SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for Quarterly period ended
March 31, 2000.
( ) Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from _______ to ________.
No. 0-24145
(Commission File Number)
MAIN STREET BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
PENNSYLVANIA 23-2960905
(State of Incorporation) (IRS Employer ID Number)
601 PENN STREET, READING, PA 19601
(Address of Principal Executive Offices) (Zip Code)
(610) 685-1400
(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Number of Shares Outstanding
as of April 30, 2000
COMMON STOCK ($1.00 Par Value) 10,449,845
(Title of Class) (Outstanding Shares)
MAIN STREET BANCORP, INC.
FORM 10-Q
For the Quarter Ended March 31, 2000
Contents
PART I FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of
March 31, 2000 and December 31,1999 4
Consolidated Statements of Income for
Three Month Periods ended
March 31, 2000 and 1999 5
Consolidated Statement of Stockholders'
Equity for the Three Month Period
Ended March 31, 2000 6
Consolidated Statements of Cash Flows for
the Three Month Periods Ended March 31,
2000 and 1999 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security
Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Main Street Bancorp, Inc. (the Company) may from time to
time make written or oral "forward-looking statements," including
statements contained in the Company's filings with the Securities
and Exchange Commission (including this Quarterly Report on Form
10-Q and the exhibits hereto and thereto), in its reports to
stockholders and in other communications by the Company, which
are made in good faith by the Company pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform
Act of 1995.
These forward-looking statements include statements with
respect to the Company's beliefs, plans, objectives, goals,
expectations, anticipations, estimates and intentions, that are
subject to significant risks and uncertainties, and are subject
to change based on various factors (some of which are beyond the
Company's control). The words "may," "could," "should," "would,"
"believe," "anticipate," "estimate," "expect," "intend," "plan"
and similar expressions are intended to identify forward-looking
statements. The following factors, among others, could cause the
Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions
expressed in such forward-looking statements: the strength of
the United States economy in general and the strength of the
local economies in which the Company conducts operations; the
effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of
Governors of the Federal Reserve System; inflation, interest
rate, market and monetary fluctuations; the timely development of
and acceptance of new products and services of the Company and
the perceived overall value of these products and services by
users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to
substitute competitors' products and services for the Company's
products and services; the success of the Company in gaining
regulatory approval of its products and services, when required;
the impact of changes in financial services' laws and regulations
(including laws concerning taxes, banking, securities and
insurance); technological changes; acquisitions; changes in
consumer spending and saving habits; and the success of the
Company at managing the risks involved in the foregoing.
The Company cautions that the foregoing list of important
factors is not exclusive. The Company does not undertake to
update any forward-looking statement, whether written or oral,
that may be made from time to time by or on behalf of the
Company.
MAIN STREET BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(In thousands, except share data)
<S> <C> <C>
Cash and due from banks $ 38,486 $ 49,904
Interest-bearing deposits with banks 150 114
Federal funds sold 470 470
Securities available for sale 474,588 438,173
Securities held to maturity, fair value March 31,
2000 $241,104; December 31, 1999 $235,829 261,783 261,785
Loans receivable, net of allowance for loan losses
March 31, 2000 $7,079; December 31, 1999 $7,002 702,443 658,725
Mortgages held for sale 6,853 4,854
Due from mortgage investors 2,659 4,957
Bank premises and equipment, net 37,280 36,477
Accrued interest receivable and other assets 51,012 41,288
TOTAL ASSETS $1,575,724 $1,496,747
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand, non-interest bearing $133,955 $122,283
Demand, interest bearing 132,559 137,352
Savings 369,938 327,422
Time deposits 472,925 437,459
TOTAL DEPOSITS 1,109,377 1,024,516
Accrued interest payable and other liabilities 13,609 24,019
Other borrowed funds 275,134 274,434
Long-term debt 85,000 85,000
Guaranteed preferred beneficial interest in
Company's subordinated debentures 10,000 10,000
TOTAL LIABILITIES 1,493,120 1,417,969
Stockholders' equity:
Common stock, par value $1.00 per share;
authorized 50,000,000 shares; issued and outstanding
March 31, 2000 10,449,845 shares; December 31,
1999 10,449,657 shares 10,450 10,450
Surplus 64,538 64,548
Retained earnings 21,816 21,326
