SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A NO. 1
(X) Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for Quarterly period ended
June 30, 1999.
( ) Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from _______ to ________.
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 July 31, 1999
COMMON STOCK ($1.00 Par Value) 10,413,601
(Title of Class) (Outstanding Shares)
<PAGE 1>
MAIN STREET BANCORP, INC.
FORM 10-Q
For the Quarter Ended June 30, 1999
Contents
PART I FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of
June 30, 1999 and December 31,1998 4
Consolidated Statements of Income for
Three and Six Month Periods ended
June 30, 1999 and 1998 5
Consolidated Statement of Stockholders'
Equity for the Six Month Period
Ended June 30, 1999 6
Consolidated Statements of Cash Flows for
the Six Month Periods Ended June 30, 1999
and 1998 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 20
PART II OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security
Holders 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 24
<PAGE 2>
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 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>
MAIN STREET BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1999 1998
(In thousands, except share data)
<S> <C> <C>
Cash and due from banks $ 33,475 $ 28,710
Interest-bearing deposits with banks 3,437 336
Federal funds sold 470 470
Securities available for sale 394,551 534,526
Securities held to maturity, fair value June 30,
1999 $210,364; December 31, 1998 $25 222,364 25
Loans receivable, net of allowance for loan losses
June 30, 1999 $6,950; December 31, 1998 $7,222 579,882 533,395
Mortgages held for sale 4,757 5,069
Due from mortgage investors 5,702 14,567
Bank premises and equipment, net 31,594 25,717
Prepaid expenses and other assets 30,664 15,726
TOTAL ASSETS $1,306,896 $1,158,541
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand, non-interest bearing $ 106,862 $ 102,432
Demand, interest bearing 116,951 68,116
Savings 330,771 326,749
Time deposits 351,325 321,253
TOTAL DEPOSITS 905,909 818,550
Accrued interest payable and other liabilities 9,739 24,007
Other borrowed funds 218,712 86,072
Long-term debt 85,000 135,000
TOTAL LIABILITIES 1,219,360 1,063,629
Stockholders' equity:
Preferred stock, authorized and unissued
5,000,000 shares - -
Common stock, par value $1.00 per share;
authorized 50,000,000 shares; issued and outstanding
June 30, 1999 10,407,903 shares; December 31, 1998
10,388,443 shares 10,408 10,388
Surplus 64,259 64,134
Retained earnings 20,698 19,227
Accumulated other comprehensive income (7,829) 1,163
TOTAL STOCKHOLDERS' EQUITY 87,536 94,912
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,306,896 $1,158,541
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE 4>
MAIN STREET BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable, including fees $11,930 $11,178 $23,384 $21,760
Interest and dividends on securities:
Taxable 5,604 3,362 10,588 6,951
Tax-exempt 3,588 969 6,820 1,765
Other 9 18 18 29
Total interest income 21,131 15,527 40,810 30,505
Interest expense:
Deposits 8,109 6,409 15,809 12,423
Other borrowed funds 2,397 367 4,128 849
Long-term debt 1,342 739 2,975 1,490
Total interest expense 11,848 7,515 22,912 14,762
Net interest income 9,283 8,012 17,898 15,743
Provision for loan losses 300 250 600 485
Net interest income after
provision for loan losses 8,983 7,762 17,298 15,258
Other income:
Income from fiduciary activities 242 207 525 431
Customer service fees 795 638 1,457 1,212
Mortgage banking activities 243 449 699 811
Net realized gains (losses) on sale
of securities (76) 468 (78) 2,150
Other 99 83 285 175
Total other income 1,303 1,845 2,888 4,779
Other expenses:
Salaries and wages 3,726 2,402 6,701 4,686
Employee benefits 810 620 1,547 1,166
Occupancy 988 561 1,741 981
Equipment depreciation and maintenance 609 383 1,100 723
Merger expenses -- 1,963 -- 1,963
Other 3,189 1,820 5,379 3,472
Total other expenses 9,322 7,749 16,468 12,991
Income before income taxes 964 1,858 3,718 7,046
Federal income taxes (benefit) (688) 478 (665) 1,951
Net Income $ 1,652 $ 1,380 $ 4,383 $ 5,095
Basic earnings per share $ 0.16 $ 0.13 $ 0.42 $ 0.49
Diluted earnings per share $ 0.16 $ 0.13 $ 0.42 $ 0.48
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE 5>
