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As filed with the Securities and Exchange Commission on April 22, 1999
Registration No.333-74279
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 1
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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Steelton Bancorp, Inc.
(Exact name of Small Business Issuer as specified in charter)
Pennsylvania 6035 25-1830745
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(State or other jurisdiction (Primary SIC No.) (I.R.S. Employer
of incorporation or organization) Identification No.)
51 South Front Street, Steelton, Pennsylvania 17113
(717) 939-1966
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(Address and telephone number of principal executive offices
and principal place of business)
Mr. Harold E. Stremmel, President and Chief Executive Officer
Steelton Bancorp, Inc.
51 South Front Street, Steelton, Pennsylvania 17113
(717) 939-1966
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(Name, address and telephone number of agent for service)
Please send copies of all communications to:
Samuel J. Malizia, Esq.
Gregory A. Gehlmann, Esq.
Tiffany A. Henricks, Esq.
MALIZIA, SPIDI, SLOANE & FISCH, P.C.
1301 K Street, N.W., Suite 700 East, Washington, D.C. 20005
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier registration statement for the
same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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Title of Each Shares Proposed Maximum Proposed Maximum Amount of
Class of Securities to be Offering Price Aggregate Registration
To Be Registered Registered Per Unit Offering Price(1) Fee
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<S> <C> <C> <C> <C>
Common Stock,
$.10 Par Value 575,288 $10.00 $5,752,880 $1,599.30
Interests of participants
in the 401(k) Plan 25,841(2) $10.00 $258,410 --(3)
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) These shares are included in the 575,288 shares being registered.
(3) The $258,410 of participations to be registered are based upon the assets
of the 401(k) Plan. Pursuant to Rule 457(h)(2) under the Securities Act of
1933, no additional fee is required with respect to the interests of
participants of the 401(k) Plan.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
Interests in
Mechanics Savings & Loan, FSA
Employee Savings & Profit Sharing Plan
and
Offering of 25,841 Shares of
Common Stock, $0.10 par value per share,
of
STEELTON BANCORP, INC.
This prospectus supplement relates to the offer and sale to
participants in the Mechanics Savings & Loan, FSA's Employees' Savings & Profit
Sharing Plan of participation interests and shares of Steelton Bancorp.
In connection with the conversion of Mechanics Savings from a federally
chartered mutual savings association to a federally chartered stock savings
bank, the plan has been amended to permit the investment of plan assets in
various participant directed investment alternatives, including investment in
the stock of Steelton Bancorp. You may direct the trustee of the plan to
purchase the stock with plan assets which are attributable to you as a
participant. This prospectus supplement relates to your decision to invest all
or a portion of your plan funds in Steelton Bancorp common stock.
The prospectus of Steelton Bancorp dated _______________, 1999 which is
attached to this prospectus supplement, includes detailed information regarding
the conversion, Steelton Bancorp stock, and the financial condition, results of
operation, and business of Mechanics Savings. This prospectus supplement
provides information regarding the plan. You should read this prospectus
supplement together with the prospectus and keep both for future reference.
Please refer to Risk Factors beginning on page __ of the prospectus.
These securities have not been approved or disapproved by the
Securities and Exchange Commission, the Office of Thrift Supervision, or any
other federal agency or any state securities commission, nor has such
commission, office, or other agency or any state securities commission passed
upon the accuracy or adequacy of this prospectus supplement. Any representation
to the contrary is a criminal offense.
These securities are not deposits or savings accounts and are not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
The date of this prospectus supplement is ______________, 1999.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
The Offering ............................................................... 1
Securities Offered ................................................ 1
Election to Purchase Stock in the Initial Offering ................ 1
Value of Participation Interests .................................. 1
Method of Directing Investments ................................... 1
Time for Directing Investment ..................................... 1
Irrevocability of Investment Direction ............................ 2
Direction to Purchase the Stock After ............................. 2
the Conversion ........................................... 2
Purchase Price of Steelton Bancorp Common Stock ................... 2
Nature of Each Participant's Interest in
Steelton Bancorp Common Stock ............................ 2
Voting and Tender Rights of Steelton Bancorp Common Stock ......... 3
Minimum Investment ................................................ 3
Description of the Plan .................................................... 3
General ........................................................... 3
Eligibility and Participation ..................................... 4
Contributions and Benefits Under the Plan ......................... 4
Limitations on Contributions ...................................... 4
Investment of Plan Assets.......................................... 5
Performance of Previous Funds...................................... 6
Performance of Employer Stock Fund................................. 6
Benefits Under the Plan............................................ 6
Withdrawals and Distributions From the Plan........................ 7
Administration of the Plan........................................ 8
Reports to Plan Participants....................................... 8
Amendment and Termination.......................................... 9
Merger, Consolidation, or Transfer................................. 9
Federal Income Tax Consequences................................... 9
Restrictions on Resale.............................................10
SEC Reporting and Short-Swing Liability............................10
Additional Information.............................................10
Legal Opinions .............................................................11
Investment Election Form ...................................................Appendix A
Change of Investment Allocation Form .......................................Appendix B
</TABLE>
<PAGE>
THE OFFERING
Securities Offered
The securities offered in connection with this prospectus supplement
are participation interests in the plan and shares of Steelton Bancorp common
stock. Only employees of Mechanics Savings who meet the eligibility requirements
under the plan may participate. Information with regard to the plan is contained
in this prospectus supplement and information with regard to the conversion and
the financial condition, results of operation, and business of Mechanics Savings
is contained in the attached prospectus.
Election to Purchase Stock in the Initial Offering
You may direct the trustee of the plan to invest all or part of the
funds in you account in the Employer Stock Fund. Based upon your election, the
trustees of the plan will subscribe for Steelton Bancorp shares in the initial
offering. You also will be permitted to direct ongoing purchases of the stock
under the plan after the initial offering. See "Direction to Purchase Stock
After the Initial Offering." The plan's trustee will follow your investment
directions. Amounts not transferred to the Employer Stock Fund will remain
invested in the other investment funds of the plan as directed by you. See
"Investment of Plan Assets."
Value of Participation Interests
As of March 8, 1999, the market value of the assets of the plan equaled
$_____. The plan administrator has informed each participant of the value of his
or her account in the plan as of March 8, 1999. The value of the plan assets
represents your past contributions to the plan, plus or minus earnings or losses
on contributions, less withdrawals and loans. You may direct up to 100% of the
value of your account assets to invest in the Employer Stock Fund. However, in
connection with the initial offering of the stock, if you elect to purchase the
stock, you will be required to invest a minimum amount of your account assets in
the Employer Stock Fund.
Method of Directing Investments
Appendix A of this prospectus supplement includes an investment form
for you to direct a transfer to the Employer Stock Fund of all or a portion of
your account under the plan. Appendix B of this prospectus supplement includes
Pentegra's change of investment allocation form. If you wish to invest all or
part of your account in the Employer Stock Fund, you need to complete the
attached form. Additionally, you may indicate the directed investment of future
contributions under the plan for investment in the Employer Stock Fund. If you
do not wish to make an investment election, you do not need to take any action.
Time for Directing Investment
The deadline for submitting your direction to invest funds in the
Employer Stock Fund in order to purchase the stock issued in the initial
offering is ______________, 1999. If you want to invest in the Employer Stock
Fund, you must return the attached form to _______ of Mechanics Savings by noon
on __________________, 1999.
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After the initial offering, you will still be able to direct the
investment of your account under the plan in the Employer Stock Fund and in
other investment alternatives.
Irrevocability of Investment Direction
The direction to invest your plan funds in the Employer Stock Fund cannot be
changed after you have turned in your forms. However, you will be able to direct
your account to purchase the stock after the initial offering by directing
amounts in your account into the Employer Stock Fund.
Direction to Purchase the Stock After the Conversion
Following completion of the conversion, you will be permitted to direct
that a certain percentage of your interest in the Trust Fund be transferred to
the Employer Stock Fund and invested in Steelton Bancorp common stock, or to the
other investment funds available under the plan. Alternatively, you may direct
that a certain percentage of your interest in the Employer Stock Fund be
transferred to the Trust Fund to be invested in the other investment funds
available in accordance with the terms of the plan. You can direct future
contributions made to the plan by you or on your behalf to be invested in the
Employer Stock Fund. Following your initial election, the allocation of your
interest in the Employer Stock Fund may be changed daily by filing a change of
investment allocation form with the plan administrator or by calling Pentegra's
voice response unit at (800) 433-4422 and changing your investment allocation by
phone.
Purchase Price of Steelton Bancorp Common Stock
The funds transferred to the Employer Stock Fund for the purchase of
the stock issued in with the initial offering will be used by the trustee to
purchase shares of Steelton Bancorp common stock. The price paid for such shares
of the stock will be $10.00. This price is the price that will be paid by all
other persons who purchase shares of the stock in the initial offering.
Your account assets directed for investment in the Employer Stock Fund
after the initial offering shall be invested by the trustee to purchase shares
of Steelton Bancorp common stock in open market transactions. The price paid by
the trustee for shares of the Steelton Bancorp common stock in the initial
offering, or otherwise, will not exceed "adequate consideration" as defined in
Section 3(18) of the Employee Retirement Income Security Act.
Nature of Each Participant's Interest in Steelton Bancorp Common Stock
The trustee will hold Steelton Bancorp common stock in the name of the
plan. Each participant has an allocable interest in the investment funds of the
plan but not in any particular assets of the plan. Accordingly, a specific
number of shares of the stock will not be directly attributable to the account
of any individual participant. Dividend rights associated with the stock held by
the Employer Stock Fund will be allocated to the Employer Stock Fund. Any
increase (or decrease) in the value of the fund as a result of dividend rights
will be reflected in each participant's allocable interest in the Employer Stock
Fund.
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Voting and Tender Rights of the Stock
You will direct the trustee of the plan about how to vote your Steelton
Bancorp shares. If you do not give voting instruction or tender instruction to
the trustee, the trustee will vote or tender those shares within its discretion
as a fiduciary under the plan or as directed by the plan administrator.
Minimum Investment
The minimum investment of assets directed by a participant for the
purchase of the stock in the initial offering is $250.00, and investments must
be in increments of $10.00. Funds may be directed for the purchase of the stock
attributable to your account regardless of whether your account assets are 100%
vested at the time of your investment election. There is no minimum level of
investment after the initial offering for investment in the Employer Stock Fund.
DESCRIPTION OF THE PLAN
General
Mechanics Savings adopted a 401(k) plan effective May 1, 1993.
Effective April 1, 1999, Mechanics Savings withdrew from its old plan and
adopted the new plan in order to permit the investment of plan assets in
Steelton Bancorp common stock. The new plan is a deferred compensation
arrangement established in accordance with the requirements under Section 401(a)
and Section 401(k) of the Internal Revenue Code. The plan will be submitted to
the IRS for a determination by the IRS that the plan is qualified under Section
401(a) of the Internal Revenue Code and that its trust is qualified under
Section 501(a). Mechanics Savings intends for the plan, in operation, to comply
with the requirements under Section 401(a) and Section 401(k). Mechanics Savings
will adopt any amendments to the plan that may be necessary to ensure the
continued qualified status of the plan under the Internal Revenue Code and other
federal regulations.
Employee Retirement Income Security Act. The plan is an "individual
account plan" other than a "money purchase pension plan" within the meaning of
the Employee Retirement Income Security Act. As such, the plan is subject to all
of the provisions of Title I (Protection of Employee Benefit Rights) and Title
II (Amendments to the Internal Revenue Code Relating to Retirement Plans) of
ERISA, except the funding requirements contained in Part 3 of Title I of ERISA,
which do not apply to an individual account plan (other than a money purchase
plan). The plan is not subject to Title IV (Plan Termination Insurance) of
ERISA. Neither the funding requirements contained in Part 3 of Title I of ERISA
nor the plan termination insurance provisions contained in Title IV of ERISA
will be extended to participants or beneficiaries under the plan.
Federal tax law imposes substantial restrictions on your right to
withdraw amounts held under the plan before your termination of employment with
Mechanics Savings. Federal law may also impose a 10% excise tax on withdrawals
you make for the plan before you reach the age of 59 1/2, regardless of whether
the withdrawal occurs during or after your employment with Mechanics Savings.
Full Text of Plan. The following portions of this prospectus supplement
are summaries of provisions in the plan. They are not complete and are qualified
in their entirety by the full text of the plan. You may obtain copies of the
full plan by sending a request to _________ at Mechanics Savings.
3
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You should carefully read the full text of the plan document to understand your
rights and obligations under the plan.
Eligibility and Participation
If you are age 21 or older, you may participate in the plan after you
work for us after completing 500 hours of service during a 6-month period with
Mechanics Savings. As of March 1, 1999, there were 14 employees eligible to
participate in the plan and 13 employees had elected to participate. The plan
year is January 1 to December 31.
Contributions and Benefits Under the Plan
Plan Participant Contributions. You are permitted amounts of not less
than 1% and not more than 15% of your annual pay, including salary, bonus or
commissions to the plan. You may change the amount of your contributions at any
time and your changes will be effective on the first day of the following pay
period.
Mechanics Savings Contributions. Mechanics Savings may match your
contribution to the plan, but we are not obligated to match you contributions.
Mechanics Savings currently matches 50% of your contributions up to 6% of you
salary. Mechanics Savings contributions are subject to revision by us and are
subject to a vesting schedule.
Limitation on Contributions
Limitation on Employee Salary Deferral. Although you may contribute up
to 15% of your pay to the plan, federal tax law limits the dollar amount of your
annual contribution to $10,000 in 1999. The Internal Revenue Service
periodically adjusts this limit for inflation. Contributions in excess of this
limit and earnings on those contributions will be generally be returned to you
by April 15 of the year following your contribution, and they will be subject to
regular federal income taxes.
Limitation on Annual Additions and Benefits. Under federal tax law,
your contributions and our contributions to the plan may not be greater than 25%
of your annual pay or, if less, $30,000. Contributions that we make to any other
retirement program that we sponsor may also count against these limits.
Special Rules About Highly-Paid Employees. Special provisions of the
Internal Revenue Code limit contributions by employees who receive annual pay
greater than $80,000. If you are in this category, some of your contribution may
be returned if your contribution, when measured as a percentage of your pay, is
substantially higher than the contributions made by other employees.
If your annual pay is less than $60,000, we may be required to make a
minimum contribution to the plan of 3% of your annual pay if the plan is
considered to be a "top heavy" plan under federal tax law. The plan is
considered "top heavy" if, in any year, the value of the plan accounts of
employees making more than $60,000 represent more than 60 percent of the value
of all accounts.
4
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Investment of Plan Assets
All amounts credited to your plan account is held in trust. A trustee
appointed by Mechanics Savings's Board of Directors administers the trust and
invests the plan assets. The plan offers the following investment choices:
S&P 500 Stock Fund: Invests in the stocks of a broad array of
established U.S. companies. Its objective is long-term: to earn higher returns
by investing in the largest companies in the U.S. economy.
Stable Value Fund: Invests primarily in Guaranteed Investment Contracts
and Synthetic Guaranteed Investment Contracts. Its objective is
short-to-intermediate term: to achieve a stable return over short to
intermediate periods of time while preserving the value of a participant's
investment.
S&P MidCap Stock Fund: Invests in the stocks of mid-sized U.S.
companies. Its objective is long-term: to earn higher returns which reflect the
growth potential of such companies.
Money Market Fund: Invests in a broad range of high-quality short-term
instruments. Its objective is short-term to achieve competitive short-term rates
or return while preserving the value of the participant's principal.
Government Bond Fund: Invests in U.S. Treasury bonds with a maturity of
20 years or more. Its objective is long-term: to earn a higher level of income
along with the potential for capital appreciation.
Income Plus Asset Allocation Fund: Invests approximately 80% of its
portfolio in a combination of stable value investments and U.S. bonds. The
balance is invested in U.S. and international stocks. Its objective is
intermediate-term: to preserve the value of a participant's investment over
short periods of time and to offer some potential for growth.
Growth and Income Asset Allocation Fund: Invests in U.S. domestic and
international stocks, U.S. domestic bonds, and stable value investments. Its
objective is intermediate-term: to provide a balance between the pursuit of
growth and protection from risk.
Growth Asset Allocation Fund: Invests the majority of its assets in
stocks -- domestic as well as international. Its objective is long-term: to
pursue high growth of a participant's investment over time.
International Stock Fund: Invests in over 1,000 foreign stocks in 20
countries. Its objective is long-term: to offer the potential return of
investing in the stocks of established non-U.S. companies, as well as the
potential risk-reduction of broad diversification.
Employer Stock Fund. The plan now offers you the Employer Stock Fund as
an additional investment choice. The Employer Stock Fund invests primarily in
the common stock of Steelton Bancorp.
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Performance of Previous Funds
Before we added the Employer Stock Fund as an investment choice, your
contributions under the plan were invested in the funds identified below. The
annual percentage return on these funds for calendar years 1998, 1997 and 1996
was approximately:
Fund 1998 1997 1996
------ ------ ------
Money Market Fund 5.5% 5.5% 5.6%
Stable Value Fund 5.9% 6.2% 6.5%
Government Bond Fund 13.8% 15.4% (2.3)%
S&P 500 Stock Fund 27.9% 32.7% 22.3%
S&P MidCap Stock Fund 18.6% 31.5% 18.6%
International Stock Fund 19.3% 3.6% 10.6%
Income Plus Asset Allocation Fund 9.7% 8.9% 8.3%
Growth Asset Allocation Fund 24.3% 19.0% 18.0%
Growth & Income Asset Allocation Fund 15.5% 13.6% 12.3%
Employer Stock Fund N/A N/A N/A
Performance of the Employer Stock Fund
The Employer Stock Fund is invested in the common stock of Steelton
Bancorp. As of the date of this prospectus supplement, none of the shares of
common stock have been issued or are outstanding and there is no established
market for the Steelton Bancorp common stock. Accordingly, there is no record of
the investment performance of the Employer Stock Fund. Performance of the
Employer Stock Fund depends on a number of factors, including the financial
condition and profitability of Steelton Bancorp and Mechanics Savings and market
conditions for Steelton Bancorp common stock generally.
Please note that investment in the Employer Stock Fund is not an
investment in a savings account or certificate of deposit, and such investment
in Steelton Bancorp common stock through the Employer Stock Fund is not insured
by the FDIC or any other regulatory agency. Further, no assurances can be given
with respect to the price at which the stock may be sold in the future.
Investments in the Employer Stock Fund may involve certain special
risks in investments in the common stock of Steelton Bancorp. For a discussion
of these risk factors, see "Risk Factors" beginning on page __ of the
prospectus.
Benefits Under the Plan
Vesting. The contributions that you make in the plan are fully vested
and cannot be forfeited. You vest in our matching contributions according to the
following schedule.
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Number of Full Years of Service Vested Percentage
------------------------------- -----------------
1 25%
2 50%
3 75%
4 100%
Withdrawals and Distributions From the Plan
Withdrawals Before Termination of Employment. Your plan account
provides you with a source of retirement income. But, while you are employed by
Mechanics Savings, if you need funds from your account before retirement, you
may be eligible to receive either an in-service withdrawal or (from your pre-tax
contributions) a hardship distribution or a loan. You can apply for a hardship
distribution or a loan from the plan by contacting _________ at Mechanics
Savings. In order to qualify for a hardship withdrawal, you must have an
immediate and substantial need to meet certain expenses, like a mortgage payment
or medical bill, and have no other reasonably available resources to meet your
financial need. If you qualify for a hardship distribution, the trustee will
make the distribution proportionately from the investment funds in which you
have invested your account balance.
Distributions Upon Termination for Any Other Reason. If you terminate
employment with Mechanics Savings for any reason other than retirement,
disability or death and your account balance exceeds $5,000, the trustee will
distribute your benefits when you turn 70 1/2, unless you request otherwise. You
may elect to maintain your account balance in the plan for as long as Mechanics
Savings maintains the plan or you may elect one or more of the forms of
distribution available under the plan. If your account balance does not exceed
$5,000, the trustee will generally distribute your benefits to you as soon as
administratively practicable following termination of employment.
Distributions Upon Disability. If you can no longer work because of a
disability, as defined in the plan, you may withdraw your total account balance
under the plan and have that amount paid to you in accordance with the terms of
the plan. If you later become reemployed after you have withdrawn some or all of
your account balance, you may not repay to the plan any withdrawn amounts.
Distributions Upon Death. If you die prior before your benefits are
paid from the plan, your benefits will be paid to your surviving spouse or
designated beneficiary.
Distributions of the Stock of Steelton Bancorp. If you receive a
distribution from the plan and assets under the plan have been directed by you
to be invested in the Employer Stock Fund, you may have those assets distributed
in kind in the form of stock of Steelton Bancorp.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations
order, as defined in the Internal Revenue Code, benefits payable under the plan
shall not be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any
kind, either voluntary or involuntary, and any attempt to anticipate, alienate,
sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any
rights to benefits payable under the plan shall be void.
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Plan Loans. You may borrow money from the vested portion of your
account. The minimum amount you may borrow is $1,000. The maximum amount is 50%
of your vested account balance. You may never borrow more than $50,000 minus the
highest outstanding balance on any individual loan during the last 12 months.
You may take up to five years to repay a general purpose loan. If you
are using the loan to purchase your primary residence, a repayment period of 15
years is permissible. You must repay the loan through payroll deductions.
If you fail to make any loan repayment when due, your loan will be in
default. If such default occurs after the first 12 monthly payments of the loan
have been satisfied, the full amount of the loan will be due and payable within
60 days of the due date of the last monthly installment payment. If the
outstanding balance of the loan is in default and is not repaid in the
aforementioned time period, you will be considered to have received a
distribution of said amount.
Administration of the Plan
Mechanics Savings, effective April 1, 1999, will administer the plan.
The Bank of New York will serve as trustee and custodian for all investment
funds under the plan except the Employer Stock Fund. Mechanics Savings's
Executive Vice President and Chief Executive Officer, Harold E. Stremmel, will
serve as trustee with respect to the Employer Stock Fund during the conversion
of Mechanics Savings and the offering by Steelton Bancorp. After the stock of
Steelton Bancorp begins trading, the Bank of New York also will be the trustee
for the Employer Stock Fund. The plan administrator is responsible for the
administration of the plan, interpretation of the provisions of the plan,
prescribing procedure for filing applications for benefits, preparation and
distribution of information explaining the plan, maintenance of plan records,
books of account and all other data necessary for the proper administration of
the plan, and preparation and filing of all returns and reports relating to the
plan which are required to be filed with the U.S. Department of Labor and the
IRS, and for all disclosures required to be made to participants, beneficiaries
and others under the Employee Retirement Income Security Act.
The trustee receives and holds the contributions to the plan in trust
and distributes them to participants and beneficiaries in accordance with the
terms of the plan and the directions of the plan administrator. The trustee is
responsible for investment of the assets of the trust. The address of the plan
administrator and the trustee for the Employer Stock Fund is 51 South Front
Street, Steelton, Pennsylvania, 17113. The address of the Bank of New York is
One Wall Street, New York, New York, 10286.
Reports to Plan Participants
The plan administrator will furnish to each participant a statement at
least quarterly showing:
o the balance in your account as of the end of that period;
o the amount of contributions allocated to your account for that period; and
o the adjustments to your account to reflect earnings or losses (if any).
8
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If you invest in the Employer Stock Fund, you will also receive a copy
of Steelton Bancorp's Annual Report to Stockholders and a proxy statement
related to stockholder meetings.
Amendment and Termination
It is the intention of Mechanics Savings to continue the plan
indefinitely. Nevertheless, Mechanics Savings, within its sole discretion may
terminate the plan at any time. If the plan is terminated in whole or in part,
then regardless of other provisions in the plan, you will have a fully vested
interest in your accounts. Mechanics Savings reserves the right to make, from
time to time, any amendment or amendments to the plan that do not cause any part
of the trust to be used for, or diverted to, any purpose other than the
exclusive benefit of participants or their beneficiaries; provided, however,
that Mechanics Savings may make any amendment it determines necessary or
desirable, with or without retroactive effect, to comply with Employee
Retirement Income Security Act.
Merger, Consolidation, or Transfer
In the event of the merger or consolidation of the plan with another
plan, or the transfer of the trust assets to another plan, the plan requires
that each participant would (if either the plan or the other plan then
terminated) receive a benefit immediately after the merger, consolidation, or
transfer that is equal to or greater than the benefit he or she would have been
entitled to receive immediately before the merger, consolidation, or transfer
(if the plan had then terminated).
Federal Income Tax Consequences
The following discussion is only a brief summary of certain federal
income tax aspects of the plan. You should not rely on this summary as a
complete or definitive description of the material federal income tax
consequences relating to the plan. The tax rules that affect your benefits under
the plan change frequently and may vary based on your individual situation. This
summary also does not discuss how state or local tax laws affect your plan
benefits. We urge you to consult your tax advisor with respect to any
distribution from the plan and transactions involving the plan.
Federal tax law provides the plan with a number of special benefits:
(1) we may deduct amounts contributed to the plan on your behalf;
(2) you pay no current income tax on your contributions or Mechanics
Savings contributions;
(3) the earnings on your plan accounts are not taxable until you
receive a distribution.
These benefits are conditioned on the plan's compliance with special
requirements of federal tax law. We intend to satisfy all of the rules that
apply to the plan. However, if the rules are not satisfied, the special tax
benefits available to the plan may be lost.
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Special Distribution Rules. If you receive a distribution of all of
your benefits from the plan, you may be eligible to spread the taxes on the
distribution over the next five years. If you turned 50 before 1986, you may be
eligible to spread the taxes on the distribution over as much as 10 years. You
should consult with your tax advisor to determine if you are eligible for these
special tax benefits and whether they are appropriate to your financial needs.
Steelton Bancorp Common Stock Included in Lump Sum Distribution. If a
distribution of all of your benefits includes shares of Steelton Bancorp common
stock, you will generally not be taxed on the increase in the value of the stock
since its purchase until you sell the stock. You will be taxed on the amount of
the distribution equal to your original cost for the stock when you receive your
distribution.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan
or to an IRA. You may roll over virtually all distributions from the plan to
retirement programs sponsored by other employers or to an individual retirement
account. We will provide you with detailed information on how to roll over a
distribution when you are eligible to receive benefits under the plan.
Restrictions on Resale
If you are an "affiliate" of Steelton Bancorp or Mechanics Savings, you
may be subject to special rules under federal securities laws that affect your
ability to sell shares you hold in the Employer Stock Fund. Directors, officers
and substantial shareholders of Mechanics Savings are generally considered
"affiliates." Any person who may be an "affiliate" of Mechanics Savings may wish
to consult with counsel before transferring any common stock they own. If you
are not considered an "affiliate" of Mechanics Savings you may freely sell any
shares of Steelton Bancorp common stock distributed to them under the plan,
either publicly or privately.
SEC Reporting and Short-Swing Profit Liability
If you are an officer, director or more than 10% owner of Steelton
Bancorp, you may be required to report purchases and sales of Steelton Bancorp
common stock through the plan to the Securities and Exchange Commission. In
addition, you may be subject to special rules that provide for the recovery by
Steelton Bancorp of profits realized by an officer director or a more than 10%
owner from the purchase and sale or sale and purchase of the common stock within
any six-month period. However, the rules except many transactions involving the
plan from the reporting and profit recovery rules. You should consult with us
regarding the impact of these rules on your transactions involving Steelton
Bancorp common stock.
Additional Information
This prospectus supplement dated ________________________, 1999, is
part of the prospectus of Steelton Bancorp dated ____________________, 1999.
This prospectus supplement shall be delivered to plan participants together with
the prospectus and is not complete unless it is accompanied by the prospectus.
10
<PAGE>
LEGAL OPINIONS
The validity of the issuance of the common stock will be passed upon by
Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C., which acted as special
counsel for Steelton Bancorp and Mechanics Savings in connection with the
conversion of Mechanics Savings and the offering by Steelton Bancorp.
11
<PAGE>
Appendix-A: Investment Election Form
<PAGE>
Appendix-A
----------
MECHANICS SAVINGS & LOAN, FSA EMPLOYEES'
SAVINGS & PROFIT SHARING PLAN AND TRUST
---------------------
Participant Voluntary Investment Election Form
---------------------
Name of Plan Participant:
---------------------------------
Social Security Number: ---------------------------------
1. Instructions.
------------
In connection with the proposed conversion of the Mechanics Savings &
Loan, FSA from a federally chartered mutual savings association to a federally
chartered stock savings bank, Mechanics Savings has adopted the Mechanics
Savings & Loan, FSA Employees' Savings & Profit Sharing Plan to permit plan
participants to direct all, or a portion, of the assets attributable to their
participant accounts into a new fund: the Employer Stock Fund. The assets
attributable to a participant's account that are transferred at the direction of
the participant into the Employer Stock Fund will be used to purchase shares of
common stock of Steelton Bancorp, Inc. to be issued in the initial stock
offering of Steelton Bancorp.
To direct a transfer of all or a part of the funds credited to your
account to the Employer Stock Fund, you should complete this form and return it
to Harold E. Stremmel, at 51 South Front Street, Steelton, Pennsylvania, 17113,
who will retain this form and return a copy to you. If you need any assistance
in completing this form, please contact Harold E. Stremmel at (717) 939-1966. If
you do not complete and return this form by _______________________, 1999, at
12:00 p.m., the funds credited to your account under the plan will continue to
be invested in accordance with your prior investment direction, or in accordance
with the terms of the plan if no investment direction has been provided.
2. Investment Directions.
---------------------
As a participant in the plan, I hereby voluntarily elect to direct the
trustee of the plan to invest the below indicated dollar sum of my participant
account balance under the plan as indicated below.
I hereby voluntarily elect and request to direct investment of the
below indicated dollar amount of my participant account funds for the purchase
of the common stock to be issued in Steelton Bancorp's initial offering (minimum
investment of $250.00; rounded to the nearest $10.00 increment; maximum
investment permissible is 10,000 shares of common stock being offered or
$100,000): $___________. Enter your $ level of requested purchase through the
plan. Such amount may not exceed the vested portion of assets held under the
plan for you. Please note that the actual number of shares of common stock
purchased on your behalf under the plan may be limited or reduced in
<PAGE>
accordance with the plan of conversion of Mechanics Savings based upon the total
number of shares of common stock subscribed for by other parties.
All other funds in my participant account will remain invested as
previously requested. All future contributions under the plan will continue to
be invested as previously requested.
3. Acknowledgment.
--------------
I fully understand that this self-directed portion of my participant
account does not share in the overall net earnings, gains, losses, and
appreciation or depreciation in the value of assets held by the plan's other
investment funds, but only in my account's allocable portion of such items from
the directed investment account invested in the common stock. I understand that
the plan's trustee, in complying with this election and in following my
directions for the investment of my account, is not responsible or liable in any
way for the expenses or losses that may be incurred by my account assets
invested in common stock under the Employer Stock Fund.
I further understand that this one time election shall become
irrevocable by me upon execution and submission of this Investment Form. Only
properly signed forms delivered to the plan trustee on or before __________,
1999, at 12:00 noon, will be honored.
The undersigned participant acknowledges that he or she has received
and read the prospectus of the Steelton Bancorp, Inc., dated __________________,
1999, the prospectus supplement dated ____________, 1999, regarding the
Mechanics Savings & Loan, FSA Employees' Savings & Profit Sharing Plan and Trust
as adopted by Mechanics Savings & Loan, FSA and this Investment Form. The
undersigned hereby acknowledges that the shares of common stock to be purchased
with the funds noted above are not savings accounts or deposits and are not
insured by the Federal Deposit Insurance Corporation, Bank Insurance Fund, the
Savings Association Insurance Fund, or any other governmental agency. Investment
in the common stock will expose the undersigned to the investment risks and
potential fluctuations in the market price of the common stock. Investment in
the common stock does not offer any guarantees regarding maintenance of the
principal value of such investment or any projections or guarantees associated
with future value or dividend payments with respect to the common stock. The
undersigned has read and understands the above listed documents and hereby
voluntarily makes and consents to this investment election and voluntarily
signed his (her) name as of the date listed below. If you so elect, you may
choose not to make any investment decision at this time.
- --------------------- ------------- ------------------------ -------------
Witness Date Participant Date
- --------------------- ------------- ------------------------ -------------
Witness Date Participant's Spouse Date
For the Trustee For the Plan Administrator
- --------------------- ------------- ------------------------ -------------
Date Date
<PAGE>
Appendix-B: Change of Investment Allocation Form
<PAGE>
Appendix-B
----------
Change of Investment Allocation Form
MECHANICS SAVINGS & LOAN, FSA
CHANGE OF INVESTMENT ALLOCATION
- -------------------------------
1. Member Data
- --------------------------------------------------------------------------------
Print your full name above (Last, first, middle initial) Social Security Number
- --------------------------------------------------------------------------------
Street Address City State Zip
2. Instructions
Mechanics Savings & Loan, FSA Employees' Savings & Profit Sharing Plan and Trust
is giving members a special opportunity to invest their 401(k) account balances
in a new investment fund - the Employer Stock Fund - which is comprised
primarily of common stock issued by Steelton Bancorp, Inc. in connection with
the conversion of Mechanics Savings & Loan, FSA from the mutual into the stock
form of organization. The percentage of a member's account transferred at the
direction of the member into the Employer Stock Fund will be used to purchase
shares of the common stock during the initial offering of Steelton Bancorp, Inc.
Please review the prospectus and the prospectus supplement before making any
decision.
In the event of an oversubscription in the offering so that the total amount you
allocate to the Employer Stock Fund can not be used by the trustee to purchase
the common stock, your account will be reinvested in the other funds of the plan
as previously directed in your last investment election.
Investing in the common stock entails some risks, and we encourage you to
discuss this investment decision with your spouse and investment advisor. The
plan trustee and the plan administrator are not authorized to make any
representations about this investment other than what appears in the prospectus
and prospectus supplement, and you should not rely on any information other than
what is contained in the prospectus and prospectus supplement. For a discussion
of certain factors that should be considered by each member in deciding whether
to invest in the common stock, see "Risk Factors" beginning on page __ of the
prospectus. Any shares purchased by the plan pursuant to your election will be
subject to the conditions or restrictions otherwise applicable to the common
stock, as discussed in the prospectus and prospectus supplement.
3. Investment Directions (Applicable to Accumulated Balances Only)
To direct a transfer of all or part of the funds credited to your accounts to
the Employer Stock Fund, you should complete and file this form with Harold E.
Stremmel, Executive Vice President and Chief Executive Officer of Mechanics
Savings & Loan, FSA, no later than _____________ at 12:00 noon. If you need any
assistance in completing this form, please contact Mr. Stremmel at (717)
939-1966. If you do not complete and return this form to Mr. Stremmel by
___________________________ at 12:00 noon, the funds credited to your account
under the plan will continue to be invested in accordance with your prior
investment direction, or in accordance with the terms of the plan if no
investment direction has been provided by you.
<PAGE>
I hereby revoke any previous investment direction and now direct that the market
value of the units that I have invested in the
following funds, to the extent permissible, be transferred out of the specified
fund and invested (in whole percentages) in the Employer Stock Fund as follows:
- --------------------------------------------------------------------------------
Fund Percentage to be transferred
---- ----------------------------
S&P 500 Stock Fund _____ %
Stable Value Fund _____ %
S&P MidCap Stock Fund _____ %
Money Market Fund _____ %
Government Bond Fund _____ %
International Stock Fund _____ %
Income Plus Fund _____ %
Growth & Income Fund _____ %
Growth Fund _____ %
- --------------------------------------------------------------------------------
Note: The total amount transferred may not exceed the total value of your
accounts.
4. Investment Directions (Applicable to Future Contributions Only)I hereby
revoke any previous investment instructions and now direct that any future
contributions and/or loan repayments, if any, made by me or on my behalf by
Mechanics Savings & Loan, FSA, including those contributions and/or repayments
received by Mechanics Savings & Loan, FSA Employees' Savings & Profit Sharing
Plan and Trust during the same reporting period as this form, be invested in the
following whole percentages. If I elect to invest in the common stock of
Steelton Bancorp, such future contributions or loan repayments, if any, will be
invested in the Employer Stock Fund the month following the conclusion of the
stock offering.
- --------------------------------------------------------------------------------
Fund Percentage
---- ----------
S&P 500 Stock Fund ____ %
Stable Value Fund ____ %
S&P MidCap Stock Fund ____ %
Money Market Fund ____ %
Government Bond Fund ____ %
International Stock Fund ____ %
Income Plus Fund ____ %
Growth & Income Fund ____ %
Growth Fund ____ %
Employer Stock Fund ____ %
Total (Important!) 100 %
- --------------------------------------------------------------------------------
Notes: No amounts invested in the Stable Value Fund may be transferred directly
to the Money Market Fund. Stable Value Fund amounts invested in the S&P 500
Stock Fund, S&P MidCap Stock Fund, Government Bond Fund, International Stock
Fund, Income Plus Fund, Growth & Income Fund, Growth Fund and/or Employer Stock
Fund, for a period of three months may be transferred to the Money Market Fund
upon the submission of a separate Change of Investment Allocation form.
The percentage that can be transferred to the Money Market Fund may be limited
by any amounts previously transferred from the Stable Value Fund that have not
satisfied the equity wash requirement. Such amounts will remain in either the
S&P 500 Stock Fund, S&P MidCap Stock Fund, Government Bond Fund, International
Stock Fund, Income Plus Fund, Growth & Income Fund, Growth Fund and/or Employer
Stock
<PAGE>
Fund and a separate direction to transfer them to the Money Market Fund will be
required when they become available.
5. Participant Signature and Acknowledgment - Required
By signing this Change Of Investment Allocation form, I authorize and direct the
plan administrator and trustee to carry out my instructions. I acknowledge that
I have been provided with and read a copy of the prospectus and prospectus
supplement relating to the issuance of the common stock. I am aware of the risks
involved in the investment in the common stock, and understand that the trustee
and plan administrator are not responsible for my choice of investment.
MEMBER'S SIGNATURE
- ----------------------------------------------------- --------------
Signature of Member Date
Pentegra Services, Inc. is hereby authorized to make the above listed change(s)
to this member's record.
- ------------------------------------------------------ --------------
Signature of Mechanics Savings & Loan, FSA Date
Authorized Representative
Please complete and return by 12:00 noon on 1999.
<PAGE>
PROSPECTUS
500,250 Shares
of
Common Stock
of
Steelton Bancorp, Inc.
(Holding Company for Mechanics Savings Bank)
51 South Front Street
Steelton, Pennsylvania, 17113
(717) 939-1966
- --------------------------------------------------------------------------------
Steelton Bancorp, Inc. is offering for sale up to 500,250 shares of
common stock at $10.00 per share in accordance with Mechanics Savings and Loan,
FSA's conversion from a federal mutual savings association to a federal stock
savings bank, to be known as Mechanics Savings Bank. As part of the conversion,
Mechanics Savings and Loan, FSA will become a wholly owned subsidiary of
Steelton Bancorp, Inc. The deadline for ordering stock is __________ p.m. on
____________ ____, 1999, and may be extended to ______________, 1999. All funds
submitted shall be placed in a deposit account at Mechanics Savings and Loan,
FSA until the shares are issued or the funds are returned. No stock will be sold
if Steelton Bancorp, Inc. does not receive orders for at least the minimum
number of shares.
There is currently no public market for the stock. The stock is
expected to be quoted on the OTC Bulletin Board under the symbol "_______."
Capital Resources, Inc. is not required to sell any specific number or
dollar amount of stock but will use their best efforts to sell the stock
offered.
- --------------------------------------------------------------------------------
--------------- --------------
MINIMUM MAXIMUM
- ------------------------------------------------- --------------- --------------
Number of Shares 369,750 500,250
- ------------------------------------------------- --------------- --------------
Total Underwriting Commissions and Expenses $ 310,000 $ 310,000
- ------------------------------------------------- --------------- --------------
Net Proceeds $3,387,500 $4,692,500
- ------------------------------------------------- --------------- --------------
Net Proceeds Per Share $ 9.16 $ 9.38
- ------------------------------------------------- --------------- --------------
Based upon market conditions and the approval of the Office of Thrift
Supervision, Steelton Bancorp, Inc. may increase the offering by up to 15% of
the 500,250 shares to be sold[, which would bring the number of shares to be
sold to 575,288 shares].
Please refer to Risk Factors beginning on page ____ of this document.
These securities are not deposits or savings accounts and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
governmental agency.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, nor any state securities regulator has approved or disapproved
these securities or determined if this prospectus is accurate or complete.
Any representation to the contrary is a criminal offense.
Capital Resources, Inc.
The Date of this Prospectus is __________ ____, 1999
<PAGE>
================================================================================
[MAP GOES HERE]
================================================================================
2
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY
To understand the stock offering fully, you should read this entire
document carefully, including the consolidated financial statements and the
notes to the consolidated financial statements.
Steelton Bancorp, Inc.
Steelton Bancorp is not an operating company and has not engaged in any
significant business to date. Its primary activity will be owning all the stock
of Mechanics Savings Bank. See pages _______.
Mechanics Savings and Loan, FSA.
Mechanics Savings and Loan, FSA is a federally chartered mutual savings
institution. It is converting from the mutual to the stock form of ownership as
part of the conversion. The converted federal stock savings bank will be called
"Mechanics Savings Bank." See pages _______.
Our use of the proceeds raised from the sale of stock.
Steelton Bancorp will use approximately 50% of the cash received in the
offering to purchase all of Mechanics Savings' stock. Steelton Bancorp will also
lend the Mechanics Savings' employee stock ownership plan cash to enable the
plan to buy 8% of the shares sold in the offering. The balance will be retained
as Steelton Bancorp's initial capitalization. See pages __________.
How we determined the price per share and the number of shares we are offering.
The number of shares offered is based on an independent appraisal [by
FinPro, Inc.] of the pro forma estimated market value of the stock [based on
information as of March 1, 1999,] divided by the purchase price of $10.00 . The
$10.00 per share was determined by the Board of Directors in consultation with
Capital Resources.
Based on various assumptions about the offering and the reinvestment of
the amount of cash raised in the offering, Steelton Bancorp's ratio of offering
price to pro forma [earnings] per share based on fiscal 1998 earnings measured:
o 23.8x at the minimum; [and]
o 27.8x at the maximum
of the estimated valuation range.
Based on market price information as of March 1, 1999, the mean ratio
of trading price to earnings per share for all fully converted publicly traded
thrift holding companies was 17.4x. The median ratio of trading price to
earnings per share for all fully converted publicly traded thrift holding
companies was 15.4x.
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
Steelton Bancorp's ratio of offering price to pro forma [book value]
per share at December 31, 1998 measured:
o 55.7% at the minimum; [and]
o 64.2% at the maximum
of the estimated valuation range.
Based on market price information as of March 1, 1999, the mean ratio
of trading price to book value per share for all fully converted publicly traded
thrift holding companies was 128.4%. The median ratio of trading price to book
value per share for all fully converted publicly traded thrift holding companies
was 114.7%.
Because of possible differences in important factors such as operating
characteristics, financial performance, asset size, capital structure, and
business prospects between Steelton Bancorp and other savings and loan holding
companies, you should not rely on these comparative valuation ratios as an
indication as to whether or not the stock is a good investment for you. [In
addition, we do not make any recommendation as to whether the stock will be a
good investment for you. See ]"Risk Factors -- There is No Guarantee that the
Price of Our Stock Will Increase to a Level Comparable to Other Publicly Traded
Savings and Loan Holding Companies" and "Pro Forma Data" and "The Offering --
Stock Pricing and the Number of Shares to be Offered."
The amount of stock you may purchase.
Minimum purchase = 25 shares
Maximum purchase = 10,000 shares for any person or persons acting together
How we will prioritize orders if we receive orders for more shares than are
available.
You might not receive any or all of the stock you want to purchase.
Mechanics Savings and Loan, FSA has granted subscription rights in the following
order of priority:
o Priority 1 - Depositors of Mechanics Savings and Loan, FSA at
the close of business on December 31, 1997 with deposits of at
least $50.00.
o Priority 2 - The tax qualified employee stock benefit plans of
Mechanics Savings Bank.
o Priority 3 - Depositors of Mechanics Savings and Loan, FSA at
the close of business on March 31, 1999 with deposits of at
least $50.00.
o Priority 4 - Other depositors and certain borrowers of
Mechanics Savings and Loan, FSA as of _______________, 1999
who are entitled to vote on the conversion.
[If] shares remain available and [depending on] market conditions at or
near the completion of the subscription offering, we will conduct one or more of
a community and syndicated community offering. In a community offering,
preference will be given to persons who reside in Dauphin County, Pennsylvania.
Any remaining shares may be offered to the general public through a group of
brokers/dealers organized by Capital Resources. Steelton Bancorp and Mechanics
Savings have the right to reject any stock order received in the community
offering or offering through broker/dealers.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
[Our corporate documents will make it difficult for anyone to acquire Steelton
Bancorp.
Our articles of incorporation and bylaws contain provisions that make
it difficult for someone to acquire control of Steelton Bancorp. These
provisions include:
o restrictions on the acquisition of our stock and limitations on
voting rights;
o the election of only 1/4 of our Board of Directors each year;
o the denial of cumulative voting to stockholders in the election
of directors;
o the inability of stockholders to call special meetings;
o the right of our Board of Directors to issue shares of preferred
or common stock without stockholder approval; and
o the 80% shareholder vote requirement for the approval of any
merger or sale of Steelton Bancorp not approved by 2/3 of our
Board of Directors.
See "Restrictions on Acquisitions of Steelton Bancorp, Inc."]
Our officers, directors and employees will receive benefits from the offering or
within one year of the offering.
In order to tie our employees' and directors' interests closer to our
stockholders' interests, we intend to establish certain benefit plans that use
our stock as compensation. Officers, directors, and employees will not be
required to pay cash in exchange for ESOP or restricted shares but will be
required to pay the exercise price to exercise options.
The following table presents information regarding the participants in
each plan, total amount, the percentage, and the dollar value of the stock that
we intend to set aside for our employee stock ownership plan and stock-based
incentive plans. The stock-based incentive plans may not be adopted for at least
six months after the offering and must be approved by a majority vote of the
public stockholders. The table below assumes the sale of 435,000 shares in the
offering. It is assumed that the value of the stock in the table is $10 per
share. Options are given no value because their exercise price will be equal to
the fair market value of the stock on the day the options are granted. As a
result, [ ]anyone who receives an option will only benefit from the option if
the price of the stock rises above the exercise price. See pages __________ for
more information, including regulatory restrictions on the maximum amount of
benefits participants may receive and the rate at which benefits may be earned
under the incentive plans.
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percentage of
Estimated Total Shares Sold
Participants Value of Shares in the Offering
------------ --------------- ---------------
<S> <C> <C> <C>
Employee Stock Ownership Plan Employees $348,000 8.0%
Stock-Based Incentive Plans:
Stock Awards Officers and 174,000 4.0
Directors
Stock Options Officers and -- 10.0
------- ----
Directors
Total $522,000 22.0%
======= ====
</TABLE>
As a public company, it is important for us to reassure our management of our
commitment to their employment with Mechanics Savings. With this in mind, some
of our employees will receive employment agreements. The agreements provide that
if Steelton Bancorp or Mechanics Savings is acquired and the employee is
terminated, the employee will receive a cash payment. Participants in our
stock-based benefit plans may also receive benefits if Steelton Bancorp or
Mechanics Savings is acquired.
Dividends
We anticipate paying cash dividends after the conversion, although the
timing, amount and frequency have not been determined. There are restrictions on
our ability to pay dividends. See pages __________.
Deadlines for purchasing stock.
The subscription offering will terminate at ____:____ __________,
Pennsylvania time, on __________ ____, 1999. The community offering and the
other offering through broker/dealers, if any, may terminate at any time without
notice but no later than __________ ____, 1999.
Subscription rights are not transferrable.
Selling or transferring your right to buy stock in the subscription
offering is illegal. If you exercise this right you must [state] that you are
purchasing stock for your own account. If [we believe] your order violates this
restriction, your order will not be filled. You also may be subject to penalties
imposed by the Office of Thrift Supervision.
There are conditions that must be satisfied before we can complete the offering
and issue the stock.
The following must occur before we can complete the offering and issue
our stock:
o We must receive all the required approvals from the government agencies
that regulate us;
o Mechanics Savings and Loan, FSA's members must approve the conversion; and
o We must sell at least the minimum number of shares offered.
- --------------------------------------------------------------------------------
6
<PAGE>
RISK FACTORS
In addition to the other information in this document, you should
consider carefully the following risk factors in evaluating an investment in our
common stock.
Future changes in interest rates may reduce our profits.
Our ability to make a profit largely depends on our net interest
income[, which could be negatively affected by changes in interest rates]. Net
interest income is the difference between:
o the interest income we earn on our interest-earning assets, such as
mortgage loans and investment securities; and
o the interest expense we pay on our interest-bearing liabilities, such as
deposits and amounts we borrow.
