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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, 1999, 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.
-------------------------
(Name of small business issuer in its charter)
Pennsylvania 23-2960905
- ----------- ------------------- -------------------
(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)
9.625% Junior Subordinated Debentures
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 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 8, 2000 was
$87,774,732. As of March 8, 2000, the Registrant had 10,449,846 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
19, 2000 are incorporated by reference into Part III of this report.
<PAGE> 2
MAIN STREET BANCORP, INC
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
Part I
<S> <C>
Item 1. Business 3
Item 2. Properties 23
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security
Holders 23
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 23
Item 6. Selected Financial Data 25
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 26
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 47
Item 8. Financial Statements and Supplementary Data 50
Item 9. Changes In and Disagreements with
Accountants on Accounting and Financial
Disclosure 78
Part III
Item 10. Directors and Executive Officers of the
Registrant 78
Item 11. Executive Compensation 78
Item 12. Security Ownership of Certain Beneficial
Owners and Management 78
Item 13. Certain Relationships and Related
Transactions 78
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 79
Signatures
</TABLE>
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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, 1999 was a bank
holding company for Main Street Bank ("the Bank") and also the parent company of
MBNK Investment Company and MBNK Capital Trust I. The Bank operates under the
Berks County Bank, Heritage Bank and Main Street Bank divisions. The Bank is a
Pennsylvania-chartered bank and member of the Federal Reserve System.
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.
MARKET OVERVIEW
At December 31, 1999, the Bank operated forty-three full service
branches in Berks, Bucks, Chester, Dauphin, Lancaster, Lehigh, Montgomery,
Northhampton and Schuylkill Counties in Pennsylvania as well Hunterdon County,
New Jersey. The Bank also operated 10 loan production offices in Berks, Bucks,
Chester, Columbia, Lackawanna, Lancaster, Lehigh, Montgomery and Schuylkill
Counties. In February 2000, the Bank opened an office in Douglassville, Berks
County and will open its forty-fifth branch in Doylestown, Bucks County in May
2000.
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
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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. In January 2000, the Company introduced on-line home banking (PC
Banking). The Company intends to offer discount brokerage services, 401(k) and
employee benefit plans, alternative investment services and general insurance
products in the next six to twelve months.
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 ("FRB") 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
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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 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, 1999,
the Bank had retained earnings of approximately $49,765,000 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.
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.
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
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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 was the
FICO bond payments. For years 1997 through 1999, SAIF insured institutions paid
approximately 6.5 cents per $100 in deposits toward the FICO bond payments while
BIF insured institutions paid approximately 1.22 cents per $100 in deposits.
During 1999 the Bank paid $98,000 to the FDIC. From the year 2000 to 2017, both
SAIF insured institutions and BIF insured institutions will be assessed at the
same rates to fund the remaining debt service on the FICO bonds. The rate is
approximately 2.08 cents per $100 in deposits.
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 Bank paying $0 for deposit
insurance premiums in 1999.
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. 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.
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
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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.
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.
Gramm-Leach-Bliley Financial Modernization Act of 1999
On November 12, 1999, the president signed into law the
Gramm-Leach-Bliley Financial Modernization Act. This historic and wide-reaching
legislation will provide the banking industry with new opportunities to compete
at the local, national and global levels, allowing banks to better serve their
ever-changing customer needs. This comprehensive legislative package contains a
variety of provisions of significant benefit to the banking industry, including
language which greatly expands the powers of banks and bank holding companies to
sell any financial product or service, reforms the Federal Home Loan Bank System
to significantly increase community banks' access to loan funding, and protects
banks from discriminatory state insurance regulation. The bill includes new
provisions in the privacy area, restricting the ability of financial
institutions to share nonpublic personal customer information with third
parties.
YEAR 2000 COMPUTER ISSUES
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The Company successfully planned for the Year 2000 (Y2K) event and did
not experience system problems, deposit run-off or loan problems related to our
customer's Y2K readiness. In anticipation of the potential for deposit run-off
and as part of its cash contingency plan, the Company purchased a sufficient
amount of cash from the Federal Reserve to add the Bank's normal cash inventory.
This cash was used to increase the normal cash levels in the Bank's ATMs for a
higher volume of customer withdrawal activity via that medium and to have extra
cash on hand in the event of heavier than normal customer withdrawals. Neither
event occurred and the extra cash was sold back to the Federal Reserve Bank the
week following December 31, 1999. In the months following December 31, 1999, the
Company has not experienced any problems from customers or systems related to
the Y2K event. The cost to the Company for Y2K preparations was immaterial.
MAIN STREET HOLDINGS
Main Street Holdings is a wholly-owned subsidiary of the Bank. Main
Street Holdings will provide investment holding services for the Bank, the
Company and other related affiliated companies in the consolidated group. These
services will include, but will not be limited to, asset/liability management
(ALCO), investment monitoring, including call provisions, quality management,
liquidity analysis, conformity to the state banking investment regulations and
FDIC guidelines. Main Street Holdings commenced operation in 1999.
GRANITE MORTGAGE COMPANY
In November 1999, the Bank acquired Granite Mortgage Company of
Springfield, Virginia. Granite Mortgage Company is a mortgage broker,
originating residential mortgages in the Metro D.C. area including Northern
Virginia and Maryland. The Bank purchase price was $1,500,000, of which $550,000
was paid at settlement, $50,000 was placed in escrow and the remaining balance
of $900,000 is due after the mortgage company meets certain performance goals.
OTHER AFFILIATED ENTITIES
In addition, the Company or the Bank holds equity interests in
certain entities that provide mortgage brokerage and real estate settlement and
title services. The operations of these subsidiaries were immaterial to the
Company on a consolidated basis.
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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, 1999 the Bank's 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, 1999 the Bank had $338.1 million in commercial loans of which 64.5%
are fixed rate loans and 35.5% are floating rate loans.
The Bank's commercial lending staff generates and services commercial
and commercial real estate loans ranging from $25,000 to $10.0 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 mostly through referrals from accountants, attorneys,
realtors, existing customers and media advertising.
The credit risk associated with the Bank's commercial loan portfolio is
greater than the credit 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.
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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 the Bank. At December 31,
1999, the Bank had $93.8 million in consumer loans of which 49.2% are fixed rate
loans and 50.8% 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 sells 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 December 31, 1999, the Bank had $181.7 million in residential
mortgage loans of which 51.1% are fixed rate loans and 48.9% are floating rate
loans.
Twenty to 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 the
Bank'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 except for 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
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mortgage insurance placed with an appropriate coverage based upon the loan to
value ratio. The Bank utilizes private mortgage insurance through several
companies and 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 policy
adheres 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. 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 loan fees at December 31, 1999
totaled $665.7 million, an increase of $125.1 million, or 23.1%, compared to net
loans at December 31, 1998 of $540.6 million. This follows an increase of $57.0
million, or 11.8%, from the $483.6 million amount of net loans at December 31,
1997. These increases reflect continued loan demand from the Company's target
customers.
The following table sets forth the Company's loans by major categories
as of the dates indicated.
<TABLE>
<CAPTION>
At December 31,
---------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Commercial, Financial and
Agricultural $ 337,751 $ 280,107 $ 222,050 $ 178,021 $ 136,594
Real estate - construction 52,251 16,624 15,091 10,662 8,506
Real estate - mortgage 182,137 171,268 175,978 152,139 125,556
Consumer Loans to individuals 92,764 71,926 70,077 62,092 53,526
--------- --------- --------- --------- ---------
664,903 539,925 483,196 402,914 324,182
Less deferred loan fees (costs) (824) (692) (380) 52 850
--------- --------- --------- --------- ---------
Total loans $ 665,727 $ 540,617 $ 483,576 $ 402,862 $ 323,332
========= ========= ========= ========= =========
</TABLE>
Loan Maturity and Interest Rate Sensitivity
The amount of loans outstanding by category as of December 31, 1999,
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.
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<TABLE>
<CAPTION>
At December 31, 1999
--------------------
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 $171,096 $101,548 $ 65,442 $338,086
Construction 24,402 5,599 22,199 52,200
Mortgage 29,908 115,979 35,783 181,670
Consumer 62,796 19,790 11,185 93,771
-------- -------- -------- --------
Total (1) $288,202 $242,916 $134,609 $665,727
======== ======== ======== ========
Loans with fixed rate $ 73,768 $227,524 $ 55,495 $356,787
Loans with floating rate 214,434 15,392 79,144 308,970
-------- -------- -------- --------
Total (1) $288,202 $242,916 $134,639 $665,757
======== ======== ======== ========
Percent composition by maturity 43.29% 36.49% 20.22% 100.00%
======== ======== ======== ========
Fixed rate loans as a percentage
of total loans maturing 11.08% 34.18% 8.33% 53.59%
======== ======== ======== ========
Floating rate loans as a percentage
of total loans maturing 32.21% 2.31% 11.89% 46.41%
======== ======== ======== ========
</TABLE>
(1) Includes deferred loan fees (costs)
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.
At December 31, 1999, 53.6% of total loans were fixed rate compared to
53.0% at December 31, 1998. For additional information regarding interest rate
sensitivity, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Market Risk and 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
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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.
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<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accruing, but past due
90 days or more $ 513 $ 867 $1,293 $ 460 $1,841
Total non-accrual loans 5,323 7,353 4,878 3,496 2,790
Restructured loans 106 113 73 79 85
------ ------ ------ ------ ------
Total non-performing loans (1) 5,942 8,333 6,244 4,035 4,716
Foreclosed real estate 459 401 465 1,183 1,336
------ ------ ------ ------ ------
Total non-performing
assets (2) $6,401 $8,734 $6,709 $5,218 $6,052
====== ====== ====== ====== ======
Non-performing loans as a
percentage of total loans,
net of unearned income 0.90% 1.54% 1.29% 1.00% 1.46%
===== ===== ====== ====== ======
Non-performing assets as a
percentage of total assets 0.43% 0.75% 0.82% 0.78% 1.19%
===== ===== ====== ====== ======
</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,
-----------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Interest income that would have
been recorded had the loans been in
accordance with their
original terms $422 $605 $392
Interest income included in net
income 153 126 82
</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, 1999, there were
three restructured loans in the amount of $106,000.
At December 31, 1999, 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 $88.1 million, or 13.4% 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.
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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, 1999, all
identified potential problem loans were included in the preceding table except
for $7.7 million of loans included on the Banks' internal watch list.
The Banks had no credit exposure to "highly leveraged transactions" at
December 31, 1999, as defined by the FRB.
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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,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year: $ 7,222 $ 5,738 $ 5,072 $ 4,883 $ 4,449
Charge-offs:
Commercial 309 207 97 497 283
Real estate-mortgage 1,216 440 300 344 173
Consumer 435 302 308 154 132
-------- -------- -------- -------- --------
Total Charge-offs $ 1,960 $ 949 $ 705 $ 995 $ 588
-------- -------- -------- -------- --------
Recoveries:
Commercial 111 59 128 236 146
Real estate-mortgage 350 84 56 29 20
Consumer 62 80 47 52 28
-------- -------- -------- -------- --------
Total recoveries $ 523 $ 223 $ 231 $ 317 $ 194
-------- -------- -------- -------- --------
Net charge-offs 1,437 726 474 678 394
Provision for loan losses 1,217 2,210 1,140 867 828
-------- -------- -------- -------- --------
Balance at end of year $ 7,002 $ 7,222 $ 5,738 $ 5,072 $ 4,883
======== ======== ======== ======== ========
Average loans outstanding (1) $595,032 $517,944 $444,839 $357,831 $308,044
======== ======== ======== ======== ========
As a percent of average loans (1):
Net charge-offs 0.24% 0.14% 0.11% 0.19% 0.13%
Provision for loan losses 0.20% 0.43% 0.26% 0.24% 0.27%
Allowance for loan losses 1.18% 1.39% 1.29% 1.42% 1.59%
Allowance as a percent of each
of the following:
Total loans, net of
unearned income 1.05% 1.34% 1.19% 1.26% 1.51%
Total non-performing loans 117.84% 86.67% 91.90% 125.70% 103.54%
</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, reasonably anticipated 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.
17
<PAGE> 18
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,
1999. 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, 1999, approximately 5.3% 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,
------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
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 $ 4,661 50.78% $4,124 51.85% $1,819 46.06% $1,398 44.17% $1,568 42.15%
Real Estate -
Mortgage 978 27.29% 981 31.67% 689 36.31% 509 37.72% 469 38.77%
Real Estate -
Construction 290 7.84% 72 3.15% 56 3.11% 73 2.73% 64 2.77%
Consumer loans
to individuals 699 14.09% 544 13.33% 709 14.52% 292 15.38% 311 16.31%
Unallocated 374 1,501 2,465 2,800 2,471
----- ----- ------ ----- ------
Total $ 7,002 100.00% $7,222 100.00% $5,738 100.00% $5,072 100.00% $4,883 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
SECURITIES PORTFOLIO
The Company's securities portfolio is intended to provide liquidity,
help manage interest rate risk and contribute to earnings without exposing the
Company to credit risk. As a result of the Company's recent growth, the
securities portfolio has grown significantly from $534.6 million at December 31,
1998 to $700.0 million at December 31, 1999. This significant increase is due in
large part to leveraging programs that used FHLB advances and the significant
deposit inflows at existing and new branches to fund both loan originations and
securities purchases. The purpose of these leverage 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 leveraging program
18
<PAGE> 19
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, 1999, 1998, and 1997 follows:
<TABLE>
<CAPTION>
Securities Securities
Available for Sale Held To Maturity
at December 31, at December 31,
---------------------------------- --------------------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 29,464 $ 9,256 $ 10,801 $ 0 $ 0 $ 0
U.S. Government agencies 130,251 192,705 32,981 121,657 60,724
State and municipal 190,937 233,615 45,538 139,505 0 10,165
Mortgage-backed and asset-
backed securities (1) 67,570 57,583 103,132 598 0 0
Other securities (2) 46,945 39,491 12,953 25 25 25
-------- -------- -------- -------- ------- --------
Total Amortized Cost of
Securities $465,167 $532,650 $205,405 $261,785 $ 25 $ 70,914
======== ======== ======== ======== ======== ========
Total Fair Value of
Securities $438,173 $534,526 $209,106 $235,829 $ 25 $ 71,769
======== ======== ======== ======== ======== ========
</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.
