-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U8tvITn8DnKNpnd0kPEnB3AW6XIwxT/BAQtznr40tLJxcktSOMr7AX1CPvw1bGeG K7pPUZ/FZ4zLMbJ/fsla6g== 0000893220-01-000375.txt : 20010330 0000893220-01-000375.hdr.sgml : 20010330 ACCESSION NUMBER: 0000893220-01-000375 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAIN STREET BANCORP INC CENTRAL INDEX KEY: 0001060558 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 232960905 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-15501-01 FILM NUMBER: 1584201 BUSINESS ADDRESS: STREET 1: 601 PENN STREET CITY: READING STATE: PA ZIP: 19603 BUSINESS PHONE: 6106851400 MAIL ADDRESS: STREET 1: 400 WASHINGTON STREET CITY: READING STATE: PA ZIP: 19601 10-K 1 w46444e10-k.txt FORM 10-K FOR MAIN STREET BANK FOR 2000 1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark one) (X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, for the fiscal year ended December 31, 2000, or ( ) TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (no fee required), for the transition period from _______________ to ______________. Commission file number: 0-24145 MAIN STREET BANCORP, INC. -------------------------- (Name of small business issuer in its charter) Pennsylvania 23-2960905 - ------------------------ -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Registrant's telephone number, including area code: (610)685-1400 Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common Stock ($1.00 par value) 9.625% Junior Subordinated Debentures Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. () The aggregate market value of common stock of the Registrant held by nonaffiliates, based on the closing sale price as of March 14, 2001 was $90,128,309. As of March 14, 2001, the Registrant had 10,470,380 shares of Common Stock outstanding. Documents incorporated by reference: Portions of the Proxy Statement of the Registrant relating to the Registrant's Annual Meeting to be held on May 2, 2001 are incorporated by reference into Part III of this report. 2 MAIN STREET BANCORP, INC FORM 10-K TABLE OF CONTENTS Page Part I Item 1. Business 3 Item 2. Properties 28 Item 3. Legal Proceedings 28 Item 4. Submission of Matters to a Vote of Security Holders 28 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 28 Item 6. Selected Financial Data 30 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 31 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 56 Item 8. Financial Statements and Supplementary Data 59 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 87 Part III Item 10. Directors and Executive Officers of the Registrant 87 Item 11. Executive Compensation 87 Item 12. Security Ownership of Certain Beneficial Owners and Management 87 Item 13. Certain Relationships and Related Transactions 87 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 88 Signatures 2 3 PART I ITEM 1. BUSINESS GENERAL Main Street Bancorp, Inc. ("the Company") is a Pennsylvania corporation headquartered in Reading, Pennsylvania and, at December 31, 2000 was the 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, 2000, the Bank operated 42 full service branches in Berks, Bucks, Chester, Dauphin, Lehigh, Montgomery, Northhampton and Schuylkill Counties in Pennsylvania as well Hunterdon County, New Jersey. 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 mortgages, 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 3 4 Bank provides safe deposit boxes, traveler's checks, credit cards, wire transfer of funds, ACH (Automated Clearing House) origination, internet banking 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 offerings in order to remain competitive. The Company intends to offer discount brokerage services, 401(k) and employee benefit plans, alternate 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 Board ("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 4 5 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 are 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. Safe and Sound Banking Practices The FRB has broad authority to prohibit activities of bank holding companies and their nonbanking subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws or regulations, and can assess civil money penalties for certain activities conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository institution. The penalties can be as high as $1.0 million for each day the activity continues. 5 6 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. 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 is 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. On July 25, 2000, the Company and the Bank entered into a Memorandum of Understanding ("MOU") with the Federal Reserve Bank of Philadelphia ("Reserve Bank") and the Pennsylvania Department of Banking (the "Department"). The MOU is not a formal supervisory action by the Reserve Bank or the Department. The MOU addresses perceived regulatory concerns identified by the Reserve Bank as a result of its combined regulatory examination of the Company and the Bank as of December 31, 1999. Under the MOU, the Company and the Bank may declare and pay corporate dividends, out of funds legally available for the payment of dividends, after prior notice to the Reserve Bank and the Department. Since the signing of the MOU, the Reserve Bank has approved payment of the Company's quarterly dividends to shareholders. The MOU is discussed in greater detail in the Company's Management's Discussion and Analysis of Financial Condition set forth elsewhere in this Annual Report on Form 10-K. 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) 6 7 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. 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 FDIC established the FICO assessment rates effective for the third quarter of 2000 at approximately 2.1 cents per $100 annually for assessable deposits. The assessments are adjusted quarterly to reflect changes in the bases of the FDIC's insurance funds and do not vary depending on a depository institution's capitalization or supervisory evaluations. 7 8 Capital Adequacy The FRB adopted risk-based capital guidelines for bank holding companies, such as the Company. The required minimum ratio of total capital to risk-weighted assets (including off-balance sheet activities, such as standby letters of credit) is 8.0%. At least half of the total capital is required to be "Tier 1 capital," consisting principally of common stockholders' equity, noncumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less goodwill. The remainder ("Tier 2 capital") may consist of a limited amount of subordinated debt and intermediate-term preferred stock, certain hybrid capital instruments and other debt securities, perpetual preferred stock, and a limited amount of the general loan loss allowance. In addition to the risk-based capital guidelines, the FRB established minimum leverage ratio (Tier 1 capital to average total assets) guidelines for bank holding companies. These guidelines provide for a minimum leverage ratio of 3% for those bank holding companies which have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. All other bank holding companies are required to maintain a leverage ratio of at least 1% to 2% above the 3% stated minimum. The Company is in compliance with these guidelines. The Bank is subject to similar capital requirements. The risk-based capital standards are required to take adequate account of interest rate risk, concentration of credit risk and the risks of non-traditional activities. 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 8 9 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 Traditionally, the activities of bank holding companies have been limited to the business of banking and activities closely related or incidental to banking. On November 12, 1999, however, the Gramm-Leach-Bliley Act was signed into law which permits bank holding companies to engage in a broader range of financial activities. Specifically, bank holding companies may elect to become "financial holding companies" which may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or incidental to a financial activity. A bank holding company may become a financial holding company under the new statute only if each of its subsidiary banks is well capitalized, is well managed and has at least a satisfactory rating under the Community Reinvestment Act. A bank holding company that falls out of compliance with such requirement may be required to cease engaging in certain activities. Any bank holding company which does not elect to become a financial holding company remains subject to the current restrictions of the Bank Holding Company Act. While the FRB will serve as the "umbrella" regulator for financial holding companies and has the power to examine banking organizations engaged in new activities, regulation and supervision of activities which are financial in nature or determined to be incidental to such financial activities will be handled along functional lines. Accordingly, activities of subsidiaries of a financial holding company will be regulated by the agency or authorities with the most experience regulating that activity as it is conducted in a financial holding company. Under the Gramm-Leach-Bliley Act, among the activities that will be deemed "financial in nature" for "financial holding companies" are, in addition to traditional lending activities, securities underwriting, dealing in or making a market in securities, sponsoring mutual funds and investment companies, insurance underwriting and agency activities, activities which FRB determines to be closely related to banking, and certain merchant banking activities. 9 10 Privacy Under the Gramm-Leach-Bliley Act, federal banking regulators are required to adopt rules that will limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations will require disclosure of privacy policies to consumers and, in some circumstances, will allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. Federal banking regulators issued final rules on May 10, 2000. Pursuant to the rules, financial institutions must provide: - initial notices to customers about their privacy policies, describing the conditions under which they may disclose nonpublic personal information to nonaffiliated third parties and affiliates; - annual notices of their privacy policies to current customers; and - a reasonable method for customers to "opt out" of disclosures to nonaffiliated third parties. The rules were effective November 13, 2000, but compliance is optional until July 1, 2001. These privacy provisions will affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. It is not possible at this time to assess the impact of the privacy provisions on the Company's financial condition or results of operations. The Company has not elected to become a financial holding company. The Company believes that the Gramm-Leach-Bliley Act will not have a material adverse effect on its operations in the near-term. However, to the extent that it permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation. This could result in a growing number of larger financial institutions that offer a wider variety of financial services than the Company currently offers and that can aggressively compete in the markets that the Company currently serves. 10 11 Consumer Protection Rules - Sale of Insurance In December 2000, pursuant to the requirements of the Gramm-Leach-Bliley Act, the federal bank and thrift regulatory agencies adopted consumer protection rules for the sale of insurance products by depository institutions. The rule is effective on October 1, 2001. The final rule applies to any depository institution or any person selling, soliciting, advertising or offering insurance products or annuities to a consumer at an office of the institution or on behalf of the institution. The regulation requires oral and written disclosure before the completion of the sale of an insurance product or annuity that such product: - is not a deposit or other obligation of, or guaranteed by, the depository institution or its affiliate; - is not insured by the FDIC or any other agency of the United States, the depository institution or its affiliates; and - has certain risks of investment, including the possible loss of value. The depository institution may not condition an extension of credit on the consumer's purchase of an insurance product or annuity from the depository institution or from any of its affiliates, or on the consumer's agreement not to obtain, or a prohibition on the consumer from obtaining, an insurance product or annuity from an unaffiliated entity. Furthermore, to the extent practicable, a depository institution must keep insurance and annuity sales activities physically segregated from the areas where retail deposits are routinely accepted from the general public. Finally, the rule addresses cross marketing and referral fees. 11 12 ABC MORTGAGE COMPANY The Bank owns an 80% interest in ABC Mortgage Company, a Pennsylvania business trust. The remaining 20% is owned by a mortgage banking affiliate of the local Century 21 Advance Realty real estate franchise. As a majority-owned subsidiary of the Bank, ABC Mortgage Company is authorized to engage in full service mortgage banking in Pennsylvania. During the latter half of 2000, ABC Mortgage Company ceased operations and the Bank plans to dissolve the business trust in 2001. The overall activity of ABC Mortgage Company in 1999 and 2000 was immaterial in relation to the Company taken as a whole. NET MORTGAGE COMPANY The Bank owns a 75% interest in Net Mortgage Company, a Pennsylvania business trust. The remaining 25% is owned by a Berkshire Real Estate Network, Inc. As a majority-owned subsidiary of the Bank, Net Mortgage Company is authorized to engage in full service mortgage banking in Pennsylvania. During the latter half of 2000, Net Mortgage Company ceased operations and the Bank plans to dissolve the business trust in 2001. The overall activity of Net Mortgage Company in 1999 and 2000 was immaterial in relation to the Company taken as a whole. MAIN STREET HOLDINGS Main Street Holdings is a wholly-owned subsidiary of the Bank. Main Street Holdings was organized to fully utilize the strengths of state income tax benefits provided to Delaware holding companies under 1902(b)(8) of the Delaware law. 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 12 13 Northern Virginia and Maryland. The Bank purchase price was $1,500,000. On May 12, 2000, the Bank ceased its Virginia mortgage operations and closed Granite Mortgage Corporation due to concerns over its profitability prospects. The Bank recorded a one-time charge of approximately $2.5 million in the second quarter of 2000 to reflect liabilities accrued with respect to the closing of Granite Mortgage Corporation. 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, 2000 the Bank's loan portfolio consisted of commercial real estate loans, 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, 2000 the Bank had $433.4 million in commercial real estate and commercial loans. The Bank's commercial lending staff generates and services commercial and commercial real estate loans generally ranging from $25,000 to $5.0 million. The Bank's philosophy is to develop a total banking relationship with its commercial customers by providing all of their lending, deposit and personal banking needs. New business is 13 14 generated mostly through referrals from accountants, attorneys, realtors and existing customers. 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 less than 5% 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. Credit cards and installment loans, which entail greater risk, account for a small percentage of the loan portfolio (1% and 4%, respectively) 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, 2000, the Bank had $120.7 million in consumer loans, excluding residential mortgages. The Bank is one of the larger originators of residential mortgage loans in our market 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. 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. 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 14 15 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. At December 31, 2000, the Bank had $196.3 million in residential mortgage loans. 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. The Bank generally does not retain servicing rights on loans sold except for the loans sold to Freddie MAC. With respect to commercial real estate loans, the Bank's lending policies are to adhere to the guidelines promulgated by federal regulators. These guidelines 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. Such loans totaled less than 4% of the loan portfolio and are typically supported with other collateral and/or guarantees. The Company's loans, net of deferred loan fees at December 31, 2000 totaled $838.3 million, an increase of $172.6 million, or 25.9%, compared to net loans at December 31, 1999 of $665.7 million. This follows an increase of $125.1 million, or 23.1%, from the $540.6 million amount of net loans at December 31, 1998. These increases reflect continued loan demand from the Company's target customers. 15 16 The following table sets forth the Company's loans by major categories as of the dates indicated.
At December 31, ---------------------------------------------------- 2000 1999 1998 1997 1996 ---------------------------------------------------- (In thousands) Commercial, Financial and Agricultural $433,365 $337,751 $280,107 $222,050 $178,021 Real estate - construction 87,576 52,251 16,624 15,091 10,662 Real estate - mortgage 196,313 182,137 171,268 175,978 152,139 Consumer Loans to individuals 120,651 92,764 71,926 70,077 62,092 -------- -------- -------- -------- -------- 837,905 664,903 539,925 483,196 402,914 Less deferred loan fees (costs) (442) (824) (692) (380) 52 -------- -------- --------- -------- ------- Total loans $838,347 $665,727 $540,617 $483,576 $402,862 ====================================================
Loan Maturity and Interest Rate Sensitivity The amount of loans outstanding by category as of December 31, 2000, 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.
At December 31, 2000 ----------------------------------------------------------------- More Than One Year One Year Through Over Total or Less Five Years Five Years Loans -------- -------- -------- -------- (Dollars in Thousands) Commercial $204,694 $129,173 $ 99,301 $433,168 Construction 64,548 987 22,041 87,576 Mortgage 39,671 121,865 34,358 195,894 Consumer 87,037 18,959 15,713 121,709 -------- -------- -------- -------- Total (1) $395,950 $270,984 $171,413 $838,347 ======== ======== ======== ======== Loans with fixed rate $ 85,228 $190,405 $155,134 $430,767 Loans with floating rate 310,722 80,579 16,279 407,580 -------- -------- -------- -------- Total (1) $395,950 $270,984 $171,413 $838,347 ======== ======== ======== ======== Percent composition by maturity 47.23% 32.32% 20.45% 100.00% ======== ======== ======== ======== Fixed rate loans as a percentage of total loans maturing 10.17% 22.71% 18.50% 51.38% ======== ======== ======== ======== Floating rate loans as a percentage of total loans maturing 37.06% 9.61% 1.95% 48.62% ======== ======== ======== ========
- ------------ (1) Includes deferred loan fees In the ordinary course of business, loans maturing within one year may be renewed, in whole or in part, as to principal amount, at interest rates prevailing at the date of renewal. At December 31, 2000, 51.4% of total loans were fixed rate compared to 53.6% at December 31, 1999. For additional information 16 17 regarding interest rate sensitivity, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset and Liability Management." Credit Quality The Company's written lending policies require credit analysis, underwriting and loan documentation standards to be met prior to funding any loan. After loans have been approved and funded, continued periodic review is required. In addition, due to the secured nature of residential mortgages and the smaller balances of consumer 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. 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. 17 18 The following summary shows information concerning loan delinquency and other non-performing assets at the dates indicated.
At December 31, -------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (Dollars in thousands) Loans accruing, but past due 90 days or more $ 430 $ 513 $ 867 $1,293 $ 460 Total non-accrual loans 7,700 5,323 7,353 4,878 3,496 Restructured loans 94 106 113 73 79 ------ ------ ------ ------ ------ Total non-performing loans (1) 8,224 5,942 8,333 6,244 4,035 Foreclosed real estate 959 459 401 465 1,183 ------- ------ ------ --- ------ Total non-performing assets (2) $9,183 $6,401 $8,734 $6,709 $5,218 ====== ====== ====== ====== ====== Non-performing loans as a percentage of total loans, net of unearned income 0.98% 0.89% 1.54% 1.29% 1.00% === ==== ==== ==== ==== Non-performing assets as a percentage of total assets 0.61% 0.43% 0.75% 0.82% 0.78% ==== ==== ==== === ====
- -------------------- (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:
Year Ended December 31, ----------------------------- 2000 1999 1998 ----------------------------- (Dollars in thousands) Interest income that would have been recorded had the loans been in accordance with their original terms $537 $422 $605 Interest income included in net income 180 153 126
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, 2000, there were two restructured loans in the amount of $94,000. At December 31, 2000, the Company had no foreign loans. The Company did have loan concentrations exceeding 10% of total loans to Non-Residential Building Operators in the amount of $91.8 million, or 11.0%, of total loans. Loan concentrations are considered to exist 18 19 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, 2000, all identified potential problem loans were included in the non-performing assets table, except for $26.7 million of loans included on the Bank's internal watch list. The Bank had no credit exposure to "highly leveraged transactions" at December 31, 2000, as defined by the Federal Reserve Bank of Philadelphia ("FRB"). 19 20 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:
Years Ended December 31, -------------------------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (Dollars in thousands) Balance at beginning of year: $ 7,002 $ 7,222 $ 5,738 $ 5,072 $ 4,883 Charge-offs: Commercial 1,374 309 207 97 497 Real estate-mortgage 574 1,216 440 300 344 Consumer 407 435 302 308 154 -------- -------- -------- -------- -------- Total Charge-offs $ 2,355 $ 1,960 $ 949 $ 705 $ 995 -------- -------- -------- -------- -------- Recoveries: Commercial 72 111 59 128 236 Real estate-mortgage 232 350 84 56 29 Consumer 95 62 80 47 52 -------- -------- -------- -------- -------- Total recoveries $ 399 $ 523 $ 223 $ 231 $ 317 -------- -------- -------- -------- -------- Net charge-offs 1,956 1,437 726 474 678 Provision for loan losses 4,625 1,217 2,210 1,140 867 -------- -------- -------- -------- -------- Balance at end of year $ 9,671 $ 7,002 $ 7,222 $ 5,738 $ 5,072 ======== ======== ======== ======== ======== Average loans outstanding (1) $757,044 $595,032 $517,944 $444,839 $357,831 ======== ======== ======== ======== ======== Allowance as a percent of each of the following: Total loans, net of unearned income 1.15% 1.05% 1.34% 1.19% 1.26% Total non-performing loans 117.59% 117.84% 86.67% 91.90% 125.70% As a percent of average loans (1): Net charge-offs 0.26% 0.24% 0.14% 0.11% 0.19% Provision for loan losses 0.61% 0.20% 0.43% 0.26% 0.24%
------- (1) Includes non-accruing loans Main Street Bank's Allowance for Loan and Lease Loss ("ALLL") Methodology includes a detailed analysis of the loan portfolio, to be performed on a regular and ongoing basis. During the fourth quarter of 2000, management adopted changes in the Loan Loss Reserve Policy and the ALLL methodology. All loans are considered, whether individually or grouped as homogeneous pools. Loans to be evaluated for impairment on an individual basis are done so in accordance with FASB 114, ("Accounting by Creditors for Impairment of a Loan"). The remainder of the portfolio is segmented into groups of loans with similar risk characteristics for evaluation and analysis according to FASB 5, ("Accounting for Contingencies"). All known internal and external factors that are relevant are considered when determining the collectibility of loans. This methodology is applied consistently, but may be modified for new factors affecting collectibility of loans. 20 21 The particular risks inherent with different kinds of lending are considered. Collateral values, less the costs to sell and other carrying expenses are considered where appropriate. The ALLL methodology includes clear explanations of the supporting analyses and rationale, and is based on current and reliable data. It includes a systematic and logical method to consolidate the loss estimates and ensures that the ALLL balance is recorded in accordance with accounting principals generally accepted in the United States of America. For the ALLL process, Main Street Bank stratifies its commercial loan portfolio by industry groups, using a range of Standard Industry Classification (SIC) codes for identification purposes. Loss factors are assigned for each group based on qualitative and quantitative factors, which are identified in the methodology below. Specific commercial loans identified as impaired due to nonaccrual status, are assigned a separate allocation in accordance with FASB 114, if a shortfall is indicated. Other commercial loans individually evaluated under FASB 114, but not considered individually impaired, are grouped in a category with an assigned loss factor, as per FASB 5. Loans of this type do not require a specific allocation. The Fair Value of Collateral method is used to measure impairment in secured loans. Measuring the fair market value of real estate collateral takes into account the appraised value, the age of the appraisal if a new appraisal or update has not been obtained, any valuation assumptions used, estimated costs to sell, and trends in the market since the appraisal date. The Asset Recovery Department provides any estimated costs to sell or other information pertinent in determining the valuation, including estimates of collateral value based upon similar properties or locations, as well as previous liquidation experience. For other types of collateral, such as business assets, vehicles, or equipment, the measurement includes the most recent financial statements available, appraisals, publications such as NADA book values, or any other information available to arrive at a legitimate value. The Asset Recovery Department provides credit memos and other written information for the credit file and for the Loan Review Department in an effort to stay abreast of fair market values. 21 22 The Present Value of Future Cash Flows method is used to measure impairment for unsecured loans, or loans where the collateral value is immaterial or cannot be reasonable estimated. The Loan Review Department makes this determination based on existing financial statements in file, and the required payment amounts based upon the loan documentation, discounted by the contractual rate of interest. The Asset Recovery Department provides documentation for any special arrangements such as forbearance agreements, to help determine the present value of future cash flows. Residential mortgages, home equity loans, installment loans, credit cards, and ready cash loans are grouped in pools and have an appropriate loss factor based on internal historical loss rates, delinquency, charge-offs and recoveries, underwriting standards, lending policies and procedures, and other environmental factors such as changes in the local and national economy, market fluctuations, etc. Loss factors are assigned for each group based on qualitative and quantitative factors, which are identified below. The summary of allocations realized from the analysis of impaired commercial loans according to FASB 114, and the analysis of reserves for homogeneous pools of loans according to FASB 5, represents the determination process used by Main Street Bank, which results in a recommended ALLL. Management maintains an ALLL balance that is deemed adequate based on the findings of the determination process and will adjust the overall ALLL by either increasing or decreasing the provision for ALLL on a quarterly basis. In addition, the bank shall maintain a "reserve for general risk" to be maintained between 5% and 20% of the actual Loan Loss Reserve allocation, based upon credit quality trends, loan volume, recent loss experience, and general economic trends. A detailed allocation of the allowance for loan losses for each of the five years ended December 31 follows. The increase in the allocation for real estate - - construction is due to the identification and correction of SIC codes at December 31, 2000, as well as new loan growth in this area. 22 23
AT DECEMBER 31, ------------------------------------------------------------------------------------------------------------------ 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------------ Percent Percent Percent Percent Percent of Loans of Loans of Loans of Loans of Loans in Each in Each in Each in Each in Each Category Category Category Category Category Amount to Loans Amount to Loans Amount to Loans Amount to Loans Amount to Loans ------ --------- ------ -------- ------ -------- ------ -------- ------ -------- (Dollars in thousands) Allocation of allowance for loan losses: Commercial, financial and agricultural $5,902 51.67% $4,661 50.78% $4,124 51.85% $1,819 46.06% $1,398 44.17% Real Estate - Mortgage 698 23.37% 978 27.29% 981 31.67% 689 36.31% 509 37.72% Real Estate - Construction 1,066 10.45% 290 7.84% 72 3.15% 56 3.11% 73 2.73% Consumer loans to individuals 938 14.51% 699 14.09% 544 13.33% 709 14.52% 292 15.38% Unallocated 1,067 374 1,501 2,465 2,800 ------ ------ ------ ------ ------ Total $9,671 100.00% $7,002 100.00% $7,222 100.00% $5,738 100.00% $5,072 100.00% ====== ====== ====== ====== ======
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. During 2000, the securities portfolio decreased $166.9 million from $700.0 million at December 31, 1999 to $533.1 million at December 31, 2000. The Company elected to sell approximately $230.0 million in primarily long-term government agency and municipal securities and incur security losses of $7.0 million as part of a plan to restructure the balance sheet to decrease interest rate risk volatility in changing interest rate environments and enhance net interest margin. A summary of securities available for sale and securities held to maturity at December 31, 2000, 1999 and 1998 follows:
Securities Securities Available for Sale Held To Maturity at December 31, at December 31, ------------------------------------ --------------------------------- 2000 1999 1998 2000 1999 1998 ---- ---- ---- ---- ---- ---- (In Thousands) (In Thousands) U.S. Treasury $ -- $ 29,464 $ 9,256 $ -- $ -- $-- U.S. Government agencies 89,300 130,251 192,705 121,658 121,657 -- State and municipal 196,903 190,937 233,615 37,193 139,505 -- Mortgage-backed and asset- backed securities (1) 59,874 67,570 57,583 9,171 598 -- Other securities (2) 19,077 46,945 39,491 -- 25 25 -------- -------- -------- -------- -------- --- Total Amortized Cost of Securities $365,154 $465,167 $532,650 $168,022 $261,785 $25 ======== ======== ======== ======== ======== === Total Fair Value of Securities $365,043 $438,173 $534,526 $163,969 $235,829 $25 ======== ======== ======== ======== ======== ===
23 24 (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, 2000. Weighted average yields on tax-exempt obligations have been computed on a taxable equivalent basis.
Available for Sale December 31, 2000 ----------------- (Dollars in Thousands) After 1 Year After 5 Years But But After 10 Years Within 1 Year Within 5 Years Within 10 Years or no maturity (1) Total ------------- ---------------- ---------------- ---------------- ---------------- Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield ------------- ---------------- ---------------- ---------------- ---------------- Amortized Cost: U.S. Treasury Securities $ -- --% $ -- -% $ -- --% $ -- --% $ -- --% U.S. Government Agencies -- -- 15,000 7.053 60,700 7.305 13,600 7.124 89,300 7.235 State and Municipal -- -- -- -- -- -- 196,903 7.232 196,903 7.232 Mortgage-backed and asset-backed securities -- -- -- -- 6 7.500 59,868 7.200 59,874 7.200 Other Securities -- -- 25 7.500 -- -- 19,052 7.239 19,077 7.239 ------ ----- ------- ----- ------- ----- -------- ----- -------- ----- Total securities available for sale $ -- --% $15,025 7.054% $60,706 7.305% $289,423 7.221% $365,154 7.228% ====== ===== ======= ===== ======= ===== ======== ===== ======== =====
Held to Maturity December 31, 2000 ----------------- (Dollars In Thousands) After 1 Year After 5 Years But But After 10 Years Within 1 Year Within 5 Years Within 10 Years or no maturity (1) Total --------------- -------------- --------------- ------------------ ---------------- Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield --------------- ------------- -------------- ------------------ ---------------- Amortized Cost: U.S. Treasury Securities $ -- --% $ -- --% $ -- --% $ -- --% -- --% U.S. Government Agencies -- -- -- -- -- -- 121,658 6.581 121,658 6.581 State and Municipal -- -- -- -- -- -- 37,193 7.155 37,193 7.155 Mortgage-backed and asset-backed securities -- -- -- -- -- -- 9,171 7.949 9,171 7.949 Other Securities -- -- -- -- -- -- -- -- -- -- ------ ----- ------ ----- ------ ----- --------- ----- -------- ----- Total securities Held to maturity $ 0 0% $ 0 0% $ 0 0% $ 168,022 6.783% $168,022 6.783% ====== ===== ====== ===== ====== ===== ========= ===== ======== =====
(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, 2000, securities having an amortized cost of $193.8 million were pledged as collateral for public funds and other purposes as required or permitted by law. Neither the Company nor the Banks held securities of any one issuer, excluding U.S. Treasury and U.S. Government Agencies, that exceeded 10% of stockholders' equity at December 31, 2000 or any prior period end. 24 25 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, 2000, 1999 and 1998.
Year Ended December 31, ------------------------------------------------------- 2000 1999 1998 ---------------- ---------------- ---------------- Amount Rate Amount Rate Amount Rate -------- ----- ------- ----- -------- ----- (Dollars in thousands) Demand--non-interest bearing $ 127,192 ----% $103,805 ----% $ 72,866 ----% Demand--interest-bearing 139,708 3.33% 110,771 3.02% 62,915 1.67% Savings 377,952 3.94% 328,123 3.36% 278,860 3.75% Time deposits 509,568 5.83% 376,985 5.34% 290,147 5.43% ---------- ---- -------- ---- -------- ---- Total deposits $1,154,420 4.26% $919,684 3.75% $704,788 3.87% ========== ==== ======== ==== ======== ====
The following is a breakdown, by maturities, of the Bank's certificates of deposit issued in denominations of $100,000 or more as of December 31, 2000.
December 31, 2000 ----------------- (In thousands) CD's ------- Maturing in: Three months or less $28,543 Over three through six months 20,831 Over six through twelve months 22,819 Over twelve months 27,781 ------- Total $99,974 =======
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 $3.5 million and $4.9 million at December 31, 2000 and 1999. The Bank had other short-term borrowings from the FHLB at December 31, 1999 in the amount of $202.7 million, which were due in 2000, at an average interest rate of 5.30%. There were no other short-term borrowings from the Federal Home Loan Bank at December 31, 2000. 25 26 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. Borrowings under these agreements totalled $15.2 million and $10.1 million at December 31, 2000 and 1999, respectively. In addition, the Bank had 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. 26 27 The following table sets forth information regarding short-term borrowings at and for the periods ended December 31, 2000, 1999 and 1998.