Accumulated other comprehensive income (loss) (14,200) (17,546)
TOTAL STOCKHOLDERS' EQUITY 82,604 78,778
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,575,724 $1,496,747
</TABLE>
See Notes to Consolidated Financial Statements
MAIN STREET BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31, 2000 March 31, 1999
(In thousands, except per share data)
<S> <C> <C>
Interest income:
Loan receivable, including fees $14,206 $11,454
Interest and dividends on securities:
Taxable 7,060 4,984
Tax-exempt 4,171 3,232
Other 10 9
Total interest income 25,447 19,679
Interest expense:
Deposits 10,416 7,700
Other borrowed funds 4,326 1,731
Long-term debt 1,282 1,633
Total interest expense 16,024 11,064
Net interest income 9,423 8,615
Provision for loan losses 375 300
Net interest income after provision
for loan losses 9,048 8,315
Other income:
Income from fiduciary activities 236 283
Customer service fees 1,707 662
Mortgage banking activities 204 456
Net realized gains (losses) on sale of securities (17) (2)
Other 310 186
Total other income 2,440 1,585
Other expenses:
Salaries and wages 3,960 2,975
Employee benefits 1,136 737
Occupancy 1,372 753
Equipment depreciation and maintenance 754 491
Other 3,301 2,190
Total other expenses 10,523 7,146
Income before income taxes 965 2,754
Federal income taxes (benefit) (988) 23
Net Income $ 1,953 $ 2,731
Basic earnings per share $ 0.19 $ 0.26
Diluted earnings per share $ 0.19 $ 0.26
</TABLE>
See Notes to Consolidated Financial Statements
MAIN STREET BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 2000
<TABLE>
<CAPTION>
Number Of Accumulated
Shares Other
Common Common Retained Comprehensive
Stock Stock Surplus Earnings Income (loss) Total
<S> <C> <C> <C> <C> <C> <C>
(In thousands, except share data)
Balance, December 31, 1999 10,449,657 $10,450 $64,548 $21,326 $(17,546) $78,778
Comprehensive income
Net income 1,953 1,953
Change in net unrealized
gains (losses) on securities
available for sale 3,346 3,346
Total comprehensive income 5,299
Issuance of common stock upon
exercise of stock options 188 -- -- -- -- --
Discount on dividend reinvestment -- -- (10) -- -- (10)
Cash dividends declared -- -- -- (1,463) -- (1,463)
Balance March 31, 2000 10,449,845 $10,450 $64,538 $21,816 ($14,200) $82,604
</TABLE>
See Notes to Consolidated Financial Statements
MAIN STREET BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31, 2000 March 31,1999
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,953 $ 2,731
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for loan losses 375 300
Provision for depreciation and amortization 894 458
(Gain) Loss on sale of equipment and foreclosed real estate (72) 17
Net realized (gain) loss on sale of securities 17 2
Provision for deferred income taxes (1,106) --
Proceeds from sale of mortgage loans 10,302 27,160
Net (gain) loss on sale of mortgage loans (57) (1)
Mortgage loans originated for sale (12,244) (27,159)
Net (amortization) of security premiums and discounts (216) 190
(Increase) decrease in:
Due from mortgage investors 2,298 10,572
Accrued interest receivable and other assets (10,115) (3,417)
Increase in accrued interest payable and other liabilities 94 440
Net cash provided by operating activities (7,877) 11,293
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 16,864 16,549
Proceeds from maturities of and principal repayments
on securities available for sale 2,522 13,657
Purchases of securities available for sale (60,942) (89,531)
Purchases of securities held to maturity -- (69,797)
(Increase) Decrease in interest-bearing deposits with banks ( 36) (364)
Loans made to customers, net of principal collected (44,653) (27,230)
Proceeds from sales of foreclosed real estate 288 222
Proceeds from sales of bank premises and equipment 5 8
Purchases of premises and equipment ( 1,677) (2,833)
Net cash used in investing activities ( 87,629) (159,319)
</TABLE>
MAIN STREET BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS Con't. (Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31, 2000 March 31, 1999
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposits $ 49,395 $ 24,541
Net increase in time deposits 35,466 22,981
Proceeds from (repayment of) other borrowed funds 700 88,824
Proceeds from long term borrowings -- 15,000
Principal payments of long-term borrowings -- (5,000)
Proceeds from exercise of stock options -- 57
Cash dividends paid (1,473) (1,455)
Net cash provided by financing activities 84,088 144,948
Increase (decrease) in cash and due from banks (11,418) (3,078)
Cash and due from banks:
Beginning 49,904 28,710
Ending $ 38,486 $ 25,632
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 15,930 $ 10,579
Income taxes $ 1,000 $ 500
</TABLE>
See Notes To Consolidated Financial Statements
MAIN STREET BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The unaudited consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, Main
Street Bank (the "Bank"), MBNK Investment Company and MBNK
Capital Trust I. All significant intercompany accounts and
transactions have been eliminated.