19
<PAGE> 20
The following table presents the maturity distribution and weighted
average yield of the securities portfolio of the Company at December 31, 1999.
Weighted average yields on tax-exempt obligations have been computed on a
taxable equivalent basis.
<TABLE>
<CAPTION>
Available for Sale
December 31, 1999
-------------------------------------------------------------------------------------------------
(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
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Amortized Cost:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities $ 0 0% $ 6,142 6.362% $ 23,322 6.363 $ 0 0 $ 29,464 6.363%
U.S. Government Agencies 0 0 6,982 6.805 74,668 6.747 48,601 6.576 130,251 6.686
State and Municipal 3,492 8.556 17,138 8.341 740 8.378 169,567 7.184 190,937 7.318
Mortgage-backed and
asset-backed securities 0 0 601 6.363 3,299 6.426 63,670 6.552 67,570 6.544
Other Securities 0 0 0 0 0 0 46,945 6.355 46,945 6.259
-------- ------ --------- ----- -------- ----- -------- ------ -------- -----
Total securities
available for sale $ 3,492 8.556% $ 30,863 7.561% $102,029 6.661% $328,783 6.853% $465,167 6.861%
======== ===== ======== ====== ========= ===== ======== ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
Held to Maturity
December 31, 1999
-----------------------------------------------------------------------------------------------
(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
-------------- -------------- --------------- ------------------ ---------------
Amortized Cost:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities 0 0% $ 0 0% $ 0 0% $ 0 0% 0 0%
U.S. Government Agencies 0 0 0 0 0 0 121,657 6.581 121,657 6.581
State and Municipal 0 0 0 0 0 0 139,505 7.420 139,505 7.420
Mortgage-backed and
asset-backed securities 0 0 0 0 0 0 598 6.071 598 6.071
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% $261,760 7.027% $261,785 7.027%
====== ===== ====== ====== ======= ===== ========= ===== ======== =====
</TABLE>
(1) The majority of the securities listed in this category are callable or
likely to repay within five years.
The Company maintains a securities portfolio for the secondary
application of funds as well as a secondary source of liquidity. At December 31,
1999, securities having an amortized cost of $432.5 million were pledged as
collateral for public funds and other purposes as required or permitted by law.
Neither the Company nor the Bank held securities of any one issuer,
excluding U.S. Treasury and U.S. Government Agencies, that exceeded 10% of
stockholders' equity at December 31, 1999 or any prior period end.
20
<PAGE> 21
DEPOSIT STRUCTURE
The following is a distribution of the average balances of the Bank's
deposits and the average rates paid thereon for the years ended December 31,
1999, 1998 and 1997.
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
-------------- -------------- --------------
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C>
Demand--non-interest bearing $ 103,805 ----% $ 72,866 ----% $ 63,970 ----%
Demand--interest-bearing 110,771 3.02% 62,915 1.67% 39,360 2.07%
Savings 328,123 3.36% 278,860 3.75% 220,247 3.40%
Time deposits 376,985 5.34% 290,147 5.43% 241,301 5.31%
-------- ----- ------- ----- -------- -----
Total deposits $919,684 3.75% $704,788 3.87% $564,878 3.74%
======== ===== ========= ===== ======== =====
</TABLE>
The following is a breakdown, by maturities, of the Bank's time
certificates of deposit issued in denominations of $100,000 or more as of
December 31, 1999.
<TABLE>
<CAPTION>
December 31, 1999
(In thousands)
Time Other
CD's Time Total
---- ---- -----
Maturing in:
<S> <C> <C> <C>
Three months or less $ 9,665 $ 115 $ 9,780
Over three through six months 13,182 -- 13,182
Over six through twelve months 8,142 -- 8,142
Over twelve months 30,636 -- 30,636
------- ------- -------
Total $61,625 $ 115 $61,740
======= ======= =======
</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 $4.9 million and $0.6 million at December 31,
1999 and 1998.
The Bank had other short-term borrowings from the FHLB at December 31,
1999 and 1998 in the amount of $202.7 million and $81.2 million, respectively.
The December 31, 1999 balance outstanding was due in 2000. The December 31, 1999
balance had an average interest rate of 5.30%.
21
<PAGE> 22
The Bank has entered into repurchase agreements with other institutions
in the amount of $56.8 million at December 31, 1999. Borrowings under these
agreements have terms ranging from one to three months and are collateralized by
certain investment securities. In addition, the Bank enters into agreements with
customers as part of its cash management services where the Bank sells
securities to the customer overnight with the agreement to repurchase them at
par. Securities sold under these agreements generally mature one day from the
transaction date. This amount totalled $10.1 million at December 31, 1999. The
securities underlying all of these agreements were under the Bank's control.
The following table sets forth information regarding short-term
borrowings at and for the periods ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Short-term advances from the FHLB bearing
interest at a weighted average
rate of 5.15%, 4.95% and 5.78% as of
December 31, 1999, 1998
and 1997, respectively: ................ $202,675 $ 81,200 $ 27,500
Securities sold under agreements to
repurchase at a weighted average rate of
5.75%, 4.59% and 5.62% as of
December 31, 1999, 1998 and 1997,
respectively: .......................... 66,905 4,228 8,204
-------- -------- --------
$269,580 $ 85,428 $ 35,704
======== ======== ========
Maximum amount of short-term advances
from the FHLB outstanding at any
month-end during the years ended
December 31, 1999, 1998 and 1997: ...... $202,675 $ 81,200 $ 67,896
Maximum amount of securities sold under
agreements to repurchase outstanding at
any month-end during the years ended
December 31, 1999, 1998 and 1997: ........ 66,905 4,228 24,758
-------- -------- --------
$269,580 $ 85,428 $ 92,654
======== ======== ========
Average amount of short-term advances
outstanding during the years ended
December 31, 1999, 1998 and 1997 at
weighted average interest rates of
5.30%, 5.59% and 5.68%, respectively ... $158,356 $ 40,766 $ 33,999
Average amount of securities sold under
Agreements to repurchase
outstanding During the years ended
December 31, 1999, 1998 and 1997 at
weighted average interest rates
of 4.99%, 4.42% and4.92%, respectively:... 24,243 3,800 675
-------- -------- --------
$182,599 $ 44,566 $ 34,674
======== ======== ========
</TABLE>
22
<PAGE> 23
The Bank's maximum borrowing capacity with the FHLB is substantially
equivalent to its short and long-term borrowings at December 31, 1999. 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, 1999, the Bank operated 43 full service community
banking offices and 10 loan production offices. Of the forty-three banking
offices, 18 are owned, 4 are land leases only and 21 are building and land
leases from independent owners. Of the 10 loan production offices, 6 are leased
from independent owners.
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
Bank's 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.
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".
23
<PAGE> 24
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.
<TABLE>
<CAPTION>
Dividends
Year Quarter High Low Per Share
<S> <C> <C> <C> <C>
1999 4th 13-3/8 9-7/16 $0.14
3rd 14-1/2 11-5/8 0.14
2nd 17-1/4 14-1/16 0.14
1st 18-3/4 14-7/8 0.14
1998(1) 4th 20-3/4 16-1/4 $0.14
3rd 21-1/32 16-1/8 0.13
2nd(2) 24-1/16 19-5/8 0.13
</TABLE>
(1)Restated to reflect a 7 percent stock dividend paid on December 15,
1998.
(2)From May 1, 1998 (Effective date of formation of Main Street
Bancorp, Inc.)
At March 8, 2000, the total number of holders of record of the
Company's common shares was approximately 6,600.
For certain limitations on the Banks' abilities to pay dividends to the
Company, see "Description of Business - Supervision and Regulation" hereof and
Note 19 to "Notes to Consolidated Financial Statements."
24
<PAGE> 25
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
At or for the
Year ended December 31,
-----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Total interest income $ 85,889 $ 65,719 $ 54,463 $ 41,809 $ 36,413
Total interest expense` 49,502 33,264 25,978 18,654 15,803
------------ ----------- ---------- ----------- -----------
Net interest income 36,387 32,455 28,485 23,155 20,610
Provision for loan losses 1,217 2,210 1,140 867 828
Other income 6,820 10,301 4,535 3,559 2,769
Other expenses 36,617 25,092 19,234 16,536 16,350
Federal income taxes (benefit) (2,574) 3,711 3,317 2,428 1,890
------------ ----------- ---------- ----------- -----------
Net income $ 7,947 $ 11,743 $ 9,329 $ 6,883 $ 4,311
============ =========== ========== =========== ===========
PER SHARE DATA:
Earnings per share (1)
Basic $ 0.76 $ 1.13 $ 1.02 $ 0.82 $ 0.51
Diluted 0.76 1.12 1.00 0.82 0.50
Cash dividends declared per share(1) 0.56 0.49 0.36 0.30 0.25
Book value per share (1)(2) 7.54 9.14 8.60 7.16 6.71
Book value per share, realized (1)(2)(3) 9.22 9.02 8.37 7.12 6.62
Average shares outstanding (1)(2) 10,414,195 0,357,974 184,980 8,345,300 8,482,808
BALANCE SHEET DATA:
Total assets $ 1,496,747 $ 1,158,541 $ 813,863 $ 666,476 $ 509,917
Total loans,net 658,725 533,395 477,838 397,790 318,449
Total securities 699,958 534,551 280,020 203,236 138,388
Total deposits 1,024,516 818,550 626,760 518,567 432,988
Borrowings 359,434 221,072 84,758 81,120 16,275
Junior subordinated deferrable
interest debentures 10,000 -- -- -- --
Total stockholders' equity $ 78,778 $ 94,912 $ 88,720 $ 59,785 $ 56,311
PERFORMANCE RATIOS:
Return on average assets 0.61% 1.28% 1.28% 1.22% 0.90%
Return on average stockholders' equity 9.02% 12.34% 13.16% 12.05% 7.95%
Net interest margin (4) 3.53% 4.03% 4.30% 4.54% 4.73%
Total other expenses as a percentage
of average assets 2.80% 2.73% 2.63% 2.93% 3.42%
ASSET QUALITY RATIOS:
Allowance for loan losses as a percentage
of loans 1.05% 1.34% 1.19% 1.26% 1.51%
Allowance for loan losses as a
percentage of non-performing loans(5) 117.84% 86.67% 91.90% 125.70% 103.54%
Non-performing loans as a percentage of
total loans, net (5) 0.90% 1.54% 12.90% 1.00% 1.46%
Non-performing assets as a percentage of
total assets (5) 0.43% 0.75% 0.82% 0.78% 1.19%
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Net charge-offs as a percentage of
average loans, net 0.24% 0.14% 0.11% 0.19% 0.13%
LIQUIDITY AND CAPITAL RATIOS:
Equity to assets (6) 6.73% 10.34% 9.71% 10.14% 11.34%
Tier 1 capital to risk-weighted assets (7) 13.48% 14.83% 17.56% 14.81% 17.04%
Leverage ratio (7)(8) 7.43% 8.70% 10.93% 9.81% 11.60%
Total capital to risk-weighted assets (7) 14.38% 15.97% 18.72% 16.06% 18.24%
Dividend payout ratio 73.59% 43.57% 35.13% 36.25% 48.67%
</TABLE>
(1) Per common share data are adjusted for all stock dividends and
stock splits effected through December 31, 1999.
(2) Based upon total shares issued and outstanding at the end of
each respective period.
(3) Realized Book value excludes the effect of FASB 115.
(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
$338.2 million from $1.159 billion at December 31, 1998 to $1.497 billion at
December 31, 1999, an increase of 29.2%. This increase was primarily reflected
in cash and due from banks, securities, loans, bank premises and equipment and
accrued interest receivable and other assets.
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
$21.0 million to $50.5 million at December 31, 1999. The increase was due to the
opening of 21 new branches in 1999 and also due to higher cash inventories at
year-end due to the possibility of Year 2000 ("Y2K") related customer
withdrawals. The Company did not incur any Y2K related computer problems nor
does the Company expect to incur any additional expense related to Y2K.
26
<PAGE> 27
Total securities increased $165.4 million, or 30.9%, to $700.0
million at December 31, 1999 compared to $534.6 million at December 31, 1998.
The increase is due to the purchase of $305.3 million in securities, offset by
the securities sales and maturities of $111.3 million. In December of 1998, the
Company announced a 23 branch expansion program. As a result, the Company
elected to increase its securities portfolio as part of a program to leverage
the balance sheet and increase earnings, thereby offsetting a portion of the
increase in operating expenses that resulted from the branch expansion program.
The securities purchases were initially funded with short-term FHLB advances. As
the deposits from these new branches are gathered, the Company plans to replace
these short-term borrowings with lower-cost deposits. The strategic program also
includes replacing securities with higher yielding loans as additional volume is
generated from the Company's new and existing markets.
