<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, 1999
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 $74,887,904 and is based upon the last sales price as quoted on
The Nasdaq Stock Market for March 1, 2000.
As of March 1, 2000, the Registrant had 5,104,763 shares outstanding (excluding
treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December 31,
1999 are incorporated by reference into Part II of this Form 10-K. Portions of
the Proxy Statement for the 2000 Annual Meeting of Stockholders are incorporated
by reference into Part III of this Form 10-K.
<PAGE>
INDEX
PAGE
----
PART I
Item 1. Business..................................................... 1
Item 2. Properties................................................... 29
Item 3. Legal Proceedings............................................ 29
Item 4. Submission of Matters to a Vote of Security Holders.......... 29
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters...................................................... 29
Item 6. Selected Financial Data...................................... 29
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 30
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.... 30
Item 8. Financial Statements and Supplementary Data.................. 32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 32
PART III
Item 10. Directors and Executive Officers of the Registrant........... 32
Item 11. Executive Compensation....................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 32
Item 13. Certain Relationships and Related Transactions............... 33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................................................. 33
SIGNATURES............................................................... 35
<PAGE>
PART 1
Item 1. Business
General
First Bell Bancorp, Inc (the "Company") was orgainzed by the Board of
Directors of Bell Federal Savings and Loan Association of Bellevue (the
"Association") for the purpose of acquiring all of the capital stock of the
Association issued in connection with the Association's conversion from a mutual
to stock form, which was consummated on June 29, 1995,(the "Conversion"). At
December 31, 1999, the Company had consolidated total assets of $816.1 million
and total equity of $54.5 million. The Company is incorporated under Delaware
law and is a savings and loan holding company subject to regulations 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
conducted through six branch offices located thoughout 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 and
adjustable-rate, owner-occupied, single family conventional mortgage loans and,
to 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 sources of funds are deposits and borrowings.
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 ("Federal Home Loan Bank").
1
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Private Securities Litigation Reform Act Safe Harbor Statement
In addition to historical information, this 10-K includes certain forward
looking statements based on current management expectations. Examples of this
forward looking information can be found in, but are not limited to, the
allowance for losses discussion and certain sections of the 1999 Annual Report
incorporated herein. The Company's actual results could differ materially from
those of management's 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
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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,
1999, total loans receivable were $545.2 million, of which $516.5 million, or
94.7%, were conventional mortgage loans. Of the conventional mortgage loans
outstanding at that date, 95.6% were fixed-rate loans. At December 31, 1999,
the loan portfolio also included $16.2 million of residential construction
loans; $500,000 of multi-family loans; $11.0 million of residential home equity
loans; and $967,000 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,
-------------------------------
1999 1998 1997
------------------ ------------------ ------------------
(in thousands)
<S> <C> <C> <C>
Loan receivable at beginning of period $559,846 $596,003 $547,210
Additions:
Originations of conventional mortgages 82,564 66,825 129,043
Reductions:
Transfer of mortgage loans to foreclosed real 459 201 104
estate
Repayments 96,729 102,781 50,157
Loan sales - - 29,989
-------- -------- --------
Total reductions 97,188 102,982 80,250
-------- -------- --------
Total loans receivable at end of period $545,222 $559,846 $596,003
======== ======== ========
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
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The following table sets forth the composition of the loan portfolio and the
mortgage-backed securities portfolio in dollar amounts and in percentages of the
portfolio at the dates indicated.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Conventional mortgages $516,514 94.73% $535,864 95.72% $568,405 95.37%
Residential construction loans 16,229 2.98 17,924 3.20 25,563 4.29
Multi family loans 500 0.09 651 0.12 860 0.14
Second mortgage loans 11,012 2.02 4,508 0.81 268 0.05
-------- ------ -------- ------ -------- ------
Total real estate loans 544,255 99.82 558,947 99.85 595,096 99.85
Consumer loans:
Loans on deposit accounts 967 0.18 895 0.15 899 0.15
Home improvement loans - - 4 - 8 -
-------- ------ -------- ------ -------- ------
Total consumer loans 967 0.18 899 0.15 907 0.15
-------- ------ -------- ------ -------- ------
Total loans receivable 545,222 100.00% 559,846 100.00% 596,003 100.00%
====== ====== ======
Less:
Undisbursed portion of loans in process 8,652 10,354 12,072
Deferred net loan origination fees 2,386 3,153 3,822
Allowance for loan losses 925 805 715
-------- -------- --------
Loans receivable, net $533,259 $545,534 $579,394
======== ======== ========
Morrtage-backed securities
GNMA $ - -% $ _ -% $ 26,958 84.55%
FHLMC - - - - - -
FNMA - - - - 4,927 1 5.45
-------- ------ -------- ------ -------- ------
Total mortgage-backed securities $ - -% $ - -% $ 31,885 100.00%
======== ====== ======== ====== ======== ======
<CAPTION>
At December 31, (in thousands)
1996 1995
---- ----
Percent of Percent of
Amount Total Amount Total
------ ----- ------ -----
<S> <C> <C> <C> <C>
Real estate loans:
Conventional mortgages $524,867 95.92% $409,807 94.67%
Residential construction loans 19,877 3.63 19,692 4.55
Multi family loans 1,220 0.22 2,075 0.48
Second mortgage loans 297 0.06 330 0.08
-------- ------ -------- ------
Total real estate loans 546,261 99.83 431,904 99.78
Consumer loans:
Loans on deposit accounts 938 0.17 937 0.22
Home improvement loans 11 - 22 -
-------- ------ -------- ------
Total consumer loans 949 0.17 959 0.22
-------- ------ -------- ------
Total loans receivable 547,210 100.00% 432,863 100.00%
====== ======
Less:
Undisbursed portion of loans in process 11,120 11,182
Deferred net loan origination fees 4,610 5,537
Allowance for loan losses 665 575
-------- --------
Loans receivable, net $530,815 $415,569
======== ========
Morrtage-backed securities
GNMA $ - -% $ -%
FHLMC - - - -
FNMA - - - -
-------- ------ -------- ------
Total mortgage-backed securities $ - -% $ - -%
======== ====== ======== ======
</TABLE>
4
<PAGE>
Loan Maturity Schedule. The following table sets forth certain information at
December 31, 1999 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 $96.7
million, $102.8 million and $50.2 million for the years ended December 31, 1999,
1998 and 1997, respectively.
<TABLE>
<CAPTION>
At December 31, 1999 (in thousands)
-------------------------------------------------------------------------------------
More Than More Than Six More Than One
Three Months Three Months Months to Year to Three
or Less to Six Months Twelve Months Years
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-earning Assets:
Real estate loans:
One-to-four-family adjustable-
rate loans........................ $ -- $-- $-- $ 27
One-to-four-family fixed-rate
loans............................. 39 1 11 643
Residential construction loans -- -- -- --
Multi family......................... 1 -- -- 27
Second mortgage loans................. 1,650 65 71 119
------ --- --- ----
Total Real Estate Loans 1,690 66 82 816
Consumer Loans 967 -- -- -
------ --- --- ----
Total loans....................... $2,657 $66 $82 $816
====== === === ====
<CAPTION>
More Than More Than
Three Years to Five Years to More Than Ten
Five Years Ten Years Years Total
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-earning Assets:
Real estate loans:
One-to-four-family adjustable-
rate loans........................ $ 179 $ 275 $ 22,031 $ 22,512
One-to-four-family fixed-rate
loans............................. 2,182 42,128 448,998 494,002
Residential construction loans -- -- 16,229 16,229
Multi family......................... 127 168 177 500
Second mortgage loans................. 7,980 1,101 26 11,012
------- ------- -------- --------
Total Real Estate Loans 10,468 43,672 487,461 544,255
Consumer Loans -- -- -- 967
------- ------- -------- --------
Total loans....................... $10,468 $43,672 $487,461 $545,222
======= ======= ======== ========
</TABLE>
5
<PAGE>
The following table sets forth the dollar amount of all loans and
mortgage-backed securities at December 31, 1999 which have fixed or adjustable
interest rates, and which are due after December 31, 2000.
<TABLE>
<CAPTION>
Due After December 31, 2000
--------------------------------------------------
Fixed Adjustable Total
-------------- ------------------ --------------
(In thousands)
<S> <C> <C> <C>
Real estate loans:
Conventional mortgages.................... $493,951 $22,512 $516,463
Residential construction.................. 12,293 3,936 16,229
Multi-family.............................. 500 - 500
Second mortgage........................... 8,299 927 9,226
Consumer loans.............................. - - -
-------- ------- --------
Total loans............................
$515,043 $27,375 $542,418
======== ======= ========
</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 originates fixed-rate
loans and adjustable rate mortgage ("ARM") loans. At December 31, 1999,
conventional mortgage loans totalled $516.5 million, or 94.7%, of total loans at
such date. Of the Association's conventional mortgage loans secured by one- to
four-family residences, $494.0 million, or 95.6%, 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 $431.9 million at December 31, 1995 to $544.2 million at December 31, 1999.
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 1999. At December 31, 1999, the Association
had $13.6 million in purchased mortgage loans and loan participations serviced
by others, totalling 2.5% 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 1999 and 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, 1999, the maximum one-to four-family loan amount
is $600,000, 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 1999, only $5.1 million of the $74.1 million, or 6.8%, of conventional
mortgage loans originated, excluding home equity loans, 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 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, 1999, 1998 and 1997, the Association
originated 47, 43 and 24 loans under the CRA loan program, with aggregate dollar
amounts of $2.8 million, $2.0 million and $1.2 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, 1999, the Association's residential construction
loans totaled $16.2 million, or 3.0% of the total loan portfolio. Of these
construction loans, $8.6 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, 1999, the Association's total loan
portfolio contained 12 multi-family loans, totalling $500,000, 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
fixed-rate 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. Home equity installment loans are underwritten for a fixed rate with
a five year term or an adjustable rate ten year term in which the rate adjusts
after the fifth year based on the prime rate. 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 1999 the Association originated $7.1 million in
installment loans and had made disbursements of $1.1 million for line of credit
loans. At December 31, 1999, the Association had $11.0 million or 2.0% of total
loans in second mortgage loans.
Consumer Loans. The Association also offers secured consumer loans.
At December 31, 1999, the Association's consumer loans totalled $967,000, or
0.2% of the Association's total loan portfolio, all of which were secured by
deposit accounts.
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, 1999, the Association was servicing $19.1 million of loans for
others. Loan servicing income was $7,000, $9,000 and $37,000 for the years ended
December 31, 1999, 1998 and 1997, respectively. The Association also receives
income in the form of service charges and other fees on loans. For the years
ended December 31, 1999, 1998 and 1997, the Association earned $149,000,
$198,000 and $214,000, respectively, in service charges and other fees.
Mortgage-backed Securities. At December 31, 1999 and 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
$31.9 million. The Association may invest in
9
<PAGE>
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, 1999,
any loan application over $600,000 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 certified appraisers. The
Board of Directors annually approves the independent appraisers used by the
Association and reviews the Association's appraisal policy. When the credit
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 form 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, 1999, 1998 and 1997, delinquencies in the
loan portfolio were as follows:
<TABLE>
<CAPTION>
At December 31, 1999 At December 31, 1998
-------------------------------------------------- ----------------------------------------------
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... 2 $ 127 7 $ 269 3 $ 156 7 $ 498
Multi-family loans............ -- -- -- -- -- -- -- --
Consumer loans................ -- -- -- -- -- -- -- --
-------- ----- -------- ----- ------- -------- ---- -------
Total loans.............. 2 $ 127 7 $ 269 3 $ 156 7 $ 498
======== ===== ======== ===== ======= ======== ==== =======
Delinquent to total loans..... 0.02% 0.05% 0.03% 0.09%
===== ===== ======== =======
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1997
--------------------------------------------------------------------------------
60 - 89 Days 90 Days or More
------------------------------ --------------------------------
Principal Principal
Number of Balance of Number of Balance of
Loans Loans Loans Loans
--------------- ------------- ------------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Conventional mortgage loans... 8 $ 436 13 $ 634
Multi-family loans............ -- -- -- --
Consumer loans................ - -- -- --
--- -------- ------ ------
Total loans.............. 8 $ 436 13 $ 634
=== ======== ====== ======
Delinquent loans to total loans 0.07% 0.11%
===== ======
</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 $390,000 in real estate owned and no in substance foreclosures
at December 31, 1999. During the years ended December 31, 1999, 1998 and 1997,
the amounts of interest income that would have been recorded on non-accrual
loans, had they been current, totalled $6,000, $32,000 and $29,000,
respectively. Interest income recorded on non-accrual loans was $8,000, $18,000
and $36,000 for each of the years ended December 31, 1999, 1998 and 1997,
respectively.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual delinquent mortgage loans $ 269 $ 498 $ 634 $ 400 $ 333
Non-accrual delinquent other loans.............. -- -- -- -- --
----- ----- ----- ----- -----
Total non-performing loans.................... 269 498 634 400 333
Real estate owned............................... 390 82 -- 229 178
----- ----- ----- ----- -----
Total non-performing assets.................. $ 659 $ 580 $ 634 $ 629 $ 511
===== ===== ===== ===== =====
Total non-performing loans to total loans....... 0.05% 0.10% 0.11% 0.08% 0.08%
Total non-performing assets to total assets..... 0.08% 0.08% 0.09% 0.10% 0.10%
</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, 1999 classified assets totaled $659,000, or 0.08% of total
assets, and consisted of real estate owned property and seven conventional
mortgage loans classifed as "Substandard".
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, 1999. 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.
12
<PAGE>
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.
The following table sets forth the allowance for loan losses at the dates
indicated.
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses:
Balance at beginning of period................. $ 805 $ 715 $ 665 $ 575 $ 575
Charge-offs:
Conventional mortgages..................... -- -- -- -- --
Residential construction................... -- -- -- -- --
Multi-family............................... -- -- -- -- --
Consumer................................... -- -- -- -- --
----- ----- ----- ----- -----
Total charge-offs........................ -- -- -- -- --
Total recoveries............................... -- -- 5 -- --
Provision for (recovery of) loan losses........ 120 90 45 90 --
----- ----- ----- ----- -----
Balance at end of period(1).................... $ 925 $ 805 $ 715 $ 665 $ 575
===== ===== ===== ===== =====
Ratio of net charge-offs during the period to
average loans outstanding during the period... --% --% --% --% --%
Ratio of allowance for loan losses to total
loans at the end of the period............... 0.17% 0.14% 0.12% 0.12% 0.13%
Ratio of allowance for loan losses to
non-performing assets at the
end of the period............................. 1.40x 1.39x 1.13x 1.06x 1.13x
</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 99.8% of total loans.
13
<PAGE>
Investment Activities
As a member of the FHLB System, the Association is required to maintain liquid
assets at minimum levels which vary from time to time. The Association increases
or decreases its liquid investments depending on the availability of funds, the
comparative yields on liquid investments in relation to the return on loans and
in response to its interest rate risk management. To meet liquidity obligations,
federally chartered savings institutions have authority to invest in various
types of assets, including U.S. Treasury obligations, securities of various
federal agencies, mortgage-backed and mortgage-related securities, certain
certificates of deposit of insured banks and savings institutions, certain
bankers acceptances, repurchase agreements, loans of federal funds and, subject
to certain limits, corporate securities, 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, 1999, $74.5 million,
or 9.1%, of the Association's total assets were invested in liquid assets.
The Company's Investment Committee, which is appointed by the Chief Executive
Officer, formulates the investment policy of the Company. The Company's
Investment Committee reports all purchases and sales of investments to the Board
of Directors. The policy of the Association is to invest funds among various
categories of investments and maturities to meet the day-to-day, cyclical and
long-term changes in assets and liabilities. In establishing its investment
strategies, the Company considers its cash position, the condition of its loans,
the stability of deposits, its capital position, its interest rate risk and
other factors.
Investment Securities. OTS guidelines regarding investment portfolio policy
and accounting require insured institutions to categorize securities and certain
other assets as held for "investment," "sale," or "trading." The Association's
investment policy provides for "held for investment" and "available for sale"
portfolios. Although the Association's investment policy allows that some
investments and loans will qualify to be held-to-maturity, the policy allows 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, 1999, the Association had total investments of $233.4
million, of which $228.4 million was classified as available-for-sale and $5.0
million was classified as held to maturity. The $228.4 million investment
classified as available-for-sale consisted of $199.1 million in municipal
securities, $12.9 million in collateralized mortgage obligations ("CMO's"),
$11.4 in FHLB stock and $5.0 in a FHLB bond. The $5.0 million investment
classified as held to maturity consists of a U.S. government security which has
a maximum term to maturity up to five years and Federal National Mortgage
Association ("FNMA") stock.
