UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
Form 10-K
(
Mark One)
S
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended
December 31, 2011
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________to ____________
Commission file number
333-86993
MainStreet
BankShares, Inc.
(Exact name
of registrant as specified in its charter)
Virginia
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54-1956616
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(State or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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1075 Spruce Street, Martinsville, Virginia
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24112
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code
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(276) 632-8054
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class
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Name of each exchange on which registered
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None
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None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes
£
No
S
Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
£
No
S
Indicate by check mark whether the registrant (1) filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes
S
No
£
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
S
No
£
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
S
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check
one):
Large accelerated filer
£
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Accelerated filer
£
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Non-accelerated filer
£
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Smaller reporting company
S
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes
£
No
S
State the aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average
bid and asked price of such common equity, as of June 30, 2011.
$5,557,971 based on $4.70 per share.
(
Applicable only to corporate registrants
) Indicate the
number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date
1,713,375
shares outstanding as of March 14, 2012.
Documents incorporated by reference
.
Portions of the
Corporation’s 2012 Proxy Statement have been incorporated by reference into Part III.
MainStreet BankShares, Inc.
Form 10-K
Index
PART I
Item 1
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Business
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1-5
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Item 1A
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Risk Factors
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5
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Item 1B
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Unresolved Staff Comments
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5
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Item 2
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Properties
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5-6
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Item 3
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Legal Proceedings
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6
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Item 4
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Mine Safety Disclosures
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6
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PART II
Item 5
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Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
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6-7
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Item 6
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Selected Financial Data
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7
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Item 7
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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8-30
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Item 7A
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Quantitative and Qualitative Disclosures about Market Risk
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30
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Item 8
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Financial Statements and Supplementary Data
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31-70
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Item 9
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Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
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71
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Item 9A
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Controls and Procedures
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71
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Item 9B
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Other Information
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71
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PART III
Item 10
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Directors, Executive Officers and Corporate Governance
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72-75
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Item 11
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Executive Compensation
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75
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Item 12
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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75
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Item 13
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Certain Relationships and Related Transactions, and Director Independence
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75
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Item 14
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Principal Accountant Fees and Services
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75
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PART IV
Item 15
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Exhibits and Financial Statement Schedules
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75-76
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PART I
Item 1. Business
General
MainStreet BankShares, Inc., (the “Corporation”,
“MainStreet”, or “BankShares”), was incorporated in the Commonwealth of Virginia on January 14, 1999. MainStreet
was primarily formed to serve as a bank holding company. Its first wholly-owned subsidiary was located in Martinsville, Virginia
and was sold on March 23, 2005 for $6.5 million. 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., for the sole purpose of owning the real estate of the Corporation.
MainStreet is authorized to engage in any lawful activity for
a bank holding company. The holding company structure provides greater flexibility than a bank standing alone because it allows
expansion and diversification of business activities through newly formed subsidiaries or through acquisitions. MainStreet’s
business is conducted through its subsidiary bank.
Franklin Community Bank, N.A.
Franklin Bank is a nationally chartered commercial bank and
member of the Federal Reserve whose deposits are insured by the FDIC. Franklin Bank opened for business on September 16, 2002.
Franklin Bank accepts deposits from the general public and makes commercial, consumer, and real estate loans. 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 emphasizes a high degree of personalized client service
in order to be able to serve each customer. Franklin Bank’s marketing approach emphasizes the advantages of dealing with
an independent, locally managed commercial bank to meet the particular needs of individuals, professionals and small to medium-sized
businesses. The main office of Franklin Bank is located at 400 Old Franklin Turnpike, Suite 100, Rocky Mount, Virginia. Franklin
Bank has banking offices located at 12930 Booker T. Washington Highway, Hardy, Virginia and in Union Hall located at 25 Southlake
Drive, Union Hall, Virginia. Franklin Bank’s primary service area is Franklin County, Town of Rocky Mount and surrounding
areas. For the most part, Franklin Bank’s business activity is with customers located in its 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. Much of the market
area is considered rural; however, the resort surrounding Smith Mountain Lake attracts many tourists to the area.
MainStreet RealEstate, Inc.
MainStreet RealEstate, Inc. was formed effective February 8,
2007 as a subsidiary of MainStreet. It was formed for the sole purpose of owning the real estate of the Corporation. It owns the
facility in which Franklin Bank’s Southlake branch operates.
Competition
Franklin Bank experiences competition in attracting
and retaining business and personal checking and savings accounts, making commercial, consumer, and real estate loans and providing
other services in their primary service area. The principal methods of competition in the banking industry for deposits are service,
rates offered, convenience of location, and flexible office hours. The principal methods of competition in the banking industry
for loans are interest rates, loan origination fees, and the range of lending services offered. Competition in the service area
comes from other commercial banks, savings institutions, brokerage firms, credit unions, and mortgage banking firms. Competition
for deposits is particularly intense in Franklin Bank’s market which increases the cost and reduces the availability of local
deposits. Because of the nature of Franklin Bank’s market, a substantial portion of the loan opportunities for which banks
compete are real estate related. During the present economic downturn, which has been focused on real estate, the number of loan
opportunities is reduced and the risk of those loans is increased. Franklin Bank has been able to take advantage of the consolidation
in the banking industry in our market area by providing personalized banking services that are desirable to large segments of customers,
which has enabled the bank to compete satisfactorily. We intend to continue to provide a high level of service with local decision-making
focused solely on our local market. We process daily by branch capture, a method by which checks are processed by tellers rather
than item processing, which allows for better efficiencies along with all day banking. We also receive and send our cash letters
electronically. We believe these factors more than offset the advantages that larger banks in our markets may have in offering
a larger number of banking locations and broader range of services.
Regulation, Supervision and Government
Policy
BankShares and Franklin Bank are subject to
state and federal banking laws and regulations that provide for general regulatory oversight of all aspects of their operations.
As a result of substantial regulatory burdens on banking, financial institutions like MainStreet and Franklin Bank are at a disadvantage
to other competitors who are not as highly regulated, and MainStreet and Franklin Bank’s costs of doing business are accordingly
higher. A brief summary follows of certain laws, rules and regulations which affect MainStreet and Franklin Bank. Recent and expected
changes in the laws and regulations governing banking and financial services could have an adverse effect on the business prospects
of MainStreet and Franklin Bank. The current economic environment has created uncertainty in this area, as legislators and regulators
attempt to address rapidly changing problems which are likely to lead to new laws and regulations affecting financial institutions.
MainStreet BankShares, Inc.
MainStreet is a bank holding company organized
under the Federal Bank Holding Company Act (BHCA), which is administered by the Board of Governors of the Federal Reserve System
(the Federal Reserve). MainStreet is required to file an annual report with the Federal Reserve and may be required to furnish
additional information pursuant to the BHCA. The Federal Reserve is authorized to examine MainStreet and its subsidiaries. With
some limited exceptions, the BHCA requires a bank holding company to obtain prior approval from the Federal Reserve before acquiring
or merging with a bank or before acquiring more than 5% of the voting shares of a bank unless it already controls a majority of
shares. On June 17, 2009, MainStreet entered into a Memorandum of Understanding (“MOU”) with the Federal Reserve which
was amended effective January 26, 2011. Refer to Item 7, Management’s Discussion and Analysis for a detailed discussion.
The Bank Holding Company Act
. Under
the BHCA, a bank holding company is generally prohibited from engaging in nonbanking activities unless the Federal Reserve has
found those activities to be incidental to banking. Bank holding companies also may not acquire more than 5% of the voting shares
of any company engaged in nonbanking activities.
The Virginia Banking Act.
The Virginia
Banking Act requires all Virginia bank holding companies to register with the Virginia State Corporation Commission (the Commission).
MainStreet is required to report to the Commission with respect to financial condition, operations and management. The Commission
may also make examinations of any bank holding company and its subsidiaries.
The Gramm-Leach-Bliley Act
. The Gramm-Leach-Bliley
Act (GLBA) permits significant combinations among different sectors of the financial services industry, allows for expansion of
financial service activities by bank holding companies and offers financial privacy protections to consumers. GLBA preempts most
state laws that prohibit financial holding companies from engaging in insurance activities. GLBA permits affiliations between banks
and securities firms in the same holding company structure, and it permits financial holding companies to directly engage in a
broad range of securities and merchant banking activities. MainStreet is not a financial holding company.
The Sarbanes-Oxley Act
. The Sarbanes-Oxley
Act (SOX) enacted sweeping reforms of the federal securities laws intended to protect investors by improving the accuracy and reliability
of corporate disclosures. It impacts all companies with securities registered under the Securities Exchange Act of 1934, including
MainStreet. SOX creates increased responsibilities for chief executive officers and chief financial officers with respect to the
content of filings with the Securities and Exchange Commission. Section 404 of SOX and related Securities and Exchange Commission
rules focused increased scrutiny by internal and external auditors on MainStreet’s systems of internal controls over financial
reporting, which is designed to insure that those internal controls are effective in both design and operation. SOX sets out enhanced
requirements for audit committees, including independence and expertise, and it includes stronger requirements for auditor independence
and limits the types of non-audit services that auditors can provide. Finally, SOX contains additional and increased civil and
criminal penalties for violations of securities laws.
Capital Requirements
. The Federal Reserve
has adopted risk-based capital guidelines that are applicable to MainStreet. The guidelines provide that the Company must maintain
a minimum ratio of 8% of qualified total capital to risk-weighted assets (including certain off-balance sheet items, such as standby
letters of credit). At least half of total capital must be comprised of Tier 1 capital, for a minimum ratio of Tier 1 capital to
risk-weighted assets of 4%. In addition, the Federal Reserve has established minimum leverage ratio guidelines of 4% for banks
that meet certain specified criteria. The leverage ratio is the ratio of Tier 1 capital to total average assets, less intangibles.
MainStreet is expected to be a source of capital strength for its subsidiary bank, and regulators can undertake a number of enforcement
actions against MainStreet if its subsidiary bank becomes undercapitalized. MainStreet’s bank subsidiary is well capitalized
and fully in compliance with capital guidelines. However, regulatory capital requirements relate to earnings and asset quality,
among other factors. Bank regulators could choose to raise capital requirements for banking organizations beyond current levels.
As discussed in Item 7, Management’s Discussion and Analysis, MainStreet’s subsidiary bank entered into a formal agreement
with the Office of the Comptroller of the Currency which contains requirements relative to Franklin Bank’s capital levels.
In addition, when the proposed “Basel III” framework is implemented in the United States, bank holding companies and
their bank subsidiaries depending on their size will likely be required to increase their capital. Because of these matters, MainStreet
is unable to predict if higher capital levels may be mandated in the future for it or its subsidiary bank. If so, such additional
capital could be dilutive to MainStreet’s then existing shareholders in the future.
Emergency Economic Stabilization Act of
2008
. On October 14, 2008, the U. S. Treasury announced the Troubled Asset Relief Program (TARP) under the Emergency Economic
Stabilization Act of 2008. In the program, the Treasury was authorized to purchase up to $250 million of senior preferred shares
in qualifying U. S. banks, savings and loan associations, and bank and savings and loan holding companies. The amount of TARP funds
was later increased up to $350 million. The minimum subscription amount was 1% of risk-weighted assets and the maximum amount was
the lesser of $25 billion or 3% of risk-weighted assets. MainStreet did not participate in TARP.
American Recovery and Reinvestment Act
of 2009
. The ARRA was enacted in 2009 and includes a wide range of programs to stimulate economic recovery. In addition, it
also imposed new executive compensation and corporate governance obligations on TARP Capital Purchase Program recipients. Because
MainStreet did not participate in TARP it is not affected by these requirements.
Dodd-Frank Wall Street Reform and Consumer
Protection Act
. The Dodd-Frank Act was signed into law on July 21, 2010. Its wide ranging provisions affect all federal financial
regulatory agencies and nearly every aspect of the American financial services industry. Among the provisions of the Dodd-Frank
Act that directly impact the Company is the creation of an independent Consumer Financial Protection Bureau, (CFPB), which has
the ability to write rules for consumer protections governing all financial institutions. All consumer protection responsibility
formerly handled by other banking regulators is consolidated in the CFPB. It will also oversee the enforcement of all federal laws
intended to ensure fair access to credit. For smaller financial institutions such as MainStreet and Franklin Bank, the CFPB will
coordinate its examination activities through their primary regulators.
Although the Dodd-Frank Act provisions themselves
are extensive, the full impact on the Company of this massive legislation continues to be unknown. The Act provides that several
federal agencies, including the Federal Reserve and the Securities and Exchange Commission, shall issue regulations implementing
major portions of the legislation, and this process is ongoing.
Franklin Community Bank, N.A.
Franklin Bank is a national banking association
incorporated under the laws of the United States, and the bank is subject to regulation and examination by the Office of the Comptroller
of the Currency (OCC). Franklin Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to the
limits of applicable law. The OCC, as the primary regulator, and the FDIC regulate and monitor all areas of Franklin Bank’s
operation. These areas include adequacy of capitalization and loss reserves, loans, deposits, business practices related to the
charging and payment of interest, investments, borrowings, payment of dividends, security devices and procedures, establishment
of branches, corporate reorganizations and maintenance of books and records. Franklin Bank is required to maintain certain capital
ratios. It must also prepare quarterly reports on its financial condition for the OCC and conduct an annual audit of its financial
affairs. The OCC requires Franklin Bank to adopt internal control structures and procedures designed to safeguard assets and monitor
and reduce risk exposure. While appropriate for the safety and soundness of banks, these requirements add to overhead expense for
Franklin Bank and other banks. On April 16, 2009, Franklin Bank entered into a formal agreement (“Agreement”) with
the OCC. Refer to Item 7, Management’s Discussion and Analysis for a detailed discussion.
The Community Reinvestment Act
. Franklin
Bank is subject to the provisions of the Community Reinvestment Act (CRA), which imposes an affirmative obligation on financial
institutions to meet the credit needs of the communities they serve, including low and moderate income neighborhoods. The OCC monitors
Franklin Bank’s compliance with the CRA and assigns public ratings based upon the bank’s performance in meeting stated
assessment goals. Unsatisfactory CRA ratings can result in restrictions on bank operations or expansion. Franklin Bank received
a “satisfactory” rating in its last CRA examination by the OCC.
The Gramm-Leach-Bliley Act
. In addition
to other consumer privacy provisions, the Gramm-Leach-Bliley Act (GLBA) restricts the use by financial institutions of customers’
nonpublic personal information. At the inception of the customer relationship and annually thereafter, Franklin Bank is required
to provide its customers with information regarding its policies and procedures with respect to handling of customers’ nonpublic
personal information. GLBA generally prohibits a financial institution from providing a customer’s nonpublic personal information
to unaffiliated third parties without prior notice and approval by the customer.
The USA Patriot Act
. The USA
Patriot Act (Patriot Act) facilitates the sharing of information among government entities and financial institutions to
combat terrorism and money laundering. The Patriot Act imposes an obligation on Franklin Bank to establish and maintain
anti-money laundering policies and procedures, including a customer identification program. Franklin Bank is also required to
screen all customers against government lists of known or suspected terrorists. There is additional regulatory oversight to
insure compliance with the Patriot Act.
Consumer Laws and Regulations
.
There are a number of laws and regulations that regulate banks’ consumer loan and deposit transactions. Among these are
the Truth in Lending Act, the Truth in Savings Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act,
the Fair Housing Act, the Fair Credit Reporting Act, and the Fair Debt Collections Practices Act. Franklin Bank is required
to comply with these laws and regulations in its dealing with customers. There are numerous disclosure and other compliance
requirements associated with the consumer laws and regulations.
Deposit Insurance
. Franklin Bank has
deposits that are insured by the Federal Deposit Insurance Corporation (FDIC). FDIC maintains a Bank Insurance Fund (BIF) that
is funded by risk-based insurance premium assessments on insured depository institutions. Assessments are determined based upon
several factors, including the level of regulatory capital and the results of regulatory examinations. FDIC may adjust assessments
if the insured institution’s risk profile changes or if the size of the BIF declines in relation to the total amount of insured
deposits. In 2011 and 2010, Franklin Bank paid $293,337 and $547,466, respectively, in FDIC assessments, which was a substantial
increase. The 2011 expense decreased due to a substantial decline in deposits, not due to the assessment rates. It is anticipated
that assessments may increase in the future to offset demands on the BIF from banks that fail in the troubled economy. Such increases
could adversely affect the Bank’s profitability.
On October 3, 2008, the FDIC announced that
deposits at FDIC-insured institutions would be insured up to at least $250,000. It was extended to December 31, 2013, and then
permanently.
FDIC announced its Transaction Account Guarantee
Program on October 14, 2008. The Transaction Account Guarantee Program, which is a part of the Temporary Liquidity Guarantee Program,
provides full coverage for non-interest bearing deposit accounts of FDIC-insured institutions that elected to participate. Franklin
Bank elected to participate in this program and opted to continue in the program. There are increased BIF assessments for program
participants.
After giving primary regulators an opportunity
to first take action, FDIC may initiate an enforcement action against any depository institution it determines is engaging in unsafe
or unsound actions or which is in an unsound condition, and the FDIC may terminate that institution’s deposit insurance.
