U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 000-26499
STEELTON BANCORP, INC.
----------------------
(Exact name of Registrant as specified in its Charter)
Pennsylvania 25-1830745
------------ ----------
(State or other jurisdicti I.R.S. Employer Identification Number
incorporation or organization)
51 South Front Street, Steelton, Pennsylvania 17113
- --------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 939-1966
--------------
Indicate by check mark whether the registrant (1) has 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 November 12, 1999, there were 385,000 shares of the Registrant's
common stock, par value $0.10 per share, outstanding. The Registrant has no
other classes of common equity outstanding.
Transitional small business disclosure format:
Yes X No
--- ---
STEELTON BANCORP, INC. AND SUBSIDIARY
STEELTON, PENNSYLVANIA
Contents
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Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements....................................................................................3
Consolidated Statements of Financial Condition - (Unaudited) as of
September 30, 1999 and December 31, 1998................................................................3
Consolidated Statements of Income - (Unaudited) for
the three months and nine months ended September 30, 1999 and 1998......................................4
Consolidated Statements of Comprehensive Income - (Unaudited) for
the three months and nine months ended September 30, 1999 and 1998......................................5
Consolidated Statements of Changes in Stockholders' Equity - (Unaudited) for
the nine months ended September 30, 1999................................................................6
Consolidated Statements of Cash Flows - (Unaudited) for
the nine months ended September 30, 1999 and 1998.......................................................7
Notes to (Unaudited) Consolidated Financial Statements..................................................9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................................11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings......................................................................................18
Item 2. Changes in Securities and Use of Proceeds..............................................................18
Item 3. Defaults Upon Senior Securities........................................................................18
Item 4. Submission of Matters to a Vote of Security Holders....................................................18
Item 5. Other Information......................................................................................18
Item 6. Exhibits and Reports on Form 8-K.......................................................................18
Signatures......................................................................................................19
PART I. FINANCIAL INFORMATION
STEELTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
Item 1. Financial Statements
At September 30, At December 31,
1999 1998
---------------- ---------------
(UNAUDITED)
ASSETS
Cash and cash equivalents
Cash and amounts due from depository institutions $ 769,082 $ 433,414
Interest bearing deposits in other banks 602,799 1,954,178
Investment securities
Securities available-for-sale 10,726,469 4,004,294
Securities held-to-maturity 5,871,615 5,200,205
Loans receivable, net 29,572,994 27,784,386
Accrued interest receivable 283,385 227,712
Federal Home Loan Bank stock, at cost 622,200 564,600
Office properties and equipment, net 1,136,088 1,046,050
Rental property, net 65,823 68,678
Deferred income taxes 205,067 97,771
Other assets 40,281 129,986
------------ ------------
TOTAL $ 49,895,803 $ 41,511,274
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 30,685,832 $ 28,272,431
Advances from Federal Home Loan Bank 11,942,894 9,257,408
Advances from borrowers for insurance and taxes 92,284 167,315
Accrued interest payable 287,314 72,227
Other liabilities 44,202 43,404
------------ ------------