2000 1999 1998 -------- -------- -------- (In Thousands) Short-term advances from the FHLB bearing interest at a weighted average rate of 5.15% and 4.95% as of December 31, 1999 and 1998, respectively: ............................... $ -- $202,675 $ 81,200 Securities sold under agreements to repurchase at a weighted average rate of 5.67%, 5.75% and 4.59% as of December 31, 2000, 1999, and 1998, respectively: ............................... 15,198 66,905 4,228 -------- -------- -------- $ 15,198 $269,580 $ 85,428 ======== ======== ======== Maximum amount of short-term advances from the FHLB outstanding at any month-end during the years ended December 31, 2000, 1999, and 1998: ......... $199,873 $202,675 $ 81,200 Maximum amount of securities sold under agreements to repurchase outstanding at any month-end during the years ended December 31, 2000, 1999, and 1998: ............................ 111,525 66,905 4,228 -------- -------- -------- $311,398 $269,580 $ 85,428 ======== ======== ======== Average amount of short-term advances outstanding during the years ended December 31, 2000, 1999 and 1998 at weighted average interest rates of 6.37%, 5.30% and 5.59%, respectively ........ $133,962 $158,356 $ 40,766 Average amount of securities sold under Agreements to repurchase outstanding during the years ended December 31, 2000, 1999 and 1998 at weighted average interest rates of 5.90%, 4.99% and 4.42%, respectively: .................... 40,154 24,243 3,800 -------- -------- -------- $174,116 $182,599 $ 44,566 ======== ======== ========
The Bank's maximum borrowing capacity with the FHLB is approximately $402,000,000 at December 31, 2000. Advances from the FHLB are required to be secured by qualifying assets of the Banks. 27 28 ITEM 2. PROPERTIES The Company's headquarters are located at 601 Penn Street, Reading, Pennsylvania. At December 31, 2000, the Bank operated 42 full service community banking offices. Of the forty-two banking offices, 18 are owned, 5 are land leases only and 19 are building and land leases from independent owners. ITEM 3. LEGAL PROCEEDINGS The Company and the Bank are , from time to time, a party (plaintiff or defendant) to lawsuits that are in the normal course of the Company's and the Banks' business. While any litigation involves an element of uncertainty, management, after reviewing pending actions with its legal counsel, is of the opinion that the liability of the Company and the Bank, if any, resulting from such actions will not have a material effect on the financial condition or results of operations of the Company and the Bank. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Shares of the Company's common stock are traded in the over-the-counter market and are quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") National Market System under the symbol "MBNK". 28 29 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.
Dividends Year Quarter High Low Per Share ---- ------- ---- --- --------- 2000 4th 8-5/16 5-3/8 $0.05 3rd 9-1/8 7-3/4 0.14 2nd 10-1/2 8 0.14 1st 10-15/16 8-5/8 0.14 1999 4th 13-3/8 9-7/16 $0.14 3rd 14-1/2 11-5/8 0.14 2nd 17-1/4 14-1/16 0.14 1st 18-3/4 14-7/8 0.14
At March 19, 2001, the total number of holders of record of the Company's common shares was approximately 7,000. For certain limitations on the Banks' abilities to pay dividends to the Company, see "Description of Business - Supervision and Regulation" hereof and Note 17 to "Notes to Consolidated Financial Statements." 29 30 ITEM 6. SELECTED FINANCIAL DATA
At or for the Year ended December 31, --------------------------------------------------------------- 2000 1999 1998 1997 1996 --------------------------------------------------------------- Income Statement Data: Total interest income $105,307 $85,889 $65,719 $54,463 $41,809 Total interest expense 65,587 49,502 33,264 25,978 18,654 --------------------------------------------------------------- Net interest income 39,720 36,387 32,455 28,485 23,155 Provision for loan losses 4,625 1,217 2,210 1,140 867 Other income 3,812 6,820 10,301 4,535 3,559 Other expenses 48,790 36,617 25,092 19,234 16,536 Federal income taxes (benefit) (7,008) (2,574) 3,711 3,317 2,428 --------------------------------------------------------------- Net income $ (2,875) $7,947 $11,743 $9,329 $6,883 =============================================================== Operating Income (1) $8,506 $9,397 $10,307 $9,093 $6,883 =============================================================== Per Share Data: Earnings per share (1)(2) Basic $ (0.27) $ 0.76 $ 1.13 $ 1.02 $ 0.82 Diluted (0.27) 0.76 1.12 1.00 0.82 Operating Earnings Per Share (1)(2) 0.81 0.90 0.98 0.98 0.82 Cash dividends declared per share(2) 0.47 0.56 0.49 0.36 0.30 Book value per share (2)(3) 8.35 7.54 9.14 8.60 7.16 Balance Sheet Data: Total assets $1,496,144 $1,496,747 $1,158,541 $813,863 $666,476 Total loans, net 828,676 658,725 533,395 477,838 397,790 Total securities 533,065 699,958 534,551 280,020 203,236 Total deposits 1,310,324 1,024,516 818,550 626,760 518,567 Borrowings 78,676 359,434 221,072 84,758 81,120 Junior subordinated deferrable interest debentures 10,000 10,000 - - - Total stockholders' equity $87,437 $78,778 $94,912 $88,720 $59,785 Performance Ratios: Return on average assets (0.19)% 0.61% 1.28% 1.28% 1.22% Return on average stockholders' equity (3.60)% 9.02% 12.34% 13.16% 12.05% Net interest margin (4) 3.28% 3.53% 4.03% 4.30% 4.54% Efficiency ratio 72.20% 69.43% 56.55% 56.61% 59.39% Asset Quality Ratios: Allowance for loan losses as a percentage of loans 1.15% 1.05% 1.34% 1.19% 1.26% Allowance for loan losses as a percentage of non-performing loans(5) 117.59% 117.84% 86.67% 91.90% 125.70% Non-performing loans as a percentage of total loans, net (5) 0.98% 0.89% 1.54% 1.29% 1.00% Non-performing assets as a percentage of total assets (5) 0.61% 0.43% 0.75% 0.82% 0.78% Capital Ratios: Tier 1 capital to risk-weighted assets (6) 10.15% 13.38% 14.83% 17.56% 14.81% Leverage ratio (6)(7) 6.46% 7.43% 8.70% 10.93% 9.81% Total capital to risk-weighted assets (6) 11.18% 14.28% 15.97% 18.72% 16.06%
(1) Operating Earnings and Operating Earnings Per share exclude special charges, security gains and losses, and other one-time charges, net of taxes. (2) Per common share data are adjusted for all stock dividends and stock splits effected through December 31, 2000. (3) Based upon total shares issued and outstanding at the end of each respective period. (4) Represents net interest income as a percentage of average total-interest earning assets, calculated on a tax-equivalent basis. (5) Non-performing loans are comprised of (i) loans which are on a nonaccrual basis, (ii) accruing loans that are 90 days or more past due which are insured for credit loss, and (iii) restructured loans. Non-performing assets are comprised of non-performing loans and foreclosed real estate (assets acquired in foreclosure). (6) Based on Federal Reserve Board risk-based capital guidelines, as applicable to the Company. (7) The leverage ratio is defined as Tier 1 capital to average total assets. 30 31 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Main Street Bancorp, Inc. (the "Company"), is a $1.5 billion holding company in which its banking subsidiary, Main Street Bank, currently operates 42 offices in 9 counties through its divisions - Berks County Bank in Berks County, Heritage Bank in Schuylkill and Dauphin Counties and Main Street Bank in Chester, Lehigh, Montgomery, Bucks, and Northhampton Counties within Pennsylvania and Hunterdon County, New Jersey. The Company was formed in May 1998 upon the completion of a merger between Reading-based Berks County Bank, which was founded in 1987 and Pottsville-based Heritage National Bank, which was founded in 1828. On July 25, 2000, the Company and the Bank entered into a Memorandum of Understanding ("MOU") with the Federal Reserve Bank of Philadelphia ("FRB") and the Pennsylvania Department of Banking (the "Department"). The MOU is not a formal supervisory action by the FRB or the Department. Generally, the MOU addresses perceived regulatory concerns identified by the FRB as a result of its combined examination of the Company and the Bank and its information systems and transfer agent examinations of the Bank, all as of December 31, 1999. The Company and the Bank agreed in the MOU to: establish a risk management program; revise its ALCO policies, limits, and procedures; develop a contingency liquidity plan; develop an interest rate-risk plan; conduct a risk assessment relating to internet banking; develop a comprehensive strategic plan and budget; take certain corrective actions with respect to loan policies, and credit management; take various actions with respect to information systems; and take certain corrective actions with respect to transfer agent activities. The management and Directors of the Company and the Bank also agreed to establish an asset liability committee and a compliance committee of at least three (3) outside directors and to engage an outside consultant to evaluate management's interest rate models and the strategies used to monitor interest rate risk. The agreement establishes a schedule for compliance and requires additional regulatory reporting by the Company and the Bank. Under the MOU, the Company and the Bank may declare and pay corporate dividends, out of funds legally available for the payment of dividends, after prior notice to the FRB and the Department. Since the signing of the MOU, the FRB has approved payment of the Company's quarterly dividends. The Company may incur additional debt and the Company may redeem its own stock with prior written approval from the FRB and the Department. The Company and the Bank continue to take those actions necessary to comply with their respective obligations under the MOU. The year 2000 was a transition period for the Company as evidenced by an executive management reorganization, the closing and sale of a business subsidiary and retail branches and the restructuring of the balance sheet, which were implemented to achieve long-term shareholder value. The management reorganization resulted in the rebuilding of the management team during the second half of the year. Additionally, during the year the Company closed the Granite Mortgage Corporation, a wholly-owned subsidiary based in Virginia, resulting from the lack of current and projected profitability. The Company's assessment of the profitability and strategic fit of all retail branches resulted in two branches closing during the fourth quarter, another branch being sold and charges taken on two additional branches that will either be sold or closed during 2001. Finally, the Company restructured the balance sheet by selling $230 million in long-term government agencies and municipal securities which was used to pay down $256 million in short-term debt, thereby reducing interest rate risk and enhancing the net interest margin while providing an increased concentration of higher-yielding loans relative to the total level of assets. The Company's strategic direction places an increased emphasis on profitability rather than growth. The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and is intended to assist in understanding and evaluating the major changes in the financial condition and results of operations of the Company. 31 32 Financial Condition Highlights The Company maintained its total asset base of $1.5 billion at December 31, 2000, compared to December 31, 1999. Despite the asset size remaining constant, the Company made significant strides to restructure its balance sheet during the year ended December 31, 2000. The transition resulted in an increased concentration of higher yielding assets and less reliance on investment securities and borrowed funds. The sale of over $230 million in investment securities, and increases in deposits enabled the Company to pay off short-term debt of $256 million and Federal Home Loan Bank of Pittsburgh ("FHLB") long-term debt of $25 million. The retail deposit growth of 28% allowed the Company to increase its loan portfolio in excess of $170 million. Stockholders' equity increased $8.6 million, or 11%, during the year due entirely to the improvement in net unrealized losses on securities available for sale. 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 $12.5 million to $63.0 million at December 31, 2000. Proceeds from security sales were invested in interest-bearing deposits at year-end pending reinvestment into other securities. Total investment securities decreased $166.9 million, or 23.8%, from $700.0 million at December 31, 1999, to $533.1 million at December 31, 2000. The decrease was substantially due to the sale of approximately $230.0 million in primarily long-term government agency and municipal securities, partially offset by the purchase of approximately $67 million in securities, most of which were callable government agencies. The Company incurred security losses of $7.0 million as part of a plan to restructure the balance sheet to decrease interest rate risk volatility in changing interest rate environments and enhance the net interest margin. On October 1, 2000, the Company adopted FAS 133, "Accounting for Derivative Instruments and Hedging Activities," and, as permitted by the Statement, the Company transferred securities with an amortized cost of $102.1 million and net unrealized losses of approximately $4.9 million from the held to maturity to the available for sale category. Other than the transfer of securities, the adoption of the FAS 133 had no material effect on the Company's financial 32 33 statements. The Company also transferred securities with an amortized cost of approximately $10.9 million from available for sale to held to maturity. These securities were transferred at their fair market value on the date of transfer, which was $1.7 million less than the amortized cost. The difference of $1.1 million, net of taxes of $574,000, is included in accumulated other comprehensive income and is being amortized over the remaining contractual life of the respective securities. Loans receivable, net of allowance for loan losses of $9.7 million at December 31, 2000, and $7.0 million at December 31, 1999, increased to $828.7 million at December 31, 2000, from $658.7 million at December 31, 1999, an increase of 25.8%. The change was primarily due to an increase in commercial real estate and home equity loans due to the continued favorable economic climate within the Company's markets and several home equity promotions during 2000. Mortgages held for sale decreased from $4.9 million at December 31, 1999, to a zero balance at December 31, 2000. During the second quarter of 2000, the Company elected to sell all of the mortgages classified as held for sale, which at the time of the sale totaled $7.9 million. As a result of this sale, the Company recorded a pretax loss in the income statement of $487,000. The Company elected to sell these fixed rate mortgages, which were 100 to 200 basis points below market rates at the time of the sale, to improve the Company's net interest margin. Amounts due from mortgage investors decreased from $5.0 million at year-end 1999 to $1.6 million at year-end 2000. 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, decreased slightly from $36.5 million at year-end 1999 to $36.1 million at year-end 2000. The decrease represents depreciation expense, offset by purchases of equipment and furniture. Accrued interest receivable and other assets declined $7.6 million from $41.2 million at December 31, 1999 to $33.6 million at December 33 34 31, 2000. The decrease was due to the recording of a $9.4 million deferred tax asset relating to the accounting requirements of FASB 115 at December 31, 1999, versus a deferred tax asset of $612,000 at December 31, 2000. Total liabilities of $1.4 billion at December 31, 2000, decreased $9.0 million, or 0.6%, from year-end 1999. During this period, deposits increased by 27.9%, from $1.0 billion at December 31, 1999, to $1.3 billion at December 31, 2000. Non interest-bearing deposits increased 24.9% to $152.8 million at December 31, 2000, from $122.3 million at December 31, 1999, resulting from the Company's continued promotion of free personal and business checking accounts. Interest-bearing checking increased from $137.4 million at December 31, 1999, to $158.1 million at December 31, 2000, an increase of 15.1% while savings deposits increased to $404.7 million at December 31, 2000, from $327.4 million at December 31, 1999, an increase of 23.6%. Time deposits increased from $437.5 million at December 31, 1999, to $594.7 million at year-end 2000, an increase of 35.9%. The growth in these retail deposit products was attributed to the retail branch expansion in 1999 and the various deposit product promotions throughout the year. Accrued interest payable and other liabilities decreased $14.3 million, or 59.6%, from $24.0 million at December 31, 1999 to $9.7 million at December 31, 2000. Most of the decline in accrued interest payable and other liabilities was due to the recording of $10.5 million in securities payable at December 31, 1999. Accounting rules require companies to record securities purchases at trade date versus settlement date. Also, at December 31, 1999, the Company had recorded $2.6 million in accrued interest payable on debt (total debt was $359.4 million) versus $250,000 at December 31, 2000 (total debt was $78.7 million). Other borrowed funds decreased $255.7 million, or 93.2%, from $274.4 million at December 31, 1999, to $18.7 million at December 31, 2000. Long-term borrowings from the FHLB decreased $25.0 million, or 29.4%, to $60.0 million at December 31, 2000. The Company was able to pay-down its other borrowed funds and long-term debt from the gathering of retail deposits and the proceeds of the sale of securities as mentioned above. 34 35 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. Stockholders' equity increased $8.6 million, or 10.9%, to $87.4 million at December 31, 2000, from $78.8 million at December 31, 1999. The increase resulted from the improvement in net unrealized losses on securities available for sale of $16.4 million which was partially offset by the net loss of $2.9 million and dividends of $5.0 million declared and paid to stockholders during 2000. The decline in unrealized losses occurred in the fourth quarter of 2000 resulting from the Company's sale of $102.1 million in long-term securities and the impact of a decrease in the general interest rate environment. Results of Operations for the Years Ended December 31, 2000, 1999 and 1998 Overview The Company's net income (loss) for the year ended December 31, 2000, was ($2.9) million compared to $7.9 million for the year ended December 31, 1999, and $11.7 million in 1998. The 2000 net loss was due to the Company incurring $11.4 million (including realized losses on sales of securities) in after-tax special charges and other one-time charges and income compared to after-tax special charges of $1.5 million in 1999 and $2.0 in 1998. Pre-tax special charges of $6.9 million and other one-time charges of $300,000 for a total of $7.2 million in 2000 consists of $2.0 million in costs related to the closing of Granite Mortgage Company, $3.7 million in severance payments and employee-related costs, and $1.5 million in expenses to close branches and loan production offices and related professional fees. During 1999, the Company incurred a $2.0 million pre-tax charge for change of control payments to two former Heritage Bank executives under agreements with the former Heritage Bancorp, Inc. In 1998, the Company incurred one-time merger related costs of $2.0 million, which 35 36 consisted primarily of professional fees and related transaction costs. Operating net income, which excludes these special charges and other one-time charges and income, was $8.5 million, $9.4 million and $10.3 million in 2000, 1999 and 1998, respectively. The decline in operating net income from 1999 to 2000 was due primarily to the increased loan loss provision, exclusive of the one-time additional provision of $1.5 million in the fourth quarter of 2000 (see "Provision for Loan Losses"). The increase in tax-equivalent net interest income of $3.8 million and non-interest income of $3.0 million was offset by the increase in operating expenses of $7.0 million related mainly to the retail branch expansion. The decline in operating net income from 1998 to 1999 was due to the retail branch expansion program in 1999. Diluted earnings (loss) per share, as reported, amounted to ($0.27), $0.76 and $1.12 for 2000, 1999 and 1998, respectively. Diluted earnings per share, on an operating basis, were $0.81, $0.90, and $0.98 for 2000, 1999, and 1998, respectively. Net Interest Income Net interest income is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. The table, 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. 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 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. 36 37
Years Ended December 31, 2000 vs. 1999 1999 vs. 1998 Change due to Change due to ------------------------------------------------------------------------------------ Average Average Increase Average Average Increase Volume Rate (Decrease) Volume Rate (Decrease) -------- -------- -------- -------- -------- -------- (In thousands) Interest earned on: Interest-bearing deposits with banks ........................... $ 37 $ 14 $ 51 $ (26) $ (1) $ (27) Federal funds sold ..................... (6) 4 (2) (192) (3) (195) Securities (1) ......................... 3,213 1,700 4,913 20,562 (421) 20,141 Loans (1) .............................. 14,201 769 14,970 6,916 (2,149) 4,767 -------- -------- -------- -------- -------- -------- Total interest income .................... $ 17,445 $ 2,487 $ 19,932 $ 27,260 $ (2,574) $ 24,686 -------- -------- -------- -------- -------- -------- Interest paid on: Interest-bearing demand and savings deposits ................. $ 2,549 $ 2,596 $ 5,145 $ 2,645 $ 231 $ 2,876 Time deposits .......................... 7,074 2,513 9,587 4,719 (374) 4,345 Borrowed funds ......................... (273) 1,626 1,353 9,572 (555) 9,017 -------- -------- -------- -------- -------- -------- Total interest expense ................... $ 9,350 $ 6,735 $ 16,085 $ 16,936 $ (698) $ 16,238 -------- -------- -------- -------- -------- -------- Net interest income ...................... $ 8,095 $ (4,248) $ 3,847 $ 10,324 $ (1,876) $ 8,448 ======== ======== ======== ======== ======== ========
- -------------- (1) Interest income is reported on a tax-equivalent basis, using a 34% statutory tax rate for 2000 and a 35% statutory rate for 1999 and 1998 and adjusted for the disallowance of the deduction for interest expense to carry bank eligible tax-exempt securities and loans. 37 38 p MAIN STREET BANCORP, INC. AVERAGE BALANCE, AVERAGE RATES AND NET INTEREST MARGIN
For twelve months ended: December 31, 2000 December 31, 1999 December 31, 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Interest Interest Interest (Dollars in thousands) Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense(1) Rate (2) Balance Expense(1) Rate (2) Balance Expense(1) Rate (2) - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST-EARNING ASSETS: Interest-bearing deposits at banks $ 1,351 $ 85 6.29% $ 651 $ 34 5.22% $ 1,124 $ 61 5.43% ----------------------------- ------------------------- ------------------------ Federal Funds Sold 347 21 6.05 470 23 4.89 3,990 218 5.46 ----------------------------- ------------------------- ------------------------ Taxable securities 378,594 25,756 6.80 340,309 21,942 6.45 241,599 15,545 6.43 Tax-exempt securities (3) 301,870 22,572 7.48 291,754 21,473 7.36 102,778 7,729 7.52 ----------------------------- ------------------------- ------------------------ Total securities 680,464 48,328 7.10 632,063 43,415 6.87 344,377 23,274 6.76 ----------------------------- ------------------------- ----------------------- Commercial loans (3) 381,434 33,902 8.89 311,503 26,466 8.50 254,583 22,760 8.94 Commercial construction loans 59,790 5,699 9.53 22,649 1,930 8.52 11,313 842 7.44 Mortgage loans 210,279 15,877 7.55 180,759 14,177 7.84 184,330 14,794 8.03 Installment loans 105,541 8,900 8.43 80,121 6,835 8.53 67,718 6,245 9.22 ----------------------------- ------------------------- ------------------------ Total loans (4) 757,044 64,378 8.50 595,032 49,408 8.30 517,944 44,641 8.62 ----------------------------- ------------------------- ----------------------- Total interest-earning assets 1,439,206 112,812 7.84 1,228,216 92,880 7.56 867,435 68,194 7.86 --------------- ------------- ------------ Unrealized gains (losses) on available for sale securities (22,363) (9,951) 5,312 Allowance for loan losses (7,769) (7,048) (6,344) Non-interest earning assets 112,495 96,610 53,871 --------- --------- --------- Total assets $ 1,521,569 $ 1,307,827 $920,274 ========= ========= ======== INTEREST-BEARING LIABILITIES: Demand deposits, interest- bearing $ 139,708 4,647 3.33% $ 110,771 3,340 3.02% $ 62,915 1,050 1.67% Savings deposits 377,952 14,874 3.94 328,123 11,036 3.36 278,860 10,450 3.75 Other time deposits 509,568 29,700 5.83 376,985 20,113 5.34 290,147 15,768 5.43 --------------------------- ------------------------- ---------------------- Total deposits 1,027,228 49,221 4.79 815,879 34,489 4.23 631,922 27,268 4.32 Other borrowed funds 188,141 11,575 6.15 186,821 9,899 5.30 46,855 2,490 5.31 Junior subordinated debentures 10,000 963 9.63 639 61 9.55 0 0 0.00 Long-term borrowings 77,391 3,828 4.95 102,480 5,053 4.93 64,401 3,506 5.44 --------------------------- ------------------------- ---------------------- Total interest-bearing liabilities 1,302,760 65,587 5.03 1,105,819 49,502 4.48 743,178 33,264 4.48 --------------------------- --------------------------- ---------------------- Spread 2.81% 3.08% 3.38% ------- -------- -------- Demand deposits, non-interest bearing 127,192 103,805 72,866 Other non-interest bearing liabilities 11,861 10,141 9,051 --------- --------- -------- Total liabilities 1,441,813 1,219,765 825,095 Stockholders' equity 79,756 88,062 95,179 --------- --------- -------- Total liabilities and stockholders' equity $ 1,521,569 $ 1,307,827 $ 920,274 ========= ========= ======== Net interest income $ 47,225 $ 43,378 $34,930 ========== ======== =========== Net interest margin (5) 3.28% 3.53% 4.03% ======== ======= ========
(1) Includes loan fee income. (2) Yields on investments are calculated on amortized cost. All yields are annualized. (3) Full taxable equivalent basis, using a 34% effective tax rate and adjusted for TEFRA disallowance. (4) Loans outstanding include non-accruing loans. (5) Represents the difference between interest earned and interest paid, divided by average total interest earning assets. 38 39 Net interest income of $47.2 million in 2000, on tax-equivalent basis, increased $3.8 million, or 8.8%, from $43.4 million in 1999. The increase in net interest income was primarily due to an increase in average interest-earning assets, which increased $211.0 million, or 17.2%, to $1.4 billion. The increase in average interest-earning assets occurred primarily in average outstanding loans, which increased $162.0 million to $757.0 million at December 31, 2000. The increase in loans occurred primarily in commercial, commercial construction and home-equity lines of credit. Net interest margin, which is the difference between interest earned and interest paid, divided by average total-interest earning assets, decreased 25 basis points to 3.28% for the year ended December 31, 2000, compared to 3.53% for the year ended December 31, 1999, calculated on a tax equivalent basis. Interest income earned on interest-earning assets increased $19.9 million, or 21.4%, to $112.8 million for the year ended December 31, 2000, calculated on a tax-equivalent basis due to a higher level of interest-earning assets and an increase in the yield. The yield on average interest-earning assets, calculated on a tax-equivalent basis, increased from 7.56% at December 31, 1999, to 7.84% at December 31, 2000, primarily due to the rising interest rate environment during 2000, which impacted loans tied to prime rate as well as loan origination rates. As a result of the higher level of average 39 40 interest-earning assets and higher corresponding yields, interest income from loans increased $15.0 million, or 30.4%, while interest income from securities increased $4.9 million, or 11.3%, for the year ended December 31, 2000. The Company's total interest expense increased $16.1 million, or 32.5%, to $65.6 million in 2000 from $49.5 million in 1999 due to an increased level of interest-bearing liabilities and an increase in the interest rates. The increase in total interest expense and the average rate paid on interest-bearing liabilities was primarily due to the retail branch expansion and also the deposit product promotions to attract potential customers. Average interest-bearing deposits increased $211.1 million, or 25.9%, to $1.0 billion at December 31, 2000, compared to $815.9 million at December 31, 1999. The average rate paid on interest-bearing liabilities was 5.03% for the year ended December 31, 2000, compared to 4.48% for the comparable period in 1999 while the average rate paid on interest-bearing deposits increased 56 basis points to 4.79% in 2000 from 4.23% in 1999. Net interest income, on tax-equivalent basis, increased $8.5 million, or 24.4%, 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 $1.2 billion from $867.4 million a year ago. The increase in average interest-earning assets occurred primarily in average securities, which increased $287.7 million to $632.1 million at December 31, 1999, from $344.4 million at year-end 1998 and were funded mainly with FHLB borrowings. Net interest margin 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 non interest-earning assets related to the branch openings coupled with a higher level of investment securities that provided a lower yield than the loan portfolio. Interest income earned on interest-earning assets increased $24.7 million, or 36.2%, to $92.9 million for the year ending December 31, 40 41 1999, calculated on a tax-equivalent basis. Interest income from securities, which accounted for the majority of the change, increased $20.1 million, or 86.3%, to $43.4 million for the year ending December 31, 1999. 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 48.6%, to $49.5 million in 1999. 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 an increased percent of higher-cost borrowings due to the expansion plan, resulted in no overall net change in the average rate paid. Average interest-bearing liabilities increased $362.6 million, or 48.8%, to $1.1 billion in 1999. Average interest-bearing deposits increased $184.0 million, or 29.1%, to $815.9 million at December 31, 1999, which were mainly attributable to the retail branch expansion. In December of 1999, the Company issued $10 million of junior subordinated debentures at a rate of 9.625%. While the cost of funds is higher for the junior subordinated debentures relative to retail deposits and wholesale borrowings, the Company was permitted to include 100% of these preferred securities as Tier I capital. Average other borrowed funds and average long-term borrowings increased $178.0 million, or 160.0%, to $289.3 million at December 31, 1999, as the Company used the proceeds from the borrowings to purchase investment securities to generate earnings to offset the operating expenses associated with the branch expansion initiatives. Provision for Loan Losses The Company establishes provisions for loan losses, which are charged to earnings, in order to maintain the allowance for loan and lease losses at a level which is deemed to be appropriate based upon assessment of prior loss experience, the volume and type of lending 41 42 presently being conducted by the Company, industry standards, past due loans, economic conditions in the Company's market area generally and other factors related to the collectibility of the Company's loan portfolio. The provision for loan losses was $4.6 million for 2000 compared to $1.2 million for 1999 and $2.2 million for 1998. In the fourth quarter of 2000, the Company increased its loan loss provision, above and beyond its normal provision, by $1.5 million, due to the recent growth in the loan portfolio and the recent declining economic trends. At December 31, 2000, non-performing assets were 0.61% of total assets and the allowance for loan losses to non-performing loans was 117.6%, as compared to 0.43% of total assets and 117.8%, of total loans, respectively, at December 31, 1999. During the fourth quarter, management adopted changes in the Loan Loss Reserve Policy and the methodology for calculating the reserve. These changes represent a pro-active approach to a proposed Policy Statement from the four federal banking agencies regarding the Allowance for Loan and Lease Losses. Many factors are considered regarding the maintenance of adequate Reserves. The Company provides written documentation pertaining to any and all changes in loss factors assigned to all loan types or pools, the rationale for levels of specific reserve allocations and any other pertinent information. The Company's Loan Review Department uses the following quantitative tools and ratios in order to ascertain the adequacy of the allowance for loan losses. These include the following: - - 4 quarter cumulative charge-off average for all loan pools- This exhibits the Bank's historical loss experience by loan pools over a rolling 4 quarter period. This can be compared to regional and national trends. At December 31, 2000, the charge-off averages were: Home equity lines of credit - 0.02%; Installment and Student Loans - 0.64%; Credit Cards - 2.49%; Ready Cash and Overdraft Lines - 3.14%; Residential Mortgages - 0.11%. Commercial loans are analyzed by Standard Industry Code (SIC) and historical charge-off information is unavailable by SIC code. Therefore, the Company uses other quantitative and qualitative factors for commercial loans. - - Allowance to Total Loans and Leases- This helps determine the overall composition of the Bank's portfolio. An up or down trend is explained as to why this is occurring. At December 31, 2000, the ratio was 1.15% compared to 1.05% at December 31, 1999. The increase was a result of the increased loan loss provision. - - Allowance to Non performing loans - This tool helps measure and ensure that the Bank's non performing loans are not or have not been increasing at a faster rate than the balance in the Allowance. At 42 43 December 31, 2000, the ratio of the allowance to non-performing loans was 117.6% compared to 117.8% at December 31, 1999. - - Recoveries to Total Loans, Net of the Reserve and Recoveries to Prior Period Losses- This ratio helps measure the Bank's charge-off policy. Typically banks with higher recovery rates are considered to have a more aggressive charge-off policy. At December 31, 2000, the ratio of recoveries to total loans was .05% compared to .08% at December 31, 1999. - - Percentage of Special Mention and Classified Assets to Total Bank Capital- This percentage helps ascertain the Bank's overall credit quality. At December 31, 2000, the ratio was 38.3% compared to 14.0% at December 31, 1999. This increase is attributed primarily to internal factors such as the increase in portfolio credit reviews in 2000 and the improved early identification of problem loans. A contributing external factor was the economic slowdown occurring during the year. - - Net Losses to Total Loans- This ratio states the net percentage of the loan portfolio that is being charged off. At December 31, 2000, this ratio was .24% compared to .22% at December 31, 1999. - - Provision to Gross Losses- This ratio exhibits the percentage of coverage between the provision versus gross losses. At December 31, 2000, this ratio was .55% compared to .18% at December 31, 1999. Given the change in the above ratios and the economic slowdown, management significantly increased its loan loss provision during the fourth quarter of 2000. Management also looks at loan concentrations in determining the adequacy of the allowance for loan losses. During the fourth quarter, loans to Non-Residential Building Operators grew to $91.8 million, up from $71.4 million at 09/30/00. The increase is attributed to the growth of loans in this industry, particularly in Chester, Montgomery, and Bucks County regions, as well as in South Jersey. This industry continues to represent the largest single industry concentration in the portfolio, representing 17.6 % of all commercial loans and 97.1% of capital. At December 31, 2000, Main Street's credit policy limits loans to a single industry group to no more than 100% of capital, with loans beyond this limit requiring Board approval. Residential Construction loans grew 60%, from $29.9 million at 9/30/00 to $50 million at 12/31/00. This growth can be attributed to the recent identification and correction of commercial loan SIC code assignments, as well as new loans in this area. Additionally, these loans represented 52.9% of capital at year end, up from 30% at 09/30/00. Loans to Residential Building Operators and Lessors grew from $39.3 million to $49 million through the quarter, and represent the third largest industry concentration at 51.8% of capital, compared to 39.4% of capital at 09/30/00. This is the largest industry group measured 43 44 in terms of number of loans with 422 individual loans. Also, this group had fourteen (14) non-performing loans for $944,000, and four (4) previous loans from this group are now Foreclosed Real Estate, totaling $102,000 after charge-downs. Other Income Other operating income, excluding the net loss on sale of securities and losses on mortgages held for sale, of $10.7 million in 2000 represented an increase of $3.8 million, or 55.1%, above the previous year primarily due to increased customer service fees. During 2000, the Company sold approximately $230 million of available for sale securities and incurred a loss of $7.0 million and also sold approximately $7.9 million in mortgages held for sale and incurred a loss of $487,000. These losses were attributable to the plan to restructure the balance sheet to decrease interest rate risk volatility in changing rate environments and enhance the net interest margin. During 1999, the Company realized losses on sales of securities of $96,000. Therefore, other income, as reported, decreased $3.0 million, or 44.1%, from $6.8 million in 1999 to $3.8 million in 2000. Income from customer service fees increased $4.1 million to $7.8 million in 2000. 