U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-QSB
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number 000-26499
STEELTON BANCORP, INC.
----------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Pennsylvania 25-1830745
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
51 South Front Street, Steelton, Pennsylvania 17113
- --------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 939-1966
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X Yes No
--- ---
As of May 7, 2002 there were 300,290 shares of the Registrant's common
stock, par value $0.10 per share, outstanding. The Registrant has no other
classes of common equity outstanding.
Transitional small business disclosure format:
Yes No X
--- ---
STEELTON BANCORP, INC. AND SUBSIDIARY
STEELTON, PENNSYLVANIA
C O N T E N T S
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements..................................................3
Consolidated Balance Sheets - as of
March 31, 2002 (unaudited) and December 31, 2001 (audited)............3
Consolidated Statements of Income - for the three months ended
March 31, 2002 and March 31, 2001 (unaudited).........................4
Consolidated Statements of Stockholders' Equity - for the three
months ended March 31, 2002 and March 31, 2001 (unaudited)............5
Consolidated Statements of Cash Flows - for the three months ended
March 31, 2002 and March 31, 2001 (unaudited).........................6
Notes to Consolidated Financial Statements............................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................11
Item 2. Changes in Securities and Use of Proceeds............................11
Item 3. Defaults Upon Senior Securities......................................11
Item 4. Submission of Matters to a Vote of Security Holders..................11
Item 5. Other Information....................................................11
Item 6. Exhibits and Reports on Form 8-K.....................................12
PART I, ITEM 1, FINANCIAL STATEMENTS
STEELTON BANCORP, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
2002 2001
------------ ------------
(Unaudited)
ASSETS
Cash and due from banks $ 616,400 $ 580,181
Interest bearing deposits with other banks 2,138,705 2,617,767
----------- -----------
Cash and Cash Equivalents 2,755,105 3,197,948
Investment securities available for sale 10,939,315 10,359,100
Investment securities held to maturity (fair values 2002 $2,265,629;
2001 $2,387,828) 2,254,067 2,362,443
Loans receivable, net of allowance for loan losses 2002 $154,417;
2001 $147,697 35,422,777 36,865,998
Federal Home Loan Bank stock, at cost 857,800 989,200
Bank premises and equipment, net 1,555,031 1,539,967
Accrued interest receivable and other assets 2,032,886 1,709,938
----------- -----------
Total Assets $55,816,981 $57,024,594
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $33,379,662 $33,555,174
Advances from Federal Home Loan Bank 15,998,538 17,185,303
Advances from borrowers for insurance and taxes 220,619 277,084
Accrued interest payable and other liabilities 554,884 335,871
----------- -----------
Total Liabilities 50,153,703 51,353,432
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, no par value; 2,000,000 shares authorized; - -
none issued and outstanding
Common stock, $.10 par value; 8,000,000 shares authorized;
issued 416,515 shares 41,652 41,652
Surplus 3,942,963 3,942,710
Retained earnings 3,788,630 3,759,801
Unearned compensation (354,939) (362,015)
Treasury stock, at cost, 2002 116,225 shares; 2001 115,325 shares (1,794,254) (1,777,154)
Accumulated other comprehensive income 39,226 66,168
----------- -----------
Total Stockholders' Equity 5,663,278 5,671,162
----------- -----------
Total Liabilities and Stockholders' Equity $55,816,981 $57,024,594
=========== ===========
See notes to consolidated financial statements.
3
STEELTON BANCORP, INC.
