SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 for the fiscal year ended December 31, 2001 or [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 for the transition period from to ____________ Commission file number 0-12724 BELMONT BANCORP. (Exact name of registrant as specified in its charter) Ohio 34-1376776 ---------------------------------- --------------------------------- (State or other jurisdiction of I.R.S. Employer Identification No.) incorporation or organization) 325 Main Street, Bridgeport, Ohio 43912 ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (740) 695-3323 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Name of each exchange on Title of each class which registered ----------------------------- ----------------------- Common stock, $0.25 par value NASDAQ Small Cap Market 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 requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] State the aggregate market value of the voting stock held by nonaffiliates of the registrant at March 18, 2002: $45,516,000 Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 11,101,403 shares Documents Incorporated by Reference: Documents Incorporated by Reference: Portions of the Registrant's proxy statement to be filed by April 30, 2002 are incorporated herein by reference in Items 10, 11, 12 and 13. 1 PART I ITEM 1-BUSINESS BELMONT BANCORP. Belmont Bancorp., (the "Company" or "Belmont"), is a bank holding company which was organized under the laws of the State of Ohio in 1982. On April 4, 1984, Belmont Bancorp. acquired all of the outstanding capital stock of Belmont National Bank (the "Bank") (formerly Belmont County National Bank), a banking corporation organized as a national banking association. Belmont National Bank provides a variety of financial services and employs 146 people. In addition to the Bank, the Company owns Belmont Financial Network, Inc., a non-bank subsidiary ("BFN"). BELMONT NATIONAL BANK Belmont National Bank resulted from the merger on January 2, 1959, of the First National Bank of St. Clairsville, and the First National Bank of Bridgeport. Both banks were organized as national associations prior to 1900. Belmont National Bank operates through a network of thirteen branches located in Belmont, Harrison and Tuscarawas Counties in Ohio and Ohio County in West Virginia. The main office is located in the Woodsdale section of Wheeling, West Virginia. In addition to its main office in West Virginia, the Bank operates a branch in the Elm Grove section of Wheeling. Branch locations in Belmont County, Ohio include St. Clairsville, Bridgeport, Lansing, Shadyside, Ohio Valley Mall, Bellaire and Plaza West, St. Clairsville. The Bank's St. Clairsville facility serves as the location for the Company's and the Bank's executive, administrative, finance and operations functions. The Harrison County branch is located in Cadiz, Ohio. Branches in Tuscarawas County are located in New Philadelphia, Ohio. The three New Philadelphia offices were acquired on October 2, 1992, when Belmont National Bank acquired the deposits and loans of these offices from Diamond Savings and Loan. Belmont National Bank provides a wide range of retail banking services to individuals and small to medium-sized businesses. These services include various deposit products, business and personal loans, credit cards, residential mortgage loans, home equity loans, and other consumer oriented financial services including IRA and Keogh accounts, safe deposit and night depository facilities. Belmont National Bank also owns automatic teller machines located at branches in Bellaire, Bridgeport, Woodsdale, Elm Grove, Cadiz, the Ohio Valley Mall, Plaza West, Shadyside, Schoenbrunn and New Philadelphia providing 24 hour banking service to our customers. Belmont National Bank belongs to STAR Systems, Inc., a nationwide ATM network with thousands of locations nationwide. Belmont National Bank offers a wide variety of fiduciary services. The trust department of the Bank administers pension, profit-sharing, personal trusts and estates. BELMONT FINANCIAL NETWORK On July 1, 1985, Belmont formed a subsidiary corporation, Belmont Financial Network, Inc. BFN serves as a community development corporation by investing in low income housing projects that provide low income and historic tax credits. SUPERVISION AND REGULATION Belmont is supervised and examined by the Board of Governors of the Federal Reserve system under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). The BHC Act requires the prior approval of the Federal Reserve Board for a bank holding company to acquire or hold more than a 5% voting interest in any bank, and restricts interstate banking activities. The BHC Act allows interstate branching by acquisitions anywhere in the country and acquisition and consolidation in those states that had not opted out by January 1, 1997. The BHC Act restricts Belmont's nonbanking activities to those which are determined by the Federal Reserve Board to be closely related to banking and a proper incident thereto. The BHC Act does not place territorial 2 restrictions on the activities of nonbank subsidiaries of bank holding companies. Belmont's banking subsidiary is subject to limitations with respect to transactions with affiliates. The enactment of the Graham-Leach-Bliley Act of 1999 (the "GLB Act") represented a pivotal point in the history of the financial services industry. The GLB Act swept away large parts of a regulatory framework that had its origins in the Depression Era of the 1930s. Effective March 11, 2000, new opportunities became available for banks, other depository institutions, insurance companies and securities firms to enter into combinations that permit a single financial services organization to offer customers a more complete array of financial products and services. The GLB Act provides a new regulatory framework for regulation through the financial holding company which has as its umbrella regulator the Federal Reserve Board. Functional regulation of the financial holding company's separately regulated subsidiaries will be conducted by their primary functional regulator. The GLB Act requires "satisfactory" or higher Community Reinvestment Act compliance for insured depository institutions and their financial holding companies in order for them to engage in new financial activities. The GLB Act provides a federal right to privacy of non-public personal information of individual customers. The Bank's deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"). As a national bank, Belmont National Bank is supervised and examined by the Office of the Comptroller of the Currency. A substantial portion of the Company's cash revenue is derived from dividends paid by its subsidiary bank. These dividends are subject to various legal and regulatory restrictions as summarized in Notes 16 and 20 of the Company's Consolidated Financial Statements. A fundamental principle underlying the Federal Reserve's supervision and regulation of bank holding companies is that bank holding companies should be a source of managerial and financial strength to their subsidiary banks. Subsidiary banks in turn are to be operated in a manner that protects the overall soundness of the institution and the safety of deposits. Bank regulators can take various remedial measures to deal with banks and bank holding companies that fail to meet legal and regulatory standards. The Financial Reform, Recovery and Enforcement Act of 1989 provides that a holding company's controlled insured depository institutions are liable for any loss incurred by the FDIC in connection with the default of any FDIC-assisted transaction involving an affiliated insured bank or savings association. The Federal Deposit Insurance Corporation Improvement Act of 1991 created five capital-based supervisory levels for banks and requires bank holding companies to guarantee compliance with capital restoration plans of undercapitalized insured depository affiliates. The monetary policies of regulatory authorities, including the Federal Reserve Board and the FDIC, have a significant effect on the operating results of banks and bank holding companies. The nature of future monetary policies and the effect of such policies on the future business and earnings of Belmont and its subsidiary bank cannot be predicted. In August 1999, Belmont and the Bank entered into consent agreements with the Federal Reserve Bank of Cleveland and the Office of the Comptroller of the Currency under which Belmont and the Bank agreed to take specified actions and adhere to specified operational procedures, as more fully described under Item 7. FOREIGN OPERATIONS Belmont Bancorp. has no foreign operations. ITEM 2-PROPERTIES DESCRIPTION OF PROPERTIES In January 1996, the Bank relocated its headquarters to Wheeling, West Virginia. The office is located at 980 National Road and consists of a 14,000 square foot, combination one and two story masonry block building. Approximately half of the space is leased to a tenant. In addition, the Bank transacts business in the following branch locations: 3 St. Clairsville Office-This office, located at 154 West Main Street, consists of a two story brick building owned by the Bank with attached drive-in facilities. The building consists of 9,216 square feet which houses the commercial bank operations and the executive and human resources offices. Ohio Valley Mall Office-This office is located at the Ohio Valley Mall, a major shopping mall located two miles east of St. Clairsville, Ohio off of Interstate 70. The office consists of a 1,400 square foot office located along the perimeter of the Mall at the main entrance. An ATM is located at the drive-in facility. Lansing Office-This 1,352 square foot office is located in Lansing, Ohio, a small community approximately six miles east of St. Clairsville on US. Route 40. The facility is a masonry building with adjoining drive-in facilities. Bridgeport Office-This office is located in Bridgeport, Ohio, a community located on the Ohio/West Virginia border, approximately 10 miles east of St. Clairsville. Part of the office space is leased to another business. This 5,096 square foot facility is a masonry building with adjoining drive-in facilities and an ATM. Shadyside Office-This 1,792 square foot office is located in Shadyside, a village located on Ohio State Route 7. The facility is a masonry building with accompanying drive-in facilities and an ATM. Cadiz Office-This office is located in Cadiz, Ohio in Harrison County, approximately seventeen miles north of St. Clairsville at the intersection of State Routes 9 and 22. The brick and tile building contains 1,800 square feet with an accompanying drive-in facility and an ATM. New Philadelphia Office-This office, located at 152 North Broadway Avenue, is a 33,792 square foot site improved with two inter-connected, two story brick office buildings with a total building area of 13,234 square feet. Part of the office space is leased to other businesses. This location also has a drive-in facility and an ATM. Schoenbrunn Office-This office, located at 2300 East High Avenue, is comprised of a one story, 1,605 square foot brick structure with a 783 square foot drive-thru canopy and an ATM. Wabash Office-This office, located at 525 Wabash Avenue, is comprised of a 14,250 square foot site with a 246 square foot drive-thru banking facility. Elm Grove Office-This office is located at 2066 National Road in Wheeling, WV, and includes a drive-thru facility and an ATM. Bellaire Office - This leased office, located in the Imperial Shopping Center, is comprised of approximately 1,750 square feet with an adjoining drive-thru facility and ATM. Plaza West Office - This office is located at the west end of St. Clairsville on Plaza Drive and includes a drive-thru facility and an ATM. All offices are owned by the Bank except for the Ohio Valley Mall and Bellaire offices. The land for the Elm Grove office is also leased. The Ohio Valley Mall office lease expires in 2003 and contains a five year renewal option. The Bellaire office lease expires in 2007 and contains a ten year renewal option. The land lease for the Elm Grove office expires in 2005 and provides for four, five year renewal options. ITEM 3-LEGAL PROCEEDINGS The Company is a defendant in a suit for damages brought in the Court of Common Pleas for Belmont County, Ohio in April 1999 by George Michael Riley and others against the Bank and certain former officers, among others, alleging torts to have occurred in connection with the Bank's denial of a loan to a third party to finance the sale of a business owned by the plaintiffs. It is claimed that a former loan officer of the Bank later 4 purchased the business at a lower price with financial assistance from the Bank's former chief operating officer. The trial, originally scheduled for October 2001, has been continued to June 2002. The plaintiffs seek monetary damages. Based on the advice of counsel, the Company believes its exposure to liability, if any, is minimal in this case. In addition, any award to the Rileys should be covered under a Directors and Officers Liability Insurance Policy issued by Progressive Casualty Insurance Company. Another case, filed in the same court in May 1999 by Charles J. and Rebecca McKeegan, the beneficial owners of the potential purchaser of the business in the same transaction, was settled for nominal consideration and dismissed with prejudice in August 2001. In October 1999, the Company joined in a pending action known as the Greentree Financial Servicing Corp. v. Schwartz Homes, Inc., et al in the Court of Common Pleas of Tuscarawas County, Ohio, alleging that it had been the victim of an "elaborate fraud" that resulted in more than $15 million in losses to the Bank. Following an extensive internal review of its loan portfolio, the Bank filed claims against Steven D. Schwartz, President of Schwartz Homes, Inc., the now-closed New Philadelphia retailer of manufactured homes. At the same time, the Bank filed claims against three additional people: Linda Reese, Schwartz Homes' Chief Financial Officer; William Wallace, the Bank's former Executive Vice-President and Chief Operating Officer; and Christine Wallace, his wife. The Wallaces have filed counterclaims in an indeterminate amount upon various bases, including invasion of privacy, defamation and failure to distribute moneys allegedly due them under a deferred and certain other compensation plans. In addition, a group of customers of Schwartz Homes, Inc. intervened and filed a complaint against the Bank, alleging that it was liable for their losses. The case had been scheduled for trial in May 2001, but during that month Mr. Schwartz filed for bankruptcy, which automatically stayed the proceeding. The Bankruptcy Court subsequently granted the Company's motion for relief from the automatic stay, and the trial before the Court of Common Pleas of Tuscarawas County, Ohio was rescheduled for January 2002. Principally for strategic considerations in other related cases, the Company dismissed the claims against William and Christine Wallace, without prejudice. These claims have since been settled, as more fully described below. In December 2001, the customers of Schwartz Homes, Inc. dismissed their claim against the Bank, without prejudice. The amount of their claim had not been specified. The Company has since reached an agreement in principle to settle those claims. In October 1999, James John Fleagane, a shareholder of the Company, filed an action against the Company, the Bank and certain of the Company's and the Bank's current and former officers and directors in the Circuit Court of Ohio County, West Virginia. The plaintiff alleged, among other things, that the Bank and its directors and officers negligently transacted and administered various loans with respect to Schwartz Homes, Inc. and customers of Schwartz. In the complaint, the plaintiff sought damages for the loss in value of his stock and other compensatory and punitive damages in an unspecified amount and requested class action certification for the common shareholders of the Company. The court denied the Company's motion to dismiss the case in July 2000. In August 2000, the plaintiff filed an amended complaint, to which the Company has filed an answer, affirmative defenses and cross-claims against the Company's former accountants, S.R. Snodgrass, A.C. and a principal thereof; against J. Vincent Ciroli, Jr., formerly the Company's President and Chief Executive Officer; and against William Wallace, formerly the Company's Chief Operating Officer. In February 2001, the court granted leave to the plaintiff to file a second amended complaint. The second amended complaint eliminated the direct claims against the Company and the Bank and the request for class action certification. Accordingly, as amended, this action constituted a derivative suit against current and former officers and directors of the Company and the Bank as well as the former auditor of the Company and the Bank. In August 2001, the plaintiff dismissed the claims against the officers of the Company and the Bank (except for Messrs. Ciroli and Wallace). In October 2001, the plaintiff, James John Fleagane, and the Company reached an agreement to settle the claims against S.R. Snodgrass and its principal for $4 million, and the court ordered that a notice of the proposed settlement be sent to the Company's shareholders to afford them the opportunity to support the settlement, object to it, or intervene in the case. A committee of four of the Company's disinterested directors who are not parties in this case recommended that the proposed settlement be approved. The proposed settlement was approved by the court on November 26, 2001. After payment of the plaintiff's attorneys fees and other litigation costs, the Company received approximately $2.2 million in February 2002, which has been recorded as income in 2002. Progressive Casualty Insurance Company ("Progressive") sold to the Company a Directors and Officers Liability Policy providing for $3 million of coverage and a separate financial institution fidelity bond in the face amount of $4.75 million. The Company filed a claim under the fidelity bond policy to recover the losses incurred in connection with the Schwartz Homes, Inc. loan relationship. The Company also claimed coverage under the 5 directors and officers liability policy in connection with the Schwartz Homes, Inc. case as well as other cases the Company is defending. Progressive declined to honor these claims and, in December 1999, filed an action in the United States District Court for the Southern District of Ohio, Eastern Division asking the court to issue a declaratory judgment declaring that Progressive is not liable under either the directors and officers liability policy or the fidelity bond policy. In September 2000, the court granted the Company's motion to dismiss the declaratory judgment claim. Progressive had also asked the court, if Progressive is to be found liable under these policies, to determine whether the Bank or other parties who have sued the Bank in separate actions are entitled to the insurance proceeds. Progressive has deposited with the court bonds in the aggregate amount of $7.75 million, which amount Progressive believes is sufficient to satisfy any liabilities under the policies in respect of this interpleader claim. In May 2001, the court consolidated this action with a separate case brought by the Company against Progressive in the Circuit Court of Ohio County, West Virginia, which was then removed to United States District Court for the Northern District of West Virginia, in which the Company sought to recover damages related to Progressive's failure to honor the Company's claims under the fidelity bond. These actions have been settled as more fully described below. In June 2001, J. Vincent Ciroli, Jr. filed an action in the Common Pleas Court of Belmont County, Ohio against the Company and the Bank seeking recovery of his defense costs in the Fleagane case and a separate proceeding brought against him by the Office of the Comptroller of the Currency, and a determination of the amount of deferred compensation and other employment benefits to which he