Most of our mortgage loans have rates of interest which are fixed for the life
of the loan and are generally originated for periods of up to 30 years, while
our deposit accounts have significantly shorter periods to maturity. Because our
interest-earning assets generally have fixed rates of interest and have longer
effective maturities than our interest-bearing liabilities, the yield on our
interest-earning assets generally will adjust more slowly to changes in interest
rates than the cost of our interest-bearing liabilities, which are primarily
time deposits. As a result, our net interest income may be reduced when interest
rates increase significantly for long periods of time. In addition, rising
interest rates may reduce our earnings because there may be a lack of customer
demand for loans. Declining interest rates may also reduce our net interest
income if adjustable rate or fixed rate mortgage loans are refinanced at reduced
rates or paid off earlier than expected, and we reinvest these funds in assets
which earn us a lower rate of interest. [See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Management of
Interest Rate Risk and Market Risk."
Our net interest income is also reduced by approximately $4.0 million
of IRA accounts that pay above market rates of interest. We have] remaining
approximately $1.8 million of IRA accounts, which were originally deposited in
the 1980s at a rate of 8%, as part of a promotion to attract long-term deposits
for IRAs. In addition, [we have] approximately $2.2 million of IRA accounts that
have a weighed average yield of 6.93%, which is significantly above the rates
paid on current deposits. Since these IRAs do not mature until approximately
2003, they will continue to adversely affect [our net interest income. See
"Business of Mechanics Savings and Loan, FSA - Sources of Funds - Deposits."]
We intend to increase our commercial real estate and consumer lending after the
offering. The risk related to these types of loans is greater than the risk
related to residential loans.
The risk that commercial real estate and consumer loans will not be
repaid [or will be late in paying] is generally greater than the [same risks
associated with residential loans]. Any failure to pay or late payments would
hurt our earnings. [As we increase the amount of commercial real estate and
consumer loans we make and hold for investment, the likelihood increases that
some of our loans will not be repaid or will be late in paying. See "Business of
Mechanics Savings and Loan, FSA - Lending Activities - Consumer Loans and
Commercial Real Estate and Other Loans."]
7
<PAGE>
If our return on equity after the offering is low, this may negatively affect
the price of our stock.
The net proceeds from the offering will substantially increase our
equity capital. It will take some time to carefully invest this capital [in
assets that produce higher rates of return]. As a result, our return on equity,
which is the ratio of our earnings divided by our equity capital, may decrease
as compared to previous years and may be lower than that of similar companies.
[Because] the stock market values a company based [in part] on its return on
equity, a decline in our return on equity could cause the trading price of our
stock to decline.
The expenses related to our stock-based benefit plans [and other business
expenses] will reduce our earnings.
We intend to adopt an employee stock ownership plan as part of the
conversion. We also intend to adopt other stock-based benefit plans. The money
that we use to buy stock to fund our stock-based benefit plans will not be
available for investment [and will increase our future expenses. In addition,
the costs of preparing reports for stockholders and the SEC and the development
of commercial and consumer loan products will also] cause our earnings to be
lower than they would be if we [remained in mutual form and did not expand our
lending products]. See "Pro Forma Data" and "Management -[-] Executive
Compensation -[-] Employee Stock Ownership Plan."
We intend to remain independent and [the steps we] have taken to discourage
takeover attempts [may prevent you from receiving a premium over market price
for your shares as part of a takeover and may make it difficult to remove our
current management].
Mechanics Savings has operated as an independent community[-]oriented
savings association since 1900. It is [our] intent to continue that tradition[,
and] you are urged not to invest in our stock if you are anticipating a quick
sale of Steelton Bancorp. [Provisions in our ] articles of incorporation and
bylaws may make it difficult for [another company to acquire us if such
acquisition is opposed by our ]Board of Directors. These provisions include:
[o] restrictions on the acquisition of [our stock;
o] limitations on voting rights;
[o] the election of only [1/4] of [our] Board of Directors each year;
[o restrictions on the ability of stockholders to call meetings,
make stockholder proposals or nominate persons as directors;
o the] denial of cumulative voting in the election of directors[,
which ensures that the holders of a majority of shares will be
able to elect all of the directors;
o the right of the Board of Directors to issue shares of preferred
or] common stock without [stockholder] approval; and
[o the] requirement [of an 80% vote] for the approval of business
combinations [not approved by 2/3 of the Board of Directors.
8
<PAGE>
The overall] effect of these provisions could [:
o] limit the trading price potential of [our stock;]
[o] result in Steelton Bancorp being less attractive to a potential
acquiror;
[o prevent an acquisition of Steelton Bancorp even if the
acquisition would result in our stockholders receiving] a
substantial premium over the market price of [our stock; and/or]
[o make it difficult to remove our current Board of Directors or
management.
See "Restrictions on Acquisition of Steelton Bancorp, Inc."
The amount of stock held by our executive officers and directors and stock
benefit plans could make it difficult for stockholders to adopt proposals or
approve takeover attempts not supported by management.
The amount of ownership and control of our stock by directors and
executive officers could make it difficult for stockholders to make successful
stockholder proposals if they are opposed by management and the Board of
Directors. In addition, directors and executive officers could use their voting
power to block the approval of transactions, such as business combinations and
amendments to Steelton Bancorp's articles of incorporation or bylaws, which are
required by Steelton Bancorp's articles of incorporation to be approved by at
least 80% of the stockholders.] Our directors and executive officers are
expected to purchase approximately 67,500 shares of stock in the offering, 15.5%
if 435,000 shares are sold. In addition, approximately 8% of the shares of
common stock issued in the offering are expected to be purchased by [our]
employee stock ownership plan. Shares owned by the Mechanics Savings' employee
stock ownership plan but not yet allocated to the accounts of employees will be
voted by a committee of non-employee directors. [If] we implement stock benefit
plans, the ownership and control by [executive] officers and directors would
increase. See "Management - Executive Compensation - Employee Stock Ownership
Plan" and "- Potential Stock Benefit Plans."
Whether or not we make a profit after the offering depends on [the health of]
our local economy .
Our business of attracting deposits and making loans is primarily
conducted within our market area. A downturn in the local economy could reduce
the amount of funds available for deposit and the ability of borrowers to repay
their loans. As a result, our profitability could be hurt. [See "Business of
Mechanics Savings and Loan, FSA - Market Area and Competition."
If we do not compete successfully against other financial institutions in our
market area, our profitability will be hurt.]
We face substantial competition for deposits and loans, and many of our
competitors have greater resources. Our ability to compete successfully will
affect our profitability. [See "Business of Mechanics Savings and Loan, FSA -
Market Area and Competition."]
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If our computer systems do not work properly with the Year 2000 date, we may not
be able to continue running our business properly.
[Rapid and accurate data processing is essential to our operations.
Data processing is also essential to most other financial institutions and many
other companies]. Many computer programs that can only distinguish the final two
digits of the year entered are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest or delinquency based on the wrong date
or are expected to be unable to compute payment, interest or delinquency.
Failure to resolve year 2000 issues presents the following risks to
Mechanics Savings:
(1) we could lose customers to other financial institutions,
resulting in a loss of revenue, if our third party service
bureau is unable to process properly customer transactions;
(2) governmental agencies, such as the Federal Home Loan Bank, and
correspondent banks could fail to provide funds to Mechanics
Savings which could materially impair our liquidity and affect
our ability to fund loans and deposit withdrawals;
(3) concern on the part of depositors that year 2000 issues could
impair access to their deposit account balances could result
in Mechanics Savings experiencing deposit outflows prior to
December 31, 1999; and
(4) we could incur increased [personnel] costs if additional staff
is required to perform functions that inoperative systems
would have otherwise performed.
Most of our material data processing that could be affected by this
problem is provided by a third party service bureau. If our third party service
bureau does not resolve this problem, we would likely experience significant
data processing delays, mistakes or failures. These delays, mistakes or failures
could have a significant adverse impact on our financial condition and
profitability. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Results of Operations - Year 2000 Readiness
Disclosure."
Future laws or regulations could hurt our profitability and the trading price of
our stock.
We operate in a highly regulated industry. The U.S. government could
adopt regulations or enact laws which restrict our operations or impose
burdensome requirements upon us. This could reduce our profitability and the
value of our franchise which could hurt the trading price of our stock.
The small amount of stock being issued to the public may make it difficult to
buy or sell our stock in the future.
Due to the relatively small size of the offering to the public, you
have no assurance that an active market for the stock will exist after the
offering. This might make it difficult to buy or sell the stock. See "Market for
the Stock."
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There is no guarantee that the price of our stock will increase to a level
comparable to other publicly traded financial institution holding companies.
There is no guarantee that the price of our stock will increase to the
relative levels of other publicly traded financial institution holding
companies. In making a decision whether to buy our stock you should consider,
among other things, the unique characteristics of each publicly traded financial
institution holding company. For more information see "Pro Forma Data."
------------------------
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THE OFFERING
General
Concurrently with the conversion, we, Steelton Bancorp, are offering
between a minimum of 369,750 shares and an anticipated maximum of 500,250 shares
of common stock in the offering (subject to adjustment to up to 575,288 shares
if our estimated pro forma market value has increased at the conclusion of the
offering), which will expire at 12:00 noon, Pennsylvania time, on __________
____, 1999 unless extended. The minimum purchase is 25 shares of common stock
(minimum investment of $250). Our common stock is being offered at a fixed price
of $10.00 per share in the offering.
Subscription funds may be held by [Mechanics Savings] for up to 45 days
after the last day of the subscription offering in order to consummate the
conversion and offering and thus, unless waived by [Mechanics Savings], all
orders will be irrevocable until __________ __, 1999. In addition, the
conversion and offering may not be consummated until [Mechanics Savings]
receives approval from the OTS. Approval by the OTS is not a recommendation of
the conversion or offering. Consummation of the conversion and offering will be
delayed, and resolicitation will be required, if the OTS does not issue a letter
of approval within 45 days after the last day of the subscription offering, or
in the event the OTS requires a material change to the offering prior to the
issuance of its approval. If the conversion and offering are not completed by
________, 1999, Pennsylvania time, subscribers will have the right to modify or
rescind their subscriptions and to have their subscription funds returned with
interest at [Mechanics Savings's] passbook rate and all withdrawal
authorizations will be canceled.
We may cancel the offering at any time, and orders for common stock
[already submitted would be canceled if the offering were canceled.]
Conduct of the Offering
Subject to the limitations of the plan, shares of common stock are
being offered in descending order of priority in the subscription offering to:
o Eligible Account Holders;
o the employee stock ownership plan;
o Supplemental Eligible Account Holders; and
o Other Members.
[If] shares remain available [after the subscription offering, and
depending on] market conditions at or near the completion of the subscription
offering, we will conduct one or more of a community and syndicated community
offering.
We have the right, in our sole discretion, to determine whether
prospective purchasers are "associates" or "acting in concert." [These]
determinations are in our sole discretion and may be based on whatever evidence
we believe to be relevant.
Subscription Offering
Subscription Rights. Non-transferable subscription rights to subscribe for
the purchase of common stock have been granted under the plan of conversion to
the following persons:
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Priority 1: Eligible Account Holders. Each Eligible Account Holder
shall be given the opportunity to purchase up to 10,000 shares, or $100,000, of
common stock offered in the subscription offering; subject to the overall
limitations described under " - Limitations on Purchases of Common Stock." If
there are insufficient shares available to satisfy all subscriptions of Eligible
Account Holders, shares will be allocated to Eligible Account Holders so as to
permit each subscribing Eligible Account Holder to purchase a number of shares
sufficient to make his total allocation equal to the lesser of 100 shares or the
number of shares ordered. Thereafter, unallocated shares will be allocated to
remaining subscribing Eligible Account Holders whose subscriptions remain
unfilled in the same proportion that each subscriber's qualifying deposit bears
to the total amount of qualifying deposits of all subscribing Eligible Account
Holders, in each case on December 31, 1997, whose subscriptions remain unfilled.
Subscription rights received by executive officers and directors, based on their
increased deposits in [Mechanics Savings] in the one year preceding the
eligibility record date will be subordinated to the subscription rights of other
eligible account holders. To ensure proper allocation of stock, each Eligible
Account Holder must list on his order form all accounts in which he had an
ownership interest as of the Eligibility Record Date.
Priority 2: The Employee Plans. The tax qualified employee plans may be
given the opportunity to purchase in the aggregate up to 10% of the common stock
issued in the subscription offering. It is expected that the employee stock
ownership plan will purchase up to 8% of the common stock issued in the
offering. If an oversubscription occurs in the offering by Eligible Account
Holders, the employee stock ownership plan may, in whole or in part, fill its
order through open market purchases subsequent to the closing of the offering.
See also "Risk Factors - Expenses Associated with Stock Benefit Plans Will
Reduce Our Earnings."
Priority 3: Supplemental Eligible Account Holders. [If] there are
sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders and the employee stock ownership plan and other tax-qualified
employee stock benefit plans, each Supplemental Eligible Account Holder shall
have the opportunity to purchase up to 10,000 shares, or $100,000, of common
stock offered in the subscription offering, subject to the overall limitations
described under "Limitations on Purchases of Common Stock." If Supplemental
Eligible Account Holders subscribe for a number of shares which, when added to
the shares subscribed for by Eligible Account Holders and the employee stock
ownership plan and other tax-qualified employee stock benefit plans, if any, is
in excess of the total number of shares offered in the offering, the shares of
common stock will be allocated among subscribing Supplemental Eligible Account
Holders first so as to permit each subscribing Supplemental Eligible Account
Holder to purchase a number of shares sufficient to make his total allocation
equal to the lesser of 100 shares or the number of shares ordered. Thereafter,
unallocated shares will be allocated to each subscribing Supplemental Eligible
account Holder whose subscription remains unfilled in the same proportion that
[each] subscriber's qualifying deposits bear to the total amount of qualifying
deposits of all subscribing Supplemental Eligible Account Holders, in each case
on March 31, 1999, whose subscriptions remain unfilled. To ensure proper
allocation of stock each Supplemental Eligible Account Holder must list on his
order form all accounts in which he had an ownership interest as of the
Supplemental Eligibility Record Date.
Priority 4: Other Members. [If] there are sufficient shares remaining
after satisfaction of all subscriptions by the Eligible Account Holders, the
tax-qualified employee stock benefit plans, and Supplemental Eligible Account
Holders, each Other Member who is not an Eligible or Supplemental Eligible
Account Holder shall have the opportunity to purchase up to 10,000 shares, or
$100,000, of common stock offered in the subscription offering, subject to the
overall limitations described under "-Limitations on Purchases of Common Stock."
If Other Members subscribe for a
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number of shares which, when added to the shares subscribed for by Eligible
Account Holders, the tax-qualified employee stock benefit plans and Supplemental
Eligible Account Holder, is in excess of the total number of shares offered in
the offering, the subscriptions of Other Members will be allocated among
subscribing Other Members to permit each subscribing Other Member to purchase a
number of shares sufficient to make his total allocation of common stock equal
to the lesser of 100 shares or the number of shares subscribed for by Other
Members. Any shares remaining will be allocated among the subscribing Other
Members whose subscriptions remain unsatisfied on a 100 shares (or whatever
lesser amount is available) per order basis until all orders have been filled or
the remaining shares have been allocated.
State Securities Laws. We, in our sole discretion, may make reasonable
efforts to comply with the securities laws of any state in the United States in
which [Mechanics Savings] members reside, and will only offer and sell the
common stock in states in which the offers and sales comply with state
securities laws. However, no person will be offered or allowed to purchase any
common stock under the plan if he resides in a foreign country or in a state of
the United States with respect to which:
o a small number of persons otherwise eligible to purchase shares under the
plan reside in [that] state or foreign country; or
o the offer or sale of shares of common stock to [these] persons would
require us or [Mechanics Savings] or our employees to register, under the
securities laws of [that] state or foreign country, as a broker or dealer
or to register or otherwise qualify its securities for sale in [that] state
or foreign country and registration or qualification would be impracticable
for reasons of cost or otherwise.
Restrictions on Transfer of Subscription Rights and Shares. The plan
prohibits any person with subscription rights, including Eligible Account
Holders, Supplemental Eligible Account Holders, and Other Members, from
transferring or entering into any agreement or understanding to transfer the
legal or beneficial ownership of the subscription rights issued under the plan
or the shares of common stock to be issued when they are exercised.
[Subscription] rights may be exercised only by the person to whom they are
granted and only for his or her account. Each person subscribing for shares will
be required to certify that [he or she] is purchasing shares solely for his or
her own account and that [he or she] has no agreement or understanding regarding
the sale or transfer of [the] shares. The regulations also prohibit any person
from offering or making an announcement of an offer or intent to make an offer
to purchase subscription rights or shares of common stock before the completion
of the offering.
Steelton Bancorp and [Mechanics Savings] will pursue any and all legal
and equitable remedies in the event we become aware of the transfer of
subscription rights and will not honor orders which we determine involve the
transfer of [subscription] rights.
Expiration Date. The subscription offering will expire at 12:00 noon,
Pennsylvania time, on __________ ____, 1999, unless it is extended, up to an
additional 45 days with the approval of the OTS, if necessary, but without
additional notice to subscribers (the "expiration date"). Subscription rights
will become void if not exercised prior to the expiration date.
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Community Offering
If less than the total number of shares of common stock to be
subscribed for in the offering are sold in the subscription offering, shares
remaining unsubscribed may be made available for purchase in the community
offering to certain members of the general public. The maximum amount of common
stock that any person may purchase in the community offering is 10,000 shares,
or $100,000. In the community offering, if any, shares will be available for
purchase by the general public with preference given first to natural persons
residing in Dauphin County in Pennsylvania and second, to natural persons
residing in the State of Pennsylvania. We will attempt to issue common stock in
a manner [that would] promote a wide distribution of common stock.
If purchasers in the community offering, whose orders would otherwise
be accepted, subscribe for more shares than are available for purchase, the
shares available to them will be allocated among persons submitting orders in
the community offering in an equitable manner we determine.
The community offering, if any, may commence simultaneously with,
during or subsequent to the completion of the subscription offering and if
commenced simultaneously with or during the subscription offering the community
offering may be limited to residents of Dauphin County in Pennsylvania. The
community offering, if any, must be completed within 45 days after the
completion of the subscription offering unless otherwise extended by the OTS.
We, in our absolute discretion, reserve the right to reject any or all
orders in whole or in part which are received in the community offering, at the
time of receipt or as soon as practicable following the completion of the
community offering.
Syndicated Community Offering
[If] shares remain available [after the subscription offering, and
depending on] market conditions at or near the completion of the subscription
offering, we may offer shares, to selected persons in a syndicated community
offering on a best-efforts basis through Capital Resources . Orders received in
connection with the syndicated community offering, if any, will receive a lower
priority than orders received in the subscription offering and community
offering. Common stock sold in the syndicated community offering will be sold at
the same price as all other shares in the subscription offering. We have the
right to reject orders, in whole or in part, in our sole discretion in the
syndicated community offering. No person will be permitted to purchase more than
10,000 shares, or $100,000, of common stock in the syndicated community
offering.
If a syndicate of broker-dealers [(selected dealers)] is formed to
assist in the syndicated community offering, a purchaser may pay for his shares
with funds held or deposited with a selected dealer. If an order form is
executed and forwarded to the selected dealer or if the selected dealer is
authorized to execute the order form on behalf of a purchaser, the selected
dealer is required to forward the order form and funds to [Mechanics Savings]
for deposit in a segregated account on or before noon of the business day
following receipt of the order form or execution of the order form by the
selected dealer. Alternatively, selected dealers may solicit indications of
interest from their customers to place orders for shares. [Selected] dealers
[will] subsequently contact their customers who indicated an interest and seek
their confirmation as to their intent to purchase. Those indicating an intent to
purchase [will] execute order forms and forward them to their selected dealer or
authorize the selected dealer to execute [order] forms. The selected dealer will
acknowledge receipt of the order to its customer in writing on the following
business day and will debit
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[that] customer's account on the third business day after the customer has
confirmed his intent to purchase (the "debit date") and on or before noon of the
next business day following the debit date will send order forms and funds to
[Mechanics Savings] for deposit in a segregated account. Although purchasers'
funds are not required to be in their accounts with selected dealers until the
debit date in the event that [this] alternative procedure is [used] once a
confirmation of an intent to purchase has been received by the selected dealer,
the purchaser has no right to rescind his order.
The date by which orders must be received in the syndicated community
offering will be set by us at the time the syndicated community offering
[commences; but] if the syndicated community offering is extended beyond
___________, 1999, each purchaser will have the opportunity to maintain, modify,
or rescind his order. In [that] event, all funds received in the syndicated
community offering will be promptly returned with interest to each purchaser
unless he [requests] otherwise.
If an order in the syndicated community offering is accepted, promptly
after the completion of the conversion, a certificate for the appropriate amount
of shares will be forwarded to Capital Resources as nominee for the beneficial
owner. If an order is not accepted or the conversion is not consummated,
[Mechanics Savings] will promptly refund with interest the funds received to
Capital Resources which will then return the funds to subscribers' accounts. If
the aggregate pro forma market value of [Mechanics Savings], as converted, is
less than $3,697,500 or more than $5,752,880, each purchaser will have the right
to modify or rescind his or her order.
Limitations on Purchases of Stock
The following additional limitations have been imposed on purchases of
shares of common stock:
1. The maximum number of shares of common stock which may be
purchased in the subscription offering by any person in the first
priority, third priority and fourth priority shall not exceed
10,000 shares, or $100,000.
2. The maximum number of shares of common stock which may be
subscribed for or purchased in all categories in the offering by
any person together with any associate or group of persons acting
in concert shall not exceed 10,000 shares, or $100,000, except
for our employee plans, which in the aggregate may subscribe for
up to 10% of the common stock issued in the offering.
3. The maximum number of shares of common stock which may be
purchased in all categories in the offering by officers and
directors of [Mechanics Savings] and their associates in the
aggregate shall not exceed 35% of the total number of shares of
common stock issued in the offering.
4. The minimum order is 25 shares of common stock .
5. If the number of shares of common stock otherwise allocable to
any person or that person's associates would be in excess of the
maximum number of shares permitted as set forth above, the number
of shares of common stock allocated to [that] person shall be
reduced to the lowest limitation applicable to that person, and
then the number of shares allocated to each group consisting of a
person and that person's associates
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shall be reduced so that the aggregate allocation to that person
and his associates complies with the above maximums, and [the]
maximum number of shares shall be reallocated among that person
and his associates in proportion to the shares subscribed by each
(after first applying the maximums applicable to each person,
separately).
6. Depending on market or financial conditions, the Board of
Directors of [Mechanics Savings], without further approval of the
depositors, may decrease or increase the purchase limitations in
the plan, provided that the maximum purchase limitations may not
be increased to a percentage in excess of 5% of the offering. If
Steelton Bancorp increases the maximum purchase limitations,
Steelton Bancorp is only required to resolicit persons who
subscribed for the maximum purchase amount and may, in the sole
discretion of Steelton Bancorp, resolicit certain other large
subscribers.
7. If the total number of shares offered increases in the offering
due to an increase in the maximum of the estimated valuation
range of up to 15% (the adjusted maximum[)] the additional shares
will be used in the following order of priority: [(a)] to fill
the Employee Plan's subscription up to 10% of the adjusted
maximum; [(b)] if there is an oversubscription at the Eligible
Account Holder level, to fill unfilled subscriptions of Eligible
Account Holders exclusive of the adjusted maximum; [(c)] if there
is an oversubscription at the Supplemental Eligible Account
Holder level, to fill unfilled subscriptions of Supplemental
Eligible Account Holders exclusive of the adjusted maximum; [(d)]
if there is an oversubscription at the other member level, to
fill unfilled subscriptions of other members exclusive of the
adjusted maximum; and [(e)] to fill unfilled subscriptions in the
community offering exclusive of the adjusted maximum, with
preference given to persons [who live] in the local community.
8. No person [will] be [allowed] to purchase any stock [if that]
purchase would be illegal under any federal law or state law or
regulation or would violate regulations or policies of the NASD,
particularly those regarding free riding and withholding.
Steelton Bancorp or [Mechanics Savings] and/or its agents may ask
for an acceptable legal opinion from any purchaser [regarding]
the legality of [the] purchase and may refuse to honor any
purchase order if [that] opinion is not timely furnished.
9. The Board of Directors has the right to reject any order
submitted by a person whose representations [it believes are
untrue or who it believes ]is violating, circumventing, or
intends to violate, evade, or circumvent the terms and conditions
of the plan[, either alone or acting in concert with others,.]
[10. The above restrictions ]also apply to purchases by persons acting
in concert under applicable regulations of the OTS. Under
regulations of the OTS, directors of [Mechanics Savings] are not
[considered] to be affiliates or a group acting in concert with
other directors solely as a result of membership on [our] Board
of Directors .
The term "associate" of a person is defined in the plan to mean (1) any
corporation or organization other than [Mechanics Savings] or a majority-owned
subsidiary of [Mechanics Savings] of which [a] person is an officer or partner
or is, directly or indirectly, the beneficial
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owner of 10% or more of any class of equity securities, (2) any trust or other
estate in which [a] person has a substantial beneficial interest or as to which
[a] person serves as trustee or in a similar fiduciary capacity, excluding
tax-qualified employee stock benefit plans or tax-qualified employee stock
benefit plans in which a person has a substantial beneficial interest or serves
as a trustee or in a similar fiduciary capacity and except that, for purposes of
aggregating total shares that may be held by officers and directors, the term
"Associate" does not include any tax-qualified employee stock benefit plan, and
(3) any relative or spouse of [a] person or any relative of [a] spouse, who has
the same home as [that] person or who is a trustee or officer of [Mechanics
Savings], or any of its parents or subsidiaries. For example, a corporation
[for] which a person serves as an officer would be an associate of [that] person
and all shares purchased by [that] corporation would be included with the number
of shares which [that] person individually could purchase under the above
limitations.
Each person purchasing shares of the common stock in the offering will
be [considered to have confirmed that his or her] purchase does not conflict
with the maximum purchase limitation. If [the] purchase limitation is violated
by any person or any associate or group of persons affiliated or otherwise
acting in concert with [that person], we will have the right to purchase from
[that] person at the [$10] purchase price per share all shares acquired by
[that] person in excess of [that] purchase limitation or, if [the] excess shares
have been sold by [that] person, to receive the difference between the purchase
price per share paid for [the] excess shares and the price at which [the] excess
shares were sold by [that] person. Our right to purchase [the] excess shares
will be assignable.
Common stock purchased pursuant to the offering will be freely
transferable, except for shares purchased by directors and officers of
[Mechanics Savings]. For certain restrictions on the common stock purchased by
directors and officers, see "- Restrictions on Transferability by Directors and
Officers." In addition, under guidelines of the NASD, members of the NASD and
their associates are subject to certain restrictions on the transfer of
securities purchased in accordance with subscription rights and to certain
reporting requirements after the purchase .
Ordering and Receiving Common Stock
Use of Order Forms. Rights to subscribe may only be exercised by
completion of an order form. Any person receiving an order form who desires to
subscribe for shares of common stock must do so prior to the applicable
expiration date by delivering by mail or in person to [Mechanics Savings] a
properly executed and completed order form, together with full payment of the
purchase price for all shares for which subscription is made; provided, however,
that if the employee plans subscribe for shares during the subscription
offering, the employee plans will not be required to pay for the shares at the
time they subscribe but rather may pay for the shares after the conversion.
Except for institutional investors, all subscription rights under the plan will
expire on the expiration date, whether or not [Mechanics Savings] has been able
to locate each person entitled to subscription rights. [Mechanics Savings] shall
have the right, in its sole discretion, to permit institutional investors to
submit contractually irrevocable orders in the syndicated community offering at
any time before completing the syndicated community offering. Once tendered,
subscription orders cannot be revoked without the consent of [Mechanics Savings]
unless the conversion is not completed within 45 days of the expiration date.
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If an stock order form:
o is not delivered and is returned to [Mechanics Savings] by the United
States Postal Service or [Mechanics Savings] is unable to locate the
addressee;
o is not received or is received after the applicable expiration date;
o is not completed correctly or executed;
o is not accompanied by the full required payment for the shares subscribed
for including instances where a savings account or certificate balance from
which withdrawal is authorized is insufficient to fund the required
payment, but excluding subscriptions by the Employee Plans or, in the case
of an institutional investor in the syndicated community offering, by
delivering irrevocable orders together with a legally binding commitment to
pay the full purchase price prior to 48 hours before the conversion is
completed; or
o is not mailed pursuant to a "no mail" order placed in effect by the account
holder, the subscription rights for [that person ]will lapse as though
[that] person failed to return the completed order form within the time
period specified.
However, we may, but will not be required to, waive any irregularity on any
order form or require the submission of corrected order forms or the remittance
of full payment for subscribed shares by [a] date [that] we may specify. The
waiver of an irregularity on an order form in no way obligates us to waive any
other irregularity on any other order form. Waivers will be considered on a case
by case basis. We reserve the right in our sole discretion to accept or reject
orders received on photocopies or facsimile order forms, or whose payment is to
be made by wire transfer or payment from private third parties. Our
interpretation of the terms and conditions of the plan and of the acceptability
of the order forms will be final, subject to the authority of the OTS.
To ensure that each purchaser receives a prospectus at least 48 hours
before the applicable expiration date, in accordance with Rule 15c2-8 of the
Securities Exchange Act of 1934, no prospectus will be mailed any later than
five days prior to [the expiration] date or hand delivered any later than two
days prior to [the expiration] date. Execution of the order form will confirm
receipt or delivery in accordance with Rule 15c2-8. Order forms will only be
distributed with a prospectus.
Payment for Shares. For subscriptions to be valid, payment for all
subscribed shares will be required to accompany all properly completed order
forms, on or prior to the expiration date specified on the order form unless we
extend the date. Employee Plans subscribing for shares during the subscription
offering may pay for [those] shares after the offering. Payment for shares of
common stock may be made
o in cash, if delivered in person,
o by check or money order, or
o for shares of common stock subscribed for in the subscription offering, by
authorization of withdrawal from savings accounts maintained with
[Mechanics Savings].
Payment for subscriptions of $25,000 or more must be paid by account withdrawal,
certified or cashier's check, or money order.
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Appropriate means by which [account] withdrawals may be authorized are
provided in the order form. Once a withdrawal has been authorized, none of the
designated withdrawal amount may be used by a subscriber for any purpose other
than to purchase the common stock for which a subscription has been made until
the offering has been completed or terminated. In the case of payments
authorized to be made through withdrawal from savings accounts, all sums
authorized for withdrawal will continue to earn interest at the contract rate
until the offering has been completed or terminated. Interest penalties for
early withdrawal applicable to certificate accounts will not apply to
withdrawals authorized for the purchase of shares, however, if a partial
withdrawal results in a certificate account with a balance less than the
applicable minimum balance requirement, the certificate shall be canceled at the
time of withdrawal, without penalty, and the remaining balance will earn
interest at the passbook savings account rate subsequent to the withdrawal. In
the case of payments made in cash or by check or money order, funds will be
placed in a segregated account and interest will be paid by [Mechanics Savings]
at the passbook savings account rate from the date payment is received until the
offering is completed or terminated. An executed order form, once we receive it,
may not be modified, amended, or rescinded without our consent, unless the
offering is not completed within 45 days after the conclusion of the
subscription offering, in which event subscribers may be given the opportunity
to increase, decrease, or rescind their subscription for a specified period of
time. If the offering is not completed for any reason, all funds submitted
pursuant to the offerings will be promptly refunded with interest as described
above.
Owners of self-directed IRAs may use the assets of [their] IRAs to
purchase shares of common stock in the offerings, provided that [their] IRAs are
not maintained on deposit at [Mechanics Savings]. Persons with IRAs maintained
at [Mechanics Savings] must have their accounts transferred to an unaffiliated
institution or broker to purchase shares of common stock in the offerings. There
is no early withdrawal or IRS interest penalties for [these] transfers.
Instructions on how to transfer self-directed IRAs maintained at [Mechanics
Savings] can be obtained from the stock information center. Depositors
interested in using funds in a [Mechanics Savings] IRA to purchase common stock
should contact the stock information center as soon as possible so that the
necessary forms may be forwarded, executed and returned prior to the expiration
date.
Federal regulations prohibit [Mechanics Savings] from lending funds or
extending credit to any person to purchase the common stock in the conversion.
Stock Center. The stock center is located at 51 South Front Street,
Steelton, Pennsylvania 17113. Its phone number is (717) 939-3100.
Delivery of Stock Certificates. Certificates representing common stock
issued in the offering will be mailed to the persons entitled thereto at the
address noted on the order form, as soon as practicable following consummation
of the offering. Any certificates returned as undeliverable will be held until
claimed by persons legally entitled thereto or otherwise disposed of in
accordance with applicable law. Until certificates for the common stock are
available and delivered to subscribers, subscribers may not be able to sell the
shares of stock for which they subscribed.
Restriction on Sales Activities
Our directors and executive officers may participate in the
solicitation of offers to purchase common stock in jurisdictions where [their]
participation is not prohibited. Other employees of [Mechanics Savings] may
participate in the offering in ministerial capacities [and] have been instructed
not to solicit offers to purchase common stock or provide advice regarding the
purchase of
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<PAGE>
common stock. Questions of prospective purchasers will be directed
to executive officers of [Mechanics Savings] or registered representatives of
Capital Resources. No officer, director or employee of [Mechanics Savings] will
be compensated in connection with [his or her] solicitations or other
participation in the offering by the payment of commissions or other
remuneration based either directly or indirectly on transactions in the common
stock.
Restrictions on Repurchase of Shares
Generally, during the first year following the conversion, Steelton
Bancorp may not repurchase its shares. During each of the second and third years
following the conversion, Steelton Bancorp may repurchase up to five percent of
the outstanding shares provided they are purchased in open-market transactions.
Repurchases must not cause us to become undercapitalized and at least 10 days
prior notice of the repurchase must be provided to the OTS. The OTS may
disapprove a repurchase program after it determines that:
o the repurchase program would adversely affect our financial condition;
o the information submitted is not enough to base a conclusion as to whether
our financial condition would be adversely affected; or
o a valid business purpose was not demonstrated.
In addition, SEC rules also govern the method, time, price, and number of shares
of common stock that may be repurchased by Steelton Bancorp and affiliated
purchasers. If, in the future, the rules and regulations regarding the
repurchase of stock are liberalized, Steelton Bancorp may utilize the rules and
regulations then in effect.
Stock Pricing and the Number of Shares to be Offered
FinPro, which is experienced in the valuation and appraisal of business
entities, including savings institutions, has been retained to prepare an
appraisal of the estimated pro forma market value of the common stock (the
"Independent Valuation"). This independent valuation will express our pro forma
market value in terms of an aggregate dollar amount. FinPro will receive fees of
$23,000 for its appraisal services, including the independent valuation and
subsequent updates, and assistance in preparation of our business plan, plus its
reasonable out-of-pocket expenses incurred in connection with the independent
valuation and business plan. [Mechanics Savings] has agreed to indemnify FinPro
under certain circumstances against liabilities and expenses arising out of or
based on any misstatement or untrue statement of a material fact contained in
the information supplied by [Mechanics Savings] to FinPro, except where FinPro
is determined to have been negligent or failed to exercise due diligence in the
preparation of the independent valuation.
Pursuant to the plan, the number of shares of common stock to be
offered in the offering will be based on the estimated pro forma market value of
the common stock and the purchase price of $10.00 per share. FinPro has
determined that as of March 1, 1999, our estimated aggregate pro forma market
value was $4,350,000. Pursuant to regulations, this estimate must be included
within a range with a minimum of $3,697,500 and a maximum of $5,002,500. We have
determined to offer shares of common stock in the offering at a price of $10.00
per share. We are offering a maximum of 500,250 shares in the offering, subject
to adjustment. In determining the offering range, the Board of Directors
reviewed FinPro's appraisal. The appraisal contains an analysis of a number of
factors, including but not limited to our financial condition and results of
operations as of December 31, 1998, our operating trends, the competitive
environment in which we operate, operating trends of certain savings
21
<PAGE>
institutions and savings and loan holding companies, relevant economic
conditions both nationally and in the Commonwealth of Pennsylvania which affect
the operations of savings institutions, stock market values of certain
institutions, and stock market conditions for publicly traded savings
institutions and savings and loan holding companies. In addition, FinPro has
advised us that it has considered and will consider the effect of the additional
capital raised by the sale of the common stock on the estimated pro forma market
value. The Board also reviewed the methodology and the assumptions used by
FinPro in preparing its appraisal. The number of shares is subject to change if
the independent valuation changes at the conclusion of the offering.
The number of shares and price per share of common stock was determined
by the Board of Directors based on the independent valuation. The actual number
of shares to be sold in the offering may be increased or decreased before
completion of the offering, subject to approval and conditions that may be
imposed by the OTS, to reflect any change in our estimated pro forma market
value.
Depending on market and financial conditions at the time of the
completion of the offering, [Mechanics Savings] may increase or decrease the
number of shares to be issued in the conversion and offering. No resolicitation
of purchasers will be made and purchasers will not be permitted to modify or
cancel their purchase orders unless the change in the number of shares to be
issued in the offering results in fewer than 369,750 shares or more than 575,288
shares being sold in the offering at the purchase price of $10.00, in which
event [Mechanics Savings] may also elect to terminate the offering. If
[Mechanics Savings] terminates the offering, purchasers will receive a prompt
refund of their purchase orders, together with interest earned thereon from the
date of receipt to the date of termination of the offering. Furthermore, any
account withdrawal authorizations will be terminated. If we receive orders for
less than 369,750 shares, at the discretion of the Board of Directors and
subject to approval of the OTS, we may establish a new offering range and
resolicit purchasers. If we resolicit, purchasers will be allowed to modify or
cancel their purchase orders. Any adjustments in our pro forma market value as a
result of market and financial conditions or a resolicitation of prospective
purchasers must be approved by the OTS.
The independent valuation will be updated at the time of the completion
of the offering, and the number of shares to be issued may increase or decrease
to reflect the changes in market conditions, the results of the offering, or the
estimated pro forma market value of [Mechanics Savings]. If the updated estimate
of the pro forma market value of [Mechanics Savings] immediately after the
offering changes, there will be a corresponding change to the shares sold to
subscribers in the offering. For example, if the independent valuation at the
conclusion of the offering increases to $5,002,500, or decreases to $3,697,500,
then the total number of shares outstanding after the conversion and offering
will be 500,250 or 369,750, respectively. If the updated independent valuation
increases, Steelton Bancorp may increase the number of shares sold in the
offering to up to 575,288 shares. Subscribers will not be given the opportunity
to change or withdraw their orders unless more than 575,288 shares or fewer than
369,750 shares are sold in the offering. Any adjustment of shares of common
stock sold will have a corresponding effect on the estimated net proceeds of the
offering and the pro forma capitalization and per share data of [Mechanics
Savings]. An increase in the total number of shares to be issued in the
conversion would decrease a subscriber's percentage ownership interest and pro
forma net worth (book value) per share and increase the pro forma net income and
net worth (book value) on an aggregate basis. In the event of a reduction in the
valuation, Steelton Bancorp may decrease the number of shares to be issued to
reflect the reduced valuation. A decrease in the number of shares to be issued
in the conversion would increase a subscriber's percentage ownership interest
and the pro forma net worth (book value) per share and decrease the pro forma
net income and net
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<PAGE>
worth on an aggregate basis. For a presentation of the
possible effects of an increase or decrease in the number of shares to be
issued, see Pro Forma Data.
The independent valuation is not intended, and must not be construed,
as a recommendation of any kind as to the advisability of purchasing the common
stock. In preparing the independent valuation, FinPro has relied on and assumed
the accuracy and completeness of financial and statistical information provided
by [Mechanics Savings]. FinPro did not independently verify the consolidated
financial statements and other information provided by [Mechanics Savings], nor
did FinPro value independently the assets and liabilities of [Mechanics
Savings]. The independent valuation considers [Mechanics Savings] only as a
going concern and should not be considered as a indication of the liquidation
value of [Mechanics Savings]. Moreover, because [the] independent valuation is
based on estimates and projections on a number of matters, all of which are
subject to change from time to time, no assurance can be given that persons
purchasing the common stock will be able to sell [their] shares at a price equal
to or greater than the purchase price.
[A copy of the appraisal report is available for your review at our
main office. In addition, the Board of Directors of Steelton Bancorp does not
make any recommendation as to whether or not the stock will be a good investment
for you.]
No sale of shares of common stock may be consummated unless FinPro
confirms that, to the best of its knowledge, nothing of a material nature has
occurred that, taking into account all relevant factors, would cause FinPro to
conclude that the independent valuation is incompatible with its estimate of our
pro forma market value at the conclusion of the offering. Any change that would
result in an aggregate value that is below $3,697,500 or above $5,752,880 would
be subject to OTS approval. If confirmation from FinPro is not received,
[Mechanics Savings] may extend the offering, reopen or commence a new offering,
request a new Independent Valuation, establish a new offering range and commence
a resolicitation of all purchasers with the approval of the OTS, or take other
action as permitted by the OTS in order to complete the offering.
Plan of Distribution/Marketing Arrangements
The common stock will be offered in the offering principally by the
distribution of this prospectus and through activities conducted at the stock
information center. It is expected that a registered representative employed by
Capital Resources will be working at, and supervising the operation of, the
stock center. Capital Resources will be responsible for overseeing the mailing
of material relating to the offering, responding to questions regarding the
conversion and the offering and processing order forms.
[Mechanics Savings] and Steelton Bancorp have entered into an agency
agreement with Capital Resources under which Capital Resources will provide
advisory assistance and assist, on a best efforts basis, in the solicitation of
subscriptions and purchase orders for the common stock in the offering. Capital
Resources is a broker-dealer registered with the National Association of
Securities Dealers, Inc. Specifically, Capital Resources will assist in the
offering in the following manner:
o assisting in the collection of proxies from depositors for use at the
Special Meeting;
o keeping records of subscriptions and orders for common stock;
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<PAGE>
o training and educating [Mechanics Savings's] employees regarding the
mechanics and regulatory requirements of the stock conversion process;
o assisting in the design and implementation of a marketing strategy for the
offering;
o assisting [Mechanics Savings's] management in scheduling and preparing for
meetings, if any, with potential investors and broker-dealers; and
o providing other general advice and assistance as may be requested to
promote the successful completion of the offering.
Capital Resources will receive, as compensation, an advisory and
marketing fee of $75,000. Fifteen thousand dollars was paid when Capital
Resources was retained; another $15,000 is due upon regulatory approval; and the
balance is due at the closing. If common stock is sold through licensed brokers
under a selected dealers agreement, we will pay the sales commission payable to
the selected dealer pursuant to the agreement and any sponsoring dealer's fees
of typically up to 4.0% of the aggregate price of [the] shares. Capital
Resources will also be reimbursed for its legal fees and out-of-pocket expenses,
not to exceed $25,000 without [Mechanics Savings's] approval. [Mechanics
Savings] has agreed to indemnify Capital Resources, to the extent allowed by
law, for reasonable costs and expenses in connection with certain claims or
liabilities, including certain liabilities under the Securities Act of 1933, as
amended. Capital Resources will also receive a fee of $10,000 for records
management services in connection with the conversion, plus reimbursement for
out-of-pocket expenses, not to exceed $4,500 without [Mechanics Savings's]
approval. See "Pro Forma Data" for further information regarding expenses of the
offering.
Restrictions on Transferability by Directors and Officers
Shares of the common stock purchased by directors or officers of
[Mechanics Savings] cannot be sold for a period of one year following completion
of the conversion, except for a disposition of shares after the death of a
stockholder. [To ensure this restriction is upheld], shares of the common stock
issued to directors and officers will bear a legend restricting their sale. Any
shares issued to directors and officers as a stock dividend, stock split, or
otherwise with respect to restricted stock will be subject to the same
restriction.
For a period of three years following the conversion, no director or
officer of [Mechanics Savings] or their associates may, without the prior
approval of the OTS, purchase our common stock except from a broker or dealer
registered with the SEC. This prohibition does not apply to negotiated
transactions including more than 1% of our common stock or purchases made for
tax qualified or non-tax qualified employee stock benefit plans which may be
attributable to individual officers or directors.
Restrictions on Agreements or Understandings Regarding Transfer of Common Stock
to be Purchased in the Offering
Before the completion of the conversion and offering, no depositor may
transfer or enter into an agreement or understanding to transfer any
subscription rights or the legal or beneficial ownership of the shares of common
stock to be purchased in the offering. Depositors who submit an order form will
be required to certify that their purchase of common stock is solely for their
own account and there is no agreement or understanding regarding the sale or
transfer of their shares. We intend to
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<PAGE>
pursue any and all legal and equitable
remedies after [we become] aware of any agreement or understanding, and will not
honor orders we reasonably believe to involve an agreement or understanding
[regarding the sale or transfer of shares].
Conditions to the Offering
Completion of the offering is subject to:
1. completion of the conversion, which requires approvals from certain
government agencies, the ratification of [Mechanics Savings's] voting
depositor and borrower members, and the receipt of rulings and/or
opinions of counsel as to the tax consequences of the conversion;
2. the receipt of all the required approvals for the issuance of common
stock in the offering, including the approval of the OTS; and
3. the sale of a minimum of shares 369,750 of common stock.
If conditions 1 and 2 above are not met before we complete the offering, all
funds received will be promptly returned with interest at [Mechanics Savings's]
passbook rate and all withdrawal authorizations will be canceled.
MECHANICS SAVINGS AND LOAN, FSA
Mechanics Savings and Loan, FSA is a federally chartered mutual savings
institution, originally chartered in 1900 as Mechanics Building and Loan
Association of Steelton. [It] converted from a Pennsylvania mutual savings
charter to a federal mutual savings charter in 1993. The [Association's]
deposits have been federally insured since 1949 and are currently insured by the
Savings Association Insurance Fund ("SAIF") as administered by the Federal
Deposit Insurance Corporation ("FDIC"). The Association is regulated by the
Office of Thrift Supervision ("OTS") and the FDIC.
[Mechanics Savings] is a community-oriented savings association
offering traditional deposit, residential real estate mortgage loans and, to a
lesser extent, consumer loans, commercial real estate loans, and other loans.
Through its main office located in Steelton and its branch office located in
Lower Swatara Township, Pennsylvania, [Mechanics Savings] provides retail
banking services, with an emphasis on one- to four-family residential mortgages.
Currently, the Association originates 15 year and 30 year conforming fixed rate
residential mortgage loans primarily for its asset portfolio. At December 31,
1998, net loans receivable amounted to approximately $27.8 million or 66.93% of
total assets, of which approximately $23.3 million or 82.74% was secured by one-
to four-family residential real estate. The Association invests excess liquidity
in mortgage-backed and investment securities, primarily in U.S. government
agency securities. Investment and mortgage-backed securities amounted to $9.2
million or 22.17% of total assets at December 31, 1998. At December 31, 1998,
the Association had total assets, deposits and total equity of $41.5 million,
$28.3 million, and $3.7 million, respectively. See "Business of [Mechanics
Savings."]
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<PAGE>
STEELTON BANCORP, INC.
Steelton Bancorp, Inc. (the "Company") is a Pennsylvania chartered
corporation that was organized in February, 1999 for the purpose of acquiring
all of the capital stock that [Mechanics Savings] will issue upon its conversion
from the mutual to stock form of ownership. The Company has not engaged in any
significant business to date but will serve as a holding company of the
Association following the conversion. The Company has applied for approval to
acquire control of the Association. We will retain up to 50% of the net proceeds
from the issuance of shares of stock as our initial capitalization. Part of the
proceeds retained by us will be used to fund the loan to [Mechanics Savings'
employee stock ownership plan]. We will use the balance of the net proceeds to
purchase all of the common stock of the Association to be issued upon
conversion. Upon consummation of the conversion, we will have no significant
assets other than that portion of the net proceeds of the offering, the
promissory note representing the amount of our loan to the [employee stock
ownership plan], and the shares of the Association's capital stock acquired in
the conversion, and we will have no significant liabilities. Our cash flow will
be dependent upon earnings from the investment of the portion of net proceeds we
retain in the conversion and any dividends received from the Association. See
"Use of Proceeds."
Management believes that the holding company structure will provide
flexibility for possible diversification of business activities through existing
or newly-formed subsidiaries, or through acquisitions of or mergers with both
savings institutions and commercial banks, as well as other financial services
related companies. Although there are no current arrangements, understandings,
or agreements regarding any [acquisition, merger or expansion] opportunities,
the Company will be in a position after the conversion, subject to regulatory
limitations and the Company's financial condition, to take advantage of any
acquisition[, merger] and expansion opportunities that may arise. However, some
of these activities could be [considered] to entail a greater risk than the
activities permissible for federally chartered savings institutions such as the
Association. The initial activities of the Company are anticipated to be funded
by the portion of the net proceeds retained by the Company and earnings thereon.
USE OF PROCEEDS
The net proceeds will depend on the total number of shares of stock
issued in the offering, which will depend on the independent valuation and
marketing considerations, and the expenses incurred by the Company and the
Association in connection with the offering. Although the actual net proceeds
from the sale of the common stock cannot be determined until the offering is
completed, we estimate that we will receive net proceeds from the sale of common
stock of between $3,388,000 at the minimum and $5,443,000 at the maximum, as
adjusted.
Assuming the sale of $4,350,000 of common stock at the midpoint of the
offering range[, expenses of $310,000] and the purchase of 8% of the shares by
the employee stock ownership plan, the following table shows the manner in which
we will use the net proceeds:
Loan to employee stock ownership plan $ 348,000
Investment in Mechanics Savings $2,020,000
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<PAGE>
Steelton Bancorp working capital $1,672,000
---------
[Net Proceeds] $4,040,000
=========
These funds will initially be invested in U.S. government and federal
agency securities, marketable securities, or a combination of both. We may also
use the net proceeds to repurchase our stock. See "The Offering - Restrictions
on Repurchases of Shares."