MAIN STREET BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Number of Accumulated
Shares Other
Common Common Retained Comprehensive
Stock Stock Surplus Earnings Income Total
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 10,388,443 $10,388 $64,134 $19,227 $ 1,163 $94,912
Comprehensive income (loss)
Net income 4,383 4,383
Change in net unrealized gains
(losses) on securities
available for sale (8,992) (8,992)
Total comprehensive income (loss) (4,609)
Issuance of common stock upon
exercise of stock options 19,460 20 125 145
Cash dividends declared -- -- -- (2,912) -- (2,912)
Balance June 30, 1999 10,407,903 $10,408 $64,259 $20,698 $(7,829) $87,536
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE 6>
MAIN STREET BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Six Months Ended
June 30, 1999 June 30, 1998
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,383 $ 5,095
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Provision for loan and foreclosed
real estate losses 600 490
Provision for depreciation and
amortization 1,082 653
(Gain) Loss on sale of equipment
and foreclosed real estate (28) 34
Net realized (gain) loss on sale
of securities 78 (2,149)
Provision for deferred income
taxes (321) (119)
Proceeds from sale of mortgage
loans 54,271 61,775
Net (gain) loss on sale of
mortgage loans 223 (76)
Mortgage loans originated for sale (54,494) (61,698)
Net (amortization) of security
premiums and discounts 224 617
(Increase) decrease in:
Due from mortgage investors 8,865 (2,898)
Accrued interest receivable and
other assets (9,554) 626
Increase in accrued interest
payable and other liabilities 1,777 960
Net cash provided by operating
activities 7,106 3,310
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities
available for sale 34,238 7,094
Proceeds from maturities of and
principal repayments on
securities available for sale 22,675 25,851
Proceeds from maturities and calls
of securities held to maturity 65 4,850
Purchases of securities available
for sale (95,054) (41,863)
Purchases of securities held to
maturity (74,451) --
(Increase) Decrease in interest-
bearing deposits with banks (3,091) 142
<PAGE 7>
MAIN STREET BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)
(Increase) Decrease in federal
funds sold -- (6,400)
Loans made to customers, net of
principal collected (47,645) (41,955)
Proceeds from sale of third-party
dealer loan portfolio -- 6,367
Proceeds from sales of foreclosed
real estate 661 598
Proceeds from sales of bank premises
and equipment 9 3
Purchases of premises and equipment (6,980) (4,574)
Net cash used in investing
activities (169,573) (49,887)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings
deposits 57,287 46,349
Net increase in time deposits 30,072 25,395
Proceeds from (repayment of) other
borrowed funds 132,640 (20,254)
Proceeds from long term borrowings -- --
Principal payments of long-term
borrowings (50,000) (4,450)
Proceeds from exercise of stock
options 145 126
Cash in lieu of fractional shares -- (20)
Pre-merger stock transactions of
pooled entity -- 464
Cash dividends paid (2,912) (2,581)
Net cash provided by financing
activities 167,232 45,029
Increase (decrease) in cash
and due from banks 4,765 (1,548)
Cash and due from banks:
Beginning 28,710 24,918
Ending $ 33,475 $ 23,370
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash payments for:
Interest $ 21,529 $ 14,721
<PAGE 8>
Income taxes $ 1,360 $ 1,110
See Notes To Consolidated Financial Statements <PAGE 9>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
On May 1, 1998, the Company was formed upon the completion of a
merger of equals between BCB Financial Services Corporation
("BCB") and Heritage Bancorp, Inc. ("Heritage"). The Company
issued approximately 9,680,000 shares of common stock to the
stockholders of BCB and Heritage. BCB stockholders received
1.3335 shares of the Company's common stock for each outstanding
share and Heritage stockholders received 1.05 shares of the
Company's common stock for each outstanding share. Cash was paid
for fractional share interests. The merger was accounted for as
a pooling of interests by the Company. Merger costs of
approximately $1,963,000, consisting primarily of professional
fees and related transaction costs, have been expensed in
connection with the merger.
