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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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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 June 30, 2003

 

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

 

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Belmont Bancorp.

(Exact name of registrant as specified in its charter)

 

Ohio		34-1376776
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
325 Main St., Bridgeport, Ohio		43912
(Address of principal executive offices)		(Zip Code)

 

(740)-695-3323

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report.)

 

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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,

11,108,903 shares outstanding

as of August 8, 2003

 

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Table of Contents

BELMONT BANCORP

Quarter Ended June 30, 2003

 

INDEX

 

Part I. FINANCIAL INFORMATION
Item 1.		Financial Statements
		Consolidated Balance Sheets—June 30, 2003 and December 31, 2002		3
		Consolidated Statements of Income—Three Months Ended June 30, 2003 and June 30, 2002		4
		Consolidated Statements of Income—Six Months Ended June 30, 2003 and June 30, 2002		5
		Condensed Consolidated Statements of Changes in Shareholders’ Equity Three and Six Months Ended June 30, 2003 and June 30, 2002		6
		Condensed Consolidated Statements of Cash Flows—Six Months Ended June 30, 2003 and June 30, 2002		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
Item 4.		Controls and Procedures		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		22
Signature page				23
Certifications				24

 

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Belmont Bancorp. and Subsidiaries

Consolidated Balance Sheets

(Unaudited) ($000s except share and per share amounts)

 

		June 30, 2003				December 31, 2002
Assets
Cash and due from banks		$	10,135			$	9,316
Interest bearing deposits in other banks			120				124
Federal funds sold			5,900				13,600
Cash and cash equivalents			16,155				23,040
Loans held for sale			1,370				786
Securities available for sale at fair value			127,023				122,794
Securities held to maturity (estimated fair value of $250,000 in 2003)			250				—
Loans			137,091				130,759
Less allowance for loan losses			(3,940	)			(4,287	)
Net loans			133,151				126,472
Premises and equipment, net			6,094				6,177
Deferred federal tax assets			4,457				5,207
Cash surrender value of life insurance			1,317				1,275
Federal taxes receivable							—
Accrued income receivable			1,488				1,600
Other assets			3,217				2,117
Total assets		$	294,522			$	289,468
Liabilities and Shareholders’ Equity
Liabilities
Noninterest bearing deposits:
Demand		$	27,642			$	28,721
Interest bearing deposits:
Demand			30,569				28,800
Savings			100,390				94,346
Time			73,288				78,376
Total deposits			231,889				230,243
Securities sold under repurchase agreements			1,345				1,307
Federal funds purchased and other short-term borrowings							—
Long-term borrowings			21,042				21,050
Accrued interest on deposits and other borrowings			344				377
Other liabilities			3,228				1,734
Total liabilities			257,848				254,711
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			17,548				17,539
Retained earnings			15,781				13,961
Treasury stock at cost (44,292 shares at 6/30/03; 44,792 shares at 12/31/02)			(997	)			(1,009	)
Accumulated other comprehensive income			1,554				1,478
Total shareholders’ equity			36,674				34,757
Total liabilities and shareholders’ equity		$	294,522			$	289,468

 

See the Notes to the Consolidated Financial Statements.

 

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Belmont Bancorp. and Subsidiaries

Consolidated Statements of Income

(Unaudited) ($000s except per share amounts)

 

		For the Three Months Ended June 30,
		2003				2002
Interest and Dividend Income
Loans:
Taxable		$	2,287			$	2,096
Tax-exempt			38				44
Securities:
Taxable			1,151				1,308
Tax-exempt			20				280
Dividends			44				48
Interest on trading securities			—				—
Interest on federal funds sold			34				57
Total interest and dividend income			3,574				3,833
Interest Expense
Deposits			1,079				1,356
Other borrowings			246				228
Total interest expense			1,325				1,584
Net interest income			2,249				2,249
Provision for loan losses			(1,350	)			—
Net interest income after provision for loan losses			3,599				2,249
Noninterest Income
Trust fees			135				122
Service charges on deposits			356				224
Legal settlements			—				2,378
Other operating income			188				156
Trading gains (losses)			—				—
Securities gains (losses)			75				(31	)
Gains on sale of loans held for sale			156				45
Total noninterest income			910				2,894
Noninterest Expense
Salary and employee benefits			1,262				1,110
Net occupancy expense of premises			218				218
Equipment expenses			195				255
Legal fees			29				251
Legal settlements expense			50				35
Other operating expenses			796				863
Total noninterest expense			2,550				2,732
Income before income taxes			1,959				2,411
Income Tax Expense			599				679
Net income		$	1,360			$	1,732
Basic and Diluted Earnings per Common Share		$	0.12			$	0.16

 

See the Notes to the Consolidated Financial Statements.