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted
accounting principles for interim financial information.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments considered necessary for fair presentation have
been included. Operating results for the three-month period
ended March 31, 2000 are not necessarily indicative of the
results that may be expected for the year ended December 31,
2000.
EARNINGS PER SHARE
The following table sets forth the computations of basic and
diluted earnings per share:
Three Months Ended
March March
31, 2000 31, 1999
Numerator, net income $1,953,000 $ 2,731,000
Denominator:
Denominator for basic
earnings per share,
weighted average shares 10,449,837 10,394,441
Effect of dilutive
securities, stock options 37,697 289,949
Denominator for diluted
earnings per share,
weighted average shares
and assumed conversions 10,487,534 10,684,390
Basic earnings per
common share $0.19 $0.26
Diluted earnings per common
share $0.19 $0.26
COMPREHENSIVE INCOME
Accounting principles 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>
For the Three Months Ended
March March
31, 2000 31, 1999
<S> <C> <C>
Unrealized holding gains (losses) on
available for sale securities $ 5,165 $ (5,131)
Less reclassification adjustment for gains
(losses) included in net income ( 17) ( 2)
Net unrealized gains (losses) 5,148 (5,133)
Tax (expense) benefit (1,802) 1,795
Net of tax amount $ 3,346 $ (3,338)
</TABLE>
OTHER EXPENSES
The following represents the most significant categories of
other expenses for the three months ended March 31:
Three Months
Ended March 31,
2000 1999
(In Thousands)
Advertising $ 755 $ 300
Data processing and MAC fees 707 328
Office supplies and expenses 612 432
Professional fees 224 210
All other expenses 1,003 920
$3,301 $2,190
ACCOUNTING POLICIES
In June 1999, the Financial Accounting Standards Board
issued Statement No. 137, which delayed the implementation date
of Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities", which now becomes effective for the Bank
January 1, 2001. Management expects this Statement will have no
impact on the Bank, as presently no derivative instruments are
held.
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis is intended to assist
in understanding and evaluating the major changes in the
financial condition and earnings performance of Main Street
Bancorp, Inc. (the "Company") with a primary focus on an analysis
of operating results.
FINANCIAL CONDITION HIGHLIGHTS
Total assets increased to $1.576 billion at March 31, 2000,
compared to $1.497 billion at December 31, 1999, an increase of
$79.0 million, or 5.3%. This increase was primarily reflected in
securities, loans and other assets.
Securities increased $36.4 million, or 5.2%, to $736.4
million at March 31, 2000 when compared to $700.0 million at
December 31, 1999. The increase is due to the purchase of $60.9
million in securities, offset by the securities sales and
maturities of $19.4 million. 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
operating expenses that increased as a result of the branch
expansion program. The securities were initially funded with
short-term Federal Home Loan Bank advances. Over time, the
Company plans to replace most of these short-term borrowings with
lower-cost deposits expected to be gathered from the branch
expansion plans. The strategic plan also includes replacing
securities with higher yielding loans as additional volume is
generated in the new markets. The Company hopes that as this
strategic plan unfolds, the initial spread of 2% on borrowings
and securities will turn into a 4% spread on deposits and loans.
