United States
Securities and Exchange Commision
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended March 31, 2002
--------------
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _____________________ to
____________________________
Commission File Number: 0-12724
Belmont Bancorp.
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(Exact name of registrant as specified in its charter)
Ohio 34-1376776
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
325 Main St., Bridgeport, Ohio 43912
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(Address of principal executive offices) (Zip Code)
(740)-695-3323
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(Registrant's telephone number, including area code)
________________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. X____ Yes ____ No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.:
Common Stock, $0.25 par value,
11,101,403 shares outstanding
as of May 7, 2002
BELMONT BANCORP
Quarter Ending March 31, 2002
INDEX
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Management's report on financial statements 3
Consolidated Balance Sheets - March 31, 2002 and
December 31, 2001 4
Consolidated Statements of Income-Three Months
Ended March 31, 2002 and March 31, 2001 5
Condensed Consolidated Statements of Changes in Shareholders' Equity
Three Months Ended March 31, 2002 and March 31, 2001 6
Condensed Consolidated Statements of Cash Flows-Three Months
Ended March 31, 2002 and March 31, 2001 7
Notes to the Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure about Market Risk 20
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature page 22
2
PART I - FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
The management of Belmont Bancorp. ("Belmont" or the "Company") is
responsible for the accurate and objective preparation of the consolidated
financial statements and the estimates and judgments upon which certain
financial statements are based. Management is also responsible for preparing the
other financial information included in this filing. In our opinion, the
financial statements on the following pages have been prepared in conformity
with accounting principles generally accepted in the United States of America
and other financial information in this quarterly report is consistent with the
financial statements.
Management is also responsible for establishing and maintaining an
adequate internal control system which encompasses policies, procedures and
controls directly related to, and designed to provide reasonable assurance as to
the integrity and reliability of the financial reporting process and the
financial statements. The concept of reasonable assurance is based on the
recognition that there are inherent limitations in all systems of internal
control, and that the cost of such systems should not exceed the derived
benefits. The systems and controls and compliance therewith are reviewed by an
extensive program of internal audits and by our independent auditors. Their
activities are coordinated to obtain maximum audit coverage with a minimum of
duplicate effort and cost. Management believes the system of internal control
effectively meets its objectives of reliable financial reporting.
The Board of Directors pursues its responsibility for the quality of
the Company's financial reporting primarily through its Audit Committee which is
comprised solely of independent directors. The Audit Committee meets regularly
with management, personnel responsible for the contract internal audit function,
and the independent auditors to ensure that each is meeting its responsibilities
and to discuss matters concerning internal controls, accounting and financial
reporting. The above parties have full and free access to the Audit Committee.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Belmont
Bancorp and its subsidiaries, Belmont National Bank (the "Bank") and Belmont
Financial Network.
3
Consolidated Balance Sheets
(Unaudited) ($000s except share and per share amounts)
March 31, December 31,
2002 2001
Assets
Cash and due from banks $ 8,086 $ 14,587
Federal funds sold 15,880 17,600
-------------------------------------
Cash and cash equivalents 23,966 32,187
Loans held for sale 205 534
Securities available for sale at fair value 132,028 125,551
Loans 114,809 115,674
Less allowance for loan losses (5,217) (5,310)
-------------------------------------
Net loans 109,592 110,364
Premises and equipment, net 6,474 6,532
Deferred federal tax assets 7,217 7,998
Cash surrender value of life insurance 1,223 1,205
Accrued income receivable 1,808 1,541
Other assets 2,711 2,944
-------------------------------------
Total assets $ 285,224 $ $288,856
=====================================
Liabilities and Shareholders' Equity
Liabilities
Non-interest bearing deposits:
Demand $ 29,212 $ 30,654
Interest-bearing deposits:
Demand 27,462 27,647
Savings 89,138 78,454
Time 87,890 101,731
-------------------------------------
Total deposits 233,702 238,486
Securities sold under repurchase agreements 897 647
Long-term borrowings 20,000 20,000
Accrued interest on deposits and other borrowings 481 652
Other liabilities 2,326 3,225
------------------------------------
Total liabilities 257,406 263,010
-------------------------------------
Shareholders' Equity
Preferred stock - authorized 90,000 shares with
no par value; no shares issued or outstanding - -
Common stock - $0.25 par value, 17,800,000 shares
authorized; 11,153,195 shares issued 2,788 2,788
Additional paid-in capital 17,514 17,506
Treasury stock at cost (51,792 shares) (1,170) (1,170)
Retained earnings 10,184 8,100
Accumulated other comprehensive loss (1,498) (1,378)
-------------------------------------
Total shareholders' equity 27,818 25,846
-------------------------------------
Total liabilities and shareholders' equity $ 285,224 $ 288,856
=====================================
The accompanying notes are an integral part of the financial statements.
