SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for Quarterly period ended
September 30, 1998.
( ) Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from __________ to __________.
No. 0-24145
(Commission File Number)
MAIN STREET BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
PENNSYLVANIA 23-2960905
(State of Incorporation) (IRS Employer ID Number)
601 PENN STREET, READING, PA 19601
(Address of Principal Executive Offices) (Zip Code)
(610) 685-1400
(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all
reports required to the filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Number of Shares Outstanding as of October 31, 1998
COMMON STOCK ($1.00 Par Value) 9,708,358
(Title of Class) (Outstanding Shares)
PAGE 1
<PAGE>
MAIN STREET BANCORP, INC.
FORM 10-Q
For the Quarter Ended September 30, 1998
Contents
PART I FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Income for
the Nine and Three-Month Periods ended
September 30, 1998 and 1997 5
Consolidated Statement of Stockholders'
Equity for the Nine-Month Period
Ended September 30, 1998 6
Consolidated Statements of Cash Flows for
the Nine-Month Periods Ended September 30,
1998 and 1997 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security
Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 27
PAGE 2
<PAGE>
Main Street Bancorp, Inc. (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 (including this Quarterly Report on
Form 10-Q and the Exhibits hereto and 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 include statements with
respect to the Company's beliefs, plans, objectives, goals,
expectations, anticipations, estimates and intentions, that are
subject to significant risks and uncertainties, and are subject
to change based on various factors (some of which are beyond the
Company's control). The words "may," "could," "should," "would,"
"believe," "anticipate," "estimate," "expect," "intend," "plan"
and similar expressions are intended to identify forward-looking
statements. 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 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.
PAGE 3
<PAGE>
MAIN STREET BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1998 1997
(In thousands, except share data)
<S> <C> <C>
Cash and due from banks $ 29,018 $ 24,918
Interest-bearing deposits with banks 278 200
Federal funds sold 470 470
Securities available for sale 478,491 209,106
Securities held to maturity, fair value
September 30, 1998 $779; December 31,
1997 $71,769 775 70,914
Loans receivable, net of allowance for loan
losses September 30, 1998 $7,475;
December 31, 1997 $5,738 518,921 477,838
Mortgages held for sale 2,709 --
Due from mortgage investors 10,195 5,425
Bank premises and equipment, net 16,832 11,511
Accrued interest receivable 6,754 5,825
Prepaid expenses and other assets 15,819 7,656
TOTAL ASSETS $1,080,262 $ 813,863
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand, non-interest bearing $ 87,030 $ 73,985
Demand, interest bearing 55,016 52,344
Savings 299,014 239,504
Time deposits 310,422 260,975
TOTAL DEPOSITS 751,482 626,808
Accrued interest payable and other
liabilities 25,920 13,625
Other borrowed funds 129,293 30,260
Long-term debt 76,000 54,450
TOTAL LIABILITIES 982,695 725,143
Stockholders' equity:
Common stock, par value $1.00 per share;
authorized 50,000,000 shares; issued
and outstanding September 30, 1998
9,700,357 shares; December 31, 1997
9,639,808 shares 9,700 9,640
Surplus 50,625 49,985
Retained earnings 31,261 26,721
Net unrealized appreciation on securities
available for sale, net of taxes 5,981 2,374
<PAGE 4>
TOTAL STOCKHOLDERS' EQUITY 97,567 88,720
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $1,080,262 $ 813,863
</TABLE>
See Notes to Consolidated Financial Statements
PAGE 5
<PAGE>
MAIN STREET BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
-------------------------- -------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------------------------ -----------------------------
(In thousands, except Per share data)
<S> <C> <C> <C> <C>
Interest income:
Loan receivable, including fees $11,381 $10,003 $33,141 $28,117
Interest and dividends on securities:
Taxable 3,572 3,428 10,523 8,957
Tax-exempt 1,345 728 3,110 2,129
Other 238 26 267 237
------- ------- ------- -------
Total interest income 16,536 14,185 47,041 39,440
------- ------- ------- -------
Interest expense:
Deposits 7,199 5,520 19,622 15,359
Other borrowed funds 363 444 1,212 1,284
Long-term debt 718 778 2,208 2,091
------- ------- ------- -------
Total interest expense 8,280 6,742 23,042 18,734
------- ------- ------- -------
Net interest income 8,256 7,443 23,999 20,706
Provision for loan losses 1,725 315 2,210 907
------- ------- ------- -------
Net interest income after provision
for loan losses 6,531 7,128 21,789 19,799
------- ------- ------- -------
Other income:
Income from fiduciary activities 195 187 626 664
Customer service fees 649 564 1,883 1,592
Mortgage banking activities 545 289 1,356 681
Net realized gains on sale of securities 1,723 10 3,873 146
Other 45 42 198 74
------- ------- ------- -------
Total other income 3,157 1,092 7,936 3,157
------- ------- ------- -------
Other expenses:
Salaries and wages 2,504 2,103 7,190 5,838
Employee benefits 666 452 1,832 1,390
Occupancy 604 314 1,585 1,045
Equipment depreciation and maintenance 390 328 1,113 981
Merger costs -- -- 1,963 --
Other 1,822 1,497 5,294 4,909