Total liabilities 43,052,526 37,812,785
------------ ------------
STOCKHOLDERS' EQUITY
Preferred Stock, 2,000,000 shares authorized,
Issued and outstanding: none at September 30, 1999; none at -- --
December 31, 1998
Common Stock, $0.10 par value, 8,000,000 shares authorized,
Issued and outstanding: 385,000 at September 30, 1999; none at 38,500 --
December 31, 1998 3,457,015 --
Additional paid-in capital
Retained earnings 3,840,637 3,712,571
Unearned ESOP Shares (308,000) --
Accumulated other comprehensive income (loss) (184,875) (14,082)
------------ ------------
Total stockholders' equity 6,843,277 3,698,489
------------ ------------
TOTAL $ 49,895,803 $ 41,511,274
============ ============
See accompanying notes to unaudited consolidated financial statements
3
STEELTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Interest income:
Loans $ 555,439 $ 620,804 $1,663,969 $1,932,569
Investment securities 228,318 57,515 546,052 162,749
Other interest earning assets 28,428 14,305 95,259 64,933
---------- ---------- ---------- ----------
Total interest income 812,185 692,624 2,305,280 2,160,251
Interest expense:
Deposits 331,898 306,073 986,476 898,679
Advances from Federal Home Loan Bank 148,942 137,050 404,260 434,517
---------- ---------- ---------- ----------
Total interest expense 480,840 443,123 1,390,736 1,333,196
Net interest income 331,345 249,501 914,544 827,055
Provision for loan losses -- 3,000 2,000 9,000
Net interest income after provision for
loan losses 331,345 246,501 912,544 818,055
---------- ---------- ---------- ----------
Other income:
Fees and service charges 48,742 23,057 121,872 64,048
Dividends on FHLB stock 15,405 9,014 33,604 26,221
Other 15,491 13,959 37,171 40,683
---------- ---------- ---------- ----------
Total other income 79,638 46,030 192,647 130,952
Other expense:
Salaries and employee benefits 159,362 150,705 453,180 426,440
Occupancy expense of premises 24,790 25,077 71,971 69,442
Equipment 48,602 41,431 148,045 125,473
Advertising 3,847 6,122 28,616 34,517
Other 83,335 44,162 214,333 136,170
---------- ---------- ---------- ----------
Total other expense 319,936 267,497 916,145 792,042
Income before income taxes 91,047 25,034 189,046 156,965
Income taxes 28,661 10,654 60,981 57,382
---------- ---------- ---------- ----------
Net income $ 62,386 $ 14,380 $ 128,065 $ 99,583
========== ========== ========== ==========
Earning per share, basic $ .18 N/A N/A N/A
========== ========== ========== ==========
Shares used in computing basic earnings per share 346,500 N/A N/A N/A
========== ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements.
4
STEELTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three months ended Nine months ended
September 30 September 30
1999 1998 1999 1998
---- ---- ---- ----
Net income $ 62,386 $ 14,380 $ 128,065 $ 99,583
Other comprehensive income (loss)
Unrealized losses on securities
available for sale (146,646) -- (259,884) --
Income tax benefit 50,590 -- 89,091 --
--------- --------- --------- ---------
Comprehensive income (loss) $ (33,670) $ 14,380 $ (42,728) $ 99,583
========= ========= ========= =========
See notes to unaudited consolidated financial statements.
5
STEELTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
Accumulated
Unearned Additional Other
Common ESOP Paid-In Retained Comprehensive
Stock Shares Capital Earnings Income (loss) Total Equity
-------- ---------- ----------- ----------- ----------- ------------
Balance, December 31, 1998 $ - $ - $ - $ 3,712,571 $ (14,082) $ 3,698,489
Net income for the nine
months ended - - - 128,065 - 128,065
September 30, 1999
Net change in unrealized losses on
securities available for sale,
net of deferred income tax - - - - (170,793) (170,793)
benefit
Issuance of Steelton Bancorp, Inc.
common stock 38,500 (308,000) 3,457,015 - - 3,187,515
-------- ---------- ----------- ----------- ----------- -----------
$38,500 $(308,000) $3,457,015 $ 3,840,636 $ (184,875) $ 6,843,276
======== ========== =========== =========== =========== ===========
See notes to unaudited consolidated financial statements.
