SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1999
-----------------
- OR -
[ ] 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: 0-26499
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Steelton Bancorp, Inc.
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(Name of Small Business Issuer in Its Charter)
Pennsylvania 25-1830745
- ------------------------------------- --------------------
(State or Other Jurisdiction of (I.R.S. Employer
of Incorporation or Organization) Identification No.)
51 South Front Street, Steelton, Pennsylvania 17113
- ----------------------------------------------------- -------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (717) 939-1966
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
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(Title of Class)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Registrant's revenues for the year ended December 31, 1999 were
$181,000.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the average of the bid and asked prices of such
stock as of March 23, 2000, was approximately $3.0 million.
As of March 23, 2000, the registrant had 377,000 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year ended
December 31, 1999. (Part II)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders for
the Fiscal Year ended December 31, 1999. (Part III)
<PAGE>
PART I
Forward-Looking Statements
Steelton Bancorp, Inc. (the "Company" or "Registrant") 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
(including this Annual Report on Form 10-KSB and the exhibits thereto), in its
reports to stockholders and in other communications by the Company, which are
made in good faith by the Company pursuant to the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve system, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing the risks involved
in the foregoing.
The Company cautions that the foregoing list of important factors is
not exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
Item 1. Description of Business
- -------------------------------
General
The Company is a Pennsylvania corporation organized in February 1999 at
the direction of Mechanics Savings and Loan, FSA (the "Bank") to acquire all of
the capital stock that the Bank issued in its conversion from the mutual to
stock form of ownership (the "Conversion"). On July 8, 1999, the Bank completed
the Conversion and became a wholly owned subsidiary of the Company. The Company
is a unitary savings and loan holding company which, under existing laws,
generally is not restricted in the types of business activities in which it may
engage provided that the Bank retains a specified amount of its assets in
housing-related investments. The
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Company conducts no significant business or operations of its own other than
holding all of the outstanding stock of the Bank and investing the Company's
portion of the net proceeds obtained in the Conversion.
The Bank is a federally chartered stock savings bank headquartered in
Steelton, Pennsylvania, originally chartered in 1900 as Mechanics Building and
Loan Association of Steelton. The Bank is subject to examination and
comprehensive regulation by the Office of Thrift Supervision ("OTS") and its
deposits are federally insured by the Savings Association Insurance Fund of the
Federal Deposit Insurance Corporation ("SAIF"). The Bank is a member of and owns
capital stock in the Federal Home Loan Bank ("FHLB") of Pittsburgh, which is one
of the 12 regional banks in the FHLB System.
The Bank operates a traditional savings bank business, attracting
deposit accounts from the general public and using those deposits, together with
other funds, primarily to originate and invest in loans secured by one- to
four-family residential real estate.
References to the Company or the Bank, include the Company, the Bank
and any subsidiaries on a consolidated basis, unless the context requires
otherwise.
Competition
The competition for deposit products comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions, and
multi-state regional banks in the Bank's market area. Deposit competition also
includes a number of insurance products sold by local agents and investment
products such as mutual funds and other securities sold by local and regional
brokers. Loan competition varies depending upon market conditions and comes from
other insured financial institutions such as commercial banks, thrift
institutions, credit unions, multi-state regional banks, and mortgage bankers.
Lending Activities
The following table sets forth information concerning the composition
of the Bank's loan portfolio by loan category at the dates indicated.
2
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<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------
1999 1998
--------------------- -------------------------
$ % $ %
--------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of Loans:
- -------------
Real estate:
1-4 family................................. $28,470 85.21% $23,537 83.52%
Non-residential............................ 830 2.48 764 2.72
Consumer loans:
Home equity and second mortgage loans...... 3,408 10.20 3,234 11.47
Share loans................................ 226 0.68 277 0.98
Other(1)................................... 403 1.21 289 1.03
Commercial (business) loans.................. 76 0.22 79 0.28
------ ------ ------ ------
Total loans.................................. 33,413 100.00% 28,181 100.00%
------ ====== ------ ======
Less:
Loans in process(2)........................ 946 51
Deferred loan origination fees and costs... 272 180
Allowance for loan losses.................. 168 166
------ ------
Total loans, net............................. $32,027 $27,784
====== ======
</TABLE>
- --------------------
(1) Consists of personal secured, auto secured, credit card loans, and premiums
on loans purchased.
(2) Relates to construction loans.
Loan Maturity Schedule. The following table sets forth the maturity or
repricing of Bank's loan portfolio at December 31, 1999. 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 Share Other Commercial
Mortgage(1) Real Estate Mortgages Loans Consumer Business Total
----------- ----------- --------- ----- -------- -------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Non-performing............ $ 380 $ 61 $ 71 $ -- $ 15 $ -- $ 527
Amounts Due:
Within 1 Year............. 315 178 432 91 20 -- 1,036
Within 1 to 5 Years....... 161 -- 451 135 286 76 1,109
After 5 Years............. 27,614 591 2,454 - 82 -- 30,741
------ --- ----- --- --- -- ------
Total amount due.......... 28,470 830 3,408 226 403 76 33,413
------ --- ----- --- --- -- ------
Less:
Allowance for loan loss... 95 -- 48 -- 17 8 168
Loans in process.......... 946 -- -- -- -- -- 946
Deferred loan fees........ 272 -- -- -- -- -- 272
------ --- ----- --- --- -- ------
Loans receivable, net..... $27,157 $830 $3,360 $226 $386 $68 $32,027
====== === ===== === === == ======
</TABLE>
- -----------------------
(1) Includes construction loans.
3
<PAGE>
The following table sets forth the dollar amount of all loans due after
December 31, 2000, 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........... $22,382 $5,393 $27,775
Non-residential real estate.. 291 300 591
Home Equity and Second.......
Mortgages.................. 2,905 -- 2,905
Share loans.................. 135 -- 135
Other consumer............... 368 -- 368
Commercial (Business)........ 76 -- 76
------ ----- ------
Total...................... $26,157 $5,693 $31,850
====== ===== ======
Residential Lending. The Bank's primary lending activity consists of
the origination of one- to four-family residential mortgage loans secured by
property located in the Bank's market area. The Bank 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 Bank 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 Bank will originate a mortgage loan in an amount up to 75% of
the lesser of the appraised value or selling price.
The Bank 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 Bank 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 Bank has originated
adjustable rate mortgage loans since 1988.
The Bank 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 Bank 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
Bank may in the future sell fixed rate mortgage loans in the secondary market,
as markets and the Bank's own portfolio needs dictate.
Substantially all of the Bank's residential mortgages include "due on
sale" clauses, which are provisions giving the Bank the right to declare a loan
immediately payable if the borrower sells or otherwise transfers an interest in
the property to a third party.
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Property appraisals on real estate securing the Bank'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 Bank 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 Bank engages in lending including loans to
qualified borrowers for construction of single-family residential properties in
the Bank'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 Bank is a limited lender to local builders
engaged in the construction of single-family homes. The Bank limits residential
construction loans to not more than two units per builder and has never had more
than seven construction loans outstanding at any one time. At December 31, 1999,
the Bank had one construction loan outstanding to a builder.
Construction lending is generally considered to involve a higher degree
of credit risk than long term financing of residential properties. The Bank'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
marketability of the property upon completion of the project prove to be
inaccurate, the Bank 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, 1999, consumer loans amounted to
$4.0 million or 12.6% of the Bank's total loan portfolio and consisted primarily
of home equity loans and FHA Title I home improvement loans. To a lesser extent,
the Bank originates personal loans (secured and unsecured), savings secured
loans (share loans), auto loans, and credit card loans. Consumer loans are
originated in the Bank's market area and have maturities of up to 15 years. On
share loans, the Bank 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 Bank is greater than that inherent in the single family
loan portfolio
5
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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 Bank.
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 Bank 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 Bank 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 Bank 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 Bank's market area and all are within the
Commonwealth of Pennsylvania. The Bank's largest commercial real estate loan had
a balance of $177,000 on December 31, 1999 and was secured by a multi-family
apartment building located in the Bank's market area.
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, 1999, the Bank's largest aggregation of loans to one
borrower was $338,000 consisting of one single-family residential home, which
was within the Bank's legal lending limit to one borrower of $810,000 at that
date. At December 31, 1999, the loan was current.
Loan Solicitation and Processing. The Bank'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
6
<PAGE>
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 Bank 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
Bank, tax escrow and the notice of requirement of insurance coverage to be
maintained to protect the Bank's interest.
Loan Commitments. The Bank 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
Bank's commitments to extend credit as of December 31, 1999, was $1,817,000.
Loan Origination and Other Fees. In addition to interest earned on
loans, the Bank receives loan origination and commitment fees for originating or
purchasing certain loans. The Bank generally receives between two and three
points on mortgage loans originated.
The Bank 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
Non-Performing Assets. The following table provides information
regarding the Bank'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 Bank did not have any troubled debt restructurings within the
meaning of Statement of Financial Accounting Standards No. 114.
7
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<TABLE>
<CAPTION>
At December 31,
------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
1-4 family residential real estate ................. $ 380 $ 223 $236
Non-residential .................................... 61 55 292
Non-mortgage loans:
Home equity and second mortgages ................... 71 44 7
Share loans ........................................ -- -- --
Other consumer ..................................... 15 -- 8
Commercial (business) .............................. -- -- --
----- ---------- ----
Total ................................................ $ 527 $ 322 $543
===== ========== ====
Accruing loans which are contractually past
due 90 days or more:
Mortgage loans:
1-4 family residential real estate ................. $ -- $ -- $ 42
Non-residential .................................... -- -- --
Non-mortgage loans:
Home equity and second mortgages ................... -- -- --
Share loans ........................................ -- -- --
Other consumer ..................................... -- -- 6
----- ---------- ----
Total ................................................ $ -- $ -- $ 48
===== ========== ====
Total non-accrual and accrual loans .................. $ 527 $ 322 $591
===== ========== ====
Real estate owned .................................... $ -- $ -- $ --
===== ========== ====
Other non-performing assets .......................... $ -- $ -- $ --
===== ========== ====
Total non-performing assets .......................... $ 527 $ 322 $591
===== ========== ====
Total non-accrual and accrual loans to net loans ..... 1.65% 1.16% 1.84%
===== ========== ====
Total non-accrual and accrual loans to total assets... 0.98% 0.78% 1.59%
===== ========== ====
Total non-performing assets to total assets .......... 0.98% 0.78% 1.59%
===== ========== ====
</TABLE>
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, 1999, the Bank had $527,000 of loans
that were held on a non-accrual basis.
During the year ended December 31, 1999, approximately $27,000 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 Bank'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, 1999.
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.
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<PAGE>
When management 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,
1999
---------------
(In thousands)
Special mention $ --
Substandard 404
Doubtful --
Loss --
---
Total $404
===
Allowance for Loan Losses. The Bank segregates the loan portfolio for
loan losses into the following broad categories: residential real estate,
commercial real estate, and consumer loans. The Bank 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:
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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.
At least quarterly, the Bank'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 Bank had $168,000 in allowances for loan losses at December
31, 1999.
While the Bank believes it has established its existing allowance for
loan losses in accordance with GAAP, there can be no assurance that regulators,
in reviewing the Bank's loan portfolio, will not request the Bank 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 Bank to significantly increase its allowance for loans losses, which would
negatively affect the Bank's financial condition and earnings.