Loans receivable, net of allowance for loan losses of $7.0 million at
December 31, 1999 and $7.2 million at December 31, 1998, increased to $658.7
million at December 31, 1999 from $533.4 million at December 31, 1998, an
increase of 23.5%. The increase was primarily due to an increase in commercial
and commercial real estate construction loans.
Amounts due from mortgage investors decreased from $14.6 million at
year-end 1998 to $5.0 million at year-end 1999. 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.
Bank premises and equipment, net of accumulated depreciation, increased
from $25.7 million at year-end 1998 to $36.5 million at year-end 1999. The
increase was largely attributable to the leasehold improvements and the purchase
of various furniture, fixtures and equipment for the 21 new branches opened in
1999.
Accrued interest receivable and other assets increased $25.6 million
from $15.7 million at December 31, 1998 to $41.3 million at December 31, 1999.
The increase was due to the recording of $14.6 million in deferred tax assets
and due to the increase in accrued interest on the loan and securities
portfolios.
27
<PAGE> 28
Total liabilities increased $354.3 million, or 33.3% , from $1.064
billion at year-end 1998 to $1.418 billion at December 31, 1999. During this
period, deposits increased by 25.2%, from $818.6 million at December 31, 1998 to
$1.025 billion at December 31, 1999. The increase in deposits was primarily in
interest-bearing checking and time deposits. Interest-bearing checking increased
from $68.1 million at December 31, 1998 to $137.4 million at December 31, 1999.
Time deposits increased from $321.3 million at December 31, 1998 to $437.5
million at year-end 1999, an increase of 36.2%. Non-interest bearing demand
deposits increased 19.4% to $122.3 million at December 31, 1999 from $102.4
million at December 31, 1998. $112.7 million of the increases in the deposit
accounts are attributable to the twenty-one new branches opened in 1999. The
average time these 21 new branches were open in 1999 was 5.9 months. Two more
branches will open in early 2000. As mentioned above, management intends to
replace short-term borrowings with lower-cost deposits as they are gathered from
the new branches.
Other borrowed funds increased $188.3 million, or 218.8%, to $274.4
million at December 31, 1999 from $86.1 million at December 31, 1998. Long-term
borrowings from the FHLB decreased $50.0 million, or 37.0%, to $85.0 million at
December 31, 1999. The net increase in borrowed funds was used primarily to fund
securities purchases. As mentioned above, the Company elected to purchase
securities ahead of the in-flow of deposits and loans expected to occur from the
addition of the 23 new branches in order to offset expected start-up costs in
1999 and 2000 associated with these branch openings.
In December 1999, the Company issued $10.0 million of 9.625% junior
subordinated deferrable interest debentures to MBNK Capital Trust I, a
wholly-owned subsidiary of the Company. The Trust then issued $10.0 million
preferred securities to investors. The preferred securities are redeemable by
the Company on or after December 31, 2004. The preferred securities must be
redeemed upon maturity of the debentures on December 31, 2029. For regulatory
capital purposes, the company was permitted to include 100% of these trust
preferred securities as Tier I capital.
Stockholder's equity decreased $16.1 million, or 17.0%, from $94.9
million at December 31, 1998, to $78.8 million at December 31, 1999. The
decrease was attributable to unrealized losses on securities available for sale,
net of taxes, as required by FASB 115. At December 31, 1998, the Company had
$1.2 million in
28
<PAGE> 29
unrealized gains and at December 31, 1999 the Company had $17.5 million in
unrealized losses on securities available for sale. This decrease occurred
because of the general increase in interest rates during that period. Should
interest rates increase in the future, stockholders' equity could further
decrease due to further unrealized losses of the securities available for sale.
Should interest rates decline in future periods, stockholders' equity could
increase as a result of unrealized gains on securities available for sale. FASB
115 requires companies to report the securities classified as "available for
sale" at fair value, with unrealized gains and losses, net of deferred income
taxes, reported as a separate component on stockholders' equity. FASB 115 only
addresses one component of the balance sheet - securities - and does not take
into account fair value adjustments for the remaining items of the balance
sheet. FASB 107 addresses additional balance sheet market values but does not
require a separate adjustment to stockholders' equity. These amounts are
disclosed in the audited financial statements in footnote 21 on page 35. The
FASB 115 adjustment is not included when calculating the Company's regulatory
capital ratios.
Results of Operations for the Years Ended December 31, 1999, 1998, and 1997
Overview
The Company's net income for the year ended December 31, 1999 was $7.9
million compared to $11.7 million for the year ending December 31, 1998. The
1999 net income was 32.3% less that than the 1998 net income. The 1998 net
income was 25.9% more than the $9.3 million in 1997. On a per share basis, basic
earnings were $0.76, $1.13 and $1.02 for 1999, 1998 and 1997, respectively.
Diluted earnings per share were $0.76, $1.12 and $1.00 for 1999, 1998 and 1997,
respectively. The decrease in 1999 is attributable to severance payments made to
two former Heritage Bank executives as well as the planned expenses associated
with the branch expansion program. Operating income, which excludes these
severance payments and losses on sales of securities for 1999, was $9.4 million
or 90 cents per share, both basic and diluted.
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 on page 11, 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) average assets, liabilities and stockholders' equity,
(ii) interest income earned on interest-earning assets and interest expense paid
on interest-
29
<PAGE> 30
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.
30
<PAGE> 31
<TABLE>
<CAPTION>
Average Balances, Average Rates, and Net Interest Margin
Years Ended December 31, 1999 December 31, 1998 December 31, 1997
- ----------- ----------------- ----------------- -----------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) 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>
INTEREST-EARNING ASSETS:
Interest-bearing deposits
at banks $ 651 $ 34 5.22% $ 1,124 $ 61 5.43% $ 4,384 $ 248 5.66%
------- ------ ---- ------- ----- ---- ------ ----- ----
Taxable securities 340,309 21,942 6.45 241,599 15,545 6.43 190,906 12,671 6.64
Tax-exempt securities 291,754 21,473 7.36 102,778 7,729 7.52 52,867 4,144 7.84
------- ------ ---- ------- ----- ---- ------ ----- ----
Total securities 632,063 43,415 6.87 344,377 23,274 6.76 243,773 16,815 6.90
------- ------ ---- ------- ----- ---- ------ ----- ----
Federal funds sold 470 23 4.89 3,990 218 5.46 670 36 5.37
------- ------ ---- ------- ----- ---- ------ ----- ----
Commercial loans (3) 334,152 28,396 8.50 265,896 23,602 8.88 207,043 18,768 9.06
Mortgage loans 180,759 14,177 7.84 184,330 14,794 8.03 171,239 13,684 7.99
Installment loans 80,121 6,835 8.53 67,718 6,245 9.22 66,557 6,226 9.35
------- ------ ---- ------- ----- ---- ------ ----- ----
Total loans(4) 595,032 49,408 8.30 517,944 44,641 8.62 444,839 38,678 8.69
------- ------ ---- ------- ----- ---- ------ ----- ----
Total interest-
earning assets 1,228,216 92,880 7.56 867,435 68,194 7.86 693,666 55,777 8.04
Unrealized gains (losses) on
available for sale
securities (9,951) 5,512 781
Allowance for loan losses (7,048) (6,344) (5,409)
Non-interest earning assets 96,610 53,871 41,395
------- ------- ------
Total assets $ 1,307,827 $920,274 $ 730,433
=========== ======== ===========
INTEREST-BEARING LIABILITIES:
Demand deposits,
interest-bearing $ 110,771 $ 3,340 3.02% $ 62,915 $ 1,050 1.67% $ 39,360 $ 814 2.07%
Savings deposits 328,123 11,036 3.36 278,860 10,450 3.75 220,247 7,495 3.40
Other time deposits 376,985 20,113 5.34 290,147 15,768 5.43 241,301 12,810 5.31
------- ------ ---- ------- ------ ---- ------- ------ ----
Total deposits 815,879 34,489 4.23 631,922 27,268 4.32 500,908 21,119 4.22
Other borrowed funds 186,821 9,899 5.30 46,855 2,490 5.31 35,396 2,000 5.65
Junior subordinated
debentures 639 61 9.55
Long-term debt 102,480 5,053 4.93 64,401 3,506 5.44 52,061 2,859 5.49
------- ----- ---- ------ ----- ---- ------ ----- ----
Total interest-bearing
liabilities 1,105,819 49,502 4.48 743,178 33,264 4.48 588,365 25,978 4.42
------ ---- ------ ---- ------ ----
Demand deposits,
non-interest bearing 103,805 72,866 63,970
Other non-interest
bearing liabilities 10,141 9,051 7,189
------ ----- -----
Total liabilities 1,219,765 825,095 659,524
Stockholders' equity 88,062 95,179 70,909
------ ------ ------
Total liabilities
and stockholders'
equity $1,307,827 $920,274 $ 730,433
========== ======== ==========
Net interest income $ 43,378 $34,930 $ 29,799
======== ======= ========
Net interest margin(5) 3.53% 4.03% 4.30%
==== ==== ====
</TABLE>
(1) Includes loan fee income.
(2) Yields on investments are calculated on amortized cost.
(3) Full taxable equivalent basis, using a 35% effective 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.
1999 vs. 1998
Net interest income, on a tax-equivalent basis, increased $8.5 million,
or 24.2%, to $43.4 million in 1999 from $34.9 million in 1998. The increase in
net interest income was primarily due to an increase in average interest-earning
assets. For the year, average interest-earning assets increased $360.8 million,
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<PAGE> 32
or 41.6%, to $1.228 billion from $867.4 million a year ago. The increase in
average interest-earning assets occurred primarily in average securities.
Average securities increased $287.7 million to $632.1 million at December 31,
1999 from $344.4 million at year-end 1998. The majority of these securities
purchases were funded with FHLB borrowings. As mentioned previously, the Company
plans to eventually replace these securities with higher-yielding loans as the
loans are generated from the new market areas.
Net interest margin, which is the difference between interest earned
and interest paid, divided by average total-interest earning assets, decreased
50 basis points to 3.53% for the year ended December 31, 1999 compared to 4.03%
for the year ended December 31, 1998, calculated on a tax equivalent basis. The
primary reasons net interest margin decreased were the significant increase in
noninterest-earning assets related to the branch openings and the significant
amount of securities funded by borrowings at an approximate spread of 2%. The
Company used some borrowings to purchase noninterest-earning assets, i.e. fixed
assets, instead of using these proceeds for interest-earning assets.
Interest income earned on interest-earning assets increased $24.7
million, or 36.2%, to $92.9 million for the year ending December 31, 1999
compared to $68.2 million for the year ending December 31, 1998, calculated on a
tax-equivalent basis. Interest income from securities increased $20.1 million,
or 86.5%, to $43.4 million for the year ending December 31, 1999 compared to
$23.3 million for the year ending December 31, 1998. Interest income from loans
increased $4.8 million, or 10.7%, to $49.4 million for the year ending December
31, 1999 compared to $44.6 million for the year ending December 31, 1998. The
yield on average interest-earning assets, calculated on a tax-equivalent basis,
decreased from 7.86% at December 31, 1998 to 7.56% at December 31, 1999,
primarily due to the addition of securities at yields below 7.86% and a lower
average prime rate during 1999.
The Company's total interest expense increased $16.2 million, or 48.8%,
to $49.5 million in 1999 from $33.3 million in 1998. The average rate paid on
interest-bearing liabilities was maintained at 4.48% for both 1999 and 1998.
While the cost of deposits actually decreased 9 basis points in 1999 to 4.23%
from 4.32% in 1998, the mix of funding which had a greater percent of borrowings
due to the expansion plan resulted in no overall net change in the average rate
paid on total interest bearing liabilities. Average interest-bearing liabilities
increased $362.6 million, or 48.8%, to $1.106 billion in 1999 from $743.2
million
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<PAGE> 33
in 1998. In December of 1999, the Company issued $10 million of junior
subordinated deferrable interest debentures at 9.625%.
Average interest-bearing deposits increased $184.0 million, or 29.1%,
to $815.9 million at December 31, 1999 compared to $631.9 million at December
31, 1998. The average rate paid on interest-bearing deposits decreased 9 basis
points from 4.32% in 1998 to 4.23% in 1999. During the latter half of 1999, the
Company ran several certificate of deposit promotions for the new branches. The
Company raised approximately $90.0 million (net of rollovers) of approximately
6.00% certificates of deposit with terms ranging between one and two years. As
part of this promotion, each customer was required to open both a low-cost
checking and savings account to obtain the high-rate certificate of deposit.
When the Company initiated its plan to open 23 new branches in 1999, it
anticipated it would be funding certain non interest-earning assets with
interest-bearing liabilities as the branches opened. The Company also
anticipated that it would be offering deposit "specials" with aggressive
interest rates in order to help attract customers to new branches in new
markets. These transactions naturally affect net interest margin negatively and
were expected to occur around the time of the opening of the majority of the 23
new branches in 1999. This is one of many of the forecasted cost components of
the branch expansion program that has contributed to the decline in earnings in
1999 compared to 1998.
Average other borrowed funds and average long-term borrowings increased
$178.0 million, or 160.0%, to $289.3 million at December 31, 1999 from $111.3
million at December 31, 1998. As mentioned previously, the Company used the
proceeds from borrowings to purchase securities at an approximate spread of
2.0%. As borrowings are replaced with lower-cost deposits and as securities are
replaced with higher yielding loans, the Company expects the initial 2.0% spread
to widen, which should cause net interest margin to increase in the future.
Average non-interest bearing deposits increased to $103.8 million in
1999 from $72.9 million at December 31, 1998. During 1999, the Company continued
an incentive based compensation program to encourage branch employees to bring
in non-interest bearing demand and lower-cost savings deposits. The Company 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.