6
STEELTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
1999 1998
---- ----
Cash flows from operating activities:
- -------------------------------------
Net income $ 128,065 $ 99,583
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 83,004 53,225
Amortization of deferred loan fees (51,347) (54,833)
Amortization of premiums on loans purchased 5,565 12,466
Accretion of investment security discounts net of premium amortization 16,840 13,172
Provision for loan losses 2,000 9,000
(Increase) decrease in:
Accrued interest receivable (55,673) (13,995)
Other assets 71,500 (42,472)
Increase (decrease) in:
Accrued interest payable 215,087 145,674
Other liabilities 798 (23,620)
----------- -----------
Net cash provided by operating activities 415,839 198,200
----------- -----------
Cash flows from investing activities:
- -------------------------------------
Investment securities available-for-sale:
Proceeds from sales and maturities of mortgaged-backed securities 1,005,246 --
Purchase of mortgage-backed securities (2,881,568) --
Purchase of other securities (5,118,133) --
Investment securities held-to-maturity:
Proceeds from maturities and repayments
Mortgage-backed securities 802,721 1,195,600
Other -- 360,000
Purchase of mortgage-backed securities (1,257,150) (3,463,186)
Purchase of other securities (221,425) (1,345,839)
Net (increase) decrease in loans (1,744,826) 2,199,598
Purchase of office properties and equipment (170,187) (59,049)
Purchase of Federal Home Loan Bank stock (57,600) (59,300)
----------- -----------
Net cash used in investing activities (9,642,922) (1,172,176)
----------- -----------
(Continued)
7
STEELTON BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(UNAUDITED)
Nine Months Ended
September 30,
------------------------------
1999 1998
---- ----
Cash flows from financing activities:
- -------------------------------------
Net increase (decrease) in:
Deposits 2,413,401 1,800,171
Advances from borrowers for insurance and taxes (75,030) (121,302)
Advances from Federal Home Loan Bank 11,764,247 5,374,000
Repayment of Federal Home Loan Bank advances (9,078,761) (5,531,507)
Issuance of common stock 3,187,515 --
------------ ------------
Net cash provided by financing activities 8,211,372 1,521,362
------------ ------------
Net increase in cash and cash equivalents (1,015,711) 547,386
Cash and cash equivalents - beginning 2,387,592 788,652
------------ ------------
Cash and cash equivalents - ending $ 1,371,881 $ 1,336,038
============ ============
Supplemental disclosures:
- -------------------------
Cash paid during the period for interest $ 1,175,649 $ 1,187,522
============ ============
Cash paid during the period for taxes -- $ 64,412
============ ============
Net change in unrealized loss on securities available-for-sale $ (259,884) --
============ ============
See accompanying notes to unaudited consolidated financial statements.
8
STEELTON BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - BASIS OF PRESENTATION
The accompanying condensed financial statements were prepared in accordance with
instructions for Form 10-QSB and, therefore, do not include all information
necessary for a complete presentation of financial condition, results of
operations, and cash flows in conformity with generally accepted accounting
principles. However, all adjustments, consisting of normal recurring accruals,
which, in the opinion of management, are necessary for a fair presentation of
the financial statements have been included. The results of operations for the
periods ended September 30, 1999 and 1998 are not necessarily indicative of the
results, which may be expected for the entire fiscal year or any other period.
The condensed financial statements as of and for the three and nine month
periods ended September 30, 1999 and 1998 include the accounts of Mechanics
Savings Bank (the "Bank") which, as discussed in Note 2, became the wholly owned
subsidiary of Steelton Bancorp, Inc. (the "Company") on July 8, 1999. The
Company's business is conducted principally through the Bank. Through its main
office located in Steelton and its branch office located in Lower Swatara
Township, Pennsylvania, the Bank provides retail banking services, with an
emphasis on one-to-four-family residential mortgages.
The interim consolidated financial statements include the accounts of Mechanics
Savings and Loan, FSA and its wholly-owned subsidiary, Baldwin Service
Corporation.
These statements should be read in conjunction with the financial statements and
related notes, which are incorporated by reference in the Company's Prospectus
dated May 14, 1999.
Note 2 - MUTUAL TO STOCK CONVERSION
On July 8, 1999, the Bank completed its mutual to stock conversion (the
"Conversion"). In connection with the Conversion, Steelton Bancorp, Inc., a
Pennsylvania chartered corporation, sold 385,000 shares of its common stock in a
subscription offering at $10.00 per share. Upon completion of these
transactions, the Bank became the wholly owned subsidiary of Steelton Bancorp,
Inc. and changed its name from Mechanics Savings and Loan, FSA to Mechanics
Savings Bank.