Capital Requirements
. The same capital
requirements that are discussed above with relation to MainStreet are applied to Franklin Bank by the OCC. The OCC guidelines provide
that banks experiencing internal growth or making acquisitions are expected to maintain strong capital positions well above minimum
levels, without reliance on intangible assets. Also, capital requirements can be increased based on earnings and asset quality
concerns as well as other issues. The Agreement between the Bank and the OCC required the Bank to develop a three year capital
plan to provide for the Bank’s capital needs based on projected growth and other factors. The plan was implemented and is
continually enhanced. Additional capital requirements may cause dilution to then existing shareholders, if needed.
Limits on Dividend Payments
. As a national
bank, Franklin Bank may not pay dividends from its capital, and it may not pay dividends if the bank would become undercapitalized,
as defined by regulation, after paying the dividend. Without prior OCC approval, Franklin Bank’s dividend payments in any
calendar year are restricted to the bank’s retained net income for that year, as that term is defined by the laws and regulations,
combined with retained net income from the preceding two years, less any required transfer to surplus. Under the Agreement, Franklin
Bank is restricted from paying dividends.
The OCC and FDIC have authority to limit dividends
paid by Franklin Bank, if the payment were determined to be an unsafe and unsound banking practice. Any payment of dividends that
depletes the Bank’s capital base could be deemed to be an unsafe and unsound banking practice. Currently under the MOU with
the Federal Reserve, MainStreet cannot pay any dividends without approval.
Branching
. As a national bank, Franklin
Bank is required to comply with the state branch banking laws of Virginia, the state in which the Bank is located. Franklin Bank
must also have the prior approval of OCC to establish a branch or acquire an existing banking operation. Under Virginia law, Franklin
Bank may open branch offices or acquire existing banks or bank branches anywhere in the state. Virginia law also permits banks
domiciled in the state to establish a branch or to acquire an existing bank or branch in another state.
Monetary Policy
The monetary and interest rate policies of
the Federal Reserve, as well as general economic conditions, affect the business and earnings of MainStreet. Franklin Bank and
other banks are particularly sensitive to interest rate fluctuations. The spread between the interest paid on deposits and that
which is charged on loans is the most important component of Franklin Bank’s profits. In addition, interest earned on investments
held by MainStreet and Franklin Bank has a significant effect on earnings. As conditions change in the national and international
economy and in the money markets, the Federal Reserve’s actions, particularly with regard to interest rates, can impact loan
demand, deposit levels and earnings at Franklin Bank. It is not possible to accurately predict the effects on MainStreet of economic
and interest rate changes.
Other Legislative and Regulatory Concerns
Particularly because of current uncertain
and volatile economic conditions as well as recent credit market turmoil and related financial institution concerns, federal and
state laws and regulations are likely to be enacted that will affect the regulation of financial institutions. The Dodd-Frank Reform
Act has been adopted and additional regulations affecting the financial sector have been enacted and additional regulations can
be expected although many of these are not directly applicable to small community financial institutions like MainStreet. The net
effect of these changes in this law as well as others will add to the regulatory burden on banks and increase the costs of compliance,
or they could change the products that can be offered and the manner in which banks do business. We cannot foresee how the additional
regulation of financial institutions may change in the future and how those changes might affect MainStreet.
Company Website
MainStreet maintains a website at
www.msbsinc.com
and for Franklin Bank at
www.fcbva.com
. The Corporation’s annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and all amendments to those reports are made available on its website through a link to the
Securities and Exchange Commission for filings. The Corporation’s proxy materials for the 2012 annual meeting of stockholders
are also posted on a separate website at
www.cfpproxy.com/6043
.
Employees
The total number of full-time equivalent persons
employed by MainStreet and its wholly owned bank subsidiary as of December 31, 2011 was 50. MainStreet believes its relationship
with its employees is good and no employees are represented by a labor union.
Item 1A. Risk Factors
Not required.
Item 1B. Unresolved Staff Comments
Not required.
Item 2. Properties
The Corporation leases its executive office
and operations facility in Martinsville, Virginia. The lease commenced on November 19, 2010 for space located at 1075 Spruce Street
in Martinsville, Virginia. The lease will expire November 30, 2015. The lease has an option to renew for one additional five year
term.
Franklin Bank’s main office is located
at 400 Old Franklin Turnpike, Suite 100, Rocky Mount, Virginia, in a section of town known as the Rocky Mount Marketplace. The
bank leases a two-story facility with approximately 8,200 square feet of which the Bank provides permanent financing to the owners
of which one is a director. The lease is for a 15-year period and the expiration date of the lease is June 30, 2018. Subject to
certain compliance issues, Franklin Bank has the option to extend the lease for one additional term of five years. If the right
to extend this lease for the first renewal term is exercised, Franklin Bank has the right to extend this lease for five additional
terms of five years each. One of the owners is a director of Franklin Bank and both owners are shareholders of BankShares. Franklin
Bank owns a lot adjacent to their Rocky Mount Office which is utilized for employee parking. Franklin Bank leases its branch which
opened on April 9, 2004 at 12930 Booker T. Washington Highway, Hardy, Virginia. Franklin Bank provides permanent financing to the
owner of this facility. A director of Franklin Bank is a partner in the ownership of this facility. The lease commenced on April
7, 2004 and will expire April 6, 2019. Subject to certain compliance issues, Franklin Bank has the option to extend the lease for
one additional term of five years. If the right to extend this lease for the first renewal term is exercised, Franklin Bank has
the right, or option, to extend or renew this lease for five additional terms of five years each. Franklin Bank leased its 220
North branch located at 35 Shepherd Drive, Rocky Mount, Virginia. A director of Franklin Bank is a partner in the ownership of
the facility. The lease commenced June 1, 2007 and will expire June 1, 2012. Franklin Bank closed this banking office effective
November 13, 2010; however, the lease remains in effect until its maturity and has a sublease until then. Management deems these
leases to be made on comparable market terms. The main office and all branches have a drive-up ATM.
MainStreet RealEstate owns the
Southlake branch located in the Union Hall area of Franklin County and leases it to F ranklinBank. The branch opened in
August 2007. The total cost of the land and building were $425,286 and $881,123, respectively. MainStreet believes its
banking facilities are well located to serve their intended banking markets and are attractively furnished and well equipped
for banking purposes. All facilities are adequately insured in management’s opinion.
Item 3. Legal Proceedings
MainStreet currently is not involved in any legal proceedings.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
MainStreet has 10,000,000 authorized shares
of common stock, no par value, and had 1,713,375 shares of its common stock outstanding at January 31, 2012. In addition, the initial
organizers of MainStreet received 96,250 warrants in connection with the initial public offering. Each warrant provided the holder
with the right to buy one share of common stock at a price of $9.09 per share of which 27,500 were exercised and the remainder
were either forfeited or expired unexercised.
Options in the amount of 33,000 (included
in the total 161,272 outstanding at year-end), of which all are vested and exercisable, were granted at the then fair market value
of $9.55 to a former employee.
In addition, the shareholders of MainStreet
BankShares, Inc. 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 and its subsidiaries. The Plan terminated on January 21, 2009. Awards made under the Plan prior to and outstanding
on that date remain outstanding in accordance with their terms. Option awards were generally 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 have a vesting period
of 3 years and have a ten year exercise term. The options issued in 2005 vested immediately upon grant and have a ten year exercise
term. All option awards provide for accelerated vesting if there is a change in control (as defined in the Plan). As of December
31, 2011, there were 136,527 options granted under this plan of which 822 options have been exercised and 7,433 stock options have
been forfeited. The rest remain unexercised.
As of December 31, 2011, 161,272 stock options
are outstanding, of which all are vested and exercisable, including those issued to a former employee.
MainStreet enrolled its stock with the OTC
Bulletin Board (“OTCBB”) quotation service effective February 12, 2007.
In order to continue on the OTCBB, MainStreet
must maintain at least one market maker and continue to submit its periodic reports to the Securities and Exchange Commission (“SEC”)
in a timely manner. MainStreet has been current on all periodic filings with the SEC and currently has three market makers. MainStreet
is quoted under the symbol MREE.
According to information obtained by Corporation
management and believed to be reliable, the quarterly range of closing prices per share for the common stock during the last two
fiscal years was as follows:
|
|
2011
|
|
|
2010
|
|
|
|
High
|
|
|
|
Low
|
|
|
|
High
|
|
|
|
Low
|
|
Quarter Ended
|
|
|
Close
|
|
|
|
Close
|
|
|
|
Close
|
|
|
|
Close
|
|
March 31
|
|
$
|
5.00
|
|
|
$
|
3.75
|
|
|
$
|
6.20
|
|
|
$
|
4.10
|
|
June 30
|
|
$
|
9.50
|
|
|
$
|
4.15
|
|
|
$
|
5.10
|
|
|
$
|
4.10
|
|
September 30
|
|
$
|
5.50
|
|
|
$
|
4.50
|
|
|
$
|
4.50
|
|
|
$
|
4.00
|
|
December 31
|
|
$
|
4.75
|
|
|
$
|
4.25
|
|
|
$
|
4.05
|
|
|
$
|
3.15
|
|
There are approximately 1,593 shareholders
of common stock as of December 31, 2011.
MainStreet declared its first cash dividend
in the amount of $.05 per share in September 2007. Given the injection of $1.3 million into the loan loss reserve by Franklin Bank
during the fourth quarter of 2008, MainStreet’s Board of Directors deemed it prudent to suspend the cash dividend at that
time. The only source of funds for dividends is dividends paid to MainStreet by Franklin Bank. Franklin Bank is limited in the
amount of dividend payments by the Office of the Comptroller of the Currency, (“OCC”), its primary regulator. Under
normal circumstances the OCC limits annual dividends to a maximum of retained profits of the current year plus the two prior years,
without prior OCC approval. However, on April 16, 2009, Franklin Bank entered into the Agreement with the OCC. Among other things,
the Agreement required the Bank to adopt a three year capital program and prohibits the payment of a dividend until the Bank is
in compliance with the program and satisfies certain other conditions. Thus, the payment of future dividends by MainStreet will
depend in part on a return by Franklin Bank to more historical levels of profitability, compliance with its capital program and
the formal agreement. On June 17, 2009, MainStreet entered into a Memorandum of Understanding (“MOU”) with the Federal
Reserve Bank of Richmond, which was amended January 26, 2011. Under the MOU, MainStreet is prohibited from paying any dividends.
Refer to Item 7, Management’s Discussion and Analysis for a detailed discussion. We cannot predict when these regulatory
restrictions on dividends may be lifted, and even if that were to occur, when MainStreet would resume the payment of dividends.
Information in the format relating to MainStreet securities
authorized for issuance under the Company’s Equity Compensation plans is as follows:
Plan Category
|
|
Number of Securities
To be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
|
|
|
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
|
|
|
Number of Securities
Remaining Available
For Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected in Column (a))
|
|
|
|
|
(a)
|
|
|
|
(b)
|
|
|
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans
|
|
|
|
|
|
|
|
|
|
|
|
|
approved by security holders
|
|
|
128,272
|
|
|
$
|
12.85
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans
|
|
|
|
|
|
|
|
|
|
|
|
|
not approved by security holders
|
|
|
33,000
|
|
|
|
9.55
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
161,272
|
|
|
$
|
12.17
|
|
|
|
---
|
|
The Plan terminated January 21, 2009, except
with respect to awards granted prior to that date.
Refer to Part II, Item 8, Note 14 for a detailed
discussion of the stock options and warrants that are outstanding.
Item 6. Selected Financial Data
Not required
Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
The following discussion is intended to assist
in understanding and evaluating the financial condition and results of operations of MainStreet BankShares, Inc. (“MainStreet”,
“BankShares”, or “Corporation”) on a consolidated basis. This discussion and analysis should be read in
conjunction with BankShares’ consolidated financial statements and related notes included in Item 8 of this report on Form
10-K.
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. MainStreet 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
MainStreet was incorporated on January 14, 1999 in the Commonwealth
of Virginia. MainStreet was primarily formed to serve as a bank holding company. Its first wholly-owned subsidiary was located
in Martinsville, Virginia, and was sold on March 23, 2005 for $6.5 million. In 2002, MainStreet organized a second bank subsidiary,
Franklin Community Bank, National Association (“Franklin Bank’) to serve 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. On February 8, 2007, MainStreet formed
a wholly-owned real estate company, MainStreet RealEstate, Inc. for the sole purpose of owning 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 Bank must comply with the Agreement while it is outstanding. The Bank submitted
the responses required in the respective time frames described below.
Within 30 days, Franklin Bank was required
to adopt sublimits for concentrations in acquisition and development loans, speculative lot loans, and speculative single-family
housing construction loans and determine if any action is necessary to reduce these concentrations. Franklin Bank reviewed and
amended these limits and certain concentrations were lowered.
Within 60 days, Franklin Bank was required
to do the following:
|
§
|
Franklin Bank was required to establish an effective
program for early identification of emerging and potential problem credits to include accurate ratings, accrual status, continued
financial analyses, and formal work out plans. Franklin Bank developed an attestation process monthly for loan officers to include
risk rating and the accrual status of their loan portfolios. Franklin Bank has a Problem Loan Committee made up of senior management
and one Board Loan Committee director that meets monthly. Criticized loan worksheets were enhanced and 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 on the worksheets. Our internal
loan review function now reports to the loan committee of the board of directors rather than to management. This committee of
the board meets quarterly and reporting was enhanced to include 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 identification of the loan officer who originated
each loan reported; concentrations of credit; and loans to executive officers and directors.
|
|
|
§
|
Franklin Bank was required to develop a written underwriting
program to include reasonable amortization of speculative lot and single family housing construction loans and ensure updated
appraisals are documented. Our credit policy was amended to address the amortization periods. Personnel were designated to ensure
the reporting system has updated appraisals and evaluations. All files were reviewed to ensure correct appraisal information.
A credit analyst position was added in December 2008 that 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, new software was purchased to assist with
this process and to assist the credit analyst and lenders in the risk rating of each loan.
|
|
§
|
The Bank also had to eliminate the basis of criticism
of assets criticized by the OCC. Franklin Bank has dedicated an experienced employee to work through problem assets. The other
actions described above also assist in achieving compliance with this requirement. The Bank continually strives to lower its problem
assets.
|
|
§
|
Franklin Bank was required to enhance its asset liability
management policy to ensure monitoring of the Bank’s liquidity position which included more detailed reporting to the Board.
The Agreement also required Franklin Bank to increase its liquidity immediately and to take action to ensure adequate sources
of liquidity. Franklin Bank increased its sources by adding correspondent bank lines; becoming a member of QwickRate (an internet
certificate of deposit program); becoming a member of the Certificate of Deposit Account Registry Service (“CDARS”);
and partnering with certain institutions to acquire brokered deposits. According to the Agreement, brokered deposits cannot exceed
15% of total deposits. At December 31, 2011 and 2010, brokered deposits were $6.9 million and $6.5 million, respectively, and
were less than 5% of total deposits in both years. Franklin Bank also participated loans during the first half of 2009 which improved
our liquidity. Franklin Bank revised its Contingency Liquidity Plan to include crises relevant to current balance sheet composition.
New reports created to assist with monitoring asset liability and liquidity include a maturity schedule of certificates of deposit;
the volatility of demand deposits; loan commitments and letters of credit; borrowing lines and continued availability; an analysis
of the impact of decreased cash flow from the loss of income from nonperforming loans and loans sold or participated; rolling
sources and uses report; rollover risk analysis; and prioritization of funding sources and uses. Franklin Bank was required to
review and enhance the analysis of the allowance for loan losses. The Bank has continued to review and enhance the process.
|
Within 90 days, Franklin Bank was required
to develop and implement a three-year detailed capital plan. The Plan was put in place and is continually updated. The plan includes
detailed projections for growth and capital requirements; projections for primary sources and secondary sources of capital; and
a revised dividend policy. The Agreement prohibits the Bank from paying dividends until compliance with the program and certain
other conditions are met.
Under the Agreement, a Compliance Committee
of three members of the Franklin Bank’s Board of Directors was formed to monitor the progress and make regular reports to
the OCC. Failure to comply with the provisions of the Agreement could subject Franklin Bank and its directors to additional enforcement
actions. The Compliance Committee of Franklin Bank continues to meet monthly to ensure adherence and compliance with the Agreement.
The Compliance Committee reviews the Agreement by article in detail at each meeting along with the corresponding actions of Franklin
Bank within each article. The Compliance Committee reports monthly to the full board of directors. While Franklin Bank intends
to continue to take such actions as may be necessary to enable it to comply with the requirements of the Agreement, there can be
no assurance that it will be able to comply fully with the provisions of the Agreement. Such compliance is costly and affects the
operations of Franklin Bank and the Corporation. Franklin Bank met all of the required time lines for submission of information
to the OCC along with regular reporting. Franklin Bank must demonstrate sustained performance under the Agreement.
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. The MOU restricted MainStreet from declaring or paying any dividends without the prior written approval
of the Federal Reserve. Under the MOU, MainStreet cannot incur or guarantee any debt or redeem or purchase any shares of its common
stock without the prior written consent of the Federal Reserve. Since then, MainStreet has not paid or declared any dividends or
incurred or guaranteed any debt. On January 26, 2011, the MOU with the Federal Reserve was amended to include additional requirements.