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CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31,
-----------------------------
2002 2001
----------- ----------
(Unaudited)
INTEREST AND DIVIDEND INCOME
Loans $ 694,658 $ 790,327
Securities:
Taxable 135,578 236,897
Tax exempt 23,682 21,964
Dividends on FHLB stock 9,794 17,620
Other 16,909 22,087
------------ ------------
Total Interest Income and Dividend Income 880,621 1,088,895
------------ ------------
INTEREST EXPENSE
Deposits 286,537 400,367
Advances from Federal Home Loan Bank 242,534 317,527
------------ ------------
Total Interest Expense 529,071 717,894
------------ ------------
Net Interest Income 351,550 371,001
PROVISION FOR LOAN LOSSES 10,500 2,500
------------ ------------
Net Interest Income after Provision for Loan Losses 341,050 368,501
------------ ------------
NONINTEREST INCOME
Fees and service charges 40,071 37,620
Gain (loss) on sales of securities available for sale - (5,777)
Earnings on bank owned life insurance 14,520 13,430
Other 17,440 18,082
------------ ------------
Total Noninterest Income 72,031 63,355
------------ ------------
NONINTEREST EXPENSES
Salaries and employee benefits 199,923 192,176
Occupancy 29,536 28,443
Equipment 57,443 60,427
Professional fees 38,900 34,924
Advertising 5,526 6,694
Date processing 36,590 41,324
Other 18,722 18,918
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Total Noninterest Expenses 386,640 382,906
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Income before Income Taxes (Benefit) 26,441 48,950
INCOME TAXES (BENEFIT) (2,388) 7,061
------------ ------------
Net Income $ 28,829 $ 41,889
============ ============
PER SHARE DATA
Net income, basic $0.11 $0.13
============ ============
Net income, diluted $0.10 $0.12
============ ============
See notes to consolidated financial statements.
4
STEELTON BANCORP, INC.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 2001
Accumulated
Other
Comprehensive Total
Common Retained Unearned Treasury Income Stockholders'
Stock Surplus Earnings Compensation Stock (Loss) Equity
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2000 $40,224 $3,665,748 $3,889,722 $(422,598) $(478,826) $(49,482) $6,644,788
----------
Comprehensive income:
Net income - - 41,889 - - - 41,889
Net change in unrealized
losses on securities
available for sale - - - - - 58,808 58,808
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Total Comprehensive Income 100,697
----------
Stock purchased for
treasury and benefit
plans - - - - (18,428) - (18,428)
Earned compensation - (1,480) - 8,554 - - 7,074
Other - - (1,429) - - - (1,429)
------- ---------- ---------- --------- --------- ---------- ----------
BALANCE - MARCH 31, 2001 $40,224 $3,664,268 $3,930,182 $(414,044) $(497,254) $ 9,326 $6,732,702
======= ========== ========== ========= ========= ========== ==========
For the Three Months Ended March 31, 2002
BALANCE - DECEMBER 31, 2001 $41,652 $3,942,710 $3,759,801 $(362,015) $(1,777,154) $ 66,168 $5,671,162
----------
Comprehensive income:
Net income 28,829 28,829
Net change in unrealized
losses on securities
available for sale (26,942) (26,942)
----------
Total Comprehensive Income 1,887
----------
Stock purchased for treasury (17,100) (17,100)
Earned compensation 253 7,076 7,329
------- ---------- ---------- --------- ----------- --------- ----------
BALANCE - MARCH 31, 2002 $41,652 $3,942,963 $3,788,630 $(354,939) $(1,794,254) $ 39,226 $5,663,278
======= ========== ========== ========= =========== ========= ==========
See notes to consolidated financial statements.
