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
March 31, 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 ___
As of April 30, 1999
COMMON STOCK ($1.00 Par Value) 10,404,449
(Title of Class) (Outstanding Shares)
<PAGE>
MAIN STREET BANCORP, INC.
FORM 10-Q
For the Quarter Ended March 31, 1999
Contents
Page No.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of
March 31, 1999 and December 31,1998 2
Consolidated Statements of Income for
Three Month Periods ended March 31, 1999
and 1998 4
Consolidated Statement of Stockholders'
Equity for the Three-Month Period Ended
March 31, 1999 6
Consolidated Statements of Cash Flows for
the Three-Month Periods Ended March 31,
1999 and 1998 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security
Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 20
<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 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 1
<PAGE>
MAIN STREET BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, December 31,
1999 1998
(In thousands,
except share data)
ASSETS
Cash and due from banks $ 25,632 $ 28,710
Interest-bearing deposits with banks 700 336
Federal funds sold 470 470
Securities available for sale 571,382 534,526
Securities held to maturity, fair
value March 31, 1999 $72,094;
December 31, 1998 $25 74,390 25
Loans receivable, net of allowance
for loan losses March 31, 1999
$7,252; December 31, 1998 $7,222 559,935 533,395
Mortgages held for sale 5,122 5,069
Due from mortgage investors 3,995 14,567
Bank premises and equipment, net 28,072 25,717
Prepaid expenses and other assets 20,975 15,726
TOTAL ASSETS $1,290,673 $1,158,541
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand, non-interest bearing $ 100,226 $ 102,432
Demand, interest bearing 93,961 68,116
Savings 327,651 326,749
Time deposits 344,234 321,253
TOTAL DEPOSITS 866,072 818,550
Accrued interest payable and
other liabilities 11,794 24,007
Other borrowed funds 174,896 86,072
Long-term debt 145,000 135,000
TOTAL LIABILITIES 1,197,762 1,063,629
Stockholders' equity:
Common stock, par value $1.00 per
share; authorized 50,000,000
shares; issued and outstanding
March 31, 1999 10,397,360
shares; December 31, 1998
10,388,443 shares 10,397 10,388
Surplus 64,182 64,134
Retained earnings 20,503 19,227
Accumulated other comprehensive <PAGE 2>
income (2,171) 1,163
TOTAL STOCKHOLDERS' EQUITY 92,911 94,912
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,290,673 $1,158,541
See Notes to Consolidated Financial Statements
PAGE 3
<PAGE>
MAIN STREET BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For the Three Months Ended
March 31, 1999 March 31, 1998
(In thousands,
except per share data)
Interest income:
Loan receivable, including fees $11,454 $10,582
Interest and dividends on
securities:
Taxable 4,984 3,589
Tax-exempt 3,232 796
Other 9 11
Total interest income 19,679 14,978
Interest expense:
Deposits 7,700 6,014
Other borrowed funds 1,731 482
Long-term debt 1,633 751
Total interest expense 11,064 7,247
Net interest income 8,615 7,731
Provision for loan losses 300 235
Net interest income after
provision for loan losses 8,315 7,496
Other income:
Income from fiduciary activities 283 224
Customer service fees 662 574
Mortgage banking activities 456 362
Net realized gains (losses) on
sale of securities (2) 1,682
Other 186 92
Total other income 1,585 2,934
Other expenses:
Salaries and wages 2,975 2,284
Employee benefits 737 546
Occupancy 753 420
Equipment depreciation and
maintenance 491 340
Other 2,190 1,652
Total other expenses 7,146 5,242
Income before income taxes 2,754 5,188