In making loans, the Bank 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 Bank's policy to review its loan portfolio, in accordance
with regulatory classification procedures, on at least a quarterly basis.
Additionally, the Bank 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.
The following table sets forth information with respect to the Bank's
allowance for loan losses at the dates indicated:
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At December 31,
----------------------
1999 1998
---- ----
(Dollars in thousands)
Total loans outstanding (net) ............. $ 32,027 $ 27,784
======== ========
Average loans outstanding ................. 28,035 29,889
======== ========
Allowance balances (at beginning of period) 166 126
Provision (credit):
1-4 family residential .................. (1) (4)
Non-residential real estate ............. 3 4
Consumer ................................ -- 42
Commercial (business) ................... -- 8
Charge-offs :
1-4 family residential .................. -- --
Non-residential real estate ............. -- --
Consumer ................................ -- 10
Commercial (business) ................... -- --
Recoveries ................................ -- --
-------- --------
Allowance balance (at end of period) ...... $ 168 $ 166
======== ========
Allowance for loan losses as a percent
of total loans outstanding .............. 0.52% .60%
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 Bank'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,
--------------------------------------------------
1999 1998
----------------------- -----------------------
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.................... $ 91 54.17% $92 55.42%
Non-residential real estate... 4 2.38 4 2.41
Consumer...................... 65 38.69 62 37.35
Commercial (business)......... 8 4.76 8 4.82
--- ------ --- ------
Total allowance............... $168 100.00% $166 100.00%
=== ====== === ======
Investment Activities
General. Federally chartered savings Banks 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
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<PAGE>
insured banks and savings institutions, municipal securities, corporate debt
securities and loans to other banking institutions.
The Bank maintains liquid assets which may be invested in specified
short-term securities and certain other investments. 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 Bank's loan origination and other activities. The Bank maintains an
investment securities portfolio and a mortgage-backed securities portfolio as
part of its investment portfolio. At December 31, 1999, the Bank had an
investment securities portfolio with a carrying value of $7.2 million (13.3% of
total assets) and a mortgage-backed securities portfolio with a carrying value
of $8.8 million (16.3% of total assets). At December 31, 1999, the market value
of the investment securities portfolio was $7.1 million and the market value of
the mortgage-backed securities portfolio was $8.6 million.
Investment Policies. The investment policy of the Bank, which is
established by the Board of Directors, is designed to foster earnings and
liquidity within prudent interest rate risk guidelines, while complementing the
Bank's lending activities. The policy provides for available for sale, held to
maturity and trading classifications. However, the Bank 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 Bank to maximize total return within the
guidelines set forth in the Bank'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 Bank 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 Bank does not participate in hedging programs, interest rate
swaps, or other activities involving the use of off-balance sheet derivative
financial instruments. Further, the Bank 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).
12
<PAGE>
Investment Securities. The Bank 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, 1999, primarily all of the
Bank'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 90.2% of the Bank's U.S. Government Agency obligations, totaling
approximately $4.6 million at December 31, 1999, could reduce the Bank's
investment yield if these securities are called prior to maturity. The Bank
invests in obligations of state and local governments as part of the Bank's
efforts to lower its tax burden. These obligations are backed by the full faith
and credit of these governmental bodies.
Mortgage-backed Securities. The Bank invests in mortgage-backed
securities to provide earnings, liquidity, cash flows, and diversification to
the Banks' overall balance sheet. These mortgage-backed securities are
classified as either available for sale or held to maturity. The securities are
participation certificates that are secured by interest in pools of mortgages.
At December 31, 1999, the Bank held mortgage-backed securities totaling $7.6
million that were issued and guaranteed by the Government National Mortgage Bank
("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC"). At December 31, 1999, the Bank held
mortgage-backed securities totaling $1.2 million that were issued by a financial
institution and were not guaranteed by the issuer. Mortgage-backed securities
typically represent a participation interest in a pool of single-family or
multi-family mortgages, although the Bank 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 Bank also invests in
CMOs, issued or sponsored by FNMA and FHLMC which totaled $14,700 at December
31, 1999. 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
13
<PAGE>
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 Bank to moderate reinvestment
risk resulting from unexpected prepayment activity associated with conventional
mortgage-backed securities. Management believes these securities represent
attractive alternatives relative to other investments due to the wide variety of
maturity, repayment and interest rate options available.
Other Securities. Other securities used by the Bank, 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 $692,000 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 Bank's overall
investment strategy.
The following table sets forth the carrying value of the Bank's
investment and mortgage-backed securities portfolio at the dates indicated.
At December 31,
------------------
1999 1998
------------------
(In thousands)
Certificates of Deposit ...................... $ 100 $ --
------- -------
Securities Held to Maturity:
U.S. Government and Federal Agencies ........ 621 500
Mortgage-backed Securities .................. 3,740 3,405
Obligations of State and Local Governments .. 1,296 1,295
------- -------
Total Securities Held to Maturity ......... 5,757 5,200
------- -------
Securities Available for Sale (at fair value):
U.S. Government and Federal Agencies ........ 4,426 200
Mortgage-backed Securities .................. 5,074 3,705
Obligations of State and Local Governments .. 752 99
------- -------
Total Securities Available for Sale ....... 10,252 4,004
------- -------
Total Investment and
Mortgage-backed Securities ................ $16,009 $ 9,204
======= =======
14
<PAGE>
The following table sets forth certain information regarding the
carrying values, weighted average yields and maturities of the Bank's investment
and mortgage-backed securities portfolio at December 31, 1999.
<TABLE>
<CAPTION>
At December 31, 1999
---------------------------------------------------------------------------------------------------------
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>
Certificates of Deposit..... $ -- --% $ 100 5.22% $ -- --% $ -- --% $ 100 5.22% $ 100
U.S. Government and
Federal Agencies.......... 500 5.79 732 5.24 1,084 6.84 2,732 7.33 5,048 6.88 5,000
Mortgage-backed securities.. -- -- 176 7.00 340 5.50 8,298 6.66 8,814 6.62 8,620
Obligations of State and
local governments......... -- -- 380 3.93 414 4.30 1,253 5.11 2,047 4.73 1,993
--- ---- ----- ---- ----- ---- ------ ---- ------ ---- ------
Total..................... $500 5.79% $1,388 5.10% $1,838 6.02% $12,283 6.65% $16,009 5.27% $15,713
=== ==== ===== ==== ===== === ====== ==== ====== ==== ======
</TABLE>
15
<PAGE>
Sources of Funds
General. Deposits are the major source of the Bank'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 Bank 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 Bank 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 Bank, 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 Bank'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
Bank attracts deposit accounts by offering outstanding service, competitive
interest rates, and convenient locations and service hours. The Bank uses
traditional methods of advertising to attract new customers and deposits,
including print media advertising, billboards, radio and direct mail. The Bank
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 Bank 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 Bank'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
Bank'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.
From time to time, the Bank 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 Bank opened a new branch
in Woodridge, the Bank offered premiums for new deposits for a period of three
months. The Bank does not currently offer any premiums and has no plans to do so
in the near future.
16
<PAGE>
Because of the large percentage of certificates of deposit in the
deposit portfolio (68% at December 31, 1999), the Bank'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 Bank after they mature and the Bank
believes that this will continue. However, the need to retain these time
deposits could result in an increase in the Bank's cost of funds.
Deposits in the Bank as of December 31, 1999, were represented by
various types of savings programs described below.3
<TABLE>
<CAPTION>
Minimum Balance at Percentage of
Category Term Interest Rate(1) Balance Amount December 31, 1999 Total Deposits
- -------- ---- ---------------- -------------- ----------------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Checking Accounts None --% $ -- $ 1,779 5.33%
NOW Accounts None 1.50 300 1,331 3.99
Savings Accounts None 2.65 100 5,457 16.34
Money Market Accounts None 2.47 2,500 2,111 6.32
Certificates of Deposit(2):
Fixed Term, Fixed Rate 3 Months 2.80 1,000 378 1.13
Fixed Term, Fixed Rate 6 Months 4.00 1,000 1,233 3.69
Fixed Term, Fixed Rate 7-12 Months 4.35 500 3,771 11.29
Fixed Term, Fixed Rate 13-36 Months 4.75 500 12,040 36.05
Fixed Term, Fixed Rate 37+ Months 5.00 500 5,297 15.86
------ ------
Total $33,397 100.00%
====== ======
</TABLE>
- --------------
(1) Weighted average rate as of December 31, 1999.
(2) Includes jumbo certificates of deposit of $3.8 million. See table of
maturities of certificates of deposit of $100,000 or more.
(3) Includes IRA accounts depending on the customers investment preference.
The following table sets forth the time deposits in the Bank classified
by interest rate as of the dates indicated.
At December 31,
1999 1998
---- ----
(In thousands)
Interest Rate
3.99% or less................. $ 243 $176
4.00-4.99%.................... 6,622 4,369
5.00-5.99%.................... 5,004 8,154
6.00-6.99%.................... 7,205 3,655
7.00-7.99%.................... 3,333 2,076
8.00% or more................. 312 1,986
------ ------
Total....................... $22,719 $20,416
====== ======
17
<PAGE>
The following table sets forth the amount and maturities of time
deposits at December 31, 1999.
Amount Due
-------------------------------------------------------------
After
December 31, December 31, December 31, December 31,
Interest Rate 2000 2001 2002 2003 Total
- ------------- ------- ----------- ----------- ----------- -----
(In thousands)
3.99% or less.... $ 243 $ -- $ -- $ -- $ 243
4.00-4.99%....... 5,504 943 172 4 6,623
5.00-5.99%....... 2,472 1,250 216 1,066 5,004
6.00-6.99%....... 2,238 2,743 2,020 203 7,204
7.00-7.99%....... 117 -- 100 3,117 3,334
8.00% or more.... 160 -- -- 151 311
------ ----- ----- ----- ------
Total.......... $10,734 $4,936 $2,508 $4,541 $22,719
====== ===== ===== ===== ======
The following table shows the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1999.
Certificates
Maturity Period of Deposits
- --------------- -----------
(In thousands)
Three months or less $ 204
Over three through six months 320
Over six through twelve months 935
Over twelve months 2,300
-----
$3,759
======
Borrowings. Deposits are the primary source of funds of the Bank's
lending and investment activities and for its general business purposes. The
Bank, 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 Bank's stock in the FHLB and a portion of the
Bank'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
Bank typically has funded loan demand and investment opportunities out of
current loan and mortgage-backed securities repayments, investment maturities
and new deposits. However, the Bank recently has utilized FHLB advances to
supplement these sources and as a match against certain assets in order to
better manage interest rate risk. Short-term advances at December 31, 1999
totaled $6.1 million. See Note 8 to the Notes to the Consolidated Financial
Statements.
18
<PAGE>
Subsidiary Activity
The Company's only subsidiary is the Bank. The Bank is permitted to
invest its assets in the capital stock of, or originate secured or unsecured
loans to, subsidiary corporations. The Bank's sole subsidiary is Baldwin Service
Corporation. The sole purpose of Baldwin Service Corporation was to temporarily
hold a six-unit apartment house that nearly adjoins the Bank's main office
location until the property could be used for expansion. The Company acquired
additional property next to the main office in 1999 for $106,000 and will
demolish buildings on the acquired property and the Baldwin Service Corporation
property in the first quarter of 2000 for expansion of parking and drive-through
banking services. At December 31, 1999, the Company had a commitment for
building demolition totaling $58,000.