 

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Belmont Bancorp. and Subsidiaries

Consolidated Statements of Income

(Unaudited) ($000s except per share amounts)

 

		For the Six Months Ended June 30,
		2003				2002
Interest and Dividend Income
Loans:
Taxable		$	4,493			$	4,198
Tax-exempt			77				89
Securities:
Taxable			2,344				2,499
Tax-exempt			67				607
Dividends			89				94
Interest on trading securities
Interest on federal funds sold			75				145
Total interest and dividend income			7,145				7,632
Interest Expense
Deposits			2,196				2,851
Other borrowings			490				467
Total interest expense			2,686				3,318
Net interest income			4,459				4,314
Provision for loan losses			(1,350	)			—
Net interest income after provision for loan losses			5,809				4,314
Noninterest Income
Trust fees			260				250
Service charges on deposits			609				445
Legal settlements			—				6,311
Other operating income			396				352
Trading gains (losses)
Securities gains (losses)			243				(94	)
Gains on sale of loans held for sale			293				105
Total noninterest income			1,801				7,369
Noninterest Expense
Salary and employee benefits			2,516				2,372
Net occupancy expense of premises			456				449
Equipment expenses			391				466
Legal fees			60				848
Legal settlements expense			103				594
Other operating expenses			1,533				1,615
Total noninterest expense			5,059				6,344
Income before income taxes			2,551				5,339
Income Tax Expense			721				1,523
Net income		$	1,830			$	3,816
Basic and Diluted Earnings per Common Share		$	0.16			$	0.34

 

See the Notes to the Consolidated Financial Statements.

 

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Belmont Bancorp. and Subsidiaries

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited) ($000s)

 

		Three Months Ended June 30,
		2003			2002
Balance, beginning of period		$	35,037		$	27,818
Comprehensive income:
Net income			1,360			1,732
Change in net unrealized gain on securities available for sale, net of tax effects			270			1,563
Total comprehensive income			1,630			3,295
Treasury stock issued			2			25
Common stock options vested			5			9
Balance, end of period		$	36,674		$	31,147
		Six Months Ended June 30,
		2003			2002
Balance, beginning of period		$	34,757		$	25,846
Comprehensive income:
Net income			1,830			3,816
Change in net unrealized gain on securities available for sale, net of tax effects			76			1,443
Total comprehensive income			1,906			5,259
Dividends declared			—			—
Treasury stock issued			—			—
Treasury stock issued			2			25
Common stock options vested			9			17
Balance, end of period		$	36,674		$	31,147

 

See the Notes to the Consolidated Financial Statements.

 

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Belmont Bancorp. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2003 and 2002

(Unaudited) ($000’s)

 

		2003				2002
Cash from Operating Activities		$	2,595			$	5,132
Investing Activities
Proceeds from:
Maturities and calls of securities			9,671				7,955
Sales of securities available for sale			4,586				16,097
Principal collected on mortgage-backed securities			13,853				14,473
Sales of loans			0				336
Sales of other real estate owned			124				230
Purchases of:
Securities held to maturity			(250	)			0
Securities available for sale			(32,781	)			(41,783	)
Premises and equipment			(191	)			(154	)
Changes in:
Loans, net			(6,170	)			(3,884	)
Cash from investing activities			(11,158	)			(6,730	)
Financing Activities
Payments on long-term debt			(8	)			0
Changes in:
Deposits			1,646				(11,098	)
Repurchase agreements			38				266
Proceeds from sale of treasury stock			2				25
Cash from financing activities			1,678				(10,807	)
Decrease in Cash and Cash Equivalents			(6,885	)			(12,405	)
Cash and Cash Equivalents, Beginning of Year			23,040				32,187
Cash and Cash Equivalents at June 30		$	16,155			$	19,782
Cash payments for interest		$	2,720			$	3,542
Cash payments for income taxes			11				0
Non-cash transfers from loans to other real estate owned and repossessions			1,020				170

 

See the Notes to the Consolidated Financial Statements.

 

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PART I—FINANCIAL INFORMATION

 

ITEM 1—FINANCIAL STATEMENTS

 

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. Material intercompany accounts and transactions have been eliminated.

 

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 to Shareholders on Form 10-K for the year ended December 31, 2002.

 

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.

 

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.

 

Earnings Per Common Share: Average shares outstanding used to compute basic and diluted earnings per share differ due to stock option grants. The average number of shares outstanding used to compute basic and diluted earnings per share was as follows:

 

		Basic				Diluted
Average shares outstanding		2003		2002		2003		2002
For the three months ended June 30		11,108,584		11,101,018		11,187,358		11,154,096
For the six months ended June 30		11,108,494		11,102,718		11,181,882		11,147,420

 

Stock Compensation: Employee compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income for options granted with an exercise price equal to or greater than the market price of the underlying common stock at date of grant. Compensation expense is reflected in net income for certain options granted with an exercise price below the market price of the underlying common stock at the date of the grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation”.

 

Newly Issued But Not Yet Effective Accounting Standards

 

The Financial Accounting Standards Board (FASB) recently issued two new accounting standards, Statement 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, and Statement 150,

 

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Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equities, both of which generally become effective in the quarter beginning July 1, 2003. Because the Company does not have these instruments or is only nominally involved in these instruments, the new accounting standards will not materially affect the Company’s operating results or financial condition.