Federal income taxes 23 1,473
<PAGE 4>
Net Income $ 2,731 $ 3,715
Basic earnings per share $ 0.26 $ 0.36
Diluted earnings per share $ 0.26 $ 0.35
See Notes to Consolidated Financial Statements
PAGE 5
<PAGE>
MAIN STREET BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
Number of Accumulated
Shares Other
Common Common Retained Comprehensive
Stock Stock Surplus Earnings Income Total
<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 - - - -
Net income - - - 2,731 - 2,731
Change in net
unrealized gains
(losses) on
securities available
for sale - - - - (3,334) (3,334)
Total comprehensive
income (603)
Issuance of common stock
upon exercise of stock
options 8,917 9 48 - - 57
Cash dividends declared -- -- -- (1,455) -- (1,455)
Balance March 31, 1999 $10,397,360 $10,397 $64,182 $20,503 $(2,171) $92,911
</TABLE>
See Notes to Consolidated Financial Statements
PAGE 6
<PAGE>
MAIN STREET BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Three Months Ended
March 31, 1999 March 31,1998
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,731 $ 3,715
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Provision for loan and
foreclosed real estate losses 300 258
Provision for depreciation and
amortization 458 309
(Gain) Loss on sale of equipment
and foreclosed real estate 17 (9)
Net realized (gain) loss on sale
of securities 2 (1,682)
Provision for deferred income
taxes -- (119)
Proceeds from sale of mortgage
loans 27,160 21,903
Net (gain) loss on sale of
mortgage loans (1) (23)
Mortgage loans originated for
sale (27,159) (21,877)
Net (amortization) of security
premiums and discounts 190 253
(Increase) decrease in:
Due from mortgage investors 10,572 (1,831)
Accrued interest receivable
and other assets (3,417) 1,207
Increase in accrued interest
payable and other liabilities 440 1,302
Net cash provided by
operating activities 11,293 3,406
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities
available for sale 16,549 3,364
Proceeds from maturities of and
principal repayments on
securities available for sale 13,657 11,583
Proceeds from maturities and
calls of securities held to
maturity -- 4,250
Purchases of securities available
for sale (89,531) (15,992)
Purchases of securities held to <PAGE 7>
maturity (69,797) (13,184)
(Increase) Decrease in interest-
bearing deposits with banks (364) 141
(Increase) Decrease in federal
funds sold -- --
Loans made to customers, net of
principal collected (27,230) (28,143)
Proceeds from sales of
foreclosed real estate 222 313
Proceeds from sales of bank
premises and equipment 8 --
Purchases of premises and
equipment (2,833) (3,315)
Net cash used in
investing activities (159,319) (40,983)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and
savings deposits 24,541 24,991
Net increase in time deposits 22,981 10,029
Proceeds from (repayment of)
other borrowed funds 88,824 2,737
Proceeds from long term borrowings 15,000 --
Principal payments of long-term
borrowings (5,000) --
Proceeds from exercise of stock
options 57 --
Pre-merger stock transactions of
pooled entity -- 327
Cash dividends paid (1,455) (1,225)
Net cash provided by
financing activities 144,948 36,859
Decrease in cash and due from
banks (3,078) (718)
Cash and due from banks:
Beginning 28,710 24,918
Ending $ 25,632 $ 24,200
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash payments for:
Interest $ 10,579 $ 7,344
Income taxes $ 500 $ 1,110
See Notes To Consolidated Financial Statements
PAGE 8
<PAGE>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL 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.