The funds received by Mechanics Savings from Steelton Bancorp in return
for the purchase of all its stock to be issued will be used for general
corporate purposes. The funds will increase Mechanics Savings' total capital to
expand investment and lending within its existing market area and expansion of
its consumer and commercial lending programs. The funds may also be used for an
expansion of the Association's main office, including the installation of
drive-through facilities at that location. However, there are no current
agreements or arrangements regarding expansion. Net proceeds may also be used by
the Association to make contributions to the employee stock ownership plan which
in turn would be used to repay the loan from Steelton Bancorp.
If the employee stock ownership plan does not purchase common stock in
the offering, it may purchase shares of common stock in the market after the
conversion. In the event the purchase price of the common stock is higher than
$10.00 per share, the amount of proceeds required for the purchase by the
[employee stock ownership plan] will increase and the resulting stockholders'
equity will decrease.
The net proceeds may vary because total expenses of the conversion may
be more or less than those estimated. The net proceeds will also vary if the
number of shares to be issued in the conversion are adjusted to reflect a change
in the estimated pro forma market value of Steelton Bancorp and Mechanics
Savings. Payments for shares made through withdrawals from existing Mechanics
Savings deposit accounts will not result in the receipt of new funds for
investment by Mechanics Savings but will result in a reduction of its deposits
and interest expense as funds are transferred from interest bearing certificates
or other deposit accounts.
DIVIDEND POLICY
The Company anticipates the establishment of a policy to pay cash
dividends. The timing, frequency and initial annual amount of the dividends have
not yet been determined. Dividends will be subject to determination and
declaration by the Company's Board of Directors. In making its decision, the
Board of Directors will consider several factors, including:
o the Company's financial condition;
o results of operations;
o tax considerations;
o industry standards; and
o economic conditions;
There can be no assurance that dividends will in fact be paid on the
stock or that, if paid, dividends will not be reduced or eliminated in future
periods.
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<PAGE>
Steelton Bancorp's ability to pay dividends also depends on the receipt
of dividends from Mechanics Savings which is subject to a variety of regulatory
limitations on the payment of dividends. See "Regulation -- Regulation of the
Association -- Dividend and Other Capital Distribution Limitations."
Furthermore, as a condition to OTS approval of the conversion, Steelton Bancorp
has agreed that it will not initiate any action within one year of completion of
the conversion in the furtherance of payment of a special distribution or return
of capital to stockholders of the Company.
In addition, earnings of the Association appropriated to bad debt
reserves [or] deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the then-current tax rate by Mechanics Savings on the amount of
earnings removed from the reserves for distribution. See "Taxation" and Note 9
of the consolidated financial statements. Mechanics Savings does not contemplate
any distribution out of its bad debt reserve which would cause [a] tax
liability.
MARKET FOR THE STOCK
Steelton Bancorp has never issued capital stock. Consequently, there is
not, at this time, any market for the stock. Following the completion of the
offering, Steelton Bancorp anticipates that its stock will be traded on the
over-the-counter market with quotations available through the OTC Electronic
Bulletin Board. Steelton Bancorp expects that Capital Resources will make a
market in the stock. Making a market may include the solicitation of potential
buyers and sellers in order to match buy and sell orders. However, Capital
Resources will not be obligated with respect to [these] efforts. If the common
stock cannot be quoted and traded on the OTC Bulletin Board, Steelton Bancorp
expects that transactions in the stock will be reported in the pink sheets of
the National Quotation Bureau, Inc.
The development of an active trading market depends on the existence of
willing buyers and sellers. Due to the small size of the offering, it is highly
unlikely that an active trading market will develop and be maintained. You could
have difficulty disposing of your shares and you should not view the shares as a
short term investment. You may not be able to sell your shares at a price equal
to or above the price you paid.
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CAPITALIZATION
Set forth below is the historical capitalization of the Association as
of December 31, 1998, and the pro forma capitalization of Steelton Bancorp after
giving effect to the offering. The table also gives affect to the assumptions
set forth under "Pro Forma Data." A change in the number of shares sold in the
offering may affect materially the pro forma capitalization.
<TABLE>
<CAPTION>
Pro Forma Capitalization at December 31, 1998
----------------------------------------------------------------
Maximum,
Minimum Midpoint Maximum as adjusted
369,750 435,000 500,250 575,288
Actual, at Shares at Shares at Shares at Shares at
December 31, $10.00 per $10.00 per $10.00 per $10.00 per
1998 share share share share
---- ----- ----- ----- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits(2) $28,272 $28,272 $28,272 $28,272 $28,272
Borrowed funds 9,257 9,257 9,257 9,257 9,257
----- ----- ----- ----- -----
Total deposits and borrowed funds $37,529 $37,529 $37,529 $37,529 $37,529
====== ====== ====== ====== ======
Stockholders' equity:
Preferred stock, no par value, 2,000,000
shares authorized; none to be issued $ -- $ -- $ -- $ -- $ --
Common stock, $0.10 par value, 8,000,000
shares authorized, assuming shares
outstanding as shown(3) -- 37 44 50 58
Additional paid-in capital(3) -- 3,351 3,996 4,643 5,385
Retained earnings 3,712 3,712 3,712 3,712 3,712
Unrealized gain on securities available (14) (14) (14) (14) (14)
for sale, net
Less:
Common stock acquired by ESOP(4) -- (296) (348) (400) (460)
Common stock acquired by
stock programs(5) -- (148) (174) (200) (230)
----- ----- ----- ----- -----
Total equity/stockholders' equity $ 3,698 $ 6,642 $ 7,216 $ 7,791 $ 8,451
====== ====== ====== ====== ======
</TABLE>
- ------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the independent valuation and a
commensurate increase in the offering range of up to 15% to reflect changes
in market and financial conditions.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
stock in the offering. [Any] withdrawals would reduce pro forma deposits by
[an] amount [equal to the] withdrawals.
(3) No effect has been given to the issuance of additional shares of stock
pursuant to any stock option plans that may be adopted by Steelton Bancorp
and the Association and presented for approval by the stockholders after
the offering. An amount equal to 10% of the shares of stock sold in the
offering would be reserved for issuance upon the exercise of options to be
granted under the stock option plans within one year following the
conversion. See "Risk Factors - Expenses Associated with Stock Benefit
Plans Will Reduce Our Earnings" and "Management - Potential Stock Benefit
Plans - Stock Options Plans."
(4) Assumes that 8.0% of the shares sold in the offering will be purchased by
the employee stock ownership plan, and that the funds used to acquire the
ESOP shares will be borrowed from Steelton Bancorp. For an estimate of the
impact of the loan on earnings, see "Pro Forma Data." The Association
intends to make scheduled discretionary contributions to the employee stock
ownership plan sufficient to enable the plan to service and repay its debt
over a ten year period. The amount of shares to be acquired by the ESOP is
reflected as a reduction of stockholders' equity. See "Management -
Executive Compensation - Employee Stock Ownership Plan." If the employee
stock ownership plan is unable to purchase stock in the conversion due to
an oversubscription in the offering by Eligible Account Holders, and the
purchase price in the open market is greater than the original $10.00 price
per share, there will be a corresponding reduction in stockholders' equity.
(5) Assumes that an amount equal to 4% of the shares of stock sold in the
offering is purchased by stock programs within one year following the
conversion. The stock purchased by the stock programs is reflected as a
reduction of stockholders' equity. See footnote (2) to the table under "Pro
Forma Data." See "Risk Factors Expenses Associated with Stock Benefit Plans
Will Reduce Our Earnings" and "Management - Potential Stock Benefit Plans -
Stock Programs."
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<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the stock cannot be determined
until the offering is completed. However, net proceeds to Steelton Bancorp are
currently estimated to be between $3.4 million and $4.7 million (or $5.4 million
if the independent valuation is increased by 15%) based on the following
assumptions:
o an amount equal to 8% of the shares issued will be loaned to the ESOP to
fund its purchase of 8% of the shares issued;
o an amount equal to 4% of the shares issued will be awarded pursuant to the
stock programs adopted no sooner than six months following the offering,
funded through open market purchases; and
o expenses of the offering are estimated to be $310,000.
We have prepared the following table, which sets forth our historical
net earnings and net worth prior to the conversion and our pro forma
consolidated net income and stockholders' equity following the conversion. In
preparing this table and in calculating pro forma data, we have made the
following assumptions:
o Pro forma earnings have been calculated assuming the stock had been sold at
the beginning of the period and the net proceeds had been invested at an
average yield of 4.59% for the year ended December 31, 1998, which
approximates the yield on a one-year U.S. Treasury bill on December 31,
1998. The yield on a one-year U.S. Treasury bill, rather than an arithmetic
average of the average yield on interest-earning assets and average rate
paid on deposits, has been used to estimate income on net proceeds because
it is believed that the one-year U.S. Treasury bill rate is a more accurate
estimate of the rate that would be obtained on an investment of net
proceeds from the offering.
o The pro forma after-tax yield on the net proceeds is assumed to be 2.94%
for the year ended December 31, 1998, based on an effective tax rate of
36%.
o We did not include any withdrawals from deposit accounts to purchase shares
in the offering.
o Historical and pro forma per share amounts have been calculated by dividing
historical and pro forma amounts by the indicated number of shares of
stock, as adjusted in the pro forma net earnings per share to give effect
to the purchase of shares by the employee stock ownership plan.
o Pro forma stockholders' equity amounts have been calculated as if the stock
had been sold on December 31, 1998[,] and no effect has been given to the
assumed earnings effect of the transactions.
The following pro forma data relies on the assumptions we outlined
above, and this data does not represent the fair market value of the common
stock, the current value of assets or liabilities, or the
30
<PAGE>
amount of money that would be distributed to stockholders if we liquidated
Steelton Bancorp. The pro forma data does not predict how much we will earn in
the future.
The following tables summarize historical data of Mechanics Savings and
pro forma data of Steelton Bancorp at or for the year ended December 31, 1998,
based on the assumptions set forth above and in the tables and should not be
used as a basis for projections of market value of the stock following the
conversion. No effect has been given in the tables to the possible issuance of
additional stock reserved for future issuance pursuant to a stock option plan
that may be adopted by the Board of Directors of Steelton Bancorp within one
year following the conversion, nor does book value give any effect to the
liquidation account to be established for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders or the bad debt reserve in
liquidation. See "The Conversion -Effects of Conversion - Liquidation Rights"
and "Management - Potential Stock Benefit Plans - Stock Option Plans."
31
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1998
----------------------------------------------------
$3,697,500 $4,350,000 $5,002,500 $5,752,880
Independent Independent Independent Independent
Valuation Valuation Valuation Valuation
--------- --------- --------- ---------
369,750 435,000 500,250 575,288
Shares Shares Shares Shares
--------- --------- --------- ---------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds ........................................................ $ 3,698 $ 4,350 $ 5,003 $ 5,753
Less expenses ......................................................... (310) (310) (310) (310)
--------- --------- --------- ---------
Estimated net proceeds ............................................. 3,388 4,040 4,693 5,443
Less ESOP funded by Steelton Bancorp .................................. (296) (348) (400) (460)
Less stock programs adjustment ........................................ (148) (174) (200) (230)
--------- --------- --------- ---------
Estimated investable net proceeds .................................. $ 2,944 $ 3,518 $ 4,093 $ 4,753
========= ========= ========= =========
Net Income:
Historical ......................................................... $ 100 $ 100 $ 100 $ 100
Pro forma income on net proceeds ................................... 87 103 120 140
Pro forma ESOP adjustments(1) ...................................... (19) (22) (26) (29)
Pro forma stock programs adjustment(2) ............................. (19) (22) (26) (29)
--------- --------- --------- ---------
Pro forma net income(1)(3)(4) ...................................... $ 149 $ 159 $ 168 $ 182
========= ========= ========= ==========
Per share net income
Historical ......................................................... $ 0.29 $ 0.25 $ 0.22 $ 0.19
Pro forma income on net proceeds ................................... 0.25 0.26 0.26 0.26
Pro forma ESOP adjustments(1) ...................................... (0.06) (0.05) (0.06) (0.05)
Pro forma stock programs adjustment(2) ............................. (0.06) (0.05) (0.06) (0.05)
--------- ----------- ---------- -----------
Pro forma net income per share(1)(3)(4) ............................ $ 0.42 $ 0.41 $ 0.36 $ 0.35
========= =========== ========== ===========
Shares used in calculation of income per share(1) Stockholders' equity:
Historical ......................................................... $ 3,698 $ 3,698 $ 3,698 $ 3,698
Estimated net proceeds ............................................. 3,388 4,040 4,693 5,443
Less: Common Stock acquired ESOP(1) ................................ (296) (348) (400) (460)
Less: Common Stock acquired by stock programs(2)
(148) (174) (200) (230)
--------- --------- --------- ---------
Pro forma stockholders' equity(1)(3)(4) ............................ $ 6,642 $ 7,216 $ 7,791 $ 8,451
========= =========== ========== ===========
Stockholders' equity per share:
Historical ......................................................... $ 10.00 $ 8.50 $ 7.39 $ 6.43
Estimated net proceeds ............................................. 9.16 9.29 9.38 9.46
Less: Common Stock acquired by the ESOP(1) ......................... (0.80) (0.80) (0.80) (0.80)
Less: Common stock acquired by stock programs(2)
(0.40) (0.40) (0.40) (0.40)
--------- ----------- ---------- -----------
Pro forma stockholders' equity per share(4) ........................ $ 17.96 $ 16.59 $ 15.57 $ 14.69
========= =========== ========== ===========
Offering price as a percentage of pro forma
stockholders' equity per share ...................................... 55.7% 60.3% 64.2% 68.1%
========= =========== ========== ===========
Offering price to pro forma
net income per share ................................................ 23.8X 24.4X 27.8X 28.6X
Shares used in calculation of earnings per share ...................... 343,128 403,680 464,232 533,867
</TABLE>
- -----------------
(1) Assumes that 8% of the shares of stock sold in the offering will be
purchased by the employee stock ownership plan and that the plan will
borrow funds from Steelton Bancorp. The stock acquired by the employee
stock ownership plan is reflected as a reduction of stockholder's equity.
The Association intends to make annual contributions to the plan in an
amount at least equal to the principal and interest
32
<PAGE>
requirement of the loan. This table assumes a 10 year amortization period.
See "Management -Executive Compensation - Employee Stock Ownership Plan."
The pro forma net earnings assumes: (i) that the Association's contribution
to the employee stock ownership plan for the principal portion of the debt
service requirement for the year ended December 31, 1998 were made at the
end of the period; (ii) that 2,958, 3,480, 4,002, and 4,602 shares at the
minimum, midpoint, maximum, and 15% above the maximum of the range,
respectively, were committed to be released during the year ended December
31, 1998 at an average fair value of $10.00 per share and were accounted
for as a charge to expense in accordance with Statement of Position ("SOP")
No. 93-6; and (iii) only the employee stock ownership plan shares committed
to be released were considered outstanding for purposes of the net earnings
per share calculations[. All employee stock ownership] plan shares were
considered outstanding for purposes of the stockholders' equity per share
calculations. See also "Risk Factors - Expenses Associated and Stock
Benefit Plans Will Reduce Our Earnings" for a discussion of possible added
costs for the employee stock ownership plan.
(2) Gives effect to the stock programs that may be adopted by the Association
following the conversion and presented for approval at a meeting of
stockholders to be held within one year after completion of the conversion.
If the stock programs are approved by the stockholders, the stock programs
would be expected to acquire an amount of stock equal to 4% of the shares
of stock sold in the offering, or 14,790, 17,400, 20,010, and 23,012 shares
of stock respectively at the minimum, midpoint, maximum and 15% above the
maximum of the range through open market purchases. Funds used by the stock
programs to purchase the shares will be contributed to the stock programs
by the Association. In calculating the pro forma effect of the stock
programs, it is assumed that the required stockholder approval has been
received, that the shares were acquired by the stock programs at the
beginning of the year ended December 31, 1998 through open market
purchases, at $10.00 per share, and that 20% of the amount contributed was
amortized to expense during the year ended December 31, 1998. The issuance
of authorized but unissued shares of stock to the stock plans instead of
open market purchases would dilute the voting interests of existing
shareholders by approximately 4.5% and pro forma net income per share would
be $0.43, $0.39, $0.36 and $0.34 at the minimum, midpoint, maximum and 15%
above the maximum of the range, respectively, and pro forma stockholders'
equity per share would be $17.27, $15.95, $14.98 and $14.13 at the minimum,
midpoint, maximum and 15% above the maximum of the range, respectively.
There can be no assurance that stockholder approval of the stock programs
will be obtained, or the actual purchase price of the shares will be equal
to $10.00 per share. See "Management - Potential Stock Benefit Plans -
Stock Programs."
(3) The retained earnings of Steelton Bancorp and the Association will continue
to be substantially restricted after the conversion. See "Dividend Policy,"
"The Conversion - Effects of Conversion Liquidation Rights" and "Regulation
- Regulation of the Association - Dividends and Other Capital Distribution
Limitations."
(4) No effect has been given to the issuance of additional shares of stock
pursuant to the stock option plans that may be adopted by the Association
following the conversion which, in turn, would be presented for approval at
a meeting of stockholders to be held within one year after the completion
of the conversion. If the stock option plans are presented and approved by
stockholders, an amount equal to 10% of the stock sold in the offering, or
36,975, 43,500, 50,025, and 57,529 shares at the minimum, midpoint, maximum
and 15% above the maximum of the range, respectively, will be reserved for
future issuance upon the exercise of options to be granted under the stock
option plans. The issuance of stock pursuant to the exercise of options
under the stock option plans will result in the dilution of existing
stockholders' interests. Assuming stockholder approval of the stock option
plans and the exercise of all options at the end of the period at an
exercise price of $10.00 per share, the pro forma net earnings per share
would be $0.39, $0.36, $0.33, and $0.31, respectively at the minimum,
midpoint, maximum and 15% above the maximum of the range for the year ended
December 31, 1998; pro forma stockholders' equity per share would be
$17.24, $15.99, $15.07 and $14.26, respectively at the minimum, midpoint,
maximum and 15% above the maximum of the range for the year ended December
31, 1998. See "Management -Potential Stock Benefit Plans - Stock Option
Plans."
33
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table presents the Mechanics Savings' historical and pro
forma capital position relative to its capital requirements as of December 31,
1998. Pro forma capital levels assume receipt by Mechanics Savings of the net
proceeds of the offering and retention by Steelton Bancorp of 50% of the net
proceeds, and that the ESOP purchases 8% of the stock sold in the offering, and
that 4% of the shares of stock sold in the offering is purchased by the stock
programs at the purchase price subsequent to the offering. For a discussion of
the assumptions underlying the pro forma capital calculations presented below,
see "Use of Proceeds," "Capitalization" and "Pro Forma Data." The definitions of
the terms used in the table are those provided in the capital regulations issued
by the OTS. For a discussion of the capital standards applicable to the
Association, see "Regulation - Regulation of the Association - Regulatory
Capital Requirements."
<TABLE>
<CAPTION>
Pro Forma at December 31, 1998
---------------------------------------------------------------------------------------
Actual, at $3,697,500 $4,350,000 $5,002,500 $5,752,880
December 31, 1998 Offering Offering Offering Offering(1)
----------------- ------------------- -------------------- -------------------- ---------------------
Percentage Percentage Percentage Percentage Percentage
Amount of Assets(2) Amount of Assets(2) Amount of Assets(2) Amount of Assets(2) Amount of Assets(2)
------ ------------ ------ ------------ ------ ------------ ------ ------------ ------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital(3)...... $ 3,698 8.91% $ 4,948 11.57% $ 5,196 12.08% $ 5,445 12.59% $ 5,730 13.16%
====== ==== ====== ===== ====== ===== ====== ===== ====== =====
Core Capital:
Actual or Pro
Forma.............. $ 3,712 8.93% $ 4,962 11.59% $ 5,210 12.10% $ 5,459 12.61% $ 5,744 13.18%
Required 1,662 4.00 1,712 4.00 1,722 4.00 1,732 4.00 1,743 4.00
----- ---- ----- ---- ----- ---- ----- ----- ----- -----
Excess............. $ 2,050 6.99% $ 3,250 7.59% $ 3,488 8.10% $ 3,727 8.61% $ 4,001 9.18%
===== ==== ====== ==== ====== ==== ====== ===== ====== ====
Tier 1 Capital:
Actual or Pro
Forma.............. $ 3,712 18.41% $ 4,962 23.86% $ 5,210 24.91% $ 5,459 25.95% $ 5,744 27.12%
Required(4)........ 807 4.00 832 4.00 837 4.00 842 4.00 847 4.00
----- ----- ----- ----- ----- ---- ----- ----- ----- -----
Excess............. $ 2,905 14.41% $ 4,130 19.86% $ 4,373 20.91% $ 4,617 21.94% $ 4,897 23.12%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Risk-Based Capital:
Actual or Pro
Forma(5)(6)........ $ 3,878 19.23% $ 5,128 24.66% $ 5,376 25.70% $ 5,625 26.73% $ 5,910 27.90%
Required........... 1,613 8.00 1,663 8.00 1,673 8.00 1,683 8.00 1,695 8.00
----- ----- ----- ----- ----- ----- ----- ---- ----- -----
Excess............. $ 2,265 11.23% $ 3,465 16.66% $ 3,703 17.70% $ 3,942 18.74% $ 4,215 19.90%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
- -----------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the offering range of up to 15% as a
result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
offerings.
(2) Core capital levels are shown as a percentage of total adjusted assets.
Tier 1 and Risk-based capital levels are shown as a percentage of
risk-weighted assets.
(3) GAAP Capital includes unrealized gain on available-for-sale securities,
net, which is not included as regulatory capital.
(4) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements which
would require a core capital ratio of 3% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and
soundness and a 4% to 5% core capital ratio requirement for all other
thrifts. See "Regulation - Regulation of the Association-Regulatory Capital
Requirements.
(5) Assumes net proceeds are invested in assets that carry a 50% risk-weighing.
(6) The difference between equity under GAAP and regulatory risk-based capital
is attributable to the addition of the general valuation allowance of
$166,000 at December 31, 1998 and the subtraction of the unrealized loss on
available-for-sale securities, net of $14,000.
34
<PAGE>
[RECENT DEVELOPMENTS
The information set forth below at or for the periods ended March 31,
1999 and 1998, is unaudited and, in the opinion of management, all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation or
the results for the unaudited periods have been made. The results of operations
for the three months ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the entire year or any other period. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements contained elsewhere in this prospectus.
Selected Financial Data]
<TABLE>
<CAPTION>
[At March 31, 1999] At December 31, 1998
------------------ --------------------
(Dollars in Thousands)
<S> <C> <C>
Total Amount of:
Assets $ 42,676 $41,511
Loans receivable, net 26,526 27,784
Mortgage-backed securities, net (1) 8,493 7,122
Investment securities (2) 3,409 2,083
Cash and cash equivalents 1,993 2,388
Deposits 29,899 28,272
FHLB advances 8,654 9,257
Retained earnings (substantially
restricted (3)) 3,702 3,698
Number of:
Total loans outstanding 533 545
Deposit accounts 4,449 3,241
Offices 2 2]
</TABLE>
- -----------------
[(1) Includes mortgage-backed securities available for sale of $5.1 and $3.7
million, respectively.
(2) Includes investment securities available for sale of $1.3 million and
$299,000, respectively.
(3) Includes accumulated other comprehensive income (loss) of $(41,000) and
$(14,000), respectively.
35
<PAGE>
Summary of Operations]
[For the Three Months Ended
March 31,
-----------------------------
1999 1998
---- ----
(In Thousands)
Interest and dividend income $ 740 $ 740
Interest expense 452 442
--- ----
Net interest income 288 298
Provision for loan losses 2 3
--- ---
Net interest income after provision for
loan losses 286 295
Non-interest income 56 42
Non-interest expenses 293 263
--- ----
Income before income taxes 49 74
Provision for income taxes 16 26
---- ----
Net income $ 33 $ 48]
====== ======
36
<PAGE>
[Selected Financial Ratios]
[At or For the Three Months Ended
March 31
---------------------------
1999(1) 1998(1)
---- ----
Return on average assets (net income
divided by average total assets).............. 0.30% 0.50%
Return on average equity (net income
divided by average equity).................... 2.87 5.30
Average equity to average assets (average
equity divided by average total assets)....... 8.79 9.49
Equity to assets at period end................. 8.67 9.30
Net interest rate spread....................... 2.74 2.80
Net yield on average interest-earnings assets.. 2.88 3.29
Non-performing assets to total assets.......... 0.72 0.93
Average interest-earning assets to average
interest-bearing liabilities.................. 105.27 106.53
Net interest income after provision for loan
losses, to total other expenses............... 97.43 112.20
Non-performing loans to total loans............ 1.16 1.18]
[(1) Ratios for the three month periods are stated on an annualized basis.
Such ratios and results are not necessarily indicative of results that
may be expected for the full year or any other period.
37
<PAGE>
Comparison of Financial Condition at March 31, 1999 and December 31, 1998
Assets. Total assets increased $1.2 million, or 2.8%, to $42.7 million
at March 31, 1999 from $41.5 million at December 31, 1998. The increase in total
assets resulted primarily from: a $1.4 million increase in mortgage-backed
securities and a $1.3 million increase in investment securities, partially
offset by a reduction of $1.3 million in net loans outstanding and a $395,000
decrease in cash and cash equivalents. Mortgage-backed and investment securities
increased due loan repayments in excess of loan originations and a $1.6 million
increase in deposits.
Liabilities. Total liabilities increased $800,000, or 2.1%, to $38.6
million at March 31, 1999 from $37.8 million at December 31, 1998. The increase
in total liabilities resulted primarily from a $1.6 million increase in deposits
from $28.3 million at December 31, 1998 to $30.0 million at march 31, 1999;
partially offset by a decrease in FHLB advances of $603,000 from $9.3 million at
December 31, 1998 to $8.7 million at March 31, 1999.
Equity. The increase in the Association's equity reflects the $33,000
in net income for the three months ended March 31, 1999 offset somewhat by
$41,000 in unrealized losses on investments available for sale, net of tax.
Comparison of Operating Results for the Three Months ended March 31, 1999 and
March 31, 1998
Net Income. Net income for the three months ended March 31, 1999
decreased 31.3% to $33,000, compared to net income of $48,000 for the same
period in 1998. The decrease is attributable in part to a $30,000 increase in
non-interest expenses to $293,000 for the three months ended March 31, 1999
compared to $263,000 for the same period in 1998, partially offset by an
increase in non-interest income of $14,000 to $56,000 for the three months ended
March 31, 1999 compared to $42,000 for the same period in 1998.
Net Interest Income. Net interest income decreased $10,000, or 3.4%, to
$288,000 for the three months ended March 31, 1999 compared to $298,000 for the
same period in 1998. This decrease resulted primarily from a decrease in the net
interest rate spread and net yield due to general market rates of interest
declining slightly.
Interest Income. Total interest income for the three months ended March
31, 1999 was equal to total interest income for the three months ended March 31,
1998.
Interest Expense. Total interest expense increased by $10,000, to
$452,000 for the three months ended March 31, 1999 compared to $442,000 for the
same period in 1998, as a result of an increase in average interest-bearing
liabilities.
Provision for Loan Losses. The provision for loan losses was $2,000 for
the three months ended March 31, 1999 compared to $3,000 at for the three months
ended March 31, 1998. The allowance for loan losses was $168,000 at March 31,
1999 and $130,000 at March 31, 1998. The current allowance represents 0.63% of
total loans outstanding at March 31, 1999.
Other Income. Other income, primarily fees and service charges
increased $14,000, or 33.3%, from $42,000 for the three months ended March 31,
1998 to $56,000 for the three months ended March 31, 1999. This increase
reflects the Association's continuing emphasis on charging appropriate fees for
its services.
38
<PAGE>
Other Expense. Other expense increased by $30,000, or 11.4%, to
$293,000 for the three months ended March 31, 1999 from $263,000 for the same
period in 1998, primarily due to an increase in compensation and employee
benefits, an average 5% increase in salary adjustments, and an overall increase
in expenses for the branch location.]
39
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
Selected Financial Data
At December 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
(Dollars in thousands)
Total Amount of:
Assets.................................. $41,511 $37,232 $36,527
Loans receivable, net................... 27,784 32,118 31,667
Mortgage-backed securities, net(1)...... 7,122 1,414 955
Investment securities(2)................ 2,083 957 1,624
Cash and cash equivalents............... 2,388 789 858
Deposits................................ 28,272 23,468 22,908
FHLB advances........................... 9,257 9,817 9,853
Retained earnings
(substantially restricted(3))......... 3,698 3,612 3,450
Number of:
[Total] loans outstanding.............. [545 615 581]
Deposit accounts........................ [4,243 3,114 2,451]
Offices................................. 2 2 1
- ----------------
(1) Includes mortgage-backed securities available for sale of $3.7 million, $0,
and $0, respectively.
(2) Includes investment securities available for sale of $299,000, $0, and $0,
respectively.
(3) Includes accumulated other comprehensive income (loss) of $(14,000), $0,
and $0, respectively.
40
<PAGE>
Summary of Operations
Year Ended December 31,
------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Interest and dividend income ............... $2,880 $2,831 $2,938
Interest expense ........................... 1,794 1,775 1,925
----- ----- ------
Net interest income ...................... 1,086 1,056 1,013
Provision for loan losses .................. 50 12 18
------ ------ ------
Net interest income after
provision for loan losses ............... 1,036 1,044 995
Non-interest income ........................ 175 121 57
Non-interest expenses ...................... 1,092 923 903(1)
------ ------ ------
Income before income taxes ................. 119 242 149
Provision for income taxes ................. 19 79 37
------ ------ ------
Net income ................................. $ 100 $ 163 $ 112
====== ====== ======
- -----------------
(1) Includes a non-recurring expense of $155,000 for the year ended December
31, 1996 for a one-time deposit insurance premium to recapitalize the SAIF.
41
<PAGE>
Selected Financial Ratios
<TABLE>
<CAPTION>
At or For the Year Ended
December 31,
--------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Return on average assets (net income
divided by average total assets) ................. 0.25% 0.43% 0.27%
Return on average equity (net income
divided by average equity) ....................... 2.77 4.62 3.33
Average equity to average assets (average equity
divided by average total assets).................. 9.14 9.41 9.03
Equity to assets at period end ..................... 8.91 9.70 9.43
Net interest rate spread ........................... 2.58 2.56 2.33
Net yield on average interest-earnings assets ...... 2.88 2.93 2.79
Non-performing assets to total assets .............. 0.78 1.59 0.57
Average interest-earning assets to average
interest-bearing liabilities ..................... 106.37 107.68 108.12
Net interest income after provision for loan losses,
to total other expenses .......................... 94.89 113.00 110.07
Non-performing loans to total loans ................ 1.16 1.84 0.65
</TABLE>
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Management's discussion and analysis of Mechanics Savings and Loan,
FSA's financial condition and results of operations is intended to provide
assistance and understanding of the Association's financial condition and
results of operations. The information in this section should be read with the
consolidated financial statements and the notes to consolidated financial
statements beginning at page F-2.
The Association's results of operations are primarily dependent on its
net interest income. Net interest income is a function of the balances of loans
and investments outstanding in any one period, the yields earned on [those]
loans and investments and the interest paid on deposits and borrowed funds that
were outstanding in that same period. The Association's noninterest income
consists primarily of fees and service charges. The results of operations are
significantly impacted by the amount of provisions for loan losses which, in
turn, are dependent upon, among other things, the size and makeup of the loan
portfolio, loan quality and loan trends. The noninterest expenses consist
primarily of employee compensation and benefits, occupancy and equipment
expenses, data processing costs, marketing costs, professional fees and federal
deposit insurance premiums. The Association's results of operations are affected
by general economic and competitive conditions, including changes in prevailing
interest rates and the policies of regulatory agencies.
Forward - Looking Statements
This document contains statements that project the future operations of
Steelton Bancorp which involve risks and uncertainties. Steelton Bancorp's
actual results may differ significantly from the results discussed in these
forward-looking statements. Factors that might cause a difference [in results]
include, but are not limited to, those discussed in "Risk Factors" beginning on
page ____ of this document.
Business Strategy
The Association's business strategy has been to operate as a
well-capitalized independent community savings association dedicated to
providing quality service at competitive prices. Generally, the Association has
sought to implement this strategy by maintaining a substantial part of its
assets in loans secured by one- to four- family residential real estate located
in the Association's market area, home equity and second mortgage loans,
mortgage-backed securities, state and local government obligations, and U.S.
Government and agency obligations.
Management believes that the Association benefits from its ability to
quickly and effectively provide personal service tailored to customer needs and
inquiries, in comparison to many of its local competitors. In 1997, the
Association enhanced its capabilities as a full service community association
with the issuance of debit cards and the installation of Steelton's first
24-hour full-service ATM at the Association's main office. A second ATM was
installed at the Association's branch office, which opened in October, 1997.
43
<PAGE>
To the extent that new deposits have exceeded loan originations, the
Association has invested these deposits primarily in mortgage-backed securities,
particularly adjustable rate mortgage-backed securities. In addition, the
Association has increased its focus on refinancing mortgage loans and consumer
lending, including home equity loans.
While management intends to maintain its community orientation by
continuing to emphasize traditional deposit and loan products, primarily
single-family residential mortgages, the additional capital provided by the
offering will allow the Association to take the following steps to achieve
greater growth and profitability.
Specifically, the Association intends to:
o increase its percentage of commercial real estate and consumer loans and
commercial deposit accounts, among other products;
o expand the Association's main office, including purchasing land to be used
as a parking lot and installing drive-through facilities; and
o invest in appropriate technology that will enable the Association to serve
its customers effectively, including telephone banking services.
By seeking to broaden the range of its products and services offered,
the Association believes it will offset the declining margins in the competitive
market for one- to four-family residential mortgage loans.
Analysis of Net Interest Income
The Association's earnings have historically depended primarily upon
the Association's net interest income, which is the difference between interest
income earned on its loans and investments ("interest-earning assets") and
interest paid on its deposits and any borrowed funds ("interest-bearing
liabilities"). Net interest income is affected by (a) the difference between
rates of interest earned on the Association's interest-earning assets and rates
paid on its interest-bearing liabilities ("interest rate spread") and (b) the
relative amounts of its interest-earnings assets and interest-bearing
liabilities.
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<PAGE>
Average Balance Sheet. The following table sets forth certain
information relating to the Association at and for the periods indicated. The
average yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. Similar information is provided as of December 31, 1998. Average
balances are derived from month-end balances. Management does not believe that
the use of month-end balances instead of daily average balances has caused any
material differences in the information presented.
<PAGE>
<TABLE>
<CAPTION>
At December 31, Year Ended December 31,
------------------- ------------------------------------------------------------------
1998 1998 1997
------------------- ------------------------------- ---------------------------------
Average Average Average Average Average
Balance Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1)..................... $27,784 9.13% $29,889 $2,537 8.49% $32,131 $2,657 8.27%
Investment securities................... 9,204 2.82 5,660 259 4.58 2,424 111 4.56
Other interest-earning assets........... 2,519 3.33 2,203 84 3.81 1,484 63 4.25
----- ----- ----- ------ -----
Total interest-earning assets........ 39,507 7.29 37,752 2,880 7.63 36,039 2,831 7.86
------ ------ ----- ------ -----
Non-interest-earning assets.............. 2,004 1,800 1,444
----- ----- -----
Total assets........................... $41,511 $39,552 $37,483
====== ====== ======
Interest-bearing liabilities:
NOW and commercial checking............. $ 2,290 0.56 $ 1,936 16 0.82 $ 1,273 13 1.02
Money market accounts................... 1,606 1.83 1,389 34 2.43 1,094 29 2.65
Savings accounts........................ 3,960 2.46 3,670 97 2.65 3,147 84 2.67
Certificates of deposit................. 20,416 5.22 18,351 1,066 5.81 17,388 1,028 5.91
Other liabilities....................... 9,257 6.71 10,147 581 5.72 10,568 621 5.88
----- ------ ----- ------ -----
Total interest-bearing liabilities..... 37,530 4.78 35,493 1,794 5.05 33,470 1,775 5.30
------ ------ ----- ------ -----
Non-interest-bearing liabilities......... 283 443 485
------ --- ------
Total liabilities....................... 37,813 35,936 33,955
------ ------ ------
Equity................................... 3,698 3,616 3,528
----- ----- -----
Total liabilities and equity............ $41,511 $39,552 $37,483
====== ====== ======
Net interest income...................... $1,086 $1,056
===== =====
Interest rate spread(2).................. 2.51% 2.58% 2.56%
==== ==== ====
Net yield on interest-earning assets(3).. 2.75% 2.88% 2.93%
==== ==== ====
Ratio of average interest-earning assets.
to average interest-bearing liabilities. 1.05X 1.06X 1.08X
==== ==== ====
</TABLE>
- --------------------------------
(1) Average balances include non-accrual loans.
(2) Interest-rate spread represents the difference between the average
yield on interest-earning assets and the average cost of
interest-bearing liabilities.
(3) Net yield on interest-earning assets represents net interest income as
a percentage of average interest-earning assets.
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<PAGE>
Rate/Volume Analysis. The relationship between the volume and rates of
the Association's interest-bearing assets and interest-bearing liabilities
influence the Association's net interest income. The following table reflects
the sensitivity of the Association's interest income and interest expense to
changes in volume and in prevailing interest rates during the periods indicated.
Each category reflects the: (1) changes in volume (changes in volume multiplied
by old rate); (2) changes in rate (changes in rate multiplied by old volume);
(3) changes in rate/volume (change in rate multiplied by the change in volume);
and (4) net change. The net change attributable to the combined impact of volume
and rate has been allocated proportionally to the absolute dollar amounts of
change in each.
Year Ended December 31,
----------------------------------
1998 vs. 1997
Increase (Decrease)
Due to
----------------------------------
Rate/
Volume Rate Volume Net
------ ---- ------ ---
Income: ............................ (In thousands)
Loans receivable .................. $(185) $ 70 $ (5) $(120)
Mortgage-backed securities
Investment securities ............. 148 -- 1 149
Other interest earning assets ..... 31 (7) (3) 21
----- ----- ----- -----
Total interest-earning assets .... $ (6) $ 63 $ (7) $ 50
===== ===== ===== =====
Interest expense:
Commercial checking and NOW accounts
7 (2) (1) 4
Savings accounts ................... 14 -- -- 14
Money market accounts .............. 8 (3) (1) 4
Certificates of deposit ............ 57 (18) (1) 38
Other liabilities .................. (25) (16) 1 (40)
----- ----- ----- -----
Total interest bearing
liabilities ...................... $ 61 $ (39) $ (2) $ 20
===== ===== ===== =====
Net change in interest income ...... $ (67) $ 102 $ (5) $ 30
===== ===== ===== =====
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<PAGE>
Management of Interest Rate Risk and Market Risk
Qualitative Analysis. Because the majority of the Association's assets
and liabilities are sensitive to changes in interest rates, the Association's
most significant form of market risk is interest rate risk, or changes in
interest rates. The Association is vulnerable to an increase in interest rates
to the extent that interest-bearing liabilities mature or reprice more rapidly
than interest-earning assets. The lending activities of the Association have
historically emphasized the origination of long-term, fixed rate loans secured
by single-family residences. The primary source of funds has been deposits with
substantially shorter maturities. While having interest-bearing liabilities that
reprice more frequently than interest-earning assets is generally beneficial to
net interest income during a period of declining interest rates, [this type of]
an asset/liability mismatch is generally detrimental during periods of rising
interest rates.
The Board of Directors has established an asset/liability committee
which consists of the Association's executive vice president, senior vice
president, chief financial officer and two members of the Board of Directors.
The committee meets on a monthly basis to review loan and deposit pricing and
production volumes, interest rate risk analysis, liquidity and borrowing needs,
and a variety of other assets and liability management topics.
To reduce the effect of interest rate changes on net interest income
the Association has adopted various strategies to enable it to improve matching
of interest-earning asset maturities to interest-bearing liability maturities.
The principal elements of these strategies include [seeking to:
o] originate commercial real-estate and consumer loans with adjustable rate
features or fixed rate loans with short maturities;
[o] lengthen the maturities of its liabilities when [it would be] cost
effective through the pricing and promotion of certificates of deposit and
utilization of FHLB advances;
[o] attract low cost checking and transaction accounts which tend to be less
interest rate sensitive when interest rates rise;
[o] when market conditions permit, to originate and hold in its portfolio
adjustable rate loans which have annual interest rate adjustments[; and
o maintain] an investment portfolio that provides a stable cash flow, thereby
providing investable funds in varying interest rate cycles.
The Association has also made a significant effort to maintain its
level of lower cost deposits as a method of enhancing profitability. In the past
year, the Association's level of demand deposits has increased significantly. At
December 31, 1998, the Association had approximately 25% of its deposits in
low-cost savings, checking and money market accounts. These deposits have
traditionally remained relatively stable and are expected to be only moderately
affected in a period of rising interest rates. This stability has enabled the
Association to offset the impact of rising rates in other deposit accounts.
Quantitative Analysis. Exposure to interest rate risk is actively
monitored by management. The Association's objective is to maintain a consistent
level of profitability within acceptable risk tolerances across a broad range of
potential interest rate environments. The Association uses the OTS Net Portfolio
Value ("NPV") Model to monitor its exposure to interest rate risk, which
calculates
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<PAGE>
changes in net portfolio value. Reports generated from assumptions
provided and modified by management are reviewed by the Asset/Liability
Management Committee and reported to the Board of Directors quarterly. The
Interest Rate Sensitivity of Net Portfolio Value Report shows the degree to
which balance sheet line items and net portfolio value are potentially affected
by a 100 to 400 basis point (1/100th of a percentage point) upward and downward
parallel shift (shock) in the Treasury yield curve.
The following table presents the Association's NPV as of December 31,
1998. The NPV was calculated by the OTS, based on information provided by the
Association.
Net Portfolio Value ("NPV") NPV as % of Present Value of Assets
--------------------------- -----------------------------------
Change Basis Point
in Rates $ Amount $ Change % Change NPV Ratio Change
-------- -------- -------- -------- --------- ------
(Dollars in thousands)
+400 bp $1,821 -2,579 -59 % 4.77 % -560 bp
+300 bp 2,584 -1,816 -41 % 6.57 % -380 bp
+200 bp 3,323 -1,077 -24 % 8.21 % -216 bp
+100 bp 3,966 -434 -10 % 9.54 % -82 bp
0 bp 4,400 10.37 %
-100 bp 4,592 192 +4 % 10.65 % +29 bp
-200 bp 4,724 324 +7 % 10.80 % +44 bp
-300 bp 4,928 528 +12 % 11.09 % +72 bp
-400 bp 5,085 685 +16 % 11.27 % +90 bp
Future interest rates or their effects on NPV or net interest income
are not predictable. Nevertheless, the Association's management does not expect
current interest rates to have a material adverse effect on the Association's
NPV or net interest income in the near future. Computations of prospective
effects of hypothetical interest rate changes are based on numerous assumptions,
including relative levels of market interest rates, prepayments, and deposit
run-offs, and should not be relied upon as indicative of actual results. Certain
shortcomings are inherent in [this type of computation]. Although certain assets
and liabilities may have similar maturity or periods of repricing, they may
react at different times and in different degrees to changes in the market
interest rates. The interest rate on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while rates on other
types of assets and liabilities may lag behind changes in market interest rates.
Certain assets such as adjustable rate mortgages, generally have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. In the event of a change in interest rates, prepayments and early
withdrawal levels could deviate significantly from those assumed in making
calculations set forth above. Additionally, an increased credit risk may result
as the ability of many borrowers to service their debt may decrease in the event
of an interest rate increase.
Comparison of Financial Condition at December 31, 1998 and 1997
Assets. Total assets increased $4.3 million, or 11.6%, to $41.5 million
at December 31, 1998 from $37.2 million at December 31, 1997. The increase in
total assets resulted primarily from: a $5.7 million increase in mortgage-backed
securities, a $1.6 million increase in cash and cash equivalents, and a $1.1
million increase in investment securities, partially offset by a reduction of
$4.3 million in net loans outstanding. The Association purchased adjustable-rate
mortgage-backed securities during 1998 as part of its interest rate risk
management. Loans receivable decreased due to continued refinancings. The
Association's increase in investment and mortgage-backed securities outpaced its
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<PAGE>
loan originations as the Association purchased adjustable rate mortgage-backed
securities and obligations of local and state governments as part of the
Association's interest rate risk management and tax strategies, respectively.
Liabilities. Total liabilities increased $4.2 million, or 12.5%, to
$37.8 million at December 31, 1998 from $33.6 million at December 31, 1997. The
increase in total liabilities resulted primarily from a $4.8 million increase in
deposits, primarily demand deposits, partially offset by a decrease in FHLB
advances of $600,000. The increase in deposits is primarily attributable to the
opening of the Woodridge branch office in October, 1997 as well as increased
emphasis on checking and over 55 savings account programs.
Equity. The increase in the Association's equity reflects the $100,000
in net income for the year ended December 31, 1998 offset somewhat by an
increase of $14,000 in unrealized losses on investments available for sale, net
of tax.
Liquidity and Capital Resources
The liquidity of a savings institution reflects its ability to provide
funds to meet loan requests, to accommodate possible outflows in deposits, and
to take advantage of interest rate market opportunities. Funding of loan
requests, providing for liability outflows, and management of interest rate
fluctuations require continuous analysis in order to match the maturities of
specific categories of short-term loans and investments with specific types of
deposits and borrowings. Savings institution liquidity is normally considered in
terms of the nature and mix of the savings institution's sources and uses of
funds.
Asset liquidity is provided through loan repayments and the management
of maturity distributions for loans and securities. An important aspect of
liquidity lies in maintaining sufficient levels of loans and mortgage-backed
securities that generate monthly cash flows.
Net cash provided by the Association's operations for 1998 was $47,000,
compared to net cash provided by its operating activities of $264,000 for 1997.
[Cash provided by operating activities declined in 1998 due primarily to a
decrease in net income of $62,000, a federal income tax refund of $68,000 in
1997 that was not present in 1998, and a $57,000 federal income tax refund for
1998 that had not been received as of December 31, 1998.]
Net cash used for the Association's investing activities[, primarily]
cash disbursed [for the Association's] investment and mortgage-backed securities
and the [loan portfolios,] totaled $2.7 million for 1998, an increase of $1.8
million from 1997.
Net cash provided by our financing activities[, primarily] cash
receipts from our net increases in deposits[,] totaled $4.2 million in 1998,
compared to net cash provided by financing activities totaling $500,000 in 1997.
The Association is subject to federal regulations that impose minimum
capital requirements. For a discussion on [these] capital levels, see
"Historical and Pro Forma Capital Compliance" and "Regulation Regulation of the
Association - Regulatory Capital Requirements."
Management is not aware of any known trends, events or uncertainties
that will have or are reasonably likely to have a material effect on the
Association's liquidity, capital or operations nor is
49
<PAGE>
management aware of any current recommendation by regulatory authorities, which
if implemented, would have [a material effect on liquidity, capital or
operations.]
Comparison of Operating Results for Year Ended December 31, 1998 to Year Ended
December 31, 1997
Net Income. Net income for 1998 decreased 39% to $100,000 compared to
net income of $163,000 for 1997. The decrease is attributable in part to a
$38,000 increase in provision for loan losses and an increase of $168,000 in
non-interest expenses, partially offset by an increase in non-interest income of
$54,000.
Net Interest Income. Net interest income increased [$]30,000, or 2.7%,
in 1998 compared to 1997. This increase resulted from a increase in interest
income of $49,000 which was partially offset by an increase in interest expense
of $19,000.
Interest Income. Total interest income increased $49,000, or 1.7%, in
1998 compared to 1997, as a result of a $1.7 million increase in average
interest-earning assets, principally mortgage-backed securities, partially
offset by a decrease of 32 basis points in the average interest rates earned.
Interest income on loans decreased by $120,000 to $2.5 million for 1998 from
$2.6 million for 1997 due primarily to a $2.2 million decrease in the average
balance of loans. The average yield on loans, however, increased by 22 basis
points from 8.27% for 1997 to 8.49% for 1998 due to increased yields on the
Association's adjustable rate portfolio and a slight increase in consumer loans.
Interest income on investment securities increased by $148,000 primarily due to
a $3.2 million increase in the average balance as excess liquidity was invested
in obligations of states and local governments to take advantage of the lower
taxes on [these types of] investments.
Interest Expense. Total interest expense increased by $19,000 [to $1.8
million] in 1998, as a result of an increase in average interest-bearing
liabilities. Average interest-bearing liabilities increased to $35.5 million for
1998 from $33.5 million for 1997. The increase is partly attributable to the
opening of the Woodridge branch. The average interest rate paid on
interest-bearing liabilities was 5.05% for 1998 compared to 5.30% for 1997, a
decrease of 25 basis points. The decrease in rates paid on interest-bearing
liabilities reflects market rates.