------- ------- ------- -------
Total other expenses 5,986 4,694 18,977 14,163
------- ------- ------- -------
Income before income taxes 3,702 3,526 10,748 8,793
Federal income taxes 574 904 2,525 2,292
------- ------- ------- -------
Net income $ 3,128 $ 2,622 $ 8,223 $ 6,501
======= ======= ======= =======
Basic earnings per share $0.32 $0.29 $0.85 $0.79
======= ======= ======= =======
Diluted earnings per share $0.32 $0.28 $0.84 $0.78
======= ======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
PAGE 6
<PAGE>
MAIN STREET BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Nine months Ended September 30, 1998
<TABLE>
<CAPTION>
Net Unrealized
Number of Appreciation
Shares of On Securities Compre-
Common Common Retained Available hensive
Stock Stock Surplus Earnings For Sale Total Income
-------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 9,639,808 $9,640 $49,985 $26,721 $2,374 $88,720
Net income -- -- -- 8,223 -- 8,223 $ 8,223
Pre-merger stock transactions
of pooled entities 31,043 31 433 -- -- 464 --
Issuance of common stock upon
exercise of stock options 29,506 29 172 -- -- 201 --
Tax benefit upon exercise of
stock options 35 35 --
Cash in lieu of fractional shares (20) (20)
Net change in unrealized apprecia-
tion on securities available for
sale, net of taxes -- -- -- -- 3,607 3,607 3,607
-------
Comprehensive income $11,830
=======
Cash dividends declared -- -- -- (3,663) -- (3,663)
--------- ------ ------- ------- ------ -------
Balance September 30, 1998 9,700,357 $9,700 $50,625 $31,261 $5,981 $97,567
========= ====== ======= ======= ====== =======
</TABLE>
See Notes to Consolidated Financial Statements
PAGE 7
<PAGE>
MAIN STREET BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, September 30,
1998 1997
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,223 $ 6,500
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Provision for loan and foreclosed real
estate losses 2,235 1,017
Provision for depreciation and amortization 1,030 895
Loss on sale of equipment and foreclosed
real estate 45 9
Net realized gain on sale of securities (3,872) (147)
Provision for deferred income taxes (246) (167)
Proceeds from sale of mortgage loans 80,438 34,230
Net gain on sale of mortgage loans (129) (13)
Mortgage loans originated for sale (80,361) (34,233)
Net accretion of security premiums
and discounts 902 62
(Increase) decrease in:
Due from mortgage investors (4,770) (4,471)
Accrued interest receivable (929) (1,233)
Prepaid expenses and other assets (9,465) (121)
Increase in accrued interest payable and
other liabilities 2,293 1,308
Net cash provided by (used in)
operating activities (4,606) 3,636
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available
for sale 27,860 31,249
Proceeds from maturities of and principal
repayments on securities available for sale 61,213 29,627
Proceeds from maturities and calls of
securities held to maturity 5,350 6,700
Purchases of securities available for sale (275,165) (116,754)
Purchases of securities held to maturity (30,094)
(Increase) Decrease in interest-bearing deposits
with banks (78) 21,387
Decrease in federal funds sold -- 1,020
Loans made to customers, net of principal
collected (53,313) (67,879)
Proceeds from sale of third-party dealer
loan portfolio 6,367 --
Proceeds from sales of foreclosed real estate 865 1,365
Proceeds from sales of bank premises and
equipment 2 30
Purchases of premises and equipment (6,356) (2,673)
Net cash used in investing activities (233,255) (126,022)
<PAGE 8>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposits $ 75,227 $ 53,314
Net increase in time deposits 49,447 20,868
Proceeds from (repayment of) other borrowed
funds 100,033 24,222
Proceeds from long term borrowings 25,000 40,000
Principal payments of long-term borrowings (4,450) (35,000)
Cash in lieu of fractional shares (20) --
Pre-merger stock transactions of pooled banks 464 (233)
Proceeds from exercise of stock options 201 --
Net proceeds from stock offering of pooled
entity -- 20,865
Cash dividends paid (3,941) (2,178)
Net cash provided by financing activities 241,961 121,858
Increase (decrease) in cash and due from
banks 4,100 (528)
Cash and due from banks:
Beginning 24,918 18,432
Ending $ 29,018 $ 17,904
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 22,853 $ 18,266
Income taxes $ 2,180 $ 2,130
</TABLE>
See Notes To Consolidated Financial Statements
PAGE 9
<PAGE>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The consolidated financial statements give retroactive effect to
the pooling of interests merger of BCB Financial Services
Corporation ("BCB") and Heritage Bancorp, Inc. ("Heritage") as
more fully described below. As a result, the consolidated
balance sheets as of September 30, 1998 and December 31, 1997,
and the related consolidated statements of income, stockholders'
equity and cash flows for each of the nine and three months ended
September 30, 1998 and 1997, are presented as if the combining
companies had been consolidated for all periods presented. As
required by generally accepted accounting principles, the
consolidated financial statements will become the historical
consolidated financial statements upon issuance of the
consolidated financial statements for the period that includes
the date of the acquisition. The consolidated statements of
stockholders' equity reflect the accounts of the Company as if
the common stock had been issued during all periods presented.