claims to be entitled for his service to the Company and the Bank. The Company filed an answer to the complaint in July 2001 and an amended answer and counterclaim in August 2001. The amended counterclaim alleges breach of fiduciary duty on the part of Mr. Ciroli and seeks recovery of certain funds paid to him under one of his incentive compensation plans. The Company has reached a settlement of these claims, described below. In late 2001, the parties agreed upon the terms of a comprehensive settlement that resolved the litigation with Progressive; the Fleagane litigation; the Ciroli litigation and the Greentree litigation (other than the claims by customers of Schwartz Homes, Inc., which were subsequently settled in March 2002). Under the settlement, Progressive will pay $3 million on the directors and officers policy toward the settlement of the claims asserted in Fleagane. On March 11, 2002, the United States District Court for the Southern District of Ohio, Eastern Division, entered an order approving the distribution of Progressive's funds consistent with the settlement agreement. After payment of plaintiff's attorneys fees and other settlement related legal costs, the Company expects to receive approximately $1.7 million during the second quarter of 2002 from Progressive. In addition, Progressive will pay $675,000 to the Company to settle the claims on the fidelity bond. The Outside Directors paid $2.65 million to settle the claims asserted by Fleagane; after payment of plaintiff's attorneys' fees and costs, the Company received approximately $1.7 million in March 2002. None of these amounts were accrued in the financial statements during 2001. The proceeds of the settlement will be recorded as income during 2002. As part of the settlement, the Company will turn over to Mr. Ciroli and Mr. Wallace funds held in their deferred compensation and retirement plans and will pay a portion of their costs of defense. These costs will be recorded during 2002 in conjunction with the receipt of the settlement proceeds. The claims asserted by Messrs. Ciroli and Wallace will be dismissed with prejudice. When completed, five separate lawsuits described above will be concluded. The Company's claim against Progressive relating to the Riley litigation will not be affected since that claim arose in a different policy year. As noted above, the claims by the customers of Schwartz Homes, Inc. have also been settled in principle, which will be recorded in 2002. There is one item from the shareholder derivative case that may remain. Mr. Fleagane sought compensation for the time he spent prosecuting the derivative claim. The Company opposed his request, and in January 2002 the trial court denied his request. The time for filing an appeal has not expired. In August 1999, the Bank was named as a defendant in a lawsuit filed in the Belmont County Common Pleas Court by Joseph C. Heinlein, Jr. against his former secretary, the Bank, other financial institutions and individuals with whom the secretary did business. The Complaint alleges that the secretary embezzled funds from the plaintiff's account over a period of several years by forging his signature to checks and alleges negligence on the 6 part of the Bank for honoring such checks. The secretary had entered into a plea agreement under which she has paid $500,000 in restitution and received a prison sentence. The complaint was amended to claim damages of $1,250,000; however, at a subsequent pre-trial conference, the plaintiff advised the court that his net losses (after application of the $500,000 restitution payment) were approximately $650,000. The complaint sought recovery of those losses. The Bank settled this suit during March 2002 for nominal consideration. On October 22, 2001, BVM Hospitality, Inc. Kiran Patel, Raman Patel and Chandu Patel filed suit in the United States District Court for the Northern District of Ohio (in Cleveland) against the Bank, four of its directors and one of its officers alleging that the Bank declined to extend credit based upon their national origin. The complaint seeks an unspecified sum of compensatory and punitive damages. BVM sought to refinance a $1.75 million mortgage loan on a motel located in Streetsboro, Ohio. The Bank has filed an answer denying the claims. In addition, the Bank has filed a motion to dismiss the case contending that venue in Cleveland is improper. The Bank believes that it has meritorious defenses and intends to defend the case. As the case was just recently filed, no trial date has been set. ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5-MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDERS' MATTERS The number of shareholders of record for the Company's stock as of March 20, 2002 was 1,010. The closing price of Belmont stock on March 16, 2002 was $4.10 per share. Belmont Bancorp.'s common stock has a par value of $0.25 and, since October 1994, has been traded on the Nasdaq SmallCap market. High and low market prices and dividend information for the past two years for Belmont's common stock are depicted in the following tables. 2001 2000 ----------------------------------------------------- -------------------------------------------- Dividend Dividend Quarter High Low per Share Quarter High Low per Share ----------------------------------------------------- -------------------------------------------- 1st $4.625 $3.063 $0.000 1st $6.500 $2.063 $0.000 2nd $4.120 $3.500 0.000 2nd $3.250 $1.625 0.000 3rd $3.820 $2.400 0.000 3rd $4.750 $2.250 0.000 4th $4.250 $2.400 0.000 4th $6.000 $2.625 0.000 ------ ------ Total $0.000 Total $0.000 ====== ====== Information regarding the limitations on dividends available to be paid can be located in Item 7 and in Note 16 of the Notes to the Consolidated Financial Statements in the Company's financial statements beginning on page F-1 (Item 8). Treasury stock is accounted for using the cost method. There were 51,792 shares held in treasury on December 31, 2001 and 2000. 7 ITEM 6 - SELECTED FINANCIAL DATA The data presented herein should be read in conjunction with the audited Consolidated Financial Statements beginning on page F-1. Consolidated Five Year Summary For the Years Ended December 31, 2001, 2000, 1999, 1998 and 1997 ($000s except per share data) 2001 2000 1999 1998 1997 ------------------------------------------------------------------------------------------------------------------- Interest and dividend income $ 18,131 $ 19,137 $ 25,870 $ 30,787 $ 28,348 Interest expense 9,810 10,702 15,609 16,480 14,004 ------------------------------------------------------------------------------------------------------------------- Net interest income 8,321 8,435 10,261 14,307 14,344 Provision for loan losses (600) 242 15,877 12,882 1,055 ------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 8,921 8,193 (5,616) 1,425 13,289 Securities gains (losses) (120) 4 (880) 1,338 799 Trading gains (losses) -- -- (10) 62 -- Gain on sale of real estate -- -- -- 383 -- Gain (loss) on sale of loans and loans held for sale 281 (40) 341 144 91 Interest on federal tax refund -- 256 -- -- -- Other operating income 2,328 2,163 2,222 2,039 1,919 Operating expenses 12,690 9,870 12,642 9,496 8,732 ------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (1,280) 706 (16,585) (4,105) 7,366 Income taxes (benefit) (865) (680) (5,554) (2,186) 1,421 ------------------------------------------------------------------------------------------------------------------- Net income (loss) ($ 415) $ 1,386 ($ 11,031) ($ 1,919) $ 5,945 ------------------------------------------------------------------------------------------------------------------- Basic earnings (loss) per common share (1) ($ 0.04) $ 0.16 ($ 2.11) ($ 0.37) $ 1.13 ------------------------------------------------------------------------------------------------------------------- Cash dividend declared per share (1) -- -- $ 0.120 $ 0.385 $ 0.306 ------------------------------------------------------------------------------------------------------------------- Book value per common share (1) $ 2.33 $ 2.31 $ 1.83 $ 4.86 $ 6.05 ------------------------------------------------------------------------------------------------------------------- Total loans $ 115,674 $ 129,876 $ 166,979 $ 208,186 $224,900 Total assets 288,856 281,788 315,767 438,283 388,713 Total deposits 238,486 231,686 255,432 304,351 263,908 Long term borrowings 20,000 20,000 20,000 91,401 69,635 Total shareholders' equity 25,846 25,602 11,231 25,364 31,899 ------------------------------------------------------------------------------------------------------------------- (1) Restated for stock dividends paid during 1997 and 1998. 8 ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The data presented in this discussion should be read in conjunction with the audited consolidated financial statements beginning on page F-1. 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 more fully below, 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. . The Company is currently engaged in certain lawsuits. In addition to making significant expenditures for legal fees, adverse judgments in one or more of these lawsuits could have a materially adverse impact on the Company's financial condition. 9 RESULTS OF OPERATIONS Summary For the year ended 2001, Belmont Bancorp. incurred a net loss of $415,000, or a loss of $0.04 per common share compared to net income of $1,386,000, or $.16 per common share, for the year ended 2000. For 1999, the Company reported a loss of $11,031,000, or a loss of $2.11 per share. Throughout 2001, the Company continued its restructuring efforts and successfully reduced nonperforming assets. By the end of 2001, nonperforming assets had declined to $2.8 million, down significantly from $9.3 million at December 31, 2000 and $14.3 million at December 31, 1999. The Company will continue to focus its efforts to achieve further reductions to nonperforming assets during 2002. The year 2001 concluded with a comprehensive legal settlement wherein the Company extricated itself from five lawsuits, including a costly shareholder derivative action. This will enable the Company to focus resources on its core business--community banking. The settlement is more fully described under Item 3 - Legal Proceedings. The Company faced unusually high operating expenses during each of the last three years. In particular, large legal expenses, consulting fees, deposit insurance costs, and other insurance costs severely impacted profitability. Legal expenses exceeded $2.8 million for the year ended 2001, $1.1 million for the year ended 2000, and $1.6 million for the year ended 1999. As a result of the settlement agreement, in February 2002 the Company received a pre-tax payment from its former independent audit firm in the amount of $2.2 million after payment of the plaintiff's attorneys' fees and costs. In March 2002, the Company received a pre-tax payment of $1.7 million representing its portion of the settlement proceeds from the claims against the Outside Directors in the derivative action. In addition, the Company expects to receive pre-tax settlement proceeds of $2.4 million, net of plaintiff's attorneys' fees and costs and other legal costs negotiated under the terms of the settlement, from its former insurance carrier. Other settlement costs are expected to be paid from these proceeds. These items will be reflected in the financial statements for 2002. 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. The performance of the Company during 1999 was severely impacted by loan losses and additional overhead costs associated with interim management, legal services, and collection efforts. Loan charge-offs during 1999 totaled $11,650,000 and the loan loss provision was $15,877,000. Interim management was retained during the last half of 1999 following the resignations of the Bank's chief operating and lending officer and the chief executive officer. During the year 2000, the Bank received settlement proceeds of $3.2 million from the Schwartz Homes, Inc. bankruptcy settlement. From the settlement proceeds, the Bank applied $1.2 million to eliminate the remaining credit exposure for the Schwartz related consumer loans, $1.8 million was recorded as a recovery in the allowance for loan losses, and the remainder was recorded as a recovery of legal expenses. The Company continues to operate under an agreement entered into during August 1999 with the Federal Reserve Bank of Cleveland, the federal regulatory agency for the Company. The Bank also continues to operate under a consent order entered into during August 1999 with the Office of the Comptroller of the Currency, its primary regulator. The consent order mandates that the Bank maintain a 6% Tier 1 leverage ratio. The agreements also prohibit the Company and the Bank from paying dividends without obtaining prior regulatory approval. These agreements are more fully described in Note 20 of the Notes to the Consolidated Financial Statements in the Company's financial statements beginning on page F-1 (Item 8). 10 The following table depicts the Company's performance for the past three years. ($000s) except per share data 2001 2000 1999 -------------------------------------------------------------------------------- Income (loss) before income taxes ($1,280) $706 ($16,585) Net income (loss) ($415) $1,386 ($11,031) Basic earnings (loss) per common share ($0.04) $0.16 ($2.11) Return on average assets -0.15% .49% -2.79% Return on average total equity -1.57% .77% -56.92% Net Interest Income Net interest income is the difference between interest income on earning assets such as loans and securities, and interest expense paid on liabilities such as deposits and borrowings. This is the Company's largest revenue source. Net interest income is affected by the general level of interest rates, changes in interest rates and by changes in the amount and composition of interest-earning assets and interest-bearing liabilities. The relative performance of the lending and deposit-raising functions is frequently measured by two statistics--net interest margin and net interest rate spread. The net interest margin is determined by dividing fully-taxable equivalent net interest income by average interest-earning assets. The net interest rate spread is the difference between the average fully-taxable equivalent yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. The net interest margin is generally greater than the net interest rate spread due to the additional income earned on those assets funded by non-interest-bearing liabilities, or free funding, such as demand deposits and shareholders' equity. The Consolidated Average Balance Sheets and Analysis of Net Interest Income compare interest revenue and interest-earning assets outstanding with interest cost and liabilities outstanding for the years ended December 31, 2001, 2000, and 1999, and compute net interest income, net interest margin and net interest rate spread for each period. All three of these measures are reported on a taxable equivalent basis. Loan fees included in interest income were $521,000, $190,000 and $343,000 for 2001, 2000 and 1999, respectively. Nonaccrual loans and loans held for sale have been included in the average loan balances. Average outstanding securities balances are based upon amortized cost excluding any unrealized gains or losses on securities available for sale. 11 Consolidated Average Balance Sheets and Analysis of Net Interest Income For the Years Ended December 31 (Taxable Equivalent Basis) ($000's) ---------------------------------------------------------------------------------------------------- 2001 2000 1999 ---------------------------------------------------------------------------------------------------- Average Average Average Average Average Average Out- Revenue/ Yield/ Out- Revenue/ Yield/ Out- Revenue/ Yield/ Standing Cost Rate standing Cost Rate standing Cost Rate ---------------------------------------------------------------------------------------------------- Assets Interest-earning assets: Loans $121,238 $10,639 8.78% $143,012 $12,240 8.56% $193,295 $16,641 8.61% Securities: Taxable 82,332 5,068 6.16% 66,038 4,479 6.78% 125,314 7,017 5.60% Exempt from income tax 39,199 2,705 6.90% 44,581 3,090 6.93% 41,276 2,893 7.01% Trading account assets -- -- na -- -- na 1,786 86 4.82% Federal funds sold 17,940 634 3.53% 6,122 391 6.39% 5,277 269 5.10% ----------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 260,709 19,046 7.31% 259,753 20,200 7.78% 366,948 26,906 7.33% ----------------------------------------------------------------------------------------------------------------------------------- Cash and due from banks 9,255 9,483 11,377 Other assets 23,161 26,255 28,590 Market value depreciation of securities available for sale (1,680) (7,382) (4,486) Allowance for loan loss (6,686) (8,046) (7,204) ----------------------------------------------------------------------------------------------------------------------------------- Total Assets 284,759 280,063 395,225 =================================================================================================================================== Liabilities Interest-bearing liabilities: Interest checking 25,137 498 1.98% 24,464 623 2.55% 40,649 1,245 3.06% Savings 69,837 1,851 2.65% 68,652 2,231 3.25% 82,919 2,653 3.20% Other time deposits 113,902 6,424 5.64% 112,605 6,311 5.60% 133,419 6,996 5.24% Other borrowings 21,266 1,037 4.88% 29,682 1,537 5.18% 87,498 4,715 5.39% ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 230,142 9,810 4.26% 235,403 10,702 4.55% 344,485 15,609 4.53% ----------------------------------------------------------------------------------------------------------------------------------- Demand deposits 25,457 24,749 28,865 Other liabilities 2,753 2,084 2,496 ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 258,352 262,236 375,846 ----------------------------------------------------------------------------------------------------------------------------------- Stockholders' Equity 26,407 17,827 19,379 ----------------------------------------------------------------------------------------------------------------------------------- Liabilities & Stockholders' Equity 284,759 280,063 395,225 =================================================================================================================================== Net interest income margin on a taxable equivalent basis 9,236 3.54% 9,498 3.66% 11,297 3.08% =================================================================================================================================== Net interest rate spread 3.05% 3.23% 2.80% =================================================================================================================================== Interest-bearing liabilities ----------------------------------------------------------------------------------------------------------------------------------- to interest-earning assets 88.28% 90.63% 93.88% ----------------------------------------------------------------------------------------------------------------------------------- Fully taxable equivalent basis computed at effective federal tax rate of 34%. 