U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------------
FORM 10-QSB
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 000-26499
STEELTON BANCORP, INC.
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(Exact name of Registrant as specified in its Charter)
Pennsylvania 25-1830745
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(State or other jurisdiction of I.R.S. Employer Identification Number
incorporation or organization)
51 South Front Street, Steelton, Pennsylvania 17113
- --------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 939-1966
Indicate by check mark whether the registrant (1) has files all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of August 9, 1999, there were 385,000 shares of the Registrant's
common stock, par value $0.10 per share, outstanding. The Registrant has no
other classes of common equity outstanding.
Transitional small business disclosure format:
Yes X No
--- ---
<PAGE>
STEELTON BANCORP, INC.
STEELTON, PENNSYLVANIA
Contents
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Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements..................................................3
Consolidated Statements of Financial Condition - (Unaudited) as of
June 30, 1999 and December 31, 1998...................................3
Consolidated Statements of Income - (Unaudited) for
the three months and six months ended June 30, 1999 and 1998..........4
Consolidated Statements of Comprehensive Income - (Unaudited) for
the three months and six months ended June 30, 1999 and 1998..........5
Consolidated Statements of Changes in Equity - (Unaudited) for
the six months ended June 30, 1999....................................6
Consolidated Statements of Cash Flows - (Unaudited) for
the six months ended June 30, 1999 and 1998...........................7
Notes to (unaudited) Consolidated Financial Statements................9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................18
Item 2. Changes in Securities and Use of Proceeds............................18
Item 3. Defaults Upon Senior Securities......................................18
Item 4. Submission of Matters to a Vote of Security Holders..................18
Item 5. Other Information....................................................18
Item 6. Exhibits and Reports on Form 8-K.....................................19
Signatures....................................................................20
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
MECHANICS SAVINGS AND LOAN, FSA AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
At June 30, At December 31,
1999 1998
------------ -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents
Cash and amounts due from depository institutions $ 318,441 $ 433,414
Interest bearing deposits in other banks 5,463,632 1,954,178
Investment securities
Securities available-for-sale 7,310,542 4,004,294
Securities held-to-maturity 6,387,254 5,200,205
Loans receivable, net 25,734,852 27,784,386
Accrued interest receivable 252,038 227,712
Federal Home Loan Bank stock, at cost 564,600 564,600
Office properties and equipment, net 1,134,257 1,046,050
Rental property, net 66,758 68,678
Deferred income taxes 136,272 97,771
Other assets 310,946 129,986
----------- -----------
Total assets $ 47,679,592 $ 41,511,274
=========== ===========
LIABILITIES AND EQUITY
Deposits $ 30,393,088 $ 28,272,431
Stock subscription deposits 3,171,519
Advances from Federal Home Loan Bank 10,049,370 9,257,408
Advances from borrowers for insurance and taxes 251,919 167,315
Accrued interest payable 103,421 72,227
Other liabilities 20,844 43,404
----------- -----------
Total liabilities 43,990,161 37,812,785
----------- -----------
Commitments and contingencies
Retained earnings (substantially restricted) 3,778,250 3,712,571
Accumulated other comprehensive income (loss) (88,819) (14,082)
----------- -----------
Total equity 3,689,431 3,698,489
----------- -----------
Total liabilities and equity $ 47,679,592 $ 41,511,274
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
3
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<TABLE>
<CAPTION>
MECHANICS SAVINGS AND LOAN, FSA AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -------------------------
1999 1998 1999 1998
--------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 543,418 $ 634,298 $1,108,530 $1,311,765
Investment securities 184,354 70,991 317,734 105,234
Other interest earning assets 25,808 22,048 66,831 50,628
--------- --------- --------- ---------
Total interest income 753,580 727,337 1,493,095 1,467,627
--------- --------- --------- ---------
Interest expense:
Deposits 326,723 296,879 654,578 592,606
Advances from Federal Home Loan Bank 131,522 151,539 255,318 297,467
--------- --------- --------- ---------
Total interest expense 458,245 448,418 909,896 890,073
--------- --------- ---------- ---------
Net interest income 295,335 278,919 583,199 577,554
Provision for loan losses -- 3,000 2,000 6,000
--------- --------- --------- ---------
Net interest income after provision for loan losses 295,335 275,919 581,199 571,554
--------- --------- --------- ---------
Other income:
Fees and service charges 39,590 20,198 73,130 40,991
Dividends on FHLB stock 9,150 8,917 18,199 17,207
Other 8,547 14,165 21,680 26,724
--------- --------- --------- ---------
Total other income 57,287 43,280 113,009 84,922
--------- --------- --------- ---------
Other expense:
Salaries and employee benefits 146,313 132,147 293,818 275,735
Occupancy expense of premises 23,111 21,472 47,181 44,365
Equipment 51,936 43,627 99,443 84,042