 

		For the Three Months Ended June 30,								For the Six Months Ended June 30,
(Expressed in thousands except per share amounts)		2003				2002				2003				2002
Net income as reported		$	1,360			$	1,732			$	1,830			$	3,816
Deduct: Stock-based compensation expense determined under fair value based method			(22	)			(11	)			(43	)			(22	)
Pro forma net income		$	1,338			$	1,721			$	1,787			$	3,794
Basic earnings per share as reported		$	0.12			$	0.16			$	0.16			$	0.34
Pro forma basic earnings per share			0.12				0.16				0.16				0.34
Diluted earnings per share as reported		$	0.12			$	0.16			$	0.16			$	0.34
Pro forma diluted earnings per share			0.12				0.15				0.16				0.34

 

2. Securities

 

Securities held to maturity at June 30, 2003 included a corporate debt issue with a book value and estimated fair market value of $250,000. No securities were classified as held to maturity at December 31, 2002.

 

The estimated fair values of securities available for sale were as follows:

 

		June 30, 2003
(Expressed in thousands)		Estimated Fair Value			Gross Unrealized Gains			Gross Unrealized Losses
U.S. Treasury securities and obligations of U.S. Government corporations and agencies		$	26,118		$	533			—
Tax-exempt obligations of states and political subdivisions			1,383			200			—
Taxable obligations of states and political Subdivisions			21,675			888			—
Mortgage-backed securities			41,141			913		$	(93	)
Collateralized mortgage obligations			18,330			298			(106	)
Corporate debt			10,418			281			(656	)
Asset-backed securities			775			6			—
Total debt securities			119,840			3,119			(855	)
Marketable equity securities			7,183			92			—
Total available for sale		$	127,023		$	3,211		$	(855	)

 

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		December 31, 2002
(Expressed in thousands)		Estimated Fair Value			Gross Unrealized Gains			Gross Unrealized Losses
U.S. Treasury securities and obligations of U.S. Government corporations and agencies		$	33,004		$	609		$	(6	)
Tax-exempt obligations of states and political subdivisions			3,596			181			(54	)
Taxable obligations of states and political subdivisions			20,042			642			—
Mortgage-backed securities			36,002			870			(116	)
Collateralized mortgage obligations			9,806			368			(1	)
Corporate debt			13,011			243			(666	)
Asset-backed securities			1,017			17			—
Total debt securities			116,478			2,930			(843	)
Marketable equity securities			6,316			152			—
Total available for sale		$	122,794		$	3,082		$	(843	)

 

3. Loans and Allowance for Loan Losses

 

Loans outstanding are as follows:

 

(Expressed in thousands)		June 30, 2003			December 31, 2002
Real estate-construction		$	4,036		$	3,856
Real estate-mortgage			50,736			49,536
Real estate-secured by nonfarm, nonresidential property			53,888			47,698
Commercial, financial and agricultural			22,892			24,057
Obligations of political subdivisions in the U.S.			2,391			2,505
Installment and credit card loans to individuals			3,148			3,107
Loans receivable		$	137,091		$	130,759

 

Non-accruing loans amounted to $2,748,000 at June 30, 2003 and $3,171,000 at December 31, 2002. Loans past due 90 days and still accruing interest were $68,000 at June 30, 2003 and $33,000 at December 31, 2002. Most non-accruing loans are also identified as impaired loans in the table below.

 

Impaired loans were as follows:

 

(Expressed in thousands)		June 30, 2003			December 31, 2002
Impaired loans with no allocated allowance for loan losses		$	59		$	134
Impaired loans with allocated allowance for loan losses			2,931			3,223
Total		$	2,990		$	3,357
Amount of the allowance for loan losses allocated		$	1,093		$	1,022

 

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(Expressed in thousands)		June 30, 2003			June 30, 2002
Average impaired loans		$	3,169		$	5,157
Interest income recognized during impairment			0			51
Cash-basis interest income recognized			0			48

 

Activity in the allowance for loan losses is summarized as follows:

 

		Three months ended June 30,								Six months ended June 30,
(Expressed in thousands)		2003				2002				2003				2002
Balance, beginning of period		$	4,337			$	5,217			$	4,287			$	5,310
Provision for loan losses			(1,350	)			0				(1,350	)			0
Loans charged-off			(3	)			(57	)			(21	)			(157	)
Recoveries on loans previously charged-off			956				90				1,024				97
Net (charge-offs) recoveries			953				33				1,003				(60	)
Balance, end of period		$	3,940			$	5,250			$	3,940			$	5,250

 

The entire allowance represents a valuation reserve which is available for future charge-offs.

 

4. Stock Option Plan

 

In May 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. 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 six months ended June 30, 2003:

 

		Available for Grant		Options Outstanding			Weighted Average Exercise Price
Balance at January 1, 2003		691,500		301,500			$	3.74
Exercised		—		(500	)		$	4.00
Forfeitures		14,000		(14,000	)		$	4.57
Granted		—		5,000			$	4.99
Balance at June 30, 2003		705,500		292,000			$	3.72

 

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, net of taxes, of $6,000 and $11,000 was recognized for the six months ended June 30, 2003 and 2002, respectively, to reflect the impact of granting certain options below their market price. Pro forma information for net income and earnings per common share is presented in Note 1.