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. The increase was a direct result of new accounts, primarily from the retail branch expansion program, new products, fee increases and higher deposit activity levels. Income from mortgage banking activities decreased $600,000 from $1.3 million in 1999 to $700,000 in 2000 and also decreased from $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 2000 to 1999 was due to the sale of mortgages held for sale as previously mentioned as well as the closing of several loan production offices in 2000 as part of the overall restructuring plan. Income from fiduciary activities of $952,000 declined by $161,000, or 14.5%, due to a loss of customer accounts and a lower value of assets under management. 44 45 Other income of $6.8 million in 1999 decreased $3.5 million, or 34.0%, from $10.3 million in 1998. The decline in other income was mostly due to realized gains and losses on sales of securities and a decline in mortgage banking income. 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 during the year. 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. Other income on an operating basis, excluding net realized gains and losses on sales of securities, was $6.9 million in 1999 versus $6.0 million in 1998. Income from customer service fees of $3.7 million in 1999 increased $1.1 million, or 42%, from $2.6 million in 1998 due primarily to the increased customer deposit base associated with the retail branch expansion. Income from mortgage banking activities of $1.3 million in 1999 declined $700,000 from $2.0 million in 1998 due to the high level of home refinancings during 1998 resulting from attractive mortgage rates. Other Expenses Other operating expenses, excluding special charges and other one-time charges, were $41.6 million and $34.6 million for the years ended 2000 and 1999, respectively. This increase of $7.0 million, or 20.2% was primarily attributable to the 21 retail branches that were added in 1999 and the 2 retail branches added in 2000. Salaries and benefits increased $3.2 million, or 19.0%, from $16.8 million in 1999 to $20.0 million in 2000. Increased occupancy expenses of $1.1 million, or 26.8%; equipment depreciation and maintenance expenses of $793,000, or 32.6%; and advertising expenses of $205,000, or 8.2%, were all mainly associated with the opening of the new retail branches. Data processing and MAC fees increased $1.2 million, or 66.6%, to $3.0 million resulting from increased volume in credit card/ATM processing due to the new ATMs located at the new retail branches and also fees linked to customer service activity. Professional fees increased $672,000, or 86.4%, to $1.5 million due to additional legal fees on 45 46 collections and loans, the outsourcing of the internal audit function and also to increased consulting fees in conjunction with the corporate restructuring. Total other expenses, as reported, increased $12.2 million, or 33.3%, to $48.8 million in 2000 as compared to $36.6 million in 1999. Total other expenses amounted to $36.6 million in 1999, which resulted in an increase of $11.5 million, or 45.8%, above the level of 1998. 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, office supplies and expense and professional fees. Excluding the special charges of $2.0 million previously noted above during 1999, other expenses totaled $34.6 million. Salaries and benefits of $16.8 million increased by $4.4 million during 1999 from $12.4 million in 1998 due to the retail branch expansion launched in March. Occupancy expenses of $4.1 million in 1999 increased $2.0 million, or 95.2%, from $2.1 million in 1998 due to the commencement of lease payments on March 1, 1999, for seventeen of the twenty-one branches opened in 1999. Equipment depreciation and maintenance increased to $2.4 million in 1999 from $1.6 million in 1998 mostly due to a full year of depreciation and maintenance on equipment and furniture for the new branches. Advertising expenses more than doubled to $2.5 million in 1999 from $1.2 million in 1998 as a result of the advertising and marketing related to the opening of the 21 new branches. Data processing and MAC fees increased $600,000, or 50.0%, to $1.8 million in 1999 from $1.2 million in 1998. The increase was the result of an increased volume in credit card processing/ATM processing due to the new ATMs located at the 23 new branches, ongoing service fees for selected deposit products related to new deposit accounts and also due to increased credit card processing. Office supplies and expense of $2.0 million increased $0.7 million, or 53.8%, from $1.3 million in 1998 in order to support the Company's growth and the new branches. Provision for Income Taxes The provision for federal income taxes was a $7.0 million benefit for the year ended December 31, 2000, compared to a $2.6 million benefit in 1999 and a $3.7 million expense in 1998. The tax benefit in 2000 46 47 resulted from the special charges and other one-time charges during the year and also from an increased level of tax-exempt interest income earned on bank-qualified municipal securities and tax free loans compared to pretax income. For federal income tax purposes, the Company is subject to the alternative minimum tax. Since this tax creates a credit that can be carried forward indefinitely to offset future federal income taxes, it is not an expense of the Company. The alternative minimum tax has, therefore, been recorded as a deferred tax asset, which will be recoverable in future years as the bank has taxable income. A reconciliation of the statutory income tax at a rate of 34% is included in footnote No. 9 to the consolidated financial statements. Asset Quality Non-performing assets, which include non-accruing loans, accruing loans that are 90 days or more past due, foreclosed real estate and restructured loans, amounted to $9.2 million at December 31, 2000. This represented an increase of $2.8 million from $6.4 million at December 31, 1999, due to increases of $2.4 million in non-accrual loans and $500,000 in foreclosed real estate. The increases in nonaccrual loans and foreclosed real estate was mostly due to commercial and commercial real estate loans, respectively. It is the Company's policy to classify a loan as non-performing within 10 days after the month end in which the loan becomes 90 days past due for either principal or interest. As a financial institution that assumes lending and credit risks as a principal element of its business, the Company anticipates that credit losses will be experienced in the normal course of business. Accordingly, management makes a monthly determination as to an appropriate provision from earnings necessary to maintain an allowance for loan losses that is adequate for potential yet undetermined losses. Management's evaluation is based upon a continuing review of the loan portfolio, which includes factors such as the risk characteristics of both individual loans and the total loan portfolio, loan charge-off experience, delinquency rates, local and general economic conditions, and regular examinations of the loan portfolio by the bank's regulators. 47 48 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, non-accrual and large delinquent loans are reviewed monthly to determine potential losses. The balance in the allowance for loan losses was $9.7 million, or 1.15% of total loans at December 31, 2000, 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 117.6% at December 31, 2000, compared to 117.8% at December 31, 1999. Management believes the allowance for loan losses was adequate to cover risks inherent in its loan portfolio at December 31, 2000. However, there can be no assurance that the Company will not have to increase its provision for loan losses in the future as a result of changes in economic conditions or for other reasons, which could adversely affect both the estimates made by management and the Company's results of operations. Asset and Liability 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. At December 31, 2000, the Company did not utilize interest rate swaps, caps or other hedging transactions. The principal objective of the Company's asset and liability management function is to maximize the Company's net interest income while maintaining a level of risk appropriate given the Company's business focus, operating environment, capital and liquidity requirements and performance objectives; establish prudent asset 48 49 concentration guidelines; and manage risk consistent with Board of Directors approved guidelines. Through such management, the Company seeks to manage the sensitivity of its operations to changes in interest rates. The Company's actions in this regard are taken under the guidance of the ALCO, which is comprised principally of members of the Company's executive management. The ALCO meets once a month to review, among other things, the sensitivity of the Company's assets and liabilities to interest rate changes, the results of net interest income simulation and market-value analysis, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activity and maturities of investments and borrowings. In connection therewith, the ALCO generally reviews the Company's liquidity, cash flow needs, maturities of investments, deposits and borrowings and current market conditions and interest rates. The ALCO also monitors the capital adequacy of the Company on a monthly basis. A pricing committee meets weekly to make pricing and funding decisions with respect to the Company's retail deposits and selected consumer loans. 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. Part of 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 re-price 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 re-pricing in the same time periods, and a negative GAP occurs when interest-sensitive liabilities exceed interest-sensitive assets re-pricing 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 following table presents a summary of the Company's interest rate sensitivity at December 31, 2000. For purposes of this table, the Company has used assumptions based on industry data and historical experience to calculate the expected cash flows of securities and loans because, statistically, 49 50 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. Although certain assets and liabilities may have similar maturities or periods to re-pricing, they may react in different degrees to changes in market interest rates. For example, GAP analysis implicitly assumes that the interest rates on all assets and liabilities that re-price within a given re-pricing period change by the same amount as the change in the market interest rate of the same duration. Prepayment and early withdrawal levels could also deviate significantly from those assumed in calculating GAP in the manner presented in the table. Accordingly, the Company measures its interest-rate risk by conducting various analyses in addition to the traditional static GAP report, including simulation modeling, duration analyses and Economic Value of Equity (EVE) analysis.
INTEREST RATE SENSITIVITY ANALYSIS AT DECEMBER 31, 2000 (1) - ------------------------------------------------------------------------------------------------------------------ 1 days 91 days 181 days 1 year through through through through Over 5 90 days 180 days 1 year 5 years Years Total ------- -------- -------- ------- ------ ----- Interest-earning assets: Loans $316,022 28,794 $51,133 $270,982 $171,416 $ 838,347 Securities (2) 180,791 8,243 17,046 126,863 200,233 533,176 Interest-bearing deposits With banks& Fed Funds sold 23,784 0 0 0 0 23,784 ------- ------ ------- ------- ------- --------- Total $520,597 $37,037 $ 68,179 $397,845 $371,649 $1,395,307 ------- ------ ------- ------- ------- --------- Interest-bearing liabilities: Interest bearing deposits(3) $361,336 91,781 $196,662 $201,955 $305,773 $1,157,507 Borrowed FundS and Debentures(4) 18,676 0 0 60,000 10,000 88,676 Non-interest-bearing deposits 7,051 0 0 93,860 51,906 152,817 ------- ------ ------- ------- ------- --------- Total $387,063 $91,781 $196,662 $355,815 $367,679 $1,399,000 ------- ------ ------- ------- ------- --------- Interest-rate sensitivity gap: Interval $133,534 $ (54,744) $(128,483) $ 42,030 $ 3,970 $ (3,693) ======= ======== ======== ======= ======= ========== Cumulative $133,534 $ 78,790 $ (49,693) $ (7,663) $ (3,693) $ (3,693) ======= ======== ======== ======== ======= ========= Ratio of cumulative gap to total rate-sensitive assets 9.56% 5.64% ( 3.56%) (0.55%) (0.26%) (0.26%) ====== ===== ======= ====== ====== ======
50 51
INTEREST RATE SENSITIVITY ANALYSIS AT DECEMBER 31, 1999 (1) - ------------------------------------------------------------------------------------------------------------------ 1 days 91 days 181 days 1 year through through through through Over 5 90 days 180 days 1 year 5 years Years Total ------- -------- -------- ------- ------ ----- Interest-earning assets: Loans $206,160 24,686 $57,356 $242,916 $134,609 $ 665,727 Securities (2) 119,078 6,808 97,753 216,160 287,153 726,952 Interest-bearing deposits With banks& Fed Funds sold 584 0 0 0 0 584 ------- ------ ------- ------- ------- --------- Total $325,822 $31,494 $155,109 $459,076 $421,762 $1,393,263 ------- ------ ------- ------- ------- --------- Interest-bearing liabilities: Interest bearing deposits(3) $275,839 58,200 $ 83,717 $221,424 $263,053 $ 902,233 Borrowed Funds and Debentures(4) 274,434 0 25,000 60,000 10,000 369,434 Non-interest-bearing deposits 0 0 0 61,142 61,141 122,283 ------- ------ ------- ------- ------- --------- Total $550,273 $58,200 $108,717 $342,566 $334,194 $1,393,950 ------- ------ ------- ------- ------- --------- Interest-rate sensitivity gap: Interval $(224,451) $ (26,706) $ 46,392 116,510 $87,568 $ (687) ======== ======= ====== ======= ====== ========== Cumulative $(224,451) $(251,157) $(204,765) $(88,255) $ (687) $ (687) ========= ========= ========= ========= ======= ========= Ratio of cumulative gap to total rate-sensitive assets (16.11%) (18.03%) (14.70%) (6.33%) (0.05%) (0.05%) ======= ======= ======= ====== ====== ======
(1) Maturity is based upon estimated repayments of principal loans and the repricing characteristics of adjustable rate loans. (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 depreciation on available for sale securities. (3) Maturity is based upon contractual date for time deposits and historical data related to the sensitivity of the pricing of all other interest-bearing deposits relative to changes in market rates. (4) Borrowings are based on maturity date if no call or put date, or by expected call or put if one applies. The Company's primary ALCO monitoring tool is asset/liability simulation models, which are prepared at a minimum on a monthly basis and are designed to capture the dynamics of balance sheet, rate and spread movements and to quantify variations in net interest income under different interest rate environments. The Company examines changes to net interest income assuming interest rate shocks, both up and down, of 100, 200 and 300 basis points in its analysis of interest rate risk. The restructuring of the balance sheet through the sale of long-term investment securities, which facilitated the pay-down of short-term and long-term debt, improved the Company's interest rate risk. As a result, the Company's simulation analysis at December 31, 2000, resulted in an increase of 3.20% in net interest income in a 200 basis point rate increase versus a 6.95% decline in net interest income for a similar interest rate shock at December 31, 1999. In a down 200 basis point rate shock, net interest income would decline 5% at December 31, 2000 versus a 6% increase in net interest income for a similar rate shock at December 31, 1999. The Company also utilizes 51 52 market-value analysis, which addresses the change in equity value arising from movements in interest rates in the same manner as simulation analysis. The estimated market value of equity is the difference in the market value of the Company's assets and liabilities. The extent to which assets have gained or lost value in relation to the gains or losses of liabilities determines the appreciation or depreciation in equity on a market-value basis. Market-value analysis is intended to evaluate the impact of immediate and sustained interest-rate shifts of the current yield curve upon the market value of the current balance sheet. The Company also reduced interest rate risk using market-value analysis by more than 50% from December 31, 1999, to December 31, 2000, assuming a 200 basis point rate increase, again due to the restructuring previously noted. Capital The Company's Tier 1 capital to risk-weighted assets ratio at December 31, 2000, was 10.15% compared to 13.38% at December 31, 1999. These ratios exceeded the regulatory Tier 1 capital requirement of 4.00%. The Company's total capital to risk-weighted assets ratio at December 31, 2000, was 11.18% compared to 14.28% at December 31, 1999. These ratios exceeded the regulatory total risk-based capital requirement of 8.00%. At December 31, 2000, the Company's leverage ratio was 6.46% versus 7.43% at December 31, 1999, exceeding the regulatory leverage ratio requirement of 4.00%. The Company is categorized as "well-capitalized" at December 31, 2000, under applicable Federal regulations in regards to all of its capital ratios. 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 achieved by either reducing assets or increasing liabilities. Sources of asset liquidity are provided by the fair market 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 not pledged as collateral. These liquid assets 52 53 totaled $534.7 million at December 31, 2000, compared to $339.5 million at December 31, 1999. Liability liquidity can be met by attracting deposits with competitive rates, buying Federal funds, or utilizing the borrowing facilities of the Federal Reserve System or the FHLB system. The Company utilizes a variety of these methods of liability liquidity. At December 31, 2000, the Company had approximately $442 million in unused lines of credit available to it under informal arrangements with correspondent banks compared to $231.8 million at December 31, 1999. These lines of credit enable the Company to purchase funds for short-term needs at current market rates. Certificates of deposit scheduled to mature within one year or less amounted to $384.6 million at December 31, 2000. Management believes that the Company has adequate resources, including principal repayments and repayments of loans, to fund all of its commitments to the extent required. In addition, although the Company has extended commitments to fund loans or lines of credit, historically, the Company has not been required to fund all of its outstanding commitments. Management believes that a significant portion of maturing customer accounts will remain with the Company. Impact of Inflation and Changing Prices The Consolidated Financial Statements of the Company and related notes presented herein have been prepared in accordance with generally accepted accounting principles ("GAAP") which require the measurement of financial position and operating results principally in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services, since such prices are affected by inflation to a larger extent than interest rates. Forward-Looking Statements 53 54 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: 1) the effect of changing regional and national economic conditions; 2) the significant changes in interest rates and prepayment speeds; 3) credit risks of commercial, real estate, consumer, and other lending activities; 4) changes in federal and state banking regulations; 5) the presence in the Company's market area of competitors with greater financial resources than the Company and; 6) other external developments which could materially impact the Company's operational and financial performance. 54 55 QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED) The following represents 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):
Three Months Ended: 2000 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 - -------------------------------------------------------------------------------------------------------------------------- Interest income $ 25,447 $ 26,379 $ 26,732 $ 26,749 Interest expense (16,024) (16,344) (16,850) (16,369) --------------------------------------------------------------------- Net interest income 9,423 10,035 9,882 10,380 Provision for loan losses (375) (1,000) (750) (2,500) Net realized losses on sale of securities (17) (43) (183) (6,787) Special charges - (4,797) (961) (1,160) Other expenses, net of other income (8,066) (8,475) (7,352) (7,137) --------------------------------------------------------------------- Income before income taxes (benefits) 965 (4,280) 636 (7,204) Income taxes (benefits) (988) (1,877) (800) (3,343) --------------------------------------------------------------------- Net income (loss) $ 1,953 $ (2,403) $ 1,436 $ (3,861) ===================================================================== Earnings (loss) per share of common stock: Basic $ 0.19 $ (0.23) $ 0.13 $ (0.37) ===================================================================== Diluted $ 0.19 $ (0.23) $ 0.13 $ (0.37) =====================================================================
Three Months Ended: 1999 March 31 June 30 Sept. 30 Dec. 31 - -------------------------------------------------------------------------------------------------------------------------- Interest income $ 19,679 $ 21,131 $ 21,795 $ 23,284 Interest expense (11,064) (11,848) (12,574) (14,016) -------------------------------------------------------------------- Net interest income 8,615 9,283 9,221 9,268 Provision for loan losses (300) (300) (200) (417) Net gains (losses) on sale of securities (2) (76) (35) 17 Special charges - (331) (1,727) 31 Other expenses, net of other income (5,559) (7,612) (7,597) (6,906) -------------------------------------------------------------------- Income before income taxes (benefits) 2,754 964 (338) 1,993 Income taxes (benefits) 23 (688) (1,108) (801) -------------------------------------------------------------------- Net income $ 2,731 $ 1,652 $ 770 $ 2,794 =================================================================== Earnings per share of common stock: Basic $ 0.26 $ 0.16 $ 0.07 $ 0.27 =================================================================== Diluted $ 0.26 $ 0.16 $ 0.07 $ 0.27 ===================================================================
55 56 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 Bank 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 - Asset and Liability Management" for discussion on interest rate sensitivity. Interest Rate Sensitivity - Cash Flow Analysis The Interest Rate Sensitivity Tables below illustrate the cash flows expected from earning assets for each of the next five years at December 31, 2000 and 1999. 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, 2000 or 1999. Cash flows from mortgage-backed securities are based on consensus prepayment speeds under an unchanged rate environment over the next 56 57 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 tables are the contractual maturities of all interest bearing liabilities. Interest bearing demand and savings deposits are included as maturing in the following year. These customers have no obligation to keep their money with the Company for any period of time. In order to determine the effect of market interest rates on these products, the Company uses a simulation model. While the entire balance of these products is affected immediately when there is an interest rate change, the interest rate change is generally not equal to the change in Fed funds or the prime rate. The Company has noted that competitive pressures drive this rate more than small changes in market rates. Time deposits are presented by contractual maturity. Short-term borrowings consist of repurchase agreements and overnight borrowings from the FHLB. Generally, the funds mature within 1 business day. Long-term borrowings are presented by contractual maturity. At December 31, 2000:
CASH FLOWS YEAR ENDED DECEMBER 31 - ----------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) 2001 2002 2003 2004 2005 THEREAFTER TOTAL FAIR VALUE ---- ---- ---- ---- ---- ---------- ----- ---------- INTEREST EARNING ASSETS: Loans: Fixed Rate $85,041 $59,832 $55,851 $43,286 $34,640 $151,269 $429,919 $413,013 Average Rate 8.38% 8.64% 8.45% 8.18% 8.37% 8.04% 8.28% Variable Rate $147,537 $34,769 $10,912 $14,176 $ 8,961 $192,073 $408,428 $407,055 Average Rate 9.18% 9.81% 8.95% 9.12% 8.89% 8.30% 8.80% Investment Securities $206,080 $10,085 $30,527 $61,792 $24,459 $200,122 $533,067 $529,012 Average Rate 6.84% 7.27% 7.03% 7.12% 7.66% 7.29% 7.10% Int Bearing Deposits 23,784 0 0 0 0 0 $23,784 $23,784 Average Rate 5.22% 5.22% INTEREST BEARING LIABILITIES: Interest Bearing Demand 158,075 $ 0 $ 0 $ 0 $ 0 $ 0 $158,075 $158,075 Average Rate 3.71% 0% 0% 0% 0% 0% 3.71% Savings Deposits $404,723 $ 0 $ 0 $ 0 $ 0 $ 0 $404,723 $404,723 Average Rate 4.11% 0% 0% 0% 0% 0% 4.11% Time Deposits: Fixed Rate $ 349,294 $154,337 $39,078 $ 4,762 $ 3,776 $ 7,759 $ 559,006 $560,916 Average Rate 5.82% 6.67% 5.97% 5.12% 5.58% 5.25% 6.05% Variable Rate $35,320 $383 $ 0 $ 0 $ 0 $ 0 $ 35,703 $ 35,703 Average Rate 5.89% 5.13% 0% 0% 0% 0% 5.89% Fixed-Rate Borrowings $ 0 $0 $0 $ 0 $0 $ 0 $ 0 $ - Average Rate 0% 0% 0% 0% 0% 0% 0% Variable Rate Borrowings $18,676 $0 $60,000 $0 $0 $0 $78,676 $74,953 Average Rate 5.61% 0% 4.85% 0% 0% 0% 5.03% Junior Subordinated $0 $0 $0 $0 $0 $10,000 $10,000 $9,880 Debentures 0% 0% 0% 0% 0% 9.62% 9.62%
57 58
At December 31, 1999: CASH FLOWS YEAR ENDED DECEMBER 31 - ----------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) 2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE ---- ---- ---- ---- ---- ---------- ----- ---------- INTEREST EARNING ASSETS: Loans Fixed Rate $72,799 $56,732 $44,355 $39,384 $29,611 $113,876 $356,757 $351,748 Average Rate 8.27% 8.31% 8.37% 8.12% 8.11% 7.81% 8.11% Variable Rate $115,287 $15,410 $ 9,977 $ 9,999 $ 9,721 $148,576 $308,970 $312,220 Average Rate 8.53% 8.04% 8.52% 8.49% 8.45% 7.92% 8.21% Investment Securities $199,211 $26,837 $28,451 $95,932 $76,903 $299,084 $726,952 $674,002 Average Rate 6.68% 7.52% 6.92% 6.62% 7.04% 7.07% 6.87% Fed Funds & Int Bearing $584 $584 $584 Average Rate 5.22% 5.22% INTEREST BEARING LIABILITIES: Interest Bearing Demand $137,352 $ 0 $ 0 $ 0 $ 0 $ 0 $137,352 $137,352 Average Rate 3.08% 0% 0% 0% 0% 0% 3.08% Savings Deposits $327,422 $ 0 $ 0 $ 0 $ 0 $ 0 $327,422 $327,422 Average Rate 3.36% 0% 0% 0% 0% 0% 3.36% Time Deposits: Fixed Rate $177,018 $157,480 $21,694 $36,467 $5,262 $8,753 $ 406,674 $404,491 Average Rate 5.27% 5.80% 5.41% 6.04% 5.09% 5.25% 5.55% Variable Rate $30,264 $468 $0 $53 $0 $0 $30,785 $30,785 Average Rate 4.93% 4.72% 0% 4.51% 0% 0% 4.93% Fixed-Rate Borrowings $236,779 $0 $0 $60,000 $0 $0 $296,772 $292,296 Average Rate 5.61% 0% 0% 4.85% 0% 0% 5.46% Variable Rate Borrowings $62,664 $0 $0 $0 $0 $0 $62,664 $62,664 Average Rate 4.18% 0% 0% 0% 0% 0% 4.18% Junior Subordinated $0 $0 $0 $0 $0 $10,000 $10,000 $9,146 Debentures 0% 0% 0% 0% 0% 9.62% 9.62%
Note: Cash flow information for loans does not include the allowance for loans losses. Cash flow information for securities is stated at amortized cost. 58 59 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA C O N T E N T S
Page INDEPENDENT AUDITOR'S REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS 60 CONSOLIDATED FINANCIAL STATEMENTS Consolidated balance sheets 61 Consolidated statements of income 62 Consolidated statements of stockholders' equity 63 Consolidated statements of cash flows 64 Notes to consolidated financial statements 65-86
59 60 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, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. /s/ Beard Miller Company LLP ---------------------------- Reading, Pennsylvania January 19, 2001 60 61 MAIN STREET BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, 2000 1999 (In Thousands, Except Share Data) --------------------------------- ASSETS Cash and due from banks $ 39,246 $ 49,904 Interest-bearing deposits with banks 23,784 114 Federal funds sold - 470 Securities available for sale 365,043 438,173 Securities held to maturity, fair value 2000 $ 163,969; 1999 $ 235,829 168,022 261,785 Loans receivable, net of allowance for loan losses 2000 $ 9,671; 1999 $ 7,002 828,676 658,725 Mortgage loans held for sale - 4,854 Due from mortgage investors 1,640 4,957 Premises and equipment, net 36,109 36,477 Accrued interest receivable and other assets 33,624 41,288 ------------------------------ Total assets $ 1,496,144 $ 1,496,747 ============================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 152,817 $ 122,283 Interest bearing 1,157,507 902,233 ------------------------------ Total deposits 1,310,324 1,024,516 Accrued interest payable and other liabilities 9,707 24,019 Other borrowed funds 18,676 274,434 Long-term debt 60,000 85,000 Guaranteed preferred beneficial interest in Company's subordinated debentures 10,000 10,000 ------------------------------ Total liabilities 1,408,707 1,417,969 ------------------------------ Stockholders' equity: Preferred stock, par value $ 10.00 per share; authorized and unissued 5,000,000 shares - - Common stock, par value $ 1.00 per share; authorized 50,000,000 shares; issued and outstanding 2000 10,470,380 shares; 1999 10,449,657 shares 10,470 10,450 Surplus 64,670 64,548 Retained earnings 13,484 21,326 Accumulated other comprehensive loss (1,187) (17,546) ------------------------------- Total stockholders' equity 87,437 78,778 ------------------------------- Total liabilities and stockholders' equity $ 1,496,144 $ 1,496,747 ===============================
See Notes to Consolidated Financial Statements. 61 62 MAIN STREET BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2000 1999 1998 (In Thousands, Except Per Share Data) ------------------------------------- Interest income: Loans receivable, including fees $ 64,291 $ 49,332 $ 44,544 Interest and dividends on securities: Taxable 25,756 21,942 15,545 Tax-exempt 15,154 14,558 5,351 Other 106 57 279 ------------------------------------- Total interest income 105,307 85,889 65,719 ------------------------------------- Interest expense: Deposits 49,221 34,489 27,268 Other borrowed funds 11,575 9,899 2,490 Long-term debt 4,791 5,114 3,506 ------------------------------------- Total interest expense 65,587 49,502 33,264 ------------------------------------- Net interest income 39,720 36,387 32,455 Provision for loan losses 4,625 1,217 2,210 ------------------------------------- Net interest income after provision for loan losses 35,095 35,170 30,245 ------------------------------------- Other income: Income from fiduciary activities 952 1,113 966 Customer service fees 7,758 3,724 2,591 Mortgage banking activities 699 1,333 2,017 Net realized gains (losses) on sales of securities (7,030) (96) 4,329 Other 1,433 746 398 ------------------------------------- Total other income 3,812 6,820 10,301 ------------------------------------- Other expenses: Salaries and employee benefits 19,956 16,803 12,353 Special charges 6,918 2,027 - Merger costs - - 1,963 Occupancy 5,157 4,084 2,081 Equipment depreciation and maintenance 3,223 2,430 1,563 Data processing and MAC fees 3,033 1,809 1,184 Advertising 2,713 2,508 1,236 Office supplies and expenses 2,190 2,035 1,281 Professional fees 1,450 778 846 Other expenses 4,150 4,143 2,585 ------------------------------------- Total other expenses 48,790 36,617 25,092 ------------------------------------- Income (loss) before income taxes (benefits) (9,883) 5,373 15,454 Federal income taxes (benefits) (7,008) (2,574) 3,711 ------------------------------------- Net income (loss) $ (2,875) $ 7,947 $ 11,743 ===================================== Basic earnings (loss) per share $ (0.27) $ 0.76 $ 1.13 ===================================== Diluted earnings (loss) per share $ (0.27) $ 0.76 $ 1.12 =====================================
See Notes to Consolidated Financial Statements. 62 63 MAIN STREET BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 2000, 1999 and 1998