The unaudited consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, Main
Street Bank (the "Bank") and MBNK Investment Company. All
significant intercompany accounts and transactions have been
eliminated. On January 1, 1999, the Company combined its two
bank subsidiaries, Berks County Bank and Heritage Bank, to form
the Bank. Berks County Bank and Heritage Bank are now operating
divisions of the Bank.
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 six-month period ended June 30, 1999 are
not necessarily indicative of the results that may be expected
for the year ended December 31, 1999.
EARNINGS PER SHARE
The following table sets forth the computations of basic and
diluted earnings per share:
<PAGE 10>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
<S> <C> <C> <C> <C>
Numerator, net income $ 1,652,000 $ 1,380,000 $ 4,383,000 $ 5,095,000
Denominator:
Denominator for basic earnings per share,
weighted average shares 10,404,802 10,359,091 10,399,650 10,340,160
Effect of dilutive securities, stock options 53,782 165,286 171,213 159,163
Denominator for diluted earnings per share,
weighted average shares and assumed
conversions 10,458,584 10,524,377 10,570,863 10,499,323
Basic earnings per common share $ 0.16 $ 0.13 $ 0.42 $ 0.49
Diluted earnings per common share $ 0.16 $ 0.13 $ 0.42 $ 0.48
</TABLE>
COMPREHENSIVE INCOME
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:
For the Six Months Ended
June 30, 1999 June 30, 1998
Unrealized holding gains (losses)
arising during the period:
Before tax amount $(13,911) $2,586
Tax (expense) benefit 4,868 (879)
Net of tax amount (9,043) 1,707
Less reclassification adjustment
for gains (losses) included in
net income:
Before tax amount (78) 222
Tax (expense) benefit 27 (75)
Net of tax amount (51) 147
Net unrealized gains (losses):
Before tax amount (13,833) 2,364
Tax (expense) benefit 4,841 (804)
Net of tax amount $ (8,992) $1,560
OTHER EXPENSES
The following represents the most significant categories of other
expenses for the three and six months ended June 30:
<PAGE 11>
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
(In Thousands)
Advertising $ 813 $ 296 $1,113 $ 568
Data processing and MAC fees 401 289 729 553
Office supplies and expenses 505 302 937 585
Professional fees 402 401 192 205
Other Service Fees 336 25 391 50
All other expenses 732 507 2,017 1,511
$3,189 $1,820 $5,379 $3,472
ACCOUNTING POLICIES
In June 1999, the Financial Accounting Standards Board
issued Statement No. 137, which delayed the implementation date
of Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities", which now becomes effective for the Bank
January 1, 2001. Management expects this Statement will have no
impact on the Bank, as presently no derivative instruments are
held.
SECURITIES
The Company transferred securities with an amortized cost of
$125.8 million from available to sale to held to maturity during
the second quarter of 1999. The primary reason for the transfer
of the securities was due to tax planning strategies. In
connection with this strategy, management re-evaluated its
intention with respect to its available for sale portfolio and
has concluded that the securities will be held to maturity. The
Company transferred all these securities at amortized cost versus
fair value due to the immateriality of the difference between the
two on the date of transfer would have no impact on earnings or
earnings per share.
NEW BRANCH OPENINGS
As of June 30, 1999, the Company has opened 14 of the 23
branches announced last year. These 14 branches have opened more
that 7,000 new accounts and account for 35% of the Company's
deposit growth in the first six months.
SUBSEQUENT EVENT
Effective August 4, 1999, Allen E. Kiefer resigned as
President of the Company. Mr. Kiefer resigned for personal
reasons and to pursue other opportunities. Mr. Kiefer served as
President of the Company since May 1998 when the Company was
formed upon the consolidation of BCB Financial Services
Corporation and Heritage Bancorp, Inc. Mr. Kiefer will continue
to serve as a member of Main Street Bancorp's Board of Directors.
<PAGE 12>
The Company expects to incur a one-time, pretax charge of
approximately $1.5 million in the third quarter for change of
control and severance payments the Company will be obligated to
pay to Mr. Kiefer under agreements he entered into with the
former Heritage Bancorp in 1997. The after-tax effect will be
approximately $1.0 million.
<PAGE 13>
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") with a primary focus on an analysis
of operating results.
FINANCIAL CONDITION HIGHLIGHTS
Total assets increased to $1.31 billion at June 30, 1999,
compared to $1.16 billion at December 31, 1998, an increase of
$150.0 million, or 12.9%. This increase was primarily reflected
in securities, loans and bank premises and equipment.
