Item 1. Financial Statements
The financial statements filed as part of Item 1 of Part I are
as follows:
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
3,457,074
|
|
|
$
|
2,929,591
|
|
Interest-bearing deposits in banks
|
|
|
5,241,116
|
|
|
|
10,343,469
|
|
Federal funds sold
|
|
|
6,599,498
|
|
|
|
4,691,091
|
|
Total Cash and Cash Equivalents
|
|
|
15,297,688
|
|
|
|
17,964,151
|
|
Securities available-for-sale, at fair value
|
|
|
20,213,191
|
|
|
|
21,832,432
|
|
Restricted equity securities
|
|
|
587,200
|
|
|
|
654,600
|
|
Loans held for sale
|
|
|
—
|
|
|
|
306,250
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
Total Gross Loans
|
|
|
126,073,634
|
|
|
|
123,637,386
|
|
Unearned deferred fees and costs, net
|
|
|
77,797
|
|
|
|
86,600
|
|
Loans, net of unearned deferred fees and costs
|
|
|
126,151,431
|
|
|
|
123,723,986
|
|
Less: Allowance for loan losses
|
|
|
(2,352,035
|
)
|
|
|
(2,379,145
|
)
|
Net Loans
|
|
|
123,799,396
|
|
|
|
121,344,841
|
|
Bank premises and equipment, net
|
|
|
1,509,958
|
|
|
|
1,509,562
|
|
Accrued interest receivable
|
|
|
440,276
|
|
|
|
462,081
|
|
Bank owned life insurance
|
|
|
1,912,573
|
|
|
|
1,898,736
|
|
Other real estate owned, net of valuation allowance
|
|
|
783,430
|
|
|
|
728,163
|
|
Other assets
|
|
|
1,945,700
|
|
|
|
2,330,201
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
166,489,412
|
|
|
$
|
169,031,017
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non-interest bearing demand deposits
|
|
$
|
28,070,187
|
|
|
$
|
26,856,990
|
|
Interest bearing deposits
|
|
|
111,925,996
|
|
|
|
115,964,448
|
|
Total Deposits
|
|
|
139,996,183
|
|
|
|
142,821,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest payable and other liabilities
|
|
|
2,159,794
|
|
|
|
2,222,038
|
|
Total Liabilities
|
|
|
142,155,977
|
|
|
|
145,043,476
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, no par value, authorized 10,000,000 shares; none issued
|
|
|
—
|
|
|
|
—
|
|
Common stock, no par value, authorized 10,000,000 shares; issued and outstanding 1,713,375 shares at March 31, 2014 and December 31, 2013, respectively
|
|
|
17,866,890
|
|
|
|
17,866,890
|
|
Retained earnings
|
|
|
6,410,186
|
|
|
|
6,161,960
|
|
Accumulated other comprehensive income (loss)
|
|
|
56,359
|
|
|
|
(41,309
|
)
|
Total Shareholders’ Equity
|
|
|
24,333,435
|
|
|
|
23,987,541
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$
|
166,489,412
|
|
|
$
|
169,031,017
|
|
See accompanying notes to consolidated financial statements.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
|
|
Three Months
Ended
March 31, 2014
|
|
|
Three Months
Ended
March 31, 2013
|
|
|
|
|
|
|
|
|
Interest and Dividend Income:
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
1,571,595
|
|
|
$
|
1,770,038
|
|
Interest on interest-bearing deposits
|
|
|
3,938
|
|
|
|
7,140
|
|
Interest on federal funds sold
|
|
|
2,621
|
|
|
|
1,586
|
|
Interest on securities available-for-sale:
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
93,357
|
|
|
|
77,132
|
|
Nontaxable
|
|
|
17,982
|
|
|
|
16,644
|
|
Dividends on restricted equity securities
|
|
|
8,596
|
|
|
|
8,309
|
|
Total Interest and Dividend Income
|
|
|
1,698,089
|
|
|
|
1,880,849
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
Interest on deposits
|
|
|
204,161
|
|
|
|
286,609
|
|
Interest on repurchase agreements
|
|
|
—
|
|
|
|
595
|
|
Total Interest Expense
|
|
|
204,161
|
|
|
|
287,204
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
1,493,928
|
|
|
|
1,593,645
|
|
Provision for loan losses
|
|
|
73,488
|
|
|
|
187,605
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income After Provision for Loan Losses
|
|
|
1,420,440
|
|
|
|
1,406,040
|
|
|
|
|
|
|
|
|
|
|
Noninterest Income:
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
57,080
|
|
|
|
69,988
|
|
Mortgage commissions
|
|
|
23,467
|
|
|
|
73,986
|
|
Electronic card fees
|
|
|
39,906
|
|
|
|
43,766
|
|
Investment fee income
|
|
|
51,347
|
|
|
|
41,244
|
|
Income on bank owned life insurance
|
|
|
13,837
|
|
|
|
9,439
|
|
Other fee income and miscellaneous income
|
|
|
25,202
|
|
|
|
27,456
|
|
Total Noninterest Income
|
|
|
210,839
|
|
|
|
265,879
|
|
|
|
|
|
|
|
|
|
|
Noninterest Expense:
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
708,164
|
|
|
|
664,329
|
|
Occupancy and equipment expense
|
|
|
196,307
|
|
|
|
190,187
|
|
Professional fees
|
|
|
53,809
|
|
|
|
60,141
|
|
Outside processing
|
|
|
84,999
|
|
|
|
104,793
|
|
FDIC assessment
|
|
|
27,547
|
|
|
|
53,929
|
|
Franchise tax
|
|
|
59,250
|
|
|
|
54,000
|
|
Regulatory examination fees
|
|
|
22,549
|
|
|
|
26,303
|
|
Other real estate and repossessions
|
|
|
3,757
|
|
|
|
62,238
|
|
Other expenses
|
|
|
115,425
|
|
|
|
113,450
|
|
Total Noninterest Expense
|
|
|
1,271,807
|
|
|
|
1,329,370
|
|
|
|
|
|
|
|
|
|
|
Net Income Before Tax
|
|
$
|
359,472
|
|
|
$
|
342,549
|
|
Income Tax Expense
|
|
|
111,246
|
|
|
|
106,692
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
248,226
|
|
|
$
|
235,857
|
|
Basic Net Income Per Common Share
|
|
$
|
.14
|
|
|
$
|
.14
|
|
Diluted Net Income Per Common Share
|
|
$
|
.14
|
|
|
$
|
.14
|
|
See accompanying notes to consolidated financial statements.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive
Income
(Unaudited)
|
|
Three Months
Ended
March 31, 2014
|
|
|
Three Months
Ended
March 31, 2013
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
248,226
|
|
|
$
|
235,857
|
|
Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
Net unrealized holding gains (losses) on securities available for sale during the period
|
|
|
147,982
|
|
|
|
(58,500
|
)
|
Deferred income tax (expense) benefit on unrealized holding gains (losses) on securities available for sale
|
|
|
(50,314
|
)
|
|
|
19,890
|
|
Other Comprehensive Income (Loss)
|
|
|
97,668
|
|
|
|
(38,610
|
)
|
Total Comprehensive Income
|
|
$
|
345,894
|
|
|
$
|
197,247
|
|
See accompanying notes to consolidated financial statements.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
|
|
Three Months
Ended
March 31, 2014
|
|
|
Three Months
Ended
March 31, 2013
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
248,226
|
|
|
$
|
235,857
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
73,488
|
|
|
|
187,605
|
|
Depreciation and amortization
|
|
|
37,725
|
|
|
|
38,711
|
|
Amortization of discounts and premiums, net
|
|
|
39,680
|
|
|
|
51,126
|
|
(Gain) loss and impairment on other real estate owned and repossessions
|
|
|
(815
|
)
|
|
|
33,385
|
|
Deferred tax expense
|
|
|
111,246
|
|
|
|
488,201
|
|
Change in loans held for sale
|
|
|
306,250
|
|
|
|
(163,000
|
)
|
Decrease in accrued interest receivable
|
|
|
21,805
|
|
|
|
58,474
|
|
(Increase) decrease in other assets
|
|
|
222,941
|
|
|
|
(288,225
|
)
|
Increase in value of bank owned life insurance
|
|
|
(13,837
|
)
|
|
|
(9,439
|
)
|
Change in reserve for unfunded lending commitments
|
|
|
3,069
|
|
|
|
3,970
|
|
Increase in executive retirement plan accrual
|
|
|
35,657
|
|
|
|
30,180
|
|
Payments on executive retirement plan
|
|
|
(140,628
|
)
|
|
|
(140,628
|
)
|
Increase (decrease) in accrued interest payable and other liabilities
|
|
|
39,658
|
|
|
|
(14,251
|
)
|
Net cash provided by operating activities
|
|
|
984,465
|
|
|
|
511,966
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of bank premises and equipment
|
|
|
(38,121
|
)
|
|
|
(50,441
|
)
|
Purchases of securities available for sale
|
|
|
—
|
|
|
|
(250,000
|
)
|
Calls/maturities/repayments of securities available for sale
|
|
|
1,727,543
|
|
|
|
2,094,350
|
|
Redemptions of restricted equity securities
|
|
|
67,400
|
|
|
|
86,400
|
|
Proceeds from sale of other real estate owned and repossessions
|
|
|
194,564
|
|
|
|
839,728
|
|
Loan originations and principal collections, net
|
|
|
(2,777,059
|
)
|
|
|
3,106,700
|
|
Net cash provided by (used in) investing activities
|
|
|
(825,673
|
)
|
|
|
5,826,737
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in non-interest bearing deposits
|
|
|
1,213,197
|
|
|
|
5,088,047
|
|
Decrease in interest bearing deposits
|
|
|
(4,038,452
|
)
|
|
|
(1,973,617
|
)
|
Repayment of repurchase agreement
|
|
|
—
|
|
|
|
(6,000,000
|
)
|
Net cash used in financing activities
|
|
|
(2,825,255
|
)
|
|
|
(2,885,570
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
(2,666,463
|
)
|
|
$
|
3,453,133
|
|
Cash and cash equivalents at beginning of period
|
|
|
17,964,151
|
|
|
|
24,038,353
|
|
Cash and cash equivalents at end of period
|
|
$
|
15,297,688
|
|
|
$
|
27,491,486
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
216,962
|
|
|
$
|
345,068
|
|
Cash paid during the period for taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
Unrealized gain (loss) on securities available for sale
|
|
$
|
147,982
|
|
|
$
|
(58,500
|
)
|
Transfers between loans, other real estate & other assets
|
|
$
|
249,016
|
|
|
$
|
48,750
|
|
See accompanying notes to consolidated financial statements.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2014
Note 1 – Summary of Accounting Policies
(a) General
The accompanying consolidated financial statements of MainStreet
BankShares, Inc. are unaudited. However, in the opinion of management, all adjustments necessary for a fair presentation of the
financial statements have been included. All adjustments were of a normal recurring nature, except as otherwise disclosed herein.
The consolidated financial statements conform to generally accepted accounting principles and general banking industry practices.
The information contained in the footnotes included in MainStreet BankShares, Inc.’s 2013 Annual Report on Form 10-K should
be referred to in connection with the reading of these unaudited interim consolidated financial statements.
MainStreet BankShares, Inc. (the “Corporation”,
“MainStreet”, or “BankShares”) was incorporated in Virginia on January 14, 1999. The Corporation was primarily
organized to serve as a bank holding company. Its first wholly-owned subsidiary was located in Martinsville, Virginia and was sold
on March 23, 2005. In 2002, MainStreet organized a second bank subsidiary, Franklin Community Bank, National Association (“Franklin
Bank”). On February 8, 2007, MainStreet formed a wholly-owned real estate company, MainStreet RealEstate, Inc. (“MainStreet
RE”) for the sole purpose of owning the real estate of the Corporation.
Franklin Bank was organized as a nationally chartered commercial
bank and member of the Federal Reserve Bank of Richmond. Franklin Bank opened for business on September 16, 2002. Franklin Bank
operates as a locally owned and operated commercial bank emphasizing personal customer service and other advantages incident to
banking with a locally owned community bank. Franklin Bank’s primary service area is Franklin County, Town of Rocky Mount
and surrounding areas. It currently has three banking offices including its main office.
The Corporation reports its activities as a single business
segment. In determining the appropriateness of segment definition, the Corporation considered components of the business about
which financial information is available and will evaluate it regularly relative to resource allocation and performance assessment.
(b) Our
accounting policies and basic principles have not changed since the summary disclosure of these in our Annual Report on Form 10-K.
Please refer to the Form 10-K for these policies.
Note 2 – Securities
The carrying values, unrealized gains and losses and approximate
market values of investment securities at March 31, 2014 and December 31, 2013 are shown in the following tables. The entire investment
portfolio is classified as available-for-sale to preserve maximum liquidity for funding needs.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2014
|
|
March 31, 2014
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Approximate
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Market Value
|
|
U.S. government sponsored agencies
|
|
$
|
1,488,770
|
|
|
$
|
—
|
|
|
$
|
(40,670
|
)
|
|
$
|
1,448,100
|
|
Mortgage backed securities
|
|
|
12,462,912
|
|
|
|
252,313
|
|
|
|
(35,983
|
)
|
|
|
12,679,242
|
|
States and political subdivisions
|
|
|
5,668,565
|
|
|
|
20,124
|
|
|
|
(102,045
|
)
|
|
|
5,586,644
|
|
Corporates
|
|
|
496,043
|
|
|
|
3,677
|
|
|
|
(515
|
)
|
|
|
499,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
$
|
20,116,290
|
|
|
$
|
276,114
|
|
|
$
|
(179,213
|
)
|
|
$
|
20,213,191
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Approximate
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Market Value
|
|
U. S. government sponsored agencies
|
|
$
|
2,688,955
|
|
|
$
|
555
|
|
|
$
|
(66,510
|
)
|
|
$
|
2,623,000
|
|
Mortgage backed securities
|
|
|
13,012,376
|
|
|
|
202,523
|
|
|
|
(59,744
|
)
|
|
|
13,155,155
|
|
States and political subdivisions
|
|
|
5,686,412
|
|
|
|
11,784
|
|
|
|
(140,819
|
)
|
|
|
5,557,377
|
|
Corporates
|
|
|
495,770
|
|
|
|
2,488
|
|
|
|
(1,358
|
)
|
|
|
496,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available-for-sale
|
|
$
|
21,883,513
|
|
|
$
|
217,350
|
|
|
$
|
(268,431
|
)
|
|
$
|
21,832,432
|
|
All of our mortgage backed securities are either guaranteed
by U.S. government agencies or issued by U. S. government sponsored agencies.
The amortized costs and market values of securities available
for sale at March 31, 2014, by contractual maturity, are shown in the following table. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
Amortized
|
|
|
Approximate
|
|
|
|
Cost
|
|
|
Market Value
|
|
Due in one year or less
|
|
$
|
—
|
|
|
$
|
—
|
|
Due after one year but within five years
|
|
|
2,349,707
|
|
|
|
2,346,867
|
|
Due after five years but within ten years
|
|
|
6,846,938
|
|
|
|
6,767,394
|
|
Due after ten years
|
|
|
10,919,645
|
|
|
|
11,098,930
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,116,290
|
|
|
$
|
20,213,191
|
|
There were no gross gains or losses recorded on sales and calls
of securities available for sale for the three month periods ending March 31, 2014 and March 31, 2013, respectively.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2014
Following demonstrates the unrealized loss position of securities
available for sale at March 31, 2014 and December 31, 2013.
|
|
March 31, 2014
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
U. S. government sponsored agencies
|
|
$
|
1,448,100
|
|
|
$
|
(40,670
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,448,100
|
|
|
$
|
(40,670
|
)
|
Mortgage backed securities
|
|
|
1,976,257
|
|
|
|
(35,983
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
1,976,257
|
|
|
|
(35,983
|
)
|
States and political subdivisions
|
|
|
3,305,496
|
|
|
|
(95,565
|
)
|
|
|
286,952
|
|
|
|
(6,480
|
)
|
|
|
3,592,448
|
|
|
|
(102,045
|
)
|
Corporates
|
|
|
249,020
|
|
|
|
(515
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
249,020
|
|
|
|
(515
|
)
|
Total temporary impaired securities
|
|
$
|
6,978,873
|
|
|
$
|
(172,733
|
)
|
|
$
|
286,952
|
|
|
$
|
(6,480
|
)
|
|
$
|
7,265,825
|
|
|
$
|
(179,213
|
)
|
|
|
December 31, 2013
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
U.S. government sponsored agencies
|
|
$
|
1,921,845
|
|
|
$
|
(66,510
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,921,845
|
|
|
$
|
(66,510
|
)
|
Mortgage backed securities
|
|
|
4,275,948
|
|
|
|
(59,744
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
4,275,948
|
|
|
|
(59,744
|
)
|
States and political Subdivisions
|
|
|
3,856,363
|
|
|
|
(140,819
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
3,856,363
|
|
|
|
(140,819
|
)
|
Corporates
|
|
|
248,135
|
|
|
|
(1,358
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
248,135
|
|
|
|
(1,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$
|
10,302,291
|
|
|
$
|
(268,431
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,302,291
|
|
|
$
|
(268,431
|
)
|
An impairment is considered “other than temporary”
if any of the following conditions are met: the Corporation intends to sell the security, it is more likely than not that the Corporation
will be required to sell the security before the recovery of its amortized cost basis, or the Corporation does not expect to recover
the security’s entire amortized cost basis (even if the Bank does not intend to sell). At March 31, 2014 and December 31,
2013, there were $7.3 million comprising nineteen securities and $10.3 million comprising twenty-three securities, respectively,
in securities with unrealized losses based on market prices at the respective dates. Declines in fair value are due to interest
rate fluctuations and not due to credit deterioration of the issuers. The Corporation does not have any securities that are considered
“other than temporarily impaired” at March 31, 2014 and December 31, 2013.