Provision for Loan Losses. The Association [maintains an allowance for
loan losses through a provision for loan losses based on management's periodic
evaluation of] the general level of loan delinquency, the level of risk by type
of loan, and general economic conditions [. The provision reflects an amount
that, in management's opinion, is adequate to absorb losses in the current
portfolio.] The provision for loan losses was $50,000 at December 31, 1998
compared to $12,000 at December 31, 1997. The increase in the provision for loan
losses relates primarily to management's assessment of the mix of its loan
portfolio, particularly the increase in commercial [and consumer] loans and
[more specifically] due to a reevaluation of loan loss reserves for FHA Title I
[home equity and second mortgage] loans purchased by the Association. The
allowance for loan losses increased from $126,000 at December 31, 1997 to
$166,000 at December 31, 1998. The current allowance represents 0.60% of total
loans outstanding at December 31, 1998. The Association had net charge-offs of
$10,000 for the year ended December 31, 1998 compared to net charge-offs of
$5,000 for the year ended December 31, 1997. See "Business of the Association --
Non-Performing Loans and Problem Assets." The Association monitors its loan
portfolio on a continuing basis and intends to continue to provide for loan
losses based on its ongoing review of the loan portfolio and general market
conditions.
50
<PAGE>
Other Income. Other income, primarily fees and service charges
increased $54,000, or 30.8% from 1997 to 1998. This increase reflects the
Association's continuing emphasis on charging appropriate fees for its services.
The Association continues to review its products with a goal to increase sources
of non-interest income, including fees and service charges.
Other Expense. Other expense increased by $168,000 to $1.1 million for
1998 from $900,000 for 1997 primarily due to an increase in compensation and
employee benefits, an average 5% increase in salary adjustments, and a full year
of staff cost and other costs, including occupancy, telephone, and supplies,
associated with the Association's new branch that opened in October 1997.
The Board of Directors and management analyzed the potential effect of
each of these expenditures prior to approval and believe that these expenditures
will have an overall positive effect on Steelton Bancorp's franchise and
shareholder value, but also realize that the expenditures will depress
profitability ratios in the short term. The Board of Directors and management
also expect that both interest income and fee income will increase as a result
of the new branch office and new employees. However, it is not possible to
precisely estimate revenue increases, if any, at this time.
Statements concerning future performance, developments, or events,
concerning expectations for growth and market forecasts, and any other guidance
on future periods, constitute forward-looking statements which are subject to a
number of risks and uncertainties, including interest rate fluctuations and
government and regulatory actions which might cause actual results to differ
materially from stated expectations or estimates.
Steelton Bancorp expects increased expenses in the future as a result
of the establishment of the employee stock ownership plan, potential stock
benefit plans, and the adoption of the directors and executive retirement plans,
as well as increased costs associated with being a public company [such as]
periodic reporting, annual meeting materials, transfer agent, and professional
fees.
Provision for Income Taxes. Provision for income taxes decreased by
$60,000 from $79,000 in 1997 to $19,000 in 1998, due to reduced earnings and
deferred taxes.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information (Statement No. 131)," which changes the
way public companies report information about segments of their business and
requires them to report selected segment information in their quarterly reports
issued to stockholders. Among other things, Statement No. 131 requires public
companies to report (1) certain financial and descriptive information about its
reportable operating segments (as defined), and (2) certain enterprise-wide
financial information about products and services, geographic areas and major
customers. The required segment financial disclosures include a measure of
profit or loss, certain specific revenue and expense items, and total assets.
Statement No. 131 is effective for reporting by public companies in fiscal years
beginning after December 15, 1997 and would be adopted by the Association upon
completion of its conversion. Statement No. 131 is not expected to have a
significant impact on the Association's financial reporting.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." This statement addresses
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<PAGE>
disclosures only. The disclosure requirements of SFAS No. 132 are effective for
fiscal years beginning after December 15, 1997 and have had no impact on the
financial condition or operations of the Association.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities"
(Statement No. 133). Statement No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Statement No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Initial application of
this Statement should be as of the beginning of an entity's fiscal quarter, on
that date, hedging relationships must be designated anew and documented pursuant
to the provisions of this Statement. Earlier application of all of the
provisions of Statement No. 133 is encouraged, but it is permitted only as of
the beginning of any fiscal quarter that begins after issuance of this
Statement. This Statement should not be applied retroactively to financial
statements of prior periods. Statement No. 133 is not expected to have a
material impact on the Association's consolidated financial statement
presentations.
Year 2000 Readiness Disclosure
Rapid and accurate data processing is essential to the Association's
operations. Many computer programs that can only distinguish the final two
digits of the year entered (a common programming practice in prior years) are
expected to read entries for the year 2000 as the year 1900 or as zero and
incorrectly attempt to compute payment, interest, delinquency and other data.
The following discussion of the implications of the year 2000 problem
for the Association, contains numerous forward looking statements based on
inherently uncertain information. The cost of the project and the date on which
the Association plans to complete the internal year 2000 modifications are based
on management's best estimates, which are derived utilizing a number of
assumptions of future events including the continued availability of internal
and external resources, third party modifications and other factors. However,
there can be no guarantee that these statements will be achieved and actual
results could differ. Moreover, although management believes it will be able to
make the necessary modifications in advance, there can be no guarantee that
failure to modify the systems would not have a material adverse effect on the
Association or Steelton Bancorp.
The Association places a high degree of reliance on computer systems of
third parties, such as customers, suppliers, and other financial and
governmental institutions. Although the Association is assessing the readiness
of these third parties and preparing contingency plans, there can be no
guarantee that the failure of these third parties to modify their systems in
advance of December 31, 1999 would not have a material adverse affect on the
Association.
The Association's Year 2000 Plan (the "Plan") was presented to the
Board of Directors in December, 1997. The Plan was developed using the
guidelines outlined in the Federal Financial Institutions Examination Council's
"The Effect of Year 2000 on Computer Systems." The Year 2000 Committee is
responsible for the Plan with the Board of Directors receiving Year 2000
progress reports on no less than a quarterly basis. Our primary operating
systems, as provided by a third party service bureau ("External Provider"), have
been tested satisfactorily. The main hardware and software used to serve our
customer base and maintain the customer transaction histories and company
accounting records are currently operating on Year 2000 compliant systems.
52
<PAGE>
An OTS on-site examination was conducted in December, 1998 and based
upon the examination results, the Association was progressing satisfactorily
[toward] completing the Plan requirements.
The primary operating software for the Association is the External
Provider. The Association is maintaining ongoing contact with this vendor so
that modification of the software for Year 2000 readiness is a top priority. The
Association has performed significant testing of the software utilized by the
External Provider with successful results. The External Provider has represented
that the software currently being utilized for the Association's current
operations is Year 2000 compliant.
The Association has contacted all other material vendors and suppliers
regarding their Year 2000 readiness. Each of these third parties has delivered
written assurance to the Association that they expect to be Year 2000 compliant
prior to the Year 2000. The Association is in the process of contacting all
significant customers and non-information technology suppliers[, including]
utility systems [and] telephone systems, regarding their year 2000 state of
readiness.
The Association has identified three vendors and systems as mission
critical, each of which is 95% Year 2000 compliant. The only critical vendors
that have not confirmed that they are Year 2000 compliant are the utility
companies and some of our correspondent banks.
Testing has been completed on the most significant vendor applications,
except the utilities as noted above, however, final testing remains on a few
critical applications. This final testing, and development of contingency plans,
[has been] completed for all critical and important applications and services
[as of March 31], 1999. Most of the items identified as minor are services that
are performed by outside vendors. We have received communication from these
vendors indicating they will be in compliance for Year 2000 without any
disruption in service. Appropriate testing, if possible, and any related
contingency plans would be performed in the second and third quarter of 1999.
We are unable to test the Year 2000 readiness of our significant
suppliers of utilities. We are relying on the utility companies' internal
testing and representations to provide the required services that drive our data
systems.
Software provided by our External Provider is supported by a
contractual agreement that states the software will be Year 2000 compliant prior
to January 1, 2000. The contracts for our other systems and services do not
contain similar statements since they have longer terms and were not subject to
specific contract negotiation in the past few years.
All non-information technology providers that were identified have been
contacted. They have assured us that the Year 2000 will not be an issue or that
the issue will be satisfactorily resolved prior to the end of 1999.
If the Plan fails to significantly address the Year 2000 issues of the
Association, the following, among other things, could negatively affect the
Association:
(a) utility service companies may be unable to provide the
necessary service to drive our data systems or provide
sufficient sanitary conditions for our offices;
(b) our primary software provider could have a major malfunction
in its system or their service could be disrupted due to its
utility providers, or some combination of the two; or
53
<PAGE>
(c) the Association may have to transact its business manually.
The Association will attempt to monitor these uncertainties by
continuing to request an update on all critical and important vendors throughout
the remainder of 1999. If the Association identifies any concern related to any
critical or important vendor, the contingency plans will be implemented
immediately to assure continued service to the Association's customers.
Costs will be incurred to replace certain non-compliant software and
hardware. The Association does not anticipate that direct costs for renovating
or replacing non-compliant hardware and software will exceed $50,000, of which
approximately [$40,000] had been expended as of [March] 31, [1999]. No assurance
can be given that the Year 2000 Plan will be completed successfully by the Year
2000, in which event the Association could incur significant costs. If the
External Provider fails to maintain its system in compliant state or incurs
other obstacles prior to Year 2000, the Association would likely experience
significant data processing delays, mistakes or failures. These delays, mistakes
or failures could have a significant adverse impact on the consolidated
financial statements of the Association.
Successful and timely completion of the Year 2000 project is based on
management's best estimates derived from various assumptions of future events,
which are inherently uncertain, including the progress and results of the
External Provider, testing plans, and all vendors, suppliers and customer
readiness.
Despite the best efforts of management to address this issue, the vast
number of external entities that have direct and indirect business relationships
with the Association, such as customers, vendors, payment system providers and
other financial institution, makes it impossible to assure that a failure to
achieve compliance by one or more of these entities would not have material
adverse impact on the operations of the Association.
Impact of Inflation and Changing Prices
The consolidated financial statements and accompanying notes presented
elsewhere in this Prospectus have been prepared in accordance with GAAP which
generally requires the measurement of financial position and operating results
in terms of historical dollars without considering the change in the relative
purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of the Association's operations. As
a result, interest rates have a greater impact on the Association's performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or, to the same extent, as prices of
goods and services.
BUSINESS OF STEELTON BANCORP, INC.
Upon consummation of the conversion we will own all of the stock of the
Association. We have not engaged in any significant business to date. Prior to
the conversion, we will not transact any material business. We will invest our
initial capitalization as discussed in the "Use of Proceeds" section. In the
future, we may pursue other business activities, including mergers and
acquisitions, investment alternatives and diversification of operations. There
are, however, no current plans for [these] activities. Initially, we will not
maintain offices separate from those of the Association or employ any persons
other than the Association's officers. Officers of Steelton Bancorp will not be
separately compensated for [their] service.
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BUSINESS OF MECHANICS SAVINGS AND LOAN, FSA
General
The Association provides retail banking services, with an emphasis on
one- to four-family residential mortgage loans, home equity loans and lines of
credit and other consumer loans as well as certificates of deposit, checking
accounts and savings accounts. In addition, to a much lesser extent, the
Association originates commercial real estate loans within its market area. At
December 31, 1998, the Association had total assets, deposits, and equity of
$41.5 million, $28.3 million, and $3.7 million, respectively.
The Association attracts deposits from the general public and uses
these deposits primarily to originate loans and to purchase investment,
mortgage-backed and other securities. The principal sources of funds for the
Association's lending and investing activities are deposits, FHLB advances, the
repayment and maturity of loans and sale, maturity, and call of securities. The
principal source of income is interest on loans and investment and
mortgage-backed securities. The principal expense is interest paid on deposits
and FHLB advances.
Market Area and Competition
The Association operates from its main office in Steelton and one
branch office in Lower Swatara Township. Both locations are in Dauphin County
which is situated in central Pennsylvania. The Association's primary market area
is the southern half of Dauphin County. As neighboring cities of Harrisburg, the
state capital, both Steelton and Lower Swatara Township benefit from their
proximity to the state government, one of the largest employers in the state.
There are approximately 43,000 residents and 18,000 households within the
Association's primary market area.
Although once heavily dependent on the steel industry, central
Pennsylvania has undergone a successful restructuring over the past decade. The
economic base is now more diverse and includes the government, manufacturing,
tourism and transportation.
The Association faces strong competition in its primary market area for
the attraction of retail deposits and in the origination of loans. The
Association's most direct competition for deposits has historically come from
commercial banks, other thrift institutions, and credit unions operating in its
primary market area. The Association's competition for loans also comes from
banks, other thrifts, and credit unions, in addition to mortgage bankers and
brokers. The Association's market area can be characterized as a market with
moderate incomes and increasing wealth, representing an attractive market that
can be served by a community financial institution such as the Association.
Lending Activities
General. The Association primarily originates one- to four-family
residential real estate loans and, to a lesser extent consumer loans, commercial
real estate loans, construction loans and other loans. Management attributes the
Association's increasing focus on consumer loans to the attractive features of
these types of loans, including shorter maturities and greater interest yields
as compared to residential mortgage loans. The Association's commercial real
estate loans consist primarily of mortgage loans secured by multi-family
properties, commercial office/retail space, and space occupied by local
fraternal, church or service organizations. The Association's construction loans
consist of loans to local builders for the construction of single-family homes.
55
<PAGE>
Loan Portfolio Composition. The following table analyzes the
composition of the Association's loan portfolio by loan category at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------
1998 1997
------------------ -------------------
$ % $ %
------------------ -------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of Loans:
Real estate:
1-4 family ........................................ $23,537 83.52% $28,310 86.80%
Non-residential ................................... 764 2.72 838 2.57
Consumer loans:
Home equity and second mortgage loans ............. 3,234 11.47 2,969 9.10
Share loans ....................................... 277 0.98 363 1.11
Other(1) .......................................... 289 1.03 137 0.42
Commercial (business) loans ......................... 79 0.28 -- --
------- ------ ------ ------
Total loans ......................................... 28,181 100.00% 32,617 100.00%
------ ====== ------ ======
Less:
Loans in process(2) ............................... 51 138
Deferred loan origination fees and costs .......... 180 234
Allowance for loan losses ......................... 166 127
------ ------
Total loans, net .................................... $27,784 $32,118
====== ======
</TABLE>
- --------------------
(1) Consists of personal secured, auto secured, credit card loans, and premiums
on loans purchased.
(2) Relates to construction loans.
56
<PAGE>
Loan Maturity Schedule. The following table sets forth the maturity or
repricing of Association's loan portfolio at December 31, 1998. Demand loans,
loans having no stated maturity and overdrafts are shown as due in one year or
less.
<TABLE>
<CAPTION>
Home
1-4 Family Non Equity and
Real Estate Residential Second Other Commercial
Mortgage(1) Real Estate Mortgages Consumer Business Total
----------- ----------- --------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Non-performing ......... $ 223 $ 55 $ 44 $ -- $-- $ 322
Amounts Due:
Within 3 months ........ 600 -- 135 17 -- 752
3 months to 1 Year ..... 2,379 -- 137 117 -- 2,633
After 1 year:
1 to 3 years .......... 2,143 230 265 132 -- 2,770
3 to 5 years .......... 148 -- 254 140 79 621
5 to 10 years ......... 596 231 1,400 63 -- 2,290
10 to 20 years ......... 4,962 249 999 97 -- 6,307
Over 20 years .......... 12,486 -- -- -- -- 12,486
-------- ----- ------- ------- ----- -------
Total due after one year 20,335 710 2,918 432 79 24,474
-------- ----- ------- ------- ----- -------
Total amount due ....... 23,537 765 3,234 566 79 28,181
-------- ----- ------- ------- ------ --------
Less:
Allowance for loan loss. [(92) (4) ] (57) (5) (8) (166)
Loans in process ....... (51) -- -- -- -- (51)
Deferred loan fees ..... (180) -- -- -- -- (180)
-------- ---- ------- ------- ----- --------
Loans receivable, net .. [$23,214] $[761] $ 3,177 $ 561 $ 71 $ 27,784
========= ===== ======= ======= ======= ========
</TABLE>
(1) Includes mortgage-backed securities and construction loans.
<PAGE>
The following table sets forth the dollar amount of all loans due after
December 31, 1999, which have pre-determined interest rates and which have
floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In thousands)
One-to-four family $ 17,480 $ 5,591 $ 23,071
Non-residential real estate 537 173 710
Home Equity and Second
Mortgages 2,918 -- 2,918
Other consumer 431 -- 431
Commercial (Business) 79 -- 79
------- ------ -------
Total $ 21,445 $ 5,764 $ 27,209
======= ====== =======
57
<PAGE>
Residential Lending. The Association's primary lending activity
consists of the origination of one- to four-family residential mortgage loans
secured by property located in the Association's market area. The Association
generally originates single-family residential mortgage loans in amounts up to
80% of the lesser of the appraised value or selling price of the mortgaged
property without requiring private mortgage insurance. The Association will
originate a mortgage loan in an amount up to 97% of the lesser of the appraised
value or selling price of a mortgaged property, however, private mortgage
insurance for the borrower is required on the amount financed in excess of 80%.
For multi-family and commercial properties, the Association will originate a
mortgage loan in an amount up to 75% of the lesser of the appraised value or
selling price.
The Association originates both fixed rate and adjustable rate mortgage
loans. The majority of the mortgage loans are fixed rate loans with terms of 30
years, however the Association also originates a significant amount of loans
with terms of 15 years. Adjustable rate mortgage loans are tied to the 1-year
U.S. Treasury Security Index or the 3-year Treasury Security Index. The
Association has originated adjustable rate mortgage loans since 1988.
The Association generally makes its fixed rate mortgage loans to meet
the secondary mortgage market standards of the Federal Home Loan Mortgage
Corporation ("FHLMC") but also makes non-conforming loans. While the Association
is an approved FHLMC seller/servicer, it has not sold any mortgage loans in the
secondary mortgage market for the three-year period ended December 31, 1998. The
Association may in the future sell fixed rate mortgage loans in the secondary
market, as markets and the Association's own portfolio needs dictate.
Substantially all of the Association's residential mortgages include
"due on sale" clauses, which are provisions giving the Association the right to
declare a loan immediately payable if the borrower sells or otherwise transfers
an interest in the property to a third party.
Property appraisals on real estate securing the Association's
single-family residential loans are made by state certified and licensed
independent appraisers approved by the Board of Directors. Appraisals are
performed in accordance with applicable regulations and policies. The
Association obtains title insurance policies on all first mortgage real estate
loans originated. All property secured loans require fire and casualty
insurance. Loans made on property located in designated flood zones require
minimum flood insurance coverage based on the amount of the loan.
Construction Lending. The Association engages in lending including
loans to qualified borrowers for construction of single-family residential
properties in the Association's market area. Construction loans are made to
builders on a speculative basis and to owners for construction of their primary
residence on a construction/permanent basis. The Association is a limited lender
to local builders engaged in the construction of single-family homes. The
Association limits residential construction loans to not more than two units per
builder and has never had more than seven construction loans outstanding an any
on time. At December 31, 1998, the Association had three construction loans
outstanding.
Construction lending is generally considered to involve a higher degree
of credit risk than long term financing of residential properties. The
Association's risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction and the estimated cost of construction. If the estimate of
construction cost and the
58
<PAGE>
marketability of the property upon completion of the project prove to be
inaccurate, the Association may be compelled to advance additional funds to
complete the construction. Furthermore, if the final value of the completed
property is less than the estimated amount, the value of the property might not
be sufficient to assure the repayment of the loan.
Consumer Loans. As of December 31, 1998, consumer loans amounted to
$3.8 million or 13.6% of the Association's total loan portfolio and consisted
primarily of home equity loans and FHA Title I home improvement loans. To a
lesser extent, the Association originates personal loans (secured and
unsecured), savings secured loans (share loans), auto loans, and credit card
loans. Consumer loans are originated in the Association's market area and have
maturities of up to 15 years. For share loans, the Association will lend up to
90% of the account balance.
Consumer loans generally have shorter terms and higher interest rates
than residential loans. The consumer loan market can be helpful in improving the
spread between average loan yield and costs of funds and at the same time
improve the matching of the rate sensitive assets and liabilities.
Consumer loans entail greater risks than one- to four-family
residential mortgage loans, particularly consumer loans secured by rapidly
depreciable assets such as automobiles or loans that are unsecured. In [these]
cases, any repossessed collateral for a defaulted loan may not provide an
adequate source of repayment of the outstanding loan balance, since there is a
greater likelihood of damage, loss or depreciation of the underlying collateral.
Further, consumer loan collections are dependent on the borrower's continuing
financial stability and are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Even for consumer loans secured by real
estate the risk to the Association is greater than that inherent in the single
family loan portfolio in that the security for consumer loans is generally not
the first lien on the property and ultimate collection of amounts due may be
dependent on whether any value remains after collection by a holder with a
higher priority than the Association. Finally, the application of various
federal laws, including federal and state bankruptcy and insolvency laws, may
limit the amount which can be recovered on [consumer] loans in the event of a
default.
The underwriting standards employed by the Association for consumer
loans include a determination of the applicant's credit history and an
assessment of the applicant's ability to meet existing obligations and payments
on the proposed loan. The stability of the applicant's monthly income may be
determined by verification of gross monthly income from primary employment, and
additionally from any verifiable secondary income. Creditworthiness of the
applicant is of primary consideration; however, the underwriting process also
includes a comparison of the value of the collateral in relation to the proposed
loan amount.
Commercial Real Estate and Other Loans. The Association originates a
limited number of commercial real estate mortgage loans, including loans on
multi-family dwellings, retail/service space, and space occupied by local
fraternal, church or service organizations. The Association requires no less
than 25% downpayment or equity for commercial real estate mortgage loans. The
average loan size is approximately $150,000. Typically these loans are made with
adjustable rates of interest with terms of up to 20 years. Essentially all
originated commercial real estate loans are within the Association's market area
and all are within the Commonwealth of Pennsylvania. As of December 31, 1998,
the Association had commercial real estate loans, totalling $765,000 or 2.7% of
the Association's total loan portfolio. The Association's largest commercial
real estate loan had a balance of $239,000 on December 31, 1998 and was secured
by a multi-family apartment building located in the Association's market area.
59
<PAGE>
Commercial real estate loans, including multi-family loans, generally
are [considered] to entail significantly greater risk than that which is
involved with single family real estate lending. The repayment of these loans
typically is dependent on the successful operations and income stream of the
commercial real estate and the borrower. [These] risks can be significantly
affected by economic conditions. In addition, commercial real estate lending
generally requires substantially greater oversight efforts compared to
residential real estate lending.
Loans to One Borrower. Under federal law, savings institutions have,
subject to certain exemptions, lending limits to one borrower in an amount equal
to the greater of $500,000 or 15% of the institution's unimpaired capital and
surplus. As of December 31, 1998, the Association's largest aggregation of loans
to one borrower was $323,000 consisting of seven loans primarily secured by
single-family residential rental units in Middletown and Lititz, Pennsylvania,
which was within the Association's legal lending limit to one borrower of
$556,886 at [that] date. At December 31, 1998, the loans were current. The
increase in the capital of the Association from this offering will increase its
lending limit.
Loan Solicitation and Processing. The Association's customary sources
of mortgage loan applications include repeat customers, walk-ins, and referrals
from home builders and real estate brokers.
Upon receipt of any loan application from a prospective borrower, a
credit report and verifications are ordered to confirm specific information
relating to the loan applicant's employment, income and credit standing. An
appraisal of the real estate intended to secure the proposed loan is undertaken
by an independent fee appraiser. In connection with the loan approval process,
the Executive Committee of the Board of Directors analyzes the loan applications
and the property involved and approves all mortgage loans in amounts above
$30,000. The Executive Vice President, Mr. Harold E. Stremmel, and the Senior
Vice President, Mr. James S. Nelson, have authority to jointly approve mortgage
loans in amounts up to $30,000. The Executive Committee ratifies most loans
below $30,000 approved by Mr. Stremmel and Mr. Nelson. Individually, Messrs.
Stremmel and Nelson have the authority to approve consumer loans in amounts up
to $15,000. The Executive Committee approves consumer loans in amount above
$30,000. The full Board of Directors ratifies all loans.
Loan applicants are promptly notified of the decision of the
Association by a letter setting forth the terms and conditions of the decision.
If approved, these terms and conditions include the amount of the loan, interest
rate basis, amortization term, a brief description of real estate to be
mortgaged to the Association, tax escrow and the notice of requirement of
insurance coverage to be maintained to protect the Association's interest.
Loan Commitments. The Association gives written commitments to
prospective borrowers on all approved real estate loans. Generally, the
commitment requires acceptance within 30 days of the date of the issuance. The
total amount of the Association's commitments to extend credit as of December
31, 1998, was $275,000.
Loan Origination and Other Fees. In addition to interest earned on
loans, the Association receives loan origination and commitment fees for
originating or purchasing certain loans. The Association generally receives
between two and three points on mortgage loans originated.
60
<PAGE>
The Association also receives other fees and charges relating to
existing loans, which include late charges, and fees collected in connection
with a change in borrower or other loan modifications. These fees and charges
have not constituted a material source of income.
Non-performing Loans and Problem Assets
Collection Procedures. The Association's collection procedures provide
that when a loan is 10 to 20 days delinquent, the borrower is notified by mail.
If the loan becomes 45 days delinquent, the borrower is sent a written
delinquent notice requiring payment. If the delinquency continues, subsequent
efforts are made to contact the delinquent borrower. In certain instances, the
Association may modify the loan or grant a limited moratorium on loan payments
to enable the borrower to reorganize his financial affairs and the Association
attempts to work with the borrower to establish a repayment schedule to cure the
delinquency. As to mortgage loans, if the borrower is unable to cure the
delinquency or reach a payment agreement with the Association within 90 days,
the Association will institute foreclosure actions. If a foreclosure action is
taken and the loan is not reinstated, paid in full or refinanced, the property
is sold at judicial sale at which the Association may be the buyer if there are
no adequate offers to satisfy the debt. Any property acquired as the result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
("REO") until it is sold or otherwise disposed of by the Association. When REO
is acquired, it is recorded at the lower of the unpaid principal balance of the
related loan or its fair market value less estimated selling costs. The initial
writedown of the property is charged to the allowance for loan losses.
Loans are reviewed on a regular basis and are placed on a non-accrual
status when they are more than 90 days delinquent. Loans may be placed on a
non-accrual status at any time if, in the opinion of management, the collection
of additional interest is doubtful. Interest accrued and unpaid at the time a
loan is placed on non-accrual status is charged against interest income.
Subsequent payments are either applied to the outstanding principal balance or
recorded as interest income, depending on the assessment of the ultimate
collectibility of the loan. At December 31, 1998, the Association had $322,000
of loans that were held on a non-accrual basis.
61
<PAGE>
Non-Performing Assets. The following table provides information
regarding the Association's non-performing loans and other non-performing assets
as of the end of each of the last three fiscal years. As of each of the dates
indicated, the Association did not have any troubled debt restructurings within
the meaning of Statement of Financial Accounting Standards No. 114.
<TABLE>
<CAPTION>
At December 31,
----------------------------
1998 1997 1996
---- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
1-4 family residential real estate ................... $223 $ 236 $ --
Non-residential ...................................... 55 292 --
Non-mortgage loans:
Home equity and second mortgages ..................... 44 7 --
Other consumer ....................................... -- 8 --
Commercial (business) ................................ -- -- --
---- -------- --------
Total .................................................. $322 $ 543 $ --
==== ======== ========
Accruing loans which are contractually past
due 90 days or more:
Mortgage loans:
1-4 family residential real estate ................... $-- $ 42 $ 65
Non-residential ...................................... -- -- 57
Non-mortgage loans:
Home equity and second mortgages ..................... -- -- --
Other consumer ....................................... -- 6 58
---- -------- --------
Total .................................................. $-- $ 48 $ 180
==== ======== ========
Total non-accrual and accrual loans .................... $322 $ 591 $ 180
==== ======== ========
Real estate owned ...................................... $-- $ -- $ 27
==== ======== ========
Other non-performing assets ............................ $-- $ -- $ --
==== ======== ========
Total non-performing assets ............................ $322 $ 591 $ 207
==== ======== ========
Total non-accrual and accrual loans to net loans ....... 1.16% 1.84% 0.65%
==== ======== ========
Total non-accrual and accrual loans to total assets .... 0.78% 1.59% 0.49%
==== ======== ========
Total non-performing assets to total assets ............ 0.78% 1.59% 0.57%
==== ======== ========
</TABLE>
During the year ended December 31, 1998, approximately $7,000 of
interest would have been recorded on loans accounted for on a non-accrual basis
if [those] loans had been current according to the original loan agreements for
the entire period. These amounts were not included in the Association's interest
income for the respective periods. The amount of interest income on loans
accounted for on a non-accrual basis that was included in income during the same
periods was insignificant during December 31, 1998.
Classified Assets. Management, in compliance with OTS guidelines, has
instituted an internal loan review program, whereby loans are classified as
special mention, substandard, doubtful or loss. When a loan is classified as
substandard or doubtful, management is required to establish a valuation reserve
for loan losses in an amount [considered] prudent [by management]. When
management
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<PAGE>
classifies a loan as a loss asset, a reserve equal to 100% of the loan balance
is required to be established or the loan is to be charged-off. This allowance
for loan losses is composed of an allowance for both inherent risk associated
with lending activities and particular problem assets.
An asset is considered "substandard" if it is inadequately protected by
the paying capacity and net worth of the obligor or the collateral pledged, if
any. Substandard assets include those characterized by the distinct possibility
that the insured institution will sustain some loss if the deficiencies are not
corrected. Assets classified as doubtful have all of the weaknesses inherent in
those classified substandard, with the added characteristic that the weaknesses
present make collection or liquidation in full, highly questionable and
improbable, on the basis of currently existing facts, conditions, and values.
Assets classified as loss are those considered uncollectible and of [so] little
value that their continuance as assets without the establishment of a loss
reserve is not warranted. Assets which do not currently expose the insured
institution to a sufficient degree of risk to warrant classification in one of
the aforementioned categories but possess credit deficiencies or potential
weaknesses are required to be designated special mention by management.
Management's evaluation of the classification of assets and the
adequacy of the allowance for loan losses is reviewed by the Board on a regular
basis and by the regulatory agencies as part of their examination process.
At
December 31,
1998
------------
(In thousands)
Special mention.................... $ --
Substandard........................ 291
Doubtful........................... --
Loss............................... --
--
----
Total............................ $ 291
====
Allowance for Loan Losses. The Association segregates the loan
portfolio for loan losses into the following broad categories: residential real
estate, commercial real estate, and consumer loans. The Association provides for
a general allowance for losses inherent in the portfolio by the above
categories, which consists of two components. General loss percentages are
calculated based upon historical analyses and other factors. A supplemental
portion of the allowance is calculated for inherent losses which probably exist
as of the evaluation date even though they might not have been identified by the
more objective processes used. This is due to the risk of error and/or inherent
imprecision in the process. This portion of the allowance is particularly
subjective and requires judgments based on qualitative factors which do not lend
themselves to exact mathematical calculations such as:
o trends in delinquencies and nonaccruals;
o trends in volume, terms and portfolio mix;
o new credit products;
o changes in lending policies and procedures;
o changes in the outlook for the local, regional and national economy;
and
o peer group comparisons.
63
<PAGE>
At least quarterly, the Association's management evaluates the need to
establish reserves against losses on loans and other assets based on estimated
losses on specific loans and on any real estate held for sale or investment when
a finding is made that a loss is estimable and probable. [This] evaluation
includes a review of all loans for which full collectibility may not be
reasonably assured and considers, among other matters: (1) the estimated market
value of the underlying collateral of problem loans, (2) prior loss experience,
(3) economic conditions and (4) overall portfolio quality.
Provisions for losses are charged against earnings in the period they
are established. The Association had $166,000 in allowances for loan losses at
December 31, 1998.
While the Association believes it has established its existing
allowance for loan losses in accordance with GAAP, there can be no assurance
that regulators, in reviewing the Association's loan portfolio, will not request
the Association to significantly increase its allowance for loan losses, or that
general economic conditions, a deteriorating real estate market, or other
factors will not cause the Association to significantly increase its allowance
for loans losses, [which would] negatively [affect] the Association's financial
condition and earnings.
In making loans, the Association recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan and, in the case of a secured loan, the quality of the security for the
loan.
It is the Association's policy to review its loan portfolio, in
accordance with regulatory classification procedures, on at least a quarterly
basis. Additionally, the Association maintains a program of reviewing loan
applications prior to making the loan and immediately after loans are made in an
effort to maintain loan quality.
64
<PAGE>
The following table sets forth information with respect to the
Association's allowance for loan losses at the dates indicated:
At December 31,
--------------------
1998 1997
--------- ---------
(Dollars in thousands)
Total loans outstanding (net) ......................... $27,784 $32,118
======= =======
Average loans outstanding ............................. 29,889 32,131
======= =======
Allowance balances (at beginning of period) ........... 126 119
Provision (credit):
1-4 family residential .............................. [(4)] --
Non-residential real estate ......................... [4 --
Consumer ............................................ 42 12
Commercial (business)] .............................. 8 --
Net Charge-offs (recoveries):
1-4 family residential .............................. -- 4
Non-residential real estate ......................... -- --
Consumer ............................................ 10 1
Commercial (business) ............................... -- --
------- -------
Allowance balance (at end of period) .................. $ 166 $ 126
======= =======
Allowance for loan losses as a percent
of total loans outstanding .......................... .60% .39%
Net loans charged off as a percent
of average loans outstanding ........................ .04% --%
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of the Association's allowance for loan losses by loan category
and the percent of loans in each category to total loans receivable, net, at the
dates indicated. The portion of the loan loss allowance allocated to each loan
category does not represent the total available for losses which may occur
within the loan category since the total loan loss allowance is a valuation
reserve applicable to the entire loan portfolio.
At December 31,
------------------------------------------------
1998 1997
Percent of Percent of
Loans to Loans to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in thousands)
At end of period allocated
to:
1-4 family [$ 92 55.42%] $ 96 86.80%
Non-residential real estate [4 2.41] -- 2.57
Consumer [62 37.35] 30 10.63
Commercial (business) [8 4.82] -- --
----- ------ ---- -------
Total allowance $166 100.00% $127 100.00%
===== ====== ==== =======
65
<PAGE>
Investment Activities
General. Federally chartered savings associations have the authority to
invest in various types of liquid assets, including United States Treasury
obligations, securities of various Federal agencies (including securities
collateralized by mortgages), certain certificates of deposits of insured banks
and savings institutions, municipal securities, corporate debt securities and
loans to other banking institutions.
The Association maintains liquid assets which may be invested in
specified short-term securities and certain other investments. See "Regulation -
Regulation of the Association - Federal Home Loan Association System" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources". Liquidity levels may be increased
or decreased depending upon the yields on investment alternatives and upon
management's judgment as to the attractiveness of the yields then available in
relation to other opportunities and its expectation of future yield levels, as
well as management's projections as to the short-term demand for funds to be
used in the Association's loan origination and other activities. The Association
maintains an investment securities portfolio and a mortgage-backed securities
portfolio as part of its investment portfolio. At December 31, 1998, the
Association had an investment securities portfolio of $2.1 million (5.0% of
total assets) and a mortgage-backed securities portfolio of $7.1 million (17.2%
of total assets). At December 31, 1998, the market value of the investment
securities portfolio was $2.1 million and the market value of the
mortgage-backed securities portfolio was $7.2 million. See Note 2 of the
consolidated financial statements.
Investment Policies. The investment policy of the Association, which is
established by the Board of Directors, is designed to foster earnings and
liquidity within prudent interest rate risk guidelines, while complementing the
Association's lending activities. The policy provides for available for sale,
held to maturity and trading classifications. However, the Association does not
currently use a trading classification and does not anticipate doing so in the
future. The policy permits investments in high credit quality instruments with
diversified cash flows while permitting the Association to maximize total return
within the guidelines set forth in the Association's interest rate risk and
liquidity management policy. Permitted investments include but are not limited
to U. S. government obligations, government agency or government-sponsored
agency obligations, state, county and municipal obligations, mortgage backed
securities and collateralized mortgage obligations guaranteed by government or
government-sponsored agencies, investment grade corporate debt securities, and
commercial paper. The Association also invests in FHLB overnight deposits and
federal funds, but these instruments are not considered part of the investment
portfolio.
The policy also includes several specific guidelines and restrictions
to insure adherence with safe and sound activities. The policy prohibits
investments in high risk mortgage derivative products, as defined within its
policy, without prior approval from the Board of Directors. Management must
demonstrate the business advantage of [those types of] investments. In addition,
the policy limits the maximum amount of the investment in a specific investment
category. The Association does not participate in hedging programs, interest
rate swaps, or other activities involving the use of off-balance sheet
derivative financial instruments. Further, the Association does not invest in
securities which are not rated investment grade.
All transactions are reported to the Board of Directors monthly, with
the entire portfolio reported quarterly, including market values and unrealized
gains (losses).
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<PAGE>
Investment Securities. The Association maintains a portfolio of
investment securities, classified as either available for sale or held to
maturity, to enhance total return on investments. At December 31, 1998, all of
the Association's investment securities consisted of obligations of state and
local governments and U.S. Government Agency obligations with varying
characteristics as to rate, maturity and call provisions. Callable agency
securities, representing 64% of the Association's U.S. Government Agency
obligations, totalling approximately $700,000 at December 31, 1998, could reduce
the Association's investment yield if these securities are called prior to
maturity. The Association has recently invested in obligations of state and
local governments as part of the Association's efforts to lower its tax burden.
Mortgage-backed Securities. The Association invests in mortgage-backed
securities to provide earnings, liquidity, cash flows, and diversification to
the Associations' overall balance sheet. These mortgage-backed securities are
classified as either available for sale or held to maturity. These securities
are participation certificates issued and guaranteed by the Government National
Mortgage Association ("GNMA"), the FNMA and the Federal Home Loan Mortgage
Corporation ("FHLMC") and secured by interest in pools of mortgages.
Mortgage-backed securities typically represent a participation interest in a
pool of single-family or multi-family mortgages, although the Association
focuses its investments on mortgage-backed securities secured by single-family
mortgages.
Expected maturities will differ from contractual maturities due to
scheduled repayments and because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or adjustable
rate mortgage loans. Mortgage-backed securities are generally referred to as
mortgage participation certificates or pass-through certificates. The interest
rate risk characteristics of the underlying pool of mortgages[, including]
fixed-rate or adjustable-rate[,] and the prepayment risk, are passed on to the
certificate holder. The life of a mortgage-backed pass-through security is equal
to the life of the underlying mortgages.
Collateralized Mortgage Obligations ("CMOs"). The Association also
invests in CMOs, issued or sponsored by FNMA and FHLMC which totalled $304,000
at December 31, 1998. CMOs are a type of debt security that aggregates pools of
mortgages and mortgage-backed securities and creates different classes of CMO
securities with varying maturities and amortization schedules as well as a
residual interest with each class having different risk characteristics. The
cash flows from the underlying collateral are usually divided into "tranches" or
classes whereby tranches have descending priorities with respect to the
distribution of principal and interest repayment of the underlying mortgages and
mortgage-backed securities as opposed to pass through mortgage-backed securities
where cash flows are distributed pro rata to all security holders. Unlike
mortgage-backed securities from which cash flow is received and prepayment risk
is shared pro rata by all securities holders, cash flows from the mortgages and
mortgage-backed securities underlying CMOs are paid in accordance with a
predetermined priority to investors holding various tranches of [the] securities
or obligations. A particular tranche or class may carry prepayment risk which
may be different from that of the underlying collateral and other tranches.
Investing in CMOs allows the Association to moderate reinvestment risk resulting
from unexpected prepayment activity associated with conventional mortgage-backed
securities. Management believes these securities represent attractive
alternatives
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relative to other investments due to the wide variety of maturity,
repayment and interest rate options available.
Other Securities. Other securities used by the Association, but not
necessarily included in the investment portfolio, consist of equity securities,
interest-bearing deposits and federal funds sold. Equity securities owned
consist of a $564,600 investment in FHLB of Pittsburgh common stock (this amount
is not shown in the securities portfolio). As a member of the FHLB of
Pittsburgh, ownership of FHLB of Pittsburgh common shares is required. The
remaining securities provide diversification and complement the Association's
overall investment strategy.
The following table sets forth the carrying value of the Association's
investment and mortgage-backed securities portfolio at the dates indicated.
At December 31,
------------------------
1998 1997
---- ----
(In thousands)
Securities Held to Maturity:
U.S. Government and Federal Agencies $ 500 $ 497
Mortgage-backed Securities 3,405 1,414
Obligations of State and Local Governments 1,295 460
-------- ------
Total Securities Held to Maturity 5,200 2,371
-------- ------
Securities Available for Sale (at fair value):
U.S. Government and Federal Agencies 200 --
Mortgage-backed Securities 3,705 --
Obligations of State and Local Governments 99 --
-------- -------
Total Securities Available for Sale 4,004 --
-------- -------
Total Investment and
Mortgage-backed Securities $ 9,204 $ 2,371
======= =======
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<PAGE>
The following table sets forth certain information regarding the
carrying values, weighted average yields and maturities of the Association's
investment and mortgage-backed securities portfolio at December 31, 1998.
<TABLE>
<CAPTION>
At December 31, 1998
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Securities
---------------- ----------------- ------------------- ------------------- ---------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
Federal Agencies ....... $ -- --% $ 250 4.15% $ 200 6.02% $ 250 7.00% $ 700 4.58% $ 682
Mortgage-backed securities -- -- -- -- -- -- 7,110 6.41 7,110 6.41 7,175
Obligations of State and
local governments ...... -- -- 382 3.93 415 4.30 597 5.18 1,394 5.70 1,407
------- --- ------ ---- ------ ---- ------ ---- ------ ---- ------
Total .................. $ -- --% $ 632 4.02% $ 615 4.86% $7,957 6.33% $9,204 6.08% $9,264
======= === ====== ==== ====== ==== ====== ==== ====== ==== ======
</TABLE>
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<PAGE>
Sources of Funds
General. Deposits are the major source of the Association's funds for
lending and other investment purposes. Borrowings (principally from the FHLB)
are used to supplement the amount of funds for lending and investment. In
addition to deposits and borrowings, the Association derives funds from loan and
mortgage-backed securities principal repayments, and proceeds from the maturity,
call and sale of mortgage-backed securities and investment securities. Loan and
mortgage- backed securities payments are a relatively stable source of funds,
while deposit inflows are significantly influenced by general interest rates and
money market conditions.
Deposits. The Association offers a variety of deposit accounts. Over
the past year, demand deposits have increased significantly. The increase in
non-interest bearing checking accounts is attributed to the fact that the
Association, unlike local competitors, does not require a minimum balance on
this type of account. A majority of deposits are in fixed-term, market-rate
certificate accounts. Deposit account terms vary, primarily as to the required
minimum balance amount, the amount of time that the funds must remain on deposit
and the applicable interest rate.
The Association's current deposit products include certificates of
deposit accounts ranging in terms from 90 days to ten years as well as checking,
savings, NOW, money market and club accounts. Individual retirement accounts
(IRAs) are included in these accounts, depending on the customers investment
preference.
Deposits are obtained primarily from residents of Dauphin County. The
Association attracts deposit accounts by offering outstanding service,
competitive interest rates, and convenient locations and service hours. The
Association uses traditional methods of advertising to attract new customers and
deposits, including print media advertising, billboards, radio and direct mail.
The Association does not utilize the services of deposit brokers and management
believes that an insignificant number of deposit accounts are held by
non-residents of Pennsylvania.
The Association pays interest on its deposits which are competitive in
its market. Interest rates on deposits are set weekly by senior management,
based upon a number of factors, including: (1) the Association's need for funds
based on loan demand, current maturities of deposits and other cash flow needs;
(2) a current survey of a selected group of competitors' rates for similar
products; (3) the Association's current cost of funds and its yield on assets;
and (4) the alternate cost of funds on a wholesale basis, in particular the cost
of advances from the FHLB of Pittsburgh.
Beginning in the 1980's the Association offered IRA accounts that
originally offered interest rates of 8 percent. Approximately $4.0 million of
these 8% IRAs were issued. The Association has since early 1998 reduced the
interest rate offered on these accounts as the accounts individually mature. At
December 31, 1998, $1.8 million of these deposits still had a rate of 8% and a
remaining average maturity of less than 6 months. At December 31, 1998, however,
the Association still had $2.2 million of these IRAs with a weighted average
yield of 6.93% and a weighted average maturity of 49 months, which is still
above market rates.
From time to time, the Association has offered depositors incentives
for making deposits into its accounts. These offers have been made on a limited
basis for a limited amount of time. In 1997, when the Association opened a new
branch in Woodridge, the Association offered premiums for new deposits for a
period of three months. The Association does not currently offer any premiums
and has no plans to do so in the near future.
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Because of the large percentage of certificates of deposit in the
deposit portfolio (72.2% at December 31, 1998), the Association's liquidity
could be reduced if a significant amount of certificates of deposit, maturing
within a short period of time, were not renewed. A significant portion of the
certificates of deposit remain with the Association after they mature and the
Association believes that this will continue. However, the need to retain these
time deposits could result in an increase in the Association's cost of funds.
Deposits in the Association as of December 31, 1998, were represented
by various types of savings programs described [below.]
<TABLE>
<CAPTION>
Minimum Balance at Percentage of
Category Term Interest Rate(1) Balance Amount December 31, 1998 Total Deposits
- -------- ---- ---------------- -------------- ----------------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Checking Accounts None --% $ -- $ 1,096 3.88%
NOW Accounts None 1.50 300 1,194 4.22
Savings Accounts None 2.67 100 3,960 14.01
Money Market Accounts None 2.47 2,500 1,606 5.68
Certificates of Deposit(2):
Fixed Term, Fixed Rate 3 Months 3.57 1,000 272 0.96
Fixed Term, Fixed Rate 6 Months 4.62 1,000 1,424 5.04
Fixed Term, Fixed Rate 9 Months 4.21 500 848 3.00
Fixed Term, Fixed Rate 12 Months 4.95 500 4,347 15.38
Fixed Term, Fixed Rate 24 Months 6.29 500 4,938 17.47
Fixed Term, Fixed Rate 36 Months 5.72 500 4,623 16.35
Fixed Term, Fixed Rate 48 Months 6.36 500 21 0.07
Fixed Term, Fixed Rate 60 Months 6.66 500 3,184 11.26
Fixed Term, Fixed Rate 120 Months 5.87 500 759 2.68
------ ------
Total $28,272 100.00%
====== ======
</TABLE>
---------------
(1) Weighted average rate as of December 31, 1998.
(2) Includes jumbo certificates of deposit of $1,934,000. See table of
maturities of certificates of deposit of [$100,000 or more.]
The following table sets forth the time deposits in the Association
classified by interest rate as of the dates indicated.
At December 31,
----------------------------
1998 1997
---- ----
(In thousands)
Interest Rate
3.99% or less $ 176 $ 671
4.00-4.99% 4,369 3,118
5.00-5.99% 8,154 5,774
6.00-6.99% 3,655 3,196
7.00-7.99% 2,076 545
8.00% or more 1,986 4,373
----- -----
Total $ 20,416 $17,677
======== ======
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<PAGE>
The following table sets forth the amount and maturities of time
deposits at December 31, 1998.
<TABLE>
<CAPTION>
Amount Due
--------------------------------------------------------------------------
After
December 31, December 31, December 31, December 31,
Interest Rate 1999 2000 2001 2002 Total
- ------------- ---- ---- ---- ----- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
3.99% or less $ 177 $ -- $ -- $ -- $ 177
4.00-4.99% 3,780 425 164 -- 4,369
5.00-5.99% 4,910 1,261 989 994 8,154
6.00-6.99% 1,226 2,119 26 284 3,655
7.00-7.99% 11 114 -- 1,951 2,076
8.00% or more 1,768 69 -- 148 1,985
- -----
Total $20,416
=======
</TABLE>
The following table shows the amount of the Association's certificates
of deposit of $100,000 or more by time remaining until maturity as of December
31, 1998.
Certificates
Maturity Period of Deposits
- --------------- -----------
(In thousands)
Three months or less $ 300
Over three through six months 220
Over six through twelve months 714
Over twelve months 700
------
$1,934
======
The following table sets forth the savings activities of the
Association for the periods indicated:
Years Ended December 31,
----------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Net increase (decrease) before interest credited $4,809 $ 557 $ (89)
Interest credited (891) (827) (765)
----- ----- ------
Net increase (decrease) in savings deposits $3,918 $ (270) $(854)
===== ==== ====
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<PAGE>
Borrowings. Deposits are the primary source of funds of the
Association's lending and investment activities and for its general business
purposes. The Association, as the need arises or in order to take advantage of
funding opportunities, borrows funds in the form of advances from the FHLB to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. Advances from the FHLB are typically secured by the Association's
stock in the FHLB and a portion of the Association's residential mortgage loans
and may be secured by other assets, mainly securities which are obligations of
or guaranteed by the U.S. Government. The Association typically has funded loan
demand and investment opportunities out of current loan and mortgage-backed
securities repayments, investment maturities and new deposits. However, the
Association recently has utilized FHLB advances to supplement these sources and
as a match against certain assets in order to better manage interest rate risk.