14
<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,
-----------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------
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......................... $199,141 $184,768 $118,986 $118,986 $ -- $ --
U.S. Treasury securities..................... 4,985 5,167 9,976 10,677 9,969 10,485
Collateralized mortgage obligations.......... 12,902 12,761 17,691 17,691 15,902 15,902
FHLB bond.................................... 5,000 4,853 -- -- -- --
Other investments............................ 4 75 4 89 4 68
FHLB Stock................................... 11,400 11,400 9,000 9,000 5,148 5,148
-------- -------- -------- -------- ------- -------
Total investments.......................... $233,432 $219,024 $155,657 $156,443 $31,023 $31,603
======== ======== ======== ======== ======= =======
</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 (excluding $11.4 million in FHLB stock and $4,000 in FNMA stock) by
maturity, call date or repricing date, whichever is first, at December 31, 1999,
(dollars in thousand).
<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>
Investment Securities:
Muncipal securties $ - -% $185,081 6.93% $14,060 7.07% $199,141 $184,768 6.94%
U.S. treasury - - 4,985 7.25 - - - -
securities
Collateralized mortgage
obligations 5,847 7.70 3,287 6.63 3,768 6.25 12,902 12,761 7.01
FHLB bond 5,000 8.00 - - - - 5,000 4,853 8.00
</TABLE>
15
<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 30.8%, from $391.4 million at December 31, 1995 to $511.9
million at December 31, 1999. 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,
----------------------------------------------------------------
1999 1998 1997
----------------- ------------------ ------------------
<S> <C> <C> <C>
(In thousands)
Deposits........................................... $740,561 $701,925 $720,943
Withdrawals........................................ 737,891 716,621 725,033
-------- -------- --------
Net increase (decrease) before interest credited... 2,670 (14,696) (4,090)
Interest credited.................................. 14,133 14,769 15,204
-------- -------- --------
Net increase in deposits........................... $ 16,803 $ 73 $ 11,114
======== ======== ========
</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, 1999.
<TABLE>
<CAPTION>
Amount
------------------------
(In thousands)
Maturity Period:
<S> <C>
Three months or less............................ $ 6,740
Over three through six months................... 5,267
Over six through 12 months...................... 15,045
Over 12 months.................................. 16,680
-------
Total........................................ $43,732
=======
</TABLE>
16
<PAGE>
The following table sets forth the distribution of the average daily
balance of deposit accounts and borrowings for the periods indicated and the
weighted average nominal interest rates on each category of deposits presented.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------------- ------------------------------- ----------------------------
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>
(in Thousands)
Money market and NOW
deposits......................... $ 53,508 $ 1,404 2.62% $ 47,945 $ 1,147 2.39% $ 46,634 $1,092 2.34%
Savings deposits.................. 85,151 3,021 3.55 82,136 2,480 3.02 78,316 2,288 2.92
Certificates of deposit........... 356,439 19,751 5.54 362,720 21,186 5.84 387,557 23,306 6.01
Borrowings........................ 230,335 12,886 5.59 142,481 8,031 5.64 102,649 5,643 5.50
-------- ------- ---- -------- ------- ---- -------- ------ ----
Total interest-bearing
liabilities.................... $725,433 $37,062 5.11% $635,282 $32,844 5.17% $615,156 $32,329 5.26%
======== ======= ======== ======= ======== =======
</TABLE>
The following table presents the amount of certificate accounts
outstanding based upon original contractual periods to maturity, at December 31,
1999, and based upon contracted rates, at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Period to Maturity from December 31, 1999 At December 31,
------------------------------------------------------------------------------------ ---------------------
Less Than One to Two to Three to Four to Five to Total
One Year Two Three Four Five Ten December
Years Years Years Years Years 31, 1999 1998 1997
------------------------------------------------------------------------------------ ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
Certificate Accounts:
3.00% to 5.50%....... $61,745 $124,221 $16,052 $ 9,821 $172 $ 5,740 $217,751 $175,279 $ 74,933
5.501% to 6.00%...... 26,225 33,803 16,763 20,602 208 22,106 119,707 123,361 156,885
6.001% to 6.50%...... 93 66 763 9,046 94 19,711 29,773 47,976 115,491
6.501% to 7.50%...... -- -- -- 34 -- 14,316 14,350 16,779 26,200
7.501% to 8.50%...... -- -- -- -- -- 2,750 2,750 2,806 2,855
8.501% to 9.50%...... -- -- -- -- -- 2,031 2,031 2,887 3,559
9.501% to 10.50%..... -- -- -- -- -- 2 2 298 281
------- -------- ------- ------- ---- ------- -------- -------- --------
$88,063 $158,090 $33,578 $39,503 $474 $66,656 $386,364 $369,386 $380,204
======= ======== ======= ======= ==== ======= ======== ======== ========
</TABLE>
17
<PAGE>
Borrowings
Borrowings are used in conjunction with deposits in funding the operating
and investment activity of the Company. At December 31, 1999, the Company had
borrowings of $238.0 million. Of these borrowings, $228.0 million are held at
the Association level and the remaining $10.0 is held at the Company level. Of
the Association's borrowings, $70.0 million have a contractual maturity of five
years at an interest rate of 5.61%. However, every six months the FHLB has the
option to convert these 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. In addition, $138.0 million in
borrowings had a original 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 these 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 5.54%. The Association also has
short-term borrowing of $20,000 with the FHLB which matures in January 2000 at a
rate of 5.83%. The borrowings are secured by the assets of the Association. The
Company has short-term borrowings of $10.0 million that matures in January 2000
at a weighted average rate of 6.94%. These borrowings are secured by the assets
of the Company.
Subsidiary Activities
The Association does not maintain any subsidiaries.
18
<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 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 FHLB System and its deposit
accounts are insured up to applicable limits by the SAIF managed by the FDIC.
The Association must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other savings institutions. The OTS and/or the FDIC conduct
periodic examinations to test the Association's safety and soundness and
compliance with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulatory requirements and
policies, whether by the OTS, the FDIC or the United States Congress, could have
a material adverse impact on the Company, the Association and their operations.
Certain of the regulatory requirements applicable to the Association and to the
Company are referred to below or elsewhere herein. The description of statutory
provisions and regulations applicable to savings institutions and their holding
companies set forth in this Form 10-K does not purport to be a complete
description of such statutes and regulations and their effects on the
Association and the Company.
Holding Company Regulation
The Company is a non-diversified unitary savings and loan holding company
within the meaning of federal law. Under prior law, a unitary savings and loan
holding company, such as the Company was not generally restricted as to the
types of business activities in which it may engage, provided that the
Association continued to be a qualified thrift lender. See "Federal Savings
Institution Regulation-QTL Test." The Gramm-Leach-Bliley Act of 1999 provides
that no company may acquire control of a savings association after May 4, 1999
unless it engages only in the financial activities permitted for financial
holding companies under the law or for multiple savings and loan holding
companies as described below. Further, the Gramm-Leach Bliley Act specifies that
existing savings and loan holding companies may only engage in such activities.
The Gramm-Leach-Bliley Act, however, grandfathered the unrestricted authority
for activities with respect to unitary savings and loan holding companies
existing prior to May 4, 1999, such as the Company, so long as the Association
continues to comply with the QTL Test. Upon any nonsupervisory acquisition by
the Company of another savings institution or savings bank that meets the
qualified thrift lender 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 separtate subsidiary) and would generally
be limited to activities permissible for bank holding companies under
19
<PAGE>
Section 4(c)(8) of the Association Holding Company 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 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 4% leverage ratio (3% for institutions receiving the highest rating on
the CAMELS rating system) 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.
20
<PAGE>
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
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, 1999, the Association met
each of its capital requirements.
The following table presents the Association's capital position at December
31, 1999.
<TABLE>
<CAPTION>
Excess Capital
Actual Required (Deficiency) Actual Required
--------------- --------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Tangible $74,838 $12,614 $62,224 8.90% 1.50%
Core 74,838 33,638 41,200 8.90 4.00
(Leverage)
Risk-based 75,763 28,176 47,587 21.51 8.00
</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, 1999, the balance of the liquidation account was $10.2 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 that has a ratio of total capital to risk weighted assets of
less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less
than 4% or a ratio of
21
<PAGE>
core capital to total assets of less than 4% (3% or less for instituitions with
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 instituition
that has a tangible capital to asset ratio equal to or less than 2% is deemed bo
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 1999,
FICO payments for SAIF members approximated 6.10 basis points, while Bank
Insurance Fund ("BIF") members paid 1.2 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 1999 was 6.5 basis points and
the premium paid for this period was $300,000. 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.
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
22
<PAGE>
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, 1999, the Association's limit on loans to one
borrower was $10.8 million and the Association's largest aggregate outstanding
balance of loans to one borrower was $417,000.
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, 1999, the Association maintained 75.6% 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. 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, 1999, the Association was a Tier I Association. Effective April 1,
1999, the OTS's capital distribution regulation was changed. 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.
23
<PAGE>
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 1999 was 8.8%, 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, 1999 totalled $145,000.
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.
24
<PAGE>
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.
Federal Home Loan Bank System
The Association is a member of the Federal Home Loan Bank System, which
consists of twelve regional Federal Home Loan Banks. The Federal Home Loan Bank
provides a central credit facility primarily for member institutions. The
Association, as a member of the Federal Home Loan Bank, is required to acquire
and hold shares of capital stock in that Federal Home Loan Bank in an amount at
least equal to 1.0% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year, or 1/20 of
its advances (borrowings) from the Federal Home Loan Bank, whichever is greater.
The Association was in compliance with this requirement with an investment in
Federal Home Loan Bank stock at December 31, 1999 of $11.4 million.
The Federal Home Loan Banks are required to provide funds for the resolution
of insolvent thrifts from the late 1980's and to contribute funds for affordable
housing programs. These requirements could reduce the amount of dividends that
the Federal Home Loan Banks pay to their members and could also result in the
Federal Home Loan Banks imposing a higher rate of interest on advances to their
members. If dividends were reduced, or interest on future Federal Home Loan Bank
advances increased, the Association's net interest income would likely also be
reduced. Recent legislation has changed the structure of the Federal Home Loan
Banks funding obligations for insolvent thrifts, revised the capital structure
of the Federal Home Loan Banks and implemented entirely voluntary membership for
Federal Home Loan Banks. Management cannot predict the effect that these changes
may have with respect to its Federal Home Loan Bank membership.
25
<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 $44.3 million or less (subject to adjustment by the
Federal Reserve Board) the reserve requirement is 3%; and for accounts
aggregating greater than $44.3 million, the reserve requirement is $1.329
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 $44.3
million. The first $5.0 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 1999 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.
26
<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 carryovers. AMTI is
increased by an
27
<PAGE>
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).
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, 1999, the Association had 52 full-time employees and 10
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.
Year 2000 Compliance
As of March 1, 2000, the Company has experienced no disruptions or problems
regarding the Year 2000 rollover. As part of the Company's Year 2000 plan, on
January 1, 2000, the Company tested and sampled internal systems, including it
primary third-party processor, telecommunications systems, automated teller
machines and related third party vendors supporting these machines, various
third party software applications and the Company's ability to interface with
its corespondent banks, such as the FHLB. All testing completed on January 1,
2000 indicated all systems were operating as normal. Through March 1, 2000, all
of the Company's internal hardware and software continue to operate as normal,
and to date, to the Company's knowledge, all vendors utilized by the company in
its daily operations are operating normally and have not indicated any Y2K
related problems.
The Company will continue to monitor and oversee all internal operations
and be in contact with its vendors regarding Y2K related issues. Based on the
successful transition through the January 2000 rollover period and the
previously conducted testing, the Company does not anticipate any significant
Y2K problems to arise. The Company's expenditures for the Y2K effort total
approximately $50,000.
28
<PAGE>
Item 2. Properties
The Company conducts its business by maintaining an office at 300 Delaware
Avenue, Suite 1704, Wilmington, Delaware 19801. The Association conducts its
business through its main office located at 532 Lincoln Avenue, Pittsburgh,
Pennsylvania 15202 and six full-service branch offices, all of which are located
in Allegheny County. Three of the Association's branch offices are leased.
Loan originations are processed at the administrative office. The Association
believes that its current facilities are adequate to meet the present and
immediately foreseeable needs of the Association and the Company.
Item 3. Legal Proceedings
Neither the Company nor its subsidiary are involved in any pending legal
proceedings other than routine legal proceedings occurring in the ordinary
course of business, which in the aggregate involve amounts which are believed by
management to be immaterial to the financial condition and results of the
operations of the Association.
Item 4. Submission of Matters to a Vote of Security Holders
See the proxy for submission of matters to a vote of security holders.
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 48
in the Registrant's 1999 Annual Report to Stockholders and is incorporated
herein by reference. Information relating to the dividend restrictions for
Registrant's common stock appears under Note 12 to the "Notes to Consolidated
Financial Statements Years Ended December 31, 1999, 1998 and 1997" on pages 33
and 34 in the Registrant's 1999 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 1999 Annual Report to
Stockholders on pages 2 and 3 is incorporated herein by reference.
29
<PAGE>
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
1999 Annual Report to Stockholders on pages 8 through 19 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 1999 Annual Report to Stockholders on pages 10
and 11 is incorporated herein by reference. For 1998, it is as follows:
Interest Rate Sensitivity Analysis
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that same time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets anticipated, based upon certain assumptions, to mature or reprice
within a specific time period and the amount of interest-bearing liabilities
anticipated, based upon certain assumptions, to mature or reprice within that
same time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. Accordingly,
in a rising interest rate environment, an institution with a positive gap would
be in a better position to invest in higher yielding assets, which would result
in the yield on its assets increasing at a pace closer to the cost of its
interest-bearing liabilities, than would be the case if it has a negative gap.
During a period of falling interest rates, an institution with a positive gap
would tend to have its assets repricing at a faster rate than one with a
negative gap, which would tend to restrain the growth of its net interest
income.
The following table sets forth the amount of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998 which are
anticipated to reprice or mature in each of the future time periods shown. The
amounts of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier of term to (i)
repricing or (ii) the contractual terms of the asset or liability adjusted for
historical 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 the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates.
30
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
----------------------------------------------------------------------------------------
More Than More Than Six More Than One
Three Months Three Months Months to Year to Three
or Less to Six Months Twelve Months Years
----------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Real Estate Loans:
ARM Loans $ 2,246 $ 371 $ 1,541 $ 13,706
Fixed Rates Loans 7,853 7,685 15,370 58,062
Residential Construction Loans - - - -
Multi-Family 1 - - 57
Second Mortgage Loans 1,047 - - -
Consumer Loans 895 - - 4
Investment securities 60,840 - - -
FHLB Stock - 175 5,348 2,560
--------- - - -
--------- --------- ---------
Total Interest Earning Assets 72,882 8,231 22,259 74,389
INTEREST BEARING LIABILITIES:
Passbook, Club and Other Accounts 2,575 2,575 5,150 16,478
Money Market and NOW Accounts 2,737 2,737 5,474 15,004
Certificate Accounts 72,172 73,154 91,132 89,252
Borrowings - - - -
Advances by Borrowers for Taxes
and Insurance 11,354 - - -
--------- --------- ---------- ---------
Total Interest Bearing Liabilities 88,838 78,466 101,756 120,734
--------- --------- ---------- ---------
Interest Sensitivity Gap $ (15,956) $ (70,235) $ (79,497) $ (46,345)
========= ========= ========== =========
Cumulative Interest Sensitivity Gap $ (15,956) $ (86,191) $(165,688) $(212,033)
========= ========= ========== =========
Cumulative Interest Sensitivity Gap
as a Percentage of Total Assets (2.08%) (11.23%) (21.58%) (27.62%)
Cumulative Net Interest Earning Assets
as a Percentage of Cumulative
Interest Bearing Liabilities 82.04% 48.48% 38.42% 45.60%
<CAPTION>
AT DECEMBER 31, 1998
----------------------------------------------------------------------------------------
More Than More Than
Three Years to Five Years to More Than Ten
Five Years Ten Years Years Total
----------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Real Estate Loans:
ARM Loans $ 1,793 $ - $ - $ 19,657
Fixed Rates Loans 53,177 154,013 216,089 512,249
Residential Construction Loans - - 7,570 7,570
Multi-Family 136 261 196 651
Second Mortgage Loans 2,681 780 - 4,508
Consumer Loans - - - 899
Investment securities - - - -
FHLB Stock 97,717 34,690 4 201,334
- - 9,000 9,000
---------- ---------- -------- ---------
Total Interest Earning Assets 155,504 189,744 232,859 755,868
INTEREST BEARING LIABILITIES:
Passbook, Club and Other Accounts 12,187 18,330 16,283 73,578
Money Market and NOW Accounts 9,193 10,866 6,153 52,164
Certificate Accounts 26,498 17,178 - 369,386
Borrowings 70,000 110,000 - 180,000
Advances by Borrowers for Taxes
and Insurance - - - 11,354
---------- ---------- -------- ---------
Total Interest Bearing Liabilities 117,878 156,374 22,436 686,482
---------- ---------- -------- ---------
Interest Sensitivity Gap $ 37,626 $ 33,370 $210,423 $ 69,386
========== ========== ======== ========
Cumulative Interest Sensitivity Gap $(174,407) $(141,037) $ 69,386 $ 69,386
========== ========== ======== ========
Cumulative Interest Sensitivity Gap
as a Percentage of Total Assets (22.72%) (18.37%) 9.04% 9.04%
Cumulative Net Interest Earning Assets
as a Percentage of Cumulative
Interest Bearing Liabilities 65.65% 78.76% 110.11% 110.11%
</TABLE>
31
<PAGE>
Net Portfolio Value. The Company's interest rate sensitivity is monitored by
management through selected interest rate risk measures produced internally and
by the OTS. Using data from the Association's quarterly Thrift Financial
Reports, the OTS measures the Association's interest rate risk by modeling the
change in net portfolio value ("NPV") over a variety of interest rate scenarios.