Federal Reserve Bank stock is included in restricted equity
securities and totaled $435,100 at March 31, 2014 and December 31, 2013. The Corporation’s investment in Federal Home Loan
Bank (“FHLB”) stock totaled $152,100 and $219,500 at March 31, 2014 and December 31, 2013, respectively, and is also
included in restricted equity securities. FHLB stock is generally viewed as a long term investment and as a restricted investment
security which is carried at cost, because there is no market for the stock other than the FHLB or member institutions. Therefore,
when evaluating FHLB stock for impairment, its value is based on ultimate recoverability of the par value rather than by recognizing
temporary declines in value.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2014
Note 3 – Loans Receivable
The major components of gross loans in the consolidated balance
sheets at March 31, 2014 and December 31, 2013 are as follows:
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
Commercial
|
|
$
|
9,822,472
|
|
|
$
|
9,426,188
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
16,339,646
|
|
|
|
16,394,964
|
|
Residential 1-4 families:
|
|
|
|
|
|
|
|
|
First liens
|
|
|
34,923,298
|
|
|
|
33,787,645
|
|
Junior liens
|
|
|
6,499,044
|
|
|
|
6,331,233
|
|
Home equity lines
|
|
|
6,097,865
|
|
|
|
5,764,941
|
|
Commercial real estate
|
|
|
51,116,797
|
|
|
|
50,579,103
|
|
Consumer
|
|
|
1,274,512
|
|
|
|
1,353,312
|
|
Total Gross Loans
|
|
$
|
126,073,634
|
|
|
$
|
123,637,386
|
|
Unearned deferred fees and costs, net
|
|
|
77,797
|
|
|
|
86,600
|
|
Recorded Investment
|
|
$
|
126,151,431
|
|
|
$
|
123,723,986
|
|
Overdrafts reclassified to loans at March 31, 2014 and December
31, 2013 were $3,621 and $6,196, respectively.
Loan Origination/Risk Management
: Franklin Bank’s
Board of Directors annually approves and reviews policies and procedures to be utilized as tools by account officers for the purpose
of making sound and prudent credit decisions. Every loan transaction is closely evaluated from the perspective of profitability
realizing that there is no profit in a loan that becomes a loss. Each credit decision is based on merit and no other factors. Account
officers carry a heavy burden of accountability in being assigned the responsibility for the development of Franklin Bank’s
loan portfolio by meeting the legitimate credit needs of our customers while also exercising prudence and seasoned judgment. A
comprehensive reporting system has been developed to provide senior management timely information related to portfolio performance
including growth, delinquency, adversely risk rated, and credit concentrations. The portfolio is constantly reviewed based on segments
of concern, past due status, extension of credits along with stress testing the portfolio’s collateral values and debt service
coverage for a significant portion of loans within defined loan concentrations. Annually, a loan review plan is developed to identify
and mitigate potential weakness in the loan portfolio. Scope is determined based upon a risk assessment of various concentrations
and loan product types in which higher risk may exist. The developed plan is presented to the Loan Committee of Franklin Bank’s
Board of Directors each year for approval. Overall, the goal is to review 26% of the entire loan portfolio annually. Review segments
vary from year to year to ensure a complete cycle of all significant loan product types. Results of each review segment are communicated
to the Loan Committee of the Board of Directors of Franklin Bank with a response from Franklin Bank’s senior lender or head
of retail lending depending on the product type reviewed.
In general all loans exceeding $100,000 are documented by three
years of financial reports in conjunction with review and analysis by a credit analyst independent of the lending approval process.
Generally all real estate loans are underwritten based on verified income, or cash flow, and margined at 80% or less depending
upon the regulatory supervisory limit. All loans are underwritten based upon analysis of all identified primary and secondary repayment
sources.
MAINSTREET BANKSHARES, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2014
Construction & Land Development
:
Emphasis is placed on the estimated absorption period of the project based on the intimate knowledge of local demand and
geographic concentrations by appraisers and account officers. Projects are monitored by Franklin Bank’s in-house
construction inspector to ensure adherence to project specifications and timely completion. Loan to values are manually
tracked to ensure conforming collateral coverage is maintained throughout the development phase. Interest carry abilities are
determined by analyzing global cash flow and available liquidity. Due to their complex nature, loans for speculative housing
and speculative lot requests are underwritten by Franklin Bank’s business lending group. Terms at origination for
speculative lot loans are based on collateral margins and on qualifying the borrower to policy requirements based on a ten
year amortization period. Speculative housing loan terms generally are held to eighteen months with allowance made for
substantial curtailments.
Commercial Real Estate
: Loans are generally underwritten
based on verified income or cash flow to ensure a global coverage ratio of at least 1.25. In general, collateral margin is determined
based on appraisal or evaluation market value not to exceed 80 percent of appraised market value or cost, whichever is less. All
properties receive proper environmental due diligence prior to funding of the credit. Account officers perform and document a market
analysis which may include data on competing businesses and projects. When applicable, market analysis data may be obtained from
independent sources. Cash flows and collateral margins are appropriately stress tested. Terms generally range from five to fifteen
years, however, may be longer based on approval from Franklin Bank’s President and Chief Credit Officer.
Commercial Loans
: Loans are generally underwritten
based on verified income or cash flow to ensure global debt service coverage ratio of at least 1.25. Terms can range up to seven
years based on loan purpose and collateral offered. Based on policy, credit lines have maturities of one year. Generally inventory
loans are margined at 50% while equipment loans, depending on age of collateral, range from 90%, if new, to 80%, if used. Receivables
are margined at 80% based on the aging of receivables outstanding sixty days or less.
Consumer /Residential 1-4 Families and Equity Lines
:
Loans are generally underwritten based on a maximum debt to income ratio of 40 percent gross. Incomes are verified for all secured
loans and unsecured loans. Policy requires income verification to be documented for all real estate loans. Collateral margins and
terms for non-real estate collateral are determined and made available to retail lenders by Franklin Bank’s Chief Credit
Officer. Cash flows for all self employed borrowers are determined by Franklin Bank’s independent credit analyst. Policy
defines unsecured loan terms at a maximum of thirty six months while individual unsecured lines are underwritten to maturities
of less than one year with the line amount being based on a percentage of available liquidity and net worth. Construction loans
for individuals are underwritten to policy based on cost overruns of at least fifteen percent. Debt to income ratios for equity
lines are underwritten based on the borrower paying 1.5% of the total available line monthly. All equity lines are reviewed annually
and filtered based on updated credit scores, average percentage drawn and delinquency. “Watch” accounts are identified
based on filters and then individually reviewed by the responsible account officer.
Note 4 – Allowance for Loan Losses
Changes in the allowance for loan losses for the three
months
ended March 31, 2014 and 2013
are as follows:
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
2,379,145
|
|
|
$
|
2,602,098
|
|
Provision for loan losses
|
|
|
73,488
|
|
|
|
187,605
|
|
Recoveries
|
|
|
62,460
|
|
|
|
10,741
|
|
Charge-offs
|
|
|
(163,058
|
)
|
|
|
(369,588
|
)
|
Balance at period end
|
|
$
|
2,352,035
|
|
|
$
|
2,430,856
|
|
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2014
A breakdown of the allowance by loan segment for the three months
ended March 31, 2014 is as follows:
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
Residential
1-4 Families
|
|
|
Home
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Land
|
|
|
First
|
|
|
Junior
|
|
|
Equity
|
|
|
Real
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Development
|
|
|
Liens
|
|
|
Liens
|
|
|
Lines
|
|
|
Estate
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
151,289
|
|
|
$
|
353,391
|
|
|
$
|
601,276
|
|
|
$
|
100,906
|
|
|
$
|
100,351
|
|
|
$
|
1,061,037
|
|
|
$
|
10,895
|
|
|
$
|
—
|
|
|
$
|
2,379,145
|
|
Charge-offs
|
|
|
(41,531
|
)
|
|
|
(38,096
|
)
|
|
|
(54,745
|
)
|
|
|
(27,739
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(947
|
)
|
|
|
—
|
|
|
|
(163,058
|
)
|
Recoveries
|
|
|
7,951
|
|
|
|
27,043
|
|
|
|
—
|
|
|
|
4,583
|
|
|
|
16,730
|
|
|
|
3,859
|
|
|
|
2,294
|
|
|
|
—
|
|
|
|
62,460
|
|
Provision
|
|
|
(14,768
|
)
|
|
|
21,078
|
|
|
|
27,997
|
|
|
|
23,829
|
|
|
|
(10,729
|
)
|
|
|
29,482
|
|
|
|
(3,401
|
)
|
|
|
—
|
|
|
|
73,488
|
|
Ending Balance
|
|
$
|
102,941
|
|
|
$
|
363,416
|
|
|
$
|
574,528
|
|
|
$
|
101,579
|
|
|
$
|
106,352
|
|
|
$
|
1,094,378
|
|
|
$
|
8,841
|
|
|
$
|
—
|
|
|
$
|
2,352,035
|
|
|
|
|
|
|
March 31,
2014
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
Residential
1-4 Families
|
|
|
Home
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Land
|
|
|
First
|
|
|
Junior
|
|
|
Equity
|
|
|
Real
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Development
|
|
|
Liens
|
|
|
Liens
|
|
|
Lines
|
|
|
Estate
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
71,539
|
|
|
$
|
335
|
|
|
$
|
—
|
|
|
$
|
410,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
481,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for
impairment
|
|
|
102,941
|
|
|
|
363,406
|
|
|
|
502,989
|
|
|
|
101,244
|
|
|
|
106,352
|
|
|
|
684,378
|
|
|
|
8,841
|
|
|
|
—
|
|
|
|
1,870,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
102,941
|
|
|
$
|
363,416
|
|
|
$
|
574,528
|
|
|
$
|
101,579
|
|
|
$
|
106,352
|
|
|
$
|
1,094,378
|
|
|
$
|
8,841
|
|
|
$
|
—
|
|
|
$
|
2,352,035
|
|
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2014
|
|
|
|
|
March 31,
2014
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
Residential
1-4 Families
|
|
|
Home
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
and Land
|
|
|
First
|
|
|
Junior
|
|
|
Equity
|
|
|
Real
|
|
|
|
|
|
Gross
|
|
|
|
Commercial
|
|
|
Development
|
|
|
Liens
|
|
|
Liens
|
|
|
Lines
|
|
|
Estate
|
|
|
Consumer
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment in loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
623,709
|
|
|
$
|
309,006
|
|
|
$
|
982,905
|
|
|
$
|
172,612
|
|
|
$
|
70,875
|
|
|
$
|
2,160,394
|
|
|
$
|
—
|
|
|
$
|
4,319,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for
impairment
|
|
|
9,198,763
|
|
|
|
16,030,640
|
|
|
|
33,940,393
|
|
|
|
6,326,432
|
|
|
|
6,026,990
|
|
|
|
48,956,403
|
|
|
|
1,274,512
|
|
|
|
121,754,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,822,472
|
|
|
$
|
16,339,646
|
|
|
$
|
34,923,298
|
|
|
$
|
6,499,044
|
|
|
$
|
6,097,865
|
|
|
$
|
51,116,797
|
|
|
$
|
1,274,512
|
|
|
$
|
126,073,634
|
|
A breakdown of the allowance for loan losses by loan segment
for the year ended December 31, 2013 is as follows:
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
Residential
1-4 Families
|
|
|
Home
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Land
|
|
|
First
|
|
|
Junior
|
|
|
Equity
|
|
|
Real
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Development
|
|
|
Liens
|
|
|
Liens
|
|
|
Lines
|
|
|
Estate
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
108,336
|
|
|
$
|
767,018
|
|
|
$
|
701,668
|
|
|
$
|
134,847
|
|
|
$
|
88,411
|
|
|
$
|
740,073
|
|
|
$
|
11,745
|
|
|
$
|
50,000
|
|
|
$
|
2,602,098
|
|
Charge-offs
|
|
|
(450,100
|
)
|
|
|
(592,292
|
)
|
|
|
(151,295
|
)
|
|
|
(156,561
|
)
|
|
|
(9,052
|
)
|
|
|
(534,150
|
)
|
|
|
(74,461
|
)
|
|
|
—
|
|
|
|
(1,967,911
|
)
|
Recoveries
|
|
|
12,278
|
|
|
|
9,090
|
|
|
|
7,448
|
|
|
|
20,497
|
|
|
|
—
|
|
|
|
1,429
|
|
|
|
29,336
|
|
|
|
—
|
|
|
|
80,078
|
|
Provision
|
|
|
480,775
|
|
|
|
169,575
|
|
|
|
43,455
|
|
|
|
102,123
|
|
|
|
20,992
|
|
|
|
853,685
|
|
|
|
44,275
|
|
|
|
(50,000
|
)
|
|
|
1,664,880
|
|
Ending Balance
|
|
$
|
151,289
|
|
|
$
|
353,391
|
|
|
$
|
601,276
|
|
|
$
|
100,906
|
|
|
$
|
100,351
|
|
|
$
|
1,061,037
|
|
|
$
|
10,895
|
|
|
$
|
—
|
|
|
$
|
2,379,145
|
|
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2014
|
|
|
|
|
December 31,
2013
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
Residential
1-4 Families
|
|
|
Home
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Land
|
|
|
First
|
|
|
Junior
|
|
|
Equity
|
|
|
Real
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Development
|
|
|
Liens
|
|
|
Liens
|
|
|
Lines
|
|
|
Estate
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
50,000
|
|
|
$
|
10
|
|
|
$
|
101,540
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
424,376
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
575,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for
impairment
|
|
|
101,289
|
|
|
|
353,381
|
|
|
|
499,736
|
|
|
|
100,906
|
|
|
|
100,351
|
|
|
|
636,661
|
|
|
|
10,895
|
|
|
|
—
|
|
|
|
1,803,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
151,289
|
|
|
$
|
353,391
|
|
|
$
|
601,276
|
|
|
$
|
100,906
|
|
|
$
|
100,351
|
|
|
$
|
1,061,037
|
|
|
$
|
10,895
|
|
|
$
|
—
|
|
|
$
|
2,379,145
|
|
|
|
|
|
|
December 31,
2013
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
Residential
1-4 Families
|
|
|
Home
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
and Land
|
|
|
First
|
|
|
Junior
|
|
|
Equity
|
|
|
Real
|
|
|
|
|
|
Gross
|
|
|
|
Commercial
|
|
|
Development
|
|
|
Liens
|
|
|
Liens
|
|
|
Lines
|
|
|
Estate
|
|
|
Consumer
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment in loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
725,863
|
|
|
$
|
576,552
|
|
|
$
|
1,130,961
|
|
|
$
|
182,170
|
|
|
$
|
71,338
|
|
|
$
|
3,308,733
|
|
|
$
|
—
|
|
|
$
|
5,995,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for
impairment
|
|
|
8,700,325
|
|
|
|
15,818,412
|
|
|
|
32,656,684
|
|
|
|
6,149,063
|
|
|
|
5,693,603
|
|
|
|
47,270,370
|
|
|
|
1,353,312
|
|
|
|
117,641,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,426,188
|
|
|
$
|
16,394,964
|
|
|
$
|
33,787,645
|
|
|
$
|
6,331,233
|
|
|
$
|
5,764,941
|
|
|
$
|
50,579,103
|
|
|
$
|
1,353,312
|
|
|
$
|
123,637,386
|
|
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2014
An age analysis of past due loans as of March 31, 2014 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing Loans
|
|
|
|
|
|
|
Loans
|
|
|
Loans
|
|
|
Loans 90
|
|
|
|
|
|
|
|
|
|
|
|
90 or More Days
|
|
|
Nonaccrual Loans
|
|
|
|
30-59 Days
Past
Due
|
|
|
60-89 Days
Past Due
|
|
|
Or More Days
Past Due
|
|
|
Total Past
Due Loans
|
|
|
Current
Loans
|
|
|
Gross
Loans
|
|
|
Past Due (Included
in Past Dues)
|
|
|
(Included in
Past
Dues & Current)
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,822,472
|
|
|
$
|
9,822,472
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land
development
|
|
|
485,410
|
|
|
|
—
|
|
|
|
162,711
|
|
|
|
648,121
|
|
|
|
15,691,525
|
|
|
|
16,339,646
|
|
|
|
—
|
|
|
|
309,006
|
|
Residential 1-4 Families