The bank holding company must comply with the restrictions on indemnification and severance payments of section 18(k) of the FDI
Act (12 U.S.C. 1828(k)) and Part 359 of the Federal Deposit Insurance Corporation’s regulations (12 C.F.R. Part 359). Also,
the Corporation shall not appoint any individual to the board or employ or change the responsibilities of any individual as senior
executive officer if the Federal Reserve notifies the Corporation of disapproval within the required time limits. MainStreet has
not paid or declared any dividends or incurred or guaranteed any debt. Management believes the holding company is appropriately
using its financial and managerial resources to assist Franklin Bank to function in a safe and sound manner.
Critical Accounting Policies
MainStreet’s
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. 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 collectibility 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 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. 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.
Overview
Total assets at December 31, 2011 and 2010
were $203,855,311 and $214,535,405, respectively, representing a decline of $10,680,094, or 4.98%. The overall composition of the
balance sheet has changed somewhat. Loan demand continues to be soft demonstrated by the overall decline of $15,600,817 in loans,
net of unearned deferred fees and costs, in the year-to-year comparison. Securities available for sale declined $5.9 million due
to sales, calls, and principal pay downs. Total cash and cash equivalents were $30.5 million and $18.8 million at December 31,
2011 and 2010, respectively, an increase of $11.7 million. Liquidity continues to be a strong focus for our Corporation; however,
we do intend to put more dollars to work for us with purchases of securities during 2012. Our deposits declined $10.8 million from
year end 2010 to year end 2011; however, with decreased loans and securities, overnight funds continued to increase. Our loan to
deposit ratio was 85.72% and 89.29% at December 31, 2011 and 2010, respectively. One of our strategies in 2011 was to lower our
deposit costs which we were successful in accomplishing. Overall costs of deposits declined 53 basis points in 2011 compared to
2010. This strategy also resulted in a lowering of our overall deposits. We maintained our relationships as can be evidenced by
the increase in demand deposits which are our free funds.
Loan demand remains soft. As discussed above,
our loans declined $15.6 million from year end 2010. Some of this decline was due to the transfer of loans into other real estate
or sold at foreclosure. We continue to monitor our asset quality closely due to our level of criticized and classified loans, economic
uncertainty, and levels of unemployment. Please refer to the Footnote #4 for a discussion of our criticized assets.
Total shareholders’ equity at December 31, 2011 and 2010
was $22,240,789 and $22,089,467
,
respectively. MainStreet and Franklin
Bank were considered well capitalized at December 31, 2011 and 2010 under the standards of regulatory capital classification. The
book value of shareholders’ equity at December 31, 2011 and 2010 was $12.98 and $12.89 per share, respectively.
MainStreet experienced a net loss of $(146,445) for the twelve
months ending December 31, 2011 compared to net income of
$791,538 for
the twelve month period ending December 31, 2010.
Basic and diluted net income (loss) per share was $(.09) and $.46 for
2011 and 2010, respectively. Return on average assets in 2011 and 2010 was
(.07)
%
and .36%, respectively while return on average shareholders’ equity was (.66)% and 3.57% for 2011 and 2010, respectively.
The return on average assets and average equity for 2009 was .03% and .32%, respectively. Year 2011 continued to be impacted by
the same issues as 2010. Loan loss provision expense for 2011 and 2010 was $1.7 million and $1.3 million, respectively. As our
problem loans moved through the cycle during 2011, we ultimately experienced losses on the sales or write downs due to depressed
real estate values reflected on recent appraisals. Our expenses, write-downs and loss on sales of other real estate were $1.2 million
and $357,359 at December 31, 2011 and 2010, respectively. Gain on sale of securities available for sale contributed $77,044 and
$429,413 net of tax, towards net income in 2011 and 2010, respectively.
Results of Operations
Net Interest Income
The low interest rate environment continued
during 2011 with the Federal Reserve leaving the short-term interest rates within a range of 0% - .25% which has been effective
since 2008. The Federal Reserve has also indicated that interest rates will remain at this level at least until mid 2014. Interest
rates on variable rate loans make up almost 25% of Franklin’s loan portfolio. In a rising interest rate environment, this
initially has a positive impact on the net interest margin because deposit rates are slower to reprice at the higher rates. In
a declining interest rate environment, asset sensitivity initially has a negative impact on the net interest margin until deposit
rates have an opportunity to reprice. Overall deposit maturity has been short because Franklin Bank was organized during a rising
interest rate environment; therefore, giving repricing opportunities in the subsequent declining interest rate environment. On
the other hand, in an environment of increasing interest rates, short deposit maturity would reduce the benefit of rising interest
rates. Furthermore, even though lower interest rates have been beneficial for our cost of deposits, with prime 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. In addition, competition for deposits remains fierce in our market; however, our goal
is to continue to lower our cost of deposits during 2012.
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 as the net interest
margin. MainStreet’s principal source of income is from the net interest margin. The distribution of assets, liabilities,
and equity along with the related interest income and interest expense is presented in the following table. The statistical information
in the table is based on daily average balances.
Distribution of Assets, Liabilities, and Shareholders’
Equity: Interest Rates and Interest Differentials
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
Loans,
net of unearned (1)
|
|
$
|
153,201,363
|
|
|
$
|
8,608,985
|
|
|
|
5.62
|
%
|
|
$
|
162,931,745
|
|
|
$
|
9,588,767
|
|
|
|
5.89
|
%
|
|
$
|
182,502,689
|
|
|
$
|
10,582,260
|
|
|
|
5.80
|
%
|
Loans
held for sale
|
|
|
8,016
|
|
|
|
270
|
|
|
|
3.37
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Securities
available-for-sale-taxable
|
|
|
24,103,456
|
|
|
|
753,407
|
|
|
|
3.13
|
|
|
|
25,650,372
|
|
|
|
963,875
|
|
|
|
3.76
|
|
|
|
22,322,424
|
|
|
|
1,127,812
|
|
|
|
5.05
|
|
Securities
available-for-sale-non taxable
|
|
|
96,835
|
|
|
|
2,029
|
|
|
|
3.08
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Restricted
equity securities
|
|
|
927,000
|
|
|
|
30,280
|
|
|
|
3.27
|
|
|
|
1,042,853
|
|
|
|
28,215
|
|
|
|
2.71
|
|
|
|
1,099,887
|
|
|
|
27,479
|
|
|
|
2.50
|
|
Interest-bearing
deposits in banks
|
|
|
11,857,846
|
|
|
|
25,757
|
|
|
|
.22
|
|
|
|
15,387,260
|
|
|
|
34 501
|
|
|
|
.22
|
|
|
|
8,842,929
|
|
|
|
19,596
|
|
|
|
.22
|
|
Federal
funds sold
|
|
|
6,820,273
|
|
|
|
11,497
|
|
|
|
.17
|
|
|
|
5,597,638
|
|
|
|
11,650
|
|
|
|
.21
|
|
|
|
5,004,455
|
|
|
|
8,037
|
|
|
|
.16
|
|
Total
Interest Earning Assets
|
|
|
197,014,789
|
|
|
|
9,432,225
|
|
|
|
4.79
|
%
|
|
|
210,609,868
|
|
|
|
10,627,008
|
|
|
|
5.05
|
%
|
|
|
219,772,384
|
|
|
|
11,765,184
|
|
|
|
5.35
|
%
|
Cash
and due from banks
|
|
|
2,746,269
|
|
|
|
|
|
|
|
|
|
|
|
2,596,935
|
|
|
|
|
|
|
|
|
|
|
|
2,631,288
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
12,119,036
|
|
|
|
|
|
|
|
|
|
|
|
12,324,767
|
|
|
|
|
|
|
|
|
|
|
|
8,444,610
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
(3,280,304
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,328,725
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,575,950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
208,599,790
|
|
|
|
|
|
|
|
|
|
|
$
|
222,202,845
|
|
|
|
|
|
|
|
|
|
|
$
|
227,272,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
checking deposits
|
|
$
|
6,928,098
|
|
|
$
|
6,720
|
|
|
|
.10
|
%
|
|
$
|
8,023,116
|
|
|
$
|
16,356
|
|
|
|
.20
|
%
|
|
$
|
8,710,551
|
|
|
$
|
19,947
|
|
|
|
.23
|
%
|
Money
market deposits
|
|
|
24,678,500
|
|
|
|
105,840
|
|
|
|
.43
|
|
|
|
21,916,385
|
|
|
|
217,881
|
|
|
|
.99
|
|
|
|
19,747,314
|
|
|
|
224,144
|
|
|
|
1.14
|
|
Savings
deposits
|
|
|
12,231,895
|
|
|
|
26,004
|
|
|
|
.21
|
|
|
|
11,072,683
|
|
|
|
37,411
|
|
|
|
.34
|
|
|
|
10,490,930
|
|
|
|
56,207
|
|
|
|
.54
|
|
Time
deposits $100,000 and over
|
|
|
46,314,130
|
|
|
|
853,058
|
|
|
|
1.84
|
|
|
|
53,618,002
|
|
|
|
1,230,463
|
|
|
|
2.29
|
|
|
|
57,708,152
|
|
|
|
1,749,608
|
|
|
|
3.03
|
|
Other
time deposits
|
|
|
61,126,990
|
|
|
|
1,000,582
|
|
|
|
1.64
|
|
|
|
72,304,687
|
|
|
|
1,584,464
|
|
|
|
2.19
|
|
|
|
71,976,216
|
|
|
|
2,120,319
|
|
|
|
2.95
|
|
Federal
funds purchased
|
|
|
603
|
|
|
|
2
|
|
|
|
.33
|
|
|
|
5,781
|
|
|
|
41
|
|
|
|
.71
|
|
|
|
59,425
|
|
|
|
531
|
|
|
|
.89
|
|
Corporate
cash management
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
161,632
|
|
|
|
813
|
|
|
|
.50
|
|
Repurchase agreements
|
|
|
13,500,000
|
|
|
|
538,071
|
|
|
|
3.99
|
|
|
|
13,500,000
|
|
|
|
538,071
|
|
|
|
3.99
|
|
|
|
13,500,000
|
|
|
|
538,071
|
|
|
|
3.99
|
|
Short-term borrowings
|
|
|
712
|
|
|
|
3
|
|
|
|
.42
|
|
|
|
5,479
|
|
|
|
27
|
|
|
|
.49
|
|
|
|
3,287,671
|
|
|
|
16,975
|
|
|
|
.52
|
|
Total
interest-bearing liabilities
|
|
|
164,780,928
|
|
|
|
2,530,280
|
|
|
|
1.54
|
%
|
|
|
180,446,133
|
|
|
|
3,624,714
|
|
|
|
2.01
|
%
|
|
|
185
641,891
|
|
|
|
4,726,615
|
|
|
|
2.55
|
%
|
Demand
deposits
|
|
|
20,680,934
|
|
|
|
|
|
|
|
|
|
|
|
18,904,678
|
|
|
|
|
|
|
|
|
|
|
|
18,146,145
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
870,010
|
|
|
|
|
|
|
|
|
|
|
|
655,347
|
|
|
|
|
|
|
|
|
|
|
|
1,330,664
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
186,331,872
|
|
|
|
|
|
|
|
|
|
|
|
200,006,158
|
|
|
|
|
|
|
|
|
|
|
|
205,118,700
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
22,267,918
|
|
|
|
|
|
|
|
|
|
|
|
22,196,687
|
|
|
|
|
|
|
|
|
|
|
|
22,153,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
208,599,790
|
|
|
|
|
|
|
|
|
|
|
$
|
222,202,845
|
|
|
|
|
|
|
|
|
|
|
$
|
227,272,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Earnings
|
|
|
|
|
|
$
|
6,901,945
|
|
|
|
3.25
|
%
|
|
|
|
|
|
$
|
7,002,294
|
|
|
|
3.04
|
%
|
|
|
|
|
|
|
$ 7,038 569
|
|
|
|
2.80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Yield on Interest Earning Assets
|
|
|
|
|
|
|
|
|
|
|
3.50
|
%
|
|
|
|
|
|
|
|
|
|
|
3.33
|
%
|
|
|
|
|
|
|
|
|
|
|
3.20
|
%
|
(1) Loan fees, net of costs, are included in total interest
income. Gross loan fee income totaled $269,618, $257,369 and $351,991 as of December 31, 2011, 2010, and 2009, respectively. The
average balance of nonaccrual assets is included in the calculation of asset yields. The yield is calculated based on the tax equivalent
yield for tax exempt interest on municipal securities using a 34% marginal tax rate.
MainStreet’s net interest margin for the years ending
December 31, 2011 and 2010 was 3.50% and 3.33%, respectively, an increase of 17 basis points. Both interest income and interest
expense declined in comparison to last year, primarily due to the interest rate environment. The yield on earning assets dropped
26 basis points to 4.79%. The funding side dropped 43 basis points. In addition to the low interest rate environment, the effect
of lost interest on nonaccrual loans impacted the net interest margin. Lost interest for 2011 was $521,729 compared to $282,181
in 2010. Loan competition for the excellent loan relationship is great and declining rates reduced loan profitability as loans
repriced and new loans were made at lower rates. The ability for nonfinancial entities to provide financial services also increases
competition, particularly during periods of reduced loan demand, like the present one. These factors also negatively impact the
margin. Finally, Franklin Bank’s growth has been quite dependent on consumer and real estate based lending and in the current
economic environment sound growth opportunities in these areas are dramatically reduced.
The following table sets forth, for the period
indicated, a summary of the change in interest income and interest expense resulting from changes in volume and rates. The change
in interest attributable to both rate and volume changes has been allocated to rate and volume changes in proportion to the relationship
of the absolute dollar amounts of the change in each.
|
|
|
2011
Compared
to 2010
Increase
(Decrease)
Due to Change
In
|
|
|
|
2010
Compared
to 2009
Increase
(Decrease)
Due to Change
In
|
|
|
|
|
Average
Volume
|
|
|
|
Average
Rate
|
|
|
|
Total
Increase
(Decrease)
|
|
|
|
Average
Volume
|
|
|
|
Average
Rate
|
|
|
|
Total
Increase
(Decrease)
|
|
Interest
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
net of unearned
|
|
$
|
(557,922
|
)
|
|
$
|
(421,860
|
)
|
|
$
|
(979,782
|
)
|
|
$
|
(1,149,700
|
)
|
|
$
|
156,207
|
|
|
$
|
(993,493
|
)
|
Loans
held for sale
|
|
|
270
|
|
|
|
---
|
|
|
|
270
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Securities
available-for-
sale-taxable
|
|
|
(55,549
|
)
|
|
|
(154,919
|
)
|
|
|
(210,468
|
)
|
|
|
152,293
|
|
|
|
(316,230
|
)
|
|
|
(163,937
|
)
|
Securities
available for
sale-nontaxable
|
|
|
2,029
|
|
|
|
---
|
|
|
|
2,029
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Restricted
equity securities
|
|
|
(3,361
|
)
|
|
|
5,426
|
|
|
|
2,065
|
|
|
|
(1,470
|
)
|
|
|
2,206
|
|
|
|
736
|
|
Interest-bearing
deposits in banks
|
|
|
(7,696
|
)
|
|
|
(1,048
|
)
|
|
|
(8,744
|
)
|
|
|
14,671
|
|
|
|
234
|
|
|
|
14,905
|
|
Federal
funds sold
|
|
|
2,286
|
|
|
|
(2,439
|
)
|
|
|
(153
|
)
|
|
|
1,033
|
|
|
|
2,580
|
|
|
|
3,613
|
|
Total
Interest Income
|
|
$
|
(619,943
|
)
|
|
$
|
(574,840
|
)
|
|
$
|
(1,194,783
|
)
|
|
$
|
(983,173
|
)
|
|
$
|
(155,003
|
)
|
|
$
|
(1,138,176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
checking deposits
|
|
$
|
(1,991
|
)
|
|
$
|
(7,645
|
)
|
|
$
|
(9,636
|
)
|
|
$
|
(1,502
|
)
|
|
$
|
(2,089
|
)
|
|
$
|
(3,591
|
)
|
Money
market deposits
|
|
|
24,627
|
|
|
|
(136,668
|
)
|
|
|
(112,041
|
)
|
|
|
23,185
|
|
|
|
(29,448
|
)
|
|
|
(6,263
|
)
|
Savings
deposits
|
|
|
3,597
|
|
|
|
(15,004
|
)
|
|
|
(11,407
|
)
|
|
|
2,967
|
|
|
|
(21,763
|
)
|
|
|
(18,796
|
)
|
Certificates
of deposit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$100,000
and over
|
|
|
(154,105
|
)
|
|
|
(223,300
|
)
|
|
|
(377,405
|
)
|
|
|
(117,201
|
)
|
|
|
(401,944
|
)
|
|
|
(519,145
|
)
|
Other
time deposits
|
|
|
(221,439
|
)
|
|
|
(362,443
|
)
|
|
|
(583,882
|
)
|
|
|
9,633
|
|
|
|
(545,488
|
)
|
|
|
(535,855
|
)
|
Federal
funds purchased
|
|
|
(24
|
)
|
|
|
(15
|
)
|
|
|
(39
|
)
|
|
|
(399
|
)
|
|
|
(91
|
)
|
|
|
(490
|
)
|
Repurchase
agreements
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Short-term
borrowings
|
|
|
(21
|
)
|
|
|
(20
|
)
|
|
|
(24
|
)
|
|
|
(16,208
|
)
|
|
|
(740
|
)
|
|
|
(16,948
|
)
|
Corporate
cash
management
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
(813
|
)
|
|
|
---
|
|
|
|
(813
|
)
|
Total
Interest Expense
|
|
$
|
(349,356
|
)
|
|
$
|
(745,078
|
)
|
|
$
|
(1,094,434
|
)
|
|
$
|
(100,338
|
)
|
|
$
|
(1,001,563
|
)
|
|
$
|
(1,101,901
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Income
|
|
$
|
(270,587
|
)
|
|
$
|
170,238
|
|
|
$
|
(100,349
|
)
|
|
$
|
(882,835
|
)
|
|
$
|
846,560
|
|
|
$
|
(36,275
|
)
|
For 2011 and 2010, net interest income totaled $6,901,945
and $7,002,294, respectively, a modest decline of $100,349, or 1.43%. The total average interest-earning assets were $
197,014,789
and $210,609,868 for the years ending December 31, 2011 and 2010, respectively, a decrease of $13,595,079
,
or 6.46%.