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<PAGE> 34
1998 vs. 1997
Net interest income, on a tax-equivalent basis, increased $5.1 million,
or 17.2%, 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 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 security
and loans. This was due to a 75 basis point decrease in prime rate late in 1998,
an overall decrease in securities 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 38.4%, 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 securities, from $243.8 million at December 31,1997 to $344.4 million
at December 31, 1998. During 1998, the Company chose to purchase mostly
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 28.0%,
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.
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<PAGE> 35
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 23.1%,
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 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.
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. As mentioned previously, the Company offers a compensation program to
encourage branch employees to bring in the non-interest bearing demand and
lower-cost savings deposits. The Company 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.
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.
35
<PAGE> 36
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 vs. 1998 1998 vs. 1997
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 $ (26) $ (1) $ (27) $ (184) $ (3) $ (187)
Federal funds sold (192) (3) (195) 178 4 182
Securities (1) 20,562 (421) 20,141 7,251 (792) 6,459
Loans (1) 6,916 (2,149) 4,767 6,490 (527) 5,963
-------- -------- -------- -------- -------- --------
Total interest income $ 27,260 $ (2,574) $ 24,686 $ 13,735 $ (1,318) $ 12,417
-------- -------- -------- -------- -------- --------
Interest paid on:
Interest-bearing demand
and savings deposits $ 2,645 $ 231 $ 2,876 $ 2,482 $ 709 $ 3,191
Time deposits 4,719 (373) 4,346 2,593 365 2,958
Borrowed funds 9,572 (556) 9,016 1,325 (188) 1,137
-------- -------- -------- -------- -------- --------
Total interest expense $ 16,936 $ (698) $ 16,238 $ 6,400 $ 886 $ 7,286
-------- -------- -------- -------- -------- --------
Net interest income $ 10,324 $ (1,876) $ 8,448 $ 7,335 $ (2,204) $ 5,131
======== ======== ======== ======== ======== ========
</TABLE>
(1) Interest income is reported on a tax-equivalent basis, using a 35%
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 Bank's 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 $1.2 million for 1999 compared to
$2.1 million for 1998 and $ 1.1 million for 1997. The Company significantly
increased its allowance for loan losses in 1998 due to the increasing
uncertainty regarding economic conditions. However, due to improving conditions
and asset quality ratios, management did not provide for as much in loan loss
provision in 1999. Non-performing assets were 0.43% of total assets at December
31, 1999, 0.75% of total assets at December 31, 1998, and 0.82% of total assets
at December 31, 1997.
Other Income
Other income decreased $3.5 million, or 33.8%, from $10.3 million in
1998 to $6.8 million in 1999. This compares to $4.5 million in 1997. The
decrease in other income was mostly due to the difference in realized gains and
losses on sales of securities and realized losses on mortgages held for sale.
Excluding these securities and mortgages held for sale gains and losses, other
income increased $1.8 million, or 39.0%, to $6.2 million for the year ending
December
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<PAGE> 37
31, 1999 from $4.4 million in 1998. During 1999, the Company realized losses on
sales of securities of $96,000 compared to realized gains on sales of securities
of $4.3 million in 1998. The 1998 realized gains on securities were the result
of sales of its available-for-sale equity securities of Pennsylvania banks in
order to provide additional revenue to help offset one-time expenses that
occurred in 1998. These one-time expenses included $2.0 million of merger
related costs, $1.7 million in loan loss provisions and approximately $0.2
million of facilities expense related to the acquisition and relocation of the
Company's new headquarters to 601 Penn Street, Reading, PA.
Income from customer service fees increased $1.1 million, from $2.6
million in 1998 to $3.7 million in 1999. This compares to $2.1 million in 1997.
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 decreased $0.7 million, or
33.9%, from $2.0 million in 1998 to $1.3 million in 1999 and increased from $1.0
million in 1997 to $2.0 million in 1998. Income from mortgage banking activities
represents income generated from mortgages originated and sold in the secondary
market. The decrease from 1998 to 1999 was due to the required accounting
treatment to mark mortgages held for sale to lower of cost or market and also
due to slower volume of mortgages being refinanced because of the rise in
interest rates. The 1998 increase was due to an increase in new home
construction, refinancings and the expansion of the Company's geographic market
into Bucks, Chester, Lancaster and Lehigh counties. Should interest rates
continue to rise throughout 2000, it is possible that income from mortgage
banking activities could decline from 1999 and 1998 levels. Other income
increased $0.3 million from $0.4 million in 1998 to $0.7 million in 1999. Other
income also increased $0.2 million in 1998 from $0.2 million in 1997. The
increase in other income in 1999 and 1998 was due primarily to outside rental
income from the lease of space at the Berks County Bank Building.
Other Expenses
Total other expenses increased $11.5 million, or 45.9%, to $36.6
million in 1999. This compares to $25.1 million in 1998 and $19.2 million in
1997. Salaries, wages and employee benefits increased $4.4 million, or 36.0%,
from $12.4 million in 1998 to $16.8 million in 1999. Salaries, wages and
employee benefits increased due to the opening and hiring of staff at the
twenty-one new branch locations. In 1998, salaries, wages and employee benefits
increased by
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<PAGE> 38
$2.5 million. This was due to the opening of two new branches in Hamburg and
Robesonia and additional back room support required to support the growth of the
Company.
During 1999, the Company incurred a $2.0 million pre-tax charge for
change of control payments to two former Heritage executives. The Company was
obligated to pay the executives under agreements they entered into with the
former Heritage Bancorp, Inc. in 1997. All other change of control rights
related to the 1998 Heritage/BCB merger have been renegotiated by current
management as part of new employment and change of control agreements executed
during 1999.
Occupancy expenses increased $2.0 million, or 96.3%, to $4.1 million in
1999 from $2.1 million in 1998. This compares with a 46.5% increase in 1998,
from $1.4 million at December 31, 1997. This 1999 increase resulted from the
commencement of lease payments on March 1, 1999 for seventeen of the twenty-one
branches opened in 1999. The 1998 increase was due to the opening of the Hamburg
and Robesonia branches and one-time expenses related to occupying the new
corporate headquarters at 601 Penn Street, Reading, Pa., known as the Berks
County Bank Building. The Company moved into the Berks County Bank Building in
April of 1998.
Equipment depreciation and maintenance increased 55.5% to $2.4 million
in 1999 from $1.6 million in 1998 and from $1.4 million in 1997. The increase
from 1999 and 1998 was due mostly to the depreciation and maintenance on
equipment for the twenty-one new branches.
Other operating expenses and merger costs increased $2.2 million, or
24.2%, to $11.3 million in 1999 compared to $9.1 million in 1998 and $6.5
million in 1997. During 1998, one-time merger related costs, consisting
primarily of professional fees and related transaction costs, totaled $2.0
million. The increases in other operating expenses occurred in advertising, data
processing and MAC fees and office supplies and expense.
Advertising increased $1.3 million, or 102.9%, to $2.5 million in 1999
from $1.2 million in 1998 and from $1.0 million in 1997. The increase in 1999
was due to advertising and marketing in conjunction with the opening of the 21
new branches. Approximately half of the increase was expenses directly connected
to opening the branches. The increase from 1997 to 1998 was due to the opening
and promotion of the Hamburg and Robesonia branches.
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<PAGE> 39
Data processing and MAC fees increased $0.6 million, or 52.8%, to $1.8
million in 1999 from $1.2 million in 1998 and from $1.0 million in 1997. The
increase was the result of an increase in the volume of new accounts in 1999 and
1998 and also due to increased credit card processing.
Office supplies and expense increased $0.7 million, or 58.9%, to $2.0
million in 1999 from $1.3 million in 1998 and from $1.1 million in 1997. This
increase in 1999 was for supplies necessary to support the Company's growth and
the 21 new branches. The increase in 1998 was to support the addition of two new
branches that year.
Professional fees remained relatively the same at $0.8 million in 1999
and 1998 and was $0.9 million in 1997. Professional fees include fees to
consultants, attorneys and accountants.
Provision for Income Taxes
The provision for federal income taxes was a $2.6 million benefit for
the year ended December 31, 1999 compared to a $3.7 million expense in 1998 and
a $3.3 million expense in 1997. The tax benefit in 1999 resulted from a higher
level of tax-exempt interest income earned on bank-qualified municipal
securities and tax free loans compared to pretax income. A reconciliation of the
statutory income tax at a rate of 34% is included in footnote No.10 to the
consolidated financial statements.
Asset Quality
Non-performing assets as a percentage of total assets decreased by
42.7% during 1999 to 0.43% at year-end 1999 and from 0.75% at year-end 1998.
Non-performing assets decreased from $8.7 million at December 31, 1998 to $6.4
million at December 31, 1999. 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 as
non-accrual within 10 days after the month end in which the loan becomes 90 days
past due for either principal or interest.
The balance in the allowance for loan losses was $7.2 million, or 1.34%
of total loans at December 31, 1998 compared to $7.0 million, or 1.05% of total
39
<PAGE> 40
loans at December 31, 1999. The ratio of the allowance for loan losses to
non-performing loans was 117.8% at December 31, 1999 compared to 86.7% at
December 31, 1998. Given the improvement in the above non-performing loan
ratios, the Company permitted the allowance for loan losses as a percentage of
total loans to decline. The balance in the allowance for loan losses was 1.49%
of total loans excluding residential mortgages at December 31, 1999 compared to
2.04% at December 31, 1998. It has been the Company's experience that the
percentage of loan losses has been substantially less in its residential
mortgage portfolio than in its commercial loan portfolio. At December 31, 1999,
29.3% of the Company's loan portfolio was in residential mortgage loans,
compared to 33.1% at December 31, 1998.
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, reasonably anticipated 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 the
bank's regulators and outside CPA firm.
When it is determined that the prospect for recovery of the principal
of a loan has significantly diminished, that portion of the loan is immediately
charged against the allowance account. Subsequent recoveries, if any, are
credited to the allowance account. In addition, nonaccrual and large delinquent
loans are reviewed monthly to determine potential losses.
40
<PAGE> 41
Management believes the allowance for loan losses was adequate to cover
risks inherent in its loan portfolio at December 31, 1999. However, there can be
no assurance that the Company will not have to increase its provision for loan
losses in the future as a result of changes in economic conditions or for other
reasons. Any such increase could adversely affect the Company's results of
operations.
Market Risk and Interest Rate Risk Management
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 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 does not utilize interest rate swaps,
caps or other hedging transactions.
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
41
<PAGE> 42
made periodically in an effort to provide dependable and steady growth in net
interest income regardless of the behavior of interest rates.
The following tables present a summary of the Company's interest rate
sensitivity at December 31, 1999 and 1998, calculated on a beta-adjusted basis.
For purposes of these tables, the Company has used assumptions based on industry
data and the Company's 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.
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, 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.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY ANALYSIS AT DECEMBER 31, 1999 (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 $ 191,837 $ 8,251 $ 6,072 $ 24,686 $ 57,356 $ 242,916 $134,609 $ 665,727
Securities (2) 56,969 9,166 52,943 6,808 97,753 216,160 287,153 726,952
Interest-bearing deposits
With banks& fed funds sold 584 0 0 0 0 0 0 584
--------- --------- --------- --------- -------- --------- -------- ----------
Total $ 249,390 $ 17,417 $ 59,015 $ 31,494 $155,109 $ 459,076 $421,762 $1,393,263
--------- --------- --------- --------- -------- --------- -------- ----------
Interest-bearing liabilities:
Interest bearing deposits $ 238,112 $ 19,109 $ 18,618 $ 58,200 $ 83,717 $ 221,424 $263,053 $ 902,233
Borrowed funds and
debentures(3) 274,434 0 0 0 25,000 60,000 10,000 369,434
Non-interest-bearing
deposits 0 0 0 0 0 61,142 61,141 122,283
--------- --------- --------- --------- -------- --------- -------- ----------
Total $ 512,546 $ 19,109 $ 18,618 $ 58,200 $108,717 $ 342,566 $334,194 $1,393,950
--------- --------- --------- --------- -------- --------- -------- ----------
Interest-rate sensitivity
gap:
Interval $(263,156) $ (1,692) $ 40,397 $ (26,706) $ 46,392 $ 116,510 $ 87,568 $ (687)
========= ========= ========= ========= ======== ========= ======== ==========
Cumulative $(263,156) $(264,848) $(224,451) $(251,157) $(204,765) $( 88,255) $ (687) $ (687)
========= ========= ========= ========= ======== ========= ======== ==========
Ratio of cumulative gap
to total rate-sensitive
assets (18.89%) (19.01%) (16.11%) (18.03%) (14.70%) (6.33%) (0.05%) (0.05%)
========= ========= ========= ========= ======== ========= ======== ==========
</TABLE>
<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
With banks & fed 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(3) 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
--------- --------- -------- -------- ---------- -------- ---------- ----------
</TABLE>
42
<PAGE> 43
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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(if there is no call
date or prepayment possibility), call date or expected cash flows;
excludes unrealized losses on available for sale securities.
(3) Borrowings are based on maturity date if no call or put date, or by
expected call or put if one applies.