Advertising 12,704 18,938 24,769 28,395
Other 68,749 44,866 130,998 92,008
--------- --------- --------- ---------
Total other expense 302,813 261,050 596,209 524,545
--------- --------- --------- ---------
Income before income taxes 49,809 58,149 97,999 131,931
Income taxes 15,936 20,825 32,320 46,728
--------- --------- -------- ---------
Net income $33,873 $37,324 $65,679 $85,203
========= ========= ======== =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
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<TABLE>
<CAPTION>
MECHANICS SAVINGS AND LOAN, FSA AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three months ended June 30 Six months ended June 30
1999 1998 1999 1998
------------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 33,873 $ 37,324 $ 65,679 $ 85,203
Other comprehensive income (loss)
Unrealized losses on securities
available for sale (68,849) -- (113,238) --
Income tax benefit 21,369 -- 38,501 --
--------- --------- --------- ---------
Comprehensive income (loss) $ (13,607) $ 37,324 $ (9,058) $ 85,203
========= ========= ========= =========
</TABLE>
See notes to unaudited consolidated financial statements.
5
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<TABLE>
<CAPTION>
MECHANICS SAVINGS AND LOAN, FSA
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
Retained Accumulated
Earnings Other
Substantially Comprehensive
Restricted Income (Loss) Total Equity
---------- ------------- ------------
<S> <C> <C> <C>
Balance, December 31, 1998 $3,712,571 $(14,082) $3,650,483
Net income for the six months ended June 30, 1999 65,679 - 65,679
Net change in unrealized losses on securities
available for sale, net of deferred income tax benefit - (74,737) (74,737)
--------- -------- ---------
Balance, June 30, 1999 $3,778,250 $(88,819) $3,689,431
========= ======== =========
</TABLE>
See notes to unaudited consolidated financial statements.
6
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<TABLE>
<CAPTION>
MECHANICS SAVINGS AND LOAN, FSA AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
------------------------------
1999 1998
---------- ------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 65,679 $ 85,203
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 38,704 34,846
Amortization of deferred loan fees (35,759) (38,989)
Amortization of premiums on loans purchased 3,883 11,795
Accretion of investment security discounts net of premium amortization 14,671 (1,720)
Provision for loan losses 2,000 6,000
(Increase) decrease in:
Accrued interest receivable (24,326) (5,109)
Other assets 22,949 (31,519)
Increase (decrease) in:
Accrued interest payable 31,194 33,249
Other liabilities (22,560) (36,021)
----------- ---------
Net cash provided by operating activities 96,435 57,735
----------- ---------
Cash flows from investing activities:
Investment securities available-for-sale:
Proceeds from sales and maturities of mortgaged-backed securities 1,098,657 --
Purchase of mortgage-backed securities (2,208,118) --
Purchase of other securities (2,320,633) --
Investment securities held-to-maturity:
Proceeds from maturities and repayments
Mortgage-backed securities 287,463 100,000
Other -- 361,007
Purchase of mortgage-backed securities (1,257,150) (3,078,154)
Purchase of other securities (221,425) (647,062)
Net (increase) decrease in loans 2,079,410 2,853,806
Purchase of office properties and equipment (124,991) (57,003)
Purchase of Federal Home Loan Bank stock -- (59,300)
Prepaid costs of conversion (203,909) --
Stock subscription deposits 3,171,519 (59,300)
---------- ----------
Net cash provided by (used in) investing activities 300,823 (526,706)
---------- ----------
</TABLE>
(Continued)
7
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<TABLE>
<CAPTION>
MECHANICS SAVINGS AND LOAN, FSA AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(UNAUDITED)
Six Months Ended
June 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in:
Deposits $ 2,120,657 $ 1,241,991
Advances from borrowers for insurance and taxes 84,604 58,471
Advances from Federal Home Loan Bank 7,000,000 5,074,000
Repayment of Federal Home Loan Bank advances (6,208,038) (4,431,465)
----------- -----------
Net cash provided by financing activities 2,997,223 1,942,997
----------- -----------
Net increase in cash and cash equivalents 3,394,481 1,474,026
Cash and cash equivalents - beginning 2,387,592 788,652
----------- -----------
Cash and cash equivalents - ending $ 5,782,073 $ 2,262,678
=========== ===========
Supplemental disclosures:
Cash paid during the period for interest $ 878,702 $ 856,825
=========== ===========
Cash paid during the period for taxes $ -- $ 39,832
=========== ===========
Net change in unrealized loss on securities available-for-sale $ (113,238) $ --
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
8
<PAGE>
MECHANICS SAVINGS AND LOAN, FSA AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - BASIS OF PRESENTATION
The accompanying condensed financial statements were prepared in accordance with
instructions for Form 10-QSB and, therefore, do not include all information
necessary for a complete presentation of financial condition, results of
operations, and cash flows in conformity with generally accepted accounting
principles. However, all adjustments, consisting of normal recurring accruals,
which, in the opinion of management, are necessary for a fair presentation of
the financial statements have been included. The results of operations for the
periods ended June 30, 1999 and 1998 are not necessarily indicative of the
results, which may be expected for the entire fiscal year or any other period.