 

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5. Litigation

 

The Company and its subsidiaries are involved in legal proceedings through the normal course of business and could face claims, including unasserted claims, which may ultimately result in litigation. It is management’s opinion that the Company’s financial position, results of operations, and cash flows would not be materially affected by the outcome of any pending or threatened legal proceedings, commitments, or claims.

 

On May 8, 2003, the Company entered into a settlement agreement with Mr. James J. Fleagane, the shareholder who commenced a derivative action on behalf of the Company. The derivative suit was settled in December 2001, however Mr. Fleagane sought compensation for his time spent prosecuting the action. The Company and Mr. Fleagane settled all claims relating to the derivative litigation and his motion for compensation. The Company agreed to enter into the settlement in order to avoid the management time and Company expense that would be involved in opposing Mr. Fleagane’s motion. The settlement cost associated with this agreement was recorded during the three month period ending June 30, 2003.

 

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ITEM 2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD-LOOKING STATEMENTS

 

In addition to historic information, this report, as well as the notes to the consolidated financial statements, 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 recognized substantial loan losses in past years, principally related to loans made under the direction of prior management. The volume of classified loans remains high relative to the Company’s peers. 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.

 

•

Certain credit, market, operational, liquidity and interest rate risks associated with the Company’s business operations as well as changes in business and economic conditions, competition, fiscal and monetary policies and legislation could impact the future operations and performance of the Company.

 

RESULTS OF OPERATIONS

 

SUMMARY

 

Belmont Bancorp. reported net income of $1,360,000, or $0.12 per common share for the three months ended June 30, 2003, compared to $1,732,000, or $0.16 per common share, for the three months ended June 30, 2002. For the first six months of 2003, the Company reported net income of $1,830,000, or $0.16 per common share, versus $3,816,000, or $0.34 per common share, for the first half of 2002. Earnings during 2002 were positively impacted by the distribution of settlement proceeds from the Company’s derivative action during the first and second quarters of 2002.

 

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Loan loss recoveries continued to reward the Company during the second quarter of 2003. During June 2003, the Bank acquired title to commercial real estate through bankruptcy proceedings involving a former customer. This action resulted in a sizable recovery on a credit relationship previously charged off by the Bank. In combination with other improvements in the Bank’s loan portfolio, this enabled the Company to reduce its allowance for loan loss by $1,350,000 during the second quarter of 2003. Net of the related federal tax effect, this contributed $891,000 to net income.

 

Ownership of this property caused nonperforming assets to increase to 1.28% of total assets at June 30, 2003, up from 1.08% of total assets at March 31, 2003. However, in July 2003, the property was sold, reducing nonperforming assets by $950,000. Had the sale taken place prior to the end of the quarter, the ratio of nonperforming assets to total assets would have been 0.96% at June 30, 2003. The completion of the sale of the property will also eliminate future legal and collection expenses associated with it.

 

Deposit service charges increased 37% to $609,000 for the six months ended June 30, 2003 compared to $445,000 for the same period in 2002, largely the result of new products offered by the Bank during the second quarter.

 

Strong refinancing activity continued during the second quarter in the mortgage lending business, fueled by low interest rates. Mortgage loan sales to the secondary market contributed $156,000 in gains during the second quarter and $293,000 in gains during the first six months of 2003, up from $45,000 for the second quarter and $105,000 for the first six months of 2002. The Company also realized $243,000 in securities gains during the first six months of 2003 compared to securities losses of $94,000 recorded during the comparative period in 2002. Securities gains for the second quarter of 2003 were $75,000 compared to a loss of $31,000 for the second quarter of 2002.

 

While low interest rates have spurred mortgage lending, many banks have seen net interest margins fall as yields on earning assets decline more quickly than their cost of funds. The Company’s taxable equivalent net interest margin for the second quarter of 2003 was 3.41% compared to 3.45% for the first quarter of 2003 and 3.42% for the fourth quarter of 2002.

 

Total operating expenses declined to $5.1 million for the first half of 2003 compared to $6.3 million for the first half of 2002. This reduction principally resulted from the near elimination of litigation and legal settlement expenses incurred during the first half of 2002.

 

Total assets at June 30, 2003 were $294.5 million compared to $289.5 million at year-end 2002. Total loans increased to $137.1 million at June 30, up from $130.8 million at December 31, 2002. Average assets were $291 million for the second quarter of 2003, compared to $283 million for the second quarter of 2002. Average assets for the six months ended June 30, 2003 were $290 million compared to $284 million for the comparable period last year.

 

Total shareholders’ equity increased to $36.7 million at June 30, 2003 compared to $34.8 million at year-end 2002. This increase bolstered the Company’s Tier One capital leverage ratio to 10.5% at June 30, 2003.

