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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934, for the fiscal year ended December 31, 1998, or
|_| TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (no fee required), for the transition period from _______________
to ______________.
Commission file number: 0-24145
MAIN STREET BANCORP, INC.
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(Name of small business issuer in its charter)
Pennsylvania 23-2960905
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Registrant's telephone number, including area code: (610)685-1400 Securities
registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common Stock ($1.00
par value)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act 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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained in herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
The aggregate market value of common stock of the Registrant held by
nonaffiliates, based on the closing sale price as of March 5, 1999 was
$148,386,938. As of March 5, 1999, the Registrant had 10,396,403 shares of
Common Stock outstanding.
Documents incorporated by reference. Portions of the Proxy Statement of
the Registrant relating to the Registrant's Annual Meeting to be held on April
14, 1999 are incorporated by reference into Part III of this report.
MAIN STREET BANCORP, INC.
FORM 10-K
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TABLE OF CONTENTS
Page
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Part I
Item 1. Business 3
Item 2. Properties 30
Item 3. Legal Proceedings 30
Item 4. Submission of Matters to a Vote of Security
Holders 31
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 31
Item 6. Selected Financial Data 32
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 33
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 54
Item 8. Financial Statements and Supplementary Data 57
Item 9. Changes In and Disagreements with
Accountants on Accounting and Financial
Disclosure 92
Part III
Item 10. Directors and Executive Officers of the
Registrant 92
Item 11. Executive Compensation 92
Item 12. Security Ownership of Certain Beneficial
Owners and Management 92
Item 13. Certain Relationships and Related
Transactions 93
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 93
Signatures
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PART I
ITEM 1. BUSINESS
General
Main Street Bancorp, Inc. ("the Company") is a Pennsylvania corporation
headquartered in Reading, Pennsylvania and, at December 31, 1998 was a
multi-bank holding company for Berks County Bank ("BCB") and Heritage National
Bank ("HNB"), and also the parent company of MBNK Investment Company. BCB was a
Pennsylvania-chartered bank and member of the Federal Reserve System while HNB
was subject to regulation by the Office of the Comptroller of the Currency.
Effective January 1, 1999, the Company merged the banks, BCB and HNB, and then
changed the entity's name to Main Street Bank. Main Street Bank will operate as
a wholly-owned subsidiary of Main Street Bancorp, Inc., under a state bank
charter, subject to regulation by the Pennsylvania Department of Banking and the
Federal Reserve Bank. This Annual Report on Form 10-K is for the period ended
December 31, 1998 when BCB and HNB (the "Banks") were separate subsidiaries of
the Company. Therefore, references herein to the "Banks" mean BCB and HNB and
references to the "Bank" mean Main Street Bank or Main Street Bank and its
predecessors, the Banks, as the context may require.
On May 1, 1998, the Company was formed upon the completion of the
consolidation between BCB Financial Services Corporation ("BCBF") and Heritage
Bancorp, Inc. ("Heritage"). The Company issued approximately 9,680,000 shares of
common stock to stockholders of BCBF and Heritage. BCBF 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. The consolidation has been accounted for as a pooling of
interests by the Company. Accordingly, all prior financial information has been
restated.
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Market Overview
BCB and HNB (the "Banks") operated twenty-two full service branches in
Berks, Dauphin, Montgomery and Schuylkill Counties in Pennsylvania as well as 8
loan production offices in Berks, Bucks, Chester, Lancaster, Lehigh, Montgomery
and Schuylkill Counties. In December of 1998, the Company announced plans to
open 23 new branch offices during 1999, which will more than double the number
of full-service community banking offices from 22 to 45. These new offices will
be located in Berks, Bucks, Chester, Delaware, Lancaster, Lehigh, Montgomery and
Northampton Counties in Pennsylvania as well as Hunterdon County, New Jersey.
These branches will begin opening in the first quarter of 1999 and all branches
are expected to be open by the third quarter of 1999.
Products and Services
The Bank offers a range of commercial and retail banking services to its
customers, including, personal and business checking and savings accounts,
certificates of deposit, residential mortgage, consumer and commercial loans,
and private banking services. The Bank also performs personal, corporate,
pension and other fiduciary services through its Trust and Investment Services
division. In addition, the Bank provides safe deposit boxes, traveler's checks,
credit cards, wire transfer of funds, ACH (Automated Clearing House) origination
and other typical banking services. The Bank is a member of the MAC/Plus
network. This membership provides customers with access to automated teller
machines worldwide.
The Company continues to update its product offering in order to remain
competitive. Plans for 1999 include offering new or expanded services in the
following areas: title insurance, brokerage services,
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PC home banking, 401(k) and employee benefit plans, alternate investments
services and general insurance products.
Supervision and Regulation
Various requirements and restrictions under the laws of the United States
and the Commonwealth of Pennsylvania affect the Company and the Bank.
General
The Company is a bank holding company subject to supervision and
regulation by the Federal Reserve Bank under the Bank Holding Company Act of
1956, as amended. As a bank holding company, the Company's activities and those
of its subsidiaries are limited to the business of banking and activities
closely related or incidental to banking and the Company may not directly or
indirectly acquire the ownership or control of more than 5% of any class of
voting shares or substantially all of the assets of any company, including a
bank, without the prior approval of the FRB.
The Bank is subject to supervision and examination by applicable federal
and state banking agencies. The Bank is a member of the Federal Reserve System,
and therefore, subject to the regulations of the FRB. The Bank is also a
Pennsylvania-chartered bank subject to supervision and regulation by the
Pennsylvania Department of Banking.
In addition, because the deposits of the Bank are insured by the FDIC, the
Bank is subject to regulation by the FDIC. The Bank is also subject to
requirements and restrictions under federal and state law, including
requirements to maintain reserves against deposits, restrictions on the types
and amounts of loans that may be granted and the interest that may be charged
thereon, and limitations on the types of investments that may be made and the
types of services that may be offered. Various consumer laws and regulations
also affect the
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operations of the Bank. In addition to the impact of regulation, commercial
banks are affected significantly by the actions of the FRB in attempting to
control the money supply and credit availability in order to influence the
economy.
Holding Company Structure
The Bank is subject to restrictions under federal law which limit its
ability to transfer funds to the Company, whether in the form of loans, other
extensions of credit, investments or asset purchases. Such transfers by the Bank
to the Company are generally limited in amount to 10% of the Bank's capital and
surplus. Furthermore, such loans and extensions of credit are required to be
secured in specific amounts, and all transactions are required to be on an arm's
length basis. The Bank has not made any loan or extension of credit to the
Company nor has it purchased any assets from the Company.
Under FRB policy, a bank holding company is expected to act as a source of
financial strength to its subsidiary banks and to commit resources to support
the bank, i.e., to downstream funds to the bank. This support may be required at
times when, absent such policy, the bank holding company might not otherwise
provide such support. Any capital loans by a bank holding company to its
subsidiary bank is subordinate in right of payment to deposits and to certain
other indebtedness of the banks. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of its subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
Regulatory Restrictions on Dividends
State and federal banking laws and regulations limit the amount of
dividends that may be paid by the Bank to the Company. As of December 31, 1998,
the Banks had retained earnings of approximately $26,040,000 available for
payment of dividends to the Company.
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State and federal regulatory authorities have adopted standards for the
maintenance of adequate levels of capital by banks. Adherence to such standards
further limits the ability of the Bank to pay dividends to the Company.
The payment of dividends to the Company by the Bank may also be affected
by other regulatory requirements and policies. If, in the opinion of the FRB,
the Bank is engaged in, or are about to engage in, an unsafe or unsound practice
(which, depending on the financial condition of the Bank, could include the
payment of dividends), the FRB may require, after notice and hearing, that the
Bank cease and desist from such practice. The FRB has formal and informal
policies providing that insured banks and bank holding companies should
generally pay dividends only out of current operating earnings.
FDIC Insurance Assessments
The FDIC has implemented a risk-related premium schedule for all insured
depository institutions that results in the assessment of premiums based on
capital and supervisory measures.
Under the risk-related premium schedule, the FDIC, on a semiannual basis,
assigns each institution to one of three capital groups (well capitalized,
adequately capitalized or under capitalized) and further assigns such
institution to one of three subgroups within a capital group corresponding to
the FDIC's judgment of the institution's strength based on supervisory
evaluations, including examination reports, statistical analysis and other
information relevant to gauging the risk posed by the institution. Only
institutions with a total capital to risk-weighted assets ratio of 10.00% or
greater, a Tier 1 capital to risk-weighted assets ratio of 6.0% or greater and a
Tier 1 leverage ratio of 5.0% or greater, are assigned to the well-capitalized
group.
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On September 30, 1996, Congress enacted a SAIF Recapitalization Plan and a
plan for banks insured by the fully capitalized BIF to share the burden of
repaying outstanding Finance Corporation (FICO) bonds issued to fund SAIF's
predecessor (the "FSLIC") in the late 1980s. The legislation enacted by Congress
containing the Recapitalization Plan is entitled the Deposit Insurance Funds Act
of 1996.
Under the Recapitalization Plan, SAIF insured institutions were required
to pay a one time special assessment in the fourth quarter of 1996 equivalent to
65.7 cents for every $100 of insured deposits as of March 31, 1995. The one time
special assessment on SAIF insured deposits is intended to result in a major
decrease in annual insurance premiums paid by SAIF insured institutions At the
end of 1996, SAIF insured institutions generally paid 23 cents for each $100 of
deposit insurance coverage while BIF insured banks insured by the fully
capitalized BIF paid virtually zero assessments.
As part of the legislation, a new formula was adopted whereby BIF insured
institutions, such as the Bank, would be required to share in the burden of
repayment of the FICO bonds issued to finance the FSLIC in the 1980s. Commencing
in calendar year 1997, the only deposit insurance cost for most
well-capitalized, well-managed BIF insured and SAIF insured institutions will be
FICO bond payments. For years 1997 through 1999, SAIF insured institutions will
pay approximately 6.5 cents per $100 in deposits toward the FICO bond payments
while BIF insured institutions will pay approximately 1.3 cents per $100 in
deposits. During 1998 the Banks paid $130,000 to the FDIC. From the year 2000 to
2017, both SAIF insured institutions and BIF insured institutions will pay
approximately 2.43 cents per $100 in deposits toward retirement of the FICO
obligations.
The legislation also contains certain restrictions on the ability of SAIF
insured institutions to transfer deposits to BIF insured affiliates over the
next three years and a requirement that Congress must eliminate the thrift
charter before merging SAIF into BIF.
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Finally, the legislation also contained a prohibition against the FDIC assessing
any deposit insurance premiums against well-managed, well-capitalized banks when
BIF reserves are at or above the statutory reserve requirement of 1.25% of total
insured deposits. This resulted in the Banks paying $0 for deposit insurance
premiums in 1998.
Capital Adequacy
The FRB adopted risk-based capital guidelines for bank holding companies,
such as the Company. The required minimum ratio of total capital to
risk-weighted assets (including off-balance sheet activities, such as standby
letters of credit) is 8.0%. At least half of the total capital is required to be
"Tier 1 capital," consisting principally of common stockholders' equity,
noncumulative perpetual preferred stock and minority interests in the equity
accounts of consolidated subsidiaries, less goodwill. The remainder ("Tier 2
capital") may consist of a limited amount of subordinated debt and
intermediate-term preferred stock, certain hybrid capital instruments and other
debt securities, perpetual preferred stock, and a limited amount of the general
loan loss allowance.
In addition to the risk-based capital guidelines, the FRB established
minimum leverage ratio (Tier 1 capital to average total assets) guidelines for
bank holding companies. These guidelines provide for a minimum leverage ratio of
3% for those bank holding companies which have the highest regulatory
examination ratings and are not contemplating or experiencing significant growth
or expansion. All other bank holding companies are required to maintain a
leverage ratio of at least 1% to 2% above the 3% stated minimum. The Company is
in compliance with these guidelines. The Bank is subject to similar capital
requirements.
The risk-based capital standards are required to take adequate account of
interest rate risk, concentration of credit risk and the risks of
non-traditional activities.
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Interstate Banking
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking Law"), amended various federal banking laws to provide
for nationwide interstate banking, interstate bank mergers and interstate
branching. The interstate banking provisions allow for the acquisition by a bank
holding company of a bank located in another state.
Interstate bank mergers and branch purchase and assumption transactions
were allowed effective June 1, 1997; however, states may "opt-out" of the merger
and purchase and assumption provisions by enacting a law which specifically
prohibits such interstate transactions. States could, in the alternative, enact
legislation to allow interstate merger and purchase and assumption transactions
prior to June 1, 1997. States could also enact legislation to allow for de novo
interstate branching by out of state banks. In July 1995, Pennsylvania adopted
"opt-in" legislation which allows such transactions.
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 finished
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
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contacted and continues to work closely with its vendors to ensure readiness.
Many noncomputer systems include embedded technology, such as micro controllers.
The Company has reviewed our noncomputer systems looking for any that could be
affected by Y2K. As part of the planning process, the Company has also been
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 the Company's customers 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. The Company has
upgraded or replaced PC's that were not Y2K compliant. Testing was competed on
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 systems designated mission critical. Testing and
implementation was completed on 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
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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.
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.
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The Company's banking subsidiaries have many customers and through the use
of questionnaires and our calling officers, these banking subsidiaries have
looked 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 a contingency plan with localized plans
addressing all core business processes 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 by implementing our localized contingency plans until
normal operations could be restored. This procedure could require changing of
schedules and significant hiring of temporary staff, which would increase the
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.
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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
telecommunication 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.
Berks Mortgage Company
The Bank owns a 70% interest in Berks Mortgage Company, a Pennsylvania
business trust. The remaining 30% is owned by a mortgage banking affiliate of
the local Coldwell Banker real estate franchise. As a majority-owned subsidiary
of the Bank, Berks Mortgage Company is authorized to engage in full service
mortgage banking in Pennsylvania. At the present time, Berks Mortgage Company
originates loans that are separately underwritten and funded by the Bank. Berks
Mortgage Company commenced operations in 1995. The overall activity of Berks
Mortgage Company in 1996, 1997, and 1998 was immaterial in relation to the
Company taken as a whole.
ABC Mortgage Company
The Bank owns a 80% interest in ABC Mortgage Company, a Pennsylvania
business trust. The remaining 20% is owned by a mortgage banking affiliate of
the local Century 21 Advance Realty real estate franchise. As a majority-owned
subsidiary of the Bank, ABC Mortgage Company is authorized to engage in full
service mortgage banking in Pennsylvania. At the present time, ABC Mortgage
Company originates loans that are separately underwritten and funded by the
Bank. ABC Mortgage Company commenced operations in 1998. The overall activity of
ABC Mortgage Company in 1998 was immaterial in relation to the Company taken as
a whole.
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Competition
The Bank faces significant competition from other commercial banks,
savings banks, savings and loan associations and several other financial or
investment services institutions in the communities it serves. Several of these
institutions are affiliated with major banking and financial institutions which
are substantially larger and have greater financial resources than the Company
and the Bank. As the financial services industry continues to consolidate,
competition affecting the Bank may increase. For most of the services that the
Bank performs there is also competition from credit unions and issuers of
commercial paper and money market funds. Such institutions, as well as brokerage
firms, consumer finance companies, insurance companies and pension trusts, are
important competitors for various types of financial services.
Loan Portfolio
At December 31, 1998 the Banks' loan portfolio consisted of commercial
loans, residential one-to-four-family mortgage loans and consumer loans.
Commercial loans are primarily made to small businesses and professionals in the
form of term loans and for working capital purposes with maturities generally
between one and five years. The majority of these commercial loans are
collateralized by real estate and further secured by personal guarantees. At
December 31, 1998 the Banks had $280.1 million in commercial loans of which
53.53% are fixed rate loans and 46.47% are floating rate loans.
The Bank's commercial lending staff generates and services commercial and
commercial real estate loans ranging from $25,000 to $5.0 million. The Bank's
philosophy is to develop a total banking relationship with its commercial
customers by providing all of their lending, deposit and personal banking needs.
New business is generated
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mostly through referrals from accountants, attorneys, realtors and existing
customers.
The risk associated with the Bank's commercial loan portfolio is greater
than the risk associated with residential real estate lending. However, the Bank
believes that this is mitigated by the fact that the majority of the commercial
loan portfolio is real estate secured and carries the personal guaranty of the
principals. Asset-based loans and unsecured loans account for a small percentage
of the Bank's loan portfolio.
The Bank's consumer loan portfolio consists primarily of home equity term
loans, home equity lines of credit, installment loans and credit card
borrowings. Although consumer lending also entails greater risk than residential
lending, the Bank's consumer lending portfolio is largely real estate based and
the Bank's experience with home equity lending has been that these loans provide
good yields, collateral coverage and repayment history. Unsecured loans and
automobile loans, which entail greater risk, account for a small percentage of
the loan portfolio because these loans are generally provided only as an
accommodation for existing customers or in conjunction with an individual
switching his or her entire banking relationship to one of the Banks. At
December 31, 1998, the Banks had $71.9 million in consumer loans of which 41.30%
are fixed rate loans and 58.70% are floating rate loans.
The Bank is one of the largest originators of residential mortgage loans
in the area. This includes all mortgage loans and loans in low and moderate
income areas. The Bank is a full service residential lender offering a wide
variety of conventional, FHA/VA and alternative credit programs. The Bank is an
active participant in the secondary market and sell loans to several investors,
the Federal National Mortgage Association ("Fannie Mae") and the Federal Home
Loan Mortgage Corporation ("Freddie MAC"). The Bank originates all mortgage
loans directly through employees who are full-time mortgage consultants. At
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December 31, 1998, the Banks had $171.2 million in residential mortgage loans of
which 57.0% are fixed rate loans and 43.0% are floating rate loans.