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Liens
|
|
|
321,968
|
|
|
|
91,431
|
|
|
|
577,677
|
|
|
|
991,076
|
|
|
|
33,932,222
|
|
|
|
34,923,298
|
|
|
|
—
|
|
|
|
981,270
|
|
Junior Liens
|
|
|
34,376
|
|
|
|
30,140
|
|
|
|
8,000
|
|
|
|
72,516
|
|
|
|
6,426,528
|
|
|
|
6,499,044
|
|
|
|
—
|
|
|
|
142,472
|
|
Home Equity lines
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,097,865
|
|
|
|
6,097,865
|
|
|
|
—
|
|
|
|
70,875
|
|
Commercial Real Estate
|
|
|
143,975
|
|
|
|
—
|
|
|
|
107,966
|
|
|
|
251,941
|
|
|
|
50,864,856
|
|
|
|
51,116,797
|
|
|
|
107,966
|
|
|
|
1,828,537
|
|
Consumer
|
|
|
2,718
|
|
|
|
2,779
|
|
|
|
—
|
|
|
|
5,497
|
|
|
|
1,269,015
|
|
|
|
1,274,512
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
988,447
|
|
|
$
|
124,350
|
|
|
$
|
856,354
|
|
|
$
|
1,969,151
|
|
|
$
|
124,104,483
|
|
|
$
|
126,073,634
|
|
|
$
|
107,966
|
|
|
$
|
3,332,160
|
|
An age analysis of past due loans as of December 31, 2013 is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing Loans
|
|
|
|
|
|
|
Loans
|
|
|
Loans
|
|
|
Loans 90
|
|
|
|
|
|
|
|
|
|
|
|
90 or More Days
|
|
|
Nonaccrual Loans
|
|
|
|
30-59 Days
Past
Due
|
|
|
60-89 Days
Past Due
|
|
|
Or More Days
Past Due
|
|
|
Total Past
Due Loans
|
|
|
Current
Loans
|
|
|
Gross
Loans
|
|
|
Past Due (Included
in Past Dues)
|
|
|
(Included in
Past
Dues & Current)
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,426,188
|
|
|
$
|
9,426,188
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
320,143
|
|
|
|
—
|
|
|
|
259,973
|
|
|
|
580,116
|
|
|
|
15,814,848
|
|
|
|
16,394,964
|
|
|
|
—
|
|
|
|
576,552
|
|
Residential 1-4 Families
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Liens
|
|
|
893,473
|
|
|
|
33,154
|
|
|
|
802,830
|
|
|
|
1,729,457
|
|
|
|
32,058,188
|
|
|
|
33,787,645
|
|
|
|
—
|
|
|
|
1,125,187
|
|
Junior Liens
|
|
|
65,603
|
|
|
|
—
|
|
|
|
16,232
|
|
|
|
81,835
|
|
|
|
6,249,398
|
|
|
|
6,331,233
|
|
|
|
—
|
|
|
|
152,985
|
|
Home Equity lines
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,764,941
|
|
|
|
5,764,941
|
|
|
|
—
|
|
|
|
71,338
|
|
Commercial Real Estate
|
|
|
416,668
|
|
|
|
—
|
|
|
|
—
|
|
|
|
416,668
|
|
|
|
50,162,435
|
|
|
|
50,579,103
|
|
|
|
—
|
|
|
|
2,079,556
|
|
Consumer
|
|
|
50,244
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50,244
|
|
|
|
1,303,068
|
|
|
|
1,353,312
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,746,131
|
|
|
$
|
33,154
|
|
|
$
|
1,079,035
|
|
|
$
|
2,858,320
|
|
|
$
|
120,779,066
|
|
|
$
|
123,637,386
|
|
|
$
|
—
|
|
|
$
|
4,005,618
|
|
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2014
Impaired loans at March 31, 2014 are as follows:
|
|
Unpaid
|
|
|
Recorded
|
|
|
Recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
|
|
|
Investment
|
|
|
Investment
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
Principal
|
|
|
with Related
|
|
|
with No Related
|
|
|
Related
|
|
|
Recorded
|
|
|
Income
|
|
|
|
Balance
|
|
|
Allowance
|
|
|
Allowance
|
|
|
Allowance
|
|
|
Investment
|
|
|
Recognized
|
|
Commercial
|
|
$
|
623,709
|
|
|
$
|
—
|
|
|
$
|
623,709
|
|
|
$
|
—
|
|
|
$
|
674,786
|
|
|
$
|
—
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land
development
|
|
|
599,179
|
|
|
|
162,710
|
|
|
|
146,296
|
|
|
|
10
|
|
|
|
442,779
|
|
|
|
4,299
|
|
Residential 1-4 Families
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Liens
|
|
|
988,481
|
|
|
|
541,540
|
|
|
|
441,365
|
|
|
|
71,539
|
|
|
|
1,056,933
|
|
|
|
289
|
|
Junior Liens
|
|
|
189,128
|
|
|
|
30,140
|
|
|
|
142,472
|
|
|
|
335
|
|
|
|
177,391
|
|
|
|
—
|
|
Home Equity lines
|
|
|
79,927
|
|
|
|
—
|
|
|
|
70,875
|
|
|
|
—
|
|
|
|
71,107
|
|
|
|
—
|
|
Commercial Real Estate
|
|
|
2,160,394
|
|
|
|
1,828,537
|
|
|
|
331,857
|
|
|
|
410,000
|
|
|
|
2,734,563
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,640,818
|
|
|
$
|
2,562,927
|
|
|
$
|
1,756,574
|
|
|
$
|
481,884
|
|
|
$
|
5,157,559
|
|
|
$
|
4,588
|
|
Impaired loans at December 31, 2013 are as follows:
|
|
Unpaid
|
|
|
Recorded
|
|
|
Recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
|
|
|
Investment
|
|
|
Investment
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
Principal
|
|
|
with Related
|
|
|
with No Related
|
|
|
Related
|
|
|
Recorded
|
|
|
Income
|
|
|
|
Balance
|
|
|
Allowance
|
|
|
Allowance
|
|
|
Allowance
|
|
|
Investment
|
|
|
Recognized
|
|
Commercial
|
|
$
|
778,980
|
|
|
$
|
60,000
|
|
|
$
|
665,863
|
|
|
$
|
50,000
|
|
|
$
|
287,405
|
|
|
$
|
34,511
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
890,255
|
|
|
|
162,710
|
|
|
|
413,842
|
|
|
|
10
|
|
|
|
960,164
|
|
|
|
24,249
|
|
Residential 1-4 Families
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Liens
|
|
|
1,154,822
|
|
|
|
541,539
|
|
|
|
589,422
|
|
|
|
101,540
|
|
|
|
1,460,986
|
|
|
|
37,253
|
|
Junior Liens
|
|
|
190,455
|
|
|
|
—
|
|
|
|
182,170
|
|
|
|
—
|
|
|
|
216,673
|
|
|
|
9,361
|
|
Home Equity lines
|
|
|
80,390
|
|
|
|
—
|
|
|
|
71,338
|
|
|
|
—
|
|
|
|
59,495
|
|
|
|
263
|
|
Commercial Real Estate
|
|
|
3,308,733
|
|
|
|
2,079,556
|
|
|
|
1,229,177
|
|
|
|
424,376
|
|
|
|
2,156,878
|
|
|
|
46,367
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,403,635
|
|
|
$
|
2,843,805
|
|
|
$
|
3,151,812
|
|
|
$
|
575,926
|
|
|
$
|
5,141,601
|
|
|
$
|
152,004
|
|
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2014
The Corporation assesses all loan modifications to
determine whether they are considered troubled debt restructurings (TDRs). During the three months ending March 31, 2014, the
Corporation modified or renewed three loans that were considered to be TDRs, of which two are on nonaccrual. The construction
and land development credit was a loan restructured to allow the borrower time to sell his property. One commercial real
estate credit was restructured into a new credit, waiving lost interest. The second
commercial real estate loan was the renewal of an existing troubled debt restructuring that is interest only.
|
|
Number of
Contracts
|
|
|
Pre-Modification
Outstanding
Recorded Investment
|
|
|
Post-Modification
Outstanding
Recorded Investment
|
|
Construction and land development
|
|
|
1
|
|
|
$
|
132,781
|
|
|
$
|
132,781
|
|
Commercial Real Estate
|
|
|
2
|
|
|
|
2,104,152
|
|
|
|
2,104,152
|
|
Total
|
|
|
3
|
|
|
$
|
2,236,933
|
|
|
$
|
2,236,933
|
|
There were no troubled debt restructurings modified during the
past twelve months that defaulted during the three month period ended March 31, 2014. For this purpose, if a note defaults it means
at some point it has been greater than 60 days past due or we have received some information that leads us to believe the full
collection of the principal and interest is doubtful.
There were no additional loans designated as troubled debt restructuring
in the first quarter of 2013. There were no troubled debt restructurings modified during the prior twelve months that defaulted
during the three month period ended March 31, 2013. For this purpose, if a note defaults it means at some point it has been greater
than 60 days past due or we have received some information that leads us to believe the full collection of the principal and interest
is doubtful.
At March 31, 2014 and December 31, 2013 the balance in loans
under the terms of troubled debt restructurings not included in nonaccrual loans was $849,235 and $1,929,999, respectively. Troubled
debt restructurings (not on nonaccrual) decreased from December 31, 2013 to March 31, 2014 because one restructured credit, with
terms reflecting current market rates, is no longer being reported as a troubled debt restructuring due to sustained performance
of six months. These loans did not have any additional commitments at March 31, 2014 and December 31, 2013, respectively. Loan
restructurings generally occur when a modification that would otherwise not be considered is granted to the borrower having financial
difficulties. These loans may continue to accrue interest as long as the borrower complies with the revised terms and conditions
and has demonstrated repayment performance with the modified terms. The borrowers were complying with the modified terms of their
contracts at March 31, 2014 and December 31, 2013, respectively, that were not in nonaccrual status. Troubled debt restructurings
are included in the impaired loan disclosures.
The following table describes the interest earned, reflected
in income and lost for the three month periods.
|
|
March 31, 2014
|
|
|
March 31, 2013
|
|
Interest that would have been earned
|
|
$
|
57,763
|
|
|
$
|
33,087
|
|
Interest reflected in income
|
|
|
4,588
|
|
|
|
263
|
|
Lost interest
|
|
$
|
53,175
|
|
|
$
|
32,824
|
|
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2014
The Corporation’s internally assigned grades for credit
quality are as follows:
Prime (1.00)
Exceptional credits are of the highest quality. These loans
are supported by large, well-established borrowers with excellent financial stability and strength, and may be secured by cash
or cash equivalents. Where applicable, guarantors have substantial net worth and personal cash flow, and could easily fulfill their
obligation should the need arise.
Good (2.00)
Superior credits are supported by well-established borrowers
with excellent financial stability and strength. The borrower’s cash flow, liquidity, and equity are more than ample. These
credits may be secured by cash or cash equivalents. For loans with personal guarantees, the guarantors are high net worth individuals,
and have the resources available to satisfy their obligation if necessary.
Acceptable (3.00)
Loans in this category are supported by borrowers and guarantors
that are financially sound. Cash flow, liquidity and equity are sufficient to provide a comfortable margin in the event of short-term
economic disturbances. Assets pledged as collateral would provide a dependable secondary source of repayment.
Pass/Watch (4.00)
Credits in this category present the maximum acceptable risk
for new facilities. Borrowers generate enough cash for debt service needs, but may not have sufficient resources to weather short-term
market fluctuations. Management may lack depth or experience, and industry volatility may be an issue. Where applicable, guarantors
have sufficient resources to provide an additional margin of protection.
Special Mention (5.00)
Assets in this category demonstrate signs of potential weakness,
which, if uncorrected, could result in default. The borrower’s liquidity or equity may be marginal, trends in cash flow and
profitability may point to a weakening financial condition, or the borrower’s industry may be slightly unstable or showing
early indications of decline.
Collateral may be illiquid or provide only a relatively small
margin. Migration analysis data is performed and updated quarterly on these loans. It is based on loans downgraded originally into
this category. Our loss factor is determined based on charge-offs during the quarter divided by the balance of special mention
loans at the beginning of the quarter. This is then increased by the qualitative factors which increase the applied loss factor
to 3%.
Substandard (6.00)
Loans in this category present an unacceptable credit risk.
Borrowers and guarantors may be financially weak, and may lack the sufficient resources to adequately service debt. The abilities
of management and industry stability may also be of concern. Collateral may be lacking in quality or liquidity, and offers little
additional protection.
Migration analysis data is performed and updated quarterly on
these loans. It is based on loans downgraded originally into this category. Our loss factor is determined based on charge-offs
during the quarter divided by the balance of substandard loans at the beginning of the quarter. This is then increased by the qualitative
factors which increases the applied loss factor to 8%. This does not apply to impaired loans where a specific reserve is determined
based on the loss, if any, that is calculated.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2014
Doubtful (7.00)
These loans have an extremely high probability of loss,
though the timing and magnitude of the loss may remain unclear. Borrowers and guarantors exhibit major financial
shortcomings, and clearly lack the sufficient resources to adequately service debt or honor their commitments. Collateral is
lacking in quality or liquidity, and offers little, if any, additional protection.
Loss (8.00)
The probability of collection on these credits is so low that
they may be properly classified as uncollectible.
Generally, consumer loans, home equity lines, and residential
1-4 family loans are not risk rated and considered a pass credit unless they are related to a risk rated commercial loan relationship
or exhibit criticized asset characteristics.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2014
|
|
|
|
|
March
31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
Residential 1-4 Families
|
|
|
Home
|
|
|
Commercial
|
|
|
|
|
|
Gross Loans by
|
|
Internal Risk Rating
Grades
|
|
Commercial
|
|
|
And Land
Development
|
|
|
First
Liens
|
|
|
Junior
Liens
|
|
|
Equity
Lines
|
|
|
Real
Estate
|
|
|
Consumer
|
|
|
Internal Risk
Rating Grade
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
9,639,841
|
|
|
$
|
14,522,154
|
|
|
$
|
33,419,046
|
|
|
$
|
5,913,662
|
|
|
$
|
6,026,990
|
|
|
$
|
46,704,061
|
|
|
$
|
1,258,631
|
|
|
$
|
117,484,385
|
|
Special Mention
|
|
|
2,197
|
|
|
|
428,545
|
|
|
|
73,390
|
|
|
|
27,400
|
|
|
|
—
|
|
|
|
1,168,006
|
|
|
|
5,691
|
|
|
|
1,705,229
|
|
Substandard
|
|
|
180,434
|
|
|
|
1,388,937
|
|
|
|
1,359,323
|
|
|
|
557,647
|
|
|
|
70,875
|
|
|
|
2,834,730
|
|
|
|
10,190
|
|
|
|
6,402,136
|
|
Doubtful
|
|
|
—
|
|
|
|
10
|
|
|
|
71,539
|
|
|
|
335
|
|
|
|
—
|
|
|
|
410,000
|
|
|
|
—
|
|
|
|
481,884
|
|
Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,822,472
|
|
|
$
|
16,339,646
|
|
|
$
|
34,923,298
|
|
|
$
|
6,499,044
|
|
|
$
|
6,097,865
|
|
|
$
|
51,116,797
|
|
|
$
|
1,274,512
|
|
|
$
|
126,073,634
|
|
|
|
|
|
|
December 31,
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
Residential 1-4 Families
|
|
|
Home
|
|
|
Commercial
|
|
|
|
|
|
Gross Loans by
|
|
Internal Risk Rating
Grades
|
|
Commercial
|
|
|
And Land
Development
|
|
|
First
Liens
|
|
|
Junior
Liens
|
|
|
Equity
Lines
|
|
|
Real
Estate
|
|
|
Consumer
|
|
|
Internal Risk
Rating Grade
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
9,179,636
|
|
|
$
|
14,308,667
|
|
|
$
|
32,126,801
|
|
|
$
|
5,773,125
|
|
|
$
|
5,693,603
|
|
|
$
|
47,028,384
|
|
|
$
|
1,342,215
|
|
|
$
|
115,452,431
|
|
Special Mention
|
|
|
—
|
|
|
|
907,175
|
|
|
|
204,731
|
|
|
|
—
|
|
|
|
—
|
|
|
|
711,413
|
|
|
|
907
|
|
|
|
1,824,226
|
|
Substandard
|
|
|
196,552
|
|
|
|
1,179,112
|
|
|
|
1,354,573
|
|
|
|
558,108
|
|
|
|
71,338
|
|
|
|
2,414,930
|
|
|
|
10,190
|
|
|
|
5,784,803
|
|
Doubtful
|
|
|
50,000
|
|
|
|
10
|
|
|
|
101,540
|
|
|
|
—
|
|
|
|
—
|
|
|
|
424,376
|
|
|
|
—
|
|
|
|
575,926
|
|
Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,426,188
|
|
|
$
|
16,394,964
|
|
|
$
|
33,787,645
|
|
|
$
|
6,331,233
|
|
|
$
|
5,764,941
|
|
|
$
|
50,579,103
|
|
|
$
|
1,353,312
|
|
|
$
|
123,637,386
|
|
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2014
Note 5 – Borrowings
The Corporation has the ability to borrow from Federal Home
Loan Bank of Atlanta (“FHLB”). Borrowing capacity is secured by a blanket lien on loans secured by commercial real
estate and loans secured by 1-4 family first liens, second liens, and equity lines. The borrowing capacity at March 31, 2014, based
upon lendable collateral value, was $29,123,175. There were no FHLB advances outstanding at March 31, 2014 and December 31, 2013.