The largest category of decline was in loans, net of unearned deferred fees and costs which decreased by $9.7
million. Higher yielding loan volume declines far exceeded other lower yielding earning assets, hence decreasing total interest
income. Interest income was also affected by lost interest on nonaccrual loans as discussed above. The total average interest-bearing
liabilities were $164,780,928
and $180,446,133 for the years ending
December 31, 2011 and 2010, respectively, a decrease of $
15,665,205 or
8.68%.
This decline can be seen primarily in time deposits including certificates of deposit $100,000 and over. Deposits
declined due to our strategy to lower our overall deposit costs. While implementing this strategy, loan demand remained soft,
which also complemented our strategy. Liquidity continued to be strong.
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 collectibility 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.
As part of this process, 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, in turn, 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: (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 and industrial loans not secured by real estate; 2) construction and land development loans; 2) loans secured
by farmland; 3) residential 1-4 family loans; 4) residential 1-4 family junior liens; 5) home equity lines; 6) commercial real
estate; and 7) consumer or loans to individuals. Historical loss is calculated based on a three-year 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.
The provision for loan losses was $1,660,783
and $1,292,100 for the years ending December 31, 2011 and 2010, respectively, an increase of $368,683, or 28.53%. While gross loan
volume declined as discussed earlier, we have added to our loan loss reserves based on our quarterly detailed allowance calculation
which includes the level of criticized and classified loans, our qualitative factors, migration analysis, historical loss, specific
reserves, and charge offs. The allowance for loan losses was $3,272,945 at December 31, 2011 which equated to 2.29% of loans, net
of unearned deferred fees and costs. At December 31, 2010, the allowance was $3,584,180, or 2.26% of loans, net of unearned deferred
fees and costs. Net charge-offs of $1,972,018 and $985,479 for the years ending December 31, 2011 and 2010, respectively equated
to 1.29% and .60%, respectively, 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. Nonaccrual loans were $7.1
million and $7.7 million at December 31, 2011 and 2010, respectively. These loans were 4.93% and 4.85% of loans, net of unearned
deferred fees and costs at December 31, 2011 and 2010, respectively. In addition, troubled debt restructurings, not included in
nonaccrual loans, were $1,685,658 and $374,597 at December 31, 2011 and 2010, respectively. Specific reserves allocated to the
nonaccrual loans and troubled debt restructuring at year end 2011 and 2010 were $818,572 and $565,704, respectively, an increase
of $252,868. Our criticized and classified loans, not included in the individually evaluated, decreased in the year-to-year comparison
approximately $5.5 million which caused a decline in the year-to-year comparison of the allowance by approximately $329,000. The
remainder of the loans, collectively evaluated, declined in volume $10.8 million and the allowance allocated to this group decreased
approximately $239,000. The change in the unallocated amount increased about $5,000 in the year to year comparison.
Following is a breakdown of our nonperforming
loans by balance sheet type which includes nonaccrual loans, loans past due 90 days and still accruing, and troubled debt restructurings.
|
|
|
December
31, 2011
|
|
|
|
December
31, 2010
|
|
|
|
December
31, 2009
|
|
|
|
December
31, 2008
|
|
|
|
December
31, 2007
|
|
Commercial
|
|
$
|
136,680
|
|
|
$
|
354,125
|
|
|
$
|
167,267
|
|
|
$
|
---
|
|
|
$
|
---
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
1,624,238
|
|
|
|
3,835,729
|
|
|
|
1,863,772
|
|
|
|
4,205,875
|
|
|
|
506,328
|
|
Residential 1-4 families:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First liens
|
|
|
4,852,061
|
|
|
|
4,055,568
|
|
|
|
1,615,027
|
|
|
|
457,247
|
|
|
|
97,314
|
|
Junior Liens
|
|
|
424,795
|
|
|
|
196,970
|
|
|
|
302,781
|
|
|
|
---
|
|
|
|
27,272
|
|
Home equity lines
|
|
|
131,439
|
|
|
|
147,978
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Commercial real estate
|
|
|
1,533,473
|
|
|
|
530,432
|
|
|
|
494,249
|
|
|
|
---
|
|
|
|
---
|
|
Consumer
|
|
|
50,694
|
|
|
|
18,312
|
|
|
|
---
|
|
|
|
19,277
|
|
|
|
---
|
|
Total Nonperforming Loans
|
|
$
|
8,753,380
|
|
|
$
|
9,139,114
|
|
|
$
|
4,443,096
|
|
|
$
|
4,682,399
|
|
|
$
|
630,914
|
|
As can be seen by the chart above, the residential
1-4 family category had the largest nonperforming loans at December 31, 2011 followed by construction and land development. The
remainder of the loans in these categories were performing at December 31, 2011 and December 31, 2010. There were no loans 90 days
or more past due and still accruing included in the nonperforming loans at December 31, 2011. Troubled debt restructurings included
in nonperforming loans that were not on nonaccrual at December 31, 2011 and 2010 were $1,685,658 and $374,597, respectively. Many
of the asset quality issues 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 the
debt to income ratio. Please refer to Item 8, Financial Statements, Note 4, for further disclosures of past due loans, nonaccrual
loans, troubled debt restructurings, impaired loans, and the allowance.
The overall economy in Franklin County continues
to struggle based on higher unemployment, a continued slowing of building activity, and a slowing of transportation and warehousing.
Unemployment is at 6.7% at December 31, 2011. Absorption analysis in our market place shows increased turnover rates for various
inventories. 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 and is largely real estate based. It is a resort area and largely follows the national trend rather than the local trend.
Until unemployment declines and consumer confidence increases, these trends may continue. There is continued economic pressure
on consumers and business enterprises.
No assurance can be given that continuing
adverse economic conditions or other circumstances will not result in increased provisions in the future. Deterioration in the
national real estate markets and in our local markets caused by the recent well-publicized credit and liquidity problems at the
national and international level has resulted in larger than historical asset quality issues within local communities like ours
and this may have a continuing adverse effect on us.
The following table shows MainStreet’s
average loan balance for each period, changes in the allowance for loan losses by loan category, and additions to the allowance
which have been charged to operating expense.
|
|
|
December 31, 2011
|
|
|
|
December 31, 2010
|
|
|
|
December 31, 2009
|
|
|
|
December 31, 2008
|
|
|
|
December 31, 2007
|
|
Average amount of loans, net of unearned, outstanding during the year
|
|
$
|
153,201,363
|
|
|
$
|
162,931,745
|
|
|
$
|
182,502,689
|
|
|
$
|
185,844,676
|
|
|
$
|
164,207,214
|
|
Balance of allowance for loan losses at beginning of year
|
|
|
3,584,180
|
|
|
|
3,277,559
|
|
|
|
3,502,029
|
|
|
|
2,086,592
|
|
|
|
1,942,781
|
|
Loans charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
(482,651
|
)
|
|
|
(142,335
|
)
|
|
|
(488,436
|
)
|
|
|
(140,003
|
)
|
|
|
(40,808
|
)
|
Construction and land development
|
|
|
(922,440
|
)
|
|
|
(597,206
|
)
|
|
|
(585,219
|
)
|
|
|
(102,637
|
)
|
|
|
---
|
|
Residential 1-4 families
|
|
|
(476,172
|
)
|
|
|
(377,957
|
)
|
|
|
(704,347
|
)
|
|
|
(190,662
|
)
|
|
|
(51,023
|
)
|
Home equity lines
|
|
|
(34,745
|
)
|
|
|
(21,766
|
)
|
|
|
---
|
|
|
|
(81,097
|
)
|
|
|
(43,663
|
)
|
Commercial real estate
|
|
|
(205,824
|
)
|
|
|
---
|
|
|
|
(325,646
|
)
|
|
|
(3,397
|
)
|
|
|
---
|
|
Consumer
|
|
|
(21,670
|
)
|
|
|
(15,971
|
)
|
|
|
(30,318
|
)
|
|
|
(36,688
|
)
|
|
|
(4,443
|
)
|
Total loans charged off:
|
|
|
(2,143,502
|
)
|
|
|
(1,155,235
|
)
|
|
|
(2,133,966
|
)
|
|
|
(554,484
|
)
|
|
|
(139,937
|
)
|
Recoveries of loans previously charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
32,312
|
|
|
|
1,740
|
|
|
|
128,901
|
|
|
|
1,740
|
|
|
|
25,037
|
|
Construction and land development
|
|
|
62,883
|
|
|
|
117,595
|
|
|
|
11,571
|
|
|
|
3,731
|
|
|
|
---
|
|
Residential 1-4 families
|
|
|
63,987
|
|
|
|
46,247
|
|
|
|
41
|
|
|
|
150
|
|
|
|
3,190
|
|
Home equity lines
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Commercial real estate
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Consumer
|
|
|
12,302
|
|
|
|
4,174
|
|
|
|
2,683
|
|
|
|
---
|
|
|
|
---
|
|
Total recoveries:
|
|
|
171,484
|
|
|
|
169,756
|
|
|
|
143,196
|
|
|
|
5,621
|
|
|
|
28,227
|
|
Net loans charged off:
|
|
|
(1,972,018
|
)
|
|
|
(985,479
|
)
|
|
|
(1,990,770
|
)
|
|
|
(548,863
|
)
|
|
|
(111,710
|
)
|
Additions to the allowance for loan losses
|
|
|
1,660,783
|
|
|
|
1,292,100
|
|
|
|
1,766,300
|
|
|
|
1,964,300
|
|
|
|
255,521
|
|
Balance of allowance for loan losses at end of year
|
|
$
|
3,272,945
|
|
|
$
|
3,584,180
|
|
|
$
|
3,277,559
|
|
|
$
|
3,502,029
|
|
|
$
|
2,086,592
|
|
Ratio of net charge offs during the period to average loans outstanding during period
|
|
|
1.29
|
%
|
|
|
.60
|
%
|
|
|
1.09
|
%
|
|
|
.30
|
%
|
|
|
.07
|
%
|
The amount of the loan loss reserve by category
and the percentage of each category to total loans is as follows:
|
|
December 2011
|
|
|
December 2010
|
|
|
December 2009
|
|
|
December 2008
|
|
|
December 2007
|
|
Commercial
|
|
$
|
154,991
|
|
|
|
7.73
|
%
|
|
$
|
138,449
|
|
|
|
6.85
|
%
|
|
$
|
236,610
|
|
|
|
7.11
|
%
|
|
$
|
274,588
|
|
|
|
9.43
|
%
|
|
$
|
226,395
|
|
|
|
10.85
|
%
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction & land development
|
|
|
902,644
|
|
|
|
18.24
|
|
|
|
1,086,183
|
|
|
|
19.78
|
|
|
|
1,053,136
|
|
|
|
20.78
|
|
|
|
1,606,333
|
|
|
|
26.47
|
|
|
|
717,370
|
|
|
|
34.38
|
|
Residential real 1-4 families
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
st
liens
|
|
|
1,100,139
|
|
|
|
26.36
|
|
|
|
1,065,683
|
|
|
|
24.89
|
|
|
|
817,387
|
|
|
|
22.77
|
|
|
|
594,858
|
|
|
|
17.65
|
|
|
|
347,835
|
|
|
|
16.67
|
|
Jr liens
|
|
|
174,809
|
|
|
|
5.93
|
|
|
|
243,526
|
|
|
|
6.01
|
|
|
|
184,617
|
|
|
|
5.39
|
|
|
|
149,817
|
|
|
|
4.95
|
|
|
|
80,542
|
|
|
|
3.86
|
|
Home equity lines
|
|
|
98,582
|
|
|
|
5.34
|
|
|
|
217,063
|
|
|
|
6.71
|
|
|
|
349,041
|
|
|
|
8.96
|
|
|
|
223,972
|
|
|
|
8.28
|
|
|
|
175,482
|
|
|
|
8.41
|
|
Commercial real estate
|
|
|
824,759
|
|
|
|
35.12
|
|
|
|
793,308
|
|
|
|
34.30
|
|
|
|
613,786
|
|
|
|
33.21
|
|
|
|
634,581
|
|
|
|
31.62
|
|
|
|
498,278
|
|
|
|
23.88
|
|
Consumer
|
|
|
11,911
|
|
|
|
1.28
|
|
|
|
39,968
|
|
|
|
1.46
|
|
|
|
22,982
|
|
|
|
1.78
|
|
|
|
17,880
|
|
|
|
1.60
|
|
|
|
40,690
|
|
|
|
1.95
|
|
Unallocated
|
|
|
5,110
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Total
|
|
$
|
3,272,945
|
|
|
|
100.00
|
%
|
|
$
|
3,584,180
|
|
|
|
100.00
|
%
|
|
$
|
3,277,559
|
|
|
|
100.00
|
%
|
|
$
|
3,502,029
|
|
|
|
100.00
|
%
|
|
$
|
2,086,592
|
|
|
|
100.00
|
%
|
Noninterest Income
Noninterest income for the years ending December
31, 2011 and December 31, 2010 was $1,090,357 and $1,707,125, respectively, a decline of $616,768 or 36.13%. The following chart
demonstrates the categories of change:
Noninterest Income
|
|
YTD 12/31/11
|
|
|
YTD 12/31/10
|
|
|
Dollar Change
|
|
|
Percentage Change
|
|
Service charges on deposit accounts
|
|
$
|
288,724
|
|
|
$
|
306,532
|
|
|
$
|
(17,808
|
)
|
|
|
(5.81
|
)%
|
Mortgage brokerage income
|
|
|
171,727
|
|
|
|
263,208
|
|
|
|
(91,481
|
)
|
|
|
(34.76
|
)
|
Electronic card fees
|
|
|
160,429
|
|
|
|
143,079
|
|
|
|
17,350
|
|
|
|
12.13
|
|
Investment fee income
|
|
|
140,758
|
|
|
|
136,208
|
|
|
|
4,550
|
|
|
|
3.34
|
|
Income on bank owned life insurance
|
|
|
110,106
|
|
|
|
108,097
|
|
|
|
2,009
|
|
|
|
1.86
|
|
Gain on sale of securities available for sale
|
|
|
116,734
|
|
|
|
650,626
|
|
|
|
(533,892
|
)
|
|
|
(82.06
|
)
|
Other fee income & miscellaneous
|
|
|
101,879
|
|
|
|
99,375
|
|
|
|
2,504
|
|
|
|
2.52
|
|
As can be seen by the above chart, there were no significant
increases in noninterest income in the year-to-year comparison.
Electronic card fees, investment fee income, income on bank
owned life insurance, and other fee income all experienced small increases. Franklin 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 in 2011 was $140, 758 as compared to $136,208 in 2010,
a modest increase. Franklin Bank has bank owned life insurance on the lives of the two executive officers. The balance at December
31, 2011 was $3.0 million. Income on this investment was stable with a modest increase compared to the prior year. Other fee income
and miscellaneous income only increased by a modest amount. Franklin Bank purchased a small interest in a title insurance company.
Title fee income was $13,814 in 2011 as compared to $16,454 in 2010, a decline of $2,640. This decline was offset by a small increase
in evaluation fee income in the amount of $4,350.
The largest decline in noninterest income was attributable to
gains on sale of securities available for sale. Gains during 2011 were $116,734. The 2010 noninterest income included $650,626
of gains on sales of securities available for sale. During 2010, we elected to sell certain securities available for sale as the
government announced they would be buying back certain mortgage pools with loans past due at par value. To preserve the gains along
with selecting securities that would add extension risk in an increasing rate environment, we sold approximately $12.6 million
in securities available for sale. Mortgage brokerage income has suffered in 2011 due to decreased volume caused in part by the
economic environment and additional regulatory enactments. This income was down $91,481 in the year -to-date comparison. 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. Service
charges on deposit accounts declined $17,808 for the year ended 2011 as compared to the year ended 2010. NSF fees, net of waived
charges, decreased by $23,845, the primary contributor to the overall decline.