Securities increased $82.3 million, or 15.4%, to $616.9
million at June 30, 1999 when compared to $534.6 million at
December 31, 1998. The increase is due to the purchase of $169.5
million in securities, offset by the securities sales and
maturities of $57.0 million. The Company elected to increase its
securities portfolio as part of a program to leverage the balance
sheet and increase earnings by offsetting operating expenses
related to the branch expansion program. The majority of the
securities were purchased in the first quarter of 1999 and were
funded primarily with short term Federal Home Loan Bank advances.
The Company plans to replace most of these short-term borrowings
with lower-cost deposits expected to be gathered from the branch
expansion plans. The strategic plan is also to replace long-term
securities with new loan volume as it is generated in the new
markets. Nearly the entire bond securities portfolio is rated
AAA by either Standard & Poor or Moodys. There were no
derivatives held at June 30, 1999 and no investments in hedge
funds. Securities held were primarily government agencies,
municipalities, or bank stocks at June 30, 1999.
The Company transferred securities with an amortized cost of
$125.8 million from available to sale to held to maturity during
the second quarter of 1999. The primary reason for the transfer
of the securities was due to tax planning strategies. In
connection with this strategy, management re-evaluated its
intention with respect to its available for sale portfolio and
has concluded that the securities will be held to maturity. The
Company transferred all these securities at amortized cost versus
fair value due to the immateriality of the difference between the
two on the date of transfer would have no impact on earnings or
earnings per share.
Loans receivable, net of allowance for loan losses of $7.0
million at June 30, 1999 and $7.2 million at December 31, 1998,
increased to $579.9 million at June 30, 1999 from $533.4 million
at December 31, 1998. The increase of $46.5 million, or 8.7%,
was primarily due to an increase in commercial loans. During the
<PAGE 14> first six months of 1999, the Company provided for $0.6
million in loan losses. See "Provision for Loan Losses" for a
further discussion of the provision.
Amounts due from mortgage investors decreased from $14.6
million at December 31, 1998 to $5.7 million at June 30, 1999.
These amounts represent loans originated by the Bank 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 $25.7 million at December 31, 1998
to $31.6 million at June 30, 1999. This increase was
attributable to the purchase of various furniture, fixtures and
equipment for the twenty-three branches expected to open by the
end of 1999.
Total deposits, the primary source of funds, increased $87.3
million to $905.9 million at June 30, 1999 compared to $818.6
million at December 31, 1998, an increase of 10.7%. The increase
in deposits was primarily in interest-bearing checking and
savings. Interest-bearing checking and savings increased from
$394.9 million at December 31, 1998 to $447.7 million at June 30,
1999, an increase of $52.8 million, or 13.4%. Total time
deposits increased $30.0 million, or 9.3%, to $351.3 million at
June 30, 1999 million from $321.3 million at December 31, 1998.
Other liabilities decreased $14.3 million, or 59.6%, from
$24.0 million at December 31, 1998 to $9.7 million at June 30,
1999. At December 31, 1998, the Company was required to record
$11.8 million in securities that were traded but had not yet
settled.
Other borrowed funds and long-term debt increased $82.6
million, or 37.4%, from $221.1 million at December 31, 1998 to
$303.7 million at June 30, 1999. The increase in other borrowed
funds and long-term debt was used to fund security purchases. As
mentioned above, the Company elected to purchase securities ahead
of the in-flow of deposits expected to occur in 1999 from the
addition of 23 new branches, because, in 1999, deposit growth is
expected to outpace loan growth.
Stockholders' equity decreased $7.4 million, or 7.8%, from
$94.9 million at December 31, 1998 to $87.5 million at June 30,
1999. The decrease was primarily due to the change in net
unrealized losses on securities available for sale. At
December 31, 1998, the Company had $1.2 million appreciation and
at June 30, 1999, the Company had $7.8 million depreciation on
securities available for sale. The change occurred because of
the general increase in interest rates during that period.
Should interest rates increase in the future, stockholders'
equity could further decrease due to further depreciation on the
securities available for sale. Should interest rates decline in
<PAGE 15> future periods, stockholders' equity could increase as
a result of appreciation on securities available for sale.