There were no overnight federal funds purchased at March 31,
2014 and December 31, 2013. The Corporation has $14,500,000 in overnight federal funds lines with its correspondents.
The Corporation has an internal Corporate Cash Management account
for customers to sweep their excess demand deposit accounts on an overnight basis in order to earn interest. This account is not
FDIC insured but the Corporation is required to pledge agency funds at 100% towards these balances. There were no Corporate Cash
Management sweep accounts at March 31, 2014 and December 31, 2013, respectively.
Note 6 – Repurchase Agreements
The Corporation entered into a repurchase agreement with Barclays
Capital on January 2, 2008 in the amount of $6,000,000. The repurchase date was January 2, 2013. The interest rate was fixed at
3.57% until maturity or until it was called. Beginning January 2, 2009 the repurchase agreement became callable and could have
been called quarterly with two business day’s prior notice. Interest was payable quarterly. The repurchase agreement was
collateralized by agency mortgage backed securities.
Note 7 – Net Income Per Common Share
The following tables show the weighted average number of
shares used in computing net income per common share and the effect on weighted average number of shares of diluted
potential common stock. Potential dilutive common stock had no effect on income available to common shareholders.
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
March 31, 2014
|
|
|
March 31, 2013
|
|
|
|
Shares
|
|
|
Per
Share
Amount
|
|
|
Shares
|
|
|
Per
Share
Amount
|
|
Net income per common share, basic
|
|
|
1,713,375
|
|
|
$
|
.14
|
|
|
|
1,713,375
|
|
|
$
|
.14
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock options and warrants
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Net income per common share, diluted
|
|
|
1,713,375
|
|
|
$
|
.14
|
|
|
|
1,713,375
|
|
|
$
|
.14
|
|
Options and warrants not included in the calculation of
diluted net income per share because they were anti-dilutive were 67,023 and 161,272 for the three month periods ending March
31, 2014 and 2013, respectively.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2014
Note 8 – Stock Options and Warrants
The shareholders of MainStreet approved the 2004 Key Employee
Stock Option Plan, (the “Plan”), at its Annual Meeting on April 15, 2004. The Plan permitted the grant of Non-Qualified
Stock Options and Incentive Stock Options to persons designated as “Key Employees” of BankShares or its subsidiaries.
The Plan was approved by the Board of Directors as of January 21, 2004 and terminated on January 21, 2009, except with respect
to awards made prior to and outstanding on that date which remain valid in accordance with their terms. Option awards were granted
with an exercise price equal to the market value of MainStreet’s stock at the date of grant. The options issued in 2007
and 2006 had a vesting period of three years and have a ten year contractual term. The options issued in 2005 vested immediately
upon grant and have a ten year contractual term. All share awards provided for accelerated vesting if there was a change in control
(as defined in the Plan). The maximum number of shares that could have been issued under the Plan could not exceed 150,700. As
of March 31, 2014, there were 136,527 stock options granted under this Plan of which 822 have been exercised, 61,249 options have
expired, and 7,433 were forfeited. Options in the amount of 33,000 not under the plan expired in June 2013.
As of March 31, 2014 the Corporation has reserved 67,023 shares
of authorized but unissued shares of common stock related to the stock option agreements.
Following is a status and summary of changes in stock options
during the three months ended March 31, 2014:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Three Month
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Period Ended
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
March 31, 2014
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
Outstanding at Beginning of year
|
|
|
67,023
|
|
|
$
|
12.87
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2014
|
|
|
67,023
|
|
|
$
|
12.87
|
|
|
|
2.00
|
|
|
$
|
—
|
|
Exercisable at March 31, 2014
|
|
|
67,023
|
|
|
$
|
12.87
|
|
|
|
2.00
|
|
|
$
|
—
|
|
The aggregate intrinsic value of a stock option in the table
above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds
the exercise price of the option) that would have been received by the option holders had all option holders exercised their options
on March 31, 2014. This amount changes based on changes in the market value of the Corporation’s stock.
As of March 31, 2014, there was no unrecognized compensation
cost related to nonvested share-based compensation arrangements granted under the Plan.
As of March 31, 2014, stock options and warrants outstanding
and exercisable are summarized as follows:
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2014
|
|
|
Stock Options
|
|
|
|
|
Range of
|
|
|
and Warrants
|
|
|
Remaining
|
|
Exercise
|
|
|
Outstanding
|
|
|
Contractual
|
|
Prices
|
|
|
And Exercisable
|
|
|
Life
|
|
$
|
12.09
|
|
|
|
43,977
|
|
|
|
1.65
|
|
|
12.09
|
|
|
|
9,066
|
|
|
|
1.75
|
|
|
15.00
|
|
|
|
7,464
|
|
|
|
3.70
|
|
|
16.75
|
|
|
|
6,516
|
|
|
|
2.75
|
|
|
$12.09 - $16.75
|
|
|
|
67,023
|
|
|
|
|
|
Note 9 – Financial Instruments With Off-Balance-Sheet
Risk
In the normal course of business to meet the financing needs
of its customers, BankShares is a party to financial instruments with off-balance-sheet risk. These financial instruments involve
commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized
in the consolidated balance sheets.
The Corporation’s exposure to credit loss in the
event of nonperformance by the other party to the financial instruments for commitments to extend credit is represented by
the contractual amount of those instruments. The same credit policy is used in making commitments as is used for
on-balance-sheet risk. At March 31, 2014, and December 31, 2013 outstanding commitments to extend credit including letters of
credit were as follows:
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
Commercial
|
|
$
|
4,175,639
|
|
|
$
|
4,258,081
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
2,540,037
|
|
|
|
1,691,512
|
|
Residential 1-4 families
|
|
|
|
|
|
|
|
|
First liens
|
|
|
840,451
|
|
|
|
918,377
|
|
Junior liens
|
|
|
279,038
|
|
|
|
359,672
|
|
Home Equity lines
|
|
|
8,049,207
|
|
|
|
7,790,927
|
|
Commercial real estate
|
|
|
2,730,869
|
|
|
|
2,271,121
|
|
Consumer
|
|
|
395,941
|
|
|
|
391,967
|
|
Total Outstanding Commitments
|
|
$
|
19,011,182
|
|
|
$
|
17,681,657
|
|
There
are no commitments to extend credit on impaired loans except for letters of credit that are outstanding and cannot be withdrawn.
Commitments to extend credit are agreements to lend to a customer as long as there is no breach of any condition
established
in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.
The commitments may expire without ever being drawn upon; therefore, the total commitment amounts do not necessarily
represent
future cash outlays for the Corporation.
Note 10 – Fair Value Measurements
Generally accepted accounting principles specify a hierarchy
of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs
reflect market data obtained from independent sources, while unobservable inputs reflect MainStreet’s market assumptions.
The three levels of the fair value hierarchy based on these two types of inputs are as follows:
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2014
|
Level 1 –
|
|
Valuation is based on quoted prices in active markets for identical assets and liabilities.
|
|
|
|
|
|
Level 2 –
|
|
Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
|
|
|
|
|
|
Level 3 –
|
|
Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.
|
The following describes the valuation techniques used by MainStreet
to measure certain assets and liabilities recorded at fair value on a recurring basis in the financial statements:
Securities available for sale
: Securities available for
sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available
(Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical
or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third
party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using
pricing models that consider observable market data (Level 2). We only utilize third party vendors to provide fair value data for
the purposes of recording amounts related to our fair value measurements of our securities available for sale portfolio. We obtain
SSAE16 reports from our third party vendor on an annual basis. Our third party vendor also utilizes a reputable pricing company
for security market data that utilizes a matrix pricing model. For government sponsored agencies the model gathers information
from market sources and integrates relative credit information, observed market movements and sector news. For agency mortgage
backed securities the model incorporates the current weighted average maturity and takes into account additional pool level information
supplied directly by the agency or government sponsored enterprise. The third party vendor system has controls and edits in place
for month-to-month market checks and zero pricing. We make no adjustments to the pricing service data received for our securities
available for sale.
The following table presents the balances of financial assets
measured at fair value on a recurring basis as of March 31, 2014 and December 31, 2013:
|
|
|
|
|
Fair Value Measurements at March 31, 2014 Using
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Balance as of
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
March 31, 2014
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. government sponsored agencies
|
|
$
|
1,448,100
|
|
|
$
|
—
|
|
|
$
|
1,448,100
|
|
|
$
|
—
|
|
Mortgage backed securities
|
|
|
12,679,242
|
|
|
|
—
|
|
|
|
12,679,242
|
|
|
|
—
|
|
States and political subdivisions
|
|
|
5,586,644
|
|
|
|
—
|
|
|
|
5,586,644
|
|
|
|
—
|
|
Corporates
|
|
|
499,205
|
|
|
|
—
|
|
|
|
499,205
|
|
|
|
—
|
|
Total available-for-sale securities
|
|
$
|
20,213,191
|
|
|
$
|
—
|
|
|
$
|
20,213,191
|
|
|
$
|
—
|
|
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2014
|
|
|
|
|
Fair Value Measurements at December 31, 2013 Using
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Balance as of
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
December 31, 2013
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. government sponsored agencies
|
|
$
|
2,623,000
|
|
|
$
|
—
|
|
|
$
|
2,623,000
|
|
|
$
|
—
|
|
Mortgage backed securities
|
|
|
13,155,155
|
|
|
|
—
|
|
|
|
13,155,155
|
|
|
|
—
|
|
States and political
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subdivisions
|
|
|
5,557,377
|
|
|
|
—
|
|
|
|
5,557,377
|
|
|
|
—
|
|
Corporates
|
|
|
496,900
|
|
|
|
—
|
|
|
|
496,900
|
|
|
|
—
|
|
Total available-for-sale securities
|
|
$
|
21,832,432
|
|
|
$
|
—
|
|
|
$
|
21,832,432
|
|
|
$
|
—
|
|
Certain assets are measured at fair value on a nonrecurring
basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market
accounting or write-downs of individual assets.
The following describes the valuation techniques used by MainStreet
to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:
Loans held for sale:
Loans held for sale are recorded
at fair value on a nonrecurring basis which is the carrying value. Loans held for sale, generally, are closed and sold within two
weeks.
Impaired Loans
: Loans are designated as impaired when,
in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual
terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either
the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral
securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts
receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing recent
appraisals conducted by an independent, licensed appraiser outside of MainStreet using observable market data (Level 2). However,
if the appraisal of the real estate property is not current, or has been discounted, then the fair value is considered Level 3.
It is also considered Level 3 if an evaluation is conducted by Franklin Bank, rather than by a third party. The value of business
equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business financial
statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables
collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for
loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred
as provision for loan losses on the Consolidated Statements of Income.
Other Real Estate Owned (OREO)
: Foreclosed assets
are adjusted to fair value upon transfer of the loans to OREO. Subsequently, OREO is carried at the lower of carrying value
or fair market value less selling costs. Fair value is based upon independent market prices, appraised values of the
collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on
a recent appraisal conducted by an independent licensed appraisal using observable market data, the Corporation records the
OREO as nonrecurring Level 2. When the appraisal of the real estate property is not current, or has been discounted, the
Corporation records the OREO as nonrecurring Level 3. It is also considered Level 3 if an evaluation is conducted by Franklin
Bank, rather than by a third party. Any fair value adjustments are recorded as other real estate and repossessions expense on
the Consolidated Statements of Income.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2014
The following table summarizes
MainStreet’s assets
that were measured at fair value on a nonrecurring basis as of March 31, 2014 and December 31, 2013.
|
|
|
|
|
Carrying value at March 31, 2014
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Balance as of
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
March 31, 2014
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Impaired loans
|
|
|
2,601,372
|
|
|
|
—
|
|
|
|
374,034
|
|
|
|
2,227,338
|
|
Other real estate owned
|
|
|
783,430
|
|
|
|
—
|
|
|
|
65,800
|
|
|
|
717,630
|
|
|
|
|
|
|
Carrying value at December 31, 2013
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Balance as of
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
December 31, 2013
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Loans held for sale
|
|
$
|
306,250
|
|
|
$
|
—
|
|
|
$
|
306,250
|
|
|
$
|
—
|
|
Impaired loans
|
|
|
3,055,465
|
|
|
|
—
|
|
|
|
369,592
|
|
|
|
2,685,873
|
|
Other real estate owned
|
|
|
728,163
|
|
|
|
—
|
|
|
|
65,800
|
|
|
|
662,363
|
|
The following table displays quantitative information about
Level 3 Fair Value Measurements for March 31, 2014:
|
|
Fair
Value
|
|
|
Valuation
Technique(s)
|
|
Unobservable
Input
|
|
Range
(Weighted
Average)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
176,101
|
|
|
Internal evaluations
|
|
Internal evaluations
|
|
|
6% - 80% (43%)
|
|
|
|
|
2,051,237
|
|
|
Appraisal
|
|
Market discount/Timing discount
|
|
|
17% - 48% (21%)
|
|
Other real estate owned
|
|
$
|
259,293
|
|
|
Internal evaluations
|
|
Internal evaluations
|
|
|
14% - 49% (34%)
|
|
|
|
$
|
458,337
|
|
|
Appraisal
|
|
Market discount
|
|
|
25% - 41% (35%)
|
|
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments for which it is practicable to estimate that value:
|
(a)
|
Short-Term Financial Instruments
|
The carrying value of short-term financial instruments
including cash and cash equivalents, federal funds sold and interest-bearing deposits in domestic banks approximate the fair value
of these instruments. These financial instruments generally expose the Corporation to limited credit risk and have no stated maturity
or have an average maturity of 30-45 days and carry interest rates which approximate market value.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2014
|
(b)
|
Securities Available-for-Sale
|
The fair value of investments is estimated
based on quoted market prices or dealer quotes.
|
(c)
|
Restricted Equity Securities
|
The carrying value of restricted equity securities
approximates fair value based on the redemption provisions of the applicable entities.
The carrying value of these loans approximates the
fair value. These loans close in our name but are generally sold within a two-week period.
Fair values are estimated for portfolios of loans
with similar financial characteristics. Loans are segregated by type such as commercial, real estate – commercial, real estate
– construction, real estate – mortgage and other consumer. Each loan category is further segmented into fixed and adjustable
rate interest terms and by performing and nonperforming categories. The fair value of performing loans is calculated by discounting
scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest
rate risk inherent in the loan as well as estimates for operating expenses and prepayments. The estimate of maturity is based on
management’s assumptions with repayment for each loan classification, modified, as required, by an estimate of the effect
of current economic and lending conditions.
The carrying amounts of accrued interest
approximate fair value.
|
(g)
|
Bank Owned Life Insurance
|
The carrying amount is a reasonable estimate
of fair value.
