<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, 1998
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 $93,032,259 and is based upon the last sales price as quoted
on The Nasdaq Stock Market for March 1, 1999.
As of March 1, 1999, the Registrant had 6,100,476 shares outstanding
excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December
31, 1998 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
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1. Business..................................................... 1
Item 2. Properties................................................... 32
Item 3. Legal Proceedings............................................ 32
Item 4. Submission of Matters to a Vote of Security Holders.......... 32
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters...................................................... 32
Item 6. Selected Financial Data...................................... 33
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 33
Item 7A. Quantative and Qualitative Disclosure about Market Risk...... 33
Item 8. Financial Statements and Supplementary Data.................. 33
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 33
PART III
Item 10. Directors and Executive Officers of the Registrant........... 33
Item 11. Executive Compensation....................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 34
Item 13. Certain Relationships and Related Transactions............... 34
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................................................. 34
SIGNATURES 36
</TABLE>
<PAGE>
PART 1
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, 1998, the Company had consolidated total assets
of $767.6 million and total equity of $73.9 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, home equity loans
and consumer loans. The Company's revenues are derived principally from
interest on conventional mortgage loans, 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, certain sections of the 1998 Annual Report
incorporated herein and the Year 2000 compliance. 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
community 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, home equity loans and
consumer loans. Mortgage loans are originated to be held in the portfolio. At
December 31, 1998, total loans receivable were $559.8 million, of which $535.9
million, or 95.7%, were conventional mortgage loans. Of the conventional
mortgage loans outstanding at that date, 96.3% were fixed-rate loans. At
December 31, 1998, the loan portfolio also included $17.9 million of residential
construction loans; $651,000 of multi-family loans; $4.5 million of residential
home equity loans; and $899,000 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.
Set forth below is a table showing loan origination, purchase and sales
activity for the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Loans receivable at beginning of period................ $596,003 $547,210 $432,863
Additions:
Originations of conventional mortgages (1)(2)......... 66,825 129,043 168,915
Reductions:
Transfer of mortgage loans to foreclosed real estate.. 201 104 229
Repayments............................................ 102,781 50,157 54,339
Loan sales............................................ -- 29,989 --
-------- -------- --------
Total reductions................................... 102,982 80,250 54,568
-------- -------- --------
Total loans receivable at end of period............ $559,846 $596,003 $547,210
======== ======== ========
Mortgage-backed securities at beginning of period...... $ 31,885 $ -- $ --
Purchases............................................. -- 92,528 --
Sales................................................. 30,255 46,676 --
Repayments............................................ 1,402 14,000 --
Premium amortization.................................. 228 197 --
Unrealized gain or loss............................... -- 230 --
-------- -------- --------
Mortgage-backed securities at end of period............ $ -- $ 31,885 $ --
======== ======== ========
- --------------------------
</TABLE>
(1) Includes conventional mortgages, residential construction loans and home
equity mortgage loans.
(2) The Association originated no multi-family loans during the periods shown.
3
<PAGE>
The following table sets forth the composition of 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,
-------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------------- --------------------- ------------------- ----------------- -----------------
Percent of Percent of Percent of Percent of Percent of
Amount Total Amount Total Amount Total Amount Total Amount Total
---------- ---------- --------- ---------- --------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Conventional mortgages... $535,864 95.72% $568,405 95.37% $524,867 95.92% $409,807 94.67% $304,760 94.38%
Residential construction
loans................... 17,924 3.20 25,563 4.29 19,877 3.63 19,692 4.55 14,090 4.36
Multi family loans....... 651 .12 860 0.14 1,220 0.22 2,075 0.48 2,646 0.82
Second mortgage loans.... 4,508 .81 268 0.05 297 0.06 330 0.08 354 0.11
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans. 558,947 99.85 595,096 99.85 546,261 99.83 431,904 99.78 321,850 99.67
Consumer loans:
Loans on deposit accounts 895 .15 899 0.15 938 0.17 937 0.22 1,018 0.32
Home improvement loans... 4 -- 8 .-- 11 .-- 22 .-- 46 0.01
-------- ------ -------- -------- -------- ------ -------- ------ -------- ------
Total consumer loans.... 899 .15 907 0.15 949 0.17 959 0.22 1,064 0.33
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable..... 559,846 100.00% 596,003 100.00% 547,210 100.00% 432,863 100.00% 322,914 100.00%
====== ====== ====== ====== ======
Less:
Undisbursed portion of
loans in process........ 10,354 12,072 11,120 11,182 8,834
Deferred net loan
origination fees........ 3,153 3,822 4,610 5,537 5,510
Allowance for loan losses 805 715 665 575 575
-------- -------- -------- -------- --------
Loans receivable, net... $545,534 $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
Total mortgage-backed
securities............. - -- $ 31,885 100.00% $ -- .--% $ -- .--% $ 4,870 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
4
<PAGE>
Loan Maturity Schedule. The following table sets forth certain information at
December 31, 1998 regarding the dollar amount of loans maturing in the portfolio
based on their remaining 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 $102.8
million, $50.2 million and $54.3 million for the years ended December 31, 1998,
1997 and 1996, respectively.
<TABLE>
<CAPTION>
At December 31, 1998
------------------------------------------------------------------------------------------------------
More Than
Three More Than More Than More Than More Than Five
Months or Three Months Six Months to One Year to Three Years Years to More Than
Less to Six Months Twelve Months Three Years to Five Years Ten Years Ten Years Total
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning Assets:
Real estate loans:
One-to-four-family
adjustable-
rate loans........ $ -- $ -- $ -- $ -- $ 95 $ 258 $ 19,304 $ 19,657
One-to-four-family
fixed-rate
loans............. 169 1 3 280 2,329 42,148 471,277 516,207
Residential
construction loans.. -- -- -- -- -- -- 17,924 17,924
Multi family......... 1 -- -- 57 136 261 196 651
Second mortgage loans. 1,047 - -- -- 2,681 780 -- 4,508
------ -- -- ---- ------ ------- -------- --------
Total Real Estate
Loans 1,217 1 3 337 5,241 43,447 508,701 558,947
Consumer Loans 895 -- -- 4 -- -- -- 899
------ -- -- ---- ------ ------- -------- --------
Total loans....... $2,112 $1 $3 $341 $5,241 $43,447 $508,701 $559,846
====== == == ==== ====== ======= ======== ========
</TABLE>
5
<PAGE>
The following table sets forth the dollar amount of all loans and mortgage-
backed securities at December 31, 1998 which have fixed or adjustable interest
rates, and which are due after December 31, 1999.
<TABLE>
<CAPTION>
Due After December 31, 1999
----------------------------------
Fixed Adjustable Total
-------- -------------- --------
(In thousands)
<S> <C> <C> <C>
Real estate loans:
Conventional mortgages.... $516,034 $19,657 $535,691
Residential construction.. 14,840 3,084 17,924
Multi-family.............. 647 3 650
Second mortgage........... 3,305 156 3,461
Consumer loans.............. 4 - 4
-------- ------- --------
Total loans............
$534,830 $22,900 $557,730
======== ======= ========
</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,
1998, conventional mortgage loans totalled $535.9 million, or 95.7%, of total
loans at such date. Of the Association's conventional mortgage loans secured by
one- to four-family residences, $516.2 million, or 96.3%, 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 $321.9
million at December 31, 1994 to $558.9 million at December 31, 1998.
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 1998. At December 31, 1998, the
Association had $17.7 million in purchased mortgage loans and loan
participations serviced by others, totalling 3.2% 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 generally must meet the same underwriting criteria as
loans originated by the Association.
6
<PAGE>
In 1998, the Association did not participate in any sales of conventional
mortgage loans. 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 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 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, 1998, the maximum one-to four-family loan
amount is $500,000, unless otherwise approved by the Board of Directors.
Presently, four 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.
7
<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 1998, only $8.9 million of the $62.2 million, or 14.4%, of
conventional mortgage 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, 1998, 1997 and 1996, the
Association originated 43, 24 and 24 loans under the CRA loan program, with
agregate dollar amounts of $2.0 million, $1.2 million and $1.1 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, 1998, the Association's residential
construction loans totalled $17.9 million, or 3.2% of the total loan portfolio.
Of these construction loans, $10.4 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
and are 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.
8
<PAGE>
Multi-Family Loans. In prior years, the Association also originated multi-
family loans. As of December 31, 1998, the Association's total loan portfolio
contained 18 multi-family loans, totalling $651,000, 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. During 1998, the Association began offering home
equity installment and line of credit loans to homeowners in its lending
territory. The home equity installment loans are underwritten for a fixed rate,
five year term loan or an adjustable rate ten year term in which the rate
adjusts after the fifth year based on the prime rate. The line of credit loans
can be drawn on for ten years and paid back in twenty years and are based on the
prime rate. The Association offers second mortgage loans with maximum combined
loan-to-value ratios of up to 80%. During 1998 the Association originated $3.7
million in installment loans and had made disbursements of $961,000 for line of
credit loans. At December 31, 1998, the Association had $4.5 million or 0.8% of
total loans in second mortgage loans.
Consumer Loans. The Association also offers secured consumer loans. At
December 31, 1998, the Association's consumer loans totalled $899,000, or 0.2%
of the Association's total loan portfolio. Of that amount, loans secured by
deposit accounts totalled $895,000, or 99.6%, and home improvement loans
totalled $4,000, or 0.04%, of total consumer loans.
Loan Servicing and Loan Fees. Servicing on all 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, 1998, the Association was servicing $24.4 million of loans for
others. Loan servicing income was $9,000, $37,000 and $14,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. The Association also
receives income in the form of service charges and other fees on loans. For the
years ended December 31, 1998, 1997 and 1996, the Association earned $198,000,
$214,000 and $192,000, respectively, in service charges and other fees.
Mortgage-backed Securities. At December 31, 1998, the Association had no
mortgage-backed securities. During the first quarter of 1998, the remaining
balance of the mortgage-backed securities portfolio was sold which resulted in a
gain of $97,000. In 1997, the Association purchased $92.5 million in adjustable
rate mortgage-backed securities. These securities were classified as available-
for-sale. Subsequently, in 1997, the Association sold $46.7 million of these
securities. At December 31, 1997, mortgage-backed securities totaled
9
<PAGE>
$31.9 million. The Association had no mortgage-backed securities during 1996.
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, 1998,
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.
On purchased mortgage loans or loan participations, monthly reports are
received from loan servicers in order to monitor the loan portfolio. Based upon
servicing agreements with the servicers of the loans, the Association relies
upon the servicer to contact delinquent borrowers, collect delinquent amounts
and to initiate foreclosure proceedings, when necessary, all in accordance with
applicable laws, regulations and the terms of the servicing agreements between
the Association and its servicing agents.
10
<PAGE>
Delinquent Loans. At December 31, 1998, 1997 and 1996, delinquencies in
the loan portfolio were as follows:
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1997
----------------------------------------------------- -----------------------------------------------
60 - 89 Days 90 Days or More 60 - 89 Days 90 Days or More
------------------------ ------------------------ ----------------------- ---------------------
Principal Principal Principal Principal
Number of Balance of Number of Balance of Number of Balance of Number of Balance of
Loans Loans Loans Loans Loans Loans Loans Loans
--------- ---------- ------- ----------- ---------- ----------- ---------- -----------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Conventional mortgage loans.. 3 $ 156 7 $ 498 8 $ 436 13 $ 634
Multi-family loans........... -- -- -- -- -- -- -- --
Consumer loans............... -- -- -- -- -- -- -- --
--------- ----- --------- ----- --------- ----------- ---------- ----------
Total loans............. 3 $ 156 7 $ 498 8 $ 436 13 $ 634
========= ===== ========= ===== ========= =========== ========== ==========
Delinquent to total loans.... 0.03% 0.09% 0.07% 0.11%
===== ===== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1996
--------------------------------------------------------------------
60 - 89 Days 90 Days or More
---------------------------- --------------------------
Principal Principal
Number of Balance of Number of Balance of
Loans Loans Loans Loans
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Conventional mortgage loans.. 4 $ 258 8 $ 400
Multi-family loans........... -- -- -- --
Consumer loans............... -- -- -- --
----- ----- ---- -----
Total loans............. 4 $ 258 8 $ 400
===== ===== ==== =====
Delinquent loans to total loans 0.05% 0.08%
===== =====
</TABLE>
11
<PAGE>
Non-Performing Loans and Real Estate Owned. The following table sets forth
information regarding non-accrual mortgage and other loans and real estate owned
("REO"). Interest is not accrued on loans past due 90 days or more. The
Association had $82,000 in real estate owned and no in substance foreclosures at
December 31, 1998. During the years ended December 31, 1998, 1997 and 1996, the
amounts of interest income that would have been recorded on non-accrual loans,
had they been current, totalled $32,000, $29,000 and $24,000, respectively.
Interest income recorded on non-accrual loans was $18,000, $36,000 and $22,000
for each of the years ended December 31, 1998, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------
1998 1997 1996 1995 1994
---------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual delinquent mortgage loans........ $ 498 $ 634 $ 400 $ 333 $ 726
Non-accrual delinquent other loans........... -- -- -- -- 15
----- ----- ----- ----- -----
Total non-performing loans................. 498 634 400 333 741
Real estate owned............................ 82 -- 229 178 30
----- ----- ----- ----- -----
Total non-performing assets................ $ 580 $ 634 $ 629 $ 511 $ 771
===== ===== ===== ===== =====
Total non-performing loans to total loans.... 0.10% 0.11% 0.08% 0.08% 0.23%
Total non-performing assets to total assets.. 0.08% 0.09% 0.10% 0.10% 0.19%
</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, 1998, classified assets totalled $498,000, or 0.08% of
total assets, and consisted of seven conventional mortgage loans classified as
"Substandard".
12
<PAGE>
Allowance for Loan Losses, Investments in Real Estate and Real Estate
Owned. The allowance for loan losses is established and maintained through a
provision for loan losses based on management's evaluation of the risk inherent
in the loan portfolio and the condition of the local economy in the Company's
market area. Such evaluation, which includes a review of all loans on which
full collectibility is not reasonably assured, considers among other matters,
the estimated fair value of the underlying collateral, economic and regulatory
conditions, and other factors that warrant recognition of an adequate loan loss
allowance. Management believes that the allowance for loan losses is adequate to
cover losses inherent in the portfolio as of December 31, 1998. 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.
13
<PAGE>
The following table sets forth the allowance for loan losses at the dates
indicated.
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------
1998 1997 1996 1995 1994
----------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Allowance for loan losses:
Balance at beginning of period........... $ 715 $ 665 $ 575 $ 575 $ 598
Charge-offs:
Conventional mortgages............... -- -- -- -- (23)
Residential construction............. -- -- -- -- --
Multi-family......................... -- -- -- -- --
Consumer............................. -- -- -- -- --
----- ----- ----- ----- ------
Total charge-offs.................. -- -- -- -- (23)
Total recoveries......................... -- 5 -- -- 4
----- ----- ----- ----- ------
Provision for (recovery of) loan
losses............................... 90 45 90 -- (4)
----- ----- ----- ----- ------
Balance at end of period(1).............. $ 805 $ 715 $ 665 $ 575 $ 575
===== ===== ===== ===== ======
Ratio of net charge-offs during the
period to average loans
outstanding during the period........ --% --% --% --% 0.01%
Ratio of allowance for loan
losses to total loans at the end of
the period........................... 0.14% 0.12% 0.12% 0.13% 0.18%
Ratio of allowance for loan
losses to non-performing assets
at the end of the period............. 1.39x 1.13x 1.06x 1.13x 74.58%
</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
14
<PAGE>
agreements, loans of federal funds and, subject to certain limits, corporate
securities, 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, 1998, $81.6 million, or 10.6%, 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, 1998, the Association had total
investments of $155.7 million, of which $145.7 million was classified as
available-for-sale and $10.0 million was classified as held to maturity. The
$145.7 million investment classified as available-for-sale consisted of $119.0
million in municipal securities, $17.7 million in collateralized mortgage
obligations ("CMO's") and $9.0 in FHLB stock. The $10.0 million investment
classified as held to maturity consists of U.S. government securities which have
maximum terms to maturity of up to six years.
15
<PAGE>
The following table sets forth certain information regarding the carrying
and market values of the portfolio of investment securities available for sale
and held to maturity at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
---------- ------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Investment securities:
Municipal securities................. $118,986 $118,986 $ -- $ -- $ -- $ --
U.S. Treasury securities............. 9,976 10,677 9,969 10,485 14,960 15,384
Collateralized mortgage obligations.. 17,691 17,691 15,902 15,902 -- --
Other investments.................... 4 89 4 68 4 45
FHLB Stock........................... 9,000 9,000 5,148 5,148 3,999 3,999
-------- -------- ------- ------- ------- -------
Total investments.................. $155,657 $156,443 $31,023 $31,603 $18,963 $19,428
======== ======== ======= ======= ======= =======
</TABLE>
The following table sets forth the carrying values, market values and
average yields for the Association's available for sale and held to maturity
investment portfolio by maturity, call date or repricing date, whichever is
first, at December 31, 1998.
<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
---------- --------- -------- -------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Investment Securities:
Municipal Securities..... -- --% $90,624 7.09% $28,362 7.04% $118,986 $118,986 7.08%
U.S. treasury securities. 4,997 6.88 -- -- 4,976 7.28 9,976 10,677 7.08
Collateralized mortgage
obligations............ 5,988 6.76 3,010 6.26 8,693 6.48 17,691 17,691 6.53
</TABLE>
16
<PAGE>
Sources of Funds
General. The lending and investment activities are predominantly funded by
savings deposits, borrowings, interest and principal payments on loans and other
investments and loan origination fees.
Deposits. Deposits serve as the predominant source of funds. The
Association offers interest rates on deposits that are competitive 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. The Association has produced an
overall increase in total deposits of 36.1%, from $363.7 million at December 31,
1994 to $495.1 million at December 31, 1998. 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,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
(In thousands)
Deposits.......................................... $701,925 $720,943 $805,469
Withdrawals....................................... 716,621 725,033 725,862
-------- -------- --------
Net increase (decrease) before interest credited.. (14,696) (4,090) 79,607
Interest credited................................. 14,769 15,204 12,923
-------- -------- --------
Net increase in deposits.......................... $ 73 $ 11,114 $ 92,530
======== ======== ========
</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, 1998.
<TABLE>
<CAPTION>
Amount
-------------
(In thousands)
<S> <C>
Maturity Period:
Three months or less........... $ 6,091
Over three through six months.. 7,451
Over six through 12 months..... 7,813
Over 12 months................. 16,773
-------
Total....................... $38,128
=======
</TABLE>
17
<PAGE>
The following table sets forth the distribution of the average deposit
accounts and borrowings for the periods indicated and the weighted average
nominal interest rates on each category of deposits presented. Average balances
for 1998 and 1997 are daily average while 1996 average balances are based on
month end balances.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ------------------------------- --------------------------------
Weighted Weighted Weighted
Average Average Average
Average Nominal Average Nominal Average Nominal
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------- -------- -------- ------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Money market and NOW
deposits.................. $ 47,945 $ 1,147 2.39% $ 46,634 $ 1,092 2.34% $ 42,088 $ 1,040 2.47%
Savings deposits............ 82,136 2,480 3.02 78,316 2,288 2.92 81,715 2,314 2.83
Certificates of deposit..... 362,720 21,186 5.84 387,557 23,306 6.01 323,199 18,504 5.73
Borrowings.................. 142,481 8,031 5.64 102,649 5,643 5.50 5,833 191 3.27
-------- ------- -------- ------- -------- ------
Total interest-bearing
liabilities........... $635,282 $32,844 5.17% $615,156 $32,329 5.26% $452,825 $22,409 4.87%
======== ======= ======== ======= ======== =======
</TABLE>
18
<PAGE>
The following table presents the amount of certificate accounts outstanding
based upon original contractual periods to maturity, at December 31, 1998, and
based upon contracted rates, at December 31, 1997 and 1996.
<TABLE>
<CAPTION>
Period to Maturity from December 31, 1998 At December 31,
--------------------------------------------------------------------------------------
Less One to Two to Three to Four to Five to Total
Than One Two Three Four Five Ten December
Year Years Years Years Years Years 31, 1998 1997 1996
-------- -------- ------- ------- ---- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
Certificate Accounts:
3.00% to 5.50%....... $71,721 $ 89,917 $ 4,108 $ 6,922 $ 15 $ 2,596 $175,279 $ 74,933 $113,356
5.501% to 6.00%...... 530 59,557 13,285 27,112 258 22,619 123,361 156,885 121,968
6.001% to 6.50%...... -- 1,651 7,728 17,494 171 20,932 47,976 115,491 98,368
6.501% to 7.50%...... -- -- -- 2,118 102 14,559 16,779 26,200 30,860
7.501% to 8.50%...... -- -- -- -- -- 2,806 2,806 2,855 3,630
8.501% to 9.50%...... -- -- -- -- -- 2,887 2,887 3,559 4,346
9.501% to 10.50%..... -- -- -- -- -- 298 298 281 266
------- -------- ------- ------- ---- ------- -------- -------- --------
$72,251 $151,125 $25,121 $53,646 $546 $66,697 $369,386 $380,204 $372,794
======= ======== ======= ======= ==== ======= ======== ======== ========
</TABLE>
Borrowings
Borrowings are used in conjunction with deposits in funding the operating
and investment activity of the Association. At December 31, 1998, the
Association had borrowings of $180.0 million. Of these borrowings, $70.0
million have a contractual maturity of five years at a rate of 5.46%. However,
every six months the FHLB has the option to convert the borrowings to an
adjustable rate based on the three month libor. If the FHLB elects to convert
the borrowings to an adjustable rate, the borrowings can be repaid without
penalty. The remaining $110.0 million in borrowings had a contractual maturity
of ten years. These borrowings carry a fixed interest rate for the first five
years. On the fifth anniversary date the FHLB has the option to convert the
borrowings to an adjustable rate base on three month libor. Again, if the FHLB
elects to convert the borrowings to adjustable rates, the borrowing can be
repaid without penalty. If the borrowings are not converted to an adjustable
rate, the rate remains fixed at the current contractual rate for the remaining
five years of the borrowings. The weighted average rate on these borrowings is
5.68%. The borrowings are secured by the assets of the Association.
Subsidiary Activities
The Association does not maintain any subsidiaries.
19
<PAGE>
REGULATION AND SUPERVISION
General
As a savings and loan holding company, the Company is required by federal
law to file reports with, and otherwise comply with, the rules and regulations
of the Office of Thrift Supervision ("OTS"). 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 Federal Home Loan Bank System and its deposit accounts are insured
up to applicable limits by the Savings Association Insurance Fund ("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 federal law. 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 generally be
limited 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.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the OTS and from acquiring or retaining control of
20
<PAGE>
a depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS
considers the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the deposit insurance funds, the convenience and needs of the community and
competitive factors.
The OTS may not approve 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, federal regulations do 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
Business Activities. The activities of federal savings institutions are
governed by federal law and regulations. These laws and regulations delineate
the nature and extent of the activities in which federal associations may
engage. In particular, many types of lending authority for federal association,
e.g., commercial, non-residential real property loans and consumer loans, are
limited to a specified percentage of the institution's capital or assets.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage ratio and an 8% risk-based capital ratio. In addition, the
prompt corrective action standards discussed below also establish, in effect, a
minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions
receiving the highest rating on the CAMELS financial institution rating system),
and, together with the risk-based capital standard itself, a 4% Tier I risk-
based capital standard. The OTS regulations also require that, in meeting the
tangible, leverage and 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%,
assigned by the OTS capital regulation based on the risks OTS believed are
21
<PAGE>
inherent in the type of asset. Core (Tier 1) 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
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% risk-weighted assets and up to 45% of unrealized
gains on available-for-sale equity securities with readily determinable fair
values. Overall, the amount of supplementary capital included as part of total
capital cannot exceed 100% of core capital.
The capital regulations 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. For the present time, the OTS has deferred implementation
of the interest rate risk component. At December 31, 1998, 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, 1998 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, 1998
Total Capital (to risk-weighted assets)... $74,264 $22.41% $26,515 8.00% $33,144 10.00%
Tier I Capital (to risk-weighted assets).. 73,459 22.16 N/A N/A 19,886 6.00
Tier I Capital (to total assets).......... 73,459 9.53 23,123 3.00 38,539 5.00
Tangible Capital.......................... 73,459 9.53 11,562 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. At
December 31, 1998, the balance of the liquidation account was $12.2 million. In
the unlikely event of a 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. 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 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
(core) capital to total assets is at least 4% (3% if the institution receives
the highest CAMELS rating). A
22
<PAGE>
savings institution that has a ratio of total capital to risk-weighted assets of
less than 8%, a ratio of Tier I (CORE) 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 risk-based capital
ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal or less
than 2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the OTS 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. The FDIC maintains a risk-based assessment system by which
institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon
the categories to which it is assigned. Assessment rates for SAIF member
institutions are determined semiannually by the FDIC and currently range from
zero basis points for the healthiest institutions to 27 basis points for the
riskiest.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980's by the Financing
Corporation ("FICO") to recapitalized the predecessor to the SAIF. During 1998,
FICO payments for SAIF members approximated 6.10 basis points, while Bank
Insurance Fund ("BIF") members paid 1.22 basis points. By law, there will be
equal showing of FICO payments between SAIF and BIF members on the earlier of
January 1, 2000 or the date the SAIF and BIF are merged.
The Association's assessment rate for fiscal 1998 was 6.5 basis points and
the premium paid for this period was $305,000. Payments toward the FICO bonds
amounted to $ . The FDIC has authority to increase insurance
assessments. A significant increase in SAIF insurance premiums would likely
have an adverse effect on the operating expenses and results of operations of
the Association. Management cannot predict what insurance assessment rates will
be in the future.
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.
23
<PAGE>
Thrift Rechartering Legislation. The September 30, 1996 law provides that
the BIF and SAIF will merge on January 1, 1999 if there are no more savings
associations as of that date. That legislation also required that the
Department of Treasury submit recommendations to Congress regarding a common
financial institutions charter, including whether the separate charters for
thrifts and banks should be abolished. Various proposals to eliminate the
federal thrift charter, create a uniform financial institutions charter and
abolish the OTS have been introduced in Congress. The bills would require
federal savings institutions to convert to a national bank or some type of state
charter by a specified date under some bills, or they would automatically become
national banks. Converted federal thrifts would generally be required to
conform their activities to those permitted for the charter selected and
divestiture of nonconforming assets would be required over a two year period,
subject to two possible one year extensions. State chartered thrifts would
become subject to the same federal regulation as applies to state commercial
banks. A more recent bill reported by the House Banking Committee would allow
federal savings institutions to continue to engage in their current activities
and investments after converting to a bank charter. Holding companies for
savings institutions would become subject to the same regulation as holding
companies that control commercial banks, with a limited grandfather provision
for certain savings and loan holding company activities. The Company is unable
to predict whether such legislation will be enacted or the extent to which the
legislation would restrict or disrupt its operations.
Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. A savings institution 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 secured by readily-marketable collateral. At December 31, 1998,
the Association's limit on loans to one borrower was $10.4 million and the
Association's largest aggregate outstanding balance of loans to one borrower was
$419,000.
QTL Test. The HOLA requires savings institutions to meet a QTL test.
Under the QTL test, a savings 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, 1998, the Association maintained 83.0% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test. Recent
legislation has expanded the extent to which education loans, credit card loans
and small business loans may be considered "qualified thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, such as cash dividends,
payments to repurchase its shares and payments to shareholders of another
institution in a cash-out merger. The rule, effective in 1998, establishes
three tiers of institutions based primarily on an institution's capital level.
24
<PAGE>
An institution that exceeded all 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 the
excess capital over its 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. At
December 31, 1998, the Association was a Tier I Association. Effective April 1,
1999, the OTS's capital distribution regulation will change. Under the new
regulation, an application to and the prior approval of the OTS will be required
prior to any capital distribution if the institution does not meet the criteria
for "expedited treatment" of applications under OTS regulations (e.g.,
generally, examination ratings in the two top categories), the total capital
distributions for the calendar year exceed net income for that year plus the
amount of retained net income for the preceding two years, the institution would
be undercapitalized following the distribution or the distribution would
otherwise be contrary to a statute, regulation or agreement with OTS. If an
application is not required, the institution must still provide prior notice to
OTS of the capital distribution. 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.
Liquidity. The Association is required to maintain an average daily
balance of specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement is currently 4%, but may be changed from
time to time by the OTS to any amount within the range of 4% to 10%. Monetary
penalties may be imposed for failure to meet these liquidity requirements. The
Association's liquidity ratio for December 31, 1998 was 12.3%, 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, 1998 totalled $146,000.