Personnel
As of December 31, 1999, the Bank had 14 full-time employees and 4
part-time employees. The employees are not represented by a collective
bargaining unit. The Bank believes its relationship with its employees to be
satisfactory.
Regulation
Set forth below is a brief description of certain laws which related to
the regulation of the Company and the Bank. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
Recent Legislation
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "Act") which will, effective March 11, 2000, permit
qualifying bank holding companies to become financial holding companies and
thereby affiliate with securities firms and insurance companies and engage in
other activities that are financial in nature. The Act defines "financial in
nature" to include securities underwriting, dealing and market making;
sponsoring mutual funds and investment companies; insurance underwriting and
agency; merchant banking activities; and activities that the Federal Reserve
Board has determined to be closely related to banking. A qualifying national
bank also may engage, subject to limitations on investment, in activities that
are financial in nature, other than insurance underwriting, insurance company
portfolio investment, real estate development, and real estate investment,
through a financial subsidiary of the bank.
The Act also prohibits new unitary thrift holding companies from
engaging in nonfinancial activities or from affiliating with an nonfinancial
entity. As a grandfathered unitary thrift holding company, the Company will
retain its authority to engage in nonfinancial activities.
19
<PAGE>
Company Regulation
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries, should such subsidiaries
be formed, which also permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings association. This
regulation and oversight is intended primarily for the protection of the
depositors of the Bank and not for the benefit of stockholders of the Company.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test. If the Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other
SAIF-insured savings association) would become subject to restrictions
applicable to bank holding companies unless such other associations each also
qualify as a QTL and were acquired in a supervisory acquisition. See "-
Regulation of the Bank - Qualified Thrift Lender Test."
Regulation of the Bank
General. Set forth below is a brief description of certain laws that
relate to the regulation of the Bank. The description does not purport to be
complete and is qualified in its entirety by reference to applicable laws and
regulations. As a federally chartered, SAIF-insured savings association, the
Bank is subject to extensive regulation by the OTS and the FDIC. Lending
activities and other investments must comply with various federal statutory and
regulatory requirements. The Bank is also subject to certain reserve
requirements promulgated by the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that are found in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
and state law, especially in such matters as the ownership of savings accounts
and the form and content of the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This 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 depositors.
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.
20
<PAGE>
Insurance of Deposit Accounts. The deposit accounts held by the Bank
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 Bank pays an annual insurance premium to
the FDIC of at least 0.064% of its total deposits. The FDIC also maintains
another insurance fund, the Bank Insurance Fund ("BIF"), which primarily insures
commercial bank deposits. Most members of BIF pay a lower premium to the FDIC.
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.
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) a leverage ratio (core capital) equal to
at least 4% of total adjusted assets, and (3) a risk-based capital requirement
equal to 8.0% of total risk-weighted assets.
The following table presents the Bank's compliance with its regulatory
capital requirements:
At December 31, 1999
------------------------------
Percentage
Amount of Assets
------------ ------------
(Dollars in Thousands)
Tangible capital......................... $5,630 10.59%
Tangible capital requirement............. 797 1.50%
----- ----
Excess................................... $4,833 9.09%
===== ====
Core capital............................. $5,630 10.59%
Core capital requirements................ 2,127 4.00%
----- -----
Excess................................... $3,503 6.59%
===== =====
Total risk-based capital................. $5,798 23.59%
Total risk-based capital requirement..... 1,966 8.00%
----- -----
Excess................................... $3,832 15.59%
===== =====
21
<PAGE>
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.
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 Bank must file an application or a notice with the
OTS at least 30 days before making a capital distribution. Savings associations
are not required to file an application for permission to make a capital
distribution and need only file a notice 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 an
application to the OTS.
The OTS may disapprove an application or notice if the proposed capital
distribution would: (i) make the savings association undercapitalized,
significantly undercapitalized, or critically undercapitalized; (ii) raise
safety or soundness concerns; or (iii) violate a statue, regulation, or
agreement with the OTS (or with the FDIC), or a condition imposed in an
OTS-approved application or notice. Further, a federal savings association, like
the Bank, cannot distribute regulatory capital that is needed for its
liquidation account.
Qualified Thrift Lender Test. Savings institutions must meet a QTL
test. If the Bank maintains an appropriate level of Qualified Thrift Investments
(primarily residential mortgages and related investments, including certain
mortgage-related securities) ("QTIs") and otherwise qualifies as a QTL, it will
continue to enjoy 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,
savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as
qualifying QTIs. An association must be in compliance with the QTL test on a
monthly basis in nine out of every 12 months. As of December 31, 1999, the Bank
was in compliance with its QTL requirement with 79% of its assets invested in
QTIs.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Pittsburgh, which is one of 12 regional FHLBs that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and
22
<PAGE>
procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Pittsburgh in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year.
Liquidity Requirements. All savings associations 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 associations. At December 31, 1999, the Bank's required
liquid asset ratio was 4%.
Federal Reserve System. The Federal Reserve Board 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 Board may be
used to satisfy the liquidity requirements that are imposed by the OTS. At
December 31, 1999, the Bank was in compliance with these Federal Reserve Board
requirements.
Item 2. Description of Property
- -------------------------------
(a) The Company owns its main office and branch office located in Dauphin
County, Pennsylvania. The main office is located in Steelton, Pennsylvania and
the branch office is located in Lower Swatara Township. The Bank also owns
property located next to its main office, including a six-unit apartment house
that nearly adjoins the Bank's main office location and a second adjoining lot
previously managed by Baldwin Service Corporation. These properties will be used
for the expansion of the Bank's main office. The Company's total investment in
office property and equipment is $1.8 million with a net book value of $1.2
million at December 31, 1999.
(b) Investment Policies.
See "Item 1. Business" above for a general description of the Company's
investment policies and any regulatory or Board of Directors' percentage of
assets limitations regarding certain investments. The Company's investments are
primarily acquired to produce income, and to a lesser extent, possible capital
gain.
(1) Investments in Real Estate or Interests in Real Estate. See "Item 1.
Business - Lending Activities and - Regulation of the Bank," and "Item
2. Description of Property."
(2) Investments in Real Estate Mortgages. See "Item 1. Business - Lending
Activities and - Regulation of the Bank."
23
<PAGE>
(3) Investments in Securities of or Interests in Persons Primarily Engaged
in Real Estate Activities. See "Item 1. Business - Lending Activities
and - Regulation of the Bank."
(c) Description of Real Estate and Operating Data.
Not Applicable.
Item 3. Legal Proceedings
- -------------------------
There are various claims and lawsuits in which Registrant is
periodically involved, such as claims to enforce liens, condemnation proceedings
on properties in which Registrant holds security interests, claims involving the
making and servicing of real property loans, and other issues incident to
Registrant's business. In the opinion of management, no material loss is
expected from any of such pending claims or lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
No matter was submitted to a vote of security holders during the forth
quarter of the fiscal year.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------
The information contained under the section captioned "Stock Price
Information" of the Company's Annual Report to stockholders for the fiscal year
ended December 31, 1999 (the "Annual Report") is incorporated herein by
reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
- -------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
Item 7. Financial Statements
- ------------------------------
The Registrant's financial statements listed under Item 13 are
incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants On Accounting and
Financial Disclosure.
- --------------------------------------------------------------------------------
Not applicable.
24
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance
with Section 16(a) of the Exchange Act.
- --------------------------------------------------------------------------------
The information contained under the sections captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" and "I - Information with Respect to
Nominees for Director, Directors Continuing in Office, and Executive Officers -
Election of Directors" and " - Biographical Information" in the Company's
definitive proxy statement for the Annual Meeting of Stockholders to be held on
April 19, 2000 (the"Proxy Statement") is incorporated herein by reference.
Item 10. Executive Compensation
- --------------------------------
The information contained in the section captioned "Director and
Executive Officer Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the first chart in the section captioned "I -
Information with Respect to Nominees for Director, Directors
Continuing in Office, and Executive Officers" in the Proxy
Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the first chart in the section captioned "I -
Information with Respect to Nominees for Director, Directors
Continuing in Office, and Executive Officers" in the Proxy
Statement.
(c) Management of the Registrant knows of no arrangements,
including any pledge by any person of securities of the
Registrant, the operation of which may at a subsequent date
result in a change in control of the Registrant.
Item 12. Certain Relationships and Related Transactions
--------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Certain Relationships and Related
Transactions" in the Proxy Statement.
25
<PAGE>
Item 13. Exhibits, List, and Reports on Form 8-K
- ------------------------------------------------
(a) Listed below are all financial statements and exhibits filed as part of
this report.
1. The following financial statements and the report of independent
accountants of the Registrant included in the Registrant's Annual
Report to Stockholders are incorporated herein by reference.
Independent Auditors' Report
Consolidated Statements of Financial Condition as of December 31,
1999 and 1998.
Consolidated Statements of Income for the Years Ended December
31, 1999 and 1998
Consolidated Statements of Comprehensive Income for the Years
Ended December 31, 1999 and 1998
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998.
Notes to Consolidated Financial Statements
2. The following exhibits are included in this Report or incorporated herein
by reference:
3(i) Articles of Incorporation of Steelton Bancorp, Inc.*
3(ii) Bylaws of Steelton Bancorp, Inc.*
4 Specimen Stock Certificate*
10.1 Employment Agreement with Harold E. Stremmel*
10.2 Steelton Bancorp, Inc. 1999 Stock Option Plan**
10.3 Mechanics Savings Bank Restricted Stock Plan**
13 1999 Annual Report to Stockholders
21 Subsidiaries of Registrant (see "Item 1 - Business")
23 Consent of McKonly & Asbury, LLP
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) filed with the SEC
on March 11, 1999.
** Incorporated by reference to the Proxy Statement for the Special Meeting on
February 3, 2000 filed with SEC on January 3, 2000.
(b) Not applicable.
26
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized as of March 27, 2000.
STEELTON BANCORP, INC.
By: /s/Harold E. Stremmel
-------------------------------
Harold E. Stremmel
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated as of March 27, 2000.
<TABLE>
<CAPTION>
<S> <C>
/s/Harold E. Stremmel /s/James E. Nelson
- -------------------------------- ---------------------------------
Harold E. Stremmel James E. Nelson
President and Chief Executive Officer Senior Vice President and Director
(Principal Executive Officer)
/s/Marino Falcone /s/Joseph A. Wiedeman
- --------------------------------- ---------------------------------
Marino Falcone Joseph A. Wiedeman
Chairman of the Board Treasurer and Director
/s/James F. Stone /s/Victor J. Segina
- --------------------------------- ---------------------------------
James F. Stone Victor J. Segina
Director Secretary and Director
/s/Richard E. Farina /s/Shannon Aylesworth
- --------------------------------- ---------------------------------
Richard E. Farina Shannon Aylesworth
Director Chief Financial Officer
(Principal Financial and Accounting Officer)
</TABLE>
EXHIBIT 13
<PAGE>
STEELTON BANCORP, INC.