RESULTS OF OPERATIONS
Overview
Net income for the second quarter of 1999 was $1.7 million
compared to $1.4 million for the second quarter of 1998, an
increase of 21.4%. On a per share basis, basic and diluted
earnings were $0.16 and $0.13 for the second quarter of 1999 and
1998, respectively. Earnings for the first six months of 1999
were $4.4 million compared to $5.1 million a year earlier. Basic
earnings per share was $0.42 and 0.49 for the first half of 1999
and 1998, respectively. Diluted earnings per share was $0.42 and
0.48 for the first six months of 1999 and 1998, respectively.
The first six months of 1999 and 1998 had several nonrecurring
items, which are explained in greater detail under "Other
Expenses."
Net Interest Income
Net interest income is the difference between interest
income on interest-earning assets and interest expense on
interest-bearing liabilities. For the second quarter of 1999,
net interest income, calculated on a tax-equivalent basis,
increased $2.1 million, or 24.7%, to $10.6 million from $8.5
million in the second quarter of 1998. For the first six months
of 1999, net interest income, calculated on a tax-equivalent
basis, was $20.6 million compared to $16.6 million for the first
six months of 1998, an increase of $4.0 million, or 24.1%. The
increase in net interest income was primarily due to an increase
in average interest-earning assets of $382.4 million, or 48.2%,
for the first six months of 1999 compared to 1998 and an increase
of $411.4 million, or 51.1%, for the second quarter of 1999
compared to 1998. The increase in assets occurred mostly in
securities. Average securities increased from $285.5 million at
June 30, 1998 to $607.8 million at June 30, 1999 for the six
month period and increased from $285.7 million at the end of the
second quarter of 1998 to $637.1 million at the end of the second
quarter of 1999. As mentioned above, the Company elected to
purchase securities with FHLB borrowings and plans to use the
deposits that will be received from the new branch openings to
replace overnight borrowings.
Average interest-bearing liabilities increased $407.0
million to $1.08 billion for the second quarter of 1999 compared
to $673.0 million for the second quarter of 1998 and increased
$388.6 million to $1.05 billion for the first six months of 1999
compared to $661.4 million for the first six months of 1998.
For the second quarter of 1999, the average rate paid on
interest-bearing liabilities was 4.38% compared to 4.48% for the
second quarter of 1998. For the first six months of 1999, the
average rate paid on interest-bearing liabilities was 4.41%
<PAGE 16> compared to 4.50% for the first six months of 1998. The
decrease was mostly due to the lowering of the money market rate
to 3.50% APY (annual percentage yield) and to an almost 50 basis
point reduction in the rates paid on other borrowed funds and
long-term debt.
Net interest margin decreased 71 basis points from 4.22% in
the second quarter of 1998 to 3.51% in the second quarter of
1999, calculated on a tax-equivalent basis. Net interest margin
decreased 68 basis points from 4.21% for the first six months of
1998 to 3.53% for the first six months 1999, calculated on a tax-
equivalent basis. Net interest margin primarily decreased due
to a decrease in the average yield earned on securities that
resulted from the substantial increase in securities in 1998 and
1999 at yields below the average earning asset yield and also to
a decrease in the average yield earned on loans due to the prime
rate dropping 75 basis points in late 1998.
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
losses is determined by management based upon its evaluation of
the known as well as inherent risks within the Bank's 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 $0.6 million for the first six months of 1999 compared