Thirty year fixed rate mortgages are sold in the secondary market unless
the loan is retained at the specific request of the customer or due to size
(i.e., jumbo loans) or other reasons the loan was not underwritten to secondary
market standards and was deemed suitable for retention in BCB or HNB's
portfolio. At any one time, the Bank may hold thirty year fixed rate mortgages
as available for sale pending disposition in the secondary market. The Bank
generally does not retain servicing rights on loans sold, but HNB did retain
servicing on the loans sold to Freddie MAC. In addition, the Bank offers
selected mortgage products which meet either the investment objectives of the
Company or are designed specifically to meet community lending needs. To serve
these community lending needs, the Bank selectively retains a portion of
mortgage loans in all categories.
The Bank underwrites generally in accordance with secondary market
guidelines. Loans in excess of 80% of appraised value are required to have
mortgage insurance placed with an appropriate coverage based upon the loan to
value ratio. The Bank utilizes private mortgage insurance through several
companies, FHA Insurance and VA Guaranty. As a community bank, the Bank
recognizes the need to provide home mortgage financing to all segments of the
market. In that regard, the Bank does have special community based lending
programs that provide financing for home purchases with greater than 80% loan to
value ratios without credit enhancement. This special program is reviewed and
approved annually by the Board of Directors.
With respect to commercial real estate loans, the Bank's lending policies
is to adhere to the Uniform Real Estate Lending Standards promulgated by federal
regulators. These standards outline the permitted loan to value ratios for
various types of real estate loans.
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Loans in excess of the standards are reported to the Company's Board of
Directors on a quarterly basis.
The Company's loans, net of deferred loans fees at December 31, 1998
totaled $540.6 million, an increase of $57.0 million, or 11.8%, compared to net
loans at December 31, 1997 of $483.6 million. This follows an increase of $80.7
million, or 20.0%, from the $402.9 million amount of net loans at December 31,
1996. These increases reflect continued loan demand from the Company's target
customers.
The following tables set forth the Company's loans by major categories as
of the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Commercial, Financial and
Agricultural $280,107 $222,050 $178,021 $136,594 $135,030
Real estate - construction 16,624 15,091 10,662 8,506 8,267
Real estate - mortgage 171,268 175,978 152,139 125,556 122,761
Consumer Loans to individuals 71,926 70,077 62,092 53,526 44,800
-------- -------- -------- -------- --------
539,925 483,196 402,914 324,182 310,858
Less deferred loan fees (costs) (692) (380) 52 850 1,053
-------- -------- -------- -------- --------
Total loans $540,617 $483,576 $402,862 $323,332 $309,805
====================================================
</TABLE>
Loan Maturity and Interest Rate Sensitivity
The amount of loans outstanding by category as of December 31, 1998, which
are due in (i) one year or less, (ii) more than one year through five years and
(iii) over five years, is shown in the following table. Loan balances are also
categorized according to their sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
At December 31, 1998
--------------------------------------------------
More Than
One Year
One Year Through Over Total
or Less Five Years Five Years Loans
------- ---------- ---------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Commercial $114,057 $ 82,774 $83,726 $280,557
Construction 14,398 763 1,313 16,474
Mortgage 30,189 91,254 49,965 171,408
</TABLE>
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<TABLE>
Consumer 43,215 20,427 8,536 72,178
<S> <C> <C> <C> <C>
-------- -------- ------- --------
Total(1) $201,859 $195,218 $143,540 $540,617
======== ======== ======== ========
Loans with fixed rate $ 70,438 $131,165 $84,907 $286,510
Loans with floating rate 131,421 64,053 58,633 254,107
-------- -------- ------- --------
Total(1) $201,859 $195,218 $143,540 $540,617
======== ======== ======== ========
Percent composition by maturity 37.34% 36.11% 26.55% 100.00%
======== ======== ======== ========
Fixed rate loans as a percentage
of total loans maturing 13.03% 24.26% 15.71% 53.00%
======== ======== ======== ========
Floating rate loans as a percentage
of total loans maturing 24.30% 11.85% 10.85% 47.00%
======== ======== ======== ========
</TABLE>
------------
(1) Includes deferred loan fees
In the ordinary course of business, loans maturing within one year may be
renewed, in whole or in part, as to principal amount, at interest rates
prevailing at the date of renewal.
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At December 31, 1998, 53.0% of total loans were fixed rate compared to
56.9% at December 31, 1997. For additional information regarding interest rate
sensitivity, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Interest Rate Risk Management."
Credit Quality
The Company's written lending policies require underwriting, loan
documentation and credit analysis standards to be met prior to funding any loan.
After the loan has been approved and funded, continued periodic review is
required. In addition, due to the secured nature of residential mortgages and
the smaller balances of individual installment loans, sampling techniques are
used on a continuing basis for credit reviews in these loan areas. The Company
has a policy to generally discontinue accrual of interest income within ten days
following the month end in which a loan becomes 90 days past due in either
principal or interest, except for those insured for credit loss. In addition, if
circumstances warrant, accrual of interest may be discontinued prior to 90 days.
In all cases, any payments received on non-accrual loans are credited to
principal until full recovery of past due payments has been recognized, and the
loan is not restored to accrual status until the obligation is brought current,
has performed in accordance with the contractual terms for a reasonable period
of time and the ultimate collectability of the total contractual principal and
interest is no longer in doubt. Loans are charged off, in whole or in part, upon
determination that a loss is anticipated. Non-accrual and large delinquent loans
are reviewed monthly to determine potential losses.
The following summary shows information concerning loan delinquency and
other non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Loans accruing, but past due
90 days or more $ 867 $1,293 $ 460 $1,841 $ 783
Total non-accrual loans 7,353 4,878 3,496 2,790 4,474
Restructured loans 113 73 79 85 91
------ ------ ------ ------ ------
Total non-performing loans (1) 8,333 6,244 4,035 4,716 5,348
Foreclosed real estate 401 465 1,183 1,336 71
------- ------ ------ ----- ------
Total non-performing
assets (2) $8,734 $6,709 $5,218 $6,052 $5,419
====== ====== ====== ====== ======
Non-performing loans as a
percentage of total loans,
net of unearned income 1.54% 1.29% 1.00% 1.46% 1.73%
==== ==== ==== ==== ====
Non-performing assets as a
percentage of total assets 0.75% 0.82% 0.78% 1.19% 1.16%
==== ==== ==== ==== ====
</TABLE>
- ----------
(1) Non-performing loans are comprised of (i) loans that are on a non-accrual
basis, (ii) accruing loans that are 90 days or more past due which are
insured for credit loss, and (iii) restructured loans.
(2) Nonperforming assets are comprised of non-performing loans and foreclosed
real estate.
The following summary shows the impact on interest income of nonaccrual
and restructured loans for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
-----------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest income that would have
been recorded had the loans
been in accordance with their
original terms $605 $392 $302
Interest income included in net
income 126 82 101
</TABLE>
Restructured loans are loans whose terms have been modified, because of a
deterioration in the financial position of the borrower, to provide for a
reduction of either interest or principal. At December 31, 1998, there were
three restructured loans in the amount of $113,000.
21
<PAGE>
At December 31, 1998, the Company had no foreign loans. The Company did
have loan concentrations exceeding 10% of total loans to Real Estate and
Apartment Operators/Lessors in the amount of $69.1 million, or 12.8% of total
loans. Loan concentrations are considered to exist when there are amounts loaned
to a multiple number of borrowers engaged in similar activities that would cause
them to be similarly impacted by economic or other conditions.
Foreclosed real estate is initially recorded at fair value, net of
estimated selling costs at the date of foreclosure, thereby establishing a new
cost basis. After foreclosure, valuations are periodically performed by
management and the assets are carried at the lower of cost or fair value, less
estimated costs to sell. Revenues and expenses from operations and changes in
the valuation allowance are included in other expenses.
Potential problem loans consist of loans that are included in performing
loans, but for which potential credit problems of the borrowers have caused
management to have serious doubts as to the ability of such borrowers to
continue to comply with present repayment terms. At December 31, 1998, all
identified potential problem loans were included in the preceding table except
for $4.9 million of loans included on the Banks' internal watch list.
The Banks had no credit exposure to "highly leveraged transactions" at
December 31, 1998, as defined by the FRB.
Allowance for Loan Losses
A detailed analysis of the Company's allowance for loan losses for each of
the years in the five year period ended December 31, is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
</TABLE>
22
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Balance at beginning of year: $ 5,738 $ 5,072 $ 4,883 $ 4,449 $ 3,900
Charge-offs:
Commercial 207 97 497 283 136
Real estate-mortgage 440 300 344 173 101
Consumer 302 308 154 132 79
-------- -------- -------- -------- -------
Total Charge-offs $ 949 $ 705 $ 995 $ 588 $ 316
-------- -------- -------- -------- -------
Recoveries:
Commercial 59 128 236 146 165
Real estate-mortgage 84 56 29 20 34
Consumer 80 47 52 28 22
-------- -------- -------- -------- -------
Total recoveries $ 223 $ 231 $ 317 $ 194 $ 221
-------- -------- -------- -------- -------
Net charge-offs 726 474 678 394 95
Provision for loan losses 2,210 1,140 867 828 644
-------- -------- -------- -------- -------
Balance at end of year $ 7,222 $ 5,738 $ 5,072 $ 4,883 $ 4,449
======== ======== ======== ======== =======
Average loans outstanding (1) $517,944 $444,839 $357,831 $308,044 $307,303
======== ======== ======== ======== ========
As a percent of average loans (1):
Net charge-offs 0.14% 0.11% 0.19% 0.13% 0.03%
Provision for loan losses 0.43% 0.26% 0.24% 0.27% 0.21%
Allowance for loan losses 1.39% 1.29% 1.42% 1.59% 1.45%
Allowance as a percent of each of the following:
Total loans, net of
unearned income 1.34% 1.19% 1.26% 1.51% 1.44%
Total non-performing loans 86.67% 91.90% 125.70% 103.54% 83.19%
</TABLE>
- ----------
(1) Includes non-accruing loans
Management makes a monthly determination as to an appropriate provision
from earnings necessary to maintain an allowance for loan losses that is
adequate for potential yet undetermined losses. This determination necessarily
includes a review of loans that are current, but for which management has
determined for a variety of reasons require more careful monitoring going
forward. The dollar amount charged to earnings is determined based upon several
factors including: a continuing review of delinquent, classified and non-accrual
loans, large loans, and overall portfolio quality; regular examination and
review of the loan portfolio by regulatory authorities; analytical review of
loan charge-off experience, delinquency rates, other relevant historical and
peer statistical ratios; and management's judgment with respect to local and
general economic conditions and their impact on the existing loan portfolio.
23
<PAGE>
Determining the appropriate level of the allowance for loan losses at
any given date is difficult, particularly in a continually changing economy. In
management's opinion, the allowance for loan losses was adequate at December 31,
1998. However, there can be no assurance that, if asset quality deteriorates in
future periods, additions to the allowance for loan losses will not be required.
The Company's management is unable to determine in what loan category
future charge-offs and recoveries may occur. The following schedule sets forth
the allocation of the allowance for loan losses among various categories. At
December 31, 1998, approximately 47.0% of the allowance for loan losses is
unallocated to protect the Company against potential yet undetermined losses.
The allocation is based upon historical experience. The entire allowance for
loan losses is available to absorb future loan losses in any loan category.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
Amount to Loans Amount to Loans Amount to Loans Amount to Loans Amount to Loans
------ -------- ------ -------- --------------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Allocation of
allowance for loan
losses:
Commercial, financial
and agricultural $4,124 51.85% $1,819 46.06% $1,398 44.17% $1,568 42.15% $1,786 43.41%
Real Estate -
Mortgage 981 31.67% 689 36.31% 509 37.72% 469 38.77% 436 39.55%
Real Estate -
Construction 72 3.15% 56 3.11% 73 2.73% 64 2.77% 62 2.57%
Consumer loans
to individuals 544 13.33% 709 14.52% 292 15.38% 311 16.31% 249 14.47%
Unallocated 1,501 2,465 2,800 2,471 1,916
------ ------ ------ ------ ------
Total $7,222 100.00% $5,738 100.00% $5,072 100.00% $4,883 100.00% $4,449 100.00%
====== ====== ====== ====== ======
</TABLE>
24
<PAGE>
Securities Portfolio
The Company's securities portfolio is intended to provide liquidity,
reduce interest rate risk and contribute to earnings while exposing the Company
to reduced credit risk. As a result of the Company's recent growth, the
securities portfolio has also grown significantly from $280.0 million at
December 31, 1997 to $534.6 million at December 31, 1998. This significant
increase is due in large part to matched funding programs that use FHLB advances
and the significant deposit inflows at existing and new branches to fund both
loan originations and securities purchases. The purpose of these matched funding
programs is to target earnings growth and net interest margin increases while
managing liquidity, credit, market and interest rate risk. From time to time a
specific matched funding program may attempt to achieve current earnings
benefits from future growth in deposits that management is reasonably confident
will occur.
A summary of securities available for sale and securities held to maturity
at December 31, 1998, 1997, and 1996 follows:
<TABLE>
<CAPTION>
Securities Securities
Available for Sale Held To Maturity
at December 31, at December 31,
------------------------------ ------------------------------
1998 1997 1996 1998 1997 1996
-------- -------- -------- -------- -------- --------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 9,256 $ 10,801 $ 3,465 $ 0 $ 0 $ 11,873
U.S. Government agencies 192,705 32,981 25,328 0 60,724 24,253
State and municipal 233,615 45,538 33,625 0 10,165 18,374
Mortgage-backed and asset-
backed securities(1) 57,583 103,132 75,051 0 0 0
Other securities(2) 39,491 12,953 10,662 25 25 25
-------- -------- -------- -------- -------- --------
Total Amortized Cost of
Securities $532,650 $205,405 $148,131 $ 25 $ 70,914 $ 54,525
======== ======== ======== ======== ======== ========
Total Fair Value of
Securities $534,526 $209,106 $148,711 $ 25 $ 71,769 $ 54,864
======== ======== ======== ======== ======== ========
</TABLE>
(1) All of these obligations consist of U.S. Government Agency issued
securities.
(2) Comprised mostly of FHLB stock, Federal Reserve Bank stock and Pennsylvania
community bank stocks.
25
<PAGE>
The following table presents the maturity distribution and weighted
average yield of the securities portfolio of the Company at December 31, 1998.
Weighted average yields on tax-exempt obligations have been computed on a
taxable equivalent basis.
<TABLE>
<CAPTION>
Available for Sale
December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
After 1 Year After 5 Years
But But After 10 Years
Within 1 Year Within 5 Years Within 10 Years or no maturity(1) Total
---------------- ---------------- ---------------- ---------------- ----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amortized Cost:
U.S. Treasury Securities $ 7,245 5.553% $ 2,011 5.823% $ 0 0% $ 0 0% $ 9,256 5.979%
U.S. Government Agencies 0 0 0 0 39,711 6.947 152,994 6.561 192,705 6.641
State and Municipal 818 6.115 2,329 6.853 5,457 7.773 225,011 7.206 233,615 7.202
Mortgage-backed and
asset-backed securities 10,184 6.835 14,712 6.239 1,440 6.881 31,247 6.779 57,583 6.654
Other Securities 0 0 0 0 0 0 39,491 6.508 39,491 6.508
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total securities
available for sale $ 18,247 6.294% $ 19,052 6.270% $ 46,608 7.042% $448,743 6.895% $532,650 6.710%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
Held to Maturity
December 31, 1998
- ------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
After 1 Year After 5 Years
But But After 10 Years
Within 1 Year Within 5 Years Within 10 Years or no maturity(1) Total
--------------- --------------- --------------- --------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Other Securities 0 0 0 0 25 7.500 0 0 25 7.500
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total securities
held to maturity $ 0 0% $ 0 0% $ 25 7.500% $ 0 0% $ 25 7.500%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- ----------
(1) The majority of the securities listed in this category are callable or
likely to repay within five years.
26
<PAGE>
The Company maintains a securities portfolio for the secondary application
of funds as well as a secondary source of liquidity. At December 31, 1998,
securities having an amortized cost of $72.3 million were pledged as collateral
for public funds and other purposes as required or permitted by law.
Neither the Company nor the Banks held securities of any one issuer,
excluding U.S. Treasury and U.S. Government Agencies, that exceeded 10% of
stockholders' equity at December 31, 1998 or any prior period end.
Deposit Structure
The following is a distribution of the average balances of the Banks'
deposits and the average rates paid thereon for the years ended December 31,
1998, 1997 and 1996.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
--------------- --------------- ---------- ----
Amount Rate Amount Rate Amount Rate
-------- ---- -------- ---- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand--non-interest bearing $ 72,866 -- % $ 63,970 -- % $ 51,653 -- %
Demand--interest-bearing 62,915 1.67% 39,360 2.07% 31,137 2.10%
Savings 278,860 3.75% 220,247 3.40% 169,517 3.01%
Time deposits 290,147 5.43% 241,301 5.31% 213,968 5.14%
Total deposits $704,788 3.87% $564,878 3.74% $466,275 3.59%
======== ==== ======== ==== ======== ====
</TABLE>
The following is a breakdown, by maturities, of the Banks' time
certificates of deposit issued in denominations of $100,000 or more as of
December 31, 1998.