4
Consolidated Statements of Income
(Unaudited) ($000s except per share amounts)
For the Three Months Ended March 31,
2002 2001
Interest and Dividend Income
Loans:
Taxable $ 2,102 $ 2,633
Tax-exempt 45 55
Securities:
Taxable 1,199 1,217
Tax-exempt 327 513
Dividends 38 58
Interest on federal funds sold 88 195
--------------------------------------------------
Total interest and dividend income 3,799 4,671
--------------------------------------------------
Interest Expense
Deposits 1,495 2,394
Other borrowings 239 262
--------------------------------------------------
Total interest expense 1,734 2,656
--------------------------------------------------
Net interest income 2,065 2,015
Provision for loan losses - -
--------------------------------------------------
Net interest income after provision
for loan losses 2,065 2,015
--------------------------------------------------
Noninterest Income
Trust fees 128 99
Service charges on deposits 221 191
Legal settlements 3,933 -
Other operating income 196 203
Securities losses (63) (2)
Gains on sale loans held for sale 60 6
--------------------------------------------------
Total noninterest income 4,475 497
--------------------------------------------------
Noninterest Expense
Salary and employee benefits 1,262 1,116
Net occupancy expense of premises 231 227
Equipment expenses 211 218
Legal fees 597 323
Other operating expenses 1,311 702
--------------------------------------------------
Total noninterest expense 3,612 2,586
--------------------------------------------------
Income (loss) before income taxes 2,928 (74)
Income Tax Expense (Benefit) 844 (239)
--------------------------------------------------
Net income $ 2,084 $ 165
==================================================
Basic and Diluted Earnings per Common Share $ 0.19 $ 0.01
==================================================
The accompanying notes are an integral part of the financial statements.
5
Condensed Consolidated Statements of Changes in Shareholders' Equity
(Unaudited) ($000s)
Three Months Ended March 31,
2002 2001
------------------------------------------
Balance at beginning of period $25,846 $25,602
Comprehensive income:
Net income 2,084 165
Change in net unrealized gain (loss) on securities
available for sale, net of reclassification and tax effects (120) 1,051
------------------------------------------
Total comprehensive income 1,964 1,216
Common stock options granted/vested 8 61
------------------------------------------
Balance at end of period $27,818 $26,879
==========================================
The accompanying notes are an integral part of the financial statements.
6
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2002 and 2001
(Unaudited) ($000's)
2002 2001
------------------------------------------
Cash from Operating Activities $ 2,693 ($544)
Investing Activities
Proceeds from:
Maturities and calls of securities 3,070 602
Sales of securities available for sale 6,945 1,176
Principal collected on mortgage-backed securities 9,008 3,854
Purchases of:
Securities available for sale (26,078) (14,921)
Premises and equipment (115) (89)
Changes in:
Loans, net 790 2,283
------------------------------------------
Cash from investing activities (6,380) (7,095)
------------------------------------------
Financing Activities
Changes in:
Deposits (4,784) 1,704
Repurchase agreements 250 (583)
------------------------------------------
Cash from financing activities (4,534) 1,121
------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents (8,221) (6,518)
Cash and Cash Equivalents, Beginning of Year 32,187 26,000
------------------------------------------
Cash and Cash Equivalents at March 31 $ 23,966 $ 19,482
==========================================
Cash payments for interest $ 1,905 $ 2,638
Cash payments for income taxes 0 0
Non-cash transfers from loans to other real estate owned
and repossessions 0 206
The accompanying notes are an integral part of the financial statements.
7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
The foregoing financial statements are unaudited; however, in the opinion
of management, all adjustments, consisting of normal recurring items, necessary
for a fair presentation of the financial statements have been included. A
summary of the Company's significant accounting policies is set forth in Note 1
to the Consolidated Financial Statements in the Company's Annual Report on Form
10-K for the year ended December 31, 2001.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Estimates particularly subject to change would include the allowance
for loan losses, deferred tax valuation allowance, fair value of financial
instruments, and loss contingencies.
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141. "Business
Combinations." SFAS No. 141 requires all business combinations within its scope
to be accounted for using the purchase method, rather than the
pooling-of-interests method. The provisions of this Statement apply to all
business combinations initiated after June 30, 2001. The adoption of this
statement will only impact the Company's financial statements if it enters into
a business combination.
Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets", which addresses the accounting for such assets arising from
prior and future business combinations. Upon the adoption of this Statement,
goodwill arising from business combinations will no longer be amortized, but
rather will be assessed regularly for impairment, with any such impairment
recognized as a reduction to earnings in the period identified. Other identified
intangible assets, such as core deposit intangible assets, will continue to be
amortized over their estimated useful lives. The adoption of this Statement will
not impact the Company's financial statements, as it has no unidentified
intangible assets related to prior business combinations.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS 143 is effective for fiscal years beginning after
June 15, 2002, and establishes an accounting standard requiring the recording of
the fair value of liabilities associated with the retirement of long-lived
assets in the period in which they are incurred. The Company is in the process
of determining the future impact that the adoption of FAS 143 may have on its
earnings and financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses financial
accounting and reporting for the impairment and disposal of long-lived assets.