to $0.5 million for the first six months of 1998. The provision
for loan losses was $0.3 million for the second quarter of 1999
and 1998. The allowance for loan losses to non-performing loans
was 110.3% at June 30, 1999 compared to 86.7% at December 31,
1998. See further discussion under "Asset Quality".
Other Income
Other income decreased $1.9 million, or 39.6%, from $4.8
million for the first six months of 1998 to $2.9 million for the
first six months of 1999. Other income decreased $0.5 million,
or 27.7%, from $1.8 million in the second quarter of 1998 to $1.3
million in the second quarter of 1999. The decrease in other
income for the first six months and second quarter of 1999 was
mostly due to the difference in realized gains and losses on
sales of securities and realized losses on mortgages held for
sale, which are included in income from mortgage banking
activities. Excluding these securities and mortgage held for sale
gains and losses, other income increased $0.6 million, or 23.1%,
for the first six months of 1999 compared to 1998 and increased
$0.2 million, or 14.3%, in the second quarter of 1999 compared to
the same period in 1998. For the first six months of 1998, the
Company realized gains on sales of securities of $2.2 million
compared to realized losses on sales of securities of $78,000 for
<PAGE 17> the first six months of 1999. In the second quarter of
1998, the Company had $0.5 million in realized gains on sales of
securities compared to a $76,000 realized loss in the second
quarter of 1999. The reason for the 1998 realized gains on
securities was to sell some of its available-for-sale equity
securities of Pennsylvania banks in order to provide additional
revenue to help offset certain one-time expenses that occurred in
the second quarter of 1998. These one-time expenses included
$1.9 million of merger related costs, and approximately $0.2
million of facilities expenses related to the acquisition and
relocation to the Company's new office at 601 Penn Street,
Reading, PA.
Income from mortgage banking activities decreased $0.1
million, or 12.5%, from $0.8 million during the first six months
of 1998 to $0.7 million for the first six months of 1998 and
decreased $0.2 million from $0.4 million in the second quarter of
1998 to $0.2 million in the second quarter of 1999. The decrease
was as a result of the accounting treatment for mortgages held
sale. Generally acceptable accounting principles require
companies to mark mortgages held for sale at the lower of cost or
market and therefore, the resulting gains or losses are a
function of interest rate movements. This resulted in a $137,000
loss that was directly reported on the income statement in the
second quarter of 1999. Also in the second quarter of 1999, the
Company reversed an $85,000 gain on mortgages held for sale at
December 31, 1998. The Company did not have any mortgages
classified as held for sale at June 30, 1998 and therefore did
not have any losses reported for the six months or quarter ended
June 30, 1998.
Customer service fees increased $0.3 million, or 25.0%, to
$1.5 million during the first six months of 1999 compared to $1.2
million for the first six months of 1998. For the second quarter
of 1999, customer service fees increased $0.2 million, or 33.3%,
to $0.8 million compared to $0.6 million for the second quarter
of 1998. Customer service fees consist of charges for overdrafts
and NSF (non-sufficient funds), safe deposit rentals, ATM and
other services that are primary deposit driven. The reason for
the increase was the increase in deposit accounts.
Other Expenses
Total other expenses increased $3.5 million, or 26.9% to
$16.5 million for the first six months of 1999 compared to $13.0
million for the first six months of 1998. Total other expenses
increased $1.6 million, or 20.8%, to $9.3 million in the second
quarter of 1999 compared to $7.7 million in the second quarter of
1998.
Salaries, wages and employee benefits increased $2.3
million, or 39.0%, from $5.9 million for the six months ended
June 30, 1998, to $8.2 million for the first six months of 1999.
In the second quarter of 1999, salaries, wages and employee
<PAGE 18> benefits increased to $4.5 million from $3.0 million in
the second quarter of 1998, an increase of 50.0%. Salaries,
wages and employee benefits increased due to the opening and
hiring of staff at fourteen new branch locations. Twelve of
these branches opened during the second quarter of 1999. Also
during the second quarter of 1999, the Company incurred a
severance pay-out to a senior management member that was
approximately $300,000.
Occupancy expense increased $0.7 million, or 70.00%, to $1.7
million for the first six months of 1999 compared to $1.0 million
for the first six months of 1998. For the second quarter of
1999, occupancy expense was $1.0 million compared to $0.6 million
for the second quarter of 1998, an increase of $0.4 million, or
66.6%. The increase was due to lease payments commencing on 17
branches on March 1, 1999 and also due to expenses related to
occupying the 14 new branches - such as utilities, maintenance,
etc.
For the first six months of 1998 and the second quarter of
1998, the Company incurred $2.0 million in one-time merger
related costs. This resulted from the May 1, 1998 merger of the
Company's predecessors as fully described in the Notes to the
Financial Statements.
Other operating expenses increased $1.9 million, or 54.3%,
to $5.4 million for the first six months of 1999, compared to
$3.5 million for the first six months of 1998. For the second
quarter of 1999, other operating expenses increased by $1.4
million, or 77.7%, to $3.2 million from $1.8 million a year
earlier. The increase in other expenses occurred in advertising,
data processing and MAC fees, office supplies and expenses, and
other service fees.