On May 1, 1998, the Company was formed upon the completion of a
merger of equals between BCB and Heritage. The merger was
accounted for as a pooling of interests. As a result of the
merger, each of the 3,478,241 outstanding shares of BCB common
stock as of April 30, 1998 was converted into 1.3335 shares of
the Company's common stock and each of the 4,793,746 outstanding
shares of Heritage common stock as of April 30, 1998 was
converted into 1.05 shares of the Company's stock, with cash
being paid for fractional share interests.
The unaudited consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, Berks
County Bank (Berks), Heritage National Bank (HNB), and Heritage
Holding Company (HHC). All significant intercompany accounts and
transactions have been eliminated.
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they
do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments
considered necessary for fair presentation have been included.
Operating results of the nine-month period ended September 30,
1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998.
PAGE 10
<PAGE>
EARNINGS PER SHARE
The following table sets forth the computations of basic and
diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
--------------------------- --------------------------
<S> <C> <C> <C> <C>
Numerator, net income $3,128,000 $2,622,000 $8,223,000 $6,501,000
========== ========== ========== ==========
Denominator:
Denominator for basic earnings per
share, weighted average shares 9,687,089 9,116,268 9,671,648 8,230,998
Effect of dilutive securities, stock
options 124,331 111,806 140,541 93,275
--------- --------- --------- ---------
Denominator for diluted earnings per
share, weighted average shares
and assumed conversions 9,811,420 9,228,074 9,812,189 8,324,273
========== ========== ========== ==========
Basic earnings per common share $0.32 $0.29 $0.85 $0.79
========== ========== ========== ==========
Diluted earnings per common share $0.32 $0.28 $0.84 $0.78
========== ========== ========== ==========
</TABLE>
OTHER EXPENSES
The following represents the most significant categories of other
expenses for the nine months ended September 30:
1998 1997
Advertising $ 844 $ 750
Data processing and MAC fees 854 714
Office supplies and expenses 979 823
Professional fees 614 695
Foreclosed real estate 140 (45)
All other expenses 1,863 1,972
$5,294 $4,909
PAGE 11
<PAGE>
COMPREHENSIVE INCOME
The Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income," in June 1997. The
Company adopted the provisions of the new standard in the first
quarter of 1998.
The only comprehensive income item that the Company
presently has is unrealized gains (losses) on securities
available for sale. The unrealized gains (losses) on securities
available for sale are as follows:
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
Unrealized holding gains (losses) arising
during the period:
Before tax amount $ 6,245 $ 2,331
Tax (expense) benefit (2,123) (793)
Net of tax amount 4,122 1,538
Less reclassification adjustment for gains
(losses) included in net income:
Before tax amount 780 146
Tax (expense) benefit (265) (50)
Net of tax amount 515 96
Net unrealized gains (losses):
Before tax amount 5,465 2,185
Tax (expense) benefit (1,858) (743)
Net of tax amount $ 3,607 $ 1,442
</TABLE>
ACCOUNTING POLICIES
In June 1998, the Financial Accounting Standards Board
issued Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which becomes effective for the Company
January 1, 2000. Management expects this Statement will have no
impact on the Company, as presently no derivative instruments are
held.
SECURITIES
The Company transferred securities with an amortized cost of
$72.6 million from held to maturity to available for sale on
May 31, 1998 in order to provide flexibility for management to
implement new investment strategies. The transfer resulted in a
$840,000 adjustment to fair value on the securities previously
classified as held to maturity with a corresponding adjustment to
equity of $554,000 for unrealized gains, net of taxes. All
<PAGE 12> securities at September 30, 1998 were classified as
available for sale except for those securities that will mature
or could be called within the next six months.
STOCK DIVIDEND
On October 27, 1998, the Board of Directors declared a 7%
stock dividend to shareholders of record on November 30, 1998.
The stock dividend will be paid on December 15, 1998.