12 The following table shows changes in taxable-equivalent interest income, interest expense, and net interest income due to volume and rate variances for major categories of earning assets and interest-bearing liabilities. The change in interest not solely due to changes in volume or rates has been consistently allocated in proportion to the absolute dollar amount of the change in each and is reflected as the mix. Analysis of Net Interest Income Changes (Taxable Equivalent Basis) ($000's) 2001 Compared to 2000 2000 Compared to 1999 --------------------------------------- ----------------------------------------- Volume Yield Mix Total Volume Yield Mix Total ------------------------------------------------------------------------------------ ----------------------------------------- Increase (decrease) in interest income: Loans ($1,864) $310 ($47) ($1,601) ($4,329) ($97) $25 ($4,401) Securities: Taxable 1,105 (414) (102) 589 (3,319) 1,482 (701) (2,538) Exempt from income tax (373) (14) 2 (385) 232 (32) (3) 197 Trading account assets 0 0 0 0 (86) (86) 86 (86) Federal funds sold 755 (175) (337) 243 43 68 11 122 ------------------------------------------------------------------------------------ ----------------------------------------- Total interest income change (377) (293) (484) (1,154) (7,459) 1,335 (582) (6,706) ------------------------------------------------------------------------------------ ----------------------------------------- Increase (decrease) in interest expense: Interest checking 17 (138) (5) (126) (496) (210) 84 (622) Savings 39 (411) (7) (379) (456) 42 (8) (422) Other time deposits 73 40 0 113 (1,091) 482 (76) (685) Other borrowings (436) (90) 26 (500) (3,116) (184) 122 (3,178) ------------------------------------------------------------------------------------ ----------------------------------------- Total interest expense change (307) (599) 14 (892) (5,159) 130 122 (4,907) ------------------------------------------------------------------------------------ ----------------------------------------- Increase (decrease) in net interest Income on a taxable equivalent basis ($70) $306 ($498) ($262) ($2,300) $1,205 ($704) ($1,799) ======================================================================== ========================================= (Increase) decrease in taxable equivalent adjustment 148 (27) ------------------------------------------------------------------------------------ ----------------------------------------- Net interest income change ($114) ($1,826) ------------------------------------------------------------------------------------ ----------------------------------------- The Company's taxable equivalent net interest income declined 2.8% to $9,236,000 in 2001 from $9,498,000 in 2000. Total interest-earning assets increased modestly to $260.7 million in 2001 from $259.8 million in 2000. The decline in net interest income was largely due to the change in the composition of earning assets with average loan balances, earning an average yield of 8.78%, falling from $143.0 million in 2000 to $121.2 million in 2001. The volume of taxable securities, earning an average yield of 6.16%, and federal funds sold, yielding an average of 3.53%, expanded to absorb the declining loan volume. The decline in loan balances was principally due to a decrease in the amount of nonaccrual loans, the decision by management not to retain a large volume of long-term, fixed rate mortgage loans originated during a period of low interest rates, and competitive pressures. Declining interest rates throughout 2001 also contributed to lower yields on earning assets and lower cost of funds. The yield on earning assets was 7.31% for 2001, down from 7.78% for 2000. The yield on loans increased slightly despite the lower overall interest rate environment because the Company substantially reduced the volume of non-performing loans throughout 2001 compared to 2000. The cost of funds declined to 4.26% for 2001, down from 4.55% for 2000. The taxable equivalent interest rate margin fell to 3.54% in 2001 from 3.66% in 2000, and the net interest rate spread declined to 3.04% in 2001 from 3.23% in 2000. The Company's net interest income declined 15.9% to $9,498,000 in 2000 from $11,297,000 in 1999. The Company's average interest-earning assets declined $107.2 million in 2000 to $259.8 million from $366.9 million in 1999, down 29.2%. Most of the downsizing of the Company occurred during the fourth quarter of 1999 and the first half of 2000 as the Company reduced its asset size as part of its strategy to achieve a 6% Tier 1 leverage ratio. The yield on interest earning assets increased to 7.78% in 2000 from 7.33% in 1999 due to an increase in yield on taxable securities. The cost of interest bearing liabilities was nearly unchanged from 1999 to 2000. The taxable equivalent net interest margin increased to 3.66% in 2000 from 3.08% in 1999, and the net interest rate spread improved to 3.23% in 2000 from 2.80% in 1999. 13 Other Operating Income Other operating income excluding securities transactions increased 9.7% and totaled $2,609,000 in 2001, compared to $2,379,000 in 2000 and $2,553,000 in 1999. The table below shows the dollar amounts and growth rates of the components of other operating income: (Expressed in thousands) 2001 Change 2000 Change 1999 ------------------------------------------------------------------------------------------------------------ Trust income $593 41.5% $419 -13.4% $484 Service charges on deposits 918 8.3% 848 -7.9% 921 Interest on federal tax refund -- -100.0% 256 N/A - Earnings on bank-owned life insurance 224 -3.0% 231 -1.7% 235 Gain (loss) on sale of loans and loans held for sale 281 802.5% (40) -111.7% 341 Trading losses -- N/A -- 100.0% (10) Other income (individually less than 1% of total income) 593 -10.8% 665 14.3% 582 ------------------------------------------------------------ Subtotal 2,609 9.7% 2,379 -6.8% 2,553 Securities gains (losses) (120) -3100.0% 4 100.5% (880) ------------------------------------------------------------ Total $2,489 4.4% $2,383 42.4% $1,673 ============================================================ Trust income increased to $593,000 in 2001, up 41.5% from $419,000 in 2000. The increase was primarily due to an increase in the service charge schedule for trust accounts effective beginning with the quarterly fees accrued on June 30, 2001, and a one time executor fee in the amount of $25,000. The decline in trust income to $419,000 in 2000 from $484,000 in 1999 was due to a loss of business. Service charges on deposits increased 8.3% to $918,000 in 2001 compared to $848,000 in 2000. This was principally due to an increase in overdraft charges and an increase in activity service charges on commercial demand deposit accounts resulting from higher usage of bank services and a lower earnings credit rate. The decline in service charge income in 2000 to $848,000 from $921,000 in 1999 was primarily the result of a reduction in the number of deposit accounts. During 2000, the Company recorded $256,000 in interest earned on federal tax refunds for taxes paid in previous years for net operating losses carried back to those years. Capitalized mortgage servicing rights included in gains on sales of loans and loans held for sale totaled $242,000 and $330,000 for 2001 and 1999, respectively. No additional mortgage servicing rights were capitalized during 2000. Mortgage loans originated and sold in the secondary market totaled $31.3 million during 2001. The total outstanding balance of mortgage loans sold without recourse and with servicing rights retained increased to $57.5 million at December 31, 2001 from $38.0 million at December 31, 2000 and $38.6 million at December 31, 1999. Securities losses recorded in 2001 included a writedown in book value of a financial institution stock owned by the Company. The Company's basis in the stock, Progress Financial Corporation ("Progress"), was written down to Progress' book value as reported for June 30, 2001 of $8.92 per share resulting in the recognition of a loss of $113,000. During July 2001, the Board of Directors of Progress approved a resolution with its regulators to reduce lending to early stage technology companies, increase its capital ratios and its valuation allowance, and implement improved credit review programs. Progress also ceased cash dividend payments. Belmont's management evaluated its holding in Progress and concluded that a writedown in value was warranted. Securities losses recorded during 1999 were part of a plan to reduce the asset size of the Bank. In October 1999, the Bank sold approximately $38 million in investment securities for a loss of $788,000 and used approximately $33 million of the proceeds to repay borrowings from the Federal Home Loan Bank of Cincinnati. Prepayment penalties associated with the repayment of borrowings totaled $342,000 and are included in operating expenses. 14 Operating Expenses The table below details the dollar amounts of and percentage changes in various categories of expense for the three years ended 2001, 2000, and 1999: (Expressed in thousands) 2001 % change 2000 % change 1999 ---------------------------------------------------------------------------------------------------------- Taxes other than payroll and real estate $226 841.7% $24 -90.6% $254 Supplies and printing 200 21.2% 165 -29.2% 233 Insurance, including federal deposit insurance 590 -23.8% 774 358.0% 169 Amortization of intangibles 147 1370.0% 10 -97.7% 439 Consulting expense 232 66.9% 139 -90.4% 1,442 Examinations and audits 446 24.2% 359 -6.8% 385 Prepayment penalties on Federal Home Loan Bank advances - N/A - -100.0% 342 Legal settlements 139 1058.3% 12 -95.9% 295 Advertising 220 57.1% 140 52.2% 92 Other (individually less than 1% of total income) 1,282 -3.2% 1,324 -22.3% 1,705 ------ ------ ------ Total $3,482 18.2% $2,947 -45.0% $5,356 ====== ====== ====== Taxes (other than payroll and real estate taxes) were $226,000 in 2001, up from $24,000 in 2000. The Bank is subject to state corporate franchise tax based on its capital base which increased as a result of the sale of the Company's common stock during 2000. The Bank's FDIC deposit insurance and other insurance costs declined to $590,000 in 2001 compared to $774,000 in 2000 due to the improvement in the Bank's capital ratios during 2000 which reduced the deposit insurance cost beginning in January 2001. Insurance costs in 2000 were significantly impacted by the Bank's risk profile as determined by its regulators due to loan losses incurred during 1999 as well as other factors. The cost of fidelity bond insurance and directors' and officers' liability insurance also increased significantly from 1999 to 2000. Amortization of intangible assets during 2001 and 2000 was related to mortgage servicing rights. No amortization expense related to mortgage servicing rights was recorded in 1999. The estimated value of mortgage servicing rights at the end of 2001 was $414,000 for a mortgage servicing porfolio of $57.5 million in outstanding loans. In 1999, the balance of core deposit intangible assets associated with branches acquired in the early 1990's were written off. The write-off resulted in the recognition of an additional $300,000 in amortization expense for the year. These intangible assets were primarily associated with the deposits acquired in the New Philadelphia market. During 1999, negative publicity surrounding the Schwartz loan relationships with the Bank resulted in a substantial decline in deposits in this market. As a result, management reevaluated the remaining core deposit intangible assets associated with this area and determined that the remaining balance should be written off. All of the amortization expense recorded during 1999 was related to core deposit intangibles. Consulting expenses in 2001 were $232,000 compared to $139,000 in 2000 and $1,442,000 in 1999. Consulting expense related to litigation in 2001 totaled $131,000. During 1999, the cost of interim management services included in consulting expense totaled $1,180,000, and consulting expense related to accounting and other services associated with the Schwartz Homes, Inc. loan collection totaled $194,000. Examination and audit expense increased to $446,000 in 2001 compared to $359,000 in 2000 and $385,000 in 1999. The increase from 2000 to 2001 was principally due to higher costs assessed by the Bank's regulators for its examinations and for audit costs associated with the Bank's trust department. Prepayment penalties associated with the repayment of borrowings at the Federal Home Loan Bank totaled $342,000 during 1999. These costs were incurred as part of the plan to reduce the asset size of the Company thereby improving the Bank's capital ratios. No repayment penalties were incurred during 2001 or 2000. 15 Other expenses incurred in 2001 and 2000 were significantly less than in 1999, principally due to expenses associated with travel and lodging costs for interim management retained during the last half of 1999. FINANCIAL CONDITION Securities The Company uses securities to generate interest and dividend revenue, to manage interest rate risk and to provide liquidity to meet operating cash needs. The securities portfolio yield at December 31, 2001 was 5.87%. Net unrealized losses in the securities portfolio at December 31, 2001 totaled $2,088,000, compared to net unrealized losses of $2,947,000 at December 31, 2000. The decline in unrealized losses was the result of a lower interest rate environment at December 31, 2001 compared to December 31, 2000. Bond prices rise as interest rates decline. Management believes the current declines in fair value are temporary. The maturities and yields of securities available for sale (excluding equity securities) at December 31, 2001 are detailed in the following table. The yields are expressed on a taxable equivalent basis. Maturities of mortgage-backed securities and agency loan pools are based on estimated average life. Maturity 1-5 Year 6-10 Year Over 10 Year (Expressed in Less Than 1 year Maturity Maturity Maturity Total thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield ------------------------------------------------------------------------------------------------------------------------------- U. S. Treasury $ -- -- $104 4.22% $ -- -- $ -- -- $104 4.22% securities U.S. Government agencies and corporations (a) -- -- 10,895 3.36% 2,731 4.02% -- -- 13,626 3.49% States and political subdivisions (b) 521 3.99% 7,270 4.97% 380 10.68% 28,656 7.24% 36,827 6.78% Corporate debt 1,997 2.76% 8,322 4.86% -- -- 2,532 7.97% 12,851 5.15% Agency mortgage-backed securities (a) 1,704 2.94% 28,306 5.85% 7,249 6.61% 2,014 8.22% 39,273 5.99% Collateralized mortgage obligations 4,843 5.32% 7,215 6.78% -- -- 6,712 6.46% 18,770 6.29% ------------------------------------------------------------------------------------------------------------------------------- Total fair value $9,065 4.23% $62,112 5.28% $10,360 6.05% $39,914 7.11% $121,451 5.87% =============================================================================================================================== Amortized cost $8,988 $61,757 $10,287 $42,599 $123,631 =============================================================================================================================== (a) Maturities of mortgage-backed securities and agency loan pools are based on estimated average life. (b) Taxable equivalent yields. The Company elected to transfer the balance of securities previously classified as Held to Maturity to the Available for Sale portfolio effective April 1, 1999 in accordance with Statement of Financial Accounting Standard (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. This was provides for greater flexibility in the management of the securities portfolio. The effect the adoption of SFAS No. 133 was to increase other comprehensive income by $244,000 for the year ended December 31, 1999. Privately issued collateralized mortgage obligations included in the table above have a book value of $6,059,000 and an estimated fair value of $6,165,000. Credit risk is evaluated based upon independent rating agencies and on the underlying collateral of the obligation. At December 31, 2001, the Company owned various investments of a single issuer, the book value of which exceeded 10% of total shareholders' equity, or $2,585,000. These concentrations occurred primarily as a result of the decline in the Company's shareholders' equity subsequent to purchase. The following table details the issuer, book value and market value of these investments. 16 (Expressed in thousands) Amortized Estimated Issuer Cost Fair Value -------------------------------------------------------------------------------- Privately Issued Collateralized Mortgage Obligations: Norwest Asset Securities Corporation $2,978 $3,038 Revenue Bonds: Suburban Lancaster PA Sewer Authority 2,838 2,573 Equity Securities: Federal Home Loan Bank stock 3,299 3,299 ------------------- Total $9,115 $8,910 =================== Loans The following table shows the history of commercial and consumer loans by major category at December 31: (Expressed in thousands) 2001 2000 1999 1998 1997 ------------------------------------------------------------------------------------- Commercial loans: Real estate construction $ 3,318 $ 12,856 $ 9,732 $ 135 $ 1,418 Real estate mortgage 35,892 22,738 17,478 14,719 19,983 Commercial, financial and agricultural 34,085 48,789 81,842 119,730 109,618 ---------------------------------------------------- Total commercial loans $ 73,295 $ 84,383 $109,052 $134,584 $131,019 ---------------------------------------------------- Consumer loans: Residential mortgage $ 38,701 $ 40,794 $ 45,944 $ 56,364 $ 77,111 Installment loans 2,870 3,832 9,315 14,483 14,435 Credit card and other consumer 808 867 823 1,021 1,451 ---------------------------------------------------- Total consumer loans $ 42,379 $ 45,493 $ 56,082 $ 71,868 $ 92,997 ---------------------------------------------------- Total loans $115,674 $129,876 $165,134 $206,452 $224,016 ==================================================== An analysis of maturity and interest rate sensitivity of business loans at the end of 2001 follows: Under 1 to 5 Over 5 (Expressed in thousands) 1 year Years Years Total -------------------------------------------------------------------------------- Domestic loans: Real estate construction $ 2,907 $ 70 $ 341 $ 3,318 Real estate mortgage 18,855 9,233 5,976 34,064 Commercial, financial and agricultural 20,025 9,926 3,232 33,183 Direct financing leases -- 249 -- 249 ------------------------------------ Total business loans (a) $41,787 $19,478 $9,549 $70,814 ==================================== Under 1 to 5 Over 5 (Expressed in thousands) 1 year Years Years Total -------------------------------------------------------------------------------- Rate sensitivity: Predetermined rate $ 1,542 $ 6,491 $8,763 $16,796 Floating or adjustable rate 40,245 12,987 786 54,018 17 ------------------------------------ Total domestic business loans (a) $41,787 $19,478 $9,549 $70,814 ==================================== Foreign loans -- -- -- -- ==================================== (a) does not include nonaccrual loans Provision and Allowance for Loan Losses The Company, as part of its philosophy of risk management, has established various credit policies and procedures intended to minimize the Company's exposure to undue credit risk. Credit evaluations of borrowers are performed to ensure that loans are granted on a sound basis. In addition, care is taken to minimize risk by diversifying among industries. The Bank has certain concentrations of credit, which are more fully described in Note 15 of the Company's financial statements beginning on page F-1. Management regularly monitors credit risk through the periodic review of individual credits to ensure compliance with policies and procedures. Adequate collateralization, contractual guarantees, and compensating balances are also utilized by Management to mitigate risk. Management determines the appropriate level of the allowance for loan losses by regularly evaluating the quality of the loan portfolio. The allowance is allocated to specific loans that exhibit above average credit loss potential based upon their payment history and the borrowers' financial conditions. The adequacy of the allowance for loan losses is evaluated based on an assessment of the probable losses incurred in the loan portfolio. The total allowance is available to absorb losses from any segment of the portfolio. Management maintains a watch list of substandard loans for monthly review. Although these loans may not be delinquent and may be adequately secured, management believes that due to location, size, or past payment history, it is necessary to monitor these loans monthly. The allowance for loan losses totaled $5,310,000, or 4.6% of total loans at December 31, 2001. At the end of the previous year, the allowance for loan losses was $7,667,000, or 5.9% of total loans. A negative provision for loan losses in the amount of $600,000 was recorded during the fourth quarter of 2001 to reduce the level of the allowance for loan losses based on improvements to the performance of the loan portfolio and a reduction in the amount of specific reserves required from the previous quarter end. The provision for loan losses recorded during 2000 was $242,000. During the second quarter of 2001, the Company charged-off approximately $2 million in loans that, during previous reporting periods, had specific reserves through an allocation of the allowance for loan loss. As previously disclosed, the Bank has taken charge-offs beginning with the fourth quarter of 1998 due principally to its relationship with Schwartz Homes, Inc., a defunct retailer of mobile homes formerly based in New Philadelphia, Ohio and retail customers of Schwartz Homes. The Bank made loans to Schwartz Home's retail customers under recourse agreements with Schwartz Homes. Under these recourse agreements, Schwartz Homes agreed to repay any loans not repaid by retail customers. Schwartz Homes apparently used the funds advanced by the Bank to fund its own operations or for other improper purposes. In many instances, Schwartz Homes failed to perform on the retail sales contracts it entered into with its customers even though the Bank had provided the funds to Schwartz Homes for this purpose. In addition, Schwartz Homes often failed to repay the floor-plan lenders on homes purchased, which further impacted the Bank's collateral position with respect to the homes. In April 1999, Schwartz Homes unexpectedly ceased operations, and in June 1999 other creditors of Schwartz Homes placed it in involuntary bankruptcy. In March 2000, a confirmation order was approved by the court in the Schwartz Homes, Inc. bankruptcy. For the year ended December 31, 2000, the Bank received settlement proceeds of $3.2 million of which $1.2 million was applied to the remaining credit exposure for the Schwartz homebuilder loans, $1.8 million was recorded as recoveries in the allowance for loan losses, and the remaining funds were recorded as recovery of legal expenses. 