Noninterest Expense
Total noninterest expense for the years ending December 31,
2011 and December 31, 2010
was $6,618,319
and $6,259,951, respectively,
an increase of $358,368, or 5.72%. Nonrecurring other real estate and repossession expenses were $1,224,894 for the twelve months
ending December 31, 2011. Excluding these expenses, total noninterest expense would have been $5,393,425, a decline of $866,526,
or 13.84% compared to the prior year. The following chart shows the noninterest expense by category for the years ending December
31, 2011 and 2010, the dollar change and the percentage change.
Expense
|
|
|
12-31-11
|
|
|
|
12-31-10
|
|
|
|
Dollar Change
|
|
|
|
Percentage Change
|
|
Salaries and employee benefits
|
|
$
|
2,807,985
|
|
|
$
|
2,958,062
|
|
|
$
|
(150,077
|
)
|
|
|
(5.07
|
)%
|
Occupancy and equipment
|
|
|
850,647
|
|
|
|
862,376
|
|
|
|
(11,729
|
)
|
|
|
(1.36
|
)
|
Professional fees
|
|
|
245,677
|
|
|
|
239,221
|
|
|
|
6,456
|
|
|
|
2.70
|
|
Outside processing
|
|
|
433,004
|
|
|
|
457,759
|
|
|
|
(24,755
|
)
|
|
|
(5.41
|
)
|
FDIC Assessment
|
|
|
293,337
|
|
|
|
547,466
|
|
|
|
(254,129
|
)
|
|
|
(46.42
|
)
|
Franchise tax
|
|
|
167,500
|
|
|
|
160,500
|
|
|
|
7,000
|
|
|
|
4.36
|
|
Other real estate and repossessions
|
|
|
1,224,894
|
|
|
|
357,359
|
|
|
|
867,535
|
|
|
|
242.76
|
|
Regulatory examination fees
|
|
|
111,332
|
|
|
|
114,099
|
|
|
|
(2,767
|
)
|
|
|
(2.43
|
)
|
Other expenses
|
|
|
483,943
|
|
|
|
563,109
|
|
|
|
(79,166
|
)
|
|
|
(14.06
|
)
|
As can be seen by the table, the largest component of
noninterest expense is salaries and employee benefits, followed by other real estate and repossessions and then by occupancy and
equipment costs. Salaries and benefit expense comprised 42.43% and 47.25% of total noninterest expense for the years ending December
31, 2011 and December 31, 2010, respectively. MainStreet’s employees continue to be its most valuable resource and asset.
Salaries and employee benefits, as a whole, decreased in 2011 compared to 2010 by $150,077, or 5.07%. Salaries expense decreased
$106,823, or 4.24%. We elected to freeze employee’s salaries in 2011. However, salary performance increases were awarded
during 2010. Also, the closing of our 220 North banking office in late 2010 contributed to the decline in expense. Commissions
paid to employees decreased $25,964 in the year-to-year comparison primarily due to the new mortgage banking rules restricting
commissions paid to lenders based on certain criteria. Commissions on investment income to the investment advisor are also included
in this total, increasing $7,672 for the year ending 2011 versus the year ending 2010. Commissions on investment income were paid
based on volumes generated. Referral fees for mortgage and investment referrals were paid during 2011and 2010. Under FAS 91, “Accounting
for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases”, (FAS
ASC 310) certain costs associated with originating loans are amortized over the life of the loan. These costs begin as credits
to salary expense and are amortized into the net interest margin over the life of the loan as a reduction. These credits to salary
expense were $16,114 less in 2011 than 2010 causing an overall increase in salary expense. This was due to decreased loan volumes.
The executive supplemental retirement plan expense (“SERP”) was $121,647 in 2011 compared to $114,621 in 2010. This
increase is partially due to accounting adjustments to adjust the deferred tax asset and other comprehensive income on the deferred
compensation liability for the plan. There were no material adjustments in the executives’ salary and assumption data. Employee
insurance costs and 401-K expense decreased $22,141 and $4,872, respectively in the year to year comparison. Employee insurance
costs and 401-K expenses decreased due to fewer personnel. Personnel taxes also declined $8,992 due to fewer personnel. Stock
option expense declined $23,240 in the year to year comparison. No stock compensation cost was recorded in 2011 because it had
been amortized completely in 2010.
Other real estate and repossessions experienced an increase
in expense of $867,535 in 2011 over 2010 levels. This increase was due to loss on sales, along with updated appraisals reflecting
depressed values, which resulted in write-downs of properties in other real estate. This was the largest contributor to the increase
in this expense category. Expenses on these properties are influenced by the volume of these properties in our portfolio and the
duration of time properties remain in our portfolio.
Occupancy and equipment costs include rent, utilities, janitorial
service, repairs and maintenance, real estate taxes, equipment rent, service maintenance contracts and depreciation expense. This
expense decreased $11,729 or 1.36% for the year 2011 as compared to 2010 due to the closing of the 220 North banking office. Offsetting
this expense somewhat are costs attributable to the holding company moving its headquarters in November 2010. Additional utilities,
repairs, depreciation and lease expense made up the increase.
Professional fees include fees for audit, legal, and other and
experienced an increase of $6,456 or 2.70%. The new format for submitting required SEC filings has caused additional professional
expenses in 2011, as we began that filing with the second quarter SEC report. Audit fees increased by $6,605 in 2011 over 2010
levels. These increases were offset by a decline in legal fees in the amount of $16,571. Outside processing expense decreased $24,755,
or 5.41% in 2011 over 2010. This decline is primarily due to our data processing expenses resulting from switching our circuits
to a different type of connection. Our FDIC premium expense decreased $254,129 or 46.42% for the year over year expense comparison
due to a decline in deposit volume. However, the overall premium is still burdensome. The turmoil in the financial services industry
has resulted in the need to increase FDIC insurance premiums to sustain the insurance fund depending on the length and depth of
the effects of the recent recession. These assessments may increase again in the future, which could place a great burden on our
financial institution. Management has tried to compensate for these elevated FDIC premiums by curtailing other expenses. Franchise
tax expense increased $7,000 due to a decreased deduction associated with our other real estate properties at year end 2011 over
2010, partially offset by a reduced net income in the same comparison. Regulatory fees from examinations declined $2,767 in 2011
over 2010. However, these expenses remain elevated due to additional monitoring of Franklin Bank because of the formal agreement
with the OCC. The other expenses category includes supplies, advertising and promotion, shareholder communications, telephone,
postage, director fees, travel expense, meals and entertainment, subscriptions and dues, seminars and education, and contributions.
This category decreased $79,166, or 14.06%, in the year over year comparison. This decline was due to the closing of the 220 North
banking office and initiatives to lower noninterest expense overall.
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 bases
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 December 31, 2011 and December 31, 2010. 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 benefit and income tax expense
in the amounts of $(140,355) and $365,830 for the years ending December 31, 2011 and 2010, respectively.
BALANCE SHEET
Investment Portfolio
MainStreet’s investment portfolio is
used for the following purposes:
1)
To maintain sufficient liquidity to cover deposit fluctuations and loan demand.
2)
To fulfill pledging collateral requirements.
3)
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, and certain other debt and equity securities. Currently, the Corporation has invested in U.S. agencies, mortgage
backed securities, Federal Reserve Bank stock and Federal Home Loan Bank stock. 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 December
31, 2011 and December 31, 2010 and is carried at estimated fair value. Unrealized market valuation gains and losses, net of deferred
taxes, on securities classified as available-for-sale are recorded as a separate component of shareholders’ equity. The amortized
cost and approximate market values and gross unrealized gains and losses of securities available for sale for years ending December
31, 2011 and 2010 appear in Part II, Item 8, Note 2 of this report. The amortized cost and approximate market values and gross
unrealized gains and losses of securities available for sale for the year ending December 31, 2009 is shown in the table below:
|
|
2009
|
|
|
|
Amortized
Cost
|
|
|
|
Gross Unrealized
Gains
|
|
|
|
Gross Unrealized
Losses
|
|
|
|
Approximate
Market Value
|
|
U.S. government sponsored agencies
|
|
$
|
1,647,191
|
|
|
$
|
7,377
|
|
|
$
|
(22,847
|
)
|
|
$
|
1,631,721
|
|
Mortgage backed securities
|
|
|
21,471,609
|
|
|
|
905,079
|
|
|
|
(30,070
|
)
|
|
|
22,346,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available-for-sale
|
|
$
|
23,118,800
|
|
|
$
|
912,456
|
|
|
$
|
(52,917
|
)
|
|
$
|
23,978,339
|
|
Proceeds from the sale of these securities
are included in the cash flow statement. Gross gains and losses along with pledged information appear in Part II, Item 8, Note
2 of this report. The following table shows the maturities of securities available-for-sale as of December 31, 2011 and the weighted
average yields of such securities. The weighted average yields are calculated on the basis of the cost and effective yields weighted
for the scheduled maturity of each security. The maturities of the mortgage backed securities are based on stated final maturity.
Cash flows from prepayments can cause actual maturities to differ significantly.
|
|
Due in One
Year or Less
|
|
|
Due After
1 – 5 Years
|
|
|
Due After
5 – 10 Years
|
|
|
Due After
10 Years
|
|
|
|
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Total
|
|
U. S. government
sponsored agencies
|
|
$
|
---
|
|
|
|
---
|
%
|
|
$
|
749,138
|
|
|
|
1.24
|
%
|
|
$
|
1,499,385
|
|
|
|
2.00
|
%
|
|
$
|
562,259
|
|
|
|
3.74
|
%
|
|
$
|
2,810,782
|
|
Mortgage backed securities
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
1,160,111
|
|
|
|
2.84
|
|
|
|
16,095,079
|
|
|
|
3.05
|
|
|
|
17,255,190
|
|
States and political
subdivisions
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
1,133,912
|
|
|
|
2.02
|
|
|
|
---
|
|
|
|
---
|
|
|
|
1,133,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
---
|
|
|
|
|
|
|
$
|
749,138
|
|
|
|
|
|
|
$
|
3,793,408
|
|
|
|
|
|
|
$
|
16,657,338
|
|
|
|
|
|
|
$
|
21,199,884
|
|
Loan Portfolio
MainStreet has 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. At December 31, 2011, 2010, 2009,
2008 and 2007 the breakdown of gross loans in the loan portfolio was as follows:
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Commercial
|
|
$
|
11,061,471
|
|
|
|
7.73
|
%
|
|
$
|
10,874,581
|
|
|
|
6.85
|
%
|
|
$
|
11,882,830
|
|
|
|
7.11
|
%
|
|
$
|
18,251,922
|
|
|
|
9.43
|
%
|
|
$
|
18,741,417
|
|
|
|
10.85
|
%
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction & land development
|
|
|
26,102,914
|
|
|
|
18.24
|
|
|
|
31,397,922
|
|
|
|
19.78
|
|
|
|
34,744,468
|
|
|
|
20.78
|
|
|
|
51,200,170
|
|
|
|
26.47
|
|
|
|
59,372,175
|
|
|
|
34.38
|
|
Residential 1-4 families
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
st
liens
|
|
|
37,735,618
|
|
|
|
26.36
|
|
|
|
39,509,829
|
|
|
|
24.89
|
|
|
|
38,082,662
|
|
|
|
22.77
|
|
|
|
34,128,944
|
|
|
|
17.65
|
|
|
|
28,782,840
|
|
|
|
16.67
|
|
Junior liens
|
|
|
8,486,594
|
|
|
|
5.93
|
|
|
|
9,537,112
|
|
|
|
6.01
|
|
|
|
9,011,349
|
|
|
|
5.39
|
|
|
|
9,579,042
|
|
|
|
4.95
|
|
|
|
6,669,863
|
|
|
|
3.86
|
|
Home equity lines
|
|
|
7,639,785
|
|
|
|
5.34
|
|
|
|
10,650,365
|
|
|
|
6.71
|
|
|
|
14,974,066
|
|
|
|
8.96
|
|
|
|
16,012,671
|
|
|
|
8.28
|
|
|
|
14,519,634
|
|
|
|
8.41
|
|
Commercial real estate
|
|
|
50,272,002
|
|
|
|
35.12
|
|
|
|
54,455,674
|
|
|
|
34.30
|
|
|
|
55,537,593
|
|
|
|
33.21
|
|
|
|
61,174,895
|
|
|
|
31.62
|
|
|
|
41,236,085
|
|
|
|
23.88
|
|
Loans to individuals
|
|
|
1,836,110
|
|
|
|
1.28
|
|
|
|
2,320,162
|
|
|
|
1.46
|
|
|
|
2,978,950
|
|
|
|
1.78
|
|
|
|
3,087,053
|
|
|
|
1.60
|
|
|
|
3,378,381
|
|
|
|
1.95
|
|
Gross Loans
|
|
|
143,134,494
|
|
|
|
100.00
|
%
|
|
|
158,745,645
|
|
|
|
100.00
|
%
|
|
|
167,211,918
|
|
|
|
100.00
|
%
|
|
|
193,434,697
|
|
|
|
100.00
|
%
|
|
|
172,700,395
|
|
|
|
100.00
|
%
|
Unearned income & deferred fees
|
|
|
89,510
|
|
|
|
|
|
|
|
79,176
|
|
|
|
|
|
|
|
105,524
|
|
|
|
|
|
|
|
72,853
|
|
|
|
|
|
|
|
82,324
|
|
|
|
|
|
Loans, net of unearned income
& deferred fees
|
|
|
143,224,004
|
|
|
|
|
|
|
|
158,824,821
|
|
|
|
|
|
|
|
167,317,442
|
|
|
|
|
|
|
|
193,507,550
|
|
|
|
|
|
|
|
172,782,719
|
|
|
|
|
|
Less: Allowance for loan losses
|
|
|
(3,272,945
|
)
|
|
|
|
|
|
|
(3,584,180
|
)
|
|
|
|
|
|
|
(3,277,559
|
)
|
|
|
|
|
|
|
(3,502,029
|
)
|
|
|
|
|
|
|
(2,086,592
|
)
|
|
|
|
|
Loans, net
|
|
$
|
139,951,059
|
|
|
|
|
|
|
$
|
155,240,641
|
|
|
|
|
|
|
$
|
164,039,883
|
|
|
|
|
|
|
$
|
190,005,521
|
|
|
|
|
|
|
$
|
170,696,127
|
|
|
|
|
|
As can be seen by the loan portfolio volume,
MainStreet experienced a decline in the loan portfolio in the year-to-year comparison. Loans, net of unearned income and deferred
fees, decreased $15.6 million, or 9.8%, at December 31, 2011 compared to December 31, 2010. The real estate market continues to
be soft and the credit markets have tightened substantially. These and other factors have resulted in diminished economic activity
and lower loan demand particularly in real estate related loans. Moreover, Franklin Bank’s current concentration in real
estate related loans reduces the Bank’s participation in these loan markets. Our loan to deposit ratio for 2011 and 2010
was 85.72% and 89.29%, respectively. In prior years, we maintained a larger loan to deposit ratio and leverage of the balance sheet.
We deemed it prudent to decrease the ratio by reducing the loan portfolio thereby increasing liquidity and preserving the institution’s
history of safety and soundness during these difficult economic times. As can be seen by the chart above, real estate loans represent
90.99% and 91.69% of gross loans at December 31, 2011 and December 31, 2010, respectively. Franklin Bank’s loan portfolio
has a large composition of real estate related loans primarily due to the markets we serve. Accordingly, the Bank took steps to
reduce certain concentrations including participating loans. The loan committee of the board of directors reviews all new loans
and renewals of loans within our target concentrations for approval.
MainStreet’s loan portfolio is its 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. We strive to build relationships with our borrowers, so it is very important
to continually understand and assess our borrowers’ financial strength and condition.
The 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 analysis of the allowance for loan loss
methodology.
Our credit policy requires updated
appraisals to be obtained on existing loans where 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 our policy requires a new appraisal 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, less estimated selling expense, 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 are included in the qualitative
factors based on loan pools in the loan loss analysis.
We continue to review and enhance our credit
policies. We monitor our concentration limits and have targets that reflect the current environment. Our concentrations levels
are within the established limits. All new credits that are deemed to be in concentration buckets are reviewed by loan committee.
We have floors in our home equity lines and certain commercial loan products. Our maximum debt to income ratio is 40% for all retail
loans. Construction loans and bridge loans can be underwritten within retail products with the use of interest only payments. Also,
we have the interest only feature available to unsecured retail lines with a one-year term which are underwritten on strict guidelines
on retail products. New loans originated must have a maximum loan-to-value of 80%; 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 have an outside service to perform environmental risk assessments prior to funding. Our home equity line products previously
had a maturity of 20 years with a three or five year review feature. The loan policy was modified for these loans to mature in
five years and be renewed only upon proper underwriting.
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 Item 8, Financial Statements, Notes #3 and #4
for further discussion of underwriting and risk ratings of loans.
As discussed earlier, MainStreet’s variable rate loans
comprise approximately 25% of our loan portfolio. Variable commercial loans are underwritten to the current fully indexed rate
at origination with cash flow analysis in underwriting at fully drawn lines. In most cases account officers stress borrowers at
2% over the fully indexed rate. Home equity lines are underwritten and qualified at 1.5% of the full equity line commitment.