PAGE 13
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis is intended to assist
in understanding and evaluating the major changes in the
financial condition and earnings performance of Main Street
Bancorp, Inc. (the "Company") on a consolidated basis with a
primary focus on an analysis of operating results.
FINANCIAL CONDITION HIGHLIGHTS
The assets increased to $1.08 billion at September 30, 1998,
compared to $813.9 million at December 31, 1997, an increase of
$266.1 million, or 32.7%. This increase was primarily reflected
in securities and deposits.
Securities increased $199.3 million, or 71.2%, to $479.3
million at September 30, 1998 when compared to $280.0 million at
December 31, 1997. The increase is due to the purchase of
$275.2 million in securities, offset by the securities sales and
maturities of $94.4 million. The Company elected to increase its
securities portfolio as part of a program to leverage the balance
sheet and increase earnings. Securities purchased were funded
primarily with short-term Federal Home Loan Bank advances. The
Company plans to replace most of these borrowings with lower-cost
deposits expected to be received over the next two years. Nearly
the entire bond securities portfolio is rated AAA by either
Standard & Poor or Moodys. There were no derivatives held at
September 30, 1998 and no investments in hedge funds. Securities
held at September 30, 1998 were primarily government agencies,
municipalities, or bank stocks.
The Company transferred securities with an amortized cost of
$72.6 million from held to maturity to available for sale on
May 31, 1998 in order to provide flexibility for management to
implement new investment strategies. The transfer resulted in a
$840,000 adjustment to fair value of the securities previously
classified as held to maturity with a corresponding adjustment to
equity of $554,000 for unrealized gains, net of taxes. All
securities at September 30, 1998 were classified as available for
sale except for those securities that will call or mature by
March 31, 1999.
Loans receivable, net of allowance for loan losses of $7.5
million at September 30, 1998 and $5.7 million at December 31,
1997, increased to $518.9 million at September 30, 1998 from
$477.8 million at December 31, 1997. The increase of
$41.1 million, or 8.60%, was primarily due to an increase in
commercial loans. During the third quarter of 1998, the Company
increased its provision for loan losses by $1.7 million due to
increasing uncertainty in economic conditions. See "-- Results
of Operations -- Provision for Loan Losses" for a further
discussion of the increase.
<PAGE 14>
Amounts due from mortgage investors increased to $10.2
million at September 30, 1998 from $5.4 million at December 31,
1997. These amounts represent loans originated by Berks for
other mortgage investors/lenders under standing commitments.
These loans are temporarily funded for investors for periods
ranging from three to twenty-one days.
Bank premises and equipment, net of accumulated
depreciation, increased from $11.5 million at December 31, 1997
to $16.8 million at September 30, 1998. This increase was mostly
attributable to the purchase of the Berks County Bank Building at
601 Penn Street, Reading, Pennsylvania, in February 1998. The
Berks County Bank Building houses the corporate offices of the
Company.
Total deposits, the primary source of funds, increased
$124.7 million to $751.5 million at September 30, 1998 compared
to $626.8 million at December 31, 1997, an increase of 19.89%.
The increase in deposits was primarily in savings and time
deposits. Savings deposits increased from $239.5 million at
December 31, 1997 to $299.0 million at September 30, 1998, an
increase of $59.5 million, or 24.84%. This was due primarily to
the offering of an above market rate of 4.20% APY (annual
percentage yield) on money market deposits to customers of Berks
which is guaranteed through December 31, 1998. Total time
deposits increased $49.4 million, or 18.93%, to $310.4 million at
September 30, 1998 from $261.0 million at December 31, 1997. As
a percentage of total deposits, time deposits decreased slightly
from 41.64% at December 31, 1997 to 41.30% at September 30, 1998.
Other borrowed funds and long-term debt increased $120.6
million, or 142.38%, from $84.7 million at December 31, 1997 to
$205.3 million at September 30, 1998. The increase resulted
because the Company took advantage of the low FHLB borrowing
rates to fund the purchase of securities.
Stockholders' equity increased $8.9 million, or 10.03%, to
$97.6 million at September 30, 1998 from $88.7 million at
December 31, 1997. The increase was primarily from the retention
of earnings for the first nine months, net of cash dividends
declared of $3.7 million. The increase in stockholders' equity
was also due to the increase in the net unrealized appreciation
on securities available for sale of $3.6 million, from $2.4
million at December 31, 1997 to $6.0 million at September 30,
1998.
RESULTS OF OPERATIONS
Overview
Net income for the first nine months of 1998 was $8.2
million compared to $6.5 million for the first nine months of
1997, an increase of 26.15%. On a per share basis, basic
earnings were $0.85 and $0.79 for the first nine months of 1998
and 1997, respectively. Diluted earnings per share were $0.84
<PAGE 15> and $0.78 for the nine months ended September 30, 1998
and 1997, respectively. Earnings for the third quarter of 1998
was $3.1 million compared to $2.6 million for the third quarter
of 1997. Basic and diluted earnings per share for the third
quarter of 1998 was $0.32 as compared to basic and diluted of
$0.29 and $0.28 respectively for the third quarter of 1997. Net
income and earnings per share increased primarily due to an
increase in net interest income.