The fair value of demand, interest checking, savings
and money market deposits is the amount payable on demand. The fair value of fixed maturity time deposits and certificates of deposit
is estimated using the rates currently offered for deposits of similar remaining maturities and repayment characteristics.
|
(i)
|
Commitments to Extend Credit and Standby Letters
of Credit
|
The only amounts recorded for commitments to extend
credit and standby letters of credit are the fees arising from these unrecognized financial instruments. The fair value of these
commitments has been determined to be immaterial.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2014
The carrying values and estimated fair values of financial instruments
at March 31, 2014 and December 31, 2013 are as follows:
|
|
|
|
|
Fair Value Measurements at March 31, 2014 using
|
|
|
|
|
|
|
|
|
|
Quoted
Prices in Active
Markets for
Identical Assets
|
|
|
Significant Other
Observable Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
|
|
Carrying Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
FINANCIAL ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
3,457,074
|
|
|
$
|
3,457,074
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,457,074
|
|
Interest-bearing deposits in banks
|
|
|
5,241,116
|
|
|
|
5,241,116
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,241,116
|
|
Federal funds sold
|
|
|
6,599,498
|
|
|
|
6,599,498
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,599,498
|
|
Securities available-for-sale
|
|
|
20,213,191
|
|
|
|
—
|
|
|
|
20,213,191
|
|
|
|
—
|
|
|
|
20,213,191
|
|
Restricted equity securities
|
|
|
587,200
|
|
|
|
—
|
|
|
|
587,200
|
|
|
|
—
|
|
|
|
587,200
|
|
Loans, net
|
|
|
123,799,396
|
|
|
|
—
|
|
|
|
374,034
|
|
|
|
123,685,042
|
|
|
|
124,059,076
|
|
Accrued interest receivable
|
|
|
440,276
|
|
|
|
—
|
|
|
|
440,276
|
|
|
|
—
|
|
|
|
440,276
|
|
Bank owned life insurance
|
|
|
1,912,573
|
|
|
|
—
|
|
|
|
1,912,573
|
|
|
|
—
|
|
|
|
1,912,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand deposits
|
|
$
|
28,070,187
|
|
|
$
|
—
|
|
|
$
|
28,070,187
|
|
|
$
|
—
|
|
|
$
|
28,070,187
|
|
Interest bearing deposits
|
|
|
111,925,996
|
|
|
|
—
|
|
|
|
112,254,045
|
|
|
|
—
|
|
|
|
112,254,045
|
|
Accrued interest payable
|
|
|
73,774
|
|
|
|
—
|
|
|
|
73,774
|
|
|
|
—
|
|
|
|
73,774
|
|
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2014
|
|
|
|
|
Fair Value measurements at December 31, 2013 using
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
Carrying Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
FINANCIAL ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
2,929,591
|
|
|
$
|
2,929,591
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,929,591
|
|
Interest-bearing deposits in other banks
|
|
|
10,343,469
|
|
|
|
10,343,469
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,343,469
|
|
Federal funds sold
|
|
|
4,691,091
|
|
|
|
4,691,091
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,691,091
|
|
Securities available-for-sale
|
|
|
21,832,432
|
|
|
|
—
|
|
|
|
21,832,432
|
|
|
|
—
|
|
|
|
21,832,432
|
|
Restricted equity securities
|
|
|
654,600
|
|
|
|
—
|
|
|
|
654,600
|
|
|
|
—
|
|
|
|
654,600
|
|
Loans held for sale
|
|
|
306,250
|
|
|
|
—
|
|
|
|
306,250
|
|
|
|
—
|
|
|
|
306,250
|
|
Loans, net
|
|
|
121,344,841
|
|
|
|
—
|
|
|
|
369,592
|
|
|
|
120,980,345
|
|
|
|
121,349,937
|
|
Accrued interest receivable
|
|
|
462,081
|
|
|
|
—
|
|
|
|
462,081
|
|
|
|
—
|
|
|
|
462,081
|
|
Bank owned life insurance
|
|
|
1,898,736
|
|
|
|
—
|
|
|
|
1,898,736
|
|
|
|
—
|
|
|
|
1,898,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand deposits
|
|
$
|
26,856,990
|
|
|
$
|
—
|
|
|
$
|
26,856,990
|
|
|
$
|
—
|
|
|
$
|
26,856,990
|
|
Interest bearing deposits
|
|
|
115,964,448
|
|
|
|
—
|
|
|
|
116,336,714
|
|
|
|
—
|
|
|
|
116,336,714
|
|
Accrued interest payable
|
|
|
86,575
|
|
|
|
—
|
|
|
|
86,575
|
|
|
|
—
|
|
|
|
86,575
|
|
Fair value estimates are made at a specific point in time, based
on relevant market information about the financial instrument. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Corporation’s entire holdings of a particular financial instrument. Because
no market exists for a significant portion of the Corporation’s financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments
and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore,
cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are
based on existing on-and-off-balance sheet financial instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered financial instruments.
The Corporation assumes interest rate risk (the risk that general
interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Corporation’s
financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the
Corporation. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest
rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely
to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds
before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates
and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits
and by investing in securities with terms that mitigate the Corporation’s overall interest rate risk.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2014
Note 11 – Contingencies and Other Matters
In the normal course of business, the Corporation may be involved
in various legal proceedings. Based on the information presently available, management believes that the ultimate outcome in such
proceedings, in the aggregate, will not have a material adverse effect on the business or the financial condition or results of
operations of the Corporation.
Note 12 – Subsequent Events
In preparing these financial statements, the Corporation has
evaluated events and transactions for potential recognition or disclosure through the date the financial statements were filed.
Note 13 – Regulatory
On April 16, 2009, Franklin Bank entered into
a formal agreement (“Agreement”) with The Comptroller of the Currency (“OCC”). The Agreement required Franklin
Bank to perform certain actions within designated time frames. The Agreement was intended to demonstrate the Bank’s commitment
to review/enhance certain aspects of various policies and practices related to credit administration and liquidity. Franklin Bank
achieved full compliance with the Agreement. The Agreement was terminated in August 2013.
On June 17, 2009, MainStreet BankShares, Inc. entered into a
Memorandum of Understanding (“MOU”) with the Federal Reserve Bank of Richmond (“Federal Reserve”). The
MOU required the bank holding company to utilize its financial and managerial resources to assist Franklin Bank in functioning
in a safe and sound manner and restricted MainStreet from conducting various activities. On January 26, 2011, we entered into a
new MOU with the Federal Reserve which contained the same terms of the previous MOU (which was terminated) but added provisions
regarding compliance with certain laws and regulations. This MOU was terminated in September 2013. There are no longer any restrictions
or stipulations attributable to the MOU.
Note 14 – Changes in Accumulated Other Comprehensive
Income (Loss)
|
|
For the Three Months Ending March 31, 2014
|
|
|
|
Net Unrealized Gains
|
|
|
|
|
|
Accumulated Other
|
|
|
|
(Losses) on Securities
|
|
|
Adjustments Related to
|
|
|
Comprehensive
|
|
|
|
available for sale
|
|
|
Post Retirement Benefits
|
|
|
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
$
|
(33,713
|
)
|
|
$
|
(7,596
|
)
|
|
$
|
(41,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
97,668
|
|
|
|
—
|
|
|
|
97,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2014
|
|
$
|
63,955
|
|
|
$
|
(7,596
|
)
|
|
$
|
56,359
|
|
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2014
|
|
For the Three Months Ended March 31, 2013
|
|
|
|
Net Unrealized Gains on
|
|
|
|
|
|
|
|
|
|
on Securities
|
|
|
Adjustments Related to
|
|
|
Accumulated Other
|
|
|
|
Available for sale
|
|
|
Post Retirement Benefits
|
|
|
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
369,940
|
|
|
$
|
56,617
|
|
|
$
|
426,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
(38,610
|
)
|
|
|
—
|
|
|
|
(38,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2013
|
|
$
|
331,330
|
|
|
$
|
56,617
|
|
|
$
|
387,947
|
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
|
Forward-Looking
Statements
This report contains forward-looking statements that are subject
to risks and uncertainties that could cause actual results to differ materially from those reflected in such forward-looking statements,
which are representative only on the date hereof. Readers of this report should not rely solely on the forward-looking statements
and should consider all uncertainties and risks discussed throughout this report. The Corporation takes no obligation to update
any forward-looking statements contained herein. Factors that may cause actual results to differ materially from those contemplated
by such forward-looking statements include, among others, the following possibilities: (1) competitive pressures among depository
and other financial institutions may increase significantly; (2) changes in the interest rate environment may reduce margins;
(3) general economic conditions, either nationally or regionally, may be less favorable than expected that could result in a deterioration
of credit quality or a reduced demand for credit; and (4) legislative or regulatory changes including changes in accounting standards,
may adversely affect the business.
General
We use the term “MainStreet” or “Corporation”
to refer to MainStreet BankShares, Inc. We use the term “Bank” or “Franklin Bank” to refer to Franklin
Community Bank, National Association. We use “we”, “us”, or “our” to refer to the consolidated
businesses of the Corporation and its subsidiaries unless the content indicates otherwise. MainStreet was incorporated on January
14, 1999 in the Commonwealth of Virginia and is the bank holding company for Franklin Bank which serves the Franklin County area
of Virginia. MainStreet provides a wide variety of banking services through Franklin Bank. Franklin Bank operates as a locally-owned
and operated commercial bank emphasizing personal customer service and other advantages incident to banking with a locally owned
community bank. It relies on local advertising and the personal contacts of its directors, employees, and shareholders to attract
customers and business to the Bank. Franklin Bank has three banking offices in Rocky Mount and Franklin County. MainStreet also
has a wholly-owned real estate company, MainStreet RealEstate, Inc. which owns the real estate of the Corporation. MainStreet
RealEstate, Inc. owns the Union Hall (Southlake) branch of Franklin Bank.
On April 16, 2009, Franklin Bank entered into a formal agreement
(“Agreement”) with The Comptroller of the Currency (“OCC”). The Agreement required Franklin Bank to perform
certain actions within designated time frames. The Agreement was intended to demonstrate the Bank’s commitment to review/enhance
certain aspects of various policies and practices related to credit administration and liquidity. Franklin Bank achieved full
compliance with the Agreement. The Agreement was terminated in August 2013.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
March 31, 2014
On June 17, 2009, MainStreet BankShares,
Inc. entered into a Memorandum of Understanding (“MOU”) with the Federal Reserve Bank of Richmond (“Federal
Reserve”). The MOU required the bank holding company to utilize its financial and managerial resources to assist Franklin
Bank in functioning in a safe and sound manner and restricted MainStreet from conducting various activities. On January 26, 2011,
we entered into a new MOU with the Federal Reserve which contained the same terms of the previous MOU (which was terminated) but
added provisions regarding compliance with certain laws and regulations. This MOU was terminated in September 2013. There are
no longer any restrictions or stipulations attributable to the MOU.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States (GAAP). The financial information contained within our statements is, to a
significant extent, based on measures of the financial effects of transactions and events that have already occurred. A variety
of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an
asset or relieving a liability.
Allowance for Loan Losses
We use historical loss factors, peer comparisons, regulatory
factors, concentrations of credit, past dues, and the trend in the economy as factors in determining the inherent loss that may
be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use in estimating
risk. The allowance for loan losses reflects our best estimate of the losses inherent in our loan portfolio. The allowance is
based on two basic principles of accounting: (i) losses are accrued when they are probable of occurring and are capable of estimation
and (ii) losses are accrued based on the differences between the value of collateral, present value of future cash flows or values
that are observable in the secondary market and the loan balance. The allowance for loan losses is maintained at a level, which
reflects management’s best estimate of probable credit losses inherent in the loan portfolio and is, therefore, believed
to be appropriate.
The amount of the allowance is based on management’s
evaluation of the collectability of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in
historical loss experience, specific impaired loans, economic conditions and other risks inherent in the portfolio. Management
reviews the past due reports and risk-rated loans and discusses individually the loans on these reports with the responsible loan
officers. Management uses these tools and provides a quarterly analysis of the allowance based on our historical loan loss experience,
risk-rated loans, past dues, concentrations of credit, unsecured loans, loan exceptions, and the economic trend. These are generally
grouped by homogeneous loan pools. Impaired loans are reviewed individually to determine possible impairment based on one of the
three recognized methods which are fair value of collateral, present value of expected cash flows, or observable market price.
A specific reserve is allocated for the amount of the impairment. Although management uses available information to recognize
losses on loans, the substantial uncertainties associated with local economic conditions, collateral values, and future cash flows
on impaired loans, make it possible that a material change in the allowance for loan losses in the near term may be appropriate.
However, the amount of the change cannot be estimated. The allowance is increased by a provision for loan losses, which is charged
to expense, and reduced by charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or
credited to the provision for loan losses. Past due status is determined based on contractual terms.
Deferred Tax Assets
The Corporation uses the asset and liability method of accounting
for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. If current available information raises doubt as to the realization
of the deferred tax assets, a valuation allowance may be established.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
March 31, 2014
Management considers the determination of this valuation allowance
to be a critical accounting policy due to the need to exercise significant judgment in evaluating the amount and timing of recognition
of deferred tax liabilities and assets, including projections of future taxable income.
These judgments and estimates are reviewed on a continual basis
as regulatory and business factors change. A valuation allowance for deferred tax assets may be required if the amounts of taxes
recoverable through loss carry backs decline, or if we project lower levels of future taxable income. If such a valuation allowance
is deemed necessary in the future, it would be established through a charge to income tax expense that would adversely affect
our operating results.
Overview
We continue 2014 with a low interest rate environment and sluggish
loan demand in our market, which has negatively impacted our net interest margin. Despite these continued challenges, we are pleased
to report a decrease in our nonperforming assets and a moderate increase in our loan portfolio as compared to year end 2013. We
continue to maintain an aggressive posture in resolving problem assets. We believe this strategy will strengthen the Corporation’s
position and prepare us for future growth.
Total assets at March 31, 2014 were $166.5 million compared
to $169.0 million at year-end December 31, 2013, a decline of $2.5 million. Our balance sheet has declined since year-end due
to our continued strategy to lower our deposit costs. At March 31, 2014, loans, net of unearned deferred fees and costs, increased
$2.4 million from year-end 2013. Our overall strategy for 2014 also includes loan growth in an effort to improve our net interest
margin and increase our net income. Despite the continued effort to resolve our problem credits and soft loan demand, our loan
portfolio experienced an overall increase. Securities available for sale decreased $1.6 million from December 31, 2013 primarily
due to calls of securities and pay downs on mortgage backed securities. Due to the maturity and repayment of all repurchase agreements,
we now have additional securities that can be utilized and pledged for other purposes as needed. Deposits decreased $2.8 million
since year end 2013. Our higher cost time deposits have declined since year end 2013. Other real estate owned only increased by
$55,267 from year end 2013. Despite transfers into other real estate from loans during the first quarter in the amount of $249,016,
our continued aggressive approach to rid the balance sheet of nonperforming assets through sales allowed only a minimal increase.
The intentional shrinkage in our balance sheet has had a positive impact on our capital ratios. Total cash and cash equivalents
decreased from year-end 2013 by $2.7 million. Liquidity continues to be an important focus for our Corporation during these tumultuous
times and our liquid assets were 24.27% of total liabilities at March 31, 2014 which remains strong. We monitor our liquidity
daily to ensure we have prudent levels of liquidity while we strive to lower our deposit costs. This strategy also resulted in
a lowering of our overall interest bearing deposits. We maintained our core relationships as can be evidenced by the increase
in demand deposits which are our free funds.
We continue to focus on our asset quality due to the elevated
level of nonperforming loans, criticized and classified assets, economic uncertainty and unemployment levels. Nonperforming loans
decreased $1.7 million from year end 2013 to March 31, 2014. Nonaccrual loans decreased by $.7 million during the first quarter
of 2014. Troubled debt restructurings (not on nonaccrual) decreased by $1.1 million during the first three months of 2014. Loans
past due 90 days or longer, and still accruing, increased by $.1 million during the same time period. Our loans rated special
mention and lower (excluding troubled debt restructurings and those in nonaccrual status) increased at March 31, 2014 as compared
to year end 2013 by $.8 million. We transferred $249,016 of loans into other real estate during the first three months of 2014.
Our other real estate properties minimally increased to $783,430 at March 31, 2014 compared to $728,163 at December 31, 2013.
Of the remaining properties in our portfolio at March 31, 2014, approximately $455,000 in properties were under contract. We are
taking a continued aggressive approach to our other real estate properties to rid our balance sheet of nonperforming assets.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
March 31, 2014
Total shareholders’ equity was $24.3 million at March
31, 2014. MainStreet and Franklin Bank were well capitalized at March 31, 2014 under bank regulatory capital classifications.
The book value of shareholders’ equity at March 31, 2014 was $14.20 per share.
Net income for the first three months ended March 31, 2014
was $248,226, or $.14 per common basic and diluted share. This net income equated to an annualized return on average assets of
0.60% and an annualized return on average shareholders’ equity of 4.15%. Net income for the same period in 2013 was $235,857,
or $.14 per common basic and diluted share. This net income equated to an annualized return on average assets and annualized return
on average shareholders’ equity of .54% and 3.92%, respectively. Credit related expenses such as the provision for loan
losses, realized losses on sales of other real estate properties, impairment losses on other real estate properties, and loss
of interest on nonaccrual loans continue to negatively impact our operating results. In addition, the lack of loan volume has
negatively impacted loan fee income and interest income. Provision expense, other real estate and repossession expenses, write
downs and losses on sales together accounted for $77,245 and $249,843 in expense for the three month periods ending March 31,
2014 and March 31, 2013, respectively.
Results of Operations
Net interest income is the difference between
total interest income and total interest expense. The amount of net interest income is determined by the volume of interest-earning
assets, the level of interest rates earned on those assets, and the cost of supporting funds. The difference between rates earned
on interest-earning assets and the cost of supporting funds is measured by the net interest margin.
Net interest income for the three month periods
ending March 31, 2014 and 2013 was $1,493,928 and $1,593,645, respectively, a modest decrease of $99,717, or 6.26%.
Both
interest income and interest expense dollars dropped in comparison to last year, primarily due to volume and the lowering of deposit
costs. The decline in interest income was also due to lost interest income on continued elevated levels of nonaccrual loans.