18 Of the $2.3 million in net charge-offs for the year ended December 31, 2000, $1.5 were related to the Schwartz Homes loan relationship. There were no remaining loans outstanding related to Schwartz Homes or its customers at December 31, 2000. Of the $11.6 million in net charge-offs for the year ended December 31, 1999, $7.5 million were related to Schwartz Homes loans. Of this $7.5 million amount, $3.4 million in net charge-offs were related to the indirect consumer loans to Schwartz Homes customers, and $4.1 million in net charge-offs were related to commercial loans made directly to Schwartz Homes. Of the $11.5 million in net charge-offs for the year ended December 31, 1998, $11.2 million were related to the Schwartz Homes consumer loans. Management's allocation of the allowance for loan losses based on estimates of incurred loan losses is set forth in the table below: Allocation of the Allowance for Loan Losses (Expressed in thousands) 2001 2000 1999 1998 1997 ------------------------------------------------------------------------------------------------------- Domestic: Commercial, financial and agricultural $ 1,682 $ 4,096 $ 4,692 $ 2,254 $ 2,564 Commercial real estate 2,443 2,207 1,154 507 313 Residential mortgage 314 301 371 295 358 Consumer 90 94 3,485 2,329 370 Foreign -- -- -- -- -- Unallocated 781 969 -- 90 529 -------------------------------------------------------- Total $ 5,310 $ 7,667 $ 9,702 $ 5,475 $ 4,134 ======================================================== Loans outstanding as a percentage of each loan category are depicted in the following table: 2001 2000 1999 1998 1997 -------------------------------------------------------- Commercial, financial and agricultural 27.1% 35.3% 58.6% 56.5% 47.6% Real estate-construction 2.9% 9.9% 0.1% 0.1% 0.6% Real estate-mortgage 33.4% 31.4% 27.8% 27.3% 34.4% Commercial real estate 31.0% 17.5% 5.5% 7.1% 8.9% Installment loans to individuals 3.2% 3.6% 6.1% 7.5% 7.1% Obligations of political subdivisions in the U.S. 2.4% 2.3% 1.9% 1.5% 1.4% Lease financing 0.0% 0.0% 0.0% 0.0% 0.0% -------------------------------------------------------- Total 100.0% 100.0% 100.0% 100.0% 100.0% ======================================================== 19 The following tables set forth the five-year historical and statistical information on the allowance for loan losses: (Expressed in thousands) 2001 2000 1999 1998 1997 -------------------------------------------------------------------------------------------------------- Balance as of January 1 $ 7,667 $ 9,702 $ 5,475 $ 4,134 $ 3,153 Provision for loan losses (600) 242 15,877 12,882 1,055 Adjustment incident to acquisition -- -- -- -- -- Loans charged off: Real estate 218 119 151 133 24 Commercial 2,135 812 8,435 178 23 Consumer 21 3,369 3,831 11,245 43 Direct financing leases -- -- -- -- -- ---------------------------------------------------------- Total loans charged-off 2,374 4,300 12,417 11,556 90 Recoveries of loans previously charged-off: Real estate -- 6 282 11 2 Commercial 262 136 73 1 1 Consumer 355 1,881 412 3 13 Direct financing leases -- -- -- -- -- ---------------------------------------------------------- Total recoveries 617 2,023 767 15 16 ---------------------------------------------------------- Net charge-offs (recoveries) 1,757 2,277 11,650 11,541 74 ---------------------------------------------------------- Balance at December 31 $ 5,310 $ 7,667 $ 9,702 $ 5,475 $ 4,134 ========================================================== (Expressed in thousands) 2001 2000 1999 1998 1997 -------------------------------------------------------------------------------------------------------- Loans outstanding at December 31 $ 115,674 $129,876 $165,134 $206,452 $224,016 Allowance as a percent of loans and leases outstanding 4.59% 5.90% 5.88% 2.65% 1.85% Average loans and leases $ 121,238 $143,012 $193,295 $222,961 $208,265 Net charge-offs as a percent of average loans and leases 1.45% 1.59% 6.03% 5.18% 0.04% The following schedule depicts the five-year history of non-performing assets. (Expressed in thousands) 2001 2000 1999 1998 1997 -------------------------------------------------------------------------------------------------------- Nonaccrual loans and leases $ 2,558 $ 8,518 $ 13,769 $ 8,569 $ 1,515 Loans 90 days or more past due but accruing interest 187 2 541 4 44 Other real estate owned 104 766 -- -- 20 ---------------------------------------------------------- Total $ 2,849 $ 9,286 $ 14,310 $ 8,573 $ 1,579 ========================================================== In addition to the above schedule of non-performing assets, Management prepares a watch list consisting of loans which management has determined require closer monitoring to further protect the Company against loss. The balance of loans classified by management as substandard due to delinquency and a change in financial position and not included in non-performing assets was $15,684,000 and $14,687,000 at the December 31, 2001 and 2000, respectively. Loans classified as doubtful and not included in non-performing assets totaled $224,000 at December 31, 2000. Deposits 20 Deposits Primarily, core deposits are used to fund interest-earning assets. The accompanying tables show the relative composition of the Company's average deposits and the change in average deposit sources during the last three years: (Expressed in thousands) Average Deposits 2001 2000 1999 -------------------------------------------------------------------------------- Demand $ 25,457 $ 24,749 $ 28,865 Interest bearing checking 25,137 24,464 40,649 Savings 69,837 68,652 82,919 Other time 97,562 95,608 106,599 Certificates-$100,000 and over 16,340 16,997 26,820 ------------------------------------- Total average deposits $ 234,333 $ 230,470 $ 285,852 ===================================== Distribution of Average Deposits 2001 2000 1999 -------------------------------------------------------------------------------- Demand 10.9% 10.7% 10.1% Interest bearing checking 10.7% 10.6% 14.2% Savings 29.8% 29.8% 29.0% Other time 41.6% 41.5% 37.3% Certificates-$100,000 and over 7.0% 7.4% 9.4% ------------------------------------- Total 100.0% 100.0% 100.0% ===================================== Change in Average 2000 1999 1998 Deposit sources to 2001 to 2000 to 1999 ------------------------------------------------------------------------------- Demand $ 708 ($ 4,116) ($ 1,045) Interest bearing checking 673 (16,185) (5,215) Savings 1,185 (14,267) 723 Other time 1,954 (10,991) (799) Certificates-$100,000 and over (657) (9,823) (267) ------------------------------------- Total $ 3,863 ($ 55,382) ($ 6,603) ===================================== The decline in average deposits during 1999 to 2000 is attributable to a number of factors. The negative publicity resulting from the Bank's loan losses had an adverse impact on bank deposits. In addition, the Bank actively reduced deposits to shrink its asset size thereby reducing the amount of capital required to meet the terms of its regulatory agreements. The Bank also sold $10 million in deposits during January of 1999. Deposit trends increased during the last half of 2000 and throughout 2001 after the Bank completed its recapitalization plan. Borrowings Other sources of funds for the Company include short-term repurchase agreements and Federal Home Loan Bank borrowings. 21 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 $6.8 million, or 2.9%, from the end of 2000 to 2001. Average deposits increased $3.9 million, or 1.7%, during 2001 compared to 2000. Average deposits decreased $55.4 million, or 19.4%, during 2000 compared to 1999. As discussed above, the decline in deposits during this period was the result of adverse publicity surrounding the Bank's financial condition, planned reductions in deposit levels to facilitate capital restoration and a branch sale. Deposit trends stabilized midyear during 2000 and increased subsequently. Liquidity may be impacted by the ability of the Company to generate future earnings. 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 December 31, 2001. 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. The main source of liquidity for the parent company has been dividends from the Bank. As discussed in Note 20 to the Company's consolidated financial statements, the Bank cannot pay dividends without prior regulatory approval. At December 31, 2001, the parent had cash and marketable securities with an estimated fair value of $1.6 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. At December 31, 2001, shareholders' equity was $25.8 million compared to $25.6 million at December 31, 2000. The increase in capital occurred principally due to the improvement in the market value of securities classified as available for sale which exceeded the net loss of $415,000 reported by the Company. The Federal Reserve Board has adopted risk-based capital guidelines that assign risk weightings to assets and off-balance sheet items. The guidelines also define and set minimum capital requirements (risk-based capital ratios). Bank holding companies are required to have core capital (Tier 1) of at least 4.0% of risk-weighted assets and total capital of 8.0% of risk-weighted assets. Tier 1 capital consists principally of shareholders' equity less goodwill, and may include a portion of deferred tax assets. However, presently none of the Company's deferred tax assets are included as Tier 1 capital. Total capital consists of Tier 1 capital, plus certain debt instruments and a portion of the allowance for loan losses. The following table shows several capital and liquidity ratios for the Company for the last two years: December 31 2001 2000 ----------------------------------------------------------------------------- Average shareholders' equity to : Average assets 9.3% 6.4% Average deposits 11.3% 7.7% Average loans and leases 21.8% 12.5% Primary capital 10.8% 11.8% Risk-based capital ratio: Tier 1 12.0% 12.7% Total 13.2% 13.9% Tier 1 leverage ratio 7.1% 7.8% The Bank's capital ratios are detailed in Note 20 of the Notes to the Consolidated Statements in the Company's financial statements beginning on page F-1. As previously described under Item 7, the Bank entered into an 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, the Bank was formally notified that it had achieved an adequately capitalized 22 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. There are no conditions or events since that notification that management believes has changed the Bank's capital category. See also Notes 3 and 20 to the Company's consolidated financial statements. Dividends The following table presents dividend payout ratios for the past three years: 2001 2000 1999 ------------------------------- Total dividends declared as a percentage of net income * 0.00% * Common dividends declared as a percentage of earnings common share * 0.00% * * not applicable because the Company reported losses for 2001 and 1999. Cash dividends were declared and paid in the amount of $0.12 per share in 1999 prior to the Company's determination that it would not realize positive earnings for the year. Future dividends will require approval of the Company's regulators. The subsidiary Bank is the primary source of funds to pay dividends to the shareholders of the Company. The approval of the Comptroller of the Currency will be required for future dividends from the Bank to the Company because previously paid dividends have exceeded the total of the Bank's retained net profits for the current and preceding two years. The Board of Governors of the Federal Reserve Bank has issued a policy statement stating that a bank holding company generally should not maintain its existing rate of cash dividends on common stock unless (1) the organization's net income available to common shareholders over the past year has been sufficient to fully fund the dividends and (2) the prospective rate of earnings retention appears consistent with the organization's capital needs, asset quality, and overall financial condition. Recent Accounting Pronouncements Currently, there are no recent accounting pronouncements that, if adopted, would have a material effect on the Company's results of operations, financial position or liquidity. ITEM 7A-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. The Company's market risk is composed primarily of interest rate risk. Interest rate risk results from timing differences in the repricing of assets, liabilities and off-balance sheet instruments, changes in relationships between rate indices and the potential exercise of explicit or embedded options. The Asset/Liability Management Committee ("ALCO") meets regularly to review the interest rate sensitivity position of the Company and to monitor and limit exposure to interest rate risk. The goal of asset/liability management is to maximize net interest income and the net value of the Company's future cash flows within the interest rate risk limits established by the Board of Directors. Interest rate risk is monitored primarily through the use of two complementary measures: earnings simulation modeling and net present value estimation. While each of these interest rate risk measurements has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Company. The key assumptions underlying these measures are periodically reviewed by ALCO. The earnings simulation model forecasts the effects on income under a variety of scenarios. This model includes assumptions about how the balance sheet is likely to evolve through time in different interest rate environments. Loan and deposit growth rate assumptions are derived from historical analysis 23 and management's outlook, as are the assumptions used to project yields and rates for new loans and deposits. Securities portfolio maturities and prepayments are assumed to be reinvested in similar instruments. Mortgage loan prepayment assumptions are developed from industry median estimates of prepayment speeds. Based on the earnings simulation model at December 31, 2001, changes in net interest income were projected as follows given a parallel shift in the yield curve: Change in % Change Net Interest in Net Interest (Expressed in thousands) Income Income -------------------------------------------------------------------------------- Down 200 basis points ($963) -10.9% Down 100 basis points (545) -6.2% Up 100 basis points 327 3.7% Up 200 basis points 295 3.3% Based on the earnings simulation model at December 31, 2000, changes in net interest income were projected as follows given a parallel shift in the yield curve: Change in % Change Net Interest in Net Interest (Expressed in thousands) Income Income -------------------------------------------------------------------------------- Down 200 basis points ($654) -7.1% Down 100 basis points (170) -1.8% Up 100 basis points 163 1.8% Up 200 basis points 210 2.3% The net present value estimation ("NPV") measure is used for discerning levels of risk present in the balance sheet that might not be taken into account in the earnings simulation model due to the shorter time horizon used by that model. The NPV of the balance sheet, at a point in time, is defined as the discounted present value of asset cash flows minus the discounted value of liability cash flows. The NPV measure also assumes a static balance sheet, versus the growth assumptions that are incorporated into the earnings simulation measure and an unlimited time horizon instead of the one-year horizon applied in the earnings simulation. As with earnings simulation modeling, assumptions about the timing and variability of balance sheet cash flows are important to NPV analysis. The estimated decline in the present value of equity as a percentage of the total market value of equity at December 31, 2001 would be 15% given a 200 basis point increase in interest rates. 24 ITEM 8 - FINANCIAL STATEMENTS & SUPPLEMENTARY DATA The financial statements and schedules are set forth beginning on page F-1. Supplementary Data ($000's except per share data) First Second Third Fourth Quarter Quarter Quarter Quarter =========================================================================================================== 2001 ----------------------------------------------------------------------------------------------------------- Interest and dividend income $ 4,671 $ 4,762 $ 4,421 $ 4,277 Interest expense 2,656 2,588 2,446 2,120 ---------------------------------------------- Net interest income 2,015 2,174 1,975 2,157 Provision for loan losses -- -- -- (600) Securities gains (losses) (2) 6 (121) (3) Gains on sale of loans held for sale 6 20 127 128 Net overhead (1) 2,093 2,267 2,916 3,086 ---------------------------------------------- Loss before income taxes (74) (67) (935) (204) Income tax expense (benefit) (239) (242) (473) 89 ---------------------------------------------- Net income (loss) $ 165 $ 175 ($ 462) ($ 293) ============================================== Basic earnings per common share $ 0.01 $ 0.02 ($ 0.04) ($ 0.03) ============================================== First Second Third Fourth Quarter Quarter Quarter Quarter =========================================================================================================== 2000 ----------------------------------------------------------------------------------------------------------- Interest and dividend income $ 4,815 $ 4,614 $ 4,921 $ 4,787 Interest expense 2,831 2,632 2,560 2,679 ---------------------------------------------- Net interest income 1,984 1,982 2,361 2,108 Provision for loan losses 242 -- -- -- Securities gains (losses) (1) 1 -- 4 Gains (losses) on sale of loans and loans held for sale (7) (53) 16 4 Net overhead (1) 1,976 1,470 1,924 2,081 ---------------------------------------------- Income (loss) before income taxes (242) 460 453 35 Income tax benefit (302) (66) (57) (255) ---------------------------------------------- Net income $ 60 $ 526 $ 510 $ 290 ============================================== Basic earnings per common share $ 0.01 $ 0.07 $ 0.05 $ 0.03 ============================================== (1) noninterest income exclusive of securities gains (losses) less noninterest expense. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with the Company's external auditors on accounting and financial disclosure. 