See Note 8 to Notes to Consolidated Financial Statements.
Subsidiary Activity
The Association is permitted to invest its assets in the capital stock
of, or originate secured or unsecured loans to, subsidiary corporations. The
Association's only subsidiary is Baldwin Service Corporation. The sole purpose
of Baldwin Service Corporation is to hold a six-unit apartment house that nearly
adjoins the Association's main office location. Baldwin Service Corporation has
owned the property since 1988. The Association expects to use the land at the
apartment location for future expansion of that office, however, no timetable
for that expansion has been developed. Currently, Baldwin Service Corporation
leases the apartments.
Personnel
As of December 31, 1998, the Association had 14 full-time employees and
4 part-time employees. The employees are not represented by a collective
bargaining unit. The Association believes its relationship with its employees to
be satisfactory.
Competition
The Association faces strong competition in its attraction of deposits,
which are its primary source of funds for lending, and in the origination of
real estate, commercial and consumer loans. The Association's competition for
deposits and loans historically has come from local and regional commercial
banks and credit unions located in the Association's market area. The
Association also competes with mortgage banking companies for real estate loans,
and commercial banks and savings institutions for consumer loans; and faces
competition for investor funds from mutual fund accounts, short-term money funds
and corporate and government securities. The Association's primary market area
is the southern half of Dauphin County, Pennsylvania.
The Association competes for loans by charging competitive interest
rates and loan fees, and emphasizing outstanding service for its customers. The
Association offers consumer banking services such as checking and savings
accounts, certificates of deposit, retirement accounts, overdraft protection,
and consumer and mortgage loans. The Association provides drive-up facilities at
its Woodridge branch office and MAC machines at both its main office and branch
office. The Association also offers a debit card program. The emphasis on
outstanding services differentiates the Association in its competition for
deposits. The Association offers overall market rates on deposits. Although the
Association has seen an increase in new accounts recently, many of the regional
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<PAGE>
commercial banking competitors of the Association offer a much broader array of
services and products.
Properties and Equipment
The Association's main office is located at 51 South Front Street in
Steelton, Pennsylvania. The Association also conducts its business through a
branch office in Middletown, Pennsylvania, in Lower Swatara Township. The
following table sets forth the location of both of the Association's offices,
the year the office was opened and the net book value of both offices and their
related equipment.
Net Book
Value at
Year Facility Leased or December 31,
Building/Office Location Opened Owned 1998
- ------------------------ ------ ----- ----
Main Office, Steelton 1980 Owned $ 185,000
Branch Office, Middletown 1997 Owned 748,000
Legal Proceedings
The Association, from time to time, is a party to routine litigation,
which arises in the normal course of business, such as claims to enforce liens,
condemnation proceedings on properties in which the Association holds security
interests, claims involving the making and servicing of real property loans, and
other issues incident to the business of the Association. There were no lawsuits
pending or known to be contemplated against the Association at December 31, 1998
that would have a material effect on our operations or income.
REGULATION
Set forth below is a brief description of certain laws which relate to
the regulation of the Association and Steelton Bancorp. The description does not
purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations.
Regulation of the Association
General. As a federally chartered, SAIF-insured savings association,
the Association is subject to extensive regulation by the OTS and the FDIC.
Lending activities and other investments must comply with federal statutory and
regulatory requirements. The Association is also subject to reserve requirements
of the Federal Reserve System. Federal regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the SAIF and members. The regulatory
structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes.
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<PAGE>
The OTS regularly examines the Association and prepares reports for
consideration by the Association's Board of Directors on deficiencies, if any,
found in the Association's operations. The Association's relationship with its
members and borrowers is also regulated by federal law, especially in matters
[such] as the ownership of savings accounts and the form and content of the
Association's mortgage documents.
The Association must file reports with the OTS and the FDIC concerning
its activities and financial condition, and must obtain regulatory approvals
prior to entering into certain transactions such as mergers with or acquisitions
of other financial institutions. [Changes] in regulations, whether by the OTS,
the FDIC or the United States Congress, could have a material adverse impact on
Steelton Bancorp and the Association, and their operations.
Insurance of Deposit Accounts. The deposit accounts held by the
Association are insured by the SAIF to a maximum of $100,000 for each insured
member (as defined by law and regulation). Insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in unsafe
or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator.
As a member of the SAIF, the Association paid an insurance premium to
the FDIC equal to a minimum of 0.23% of its total deposits during 1996 and prior
years. The FDIC also maintains another insurance fund, the Association Insurance
Fund ("BIF"), which primarily insures commercial bank deposits. In 1996, the
annual insurance premium for most BIF members was lowered to $2,000. The lower
insurance premiums for BIF members placed SAIF members at a competitive
disadvantage to BIF members.
Effective December 31, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Association of
approximately 0.657% of deposits held on March 31, 1995. Beginning January 1,
1997, the deposit insurance assessment for most SAIF members was reduced to
0.064% of deposits on an annual basis through the end of 1999. During this same
period, BIF members will be assessed approximately 0.013% of deposits. After
1999, assessments for BIF and SAIF members should be the same. It is expected
that these continuing assessments for both SAIF and BIF members will be used to
repay outstanding Financing Corporation bond obligations. As a result of these
changes, beginning January 1, 1997, the rate of deposit insurance assessed the
Association declined by approximately 70%.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) core capital equal to at least 3% of total
adjusted assets, and (3) risk-based capital equal to 8% of total risk-weighted
assets. The Association's capital ratios are set forth under "Historical and Pro
Forma Capital Compliance."
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), less certain mortgage servicing rights and
less certain investments. Core capital is defined as common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries, certain
nonwithdrawable
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<PAGE>
accounts and pledged deposits of mutual savings associations and qualifying
supervisory goodwill, less nonqualifying intangible assets, certain mortgage
servicing rights and certain investments.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock, and the portion of the allowance for loan
losses not designated for specific loan losses. The portion of the allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is
limited to 100% of core capital. A savings association must calculate its
risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans, and other assets.
The OTS has adopted a rule requiring a deduction from capital for
institutions with certain levels of interest rate risk. The OTS calculates the
sensitivity of an institution's net portfolio value based on data submitted by
the institution in a schedule to its quarterly Thrift Financial Report and using
the interest rate risk measurement model adopted by the OTS. The amount of the
interest rate risk component, if any, to be deducted from an institution's total
capital will be based on the institution's Thrift Financial Report filed two
quarters earlier. Federal savings institutions with less than $300 million in
assets and a risk-based capital ratio above 12% are generally exempt from filing
the interest rate risk schedule with their Thrift Financial Reports. However,
the OTS may require any exempt institution that it determines may have a high
level of interest rate risk exposure to file [this] schedule on a quarterly
basis and may be subject to an additional capital requirement based upon its
level of interest rate risk as compared to its peers.
Dividend and Other Capital Distribution Limitations. The OTS imposes
various restrictions or requirements on the ability of savings institutions to
make capital distributions, including [cash dividends.
]
[A savings association that is a subsidiary of a savings and loan
holding company, such as the Association after the conversion, must file an
application or a notice with the OTS at least 30 days before making a capital
distribution. Savings associations are not required application for permission]
to make a capital distribution [if the following conditions are met: (1) they
are eligible for expedited treatment under OTS regulations, (2) they would
remain adequately capitalized after the distribution, (3) the annual amount of
capital distribution does not exceed net income for that year to date added to
retained net income for the two preceding years, and (4) the capital
distribution would not violate any agreements between the OTS and the savings
association or any OTS regulations. Any other situation would require a notice
to the OTS].[
]In addition, the OTS could prohibit a proposed capital distribution by
any institution, which would otherwise be permitted by the regulation, if the
OTS determines that [the] distribution would constitute an unsafe or unsound
practice.
A federal savings institution is prohibited from making a capital
distribution if, after making the distribution, the savings institution would be
[unable to] meet any one of its minimum
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<PAGE>
regulatory capital requirements. Further, a federal savings institution cannot
distribute regulatory capital that is needed for its liquidation account.
Qualified Thrift Lender Test. Federal savings institutions must meet a
qualified thrift lender ("QTL") test or they become subject to certain operating
restrictions. If we maintain an appropriate level of qualified thrift
investments ("QTIs") (primarily residential mortgages and related investments,
including certain mortgage-related securities) and otherwise qualify as a QTL,
we will have full borrowing privileges from the FHLB of Pittsburgh. The required
percentage of QTIs is 65% of portfolio assets (defined as all assets minus
intangible assets, property used by the institution in conducting its business
and liquid assets equal to 10% of total assets). Certain assets are subject to a
percentage limitation of 20% of portfolio assets. In addition, federal savings
institutions may include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs.
Compliance with the QTL test is determined on a monthly basis in nine out of
every twelve months.
Transactions With Affiliates. Generally, federal banking law requires
that transactions between a savings institution or its subsidiaries and its
affiliates must be on terms as favorable to the savings institution as
comparable transactions with non-affiliates. In addition, certain types of these
transactions are restricted to an aggregate percentage of the savings
institution's capital. Collateral in specified amounts must usually be provided
by affiliates in order to receive loans from the savings institution. In
addition, a savings institution may not extend credit to any affiliate engaged
in activities not permissible for a bank holding company or acquire the
securities of any affiliate that is not a subsidiary. The OTS has the discretion
to treat subsidiaries of savings institution as affiliates on a case-by-case
basis.
Liquidity Requirements. All federal savings institutions are required
to maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. The liquidity requirement
may vary from time to time (between 4% and 10%) depending upon economic
conditions and savings flows of all savings institutions. Monetary penalties may
be imposed upon institutions for violations of liquidity requirements.
Federal Home Loan Bank System. We are a member of the FHLB of
Pittsburgh, which is one of 12 regional FHLBs. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from funds deposited by savings institutions and proceeds derived from the sale
of consolidated obligations of the FHLB System. It makes loans to members in
accordance with policies and procedures established by the Board of Directors of
the FHLB.
As a member, we are required to purchase and maintain stock in the FHLB
of Pittsburgh in an amount equal to at least 1% of our aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. We are in compliance with this requirement. The FHLB
imposes various limitations on advances such as limiting the amount of certain
types of real estate related collateral to 30% of a member's capital and
limiting total advances to a member.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These
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<PAGE>
contributions have adversely affected the level of FHLB dividends paid and could
continue to do so in the future.
Federal Reserve System. The Federal Reserve System requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve System may be used
to satisfy the liquidity requirements that are imposed by the OTS.
Savings institutions have authority to borrow from the Federal Reserve
System "discount window," but Federal Reserve System policy generally requires
savings institutions to exhaust all other sources before borrowing from the
Federal Reserve System.
Regulation of Steelton Bancorp
General. Upon completion of the conversion, Steelton Bancorp will
become a unitary savings and loan holding company within the meaning of Section
10(o) of the Home Owners' Loan Act ("HOLA"). Steelton Bancorp will be required
to register and file reports with the OTS and will be subject to regulation and
examination by the OTS. In addition, the OTS will have enforcement authority
over Steelton Bancorp and any non-savings institution subsidiaries. This will
permit the OTS to restrict or prohibit activities that it determines to be a
serious risk to us. This regulation is intended primarily for the protection of
our members and not for the benefit of you, as stockholders of Steelton Bancorp.
QTL Test. Since Steelton Bancorp will only own one savings institution,
it will, under current law, be able to diversify its operations into activities
not related to banking, but only so long as the Association satisfies the QTL
test. If Steelton Bancorp controls more than one savings institution, it would
lose the ability to diversify its operations into nonbanking related activities,
unless [the] other savings institutions each also qualify as a QTL or were
acquired in a supervised acquisition. See "Regulation of the Association -
Qualified Thrift Lender Test."
Restrictions on Acquisitions. Steelton Bancorp must obtain approval
from the OTS before acquiring control of any other SAIF-insured savings
institution. No person may acquire control of a federally insured savings
institution without providing at least 60 days written notice to the OTS and
giving the OTS an opportunity to disapprove the proposed acquisition.
TAXATION
Federal Taxation
Savings institutions are subject to the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), in the same general manner as
other corporations. Prior to certain changes to the Code in 1996, thrift
institutions enjoyed a tax advantage over banks with respect to determining
additions to its bad debt reserves. All thrift institutions, prior to 1996, were
generally allowed a deduction for additions to a reserve for bad debts. In
contrast, only "small banks" [(those with an] average adjusted bases of all
assets [equal to] $500 million or less) were allowed a similar deduction for
additions to their bad debt reserves. In addition, while small banks were only
allowed to
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use the experience method in determining their annual addition to a bad debt
reserve, all thrift institutions generally enjoyed a choice between (1) the
percentage of taxable income method and, (2) the experience method, for
determining the annual addition to their bad debt reserve. This choice of
methods provided a distinct advantage to thrift institutions that continually
experienced little or no losses from bad debts, over small banks in a similar
situation, because thrift institutions in comparison to small banks were
generally allowed a greater tax deduction by using the percentage of taxable
income method (rather than the experience method) to determine their deductible
addition to their bad debt reserves.
The Code was revised in August 1996 to equalize the taxation of thrift
institutions and banks, effective for taxable years beginning after 1995. All
thrift institutions are now subject to the same provisions as banks with respect
to deductions for bad debt. Now only thrift institutions that are treated as
small banks under the Code may continue to account for bad debts under the
reserve method; however [these] institutions may only use the experience method
for determining additions to their bad debt reserve. Thrift institutions that
are not treated as small banks may no longer use the reserve method to account
for their bad debts but must now use the specific charge-off method.
The revisions to the Code in 1996 also provided that all thrift
institutions must generally recapture any "applicable excess reserves" into
their taxable income, over a six year period beginning in 1996; however, [that]
recapture may be delayed up to two years if a thrift institution meets a
residential-lending test. Generally, a thrift institution's applicable excess
reserves equals the excess of (1) the balance of its bad debt reserves as of the
close of its taxable year beginning before January 1, 1996, over (2) the balance
of [the] reserves as of the close of its last taxable year beginning before
January 1, 1988 ("pre-1988 reserves"). The Association will be required to
recapture $181,000 of applicable excess reserve.
In addition, all thrift institutions must continue to keep track of
their pre-1988 reserves because this amount remains subject to recapture in the
future under the Code. A thrift institution such as the Association, would
generally be required to recapture into its taxable income its pre-1988 reserves
in the case of certain excess distributions to, and redemptions of the
Association's stockholders and in the case of a reduction in the Association's
outstanding loans when comparing loans currently outstanding to loans
outstanding at the end of the base year. For taxable years after 1995, the
Association will continue to account for its bad debts under the reserve method.
The balance of the Association's pre-1988 reserves equaled $700,000.
Steelton Bancorp may exclude from its income 100% of dividends received
from the Association as a member of the same affiliated group of corporations. A
70% dividends received deduction generally applies with respect to dividends
received from corporations that are not members of [the] affiliated group.
The Association's federal income tax returns for the last five tax
years have not been audited by the IRS.
State Taxation
The Association is subject to the Mutual Thrift Institutions Tax of the
Commonwealth of Pennsylvania based on its financial net income determined in
accordance with generally accepted
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accounting principles with certain adjustments. The Association's tax rate under
the Mutual Thrift Institution Tax is 11.5%. Interest on state and federal
obligations is excluded from net income. An allocable portion of net interest
expense incurred to carry the obligations is disallowed as a deduction. Three
year carryforwards of losses are allowed.
Upon consummation of the Conversion, Steelton Bancorp will also be
subject to the Corporate Net Income Tax and the Capital Stock Tax of the
Commonwealth of Pennsylvania.
The Association's state tax returns have not been audited for the past
five years.
MANAGEMENT
Directors and Executive Officers
The Association's Board of Directors is composed of seven members each
of whom serves for a term of three years, with approximately one-third of the
directors elected each year. Steelton Bancorp's proposed articles of
incorporation and bylaws require that directors be divided into four classes, as
nearly equal in number as possible, with approximately one-fourth of the
directors elected each year. The Association's officers are elected annually by
our board and serve at the board's discretion. These same provisions apply to
Steelton Bancorp, which will have the same directors and executive officers as
the Association.
The following table sets forth information with respect to the
directors and executive officers, all of whom will continue to serve in the same
capacities after the conversion.
<TABLE>
<CAPTION>
Age at Current
December 31, Director Term
Name 1998 Position Since Expires (1)
- --------------------- --------------- ------------------------------ --------- -----------
<S> <C> <C> <C> <C>
Marino Falcone 79 President, Director 1961 2001
Harold E. Stremmel 64 Executive Vice President, CEO, 1991 2000
Director
James F. Stone 70 Vice President, Director 1970 2000
Joseph A. Wiedeman 59 Treasurer, Director 1979 2002
Victor J. Segina 71 Secretary, Director 1980 2000
Richard E. Farina 67 Director 1966 2001
James S. Nelson 50 Senior Vice President, Director 1994 2001
Shannon Aylesworth 28 Vice President, Chief
Financial Officer
Barbara G. Coates 50 Vice President
Michael S. Leonzo 55 Vice President
</TABLE>
- -------------------
(1) The terms for directors of Steelton Bancorp are the same as those of
the Association except that Harold E. Stremmel's term will expire in
2002 and James S. Nelson's term will expire in 2003.
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The business experience for the past five years of each of the
directors and executive officers is as follows:
Marino Falcone has been president of the Association's Board since 1987
and has been a director of the Association since 1961. Since 1986, Mr. Falcone
has been retired. He was previously the sole owner of Steelton Coal and Oil
Company in Steelton, Pennsylvania.
Harold E. Stremmel has been Executive Vice President and Chief
Executive Officer of the Association since 1987 and has been a director of the
Association since 1991. Mr. Stremmel is the past president and treasurer of the
Harrisburg East Shore Kiwanis Club and was previously the treasurer of the New
Steelton Association.
James F. Stone is Vice President of the Association's Board and has
been a director of the Association since 1970. Since 1992, Mr. Stone has been
retired. He was previously owner and operator of Stone Funeral Home in Steelton,
Pennsylvania.
Joseph A. Wiedeman is Treasurer of the Association and has been a
director of the Association since 1979. Since 1974, Mr. Wiedeman has been a
majority stockholder of Wiedeman & Douty, P.C., Certified Public Accountants, an
accounting firm located in Steelton, Pennsylvania.
Victor J. Segina has been a director of the Association since 1980 and
is Secretary of the Association. Mr. Segina retired in 1998. He was previously
the sole owner of an architectural firm located in Harrisburg, Pennsylvania. Mr.
Segina serves on the Building Commission of the Harrisburg Catholic Diocese.
Richard E. Farina has been a director of the Association since 1966.
Since 1994, Mr. Farina has been retired. He was previously a branch manager for
the Pennsylvania Insurance Company in Harrisburg, Pennsylvania.
James S. Nelson is Senior Vice President of the Association and chief
lending officer. He has been a director of the Association since 1994 and has
been employed by the Association since 1987. Mr. Nelson is a director and the
treasurer of the Church of the Brethren Disaster Relief Auction, Inc. and
previously served as chairman of the board of the Ridgeway Community Church of
the Brethren.
Shannon Aylesworth has been Chief Financial Officer of the Association
since 1996 and a Vice President since January, 1999. Ms. Aylesworth has been
employed by the Association since 1990.
Barbara G. Coates has been a Vice President of the Association since
1997. Ms. Coates has been employed by the Association since 1978.
Michael S. Leonzo has been a Vice President of the Association since
1997. Mr. Leonzo has been employed by the Association since 1997 and was
previously Vice President of marketing for First Federal Savings and Loan of
Harrisburg.
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Meetings and Committees of the Board of Directors
The Board of Directors conducts its business through meetings of the
board and through activities of its committees. During the year ended December
31, 1998, the Board of Directors held 12 regular meetings. No director attended
fewer than 75% of the total meetings of the Board of Directors and committees on
which [he] served during the year ended December 31, 1998. The Association has a
standing audit committee, as well as other standing committees such as the
executive, budget and asset/liability committees. The entire Board of Directors
serves as a nominating committee and a compensation committee.
The audit committee of the Association consists of Directors Wiedeman,
Stone and Segina and Ms. Coates, an officer of the Association. The audit
committee meets quarterly and meets with the Association's independent certified
public accountants to review the results of the annual audit and other related
matters. The audit committee met 4 times during the year ended December 31,
1998.
Director Compensation
Board Fees. During 1998 each director was paid a fee of $5,200. The
president of the board, the secretary, and the treasurer receive an additional
yearly fee of $2,756, $2,756 and $1,985, respectively. Directors do not receive
compensation for attending committee meetings. The total fees paid to the
directors for the year ended December 31, 1998 were approximately $44,000.
Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by our chief executive officer for
the year ended December 31, 1998. No current executive officer received a total
annual salary and bonus in excess of $100,000 during the reporting period.
<TABLE>
<CAPTION>
Annual Compensation
----------------------------------------------
Other Annual
Fiscal Compensation
Name and Principal Position Year Salary Bonus (1)
- --------------------------- ---- ------ ----- -------------
<S> <C> <C> <C> <C>
Harold E. Stremmel, Executive Vice 1998 $56,753 $-- $7,045
President and Chief Executive
Officer
</TABLE>
- --------------------
(1) Includes directors fees.
Employment Agreements. The Association has entered into an employment
agreement with its President, Harold E. Stremmel. Mr. Stremmel's current base
salary under the employment agreement is $59,591. The employment agreement has a
term of three years. The agreement is terminable by us for "just cause" as
defined in the agreement. If we terminate Mr. Stremmel without just cause, he
will be entitled to a continuation of his salary from the date of termination
through the remaining term of the agreement, but in no event for a period of
less than 1 year. The employment agreement contains a provision stating that in
the event of the termination of employment in connection with any change in
control of us, Mr. Stremmel will be paid a lump sum amount equal to 2.99 times
his five-year average
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annual taxable cash compensation. If a payment had been made under the agreement
as of December 31, 1998, the payment would have equaled approximately $178,177.
The aggregate payment that would have been made to Mr. Stremmel would be an
expense to us and would have resulted in reductions to our net income and
capital. The agreement may be renewed annually by our Board of Directors upon a
determination of satisfactory performance within the board's sole discretion. If
Mr. Stremmel shall become disabled during the term of the agreement, he shall
continue to receive payment of 100% of [his] base salary for a period of 12
months and 65% of [his] base salary for the remaining term of the agreement.
[The] payments shall be reduced by any other benefit payments made under other
disability programs in effect for our employees. The Association has also
entered into employment agreements with two other executive officers and the
aggregate payment (based upon current salaries) that may have to be made to
these two executives upon a change in control of the Association is
approximately $234,028.
Pension Plan. The Pension Plan provides for benefits as a life annuity
payable monthly after retirement or termination. Generally, the compensation
covered under the Pension Plan includes total cash compensation paid to a
participant as reported or reportable on IRS Form W-2, including non-cash
compensation. If a participant retires at age 65 his monthly income payable will
be 1.5% of his Average Monthly Compensation, multiplied by the number of years
of service under the Pension Plan (not to exceed 25 years). Average Monthly
Compensation is based on the participant's total number of years of service and
is averaged over the five-year consecutive period within the ten-year period
preceding the date of termination of employment which produces the highest
average.
Employee Stock Ownership Plan. We have established an employee stock
ownership plan for the exclusive benefit of participating employees of ours, to
be implemented after the completion of the reorganization. Participating
employees are employees who have completed one year of service with us or our
subsidiary and have attained the age of 21. An application for a letter of
determination as to the tax-qualified status of the employee stock ownership
plan will be submitted to the IRS. Although no assurances can be given, we
expect that the employee stock ownership plan will receive a favorable letter of
determination from the IRS.
The employee stock ownership plan is to be funded by contributions made
by us in cash or common stock. Benefits may be paid either in shares of the
common stock or in cash. The plan will borrow funds with which to acquire up to
8% of the common stock to be issued in the offering. The employee stock
ownership plan intends to borrow funds from Steelton Bancorp. The loan is
expected to be for a term of ten years at an annual interest rate equal to the
prime rate as published in The Wall Street Journal. Presently it is anticipated
that the employee stock ownership plan will purchase up to 8% of the common
stock to be issued in the offering. The loan will be secured by the shares
purchased and earnings of employee stock ownership plan assets. Shares purchased
with loan proceeds will be held in a suspense account for allocation among
participants as the loan is repaid. It is anticipated that all contributions
will be tax-deductible. This loan is expected to be fully repaid in
approximately 10 years.
Shares sold above the maximum of the offering range may be sold to the
employee stock ownership plan before satisfying remaining unfilled orders of
Eligible Account Holders to fill the plan's subscription, or the plan may
purchase some or all of the shares covered by its subscription after the
offering in the open market.
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Contributions to the employee stock ownership plan and shares released
from the suspense account will be allocated among participants on the basis of
total compensation. All participants must be employed at least 1,000 hours in a
plan year, or have terminated employment following death, disability or
retirement, in order to receive an allocation. Participant benefits become fully
vested in plan allocations following five years of service. Employment before
the adoption of the employee stock ownership plan shall be credited for the
purposes of vesting. Our contributions to the employee stock ownership plan are
discretionary and may cause a reduction in other forms of compensation. As a
result, benefits payable under this plan cannot be estimated.
The board of directors has appointed the non-employee directors to a
committee that will administer the plan and to serve as the plan's trustees. The
trustees must vote all allocated shares held in the plan as directed by plan
participants. Unallocated shares and allocated shares for which no timely
direction is received will be voted as directed by the board of directors or the
plan's committee, subject to the trustees' fiduciary duties.
401(k) Savings Plan. The Association sponsors a tax-qualified defined
contribution savings plan ("401(k) Plan") for the benefit of its employees.
Employees become eligible to participate under the 401(k) Plan after reaching
age 21 and completing three months of service. Under the 401(k) Plan, employees
may voluntarily elect to defer between 0% and 15% of compensation, not to exceed
applicable limits under the Code[. In 1998, employees could defer up to
$10,000]. The Association matches a minimum of 50% of the first 6% of employee
contributions. Employee and matching contributions immediately vest. The 401(k)
Plan permits voluntary investments of plan assets by participants in the
offering.
Benefits are payable upon termination of employment, retirement, death,
disability, or plan termination. Normal retirement age under the 401(k) Plan is
65. Additionally, funds under the 401(k) Plan may be distributed upon
application to the plan administrator upon severe financial hardship in
accordance with uniform guidelines which comply with those specified by the
Code. It is intended that the 401(k) Plan operate in compliance with the
provisions of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the requirements of Section 401(a) of the Code. Contributions to
the 401(k) Plan by the Association for employees may be reduced in the future or
eliminated as a result of contributions made to the Employee Stock Ownership
Plan. See "- Employee Stock Ownership Plan."
Potential Stock Benefit Plans
Stock Option Plans. Following the offering, we intend to adopt a stock
option plan for directors and key employees within one year after the
conversion. Any plan adopted will be subject to stockholder approval and
applicable laws. Any plan adopted within one year of the conversion will require
the approval of a majority of our stockholders and will also be subject to
various other regulatory limitations. Up to 10% of the shares of common stock
sold in the offering will be reserved for issuance under the stock option plan.
No determinations have been made as to the specific terms of, or awards under,
the stock option plan.
The purpose of the stock option plan will be to attract and retain
qualified personnel in key positions, provide officers, key employees and
directors with a proprietary interest in Steelton Bancorp as an incentive to
contribute to our success and reward officers and key employees for outstanding
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performance. Although the terms of the stock option plan have not yet been
determined, it is expected that the stock option plan will provide for the grant
of: (2) options to purchase the common stock intended to qualify as incentive
stock options under the Code (incentive stock options); and (2) options that do
not so qualify (non-statutory stock options). Any stock option plans would be in
effect for up to ten years from the earlier of adoption by the Board of
Directors or approval by the stockholders.
Under the OTS conversion regulations, a stock option plan adopted
within a year of the conversion, would provide for a term of 10 years, after
which no awards could be made, unless earlier terminated by the Board of
Directors pursuant to the option plan and the options would vest over a five
year period [at] 20% per year, beginning one year after the date of grant of the
option. Options would expire no later than 10 years from the date granted and
would expire earlier if the option committee so determines or in the event of
termination of employment. Options would be granted based upon several factors,
including seniority, job duties and responsibilities, job performance, our
financial performance and a comparison of awards given by other savings
institutions converting from mutual to stock form.
Stock Programs. Following the offering, we also intend to establish
stock programs to provide our officers and outside directors with a proprietary
interest in Steelton Bancorp. The stock programs are expected to provide for the
award of common stock, subject to vesting restrictions, to eligible officers,
employees and directors. Any plan adopted within one year of the conversion
would require the approval of a majority of our stockholders and will also be
subject to various other regulatory limitations.
We expect to contribute funds to stock programs to acquire, in the
aggregate, up to 4% of the shares of common stock sold in the offering. Shares
used to fund the stock programs may be acquired through open market purchases or
from authorized but unissued shares. No determinations have been made as to the
specific terms of stock programs.
Restrictions on Stock Benefit Plans. OTS regulations provide that [if]
we implement stock option or management and/or employee stock benefit plans
within one year from the date of conversion, [the] plans must comply with the
following restrictions:
o for stock option plans, the total number of shares for which options may be
granted may not exceed 10% of the shares issued in the conversion;
o for restricted stock plans such as the MRP, the shares may not exceed 3% of
the shares issued in the conversion (4% for institutions with 10% or
greater tangible capital);
o the aggregate amount of stock purchased by the ESOP in the conversion may
not exceed 10% (12% for well-capitalized institutions utilizing a 4%
management recognition plan);
o no individual employee may receive more than 25% of the available awards
under the option plan or a restricted stock plan;
o directors who are not employees may not receive more than 5% individually
or 30% in the aggregate of the awards under any plan;
o all plans must be approved by a majority of the total votes eligible to be
cast at any duly called meeting of Steelton Bancorp's stockholders held no
earlier than six months following the conversion;
o for stock option plans, the exercise price must be at least equal to the
market price of the stock at the time of grant;
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o for restricted stock plans, no stock issued in a mutual-to-stock conversion
may by used to fund the plan; [and]
o neither stock option awards nor restricted stock awards may vest earlier
than 20% as of one year after the date of stockholder approval and 20% per
year thereafter, and vesting may be accelerated only in the case of
disability of death[,] or if not inconsistent with applicable OTS
regulations in effect at [the] time, in the event of a change in control[.]
Transactions with Management and Others
No directors, executive officers or [their] immediate family members
were engaged in transactions with the Association or any subsidiary involving
more than $60,000 (other than through a loan) during the year ended December 31,
1998. Furthermore, the Association had no "interlocking" relationships in which
(2) any executive officer is a member of the Board of Directors or of another
entity, one of whose executive officers are a member of the Association's Board
of Directors, or where (2) any executive officer is a member of the compensation
committee of another entity, one of whose executive officers is a member of the
Association's Board of Directors.
The Association has followed the policy of offering residential
mortgage loans for the financing of personal residences, share loans, and
consumer loans to its officers, directors and employees. Share loans and
consumer loans are made in the ordinary course of business and also made on
substantially the same terms and conditions, including interest rate and
collateral, as those of comparable transactions prevailing at the time with
other persons, and do not include more than the normal risk of collectibility or
present other unfavorable features. The Association offers mortgage loans to
full-time employees for the purchase or refinance of a permanent residence on
special terms and conditions including waiver of appraisal and credit report
fees and a one percent reduction in service charges and interest rate. If the
employee is terminated, or the residence is no longer owner-occupied, the one
percent reduction is eliminated. As of December 31, 1998, the aggregate
principal balance of loans outstanding to all directors, executive officers and
[their] immediate family members was approximately $302,000.
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Proposed Stock Purchases by Management
The following table sets forth for each of the directors and executive
officers of the Association and for all [of the] directors and executive
officers as a group (including in each case all "associates" of [the directors
and executive officers)] the number of shares of common stock which [each
director and executive officer] intends to purchase, assuming the sale of
435,000 shares of common stock at $10.00 per share. The table does not include
purchases by the employee stock ownership plan (8% of the common stock sold in
the offering or 34,800 shares), and does not take into account any stock benefit
plans to be adopted within one year following the conversion. See "Management -
Potential Stock Benefit Plans."
Percentage of
Total Number Total Dollar 435,000 Total
of Shares Amount of Shares Shares Sold in
Name to be Purchased to be Purchased the Offering(1)
- ------------------ --------------- --------------- ------------
Marino Falcone 5,000 50,000 1.1%
Harold E. Stremmel 10,000 100,000 2.3
James F. Stone 10,000 100,000 2.3
Joseph A. Wiedeman 10,000 100,000 2.3
Victor J. Segina 10,000 100,000 2.3
Richard E. Farina 2,500 25,000 1.0
James S. Nelson 10,000 100,000 2.3
Other officers 10,000 100,000 2.3
------ ------- ------
Total 67,500 $ 675,000 15.5%
====== ========== ======
- ------------
(1) In the event the stockholders of Steelton Bancorp approve the stock benefit
plans as discussed in this prospectus (stock programs (4% of the common
stock sold in the offering) and the stock option plans (10% of the common
stock sold in the offering)), and all of the common stock is awarded
pursuant to the stock benefit plans and all options are exercised
(increasing the number of outstanding shares), directors and executive
officers would own 128,400 or 29.5% of the shares of common stock
outstanding. If fewer than 435,000 shares were publicly sold, these
percentage ownership estimates would increase. See "- Potential Stock
Benefit Plans."
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THE CONVERSION
[The Board of Directors of Mechanics Savings and Loan, FSA has adopted
the plan authorizing the conversion and the offering, subject to the approval of
the OTS and of the members of the Association and the satisfaction of certain
other conditions. OTS approval does not constitute a recommendation or
endorsement of the plan by the] OTS.
General
On January 27, 1999, the Board of Directors of Mechanics Savings and
Loan, FSA adopted the plan of conversion and stock issuance which was
subsequently amended, pursuant to which the Association proposes to reorganize
from a federally chartered mutual savings institution to a federally chartered
stock savings institution. The Association will become a wholly owned subsidiary
of Steelton Bancorp. Concurrently with the conversion, Steelton Bancorp will
sell its common stock in the offering to the Association's members and, if
necessary, the general public. The Board of Directors unanimously adopted the
Plan after consideration of the advantages and the disadvantages of the
conversion and offering. After we receive all the required approvals from the
government agencies that regulate us, the approval of the plan by the
Association's members and the satisfaction of all other conditions precedent to
the conversion, the Association will effect the conversion by exchanging its
federal mutual savings institution charter for a federal stock savings
institution charter and becoming a wholly owned subsidiary of Steelton Bancorp,
and having the depositors of the Association receive liquidation interests in
the newly formed stock savings institution as they have in the Association
before the conversion. See "- Description of the Conversion." On the effective
date, Steelton Bancorp will commence business as Steelton Bancorp, a savings and
loan holding company, and the Association will commence business as Mechanics
Savings Bank, a federally chartered stock savings bank. The conversion will be
accomplished in accordance with the procedures set forth in the plan, the
requirements of applicable laws and regulations, and the policies of the OTS.
For additional information concerning the offering, see "The Offering."
Purposes of the Conversion
The Board of Directors of Mechanics Savings and Loan has determined
that the conversion is in the best interest of the Association and has several
business purposes for the conversion.
The conversion will structure the Association in the stock form, which
is used by commercial banks, most major business corporations and an increasing
number of savings institutions. Formation of the Association as a capital stock
savings institution subsidiary of Steelton Bancorp will permit Steelton Bancorp
to issue stock, which is a source of capital not available to mutual savings
institutions. The holding company form of organization is expected to provide
additional flexibility to diversify the Association's business activities
through existing or newly formed subsidiaries, or through acquisitions of or
mergers with other financial institutions, as well as other companies. Although
the Association has no current arrangements, understandings or agreements
regarding any opportunities, Steelton Bancorp will be in a position after the
conversion and offering, subject to regulatory limitations and
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Steelton Bancorp's financial position, to take advantage of any [acquisition,
merger or diversification] opportunities that may arise.
Steelton Bancorp is offering for sale its common stock in the offering
at an aggregate price based on an independent appraisal. The proceeds from the
sale of common stock of Steelton Bancorp will provide the Association with new
equity capital, which will support future deposit growth and expanded
operations. The ability of Steelton Bancorp to sell stock also will enable
Steelton Bancorp and the Association to increase capital in response to the
changing capital requirements of the OTS. While the Association currently meets
or exceeds all regulatory capital requirements, the sale of stock in connection
with the conversion, coupled with the accumulation of earnings, less dividends
or other reductions in capital, from year to year, represents a means for the
orderly preservation and expansion of the Association's capital base, and allows
flexibility to respond to sudden and unanticipated capital needs. After the
conversion and offering, Steelton Bancorp may repurchase shares of its common
stock. The investment of the net proceeds of the offering also will provide
additional income to enhance further the Association's future capital position.
The ability of Steelton Bancorp to issue stock also will enable it in
the future to establish stock benefit plans for management and employees of
Steelton Bancorp and the Association, including incentive stock option plans,
stock award plans, and employee stock ownership plans.
Steelton Bancorp will also be able to borrow funds, on a secured and
unsecured basis, and to issue debt to the public or in a private placement. The
proceeds of any borrowings or debt issuance may be contributed to the
Association as core capital for regulatory capital purposes. Steelton Bancorp
has not made a determination to borrow funds or issue debt at the present time.
Description of the Conversion
After receiving all of the required approvals from the government
agencies that regulate us and the ratification of the plan of conversion by the
Association's members, the conversion will be completed. After the conversion,
the legal existence of the Association will not terminate, the converted stock
bank will be a continuation of the Association and all property of the
Association, including its right, title, and interest in and to all property of
any kind and nature, interest and asset of every conceivable value or benefit
then existing or pertaining to the Association, or which would inure to the
Association immediately by operation of law and without the necessity of any
conveyance or transfer and without any further act or deed, will continue to be
owned by the Association. The Association will possess, hold and enjoy the same
in its right and fully and to the same extent as the same was possessed, held
and enjoyed by the Association. The Association will continue to have, succeed
to, and be responsible for all the rights, liabilities, and obligations of the
Association and will maintain its headquarters operations at the Association's
present location.
The foregoing description of the conversion is qualified in its
entirety by reference to the plan and the charter and bylaws of the Association
and Steelton Bancorp to be effective after the conversion.
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Effects of the Conversion
General. The conversion will not have any effect on the Association's
present business of accepting deposits and investing its funds in loans and
other investments permitted by law. The conversion will not result in any change
in the existing services provided to depositors and borrowers, or in existing
offices, management, and staff. After the conversion, the Association will
continue to be subject to regulation, supervision, and examination by the OTS
and the FDIC.
Deposits and Loans. Each holder of a deposit account in the Association
at the time of the conversion will continue as an account holder in the
Association after the conversion, and the conversion will not affect the deposit
balance, interest rate, [or] other terms . Each [deposit] account will be
insured by the FDIC to the same extent as before the conversion. Depositors will
continue to hold their existing certificates, passbooks, checkbooks, and other
evidence of their accounts. The conversion will not affect the loans of any
borrower from the Association. The amount, interest rate, maturity, security
for, and obligations under each loan will remain contractually fixed as they
existed prior to the conversion. See "- Voting Rights" and "Liquidation Rights"
below for a discussion of the effects of the conversion on the voting and
liquidation rights of the depositors and borrowers of the Association.
Voting Rights. As a federally chartered mutual savings institution, the
Association has no authority to issue capital stock and thus, no stockholders.
Control of the Association in its mutual form is vested in the Board of
Directors of the Association. The Directors are elected by the Association's
members. Holders of qualifying deposits in the Association and borrowers of the
Association with loans outstanding on February 1, 1993 which remain outstanding
are members of the Association. In the consideration of all questions requiring
action by members of the Association, each holder of a qualifying deposit is
permitted to cast one vote for each $100, or fraction thereof, of the withdrawal
value of the voting depositor's account. Voting borrowers are entitled to cast
one vote. No member may cast more than 1,000 votes.
After the conversion, all voting rights will be held solely by
stockholders. A stockholder will be entitled to one vote for each share of
common stock owned.
Tax Effects. We have received an opinion from our counsel, Malizia,
Spidi, Sloane & Fisch, P.C. on the federal tax consequences of the conversion.
The opinion has been filed as an exhibit to the registration statement of which
this prospectus is a part and covers those federal tax matters that are material
to the transaction. The opinion provides that:
[o] the conversion will qualify as a reorganization under Section
368(a)(1)(F) of the Code, and no gain or loss will be
recognized by us by reason of the proposed conversion;
[o] no gain or loss will be recognized by us upon the receipt of
money from Steelton Bancorp for our stock, and no gain or loss
will be recognized by Steelton Bancorp upon the receipt of
money for the shares;
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<PAGE>
[o] no gain or loss will be recognized by the Eligible Account
Holders, Supplemental Eligible Account Holders, and Other
Members upon the issuance to them of withdrawable savings
accounts in us in the stock form in the same dollar amount as
their savings accounts in us in the mutual form plus an
interest in the liquidation account of us in the stock form in
exchange for their savings accounts in us in the mutual form;
and
[o] provided that the amount to be paid for the shares pursuant to
the subscription rights is equal to the fair market value of
[the] shares, no gain or loss will be recognized by Eligible
Account Holders, Supplemental Eligible Account Holders, and
Other Members under the Plan upon the distribution to them of
nontransferable subscription rights.
[We have received an opinion from FinPro which concludes that the
subscription rights will not have any economic value at the time the rights are
distributed or at the time the shares are purchased. FinPro's opinion is based
on the fact that the subscription rights:
o are given to the recipients without payment;
o may not be sold or transferred;
o are good only for a short time; and
o give the recipients only the right to purchase shares at a
price equal to the estimated fair market value, which will be
the same price at which shares will be sold in the community,
public or syndicated public offerings.
If the subscription rights were determined to have an economic value,
receipt of the subscription rights would be taxable in an amount equal to that
value. The opinion of] Malizia, Spidi, Sloane & Fisch, P.C. [relies in part on
the FinPro opinion.]
We are also subject to Pennsylvania income taxes and have received an
opinion from Malizia, Spidi, Sloane & Fisch, P.C. that the conversion will be
treated for Pennsylvania state tax purposes similar to the conversion's
treatment for federal tax purposes.
Unlike a private letter ruling [from the IRS], the opinions of Malizia,
Spidi, Sloane & Fisch, P.C. and FinPro have no binding effect or official
status, and no assurance can be given that the conclusions reached in any of
those opinions would be sustained by a court if contested by the IRS or the
Pennsylvania tax authorities. Eligible Account Holders, Supplemental Eligible
Account Holders, and Other Members are encouraged to consult with their own tax
advisers as to the tax consequences in the event the subscription rights are
[determined] to have an [economic] value. If the subscription rights are
[determined] to have an [economic] value, eligible account holders, supplemental
eligible account holders, and other members may be [determined] to have taxable
income based upon [that value].
Liquidation Account. In the unlikely event of our complete liquidation
in our present mutual form, each depositor is entitled to share in a
distribution of our assets, remaining after payment of claims of all creditors
(including the claims of all depositors to the withdrawal value of their
accounts). Each depositor's pro rata share of [the] remaining assets would be in
the same proportion as the value of his deposit accounts was to the total value
of all deposit accounts in us at the time of liquidation.
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<PAGE>
Upon a complete liquidation after the conversion, each depositor would
have a claim, as a creditor, of the same general priority as the claims of all
other general creditors of ours. [Except] as described below, a depositor's
claim would be solely in the amount of the balance in his deposit account plus
accrued interest. A depositor would not have an interest in the residual value
of our assets above that amount, if any.
The Plan provides for the establishment, upon the completion of the
conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders. Each Eligible Account
Holder and Supplemental Eligible Account Holder, if he continues to maintain his
deposit account with us, would be entitled on a complete liquidation of us after
conversion, to an interest in the liquidation account prior to any payment to
stockholders. Each Eligible Account Holder would have an initial interest in
[the] liquidation account for each deposit account held in us on the qualifying
date, ___________, 199_. Each Supplemental Eligible Account Holder would have a
similar interest as of the qualifying date, ________, 1999. The interest as to
each deposit account would be in the same proportion of the total liquidation
account as the balance of the deposit account on the qualifying dates was to the
aggregate balance in all the deposit accounts of Eligible Account Holders and
Supplemental Eligible Account Holders on [the] qualifying dates. However, if the
amount in the deposit account on any annual closing date of ours (December 31)
is less than the amount in [the liquidation] account on the respective
qualifying dates, then the interest in this special liquidation account would be
reduced from time to time by an amount proportionate to any reduction, and the
interest would cease to exist if [the] deposit account were closed. The interest
in the special liquidation account will never be increased despite any increase
in the related deposit account after the respective qualifying dates.
No merger, consolidation, purchase of bulk assets with assumptions of
savings accounts and other liabilities, or similar transactions with another
insured institution in which we, in our converted form, are not the surviving
institution, shall be considered a complete liquidation. In [these]
transactions, the liquidation account shall be assumed by the surviving
institution.
Accounting Consequences
The conversion will be accounted for in a manner similar to a
pooling-of-interests under GAAP. [This means that] the carrying value of the
Association's assets, liabilities, and capital will be unaffected by the
conversion and will be reflected in Steelton Bancorp's and the Association's
consolidated financial statements based on their historical amounts.
Conditions to the Conversion
Before we can complete the conversion, Steelton Bancorp and the
Association must receive all the required approvals from the government agencies
that regulate us, including various approvals or non-objections from the OTS.
The receipt of [these] approvals or non-objections from the OTS does not
constitute a recommendation or endorsement of the plan or conversion by the OTS.
Consummation of the conversion also is subject to ratification of the plan by a
majority of the total votes of depositors at a special meeting called for the
purpose of approving the plan. The Board of Directors may decide to consummate
the conversion without forming a holding company.
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<PAGE>
Amendment or Termination of the Plan of Conversion
If [determined to be] necessary or desirable by the Board of Directors
of the Association, the plan may be amended by a two-thirds vote of the
Association's Board of Directors, with the concurrence of the OTS, at any time
prior to or after submission of the plan to members of the Association for
ratification. The plan may be terminated by the Board of Directors of the
Association at any time prior to or after ratification by the members, by a
two-thirds vote with the concurrence of the OTS.
RESTRICTIONS ON ACQUISITION OF STEELTON BANCORP, INC.
General
The following discussion is a summary of statutory and regulatory
restrictions on the acquisition of our common stock. In addition, the following
discussion summarizes provisions of our articles of incorporation and bylaws and
regulatory provisions that have an anti-takeover effect.
Change in Association Control Act
Federal law provides that no person, acting directly or indirectly or
through or in concert with one or more other persons, may acquire control of a
savings association unless the OTS has been given 60 days prior written notice.
Federal law provides that no company may acquire control of a savings and loan
holding company without the prior approval of the OTS. Any company that acquires
control becomes a "savings and loan holding company" subject to registration,
examination and regulation by the OTS. Pursuant to federal regulations, control
is [considered] to have [been acquired] when an entity, among other things, has
acquired more than 25 percent of any class of voting stock of the institution or
the ability to control the election of a majority of the directors of an
institution. Moreover, control is presumed to have occurred, subject to
rebuttal, upon the acquisition of more than 10 percent of any class of voting
stock, or of more than 25 percent of any class of stock, of a savings
institution, where certain enumerated control factors are also present in the
acquisition. The OTS may prohibit an acquisition of control if: (1) it would
result in a monopoly or substantially lessen competition; (2) the financial
condition of the acquiring person might jeopardize the financial stability of
the institution; or (3) the competence, experience or integrity of the acquiring
person indicates that it would not be in the interest of the depositors or of
the public to permit the acquisition of control by [that] person. The foregoing
restrictions do not apply to the acquisition of stock by one or more
tax-qualified employee stock benefit plans, provided that the plan or plans do
not have beneficial ownership in the aggregate of more than 25 percent of any
class of our equity security.
Steelton Bancorp's Articles of Incorporation and Bylaws
General. Our articles of incorporation and bylaws are available at our
administrative office or by writing or calling us, 51 South Front Street,
Steelton, Pennsylvania 17113 (our telephone number is (717) 939-1966).
Classified Board of Directors and Related Provisions. Our Board of
Directors is divided into four classes which are as nearly equal in number as
possible. Directors serve for terms of four years. As a result, each year, only
one-fourth of the directors are to be elected and it would take at least two
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<PAGE>
years to elect a majority of our directors. A director may be removed only by
[a] vote of the holders of a majority of the shares .
Restrictions on Voting of Securities. [Our articles of incorporation]
provides that any shares of common stock beneficially owned directly or
indirectly in excess of 10% by any person will not be counted as shares entitled
to vote, shall not be voted by any person or counted as voting shares [, and
will] not be counted as outstanding for purposes of determining a quorum or the
affirmative vote necessary to approve any matter submitted to the stockholders
for a vote. The purpose of this provision is to reduce the chance that large
stockholders could challenge our management.
Prohibition Against Cumulative Voting. Our [articles of incorporation
prohibit] cumulative voting by stockholders in the election of directors. The
absence of cumulative voting means that the holders of a majority of the shares
voted may, if they so choose, elect all [of the] directors elected at the
meeting, thus [preventing] a minority stockholder from obtaining representation
on [our] Board of Directors unless the minority stockholder is able to obtain
the support of a majority.