<TABLE>
<CAPTION>
December 31, 1998
-----------------
(In thousands)
Time Other
CD's Time Total
------- ------- -------
<S> <C> <C> <C>
</TABLE>
27
<PAGE>
<TABLE>
<S> <C> <C> <C>
Maturing in:
Three months or less $ 4,103 $ 501 $ 4,604
Over three through six months 4,688 -- 4,688
Over six through twelve months 7,223 -- 7,223
Over twelve months 10,881 -- 10,881
------- ------- -------
Total $26,895 $ 501 $27,396
======= ======= =======
</TABLE>
Long-Term Debt and Other Borrowed Funds
The Bank maintains a U.S. Treasury tax and loan note option account for
the deposit of withholding taxes, corporate income taxes and certain other
payments to the federal government. Deposits are subject to withdrawal and are
evidenced by an open-ended interest-bearing note. Borrowings under this note
option account were approximately $0.6 million and $1.1 million at December 31,
1998 and 1997.
The Banks had other short-term borrowings from the FHLB at December 31,
1998, 1997 and 1996 in the amount of $81.2 million, $27.5 million and $28.7
million, respectively. The December 31, 1998 balance outstanding was due in
January 1999. The December 31, 1998 balance had an average interest rate of
4.95%.
The following table sets forth information regarding short-term borrowings
at and for the periods ended December 31, 1998, 1997 and 1996.
1998 1997 1996
---- ---- ----
(In Thousands)
Short-term advances from the FHLB
bearing interest at a weighted
average rate of 4.95%, 5.78% and
5.44% as of December 31, 1998, 1997
and 1996, respectively: $81,200 $27,500 $28,700
======= ======= =======
28
<PAGE>
Maximum amount of short-term advances
from the FHLB outstanding at any
month-end during the years ended
December 31, 1998, 1997 and 1996: $81,200 $67,896 $52,400
======= ======= =======
Average amount of short-term advances
outstanding during the years ended
December 31, 1998, 1997 and 1996 at
weighted average interest rates of
5.59%, 5.68% and 5.44%, respectively $40,766 $33,999 $21,040
======= ======= =======
29
<PAGE>
The Banks had maximum borrowing capacity with the FHLB of approximately
$327.1 million. Advances from the FHLB are secured by qualifying assets of the
Banks.
ITEM 2. PROPERTIES
The Company's headquarters are located at 601 Penn Street, Reading,
Pennsylvania. At December 31, 1998, the Banks operate 22 full service community
banking offices and 8 loan production offices. Of the twenty-two community
banking offices, 16 are owned, 4 are land leases only and 2 are building and
land leases from independent owners. Of the 8 loan production offices, 7 are
leased from independent owners.
On December 23, 1998, the Company announced plans to open 23 new branches
in 1999. 17 of these 23 will be leased beginning in March of 1999. The remaining
six branches are de novo branches that will be built on land owned by the bank.
ITEM 3. LEGAL PROCEEDINGS
The Company and the Bank is, from time to time, a party (plaintiff or
defendant) to lawsuits that are in the normal course of the Company's and the
Banks' business. While any litigation involves an element of uncertainty,
management, after reviewing pending actions with its legal counsel, is of the
opinion that the liability of the Company and the Bank, if any, resulting from
such actions will not have a material effect on the financial condition or
results of operations of the Company and the Bank.
30
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Shares of the Company's common stock are traded in the over-the-counter
market and are quoted on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") National Market System under the symbol
"MBNK".
The table below presents the high and low trade prices reported for the
Company's common shares and the cash dividends declared on such common shares
for the periods indicated. The range of high and low prices is based on trade
prices reported on NASDAQ. Market quotations reflect inter-dealer prices,
without retail mark-up, mark-down, or commission, and may not necessarily
reflect actual transactions. This table is presented from May 1, 1998, the date
of the Company's formation.
Dividends
Year Quarter High Low Per Share
- ---- ------- ---- --- ---------
1998 4th 20-3/4 16-1/4 $ 0.14
3rd 21-1/32 16-1/8 0.13
2nd 24-1/16 19-5/8 0.13
All price information in the table has been adjusted retroactively to
reflect a 7 percent stock dividend paid on December 15, 1998.
31
<PAGE>
At March 5, 1999, the total number of holders of record of the Company's
common shares was approximately 5,950.
For certain limitations on the Banks' abilities to pay dividends to the
Company, see "Description of Business Supervision and Regulation" hereof and
Note 18 to "Notes to Consolidated Financial Statements."
ITEM 6. SELECTED FINANCIAL DATA (Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
At or for the
Year ended December 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Total interest income $65,719 $54,463 $41,809 $36,413 $31,861
Total interest expense 33,264 25,978 18,654 15,803 12,519
-----------------------------------------------------------
Net interest income 32,455 28,485 23,155 20,610 19,342
Provision for loan losses 2,210 1,140 867 828 644
Other income 10,301 4,535 3,559 2,769 2,724
Other expenses 25,092 19,234 16,536 16,350 14,331
Federal income taxes 3,711 3,317 2,428 1,890 2,013
-----------------------------------------------------------
Net income $11,743 $9,329 $6,883 $4,311 $5,078
===========================================================
Per Share Data:
Earnings per share (1)(2)
Basic 1.13 1.02 0.82 0.51 0.63
Diluted 1.12 1.00 0.82 0.50 0.63
Cash dividends declared per share(2) 0.49 0.36 0.30 0.25 0.22
Book value per share (2)(3) 9.14 8.60 7.16 6.71 6.22
Average shares outstanding(2) 10,357,974 9,184,980 8,345,300 8,482,808 8,048,922
Balance Sheet Data:
Total assets $1,158,541 $813,863 $666,476 $509,917 $468,187
Total loans,net 533,395 477,838 397,790 318,449 305,356
Total securities 534,551 280,020 203,236 138,388 125,796
Total deposits 818,550 626,760 518,567 432,988 381,837
Borrowings 221,072 84,758 81,120 16,275 28,776
Total stockholders' equity $94,912 $88,720 $59,785 $56,311 $52,565
Performance Ratios:
Return on average assets 1.28% 1.28% 1.22% 0.90% 1.06%
Return on average stockholders' equity 12.34% 13.16% 12.05% 7.95% 10.24%
Net interest margin(4) 4.03% 4.30% 4.54% 4.73% 4.64%
Total other expenses as a percentage
of average assets 2.73% 2.63% 2.93% 3.42% 2.99%
</TABLE>
32
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Asset Quality Ratios:
Allowance for loan losses as a percentage of loans 1.34% 1.19% 1.26% 1.51% 1.44%
Allowance for loan losses as a percentage of
non-performing loans(5) 86.67% 91.90% 125.70% 103.54% 83.19%
Non-performing loans as a percentage of total loans, net(5) 1.54% 1.29% 1.00% 1.46% 1.73%
Non-performing assets as a percentage of total assets(5) 0.75% .82% 0.78% 1.19% 1.16%
Net charge-offs as a percentage of average loans, net 0.14% 0.11% 0.19% 0.13% 0.03%
Liquidity and Capital Ratios:
Equity to assets (6) 10.34% 9.71% 10.14% 11.34% 10.95%
Tier 1 capital to risk-weighted assets(7) 14.83% 17.56% 14.81% 17.04% 18.48%
Leverage ratio(7)(8) 8.70% 10.93% 9.81% 11.60% 11.99%
Total capital to risk-weighted assets(7) 15.97% 18.72% 16.06% 18.24% 19.74%
Dividend payout ratio 43.57% 35.13% 36.25% 48.67% 35.09%
</TABLE>
(1) Earnings per share amounts have been computed in accordance with the
provisions of FASB Statement No. 128 , Earnings Per Share.
(2) Per common share data are adjusted for all stock dividends and stock splits
effected through December 31, 1998.
(3) Based upon total shares issued and outstanding at the end of each respective
period.
(4) Represents net interest income as a percentage of average total-interest
earning assets, calculated on a tax-equivalent basis.
(5) Non-performing loans are comprised of (i) loans which are on a nonaccrual
basis, (ii) accruing loans that are 90 days or more past due which are
insured for credit loss, and (iii) restructured loans. Non-performing assets
are comprised of non-performing loans and foreclosed real estate (assets
acquired in foreclosure).
(6) Based upon average daily balances for the respective periods.
(7) Based on Federal Reserve Board risk-based capital guidelines, as applicable
to the Company.
(8) The leverage ratio is defined as Tier 1 capital to average total assets.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Financial Condition Highlights
Main Street Bancorp, Inc.'s (the Company's) total assets increased $346.1
million or 42.5% from $ 813.9 million at December 31, 1997 to $1.16 billion at
December 31, 1998. Net loans increased $55.6 million, or 11.6 %, to $533.4
million at December 31, 1998 compared to $477.8 million a year earlier. Total
securities increased by 90.9%, from $280.0 million at December 31, 1997, to
$534.6 million at December 31, 1998.
33
<PAGE>
The increase in securities was due to the growth in deposits exceeding growth in
net loans in 1998 by $136.2 million as well as the expectation that growth in
deposits will exceed growth in loans in 1999 due to the branch expansion plan
for 1999.
Cash and amounts due from banks, interest-bearing deposits (which are held
at Federal Home Loan Bank of Pittsburgh, "FHLB") and federal funds sold are all
liquid funds. The aggregate amount in these three categories increased by $3.9
million to $29.5 million at December 31, 1998.
Amounts due from mortgage investors increased from $5.4 million at
year-end 1997 to $14.6 million at year-end 1998. These amounts represent loans
originated by the Company for other mortgage investors/lenders under standing
commitments. These loans are temporarily funded for such investors for periods
ranging from three to forty-five days. Mortgage loans held for sale increased
$5.1 million from $0 at year-end 1997 to $5.1 million at year-end 1998.
Bank premises and equipment, net of accumulated depreciation, increased
from $11.5 million at year-end 1997 to $25.7 million at year-end 1998. The
increase was due to the purchase of a 150,000 square foot commercial/retail
office building in February of 1998, located at 601 Penn Street, Reading, PA
which now serves as corporate headquarters for the Company, the construction of
the Robesonia branch, which opened in October of 1998 and the capitalization of
six branch leases for $8.2 million. These branches are expected to open by
mid-1999. Accrued interest receivable and other assets increased $2.2 million
from $13.5 million at December 31, 1997 to $15.7 million at December 31, 1998.
The increase was primarily due to the interest accrued on new security
purchases.
Total liabilities increased $334.9 million, or 46.2%, from $725.1 million
at year-end 1997 to $ 1.06 billion at December 31, 1998. During this period,
deposits increased by 30.6%, from $626.8 million at
34
<PAGE>
December 31, 1997 to $818.6 million at December 31, 1998. During 1998, the
Company continued to place greater emphasis upon the generation of checking and
savings deposits versus higher-cost certificates of deposits. At December 31,
1998 aggregate demand deposits and savings deposits increased $131.5 million, or
36.0%, from $365.6 million at December 31, 1997 to $497.3 million at December
31, 1998. Aggregate demand deposits include non-interest bearing demand,
interest checking and money market checking. Aggregate savings deposits include
money market savings, traditional savings and passbook savings. As a percentage
of total deposits, aggregate demand deposits and savings deposits increased from
58.3% at December 31, 1997 to 60.8% at December 31, 1998. Certificates of
deposit increased $60.1 million, or 23.1%, from $261.2 million at year-end 1997
to $321.3 million at December 31, 1998. The proceeds from the increase in
deposits were used to fund new loans, new security purchases and the increase in
bank premises and equipment. Other liabilities increased $10.4 million, or
76.5%, to $24.0 million at December 31, 1998 from $13.6 million at December 31,
1997. The increase in other liabilities was primarily attributable to an
increase in accrued interest payable and also to the recording of securities
traded but not settled at December 31, 1998. Other borrowed funds increased
$55.8 million, or 184.2%, to $86.1 million at December 31, 1998. Long-term
borrowings from the FHLB increased $80.5 million, or 147.7%, to $ 135.0 million
at December 31, 1998. The increase in borrowed funds 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.
Stockholder's equity increased $6.2 million, or 7.0%, to $94.9 million at
December 31, 1998, from $88.7 million at December 31, 1997. The increase in
stockholder's equity is mostly attributable to the retention of earnings of
$11.7 million, less cash dividends declared of $5.1 million. The increase in net
unrealized gains on securities available for sale, net of taxes, was $1.2
million, from $2.4 million at December 31, 1997 to $1.2 million at December 31,
1998.
35
<PAGE>
Results of Operations for the Years Ended December 31, 1998, 1997 and 1996
Overview
The Company's net income for the year ended December 31, 1998 was $ 11.7
million, increasing by 25.8%, or $2.4 million, from $9.3 million for the year
ending December 31, 1997. Net income for 1997 was 35.5% more than the $6.9
million in 1996. This increase was largely attributable to an increase in net
interest income as well as an increase in other income. On a per share basis,
earnings were $1.13 per basic share and $1.12 per diluted share for the year
ended December 31, 1998, compared to $1.02 per basic share and $1.00 per diluted
share for the year ended December 31, 1997, and 82 cents per basic and diluted
share for 1996.
Analysis of Net Interest Income
Net interest income is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
The chart below, Average Balances, Average Rates, and Net Interest Margin,
provides an analysis of net interest income on a tax-equivalent basis, setting
forth for the periods (i) daily average assets, liabilities and stockholders'
equity, (ii) interest income earned on interest-earning assets and interest
expense paid on interest-bearing liabilities, (iii) average yields earned on
interest-earning assets and average rates paid on interest-bearing liabilities,
and (iv) the Company's net interest margin.
<TABLE>
<CAPTION>
Average Balances, Average Rates, and Net Interest Margin
Years Ended December 31, 1998 December 31, 1997 December 31, 1996
- --------------------------------------------------------------------------------------------------------------------------
Interest Interest Interest
(Dollars in thousands) Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense(1) Rate(2) Balance Expense(1) Rate(2) Balance Expense(1) Rate(2)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
36
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing deposits
at banks $ 1,124 $ 61 5.43% $ 4,384 $ 248 5.66% $ 8,137 $ 433 5.32%
-------- ------- ---- --------- ------- ---- --------- ------- ----
U.S. Treasury 10,297 625 6.07 13,033 819 6.28 19,705 1,201 6.09
U.S. Government agencies 212,017 13,875 6.54 165,848 11,220 6.77 102,024 6,724 6.59
State and municipal (3) 102,778 7,729 7.52 52,867 4,144 7.84 37,069 2,958 7.98
Other bonds and securities 19,285 1,045 5.42 12,025 632 5.26 7,337 338 4.61
-------- ------- ---- --------- ------- ---- --------- ------- ----
Total securities 344,377 23,274 6.76 243,773 16,815 6.90 166,135 11,221 6.75
-------- ------- ---- --------- ------- ---- --------- ------- ----
Federal funds sold 3,990 218 5.46 670 36 5.37 2,524 132 5.23
-------- ------- ---- --------- ------- ---- --------- ------- ----
Commercial loans (3) 265,896 23,602 8.88 207,043 18,768 9.06 158,550 14,546 9.17
Mortgage loans 184,330 14,794 8.03 171,239 13,684 7.99 143,421 11,415 7.96
Installment loans 67,718 6,245 9.22 66,557 6,226 9.35 55,860 5,191 9.29
-------- ------- ---- --------- ------- ---- --------- ------- ----
Total loans(4) 517,944 44,641 8.62 444,839 38,678 8.69 357,831 31,152 8.71
-------- ------- ---- --------- ------- ---- --------- ------- ----
Total interest-
earning assets 867,435 68,194 7.86 693,666 55,777 8.04 534,627 42,938 8.03
Unrealized gains
(losses) on available
for sale
securities 5,312 781 (379)
Allowance for loan losses (6,344) (5,409) (5,068)
Non-interest earning assets 53,871 41,395 34,109
-------- --------- ---------
Total assets $920,274 $ 730,433 $ 563,289
======== ========= =========
INTEREST-BEARING LIABILITIES:
Demand deposits,
interest-bearing $ 62,915 $ 1,050 1.67% $ 39,360 $ 814 2.07% $ 31,137 $ 653 2.10%
Savings deposits 278,860 10,450 3.75 220,247 7,495 3.40 169,517 5,094 3.01
Other time deposits 290,147 15,768 5.43 241,301 12,810 5.31 213,968 10,993 5.14
-------- ------- ---- --------- ------- ---- --------- ------- ----
Total deposits 631,922 27,268 4.32 500,908 21,119 4.22 414,622 16,740 4.04
Other borrowed funds 46,855 2,490 5.31 35,396 2,000 5.65 23,430 1,271 5.42
Long-term borrowings 64,401 3,506 5.44 52,061 2,859 5.49 11,602 643 5.54
-------- ------- ---- --------- ------- ---- --------- ------- ----
Total interest-bearing
liabilities 743,178 33,264 4.48 588,365 25,978 4.42 449,654 18,654 4.15
------- ---- ------- ---- ------- ----
Demand deposits,
non-interest bearing 72,866 63,970 51,653
Other non-interest
bearing liabilities 9,051 7,189 4,861
-------- --------- ---------
Total liabilities 825,095 659,524 506,168
Stockholders' equity 95,179 70,909 57,121
-------- --------- ---------
Total liabilities
and stockholders' equity $920,274 $ 730,433 $ 563,289
======== ========= =========
Net interest income $34,930 $ 29,799 $24,284
======= ======= =======
Net interest margin(5) 4.03% 4.30% 4.54%
==== ==== ====
</TABLE>
37
<PAGE>
- ----------
(1) Includes loan fee income.
(2) Yields on investments are calculated on amortized cost.
(3) Taxable equivalent basis, using a 34% statutory tax rate and adjusted for
the disallowance of the deduction for interest expense to carry bank
eligible tax-exempt securities and loans.
(4) Loans outstanding include non-accruing loans.