Accumulated Shares Of Other Common Common Retained Comprehensive Stock Stock Surplus Earnings Income (Loss) Total ----------------------------------------------------------------------------- (In Thousands, Except Share Data) Balance, December 31, 1997 9,639,808 $ 9,640 $ 49,985 $ 26,721 $ 2,374 $ 88,720 Comprehensive income: --------- Net income - - - 11,743 - 11,743 Change in net unrealized gains (losses) on securities available for sale - - - - (1,211) (1,211) ----- Total comprehensive income 10,532 ------ Issuance of common stock upon exercise of stock options 38,520 38 304 - - 342 Issuance of common stock in connection with a 7% stock dividend 679,072 679 13,412 (14,120) - (29) Cash dividends declared, $ 0.49 per share - - - (5,117) - (5,117) Pre-merger stock transactions of pooled entities 31,043 31 433 - - 464 ----------------------------------------------------------------------------- Balance, December 31, 1998 10,388,443 10,388 64,134 19,227 1,163 94,912 Comprehensive income: ------ Net income - - - 7,947 - 7,947 Change in net unrealized gains (losses) on securities available for sale - - - - (18,709) (18,709) ------ Total comprehensive loss (10,762) ------ Issuance of common stock upon exercise of stock options 61,214 62 414 - - 476 Cash dividends declared, $ 0.56 per share - - - (5,848) - (5,848) ----------------------------------------------------------------------------- Balance, December 31, 1999 10,449,657 10,450 64,548 21,326 (17,546) 78,778 Comprehensive income: ------ Net loss - - - (2,875) - (2,875) Change in net unrealized gains (losses) on securities - - - - 16,359 16,359 ------ Total comprehensive income (loss) 13,484 ------ Issuance of common stock upon exercise of stock options 20,723 20 122 - - 142 Cash dividends declared, $ 0.47 per share - - - (4,967) - (4,967) ----------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2000 10,470,380 $ 10,470 $ 64,670 $ 13,484 $ (1,187) $87,437 ==============================================================================
See Notes to Consolidated Financial Statements. 63 64
MAIN STREET BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2000 1999 1998 ------------------------------------- (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (2,875) $ 7,947 $ 11,743 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for loan losses 4,625 1,217 2,210 Provision for depreciation and amortization 3,603 2,577 1,430 Provision for deferred income taxes (4,050) (4,477) (586) Net realized (gains) losses on sales of securities 7,030 96 (4,329) (Gain) loss on disposal of equipment and other assets (201) 49 114 Proceeds from sale of mortgage loans 63,916 86,772 113,746 Net gains on mortgage loans (304) (749) (1,536) Mortgage loans originated for sale (58,758) (85,808) (117,279) Net amortization of securities premiums and discounts (973) (326) 1,041 (Increase) decrease in: Due from mortgage investors 3,317 9,610 (9,142) Accrued interest receivable and other assets 3,323 (10,414) (2,201) Increase (decrease) in accrued interest payable and other liabilities (3,824) (1,135) 10,382 ------------------------------------- Net cash provided by operating activities 14,829 5,359 5,593 ------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales of securities available for sale 229,978 80,434 45,665 Proceeds from maturities and calls of and principal repayments on securities available for sale 12,716 30,728 84,660 Proceeds from maturities and calls of securities held to maturity 38 115 5,350 Purchases of securities available for sale (67,205) (183,596) (388,743) Purchases of securities held to maturity - (121,728) - (Increase) decrease in interest-bearing deposits with banks (23,670) 222 (136) Decrease in federal funds sold 470 - - Loans made to customers, net of principal collected (175,725) (126,547) (57,767) Cash paid for purchase of mortgage company - (695) - Proceeds from sales of equipment and other assets 786 1,191 1,047 Purchases of premises and equipment (4,099) (13,245) (15,641) ------------------------------------- Net cash used in investing activities (26,711) (333,121) (325,565) ------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in demand and savings deposits 132,305 89,760 131,734 Net increase in time deposits 161,524 116,206 60,056 Sale of deposits, net (7,022) - - Net increase (decrease) in other borrowed funds (255,758) 188,362 55,764 Proceeds from long-term debt - - 85,000 Principal payments on long-term debt (25,000) (50,000) (4,450) Issuance of subordinated debentures - 10,000 - Proceeds from exercise of stock options 142 476 342 Cash paid in lieu of fractional shares - - (29) Pre-merger stock transactions of pooled entities - - 464 Cash dividends paid (4,967) (5,848) (5,117) ------------------------------------- Net cash provided by financing activities 1,224 348,956 323,764 ------------------------------------- Increase (decrease) in cash and due from banks (10,658) 21,194 3,792 Cash and due from banks: January 1 49,904 28,710 24,918 ------------------------------------- December 31 $ 39,246 $ 49,904 $ 28,710 =====================================
See Notes to Consolidated Financial Statements. 64 65 MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation: The consolidated financial statements include the accounts of Main Street Bancorp, Inc. ("the Company") and its wholly-owned subsidiaries, Main Street Bank ("the Bank") and MBNK Investment Company. All significant intercompany accounts and transactions have been eliminated. Nature of operations: The Bank operates under a state bank charter and provides full banking services. The Company and the Bank are subject to regulation by the Pennsylvania Department of Banking and the Federal Reserve Bank. The Bank operates under the Berks County Bank, Heritage Bank and Main Street Bank divisions. The areas served by the Bank are principally eastern Pennsylvania and sections of New Jersey. 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 $ 68,021,000 in 2000, $ 45,545,000 in 1999 and $ 32,880,000 in 1998. Income taxes paid were $ 1,360,000 in 2000, $ 1,360,000 in 1999 and $ 4,680,000 in 1998. Amounts transferred to foreclosed real estate were $ 1,149,000 in 2000, $ 1,157,000 in 1999 and $ 1,086,000 in 1998. 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. 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. 65 66 MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Allowance for loan losses: The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses 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 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. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures. 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. 66 67 MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Advertising costs: The Bank follows the policy of charging the costs of advertising to expense as incurred. 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. Derivative instruments: In June 1998, the Financial Accounting Standards Board issued Statement No. 133 (as amended by Statement Nos. 137 and 138), "Accounting for Derivative Instruments and Hedging Activities." This Statement and its amendments establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other contracts, and requires that a company recognize all derivatives as assets or liabilities in the balance sheet and measure them at fair value. The Statement requires that changes in the fair value of derivative be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is the type of hedge transaction. The Company chose to adopt the Statement as of October 1, 2000 and, as permitted by the Statement, the Company transferred securities with an amortized cost of approximately $ 102,100,000 and net unrealized losses of approximately $ 4,900,000 from held to maturity to available for sale. Other than the transfer of securities, the adoption of the Statement had no material effect on the Company's financial statements. 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. 67 68 MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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: In September 2000, the Financial Accounting Standards Board issued Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Statement replaces SFAS No. 125 of the same name. It revises the standards of securitizations and other transfers of financial assets and collateral and requires certain disclosures, but carries over most of the provisions of SFAS No. 125 without reconsideration. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. This Statement is to be applied prospectively with certain exceptions. Other than these exceptions, earlier or retroactive application of its accounting provision is not permitted. The adoption of the Statement is not expected to have a significant impact on the Company. 2 MERGER The consolidated financial statements give retroactive effect to the pooling of interests merger of BCB Financial Services Corporation (BCB) and Heritage Bancorp, Inc. (Heritage) as more fully described below. As a result, the consolidated statements of income, stockholders' equity and cash flows for the year ended December 31, 1998 are presented as if the combining companies had been consolidated since January 1, 1998. 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. The results of operations of the separate entities for periods prior to the combination are as follows:
BCB Heritage Combined ---------------------------------------- (In Thousands) For the period from January 1, 1998 to May 1, 1998: Net interest income $ 4,849 $ 5,450 $ 10,299 Net income 899 1,646 2,545
68 69 MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3 SPECIAL CHARGES On November 17, 1999, the Bank purchased 100% of the stock of a mortgage company in Virginia for approximately $ 1,500,000. In April 2000, the Company announced a plan to restructure the Company, which included plans to close the mortgage company. On May 12, 2000, the Company ceased the operations of the mortgage company and recorded the related exit costs, which included the write-off of goodwill and accruals related to satisfaction of contractual obligations, severance and other employee related matters. In addition, the Company's restructuring plans included closing or selling branch locations, closing certain loan offices and the termination of employment agreements for certain executives. On December 8, 2000, the Company sold the assets and approximately $ 8,000,000 of deposits of a branch location to another financial institution. The Company recognized a gain of approximately $ 585,000 on this transaction which is included in other income. For the year ended December 31, 2000, special charges and accruals related to the Company's restructuring plans are as follows:
Remaining Special Liability As Of Charges Non-Cash Cash December 31, Incurred Writedowns Payments 2000 --------------------------------------------------------- (In Thousands) Severance and employee related obligations $ 3,711 $ - $ 774 $ 2,937 Exit costs related to mortgage company 2,027 750 263 1,014 Other 1,180 3 248 929 --------------------------------------------------------- $ 6,918 753 1,285 $ 4,880 =========================================================
Other special charges consist primarily of costs associated with the closing of certain loan offices and related professional fees. Special charges for the year ended December 31, 1999 consisted of severance obligations from change in control provisions for former Heritage officers totaling $ 2,027,000. 69 70 MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4 SECURITIES The amortized cost and approximate fair value of securities at December 31 were as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------------------------------------------------------- (In Thousands) AVAILABLE FOR SALE SECURITIES: DECEMBER 31, 2000: U.S. Government agencies and corporations $ 89,300 $ 2,413 $ (213) $ 91,500 States and political subdivisions 196,903 1,681 (4,030) 194,554 Other securities 19,077 71 (263) 18,885 Mortgage-backed and asset-backed securities 59,874 492 (262) 60,104 ---------------------------------------------------------- $ 365,154 $ 4,657 $ (4,768) $ 365,043 ========================================================== DECEMBER 31, 1999: U.S. Treasury securities $ 29,464 $ - $ (209) $ 29,255 U.S. Government agencies and corporations 130,251 - (7,870) 122,381 States and political subdivisions 190,937 611 (16,840) 174,708 Other securities 46,945 - (270) 46,675 Mortgage-backed and asset-backed securities 67,570 312 (2,728) 65,154 ---------------------------------------------------------- $ 465,167 $ 923 $ (27,917) $ 438,173 ========================================================== HELD TO MATURITY SECURITIES: DECEMBER 31, 2000: U.S. Government agencies and corporations $ 121,658 $ - $ (4,308) $ 117,350 States and political subdivisions 37,193 7 (898) 36,302 Mortgage-backed and asset-backed securities 9,171 1,146 - 10,317 ---------------------------------------------------------- $ 168,022 $ 1,153 $ (5,206) $ 163,969 ========================================================== DECEMBER 31, 1999: U.S. Government agencies and corporations $ 121,657 $ - $ (12,194) $ 109,463 States and political subdivisions 139,505 - (13,721) 125,784 Mortgage-backed and asset-backed securities 598 - (41) 557 Other 25 - - 25 ---------------------------------------------------------- $ 261,785 $ - $ (25,956) $ 235,829 ==========================================================
Other available for sale securities are principally comprised of equity securities in Pennsylvania community banks, Federal Home Loan Bank and Federal Reserve Bank stock. 70 71 MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4 SECURITIES (CONTINUED) During 2000 the Company transferred securities with an amortized cost of approximately $ 10,860,000 from available for sale to held to maturity. These securities were transferred at fair value at the date of transfer, which was $ 1,688,000 less than amortized cost. The difference of $ 1,114,000, net of taxes of $ 574,000, was reflected in accumulated other comprehensive income and is being amortized over the remaining contractual life of the respective securities. The Company also transferred securities with an amortized cost of approximately $ 97,824,000 from available for sale to held to maturity in 1999. The amortized cost approximated the fair market value, therefore, there was no adjustment to other comprehensive income for the 1999 transfer. The amortized cost and fair value of securities as of December 31, 2000, 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.
AVAILABLE FOR SALE HELD TO MATURITY ---------------------------------------------------------- AMORTIZED COST FAIR AMORTIZED COST FAIR VALUE VALUE ---------------------------------------------------------- (IN THOUSANDS) Due in one year or less $ - $ - $ - $ - Due after one year through five years 15,000 15,360 - - Due after five years through ten years 60,700 62,730 - - Due after ten years 210,503 207,964 158,851 153,652 Mortgage-backed and asset-backed securities 59,874 60,104 9,171 10,317 Other securities 19,077 18,885 - - ---------------------------------------------------------- $ 365,154 $ 365,043 $ 168,022 $ 163,969 ==========================================================
Gross gains of $ 964,000 and gross losses of $ 7,994,000 were realized on the sales of available for sale securities in 2000. 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. Securities with an amortized cost of $ 193,816,000 and $ 432,515,000 at December 31, 2000 and 1999, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law. 71 72 MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES The components of loans receivable at December 31, 2000 and 1999 were as follows:
2000 1999 ----------------------------- (In Thousands) Commercial $ 433,365 $ 337,751 Mortgage 196,313 182,137 Consumer 120,651 92,764 Construction 87,576 52,251 ----------------------------- 837,905 664,903 Less: Allowance for loan losses 9,671 7,002 Net deferred loan fees and (costs) (442) (824) ----------------------------- $ 828,676 $ 658,725 =============================
Changes in the allowance for loan losses for the years ended December 31, 2000, 1999 and 1998 were as follows:
2000 1999 1998 ------------------------------------- (In Thousands) Balance, beginning $ 7,002 $ 7,222 $ 5,738 Provision for loan losses 4,625 1,217 2,210 Loans charged off (2,355) (1,962) (949) Recoveries 399 525 223 ------------------------------------- Balance, ending $ 9,671 $ 7,002 $ 7,222 =====================================
Total impaired loans at December 31, 2000 and 1999 were $4,288,000 and $2,857,000, respectively. Impaired loans not requiring an allowance for loan losses were $2,001,000 and $1,500,000 at December 31, 2000 and 1999, respectively. Impaired loans requiring an allowance for loan losses were $2,287,000 and $1,357,000 at December 31, 2000 and 1999, respectively. At December 31, 2000 and 1999, the related allowance for loan losses associated with those loans was $832,000 and $900,000, respectively. For the years ended December 31, 2000, 1999 and 1998, average impaired loans were $4,233,000, $4,100,000 and $5,387,000, respectively. Interest income on impaired loans of $120,000, $83,000 and $86,000 was recognized for cash payments received in 2000, 1999 and 1998, respectively. 72 73 MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 PREMISES AND EQUIPMENT Components of premises and equipment at December 31, 2000 and 1999 were as follows:
2000 1999 --------------------------- (In Thousands) Land $ 3,713 $ 3,783 Building and improvements 27,793 26,024 Furniture, fixtures and equipment 16,309 14,304 Leasehold improvements 2,508 2,599 Construction in progress 259 1,442 --------------------------- 50,582 48,152 Less accumulated depreciation 14,473 11,675 --------------------------- $ 36,109 $ 36,477 ===========================
Included in buildings and improvements above are approximately $9,000,000 and $9,400,000 of leased property under capital leases as of December 31, 2000 and 1999, respectively. 7 DEPOSITS The components of deposits at December 31, 2000 and 1999 were as follows:
2000 1999 --------------------------- (In Thousands) Demand, non-interest bearing $ 152,817 $ 122,283 Demand, interest bearing 158,075 137,352 Savings 404,723 327,422 Time, $ 100,000 and over 99,974 61,740 Time, other 494,735 375,719 --------------------------- $ 1,310,324 $ 1,024,516 ===========================
At December 31, 2000, the scheduled maturities of time deposits are as follows (in thousands):
2001 $ 384,615 2002 154,720 2003 39,078 2004 4,762 2005 3,776 Thereafter 7,758 ------------ $ 594,709 ============
73 74 MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8 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 $ 3,478,000 and $ 4,854,000 at December 31, 2000 and 1999, respectively. 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. In addition, at December 31, 1999, the Bank had repurchase agreements with other institutions in the amount of $ 56,771,000. Securities sold under agreements to repurchase are summarized as follows (in thousands):
2000 1999 ------------------------- Outstanding balance at December 31 $ 15,198 $ 66,905 Average balance during the year 40,154 24,243 Average interest rate during the year 5.90% 4.99% Maximum month-end balance during the year 111,525 66,905
The Bank had other short-term borrowings from the Federal Home Loan Bank at December 31, 1999 in the amount of $ 202,675,000, which were due in 2000, at an average interest rate of 5.30%. There were no other short-term borrowings from the Federal Home Loan Bank at December 31, 2000. Long-term debt: Long-term debt consisted of the following at December 31, 2000 and 1999 (in thousands):
2000 1999 ------------------------- Notes with the Federal Home Loan Bank (FHLB): 10 year/2 year term note due September 2008 at 4.62% fixed rate $ - $ 25,000 10 year/5 year term note due November 2008 at 4.75% fixed rate 10,000 10,000 10 year/5 year term note due December 2008 at 4.92% fixed rate 25,000 25,000 10 year/5 year term note due December 2008 at 4.815% fixed rate 25,000 25,000 ------------------------- $ 60,000 $ 85,000 =========================
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 (6.40% at December 31, 2000) plus 10 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 refer to the maturity of the note and the term until the first convertible date. 74 75 MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8 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 approximately $ 402,000,000 at December 31, 2000 of which $ 60,000,000 was outstanding. 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 full 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. 9 INCOME TAXES The provision for federal income taxes (benefits) for the years ended December 31, 2000, 1999 and 1998 consisted of the following (in thousands):
2000 1999 1998 -------------------------------------- Current $ (2,958) $ 1,903 $ 4,297 Deferred (4,050) (4,477) (586) -------------------------------------- Provision for income taxes (benefits) $ (7,008) $ (2,574) $ 3,711 ======================================
A reconciliation of the statutory income tax to the income taxes (benefits) in the consolidated statements of income for the years ended December 31, 2000, 1999 and 1998 is as follows (in thousands):
2000 1999 1998 -------------------------------------- Federal income tax at statutory rate $ (3,360) $ 1,827 $ 5,254 Tax-exempt interest (4,304) (5,026) (1,891) Disallowance of interest expense 559 596 270 Other 97 29 78 -------------------------------------- $ (7,008) $ (2,574) $ 3,711 ======================================
The income tax provision includes $ (2,390,000) in 2000, $ (33,000) in 1999 and $ 1,472,000 in 1998 of income taxes (benefits) related to net realized securities gains (losses). 75 76 MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9 INCOME TAXES (CONTINUED) The net deferred tax asset consisted of the following components as of December 31, 2000 and 1999:
2000 1999 ---------------------- (In Thousands) Deferred tax assets: Allowance for loan losses $ 3,288 $ 2,022 Unrealized losses on securities 612 9,448 Tax credit carryforwards 5,364 4,792 Special charges 1,724 - Interest on non-accrual loans 210 176 Deferred compensation 185 45 Other 142 37 ---------------------- Total deferred tax assets 11,525 16,520 ---------------------- Deferred tax liabilities: Premises and equipment 526 662 Prepaid expenses - 37 Loan origination fees and costs 146 182 ---------------------- Total deferred tax liabilities 672 881 ---------------------- Net deferred tax asset $ 10,853 $ 15,639 ======================
10 EMPLOYEE BENEFIT PLANS The Company has a 401(k) plan with profit sharing provisions which covers employees who meet the eligibility requirements of having worked 1,000 hours in a plan year and have attained the age of 21. Participants are permitted to contribute from 1% to 15% of compensation. The Company will match the participant's contributions up to a maximum percentage. The expense related to this plan was $ 842,000, $ 749,000 and $ 503,000 for the years ended December 31, 2000, 1999 and 1998, 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. 76 77 MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11 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:
Years Ended December 31, 2000 1999 1998 -------------------------------------- (In Thousands) Unrealized holding gains (losses) on available for sale securities $ 19,853 $ (28,966) $ (589) Unrealized holding losses on securities transferred to held to maturity (1,688) - - Reclassification adjustment for (gains) losses realized in income 7,030 96 (1,236) -------------------------------------- Net unrealized gains (losses) 25,195 (28,870) (1,825) Tax effect 8,836 (10,161) (614) -------------------------------------- Net of tax amount $ 16,359 $ (18,709) $ (1,211) ======================================
12 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 ten years. Options are generally exercisable at the time they are granted up to two years after the date of grant. A summary of the Company's stock option activity and related information for the years ended December 31 follows:
2000 1999 1998 ------------------------------------------------------------------------ WEIGHTED Weighted Weighted AVERAGE Average Average EXERCISE Exercise Exercise OPTIONS PRICE Options Price Options Price ------------------------------------------------------------------------ Outstanding, beginning of year 541,548 $ 14.24 326,020 $ 12.27 301,178 $ 8.33 Granted 263,769 8.11 330,000 15.35 106,268 19.43 Exercised (20,723) 6.86 (61,214) 7.67 (62,144) 7.26 Forfeited (185,909) 13.97 (53,258) 16.84 (19,282) 9.05 ------------------------------------------------------------------------ Outstanding, end of year 598,685 $ 11.85 541,548 $ 14.24 326,020 $ 12.27 ======================================================================== Exercisable at December 31, 2000 506,457 $ 12.30 =====================
Stock options outstanding at December 31, 2000 are exercisable at prices ranging from $ 5.81 to $ 19.92 a share. The weighted-average remaining contractual life of those options is approximately 8 years. 77 78 MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12 STOCK OPTIONS AND GRANTS (CONTINUED) Had compensation cost for stock options granted in 2000, 1999 and 1998 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, 2000, 1999 and 1998 would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts):
2000 1999 1998 ---------------------------------------- Net income: As reported $ (2,875) $ 7,947 $ 11,743 ======================================== Pro forma $ (3,278) $ 6,993 $ 11,475 ======================================== Basic earnings per share: As reported $ (0.27) $ 0.76 $ 1.13 ======================================== Pro forma $ (0.31) $ 0.67 $ 1.11 ======================================== Diluted earnings per share: As reported $ (0.27) $ 0.76 $ 1.12 ======================================== Pro forma $ (0.31) $ 0.67 $ 1.09 ========================================
The fair value of each option grant is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for 2000, 1999 and 1998, respectively: risk-free interest rate of 6.1%, 5.6% and 4.6%, volatility .34, .23 and .26, dividend yield of 5.4%, 4.0% and 3.0%, and an expected life of 7.0, 7.8 and 7.8 years. The weighted-average fair value of options granted was $1.47 per share in 2000, $4.36 per share in 1999 and $5.07 per share in 1998. 13 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, 2000 are as follows: During the year ending December 31 (in thousands):
2001 $ 1,385 2002 1,418 2003 1,419 2004 1,324 2005 1,007 Later years 20,247 ----------- $ 26,800 ===========
The total rental expense included in the income statements for the years ended December 31, 2000, 1999 and 1998 is $1,476,000, $1,254,000 and $388,000, respectively. 78 79 MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13 COMMITMENTS AND CONTINGENCIES (CONTINUED) Contingencies: The Company is a defendant in various lawsuits wherein various amounts are claimed. In the opinion of the Company's management, these suits should not result in judgments which, in the aggregate, would have a material adverse effect on the Company's consolidated financial statements. 14 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, 2000 and 1999 is as follows (in thousands):
2000 1999 -------------------------- Commitments to grant loans $ 90,000 $ 56,000 Unfunded commitments under lines of credit 169,000 113,000 Outstanding letters of credit 5,000 9,000
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The 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. 15 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 5. Although the Bank has a diversified loan portfolio, its debtors' ability to honor their contracts is influenced by the region's economy. 79 80 MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16 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, 2000 and 1999, these persons were indebted to the Bank for loans totaling $ 8,797,000 and $ 9,581,000, respectively. During 2000, $ 3,184,000 of new loans were made, repayments totaled $ 2,315,000 and other changes were $ 1,653,000. Other changes consisted of loans to persons no longer affiliated with the Company as an executive officer or director. 17 REGULATORY MATTERS AND STOCKHOLDERS' EQUITY The Bank is required to maintain average reserve balances with the Federal Reserve Bank or in vault cash. At December 31, 2000 and 1999, required reserves were approximately $ 5,445,000 and $ 2,512,000, respectively. 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, 2000, that the Company and its bank subsidiary meet all capital adequacy requirements to which they are subject. As of December 31, 2000, 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. 80 81 MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17 REGULATORY MATTERS AND STOCKHOLDERS' EQUITY (CONTINUED) The actual capital amounts and ratios are also presented in the table below:
To Be Well For Capital Capitalized Under Adequacy Prompt Corrective Actual Purposes Action Provisions ------------------------------------------------------------------ Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------------------------ (Dollars In Thousands) AS OF DECEMBER 31, 2000: Total capital (to risk weighted assets): Company $ 105,334 11.18 % $ 75,374 8.00 % N/A Bank 101,366 10.76 75,358 8.00 $ 94,198 10.00 % Tier I capital (to risk weighted assets): Company 95,663 10.15 37,687 4.00 N/A Bank 91,695 9.73 37,679 4.00 56,519 6.00 Tier I capital (to average assets): Company 95,633 6.46 59,249 4.00 N/A Bank 91,695 6.21 59,067 4.00 73,833 5.00 AS OF DECEMBER 31, 1999: Total capital (to risk weighted assets): Company $ 111,747 14.28 % $ 62,172 8.00 % N/A Bank 104,435 13.41 62,320 8.00 $ 77,899 10.00 % Tier I capital (to risk weighted assets): Company 104,746 13.38 31,086 4.00 N/A Bank 97,434 12.51 31,160 4.00 46,740 6.00 Tier I capital (to average assets): Company 104,746 7.43 56,363 4.00 N/A Bank 97,434 6.94 56,142 4.00 70,178 5.00
State and federal banking laws and regulations limit the amount of dividends that may be paid by the Bank and the Company. Under an agreement with the Company's regulatory agencies, the regulatory agencies must be notified of all Company and Bank dividends and the dividends must be in compliance with applicable laws and regulations or be approved by the regulatory agencies. Additionally, any new indebtedness of the Company, or the purchase of treasury stock by the Company, requires approval by the regulatory agencies. 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. 81 82 MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18 - -------------------------------------------------------------------------------- EARNINGS PER SHARE The following table sets forth the computations of basic and diluted earnings per share:
Years Ended December 31, 2000 1999 1998 --------------------------------------- (In Thousands, Except Per Share Data) Net income (loss) applicable to common stock $ (2,875) $ 7,947 $ 11,743 ======================================= Weighted average common shares outstanding 10,462 10,414 10,358 Effect of dilutive securities, stock options -- 77 142 --------------------------------------- Weighted average common shares outstanding used to calculate diluted earnings per share 10,462 10,491 10,500 ======================================= Basic earnings (loss) per share $ (0.27) $ 0.76 $ 1.13 ======================================= Diluted earnings (loss) per share $ (0.27) $ 0.76 $ 1.12 =======================================
19 - -------------------------------------------------------------------------------- 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. 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, 2000 and 1999: 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. 82 83 MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19 - -------------------------------------------------------------------------------- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) 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. 83 84 MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19 - -------------------------------------------------------------------------------- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The estimated fair value of the Company's financial instruments at December 31, 2000 and 1999 were as follows:
2000 1999 -------------------------------------------------------------- CARRYING ESTIMATED Carrying Estimated AMOUNT FAIR VALUE Amount Fair Value -------------------------------------------------------------- (In Thousands) Financial Assets: Cash and due from banks $ 39,246 $ 39,246 $ 49,904 $ 49,904 Interest-bearing deposits with banks 23,784 23,784 114 114 Federal funds sold -- -- 470 470 Securities available for sale 365,043 365,043 438,173 438,173 Securities held to maturity 168,022 163,969 261,785 235,829 Loans receivable, net 828,676 820,068 658,725 656,966 Mortgage loans held for sale -- -- 4,854 4,854 Due from mortgage investors 1,640 1,640 4,957 4,957 Accrued interest receivable 13,381 13,381 13,970 13,970 Financial Liabilities: Deposits 1,310,324 1,312,234 1,024,516 1,022,333 Accrued interest payable 4,254 4,254 6,688 6,688 Other borrowed funds 18,676 18,676 274,434 274,434 Long-term debt 60,000 56,277 85,000 80,526 Guaranteed preferred beneficial interest in Company's subordinated debentures 10,000 9,880 10,000 9,146 Off-Balance Sheet Financial Instruments: Commitments to extend credit -- -- -- -- Outstanding letters of credit -- -- -- --
84 85 MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 20 - -------------------------------------------------------------------------------- PARENT COMPANY ONLY FINANCIAL INFORMATION BALANCE SHEETS - --------------------------------------------------------------------------------
December 31, 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------- (In Thousands) ASSETS Cash $ 249 $ 1,875 Investment in subsidiaries: Banking subsidiary 93,468 83,702 Non-banking subsidiary 1,744 1,629 Other assets 2,701 2,517 ------------------------------- $ 98,162 $ 89,723 =============================== LIABILITIES AND STOCKHOLDERS' EQUITY Guaranteed preferred beneficial interest in Company's subordinated debentures $ 10,000 $ 10,000 Other liabilities 725 945 ------------------------------- 10,725 10,945 Stockholders' equity 87,437 78,778 ------------------------------- $ 98,162 $ 89,723 ===============================
STATEMENTS OF INCOME - --------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- (In Thousands) Dividend income: Banking subsidiary $ 4,327 $ 7,500 $ 3,550 Non-banking subsidiary 50 -- 4,900 Interest and dividend income 60 181 474 Interest expense (962) (61) -- Other income 195 127 870 Other expenses (398) (385) (3,247) ------------------------------------------------- Income before income tax benefits and equity in undistributed net income (loss) of subsidiaries 3,272 7,362 6,547 Income tax benefits (379) (4) (532) ------------------------------------------------- Income before equity in undistributed net income (loss) of subsidiaries 3,651 7,366 7,079 ------------------------------------------------- Equity in undistributed net income (loss): Banking subsidiary (6,542) 537 6,464 Non-banking subsidiary 16 44 (1,800) ------------------------------------------------- (6,526) 581 4,664 ------------------------------------------------- Net income (loss) $ (2,875) $ 7,947 $ 11,743 =================================================
85 86 MAIN STREET BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 20 - -------------------------------------------------------------------------------- PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED) STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (2,875) $ 7,947 $ 11,743 Undistributed net income (loss) of subsidiaries 6,526 (581) (4,664) Other (402) (611) (1,831) ----------------------------------------------- Net cash provided by operating activities 3,249 6,755 5,248 ----------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Sales of securities available for sale -- -- 100 Additional investments in subsidiaries (50) (13,000) (5,000) ----------------------------------------------- Net cash used in investing activities (50) (13,000) (4,900) ----------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Pre-merger stock transactions of pooled entities -- -- 464 Guaranteed preferred beneficial interest in Company's subordinated debentures -- 10,000 -- Proceeds from exercise of stock options 142 476 342 Cash payment for fractional shares in connection with dividend -- -- (29) Cash dividends (4,967) (5,848) (5,117) ----------------------------------------------- Net cash provided by (used in) financing activities (4,825) 4,628 (4,340) ----------------------------------------------- Net decrease in cash (1,626) (1,617) (3,992) Cash: Beginning 1,875 3,492 7,484 ----------------------------------------------- Ending $ 249 $ 1,875 $ 3,492 ===============================================