The condensed financial statements as of and for the three and six month periods
ended June 30, 1999 and 1998 include the accounts of Mechanics Savings and Loan,
FSA (the "Bank") in mutual form which, as discussed in Note 2, became the wholly
owned subsidiary of Steelton Bancorp, Inc. (the "Company") on July 8, 1999. The
Company's business is conducted principally through the Bank. Through its main
office located in Steelton and its branch office located in Lower Swatara
Township, Pennsylvania, the Bank provides retail banking services, with an
emphasis on one-to-four-family residential mortgages
The interim consolidated financial statements include the accounts of Mechanics
Savings and Loan, FSA and its wholly-owned subsidiary, Baldwin Service
Corporation.
These statements should be read in conjunction with the financial statements and
related notes, which are incorporated by reference in the Company's Prospectus
dated May 14, 1999.
Note 2 - MUTUAL TO STOCK CONVERSION On July 8, 1999, the Bank completed its
mutual to stock conversion (the "Conversion"). In connection with the
Conversion, Steelton Bancorp, Inc., a Pennsylvania chartered corporation, sold
385,000 shares of its common stock in a subscription offering at $10.00 per
share. Upon completion of these transactions, the Bank became the wholly owned
subsidiary of Steelton Bancorp, Inc. and changed its name to Mechanics Savings
Bank.
The common stock of the Company began trading on the Electronic Bulletin Board
under the symbol "SELO" on July 9, 1999.
Note 3 - RECENT ACCOUNTING PRONOUNCEMENTS
Comprehensive Income. Effective January 1, 1998, the Bank adopted SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
financial statements. Under SFAS No. 130, comprehensive income is divided into
net income and other comprehensive income. Other
9
<PAGE>
comprehensive income includes items previously recorded directly in equity, such
as unrealized gains or losses on securities available for sale. SFAS No. 130
requires total comprehensive income and its components to be reported in a
financial statement with equal prominence as other financial statements.
For the three and six months ended June 30, 1999, the Bank reported other
comprehensive income (loss) of $(41,000) and $(33,000) respectively, and $0 and
$0 for the same periods in 1998. Such income (loss) consisted entirely of
unrealized gains or (losses), net of taxes, on available for sale securities.
Segments of an Enterprise and Related Information. In June 1997, the FASB issued
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, 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, SFAS No. 131 requires public companies to report (a) certain financial
and descriptive information about its reportable operating segments (as
defined); and (b) 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. The Bank adopted SFAS NO. 131 on
June 30, 1999. However, no specific segment disclosure is required since the
Bank views its operations as a single segment.
Employers' Disclosure About Pensions and Other Postretirement Benefits. In
February 1998, the FASB issued SFAS No. 132, Employers' Disclosure About
Pensions and Other Postretirement Benefits. SFAS No. 132 revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. SFAS No. 132 became
effective for the Bank on January 1, 1998. Adoption of this statement did not
have a material effect on the Bank's financial condition or results of
operations.
Accounting for Derivative Instruments and Hedging Activities. In June 1998, the
FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS 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. 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 SFAS No.
133. Earlier application of all of the provisions of SFAS 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. SFAS No. 133 is not
expected to have a material impact on the Bank's financial statement
presentations.
In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133. SFAS No. 137 established that SFAS No. 133 be effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000.