(5) Represents the difference between interest earned and interest paid, divided
by average total interest-earning assets.
1998 vs. 1997
Net interest income, on a tax-equivalent basis, increased $5.1 million, or
17.1%, to $34.9 million in 1998 from $29.8 million in 1997. The increase in net
interest income was primarily due to an increase in total interest income on
interest-earning assets, offset by an increase in interest expense on
interest-bearing liabilities. Net interest margin (the difference between
interest earned and interest paid, divided by average total interest-earning
assets) decreased 27 basis points to 4.03% for the year ended December 31, 1998
compared to 4.30% for the year ended December 31, 1997, calculated on a
tax-equivalent basis. Net interest margin decreased in 1998 primarily due to a
decrease in the average yield on securities and loans. This was due to a 75
basis point decrease in the prime rate late in 1998, an overall decrease in
security yields in 1998 and an increase in securities as a percentage of total
earning assets (because securities generally yield less than loans yield). The
Company's total interest income on a tax-equivalent basis increased by $12.4
million to $68.2 million during 1998, from $55.8 million in 1997. Interest
income from securities increased $6.5 million, or 38.7%, from $16.8 million in
1997 to $23.3 million in 1998, calculated on a tax-equivalent basis. Interest
income on securities increased due to an increase in the average balance of
38
<PAGE>
securities, from $243.8 million at December 31,1997 to $344.4 million at
December 31, 1998. During 1998, the Company chose to purchase tax-free,
municipal securities to lower its effective tax rate from the statutory rate of
34% to 24% and also as part of a program to leverage the balance sheet and
increase earnings. Interest income on loans, calculated on a tax-equivalent
basis, increased from $38.7 million in 1997 to $44.6 million in 1998. The yield
on average loans decreased slightly, from 8.69% in 1997 to 8.62% in 1998. This
slight decrease was due to the prime rate decreasing 75 basis points in late
1998.
The Company's total interest expense increased $7.3 million, or 28.1%, to
$33.3 million in 1998 from $26.0 million in 1997. This was due to a $154.8
million increase in the volume of average interest-bearing liabilities, or
26.3%, to $743.2 million at December 31, 1998 from $588.4 million at December
31, 1997. The average rate paid on interest-bearing liabilities, remained
substantially the same, increasing 6 basis points, or 1.4%, from 4.42% in 1997
to 4.48% in 1998.
The average rate paid on interest-bearing deposits increased 10 basis
points, or 2.4%, from 4.22% in 1997 to 4.32% in 1998. This was due to an
increase in the volume of cash management savings and municipal deposits at
interest rates above 1997's average cost of funds. Average interest bearing
deposits increased from $500.9 million at December 31, 1997 to $631.9 million at
December 31, 1998 while total interest expense on deposits increased $6.2
million from $21.1 million in 1997 to $27.3 million in 1998. Interest expense on
time deposits increased $3.0 million, or 23.4%, from $12.8 million during 1997
to $15.8 million in 1998. This increase was due to a $48.8 million, or 20.2%,
increase in the average volume of time deposits from $241.3 million in 1997 to
$290.1 million in 1998.
Interest expense on other borrowed funds and long-term borrowings
increased in 1998 to $6.0 million from $4.9 million in 1997 as the average
balance of other borrowed funds and long-term borrowings increased to $111.3
million in 1998 from $87.5 million in 1997. This
39
<PAGE>
increase, along with the increase in deposits, funded purchases of securities
and loans as part of a program to leverage the balance sheet and increase
earnings. The Company plans to replace most of the short-term borrowings with
lower-cost deposits expected to be gathered from the 23 new branches in 1999.
During 1998, average non-interest bearing personal and business demand
(checking) deposits increased to $72.9 million from $64.0 million at December
31, 1997. During 1998, the Company continued a compensation program to encourage
branch employees to bring in non-interest bearing demand and lower-costing
savings deposits. Berks County Bank ("Berks") also continued to offer free
checking in an overall effort to lower its cost of funds by attracting
significant volumes of new deposits at incremental rates below rates on time
deposits or borrowings.
1997 vs. 1996
Net interest income on a tax-equivalent basis increased $5.5 million, or
22.6%, in 1997 compared to 1996. The increase in net interest income was
primarily due to an increase in the volume of average interest-earning assets
over an increase in the volume of interest bearing liabilities. Interest income,
on a tax-equivalent basis, increased $12.9 million, or 30.0%, from $42.9 million
in 1996 to $55.8 million in 1997, while interest expense increased $7.3 million,
or 39.0%.
During 1997, net-interest margin decreased 24 basis points to 4.30%, from
4.54% in 1996, calculated on a tax-equivalent basis. Net interest margin
decreased due to an increase in the volume of average interest-bearing
liabilities as well as an increase in the average rate on average
interest-bearing liabilities. Average interest-bearing liabilities increased
from $449.7 million in 1996 to $588.4 million in 1997, while the average rate
increased from 4.15% in 1996 to 4.42% in 1997. The increase in the average rate
and average volume of interest-bearing liabilities in 1997 was due to Berks
offering an above market
40
<PAGE>
rate of 4.20% APY (annual percentage yield) on money market savings accounts
having balances of $1,000 or more, as well as an increase in average borrowed
funds at yields above 1996's average cost of funds yield.
The average yield on interest-earning assets in 1997 increased 1 basis
point to 8.04%, calculated on a tax equivalent basis. The average yield on
securities increased from 6.75% in 1996 to 6.90% in 1997, calculated on a
tax-equivalent basis. During 1997, the Company increased the size of the
securities portfolio through the purchase of tax-exempt state and municipal
securities. The average yield on securities increased 15 basis points to 6.90%,
calculated on a tax equivalent basis.
During 1997, the Company increased its borrowings from the FHLB to fund
the purchases of securities. Average other borrowed funds and long-term
borrowings increased $52.4 million, or 149.6%. This resulted in an increase in
interest expense of $2.9 million in 1997 compared to 1996.
Rate/Volume Analysis of Changes in Net Interest Income
Net interest income may also be analyzed by segregating the volume and
rate components of interest income and interest expense. The "Rate/Volume
Analysis of Changes in Net Interest Income" table which follows sets forth an
analysis of volume and rate changes in net interest income for the periods
indicated. For purposes of this table, changes in interest income and interest
expense are allocated to volume and rate categories based upon the respective
percentage changes in average balances and average rates.
<TABLE>
<CAPTION>
Years Ended December 31,
1998 vs. 1997 1997 vs. 1996
------------- -------------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Change due to Change due to
-------------------------------- -------------------------------
Average Average Increase Average Average Increase
Volume Rate (Decrease) Volume Rate (Decrease)
-------- ------- -------- -------- ------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Interest-bearing deposits
with banks $ (184) $ (3) $ (187) $ (200) $ 15 $ (185)
Federal funds sold 178 4 182 (97) 1 (96)
Securities (1) 7,251 (792) 6,459 5,284 310 5,594
Loans (1) 6,490 (527) 5,963 7,657 (131) 7,526
-------- ------- -------- -------- ------- --------
Total interest income $ 13,735 $(1,318) $ 12,417 $ 12,644 $ 195 $ 12,839
-------- ------- -------- -------- ------- --------
Interest paid on:
Interest-bearing demand
and savings deposits $ 2,482 $ 709 $ 3,191 $ 1,696 $ 866 $ 2,562
Time deposits 2,593 365 2,958 1,404 413 1,817
Borrowed funds 1,325 (188) 1,137 2,891 54 2,945
-------- ------- -------- -------- ------- --------
Total interest expense $ 6,400 $ 886 $ 7,286 $ 5,991 $ 1,333 $ 7,324
-------- ------- -------- -------- ------- --------
Net interest income $ 7,335 $(2,204) $ 5,131 $ 6,653 $(1,138) $ 5,515
======== ======= ======== ======== ======= ========
</TABLE>
42
<PAGE>
- ----------
(1) Interest income is reported on a tax-equivalent basis, using a 34% statutory
tax rate and adjusted for the disallowance of the deduction for interest
expense to carry bank eligible tax-exempt securities and loans.
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 of the
Company based upon its evaluation of the known as well as inherent risks within
the Banks' loan portfolio. Management's evaluations are 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 $2.2 million for 1998 compared to
$1.1 million for 1997 and $0.9 million for 1996. The Company boosted its
provision in 1998 due to the increase in net new loans and to the increasing
uncertainty regarding economic conditions. Non-performing assets were 0.75% of
total assets at December 31, 1998, compared to 0.82% and 0.78% at December 31,
1997 and 1996 respectively.
Other Income
Other income increased $5.8 million, or 128.9%, to $10.3 million in 1998
compared to $4.5 million in 1997 and $3.6 million in 1996. The 1998 increase was
primarily due to net realized gains on sale of securities of $4.3 million.
Management elected to sell some of its equity securities of Pennsylvania banks
in order to provide additional revenue to offset certain one-time merger-related
expenses and increased loan loss provision. As approved by the Asset/Liability
Committee, management sold these equity securities during a peak in bank stocks
and turned the "paper" gains into "realized gains. Income from customer service
fees increased $0.5 million, from $2.1 million in 1997 to
43
<PAGE>
$2.6 million in 1998. This compares to $1.8 million in 1996. Customer service
fees consist of charges for overdrafts and NSF (non-sufficient funds), safe
deposit rentals, ATM, and other services that are primarily deposit driven.
Income from mortgage banking activities increased $1.0 million, or 100.0%, from
$1.0 million in 1997 to $2.0 million in 1998. Mortgage banking activities income
represents income generated from mortgages originated and sold in the secondary
market. The 1998 increase was due to an increase in new home and refinancing and
the expansion of the Company's geographic market into Bucks, Chester, Lancaster
and Lehigh counties. Income from mortgage banking activities increased $0.3
million in 1997 from $0.7 million in 1996. The 1997 increase was due to an
increase in new home construction.
Other Expenses
Total other expenses increased $5.9 million, or 30.7%, to $25.1 million in
1998. This compares to $19.2 million in 1997 and $16.5 million in 1996.
Salaries, wages and employee benefits increased $2.5 million, or 25.3%,from $9.9
million in 1997 to $12.4 million in 1998. Salaries, wages and employee benefits
increased in 1998 due to the opening and staffing of two new branches in Hamburg
and Robesonia, additional back room support required to support the rapid growth
of the Company and also due to the accrual of the money purchase pension plan,
as approved in the agreement of consolidation, which provides for a fixed
employer contribution equal to 3% of an eligible employee's base salary. In
1997, salaries, wages and employee benefits increased by $2.0 million. This was
due to opening and staffing of two new branches in 1997-Shillington and
Muhlenburg.
Occupancy expenses increased $0.7 million, or 50.0%, to $2.1 million in
1998 from $1.4 million in 1997 and 1996. This increase resulted from the opening
of the Hamburg and Robesonia branches in 1998 and one-time expenses related to
occupying the new
44
<PAGE>
corporate headquarters at the Berks County Bank Building. The Company moved into
the Berks County Bank Building in April of 1998.
Other operating expenses and merger costs increased $2.6 million, or 40%,
to $9.1 million for the year ended December 31, 1998 compared to $6.5 million in
1997 and $6.0 million in 1996. One-time merger related costs, consisting
primarily of professional fees and related transaction costs, totaled $2.0
million. Other changes occurred in advertising, data processing and MAC fees,
office supplies and expense and professional fees.
Advertising increased $0.2 million, or 20.0%, to $1.2 million in 1998 from
$1.0 million in 1997 and 1996. The increase from prior years was primarily due
to the opening and promotion of the Hamburg and Robesonia branches.
Data processing and MAC fees increased $0.2 million, or 20.0%, to $1.2
million in 1998 from $1.0 million in 1997 and $0.8 million in 1996. The increase
was a result of an increase in the volume of new accounts in 1998 and 1997.
Office supplies and expenses increased $0.2 million, or 18.2%, to $1.3
million in 1998 from $1.1 million in 1997 and $0.9 million in 1996. This
increase was attributable to the overall growth of the bank in 1998 and 1997.
Professional fees remained relatively the same at $0.9 million in 1998 and
1997 and $0.7 million in 1996. Professional fees include fees to consultants,
attorneys and accountants.
Provision for Income Taxes
The provision for federal income taxes increased $0.4 million, or 12.1%,
to $3.7 million in 1998 compared to $3.3 million in 1997 and $2.4 million in
1996. The effective tax rates
45
<PAGE>
for the years ended December 31, 1998, 1997 and 1996 were 24.0%, 26.2% and 26.1%
respectively. The decrease in 1998's, 1997's and 1996's effective tax rate from
the statutory rate of 34% was due to the significant amount of tax-exempt
interest income earned on bank-qualified municipal securities and tax free
loans. A reconciliation of the statutory income tax at a rate of 34% to the
income tax expense for 1998, 1997 and 1996 is included in footnote No. 9 in the
"Notes to Consolidated Financial Statements".
Asset Quality
Non-performing assets as a percentage of total assets decreased by 8.54%
during 1998 to 0.75% at year-end 1998 from 0.82% at year-end 1997.
Non-performing assets increased from $6.7 million at December 31, 1997 to $8.7
million at December 31, 1998, in a slightly-lower proportion to the increase in
total assets. Non-performing assets are comprised of nonaccrual loans, accruing
loans that are 90 days or more past due, foreclosed real estate and restructured
loans. It is the Company's policy to classify a loan within 10 days after the
month end in which the loan becomes 90 days past due for either principal or
interest. The Company increased the balance in the allowance for loan losses
from $5.7 million, or 1.2% of total loans at December 31, 1997 to $7.2 million,
or 1.3% of total loans at December 31, 1998. The increase was in recognition of
increased risk in the economy given the high volatility the markets experienced
during 1998, as well as to maintain adequate reserves given the Company's strong
growth in loans during 1998. The ratio of the allowance for loans losses to
non-performing loans was 86.7% at December 31, 1998 compared to 91.9% at
December 31, 1997. The balance in the allowance for loan losses was 1.96% of
total loans excluding residential mortgages at December 31, 1998 compared to
1.87% at December 31, 1997. It has been the Company's experience that the
percentage of loan losses have been substantially less in its residential
mortgage portfolio than in its commercial loan
46
<PAGE>
portfolio. At December 31, 1998, 31.7% of the Company's loan portfolio was in
residential mortgage loans, compared to 36.4% at December 31, 1997.
As a financial institution which assumes lending and credit risks as a
principal element of its business, the Company anticipates that credit losses
will be experienced in the normal course of business. Accordingly, management
makes a monthly determination as to an appropriate provision from earnings
necessary to maintain an allowance for loan losses that is adequate for
potential yet undetermined losses. The amount charged against earnings is based
upon several factors including, at a minimum, each of the following:
*a continuing review of delinquent, classified and nonaccrual loans, large
loans, and overall portfolio quality. This continuous review assesses the risk
characteristics of both individual loans and the total loan portfolio;
*analytical review of loan charge-off experience, delinquency rates and
other relevant historical and peer statistical ratios;
*management's judgment with respect to local and general economic
conditions and their impact on the existing loan portfolio;
*regular examinations and reviews of the loan portfolio by bank
regulators.
When it is determined that the prospect for recovery of the principal of a
loan has significantly diminished, that portion of the loan which is determined
to be uncollectible is immediately charged against the allowance account.
Subsequent recoveries, if any, are credited to the allowance account. In
addition,
47
<PAGE>
nonaccrual and large delinquent loans are reviewed monthly to determine
potential losses.
Management believes the allowance for loan losses was adequate to cover
risks inherent in its loan portfolio at December 31, 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.
Interest Rate Risk Management
Interest rate risk management involves managing the extent to which
interest-sensitive assets and interest-sensitive liabilities are matched. The
Company typically defines interest-sensitive assets and interest-sensitive
liabilities as those that reprice within one year or less. Maintaining an
appropriate match is a method of avoiding wide fluctuations in net interest
margin during periods of changing interest rates.
The difference between interest-sensitive assets and interest-sensitive
liabilities is known as the "interest-sensitivity gap" ("GAP"). A positive GAP
occurs when interest-sensitive assets exceed interest-sensitive liabilities
repricing in the same time periods, and a negative GAP occurs when
interest-sensitive liabilities exceed interest-sensitive assets repricing in the
same time periods. A negative GAP suggests that a financial institution may be
better positioned to take advantage of declining interest rates rather than
increasing interest rates, and a positive GAP ratio suggests the converse.
The Company attempts to manage its assets and liabilities in a manner that
stabilizes net interest income and net economic value under a broad range of
interest rate environments. Adjustments to the mix of assets and liabilities are
made
48
<PAGE>
periodically in an effort to provide dependable and steady growth in net
interest income regardless of the behavior of interest rates.