5
STEELTON BANCORP, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
----------------------------
2002 2001
----------- -----------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 28,829 $ 41,889
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 10,500 2,500
Depreciation 20,242 15,439
Deferred benefit plan expense 30,196 27,158
Earnings on bank-owned life insurance (14,520) (13,430)
Deferred income taxes (benefit) (11,491) (4,439)
Increase (decrease) in accrued interest receivable (9,888) 56,716
Increase in accrued interest payable 163,868 288,136
Other, net (199,971) (13,293)
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Net Cash Provided by (Used in) Operating Activities 17,765 400,676
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Available for sale securities:
Sales - 2,171,050
Maturities and paydowns 986,428 2,301,002
Purchases (1,630,980) (4,198,519)
Held to maturity securities:
Maturities and paydowns 107,584 203,037
Purchases - (508,750)
Net (increase) decrease in loans 1,443,221 577,537
Purchase of bank premises and equipment (35,306) (143,696)
Redemption of Federal Home Loan Bank stock 131,400 41,500
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Net Cash Provided by (Used in) Investing Activities 1,002,347 443,161
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits (175,512) 556,709
Net decrease in advances from borrowers for insurance and taxes (56,465) (96,043)
Advances from Federal Home Loan Bank - 8,681,200
Repayment of Federal Home Loan Bank advances (1,186,765) (8,354,684)
Stock purchased for treasury (17,100) (18,428)
Payment of dividends (27,113) (28,240)
---------- ----------
Net Cash Provided by (Used in) Financing Activities (1,462,955) 740,514
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents (442,843) 1,584,351
CASH AND CASH EQUIVALENTS - BEGINNING 3,197,948 1,418,562
---------- ----------
CASH AND CASH EQUIVALENTS - ENDING $2,755,105 $3,002,913
========== ==========
SUPPLEMENTARY CASH FLOWS INFORMATION
Interest paid $ 365,203 $ 429,757
========== ==========
Income taxes paid $ - $ 11,500
========== ==========
See notes to consolidated financial statements.
6
STEELTON BANCORP, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed financial statements were prepared in accordance with
instructions for Form 10-QSB and, therefore, do not include all information
necessary for a complete presentation of financial condition, results of
operations and cash flows in conformity with accounting principles generally
accepted in the United States of America. However, all adjustments, consisting
of normal recurring accruals that, in the opinion of management, are necessary
for a fair presentation of the financial statements have been included. The
results of operations for the period ended March 31, 2002 are not necessarily
indicative of the results that may be expected for the fiscal year ending
December 31, 2002 or any other period. The condensed financial statements as of
and for the three month period ended March 31, 2002 and 2001 include the
accounts of Steelton Bancorp, Inc. (the "Corporation"), its wholly-owned
subsidiary, Mechanics Savings Bank (the "Bank"), and the Bank's wholly-owned
subsidiary, Baldwin Investment Corporation. The Corporation's business is
conducted principally through the Bank. Through its main office located in
Steelton and its branch office located in Lower Swatara Township, Pennsylvania,
the Bank provides retail banking services, with an emphasis on one-to-four
family residential mortgages.
NOTE 2 - EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the period ended March 31,
2002 and 2001. Shares for 2001 were adjusted for the impact of a 5% stock
dividend distributed in December 2001.
2002 2001
--------- ---------
Numerator, net income $ 28,829 $ 41,889
========= =========
Denominators:
Average basic shares outstanding 261,972 334,983
Average dilutive stock option effect 20,775 16,035
Average restricted stock effect 2,051 3,360
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Average Dilutive Shares Outstanding 284,798 354,378
========= =========
Earnings per share:
Basic $0.11 $0.13
========= =========
Diluted $0.10 $0.12
========= =========
NOTE 3 - NEW ACCOUNTING STANDARDS
In June of 2001, the Financial Accounting Standards Board issued Statement 143,
"Accounting for Asset Retirement Obligations," which addresses the financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
Statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset. This
Statement will become effective for the Corporation on January 1, 2003.
7
PART I, ITEM 2, MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The Corporation may from time-to-time make written or oral forward-looking
statements, including statements contained in the Corporation's filings with the
Securities and Exchange Commission (the "Commission") and its reports to
stockholders. Statements made in such documents, other than those concerning
historical information, should be considered forward-looking and subject to
various risks and uncertainties. Such forward-looking statements are made based
upon management's beliefs as well as assumptions made by, and information
currently available to, management pursuant to "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. The Corporation's actual
results may differ materially from the results anticipated in forward-looking
statements due to a variety of factors, including governmental monetary and
fiscal policies, deposit levels, loan demand, loan collateral values, securities
portfolio values and interest rate risk management; the effects of competition
in the banking business and changes in governmental regulations relating to the
banking industry. The Corporation cautions that such factors are not exclusive.
The Corporation does not undertake to update any forward-looking statements that
may be made from time-to-time by, or on behalf of, the Corporation.