Net Interest Income
Net interest income is the difference between interest
income on interest-earning assets and interest expense on
interest-bearing liabilities. Net interest income, on a tax-
equivalent basis, increased $4.1 million, or 19.16%, to $25.5
million for the first nine months of 1998 compared to $21.4
million for the first nine months of 1997. For the third quarter
of 1998, net interest income on a tax-equivalent basis, increased
$1.3 million, or 16.88%, to $9.0 million from $7.7 million for
the third quarter of 1997. The increase in net interest income
was primarily due to an increase in average interest-earning
assets of $144.1 million, or 21.46%, for the first nine months of
1998 compared to 1997 and an increase of $143.0 million, or
19.94%, for the third quarter of 1998 compared to the third
quarter of 1997. Average interest-bearing liabilities increased
$112.3 million and $124.9 million for the first nine months and
third quarter of 1998, respectively, compared to the
corresponding periods in 1997. The average rate paid on
interest-bearing liabilities increased to 4.50% for the first
nine months of 1998 compared to 4.38% for the first nine months
of 1997. For the third quarter of 1998, the average rate paid on
interest-bearing liabilities was 4.50% compared to 4.43% for the
third quarter of 1997. The increase was mostly due to the higher
cost of the increase in FHLB borrowings.
Net interest margin decreased 7 basis points from 4.26% for
the first nine months of 1997 to 4.19% for the first nine months
of 1998, calculated on a tax-equivalent basis. Net interest
margin decreased 12 basis points from 4.25% in the third quarter
of 1997 to 4.13% in the third quarter of 1998, calculated on a
tax-equivalent basis. Net interest margin primarily decreased
due to an increase in the average rate paid on interest-bearing
liabilities, especially on FHLB borrowings, and to a decrease in
the average yield on interest-earning assets that resulted from
the substantial increase in securities in 1998 at yields below
1997's average earning asset yield. As short-term FHLB
borrowings are replaced by more deposits that will result in a
decrease in the average rate paid on interest-bearing
liabilities, the net interest margin should increase.
Provision For Loan Losses
The provision for loan losses is charged to operations to
bring the total allowance for loan losses to a level considered
appropriate by management. The level of the allowance for loan
<PAGE 16> losses is determined by management based upon its
evaluation of the known as well as inherent risks within the
Banks' loan portfolio. Management's periodic evaluation is based
upon an examination of the portfolio, past loss experience,
current economic conditions, the results of the most recent
regulatory examinations and other relevant factors. The
provision for loan losses was $2,210,000 for the first nine
months of 1998 compared to $907,000 for the first nine months of
1997. For the third quarter of 1998, the provision for loan
losses was $1,725,000 compared to $315,000 for the third quarter
of 1997. Overall loan delinquency was approximately 2.05% at
September 30, 1998. The allowance for loan losses to non-
performing loans was 95.38% at September 30, 1998 compared to
91.89% at December 31, 1997. While our loan quality and
delinquency experience is favorable, the Company believes that
boosting the provision at this time is prudent in view of recent
volatility in the markets and increasing uncertainty in economic
conditions.
Other Income
Other income increased $4.7 million, or 146.88%, to $7.9
million for the first nine months of 1998 compared to $3.2
million for the first nine months of 1997. For the third quarter
of 1998, other income increased $2.1 million, or 190.90%, to $3.2
million from $1.1 million for the third quarter of 1997. The
increase in other income for the first nine months and third
quarter of 1998 was mostly due to realized gains on sales of
securities and income from mortgage banking activities. For the
first nine months of 1998, realized gains on sales of securities
increased $3.8 million to $3.9 million from $146,000 for the same
period a year earlier. For the third quarter of 1998, realized
gains on sales of securities increased $1.7 million to $1.7
million from $10,000 reported in the third quarter of 1997.
Management elected to sell some of its available-for-sale equity
securities of Pennsylvania banks in order to provide additional
revenue to offset certain one time extraordinary expenses. These
extraordinary expenses included $1.9 million of merger related
costs, an extra provision to loan losses of $1.7 million, and
approximately $0.2 million of facilities expenses related to the
acquisition of the Berks County Bank Building at 601 Penn Street,
Reading, Pennsylvania.