Advertising increased $0.5 million to $1.1 million for the
first six months of 1999 compared to $0.6 million for the first
six months of 1998 and increased $517,000 to $813,000 in the
second quarter of 1999 compared to $296,000 in the second quarter
of 1998. The increase from last year was due to advertising and
marketing in conjunction with the opening of the 14 new branches
that opened from the end of March through the end of June.
Approximately half of the increases are one-time expenses
directly connected to opening the branches.
Data processing and MAC fees increased $176,000, or 31.8%,
from $553,000 in the first six months of 1998 to $729,000 in the
first six months of 1999. For the second quarter of 1999, data
processing and MAC fees increased $112,000, or 38.8%, to $401,000
from $289,000 in the second quarter in 1998. The increase was a
result of increased volume in credit card processing/ATM
processing due to the 14 new branches.
Office supplies and expenses increased $352,000, or 60.2%,
to $937,000 for the first six months of 1999 compared to $585,000
<PAGE 19> for the same period in 1998 and increased $203,000, or
67.2%, to $505,000 in the second quarter of 1999 from $302,000 in
the second quarter of 1998. The increase was due to supplies
necessary to support the Company's growth and the 14 new branches
as well as an increase in the postage rate.
Other service fees increased $341,000, or 682.0%, to
$391,000 for the first six months of 1999 compared to $50,000 for
the first six months of 1998. For the second quarter of 1999,
other service fees increased $311,000 to $336,000 from $25,000
reported for the same period in 1998. In May of 1999, the
Company elected to prepay $45 million in FHLB borrowings and
incur a prepayment penalty of $300,000. The reason for the
prepayment was that the Bank would generate significant deposit
growth in the upcoming months and there would be significant
earnings benefit to prepay the debt and replace the funds with
lower cost deposits. The Company expects this non-recurring
prepayment penalty to be earned back before December 31, 1999.
Federal Income Taxes
The provision for federal income taxes was a ($665,000)
benefit for the first six months of 1999 compared to $2.0 million
expense for the first six months of 1998. For the second quarter
of 1999, the provision for federal income taxes was a ($688,000)
benefit compared to $478,000 expense for the second quarter of
1998. The tax benefit in 1999 resulted from higher level of
tax-exempt interest income earned on bank-qualified municipal
securities and tax-free loans compared to pretax income. This is
expected to occur through the remainder of 1999.
Asset Quality
Non-performing assets as a percentage of total assets
decreased from 0.75% at December 31, 1998 to 0.48% at June 30,
1999. Non-performing assets decreased from $8.7 million at
December 31, 1998 to $6.3 million at June 30, 1999. During the
second quarter of 1999, the Company sold $1.6 million of non-
performing loans. This temporarily boosted the charge-offs but
immediately improved the overall loan portfolio quality
measurements. Another benefit of the loan sale is that the
Company now has $1.6 million that can be deployed into an earning
asset, thereby mitigating the impact of the one-time charge-off
associated with this loan sale. The ratio of the allowance for
loan losses to non-performing loans was 86.7% at December 31,
1998 and increased to 110.3% at June 30, 1999. Non-performing
loans are comprised of non-accrual loans, accruing loans that are
90 days or more past due and restructured loans.
Management believes the allowance for loan losses was
adequate to cover risks inherent in its loan portfolio at
June 30, 1999. 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
<PAGE 20> 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 June 30, 1999 was 13.12% compared to 14.83% at December 31,
1998. These ratios far exceeded the Tier 1 regulatory capital
requirement of 4.00%. The Company's total capital to risk-
weighted assets ratio at June 30, 1999 was 14.08% compared to
15.97% at December 31, 1998. These ratios exceeded the total
risk-based capital regulatory requirement of 8.00%. At June 30,
1999, the Company's leverage ratio was 7.42% versus 8.70% at
December 31, 1998. The Company is 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 available-for-sale securities, cash and amounts due from
banks, interest-bearing deposits with banks, and Federal funds
sold.
These liquid assets totaled $431.9 million at June 30, 1999
compared to $564.0 million at December 31, 1998. Maturing and
repaying loans are another source of asset liquidity. At
June 30, 1999, the Company estimated that an additional $ 105.9
million of loans will mature or reprice in the next six-month
period ended December 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
Bank utilizes a variety of these methods of liability liquidity.