Critical Accounting Policies
Disclosure of the Corporation's significant accounting policies is included in
Note 1 to the consolidated financial statements of the 2001 Annual Report to
Stockholders Form 10-KSB for the period ended December 31, 2001. Some of these
policies are particularly sensitive requiring significant judgements, estimates
and assumptions to be made by management. Additional information is contained in
Management's Discussion and Analysis for the most sensitive of these issues,
including the provision and allowance for loan losses, which are located on page
10 of this report.
Significant estimates are made by management in determining the allowance for
loan losses. Consideration is given to a variety of factors in establishing this
estimate. In estimating the allowance for loan losses, management considers
current economic conditions, diversification of the loan portfolio, delinquency
statistics, results of internal loan reviews, financial and managerial strengths
of borrowers, adequacy of collateral, if collateral dependent, or present value
of future cash flows and other relevant factors.
Income Statement Performance
The primary source of revenue for the Corporation is net interest income, which
represents the difference between interest income recognized on interest-earning
assets such as loans and investments, and interest expense paid on
interest-bearing liabilities such as deposits and Federal Home Loan Bank
("FHLB") borrowings. Levels of net interest income are heavily dependent on the
volume of interest-earning assets and interest-bearing liabilities as well as
the interest rate environment and competitive conditions.
For the three months ended March 31, 2002, Steelton Bancorp reported net income
of $28,829 compared with $41,889 for the same period in 2001. The decline in net
income for the current period is primarily attributable to a $19,451 or 5.2%
decline in net interest income. The components of net interest income and their
respective changes are described in further detail below.
8
PART I, ITEM 2, MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the quarter ended March 31, 2002, interest and dividend income decreased 19%
to $880,621 from $1,088,895 for the first quarter of 2001. The decrease was a
function of a decreased loan portfolio and a lower interest rate environment for
the first quarter of 2002 as compared to the same period of the previous year.
Specifically, average loans receivable decreased approximately $3.35 million
from the first quarter of 2001 compared to the first quarter of 2002. As a
result, interest income on loans for the quarter ended March 31, 2002 decreased
12% to $694,658 from $790,327 for the first quarter of 2001. With respect to
interest income on securities, the Company's investment portfolio declined
approximately $2.5 million, on average from 2001 to 2002 and was comprised of
higher yielding securities during the first quarter of the previous year. Many
of those investments have subsequently been called or matured and have been
replaced with lower yielding investments. Accordingly, interest income from
securities for the first quarter of 2002 decreased 38% to $159,260 compared to
$258,861 for the same quarter in 2001.
On the liability side, interest expense decreased $188,823 or 26% in the first
quarter of 2002 compared to the same quarter of 2001. The cause of the reduction
was twofold. First, as a result of rates on deposits being lowered mid-year in
2001 to better match the overall rate environment, interest expense on deposits
for the quarter ended March 31, 2002 decreased 28% to $286,537 from $400,367 for
the same quarter of 2001. Second, repayments on maturing advances from the FHLB
resulted in average balances outstanding declining by approximately $3.0 million
and thus lower related interest expense. Specifically, interest expense on
advances from FHLB advances decreased 24% for the first quarter of 2002 to
$242,534 compared to $317,527 for the same quarter of the previous year.
The provision for loan losses was $10,500 for the first quarter of 2002,
compared to $2,500 for the same quarter of 2001. The expense for each period was
responsive to management's assessment of the credit quality of the loan
portfolio.
Noninterest income, excluding securities gains or losses, remained relatively
flat when comparing the quarters ending March 31, 2001 and 2002, respectively.
Specifically, noninterest income, excluding securities losses of $5,777 in 2001,
increased only 4% to $72,031 for the quarter ended March 31, 2002 compared to
$69,132 for the same quarter in 2001. Most of the increase was in fees and
service charges.
There was no sales activity for the first quarter of 2002 with respect to
investment securities. Accordingly, there were no securities gains or losses for
the quarter ended March 31, 2002. Losses on securities for the first quarter of
2001 were $5,777.