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.
25
<PAGE>
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 federal law. The
aggregate amount of covered transactions with any individual affiliate is
limited 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 federal law. Transactions with affiliates must be on terms and
under circumstances that are 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 bank
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 federal law. Such loans are required to be made on
terms substantially the same as those offered to unaffiliated individuals and
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. The law also limits both the
individual and aggregate amount of loans the Association may make to insiders
based, in part, on the Association's capital position and requires certain board
approval procedures to be followed.
Enforcement. 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. 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.
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. If the OTS determines that an
institution fails to meet any standard prescribed by the guidelines, the OTS may
require the institution to submit an acceptable plan to achieve compliance with
the standard.
26
<PAGE>
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 regulations generally
provide that reserves be maintained against aggregate transaction accounts as
follows: for accounts aggregating $46.5 million or less (subject to adjustment
by the Federal Reserve Board) the reserve requirement is 3%; and for accounts
aggregating greater than $46.5 million, the reserve requirement is $1.395
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 $46.5
million. The first $4.9 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. The Association complies with the foregoing requirements.
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 1998 taxable year, the
Company is subject to a maximum federal income tax rate of 34%.
Bad Debt Reserves. For fiscal years beginning prior to December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986 (the "Code") were permitted to
use certain favorable provisions to calculate their deductions from taxable
income for annual additions to their bad debt reserve. A reserve could be
established for bad debts on qualifying real property loans (generally secured
by interests in real property improved or to be improved) under (i) the
Percentage of Taxable Income Method (the "PTI Method") or (ii) the Experience
Method. The reserve for non-qualifying loans was computed using the Experience
Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which was
enacted on August 20, 1996, requires savings institutions to recapture (i.e.,
take into income) certain portions of their accumulated bad debt reserves. The
1996 Act repeals the reserve method of accounting for bad debts effective for
tax years beginning after 1995. Thrift institutions that 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.
27
<PAGE>
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 with the first taxable year after 1995, subject to a two-year
suspension if the "residential loan requirement" is satisfied.
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 taxable year of 1998, in which the Association
originates a minimum of certain residential loans based upon the average of the
principal amounts of such loans made by the Association during its six taxable
years preceding its current taxable year.
Under the 1996 Act, for its current and future taxable years, the
Association is not permitted to make additions to its tax bad debt reserves. In
addition, the Association is required to recapture (i.e., take into income) over
a six year period the excess of the balance of its tax bad debt reserves as of
December 31, 1995 over the balance of such reserves as of December 31, 1987. As
a result of such recapture, the Association will incur an additional tax
liability of approximately $1.2 million over six years beginning with the 1998
tax year.
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
28
<PAGE>
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.
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, 1998, the Association had 50 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.
Preparation for the Year 2000
Many computer systems may not correctly process information with dates
beyond December 31, 1999 due to programming assumptions that were made as
computer applications were developed. The Company has assessed its primary
business information system with respect to the compatibility with the Year
2000. The Company utilizes a third-party vendor for processing its primary
banking applications and several other third-party vendors for ancillary
computer applications. The Company and all third-party vendors for the
Company's banking applications have modified, upgraded or replaced their
computer applications and are in the process of validating the changes to ensure
Year 2000 compliance. The Company's primary
29
<PAGE>
regulator, in conjunction with other regulatory agencies, has developed
guidelines which must be met by the Company to ensure that the Year 2000 issue
is properly addressed. In accordance with these guidelines, the Board of
Directors has appointed a Year 2000 Committee, comprised of senior managers and
department heads to assess the impact that the Year 2000 will have on the
Company's operations and financial standing. The Year 2000 Committee has
developed a Year 2000 Compliance Program, the ("Program"). The Program has been
divided into 5 subparts, awareness, assessment, renovation, validation and
implementation. The awareness, assessment and renovation portions of the
program are complete. The validation and implementation portions have been
completed with respect to the Company's mission critical systems. Ancillary
computer communications, data exchanges and non information technology continue
to be tested as other third party vendors complete their Year 2000 computer
changes. These final two portions of the plan are expected to be complete by
June 30, 1999. In addition to internal processes, the Company monitors through
correspondence, the progress of other third party vendors to ensure that their
systems do not indirectly affect the Company's operations.
Costs
The Company has not and does not expect to incur any material expense to replace
data processing equipment. The company does not currently expect that the cost
of its Year 2000 compliance program, including possible remediation costs, will
be material to its financial condition and expects that it will satisfy such
compliance program without material disruption of its operations. The Company
estimates the costs related to Year 2000 compliance will be less then $75,000.
Risks and Contingencies
The Company does not have commercial loans outstanding. However, the Company's
mortgage loans could be indirectly affected by the Year 2000 if the employer's
of the borrowers are affected by the Year 2000. The Company has attempted to
make its borrowers aware of the Year 2000 issue but the effect that the Year
2000 will have, if any, on the Company's loans cannot be determined.
In the event that the Company's operations are affected by the Year 2000, either
internally or externally through significant vendors including utilities, other
financial institutions or supply companies, the Company's results of operations
and/or financial condition could be adversely affected. In the event that
problems arise a contingency plan has been developed to ensure the continued
operation of the Company.
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.
30
<PAGE>
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.
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 52
in the Registrant's 1998 Annual Report to Stockholders and is incorporated
herein by reference. Information relating to the dividend restrictions for
Registrant's common stock appears under Note 13 to the "Notes to Consolidated
Financial Statements Years Ended December 31, 1998, 1997 and 1996" on page 36 in
the Registrant's 1998 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 1998 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
1998 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 heading "Interest Rate
Sensitivity" in the registrant's 1998 Annual Report to Stockholders on pages 10
and 11 is incorporated herein by reference.
31
<PAGE>
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of First Bell Bancorp, Inc. and its
subsidiary, together with the report thereon by Deloitte & Touche LLP appears in
the Registrant's 1998 Annual Report to Stockholders on pages 21 through 50 and
are incorporated herein by reference.
Item 9. Change in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 26, 1999,
at pages 5 through 7.
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 26, 1999,
at pages 7 through 14 (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 26, 1999,
at pages 3 through 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 26, 1999, at page 14 and 15.
32
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Company are incorporated by
reference to the following indicated pages of the 1998 Annual Report to
Stockholders.
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors Report......................................... 21
Consolidated Balance Sheets for the
December 31, 1998 and 1997........................................ 24
Consolidated Statements of Income and Comprehensive Income for the
Years Ended December 31, 1998, 1997 and 1996...................... 25
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996.............. 26
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998, 1997 and 1996...................... 27
Notes to Consolidated Financial Statements for the
Years Ended December 31, 1998, 1997 and 1996...................... 28-50
</TABLE>
The remaining information appearing in the 1998 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.*
__________________________________
* 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.
33
<PAGE>
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*
10.6 Employment Agreement between First Bell Bancorp, Inc. and certain
executive officers, including Messrs. Eckert and Hinds (filed
herewith)
10.7 Employment Agreement between Bell Federal Savings and Loan
Association of Bellevue and certain executive officers,
including Messrs. Eckert and Hinds (filed herewith)
11.0 Computation of earnings per share (filed herewith)
13.0 Portions of the 1998 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 1999 Annual Meeting of Stockholders to be held
on April 26, 1999 and previously filed on March 19, 1999 is herein
incorporated by reference.
__________________________________
* 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.
(b) Reports on Form 8-K
None.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: March 31, 1999 By: /s/ Albert H. Eckert II
------------------------ -------------------------------------
Albert H. Eckert II,
President, Chief Executive Officer
and Director
Date: March 31, 1999 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 31, 1999
- ---------------------------- Officer and Director --------------
Albert H. Eckert, II
/s/ Jeffrey M. Hinds Executive Vice President, March 31, 1999
- ---------------------------- Chief Financial Officer and --------------
Jeffrey M. Hinds Director
/s/ David F. Figgins Vice President and March 31, 1999
- ---------------------------- --------------
David F. Figgins
/s/ Thomas J. Jackson, Jr. Director March 31, 1999
- ---------------------------- --------------
Thomas J. Jackson, Jr.
/s/ Robert C. Baierl Secretary and Director March 31, 1999
- ---------------------------- --------------
Robert C. Baierl
/s/ William S. McMinn Vice President and March 31, 1999
- ---------------------------- Director --------------
William S. McMinn
35
<PAGE>
/s/ Peter E. Reinert Director March 31, 1999
- --------------------------- --------------
Peter E. Reinert
/s/ Jack W. Schweiger Director March 31, 1999
- --------------------------- --------------
Jack W. Schweiger
/s/ Theodore R. Dixon Director March 31, 1999
- --------------------------- --------------
Theodore R. Dixon
36
<PAGE>
Exhibit 10.6
THREE YEAR
FIRST BELL BANCORP, INC.
EMPLOYMENT AGREEMENT
This AGREEMENT ("Agreement") is made effective as of November 16,
1998, by and between First Bell Bancorp, Inc. (the "Holding Company"), a
corporation organized under the laws of Delaware, with its principal
administrative office at 300 Delaware Avenue, Suite 1704, Wilmington, Delaware
19801 and Albert H. Eckert, II (the "Executive"). Any reference to
"Institution" herein shall mean Bell Federal Savings and Loan Association of
Bellevue or any successor thereto.
WHEREAS, the Holding Company wishes to assure itself of the services
of Executive for the period provided in this Agreement; and
WHEREAS, the Executive is willing to serve in the employ of the
Holding Company on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES
During the period of his employment hereunder, Executive agrees to
serve as President and Chief Executive Officer of the Holding Company. The
Executive shall render administrative and management services to the Holding
Company such as are customarily performed by persons in a similar executive
capacity. During said period, Executive also agrees to serve, if elected, as an
officer and director of any subsidiary of the Holding Company.
2. TERMS
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) full calendar months thereafter. Commencing on
the first anniversary date of this Agreement, and continuing on each anniversary
thereafter, the term of this Agreement shall be extended by an additional year,
such that the remaining term of the Agreement shall be three years, until such
time as the board of directors of the Holding Company ("Board") or the Executive
elects not to extend the term of this Agreement further by giving written notice
to the other party in accordance with Section 8 of this Agreement. In the event
that written notice is given. this Agreement shall terminate at the end of the
remaining term of the Agreement.
<PAGE>
2
(b) During, the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantially all his
business time, attention, skill, and efforts to the faithful performance of his
duties hereunder including activities and services related to the organization,
operation and management of the Holding Company and its, direct or indirect,
subsidiaries ("Subsidiaries") and participation in community and civic
organizations; provided, however, that, with the approval of the Board, as
evidenced by a resolution of such Board, from time to time, Executive may serve,
or continue to serve, on the boards of directors of, and hold any other offices
or positions in, companies or organizations, which, in such Board's judgment,
will not present any conflict of interest with the Holding Company or its
Subsidiaries, or materially affect the performance of Executive's duties
pursuant to this Agreement.
(c) Notwithstanding anything herein contained to the contrary
Executive's employment with the Holding Company may be terminated by the Holding
Company or Executive during the term of this Agreement, subject to the terms and
conditions of this Agreement. However, Executive shall not perform, in any
respect, directly or indirectly, during the pendency of his temporary or
permanent suspension or termination from the Institution, duties and
responsibilities formerly performed at the Institution as part of his duties and
responsibilities as President and Chief Executive Officer of the Holding
Company.
3. COMPENSATION AND REIMBURSEMENT
(a) The Executive shall be entitled to a salary from the Holding
Company or its Subsidiaries of not less than $200,129 per year ("Base Salary").
Base Salary shall include any amounts of compensation deferred by Executive
under any qualified or unqualified plan maintained by the Holding Company and
its Subsidiaries. Such Base Salary shall be payable bi-weekly. During, the
period of this Agreement, Executive's Base Salary shall be reviewed at least
annually; the first such review will be made no later than one year from the
date of this Agreement. Such review shall be conducted by the Board or by a
Committee of the Board delegated such responsibility by the Board. The
Committee or the Board may increase Executive's Base Salary. The increased
Base Salary shall become the "Base Salary" for purposes of this Agreement. In
addition to the Base Salary provided in this Section 3(a), the Holding Company
shall also provide Executive, at no premium cost to Executive, with all such
other benefits as provided uniformly to permanent full-time employees of the
Holding Company and its Subsidiaries.
(b) The Executive shall be entitled to participate in any employee
benefit plans, arrangements and perquisites substantially equivalent to those in
which Executive was participating or otherwise deriving benefit from immediately
prior to the beginning of the term of this Agreement, and the Holding Company
and its Subsidiaries will not, without Executive's prior written consent, make
any changes in such plans, arrangements or perquisites which would
<PAGE>
3
materially adversely affect Executive's rights or benefits thereunder, except to
the extent that such changes are made applicable to all Holding Company and
Institution employees eligible to participate in such plans, arrangements and
perquisites on a non-discriminatory basis. Without limiting the generality of
the foregoing provisions of this Subsection (b), Executive shall be entitled to
participate in or receive benefits under any employee benefit plans including,
but not limited to, retirement plans, supplemental retirement plans, pension
plans, profit-sharing plans, health-and-accident plans, medical coverage or any
other employee benefit plan or arrangement made available by the Holding Company
and its Subsidiaries in the future to its senior executives and key management
employees, subject to and on a basis consistent with the terms, conditions and
overall administration of such plans and arrangements. Executive shall be
entitled to incentive compensation and bonuses as provided in any plan of the
Holding Company and its Subsidiaries in which Executive is eligible to
participate. Nothing paid to the Executive under any such plan or arrangement
will be deemed to be in lieu of other compensation to which the Executive is
entitled under this Agreement.
(c) In addition to the Base Salary provided for by paragraph (a) of
this Section 3 and other compensation provided for by paragraph (b) of this
Section 3, the Holding Company shall pay or reimburse Executive for all
reasonable travel and other reasonable expenses incurred in the performance of
Executive's obligations under this Agreement and may provide such additional
compensation in such form and such amounts as the Board may from time to time
determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Holding Company of Executive's full-time employment hereunder
for any reason other than termination governed by Section 5(a) hereof, or for
Cause, as defined in Section 7 hereof, (ii) Executive's resignation from the
Holding Company's employ upon any (A) failure to reappoint Executive as
President and Chief Executive Officer, unless consented to by the Executive, (B)
a material change in Executive's function, duties, or responsibilities with the
Holding Company or its Subsidiaries, which change would cause Executive's
position to become one of lesser responsibility, importance, or scope from the
position and attributes thereof described in Section 1, above, unless consented
to by the Executive, (C) a relocation of Executive's principal place of
employment by more than 30 miles from its location at the effective date of this
Agreement, unless consented to by the Executive, (D) a material reduction in the
benefits and perquisites to the Executive from those being provided as of the
effective date of this Agreement, unless consented to by the Executive, (E) a
liquidation or dissolution of the Holding Company or the Institution, or (F)
breach of this Agreement by the Holding Company. Upon the occurrence of any
event described in clauses (A), (B), (C), (D) (E)
<PAGE>
4
or (F), above, Executive shall have the right to elect to terminate his
employment under this Agreement by resignation upon not less than sixty (60)
days prior written notice given within six full calendar months after the event
giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Holding Company shall be obligated to
pay Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, a lump sum payment in amount
equal to the sum of (i) the amount of the remaining payments that the Executive
would have earned if he had continued his employment with the Institution during
the remaining term of this Agreement at the Executive's Base Salary at the Date
of Termination; (ii) the amount equal to the annual contributions that would
have been made on Executive's behalf to any employee benefit plans, programs,
policies or arrangements of the Institution or the Holding Company during the
remaining term of this Agreement based on contributions made (on an annualized
basis) at the Date of Termination; and (iii) the amount of the monthly cost of
operating and maintaining the automobile provided by the Holding Company or the
Institution to the Executive for the remaining term of the Agreement based on
the monthly cost at the Date of Termination. Such payments shall not be reduced
in the event the Executive obtains other employment following termination of
employment.
(c) Upon the occurrence of an Event of Termination, the Holding
Company will cause to be continued life, long term disability, medical, health
and dental coverage substantially equivalent to the coverage that is then
maintained by the Holding Company or its Subsidiaries for Executive and his
eligible dependents immediately prior to his termination as agreed to by the
insurance carrier at no premium cost to the Executive. Such coverage shall
cease upon the expiration of the remaining term of this Agreement.
5. CHANGE IN CONTROL
(a) For purposes of this Agreement, a "Change in Control" of the
Holding Company or the Institution shall mean an event of a nature that; (i)
would be required to be reported in response to Item 1(a) of the current report
on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a
Change in Control of the Institution or the Holding Company within the meaning
of the Home Owners' Loan Act of 1933, as amended, the Federal Deposit Insurance
Act, and the Rules and Regulations promulgated by the Office of Thrift
Supervision (or its predecessor agency), as in effect on the date hereof
(provided, that in applying the definition of change in control as set forth
under the rules and regulations of the OTS, the Board shall substitute its
judgment for that of the OTS); or (iii) without limitation such a Change in
Control shall be deemed to have occurred at such time as (A) any "person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of voting securities of the Institution or the Holding
Company representing 25% or more of the Institution's or the Holding Company's
<PAGE>
5
outstanding voting securities or right to acquire such securities except for any
voting securities of the Institution purchased by the Holding Company and any
voting securities purchased by any employee benefit plan of the Holding Company
or its Subsidiaries; or (B) individuals who constitute the Board on the date
hereof (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least three-quarters of
the directors comprising the Incumbent Board, or whose nomination for election
by the Company's stockholders was approved by a Nominating Committee solely
composed of members which are Incumbent Board members, shall be, for purposes of
this clause (B), considered as though he were a member of the Incumbent Board;
or (C) a plan of reorganization, merger, consolidation, sale of all or
substantially all the assets of the Institution or the Holding Company or
similar transaction occurs or is effectuated in which the Institution or Holding
Company is not the resulting entity; provided, however, that such an event
listed above will be deemed to have occurred or to have been effectuated upon
the receipt of all required federal regulatory approvals not including the lapse
of any statutory waiting periods; or (D) a proxy statement shall be distributed
soliciting proxies from stockholders of the Holding Company, by someone other
than the current management of the Holding Company, seeking stockholder approval
of a plan of reorganization, merger or consolidation of the Holding Company or
Institution with one or more corporations as a result of which the outstanding
shares of the class of securities then subject to such plan or transaction are
exchanged for or converted into cash or property or securities not issued by the
Institution or the Holding Company shall be distributed; or (E) a tender offer
is made for 25% or more of the voting securities of the Institution or Holding
Company then outstanding.
(b) If a Change in Control has occurred pursuant to Section 5(a) or
the Board has determined that a Change in Control has occurred, Executive shall
be entitled to the benefits provided in paragraphs (c) and (d) of this Section 5
upon his subsequent termination of employment at any time during the term of
this Agreement due to (i) Executive's dismissal, (ii) Executive's voluntary
resignation following any demotion, loss of title, office or significant
authority or responsibility, reduction in the annual compensation or material
reduction in benefits or (iii) relocation of his principal place of employment
by more than 30 miles from its location immediately prior to the Change in
Control, unless such termination is because of his death, or Termination for
Cause.
(c) Upon the Executive's entitlement to benefits pursuant to Section
5(b), the Holding Company shall pay Executive within five business days , or in
the event of his subsequent death, his beneficiary or beneficiaries, or his
estate, as the case may be, as severance pay, a lump sum payment equal to the
greater of: (i) the payments due for the remaining term of the Agreement; or
(ii) three (3) times Executive's average annual compensation for the five (5)
preceding taxable years. Such annual compensation shall include Base Salary,
commissions, bonuses, contributions on behalf of Executive to any pension and
profit sharing plan, severance payments, directors or committee fees and fringe
benefits paid or to be paid to the Executive
<PAGE>
6
during such years, excluding amounts received by the Executive pursuant to
Section 5(d). Such payments shall not be reduced in the event Executive obtains
other employment following termination of employment.
(d) Upon the Executive's entitlement to benefits pursuant to Section
5(b), the Company will cause to be continued life, medical and dental coverage
substantially equivalent to the coverage that is then maintained by the
Institution for Executive, as agreed to by the insurance carrier, at no premium
cost to Executive prior to his severance. Such coverage and benefits shall
cease upon the expiration of thirty-six (36) months following the Change in
Control. In addition, the Executive will receive payments provided for in
Appendix A.
6. GROSS UP PAYMENTS AND PAYMENTS AND BENEFITS AFTER CHANGE
IN CONTROL
(a) Anything in this Agreement to the contrary or any termination of
this Agreement notwithstanding, in the event that it shall be determined that
any payment or distribution or benefits made or provided by the Holding Company
or its affiliated companies to or for the benefit of the Executive whether
pursuant to this Agreement or otherwise and without regard to any additional
payments under this Section 6 would be subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") or
any interest or penalties are incurred by Executive with respect to such excise
tax (such excise tax, together with any such interest or penalties, are
hereinafter collectively referred to as the "Excise Tax"), then the Holding
Company shall pay Executive an additional amount or amounts (each, a "Gross Up
Payment") such that the net amount or amounts retained by Executive, after
deduction of any Excise Tax on any of the above described payments or benefits
and any Federal, state and local income tax and Excise Tax upon payment provided
for by this Section 6, shall be equal to the amount of such payments or benefits
prior to the imposition of such Excise Tax.
(b) All determinations required to be made under this Section 6,
including whether and when a Gross-Up Payment is required and the amount of such
Gross-Up Payment and the assumptions to be utilized in arriving at such
determination, shall be made by Deloitte & Touche or such successor thereto (the
"Accounting Firm") which shall provide detailed supporting calculations both to
the Holding Company and the Executive within 15 business days of the receipt of
notice from the Executive that there has been a payment, such earlier time as is
requested by the Holding Company. All fees and expenses of the Accounting Firm
shall be borne solely by the Holding Company. Any Gross-Up Payment, as
determined pursuant to this Section 6, shall be paid by the Holding Company to
the Executive within five days of the receipt of the Accounting Firm's
determination. Any determination by the Accounting Firm shall be binding upon
the Holding Company and the Executive. For purposes of determining the amount
of a Gross Up Payment, Executive shall be deemed to pay federal income taxes at
the highest marginal rate of federal income taxation (including, but not limited
to, Alternative Minimum Tax) in the calendar year in which the Gross Up Payment
is payable and state and local income taxes at the
<PAGE>
7
highest marginal rate of taxation in the state and locality of Executive's
residence on the date the Gross Up Payment is payable, net of the maximum
reduction in federal income taxes which could be obtained from any available
deduction of such state and local taxes.
(c) In the event that the amount of the Excise Tax is subsequently
determined to be less than the amount taken into account in calculating a Gross
Up Payment hereunder, Executive shall repay to the Holding Company (to the
extent actually paid to Executive) at the time that the amount of such reduction
in Excise Tax is finally determined, the portion of the Gross Up Payment
attributable to such reduction (plus the portion of the Gross Up Payment
attributable to the Excise Tax and federal and state and local income tax
imposed on the Gross Up Payment being repaid by Executive if such repayment
results in a reduction in, or a refund of, Excise Tax and/or federal and state
and local income tax) plus interest on the amount of such payment at the rate
provided in Section 1274(b)(2) (B) of the Code.
(d) In the event that the amount of the Excise Tax is determined to
exceed the amount taken into account in calculating a Gross Up Payment hereunder
(including by reason of any payment the existence or amount of which cannot be
determined at the time of the Gross Up Payment), the Holding Company shall pay
an additional Gross Up Payment in respect of such excess (plus any interest
payable with respect to such excess) at the time that the amount of such excess
is finally determined.
(e) Each Gross Up Payment shall be paid by the Holding Company on the
date on which Executive becomes entitled to the payment or benefits giving rise
to such Gross Up Payment.
7. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of a
material loss to the Holding Company or one of its Subsidiaries caused by the
Executive's intentional failure to perform stated duties, personal dishonesty,
willful violation of any law, rule, regulation (other than traffic violations or
similar offenses), final cease and desist order or material breach of any
provision of this Agreement. For purposes of this Section, no act, or the
failure to act, on Executive's part shall be "willful" unless done, or omitted
to be done, not in good faith and without reasonable belief that the action or
omission was in the best interest of the Holding Company or its Subsidiaries.
Notwithstanding the foregoing, Executive shall not be deemed to have been
Terminated for Cause unless and until there shall have been delivered to him a
Notice of Termination which shall include a copy of a resolution duly adopted by
the affirmative vote of not less than three-fourths of the members of the Board
at a meeting of the Board called and held for that purpose (after reasonable
notice to Executive and an opportunity for him, together with counsel, to be
heard before the Board), finding that in the good faith opinion of the Board,
Executive was guilty of conduct justifying Termination for Cause and specifying
the particulars
<PAGE>
8
thereof in detail. The Executive shall not have the right to receive
compensation or other benefits for any period after Termination for Cause except
for compensation and benefits already vested. During the period beginning on the
date of the Notice of Termination for Cause pursuant to Section 8 hereof and
through the Date of Termination, stock options and related limited rights
granted to Executive under any stock option plan shall not be exercisable nor
shall any unvested awards granted to Executive under any stock benefit plan of
the Holding Company or any subsidiary or affiliate thereof vest. At the Date of
Termination for Cause, such stock options and related limited rights and
unvested awards shall become null and void and shall not be exercisable by or
delivered to Executive at any time subsequent to such Date of Termination for
Cause.
8. NOTICE
(a) Any purported termination by the Holding Company or by Executive
shall be communicated by Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Executive's employment under the
provision so indicated.
(b) "Date of Termination" shall mean the same date as the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, except upon the occurrence of
a Change in Control and voluntary termination by the Executive in which case the
Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Holding Company will
continue to pay Executive his full compensation in effect when the notice giving
rise to the dispute was given (including, but not limited to, Base Salary) and
continue Executive as a participant in all compensation, benefit and insurance
plans in which he was participating when the notice of dispute was given, until
the dispute is finally resolved in accordance with this Agreement. Amounts paid
under this Section are in addition to all other amounts due under this Agreement
and shall not be offset against or reduce any other amounts due under this
Agreement.
<PAGE>
9
9. POST-TERMINATION OBLIGATIONS
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for one (1) full year
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Holding Company. Executive shall, upon
reasonable notice, furnish such information and assistance to the Holding
Company as may reasonably be required by the Holding Company in connection with
any litigation in which it or any of its subsidiaries or affiliates is, or may
become, a party.
10. NON-COMPETITION
(a) Upon any termination of Executive's employment hereunder pursuant
to Section 4 hereof, Executive agrees not to compete with the Holding Company or
its Subsidiaries for a period of one (1) year following such termination in any
city, town or county in which the Executive's normal business office is located
and the Holding Company or any of its Subsidiaries has an office or has filed an
application for regulatory approval to establish an office, determined as of the
effective date of such termination, except as agreed to pursuant to a resolution
duly adopted by the Board. Executive agrees that during such period and within
said cities, towns and counties, Executive shall not work for or advise, consult
or otherwise serve with, directly or indirectly, any entity whose business
materially competes with the depository, lending or other business activities of
the Holding Company or its Subsidiaries. The parties hereto, recognizing that
irreparable injury will result to the Holding Company or its Subsidiaries, its
business and property in the event of Executive's breach of this Subsection
10(a) agree that in the event of any such breach by Executive, the Holding
Company or its Subsidiaries, will be entitled, in addition to any other remedies
and damages available, to an injunction to restrain the violation hereof by
Executive, Executive's partners, agents, servants, employees and all persons
acting for or under the direction of Executive. Executive represents and admits
that in the event of the termination of his employment pursuant to Section 7
hereof, Executive's experience and capabilities are such that Executive can
obtain employment in a business engaged in other lines and/or of a different
nature than the Holding Company or its Subsidiaries, and that the enforcement of
a remedy by way of injunction will not prevent Executive from earning a
livelihood. In addition, Executive shall not, for a period of one year after
the termination of this Agreement, engage any person employed by the Holding
Company or its subsidiaries in an employment or contractual relationship with
Executive, Executive's own employer or any other business concern without the
written permission of the Chief Executive Officer of the Holding Company.
Notwithstanding the foregoing, the Executive's obligations under this subsection
10(a) shall terminate upon the occurrence of either of the following events: (i)
a Change in Control or (ii) an Event of Termination. Nothing herein will be
construed as prohibiting the Holding Company or its Subsidiaries from pursuing
any other remedies available to the Holding Company or its Subsidiaries for such
breach or threatened breach, including the recovery of damages from Executive.