The following table presents a summary of the Company's interest rate
sensitivity at December 31, 1998, calculated on a beta-adjusted basis. For
purposes of this table, the Company has used assumptions based on industry data
and historical experience to calculate the expected maturity of securities and
loans because, statistically, certain categories of securities and loans are
prepaid before their maturity date, even without regard to interest rate
fluctuations.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY ANALYSIS AT December 31, 1998(1)
- ------------------------------------------------------------------------------------------------------------------------------------
0 days 31 days 61 days 91 days 181 days 1 year
through through through through through through Over 5
30 days 60 days 90 days 180 days 1 year 5 years Years Total
------- ------- ------- -------- ------ ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 112,288 $ 6,119 $ 5,775 $ 28,572 $ 49,105 $195,218 $ 143,540 $ 540,617
Securities(2) 11,590 3,532 32,645 10,748 47,794 213,136 213,230 532,675
Interest-bearing deposits
& Federal Funds sold 806 0 0 0 0 0 0 806
--------- --------- -------- -------- -------- -------- --------- ----------
Total $ 124,684 $ 9,651 $ 38,420 $ 39,320 $ 96,899 $408,354 $ 356,770 $1,074,098
--------- --------- -------- -------- -------- -------- --------- ----------
Interest-bearing liabilities:
Interest bearing deposits $ 148,586 $ 10,688 $ 12,319 $ 50,566 $ 88,264 $136,861 $ 268,834 $ 716,118
Borrowed Funds 86,072 0 0 0 5,000 45,000 85,000 221,072
Non-interest-bearing deposits 0 0 0 0 0 51,202 51,230 102,432
--------- --------- -------- -------- -------- -------- --------- ----------
Total $ 234,658 $ 10,688 $ 12,319 $ 50,566 $ 93,264 $233,063 $ 405,064 $1,039,622
--------- --------- -------- -------- -------- -------- --------- ----------
Interest-rate sensitivity
gap:
Interval $(109,974) $ (1,037) $ 26,101 $(11,246) $ 3,635 $175,291 $ (48,294) $ 34,476
========= ========= ======== ======== ======== ======== ========= ==========
Cumulative $(109,974) $(111,011) $(84,910) $(96,156) $(92,521) $ 82,770 $ 34,476 $ 34,476
========= ========= ======== ======== ======== ======== ========= ==========
Ratio of cumulative gap
to total rate-sensitive
assets (10.24%) (10.34%) (7.91%) (8.95%) (8.61%) 7.71% 3.21% 3.21%
========= ========= ======== ======== ======== ======== ========= ==========
</TABLE>
(1) Calculated on a beta-adjusted basis.
(2) Maturity of securities is based on maturity date; excludes unrealized gains
on available for sale securities.
Shortcomings are inherent in a simplified and static GAP analysis that may
result in an institution with a negative GAP having interest rate behavior
characteristics of an asset-sensitive balance sheet. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing,
49
<PAGE>
they may react in different degrees to changes in market interest rates.
Prepayment and early withdrawal levels could also deviate significantly from
those assumed in calculating GAP in the manner presented in the table.
The traditional static GAP analysis implicitly assumes that the interest
rates on all assets and liabilities that reprice within a given repricing period
change by the same amount as the change in the market interest rate of the same
duration. For example, if the Federal funds rate increased by 100 basis points,
a static GAP model assumes that the prime rate and the rate paid on money market
deposits will each change by 100 basis points. However, experience suggests that
such an analysis is not accurate. For example, if the Federal funds rate changes
by 100 basis points, the prime rate may only change by 90 basis points and the
rate paid on money market accounts may only change by 40 basis points. More
sophisticated asset/liability management models attempt to adjust for this
defect in the static GAP model. Accordingly, the Company measures its
interest-rate risk by conducting various analyzes in addition to the traditional
static GAP report, including repricing matrices, beta-adjusted GAP reports,
simulation modeling and duration analyses.
Beta is the measure of the relative sensitivity of the amount of change in
the interest rate on a given asset or liability with the amount of change in
another independent financial instrument. For example, an asset or liability
with a beta of 0.75 means that a 100 basis point change in the independent
variable (e.g. Federal funds) will result in a 75 basis point change in the rate
of the asset or liability (dependent variable). A beta is assigned to each key
rate for each asset and liability account, and the volume of assets and
liabilities that reprice within a repricing period are adjusted by this beta
factor. The result is a beta-adjusted GAP position. This data is also organized
into a repricing matrix to give a graphical presentation of the GAP position.
Results of these
50
<PAGE>
analyses as of December 31, 1998 indicate that despite the negative GAP balance
shown in the table, the Company does not have material interest-rate risk in the
event that interest rates rise or fall as much as 300 basis points over the next
twelve months.
Capital
The Company's Tier 1 capital to risk-weighted assets ratio at December 31,
1998 was 14.83% compared to 17.56% at December 31, 1997. These ratios exceeded
the regulatory Tier 1 capital requirement of 4.00%. The Company's total capital
to risk-weighted assets ratio at December 31, 1998 was 15.97% compared to 18.72%
at December 31, 1997. These ratios exceeded the regulatory total risk-based
capital requirement of 8.00%. At December 31, 1998, the Company's leverage ratio
was 8.70% versus 10.93% at December 31, 1997. These ratios exceeded the
regulatory leverage ratio requirement of 4.00%. The Company is categorized as
"well-capitalized" at December 31, 1998 under applicable Federal regulations.
Liquidity and Capital Resources
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 and Federal funds sold.
Liquid assets totaled $564.0 million at December 31, 1998 compared to
$234.7 million at December 31, 1997. Maturing and repaying loans are another
source of asset liquidity. At December 31, 1998, the Company estimated that an
additional $67.3 million
51
<PAGE>
of loans will mature in the next six-month period ended June 30, 1999.
Liability liquidity can be met by attracting deposits with competitive
rates, buying Federal funds or utilizing the borrowing facilities of the Federal
Reserve System or the FHLB system. The Company utilizes a variety of these
methods of liability liquidity. At December 31, 1998, the Company had
approximately $152.2 million in unused lines of credit available to it under
informal arrangements with correspondent banks compared to $222.8 million at
December 31, 1997. These lines of credit enable the Company to purchase funds
for short-term needs at current market rates.
Capital expenditures that are anticipated for 1999 include approximately
$10.5 million for the purchase, renovation and equipping of 23 full-service
branches. See "Future Outlook" for further discussion on the 23 new branches.
Effects of Inflation
The Company's asset and liability structures are primarily monetary in
nature. As such, the Company's assets and liabilities tend to move in concert
with interest rates. While changes in interest rates may have a significant
impact on financial performance, interest rates do not necessarily move in the
same direction or in the same magnitude as prices of other goods and services
and may frequently reflect government policy initiatives or economic factors not
measured by a price index.
Recently Issued Accounting Standard
The Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" in June 1998. The
Company is required to adopt the
52
<PAGE>
Statement on January 1, 2000. The adoption of the Statement is not expected to
have a significant impact on the financial condition or results of operations of
the Company.
Future Outlook
Effective January 1, 1999, HNB was merged into BCB which changed the legal
name of the bank to Main Street Bank. Berks County Bank, a division of Main
Street Bank, is the name that will continue to be used for branches in the
former Berks County Bank's market place. Heritage Bank, a division of Main
Street Bank, will operate in the former Heritage National Bank's market place
and the Main Street Bank name will be used for branches opened in new markets.
As of the date of this report, the Bank has formed, or is in the process
of exploring, the formation of additional joint ventures with major realtors,
opening a title agency, becoming a broker-dealer, offering alternative
investment services and providing general insurance products and additional
related financial services. The management believes that adding these products
and services to the many quality financial services we already offer our
customers, will allow us to better serve our customers, compete more effectively
for greater market share, and create new income opportunities enabling us to
increase earnings per share on a consistent basis.
Certainly, the largest undertaking for 1999 is the planned opening of
approximately twenty three new full service bank offices which will more than
double the number of full service offices from 22 to 45. These new locations
have the potential to contribute significantly to the Company's deposit and loan
growth. Our forecasts indicate that these new branches will be slightly dilutive
to 1999 earnings and accretive to earnings in the year 2000.
53
<PAGE>
Forward-Looking Statement: This report contains various forward-looking
statements and includes assumptions concerning the Company's operations, future
results, and prospects. These forward-looking statements are based upon current
expectations and are subject to risk and uncertainties. In connection with the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, the Company provides the following cautionary statement identifying
important factors which could cause the actual results or events to differ
materially from those set forth in or implied by the forward-looking statements
and related assumptions.
Such factors include the following: (i) the effect of changing regional
and national economic conditions; (ii) significant changes in interest rates and
prepayment speeds; (iii) credit risks of commercial, real estate, consumer, and
other lending activities; (iv) changes in federal and state banking regulations;
(v) the presence in the Company's market area of competitors with greater
financial resources than the Company; (vi) the ability of third-party vendors
upon whom the Company relies, loan customers and businesses and governmental
units generally to achieve Y2K compliance on a timely basis and; (vii) other
external developments which could materially impact the Company's operational
and financial performance.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Market risk is the risk of loss arising from adverse changes in the fair
value of financial instruments due to changes in interest rates, exchange rates,
and equity prices. The Company's market risk is composed primarily of interest
rate risk. The Company's Asset/Liability Committee (ALCO) is responsible for
54
<PAGE>
reviewing the interest rate sensitivity position of the Company and establishing
policies to monitor and limit exposure to interest rate risk. The operations of
the Company do not subject it to foreign currency exchange or commodity price
risk. Also, the Company and the Banks do not utilize interest rate swaps, caps,
or other hedging transactions.
Interest Rate Sensitivity
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Interest Rate Risk Management" for discussion on
interest rate sensitivity.
Interest Rate Sensitivity - Cash Flow Analysis
The Interest Rate Sensitivity Table below illustrates the cash flows
expected from earning assets for each of the next five years. Cash flows from
loans are based on contractual payments and actual cash flows will most likely
vary based on the fluctuation of interest rates. Generally, loans will prepay
faster in a decreasing rate environment. This will result in lower interest
income because there are more cash flows to reinvest at lower interest rates.
Cash flows from bullet securities, which include U.S. Treasury securities,
obligations of states and political subdivisions, and other securities are based
on the earlier of the contractual maturity or the call date if the security is
likely to be called, with little or no change in interest rates from December
31, 1998. Cash flows from mortgage-backed securities are based on consensus
prepayment speeds under an unchanged rate environment over the next five years.
Similar to loans, prepayments on mortgage-backed securities tend to increase as
interest rates fall, and fall as rates rise.
Also included on the table is the contractual maturities of all interest
bearing liabilities. Interest bearing demand and
55
<PAGE>
savings deposits are included as maturing in 1999. These customers have no
obligation to keep their money with the Company for any period of time. In order
to determine the effect of market interest rates on these products, the Company
uses a simulation model. While the entire balance of these products is affected
immediately when there is an interest rate change, the interest rate change is
generally not equal to the change in Fed funds or the prime rate. The Company
has noted that competitive pressures drive this rate more than small changes in
market rates. Time deposits are presented by contractual maturity. Short-term
borrowings consist of repurchase agreements and overnight borrowings from the
FHLB. Generally, the funds mature within 1 business day. Long-term borrowings
are presented by contractual maturity.
<TABLE>
<CAPTION>
CASH FLOWS YEAR ENDED DECEMBER 31
- -------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans
Fixed Rate $ 59,489 $46,718 $43,605 $27,469 $26,842 $ 82,387 $286,510 $311,837
Average Rate 8.32% 9.87% 8.23% 8.34% 8.05% 7.69% 8.35%
Variable Rate $ 79,814 $13,232 $12,072 $12,256 $10,417 $124,316 $254,107 $254,107
Average Rate 8.57% 10.55% 8.94% 9.63% 10.64% 7.64% 8.38%
Investment Securities $ 59,590 $57,788 $39,310 $19,186 $87,838 $268,963 $532,675 $534,551
Average Rate 6.66% 6.69% 6.66% 6.52% 6.41% 6.41% 6.49%
INTEREST BEARING LIABILITIES:
Interest Bearing Demand $ 68,116 $ 0 $ 0 $ 0 $ 0 $ 0 $ 68,116 $ 68,116
Average Rate 1.72% 0% 0% 0% 0% 0% 1.67%
Savings Deposits $326,749 $ 0 $ 0 $ 0 $ 0 $ 0 $326,749 $326,749
Average Rate 3.92% 0% 0% 0% 0% 0% 3.75%
Time Deposits:
Fixed Rate $150,374 $69,424 $20,170 $11,626 $35,706 $ 1,493 $288,793 $397,510
Average Rate 5.24% 5.74% 5.85% 6.12% 6.07% 5.97% 5.53%
Variable Rate $ 31,134 $ 1,184 $ 0 $ 0 $ 142 $ 0 $ 32,460 $ 32,460
Average Rate 4.20% 4.54% 0% 0% 5.07% 0% 4.22%
Short-Term Borrowings $ 86,072 $ 0 $ 0 $ 0 $ 0 $ 0 $ 86,072 $ 86,072
Average Rate 4.95% 4.95%
Long-Term Borrowings $ 5,000 $ 5,000 $40,000 $ 0 $ 85,000 $135,000 134,339
Average Rate 5.87% 6.05% 5.49% 0% 4.78% 5.44%
</TABLE>
Note: Cash flow information for loans does not include the allowance for
loans losses. Cash flow information for securities is stated at amortized cost.
56
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
<S> <C>
INDEPENDENT AUDITOR'S REPORT
ON THE CONSOLIDATED FINANCIAL STATEMENTS 58
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets 60
Consolidated statements of income 61
Consolidated statements of stockholders' equity 62
Consolidated statements of cash flows 63, 64 & 65
Notes to consolidated financial statements 66-90
QUARTERLY FINANCIAL INFORMATION (unaudited) 91
</TABLE>
57
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Main Street Bancorp, Inc.
Reading, Pennsylvania
We have audited the accompanying consolidated balance sheets of Main
Street Bancorp, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Main
Street Bancorp, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
58
<PAGE>
Reading, Pennsylvania
January 29, 1999
59
<PAGE>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
December 31, 1998 1997
- ---------------------------------------------------------------------------------------------------------------
(In Thousands, Except Share Data)
<S> <C> <C>
ASSETS
Cash and due from banks $ 28,710 $ 24,918
Interest-bearing deposits with banks 336 200
Federal funds sold 470 470
Securities available for sale 534,526 209,106
Securities held to maturity, fair value 1998 $ 25; 1997 $ 71,769 25 70,914
Loans receivable, net of allowance for loan losses 1998 $ 7,222; 1997 $ 5,738 533,395 477,838
Mortgage loans held for sale 5,069 --
Due from mortgage investors 14,567 5,425
Premises and equipment, net 25,717 11,511
Accrued interest receivable and other assets 15,726 13,481
---------- ----------
Total assets $1,158,541 $ 813,863
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 102,432 $ 73,937
Interest bearing 716,118 552,823
---------- ----------
Total deposits 818,550 626,760
Accrued interest payable and other liabilities 24,007 13,625
Other borrowed funds 86,072 30,308
Long-term debt 135,000 54,450
---------- ----------
Total liabilities 1,063,629 725,143
---------- ----------
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 1998 10,388,443 shares; 1997 9,639,808 shares 10,388 9,640
Surplus 64,134 49,985
Retained earnings 19,227 26,721
Accumulated other comprehensive income 1,163 2,374
---------- ----------
Total stockholders' equity 94,912 88,720
---------- ----------
Total liabilities and stockholders' equity $1,158,541 $ 813,863
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
60
<PAGE>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C>
Interest income:
Loans receivable, including fees $ 44,544 $ 38,639 $ 30,941
Interest and dividends on securities:
Taxable 15,545 12,671 8,263
Tax-exempt 5,351 2,869 2,040
Other 279 284 565
-------- -------- --------
Total interest income 65,719 54,463 41,809
-------- -------- --------
Interest expense:
Deposits 27,268 21,119 16,740
Other borrowed funds 2,490 2,000 1,271
Long-term debt 3,506 2,859 643
-------- -------- --------
Total interest expense 33,264 25,978 18,654
-------- -------- --------
Net interest income 32,455 28,485 23,155
Provision for loan losses 2,210 1,140 867
-------- -------- --------
Net interest income after provision for loan losses 30,245 27,345 22,288
-------- -------- --------
Other income:
Income from fiduciary activities 966 875 781
Customer service fees 2,591 2,060 1,802
Mortgage banking activities 2,017 1,034 687
Net realized gains (losses) on sales of securities 4,329 357 (1)
Other 398 209 290
-------- -------- --------
Total other income 10,301 4,535 3,559
-------- -------- --------
Other expenses:
Salaries and wages 9,857 8,006 6,369
Employee benefits 2,496 1,912 1,591
Occupancy 2,081 1,420 1,423
Equipment depreciation and maintenance 1,563 1,351 1,193
Merger costs 1,963 -- --
Other 7,132 6,545 5,960
-------- -------- --------
Total other expenses 25,092 19,234 16,536
-------- -------- --------
Income before income taxes 15,454 12,646 9,311
Federal income taxes 3,711 3,317 2,428
-------- -------- --------
Net income $ 11,743 $ 9,329 $ 6,883
======== ======== ========
Basic earnings per share $ 1.13 $ 1.02 $ 0.82
======== ======== ========
Diluted earnings per share $ 1.12 $ 1.00 $ 0.82
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
61
<PAGE>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Years Ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Shares Of 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, 1995 7,843,414 $ 7,843 $31,435 $ 16,292 $ 741 $56,311
-------
Comprehensive income:
Net income -- -- -- 6,883 -- 6,883
Change in net unrealized gains (losses)
on securities available for sale -- -- -- -- (395) (395)
-------
Total comprehensive income 6,488
-------
Cash dividends declared by pooled entities,
$ .30 per share -- -- -- (2,495) -- (2,495)
Pre-merger stock transactions of pooled
entities (42,008) (42) (466) (11) -- (519)
--------------------------------------------------------------------
Balance, December 31, 1996 7,801,406 7,801 30,969 20,669 346 59,785
-------
Comprehensive income:
Net income -- -- -- 9,329 -- 9,329
Change in net unrealized gains (losses)
on securities available for sale -- -- -- -- 2,028 2,028
-------
Total comprehensive income 11,357
-------
Net proceeds of stock offering of pooled
entity
(net of offering costs of $ 1,728) 1,840,230 1,840 19,029 -- -- 20,869
Cash dividends declared by pooled entities,
$ .36 per share -- -- -- (3,277) -- (3,277)
Pre-merger stock transactions of pooled
entities (1,828) (1) (13) -- -- (14)
--------------------------------------------------------------------
Balance, December 31, 1997 9,639,808 9,640 49,985 26,721 2,374 88,720
-------
Comprehensive income:
Net income -- -- -- 11,743 -- 11,743
Change in net unrealized gains (losses)
on securities available for sale -- -- -- -- (1,211) (1,211)
-------
Total comprehensive income 10,532
-------
Issuance of common stock upon exercise
of stock options 38,520 38 304 -- -- 342
Issuance of common stock in connection
with a 7% stock dividend 679,072 679 13,412 (14,120) -- (29)
Cash dividends declared, $ .49 per share -- -- -- (5,117) -- (5,117)
Pre-merger stock transactions of pooled
entities 31,043 31 433 -- -- 464
--------------------------------------------------------------------
Balance, December 31, 1998 10,388,443 $10,388 $64,134 $ 19,227 $ 1,163 $94,912
====================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
62
<PAGE>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 11,743 $ 9,329 $ 6,883
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan and foreclosed real estate losses 2,210 1,255 1,100
Provision for depreciation and amortization 1,430 1,220 1,047
Provision for deferred income taxes (586) (333) (5)
Net realized (gains) losses on sales of securities (4,329) (357) 1
(Gain) loss on sale of equipment and foreclosed real estate 114 (210) (55)
Proceeds from sale of mortgage loans 113,746 54,820 34,710
Net realized (gains) losses on sales of mortgage loans (162) (111) 11
Mortgage loans originated for sale (118,653) (54,100) (34,878)
Net amortization of securities premiums and discounts 1,041 241 17
(Increase) decrease in:
Due from mortgage investors (9,142) (1,947) (274)
Accrued interest receivable and other assets (2,201) (3,805) (2,400)
Increase (decrease) in accrued interest payable and other liabilities 10,382 (320) 1,558
-----------------------------------
Net cash provided by operating activities 5,593 5,682 7,715
-----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 45,665 63,052 2,882
Proceeds from maturities and calls of and principal repayments on
securities available for sale 84,660 32,468 15,571
Proceeds from maturities and calls of securities held to maturity 5,350 9,225 10,335
Purchases of securities available for sale (388,743) (135,296) (63,603)
Purchases of securities held to maturity -- (37,094) (29,428)
(Increase) decrease in interest-bearing deposits with banks (136) 21,227 (11,360)
Decrease in federal funds sold -- 820 1,755
Loans made to customers, net of principal collected (57,767) (81,930) (80,404)
Proceeds from sales of equipment and foreclosed real estate 1,047 1,821 575
Purchases of premises and equipment (15,641) (3,026) (1,901)
-----------------------------------
Net cash used in investing activities (325,565) (128,733) (155,578)
-----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposits 131,734 73,932 64,273
Net increase in time deposits 60,056 34,309 21,306
Net proceeds from other borrowed funds 55,764 590 21,845
Proceeds from long-term debt 85,000 40,000 47,000
Principal payments on long-term debt (4,450) (37,000) (4,000)
Proceeds from exercise of stock options 342 -- --
Cash paid in lieu of fractional shares (29) -- --
Pre-merger stock transactions of pooled entities 464 (36) (666)
Net proceeds from stock offering of pooled entity -- 20,869 --
Cash dividends paid (5,117) (3,123) (2,456)
-----------------------------------
Net cash provided by financing activities 323,764 129,541 147,302
-----------------------------------
Increase (decrease) in cash and due from banks 3,792 6,490 (561)
Cash and due from banks:
January 1 24,918 18,428 18,989
-----------------------------------
</TABLE>
63
<PAGE>
<TABLE>
<S> <C> <C> <C>
December 31 $ 28,710 $ 24,918 $ 18,428
===================================
</TABLE>
64
<PAGE>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
- --------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
(In Thousands)
DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $32,880 $25,530 $18,480
===============================
Income taxes $ 4,680 $ 3,237 $ 2,709
===============================
See Notes to Consolidated Financial Statements.