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 three-month period ended March 31, 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:
Three Months Ended
March 31, 1999 March 31, 1998
Numerator, net income $ 2,731,000 $ 3,715,000
Denominator:
Denominator for basic earnings
per share, weighted average
shares 10,394,441 10,321,231
Effect of dilutive securities,
stock options 289,949 153,038
<PAGE 9>
Denominator for diluted
earnings per share,
weighted average shares
and assumed conversions 10,684,390 10,474,269
Basic earnings per common
share $ 0.26 $ 0.36
Diluted earnings per common
share $ 0.26 $ 0.35
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 Three Months Ended
March 31, 1999 March 31, 1998
Unrealized holding gains (losses)
arising during the period:
Before tax amount $(5,131) $(320)
Tax (expense) benefit 1,795 109
Net of tax amount (3,336) (211)
Less reclassification adjustment
for gains (losses) included
in net income:
Before tax amount (2) --
Tax (expense) benefit -- --
Net of tax amount (2) --
Net unrealized gains (losses):
Before tax amount (5,129) (320)
Tax (expense) benefit 1,795 109
Net of tax amount $(3,334) $(211)
OTHER EXPENSES
The following represents the most significant categories of other
expenses for the three months ended March 31:
1999 1998
(In Thousands)
Advertising $ 300 $ 272
Data processing and MAC fees 328 264
Office supplies and expenses 432 283
Professional fees 210 196
All other expenses 920 637
$2,190 $1,652
<PAGE 10>
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 Bank
January 1, 2000. Management expects this Statement will have no
impact on the Bank, as presently no derivative instruments are
held.
PAGE 11
<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") with a primary focus on an analysis
of operating results.
FINANCIAL CONDITION HIGHLIGHTS
Total assets increased to $1.29 billion at March 31,
1999, compared to $1.16 billion at December 31, 1998, an increase
of $130.0 million, or 11.2%. This increase was primarily
reflected in securities and deposits.
Securities increased $111.2 million, or 20.8%, to
$645.8 million at March 31, 1999 when compared to $534.6 million
at December 31, 1998. The increase is due to the purchase of
$159.3 million in securities, offset by the securities sales and
maturities of $30.2 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 gathered from branch expansion plans.
Nearly the entire bond securities portfolio is rated AAA by
either Standard & Poor or Moodys. There were no derivatives held
at March 31, 1999 and no investments in hedge funds. Securities
held were primarily government agencies, municipalities, or bank
stocks at March 31, 1999.
Loans receivable, net of allowance for loan losses of
$7.3 million at March 31, 1999 and $7.2 million at December 31,
1998, increased to $559.9 million at March 31, 1999 from
$533.4 million at December 31, 1998. The increase of
$26.5 million, or 5.0%, was primarily due to an increase in
commercial loans. During the first quarter of 1999, the Company
provided for $0.3 million in loan losses. See "Provision for
Loan Losses" for a further discussion of the increase.
Amounts due from mortgage investors decreased from
$14.6 million at December 31, 1998 to $4.0 million at March 31,
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 $28.1 million at March 31, 1999. This increase was mostly
attributable to the purchase of various furniture, fixtures and
equipment for the twenty-three branches expected to open by the
end of the third quarter of 1999. <PAGE 12>
Total deposits, the primary source of funds, increased
$47.5 million to $866.1 million at March 31, 1999 compared to
$818.6 million at December 31, 1998, an increase of 5.8%. 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 $421.6 million at
March 31, 1999, an increase of $26.7 million, or 6.8%. Total
time deposits increased $22.9 million, or 7.1%, to $344.2 million
at March 31, 1999 compared to $321.3 million at December 31,
1998.
Other liabilities decreased $12.2 million, or 50.8%,
from $24.0 million at December 31, 1998 to $11.8 million at
March 31, 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
$98.8 million, or 44.7%, from $221.1 million at December 31, 1998
to $319.9 million at March 31, 1999. The increase in other
borrowed funds and long-term debt was used to fund security
purchases. 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 $2.0 million, or 2.1%,
from $94.9 million at December 31, 1998 to $92.9 million at
March 31, 1999. The decrease was primarily due to the change in
net appreciation (depreciation) on securities available for sale.
At December 31, 1998, the Company had $1.2 million appreciation
and at March 31, 1999, the Company had ($2.2) million
depreciation on securities available for sale. The change
occurred because of the general increase in interest rates during
that period.