25 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this section will be included in the Company's Proxy Statement to be filed with the Securities and Exchange Commission on or before April 30, 2002. Such information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this section will be included in the Company's Proxy Statement to be filed with the Securities and Exchange Commission on or before April 30, 2002. Such information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this section will be included in the Company's Proxy Statement to be filed with the Securities and Exchange Commission on or before April 30, 2002. Such information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this section will be included in the Company's Proxy Statement to be filed with the Securities and Exchange Commission on or before April 30, 2002. Such information is incorporated herein by reference. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements as listed on page 28. 2. Financial Statement Schedules as listed on page 28. 3. Exhibits as listed on page E-1. (b) Reports on Form 8-K. None 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 on March 18, 2002. By /s/ Wilbur R. Roat BELMONT BANCORP. ------------------------------ Wilbur R. Roat (Registrant) President & Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the date indicated. SIGNATURE TITLE DATE ---------------------------------------------------------------------------------------- /s/ Wilbur R. Roat 3/18/02 ---------------------------------------------------------------------------------------- Wilbur R. Roat Director, President & Chief Executive Officer ---------------------------------------------------------------------------------------- /s/ Jane R. Marsh 3/18/02 ---------------------------------------------------------------------------------------- Jane R. Marsh Secretary (principal financial and accounting officer) ---------------------------------------------------------------------------------------- /s/ Jay A. Beck 3/18/02 ---------------------------------------------------------------------------------------- Jay A. Beck Director ---------------------------------------------------------------------------------------- /s/ David R. Giffin 3/18/02 ---------------------------------------------------------------------------------------- David R. Giffin Chairman of the Board and Director ---------------------------------------------------------------------------------------- /s/ John H. Goodman II 3/18/02 ---------------------------------------------------------------------------------------- John H. Goodman, II Director ---------------------------------------------------------------------------------------- /s/ Charles J. Kaiser, Jr. 3/18/02 ---------------------------------------------------------------------------------------- Charles J. Kaiser, Jr. Director ---------------------------------------------------------------------------------------- /s/ Terrence A. Lee 3/18/02 ---------------------------------------------------------------------------------------- Terrence A. Lee Director ---------------------------------------------------------------------------------------- /s/ Dana J. Lewis 3/18/02 ---------------------------------------------------------------------------------------- Dana J. Lewis Director ---------------------------------------------------------------------------------------- /s/ James R. Miller 3/18/02 ---------------------------------------------------------------------------------------- James R. Miller Director ---------------------------------------------------------------------------------------- /s/ Tom Olszowy 3/18/02 ---------------------------------------------------------------------------------------- Tom Olszowy Director ---------------------------------------------------------------------------------------- /s/ Keith A. Sommer 3/18/02 ---------------------------------------------------------------------------------------- Keith A. Sommer Director ---------------------------------------------------------------------------------------- /s/ Charles A. Wilson, Jr. 3/18/02 ---------------------------------------------------------------------------------------- Charles A. Wilson, Jr. Director 27 INDEX TO FINANCIAL STATEMENTS Consolidated Balance Sheets at December 31, 2001 and 2000 F-1 Consolidated Statements of Income for the years ended December 31, 2001, 2000, and 1999 F-2 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2001, 2000, and 1999 F-3 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000, and 1999 F-4 Notes to Financial Statements F-5 Report on Management's Responsibilities F-19 Report of Crowe, Chizek and Company, LLP F-20 28 Belmont Bancorp. and Subsidiaries Consolidated Balance Sheets ($000's) [LOGO] ================================================================================ December 31, Assets 2001 2000 ------------------------ Cash and due from banks $ 14,587 $ 11,270 Federal funds sold 17,600 14,730 ------------------------ Cash and cash equivalents 32,187 26,000 Loans held for sale 534 -- Securities available for sale at fair value 125,551 109,684 Loans 115,674 129,876 Less allowance for loan losses (5,310) (7,667) ------------------------ Net loans 110,364 122,209 Premises and equipment, net 6,532 6,792 Deferred federal tax assets 7,998 7,346 Cash surrender value of life insurance 1,205 4,419 Accrued income receivable 1,541 1,658 Other assets 2,944 3,680 ------------------------ Total assets $ 288,856 $ 281,788 ======================== Liabilities and Shareholders' Equity Liabilities Noninterest bearing deposits: Demand $ 30,654 $ 25,123 Interest bearing deposits: Demand 27,647 26,136 Savings 78,454 66,857 Time 101,731 113,570 ------------------------ Total deposits 238,486 231,686 Securities sold under repurchase agreements 647 1,204 Long-term borrowings 20,000 20,000 Accrued interest on deposits and other borrowings 652 820 Other liabilities 3,225 2,476 ------------------------ Total liabilities 263,010 256,186 ------------------------ 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 at 12/31/01 and 12/31/00 2,788 2,788 Additional paid-in capital 17,506 17,414 Treasury stock at cost (51,792 shares) (1,170) (1,170) Retained earnings 8,100 8,515 Accumulated other comprehensive loss (1,378) (1,945) ------------------------ Total shareholders' equity 25,846 25,602 ------------------------ Total liabilities and shareholders' equity $ 288,856 $ 281,788 ======================== The accompanying notes are an integral part of the financial statements. F-1 Belmont Bancorp. and Subsidiaries Consolidated Statements of Income For the Years Ended December 31, 2001, 2000 and 1999 ($000's) [LOGO] ================================================================================ Interest and Dividend Income 2001 2000 1999 --------------------------------------------- Loans: Taxable $ 10,340 $ 11,867 $ 16,223 Tax-exempt 205 255 284 Securities: Taxable 4,822 4,254 6,642 Tax-exempt 1,879 2,139 1,985 Dividends 251 231 381 Interest on trading securities -- -- 86 Interest on federal funds sold 634 391 269 --------------------------------------------- Total interest and dividend income 18,131 19,137 25,870 --------------------------------------------- Interest Expense Deposits 8,773 9,165 10,894 Other borrowings 1,037 1,537 4,715 --------------------------------------------- Total interest expense 9,810 10,702 15,609 --------------------------------------------- Net interest income 8,321 8,435 10,261 Provision for Loan Losses (600) 242 15,877 --------------------------------------------- Net interest income (loss) after provision for loan losses 8,921 8,193 (5,616) --------------------------------------------- Noninterest Income Trust fees 593 419 484 Service charges on deposits 918 848 921 Interest on federal tax refund -- 256 -- Other operating income 817 896 817 Trading losses -- -- (10) Securities gains (losses) (120) 4 (880) Gains (losses) on sale of loans and loans held for sale 281 (40) 341 --------------------------------------------- Total noninterest income 2,489 2,383 1,673 --------------------------------------------- Noninterest Expense Salary and employee benefits 4,565 4,066 3,826 Net occupancy expense of premises 900 839 898 Equipment expenses 907 865 891 Legal fees 2,836 1,153 1,671 Other operating expenses 3,482 2,947 5,356 --------------------------------------------- Total noninterest expense 12,690 9,870 12,642 --------------------------------------------- Income (loss) before income taxes (1,280) 706 (16,585) Income Tax Benefit (865) (680) (5,554) --------------------------------------------- Net income (loss) $ (415) $ 1,386 $ (11,031) ============================================= Weighted Average Number of Shares Outstanding 11,101,403 8,778,621 5,235,431 ============================================= Basic and Diluted Earnings (Loss) Per Common Share $ (0.04) $ 0.16 $ (2.11) ============================================= The accompanying notes are an integral part of the financial statements. F-2 Belmont Bancorp. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity For the Years Ended December 31, 2001, 2000 and 1999 ($000's) [LOGO] ================================================================================ Accumulated Other Additional Compre- Compre- Preferred Common Paid-in Retained Treasury hensive hensive Total Stock Stock Capital Earnings Stock Loss Income (Loss) ---------------------------------------------------------------------------------------------- Balance, January 1, 1999 $ 25,364 -- $ 1,321 $ 7,854 $ 18,788 $(1,400) $ (1,199) Comprehensive income Net loss (11,031) (11,031) $ (11,031) Other comprehensive income, net of tax Unrealized loss on securities net of reclassification adjustment (4,404) (4,404) (4,404) ---------- Comprehensive loss $ (15,435) ========== Cash dividends declared: Common stock ($.12 per share) (628) (628) Issuance of Series A convertible preferred stock 1,650 1,650 Issuance of treasury stock 280 50 230 ------------------------------------------------------------------------------ Balance, December 31, 1999 11,231 1,650 1,321 7,904 7,129 (1,170) (5,603) Comprehensive income Net income 1,386 1,386 $ 1,386 Other comprehensive income, net of tax Unrealized gain on securities net of reclassification adjustment 3,658 3,658 3,658 ---------- Comprehensive income $ 5,044 ========== Conversion of Series A preferred stock to common stock -- (1,650) 206 1,444 Issuance of common stock 9,327 1,261 8,066 ------------------------------------------------------------------------------ Balance, December 31, 2000 25,602 -- 2,788 17,414 8,515 (1,170) (1,945) Comprehensive income Net loss (415) (415) $ (415) Other comprehensive income, net of tax Unrealized gain on securities net of reclassification adjustment 567 567 567 ---------- Comprehensive income $ 152 ========== Common stock options granted 92 92 ------------------------------------------------------------------------------ Balance, December 31, 2001 $ 25,846 $ -- $ 2,788 $17,506 $ 8,100 $(1,170) $ (1,378) ============================================================================== The accompanying notes are an integral part of the financial statements. F-3 Belmont Bancorp. and Subsidiaries Consolidated Statements of Cash Flows For the Years Ended December 31, 2001, 2000 and 1999 ($000's) [LOGO] ================================================================================ 2001 2000 1999 ----------------------------------- Operating Activities Net income (loss) $ (415) $ 1,386 $ (11,031) Adjustments to reconcile net income (loss) to net cash flows from operating activities: Provision for loan losses (600) 242 15,877 Depreciation and amortization expense 687 675 710 Amortization of investment security premiums 997 593 2,419 Accretion of investment security discounts (411) (610) (648) Amortization of intangibles 147 10 439 Securities (gains) losses 120 (4) 880 Trading losses -- -- 10 Common stock options granted 92 -- -- Deferred taxes (944) (680) (4,668) Proceeds from sale of trading securities -- -- 13,592 Purchase of securities for trading account -- -- (15,516) Federal Home Loan Bank stock dividends (213) (223) (362) (Gain) loss on sale of fixed assets 5 (4) -- (Gain) loss on sale of loans (281) 40 (341) Gain on sale of other real estate owned (11) -- -- Changes in: Interest receivable 117 93 980 Interest payable (168) 73 (149) Loans held for sale (534) 1,805 (111) Federal tax refund -- 5,696 -- Others, net 740 (280) (3,478) ----------------------------------- Cash from operating activities (672) 8,812 (1,397) ----------------------------------- Investing Activities Proceeds from: Maturities and calls of securities 9,203 4,557 6,237 Sale of securities available for sale 15,074 5,667 73,846 Principal collected on mortgage-backed securities 29,195 11,046 40,897 Sale of loans -- 2,178 9,008 Redemption of life insurance contracts 3,431 -- 1,741 Sales of other real estate owned 989 97 155 Sales of premises and equipment 15 9 -- Purchases of: Securities available for sale (68,973) (14,475) (38,927) Life insurance contracts -- -- (81) Premises and equipment (447) (209) (596) Changes in: Loans, net 12,129 29,902 20,516 ----------------------------------- Cash from investing activities 616 38,772 112,796 ----------------------------------- Financing Activities Proceeds from: Issuance of preferred stock -- -- 1,650 Issuance of common stock -- 9,327 -- Issuance of treasury stock -- -- 280 Payments on long-term debt -- -- (71,401) Dividends paid on common stock -- -- (628) Sale of branch deposits -- -- (10,311) Changes in: Deposits 6,800 (23,746) (38,608) Repurchase agreements (557) (4,889) (146) Short-term borrowings -- (19,740) 15,790 ----------------------------------- Cash from financing activities 6,243 (39,048) (103,374) ----------------------------------- Increase in Cash and Cash Equivalents 6,187 8,536 8,025 Cash and Cash Equivalents, Beginning of Year 26,000 17,464 9,439 ----------------------------------- Cash and Cash Equivalents, End of Year $ 32,187 $ 26,000 $ 17,464 =================================== The accompanying notes are an integral part of the financial statements. F-4 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements [LOGO] For the Years Ended December 31, 2001, 2000 and 1999 ================================================================================ 1. Summary of Significant Accounting Policies The accounting and reporting policies and practices of Belmont Bancorp. (the "Company") and its subsidiaries are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. The more significant of these policies and practices are summarized below. Nature of Operations: Belmont Bancorp. provides a variety of banking services to individuals and businesses through the branch network of its wholly-owned subsidiary, Belmont National Bank (BNB). BNB operates twelve full-service banking facilities located in Belmont, Harrison, and Tuscarawas Counties in Ohio, and Wheeling, West Virginia. Principles of Consolidation: The consolidated financial statements include the accounts of Belmont Bancorp. and its wholly-owned subsidiaries, Belmont National Bank and Belmont Financial Network, Inc. Material intercompany accounts and transactions have been eliminated. Use of Estimates: 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 taxes, fair values of financial instruments, and loss contingencies. Securities Held to Maturity: These securities are purchased with the original intent to hold to maturity. Events which may be reasonably anticipated are considered when determining the Company's intent and ability to hold to maturity. Securities meeting such criteria at date of purchase and as of the balance sheet date are carried at cost, adjusted for amortization of premiums and accretion of discounts. Securities Available for Sale: Debt and equity securities to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale and carried at fair value with net unrealized gains and losses, net of tax, reflected as a component of other comprehensive income until realized. Securities held for indefinite periods of time include securities that may be sold to meet liquidity needs or in response to significant changes in interest rates or prepayment risks as part of the Company's overall asset/liability management strategy. Trading Securities: Trading securities are held for resale within a short period of time and are stated at fair value. Trading gains and losses include the net realized gain or loss and market value adjustments of the trading account portfolio. These gains and losses are reported in current earnings. Securities with a fair value of $3,998,000 were transferred from the Trading portfolio to the Available for Sale portfolio during 1999. There were no transfers of securities between classifications in 2001 or 2000. The Financial Accounting Standards Board (FASB) issued the Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities in June 1998. The Company adopted SFAS No. 133 as of April 1, 1999. As permitted in SFAS No. 133, on April 1 1999, the Company transferred securities with an amortized cost of $11,861,000 and a fair value of $12,085,000 from the Held to Maturity portfolio to the Available for Sale portfolio. The Company does not have any derivative instruments nor does the Company have any hedging activities. Loans Held for Sale: Residential mortgage loans which management does not intend to hold to maturity or for which sales are pending are reported as loans held for sale. Such loans are carried at the lower of aggregate cost or market. Income Recognition: Income earned by the Company and its subsidiaries is recognized principally on the accrual basis of accounting. Certain fees, principally service, are recognized as income when billed. The subsidiary bank suspends the accrual of interest on loans when, in management's opinion, the collection of all or a portion of interest has become doubtful. Generally, when a loan is placed on nonaccrual, the Bank charges all previously accrued and unpaid interest against income. In future periods, interest will be included in income to the extent received only if complete principal recovery is reasonably assured. It is the Company's policy not to recognize interest income on impaired loans unless the likelihood of future loss is remote. Interest payments received on such loans are applied as a reduction of the loan principal balance. The Company defers and amortizes loan fees and related origination costs. These fees and costs are amortized into interest or other income over the estimated life of the loan using a method which approximates the interest method. For securities, interest income includes amortization of purchase premium or discount. Gains and losses on sales are based on the amortized cost of the security sold. Securities are written down to fair value when a decline in fair value is not temporary. Allowance For Loan Losses: The allowance for loan losses is maintained at a level which, in management's judgment, is adequate to absorb probable credit losses incurred in the loan portfolio. The amount of the allowance is based on management's evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. F-5 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements [LOGO] For the Years Ended December 31, 2001,2000 and 1999 ================================================================================ 1.Summary of Significant Accounting Policies (continued) A loan is impaired when, based on current information and events, it is probable that all scheduled payments of principal and interest will not be collected according to the loan agreement. Factors in determining impairment include payment status and the probability of collecting scheduled payments. Insignificant payment delays and payment shortfalls generally do not result in impairment. Impairment for individual commercial and construction loans is measured by either the present value of expected future cash flows discounted at the loan's effective rate or the fair value of the collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as residential mortgage, credit card, and consumer loans, are collectively evaluated for impairment. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Because of uncertainties inherent in the estimation process, management's estimate of credit losses inherent in the loan portfolio and the related allowance may change in the near term. Premises and Equipment: Premises and equipment are stated at cost, less accumulated depreciation and amortization. Provisions for depreciation and amortization are computed generally using the straight line method over the estimated useful lives of the assets. Leasehold improvements are amortized on the straight line basis over the lease period. When units of property are disposed, the premises and equipment accounts are relieved of the cost and the accumulated depreciation related to such units. Any resulting gains or losses are credited to or charged against income. Costs of repairs and maintenance are charged to expense as incurred. Major renewals and betterments are capitalized at cost. Foreclosed Assets: Assets acquired through or instead of loan foreclosure are initially recorded at lower of cost or fair value when acquired, establishing a new cost basis. If fair value declines, a valuation allowance is recorded through expense. Costs after acquisition are expensed. Servicing Rights: Servicing rights are recognized as assets for purchased rights and for the allocated value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment of a grouping is reported as a valuation allowance. Long-term Assets: Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at discounted amounts. Repurchase Agreements: Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance. Benefit Plans: Profit-sharing and 401k plan expense is the amount contributed determined by formula and by board decision. Deferred compensation plan expense allocates the benefits over years of service. Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the holding company or by the holding company to shareholders. Neither the Company nor the Bank can currently pay dividends without regulatory approval. See notes 16 and 20. Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgement regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. F-6 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements [LOGO] For the Years Ended December 31, 2001, 2000 and 1999 ================================================================================ 1. Summary of Significant Accounting Policies (continued) Business Segments: While the Company's chief decision-makers monitor 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 financial service operations are considered by management to be aggregated in one reportable operating segment. Earnings Per Common Share: Earnings per common share are calculated based on net income after preferred dividend requirements and the weighted average number of shares of common stock outstanding during the year. The Company's preferred stock was not dilutive for 1999. The preferred stock was converted to common stock during 2000. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. These options were anti-dilutive in all years presented. Excess of Cost Over Net Assets Acquired: In 1999, the Company wrote off the remaining balance of intangible assets associated with branches purchased in 1991 and 1992 due to the sale of one of the branches and an evaluation of the Bank's position within the marketplace for the remaining branches. Amortization charged to expense was $439,000 in the period ended December 31, 1999. Stock Compensation: Employee compensation expense under stock option plans is reported if options are granted below market price at grant date. Pro forma disclosures of net income and earnings per share are shown using the fair value method of SFAS No. 123 to measure expense for options granted after 1994, using an option pricing model to estimate fair value. Reclassifications: Certain prior year amounts may have been reclassified to conform with current year presentation. 2. Recent Accounting Pronouncements In June 2001, the FASB issued 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. While SFAS 141 will affect how future business combinations, if undertaken, are accounted for and disclosed in the financial statements, the issuance of the new guidance had no effect on the Company's results of operations, financial position or liquidity. In conjunction with the issuance of the new guidance for business combinations, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible Assets", which addresses the accounting for such acquired goodwill arising from prior and future business combinations and other intangible assets. Upon the adoption of this Statement, goodwill arising from business combinations will no longer be amortized into net income over an estimated life, 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 results of operations, financial position or liquidity, as it has no intangible assets related to prior business combinations. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS 143 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 standard is effective for the Company beginning January 1, 2002, and its adoption is not expected to have a material impact on the Company's results of operations, financial position or liquidity. In October 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. The standard is effective for the Company beginning January 1, 2002, and its adoption is not expected to have a material impact on the Company's results of operations, financial position or liquidity. 3. Financial Results, Shareholders' Equity and Regulatory Matters During 1999 the Company recorded a provision for loan losses in the amount of $15,877,000 for losses relating to the bankruptcy of a large commercial borrower of the Bank, an indirect consumer lending program through the now-bankrupt borrower, and other loan losses including loans to companies in the amusement industry. In addition, the Company incurred significant additional expenses for the retention of interim management during 1999 and for legal expenses, federal deposit insurance premiums, and other expenses incurred in connection with the Bank's loan portfolio during each of the years ended December 31, 1999, 2000 and 2001. Also during 2000 and 2001, legal and consulting expenses incurred for a shareholder derivative action exceeded $2.1 million. As more fully described in Note 24, a comprehensive settlement for this derivative suit and four other lawsuits in which the Company was a party was reached in late 2001. As more fully described in Note 20, formal regulatory action by the Federal Reserve Bank and the Office of the Comptroller of the Currency (OCC) have required the Company and Bank to meet minimum capital requirements including improving and maintaining its Tier 1 capital as a percent of average assets (or Tier 1 leverage ratio) at 6% so long as the regulatory agreements remain in place. The Bank achieved (and continues to comply with) this requirement by June 30, 2000, when the Company completed a recapitalization plan it began in November 1999 with the sale of $1.65 million of convertible preferred stock to its board of directors, which stock was subsequently converted into 825,000 shares of the Company's common stock based on a common stock price of $2.00 per share. F-7 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements For the Years Ended December 31, 2001, 2000 and 1999 [LOGO] ================================================================================ 3. Financial Results and Shareholders' Equity (continued) In February 2000, the Company commenced the first of two successive public offerings. In the initial offering, which closed in April 2000, the Company sold 2,039,869 shares of common stock at $2.00 per share and received $4.1 million in gross offering proceeds. In the second offering, which began in May 2000 and closed in June 2000, the Company sold 3,000,000 shares of common stock, also at $2.00 per share. The Company received $6.0 million in gross offering proceeds in this fully subscribed follow-on offering. In this recapitalization, the Company issued a total of 5,864,869 shares of its common stock and received $11.7 million in aggregate gross offering proceeds. After payment of aggregate offering costs of approximately $700,000, the Company applied the net offering proceeds of $11.0 million to increase the Bank's capital. The following table represents the change in the Company's outstanding shares: Preferred Common Stock Stock ------------------------- Shares outstanding, December 31, 1999 16,500 5,236,534 Preferred shares converted into common stock (16,500) 825,000 Shares issued -- 5,039,869 --------- ---------- Shares outstanding, December 31, 2000 -- 11,101,403 Shares issued -- -- --------- ---------- Shares outstanding, December 31, 2001 -- 11,101,403 ========= ========== 4. Securities At December 31, 2001 and 2000, all securities were classified as available for sale. The estimated fair value of securities as of December 31 are depicted in the following tables: 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) ================================== 2000 ----------------------------------- 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 $ 5,411 $ -- $ (221) Obligations of states and political subdivisions 41,588 120 (1,930) Mortgage-backed securities 34,691 51 (490) Collateralized mortgage obligations 21,101 101 (166) Corporate debt 2,745 -- (357) ---------------------------------- Total debt securities 105,536 272 (3,164) Marketable equity securities 4,148 83 (138) ---------------------------------- Total available for sale $109,684 $ 355 $ (3,302) ================================== The estimated fair value of securities at December 31, 2001, by contractual maturity, follow. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. (Expressed in thousands) Due in one year or less $ 2,518 Due after one year through five years 26,590 Due after five years through ten years 3,111 Due after ten years 31,189 Mortgage-backed securities 39,273 Collateralized mortgage obligations 18,770 Equity securities 4,100 --------- Total $ 125,551 ========= Sales and write-downs of securities resulted in the following: (Expressed in thousands) 2001 2000 1999 -------------------------------- Proceeds from sales $ 15,074 $ 5,667 $ 73,846 Gross gains 86 78 118 Gross losses (93) (18) (992) Realized losses on market declines (113) (56) -- Losses on securities called -- -- (7) Gains on securities called -- -- 1 Gross trading gains -- -- 69 Gross trading losses -- -- (79) Assets carried at $20,366,000 and $26,078,000 at December 31, 2001 and 2000, respectively, were pledged to secure United States Government and other public funds, and for other purposes as required or permitted by law. Certain other securities were pledged to secure Federal Home Loan Bank advances as disclosed below under the caption "Borrowings." F-8 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements For the Years Ended December 31, 2001, 2000 and 1999 [LOGO] ================================================================================ 5. Loans and Allowance for Loan Losses Loans outstanding at December 31 are as follows: (Expressed in thousands) 2001 2000 --------------------- Real estate-construction $ 3,318 $ 12,856 Real estate-mortgage 38,701 40,794 Real estate-secured by nonfarm, nonresidential property 35,892 22,738 Commercial, financial and agricultural 31,306 45,838 Obligations of political subdivisions in the U.S 2,779 2,951 Installment and creditcard loans to individuals 3,678 4,699 --------------------- Loans receivable $ 115,674 $ 129,876 ===================== Mortgage loans serviced for others approximated $57,548,000 and $38,097,000 at December 31, 2001 and 2000, respectively. Non-accruing loans amounted to $2,558,000 and $8,518,000 at December 31, 2001 and 2000, respectively. The after-tax effect of the interest that would have been accrued on these loans was $499,000 in 2001 and $533,000 in 2000. Loans past due 90 days and still accruing interest were $187,000 and $2,000 at year-end 2001 and 2000. At December 31, impaired loans were as follows: (Expressed in thousands) 2001 2000 1999 --------------------------------- Impaired loans with no allocated allowance for loan losses $ 124 $ 2 $ 352 Impaired loans with allocated allowance for loan losses 5,822 9,020 13,930 --------------------------------- Total $ 5,946 $ 9,022 $ 14,282 Amount of the allowance for loan losses allocated $ 1,115 $ 2,673 $ 5,157 Average impaired loans $ 7,429 $ 11,545 $ 12,839 Interest income recognized during impairment $ 4 $ -- $ -- Cash-basis interest income recognized $ 4 $ -- $ -- Activity in the allowance for loan losses is summarized as follows: December 31 (Expressed in thousands) 2001 2000 1999 --------------------------------- Balance at beginning of year $ 7,667 $ 9,702 $ 5,475 Provision for loan losses (600) 242 15,877 Recoveries on loans previously charged-off 617 2,023 767 Loans charged-off (2,374) (4,300) (12,417) --------------------------------- Balance at end of year $ 5,310 $ 7,667 $ 9,702 ================================= The entire allowance represents a valuation reserve which is available for future charge-offs. 6. Premises and Equipment Premises and equipment are as follows: Original December 31 Useful Life (Expressed in thousands) 2001 2000 Years --------------------------------- Land and land improvements $ 1,185 $ 1,189 Buildings 5,896 5,864 30 - 50 Furniture, fixtures and equipment 4,458 6,436 5 - 12 Leasehold improvements 408 787 5 - 20 --------------------------------- Total 11,947 14,276 Less accumulated depreciation and amortization 5,415 7,484 --------------------------------- Premises and equipment, net $ 6,532 $ 6,792 ================================= 7. Deposits At December 31, 2001, the aggregate maturities of time deposits are summarized as follows: (Expressed in thousands) 2002 $ 65,461 2003 13,769 2004 5,478 2005 6,503 2006 3,812 Thereafter 6,708 --------- Total $ 101,731 ========= A maturity distribution of time certificates of deposit of $100,000 or more follows: (Expressed in thousands) 2001 2000 ------------------- Due in three months or less $ 4,923 $ 4,397 Due after three months through six months 1,919 4,592 Due after six months through twelve months 1,473 3,017 Due after one year through five years 3,926 3,597 Due after five years 1,725 1,775 ------------------- Total $13,966 $17,378 =================== 8. Securities Sold Under Repurchase Agreements Securities sold under agreements to repurchase represent primarily overnight borrowings. For all repurchase agreements, the securities underlying the agreements were under the subsidiary bank's control. Information related to these borrowings is summarized below: (Expressed in thousands) 2001 2000 ------------------- Balance at year-end $ 647 $ 1,204 Average during the year $ 1,266 $ 2,463 Maximum month-end balance $ 1,454 $ 4,308 Weighted average rate during the year 3.09% 5.38% Weighted average rate at December 31 1.38% 4.89% F-9 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements For the Years Ended December 31, 2001, 2000 and 1999 [LOGO] ================================================================================ 9. Borrowings The Company uses both short and long-term borrowings to meet its liquidity and funding needs consisting primarily of federal funds purchased and advances from the Federal Home Loan Bank of Cincinnati (FHLB). All FHLB advances, including short and long-term borrowings, are secured by collateral consisting of a blanket pledge of residential mortgage loans, securities, and shares of stock of the FHLB which is carried at cost and is included in securities available for sale. The carrying value of residential mortgage loans available as collateral for FHLB advances was $15,081,000 and $22,206,000 at December 31, 2001 and 2000, respectively. The carrying value of FHLB stock and securities that secure the FHLB debt was $18,560,000 and $27,391,000 at December 31, 2001 and 2000, respectively. FHLB advances are made under agreements which allow for maximum borrowings of $40 million subject to collateral requirements. Advances can be made at fixed or variable rates of interest. Information related to these borrowings at December 31, 2001 and 2000, is summarized below. Long-term borrowings Long term borrowings consist of two $10 million advances from the FHLB with initial fixed interest rates of 4.78% and 4.54% for three years. These advances have a ten year final maturity and are due in 2008. The FHLB has the option at the end of the first three year term and every quarter thereafter to convert the advances to a floating rate based on the 3 month LIBOR rate. If this option is exercised by the FHLB, the Bank may repay the advance without penalty in full or in part. Scheduled principal payments on long-term debt in each of the five years subsequent to December 31, 2001, are as follows: (Expressed in thousands) 2002 $ 0 2003 0 2004 0 2005 0 2006 0 Thereafter 20,000 10. Income Tax The components of income taxes are as follows: (Expressed in thousands) 2001 2000 1999 ---------------------------------- Current payable (refundable) $ 79 $ -- $ (886) Deferred (944) (680) (5,668) Change in valuation allowance -- -- 1,000 ---------------------------------- Income tax (benefit) $ (865) $ (680) $ (5,554) ================================== The following temporary differences gave rise to the deferred tax asset at December 31, 2001 and 2000: (Expressed in thousands) 2001 2000 -------------------- Deferred tax assets: Allowance for loan losses $ 322 $ 1,264 Interest on non-accrual loans 257 104 Deferred compensation liability for employees' future benefits 294 283 Intangible assets 313 368 Unrealized losses on investments 710 1,002 Other deferred tax assets 124 72 Net operating loss carryforward 6,543 4,857 Tax credit carryforwards 1,660 1,460 -------------------- Total deferred tax assets 10,223 9,410 Valuation allowance (1,000) (1,000) -------------------- Total deferred tax assets, net of valuation allowance 9,223 8,410 -------------------- Deferred tax liabilities: Federal Home Loan Bank stock dividends (619) (546) Other deferred tax liabilities (606) (518) -------------------- Total deferred tax liabilities (1,225) (1,064) -------------------- Net deferred tax asset $ 7,998 $ 7,346 ==================== Included in the tax assets above are significant balances related to tax loss carryforwards and tax credits. Management believes that these items will be used prior to their expiration. This is based on management's estimates regarding earnings in future periods, which includes the expected settlement for litigation which management believes will be taxable income in 2002, reduced levels of legal expenses resulting from the settlement of several outstanding cases as discussed in Note 24, improvement in non-earning asset balances, and a reduction in tax exempt income. A reconciliation between the amount of reported income tax expense and the amount computed by applying the statutory federal income tax rate to income before income taxes is as follows: 2001 2000 1999 ------------------------------------------------------------------- (Expressed in thousands) Amount Percent Amount Percent Amount Percent ------------------------------------------------------------------- Tax at statutory rate $ (435) (34.0) $ 240 34.0 $ (5,639) (34.0) Tax exempt interest on investments and loans (602) (47.0) (684) (96.9) (794) (4.8) Tax credits (210) (16.5) (197) (27.9) (169) (1.0) Earnings on life insurance policies 191 14.9 (79) (11.2) (24) -- Others-net 191 14.9 40 5.7 72 -- Change in valuation allowance -- -- -- -- 1,000 6.3 ------------------------------------------------------------------- Actual tax expense (benefit) $ (865) (67.7) $ (680) (96.3) $ (5,554) (33.5) =================================================================== F-10 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements For the Years Ended December 31, 2001, 2000 and 1999 [LOGO] ================================================================================ 10. Income Tax (continued) During 1998 and 1999, the Company generated taxable losses aggregating approximately $22,063,000 which were carried back to prior years. The taxable income in all open taxable years has been eliminated and the remaining net operating loss is being carried forward. During 2000 and 2001, the Company generated additional taxable losses of $4,758,000 and $4,956,000 which increased the net operating loss carryforward. The total carryforward at December 31, 2001 of $19,242,000 expires $9,528,000 in 2019, $4,758,000 in 2020 and $4,956,000 in 2021. The Company also has a low income housing credit carryforward of $665,000, an historic tax credit carryforward of $485,000, and an alternative minimum tax credit carryforward of $509,000. The low income housing credit expires in varying amounts from 2017 through 2021. The historic credit expires in 2012. The alternative minimum tax credit can be carried forward indefinitely. A valuation allowance has been established reducing the Company's deferred tax asset to reflect management's estimate of that portion of the asset that may not be realized. The expense (benefit) related to securities gains and losses were $(41,000), $1,000, and $(303,000) for 2001, 2000 and 1999, respectively. 