 

NET INTEREST INCOME

 

Interest rates across the maturity horizon remained low relative to historical levels during the first half of 2003. The Federal Open Market Committee (the “FOMC”) maintained a very accommodative stance to aid economic recovery. In late June 2003, the FOMC reduced its targeted federal funds rate by 0.25% following a rate reduction in November 2002 of 0.50%. In 2001, the federal funds rate fell from 6.50% to 1.75%. Likewise, the prime-lending rate fell from 9.50% at the beginning of 2001 to 4.00% by June 2003. Changing interest rates impact the Company through loan refinancing activity, reinvestment opportunities in loans and investments, and financing costs on its deposit base and other borrowings. Generally, higher

 

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interest rates will positively impact the Company’s net interest income, while lower interest rates will negatively impact net interest income.

 

Net interest income on a taxable equivalent basis declined $121,000 for the second quarter of 2003 compared to the second quarter of 2002. Average earning assets increased to $268 million during the second quarter of 2003 from $264 million for the second quarter of 2002. The taxable equivalent net interest margin was 3.41% and 3.65% for the three months ended June 30, 2003 and 2002, respectively. The net interest rate spread (the difference between the average yields on earning assets and interest bearing liabilities) was 3.02% for the second quarter of 2003 compared to 3.22% for the comparable period of 2002. The taxable equivalent yield on earning assets declined to 5.39% from 6.06%, a decrease of 67 basis points, during the second quarter of 2003 compared to the second quarter of 2002. This decline was partially offset by a decrease of 47 basis points in the cost of interest-bearing liabilities to 2.36% from 2.83%.

 

Net interest income on a taxable equivalent basis decreased by $104,000 for the first six months of 2003 compared to the same period last year as average earning assets increased $2.5 million to $266 million for the first six months of 2003. The yield on earning assets decreased from 6.07% to 5.46%, and the cost of interest bearing liabilities decreased from 2.97% to 2.42%. The taxable equivalent net interest margin declined to 3.43% for the first six months of 2003 compared to 3.54% for the same period in 2002.

 

OTHER OPERATING INCOME

 

Changes in various categories of other income are depicted in the table below.

 

		Three months ended June 30,										Six months ended June 30,
(Expressed in thousands)		2003			2002				% Change			2003			2002				% Change
Trust fees		$	135		$	122			10.7	%		$	260		$	250			4.0	%
Service charges on deposits			356			224			58.9	%			609			445			36.9	%
Legal settlements			0			2,378			-100.0	%			0			6,311			-100.0	%
Gain on sale of loans held for sale			156			45			246.7	%			293			105			179.0	%
Other income (individually less than 1% of total income)			188			156			20.5	%			396			352			12.5	%
Subtotal			835			2,925			-71.5	%			1,558			7,463			-79.1	%
Securities gains (losses)			75			(31	)		341.9	%			243			(94	)		358.5	%
Total		$	910		$	2,894			-68.6	%		$	1,801		$	7,369			-75.6	%

 

Trust fees increased 4% to $260,000 for the first six months of 2003 compared to $250,000 for the comparative period in 2002. For the second quarter of 2003, trust fees increased to $135,000 compared to $122,000 in 2002. The improvement in revenue was the result of a fee increase on trust accounts.

 

Service charges on deposits increased 36.9% from $445,000 to $609,000 during the six months ended June 30, 2003, compared to the same period in 2002, principally due to the introduction during the second quarter of 2003 of a new product and the implementation of a new service charge. Since these changes were introduced during the second quarter of 2003, the percentage increase in service charges on deposits is larger for the quarter than for the year-to-date period; service charges increased 58.9% in the quarter to quarter comparison.

 

Operating results during the first and second quarters of 2002 were impacted by a comprehensive legal settlement as more fully described in the Company’s Annual Report to Shareholders on Form 10-K for the year ended December 31, 2002. Other income during the second quarter of 2002 included $2.4 million in payments to the Company related to this settlement. For the first six months of 2002, the Company received at total of $6.3 million in payments related to the settlement.

 

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Gains on sales of loans and loans held for sale increased from $105,000 for the first six months of 2002 to $293,000 for same period of 2003. Capitalized mortgage servicing rights of $114,000 were included in gains on sales of loans held for sale for the six months ended June 30, 2003 compared to $66,000 for the comparable period of 2002. The total outstanding balance of mortgage loans sold without recourse and with servicing rights retained increased to $69.6 million at June 30, 2003 from $65.9 million at December 31, 2002. Gains on sales of loans also included $13,000 for gains realized on the sale of the Bank’s credit card portfolio during the second quarter of 2002. Management expects that as mortgage interest rates increase, mortgage refinancing volume will subside and fees related to mortgage loan activities will decline.

 

Other income increased 20.5% to $188,000 for the three months ended June 30, 2003 and 12.5% to $396,000 for the six months ended June 30, 2003. This increase was primarily related to an increase in fee income associated with lending and loan servicing fees.