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 shortcoming in the static GAP model. Accordingly, the Company
measures its interest-rate risk by conducting various analyses 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 .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 analyses as of December 31, 1999 indicate that, given the
43
<PAGE> 44
negative GAP balance shown in the table, the Company does not have material
interest-rate risk in the event that interest rates should rise as much as 150
basis points or fall as much as 300 basis points from the December 31, 1999
levels over the next twelve months. Interest rates have been rising since
November 1998. So far in this rising interest rate cycle, as of December 31,
1999, short-term interest rates (as measured by the Federal Funds Rate) have
already risen 75 basis points and long-term interest rates (as measured by the
ten year Treasury note) have already risen nearly 175 basis points with no
material negative impact on the Company's net interest margin. The Company's
simulation models indicate that should rates instantaneously rise 150 to 300
basis points above the December 31, 1999 levels (which would mean interest rates
had risen 250 to 475 basis points since the November 1998 levels), then net
interest margin could be at risk of declining more than 10%. However, this risk
is mitigated to the extent that the Company is successful in executing its
strategic plan to replace short-term borrowed funds with core deposits from the
twenty-one new branches opened in 1999 and the twenty-two branches that were
open prior to 1999, since core deposits are less interest-rate sensitive than
borrowings and they typically have a lower interest cost associated with them.
This risk is further mitigated to the extent that any further interest rate
increases beyond an additional 150 basis points are not instantaneous, but
rather occur gradually over time, allowing the Company time to reduce its
negative GAP position.
At December 31, 1999, the Company had $53.0 million in net unrealized
losses in its securities portfolio. The unrealized losses occurred because of
the general increase in interest rates. If interest rates continue to increase,
the unrealized losses on securities may continue to increase. If interest rates
fail, the unrealized losses may decrease or even become unrealized gains.
Capital
The Company's Tier 1 capital to risk-weighted assets ratio at December
31, 1999 was 13.38% compared to 14.83% at December 31, 1998. These ratios far
exceeded the regulatory Tier 1 capital requirement of 4.00%. The Company's total
capital to risk-weighted assets ratio at December 31, 1999 was 14.28% compared
to 15.97% at December 31, 1998. These ratios exceeded the regulatory total
risk-based capital requirement of 8.00%. At December 31, 1999, the Company's
leverage ratio was 7.43% versus 8.70% at December 31, 1998. These ratios
exceeded the
44
<PAGE> 45
regulatory leverage ratio requirement of 4.00%. The Company is categorized as
"well-capitalized" at December 31, 1999 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 the fair value of securities not pledged as
collateral, cash and amounts due from banks, interest-bearing deposits and
Federal funds sold. Held-to-maturity securities are classified as liquid assets
to the extent they are pledged as collateral.
These liquid assets totaled $339.5 million at December 31, 1999
compared to $564.0 million at December 31, 1998. Maturing loans are another
source of asset liquidity. At December 31, 1999, the Company estimated that an
additional $80.8 million of loans will mature in the next six-month period ended
June 30, 2000.
Liability liquidity can be met by attracting deposits with competitive
rates, buying Federal funds, utilizing the borrowing facilities of the Federal
Reserve System or the FHLB system or utilizing repurchase agreements with other
institutions. The Company utilizes a variety of these methods of liability
liquidity. At December 31, 1999, the Company had approximately $231.8 million in
unused lines of credit available to it under informal arrangements with
correspondent banks compared to $152.2 million at December 31, 1998. These lines
of credit enable the Company to purchase funds for short-term needs at current
market rates.
Future Outlook
The opening of 21 new offices during 1999 was a very unusual
occurrence. That accomplishment, which we viewed as a "once-in-a-lifetime"
opportunity, will not be repeated in 2000.
We have identified two new full-service offices which are scheduled to
open in 2000. They are the Douglassville Office, along Route 422 in Amity
Township, which opened February 5, 2000 and a Doylestown Office close to Routes
202 and 611 in Doylestown Township, Bucks County, scheduled to open during April
of this
45
<PAGE> 46
year. Consideration will be given to opening additional sites if prime locations
become available. Likewise, we will consider closing branches which are not
achieving required levels of growth and profitability.
During 2000, our efforts will be directed toward achieving
profitability at our new branches as rapidly as possible. We also plan to
increase the number of accounts per relationship while continuing to provide
fairly-priced products and services.
Also, we intend to take advantage of the recently passed
Gramm-Leach-Bliley Financial Modernization Act of 1999 which allows banks to
offer additional financial products such as brokerage and insurance services to
our customers.
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.
During July 1999, the FASB issued Statement No. 137, delaying the effective date
of this Statement. The Company is required to adopt the Statement on January 1,
2001. The adoption of the Statement is not expected to have a significant impact
on the financial condition or results of operations of the Company
Forward-looking disclaimer: 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)
46
<PAGE> 47
the 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 and; (VI) 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 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 - Market Risk and 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,
47
<PAGE> 48
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 savings deposits are
included as maturing in 2000. 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 changes in market rates. Time deposits are
presented by contractual maturity. Short-term borrowings consist of repurchase
agreements and less than one year borrowings from the FHLB. Generally, the funds
mature within 180 days. Long-term borrowings greater than one year are presented
by contractual maturity.
48
<PAGE> 49
<TABLE>
<CAPTION>
CASH FLOWS YEAR ENDED DECEMBER 31
---------------------------------
(IN THOUSANDS) 2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ----- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans
Fixed Rate $ 72,799 $ 56,732 $44,355 $39,384 $29,611 $113,876 $356,757 $351,748
Average Rate 8.27% 8.31% 8.37% 8.12% 8.11% 7.81% 8.11%
Variable Rate $115,287 $ 15,410 $ 9,977 $ 9,999 $ 9,721 $148,576 $308,970 $312,220
Average Rate 8.53% 8.04% 8.52% 8.49% 8.45% 7.92% 8.21%
Investment Securities $199,211 $ 26,837 $28,451 $95,932 $76,903 $299,084 $726,952 $674,002
Average Rate 6.68% 7.52% 6.92% 6.62% 7.04% 7.07% 6.87%
Fed Funds & Int Bearing $ 584 $ 584 $ 584
Average Rate 5.22% 5.22%
INTEREST BEARING LIABILITIES:
Interest Bearing Demand $137,352 $ 0 $ 0 $ 0 $ 0 $ 0 $137,352 $137,352
Average Rate 3.08% 0% 0% 0% 0% 0% 3.08%
Savings Deposits $327,422 $ 0 $ 0 $ 0 $ 0 $ 0 $327,422 $327,422
Average Rate 3.36% 0% 0% 0% 0% 0% 3.36%
Time Deposits:
Fixed Rate $177,018 $157,480 $21,694 $36,467 $ 5,262 $ 8,753 $406,674 $404,491
Average Rate 5.27% 5.80% 5.41% 6.04% 5.09% 5.25% 5.55%
Variable Rate $ 30,264 $ 468 $ 0 $ 53 $ 0 $ 0 $ 30,785 $ 30,785
Average Rate 4.93% 4.72% 0% 4.51% 0% 0% 4.93%
Fixed-Rate Borrowings $236,779 $ 0 $ 0 $60,000 $ 0 $ 0 $296,772 $292,296
Average Rate 5.61% 0% 0% 4.85% 0% 9.62% 5.46%
Variable Rate Borrowings $ 62,664 $ 0 $ 0 $ 0 $ 0 $ 0 $ 62,664 $ 62,664
Average Rate 4.18% 0% 0% 0% 0% 0% 4.18%
Junior Subordinated $ 0 $ 0 $ 0 $ 0 $ 0 $ 10,000 $ 10,000 $ 9,146
Debentures 0% 0% 0% 0% 0% 9.62% 9.62%
</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.
49
<PAGE> 50
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
<S> <C>
INDEPENDENT AUDITOR'S REPORT
ON THE CONSOLIDATED FINANCIAL STATEMENTS 51
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets 52
Consolidated statements of income 53
Consolidated statements of stockholders' equity 54
Consolidated statements of cash flows 55
Notes to consolidated financial statements 56-77
</TABLE>
50
<PAGE> 51
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, 1999 and 1998, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with generally accepted
accounting principles.
/s/ Beard & Company, Inc.
Reading, Pennsylvania
January 21, 2000
51
<PAGE> 52
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1999 1998
- ------------ ---- ----
(In Thousands, Except Share Data)
<S> <C> <C>
ASSETS
Cash and due from banks $ 49,904 $ 28,710
Interest-bearing deposits with banks 114 336
Federal funds sold 470 470
Securities available for sale 438,173 534,526
Securities held to maturity, fair value 1999 $ 235,829; 1998 $ 25 261,785 25
Loans receivable, net of allowance for loan losses 1999 $ 7,002; 1998 $ 7,222 658,725 533,395
Mortgage loans held for sale 4,854 5,069
Due from mortgage investors 4,957 14,567
Premises and equipment, net 36,477 25,717
Accrued interest receivable and other assets 41,288 15,726
-------------- -------------
Total assets $ 1,496,747 $ 1,158,541
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 122,283 $ 102,432
Interest bearing 902,233 716,118
-------------- -------------
Total deposits 1,024,516 818,550
Accrued interest payable and other liabilities 24,019 24,007
Other borrowed funds 274,434 86,072
Long-term debt 85,000 135,000
Guaranteed preferred beneficial interest in Company's subordinated debentures 10,000 -
Total liabilities 1,417,969 1,063,629
-------------- -------------
Stockholders' equity:
Preferred stock, par value $ 10.00 per share; authorized and unissued
5,000,000 shares - -
Common stock, par value $ 1.00 per share; authorized 50,000,000 shares;
issued and outstanding 1999 10,449,657 shares; 1998 10,388,443 shares 10,450 10,388
Surplus 64,548 64,134
Retained earnings 21,326 19,227
Accumulated other comprehensive income (loss) (17,546) 1,163
-------------- -------------
Total stockholders' equity 78,778 94,912
-------------- -------------
Total liabilities and stockholders' equity $ 1,496,747 $ 1,158,541
============== =============
</TABLE>
See Notes to Consolidated Financial Statements.
52
<PAGE> 53
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- ------------------------ ---- ---- ----
(In Thousands, Except Per Share Data)
<S> <C> <C> <C>
Interest income:
Loans receivable, including fees $ 49,332 $ 44,544 $ 38,639
Interest and dividends on securities:
Taxable 21,942 15,545 12,671
Tax-exempt 14,558 5,351 2,869
Other 57 279 284
-------------- ------------ ------------
Total interest income 85,889 65,719 54,463
-------------- ------------ ------------
Interest expense:
Deposits 34,489 27,268 21,119
Other borrowed funds 9,899 2,490 2,000
Long-term debt 5,114 3,506 2,859
-------------- ------------ ------------
Total interest expense 49,502 33,264 25,978
-------------- ------------ ------------
Net interest income 36,387 32,455 28,485
Provision for loan losses 1,217 2,210 1,140
-------------- ------------ ------------
Net interest income after provision for loan losses 35,170 30,245 27,345
-------------- ------------ ------------
Other income:
Income from fiduciary activities 1,113 966 875
Customer service fees 3,724 2,591 2,060
Mortgage banking activities 1,333 2,017 1,034
Net realized gains (losses) on sales of securities (96) 4,329 357
Other 746 398 209
-------------- ------------ ------------
Total other income 6,820 10,301 4,535
-------------- ------------ ------------
Other expenses:
Salaries and wages 13,309 9,857 8,006
Employee benefits 3,494 2,496 1,912
Change in control payments 2,027 - -
Occupancy 4,084 2,081 1,420
Equipment depreciation and maintenance 2,430 1,563 1,351
Merger costs - 1,963 -
Other 11,273 7,132 6,545
-------------- ------------ ------------
Total other expenses 36,617 25,092 19,234
-------------- ------------ ------------
Income before income taxes 5,373 15,454 12,646
Federal income taxes (benefit) (2,574) 3,711 3,317
-------------- ------------ ------------
Net income $ 7,947 $ 11,743 $ 9,329
============== ============ ============
Basic earnings per share $ 0.76 $ 1.13 $ 1.02
============== ============ ============
Diluted earnings per share $ 0.76 $ 1.12 $ 1.00
============== ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
53
<PAGE> 54
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended December 31, 1999, 1998 and 1997
Accumulated
Shares Of Other
Common Common Retained Comprehensive
Stock Stock Surplus Earnings Income (Loss) Total
(In Thousands, Except Share Data)
<S> <C> <C> <C> <C> <C> <C>
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
-----------
Comprehensive income:
Net income -- -- -- 7,947 -- 7,947
Change in net unrealized gains (losses)
on securities available for sale -- -- -- -- (18,709) (18,709)
-----------
Total comprehensive income (loss) (10,762)
-----------
Issuance of common stock upon exercise
of stock options 61,214 62 414 -- -- 476
Cash dividends declared, $ .56 per share -- -- -- (5,848) -- (5,848)
---------- -------- -------- ----------- ----------- -----------
Balance, December 31, 1999 10,449,657 $ 10,450 $ 64,548 $ 21,326 $ (17,546) $ 78,778
=========== ======== ======== =========== ============ ===========
</TABLE>
See Notes to Consolidated Financial Statements
54
<PAGE> 55
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- ------------------------ ---- ---- ----
(In Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,947 $ 11,743 $ 9,329
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan and foreclosed real estate losses 1,217 2,210 1,255
Provision for depreciation and amortization 2,577 1,430 1,220
Provision for deferred income taxes (4,477) (586) (333)
Net realized (gains) losses on sales of securities 96 (4,329) (357)
(Gain) loss on sale of equipment and foreclosed real estate 49 114 (210)
Proceeds from sale of mortgage loans 86,772 113,746 54,820
Net gains on mortgage loans (749) (1,536) (743)
Mortgage loans originated for sale (85,808) (117,279) (53,468)
Net amortization of securities premiums and discounts (326) 1,041 241
(Increase) decrease in:
Due from mortgage investors 9,610 (9,142) (1,947)
Accrued interest receivable and other assets (10,414) (2,201) (3,805)
Increase (decrease) in accrued interest payable and other liabilities (1,135) 10,382 (320)
------------- ------------ ------------
Net cash provided by operating activities 5,359 5,593 5,682
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 80,434 45,665 63,052
Proceeds from maturities and calls of and principal repayments on
securities available for sale 30,728 84,660 32,468
Proceeds from maturities and calls of securities held to maturity 115 5,350 9,225
Purchases of securities available for sale (183,596) (388,743) (135,296)
Purchases of securities held to maturity (121,728) - (37,094)
(Increase) decrease in interest-bearing deposits with banks 222 (136) 21,227
Decrease in federal funds sold - - 820
Loans made to customers, net of principal collected (126,547) (57,767) (81,930)
Cash paid for purchase of mortgage company (695) - -
Proceeds from sales of equipment and foreclosed real estate 1,191 1,047 1,821
Purchases of premises and equipment (13,245) (15,641) (3,026)
------------- ------------ ------------
Net cash used in investing activities (333,121) (325,565) (128,733)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposits 89,760 131,734 73,932
Net increase in time deposits 116,206 60,056 34,309
Net proceeds from other borrowed funds 188,362 55,764 590
Proceeds from long-term debt - 85,000 40,000
Principal payments on long-term debt (50,000) (4,450) (37,000)
Issuance of subordinated debentures 10,000 - -
Proceeds from exercise of stock options 476 342 -
Cash paid in lieu of fractional shares - (29) -
Pre-merger stock transactions of pooled entities - 464 (36)
Net proceeds from stock offering of pooled entity - - 20,869
Cash dividends paid (5,848) (5,117) (3,123)
------------- ------------ ------------
Net cash provided by financing activities 348,956 323,764 129,541
------------- ------------ ------------
Increase in cash and due from banks 21,194 3,792 6,490
Cash and due from banks:
January 1 28,710 24,918 18,428
------------- ------------ ------------
December 31 $ 49,904 $ 28,710 $ 24,918
============= ============ ============
</TABLE>
See Notes To Consolidated Financial Statements
55
<PAGE> 56
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") and its wholly-owned subsidiaries, Main
Street Bank ("the Bank") and MBNK Investment Company. All significant
intercompany accounts and transactions have been eliminated.