Income from mortgage banking activities increased $675,000,
or 99.12%, to $1.4 million during the first nine months of 1998
compared to $681,000 for the first nine months of 1997. For the
third quarter of 1998, income from mortgage banking activities
increased $256,000, or 88.58%, to $545,000 from $289,000 in the
third quarter of 1997. Mortgage banking income represents income
generated from the mortgages temporarily funded for mortgage
investors. The increase was due to an increase in new home
construction and refinancing, the expansion of the Company's
geographic market into Bucks, Chester, Lancaster, and Lehigh
counties, and the lower interest rate environment in 1998.
<PAGE 17>
Other Expenses
Total other expenses increased $4.8 million, or 33.80%, to
$19.0 million for the first nine months of 1998 compared to $14.2
million for the first nine months of 1997. Total other expenses
also increased during the third quarter of 1998 to $6.0 million
from $4.7 million for the third quarter of 1997, an increase of
$1.3 million, or 27.66%.
Salaries, wages and employee benefits increased $1.8
million, or 25.00%, and $615,000, or 24.07%, for the nine and
three months ended September 30, 1998, respectively, compared to
the respective periods in 1997. Salaries, wages and employee
benefits increased due to the growth of the Company and also due
to the accrual of the 3% salary match for all eligible employees
under the new money purchase plan as approved under the
consolidation agreement pursuant to which BCB and Heritage were
consolidated to form the Company.
Occupancy expense increased $600,000, or 60.00%, to $1.6
million for the first nine months of 1998 compared to $1.0
million for the first nine months of 1997. For the third quarter
of 1998, occupancy expense was $604,000 compared to $314,000 for
the third quarter of 1997, an increase of $290,000, or 92.36%.
These increases reflect one-time expenses related to occupying
the new corporate headquarters at the Berks County Bank Building
and also includes obligations to pay the remaining lease payments
for the prior headquarters. The Company expects to lease out
several floors of the Company's new headquarters in the fourth
quarter of 1998 which should help mitigate these increased
occupancy expenses in future periods.
Other operating expenses increased $2.4 million, or 48.98%,
to $7.3 million for the first nine months of 1998, compared to
$4.9 million for the first nine months of 1997. For the third
quarter of 1998, other operating expenses increased by $0.3
million, or 20.0%, to $1.8 million from $1.5 million a year
earlier. The large increase in other expenses for the first nine
months of 1998 was mostly due to the one-time merger related
costs of $2.0 million. Other slight increases or decreases
occurred in advertising, data processing and MAC fees,
professional fees and office supplies and expenses. Advertising
increased $94,000 to $844,000 for the first nine months of 1998
compared to $750,000 for the first nine months of 1997 and
increased $60,000 during the third quarter to $276,000 in 1998
from $216,000 in 1997. The increase from last year was due to a
marketing campaign to attract disgruntled First Union/CoreStates
customers. Data processing and MAC fees increased $140,000, or
19.61%, from $714,000 in the first nine months of 1997 to
$854,000 in the first nine months of 1998. For the third
quarter, data processing and MAC fees increased $55,000 to
$301,000 from $246,000 a year earlier. The increase was a result
of increased volume in credit card processing/ATM processing.
Professional fees decreased $81,000, or 11.65%, and increased
$1,000, or 0.04% for the nine and three months ended <PAGE 18>
September 30, 1998 compared to the same period in 1997. Office
supplies and expenses increased $156,000, or 18.96%, to $979,000
for the first nine months of 1998 compared to $823,000 for the
same period in 1997. For the third quarter of 1998, office
supplies and expenses increased $143,000, or 56.97%, to $394,000
compared to $251,000 for the third quarter of 1997. The increase
was due to supplies necessary to support the Company's growth as
well as increased postage as a result of an increase in mailings
of statements, notices, etc.
Federal Income Taxes
The provision for federal income taxes was $2.5 million for
the first nine months of 1998 compared to $2.3 million for the
first nine months of 1997. The provision for income taxes was
$574,000 for the third quarter of 1998 compared to $904,000 for
the third quarter of 1997. The effective tax rate for the first
nine months of 1998 was 23.49% versus 26.07% for the first nine
months of 1997. The decrease in 1998's effective tax rate from
the statutory tax rate of 34% was due to the significant amount
of tax-exempt interest income earned on bank-qualified municipal
securities and tax-free loans.
Asset Quality
Non-performing assets as a percentage of total assets
remained relatively the same at .82% at December 31, 1997
compared to 0.77% at September 30, 1998. Non-performing assets
increased from $6.7 million at December 31, 1997 to $8.4 million
at September 30, 1998. The ratio of the allowance for loan
losses to non-performing assets was 85.53% at December 31, 1997
compared to 89.34% at September 30, 1998. Non-performing assets
are comprised of non-accrual loans, accruing loans that are 90
days or more past due, foreclosed real estate and restructured
loans.
Management believes the allowance for loan losses was
adequate to cover risks inherent in its loan portfolio at
September 30, 1998. However, there can be no assurance that the
Company will not have to increase its provision for loan losses
in the future as a result of changes in economic conditions or
for other reasons. Any such increase could adversely affect the
Company's results of operations.