NPV is the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. A NPV ratio, in any interest rate scenario, is
defined as the NPV in that rate scenario divided by the market value of assets
in the same scenario.
The interest rate risk measures used by the OTS include an interest rate risk
"Exposure Measure" or "post-shock" NPV ratio and a "Sensitivity Measure." A low
"post-shock" NPV ratio indicates greater exposure to interest rate risk.
Greater exposure can result from a low initial NPV ratio or high sensitivity to
changes in interest rates. The Sensitivity Measure is the decline in the NPV
ratio, in basis points, caused by a 200 basis point increase or decrease in
rates, whichever produces a larger decline.
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 increase in interest rates, the Association's "post-shock" NPV, which
provides a larger decline than a 200 point decrease, was $68.9 million, or 8.37%
of the market value of assets. The change in the NPV ratio or the Association's
Sensitivity Measure was -219 basis points. Under OTS capital requirements which
have not yet 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.
The above-captioned information appears under the heading "Interest Rate
Sensitivity" in the registrant's 1999 Annual Report to Stockholders on pages 10
and 11 is incorporated herein by reference. For 1998, it is as follows:
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 1999 Annual Report to Stockholders on pages 21 through 45 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 24, 2000,
at pages 4 through 6.
Item 11. Executive Compensation
The information relating to directors' compensation and executives'
compensation is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 24, 2000,
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 24, 2000,
at pages 4 through 6.
32
<PAGE>
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 24, 2000, at page 14.
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 1999 Annual Report to
Stockholders.
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors Report.................................... 21
Consolidated Balance Sheets for the
December 31, 1999 and 1998................................... 22
Consolidated Statements of Income for the
Years Ended December 31, 1999, 1998 and 1997................. 23
Consolidated Statements of Comprehensive Income (Loss) for the
Years Ended December 31, 1999, 1998 and 1997................. 24
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1999, 1998 and 1997......... 25
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1999, 1998 and 1997................. 26
Notes to Consolidated Financial Statements for the
Years Ended December 31, 1999, 1998 and 1997................. 27-45
</TABLE>
The remaining information appearing in the 1999 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.
33
<PAGE>
(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.
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 1999 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 2000 Annual Meeting of Stockholders to be held
on April 24, 2000 and previously filed on March 17, 2000 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, 1999,
Registration No. 33-86160.
(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 30, 2000 By: /s/ Albert H. Eckert II
------------------------ ----------------------------------------
Albert H. Eckert II,
President, Chief Executive Officer
and Director
Date: March 30, 2000 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 30, 2000
- -------------------------- Officer and Director --------------
Albert H. Eckert, II
/s/ Jeffrey M. Hinds Executive Vice President, March 30, 2000
- -------------------------- Chief Financial Officer --------------
Jeffrey M. Hinds and Director
/s/ David F. Figgins Vice President and March 30, 2000
- -------------------------- Director --------------
David F. Figgins
/s/ Thomas J. Jackson, Jr. Director March 30, 2000
- -------------------------- --------------
Thomas J. Jackson, Jr.
/s/ Robert C. Baierl Secretary and Director March 30, 2000
- -------------------------- --------------
Robert C. Baierl
/s/ William S. McMinn Vice President and March 30, 2000
- ------------------------- Director --------------
William S. McMinn
35
<PAGE>
/s/ Peter E. Reinert Director March 30, 2000
- --------------------------- --------------
Peter E. Reinert
/s/ Jack W. Schweiger Director March 30, 2000
- --------------------------- --------------
Jack W. Schweiger
/s/ Theodore R. Dixon Director March 30, 2000
- --------------------------- --------------
Theodore R. Dixon
36
<PAGE>
Exhibit 11
FIRST BELL BANCORP, INC.
COMPUTATION OF EARNINGS PER SHARE
DECEMBER 31, 1999
<TABLE>
<CAPTION>
TWELVE TWELVE
MONTHS MONTHS
ENDED ENDED
12/31/99 12/31/99
-------- --------
BASIC FULLY DILUTED
<S> <C> <C>
Net income applicable to common stock $8,041,756 $8,041,756
---------- ----------
Weighted average shares outstanding 5,043,325 5,043,325
Add: Option common stock equivalents - 138,439
Less: MRP shares 242,384 242,384
Add: Granted MRP shares - 64,714
---------- ----------
Total Shares 4,800,941 5,004,096
========== ==========
Earnings per share $ 1.68 $ 1.61
========== ==========
</TABLE>
<PAGE>
[LOGO]
First Bell
Bancorp,
Inc.
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT
<PAGE>
Table of Contents
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Selected Financial and Other Data of the Company 2
- --------------------------------------------------------------
Letter to Our Shareholders 4
- --------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
- --------------------------------------------------------------
Management's Report on the Internal Control Structure and
Compliance with Laws and Regulations 20
- --------------------------------------------------------------
Independent Auditors' Report 21
- --------------------------------------------------------------
Consolidated Financial Statements 22
- --------------------------------------------------------------
Notes to Consolidatated Financial Statements 27
- --------------------------------------------------------------
Executive Management and Directors 46
- --------------------------------------------------------------
Shareholder Information 48
- --------------------------------------------------------------
Office Locations 49
- --------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
1
<PAGE>
FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT
Selected Financial and Other Data of the Company
- --------------------------------------------------------------------------------
The following table sets forth certain summary historical financial informa-
tion concerning the financial position of the Company for the period and at the
dates indicated. The financial data is derived in part from, and should be read
in conjunction with, the consolidated financial statements and related notes
contained elsewhere herein.
<TABLE>
<CAPTION>
At December 31
--------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Financial Condition Data:
Total assets...................... $816,122 $767,606 $675,684 $656,183 $520,842
Investments, at cost.............. 4,989 9,980 9,973 14,964 19,953
Investments, at fair value........ 202,382 136,677 15,902 -- --
Cash and cash equivalents......... 20,468 21,543 24,523 26,406 23,722
Total loans receivable, net....... 532,292 545,535 579,394 530,815 415,569
Mortgage-backed securities, at
fair value....................... -- -- 31,855 -- --
Deposits.......................... 511,931 495,128 495,055 483,941 391,411
Borrowings........................ 238,000 180,000 90,000 70,000 --
Stockholders' equity.............. 54,518 73,902 72,983 86,433 118,482
<CAPTION>
Year Ended December 31
--------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income................... $ 52,090 $ 49,649 $ 49,226 $ 41,007 $ 33,831
Interest expense.................. 37,061 32,843 32,329 22,050 18,432
-------- -------- -------- -------- --------
Net interest income.............. 15,029 16,806 16,897 18,957 15,399
Provision for loan losses........ 120 90 45 90 --
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses....... 14,909 16,716 16,852 18,867 15,399
Total other income................ 598 643 829 1,198 824
-------- -------- -------- -------- --------
Total other expenses.............. 6,116 5,643 5,060 8,177 4,945
-------- -------- -------- -------- --------
Income before provision for income
taxes............................ 9,391 11,716 12,621 11,888 11,278
-------- -------- -------- -------- --------
Provision for income taxes........ 1,349 3,878 5,046 4,485 4,345
-------- -------- -------- -------- --------
Net income (4).................... $ 8,042 $ 7,838 $ 7,575 $ 7,403 $ 6,933
======== ======== ======== ======== ========
Earnings per share
Basic (4)........................ $1.68 $1.41 $1.29 $1.05 $0.52
======== ======== ======== ======== ========
Diluted (4)...................... $1.61 $1.35 $1.23 $1.02 $0.52
======== ======== ======== ======== ========
Dividends declared per common
shares........................... $0.40 $0.40 $0.40 $0.37 --
======== ======== ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
-------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other
Data:
Book value per share................. $ 10.51 $ 12.11 $ 11.21 $ 11.14 $ 13.78
Stockholders' equity to assets at
period end.......................... 6.68% 9.63% 10.80% 13.17% 22.75%
Return on average assets (net income
divided by average total assets) (4). 0.99 1.09 1.08 1.30 1.48
Return on average equity (net income
divided by average equity) (4)...... 12.50 10.36 10.25 6.75 8.38
Stockholders' equity to assets ratio
(average stockholders' equity
divided by average total assets).... 7.96 10.50 10.55 19.26 17.64
Dividend payout ratio................ 23.04 28.48 31.04 36.43 --
Average interest rate spread (1)(5).. 1.91 1.99 1.90 2.45 2.52
Net interest margin (2)(5)........... 2.36 2.53 2.45 3.38 3.35
Other income to average assets....... 0.07 0.09 0.11 0.21 0.18
Efficiency ratio (3)................. 31.50 30.34 28.95 29.07 30.48
Other expenses to average assets (4). 0.76 0.78 0.72 1.44 1.05
Non-performing assets to total
assets.............................. 0.08 0.08 0.09 0.10 0.10
Non-performing loans to total loans.. 0.05 0.09 0.11 0.08 0.08
Allowance for loan losses to total
loans............................... 0.17 0.15 0.12 0.13 0.13
Allowance for loan losses to non-
performing assets................... 1.40x 1.39x 1.13x 1.06x 1.13x
Net interest income to other expenses
(5)................................. 3.08x 3.18x 3.34x 2.32x 3.11x
Net interest income after provision
for loan losses to total other
expenses (5)........................ 3.06x 3.17x 3.33x 2.31x 3.11x
Average interest-earning assets to
average interest-bearing
liabilities......................... 1.09x 1.12x 1.12x 1.24x 1.21x
Number of:
Depositor accounts.................. 54,257 53,579 53,628 53,188 47,409
Full-service customer service
facilities......................... 7 7 7 7 7
</TABLE>
- -------
(1) The interest rate spread represents the difference between the weighted-
average yield on interest-earning assets and the weighted-average cost of
interest-bearing liabilities.
(2) The net interest margin represents net interest income as a percentage of
average interest-earning assets.
(3) The efficiency ratio represents the ratio of recurring other expenses to
recurring other income and net interest income.
(4) Without giving effect to the one-time special Savings Association Insurance
Fund ("SAIF") assessment of $2.5 million, or $1.5 million after tax, to
recapitalize the SAIF recorded in September, 1996 and the return of capital
of $20.7 million paid on December 31, 1996, net income would have been $8.9
million, the basic and diluted earnings per share would have been $1.27 and
$1.23, respectively, other expenses to average assets would have been
1.00%, return on average assets would have been 1.57% and return on average
equity would have been 8.01%.
(5) Ratios are based on net interest income determined with tax equivalent
rates of return for non-taxable investment securities.
- --------------------------------------------------------------------------------
3
<PAGE>
FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT
To Our Shareholders
- --------------------------------------------------------------------------------
In a challenging environment, First Bell Bancorp,
Inc., the parent corporation of Bell Federal Sav-
ings and Loan Association of Bellevue, posted an-
other year of successful financial performance.
Net income rose to $8.04 million for the year, up
from $7.84 million in 1998. Earnings per share
were up to $1.61, a 19.3% increase over the previ-
ous year's $1.35. Return on average equity im-
proved substantially, to 12.50%, from the preced-
ing year's 10.36%. Our efficiency ratio remained
one of the best in the country with an overall
31.5% for the year.
We are proud to have accomplished these results
during a year when most financial institutions
were struggling to attract investor attention.
Stock prices for financial institutions experi-
enced severe downward pressure. Although First
Bell was not immune from the negative market envi-
ronment, our strong financial results helped us to
outperform our peer group.
In these circumstances, we have worked even
harder to reinforce shareholder value. Once again,
therefore, we engaged in two large share repur-
chase programs, programs we consider a sound long-
term investment.
We have continued to work to diversify our loan
portfolio by increasing our efforts to originate
adjustable rate mortgage loans and home equity
loans. In 1999, we increased the dollar balance of
home equity loans by 144.3% (to $11.0 million from
$4.5 million). Our adjustable rate mortgage port-
folio increased by 14.5% as we were proactive in
marketing these products.
While we have naturally paid close attention to
the earnings side of our ledger, we have sustained
our careful management of expenses. We are partic-
ularly pleased with our record in credit manage-
ment, and in 1999, we lowered our ratio of non-
performing loans to total loans from a 1998 level
that was already among the best in the industry.
We remain deeply committed to the principle of
prudent expense control and are proud of the rec-
ognition it has received, some of which is de-
tailed on the following pages.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
In order to attract business in our highly com-
petitive world, we have given new emphasis to ad-
vertising and marketing. Most recently, we have:
. expanded an energetic marketing campaign to
new media;
. strived to make our products and services
available to the public through a variety of
outlets;
. broadened our investment in technological
access for our customers, and will continue
to examine new means of doing so.
Our shareholders, who are in numerous cases also
our customers, have demonstrated extraordinary
loyalty. Our staff has worked hard, and imagina-
tively, to deal with competitive and market chal-
lenges. Let me express, on behalf of our entire
management team, the gratitude we owe them all.
Sincerely,
/s/ Albert H. Eckert, II
Albert H. Eckert, II
President and Chief Executive
Officer
- --------------------------------------------------------------------------------
5
<PAGE>
FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT
Adaptation with Purpose--Business in a New Century
- --------------------------------------------------------------------------------
Every business must learn to cope with change; in
the 21st century, there is good reason to believe,
change will be more rapid and broader than ever
before. Yet response to change must be carefully
chosen; adaptation must be thoughtful and fo-
cused-- intended not to merely sidestep some imme-
diate threat, but to take an institution in a cer-
tain strategic direction.
At First Bell Bancorp, Inc., we have certainly
engaged in more than our share of adaptation to
change since we went public in 1995. But we be-
lieve that we have remained purposeful, with a
clear vision of who we are, how we can best serve
customers, and grow value for our shareholders.
It is, of course, one thing to express this be-
lief--and entirely another to have the marketplace
agree. Thus it was with particular pride that we
read the report of ThriftINVESTOR, a highly re-
spected publication dedicated to reporting on and
evaluating the thrift industry. In its July 1999
issue, ThriftINVESTOR ranked the leading 100 pub-
licly traded thrift institutions nationwide. First
Bell Bancorp, Inc., ranked seventh, well above
many institutions with vastly greater assets. In
addition, we ranked third among the same popula-
tion in efficiency ratio, measured by dividing net
interest income plus noninterest income into non-
interest expense. Increasingly, analysts are per-
suaded that the winners in our industry will also
be among the lowest-cost providers, and we are de-
termined to guard our standing in that group.
...we think low-multiple companies such as
FirstBell will become very attractive to value
investors with a long-term perspective on the
opportunities offered by community banks spe-
cializing in the delivery of basic banking prod-
ucts...
Lehman Brothers
March 2000
- --------------------------------------------------------------------------------
6
<PAGE>
- -------------------------------------------------------------------------------
Any retail institution today must open new tech-
nological avenues to its customers. We continue to
invest in broadening the channels we have already
established. In 1999, we put in place a 24-hour
telephone banking system which unquestionably im-
proved both the efficiency and quality of our cus-
tomer relations. But that system was only a pro-
logue to the Internet banking program planned for
2000. Once implemented, the program will permit
online transfer of accounts, deposits and with-
drawals. During the course of the year, we will
explore the possibility of paying bills online. In
addition, we remain linked to the Freedom ATM Al-
liance network of more than 30 financial institu-
tions and 200 ATM machines. Our customers will
continue to use these ATMs without surcharges.
Keeping our message before the public has been
another area of investment. We have expanded our
advertising campaigns in newspapers throughout
metropolitan Pittsburgh and begun marketing ef-
forts on area radio and television alike. When
combined with our ongoing efforts in cross sell-
ing--alerting our customers to our full array of
products rather than simply the one in which they
expressed initial interest--we believe that inten-
sified marketing has produced solid results.
The challenging market conditions of 1999 have
kept the emphasis upon adaptation and innovation.
But they have not panicked us into changing our
institutional identity. Far from it. We will man-
age rigorously, and we will manage creatively. We
will stay close to our customer base and our
shareholder base. With their support, we will con-
tinue to refine ourselves to take advantage of
growth opportunities.