Nearly the entire bond securities portfolio is rated AAA by
either Standard & Poor or Moodys. There were no derivatives held
at March 31, 2000 and no investments in hedge funds. Securities
held were primarily government agencies, municipalities, or bank
stocks at March 31, 2000.
Loans receivable, net of allowance for loan losses of $7.1
million at March 31, 2000 and $7.0 million at December 31, 1999,
increased to $702.4 million at March 31, 2000 from $658.7 million
at December 31, 1999. The increase of $43.7 million, or 6.6%,
was primarily due to an increase in commercial loans. During the
first three months of 1999, the Company provided for $375,000 in
loan losses. See "Provision for Loan Losses" for a further
discussion of the provision.
Amounts due from mortgage investors decreased from $5.0
million at December 31, 1999 to $2.7 million at March 31, 2000.
These amounts represent loans originated by the Bank for other
mortgage investors/lenders under standing commitments. These
loans are temporarily funded for investors for periods ranging
from three to twenty-one days.
Mortgages held for sale increased $2.0 million, or 41.2%, to
$6.9 million at March 31, 2000 from $4.9 million at December 31,
1999. Generally accepted accounting principles ("GAAP") require
that mortgages held for sale be marked to lower of cost or
market. As a result, mortgages held for sale losses increased by
$74,000 during the first quarter of 2000 to $253,000 at March 31,
2000.
Accrued interest receivable and other assets increased by
23.6%, or $9.7 million, to $51.0 million at March 31, 2000 from
$41.3 million at December 31, 1999. The increase was due to the
recording of a $12.2 million receivable for securities that were
sold at March 31, 2000 but had not settled.
Total deposits, the primary source of funds, increased $84
million to $1.109 billion at March 31, 2000 compared to $1.025
billion at December 31, 1999, an increase of 8.3%. The increase
in deposits was primarily in savings and time deposits. Savings
deposits increased from $327.4 million at December 31, 1999 to
$369.9 million at March 31, 2000, an increase of $42.5 million,
or 13.0%. The increase was due to increased advertising and the
raising of the money market savings rate. Total time deposits
increased $35.4 million, or 8.1%, to $472.9 million at March 31,
2000 million from $437.5 million at December 31, 1999. The
increase in time deposits was due to the CD (certificate of
deposit) special the Company was promoting to provide long term
funding for loan and security purchases and to attract new
customers to the Company's new branches. In order to receive the
bonus CD rate, customers are also required to open a lower-cost
checking and savings account.
As of March 31, 2000, the Company has opened 22 of the 23
branches announced last year. These branches have been open an
average of 8 months and have gathered $170 million in deposits.
When the Company announced the branch expansion program, the goal
was for these branches to gather , on average, $950,000 in
deposits per month. In February and March 2000, this goal was
accomplished and the Company hopes to continue to reach or exceed
this goal in the upcoming months.
Accrued interest payable and other liabilities decreased
$10.4 million, or 43.3%, from $24.0 million at December 31, 1999
to $13.6 million at March 31, 2000. The decrease was due to the
recording of a $10.5 million payable at December 31, 1999 for
securities that were traded but not settled. At March 31, 2000,
the Company had $0 in securities traded not settled.
Other borrowed funds and long-term debt was essentially flat
at about $360.0 million at December 31, 1999 and March 31, 2000.
As mentioned above, the Company elected to purchase securities
ahead of the in-flow of deposits and loans expected to occur in
2000 and beyond from the addition of 23 new branches in order to
offset expected start-up costs associated with these branch
openings.