 

Securities gains for the six months ended June 30, 2003 totaled $243,000 and included $92,000 in gains on sales of equity securities. Securities losses incurred during the first six months of 2002 were related to the sale of approximately $11.0 million in tax-exempt bonds. During this period, the Bank continued to reduce its tax-exempt bond portfolio to minimize the interest rate risk associated with long-term fixed rate investments and to increase taxable income thereby enabling the Company to utilize its tax loss carryforwards and tax credits.

 

OPERATING EXPENSES

 

The following table shows the dollar amounts and the percent change in various components of operating expenses.

 

		Three months ended June 30,									Six months ended June 30,
(Expressed in thousands)		2003			2002			% Change			2003			2002			% change
Salaries and wages		$	1,020		$	905		12.7	%		$	2,016		$	1,905		5.8	%
Employee benefits			242			206		17.5	%			500			468		6.8	%
Occupancy expense			218			218		0.0	%			456			449		1.6	%
Furniture and equipment expense			195			255		-23.5	%			391			466		-16.1	%
Legal fees			29			251		-88.4	%			60			848		-92.9	%
Legal settlements			50			35		42.9	%			103			594		-82.7	%
Insurance, including federal deposit insurance			52			150		-65.3	%			104			298		-65.1	%
Examinations and audits			88			133		-33.8	%			175			254		-31.1	%
Taxes other than payroll and real estate			94			51		84.3	%			185			118		56.8	%
Supplies and printing			63			59		6.8	%			108			104		3.8	%
Data processing			35			68		-48.5	%			92			128		-28.1	%
Advertising			68			58		17.2	%			89			71		25.4	%
Amortization of mortgage servicing rights			47			40		17.5	%			76			76		0.0	%
Other (individually less than 1% of total income)			349			303		15.2	%			704			565		24.6	%
Total		$	2,550		$	2,732		-6.7	%		$	5,059		$	6,344		-20.3	%

 

The employee count at the end of June 2003 was 134 full time equivalent employees (“FTEs”). The average number of FTEs for 2003 through June was 130 versus 132 for the same period during 2002. The increase in salaries and wages for the six months ended June 30, 2003 compared to the six months ended June 30, 2002 was principally the result of incentive compensation paid during 2003. Compensation costs associated with the grant of stock options were $9,000 and $16,000 for the first six months of 2003 and 2002, respectively.

 

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Employee benefit costs presented for the 2003 periods were higher than the comparative periods of 2002 due to higher payroll taxes and health insurance benefits. Health insurance costs increased 8.8% for the first half of 2003 compared to 2002.

 

Furniture and equipment expense incurred for the 2003 periods were lower than the comparative periods of 2002 largely as the result of the Bank’s mainframe computer and wide-area network costs being fully depreciated during the fourth quarter of 2002. As the Company upgrades its data processing systems, management expects these costs will increase.

 

Legal fees and legal settlements expense were down significantly during 2003 compared to 2002 resulting from the settlement of the derivative action in late 2001 with settlement distributions concluding during the first six months of 2003. Legal settlements expense for the first half of 2003 totaled $103,000 and represents the conclusion of all material litigation previously confronting the Company.

 

Insurance costs includes the expense associated with FDIC deposit insurance. The Company realized large savings in FDIC costs during 2003 compared to 2002 because of improvements to the Company’s regulatory risk profile which became effective with the assessment period beginning January 1, 2003. The regulatory risk profile also impacts examination cost assessed by the Bank’s regulator. Examination and audit costs were down approximately 34% for the comparative quarter and 31% for the six months ended June 30, 2003.

 

Other taxes increased 57% to $185,000 for the first six months of 2003 compared to the first half of 2002. This increase reflects higher state corporate franchise tax expense and is directly related to a larger capital base at year-end 2002 compared to year-end 2001 because the Company’s state franchise tax is assessed based on a tax rate applied to its capital base.

 

Data processing costs decreased 28% to $92,000 for the first six months of 2003 resulting from changes in processing for the Trust Department and brokerage services. These changes will result in cost efficiencies in future periods on a comparative basis as well.

 

Other expense increased 25% to $704,000 for the first six months of 2003. This increase is principally related to the resumption of payment of director fees and collection expenses related to a large commercial real estate property. That property was sold during July 2003.

 

SECURITIES

 

The estimated fair value of securities available for sale at June 30, 2003 and December 31, 2002 are detailed in Note 2 of the quarterly financial statements.

 

At June 30, 2003, the Company did not own any investments of a single issuer, the value of which exceeded 10% of total shareholders’ equity, or $3,667,000.

 

PROVISION AND ALLOWANCE FOR LOAN LOSSES

 

The Company provides as an expense an amount that reflects the change in probable loan losses. This provision is based on several factors including 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 are charged against the allowance established on the Consolidated Balance Sheets through the provision for loan losses.