This statement is effective for fiscal years beginning after December 15, 2001.
The Company is currently evaluating the impact the adoption of this statement
will have on its financial position and results of operations.
While management monitors the revenue streams of the various Company
products and services, the identifiable segments are not material and operations
are managed and financial performance is evaluated on a Company-wide basis.
Accordingly, all of the Company's service operations are considered by
management to be aggregated in one reportable operating segment.
8
The average number of shares outstanding used to compute earnings per
share was as follows:
Basic earnings per share:
For the three months ended March 31, 2002 11,101,403 shares
For the three months ended March 31, 2001 11,101,403 shares
Diluted earnings per share:
For the three months ended March 31, 2002 11,140,729 shares
For the three months ended March 31, 2001 11,133,670 shares
2. Securities
The estimated fair values of securities were as follows:
March 31, 2002
---------------------------------------------------------
Estimated Gross Gross
Fair Unrealized Unrealized
(Expressed in thousands) Value Gains Losses
--------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $ 26,942 $ 33 $ 174
Obligations of states and political subdivisions 35,178 138 1,968
Mortgage-backed securities 36,387 376 267
Collateralized mortgage obligations 15,544 216 29
Corporate debt 13,807 29 750
---------------------------------------------------------
Total debt securities 127,858 792 3,188
Marketable equity securities 4,170 125 0
---------------------------------------------------------
Total available for sale $ 132,028 $ 917 $ 3,188
=========================================================
9
December 31, 2001
---------------------------------------------------------
Estimated Gross Gross
Fair Unrealized Unrealized
(Expressed in thousands) Value Gains Losses
--------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $ 13,730 $ 54 $ 47
Obligations of states and political subdivisions 36,827 163 2,377
Mortgage-backed securities 39,273 452 173
Collateralized mortgage obligations 18,770 323 33
Corporate debt 12,851 42 584
---------------------------------------------------------
Total debt securities 121,451 1,034 3,214
Marketable equity securities 4,100 112 20
---------------------------------------------------------
Total available for sale 125,551 $1,146 $3,234
=========================================================
3. Loans and Allowance for Loan Losses
Loans outstanding are as follows:
March 31, December 31,
(Expressed in thousands) 2002 2001
------------------------------------------------------------------------------------------
Real estate-construction $ 3,900 $ 3,318
Real estate-mortgage 40,613 38,701
Real estate-secured by
nonfarm, nonresidential property 36,572 35,892
Commercial, financial and agricultural 27,784 31,306
Obligations of political subdivisions in the U.S. 2,722 2,779
Installment and credit card loans to
Individuals 3,218 3,678
----------------------------------------
Loans receivable $114,809 $115,674
========================================
Non-accruing loans amounted to $2,403,000 and $2,558,000 at March 31, 2002
and December 31, 2001, respectively. Loans past due 90 days and still accruing
interest were $29,000 and $187,000 at March 31, 2002 and December 31, 2001,
respectively.
Impaired loans were as follows:
March 31, December 31, March 31,
(Expressed in thousands) 2002 2001 2000
------------------------------------------------------------------------------------------------------------------
Impaired loans with no allocated allowance for loan losses $ 273 $ 124 $ 0
Impaired loans with allocated allowance for loan losses 5,188 5,822 9,269
---------------------------------------------------
Total $5,461 $5,946 $9,269
===================================================
Amount of the allowance for loan losses allocated $1,277 $1,115 $3,111
Average impaired loans 5,704 7,429 9,146
Interest income recognized during impairment 51 4 6
Cash-basis interest income recognized 48 4 6
Activity in the allowance for loan losses is summarized as follows:
10
Three months ended March 31,
(Expressed in thousands) 2002 2001
-------------------------------------------------------------------------------------------------
Balance, beginning of period 5,310 7,667
Provision for loan losses 0 0
Loans charged-off (100) (56)
Recoveries on loans previously charged-off 7 216
----------------------------------
Net (charge offs) recoveries (93) 160
----------------------------------
Balance, end of period $5,217 $7,827
==================================
The entire allowance represents a valuation reserve which is available for
future charge-offs.
4. Shareholders' Equity and Regulatory Matters
As described in its Annual Report on Form 10-K, the Company and the
Bank continue to operate under an agreement with the Federal Reserve Bank of
Cleveland, the Company's primary regulator, and a Consent Order with the Office
of the Comptroller of the Currency, the Bank's primary regulator. Each of the
Company and the Bank has complied with or is taking steps designed to comply
with all of the requirements imposed by its regulators. One of the provisions of
the Consent Order requires that the Bank achieve and maintain a Tier 1 capital
leverage ratio of at least 6.0%. Since the completion of two successive stock
offerings concluding in June 2000, the Bank has exceeded this minimum
requirement. The bank's unaudited Tier 1 leverage ratio at March 31, 2002 was
7.7%.