1999 ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
STEELTON BANCORP, INC.
ANNUAL REPORT
TABLE OF CONTENTS
Page
----
Letter to Stockholders .................................................... 1
Corporate Profile and Stock Price Information ............................. 2
Selected Financial Ratios and Other Data .................................. 3
Management's Discussion and Analysis ...................................... 4
Independent Auditor's Report .............................................. 13
Consolidated Financial Statements ......................................... 14
Notes to Consolidated Financial Statements ................................ 20
Corporate Information ..................................................... 42
i
<PAGE>
[Steelton Bancorp, Inc. Letterhead]
To Our Stockholders:
On behalf of our Board of Directors and employees, we are pleased to present the
first Annual Report to Stockholders of Steelton Bancorp, Inc. (the "Company").
As you will see from the Annual Report, 1999 was an eventful year for the
Company and its wholly-owned subsidiary, Mechanics Savings Bank (the "Bank").
On July 8, 1999, the Bank successfully completed its conversion from the mutual
to stock form of organization and the concurrent public offering of 385,000
shares of the Company's common stock (the "Conversion"). Net proceeds to the
Company and the Bank from the Conversion were approximately $3.5 million.
For the fiscal year ended December 31, 1999, the Company earned $182,000 or $.47
per share, as compared to net income of $100,000 for the fiscal year ended
December 31, 1998. The increase in net income was primarily attributable to the
net proceeds received from the Conversion.
At December 31, 1999, the Company's assets totaled $53.9 million, as compared to
$41.5 million at December 31, 1998. Stockholders' equity was $6.8 million or
$17.66 per share at December 31, 1999, as compared to retained earnings of $3.7
million at December 31, 1998. The increase in assets and stockholders' equity
was primarily attributable to the net proceeds received from the Conversion.
We are pleased to announce that our bank entered the new millennium without any
Y2K computer problems. Two years of planning, testing and the dedication of our
employees allowed us to enter the New Year successfully. As we move forward, we
plan to proceed with long anticipated expansion plans for our Steelton office.
During 1999 we were able to purchase property to the north and adjoining our
main office building and next to property we purchased back in 1988 for this
purpose. Arrangements have been made to clear the buildings from these
properties so that we can begin construction of much needed parking for the
convenience of our customers. Plans also call for the addition of a
drive-through window complete with a 24 hour full-service ATM. The year 2000
proves to be an eventful year as we celebrate the Bank's 100 years of continuous
service to the Borough of Steelton and surrounding communities.
We sincerely appreciate the confidence shown by our customers and local
community during the Conversion. The goal of your Board of Directors and
Management is to continuously strive to enhance your investment in the Company.
Sincerely,
/s/Harold E. Stremmel
- ---------------------
Harold E. Stremmel
President and Chief Executive Officer
<PAGE>
CORPORATE PROFILE
Steelton Bancorp, Inc. (the "Company") is the parent company for Mechanics
Savings Bank (the "Bank"). The Company was formed as a Pennsylvania corporation
in February 1999 at the direction of the Bank in connection with the Bank's
conversion from a mutual to stock form of ownership (the "Conversion"). The
Company acquired all of the capital stock issued by the Bank upon its
conversion. On July 8, 1999, the Bank completed its conversion in connection
with a $3.85 million initial public offering of the Company's common stock. The
Company is a unitary savings and loan holding company which, under existing
laws, generally is not restricted in the types of business activities in which
it may engage provided that the Bank retains a specified amount of its assets in
housing-related investments. At the present time, the Company conducts no
significant business or operations of its own other than holding all of the
outstanding stock of the Bank and investing the Company's portion of the net
proceeds obtained in the Conversion.
Mechanics Savings Bank, founded in 1900 under the name "Mechanics Building and
Loan Association of Steelton," is a federally-chartered stock savings bank
headquartered in Steelton, Pennsylvania. The Bank is subject to examination and
comprehensive regulation by the Office of Thrift Supervision (the "OTS") and its
deposits are federally insured by the Savings Association Insurance Fund (the
"SAIF"), as administered by the Federal Deposit Insurance Corporation (the
"FDIC") . The Bank is a member of, and owns capital stock in, the Federal Home
Loan Bank (the "FHLB") of Pittsburgh, one of the twelve regional banks in the
FHLB system.
The Bank operates a traditional savings bank business, attracting deposits
accounts from the general public and using those deposits, together with other
funds, primarily to originate and invest in loans secured by one- to four-family
residential real estate.
STOCK PRICE INFORMATION
The Company's common stock has been traded on the OTC-Bulletin Board under the
trading symbol of "SELO" since it commenced trading on July 9, 1999. The
following table reflects the high and low bids for the Company's common stock
during the quarters indicated. The quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions.
Dividends per
1999 High Low share Declared
- ---- ---- --- --------------
Third Quarter (beginning July 9, 1999) $11.00 $10.50 --
Fourth Quarter $11.00 $8.75 $0.08
The number of shareholders of record of common stock as of February 29, 2000,
was approximately 206. This does not reflect the number of persons or entities
who held stock in nominee or "street" name through various brokerage firms. At
February 29, 2000, there were
2
<PAGE>
377,000 shares outstanding. There were no dividends paid by the Company during
the fiscal year ended December 31, 1999. The Company's ability to pay dividends
to stockholders is largely dependent upon the dividends it receives from the
Bank. The Bank may not declare or pay a cash dividend on any of its stock if the
effect thereof would cause the Bank's regulatory capital to be reduced below (1)
the amount required for the liquidation account established in connection with
the Conversion, or (2) the regulatory requirements imposed by the OTS.
SELECTED FINANCIAL RATIOS AND OTHER DATA
At or For the Years Ended
-------------------------------
December 31
-------------------------------
1999 1998 1997
------- ------- -------
Return on average assets ...................... 0.38% 0.25% 0.43%
Return on average equity ...................... 3.84 2.77 4.62
Average equity to average assets .............. 10.00 9.14 9.41
Equity to assets at period end ................ 12.57 8.91 9.70
Average interest-earning assets to average
interest-bearing liabilities .............. 107.42 106.37 107.68
Net interest rate spread(1) ................... 2.45 2.58 2.56
Net interest margin(2) ........................ 2.77 2.88 2.93
Non-performing loans to total loans ........... 1.65 1.16 1.84
Allowance for loan loss to total loans ........ 0.53 0.60 0.39
Allowance for loan losses to non-
performing loans ........................... 31.92 51.55 21.32
- -------------------
(1) Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
(2) Net interest income as a percentage of average interest earning assets.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company and the Bank, and should be read in conjunction with
the accompanying Consolidated Financial Statements.
Forward - Looking Statements
This document contains statements that project the future operations of
the Company which involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in these forward-looking
statements. Statements concerning future performance, developments, events,
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.
GENERAL
The Company conducts no significant business or operations of its own
other than holding all of the outstanding stock of the Bank and investing the
Company's portion of the net proceeds obtained in the Bank's mutual-to-stock
conversion. The following discussion relates only to the Bank's financial
condition and results of operations.
The Bank's results of operations depend primarily on net interest
income, which is determined by (i) the difference between rates of interest the
Bank earns on its interest-earning assets and the rates the Bank pays on
interest-bearing liabilities (interest rate spread), and (ii) the relative
amounts of interest-earning assets and interest-bearing liabilities. The Bank's
results of operations are also affected by non-interest income, including,
primarily, income from customer deposit account service charges, gains and
losses from the sale of investments and mortgage-backed securities and
non-interest expense, including, primarily, compensation and employee benefits,
federal deposit insurance premiums, office occupancy cost, and data processing
cost. The Bank's results of operations are also affected significantly by
general and economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities, all
of which are beyond the Bank's control.
MARKET RISK ANALYSIS
Qualitative Analysis. Because the majority of the Bank's assets and
liabilities are sensitive to changes in interest rates, the Bank's most
significant form of market risk is interest rate risk.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If the Bank's
assets mature or reprice more quickly or to a greater
4
<PAGE>
extent than its liabilities, the Bank's net portfolio value and net interest
income would tend to increase during periods of rising interest rates but
decrease during periods of falling interest rates. Conversely, if the Bank's
assets mature or reprice more slowly or to a lesser extent than its liabilities,
the Bank's net portfolio value and net interest income would tend to decrease
during periods of rising interest rates but increase during periods of falling
interest rates. The Bank's policy has been to address the interest rate risk
inherent in the historical savings institution business of originating long-term
loans funded by short-term deposits by maintaining sufficient liquid assets for
material and prolonged changes in interest rates and by originating loans with
shorter terms to maturity such as construction, commercial and consumer loans.
In addition, the Bank has invested in adjustable-rate mortgage-backed securities
as an interest rate risk management strategy.
Quantitative Analysis. In order to encourage savings associations to
reduce their interest rate risk, the OTS adopted a rule incorporating an
interest rate risk ("IRR") component into the risk-based capital rules. The IRR
component is a dollar amount that will be deducted from total capital for the
purpose of calculating an institution's risk-based capital requirement and is
measured in terms of the sensitivity of its net portfolio value ("NPV") to
changes in interest rates. NPV is the difference between incoming and outgoing
discounted cash flows from assets, liabilities, and off-balance sheet contracts.
An institution's IRR is measured as the change to its NPV as a result of a
hypothetical 200 basis point ("bp") change in market interest rates. A resulting
change in NPV of more than 2% of the estimated present value of total assets
("PV") will require the institution to deduct from its capital 50% of that
excess change. The rules provide that the OTS will calculate the IRR component
quarterly for each institution. Based on the Bank's asset size and risk-based
capital, the Bank has been informed by the OTS that it is exempt from this rule.
Nevertheless, the following table presents the Bank's NPV at December 31, 1999,
as calculated by the OTS, based on quarterly information voluntarily provided to
the OTS.
Changest Net Portfolio Value
in Market -------------------
Interest Rates $ Amount $ Change % Change NPV Ratio(1)
-------------- ----------- ------------ ---------- ------------
(basis points) (Dollars in Thousands)
+300 1,857 -3,894 -68% 3.86%
+200 3,174 -2,577 -45% 6.39%
+100 4,530 -1,221 -21% 8.82%
0 5,751 10.87%
-100 6,816 1,065 +19% 12.55%
-200 7,280 1,529 +27% 13.19%
-300 7,451 1,700 +30% 13.35%
- ---------------
(1) Calculated as the estimated NPV divided by present value of total assets.
5
<PAGE>
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 such
computations. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react at different times and in
different degrees to changes in market rates of interest. The interest rates 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. In the event of a change in
interest rates, prepayments and early withdrawal levels could deviate
significantly from those assumed in making the calculations set forth above.
Additionally, an increased credit risk may result as many borrowers may be
unable to service their debt in the event of an interest rate increase.
The Bank's Board of Directors reviews the Bank's asset and liability
policies on an annual basis. The Board of Directors meets quarterly to review
interest rate risk and trends, as well as liquidity and capital ratios and
requirements. Management administers the policies and determinations of the
Board of Directors with respect to the Bank's asset and liability goals and
strategies. The Bank expects that its asset and liability policies and
strategies will continue as described so long as competitive and regulatory
conditions in the financial institution industry and market interest rates
continue as they have in recent years.