<PAGE>
10
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Holding Company and
its Subsidiaries as it may exist from time to time, is a valuable, special and
unique asset of the business of the Holding Company and its Subsidiaries.
Executive will not, during or after the term of his employment, disclose any
knowledge of the past, present, planned or considered business activities of the
Holding Company and its Subsidiaries thereof to any person, firm, corporation,
or other entity for any reason or purpose whatsoever, unless expressly
authorized by the Board of Directors or required by law. Notwithstanding the
foregoing, Executive may disclose any knowledge of banking, financial and/or
economic principles, concepts or ideas which are not solely and exclusively
derived from the business plans and activities of the Holding Company. In the
event of a breach or threatened breach by the Executive of the provisions of
this Section, the Holding Company will be entitled to an injunction restraining
Executive from disclosing, in whole or in part, the knowledge of the past,
present, planned or considered business activities of the Holding Company or its
Subsidiaries or from rendering any services to any person, firm, corporation,
other entity to whom such knowledge, in whole or in part, has been disclosed or
is threatened to be disclosed. Nothing herein will be construed as prohibiting
the Holding Company from pursuing any other remedies available to the Holding
Company for such breach or threatened breach, including the recovery of damages
from Executive.
11. SOURCE OF PAYMENTS
(a) All payments provided in this Agreement shall be timely paid in
cash or check from the general funds of the Holding Company subject to this
Section 11(b).
(b) Notwithstanding any provision herein to the contrary, to the
extent that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement dated November 16, 1998,
between Executive and the Institution, such compensation payments and benefits
paid by the Institution (including, but not limited to, any severance payments
made under Sections 4 and 5 of such Employment Agreement) will be subtracted
from any amount due simultaneously to Executive under similar provisions of this
Agreement. Payments pursuant to this Agreement and the Institution Agreement
shall be allocated in proportion to the level of activity and the time expended
on such activities by the Executive as determined by the Holding Company and the
Institution on a quarterly basis.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Holding Company
or any predecessor of the Holding Company and Executive (including, but not
limited to, the prior employment agreement dated August 15, 1996, between
Executive and the Holding Company), except that this
<PAGE>
11
Agreement shall not affect or operate to reduce any benefit or compensation
inuring to the Executive of a kind elsewhere provided. No provision of this
Agreement shall be interpreted to mean that Executive is subject to receiving
fewer benefits than those available to him without reference to this Agreement.
13. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Holding Company and their respective successors and assigns.
14. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have
been waived, nor shall there be any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each such waiver shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future as to any act other
than that specifically waived.
15. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of
any provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so invalid,
and each such other provision and part thereof shall to the full extent
consistent with law continue in full force and effect.
16. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
<PAGE>
12
17. GOVERNING LAW
This Agreement shall be governed by the laws of the State of Delaware,
unless otherwise specified herein.
18. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the Executive within
fifty (50) miles from the location of the Institution, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection
with Executive's termination is resolved in favor of the Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses and any other cash compensation,
fringe benefits and any compensation and benefits due Executive under this
Agreement.
19. PAYMENT OF COSTS AND LEGAL FEES
All reasonable costs and legal fees paid or incurred by Executive
pursuant to any dispute or question of interpretation relating to this Agreement
shall be paid or reimbursed by the Holding Company, if Executive is successful
pursuant to a legal judgment, arbitration or settlement.
20. INDEMNIFICATION
The Holding Company shall provide Executive (including his heirs,
executors and administrators) with coverage under a standard directors' and
officers' liability insurance policy at its expense and shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under Delaware law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the Holding Company (whether or not he continues to be a director
or officer at the time of incurring such expenses or liabilities), such expenses
and liabilities to include, but not be limited to, judgments, court costs and
attorneys' fees and the cost of reasonable settlements.
<PAGE>
13
21. SUCCESSOR TO THE HOLDING COMPANY.
The Holding Company shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Institution or the Holding
Company, expressly and unconditionally to assume and agree to perform the
Holding Company's obligations under this Agreement, in the same manner and to
the same extent that the Holding Company would be required to perform if no such
succession or assignment had taken place.
<PAGE>
14
SIGNATURES
IN WITNESS WHEREOF, First Bell Bancorp, Inc. has caused this Agreement
to be executed and its seal to be affixed hereunto by its duly authorized
officer and its directors, and Executive has signed this Agreement, on the 22nd
day of February, 1999.
ATTEST: FIRST BELL BANCORP, INC.
/s/ Robert C. Baierl By: /s/ William S. McMinn
- --------------------------- ----------------------------
Secretary On behalf of the Board of
Directors
WITNESS:
/s/ Jack Schweiger By: /s/ Albert H. Eckert, II
- --------------------------- ----------------------------
Albert H. Eckert, II
<PAGE>
15
APPENDIX A
-----------
Upon the Executive's entitlement to benefits pursuant to Section 5(c), the
Executive will receive the following amounts in a lump sum cash payment as soon
as practicable:
(1) An aggregate payment in the amount of $266,964, representing the
value of (a) the maximum matching contribution that the Executive would
have been eligible to receive under the Bell Federal Savings and Loan
Association of Bellevue 401(k) Plan (the "401(k) Plan"), assuming that the
Executive had remained employed with the Holding Company or the Institution
and participated in the 401(k) Plan during the thirty-six month period
immediately following his Date of Termination, plus (b) the value of the
----
allocations of common stock that the Executive would have been eligible to
receive under the Bell Federal Savings and Loan Association of Bellevue
Employee Stock Ownership Plan (the "ESOP"), assuming that the Executive had
remained employed with the Holding Company or the Institution and
participated in the ESOP during the thirty-six month period immediately
following his Date of Termination. For purposes of this paragraph (1), it
shall be assumed that the allocations that would have been made to the
Executive under the ESOP are equal in value to the allocation received by
the Executive for the 1997 calendar year. All amounts payable under this
paragraph (1) shall be payable exclusively by the Holding Company outside
of the 401(k) Plan and the ESOP;
(2) An additional Supplemental Retirement Benefit under the Bell
Federal Savings and Loan Association of Bellevue Supplemental Retirement
Plan (the "SERP") based on the benefit formula set forth in the Executive's
Supplemental Retirement Agreement and assuming that (a) the Executive had
remained employed with the Holding Company or the Institution during the
thirty-six month period following his Date of Termination and (b) the
Institution's return on assets is equal to or greater than 1.0 during such
thirty-six month period. Any amounts payable to the Executive under this
paragraph 2 shall be fully vested on his Date of Termination; and
(3) An amount equal to the value of the monthly costs of operating and
maintaining the automobile that the Holding Company or the Institution
provides to the Executive at his Date of Termination multiplied by thirty-
six.
<PAGE>
THREE YEAR
FIRST BELL BANCORP, INC.
EMPLOYMENT AGREEMENT
This AGREEMENT ("Agreement") is made effective as of November 16,
1998, by and between First Bell Bancorp, Inc. (the "Holding Company"), a
corporation organized under the laws of Delaware, with its principal
administrative office at 300 Delaware Avenue, Suite 1704, Wilmington, Delaware
19801 and Jeffrey M. Hinds (the "Executive"). Any reference to "Institution"
herein shall mean Bell Federal Savings and Loan Association of Bellevue or any
successor thereto.
WHEREAS, the Holding Company wishes to assure itself of the services
of Executive for the period provided in this Agreement; and
WHEREAS, the Executive is willing to serve in the employ of the
Holding Company on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES
During the period of his employment hereunder, Executive agrees to
serve as Executive Vice President and Chief Financial Officer of the Holding
Company. The Executive shall render administrative and management services to
the Holding Company such as are customarily performed by persons in a similar
executive capacity. During, said period, Executive also agrees to serve, if
elected, as an officer and director of any subsidiary of the Holding Company.
2. TERMS
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) full calendar months thereafter. Commencing on
the first anniversary date of this Agreement, and continuing on each anniversary
thereafter, the term of this Agreement shall be extended by an additional year,
such that the remaining term of the Agreement shall be three years, until such
time as the board of directors of the Holding Company ("Board") or the Executive
elects not to extend the term of this Agreement further by giving written notice
to the other party in accordance with Section 8 of this Agreement. In the event
that written notice is given. this Agreement shall terminate at the end of the
remaining term of the Agreement.
<PAGE>
2
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantially all his
business time, attention, skill, and efforts to the faithful performance of his
duties hereunder including activities and services related to the organization,
operation and management of the Holding Company and its, direct or indirect,
subsidiaries ("Subsidiaries") and participation in community and civic
organizations; provided, however, that, with the approval of the Board, as
evidenced by a resolution of such Board, from time to time, Executive may serve,
or continue to serve, on the boards of directors of, and hold any other offices
or positions in, companies or organizations, which, in such Board's judgment,
will not present any conflict of interest with the Holding Company or its
Subsidiaries, or materially affect the performance of Executive's duties
pursuant to this Agreement.
(c) Notwithstanding anything herein contained to the contrary
Executive's employment with the Holding Company may be terminated by the Holding
Company or Executive during the term of this Agreement, subject to the terms and
conditions of this Agreement. However, Executive shall not perform, in any
respect, directly or indirectly, during the pendency of his temporary or
permanent suspension or termination from the Institution, duties and
responsibilities formerly performed at the Institution as part of his duties and
responsibilities as Executive Vice President and Chief Financial Officer of the
Holding Company.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Executive shall be entitled to a salary from the Holding
Company or its Subsidiaries of not less than $107,090 per year ("Base Salary").
Base Salary shall include any amounts of compensation deferred by Executive
under any qualified or unqualified plan maintained by the Holding Company and
its Subsidiaries. Such Base Salary shall be payable bi-weekly. During the
period of this Agreement, Executive's Base Salary shall be reviewed at least
annually; the first such review will be made no later than one year from the
date of this Agreement. Such review shall be conducted by the Board or by a
Committee of the Board delegated such responsibility by the Board. The
Committee or the Board may increase Executive's Base Salary. The increased Base
Salary shall become the "Base Salary" for purposes of this Agreement. In
addition to the Base Salary provided in this Section 3(a), the Holding Company
shall also provide Executive, at no premium cost to Executive, with all such
other benefits as provided uniformly to permanent full-time employees of the
Holding Company and its Subsidiaries.
(b) The Executive shall be entitled to participate in any employee
benefit plans, arrangements and perquisites substantially equivalent to those in
which Executive was participating or otherwise deriving benefit from immediately
prior to the beginning of the term of this Agreement, and the Holding Company
and its Subsidiaries will not, without Executive's prior
<PAGE>
3
written consent, make any changes in such plans, arrangements or perquisites
which would materially adversely affect Executive's rights or benefits
thereunder, except to the extent that such changes are made applicable to all
Holding Company and Institution employees eligible to participate in such plans,
arrangements and perquisites on a non-discriminatory basis. Without limiting the
generality of the foregoing provisions of this Subsection (b), Executive shall
be entitled to participate in or receive benefits under any employee benefit
plans including, but not limited to, retirement plans, supplemental retirement
plans, pension plans, profit-sharing plans, health-and-accident plans, medical
coverage or any other employee benefit plan or arrangement made available by the
Holding Company and its Subsidiaries in the future to its senior executives and
key management employees, subject to and on a basis consistent with the terms,
conditions and overall administration of such plans and arrangements. Executive
shall be entitled to incentive compensation and bonuses as provided in any plan
of the Holding Company and its Subsidiaries in which Executive is eligible to
participate. Nothing paid to the Executive under any such plan or arrangement
will be deemed to be in lieu of other compensation to which the Executive is
entitled under this Agreement.
(c) In addition to the Base Salary provided for by paragraph (a) of
this Section 3 and other compensation provided for by paragraph (b) of this
Section 3, the Holding Company shall pay or reimburse Executive for all
reasonable travel and other reasonable expenses incurred in the performance of
Executive's obligations under this Agreement and may provide such additional
compensation in such form and such amounts as the Board may from time to time
determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Holding Company of Executive's full-time employment hereunder
for any reason other than termination governed by Section 5(a) hereof, or for
Cause, as defined in Section 7 hereof; (ii) Executive's resignation from the
Holding Company's employ upon any (A) failure to reappoint Executive as
Executive Vice President and Chief Financial Officer, unless consented to by the
Executive, (B) a material change in Executive's function, duties, or
responsibilities with the Holding Company or its Subsidiaries, which change
would cause Executive's position to become one of lesser responsibility,
importance, or scope from the position and attributes thereof described in
Section 1, above, unless consented to by the Executive, (C) a relocation of
Executive's principal place of employment by more than 30 miles from its
location at the effective date of this Agreement, unless consented to by the
Executive, (D) a material reduction in the benefits and perquisites to the
Executive from those being provided as of the effective date of this Agreement,
unless consented to by the Executive, (E) a liquidation or dissolution of the
Holding Company or the Institution, or (F) breach of this Agreement by the
<PAGE>
4
Holding Company. Upon the occurrence of any event described in clauses (A),
(B), (C), (D) (E) or (F), above, Executive shall have the right to elect to
terminate his employment under this Agreement by resignation upon not less than
sixty (60) days prior written notice given within six full calendar months after
the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Holding Company shall be obligated to
pay Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be a lump sum payment in an amount
equal to the sum of (i) the amount of the remaining payments that the Executive
would have earned if he had continued his employment with the Institution during
the remaining term of this Agreement at the Executive's Base Salary at the Date
of Termination; and (ii) the amount equal to the annual contributions that would
have been made on Executive's behalf to any employee benefit plans of the
Institution or the Holding Company during the remaining term of this Agreement
based on contributions made (on an annualized basis) at the Date of Termination.
Such payments shall not be reduced in the event the Executive obtains other
employment following termination of employment.
(c) Upon the occurrence of an Event of Termination, the Holding
Company will cause to be continued life, long term disability, medical, health
and dental coverage substantially equivalent to the coverage that is then
maintained by the Holding Company or its Subsidiaries for Executive and his
eligible dependents immediately prior to his termination as agreed to by the
insurance carrier at no premium cost to the Executive. Such coverage shall
cease upon the expiration of the remaining term of this Agreement.
5. CHANGE IN CONTROL
(a) For purposes of this Agreement, a "Change in Control" of the
Holding Company or the Institution shall mean an event of a nature that; (i)
would be required to be reported in response to Item l (a) of the current report
on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a
Change in Control of the Institution or the Holding Company within the meaning
of the Home Owners' Loan Act of 1933, as amended, the Federal Deposit Insurance
Act, and the Rules and Regulations promulgated by the Office of Thrift
Supervision (or its predecessor agency), as in effect on the date hereof
(provided, that in applying the definition of change in control as set forth
under the rules and regulations of the OTS, the Board shall substitute its
judgment for that of the OTS); or (iii) without limitation such a Change in
Control shall be deemed to have occurred at such time as (A) any "person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of voting securities of the Institution or the Holding
Company representing 25% or more of the Institution's or the Holding Company's
outstanding voting securities or right to acquire such securities except for any
voting securities of the Institution purchased by the Holding Company and any
voting securities purchased by any
<PAGE>
5
employee benefit plan of the Holding Company or its Subsidiaries; or (B)
individuals who constitute the Board on the date hereof (the "Incumbent Board")
cease for any reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board, or whose nomination for election by the Company's stockholders
was approved by a Nominating Committee solely composed of members which are
Incumbent Board members, shall be, for purposes of this clause (B), considered
as though he were a member of the Incumbent Board; or (C) a plan of
reorganization, merger, consolidation, sale of all or substantially all the
assets of the Institution or the Holding Company or similar transaction occurs
or is effectuated in which the Institution or Holding Company is not the
resulting entity; provided, however, that such an event listed above will be
deemed to have occurred or to have been effectuated upon the receipt of all
required federal regulatory approvals not including the lapse of any statutory
waiting periods; or (D) a proxy statement shall be distributed soliciting
proxies from stockholders of the Holding Company, by someone other than the
current management of the Holding Company, seeking stockholder approval of a
plan of reorganization, merger or consolidation of the Holding Company or
Institution with one or more corporations as a result of which the outstanding
shares of the class of securities then subject to such plan or transaction are
exchanged for or converted into cash or property or securities not issued by the
Institution or the Holding Company shall be distributed; or (E) a tender offer
is made for 25% or more of the voting securities of the Institution or Holding
Company then outstanding.
(b) If a Change in Control has occurred pursuant to Section 5(a) or
the Board has determined that a Change in Control has occurred, Executive shall
be entitled to the benefits provided in paragraphs (c) and (d) of this Section 5
upon his subsequent termination of employment at any time during the term of
this Agreement due to (i) Executive's dismissal, (ii) Executive's voluntary
resignation following any demotion, loss of title, office or significant
authority or responsibility, reduction in the annual compensation or material
reduction in benefits or (iii) relocation of his principal place of employment
by more than 30 miles from its location immediately prior to the Change in
Control, unless such termination is because of his death, or Termination for
Cause.
(c) Upon the Executive's entitlement to benefits pursuant to Section
5(b), the Holding Company shall pay Executive within five business days, or in
the event of his subsequent death, his beneficiary or beneficiaries, or his
estate, as the case may be, as severance pay, a lump sum payment equal to the
greater of: (i) the payments due for the remaining term of the Agreement; or
(ii) three (3) times Executive's average annual compensation for the five (5)
preceding taxable years. Such annual compensation shall include Base Salary,
commissions, bonuses, contributions on behalf of Executive to any pension and
profit sharing plan, severance payments, directors or committee fees and fringe
benefits paid or to be paid to the Executive during such years, excluding
amounts received by the Executive pursuant to Section 5(d). Such payments
shall not be reduced in the event Executive obtains other employment following
termination of employment.
<PAGE>
6
(d) Upon the Executive's entitlement to benefits pursuant to Section
5(b), the Company will cause to be continued life, medical and dental coverage
substantially equivalent to the coverage that is then maintained by the
Institution for Executive, as agreed to by the insurance carrier, at no premium
cost to Executive prior to his severance. Such coverage and benefits shall
cease upon the expiration of thirty-six (36) months following the Change in
Control. In addition, the Executive will receive the payments provided for in
Appendix A.
6. GROSS UP PAYMENTS AND PAYMENTS AND BENEFITS AFTER CHANGE
IN CONTROL
(a) Anything in this Agreement to the contrary or any termination of
this Agreement notwithstanding, in the event that it shall be determined that
any payment or distribution or benefits made or provided by the Holding Company
or its affiliated companies to or for the benefit of the Executive whether
pursuant to this Agreement or otherwise and without regard to any additional
payments under this Section 6 would be subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") or
any interest or penalties are incurred by Executive with respect to such excise
tax (such excise tax, together with any such interest or penalties, are
hereinafter collectively referred to as the "Excise Tax"), then the Holding
Company shall pay Executive an additional amount or amounts (each, a "Gross Up
Payment") such that the net amount or amounts retained by Executive, after
deduction of any Excise Tax on any of the above described payments or benefits
and any Federal, state and local income tax and Excise Tax upon payment provided
for by this Section 6, shall be equal to the amount of such payments or benefits
prior to the imposition of such Excise Tax.
(b) All determinations required to be made under this Section 6,
including whether and when a Gross-Up Payment is required and the amount of such
Gross-Up Payment and the assumptions to be utilized in arriving at such
determination, shall be made by Deloitte & Touche or such successor thereto (the
"Accounting Firm") which shall provide detailed supporting calculations both to
the Holding Company and the Executive within 15 business days of the receipt of
notice from the Executive that there has been a payment, such earlier time as is
requested by the Holding Company. All fees and expenses of the Accounting Firm
shall be borne solely by the Holding Company. Any Gross-Up Payment, as
determined pursuant to this Section 6, shall be paid by the Holding Company to
the Executive within five days of the receipt of the Accounting Firm's
determination. Any determination by the Accounting Firm shall be binding upon
the Holding Company and the Executive. For purposes of determining the amount
of a Gross Up Payment, Executive shall be deemed to pay federal income taxes at
the highest marginal rate of federal income taxation (including, but not limited
to, Alternative Minimum Tax) in the calendar year in which the Gross Up Payment
is payable and state and local income taxes at the highest marginal rate of
taxation in the state and locality of Executive's residence on the date the
<PAGE>
7
Gross Up Payment is payable, net of the maximum reduction in federal income
taxes which could be obtained from any available deduction of such state and
local taxes.
(c) In the event that the amount of the Excise Tax is subsequently
determined to be less than the amount taken into account in calculating a Gross
Up Payment hereunder, Executive shall repay to the Holding Company (to the
extent actually paid to Executive) at the time that the amount of such reduction
in Excise Tax is finally determined, the portion of the Gross Up Payment
attributable to such reduction (plus the portion of the Gross Up Payment
attributable to the Excise Tax and federal and state and local income tax
imposed on the Gross Up Payment being repaid by Executive if such repayment
results in a reduction in, or a refund of, Excise Tax and/or federal and state
and local income tax) plus interest on the amount of such payment at the rate
provided in Section 1274(b)(2) (B) of the Code.
(d) In the event that the amount of the Excise Tax is determined to
exceed the amount taken into account in calculating a Gross Up Payment hereunder
(including by reason of any payment the existence or amount of which cannot be
determined at the time of the Gross Up Payment), the Holding Company shall pay
an additional Gross Up Payment in respect of such excess (plus any interest
payable with respect to such excess) at the time that the amount of such excess
is finally determined.
(e) Each Gross Up Payment shall be paid by the Holding Company on the
date on which Executive becomes entitled to the payment or benefits giving rise
to such Gross Up Payment.
7. TERMINATION FOR CAUSE
The term "Termination for Cause" shall mean termination because of a
material loss to the Holding Company or one of its Subsidiaries caused by the
Executive's intentional failure to perform stated duties, personal dishonesty,
willful violation of any law, rule, regulation (other than traffic violations or
similar offenses), final cease and desist order or material breach of any
provision of this Agreement. For purposes of this Section, no act, or the
failure to act, on Executive's part shall be "willful" unless done, or omitted
to be done, not in good faith and without reasonable belief that the action or
omission was in the best interest of the Holding Company or its Subsidiaries.
Notwithstanding the foregoing, Executive shall not be deemed to have been
Terminated for Cause unless and until there shall have been delivered to him a
Notice of Termination which shall include a copy of a resolution duly adopted by
the affirmative vote of not less than three-fourths of the members of the Board
at a meeting of the Board called and held for that purpose (after reasonable
notice to Executive and an opportunity for him, together with counsel, to be
heard before the Board), finding that in the good faith opinion of the Board,
Executive was guilty of conduct justifying Termination for Cause and specifying
the particulars thereof in detail. The Executive shall not have the right to
receive compensation or other benefits
<PAGE>
8
for any period after Termination for Cause except for compensation and benefits
already vested. During the period beginning on the date of the Notice of
Termination for Cause pursuant to Section 8 hereof and through the Date of
Termination, stock options and related limited rights granted to Executive under
any stock option plan shall not be exercisable nor shall any unvested awards
granted to Executive under any stock benefit plan of the Holding Company or any
subsidiary or affiliate thereof vest. At the Date of Termination for Cause, such
stock options and related limited rights and unvested awards shall become null
and void and shall not be exercisable by or delivered to Executive at any time
subsequent to such Date of Termination for Cause.
8. NOTICE
(a) Any purported termination by the Holding Company or by Executive
shall be communicated by Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Executive's employment under the
provision so indicated.
(b) "Date of Termination" shall mean the same date as in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, except upon the occurrence of
a Change in Control and voluntary termination by the Executive in which case the
Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Holding Company will
continue to pay Executive his full compensation in effect when the notice giving
rise to the dispute was given (including, but not limited to, Base Salary) and
continue Executive as a participant in all compensation, benefit and insurance
plans in which he was participating when the notice of dispute was given, until
the dispute is finally resolved in accordance with this Agreement. Amounts paid
under this Section are in addition to all other amounts due under this Agreement
and shall not be offset against or reduce any other amounts due under this
Agreement.
9. POST-TERMINATION OBLIGATIONS
<PAGE>
9
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for one (1) full year
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Holding Company. Executive shall, upon
reasonable notice, furnish such information and assistance to the Holding
Company as may reasonably be required by the Holding Company in connection with
any litigation in which it or any of its subsidiaries or affiliates is, or may
become, a party.
10. NON-COMPETITION
(a) Upon any termination of Executive's employment hereunder pursuant
to Section 4 hereof, Executive agrees not to compete with the Holding Company or
its Subsidiaries for a period of one (1) year following such termination in any
city, town or county in which the Executive' s normal business office is located
and the Holding Company or any of its Subsidiaries has an office or has filed an
application for regulatory approval to establish an office, determined as of the
effective date of such termination, except as agreed to pursuant to a resolution
duly adopted by the Board. Executive agrees that during such period and within
said cities, towns and counties, Executive shall not work for or advise, consult
or otherwise serve with, directly or indirectly, any entity whose business
materially competes with the depository, lending or other business activities of
the Holding Company or its Subsidiaries. The parties hereto, recognizing that
irreparable injury will result to the Holding Company or its Subsidiaries, its
business and property in the event of Executive's breach of this Subsection
10(a) agree that in the event of any such breach by Executive, the Holding
Company or its Subsidiaries, will be entitled, in addition to any other remedies
and damages available, to an injunction to restrain the violation hereof by
Executive, Executive's partners, agents, servants, employees and all persons
acting for or under the direction of Executive. Executive represents and admits
that in the event of the termination of his employment pursuant to Section 7
hereof, Executive's experience and capabilities are such that Executive can
obtain employment in a business engaged in other lines and/or of a different
nature than the Holding Company or its Subsidiaries, and that the enforcement of
a remedy by way of injunction will not prevent Executive from earning a
livelihood. In addition, Executive shall not, for a period of one year after
the termination of this Agreement, engage any person employed by the Holding
Company or its subsidiaries in an employment or contractual relationship with
Executive, Executive's own employer or any other business concern without the
written permission of the Chief Executive Officer of the Holding Company.
Notwithstanding the foregoing, the Executive's obligations under this subsection
10(a) shall terminate upon the occurrence of either of the following events: (i)
a Change in Control or (ii) an Event of Termination. Nothing herein will be
construed as prohibiting the Holding Company or its Subsidiaries from pursuing
any other remedies available to the Holding Company or its
<PAGE>
10
Subsidiaries for such breach or threatened breach, including the recovery of
damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Holding Company and
its Subsidiaries as it may exist from time to time, is a valuable, special and
unique asset of the business of the Holding Company and its Subsidiaries.
Executive will not, during or after the term of his employment, disclose any
knowledge of the past, present, planned or considered business activities of the
Holding Company and its Subsidiaries thereof to any person, firm, corporation,
or other entity for any reason or purpose whatsoever, unless expressly
authorized by the Board of Directors or required by law. Notwithstanding the
foregoing, Executive may disclose any knowledge of banking, financial and/or
economic principles, concepts or ideas which are not solely and exclusively
derived from the business plans and activities of the Holding Company. In the
event of a breach or threatened breach by the Executive of the provisions of
this Section, the Holding Company will be entitled to an injunction restraining
Executive from disclosing, in whole or in part, the knowledge of the past,
present, planned or considered business activities of the Holding Company or its
Subsidiaries or from rendering any services to any person, firm, corporation,
other entity to whom such knowledge, in whole or in part, has been disclosed or
is threatened to be disclosed. Nothing herein will be construed as prohibiting
the Holding Company from pursuing any other remedies available to the Holding
Company for such breach or threatened breach, including the recovery of damages
from Executive.
11. SOURCE OF PAYMENTS
(a) All payments provided in this Agreement shall be timely paid in
cash or check from the general funds of the Holding Company subject to this
Section 11(b).
(b) Notwithstanding any provision herein to the contrary, to the
extent that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement dated November 16, 1998,
between Executive and the Institution, such compensation payments and benefits
paid by the Institution (including, but not limited to, any severance payments
made under Sections 4 and 5 of such Employment Agreement) will be subtracted
from any amount due simultaneously to Executive under similar provisions of this
Agreement. Payments pursuant to this Agreement and the Institution Agreement
shall be allocated in proportion to the level of activity and the time expended
on such activities by the Executive as determined by the Holding Company and the
Institution on a quarterly basis.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Holding Company
or any predecessor of
<PAGE>
11
the Holding Company and Executive (including, but not limited to, the prior
employment agreement dated August 15, 1996, between Executive and the Holding
Company), except that this Agreement shall not affect or operate to reduce any
benefit or compensation inuring to the Executive of a kind elsewhere provided.
No provision of this Agreement shall be interpreted to mean that Executive is
subject to receiving fewer benefits than those available to him without
reference to this Agreement.
13. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Holding Company and their respective successors and assigns.
14. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have
been waived, nor shall there be any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each such waiver shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future as to any act other
than that specifically waived.
15. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of
any provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so invalid,
and each such other provision and part thereof shall to the full extent
consistent with law continue in full force and effect.
16. HEADINGS FOR REFERENCE ONLY
<PAGE>
12
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
17. GOVERNING LAW
This Agreement shall be governed by the laws of the State of Delaware,
unless otherwise specified herein.
18. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the Executive within
fifty (50) miles from the location of the Institution, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection
with Executive's termination is resolved in favor of the Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses and any other cash compensation,
fringe benefits and any compensation and benefits due Executive under this
Agreement.
19. PAYMENT OF COSTS AND LEGAL FEES
All reasonable costs and legal fees paid or incurred by Executive
pursuant to any dispute or question of interpretation relating to this Agreement
shall be paid or reimbursed by the Holding Company, if Executive is successful
pursuant to a legal judgment, arbitration or settlement.
20. INDEMNIFICATION
The Holding Company shall provide Executive (including his heirs,
executors and administrators) with coverage under a standard directors' and
officers' liability insurance policy at its expense and shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under Delaware law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the Holding Company (whether or
<PAGE>
13
not he continues to be a director or officer at the time of incurring such
expenses or liabilities), such expenses and liabilities to include, but not be
limited to, judgments, court costs and attorneys' fees and the cost of
reasonable settlements.
21. SUCCESSOR TO THE HOLDING COMPANY
The Holding Company shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Institution or the Holding
Company, expressly and unconditionally to assume and agree to perform the
Holding Company's obligations under this Agreement, in the same manner and to
the same extent that the Holding Company would be required to perform if no such
succession or assignment had taken place.
<PAGE>
14
SIGNATURES
IN WITNESS WHEREOF, First Bell Bancorp, Inc. has caused this Agreement
to be executed and its seal to be affixed hereunto by its duly authorized
officer and its directors, and Executive has signed this Agreement, on the 22nd
day of February, 1999.
ATTEST: FIRST BELL BANCORP, INC.
/s/ Robert C. Baierl By: /s/ William S. McMinn
- ---------------------------- -------------------------------------
Secretary On behalf of the Board of Directors
WITNESS:
/s/ Jack Schweiger By: /s/ Jeffrey M. Hinds
- ---------------------------- -------------------------------------
Jeffrey M. Hinds
<PAGE>
15
APPENDIX A
----------
Upon the Executive's entitlement to benefits pursuant to Section 5(c), the
Executive will receive the following amounts in a lump sum cash payment as soon
as practicable:
(1) An aggregate payment in the amount of $263,373, representing the
value of (a) the maximum matching contribution that the Executive would
have been eligible to receive under the Bell Federal Savings and Loan
Association of Bellevue 401(k) Plan (the "401(k) Plan"), assuming that the
Executive had remained employed with the Holding Company or the Institution
and participated in the 401(k) Plan during the thirty-six month period
immediately following his Date of Termination, plus (b) the value of the
----
allocations of common stock that the Executive would have been eligible to
receive under the Bell Federal Savings and Loan Association of Bellevue
Employee Stock Ownership Plan (the "ESOP"), assuming that the Executive had
remained employed with the Holding Company or the Institution and
participated in the ESOP during the thirty-six month period immediately
following his Date of Termination. For purposes of this paragraph (1), it
shall be assumed that the allocations that would have been made to the
Executive under the ESOP are equal in value to the allocation received by
the Executive for the 1997 calendar year. All amounts payable under this
paragraph (1) shall be payable exclusively by the Holding Company outside
of the 401(k) Plan and the ESOP.
<PAGE>
Exhibit 10.7
THREE YEAR
BELL FEDERAL SAVINGS AND LOAN ASSOCIATION OF BELLEVUE
EMPLOYMENT AGREEMENT
This AGREEMENT is made effective as of November 16, 1998, by and among
Bell Federal Savings and Loan Association of Bellevue (the "Institution"), a
federally chartered savings institution, with its principal administrative
office at 532 Lincoln Avenue, Bellevue, Pennsylvania, First Bell Bancorp, Inc.,
a corporation organized under the laws of the State of Delaware, the holding
company for the Institution (the "Holding Company"), and Albert H. Eckert, II
("Executive").
WHEREAS, the Institution wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the
Institution on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, Executive agrees to
serve as President and Chief Executive Officer of the Institution. Executive
shall render administrative and management services to the Institution such as
are customarily performed by persons situated in a similar executive capacity.
During said period, Executive also agrees to serve, if elected, as an officer
and director of the Holding Company or any subsidiary of the Institution.
2. TERMS AND DUTIES.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six full calendar months thereafter. Commencing on the
first anniversary date of this Agreement, and continuing on each anniversary
thereafter, the disinterested members of the board of directors of the
Institution ("Board") may extend the Agreement an additional year such that the
remaining term of the Agreement shall be three years unless the Executive elects
not to extend the term of this Agreement by giving written notice in accordance
with Section 8 of this Agreement. The Board will review the Agreement and
Executive's performance annually for purposes of determining whether to extend
the Agreement and the rationale and results thereof shall be included in the
minutes of the Board's meeting. The Board shall give notice to the Executive as
soon as possible after such review as to whether the Agreement is to be
extended.
<PAGE>
2
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantially all his
business time, attention, skill, and efforts to the faithful performance of his
duties hereunder including activities and services related to the organization,
operation and management of the Institution and participation in community and
civic organizations; provided, however, that, with the approval of the Board. as
evidenced by a resolution of such Board. from time to time, Executive may serve,
or continue to serve on the boards of directors of, and hold any other offices
or positions in, companies or organizations, which, in such Board's judgment,
will not present any conflict of interest with the Institution, or materially,
affect the performance of Executive's duties pursuant to this Agreement.
(c) Notwithstanding anything herein to the contrary, Executive's
employment with the Institution may be terminated by the Institution or the
Executive during the term of this Agreement, subject to the terms and conditions
of this Agreement. However, Executive shall not perform, in any respect,
directly or indirectly, during the pendency of his temporary or permanent
suspension or termination from the Institution, duties and responsibilities
formerly performed at the Institution as part of his duties and responsibilities
as President and Chief Executive Officer of the Holding Company.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Institution shall pay Executive as compensation a salary of
not less than $200,129 per year ("Base Salary"). Base Salary shall include any
amounts of compensation deferred by Executive under any qualified or unqualified
plan maintained by the Institution. Such Base Salary shall be payable bi-
weekly. During the period of this Agreement, Executive's Base Salary shall be
reviewed at least annually; the first such review will be made no later than one
year from the date of this Agreement. Such review shall be conducted by the
Board or by a Committee of the Board, delegated such responsibility by the
Board. The Committee or the Board may increase Executive's Base Salary. Any
increase in Base Salary shall become the "Base Salary" for purposes of this
Agreement. In addition to the Base Salary provided in this Section 3(a), the
Institution shall also provide Executive, at no premium cost to Executive, with
all such other benefits as are provided uniformly, to permanent full-time
employees of the Institution.
(b) The Executive shall be entitled to participate in any employee
benefit plans, arrangements and perquisites substantially equivalent to those in
which Executive was participating, or otherwise deriving benefit from
immediately prior to the beginning of the term of this Agreement. and the
Institution will not, without Executive's prior written consent, make any
changes in such plans, arrangements or perquisites which would materially
adversely affect Executive's rights or benefits thereunder; except to the extent
such changes are made applicable to all Institution employees on a
nondiscriminatory basis. Without limiting the generality of the
<PAGE>
3
foregoing provisions of this subsection (b), Executive shall be entitled to
participate in or receive benefits under any employee benefit plans including,
but not limited to, retirement plans, supplemental retirement plans, pension
plans, profit sharing, plans. health and accident plans, medical coverage or any
other employee benefit plan or arrangement made available by the Institution in
the future to its senior executives and key management employees, subject to and
on a basis consistent with the terms, conditions and overall administration of
such plans and arrangements. Executive shall be entitled to incentive
compensation and bonuses as provided in any plan of the Institution in which
Executive is eligible to participate. Nothing paid to the Executive under any
such plan or arrangement will be deemed to be in lieu of other compensation to
which the Executive is entitled under this Agreement.
(c) In addition to the Base Salary provided for by paragraph (a) of'
this Section 3 and other compensation provided for by paragraph (b) of this
Section 3, the Institution shall pay or reimburse Executive for all reasonable
travel and other reasonable expenses incurred in the performance of Executive's
obligations under this Agreement and may provide such additional compensation in
such form and such amounts as the Board may from time to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Institution or the Holding Company of Executive's full-time
employment hereunder for any reason other than a termination governed by Section
5(a) hereof, or Termination for Cause. as defined in Section 7 hereof; (ii)
Executive's resignation from the Institution's employ upon any (A) failure to
elect or reelect or to appoint or reappoint Executive as President and Chief
Executive Officer, unless consented to by the Executive, (B) a material change
in Executive's function, duties, or responsibilities, which change would cause
Executive's position to become one of lesser responsibility, importance. or
scope from the position and attributes thereof described in Section 1. above,
unless consented to by Executive, (C) a relocation of Executive's principal
place of employment by more than 30 miles from its location at the effective
date of this agreement, unless consented to by the Executive, (D) a material
reduction in the benefits and perquisites to the Executive from those being
provided as of the effective date of this Agreement, unless consented to by the
Executive, (E) a liquidation or dissolution of the Institution or Holding
Company or (F) breach of this Agreement by the Institution. Upon the Occurrence
of any event described in clauses (A), (B), (C), (D), (E) or (F), above,
Executive shall have the right to elect to terminate his employment under this
Agreement by resignation upon not less than sixty (60) days prior written notice
given within six full months after the event giving rise to said right to elect.
<PAGE>
4
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Institution shall be obligated to pay
Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, a lump sum payment in an
amount equal to the sum of: (i) the amount of the remaining payments that the
Executive would have earned if he had continued his employment with the
Institution during the remaining term of this Agreement at the Executive's Base
Salary at the Date of Termination and (ii) the amount equal to the annual
contributions that would have been made on Executive's behalf to any employee
benefit plans of the Institution or the Holding Company during the remaining
term of this Agreement based on contributions made (on an annualized basis) at
the Date of Termination; provided, however, payments pursuant to this subsection
and subsection 4(c) below shall not, in the aggregate, exceed (3) three times
Executive's average annual compensation for the five most recent taxable years
that Executive has been employed by the Institution or such lesser number of
years in the event that Executive shall have been employed by the Institution
for less than five years. In the event the Institution is not in compliance
with its minimum capital requirements or if such payments pursuant to this
subsection (b) would cause the Institution's capital to be reduced below its
minimum regulatory capital requirements, such payments shall be deferred until
such time as the Institution or successor thereto is in capital compliance. In
the event that no election is made, payment to Executive will be made on a
monthly basis in approximately equal installments during the remaining term of
the Agreement. Such payments shall not be reduced in the event the Executive
obtains other employment following termination of employment.
(c) Upon the occurrence of an Event of Termination, the Institution
will cause to be continued life, long term disability, medical, health and
dental coverage substantially identical to the coverage that is then maintained
by the Institution or the Holding Company for Executive and his eligible
dependents immediately prior to his termination as agreed to by the insurance
carrier at no premium cost to the Executive, except to the extent such coverage
may be changed in its application to all Institution or Holding Company
employees. Such coverage shall cease upon the expiration of the remaining term
of this Agreement.
5. CHANGE IN CONTROL
(a) For purposes of this Agreement, a "Change in Control" of the
Institution or Holding Company shall mean an event of a nature that: (i) would
be required to be reported in response to Item 1 of the current report on Form
8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); or (ii)
results in a Change in Control of the Institution or the Holding Company within
the meaning of the Home Owners' Loan Act of 1933, as amended, the Federal
Deposit Insurance Act and the Rules and Regulations promulgated by the Office of
Thrift Supervision ("OTS") (or its predecessor agency), as in effect on the date
hereof (provided, that in applying the definition of change in control as set
forth under the rules and regulations of the OTS, the Board shall
<PAGE>
5
substitute its judgment for that of the OTS); or (iii) without limitation such a
Change in Control shall be deemed to have occurred at such time as (A) any
"person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act)
is or becomes the "beneficial owner" (as defined in Rule 13d-3) under the
Exchange Act), directly or indirectly, of voting securities of the Institution
or the Holding Company representing 25% or more of the Institution's or the
Holding Company's outstanding voting securities or right to acquire such
securities except for any voting securities of the Institution purchased by the
Holding Company and any voting securities purchased by any employee benefit plan
of the Institution or the Holding Company, or (B) individuals who constitute the
Board on the date hereof (the "Incumbent Board") cease for any reason to
constitute at least a majority thereof, provided that any person becoming a
director subsequent to the date hereof whose election was approved by a vote of
at least three-quarters of the directors comprising the Incumbent Board, or
whose nomination for election by the Holding Company's stockholders was approved
by the same Nominating Committee serving under an Incumbent Board, shall be, for
purposes of this clause (B), considered as though he were a member of the
Incumbent Board, or (C) a plan of reorganization, merger, consolidation, sale of
all or substantially all the assets of the Institution or the Holding Company or
similar transaction occurs in which the Institution or Holding Company is not
the resulting entity; provided, however, that such an event listed above will be
deemed to have occurred or to have been effectuated upon the receipt of all
required regulatory approvals not including the lapse of any statutory waiting
periods, or (D) a proxy statement shall be distributed soliciting proxies from
stockholders of the Holding Company, by someone other than the current
management of the Holding Company, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Holding Company or Institution
with one or more corporations as a result of which the outstanding shares of the
class of securities then subject to such plan or transaction are exchanged for
or converted into cash or property or securities not issued by the Institution
or the Holding Company shall be distributed, or (E) a tender offer is made for
25% or more of the voting securities of the Institution or Holding Company then
outstanding.
(b) If a Change in Control has occurred pursuant to Section 5(a), or
the Board has determined that a Change in Control has occurred, Executive shall
be entitled to the benefits provided in paragraphs (c), and (d) of this Section
5 upon his subsequent termination of employment at any time during the term of
this Agreement due to: (1) Executive's dismissal or Executive's voluntary
resignation following any demotion, loss of title, office or significant
authority or responsibility, (2) material reduction in annual compensation or
benefits or (3) relocation of his principal place of employment by more than 30
miles from its location immediately prior to the Change in Control, unless such
termination is because of his death or termination for Cause.
(c) Upon Executive's entitlement to benefits pursuant to Section 5(b),
the Institution shall pay Executive within five business days, or in the event
of his subsequent death, his beneficiary or beneficiaries, or his estate, as the
case may be, a lump sum payment equal to
<PAGE>
6
the greater of: (1) the payments due for the remaining term of the Agreement; or
(2) three (3) times Executive's average annual compensation for the five (5)
most recent taxable years that Executive has been employed by the Institution or
such lesser number of' years in the event that Executive shall have been
employed by the Institution for less than five (5) years. Such average annual
compensation shall include Base Salary, any commissions, bonuses. contributions
on Executive's behalf to any pension and/or profit sharing plan, severance
payments, retirement payments, directors or committee fees, fringe benefits paid
or to be paid to the Executive in any such year, and payment of expense items
without accountability or business purpose or that do not meet the IRS
requirements for deductibility by the Institution; provided, however, that any
payment under this provision and subsection 5(d) below shall not exceed three
(3) times the Executive's average annual compensation. In the event the
Institution is not in compliance with its minimum capital requirements or if
such payments would cause the Institution's capital to be reduced below its
minimum regulatory capital requirements, such payments shall be deferred until
such time as the Institution or successor thereto is in capital compliance. In
the event that no election is made, payment to the Executive will be made on a
monthly basis in approximately equal installments over a period of thirty-six
months following the Executive's termination. Such payments shall not be reduced
in the event Executive obtains other employment following termination of
employment.
(d) Upon the Executive's entitlement to benefits pursuant to Section
5(b), the Institution will cause to be continued life, medical and dental
coverage substantially identical to the coverage maintained by the Institution
for Executive prior to his severance as agreed to by the insurance carrier at no
premium cost to the Executive, except to the extent that such coverage may be
changed in its application for all Institution employees on a non-discriminatory
basis. Such coverage and payments shall cease upon the expiration of thirty-six
months following the Date of Termination.
6. CHANGE OF CONTROL RELATED PROVISIONS.
Notwithstanding the paragraphs of Section 5, in no event shall the
aggregate payments or benefits to be made or afforded to Executive under said
paragraphs (the "Termination Benefits") constitute an "excess parachute payment"
under Section 280G of the Code or any successor thereto. and in order to avoid
such a result, Termination Benefits will be reduced, if necessary, to an amount
(the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less
than an amount equal to three (3) times Executive's "base amount", as determined
in accordance with said Section 280G. The allocation of the reduction required
hereby among the Termination Benefits provided by Section 5 shall be determined
by Executive.
7. TERMINATION FOR CAUSE.
<PAGE>
7
The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order or material
breach of any provision of this Agreement. For purposes of this Section, no
act. or the failure to act, on Executive's part shall be "willful" unless done,
or omitted to be done not in good faith and without reasonable belief that the
action or omission was in the best interest of the Institution or its
affiliates. Notwithstanding the foregoing, Executive shall not be deemed to
have been Terminated for Cause unless and until there shall have been delivered
to him a Notice of Termination which shall include a copy of a resolution duly
adopted by the affirmative vote of not less than a majority of the members of
the Board at a meeting of the Board called and held for that purpose (after
reasonable notice to Executive and an opportunity for him, together with
counsel, to be heard before the Board), finding, that in the good faith opinion
of the Board, Executive was guilty of conduct justifying Termination for Cause
and specifying the particulars thereof in detail. Executive shall not have the
right to receive compensation or other benefits for any period after Termination
for Cause except for compensation and benefits for already vested. During the
period beginning on the date of the Notice of Termination for Cause pursuant to
Section 8 hereof and through the Date of Termination, stock options and related
limited rights granted to Executive under any stock option plan shall not be
exercisable nor shall any unvested awards granted to Executive under any stock
benefit plan of the Institution, the Holding Company or any subsidiary or
affiliate thereof vest. At the Date of Termination for Cause, such stock
options and related limited rights and unvested awards shall become null and
void and shall not be exercisable by or delivered to Executive at any time
subsequent to such Date of Termination for Cause.
8. NOTICE.
(a) Any purported termination by the Institution or by Executive shall
be communicated by Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Executive's employment under the
provision so indicated.
(b) "Date of Termination" shall mean the same date as the Notice of
Termination (which in the case of a Termination for Cause, shall not be less
than thirty days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, except upon the occurrence of
a Change in Control and voluntary
<PAGE>
8
termination by the Executive in which case the Date of Termination shall be the
date specified in the Notice, the Date of Termination shall be the date on which
the dispute is finally determined, either by mutual written agreement of the
parties, by a binding arbitration award, or by a final judgment, order or decree
of a court of competent jurisdiction (the time for appeal therefrom having
expired and no appeal having been perfected) and provided further that the Date
of Termination shall be extended by a notice of dispute only if such notice is
given in good faith and the party giving such notice pursues the resolution of
such dispute with reasonable diligence. Notwithstanding the pendency of any such
dispute, the Institution will continue to pay Executive his Base Salary in
effect when the notice giving rise to the dispute was given until the earlier
of: (1) the resolution of the dispute in accordance with this Agreement; or (2)
the expiration of the remaining term of this Agreement as determined as of the
Date of Termination. Amounts paid under this Section are in addition to all
other amounts due under this Agreement and shall not be offset against or reduce
any other amounts due under this Agreement.
9. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for one (1) full year
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Institution. Executive shall, upon reasonable
notice, furnish such information and assistance to the Institution as may
reasonably be required by the Institution in connection with any litigation in
which it or any of its subsidiaries or affiliates is, or may become, a party.
10. NON-COMPETITION.
(a) Upon any termination of Executive's employment hereunder pursuant
to Section 4 hereof, Executive agrees not to compete with the Institution for a
period of one (1) year following such termination in any city, town or county in
which the Executive's normal business office is located and the Institution has
an office or has filed an application for regulatory approval to establish an
office, determined as of the effective date of such termination, except as
agreed to pursuant to a resolution duly adopted by the Board. Executive agrees
that during such period and within said cities, towns and counties, Executive
shall not work for or advise, consult or otherwise serve with, directly or
indirectly, any entity whose business materially competes with the depository,
lending or other business activities of the Institution. The parties hereto,
recognizing that irreparable injury will result to the Institution, its business
and property in the event of Executive's breach of this subsection 10(a) agree
that in the event of any such breach by Executive, the Institution, will be
entitled, in addition to any other remedies and damages available, to an
injunction to restrain the violation hereof by Executive, Executive's partners,
agents, servants, employees and all persons acting for or under the direction of
Executive. In addition, Executive shall not, for a period of one year after the
termination of this Agreement, engage any person employed by the Holding Company
or the Institution in an employment or
<PAGE>
9
contractual relationship with Executive, Executive's own employer or any other
business concern without the written permission of the Chief Executive Officer
of the Holding Company or the Institution. Notwithstanding the foregoing, the
Executive's obligations under this subsection 10(a) shall terminate upon the
occurrence of either of the following events: (i) a Change in Control or (ii) an
Event of Termination. Nothing herein will be construed as prohibiting the
Institution from pursuing any other remedies available to the Institution for
such breach or threatened breach, including the recovery of damages from
Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Institution and
affiliates thereof, as it may exist from time to time, is a valuable, special
and unique asset of the business of the Institution. Executive will not, during
or after the term of his employment, disclose any knowledge of the past,
present, planned or considered business activities of the Institution or
affiliates thereof to any person, firm, corporation, or other entity for any
reason or purpose whatsoever, unless expressly authorized by the Board of
Directors or required by law. Notwithstanding the foregoing, Executive may
disclose any knowledge of banking financial and/or economic principles, concepts
or ideas which are not solely and exclusively derived from the business plans
and activities of the Institution. In the event of a breach or threatened
breach by Executive of the provisions of this Section, the Institution will be
entitled to an injunction restraining Executive from disclosing, in whole or in
part, the knowledge of the past, present, planned or considered business
activities of the Institution or affiliates thereof, or from rendering any
services to any person, firm, corporation, other entity to whom such knowledge,
in whole or in part, has been disclosed or is threatened to be disclosed.
Nothing herein will be construed as prohibiting the Institution from pursuing
any other remedies available to the Institution for such breach or threatened
breach, including the recovery of damages from Executive.
11. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in
cash or check from the general funds of the Institution. The Holding Company,
however, unconditionally guarantees payment and provision of all amounts and
benefits due hereunder to Executive and, if such amounts and benefits due from
the Institution are not timely paid or provided by the Institution, such amounts
and benefits shall be paid or provided by the Holding Company.
(b) Notwithstanding any provision herein to the contrary, to the
extent that payments and benefits, as provided by this Agreement, are paid to
or received by Executive under the Employment Agreement dated November 16, 1998,
between Executive and the Holding Company, such compensation payments and
benefits paid by the Holding Company will be subtracted from any amounts due
simultaneously to Executive under similar provisions of this Agreement.
Payments pursuant to this Agreement and the Holding Company Agreement shall
<PAGE>
10
be allocated in proportion to the services rendered and time expended on such
activities by Executive as determined by the Holding Company and the Institution
on a quarterly basis.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Institution or
any predecessor of the Institution and Executive (including, but not limited to,
the Employment Agreement dated August 15, 1996 between the Executive and the
Institution), except that this Agreement shall not affect or operate to reduce
any benefit or compensation inuring to Executive of a kind elsewhere provided.
No provision of this Agreement shall be interpreted to mean that Executive is
subject to receiving fewer benefits than those available to him without
reference to this Agreement.
13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Institution and their respective successors and assigns.
14. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have
been waived, nor shall there be any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each such waiver shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future as to any act other
than that specifically waived.
15. REQUIRED PROVISIONS.
(a) The Institution may terminate Executive's employment at any time,
but any termination by the Institution, other than Termination for Cause, shall
not prejudice
<PAGE>
11
Executive's right to compensation or other benefits under this Agreement.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 7 hereinabove.
(b) If Executive is suspended from office and/or temporarily
prohibited from participation in the conduct of the Institution's affairs by a
notice served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance
Act. 12 U.S.C. (S)1818(e)(3) or (g)(1); the Institution's obligations under this
contract shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
Institution may in its discretion (i) pay Executive all or part of the
compensation withheld while their contract obligations were suspended and (ii)
reinstate (in whole or in part) any of the obligations which were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Institution's affairs by an order issued
under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
(S)1818(e)(4) or (g)(1), all obligations of the Institution under this contract
shall terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Institution is in default as defined in Section 3(x)(1) of
the Federal Deposit Insurance Act, 12 U.S.C. (S)1813(x)(1) all obligations of
the Institution under this contract shall terminate as of the date of default,
but this paragraph shall not affect any vested rights of the contracting
parties.
(e) All obligations of the Institution under this contract shall be
terminated, except to the extent determined that continuation of the contract is
necessary for the continued operation of the Institution, (i) by the Director of
the OTS (or his designee), the FDIC or the Resolution Trust Corporation, at the
time the FDIC enters into an agreement to provide assistance to or on behalf of
the Institution under the authority contained in Section l3(c) of the Federal
Deposit Insurance Act, 12 U.S.C. (S)1823(c); or (ii) by the Director of the OTS
(or his designee) at the time the Director (or his designee) approves a
supervisory Merger to resolve problems related to the operations of the
Institution or when the Institution is determined by the Director to be in an
unsafe or unsound condition. Any rights of the parties that have already
vested, however, shall not be affected by such action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
(S)1828(k) and 12 C.F.R. (S)545.121 and any rules and regulations promulgated
thereunder.
16. REINSTATEMENT OF BENEFITS UNDER SECTION 15(b).
<PAGE>
12
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Institution's affairs by a notice described
in Section 15(b) hereof (the "Notice") during the term of this Agreement and a
Change in Control, as defined herein, occurs, the Institution will assume its
obligations to pay and Executive will be entitled to receive all of the
termination benefits provided for under Section 5 of this Agreement upon the
Institution's receipt of a dismissal of charges in the Notice.
17. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of
any provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so invalid,
and each such other provision and part thereof shall to the full extent
consistent with law continue in full force and effect.
18. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
19. GOVERNING LAW.
The validity, interpretation, performance and enforcement of this
Agreement shall be governed by the laws of the Commonwealth of Pennsylvania, but
only to the extent not superseded by federal law.
20. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Institution, in accordance with the rules of
the American Arbitration Association then in effect. Judgment may be entered on
the arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection
with Executive's termination is resolved in favor of Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses
<PAGE>
13
and any other cash compensation. fringe benefits and any compensation and
benefits due Executive under this Agreement.
21. PAYMENT OF COSTS AND LEGAL FEES.
All reasonable costs and legal fees paid or incurred by Executive
pursuant to any dispute or question of interpretation relating to this Agreement
shall be paid or reimbursed by the Institution if Executive is successful on the
merits pursuant to a legal judgment, arbitration or settlement.
22. INDEMNIFICATION.
(a) The Institution shall provide Executive (including his heirs,
executors and administrators) with coverage under a standard directors' and
officers' liability insurance policy at its expense, or in lieu thereof, shall
indemnify Executive (and his heirs, executors and administrators) as permitted
under federal law against all expenses and liabilities reasonably incurred by
him in connection with or arising out of any action, suit or proceeding in which
he may be involved by reason of his having been a director or officer of the
Institution (whether or not he continues to be a director or officer at the time
of incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgments, court costs and attorneys' fees and
the cost of reasonable settlements.
(b) Any payments made to Executive pursuant to this Section are
subject to and conditioned upon compliance with 12 C.F.R.(S) 545.121 and any
rules or regulations promulgated thereunder.
23. SUCCESSOR TO THE INSTITUTION.
The Institution shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise to all or
substantially all the business or assets of the Institution or the Holding
Company, expressly and unconditionally to assume and agree to perform the
Institution's obligations under this Agreement, in the same manner and to the
same extent that the Institution would be required to perform if no such
succession or assignment had taken place.
<PAGE>
14
SIGNATURES
IN WITNESS WHEREOF, Bell Federal Savings and Loan Association of
Bellevue and First Bell Bancorp, Inc. have caused this Agreement to be executed
and their seals to be affixed hereunto by their duly authorized officers and
directors, and Executive has signed this Agreement on the 22nd day of February,
1999.