The common stock of the Company began trading on the Electronic Bulletin Board
under the symbol "SELO" on July 9, 1999.
Note 3 - RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for Derivative Instruments and Hedging Activities. In June 1998, the
FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133
9
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. Initial application of this Statement should be as of the
beginning of an entity?s fiscal quarter. On that date, hedging relationships
must be designated anew and documented pursuant to the provisions of SFAS No.
133. Earlier application of all of the provisions of SFAS No. 133 is encouraged,
but it is permitted only as of the beginning of any fiscal quarter that begins
after issuance of this Statement. This Statement should not be applied
retroactively to financial statements of prior periods. SFAS No. 133 is not
expected to have a material impact on the Bank's financial statement
presentations.
In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133. SFAS No. 137 established that SFAS No. 133 be effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000.
Mortgaged-Backed Securities. In October 1998, the FASB issued SFAS No. 134,
"Accounting for Mortgaged-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." SFAS No. 134
amends FASB Statement No. 65, "Accounting for Certain Mortgage Banking
Activities" as previously amended by FASB Statements No. 115, "Accounting for
Certain Investment in Debt and Equity Securities" and FASB No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" to require that after the securitization of mortgage loans held for
sale, an entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interests based on its ability and
intent to sell or hold those investments. SFAS No. 134 conforms the subsequent
accounting for securities retained after the securitization of mortgage loans by
a mortgage banking enterprise with the subsequent accounting for securities
retained after the securitization of other types of assets by a non-mortgage
banking enterprise. SFAS No. 134 became effective for the Bank on January 1,
1999. Adoption of this statement did not have a material effect on the Bank's
financial condition or results of operations.
Note 4-EARNINGS PER COMMON SHARE
Basic net income per common share for the three months ended September 30, 1999
is calculated by dividing net income by the number of shares of common stock
outstanding adjusted for the unallocated portion of shares held by the ESOP.
Diluted net income per share is calculated by adjusting the number of shares of
common stock outstanding to include the effect of stock options, stock-based
compensation grants and other securities, if dilutive, generally, using the
treasury stock method. The Company has no potentially dilutive securities.
Net income per common share for the three months ended September 30, 1999 has
been calculated with the assumption that the common stock issued has been
outstanding since July 1, 1999.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Forward-Looking Statements
The Company may from time to time make written or oral forward-looking
statements, including statements contained in the Company's filings with the
Securities and Exchange Commission (the "Commission") and its reports to
stockholders. Statements made in such documents, other than those concerning
historical information, should be considered forward-looking and subject to
various risks and uncertainties. Such forward-looking statements are made based
upon management's beliefs as well as assumptions made by, and information
currently available to, management pursuant to "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. The Company's actual results
may differ materially from the results anticipated in forward-looking statements
due to a variety of factors, including governmental monetary and fiscal
policies, deposit levels, loan demand, loan collateral values, securities
portfolio values, and interest rate risk management; the effects of competition
in the banking business from other commercial banks, savings and loan
associations, mortgage banking firms, consumer finance companies, credit unions,
securities brokerage firms, insurance companies, money market mutual funds and
other financial institutions operating in the Company's market area and
elsewhere, including institutions operating through the Internet; changes in
governmental regulations relating to the banking industry, including regulations
relating to branching and acquisitions; failure of assumptions underlying the
establishment of reserves for losses, including the value of collateral
underlying delinquent loans, and other factors. The Company cautions that such
factors are not exclusive. The Company does not undertake to update any
forward-looking statements that may be made from time to time by, or on behalf
of, the Company.
Comparison of Financial Condition at September 30, 1999 and December 31, 1998
Assets. Total assets increased $8.4 million, or 20.2%, to $49.9 million at
September 30, 1999 from $41.5 million at December 31, 1998. The increase in
total assets resulted primarily from a $1.8 million increase in net loans
outstanding and a $7.4 million increase in investment securities, partially
offset by a $1.0 million decrease in cash and cash equivalents.