For
the three months ending March 31, 2014 and 2013, the net interest margin was 3.82
%
and 3.84
%, respectively, a 2 basis point decrease. The yield on interest earning assets for the three month period ending
March 31, 2014 was
4.34
% compared to
4.53
%
for the three month period ending March 31, 2013, a decrease of 19 basis points. However, the funding side of the net interest
margin also dropped by a favorable 17 basis points in the same quarter-to-quarter comparison. The maturity of our repurchase agreements
has had a positive impact on our net interest margin. We engaged a consultant to assist us in the lowering of our deposit costs.
We have realized the positive impact of our strategic effort.
The yield on interest earning assets has
declined due to the interest rate environment, lack of loan demand reducing loan fee income, and continued lost interest on nonaccrual
loans. Lost interest for the three month periods ending March 31, 2014 and 2013 was $53,175 and $32,824, respectively. Franklin
Bank’s growth is also quite dependent on the recovery in consumer and real estate based lending and there is concern over
the timing of recoveries in these markets given the current economic environment. Franklin Bank’s future growth and earnings
may be negatively affected if real estate and consumer based markets remain depressed or deteriorate further.
The low interest rate environment continues
with the Federal Reserve leaving short-term interest rates within a range of 0% - .25%. This low rate environment has been in
effect since 2008. The Federal Reserve has also indicated that it will continue to monitor the economy given its tenuous nature
and threat of inflation. Franklin Bank has a portfolio of variable rate loans. A rising interest rate environment generally has
a positive impact on the net interest margin because deposits rates are slower to increase. Although low interest rates have been
beneficial for our cost of funds, with prime presently at 3.25% which is the interest rate basis for many of our loans, MainStreet’s
net interest margin has been adversely affected by the prolonged, recessionary low interest rate environment.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
March 31, 2014
The net interest margin and net interest
income have shown improvement since the maturity of our repurchase agreements. The rates on these repurchase agreements were above
current market rates. Of these repurchase agreements, $7.5 million matured in September 2012 and $6.0 million matured in early
January 2013.
Provision for Loan Losses
A provision for loan losses is charged to earnings for the
purpose of establishing an allowance for loan losses that is maintained at a level which reflects management’s best estimate
of probable credit losses inherent in the loan portfolio and is, therefore, believed to be appropriate. The amount of the allowance
is based on management’s evaluation of the collectability of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired loans, economic conditions, and other risks inherent
in the portfolio. Management reviews the past due reports and risk ratings and discusses individually the loans on these reports
with the responsible loan officers. Management provides a detailed quarterly analysis of the allowance based on homogenous loan
pools, identifying impairment, historical losses, credit concentrations, economic conditions, and other risks. As the allowance
is maintained, losses are charged to this allowance rather than being reported as a direct expense.
Our methodology for determining the allowance is based on two
basic principles of accounting as follows: (i) losses are accrued when they are probable of occurring and are capable of estimation
and (ii) losses are accrued based on the differences between the value of collateral, present value of future cash flows or values
that are observable in the secondary market and the loan balance. Our analysis is based on an individual review of all credits
rated Pass/Watch and lower in our risk rating system by account officers in addition to a review of management information system
reports on numerous portfolio segments. The analysis of the allowance is solely based on historical and qualitative factors with
historical losses adjusted to higher factors for our criticized and classified loans compared to similar banks with comparable
real estate concentrations nationally. Our process allows loan groups to be identified and properly categorized. Our impaired
loans are individually reviewed to determine possible impairment based on one of three recognized methods which are fair value
of collateral, present value of expected cash flows, or observable market price. A specific reserve is then allocated for the
amount of the impairment. Impairment is defined as a loan in which we feel it is probable (meaning likely, not virtually certain)
that we will be unable to collect all amounts due under the contractual terms of the loan agreement. Possible loss for loans risk
rated special mention or lower are then allocated based on a historical loss migration and adjusted for qualitative factors. Remaining
loans are pooled based on homogenous loan groups and allocated based on Franklin Bank’s historical net loss experience.
These pools are as follows: 1) commercial loans; 2) construction and land development; 3) residential 1-4 family first liens;
4) residential 1-4 family junior liens; 5) home equity lines; 6) commercial real estate; and 7) consumer loans. Historical loss
is calculated based on a twelve-quarter average history. Historical net loss data is adjusted and applied to pooled loans based
on qualitative factors. We utilize the following qualitative factors: 1) changes in the value of underlying collateral such as
loans not conforming to supervisory loan to value limits; 2) national and local economic conditions; 3) changes in portfolio volume
and nature such as borrower’s living outside our primary trade area; 4) changes in past dues, nonaccruals; and 5) quality
and impact and effects of defined credit concentrations. The methodology has continued to evolve as our company has grown and
our loan portfolio has grown and become more diverse.
Provision expense
for the first three months of 2014 was $73,488 as compared to $187,605 for the first three months of 2013. Our loan portfolio,
net of unearned deferred fees and costs, increased $2.4 million or 1.96% from year-end 2013. Gross charge-offs quarter-to-date
2014 were $163,508 compared to $369,588 quarter-to-date 2013. We transferred $249,016 from loans to other real estate during the
quarter-to-date period ending March 31, 2014. The allowance for loan losses was $2.4 million at March 31, 2014 and $2.4 million
at December 31, 2013, representing a minimal decline, which is discussed below. The allowance for loan losses was 1.86% and 1.92%
of loans net of unearned deferred fees and costs at March 31, 2014 and December 31, 2013, respectively. Our criticized and classified
loans that are evaluated by historical loss migration increased $779,892 at March 31, 2014 compared to year-end 2013. The loans
evaluated collectively by pools increased $3.3 million at March 31, 2014 versus December 31, 2013. Impaired loans evaluated individually
were $4.3 million and $6.0 million at March 31, 2014 and December 31, 2013, respectively, with specific reserves of $481,884 and
$575,926, respectively. The relatively unchanged balance in the allowance for loan losses from year end 2013 was primarily due
to decreased specific reserves on nonaccrual loans and reduced allocations on loan volumes evaluated collectively by pools, all
offset by an increase in adversely rated loans. The ratio of the allowance for loan losses to loans, net of unearned fees and
costs actually declined due to the increase in the loan portfolio since year end 2013. The allowance for loan losses did not increase
by the full amount of gross charge-offs during the first quarter because approximately $41,000 in charge-offs were included in
the allowance for loan losses as a specific reserve at December 31, 2013. There was no unallocated amount included in the allowance
for loan losses at March 31, 2014 or December 31, 1013. Net charge-offs of $100,598
and $358,847 for the first three months of 2014 and 2013 equated to .32% and 1.08%, r
espectively, of average loans outstanding
net of unearned income and deferred fees
.
The amount of charge-offs can fluctuate substantially
based on the financial condition of the borrowers, business conditions in the borrower’s market, collateral values and other
factors which are not capable of precise projection at any point in time.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
March 31, 2014
Following is a breakdown of our nonperforming
loans by balance sheet type which includes nonaccrual loans, loans past due 90 days and still accruing, troubled debt restructurings,
and other impaired loans.
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
Commercial
|
|
$
|
623,709
|
|
|
$
|
725,863
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
309,006
|
|
|
|
576,552
|
|
Residential 1-4 families:
|
|
|
|
|
|
|
|
|
First liens
|
|
|
982,905
|
|
|
|
1,130,961
|
|
Junior liens
|
|
|
172,612
|
|
|
|
182,170
|
|
Home equity loans
|
|
|
70,875
|
|
|
|
71,338
|
|
Commercial real estate
|
|
|
2,160,394
|
|
|
|
3,308,733
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
Total Nonperforming Loans
|
|
$
|
4,319,501
|
|
|
$
|
5,995,617
|
|
Total nonperforming loans decreased in the
amount of $1,676,116 or 27.96% at March 31, 2014 as compared to December 31, 2013. Nonaccrual loans (included in the impaired
loans above) were $3,332,160 and $4,005,618 at March 31, 2014 and December 31, 2013, respectively, which represented 2.64% and
3.24%, respectively, of loans, net of unearned deferred fees and costs. Management considers these loans impaired along with loans
90 days or more past due and still accruing, troubled debt restructurings (not on nonaccrual), and other impaired loans. Loans
once considered impaired are included in the reserve, but if well collateralized, no specific reserve is allocated for them. Please
refer to Note 4 to the financial statements for a breakdown of the allowance by category, specific reserves by category, and impaired
loans by category. Note 4 also gives information related to which categories of loans and dollar amounts had specific reserves
allocated. At March 31, 2014 loans secured by commercial real estate were the largest category of impaired loans at $2.2 million.
At December 31, 2013 loans secured by commercial real estate were the largest category of impaired loans at $3.3 million. Loans
secured by residential 1-4 family first liens were the next largest of the impaired loan categories at March 31, 2014 at $1.0
million. Residential 1-4 family first liens were the next largest of the impaired loan categories at December 31, 2013 at $1.1
million.
Many of the asset quality issues in our loan portfolio are
the result of our borrowers having to sell various real estate properties to repay the loan. In order to sell the properties and
repay the loan, there must be buyers in the marketplace to acquire the properties. Our market, mainly real estate, continues to
produce few buyers. In addition, borrowers’ incomes have been reduced which increases their debt to income ratio. The overall
economy in Franklin County has shown little improvement over the last year. We continue to struggle with high unemployment, a
continued slowing of building activity, a slowing of transportation and warehousing, and excessive supply of real estate in the
Smith Mountain Lake resort area as discussed below. There is continued economic pressure on consumers and business enterprises
and unemployment is at 5.7% (January 2014 data), up from 4.6% at December 31, 2013. Absorption analysis in our market place shows
increased turnover rates for various inventories over historical levels. Data obtained also revealed declines in real estate values
based on listing prices to selling price. Locally and nationally there has been an overall loss of wealth in real estate and equities.
Smith Mountain Lake is a core area for development in Franklin County. It is a resort area and largely follows the national trend
rather than the local trend and has been particularly adversely affected as a result. Until unemployment declines and consumer
confidence increases, these trends may continue. While we continue to address our asset quality issues and have shown great improvement,
no assurance can be given that continuing adverse economic conditions or other circumstances will not result in increased provisions
in the future.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
March 31, 2014
Noninterest Income
Total noninterest income was $210,839 and
$265,879 for the three months ending March 31, 2014 and 2013, respectively, a decrease of $55,040, or 20.70%. The following chart
demonstrates the categories of change:
Noninterest Income
|
|
YTD 3/31/14
|
|
|
YTD 3/31/13
|
|
|
Dollar Change
|
|
|
Percentage
Change
|
|
Service charges on deposit accounts
|
|
$
|
57,080
|
|
|
$
|
69,988
|
|
|
$
|
(12,908
|
)
|
|
|
(18.44
|
)%
|
Mortgage commissions
|
|
|
23,467
|
|
|
|
73,986
|
|
|
|
(50,519
|
)
|
|
|
(68.28
|
)
|
Electronic card fees
|
|
|
39,906
|
|
|
|
43,766
|
|
|
|
(3,860
|
)
|
|
|
(8.82
|
)
|
Investment fee income
|
|
|
51,347
|
|
|
|
41,244
|
|
|
|
10,103
|
|
|
|
24.50
|
|
Income on bank owned life insurance
|
|
|
13,837
|
|
|
|
9,439
|
|
|
|
4,398
|
|
|
|
46.59
|
|
Other fee income & miscellaneous
|
|
|
25,202
|
|
|
|
27,456
|
|
|
|
(2,254
|
)
|
|
|
(8.21
|
)
|
As noted above, total noninterest income
decreased $55,040 for the three months ending March 31, 2014 compared to the three months ending March 31, 2013. Service charges
on deposit accounts decreased $12,908 in the quarter to quarter comparison. This decrease is primarily due to a decrease in NSF
charges, demand deposit service charges, and miscellaneous service charges on accounts, all offset by a decline in demand deposit
charge-offs. Mortgage commissions decreased in the year to year comparison by $50,519, or 68.28%. Mortgage volumes have decreased
in part by the economic environment and additional regulatory enactments.
Franklin
Bank partners with several organizations in which we originate residential mortgage loans that are sold to other companies. Franklin
Bank receives the mortgage brokerage commission. Within our partnerships, we have begun to close some mortgage loans in our name
and then sell them to our partners within a very short period of days. Our partners provide the underwriting of the loans. Electronic
card fees experienced a decrease of $3,860 or 8.82% for the three months ended March 31, 2014 as compared to March 31, 2013. Franklin
Bank has an investment advisor which partners with Infinex Financial Group to advise and manage investment portfolios for our
clients. Franklin Bank receives fee income from this partnership based upon volume. Fee income received on investment income during
the first three months of 2014 and 2013 was $51,347 and $41,244, respectively, an increase of $10,103, or 24.50%. Franklin Bank
has bank owned life insurance on the life of one of its current executive officers. Prior to the death of Larry Heaton in December
2012, Franklin Bank insured the lives of two executive officers. The balance at March 31, 2014 was $1.9 million. Income on this
investment increased $4,398 or 46.59% compared to the prior quarter of the prior year. Other fee income and miscellaneous income
experienced a decrease of $2,254, or 8.21%. This decrease is primarily due to a decrease in title fee income offset by small increases
in miscellaneous income, wire fee charges, and safe deposit box rental income. Title fee income decreased by $5,286 in the year
to year comparison. Title fee income is generated from a small interest purchased in a title insurance company by Franklin Bank.
Franklin Bank has elected to present assets and liabilities related to derivatives on its mortgage loans held for sale on a gross
basis. Derivatives in a gain position are recorded as other assets and those in a loss position are recorded as other liabilities,
with the offset being miscellaneous income and miscellaneous expense, respectively. This quarterly entry can cause fluctuations
in these accounts, as a decrease of $1,526 has been recorded to noninterest income in the three months ending March 31, 2014.
Offsetting this decrease was Franklin Bank’s receipt of a dividend on its stock ownership in Pacific Coast Bankers Bank
in the first quarter of 2014.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
March 31, 2014
Noninterest Expense
Total noninterest expense was $1,271,807
and $1,329,370
for the three month period ending March 31, 2014
and 2013, respectively, a decrease of $57,563,
or 4.33
%. Excluding
the nonrecurring expenses of other real estate and repossessions, noninterest expense increased $918, or 0.07%. The following
chart demonstrates the categories of change:
Noninterest Expense
|
|
YTD 3/31/14
|
|
|
YTD 3/31/13
|
|
|
Dollar Change
|
|
|
Percentage
Change
|
|
Salaries and employee benefits
|
|
$
|
708,164
|
|
|
$
|
664,329
|
|
|
$
|
43,835
|
|
|
|
6.60
|
%
|
Occupancy and equipment
|
|
|
196,307
|
|
|
|
190,187
|
|
|
|
6,120
|
|
|
|
3.22
|
|
Professional fees
|
|
|
53,809
|
|
|
|
60,141
|
|
|
|
(6,332
|
)
|
|
|
(10.53
|
)
|
Outside processing
|
|
|
84,999
|
|
|
|
104,793
|
|
|
|
(19,794
|
)
|
|
|
(18.89
|
)
|
FDIC Assessment
|
|
|
27,547
|
|
|
|
53,929
|
|
|
|
(26,382
|
)
|
|
|
(48.92
|
)
|
Franchise tax
|
|
|
59,250
|
|
|
|
54,000
|
|
|
|
5,250
|
|
|
|
9.72
|
|
Regulatory examination fees
|
|
|
22,549
|
|
|
|
26,303
|
|
|
|
(3,754
|
)
|
|
|
(14.27
|
)
|
Other real estate and repossessions
|
|
|
3,757
|
|
|
|
62,238
|
|
|
|
(58,481
|
)
|
|
|
(93.96
|
)
|
Other expenses
|
|
|
115,425
|
|
|
|
113,450
|
|
|
|
1,975
|
|
|
|
1.74
|
|
MainStreet’s employees continue to
be its most valuable resource and asset. Salaries and employee benefits expense comprise the largest category of noninterest expense
at 55.68% and 49.97%, respectively, of total noninterest expense for the three-month periods ending March 31, 2014 and 2013. Salaries
and employee benefits increased $43,835 or 6.6% in the first quarter of 2014 as compared to the first quarter of 2013. Of this
increase, total salaries increased $34,797 and employee benefits increased $9,038. Commissions were only paid to mortgage and
investment personnel. Referral fees were also paid to employees for mortgage and investment referrals. The primary contributors
to the increase in employee benefits were increases in supplemental executive retirement plan expense and employee insurance costs
in the amounts of $5,477 and $2,955, respectively. Occupancy and equipment costs include rent, utilities, janitorial service,
repairs and maintenance, real estate taxes, equipment rent, service maintenance contracts and depreciation expense. This category
increased $6,120 which was attributable to an increase in utilities, repairs and maintenance, and service maintenance contracts,
all offset by a decrease in janitorial expense and depreciation on furniture and fixtures. Professional fees include fees for
audit, legal, and other professional fees and showed a $6,332 decrease in the quarter to quarter comparison. Outside processing
expenses decreased $19,794 or 18.89% in the quarter to quarter comparison primarily due to a decrease in data processing fees.