Stockholders' equity increased $3.8 million, or 4.9%, from
$78.8 million at December 31, 1999 to $82.6 million at March 31,
2000. The increase was primarily due to the change in net
unrealized gains (losses) on securities available for sale, as
required by FASB 115. At December 31, 1999, the Company had
$17.5 million in unrealized losses and at March 31, 2000, the
Company had $14.2 million in unrealized losses on securities
available for sale. Should interest rates increase in the
future, stockholders' equity could decrease due to further
unrealized losses on the securities available for sale. Should
interest rates decline in future periods, stockholders' equity
could further 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 of 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
the full balance sheet market value issue but does not require a
separate adjustment to stockholders' equity. In addition, the
Company does not include the FASB 115 adjustment to stockholders'
equity when calculating the regulatory ratios. Thus, the $14.2
million reduction to equity for unrealized losses on securities
available for sale at March 31, 2000, had no impact on the
Company's regulatory capital adequacy ratios.
RESULTS OF OPERATIONS
Overview
Net income for the first quarter of 2000 was $2.0 million
compared to $2.7 million for the first quarter of 1999. On a
per share basis, basic and diluted earnings were $0.19 and $0.26
for the first quarter of 2000 and 1999, respectively. The
reduction in net income and earnings per share was expected due
to increased costs associated with the opening of 22 new branches
throughout eastern Pennsylvania and Hunterdon County, New Jersey.
Net Interest Income
Net interest income is the difference between interest
income on interest-earning assets and interest expense on
interest-bearing liabilities. For the first quarter of 2000, net
interest income, calculated on a tax-equivalent basis, increased
$1.3 million, or 13.1%, to $11.5 million from $10.2 million in
the first quarter of 1999.
The increase in net interest income was primarily due to an
increase in average interest-earning assets at yields greater
than rates paid on average interest-bearing liabilities. Average
interest-earning assets increased $305.0 million, or 26.9%, from
$1.134 billion at March 31, 1999 to $1.439 billion at March 31,
2000. The increase in average assets consisted mostly of
securities and loans. Securities increased $176.1 million, or
30.5 %, from $578.2 million at March 31, 1999 to $754.3 million
at March 31, 2000. The majority of these securities purchases
were funded with FHLB borrowings at an approximate interest rate
spread of 2.0%. As interest rates rise, the spread between FHLB
borrowings and securities could narrow below 2.0%. However, this
narrowing of the spread is mitigated to some degree by widening
spreads [elsewhere]. As mentioned earlier, the Company plans to
eventually replace these borrowings with deposits that will be
gathered from the new branch openings. Average loans increased
$129.3 million, or 23.3%, to $684.4 million at March 31, 2000
from $555.1 million at March 31, 1999.
Interest income earned on interest-earning assets increased
$6.3 million, or 29.7%, to $27.5 million for the first quarter
ending March 31, 2000 compared to $21.2 million for the first
quarter ending March 31, 1999, calculated on a tax-equivalent
basis. Interest income from securities, calculated on a tax
equivalent basis, increased $3.6 million, or 36.5%, to $13.3
million for the first quarter ending March 31, 2000 compared to
$9.7 million for the first quarter ending March 31, 1999.
Interest income from loans, calculated on a tax equivalent basis,
increased $2.7 million, or 23.9%, to $14.2 million for the first
quarter ending March 31, 2000 compared to $11.5 million for the
first quarter ending March 31, 1999.
The Company's total interest expense increased $5.0 million,
or 44.8%, to $16.0 million for the first quarter of 2000 compared
to $11.0 million for the first quarter of 1999. Average
interest-bearing liabilities increased $310.0 million to $1.318
billion for the first quarter of 2000 compared to $1.008 billion
for the first quarter of 1999. The average rate paid on
interest-bearing liabilities was 4.89% for the first quarter of
2000 compared to 4.45% for the first quarter of 1999.