For the most part, MainStreet’s business
activity is with customers located in its 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.
Please refer to Item 8, Note 18, Concentrations
of Credit Risk, for a detailed discussion of our concentrations of credit.
The following table shows the amount of commercial
loans outstanding at December 31, 2011 and their maturity distribution.
|
|
|
Within
One
Year
|
|
|
|
After
One
But
Within
Five
Years
|
|
|
|
After
Five
Years
|
|
|
|
Total
|
|
Commercial
|
|
$
|
3,904,628
|
|
|
$
|
6,516,921
|
|
|
$
|
639,922
|
|
|
$
|
11,061,471
|
|
Interest rates are floating or adjustable
|
|
|
1,939,519
|
|
|
|
2,162,020
|
|
|
|
21,383
|
|
|
|
4,122,922
|
|
Interest rates are fixed or predetermined
|
|
|
1,965,109
|
|
|
|
4,354,901
|
|
|
|
618,539
|
|
|
|
6,938,549
|
|
The following table shows the amount of real
estate construction loans outstanding at December 31, 2011 and their maturity distribution.
|
|
|
Within
One
Year
|
|
|
|
After
One
But
Within
Five
Years
|
|
|
|
After
Five
Years
|
|
|
|
Total
|
|
Real estate construction
|
|
$
|
10,616,788
|
|
|
$
|
11,908,627
|
|
|
$
|
3,577,499
|
|
|
$
|
26,102,914
|
|
Interest rates are floating or adjustable
|
|
|
2,558,773
|
|
|
|
1,005,882
|
|
|
|
---
|
|
|
|
3,564,655
|
|
Interest rates are fixed or predetermined
|
|
|
8,058,015
|
|
|
|
10,902,745
|
|
|
|
3,577,499
|
|
|
|
22,538,259
|
|
Nonaccrual loans, loans past due 90 days or
more, and troubled debt restructurings are considered by MainStreet to be nonperforming loans. MainStreet’s policy is to
discontinue the accrual of interest on loans once they become 90 days past due and are not well-collateralized, or earlier when
it becomes doubtful that the full principal and interest will be collected. Once a loan is placed on nonaccrual status, any interest
that is collected will generally be recorded on a cash basis until the loan is satisfied in full or circumstances have changed
to such an extent that the collection of both principal and interest is probable.
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 quarterly criticized loan workout sheets for all loans risk rated special mention or lower and all loans
60-days or more delinquent 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 Committee meets monthly to review updates on these loans along with the attestation sheets completed by the account officers.
The criticized loan worksheets have been 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. An officer has been assigned to manage our problem assets as a
full-time position. 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, new software was purchased to assist with this process. Software has been purchased to assist
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.
In summary, we have enhanced our processes, personnel and software
to address nonaccrual and criticized loans. Also, more detailed and frequent reporting regarding asset quality helps insure more
timely and greater oversight of asset quality. We believe these enhancements are assisting us in working through the asset quality
issues resulting from the severe recession.
Net charge offs of $1,972,018 and $985,479
for 2011 and 2010, respectively, equated to 1.29% and .60%, respectively, of average loans outstanding, net of unearned deferred
fees and costs. Gross charge offs were $2,143,502 for 2011 which was $482,709 greater than the provision expense for 2011. This
was due to a specific reserve of $565,704 at year end 2010. Of the loans representing the specific reserve at year-end 2010, $328,807
were subsequently charged off in 2011 and approximately $176,000 was unallocated in 2011 due to the pledging of additional collateral.
The loan loss reserve at December 31, 2011 and 2010 represented 2.29% and 2.26%, respectively, of loans, net of unearned deferred
fees and costs. Refer to the provision for loan losses section of this discussion and analysis for a breakdown by loan type of
nonperforming loans at December 31, 2011 and 2010, respectively. Following is a breakdown of our nonperforming assets.
|
|
For the Periods Ended
|
|
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
Nonaccrual loans and leases
|
|
$
|
7,067,722
|
|
|
$
|
7,702,343
|
|
Loans 90 days or more past due and still accruing
|
|
|
---
|
|
|
|
1,062,174
|
|
Troubled debt restructurings (not on nonaccrual)
|
|
|
1,685,658
|
|
|
|
374,597
|
|
Total nonperforming loans
|
|
|
8,753,380
|
|
|
|
9,139,114
|
|
Foreclosed real estate
|
|
|
3,572,518
|
|
|
|
4,152,667
|
|
Other foreclosed property
|
|
|
103,649
|
|
|
|
---
|
|
Total foreclosed property
|
|
|
3,676,167
|
|
|
|
4,152,667
|
|
Total nonperforming assets
|
|
$
|
12,429,547
|
|
|
$
|
13,291,781
|
|
At
December 31, 2009, 2008, and 2007, nonaccrual loans were $3,890,152
, $4,217,698, and $147,278, respectively. Lost interest
related to impaired loans as of December 31, 2011, 2010, 2009, 2008, and 2007 was $521,729, $282,181, $334,620, $113,626, and $15,421,
respectively. Interest income reflected in the 2011, 2010, 2009, 2008, and 2007 income statements related to impaired loans was
$272,445, $240,882, $203,755, $207,346, and $1,126, respectively. Loans that were past due more than 90 days at December 31, 2009,
2008, and 2007 were $552,944, $464,701, and $483,636, respectively. Nonaccrual loans, troubled debt restructurings and loans 90
days or more past due are considered to be our impaired loans. A specific reserve allowance was maintained against these loans
at December 31, 2011 and 2010 in the amount of $818,572 and $565,704, respectively. Overall, Franklin Bank continues to work with
troubled borrowers when appropriate and to move quickly to identify and resolve any problem loans. Please refer to Item 8, Financial
Statements, Note #4 for further discussions and break downs of our past due loans, nonaccrual loans, and troubled debt restructurings.
At December 31, 2011, 2010, and 2009, MainStreet
had $3,572,518, $4,152,667, and $3,513,485, respectively, in other real estate, which is property acquired through foreclosure.
Other real estate is carried at the lower of cost or fair market value, less selling costs, based on appraised value. Our other
real estate is expected to increase as our nonaccrual loans work through the process and several foreclosures are scheduled. Because
of the regulatory environment, we are accelerating our disposals of these properties. This accelerated disposal strategy could
result in material losses on the other real estate properties that cannot be measured at this time. Other foreclosed assets were
$103,649 at December 31, 2011. There were no other foreclosed assets at December 31, 2010 and 2009, respectively.
Deposits
Deposits are the largest source of funds
used to support the liquidity of MainStreet. The ratio of loans, net of unearned deferred costs and fees, to deposits was 85.72
%
and 89.29% as of December 31, 2011 and 2010, respectively. The ratio of total time deposits, including $100,000 and over,
to total deposits was 59.78% and 65.51% at December 31, 2011 and 2010, respectively. Total deposits at December 31, 2011 and 2010
were $167,082,842 and $177,873,964, respectively, a decrease of $10,791,122, or 6.07%. The deposit mix was as follows:
|
|
2011
|
|
2010
|
Demand deposits
|
|
$
|
20,975,660
|
|
|
|
12.56
|
%
|
|
$
|
19,357,378
|
|
|
|
10.88
|
%
|
Interest checking deposits
|
|
|
7,472,911
|
|
|
|
4.47
|
|
|
|
6,971,993
|
|
|
|
3.92
|
|
Money market deposits
|
|
|
24,651,034
|
|
|
|
14.75
|
|
|
|
23,931,136
|
|
|
|
13.45
|
|
Savings deposits
|
|
|
14,093,416
|
|
|
|
8.44
|
|
|
|
11,095,560
|
|
|
|
6.24
|
|
Time deposits $100,000 and over
|
|
|
42,776,337
|
|
|
|
25.60
|
|
|
|
50,672,382
|
|
|
|
28.49
|
|
Other time deposits
|
|
|
57,113,484
|
|
|
|
34.18
|
|
|
|
65,845,515
|
|
|
|
37.02
|
|
Total
|
|
$
|
167,082,842
|
|
|
|
100.00
|
%
|
|
$
|
177,873,964
|
|
|
|
100.00
|
%
|
The chart reflects
that the largest component of deposits continues to be in time deposits including $100,000 and over. As a percentage of total deposits,
the mix has changed somewhat over the past year. Demand deposits have increased 8.36% over the prior year which is essentially
free funds. Interest checking, money market and savings deposits have all increased in dollars in comparison to the prior year
and as a percentage of total deposits. As discussed above, total deposits declined $10.8 million in comparison to the prior year;
however, time deposits including $100,000 and over dropped $16.6 million, or 14.27%. Our strategy for deposits in 2011 has been
to lower our deposit costs while maintaining ample liquidity to fill our needs and for contingency planning. 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. Competition for deposits is great in our market. This affects the availability and ultimately the pricing of deposits.
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 relationship and not just certificates of
deposit. We have been successful in lowering our deposit costs and maintaining liquidity. Loan demand has been soft, therefore,
paralleling our strategy. The overall rate on interest bearing deposits was 1
.32
%
and 1.85% for 2011 and 2010, respectively, a decline of 53 basis points. Our strategic plan in 2012 also includes continued lowering
of our deposit costs to benefit net income. Franklin Bank attracted brokered deposits for the first time during 2009. These deposits
were $6.9 million and $6.5 million, respectively, at December 31, 2011 and 2010 and included deposits through the CDARS program.
The average amount and rate of deposits can be found in the Net Interest Income section of
this Management’s Discussion and Analysis in the Distribution of Assets, Liabilities, and Shareholders’ Equity: Interest
Rate and Interest Differentials table. The maturities of time deposits $100,000 and over and other time deposits are shown in Part
II, Item 8, Footnote #7. Demand deposits were 12.55% and 10.88% of total deposits at year end 2011 and 2010, respectively. A further
increase in demand deposits would improve the net interest margin and the total rate paid on interest bearing deposits. Increasing
demand deposits is a continued focus in 2012.
Borrowings
MainStreet has several sources for borrowings
generally to assist with liquidity. At December 31, 2011, MainStreet had no balances outstanding with 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 December 31, 2011 and 2010 were $103,468,835
and $120,233,308, respectively.
The Corporation 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 Corporation is required to pledge agency funds at 100% towards these balances. The Corporate Cash
Management sweep accounts totaled $0 at December 31, 2011 and December 31, 2010.
The Corporation entered into a repurchase agreement with Citigroup
Global Markets, Inc. (“CGMI”) in the amount of $7,500,000 on September 18, 2007. The repurchase date is September 18,
2012. The interest rate was fixed at 4.22% until maturity or until it is called. Beginning September 18, 2008, the repurchase agreement
became callable by CBMI and can be called quarterly with two business days prior notice. Interest is payable quarterly. The repurchase
agreement is collateralized by federal agency and agency mortgage backed securities. The interest rate remained at 4.22% at December
31, 2011.
The Corporation entered into a repurchase agreement with Barclays
Capital on January 2, 2008 in the amount of $6,000,000. The repurchase date is January 2, 2013. The interest rate was fixed at
3.57% until maturity or until it is called. Beginning January 2, 2009 the repurchase agreement became callable and can be called
quarterly with two business days prior notice. Interest is payable quarterly. The repurchase agreement is collateralized by federal
agency and agency mortgage backed securities. The interest rate remained at 3.57% at December 31, 2011.
The following table presents information on
each category of MainStreet’s borrowings.
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
Short-term Federal Home Loan Bank advances
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount outstanding at period end
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
Weighted average interest rate at period end
|
|
|
---%
|
|
|
|
---%
|
|
|
|
---%
|
|
Maximum amount outstanding at any month-end during the period
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
10,000,000
|
|
Average amount outstanding during the period
|
|
$
|
712
|
|
|
$
|
5,479
|
|
|
$
|
3,287,671
|
|
Weighted average interest rate during period
|
|
|
.49
|
%
|
|
|
.49
|
%
|
|
|
.52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount outstanding at period end
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
Weighted average interest rate at period end
|
|
|
---%
|
|
|
|
---%
|
|
|
|
---%
|
|
Maximum amount outstanding at any month-end during the period
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
Average amount outstanding during the period
|
|
$
|
603
|
|
|
$
|
5,781
|
|
|
$
|
59,425
|
|
Weighted average interest rate during period
|
|
|
.33
|
%
|
|
|
.71
|
%
|
|
|
.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount outstanding at period end
|
|
$
|
13,500,000
|
|
|
$
|
13,500,000
|
|
|
$
|
13,500,000
|
|
Weighted average interest rate at period end
|
|
|
3.93
|
%
|
|
|
3.93
|
%
|
|
|
3.93
|
%
|
Maximum amount outstanding at any month-end during the period
|
|
$
|
13,500,000
|
|
|
$
|
13,500,000
|
|
|
$
|
13,500,000
|
|
Average amount outstanding during the period
|
|
$
|
13,500.000
|
|
|
$
|
13,500,000
|
|
|
$
|
13,500,000
|
|
Weighted average interest rate during the period
|
|
|
3.99
|
%
|
|
|
3.99
|
%
|
|
|
3.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Cash Management
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount outstanding at period end
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
Weighted average interest rate at period end
|
|
|
---%
|
|
|
|
---%
|
|
|
|
---%
|
|
Maximum amount outstanding at any month-end during the period
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
401,138
|
|
Average amount outstanding during the period
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
161,632
|
|
Weighted average interest rate during the period
|
|
|
---%
|
|
|
|
---%
|
|
|
|
.50
|
%
|
Shareholders’ Equity
Total shareholders’ equity was $
22,240,789,
$22,089,467, and $21,777,262 at December 31, 2011, 2010 and 2009, respectively. Average shareholders’ equity to average
assets was 10.67%, 9.99%, and 9.75% for 2011, 2010, and 2009, respectively. Book value per share was $12.98, $12.89, and $12.71
at December 31, 2011, 2010, and 2009, respectively.
In September 2007, the Board of Directors approved a plan to
repurchase up to 100,000 shares of the Company’s common stock. By year end 2008, a total of 78,800 shares had been repurchased
with total costs of $1,176,170. Of this 26,000 shares were repurchased in 2008 for a total cost of $383,330. The plan has been
terminated. In addition, the Corporation is prohibited from repurchasing any of its own stock by the terms of the MOU with the
Federal Reserve Bank of Richmond.
Also, in September 2007, MainStreet’s Board of Directors
approved a cash dividend of $.05 per share which was MainStreet’s first cash dividend paid. Since that date, MainStreet paid
a quarterly dividend until the fourth quarter of 2008. The dividend payout ratio for 2008 was 43.99%. Under the MOU with the Federal
Reserve Bank of Richmond, MainStreet is restricted from declaring or paying any dividends without the prior written approval of
the Federal Reserve Bank of Richmond. Also, MainStreet cannot incur or guarantee any debt or redeem or purchase any shares of its
common stock without the prior written consent of the Federal Reserve Bank of Richmond.
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 certain capital ratios. Failure to meet 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 the bank to grow other
assets. The required level of capital can also be affected by earnings, asset quality and other issues.
Franklin
Bank was required under the Agreement with the OCC to implement a three-year capital program which, among other things,
requires Franklin Bank to plan for adequate capital to meet its current and future needs.
While MainStreet and
Franklin Bank were considered well-capitalized under established regulatory classifications at December 31, 2011 and 2010 in
the current economic circumstances, capital resources are a focus for the Corporation. See Note 15 to the financial
statements for capital ratios. Should it be necessary or appropriate to obtain additional capital, then current shareholders
could suffer dilution.
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. MainStreet’s
material off-balance sheet obligations are loan commitments that
were
$18,556,714
and $19,487,404
, respectively
at December 31,
2011 and 2010. MainStreet has a liquidity contingency plan that gives guidance on the maintenance of appropriate liquidity and
what action is required under various liquidity scenarios. MainStreet’s liquidity is provided by cash and due from banks,
interest-bearing deposits, overnight federal funds sold, securities available-for-sale, and loan repayments. MainStreet also 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 (“FHLB”).
At December 31, 2011 and December 31, 2010, we had available credit from borrowings
in the amount of $45,091,542 and $41,413,677, respectively.
MainStreet’s
ratio of liquid assets to total liabilities at December 31, 2011, December 31, 2010 and December 31, 2009 was 19.17%,
14.93%,
and 13.97%, respectively. As can be seen from the ratios, liquidity has continued to be strong and has increased over the last
three years due to strategies implemented. Deposits provide the basic core for our liquidity. As discussed previously, our deposits
declined $10.8 million at December 31, 2011 compared to December 31, 2010. Pricing in our market continues to be competitive. As
a company, one of our strategies for 2011 was to lower deposit costs. In doing this, we have lost some deposits. Loan demand in
2011 was soft which worked well with our strategy to lower deposits. We have accomplished this and have increased our liquidity
percentages at the same time. We have managed these levels and continue to do so as we work towards lowering our deposits costs
in 2012.