 

Details of the activity in the Allowance for Loan Losses the second quarter are included in Note 3 of the quarterly financial statements. No loan loss provision was recorded during the second quarter or first six months of 2002 because the Company had an appropriate balance in the allowance based on its analysis of loan quality. During the second quarter of 2003, the Company recorded a negative loan loss provision in

 

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the amount of $1,350,000 based on loan loss recoveries and improvements to its loan asset quality. This contributed $0.08 per common share (basic and diluted) after income taxes, to the Company’s operating results for the period. If the Company continues to experience either low net charge-offs or net recoveries in future periods, and continues to experience improvements in its loan loss rates, it is possible that the Company will record additional reductions to its allowance for loan loss through negative loan loss provisions in forthcoming periods. The following table depicts various loan and loan-related statistics.

 

		Three months ended June 30,								Six months ended June 30,
(Expressed in thousands)		2003				2002				2003				2002
Loans outstanding		$	137,091			$	119,056			$	137,091			$	119,056
Average loans		$	136,906			$	116,379			$	134,520			$	115,572
Annualized net (charge offs) recoveries as a percent of:
Average loans			2.78	%			0.11	%			1.49	%			-0.10	%
Allowance for loan losses			96.75	%			2.51	%			50.91	%			-2.29	%
Allowance for loan losses to:
Total loans at end of period			2.87	%			4.41	%			2.87	%			4.41	%
Non-performing assets			104.62	%			270.62	%			104.62	%			270.62	%

 

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:

 

Non-performing assets (Expressed in thousands)		June 30, 2003				Dec. 31, 2002
Non-accrual loans and leases		$	2,748			$	3,171
Loans 90 days or more past due but accruing interest			68				33
Other real estate owned			950				50
Total		$	3,766			$	3,254
Non-performing assets as a percent of total assets			1.28	%			1.12	%

 

Although nonperforming assets increased at June 30, 2003 compared to December 31, 2002, the Bank sold a commercial property during July 2003 resulting in a reduction to nonperforming assets in the amount of $950,000. Had the sale taken place prior to the end of the quarter, the ratio of nonperforming assets to total assets would have been 0.96% at June 30, 2003.

 

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 classified by management as substandard due to delinquency, a change in financial

 

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position, or other factors and not included as non-performing assets totaled $7,423,000 at June 30, 2003, $11,419,000 at December 31, 2002, and $15,177,000 at June 30, 2002; 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 the Bank’s Tier 1 capital are detailed in the following tables.

 

		(Expressed in thousands)
Industry		June 30, 2003				December 31, 2002
Real estate—operators of nonresidential buildings
Loan balance and available credit		$	13,009			$	11,521
Percent of tier 1 capital			45.6	%			44.3	%

 

DEFERRED FEDERAL TAX ASSETS

 

Deferred federal tax assets totaled $4.5 million at June 30, 2003. The deferred federal tax assets include significant balances related to tax loss carryforwards and tax credits. It also includes the tax effect of recording securities available for sale at estimated fair value. At June 30, 2003, management believes no deferred tax valuation allowance is needed as future estimated taxable income will be sufficient to realize the net deferred tax assets.

 

OTHER LIABILITIES

 

Other liabilities increased to $3.2 million at June 30, 2003 compared to $1.7 million at December 31, 2002. Other liabilities include amounts for various accrued expenses, accounts payable, funds owed for securities traded but not yet settled, and obligations related to compensation plans. The increase for the periods presented is related to recording a liability for securities traded but not settled.

 

CAPITAL RESOURCES

 

The table below depicts the capital ratios for the Bank and for the Company on a consolidated basis as of June 30, 2003. 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.

 

		Actual						Minimum Required For Capital Adequacy Purposes						Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations
As of June 30, 2003:		Amount			Ratio			Amount			Ratio			Amount			Ratio
Total risk based capital to risk weighted assets:
Consolidated		$	32,016		18.5	%		$	13,866		8.0	%		$	17,332		10.0	%
Bank			30,755		17.5	%			14,094		8.0	%			17,617		10.0	%
Tier 1 capital to risk weighted assets:
Consolidated			29,827		17.2	%			6,933		4.0	%			10,399		6.0	%
Bank			28,532		16.2	%			7,047		4.0	%			10,570		6.0	%

 

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Tier 1 capital to average assets:
Consolidated		29,827		10.5	%		11,233		4.0	%		14,041		5.0	%
Bank		28,532		10.1	%		11,341		4.0	%		14,176		5.0	%

 

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 increased $1.6 million, or 0.7%, from December 31, 2002 to June 30, 2003. The Bank’s federal funds sold at June 30, 2003 totaled $5.9 million, down from $13.6 million at December 31, 2002.

 

Cash flows from the securities portfolio are also a source of liquidity. Proceeds from principal repayments, sales, calls and maturities of investment securities totaled $28.1 million during the six months ended June 30, 2003. Securities available for sale increased from $123 million at December 31, 2002 to $127 million at June 30, 2003.

 

The Bank has an available line of credit with a correspondent bank totaling $4,100,000 that may be used as an alternative funding source. The Bank also 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 June 30, 2003, the Bank had sufficient eligible collateral to utilize the credit line.

 

The main source of liquidity for the parent company is dividends from the Bank. At June 30, 2003, the parent had cash and marketable securities with an estimated fair value of $1.3 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.