Average interest-bearing deposits increased $189.5 million,
or 25.6%, to $929.3 million at March 31, 2000 compared to $739.8
million at March 31, 1999. The average rate paid on average
interest-bearing deposits was 4.51% at March 31, 2000 compared to
4.22% at March 31, 1999. The primary reason the average rate
paid on average interest-bearing deposits increased was due to a
certificate of deposit promotion for the bank. In the first
quarter of 2000, the Company raised nearly $40.0 million of 6.55%
(APY) certificates of deposit with a term of 16 months. As part
of this promotion each customer was required to open a low cost
checking and savings account in order to obtain the high rate
certificate of deposit.
Net interest margin is the difference between interest
earned and interest paid, divided by average total interest-
earning assets. Net interest margin decreased 42 basis points
from 3.63% in the first quarter of 1999 to 3.21% in the first
quarter of 2000, calculated on a tax-equivalent basis. Net
interest margin decreased primarily because, in connection with
the Company's plan to open 23 new branches, the Company conducted
a leveraging strategy whereby it increased securities nearly
$300.0 million at yields approximately 2.0% above the interest
rate paid on funding liabilities. Because the spread on this
incremental leveraging was nearly 200 basis points below the
Company's net interest margin at the start of the leveraging
(during the fourth quarter 1998), the Company's overall net
interest margin naturally has declined. However, the net
interest income on this leveraging has been used to offset nearly
$8.0 million of operating costs associated with opening the new
branches since March of 1999. 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 of
this leveraging program to widen and eventually reverse the
recent decline in net interest margin.
Another reason net interest margin decreased in the first
quarter of 2000 versus the first quarter of 1999 was the
significant increase in non interest-earning assets related to
the branch openings. Each new branch required vault cash
inventories and premises and equipment expenditures. Average
non-interest earning assets increased from $73.7 million at March
31, 1999 to $119.7 million at March 31, 2000.
Provision For Loan Losses
The provision for loan losses is charged to operations to
bring the total allowance for loan losses to a level considered
appropriate by management. The level of the allowance for loan
losses is determined by management based upon its evaluation of
the known as well as inherent risks within the Bank's loan
portfolio. Management's periodic evaluation is based upon an
examination of the portfolio, past loss experience, current
economic conditions, the results of the most recent regulatory
examinations and other relevant factors. The provision for loan
losses was $375,000 for the first three months of 2000 compared
to $300,000 for the first three months of 1999. Non-performing
assets as a percentage of total assets remained relatively the
same: .44% as of March 31, 2000 compared to .43% at December 31,
1999. See further discussion under "Asset Quality".
Other Income
Other income increased $855,000, or 53.9%, from $1.6 million
for the first quarter of 1999 to $2.4 million for the first
quarter of 2000. The increase in other income for the first
quarter of 2000 was mostly due to increased customer service
fees. Customer service fees increased from $662,000 in the first
quarter of 1999 to $1.7 million in the first quarter of 2000.
The increased customer service fees are a direct result of the
branch expansion plan and also due to the introduction of Bounce
Protection in December 1999. Bounce Protection is a special
overdraft privilege for checking account customers for which the
bank will honor overdrafts up to a pre-approved limit.
Income from mortgage banking activities decreased $252,000,
or 55.3%, from $456,000 during the first quarter of 1999 to
$204,000 for the first quarter of 2000. Income from mortgage
banking activities decreased for several reasons. $74,000 of the
decrease was due to the requirement of Generally Accepted
Accounting Principles (GAAP) that companies record mortgages held
for sale at the lower of cost or market. The resulting gains or
losses are primarily a function of interest rate movements. This
$74,000 loss was directly reported on the income statement in
2000 and another $179,000 was reported on the income statement in
1999 for a total loss of $253,000, or 3.57% of the $7.1 million
in loans classified as held for sale. The remaining $178,000
decrease in income from mortgage banking activities was due to a
slower volume of refinancing business because of the rise in
interest rates.
Other income increased $124,000, or 66.7%, to $310,000 for
the first quarter of 2000 compared to $186,000 for the first
quarter of 1999. The increase was mostly due to the income from
the deferred compensation plans.
Other Expenses
Total other expenses increased $3.4 million, or 47.3% to
$10.5 million for the first quarter of 2000 compared to $7.1
million for the first quarter of 1999. The increase was due to
salaries and employee benefits, occupancy, equipment depreciation
and maintenance, and other operating expenses.