In addition to the borrowing facilities, MainStreet
has continuing relationships with several entities allowing for the gathering of brokered deposits. We are also a member of the
Certificate of Deposit Account Registry Service (“CDARS”). This allows us to provide our depositors with up to $50
million dollars in FDIC insurance. We receive the deposits and forward them to CDARS and we receive deposits back if wanted. The
send and receive transaction is called a reciprocal transaction. 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 has accepted brokered deposits
in the amount of $6.9 million as of December 31, 2011 which was 4.10% of total deposits. We are restricted by our Agreement with
the OCC to not have more than 15% brokered deposits as a percentage of total deposits. We are well within this margin. At December
31, 2011, this would allow us to gather an additional $18.3 million in brokered deposits. Franklin Bank continues to be a member
of QwickRate in order to bid for internet certificates of deposit as another source of liquidity. At December 31, 2011, Franklin
Bank had $4.1 million in internet certificates of deposit. We have set policy limits on the amount of internet certificates of
deposit that we can gather. According to our policy, we would be able to accept an additional $26.4 million at December 31, 2011.
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. MainStreet
utilizes these techniques for management of interest rate risk in order to minimize change in net interest income with interest
rate changes. MainStreet BankShares, Inc. 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
basis point interest rate environment, as applicable. With the change from level shock, net interest income is modeled assuming
that interest rates move the full rate change in the first month. With the change from level 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 that 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 then current
level prime rate of 3.25% at December 31, 2011 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%
|
|
|
|
10.00%
|
|
|
|
17.00%
|
|
+300 bp
|
|
|
6.25
|
|
|
|
8.00
|
|
|
|
14.00
|
|
+200 bp
|
|
|
5.25
|
|
|
|
6.00
|
|
|
|
10.00
|
|
+100 bp
|
|
|
4.25
|
|
|
|
3.00
|
|
|
|
5.00
|
|
-100 bp
|
|
|
2.25
|
|
|
|
-1.00
|
|
|
|
-2.00
|
|
-200 bp
|
|
|
1.25
|
|
|
|
-1.00
|
|
|
|
-2.00
|
|
-300 bp
|
|
|
0.25
|
|
|
|
-3.00
|
|
|
|
-5.00
|
|
MainStreet is sensitive to change in the interest
rate environment particularly due to variable rate loans in our loan portfolio. In a rising rate environment, it is anticipated
that the impact would be positive on the net interest margin. In a declining rate environment, MainStreet has exposure to the net
interest margin. Management seeks to lower the impact on the net interest margin.
Contractual Obligations, Commitments, Contingent
Liabilities, Off-Balance Sheet Arrangements, and Related Party Transactions
MainStreet provides certain services for its subsidiary bank
and real estate company. These services include accounting, investments, treasury management, compliance, audit, deposit and loan
operations, and data processing. In exchange for these services, the Bank and the real estate company pay an affiliate fee to the
holding company.
The affiliate fee paid to MainStreet helps support MainStreet’s
cash requirements since most of the expenses are directly related to the companies it owns. Dividends from Franklin Bank are also
a source of cash for MainStreet. Under the applicable federal laws, the Comptroller of the Currency restricts the total dividend
payments of any calendar year, without prior approval, to the net profits of that year as defined, combined with retained net profits
for the two preceding years. In addition, as previously noted, the Agreement between Franklin Bank and the OCC prohibits the payment
of dividends by Franklin Bank.
MainStreet RealEstate owns the facility in which the Southlake
branch of Franklin Bank operates. The land cost was $425,286 and the cost of the building was $881,123. The construction of the
facility was completed and operations began in August 2007. The corporation has only a modest amount of fixed assets.
A summary of MainStreet’s significant
contractual obligations and commitments is presented in the following table, with a reference to the footnote disclosure in Item
8 detailing the dollar amount by maturity.
|
Footnote Disclosure in Item 8
|
|
Notes to Consolidated Financial Statements
|
Contractual Cash Obligations
|
|
Operating Leases
|
Footnote #13
|
|
|
Other Commitments
|
|
Commitments to extend credit
|
Footnote #17
|
|
|
Related Person Loans
|
Footnote #5
|
|
|
Borrowings
|
Footnote #8
|
|
|
Repurchase Agreements
|
Footnote #9
|
Impact of Inflation
Most of MainStreet’s assets are monetary
in nature and therefore are sensitive to interest rate fluctuations. MainStreet does not have significant fixed assets or inventories.
Fluctuations in interest rates and actions of the Board of Governors of the
Federal Reserve System (“FRB”)
have a great effect on MainStreet’s profitability. Management continually strives to manage the relationship between interest-sensitive
assets and liabilities. As discussed above, 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 the Corporation’s 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 on April 15, 2004. This Plan permitted the granting of Non-qualified Stock Options and Incentive
Stock Options 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 2010, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update (ASU) 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures
about Fair Value Measurements.” ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures,
and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06
is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances,
and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal
years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of the new guidance did
not have a material impact on the Corporation’s consolidated financial statements.
In July 2010, the FASB issued ASU 2010-20, “Receivables
(Topic 310) – Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.”
The new disclosure guidance significantly expands the existing requirements and will lead to greater transparency into an entity’s
exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting
period became effective for both interim and annual reporting periods ending on or after December 15, 2010. Specific disclosures
regarding activity that occurred before the issuance of the ASU, such as the allowance roll forward and modification disclosures,
will be required for periods beginning on or after December 15, 2010. The Corporation has included the required disclosures
in its consolidated financial statements.
In December 2010, the FASB issued ASU 2010-28, “Intangible
– Goodwill and Other (Topic 350) – When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with
Zero or Negative Carrying Amounts.” The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting
units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill
impairment test if it is more likely than not that a goodwill impairment exists. The amendments in this ASU are effective for fiscal
years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption
of the new guidance did not have a material impact on the Corporation’s consolidated financial statements.
In December 2010, the FASB issued ASU 2010-29, “Business
Combinations (Topic 805) – Disclosure of Supplementary Pro Forma Information for Business Combinations.” The guidance
requires pro forma disclosure for business combinations that occurred in the current reporting period as though the acquisition
date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If
comparative financial statements are presented, the pro forma information should be reported as though the acquisition date for
all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting
period. ASU 2010-29 is effective for business combinations for which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The adoption of the new guidance
did not have a material impact on the Corporation’s consolidated financial statements.
The Securities Exchange Commission
(SEC) issued Final Rule No. 33-9002, “Interactive Data to Improve Financial Reporting.” The rule requires companies
to submit financial statements in extensible business reporting language (XBRL)
format with their SEC filings on a phased-in
schedule. L
arge accelerated filers and foreign large accelerated filers using U.S. generally accepted accounting principles
(GAAP) were required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on
or after June 15, 2010.
All remaining filers were required to provide interactive data reports starting
with their first quarterly report for fiscal periods ending on or after June 15, 2011. The Corporation has submitted financial
statements in extensible business reporting language (XBRL)
format with their SEC filings in accordance with the phased-in
schedule.
In March 2011, the SEC issued Staff
Accounting Bulletin (SAB) 114. This SAB revises or rescinds portions of the interpretive guidance included in the codification
of the Staff Accounting Bulletin Series. This update is intended to make the relevant interpretive guidance consistent with current
authoritative accounting guidance issued as a part of the FASB’s Codification. The principal changes involve revision or
removal of accounting guidance references and other conforming changes to ensure consistency of referencing through the SAB Series.
The effective date for SAB 114 is March 28, 2011.
The adoption of the new guidance did not have a material impact on the
Corporation’s consolidated financial statements.
In January 2011, the FASB issued
ASU 2011-01, “Receivables (Topic 310) – Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings.”
The amendments in this ASU temporarily delayed the effective date of the disclosures about troubled debt restructurings in Update
2010-20 for public entities. The delay was intended to allow the Board time to complete its deliberations on what constitutes a
troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and
the guidance for determining what constitutes a troubled debt restructuring was effective for interim and annual periods ending
after June 15, 2011.
The Corporation has adopted ASU 2011-01 and included the required disclosures in its consolidated financial
statements.
In April 2011, the FASB issued ASU
2011-02, “Receivables (Topic 310) – A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt
Restructuring.” The amendments in this ASU clarify the guidance on a creditor’s evaluation of whether it has granted
a concession to a debtor. They also clarify the guidance on a creditor’s evaluation of whether a debtor is experiencing financial
difficulty. The amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011.
Early adoption is permitted. Retrospective application to the beginning of the annual period of adoption for modifications occurring
on or after the beginning of the annual adoption period is required. As a result of applying these amendments, an entity may identify
receivables that are newly considered to be impaired. For purposes of measuring impairment of those receivables, an entity should
apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011.
The Corporation
has adopted ASU 2011-02 and included the required disclosures in its consolidated financial statements.
In April 2011, the FASB issued ASU
2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements.”
The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the
ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee
and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this ASU are effective
for the
first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively
to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted.
The Corporation is currently assessing the impact that ASU 2011-03 will have on its consolidated financial
statements.
In May 2011, the FASB issued ASU 2011-04, “Fair Value
Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and
IFRSs.” This ASU is the result of joint efforts by the FASB and International Accounting Standards Board (IASB) to develop
a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value
measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many
of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and International Financial Reporting Standards
(IFRS). The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application.
Early application is not permitted. The Corporation is currently assessing the impact that ASU 2011-04 will have on its consolidated
financial statements.
In June 2011, the FASB issued ASU 2011-05, “Comprehensive
Income (Topic 220) – Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability,
consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income
by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’
equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous
statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should
include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive
income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income
and its components followed consecutively by a second statement that should present all the components of other comprehensive income,
a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must
be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either
net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments
in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years
beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The
amendments do not require transition disclosures. The Corporation is currently assessing the impact that ASU 2011-05 will have
on its consolidated financial statements.
In August 2011, the SEC issued Final Rule No. 33-9250, “Technical
Amendments to Commission Rules and Forms related to the FASB’s Accounting Standards Codification.” The SEC
has adopted technical amendments to various rules and forms under the Securities Act of 1933, the Securities Exchange Act of 1934,
and the Investment Company Act of 1940. These revisions were necessary to conform those rules and forms to the FASB
Accounting Standards Codification. The technical amendments include revision of certain rules in Regulation S-X, certain
items in Regulation S-K, and various rules and forms prescribed under the Securities Act, Exchange Act and Investment Company Act. The
Release was effective as of August 12, 2011. The adoption of the new guidance did not have a material impact on the
Corporation’s consolidated financial statements.
In September 2011, the FASB issued ASU 2011-08, “Intangible
– Goodwill and Other (Topic 350) – Testing Goodwill for Impairment.” The amendments in this ASU permit
an entity to first assess qualitative factors related to goodwill to determine whether it is more likely than not that the fair
value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the
two-step goodwill test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood
of more than 50 percent. Under the amendments in this ASU, an entity is not required to calculate the fair value of
a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The
amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after
December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date
before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet
been issued.
There will be no impact on the Corporation’s consolidated financial statements
because we do not have any assets related to this ASU 2011-08.
In December 2011, the FASB issued ASU 2011-11, “Balance
Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.” This ASU requires entities to disclose both
gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments
and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments
for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity
should provide the disclosures required by those amendments retrospectively for all comparative periods presented. There will be
no impact on the Corporation’s consolidated financial statements related to this ASU 2011-11.
In December 2011, the FASB issued
ASU 2011-12, “Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation
of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.”
The amendments are being made to allow the Board time to redeliberate whether to present on the face of the financial statements
the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive
income for all periods presented. While the Board is considering the operational concerns about the presentation requirements for
reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments,
entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation
requirements in effect before ASU 2011-05. All other requirements in ASU 2011-05 are not affected by ASU 2011-12, including the
requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive
financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years,
beginning after December 15, 2011. Nonpublic entities should begin applying these requirements for fiscal years ending after December
15, 2012, and interim and annual periods thereafter.
The Corporation is currently assessing the impact
that ASU 2011-12 will have on its consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk
Not required.
Item 8. Financial Statements and Supplementary
Data
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
MainStreet BankShares, Inc.
Martinsville, Virginia
We have audited the accompanying consolidated balance sheets
of MainStreet BankShares, Inc. and Subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations,
changes in shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2011. These financial
statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. The Corporation is not required
to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the Corporation’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of MainStreet BankShares, Inc. and Subsidiaries as of
December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the two years in the period ended
December 31, 2011, in conformity with U.S. generally accepted accounting principles.