Capital
The Company's Tier 1 capital to risk-weighted assets ratio
at September 30, 1998 was 15.38% compared to 17.56% at
December 31, 1997. These ratios far exceeded the Tier 1
regulatory capital requirement of 4.00%. The Company's total
capital to risk-weighted assets ratio at September 30, 1998 was
16.63% compared to 18.72% at December 31, 1997. These ratios
exceeded the total risk-based capital regulatory requirement of
8.00%. At September 30, 1998, the Company's leverage ratio was
10.04% versus 10.93% at December 31, 1997. The Company is
<PAGE 19> categorized as "well capitalized" under applicable
Federal regulations.
Liquidity
Financial institutions must maintain liquidity to meet day-
to-day requirements of depositors and borrowers, take advantage
of market opportunities, and provide a cushion against unforeseen
needs. Liquidity needs can be met by either reducing assets or
increasing liabilities. Sources of asset liquidity are provided
by securities, cash and amounts due from banks, interest-bearing
deposits with banks, and Federal funds sold.
These liquid assets totaled $508.3 million at September 30,
1998 compared to $234.7 million at December 31, 1997. Maturing
and repaying loans are another source of asset liquidity. At
September 30, 1998, the Company estimated that an additional
$32.4 million of loans will mature or reprice in the next six-
month period ended March 31, 1999.
Liability liquidity can be met by attracting deposits with
competitive rates, buying Federal funds or utilizing the
facilities of the Federal Reserve System or the FHLB System. The
Banks utilize a variety of these methods of liability liquidity.
At September 30, 1998, the Banks had approximately $265.8 million
in unused lines of credit available to it under informal
arrangements with correspondent banks compared to $225.7 million
at December 31, 1997. These lines of credit enable the Bank to
purchase funds for short-term needs at current market rates.
PAGE 20
<PAGE>
PART II
Item 1. Legal Proceedings - None
Item 2. Change in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders -
None
Item 5. Other Information
Year 2000 Computer Issues
The Year 2000 (Y2K) poses not just technology issues, but
provides an enterprise-wide challenge, not only for the Company,
but for all businesses. Senior management and the Board of
Directors of the Company have been actively involved in the
planning, allocating of resources and monitoring the progress to
evaluate and implement corrective actions to assure Y2K
readiness. The Company has named the Senior Vice President of
Operations as the Y2K officer to oversee the project. The Y2K
officer reports to the Board on a quarterly basis and to Senior
Management on a monthly basis. Remediation and testing is
underway to ensure that the Company's computer systems will
operate in the Year 2000. The Company's software systems are
products provided by software vendors, and are not developed in-
house. The Company has contacted and is working closely with its
vendors to ensure readiness. Many noncomputer systems include
embedded technology, such as micro controllers. The Company is
also reviewing our noncomputer systems looking for any that could
be affected by Y2K. As part of the planning process, the Company
is also developing contingency plans that will provide
alternative methods of doing business, should it be necessary.
The IBM AS400 computer processes the daily transactions and
is the recordkeeping system for our customer's loan and deposit
accounts and the Company's general ledger system. The Company's
IBM AS400 computer is Y2K compliant, and both the hardware and
software were tested and certified in July 1998. Another
important area is the Company's PC network. Throughout the year,
the Company has been upgrading or replacing PC's that are not Y2K
compliant. Testing is expected to be completed by December 31,
1998 on the Company's PC network and other systems that are vital
to the successful continuance of the Company's business.
The overall Y2K compliance plan consists of five phases:
awareness, assessment, plan development, testing and
implementation. Systems were also assigned a level of importance
to the daily functioning of the Company: mission critical, need
but not mission critical, and can use but can do without.
Awareness, assessment, and plan development are complete for
systems designated mission critical. Testing and implementation
<PAGE 21> are underway and expected to be completed by
December 31, 1998. For all other systems, testing and
implementation is expected to be completed by March 31, 1999.
The Company has experienced considerable growth in recent
years, which independent of the Y2K issue, has created the need
to upgrade some hardware and software. Therefore, it is
difficult to isolate expenses and capital investments that have
been implemented or accelerated for Y2K from normal business
replacement and time spent by the Company personnel working on
Y2K issues. Costs, to date which include capital expenditures,
are currently estimated at $55,000 (excluding personnel costs),
and are not considered material to any one fiscal period. The
Company has compiled an estimate of future remediation costs to
be $80,000. Should the Company have to resort to alternative
operating procedures due to major systems or communication
failures at the beginning of the Year 2000, the extra costs could
be material.
Three federal agencies share responsibility for supervising
efforts by banking subsidiaries regarding the Y2K date change.