Nature of operations:
The Bank operates under a state bank charter and provides full banking
services. The Company is subject to regulation by the Pennsylvania
Department of Banking and the Federal Reserve Bank. The Bank operates under
the Berks County Bank, Main Street Bank and Heritage Bank divisions. The
areas served by the Bank are principally eastern Pennsylvania and sections
of New Jersey. The Bank also has mortgage operations in Virginia.
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.
Cash flows:
For purposes of reporting cash flows, cash and due from banks includes cash
on hand and amounts due from banks. Cash payments for interest totaled $
45,545,000 in 1999, $ 32,880,000 in 1998 and $ 25,530,000 in 1997. Income
taxes paid were $ 1,360,000 in 1999, $ 4,680,000 in 1998 and $ 3,237,000 in
1997. Amounts transferred to foreclosed real estate were $ 1,157,000 in
1999, $ 1,086,000 in 1998 and $ 1,134,000 in 1997.
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 Bank is 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.
56
<PAGE> 57
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 Bank's
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:
The Bank 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.
Other assets:
Financing costs related to the issuance of the Company's subordinated
debentures are being amortized over the life of the debentures and are
included in other assets.
Advertising costs:
The Bank follows the policy of charging the costs of advertising to expense
as incurred.
57
<PAGE> 58
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. All per share amounts have been adjusted to give
retroactive effect to stock dividends declared.
Stock options:
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," contains a fair value-based method for valuing
stock-based compensation that entities may use, which measures compensation
cost at the grant date based on the fair value of the award. Compensation
is then recognized over the service period, which is usually the vesting
period. Alternatively, the standard permits entities to continue accounting
for employee stock options and similar equity instruments under Accounting
Principles Board (APB) Opinion 25, "Accounting for Stock Issued to
Employees." Entities that continue to account for stock options using APB
Opinion 25 are required to make pro forma disclosures of net income and
earnings per share, as if the fair value-based method of accounting defined
in SFAS No. 123 had been applied. The Company has elected to account for
its employee stock option plans under APB Opinion 25. Accordingly, no
compensation cost has been recognized in the statement of income for
options granted.
Off-balance sheet financial instruments:
In the ordinary course of business, the Bank has 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 subsidiary acts as an independent community financial
services provider, and offers traditional banking and related financial
services to individual, business and government customers. Through its
branch and automated teller machine network, the Bank offers 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. The Bank
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.
New accounting standard:
The Financial Accounting Standards Board (FASB) issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," in June
1998. During July 1999, the FASB issued Statement No. 137 delaying the
effective date of this Statement. The Company is required to adopt the
Statement on January 1, 2001. The adoption of the Statement is not expected
to have a significant impact on the financial condition or results of
operations of the Company.
58
<PAGE> 59
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 statements of income, stockholders' equity and cash flows for the
years ended December 31, 1998 and 1997 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, were expensed in connection with the merger. During 1999,
certain Heritage officers exercised their change of control employment contract
provisions, resulting in an expense to the Company of $ 2,027,000.
The results of operations of the separate entities for periods prior to the
combination are as follows:
<TABLE>
<CAPTION>
BCB Heritage Combined
--------------------------------------------
(In Thousands)
<S> <C> <C> <C>
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
</TABLE>
3
ACQUISITION OF MORTGAGE COMPANY
On November 17, 1999, the Bank purchased 100% of the stock of a mortgage company
in Virginia for approximately $ 1,500,000 of which $ 550,000 was paid at
settlement, $ 50,000 was placed in escrow and the remaining balance of $ 900,000
is due after the mortgage company meets certain performance goals. The goodwill
is being amortized over 15 years. Operations of the mortgage company have been
included in these financial statements since the date of acquisition.
4
RESTRICTIONS ON CASH AND DUE FROM BANK BALANCES
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank or in vault cash. At December 31, 1999 and 1998, required reserves
held at the Federal Reserve Bank were approximately $ 2,512,000 and $ 2,573,000,
respectively.
59
<PAGE> 60
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
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, 1999:
U.S. Treasury securities $ 29,464 $ - $ (209) $ 29,255
U.S. Government agencies and corporations 130,251 - (7,870) 122,381
States and political subdivisions 190,937 611 (16,840) 174,708
Other securities 46,945 - (270) 46,675
Mortgage-backed and asset-backed securities 67,570 312 (2,728) 65,154
--------- ------- --------- ----------
$ 465,167 $ 923 $ (27,917) $ 438,173
========= ======= ========= ==========
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 39,491 45 - 39,536
Mortgage-backed and asset-backed securities 57,583 811 (190) 58,204
--------- ------- --------- ----------
$ 532,650 $ 4,780 $ (2,904) $ 534,526
========= ======= ========= ==========
HELD TO MATURITY SECURITIES:
DECEMBER 31, 1999:
U.S. Government agencies and corporations $ 121,657 $ - $ (12,194) $ 109,463
States and political subdivisions 139,505 - (13,721) 125,784
Mortgage-backed and asset-backed securities 598 - (41) 557
Other 25 - - 25
--------- ------- --------- ----------
$ 261,785 $ - $ (25,956) $ 235,829
========= ======= ========= ==========
DECEMBER 31, 1998,
Other $ 25 $ - $ - $ 25
========= ======= ========= ==========
</TABLE>
60
<PAGE> 61
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
SECURITIES (CONTINUED)
Other available for sale securities are principally comprised of equity
securities in Pennsylvania community banks, Federal Home Loan Bank and Federal
Reserve Bank stock.
During 1998, the Company 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 (loss).
In 1999, the Company re-evaluated its securities portfolio and transferred
securities with an amortized cost of approximately $ 97,824,000 from available
for sale to held to maturity securities. The amortized cost approximated the
fair market value, therefore, there was no adjustment to other comprehensive
income for the transfer.
The amortized cost and fair value of securities as of December 31, 1999, 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 $ 3,492 $ 3,524 $ - $ -
Due after one year through five years 30,262 30,608 - -
Due after five years through ten years 98,732 95,447 - -
Due after ten years 218,267 196,862 261,162 235,247
Mortgage-backed and asset-backed securities 67,570 65,154 598 557
Other securities 46,844 46,578 25 25
--------- --------- ----------- ----------
$ 465,167 $ 438,173 $ 261,785 $ 235,829
========= ========= =========== ==========
</TABLE>
Gross gains of $ 398,000 and gross losses of $ 494,000 were realized on the
sales of available for sale securities in 1999. 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.
Securities with an amortized cost of $ 432,515,000 and $ 72,315,000 at December
31, 1999 and 1998, respectively, were pledged as collateral on public deposits
and for other purposes as required or permitted by law.
61
<PAGE> 62
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
The components of loans receivable at December 31, 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
(In Thousands)
--------------
<S> <C> <C>
Commercial $ 337,751 $ 280,107
Mortgage 182,137 171,268
Consumer 92,764 71,926
Construction 52,251 16,624
--------- ---------
664,903 539,925
Less:
Allowance for loan losses 7,002 7,222
Net deferred loan fees and costs (824) (692)
--------- ---------
$ 658,725 $ 533,395
========= =========
</TABLE>
Changes in the allowance for loan losses for the years ended December 31, 1999,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(In Thousands)
--------------
<S> <C> <C> <C>
Balance, beginning $ 7,222 $ 5,738 $ 5,072
Provision for loan losses 1,217 2,210 1,140
Loans charged off (1,962) (949) (705)
Recoveries 525 223 231
------- ------- -------
Balance, ending $ 7,002 $ 7,222 $ 5,738
======= ======= =======
</TABLE>
Impaired loans, not requiring an allowance for loan losses, were $ 1,500,000 and
$ 4,330,000 at December 31, 1999 and 1998, respectively. Impaired loans
requiring an allowance for loan losses were $ 1,357,000 and $ 643,000 at
December 31, 1999 and 1998, respectively. At December 31, 1999 and 1998, the
related allowance for loan losses associated with those loans was $ 900,000 and
$ 337,000, respectively. For the years ended December 31, 1999, 1998 and 1997,
average impaired loans were $ 4,100,000, $ 5,387,000 and $ 2,704,000,
respectively. Interest income on impaired loans of $ 83,000, $ 86,000 and $
63,000 was recognized for cash payments received in 1999, 1998 and 1997,
respectively.
62
<PAGE> 63
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
PREMISES AND EQUIPMENT
Components of premises and equipment at December 31, 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
(In Thousands)
--------------
<S> <C> <C>
Land $ 3,783 $ 2,611
Building and improvements 26,024 22,419
Furniture, fixtures and equipment 14,304 9,400
Leasehold improvements 2,599 215
Construction in progress 1,442 878
------- -------
48,152 35,523
Less accumulated depreciation 11,675 9,806
------- -------
$36,477 $25,717
======= =======
</TABLE>
Included in buildings and improvements above are approximately $ 9,900,000 and
$8,200,000 of leased property under capital leases as of December 31, 1999 and
1998, respectively.
8
DEPOSITS
The components of deposits at December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
(In Thousands)
--------------
<S> <C> <C>
Demand, non-interest bearing $ 122,283 $ 102,432
Demand, interest bearing 137,352 68,116
Savings 327,422 326,749
Time, $ 100,000 and over 61,740 27,396
Time, other 375,719 293,857
---------- ----------
$1,024,516 $ 818,550
========== ==========
</TABLE>
At December 31, 1999, the scheduled maturities of time deposits are as follows
(in thousands):
<TABLE>
<S> <C>
2000 $ 207,282
2001 157,948
2002 21,693
2003 36,520
2004 5,262
Thereafter 8,754
-------------
$ 437,459
=============
</TABLE>
63
<PAGE> 64
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9
OTHER BORROWED FUNDS AND LONG-TERM DEBT
Other borrowed funds:
The Bank maintains 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 $ 4,854,000 and $ 644,000 at December 31,
1999 and 1998, respectively.
The Bank has other short-term borrowings from the Federal Home Loan Bank at
December 31, 1999 and 1998 in the amount of $ 202,675,000 and $ 81,200,000,
respectively. The December 31, 1999 balance outstanding is due in 2000, at
an average interest rate of 5.30%.
The Bank has entered into repurchase agreements with other institutions in
the amount of $ 56,771,000 at December 31, 1999. Borrowings under these
agreements have terms ranging from one to three months and are
collateralized by certain investment securities. In addition, the Bank
enters into agreements with customers as part of its cash management
services where the Bank sells securities to the customer overnight with the
agreement to repurchase them at par. Securities sold under these agreements
generally mature one day from the transaction date. The securities
underlying all of these agreements were under the Bank's control.
Securities sold under agreements to repurchase are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Outstanding balance $66,905 $ 4,228
Average balance during the year 24,243 3,800
Average interest rate during the year 4.99% 4.42%
Maximum month-end balance during the year 66,905 4,228
</TABLE>
Long-term debt:
Long-term debt consisted of the following at December 31, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Notes with the Federal Home Loan Bank (FHLB):
3 year/3 month term note due October 1999 at 5.87% fixed rate $ - $ 5,000
5 year/2 year term note due September 2001 at 6.05% fixed rate - 5,000
5 year/6 month term note due March 2002 at 5.46% fixed rate - 30,000
5 year/3 month term note due July 2002 at 5.60% fixed rate - 10,000
10 year/2 year term note due September 2008 at 4.62% fixed rate 25,000 25,000
10 year/5 year term note due November 2008 at 4.75% fixed rate 10,000 10,000
10 year/5 year term note due December 2008 at 4.92% fixed rate 25,000 25,000
10 year/5 year term note due December 2008 at 4.815% fixed rate 25,000 25,000
------- --------
$85,000 $135,000
======= ========
</TABLE>
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 (6.00% at December 31, 1999) 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 refer to the
maturity of the note (in years) and the term until the first convertible
date (in years or months).