Procedures for Certain Business Combinations. Our articles of
incorporation require the affirmative vote of at least 80% of the [shares in
order for us to enter into any merger, consolidation, sale, liquidation, or
dissolution of Steelton Bancorp with any "interested shareholder." If] the
proposed transaction has been approved in advance by [2/3 of the members of] our
Board of Directors who were directors prior to the time the [interested
shareholder became a interested shareholder, the transaction would only require
the affirmative vote of at least 50% of the shareholders. An interested
shareholder is any person who], directly or indirectly, [has the right to vote
or to sell] 20% or more of the outstanding shares [. Affiliates and associates
of an interested shareholder are also considered to be interested shareholders].
Any amendment to this provision requires the vote of at least 80% of the shares
[. ]
[In addition to the interested shareholder restrictions, our articles
of incorporation also require the affirmative vote of at least 80% of the shares
in order for us to enter into] any merger, consolidation, [sale,] liquidation,
or dissolution of Steelton Bancorp , unless the transaction is approved by [2/3
of our Board of Directors.]
Amendment to [our] Articles of Incorporation and Bylaws. Amendments to
our articles of incorporation must be approved by our Board of Directors and
also by [the holders of] a majority of the [shares. Approval] by at least 80% of
the [shares is required to amend] provisions relating to restrictions on the
acquisition and voting of [more] than 10% of the common stock; number, election
and removal of directors; amendment of bylaws; call of special stockholder
meetings; director liability; certain business combinations; [and] power of
indemnification[. ]
[Our] bylaws may be amended by a majority vote of [our] Board of
Directors or [by] the holders of at least 80% of the [shares].
Additional Anti-Takeover Provisions. The provisions described above are
not the only provisions of our [articles of incorporation] and bylaws [which
have] an anti-takeover effect. For example, [our articles of incorporation
authorize] the issuance of up to two million shares of preferred stock, which
conceivably would represent an additional class of stock required to approve
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<PAGE>
any proposed acquisition. This preferred stock, none of which has been issued,
together with authorized but unissued shares of the common stock [(our articles
of incorporation authorize] the issuance of up to eight million shares of common
stock), also could represent additional capital required to be purchased by the
acquiror.
In addition to discouraging a takeover attempt which a majority of our
stockholders might determine to be in their best interest or in which our
stockholders might receive a premium over the current market prices for their
shares, the effect of these provisions may render the removal of our management
more difficult.
DESCRIPTION OF CAPITAL STOCK
Steelton Bancorp is authorized to issue 8,000,000 shares of common
stock, par value $0.10 per share and 2,000,000 shares of preferred stock, no par
value. We currently expect to issue between 369,750 and 500,250 shares of common
stock in the conversion[, subject to an increase to 575,288 shares]. See
"Capitalization." Upon payment of the purchase price shares of common stock
issued in the offering will be fully paid and non-assessable. The common stock
will represent nonwithdrawable capital, will not be an account of insurable type
and will not be insured by the FDIC or any other governmental agency. See also
"Dividend Policy."
Voting Rights
The holders of common stock will possess exclusive voting rights in
Steelton Bancorp. The holder of shares of common stock will be entitled to one
vote for each share held on all matters subject to stockholder vote. See also
"The Conversion - Effects of the Conversion - Voting Rights"
Liquidation Rights
In the event of any liquidation, dissolution, or winding-up of Steelton
Bancorp, the holders of the common stock generally would be entitled to receive,
after payment of all debts and liabilities of Steelton Bancorp (including all
debts and liabilities of the Association), all assets of Steelton Bancorp
available for distribution. See also "The Conversion - Effects of the Conversion
- - Liquidation Rights."
Preemptive Rights; Redemption
[Because the] holders of the common stock do not have any preemptive
rights with respect to any shares we may issue[,] the Board of Directors may
sell shares of capital stock of Steelton Bancorp without first offering such
shares to existing stockholders of Steelton Bancorp. The common stock will not
be subject to any redemption provisions.
Preferred Stock
We are authorized to issue up to 2,000,000 shares of preferred stock
and to fix and state voting powers, designations, preferences, or other special
rights of [preferred stock] and the qualifications, limitations and restrictions
of those shares as the Board of Directors may determine in its discretion.
Preferred stock may be issued in distinctly designated series, may be
convertible into
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common stock and may rank prior to the common stock as to dividends rights,
liquidation preferences, or both, and may have full or limited voting rights.
[The] issuance of preferred stock could adversely affect the voting and other
rights of holders of common stock.
The authorized but unissued shares of preferred stock and the
authorized but unissued and unreserved shares of common stock will be available
for issuance in future mergers or acquisitions, in future public offerings or
private placements. Except as otherwise required to approve the transaction in
which the additional authorized shares of preferred stock would be issued, no
stockholder approval generally would be required for the issuance of these
shares.
LEGAL AND TAX OPINIONS
The legality of the issuance of the common stock being offered and
certain matters relating to the conversion and federal and state taxation will
be passed upon for us by Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C.
Certain legal matters will be passed upon for Capital Resources, Inc. by Steele,
Silcox & Browning, P.C.
EXPERTS
The consolidated financial statements of Mechanics Savings and Loan,
FSA as of December 31, 1998 and 1997 and for each of the years in the three year
period ended December 31, 1998 have been included in this prospectus in reliance
upon the report of McKonly & Asbury, LLP, independent certified public
accountants, appearing elsewhere in this prospectus, and upon the authority of
said firm as experts in accounting and auditing.
FinPro, Inc. has consented to the publication in this document of a
summary of its letter to Mechanics Savings and Loan, FSA setting forth its
opinion as to the estimated pro forma market value of the common stock upon the
conversion and stock offering and its opinion setting forth the value of
subscription rights and to the use of its name and statements with respect to it
appearing in this document.
REGISTRATION REQUIREMENTS
Our common stock will be registered pursuant to Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). We will be
subject to the information, proxy solicitation, insider trading restrictions,
tender offer rules, periodic reporting and other requirements of the SEC under
the Exchange Act. We may not deregister the common stock under the Exchange Act
for a period of at least three years following the conversion.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We are subject to the informational requirements of the Exchange Act
and must file reports and other information with the SEC.
We have filed with the SEC a registration statement on Form SB-2 under
the Securities Act of 1933, as amended, with respect to the common stock offered
in this document. As permitted by the rules and regulations of the SEC, this
document does not contain all the information set forth in the
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<PAGE>
registration statement. [This] information can be examined without charge at the
public reference facilities of the SEC located at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of [the registration materials] can be
obtained from the SEC at prescribed rates. You may obtain information on the
operation of the Public Reference Room by calling 1-800-SEC-0330. The SEC also
maintains an internet address ("Web site") that contains reports, proxy and
information statements and other information regarding registrants, including
Steelton Bancorp, that file electronically with the SEC. The address for this
Web site is "http://www.sec.gov." The statements contained in this document as
to the contents of any contract or other document filed as an exhibit to the
Form SB-2 are, of necessity, brief descriptions and are not necessarily
complete; each statement is qualified by reference to [the complete] contract or
document.
A copy of our articles of incorporation and bylaws, as well as those of
the Association, are available without charge from Mechanics Savings and Loan,
FSA. Copies of the plan of conversion are also available without charge.
The Association has filed an application for conversion with the OTS.
This prospectus omits certain information contained in that application. [That]
information can be examined without charge at the public reference facilities of
the OTS located at 1700 G Street, N.W., Washington, D.C. 20552.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Mechanics Savings and Loan, FSA
Independent Auditor's Report F-1
Consolidated Statements of Financial Condition at December 31, 1998
and December 31, 1997 F-2
Consolidated Statements of Income for each of the years in the
two-year period ended December 31, 1998 F-3
Consolidated Statements of Changes in Equity for each of the years in the
two-year period ended December 31, 1998 F-4
Consolidated Statements of Cash Flows for each of the years in the
two-year period ended December 31, 1998 F-5
Notes to Consolidated Financial Statements F-7
Other schedules are omitted as they are not required or are not applicable or
the required information is shown in the consolidated financial statements or
related notes.
Financial statements of Steelton Bancorp, Inc. have not been provided because
they have conducted no operations.
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<PAGE>
[LETTERHEAD OF McKONLY & ASBURY]
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Mechanics Savings and Loan, FSA
Steelton, Pennsylvania
We have audited the accompanying consolidated statements of financial condition
of Mechanics Savings and Loan FSA, and subsidiary (the Association) as of
December 31, 1998 and 1997, and the related consolidated statements of income
and changes in equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Association's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mechanics Savings
and Loan FSA, and subsidiary as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ McKonly & Asbury, LLP
---------------------------------------
McKonly & Asbury, LLP
Harrisburg, Pennsylvania
February 5, 1999
F-1
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
ASSETS
Note 1998 1997
---- --------- -----------
(as restated)
Cash and cash equivalents
Cash and amounts due from depository
institutions 1 $ 433,414 $ 298,564
Interest bearing deposits in other banks 1 1,954,178 490,088
Investment securities
Securities available-for-sale 1, 2 4,004,294 --
Securities held-to-maturity 1, 2 5,200,205 2,370,739
Loans receivable, net 1, 3 27,784,386 32,118,391
Accrued interest receivable 1, 4 227,712 203,047
Federal Home Loan Bank stock, at cost 15 564,600 490,900
Office properties and equipment, net 1, 5 1,046,050 1,061,340
Rental property, net 1, 6 68,678 72,812
Deferred income taxes 1, 9 97,771 86,873
Other assets -- 129,986 39,640
---------- ----------
Total assets $41,511,274 $37,232,394
========== ==========
LIABILITIES AND EQUITY
Deposits 1, 7 $28,272,431 $23,467,695
Advances from Federal Home Loan Bank 8 9,257,408 9,816,528
Advances from borrowers for insurance and taxes - 167,315 186,361
Accrued interest payable 72,227 84,893
Other liabilities 43,404 64,662
---------- ----------
Total liabilities 37,812,785 33,620,139
---------- ----------
Commitments and contingencies 1, 3
Retained earnings (substantially restricted) 3,712,571 3,612,255
Accumulated other comprehensive income (loss) (14,082) -
---------- ----------
Total equity 3,698,489 3,612,255
---------- ----------
Total liabilities and equity $41,511,274 $37,232,394
========== ==========
See notes to consolidated financial statements.
F-2
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
Note 1998 1997
----------- ------------------- ------------------
<S> <C> <C> <C>
Interest income (as restated)
Loans 1 $2,536,713 $2,656,973
Investment securities 1, 2 259,160 110,581
Other interest earning assets 83,818 63,423
------------------- ------------------
Total interest income 2,879,691 2,830,977
------------------- ------------------
Interest expense
Deposits 7 1,213,091 1,154,062
Advances from Federal Home Loan Bank 8 580,763 620,860
------------------- ------------------
Total interest expense 1,793,854 1,774,922
------------------- ------------------
Net interest income 1,085,837 1,056,055
Provision for loan losses 1,3 50,000 12,000
------------------- ------------------
Net interest income after provision
for loan losses 1,035,837 1,044,055
------------------- ------------------
Other income
Fees and service charges 85,909 52,398
Dividends on FHLB stock 35,343 33,909
Other 54,208 35,036
------------------- ------------------
Total other income 175,460 121,343
------------------- ------------------
Other expense
Salaries and employee benefits 592,612 477,848
Occupancy expense of premises 92,560 60,038
Equipment 180,526 135,960
Advertising 40,859 66,214
Other 185,066 183,886
------------------- ------------------
Total other expense 1,091,623 923,946
------------------- ------------------
Income before income taxes 119,674 241,452
Income taxes 1, 9 19,358 78,704
------------------- ------------------
Net income $100,316 $162,748
=================== ==================
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
Retained Accumulated
Earnings Other
Substantially Comprehensive
Restricted Income (loss) Total Equity
-------------- --------------- ---------------
<S> <C> <C> <C>
Balance - January 1, 1997,
as restated $ 3,449,507 $ - $3,449,507
Comprehensive income
Net income, as restated 162,748 - 162,748
------------- ------------ ---------------
Balance - December 31, 1997,
as restated 3,612,255 - 3,612,255
Comprehensive income
Net income 100,316 - 100,316
Other comprehensive income (loss),
net of tax
Unrealized losses on
securities available for sale,
net of deferred income tax
benefit of $7,254 - (14,082) (14,082)
------------- ------------ ---------------
Total comprehensive income 100,316 (14,082) 86,234
------------- ------------ ---------------
Balance - December 31, 1998 $ 3,712,571 (14,082) $3,698,489
============= ============ ===============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
1998 1997
--------- ---------
as restated)
Cash flows from operating activities
<S> <C> <C>
Net income $ 100,316 $ 162,748
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 98,129 78,494
Gain on sale of foreclosed real estate -- 716
Amortization of deferred loan fees (75,735) (35,571)
Amortization of premiums on loans purchased 8,030 3,941
Accretion of investment security discounts
net of premium amortization 19,110 (500)
Provision for loan losses 50,000 12,000
Deferred income taxes (3,644) (8,118)
(Increase) decrease in
Accrued interest receivable (24,665) (43,161)
Other assets (90,346) 83,381
Increase (decrease) in
Accrued interest payable (12,666) (38,948)
Other liabilities (21,258) 48,589
---------- ---------
Net cash provided by operating
activities 47,271 263,571
---------- ---------
Cash flows from investing activities
Investment securities available-for-sale
Proceeds from sales and maturities of
mortgaged-backed securities 29,998 --
Purchase of mortgage-backed securities (3,956,056) --
Purchase of other securities (99,740) --
Investment securities held-to-maturity
Proceeds from maturities and repayments
Mortgage-backed securities 1,513,064 311,446
Other 510,000 1,115,000
Purchase of mortgage-backed securities (3,325,633) (769,954)
Purchase of other securities (1,545,839) (447,624)
Net (increase) decrease in loans 4,351,710 (431,798)
Purchase of office properties and equipment (78,705) (673,994)
Proceeds from sale of foreclosed real estate -- 26,266
Improvements to rental properties -- (3,743)
Purchase of Federal Home Loan Bank stock (73,700) (196,600)
Proceeds from sale of Federal Home Loan Bank stock -- 223,400
---------- ---------
Net cash used in
investing activities (2,674,901) (847,601)
---------- ---------
</TABLE>
(continued)
F-5
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
1998 1997
------------- ---------------
(as restated)
<S> <C> <C>
Cash flows from financing activities
Net increase (decrease) in
Deposits $4,804,736 $559,358
Advances from borrowers for insurance and taxes (19,046) (8,148)
Advances from Federal Home Loan Bank - 6,550,000
Repayment of Federal Home Loan Bank advances (559,120) (6,586,443)
------------- --------------
Net cash provided by
financing activities 4,226,570 514,767
------------- --------------
Net increase (decrease) in cash
and cash equivalents 1,598,940 (69,263)
Cash and cash equivalents - beginning 788,652 857,915
------------- --------------
Cash and cash equivalents - ending $2,387,592 $788,652
============= ==============
Supplemental disclosures
Cash paid during the year for interest $1,806,520 $1,813,870
============= ==============
Cash paid during the year for taxes $ 88,992 $ 36,948
============= ==============
Second mortgage received on sale
of foreclosed property $ - $ 9,770
============= ==============
Loans transferred to foreclosed real
estate during the year $ - $ 12,332
============= ==============
Deferred income tax benefit on recorded
unrealized losses on securities available-
for-sale $ 7,254 $ -
============== ==============
Recorded unrealized loss on securities
available-for-sale $ 21,336 $ -
============== ==============
</TABLE>
(continued)
F-6
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Association provides a variety of financial services to customers
through its two offices in Dauphin County, Pennsylvania. The
Association's primary deposit products are non-interest and
interest-bearing checking accounts, savings accounts and certificates of
deposit. Its primary lending products are single-family residential
loans.
The Association's wholly-owned subsidiary, Baldwin Service Corporation,
invests in rental properties. In excess of 99% of consolidated net
assets relate to the Association. The Association reports its activities
as one operating segment.
Basis of Consolidation
The consolidated financial statements include the accounts of Mechanics
Savings and Loan, FSA and its wholly-owned subsidiary, Baldwin Service
Corporation. All material inter-company balances and transactions have
been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure 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.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for losses on loans
and the valuation of real estate acquired in connection with
foreclosures. In connection with the determination of the allowances for
losses on loans and foreclosed real estate, management obtains
independent appraisals for significant properties.
A majority of the Association's loan portfolio consists of single-family
residential loans in the area of Dauphin County, Pennsylvania. The
regional economy is currently stable and consists of various types of
industry, services, and government employment. Real estate prices in
this market are also stable; however, the ultimate collectibility of a
substantial portion of the Association's loan portfolio are susceptible
to change in local market conditions.
(continued)
F-7
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Use of Estimates (Cont'd)
While management uses available information to recognize losses on loans
and foreclosed real estate, future additions to the allowances may be
necessary based on changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the Association's allowances for losses on loans and
foreclosed real estate.
Such agencies may require the Association to recognize additions to the
allowances based on their judgments about information available to them
at the time of their examination. Because of these factors, it is
reasonably possible that the allowances for losses on loans and
foreclosed real estate may change materially in the near term. However,
the amount of the change that is reasonably possible cannot be
estimated.
Investment Securities
The Association's investments in securities are classified as
available-for-sale and held-to-maturity and are accounted for as
follows:
o Securities Held-to-Maturity Government, Federal agency, and corporate
debt securities that management has the positive intent and ability to
hold to maturity are reported at cost, adjusted for amortization of
premiums and accretion of discounts that are recognized in interest
income using methods approximating the interest method over the period
to maturity. Mortgage-backed securities represent participating
interests in pools of long-term first mortgage loans originated and
serviced by issuers of the securities. Mortgage-backed securities are
carried at unpaid principal balances, adjusted for unamortized
premiums and unearned discounts. Premiums and discounts are amortized
using methods approximating the interest method over the remaining
period to contractual maturity, adjusted for anticipated prepayments.
o Securities Available-for-sale Available-for-sale securities consist of
investment securities not classified as held-to-maturity securities.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are included in other comprehensive income. Realized gains
and losses on available-for-sale securities are included in other
income (expense) and, when applicable, are reported as a
reclassification adjustment, net of tax, in other comprehensive
income. Gains and losses on the sale of available-for-sale securities
are determined using the specific identification method. The
amortization of premiums and the accretion of discounts are recognized
in interest income using methods approximating the interest method
over the period of maturity.
(continued)
F-8
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Loans and Allowance for Loan Losses
Loans are stated at unpaid principal balances, less the allowance for loan
losses and net deferred loan fees and costs.
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the
contractual lives of the related loans using the interest method.
Interest income generally is not recognized on specific impaired loans
unless the likelihood of further loss is remote. Interest payments received
on such loans are applied as a reduction of the loan principal balance.
Interest income on other impaired loans is recognized only to the extent of
interest payments received.
An allowance for loan losses is maintained at a level considered adequate
to absorb loan losses. Management of the Association, in determining the
allowance for loan losses, considers the risks inherent in its loan
portfolio and changes in the nature and volume of its loan activities,
along with general economic and real estate market conditions. The
Association utilizes a two tier approach: (1) identification of impaired
loans and the establishment of specific loss allowances on such loans; and
(2) establishment of general loss allowances on the remainder of its loan
portfolio. The Association maintains a loan review system which allows for
a periodic review of its loan portfolio and the early identification of
potential impaired loans. Such system takes into consideration, among other
things, delinquency status, size of loans, type and estimated fair value of
collateral and financial condition of the borrowers. Specific loan loss
allowances are established for identified losses based on a review of such
information. General loan loss allowances are based on a combination of
factors including, but not limited to, actual loan loss experience,
composition of the loan portfolio, current economic conditions and
management's judgement. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated
cash flows. The allowance is increased by a provision for loan losses,
which is charged to expense, and reduced by charge-offs, net of recoveries.
Office Properties and Equipment
Office properties and equipment are comprised of land, at cost, and
buildings, building improvements and furnishings and equipment, at cost
less accumulated depreciation. Depreciation charges are computed on the
straight-line and declining balance methods over the following estimated
useful lives:
Buildings and improvement 10 to 40 years
Furnishings and equipment 5 to 10 years
(continued)
F-9
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Office Properties and Equipment (Cont'd)
Significant renewals and betterments are charged to the premises and
equipment account. Maintenance and repairs are charged to operations
in the period incurred.
Pension Plan
The Association has a pension plan covering substantially all
employees. The plan is a fully insured defined benefit plan provided
through a contract with a life insurance company that is currently
funded by the Association through annual premiums.
Income Taxes
Income taxes are provided for the tax effects of the transactions
reported in the financial statements and consist of taxes currently
due plus deferred taxes. The deferred tax assets and liabilities
represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred tax assets and
liabilities are reflected at income tax rates applicable to the period
in which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provision
for income taxes.
Comprehensive Income
In 1998, the Association adopted Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income. SFAS No. 130
establishes reporting requirements of comprehensive income and its
components. Comprehensive income for the Association consist of net
income and unrealized losses on available for sale securities and is
presented in the consolidated statement of changes in equity. The
adoption of SFAS No. 130 had no impact on total equity. Prior year
financial statements have been reclassified to conform to the SFAS No.
130 requirements.
Statements of Cash Flows
The Association considers all cash and amounts due from depository
institutions and interest-bearing deposits in other banks to be cash
equivalents for purposes of the statements of cash flows.
(continued)
F-10
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Reclassifications
Certain amounts in 1997 have been reclassified to conform with the
1998 presentation.
2. INVESTMENT SECURITIES
The amortized cost and estimated fair values of the Association's
investments in securities at December 31, 1998 and 1997 are summarized
as follows:
<TABLE>
December 31, 1998
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------------- ------------- --------------- ----------------
<S> <C> <C> <C> <C>
Securities available-
for-sale
U.S. Government and
federal agencies $ 200,000 $ 360 $ - $ 200,360
State and local
governments 99,745 - (1,245) 98,500
Mortgaged-backed
securities
FNMA 1,501,363 - (6,299) 1,495,064
GNMA 1,239,376 3,964 - 1,243,340
Other 985,146 - (18,116) 967,030
--------------- ------------- -------------- ---------------
$4,025,630 $ 4,324 $ (25,660) $4,004,294
=============== ============== =============== ===============
December 31, 1998
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------------- ------------- --------------- ----------------
Securities held-
to-maturity
U.S. Government and
federal agencies $ 500,000 $ - $ (17,835) $ 482,165
State and local
governments 1,295,177 13,202 - 1,308,379
Mortgaged-backed
securities
FHLMC 487,737 323 - 488,060
FNMA 2,511,591 64,839 - 2,576,430
GNMA 384,624 - (362) 384,262
Other 21,076 - (199) 20,877
--------------- -------------- --------------- ----------------
$5,200,205 $78,364 $ (18,396) $5,260,173
=============== ============== =============== ================
</TABLE>
(continued)
F-11
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
2. INVESTMENT SECURITIES (Cont'd)
The Association did not have securities classified as available-for-sale at
December 31, 1997.
<TABLE>
December 31, 1997
----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Securities held-
to-maturity
U.S. Government and
federal agencies $496,799 $ - $ (21,323) $ 475,476
State and local
governments 460,000 4,991 - 464,991
Mortgaged-backed
securities
FHLMC 517,404 4,384 - 521,788
FNMA 866,286 19,872 - 886,158
Other 30,250 - (80) 30,170
----------------- ---------------- ----------------- -----------------
$ 2,370,739 $ 29,247 $(21,403) $ 2,378,583
================= ================ ================= =================
</TABLE>
The following is a summary of maturities of available-for-sale and
securities held-to maturity at December 31, 1998:
<TABLE>
Available-for-sale Held-to-maturity
--------------------------------- -------------------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
--------------- ---------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Amounts maturing in:
One year or less $ - $ - $ - $ -
After one year
through five years 99,745 98,500 533,893 520,794
After five years
through ten
years 200,000 200,360 414,498 419,080
After ten years 3,725,885 3,705,434 4,251,814 4,320,299
--------------- ---------------- ----------------- ------------------
$4,025,630 $4,004,294 $5,200,205 $ 5,260,173
=============== ================ ================= ==================
</TABLE>
(continued)
F-12
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
2. INVESTMENT SECURITIES (Cont'd)
The amortized cost and fair value of mortgage-backed securities are
presented by contractual maturity in the preceding table. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations without call or prepayment
penalties.
3. LOANS RECEIVABLE - NET
Loans receivable - net at December 31, 1998 and 1997 consists of the
following:
1998 1997
---------- ----------
Real estate
1 - 4 family $23,537,782 $28,309,779
Non-residential 765,331 837,824
Consumer loans
Home equity and second mortgage 3,233,871 2,968,903
Share loans 276,873 362,711
Other 289,183 137,589
Commercial loans 78,799 -
---------- ----------
28,181,839 32,616,806
Loans in process (51,175) (138,400)
Net deferred loan origination fees (180,078) (233,436)
Allowance for loan losses (166,200) (126,579)
---------- ----------
$27,784,386 $32,118,391
========== ==========
An analysis of the allowance for loan losses at December 31, 1998 and
1997 is as follows:
1998 1997
--------------- ---------------
Balance, beginning of year $ 126,579 $ 119,199
Provision for loan losses 50,000 12,000
Charge-offs (10,379) (4,620)
--------------- ---------------
Balance, end of year $ 166,200 $ 126,579
=============== ===============
(continued)
F-13
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
3. LOANS RECEIVABLE - NET (Cont'd)
Nonaccrual loans totaled $322,000 and $543,000 at December 31, 1998 and
1997. Nonaccrual loans are those on which income under the accrual
method has been discontinued with subsequent interest payments credited
to interest income and when received or, if the ultimate collectibility
of principal is in doubt, applied as principal reductions. The impact of
nonaccrual loans was to reduce interest income by $7,048 and $10,016 for
the years ended December 31, 1998 and 1997.
The Association has entered into lending transactions, in the ordinary
course of business, with executive officers and directors of the
Association and to their associates on the same terms as those
prevailing for comparable transactions with other borrowers. A summary
of activity related to such loans is as follows:
1998 1997
--------- ---------
Balance, beginning of year $ 201,805 $ 213,161
Loans 228,703 22,000
Repayments (128,124) (33,356)
--------- ---------
Balance, end of year $ 302,384 $ 201,805
========= =========
4. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following at December 31,
1998 and 1997:
1998 1997
--------- ---------
Loans $ 175,930 $ 204,993
Investments 68,110 20,600
--------- ---------
244,040 225,593
Allowance for uncollectible interest (16,328) (22,546)
--------- ---------
$ 227,712 $ 203,047
========= =========
(continued)
F-14
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
5. OFFICE PROPERTIES AND EQUIPMENT
A summary of office properties and equipment at December 31, 1998 and
1997 follows:
Description 1998 1997
-------------------------- ------------ ------------
Land $ 193,930 $ 193,930
Buildings and improvements 820,635 759,283
Furnishings and equipment 587,960 570,607
------------ ------------
1,602,525 1,523,820
Accumulated depreciation (556,475) (462,480)
------------ ------------
$1,046,050 $ 1,061,340
============ ============
6. RENTAL PROPERTY
A summary of rental property at December 31, 1998 and 1997 follows:
1998 1997
------------------ ------------------
Land $ 9,800 $ 9,800
Building and improvements 98,387 98,387
------------------ ------------------
108,187 108,187
Accumulated depreciation (39,509) (35,375)
------------------ ------------------
$ 68,678 $ 72,812
================== ==================
(continued)
F-15
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
7. DEPOSITS
Deposits at December 31, 1998 and 1997 consisted of the following:
1998 1997
------------------------- -------------------------
Percent Percent
of of
Total Total
Amount Deposits Amount Deposits
------------ ----------- ------------ -----------
Commercial checking $ 1,096,334 3.88% $ 552,759 2.36%
accounts
NOW accounts 1,193,744 4.22% 766,379 3.27%
Savings accounts 3,959,892 14.01% 3,312,062 14.11%
Money Market 1,606,027 5.68% 1,159,218 4.94%
Certificates of deposit
1 - 3 months 272,726 0.96% 16,140 0.07%
4 - 6 months 1,325,018 4.69% 899,152 3.83%
7 - 12 months 5,194,567 18.37% 3,396,575 14.47%
13 - 36 months 9,660,262 34.17% 10,909,867 46.49%
37 + months 3,963,861 14.02% 2,455,543 10.46%
------------ ------------ ------------- ------------
$28,272,431 100.00% $23,467,695 100.00%
============ ============ ============= ===========
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was $1,933,731 at December 31, 1998 and $2,211,301 at December 31,
1997. Deposits in excess of $100,000 are not insured by the Savings Association
Insurance Fund.
Maturities of certificates of deposit at December 31, 1998 are as
follows:
1999 $11,772,014
2000 3,988,623
2001 1,179,655
2002 434,555
2003 and thereafter 3,041,587
-----------
$20,416,434
==========
(continued)
F-16
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
7. DEPOSITS (Cont'd)
Interest expense on deposits consists of:
1998 1997
------------------ ------------------
NOW accounts $ 15,931 $ 12,747
Money market $ 33,754 $ 29,469
Savings accounts 97,335 83,738
Certificates of Deposit 1,066,071 1,028,108
------------------ ------------------
$1,213,091 $1,154,062
================== ==================
8. ADVANCES FROM FEDERAL HOME LOAN BANK
Advances in the amount of $9,257,408 in 1998 and $9,816,528 in 1997
are due in each of the next five years and thereafter as follows:
Weighted Weighted
Average Average
December 31, Interest rate December 31, Interest rate
1998 1998 1997 1997
------------ ------------- ------------ -------------
Maturity
Within one year $3,000,000 5.48% $3,412,000 5.90%
Within two years 2,007,408 5.95% 3,000,000 5.47%
Within three years - - 2,404,528 6.12%
Within four years 1,000,000 6.08% - -
Five years and
thereafter 3,250,000 5.18% 1,000,000 6.08%
--------- ---------
$9,257,408 $9,816,528
========= =========
The Association's investment securities issued by the U.S. Government
and federal agencies, mortgage-backed securities and real estate
mortgage loans receivable with carrying values of approximately
$32,000,000 at December 31, 1998 are pledged as collateral for FHLB
advances.
(continued)
F-17
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
9. INCOME TAXES
The Association and subsidiary file a consolidated federal income tax
return. The consolidated provision for income taxes for 1998 and 1997
consists of the following: The difference between the statutory federal
income tax rate and the effective income tax rates are as follows:
1998 1997
------------- ----------------
(as restated)
Taxes currently payable
Federal $ 14,160 $ 72,890
State 8,842 16,272
Deferred taxes (benefit) (3,644) (10,458)
------------- ----------------
Total income tax expense $ 19,358 $ 78,704
============= ================
Effective income tax rate 16.18% 32.60%
============= ================
The difference between the statutory federal income tax rate and the
effective income tax rates are as follows:
1998 1997
------------- ------------------
(as restated)
Pre-tax income $ 119,674 $ 241,452
Expected tax provision at 34% rate 40,689 82,094
Tax-exempt interest income (15,292) (9,403)
Reserve for loan losses 13,640 (6,178)
State income tax, net of
federal income tax benefit 5,346 10,250
Reserve for uncollected interest (2,114) 5,735
Deferred loan fees (18,141) (10,023)
Other (4,770) 6,229
------------- ------------------
Actual income tax expense $ 19,358 $ 78,704
============= ==================
(continued)
F-18
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
9. INCOME TAXES (Cont'd)
The components of deferred tax assets (liabilities) at December 31, 1998
and 1997 are as follows:
1998 1997
------------ ------------------
(as restated)
Deferred loan fees $ 61,227 $ 79,368
Unrealized depreciation on securities
available-for-sale 7,254 -
Reserve for uncollected interest 5,552 7,666
Reserve for loan losses 54,514 40,874
Recapture of excess loan loss reserves (30,776) (41,035)
------------ ------------------
Net deferred tax asset $ 97,771 $ 86,873
============ ==================
The Association is permitted a special bad debt deduction for federal
income tax purposes which is limited generally to an amount calculated
under the experience method as defined in Section 585 of the Internal
Revenue Code. With the passage of the Small Business Jobs Protection Act
of 1996, thrift institutions are no longer permitted to use the
percentage of taxable income method of computing additions to their bad
debt reserves as provided for in Code Section 593. In addition, the
excess of the thrift's bad debt reserves over those permitted, as
defined under the provisions of the new Act, are required to be
recaptured into income for federal income tax purposes beginning in
calendar years after 1995 over a six year period. Excess reserves are
those reserves in excess of the base year reserves generally defined as
the balance of reserves as of December 31, 1987. In accordance with SFAS
109, "Accounting for Income Taxes", a deferred liability has not been
established for the tax bad debt base year reserve of the Association.
Therefore, retained earnings at December 31, 1998 and 1997 includes
approximately $703,000 representing such bad debt deductions for which
no deferred taxes have been provided. Reserves totaling $181,035 are
being recaptured into federal taxable income ratably over a six year
period that began in 1996.
No valuation allowance is considered necessary at December 31, 1998
and 1997.
(continued)
F-19
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
10. REGULATORY MATTERS
The Association is subject to various regulatory capital requirements
administered by its primary federal regulator, the Office of Thrift
Supervision (OTS). Failure to meet the minimum regulatory capital
requirements can initiate certain mandatory, and possible additional
discretionary actions by regulators, that if undertaken, could have a
direct material effect on the Association and the consolidated financial
statements. Under the regulatory capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Association must
meet specific capital guidelines involving quantitative measures of the
Association's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Association's
capital amounts and classification are also subject to qualitative
judgements by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Association to maintain minimum amounts of ratios
of Total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and Tier 1 capital to assets (as
defined).
The following tables present a reconciliation of capital per generally
accepted accounting principles (GAAP) and regulatory capital and
information as to the Association's capital levels at the dates
presented (in thousands):
December December
31, 1998 31, 1997
-------- --------
GAAP equity $ 3,698 $ 3,565
Add: Unrealized losses on AFS securities
net of income taxes 14 -
-------- --------
Tangible and core capital 3,712 3,565
Add: General valuation allowance 166 126
-------- --------
Total regulatory capital $ 3,878 $ 3,691
======== ========
(continued)
F-20
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
10. REGULATORY MATTERS (Cont'd)
<TABLE>
December 31, 1998
--------------------------------------------------------------------------------------
To Be Well
Capitalized Under
Minimum Prompt Corrective
Actual Capital Requirements Action Provisions
----------------------- ------------------------- -----------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- --------- ------------ ------------- ------------------ -------------
(Thousands) (Thousands) (Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-
weighted assets) $ 3,878 19.23% $ 1,613 8.00% $ 2,017 10.00%
Tier 1 capital (to risk-
weighted assets) 3,712 18.41% - - 1,210 6.00%
Core (Tier 1) capital (to
adjusted total assets) 3,712 8.93% 1,622 4.00% 2,078 5.00%
Tangible equity (to
adjusted total assets) 3,712 8.93% 623 1.50% - -
December 31, 1997
------------------------------------------------------------------------------------
To Be Well
Capitalized Under
Minimum Prompt Corrective
Actual Capital Requirements Action Provisions
---------------------- ------------------------- ---------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- -------- ----------- ------------- ------------------ -------------
(Thousands) (Thousands) (Thousands)
Total capital (to risk- $ 3,691 17.90% $ 1,650 8.00% $ 2,062 10.00%
weighted assets)
Tier 1 capital (to risk- 3,565 17.29% - - $ 1,237 6.00%
weighted assets)
Core (Tier 1) capital (to
adjusted total assets) 3,565 9.56% 1,487 4.00% 1,859 5.00%
Tangible equity (to
adjusted total assets) 3,565 9.56% 558 1.50% - -
</TABLE>
(continued)
F-21
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
10. REGULATORY MATTERS (Cont'd)
As of November 30, 1998, the most recent notification from the OTS, the
Association was categorized as adequately capitalized under the
regulatory framework for prompt corrective action. There are no
conditions existing or events which have occurred since notification
that management believes have changed the institution's category.
11. PENSION PLAN
The Association has a qualified, noncontributory, fully insured defined
benefit pension plan which covers substantially all of the employees.
The benefits are primarily based on years of service and earnings. The
plan is fully insured through a contract with a life insurance company
and, as such, the benefits of the plan are covered by the insurance
contract. As a result, disclosure of the accumulated benefit
obligations, plan assets and the components of annual pension expense
required by Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions" is not applicable.
The Association makes annual premium payments for plan years that
coincide with the Association's fiscal year. The Association has no
obligation for benefits covered by the plan other than the payment of
premiums due to the insurance company. Pension expense of the
Association, net of experienced-rated dividends for the years ended
December 31, 1998 and 1997 follows:
1998 1997
--------------- ---------------
Premium for plan year ended December 31, $ 67,096 $ 52,199
Experienced-rated dividends (15,712) (14,449)
--------------- ---------------
$ 51,384 $ 37,750
=============== ===============
12. RETIREMENT SAVINGS PLAN
The Association is a participant in the Financial Institutions Thrift
Plan. The plan covers substantially all employees and is in
participation with other institutions. The plan is a qualified 401(k)
salary deduction plan that permits participants to contribute up to 15%
of their salary to the plan. Additionally, the Association provides
matching contributions up to 6% of the participant salaries. For the
years ended December 31, 1998 and 1997, the Association's contributions
totaled $15,814 and $13,715.
(continued)
F-22
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
13. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Association has various
outstanding commitments and contingent liabilities that are not
reflected in the accompanying consolidated financial statements. The
financial commitments of the Association are as follows:
The Association has outstanding commitments to originate loans as
follows:
December 31,
----------------------------
1998 1997
--------------- -----------
First mortgage loans (fixed rate) $ 274,600 $208,800
=============== ===========
The range of interest rates on fixed rate first mortgage loan
commitments was 6.5% to 8.0% at December 31, 1998.
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Association is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financial needs of its customers. These financial instruments consist of
commitments to extend credit. These instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in
the statement of financial position. The contract or notional amounts of
those instruments reflect the extent of involvement the Association has
in particular classes of financial instruments.
The Association's exposure to credit loss in the event of
non-performance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual notional
amount of those instruments. The Association uses the same credit
policies in making commitments as it does for on-balance-sheet
instruments.
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. The Association evaluates each customer's
credit-worthiness on a case-by-case basis. The amount of collateral
obtained upon extension of credit is based on management's credit
evaluation of the counter party.
(continued)
F-23
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
15. FAIR VALUES 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 statement of financial condition. 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 settlement of the instruments. Statement No. 107 excludes
certain financial instruments and all non-financial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Association.
The following methods and assumptions were used by the Association in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents - The carrying amounts reported in the
statement of financial condition for cash and cash equivalents
approximate fair value.
Investment securities (including mortgage-backed securities) Fair
values for investment securities are based on quoted market
prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of
comparable instruments.
Loans - The fair values for loans are estimated using discounted
cash flow analysis, based on interest rates currently being
offered for loans with similar terms to borrowers of similar
credit quality. Loan fair value estimates include judgments
regarding future expected loss experience and risk
characteristics. The carrying amount of accrued interest
receivable approximates its fair value.
Federal Home Loan Bank Stock - No ready market exists for this
stock and it has no quoted market value. However, redemption of
this stock has historically been at par value. Accordingly, the
carrying amount is deemed to be a reasonable estimate of fair
value.
(continued)
F-24
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
15. FAIR VALUES OF FINANCIAL INSTRUMENTS (Cont'd)
Deposits - The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the
reporting date (that is, their carrying amounts). The fair values
for certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated contractual
maturities on such time deposits. The carrying amount of accrued
interest payable approximates fair value.
Advances - The carrying amounts of advances from the Federal Home
Loan Bank are estimated using discounted cash flow analysis,
based on interest rates currently being offered for loans with
similar terms.
Commitments to extend credit - The fair value of these items
approximate their contractual amounts.
The carrying amounts and estimated fair values of the Association's
financial instruments at December 31, 1998 and 1997 are as follows:
<TABLE>
1998 1997
------------------------------ ----------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------ ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Financial assets
Cash $433,414 $433,414 $298,564 $298,564
Interest-bearing
deposits 1,954,178 1,954,178 490,008 490,008
Investments
Available-for-sale 4,004,294 4,004,294 - -
Held-to-maturity 5,200,205 5,260,173 2,370,739 2,378,583
Loans receivable - net 27,784,386 28,324,393 32,118,391 32,772,000
Federal Home Loan
Bank stock 564,600 564,600 490,900 490,900
Financial liabilities
Deposits 28,272,431 28,492,224 23,467,695 23,506,660
Advances from Federal
Home Loan Bank 9,257,408 9,258,408 9,816,528 9,775,530
Off-balance sheet select
financial liabilities
Commitments to
originate loans 274,600 274,600 208,800 208,800
Unused lines of credit 201,000 201,000 115,000 115,000
</TABLE>
(continued)
F-25
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
15. FAIR VALUES OF FINANCIAL INSTRUMENTS (Cont'd)
The carrying amounts in the preceding table are included in the
Consolidated Statement of Financial Condition under the applicable
captions.
Fair value estimates are made at a specific point in time based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the entire holdings of a
particular financial instrument. Because no market exists for a
significant portion of the financial instruments, fair value estimates
are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in
nature, involve uncertainties and matters of judgment and, therefore,
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Finally, reasonable comparability between financial institutions may not
be likely due to the wide range of permitted valuation techniques and
numerous estimates which must be made given the absence of active
secondary markets for many of the financial instruments. This lack of
uniform valuation methodologies introduces a greater degree of
subjectivity to these estimated fair values.
16. YEAR 2000 ISSUE
The Association has assessed and continues to assess the potential
impact that the year 2000 issue has on its operations. Procedures and
processes completed to date include upgrades or replacements of
non-compliant systems, testing of year 2000 compliant systems, and
development of contingency plans for each system deemed mission critical
to the Association. Costs of system upgrades or replacements have been
expensed or capitalized appropriately, as incurred. Anticipated costs to
upgrade or replace the Association's software or systems related to year
2000 compliance is not expected to exceed $50,000 in 1999. Although it
is not possible to quantify the effects year 2000 compliance issues will
have on customers or suppliers, the Association does not anticipate
related material adverse effects on its financial condition or results
of operations.
(continued)
F-26
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
17. PLAN OF CONVERSION
On January 27, 1999, the Board of Directors of the Association, subject
to regulatory approval, ratified a Plan of Conversion (the "plan") to
convert from a federally chartered mutual savings institution to a
federally chartered stock savings institution. The Association will
become a wholly owned subsidiary of a concurrently formed holding
company. The plan provides that the holding company will offer
nontransferable subscription rights to purchase common stock of the
holding company. The rights will be offered first to eligible account
holders, the employee stock ownership plan, which will be formed
concurrently with the reorganization, supplemental eligible account
holders and other members. Any shares remaining may then be offered to
the general public.
Costs associated with the conversion will be deferred and deducted from
the proceeds of the stock offering. If, for any reason, the offering is
not successful, the deferred costs will be charged to operations. As of
December 31, 1998 there were $5,000 of costs associated with the
conversion that have been deferred and presented as other assets.
18. PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The Association's financial statements as of December 31, 1997 have been
restated to reflect the deferred tax effects of certain temporary
differences between book and tax reserves. The effect of the restatement
is as follows:
As Previously
Reported As
Restated
--------------- ---------------
Statement of financial condition
Deferred tax assets $ 40,005 $86,873
Retained earnings 3,565,387 3,612,255
Additionally, the consolidated statement of changes in equity reflects an
increase in the Association's retained earnings of $40,657 as of January
1, 1997.
(continued)
F-27
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
19. IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No 131, "Disclosures
about Segments of an Enterprise and Related Information" (Statement No.
131), which changes the way public companies report information about
segments of their businesses and requires them to report selected
segment information in their quarterly reports issued to stockholders.
Among other things, Statement No. 131 requires public companies to
report (1) certain financial and descriptive information about their
reportable operating segments (as defined), and (2) certain
enterprise-wide financial information about products and services,
geographic areas and major customers. The required segment financial
disclosures include a measure of profit or loss, certain specific
revenue and expense items, and total assets. Statement No. 131 is
effective for reporting by public companies in fiscal years beginning
after December 15, 1997 and, accordingly, would be adopted by the
Association upon completion of its conversion. Statement No. 131 is not
expected to have a significant impact on the Association's financial
reporting.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." The statement
addresses disclosures only. The disclosure requirements of SFAS No. 132
are effective for fiscal years beginning after December 15, 1997 and
have had no impact on the financial condition or operations of the
Association.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging
activities. It requires an entity to recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. In addition, certain provisions of this
statement will permit, at the date of initial adoption of the statement,
the transfer of any held-to-maturity security into either the
available-for-sale or trading category and the transfer of any
available-for-sale security into the trading category. Transfers from
the held-to-maturity portfolio at the date of initial adoption will not
call into question the entity's intent to hold other debt securities to
maturity in the future. SFAS No. 133 is effective for fiscal quarters
beginning after June 15, 1999 and is not expected to have a material
impact on the Association. The Association does not intend to adopt SFAS
No. 133 earlier than required.
(continued)
F-28
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
19. IMPACT OF NEW ACCOUNTING STANDARDS (Cont'd)
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgaged-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." SFAS No.
134 amends FASB Statement No. 65,"Accounting for Certain Mortgage
Banking Activities" as previously amended by FASB Statements No. 115,
"Accounting for Certain Investment in Debt and Equity Securities" and
FASB No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" to require that after the
securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed
securities or other retained interests based on its ability and intent
to sell or hold those investments. SFAS No. 134 conforms the subsequent
accounting for securities retained after the securitization of mortgage
loans by a mortgage banking enterprise with the subsequent accounting
for securities retained after the securitization of other types of
assets by a non-mortgage banking enterprise. This statement is effective
for the first fiscal quarter beginning after December 15, 1998 and is
not expected to have a material impact on the Association.
F-29
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
================================================================================ ==================================================
You should rely only on the information contained in this document. We have not
authorized anyone to provide you with information that is different. This
document does not constitute an offer to sell, or the solicitation of an offer
to buy, any of the securities offered hereby to any person in any jurisdiction
in which [the] offer or solicitation would be unlawful. The affairs of Mechanics
Savings and Loan, FSA or Steelton Bancorp, Inc. may change after the date of 500,250 Shares
this prospectus. Delivery of this document and the sales of shares made
hereunder does not mean otherwise.
TABLE OF CONTENTS
Page
----
Summary.........................................................................
Risk Factors....................................................................
The Offering....................................................................
Mechanics Savings and Loan, FSA.................................................
Steelton Bancorp, Inc...........................................................
Use of Proceeds.................................................................
Dividend Policy................................................................. Steelton Bancorp, Inc.
Market for the Stock............................................................
Capitalization..................................................................
Pro Forma Data..................................................................
Historical and Pro Forma Capital Compliance.....................................
[Recent Developments............................................................] ----------------------
Selected Financial and Other Data...............................................
Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................. PROSPECTUS
Business of Steelton Bancorp, Inc...............................................
Business [of] Mechanics Savings and Loan, FSA...................................
Regulation...................................................................... ----------------------
Taxation........................................................................
Management......................................................................
The Conversion..................................................................
Restrictions on Acquisition of Steelton Bancorp, Inc............................
Description of Capital Stock....................................................
Legal and Tax Opinions.......................................................... Capital Resources, Inc.
Experts.........................................................................
Registration Requirements.......................................................
Where You Can Find Additional Information.......................................
Index to Consolidated Financial Statements...................................... ________________ ______, 1999
Until the later of ________or 90 days after commencement of the offering, all THESE SECURITIES ARE NOT DEPOSITS OR
dealers effecting transactions in these securities, whether or not participating SAVINGS ACCOUNTS AND ARE NOT
in this offering, may be required to deliver a prospectus. This is in addition FEDERALLY INSURED OR GUARANTEED
to the dealers' obligation to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
================================================================================ ==================================================
</TABLE>
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 27. Exhibits:
The exhibits filed as part of this Registration Statement are
as follows:
<TABLE>
<CAPTION>
<S> <C>
1 Form of Sales Agency Agreement with Capital Resources, Inc.*
2 Plan of Conversion of Mechanics Savings & Loan, FSA
3(i) Articles of Incorporation of Steelton Bancorp, Inc.*
3(ii) Bylaws of Steelton Bancorp, Inc.*
4 Specimen Stock Certificate of Steelton Bancorp, Inc.*
5.1 Opinion of Malizia, Spidi, Sloane & Fisch, P.C. regarding legality of securities registered*
5.2 Opinion of FinPro, Inc. as to the value of subscription rights*
8.1 Federal Tax Opinion of Malizia, Spidi, Sloane & Fisch, P.C.
8.2 State Tax Opinion of Malizia, Spidi, Sloane & Fisch, P.C.*
10.1 Form of Employment Agreement between the Bank and Harold E. Stremmel*
23.1 Consent of Malizia, Spidi, Sloane & Fisch, P.C. (contained in its opinions filed as Exhibits 5.1, 8.1 and
8.2)
23.2 Consent of McKonly & Asbury, LLP*
23.3 Consent of FinPro, Inc.*
24 Power of Attorney (reference is made to the signature page)
27 Financial Data Schedule**
99.1 Stock Order Form
99.2 Marketing Materials*
</TABLE>
- ---------------------------------
* Previously filed
* * Electronic filing only
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, in
Steelton, Pennsylvania, on April 22, 1999.