Loans receivable increased by $1.8 million due to a strong 1999 third quarter
increase in loan originations. Investment securities increased $7.4 million or
55.5% as the Company invested excess liquidity
Liabilities. Total liabilities increased by 13.9%, or $5.2 million, between
December 31, 1998 and September 30, 1999. The increase in total liabilities is
primarily from a $2.4 million increase in deposits and a $2.6 million increase
in advances from the Federal Home Loan Bank (the "FHLB").
Stockholders' Equity. Stockholders' equity increased by $3.1 million between
December 31, 1998 and September 30, 1999. The increase was due to the sale of
common stock in the Conversion and net income for the period of $128,000 offset
somewhat by unrealized losses on investments available for sale, net of tax, of
$171,000.
11
Liquidity and Capital Resources
The liquidity of a savings institution reflects its ability to provide funds to
meet loan requests, to accommodate possible outflows in deposits, and to take
advantage of interest rate market opportunities. Funding of loan requests,
providing for liability outflows, and management of interest rate fluctuations
require continuous analysis in order to match the maturities of specific
categories of short-term loans and investments with specific types of deposits
and borrowings. Savings institution liquidity is normally considered in terms of
the nature and mix of the savings institution's sources and uses of funds.
Asset liquidity is provided through loan repayments and the management of
maturity distributions for loans and securities. An important aspect of
liquidity lies in maintaining sufficient levels of loans and mortgage-backed
securities that generate monthly cash flows.
Net cash provided by operations for the nine months ended September 30, 1999 was
$416,000 compared to net cash provided by its operating activities of $198,000
for the same period in 1998. The primary factors for the increase in cash
provided by operations in 1999 was a federal income tax refund of $57,000 for
1998 that was received in 1999, a net increase in net income of $28,000, a net
increase in depreciation of $30,000 and an increase in accrued interest payable
of $ $69,000.
Net cash used in the Company's investing activities totaled $9.6 million for the
nine months ended September 30, 1999. The net cash used in investing activities
for the nine months ended September 30, 1999 included cash used to purchase
office properties and equipment totaling $170,000, net cash used for investment
and mortgage-backed securities of $7.7 million and a net increase in the loan
portfolio totaling $1.7 million for the nine months ended September 30, 1999.
Net cash provided by financing activities, primarily from the issuance of common
stock, net increases in FHLB advances and cash receipts from its net increases
in deposits, totaled $8.2 million for the nine months ended September 30, 1999,
compared to net cash provided by financing activities totaling $1.5 million for
the same period in 1998.
On September 30, 1999, the Bank was in compliance with its regulatory capital
requirements as follows:
Amount Percent
------ -------
(Dollars in thousands)
Core capital....................... $5,581 11.43%
Core capital requirement........... $1,951 4.00%
Excess over requirement............ $3,630 7.43%
Risk based capital................. $5,749 25.26%
Risk based capital requirement..... $1,821 8.00%
Excess over requirement............ $3,928 17.26%
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
12
minimum capital requirements.
Comparison of Operating Results for Three and Nine Months Ended September 30,
1999 and 1998
General. The largest component of the Company's total income and total expenses
are interest items. As a result, its earnings are greatly influenced by its net
interest income, which is determined by the difference between the interest
earned on its interest-earning assets and the rates paid on its interest-bearing
liabilities (interest rate spread) as well as by the relative amounts of its
interest-earning assets and interest-bearing liabilities.
Like most savings banks, the Bank's interest income and cost of funds are
substantially affected by general economic conditions. Because a significant
portion of the Bank's assets consist of fixed rate loans, increases in interest
costs will result in a decline in its net interest income.
Net Income. The Company's net income increased by $48,000 and $28,000 for the
three and nine month periods ended September 30, 1999, when compared to the same
periods in 1998 primarily due to increases in net interest income and other
income. The increases in net interest income and other income were partially
offset by increases in other expenses.