10
<PAGE>
Mortgaged-Backed Securities. 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. SFAS No. 134 became effective for the Bank on January 1,
1999. Adoption of this statement did not have a material effect on the Bank's
financial condition or results of operations
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Forward-Looking Statements
The Company may from time to time make written or oral forward-looking
statements, including statements contained in the Company's filings with the
Securities and Exchange Commission (the "Commission") and its reports to
stockholders. Statements made in such documents, other than those concerning
historical information, should be considered forward-looking and subject to
various risks and uncertainties. Such forward-looking statements are made based
upon management's beliefs as well as assumptions made by, and information
currently available to, management pursuant to "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. The Company's actual results
may differ materially from the results anticipated in forward-looking statements
due to a variety of factors, including governmental monetary and fiscal
policies, deposit levels, loan demand, loan collateral values, securities
portfolio values, and interest rate risk management; the effects of competition
in the banking business from other commercial banks, savings and loan
associations, mortgage banking firms, consumer finance companies, credit unions,
securities brokerage firms, insurance companies, money market mutual funds and
other financial institutions operating in the Company's market area and
elsewhere, including institutions operating through the Internet; changes in
governmental regulations relating to the banking industry, including regulations
relating to branching and acquisitions; failure of assumptions underlying the
establishment of reserves for losses, including the value of collateral
underlying delinquent loans, and other factors. The Company cautions that such
factors are not exclusive. The Company does not undertake to update any
forward-looking statements that may be made from time to time by, or on behalf
of, the Company.
Comparison of Financial Condition at June 30, 1999 and December 31, 1998
Assets. Total assets increased $6.2 million, or 14.9%, to $47.7 million at
June 30, 1999 from $41.5 million at December 31, 1998. The increase in total
assets resulted primarily from a $2.1 million increase in deposits during the
six month period ended June 30, 1999 and $3.2 million in stock subscription
deposits held at June 30, 1999 in conjunction with the Conversion.
Loans receivable decreased $2.1 million due to slow loan originations.
Investment securities increased $4.5 million or 32.8% as the Bank invested
excess liquidity. Interest bearing deposits in other banks increased due to
receipt of stock subscriptions in the Conversion.
Liabilities. Total liabilities increased by 16.4%, or $6.2 million, between
December 31, 1998 and June 30, 1999. The increase in total liabilities is
primarily from a $2.1 million increase in deposits, a $3.2 million increase in
stock subscription deposits and a $700,000 increase in advances from the Federal
Home Loan Bank. On July 8, 1999, the Stock subcription deposits were converted
to equity in conjunction with the Conversion.
Equity. Equity decreased by $9,000 between December 31, 1998 and June 30,
1999. The decrease was due to net income for the period of $66,000 and
unrealized losses on investments available for sale, net of tax, of $71,000.
12
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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 Bank's operations for the six months ended June 30,
1999 was $96,000 compared to net cash provided by its operating activities of
$58,000 for the same period in 1998. The primary factors for the increase in
cash used by operations in 1999 was a federal income tax refund of $57,000 for
1998 that was received in 1999 partially offset by a decrease in net income of
$19,000.
Net cash provided by the Bank's investing activities totaled $300,000 for the
six months ended June 30, 1999. The net cash provided by investing activities
for the six months ended June 30, 1999 included cash provided by $3.2 million in
stock subscription deposits held in conjunction with the Conversion. This was
partially offset by net cash used to purchase office properties and equipment
totaling $125,000 and net cash used for the Bank's investment and
mortgage-backed securities and the loan portfolios totaling $3.1 million for the
six months ended June 30, 1999. On June 30, 1999, the Bank purchased property
adjacent to the Steelton office for $106,000 to be used for future expansion.
Net cash provided by the Bank's financing activities, primarily cash receipts
from its net increases in deposits, totaled $3.0 million for the six months
ended June 30, 1999, compared to net cash provided by financing activities
totaling $1.9 million for the same period in 1998.
On June 30, 1999, the Bank was in compliance with its regulatory capital
requirements as follows:
Amount Percent
---------------------
(Dollars in thousands)
Core capital........................................ $3,735 7.81%
Core capital requirement............................ 1,913 4.0 %
Excess over requirement............................. 1,813 3.81%
Risk based capital.................................. $3,903 18.14%
Risk based capital requirement...................... 1,721 8.0 %
Excess over requirement............................. 2,182 10.14%
13
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Management believes that under current regulations, the Bank will continue to
meet its minimum capital requirements in the foreseeable future. Events beyond
the control of the Bank, such as increased interest rates or a downturn in the
economy in areas in which the Bank operates could adversely affect future
earnings and as a result, the ability of the Bank to meet its future minimum
capital requirements.