ATTEST: BELL FEDERAL SAVINGS AND LOAN
ASSOCIATION OF BELLEVUE
/s/ Thomas J. Jackson By: /s/ William S. McMinn
- -------------------------- ------------------------------------------
Secretary On behalf of the Board of Directors
[SEAL]
ATTEST: FIRST BELL BANCORP, INC.
(Guarantor)
/s/ Robert C. Baierl By: /s/ David F. Figgins
- -------------------------- ------------------------------------------
Secretary On behalf of the Board of Directors
[SEAL]
WITNESS:
/s/ Jack Schweiger /s/ Albert H. Eckert, II
- -------------------------- ------------------------------------------
Albert H. Eckert, II
<PAGE>
THREE YEAR
BELL FEDERAL SAVINGS AND LOAN ASSOCIATION OF BELLEVUE
EMPLOYMENT AGREEMENT
This AGREEMENT is made effective as of November 16, 1998, by and among
Bell Federal Savings and Loan Association of Bellevue (the "Institution"), a
federally chartered savings institution, with its principal administrative
office at 532 Lincoln Avenue, Bellevue, Pennsylvania, First Bell Bancorp, Inc.,
a corporation organized under the laws of the State of Delaware, the holding
company for the Institution (the "Holding Company"), and Jeffrey M. Hinds
("Executive").
WHEREAS, the Institution wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the
Institution on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, Executive agrees to
serve as Executive Vice President and Chief Financial Officer of the
Institution. Executive shall render administrative and management services to
the Institution such as are customarily performed by persons situated in a
similar executive capacity. During said period, Executive also agrees to serve,
if elected, as an officer and director of the Holding Company or any subsidiary
of the Institution.
2. TERMS AND DUTIES.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six full calendar months thereafter. Commencing on the
first anniversary date of this Agreement, and continuing on each anniversary
thereafter, the disinterested members of the board of directors of the
Institution ("Board") may extend the Agreement an additional year such that the
remaining term of the Agreement shall be three years unless the Executive elects
not to extend the term of this Agreement by giving written notice in accordance
with Section 8 of this Agreement. The Board will review the Agreement and
Executive's performance annually for purposes of determining whether to extend
the Agreement and the rationale and results thereof shall be included in the
minutes of the Board's meeting. The Board shall give notice to the Executive as
soon as possible after such review as to whether the Agreement is to be
extended.
<PAGE>
2
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantially all his
business time, attention, skill, and efforts to the faithful performance of his
duties hereunder including activities and services related to the organization,
operation and management of the Institution and participation in community and
civic organizations; provided, however, that, with the approval of the Board. as
evidenced by a resolution of such Board. from time to time, Executive may serve,
or continue to serve on the boards of directors of, and hold any other offices
or positions in, companies or organizations, which, in such Board's judgment,
will not present any conflict of interest with the Institution, or materially,
affect the performance of Executive's duties pursuant to this Agreement.
(c) Notwithstanding anything herein to the contrary, Executive's
employment with the Institution may be terminated by the Institution or the
Executive during the term of this Agreement, subject to the terms and conditions
of this Agreement. However, Executive shall not perform, in any respect,
directly or indirectly, during the pendency of his temporary or permanent
suspension or termination from the Institution, duties and responsibilities
formerly performed at the Institution as part of his duties and responsibilities
as Executive Vice President and Chief Financial Officer of the Holding Company.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Institution shall pay Executive as compensation a salary of
not less than $107,090 per year ("Base Salary"). Base Salary shall include any
amounts of compensation deferred by Executive under any qualified or unqualified
plan maintained by the Institution. Such Base Salary shall be payable bi-
weekly. During the period of this Agreement, Executive's Base Salary shall be
reviewed at least annually; the first such review will be made no later than one
year from the date of this Agreement. Such review shall be conducted by the
Board or by a Committee of the Board, delegated such responsibility by the
Board. The Committee or the Board may increase Executive's Base Salary. Any
increase in Base Salary shall become the "Base Salary" for purposes of this
Agreement. In addition to the Base Salary provided in this Section 3(a), the
Institution shall also provide Executive, at no premium cost to Executive, with
all such other benefits as are provided uniformly, to permanent full-time
employees of the Institution.
(b) The Executive shall be entitled to participate in any employee
benefit plans, arrangements and perquisites substantially equivalent to those in
which Executive was participating, or otherwise deriving benefit from
immediately prior to the beginning of the term of this Agreement. and the
Institution will not, without Executive's prior written consent, make any
changes in such plans, arrangements or perquisites which would materially
adversely affect Executive's rights or benefits thereunder; except to the extent
such changes are made applicable to all Institution employees on a
nondiscriminatory basis. Without limiting the generality of the foregoing
provisions of this subsection (b), Executive shall be entitled to participate in
or receive
<PAGE>
3
benefits under any employee benefit plans including, but not limited to,
retirement plans, supplemental retirement plans, pension plans, profit sharing,
plans. health and accident plans, medical coverage or any other employee benefit
plan or arrangement made available by the Institution in the future to its
senior executives and key management employees, subject to and on a basis
consistent with the terms, conditions and overall administration of such plans
and arrangements. Executive shall be entitled to incentive compensation and
bonuses as provided in any plan of the Institution in which Executive is
eligible to participate. Nothing paid to the Executive under any such plan or
arrangement will be deemed to be in lieu of other compensation to which the
Executive is entitled under this Agreement.
(c) In addition to the Base Salary provided for by paragraph (a) of
this Section 3 and other compensation provided for by paragraph (b) of this
Section 3, the Institution shall pay or reimburse Executive for all reasonable
travel and other reasonable expenses incurred in the performance of Executive's
obligations under this Agreement and may provide such additional compensation in
such form and such amounts as the Board may from time to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Institution or the Holding Company of Executive's full-time
employment hereunder for any reason other than a termination governed by Section
5(a) hereof, or Termination for Cause. as defined in Section 7 hereof; (ii)
Executive's resignation from the Institution's employ upon any (A) failure to
elect or reelect or to appoint or reappoint Executive as Executive Vice
President and Chief Financial Officer, unless consented to by the Executive, (B)
a material change in Executive's function, duties, or responsibilities, which
change would cause Executive's position to become one of lesser responsibility,
importance. or scope from the position and attributes thereof described in
Section 1. above, unless consented to by Executive, (C) a relocation of
Executive's principal place of employment by more than 30 miles from its
location at the effective date of this agreement, unless consented to by the
Executive, (D) a material reduction in the benefits and perquisites to the
Executive from those being provided as of the effective date of this Agreement,
unless consented to by the Executive, (E) a liquidation or dissolution of the
Institution or Holding Company or (F) breach of this Agreement by the
Institution. Upon the Occurrence of any event described in clauses (A), (B),
(C), (D), (E) or (F), above, Executive shall have the right to elect to
terminate his employment under this Agreement by resignation upon not less than
sixty (60) days prior written notice given within six full months after the
event giving rise to said right to elect.
<PAGE>
4
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Institution shall be obligated to pay
Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, in a lump sum payment in an
amount equal to the sum of: (i) the amount of the remaining payments that the
Executive would have earned if he had continued his employment with the
Institution during the remaining term of this Agreement at the Executive's Base
Salary at the Date of Termination and (ii) the amount equal to the annual
contributions that would have been made on Executive's behalf to any employee
benefit plans of the Institution or the Holding Company during the remaining
term of this Agreement based on contributions made (on an annualized basis) at
the Date of Termination; provided, however, payments pursuant to this subsection
and subsection 4(c) below shall not, in the aggregate, exceed (3) three times
Executive's average annual compensation for the five most recent taxable years
that Executive has been employed by the Institution or such lesser number of
years in the event that Executive shall have been employed by the Institution
for less than five years. In the event the Institution is not in compliance
with its minimum capital requirements or if such payments pursuant to this
subsection (b) would cause the Institution's capital to be reduced below its
minimum regulatory capital requirements, such payments shall be deferred until
such time as the Institution or successor thereto is in capital compliance. In
the event that no election is made, payment to Executive will be made on a
monthly basis in approximately equal installments during the remaining term of
the Agreement. Such payments shall not be reduced in the event the Executive
obtains other employment following termination of employment.
(c) Upon the occurrence of an Event of Termination, the Institution
will cause to be continued life, long term disability, medical, health and
dental coverage substantially identical to the coverage that is then maintained
by the Institution or the Holding Company for Executive and his eligible
dependents immediately prior to his termination as agreed to by the insurance
carrier at no premium cost to the Executive, except to the extent such coverage
may be changed in its application to all Institution or Holding Company
employees. Such coverage shall cease upon the expiration of the remaining term
of this Agreement.
5. CHANGE IN CONTROL
(a) For purposes of this Agreement, a "Change in Control" of the
Institution or Holding Company shall mean an event of a nature that: (i) would
be required to be reported in response to Item 1 of the current report on Form
8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); or (ii)
results in a Change in Control of the Institution or the Holding Company within
the meaning of the Home Owners' Loan Act of 1933, as amended, the Federal
Deposit Insurance Act and the Rules and Regulations promulgated by the Office of
Thrift Supervision ("OTS") (or its predecessor agency), as in effect on the date
hereof (provided, that in applying the definition of change in control as set
forth under the rules and regulations of the OTS, the Board shall
<PAGE>
5
substitute its judgment for that of the OTS); or (iii) without limitation such a
Change in Control shall be deemed to have occurred at such time as (A) any
"person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act)
is or becomes the "beneficial owner" (as defined in Rule 13d-3) under the
Exchange Act), directly or indirectly, of voting securities of the Institution
or the Holding Company representing 25% or more of the Institution's or the
Holding Company's outstanding voting securities or right to acquire such
securities except for any voting securities of the Institution purchased by the
Holding Company and any voting securities purchased by any employee benefit plan
of the Institution or the Holding Company, or (B) individuals who constitute the
Board on the date hereof (the "Incumbent Board") cease for any reason to
constitute at least a majority thereof, provided that any person becoming a
director subsequent to the date hereof whose election was approved by a vote of
at least three-quarters of the directors comprising the Incumbent Board, or
whose nomination for election by the Holding Company's stockholders was approved
by the same Nominating Committee serving under an Incumbent Board, shall be, for
purposes of this clause (B), considered as though he were a member of the
Incumbent Board, or (C) a plan of reorganization, merger, consolidation, sale of
all or substantially all the assets of the Institution or the Holding Company or
similar transaction occurs in which the Institution or Holding Company is not
the resulting entity; provided, however, that such an event listed above will be
deemed to have occurred or to have been effectuated upon the receipt of all
required regulatory approvals not including the lapse of any statutory waiting
periods, or (D) a proxy statement shall be distributed soliciting proxies from
stockholders of the Holding Company, by someone other than the current
management of the Holding Company, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Holding Company or Institution
with one or more corporations as a result of which the outstanding shares of the
class of securities then subject to such plan or transaction are exchanged for
or converted into cash or property or securities not issued by the Institution
or the Holding Company shall be distributed, or (E) a tender offer is made for
25% or more of the voting securities of the Institution or Holding Company then
outstanding.
(b) If a Change in Control has occurred pursuant to Section 5(a), or
the Board has determined that a Change in Control has occurred, Executive shall
be entitled to the benefits provided in paragraphs (c), and (d) of this Section
5 upon his subsequent termination of employment at any time during the term of
this Agreement due to: (1) Executive's dismissal or Executive's voluntary
resignation following any demotion, loss of title, office or significant
authority or responsibility, (2) material reduction in annual compensation or
benefits or (3) relocation of his principal place of employment by more than 30
miles from its location immediately prior to the Change in Control, unless such
termination is because of his death or termination for Cause.
(c) Upon Executive's entitlement to benefits pursuant to Section 5(b),
the Institution shall pay Executive within five business days, or in the event
of his subsequent death, his beneficiary or beneficiaries, or his estate, as the
case may be, a lump sum payment equal to
<PAGE>
6
the greater of: (1) the payments due for the remaining term of the Agreement; or
(2) three (3) times Executive's average annual compensation for the five (5)
most recent taxable years that Executive has been employed by the Institution or
such lesser number of' years in the event that Executive shall have been
employed by the Institution for less than five (5) years. Such average annual
compensation shall include Base Salary, any commissions, bonuses. contributions
on Executive's behalf to any pension and/or profit sharing plan, severance
payments, retirement payments, directors or committee fees, fringe benefits paid
or to be paid to the Executive in any such year, and payment of expense items
without accountability or business purpose or that do not meet the IRS
requirements for deductibility by the Institution; provided, however, that any
payment under this provision and subsection 5(d) below shall not exceed three
(3) times the Executive's average annual compensation. In the event the
Institution is not in compliance with its minimum capital requirements or if
such payments would cause the Institution's capital to be reduced below its
minimum regulatory capital requirements, such payments shall be deferred until
such time as the Institution or successor thereto is in capital compliance. In
the event that no election is made, payment to the Executive will be made on a
monthly basis in approximately equal installments over a period of thirty-six
months following the Executive's termination. Such payments shall not be reduced
in the event Executive obtains other employment following termination of
employment.
(d) Upon the Executive's entitlement to benefits pursuant to Section
5(b), the Institution will cause to be continued life, medical and dental
coverage substantially identical to the coverage maintained by the Institution
for Executive prior to his severance as agreed to by the insurance carrier at no
premium cost to the Executive, except to the extent that such coverage may be
changed in its application for all Institution employees on a non-discriminatory
basis. Such coverage and payments shall cease upon the expiration of thirty-six
months following the Date of Termination.
6. CHANGE OF CONTROL RELATED PROVISIONS.
Notwithstanding the paragraphs of Section 5, in no event shall the
aggregate payments or benefits to be made or afforded to Executive under said
paragraphs (the "Termination Benefits") constitute an "excess parachute payment"
under Section 280G of the Code or any successor thereto. and in order to avoid
such a result, Termination Benefits will be reduced, if necessary, to an amount
(the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less
than an amount equal to three (3) times Executive's "base amount", as determined
in accordance with said Section 280G. The allocation of the reduction required
hereby among the Termination Benefits provided by Section 5 shall be determined
by Executive.
7. TERMINATION FOR CAUSE.
<PAGE>
7
The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order or material
breach of any provision of this Agreement. For purposes of this Section, no
act. or the failure to act, on Executive's part shall be "willful" unless done,
or omitted to be done not in good faith and without reasonable belief that the
action or omission was in the best interest of the Institution or its
affiliates. Notwithstanding the foregoing, Executive shall not be deemed to
have been Terminated for Cause unless and until there shall have been delivered
to him a Notice of Termination which shall include a copy of a resolution duly
adopted by the affirmative vote of not less than a majority of the members of
the Board at a meeting of the Board called and held for that purpose (after
reasonable notice to Executive and an opportunity for him, together with
counsel, to be heard before the Board), finding, that in the good faith opinion
of the Board, Executive was guilty of conduct justifying Termination for Cause
and specifying the particulars thereof in detail. Executive shall not have the
right to receive compensation or other benefits for any period after Termination
for Cause except for compensation and benefits for already vested. During the
period beginning on the date of the Notice of Termination for Cause pursuant to
Section 8 hereof and through the Date of Termination, stock options and related
limited rights granted to Executive under any stock option plan shall not be
exercisable nor shall any unvested awards granted to Executive under any stock
benefit plan of the Institution, the Holding Company or any subsidiary or
affiliate thereof vest. At the Date of Termination for Cause, such stock
options and related limited rights and unvested awards shall become null and
void and shall not be exercisable by or delivered to Executive at any time
subsequent to such Date of Termination for Cause.
8. NOTICE.
(a) Any purported termination by the Institution or by Executive shall
be communicated by Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Executive's employment under the
provision so indicated.
(b) "Date of Termination" shall mean the same date as the Notice of
Termination (which in the case of a Termination for Cause, shall not be less
than thirty days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, except upon the occurrence of
a Change in Control and voluntary
<PAGE>
8
termination by the Executive in which case the Date of Termination shall be the
date specified in the Notice, the Date of Termination shall be the date on which
the dispute is finally determined, either by mutual written agreement of the
parties, by a binding arbitration award, or by a final judgment, order or decree
of a court of competent jurisdiction (the time for appeal therefrom having
expired and no appeal having been perfected) and provided further that the Date
of Termination shall be extended by a notice of dispute only if such notice is
given in good faith and the party giving such notice pursues the resolution of
such dispute with reasonable diligence. Notwithstanding the pendency of any such
dispute, the Institution will continue to pay Executive his Base Salary in
effect when the notice giving rise to the dispute was given until the earlier
of: (1) the resolution of the dispute in accordance with this Agreement; or (2)
the expiration of the remaining term of this Agreement as determined as of the
Date of Termination. Amounts paid under this Section are in addition to all
other amounts due under this Agreement and shall not be offset against or reduce
any other amounts due under this Agreement.
9. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for one (1) full year
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Institution. Executive shall, upon reasonable
notice, furnish such information and assistance to the Institution as may
reasonably be required by the Institution in connection with any litigation in
which it or any of its subsidiaries or affiliates is, or may become, a party.
10. NON-COMPETITION.
(a) Upon any termination of Executive's employment hereunder pursuant
to Section 4 hereof, Executive agrees not to compete with the Institution for a
period of one (1) year following such termination in any city, town or county in
which the Executive's normal business office is located and the Institution has
an office or has filed an application for regulatory approval to establish an
office, determined as of the effective date of such termination, except as
agreed to pursuant to a resolution duly adopted by the Board. Executive agrees
that during such period and within said cities, towns and counties, Executive
shall not work for or advise, consult or otherwise serve with, directly or
indirectly, any entity whose business materially competes with the depository,
lending or other business activities of the Institution. The parties hereto,
recognizing that irreparable injury will result to the Institution, its business
and property in the event of Executive's breach of this subsection 10(a) agree
that in the event of any such breach by Executive, the Institution, will be
entitled, in addition to any other remedies and damages available, to an
injunction to restrain the violation hereof by Executive, Executive's partners,
agents, servants, employees and all persons acting for or under the direction of
Executive. In addition, Executive shall not, for a period of one year after the
termination of this Agreement, engage any person employed by the Holding Company
or the Institution in an employment or
<PAGE>
9
contractual relationship with Executive, Executive's own employer or any other
business concern without the written permission of the Chief Executive Officer
of the Holding Company or the Institution. Notwithstanding the foregoing, the
Executive's obligations under this subsection 10(a) shall terminate upon the
occurrence of either of the following events: (i) a Change in Control or (ii) an
Event of Termination. Nothing herein will be construed as prohibiting the
Institution from pursuing any other remedies available to the Institution for
such breach or threatened breach, including the recovery of damages from
Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Institution and
affiliates thereof, as it may exist from time to time, is a valuable, special
and unique asset of the business of the Institution. Executive will not, during
or after the term of his employment, disclose any knowledge of the past,
present, planned or considered business activities of the Institution or
affiliates thereof to any person, firm, corporation, or other entity for any
reason or purpose whatsoever, unless expressly authorized by the Board of
Directors or required by law. Notwithstanding the foregoing, Executive may
disclose any knowledge of banking financial and/or economic principles, concepts
or ideas which are not solely and exclusively derived from the business plans
and activities of the Institution. In the event of a breach or threatened
breach by Executive of the provisions of this Section, the Institution will be
entitled to an injunction restraining Executive from disclosing, in whole or in
part, the knowledge of the past, present, planned or considered business
activities of the Institution or affiliates thereof, or from rendering any
services to any person, firm, corporation, other entity to whom such knowledge,
in whole or in part, has been disclosed or is threatened to be disclosed.
Nothing herein will be construed as prohibiting the Institution from pursuing
any other remedies available to the Institution for such breach or threatened
breach, including the recovery of damages from Executive.
11. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in
cash or check from the general funds of the Institution. The Holding Company,
however, unconditionally guarantees payment and provision of all amounts and
benefits due hereunder to Executive and, if such amounts and benefits due from
the Institution are not timely paid or provided by the Institution, such amounts
and benefits shall be paid or provided by the Holding Company.
(b) Notwithstanding any provision herein to the contrary, to the
extent that payments and benefits, as provided by this Agreement, are paid to
or received by Executive under the Employment Agreement dated November 16, 1998,
between Executive and the Holding Company, such compensation payments and
benefits paid by the Holding Company will be subtracted from any amounts due
simultaneously to Executive under similar provisions of this Agreement.
Payments pursuant to this Agreement and the Holding Company Agreement shall
<PAGE>
10
be allocated in proportion to the services rendered and time expended on such
activities by Executive as determined by the Holding Company and the Institution
on a quarterly basis.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Institution or
any predecessor of the Institution and Executive (including, but not limited to,
the Employment Agreement dated August 15, 1996 between the Executive and the
Institution), except that this Agreement shall not affect or operate to reduce
any benefit or compensation inuring to Executive of a kind elsewhere provided.
No provision of this Agreement shall be interpreted to mean that Executive is
subject to receiving fewer benefits than those available to him without
reference to this Agreement.
13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Institution and their respective successors and assigns.
14. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have
been waived, nor shall there be any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each such waiver shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future as to any act other
than that specifically waived.
15. REQUIRED PROVISIONS.
(a) The Institution may terminate Executive's employment at any time,
but any termination by the Institution, other than Termination for Cause, shall
not prejudice
<PAGE>
11
Executive's right to compensation or other benefits under this Agreement.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 7 hereinabove.
(b) If Executive is suspended from office and/or temporarily
prohibited from participation in the conduct of the Institution's affairs by a
notice served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance
Act. 12 U.S.C. (S)1818(e)(3) or (g)(1); the Institution's obligations under this
contract shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
Institution may in its discretion (i) pay Executive all or part of the
compensation withheld while their contract obligations were suspended and (ii)
reinstate (in whole or in part) any of the obligations which were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Institution's affairs by an order issued
under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
(S)1818(e)(4) or (g)(1), all obligations of the Institution under this contract
shall terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Institution is in default as defined in Section 3(x)(1) of
the Federal Deposit Insurance Act, 12 U.S.C. (S)1813(x)(1) all obligations of
the Institution under this contract shall terminate as of the date of default,
but this paragraph shall not affect any vested rights of the contracting
parties.
(e) All obligations of the Institution under this contract shall be
terminated, except to the extent determined that continuation of the contract is
necessary for the continued operation of the Institution, (i) by the Director of
the OTS (or his designee), the FDIC or the Resolution Trust Corporation, at the
time the FDIC enters into an agreement to provide assistance to or on behalf of
the Institution under the authority contained in Section l3(c) of the Federal
Deposit Insurance Act, 12 U.S.C. (S)1823(c); or (ii) by the Director of the OTS
(or his designee) at the time the Director (or his designee) approves a
supervisory Merger to resolve problems related to the operations of the
Institution or when the Institution is determined by the Director to be in an
unsafe or unsound condition. Any rights of the parties that have already
vested, however, shall not be affected by such action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
(S)1828(k) and 12 C.F.R. (S)545.121 and any rules and regulations promulgated
thereunder.
16. REINSTATEMENT OF BENEFITS UNDER SECTION 15(b).
<PAGE>
12
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Institution's affairs by a notice described
in Section 15(b) hereof (the "Notice") during the term of this Agreement and a
Change in Control, as defined herein, occurs, the Institution will assume its
obligations to pay and Executive will be entitled to receive all of the
termination benefits provided for under Section 5 of this Agreement upon the
Institution's receipt of a dismissal of charges in the Notice.
17. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of
any provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so invalid,
and each such other provision and part thereof shall to the full extent
consistent with law continue in full force and effect.
18. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
19. GOVERNING LAW.
The validity, interpretation, performance and enforcement of this
Agreement shall be governed by the laws of the Commonwealth of Pennsylvania, but
only to the extent not superseded by federal law.
20. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Institution, in accordance with the rules of
the American Arbitration Association then in effect. Judgment may be entered on
the arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection
with Executive's termination is resolved in favor of Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses
<PAGE>
13
and any other cash compensation. fringe benefits and any compensation and
benefits due Executive under this Agreement.
21. PAYMENT OF COSTS AND LEGAL FEES.
All reasonable costs and legal fees paid or incurred by Executive
pursuant to any dispute or question of interpretation relating to this Agreement
shall be paid or reimbursed by the Institution if Executive is successful on the
merits pursuant to a legal judgment, arbitration or settlement.
22. INDEMNIFICATION.
(a) The Institution shall provide Executive (including his heirs,
executors and administrators) with coverage under a standard directors' and
officers' liability insurance policy at its expense, or in lieu thereof, shall
indemnify Executive (and his heirs, executors and administrators) as permitted
under federal law against all expenses and liabilities reasonably incurred by
him in connection with or arising out of any action, suit or proceeding in which
he may be involved by reason of his having been a director or officer of the
Institution (whether or not he continues to be a director or officer at the time
of incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgments, court costs and attorneys' fees and
the cost of reasonable settlements.
(b) Any payments made to Executive pursuant to this Section are
subject to and conditioned upon compliance with 12 C.F.R.(S) 545.121 and any
rules or regulations promulgated thereunder.
23. SUCCESSOR TO THE INSTITUTION.
The Institution shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise to all or
substantially all the business or assets of the Institution or the Holding
Company, expressly and unconditionally to assume and agree to perform the
Institution's obligations under this Agreement, in the same manner and to the
same extent that the Institution would be required to perform if no such
succession or assignment had taken place.
<PAGE>
14
SIGNATURES
IN WITNESS WHEREOF, Bell Federal Savings and Loan Association of
Bellevue and First Bell Bancorp, Inc. have caused this Agreement to be executed
and their seals to be affixed hereunto by their duly authorized officers and
directors, and Executive has signed this Agreement on the 22nd day of February,
1999.
ATTEST: BELL FEDERAL SAVINGS AND LOAN ASSOCIATION OF BELLEVUE
/s/ Thomas J. Jackson By: /s/ William S. McMinn
- --------------------------- ------------------------------------
Secretary On behalf of the Board of Directors
[SEAL]
ATTEST: FIRST BELL BANCORP, INC.
(Guarantor)
/s/ Robert C. Baierl By: /s/ David F. Figgins
- --------------------------- ------------------------------------
Secretary On behalf of the Board of Directors
[SEAL]
WITNESS:
/s/ Jack Schweiger /s/ Jeffrey M. Hinds
- --------------------------- ------------------------------------
Jeffrey M. Hinds
<PAGE>
Exhibit 11
FIRST BELL BANCORP, INC.
COMPUTATION OF EARNINGS PER SHARE
DECEMBER 31, 1998
<TABLE>
<CAPTION>
TWELVE TWELVE
MONTHS MONTHS
ENDED ENDED
12/31/98 12/31/98
---------- ----------
BASIC FULLY DILUTED
<S> <C> <C>
Net income applicable to common stock $7,838,160 $7,838,160
---------- ----------
EARNINGS PER SHARE
Weighted average shares outstanding 5,830,344 5,830,344
Add: Option common stock equivalents - 155,727
Less: MRP shares 275,441 275,441
Add: Granted MRP shares - 99,171
---------- ----------
Total Shares 5,554,903 5,809,801
========== ==========
Earnings per share $ 1.41 $1.35
========== ==========
</TABLE>
<PAGE>
FIRST BELL BANCORP, INC. 1998 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"). The only significant assets of the Company are
the capital stock of the Association and the Company's loan to the Associa-
tion's Employee Stock Ownership Plan ("ESOP"). Currently, the Company does not
transact any material business other than through its subsidiary, the Associa-
tion. 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.
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 and investment secu-
rities. The Company's primary 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, consisting primarily of the interest paid on its deposits and
borrowings from the Federal Home Loan Bank ("FHLB"). The Company's results of
operations are affected by its provision for loan losses, non-interest expenses
and by general economic and competitive conditions, particularly changes in
market interest rates, government policies and actions of regulatory authori-
ties. Future changes in applicable law, regulations or government policies may
materially impact the Company.
Residential Mortgage Lending and Investment Securities
The Company has emphasized originating conventional one- to four-family resi-
dential mortgage loans for its portfolio in its primary market area, the
greater Pittsburgh metropolitan area. The Company originates primarily 15 and
30 year, fixed-rate mortgage loans. To a lesser extent, the Company also origi-
nates residential construction loans and home equity installment and line of
credit loans on one- to four-family properties. In 1997, and continuing through
1998, the Company began to place more emphasis on its investment portfolio to
support the Company's continued growth. The investment portfolio is comprised
of Bank Qualified Municipal Securities, Collateralized Mortgage Obligations,
Treasury Securities and in 1997, Mortgage Backed Securities.