64
<PAGE> 65
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9
OTHER BORROWED FUNDS AND LONG-TERM DEBT (CONTINUED)
Long-term debt (continued):
The Bank's maximum borrowing capacity with the Federal Home Loan Bank is
substantially equivalent to its outstanding short and long-term borrowings
at December 31, 1999. Advances from the Federal Home Loan Bank are secured
by qualifying assets of the Bank.
Subordinated debentures:
In December 1999, the Company issued $ 10,000,000 of 9.625% junior
subordinated deferrable interest debentures (the debentures) to MBNK
Capital Trust I (the Trust), a Delaware business trust, in which the
Company owns all of the common equity. The debentures are the sole asset of
the Trust. The Trust issued $ 10,000,000 preferred securities to investors.
The Company's obligations under the debentures and related documents, taken
together, constitute a fully and unconditional guarantee by the Company of
the Trust's obligations under the preferred securities. The preferred
securities are redeemable by the Company on or after December 31, 2004, or
earlier in the event of certain adverse tax, Investment Company Act, or
bank regulatory developments. The preferred securities must be redeemed
upon maturity of the debentures on December 31, 2029.
10
INCOME TAXES
The provision for federal income taxes for the years ended December 31, 1999,
1998 and 1997 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current $ 1,903 $ 4,297 $ 3,650
Deferred (4,477) (586) (333)
------- ------- -------
Provision for income taxes $(2,574) $ 3,711 $ 3,317
======= ======= =======
</TABLE>
A reconciliation of the statutory income tax to the income tax expense (benefit)
in the consolidated statements of income for the years ended December 31, 1999,
1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal income tax at statutory rate $ 1,827 $ 5,254 $ 4,299
Tax-exempt interest (5,026) (1,891) (1,093)
Disallowance of interest expense 596 270 143
Other 29 78 (32)
------- ------- -------
$(2,574) $ 3,711 $ 3,317
======= ======= =======
</TABLE>
The income tax provision includes $ (33,000) in 1999, $ 1,472,000 in 1998 and $
121,000 in 1997 of income tax expense (benefit) related to net realized
securities gains (losses).
65
<PAGE> 66
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10
INCOME TAXES (CONTINUED)
The net deferred tax asset consisted of the following components as of December
31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 2,022 $ 1,976
Unrealized losses on securities available for sale 9,448 --
Tax credit carryforwards 4,792 --
Interest on non-accrual loans 176 230
Deferred compensation 45 66
Other 37 27
------- -------
Total deferred tax assets 16,520 2,299
------- -------
Deferred tax liabilities:
Premises and equipment 662 329
Prepaid expenses 37 37
Loan origination fees and costs 182 219
Unrealized gains on securities available for sale -- 713
-------
Total deferred tax liabilities 881 1,298
------- -------
Net deferred tax asset $15,639 $ 1,001
======= =======
</TABLE>
11
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 $ 749,000, $ 503,000 and $ 138,000 for the years ended December
31, 1999, 1998 and 1997, respectively.
In May 1998, the Bank terminated a noncontributory pension plan covering
eligible employees. 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.
66
<PAGE> 67
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12
COMPREHENSIVE INCOME
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 (loss).
The components of other comprehensive income (loss) and related tax effects are
as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Unrealized holding gains (losses) on available for sale securities $(28,966) $ (589) $ 3,478
Less reclassification adjustment for gains (losses) realized in income (96) 1,236 357
-------- ------- -------
Net unrealized gains (losses) (28,870) (1,825) 3,121
Tax effect (10,161) (614) 1,093
-------- ------- -------
Net of tax amount $(18,709) $(1,211) $ 2,028
======== ======= =======
</TABLE>
13
OTHER EXPENSES
The following represent the most significant categories of other expenses for
the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Advertising $ 2,508 $ 1,236 $ 978
Data processing and MAC fees 1,809 1,184 980
Office supplies and expenses 2,035 1,281 1,136
Professional fees 778 846 936
All other expenses 4,143 2,585 2,515
------- ------- -------
$11,273 $ 7,132 $ 6,545
======= ======= =======
</TABLE>
67
<PAGE> 68
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14
STOCK OPTIONS AND GRANTS
The Company has various qualified and non-qualified stock option plans for
employees and non-employee directors. Approximately 865,000 shares of common
stock were made available for issuance under these plans. 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>
1999 1998 1997
---- ---- ----
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 326,020 $12.27 301,178 $ 8.33 277,231 $ 7.79
Granted 330,000 15.35 106,268 19.43 54,265 11.89
Exercised (61,214) 7.67 (62,144) 7.26 (19,811) 7.54
Forfeited (53,258) 16.84 (19,282) 9.05 (10,507) 11.91
------- ------ ------- ------ ------- ------
Outstanding, end of year 541,548 $14.24 326,020 $12.27 301,178 $ 8.33
======= ====== ======= ====== ======= ======
Exercisable at end of year 446,426 $13.70 251,995 $10.24 266,012 $ 7.85
======= ====== ======= ====== ======= ======
</TABLE>
Stock options outstanding at December 31, 1999 are exercisable at prices ranging
from $ 5.83 to $ 19.92 a share. The weighted average remaining contractual life
of those options is approximately 9 years.
Had compensation cost for stock options granted in 1999, 1998 and 1997 been
determined based on the fair value at the grant dates consistent with the
provisions of SFAS No. 123, the Company's net income and earnings per share for
the years ended December 31, 1999, 1998 and 1997 would have been reduced to the
pro forma amounts indicated below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income:
As reported $7,947 $ 11,743 $9,329
====== ======== ======
Pro forma $6,993 $ 11,475 $9,260
====== ======== ======
Basic earnings per share:
As reported $ 0.76 $ 1.13 $ 1.02
====== ======== ======
Pro forma $ 0.67 $ 1.11 $ 1.01
====== ======== ======
Diluted earnings per share:
As reported $ 0.76 $ 1.12 $ 1.00
====== ======== ======
Pro forma $ 0.67 $ 1.09 $ 1.00
====== ======== ======
</TABLE>
The fair value of each option grant is estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions for 1999,
1998 and 1997, respectively: risk-free interest rate of 5.6%, 4.6% and 6.5%,
volatility .23, .26 and .12, dividend yield of 4.0%, 3.0% and 3.6%, and an
expected life of 7.8, 7.8 and 7.5 years. The weighted-average fair value of
options granted was $ 4.36 per share in 1999, $ 5.07 per share in 1998 and
$2.21 per share in 1997.
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
68
<PAGE> 69
15
COMMITMENTS AND CONTINGENCIES
Lease commitments and total rental expense:
The Bank rents facilities under lease agreements which expire at various
dates through 2024, and require various minimum annual rentals. The total
minimum rental commitments at December 31, 1999 are as follows:
During the year ending December 31 (in thousands):
<TABLE>
<S> <C> <C>
2000 $ 1,727
2001 1,726
2002 1,664
2003 1,570
2004 1,492
Later years 23,732
---------------
$ 31,911
===============
</TABLE>
The total rental expense included in the income statements for the years
ended December 31, 1999, 1998 and 1997 is $ 1,254,000, $ 388,000 and $
347,000, respectively.
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.
16
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its 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 Bank's 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
Bank uses 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 Bank's financial instrument
commitments at December 31, 1999 and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Commitments to grant loans $ 56,000 $ 43,000
Unfunded commitments under lines of credit 113,000 117,000
Outstanding letters of credit 9,000 7,000
</TABLE>
69
<PAGE> 70
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
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 Bank evaluates 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 Bank 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.
17
CONCENTRATION OF CREDIT RISK
The Bank grants commercial, residential and consumer loans to customers
primarily located in eastern Pennsylvania. The concentrations of credit by type
of loan are set forth in Note 6. Although the Bank has a diversified loan
portfolio, its debtors' ability to honor their contracts is influenced by the
region's economy.
18
TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS
The Bank has 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, 1999 and 1998, these persons were
indebted to the Banks for loans totaling $ 9,581,000 and $ 7,468,000,
respectively. During 1999, $ 12,926,000 of new loans were made and repayments
totaled $ 10,813,000.
19
REGULATORY MATTERS AND STOCKHOLDERS' EQUITY
The Company and its Bank subsidiary 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 subsidiary 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,
1999, that the Company and its bank subsidiary meet all capital adequacy
requirements to which they are subject.
70
<PAGE> 71
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19
REGULATORY MATTERS AND STOCKHOLDERS' EQUITY (CONTINUED)
As of December 31, 1999, the most recent notification from the Bank's primary
regulator categorized the Bank 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 Bank's category.
The actual capital amounts and ratios are also presented in the table below:
<TABLE>
<CAPTION>
For Capital
Adequacy
Actual Purposes
------ --------
Amount Ratio Amount Ratio
------ ----- ------ -----
(Dollars In Thousands)
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1999:
Total capital (to risk weighted assets):
Company $111,747 14.28% $(GREATER THAN)62,610 (GREATER THAN)8.00%
(OR EQUAL TO) (OR EQUAL TO)
BANK 104,435 13.41 (GREATER THAN)62,320 (GREATER THAN)8.00
Tier I capital (to risk weighted assets): (OR EQUAL TO) (OR EQUAL TO)
Company 104,746 13.38 (GREATER THAN)31,305 (GREATER THAN)4.00
(OR EQUAL TO) (OR EQUAL TO)
Bank 97,434 12.51 (GREATER THAN)31,160 (GREATER THAN)4.00
Tier I capital (to average assets): (OR EQUAL TO) (OR EQUAL TO)
Company 104,746 7.43 (GREATER THAN)56,363 (GREATER THAN)4.00
(OR EQUAL TO) (OR EQUAL TO)
Bank 97,434 6.94 (GREATER THAN)56,142 (GREATER THAN)4.00
AS OF DECEMBER 31, 1998: (OR EQUAL TO) (OR EQUAL TO)
Total capital (to risk weighted assets):
Company $100,409 15.97% $(greater than)50,285 (greater than)8.00%
(or equal to) (or equal to)
Bank 93,838 15.01 (greater than)50,029 (greater than)8.00
Tier I capital (to risk weighted assets): (or equal to) (or equal to)
Company 93,187 14.83 (greater than)25,143 (greater than)4.00
(or equal to) (or equal to)
Bank 86,977 13.91 (greater than)25,015 (greater than)4.00
Tier I capital (to average assets): (or equal to) (or equal to)
Company 93,187 8.70 (greater than)42,852 (greater than)4.00
(or equal to) (or equal to)
Bank 86,977 8.17 (greater than)42,609 (greater than)4.00
(or equal to)42,609 (or equal to) 4.00
</TABLE>
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
-----------------
Amount Ratio
------ -----
<S> <C> <C> <C>
AS OF DECEMBER 31, 1999:
Total capital (to risk weighted assets):
Company N/A
Bank $(GREATER THAN)77,899 (GREATER THAN)10.00%
Tier I capital (to risk weighted assets): (OR EQUAL TO) (OR EQUAL TO)
Company N/A
Bank (GREATER THAN)46,740 (GREATER THAN) 6.00
Tier I capital (to average assets): (OR EQUAL TO) (OR EQUAL TO)
Company N/A
Bank (GREATER THAN)70,178 (GREATER THAN) 5.00
AS OF DECEMBER 31, 1998: (OR EQUAL TO) (OR EQUAL TO)
Total capital (to risk weighted assets):
Company n/a
Bank $(GREATER THAN)62,536 (GREATER THAN)10.00%
Tier I capital (to risk weighted assets): (OR EQUAL TO) (OR EQUAL TO)
Company n/a
Bank (GREATER THAN)37,523 (GREATER THAN) 6.00
Tier I capital (to average assets): (OR EQUAL TO) (OR EQUAL TO)
Company n/a
Bank (GREATER THAN)53,261 (GREATER THAN) 5.00
(OR EQUAL TO) (OR EQUAL TO)
</TABLE>
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, 1999, the Bank
had retained earnings of approximately $ 49,765,000 available for payment of
dividends to the Company. Under Federal Reserve Regulations, the Bank is limited
as to the amount it may lend affiliates, including the Company, unless such
loans are collateralized by specified obligations. At December 31, 1999, the
maximum amount available for transfer from the Bank to the Company in the form
of loans approximated 10% of capital and surplus.
<PAGE> 72
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20
- --------------------------------------------------------------------------------
EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
-----------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Net income applicable to common stock $ 7,947 $ 11,743 $ 9,329
===============================================
Weighted average common shares outstanding 10,414 10,358 9,185
Effect of dilutive securities, stock options 77 142 106
-----------------------------------------------
Weighted average common shares outstanding used to
calculate diluted earnings per share 10,491 10,500 9,291
===============================================
</TABLE>
21
- --------------------------------------------------------------------------------
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.
72
<PAGE> 73
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21
- --------------------------------------------------------------------------------
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 and liabilities. 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, 1999 and 1998:
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 its 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 is
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 its fair
value.
Other borrowed funds:
The carrying amounts of short-term borrowings approximate their fair
values.
Long-term debt and subordinated debentures:
The fair values of the Company's long-term debt and subordinated
debentures 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.