- -------------------------------------------------------------------------------
7
<PAGE>
FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
General
First Bell Bancorp, Inc. (the "Company" or "First Bell") 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 Association's Employee Stock Ownership Plan ("ESOP"). 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.
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 and investment securities portfolios, and its cost of funds, consisting
primarily of the interest paid on its deposits and borrowings. The Company's
results of operations are affected by its provision for loan losses, non-inter-
est expenses and by general economic and competitive conditions, particularly
changes in market interest rates, government policies and actions of regulatory
authorities. Future changes in applicable law, regulations or government poli-
cies may materially impact the Company.
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", "Management's Discussion and Analy-
sis of Financial Condition and Results of Operations", "Asset Quality",
"Interest Rate Sensitivity Analysis", and in the "Notes to Consolidated Finan-
cial Statements for the Years Ended December 31, 1999, 1998 and 1997", "Note
5-- Investment Securities Available for Sale", "Note 17--Commitments and Con-
tingencies" and "Note 18--Fair Values of Financial Instruments". The Company's
actual results could differ materially from those management expectations. Fac-
tors that could cause future results to vary from current management
expectations include, but are not limited to, general economic conditions, leg-
islative 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 rate, 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 de-
tail in Item 1, "Business" of the Company's 1999 10-K.
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 15 and 30 year,
fixed-rate and adjustable rate mortgage loans. The Company also originates res-
idential construction loans and home equity installment and line of credit
loans on one- to four-family properties. In recent years, the Company has
placed more emphasis on its investment portfolio to support the Company's con-
tinued growth. The investment portfolio is comprised of Bank Qualified Munici-
pal Securities, Collateralized Mortgage Obligations ("CMO's"), Treasury Securi-
ties and in 1999, a Federal Home Loan Bank ("FHLB") Bond.
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. In 1999 and 1998, First Bell placed consider-
able emphasis on core deposit relationships, consisting of money market, NOW,
passbook, club and statement savings accounts. These accounts
- --------------------------------------------------------------------------------
8
<PAGE>
- -------------------------------------------------------------------------------
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, 1999, the Company had outstanding borrowings from the FHLB
in the amount of $228.0 million and a bank line of credit of $10.0 million.
These borrowings were used to fund the investment portfolio and to help manage
the Company's equity position and the 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 $925,000 or 140.4% of total non-performing assets at
December 31, 1999. The allowance ratio is based on management's assessment of
prospective 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 ade-
quate. However, the balance of reserves necessary can be greatly influenced by
regulatory changes and economic conditions. Therefore, the level of future re-
serves and the related effect on net income cannot be assured.
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
expenses to average assets was 0.76%, 0.78% and 0.72% for the years ended
December 31, 1999, 1998 and 1997, respectively. Low operating costs are
maintained by managing and monitoring overhead costs, primarily through
controlling the growth in personnel. At December 31, 1999, the Company's seven
offices and $816.1 million in assets were operated by a total of fifty two
full-time employees and ten part-time employees, resulting in an average of
$13.2 million in assets per employee.
Liquidity and Capital Resources
The Company is required to maintain an average daily balance of specified
liquid assets equal to a monthly average of not less than a specified percent-
age of its net withdrawable deposit accounts plus short-term borrowings. This
liquidity requirement was 4% for fiscal 1999, but is subject to change from
time to time by the Office of Thrift Supervision ("OTS") to any amount within
the range of 4% to 10% depending upon economic conditions and the savings
flows of member institutions. Monetary penalties may be imposed for failure to
meet these liquidity requirements. The Company's liquidity ratio for 1999 was
8.8%, which exceeded the applicable requirements. The Company has never been
subject to monetary penalties 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 investment securities. While maturities and
scheduled amortization of loans are predictable sources of funds, deposit
flows and mortgage prepayments are strongly influenced by changes in general
interest rates, economic conditions and competition.
At December 31, 1999, loan commitments were $6.4 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, 1999 totaled $265.0 million. Man-
agement believes that a significant portion of such deposits will remain with
the Association. As a member of the FHLB, the Association has the ability to
borrow from the FHLB, if necessary. As of December 31, 1999, the Association
had $228.0 million in outstanding borrowings. The most recent FHLB report had
the Association's additional borrowing capacity from the FHLB at $193.4 mil-
lion.
Impact of Inflation and Changing Prices
The Financial Statements and Notes thereto presented herein have been pre-
pared in accordance with Generally Accepted Accounting Principles ("GAAP"),
which require 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 indus-
trial companies, nearly all of the assets and liabilities of the Company are
monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation. In-
terest rates do not necessarily move in the same direction or to the same ex-
tent as the price of goods and services.
- -------------------------------------------------------------------------------
9
<PAGE>
FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT
- --------------------------------------------------------------------------------
Results of the Preparation for the Year 2000
The Company's computer system property handled the date change to January 1,
2000. The Company did not experience any interruption in its operations as a
result of the millenium change. Expenses incurred in preparation for the date
change were not material to the financial results 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. Other assumptions
are made with respect to; the value of options imbedded in the asset or liabil-
ity, 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 accumu-
lated over a variety of interest rate scenarios.
As of December 31, 1999, the Association's NPV, as measured by the OTS, was
$69.8 million or 10.56% of the market value of assets. Following a 200 basis
point increase in interest rates, the Association's "post-shock" NPV, which
provides a larger decline than a 200 basis point decrease, was $26.5 million,
or 3.48% of the market value of assets. The change in the NPV ratio or the As-
sociation's Sensitivity Measure was -503 basis points. Under OTS capital re-
quirements which have not been fully implemented, the decline in the NPV ratio
at December 31, 1999 would reflect an above average interest rate risk. If the
regulations are implemented 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.
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 rising interest rates, an institution with a negative gap would tend
to have its assets repricing at a slower rate than one with a positive gap,
which would tend to restrain the growth or decrease net interest income.
The following table sets forth the amount of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1999 which are
anticipated to reprice or mature in each of the future time periods shown. The
amounts of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier of term to (i)
repricing or (ii) the contractual terms of the asset or liability adjusted for
prepayment rates. The prepayment rates for fixed-rate mortgage loans on one- to
four-family residences are assumed to prepay at a rate of 9% per year and are
net of deferred loan origination fees and the allowance for loan losses. Decay
rates of 14% for passbook accounts, 17% for NOW accounts and 31% for money
market deposit accounts are assumed. In addition, it is assumed that fixed
maturity deposits are not withdrawn prior to maturity. Although management
believes the assumptions are reasonable, they should not be regarded as
necessarily indicative of the actual decay rates that may be experienced in the
future. 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.
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At December 31, 1999
----------------------------------------------------------------------------------------------
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.............. $ 2,892 $ 1,105 $ 4,199 $ 10,316 $ 2,423 $ 1,577 $ -- $ 22,512
Fixed Rates loans...... 11,080 11,042 22,092 81,018 68,089 183,238 114,132 490,691
Residential
construction loans.... -- -- -- -- -- -- 7,577 7,577
Multi-family........... -- -- -- 27 127 168 178 500
Second mortgage loans.. 1,824 -- -- 81 7,980 1,101 26 11,012
Consumer loans......... 967 -- -- -- -- -- -- 967
Investment securities.. 49,775 375 768 8,247 2,980 41,430 167,864 271,439
FHLB stock............. -- -- -- -- -- -- 11,400 11,400
-------- --------- --------- --------- --------- --------- -------- --------
Total interest earning
assets................. 66,538 12,522 27,059 99,689 81,599 227,514 301,177 816,098
INTEREST BEARING
LIABILITIES:
Passbook, club and
other accounts........ 2,546 2,546 5,091 16,318 12,101 18,275 16,432 73,309
Money market and NOW
Accounts.............. 2,719 2,719 5,437 14,936 9,189 10,946 6,313 52,259
Certificate accounts... 70,824 65,000 129,164 85,895 23,202 12,279 -- 386,364
Borrowings............. 30,000 -- -- -- 70,000 138,000 -- 238,000
Advances by borrowers
for taxes
and insurance......... 11,223 -- -- -- -- -- -- 11,223
-------- --------- --------- --------- --------- --------- -------- --------
Total interest bearing
liabilities............ 117,312 70,265 139,692 117,149 114,492 179,500 22,745 761,155
-------- --------- --------- --------- --------- --------- -------- --------
Interest sensitivity
gap.................... $(50,774) $ (57,743) $(112,633) $ (17,460) $ (32,893) $ 48,014 $278,432 $ 54,943
======== ========= ========= ========= ========= ========= ======== ========
Cumulative interest
sensitivity gap........ $(50,774) $(108,517) $(221,150) $(238,610) $(271,503) $(223,489) $ 54,943 $ 54,943
======== ========= ========= ========= ========= ========= ======== ========
Cumulative interest
sensitivity gap
as a percentage of
total assets........... (6.22%) (13.30%) (27.10%) (29.24%) (33.27%) (27.38%) 6.73% 6.73%
Cumulative net interest
earning assets
as a percentage of
cumulative interest
bearing liabilities.... 56.72% 42.15% 32.43% 46.31% 51.42% 69.73% 107.22% 107.22%
</TABLE>
- --------------------------------------------------------------------------------
11
<PAGE>
FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT
- -------------------------------------------------------------------------------
Financial Condition
The following table sets forth information concerning the composition of the
Company's assets at December 31, 1999 and 1998. Dollar amounts are in
thousands.
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
---------------- ----------------
Percent Percent
of of
Amount Total Amount Total
-------- ------- -------- -------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalent.................... $ 20,468 2.51% $ 21,543 2.81%
Federal funds sold.......................... 33,000 4.04 36,175 4.71
Investment securities....................... 207,371 25.41 146,657 19.11
Conventional loans, net..................... 532,292 65.22 544,636 70.95
Other loans................................. 967 .12 899 .12
FHLB stock.................................. 11,400 1.40 9,000 1.17
Other assets................................ 10,624 1.30 8,696 1.13
-------- ------ -------- ------
TOTAL ASSETS............................... $816,122 100.00% $767,606 100.00%
======== ====== ======== ======
</TABLE>
Total Assets
Total assets increased by $48.5 million or 6.3% to $816.1 million at December
31, 1999 from $767.6 million at December 31, 1998. The increase in total
assets was the result of increases in investment securities and FHLB stock.
Offsetting these increases were decreases in conventional mortgages, net and
federal funds sold.
Investment Securities and Other Interest Earning Investments
Investment securities increased by $60.7 million or 41.4% to $207.4 million
at December 31, 1999 from $146.7 million at December 31, 1998. The increase
was the result of the purchase of $90.2 million of municipal securities and a
FHLB bond of $5.0 million. Offsetting these purchases was a decline in the net
unrealized gain or loss on securities available-for-sale of $16.6 million, the
maturity of a treasury note of $5.0 million, principal paydowns on CMO's of
$4.7 million and the sale of municipal securities of $3.3 million. FHLB stock
increased to $11.4 million at December 31, 1999 from $9.0 million at December
31, 1998. The $2.4 million or 26.7% increase was the result of the minimum
amount of stock required by the FHLB increasing due to the additional
borrowings obtained from the FHLB during the year. Federal funds sold
decreased by $3.2 million or 8.8% to $33.0 million at December 31, 1999 from
$36.2 million at December 31, 1998. The decrease was the result of the funds
being use to help fund the purchase of investment securities offset by the
investment of excess cash into federal funds sold.
Conventional Mortgage Loans
Conventional mortgage loans decreased by $12.3 million or 2.3% to $532.3 mil-
lion at December 31, 1999 from $544.6 million at December 31, 1998. The
decrease was the primarily the result of principal repayments of $96.7 million
offset by the funding of conventional mortgage loans of $82.6 million. Conven-
tional mortgage loans are comprised of residential mortgages, residential con-
struction loans, home equity installment and line of credit loans and multi-
family loans. At December 31, 1999, residential mortgage loans totaled $516.5
million or 94.9% of the total loan portfolio. At that date, $494.0 million or
95.6% consisted of fix-rate mortgage loans. Residential construction mortgage
loans totaled $16.2 million or 3.0% of total loans and home equity loans to-
taled $11.0 million or 2.0% of total loans.
- -------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
The following table sets forth information concerning the Company's
liabilities and stockholders' equity at December 31, 1999 and 1998. Dollar
amounts are in thousands.
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
---------------- ----------------
Percent Percent
of of
Amount Total Amount Total
-------- ------- -------- -------
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits..................................... $511,931 62.73% $495,128 64.50%
Borrowings................................... 238,000 29.16 180,000 23.45
Other liabilities............................ 11,673 1.43 18,576 2.42
Stockholders' equity......................... 54,518 6.68 73,902 9.63
-------- ------ -------- ------
TOTAL LIABILITIES STOCKHOLDERS' EQUITY...... $816,122 100.00% $767,606 100.00%
======== ====== ======== ======
</TABLE>
Liabilities
Total liabilities increased to $761.6 million at December 31, 1999 from $693.7
million at December 31, 1998. The $67.9 million or 9.8% increase was the result
of increases in borrowings and deposits reduced by a decrease in deferred tax-
es. Borrowings increased by $58.0 million or 32.2% to $238.0 million at Decem-
ber 31, 1999 from $180.0 million at December 31, 1998. Total deposits increased
by $16.8 million or 3.4% to $511.9 million at December 31, 1999 from $495.1
million at December 31, 1998. The increase was the result of certificate ac-
counts increasing by $17.0 million. The total number of depositor accounts in-
creased to 54,300 accounts at December 31, 1999 from 53,600 at December 31,
1998. The deferred tax liability decreased by $6.8 million to an asset of $4.4
million at December 31, 1999 from a liability of $2.4 million at December 31,
1998. The decrease was the result of the net unrealized net loss on investment
securities available-for-sale.
Capital
Total stockholders' equity decreased by $19.4 million or 26.2% to $54.5 mil-
lion at December 31, 1999 from $73.9 million at December 31, 1998. The primar-
ily factors contributing to the decrease in total stockholders' equity was the
purchase of $16.6 million in treasury stock, the decline of other comprehensive
income, net of taxes of $10.1 million and dividends declared of $1.9 million,
off set by net income of $8.0 million.
- --------------------------------------------------------------------------------
13
<PAGE>
FIRST BELL BANCORP, INC. 1999 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, 1999, and average balance sheets and statements
of income for the years ended December 31, 1999, 1998 and 1997, 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
expense by the average monthly balance of assets or liabilities, respectively,
for the years presented. Average balances are based on average daily balances.
The yields and costs include fees which are considered adjustments to yields.
Interest income for 1999 and 1998 shown in the chart below is the tax
equivalent interest income. Tax equivalent interest income is being used
because interest on investment 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. Tax equivalent adjustments of $3.8 million and $1.1 million were made to
interest income on investment securities in 1999 and 1998, respectively. The
Company had no tax exempt securities in 1997.
<TABLE>
<CAPTION>
At December 31, 1999 Year Ended December 31, 1999
------------------------ ----------------------------
Average Average
Balance Yield/Cost Balance Interest Yield/Cost
------------ ----------- -------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning Assets:
Investment securities (1).............. $ 235,178 6.82% $241,728 $15,765 6.52%
Conventional loans (2)(6).............. 532,291 7.09 535,222 38,975 7.28
Other loans............................ 967 6.92 937 65 6.94
Mortgage-backed securities............. -- -- -- -- --
Federal funds sold..................... 33,000 5.16 18,518 1,073 5.79
------------ -------- -------
Total interest-earning assets........ 801,436 6.93 796,405 55,878 7.02
Non-interest earning assets.......... 14,686 12,190
------------ --------
TOTAL ASSETS....................... $ 816,122 $808,595
============ ========
Interest-bearing Liabilities:
Passbook, club and other accounts (5).. $ 84,531 3.07% $ 85,151 $ 3,021 3.55%
Money market and NOW accounts.......... 52,259 2.78 53,508 1,404 2.62
Certificate accounts................... 386,364 5.54 356,439 19,751 5.54
Borrowings............................. 238,000 5.64 230,335 12,886 5.59
------------ -------- -------
Total interest-bearing liabilities... 761,154 5.11 725,433 37,062 5.11
Non-interest-bearing liabilities..... 450 18,836
------------ --------
TOTAL LIABILITIES.................. 761,604 744,269
Stockholders' equity................... 54,518 64,326
------------ --------
Total liabilities and stockholders'
equity................................ $ 816,122 $808,595
============ ========
Net tax equivalent interest income/net
interest rate spread (3)................ 1.82% $18,816 1.91%
=======
Net tax equivalent yield on average
interest-earning assets (4)............. 2.36%
Ratio of average interest-earning assets
to average interest-bearing liabilities. 1.05 1.10
</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 $723, $613, and $406
for the years ended December 31, 1999, 1998 and 1997, respectively.