Salaries, wages and employee benefits increased $1.4
million, or 37.3%, from $3.7 million for the first quarter ended
March 31, 1999, to $5.1 million for the first quarter of 2000.
Salaries, wages and employee benefits increased from the first
quarter of 1999 to the first quarter of 2000 due to the opening
and hiring of staff at the twenty two new branch locations.
Salaries, wages and employee benefits also increased due to FASB
91. FASB 91 requires companies to defer a portion of
nonrefundable loan fees that relate to originating a loan. Since
most of the costs of originating a loan are salaries and
benefits, a contra salary adjustment is made and deferred over
the life of the loan. Due to the increase in interest rates, the
Company had less loan originations and hence, less contra
salaries.
Occupancy expense increased $619,000, or 82.2%, to $1.4
million for the first quarter of 2000 compared to $753,000 for
the first quarter of 1999. The increase was due to lease
expenses, utilities, real estate taxes, and similar expenses, on
the 22 new branches that have opened since March 1999.
Equipment depreciation and maintenance increased $263,000,
or 53.6%, to $754,000 for the first quarter of 2000 compared to
$491,000 for the first quarter of 1999. The increase was due
primarily to depreciation and maintenance on new equipment and
furniture for the twenty-two new branches.
Other operating expenses increased $1.1 million, or 50.7%,
to $3.3 million for the first quarter of 2000, compared to $2.2
million for the first quarter of 1999. The increase in other
expenses occurred in advertising, data processing and MAC fees,
office supplies and expenses, and professional fees. An
explanation for these increase follows:
Advertising and marketing increased $455,000, or 151.7%, to
$755,000 for the first quarter of 2000 compared to $300,000 for
the first quarter of 1999. The increase from last year was due
to advertising and marketing in conjunction with the opening of
the 22 new branches that opened from the end of March of 1999
through February of 2000. Advertising and marketing includes
media costs, promotional items (pens, mugs, etc.), printing
costs, new branch opening costs and branch freebies (cookies,
coffee and other treats).
Data processing and MAC fees increased $379,000, or 115.5%,
from $328,000 in the first quarter of 1999 to $707,000 in the
first quarter of 2000. The increase was a result of increased
volume in credit card processing/ATM processing due to the 22 new
branches, an ongoing service fee to Pinnacle Financial for Bounce
Protection and also due to unexpected losses in merchant
services. In the first quarter of 2000, the Company accrued for a
net $89,000 in merchant services losses.
Office supplies and expenses increased $180,000, or 41.7%,
to $612,000 for the first quarter of 2000 compared to $432,000
for the same period in 1999. The increase was due to supplies
necessary to support the Company's growth and the 22 new
branches.
Professional fees increased $14,000, or 6.7%, to $224,000
for the first quarter of 2000 compared to $210,000 for the first
quarter of 1999. All of the increase in professional fees was
due to the acquisition of Granite Mortgage.
Federal Income Taxes
The provision for federal income taxes was a $988,000
benefit for the first quarter of 2000 compared to $23,000 expense
for the first quarter of 1999. The tax benefit in 2000 resulted
from a higher level of tax-exempt interest income earned on bank-
qualified municipal securities and tax-free loans compared to
pretax income. This is expected to occur throughout most of
2000. For federal income tax purposes, the Company is subject to
the alternative minimum tax, which totalled $177,000 for the
first quarter of 2000. Since this tax creates a credit that can
be carried forward indefinitely to offset future federal income
taxes, it is not an expense of the Company. The alternative
minimum tax has, therefore, been recorded as a deferred tax
asset, which will be recoverable in future years as the bank has
taxable income.