5. Stock Options
On May 21, 2001, the Company's shareholders approved the Belmont
Bancorp. 2001 Stock Option Plan (the "Plan"). The Plan authorized the granting
of up to 1,000,000 shares of common stock as incentive and nonqualified stock
options. During 2001, the Board of Directors granted options to purchase shares
of common stock at an exercise price ranging from $2.00 to $4.00 to certain
employees and officers of the Company. Generally, one fourth of the options
awarded become exercisable on each of the four anniversaries of the date of
grant. However, some of the options granted in 2001 vested immediately on the
date of the grant with the remaining amount vesting over the next three to four
years. The option period expires 10 years from the date of grant.
The following is a summary of the activity in the Plan for the three
months ended March 31, 2002:
Weighted
Average
Available Options Exercise
for Grant Outstanding Price
-----------------------------------
Balance at January 1, 2002 779,000 221,000 $3.26
Forfeitures 53,000 (53,000) $3.79
Granted - -
-----------------------------------
Balance at March 31, 2002 832,000 168,000 $3.09
===================================
The Company accounts for the stock options under Accounting Principles
Board Opinion No. 25, which requires expense recognition only when the exercise
price is less than the market value of the underlying stock at the measurement
date. Compensation expense of $8,000 and $61,000 was recognized for the three
11
months ended March 31, 2002 and 2001, respectively, to reflect the impact of
granting certain options below their market price.
SFAS No. 123 requires pro forma disclosures for companies that do not
adopt its fair value accounting method for stock-based compensation. Instead,
pro forma information for net income and basic and diluted earnings per common
share will be provided in the notes to the financial statements as if the fair
value method had been used. During the first quarter of 2002 and 2001, pro forma
expense was not considered significant, but the Company anticipates that pro
forma expense will increase and will be disclosed in future periods. For the
year ended 2001, the Company reported a net loss of $415,000. A pro forma loss
of $471,000 would have been recorded had the fair value of the options been
expensed in the consolidated financial statements.
6. Litigation
The Company and its subsidiaries have been named as defendants in legal
actions. Management believes, based on the advice of counsel, that no accrual
for loss is necessary.
Since the date of the filing of the Company's Annual Report to
Shareholders and Form 10-K for the year ended December 31, 2001, there have been
no material new legal proceedings involving the Company or any material
developments to the proceedings described in such 10-K except as described
below.
As described in the Company's Annual Report to Shareholders and Form
10-K for the year ended December 31, 2001, a number of cases related to the
shareholder derivative litigation were settled at the end of 2001, with the one
remaining claim involving the customers of Schwartz Homes having been settled in
March of 2002. During the first three months of 2002, the Company received
payments of approximately $3.9 million representing its share of a portion of
the settlement proceeds in the shareholder derivative litigation. In April
2002, the Company received another payment of approximately $1.7 million
representing its share of the remaining settlement proceeds in the shareholder
derivative litigation. In addition, in April 2002, the Company received a
payment of $675,000 from Progressive Casualty Insurance Company on the fidelity
bond issued by Progressive. As a result of this global settlement, the
litigation involving loans to Schwartz Homes, Inc. and customers of Schwartz
Homes, Inc., the shareholder derivative action, the actions with Progressive,
the action with Mr. Ciroli and the action in Tuscarawas County, have all been
concluded.
As initially disclosed in the Company's Annual Report to Shareholders
and Form 10-K for the year ended December 31, 2001, an action was filed by BVM
Hospitality, Inc., Kiran Patel, Raman Patel and Chandra Patel, on October 22,
2001 in the United States District Court for the Northern District of Ohio. The
claim against the Bank, four of its directors and one of its officers alleged
that the Bank declined to extend credit based upon national origin, and sought
an unspecified sum of compensatory and punitive damages. During the first
quarter of 2002, the Court denied the Company's motion to dismiss due to
improper venue. The Court also issued a Scheduling Order, which set a mediation
in May 2002, a non-expert discovery cut-off of June 14, 2002, an expert
discovery cut-off of September 30, 2002, and a deadline for dispositive motions
of September 9, 2002. The Scheduling Order did not contain a trial date. The
Company believes it has meritorious defenses to this action and intends to
vigorously defend the claims.
12
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historic information, this report may contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are statements other
than statements of historical fact, including statements regarding the Company's
expectations, beliefs, hopes, intentions or strategies regarding the future. In
some cases, forward-looking statements can be identified by the use of words
such as "may," "will," "expects," "should," "believes," "plans," "anticipates,"
"estimates," "predicts," "potential," "continue," or other words of similar
meaning. Forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those discussed in, or
implied by, the forward looking statements. Readers should not place undue
reliance on forward-looking statements, which reflect management's opinion only
as of the date on which they were made. Except as required by law, the Company
disclaims any obligation to review or update these forward-looking statements to
reflect events or circumstances as they occur. Readers should also carefully
review any risk factors described in Company reports filed with the Securities
and Exchange Commission.
Various statements made in this Report concerning the manner in which
the Company intends to conduct its future operations, and potential trends that
may impact future results of operations, are forward-looking statements. The
Company may be unable to realize its plans and objectives due to various
important factors, including, but not limited to, the factors described below.