11. Employee Benefit Plans The Company has a profit-sharing retirement plan which includes all full-time employees who have reached the age of twenty-one and have completed at least one year of service. Each participant can elect to contribute to the plan an amount not to exceed 10% of their salary. The plan provides for an employer matching contribution on the first 4% of the participant's elective contribution. In addition to the matching contribution, the plan provides for a discretionary contribution to be determined by the Bank's Board of Directors. Total profit-sharing expense for 2001, 2000, and 1999 was $48,000, $52,000, and $55,000, respectively. In addition to providing the profit-sharing plan, the Company sponsors two defined benefit post-retirement plans that cover both salaried and nonsalaried employees. Employees must be fifty-five years old and have ten years of service to qualify for the plans. One plan provides medical and dental benefits, and the other provides life insurance benefits. The post-retirement health care plan is contributory, with retiree contributions adjusted annually; the life insurance plan is noncontributory. The expense, liability, and contributions under the plans are not material in any period presented. 12. Leases The subsidiary bank utilized certain bank premises and equipment under long-term leases expiring at various dates. In certain cases, these leases contain renewal options and generally provide that the Company will pay for insurance, taxes and maintenance. As of December 31, 2001 the future minimum rental payments required under noncancelable operating leases with initial terms in excess of one year are as follows: (Expressed in thousands) Operating Leases --------------- Year ending December 31, 2002 $ 124 2003 121 2004 70 2005 58 2006 24 Thereafter 12 ----- Total minimum lease payments $ 409 ===== Rental expense under operating leases approximated $122,000 in 2001, $119,000 in 2000, and $139,000 in 1999. 13. Related Party Transactions Certain directors and executive officers and their associates were customers of, and had other transactions with, the subsidiary bank in the ordinary course of business in 2001 and 2000. The following is an analysis of loan activity to directors, executive officers, and their associates: (Expressed in thousands) 2001 2000 --------------------- Balance previously reported $ 3,984 $ 5,459 New loans during the year 800 34 --------------------- Total 4,784 5,493 Less repayments during the year (1,589) (486) Effect of changes in related parties (105) (1,023) --------------------- Balance, December 31 $ 3,090 $ 3,984 ===================== Related party deposits totaled $1,920,000 and $2,018,000 at December 31, 2001 and 2000, respectively. F-11 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements For the Years Ended December 31, 2001, 2000 and 1999 [LOGO] ================================================================================ 14. Off-Balance Sheet Financial Instruments The subsidiary bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The following represents financial instruments whose contract amounts represent credit risk at December 31: Contract Amount --------------------- (Expressed in thousands) 2001 2000 --------------------- Commitments to extend credit $ 12,023 $ 15,389 Standby letters of credit 353 466 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counter party. Collateral held varies, but may include accounts receivable, inventory, property, plant, and equipment, and income-producing properties. At December 31, 2001, $8,453,000 in commitments to extend credit were issued at an adjustable rate of interest; the remaining $3,570,000 in commitments were issued at fixed rates, with rates ranging from 6.36% to 18.00%. Most of these commitments expire within one year. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. Of the standby letters of credit, $333,000 expire in 2002, while the remaining $20,000 expire in 2003. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. 15. Concentrations of Credit Risk The subsidiary bank extends commercial, consumer, and real estate loans to customers primarily located in Belmont, Harrison, Jefferson, and Tuscarawas Counties in Ohio and Ohio and Marshall Counties in West Virginia. While the loan portfolios are diversified, the ability of the borrowers to meet their contractual obligations partially depends upon the general economic condition of Southeastern Ohio and the Northern Panhandle of West Virginia. The subsidiary bank measures concentration of credit based on categorizing loans by the Standard Industry Classification codes. Loans and commitments equal to or exceeding 25% of Tier 1 capital are considered concentrations of credit. At year end, the bank had concentrations of credit in the following industries: (Expressed in thousands) 2001 --------------------------------------- Loan balance and Percent of Industry available credit Tier 1 Capital ------------------------------------------------------------------------------- Real estate - operators of $ 7,520 40.9% nonresidential buildings (Expressed in thousands) 2000 --------------------------------------- Loan balance and Percent of Industry available credit Tier 1 Capital ------------------------------------------------------------------------------- Amusement industry $ 6,864 35.8% Services-hotel/motel 5,549 29.0% 16. Limitations on Dividends The approval of the Comptroller of the Currency is required to pay dividends if the total of all dividends declared by a national bank in any calendar year exceeds the total of its retained net profits for the current year plus the two preceding years. Under this formula, the bank cannot declare dividends in 2002 without approval of the Comptroller of the Currency. The subsidiary bank is the primary source of funds to pay dividends to the shareholders of Belmont Bancorp. As discussed later, the Company and the subsidiary bank are prohibited from paying dividends without regulatory approval. F-12 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements For the Years Ended December 31, 2001, 2000 and 1999 [LOGO] ================================================================================ 17. Other Operating Expenses Other operating expenses include the following: (Expressed in thousands 2001 2000 1999 -------------------------------- Taxes other than payroll and real estate $ 226 $ 24 $ 254 Supplies and printing 200 165 233 Insurance, including federal deposit insurance 590 774 169 Amortization of intangibles 147 10 439 Consulting expense 232 139 1,442 Examinations and audits 446 359 385 Prepayment penalties on Federal Home Loan Bank advances -- -- 342 Legal settlements 139 12 295 Advertising 220 140 92 Other (individually less than 1% of total income) 1,282 1,324 1,705 -------------------------------- Total $ 3,482 $ 2,947 $ 5,356 ================================ 18. Restrictions on Cash The subsidiary bank is required to maintain a reserve balance with the Federal Reserve Bank. The amounts of the reserve balance at December 31, 2001 and 2000, were $2,934,000 and $2,162,000, respectively. 19. Cash Flows Information The Company's policy is to include cash on hand and amounts due from banks in the definition of cash and cash equivalents. Cash payments for interest in 2001, 2000, and 1999 were $9,978,000, $10,629,000, and $15,758,000, respectively. There were no cash payments for income taxes during 2001 and 2000. Cash payments for income taxes for 1999 were $383,000. In 2000, the Company received a tax refund of $5,696,000. Non-cash transfers during 2001 for the transfer of loans to other real estate were $316,000. Non-cash transfers during 2000 involved the conversion of preferred stock to common stock for $1,650,000 and the transfer of loans to other real estate of $901,000. Securities transfers in 1999 are described in Note 1. 20. Regulatory Matters The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's and Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company's and Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk, weighting, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Under the Federal Deposit Insurance Corporation (FDIC) Improvement Act of 1991, the federal banking regulators are required to take prompt corrective action if an insured depository institution fails to satisfy certain minimum capital requirements. An institution that fails to meet the minimum level to be considered adequately capitalized (an "undercapitalized institution") may be: (i) subject to increased monitoring by the appropriate federal banking regulator; (ii) required to submit an acceptable capital restoration plan within 45 days; (iii) subject to asset growth limits; and (iv) required to obtain prior regulatory approval for acquisitions, branching and new lines of businesses. In addition, the federal banking regulators may impose discretionary actions including, but not limited to, requiring recapitalization, restricting transactions with affiliates, restricting asset growth and interest rates paid, and divestiture of the insured institution by any company having control of the institution. The capital restoration plan required in item (ii) above must include a guarantee by the institution's holding company that the institution will comply with the plan until it has been adequately capitalized on average for four consecutive quarters, under which the holding company would be liable up to the lesser of 5% of the institution's total assets or the amount necessary to bring the institution into capital compliance as of the date it failed to comply with its capital restoration plan. The capital ratios and the regulatory framework for adequately capitalized institutions are depicted as set forth in the following table: For Capital Actual Adequacy Purposes(1) --------------------------------------- (Expressed in thousands) Amount Ratio Amount Ratio --------------------------------------- As of December 31, 2001: Total risk based capital to risk weighted assets: Consolidated $ 22,008 13.2% $ 13,336 8.0% Bank 20,394 12.4% 13,152 8.0% Tier I capital to risk weighted assets: Consolidated 19,974 12.0% 6,668 4.0% Bank 18,380 11.2% 6,576 4.0% Tier I capital to average assets: Consolidated 19,974 7.1% 11,297 4.0% Bank 18,380 6.5% 11,235 4.0% (2) F-13 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements For the Years Ended December 31, 2001, 2000 and 1999 [LOGO] ================================================================================ 20. Regulatory Matters (continued) For Capital Actual Adequacy Purposes (1) ------------------------------------------ (Expressed in thousands) Amount Ratio Amount Ratio ------------------------------------------ As of December 31, 2000: Total risk based capital to risk weighted assets: Consolidated $ 23,327 13.9% $ 13,360 8.0% Bank 21,277 12.9% 13,196 8.0% Tier I capital to risk weighted assets: Consolidated 21,171 12.7% 6.680 4.0% Bank 19,146 11.6% 6,598 4.0% Tier I capital to average assets: Consolidated 21,171 7.8% 10,898 4.0% Bank 19,146 7.1% 10,820 4.0%(2) (1) These are also the standards to be "adequately capitalized" under Prompt Corrective Action Provisions. (2) The consent order discussed below requires a 6% Tier 1 leverage ratio, or $16,852,000 at December 31, 2001. Consent Order: In August, 1999, the Bank received the written report of an examination of the Bank by the OCC, the Bank's principal federal regulatory agency. At the same time, the Bank entered into a consent order with the OCC relating to the results of the examination, which contains certain required actions and certain restrictions. The consent order required the bank to formulate new plans, policies, procedures and programs relating to long-term strategy, organizational structure, management, loans, loan loss reserves, overdrafts, loan interest accrual and non-accrual loans, loan diversification, internal audit and periodic loan review by certain dates and then to implement and follow those plans, policies, and procedures and programs. The Bank is also required to review and evaluate certain groups of loans and correct deficiencies, and going forward to properly document commercial extensions of credit and comply with law and regulations relating to lending. In addition, the consent order mandates that the Bank must achieve and maintain a 6% Tier 1 leverage ratio. Through its recapitalization efforts, the Company and the Bank achieved the minimum Tier 1 leverage ratio mandated by the consent order by June 30, 2000. Under the terms of the consent order, the board of directors of the Bank is responsible for the proper and sound management of the Bank, must appoint a compliance committee from among their independent members, and report monthly to the OCC on progress in complying with the consent order. The board has appointed a compliance committee and has filed its monthly reports with the OCC. Federal Reserve Bank Agreement: In August 1999, the board of directors also entered into an agreement with the Federal Reserve Bank of Cleveland, under authority given it by the Board of Governors of the Federal Reserve System, the federal regulatory agency for the Company. As with the consent agreement of the OCC, the Federal Reserve agreement necessitates certain actions and restrictions. Without prior Federal Reserve approval, the agreement prohibits the Company from paying dividends, incurring debt, redeeming stock, receiving dividends from the Bank, imposing charges on the Bank, and engaging in any transaction with the bank in violation of federal law. To date, the Company has taken, and intends to continue to take, all appropriate steps to comply with the Federal Reserve requirements. Subsequent Notification: In February 2000, the Bank was notified by the OCC that its capital category at December 31, 1999 under Prompt Corrective Action regulations was significantly undercapitalized. As a result of its recapitalization efforts described in Note 3, 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 OCC dated July 27, 2000. There are no conditions or events since that notification that management believes has changed the Bank's capital category. 21. Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlements of the instruments. Statement 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. The fair value of off-balance sheet instruments is not considered material. In addition, the value of long-term relationships with depositors and other customers is not reflected. The value of these items is significant. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used in estimating fair values of financial instruments as disclosed herein: Cash and Cash Equivalents: For those short-term instruments, the carrying amount is a reasonable estimate of fair value. F-14 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements For the Years Ended December 31, 2001, 2000 and 1999 [LOGO] ================================================================================ 21. Fair Value of Financial Instruments (continued) Securities: For debt securities and marketable equity securities, fair values are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans: For certain homogeneous categories of loans, such as some residential mortgages, fair value is estimated using the quoted market prices for securities backed by similar loans. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of impaired loans was estimated at book value, net of related reserves. Deposit Liabilities: The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Short-Term Borrowings: These liabilities represent primarily overnight borrowings and debt maturing within ninety days of issuance with interest rates adjusted daily or weekly. Accordingly, the carrying amount is a reasonable estimate of fair value. Long-Term Borrowings: The fair values of long-term borrowings are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The estimated fair values of the Company's financial instruments are as follows: 2001 2000 ------------------------------------------------- Carrying Estimated Carrying Estimated (Expressed in thousands) Amount Fair Value Amount Fair Value ------------------------------------------------- Financial assets: ----------------- Cash due from banks $ 14,587 $ 14,587 $ 11,270 $ 11,270 Federal funds sold 17,600 17,600 14,730 14,730 Loans held for sale 534 534 -- -- Securities available for sale 125,551 125,551 109,684 109,684 Loans, net 110,364 114,096 122,209 123,836 Accrued income receivable 1,541 1,541 1,658 1,658 Financial liabilities: ---------------------- Deposits 238,486 238,909 231,686 226,514 Repurchase agreements 647 646 1,204 1,204 Accrued interest payable 652 652 820 820 Long-term borrowings 20,000 20,502 20,000 19,780 22. Condensed Parent Company Financial Statements Presented below are the condensed balance sheets, statements of income, and statements of cash flows for Belmont Bancorp. Balance Sheets (Expressed in thousands) December 31, 2001 2000 ------------------------ Assets Cash $ 1,334 $ 1,402 Investment in subsidiaries (at equity in net assets) 23,684 23,418 Equity securities 284 400 Advances to subsidiaries 627 447 Other assets 1,349 1,062 ------------------------ Total assets $ 27,278 $ 26,729 ======================== Liabilities Payable to subsidiary $ 805 $ 560 Deferred compensation 627 567 ------------------------ Total liabilities 1,432 1,127 Shareholders' equity 25,846 25,602 ------------------------ Total liabilities and shareholder's equity $ 27,278 $ 26,729 ======================== Statements of Income 2001 2000 1999 ---------------------------------- Operating income Dividends from subsidiaries $ -- $ -- $ 628 Impairment loss in market decline on equity securities (113) (56) -- Other income 65 71 51 --------------------------------- Total income (loss) (48) 15 679 Operating expenses 194 141 79 ---------------------------------- Income(loss) before income tax and equity in undistributed income of subsidiaries (242) (126) 600 Income tax benefit (31) (43) (57) Equity in undistributed income (loss) of subsidiaries (204) 1,469 (11,688) ---------------------------------- Net income (loss) $ (415) $ 1,386 $ (11,031) ================================== F-15 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements For the Years Ended December 31, 2001, 2000 and 1999 [LOGO] ================================================================================ Statements of Cash Flows 2001 2000 1999 -------------------------------- Operating activities Net income (loss) $ (415) $ 1,386 $(11,031) Adjustments to reconcile net income to net cash from operating activities: Impairment loss in market decline on equity securities 113 56 - Undistributed (earnings) loss of affiliates 204 (1,469) 11,688 Common stock options granted 92 - - Changes in operating assets and liabilities: Prepaid expenses - 508 (354) Accrued expenses and dividends 29 40 33 Other (306) (295) (88) -------------------------------- Cash from operating activities (283) 226 248 -------------------------------- Investing activities Payments from subsidiaries 245 212 1,083 Payments to subsidiaries (180) (175) (149) Additional investment in subsidiary - (9,329) (1,650) Investment redemption 150 - - -------------------------------- Cash from investing activities 215 (9,292) (716) -------------------------------- Financing activities Issuance of preferred stock - - 1,650 Issuance of common stock - 9,327 - Issuanceoftreasurystock - - 280 Dividends - - (628) -------------------------------- Cash from financing activities - 9,327 1,302 -------------------------------- Increase (decrease) in cash & cash equivalents (68) 261 834 Cash and cash equivalents at beginning of year 1,402 1,141 307 -------------------------------- Cash and cash equivalents at end of year $ 1,334 $ 1,402 $ 1,141 ================================ 23. Comprehensive Income The components of other comprehensive income were as follows: (Expressed in thousands) 2001 2000 1999 -------------------------------- Unrealized holding gains/losses arising during the period $ 739 $ 5,546 $ (7,776) Adoption of SFAS No. 133 - - 224 Reclassification adjustment 120 (4) 880 -------------------------------- Net gains/losses arising during the period 859 5,542 (6,672) Tax effect (292) (1,884) 2,268 -------------------------------- Other comprehensive income (loss) $ 567 $ 3,658 $ (4,404) ================================ 24. 