Sources 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 and develop deposit relationships with such customers. In 1998, the Com-
pany instituted a sales training program to improve the product knowledge of
our customer service representatives and to develop their skills in recognizing
and responding to customer needs. Also in 1998, First Bell placed considerable
emphasis on core deposit relationships, consisting of money market, NOW, pass-
book, club and statement savings accounts. These accounts tend to be stable and
lower cost than other types of deposits. Certificates of deposit are offered
with terms ranging from three months to ten years and are priced at competitive
rates.
As of December 31, 1998, the Company had outstanding borrowings from the FHLB
in the amount of $180.0 million. These borrowings were used to fund the invest-
ment portfolio and are utilized to help manage the Company's interest rate risk
position.
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, management believes
the Company has maintained high asset quality. The Company has established a
general loss allowance to provide for losses in its portfolio. The provision
for loan losses is $805,000 or 138.8% of total non-performing assets at Decem-
ber 31, 1998. The allowance ratio is based on management's assessment of pro-
spective national and local economic conditions, 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 necessary can be greatly influenced by regula-
tory changes and economic conditions. Therefore, the level of future reserves
and the related effect on net income cannot be assured.
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
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 0.78%, 0.72% and 1.44% for the years ended Decem-
ber 31, 1998, 1997 and 1996, 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, 1998,
the Company's seven offices and $767.6 million in assets were operated by a to-
tal of fifty (50) full-time employees and seven part-time employees, resulting
in an average of $13.5 million in assets per employee.
Liquidity and Capital Resources
The Company is required to maintain an average daily balance of specified liq-
uid assets equal to a monthly average of not less than a specified percentage
of its net withdrawable deposit accounts plus short-term borrowings. This li-
quidity requirement was 4% for fiscal 1998, 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. Monetary pen-
alties may be imposed for failure to meet these liquidity requirements. The
Company's liquidity ratio for December 31, 1998 was 12.3%, which exceeded the
applicable requirements. The Company has never been subject to monetary penal-
ties for failure to meet its liquidity requirements.
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.
At December 31, 1998, loan commitments were $28.7 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, 1998 totalled $236.5 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, 1998, the Association had
$180.0 million in outstanding borrowings and $448.1 million in additional bor-
rowing 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.
Preparation for the Year 2000
Many computer systems may not correctly process information with dates beyond
December 31, 1999 due to programming assumptions that were made as computer ap-
plications were developed. The Company has assessed its primary business infor-
mation system with respect to the compatibility with the Year 2000. The Company
utilizes a third-party vendor for processing its primary banking applications
and several other third-party vendors for ancillary computer applications. The
Company and all third-party vendors for the Company's banking applications have
modified, upgraded or replaced their computer applications and are in the proc-
ess of validating the changes to ensure Year 2000 compliance. The Company's
primary regulator, in conjunction with other regulatory agencies, has developed
guidelines which must be met by the Company to ensure that the Year 2000 issue
is properly addressed. In accordance with these guidelines,
- --------------------------------------------------------------------------------
9
<PAGE>
FIRST BELL BANCORP, INC. 1998 ANNUAL REPORT
- --------------------------------------------------------------------------------
the Board of Directors has appointed a Year 2000 Committee, comprised of senior
managers and department heads to assess the impact that the year 2000 will have
on the Company's operations and financial standing. The Year 2000 Committee has
developed a Year 2000 Compliance Program, the ("Program"). The Program has been
divided into 5 subparts; awareness, assessment, renovation, validation and im-
plementation. The awareness, assessment and renovation portions of the program
are complete. The validation and implementation portions have been completed
with respect to the Company's mission critical systems. Ancillary computer com-
munications, data exchanges and non information technology continue to be
tested as other third party vendors complete their Year 2000 computer changes.
These final two portions of the plan are expected to be complete by June 30,
1999. In addition to internal processes, the Company monitors through corre-
spondence, the progress of other third party vendors to ensure that their sys-
tems do not indirectly affect the Company's operations.
Costs
The Company has not and does not expect to incur any material expense to re-
place data processing equipment. The Company does not currently expect that the
cost of its Year 2000 compliance program, including possible remediation costs,
will be material to its financial condition and expects that it will satisfy
such compliance program without material disruption of its operations. The Com-
pany estimates the costs related to Year 2000 compliance will be less then
$75,000.
Risks and Contingencies
The Company does not have commercial loans outstanding. However, the Company's
mortgage loans could be indirectly affected by the Year 2000 if the employer's
of the borrowers are affected by the Year 2000. The Company has attempted to
make its borrowers aware of the Year 2000 issue but the effect that the Year
2000 will have, if any, on the Company's loans cannot be determined.
In the event that the Company's operations are affected by the year 2000, ei-
ther internally or externally through significant vendors including utilities,
other financial institutions or supply companies, the Company's results of op-
erations and/or financial condition could be adversely affected. In the event
that problems arise a contingency plan has been developed to ensure the contin-
ued operation of the Company.
Interest Rate Sensitivity
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are interest rate sensitive. The Company's
interest rate sensitivity is monitored by management through selected interest
rate risk measures produced internally and by the OTS. The Company's interest
rate risk is measured by modeling the change in net portfolio value ("NPV") and
net interest income over a variety of interest rate scenarios and, to a lesser
extent, through GAP analysis.
The OTS calculates interest rate risk through modeling. All calculations have
limitations because of inherent assumptions which must be made with respect to
market values, discount rates, prepayments, the interest rate sensitivity of
the assets and liabilities to changes in base interest rates, the value of op-
tions imbedded in the asset or liability, the likelihood that the option will
be exercised and the extent to which customers elect to make prepayments on
loans or deposits or withdrawals from savings accounts. Management bases their
assumptions on historical data accumulated over a variety of interest rate sce-
narios.
As of December 31, 1998, the Association's NPV, as measured by the OTS, was
$83.6 million or 10.56% of the market value of assets. Following a 200 basis
point decrease in interest rates, the Association's "post-shock" NPV, which
provides a larger decline than a 200 basis point increase, was $68.9 million,
or 8.37% of the market value of assets. The change in the NPV ratio or the As-
sociation's Sensitivity Measure was -219 basis points. Under OTS capital re-
quirements which have not been fully implemented, the decline in the NPV ratio
at December 31, 1998 would reflect an above average interest rate risk. If the
regulations are finalized as proposed, the Company would remain in compliance
with the fully phased in capital requirements. Management reviews the quarterly
OTS measurements and compares them to evaluations produced through internally
generated simulation models. These measures are used in conjunction with NPV
measures to identify excessive interest rate risk.
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
Another method to calculate interest rate sensitivity is through "GAP" analy-
sis. In a GAP analysis, assets and liabilities are analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and
by monitoring an institution's interest rate sensitivity "GAP." In a rising in-
terest rate environment, an institution with a positive gap would be in a bet-
ter position to invest in higher yielding assets, which would result in the
yield on its assets increasing at a pace closer to the cost of its interest-
bearing liabilities, than would be the case if it has a negative gap. During a
period of falling interest rates, an institution with a positive gap would tend
to have its assets repricing at a faster rate than one with a negative gap,
which would tend to restrain the growth of its net interest income.
The following table sets forth the amount of interest-earning assets and in-
terest-bearing liabilities outstanding at December 31, 1998 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
prepayment rates. The prepayment rates utilized are based on the historical
prepayment rates experienced by the Company, which management believes 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 presumptions
about changes in prepayment tendencies, deposit or loan maturity preferences or
repricing time lags that may occur in response to a change in the interest rate
environment.
Certain shortcomings are inherent in this method of analysis. For example, al-
though 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 interest rates, while interest rates
on other types may lag behind changes in market rates.
<TABLE>
<CAPTION>
At December 31, 1998
---------------------------------------------------------------------------------------------
More More Than More More More
Three Than Three Six Months Than One Than Three Than Five More
Months Months to to Twelve Year to Years to Years to Than
or Less Six Months Months Three Years Five Years Ten Years Ten Years Total
-------- ---------- ---------- ----------- ---------- --------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Real Estate Loans:
ARM Loans.............. $ 2,246 $ 371 $ 1,541 $ 13,706 $ 1,793 $ -- $ -- $ 19,657
Fixed Rates Loans...... 7,853 7,685 15,370 58,062 53,177 154,013 216,089 512,249
Residential
Construction Loans.... -- -- -- -- -- -- 7,570 7,570
Multi-Family........... 1 -- -- 57 136 261 196 651
Second Mortgage Loans.. 1,047 -- -- -- 2,681 780 -- 4,508
Consumer Loans......... 895 -- -- 4 -- -- -- 899
Investment securities.. 60,840 175 5,348 2,560 97,717 34,690 4 201,334
FHLB Stock............. -- -- -- -- -- -- 9,000 9,000
-------- -------- --------- --------- --------- --------- -------- --------
Total Interest Earning
Assets................. 72,882 8,231 22,259 74,389 155,504 189,744 232,859 755,868
INTEREST BEARING
LIABILITIES:
Passbook, Club and
Other Accounts........ 2,575 2,575 5,150 16,478 12,187 18,330 16,283 73,578
Money Market and NOW
Accounts.............. 2,737 2,737 5,474 15,004 9,193 10,866 6,153 52,164
Certificate Accounts... 72,172 73,154 91,132 89,252 26,498 17,178 -- 369,386
Borrowings............. -- -- -- -- 70,000 110,000 -- 180,000
Advances by Borrowers
for Taxes
and Insurance......... 11,354 -- -- -- -- -- -- 11,354
-------- -------- --------- --------- --------- --------- -------- --------
Total Interest Bearing
Liabilities............ 88,838 78,466 101,756 120,734 117,878 156,374 22,436 686,482
-------- -------- --------- --------- --------- --------- -------- --------
Interest Sensitivity
Gap.................... $(15,956) $(70,235) $ (79,497) $ (46,345) $ 37,626 $ 33,370 $210,423 $ 69,386
======== ======== ========= ========= ========= ========= ======== ========
Cumulative Interest
Sensitivity Gap........ $(15,956) $(86,191) $(165,688) $(212,033) $(174,407) $(141,037) $ 69,386 $ 69,386
======== ======== ========= ========= ========= ========= ======== ========
Cumulative Interest
Sensitivity Gap
as a Percentage of
Total Assets........... (2.08%) (11.23%) (21.58%) (27.62%) (22.72%) (18.37%) 9.04% 9.04%
Cumulative Net Interest
Earning Assets
as a Percentage of
Cumulative Interest
Bearing Liabilities.... 82.04% 48.48% 38.42% 45.60% 65.65% 78.76% 110.11% 110.11%
</TABLE>
- --------------------------------------------------------------------------------
11
<PAGE>
FIRST BELL BANCORP, INC. 1998 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, 1998, and average balance sheets and statements
of income for the years ended December 31, 1998, 1997 and 1996, and reflect the
tax equivalent average yield on assets and average cost of liabilities for the
periods indicated. Such yields and costs are derived by dividing income or ex-
pense by the average monthly balance of assets or liabilities, respectively,
for the periods shown. Average balances for 1998 and 1997 are based on average
daily balances; balances for 1996 are derived from month-end balances. The
yields and costs include fees which are considered adjustments to yields. In-
terest income for 1998 shown in the chart below is the tax equivalent interest
income. Tax equivalent interest income is being used because interest on in-
vestment securities include tax-exempt securities. Tax-exempt securities carry
pre-tax yields lower than comparable taxable assets. Therefore, it is more
meaningful to analyze interest income on a tax-equivalent basis. A tax equiva-
lent adjustment of $1.1 million was made to interest income on investment secu-
rities in 1998. The Company had no tax exempt securities in 1997 or 1996.
<TABLE>
<CAPTION>
At December 31, 1998 Years Ended December 31, 1998
------------------------ ------------------------------
Tax
Average Equivalent Average
Balance Yield/Cost Balance Interest Yield/Cost
------------ ----------- -------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning Assets:
Investment securities (1). $ 174,159 6.82% $115,109 $ 7,395 6.42%
Conventional loans (2)(6). 544,636 7.18 566,367 41,848 7.39
Other loans............... 899 6.65 831 58 6.98
Mortgage-backed
securities............... -- -- 4,979 284 5.70
Federal funds sold........ 36,175 5.50 22,413 1,212 5.41
------------ -------- -------
Total interest-earning
assets................. 755,869 7.02 709,699 50,797 7.16
Non-interest earning
assets................. 11,737 10,762
------------ --------
TOTAL ASSETS.......... $ 767,606 $720,461
============ ========
Interest-bearing
Liabilities:
Passbook, club and other
accounts (5)............. $ 84,932 3.00% $ 82,136 $ 2,480 3.02%
Money market and NOW
accounts................. 52,164 2.70 47,945 1,147 2.39
Certificate accounts...... 369,386 5.67 362,720 21,186 5.84
Borrowings................ 180,000 5.60 142,481 8,030 5.64
------------ -------- -------
Total interest-bearing
liabilities............ 686,482 5.10 635,282 32,843 5.17
Non-interest-bearing
liabilities............ 7,222 9,524
------------ --------
TOTAL LIABILITIES..... 693,704 644,806
Stockholders' equity...... 73,902 75,655
------------ --------
Total liabilities and
stockholders' equity..... $ 767,606 $720,461
============ ========
Net tax equivalent interest
income/net
interest rate spread (3)... 1.92% $17,954 1.99%
=======
Net tax equivalent yield on
average
interest-earning assets (4). 2.53%
Ratio of average interest-
earning assets
to average interest-bearing
liabilities................ 1.10 1.12
</TABLE>
- -------
(1) Includes interest-bearing deposits in other financial institutions and FHLB
stock.
(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 aver-
age interest-earning assets.
(5) Includes advances by borrowers for taxes and insurance.
(6) Interest on conventional loans includes loan fees of $613, $406, and $990
for the years ended December 31, 1998, 1997 and 1996, respectively.
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1997 1996
---------------------------- ----------------------------
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). $ 66,212 $ 4,117 6.22% $ 36,869 $ 2,244 6.09%
Conventional loans (2)(6). 558,398 41,397 7.41 487,322 36,727 7.54
Other loans............... 917 67 7.31 944 71 7.52
Mortgage-backed
securities............... 55,505 3,148 5.67 -- -- --
Federal funds sold........ 8,932 497 5.56 35,075 1,965 5.60
-------- ------- -------- -------
Total interest-earning
assets................. 689,964 49,226 7.13 560,210 41,007 7.32
Non-interest earning
assets................. 10,174 9,437
-------- --------
TOTAL ASSETS.......... $700,138 $569,647
======== ========
Interest-bearing
Liabilities:
Passbook, club and other
accounts (5)............. $ 78,315 $ 2,288 2.92% $ 81,715 $ 2,314 2.83%
Money market and NOW
accounts................. 46,634 1,092 2.34 42,088 1,040 2.47
Certificate accounts...... 387,557 23,306 6.01 323,199 18,504 5.73
Borrowings................ 102,649 5,643 5.50 5,833 191 3.27
-------- ------- -------- -------
Total interest-bearing
liabilities............ 615,155 32,329 5.26 452,835 22,049 4.87
Non-interest-bearing
liabilities............ 10,484 7,082
-------- --------
TOTAL LIABILITIES..... 625,539 459,917
Stockholders' equity...... 74,499 109,730
-------- --------
Total liabilities and
stockholders' equity..... $700,138 $569,647
======== ========
Net tax equivalent interest
income/net
interest rate spread (3)... $16,897 1.88% $18,958 2.45%
======= =======
Net tax equivalent yield on
average
interest-earning assets (4). 2.45% 3.38%
Ratio of average interest-
earning assets
to average interest-bearing
liabilities................ 1.12 1.24
</TABLE>
- --------------------------------------------------------------------------------
13
<PAGE>
FIRST BELL BANCORP, INC. 1998 ANNUAL REPORT
- --------------------------------------------------------------------------------
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. The aver-
age rates for investment securities used to calculate the variances in the fol-
lowing table, for 1998, are tax equivalent rates.
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
1998 vs. 1997 1997 vs. 1996
Increase (Decrease) in Increase (Decrease) in
Net Interest Income Due to Net Interest Income Due to
-------------------------------- ----------------------------
Total Total
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
--------- ------- ------------ ------- ------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities. $ 3,504 $ (226) $ 3,278 $ 1,786 $ 87 $ 1,873
Conventional loans.... 591 (140) 451 5,357 (687) 4,670
Other loans........... (6) (3) (9) (2) (2) (4)
Mortgage-backed
securities........... (2,866) 2 (2,864) 3,148 -- 3,148
Federal funds sold.... 750 (35) 715 (1,465) (3) (1,468)
--------- ------- --------- ------- ------- -------
Total interest-
earning assets..... 1,973 (402) 1,571 8,824 (605) 8,219
--------- ------- --------- ------- ------- -------
Interest-bearing
liabilities:
Passbook, club and
other accounts....... 112 80 192 (96) 70 (26)
Money Market and NOW
accounts............. 31 24 55 112 (60) 52
Certificate accounts.. (1,494) (626) (2,120) 3,685 1,117 4,802
Borrowings............ 2,190 198 2,388 3,170 2,282 5,452
--------- ------- --------- ------- ------- -------
Total interest-
bearing
liabilities........ 839 (324) 515 6,871 3,409 10,280
--------- ------- --------- ------- ------- -------
Net change in net
interest income........ $ 1,134 $ (78) $ 1,056 $ 1,953 $(4,014) $(2,061)
========= ======= ========= ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
14
<PAGE>
- -------------------------------------------------------------------------------
Financial Condition
The following table sets forth information concerning the composition of the
Company's assets at December 31, 1998 and 1997. Dollar amounts are in thou-
sands.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------- -------------------
Percent of Percent of
Amount Total Amount Total
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents............... $ 21,543 2.81% $ 24,523 3.63%
Mortgage-backed securities.............. -- -- 31,885 4.72
Federal funds sold...................... 36,175 4.71 1,550 0.23
Investment securities................... 146,657 19.11 25,875 3.83
Conventional loans, net................. 544,636 70.95 578,487 85.62
Other loans............................. 899 .12 907 .13
FHLB stock.............................. 9,000 1.17 5,148 .76
Other assets............................ 8,696 1.13 7,309 1.08
-------- ------ -------- ------
TOTAL ASSETS........................... $767,606 100.00% $675,684 100.00%
======== ====== ======== ======
</TABLE>
Total Assets
Total assets increased by $91.9 million or 13.6% to $767.6 million at Decem-
ber 31, 1998 from $675.7 at December 31, 1997. The increase in total assets
was the result of increases in investment securities, Federal Funds Sold, and
FHLB stock. Reducing the impact on total assets of these increases were de-
creases on conventional mortgage loans and mortgage-backed securities.
Investment Securities, Mortgage Backed Securities and Other Interest Earning
Investments
Investment securities increased to $146.7 million at December 31, 1998 from
$25.9 million at December 31, 1997. The $120.8 million increase was the result
of the purchase of $117.6 million of municipal securities and $15.7 million in
collateralized mortgage obligations ("CMO") offset by one CMO for $10.0 mil-
lion being called. Federal funds sold at December 31, 1998 increased by $34.6
million to $36.2 million from $1.6 million at December 31, 1997. The increase
in federal funds sold are used to maintain liquidity requirements, manage in-
terest rate risk and will be partially used to fund the purchase of additional
securities. At December 31, 1998 the Company had commitments to purchase an
additional $24.9 million in securities. FHLB stock increased by $3.9 million
or 74.8% to $9.0 million at December 31, 1998 from $5.1 million at December
31,1997. The investment in FHLB stock is required for FHLB membership and is
adjusted based on the level of FHLB borrowings. At December 31, 1998 there
were no mortgage-backed securities compared to $31.9 million at December 31,
1997. The entire mortgage-backed securities portfolio was sold in 1998 result-
ing in a gain of $97,000.
Conventional Mortgage Loans
Conventional mortgage loans are comprised of residential mortgages, residen-
tial construction loans, multi-family loans and home equity installment and
line of credit loans. Conventional mortgage loans at December 31, 1998 were
$544.6 million compared to $578.5 million at December 31, 1997. At December
31, 1998, residential mortgage loans totalled $535.9 million, or 95.7% of the
total loan portfolio. At that date, $516.2 million, or 96.3% of the Company's
total residential loan portfolio consisted of fixed-rate mortgage loans. Resi-
dential construction loans totalled $17.9 million, or 3.2% of total loans,
while home equity loans totalled $4.5 million, or 0.8% of total loans, at De-
cember 31, 1998.
For the year ended December 31, 1998 the Company originated $66.8 million of
residential mortgage and residential construction loans and $5.8 million in
home equity loans. Principal repayments of conventional mortgage loans
- -------------------------------------------------------------------------------
15
<PAGE>
FIRST BELL BANCORP, INC. 1998 ANNUAL REPORT
- --------------------------------------------------------------------------------
were $102.8 million in 1998 as the result of an increase in mortgage loans be-
ing refinanced. In 1997, the Company originated $129.0 million in residential
mortgage and construction loans and sold $30.0 million of fixed rate residen-
tial mortgage loans to adjust the Company's interest rate risk position. The
Company's total loan portfolio has decreased from $596.0 million at December
31, 1997 to $559.8 million at December 31, 1998.
The following table sets forth information concerning the Company's liabili-
ties and stockholders' equity at December 31, 1998 and 1997. Dollar amounts are
in thousands.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------- -------------------
Percent of Percent of
Amount Total Amount Total
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits............................... $495,128 64.50% $405,055 73.27%
Borrowings............................. 180,000 23.45 90,000 13.32
Other liabilities...................... 18,576 2.42 17,646 2.61
Stockholders' equity................... 73,902 9.63 72,983 10.80
-------- ------ -------- ------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................... $767,606 100.00% $585,684 100.00%
======== ====== ======== ======
</TABLE>
Liabilities
In 1998, the Company instituted a training program for its employees and an
advertising campaign that emphasized the cross selling of core deposit ac-
counts. Core deposits increased by $10.9 million and represented 25.4% of total
deposits. High rate certificate of deposit accounts were allowed to runoff to
reduce the average cost of funds resulting in certificate accounts decreasing
by $10.8 million. Therefore, total deposits remained flat at $495.1 million at
December 31, 1998 and 1997. Additional borrowings were used to help fund the
purchase of the municipal securities and to manage the Company's interest rate
risk position.
Capital
Total stockholders' equity increased by $919,000 or 1.3% to $73.9 million at
December 31, 1998, from $73.0 million at December 31, 1997. The increase was
primarily the result of net income of $7.8 million and an increase in accumu-
lated other comprehensive income, net of taxes of $1.1 million. Offsetting
these increases were treasury stock purchases of $7.1 million and $2.2 million
in dividends declared.
December 31, 1998 Operating Results
The following table presents selected components of net income (adjusted for
tax equivalent yields) for the years ended December 31, 1998, 1997 and 1996.
Dollar amounts are in thousands.
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Interest income........................................ $50,798 $49,226 $41,007
Interest Expense....................................... 32,844 32,329 22,050
------- ------- -------
Net Interest Income.................................... 17,954 16,897 18,957
Provision for Loan Loss................................ 90 45 90
Other Income........................................... 643 829 1,198
Other Expenses......................................... 5,643 5,060 8,177
Income Taxes........................................... 5,026 5,046 4,485
------- ------- -------
Net Income............................................. $ 7,838 $ 7,575 $ 7,403
======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
16
<PAGE>
- --------------------------------------------------------------------------------
Net income for the year ended December 31, 1998 increased by $263,000 or 3.5%
to $7.8 million from $7.6 million for the year ended December 31, 1997. The
increase was the result of a rise in tax equivalent interest income offset by
increases in interest expense and other expenses and a decrease in other
income.
Interest Income
Interest income discussed in this section is the tax equivalent income. Tax
equivalent interest income is being used because interest on investment
securities includes tax-exempt securities. Tax-exempt securities carry pre-tax
yields lower than comparable taxable assets. Therefore, it is more meaningful
to analyze interest income on a tax-equivalent basis. A tax equivalent
adjustment of $1.1 million has been made to interest on investment securities
for the year ended December 31, 1998. The Company had no tax-exempt securities
in 1997. Interest income increased $1.6 million or 3.2% to $50.8 million for
the year ended December 31, 1998 from $49.2 million for the year ended December
31, 1997. The increase was the result of additional interest earned on
investment securities, federal funds sold and conventional mortgage loans for
the year ended December 31, 1998 as compared to the year ended December 31,
1997. Offsetting these increases was a decrease in interest earned on mortgage-
backed securities which were sold during fiscal 1998. Interest earned on
investment securities for the year ended December 31, 1998 increased by $3.3
million or 137.6% to $5.7 million from $2.4 million for the comparable 1997
period. The increase was primarily the result of the average balance in
investment securities increasing by $50.1 million or 146.0% to $84.3 million
for the year ended December 31, 1998 from $34.3 million for the year ended
December 31, 1997. Interest earned on federal funds sold was $1.2 million for
the year ended December 31, 1998 compared to $497,000 for the year ended
December 31, 1997. The $715,000 or 143.9% increase was the result of the
average balance of Federal Funds Sold rising to $22.4 million for the year
ended December 31, 1998 from $8.9 million for the comparable 1997 period.
Interest on conventional mortgage loans increased by $451,000 or 1.1% to
$41.8 million for the year ended December 31, 1998 from $41.4 million for the
year ended December 31, 1997. The increase was the result of the average
balance rising $8.0 million or 1.4% to $566.4 million for the year ended
December 31, 1998 from $558.4 million for the comparable 1997 period. Interest
earned on mortgage-backed securities decreased by $2.9 million as the result of
the sale of the remaining mortgage-backed securities as previously discussed.
Interest Expense
Interest expense for the year ended December 31, 1998 was $32.8 million as
compared to $32.3 million for the year ended December 31, 1997. The increase
was the result of a rise in interest expense on borrowings offset by a decrease
in interest expense on deposits. Interest expense on borrowings increased by
$2.4 million, or 42.3% to $8.0 million for the year ended December 31, 1998
from $5.6 million for the comparable 1997 period. The increase was the result
of the average balance of borrowings increasing to $142.5 million for the year
ended December 31, 1998 from $102.6 million for the year ended December 31,
1997. Interest expense on deposits decreased by $1.9 million or 7.0% to $24.8
million for the year ended December 31, 1998 from $26.7 million for the year
ended December 31, 1997. The decrease was the result of the average balance of
deposits declining to $480.8 million for the year ended December 31, 1998 from
$500.7 million for the comparable 1997 period. In addition, there was a 17
basis points decline on the average yield paid on certificate accounts. For the
year ended December 31, 1998. The average yield was 5.84% compared to 6.01% for
the year ended December 31, 1997.
Net Interest Income
Tax equivalent net interest income for the year ended December 31, 1998 in-
creased by $1.1 million or 6.3% to $18.0 million from $16.9 million for the
comparable 1997 period. This increase was the result of interest income in-
creasing by $1.6 million offset by a rise in interest expense of $514,000. In
addition, the net interest rate spread increased to 1.99% for 1998 from 1.88%
for 1997.
- --------------------------------------------------------------------------------
17
<PAGE>
FIRST BELL BANCORP, INC. 1998 ANNUAL REPORT
- --------------------------------------------------------------------------------
Provision for Loan Loss
The provision for loan loss was $90,000 for 1998 compared to $45,000 for 1997.
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 years ended December 31, 1998 and 1997. Man-
agement 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 as-
surance that the Company will not sustain losses in future periods.
Other Income
Other income decreased by $186,000 or 22.4% to $643,000 for the year ended De-
cember 31, 1998 from $829,000 for the comparable 1997 period. The decrease was
primarily the result of a decline of $153,000 or 61.2% in gains on the sale of
mortgage-backed securities and loans. In 1997 the sale of conventional mortgage
loans and mortgage-backed securities resulted in a gain of $250,000 compared to
the gain of $97,000 on the sale of the mortgage-backed securities in 1998. The
mortgage-backed securities were sold due to high prepayment rate and the loans
were sold to adjust the Company's interest rate risk position. In addition,
miscellaneous income decreased by $24,000 primarily as the result of a decline
in gains recorded from the sale of real estate owned.
Other Expenses
Other expenses increased by $583,000 or 11.5% to $5.6 million for the year
ended December 31, 1998 from $5.1 million for the year ended December 31, 1997.