86 87 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information relating to the directors and executive officers is incorporated herein by reference to the Company's definitive Proxy Statement to be used in connection with the Company's 2001 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, 2000, all Section 16(a) filing requirements applicable to its executive officers, directors and control persons were complied with, with the exception of a Form 4 required to be filed by Mr. Ehrlich in connection with the purchase of common stock acquired through the exercise of stock options, which was filed late. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to the Proxy Statement. 87 88 PART IV ITEM 14. EXHIBITS a.(1) Exhibits The following exhibits are filed herewith or incorporated by reference herein as part of this Annual Report: 3.1 Articles of Incorporation of Main Street Bancorp, Inc., incorporated herein by reference to Exhibit 3.1 of the Registration Statement No. 333-44697 on Form S-4 of the registrant. 3.2 Bylaws of Main Street Bancorp, Inc., as amended. 10.1 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. 10.2 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. 10.3 Executive Employment Agreement, dated November 1, 2000, by and among Main Street Bancorp, Inc., Main Street Bank and Brian M. Hartline, President and Chief Executive Officer, incorporated herein by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. 10.4 Executive Employment Agreement, dated November 1, 2000 by and among Main Street Bancorp, Inc., Main Street Bank and Andrew J. Rothermel, Executive Vice President and General Counsel. 88 89 10.5 Executive Employment Agreement, dated November 1, 2000 by and among Main Street Bancorp, Inc., Main Street Bank and Robert J. Smik, Executive Vice President and Chief of Operations. 10.6 Executive Employment Agreement, dated November 1, 2000 by and among Main Street Bancorp, Inc., Main Street Bank and Robert A. Kuehl, Executive Vice President and Chief Financial Officer. 21.1 List of Subsidiaries of the Company, included herein. 23.1 Consent of Beard Miller Company LLP, independent auditors. a.(2) Financial Statement Schedules None. a.(3) Reports on Form 8-K (1) On October 30, 2000, the Company filed a Current Report on Form 8-K, dated October 24, 2000, to report information under item 5. No financial statements were filed with the Current Report. (2) On November 17, 2000, the Company filed a Current Report on Form 8-K, dated November 14, 2000, to report information under item 5. The Company's third quarter financial statements were filed as part of the Current Report. 89 90 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/Brian M. Hartline ------------------------ Brian M. Hartline President and CEO March 27, 2001 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/Brian M. Hartline Director, President March 27, 2001 - ----------------------------- and CEO (Principal Brian M. Hartline Executive Officer) /s/Robert A. Kuehl Executive V.P./ March 27, 2001 - ----------------------------- CFO (Principal Robert A. Kuehl Financial Officer) /s/Donna L. Rickert Sr. V.P./Controller March 27, 2001 - ----------------------------- (Principal Accounting Donna L. Rickert, C.P.A. Officer) /s/ Chairman of the Board March 27, 2001 - ----------------------------- and Director Ezekial S. Ketchum /s/Albert L. Evans, Jr. Vice Chairman and March 27, 2001 - ----------------------------- Director Albert L. Evans, Jr. /s/Richard D. Biever Director March 27, 2001 - ----------------------------- Biever, Richard D. /s/Richard T. Fenstermacher Director March 27, 2001 - ----------------------------- Richard T. Fenstermacher /s/Ivan H. Gordon Director March 27, 2001 - ----------------------------- Ivan H. Gordon
90 91 /s/Frederick A. Gosch Director March 27, 2001 - ----------------------------- Frederick A. Gosch /s/Jeffrey W. Hayes Director March 27, 2001 - ----------------------------- Jeffrey W. Hayes /s/Alfred B. Mast Director March 27, 2001 - ----------------------------- Alfred B. Mast /s/Wesley R. Pace Director March 27, 2001 - ----------------------------- Wesley R. Pace /s/Raman V. Patel Director March 27, 2001 - ----------------------------- Raman V. Patel /s/Floyd S. Weber Director March 27, 2001 - ----------------------------- Floyd S. Weber
91 92 INDEX TO EXHIBITS
Exhibit Number ------- 3.1 Articles of Incorporation of Main Street Bancorp, Inc., incorporated herein by reference to Exhibit 3.1 of the Registration Statement No. 333-44697 on Form S-4 of the registrant. 3.2 Bylaws of Main Street Bancorp, Inc., as amended. 10.1 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. 10.2 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. 10.3 Executive Employment Agreement, dated November 1, 2000, by and among Main Street Bancorp, Inc., Main Street Bank and Brian M. Hartline, President and Chief Executive Officer, incorporated herein by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. 10.4 Executive Employment Agreement, dated November 1, 2000 by and among Main Street Bancorp, Inc., Main Street Bank and Andrew J. Rothermel, Executive Vice President and General Counsel. 10.5 Executive Employment Agreement, dated November 1, 2000 by and among Main Street Bancorp, Inc., Main Street Bank and Robert J. Smik, Executive Vice President and Chief of Operations. 10.6 Executive Employment Agreement, dated November 1, 2000 by and among Main Street Bancorp, Inc., Main Street Bank and Robert A. Kuehl, Executive Vice President and Chief Financial Officer. 21.1 List of Subsidiaries of the Company, included herein. 23.1 Consent of Beard Miller Company LLP, independent auditors, included herein.
92 EX-3.2 2 w46444ex3-2.txt BYLAWS OF MAIN STREET BANCORP, INC., AS AMENDED 1 Exhibit 3.2 BYLAWS OF MAIN STREET BANCORP, INC. (As Amended, February 27, 2001) ARTICLE I. MEETINGS OF SHAREHOLDERS. Section 101. Place of Meetings. All meetings of the shareholders shall be held at such place or places, within or without the Commonwealth of Pennsylvania, as shall be determined by the Board of Directors from time to time. Section 102. Annual Meetings. (a) Time and Date. The annual meeting of the shareholders for the election of Directors and the transaction of such other business as may properly come before the meeting shall be held at such date or hour as may be fixed by the Board of Directors. At each annual meeting of shareholders, directors shall be elected, reports of the affairs of the Corporation shall be considered, and any other business may be transacted which is within the power of the shareholders. (b) Agenda for Annual Meeting. Matters to be placed on the agenda for consideration at annual meetings of shareholders may be determined by the Board of Directors or by any shareholder entitled to vote for the election of directors. Matters proposed for the agenda by shareholders entitled to vote for the election of directors shall be made by notice in writing, delivered or mailed by first-class United States mail, postage prepaid, to the Secretary of the Corporation not less than sixty (60) days prior to any annual meeting of shareholders; provided, however, that if less than twenty-one (21) days' notice of the meeting is given to shareholders, such written notice shall be delivered or mailed, as prescribed, to the Secretary of the Corporation not later than the close of the seventh day following the day on which notice of the meeting was mailed to shareholders. Notice of matters which are proposed by the Board of Directors shall be given at any time by the Chairman of the Board or any other appropriate officer. Each notice made by shareholders shall set forth a brief description of the business desired to be brought before the annual meeting. The chairman of the meeting may determine and declare to the meeting that a matter proposed for the agenda was not made in accordance with the foregoing procedure, and if the chairman should so determine, the chairman shall so declare to the meeting and the matter shall be disregarded. Section 103. Special Meetings. Special meetings of the shareholders may be called at any time by the Board of Directors in the manner provided herein. Shareholders shall not have the right to call special meetings of shareholders, except as specifically provided by law. Section 104. Conduct of Shareholders' Meetings. At every meeting of the shareholders, the Chairman of the Board or, in the Chairman's absence, the President or, in the President's absence, a chairman (who shall be one of the officers, if any is present) chosen by a majority of the members of the Board of Directors shall act as chairman of the meeting. The chairman of the meeting shall have any and all powers and authority necessary in the chairman's sole discretion to conduct an orderly meeting and preserve order and to determine any and all procedural matters, including imposing reasonable limits on the amount of time at the meeting taken up in remarks by any one shareholder or group of shareholders. In addition, until the business to be completed at a meeting of the shareholders is completed, the chairman of a meeting of the shareholders is 93 2 expressly authorized to temporarily adjourn and postpone the meeting from time to time. The Secretary of the Corporation or in the Secretary's absence, an assistant secretary, shall act as secretary of all meetings of the shareholders. In the absence at such meeting of the Secretary or assistant secretary, the chairman of the meeting may appoint another person to act as secretary of the meeting. Section 105. Determination of Record Date. The Board of Directors may fix a time prior to the date of any meeting of shareholders as a record date for the determination of the shareholders entitled to notice of, or to vote at, the meeting, which time, except in the case of an adjourned meeting, shall be not more than 90 days prior to the date of the meeting of shareholders. Only shareholders of record on the date fixed shall be so entitled notwithstanding any transfer of shares on the books of the Corporation after any record date fixed as provided in this section. The Board of Directors may similarly fix a record date for the determination of shareholders of record for any other purpose. When a determination of shareholders of record has been made as provided in this section for purposes of a meeting, the determination shall apply to any adjournment thereof unless the Board of Directors fixes a new record date for the adjourned meeting. Section 106. Voting List. The officer or agent having charge of the transfer books for shares of the Corporation shall make a complete list of the shareholders entitled to vote at any meeting of shareholders, arranged in alphabetical order, with the address of and the number of shares held by each. The list shall be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting for the purposes thereof. Failure to comply with the requirements of this section shall not affect the validity of any action taken at a meeting prior to a demand at the meeting by any shareholder entitled to vote thereat to examine the list. The original share register or transfer book, or a duplicate thereof kept in Pennsylvania, shall be prima facie evidence as to who are the shareholders entitled to examine the list or share register or transfer book or to vote at any meeting of shareholders. Section 107. Judges of Election. In advance of any meeting of shareholders of the Corporation, the Board of Directors may appoint judges of election, who need not be shareholders, to act at the meeting or any adjournment thereof. If judges of election are not so appointed, the presiding officer of the meeting may, and on the request of any shareholder shall, appoint judges of election at the meeting. The number of judges shall be one (1) or three (3). No person who is a candidate for office to be filled at the meeting shall act as a judge of election. In the event any person appointed as a judge fails to appear or fails or refuses to act, the vacancy may be filled by appointment made by the Board of Directors in advance of convening the meeting or at the meeting by the presiding officer thereof. The judges of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies, receive votes or ballots, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes, determine the result and do such acts as may be proper to conduct the election or vote with fairness to all shareholders. The judge or judges of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three judges of election, the decision, act or certificate of a majority shall be effective in all respects as the decision, act or certificate of all. 94 3 On request of the presiding officer of the meeting, or of any shareholder, the judge or judges shall make a report in writing of any challenge or question or matter determined by them, and execute a certificate of any fact found by them. Any report or certificate made by them shall be prima facie evidence of the facts stated therein. Section 108. No Consent of Shareholders in Lieu of Meeting. No action required to be taken or which may be taken at any annual or special meeting of shareholders of the Corporation may be taken without a meeting, and the power of the shareholders to consent in writing to action without a meeting is specifically denied. ARTICLE II. DIRECTORS AND BOARD MEETINGS. Section 201. Management by Board of Directors. The business and affairs of the Corporation shall be managed by a Board of Directors consisting of not less than five (5) nor more than twenty-five (25) members, as fixed by the Board of Directors from time to time. The Board of Directors may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute, regulation, the Articles of Incorporation or these Bylaws directed or required to be exercised or done by the shareholders. The Board of Directors shall appoint one of its members to be the Chairman to serve at the pleasure of the Board. He shall be a voting member of the Board of Directors and shall preside at all meetings of the Board of Directors and Shareholders. The Board of Directors shall also appoint a Vice Chairman. The Vice Chairman shall preside at any meeting of the Board in the absence of the Chairman. Section 202. Nominations for Directors. Nominations by shareholders for directors to be elected at an annual meeting of shareholders must be submitted to the Secretary of the Corporation in writing not later than the close of business on the ninetieth (90th) day immediately preceding the date of the meeting. Such notification shall contain the following information: (a) name and address of each proposed nominee; (b) the principal occupation of each proposed nominee; (c) the total number of shares of capital stock of the Corporation that will be voted for each proposed nominee; (d) the name and residence address of the notifying shareholder; and (e) the number of shares of capital stock of the Corporation owned by the notifying shareholder. Nominations not made in accordance herewith may, in the discretion of the chairman of the meeting, be disregarded and, upon instruction, the judges of election may disregard all votes cast for any such proposed nominee. Section 203. Qualifications of Directors; Share Ownership. Every Director must be a shareholder of the Corporation and shall own in his/her own right the number of shares (if any) required by law in order to qualify as such Director. Any Director shall forthwith cease to be a Director when he/she no longer holds such shares, which fact shall be reported to the Board of Directors by the Secretary, whereupon the Board of Directors shall declare the seat of such Director vacated. Section 203.1. Qualifications of Directors; Mandatory Retirement Age. The mandatory retirement age for Directors shall be seventy (70) years. Any Director shall forthwith cease to be a Director upon reaching the mandatory retirement age, which fact shall be reported to the Board of Directors by the Secretary, whereupon the Board of Directors shall declare the seat of such Director vacated. Section 204. Classification of Directors. The Board of Directors of the Corporation shall be divided into three (3) classes, as nearly equal in number as possible, as provided in the Corporation's Articles of Incorporation. 95 4 Section 205. Compensation of Directors. No Director shall be entitled to any salary as such; but the Board of Directors may fix, from time to time, reasonable fees or other compensation, payable in cash, stock or other property, for acting as a Director and reasonable fees to be paid each Director for his/her services in attending meetings of the Board and meetings of committees appointed by the Board. The Corporation may reimburse Directors for expenses related to their duties as members of the Board of Directors. Section 206. Regular Meetings. Regular meetings of the Board of Directors shall be held on such day, at such hour, and at such place, consistent with applicable law, as the Board of Directors shall from time to time designate or as may be designated in any notice from the Secretary calling the meeting. The Board of Directors shall meet for reorganizational purposes at the first regular meeting following the annual meeting of shareholders at which the Directors are elected. Notice need not be given of regular meetings of the Board of Directors which are held at the time and place designated by the Board of Directors. If a regular meeting is not to be held at the time and place designated by the Board of Directors, notice of such meeting, which need not specify the business to be transacted thereat and which may be either verbal or in writing, shall be given by the President to each member of the Board of Directors at least twenty-four (24) hours before the time of the meeting. A majority of the members of the Board of Directors shall constitute a quorum for the transaction of business. If at the time fixed for the meeting, including the meeting to organize the new Board following the annual meeting of shareholders, a quorum is not present, the directors in attendance may adjourn the meeting from time to time until a quorum is present. Except as otherwise provided herein, a majority of Directors present and voting at any meeting of the Board of Directors at which a quorum is present, shall decide each matter considered. A Director cannot vote by proxy, or otherwise act by proxy at a meeting of the Board of Directors. Section 207. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board, or at the request of a majority of Directors then in office. A special meeting of the Board of Directors shall be deemed to be any meeting other than a regular meeting of the Board of Directors. Notice of the time and place of every special meeting, which need not specify the business to be transacted thereat, shall be given by the Chairman to each member of the Board at least twenty-four (24) hours before the time of such meeting. Section 208. Reports and Records. The reports of officers and Committees and the records of the proceedings of all Committees shall be filed with the Secretary of the Corporation and presented to the Board of Directors, if practicable, at its next regular meeting. The Board of Directors shall keep complete records of its proceedings in a minute book kept for that purpose. When a Director shall request it, the vote of each Director upon a particular question shall be recorded in the minutes. Section 209. Removal by the Board. The Board of Directors may declare vacant the office of a Director who has been judicially declared of unsound mind or who has been convicted upon any offense punishable by imprisonment for a term of more than one year or who has a substantial disability, or if, within thirty (30) days after notice of his selection, he does not accept the office either in writing or by attending a meeting of the Board of Directors. For purposes of this Section 209, "substantial disability" shall mean the inability of a Director, because of physical or mental incapacity, to perform his duties and responsibilities for a period of more than six (6) months. 96 5 ARTICLE III. COMMITTEES. Section 301. Committees. The following two (2) Committees of the Board of Directors shall be established by the Board of Directors in addition to any other Committee the Board of Directors may in its discretion establish: Executive and Audit Committees. Section 302. Executive Committee. The Executive Committee shall consist of six (6) Directors. A majority of the members of the Executive Committee shall constitute a quorum, and actions of a majority of those present at a meeting at which a quorum is present shall be the actions of the Committee. Meetings of the Committee may be called at any time by the Chairman of the Committee or his designee. The Executive Committee shall have and exercise the authority of the Board of Directors in the management of the business of the Corporation between the dates of regular meetings of the Board of Directors. Section 303. Audit Committee. The Audit Committee shall consist of at least five (5) Directors, none of whom shall be officers of the Corporation. Meetings of the Committee may be called at any time by the Chairman of the Committee or his designee. A majority of the members of the Committee shall constitute a quorum for the transaction of business, and the actions of a majority of those present at a meeting at which a quorum is present shall be the actions of the Committee. The Committee shall, among other things, supervise the audit of the books of the Corporation and recommend for approval by the Board the services of a reputable Certified Public Accounting firm to perform such audit. Section 304. Appointment of Committee Members. The Board of Directors shall appoint the members of the Committees and the Chairman of each such Committee to serve until the next annual meeting of shareholders. The Board of Directors shall appoint the members of any other Committees established it, and the Chairman of such Committee, to serve until the next annual meeting of shareholders. The Board of Directors may appoint, from time to time, other committees, for such purposes and with such powers as the Board may determine. Section 305. Organization and Proceedings. Each Committee of the Board of Directors shall effect its own organization by the appointment of a Secretary and such other officers, except the Chairman, as it may deem necessary. A record of proceedings of all Committees shall be kept by the Secretary of such Committee and filed and presented as provided in Section 208 of these Bylaws. ARTICLE IV. OFFICERS. Section 401. Officers. The Board of Directors shall appoint a Chief Executive Officer, a President, one or more Vice Presidents, a Secretary, Chief Financial Officer and such other Officers and Assistant Officers as the Board of Directors or any, from time to time deem advisable. Any number of offices may be held by the same person except the offices of President and Chief Financial Officer. The Chief Executive Officer may, subject to change by the Board of Directors, appoint such other officers and assistant officers as he or she may deem advisable provided such officers or assistant officers have a title no higher than Vice President, who shall hold office for such periods as the Chief Executive Officer may determine. Officers may, but need not be Directors. Section 402. Chief Executive Officer. In the absence of the Chairman or Vice Chairman of the Board, the Chief Executive Officer shall preside at any meeting of the Board. The Chief Executive Officer shall have general executive powers, and shall have and may exercise any and all other powers and duties pertaining by law, regulation, or practice, to the office of Chief Executive Officer, or imposed by these Bylaws. He shall also have and may exercise such 97 6 further powers and duties as from time to time may be conferred upon or assigned to him by the Board of Directors. Section 403. President. In the absence of the Chairman or Vice Chairman of the Board and the Chief Executive Officer, the President shall preside at any meeting of the Board. The President shall have and may exercise any and all powers and duties pertaining to bylaw, regulation or practice, to the office of President, or imposed by these Bylaws. He shall also have and may exercise such further powers and duties as from time to time may be conferred upon or assigned to him by the Board of Directors or the Chief Executive Officer. Section 404. Vice Presidents. The Board of Directors may appoint one or more Executive Vice Presidents, Senior Vice Presidents, Vice Presidents and Assistant Vice Presidents (collectively referred to herein as the "Vice Presidents"). The Vice Presidents shall have such powers and duties as may be assigned to them by the Board of Directors. The Executive Vice Presidents shall, in the absence of the President and the Chief Executive Officer, perform all the duties of the President and the Chief Executive Officer. Section 405. Secretary. The Secretary shall be Secretary of the Board and of the Corporation, and shall keep accurate minutes of all meetings. He shall attend to the giving of all notices required by these Bylaws to be given. He shall be custodian of the corporate seal, records, documents and papers of the Corporation. He shall provide for the keeping of proper records of all transactions of the Corporation. He shall have and may exercise any and all other powers and duties pertaining by law, regulation or practice, to the office of Secretary, or imposed by these Bylaws. He shall also perform such other duties as may be assigned to him, from time to time, by the Board of Directors. Section 406. Chief Financial Officer. The Chief Financial Officer shall act under the supervision of the Chief Executive Officer or such other officer as the Chief Executive Officer may designate. The Chief Financial Officer shall have custody of the Corporation's funds and such other duties as may be prescribed by the Board of Directors, Chief Executive Officer or such other supervising officer as the Chief Executive Officer may designate. Section 407. Assistant Officers. Unless otherwise provided by the Board of Directors, each Assistant Officer shall perform such duties as shall be prescribed by the Board of Directors, the Chief Executive Officer or the Officer to whom he/she is an Assistant. In the event of the absence or disability of an Officer or his/her refusal to act, his/her Assistant Officer shall, in the order of their rank, and within the same rank in the order of their seniority, have the powers and authorities of such Officer. Section 408. Compensation. Unless otherwise provided by the Board of Directors, the salaries and compensation of all Officers and Assistant Officers, except the Chief Executive Officer, President and the Executive Vice Presidents, shall be fixed by the Chief Executive Officer in accordance with the general salary administration programs and guidelines established by the Board. Section 409. General Powers. The Officers are authorized to do and perform such corporate acts as are necessary in the carrying on of the business of the Corporation, subject always to the direction of the Board of Directors. 98 7 ARTICLE V. SHARES OF CAPITAL STOCK. Section 501. Authority to Sign Share Certificates. Every share certificate of the Corporation shall be signed by the Chairman of the Board, the President or by an Executive Vice President or one of the Vice Presidents. Certificates may be signed by facsimile signature. Section 502. Lost or Destroyed Certificates. Any person claiming a share certificate to be lost, destroyed or wrongfully taken shall receive a replacement certificate if such person shall have: (a) requested such replacement certificate before the Corporation has notice that the shares have been acquired by a bona fide purchaser; (b) provided the Corporation with an indemnity agreement satisfactory in form and substance to the Chairman of the Board, Chief Executive Officer, the Chief Financial Officer, President or the Executive Vice President; and (c) satisfied any other reasonable requirements (including providing an affidavit and a surety bond) fixed by the Chief Executive Officer, Chief Financial Officer, President or the Executive Vice President. ARTICLE VI. GENERAL. Section 601. Fiscal Year. The fiscal year of the Corporation shall begin on the first (1st) day of January in each year and end on the thirty-first (31st) day of December in each year. Section 602. Absentee Participation in Meetings. Participation in meetings of the Board of Directors, or of Committees of the Board, by means of a conference telephone or similar communications equipment, by means of which all persons participating in the meeting can hear each other shall be permitted. Section 603. Emergency Bylaws. In the event of any emergency resulting from a nuclear attack or similar disaster, and during the continuance of such emergency, the following Bylaw provisions shall be in effect, notwithstanding any other provisions of the Bylaws: (a) A meeting of the Board of Directors or of any Committee thereof may be called by any Officer or Director upon one (1) hour's notice to all persons entitled to notice whom, in the sole judgment of the notifier, it is feasible to notify; (b) The Director or Directors in attendance at the meeting of the Board of Directors or of any Committee thereof shall constitute a quorum; and (c) These Bylaws may be amended or repealed, in whole or in part, by a majority vote of the Directors attending any meeting of the board of Directors, provided such amendment or repeal shall only be effective for the duration of such emergency. Section 604. Severability. If any provision of these Bylaws is illegal or unenforceable as such, such illegality or unenforceability shall not affect any other provision of these Bylaws and such other provisions shall continue in full force and effect. ARTICLE VII. LIABILITY OF DIRECTORS: INDEMNIFICATION. Section 701. Elimination of Liability. To the fullest extent permitted by the laws of the Commonwealth of Pennsylvania, a Director of the Corporation shall not be personally liable for monetary damages for any action taken or any failure to take any action unless the Director has breached or failed to perform the 99 8 duties of his or her office under the Pennsylvania Business Corporation Law of 1988, as amended, or any successor statute, and such breach or failure constitutes self-dealing, willful misconduct or recklessness. The provisions of this Section 701 shall not apply with respect to the responsibility or liability of a Director under any criminal statute or the liability of a director for the payment of taxes pursuant to local, state or federal law. Section 702. Indemnification. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative by reason of the fact that such person is or was a Director, officer, employee, or agent of the Corporation, or is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), amounts paid in settlement, judgments, and fines actually and reasonably incurred by such person in connection with such action, suit, or proceeding; provided, however, that no indemnification shall be made in any case where the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness. Section 703. Expenses. Expenses (including attorneys' fees) incurred in defending a civil or criminal action, suit, or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit, or proceeding upon receipt of an undertaking by or on behalf of the Director, officer, employee, or agent to repay such amount if it shall be ultimately determined that he/she is not entitled to be indemnified by the Corporation as authorized in this Article VII. Section 704. Non-Exclusive. The indemnification and advancement of expenses provided by this Article VII shall not be deemed exclusive of any other right to which persons seeking indemnification and advancement of expenses may be entitled under any agreement, vote of shareholders or disinterested directors, or otherwise, both as to actions in such persons' official capacity and as to their actions in another capacity while holding office, and shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrator of such person. Section 705. Insurance, Etc. The Corporation may purchase and maintain insurance on behalf of any person, may enter into contracts of indemnification with any person, may create a fund of any nature (which may, but need not be, under the control of a trustee) for the benefit of any person, and may otherwise secure in any manner its obligations with respect to indemnification and advancement of expenses, whether arising under this Article IX or otherwise, to or for the benefit of any person, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this Article VII. Section 706. Amendment. Notwithstanding anything herein contained or contained in the Articles of Incorporation to the contrary, this Article VII may not be amended or repealed, and a provision inconsistent herewith may not be adopted, except by the affirmative vote of 66 2/3% of the members of the entire Board of Directors or by the affirmative vote of shareholders of the corporation entitled to cast at least 75% of all votes which shareholders of the corporation are then entitled to cast, except that, if the laws of the Commonwealth of Pennsylvania are amended or any other statute is enacted so as to decrease the exposure of directors to liability or to increase the indemnification rights available, this Article VII and any other provision of these Bylaws inconsistent with such decreased exposure or increased 100 9 indemnification rights shall be amended, automatically and without any further action on the part of shareholders or directors, to reflect such decreased exposure or to include such increased indemnification rights, unless such legislation expressly otherwise requires. Any repeal or modification of this Article VII by the directors or shareholders of the Corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Corporation or any right to indemnification for any action taken or any failure to take any action occurring prior to the time of such repeal or modification. Section 707. Severability. If, for any reason, any provision of this Article VII shall be held invalid, such invalidity shall not affect any other provision not held so invalid, and each such other provision shall, to the full extent consistent with law, continue in full force and effect. If any provision of this Article VII shall be held invalid in part, such invalidity shall in no way affect the remainder of such provision, and the remainder of such provision, together with all other provisions of this Article VII shall, to the full extent consistent with law, continue in full force and effect. ARTICLE VIII. AMENDMENT OR REPEAL. Section 801. Amendment or Repeal by the Board of Directors. These Bylaws may be amended or repealed, in whole or in part, in the manner set forth in the Articles of Incorporation. 