FDIC assessment declined $26,382 or 48.92% due to the decline in assets and the new method adopted by the FDIC for its calculation
using assets as its base; however, the overall premium is still burdensome. The turmoil in the financial services industry resulted
in the need to increase prepaid FDIC insurance premiums several years ago to sustain the insurance fund. Depending on the length
and depth of the recessionary environment, there could be additional increased prepaid assessments depending on the health of
the financial services sector. This could place a great financial burden on our financial institution. However, as stated above,
the expense the company has recognized actually has declined due to the new FDIC assessment calculation based upon assets as the
base. Franchise tax increased by $5,250 in the quarter to quarter comparison. Regulatory examination fees decreased $3,754 in
the first three months of 2014 as compared to the first three months of 2013. With the termination of the formal agreement with
the OCC, the surcharge on our regulatory assessment fee is no longer applicable. Other real estate and repossessions are nonrecurring
expenses in the category of noninterest expense. The losses, write-downs and expenses associated with our other real estate properties
experienced a decrease of $58,481, or 93.96%, compared to the same period in 2013. The Company continues to take an aggressive
approach to disposing of its other real estate properties to rid its balance sheet of nonperforming assets. Other expenses increased
a nominal $1,975 or 1.74% in the quarter to quarter comparison.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
March 31, 2014
Income Taxes
MainStreet is subject to both federal and state income taxes.
Franklin Bank is not subject to state income taxes. A bank in Virginia is required to pay a franchise tax that is based on the
capital of the entity. The liability (or balance sheet) approach is used in financial accounting and reporting for income taxes.
Deferred income tax assets and liabilities are computed quarterly for differences between the financial statement and tax basis
of assets and liabilities that will result in taxable or deductible amounts in the future. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be realized. No valuation allowances were deemed necessary
at March 31, 2014 and December 31, 2013. Income tax expense is the tax payable or refundable for the period plus or minus the
change during the period in deferred tax assets and liabilities.
MainStreet recorded income tax expense in the amounts
of $111,246 and $106,692 for the three month periods ending March 31, 2014 and March 31, 2013, respectively.
BALANCE SHEET
Investment Portfolio
The Corporation’s investment portfolio
is used for several purposes as follows:
|
1)
|
To maintain sufficient liquidity to
cover deposit fluctuations and loan demand.
|
|
2)
|
To use securities to fulfill pledging
collateral requirements.
|
|
3)
|
To utilize the maturity/repricing
mix of portfolio securities to help balance the overall interest rate risk position of
the balance sheet.
|
|
4)
|
To make a reasonable return on investments.
|
Funds not utilized for capital expenditures or lending are
invested in overnight federal funds, securities of the U.S. Government and its agencies, mortgage-backed securities, municipal
bonds, corporate debt securities and certain equity securities. Currently, we have invested in overnight federal funds, U.S. Agencies,
mortgage-backed securities, municipal bonds, corporate debt securities, Federal Reserve Bank stock and Federal Home Loan Bank
stock. The value of our investment portfolio is susceptible to the impact of monetary and fiscal policies of the United States,
particularly whether and how the current debate over fiscal issues are resolved. Our mortgage backed securities are either guaranteed
by U.S. government agencies or issued by U.S. government sponsored agencies. MainStreet’s policy is not to invest in derivatives
or other high-risk instruments at this time. The entire securities portfolio was categorized as available for sale
at
March 31, 2014
and is carried at estimated fair value. Unrealized market valuation gains and losses on securities classified
as available for sale are recorded as a separate component of shareholders’ equity. Please refer to Note 2 of the Notes
to Consolidated Financial Statements for the breakdown of the securities available for sale portfolio.
Loan Portfolio
We have established a credit policy detailing
the credit process and collateral in loan originations. Loans to purchase real estate and personal property are generally collateralized
by the related property with loan amounts established based on certain percentage limitations of the property’s total stated
or appraised value. Credit approval is primarily a function of the credit worthiness of the individual borrower or project
based
on pertinent financial information, the amount to be financed, and collateral. The loan portfolio was as follows:
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
March 31, 2014
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
Commercial
|
|
$
|
9,822,472
|
|
|
|
7.79
|
%
|
|
$
|
9,426,188
|
|
|
|
7.63
|
%
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction & land development
|
|
|
16,339,646
|
|
|
|
12.96
|
|
|
|
16,394,964
|
|
|
|
13.26
|
|
Residential 1-4 families:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First liens
|
|
|
34,923,298
|
|
|
|
27.70
|
|
|
|
33,787,645
|
|
|
|
27.33
|
|
Junior liens
|
|
|
6,499,044
|
|
|
|
5.15
|
|
|
|
6,331,233
|
|
|
|
5.12
|
|
Home equity lines
|
|
|
6,097,865
|
|
|
|
4.84
|
|
|
|
5,764,941
|
|
|
|
4.66
|
|
Commercial real estate
|
|
|
51,116,797
|
|
|
|
40.55
|
|
|
|
50,579,103
|
|
|
|
40.91
|
|
Consumer
|
|
|
1,274,512
|
|
|
|
1.01
|
|
|
|
1,353,312
|
|
|
|
1.09
|
|
Total Gross Loans
|
|
$
|
126,073,634
|
|
|
|
100.00
|
%
|
|
$
|
123,637,386
|
|
|
|
100.00
|
%
|
Unearned deferred fees & costs, net
|
|
|
77,797
|
|
|
|
|
|
|
|
86,600
|
|
|
|
|
|
Recorded Investment
|
|
$
|
126,151,431
|
|
|
|
|
|
|
$
|
123,723,986
|
|
|
|
|
|
Gross loans increased $2,436,248, or 1.97% at March 31, 2014
compared to December 31, 2013. As can be seen by the chart above, Franklin Bank has a high concentration in real estate loans.
These loans represented 91.20% and 91.28% of gross loans at March 31, 2014 and December 31, 2013, respectively. Accordingly, the
Bank took steps to reduce certain concentrations within the real estate loans, including participating loans in our loan portfolio.
The loan committee of the board of directors reviews all new loans and renewals of loans within our target concentrations for
approval. During this economic environment, the credit markets have tightened substantially and the real estate market continues
to be soft. These and other factors indicate diminished economic activity, higher risk in these loans, and lower loan demand.
Moreover, Franklin Bank’s current concentration in real estate related loans reduces the Bank’s ability to participate
in these loan categories. Our loan to deposit ratio for March 31, 2014 was 90.11% compared to 86.63% at December 31, 2013, an
increase of 3.48%. We lowered our policy loan to deposit ratio thus increasing liquidity and have maintained the lower percentage
because of lower loan demand. However, due to the increase this quarter in our loan portfolio, this ratio has increased since
year end 2013. We will continue to serve our customers, but in doing so will be governed by the necessity of preserving the institution’s
history of safety and soundness during these difficult economic times.
Our loan portfolio is our primary source of profitability;
therefore, our underwriting approach is critical and is designed throughout our policies to have an acceptable level of risk.
Cash flow adequacy has always been a necessary condition of creditworthiness. If the debt cannot be serviced by the borrower’s
cash flow, there must be an additional secondary source of repayment. As we have discussed, many of our loans are real estate
based so they are also secured by the underlying collateral, the value of which has been under stress due to economic conditions.
We strive to build relationships with our borrowers, so it is very important to continually understand and assess our borrowers’
financial strength and condition.
Our credit policy requires that new loans originated must have
a maximum loan-to-value of 80% while certain loans have lower limits as follows: raw land (65%); improved land (75%); non-obsolete
inventory (60% of value); used automobiles (75% of purchase price); and stock (75%). We do not require mortgage insurance; however,
loans exceeding supervisory loan to value limits are one of our qualitative factors in the allowance for loan loss methodology.
Our credit policy requires updated appraisals to be obtained
on existing loans whereby collateral value is critical to the repayment of the loan and market value may have declined by 15%
or more. In regard to development projects a new appraisal should be obtained when the project sale out rate is less than 25%
of the original assumptions documented by the existing appraisal in the file. Development loans must be reviewed at least annually
or sooner in a declining real estate cycle. Once an appraisal exceeds 18 months it must be updated and reviewed before additional
funding may occur. An appraisal in file may not be used for additional funding under any circumstances after 36 months. Loan account
officers prepare criticized loan workout sheets for the Problem Loan Committee on all loans risk rated special mention or lower
and any loan delinquent 60 days or more. Account officers who indicate a loan is impaired are required to determine collateral
value by one of three recognized methods which are 1) fair value of collateral; 2) present value of expected cash flows; or 3)
observable market value. The difference in the collateral value minus estimated selling expenses, the present value of expected
future cash flows, or the observable market value as compared to the recorded loan balance is allocated as a specific reserve
in the loan loss analysis. Any collateral declines dropping loans below supervisory loan to value limits is included in the qualitative
factors based on loan pools in the loan loss analysis.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
March 31, 2014
We continue to review and enhance our credit policies based on economic and environmental changes. We have developed a list of critical exceptions that require additional monitoring of loans which contain them. Financials are required for business and retail loans less than $35,000 and annual financials are required on all business term loans exceeding $250,000. Our credit policy requires detailed rent rolls on all commercial income producing properties at origination and renewal. We also require real estate site visits by the originating officer on loans over $250,000. We believe there is great value in looking at the collateral upon which we are taking a lien. We have eliminated interest only periods for speculative lot loans and require amortization at origination. The bank introduced an interest only home equity line product in late 2013. These new lines require a loan to value of 80% or less with debt to income being calculated at 1.5% of the outstanding balance. Loans must be collateralized by a first or second deed of trust on the primary residence of the borrower. Other banks have similarly tightened credit availability, particularly for real estate related loans. Moreover higher standards for consumer real estate loans set under the Dodd-Frank Act further restrict the ability to provide residential loans. Generally this has the effect of reducing qualified buyers for real estate and therefore the value of real estate. This in turn can lead to lower appraisals and additional charge offs within our loan portfolio and other real estate properties as well as increased provisions which reduce income.
In addition, we hired an experienced in-house credit analyst
and purchased software to assist lenders with cash flow and certain ratio analysis. We also purchased software to assist with
the credit ratings of loans upon origination, renewal, and the receipt of new financials. Please refer to Notes #3 and #4 to the
financial statements for further discussion of underwriting and risk ratings of loans.
Approximately 26% of our loan portfolio consists of variable
rate loans. Variable rate commercial loans are stressed 2% above the current rate to communicate the impact of potential rate
increases to account officers. Retail loans with variable rate features are underwritten 2% over the current rate. Home equity
lines are underwritten at 1.5% of the full committed loan amount for debt to income purposes.
We monitor our loan portfolio by the loan segments found in
Note #3 of the financial statements. In addition, we look at the trends of significant industries within the loan segments. Loan
segments are categorized primarily based upon regulatory guidelines, which follows the underlying collateral. For the most part,
our business activity is with customers located in our primary market area. Accordingly, operating results are closely correlated
with the economic trends within the region and influenced by the significant industries in the region including pre-built housing,
real estate development, agriculture, and resort and leisure services. In addition, the ultimate collectability of the loan portfolio
is susceptible to changes in the market condition of the region. The real estate market in our area, particularly Smith Mountain
Lake, is also affected by the national economy because a substantial portion of our lending is real estate based and dependent
on buyers who move into our region.
We continue to monitor portfolio concentrations
and have established guide limits based on loss exposure and potential impact to capital. Our defined concentration limits are
within the regulatory guidelines. There are two industry concentrations that are broken out in the tables below by our loan segments.
MainStreet does not currently consider its loans for construction of heavy and civil engineering buildings to be a concentration
of credit because their total does not exceed 25% of total capital as of March 31, 2014.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
March 31, 2014
|
|
March 31, 2014
|
|
|
|
|
|
|
|
|
|
Loans for
|
|
|
|
|
|
|
Loans for
|
|
|
Real Estate
|
|
|
|
|
|
|
Construction
|
|
|
Including
|
|
|
|
|
|
|
of Buildings
|
|
|
Construction
|
|
|
Total
|
|
Commercial
|
|
$
|
302,401
|
|
|
$
|
201,943
|
|
|
$
|
504,344
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
2,085,350
|
|
|
|
1,965,096
|
|
|
|
4,050,446
|
|
Residential, 1-4 families
|
|
|
|
|
|
|
|
|
|
|
|
|
First Liens
|
|
|
3,348,075
|
|
|
|
8,393,406
|
|
|
|
11,741,481
|
|
Junior Liens
|
|
|
604,839
|
|
|
|
461,201
|
|
|
|
1,066,040
|
|
Home Equity Lines
|
|
|
9,663
|
|
|
|
308,552
|
|
|
|
318,215
|
|
Commercial real estate
|
|
|
2,641,791
|
|
|
|
25,051,680
|
|
|
|
27,693,471
|
|
Consumer
|
|
|
514
|
|
|
|
12,306
|
|
|
|
12,820
|
|
Total
|
|
$
|
8,992,633
|
|
|
$
|
36,394,184
|
|
|
$
|
45,386,817
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans for
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction of
|
|
|
Loans for
|
|
|
|
|
|
|
Loans for
|
|
|
Heavy & Civil
|
|
|
Real Estate
|
|
|
|
|
|
|
Construction
|
|
|
Engineering
|
|
|
Including
|
|
|
|
|
|
|
of Buildings
|
|
|
Buildings
|
|
|
Construction
|
|
|
Total
|
|
Commercial
|
|
$
|
296,178
|
|
|
$
|
687,341
|
|
|
$
|
221,608
|
|
|
$
|
1,205,127
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
2,366,758
|
|
|
|
4,138,105
|
|
|
|
2,014,334
|
|
|
|
8,519,197
|
|
Residential, 1-4 families
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Liens
|
|
|
3,666,276
|
|
|
|
795,653
|
|
|
|
8,179,695
|
|
|
|
12,641,624
|
|
Junior Liens
|
|
|
529,732
|
|
|
|
—
|
|
|
|
472,819
|
|
|
|
1,002,551
|
|
Home Equity Lines
|
|
|
9,880
|
|
|
|
34,667
|
|
|
|
334,442
|
|
|
|
378,989
|
|
Commercial real estate
|
|
|
2,552,156
|
|
|
|
—
|
|
|
|
24,556,483
|
|
|
|
27,108,639
|
|
Consumer
|
|
|
2,735
|
|
|
|
—
|
|
|
|
13,209
|
|
|
|
15,944
|
|
Total
|
|
$
|
9,423,715
|
|
|
$
|
5,655,766
|
|
|
$
|
35,792,590
|
|
|
$
|
50,872,071
|
|
Disclosed below are concentrations in acquisition
and development loans, speculative lot loans, and speculative single-family housing construction. Some of these amounts are also
included in the above concentrations as shown below.
|
|
March 31, 2014
|
|
|
|
|
|
|
Total
Concentration
|
|
|
Concentrations
Included Above
|
|
|
Net Addition to
Concentrations
|
|
Acquisition & development
|
|
$
|
453,978
|
|
|
$
|
—
|
|
|
$
|
453,978
|
|
Speculative lot loans
|
|
|
3,659,663
|
|
|
|
444,391
|
|
|
|
3,215,272
|
|
Speculative single-family housing construction
|
|
|
2,728,652
|
|
|
|
636,617
|
|
|
|
2,092,035
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
Total
Concentration
|
|
|
Concentrations
Included Above
|
|
|
Net Addition to
Concentrations
|
|
Acquisition & development
|
|
$
|
455,405
|
|
|
$
|
—
|
|
|
$
|
455,405
|
|
Speculative lot loans
|
|
|
4,007,894
|
|
|
|
3,138,066
|
|
|
|
869,828
|
|
Speculative single-family housing construction
|
|
|
1,971,059
|
|
|
|
1,399,864
|
|
|
|
571,195
|
|
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
March 31, 2014
Overall, our concentrations increased nominally from year end
to the end of the first quarter of 2014, excluding loans for construction of heavy and civil engineering buildings. We continue
to monitor them on an ongoing basis in an effort to control their growth.
MainSteet also considers its home equity lines of credit and
its 1-4 family residential first and junior liens to be a concentration of credit.