- --------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1998 1997
---------------------------- ----------------------------
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)........... $115,109 $ 7,395 6.42% $ 66,212 $ 4,117 6.22%
Conventional loans (2)(6)........... 566,367 41,848 7.39 558,398 41,397 7.41
Other loans......................... 831 58 6.98 917 67 7.31
Mortgage-backed securities.......... 4,979 284 5.70 55,505 3,148 5.67
Federal funds sold.................. 22,413 1,212 5.41 8,932 497 5.56
-------- ------- -------- -------
Total interest-earning assets..... 709,699 50,797 7.16 689,964 49,226 7.13
Non-interest earning assets....... 10,762 10,174
-------- --------
TOTAL ASSETS.................... $720,461 $700,138
======== ========
Interest-bearing Liabilities:
Passbook, club and other
accounts (5)....................... $ 82,136 $ 2,480 3.02% $ 78,315 $ 2,288 2.92%
Money market and NOW accounts....... 47,945 1,147 2.39 46,634 1,092 2.34
Certificate accounts................ 362,720 21,186 5.84 387,557 23,306 6.01
Borrowings.......................... 142,481 8,030 5.64 102,649 5,643 5.50
-------- ------- -------- -------
Total interest-bearing
liabilities...................... 635,282 32,843 5.17 615,155 32,329 5.26
Non-interest-bearing liabilities.. 9,524 10,484
-------- --------
TOTAL LIABILITIES............... 644,806 625,639
Stockholders' equity................ 75,655 74,499
-------- --------
Total liabilities and stockholders'
equity............................. $720,461 $700,138
======== ========
Net tax equivalent interest income/net
interest rate spread (3)............. $17,954 1.99% $16,897 1.88%
======= =======
Net tax equivalent yield on average
interest-earning assets (4).......... 2.53% 2.45%
Ratio of average interest-earning
assets to average interest-bearing
liabilities.......................... 1.12 1.12
</TABLE>
- --------------------------------------------------------------------------------
15
<PAGE>
FIRST BELL BANCORP, INC. 1999 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 years 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 1999 and 1998, are tax equivalent rates.
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
1999 vs. 1998 1998 vs. 1997
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. $ 8,664 $ (294) $ 8,370 $ 3,504 $ (226) $ 3,278
Conventional loans.... (2,301) (572) (2,873) 591 (140) 451
Other loans........... 7 -- 7 (6) (3) (9)
Mortgage-backed
securities........... (284) -- (284) (2,866) 2 (2,864)
Federal funds sold.... (211) 72 (139) 750 (35) 715
-------- -------- -------- --------- ------- ---------
Total interest-
earning assets..... 5,875 (794) 5,081 1,973 (402) 1,571
-------- -------- -------- --------- ------- ---------
Interest-bearing
liabilities:
Passbook, club and
other accounts....... 133 124 257 112 80 192
Money market and NOW
accounts............. 91 450 541 31 24 55
Certificate accounts.. (367) (1,068) (1,435) (1,494) (626) (2,120)
Borrowings............ 4,952 (97) 4,855 2,190 198 2,388
-------- -------- -------- --------- ------- ---------
Total interest-
bearing
liabilities........ 4,809 (591) 4,218 839 (324) 515
-------- -------- -------- --------- ------- ---------
Net change in net
interest income........ $ 1,066 $ (203) $ 863 $ 1,134 $ (78) $ 1,056
======== ======== ======== ========= ======= =========
</TABLE>
December 31, 1999 Operating Results
The following table presents selected components of net income for the years
ended December 31, 1999, 1998 and 1997. Dollar amounts are in thousands.
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Interest income........................................ $55,878 $50,798 $49,226
Interest expense....................................... 37,061 32,844 32,329
------- ------- -------
Net interest income.................................... 18,817 17,954 16,897
Provision for loan loss................................ 120 90 45
Other income........................................... 598 643 829
Other expenses......................................... 6,116 5,643 5,060
Income taxes........................................... 5,137 5,026 5,046
------- ------- -------
Net Income............................................. $ 8,042 $ 7,838 $ 7,575
======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
16
<PAGE>
- -------------------------------------------------------------------------------
Net income for the year ended December 31, 1999 increased by $204,000 or 2.6%
to $8.0 million from $7.8 million for the year ended December 31, 1998. The
increase was primarily the result of an increase in net interest income offset
by an increase in other expenses.
Interest Income
Interest income discussed in this section is tax equivalent interest income.
Tax equivalent adjustments of $3.8 million and $1.1 million were made for the
years ended December 31, 1999 and 1998, respectively. Interest income
increased by $5.1 million or 10.0% to $55.9 million for the year ended Decem-
ber 31, 1999 from $50.8 million for the year ended December 31, 1998. The
increase was primarily due to an increase in interest earned on investment
securities offset by a decrease in interest earned on conventional mortgage
loans. Interest on investment securities increased by $8.1 million or 140.9%
to $13.9 million for the year ended December 31, 1999 from $5.8 million for
the comparable 1998 period. The increase was the result of the average balance
increasing to $208.4 million for the year ended December 31, 1999 from $84.3
million for the year ended December 31, 1998. Interest on conventional
mortgage loans decreased by $2.9 million or 6.9% to $39.0 million for the year
ended December 31, 1999 from $41.8 million for the year ended December 31,
1998. The decrease was the result of the average balance for conventional
mortgage loans decreasing by $31.1 million or 5.5% to $535.2 million for the
year ended December 31, 1999 from $566.4 million for the comparable 1998
period. Also contri-buting to the decrease was an eleven basis points decline
in the average rate earned on conventional mortgage loans. The average rate
earned on conventional mortgage loans for 1999 was 7.28% compared to 7.39% for
1998.
Interest Expense
Interest expense increased to $37.0 million for the year ended December 31,
1999 from $32.8 million for the year ended December 31, 1998. The $4.2 million
or 12.8% increase was the result of an increase in interest expense on
borrowings offset by a decrease in interest expense on deposits. Interest ex-
pense on borrowings increased by $4.9 million or 60.5% to $12.9 million for
the year ended December 31, 1999 from $8.0 million for the year ended December
31, 1998. The average balance on borrowings which increased to $230.3 million
for the year ended December 31, 1999 from $142.5 million for the year ended
December 31, 1998. Interest expense on deposits decreased by $638,000 or 2.6%
to $24.2 million for the year ended December 31, 1999 from $24.8 million for
the comparable 1998 period. The decrease was primarily the result of a decline
in the average cost on certificate accounts. The average cost for 1999 was
5.54% compared to 5.84% for 1998.
Net Interest Income
Tax equivalent net interest income increased by $863,000 or 4.8% to $18.8
million for the year ended December 31, 1999 from $18.0 million for the year
ended December 31, 1998. The increase was the result of interest income rising
by $5.1 million offset by an increase in interest expense of $4.2 million.
Provision for Loan Loss
The provision for loan loss for 1999 was $120,000. The addition to the provi-
sion is the result of an increase in the origination of jumbo, home equity and
Community Reinvestment Act ("CRA") mortgages. In determining the provision for
loan losses, management assesses the risk inherent in its loan portfolio in-
cluding, but not limited to, an evaluation of the concentration of loans se-
cured by properties located in the Pittsburgh area, the trends in national and
local economies, trends in the real estate market and in the Company's loan
portfolio and the level of non-performing loans and assets. The Company's his-
tory of loan losses has been minimal, which management believes is a reflec-
tion of the Company's underwriting standards.
There were no charge-offs for the years ended December 31, 1999 and 1998.
Management believes the current level of loan loss reserve is adequate to
cover losses inherent in the portfolio as of such date. However, there can be
no assurance that the Company will not sustain losses in future periods.
Other Income
Other income decreased by $45,000 or 7.0% to $598,000 for the year ended De-
cember 31, 1999 from $643,000 for the year ended December 31, 1998. The de-
crease was the result of gains on sales of investment securities declining to
$45,000 for the year ended December 31, 1999 compared to $97,000 for the year
ended December 31, 1998. In addition, a decline in miscellaneous income of
$19,000 was primarily the result
- -------------------------------------------------------------------------------
17
<PAGE>
FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT
- --------------------------------------------------------------------------------
of losses on real estate owned included in miscellaneous income. Offsetting
these decreases was a rise in loan fees and service charges of $26,000 or 5.0%.
Other Expenses
Other expenses increased by $473,000 or 8.4% to $6.1 million for the year
ended December 31, 1999 from $5.6 million for the year ended December 31, 1998.
The increase was primarily the result of an increase in miscellaneous expenses.
Miscellaneous expenses increased to $1.5 million for the year ended December
31, 1999 from $1.1 million for the comparable 1998 period. The $456,000 or
41.7% increase was due to expenses associated with the annual meeting and one-
time non-recurring expenses related to the operation of the Association.
Income Taxes
Income taxes remained relatively flat for the years ended December 31, 1999
and 1998. Tax equivalent adjustments of $3.8 million and $1.1 million were made
for the years ended December 31, 1999 and 1998, respectively. The annualized
effective tax rate after the tax equivalent increase was 39.0% for 1999 and
39.1% for 1998.
New Accounting Pronouncements
For a discussion of new accounting pronouncements and their effect on the Com-
pany, see note number 2 to the Consolidated Financial Statements.
December 31, 1998 Operating Results
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 in-
come.
Interest Income
As discussed previously, interest income discussed in this section is the tax
equivalent income. 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
- --------------------------------------------------------------------------------
18
<PAGE>
- -------------------------------------------------------------------------------
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
increased 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
increasing 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.
Provision for Loan Loss
The provision for loan loss was $90,000 for 1998 compared to $45,000 for
1997. There were no charge-offs for the years ended December 31, 1998 and
1997.
Other Income
Other income decreased by $186,000 or 22.4% to $643,000 for the year ended
December 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 a 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 fed-
eral insurance premiums. Compensation, payroll taxes and fringe benefits in-
creased 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 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. Miscellane-
ous 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 con-
tracts 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 fed-
eral deposit insurance refund that was recorded in the first quarter of 1997.
Income Taxes
A tax equivalent adjustment of $1.1 million was made for the year ended De-
cember 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 equiva-
lent increase was 39.1% for 1998 and 40.0% for 1997.
- -------------------------------------------------------------------------------
19
<PAGE>
FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT
Management's Report on the Internal Control Structure and
Compliance with Laws and Regulations
- --------------------------------------------------------------------------------
January 24, 2000
To the Stockholders of First Bell Bancorp, Inc.:
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, 1999. 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
confor-mity with both generally accepted accounting principles and TFR
instructions as of December 31, 1999.
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, 1999.
/s/ Albert H. Eckert, II
Albert H. Eckert, II
Chief Executive Officer
/s/ Jeffrey M. Hinds
Jeffrey M. Hinds
Chief Financial Officer
- --------------------------------------------------------------------------------
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, 1999 and 1998, and the related
consolidated statements of income, comprehensive income (loss), changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
First Bell Bancorp Inc.'s management. Our responsibility is to express an opin-
ion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of First Bell Bancorp, Inc. and sub-
sidiary as of December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
January 24, 2000
- --------------------------------------------------------------------------------
21
<PAGE>
FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT
Consolidated Balance Sheets
(In thousands, except shares and per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
ASSETS -------- --------
<S> <C> <C>
CASH AND CASH EQUIVALENTS:
Cash on hand.................................................................. $ 1,857 $ 925
Noninterest-bearing deposits.................................................. 2,204 2,116
Interest-bearing deposits..................................................... 16,407 18,502
-------- --------
Total cash and cash equivalents............................................. 20,468 21,543
FEDERAL FUNDS SOLD.............................................................. 33,000 36,175
INVESTMENT SECURITIES HELD-TO-MATURITY--At cost
(fair value of $5,242 and $10,766 at December 31, 1999 and 1998, respectively). 4,989 9,980
INVESTMENT SECURITIES AVAILABLE-FOR-SALE--At fair value
(cost of $217,043 and $134,743 at December 31, 1999 and 1998, respectively).... 202,382 136,677
CONVENTIONAL LOANS--Net of allowance for loan losses of $925 and $805 at
December 31, 1999 and 1998, respectively....................................... 532,292 544,636
OTHER LOANS--Net................................................................ 967 899
REAL ESTATE OWNED............................................................... 390 82
PREMISES AND EQUIPMENT--Net..................................................... 3,924 3,405
FEDERAL HOME LOAN BANK STOCK--At cost........................................... 11,400 9,000
ACCRUED INTEREST RECEIVABLE..................................................... 4,947 4,272
OTHER ASSETS.................................................................... 1,363 937
-------- --------
Total assets................................................................ $816,122 $767,606
======== ========
<CAPTION>
1999 1998
LIABILITIES AND STOCKHOLDERS' EQUITY -------- --------
<S> <C> <C>
DEPOSITS:
Passbook, club and other accounts............................................. $ 73,308 $ 73,578
Money market and NOW accounts................................................. 52,259 52,164
Certificate accounts.......................................................... 386,364 369,386
-------- --------
Total deposits.............................................................. 511,931 495,128
BORROWINGS...................................................................... 238,000 180,000
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE................................... 11,223 11,354
ACCRUED INTEREST ON DEPOSITS.................................................... 703 600
ACCRUED INTEREST ON BORROWINGS.................................................. 864 863
ACCRUED INCOME TAXES............................................................ 93 120
DEFERRED TAX (ASSET) LIABILITY.................................................. (4,365) 2,424
DIVIDENDS PAYABLE ON COMMON STOCK............................................... 453 536
OTHER LIABILITIES............................................................... 2,702 2,679
-------- --------
Total liabilities........................................................... 761,604 693,704
-------- --------
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 5,189,063 and 6,100,476 outstanding; one stock right per share)... 86 86
Additional paid-in capital.................................................... 62,217 61,768
Unearned ESOP shares.......................................................... (3,740) (3,972)
Unearned MRP shares........................................................... (3,378) (3,839)
Treasury stock, at cost (3,407,187 and 2,495,774 shares)...................... (55,523) (38,918)
Accumulated other comprehensive (loss) income, net of taxes................... (8,931) 1,179
Retained earnings--substantially restricted................................... 63,787 57,598
-------- --------
Total stockholders' equity.................................................. 54,518 73,902
-------- --------
Total liabilities and stockholders' equity.................................. $816,122 $767,606
======== ========
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
22
<PAGE>
Consolidated Statements of Income
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Conventional loans.............................. $ 38,974 $ 41,848 $ 41,397
Interest-bearing deposits....................... 1,027 1,152 1,343
Mortgage-backed securities...................... -- 284 3,148
Federal funds sold.............................. 1,073 1,212 497
Investment securities, taxable.................. 3,212 2,509 2,425
Investment securities, non-taxable.............. 6,981 2,104 --
Other loans..................................... 66 58 67
Federal Home Loan Bank stock.................... 757 482 349
-------- -------- --------
Total interest and dividend income............ 52,090 49,649 49,226
-------- -------- --------
INTEREST EXPENSE:
Deposits........................................ 24,175 24,813 26,686
Borrowings...................................... 12,886 8,030 5,643
-------- -------- --------
Total interest expense........................ 37,061 32,843 32,329
-------- -------- --------
NET INTEREST INCOME............................... 15,029 16,806 16,897
PROVISION FOR LOAN LOSSES......................... 120 90 45
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES........................................... 14,909 16,716 16,852
-------- -------- --------
OTHER INCOME:
Service fees and charges........................ 542 516 525
Gain (loss) on sales of mortgage-backed
securities available-for-sale.................. -- 97 (8)
Gain on sale of conventional loans.............. -- -- 258
Gain on sale of investments available-for-sale.. 45 -- --
Miscellaneous income............................ 11 30 54
-------- -------- --------
Total other income............................ 598 643 829
-------- -------- --------
OTHER EXPENSES:
Compensation, payroll taxes and fringe benefits. 3,193 3,227 2,953
Federal insurance premiums...................... 300 305 261
Office occupancy expense, excluding
depreciation................................... 522 498 415
Depreciation.................................... 291 296 296
Computer services............................... 261 224 218
Miscellaneous expenses.......................... 1,549 1,093 917
-------- -------- --------
Total other expenses.......................... 6,116 5,643 5,060
-------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES.......... 9,391 11,716 12,621
-------- -------- --------
PROVISION FOR INCOME TAXES:
Current:
Federal........................................ 925 3,048 3,665
State.......................................... 728 809 976
Deferred (benefit) expense...................... (304) 21 405
-------- -------- --------
Total provision for income taxes.............. 1,349 3,878 5,046
-------- -------- --------
NET INCOME........................................ $ 8,042 $ 7,838 $ 7,575
======== ======== ========
BASIC EARNINGS PER SHARE.......................... $ 1.68 $ 1.41 $ 1.29
======== ======== ========
DILUTED EARNINGS PER SHARE........................ $ 1.61 $ 1.35 $ 1.23
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
23
<PAGE>
FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Net Income........................................ $ 8,042 $ 7,838 $ 7,575
Unrealized gains (losses) arising during the
period........................................... (16,551) 1,993 197
Less: reclassification adjustment for (gains)
losses realized in net income.................... (45) (97) 8
--------- ------- -------
Other comprehensive income, before taxes.......... (8,554) 9,734 7,780
Tax benefit (expense)............................. 6,486 (834) (88)
--------- ------- -------
Other comprehensive (loss) income, net of taxes... $ (2,068) $ 8,900 $ 7,692
========= ======= =======
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
24
<PAGE>
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, 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 ($.40 per share)............. -- -- -- -- -- --
Net income............................. -- -- -- -- -- --
--- --- ------ --- ------- -------
BALANCE, DECEMBER 31, 1998............... -- -- 6,100 86 61,768 (3,972)
--- --- ------ --- ------- -------
Purchase of treasury stock............. -- -- (911) -- -- --
Allocation of MRP shares............... -- -- -- -- 129 --
Allocation of ESOP shares.............. -- -- -- -- 320 232
Change in unrealized gain in securities
available-for-sale, net of taxes...... -- -- -- -- -- --
Dividends ($.40 per share)............. -- -- -- -- -- --
Net income............................. -- -- -- -- -- --
--- --- ------ --- ------- -------
BALANCE, DECEMBER 31, 1999............... -- $-- 5,189 $86 $62,217 $(3,740)
=== === ====== === ======= =======
</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, 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
------- -------- -------- ------- --------
Purchase of treasury stock............. -- (16,604) -- -- (16,604)
Allocation of MRP shares............... 461 -- -- -- 590
Allocation of ESOP shares.............. -- -- -- -- 552
Change in unrealized gain in securities
available-for-sale, net of taxes...... -- -- (10,110) -- (10,110)
Dividends ($.40 per share)............. -- -- -- (1,854) (1,854)
Net income............................. -- -- -- 8,042 8,042
------- -------- -------- ------- --------
BALANCE, DECEMBER 31, 1999............... $(3,378) $(55,522) $ (8,931) $63,786 $ 54,518
======= ======== ======== ======= ========
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
25
<PAGE>
FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT
Consolidated Statements of Cash Flows
(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1999 1998 1997
-------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 8,042 $ 7,838 $ 7,575
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation................................... 291 296 296
Deferred income taxes.......................... (304) 21 405
Amortization of premiums and accretion of (93) (19) 195
discounts.....................................