 

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 to Shareholders on Form 10-K for the year ended December 31, 2002. There has been no material change in the disclosure regarding market risk.

 

ITEM 4. CONTROLS AND PROCEDURES

 

The Company’s Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation within 90 days prior to the filing date of this quarterly report, that the Company’s disclosure controls and procedures are effective for the timely recording, processing, summarizing and reporting of the information required to be disclosed in reports filed under the Securities and Exchange Act of 1934.

 

There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect those controls subsequent to the date of their evaluation.

 

PART II—OTHER INFORMATION

 

Item 1. Legal proceedings

 

The Company and its subsidiaries are involved in legal proceedings through the normal course of business and could face claims, including unasserted claims, which may ultimately result in litigation. It is management’s opinion that the Company’s financial position, results of operations, and cash flows would not

 

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be materially affected by the outcome of any pending or threatened legal proceedings, commitments, or claims.

 

As reported in its Form 10-Q for the three months ended March 31, 2003, the Company entered into a settlement agreement on May 8, 2003 with Mr. James J. Fleagane, the shareholder who commenced a derivative action on behalf of the Company. Mr. Fleagane sought compensation for his time spent prosecuting the derivative action. The Company and Mr. Fleagane settled all claims relating to the derivative litigation and his motion for compensation. The Company agreed to enter into the settlement in order to avoid the management time and Company expense that would be involved in opposing Mr. Fleagane’s motion. The settlement cost associated with this agreement was recorded during the three month period ending June 30, 2003.

 

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

 

The annual meeting of shareholders was held on May 19, 2003. Of the 11,108,403 shares entitled to vote at the meeting, 9,090,606 shares were voted. The results were as follows:

 

Proposal number 1—Election of directors

 

(Term expiring in the Year 2006):

 

		FOR		WITHHOLD
David R. Giffin		9,027,571		63,035
Terrence A. Lee		9,016,140		74,466
Wilbur R. Roat		9,028,781		61,825

 

Proposal number 2—To ratify the appointment of Crowe Chizek and Company LLC as independent auditors for the year ending December 31, 2003:

 

FOR		AGAINST		ABSTAIN
9,059,604		15,327		15,674

 

The following directors continued in office:

 

Directors with terms ending in 2004:

John H. Goodman, II

James R. Miller

Brian L. Schambach

Keith A. Sommer

 

Directors with terms ending in 2005:

Jay A. Beck

David B. Kelley

Tillio P. Petrozzi

Charles A. Wilson, Jr.

 

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Item 5. Other information

 

None

 

Item 6. Exhibits and Reports on Form 8-K

 

(a)

Exhibits

3.1

Articles of Incorporation (1)

3.2

Amendment regarding Series A Preferred Stock (2)

3.3

Amendment regarding number of directors (3)

3.4

Code of Regulations (4)

10.1

Employment Agreement dated December 15, 1999 between Wilbur R. Roat, Belmont Bancorp. and Belmont National Bank (5)

10.2

Employment Agreement dated April 16, 2001 between Michael Baylor, Belmont Bancorp. and Belmont National Bank (6)

10.3

Belmont Bancorp. 2001 Stock Option Plan (7)

31.1

Certification under Section 302 of the Sarbanes-Oxley Act of 2002 of Quarterly Report on Form 10-Q of Belmont Bancorp. for the quarter ended June 30, 2003

31.2

Certification under Section 302 of the Sarbanes-Oxley Act of 2002 of Quarterly Report on Form 10-Q of Belmont Bancorp. for the quarter ended June 30, 2003

32.1

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Quarterly Report on Form 10-Q of Belmont Bancorp. for the quarter ended June 30, 2003

32.2

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Quarterly Report on Form 10-Q of Belmont Bancorp. for the quarter ended June 30, 2003

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1.

Filed as an exhibit to the Company’s Registration Statement on Form S-2 filed with the Securities and Exchange Commission on November 16, 1999, and incorporated herein by reference.

2.

Filed as an exhibit to Amendment No. 3 to the Company’s Registration Statement on Form S-2 filed with the Securities and Exchange Commission (Registration No. 333-91035) on February 3, 2000 and incorporated herein by reference.

3.

Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002.

4.

Filed as an exhibit to the Company’s Registration Statement on Form S-2 filed with the Securities and Exchange Commission on November 16, 1999, and incorporated herein by reference.

5.

Filed as an exhibit to the Company’s Annual Report and Form 10-K for the year ended December 31, 1999 (Registration No. 0-12724) and incorporated herein by reference.

6.

Filed as an exhibit to the Company’s Annual Report and Form 10-K for the year ended December 31, 2001 (Registration No. 0-12724) and incorporated herein by reference.

7.

Filed as an exhibit to the Company’s Annual Report and Form 10-K for the year ended December 31, 2000 (Registration No. 0-12724) and incorporated herein by reference.

 

(b)

Reports on Form 8-K

 

On April 23, 2003, Belmont Bancorp. issued a news release announcing its earnings for the three month period ending March 31, 2003.

 

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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.

 

 

 

August 8, 2003

 

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