The agencies are conducting special examinations to make sure
that the insured banking subsidiaries are taking the necessary
steps to get ready for Y2K and are closely monitoring their
progress in completing critical steps required by their Y2K
plans. The Company's progress and plan is subject to review and
examination by the Federal Reserve and OCC. Our banking
application software vendor is also subject to examination by
these agencies to evaluate their Y2K remediation process, the
results of which have been released to this Company for our
review.
The Company's banking subsidiaries have many customers and
through the use of questionnaires and our calling officers, these
banking subsidiaries are looking at their larger customers to
determine their potential Y2K risk. No individual customer is
significant enough to materially impact the financial position of
the Company. However, one concern is that the credit risk
associated with lending may increase to the extent that our
borrowers or their suppliers or clients may not adequately
address Y2K issues. As a result, problem loans and losses could
increase in the years following. Due to the uncertainties
involved, it is not possible to quantify potential losses due to
Y2K, if any, at this time.
Senior management has developed an outline for a contingency
plan to provide operating alternatives for continuation of
services to the Company's customers in the event of systems or
communication failures at the beginning of the Year 2000. Based
on preliminary planning during development of the contingency
plan, management believes that the Company will be able to
continue to operate in the Year 2000 even if some systems fail.
In a worst case scenario, due to the size of the Company, we
believe that we would be able to operate with all transactions
processed manually until normal operations could be restored.
<PAGE 22> This procedure could require changing of schedules and
significant hiring of temporary staff, which would increase cost
of operations. If this procedure were to continue for any
extended period of time, or if we ultimately had to change our
banking application software vendor, the cost could be material.
Management believes that adequate resources are available to
fund and address the Year 2000 issues and that the costs
associated with bringing the Company into compliance will not
have a material impact on the Company's financial statements.
However, with all remediation, testing and contingency plans
there is no guarantee that these steps will fully mitigate all
failures and problems. In addition, the Company relies on
various third party providers, such as telecommunications and
utility companies, where alternative sources or arrangements are
limited or unavailable. While the Company continues to address
Y2K issues, and work with our vendors and corporate customers to
identify, assess and control potential Y2K risks, the Company
does not manage these businesses and therefore, potential
uncertainties remain.
Branch Locations
On October 3, 1998, Berks County Bank opened its eighth full
service branch in Robesonia, Berks County. Berks County
purchased the land upon which it constructed its Robesonia
branch.
During 1997, Berks County purchased land for the
construction of its ninth full-service branch near Boyertown in
Douglas Township, Montgomery County. Construction of the branch
is to begin in early 1999 with an estimated completion date of
the second quarter of 1999.
On September 1, 1998, Main Street Bancorp, Inc. signed a
lease agreement for a full-service branch to be located at
3900 Hamilton Center, Allentown, Lehigh County. The Hamilton
Boulevard branch is expected to open in the second quarter of
1999. The lease expense in 1999 will be approximately $45,000.
On September 18, 1998, Berks County Bank announced that it
will open its second full service branch in Exeter Township,
Berks County. The new branch, located at 4001 Perkiomen Avenue,
is expected to open in early 1999. Berks has agreed to lease the
existing building for an initial term of 10 years. The lease
expense in 1999 will be approximately $60,000.
In addition to the de novo branches listed above and several
other de novo branches in the early discussion stages, the
Company is actively seeking to expand its market territory into
the surrounding counties. The method of expansion will be
additional de novo branches as well as possible branch
acquisitions from other banks. Such branch acquisitions may
include site acquisitions only with no accompanying deposit
transfer. <PAGE 23>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation of Main Street
Bancorp, Inc., incorporated herein by reference
to Exhibit 3.1 of the Registration Statement
No. 333-44697 on Form S-4 of the registrant.
3.1 Bylaws of Main Street Bancorp, Inc.,
incorporated herein by reference to Exhibit 3.2
of the Registration Statement No. 333-44697 on
Form S-4 of the registrant.
27. Financial Data Schedule.
(b) Reports on Form 8-K - None
PAGE 24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
MAIN STREET BANCORP, INC.
(Registrant)
November 6, 1998 /s/ Robert D. McHugh, Jr.
Robert D. McHugh, Jr.
Executive Vice President and
Treasurer
/s/ Donna L. Rickert
Donna L. Rickert
Senior Vice President and
Controller
(Principal Accounting Officer)
PAGE 25
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
3.1 Articles of Incorporation of Main Street Bancorp,
Inc., incorporated herein by reference to
Exhibit 3.1 of the Registration Statement No. 333-
44697 on Form S-4 of the registrant.
3.1 Bylaws of Main Street Bancorp, Inc., incorporated
herein by reference to Exhibit 3.2 of the
Registration Statement No. 333-44697 on Form S-4
of the registrant.
27. Financial Data Schedule. <PAGE 26>
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