Comparison of Operating Results for Three and Six Months Ended June 30, 1999 and
1998
Net Income. The bank's net income decreased by $3,000 and $19,000 for the
three and six month periods ended June 30, 1999, when compared to the same
periods in 1998 primarily due to increases of other expenses of $42,000 and
$71,000 for the three and six month periods ended June 30, 1999, when compared
to the same periods in 1998. The increased in other expenses were partially
offset by increases in net interest income of $16,000 and $11,000 and other
income of $14,000 and $28,000 for the three and six month periods ended June 30,
1999, when compared to the same periods in 1998.
Interest Income. Total interest income increased by $27,000 and $25,000 for
the three and six months periods ended June 30, 1999, when compared to the same
periods in 1998. Interest income from the loan portfolio decreased by $91,000
and $203,000 for the three and six month periods ended June 30, 1999, when
compared to the same periods in 1998 primarily as a result of the decrease in
the average balances of loans receivable during the three and six month periods
ended June 30, 1999, when compared to the same periods in 1998. Interest income
from investment securities, principally mortgage-backed securities, increased by
$113,000 and $213,000 for the three and six months periods ended June 30, 1999,
when compared to the same periods in 1998 as increased liquidity was invested.
Interest Expense. Interest expense on deposits increased by $30,000 and
$62,000 for the three and six-month periods ended June 30, 1999, respectively,
when compared to the same periods in 1998. The increase in interest expense on
deposits was primarily the result of increases in the average amounts of
deposits in the first half of 1999 when compared to the first half of 1998.
Interest expense on advances from the Federal Home Loan Bank decreased $20,000
and $42,000 for the three and six-month periods ended June 30, 1999,
respectively, when compared to the same periods in 1999. Cash obtained from net
repayments of loans and increases in deposits during the second half of 1998 and
first half of 1999 was used to reduce average advances from the Federal Home
Loan Bank during the first half of 1999 when compared to the first half of 1998.
Net Interest Income. Net interest income increased by $16,000 and $5,000 for
the three and six month periods ended June 30, 1999, when compared to the same
periods in 1998 due to the changes in interest income and interest expense
described above.
Provision for Loan Losses. The Bank 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 $0 and $2,000 for the three and six months ended
June 30, 1999 compared to $3,000 and $6,000 for the same periods in 1998. The
current allowance represents 0.65% of total loans outstanding at June 30, 1999.
The Bank monitors its
14
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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.
Other Income. Other income, primarily fees and services charges increased by
$14,000 and $28,000 for the three and six month periods ended June 30, 1999,
respectively, when compared to the same periods in 1998. The bank had $19,000 in
automated teller machine services charges for non-customer use in the first half
of 1999. The bank did not charge automated teller machine service charges in the
first half of 1998.
Other Expense. Other expense increased by $42,000 and $71,000 for the three
and six month periods ended June 30, 1999, when compared to the same periods in
1998. Salaries and employee benefits increased by $14,000 and $18,000 for the
three and six month periods ended June 30, 1999, when compared to the same
periods in 1998. Automated teller machine related expenses increased by $10,000
in the first half of 1999 compared to the first half of 1998. Service charges by
the Federal Home Loan Bank increased by $9,000 in the first half of 1999
compared to the first half of 1998.
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.
The Bank 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. Income tax expense decreased by $5,000 and
$15,000 for the three and six month periods ended June 30, 1999 when compared to
the same periods in 1998. This decrease was the result of a decrease in income
before income taxes for the three and six month periods ended June 30, 1999 when
compared to the same periods in 1998.
Year 2000 Readiness Disclosure
Rapid and accurate data processing is essential to the Bank'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 Bank, contains numerous forward looking statements based on inherently
uncertain information. The cost of the project and the date on which the Bank
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 Bank or the Company.
15
<PAGE>
The Bank places a high degree of reliance on computer systems of third
parties, such as customers, suppliers, and other financial and governmental
institutions. Although the Bank 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 Bank.
The Bank'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. The Bank's 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 the Bank's customer
base and maintain the customer transaction histories and company accounting
records are currently operating on Year 2000 compliant systems.
OTS on-site examinations were conducted in December 1998 and July 1999 and
based upon the examination results, the Bank was progressing satisfactorily
toward completing the Plan requirements.
The primary operating software for the Bank is the External Provider. The
Bank is maintaining ongoing contact with this vendor so that modification of the
software for Year 2000 readiness is a top priority. The Bank 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 Bank's current operations is Year 2000
compliant.