Financial Condition
Assets increased $12.4 million or 29.9% to $53.9 at December 31, 1999
from $41.5 million at December 31,1998. The increase was primarily attributable
to a net increase in loans receivable of $4.2 million, a net increase in
investment securities of $6.8 million and an increase in cash and cash
equivalents of $900,000.
The loan receivable increase of $4.2 million was primarily attributable
to a strong increase in loan originations in the third and fourth quarters of
1999. The $6.8 million increase in investment securities was primarily
attributable to proceeds from the Conversion and investment of excess liquidity.
Cash and cash equivalents increased by $900,000 as a result of regulatory
required additional cash reserves at December 31, 1999 due to year 2000
concerns.
The Company's total liabilities increased $9.3 million or 24.6% to
$47.1 million at December 31, 1999 from $37.8 million at December 31, 1998. The
increase was primarily attributable to a $5.0 million increase in deposits and a
$4.0 million increase in advances from the Federal Home Loan Bank (the "FHLB").
Stockholders' equity increased $3.1 million to $6.8 million or 12.6% of
total assets at December 31, 1999, as compared to retained earnings of $3.7
million or 8.9% of total assets at December 31, 1998. The increase is primarily
attributable to the Conversion and net income.
6
<PAGE>
Average Balance Sheet
The following table sets forth a summary of average balances of assets
and liabilities as well as average yield and rate information. Average balances
are based upon month-end balances, however, the Company does not believe the use
of month-end balances differs significantly from an average based upon daily
balances. There have been no tax equivalent adjustments made to yields.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1999 1998
-------------------------------- --------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- -------
(Dollar in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) $28,035 $2,267 8.09% $29,889 $2,537 8.49%
Investment securities 13,527 823 6.08 5,660 259 4.58
Other interest-earning assets 3,491 100 2.86 2,203 84 3.81
------ ----- ------ -----
Total interest-earning assets 45,053 3,190 7.08 37,752 2,880 7.63
----- -----
Noninterest-earning assets 2,395 1,800
------ ------
Total assets $47,448 $39,552
====== ======
Interest-bearing liabilities:
NOW and commercial checking $ 3,749 21 0.56 $ 1,936 16 0.82
Savings accounts 4,392 115 2.62 3,670 97 2.65
Money market accounts 1,936 47 2.43 1,389 34 2.43
Certificates of deposit 21,209 1,170 5.52 18,351 1,066 5.81
Other liabilities 10,656 589 5.53 10,147 581 5.72
------ ----- ------ -----
Total interest-bearing liabilities 41,942 1,942 4.63 35,493 1,794 5.05
----- -----
Noninterest-bearing liabilities 763 443
------ ------
Total liabilities 42,705 35,936
------ ------
Stockholders' equity 4,743 3,616
------ ------
Total liabilities and stockholders' $47,448 $39,552
====== ======
equity
Net interest income $ 1,248 $ 1,086
====== ======
Interest rate spread(2) 2.45% 2.58%
==== ====
Net yield on interest-earning assets(3) 2.77% 2.88%
==== ====
Ratio of average interest-earning assets to
average interest-bearing liabilities 107.42% 106.37%
====== ======
</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.
7
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in the
Company's interest income and interest expense for the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume).
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
1999 vs. 1998 1998 vs. 1997
--------------------------- ----------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------ ------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ----- ------ ----- ------ ---- ------ -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable ............. $(157) $(120) $ 7 $(270) $(185) $ 70 $ (5) $(120)
Investment securities ........ 360 85 118 563 148 -- 1 149
Other interest-earning assets 49 (21) (12) 16 (31) (7) (3) 21
----- ----- ----- ----- ----- ----- ----- -----
Total interest-earning assets $ 252 $ (56) $ 113 $ 309 $ (6) $ 63 $ (7) $ 50
===== ===== ===== ===== ===== ===== ===== =====
Interest expense:
Commercial checking and
NOW accounts .............. $ 15 $ (5) $ (4) $ 6 $ 7 $ (2) $ (1) $ 4
Savings account .............. 19 (1) -- 18 14 -- -- 14
Money market accounts ........ 13 -- -- 13 8 (3) (1) 4
Certificates of deposit ...... 166 (53) (8) 105 57 (18) (1) 38
Other liabilities ............ 29 (19) (1) 9 (25) (16) 1 (40)
----- ----- ----- ----- ----- ----- ----- -----
Total interest-bearing
liabilities ............... $ 242 $ (78) $ (13) $ 151 $ 61 $ (39) $ (2) $ 20
===== ===== ===== ===== ===== ===== ===== =====
Net change in interest income.. $ 10 $ 22 $ 126 $ 158 $ (67) $ 102 $ (5) $ 30
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
8
<PAGE>
Results of Operations
Net Income. The Company's net income increased $82,000 for the year
ended December 31, 1999, to $182,000 from $100,000 for the year ended December
31, 1998. This increase was primarily attributable to a $163,000 increase in the
Company's net interest income and a $89,000 increase in the Bank's non-interest
income, partially offset by a $172,000 increase in non-interest expense.
Net Interest Income. Net interest income is the most significant
component of the Company's income from operations. Net interest income is the
difference between interest the Company received on its interest-earning assets,
primarily loans, investment and mortgage-backed securities and interest the
Company pays on its interest-bearing liabilities, primarily deposits and
advances from the FHLB. Net interest income depends on the volume of and rates
earned on interest-earning assets and the volume of and rates paid on
interest-bearing liabilities.
Net interest income increased $163,000 or 15.1%, to $1.2 million for
the year ended December 31, 1999, as compared to the year ended December 31,
1998. The increase was primarily due to the growth in average interest-earning
assets to $45.1 million in 1999 from $37.8 million in 1999 partially offset by a
decline in the Company's interest rate spread to 2.45% for 1999 compared to
2.58% for 1998.
The increase in average interest-earning assets of $7.3 million
primarily reflects $7.9 million increase in average investment securities
partially offset by average decreases in loans and other interest earning
assets.
Net yield on interest-earning assets decreased to 7.08% for 1999
compared to 7.63% for 1998, partially offset by a decrease in the Company's
average cost on interest-bearing liabilities to 4.63% for 1999 compared to 5.05%
for 1998. The decrease in the Company's average yield on interest-earning assets
was due primarily to a decline in the average yield on loans to 8.09% for 1999
compared to 8.49% for 1998 offset somewhat by an increase in the yield on
investment securities. The increase in the Company's average yield on its
investment securities to 6.08% from 4.58% was due primarily to higher yields on
investment securities purchased in 1999.
The increase in average interest-bearing liabilities of $6.4 million
reflects average balance increases of $1.8 million in interest-bearing NOW
accounts, $4.1 million in savings, money market and certificates of deposit, and
$500,000 in other interest-bearing liabilities.
Provision for Loan Losses. Provision for loan losses was $2,000 for the
year ended December 31 , 1999, as compared to $50,000 for the year ended
December 31, 1998. The decrease in the provision is due to management's periodic
evaluation of the general level of loan delinquency, the level of risk by type
of loan, specific loan evaluations, and general economic conditions. The current
allowance represents .52% of total loans outstanding at December 31, 1999
compared to .60% at December 31, 1998.
9
<PAGE>
Management believes the allowance for loan losses is at a level that is
adequate to provide for estimated losses. However, there can be no assurance
that further additions will not be made to the allowance and that such losses
will not exceed the estimated amount.
Non-interest Income. Non-interest income increased $90,000 or 51.4%
from $175,000 for the year ended December 31, 1998 to $265,000 for 1999. This
increase in the Company's non-interest income was primarily due to a $77,000
increase in fees and service charges including $36,000 in automated teller
machine charges for non-customer withdrawals and a $22,000 increase in service
charges on NOW accounts.
Non-interest Expense. Non-interest expense increased $172,000 or 15.8%
from $1,092,000 for the year ended December 31, 1998 to $1,264,000 for 1999. The
increase in the Company's non-interest expense was primarily attributable to a
$33,000 increase in salaries and employee benefits, including the expense
related to the employee stock ownership plan, and a $142,000 increase in other
expenses. The increase in other expenses is primarily due to the costs
associated with being a public company such as periodic reporting, transfer
agent and professional fees.
The category of non-interest expense described as "Other" is comprised
of expenses related to fees charged by banks, loan processing fees, NOW
expenses, costs related to postage, supplies and professional fees. The highest
of these expenses was $59,000 for professional fees, which were greater in 1999
as compared to 1998 due to legal and accounting fees in connection with the
Conversion and becoming a public company.
Management expects compensation and benefits expenses will increase in
future periods due to the employee stock ownership plan as well as the stock
option and restricted stock plans adopted by stockholders of the Company at a
special meeting held on February 3, 2000. Furthermore, the planned expansion of
the Steelton office, which will include a larger parking lot and a drive-through
window with a full-service ATM, will result in increased expenses during future
periods. It is not possible to project the total costs of the expansion at this
time.
Income Tax Expense. Income tax expense increased $47,000 from $19,000
in 1998 to $66,000 in 1999. This increase in income tax expense is due to the
increase in the Company's pretax income of $128,000 from $120,000 for 1998 to
$248,000 for 1999. The Company's effective tax rate was 26.6% and 15.9% for the
years ended December 31, 1999 and 1998, respectively.
Liquidity and Capital Resources
The Bank is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which varies from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of the Bank's deposits and short-term borrowings. The required ratio currently
is 4% and the Bank's regulatory liquidity ratio average was 37% and 26% at
December 31, 1999 and 1998, respectively.
10
<PAGE>
The Company's primary sources of funds are deposits, repayment of loans
and mortgage-backed securities, maturities of investment securities and
interest-bearing deposits with other banks, advances from the FHLB of Pittsburgh
and funds provided from operations. While scheduled repayments of loans and
mortgage-backed securities and maturities of investment securities are
predictable sources of funds, deposit flows, and loan prepayments are greatly
influenced by the general level of interest rates, economic conditions and
competition. The Company uses its liquidity resources principally to fund
existing and future loan commitments, maturing certificates of deposit and
demand deposit withdrawals, to invest in other interest-earning assets, to
maintain liquidity, and meet operating expenses.
Net cash provided by the Company's operating activities (the cash
effects of transactions and other events that enter into the Company's
determination of net income) was $338,000 in 1999, an increase of $291,000
compared with the same period in 1998. This increase in 1999 was largely due to
a net decrease in income taxes paid in 1999 of $140,000 as well as increases in
accrued interest payable and other liabilities of $177,000.
Net cash provided by the Company's investing activities (i.e., cash
disbursements, primarily for the purchase of the bank's investment securities
and mortgage-backed securities portfolios and the Bank's loan portfolio) for the
year ended December 31, 1999, totaled $11.8 million, an increase of $9.1 million
from 1998. This increase was primarily due to net increases in loans and
investment securities.
Net cash provided by financing activities increased by $8.1 million
largely due to increases in deposits and advances from the FHLB and proceeds
from issuance of common stock.
Approximately $10.7 million of the Bank's time deposits mature within
the next 12 months. To the extent that these deposits do not remain at the Bank
upon maturity, the Bank believes that it can replace these funds with deposits,
excess liquidity, FHLB advances or outside borrowings. It has been the Bank's
experience that a substantial portion of such maturing deposits remain with the
Bank.