Provision for loan loss........................ 120 90 45
Compensation expense--allocations of ESOP and 1,055 1,175 1,055
MRP shares....................................
Loss (gain) on sale of real estate owned....... 11 (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 investments available-for-sale. (45) -- --
Net proceeds from sale of conventional loans... -- -- 29,662
Increase or decrease in assets and liabilities:
Accrued interest receivable................... (676) (1,069) (444)
Accrued interest on deposits.................. 103 65 32
Accrued interest on borrowings................ 1 531 141
Accrued income taxes.......................... (26) (109) 148
Other assets.................................. (426) (322) (170)
Other liabilities............................. 195 296 (100)
Dividends payable............................. (83) (39) (138)
-------- --------- --------
Net cash provided by operating activities....... 8,165 8,644 38,415
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities available-for- (90,188) (132,770) (25,947)
sale...........................................
Purchase of mortgage-backed securities -- -- (92,528)
available-for-sale.............................
Net decrease (increase) in Federal Funds........ 3,175 (34,625) 71,325
Maturity of investment securities held-to- 5,000 -- 5,000
maturity.......................................
Maturity of investment securities available-for- -- 10,000 10,000
sale...........................................
Principal paydowns on mortgage-backed securities -- 1,402 14,000
available-for-sale.............................
Net proceeds from sale of mortgage-backed -- 30,352 46,668
securities available-for-sale..................
Net proceeds from sale of investment securities 3,317 -- --
available-for-sale.............................
Principal paydowns on investment securities 4,700 3,974 --
available-for-sale.............................
Net decrease (increase) in conventional loans... 11,765 33,958 (78,145)
Net decrease (increase) in other loans.......... (68) 8 42
Purchase of Federal Home Loan Bank stock........ (2,400) (3,852) (1,149)
Net proceeds from sale of real estate owned..... 140 128 342
Purchase of premises and equipment.............. (810) (209) (96)
-------- --------- --------
Net cash used in investing activities........... (65,369) (91,634) (50,488)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, NOW
accounts and savings accounts.................. (174) 10,891 3,704
Net increase (decrease) in certificate accounts. 16,977 (10,818) 7,410
Advances by borrowers for taxes and insurance... (132) (872) 1,404
Net increase in borrowings...................... 58,000 90,000 20,000
Dividends paid.................................. (1,938) (2,271) (1,935)
Proceeds from stock options exercised........... -- 149 --
Purchase of treasury stock...................... (16,604) (7,069) (20,393)
-------- --------- --------
Net cash provided by financing activities....... 56,129 80,010 10,190
-------- --------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS......... (1,075) (2,980) (1,883)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR...... 21,543 24,523 26,406
-------- --------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR............ $ 20,468 $ 21,543 $ 24,523
======== ========= ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest on deposits and advances by borrowers
for taxes and insurance....................... $ 24,073 $ 24,747 $ 26,655
Interest on borrowings......................... 12,886 7,500 5,502
Income taxes................................... 1,731 3,936 4,606
Noncash transactions:
Transfers from conventional loans to real
estate acquired through foreclosure........... 459 201 104
Increase in additional paid-in capital--ESOP
and MRP allocations........................... 449 397 308
Transfers from conventional mortgage loans to
conventional mortgage loans held-for-sale..... -- -- 29,989
Unrealized (loss) gain on securities available-
for-sale...................................... (16,596) 1,896 205
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
26
<PAGE>
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
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
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 in
Wilmington, 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. 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
noninterest-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,
1999 and 1998, restricted cash of approximately $427,000 and $502,000,
respectively, has been segregated on the books of the Association.
The Association's reserve requirements imposed by the Federal Reserve
Bank averaged approximately $1,132,000 and $1,004,000 for the years
ended December 31, 1999 and 1998, respectively.
c. Investments and Mortgage-Backed Securities--The Company follows State-
ment of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Debt and Equity Securities," for investments and mortgage-backed
securities. Investments and mortgage-backed securities that may be sold
as part of the Company's asset/liability or liquidity management or in
response to or in anticipation of changes in interest rates and prepay-
ment risk or other factors are classified as available-for-sale and are
carried at fair market value. Unrealized gains and losses on such secu-
rities 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 com-
puted 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
- --------------------------------------------------------------------------------
27
<PAGE>
FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT
- --------------------------------------------------------------------------------
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
$19,088,000, $24,388,000 and $31,407,000, at December 31, 1999, 1998 and
1997, respectively. During 1997, $29,989,000 of conventional mortgage
loans were sold to FNMA in which the servicing of such loans were
maintained 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
necessary for changes in economic conditions beyond the Association's
control.
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 amor-tization. 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.
k. Other Comprehensive Income--The Financial Accounting Standards Board
("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," which
became effective for financial statements for fiscal years beginning
after December 15, 1997. SFAS No. 130 established standards for
reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. Prior years financial statements have been
reclassified for comparative purposes.
- --------------------------------------------------------------------------------
28
<PAGE>
- -------------------------------------------------------------------------------
The following table sets forth the related tax effects allocated to each
element of comprehensive income for the years ended December 31, 1999, 1998
and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- ------------------------ -----------------------
Tax Tax Tax
(Expense) Net-of- Pre- (Expense) Net- Pre- (Expense) Net-
Pre-tax or tax tax or of-tax tax or of-tax
Amount Benefit Amount Amount Benefit Amount Amount Benefit Amount
-------- --------- -------- ------ --------- ------ ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unrealized gains
(losses) on securities:
Unrealized holding
gains (losses)
arising during period. $(16,551) $6,468 $(10,083) $1,993 $(872) $1,121 $197 $(85) $112
Less: reclassification
adjustment for (gains)
losses realized in net
income................ (45) 18 (27) (97) 38 (59) 8 (3) 5
-------- ------ -------- ------ ----- ------ ---- ---- ----
Net unrealized gains
(losses).............. (16,596) 6,486 (10,110) 1,896 (834) 1,062 205 (88) 117
-------- ------ -------- ------ ----- ------ ---- ---- ----
Other comprehensive
income................. $(16,596) $6,486 $(10,110) $1,896 $(834) $1,062 $205 $(88) $117
======== ====== ======== ====== ===== ====== ==== ==== ====
</TABLE>
The following table sets forth the components of accumulated other compre-
hensive income for the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------ ----
<S> <C> <C> <C>
Beginning balance...................................... $ 1,179 $ 117 $ --
Net unrealized gains on securities, net of taxes....... (10,110) 1,062 117
-------- ------ ----
Ending balance......................................... $ (8,931) $1,179 $117
======== ====== ====
</TABLE>
l. 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. The Company has determined that it only has one oper-
ating segment which is the operation of a thrift, therefore, will not be
presenting any further segment information.
m. Earnings Per Share--Basic EPS is computed by dividing net income avail-
able to common stockholders 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 secu-
rities, by the weighted average number of common shares outstanding, ad-
justed for dilutive securities.
n. Treasury Stock--Treasury stock is recorded at cost.
o. Interest Rate Risk--A significant portion of the Company's assets con-
sist of long-term fixed-rate residential mortgage loans, while a
significant portion of the Company's liabilities consist of deposits
with considerably 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
operations. 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.
p. New Accounting Pronouncements Not Yet Adopted--In June 1998, the FASB
issued SFAS No. 133,"Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and reporting stan-
dards for derivative instruments, including certain derivative instru-
ments embedded in other contracts, and for hedging activities. The pro-
visions of this statement are effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000. Management is in the process
of evaluating the impact of this statement on the consolidated financial
statements.
3.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.
- -------------------------------------------------------------------------------
29
<PAGE>
FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT
- --------------------------------------------------------------------------------
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.
4.INVESTMENT SECURITIES HELD-TO-MATURITY
The following is a summary of investment securities held-to-maturity at De-
cember 31 (in thousands):
<TABLE>
<CAPTION>
1999
-----------------------------
Gross Gross
Amor- Unreal- Unreal-
tized ized ized Fair
Cost Gain Loss Value
------ ------- ------- ------
<S> <C> <C> <C> <C>
Treasury bills................................. $4,985 $182 $-- $5,167
Other investments.............................. 4 71 -- 75
------ ---- --- ------
$4,989 $253 $-- $5,242
====== ==== === ======
</TABLE>
<TABLE>
<CAPTION>
1998
------------------------------
Gross Gross
Amor- Unreal- Unreal-
tized ized ized 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>
The carrying value and fair value of investment securities held-to-maturity
by contractual maturity as of December 31, 1999, are shown below (in
thousands):
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- ------
<S> <C> <C>
Due after one year through five years...................... $4,985 $5,167
Due after five years through ten years..................... 4 75
------ ------
$4,989 $5,242
====== ======
</TABLE>
There were no sales of investment securities held-to-maturity during the
years ended December 31, 1999, 1998 and 1997.
5. INVESTMENT SECURITIES AVAILABLE-FOR-SALE
These investments consist of municipal securities, collateralized mortgage
obligations ("CMO's") and a FHLB Bond. The following is a summary of in-
vestment securities available-for-sale at December 31, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
1999
-----------------------------------
Gross Gross
Amor- Unreal- Unreal-
tized ized ized Fair
Cost Gain Loss Value
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Municipal securities..................... $199,141 $ -- $(14,373) $184,768
CMO's.................................... 12,902 12 (153) 12,761
FHLB Bond................................ 5,000 -- (147) 4,853
-------- ------ -------- --------
$217,043 $ 12 $(14,673) $202,382
======== ====== ======== ========
<CAPTION>
1998
-----------------------------------
Gross Gross
Amor- Unreal- Unreal-
tized ized ized 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
======== ====== ======== ========
</TABLE>
In 1999, proceeds from the sale of municipal securities available-for-sale
were $3,317,000 resulting in
- --------------------------------------------------------------------------------
30
<PAGE>
- --------------------------------------------------------------------------------
gross and net gains of $45,000. There were no sales of investment securi-
ties available-for-sale during the years ended December 31, 1998 and 1997.
The carrying value and fair value of investment securities available-for-
sale by contractual maturity as of December 31, 1999, are shown below
(in thousands):
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- --------
<S> <C> <C>
Due after five years through ten years................... $ 37,218 $ 35,884
Due after ten years...................................... 179,825 166,498
-------- --------
$217,043 $202,382
======== ========
</TABLE>
The expected maturity may differ from the contractual maturity for the mu-
nicipal securities and the FHLB Bond because most of these securities have
a call feature that is earlier than the contractual maturity date. For the
CMO's, the expected maturity may differ from the contractual maturity be-
cause borrowers may have the right to prepay obligations with or without
prepayment penalties.
6. MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE
There were no mortgage-backed securities available-for-sale held at Decem-
ber 31, 1999 and 1998.
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. The sales resulted in gross gains of $200,000 and $94,000,
and gross losses of $103,000 and $102,000 for the years ended December 31,
1998 and 1997, respectively.
7.CONVENTIONAL LOANS
The following is a summary of conventional loans as of December 31, 1999
and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Conventional mortgages..................................... $516,514 $535,864
Residential construction loans............................. 16,229 17,924
Multi-family loans......................................... 500 651
Second mortgage loans...................................... 11,012 4,508
-------- --------
544,255 558,947
Less:
Deferred net loan origination fees......................... 2,386 3,152
Undisbursed portion of construction loans in process....... 8,652 10,354
Allowance for loan losses.................................. 925 805
-------- --------
$532,292 $544,636
======== ========
</TABLE>
Conventional mortgages consist of one- to four-family fixed and adjustable
rate loans. The Company grants loans throughout the greater Pittsburgh,
Pennsylvania metropolitan area. The mortgagor's ability to repay the loans
outstanding is, therefore, dependent on the economy of that area.
Nonaccrual loans totaled $269,000 and $498,000 at December 31, 1999 and
1998, respectively. The Association does not accrue interest on loans past
due 90 days or more. Uncollected interest on total nonaccrual loans
amounted to $6,000, $32,000 and $29,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
During 1997, the Company reclassified approximately $29,989,000 of
conventional mortgages classified as held to maturity to held-for-sale, and
subsequently sold all such conventional mortgages, resulting in a gain of
approximately $258,000. The Company reclassified and sold such mortgages in
efforts to better manage the Company's interest rate risk.
- --------------------------------------------------------------------------------
31
<PAGE>
FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT
- -------------------------------------------------------------------------------
8.ALLOWANCE FOR LOAN LOSSES
The following is an analysis of the changes in the allowance for loan
losses for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year................................... $805 $715 $665
Provision for loan losses.................................... 120 90 45
Recovery of previous loan chargeoffs......................... -- -- 5
---- ---- ----
Balance, end of year......................................... $925 $805 $715
==== ==== ====
</TABLE>
9.PREMISES AND EQUIPMENT
The following is a summary of premises and equipment as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Land and land improvements.................................... $ 529 $ 351
Office buildings and leasehold improvements................... 4,435 3,973
Furniture, fixtures and equipment............................. 1,874 1,722
------ ------
6,838 6,046
Less accumulated depreciation and amortization................ 2,914 2,641
------ ------
$3,924 $3,405
====== ======
</TABLE>
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>
2000........................ $143
2001........................ 149
2002........................ 84
2003........................ 71
2004........................ 64
2005 and thereafter......... 128
</TABLE>
Rental expense under these leases was approximately $157,000, $163,000 and
$161,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
10.DEPOSITS
The following is a summary of deposits and stated interest rates as of De-
cember 31 (in thousands):
<TABLE>
<CAPTION>
Stated Rate 1999 1998
------------- -------- --------
<S> <C> <C> <C>
Balance by interest rate:
Passbook, club and other accounts.......... 3.00%--4.45% $ 73,308 $ 73,578
-------- --------
Money market and NOW accounts.............. 0.00%--3.21% 52,259 52,164
-------- --------
Certificate accounts....................... 3.00%--5.50% 217,751 175,279
5.51%--6.00% 119,707 123,361
6.01%--6.50% 29,773 47,976
6.51%--7.50% 14,350 16,779
7.51%--8.50% 2,750 2,806
8.51%--9.50% 2,032 2,887
9.51%--10.00% 1 298
-------- --------
386,364 369,386
-------- --------
$511,931 $495,128
======== ========
</TABLE>
Noninterest-bearing demand deposits were approximately $3,791,000 and
$5,428,000 at December 31, 1999 and 1998, respectively.
The following is a summary of certificate accounts by contractual maturity
at December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
Contractual
Maturity
-----------
<S> <C>
2000............................. $261,266
2001............................. 66,541
2002............................. 19,354
2003............................. 17,383
2004............................. 5,819
2005 and thereafter.............. 16,001
--------
$386,364
========
</TABLE>
The Association maintains insurance on deposits through the Savings Associ-
ation Insurance Fund ("SAIF"), which is under the supervision of the
Federal Deposit Insurance Corporation ("FDIC").