Interest Income. Total interest income increased by $120,000 and $145,000 for
the three and nine months periods ended September 30, 1999, when compared to the
same periods in 1998. Interest income from investment securities increased by
$171,000 and $383,000 for the three and nine month periods ended September 30,
1999, primarily as a result of investing excess liquidity primarily in
mortgage-backed securities. The previously mentioned increases in interest
income from investment securities was partially offset by decreases in interest
income from the loan portfolio of $65,000 and $334,000 for the three and nine
month periods ended September 30, 1999, primarily as a result of the decrease in
the average balances of loans receivable due to a decrease in loan originations
for the first six months of 1999.
Interest Expense. Interest expense on deposits increased by $26,000 and $88,000
for the three and nine-month periods ended September 30, 1999, respectively,
when compared to the same periods in 1998. The increase in interest expense on
deposits was primarily the result of increases in the average amounts of
deposits in 1999. Interest expense on advances from the Federal Home Loan Bank
increased $12,000 and decreased by $30,000 for the three and nine-month periods
ended September 30, 1999, respectively, when compared to the same periods in
1999. Cash obtained from net repayments of loans and increases in deposits
during the second half of 1998 and first half of 1999 was used to reduce average
advances from the Federal Home Loan Bank during the first half of 1999 when
compared to the first half of 1998. Average outstanding advances from the
Federal Home Loan Bank increased during the quarter ended September 30, 1999 to
meet liquidity needs due to an increase in loan originations.
Net Interest Income. Net interest income increased by $82,000 and $87,000 for
the three and nine month periods ended September 30, 1999, when compared to the
same periods in 1998 due to the changes in interest income and interest expense
described above.
Provision for Loan Losses. An allowance for loan losses is maintained through a
provision for loan losses based on management's periodic evaluation of the
general level of loan delinquency,
13
the level of risk by type of loan, and general economic conditions. The
provision reflects an amount that, in management's opinion, is adequate to
absorb losses in the current portfolio. The provision for loan losses was $0 and
$2,000 for the three and nine months ended September 30, 1999 compared to $3,000
and $9,000 for the same periods in 1998. The current allowance represents 0.58%
of total loans outstanding at September 30, 1999. Management monitors the loan
portfolio on a continuing basis and intends to continue to provide for loan
losses based on its ongoing review of the loan portfolio and general market
conditions.
Other Income. Other income, primarily fees and services charges increased by
$33,000 and $62,000 for the three and nine month periods ended September 30,
1999, respectively, when compared to the same periods in 1998. The Bank had
$27,000 in automated teller machine services charges for non-customer use in the
first three quarters of 1999. The Bank did not charge automated teller machine
service charges during the ninth months ended September 30, 1998. . In addition,
services charges assessed on NOW accounts increased by $15,000 for the
nine-month period ended September 30, 1999 compared to the same period in 1998.
Other Expense. Other expense increased by $52,000 and $124,000 for the three and
nine month periods ended September 30, 1999, when compared to the same periods
in 1998. Automated teller machine related expenses increased by $6,000 and
$14,000 for the three and nine month periods ended September 30, 1999, due to an
increase in the number of transactions by the Bank's customers. Service charges
by the Federal Home Loan Bank increased by $6,000 and $15,000 for the three and
nine month periods ended September 30, 1999 due to increased checking account
and investment transactions subject to services charges. NOW and MMDA check
expenses increased by $7,000 and $17,000 for the three and nine months periods
ended September 30, 1999 due an increased number of customer accounts. In
general, administrative expenses have increased in 1999 compare to 1998 as a
result of the increased reporting requirements of a public company.
Statements concerning future performance, developments, or events, concerning
expectations for growth and market forecasts, and any other guidance on future
periods, constitute forward-looking statements which are subject to a number of
risks and uncertainties, including interest rate fluctuations and government and
regulatory actions which might cause actual results to differ materially from
stated expectations or estimates.
The Company expects increased expenses in the future as a result of the
establishment of the employee stock ownership plan, potential stock benefit
plans, and the adoption of the directors and executive retirement plans, as well
as increased costs associated with being a public company such as periodic
reporting, annual meeting materials, transfer agent, and professional fees.