At December 31, 1999, the Bank had loan commitments outstanding of $1.8
million. Funds required to fill these commitments are derived primarily from
current excess liquidity, deposit inflows or loan and investment and
mortgage-backed security repayments.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with GAAP, which
require 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 due to inflation. The impact of inflation is reflected
in the increased cost of the Company's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Company are financial.
As a result, interest rates have a greater impact
11
<PAGE>
on the Company'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.
Year 2000
Like many financial institutions, the Bank relies on computers to
conduct its business and information systems processing. Industry experts were
concerned that on January 1, 2000, some computers might not be able to interpret
the new year properly, causing computer malfunctions. Some banking industry
experts remain concerned that some computers may not be able to interpret
additional dates in the year 2000 properly. The Bank has operated and evaluated
its computer operating systems following January 1, 2000 and has not identified
any errors or experienced any computer system malfunctions. The Bank will
continue to monitor its information systems to assess whether its systems are at
risk of misinterpreting any future dates and will develop appropriate
contingency plans to prevent any potential system malfunction or correct any
system failures. The Bank has not been informed of any such problem experienced
by its vendors or its customers, nor by any of the municipal agencies that
provide services to the Bank.
Nevertheless, it is too soon to conclude that there will not be any
problems arising from the Year 2000 problem, particularly at some of the Bank's
vendors. The Bank will continue to monitor its significant vendors of goods and
services with respect to Year 2000 problems they may encounter as those issues
may effect the Bank's ability to continue operations, or might adversely affect
the Bank's financial position, results of operations and cash flows. The Bank
does not believe at this time that these potential problems will materially
impact the ability of the Bank to continue its operations, however, no assurance
can be given that this will be the case.
The expectations of the Bank contained in this section on Year 2000 are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and involve substantial risks and uncertainties
that may cause actual results to differ materially from those indicated by the
forward looking statements. All forward looking statements in this section are
based on information available to the Company on the date of this document, and
the Company assumes no obligation to update such forward looking statements.
12
<PAGE>
[McKonley & Asbury LLP letterhead]
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Steelton Bancorp, Inc.
Steelton, Pennsylvania
We have audited the accompanying consolidated statements of financial condition
of Steelton Bancorp, Inc. and subsidiary (the Corporation) as of December 31,
1999 and 1998, and the related consolidated statements of income, comprehensive
income, changes in stockholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Corporation'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 Steelton Bancorp,
Inc. and subsidiary as of December 31, 1999 and 1998, 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
Harrisburg, Pennsylvania
January 24, 2000
13
<PAGE>
STEELTON BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS
Note 1999 1998
------- ------------------ ------------------
<S> <C> <C> <C>
Cash and cash equivalents
Cash and amounts due from depository
institutions 1 $1,617,768 $433,414
Interest bearing deposits in other banks 1 1,670,023 1,954,178
Investment securities
Securities available-for-sale 1, 2 10,252,585 4,004,294
Securities held-to-maturity 1, 2 5,756,786 5,200,205
Loans receivable, net 1, 3 32,027,255 27,784,386
Accrued interest receivable 1, 4 322,219 227,712
Federal Home Loan Bank stock, at cost 14 691,800 564,600
Office properties and equipment, net 1, 5 1,212,927 1,046,050
Rental property, net 1, 5 - 68,678
Deferred income taxes 1, 8 302,800 97,771
Other assets 41,208 129,986
------------------ ------------------
Total assets $53,895,371 $41,511,274
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits 1, 6 $33,266,127 $28,272,431
Advances from Federal Home Loan Bank 7 13,334,745 9,257,408
Advances from borrowers for insurance and taxes 232,508 167,315
Accrued interest payable 140,473 72,227
Dividends payable 30,800 -
Other liabilities 118,640 43,404
------------------ ------------------
Total liabilities 47,123,293 37,812,785
------------------ ------------------
Commitments and contingencies 1,3,12
Preferred stock, no par value; 2,000,000
shares authorized; none issued and
outstanding at December 31, 1999 and 1998 - -
Common stock, $.10 par value; 8,000,000
shares authorized; 385,000 shares
issued and outstanding
at December 31, 1999; none issued or
outstanding at December 31, 1998 38,500 -
Additional paid-in capital 3,457,015 -
Retained earnings 3,863,701 3,712,571
Unearned compensation ESOP 1 (308,000) -
Accumulated other comprehensive income (loss) (279,138) (14,082)
------------------ ------------------
Total stockholders' equity 6,772,078 3,698,489
------------------ ------------------
Total liabilities and stockholders' equity $53,895,371 $41,511,274
================== ==================
</TABLE>
The accompanying notes are an integral
part of these financial statements.
14
<PAGE>
STEELTON BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Note 1999 1998
----------- ------------------- ------------------
<S> <C> <C> <C>
Interest income
Loans 1 $2,266,609 $2,536,713
Investment securities 1, 2 822,924 259,160
Other interest earning assets 100,459 83,818
------------------- ------------------
Total interest income 3,189,992 2,879,691
------------------- ------------------
Interest expense
Deposits 6 1,351,594 1,213,091
Advances from Federal Home Loan Bank 7 589,316 580,763
------------------- ------------------
Total interest expense 1,940,910 1,793,854
------------------- ------------------
Net interest income 1,249,082 1,085,837
Provision for loan losses 1,3 2,000 50,000
------------------- ------------------
Net interest income after provision
for loan losses 1,247,082 1,035,837
------------------- ------------------
Other income
Fees and service charges 162,634 85,909
Dividends on FHLB stock 52,129 35,343
Other 49,842 54,208
------------------- ------------------
Total other income 264,605 175,460
------------------- ------------------
Other expense
Salaries and employee benefits 625,736 592,612
Occupancy expense of premises 97,040 92,560
Equipment 171,169 180,526
Advertising 42,422 40,859
Other 327,224 185,066
------------------- ------------------
Total other expense 1,263,591 1,091,623
------------------- ------------------
Income before income taxes 248,096 119,674
Income taxes 1, 8 66,166 19,358
------------------- ------------------
Net income $181,930 $100,316
=================== ==================
Earnings per share, basic 0.33 N/A
=================== ==================
Shares used in computing basic earnings per share 354,200 N/A
=================== ==================
</TABLE>
The accompanying notes are an integral
part of these financial statements.
15
<PAGE>
STEELTON BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------------- ------------------
<S> <C> <C>
Net income $181,930 $ 100,316
Other comprehensive income (loss)
Unrealized losses on securities
available for sale (432,233) (21,336)
Income tax benefit 167,177 7,254
----------------- ------------------
Comprehensive income (loss) $(83,126) $ 86,234
================= ==================
</TABLE>
The accompanying notes are an integral
part of these financial statements.
16
<PAGE>
STEELTON BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Accumulated
Other Total
Additional Unearned Compre- Stock-
Common Paid-in Retained ESOP hensive holders'
Stock Capital Earnings Shares Income (loss) Equity
----------- ----------- ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1998 $ - $ - $3,612,255 $ - $ - $3,612,255
Net income - - 100,316 - - 100,316
Net change in unrealized losses on
securities available for sale,
net of deferred income tax benefit - - - - (14,082) (14,082)
----------- ----------- ----------- ----------- ------------ -----------
Balance - December 31, 1998 - - 3,712,571 - (14,082) 3,698,489
Issuance of Steelton Bancorp, Inc.
common stock 38,500 3,457,015 - (308,000) - 3,187,515
Net income - - 181,930 - - 181,930
Dividends declared - - (30,800) - (30,800)
Net change in unrealized losses on
securities available for sale,
net of deferred income tax benefit - - - - (265,056) (265,056)
----------- ----------- ----------- ----------- ------------ -----------
Balance - December 31, 1999 $ 38,500 $3,457,015 $3,863,701 $ (308,000) $ (279,138) $6,772,078
=========== =========== =========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
17
<PAGE>
STEELTON BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------------ -------------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 181,930 $ 100,316
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 84,077 98,129
Amortization of deferred loan fees (58,000) (75,735)
Amortization of premiums on loans purchased 7,487 8,030
Accretion of investment security discounts
net of premium amortization 20,561 19,110
Provision for loan losses 2,000 50,000
Deferred income taxes (37,852) (3,644)
(Increase) decrease in
Accrued interest receivable (94,507) (24,665)
Other assets 88,778 (90,346)
Increase (decrease) in
Accrued interest payable 68,246 (12,666)
Other liabilities 75,236 (21,258)
------------------ -------------------
Net cash provided by operating activities 337,956 47,271
------------------ -------------------
Cash flows from investing activities
Investment securities available-for-sale:
Proceeds from sales and maturities of
mortgaged-backed securities 1,447,318 29,998
Purchase of mortgage-backed securities (2,881,568) (3,956,056)
Purchase of other securities (5,261,494) (99,740)
Investment securities held-to-maturity:
Proceeds from maturities and repayments
Mortgage-backed securities 916,652 1,513,064
Other - 510,000
Purchase of mortgage-backed securities (1,257,149) (3,325,633)
Purchase of other securities (221,425) (1,545,839)
Net (increase) decrease in loans (4,194,356) 4,351,710
Purchase of office properties and equipment (182,276) (78,705)
Purchase of Federal Home Loan Bank stock (127,200) (73,700)
------------------ -------------------
Net cash used in investing activities (11,761,498) (2,674,901)
------------------ -------------------
</TABLE>
(continued)
18
<PAGE>
STEELTON BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
Cash flows from financing activities
Net increase (decrease) in
Deposits 4,993,696 4,804,736
Advances from borrowers for insurance and taxes 65,193 (19,046)
Advances from Federal Home Loan Bank 14,264,247 -
Repayment of Federal Home Loan Bank advances (10,186,910) (559,120)
Proceeds from issuance of stock, net 3,187,515 -
--------------- ----------------
Net cash provided by financing activities 12,323,741 4,226,570
--------------- ----------------
Net increase in cash
and cash equivalents 900,199 1,598,940
Cash and cash equivalents - beginning 2,387,592 788,652
--------------- ----------------
Cash and cash equivalents - ending $ 3,287,791 $ 2,387,592
=============== ================
Supplemental disclosures
Cash paid during the year for interest $ 1,872,665 $ 1,806,520
=============== ================
Cash (received) paid during the year for taxes $ (49,152) $ 88,992
=============== ================
Deferred income tax benefit on recorded
unrealized losses on securities available-for-sale $ 167,177 $ 7,254
=============== ================
Total increase in unrealized loss on securities
available-for-sale $(432,233) $ (21,336)
=============== ================
</TABLE>
The accompanying notes are an integral
part of these financial statements.
19
<PAGE>
STEELTON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Corporation's business is conducted principally through its
wholly-owned subsidiary, Mechanics Savings Bank (the "Bank"). The Bank
provides a variety of retail banking services to customers through its
main office located in Steelton and its branch office located in Lower
Swatara Township, Pennsylvania. The Bank'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 Corporation reports its activities
as one operating segment.