Noninterest expense was effectively managed and experienced a marginal increase
of $3,734, or 1%. Total noninterest expense was $386,640 for the quarter ended
March 31, 2002 compared to $382,906 for the same quarter of the previous year.
In addition, all line item components that comprise noninterest expense
experienced minor fluctuations when comparing quarter to quarter. This is
reflective of the decline in total assets and management's efforts to control
these expenses.
As a result of tax-free income being a much larger portion of pre-tax income the
Corporation had an income tax benefit for the first quarter of 2002 of $2,388
compared to income tax expense of $7,061 for the first quarter of 2001.
9
PART I, ITEM 2, MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Balance Sheet Analysis
Total assets decreased by $1.2 million or 2% from December 31, 2001 to March 31,
2002. The decrease was primarily attributable to a $1.4 million net or 3%
decrease in loans receivable. This decline in loans was due primarily to normal
run-off that was not replaced with new loan growth. The Corporation is not
emphasizing loan origination due to a desire to use available funds to reduce
high cost borrowings. Accordingly, advances from the FHLB declined $1.2 million,
or 7% from December 31, 2001 to March 31, 2002. As previously indicated, funds
provided from the liquidation of the loan portfolio were utilized to decrease
advances from the FHLB.
Other balance sheet account fluctuations included a $471,840, or 4% increase in
total investment securities from December 31, 2001 to March 31, 2002. The
increase was primarily the result of additional purchases funded through
available cash. Accordingly, cash and due from banks decreased $442,843, or 14%
from December 31, 2001 to March 31, 2002. FHLB stock decreased $131,400, or 13%
from December 31, 2001 to March 31, 2002 as a result of redemptions of stock due
to the reduced borrowing base outlined above. No significant changes occurred
within Deposits. There were no other significant changes in the status of the
Corporation's overall liquidity from December 31, 2001 until March 31, 2002.
The allowance for loan losses increased $6,720, or 4.5%, to $154, 417 at March
31, 2002 from $147, 697 at December 31, 2001. The increase was the net result of
the monthly provision offset by any charge-off activity. Management periodically
reviews the adequacy of the allowance for loan losses, and the corresponding
monthly provision. Based on this analysis management believes the allowance is
adequate at March 31, 2002.
Stockholder's equity decreased a total of $7,884, or .1% from December 31, 2001
to March 31, 2002. The decrease was primarily the net result of the purchase of
900 shares of treasury stock at a cost of $17,100 and a decline in the fair
value of available for sale securities of $26,942 offset by net income of
$28,829.
The Corporation's board of directors approved a stock repurchase program for up
to 15,000 shares through October 2002. As of March 31, 2002, 900 shares were
acquired under this program.
Regulatory capital ratios for the bank were as follows at March 31, 2002
compared with December 31, 2001 and the minimum requirements:
------- -------- --------------------
3/31/02 12/31/01 Minimum Requirements
------- -------- --------------------
Total Risk-based Capital 19.20% 18.98% 8.00%
Tier 1 Capital 18.63% 18.44% N/A
Leverage Ratio 9.10% 8.84% 4.00%
Other Information
The Company will be changing its data processing provider during 2002.
Anticipated costs associated with the conversion are approximately $212,000.
This amount includes training, hardware, software and implementation costs. The
conversion is scheduled for completion by the end of the second quarter of 2002.
10
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Corporation and its subsidiary may be a party
to various legal proceedings incident to its or their business. At March 31,
2002, there were no legal proceedings to which the Corporation or its subsidiary
was a party, or to which of any of their property was subject, which were
expected by management to result in a material loss.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K
None.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STEELTON BANCORP, INC.
Date: May 13, 2002 By: /s/ Harold E. Stremmel
-------------------------------------
Harold E. Stremmel
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 13, 2002 By: /s/ Shannon Aylesworth
-------------------------------------
Shannon Aylesworth
Chief Financial Officer
(Principal Accounting Officer)
12