73
<PAGE> 74
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21
- --------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair value of the Company's financial instruments at December 31,
1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------
CARRYING ESTIMATED Carrying Estimated
AMOUNT FAIR VALUE Amount Fair Value
---------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks $ 49,904 $ 49,904 $ 28,710 $ 28,710
Interest-bearing deposits with banks 114 114 336 336
Federal funds sold 470 470 470 470
Securities available for sale 438,173 438,173 534,526 534,526
Securities held to maturity 261,785 235,829 25 25
Loans receivable, net 658,725 656,966 533,395 558,722
Mortgage loans held for sale 4,854 4,854 5,069 5,069
Due from mortgage investors 4,957 4,957 14,567 14,567
Accrued interest receivable 13,970 13,970 10,202 10,202
Financial Liabilities:
Deposits 1,024,516 1,022,333 818,550 824,835
Accrued interest payable 6,688 6,688 2,731 2,731
Other borrowed funds 274,434 274,434 86,072 86,072
Long-term debt 85,000 80,526 135,000 134,339
Guaranteed preferred beneficial interest in
Company's subordinated debentures 10,000 9,146 - -
Off-Balance Sheet Financial Instruments:
Commitments to extend credit - - - -
Outstanding letters of credit - - - -
</TABLE>
74
<PAGE> 75
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22
- --------------------------------------------------------------------------------
PARENT COMPANY ONLY FINANCIAL INFORMATION
BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
ASSETS
<S> <C> <C>
Cash $ 1,875 $ 3,492
Investment in subsidiaries:
Banking subsidiary 83,702 88,752
Non-banking subsidiary 1,629 933
Securities available for sale - 685
Other assets 2,517 1,430
-------------------------------
$ 89,723 $ 95,292
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Guaranteed preferred beneficial interest in Company's subordinated debentures $ 10,000 $ -
Other liabilities 945 380
-------------------------------
10,945 380
Stockholders' equity 78,778 94,912
-------------------------------
$ 89,723 $ 95,292
===============================
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Dividend income:
Banking subsidiaries $ 7,500 $ 3,550 $ 2,275
Non-banking subsidiary - 4,900 -
Interest and dividend income 181 474 318
Interest expense (61) - -
Net realized gains on securities available for sale - - 180
Other income 127 870 -
Other expenses (385) (3,247) (140)
-------------------------------------------------
Income before income taxes (benefit) and equity in
undistributed net income of subsidiaries 7,362 6,547 2,633
Income taxes (benefit) (4) (532) 103
-------------------------------------------------
Income before equity in undistributed net
income of subsidiaries 7,366 7,079 2,530
-------------------------------------------------
Equity in undistributed net income (loss):
Banking subsidiaries 537 6,464 6,799
Non-banking subsidiary 44 (1,800) -
-------------------------------------------------
581 4,664 6,799
-------------------------------------------------
Net income $ 7,947 $ 11,743 $ 9,329
=================================================
</TABLE>
75
<PAGE> 76
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22
- --------------------------------------------------------------------------------
PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,947 $ 11,743 $ 9,329
Undistributed net income of subsidiaries (581) (4,664) (6,799)
Net realized gains on sales of securities - - (180)
Other (611) (1,831) 407
-----------------------------------------------
Net cash provided by operating activities 6,755 5,248 2,757
-----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale - - (856)
Sales of securities available for sale - 100 247
Additional investment in bank subsidiaries (13,000) (5,000) (15,500)
-----------------------------------------------
Net cash used in investing activities (13,000) (4,900) (16,109)
-----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Pre-merger stock transactions of pooled entities - 464 (36)
Net proceeds from stock offering of pooled entity - - 20,869
Guaranteed preferred beneficial interest in Company's subordinated
debentures 10,000 - -
Proceeds from exercise of stock options 476 342 -
Cash payment for fractional shares in connection with dividend - (29) -
Cash dividends (5,848) (5,117) (3,123)
-----------------------------------------------
Net cash provided by (used in) financing activities 4,628 (4,340) 17,710
-----------------------------------------------
Net increase (decrease) in cash (1,617) (3,992) 4,358
Cash:
Beginning 3,492 7,484 3,126
-----------------------------------------------
Ending $ 1,875 $ 3,492 $ 7,484
===============================================
</TABLE>
76
<PAGE> 77
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23
- --------------------------------------------------------------------------------
QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
The following represents summarized quarterly financial data of the Company,
which, in the opinion of management, reflects all adjustments necessary for a
fair presentation (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
1999 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 19,679 $ 21,131 $ 21,795 $ 23,284
Interest expense (11,064) (11,848) (12,574) (14,016)
--------------------------------------------------------------------
Net interest income 8,615 9,283 9,221 9,268
Provision for loan losses (300) (300) (200) (417)
Net realized gains (losses) on sale of securities (2) (76) (35) 17
Change in control payments - (331) (1,727) 31
Other expenses, net of other income (5,559) (7,612) (7,597) (6,906)
--------------------------------------------------------------------
Income (loss) before income tax benefit (expense) 2,754 964 (338) 1,993
Income tax benefit (expense) (23) 688 1,108 801
--------------------------------------------------------------------
Net income $ 2,731 $ 1,652 $ 770 $ 2,794
====================================================================
Earnings per common share:
Basic $ 0.26 $ 0.16 $ 0.07 $ 0.27
====================================================================
Diluted $ 0.26 $ 0.16 $ 0.07 $ 0.27
====================================================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
1998 March 31 June 30 September 30 December 31
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 14,978 $ 15,527 $ 16,536 $ 18,678
Interest expense (7,247) (7,515) (8,280) (10,222)
--------------------------------------------------------------------
Net interest income 7,731 8,012 8,256 8,456
Provision for loan losses (235) (250) (1,725) -
Net realized gains on sale of securities 1,682 468 1,723 456
Merger costs - (1,963) - -
Other expenses, net of other income (3,990) (4,409) (4,552) (4,206)
--------------------------------------------------------------------
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 common share:
Basic $ 0.36 $ 0.13 $ 0.30 $ 0.34
====================================================================
Diluted $ 0.35 $ 0.13 $ 0.30 $ 0.34
====================================================================
</TABLE>
77
<PAGE> 78
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 2000 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,
1999, 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the Proxy Statement.
78
<PAGE> 79
PART IV
ITEM 14. EXHIBITS
a. (1) Financial Statements - Included in Item 8
a. (2) Financial Statement Schedules
None
a. (3) 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 August 13, 1999, among
Main Street Bancorp, Inc., Main Street 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 September 30, 1999.
10.2 Executive Employment Agreement, dated August 13, 1999, among
Main Street Bancorp, Inc., Main Street Bank and Robert D.
McHugh, Jr., incorporated herein by reference to Exhibit 10.2
of the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999.
10.3 Executive Employment Agreement, dated August 13, 1999, among
Main Street Bancorp, Inc., Main Street 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 September 30, 1999.
79
<PAGE> 80
10.4 Executive Employment Agreement, dated August 13, 1999, among
Main Street Bancorp, Inc., Main Street 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 September 30, 1999.
10.5 Executive Employment Agreement, dated August 13, 1999, among
Main Street Bancorp, Inc., Main Street 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 September 30, 1999.
10.6 Deferred Compensation Agreement, dated October 14, 1999 by and
between Main Street Bancorp, Inc., and Nelson R. Oswald,
incorporated herein by reference to Exhibit 10.6 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.
10.7 Deferred Compensation Agreement, dated October 14, 1999 by and
between Main Street Bancorp, Inc., and Robert D. McHugh, Jr.,
incorporated herein by reference to Exhibit 10.7 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.
10.8 Deferred Compensation Agreement, dated October 14, 1999 by and
between Main Street Bancorp, Inc., and Richard A. Ketner,
incorporated herein by reference to Exhibit 10.8 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.
21.1 List of Subsidiaries of the Main Street Bancorp, Inc, included
herein.
23.1 Consent of Beard & Company, Inc., independent auditors.
27.1 Financial Data Schedule.
b. Reports on Form 8-K
None.
80
<PAGE> 81
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 28, 2000
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Nelson R. Oswald
- ------------------------ Director and Chairman March 28, 2000
Nelson R. Oswald of the Board and
CEO (Principal
Executive Officer)
/s/ Robert D. McHugh, Jr.
- ------------------------ Executive V.P./ March 28, 2000
Robert D. McHugh, Jr. Treasurer (Principal
Financial Officer)
/s/ Donna L. Rickert
- ------------------------ Sr. V.P./Controller March 28, 2000
Donna L. Rickert, C.P.A. (Principal Accounting
Officer)
/s/ Richard D. Biever
- ------------------------ Director March 28, 2000
Richard D. Biever
/s/ Edward J. Edwards
- ------------------------ Director March 28, 2000
Edward J. Edwards
/s/ Albert L. Evans
- ------------------------ Director March 28, 2000
Albert L. Evans
/s/ Richard T. Fenstermacher
- ------------------------ Director March 28, 2000
Richard T. Fenstermacher
/s/ Ivan H. Gordon
- ------------------------ Director March 28, 2000
Ivan H. Gordon
</TABLE>
81
<PAGE> 82
<TABLE>
<S> <C> <C>
/s/ Frederick A. Gosch
- ------------------------ Director March 28, 2000
Frederick A. Gosch
- ------------------------ Director March 28, 2000
Jeffrey W. Hayes
/s/ Alfred B. Mast
- ------------------------ Director March 28, 2000
Alfred B. Mast
/s/ Wesley R. Pace
- ------------------------ Director March 28, 2000
Wesley R. Pace
/s/ Raman V. Patel
- ------------------------ Director March 28, 2000
Raman V. Patel
/s/ Joseph P. Schlitzer
- ------------------------ Director March 28, 2000
Joseph P. Schlitzer
/s/ Floyd S. Weber
- ------------------------ Director March 28, 2000
Floyd S. Weber
</TABLE>
82
<PAGE> 83
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number
<S> <C>
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 August 13, 1999, among
Main Street Bancorp, Inc., Main Street 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 September 30, 1999.
10.2 Executive Employment Agreement, dated August 13, 1999, among
Main Street Bancorp, Inc., Main Street Bank and Robert D.
McHugh, Jr., incorporated herein by reference to Exhibit 10.2
of the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999.
10.3 Executive Employment Agreement, dated August 13, 1999, among
Main Street Bancorp, Inc., Main Street 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 September 30, 1999.
10.4 Executive Employment Agreement, dated August 13, 1999, among
Main Street Bancorp, Inc., Main Street 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 September 30, 1999.
10.5 Executive Employment Agreement, dated August 13, 1999, among
Main Street Bancorp, Inc., Main Street 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 September 30, 1999.
10.6 Deferred Compensation Agreement, dated October 14, 1999, by
and between Main Street Bancorp, Inc. and Nelson R. Oswald,
incorporated herein by reference to Exhibit 10.6 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.
</TABLE>
83
<PAGE> 84
<TABLE>
<S> <C>
10.7 Deferred Compensation Agreement, dated October 14, 1999, by
and between Main Street Bancorp, Inc. and Robert D. McHugh,
Jr., incorporated herein by reference to Exhibit 10.7 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.
10.8 Deferred Compensation Agreement, dated October 14, 1999, by
and between Main Street Bancorp, Inc. and Richard A. Ketner,
incorporated herein by reference to Exhibit 10.8 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.
21.1 List of Subsidiaries of the Main Street Bancorp, Inc.,
included herein.
23.1 Consent of Beard & Company, Inc., independent auditors,
included herein.
27.1 Financial Data Schedule
</TABLE>
84
<PAGE> 1
MAIN STREET BANCORP, INC.
EXHBIT 21.1
Main Street Bank
-Granite Mortgage Company
-Main Street Holdings
MBNK Investment Company
MBNK Capital Trust I
85
<PAGE> 1
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).
10. Registration Statement on Form S-3 relating to the MBNK Capital Trust I
Preferred Securities (File #333-86943).
We consent to the incorporation by reference in the above listed
Registration Statements of our report dated, January 21, 2000, 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, 1999.
/s/ BEARD & COMPANY, INC.
Reading, Pennsylvania
March 24, 2000
86
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 49,904
<INT-BEARING-DEPOSITS> 114
<FED-FUNDS-SOLD> 470
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 438,173
<INVESTMENTS-CARRYING> 261,785
<INVESTMENTS-MARKET> 235,829
<LOANS> 665,727
<ALLOWANCE> 7,002
<TOTAL-ASSETS> 1,496,747
<DEPOSITS> 1,024,516
<SHORT-TERM> 274,434
<LIABILITIES-OTHER> 24,019
<LONG-TERM> 95,000
0
0
<COMMON> 10,450
<OTHER-SE> 68,328
<TOTAL-LIABILITIES-AND-EQUITY> 1,496,747
<INTEREST-LOAN> 49,332
<INTEREST-INVEST> 36,500
<INTEREST-OTHER> 57
<INTEREST-TOTAL> 85,889
<INTEREST-DEPOSIT> 34,489
<INTEREST-EXPENSE> 49,502
<INTEREST-INCOME-NET> 36,387
<LOAN-LOSSES> 1,217
<SECURITIES-GAINS> (96)
<EXPENSE-OTHER> 36,617
<INCOME-PRETAX> 5,373
<INCOME-PRE-EXTRAORDINARY> 5,373
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,947
<EPS-BASIC> 0.76
<EPS-DILUTED> 0.76
<YIELD-ACTUAL> 2.96
<LOANS-NON> 5,323
<LOANS-PAST> 513
<LOANS-TROUBLED> 106
<LOANS-PROBLEM> 7,676
<ALLOWANCE-OPEN> 7,222
<CHARGE-OFFS> 1,960
<RECOVERIES> 523
<ALLOWANCE-CLOSE> 7,002
<ALLOWANCE-DOMESTIC> 6,628
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 374
</TABLE>