Deposits in excess of $100,000 are not insured by the SAIF. The aggregate
amount of certificates of deposit with a minimum denomination of $100,000
was $43,732,000 and $38,128,000 at December 31, 1999 and 1998, respective-
ly.
- -------------------------------------------------------------------------------
32
<PAGE>
- --------------------------------------------------------------------------------
11.BORROWINGS
The following is a summary of borrowings as of December 31, (in thousands):
<TABLE>
<CAPTION>
1999
Amount Rate Type Maturity Date
------ ---- ---------- -------------
<S> <C> <C> <C>
$20,000 5.83% Fixed January 2000
8,000 6.96% Adjustable January 2000
2,000 6.84% Adjustable January 2000
70,000 5.61%(1) Fixed December 2004
40,000 5.79%(2) Fixed April 2008
25,000 5.66%(2) Fixed May 2008
45,000 5.60%(2) Fixed June 2008
28,000 4.99%(3) Fixed January 2009
<CAPTION>
1998
Amount Rate Type Maturity Date
------ ---- ---------- -------------
<S> <C> <C> <C>
$70,000 5.46%(4) 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
</TABLE>
The above borrowings are secured by the assets of the Company.
-------
(1) At December 31, 1999, the interest rate was fixed at 5.61%. 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.
(3) The FHLB has the option to convert 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 first quarter of
2004.
(4) At December 31, 1998, the interest rate was fixed at 5.46%. Every six
months the FHLB has the option to convert this interest rate to an ad-
justable rate based on the three-month LIBOR. This borrowing was paid
off in 1999.
12. REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS
The Association is subject to various regulatory capital requirements ad-
ministered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional dis-
cretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Association's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective ac-
tion, the Association must meet specific capital guidelines that involve
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 following table) 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%.
The increase in the Tier I Capital to total assets ratio did not materially
impact the Association. As of December 31, 1999, the Association met all
capital adequacy requirements to which it is subject.
The most recent notification from the OTS categorized the Association as
well capitalized under the regulatory framework for prompt corrective ac-
tion. To be categorized as well capitalized the Association 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.
- --------------------------------------------------------------------------------
33
<PAGE>
FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT
- --------------------------------------------------------------------------------
The Association had the following amounts of capital and capital ratios at
December 31, 1999 and 1998 (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, 1999:
Total Capital (to risk-
weighted assets).......... $75,763 21.51% $28,176 8.00% $ 35,220 10.00%
Tier I Capital (to risk-
weighted assets).......... 74,838 21.25 N/A N/A 21,132 6.00
Tier I Capital (to total
assets)................... 74,838 8.90 33,638 4.00 42,048 5.00
Tangible Capital........... 74,838 8.90 12,614 1.50 N/A N/A
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>
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 $352,195,000 and $331,439,000 at
December 31, 1999 and 1998, respectively.
At the date of the conversion from a mutual to a stock organization, the
Association established a liquidation account in an amount equal to its
retained income as of June 30, 1995. The liquidation account is maintained
for the benefit of eligible account holders and supplemental eligible ac-
count holders who continue to maintain their accounts at the Association
after the conversion. The liquidation account is reduced annually to the
extent that eligible account holders and supplemental eligible account
holders have reduced their qualifying deposits as of each anniversary date.
Subsequent increases in such balances will not restore an eligible account
holder's or supplemental eligible account holder's interest in the liquida-
tion account. In the event of a complete liquidation of the Association,
each eligible account holder and supplemental eligible account holder will
be entitled to receive a distribution from the liquidation account in an
amount proportionate to the current adjusted qualifying balances for ac-
counts then held.
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, 1999, the maximum dividend the Association may de-
clare and pay to First Bell is approximately $32,432,000.
13.EARNINGS PER SHARE
Both basic and diluted earnings per share are calculated as of December 31
as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Weighted
Average Per
Income Shares Share
1999 ------ -------- -----
<S> <C> <C> <C>
Income available to common stockholders................ $8,042 5,590
Unearned ESOP shares................................... -- (547)
Unearned MRP shares.................................... -- (242)
------ -----
Basic earnings per share............................... 8,042 4,801 $1.68
=====
Effect of dilutive securities:
MRP shares............................................ -- 65
Stock options......................................... -- 138
------ -----
Diluted earnings per share............................. $8,042 5,004 $1.61
====== ===== =====
</TABLE>
- --------------------------------------------------------------------------------
34
<PAGE>
- --------------------------------------------------------------------------------
<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
====== ===== =====
<CAPTION>
Weighted
Average Per
Income Shares Share
1997 ------ -------- -----
<S> <C> <C> <C>
Income available to common stockholders................ $7,575 6,784
Unearned ESOP shares................................... -- (615)
Unearned MRP shares.................................... -- (308)
------ -----
Basic earnings per share............................... 7,575 5,861 $1.29
=====
Effect of dilutive securities:
MRP shares............................................ -- 129
Stock options......................................... -- 144
------ -----
Diluted earnings per share............................. $7,575 6,134 $1.23
====== ===== =====
</TABLE>
14.INTEREST EXPENSE
The following is a summary of interest expense on deposits for the years
ended December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Passbook, club and other accounts.................... $ 3,021 $ 2,480 $ 2,288
Money market and NOW accounts........................ 1,404 1,147 1,092
Certificate accounts................................. 19,750 21,186 23,306
------- ------- -------
$24,175 $24,813 $26,686
======= ======= =======
</TABLE>
15.INCOME TAXES
Deferred income taxes reflect the net effects of temporary differences be-
tween the carrying amounts of assets and liabilities for financial report-
ing purposes and the bases used for income tax purposes. The tax effects of
significant items comprising the net deferred tax asset (liability) at De-
cember 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Deferred Tax Assets:
Unrealized loss on investment securities available-for-
sale..................................................... $ 5,731 $ --
Other..................................................... 199 193
------- -------
Total deferred tax assets................................ 5,930 193
------- -------
Deferred Tax Liabilities:
Deferred loan origination fees............................ (751) (750)
Allowance for loan losses................................. (449) (680)
Depreciation on premises and equipment.................... (365) (239)
Unrealized gain on investment securities available-for-
sale..................................................... -- (754)
Other..................................................... -- (194)
------- -------
Total deferred tax liabilities........................... (1,565) (2,617)
------- -------
Net deferred tax asset (liability)....................... $ 4,365 $(2,424)
======= =======
</TABLE>
The provision for income taxes consists of the following components for the
year ended December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Current:
Federal............................................... $ 925 $3,048 $3,665
State................................................. 728 809 976
Deferred (benefit) expense............................. (304) 21 405
------ ------ ------
Total provision for income taxes..................... $1,349 $3,878 $5,046
====== ====== ======
</TABLE>
The following table presents the principal com-ponents of deferred income
tax expense as of December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- ----
<S> <C> <C> <C>
Allowance for loan losses................................ $(232) $(221) $(13)
Deferred loan origination fees........................... 1 269 425
Depreciation differences................................. 126 (12) 4
Other--net............................................... (199) (15) (11)
----- ----- ----
$(304) $ 21 $405
===== ===== ====
</TABLE>
- --------------------------------------------------------------------------------
35
<PAGE>
FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT
- --------------------------------------------------------------------------------
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>
1999 1998 1997
----- ---- ----
<S> <C> <C> <C>
Statutory tax rate......................................... 34.0% 34.0% 34.0%
State income taxes......................................... 5.1 4.6 5.2
Tax exempt interest income................................. (25.3) (5.8) --
Other--net................................................. 0.6 0.3 0.8
----- ---- ----
Effective tax rate....................................... 14.4% 33.1% 40.0%
===== ==== ====
</TABLE>
In accordance with SFAS No. 109, the Company has provided for deferred in-
come taxes for the differences between the bad debt deduction for tax and
financial statement purposes incurred after December 31, 1987. Deferred
taxes have not been recognized with respect to pre-1988 tax basis bad debt
reserves. In the event that the Company were to recapture these reserves
into income, it would recognize tax expense of approximately $1.7 million.
As a result of legislation enacted in 1996, however, this liability will
not be recaptured if the Company were to change its depository institution
charter.
16.EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plan--The Company had a defined benefit pension
plan for substantially all employees. During 1999, the Company terminated
the Defined Benefit Pension Plan. The termination is considered a settle-
ment as defined in SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined benefit Pension Plans and for Termination Bene-
fits." At the option of the employee, all plan assets were distributed
either through the purchase of a non-participating annuity contract or lump
sum distribution. The Company was relieved of primary responsibility for
any pension benefit obligation. The termination eliminated significant
risks related to the obligation and the assets used to effect the settle-
ment. On May 10, 1999, the final contribution was made which resulted in an
expense of $100,000. The benefits of the defined benefit plan were gener-
ally based on the years of service and the employee's compensation during
the last five years of employment.
The Defined Benefit Pension Plan was amended in the prior year to freeze
benefit accruals effective March 31, 1998 and to fully vest all active Par-
ticipants on April 1, 1998. Such amendment constituted a curtailment as de-
fined by SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Bene-
fits." The effects of such curtailment are reflected in the following ta-
bles.
- --------------------------------------------------------------------------------
36
<PAGE>
- --------------------------------------------------------------------------------
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>
1999 1998
---- ------
<S> <C> <C>
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at beginning of year.............. $-- $1,182
Service cost................................................... -- 18
Interest cost.................................................. -- 77
Curtailment.................................................... -- (68)
Benefits paid.................................................. -- (78)
Actuarial (gain) or loss....................................... -- (58)
Change in discount rate........................................ -- 39
--- ------
Projected benefit obligation at end of year.................... $-- $1,112
=== ======
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year................. $-- $1,173
Actual return on plan assets................................... -- 73
Employer contributions......................................... -- 76
Benefits paid.................................................. -- (78)
--- ------
Fair value of plan assets at end of year....................... $-- $1,244
=== ======
FUNDED STATUS
Funded status at end of year................................... $-- $ 132
Unrecognized net actuarial loss................................ -- 126
Unrecognized prior service cost................................ -- --
Unrecognized transition asset.................................. -- (47)
--- ------
Net amount recognized.......................................... $-- $ 211
=== ======
Amounts recognized in the consolidated balance sheets consist
of:
Prepaid benefit cost.......................................... $-- $ 211
Accrued benefit liability..................................... -- --
Intangible asset.............................................. -- --
Amount included in comprehensive income....................... -- --
--- ------
Net amount recognized.......................................... $-- $ 211
=== ======
DEVELOPMENT OF (ACCRUED) PREPAID PENSION COST
Prepaid pension cost at beginning of year...................... $-- $ 32
FAS 87 net periodic pension cost (income)...................... -- 103
Contributions.................................................. -- 76
--- ------
Prepaid pension cost at end of year............................ $-- $ 211
=== ======
</TABLE>
- --------------------------------------------------------------------------------
37
<PAGE>
FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT
- -------------------------------------------------------------------------------
Net periodic pension cost for the defined benefit plan includes the follow-
ing components for the year ended December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ----- ----
<S> <C> <C> <C>
Components of Net Periodic Pension Cost
Service cost--benefits earned during the period........... $-- $ 18 $ 65
Interest cost on projected benefit obligation............. -- 77 76
Expected return on assets................................. -- (74) (70)
Amortization of initial unrecognized net obligation or
(net asset) as of January 1, 1987........................ -- (5) (5)
Amortization of prior service cost........................ -- (2) (7)
Recognized net actuarial (gain) or loss................... -- -- 3
--- ----- ----
FAS 87 net periodic pension cost.......................... -- 14 62
Curtailment recognized during the year.................... -- (117) --
--- ----- ----
Total net periodic pension (income) cost................... $-- $(103) $ 62
=== ===== ====
</TABLE>
The following rate assumptions were used in the plan accounting as of De-
cember 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Discount rate................................................ -- 6.70% 7.00%
Rate of compensation increases............................... -- 5.00% 6.00%
Expected long-term rate of return on plan assets............. -- 6.75% 7.00%
</TABLE>
Deferred Supplemental Executive Retirement Plan--During 1992, the Board of
Directors approved a deferred supplemental executive retirement plan for
the President of the Association. The plan provides that the President will
receive deferred compensation in an amount up to $60,000 per year based
upon the return on assets of the Company for the year. The compensation
will be paid to the President upon his retirement. For the years ended De-
cember 31, 1999, 1998 and 1997, deferred compensation expenses under this
plan were $60,000 per 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, 1999, 1998 and 1997, was ap-
proximately $9,900, $9,800 and $9,200, 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.
Compensation expense related to the ESOP for 1999, 1998 and 1997, totaled
$511,000, $586,000 and $537,000, 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, 1999 was
approximately $8,063,000. Shares held by the ESOP were as follows as of
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Unallocated shares, beginning of year............. 561,562 596,089 629,622
Shares released for allocation.................... (32,823) (34,527) (33,533)
------- ------- -------
Unallocated shares, end of year................... 528,739 561,562 596,089
======= ======= =======
</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
- -------------------------------------------------------------------------------
38
<PAGE>
- --------------------------------------------------------------------------------
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
1999 ------ -------- --------
<S> <C> <C> <C>
As reported......................................... $8,042 $1.68 $1.61
Pro forma........................................... 7,856 1.64 1.57
<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
</TABLE>
<TABLE>
<CAPTION>
Basic Diluted
Earnings Earnings
Net Per Per
Income Share Share
1997 ------ -------- --------
<S> <C> <C> <C>
As reported......................................... $7,575 $1.29 $1.23
Pro forma........................................... 7,025 1.20 1.15
</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
-------
<S> <C>
Dividend yield...................................................... 2.00%
Expected volatility................................................. 29.00%
Risk-free interest rate............................................. 5.60%
Expected lives...................................................... 9 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. As a result, the Company was required to issue additional options to
the existing participants in an amount equal to the difference between the
value of the options in each participant's account before the reduction in
the exercise price, and the value of the options in each participant's ac-
count 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 options may be exercised after the end of each year, and
no option will be exercisable after ten years from the date of grant. Ter-
minated employees forfeit any non-vested options.
The following summarizes the activity in the Stock Option Plan for the year
ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Options outstanding, beginning of year............ 380,486 437,288 361,037
Equitable right adjustment........................ -- -- 89,113
Options exercised................................. -- (13,931) --
Options forfeited................................. -- (42,871) (12,862)
------- ------- -------
Options outstanding, end of year.................. 380,486 380,486 437,288
======= ======= =======
Weighted average exercise price, end of year...... $10.70 $10.70 $10.70
======= ======= =======
Options exercisable, end of year.................. 228,285 152,188 90,030
======= ======= =======
Options available for grant, end of year.......... 465,208 465,208 422,337
======= ======= =======
Weighted-average fair value of options granted
during the year.................................. $-- $-- $10.25
======= ======= =======
Remaining contractual life of outstanding options. 7 Years 8 Years 9 Years
</TABLE>
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.
- --------------------------------------------------------------------------------
39
<PAGE>
FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT
- --------------------------------------------------------------------------------
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 $3.4 million and
$3.8 million at December 31, 1999 and 1998, respectively. Compensation cost
is recorded over the five-year period as shares are earned based on the av-
erage fair market value of the common stock during the fiscal year. The ex-
pense for the years ended December 31, 1999, 1998 and 1997 was $545,000,
$590,000 and $518,000 respectively. Terminated employees forfeit any non-
vested awards.
The following summarizes activity in the MRP for the year ended December
31:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Awards outstanding, beginning of year............. 99,171 129,428 180,260
Awards granted.................................... -- 2,100 1,500
Awards forfeited.................................. (1,400) -- (16,280)
Awards vested..................................... (33,057) (32,357) (36,052)
------- ------- -------
Awards outstanding, end of year................... 64,714 99,171 129,428
======= ======= =======
Total remaining MRP shares, end of year........... 242,384 275,441 307,798
======= ======= =======
</TABLE>
17.COMMITMENTS AND CONTINGENCIES
The total commitments outstanding at December 31 are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
Notional Notional Notional Notional
Amount Rate Amount Rate
-------- -------- -------- --------
<S> <C> <C> <C> <C>
3--5 year adjustable rate mortgages..... $ 578 6.84% $ -- --%
15 year fixed rate mortgages............ 777 7.50 6,688 6.55
30 year fixed rate mortgages............ 3,185 7.51 9,785 7.00
Construction mortgages.................. 1,489 7.56 10,354 6.81
Home equity loans....................... 270 6.74 594 6.74
Available line of credit................ 58 6.40 1,233 7.91
------ -------
$6,357 $28,654
====== =======
</TABLE>
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.
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.