101 EX-10.4 3 w46444ex10-4.txt EMPLOYMENT AGREEMENT FOR ANDREW J. ROTHERMEL 1 Exhibit 10.4 EMPLOYMENT AGREEMENT THIS AGREEMENT ("Agreement") made as of the 1st day of November, 2000, between MAIN STREET BANCORP, INC., a Pennsylvania business corporation ("Main"), MAIN STREET BANK, a Pennsylvania banking corporation (the "Bank"), and ANDREW J. ROTHERMEL, an individual (the "Executive"). WITNESSETH: WHEREAS, Main, the Bank and the Executive desire to enter into an Agreement regarding, among other things, the employment of the Executive by Main and the Bank, all as hereinafter set forth. NOW, THEREFORE, the parties hereto, intending to be legally bound hereby, agree as follows: 1. Employment. Main and the Bank each hereby employ the Executive, and the Executive hereby accepts employment with Main and the Bank, on the terms and conditions set forth in this Agreement. 2. Duties of Employee. The Executive will perform and discharge well and faithfully such duties as an executive officer of Main and the Bank as may be assigned to him from time to time by the Board of Directors of Main or the Bank, or the Executive committee of such Boards. The Executive will be employed as Executive Vice President, Secretary, and General Counsel of Main and the Bank, and will hold such other titles as may be given to him from time to time by the Board of Directors of Main and the Bank, or the Executive Committee of such Boards. The Executive will devote his full time, attention and energies to the business of Main and the Bank and will not, during the Employment Period (as defined in Section 3), be employed or involved in any other business activity, whether or not such activity is pursued for gain, profit or other pecuniary advantage; provided, however, that this section will not be construed as preventing the Executive from (a) passively investing his personal assets, (b) acting as a member of the Board of Directors of Main, the Bank, or with pre-approval of the Chairman of Main, any other corporation not in competition with either, or (c) being involved in any community, civic or similar activity serving as a member of a Board of Directors, Trustee or otherwise. 3. Term of Employment. The Executive's employment under this Agreement will be for a period (the "Employment Period") commencing upon the date of this Agreement and ending at the end of the term of this Agreement pursuant to Section 17, unless the Executive's employment is sooner terminated in accordance with Section 5 or one of the following provisions: (a) Termination for Cause. The Executive's employment under this Agreement may be terminated at any time during the Employment Period for "Cause" (as herein defined), by action of the Board of Directors of Main or the Bank, or the Executive Committee of such Boards, upon giving written notice of such termination to the Executive. As used in this Agreement, "Cause" means any of the following events: (i) the Executive is convicted of or enters a plea of guilty or nolo contendere to a felony, a crime of falsehood, or a crime involving fraud or moral turpitude, or the actual incarceration of the Executive for a period of five (5) consecutive days; 102 2 (ii) the Executive, in the reasonable opinion of the Board of Directors of Main or the Bank, willfully fails or continuously neglects, to perform the responsibilities and duties assigned to him following receipt of two (2) written warnings at least thirty (30) days apart from the Board of Directors of Main or the Bank (excluding however, failure to perform due to Executive's incapacity because of physical or mental illness); (iii) the Executive has, in the reasonable opinion of the Board of Directors of Main or the Bank, engaged in gross misconduct or gross negligence in the course of his employment with Main; (iv) a government regulatory agency recommends or orders in writing that the Bank terminate the employment of the Executive with the Bank or relieve him of his duties as such relate to the Bank; or (v) the Executive has, in the reasonable opinion of the Board of Directors, committed an intentional act of fraud, embezzlement or theft in connection with the Executive's duties in the course of his employment; (vi) the Executive has, in the reasonable opinion of the Board of Directors, caused intentional damage to property of Main or has intentionally and wrongfully disclosed Confidential Information. If the Executive's employment is terminated under the provisions of this subsection, then all rights of the Executive under Section 4 will cease as of the effective date of such termination. For purposes of this Section 3(a), any notice delivered by the Chief Executive Officer of Main or Bank shall be deemed to be delivered by the Board of Directors of Main or Bank. (b) Termination Without Cause. The Executive's employment under this Agreement may be terminated at any time during the Employment Period without "Cause" (as defined in Section 3 (a)), by action of the Board of Directors of Main or the Bank, upon giving notice of such termination of the Executive at least thirty (30) days prior to the date upon which such termination is to take effect. If the Executive's employment is terminated under the provisions of this subsection, then the Executive will be entitled to receive the compensation set forth in Section 6. (c) Voluntary Termination, Retirement or Death. If the Executive voluntarily terminates employment without Good Reason (as defined in Section 5), retires or dies, the Executive's employment under this Agreement will be deemed terminated as of the date of the Executive's voluntary termination, retirement or death, and all rights of the Executive under Section 4 will cease as of the date of such termination and any benefits payable to the Executive will be determined in accordance with the pension, welfare, fringe benefit, expense reimbursement, salary deferral and insurance programs of Main and of the Bank then in effect. (d) Disability. If the Executive is incapacitated by accident, sickness, or otherwise so as to render the Executive mentally or physically incapable of performing the essential duties required of the Executive under Section 2, notwithstanding reasonable accommodation, for a continuous period of six months, then, upon the expiration of such period or at any time thereafter, by action of the Board of Directors of Main or the Bank, the Executive's employment under this Agreement may be terminated immediately upon giving the Executive notice to that effect. If the Executive's employment is terminated under the provisions of this subsection 3(d), then all rights of the Executive under Section 4 will cease as of the last business day of the week in which such termination occurs, and the Executive will thereafter be entitled to the benefits to which he is 103 3 entitled under any disability plan of Main or the Bank, if any, in which he is then a participant (including the minimum benefit described in Section 4 (d) (ii)). 4. Employment Period Compensation and Related Matters. (a) Salary. For services performed by the Executive under this Agreement, Main and the Bank will pay the Executive a salary, in the aggregate, during the Employment Period, at the annualized rate of $140,000, payable at the same times as salaries are payable to other executive employees of Main or of the Bank. Main and/or the Bank may, from time to time, increase (but not decrease) the Executive's salary, and any and all such increases will be deemed to constitute amendments to this subsection to reflect the increased amounts, effective as of the dates established for such increases by the Board of Directors of Main or of the Bank in the resolutions authorizing such increases. (b) Bonus. For services performed by the Executive under this Agreement, Main will pay the Executive a bonus, annually during the Employment Period, in such amounts (if any) and at such times as is provided in such incentive plan(s) as may be approved by the Board of Directors of Main and in effect from time to time. In addition, Main may, from time to time, pay such other bonus or bonuses to the Executive as Main, in its sole discretion, deems appropriate. The payment of any such bonuses will not reduce or otherwise affect any other obligation of Main and/or the Bank to the Executive provided for in this Agreement. (c) Pension and Welfare Benefits. Main will provide the Executive, during the Employment Period, with pension and welfare benefits (within the meaning of Section 3 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) in the aggregate not less favorable than those received by other employees of Main. (d) Fringe Benefits. (i) In General. Except as otherwise provided in this subsection, Main will provide the Executive, during the Employment Period, with such fringe benefits as may be provided generally from time to time for other executives similarly situated in status with the Executive. (ii) Vacation. The Executive will be entitled to not less than four weeks of vacation per calendar year, plus one additional day for each five years of service with Main and any predecessor of Main. The right to carry over unused vacation days will be subject to the executive personnel policies of Main from time to time in effect. (iii) Stock Options. The Executive will be entitled to such stock option grants as may be granted from time to time by the Board of Directors of Main and/or the Compensation Committee of such Board and as are consistent with the Executive's responsibilities and performance. (iv) Automobile. Executive shall be provided an automobile allowance reasonably consistent with the Executive's position and in accordance with Main's then in effect automobile policy for executive officers. (v) Country Club Membership. The Executive will be entitled to reimbursement for reasonable expenses related to maintaining a full membership at the Berkshire Country Club. (e) Expense Reimbursement. The Executive will be entitled to reimbursement of all reasonable business expenses incurred by him in the discharge of his duties hereunder, or otherwise in furtherance of the business 104 4 of Main and the Bank, provided he renders an accounting of such expenses in such manner as may be required from time to time for employees generally. (f) Salary Deferral. The Executive may request that the payment of any portion of his base salary and/or bonus for any calendar year be deferred. Such request must be made in writing to Main and the Bank before the beginning of such calendar year and must include the period of deferral requested by the Executive (the "Deferral Period"). If the Board of Directors of Main and of the Bank approve such request, the Executive will be entitled to receive, at the end of the Deferral Period, the deferred portion of his base salary and/or bonus plus interest at a compounded rate of 8% per annum. Any salary and/or bonus which is deferred as described herein will be credited to an account on the books of Main and of the Bank established in the name of the Executive. However, this account will not be funded, and neither Main nor the Bank will be deemed to be a trustee for the Executive with respect to any deferred amount. The liabilities of Main and the Bank to the Executive hereunder are those of a debtor pursuant to such contractual obligations as are created by this Agreement and Executive's status with respect to his deferred compensation shall be that of a general unsecured creditor of Main. No liabilities of Main and the Bank which arise under this subsection will be deemed to be secured by any pledge or other encumbrance on any property of Main or of the Bank. Main and the Bank will not be required to segregate any funds representing such deferred amounts, and nothing herein will be construed as providing for such segregation. 5. Resignation of the Executive for Good Reason. (a) Events Giving Right to Terminate for Good Reason. The Executive may resign for Good Reason (as herein defined) at any time during the Employment Period, as hereinafter set forth. As used in this Agreement, the term "Good Reason" means any of the following: (i) any reassignment of the Executive to a principal office which is more than 50 miles from 601 Penn Street, Reading, Pennsylvania; (ii) a reduction in Executive's title coincident with a reduction of the authority, duties and responsibilities assigned to Executive by Main; (iii) any reduction in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (iv) any failure by Main and/or the Bank to provide the Executive with benefits at least as favorable as those enjoyed by the Executive under any of the pension or welfare plans (as such terms are defined in ERISA Section 3) of Main in which the Executive is participating on the date of this Agreement, or the taking of any action that would materially reduce any of such benefits, unless the change is part of a change applicable in each case to employees generally; or (v) any material breach of this Agreement by Main or the Bank, coupled with the failure to cure the same within 30 days after receipt of a written notice of such breach from the Executive. (b) Notice of Termination. At the option of the Executive, exercisable by the Executive within 90 days after the occurrence of the event constituting Good Reason, the Executive may resign from employment under this Agreement by a notice in writing (the "Notice of Termination") delivered to Main and the Bank and the provisions of Section 6 will thereupon apply. 105 5 (c) Special Right of Termination. Notwithstanding anything herein to the contrary, but subject to the provisions of Section 3(a), from the occurrence of the Change in Control event until the end of the one-year period following the consummation of the Change in Control (as defined below), the Executive may terminate his employment for any or no reason by delivering a Notice of Termination, to Main, specifying that the Notice is being given pursuant to this Section 5(c); and such termination will be deemed for all purposes to constitute a resignation for Good Reason. In such event, the Executive will be entitled to the payments and benefits described in Section 6. (d) Change in Control Defined. For purposes of this Agreement, the term "Change in Control" means any of the following: (i) any "person" (as such term is used in Sections 13(d) and 14(d) (2) of the Securities and Exchange Act of 1934 (the "Exchange Act")), other than Main, a subsidiary of Main, an employee benefit plan of Main or a subsidiary of Main (including a related trust), becomes the beneficial owner (as determined pursuant to Rule 13d-3 under the Exchange Act), directly or indirectly of securities of Main representing more than 20% of the combined voting power of Main's then outstanding securities; (ii) the occurrence of, or execution of an agreement providing for, a sale of all or substantially all of the assets of Main or the Bank to an entity which is not a direct or indirect subsidiary of Main; (iii) the occurrence of, or execution of an agreement providing for, a reorganization, merger, consolidation or similar transaction involving Main, unless (A) the shareholders of Main immediately prior to the consummation of any such transaction will initially own securities representing a majority of the voting power of the surviving or resulting corporation, and (B) the directors of Main immediately prior to the consummation of such transaction will initially represent a majority of the directors of the surviving or resulting corporation; or (iv) any other event which is at any time irrevocably designated as a "Change in Control" for purposes of this Agreement by resolution adopted by a majority of the directors of Main. (e) Special Right of Payment. Within thirty (30) days following the occurrence of an event described in Section 5 (d) (i) of this Agreement, Main or the Bank shall pay to Executive a lump sum amount equal to the amount set forth in Section 6 (b) (i) of this Agreement. This payment shall be separate and apart from any payments otherwise due Executive under this Agreement 6. Rights in Event of Certain Termination of Employment. In the event that during the term of this Agreement as established pursuant to Section 17 the Executive resigns from employment for Good Reason, by delivery of a Notice of Termination or other permitted notice to Main and the Bank, or the Executive's employment is terminated by Main without Cause, Executive will be entitled to receive the amounts and benefits set forth in this section. (a) Basic Payments (prior to the occurrence of a Change in Control). In the event of a termination pursuant to Section 3 (b) prior to the occurrence of a Change in Control, or a termination pursuant to Section 5 (a) that is not also a termination pursuant to Section 5(c), Main shall be obligated to continue to pay the Executive his base salary in effect as of his termination for the greater of (i) the balance of the term of the Agreement, or (ii) twelve (12) 106 6 months. Such amounts will be paid to Executive in accordance with Main's normal payroll schedule. (b) Basic Payments (following the occurrence of a Change in Control). In the event of a termination pursuant to Section 3 (b) at the time of or following the occurrence of a Change in Control, or a termination pursuant to Section 5 (c), the Executive will be paid an amount equal to two times the sum of (i) the highest annualized base salary paid to him during the year of termination or the immediately preceding two calendar years, and (ii) the highest bonus paid to him with respect to one of the three calendar years immediately preceding the year of termination. The Executive will, within 30 days after his termination of employment, be paid a lump sum equal to the present value of the amounts otherwise payable under this subsection. For purposes of the preceding sentence, present value will be determined by using the short-term applicable federal rate under Section 1274 of the Internal Revenue Code of 1986, as amended (the "Code"), in effect on the date of termination of employment. For purposes of this subsection, to the extent necessary, base salary and bonuses with any predecessor of Main or an affiliate thereof shall be taken into account. (c) Supplemental Payment in Lieu of Certain Benefits. In the event of a termination pursuant to Section 3 (b) at the time of or following the occurrence of a Change in Control or a termination pursuant to Section 5 (c), in lieu of continued pension, welfare and other benefits, a lump sum cash payment of $22,000 will be paid to the Executive within 30 days following the date of termination of employment. (d) Excise Tax Matters in General. In the event that the amounts and benefits payable under Section 6(a), 6(b) and 6(c), when added to other amounts and benefits which may become payable to the Executive by Main and/or the Bank, are such that he becomes subject to the excise tax provisions of Code Section 4999, Main and/or the Bank will pay him such additional amount or amounts as will result in his retention (after the payment of all federal, state and local excise, employment, and income taxes on such payments and the value of such benefits) of a net amount equal to the net amount he would have retained had the initially calculated payments and benefits been subject only to income and employment taxation. For purposes of the preceding sentence, the Executive will be deemed to be subject to the highest marginal federal, state and local tax rates. All calculations required to be made under this subsection will be made by Main's independent certified public accountants, subject to the right of Executive's representative to review the same. All such amounts required to be paid will be paid at the time any withholding may be required under applicable law, and any additional amounts to which the Executive may be entitled will be paid or reimbursed no later than 15 days following confirmation of such amount by Main's accountants. In the event any amounts paid hereunder are subsequently determined to be in error because estimates were required or otherwise, the parties agree to reimburse each other to correct such error, as appropriate, and to pay interest thereon at the applicable federal rate (as determined under Code Section 1274A for the period of time such erroneous amount remained outstanding and unreimbursed). The parties recognize that the actual implementation of the provisions of this subsection are complex and agree to deal with each other in good faith to resolve any questions or disagreements arising hereunder. 7. Confidentiality. (a) As used in this section, the term "Confidential Information" means any and all information regarding the organization, business or finances of Main or any of its subsidiaries and affiliates, including, but not limited to, any and all business plans and strategies, financial information, proposals, reports, marketing plans and information, cost information, customer information, claims history and experience data, sales volume and other sales 107 7 statistics, personnel data, pricing information, concepts and ideas, information respecting existing and proposed investments and acquisitions, and information regarding customers and suppliers, but the term "Confidential Information" will not include information created by the Executive or which prior to the Executive's receipt thereof (i) was generally publicly available, or (ii) was in the Executive's possession free of any restrictions on it use or disclosure and from a source other than Main or any of its subsidiaries or affiliates. (b) The Executive acknowledges and agrees that his employment by Main and the Bank will afford him an opportunity to acquire Confidential Information and that the misappropriation or disclosure of any Confidential Information would cause irreparable harm to Main and its subsidiaries and affiliates. (c) During the Employment Period and for a period of two years thereafter, the Executive will not use for the benefit of anyone other than Main and its subsidiaries and affiliates or disclose any of the Confidential Information for any reason or purpose whatsoever except to authorized representatives of such business entities or as directed or authorized by Main. (d) With respect to those items of Confidential Information which constitute trade secrets under applicable law, the Executive's obligations of confidentiality and nondisclosure as set forth in this section will continue and survive after the two-year period as provided in Subsection (c) to the greatest extent permitted by applicable law. (e) The Executive will not remove any records, documents, or any other tangible items (excluding the Executive's personal property) from the premises of Main or its subsidiaries or affiliates, in either original or duplicate form, except as needed in the ordinary course of performing services hereunder. (f) Upon termination of this Agreement, the Executive will immediately surrender to the owner thereof all documents (other than documents created by him) in his possession, custody or control embodying the Confidential Information or any part thereof and will not thereafter remove the same from the premises on which it is located. (g) The provisions of this Section 7 shall survive termination of this Agreement for any reason. 8. Remedies. Executive acknowledges and agrees that the remedy at law of Main and of the Bank for a breach or threatened breach of any of the provisions of Section 7 would be inadequate and, in recognition of this fact, in the event of a breach or threatened breach by the Executive of any of the provisions of Section 7, it is agreed that, in addition to the remedy at law, Main and the Bank will be entitled to, without posting any bond, and the Executive agrees not to oppose any request of Main and the Bank for, equitable relief in the form of specific performance, a temporary restraining order, a temporary or permanent injunction, or any other equitable remedy which may then be available. Nothing herein contained will be construed as prohibiting Main and the Bank from pursuing any other remedies available to them for such breach or threatened breach. 9. Arbitration. Main, the Bank and Executive recognize that in the event a dispute should arise between them concerning the interpretation or implementation of this Agreement, lengthy and expensive litigation will not afford a practical resolution of the issues within a reasonable period of time. Consequently, each party agrees that all disputes, disagreements and questions of interpretation concerning this Agreement are to be submitted for resolution to the American Arbitration Association ("Association") in Philadelphia, Pennsylvania, in accordance with the Individual Employment Dispute Resolution rules of the Association. Main and 108 8 the Bank, or Executive, may initiate an arbitration proceeding at any time by giving notice to the others in accordance with the rules of the Association. The Association will designate a single arbitrator to conduct the proceeding, but Main and the Bank, and the Executive, may, as a matter of right, require the substitution of a different arbitrator chosen by the Association. Each such right of substitution may be exercised only once. The arbitrator will not be bound by the rules of evidence and procedure of the courts of the Commonwealth of Pennsylvania but will be bound by the substantive law applicable to this Agreement. The decision of the arbitrator, absent fraud, duress, incompetence or gross and obvious error of fact, will be final and binding upon the parties and will be enforceable in courts of proper jurisdiction. Following written notice of a request for arbitration, Main and the Bank, and the Executive, will be entitled to an injunction restraining all further proceedings in any pending or subsequently filed litigation concerning this Agreement, except as otherwise provided herein. 10. Legal Expenses. Main and/or the Bank will pay to the Executive all reasonable legal fees and expenses when incurred by the Executive in seeking to obtain or enforce any right or benefit provided by this Agreement, provided he brings the action in good faith, and he prevails. 11. Indemnification. Main and the Bank will indemnify the Executive, to the fullest extent permitted under Pennsylvania and federal law, with respect to any threatened, pending or completed legal or regulatory action, suit or proceeding brought against him by reason of the fact that he is or was a director, officer, employee or agent of Main or the Bank, or is or was serving at the request of Main or the Bank as a director, officer, employee or agent of another person or entity. To the fullest extent permitted by Pennsylvania and federal law, Main and the Bank will, in advance of final disposition, pay any and all expenses incurred by the Executive in connection with any threatened, pending or completed legal or regulatory action, suit or proceeding with respect to which he may be entitled to indemnification hereunder. Main and the Bank will use their best efforts to obtain insurance coverage for the Executive under a policy covering directors and officers thereof against litigation, arbitrations and other legal and regulatory proceedings; provided, however, that nothing herein is to be construed as requiring such action if the Board of Directors of Main and the Bank determine that such insurance coverage cannot be obtained at commercially reasonable rates. 12. Notices. Any notice required or permitted to be given under this Agreement will, to be effective hereunder, be given to both Main and the Bank, in the case of notices given by the Executive, and will, to be effective hereunder, be given by both Main and the Bank, in the case of notices given to the Executive. Any notice given by Main, to the extent required will be deemed to be given by Main and the Bank. Any notice given to Main, to the extent required will be deemed to be given to Main and the Bank. Any such notice will be deemed properly given if in writing and if mailed by registered or certified mail, postage prepaid with return receipt requested, to the residence of the Executive, in the case of notices to the Executive, and to the respective principal offices of Main and of the Bank, in the case of notices to Main and the Bank. 13. Waiver. No provision of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in writing and signed by the Executive, an executive officer of Main, and an executive officer of the Bank, each such officer specifically designated by the Board of Directors of Main and the Bank, respectively. No waiver by any party hereto at any time or any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 109 9 14. Assignment. This Agreement is not assignable by any party hereto, except by Main and the Bank to any successor in interest to the respective businesses of Main and the Bank. 15. Entire Agreement. This Agreement contains the entire agreement of the parties relating to the subject matter of this Agreement and, in accordance with the provisions of Section 15, supersedes any prior agreement of the parties. 16. Successors; Binding Agreement. (a) Main and the Bank will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of Main and/or the Bank to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Main and the Bank would be required to perform it if no such succession had taken place. Failure by Main and the Bank to obtain such assumption and agreement prior to the effectiveness of any such succession will constitute a material breach of this Agreement. As used in this Agreement, "Main" and the "Bank" means Main and the Bank as hereinbefore defined and any successor to the business and/or assets of Main and/or the Bank as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (b) This Agreement will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, heirs, distributees, devisees, and legatees. If the Executive should die while any amount is payable to the Executive under this Agreement if the Executive had continued to live, all such amounts, unless otherwise provided herein, will be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee, or, if there is no such designee, to the Executive's estate. 17. Termination. (a) Unless the Executive's employment is terminated pursuant to the provisions of Section 3 or Section 5, the term of this Agreement will be for a period commencing on the date of this Agreement and ending on December 31, 2002; provided, however, that this Agreement will be automatically renewed on January 1, 2002, for the two-year period commencing on such date and ending on December 31, 2003, unless either party gives written notice of non-renewal to the other party on or before December 1, 2001 (in which case this Agreement will continue in effect through December 31, 2002); and provided further, that if this Agreement is renewed on January 1, 2002, it will be automatically renewed on January 1 of each subsequent year (the "Annual Renewal Date") for a period ending two years from each Annual Renewal Date unless either party gives written notice of non-renewal to the other party at least 30 days prior to an Annual Renewal Date (in which case this Agreement will continue in effect for a term ending one year from the Annual Renewal Date immediately following such notice). For purposes of the preceding sentence Main and the Bank will be considered one party. (b) Any termination of the Executive's employment under this Agreement or of the term of this Agreement will not affect the benefit and confidentiality of information provisions of Sections 6, 7, 8, 9, 10 and 11 shall survive any termination of employment of the term of this Agreement and remain in full force and effect in accordance with their respective terms. (c) Nothing herein will be construed as limiting, restricting or eliminating any rights the Executive may have under any plan, contract or arrangement to which he is a party or in which he is a vested participant; provided, however, that any termination payments required hereunder will be in lieu of any severance benefits to which he may be entitled under a severance 110 10 plan or arrangement of Main and the Bank; and provided further, that if the benefits under any such plan or arrangement may not legally be eliminated, then the payments hereunder will be correspondingly reduced in such equitable manner as the Board of Directors of Main may determine. (d) Notwithstanding any provisions of this Agreement to the contrary, no further payments or benefits shall be paid to the Executive following the end of the term as described in subsection 17(a) above. 18. No Mitigation or Offset. The Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking employment or otherwise; nor will any amounts or benefits payable or provided hereunder be reduced in the event he does secure employment, except as otherwise provided herein. 19. Validity. The invalidity or unenforceability of any provisions of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, which will remain in full force and effect. 20. Applicable Law. Except to the extent preempted by federal law, this Agreement will be governed by and construed in accordance with the domestic internal law of the Commonwealth of Pennsylvania. 21. Number. Words used herein in the singular will be construed as being used in the plural, as the context requires, and vice versa. 22. Headings. The headings of the sections and subsections of this Agreement are for convenience only and will not control or affect the meaning or construction or limit the scope or intent of any of the provisions of this Agreement. 23. References to Entities. All references to Main will be deemed to include references to the Bank, as appropriate in the relevant context, and vice versa. As of the date of this Agreement, Main and the Bank share one Board of Directors. To the extent, under this Agreement or law, an action is required by the Board of Directors of the Bank, a similar action of the board of Directors of Main shall be deemed sufficient 24. Guaranty. Main hereby irrevocably and unconditionally guarantees to the Executive the full and timely performance by the Bank of each and every obligation of the Bank contained in this Agreement. 25. Effective Date, Termination of Prior Agreement. This Agreement will become effective immediately upon the execution and delivery of this Agreement by the parties hereto. Upon the execution and delivery of this Agreement, any prior agreement relating to the subject matter hereof, including without limitation the Employment Agreement by and among Executive, Main and the Bank dated January 25, 2000, will be deemed automatically terminated and be of no further force or effect. 26. Withholding for Taxes. All amounts and benefits paid or provided hereunder will be subject to withholding for taxes as required by law. 27. Individual Agreement. This Agreement is an agreement solely between and among the parties hereto. It is intended to constitute a nonqualified unfunded agreement for the benefit of a key management employee and will be construed and interpreted in a manner consistent with such intention. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. MAIN STREET BANCORP, INC. 111 11 By /s/ Brian M Hartline ----------------------- (SEAL) Attest: /s/ Trudy Michael ----------------------- (Assistant) Secretary ("Main") MAIN STREET BANK By /s/ Brian M. Hartline ----------------------- (SEAL) Attest: /s/ Trudy Michael ----------------------- (Assistant) Secretary ("Bank") Witness: /s/ Carol Sheeler /s/ Andrew J. Rothermel (SEAL) - ------------------- ------------------------ ANDREW J. ROTHERMEL ("Executive") 112 EX-10.5 4 w46444ex10-5.txt EMPLOYMENT AGREEMENT FOR ROBERT J. SMIK 1 Exhibit 10.5 EMPLOYMENT AGREEMENT THIS AGREEMENT ("Agreement") made as of the 1st day of November, 2000, between MAIN STREET BANCORP, INC., a Pennsylvania business corporation ("Main"), MAIN STREET BANK, a Pennsylvania banking corporation (the "Bank"), and ROBERT J. SMIK, an individual (the "Executive"). WITNESSETH: WHEREAS, Main, the Bank and the Executive desire to enter into an Agreement regarding, among other things, the employment of the Executive by Main and the Bank, all as hereinafter set forth. NOW, THEREFORE, the parties hereto, intending to be legally bound hereby, agree as follows: 1. Employment. Main and the Bank each hereby employ the Executive, and the Executive hereby accepts employment with Main and the Bank, on the terms and conditions set forth in this Agreement. 