The Bank has contacted all other material vendors and suppliers regarding
their Year 2000 readiness. Each of these third parties has delivered written
assurance to the Bank that they expect to be Year 2000 compliant prior to the
Year 2000. The Bank 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 Bank 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 the Bank's correspondent banks.
Testing has been completed on the most significant vendor applications,
except the utilities as noted above. Testing on a few critical applications and
development of contingency plans has been completed for all critical and
important applications and services. Most of the items identified as minor are
services that are performed by outside vendors. The Bank has 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 may be performed in the third quarter of 1999.
The Bank is unable to test the Year 2000 readiness of its significant
suppliers of utilities. The Bank is relying on the utility companies' internal
testing and representations to provide the required services that drive its data
systems.
16
<PAGE>
Software provided by the Bank's 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 the Bank's 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 the Bank 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
Bank, the following, among other things, could negatively
affect the Bank:
(a) utility service companies may be unable to provide the necessary
service to drive the Bank's data systems or provide sufficient
sanitary conditions for its offices;
(b) the Bank's 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
(c) the Bank may have to transact its business manually.
The Bank 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 Bank identifies any concern related to any critical or important
vendor, the contingency plans will be implemented immediately to assure
continued service to the Bank's customers.
Costs will be incurred to replace certain non-compliant software and
hardware. The Bank does not anticipate that direct costs for renovating or
replacing non-compliant hardware and software will exceed $50,000, of which
approximately $39,000 had been expended as of June 30, 1999. No assurance can be
given that the Year 2000 Plan will be completed successfully by the Year 2000,
in which event the Bank 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 Bank 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 Bank.
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 Bank, such as utilities, 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 Bank.
Impact of Inflation
The condensed financial statements of the Bank and notes thereto, presented
elsewhere herein, have been prepared in accordance with GAAP, which require the
measurement of financial
17
<PAGE>
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Bank's operations. Unlike most industrial companies, nearly all the assets and
liabilities of the Bank are financial. As a result, interest rates have a
greater impact on the Bank'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 the prices of goods and services.
18
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
From time to time, the Company and its subsidiary may be a party to
various legal proceedings incident to its or their business. At June
30, 1999, there were no legal proceedings to which the Company or its
subsidiary was a party, or to which of any of their property was
subject, which were expected by management to result in a material
loss.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
(d) Use of Proceeds. The Registration Statement on Form SB-2 (No.
333-74279) for which the use of proceeds information is being disclosed
was declared effective by the Securities and Exchange Commission on May
14, 1999. The offering commenced on May 14, 1999 and terminated on June
22, 1999 after 385,000 shares were sold. The Registration Statement
covered the issuance of 575,288 shares. The managing underwriter for
the offering was Capital Resources, Inc. The title of the securities
registered was Common Stock, par value $0.10 per share. The aggregate
price of the offering amount registered was $5,752,880, and the
aggregate offering price of the amount sold was $3,850,000. The
expenses incurred by the Company and the Bank in connection with the
issuance and distribution of the securities were approximately
$350,000, including $100,000 in underwriting fees. Such payments were
not direct or indirect payments to directors, officers, general
partners of the issuer or their associates, persons owning 10 percent
or more of any class of equity security of the Company or affiliates of
the Company. The net offering proceeds to the Company were
approximately $3,500,000. Of this amount, approximately $1,770,000 was
contributed to the working capital of the Bank and $1,460,000 was
contributed to the working capital of the Company.
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
See note 2 to the Unaudited Condensed Financial Statements regarding
the Mutual to Stock Conversion.
19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
2 Plan of Conversion*
3(i) Articles of Incorporation of Steelton Bancorp, Inc.*
3(ii)Bylaws of Steelton Bancorp, Inc.*
4 Specimen Stock Certificate*
10.1 Employment Agreement between the Bank and Harold E.
Stremmel*
27 Financial Data Schedule (electronic filing only)
- ---------------------
* Incorporated by reference to an identically numbered exhibit to the
registration statement on Form SB-2 (File No. 333-74279) initially filed
with the SEC on March 11, 1999.
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STEELTON BANCORP, INC.
Date: August 12, 1999 By: /s/ Harold E. Stremmel
--------------------------------------
Harold E. Stremmel
President and Chief Executive Officer
(Principal Executive Officer)
(Duly Authorized Officer)
Date: August 12, 1999 By: /s/ Shannon Aylesworth
--------------------------------------
Shannon Aylesworth
Chief Financial Officer
(Principal Accounting Officer)
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