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. The Company is a defendant in a suit for damages brought in the Court of Common Pleas for Belmont County, Ohio in April 1999 by George Michael Riley and others against the Bank and certain former officers, among others, alleging torts to have occurred in connection with the Bank's denial of a loan to a third party to finance the sale of a business owned by the plaintiffs. It is claimed that a former loan officer of the Bank later purchased the business at a lower price with financial assistance from the Bank's former chief operating officer. The trial, originally scheduled for October 2001, has been continued to June 2002. The plaintiffs seek monetary damages. Based on the advice of counsel, the Company believes its exposure to liability, if any, is minimal in this case. In addition, any award to the Rileys should be covered under a Directors and Officers Liability Insurance Policy issued by Progressive Casualty Insurance Company. Another case, filed in the same court in May 1999 by Charles J. and Rebecca McKeegan, the beneficial owners of the potential purchaser of the business in the same transaction, was settled for nominal consideration and dismissed with prejudice in August 2001. In October 1999, the Company joined in a pending action known as the Greentree Financial Servicing Corp. v. Schwartz Homes, Inc., et al in the Court of Common Pleas of Tuscarawas County, Ohio, alleging that it had been the victim of an "elaborate fraud" that resulted in more than $15 million in losses to the Bank. Following an extensive internal review of its loan portfolio, the Bank filed claims against Steven D. Schwartz, President of Schwartz Homes, Inc., the now-closed New Philadelphia retailer of manufactured homes. At the same time, the Bank filed claims against three additional people: Linda Reese, Schwartz Homes' Chief Financial Officer; William Wallace, the Bank's former Executive Vice-President and Chief Operating Officer; and Christine Wallace, his wife. The Wallaces have filed counterclaims in an indeterminate amount upon various bases, including invasion of privacy, defamation and failure to distribute moneys allegedly due them under a deferred and certain other compensation plans. In addition, a group of customers of Schwartz Homes, Inc. intervened and filed a complaint against the Bank, alleging that it was liable for their losses. The case had been scheduled for trial in May 2001, but during that month Mr. Schwartz filed for bankruptcy, which automatically stayed the proceeding. The Bankruptcy Court subsequently granted the Company's motion for relief from the automatic stay, and the trial before the Court of Common Pleas of Tuscarawas County, Ohio was rescheduled for January 2002. Principally for strategic considerations in other related cases, the Company dismissed the claims against William and Christine Wallace, without prejudice. These F-16 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements For the Years Ended December 31, 2001, 2000 and 1999 [LOGO] ================================================================================ 24. Litigation (continued) claims have since been settled, as more fully described below. In December 2001, the customers of Schwartz Homes, Inc. dismissed their claim against the Bank, without prejudice. The amount of their claim had not been specified. The Company has since reached an agreement in principle to settle those claims. In October 1999, James John Fleagane, a shareholder of the Company, filed an action against the Company, the Bank and certain of the Company's and the Bank's current and former officers and directors in the Circuit Court of Ohio County, West Virginia. The plaintiff alleged, among other things, that the Bank and its directors and officers negligently transacted and administered various loans with respect to Schwartz Homes, Inc. and customers of Schwartz. In the complaint, the plaintiff sought damages for the loss in value of his stock and other compensatory and punitive damages in an unspecified amount and requested class action certification for the common shareholders of the Company. The court denied the Company's motion to dismiss the case in July 2000. In August 2000, the plaintiff filed an amended complaint, to which the Company has filed an answer, affirmative defenses and cross-claims against the Company's former accountants, S.R. Snodgrass, A.C. and a principal thereof; against J. Vincent Ciroli, Jr., formerly the Company's President and Chief Executive Officer; and against William Wallace, formerly the Company's Chief Operating Officer. In February 2001, the court granted leave to the plaintiff to file a second amended complaint. The second amended complaint eliminated the direct claims against the Company and the Bank and the request for class action certification. Accordingly, as amended, this action constituted a derivative suit against current and former officers and directors of the Company and the Bank as well as the former auditor of the Company and the Bank. In August 2001, the plaintiff dismissed the claims against the officers of the Company and the Bank (except for Messrs. Ciroli and Wallace). In October 2001, the plaintiff, James John Fleagane, and the Company reached an agreement to settle the claims against S.R. Snodgrass and its principal for $4 million, and the court ordered that a notice of the proposed settlement be sent to the Company's shareholders to afford them the opportunity to support the settlement, object to it, or intervene in the case. A committee of four of the Company's disinterested directors who are not parties in this case recommended that the proposed settlement be approved. The proposed settlement was approved by the court on November 26, 2001. After payment of the plaintiff's attorneys fees and other litigation costs, the Company received approximately $2.2 million in February 2002, which has been recorded as income in 2002. Progressive Casualty Insurance Company ("Progressive") sold to the Company a Directors and Officers Liability Policy providing for $3 million of coverage and a separate financial institution fidelity bond in the face amount of $4.75 million. The Company filed a claim under the fidelity bond policy to recover the losses incurred in connection with the Schwartz Homes, Inc. loan relationship. The Company also claimed coverage under the directors and officers liability policy in connection with the Schwartz Homes, Inc. case as well as other cases the Company is defending. Progressive declined to honor these claims and, in December 1999, filed an action in the United States District Court for the Southern District of Ohio, Eastern Division asking the court to issue a declaratory judgment declaring that Progressive is not liable under either the directors and officers liability policy or the fidelity bond policy. In September 2000, the court granted the Company's motion to dismiss the declaratory judgment claim. Progressive had also asked the court, if Progressive is to be found liable under these policies, to determine whether the Bank or other parties who have sued the Bank in separate actions are entitled to the insurance proceeds. Progressive has deposited with the court bonds in the aggregate amount of $7.75 million, which amount Progressive believes is sufficient to satisfy any liabilities under the policies in respect of this interpleader claim. In May 2001, the court consolidated this action with a separate case brought by the Company against Progressive in the Circuit Court of Ohio County, West Virginia, which was then removed to United States District Court for the Northern District of West Virginia, in which the Company sought to recover damages related to Progressive's failure to honor the Company's claims under the fidelity bond. These actions have been settled as more fully described below. In June 2001, J. Vincent Ciroli, Jr. filed an action in the Common Pleas Court of Belmont County, Ohio against the Company and the Bank seeking recovery of his defense costs in the Fleagane case and a separate proceeding brought against him by the Office of the Comptroller of the Currency, and a determination of the amount of deferred compensation and other employment benefits to which he claims to be entitled for his service to the Company and the Bank. The Company filed an answer to the complaint in July 2001 and an amended answer and counterclaim in August 2001. The amended counterclaim alleges breach of fiduciary duty on the part of Mr. Ciroli and seeks recovery of certain funds paid to him under one of his incentive compensation plans. The Company has reached a settlement of these claims, described below. In late 2001, the parties agreed upon the terms of a comprehensive settlement that resolved the litigation with Progressive; the Fleagane litigation; the Ciroli litigation and the Greentree litigation (other than the claims by customers of Schwartz Homes, Inc., which were subsequently settled in March 2002). Under the settlement, Progressive will pay $3 million on the directors and officers policy toward the settlement of the claims asserted in Fleagane. On March 11, 2002, the United States District Court for the Southern District of Ohio, Eastern Division, entered an order approving the F-17 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements For the Years Ended December 31, 2001, 2000 and 1999 [LOGO] ================================================================================ 24. Litigation (continued) distribution of Progressive's funds consistent with the settlement agreement. After payment of plaintiff's attorneys fees and other settlement related legal costs, the Company expects to receive approximately $1.7 million during the second quarter of 2002 from Progressive. In addition, Progressive will pay $675,000 to the Company to settle the claims on the fidelity bond. The Outside Directors paid $2.65 million to settle the claims asserted by Fleagane; after payment of plaintiff's attorneys' fees and costs, the Company received approximately $1.7 million in March 2002. None of these amounts were accrued in the financial statements during 2001. The proceeds of the settlement will be recorded as income during 2002. As part of the settlement, the Company will turn over to Mr. Ciroli and Mr. Wallace funds held in their deferred compensation and retirement plans and will pay a portion of their costs of defense. These costs will be recorded during 2002 in conjunction with the receipt of the settlement proceeds. The claims asserted by Messrs. Ciroli and Wallace will be dismissed with prejudice. When completed, five separate lawsuits described above will be concluded. The Company's claim against Progressive relating to the Riley litigation will not be affected since that claim arose in a different policy year. As noted above, the claims by the customers of Schwartz Homes, Inc. have also been settled in principle, which will be recorded in 2002. There is one item from the shareholder derivative case that may remain. Mr. Fleagane sought compensation for the time he spent prosecuting the derivative claim. The Company opposed his request, and in January 2002 the trial court denied his request. The time for filing an appeal has not expired. In August 1999, the Bank was named as a defendant in a lawsuit filed in the Belmont County Common Pleas Court by Joseph C. Heinlein, Jr. against his former secretary, the Bank, other financial institutions and individuals with whom the secretary did business. The Complaint alleges that the secretary embezzled funds from the plaintiff's account over a period of several years by forging his signature to checks and alleges negligence on the part of the Bank for honoring such checks. The secretary had entered into a plea agreement under which she has paid $500,000 in restitution and received a prison sentence. The complaint was amended to claim damages of $1,250,000; however, at a subsequent pre-trial conference, the plaintiff advised the court that his net losses (after application of the $500,000 restitution payment) were approximately $650,000. The complaint sought recovery of those losses. The Bank settled this suit during March 2002 for nominal consideration. On October 22, 2001, BVM Hospitality, Inc. Kiran Patel, Raman Patel and Chandu Patel filed suit in the United States District Court for the Northern District of Ohio (in Cleveland) against the Bank, four of its directors and one of its officers alleging that the Bank declined to extend credit based upon their national origin. The complaint seeks an unspecified sum of compensatory and punitive damages. BVM sought to refinance a $1.75 million mortgage loan on a motel located in Streetsboro, Ohio. The Bank has filed an answer denying the claims. In addition, the Bank has filed a motion to dismiss the case contending that venue in Cleveland is improper. The Bank believes that it has meritorious defenses and intends to defend the case. As the case was just recently filed, no trial date has been set. 25. Stock Option Plan 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 qualified 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 $4.10 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 grant with the remaining amount vesting over the next three to four years. The option period expires 10 years from the date of grant. A summary of the activity in the plan was as follows for 2001: Weighted Average Available Options Exercise For Grant Outstanding Price ------------------------------------ Balance at beginning of year -- -- -- Authorized 1,000,000 -- -- Granted (221,000) 221,000 $ 3.26 ------------------- Balance of end of year 779,000 221,000 $ 3.26 =================== Options exercisable at year-end 37,000 $ 3.26 Options outstanding at year-end were as follows: Weighted Average Remaining Exercise Number Contractual Number Prices Outstanding Life Exercisable ------------------------------------------------------------------------------- $ 2.00 75,000 9.10 yrs 30,000 $ 3.60 35,000 9.30 yrs 7,000 $ 4.00 111,000 10.00 yrs -- ------------------------------------------ Outstanding at year-end 221,000 9.50 yrs 37,000 ========================================== F-18 Belmont Bancorp. and Subsidiaries Notes to the Consolidated Financial Statements For the Years Ended December 31, 2001, 2000 and 1999 [LOGO] ================================================================================ 25. Stock Option Plan (continued) The fair values of options granted in 2001 were estimated using the Black-Scholes option pricing model using the following assumptions: risk-free interest rate ranging from 5.29% to 5.03%, expected life of 7 years, expected volatility of stock price ranging from 69% to 70% and no expected dividend yield. Based on these assumptions, the estimated fair value of options granted in 2001 ranged from $2.68 to $2.96 per option. The following pro forma information presents net income and earnings per common share had the fair value of the options been used to measure compensation cost for the stock option plan. A compensation expense of $92,000 was recognized for the year ended December 31, 2001 to reflect that impact of granting certain options below their market price. 2001 ------ Reported net loss $ (415) Pro forma net loss (471) Reported loss per common share Basic $ (0.04) Diluted (0.04) Pro forma loss per common share Basic $ (0.04) Diluted (0.04) 26. Quarterly Financial Data (Unaudited) Net Earnings (Loss) Interest Net Interest Income Per Common Share Income Income (Loss) Basic Fully Diluted --------------------------------------------------------------------------- 2001 First quarter $ 4,671 $ 2,015 $ 165 $ 0.01 $ 0.01 Second quarter 4,762 2,174 175 0.02 0.02 Third quarter 4,421 1,975 (462) (0.04) (0.04) Fourth quarter 4,277 2,157 (293) (0.03) (0.03) 2000 First quarter $ 4,815 $ 1,984 $ 60 $ 0.01 $ 0.01 Second quarter 4,614 1,982 526 0.07 0.07 Third quarter 4,921 2,361 510 0.05 0.05 Fourth quarter 4,787 2,108 290 0.03 0.03 F-19 Belmont Bancorp. and Subsidiaries Independent Auditor's Report [LOGO] ================================================================================ To the Shareholders and Board of Directors of Belmont Bancorp. We have audited the accompanying consolidated balance sheets of Belmont Bancorp. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Belmont Bancorp. and subsidiaries at December 31, 2001 and 2000, and the results of its operations and its cash flows, for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ Crowe, Chizek and Company LLP Crowe, Chizek and Company LLP Columbus, Ohio February 5, 2002, Except for Note 24 which date is March 26, 2002 F-20 Belmont Bancorp. and Subsidiaries Management's Report [LOGO] Management of Belmont Bancorp. is responsible for the accurate and objective preparation of the consolidated financial statements and the estimates and judgements upon which certain financial statements are based. Management is also responsible for preparing the other financial information included in this annual report. In our opinion, the financial statements on the preceding pages have been prepared in conformity with accounting principles generally accepted in the United States of America and other financial information in this annual 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 generated therefrom. 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 benefits to be derived therefrom. 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 outside 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. /s/ David R. Griffin /s/ Wilbur R. Roat David R. Giffin Wilbur R. Roat Chairman President and Belmont Bancorp. Chief Executive Officer Belmont National Bank Belmont Bancorp. Belmont National Bank /s/ Jane R. Marsh Jane R. Marsh Secretary, Belmont Bancorp. Senior Vice President, Controller and Cashier Belmont National Bank F-21 EXHIBIT INDEX Exhibit Number Description ------- ----------- 4.1 -- Charter (1) 4.2 -- Charter Amendment regarding Series A Preferred Stock (2) 4.3 -- Bylaws as currently in effect (1) 10.1 -- Employment Agreement dated December 15, 1999 between Wilbur R. Roat, Belmont Bancorp. and Belmont National Bank (3) 10.2 -- Employment Agreement dated April 16, 2001 between Michael Baylor, Belmont Bancorp., and Belmont National Bank (5) 10.3 -- Belmont Bancorp. 2001 Stock Option Plan (4) 11.0 -- Statement Regarding Computation of Per Share Earnings (5) 21.1 -- List of Subsidiaries (5) 23.1 -- Consent of Crowe, Chizek and Company LLP (5) ___________________ (1) Filed as an exhibit to the Company's Registration Statement on Form S-2 filed with the Securities and Exchange Commission (Registration No. 333-91035) on November 16, 1999 and incorporated herein by reference. (2) Filed as an exhibit to Amendment No. 1 to the Company's Registration Statement on Form S-2 filed with the Securities and Exchange Commission (Registration No. 333-91035) on January 12, 2000 and incorporated herein by reference. (3) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 (Registration No. 0-12724) and incorporated herein by reference. (4) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31. 2000 (Registration No. 0-12724) and incorporated herein by reference. (5) Filed herewith. E-1