Basis of Consolidation
The consolidated financial statements include the accounts of Steelton
Bancorp, Inc. (the "Corporation") and its wholly-owned subsidiary,
Mechanics Savings Bank. The Bank's wholly-owned subsidiary, Baldwin
Service Corporation, invests in real estate properties. All material
inter-company balances and transactions have been eliminated in
consolidation.
Mutual to Stock Conversion
On July 8, 1999, the Bank completed it 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 from Mechanics
Savings and Loan, FSA to Mechanics Savings Bank.
This business combination has been accounted for at historical cost in a
manner similar to the accounting method known as the "pooling of
interest" method.
At the time of Conversion, the Bank segregated and restricted
approximately $3.7 million of retained earnings in a liquidation
account for the benefit of eligible account holders who continue to
maintain their deposit accounts in the Bank after conversion. In the
event of a complete liquidation of the Bank (and only in such an
event), eligible depositors who continue to maintain accounts shall be
entitled to receive a distribution from the liquidation account in an
amount proportionate to the current adjusted balances of all
qualifying deposits then held. The liquidation account will be reduced
annually to the extent that eligible account holders have reduced
their qualifying deposits.
(continued)
20
<PAGE>
STEELTON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Subsequent to the Conversion, the Corporation or Mechanics Savings Bank
may not declare or pay a cash dividend on any of its shares of common
stock if the effect would reduce stockholders' equity below either the
amount required for the liquidation account discussed above or the
applicable regulatory capital requirements or if such declaration and
payment would otherwise violate regulatory requirements.
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 Bank'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 Corporation's loan portfolio is susceptible
to change in local market conditions.
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 Corporation's allowances for losses on loans and
foreclosed real estate. Such agencies may require the Corporation 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.
(continued)
21
<PAGE>
STEELTON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Investment Securities
The Corporation'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
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 the interest
method over the period of maturity.
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.
(continued)
22
<PAGE>
STEELTON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Loans and Allowance for Loan Losses (Cont'd)
An allowance for loan losses is maintained at a level considered
adequate to absorb loan losses. Management of the Corporation, 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 Corporation 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 Corporation
maintains a loan review system that 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, 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 improvements 10 to 40 years
Furnishings and equipment 5 to 10 years
Significant renewals and betterments are charged to the office
properties and equipment account. Maintenance and repairs are charged to
operations in the period incurred.
Pension Plan
The Corporation 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
Corporation through annual premiums.
(continued)
23
<PAGE>
STEELTON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
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 Corporation 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 Corporation consists of net
income and unrealized losses on available for sale securities and is
presented in the consolidated statement of changes in equity. At
January 1, 1998, the adoption of SFAS No. 130 had no impact on total
equity.
Earnings Per Share
Basic earnings per common share for the year ended December 31, 1999 was
calculated by dividing net income for the period from the date of
conversion to December 31, 1999 of $116,251 by the weighted average
common shares outstanding for that same period of 354,200. Common stock
outstanding is adjusted for the unallocated portion of shares held by
the Employee Stock Ownership Plan (ESOP). The ESOP purchased 30,800
shares of common stock in conjunction with the conversion that is
financed through a loan from the corporation.
Diluted earnings per common share is calculated by adjusting outstanding
shares, assuming conversion of all potentially dilutive stock options.
The Company did not have potentially dilutive securities in 1999 or
1998.
Statements of Cash Flows
The Corporation 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.
(contiued)
24
<PAGE>
STEELTON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Reclassifications
Certain amounts in 1998 have been reclassified to conform with the 1999
presentation.
2. INVESTMENT SECURITIES
The amortized cost and estimated fair values of the Corporation's
investments in securities at December 31, 1999 and 1998 are summarized
as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
December 31, 1999 Cost Gains Losses Fair Value
- ------------------------------------- ------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Securities available-
for-sale
U.S. Government and
federal agencies $ 4,591,384 $ 1,458 $ (166,358) $ 4,426,484
State and local
governments 826,762 - (75,038) 751,724
Mortgaged-backed
securities
FHLMC 432,979 - (5,927) 427,052
FNMA 2,546,433 3,065 (51,209) 2,498,289
Other 2,308,597 - (159,561) 2,149,036
------------------- ------------------- ------------------ -------------------
$ 10,706,155 $ 4,523 $ (458,093) $ 10,252,585
=================== =================== ================== ===================
Securities held-
to-maturity
Certificate of deposit $ 100,000 $ - $ - $ 100,000
U.S. Government and
federal agencies 621,312 - (48,807) 572,505
State and local
governments 1,295,743 6,775 (61,485) 1,241,033
Mortgaged-backed
securities
FHLMC 276,372 472 (1,442) 275,402
FNMA 2,852,791 6,974 (159,173) 2,700,592
Other 610,568 - (40,544) 570,024
------------------- ------------------- ------------------ -------------------
$ 5,756,786 $ 14,221 $ (311,451) $ 5,459,556
=================== =================== ================== ===================
</TABLE>
(continued)
25
<PAGE>
STEELTON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
2. INVESTMENT SECURITIES (Cont'd)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
December 31, 1998 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
=============== =============== =============== ==============
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>
State and local government securities held at December 31, 1999 and 1998
are backed by the full faith and credit of the issuing organization.
(continued)
26
<PAGE>
STEELTON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
2. INVESTMENT SECURITIES (Cont'd)
The following is a summary of maturities of available-for-sale and
securities held-to maturity at December 31, 1999:
Available-for-sale Held-to-maturity
------------------------- -------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
----------- ----------- ----------- -----------
Amounts maturing in:
One year or less $ 500,000 $ 500,000 $ - $ -
After one year
through five years 599,800 578,010 810,254 783,960
After five years
through ten years 1,344,615 1,302,341 535,863 510,205
After ten years 8,261,740 7,872,234 4,410,669 4,165,391
---------- ----------- ----------- -----------
$10,706,155 $10,252,585 $5,756,786 $5,459,556
========== =========== =========== ===========
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, 1999 and 1998 consists of the
following:
1999 1998
------------ -------------
Real estate
1 - 4 family $28,470,370 $23,537,782
Non-residential 830,132 765,331
Consumer loans
Home equity and second mortgage 3,408,553 3,233,871
Share loans 225,549 276,873
Other 403,509 289,183
Commercial loans 75,485 78,799
------------ -------------
33,413,598 28,181,839
Loans in process (946,638) (51,175)
Net deferred loan origination fees (271,505) (180,078)
Allowance for loan losses (168,200) (166,200)
------------ -------------
$32,027,255 $27,784,386
============ =============
(continued)
27
<PAGE>
STEELTON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
3. LOANS RECEIVABLE - NET (Cont'd)
An analysis of the allowance for loan losses at December 31, 1999 and
1998 is as follows:
1999 1998
---------------- -------------
Balance, beginning of year $166,200 $126,579
Provision for loan losses 2,000 50,000
Charge-offs - (10,379)
---------------- -------------
Balance, end of year $168,200 $166,200
================ =============
Nonaccrual loans totaled $527,000 and $322,000 at December 31, 1999 and
1998. 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 $27,382 and $16,328
for the years ended December 31, 1999 and 1998.
There were no impaired loans as of December 31, 1999 and 1998.
The Corporation has entered into lending transactions, in the ordinary
course of business, with executive officers and directors of the
Corporation 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:
1999 1998
-------------- --------------
Balance, beginning of year $ 302,384 $ 201,805
Loans 121,796 228,703
Repayments (44,618) (128,124)
-------------- --------------
Balance, end of year $ 379,562 $ 302,384
============== ==============
(continued)
28
<PAGE>
STEELTON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
4. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following at December 31,
1999 and 1998:
1999 1998
------------ ------------
Loans $ 169,238 $ 175,930
Investments 179,858 68,110
------------ ------------
349,096 244,040
Allowance for uncollectible interest (26,877) (16,328)
------------ ------------
$ 322,219 $ 227,712
============ ============
5. OFFICE PROPERTIES AND EQUIPMENT
A summary of office properties and equipment at December 31, 1999 and
1998 follows:
Description 1999 1998
- ------------------------------------- ------------- -------------
Land $ 193,930 $ 193,930
Properties held for expansion 179,248 -
Buildings and improvements 863,066 820,635
Furnishings and equipment 614,354 587,960
------------- -------------
1,850,598 1,602,525
Accumulated depreciation (637,671) (556,475)
------------- -------------
$1,212,927 $1,046,050
============= =============
In 1999, the Corporation purchased properties adjacent to the principal
offices in Steelton for expansion of operations. During 1999, the only
rental property of the Corporation was also converted to property held
for expansion.
(continued)
29
<PAGE>
STEELTON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
6. DEPOSITS
Deposits at December 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
Percent Percent
of of
Total Total
Amount Deposits Amount Deposits
-------------- ---------- -------------- ---------
<S> <C> <C> <C> <C>
Commercial checking
accounts $ 1,778,931 5.33% $ 1,096,334 3.88%
NOW accounts 1,330,492 3.98% 1,193,744 4.22%
Savings accounts 5,457,016 16.34% 3,959,892 14.01%
Money Market 2,111,086 6.32% 1,606,027 5.68%
Certificates of deposit
1 - 3 months 377,396 1.13% 272,726 0.96%
4 - 6 months 1,233,379 3.69% 1,325,018 4.69%
7 - 12 months 3,771,064 11.29% 5,194,567 18.37%
13 - 36 months 12,040,158 36.05% 9,660,262 34.17%
37 + months 5,297,312 15.86% 3,963,861 14.02%
-------------- ---------- -------------- ---------
33,396,834 100.00% 28,272,431 100.00%
========== =========
Inter-company account
eliminated in consolidation (130,707) -
-------------- --------------
$33,266,127 $28,272,431
============== ==============
</TABLE>
The aggregate amount of certificates of deposit including individual
retirement accounts with a minimum denomination of $100,000 was
$3,759,212 at December 31, 1999 and $1,933,731 at December 31, 1998.
Deposits in excess of $100,000 are not insured by the Savings
Corporation Insurance Fund.
Maturities of certificates of deposit at December 31, 1999 are as
follows:
2000 $10,734,556
2001 4,935,510
2002 2,507,496
2003 2,358,026
2004 and thereafter 2,183,721
--------------
$22,719,309
==============
(continued)
30
<PAGE>
STEELTON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
6. DEPOSITS (Cont'd)
Interest expense on deposits consists of:
1999 1998
------------ -------------
NOW and money market accounts $ 68,069 $ 49,685
Savings accounts 115,268 97,335
Certificates of deposit 1,168,257 1,066,071
------------ -------------
$1,351,594 $1,213,091
============ =============
7. ADVANCES FROM FEDERAL HOME LOAN BANK
Advances in the amount of $13,334,745 in 1999 and $9,257,408 in 1998 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
1999 1999 1998 1998
------------- ------------- ----------- -------------
Maturity
Within one year $ 6,084,745 5.78% $ 3,000,000 5.48%
Within two years 2,000,000 5.76% 2,007,408 5.95%
Within three years 1,000,000 6.08% - -
Within four years 1,000,000 5.35% 1,000,000 6.08%
Five years and
thereafter 3,250,000 5.76% 3,250,000 5.18%
------------- -------------
$13,334,745 $ 9,257,408
============= =============
The Corporation'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
$43,000,000 at December 31, 1999 are pledged as collateral for FHLB
advances.