These and other factors are more fully discussed elsewhere in this Report.
. The Company has entered into consent agreements with the Federal
Reserve Bank of Cleveland and the Office of the Comptroller of the
Currency, described in Note 4 to the quarterly consolidated financial
statements and below under the caption "Capital Resources," that
require it to take various actions and meet various requirements. If
the Company fails to satisfy all of these requirements, the Comptroller
of the Currency and Federal Reserve Bank could potentially assume
complete or significantly greater control of the Company's operations.
. The Company has recognized substantial loan losses in recent years,
principally related to loans made under the direction of prior
management. While the Company has created what it believes are
appropriate loan loss reserves, the Company could incur significant
additional loan losses in future periods, particularly if general
economic conditions or conditions in particular industries in which its
loans are concentrated deteriorate.
. The Company is subject to increasingly vigorous and intense competition
from other banking institutions and from various financial institutions
and other nonbank or non-regulated companies or firms that engage in
similar activities. Many of these institutions have significantly
greater resources than the Company.
13
RESULTS OF OPERATIONS
SUMMARY
For the three months ended March 31, 2002, Belmont Bancorp. earned
$2,084,000, or $0.19 per share, compared to earnings of $165,000 for the three
months ended March 31, 2001. Included in earnings for the first quarter of 2002
are proceeds from settlements of legal matters including a derivative action and
related litigation. Exclusive of settlement proceeds and related expenses, the
Company would have reported net earnings of $161,000 for the first quarter of
2002.
Average assets increased to $285 million for the first quarter of 2002,
compared to $282 million for the first quarter of 2001. Total assets at March
31, 2002 were $285 million, up slightly from $284 million at March 31, 2001.
Net interest income on a taxable equivalent basis decreased $30,000 for
the first quarter of 2002 compared to the first quarter of 2001. Average earning
assets increased to $264 million during the first quarter of 2002 from $259
million for the first quarter of 2001. The taxable equivalent net interest
margin was 3.43% and 3.55% for the three months ended March 31, 2002 and 2001,
respectively. The net interest rate spread (the difference between the average
yields on earning assets and interest-bearing liabilities) was 2.98% for the
first three months of 2002 compared to 3.00% for the comparable period of 2001.
The taxable equivalent yield on earning assets declined to 6.09% from 7.71%, a
decrease of 162 basis points, during the first quarter of 2002 compared to the
first quarter of 2001. This decline was largely offset by a decrease of 160
basis points in the cost of interest-bearing liabilities to 3.11% from 4.71%.
The declines in yields on earning assets and the cost of funds reflect the
precipitous drop in interest rates throughout 2001, most notably the targeted
federal funds rate set by the Federal Open Market Committee fell from 6.50% at
the beginning of 2001 to 1.75% by the end of 2001, and the prime lending rate
declined from 9.50% to 4.75% during 2001.
OTHER OPERATING INCOME
Changes in various categories of other income are depicted in the table
below.
Three months ended March 31,
(Expressed in thousands) 2002 2001 % Change
-------------------------------------------------------------------------------
Trust fees $ 128 $ 99 29.3%
Service charges on deposits 221 191 15.7%
Earnings on bank-owned life insurance 17 54 -68.5%
Gain on sale of loans held for sale 60 6 900.0%
Legal settlements 3,933 0 na
Other income (individually less than
1% of total income) 179 149 20.1%
--------------------------------------
Subtotal 4,538 499 809.4%
--------------------------------------
Gains (losses) securities
available for sale (63) (2) -3050.0%
--------------------------------------
Total $ 4,475 $ 497 800.4%
======================================
14
Included in noninterest income for the first quarter of 2002 was $3.9
million in proceeds from legal settlements. During December 2001, the Company
reached a comprehensive legal settlement wherein the Company resolved five
lawsuits, including a costly derivative action. Each case, concluded as a result
of the comprehensive settlement, was either directly or indirectly related to
losses incurred by the Company during 1998 and 1999 for commercial loans to
Schwartz Homes, Inc., formerly the Bank's largest commercial borrower, and an
interim lending program offered by the Bank to customers of Schwartz Homes, Inc.
Schwartz Homes, Inc. filed bankruptcy during 1999 and was subsequently
liquidated. As a result of the settlement, the Company received a pre-tax
payment from its former independent audit firm in the amount of $2.2 million and
a pre-tax payment of $1.7 million settling claims against certain current and
former directors of the Company.
The settlement concluded during April 2002 when the Bank received the
last payment of the settlement from Progressive Insurance, its former carrier
for directors and officers liability insurance and fidelity bond insurance. The
gross amount of Progressive's payment to the Company was $2.4 million. After
payment of legal expenses, the Company expects after tax net proceeds of
approximately $1.5 million.
Trust fees were up $29,000, or 29.3%, for the first three months of
2002 compared to the first three months of 2001 due to an increase in the trust
fee schedule effective for quarterly fees assessed beginning June 2001.
