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
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
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.
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
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
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
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.
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.
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
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.
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.
(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
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.
(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:
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.
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.
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:
(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.
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.
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
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:
(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.
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.
(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.
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.
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.
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%.
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.
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.
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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Shares of the Company's common stock are traded in the over-the-counter market and are quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") National Market System under the symbol "MBNK".
The table below presents the high and low trade prices reported for the Company's common shares and the cash dividends declared on such common shares for the periods indicated. The range of high and low prices is based on trade prices reported on NASDAQ. Market quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not necessarily reflect actual transactions.
(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."
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (Dollars in thousands, except per share data)
(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.
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.
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.
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
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-
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.
(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,
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 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.
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.
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.
(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
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
$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.
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
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.
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
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.
(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
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
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
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)
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
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,
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.
Note: Cash flow information for loans does not include the allowance for loans losses. Cash flow information for securities is stated at amortized cost.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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
MAIN STREET BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
See Notes to Consolidated Financial Statements.
MAIN STREET BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
See Notes to Consolidated Financial Statements.
MAIN STREET BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See Notes to Consolidated Financial Statements
MAIN STREET BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
See Notes To Consolidated Financial Statements
MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
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.
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.
MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SECURITIES
The amortized cost and approximate fair value of securities at December 31 were as follows:
MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
The components of loans receivable at December 31, 1999 and 1998 were as follows:
Changes in the allowance for loan losses for the years ended December 31, 1999, 1998 and 1997 were as follows:
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.
MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PREMISES AND EQUIPMENT
Components of premises and equipment at December 31, 1999 and 1998 were as follows:
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.
DEPOSITS
The components of deposits at December 31, 1999 and 1998 were as follows:
At December 31, 1999, the scheduled maturities of time deposits are as follows (in thousands):
MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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):
Long-term debt: Long-term debt consisted of the following at December 31, 1999 and 1998 (in thousands):
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).
MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
INCOME TAXES
The provision for federal income taxes for the years ended December 31, 1999, 1998 and 1997 consisted of the following (in thousands):
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):
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).
MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES (CONTINUED)
The net deferred tax asset consisted of the following components as of December 31, 1999 and 1998:
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.
MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
OTHER EXPENSES
The following represent the most significant categories of other expenses for the years ended December 31:
MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
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):
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
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):
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.
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):
MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
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.
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.
MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
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. MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------- EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted earnings per share:
- -------------------------------------------------------------------------------- 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.
MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------- 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.
MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------- 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:
MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------- PARENT COMPANY ONLY FINANCIAL INFORMATION
BALANCE SHEETS
STATEMENTS OF INCOME
MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------- PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------- 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):
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
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.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the Proxy Statement.
ITEM 12.
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to the Proxy Statement.
PART IV
ITEM 14.
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.
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.
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.
INDEX TO EXHIBITS