65
<PAGE>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
- --------------------------------------------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation:
The consolidated financial statements include the accounts of Main Street
Bancorp, Inc. ("the Company"), a multi-bank holding company, and its
wholly-owned subsidiaries, Berks County Bank, Heritage National Bank ("the
Banks") and MBNK Investment Company (see Note 2). All significant
intercompany accounts and transactions have been eliminated.
Nature of operations:
The Banks operate under a state bank and national bank charter
respectively, and provide full banking services. The Company and Berks
County Bank are subject to regulation of the Pennsylvania Department of
Banking and the Federal Reserve Bank, while Heritage National Bank is
subject to regulation of the Office of the Comptroller of the Currency.
The area served by the Banks is principally Berks, Bucks, Chester,
Dauphin, Lehigh, Montgomery and Schuylkill Counties in Pennsylvania.
Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Presentation of cash flows:
For purposes of reporting cash flows, cash and due from banks includes
cash on hand and amounts due from banks.
Securities:
Securities that management has both the positive intent and ability to
hold to maturity are classified as securities held to maturity and are
carried at cost, adjusted for amortization of premium or accretion of
discount using the interest method. Securities that may be sold prior to
maturity for asset/liability management purposes, or that may be sold in
response to changes in interest rates, changes in prepayment risk, to
increase regulatory capital or other similar factors, are classified as
securities available for sale and carried at fair value with adjustments
to fair value, after tax, reported in other comprehensive income.
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation at each balance
sheet date.
Interest and dividends on securities, including the amortization of
premiums and the accretion of discounts, calculated using the interest
method, are reported in interest income. Gains and losses on the sale of
securities are recorded on the trade date and are calculated using the
specific identification method.
Loans receivable:
Loans receivable that management has the intent and ability to hold for
the foreseeable future or until maturity or payoff are stated at their
outstanding unpaid principal balances, net of an allowance for loan losses
and any deferred fees or costs. Interest income is accrued on the unpaid
principal balance. Loan origination fees, net of certain direct
origination costs, are deferred and recognized as an adjustment of the
yield (interest income) of the related loans. The Banks are generally
amortizing these amounts over the contractual life of the loan.
A loan is generally considered impaired when it is probable the Bank will
be unable to collect all contractual principal and interest payments due
in accordance with the terms of the loan agreement. The accrual of
interest is generally discontinued when the contractual payment of
principal or interest has become 90 days past due or management has
serious doubts about further collectibility of principal or interest, even
though the loan is currently performing. A loan may remain on accrual
status if it is in the process of collection and is either guaranteed or
well secured. When a loan is placed on nonaccrual status, unpaid interest
credited to income in the current year is reversed and unpaid interest
accrued in prior years is charged against the allowance for loan losses.
Interest received on nonaccrual loans generally is either applied against
principal or reported as interest income, according to management's
judgment as to the collectibility of principal. Generally, loans are
restored to accrual status when the obligation is brought current, has
performed in accordance with the contractual terms for a reasonable period
of time and the ultimate collectibility of the total contractual principal
and interest is no longer in doubt.
66
<PAGE>
67
<PAGE>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
- --------------------------------------------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Allowance for loan losses:
The allowance for loan losses is established through provisions for loan
losses charged against income. Loans deemed to be uncollectible are
charged against the allowance for loan losses, and subsequent recoveries,
if any, are credited to the allowance.
The allowance for loan losses related to impaired loans that are
identified for evaluation is based on discounted cash flows using the
loan's initial effective interest rate or the fair value, less selling
costs, of the collateral for collateral dependent loans. By the time a
loan becomes probable of foreclosure it has been charged down to fair
value, less estimated cost to sell.
The allowance for loan losses is maintained at a level considered adequate
to provide for losses that can be reasonably anticipated. Management's
periodic evaluation of the adequacy of the allowance is based on the
Banks' past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral, composition of
the loan portfolio, current economic conditions and other relevant
factors. This evaluation is inherently subjective as it requires material
estimates that may be susceptible to significant change, including the
amounts and timing of future cash flows expected to be received on
impaired loans.
Mortgage loans held for sale:
Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated fair value. Net unrealized
losses are recognized through a valuation allowance by corresponding
charges in the statements of income. All sales are made without recourse.
Due from mortgage investors:
A division of one of the Bank subsidiaries performs underwriting and
origination services for various mortgage investors. As part of this
program, the Bank will temporarily fund the investors' mortgage
commitments for periods generally ranging from three to forty-five days.
Premises and equipment:
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on the straight-line and accelerated depreciation
methods over the related assets estimated useful lives.
Foreclosed real estate:
Foreclosed real estate, which is recorded in other assets, is comprised of
property acquired through a foreclosure proceeding or acceptance of a
deed-in-lieu of foreclosure and loans classified as in-substance
foreclosure. A loan is classified as in-substance foreclosure when the
Bank has taken possession of the collateral regardless of whether formal
foreclosure proceedings take place.
Foreclosed real estate is initially recorded at fair value, net of
estimated selling costs at the date of foreclosure, establishing a new
cost basis. After foreclosure, valuations are periodically performed by
management and the assets are carried at the lower of cost or fair value,
less estimated costs to sell. Revenues and expenses from operations, net
realized gains and losses on sales and changes in the valuation allowance
are included in other expenses.
Advertising costs:
The Banks follow the policy of charging the costs of advertising to
expense as incurred.
68
<PAGE>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
- --------------------------------------------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income taxes:
Deferred taxes are provided on the liability method whereby deferred tax
assets are recognized for deductible temporary differences and deferred
tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of
assets and liabilities and their tax basis. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is
more likely than not that some portion of the deferred tax assets will not
be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment. The
Company and its subsidiaries file a consolidated federal income tax
return.
Earnings per common share:
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflects
additional common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustment to
income that would result from the assumed issuance. Potential common
shares that may be issued by the Company relate solely to outstanding
stock options, and are determined using the treasury stock method. Per
share amounts have been adjusted to give retroactive effect to stock
dividends declared through December 31, 1998.
Off-balance sheet financial instruments:
In the ordinary course of business, the Banks have entered into
off-balance sheet financial instruments consisting of commitments to
extend credit, letters of credit and commitments to sell loans. Such
financial instruments are recorded in the consolidated balance sheets when
they are funded.
Trust assets:
Assets held in a fiduciary capacity for customers are not included in the
consolidated financial statements since such items are not assets of the
Bank. Trust income is recorded on the accrual method.
Segment reporting:
The Company's banking subsidiaries act as independent community financial
services providers, and offer traditional banking and related financial
services to individual, business and government customers. Through their
branch and automated teller machine network, the Banks offer a full array
of commercial and retail financial services, including the taking of time,
savings and demand deposits; the making of commercial, consumer and
mortgage loans; and the providing of other financial services. One of the
banking subsidiaries also performs personal, corporate, pension and
fiduciary services through its Trust Department.
Management does not separately allocate expenses, including the cost of
funding loan demand, between the commercial, retail, trust and mortgage
banking operations of the Company, nor its subsidiaries. As such, discrete
financial information is not available and segment reporting would not be
meaningful.
Reclassifications:
Certain items in the 1997 and 1996 financial statements have been
reclassified to conform to the 1998 financial statement presentation
format. These reclassifications had no effect on net income.
New accounting standard:
The Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities", in June
1998. The Company is required to adopt the Statement on January 1, 2000.
The adoption of the Statement is not expected to have a significant impact
on the financial condition or results of operations of the Company.
69
<PAGE>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
- --------------------------------------------------------------------------------
MERGER
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 December 31, 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1998, are presented as
if the combining companies had been consolidated for all periods presented. 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 the merger between
BCB and 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 results of operations of the separate entities for periods prior to the
combination are as follows:
BCB Heritage Combined
---------------------------
(In Thousands)
For the period from January 1, 1998 to May 1, 1998:
Net interest income $ 4,849 $ 5,450 $10,299
Net income 899 1,646 2,545
For the year ended December 31, 1997:
Net interest income $12,117 $16,368 $28,485
Net income 3,301 6,028 9,329
For the year ended December 31, 1996:
Net interest income $ 8,134 $15,021 $23,155
Net income 1,903 4,980 6,883
3
- --------------------------------------------------------------------------------
RESTRICTIONS ON CASH AND DUE FROM BANK BALANCES
The Banks are required to maintain average reserve balances with the Federal
Reserve Bank or in vault cash. The total of those reserve balances was
approximately $ 2,573,000 and $ 3,648,000 at December 31, 1998 and 1997
respectively.
70
<PAGE>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
- --------------------------------------------------------------------------------
SECURITIES
The amortized cost and approximate fair value of securities at December 31 were
as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Available for sale securities:
December 31, 1998:
U.S. Treasury securities $ 9,256 $ 97 $ -- $ 9,353
U.S. Government agencies and corporations 192,705 968 (1,133) 192,540
States and political subdivisions 233,615 2,859 (1,581) 234,893
Other securities 14,454 10 -- 14,464
Mortgage-backed and asset-backed securities 57,583 811 (190) 58,204
Equity securities 25,037 35 -- 25,072
-----------------------------------------------
$ 532,650 $ 4,780 $ (2,904) $ 534,526
===============================================
December 31, 1997:
U.S. Treasury securities $ 10,801 $ 58 $ (7) $ 10,852
U.S. Government agencies and corporations 32,981 488 (9) 33,460
States and political subdivisions 45,538 1,248 (10) 46,776
Other securities 100 1 -- 101
Mortgage-backed and asset-backed securities 103,132 1,172 (224) 104,080
Equity securities 12,853 984 -- 13,837
-----------------------------------------------
$ 205,405 $ 3,951 $ (250) $ 209,106
===============================================
Held to maturity securities:
December 31, 1998:
Other $ 25 $ -- $ -- $ 25
===============================================
December 31, 1997:
U.S. Government agencies and corporations $ 60,724 $ 602 $ (41) $ 61,285
States and political subdivisions 10,165 302 (8) 10,459
Other 25 -- -- 25
-----------------------------------------------
$ 70,914 $ 904 $ (49) $ 71,769
===============================================
</TABLE>
71
<PAGE>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
- --------------------------------------------------------------------------------
SECURITIES (CONTINUED)
Equity securities are principally comprised of Pennsylvania community banks,
Federal Home Loan Bank and Federal Reserve Bank stock.
During 1998, the Company re-evaluated its securities portfolio as a result of
the merger discussed in Note 2 and to provide flexibility for management to
implement new investment strategies. Accordingly, the Company transferred
securities with an amortized cost of $ 72,600,000 from held to maturity to
available for sale. The transfer resulted in an $ 840,000 adjustment to fair
value and an unrealized gain of $ 554,000 at the date of transfer, net of tax,
was included in other comprehensive income.
The amortized cost and fair value of securities as of December 31, 1998, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because the securities may be called or prepaid with or
without any penalties.
<TABLE>
<CAPTION>
Available For Sale Held To Maturity
-----------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-----------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 10,542 $ 10,611 $ -- $ --
Due after one year through five years 4,341 4,410 -- --
Due after five years through ten years 45,168 46,139 25 25
Due after ten years 389,979 390,090 -- --
Mortgage-backed and asset-backed securities 57,583 58,204 -- --
Equity securities 25,037 25,072 -- --
-----------------------------------------
$532,650 $534,526 $ 25 $ 25
=========================================
</TABLE>
Gross gains of $ 5,121,000 and gross losses of $ 792,000 were realized on the
sales of available for sale securities in 1998. Gross gains of $ 606,000 and
gross losses of $ 249,000 were realized on sales of available for sale
securities in 1997. Gross gains of $ 2,000 and gross losses of $ 3,000 were
realized on sales of available for sale securities in 1996.
Securities with an amortized cost of $ 72,315,000 and $ 35,142,000 at December
31, 1998 and 1997 respectively were pledged as collateral on public deposits and
for other purposes as required or permitted by law.
72
<PAGE>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
- --------------------------------------------------------------------------------
LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
The components of loans receivable at December 31, 1998 and 1997 were as
follows:
1998 1997
-------------------------
(In Thousands)
Commercial $ 280,107 $ 222,050
Mortgage 171,268 175,978
Consumer 71,926 70,077
Construction 16,624 15,091
-------------------------
539,925 483,196
Less:
Allowance for loan losses 7,222 5,738
Net deferred loan fees and costs (692) (380)
-------------------------
$ 533,395 $ 477,838
=========================
Changes in the allowance for loan losses for the years ended December 31, 1998,
1997 and 1996 were as follows:
1998 1997 1996
-----------------------------------
(In Thousands)
Balance, beginning $ 5,738 $ 5,072 $ 4,883
Provision for loan losses 2,210 1,140 867
Loans charged off (949) (705) (995)
Recoveries 223 231 317
-----------------------------------
Balance, ending $ 7,222 $ 5,738 $ 5,072
===================================
Impaired loans, not requiring an allowance for loan losses, were $ 4,330,000 and
$ 2,409,000 at December 31, 1998 and 1997 respectively. Impaired loans requiring
an allowance for loan losses were $ 643,000 and $ 614,000 at December 31, 1998
and 1997 respectively. At December 31, 1998 and 1997, the related allowance for
loan losses associated with those loans was $ 337,000 and $ 287,000
respectively. For the years ended December 31, 1998, 1997 and 1996, average
impaired loans were $ 5,387,000, $ 2,704,000 and $ 2,390,000 respectively.
Interest income on impaired loans of $ 86,000, $ 63,000 and $ 84,000 was
recognized for cash payments received in 1998, 1997 and 1996 respectively.