Following is a breakdown of our nonperforming loans and assets.
|
|
For the Periods Ended
|
|
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
Nonaccrual loans and leases
|
|
$
|
3,332,160
|
|
|
$
|
4,005,618
|
|
Loans past due 90 days or more and still accruing
|
|
|
107,966
|
|
|
|
—
|
|
Troubled debt restructurings (not on nonaccrual)
|
|
|
849,235
|
|
|
|
1,929,999
|
|
Other impaired loans
|
|
|
30,140
|
|
|
|
60,000
|
|
Total nonperforming loans
|
|
|
4,319,501
|
|
|
|
5,995,617
|
|
Foreclosed real estate
|
|
|
783,430
|
|
|
|
728,163
|
|
Total foreclosed property
|
|
|
783,430
|
|
|
|
728,163
|
|
Total nonperforming assets
|
|
$
|
5,102,931
|
|
|
$
|
6,723,780
|
|
Impaired loans totaled $4,319,501 and $5,995,617
at March 31, 2014 and December 31, 2013, respectively, a decline of $1,676,116. Nonaccrual loans decreased $673,458 at March 31,
2014 compared to year end 2013. Troubled debt restructurings (not on nonaccrual) decreased $1,080,764 from year end 2013. Loans
past due more than 90 days, and still accruing, increased by $107,966 at March 31, 2014 as compared to year end 2013. Other impaired
loans decreased by $29,860 from December 31, 2013. We are continuing to work with our troubled borrowers. We move quickly to identify
and resolve any problem loans. Please refer to Note #4 to the consolidated financial statements for detailed information of nonaccrual
loans, impaired loans, and nonperforming assets. Also, please refer to Provision Expense in this Management’s Discussion
and Analysis.
To ensure timely identification of nonaccrual loans, loan account
officers review monthly their individual portfolios along with past due reports to determine the proper accrual status. Account
officers also prepare criticized loan workout sheets for all loans risk rated special mention or lower and all loans 60-days or
more delinquent are reported to the Franklin Bank’s Problem Loan Committee made up of senior management. The accrual status
of these loans is reviewed and approved by the Problem Loan Committee. Account officers must attest to the accrual status and
risk rating of all loans in their portfolio on a monthly basis. Attestations are presented to and reviewed by the Problem Loan
Committee. The criticized loan worksheets are presented to the Problem Loan Committee quarterly. The Committee meets monthly to
review updates on these loans along with the attestation sheets completed by the account officers. The criticized loan worksheets
were expanded to include a summary of the most recent financial analysis; most recent collateral valuation factoring possible
liquidation and timing discount; and enhanced action plans with target dates. Primary and secondary repayment sources are detailed.
A dedicated officer now manages our problem assets, although currently on a less than full-time basis due to decreased volumes.
A credit analyst performs required financial analysis on all loans $100,000 and over at origination or renewal and at the receipt
of new financial statements. In addition, software was purchased to assist with this process. Software assists the credit analyst
and lender in the risk rating of each loan.
We have an internal loan review function that has an annual
loan review plan approved by the loan committee and the President. Enhanced reporting includes the overall quality of the loan
portfolio; the identification, type, rating, and amount of problem loans; the identification and amount of delinquent loans; credit
and collateral documentation exceptions; the identification and status of credit-related violations of law; the loan officer who
originated each loan reported; concentrations of credit; and loans to executive officers and directors.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
March 31, 2014
Deposits
Total deposits at March 31, 2014 and
December
31, 2013 were $139,996,183
and $142,821,438, respectively, a decrease of $2,825,255, or 1.98%. We continue in 2014 our
strategy to lower overall deposit costs, which is discussed in more detail below. The deposit mix was as follows:
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
Demand deposits
|
|
$
|
28,070,187
|
|
|
|
20.05
|
%
|
|
$
|
26,856,990
|
|
|
|
18.80
|
%
|
Interest checking deposits
|
|
|
8,928,520
|
|
|
|
6.38
|
|
|
|
9,248,249
|
|
|
|
6.48
|
|
Money market deposits
|
|
|
24,400,418
|
|
|
|
17.43
|
|
|
|
23,660,000
|
|
|
|
16.57
|
|
Savings deposits
|
|
|
16,464,657
|
|
|
|
11.76
|
|
|
|
16,240,448
|
|
|
|
11.37
|
|
Time deposits $100,000 and over
|
|
|
27,207,956
|
|
|
|
19.43
|
|
|
|
29,977,151
|
|
|
|
20.99
|
|
Other time deposits
|
|
|
34,924,445
|
|
|
|
24.95
|
|
|
|
36,838,600
|
|
|
|
25.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
139,996,183
|
|
|
|
100.00
|
%
|
|
$
|
142,821,438
|
|
|
|
100.00
|
%
|
The largest component of deposits continues to be time deposits
including those $100,000 and over representing 44.38% of total deposits at March 31, 2014 compared to 46.78% at December 31, 2013.
As a percentage of total deposits, the mix continues to change somewhat. The levels and mix of deposits are influenced by such
factors as customer service, interest rates paid, service charges, and the convenience of banking locations. Our core deposit
relationships remained as can be seen by the increase in demand deposits, which do not pay interest. Demand deposits are now 20.05%
of total deposits as compared to 18.80% at December 31, 2013. The dollar amount of our demand deposits has also increased $1.2
million from year end 2013. A further increase in demand deposits would improve the net interest margin and the total yield on
interest bearing deposits. Savings accounts increased as a percentage of total deposits along with the dollar amount. Interest
checking accounts actually decreased as a percentage of total deposits along with the dollar amount. Money market deposits increased
$740,418 since year end 2013 and as a percentage of total deposits. Our total deposits have decreased $2.8 million since year
end 2013 primarily due to a $4.7 million decline in our time deposits, offset by a total increase in our other deposit accounts
in the amount of $1.9 million, which carry a lower cost than our time deposits. This is all part of our strategic efforts to lower
our deposit costs while maintaining ample liquidity to fill our needs and for contingency planning.
Competition remains strong in our market from other depository
institutions. Management attempts to identify and implement the pricing and marketing strategies that will help control the overall
cost of deposits and to
maintain a stable deposit mix. Our goal has been
to strive to gather the whole customer relationship, including deposits and loans, and not just certificates of deposit. We have
been successful in lowering our deposit costs and maintaining liquidity. Loan demand has been soft overall, despite our increase
in loans since year end, and parallels our deposit strategy. Our strategic plan in 2014 includes continued lowering of our deposit
costs to benefit net income, which includes increasing our demand deposits. The overall cost of interest bearing deposits was
.73% and .92%, respectively, for the three months ended March 31, 2014 and March 31, 2013. This decline of 19 basis points is
due to the continued monitoring of deposit rates and the rollover of many deposits into lower current market interest rates. We
monitor this closely to keep deposit costs low, but to maintain ample liquidity. We are a member of the CDARS programs and of
QwickRate.
Borrowings
We have several sources for borrowings generally
to assist with liquidity. At March 31, 2014 and December 31, 2013, we had no balances outstanding with the Federal Home Loan Bank
of Atlanta (“FHLB”), overnight federal funds purchased, or corporate cash management accounts. The FHLB holds a blanket
lien on loans secured by commercial real estate and loans secured by 1-4 family first liens, second liens, and equity lines, which
provide a source of liquidity to the Corporation. Loans included in these portfolios at March 31, 2014 and December 31, 2013 were
$98,297,709 and $96,223,160, respectively.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
March 31, 2014
The Bank has an internal Corporate Cash Management account
for customers into which excess demand deposit accounts are swept on an overnight basis in order to earn interest. This account
is not FDIC insured but the Bank is required to pledge agency funds at 100% towards these balances. The Corporate Cash Management
sweep accounts totaled $0 at March 31, 2014 and December 31, 2013.
Repurchase Agreements
The Bank entered into a repurchase agreement with Barclays
Capital (“Barclays”) on January 2, 2008 in the amount of $6,000,000. The repurchase date was January 2, 2013. The
interest rate was fixed at 3.57% until maturity or until it was called. Beginning January 2, 2009 the repurchase agreement became
callable and could have been called quarterly with two business day’s prior notice. Interest was payable quarterly. The
repurchase agreement was collateralized by federal agency and agency mortgage backed securities.
Shareholders’ Equity
Total shareholders’ equity was $24,333,435
and $23,987,541
at March 31, 2014 and
December
31, 2013
, respectively. Book value per share was $14.20 and $14.00 at March 31, 2014 and December 31, 2013, respectively.
The maintenance of appropriate
levels of capital is a priority and is
continually monitored. MainStreet and Franklin Bank are subject to various regulatory capital requirements administered by the
federal and state banking agencies. Quantitative measures established by regulations to ensure capital adequacy require MainStreet
and Franklin Bank to maintain minimum capital ratios. Failure to meet minimum capital ratios can initiate certain mandatory, and
possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the consolidated
financial statements. Also, declining capital can impact the ability of Franklin Bank to grow other assets. The required level
of capital can also be affected by earnings, asset quality, and other issues. While MainStreet and Franklin Bank were considered
well-capitalized under established regulatory classifications at March 31, 2014 and December 31, 2013, in the current economic
circumstances, capital resources are a focus for the Corporation.
Capital adequacy levels are also monitored to support
the Bank’s safety and soundness.
Should it be necessary or appropriate
to obtain additional capital, then the current shareholder base could suffer dilution.
The following are MainStreet’s capital
ratios at:
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
Tier I Leverage Ratio (Actual)
|
|
|
14.07
|
|
|
|
13.62
|
%
|
Tier I Leverage Ratio (Quarterly Ave.)
|
|
|
14.06
|
|
|
|
13.59
|
|
Tier I Risk-Based Capital Ratio
|
|
|
19.09
|
|
|
|
18.98
|
|
Tier II Risk-Based Capital Ratio
|
|
|
20.34
|
|
|
|
20.24
|
|
Liquidity and Asset Liability Management
Asset liability management functions to maximize profitability
within established guidelines for liquidity, capital adequacy, and interest rate risk. It also helps to ensure that there is adequate
liquidity to meet loan demand or deposit outflows and interest rate fluctuations. Liquidity is the ability to meet maturing obligations
and commitments, withstand deposit fluctuations, fund operations, and provide for loan requests. In this economic environment
liquidity remains a concern. MainStreet’s material off-balance sheet obligations were primarily loan commitments of the
Bank in the amount of $19,011,182 at March 31, 2014. We have a liquidity contingency plan that provides guidance on the maintenance
of appropriate liquidity and what action is required under various liquidity scenarios. Our liquidity is provided by cash and
due from banks, interest-bearing deposits, federal funds sold, securities available for sale, and loan repayments. The Bank has
overnight borrowing lines available with their correspondent banks, the ability to borrow from the Federal Reserve Bank’s
discount window, and the ability to borrow long-term and short-term from the Federal Home Loan Bank of Atlanta. At March 31, 2014
and December 31, 2013, we had available credit from borrowing in the amount of $43,623,175, and $43,687,459, respectively. Our
ratio of liquid assets to total liabilities at March 31, 2014 and December 31, 2013 was 24.27% and 26.88%, respectively.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
March 31, 2014
Core deposits are the primary foundation
for our Corporation’s liquidity. Our core deposit relationships remained as can be seen by the increase in demand deposits.
Competition in our markets is strong and customers seek higher interest rates especially during this low interest rate environment.
Lines of credit are essential to our business while other funding sources may be utilized. Due to our strategic efforts to reduce
deposit costs, total time deposits have decreased from year end 2013; however, demand deposits, money market deposits, and savings
deposits all increased over 2013 levels. Interest checking accounts decreased over 2013 levels. Total deposits actually decreased
$2.8 million from year end 2013. The shrinkage of the balance sheet has had a positive impact on our capital. We monitor the deposits
and our liquidity daily to ensure we have ample liquidity. The Bank is a member of the Certificate of Deposit Account Registry
Service (“CDARS”). This allows us to provide the Bank’s depositors with up to $50 million in FDIC insurance.
In a reciprocal transaction, the Bank receives the deposits and forwards them to CDARS and receives deposits back, if wanted.
We can also bid on deposits in a one-way buy transaction which would allow for new depositors. CDARS deposits are also considered
brokered deposits. Franklin Bank had accepted brokered deposits in the amount of $2.4 million as of March 31, 2014. Franklin Bank
became a member of QwickRate in order to bid for internet certificates of deposit as another source of liquidity. At March 31,
2014, Franklin Bank had $2.3 million in internet certificates of deposit.
Interest rate sensitivity is measured by
the difference, or gap, between interest sensitive earning assets and interest sensitive interest bearing liabilities and the
resultant change in net interest income due to market rate fluctuations, and the effect of interest rate movements on the market.
Management utilizes these techniques to manage interest rate risk in order to minimize change in net interest income with interest
rate changes. MainStreet has partnered with Compass Bank using the Sendero model to help measure interest rate risk. The asset
liability management process requires a number of key assumptions. Management determines the most likely outlook for the economy
and interest rates measuring the effect on net interest income in a rising and declining 100, 200, 300, and 400 interest rate
environment, as applicable. A shock report for these rates along with a ramped approach with each is modeled. With the shock,
net interest income is modeled assuming that interest rates move the full rate change in the first month. With the ramp, net interest
income is modeled assuming rates move one quarter of the full rate change in each quarter. With this approach, management also
reviews the economic value of equity which is the net present value of the balance sheet’s cash flows or the residual value
of future cash flows ultimately due to shareholders. The following table demonstrates the percentage change in net interest income
from the level prime rate of 3.25% at March 31, 2014 in a rising and declining 100, 200, 300, and 400 basis point interest rate
environment, as applicable:
Net Interest Income Percentage Change
From Level Rates
Rate Shift
|
|
Prime Rate
|
|
|
Change From Level Ramp
|
|
|
Change from Level Shock
|
|
+400 bp
|
|
|
7.25
|
%
|
|
|
4.00
|
%
|
|
|
5.00
|
%
|
+300 bp
|
|
|
6.25
|
|
|
|
3.00
|
|
|
|
4.00
|
|
+200 bp
|
|
|
5.25
|
|
|
|
2.00
|
|
|
|
3.00
|
|
+100 bp
|
|
|
4.25
|
|
|
|
1.00
|
|
|
|
1.00
|
|
-100 bp
|
|
|
2.25
|
|
|
|
-1.00
|
|
|
|
-1.00
|
|
-200 bp
|
|
|
1.25
|
|
|
|
-1.00
|
|
|
|
-3.00
|
|
-300 bp
|
|
|
.25
|
|
|
|
-2.00
|
|
|
|
-5.00
|
|
MainStreet is sensitive to change in the
interest rate environment particularly due to the level of variable rate loans in our loan portfolio, the short-term of fixed
rate loans, and the assumed repricing of our interest bearing liabilities. Management seeks to lower the impact on the net interest
margin. The addition of floors to segments of our variable rate loan portfolio has contributed significantly to management of
the interest income component of our net interest margin. Historically, Franklin Bank has been asset sensitive. However, due to
the large amount of repricing deposit liabilities in the near term, the Bank has shifted to a liability sensitive position.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
March 31, 2014
Inflation
Most of our assets are monetary in nature
and therefore are sensitive to interest rate fluctuations. We do not have significant fixed assets or inventories. Fluctuations
in interest rates and actions of the Board of Governors of the Federal Reserve Systems (“FRB”), including “quantitative
easing” during the Great Recession, as well as whether and how the fiscal issues confronting the United States are resolved
can have a great effect on our profitability. Management continually strives to manage the relationship between interest-sensitive
assets and liabilities. MainStreet and Franklin Bank must comply with numerous federal and state laws and regulations. In light
of the increasing government involvement in the financial services industry and to address the underlying causes of the recent
credit crunch, it is likely that financial institutions like MainStreet and Franklin Bank will have to meet additional legal requirements,
all of which add to our cost of doing business. In addition, regulatory concerns over real estate related assets on the balance
sheets of financial institutions and liquidity due to deposit fluctuations and other factors are likely to translate into higher
regulatory scrutiny of financial institutions. This could impact MainStreet.
Stock Compensation Plans
BankShares approved the 2004 Key Employee
Stock Option Plan at its Annual Meeting of Shareholders, April 15, 2004. This plan permitted the granting of Incentive and Non
Qualified stock options as determined by BankShares’ Board of Directors to persons designated as “Key Employees”
of BankShares and its subsidiaries. The Plan terminated on January 21, 2009. Awards made under the Plan prior to and outstanding
on that date remain valid in accordance with their terms.
Recent Accounting Developments
In January 2014, the FASB issued ASU 2014-04,
“Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate
Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force).” The amendments
in this ASU clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical
possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining
legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest
in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure
or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount
of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans
collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the
applicable jurisdiction. The amendments in this ASU are effective for public business entities for annual periods, and interim
periods within those annual periods, beginning after December 15, 2014. The Corporation is currently assessing the impact that
the new guidance will have on its consolidated financial statements.
In April 2014, the FASB issued ASU 2014-08,
“Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued
Operations and Disclosures of Disposals of Components of an Entity.” The amendments in this ASU change the criteria for
reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, only disposals representing
a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect
on the organization’s operations and financial results and include disposals of a major geographic area, a major line of
business, or a major equity method investment. The new guidance requires expanded disclosures about discontinued operations that
will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued
operations. Additionally, the new guidance requires disclosure of the pre-tax income attributable to a disposal of a significant
part of an organization that does not qualify for discontinued operations reporting. The amendments in the ASU are effective for
public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014.
Early adoption is permitted. The Corporation does not expect the adoption of ASU 2014-08 to have a material impact on its consolidated
financial statements.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
March 31,
2014