STEELTON BANCORP, INC.
By: /s/ Harold E. Stremmel
Harold E. Stremmel
President, Chief Executive Officer and Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities indicated as of April 22, 1999.
<TABLE>
<CAPTION>
<S> <C>
/s/Marino Falcone* /s/ Harold E. Stremmel
- -------------------------------------------- -----------------------------------------------
Marino Falcone Harold E. Stremmel
Chairman of the Board President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/James F. Stone* /s/James S. Nelson
- -------------------------------------------- -----------------------------------------------
James F. Stone James S. Nelson
Vice Chairman of the Board Senior Vice President and Director
/s/Shannon Aylesworth /s/Victor J. Segina*
- -------------------------------------------- -----------------------------------------------
Shannon Aylesworth Victor J. Segina
Chief Financial Officer Secretary and Director
(Principal Accounting and Financial Officer)
/s/Joseph A. Wiedeman* /s/Richard E. Farina*
- -------------------------------------------- -----------------------------------------------
Joseph A. Wiedeman Richard E. Farina
Treasurer and Director Director
</TABLE>
__________________________
*Signed pursuant to a Power of Attorney.
<PAGE>
As filed with the Securities and Exchange Commission on April 22, 1999
Registration No. 333-74279
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
EXHIBITS TO
PRE-EFFECTIVE AMENDMENT NO. 1
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
-------------------
Steelton Bancorp, Inc.
- --------------------------------------------------------------------------------
(Exact name of Small Business Issuer as specified in charter)
Pennsylvania 6035 25-1830745
- --------------------------------- ----------------- -------------------
(State or other jurisdiction (Primary SIC No.) (I.R.S. Employer
of incorporation or organization) Identification No.)
51 South Front Street, Steelton, Pennsylvania 17113
(717) 939-1966
- --------------------------------------------------------------------------------
(Address, including zip code, and telephone number, including area code,
of principal executive offices and principal place of business)
Mr. Harold E. Stremmel
President and Chief Executive Officer
Steelton Bancorp, Inc.
51 South Front Street, Steelton, Pennsylvania 17113
(717) 939-1966
- --------------------------------------------------------------------------------
(Name, address and telephone number of agent for service)
Please send copies of all communications to:
Samuel J. Malizia, Esq.
Gregory A. Gehlmann, Esq.
Tiffany A. Henricks, Esq.
MALIZIA, SPIDI, SLOANE & FISCH, P.C.
1301 K Street, N.W., Suite 700 East, Washington, D.C. 20005
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
<PAGE>
INDEX TO EXHIBITS TO FORM SB-2
Exhibit
- -------
<TABLE>
<CAPTION>
<S> <C>
1 Form of Sales Agency Agreement with Capital Resources, Inc.*
2 Plan of Conversion of Mechanics Savings & Loan, FSA
3(i) Articles of Incorporation of Steelton Bancorp, Inc.*
3(ii) Bylaws of Steelton Bancorp, Inc.*
4 Specimen Stock Certificate of Steelton Bancorp, Inc.*
5.1 Opinion of Malizia, Spidi, Sloane & Fisch, P.C. regarding legality of securities registered*
5.2 Opinion of FinPro, Inc. as to the value of subscription rights*
8.1 Federal Tax Opinion of Malizia, Spidi, Sloane & Fisch, P.C.
8.2 State Tax Opinion of Malizia, Spidi, Sloane & Fisch, P.C.*
10.1 Form of Employment Agreement between the Bank and Harold E. Stremmel*
23.1 Consent of Malizia, Spidi, Sloane & Fisch, P.C. (contained in its opinions filed as Exhibits 5.1, 8.1 and 8.2)
23.2 Consent of McKonly & Asbury, LLP*
23.3 Consent of FinPro, Inc.*
24 Power of Attorney (reference is made to the signature page)
27 Financial Data Schedule**
99.1 Stock Order Form
99.2 Marketing Materials*
</TABLE>
- ---------------
* Previously filed
** Electronic filing only
EXHIBIT 2
<PAGE>
PLAN OF CONVERSION
Adopted on
January 27, 1999
and Subsequently Amended
By the Board of Directors of
Mechanics Savings & Loan, FSA
Steelton, Pennsylvania
<PAGE>
TABLE OF CONTENTS
Page
----
1. Introduction................................................. 1
2. Definitions.................................................. 2
3. Procedure for Conversion..................................... 5
4. Holding Company Applications and Approvals................... 5
5. Sale of Conversion Stock..................................... 5
6. Number of Shares and Purchase Price of
Conversion Stock...................................... 6
7. Purchase by the Holding Company of the Stock
of the Institution.................................... 7
8. Subscription Rights of Eligible Account
Holders (First Priority).............................. 7
9. Subscription Rights of Employee Plans (Second Priority)...... 7
10. Subscription Rights of Supplemental Eligible
Account Holders (Third Priority)...................... 8
11. Subscription Rights of Other Members
(Fourth Priority)..................................... 8
12. Community Offering........................................... 9
13. Public Offering.............................................. 9
14. Limitation on Purchases...................................... 10
15. Payment for Conversion Stock................................. 11
16. Manner of Exercising Subscription Rights
Through Order Forms................................... 12
17. Undelivered, Defective or Late Order Forms or
Insufficient Payment.................................. 13
18. Restrictions on Resale or Subsequent Disposition............. 13
19. Voting Rights of Stockholders................................ 14
20. Establishment of Liquidation Account......................... 14
21. Transfer of Savings Accounts................................. 15
22. Restrictions on Acquisition of the Institution
and Holding Company................................... 16
23. Payment of Dividends and Repurchases of Stock................ 16
24. Amendment of Plan............................................ 16
25. Charter and Bylaws........................................... 16
26. Consummation of Conversion................................... 16
27. Registration and Marketing................................... 16
28. Residents of Foreign Countries and Certain States............ 16
29. Expenses of Conversion....................................... 17
30. Conditions to Conversion..................................... 17
31. Interpretation............................................... 17
<PAGE>
PLAN OF CONVERSION
FOR
MECHANICS SAVINGS & LOAN, FSA
STEELTON, PENNSYLVANIA
1. INTRODUCTION
This Plan of Conversion ("Plan") provides for the conversion of
Mechanics Savings & Loan, FSA ("INSTITUTION") from a Federal mutual savings
association to a federal capital stock savings bank, to be known as Mechanics
Savings Bank. The Board of Directors of the INSTITUTION currently contemplates
that all of the stock of the INSTITUTION shall be held by another corporation
(the "Holding Company"). The purpose of this conversion is to enable the
INSTITUTION to be in the stock form of organization, like commercial banks and
most other corporations. The conversion will result in an increase in the
INSTITUTION's capital available to support growth and for expansion of its
facilities, possible diversification into other related financial services
activities and further enhance the INSTITUTION's ability to render services to
the public and compete with other financial institutions. The use of the Holding
Company would also provide greater organizational flexibility. Shares of capital
stock of the INSTITUTION will be sold to the Holding Company and the Holding
Company will offer the Conversion Stock upon the terms and conditions set forth
herein to Eligible Account Holders, the tax-qualified employee stock benefit
plans (the "Employee Plans") established by the INSTITUTION or the Holding
Company, which may be funded by the Holding Company, Supplemental Eligible
Account Holders, and Other Members in the respective priorities set forth in
this Plan. Any shares of Conversion Stock not subscribed for by the foregoing
classes of persons may be offered for sale to certain members of the public
either directly by the INSTITUTION and the Holding Company through a Community
Offering or through a Public Offering by an Underwriter. In the event that the
INSTITUTION decides not to utilize the Holding Company in the conversion,
Conversion Stock of the INSTITUTION, in lieu of the Holding Company, will be
sold as set forth above and in the respective priorities set forth in this Plan.
In addition to the foregoing, the INSTITUTION and the Holding Company intend to
implement stock option plans and other stock benefit plans at the time of or
subsequent to the conversion and may provide employment or severance agreements
to certain management employees and certain other benefits to the directors,
officers and employees of the INSTITUTION as described in the prospectus for the
Conversion Stock.
This Plan, which has been approved by the Board of Directors of the
INSTITUTION, must also be approved by the affirmative vote of a majority of the
total number of votes entitled to be cast by Voting Members of the INSTITUTION
at a special meeting to be called for that purpose. Prior to the submission of
this Plan to the Voting Members for consideration, the Plan must be approved by
the Office of Thrift Supervision (the "OTS").
Upon conversion, each Account Holder having a Savings Account at the
INSTITUTION prior to conversion will continue to have a Savings Account, without
payment therefor, in the same amount and subject to the same terms and
conditions (except for voting and liquidation rights) as in effect prior to the
conversion. After conversion, the INSTITUTION will succeed to all the rights,
interests, duties and obligations of the INSTITUTION before conversion,
including but not limited to all rights and interests of the INSTITUTION in and
to its assets and properties, whether real, personal or mixed. The INSTITUTION
will become a member of the Federal Home Loan Bank System and all its insured
savings deposits will continue to be insured by the Federal Deposit Insurance
Corporation (the "FDIC") to the extent provided by applicable law.
A-1
<PAGE>
2. DEFINITIONS
For the purposes of this Plan, the following terms have the following
meanings:
Account Holder - The term Account Holder means any Person holding a
Savings Account in the INSTITUTION.
Acting in Concert - The Term "Acting in Concert" means (i) knowing
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement; (ii) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise; or
(iii) a person or company which acts in concert with another person or company
("other party") shall also be deemed to be acting in concert with any person or
company who is also acting in concert with that other party, except that any
tax-qualified employee stock benefit plan will not be deemed to be acting in
concert with its trustee or a person who serves in a similar capacity solely for
the purpose of determining whether stock held by the trustee and stock held by
the plan will be aggregated.
Associate - The term Associate when used to indicate a relationship
with any person, means (i) any corporation or organization (other than the
INSTITUTION or a majority-owned subsidiary of the INSTITUTION) of which such
person is an officer or partner or is, directly or indirectly, the beneficial
owner of 10 percent or more of any class of equity securities, (ii) any trust or
other estate in which such person has a substantial beneficial interest or as to
which such person serves as trustee or in a similar fiduciary capacity except
that for the purposes of Sections 9 and 14 hereof, the term "Associate" does not
include any Tax-Qualified Employee Stock Benefit Plan or any Non-Tax-Qualified
Employee Stock Benefit Plan in which a person has a substantial beneficial
interest or serves as a trustee or in a similar fiduciary capacity, and except
that, for purposes of aggregating total shares that may be held by Officers and
Directors the term "Associate" does not include any Tax-Qualified Employee Stock
Benefit Plan, and (iii) any relative or spouse of such person, or any relative
of such spouse, who has the same home as such person or who is a Director or
Officer of the INSTITUTION or the Holding Company, or any of its parents or
subsidiaries.
Community Offering - The term Community Offering, if applicable, means
the offering for sale to certain members of the general public directly by the
Holding Company, of shares not subscribed for in the Subscription Offering.
Conversion Stock - The term Conversion Stock means the $.10 par value
common stock offered and issued by the Holding Company upon conversion.
Director - The term Director means a member of the Board of Directors
of the INSTITUTION and, where applicable, a member of the Board of Directors of
the Holding Company.
Eligible Account Holder - The term Eligible Account Holder means any
person holding a Qualifying Deposit at the INSTITUTION on the Eligibility Record
Date. Only the name(s) of the Person(s) listed on the account as of the
Eligibility Record Date (or a successor entity or estate) is an Eligible Account
Holder. Any Person(s) added to a Qualifying Deposit after the Eligibility Record
Date is not an Eligible Account Holder.
Eligibility Record Date - The term Eligibility Record Date means the
date for determining Eligible Account Holders in the INSTITUTION and is the
close of business on December 31, 1997.
Employees - The term Employees means all Persons who are employed by
the INSTITUTION, excluding Directors and Officers.
Employee Plans - The term Employee Plans means the Tax-Qualified
Employee Stock Benefit Plans, including the Employee Stock Ownership Plan,
approved by the Board of Directors of the INSTITUTION.
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Estimated Valuation Range. The term Estimated Valuation Range means the
range of the estimated pro forma market value of the Conversion Stock as
determined by the Independent Appraiser prior to the Subscription Offering and
as it may be amended from time to time thereafter.
FDIC - The term FDIC means the Federal Deposit Insurance Corporation.
Holding Company - The term Holding Company means the corporation formed
for the purpose of acquiring all of the shares of capital stock of the
INSTITUTION to be issued upon its conversion to stock form unless the Holding
Company form of organization is not utilized. Shares of common stock of the
Holding Company will be issued in the Conversion to Participants and others in a
Subscription, Community, Public Offering, or through a combination thereof.
Independent Appraiser - The term Independent Appraiser means an
appraiser retained by the INSTITUTION to prepare an appraisal of the pro forma
market value of the Conversion Stock.
Institution - The term INSTITUTION means Mechanics Savings & Loan, FSA,
Steelton, Pennsylvania.
Local Community - The term local community means the county of Dauphin
in the Commonwealth of Pennsylvania.
Member - The term Member means any Person or entity who qualifies as a
member of the INSTITUTION pursuant to its charter and bylaws.
OTS - The term OTS means Office of Thrift Supervision of the Department
of the Treasury.
Officer - The term Officer means an executive officer of the
INSTITUTION and may include the Chairman of the Board, President, Vice
Presidents in charge of principal business functions, Secretary and Treasurer
and any individual performing functions similar to those performed by the
foregoing persons.
Order Form - The term Order Form means any form together with attached
cover letter, sent by the INSTITUTION to any Person containing among other
things a description of the alternatives available to such Person under the Plan
and by which any such Person may make elections regarding subscriptions for
Conversion Stock in the Subscription and Community Offerings.
Other Member - The term Other Member means any person, who is a Member
of the INSTITUTION (other than Eligible Account Holders or Supplemental Eligible
Account Holders) at the close of business on the voting record date.
Participants - The term Participants means the Eligible Account
Holders, Employee Plans, Supplemental Eligible Account Holders and Other
Members.
Person - The term Person means an individual, a corporation, a
partnership, an association, a joint-stock company, a trust (including
Individual Retirement Accounts and KEOGH Accounts), any unincorporated
organization, a government or political subdivision thereof.
Plan - The term Plan means this Plan of Conversion of the INSTITUTION
as it exists on the date hereof and as it may hereafter be amended in accordance
with its terms.
Public Offering - The term Public Offering, if applicable, means the
offering for sale through the Underwriter to the general public of any shares of
Conversion Stock not subscribed for in the Subscription Offering.
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Purchase Order - The term Purchase Order means any form together with
attached cover letter, sent by the Underwriter to any Person containing among
other things a description of the alternatives available to such Person under
the Plan and by which any such Person may make elections regarding subscriptions
for Conversion Stock in the Public Offering.
Purchase Price - The term Purchase Price means the per share price at
which the Conversion Stock will be sold in accordance with the terms hereof.
Qualifying Deposit - The term Qualifying Deposit means the balance of
each Savings Account of $50 or more in the INSTITUTION at the close of business
on the Eligibility Record Date or Supplemental Eligibility Record Date. Savings
Accounts with total deposit balances of less than $50 shall not constitute a
Qualifying Deposit. Pursuant to the authority contained in 12 C.F.R.
ss.563b.3(e)(1), the term Qualifying Deposit also includes demand accounts as
defined in 12 C.F.R. ss.561.16(a) of $50 or more in the INSTITUTION at the close
of business on the Eligibility Record Date or Supplemental Eligibility Record
Date.
SEC - The term SEC refers to the Securities and Exchange Commission.
Savings Account - The term Savings Account includes savings accounts as
defined in Section 561.42 of the Rules and Regulations of the OTS and includes
certificates of deposit.
Special Meeting of Members - The term Special Meeting of Members means
the special meeting and any adjournments thereof held to consider and vote upon
this Plan.
Subscription Offering - The term Subscription Offering means the
offering of Conversion Stock for purchase through Order Forms to Participants.
Supplemental Eligibility Record Date - The term Supplemental
Eligibility Record Date means the close of business on the last day of the
calendar quarter preceding the approval of the Plan by the OTS.
Supplemental Eligible Account Holder - The term Supplemental Eligible
Account Holder means a holder of a Qualifying Deposit in the INSTITUTION (other
than an officer or trustee or their Associates) at the close of business on the
Supplemental Eligibility Record Date.
Tax-Qualified Employee Stock Benefit Plan - The term Tax-Qualified
Employee Stock Benefit Plan means any defined benefit plan or defined
contribution plan, such as an employee stock ownership plan, stock bonus plan,
profit-sharing plan or other plan, which, with its related trust, meets the
requirements to be "qualified" under Section 401 of the Internal Revenue Code.
Underwriter - The term Underwriter means the investment banking firm or
firms through which the Conversion Stock will be offered and sold in the Public
Offering.
Voting Members - The term Voting Members means those Persons qualifying
as voting members of the INSTITUTION pursuant to its charter and bylaws.
Voting Record Date - The term Voting Record Date means the date fixed
by the Directors in accordance with OTS regulations for determining eligibility
to vote at the Special Meeting of Members.
3. PROCEDURE FOR CONVERSION
After approval of the Plan by the Board of Directors of the
INSTITUTION, the Plan shall be submitted together with all other requisite
material to the OTS for its approval. Notice of the adoption of the Plan by the
Board of Directors of the INSTITUTION will be published in a newspaper having
general circulation in each community
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in which an office of the INSTITUTION is located and copies of the Plan will be
made available at each office of the INSTITUTION for inspection by the Members.
Upon filing the application with the OTS, the INSTITUTION also will cause to be
published a notice of the filing with the OTS of an application to convert in
accordance with the provisions of the Plan. Following approval by the OTS, the
Plan will be submitted to a vote of the Voting Members at a Special Meeting of
Members called for that purpose. Upon approval of the Plan by a majority of the
total votes eligible to be cast by the Voting Members, the INSTITUTION will take
all other necessary steps pursuant to applicable laws and regulations to convert
the INSTITUTION to stock form. The conversion must be completed within 24 months
of the approval of the Plan by the Voting Members, unless a longer time period
is permitted by governing laws and regulations.
The Board of Directors of the INSTITUTION intends to take all necessary
steps to form the Holding Company including the filing of an Application on Form
H-(e)1 or H-(e)1-S, if available to the Holding Company, with the OTS. Upon
conversion, the INSTITUTION will issue its capital stock to the Holding Company
and the Holding Company will issue and sell the Conversion Stock in accordance
with this Plan.
The Board of Directors of the INSTITUTION may determine for any reason
at any time prior to the issuance of the Conversion Stock not to utilize a
holding company form of organization in the Conversion, in which case, the
Holding Company's registration statement on Form S-1 or Form SB-2 will be
withdrawn from the SEC, the INSTITUTION will take all steps necessary to
complete the conversion from the mutual to the stock form of organization,
including filing any necessary documents with the OTS and will issue and sell
the Conversion Stock in accordance with this Plan. In such event, any
subscriptions or orders received for Conversion Stock of the Holding Company
shall be deemed to be subscriptions or orders for Conversion Stock of the
INSTITUTION without any further action by the INSTITUTION or the subscribers for
the Conversion Stock. Any references to the Holding Company in this Plan shall
mean the INSTITUTION in the event the Holding Company is eliminated in the
Conversion.
The Conversion Stock will not be insured by the FDIC. [The INSTITUTION
will not knowingly lend funds or otherwise extend credit to any Person to
purchase shares of the Conversion Stock.]
4. HOLDING COMPANY APPLICATIONS AND APPROVALS
The Holding Company shall make timely applications for any requisite
regulatory approvals, including an Application on Form H-(e)1 or an H-(e)1-S, if
available to the Holding Company, to be filed with the OTS and a Registration
Statement on Form S-1 or Form SB-2 to be filed with the SEC. The INSTITUTION
shall be a wholly owned subsidiary of the Holding Company.
5. SALE OF CONVERSION STOCK
The Conversion Stock will be offered simultaneously in the Subscription
Offering to the Eligible Account Holders, Employee Plans, Supplemental Eligible
Account Holders and Other Members in the respective priorities set forth in
Sections 8 through 11 of this Plan. The Subscription Offering may be commenced
as early as the mailing of the Proxy Statement for the Special Meeting of
Members and must be commenced in time to complete the conversion within the time
period specified in Section 3.
Any shares of Conversion Stock not subscribed for in the Subscription
Offering may be offered for sale in the Community Offering, if any, as provided
in Section 12 of this Plan or offered in a Public Offering, as provided in
Section 13, if necessary and feasible. The Subscription Offering may be
commenced prior to the Special Meeting of Members and, in that event, the
Community Offering or Public Offering may also be commenced prior to the Special
Meeting of Members. The offer and sale of Conversion Stock, prior to the Special
Meeting of Members shall, however, be conditioned upon approval of the Plan by
the Voting Members.
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Shares of Conversion Stock may be sold in a Public Offering, as
provided in Section 13 of this Plan in a manner that will achieve the widest
distribution of the Conversion Stock as determined by the INSTITUTION. In the
event of a Public Offering, the sale of all Conversion Stock subscribed for in
the Subscription Offering will be consummated simultaneously on the date the
sale of Conversion Stock in the Public Offering is consummated and only if all
unsubscribed for Conversion Stock is sold.
The INSTITUTION may elect to pay fees on either a fixed fee or
commission basis or combination thereof to an investment banking firm which
assists it in the sale of the Conversion Stock in the offerings.
6. NUMBER OF SHARES AND PURCHASE PRICE OF CONVERSION STOCK
The total number of shares (or a range thereof) of Conversion Stock to
be issued and offered for sale will be determined by the Boards of Directors of
the INSTITUTION and the Holding Company, immediately prior to the commencement
of the Offerings, subject to adjustment thereafter if necessitated by a change
in the appraisal due to changes in market or financial conditions, with the
approval of the OTS, if necessary.
All shares sold in the Conversion will be sold at a uniform price per
share referred to in this Plan as the Purchase Price. The aggregate Purchase
Price for all shares of Conversion Stock will not be inconsistent with the
estimated consolidated pro forma market value of the INSTITUTION. The estimated
consolidated pro forma market value of the INSTITUTION will be determined for
such purpose by the Independent Appraiser. Prior to the commencement of the
Subscription and Community Offerings, an Estimated Valuation Range will be
established, which range will vary within 15% above to 15% below the midpoint of
such range. The number of shares of Conversion Stock to be issued and/or the
Purchase Price may be increased or decreased by the INSTITUTION. In the event
that the aggregate Purchase Price of the Conversion Stock is below the minimum
of the Estimated Valuation Range, or materially above the maximum of the
Estimated Valuation Range, a resolicitation only of persons who submitted a
purchase order may be required, provided that up to a 15% increase above the
maximum of the Estimated Valuation Range will not be deemed material so as to
require a resolicitation. Any such resolicitation shall be effected in such
manner and within such time as the INSTITUTION shall establish, with the
approval of the OTS, if required. Up to a 15% increase in the number of shares
to be issued which is supported by an appropriate change in the estimated pro
forma market value of the INSTITUTION or in order to fill the order by the
Employee Plans will not be deemed to be material so as to require a
resolicitation of subscriptions.
Based upon the independent valuation, as updated prior to the
consummation of the Subscription, Community and/or Public Offerings, the Boards
of Directors of the INSTITUTION and the Holding Company will fix the Purchase
Price.
Notwithstanding the foregoing, no sale of Conversion Stock may be
consummated unless, prior to such consummation, the Independent Appraiser
confirms to the INSTITUTION and Holding Company and to the OTS that, to the best
knowledge of the Independent Appraiser, nothing of a material nature has
occurred which, taking into account all relevant factors, would cause the
Independent Appraiser to conclude that the aggregate value of the Conversion
Stock sold at the Purchase Price is incompatible with its estimate of the
aggregate consolidated pro forma market value of the INSTITUTION. If such
confirmation is not received, the INSTITUTION may cancel the Subscription
Offering, Community Offering and/or the Public Offering, reopen or hold new
Offerings to take such other action as the OTS may permit.
The Conversion Stock to be issued in the Conversion shall be fully paid
and nonassessable.
7. PURCHASE BY THE HOLDING COMPANY OF THE STOCK OF THE INSTITUTION
Upon the consummation of the sale of all of the Conversion Stock, the
Holding Company will purchase from the INSTITUTION all of the capital stock of
the INSTITUTION to be issued by the INSTITUTION in the conversion in exchange
for the Conversion proceeds that are not permitted to be retained by the Holding
Company.
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The Holding Company will apply to the OTS to retain up to 50% of the
proceeds of the Conversion. Assuming the Holding Company is not eliminated, a
lesser percentage may be acceptable.
8. SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS (FIRST PRIORITY)
A. Each Eligible Account Holder shall receive, without payment,
nontransferable subscription rights to subscribe for shares of Conversion Stock
equal to the greater of: (i) the maximum established for the Community Offering;
(ii) one-tenth of one percent of the Conversion Stock offered; or (iii) 15 times
the product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Conversion Stock offered by a fraction of which the
numerator is the amount of the Qualifying Deposit of such Eligible Account
Holder and the denominator is the total amount of Qualifying Deposits of all
Eligible Account Holders but in no event greater than the maximum purchase
limitation specified in Section 14 hereof. All such purchases are subject to the
maximum and minimum purchase limitations specified in Section 14 and are
exclusive of an increase in the total number of shares issued due to an increase
in the maximum of the Estimated Valuation Range of up to 15%. Only a Person(s)
with a Qualifying Deposit as of the Eligibility Record Date (or a successor
entity or estate) shall receive subscription rights. Any Person(s) added to a
Qualifying Deposit after the Eligibility Record Date is not an Eligible Account
Holder.
B. In the event that Eligible Account Holders exercise Subscription
Rights for a number of shares of Conversion Stock in excess of the total number
of such shares eligible for subscription, the shares of Conversion Stock shall
be allocated among the subscribing Eligible Account Holders so as to permit each
subscribing Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation of Conversion
Stock equal to the lesser of 100 shares or the number of shares subscribed for
by the Eligible Account Holder. Any shares remaining after that allocation will
be allocated among the subscribing Eligible Account Holders whose subscriptions
remain unsatisfied in the proportion that the amount of the Qualifying Deposit
of each Eligible Account Holder whose subscription remains unsatisfied bears to
the total amount of the Qualifying Deposits of all Eligible Account Holders
whose subscriptions remain unsatisfied. If the amount so allocated exceeds the
amount subscribed for by any one or more Eligible Account Holders, the excess
shall be reallocated (one or more times as necessary) among those Eligible
Account Holders whose subscriptions are still not fully satisfied on the same
principle until all available shares have been allocated or all subscriptions
satisfied.
C. Subscription rights as Eligible Account Holders received by
Directors and Officers and their Associates which are based on deposits made by
such persons during the twelve (12) months preceding the Eligibility Record Date
shall be subordinated to the Subscription Rights of all other Eligible Account
Holders.
9. SUBSCRIPTION RIGHTS OF EMPLOYEE PLANS (SECOND PRIORITY)
Subject to the availability of sufficient shares after filling
subscription orders of Eligible Account Holders under Section 8, the Employee
Plans shall receive without payment nontransferable subscription rights to
purchase in the Subscription Offering the number of shares of Conversion Stock
requested by such Plans, subject to the purchase limitations set forth in
Section 14.
The Employee Plans shall not be deemed to be associates or affiliates
of or Persons Acting in Concert with any Director or Officer of the Holding
Company or the INSTITUTION.
[The INSTITUTION may make scheduled discretionary contributions to the
Employee Plans, provided such contributions do not cause the INSTITUTION to fail
to meet its regulatory capital requirements.]
10. SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS (THIRD PRIORITY)
A. In the event that the Eligibility Record Date is more than 15 months
prior to the date of the latest amendment to the Application filed prior to OTS
approval, then, and only in that event, each Supplemental Eligible Account
Holder shall receive, without payment, nontransferable subscription rights
entitling such Supplemental Eligible Account Holder to purchase that number of
shares of Conversion Stock which is equal to the greater of: (i) the maximum
purchase limitation established for the Community Offering; (ii) one-tenth of 1%
of the Conversion
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Stock Offered; and (iii) or 15 times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares of Conversion Stock
to be issued by a fraction of which the numerator is the amount of the
Qualifying Deposit of the Supplemental Eligible Account Holder and the
denominator is the total amount of the Qualifying Deposits of all Supplemental
Eligible Account Holders. All such purchases are subject to the maximum and
minimum purchase limitations in Section 14 and are exclusive of an increase in
the total number of shares issued due to an increase in the maximum of the
Estimated Valuation Range of up to 15%.
B. Subscription rights received pursuant to this Category shall be
subordinated to the subscription rights received by Eligible Account Holders and
by the Employee Plans.
C. Any subscription rights to purchase shares of Conversion Stock
received by an Eligible Account Holder in accordance with Section 8 shall reduce
to the extent thereof the subscription rights to be distributed pursuant to this
Section.
D. In the event of an oversubscription for shares of Conversion Stock
pursuant to this Section, shares of Conversion Stock shall be allocated among
the subscribing Supplemental Eligible Account Holders as follows:
(1) Shares of Conversion Stock shall be allocated so as to
permit each such Supplemental Eligible Account Holder, to the extent possible,
to purchase a number of shares of Conversion Stock sufficient to make his total
allocation (including the number of shares of Conversion Stock, if any,
allocated in accordance with Section 8) equal to 100 shares of Conversion Stock
or the total amount of his subscription, whichever is less.
(2) Any shares of Conversion Stock not allocated in accordance
with subparagraph (1) above shall be allocated among the subscribing
Supplemental Eligible Account Holders on an equitable basis, related to the
amounts of their respective Qualifying Deposits as compared to the total
Qualifying Deposits of all subscribing Supplemental Eligible Account Holders.
11. SUBSCRIPTION RIGHTS OF OTHER MEMBERS (FOURTH PRIORITY)
A. Each Other Member shall receive, without payment, nontransferable
subscription rights to subscribe for shares of Conversion Stock in an amount
equal to the greater of the maximum purchase limitation established for the
Community Offering or one-tenth of one percent of the Conversion Stock offered,
subject to the maximum and minimum purchase limitations specified in Section 14
and exclusive of an increase in the total number of shares issued due to an
increase in the maximum of the Estimated Valuation Range of up to 15%, which
will be allocated only after first allocating to Eligible Account Holders, the
Employee Plans and Supplemental Eligible Account Holders all shares of
Conversion Stock subscribed for pursuant to Sections 8, 9 and 10 above.
B. In the event that such Other Members subscribe for a number of
shares of Conversion Stock which, when added to the shares of Conversion Stock
subscribed for by the Eligible Account Holders, the Employee Plans and the
Supplemental Eligible Account Holders is in excess of the total number of shares
of Conversion Stock being issued, the subscriptions of such Other Members will
be allocated among the subscribing Other Members so as to permit each
subscribing Other Member, to the extent possible, to purchase a number of shares
sufficient to make his total allocation of Conversion Stock equal to the lesser
of 100 shares or the number of shares subscribed for by the Other Member. Any
shares remaining will be allocated among the subscribing Other Members whose
subscriptions remain unsatisfied on a 100 shares (or whatever lesser amount is
available) per order basis until all orders have been filled or the remaining
shares have been allocated.
12. COMMUNITY OFFERING
If less than the total number of shares of Conversion Stock to be
subscribed for in the Conversion are sold in the Subscription Offering, shares
remaining unsubscribed may be made available for purchase in the Community
Offering to certain members of the general public. The maximum number of shares
of Conversion Stock, which may be subscribed for in the Community Offering, if
any, by any Person shall not exceed such number of shares of Conversion Stock as
shall equal $100,000 divided by the Purchase Price, subject to the maximum and
minimum purchase limitations specified in Section 14. The shares may be made
available in the Community Offering, if any,
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through a direct community marketing program which may provide for utilization
of a broker, dealer, consultant or investment banking firm, experienced and
expert in the sale of savings institution securities. In the Community Offering,
if any, shares will be available for purchase by the general public with
preference given to natural persons residing in the Local Community. Subject to
these preferences, the INSTITUTION shall make distribution of the Conversion
Stock to be sold in the Community Offering in such a manner as to promote the
widest distribution of Conversion Stock.
If Persons in the Community Offering, whose orders would otherwise be
accepted, subscribe for more shares than are available for purchase, the shares
available to them will be allocated among Persons submitting orders in the
Community Offering in an equitable manner as determined by the Board of
Directors. The INSTITUTION may establish all terms and conditions of such offer.
The Community Offering, if any, may commence simultaneously with,
during or subsequent to the completion of the Subscription Offering. The
Community Offering must be completed within 45 days after the completion of the
Subscription Offering unless otherwise extended by the OTS.
The INSTITUTION and the Holding Company, in their absolute discretion,
reserve the right to reject any or all orders in whole or in part which are
received in the Community Offering, at the time of receipt or as soon as
practicable following the completion of the Community Offering. Actions
concerning the rejection of orders should not be in contravention of law.
13. PUBLIC OFFERING
Any shares of Conversion Stock not sold in the Subscription Offering
may be sold through the Underwriter to the general public at the Purchase Price
in the Public Offering, subject to such terms, conditions and procedures as may
be determined by the Boards of Directors of the INSTITUTION and the Holding
Company, in a manner that will achieve the widest distribution of the Conversion
Stock and subject to the right of the INSTITUTION and the Holding Company, in
their absolute discretion, to accept or reject in whole or in part all
subscriptions in the Public Offering. In the Public Offering, if any, any Person
may purchase up to the maximum purchase limitation established for the Community
Offering, subject to the maximum and minimum purchase limitations specified in
Section 14. Shares purchased by any Person together with any Associate or group
of persons Acting in Concert pursuant to Section 12 shall be counted toward
meeting the maximum purchase limitation specified for this Section. Provided
that the Subscription Offering has commenced, the INSTITUTION may commence the
Public Offering at any time after the mailing to the Members of the Proxy
Statement to be used in connection with the Special Meeting of Members, provided
that the completion of the offer and sale of the Conversion Stock shall be
conditioned upon the approval of this Plan by the Voting Members. It is expected
that the Public Offering, if any, will commence just prior to, or as soon as
practicable after, the termination of the Subscription Offering. The Public
Offering shall be completed within 45 days after the termination of the
Subscription Offering, unless such period is extended as provided in Section 3,
above.
If for any reason a Public Offering of shares of Conversion Stock not
sold in the Subscription and Community Offerings can not be effected, other
purchase arrangements will be made for the sale of unsubscribed shares by the
INSTITUTION, if possible. Such other purchase arrangements will be subject to
the approval of the OTS.
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14. LIMITATION ON PURCHASES
The following limitations shall apply to all purchases of shares of
Conversion Stock:
A. The maximum number of shares of Conversion Stock which may be
purchased in the Subscription Offering, or Community Offering and/or Public
Offering by any Person (or persons through a single account) shall not exceed
such number of shares as shall equal $100,000 divided by the Purchase Price.
B. The maximum number of shares of Conversion Stock which may be
subscribed for or purchased in all categories in the Conversion by any Person
(or persons through a single account) or Participant together with any Associate
or group of persons Acting in Concert shall not exceed such number of shares as
shall equal $100,000 divided by the Purchase Price, except for Employee Plans,
which in the aggregate may subscribe for up to 10% of the Conversion Stock
issued. In accordance with Section 31, the Board of Directors shall have the
authority to determine whether persons are Acting in Concert or otherwise are in
compliance with the limitations on purchases.
C. The maximum number of shares of Conversion Stock which may be
purchased in all categories in the conversion by Officers and Directors of the
INSTITUTION and their Associates in the aggregate shall not exceed 35% of the
total number of shares of Conversion Stock issued.
D. A minimum of 25 shares of Conversion Stock must be purchased by each
Person purchasing shares in the conversion to the extent those shares are
available; provided, however, that the minimum number of shares requirement will
not apply if the number of shares of Conversion Stock purchased times the price
per share exceeds $500.
E. The Employee Plans shall not be deemed to be associates or
affiliates of or Persons Acting in Concert with any Director or Officer of the
Holding Company or the Institution.
If the number of shares of Conversion Stock otherwise allocable
pursuant to Sections 8 through 13, inclusive, to any Person or that Person's
Associates would be in excess of the maximum number of shares permitted as set
forth above, the number of shares of Conversion Stock allocated to each such
person shall be reduced to the lowest limitation applicable to that Person, and
then the number of shares allocated to each group consisting of a Person and
that Person's Associates shall be reduced so that the aggregate allocation to
that Person and his Associates complies with the above maximums, and such
maximum number of shares shall be reallocated among that Person and his
Associates as they may agree, or in the absence of an agreement, in proportion
to the shares subscribed by each (after first applying the maximums applicable
to each Person, separately).
Depending upon market or financial conditions, the Board of Directors
of the INSTITUTION and the Holding Company, without further approval of the
Members, may decrease or increase the purchase limitations in this Plan,
provided that the maximum purchase limitations may not be increased to a
percentage in excess of 5%. Notwithstanding the foregoing, the maximum purchase
limitation may be increased up to 9.99% provided that orders for Conversion
Stock exceeding 5% of the shares being offered shall not exceed, in the
aggregate, 10% of the total offering. If the INSTITUTION and the Holding Company
increase the maximum purchase limitations, the INSTITUTION and the Holding
Company are only required to resolicit Persons who subscribed for the maximum
purchase amount and may, in the sole discretion of the INSTITUTION and the
Holding Company, resolicit certain other large subscribers. For purposes of this
Section 14, the Directors of the INSTITUTION and the Holding Company shall not
be deemed to be Associates or a group affiliated with each other or otherwise
Acting in Concert solely as a result of their being Directors of the INSTITUTION
or the Holding Company.
In the event of an increase in the total number of shares offered in
the conversion due to an increase in the maximum of the Estimated Valuation
Range of up to 15% (the "Adjusted Maximum") the additional shares will be used
in the following order of priority: (i) to fill the Employees Plan's
subscription to up to 10% of the Adjusted Maximum; (ii) in the event that there
is an oversubscription at the Eligible Account Holder level, to fill unfilled
subscriptions of Eligible Account Holders exclusive of the Adjusted Maximum
according to Section 8; (iii) in the event that there is an oversubscription at
the Supplemental Eligible Account Holder level, to fill unfilled subscriptions
of Supplemental Eligible Account Holders exclusive of the Adjusted Maximum
according to Section 10; (iv) in the
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event that there is an oversubscription at the Other Member level, to fill
unfilled subscriptions of Other Members exclusive of the Adjusted Maximum in
accordance with Section 11; and (v) to fill unfilled Subscriptions in the
Community Offering exclusive of the Adjusted Maximum.
Each Person purchasing Conversion Stock in the Conversion shall be
deemed to confirm that such purchase does not conflict with the above purchase
limitations contained in this Plan.
For a period of three years following the conversion, no Officer,
Director or their Associates shall purchase, without the prior written approval
of the OTS, any outstanding shares of common stock of the Holding Company,
except from a broker-dealer registered with the SEC. This provision shall not
apply to negotiated transactions involving more than one percent of the
outstanding shares of common stock of the Holding Company, the exercise of any
options pursuant to a stock option plan or purchases of common stock of the
Holding Company, made by or held by any Tax-Qualified Employee Stock Benefit
Plan or Non-Tax Qualified Employee Stock Benefit Plan of the INSTITUTION or the
Holding Company (including the Employee Plans) which may be attributable to any
Officer or Director. As used herein, the term "negotiated transaction" means a
transaction in which the securities are offered and the terms and arrangements
relating to any sale are arrived at through direct communications between the
seller or any person acting on its behalf and the purchaser or his investment
representative. The term "investment representative" shall mean a professional
investment advisor acting as agent for the purchaser and independent of the
seller and not acting on behalf of the seller in connection with the
transaction.
15. PAYMENT FOR CONVERSION STOCK
All payments for Conversion Stock subscribed for in the Subscription,
Community, Public Offerings must be delivered in full to the INSTITUTION,
together with a properly completed and executed Order Form, or Purchase Order in
the case of the Public Offering, on or prior to the expiration date specified on
the Order Form or Purchase Order, as the case may be, unless such date is
extended by the INSTITUTION; provided, however, that if the Employee Plans
subscribes for shares during the Subscription Offering, the Employee Plan will
not be required to pay for the shares at the time they subscribe but rather may
pay for such shares of Conversion Stock upon consummation of the Conversion. The
INSTITUTION may make scheduled discretionary contributions to an Employee Plan
provided such contributions do not cause the INSTITUTION to fail to meet its
regulatory capital requirement.
Notwithstanding the foregoing, the INSTITUTION and the Holding Company
shall have the right, in their sole discretion, to permit institutional
investors to submit contractually irrevocable orders in the Community Offering,
Public Offering and to thereafter submit payment for the Conversion Stock for
which they are subscribing in the Community Offering, Public Offering at any
time prior to the completion of the Conversion.
Payment for Conversion Stock subscribed for shall be made either in
cash (if delivered in person), check or money order. Alternatively, subscribers
in the Offerings may pay for the shares subscribed for by authorizing the
INSTITUTION on the Order Form or Purchase Order to make a withdrawal from the
subscriber's Qualifying Deposit at the INSTITUTION in an amount equal to the
purchase price of such shares. Such authorized withdrawal, whether from a
savings, passbook or certificate account, shall be without penalty as to
premature withdrawal. If the authorized withdrawal is from a certificate
account, and the remaining balance does not meet the applicable minimum balance
requirement, the certificate shall be canceled at the time of withdrawal,
without penalty, and the remaining balance will earn interest at the passbook
rate. Funds for which a withdrawal is authorized will remain in the subscriber's
Qualifying Deposit but may not be used by the subscriber until the Conversion
Stock has been sold or the 45-day period (or such longer period as may be
approved by the OTS) following the Subscription Offering has expired, whichever
occurs first. Thereafter, the withdrawal will be given effect only to the extent
necessary to satisfy the subscription (to the extent it can be filled) at the
Purchase Price per share. Interest will continue to be earned on any amounts
authorized for withdrawal until such withdrawal is given effect. Interest will
be paid by the INSTITUTION at not less than the passbook annual rate on payments
for Conversion Stock received in cash or by money order or check. Such interest
will be paid from the date payment is received by the INSTITUTION until
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<PAGE>
consummation or termination of the conversion. If for any reason the Conversion
is not consummated, all payments made by subscribers in the Offerings will be
refunded to them with interest. In case of amounts authorized for withdrawal
from Qualifying Deposits, refunds will be made by canceling the authorization
for withdrawal.
16. MANNER OF EXERCISING SUBSCRIPTION RIGHTS THROUGH ORDER FORMS
As soon as practicable after the Prospectus prepared by the Holding
Company and INSTITUTION has been declared effective by the OTS and the SEC,
Order Forms will be distributed to the Participants at their last known
addresses appearing on the records of the INSTITUTION for the purpose of
subscribing to shares of Conversion Stock in the Subscription Offering.
Notwithstanding the foregoing, the INSTITUTION may elect to send Order Forms
only to those Persons who request them after such notice as is approved by the
OTS and is adequate to apprise the Participants of the pendency of the
Subscription Offering has been given. Such notice may be included with the proxy
statement for the Special Meeting of Members and may also be included in a
notice of the pendency of the conversion and the Special Meeting of Members sent
to all Eligible Account Holders in accordance with regulations of the OTS.
Each Order Form or Purchase Order will be preceded or accompanied by
the Prospectus (if a holding company form of organization is utilized) or the
Offering Circular (if the holding company form of organization is not utilized)
describing the Holding Company (if utilized), the INSTITUTION, the Conversion
Stock and the Offerings. Each Order Form or Purchase Order will contain, among
other things, the following:
A. A specified date by which all Order Forms and Purchase Orders must
be received by the INSTITUTION, which date shall be not less than twenty (20),
nor more than forty-five (45) days, following the date on which the Order Forms
are mailed by the INSTITUTION, and which date will constitute the termination of
the Subscription Offering;
B. The purchase price per share for shares of Conversion Stock to be sold
in the Offerings;
C. A description of the minimum and maximum number of shares of
Conversion Stock which may be subscribed for pursuant to the exercise of
Subscription Rights or otherwise purchased in the Community Offering or Public
Offering;
D. Instructions as to how the recipient of the Order Form or Purchase
Order is to indicate thereon the number of shares of Conversion Stock for which
such person elects to subscribe and the available alternative methods of payment
therefor;
E. An acknowledgment that the recipient of the Order Form or Purchase
Order has received a final copy of the Prospectus or Offering Circular, as the
case may be, prior to execution of the Order Form or Purchase Order.
F. A statement to the effect that all subscription rights are
nontransferable, will be void at the end of the Subscription Offering, and can
only be exercised by delivering within the subscription period such properly
completed and executed Order Form, together with cash (if delivered in person),
check or money order in the full amount of the purchase price as specified in
the Order Form for the shares of Conversion Stock for which the recipient elects
to subscribe in the Subscription Offering (or by authorizing on the Order Form
that the INSTITUTION withdraw said amount from the subscriber's Qualifying
Deposit at the INSTITUTION) to the INSTITUTION; and
G. A statement to the effect that the executed Order Form or Purchase
Order, once received by the INSTITUTION, may not be modified or amended by the
subscriber without the consent of the INSTITUTION.
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<PAGE>
Notwithstanding the above, the INSTITUTION and the Holding Company
reserve the right in their sole discretion to accept or reject orders received
on photocopied or facsimiled order forms or whose payment is to be made by wire
transfer.
17. UNDELIVERED, DEFECTIVE OR LATE ORDER FORMS: INSUFFICIENT PAYMENT
In the event Order Forms (a) are not delivered and are returned to the
INSTITUTION by the United States Postal Service or the INSTITUTION is unable to
locate the addressee, (b) are not received back by the INSTITUTION or are
received by the INSTITUTION after the expiration date specified thereon, (c) are
defectively filled out or executed, (d) are not accompanied by the full required
payment, or, in the case of institutional investors in the Community Offering or
Public Offering, by delivering irrevocable orders together with a legally
binding commitment to pay in cash, check, money order or wire transfer the full
amount of the purchase price prior to 48 hours before the completion of the
conversion for the shares of Conversion Stock subscribed for (including cases in
which accounts from which withdrawals are authorized are insufficient to cover
the amount of the required payment), or (e) are not mailed pursuant to a "no
mail" order placed in effect by the account holder, the subscription rights of
the person to whom such rights have been granted will lapse as though such
person failed to return the completed Order Form within the time period
specified thereon; provided, however, that the INSTITUTION may, but will not be
required to, waive any immaterial irregularity on any Order Form or Purchase
Order or require the submission of corrected Order Forms or Purchase Orders or
the remittance of full payment for subscribed shares by such date as the
INSTITUTION may specify. The interpretation of the INSTITUTION of terms and
conditions of the Plan and of the Order Forms or Purchase Orders will be final,
subject to the authority of the OTS.
18. RESTRICTIONS ON RESALE OR SUBSEQUENT DISPOSITION
A. All shares of Conversion Stock purchased by Directors or Officers of
the INSTITUTION or the Holding Company in the conversion shall be subject to the
restriction that, except as provided in Section 18B, below, or as may be
approved by the OTS, no interest in such shares may be sold or otherwise
disposed of for value for a period of one (1) year following the date of
purchase.
B. The restriction on disposition of shares of Conversion Stock set
forth in Section 18A above shall not apply to the following:
(i) Any exchange of such shares in connection with a merger or
acquisition involving the INSTITUTION or the Holding Company, which has been
approved by the OTS; and
(ii) Any disposition of such shares following the death of the
person to whom such shares were initially sold under the terms of the Plan.
C. With respect to all shares of Conversion Stock subject to
restrictions on resale or subsequent disposition, each of the following
provisions shall apply;
(i) Each certificate representing shares restricted within the
meaning of Section 18A, above, shall bear a legend prominently stamped on its
face giving notice of the restriction;
(ii) Instructions shall be issued to the stock transfer agent
for the Holding Company not to recognize or effect any transfer of any
certificate or record of ownership of any such shares in violation of the
restriction on transfer; and
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<PAGE>
(iii) Any shares of capital stock of the Holding Company
issued with respect to a stock dividend, stock split, or otherwise with respect
to ownership of outstanding shares of Conversion Stock subject to the
restriction on transfer hereunder shall be subject to the same restriction as is
applicable to such Conversion Stock.
19. VOTING RIGHTS OF STOCKHOLDERS
Upon conversion, the holders of the capital stock of the INSTITUTION
shall have the exclusive voting rights with respect to the INSTITUTION as
specified in its charter. The holders of the common stock of the Holding Company
shall have the exclusive voting rights with respect to the Holding Company.
20. ESTABLISHMENT OF LIQUIDATION ACCOUNT
The INSTITUTION shall establish at the time of conversion a liquidation
account in an amount equal to its net worth as of the latest practicable date
prior to conversion. The liquidation account will be maintained by the
INSTITUTION for the benefit of the Eligible Account Holders and Supplemental
Eligible Account Holders who continue to maintain their Savings Accounts at the
INSTITUTION. Each Eligible Account Holder and Supplemental Eligible Account
Holder shall, with respect to his Savings Account, hold a related inchoate
interest in a portion of the liquidation account balance, in relation to his
Savings Account balance at the Eligibility Record Date and Supplemental
Eligibility Record Date or to such balance as it may be subsequently reduced, as
hereinafter provided.