- --------------------------------------------------------------------------------
40
<PAGE>
- --------------------------------------------------------------------------------
18. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments as of December 31
are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Assets:
Cash and noninterest-bearing deposits. $ 4,061 $ 4,061 $ 3,041 $ 3,041
Interest-bearing deposits............. 16,407 16,407 18,502 18,502
Federal Funds sold.................... 33,000 33,000 36,175 36,175
Investment securities held-to-
maturity............................. 4,989 5,242 9,980 10,766
Investment securities available-for-
sale................................. 202,382 202,382 136,677 136,677
Conventional loans.................... 532,292 513,506 544,636 551,979
Federal Home Loan Bank stock.......... 11,400 11,400 9,000 9,000
Liabilities:
Passbook, club, money market, NOW and
other accounts....................... $125,567 $125,567 $125,742 $125,742
Certificate accounts.................. 386,364 388,713 369,386 374,411
Borrowings............................ 238,000 225,225 180,000 189,646
</TABLE>
a. Cash and Noninterest-bearing Deposits, Interest-bearing Deposits and Fed-
eral Funds Sold--For cash and noninterest-bearing deposits, interest-
bearing deposits and Federal funds sold, the fair value is estimated as the
carrying amount.
b. Investment Securities Held-to-Maturity and Investment 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 inter-
est 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.
- --------------------------------------------------------------------------------
41
<PAGE>
FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT
- --------------------------------------------------------------------------------
19. PARENT COMPANY
The following are condensed financial statements for First Bell as of De-
cember 31, 1999 and 1998 and for the years ended December 31, 1999, 1998
and 1997 (in thousands):
BALANCE SHEETS
<TABLE>
<CAPTION>
1999 1998
ASSETS -------- --------
<S> <C> <C>
CASH AND INTEREST-BEARING DEPOSITS..................... $ 8 $ 2
FEDERAL FUNDS SOLD..................................... 600 --
INVESTMENT IN AND ADVANCES TO BELL FEDERAL............. 74,838 73,459
LOAN RECEIVABLE--ESOP.................................. 4,304 4,409
OTHER ASSETS........................................... 1,109 1,204
-------- --------
Total assets......................................... $ 80,859 $ 79,074
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
BORROWINGS............................................. $ 10,000 $ --
LOAN PAYABLE TO BELL FEDERAL........................... 6,691 5,604
ACCRUED INTEREST....................................... 126 --
ACCRUED INCOME TAXES................................... (215) 21
OTHER LIABILITIES...................................... 808 727
-------- --------
Total liabilities.................................... 17,410 6,352
-------- --------
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 5,189,063 and
6,110,476 outstanding: one stock right per share).... 86 86
Additional paid-in capital............................ 62,217 61,768
Unearned ESOP shares.................................. (3,740) (3,972)
Unearned MRP shares................................... (3,378) (3,839)
Treasury stock, at cost............................... (55,523) (38,919)
Retained earnings..................................... 63,787 57,598
-------- --------
Total stockholders' equity........................... 63,449 72,722
-------- --------
Total liabilities and stockholders' equity........... $ 80,859 $ 79,074
======== ========
</TABLE>
- --------------------------------------------------------------------------------
42
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
INTEREST INCOME:
Interest bearing deposits....................... $ 7 $ 36 $ 39
Federal funds sold.............................. 32 59 77
Interest on ESOP loan receivable................ 357 382 386
------- ------- -------
Total interest income......................... 396 477 502
------- ------- -------
INTEREST EXPENSE................................. 942 412 300
------- ------- -------
NET INTEREST (EXPENSE) INCOME.................... (546) 65 202
GENERAL AND ADMINISTRATIVE EXPENSES.............. 195 132 213
------- ------- -------
LOSS BEFORE PROVISION FOR INCOME TAXES........... (741) (67) (11)
------- ------- -------
(BENEFIT) PROVISION FOR INCOME TAXES--
Current:
Federal........................................ (265) (44) (18)
State.......................................... 39 28 41
------- ------- -------
Total (benefit) provision for income taxes.... (226) (16) 23
------- ------- -------
LOSS BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF
SUBSIDIARY...................................... (515) (51) (34)
Equity in undistributed earnings of Bell
Federal....................................... 8,557 7,889 7,609
------- ------- -------
NET INCOME....................................... $ 8,042 $ 7,838 $ 7,575
======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
43
<PAGE>
FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1999 1998 1997
-------- ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 8,042 $ 7,838 $ 7,575
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of Bell
Federal....................................... (8,557) (7,889) (7,609)
Increase or decrease in assets and liabilities:
Accrued income taxes.......................... (236) (59) 22
Accrued interest.............................. 126 (14) 14
Other assets.................................. 95 (1,011) 430
Other liabilities............................. 164 (7) (127)
Dividends payable............................. (83) (39) (138)
-------- ------- --------
Net cash provided by (used in) operating
activities.................................. (449) (1,181) 167
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in Federal Funds......... (600) 1,550 (1,325)
Principal paydowns on ESOP loan receivable....... 105 84 76
Dividend from Bell Federal....................... 8,000 7,000 16,000
Investment in and advances to Bell Federal....... 405 598 3,087
-------- ------- --------
Net cash provided by investing activities.... 7,910 9,232 17,838
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in borrowings....................... 10,000 -- --
Dividends paid................................... (1,938) (2,271) (1,935)
Purchase of treasury stock....................... (16,604) (7,069) (20,393)
Loan payable to Bell Federal..................... 14,377 1,365 4,400
Principal payment on loan payable................ (13,290) (84) (76)
-------- ------- --------
Net cash used in financing activities........ (7,455) (8,059) (18,004)
-------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................... 6 (8) 1
CASH, BEGINNING OF YEAR........................... 2 10 9
-------- ------- --------
CASH, END OF YEAR................................. $ 8 $ 2 $ 10
======== ======= ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Income taxes.................................... $ 42 $ 37 $ 93
Interest........................................ 816 426 286
Non-cash transactions:
Increase in additional paid-in capital--ESOP and
MRP share allocations.......................... 449 397 308
</TABLE>
- --------------------------------------------------------------------------------
44
<PAGE>
- --------------------------------------------------------------------------------
20. QUARTERLY EARNINGS SUMMARY (Unaudited)
Quarterly earnings for the years ended December 31, 1999 and 1998 are as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1999
-------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME..... $12,966 $12,959 $12,854 $13,311
INTEREST EXPENSE................. 8,898 9,215 9,379 9,569
------- ------- ------- -------
NET INTEREST INCOME............. 4,068 3,744 3,475 3,742
PROVISION FOR LOAN LOSSES........ 30 30 30 30
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES...... 4,038 3,714 3,445 3,712
OTHER INCOME..................... 123 139 180 156
OTHER EXPENSES................... 1,632 1,655 1,420 1,409
------- ------- ------- -------
INCOME BEFORE PROVISION FOR
INCOME TAXES.................... 2,529 2,198 2,205 2,459
PROVISION FOR INCOME TAXES....... 494 265 230 360
------- ------- ------- -------
NET INCOME....................... 2,035 1,933 1,975 2,099
------- ------- ------- -------
OTHER COMPREHENSIVE INCOME, NET
OF TAX--
Unrealized gain (loss) on
investments.................... (961) (5,224) (1,764) (2,161)
------- ------- ------- -------
COMPREHENSIVE INCOME............. $ 1,074 $(3,291) $ 211 $ (62)
======= ======= ======= =======
BASIC EARNINGS PER SHARE (1)..... $ 0.39 $ 0.40 $ 0.43 $ 0.47
======= ======= ======= =======
DILUTED EARNINGS PER SHARE (1)... $ 0.37 $ 0.38 $ 0.41 $ 0.45
======= ======= ======= =======
</TABLE>
<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>
- -------
(1) Quarterly per share amounts may not add to the total for the years ended
December 31, 1999 and 1998, due to rounding.
(2) Amounts reflect reclassification of $108,000 related to tax equivalent in-
terest income.
- --------------------------------------------------------------------------------
45
<PAGE>
FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT
- --------------------------------------------------------------------------------
First Bell Bancorp, Inc.
Executive Management
Albert H. Eckert, II Robert C. Baierl
President and Chief Executive Officer Secretary
Jeffrey M. Hinds Robert Murcko
Executive Vice President and Assistant Secretary
Chief Financial Officer
William S. McMinn
David F. Figgins Treasurer
Vice President
Directors
Albert H. Eckert, II Jeffrey M. Hinds
President and Chief Executive Officer Executive Vice President and
First Bell Bancorp, Inc. and Chief Financial Officer
Bell Federal Savings and Loan First Bell Bancorp, Inc. and
Association of Bellevue Bell Federal Savings and Loan
Association of Bellevue
David F. Figgins
Retired Vice President and
General Manager
Marshall Contractors, Inc.
Theodore R. Dixon
President
Dixon Agency
Thomas J. Jackson, Jr. Jack W. Schweiger
Retired Attorney-at-Law President
Houston Harbaugh Schweiger Homes
Robert C. Baierl Peter E. Reinert
President Partner
Wright Contract Interiors Akerman, Senterfitt & Edison, P.A.
William S. McMinn
Senior Executive Vice President
Aon Risk Services, Inc. of Pennsylvania
- --------------------------------------------------------------------------------
46
<PAGE>
- --------------------------------------------------------------------------------
Bell Federal Savings and Loan Association of Bellevue
Executive Management
Albert H. Eckert, II Margaret L. Gerber
President and Chief Executive Officer Assistant Vice President
Jeffrey M. Hinds Robert Murcko
Executive Vice President and Assistant Secretary
Chief Financial Officer
Jeffrey A. Spindler
Thomas J. Jackson, Jr. Assistant Vice President
Secretary
Ronald S. Boltey
William S. McMinn Assistant Vice President
Treasurer
Directors
Albert H. Eckert, II Jeffrey M. Hinds
President and Chief Executive Officer Executive Vice President and
First Bell Bancorp, Inc. and Chief Financial Officer
Bell Federal Savings and Loan First Bell Bancorp, Inc. and
Association Bell Federal Savings and Loan
Association
David F. Figgins
Retired Vice President and
General Manager
Marshall Contractors, Inc.
Theodore R. Dixon
President
Dixon Agency
Thomas J. Jackson, Jr. Jack W. Schweiger
Retired Attorney-at-Law President
Houston Harbaugh Schweiger Homes
Robert C. Baierl Peter E. Reinert
President Partner
Wright Contract Interiors Akerman, Senterfitt & Edison, P.A.
William S. McMinn
Senior Executive Vice President
Aon Risk Services, Inc. of Pennsylvania
- --------------------------------------------------------------------------------
47
<PAGE>
Shareholder Information
- -------------------------------------------------------------------------------
Market Summary of Stock
First Bell Bancorp, Inc.'s common stock trades on The Nasdaq National Market.
The following summary sets forth the range of prices for common stock over the
periods noted. The common stock of the Company began trading on June 29, 1995.
As of March 1, 2000, there were approximately 3,000 stockholders of record and
5,104,763 common shares outstanding.
<TABLE>
<CAPTION>
1999
-----------------------
High Low Dividends
------ ------ ---------
<S> <C> <C> <C>
1st Quarter............................................. 17.500 14.750 $0.10
2nd Quarter............................................. 20.313 16.500 $0.10
3rd Quarter............................................. 18.000 15.750 $0.10
4th Quarter............................................. 16.750 14.625 $0.10
<CAPTION>
1998
-----------------------
High Low Dividends
------ ------ ---------
<S> <C> <C> <C>
1st Quarter............................................. 21.500 17.250 $0.10
2nd Quarter............................................. 21.375 18.250 $0.10
3rd Quarter............................................. 19.750 15.000 $0.10
4th Quarter............................................. 16.000 12.875 $0.10
</TABLE>
Dividend Policy
The management and Board of Directors of the Company continually review the
Company's dividend policy. The Company intends to continue its policy of pay-
ing quarterly dividends; however, the payment will depend
upon a number of factors, including capital requirements, regulatory limita-
tions, the Company's financial condition, results of operations and the Asso-
ciation's ability to pay dividends to the Company. At present, the Company has
no significant source of income other than dividends from the Association and
to a lesser extent interest on short-term investments. Consequently, the Com-
pany depends upon dividends from the Association to accumulate earnings for
payment of cash dividends to its shareholders. See Note 12 to the Consolidated
Financial Statements for a discussion of restrictions on the Association's
ability to pay dividends.
Nasdaq Listing
Quotes on the common stock can be found on The Nasdaq stock market under the
symbol "FBBC".
Dividend Reinvestment
First Bell Bancorp, Inc.'s registered shareholders may reinvest their divi-
dends in additional shares of the Company's common stock and, if desired, pur-
chase additional shares through a voluntary cash investment of $50 to $3,000
per quarter. Participants in the plan pay no broker fees. Purchases for the
plan are generally made on the third Friday of January, April, July and Octo-
ber. For more information on this service, call the Dividend Reinvestment De-
partment of Registrar and Transfer Company at 1-800-368-5948.
Annual Meeting
The 2000 Annual Meeting of the Stockholders of First Bell Bancorp, Inc. will
be held at 3:00 P.M. on Monday, April 24, 2000 at 629 Lincoln Avenue, Belle-
vue, Pennsylvania 15202.
Annual Report on Form 10-K and Exhibits
A copy of the Annual Report on Form 10-K (excluding exhibits) of the Company
for the year ended December 31, 1999, as filed with the Securities and Ex-
change Commission, is available on the Association's web page or will be fur-
nished free of charge, upon written request to stockholders who have not pre-
viously received a copy from the Company.
Written requests may be directed to:
Shareholder Relations
First Bell Bancorp, Inc.
c/o Bell Federal Savings and Loan Association of Bellevue
532 Lincoln Avenue
Pittsburgh, Pennsylvania 15202
The Company will furnish any exhibit to its Annual Report on Form 10-K upon
payment of a reasonable fee.
Transfer Agent and Registrar
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
Independent Auditors
Deloitte & Touche LLP
2500 One PPG Place
Pittsburgh, Pennsylvania 15222
Special Counsel
Muldoon, Murphy and Faucette, LLP
5101 Wisconsin Avenue N.W.
Washington, DC 20016
- -------------------------------------------------------------------------------
48
<PAGE>
FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT
- --------------------------------------------------------------------------------
First Bell Bancorp, Inc.
Executive Offices
300 Delaware Avenue
Wilmington, Delaware 19801
(302) 427-7883
Bell Federal Savings and Loan Association of Bellevue
Office Locations
<TABLE>
<S> <C>
Bellevue Office Wood Street Office*
532 Lincoln Avenue Sixth & Wood Street
Bellevue, Pennsylvania 15202 Suite 100
(412) 734-2700 Pittsburgh, Pennsylvania 15222
Wexford Office* Mt. Lebanon Office*
10533 Perry Highway 300 Cochran Road
Wexford, Pennsylvania 15090 Pittsburgh, Pennsylvania 15228
McKnight Road Office* Craig Street Office*
7709 McKnight Road 201 North Craig Street
Pittsburgh, Pennsylvania 15237 Pittsburgh, Pennsylvania 15213
Sewickley Office
414 Beaver Street
Sewickley, Pennsylvania 15143
</TABLE>
- -------
*Bell Federal Savings maintains an Automated Teller Machine (ATM) at these
locations.
World Wide Web Address
www.bellfederalsavings.com
- --------------------------------------------------------------------------------
<PAGE>
[LOGO]
First Bell
Bancorp,
Inc.
www.bellfederalsavings.com
<PAGE>
Exhibit 23.0
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-27444 of First Bell Bancorp, Inc. on Form S-8 of our report dated January
24, 2000, incorporated by reference in the Annual Report on Form 10-K of First
Bell Bancorp, Inc. for the year ended December 31, 1999.
/s/ DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,061
<INT-BEARING-DEPOSITS> 16,407
<FED-FUNDS-SOLD> 33,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 202,382
<INVESTMENTS-CARRYING> 4,989
<INVESTMENTS-MARKET> 5,242
<LOANS> 533,259
<ALLOWANCE> 925
<TOTAL-ASSETS> 816,122
<DEPOSITS> 511,931
<SHORT-TERM> 30,000
<LIABILITIES-OTHER> 2,702
<LONG-TERM> 208,000
0
0
<COMMON> 86
<OTHER-SE> 54,432
<TOTAL-LIABILITIES-AND-EQUITY> 816,122
<INTEREST-LOAN> 39,040
<INTEREST-INVEST> 12,293
<INTEREST-OTHER> 757
<INTEREST-TOTAL> 52,090
<INTEREST-DEPOSIT> 24,175
<INTEREST-EXPENSE> 37,061
<INTEREST-INCOME-NET> 15,029
<LOAN-LOSSES> 120
<SECURITIES-GAINS> 45
<EXPENSE-OTHER> 6,116
<INCOME-PRETAX> 9,391
<INCOME-PRE-EXTRAORDINARY> 9,391
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,042
<EPS-BASIC> 1.68
<EPS-DILUTED> 1.61
<YIELD-ACTUAL> 2.36
<LOANS-NON> 269
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 805
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 925
<ALLOWANCE-DOMESTIC> 925
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 925
</TABLE>