(continued)
31
<PAGE>
STEELTON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
8. INCOME TAXES
The Corporation and subsidiary file a consolidated federal income tax
return. The consolidated provision for income taxes for 1999 and 1998
consists of the following:
1999 1998
----------- -----------
Taxes currently payable
Federal $ 90,564 $ 14,160
State 13,454 8,842
Deferred taxes (benefit) (37,852) (3,644)
----------- -----------
Total income tax expense $ 66,166 $ 19,358
=========== ===========
Effective income tax rate 26.67% 16.18%
=========== ===========
The difference between the statutory federal income tax rate and the
effective income tax rates are as follows:
1999 1998
----------- ------------
Pre-tax income $ 248,096 $ 119,674
=========== ============
Expected tax provision at 34% rate $ 84,353 $ 40,689
Tax-exempt interest income (29,998) (15,292)
Disallowed interest expense 4,784 -
State income tax, net of
federal income tax benefit 9,540 5,346
Other (2,513) (11,385)
----------- ------------
Actual income tax expense $ 66,166 $ 19,358
=========== ============
(continued)
32
<PAGE>
STEELTON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
8. INCOME TAXES (Cont'd)
Temporary differences between the amounts reported in the financial
statements and the tax bases of assets and liabilities result in
deferred taxes. Deferred tax assets and liabilities for the years ended
December 31 are summarized as follows:
1999 1998
------------ ------------
Deferred loan fees $ 92,312 61,227
Unrealized depreciation on securities
available-for-sale 174,431 7,254
Accelerated depreciation on fixed assets (7,556) -
Allowance for uncollected interest 9,138 5,552
Allowance for loan losses 54,993 54,514
Recapture of excess loan loss allowance (20,518) (30,776)
------------ ------------
Net deferred tax asset $ 302,800 $ 97,771
============ ============
The Corporation 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 Corporation.
Therefore, retained earnings at December 31, 1999 and 1998 includes
approximately $703,000 representing such bad debt deductions for which
no deferred taxes have been provided. Deferred taxes are provided for
reserves totaling $181,035 that are being recaptured into federal
taxable income ratably over a six year period that began in 1996.
Management has determined that it is not required to establish a
valuation reserve for the deferred tax asset since it is more likely
than not that the deferred tax asset will be realized through carryback,
future reversals of existing taxable temporary differences, future
taxable income and tax planning strategies.
(continued)
33
<PAGE>
STEELTON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
9. REGULATORY MATTERS
The Bank 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 Corporation and the consolidated financial
statements. Under the regulatory capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Corporation must
meet specific capital guidelines involving quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank'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 Corporation 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 Bank's capital levels at the dates presented (in
thousands):
(continued)
34
<PAGE>
STEELTON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
9. REGULATORY MATTERS (Cont'd)
<TABLE>
<CAPTION>
For Capital
Adequacy Purposes and
to Be Adequately
Capitalized under the
Prompt Corrective
December 31, 1999 Actual Action Provisions
- ------------------------------------ --------------------- --------------------------
Amount Ratio Amount Ratio
---------- ---------- -------------- ----------
(Thousands) (Thousands)
<S> <C> <C> <C> <C>
Total capital (to risk-
weighted assets) $ 5,798 23.59% $ 1,966 8.00%
Tier 1 capital (to risk-
weighted assets) 5,630 22.91% - -
Core (Tier 1) capital (to
adjusted total assets) 5,630 10.59% 2,127 4.00%
Tangible equity (to
adjusted total assets) 5,630 10.59% 797 1.50%
December 31, 1998
- ------------------------------------
Total capital (to risk-
weighted assets) $ 3,878 19.23% $ 1,613 8.00%
Tier 1 capital (to risk-
weighted assets) 3,712 18.41% - -
Core (Tier 1) capital (to
adjusted total assets) 3,712 8.93% 1,622 4.00%
Tangible equity (to
adjusted total assets) 3,712 8.93% 623 1.50%
</TABLE>
(continued)
35
<PAGE>
STEELTON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
9. REGULATORY MATTERS (Cont'd)
As of July 31, 1999, the most recent notification from the OTS, the Bank
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.
10. PENSION PLAN
The Corporation 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 Corporation makes annual premium payments for plan years that
coincide with the Corporation's fiscal year. The Corporation has no
obligation for benefits covered by the plan other than the payment of
premiums due to the insurance company. Pension expense of the
Corporation, net of experienced-rated dividends for the years ended
December 31, 1999 and 1998 follows:
1999 1998
---------- -------------
Premium for plan year ended December 31, $ 79,167 $ 67,096
Experienced-rated dividends (16,236) (15,712)
---------- -------------
$ 62,931 $ 51,384
========== =============
11. RETIREMENT SAVINGS PLAN
The Corporation 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 Corporation provides
matching contributions up to 6% of the participant salaries. For the
years ended December 31, 1999 and 1998, the Corporation's contributions
totaled $18,487 and $15,814.
(continued)
36
<PAGE>
STEELTON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
12. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Corporation has various
outstanding commitments and contingent liabilities that are not
reflected in the accompanying consolidated financial statements. The
financial commitments of the Corporation are as follows:
The Corporation has outstanding commitments to originate loans at
December 31, as follows:
1999 1998
------------ -------------
First mortgage loans (fixed rate) $1,817,316 $ 274,600
============ =============
The range of interest rates on fixed rate first mortgage loan
commitments was 7.0% to 7.4% at December 31, 1999.
The Corporation has pledged mortgage-backed securities with fair values
totaling $1,387,000 at December 31, 1999 as collateral for certain
deposits held in excess of applicable deposit insurance coverage with
carrying values at December 31, 1999 of $1,126,000.
At December 31, 1999, the Corporation had a commitment totaling $58,000
with a contractor for building demolition on properties held for
expansion of operations.
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation 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 Corporation has
in particular classes of financial instruments.
The Corporation'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 Corporation 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 Corporation 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)
37
<PAGE>
STEELTON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
14. 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 Corporation.
The following methods and assumptions were used by the Corporation 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 that is held by the Corporation as required by law.
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)
38
<PAGE>
STEELTON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
14. 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 Corporation's
financial instruments at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------------- ---------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash $ 1,617,768 $ 1,617,768 $ 433,414 $ 433,414
Interest-bearing
deposits 1,670,023 1,670,023 1,954,178 1,954,178
Investments
Available-for-sale 10,252,585 10,252,585 4,004,294 4,004,294
Held-to-maturity 5,756,786 5,459,556 5,200,205 5,260,173
Loans receivable - net 32,027,255 31,485,994 27,784,386 28,324,393
Federal Home Loan
Bank stock 691,800 691,800 564,600 564,600
Financial liabilities
Deposits 33,266,127 32,999,998 28,272,431 28,492,224
Advances from Federal
Home Loan Bank 13,334,745 13,176,062 9,257,408 9,258,408
Off-balance sheet select
financial liabilities
Commitments to
originate loans 1,817,316 1,817,316 274,600 274,600
Unused lines of credit 298,000 298,000 201,000 201,000
</TABLE>
(continued)
39
<PAGE>
STEELTON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
14. 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.
15. IMPACT OF NEW ACCOUNTING STANDARDS
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, including certain
derivative instruments embedded in other contracts (collectively
referred to as derivatives) 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. 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. 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 Corporation.
(continued)
40
<PAGE>
STEELTON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
15. IMPACT OF NEW ACCOUNTING STANDARDS (Cont'd)
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.
16. YEAR 2000 ISSUE
The Corporation has assessed and continues to assess the potential
impact that the year 2000 issue could have on operations. The
Corporation does not anticipate any related material adverse affects on
its financial condition or results of operations.
41
<PAGE>
Corporate Information
- ---------------------
STEELTON BANCORP, INC.
51 South Front Street
Steelton, Pennsylvania 17113
(717) 939-1966
MECHANICS SAVINGS BANK
<TABLE>
<CAPTION>
<S> <C> <C>
Main Office Middletown Office
51 South Front Street 1100 Spring Garden Drive
Steelton, Pennsylvania, 17113 Middletown, Pennsylvania, 17057
Board of Directors
Marino Falcone
Chairman of the Board
Retired - Steelton Coal and Oil Company
Harold E. Stremmel Richard E. Farina
President and Chief Executive Officer Retired - Pennsylvania Insurance Company
James F. Stone Joseph A. Wiedeman
Retired - Stone Funeral Home CPA - Wiedeman & Douty, P.C.
James S. Nelson Victor J. Segina
Senior Vice President Retired - Architect
Executive Officers
Harold E. Stremmel
President and Chief Executive Officer
Victor J Segina, Secretary Joseph A. Wiedeman, Treasurer
James S. Nelson, Senior Vice President Shannon Aylesworth, Chief Financial Officer
Local Counsel Independent Auditor
Skarlatos and Zonarich McKonly & Asbury, LLP
204 State Street 415 Fallowfield Road, 2nd Floor
Harrisburg, Pennsylvania 17101 Camp Hill, Pennsylvania 17011
Special Counsel Transfer Agent and Registrar
Malizia Spidi & Fisch, PC Illinois Stock Transfer Company
1301 K Street, N.W., Suite 700 East 209 West Jackson Blvd., Suite 903
Washington, D.C. 20005 Chicago, Illinois 60607
</TABLE>
The Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1999 is available without charge upon written request. For a copy of the
Form 10-KSB, please write or call Mr. James S. Nelson, Vice President at the
Company's Office. The Annual Meeting of Stockholders will be held on April 19,
1999 at 10:00 a.m. at 1100 Spring Garden Dr., Middletown, Pennsylvania 17057.
EXHIBIT 23
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
As independent auditors, we hereby consent to the incorporation of our report,
dated January 24, 2000, incorporated by reference in this annual report of
Steelton Bancorp, Inc. on Form 10-KSB for the year ended December 31, 1999, into
the Company's previously filed Form S-8 Registration Statement File No.
333-82043.
/s/ McKonly & Asbury, LLP
March 27, 2000
Camp Hill, Pennsylvania
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ANNUAL REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,618
<INT-BEARING-DEPOSITS> 1,670
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,253
<INVESTMENTS-CARRYING> 5,757
<INVESTMENTS-MARKET> 5,460
<LOANS> 33,414
<ALLOWANCE> 168
<TOTAL-ASSETS> 53,895
<DEPOSITS> 33,266
<SHORT-TERM> 6,085
<LIABILITIES-OTHER> 522
<LONG-TERM> 7,250
0
0
<COMMON> 38
<OTHER-SE> 6,734
<TOTAL-LIABILITIES-AND-EQUITY> 53,895
<INTEREST-LOAN> 2,267
<INTEREST-INVEST> 823
<INTEREST-OTHER> 100
<INTEREST-TOTAL> 3,190
<INTEREST-DEPOSIT> 1,352
<INTEREST-EXPENSE> 1,941
<INTEREST-INCOME-NET> 1,249
<LOAN-LOSSES> 2
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,264
<INCOME-PRETAX> 248
<INCOME-PRE-EXTRAORDINARY> 248
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 182
<EPS-BASIC> .33
<EPS-DILUTED> .33
<YIELD-ACTUAL> 2.77
<LOANS-NON> 527
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 166
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 168
<ALLOWANCE-DOMESTIC> 168
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