In the unlikely event of a complete liquidation of the INSTITUTION (and
only in such event), following all liquidation payments to creditors (including
those to Account Holders to the extent of their Savings Accounts) each Eligible
Account Holder and Supplemental Eligible Account Holder shall be entitled to
receive a liquidating distribution from the liquidation account, in the amount
of the then adjusted subaccount balance for his Savings Account then held,
before any liquidation distribution may be made to any holders of the
INSTITUTION's capital stock. No merger, consolidation, purchase of bulk assets
with assumption of Savings Accounts and other liabilities, or similar
transactions with an FDIC institution, in which the INSTITUTION is not the
surviving institution, shall be deemed to be a complete liquidation for this
purpose. In such transactions, the liquidation account shall be assumed by the
surviving institution.
The initial subaccount balance for a Savings Account held by an
Eligible Account Holder or Supplemental Eligible Account Holder shall be
determined by multiplying the opening balance in the liquidation account by a
fraction, the numerator of which is the amount of such Eligible Account Holder's
and Supplemental Eligible Account Holder's Qualifying Deposit and the
denominator of which is the total amount of all Qualifying Deposits of all
Eligible Account Holders and Supplemental Eligible Account Holders in the
INSTITUTION. Such initial subaccount balance shall not be increased, but shall
be subject to downward adjustment as described below.
If, at the close of business on any annual closing date, commencing on
or after the effective date of conversion, the deposit balance in the Savings
Account of an Eligible Account Holder or Supplemental Eligible Account Holder is
less than the lesser of (i) the balance in the Savings Account at the close of
business on any other annual closing date subsequent to the Eligibility Record
Date or Supplemental Eligibility Record Date, as applicable, or (ii) the amount
of the Qualifying Deposit in such Savings Account, the subaccount balance of
such Savings Account shall be adjusted by reducing such subaccount balance in an
amount proportionate to the reduction in such deposit balance. In the event of
such downward adjustment, the subaccount balance shall not be subsequently
increased, notwithstanding any subsequent increase in the deposit balance of the
related Savings Account. If any such Savings Account is closed, the related
subaccount shall be reduced to zero.
The creation and maintenance of the liquidation account shall not
operate to restrict the use or application of any of the net worth accounts of
the INSTITUTION.
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<PAGE>
21. TRANSFER OF SAVINGS ACCOUNTS
Each person holding a Savings Account at the INSTITUTION at the time of
conversion shall retain an identical Savings Account at the INSTITUTION
following conversion in the same amount and subject to the same terms and
conditions (except as to voting and liquidation rights).
22. RESTRICTIONS ON ACQUISITION OF THE INSTITUTION AND HOLDING COMPANY
A. In accordance with OTS regulations, for a period of three years from
the date of consummation of conversion, no Person, other than the Holding
Company, shall directly or indirectly offer to acquire or acquire the beneficial
ownership of more than 10% of any class of an equity security of the INSTITUTION
without the prior written consent of the OTS.
B.1. The charter of the INSTITUTION contains a provision stipulating
that no person, except the Holding Company, for a period of five years following
the date of conversion shall directly or indirectly offer to acquire or acquire
the beneficial ownership of more than 10% of any class of an equity security of
the INSTITUTION, without the prior written approval of the OTS. In addition,
such charter may also provide that for a period of five years following the
conversion, shares beneficially owned in violation of the above-described
charter provision shall not be entitled to vote and shall not be voted by any
person or counted as voting stock in connection with any matter submitted to
stockholders for a vote. In addition, special meetings of the stockholders
relating to changes in control or amendment of the charter may only be called by
the Board of Directors, and shareholders shall not be permitted to cumulate
their votes for the election of directors.
B.2. The Certificate of Incorporation of the Holding Company will
contain a provision stipulating that in no event shall any record owner of any
outstanding shares of the Holding Company's common stock who beneficially owns
in excess of 10% of such outstanding shares be entitled or permitted to any vote
in respect to any shares held in excess of 10%. In addition, the Certificate of
Incorporation and Bylaws of the Holding Company provide for staggered terms of
the directors, noncumulative voting for directors, limitations on the calling of
special meetings, a fair price provision for certain business combinations and
certain notice requirements.
C. For the purposes of this Section 22, B.1.:
(i) The term "person" includes an individual, a group acting
in concert, a corporation, a partnership, an association, a joint stock company,
a trust, an unincorporated organization or similar company, a syndicate or any
other group formed for the purpose of acquiring, holding or disposing of
securities of an insured institution;
(ii) The term "offer" includes every offer to buy or acquire,
solicitation of an offer to sell, tender offer for, or request or invitation for
tenders of, a security or interest in a security for value;
(iii) The term "acquire" includes every type of acquisition,
whether effected by purchase, exchange, operation of law or otherwise; and
(iv) The term "security" includes non-transferable
subscription rights issued pursuant to a plan of conversion as well as a
"security" as defined in 15 U.S.C. ss.78c(a)(10).
23. PAYMENT OF DIVIDENDS AND REPURCHASES OF STOCK
The INSTITUTION shall not declare or pay a cash dividend on, or
repurchase any of, its capital stock if the effect thereof would cause its
regulatory capital to be reduced below (i) the amount required for the
Liquidation Account or (ii) the federal regulatory capital requirement in
Section 567.2 of the Rules and Regulations of the OTS.
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<PAGE>
Otherwise, the INSTITUTION may declare dividends or make capital distributions
in accordance with applicable law and regulations.
24. AMENDMENT OF PLAN
If deemed necessary or desirable, the Plan may be substantively amended
at any time prior to solicitation of proxies from Members to vote on the Plan by
a two-thirds vote of the INSTITUTION's Board of Directors, and at any time
thereafter by such vote of such Board of Directors with the concurrence of the
OTS. Any amendment to the Plan made after approval by the Members with the
approval of the OTS shall not necessitate further approval by the Members unless
otherwise required by the OTS. The Plan may be terminated by majority vote of
the INSTITUTION's Board of Directors at any time prior to the Special Meeting of
Members to vote on the Plan, and at any time thereafter with the concurrence of
the OTS.
By adoption of the Plan, the Members of the INSTITUTION authorize the
Board of Directors to amend or terminate the Plan under the circumstances set
forth in this Section.
25. CHARTER AND BYLAWS
By voting to adopt the Plan, members of the INSTITUTION will be voting
to adopt a charter and bylaws to read in the form of charter and bylaws for a
federally chartered stock institution. The effective date of the INSTITUTION's
amended charter and bylaws shall be the date of issuance and sale of the
Conversion Stock as specified by the OTS.
26. CONSUMMATION OF CONVERSION
The conversion of the INSTITUTION shall be deemed to take place and be
effective upon the completion of all requisite organizational procedures for
obtaining the federal stock charter for the INSTITUTION and sale of all
Conversion Stock.
27. REGISTRATION AND MARKETING
Within the time period required by applicable laws and regulations, the
Holding Company will register the securities issued in connection with the
conversion pursuant to the Securities Exchange Act of 1934 and will not
deregister such securities for a period of at least three years thereafter,
except that the maintenance of registration for three years requirement may be
fulfilled by any successor to the Holding Company. In addition, the Holding
Company will use its best efforts to encourage and assist a market-maker to
establish and maintain a market for the Conversion Stock and to list those
securities on a national or regional securities exchange or the NASDAQ System.
28. RESIDENTS OF FOREIGN COUNTRIES AND CERTAIN STATES
The INSTITUTION will make reasonable efforts to comply with the
securities laws of all States in the United States in which Persons entitled to
subscribe for shares of Conversion Stock pursuant to the Plan reside. However,
no such Person will be issued subscription rights or be permitted to purchase
shares of Conversion Stock in the Subscription Offering if such Person resides
in a foreign country or in a state of the United States with respect to which
any of the following apply: (i) a small number of Persons otherwise eligible to
subscribe for shares under the Plan reside in such state; (ii) the issuance of
subscription rights or the offer or sale of shares of Conversion Stock to such
Persons would require the INSTITUTION or the Holding Company, as the case may
be, under the securities laws of such state, to register as a broker, dealer,
salesman or agent or to register or otherwise qualify its securities for sale in
such state; or (iii) such registration or qualification would be impracticable
for reasons of cost or otherwise.
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<PAGE>
29. EXPENSES OF CONVERSION
The INSTITUTION shall use its best efforts to assure that expenses
incurred by it in connection with the conversion shall be reasonable.
30. CONDITIONS TO CONVERSION
The conversion of the INSTITUTION pursuant to this Plan is expressly
conditioned upon the following:
(a) Prior receipt by the INSTITUTION of rulings of the United States
Internal Revenue Service and the Commonwealth of Pennsylvania taxing
authorities, or opinions of counsel, substantially to the effect that the
conversion will not result in any adverse federal or state tax consequences to
Eligible Account Holders or the INSTITUTION and the Holding Company before or
after the conversion;
(b) The sale of all of the Conversion Stock offered in the conversion; and
(c) The completion of the conversion within the time period specified in
Section 3 of this Plan.
31. INTERPRETATION
All interpretations of this Plan and application of its provisions to
particular circumstances by a majority of the Board of Directors of the
INSTITUTION shall be final, subject to the authority of the OTS.
A-17
MALIZIA, SPIDI, SLOANE & FISCH, P.C.
ATTORNEYS AT LAW
1301 K STREET, N.W.
SUITE 700 EAST
WASHINGTON, D.C. 20005
(202) 434-4660
FACSIMILE: (202) 434-4661
April 22, 1999
Board of Directors
Mechanics Savings & Loan, FSA
51 South Front Street
Steelton, Pennsylvania 17113
Re: Federal Income Tax Opinion Relating to the Proposed Conversion of
Mechanics Savings & Loan, FSA from a Federal Mutual Savings
Association to a Federal Capital Stock Savings Bank Pursuant to
Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as
amended
-----------------------------------------------------------------
Members of the Board:
In accordance with your request, set forth hereinbelow is the opinion
of this firm relating to the material federal income tax consequences of the
proposed conversion (the "Conversion") of Mechanics Savings & Loan, FSA (the
"Institution") from a federally-chartered mutual savings association to a
federally-chartered capital stock savings bank (the "Stock Bank"), and formation
of a parent holding company (the "Holding Company") which will simultaneously
acquire all of the outstanding stock of Stock Bank. As proposed, the Conversion
will be implemented pursuant to Section 368(a)(1)(F) of the Internal Revenue
Code of 1986, as amended (the "Code").
We have examined such corporate records, certificates and other
documents as we have considered necessary or appropriate for this opinion. In
such examination, we have accepted, and have not independently verified, the
authenticity of all original documents, the accuracy of all copies, and the
genuineness of all signatures. Further, the capitalized terms which are used in
this opinion and are not expressly defined herein shall have the meaning
ascribed to them in the Institution's Plan of Conversion adopted on January 27,
1999, as amended (the "Plan of Conversion").
STATEMENT OF FACTS
------------------
Based solely upon our review of such documents, and upon such
information as the Institution has provided to us (which we have not attempted
to verify in any respect), and in reliance upon such documents and information,
we understand the relevant facts with respect to the Conversion to be as
follows:
<PAGE>
Board of Directors
Mechanics Savings & Loan, FSA
April 22, 1999
Page 2
The Institution is a federally-chartered mutual savings association. As
a mutual savings association, the Institution has no authorized capital stock.
Instead, the Institution, in mutual form, has a unique equity structure. A
savings depositor of the Institution is entitled to interest income on his or
her account balance as declared and paid by the Institution. A savings depositor
has no right to a distribution of any earnings of the Institution, but rather
these amounts become retained earnings of the Institution. However, a savings
depositor has a right to share pro rata, with respect to the withdrawal value of
his or her respective savings account, in any liquidation proceeds distributed
in the event the Institution is ever liquidated. Voting rights in the
Institution are held by its members. Each member is entitled to cast one vote
for each $100 or a fraction thereof of the withdrawal value of the member's
account and each borrower member is entitled to one vote. Each member shall have
a maximum of 1,000 votes. All of the interests held by a savings depositor in
the Institution cease when such depositor closes his or her account(s) with the
Institution.
The Board of Directors of the Institution has decided that in order to
promote the growth and expansion of the Institution through the raising of
additional capital, it would be advantageous for the Institution to: (i) convert
from a federally-chartered mutual savings association to a federally-chartered
capital stock savings bank, and (ii) arrange for the Holding Company to
simultaneously acquire all of the Stock Bank's stock. The Institution's Board of
Directors has determined that in order to provide greater flexibility in future
operations of the Institution, including diversification of business
opportunities and acquisitions, it is advantageous to have the Stock Bank's
stock held by the Holding Company. Pursuant to the Plan of Conversion, the
Institution's certificate of incorporation to operate as a mutual savings
association will be amended and a new certificate of incorporation will be
acquired to allow it to continue its operations in the form of a
federally-chartered capital stock savings bank. The Plan of Conversion provides
for the conversion of the Institution from mutual-to-stock form, and an
appraisal of the pro forma market value of the stock of the Stock Bank, which
will be owned solely by the Holding Company. The Plan of Conversion must be
approved by the Office of Thrift Supervision ("OTS"), and by an affirmative vote
of at least a majority of the total votes eligible to be cast at a special
meeting of the Institution's members called to vote on the Plan of Conversion.
The Holding Company is being formed under the laws of the Commonwealth
of Pennsylvania, for the purpose of the proposed transaction described herein,
to engage in business as a savings and loan holding company and to hold all of
the stock of the Stock Bank. The Holding Company will issue shares of its voting
common stock ("Holding Company Stock") upon completion of the Conversion, as
described below, to persons purchasing such shares through a Subscription
Offering and to the general public in a Public Offering.
<PAGE>
Board of Directors
Mechanics Savings & Loan, FSA
April 22, 1999
Page 3
The aggregate purchase price at which all shares of Holding Company
Stock will be offered and sold pursuant to the Plan of Conversion will be equal
to the estimated pro forma market value of the Institution at the time of the
Conversion as held as a subsidiary of the Holding Company. The estimated pro
forma market value will be determined by an independent appraiser. Pursuant to
the Plan of Conversion, all such shares of Holding Company Stock will be issued
and sold at a uniform price per share. The Conversion and the sale of newly
issued shares of the Stock Bank's stock to the Holding Company will be deemed
effective concurrently with the closing of the sale of Holding Company Stock.
As required by OTS regulations, shares of Holding Company Stock will be
offered pursuant to non-transferable subscription rights on the basis of
preference categories. All shares must be sold and to the extent that Holding
Company Stock is available, no subscriber will be allowed to purchase less than
25 shares of Holding Company Stock, unless the aggregate purchase price exceeds
$500. The Institution has established various preference categories under which
shares of Holding Company Stock may be purchased and a public offering category
for the sale of shares not purchased under the preference categories. If the
third preference category is determined to be inappropriate to the Conversion,
then there will only be three preference categories consisting of the first,
second, and fourth preference categories set forth below, and all references
herein to Supplemental Eligible Account Holder and the Supplemental Eligibility
Record Date shall not be applicable to the Conversion.
The first preference category is reserved for the Institution's
Eligible Account Holders. The Plan of Conversion defines "Eligible Account
Holder" as any person holding a Qualifying Deposit. The Plan of Conversion
defines "Qualifying Deposit" as the aggregate balance of all savings accounts of
an Eligible Account Holder in the Institution at the close of business on
December 31, 1997, which is at least equal to $50.00. If a savings account
holder of the Institution qualifies as an Eligible Account Holder, he or she
will receive, without payment, non-transferable subscription rights to purchase
Holding Company Stock. The number of shares that each Eligible Account Holder
may subscribe to is equal to the greater of (a) the maximum purchase limitation
established for the Public Offering; (b) one tenth of one percent of the total
offering of shares; or (c) fifteen times the product (rounded down to the next
whole number) obtained by multiplying the total number of shares of Holding
Company Stock to be issued by a fraction of which the numerator is the amount of
the Qualifying Deposit of the Eligible Account Holder and the denominator is the
total amount of the Qualifying Deposits of all Eligible Account Holders. If
there is an oversubscription, shares will be allocated among subscribing
Eligible Account Holders so as to permit each account holder, to the extent
possible, to purchase a number of shares sufficient to make his or her total
allocation equal to 100 shares. Any shares not then allocated shall be allocated
among the subscribing Eligible Account Holders on an equitable basis, related to
the amounts of their respective deposits as compared to the total deposits of
Eligible
<PAGE>
Board of Directors
Mechanics Savings & Loan, FSA
April 22, 1999
Page 4
Account Holders on the Eligibility Record Date. Non-transferable
subscription rights to purchase Holding Company Stock received by officers and
directors of the Institution and their associates based on their increased
deposits in the Institution in the one year period preceding the Eligibility
Record Date shall be subordinated to all other subscriptions involving the
exercise of nontransferable subscription rights to purchase shares of Holding
Company Stock under the first preference category.
The second preference category is reserved for tax-qualified employee
stock benefit plans of the Stock Bank. The Plan of Conversion defines "tax
qualified employee stock benefit plans" as any defined benefit plan or defined
contribution plan, such as an employee stock ownership plan, stock bonus plan,
profit-sharing plan or other plan, which, with its related trust meets the
requirements to be "qualified" under Section 401 of the Code. Under the Plan of
Conversion, the Stock Bank's tax-qualified employee stock benefit plans may
subscribe for up to 10% of the shares of Holding Company Stock to be offered in
the Conversion.
The third preference category is reserved for the Institution's
Supplemental Eligible Account Holders. The Plan of Conversion defines
"Supplemental Eligible Account Holder" as any person (other than officers or
directors of the Institution and their associates) holding a deposit in the
Institution on the last day of the calendar quarter preceding the approval of
the Plan of Conversion by the OTS ("Supplemental Eligibility Record Date"). This
third preference category will only be used in the event that the Eligibility
Record Date is more than 15 months prior to the date of the latest amendment to
the Application for Approval of Conversion on Form AC filed prior to approval by
the OTS. The third preference category provides that each Supplemental Eligible
Account Holder will receive, without payment, nontransferable subscription
rights to purchase Holding Company Stock to the extent that such shares of
Holding Company Stock are available after satisfying subscriptions for shares in
the first and second preference categories above. The number of shares to which
a Supplemental Eligible Account Holder may subscribe to is the greater of (a)
the maximum purchase limitation established for the Community Offering; (b)
one-tenth of one percent of the total offering of shares; or (c) fifteen times
the product (rounded down to the next whole number) obtained by multiplying the
total number of the shares of Holding Company Stock to be issued by a fraction
of which the numerator is the amount of the deposit of the Supplemental Eligible
Account Holder and the denominator is the total amount of the deposits of all
Supplemental Eligible Account Holders on the Supplemental Eligibility Record
Date. Subscription rights received pursuant to the third preference category
shall be subordinated to all rights under the first and second preference
categories. Non-transferable subscription rights to be received by a
Supplemental Eligible Account Holder in the third preference category shall be
reduced by the subscription rights received by such account holder as an
Eligible Account Holder under the first and second preference categories. In the
event of an oversubscription, shares will be allocated so as to enable each
Supplemental Eligible Account Holder, to the extent
<PAGE>
Board of Directors
Mechanics Savings & Loan, FSA
April 22, 1999
Page 5
possible, to purchase a
number of shares sufficient to make his total allocation, including shares
previously allocated in the first and second preference categories, equal to 100
shares or the total amount of his subscription, whichever is less. Any shares
not then allocated shall be allocated among the subscribing Supplemental
Eligible Account Holders on an equitable basis related to the amount of their
respective deposits as compared to the total deposits of Supplemental Eligible
Account Holders on the Supplemental Eligibility Record Date.
If there is no oversubscription of the Holding Company Stock in the
first, second, and third preference categories, the fourth preference category
becomes operable. In the fourth preference category, members of the Institution
entitled to vote at the special meeting of members to approve the Plan of
Conversion who are not Eligible Account Holders or Supplemental Eligible Account
Holders ("Other Members") will receive, without payment, non-transferable
subscription rights entitling them to purchase Holding Company Stock. Other
Members shall each receive subscription rights to purchase up to the maximum
purchase limitation established for the Public Offering or one-tenth of one
percent of the total offering of shares, to the extent that Holding Company
Stock is available. In the event of an oversubscription by Other Members,
Holding Company Stock will be allocated pro rata according to the number of
shares subscribed for by each Other Member.
The Plan of Conversion further provides for limitations upon purchases
of Holding Company Stock. Specifically, any person by himself or herself or with
an associate or a group of persons acting in concert may subscribe for not more
than $100,000 of Holding Company Stock offered pursuant to the Plan of
Conversion, except that Tax-Qualified Employee Stock Benefit Plans may purchase
up to 10% of the total shares of Holding Company Stock issued. Subject to any
required regulatory approval and the requirements of applicable laws and
regulations, the Institution may increase or decrease any of the purchase
limitations set forth herein at any time. The Board of Directors of the
Institution may, in its sole discretion, increase the maximum purchase
limitation up to 5.0%. Requests to purchase additional shares of Holding Company
Stock under this provision will be allocated by the Board of Directors on a pro
rata basis giving priority in accordance with the priority rights set forth in
the Plan of Conversion. Officers and directors of the Institution and their
associates may not purchase in the aggregate more than 35% of the Holding
Company Stock issued pursuant to the Conversion. Directors of the Institution
will not be deemed associates or a group acting in concert solely as a result of
their membership on the Board of Directors of the Institution. All of the shares
of Holding Company Stock purchased by officers and directors will be subject to
certain restrictions on sale for a period of one year.
The Plan of Conversion provides that no person will be issued any
subscription rights or be permitted to purchase any Holding Company Stock if
such person resides in a foreign country or in a state of the United States with
respect to which all of the following apply: (a) a small
<PAGE>
Board of Directors
Mechanics Savings & Loan, FSA
April 22, 1999
Page 6
number of persons
otherwise eligible to subscribe for shares under the Plan of Conversion reside
in such state; (b) the issuance of subscription rights or the offer or sale of
the Holding Company Stock in such state, would require the Institution or the
Holding Company under the securities laws of such state to register as a broker
or dealer or to register or otherwise qualify its securities for sale in such
state; and (c) such registration or qualification would be impracticable for
reasons of cost or otherwise.
The Plan of Conversion also provides for the establishment of a
Liquidation Account by the Stock Bank for the benefit of all Eligible Account
Holders and Supplemental Eligible Account Holders (if applicable). The
Liquidation Account will be equal in amount to the net worth of Institution as
of the time of the Conversion. The establishment of the Liquidation Account will
not operate to restrict the use or application of any of the net worth accounts
of the Stock Bank, except that the Stock Bank will not declare or pay cash
dividends on or repurchase any of its stock if the result thereof would be to
reduce its net worth below the amount required to maintain the Liquidation
Account. The Liquidation Account will be for the benefit of the Institution's
Eligible Account Holders and Supplemental Eligible Account Holders who maintain
accounts in the Institution at the time of the Conversion. All such account
holders, including those not entitled to subscription rights for reasons of
foreign or out-of-state residency (as described above), will have an interest in
the Liquidation Account. The interest an Eligible Account Holder and
Supplemental Eligible Account Holder will have a right to receive, in the event
of a complete liquidation of the Stock Bank, is a distribution from the
Liquidation Account in the amount of the then current adjusted subaccount
balances for savings accounts then held, which will be made prior to any
liquidation distribution with respect to the capital stock of the Stock Bank.
The initial subaccount balance for a savings account held by an
Eligible Account Holder and/or Supplemental Eligible Account Holder shall be
determined by multiplying the opening balance in the Liquidation Account by a
fraction of which the numerator is the amount of the qualifying deposit in the
savings account, and the denominator is the total amount of qualifying deposits
of all Eligible Account Holders and Supplemental Eligible Account Holders in the
Stock Bank. The initial subaccount balance will never be increased, but may be
decreased if the deposit balance in any qualifying savings account of any
Eligible Account Holder or any savings account of any Supplemental Eligible
Account Holder on any annual closing date subsequent to the Eligibility Record
Date or Supplemental Eligibility Record Date, whichever is applicable, is less
than the lesser of (1) the deposit balance in the savings account at the close
of business on any other annual closing date subsequent to the Eligibility
Record Date or the Supplemental Eligibility Record Date, or (2) the amount of
the qualifying deposit in such savings account. In such event, the subaccount
balance for the savings account will be adjusted by reducing each subaccount
balance in an amount proportionate to the reduction in the savings account
balance. Once decreased, the Plan of Conversion provides that the subaccount
balance will never be subsequently
<PAGE>
Board of Directors
Mechanics Savings & Loan, FSA
April 22, 1999
Page 7
increased, and if the savings account of an Eligible Account Holder or
Supplemental Eligible Account Holder is closed, the related subaccount balance
in the Liquidation Account will be reduced to zero.
The net proceeds from the sale of the shares of Holding Company Stock
will become the permanent capital of Holding Company, and the Holding Company
will in turn purchase 100% of the stock issued by Stock Bank, in exchange for up
to 50% of the Holding Company's stock offering net proceeds or such other
percentage as is approved by the Board of Directors with the concurrence of the
OTS.
Following the Conversion, voting rights in Stock Bank will rest
exclusively in the Holding Company. Voting rights in the Holding Company will
rest exclusively in the stockholders of the Holding Company. The Conversion will
not interrupt the business of the Institution, and its business will continue as
usual under the Stock Bank. Each depositor will retain a withdrawable savings
account or accounts equal in amount to the withdrawable account or accounts at
the time of the Conversion. Mortgage loans of the Institution will remain
unchanged and retain their same characteristics in the Stock Bank after the
Conversion. The Stock Bank will continue membership in the Federal Home Loan
Bank System, and will remain subject to the regulatory authority of the OTS.
Immediately prior to the Conversion, the Institution will have a
positive net worth in accordance with generally accepted accounting principles.
The savings account holders of the Institution will pay expenses of the
Conversion solely attributable to them, if any. Further, the Institution will
pay its own expenses of the Conversion and will not pay any expenses solely
attributable to the Institution's savings account holders or to the purchasers
of Holding Company Stock.
REPRESENTATIONS BY MANAGEMENT
-----------------------------
In connection with the Conversion, the following statements,
representations and declarations have been made to us by management of the
Institution:
1. The Conversion will be implemented in accordance with the terms of
the Plan of Conversion and all conditions precedent contained in the Plan of
Conversion shall be performed prior to the consummation of the Conversion.
2. The fair market value of the withdrawable savings accounts plus
interests in the Liquidation Account to be constructively received under the
Plan of Conversion will in each instance be equal to the fair market value of
each savings account of the Institution plus the interest
<PAGE>
Board of Directors
Mechanics Savings & Loan, FSA
April 22, 1999
Page 8
in the residual equity of the Institution surrendered in exchange therefor. All
proprietary rights in the Institution form an integral part of the withdrawable
savings accounts being surrendered in the Conversion.
3. The Holding Company and the Stock Bank each have no plan or
intention to redeem or otherwise acquire any of the Holding Company Stock issued
in the proposed transaction.
4. To the best of the knowledge of the management of the Institution,
there is not now nor will there be at the time of the Conversion, any plan or
intention, on the part of the depositors in the Institution to withdraw their
deposits following the Conversion. Deposits withdrawn immediately prior to or
immediately subsequent to the Conversion (other than maturing deposits) are
considered in making these assumptions.
5. Immediately following the consummation of the proposed transaction,
the Stock Bank will possess the same assets and liabilities as the Institution
held immediately prior to the proposed transaction, plus substantially all of
the net proceeds from the sale of its stock to the Holding Company (except for
assets used to pay expenses in the Conversion). Assets used to pay expenses of
the Conversion (without reference to the expenses of the Subscription Offering
and the Public Offering) and all distributions (except for regular normal
interest payments made by the Institution immediately preceding the transaction)
will in the aggregate constitute less than one percent (1%) of the assets of the
Institution, net of liabilities associated with such assets, and will be paid by
the Institution and the Holding Company from the proceeds of the Subscription
Offering and Public Offering.
6. Following the Conversion, the Stock Bank will continue to engage in
its business in substantially the same manner as engaged in by the Institution
prior to the Conversion. The Stock Bank has no plan or intention to sell or
otherwise dispose of any of its assets, except in the ordinary course of
business.
7. No cash or property will be given to any member of the Institution
in lieu of subscription rights or an interest in the Liquidation Account of the
Stock Bank.
8. None of the compensation to be received by any deposit account
holder-employees of the Institution or the Holding Company will be separate
consideration for, or allocable to, any of their deposits in the Institution. No
interest in the Liquidation Account of the Stock Bank will be received by any
deposit account holder-employees as separate consideration for, or will
otherwise be allocable to, any employment agreement, and the compensation paid
to each deposit account holder-employee, during the twelve month period
preceding or subsequent to the Conversion, will be for services actually
rendered and will be commensurate with amounts paid
<PAGE>
Board of Directors
Mechanics Savings & Loan, FSA
April 22, 1999
Page 9
to third parties bargaining at arm's length for similar services. No shares of
Holding Company Stock will be issued to or purchased by any deposit account
holder-employee of the Institution or the Holding Company at a discount or as
compensation in the Conversion.
9. The aggregate fair market value of the Qualifying Deposits held by
Eligible Account Holders or Supplemental Eligible Account Holders (if
applicable) as of the close of business on the Eligibility Record Date or
Supplemental Eligibility Record Date (if applicable) entitled to interests in
the Liquidation Account to be established by Stock Bank equalled or exceeded 99%
of the aggregate fair market value of all savings accounts (including those
accounts of less than $50.00) in the Institution as of the close of business on
such date.
10. There is no plan or intention for the Stock Bank to be liquidated
or merged with another corporation following the consummation of the Conversion.
11. The Institution and the Stock Bank are corporations within the
meaning of Section 7701(a)(3) of the Code.
12. The Holding Company has no plan or intention to sell or otherwise
dispose of the stock of the Stock Bank received by it in the proposed
transaction.
13. Both the Stock Bank and the Holding Company have no plan or
intention, either currently or at the time of the Conversion, to issue
additional shares of common stock following the proposed transaction, other than
shares that may be issued to employees or directors pursuant to certain stock
option and stock incentive plans or that may be issued to employee benefit
plans.
14. At the time of the proposed transaction, the fair market value of
the assets of the Institution on a going concern basis (including intangibles)
will equal or exceed the amount of its liabilities plus the amount of liability
to which such assets are subject. The Institution will have a positive
regulatory net worth at the time of the Conversion.
15. The Institution is not under the jurisdiction of a court in a Title
11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. The
proposed transaction does not involve a receivership, foreclosure, or similar
proceeding before a federal or state agency involving a financial institution.
16. The Institution's savings depositors will pay expenses of the
Conversion solely attributable to them, if any. The Holding Company, the Stock
Bank, and the Institution will pay their own expenses of the Conversion and will
not pay any expenses solely attributable to the savings depositors or to the
Holding Company stockholders.
<PAGE>
Board of Directors
Mechanics Savings & Loan, FSA
April 22, 1999
Page 10
17. The liabilities of the Institution assumed by the Stock Bank plus
the liabilities, if any, to which the transferred assets are subject were
incurred by the Institution in the ordinary course of its business and are
associated with the assets transferred.
18. There will be no purchase price advantage for the Institution's
deposit account holders who purchase Holding Company Stock in the Conversion.
19. Neither the Institution nor the Stock Bank is an investment company
as defined in Sections 368(a)(2)(F)(iii) and (iv) of the Code.
20. No creditors of the Institution have taken any steps to enforce
their claims against the Institution by instituting bankruptcy or other legal
proceedings, in either a court or appropriate regulatory agency, that would
eliminate the proprietary interests of the members of the Institution prior to
the Conversion.
21. The proposed transaction does not involve the payment to the Stock
Bank or the Institution of financial assistance from federal agencies within the
meaning of Notice 89-102, 1989-40 C.B. 1.
22. The Eligible Account Holders' and Supplemental Eligible Account
Holders' proprietary interest in the Institution arise solely by virtue of the
fact that they are account holders in the Institution.
23. At the time of the Conversion, the Institution will not have
outstanding any warrants, options, convertible securities, or any other type of
right pursuant to which any person could acquire an equity interest in the
Holding Company or the Stock Bank.
24. The Stock Bank has no plan or intention to sell or otherwise
dispose of any of the assets of the Institution acquired in the transaction
(except for dispositions, including deposit withdrawals, made in the ordinary
course of business).
25. On a per share basis, the purchase price of the Holding Company
Stock in the Conversion will be equal to the fair market value of such stock at
the time of the completion of the proposed transaction.
26. The Institution has received or will receive an opinion from
FinPro, Inc. ("Appraiser's Opinion"), which concludes that subscription rights
to be received by Eligible Account Holders, Supplemental Eligible Account
Holders, and other eligible subscribers do not have any ascertainable fair
market value, because they are acquired by the recipients without cost,
<PAGE>
Board of Directors
Mechanics Savings & Loan, FSA
April 22, 1999
Page 11
are non-transferable, exist for such a short duration, and merely afford the
recipients a right only to purchase Holding Company Stock at a price equal to
its estimated fair market value, which will be the same price used in the Public
Offering for unsubscribed shares of Holding Company Stock.
27. The Institution will not have any net operating losses, capital
loss carryovers, or built-in losses at the time of the Conversion.
OPINION OF COUNSEL
------------------
Based solely upon the foregoing information and our analysis and
examination of current applicable federal income tax laws, rulings, regulations,
judicial precedents, and the Appraiser's Opinion, and provided the Conversion is
undertaken in accordance with the above assumptions, we render the following
opinion of counsel:
1. The change in the form of operation of the Institution from a
federally-chartered mutual savings association to a federally chartered capital
stock savings bank, as described above, will constitute a reorganization within
the meaning of Section 368(a)(1)(F) of the Code, and no gain or loss will be
recognized to either the Institution or to the Stock Bank as a result of such
Conversion. (See Rev. Rul. 80-105, 1980-1 C.B. 78). The Institution and the
Stock Bank will each be a party to a reorganization within the meaning of
Section 368(b) of the Code. (Rev. Rul. 72-206, 1972-1 C.B. 104).
2. No gain or loss will be recognized by the Stock Bank on the receipt
of money in exchange for shares of Stock Bank stock. (Section 1032(a) of the
Code).
3. The Holding Company will recognize no gain or loss upon its receipt
of money in exchange for shares of Holding Company Stock. (Section 1032(a) of
the Code).
4. Depositors will realize gain, if any, upon the issuance to them of
(i) withdrawable deposit accounts of the Stock Bank, (ii) subscription rights in
connection with the Conversion, and/or (iii) interests in the Liquidation
Account of the Stock Bank. Any gain resulting therefrom will be recognized, but
only in an amount not in excess of the fair market value of the Liquidation
Accounts and/or subscription rights received. The Liquidation Accounts will have
nominal, if any, fair market value. Based solely on the accuracy of the
conclusion reached in the Appraiser's Opinion, and our reliance on such opinion,
that the subscription rights have no value at the time of distribution or
exercise, no gain or loss will be required to be recognized by depositors upon
receipt or distribution of subscription rights. (Section 1001 of the Code). See
Paulsen v. Commissioner, 469 U.S. 131, 139 (1985).
<PAGE>
Board of Directors
Mechanics Savings & Loan, FSA
April 22, 1999
Page 12
Likewise, based solely on the accuracy of the aforesaid conclusion
reached in the Appraiser's Opinion, and our reliance thereon, we give the
following opinions: (a) no taxable income will be recognized by the borrowers,
directors, officers, and employees of the Institution upon distribution to them
of subscription rights or upon the exercise or lapse of the subscription rights
to acquire Holding Company Stock at fair market value; (b) no taxable income
will be realized by the depositors of the Institution as a result of the
exercise or lapse of the subscription rights to purchase Holding Company Stock
at fair market value (Rev. Rul. 56-572, 1956-2 C.B. 182); and (c) no taxable
income will be realized by the Institution, the Stock Bank, or the Holding
Company on the issuance or distribution of subscription rights to depositors of
the Institution to purchase shares of Holding Company Stock at fair market value
(Section 311 of the Code).
Notwithstanding the Appraiser's Opinion, if the subscription rights are
subsequently found to have a fair market value greater than zero, income may be
recognized by various recipients of the subscription rights (in certain cases,
whether or not the rights are exercised) and the Holding Company and/or the
Stock Bank may be taxable on the distribution of the subscription rights.
(Section 311 of the Code). In this regard, the subscription rights may be taxed
partially or entirely at ordinary income tax rates.
5. The part of the taxable year of the Institution before the
Conversion and the part of the taxable year of the Stock Bank after the
Conversion will constitute a single taxable year of the Stock Bank. (See Rev.
Rul. 57-276, 1957-1 C.B. 126). Consequently, the Institution will not be
required to file a federal income tax return for any portion of such taxable
year (Section 1.381(b)-1(a)(2) of the Treasury Regulations).
6. As provided by Section 381(c)(2) of the Code and Section
1.381(c)(2)-1 of the Treasury Regulations, the Stock Bank will succeed to and
take into account the earnings and profits or deficit in earnings and profits of
the Institution as of the date or dates of transfer.
SCOPE OF OPINION
----------------
Our opinion is limited to the federal income tax matters described
above and does not address any other federal income tax considerations or any
state, local, foreign, or other tax considerations. If any of the information on
which we have relied is incorrect, or if changes in the relevant facts occur
after the date hereof, our opinion could be affected thereby. Moreover, our
opinion is based on the Internal Revenue Code of 1986, as amended, applicable
Treasury regulations promulgated thereunder, and Internal Revenue Service
rulings, procedures, and other pronouncements published by the United States
Internal Revenue Service. These authorities are all subject to change, and such
change may be made with retroactive effect. We can give no assurance that, after
such change, our opinion would not be different. We undertake no
<PAGE>
Board of Directors
Mechanics Savings & Loan, FSA
April 22, 1999
Page 13
responsibility to update or supplement our opinion. This opinion is not binding
on the Internal Revenue Service, and there can be no assurance, and none is
hereby given, that the Internal Revenue Service will not take a position
contrary to one or more of the positions reflected in the foregoing opinion, or
that our opinion will be upheld by the courts if challenged by the Internal
Revenue Service.
USE OF OPINION
--------------
This opinion is given solely for the benefit of the parties to the
^[Plan of Conversion, the shareholders of Stock Bank and Eligible Account
Holders, Supplemental Eligible Account Holders and other investors who purchase
stock pursuant to the Plan of Conversion,] and may not be relied upon by any
other party or entity or referred to in any document without our express written
consent.
We hereby consent to the filing of this opinion as an exhibit to the
Application for Conversion on Form AC of the Institution filed with the OTS, the
Application H-(e)(1)-S of the Holding Company filed with the OTS, and the
Registration Statement on Form SB-2 of the Holding Company filed under the
Securities Act of 1933, as amended, and to the reference of our firm in the
prospectus related to this opinion.
Very truly yours,
/s/ Malizia, Spidi, Sloane & Fisch, P.C.
-----------------------------------------
MALIZIA, SPIDI, SLOANE & FISCH, P.C.
EXHIBIT 99.1
<PAGE>
[LOGO]
STOCK ORDER FORM
DEADLINE
This order form, properly executed and with the full payment must and will be
deemed received upon the date and the time of delivery of the form to one of our
offices. Please submit your order using the enclosed postage-paid envelope or
hand-delivering the order form to Mechanics Savings and Loan, FSA.
NUMBER OF SHARES
Fill in the number of shares you wish to purchase and the total amount due. No
fractional shares will be issued. The minimum order is 25 shares. With the
exception of the ESOP, no person (or persons who have subscription rights
through a single account) may purchase in the Offerings more than 10,000 shares
of Common Stock and no person (or persons who have subscription rights through a
single account), together with associates of persons acting in concert with such
person, may purchase in the aggregate more than 10,000 shares of Common Stock.
See the Prospectus for a description of purchase limitations, including how to
determine whether your purchases will be aggregated with any associates or
persons acting in concert.
METHOD OF PAYMENT
Check the appropriate box(es). You may pay by cash, check, or money order. If
paying by check or money order, please make it payable to Steelton Bancorp, Inc.
If paying by cash, please hand- deliver your order form. Your funds will earn
interest at the interest rate paid on passbook savings accounts from the date of
receipt until the offering is completed. You may also wish to pay by authorizing
withdrawal from your Mechanics Savings and Loan, FSA savings or certificate
account(s). If paying by withdrawal, please list the appropriate account
number(s); these designated funds will continue to earn interest at the
contractual rate, but cannot be withdrawn by you.
STOCK REGISTRATION
Print the name(s) in which you want the stock registered. If you are a voting
member, to protect your priority over other purchasers as described in the
Prospectus, you must take ownership in at least one of the account holders'
names.
Enter the Social Security Number (or Tax I.D. Number) of a registered owner.
Only one number is required.
Indicate the manner in which you wish to take ownership by checking the
appropriate box. If necessary, check "Other" and note ownership such as
corporation, estate or trust. If stock is purchased for a trust, the date of the
trust agreement and trust title must be included. See the reverse side of this
form for registration guidelines.
Total
Number of Purchase Total
Shares Price Amount
X $10.00 = $
- ---------- -------- ----------
[ ] Enclosed is a check or money order payable
to Steelton Bancorp, Inc. for
$__________.
[ ] I authorize withdrawal from the following
Mechanics Savings and Loan, FSA account(s):
Account Number(s) Amount
__________________ $ __________
__________________ $ __________
__________________ $ __________
Total Withdrawal $ __________
No penalty for early withdrawal.
- ----------------------------------------------------
Name(s) in which stock is to be registered.
- ----------------------------------------------------
Name(s) in which stock is to be registered.
- ----------------------------------------------------
Address
- ----------------------------------------------------
City County
- ----------------------------------------------------
State Zip Code
- ----------------------------------------------------
Social Security # or Tax ID #
[ ] Individual [ ]Joint Tenants [ ]Tenants in Common
[ ] Uniform Transfer to Minors [ ] Other
<PAGE>
Steelton Bancorp, Inc.
GUIDELINES FOR REGISTERING STOCK
For reasons of clarity and standardization, the stock transfer
industry has developed uniform stockholder registrations which we will utilize
in the issuance of your Steelton Bancorp, Inc. stock certificate(s). If you have
any questions, please consult your legal advisor.
Stock ownership must be registered in one of the following
manners:
- --------------------------------------------------------------------------------
INDIVIDUAL Avoid the use of two initials. Include the first given name,
middle initial and last name of the stockholder. Omit words of
limitation that do not affect ownership rights such as "special
account," "single man," "personal property," etc.
- --------------------------------------------------------------------------------
JOINT Joint ownership of stock by two or more persons shall be
inscribed on the certificate with one of the following types of
joint ownership. Names should be joined by "and," do not connect
with "or". Omit titles such as "Mrs.," "Dr.," etc. JOINT TENANTS
Joint Tenancy with Right of Survivorship and not as Tenants in
Common may be specified to identify two or more owners where
ownership is intended to pass automatically to the surviving
tenant(s). TENANTS IN COMMON Tenants in common may be specified
to identify two or more owners. When stock is held in a tenancy
in common, upon the death of one co-tenant, ownership of the
stock will be held by the surviving co-tenant(s) and by the heirs
of the deceased co-tenant. All parties must agree to the transfer
or sale of shares held in this form of ownership.
- --------------------------------------------------------------------------------
UNIFORM
TRANSFER
TO MINORS Stock may be held in the name of a custodian for a minor under
the Uniform Transfers to Minors laws of the individual states.
There may be only one custodian and one minor designated on a
stock certificate. The standard abbreviation of custodian is
"CUST," while the description "Uniform Transfers to Minors Act"
is abbreviated "UNIF TRANS MIN ACT." Standard U.S. Postal Service
state abbreviations should be used to describe the appropriate
state. For example, stock held by John P. Jones under the
Pennsylvania Uniform Transfers to Minors Act will be abbreviated.
JOHN P. JONES CUST SUSAN A. JONES
UNIF TRANS MIN ACT
- --------------------------------------------------------------------------------
FIDUCIARIES Stock held in a fiduciary capacity must contain the following:
1. The name(s) of the fiduciary --
* If an individual, list the first given name, middle initial,
and last name.
* If a corporation, list the corporate title
* If an individual and a corporation, list the corporation's
title before the initial.
2. The fiduciary capacity --
* Administrator
* Conservator
* Committee
* Executor
* Trustee
* Personal Representative
* Custodian
3. The type of document governing the fiduciary relationship.
Generally, such relationships are either under a form of
living trust agreement or pursuant to a court order. Without
a document establishing a fiduciary relationship, your stock
may not be registered in a fiduciary capacity.
4. The date of document governing the relationship. The date of
the document need not be used in the description of a trust
created by a will.
5. Either of the following: The name of the
maker, donor or testator
or
The name of the beneficiary
Example of Fiduciary Ownership:
JOHN D. SMITH, TRUSTEE FOR TOM A. SMITH
UNDER AGREEMENT DATED ___/___/___
<PAGE>
NASD AFFILIATIONS
Please refer to the National Association of Securities Dealers, Inc., ("NASD")
affiliation section and check the box, if applicable. The NASD Interpretation
With Respect to Free-Riding and Withholding (the "Interpretation") restricts the
sale of a "hot issue" (securities that trade at a premium in the aftermarket) to
NASD members, persons associated with NASD members (i.e., an owner, director,
officer, partner, employee, or agent of a NASD member) and certain members of
their families. Such persons are requested to indicate that they will comply
with certain conditions required for an exemption from the restrictions.
[ ] Check here and initial below if you are a member of the NASD or a person
associated with an NASD member or a partner with a securities brokerage firm or
a member of the immediate family of any such person to whose support such person
contributes directly or indirectly or if you have an account in which a NASD
member or a person associated with a NASD member has a beneficial interest. I
agree (i) not to sell, transfer or hypothecate the stock for a period of three
months following issuance, and (ii) to report this stock purchase in writing to
the applicable NASD member I am associated with within one day of the payment
for the stock. (Initials) _______________
TELEPHONE INFORMATION ACKNOWLEDGMENT Please enter both a daytime and an evening
telephone number where you may be reached in the event we cannot execute your
order as given. Please include your area code.
Daytime Phone ( ) ___________________
Evening Phone ( ) ___________________
ACKNOWLEDGEMENT
Sign and date the order form. When purchasing as a custodian, corporate officer,
etc., add your full title to your signature. An additional signature is required
only when payment is by withdrawal from an account that requires more than one
signature to withdraw funds. Your order will be filled according to the
provisions of the Plan of Conversion as described in the Prospectus.
I (WE) ACKNOWLEDGE THAT THIS SECURITY IS NOT
A SAVINGS ACCOUNT OR DEPOSIT AND IS NOT
FEDERALLY INSURED AND IS NOT GUARANTEED BY
MECHANICS SAVINGS AND LOAN, FSA OR THE
FEDERAL GOVERNMENT.
I (we) further certify that I (we) received a Prospectus prior to purchasing the
Common Stock of Steelton Bancorp, Inc. and acknowledge the terms and conditions
described therein. The Prospectus that I (we) received contains disclosure
concerning the nature of the security being offered and describes the risks
involved in the investment. These include, among others^:
^o future changes in interest rates which may reduce our profits;
^o increase in commercial real estate and consumer lending which carry a
greater risk than residential loans;
^o decreased return on equity and increased expenses immediately after the
conversion which may negatively affect the price of our stock;
^o expenses of our stock-based benefit plans which will reduce our earnings;
^o anti-takeover provisions ^in our articles of incorporation that could
discourage takeover attempts;
^o possible downturn in local economy and competition which could hurt our
profitability;
^o potential impact of the Year 2000 issues;
^o adoption of financial institution regulations that could reduce our
profitability;
^o lack of an active market for our stock; and
^o risk that the price of our stock will not increase to a level comparable to
other publicly traded financial institution holding companies.
If anyone asserts that this security is federally insured or guaranteed, or is
as safe as an insured deposit, I we) should call the Office of Thrift
Supervision Regional Director for the Northeast Region, at (201) 413-1000.
I (we) understand that, after receipt by Steelton Bancorp, Inc. this order may
not be modified or withdrawn without the consent of Steelton Bancorp, Inc. or
Mechanics Savings and Loan, FSA. Further, I (we) certify that my (our) purchase
does not conflict with the purchase limitations in the Plan of Conversion and
that the shares being purchased are for my (our) account only and that there is
no present agreement or understanding regarding any subsequent sale or transfer
of such shares. Under penalties of perjury, I (we) certify that: (1) the Social
Security Number or Tax Identification Number given above is correct; and (2) I
(we) am (are) not subject to backup withholding. Instructions: You must cross
out #2 above if you have been notified by the Internal Revenue Service that you
are subject to withholding because of under-reporting interest or dividends on
your tax return.
^I understand that by executing this order I do not waive any rights afforded to
me by the Securities Act of 1933 or the Securities Exchange Act of 1934.
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Signature Date
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Additional Signature (if required) Date
THIS ORDER NOT ^VALID UNLESS SIGNED
FOR ASSISTANCE, PLEASE CALL OUR STOCK CENTER AT
(717) 939-3100 (STEELTON BANCORP, INC.)
FROM 9:00 A.M. TO 4:00 P.M., MONDAY THROUGH FRIDAY