RESULTS OF OPERATIONS
Overview
Net income for the first three months of 1999 was
$2.7 million compared to $3.7 million for the first three months
of 1998. Excluding gain on sale of securities during the first
quarter of 1998, net income would have been $2.6 million. First
quarter 1999 net income exceeded 1998's first quarter net
income -- exclusive of gains on securities sales -- by 3.8%. On
a per share basis, basic and diluted earnings were $0.26 and
$0.25 for the first three months of 1999 and 1998, respectively,
excluding security gains. Including the security gains, basic
and diluted earnings per share were $0.36 and $0.35,
respectively, for the first three months of 1998.
<PAGE 13>
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 first quarter of 1999, net
interest income on a tax-equivalent basis, increased
$1.9 million, or 23.8%, to $9.9 million from $8.0 million for the
first quarter of 1998. The increase in net interest income was
primarily due to an increase in average-earning assets of
$357.8 million, or 46.1%, for the first quarter of 1999 compared
to the first quarter of 1998. Average securities increased from
$280.2 million at March 31, 1998 to $578.2 million at March 31,
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 $357.9 million to $1.01 billion for the first quarter
of 1999 compared to $649.7 million for the first quarter of 1998.
For the first quarter of 1999, the average rate paid on interest-
bearing liabilities was 4.45% compared to 4.53% for the first
quarter of 1998. The decrease was mostly due to the lowering of
the money market rate to 3.50% APY (annual percentage yield) and
to the lower rate paid on other borrowed funds and long-term
debt.
Net interest margin decreased 63 basis points from
4.18% in the first quarter of 1998 to 3.55% in the first quarter
of 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 $0.3 million for the first three
months of 1999 compared to $0.2 million for the first three
months of 1998. The allowance for loan losses to non-performing
loans was 97.9% at March 31, 1999 compared to 82.7% at
December 31, 1998.
<PAGE 14>
Other Income
Other income decreased $1.3 million, or 44.8%, from
$2.9 million for the first three months of 1998 to $1.6 million
for the first three months of 1999. The first quarter of 1998
had realized gains on sale of securities of $1.7 million.
Excluding these gains, other income increased $0.4 million, or
33.3%. In 1998, management elected 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 increased
$0.1 million, or 25.0%, to $0.5 million during the first three
months of 1999 compared to $0.4 million for the first three
months of 1998. Mortgage banking income represents income
generated from the mortgages temporarily funded for mortgage
investors. Customers services fees increased $0.1 million, or
16.7%, to $0.7 million during the first three months of 1999
compared to $0.6 million for the first three months 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.
Other Expenses
Total other expenses increased $1.9 million, or 36.5%
to $7.1 million for the first three months of 1999 compared to
$5.2 million for the first three months of 1998.
Salaries, wages and employee benefits increased
$0.9 million, or 32.1%, from $2.8 million for the three months
ended March 31, 1998, to $3.7 million for the first three months
of 1999. Salaries, wages and employee benefits increased due to
the growth of the Company and also to hiring of staff at two new
locations in Berks County -- Reading Airport and Reiffton. The
Company also began to hire for the management positions in the
new market areas of Lehigh, Bucks, and Chester Counties.
Occupancy expense increased $0.4 million, or 100.00%,
to $0.8 million for the first three months of 1999 compared to
$0.4 million for the first three months of 1998. The increase
was due to lease payments commencing on 17 branches on March 1,
1999 and also due to expenses related to occupying the new
headquarters at the Berks County Bank Building. The Company
moved into the new headquarters in April of 1998 and prior to
that, had minimal costs to maintain the building.