The increase occurred due to increases in compensation, payroll taxes and
fringe benefits, miscellaneous expenses, office occupancy expense and federal
insurance premiums. Compensation, payroll taxes and fringe benefits increased
by $274,000 or 9.3% to $3.2 million for the year ended December 31, 1998 from
$3.0 million for the year ended December 31, 1997. The increase was due to a
rise in the average price of the Company's stock rising to $17.84 in 1998 from
$16.00 in 1997. The Company's ESOP and stock compensation programs are expensed
based on the average market price of the Company's stock. Miscellaneous
expenses increased by $176,000 or 19.2% to $1.1 million for the year ended
December 31, 1998 from $917,000 for the comparable 1997 period. The increase
was primarily the result of additional expenses associated with advertising and
origination costs for home equity installment loans and lines of credit. Office
occupancy expense increased by $83,000 or 20.0% to $498,000 for the year ended
December 31, 1998 from $415,000 for the year ended December 31, 1997. The
increase was the result of property taxes and prepaid service contracts expense
rising during 1998. Federal insurance premiums rose by $44,000 or 16.9% to
$305,000 for the year ended December 31, 1998 from $261,000 for the year ended
December 31, 1997. The increase was the result of a 1996 federal insurance
refund that was recorded in the first quarter of 1997.
Income Taxes
A tax equivalent adjustment of $1.1 million was made in the foregoing table
for the year ended December 31, 1998. Income taxes for the year ended December
31, 1998 remained flat at $5.0 million. The annualized effective tax rate after
the tax equivalent increase was 38.9% for 1998 and 40.0% for 1997.
New Accounting Pronouncements
For a discussion of New Accounting Pronouncements and their effect on the Com-
pany, see note numbers 3 and 21 to the Consolidated Financial Statements.
- --------------------------------------------------------------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
December 31, 1997 Operating Results
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
million offset by a decrease in net interest income of $2.1 million and an
increase 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 interest-
bearing deposits offset by a decline on interest earned on federal funds sold.
Interest earned on conventional mortgage loans increased by $4.7 million, 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 result of the
average balance in conventional mortgage loans increasing by $71.2 million or
14.6% to $558.4 million for 1997 from $487.3 million for 1996. Offsetting this
increase was a 13 basis points decline on the average yield earned on
conventional mortgage loans to 7.4% for the year ended December 31, 1997 from
7.5% 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 securities
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 increase was the
result of the average balance in investment securities increasing by $16.8
million, or 96.4% to $34.3 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 $10.8 million or 69.4% to $26.4 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 $8.9 million during 1997 from $35.1 million
during 1996.
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 $64.4 million, or 19.9% to
$387.6 million during 1997 from $323.2 million for the year ended December 31,
1996. Interest expense on borrowings for the year ended December 31, 1997 was
$5.6 million compared to $191,000 for the year ended December 31, 1996. The in-
crease was the result of the Company undertaking 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 $162.4
million or 35.9% to $615.2 million during 1997 compared to $452.8 million for
1996. Offsetting the increase in average interest-bearing liabilities was an
increase in average interest earning assets of $129.8 million, or 23.2% to
$690.0 million during 1997 from $560.2 million during 1996. In addition, the
net interest income/net interest rate spread declined by 57 basis points to
1.88% for 1997 from 2.45% for 1996 as the result of a flat yield curve.
- --------------------------------------------------------------------------------
19
<PAGE>
FIRST BELL BANCORP, INC. 1998 ANNUAL REPORT
- --------------------------------------------------------------------------------
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
allowance for loan losses to non-performing assets was 112.8% compared to
105.7% at December 31, 1996.
Other Income
Other income declined by $369,000 or 30.8% to $829,000 for the year ended
December 31, 1997 from $1.2 million for the year ended December 31, 1996. The
decrease 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. Offsetting this in 1997
was a gain of $250,000 from the sale of loans and investments.
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.
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"; "Competing Successfully in a World of
Change"; "Management's Discussion and Analysis of Financial Condition and
Results of Operations", "Asset Quality", and, "Interest Rate Sensitivity
Analysis"; and in the "Notes to Consolidated Financial Statements Years Ended
December 31, 1998, 1997 and 1996", "Note 6--Investment Securities Available for
Sale", "Note 7--Mortgage-Backed Securities Available-for-Sale", "Note 18--
Commitments and Contingencies" and "Note 19--Fair Values of Financial
Instruments". 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. Further description of the risks and uncertainties to the
business are included in detail in Item 1, "Business" of the Company's 1998
Form 10-K.
- --------------------------------------------------------------------------------
20
<PAGE>
Independent Auditors' Report
- --------------------------------------------------------------------------------
To the Board of Directors and Stockholders of
First Bell Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of First Bell
Bancorp, Inc. and subsidiary, as of December 31, 1998 and 1997, and the related
consolidated statements of income and comprehensive income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of First Bell Bancorp, Inc. and
subsidiary as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
January 22, 1999
- --------------------------------------------------------------------------------
21
<PAGE>
FIRST BELL BANCORP, INC. 1998 ANNUAL REPORT
Management's Report on the Internal Control Structure and
Compliance with Laws and Regulations
- --------------------------------------------------------------------------------
January 22, 1999
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 ac-
counting 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 inter-
nal control structure over financial reporting, including safeguarding of as-
sets, presented in conformity with both generally accepted accounting princi-
ples and the Office of Thrift Supervision ("OTS") instructions for Thrift
Financial Reports ("TFR") instructions. The structure contains monitoring mech-
anisms, and actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any structure of inter-
nal control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control struc-
ture can provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, the effectiveness of an
internal control structure may vary over time.
Management assessed the institution's internal control structure over
financial reporting, including safeguarding of assets, presented in conformity
with both generally accepted accounting principles and TFR instructions as of
December 31, 1998. 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 Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that the Company maintained an effective internal control structure
over financial reporting, including safeguarding of assets, presented in
conformity with both generally accepted accounting principles and TFR
instructions as of December 31, 1998.
- --------------------------------------------------------------------------------
22
<PAGE>
- --------------------------------------------------------------------------------
The Audit Committee of the Board of Directors is comprised entirely of outside
directors who are independent of the Company's management. The Audit Committee
is responsible for recommending to the Board of Directors, the selection of in-
dependent auditors. It meets periodically with management, the independent au-
ditors, and the internal auditors to ensure that they are carrying out their
responsibilities. The Committee is also responsible for performing an oversight
rule of reviewing and monitoring the financial, accounting and auditing proce-
dures 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 financial reporting and any
other matters which they believe should be brought to the attention of the Com-
mittee.
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, 1998.
/s/ Albert H. Eckert, II
Albert H. Eckert, II /s/ Jeffrey M. Hinds
Chief Executive Officer Jeffrey M. Hinds
Chief Financial Officer
- --------------------------------------------------------------------------------
23
<PAGE>
FIRST BELL BANCORP, INC. 1998 ANNUAL REPORT
Consolidated Balance Sheets
(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
ASSETS -------- --------
<S> <C> <C>
CASH AND CASH EQUIVALENTS:
Cash on hand................................................................... $ 925 $ 872
Noninterest-bearing deposits................................................... 2,116 1,708
Interest-bearing deposits...................................................... 18,502 21,943
-------- --------
Total cash and cash equivalents.............................................. 21,543 24,523
FEDERAL FUNDS SOLD............................................................... 36,175 1,550
INVESTMENT SECURITIES HELD-TO-MATURITY--At cost
(fair value of $10,766 and $10,553 at December 31, 1998 and 1997, respectively). 9,980 9,973
INVESTMENT SECURITIES AVAILABLE-FOR-SALE--At fair value
(cost of $134,743 and $15,940 at December 31, 1998 and 1997, respectively)...... 136,677 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 $805 and $715 at
December 31, 1998 and 1997, respectively........................................ 544,636 578,487
OTHER LOANS--Net................................................................. 899 907
REAL ESTATE OWNED................................................................ 82 --
PREMISES AND EQUIPMENT--Net...................................................... 3,405 3,492
FEDERAL HOME LOAN BANK STOCK--At cost............................................ 9,000 5,148
ACCRUED INTEREST RECEIVABLE...................................................... 4,272 3,202
OTHER ASSETS..................................................................... 937 615
-------- --------
Total assets................................................................. $767,606 $675,684
======== ========
<CAPTION>
1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY -------- --------
<S> <C> <C>
DEPOSITS:
Passbook, club and other accounts.............................................. $ 73,578 $ 67,587
Money market and NOW accounts.................................................. 52,164 47,264
Certificate accounts........................................................... 369,386 380,204
-------- --------
Total deposits............................................................... 495,128 495,055
BORROWINGS....................................................................... 180,000 90,000
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE.................................... 11,354 12,226
ACCRUED INTEREST ON DEPOSITS..................................................... 600 535
ACCRUED INTEREST ON BORROWINGS................................................... 863 332
ACCRUED INCOME TAXES............................................................. 120 229
DEFERRED TAX LIABILITY........................................................... 2,424 1,725
DIVIDENDS PAYABLE ON COMMON STOCK................................................ 536 575
OTHER LIABILITIES................................................................ 2,679 2,024
-------- --------
Total liabilities............................................................ 693,704 602,701
-------- --------
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 6,100,476 and 6,510,625 outstanding; one stock right per share).... 86 86
Additional paid-in capital..................................................... 61,768 61,371
Unearned ESOP shares........................................................... (3,972) (4,217)
Unearned MRP shares............................................................ (3,839) (4,290)
Treasury stock, at cost (2,495,774 and 2,085,625 shares)....................... (38,918) (32,077)
Accumulated other comprehensive income, net of taxes........................... 1,179 117
Retained earnings--substantially restricted.................................... 57,598 51,993
-------- --------
Total stockholders' equity................................................... 73,902 72,983
-------- --------
Total liabilities and stockholders' equity................................... $767,606 $675,684
======== ========
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
24
<PAGE>
Consolidated Statements of Income and Comprehensive Income
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Conventional loans............................... $ 41,848 $ 41,397 $ 36,727
Interest-bearing deposits........................ 1,152 1,343 791
Mortgage-backed securities....................... 284 3,148 --
Federal funds sold............................... 1,212 497 1,965
Investment securities............................ 4,613 2,425 1,214
Other loans...................................... 58 67 71
Federal Home Loan Bank stock..................... 482 349 239
-------- -------- --------
Total interest and dividend income............. 49,649 49,226 41,007
-------- -------- --------
INTEREST EXPENSE:
Deposits......................................... 24,813 26,686 21,859
Borrowings....................................... 8,030 5,643 191
-------- -------- --------
Total interest expense......................... 32,843 32,329 22,050
-------- -------- --------
NET INTEREST INCOME................................ 16,806 16,897 18,957
PROVISION FOR LOAN LOSSES.......................... 90 45 90
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES............................................ 16,716 16,852 18,867
-------- -------- --------
OTHER INCOME:
Service fees and charges......................... 516 525 644
Gain (loss) on sales of mortgage-backed
securities available-for-sale................... 97 (8) --
Gain on sale of conventional loans............... -- 258 --
Gain on sale of premise.......................... -- -- 536
Miscellaneous income............................. 30 54 18
-------- -------- --------
Total other income............................. 643 829 1,198
-------- -------- --------
OTHER EXPENSES:
Compensation, payroll taxes and fringe benefits.. 3,227 2,953 2,844
Federal insurance premiums....................... 305 261 3,418
Office occupancy expense, excluding depreciation. 498 415 459
Depreciation..................................... 296 296 244
Computer services................................ 224 218 206
Miscellaneous expenses........................... 1,093 917 1,006
-------- -------- --------
Total other expenses........................... 5,643 5,060 8,177
-------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES........... 11,716 12,621 11,888
-------- -------- --------
PROVISION FOR INCOME TAXES:
Current:
Federal......................................... 3,048 3,665 3,189
State........................................... 809 976 725
Deferred expense................................. 21 405 571
-------- -------- --------
Total provision for income taxes............... 3,878 5,046 4,485
-------- -------- --------
NET INCOME......................................... 7,838 7,575 7,403
-------- -------- --------
OTHER COMPREHENSIVE INCOME, NET OF TAXES--
Unrealized gain on investments................... 1,062 117 --
-------- -------- --------
COMPREHENSIVE INCOME............................... $ 8,900 $ 7,692 $ 7,403
======== ======== ========
BASIC EARNINGS PER SHARE........................... $ 1.41 $ 1.29 $ 1.05
======== ======== ========
DILUTED EARNINGS PER SHARE......................... $ 1.35 $ 1.23 $ 1.02
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
25
<PAGE>
FIRST BELL BANCORP, INC. 1998 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, 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 ($.40 per share)....... -- -- -- -- -- --
Net income....................... -- -- -- -- -- --
--- --- ------ --- -------- -------
BALANCE, DECEMBER 31, 1997......... -- -- 6,511 86 61,371 (4,217)
Purchase of treasury stock....... -- -- (424) -- -- --
Allocation of MRP shares......... -- -- -- -- 67 --
Allocation of ESOP shares........ -- -- -- -- 373 245
Exercise of options.............. -- -- 13 -- (43) --
Change in unrealized gain in
securities
available-for-sale, net of taxes. -- -- -- -- -- --
Dividends ($.40 per share)....... -- -- -- -- -- --
Net income....................... -- -- -- -- -- --
--- --- ------ --- -------- -------
BALANCE, DECEMBER 31, 1998......... -- $-- 6,100 $86 $ 61,768 $(3,972)
=== === ====== === ======== =======
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Unearned Comprehensive
MRP Treasury Income, Retained
Shares Stock Net of Taxes Earnings Total
-------- -------- ------------- -------- --------
<S> <C> <C> <C> <C> <C>
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 ($.40 per share)....... -- -- -- (1,796) (1,796)
Net income....................... -- -- -- 7,575 7,575
------- -------- ------ ------- --------
BALANCE, DECEMBER 31, 1997......... (4,290) (32,077) 117 51,993 72,983
Purchase of treasury stock....... -- (7,069) -- -- (7,069)
Allocation of MRP shares......... 451 -- -- -- 518
Allocation of ESOP shares........ -- -- -- -- 618
Exercise of options.............. -- 228 -- -- 185
Change in unrealized gain in
securities
available-for-sale, net of taxes. -- -- 1,062 -- 1,062
Dividends ($.40 per share)....... -- -- -- (2,233) (2,233)
Net income....................... -- -- -- 7,838 7,838
------- -------- ------ ------- --------
BALANCE, DECEMBER 31, 1998......... $(3,839) $(38,918) $1,179 $57,598 $ 73,902
======= ======== ====== ======= ========
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
26
<PAGE>
Consolidated Statements of Cash Flows
(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1998 1997 1996
--------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................... $ 7,838 $ 7,575 $ 7,403
Adjustments to reconcile net income to net
cash
provided by operating activities:
Depreciation................................ 296 296 244
Deferred income taxes....................... 21 405 571
Amortization of premiums and accretion of (19) 195 (11)
discounts..................................
Provision for loan loss..................... 90 45 90
Compensation expense--allocations of ESOP 1,175 1,055 930
and MRP shares.............................
Gain on sale of real estate owned........... (13) (37) --
Gain on sale of conventional loans.......... -- (258) --
Loss (gain) on sale of mortgage-backed (97) 8 --
securities available-for-sale..............
Gain on sale of premise..................... -- -- (536)
Net proceeds from sale of conventional -- 29,662 --
loans......................................
Increase or decrease in assets and
liabilities:
Accrued interest receivable................ (1,069) (444) (81)
Accrued interest on deposits............... 65 32 165
Accrued interest on borrowings............. 531 141 191
Accrued income taxes....................... (109) 148 58
Other assets............................... (322) (170) (337)
Other liabilities.......................... 296 (100) 1,073
Dividends payable.......................... (39) (138) (713)
--------- -------- ---------
Net cash provided by operating activities.... 8,644 38,415 9,047
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities available- (132,770) (25,947) --
for-sale....................................
Purchase of mortgage-backed securities -- (92,528) --
available-for-sale..........................
Net decrease (increase) in Federal Funds..... (34,625) 71,325 (20,850)
Maturity of investment securities held-to- -- 5,000 5,000
maturity....................................
Maturity of investment securities available- 10,000 10,000 --
for-sale....................................
Principal paydowns on mortgage-backed 1,402 14,000 --
securities available-for-sale...............
Net proceeds from sale of mortgage-backed 30,352 46,668 --
securities available-for-sale...............
Principal paydowns on investment securities 3,974 -- --
available-for-sale..........................
Net decrease (increase) in conventional 33,958 (78,145) (115,575)
loans.......................................
Net decrease in other loans.................. 8 42 10
Purchase of Federal Home Loan Bank stock..... (3,852) (1,149) (990)
Net proceeds from sale of real estate owned.. 128 342 178
Net proceeds from sale of premises........... -- -- 915
Purchase of premises and equipment........... (209) (96) (714)
--------- -------- ---------
Net cash used in investing activities........ (91,634) (50,488) (132,026)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts........... 10,891 3,704 (23)
Net increase (decrease) in certificate
accounts.................................... (10,818) 7,410 92,553
Advances by borrowers for taxes and
insurance................................... (872) 1,404 2,277
Net increase in borrowings................... 90,000 20,000 70,000
Dividends paid............................... (2,271) (1,935) (1,984)
Return of capital............................ -- -- (20,684)
Purchase of MRP stock........................ -- -- (4,792)
Proceeds from stock options exercised........ 149 -- --
Purchase of treasury stock................... (7,069) (20,393) (11,684)
--------- -------- ---------
Net cash provided by financing activities.... 80,010 10,190 125,663
--------- -------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS................................... (2,980) (1,883) 2,684
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR... 24,523 26,406 23,722
--------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR......... $ 21,543 $ 24,523 $ 26,406
========= ======== =========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest on deposits and advances by
borrowers for taxes and insurance.......... $ 24,747 $ 26,655 $ 21,693
Interest on borrowings...................... 7,500 5,502 --
Income taxes................................ 3,936 4,606 3,870
Noncash transactions:
Transfers from conventional loans to real
estate acquired through foreclosure........ 201 104 229
Increase in additional paid-in capital--ESOP
and MRP allocations........................ 397 308 203
Transfers from conventional mortgage loans
to conventional mortgage loans, held-for-
sale....................................... -- 29,989 --
Unrealized appreciation on securities
available-for-sale......................... 1,741 192 --
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
27
<PAGE>
FIRST BELL BANCORP, INC. 1998 ANNUAL REPORT
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
1.BASIS OF PRESENTATION
The principal business of the Company is to operate a traditional customer
oriented savings and loan association. The Association's business is pri-
marily 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 in Wilming-
ton, Delaware.
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 consolidated 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 statements and the reported amounts of revenues and expenses dur-
ing the period. Actual results could differ from those estimates.
2.RETURN OF CAPITAL
On December 16, 1996, the Company declared a one-time cash distribution of
$3.00 per share. The Company obtained a private letter ruling from the
Internal Revenue Service which allowed them to treat $2.93 per share of
this distribution as a return of capital. The return of capital was
reflected as a reduction to additional paid-in-capital and unearned ESOP
shares in the Company's financial statements. For the stockholders, the
return of capital is treated as a reduction in the cost basis of the shares
and is not subject to income taxes until the shares are sold. The remaining
$.07 per share was treated as an ordinary dividend. The total distribution
paid was $23,274,450 on 7,758,150 shares of stock on December 31, 1996 to
shareholders of record as of December 20, 1996.
3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Federal Home Loan Bank System--The Association is a member of the Fed-
eral Home Loan Bank ("FHLB") system. As a member, the Association is re-
quired to maintain a minimum investment in capital stock of the FHLB of
not less than 1% of the Association's outstanding conventional mortgage
loans or 0.3% of its total assets. Deficiencies, if any, in the required
investment at the end of any reporting period are purchased in the sub-
sequent reporting period. The Association receives dividends on its FHLB
stock.
b. Cash and Cash Equivalents--For the purpose of presenting the consoli-
dated statements of cash flows, cash on hand and interest and noninter-
est-bearing deposits with original maturities of less than 90 days are
considered cash equivalents.
The Association services mortgage loans for the Federal National Mort-
gage Association ("FNMA"). The Association is required to restrict cash
balances equal to the corresponding escrow funds. As of December 31,
1998 and 1997, restricted cash of approximately $502,000 and $634,000,
respectively, has been segregated on the books of the Association.
The Association's reserve requirements imposed by the Federal Reserve
Bank averaged approximately $1,004,000 and $860,000 for the years ended
December 31, 1998 and 1997, respectively.
c. Investment and Mortgage-Backed Securities--First Bell follows Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Debt and Equity Securities," for investment and mortgage-backed
securities. Investment and mortgage-backed securities that may be sold
as part of First
- --------------------------------------------------------------------------------
28
<PAGE>
- -------------------------------------------------------------------------------
Bell's asset/liability or liquidity management or in response to or in
anticipation of changes in interest rates and prepayment risk or other
factors are classified as available-for-sale and are carried at fair
market value. Unrealized gains and losses on such securities are
reported net of related taxes as other comprehensive income and as a
separate component of stockholders' 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 identification 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
$24,388,000, $31,407,000, and $4,173,000 at December 31, 1998, 1997 and
1996, 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 is being 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 ex-
pense monthly and is paid in accordance with the terms of the respective
accounts.
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.
- -------------------------------------------------------------------------------
29
<PAGE>
FIRST BELL BANCORP, INC. 1998 ANNUAL REPORT
- --------------------------------------------------------------------------------
k. New Accounting Pronouncements
Other Comprehensive Income--The Financial Accounting Standards Board
("FASB") recently issued SFAS No. 130, "Reporting Comprehensive Income,"
which became effective for financial statements for fiscal years begin-
ning after December 15, 1997. SFAS No. 130 establishes standards for re-
porting and display of comprehensive income and its components (reve-
nues, expenses, gains and losses) in a full set of general-purpose
financial statements.
For the years ended December 31, 1997 and 1996, the financial statements
have been reclassified for comparative purposes.
The following table sets forth the related tax effects allocated to each
element of comprehensive income for the years ended December 31, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
------------------------- ------------------------
Pre- Net- Pre- Net-
tax (Expense) of-tax tax (Expense) of-tax
Amount or Benefit Amount Amount or Benefit Amount
------ ---------- ------ ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Unrealized gains
(losses) on
securities:
Unrealized holding
gains (losses)
arising during
period.............. $1,993 $(872) $1,121 $197 $(85) $112
Less:
reclassification
adjustment for
(gains) losses
realized in net
income.............. (97) 38 (59) 8 (3) 5
------ ----- ------ ---- ---- ----
Net unrealized gains
(losses)............ 1,896 (834) 1,062 205 (88) 117
------ ----- ------ ---- ---- ----
Other comprehensive
income............... $1,896 $(834) $1,062 $205 $(88) $117
====== ===== ====== ==== ==== ====
</TABLE>
The following table sets forth the components of accumulated other com-
prehensive income for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------ ----
<S> <C> <C>
Beginning Balance........................................... $ 117 $ --
Net unrealized gains on securities, net of taxes............ 985 117
------ ----
Ending balance.............................................. $1,062 $117
====== ====
</TABLE>
First Bell held no available-for-sale securities during 1996.
Segment Information--In June 1997, the FASB issued Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information,"
which was effective for financial statements for periods beginning after
December 15, 1997. This statement redefines how operating segments are
determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. The Company has deter-
mined that it only has one operating segment which is the operation of a
bank, therefore, will not be presenting any further segment information.
Pension and Other Post-Retirement Benefits--In February 1998, the FASB
issued Statement No. 132, "Employers' Disclosure About Pension and Other
Post-Retirement Benefits." This statement will require certain footnote
disclosures related to pension and other retiree benefits and will have
no impact on the Company's financial position or results of operations.
Implementation of this standard is reflected in Note 17 to these finan-
cial statements.
l. Earnings Per Share--FASB recently issued SFAS No. 128, "Earnings Per
Share," which became effective for financial statements for periods end-
ing after December 15, 1997. SFAS No. 128 establishes standards for com-
puting and presenting earnings per share ("EPS"). It simplifies the
standards for computing EPS and makes them comparable to international
EPS.
- --------------------------------------------------------------------------------
30
<PAGE>
- -------------------------------------------------------------------------------
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 year ended December 31, 1996 EPS has been restated to conform
with the provisions of SFAS No. 128.
m. Treasury Stock--Treasury stock is recorded at cost.
n. 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.STOCKHOLDER RIGHTS PLAN
The Company adopted a Stockholder Rights Plan on November 18, 1998 in which
preferred stock purchase rights were distributed as a dividend at the rate
of one right for each share of common stock held as of the close of busi-
ness on November 30, 1998 and for each share of Company Common Stock issued
(including shares distributed from Treasury) by the Company thereafter and
prior to the Distribution Date.
Each Right will entitle stockholders to buy one one-thousandth of a share
of Series A Preferred Stock of the Company at an exercise price of $50.00.
The Rights will be exercisable only if a person or group acquires benefi-
cial ownership of 10% or more of the Company's outstanding Common Stock or
commences a tender or exchange offer upon consummation of which a person or
group would beneficially own 10% or more of the Company's outstanding Com-
mon Stock.
If any person becomes the beneficial owner of 10% or more of Company's Com-
mon Stock or a holder of 10% or more of the Company's Common Stock engages
in certain self-dealing transactions or a merger transaction in which the
Company is the surviving corporation and its Common Stock remains outstand-
ing, then each Right not owned by such person or certain related parties
will entitle its holder to purchase, at the Right's then-current exercise
price, units of the Company's Series A Preferred Stock having a market
value equal to twice the then-current exercise price. In addition, if First
Bell is involved in a merger or other business combination transactions
with another person after which its Common Stock does not remain outstand-
ing, or sells 50% or more of its assets or earning power to another person,
each Right will entitle its holder to purchase, at the Right's then-current
exercise price, shares of common stock of the ultimate parent of such other
person having a market value equal to twice the then-current exercise
price.
First Bell will generally be entitled to redeem the Rights at $0.01 per
right at any time until the 10th business day following public announcement
that a person or group has acquired 10% or more of the Company's Common
Stock.
- -------------------------------------------------------------------------------
31
<PAGE>
FIRST BELL BANCORP, INC. 1998 ANNUAL REPORT
- -------------------------------------------------------------------------------
5.INVESTMENT SECURITIES HELD-TO-MATURITY
The following is a summary of investment securities held-to-maturity at De-
cember 31 (in thousands):
<TABLE>
<CAPTION>
1998
---------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Treasury bills........................ $9,976 $701 $-- $10,677
Other investments..................... 4 85 -- 89
------ ---- --- -------
$9,980 $786 $-- $10,766
====== ==== === =======
</TABLE>
<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
====== ==== === =======
</TABLE>
The carrying value and fair value of investment securities held-to-maturity
by contractual maturity as of December 31, 1998, are shown below (in
thousands):
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- -------
<S> <C> <C>
Due within one year........................................ $4,997 $ 5,063
Due after five years through ten years..................... 4,983 5,703
------ -------
$9,980 $10,766
====== =======
</TABLE>
There were no sales of investment securities held-to-maturity during the
years ended December 31, 1998, 1997 and 1996.
6.INVESTMENT SECURITIES AVAILABLE-FOR-SALE
These investments consist of municipal securities and collateralized mort-
gage obligations ("CMO's"). The following is a summary of investment secu-
rities available-for-sale at December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998
----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Municipal Securities................ $117,159 $1,980 $(153) $118,986
CMO's............................... 17,584 107 -- 17,691
-------- ------ ----- --------
$134,743 $2,087 $(153) $136,677
======== ====== ===== ========
<CAPTION>
1997
----------------------------------------
<S> <C> <C> <C> <C>
CMO's............................... $ 15,940 $-- $ (38) $ 15,902
======== ====== ===== ========
</TABLE>
There were no investment securities available-for-sale held by the Company
during the year ended December 31, 1996. There were no sales of investment
securities available-for-sale during the years ended December 31, 1998 and
1997.
- -------------------------------------------------------------------------------
32
<PAGE>
- --------------------------------------------------------------------------------
The carrying value and fair value of investment securities available-for-
sale by contractual maturity as of December 31, 1998, are shown below (in
thousands):
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- --------
<S> <C> <C>
Due after five years through ten years.................... $ 17,515 $ 17,516
Due after ten years....................................... 117,228 119,161
-------- --------
$134,743 $136,677
======== ========
</TABLE>
The expected maturity may differ from the contractual maturity for the mu-
nicipal securities because most of these securities have a call feature
that is earlier than the contractual maturity date. For the CMO's, the ex-
pected maturity may differ from the contractual maturity because borrowers
may have the right to prepay obligations with or without prepayment penal-
ties.
7.MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE
There were no mortgage-backed securities available-for-sale held at Decem-
ber 31, 1998.