2. Duties of Employee. The Executive will perform and discharge well and faithfully such duties as an executive officer of Main and the Bank as may be assigned to him from time to time by the Board of Directors of Main or the Bank, or the Executive committee of such Boards. The Executive will be employed as Executive Vice President/Chief of Operations of Main and the Bank, and will hold such other titles as may be given to him from time to time by the Board of Directors of Main and the Bank, or the Executive Committee of such Boards. The Executive will devote his full time, attention and energies to the business of Main and the Bank and will not, during the Employment Period (as defined in Section 3), be employed or involved in any other business activity, whether or not such activity is pursued for gain, profit or other pecuniary advantage; provided, however, that this section will not be construed as preventing the Executive from (a) passively investing his personal assets, (b) acting as a member of the Board of Directors of Main, the Bank, or with pre-approval of the Chairman of Main, any other corporation not in competition with either, or (c) being involved in any community, civic or similar activity serving as a member of a Board of Directors, Trustee or otherwise. 3. Term of Employment. The Executive's employment under this Agreement will be for a period (the "Employment Period") commencing upon the date of this Agreement and ending at the end of the term of this Agreement pursuant to Section 17, unless the Executive's employment is sooner terminated in accordance with Section 5 or one of the following provisions: (a) Termination for Cause. The Executive's employment under this Agreement may be terminated at any time during the Employment Period for "Cause" (as herein defined), by action of the Board of Directors of Main or the Bank, or the Executive Committee of such Boards, upon giving written notice of such termination to the Executive. As used in this Agreement, "Cause" means any of the following events: (i) the Executive is convicted of or enters a plea of guilty or nolo contendere to a felony, a crime of falsehood, or a crime involving 113 2 fraud or moral turpitude, or the actual incarceration of the Executive for a period of five (5) consecutive days; (ii) the Executive, in the reasonable opinion of the Board of Directors of Main or the Bank, willfully fails or continuously neglects, to perform the responsibilities and duties assigned to him following receipt of two (2) written warnings at least thirty (30) days apart from the Board of Directors of Main or the Bank (excluding however, failure to perform due to Executive's incapacity because of physical or mental illness); (iii) the Executive has, in the reasonable opinion of the Board of Directors of Main or the Bank, engaged in gross misconduct or gross negligence in the course of his employment with Main; (iv) a government regulatory agency recommends or orders in writing that the Bank terminate the employment of the Executive with the Bank or relieve him of his duties as such relate to the Bank; or (v) the Executive has, in the reasonable opinion of the Board of Directors, committed an intentional act of fraud, embezzlement or theft in connection with the Executive's duties in the course of his employment; (vi) the Executive has, in the reasonable opinion of the Board of Directors, caused intentional damage to property of Main or has intentionally and wrongfully disclosed Confidential Information. If the Executive's employment is terminated under the provisions of this subsection, then all rights of the Executive under Section 4 will cease as of the effective date of such termination. For purposes of this Section 3(a), any notice delivered by the Chief Executive Officer of Main or the Bank shall be deemed to be delivered by the Board of Directors of Main or the Bank. (b) Termination Without Cause. The Executive's employment under this Agreement may be terminated at any time during the Employment Period without "Cause" (as defined in Section 3 (a)), by action of the Board of Directors of Main or the Bank, upon giving notice of such termination of the Executive at least thirty (30) days prior to the date upon which such termination is to take effect. If the Executive's employment is terminated under the provisions of this subsection, then the Executive will be entitled to receive the compensation set forth in Section 6. (c) Voluntary Termination, Retirement or Death. If the Executive voluntarily terminates employment without Good Reason (as defined in Section 5), retires or dies, the Executive's employment under this Agreement will be deemed terminated as of the date of the Executive's voluntary termination, retirement or death, and all rights of the Executive under Section 4 will cease as of the date of such termination and any benefits payable to the Executive will be determined in accordance with the pension, welfare, fringe benefit, expense reimbursement, salary deferral and insurance programs of Main and of the Bank then in effect. (d) Disability. If the Executive is incapacitated by accident, sickness, or otherwise so as to render the Executive mentally or physically incapable of performing the essential duties required of the Executive under Section 2, notwithstanding reasonable accommodation, for a continuous period of six months, then, upon the expiration of such period or at any time thereafter, by action of the Board of Directors of Main or the Bank, the Executive's employment under 114 3 this Agreement may be terminated immediately upon giving the Executive notice to that effect. If the Executive's employment is terminated under the provisions of this subsection 3(d), then all rights of the Executive under Section 4 will cease as of the last business day of the week in which such termination occurs, and the Executive will thereafter be entitled to the benefits to which he is entitled under any disability plan of Main or the Bank, if any, in which he is then a participant (including the minimum benefit described in Section 4 (d) (ii)). 4. Employment Period Compensation and Related Matters. (a) Salary. For services performed by the Executive under this Agreement, Main and the Bank will pay the Executive a salary, in the aggregate, during the Employment Period, at the annualized rate of $125,000, payable at the same times as salaries are payable to other executive employees of Main or of the Bank. Main and/or the Bank may, from time to time, increase (but not decrease) the Executive's salary, and any and all such increases will be deemed to constitute amendments to this subsection to reflect the increased amounts, effective as of the dates established for such increases by the Board of Directors of Main or of the Bank in the resolutions authorizing such increases. (b) Bonus. For services performed by the Executive under this Agreement, Main will pay the Executive a bonus, annually during the Employment Period, in such amounts (if any) and at such times as is provided in such incentive plan(s) as may be approved by the Board of Directors of Main and in effect from time to time. In addition, Main may, from time to time, pay such other bonus or bonuses to the Executive as Main, in its sole discretion, deems appropriate. The payment of any such bonuses will not reduce or otherwise affect any other obligation of Main and/or the Bank to the Executive provided for in this Agreement. (c) Pension and Welfare Benefits. Main will provide the Executive, during the Employment Period, with pension and welfare benefits (within the meaning of Section 3 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) in the aggregate not less favorable than those received by other employees of Main. (d) Fringe Benefits. (i) In General. Except as otherwise provided in this subsection, Main will provide the Executive, during the Employment Period, with such fringe benefits as may be provided generally from time to time for other executives similarly situated in status with the Executive. (ii) Vacation. The Executive will be entitled to not less than four weeks of vacation per calendar year, plus one additional day for each five years of service with Main and any predecessor of Main. The right to carry over unused vacation days will be subject to the executive personnel policies of Main from time to time in effect. (iii) Stock Options. The Executive will be entitled to such stock option grants as may be granted from time to time by the Board of Directors of Main and/or the Compensation Committee of such Board and as are consistent with the Executive's responsibilities and performance. (iv) Automobile. Executive shall be provided an automobile allowance reasonably consistent with the Executive's position and in accordance with Main's then in effect automobile policy for executive officers. 115 4 (e) Expense Reimbursement. The Executive will be entitled to reimbursement of all reasonable business expenses incurred by him in the discharge of his duties hereunder, or otherwise in furtherance of the business of Main and the Bank, provided he renders an accounting of such expenses in such manner as may be required from time to time for employees generally. (f) Salary Deferral. The Executive may request that the payment of any portion of his base salary and/or bonus for any calendar year be deferred. Such request must be made in writing to Main and the Bank before the beginning of such calendar year and must include the period of deferral requested by the Executive (the "Deferral Period"). If the Board of Directors of Main and of the Bank approve such request, the Executive will be entitled to receive, at the end of the Deferral Period, the deferred portion of his base salary and/or bonus plus interest at a compounded rate of 8% per annum. Any salary and/or bonus which is deferred as described herein will be credited to an account on the books of Main and of the Bank established in the name of the Executive. However, this account will not be funded, and neither Main nor the Bank will be deemed to be a trustee for the Executive with respect to any deferred amount. The liabilities of Main and the Bank to the Executive hereunder are those of a debtor pursuant to such contractual obligations as are created by this Agreement and Executive's status with respect to his deferred compensation shall be that of a general unsecured creditor of Main. No liabilities of Main and the Bank which arise under this subsection will be deemed to be secured by any pledge or other encumbrance on any property of Main or of the Bank. Main and the Bank will not be required to segregate any funds representing such deferred amounts, and nothing herein will be construed as providing for such segregation. 5. Resignation of the Executive for Good Reason. (a) Events Giving Right to Terminate for Good Reason. The Executive may resign for Good Reason (as herein defined) at any time during the Employment Period, as hereinafter set forth. As used in this Agreement, the term "Good Reason" means any of the following: (i) any reassignment of the Executive to a principal office which is more than 50 miles from 601 Penn Street, Reading, Pennsylvania; (ii) a reduction in Executive's title coincident with a reduction of the authority, duties and responsibilities assigned to Executive by Main; (iii) any reduction in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (iv) Any failure by Main and/or the Bank to provide the Executive with benefits at least as favorable as those enjoyed by the Executive under any of the pension or welfare plans (as such terms are defined in ERISA Section 3) of Main in which the Executive is participating on the date of this Agreement, or the taking of any action that would materially reduce any of such benefits, unless the change is part of a change applicable in each case to employees generally; or (v) any material breach of this Agreement by Main or the Bank, coupled with the failure to cure the same within 30 days after receipt of a written notice of such breach from the Executive. (b) Notice of Termination. At the option of the Executive, exercisable by the Executive within 90 days after the occurrence of the event constituting Good Reason, the Executive may resign from employment under this Agreement by a 116 5 notice in writing (the "Notice of Termination") delivered to Main and the Bank and the provisions of Section 6 will thereupon apply. (c) Special Right of Termination. Notwithstanding anything herein to the contrary, but subject to the provisions of Section 3(a), from the occurrence of the Change in Control event until the end of the one-year period following the consummation of the Change in Control (as defined below), the Executive may terminate his employment for any or no reason by delivering a Notice of Termination, to Main, specifying that the Notice is being given pursuant to this Section 5(c); and such termination will be deemed for all purposes to constitute a resignation for Good Reason. In such event, the Executive will be entitled to the payments and benefits described in Section 6. (d) Change in Control Defined. For purposes of this Agreement, the term "Change in Control" means any of the following: (i) any "person" (as such term is used in Sections 13(d) and 14(d) (2) of the Securities and Exchange Act of 1934 (the "Exchange Act")), other than Main, a subsidiary of Main, an employee benefit plan of Main or a subsidiary of Main (including a related trust), becomes the beneficial owner (as determined pursuant to Rule 13d-3 under the Exchange Act), directly or indirectly of securities of Main representing more than 20% of the combined voting power of Main's then outstanding securities; (ii) the occurrence of, or execution of an agreement providing for, a sale of all or substantially all of the assets of Main or the Bank to an entity which is not a direct or indirect subsidiary of Main; (iii) the occurrence of, or execution of an agreement providing for, a reorganization, merger, consolidation or similar transaction involving Main, unless (A) the shareholders of Main immediately prior to the consummation of any such transaction will initially own securities representing a majority of the voting power of the surviving or resulting corporation, and (B) the directors of Main immediately prior to the consummation of such transaction will initially represent a majority of the directors of the surviving or resulting corporation; or (iv) any other event which is at any time irrevocably designated as a "Change in Control" for purposes of this Agreement by resolution adopted by a majority of the directors of Main. (e) Special Right of Payment. Within thirty (30) days following the occurrence of an event described in Section 5(d) (i) of this Agreement, Main or the Bank shall pay to Executive a lump sum amount equal to the amount set forth in Section 6 (b) (i) of this Agreement. This payment shall be separate and apart from any payments otherwise due Executive under this Agreement. 6. Rights in Event of Certain Termination of Employment. In the event that during the term of this Agreement as established pursuant to Section 17 the Executive resigns from employment for Good Reason, by delivery of a Notice of Termination or other permitted notice to Main and the Bank, or the Executive's employment is terminated by Main without Cause, Executive will be entitled to receive the amounts and benefits set forth in this section. (a) Basic Payments (prior to the occurrence of a Change in Control). In the event of a termination pursuant to Section 3 (b) prior to the occurrence of a Change in Control, or a termination pursuant to Section 5 (a) that is not also a termination pursuant to Section 5(c), Main shall be obligated to continue to pay the Executive his base salary in effect as of his termination for the greater of (i) the balance of the term of the Agreement, or (ii) twelve (12) 117 6 months. Such amounts will be paid to Executive in accordance with Main's normal payroll schedule. (b) Basic Payments (following the occurrence of a Change in Control). In the event of a termination pursuant to Section 3 (b) at the time of or following the occurrence of a Change in Control, or a termination pursuant to Section 5 (c), the Executive will be paid an amount equal to two times the sum of (i) the highest annualized base salary paid to him during the year of termination or the immediately preceding two calendar years, and (ii) the highest bonus paid to him with respect to one of the three calendar years immediately preceding the year of termination. The Executive will, within 30 days after his termination of employment, be paid a lump sum equal to the present value of the amounts otherwise payable under this subsection. For purposes of the preceding sentence, present value will be determined by using the short-term applicable federal rate under Section 1274 of the Internal Revenue Code of 1986, as amended (the "Code"), in effect on the date of termination of employment. For purposes of this subsection, to the extent necessary, base salary and bonuses with any predecessor of Main or an affiliate thereof shall be taken into account. (c) Supplemental Payment in Lieu of Certain Benefits. In the event of a termination pursuant to Section 3 (b) at the time of or following the occurrence of a Change in Control or a termination pursuant to Section 5 (c), in lieu of continued pension, welfare and other benefits, a lump sum cash payment of $22,000 will be paid to the Executive within 30 days following the date of termination of employment. (d) Excise Tax Matters in General. In the event that the amounts and benefits payable under Section 6(a), 6(b) and 6(c), when added to other amounts and benefits which may become payable to the Executive by Main and/or the Bank, are such that he becomes subject to the excise tax provisions of Code Section 4999, Main and/or the Bank will pay him such additional amount or amounts as will result in his retention (after the payment of all federal, state and local excise, employment, and income taxes on such payments and the value of such benefits) of a net amount equal to the net amount he would have retained had the initially calculated payments and benefits been subject only to income and employment taxation. For purposes of the preceding sentence, the Executive will be deemed to be subject to the highest marginal federal, state and local tax rates. All calculations required to be made under this subsection will be made by Main's independent certified public accountants, subject to the right of Executive's representative to review the same. All such amounts required to be paid will be paid at the time any withholding may be required under applicable law, and any additional amounts to which the Executive may be entitled will be paid or reimbursed no later than 15 days following confirmation of such amount by Main's accountants. In the event any amounts paid hereunder are subsequently determined to be in error because estimates were required or otherwise, the parties agree to reimburse each other to correct such error, as appropriate, and to pay interest thereon at the applicable federal rate (as determined under Code Section 1274A for the period of time such erroneous amount remained outstanding and unreimbursed). The parties recognize that the actual implementation of the provisions of this subsection are complex and agree to deal with each other in good faith to resolve any questions or disagreements arising hereunder. 7. Confidentiality. (a) As used in this section, the term "Confidential Information" means any and all information regarding the organization, business or finances of Main or any of its subsidiaries and affiliates, including, but not limited to, any and all business plans and strategies, financial information, proposals, reports, marketing plans and information, cost information, customer information, claims history and experience data, sales volume and other sales 118 7 statistics, personnel data, pricing information, concepts and ideas, information respecting existing and proposed investments and acquisitions, and information regarding customers and suppliers, but the term "Confidential Information" will not include information created by the Executive or which prior to the Executive's receipt thereof (i) was generally publicly available, or (ii) was in the Executive's possession free of any restrictions on it use or disclosure and from a source other than Main or any of its subsidiaries or affiliates. (b) The Executive acknowledges and agrees that his employment by Main and the Bank will afford him an opportunity to acquire Confidential Information and that the misappropriation or disclosure of any Confidential Information would cause irreparable harm to Main and its subsidiaries and affiliates. (c) During the Employment Period and for a period of two years thereafter, the Executive will not use for the benefit of anyone other than Main and its subsidiaries and affiliates or disclose any of the Confidential Information for any reason or purpose whatsoever except to authorized representatives of such business entities or as directed or authorized by Main. (d) With respect to those items of Confidential Information which constitute trade secrets under applicable law, the Executive's obligations of confidentiality and nondisclosure as set forth in this section will continue and survive after the two-year period as provided in Subsection (c) to the greatest extent permitted by applicable law. (e) The Executive will not remove any records, documents, or any other tangible items (excluding the Executive's personal property) from the premises of Main or its subsidiaries or affiliates, in either original or duplicate form, except as needed in the ordinary course of performing services hereunder. (f) Upon termination of this Agreement, the Executive will immediately surrender to the owner thereof all documents (other than documents created by him) in his possession, custody or control embodying the Confidential Information or any part thereof and will not thereafter remove the same from the premises on which it is located. (g) The provisions of this Section 7 shall survive termination of this Agreement for any reason. 8. Remedies. Executive acknowledges and agrees that the remedy at law of Main and of the Bank for a breach or threatened breach of any of the provisions of Section 7 would be inadequate and, in recognition of this fact, in the event of a breach or threatened breach by the Executive of any of the provisions of Section 7, it is agreed that, in addition to the remedy at law, Main and the Bank will be entitled to, without posting any bond, and the Executive agrees not to oppose any request of Main and the Bank for, equitable relief in the form of specific performance, a temporary restraining order, a temporary or permanent injunction, or any other equitable remedy which may then be available. Nothing herein contained will be construed as prohibiting Main and the Bank from pursuing any other remedies available to them for such breach or threatened breach. 9. Arbitration. Main, the Bank and Executive recognize that in the event a dispute should arise between them concerning the interpretation or implementation of this Agreement, lengthy and expensive litigation will not afford a practical resolution of the issues within a reasonable period of time. Consequently, each party agrees that all disputes, disagreements and questions of interpretation concerning this Agreement are to be submitted for resolution to the American Arbitration Association ("Association") in Philadelphia, Pennsylvania, in accordance with the Individual Employment Dispute Resolution rules of the Association. Main and the Bank, or Executive, may initiate an arbitration proceeding at any time by giving 119 8 notice to the others in accordance with the rules of the Association. The Association will designate a single arbitrator to conduct the proceeding, but Main and the Bank, and the Executive, may, as a matter of right, require the substitution of a different arbitrator chosen by the Association. Each such right of substitution may be exercised only once. The arbitrator will not be bound by the rules of evidence and procedure of the courts of the Commonwealth of Pennsylvania but will be bound by the substantive law applicable to this Agreement. The decision of the arbitrator, absent fraud, duress, incompetence or gross and obvious error of fact, will be final and binding upon the parties and will be enforceable in courts of proper jurisdiction. Following written notice of a request for arbitration, Main and the Bank, and the Executive, will be entitled to an injunction restraining all further proceedings in any pending or subsequently filed litigation concerning this Agreement, except as otherwise provided herein. 10. Legal Expenses. Main and/or the Bank will pay to the Executive all reasonable legal fees and expenses when incurred by the Executive in seeking to obtain or enforce any right or benefit provided by this Agreement, provided he brings the action in good faith, and he prevails. 11. Indemnification. Main and the Bank will indemnify the Executive, to the fullest extent permitted under Pennsylvania and federal law, with respect to any threatened, pending or completed legal or regulatory action, suit or proceeding brought against him by reason of the fact that he is or was a director, officer, employee or agent of Main or the Bank, or is or was serving at the request of Main or the Bank as a director, officer, employee or agent of another person or entity. To the fullest extent permitted by Pennsylvania and federal law, Main and the Bank will, in advance of final disposition, pay any and all expenses incurred by the Executive in connection with any threatened, pending or completed legal or regulatory action, suit or proceeding with respect to which he may be entitled to indemnification hereunder. Main and the Bank will use their best efforts to obtain insurance coverage for the Executive under a policy covering directors and officers thereof against litigation, arbitrations and other legal and regulatory proceedings; provided, however, that nothing herein is to be construed as requiring such action if the Board of Directors of Main and the Bank determine that such insurance coverage cannot be obtained at commercially reasonable rates. 12. Notices. Any notice required or permitted to be given under this Agreement will, to be effective hereunder, be given to both Main and the Bank, in the case of notices given by the Executive, and will, to be effective hereunder, be given by both Main and the Bank, in the case of notices given to the Executive. Any notice given by Main, to the extent required will be deemed to be given by Main and the Bank. Any notice given to Main, to the extent required will be deemed to be given to Main and the Bank. Any such notice will be deemed properly given if in writing and if mailed by registered or certified mail, postage prepaid with return receipt requested, to the residence of the Executive, in the case of notices to the Executive, and to the respective principal offices of Main and of the Bank, in the case of notices to Main and the Bank. 13. Waiver. No provision of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in writing and signed by the Executive, an executive officer of Main, and an executive officer of the Bank, each such officer specifically designated by the Board of Directors of Main and the Bank, respectively. No waiver by any party hereto at any time or any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 14. Assignment. This Agreement is not assignable by any party hereto, except by Main and the Bank to any successor in interest to the respective businesses of Main and the Bank. 120 9 15. Entire Agreement. This Agreement contains the entire agreement of the parties relating to the subject matter of this Agreement and, in accordance with the provisions of Section 15, supersedes any prior agreement of the parties. 16. Successors; Binding Agreement. (a) Main and the Bank will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of Main and/or the Bank to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Main and the Bank would be required to perform it if no such succession had taken place. Failure by Main and the Bank to obtain such assumption and agreement prior to the effectiveness of any such succession will constitute a material breach of this Agreement. As used in this Agreement, "Main" and the "Bank" means Main and the Bank as hereinbefore defined and any successor to the business and/or assets of Main and/or the Bank as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (b) This Agreement will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, heirs, distributees, devisees, and legatees. If the Executive should die while any amount is payable to the Executive under this Agreement if the Executive had continued to live, all such amounts, unless otherwise provided herein, will be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee, or, if there is no such designee, to the Executive's estate. 17. Termination. (a) Unless the Executive's employment is terminated pursuant to the provisions of Section 3 or Section 5, the term of this Agreement will be for a period commencing on the date of this Agreement and ending on December 31, 2002; provided, however, that this Agreement will be automatically renewed on January 1, 2002 for the two-year period commencing on such date and ending on December 31, 2003, unless either party gives written notice of non-renewal to the other party on or before December 1, 2001 (in which case this Agreement will continue in effect through December 31, 2002); and provided further, that if this Agreement is renewed on January 1, 2002, it will be automatically renewed on January 1 of each subsequent year (the "Annual Renewal Date") for a period ending two years from each Annual Renewal Date unless either party gives written notice of non-renewal to the other party at least 30 days prior to an Annual Renewal Date (in which case this Agreement will continue in effect for a term ending one year from the Annual Renewal Date immediately following such notice). For purposes of the preceding sentence Main and the Bank will be considered one party. (b) Any termination of the Executive's employment under this Agreement or of the term of this Agreement will not affect the benefit and confidentiality of information provisions of Sections 6, 7, 8, 9, 10 and 11 shall survive any termination of employment of the term of this Agreement and remain in full force and effect in accordance with their respective terms. (c) Nothing herein will be construed as limiting, restricting or eliminating any rights the Executive may have under any plan, contract or arrangement to which he is a party or in which he is a vested participant; provided, however, that any termination payments required hereunder will be in 121 10 lieu of any severance benefits to which he may be entitled under a severance plan or arrangement of Main and the Bank; and provided further, that if the benefits under any such plan or arrangement may not legally be eliminated, then the payments hereunder will be correspondingly reduced in such equitable manner as the Board of Directors of Main may determine. (d) Notwithstanding any provisions of this Agreement to the contrary, no further payments or benefits shall be paid to the Executive following the end of the term as described in subsection 17(a) above. 18. No Mitigation or Offset. The Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking employment or otherwise; nor will any amounts or benefits payable or provided hereunder be reduced in the event he does secure employment, except as otherwise provided herein. 19. Validity. The invalidity or unenforceability of any provisions of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, which will remain in full force and effect. 20. Applicable Law. Except to the extent preempted by federal law, this Agreement will be governed by and construed in accordance with the domestic internal law of the Commonwealth of Pennsylvania. 21. Number. Words used herein in the singular will be construed as being used in the plural, as the context requires, and vice versa. 22. Headings. The headings of the sections and subsections of this Agreement are for convenience only and will not control or affect the meaning or construction or limit the scope or intent of any of the provisions of this Agreement. 23. References to Entities. All references to Main will be deemed to include references to the Bank, as appropriate in the relevant context, and vice versa. As of the date of this Agreement, Main and the Bank share one Board of Directors. To the extent, under this Agreement or law, an action is required by the Board of Directors of the Bank, a similar action of the board of Directors of Main shall be deemed sufficient 24. Guaranty. Main hereby irrevocably and unconditionally guarantees to the Executive the full and timely performance by the Bank of each and every obligation of the Bank contained in this Agreement. 25. Effective Date. This Agreement will become effective immediately upon the execution and delivery of this Agreement by the parties hereto. 26. Withholding for Taxes. All amounts and benefits paid or provided hereunder will be subject to withholding for taxes as required by law. 27. Individual Agreement. This Agreement is an agreement solely between and among the parties hereto. It is intended to constitute a nonqualified unfunded agreement for the benefit of a key management employee and will be construed and interpreted in a manner consistent with such intention. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. MAIN STREET BANCORP, INC. By /s/ Brian M. Hartline ----------------------- (SEAL) Attest: /s/ Andrew J. Rothermel ------------------------- 122 11 (Assistant) Secretary ("Main") MAIN STREET BANK By /s/ Brian M. Hartline ----------------------- (SEAL) Attest: /s/ Andrew J. Rothermel ------------------------- (Assistant) Secretary ("Bank") Witness: /s/ Carol Sheeler /s/ Robert J. Smik (SEAL) - ------------------- ------------------- ROBERT J. SMIK ("Executive") 123 EX-10.6 5 w46444ex10-6.txt EMPLOYMENT AGREEMENT FOR ROBERT A. KUEHL 1 EXHIBIT 10.6 EMPLOYMENT AGREEMENT THIS AGREEMENT ("Agreement") made as of the 1st day of November, 2000, between MAIN STREET BANCORP, INC., a Pennsylvania business corporation ("Main"), MAIN STREET BANK, a Pennsylvania banking corporation (the "Bank"), and ROBERT A. KUEHL, an individual (the "Executive"). WITNESSETH: WHEREAS, Main, the Bank and the Executive desire to enter into an Agreement regarding, among other things, the employment of the Executive by Main and the Bank, all as hereinafter set forth. NOW, THEREFORE, the parties hereto, intending to be legally bound hereby, agree as follows: 1. Employment. Main and the Bank each hereby employ the Executive, and the Executive hereby accepts employment with Main and the Bank, on the terms and conditions set forth in this Agreement. 