73
<PAGE>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
- --------------------------------------------------------------------------------
PREMISES AND EQUIPMENT
Components of premises and equipment at December 31, 1998 and 1997 were as
follows:
Estimated
Useful Lives 1998 1997
------------ -----------------
(In Thousands)
Land $ 2,611 $ 2,162
Building and improvements 7-50 Years 22,419 10,327
Furniture, fixtures and equipment 1.5-10 Years 9,400 7,301
Leasehold improvements 2-11 Years 215 110
Construction in progress 878 83
-----------------
35,523 19,983
Less accumulated depreciation 9,806 8,472
-----------------
$25,717 $11,511
=================
Included in buildings and improvements above are approximately $ 8,200,000 and
$ -0- of leased property under capital leases as of December 31, 1998 and 1997
respectively.
7
- --------------------------------------------------------------------------------
DEPOSITS
The components of deposits at December 31, 1998 and 1997 were as follows:
1998 1997
-------------------------
(In Thousands)
Demand, non-interest bearing $102,432 $ 73,937
Demand, interest bearing 68,116 52,373
Savings 326,749 239,253
Time, $ 100,000 and over 27,396 18,528
Time, other 293,857 242,669
-------------------------
$818,550 $626,760
=========================
At December 31, 1998, the scheduled maturities of time deposits are as follows
(in thousands):
1999 $182,695
2000 70,110
2001 20,112
2002 11,179
2003 35,843
Thereafter 1,314
--------
$321,253
========
74
<PAGE>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8
- --------------------------------------------------------------------------------
OTHER BORROWED FUNDS AND LONG-TERM DEBT
The Banks maintain U.S. Treasury tax and loan note option accounts for the
deposit of withholding taxes, corporate income taxes and certain other payments
to the federal government. Deposits are subject to withdrawal and are evidenced
by an open-ended interest-bearing note. Borrowings under these note option
accounts were $ 644,000 and $ 1,104,000 at December 31, 1998 and 1997
respectively.
The Banks have other short-term borrowings from the Federal Home Loan Bank at
December 31, 1998 and 1997 in the amount of $ 81,200,000 and $ 27,500,000
respectively. The December 31, 1998 balance outstanding is due in 1999, at an
average interest rate of 4.95%.
In addition, one of the banking subsidiaries enters into agreements with
customers as part of cash management services where the Bank sells securities to
the customer overnight with the agreement to repurchase them at par. Securities
sold under agreements to repurchase generally mature one day from the
transaction date. The securities underlying the agreements were under the Bank's
control. Securities sold to customers under agreements to repurchase totaled $
4,228,000 and $ 1,704,000 at December 31, 1998 and 1997 respectively.
Long-term debt consisted of the following at December 31, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
1998 1997
-------------------
<S> <C> <C>
Notes with the Federal Home Loan Bank (FHLB):
Term notes due May 1998 at 5.66% weighted average fixed rate $ -- $ 3,450
Term note due November 1998 at 5.56% fixed rate -- 1,000
3 year/3 month term note due October 1999 at 5.87% fixed rate(1)(2) 5,000 5,000
5 year/2 year term note due September 2001 at 6.05% fixed rate(1)(2) 5,000 5,000
5 year/6 month term note due March 2002 at 5.46% fixed rate(1)(2) 30,000 30,000
5 year/3 month term note due July 2002 at 5.60% fixed rate(1)(2) 10,000 10,000
10 year/2 year term note due September 2008 at 4.62% fixed rate(1) 25,000 --
10 year/5 year term note due November 2008 at 4.75% fixed rate(1) 10,000 --
10 year/5 year term note due December 2008 at 4.92% fixed rate(1) 25,000 --
10 year/5 year term note due December 2008 at 4.815% fixed rate(1) 25,000 --
-------------------
$135,000 $ 54,450
===================
</TABLE>
(1) These notes contain a convertible option which allows the FHLB, at quarterly
intervals, to change the note to an adjustable-rate advance at three-month
LIBOR (5.07% at December 31, 1998) plus 3 to 15 basis points. If the notes
are converted, the option allows the Bank to put the funds back to the FHLB
at no charge. The years/years or months refers to the maturity of the note
(in years) and the term until the first convertible date (in years or
months).
(2) All of these notes have passed the original convertible date.
Contractual maturities of long-term debt at December 31, 1998 are as follows (in
thousands):
1999 $ 5,000
2000 --
2001 5,000
2002 40,000
2003 to 2007 --
2008 85,000
--------
$135,000
========
75
<PAGE>
The Banks have a maximum borrowing capacity with the Federal Home Loan Bank of
approximately $ 327,108,000. Advances from the Federal Home Loan Bank are
secured by qualifying assets of the Banks.
76
<PAGE>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9
- --------------------------------------------------------------------------------
INCOME TAXES
The provision for federal income taxes for the years ended December 31, 1998,
1997 and 1996 consisted of the following (in thousands):
1998 1997 1996
-----------------------------------------
Current $ 4,297 $ 3,650 $ 2,433
Deferred (586) (333) (5)
-----------------------------------------
$ 3,711 $ 3,317 $ 2,428
=========================================
A reconciliation of the statutory income tax at a rate of 34% to the income tax
expense in the consolidated statements of income for the years ended December
31, 1998, 1997 and 1996 is as follows (in thousands):
1998 1997 1996
-------------------------------
Federal income tax at statutory rate $ 5,254 $ 4,299 $ 3,166
Tax-exempt interest (1,891) (1,093) (807)
Disallowance of interest expense 270 143 97
Other 78 (32) (28)
-------------------------------
$ 3,711 $ 3,317 $ 2,428
===============================
The income tax provision includes $ 1,472,000 in 1998, $ 121,000 in 1997 and $
- -0- in 1996 of income tax expense related to net realized securities gains.
The net deferred tax asset (liability) consisted of the following components as
of December 31, 1998 and 1997:
1998 1997
------------------
(In Thousands)
Deferred tax assets:
Allowance for loan losses $ 1,976 $ 1,363
Interest on non-accrual loans 230 138
Deferred compensation 66 104
Other 27 85
------------------
Total deferred tax assets 2,299 1,690
------------------
Deferred tax liabilities:
Premises and equipment 329 279
Prepaid expenses 37 119
Loan origination fees and costs 219 164
Unrealized gains on securities available for sale 713 1,327
------------------
Total deferred tax liabilities 1,298 1,889
------------------
Net deferred tax asset (liability) $ 1,001 $ (199)
==================
77
<PAGE>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10
- --------------------------------------------------------------------------------
EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan with profit sharing provisions which covers
employees who meet the eligibility requirements of having worked 1,000 hours in
a plan year and have attained the age of 21. Participants are permitted to
contribute from 1% to 15% of compensation. The Company will match the
participant's contributions up to a maximum percentage. The expense related to
this plan was $ 503,000, $ 138,000 and $ 105,000 for the years ended December
31, 1998, 1997 and 1996 respectively.
A Bank subsidiary had a noncontributory pension plan covering eligible
employees. Benefits were based on the employee's compensation and years of
service. In May 1998, the pension plan was terminated. The plan assets in excess
of the projected benefit obligation were allocated to the plan's eligible
participants and the prepaid pension cost of $ 299,000 was charged to expense.
The net periodic pension cost for the years ended December 31, 1998, 1997 and
1996 was not material.
11
- --------------------------------------------------------------------------------
COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," as of
January 1, 1998. Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
available for sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. The adoption of SFAS No. 130 had no effect
on the Company's net income or stockholders' equity.
The components of other comprehensive income and related tax effects are as
follows:
Years Ended December 31,
1998 1997 1996
--------------------------------
(In Thousands)
Unrealized holding gains (losses) on
available for sale securities $ (589) $ 3,478 $ (569)
Less reclassification adjustment for
gains (losses) realized in income 1,236 357 (1)
--------------------------------
Net unrealized gains (losses) (1,825) 3,121 (568)
Tax effect (614) 1,093 (173)
--------------------------------
Net of tax amount $(1,211) $ 2,028 $ (395)
================================
78
<PAGE>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12
- --------------------------------------------------------------------------------
OTHER EXPENSES
The following represents the most significant categories of other expenses for
the years ended December 31:
1998 1997 1996
-------------------------------
(In Thousands)
Advertising $1,236 $ 978 $ 991
Data processing and MAC fees 1,184 980 795
Office supplies and expenses 1,281 1,136 885
Professional fees 846 936 746
Taxes, other than income 636 552 536
All other expenses 1,949 1,963 2,007
-------------------------------
$7,132 $6,545 $5,960
===============================
13
- --------------------------------------------------------------------------------
STOCK OPTIONS AND GRANTS
The pooled entities to the Company had various qualified and non-qualified stock
option plans for employees and non-employee directors which have carried over to
the Company and which cover approximately 820,000 shares of common stock. The
option prices under the plans are the fair market value of the common stock on
the date the options are granted and an option's maximum term is generally ten
years. Options are generally exercisable six months to one year after the date
of grant.
A summary of the Company's stock option activity and related information for the
years ended December 31 follows:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 301,178 $ 8.33 277,231 $ 7.79 141,077 $ 6.38
Granted 106,268 19.43 54,265 11.89 151,468 8.77
Exercised (62,144) 7.26 (19,811) 7.54 (15,314) 5.08
Forfeited (19,282) 9.05 (10,507) 11.91 -- --
-----------------------------------------------------------
Outstanding, end of year 326,020 $12.27 301,178 $ 8.33 277,231 $ 7.79
===========================================================
Exercisable at end of year 251,995 $10.24 266,012 $ 7.85 134,182 $ 6.79
===========================================================
</TABLE>
Stock options outstanding at December 31, 1998 are exercisable at prices ranging
from $ 4.87 to $ 19.92 a share. The weighted average remaining contractual life
of those options is approximately 8 years.
79
<PAGE>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13
- --------------------------------------------------------------------------------
STOCK OPTIONS AND GRANTS (CONTINUED)
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for options granted in
1998, 1997 and 1996. Had compensation cost for stock options granted in 1998,
1997 and 1996 been determined based on the fair value at the grant date
consistent with the provisions of SFAS No. 123, the Company's net income and
earnings per share for the years ended December 31, 1998, 1997 and 1996 would
have been reduced to the pro forma amounts indicated below (in thousands, except
per share amounts):
1998 1997 1996
------------------------------------
Net income:
As reported $ 11,743 $ 9,329 $ 6,883
====================================
Pro forma $ 11,475 $ 9,260 $ 6,703
====================================
Basic earnings per share:
As reported $ 1.13 $ 1.02 $ 0.82
====================================
Pro forma $ 1.11 $ 1.01 $ 0.80
====================================
Diluted earnings per share:
As reported $ 1.12 $ 1.00 $ 0.82
====================================
Pro forma $ 1.09 $ 1.00 $ 0.80
====================================
The fair value of each option grant is estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions for 1998,
1997 and 1996 respectively: risk-free interest rate of 4.6%, 6.5% and 6.0%,
volatility .26, .12 and .11, dividend yield of 3.0%, 3.6% and 3.6%, and an
expected life of 7.8, 7.5 and 5.5 years. The weighted-average fair value of
options granted was $ 5.07 per share in 1998, $ 2.21 per share in 1997 and $
2.13 per share in 1996.
14
- --------------------------------------------------------------------------------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENT
Lease commitments and total rental expense:
The Banks rent facilities under lease agreements which expire at various
dates through 2014, and require various minimum annual rentals. The total
minimum rental commitments at December 31, 1998 are as follows:
During the year ending December 31 (in thousands):
1999 $ 1,298
2000 1,355
2001 1,318
2002 1,293
2003 1,263
Later years 19,602
-------
$26,129
=======
80
<PAGE>
The total rental expense included in the income statements for the years ended
December 31, 1998, 1997 and 1996 is $ 388,000, $ 347,000 and $ 360,000
respectively.
81
<PAGE>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14
- --------------------------------------------------------------------------------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENT (CONTINUED)
Commitments:
At December 31, 1998, the Company has entered into agreements to purchase
or lease properties for the purpose of opening new branch offices during
1999. The estimated cost to acquire and complete these projects, which
will be capitalized as bank premises and equipment, is approximately $
10,500,000 at December 31, 1998.
Contingencies:
The Company is a defendant in various lawsuits wherein various amounts are
claimed. In the opinion of the Company's management, these suits are
without merit and should not result in judgments which, in the aggregate,
would have a material adverse effect on the Company's consolidated
financial statements.
Subsequent event:
Effective January 1, 1999, the Corporation merged Heritage National Bank
with and into Berks County Bank, and then changed the entity's name to
Main Street Bank. Main Street Bank will operate as a wholly-owned
subsidiary of Main Street Bancorp, Inc. under a state bank charter,
subject to regulation by the Pennsylvania Department of Banking and the
Federal Reserve Bank.
15
- --------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Banks are parties to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of their customers.
These financial instruments include commitments to extend credit and letters of
credit. Those instruments involve, to varying degrees, elements of credit risk
and interest rate risk in excess of the amount recognized in the balance sheets.
The Banks' exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and letters
of credit is represented by the contractual amount of those instruments. The
Banks use the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
A summary of the contractual amount of the Banks' financial instrument
commitments at December 31, 1998 and 1997 is as follows (in thousands):
1998 1997
----------------------
Commitments to grant loans $ 43,000 $ 18,000
Unfunded commitments under lines of credit 117,000 68,000
Outstanding letters of credit 7,000 5,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Banks evaluate each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary upon extension of credit, is based on management's credit evaluation.
Collateral held varies but may include personal or commercial real estate,
accounts receivable, inventory and equipment.
Outstanding letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
82
<PAGE>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16
- --------------------------------------------------------------------------------
CONCENTRATION OF CREDIT RISK
The Banks grant commercial, residential and consumer loans to customers
primarily located in Berks, Bucks, Chester, Dauphin, Lehigh, Montgomery and
Schuylkill Counties in Pennsylvania. The concentrations of credit by type of
loan are set forth in Note 5. Although the Banks have a diversified loan
portfolio, their debtors' ability to honor their contracts is influenced by the
region's economy.
17
- --------------------------------------------------------------------------------
TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS
The Banks have had, and may be expected to have in the future, banking
transactions in the ordinary course of business with their executive officers
and directors and their related interests on the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with others. At December 31, 1998 and 1997, these persons were
indebted to the Banks for loans totaling $ 7,468,000 and $ 4,709,000
respectively. During 1998, $ 10,965,000 of new loans were made and repayments
totaled $ 8,206,000.
18
- --------------------------------------------------------------------------------
REGULATORY MATTERS AND STOCKHOLDERS' EQUITY
The Company and its Bank subsidiaries are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and its Bank subsidiaries must meet specific capital guidelines that
involve quantitative measures of its assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. The capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the maintenance of minimum amounts and ratios (set forth below) of total
and Tier I capital (as defined in the regulations) to risk-weighted assets, and
of Tier I capital to average assets. Management believes, as of December 31,
1998, that the Company and its bank subsidiaries meet all capital adequacy
requirements to which they are subject.
As of December 31, 1998, the most recent notifications from the banking agencies
categorized the bank subsidiaries as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events since
that notification that management believes have changed the Banks' category.
83
<PAGE>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18
- --------------------------------------------------------------------------------
REGULATORY MATTERS AND STOCKHOLDERS' EQUITY (CONTINUED)
The actual capital amounts and ratios are also presented in the table below:
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
---------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total capital (to risk weighted assets):
Company $100,409 15.97% $ >=50,285 >=8.00% N/A
Berks County Bank 49,333 13.33 >=29,603 >=8.00 $ >=37,004 >=10.00%
Heritage National Bank 44,505 17.43 >=20,425 >=8.00 >=25,532 >=10.00
Tier I capital (to risk weighted assets):
Company 93,187 14.83 >=25,143 >=4.00 N/A
Berks County Bank 45,668 12.34 >=14,802 >=4.00 >=22,202 >=6.00
Heritage National Bank 41,309 16.18 >=10,213 >=4.00 >=15,319 >=6.00
Tier I capital (to average assets):
Company 93,187 8.70 >=42,852 >=4.00 N/A
Berks County Bank 45,668 7.15 >=25,563 >=4.00 >=31,954 >=5.00
Heritage National Bank 41,309 9.69 >=17,046 >=4.00 >=21,307 >=5.00
As of December 31, 1997:
Total capital (to risk weighted assets):
Company $ 92,182 18.72% $ >=39,394 >=8.00% N/A
Berks County Bank 39,253 15.38 >=20,411 >=8.00 $ >=25,514 >=10.00%
Heritage National Bank 42,276 19.13 >=17,679 >=8.00 >=22,099 >=10.00
Tier I capital (to risk weighted assets):
Company 86,444 17.56 >=19,691 >=4.00 N/A
Berks County Bank 36,650 14.36 >=10,206 >=4.00 >=15,308 >=6.00
Heritage National Bank 39,510 17.88 >=8,839 >=4.00 >=13,258 >=6.00
Tier I capital (to average assets):
Company 86,444 10.93 >=31,635 >=4.00 N/A
Berks County Bank 36,650 8.33 >=17,591 >=4.00 >=21,989 >=5.00
Heritage National Bank 39,510 11.38 >=13,888 >=4.00 >=17,359 >=5.00
</TABLE>
State and federal banking laws and regulations limit the amount of dividends
that may be paid by the Bank subsidiaries to the Company. As of December 31,
1998, the Bank subsidiaries had retained earnings of approximately $ 26,040,000
available for payment of dividends to the Company. Under Federal Reserve
Regulations, the Banks are limited as to the amount they may lend affiliates,
including the Company, unless such loans are collateralized by specified
obligations. At December 31, 1998, the maximum amount available for transfer
from the Banks to the Company in the form of loans approximated 10% of capital
and surplus.