Earnings on bank-owned life insurance policies declined $37,000, or
68.5%, during the comparative reporting periods due to the redemption of
approximately $3.4 million in officer life insurance policies during December
2001.
Capitalized mortgage servicing rights of $42,000 were included in gains
on sales of loans held for sale. Gains on sales of loans held for sale increased
from $6,000 for the first three months of 2001 to $60,000 for the first three
months of 2002. No mortgage servicing rights were capitalized during the first
quarter of 2001. The total outstanding balance of mortgage loans sold without
recourse and with servicing rights retained increased to $60.2 million at March
31, 2002 from $38.9 million at March 31, 2001.
Securities losses incurred during the first quarter of 2002 were
related to the sale of approximately $6.5 million in municipal bonds. The Bank
continues to reduce the tax-exempt municipal bond portfolio to reduce its
interest rate risk and to increase taxable income.
15
OPERATING EXPENSES
The following table shows the dollar amounts and the percent change in
various components of operating expenses.
Three months ended March 31,
(Expressed in thousands) 2002 2001 % Change
-------------------------------------------------------------------------------------------
Salaries and wages $1,000 $ 887 12.7%
Employee benefits 262 229 14.4%
Occupancy expense 231 227 1.8%
Furniture and equipment expense 211 218 -3.2%
Legal fees 597 323 84.8%
Legal settlements 559 - na
Insurance, including federal deposit insurance 148 146 1.4%
Examinations and audits 121 97 24.7%
Telecommunication expense 41 39 5.1%
Taxes other than payroll and real estate 67 56 19.6%
Supplies and printing 45 39 15.4%
Amortization of mortgage servicing rights 36 - na
Other (individually less than 1% of total income) 294 325 -9.5%
---------------------------------------
Total $3,612 $2,586 39.7%
=======================================
The employee count at the end of March 2002 was 131 full time
equivalent employees, down from 135 full time equivalent employees at the end of
March 2001. The reduction of full time equivalent employees during 2002 occurred
during the month of March. The increase in salaries and wages for the three
months ended March 31, 2002 compared to the three months ended March 31, 2001
was principally the result of incentive compensation paid during 2002.
Compensation costs associated with the grant of stock options were $8,000 and
$61,000 for the first quarter of 2002 and 2001, respectively.
Employee benefits for the three months ended March 31, 2002 include
approximately $62,000 in costs associated with expenses related to former
executives of the Company in connection with the comprehensive legal settlement
previously described. These costs include payroll taxes associated with the
payment of various compensation plans and a contribution to the Company's 401(k)
plan for the benefit of one of the former executives.
Legal fees totaled $597,000 for the first three months of 2002 and
included approximately $432,000 in costs related to the comprehensive legal
settlement previously described. The Company expects legal costs to be
substantially reduced subsequent to the completion of the comprehensive
settlement during the second quarter of 2002.
Legal settlements expense for the first three months of 2002 totaled
$559,000 and includes $179,000 in settlement charges related to the
comprehensive legal settlement previously described. The remaining settlement
charges relate to various claims against the Company described under Item 1 -
"Legal Proceedings" below and in the Company's Annual Report to Shareholders
and Form 10-K for the year ended December 31, 2001.
16
SECURITIES
The estimated fair value of securities available for sale at March 31,
2002 and December 31, 2001 are detailed in Note 2 of the quarterly financial
statements.
At March 31, 2002, the Company owned various investments of a single
issuer, the value of which exceeded 10% of total shareholders' equity, or
$2,782,000. The following table details the issuer, book value and market value
of these investments.
(Expressed in thousands)
Estimated
Issuer Amortized Cost Fair Value
--------------------------------------------------------------------------------------------------
Privately Issued Collateralized Mortgage Obligations:
Norwest Asset Securities Corporation $2,770 $2,814
Revenue Bonds:
Suburban Lancaster PA Sewer Authority 2,838 2,595
Equity Securities:
Federal Home Loan Bank stock 3,335 3,335
-----------------------------------------
Total $8,943 $8,744
=========================================
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Company provides as an expense an amount which reflects incurred
loan losses. This provision is based on the growth of the loan portfolio and on
historical loss experience. The expense is called the provision for loan losses
in the Consolidated Statements of Income. Actual losses on loans and leases are
charged against the allowance built up on the Consolidated Balance Sheets
through the provision for loan losses. The amount of loans actually removed as
assets from the Consolidated Balance Sheets is referred to as charge-offs and,
after netting out recoveries of previously charged-off assets, becomes net
charge-offs.
Details of the activity in the Allowance for Loan Losses for the first
quarter of 2002 and 2001 are included in Note 3 of the quarterly financial
statements. No loan loss provision was recorded during the quarter ended March
31, 2002 or 2001 because the Company had sufficient reserves based on its
analysis of the allowance for loan losses. The following table depicts various
loan and loan-related statistics.