Provision for Income Taxes. Income tax expense increased by $18,000 and $4,000
for the three and nine month periods ended September 30, 1999 when compared to
the same periods in 1998. These increases resulted primarily from an increase in
income before income taxes for the three and nine month periods ended September
30, 1999 when compared to the same periods in 1998.
14
Year 2000 Readiness
Rapid and accurate data processing is essential to the Bank's operations. Many
computer programs that can only distinguish the final two digits of the year
entered (a common programming practice in prior years) are expected to read
entries for the year 2000 as the year 1900 or as zero and incorrectly attempt to
compute payment, interest, delinquency and other data.
The following discussion of the implications of the year 2000 problem for the
Bank, contains numerous forward looking statements based on inherently uncertain
information. The cost of the project and the date on which the Bank plans to
complete the internal year 2000 modifications are based on management's best
estimates, which are derived utilizing a number of assumptions of future events
including the continued availability of internal and external resources, third
party modifications and other factors. However, there can be no guarantee that
these statements will be achieved and actual results could differ. Moreover,
although management believes it will be able to make the necessary modifications
in advance, there can be no guarantee that failure to modify the systems would
not have a material adverse effect on the Bank or the Company.
The Bank places a high degree of reliance on computer systems of third parties,
such as customers, suppliers, and other financial and governmental institutions.
Although the Bank is assessing the readiness of these third parties and
preparing contingency plans, there can be no guarantee that the failure of these
third parties to modify their systems in advance of December 31, 1999 would not
have a material adverse affect on the Bank.
The Bank's Year 2000 Plan (the "Plan") was presented to the Board of Directors
in December, 1997. The Plan was developed using the guidelines outlined in the
Federal Financial Institutions Examination Council's "The Effect of Year 2000 on
Computer Systems." The Year 2000 Committee is responsible for the Plan with the
Board of Directors receiving Year 2000 progress reports on no less than a
quarterly basis. The Bank's primary operating systems, as provided by a third
party service bureau ("External Provider"), have been tested satisfactorily. The
main hardware and software used to serve the Bank's customer base and maintain
the customer transaction histories and Bank accounting records are currently
operating on Year 2000 compliant systems.
OTS on-site examinations were conducted in December 1998 and July 1999 and based
upon the examination results, the Bank was progressing satisfactorily toward
completing the Plan requirements.
The primary operating software for the Bank is the External Provider. The Bank
is maintaining ongoing contact with this vendor so that modification of the
software for Year 2000 readiness is a top priority. The Bank has performed
significant testing of the software utilized by the External Provider with
successful results. The External Provider has represented that the software
currently being utilized for the Bank's current operations is Year 2000
compliant.
The Bank has contacted all other material vendors and suppliers regarding their
Year 2000 readiness. Each of these third parties has delivered written assurance
to the Bank that they expect to be Year 2000 compliant prior to the Year 2000.
The Bank has contacted all significant customers and non-information technology
suppliers, including utility systems and telephone systems, regarding their year
2000 state of readiness.
15
The Bank has identified three vendors and systems as mission critical, each of
which is 100% Year 2000 compliant. The only critical vendors that have not
confirmed that they are Year 2000 compliant are the utility companies. The
Bank's correspondent banks have confirmed year 2000 compliance.
Testing has been completed on the most significant vendor applications, except
the utilities as noted above. Testing on a few critical applications and
development of contingency plans has been completed for all critical and
important applications and services. Most of the items identified as minor are
services that are performed by outside vendors. The Bank has received
communication from these vendors indicating they will be in compliance for Year
2000 without any disruption in service.
The Bank is unable to test the Year 2000 readiness of its significant suppliers
of utilities. The Bank is relying on the utility companies' internal testing and
representations to provide the required services that drive its data systems.
Any prolonged disruption in utility service could impair the ability of the Bank
to service its customers on a timely basis.