Asset Quality
Non-performing assets as a percentage of total assets
remained relatively the same at 0.43% at December 31, 1999 and
0.44% at March 31, 2000. Non-performing assets increased
slightly from $6.4 million at December 31, 1999 to $7.0 million
at March 31, 2000. The ratio of the allowance for loan losses to
non-performing loans was 117.84% at December 31, 1999 and
decreased slightly to 114.81% at March 31, 2000. Non-performing
loans are comprised of non-accrual loans, accruing loans that are
90 days or more past due and restructured loans. Given the fact
that the above ratios remained relatively the same as well as
other qualitative and quantitative factors, the Company felt
comfortable allowing the loan loss reserve ratio as a percentage
of total loans to decline from 1.05% at December 31, 1999 to
1.00% at March 31, 2000. The loan loss reserve as a percentage
of total loans, excluding mortgages, was 1.40% at March 31, 2000,
down from 1.49% at December 31, 1999.
Management believes the allowance for loan losses was
adequate to cover risks inherent in its loan portfolio at March
31, 2000. 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, an increase
in loan volume, or for other reasons. Any such increase could
adversely affect the Company's results of operations.
Capital
The Company's Tier 1 capital to risk-weighted assets ratio
at March 31, 2000 was 12.59% compared to 13.38% at December 31,
1999. These ratios far exceeded the Tier 1 regulatory capital
requirement of 4.00%. The Company's total capital to risk-
weighted assets ratio at March 31, 2000 was 13.43% compared to
14.28% at December 31, 1999. These ratios exceeded the total
risk-based capital regulatory requirement of 8.00%. At March 31,
2000, the Company's leverage ratio was 6.96% versus 7.43% at
December 31, 1999. The Company is categorized as "well
capitalized" under applicable Federal regulations.
Liquidity
Financial institutions must maintain liquidity to meet day-
to-day requirements of depositors and borrowers, take advantage
of market opportunities, and provide a cushion against unforeseen
needs. Liquidity needs can be met by either reducing assets or
increasing liabilities. Sources of asset liquidity are provided
by the fair value of securities not pledged as collateral, cash
and amounts due from banks, interest-bearing deposits with banks,
and Federal funds sold. Held to maturity securities are
classified as liquid assets to the extent they are not pledged as
collateral.
These liquid assets totaled $378.9 million at March 31, 2000
compared to $339.5 million at December 31, 1999. Maturing and
repaying loans are another source of asset liquidity. At March
31, 2000, the Company estimated that an additional $84.7 million
of loans will mature in the next six-month period ended
September 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
utilitizing repurchase agreements with other institutions and
customers. The Bank utilizes a variety of these methods of
liability liquidity. At March 31, 2000, the Bank had
approximately $207.4 million in unused lines of credit available
to it under informal arrangements with correspondent banks
compared to $231.8 million at December 31, 1999. These lines of
credit enable the Bank to purchase funds for short-term needs at
current market rates.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
Please refer to Item 7A of the Company's annual report to
shareholders on Form 10-K for December 31, 1999. There have been
no significant changes regarding market risk since that date.
PART II
Item 1. Legal Proceedings - None
Item 2. Change in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders -
None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8 - K
(a) Exhibits
3.1 Articles of Incorporation of Main Street Bancorp, Inc.,
incorporated herein by reference to Exhibit 3.1 of the
Registration Statement No. 333-44697 on Form S-4 of the
registrant.
3.2 Bylaws of Main Street Bancorp, Inc., as amended,
incorporated herein by reference to Exhibit 3 (ii) on the
Current Form of 8-K dated April 25, 2000.
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, 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.
10.7 Deferred Compensation Agreement, dated October 14, 1999
by and between Main Street Bancorp, Inc. and Robert D.
McHugh, 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.
27.1 Financial Data Schedule.
(b) Reports on Form 8 - K
(1) - On January 18, 2000, the Company filed a Current
Report on Form 8-K, dated January 18, 2000, to
report information under item 7(a). Financial
statements were filed with the Current Report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
MAIN STREET BANCORP, INC.
(Registrant)
May 11, 2000 /s/ Robert D. McHugh, Jr.
Robert D. McHugh, Jr.
Executive Vice President and
Treasurer
05/11/00/SL1 66353v1/01350.002
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