84
<PAGE>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19
- --------------------------------------------------------------------------------
EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted earnings
per share:
Years Ended December 31,
1998 1997 1996
---------------------------
(In Thousands)
Net income applicable to common stock $11,743 $ 9,329 $ 6,883
===========================
Weighted average common shares outstanding 10,358 9,185 8,345
Effect of dilutive securities, stock options 142 106 36
---------------------------
Weighted average common shares outstanding used to
calculate diluted earnings per share 10,500 9,291 8,381
===========================
20
- --------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management uses its best judgment in estimating the fair value of the Company's
financial instruments; however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments, the fair
value estimates herein are not necessarily indicative of the amounts the Company
could have realized in a sales transaction on the dates indicated. The estimated
fair value amounts have been measured as of their respective year ends, and have
not been reevaluated or updated for purposes of these consolidated financial
statements subsequent to those respective dates. As such, the estimated fair
values of these financial instruments subsequent to the respective reporting
dates may be different than the amounts reported at each year end.
85
<PAGE>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20
- --------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following information should not be interpreted as an estimate of the fair
value of the entire Company since a fair value calculation is only provided for
a limited portion of the Company's assets. Due to a wide range of valuation
techniques and the degree of subjectivity used in making the estimates,
comparisons between the Company's disclosures and those of other companies may
not be meaningful. The following methods and assumptions were used to estimate
the fair values of the Company's financial instruments at December 31, 1998 and
1997:
Cash, federal funds sold and interest-bearing deposits with banks:
The carrying amounts reported in the balance sheet for cash and
short-term instruments approximate those assets' fair values.
Securities:
Fair values for securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable securities.
Loans receivable:
For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
values. The fair values for fixed rate loans are estimated using
discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality.
Mortgage loans held for sale:
The fair values of the Company's mortgages held for sale are based
on quoted market prices of similar loans sold.
Due from mortgage investors:
The carrying amounts of due from mortgage investors approximate
their fair values.
Accrued interest receivable:
The carrying amounts of accrued interest receivable approximate
their fair value.
Deposit liabilities:
The fair value of demand deposits, savings accounts and certain
money market accounts is the amount payable on demand at the
reporting date. The carrying amounts for variable-rate fixed-term
money market accounts and certificates of deposits approximate their
fair values at the reporting date. The fair value of fixed-rate
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered for
deposits of similar remaining maturities.
Accrued interest payable:
The carrying amounts of accrued interest payable approximate their
fair value.
Other borrowed funds:
The carrying amounts of short-term borrowings approximate their fair
values.
Long-term debt:
The fair values of the Company's long-term debt are estimated using
discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing
arrangements.
Off-balance sheet instruments:
The fair values of the Company's commitments to extend credit and
outstanding letters of credit are estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit
standing.
86
<PAGE>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20
- --------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair value of the Company's financial instruments at December 31,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks $ 28,710 $ 28,710 $ 24,918 $ 24,918
Interest-bearing deposits with banks 336 336 200 200
Federal funds sold 470 470 470 470
Securities 534,551 534,551 280,020 280,875
Loans receivable, net 533,395 558,722 477,838 482,271
Mortgage loans held for sale 5,069 5,069 -- --
Due from mortgage investors 14,567 14,567 5,425 5,425
Accrued interest receivable 10,202 10,202 5,825 5,825
Financial Liabilities:
Deposits 818,550 824,835 626,760 628,274
Accrued interest payable 2,731 2,731 2,347 2,347
Other borrowed funds 86,072 86,072 30,308 30,308
Long-term debt 135,000 134,339 54,450 54,305
Off-Balance Sheet Financial Instruments:
Commitments to extend credit -- -- -- --
Outstanding letters of credit -- -- -- --
</TABLE>
87
<PAGE>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21
- --------------------------------------------------------------------------------
PARENT COMPANY ONLY FINANCIAL INFORMATION
BALANCE SHEETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31, 1998 1997
- --------------------------------------------------------------------------------
(In Thousands)
ASSETS
<S> <C> <C>
Cash $ 3,492 $ 7,484
Investment in subsidiaries:
Banking subsidiaries 88,752 77,867
Non-banking subsidiary 933 --
Securities available for sale 685 4,542
Other assets 1,430 356
---------------------
$95,292 $90,249
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ 380 $ 1,529
Stockholders' equity 94,912 88,720
---------------------
$95,292 $90,249
=====================
<CAPTION>
STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Dividend income:
Banking subsidiaries $ 3,550 $ 2,275 $ 3,550
Non-banking subsidiary 4,900 -- --
Interest and dividend income 474 318 36
Net realized gains on securities available for sale -- 180 --
Other income 870 -- --
Other expenses (3,247) (140) (77)
--------------------------------
Income before income taxes (benefit) and equity in
undistributed net income of subsidiaries 6,547 2,633 3,509
Income taxes (benefit) (532) 103 (23)
--------------------------------
Income before equity in undistributed net
income of subsidiaries 7,079 2,530 3,532
--------------------------------
Equity in undistributed net income (loss):
Banking subsidiaries 6,464 6,799 3,351
Non-banking subsidiary (1,800) -- --
--------------------------------
4,664 6,799 3,351
--------------------------------
Net income $ 11,743 $ 9,329 $ 6,883
================================
</TABLE>
88
<PAGE>
89
<PAGE>
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21
- --------------------------------------------------------------------------------
PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
--------------------------------
(In Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 11,743 $ 9,329 $ 6,883
Undistributed net income of subsidiaries (4,664) (6,799) (3,351)
Net realized gains on sales of securities -- (180) --
Other (1,831) 407 187
--------------------------------
Net cash provided by operating activities 5,248 2,757 3,719
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale -- (856) (184)
Sales of securities available for sale 100 247 --
Additional investment in bank subsidiaries (5,000) (15,500) --
--------------------------------
Net cash used in investing activities (4,900) (16,109) (184)
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Pre-merger stock transactions of pooled entities 464 (36) (666)
Net proceeds from stock offering of pooled entity -- 20,869 --
Proceeds from exercise of stock options 342 -- --
Cash payment for fractional shares in connection with dividend (29) -- --
Cash dividends (5,117) (3,123) (2,456)
--------------------------------
Net cash provided by (used in) financing activities (4,340) 17,710 (3,122)
--------------------------------
Net increase (decrease) in cash (3,992) 4,358 413
Cash:
Beginning 7,484 3,126 2,713
--------------------------------
Ending $ 3,492 $ 7,484 $ 3,126
================================
</TABLE>
90
<PAGE>
Quarterly Results of Operations
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------
1998 March June September December
---- 31 30 30 31
--------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income $ 15,008 $ 15,527 $ 16,536 $ 18,648
Interest expense (7,247) (7,515) (8,280) (10,222)
--------------------------------------------
Net interest income 7,761 8,012 8,256 8,426
Provision for loan losses (235) (250) (1,725) --
Securities gains 1,682 468 1,723 456
Other income 1,222 1,377 1,434 1,939
Other expenses (5,242) (7,749) (5,986) (6,115)
--------------------------------------------
Income before income taxes 5,188 1,858 3,702 4,706
Income taxes (1,473) (478) (574) (1,186)
--------------------------------------------
Net income $ 3,715 $ 1,380 $ 3,128 $ 3,520
============================================
Earnings per share:
Basic $ 0.36 $ 0.13 $ 0.30 $ 0.34
============================================
Diluted $ 0.35 $ 0.13 $ 0.30 $ 0.34
============================================
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------
1997 March June September December
---- 31 30 30 31
--------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income $ 12,213 $ 13,068 $ 14,185 $ 14,997
Interest expense (5,745) (6,247) (6,742) (7,244)
--------------------------------------------
Net interest income 6,468 6,821 7,443 7,753
Provision for loan losses (286) (306) (315) (233)
Securities gains 128 8 10 211
Other income 886 1,017 1,082 1,193
Other expenses (4,701) (4,768) (4,694) (5,071)
--------------------------------------------
Income before income taxes 2,495 2,772 3,526 3,853
Income taxes (650) (738) (904) (1,025)
--------------------------------------------
Net income $ 1,845 $ 2,034 $ 2,622 $ 2,828
============================================
Earnings per share:
Basic $ 0.22 $ 0.24 $ 0.27 $ 0.29
============================================
Diluted $ 0.22 $ 0.24 $ 0.27 $ 0.27
============================================
</TABLE>
91
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to the directors and executive officers is
incorporated herein by reference to the Company's definitive Proxy Statement to
be used in connection with the Company's 1998 Annual Meeting of Shareholders
(the "Proxy Statement"). Pursuant to Securities and Exchange Commission
regulations, the Company is required to identify the names of persons who failed
to file or filed a late report required under Section 16(a) of the Exchange Act
of 1934, as amended. Generally, the reporting regulations under Section 16(a)
require directors and executive officers to report changes in their ownership in
the Company's stock. Based on the Company's review of copies of such reports
received or written representations from certain directors and executive
officers, the Company believes that, during the fiscal year ended December 31,
1998, all Section 16(a) filing requirements applicable to its executive
officers, directors and control persons were complied with.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
to the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
to the Proxy Statement.
92
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the Proxy Statement.
PART IV ITEM 14. EXHIBITS
a.(1) Exhibits
The following exhibits are filed herewith or incorporated by reference
herein as part of this Annual Report:
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.
10.1 Executive Employment Agreement, dated May 1, 1998, among Main Street
Bancorp, Inc., Berks County Bank and Nelson R. Oswald, incorporated
herein by reference to Exhibit 10.1 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
10.2 Executive Employment Agreement, dated May 1, 1998, among Main Street
Bancorp, Inc., Heritage National Bank and Allen E. Kiefer,
incorporated herein by reference to Exhibit 10.2 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
93
<PAGE>
10.3 Executive Employment Agreement, dated May 1, 1998, among Main Street
Bancorp, Inc., Heritage National Bank and Richard A. Ketner,
incorporated herein by reference to Exhibit 10.3 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
10.4 Change of control agreement, dated May 1, 1998, among Main Street
Bancorp, Inc., Berks County Bank and Steven A. Ehrlich, incorporated
herein by reference to Exhibit 10.4 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
10.5 Change of control agreement, dated May 1, 1998, among Main Street
Bancorp, Inc., Berks County Bank and Norman E. Heilenman,
incorporated herein by reference to Exhibit 10.5 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
21.1 List of Subsidiaries of the Company Financial Services Corporation,
included herein.
23.1 Consent of Beard & Company, Inc., independent auditors.
27.1 Financial Data Schedule.
a.(2) Financial Statement Schedules
None.
a.(3) Reports on Form 8-K
None.
94
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MAIN STREET BANCORP, INC.
By: /s/ Nelson R. Oswald
-----------------------------
Nelson R. Oswald
CEO and Chairman of the Board
March 23, 1999
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Nelson R. Oswald Director and Chairman March 23, 1998
- ------------------------- of the Board and
Nelson R. Oswald CEO (Principal
Executive Officer)
/s/ Robert D. McHugh, Jr. Executive V.P./ March 23, 1998
- ------------------------- Treasurer (Principal
Robert D. McHugh, Jr. Financial Officer)
/s/ Donna L. Rickert Sr. V.P./Controller March 23, 1998
- ------------------------- (Principal Accounting
Donna L. Rickert, C.P.A. Officer)
/s/ Richard D. Biever Director and Secretary March 23, 1998
- -------------------------
Richard D. Biever
/s/ Edward J. Edwards Director March 23, 1998
- -------------------------
Edward J. Edwards
/s/ Albert L. Evans Director March 23, 1998
- -------------------------
Albert L. Evans
Director March 23, 1998
- -------------------------
Richard T. Fenstermacher
/s/ Ivan H. Gordon Director March 23, 1998
- -------------------------
95
<PAGE>
Ivan H. Gordon
/s/ Frederick A. Gosch Director March 23, 1998
- -------------------------
Frederick A. Gosch
/s/ Jeffrey W. Hayes Director March 23, 1998
- -------------------------
Jeffrey W. Hayes
/s/ Allen E. Kiefer Director, C0O and March 23, 1998
- -------------------------
Allen E. Kiefer President
/s/ Alfred B. Mast Director March 23, 1998
- -------------------------
Alfred B. Mast
/s/ Wesley R. Pace Director March 23, 1998
- -------------------------
Wesley R. Pace
/s/ Joseph P. Schlitzer Director March 23, 1998
- -------------------------
Joseph P. Schlitzer
/s/ Floyd S. Weber Director March 23, 1998
- -------------------------
Floyd S. Weber
96
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
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.
10.1 Executive Employment Agreement, dated May 1, 1998, among Main Street
Bancorp, Inc., Berks County Bank and Nelson R. Oswald, incorporated
herein by reference to Exhibit 10.1 of the Company's quarterly
report on Form 10-Q for the quarter ended June 30, 1998.
10.2 Executive Employment Agreement, dated May 1, 1998, among Main Street
Bancorp, Inc., Heritage National Bank and Allen E. Kiefer,
incorporated herein by reference to Exhibit 10.2 of the Company's
quarterly report on Form 10-Q for the quarter ended June 30, 1998.
10.3 Executive Employment Agreement, dated May 1, 1998, among Main Street
Bancorp, Inc., Heritage National Bank and Richard A. Ketner,
incorporated herein by reference to Exhibit 10.3 of the Company's
quarterly report on Form 10-Q for the quarter ended June 30, 1998.
10.4 Change of control agreement, dated May 1, 1998, among Main Street
Bancorp, Inc., Berks County Bank and Steven A. Ehrlich, incorporated
herein by reference to Exhibit 10.4 of the Company's quarterly
report on Form 10-Q for the quarter ended June 30, 1998.
10.5 Change of control agreement, dated May 1, 1998, among Main Street
Bancorp, Inc., Berks County Bank and Norman E. Heilenman,
incorporated herein by reference to Exhibit 10.5 of the Company's
quarterly report on Form 10-Q for the quarter ended June 30, 1998.
21.1 List of Subsidiaries of the Company Financial Services Corporation,
included herein.
23.1 Consent of Beard & Company, Inc., independent auditors, included
herein.
27.1 Financial Data Schedule
97
<PAGE>
Exhibit 21.1
Main Street Bancorp, Inc.
Exhbit 21.1
Berks County Bank
Heritage National Bank
MBNK Investment Company
<PAGE>
Exhibit 23.1
CONSENT OF BEARD & COMPANY, INC., INDEPENDENT AUDITORS
Regarding:
1. Registration Statement on Form S-8 relating to the Main Street Bancorp,
Inc. 1994 Stock Option Plan (File #33357777).
2. Registration Statement on Form S-8 relating to the Main Street Bancorp,
Inc. 1993 Independent Directors Stock Option Plan (File #333-57783).
3. Registration Statement on Form S-8 relating to the Main Street Bancorp,
Inc. 1995 Stock Incentive Plan (File #33357803).
4. Registration Statement on Form S-8 relating to the Main Street Bancorp,
Inc. 1995 Stock Option Plan for Non-Employee Directors (File #333-57825).
5. Registration Statement on Form S-8 relating to the Main Street Bancorp,
Inc. 1989 Stock Option Plan (File #333-57841).
6. Registration Statement on Form S-8 relating to the Main Street Bancorp,
Inc. 1988 Stock Option Plan (File #33357847).
7. Registration Statement on Form S-8 relating to the Main Street Bancorp,
Inc. 401(k) Retirement Plan (File #333-57851).
8. Registration Statement on Form S-8 relating to the Main Street Bancorp,
Inc. 1996 Stock Option Plan (File #333-57703).
9. Registration Statement on Form S-3 relating to the Shareholder Automatic
Dividend Reinvestment and Stock Purchase Plan (File #333-57689).
We consent to the incorporation by reference in the above listed
Registration Statements of our report dated, January 29, 1999, with respect to
the consolidated financial statements of Main Street Bancorp, Inc. and
subsidiaries included in this Annual Report (Form 10-K) for the year ended
December 31, 1998.
/s/ BEARD & COMPANY, INC.
Reading, Pennsylvania
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 28,710
<INT-BEARING-DEPOSITS> 336
<FED-FUNDS-SOLD> 470
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 534,526
<INVESTMENTS-CARRYING> 25
<INVESTMENTS-MARKET> 25
<LOANS> 533,395
<ALLOWANCE> 7,222
<TOTAL-ASSETS> 1,158,541
<DEPOSITS> 818,550
<SHORT-TERM> 86,072
<LIABILITIES-OTHER> 24,007
<LONG-TERM> 135,000
0
0
<COMMON> 10,388
<OTHER-SE> 84,524
<TOTAL-LIABILITIES-AND-EQUITY> 1,158,541
<INTEREST-LOAN> 44,544
<INTEREST-INVEST> 20,896
<INTEREST-OTHER> 279
<INTEREST-TOTAL> 65,719
<INTEREST-DEPOSIT> 27,268
<INTEREST-EXPENSE> 33,264
<INTEREST-INCOME-NET> 32,455
<LOAN-LOSSES> 2,210
<SECURITIES-GAINS> 4,329
<EXPENSE-OTHER> 25,092
<INCOME-PRETAX> 15,454
<INCOME-PRE-EXTRAORDINARY> 11,743
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,743
<EPS-PRIMARY> 1.13
<EPS-DILUTED> 1.12
<YIELD-ACTUAL> 3.741
<LOANS-NON> 7,353
<LOANS-PAST> 867
<LOANS-TROUBLED> 113
<LOANS-PROBLEM> 4,900
<ALLOWANCE-OPEN> 5,738
<CHARGE-OFFS> 949
<RECOVERIES> 223
<ALLOWANCE-CLOSE> 7,222
<ALLOWANCE-DOMESTIC> 5,721
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,501
</TABLE>