Software provided by the Bank's External Provider is supported by a contractual
agreement that states the software will be Year 2000 compliant prior to January
1, 2000. The contracts for the Bank's other systems and services do not contain
similar statements since they have longer terms and were not subject to specific
contract negotiation in the past few years.
All non-information technology providers that were identified have been
contacted. They have assured the Bank that the Year 2000 will not be an issue or
that the issue will be satisfactorily resolved prior to the end of 1999.
If the Plan fails to significantly address the Year 2000 issues of the Bank, the
following, among other things, could negatively affect the Bank:
(a) utility service companies may be unable to provide the necessary
service to drive the Bank's data systems or provide sufficient
sanitary conditions for its offices;
(b) the Bank's primary software provider could have a major
malfunction in its system or their service could be disrupted due
to its utility providers, or some combination of the two; or
(c) the Bank may have to transact its business manually.
The Bank will attempt to monitor these uncertainties by continuing to request an
update on all critical and important vendors throughout the remainder of 1999.
If the Bank identifies any concern related to any critical or important vendor,
the contingency plans will be implemented immediately to assure continued
service to the Bank's customers.
Costs will be incurred to replace certain non-compliant software and hardware.
The Bank does not anticipate that direct costs for renovating or replacing
non-compliant hardware and software will exceed $50,000, of which approximately
$45,000 had been expended as of September 30, 1999. No assurance can be given
that the Year 2000 Plan will be completed successfully by the Year 2000, in
which event the Bank could incur significant costs. If the External Provider
fails to maintain its system in compliant state or incurs other obstacles prior
to Year 2000, the Bank
16
would likely experience significant data processing delays, mistakes or
failures. These delays, mistakes or failures could have a significant adverse
impact on the consolidated financial statements of the Bank.
Successful and timely completion of the Year 2000 project is based on
management's best estimates derived from various assumptions of future events,
which are inherently uncertain, including the progress and results of the
External Provider, testing plans, and all vendors, suppliers and customer
readiness.
Despite the best efforts of management to address this issue, the vast number of
external entities that have direct and indirect business relationships with the
Bank, such as utilities, customers, vendors, payment system providers and other
financial institution, makes it impossible to assure that a failure to achieve
compliance by one or more of these entities would not have material adverse
impact on the operations of the Bank.
Impact of Inflation
The condensed financial statements of the Bank and notes thereto, presented
elsewhere herein, have been prepared in accordance with GAAP, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time due to inflation. The impact of inflation is reflected in the
increased cost of the Bank's operations. Unlike most industrial companies,
nearly all the assets and liabilities of the Bank are financial. As a result,
interest rates have a greater impact on the Bank's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the prices of goods and services.
17
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
From time to time, the Company and its subsidiary may be a party to
various legal proceedings incident to its or their business. At
September 30, 1999, there were no legal proceedings to which the
Company or its subsidiary was a party, or to which of any of their
property was subject, which were expected by management to result in a
material loss.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
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
3(i) Articles of Incorporation of Steelton Bancorp, Inc.*
3(ii) Bylaws of Steelton Bancorp, Inc.*
4 Specimen Stock Certificate*
10.1 Employment Agreement between the Bank and Harold E. Stremmel*
27 Financial Data Schedule (electronic filing only)
- ---------------------
* Incorporated by reference to an identically numbered exhibit to the
registration statement on Form SB-2 (File No. 333-74279) initially filed with
the SEC on March 11, 1999.
(b) The following current reports on Form 8-K were filed during the
quarter ended September 30, 1999:
On July 14, 1999, the Company filed a From 8-K to report the
completion of the Bank's mutual to stock conversion on July 8, 1999.
18
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: November 15, 1999 By:/s/Harold E. Stremmel
-------------------------------------------
Harold E. Stremmel
President and Chief Executive Officer
(Principal Executive Officer)
(Duly Authorized Officer)
Date: November 15, 1999 By: /s/Shannon Aylesworth
-------------------------------------------
Shannon Aylesworth
Chief Financial Officer
(Principal Accounting Officer)
19