Three months ended March 31,
(Expressed in thousands) 2002 2001
-------------------------------------------------------------------------------------------------
Loans outstanding, end of period $114,809 $127,553
Average loans $114,764 $128,507
Annualized net charge offs (recoveries) as a percent of:
Average loans and leases 0.32% -0.50%
Allowance for loan losses 7.13% -8.18%
Allowance for loan losses to:
Total loans at end of period 4.54% 6.14%
Non-performing assets 205.72% 80.17%
17
NON-PERFORMING ASSETS
Non-performing assets consist of (1) non-accrual loans, leases and debt
securities for which the ultimate collectibility of the full amount of interest
is uncertain, (2) loans and leases past due ninety days or more as to principal
or interest (unless management determines that, based on specific circumstances,
interest should continue to accrue on such loans) and (3) other real estate
owned. A loan is placed on non-accrual status when payment of the full amount of
principal and interest is not expected, or when principal or interest has been
in default for a period of ninety days or more unless the loan is well secured
and in the process of collection. A summary of non-performing assets follows:
March 31, Dec. 31, March 31,
(Expressed in thousands) 2002 2001 2001
--------------------------------------------------------------------------------
Non-accrual loans and leases $2,403 $2,558 $8,541
Loans 90 days or more past due
but accruing incterest 29 187 271
Other real estate owned 104 104 951
-----------------------------------
Total $2,536 $2,849 $9,763
===================================
Non-performing assets as a percent of
total assets 0.89% 0.99% 3.44%
Details of impaired loans and related information are included in Note
3 of the quarterly financial statements.
In addition to the schedule of non-performing assets, management
prepares a watch list consisting of loans which they have determined require
closer monitoring to further protect the Company against loss. The balance of
loans and available credit classified by management as substandard due to
delinquency, a change in financial position, or other factors and not included
as non-performing assets totaled $15,776,000 at March 31, 2002, $15,684,000 at
December 31, 2001, and $15,542,000 at March 31, 2001; no loans were classified
as doubtful.
LOAN CONCENTRATIONS
The Company uses the Standard Industry Code (SIC) system to determine
concentrations of credit risk by industry. Management monitors concentrations of
credit as measured by an industry's total available and outstanding credit
balance expressed as a percent of Tier 1 capital. Loan concentrations exceeding
25% of Tier 1 capital are detailed in the following tables.
(Expressed in thousands) As of March 31, 2002
Loan Balance and % of
Industry Available Credit Tier 1 Capital
------------------------------------------------------------------------------------------------
Real estate - operators of nonresidential buildings $7,903 36.9%
(Expressed in thousands) As of December 31, 2001
Loan Balance and % of
Industry Available Credit Tier 1 Capital
-------------------------------------------------------------------------------------------------
Real estate - operators of nonresidential buildings $7,520 40.9%
18
CAPITAL RESOURCES
The table below depicts the capital ratios for the Bank and for the
Company on a consolidated basis as of March 31, 2002. In addition, the table
depicts the regulatory requirements for classification as "adequately
capitalized" under the regulatory guidelines for Prompt Corrective Action. Tier
1 capital consists principally of shareholders' equity less goodwill and
deferred tax assets, while Tier 2 capital consists of certain debt instruments
and a portion of the allowance for loan losses. Total capital consists of Tier 1
and Tier 2 capital.
As described in Note 4 of the quarterly financial statements, the Bank entered
into a Consent Agreement with the Office of the Comptroller of the Currency to
maintain a Tier 1 leverage ratio of at least 6.0%. As a result of its
recapitalization efforts which began in 1999 and concluded in June 2000, the
Bank was formally notified that it had achieved an adequately capitalized
designation under Prompt Corrective Action regulations as of June 30, 2000 in a
letter from the Office of the Comptroller of the Currency dated July 27, 2000.
Under the Consent Order, the Bank will not be treated as "well capitalized" even
though it has achieved a Tier 1 leverage ratio of 7.7%, well in excess of the
requirement of 6%, unless and until the consent order is terminated or modified
to eliminate the capital requirement under the Consent Order. There are no
conditions or events since that notification that management believes has
changed the Bank's capital category.
For Capital
Actual Adequacy Purposes (1)
As of March 31, 2002: Amount Ratio Amount Ratio
----------------------------------------------------------------------------------------------
Total risk based capital to risk weighted
assets:
Consolidated 24,941 15.1% 12,754 8.0%
Bank 23,534 14.4% 12,675 8.0%
Tier 1 capital to risk weighted assets:
Consolidated 22,829 13.8% 6,377 4.0%
Bank 21,443 13.1% 6,337 4.0%
Tier 1 capital to average assets:
Consolidated 22,829 8.2% 6,377 4.0%
Bank 21,443 7.7% 11,148 4.0% (2)
(1) These are also the standards to be "adequately capitalized" under Prompt
Corrective Action Provisions.