Other operating expenses increased $0.5 million, or
29.4%, to $2.2 million for the first three months of 1999,
compared to $1.7 million for the first three months of 1998. The
<PAGE 15> increase in other expenses occurred in advertising,
data processing and MAC fees, professional fees, office supplies
and expenses, and other loan expenses. Advertising increased
$28,000 to $300,000 for the first three months of 1999 compared
to $272,000 for the first three months of 1998. The increase
from last year was due to advertising and marketing in
conjunction with the opening of the Reading Airport and Reiffton
branches in the first quarter of 1999. Data processing and MAC
fees increased $64,000, or 24.2%, from $264,000 in the first
three months of 1998 to $328,000 in the first three months of
1999. The increase was a result of increased volume in credit
card processing/ATM processing. Professional fees increased
$14,000, or 7.1% for the three months ended March 31, 1999
compared to the same period in 1998. Office supplies and
expenses increased $149,000, or 52.7%, to $432,000 for the first
three months of 1999 compared to $283,000 for the same period in
1998. The increase was due to supplies necessary to support the
Company's growth and the two new branches as well as increased
postage as a result of an increase in mailings of statements,
notices, etc. Other loan expenses increased $91,000, or 233.3%,
to $130,000 for the first three months of 1999 compared to
$39,000 for the first three months of 1998. This increase was
due to one-time adjustments to related liability accounts.
Federal Income Taxes
The provision for federal income taxes was $23,000 for
the first three months of 1999 compared to $1.5 million for the
first three months of 1998. The effective tax rate for the first
three months of 1999 was 0.8% versus 28.4% for the first three
months of 1998. The decrease in 1999's effective tax rate from
the statutory tax rate of 35% and from 1998's effective tax rate
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
decreased slightly -- from 0.75% at December 31, 1998 compared to
0.61% at March 31, 1999. Non-performing assets decreased from
$8.7 million at December 31, 1998 to $7.9 million at March 31,
1999. The ratio of the allowance for loan losses to non-
performing loans was 86.7% at December 31, 1998 compared to 97.9%
at March 31, 1999. Non-performing loans are comprised of non-
accrual loans, accruing loans that are 90 days or more past due.
Management believes the allowance for loan losses was
adequate to cover risks inherent in its loan portfolio at
March 31, 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
for other reasons. Any such increase could adversely affect the
Company's results of operations.
<PAGE 16>
Capital
The Company's Tier 1 capital to risk-weighted assets
ratio at March 31, 1999 was 13.79% 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 March 31, 1999 was
14.84% compared to 15.97% at December 31, 1998. These ratios
exceeded the total risk-based capital regulatory requirement of
8.00%. At March 31, 1999, the Company's leverage ratio was 7.93%
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 $511.5 million at March 31,
1999 compared to $491.7 million at December 31, 1998. Maturing
and repaying loans are another source of asset liquidity. At
March 31, 1999, the Company estimated that an additional
$124.2 million of loans will mature or reprice in the next six-
month period ended September 30, 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 March 31, 1999, the Bank had approximately $108.4 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.
PAGE 17
<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 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
also 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
<PAGE 18> 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 $60,000 (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 $100,000. 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.
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. Based on 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 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
<PAGE 19> 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.
Affiliations and Openings
On March 22, 1999, the Company announced the opening of
Main Street Agency which will provide Title Insurance and
settlement services. Main Street Agency is a limited partnership
between Main Street Bancorp, Inc. and T.A. Title Insurance
Company.
On January 11, 1999, the Company opened its eighth loan
production office in Clarks Summit, Lackawanna County, PA. On
March 15, 1999 the Company opened its ninth loan production
office in Bloomsburg, Columbia County, PA.
On January 29, 1999, the Company commenced its third
mortgage joint venture with Berkshire Real Estate. Net Mortgage
Company is authorized to engage in full service mortgage banking
in Pennsylvania. Net Mortgage Company will originate loans that
will be separately underwritten and funded by the Bank.
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.
<PAGE 20>
(b) Reports on Form 8 - K - None
PAGE 21
<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)
May 13, 1999 /s/Robert D. McHugh, Jr.
Robert D. McHugh, Jr.,
Executive Vice President and
Treasurer
/s/Donna L. Rickert
Donna L. Rickert, CPA
Senior Vice President and
Controller (Principal Accounting
Officer)
PAGE 22
<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.
3.2 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 23>