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
$30,352,000 and $46,668,000 for the years ended December 31, 1998 and 1997,
respectively, resulting in gross gains of $200,000 and $94,000 for the
years ended December 31, 1998 and 1997, respectively, and gross losses of
$103,000 and $102,000 for the years ended December 31, 1998 and 1997, re-
spectively. There were no sales of such securities during 1996. There were
no mortgage-backed securities held by the Company during the year ended De-
cember 31, 1996.
8.CONVENTIONAL LOANS
The following is a summary of conventional loans as of December 31, 1998
and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Conventional mortgages...................................... $535,864 $568,405
Residential construction loans.............................. 17,924 25,563
Multi-family loans.......................................... 651 860
Second mortgage loans....................................... 4,508 268
-------- --------
558,947 595,096
Less:
Deferred net loan origination fees.......................... 3,152 3,822
Undisbursed portion of construction loans in process........ 10,354 12,072
Allowance for loan losses................................... 805 715
-------- --------
$544,636 $578,487
======== ========
</TABLE>
- --------------------------------------------------------------------------------
33
<PAGE>
FIRST BELL BANCORP, INC. 1998 ANNUAL REPORT
- -------------------------------------------------------------------------------
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 $498,000 and $634,000 at December 31, 1998 and
1997, respectively. The Association does not accrue interest on loans past
due 90 days or more. Uncollected interest on total nonaccrual
loans amounted to $32,000, $29,000 and $24,000 for the years ended December
31, 1998, 1997 and 1996, respectively.
During 1997, the Company reclassified 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 reclassified and sold such mortgages in
efforts to better manage the Company's interest rate risk.
9.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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year..................................... $715 $665 $575
Provision for loan losses...................................... 90 45 90
Loans charged off.............................................. -- -- --
Recovery of previous loan chargeoffs........................... -- 5 --
---- ---- ----
Balance, end of year........................................... $805 $715 $665
==== ==== ====
</TABLE>
10.PREMISES AND EQUIPMENT
The following is a summary of premises and equipment as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Land and land improvements..................................... $ 351 $ 351
Office buildings and leasehold improvements.................... 3,973 3,815
Furniture, fixtures and equipment.............................. 1,722 1,671
------ ------
6,046 5,837
Less accumulated depreciation and amortization................. 2,641 2,345
------ ------
$3,405 $3,492
====== ======
</TABLE>
During the year ended December 31, 1996, the Association's branch office,
which was located in the central business district in the City of Pitts-
burgh, 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>
1999 $164
2000 170
2001 178
2002 113
2003 100
2004 and thereafter 243
</TABLE>
- -------------------------------------------------------------------------------
34
<PAGE>
- --------------------------------------------------------------------------------
Rental expense under these leases was approximately $163,000, $161,000 and
$113,000 for the years ended December 31, 1998, 1997 and 1996, respective-
ly.
11.DEPOSITS
The following is a summary of deposits and stated interest rates as of De-
cember 31 (in thousands):
<TABLE>
<CAPTION>
Stated Rate 1998 1997
------------- -------- --------
<S> <C> <C> <C>
Balance by interest rate:
Passbook, club and other accounts........... 3.00%-- 4.45% $ 73,578 $ 67,587
-------- --------
Money market and NOW accounts............... 0.00%-- 3.21% 52,164 47,264
-------- --------
Certificate accounts........................ 3.00%-- 5.50% 175,279 74,933
5.51%-- 6.00% 123,361 156,885
6.01%-- 6.50% 47,976 115,491
6.51%-- 7.50% 16,779 26,200
7.51%-- 8.50% 2,806 2,855
8.51%-- 9.50% 2,887 3,559
9.51%--10.50% 298 281
-------- --------
369,386 380,204
-------- --------
$495,128 $495,055
======== ========
</TABLE>
Noninterest-bearing demand deposits were approximately $5,428,000 and
$3,610,000 at December 31, 1998 and 1997, 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, 1998 (in thousands):
<TABLE>
<CAPTION>
Contractual Maturity
--------------------
<S> <C>
1999 $236,457
2000 59,308
2001 30,035
2002 9,573
2003 16,925
2004 2,715
2005 and thereafter 14,373
--------
$369,386
========
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was $38,128,000 and $37,828,000 at December 31, 1998 and 1997,
respectively. Deposits in excess of $100,000 are not insured by the SAIF.
- --------------------------------------------------------------------------------
35
<PAGE>
FIRST BELL BANCORP, INC. 1998 ANNUAL REPORT
- --------------------------------------------------------------------------------
12.BORROWINGS
The following is a summary of borrowings as of December 31, (in thousands):
<TABLE>
<CAPTION>
1998
Amount Rate Type Maturity Date
------ ---- ----- -------------
<S> <C> <C> <C>
$70,000 5.46%(1) Fixed March 2002
40,000 5.79%(2) Fixed April 2008
25,000 5.66%(2) Fixed May 2008
45,000 5.60%(2) Fixed June 2008
<CAPTION>
1997
Amount Rate Type Maturity Date
------ ---- ----- -------------
<S> <C> <C> <C>
$70,000 5.46%(1) Fixed March 2002
20,000 6.50% Fixed January 1998
</TABLE>
The above borrowings are secured by the assets of the Company.
-------
(1) At December 31, 1998, the interest rate was fixed at 5.46%. Every six
months the Federal Home Loan Bank ("FHLB") has the option to convert
this interest rate to an adjustable rate based on the three-month Lon-
don Interbank Offered Rate ("LIBOR").
(2) The FHLB has the option to covert this interest rate to an adjustable
rate based on the three-month LIBOR at the five year anniversary date
of the borrowings origination, which will occur in the second quarter
of 2003.
13.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
quantitative 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. Effective in April 1999,
the minimum Tier I Capital to total assets ratio changed to 4.00% and the
increase in the Tier I Capital to total assets ratio will not materially
impact the Association. Management believes, as of December 31, 1998, that
the Association meets all capital adequacy requirements to which it is sub-
ject.
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
institution's category.
- --------------------------------------------------------------------------------
36
<PAGE>
- --------------------------------------------------------------------------------
The Association had the following amounts of capital and capital ratios at
December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
------------- ------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- --------- --------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to risk-
weighted assets).......... $74,264 22.41% $26,515 8.00% $33,144 10.00%
Tier I Capital (to risk-
weighted assets).......... 73,459 22.16 N/A N/A 19,886 6.00
Tier I Capital (to total
assets)................... 73,459 9.53 23,123 3.00 38,539 5.00
Tangible Capital........... 73,459 9.53 11,562 1.50 N/A N/A
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>
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 $331,439,000 and $310,121,000 at
December 31, 1998 and 1997, 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, 1998, the maximum dividend the Association may de-
clare and pay to First Bell is approximately $31,745,000.
14.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
1998 ------ -------- -----
<S> <C> <C> <C>
Income available to common stockholders................ $7,838 6,411
Unearned ESOP shares................................... -- (581)
Unearned MRP shares.................................... -- (275)
------ -----
Basic earnings per share............................... 7,838 5,555 $1.41
=====
Effect of dilutive securities:
MRP shares............................................ -- 99
Stock options......................................... -- 156
------ -----
Diluted earnings per share............................. $7,838 5,810 $1.35
====== ===== =====
</TABLE>
- --------------------------------------------------------------------------------
37
<PAGE>
FIRST BELL BANCORP, INC. 1998 ANNUAL REPORT
- --------------------------------------------------------------------------------
<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
====== ===== =====
<CAPTION>
Weighted
Average Per
Income Share 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
====== ===== =====
</TABLE>
15.INTEREST EXPENSE
The following is a summary of interest expense on deposits for the year
ended December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Passbook, club and other accounts.................... $ 2,480 $ 2,288 $ 2,314
Money market and NOW accounts........................ 1,147 1,092 1,040
Certificate accounts................................. 21,186 23,306 18,505
------- ------- -------
$24,813 $26,686 $21,859
======= ======= =======
</TABLE>
16.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>
1998 1997
------- -------
<S> <C> <C>
Deferred Tax Assets:
Deferred loan origination fees............................. $ -- $ --
Other...................................................... 193 171
------- -------
Total deferred tax assets................................. 193 171
------- -------
Deferred Tax Liabilities:
Deferred loan origination fees............................. (750) (482)
Allowance for loan losses.................................. (680) (903)
Depreciation on premises and equipment..................... (239) (252)
Other...................................................... (948) (259)
------- -------
Total deferred tax liabilities............................ (2,617) (1,896)
------- -------
Net deferred tax liability................................ $(2,424) $(1,725)
======= =======
</TABLE>
- --------------------------------------------------------------------------------
38
<PAGE>
- --------------------------------------------------------------------------------
The provision for income taxes consists of the following components for the
year ended December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Current:
Federal................................................. $3,048 $3,665 $3,189
State................................................... 809 976 725
Deferred expense......................................... 21 405 571
------ ------ ------
Total provision for income taxes....................... $3,878 $5,046 $4,485
====== ====== ======
</TABLE>
The following table presents the principal components of deferred income
tax expense as of December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----- ---- -----
<S> <C> <C> <C>
Allowance for loan losses................................ $(221) $(13) $(123)
Deferred loan origination fees........................... 269 425 550
Depreciation differences................................. (12) 4 (6)
Other--net............................................... (15) (11) 150
----- ---- -----
$ 21 $405 $ 571
===== ==== =====
</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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate.......................................... 34.0% 34.0% 34.0%
State income taxes.......................................... 4.6 5.2 4.0
Tax exempt interest income.................................. (5.8) -- --
Other--net.................................................. 0.3 0.8 (0.3)
---- ---- ----
Effective tax rate........................................ 33.1% 40.0% 37.7%
==== ==== ====
</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.
17.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.
The Defined Benefit Pension Plan was amended in the current year to freeze
benefit accruals effective March 31, 1998 and to fully vest all active
Participants on April 1, 1998. Such amendment constitutes a curtailment as
defined by SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination
Benefits." The effects of such curtailment are reflected in the following
tables.
- --------------------------------------------------------------------------------
39
<PAGE>
FIRST BELL BANCORP, INC. 1998 ANNUAL REPORT
- --------------------------------------------------------------------------------
The following tables reconcile the projected benefit obligation, plan as-
sets, funded status, and accrued/prepaid pension cost of the plan for the
years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at beginning of year........... $1,182 $1,041
Service cost................................................ 18 64
Interest cost............................................... 77 76
Curtailment................................................. (68) --
Benefits paid............................................... (78) (44)
Actuarial (gain) or loss.................................... (58) 3
Change in discount rate..................................... 39 42
------ ------
Projected benefit obligation at end of year................. $1,112 $1,182
====== ======
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.............. $1,173 $1,073
Actual return on plan assets................................ 73 63
Employer contributions...................................... 76 81
Benefits paid............................................... (78) (44)
------ ------
Fair value of plan assets at end of year.................... $1,244 $1,173
====== ======
FUNDED STATUS
Funded status at end of year................................ $ 132 $ (9)
Unrecognized net actuarial loss............................. 126 213
Unrecognized prior service cost............................. -- (119)
Unrecognized transition asset............................... (47) (53)
------ ------
Net amount recognized....................................... $ 211 $ 32
====== ======
Amounts recognized in the consolidated balance sheets
consist of:
Prepaid benefit cost....................................... $ 211 $ 32
Accrued benefit liability.................................. -- --
Intangible asset........................................... -- --
Amount included in comprehensive income.................... -- --
------ ------
Net amount recognized....................................... $ 211 $ 32
====== ======
DEVELOPMENT OF (ACCRUED) PREPAID PENSION COST
Prepaid pension cost at beginning of year................... $ 32 $ 13
FAS 87 net periodic pension cost (income)................... 103 (62)
Contributions............................................... 76 81
------ ------
Prepaid pension cost at end of year......................... $ 211 $ 32
====== ======
</TABLE>
- --------------------------------------------------------------------------------
40
<PAGE>
- --------------------------------------------------------------------------------
Net periodic pension cost for the defined benefit plan includes the follow-
ing components for the year ended December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----- ---- ----
<S> <C> <C> <C>
Components of Net Periodic Pension Cost
Service cost--benefits earned during the period........... $ 18 $ 65 $ 82
Interest cost on projected benefit obligation............. 77 76 68
Expected return on assets................................. (74) (70) (65)
Amortization of initial unrecognized net obligation or
(net asset) as of January 1, 1987........................ (5) (5) (5)
Amortization of prior service cost........................ (2) (7) (7)
Recognized net actuarial (gain) or loss................... -- 3 7
----- ---- ----
FAS 87 net periodic pension cost.......................... 14 62 80
Curtailment recognized during the year.................... (117) -- --
----- ---- ----
Total net periodic pension (income) cost................... $(103) $ 62 $ 80
===== ==== ====
</TABLE>
The following rate assumptions were used in the plan accounting as of De-
cember 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Discount rate............................................... 6.70% 7.00% 7.25%
Rate of compensation increases.............................. 5.00% 6.00% 6.00%
Expected long-term rate of return on plan assets............ 6.75% 7.00% 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,
1998, 1997 and 1996, 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, 1998, 1997 and 1996, was ap-
proximately $9,800, $9,200 and $6,400, respectively.
Employee Stock Ownership Plan--The Association has established the Bell
Federal Savings and Loan Association of Bellevue Employee Stock Ownership
Plan ("ESOP") which covers substantially all employees. The shares for the
plan 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.
- --------------------------------------------------------------------------------
41
<PAGE>
FIRST BELL BANCORP, INC. 1998 ANNUAL REPORT
- --------------------------------------------------------------------------------
Compensation expense related to the ESOP for 1998, 1997 and 1996, totaled
$586,000, $537,000 and $405,000, 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, 1998 was
approximately $8,704,000. Shares held by the ESOP were as follows as of De-
cember 31:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Unallocated shares, beginnning of year............ 596,089 629,622 663,578
Shares released for allocation.................... (34,527) (33,533) (33,956)
------- ------- -------
Unallocated Shares, end of year................... 561,562 596,089 629,622
======= ======= =======
</TABLE>
Stock Option Plan--The Company has a fixed option plan that was approved by
Shareholders on April 29, 1996. Options under this plan have been granted
to certain officers and directors of the Company. The plan also permits op-
tions to be granted to employees at the Company's discretion. Under the
plan, the total number of shares of common stock that may be granted is
859,625. The Company has adopted the disclosure-only provision of SFAS No.
123, "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
1998 ------ -------- --------
<S> <C> <C> <C>
As reported......................................... $7,838 $1.41 $1.35
Pro forma........................................... 7,500 1.35 1.29
<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........................................... 7,025 1.20 1.15
<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>
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 options granted in each respective year:
<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>
- --------------------------------------------------------------------------------
42
<PAGE>
- --------------------------------------------------------------------------------
The following summarizes the activity in the Stock Option Plan for the year
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Options outstanding, beginning of year......... 437,288 361,037 --
Options granted................................ -- -- 361,037
Equitable right adjustment..................... -- 89,113 --
Options exercised.............................. (13,931) -- --
Options forfeited.............................. (42,871) (12,862) --
-------- -------- --------
Options outstanding, end of year............... 380,486 437,288 361,037
======== ======== ========
Weighted average exercise price, end of year... $10.70 $10.70 $13.38
======== ======== ========
Options exercisable, end of year............... 152,188 90,030 --
======== ======== ========
Options available for grant, end of year....... 465,208 422,337 498,588
======== ======== ========
Weighted-average fair value of options granted
during the year............................... $-- $10.25 $4.70
======== ======== ========
Remaining contractual life of outstanding
options....................................... 8 Years 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>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Awards outstanding, beginning of year............. 129,428 180,260 --
Awards granted.................................... 2,100 1,500 183,760
Awards forfeited.................................. -- (16,280) (3,500)
Awards vested..................................... (32,357) (36,052) --
------- ------- -------
Awards outstanding, end of year................... 99,171 129,428 180,260
======= ======= =======
Total MRP shares, end of year..................... 275,441 307,798 343,850
======= ======= =======
</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 stockholders' equity, aggregated $3,839,000 and
$4,290,000 at December 31, 1998 and 1997, 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 years ended December 31, 1998 and 1997, was $590,000 and $518,000, re-
spectively. Terminated employees forfeit any non-vested awards.
- --------------------------------------------------------------------------------
43
<PAGE>
FIRST BELL BANCORP, INC. 1998 ANNUAL REPORT
- --------------------------------------------------------------------------------
18.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>
1998 1997
----------------- -----------------
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............ 6,688 6.55 437 7.13
30 year fixed rate mortgages............ 9,785 7.00 4,044 7.38
Construction mortgages.................. 10,354 6.81 12,687 7.38
Home equity loans....................... 594 6.74 -- --
Available line of credit................ 1,233 7.91 -- --
------- -------
$28,654 $17,905
======= =======
</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.
In addition, at December 31, 1998 the Company has committed to purchase
$24,905,000 of municipal securities.
19.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>
1998 1997
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Assets:
Cash and noninterest-bearing deposits. $ 3,041 $ 3,041 $ 2,580 $ 2,580
Interest-bearing deposits............. 18,502 18,502 21,943 21,943
Federal Funds sold.................... 36,175 36,175 1,550 1,550
Investment securities held-to-
maturity............................. 9,980 10,766 9,973 10,485
Investment securities available-for-
sale................................. 136,677 136,677 15,902 15,902
Mortgage-backed securities available-
for-sale............................. -- -- 31,885 31,885
Conventional loans.................... 544,636 551,979 578,487 581,058
Federal Home Loan Bank stock.......... 9,000 9,000 5,148 5,148
Liabilities:
Passbook, club, money market, NOW and
other accounts....................... $125,742 $125,742 $114,851 $114,851
Certificate accounts.................. 369,386 374,411 380,204 382,976
Borrowings............................ 180,000 189,646 90,000 90,000
</TABLE>
- --------------------------------------------------------------------------------
44
<PAGE>
- --------------------------------------------------------------------------------
a. Cash and Noninterest-bearing Deposits, Interest-bearing Deposits and Federal
Funds Sold--For cash and noninterest-bearing deposits, interest- bearing de-
posits 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 ratings 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 de-
posit is estimated by discounting future cash flows using the rates cur-
rently offered for deposits of similar remaining maturities.
f. Borrowings--The fair value of borrowings is estimated as the present value
of the remaining payments of the borrowings using the year end FHLB interest
rate for like borrowings.
g. Off-balance Sheet Commitments to Extend Credit--The fair value of off- bal-
ance sheet commitments to extend credit is estimated to equal the outstand-
ing commitment amount. Management does not believe it is meaningful to pro-
vide an estimate of fair value that differs from the outstanding 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.
20.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.
21.NEW ACCOUNTING PRONOUNCEMENT NOT YET ADOPTED
Accounting for Derivative Instruments and Hedging Activities--In June 1998,
the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instru-
ments embedded in other contracts, and for hedging activities. The provi-
sions of this statement are effective for all fiscal quarters of all fiscal
years beginning after June 15, 1999. Management is in the process of evalu-
ating the impact of this statement on the consolidated financial state-
ments.
- --------------------------------------------------------------------------------
45
<PAGE>
FIRST BELL BANCORP, INC. 1998 ANNUAL REPORT
- --------------------------------------------------------------------------------
22.PARENT COMPANY
The following are condensed financial statements for First Bell as of De-
cember 31, 1998 and 1997 and for the years ended December 31, 1998, 1997
and 1996 (in thousands):
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS 1998 1997
------- -------
<S> <C> <C>
CASH AND INTEREST-BEARING DEPOSITS........................ $ 2 $ 10
FEDERAL FUNDS SOLD........................................ -- 1,550
INVESTMENT IN AND ADVANCES TO BELL FEDERAL................ 73,459 71,808
LOAN RECEIVABLE--ESOP..................................... 4,409 4,493
OTHER ASSETS.............................................. 1,204 195
------- -------
Total assets............................................ $79,074 $78,056
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LOAN PAYABLE TO BELL FEDERAL.............................. $ 5,604 $ 4,323
ACCRUED INTEREST.......................................... -- 14
ACCRUED INCOME TAXES...................................... 21 80
OTHER LIABILITIES......................................... 727 773
------- -------
Total liabilities....................................... 6,352 5,190
------- -------
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 shares issued and 6,110,476 and
6,510,625 outstanding; one stock right per share)....... 86 86
Additional paid-in capital............................... 61,768 61,371
Unearned ESOP shares..................................... (3,972) (4,217)
Unearned MRP shares...................................... (3,839) (4,290)
Treasury stock, at cost.................................. (38,919) (32,077)
Retained earnings........................................ 57,598 51,993
------- -------
Total stockholders' equity.............................. 72,722 72,866
------- -------
Total liabilities and stockholders' equity.............. $79,074 $78,056
======= =======
</TABLE>
- --------------------------------------------------------------------------------
46
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
INTEREST INCOME:
Interest bearing deposits........................ $ 36 $ 39 $ 89
Federal funds sold............................... 59 77 1,391
Interest on ESOP loan receivable................. 382 386 551
------- ------- -------
Total interest income.......................... 477 502 2,031
------- ------- -------
INTEREST EXPENSE.................................. 412 300 --
------- ------- -------
NET INTEREST INCOME............................... 65 202 2,031
GENERAL AND ADMINISTRATIVE EXPENSES............... 132 213 231
------- ------- -------
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES... (67) (11) 1,800
------- ------- -------
(BENEFIT) PROVISION FOR INCOME TAXES--
Current:
Federal......................................... (44) (18) 601
State........................................... 28 41 41
------- ------- -------
Total provision for income taxes............... (16) 23 642
------- ------- -------
(LOSS) INCOME BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF
SUBSIDIARY....................................... (51) (34) 1,158
Equity in undistributed earnings of Bell
Federal........................................ 7,889 7,609 6,245
------- ------- -------
NET INCOME........................................ $ 7,838 $ 7,575 $ 7,403
======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
47
<PAGE>
FIRST BELL BANCORP, INC. 1998 ANNUAL REPORT
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 7,838 $ 7,575 $ 7,403
Adjustments to reconcile net income to net
cash
provided by operating activities:
Equity in undistributed earnings of Bell
Federal.................................... (7,889) (7,609) (6,245)
Increase or decrease in assets and
liabilities:
Accrued income taxes....................... (59) 22 (46)
Accrued interest........................... (14) 14 --
Other assets............................... (1,011) 430 (533)
Other liabilities.......................... (7) (127) 1,038
Dividends payable.......................... (39) (138) (713)
------- -------- --------
Net cash provided by (used in) operating
activities............................... (1,181) 167 904
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in Federal Funds...... 1,550 (1,325) 33,150
Principal paydowns on ESOP loan receivable.... 84 76 2,067
ESOP loan receivable.......................... -- -- --
Dividend from Bell Federal.................... 7,000 16,000 --
Investment in and advances to Bell Federal.... 598 3,087 3,016
------- -------- --------
Net cash provided by investing activities. 9,232 17,838 38,233
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid................................ (2,271) (1,935) (1,984)
Return of capital............................. -- -- (20,684)
Purchase of treasury stock.................... (7,069) (20,393) (11,684)
Purchase of MRP shares........................ -- -- (4,792)
Loan payable to Bell Federal.................. 1,365 4,400 --
Principal payment on loan payable............. (84) (76) --
------- -------- --------
Net cash used in financing activities..... (8,059) (18,004) (39,144)
------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... (8) 1 (7)
CASH, BEGINNING OF YEAR........................ 10 9 16
------- -------- --------
CASH, END OF YEAR.............................. $ 2 $ 10 $ 9
======= ======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Income taxes................................. $ 37 $ 93 $ 688
Interest..................................... 426 286 --
Non-cash transactions:
Increase in additional paid-in-capital--ESOP
and MRP share allocations................... 397 308 203
</TABLE>
- --------------------------------------------------------------------------------
48
<PAGE>
- --------------------------------------------------------------------------------
23.QUARTERLY EARNINGS SUMMARY (Unaudited)
Quarterly earnings for the years ended December 31, 1998 and 1997 are as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1998
---------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME... $11,973 $12,145(2) $12,781 $12,750
INTEREST EXPENSE............... 7,536 7,769 8,763 8,775
------- ------- ------- -------
NET INTEREST INCOME........... 4,437 4,376 4,018 3,975
PROVISION FOR LOAN LOSSES...... 20 10 30 30
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES.... 4,417 4,366 3,988 3,945
OTHER INCOME................... 206 123 119 195
OTHER EXPENSES................. 1,400 1,404 1,432 1,407
------- ------- ------- -------
INCOME BEFORE PROVISION FOR
INCOME TAXES.................. 3,223 3,085 2,675 2,733
PROVISION FOR INCOME TAXES..... 1,297 1,127(2) 725 729
------- ------- ------- -------
NET INCOME..................... 1,926 1,958 1,950 2,004
------- ------- ------- -------
OTHER COMPREHENSIVE INCOME, NET
OF TAX--Unrealized gain (loss)
on investments................ (65) 235 761 131
------- ------- ------- -------
COMPREHENSIVE INCOME........... $ 1,861 $ 2,193 $ 2,711 $ 2,135
======= ======= ======= =======
BASIC EARNINGS PER SHARE (1)... $ 0.34 $ 0.35 $ 0.35 $ 0.38
======= ======= ======= =======
DILUTED EARNINGS PER SHARE (1). $ 0.33 $ 0.33 $ 0.34 $ 0.36
======= ======= ======= =======
</TABLE>
<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 LOAN LOSSES......... 20 30 -- (5)
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR 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
OTHER COMPREHENSIVE INCOME, NET OF
TAX--
Unrealized gain (loss) on
investments...................... (100) 199 18 165
------- ------- ------- -------
COMPREHENSIVE INCOME.............. $ 1,896 $ 2,113 $ 2,029 $ 1,984
======= ======= ======= =======
BASIC EARNINGS PER SHARE (1)...... $ 0.30 $ 0.34 $ 0.33 $ 0.33
======= ======= ======= =======
DILUTED EARNINGS PER SHARE........ $ 0.29 $ 0.32 $ 0.31 $ 0.31
======= ======= ======= =======
</TABLE>
- -------
(1) Quarterly per share amounts do not add to the total for the years ended De-
cember 31, 1998 and 1997, due to rounding.
(2) Amounts reflect reclassification of $108,000 related to tax equivalent in-
terest income.
- --------------------------------------------------------------------------------
49
<PAGE>
FIRST BELL BANCORP, INC. 1998 ANNUAL REPORT
- --------------------------------------------------------------------------------
24.SUBSEQUENT EVENTS
On January 1, 1999, the Company terminated the Defined Benefit Pension
Plan. The termination is considered a settlement as defined in SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits." At the option of the employee,
all plan assets will be distributed either through the purchase of a non-
participating annuity contract or lump sum distribution. The Company will
be relieved of primary responsibility for any pension benefit obligation.
The termination eliminates significant risks related to the obligation and
the assets used to effect the settlement. As the settlement has not been
completed, no gain or loss has been estimated.
During the period January 1, 1999 through January 22, 1999, the Association
has committed to purchase an additional $37,350,000 in investment securi-
ties available-for-sale. To help fund these purchases, on January 22, 1999,
the Association borrowed an additional $28,000,000 from the FHLB.
* * * * * *
- --------------------------------------------------------------------------------
50
<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 22, 1999, incorporated by reference in this Annual Report on
Form 10-K of First Bell Bancorp, Inc. for the year ended December 31, 1998.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
March 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,041
<INT-BEARING-DEPOSITS> 18,520
<FED-FUNDS-SOLD> 36,175
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 136,677
<INVESTMENTS-CARRYING> 9,980
<INVESTMENTS-MARKET> 10,766
<LOANS> 545,535
<ALLOWANCE> 805
<TOTAL-ASSETS> 767,606
<DEPOSITS> 495,128
<SHORT-TERM> 0
<LIABILITIES-OTHER> 18,576
<LONG-TERM> 180,000
0
0
<COMMON> 86
<OTHER-SE> 78,816
<TOTAL-LIABILITIES-AND-EQUITY> 767,606
<INTEREST-LOAN> 41,906
<INTEREST-INVEST> 7,261
<INTEREST-OTHER> 482
<INTEREST-TOTAL> 49,649
<INTEREST-DEPOSIT> 24,813
<INTEREST-EXPENSE> 32,843
<INTEREST-INCOME-NET> 16,806
<LOAN-LOSSES> 90
<SECURITIES-GAINS> 97
<EXPENSE-OTHER> 5,643
<INCOME-PRETAX> 11,716
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,838
<EPS-PRIMARY> 1.41
<EPS-DILUTED> 1.35
<YIELD-ACTUAL> 2.53
<LOANS-NON> 498
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 775
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 805
<ALLOWANCE-DOMESTIC> 805
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 805
</TABLE>