(2) The Consent Order requires a 6% Tier 1 leverage ratio. At March 31, 2002,
the amount of the Bank's Tier 1 capital requirement to meet compliance with the
Consent Order was $16,721,000; the Bank's actual Tier 1 capital was $21,443,000
at March 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Effective liquidity management involves ensuring that the cash flow
requirements of depositors and borrowers, as well as the operating needs of the
Company, are met. Funds are available through the operation of the Bank's branch
banking network that gathers demand and retail time deposits. The Bank also
acquires funds through repurchase agreements and overnight federal funds that
provide additional sources of liquidity. Total deposits decreased $4.8 million,
or 2.0%, from the end of 2001 to March 31, 2002. Average quarterly deposits
declined $3.1 million during the first quarter of 2002 compared to the fourth
quarter of 2001. With the decline in interest rates during 2001, the banking
industry has experienced a large amount of loan refinancing activity. The Bank's
federal funds sold at March 31, 2002 totaled $15.9 million, up from $9.3 million
at March 31, 2001.
19
Cash flows from the securities portfolio are also a source of
liquidity. Securities available for sale increased from $126 million at December
31, 2001 to $132 million at March 31, 2002. Purchases during the first quarter
were primarily directed toward investments with relatively short average lives
due to the lower interest rate environment.
The Bank also has lines of credit with various correspondent banks
totaling $4,100,000 that may be used as an alternative funding source; none of
these lines were drawn upon at March 31, 2002. The Bank has an unused credit
line with the Federal Home Loan Bank for $20 million. All borrowings at the
Federal Home Loan Bank are subject to eligible collateral requirements; at March
31, 2002, the Bank had sufficient eligible collateral to utilize the credit
line.
The main source of liquidity for the parent company has been dividends
from the Bank. Presently, the Bank cannot pay dividends without prior regulatory
approval. At March 31, 2002, the parent had cash and marketable securities with
an estimated fair value of $1.5 million. The parent company does not have any
debt to third parties. Management believes sufficient liquidity is currently
available to meet estimated short-term and long-term funding needs for the Bank
and the parent company. Liquidity may be impacted by the ability of the Company
to generate future earnings.
ITEM 3-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 3 has been disclosed in Item 7A of the
Company's Annual Report on Form 10-K for the year ended December 31, 2001. There
has been no material change in the disclosure regarding market risk.
PART II - OTHER INFORMATION
Item 1. Legal proceedings
Since the date of the filing of the Company's Annual Report to
Shareholders and Form 10-K for the year ended December 31, 2001, there have been
no material new legal proceedings involving the Company or any material
developments to the proceedings described in such 10-K except as described
below.
As described in the the Company's Annual Report to Shareholders and
Form 10-K for the year ended December 31, 2001, a number of cases related to the
shareholder derivative litigation were settled at the end of 2001, with the one
remaining claim involving the customers of Schwartz Homes having been settled in
March of 2002. During the first three months of 2002, the Company received
payments of approximately $3.9 million representing its share of a portion of
the settlement proceeds in the shareholder derivative litigation. In April
2002, the Company received another payment of approximately $1.7 million
representing its share of the remaining settlement proceeds in the shareholder
derivative litigation. In addition, in April 2002, the Company received a
payment of $675,000 from Progressive Casualty Insurance Company on the fidelity
bond issued by Progressive. As a result of this global settlement, the
litigation involving loans to Schwartz Homes, Inc. and customers of Schwartz
Homes, Inc., the shareholder derivative action, the actions with Progressive,
the action with Mr. Ciroli and the action in Tuscarawas County, have all been
concluded.
As initially disclosed in the Company's Annual Report to Shareholders
and Form 10-K for the year ended December 31, 2001, an action was filed by BVM
Hospitality, Inc., Kiran Patel, Raman Patel and Chandra Patel, on October 22,
2001 in the United States District Court for the Northern District of Ohio. The
claim against the Bank, four of its directors and one of its officers alleged
that the Bank declined to extend credit based upon national origin, and sought
an unspecified sum of compensatory and punitive damages. During the first
quarter of 2002, the Court denied the Company's motion to dismiss due to
improper venue. The Court also issued a Scheduling Order, which set a mediation
20
in May 2002, a non-expert discovery cut-off of June 14, 2002, an expert
discovery cut-off of September 30, 2002, and a deadline for dispositive motions
of September 9, 2002. The Scheduling Order did not contain a trial date. The
Company believes it has meritorious defenses to this action and intends to
vigorously defend the claims.
Item 2. Changes in securities and use of proceeds
None
Item 3. Defaults upon senior securities
None
Item 4. Submission of matters to a vote of security shareholders
None
Item 5. Other information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
(b) Reports on Form 8-K
1. Form 8-K filed on January 15, 2002, disclosing under Item 5, Other
Events, the comprehensive settlement of five law suits.
21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Belmont Bancorp.
(Registrant)
/s/ Wilbur Roat
By: Wilbur Roat
President & CEO
/s/ Jane Marsh
By: Jane Marsh
Secretary
(Principal Financial and Accounting Officer)
May 9, 2002
22