At June 30, 1999, the Bank had approximately $75.7 million in
unused lines of credit available to it under informal
arrangements with correspondent banks compared to $152.2 million
at December 31, 1998. These lines of credit enable the Bank to
purchase funds for short-term needs at current market rates.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
Please refer to the annual report to shareholders on
Form 10-K for December 31, 1998. There have been no significant
changes regarding market risk since that date.
<PAGE 21>
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
The 1999 Annual Meeting of Shareholders ( the "Meeting") of
the Company was held on April 14, 1999. Notice of the Meeting
was mailed to shareholders on or about March 5, 1999.
The Meeting was held for the following purposes:
1. To elect four Class 1 directors to hold office for
three years from the date of election and until their
successors are elected and qualified (Matter No.1);
2. To ratify the appointment by the Company's Board of
Directors of Beard & Company, Inc., as the Company's
independent auditors for the fiscal year ending
December 31, 1999 ( Matter No. 2).
There was no solicitation in opposition to the nominees of
the Board of Directors. All nominees of the Board of Directors
were elected. The number of votes cast for or against, as well
as the number of abstentions for each of the nominees for
election to the Board of Directors were as follows:
Abstentions and
Nominee For Against Broker Non-Votes
Richard D. Biever 8,291,240 71,445 28,881
Edward J. Edwards 8,248,886 113,819 28,861
Richard T. Fenstermacher 8,291,102 71,603 28,861
Ivan H. Gordon 8,197,753 164,952 28,861
Matter No. 2 was approved by shareholders at the Meeting.
The votes cast for this Matter were as follows:
Abstentions and
For Against Broker Non-Votes
8,291,403 37,897 62,266
<PAGE 22>
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 and
Chief Information Officer 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 have been completed 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 reviewing our noncomputer systems,
looking for any that could be affected by Y2K. As part of the
planning process, the Company has also developed 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
operating software were tested in July of 1998. The banking
software package, Peerless 21, was tested successfully for Y2K
compliance by December 31, 1998. Another important area is the
Company's PC network. The Company has upgraded or replaced PC's
that are not Y2K compliant. Testing was complete 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. All
five phases are complete for all systems.
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 $70,000 (excluding personnel costs),
<PAGE 23> 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 banks regarding the Y2K date change. The agencies are
conducting special examinations to make sure that the insured
banks and savings associations 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. 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 bank subsidiary has many customers and through
the use of questionnaires and our calling officers, the Company
is looking at our 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 association 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.
The Company continues to be active in the Y2K Public
Awareness Program. The Company is promoting the preparedness of
the financial industry for the Year 2000. The Company is
communicating with our customers that there is no safer place to
keep their money than in a federally insured deposit account with
our bank subsidiary. The Company is educating the staff and
customers on the appropriate action and security procedures to
take regarding Y2K criminal activity.
Senior management has developed 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. Every significant
banking process has a detailed contingency plan which will be
tested during the third quarter of 1999. Based on 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 in a manual mode until
normal operations could be restored. 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
<PAGE 24> 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.
Subsequent Event
Effective August 4, 1999, Allen E. Kiefer resigned as
President of the Company. Mr. Kiefer resigned for personal
reasons and to pursue other opportunities. Mr. Kiefer served as
President of the Company since May 1998 when the Company was
formed upon the consolidation of BCB Financial Services
Corporation and Heritage Bancorp, Inc. Mr. Kiefer will continue
to serve as a member of Main Street Bancorp's Board of Directors.
The Company expects to incur a one-time, pretax charge of
approximately $1.5 million in the third quarter for change of
control and severance payments the Company will be obligated to
pay to Mr. Kiefer under agreements he entered into with the
former Heritage Bancorp in 1997. The after-tax effect will be
approximately $1.0 million.
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.
3.2 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 25>
<PAGE 26>
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)
September 20, 1999 /s/ Nelson R. Oswald
Nelson R. Oswald,
Chairman, President and Chief
Executive Officer
/s/ Donna L. Rickert
Donna L. Rickert,
Senior Vice President and
Controller (Principal Accounting
Officer)
<PAGE 27>
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.
3.2 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 28>