2. Duties of Employee. The Executive will perform and discharge well and faithfully such duties as an executive officer of Main and the Bank as may be assigned to him from time to time by the Board of Directors of Main or the Bank, or the Executive committee of such Boards. The Executive will be employed as Executive Vice President/Chief Financial Officer of Main and the Bank, and will hold such other titles as may be given to him from time to time by the Board of Directors of Main and the Bank, or the Executive Committee of such Boards. The Executive will devote his full time, attention and energies to the business of Main and the Bank and will not, during the Employment Period (as defined in Section 3), be employed or involved in any other business activity, whether or not such activity is pursued for gain, profit or other pecuniary advantage; provided, however, that this section will not be construed as preventing the Executive from (a) passively investing his personal assets, (b) acting as a member of the Board of Directors of Main, the Bank, or with pre-approval of the Chairman of Main, any other corporation not in competition with either, or (c) being involved in any community, civic or similar activity serving as a member of a Board of Directors, Trustee or otherwise. 3. Term of Employment. The Executive's employment under this Agreement will be for a period (the "Employment Period") commencing upon the date of this Agreement and ending at the end of the term of this Agreement pursuant to Section 17, unless the Executive's employment is sooner terminated in accordance with Section 5 or one of the following provisions: (a) Termination for Cause. The Executive's employment under this Agreement may be terminated at any time during the Employment Period for "Cause" (as herein defined), by action of the Board of Directors of Main or the Bank, or the Executive Committee of such Boards, upon giving written notice of such termination to the Executive. As used in this Agreement, "Cause" means any of the following events: (i) the Executive is convicted of or enters a plea of guilty or nolo contendere to a felony, a crime of falsehood, or a crime involving 124 2 fraud or moral turpitude, or the actual incarceration of the Executive for a period of five (5) consecutive days; (ii) the Executive, in the reasonable opinion of the Board of Directors of Main or the Bank, willfully fails or continuously neglects, to perform the responsibilities and duties assigned to him following receipt of two (2) written warnings at least thirty (30) days apart from the Board of Directors of Main or the Bank (excluding however, failure to perform due to Executive's incapacity because of physical or mental illness); (iii) the Executive has, in the reasonable opinion of the Board of Directors of Main or the Bank, engaged in gross misconduct or gross negligence in the course of his employment with Main; (iv) a government regulatory agency recommends or orders in writing that the Bank terminate the employment of the Executive with the Bank or relieve him of his duties as such relate to the Bank; or (v) the Executive has, in the reasonable opinion of the Board of Directors, committed an intentional act of fraud, embezzlement or theft in connection with the Executive's duties in the course of his employment; (vi) the Executive has, in the reasonable opinion of the Board of Directors, caused intentional damage to property of Main or has intentionally and wrongfully disclosed Confidential Information. If the Executive's employment is terminated under the provisions of this subsection, then all rights of the Executive under Section 4 will cease as of the effective date of such termination. For purposes of this Section 3(a), any notice delivered by the Chief Executive Officer of Main or the Bank shall be deemed to be delivered by the Board of Directors of Main or the Bank. (b) Termination Without Cause. The Executive's employment under this Agreement may be terminated at any time during the Employment Period without "Cause" (as defined in Section 3 (a)), by action of the Board of Directors of Main or the Bank, upon giving notice of such termination of the Executive at least thirty (30) days prior to the date upon which such termination is to take effect. If the Executive's employment is terminated under the provisions of this subsection, then the Executive will be entitled to receive the compensation set forth in Section 6. (c) Voluntary Termination, Retirement or Death. If the Executive voluntarily terminates employment without Good Reason (as defined in Section 5), retires or dies, the Executive's employment under this Agreement will be deemed terminated as of the date of the Executive's voluntary termination, retirement or death, and all rights of the Executive under Section 4 will cease as of the date of such termination and any benefits payable to the Executive will be determined in accordance with the pension, welfare, fringe benefit, expense reimbursement, salary deferral and insurance programs of Main and of the Bank then in effect. (d) Disability. If the Executive is incapacitated by accident, sickness, or otherwise so as to render the Executive mentally or physically incapable of performing the essential duties required of the Executive under Section 2, notwithstanding reasonable accommodation, for a continuous period of six months, then, upon the expiration of such period or at any time thereafter, by action of the Board of Directors of Main or the Bank, the Executive's employment under 125 3 this Agreement may be terminated immediately upon giving the Executive notice to that effect. If the Executive's employment is terminated under the provisions of this subsection 3(d), then all rights of the Executive under Section 4 will cease as of the last business day of the week in which such termination occurs, and the Executive will thereafter be entitled to the benefits to which he is entitled under any disability plan of Main or the Bank, if any, in which he is then a participant (including the minimum benefit described in Section 4 (d) (ii)). 4. Employment Period Compensation and Related Matters. (a) Salary. For services performed by the Executive under this Agreement, Main and the Bank will pay the Executive a salary, in the aggregate, during the Employment Period, at the annualized rate of $120,000, payable at the same times as salaries are payable to other executive employees of Main or of the Bank. Main and/or the Bank may, from time to time, increase (but not decrease) the Executive's salary, and any and all such increases will be deemed to constitute amendments to this subsection to reflect the increased amounts, effective as of the dates established for such increases by the Board of Directors of Main or of the Bank in the resolutions authorizing such increases. (b) Bonus. For services performed by the Executive under this Agreement, Main will pay the Executive a bonus, annually during the Employment Period, in such amounts (if any) and at such times as is provided in such incentive plan(s) as may be approved by the Board of Directors of Main and in effect from time to time. In addition, Main may, from time to time, pay such other bonus or bonuses to the Executive as Main, in its sole discretion, deems appropriate. The payment of any such bonuses will not reduce or otherwise affect any other obligation of Main and/or the Bank to the Executive provided for in this Agreement. (c) Pension and Welfare Benefits. Main will provide the Executive, during the Employment Period, with pension and welfare benefits (within the meaning of Section 3 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) in the aggregate not less favorable than those received by other employees of Main. (d) Fringe Benefits. (i) In General. Except as otherwise provided in this subsection, Main will provide the Executive, during the Employment Period, with such fringe benefits as may be provided generally from time to time for other executives similarly situated in status with the Executive. (ii) Vacation. The Executive will be entitled to not less than four weeks of vacation per calendar year, plus one additional day for each five years of service with Main and any predecessor of Main. The right to carry over unused vacation days will be subject to the executive personnel policies of Main from time to time in effect. (iii)Stock Options. The Executive will be entitled to such stock option grants as may be granted from time to time by the Board of Directors of Main and/or the Compensation Committee of such Board and as are consistent with the Executive's responsibilities and performance. (iv) Automobile. Main will provide the Executive an automobile allowance reasonably consistent with the Executive's position and in accordance with Main's then in effect automobile policy for executive officers. 126 4 (e) Expense Reimbursement. The Executive will be entitled to reimbursement of all reasonable business expenses incurred by him in the discharge of his duties hereunder, or otherwise in furtherance of the business of Main and the Bank, provided he renders an accounting of such expenses in such manner as may be required from time to time for employees generally. (f) Salary Deferral. The Executive may request that the payment of any portion of his base salary and/or bonus for any calendar year be deferred. Such request must be made in writing to Main and the Bank before the beginning of such calendar year and must include the period of deferral requested by the Executive (the "Deferral Period"). If the Board of Directors of Main and of the Bank approve such request, the Executive will be entitled to receive, at the end of the Deferral Period, the deferred portion of his base salary and/or bonus plus interest at a compounded rate of 8% per annum. Any salary and/or bonus which is deferred as described herein will be credited to an account on the books of Main and of the Bank established in the name of the Executive. However, this account will not be funded, and neither Main nor the Bank will be deemed to be a trustee for the Executive with respect to any deferred amount. The liabilities of Main and the Bank to the Executive hereunder are those of a debtor pursuant to such contractual obligations as are created by this Agreement and Executive's status with respect to his deferred compensation shall be that of a general unsecured creditor of Main. No liabilities of Main and the Bank which arise under this subsection will be deemed to be secured by any pledge or other encumbrance on any property of Main or of the Bank. Main and the Bank will not be required to segregate any funds representing such deferred amounts, and nothing herein will be construed as providing for such segregation. 5. Resignation of the Executive for Good Reason. (a) Events Giving Right to Terminate for Good Reason. The Executive may resign for Good Reason (as herein defined) at any time during the Employment Period, as hereinafter set forth. As used in this Agreement, the term "Good Reason" means any of the following: (i) any reassignment of the Executive to a principal office which is more than 50 miles from 601 Penn Street, Reading, Pennsylvania; (ii) a reduction in Executive's title coincident with a reduction of the authority, duties and responsibilities assigned to Executive by Main; (iii) any reduction in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (iv) Any failure by Main and/or the Bank to provide the Executive with benefits at least as favorable as those enjoyed by the Executive under any of the pension or welfare plans (as such terms are defined in ERISA Section 3) of Main in which the Executive is participating on the date of this Agreement, or the taking of any action that would materially reduce any of such benefits, unless the change is part of a change applicable in each case to employees generally; or (v) any material breach of this Agreement by Main or the Bank, coupled with the failure to cure the same within 30 days after receipt of a written notice of such breach from the Executive. (b) Notice of Termination. At the option of the Executive, exercisable by the Executive within 90 days after the occurrence of the event constituting Good Reason, the Executive may resign from employment under this Agreement by a 127 5 notice in writing (the "Notice of Termination") delivered to Main and the Bank and the provisions of Section 6 will thereupon apply. (c) Special Right of Termination. Notwithstanding anything herein to the contrary, but subject to the provisions of Section 3(a), from the occurrence of the Change in Control event until the end of the one-year period following the consummation of the Change in Control (as defined below), the Executive may terminate his employment for any or no reason by delivering a Notice of Termination, to Main, specifying that the Notice is being given pursuant to this Section 5(c); and such termination will be deemed for all purposes to constitute a resignation for Good Reason. In such event, the Executive will be entitled to the payments and benefits described in Section 6. (d) Change in Control Defined. For purposes of this Agreement, the term "Change in Control" means any of the following: (i) any "person" (as such term is used in Sections 13(d) and 14(d) (2) of the Securities and Exchange Act of 1934 (the "Exchange Act")), other than Main, a subsidiary of Main, an employee benefit plan of Main or a subsidiary of Main (including a related trust), becomes the beneficial owner (as determined pursuant to Rule 13d-3 under the Exchange Act), directly or indirectly of securities of Main representing more than 20% of the combined voting power of Main's then outstanding securities; (ii) the occurrence of, or execution of an agreement providing for, a sale of all or substantially all of the assets of Main or the Bank to an entity which is not a direct or indirect subsidiary of Main; (iii) the occurrence of, or execution of an agreement providing for, a reorganization, merger, consolidation or similar transaction involving Main, unless (A) the shareholders of Main immediately prior to the consummation of any such transaction will initially own securities representing a majority of the voting power of the surviving or resulting corporation, and (B) the directors of Main immediately prior to the consummation of such transaction will initially represent a majority of the directors of the surviving or resulting corporation; or (iv) any other event which is at any time irrevocably designated as a "Change in Control" for purposes of this Agreement by resolution adopted by a majority of the directors of Main. (e) Special Right of Payment. Within thirty (30) days following the occurrence of an event described in Section 5 (d) (i) of this Agreement, Main or the Bank shall pay to Executive a lump sum amount equal to the amount set forth in Section 6 (b) (i) of this Agreement. This payment shall be separate and apart from any payments otherwise due Executive under this Agreement. 6. Rights in Event of Certain Termination of Employment. In the event that during the term of this Agreement as established pursuant to Section 17 the Executive resigns from employment for Good Reason, by delivery of a Notice of Termination or other permitted notice to Main and the Bank, or the Executive's employment is terminated by Main without Cause, Executive will be entitled to receive the amounts and benefits set forth in this section. (a) Basic Payments (prior to the occurrence of a Change in Control). In the event of a termination pursuant to Section 3 (b) prior to the occurrence of a Change in Control, or a termination pursuant to Section 5 (a) that is not also a termination pursuant to Section 5(c), Main shall be obligated to continue to pay the Executive his base salary in effect as of his termination for the greater of (i) the balance of the term of the Agreement, or (ii) twelve (12) 128 6 months. Such amounts will be paid to Executive in accordance with Main's normal payroll schedule. (b) Basic Payments (following the occurrence of a Change in Control). In the event of a termination pursuant to Section 3 (b) at the time of or following the occurrence of a Change in Control, or a termination pursuant to Section 5 (c), the Executive will be paid an amount equal to two times the sum of (i) the highest annualized base salary paid to him during the year of termination or the immediately preceding two calendar years, and (ii) the highest bonus paid to him with respect to one of the three calendar years immediately preceding the year of termination. The Executive will, within 30 days after his termination of employment, be paid a lump sum equal to the present value of the amounts otherwise payable under this subsection. For purposes of the preceding sentence, present value will be determined by using the short-term applicable federal rate under Section 1274 of the Internal Revenue Code of 1986, as amended (the "Code"), in effect on the date of termination of employment. For purposes of this subsection, to the extent necessary, base salary and bonuses with any predecessor of Main or an affiliate thereof shall be taken into account. (c) Supplemental Payment in Lieu of Certain Benefits. In the event of a termination pursuant to Section 3 (b) at the time of or following the occurrence of a Change in Control or a termination pursuant to Section 5 (c), in lieu of continued pension, welfare and other benefits, a lump sum cash payment of $22,000 will be paid to the Executive within 30 days following the date of termination of employment. (d) Excise Tax Matters in General. In the event that the amounts and benefits payable under Section 6(a), 6(b) and 6(c), when added to other amounts and benefits which may become payable to the Executive by Main and/or the Bank, are such that he becomes subject to the excise tax provisions of Code Section 4999, Main and/or the Bank will pay him such additional amount or amounts as will result in his retention (after the payment of all federal, state and local excise, employment, and income taxes on such payments and the value of such benefits) of a net amount equal to the net amount he would have retained had the initially calculated payments and benefits been subject only to income and employment taxation. For purposes of the preceding sentence, the Executive will be deemed to be subject to the highest marginal federal, state and local tax rates. All calculations required to be made under this subsection will be made by Main's independent certified public accountants, subject to the right of Executive's representative to review the same. All such amounts required to be paid will be paid at the time any withholding may be required under applicable law, and any additional amounts to which the Executive may be entitled will be paid or reimbursed no later than 15 days following confirmation of such amount by Main's accountants. In the event any amounts paid hereunder are subsequently determined to be in error because estimates were required or otherwise, the parties agree to reimburse each other to correct such error, as appropriate, and to pay interest thereon at the applicable federal rate (as determined under Code Section 1274A for the period of time such erroneous amount remained outstanding and unreimbursed). The parties recognize that the actual implementation of the provisions of this subsection are complex and agree to deal with each other in good faith to resolve any questions or disagreements arising hereunder. 7. Confidentiality. (a) As used in this section, the term "Confidential Information" means any and all information regarding the organization, business or finances of Main or any of its subsidiaries and affiliates, including, but not limited to, any and all business plans and strategies, financial information, proposals, reports, marketing plans and information, cost information, customer information, claims history and experience data, sales volume and other sales 129 7 statistics, personnel data, pricing information, concepts and ideas, information respecting existing and proposed investments and acquisitions, and information regarding customers and suppliers, but the term "Confidential Information" will not include information created by the Executive or which prior to the Executive's receipt thereof (i) was generally publicly available, or (ii) was in the Executive's possession free of any restrictions on it use or disclosure and from a source other than Main or any of its subsidiaries or affiliates. (b) The Executive acknowledges and agrees that his employment by Main and the Bank will afford him an opportunity to acquire Confidential Information and that the misappropriation or disclosure of any Confidential Information would cause irreparable harm to Main and its subsidiaries and affiliates. (c) During the Employment Period and for a period of two years thereafter, the Executive will not use for the benefit of anyone other than Main and its subsidiaries and affiliates or disclose any of the Confidential Information for any reason or purpose whatsoever except to authorized representatives of such business entities or as directed or authorized by Main. (d) With respect to those items of Confidential Information which constitute trade secrets under applicable law, the Executive's obligations of confidentiality and nondisclosure as set forth in this section will continue and survive after the two-year period as provided in Subsection (c) to the greatest extent permitted by applicable law. (e) The Executive will not remove any records, documents, or any other tangible items (excluding the Executive's personal property) from the premises of Main or its subsidiaries or affiliates, in either original or duplicate form, except as needed in the ordinary course of performing services hereunder. (f) Upon termination of this Agreement, the Executive will immediately surrender to the owner thereof all documents (other than documents created by him) in his possession, custody or control embodying the Confidential Information or any part thereof and will not thereafter remove the same from the premises on which it is located. (g) The provisions of this Section 7 shall survive termination of this Agreement for any reason. 8. Remedies. Executive acknowledges and agrees that the remedy at law of Main and of the Bank for a breach or threatened breach of any of the provisions of Section 7 would be inadequate and, in recognition of this fact, in the event of a breach or threatened breach by the Executive of any of the provisions of Section 7, it is agreed that, in addition to the remedy at law, Main and the Bank will be entitled to, without posting any bond, and the Executive agrees not to oppose any request of Main and the Bank for, equitable relief in the form of specific performance, a temporary restraining order, a temporary or permanent injunction, or any other equitable remedy which may then be available. Nothing herein contained will be construed as prohibiting Main and the Bank from pursuing any other remedies available to them for such breach or threatened breach. 9. Arbitration. Main, the Bank and Executive recognize that in the event a dispute should arise between them concerning the interpretation or implementation of this Agreement, lengthy and expensive litigation will not afford a practical resolution of the issues within a reasonable period of time. Consequently, each party agrees that all disputes, disagreements and questions of interpretation concerning this Agreement are to be submitted for resolution to the American Arbitration Association ("Association") in Philadelphia, Pennsylvania, in accordance with the Individual Employment Dispute Resolution rules of the Association. Main and the Bank, or Executive, may initiate an arbitration proceeding at any time by giving 130 8 notice to the others in accordance with the rules of the Association. The Association will designate a single arbitrator to conduct the proceeding, but Main and the Bank, and the Executive, may, as a matter of right, require the substitution of a different arbitrator chosen by the Association. Each such right of substitution may be exercised only once. The arbitrator will not be bound by the rules of evidence and procedure of the courts of the Commonwealth of Pennsylvania but will be bound by the substantive law applicable to this Agreement. The decision of the arbitrator, absent fraud, duress, incompetence or gross and obvious error of fact, will be final and binding upon the parties and will be enforceable in courts of proper jurisdiction. Following written notice of a request for arbitration, Main and the Bank, and the Executive, will be entitled to an injunction restraining all further proceedings in any pending or subsequently filed litigation concerning this Agreement, except as otherwise provided herein. 10. Legal Expenses. Main and/or the Bank will pay to the Executive all reasonable legal fees and expenses when incurred by the Executive in seeking to obtain or enforce any right or benefit provided by this Agreement, provided he brings the action in good faith, and he prevails. 11. Indemnification. Main and the Bank will indemnify the Executive, to the fullest extent permitted under Pennsylvania and federal law, with respect to any threatened, pending or completed legal or regulatory action, suit or proceeding brought against him by reason of the fact that he is or was a director, officer, employee or agent of Main or the Bank, or is or was serving at the request of Main or the Bank as a director, officer, employee or agent of another person or entity. To the fullest extent permitted by Pennsylvania and federal law, Main and the Bank will, in advance of final disposition, pay any and all expenses incurred by the Executive in connection with any threatened, pending or completed legal or regulatory action, suit or proceeding with respect to which he may be entitled to indemnification hereunder. Main and the Bank will use their best efforts to obtain insurance coverage for the Executive under a policy covering directors and officers thereof against litigation, arbitrations and other legal and regulatory proceedings; provided, however, that nothing herein is to be construed as requiring such action if the Board of Directors of Main and the Bank determine that such insurance coverage cannot be obtained at commercially reasonable rates. 12. Notices. Any notice required or permitted to be given under this Agreement will, to be effective hereunder, be given to both Main and the Bank, in the case of notices given by the Executive, and will, to be effective hereunder, be given by both Main and the Bank, in the case of notices given to the Executive. Any notice given by Main, to the extent required will be deemed to be given by Main and the Bank. Any notice given to Main, to the extent required will be deemed to be given to Main and the Bank. Any such notice will be deemed properly given if in writing and if mailed by registered or certified mail, postage prepaid with return receipt requested, to the residence of the Executive, in the case of notices to the Executive, and to the respective principal offices of Main and of the Bank, in the case of notices to Main and the Bank. 13. Waiver. No provision of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in writing and signed by the Executive, an executive officer of Main, and an executive officer of the Bank, each such officer specifically designated by the Board of Directors of Main and the Bank, respectively. No waiver by any party hereto at any time or any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 14. Assignment. This Agreement is not assignable by any party hereto, except by Main and the Bank to any successor in interest to the respective businesses of Main and the Bank. 131 9 15. Entire Agreement. This Agreement contains the entire agreement of the parties relating to the subject matter of this Agreement and, in accordance with the provisions of Section 15, supersedes any prior agreement of the parties. 16. Successors; Binding Agreement. (a) Main and the Bank will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of Main and/or the Bank to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Main and the Bank would be required to perform it if no such succession had taken place. Failure by Main and the Bank to obtain such assumption and agreement prior to the effectiveness of any such succession will constitute a material breach of this Agreement. As used in this Agreement, "Main" and the "Bank" means Main and the Bank as hereinbefore defined and any successor to the business and/or assets of Main and/or the Bank as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (b) This Agreement will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, heirs, distributees, devisees, and legatees. If the Executive should die while any amount is payable to the Executive under this Agreement if the Executive had continued to live, all such amounts, unless otherwise provided herein, will be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee, or, if there is no such designee, to the Executive's estate. 17. Termination. (a) Unless the Executive's employment is terminated pursuant to the provisions of Section 3 or Section 5, the term of this Agreement will be for a period commencing on the date of this Agreement and ending on December 31, 2002; provided, however, that this Agreement will be automatically renewed on January 1, 2002, for the two-year period commencing on such date and ending on December 31, 2003, unless either party gives written notice of non-renewal to the other party on or before December 1, 2001 (in which case this Agreement will continue in effect through December 31, 2002); and provided further, that if this Agreement is renewed on January 1, 2002, it will be automatically renewed on January 1 of each subsequent year (the "Annual Renewal Date") for a period ending two years from each Annual Renewal Date unless either party gives written notice of non-renewal to the other party at least 30 days prior to an Annual Renewal Date (in which case this Agreement will continue in effect for a term ending one year from the Annual Renewal Date immediately following such notice). For purposes of the preceding sentence Main and the Bank will be considered one party. (b) Any termination of the Executive's employment under this Agreement or of the term of this Agreement will not affect the benefit and confidentiality of information provisions of Sections 6, 7, 8, 9, 10 and 11 shall survive any termination of employment of the term of this Agreement and remain in full force and effect in accordance with their respective terms. (c) Nothing herein will be construed as limiting, restricting or eliminating any rights the Executive may have under any plan, contract or arrangement to which he is a party or in which he is a vested participant; provided, however, that any termination payments required hereunder will be in 132 10 lieu of any severance benefits to which he may be entitled under a severance plan or arrangement of Main and the Bank; and provided further, that if the benefits under any such plan or arrangement may not legally be eliminated, then the payments hereunder will be correspondingly reduced in such equitable manner as the Board of Directors of Main may determine. (d) Notwithstanding any provisions of this Agreement to the contrary, no further payments or benefits shall be paid to the Executive following the end of the term as described in subsection 17(a) above. 18. No Mitigation or Offset. The Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking employment or otherwise; nor will any amounts or benefits payable or provided hereunder be reduced in the event he does secure employment, except as otherwise provided herein. 19. Validity. The invalidity or unenforceability of any provisions of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, which will remain in full force and effect. 20. Applicable Law. Except to the extent preempted by federal law, this Agreement will be governed by and construed in accordance with the domestic internal law of the Commonwealth of Pennsylvania. 21. Number. Words used herein in the singular will be construed as being used in the plural, as the context requires, and vice versa. 22. Headings. The headings of the sections and subsections of this Agreement are for convenience only and will not control or affect the meaning or construction or limit the scope or intent of any of the provisions of this Agreement. 23. References to Entities. All references to Main will be deemed to include references to the Bank, as appropriate in the relevant context, and vice versa. As of the date of this Agreement, Main and the Bank share one Board of Directors. To the extent, under this Agreement or law, an action is required by the Board of Directors of the Bank, a similar action of the board of Directors of Main shall be deemed sufficient. 24. Guaranty. Main hereby irrevocably and unconditionally guarantees to the Executive the full and timely performance by the Bank of each and every obligation of the Bank contained in this Agreement. 25. Effective Date. This Agreement will become effective immediately upon the execution and delivery of this Agreement by the parties hereto. 26. Withholding for Taxes. All amounts and benefits paid or provided hereunder will be subject to withholding for taxes as required by law. 27. Individual Agreement. This Agreement is an agreement solely between and among the parties hereto. It is intended to constitute a nonqualified unfunded agreement for the benefit of a key management employee and will be construed and interpreted in a manner consistent with such intention. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. MAIN STREET BANCORP, INC. By /s/ Brian M. Hartline ----------------------------- (SEAL) Attest: /s/ Andrew J. Rothermel --------------------------- (Assistant) Secretary 133 11 ("Main") MAIN STREET BANK By /s/ Brian M. Hartline ---------------------- (SEAL) Attest: Andrew J. Rothermel ------------------- (Assistant) Secretary ("Bank") Witness: /s/ Annette McCracken /s/ Robert A. Kuehl (SEAL) - ---------------------- -------------------- ROBERT A. KUEHL ("Executive") 134 EX-21.1 6 w46444ex21-1.txt LIST OF SUBSIDIARIES OF THE COMPANY 1 MAIN STREET BANCORP, INC. EXHIBIT 21.1 Main Street Bank MBNK Investment Company MBNK Capital Trust I 135 EX-23.1 7 w46444ex23-1.txt CONSENT OF BEARD MILLER COMPANY LLC 1 Exhibit 23.1 CONSENT OF BEARD MILLER COMPANY LLP, INDEPENDENT AUDITORS Regarding: 1. Registration Statement on Form S-8 relating to the Main Street Bancorp, Inc. 1994 Stock Option Plan (File #33357777). 2. Registration Statement on Form S-8 relating to the Main Street Bancorp, Inc. 1993 Independent Directors Stock Option Plan (File #333-57783). 3. Registration Statement on Form S-8 relating to the Main Street Bancorp, Inc. 1995 Stock Incentive Plan (File #33357803). 4. Registration Statement on Form S-8 relating to the Main Street Bancorp, Inc. 1995 Stock Option Plan for Non-Employee Directors (File #333-57825). 5. Registration Statement on Form S-8 relating to the Main Street Bancorp, Inc. 1989 Stock Option Plan (File #333-57841). 6. Registration Statement on Form S-8 relating to the Main Street Bancorp, Inc. 1988 Stock Option Plan (File #33357847). 7. Registration Statement on Form S-8 relating to the Main Street Bancorp, Inc. 401(k) Retirement Plan (File #333-57851). 8. Registration Statement on Form S-8 relating to the Main Street Bancorp, Inc. 1996 Stock Option Plan (File #333-57703). 9. Registration Statement on Form S-3 relating to the Shareholder Automatic Dividend Reinvestment and Stock Purchase Plan (File #333-57689). We consent to the incorporation by reference in the above listed Registration Statements of our report dated, January 19, 2001, with respect to the consolidated financial statements of Main Street Bancorp, Inc. and subsidiaries included in this Annual Report (Form 10-K) for the year ended December 31, 2000. /s/ BEARD MILLER COMPANY LLP Reading, Pennsylvania March 22, 2001 -----END PRIVACY-ENHANCED MESSAGE-----