Winchester, Virginia
March 15, 2012
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
ASSETS
|
|
|
December 31, 2011
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
2,767,395
|
|
|
$
|
2,238,381
|
|
Interest-bearing deposits in banks
|
|
|
17,091,438
|
|
|
|
8,866,966
|
|
Federal funds sold
|
|
|
10,612,680
|
|
|
|
7,660,000
|
|
Total Cash and Cash Equivalents
|
|
|
30,471,513
|
|
|
|
18,765,347
|
|
Securities available-for-sale, at fair value
|
|
|
21,199,884
|
|
|
|
27,054,527
|
|
Restricted equity securities
|
|
|
830,000
|
|
|
|
996,600
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
Total Gross Loans
|
|
|
143,134,494
|
|
|
|
158,745,645
|
|
Unearned deferred fees and costs, net
|
|
|
89,510
|
|
|
|
79,176
|
|
Loans, net of unearned deferred fees and costs
|
|
|
143,224,004
|
|
|
|
158,824,821
|
|
Less: Allowance for loan losses
|
|
|
(3,272,945
|
)
|
|
|
(3,584,180
|
)
|
Net Loans
|
|
|
139,951,059
|
|
|
|
155,240,641
|
|
Bank premises and equipment, net
|
|
|
1,654,496
|
|
|
|
1,811,673
|
|
Accrued interest receivable
|
|
|
547,905
|
|
|
|
725,261
|
|
Bank owned life insurance
|
|
|
3,049,696
|
|
|
|
2,939,590
|
|
Other real estate, net of valuation allowance
|
|
|
3,572,518
|
|
|
|
4,152,667
|
|
Other assets
|
|
|
2,578,240
|
|
|
|
2,849,099
|
|
Total Assets
|
|
$
|
203,855,311
|
|
|
$
|
214,535,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non-interest bearing demand deposits
|
|
$
|
20,975,660
|
|
|
$
|
19,357,378
|
|
Interest bearing deposits
|
|
|
146,107,182
|
|
|
|
158,516,586
|
|
Total Deposits
|
|
|
167,082,842
|
|
|
|
177,873,964
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
|
13,500,000
|
|
|
|
13,500,000
|
|
Accrued interest payable and other liabilities
|
|
|
1,031,680
|
|
|
|
1,071,974
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
181,614,522
|
|
|
|
192,445,938
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
in 2011 and 2010, respectively
|
|
|
17,866,890
|
|
|
|
17,866,890
|
|
Retained earnings
|
|
|
3,986,150
|
|
|
|
4,132,595
|
|
Accumulated other comprehensive income
|
|
|
387,749
|
|
|
|
89,982
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders’ Equity
|
|
|
22,240,789
|
|
|
|
22,089,467
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders’ Equity
|
|
$
|
203,855,311
|
|
|
$
|
214,535,405
|
|
See accompanying notes to consolidated financial
statements.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
|
|
|
Year Ended
December 31, 2011
|
|
|
|
Year Ended
December 31, 2010
|
|
Interest and Dividend Income:
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
8,609,255
|
|
|
$
|
9,588,767
|
|
Interest on interest-bearing deposits
|
|
|
25,757
|
|
|
|
34,501
|
|
Interest on federal funds sold
|
|
|
11,497
|
|
|
|
11,650
|
|
Interest on securities available-for-sale:
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
753,407
|
|
|
|
963,875
|
|
Nontaxable
|
|
|
2,029
|
|
|
|
---
|
|
Dividends on restricted equity securities
|
|
|
30,280
|
|
|
|
28,215
|
|
|
|
|
|
|
|
|
|
|
Total Interest and Dividend Income
|
|
|
9,432,225
|
|
|
|
10,627,008
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
Interest on deposits
|
|
|
1,992,204
|
|
|
|
3,086,575
|
|
Interest on short-term borrowings
|
|
|
5
|
|
|
|
68
|
|
Interest on repurchase agreements
|
|
|
538,071
|
|
|
|
538,071
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense
|
|
|
2,530,280
|
|
|
|
3,624,714
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
6,901,945
|
|
|
|
7,002,294
|
|
Provision for loan losses
|
|
|
1,660,783
|
|
|
|
1,292,100
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income After Provision for Loan Losses
|
|
|
5,241,162
|
|
|
|
5,710,194
|
|
|
|
|
|
|
|
|
|
|
Noninterest Income:
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
288,724
|
|
|
|
306,532
|
|
Mortgage brokerage income
|
|
|
171,727
|
|
|
|
263,208
|
|
Electronic card fees
|
|
|
160,429
|
|
|
|
143,079
|
|
Investment fee income
|
|
|
140,758
|
|
|
|
136,208
|
|
Income on bank owned life insurance
|
|
|
110,106
|
|
|
|
108,097
|
|
Gain on sale of securities available-for-sale
|
|
|
116,734
|
|
|
|
650,626
|
|
Other fee income and miscellaneous income
|
|
|
101,879
|
|
|
|
99,375
|
|
Total Noninterest Income
|
|
|
1,090,357
|
|
|
|
1,707,125
|
|
|
|
|
|
|
|
|
|
|
Noninterest Expense:
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
2,807,985
|
|
|
|
2,958,062
|
|
Occupancy and equipment expense
|
|
|
850,647
|
|
|
|
862,376
|
|
Professional fees
|
|
|
245,677
|
|
|
|
239,221
|
|
Outside processing
|
|
|
433,004
|
|
|
|
457,759
|
|
FDIC assessment
|
|
|
293,337
|
|
|
|
547,466
|
|
Franchise tax
|
|
|
167,500
|
|
|
|
160,500
|
|
Other real estate and repossessions
|
|
|
1,224,894
|
|
|
|
357,359
|
|
Regulatory examination fees
|
|
|
111,332
|
|
|
|
114,099
|
|
Other expenses
|
|
|
483,943
|
|
|
|
563,109
|
|
Total Noninterest Expense
|
|
|
6,618,319
|
|
|
|
6,259,951
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Before Tax
|
|
$
|
(286,800
|
)
|
|
$
|
1,157,368
|
|
Income Tax Expense (Benefit)
|
|
|
(140,355
|
)
|
|
|
365,830
|
|
Net Income (Loss)
|
|
$
|
(146,445
|
)
|
|
$
|
791,538
|
|
|
|
|
|
|
|
|
|
|
Basic Net Income (Loss) Per Share
|
|
$
|
(.09
|
)
|
|
$
|
.46
|
|
Diluted Net Income (Loss) Per Share
|
|
$
|
(.09
|
)
|
|
$
|
.46
|
|
See accompanying notes to consolidated financial
statements.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in
Shareholders’ Equity
|
|
|
Number
Of Common
Shares
|
|
|
|
Common
Stock
|
|
|
|
Retained
Earnings
|
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
|
Total
Shareholders’
Equity
|
|
Balance at December 31, 2009
|
|
|
1,713,375
|
|
|
$
|
17,843,650
|
|
|
$
|
3,341,057
|
|
|
$
|
592,555
|
|
|
$
|
21,777,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
---
|
|
|
|
---
|
|
|
|
791,538
|
|
|
|
---
|
|
|
|
791,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding losses during
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the period
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
(122,456
|
)
|
|
|
(122,456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax benefit
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
41,635
|
|
|
|
41,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less reclassification adjustments for
gains included in net income, net
of income tax expense of
$221,213
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
(429,413
|
)
|
|
|
(429,413
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in actuarial gain on SERP
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
11,608
|
|
|
|
11,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
(3,947
|
)
|
|
|
(3,947
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
(502,573
|
)
|
|
|
(502,573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income (Loss)
|
|
|
---
|
|
|
|
---
|
|
|
|
791,538
|
|
|
|
(502,573
|
)
|
|
|
288,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation costs
|
|
|
---
|
|
|
|
23,240
|
|
|
|
---
|
|
|
|
---
|
|
|
|
23,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
1,713,375
|
|
|
$
|
17,866,890
|
|
|
$
|
4,132,595
|
|
|
$
|
89,982
|
|
|
$
|
22,089,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
---
|
|
|
|
---
|
|
|
|
(146,445
|
)
|
|
|
---
|
|
|
|
(146,445
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gains
during the period
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
555,422
|
|
|
|
555,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
(188,844)
|
|
|
|
(188,844)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less reclassification adjustments for
gains included in net income, net
of income tax expense of
$39,690
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
(77,044)
|
|
|
|
(77,044)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in actuarial gain on SERP
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
12,474
|
|
|
|
12,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
(4,241
|
)
|
|
|
(4,241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
297,767
|
|
|
|
297,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
|
---
|
|
|
|
---
|
|
|
|
(146,445
|
)
|
|
|
297,767
|
|
|
|
151,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
1,713,375
|
|
|
$
|
17,866,890
|
|
|
$
|
3,986,150
|
|
|
$
|
387,749
|
|
|
$
|
22,240,789
|
|
See accompanying notes to consolidated financial statements.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
|
Year Ended
December 31, 2011
|
|
|
|
Year Ended
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
Net income (loss) from operations
|
|
$
|
(146,445
|
)
|
|
$
|
791,538
|
|
Provision for loan losses
|
|
|
1,660,783
|
|
|
|
1,292,100
|
|
Depreciation and amortization
|
|
|
209,718
|
|
|
|
231,716
|
|
Amortization of discounts and premiums, net
|
|
|
159,390
|
|
|
|
96,868
|
|
Gain on sale of securities
|
|
|
(116,734
|
)
|
|
|
(650,626
|
)
|
Loss and impairment on other real estate owned and repossessions
|
|
|
1,139,172
|
|
|
|
216,200
|
|
Loss on disposal of fixed assets
|
|
|
---
|
|
|
|
3,895
|
|
Stock option expense
|
|
|
---
|
|
|
|
23,240
|
|
Deferred tax expense (benefit)
|
|
|
53,182
|
|
|
|
(220,501
|
)
|
Decrease in accrued interest receivable
|
|
|
177,356
|
|
|
|
89,670
|
|
Decrease in other assets
|
|
|
163,131
|
|
|
|
1,040,587
|
|
Increase in value of BOLI
|
|
|
(110,106
|
)
|
|
|
(108,097
|
)
|
Increase (decrease) in accrued interest payable and other liabilities
|
|
|
(27,820
|
)
|
|
|
74,211
|
|
Net cash provided by operating activities
|
|
|
3,161,627
|
|
|
|
2,880,801
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of furniture, fixtures, and equipment
|
|
|
(52,541
|
)
|
|
|
(86,578
|
)
|
Purchases of securities available-for-sale
|
|
|
(3,361,486
|
)
|
|
|
(35,189,662
|
)
|
Redemption of restricted equity securities
|
|
|
166,600
|
|
|
|
67,200
|
|
Calls/maturities/repayments of securities available-for-sale
|
|
|
8,020,623
|
|
|
|
18,633,581
|
|
Proceeds from sale of securities
|
|
|
1,591,538
|
|
|
|
13,260,569
|
|
Capital improvements to other real estate owned
|
|
|
(277,372)
|
|
|
|
(295,232)
|
|
Proceeds from sale of other real estate owned and repossessions
|
|
|
4,933,631
|
|
|
|
2,870,135
|
|
Loan originations and principal collections, net
|
|
|
8,314,668
|
|
|
|
4,571,704
|
|
Net cash provided by investing activities
|
|
|
19,335,661
|
|
|
|
3,831,717
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Increase in non-interest bearing deposits
|
|
|
1,618,282
|
|
|
|
1,774,867
|
|
Decrease in interest bearing deposits
|
|
|
(12,409,404
|
)
|
|
|
(12,817,683
|
)
|
Net cash used in financing activities
|
|
|
(10,791,122
|
)
|
|
|
(11,042,816
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
11,706,166
|
|
|
|
(4,330,298
|
)
|
Cash and cash equivalents at beginning of year
|
|
$
|
18,765,347
|
|
|
$
|
23,095,645
|
|
Cash and cash equivalents at end of year
|
|
$
|
30,471,513
|
|
|
$
|
18,765,347
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest
|
|
$
|
2,644,065
|
|
|
$
|
3,706,849
|
|
Cash paid during the period for taxes
|
|
$
|
---
|
|
|
$
|
225,000
|
|
Unrealized gain (loss) on securities available for sale
|
|
$
|
438,688
|
|
|
$
|
(773,082
|
)
|
Transfer of loans to other real estate and other assets
|
|
$
|
5,314,131
|
|
|
$
|
3,430,285
|
|
See accompanying notes to consolidated financial statements.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Note 1 – Summary of Accounting Policies
MainStreet BankShares, Inc. (the “Corporation”,
“MainStreet”, or “BankShares”), was incorporated as a Virginia corporation effective January 14, 1999.
The Corporation was primarily organized to serve as a bank holding company. Its first wholly-owned subsidiary was located in Martinsville,
VA and was sold on March 23, 2005 for $6.5 million. 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., 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. When MainStreet sold its first banking
subsidiary the capital was redeployed to Franklin Bank.
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)
|
Principles of Consolidation
|
The consolidated financial statements include the accounts of
MainStreet and its wholly-owned subsidiaries, Franklin Bank and MainStreet RealEstate, Inc. All significant intercompany accounts
and transactions associated with MainStreet’s subsidiaries have been eliminated.
For purposes of reporting cash flows, cash and cash equivalents
include cash, due from banks, interest-bearing deposits in banks, and federal funds sold.
Certain debt securities that management has
the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized
cost. Trading securities are recorded at fair value with changes in fair value and included in earnings. Securities not classified
as held to maturity or trading, including equity securities with readily determinable fair values, are classified as “available
for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive
income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.
Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification
method.
Declines in the fair value of held to maturity and available
for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In
estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair
value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether the Corporation
intends to sell the security, whether it is more likely than not that the Corporation will be required to sell the security before
recovery of its amortized cost basis, and whether the Corportion expects to recover the security’s entire amortized cost
basis.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
The recorded
investment in loans represents the customers unpaid principal balances, net of partial charge-offs and unearned fees and costs.
Interest on loans is computed by methods which generally result in level rates of return on principal amounts outstanding
.
Past due status on all loans is recognized and determined based on contractual terms. It is the Corporation’s
policy to discontinue the accrual of interest on all loans once they become 90 days past due and are not well-collateralized or
earlier when it becomes doubtful that the full principal and interest will be collected. Generally, all payments for all loans
on nonaccrual status are applied as a principal reduction until the principal is satisfied. As a general rule, a nonaccrual loan
may be restored to accrual status when none of its principal and interest is due and unpaid, and the Company expects repayment
of the remaining contractual principal and interest. If any interest payments received while the loan was in nonaccrual status
were applied to reduce the recorded investment in the loan, the application of these payments to the loan’s recorded investment
is not reversed (and interest income is not credited) when the loan is returned to accrual status. The Company must have received
repayment of the past due principal and interest unless the asset has been formally restructured and qualifies for accrual status
or the borrower has resumed paying the full amount of the scheduled contractual interest and principal payments on a loan that
is past due and in nonaccrual status, even though the loan has not been brought fully current, and the following two criteria are
met: 1) all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within
a reasonable period and, 2) there is a sustained period of repayment performance (generally a minimum of six months) by the borrower
in accordance with the contractual terms involving payments of cash or cash equivalents. A loan that meets these two criteria may
be restored to accrual status but must continue to be disclosed as past due if all arrearages have not been paid.
BankShares collectively reviews for impairment all consumer
loans and smaller homogeneous loans. BankShares considers a loan to be impaired when, based upon current information and events,
it is probable that BankShares will be unable to collect all amounts due according to the contractual terms of the loan agreement.
Included in our analysis of impaired loans are loans 90 days or more past due and still accruing nonaccrual loans and troubled
debt restructurings. BankShares evaluates its impaired loans and troubled debt restructurings on an individual basis. For collateral
dependent loans, BankShares bases the measurement of these impaired loans on the fair value of the loan’s collateral properties.
For all other loans, BankShares uses the measurement of these impaired loans on the more readily determinable of the present value
of expected future cash flows discounted at the loan’s effective interest rate or the observable market price. Impairment
losses are recognized through an increase in the allowance for loan losses and a corresponding charge to the provision for loan
losses. Adjustments to impairment losses due to changes in the fair value of impaired loans are included in the provision for loan
losses.
|
(f)
|
Troubled Debt Restructurings
|
In situations where, for economic or legal reasons related to
a borrower’s financial condition, management may grant a concession to the borrower that it would not otherwise consider,
the related loan is classified as a troubled debt restructuring (TDR). Management strives to identify borrowers in financial difficulty
early and work with them to modify their loan to more affordable terms before their loan reaches nonaccrual status. These modified
terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic
loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for
a reduction of either interest or principal, management measures any impairment on the restructuring as noted above for impaired
loans. Total troubled debt restructurings at December 31, 2011 were $3.7 million.
Using a method that approximates the interest method, loan origination
and commitment fees and certain costs are deferred over the contractual life of the related loan as an adjustment to the net interest
margin.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
|
(h)
|
Allowance for Loan Losses
|
The allowance for loan losses is an estimate of the
losses that may be sustained 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, in management’s judgment, is adequate to absorb credit
losses inherent in the loan portfolio. The amount of the allowance is based on management’s evaluation of the
collectibility 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. As part of this process
management reviews the past due reports and risk-rated loans and discusses individually the loans on these reports with the
responsible loan officers. Management provides a detailed 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 loan segments.
Our impaired loans are individually reviewed to
determine possible impairment based on one of three recognized methods which are described above. A specific reserve is then
allocated for the amount of the impairment. 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 and industrial loans not secured by real estate; 2) construction and land development loans; 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
or loans to individuals. Historical loss is calculated based on a three-year 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.
Our allowance methodology has continued to evolve as our company
has grown and our loan portfolio has grown and become more diverse. Although management uses available information to recognize
losses on loans, because of uncertainties associated with local economic conditions, collateral values, and future cash flows on
impaired loans, it is reasonably possible that a material change could occur in the allowance for loan losses in the near term;
however, this amount cannot be reasonably estimated.
The allowance is increased by a provision for loan losses, which
is charged to expense, and reduced by charge-offs, net of recoveries. Charge-offs on commercial loans are recorded when available
information confirms the loan is not fully collectible and the loss is reasonably quantifiable. Consumer loans are generally charged
off for closed end loans after 120 days past due and open end loans after 180 days past due, or earlier if there is information
related to a loss. Loans secured by real estate are generally written down to appraised value less liquidation expenses with the
remainder charged-off when a loss is apparent. Refer to Note 4 of the consolidated financial statements for detailed information
related to the allowance for loan losses.
Assets acquired through, or in lieu of, loan foreclosure are
held for sale and are initially recorded at the lower of the loan balance or the fair value less costs to sell at the date of foreclosure.
Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets based on updated appraisals, general
market conditions, recent sales of like properties, length of time the properties have been held, and our ability and intention
with regard to continued ownership of the properties. The Corporation may incur additional write-downs of foreclosed assets to
fair value less costs to sell if valuations indicate a further other-than-temporary deterioration in market conditions.
|
(j)
|
Bank Premises and Equipment
|
Land is carried at cost. Buildings, furniture, fixtures and
equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are charged to expense
on a straight-line basis over the estimated useful lives ranging from three years to forty years. Maintenance, repairs and
minor improvements are charged to expense as incurred. Significant improvements are capitalized.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
|
(k)
|
Stock Options and Warrants
|
MainStreet recognizes compensation cost relating to share-based
payment transactions in accordance with generally accepted accounting principles. That cost is measured based on the fair value
of the equity or liability instruments issued. The expense measures the cost of employee services received in exchange for the
award based on the grant-date fair value of the award and recognizes the cost over the period the employee is required to provide
services for the award. MainStreet recorded compensation cost in the amount of $0 and $23,240 for the years ended December 31,
2011 and December 31, 2010, respectively. Additional disclosures required are included in Note 14 to the consolidated financial
statements herein.
The Corporation is subject to federal and state income
taxes. 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 bases 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. 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.
When tax returns are filed, it is highly certain that some
positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about
the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a
tax position is recognized in the financial statements in the period during which, based on all available evidence,
management believes it is more likely than not that the position will be sustained upon examination, including the resolution
of appeals or litigation processes, if any. Tax positions taken are not offset or
aggregated
with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest
amount of tax benefit that is more than 50 percent likely of being realized
upon
settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that
exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying
balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon
examination. Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in
the statements of operations.
|
(m)
|
Net Income (Loss) Per Share
|
ASC 260 “Earnings Per Share” requires dual
presentation of basic and diluted earnings per share on the face of the statements of income and requires a reconciliation of
the numerators and denominators of the basic and diluted earnings per share calculation. Basic income (loss) per share is
calculated based on the weighted average number of shares of common stock outstanding during each period. Diluted income
(loss) per share is computed using the weighted average number of shares of common stock outstanding during each period
adjusted to reflect the dilutive effect of all potential common shares that were outstanding during the period. Please refer
to Note 11 for detailed information on net income (loss) per share for the years ending December 31, 2011 and 2010,
respectively. Please refer to Note 14 for detailed information on stock options and warrants for the years ending December
31, 2011 and 2010, respectively.
Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains
and losses on available for sale securities and pension liability adjustments, are reported as a separate component of the equity
section of the balance sheet, such items, along with net income are components of comprehensive income.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
|
(o)
|
Fair Value Measurements
|
Fair values of financial instruments are estimated using relevant
market information and other assumptions, as more fully disclosed in Note 19. Fair value estimates involve uncertainties and matters
of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.
The Corporation follows the policy of charging the costs of
advertising to expense as incurred. Advertising expense was $48,906 and $75,639 for 2011 and 2010, respectively.
|
(q)
|
Transfers of Financial Assets
|
Transfers of financial assets are accounted for as sales, when
control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have
been isolated from the Corporation – put presumptively beyond reach of the transferor and its creditors, even in bankruptcy
or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that
right) to pledge or exchange the transferred assets, and (3) the Corporation does not maintain effective control over the transferred
assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return
specific assets.
Certain reclassifications have been made to prior period balances
to conform to current year provisions.
The presentation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates
that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan
losses, the valuation of deferred tax assets, other-than-temporary impairments of securities, valuation of other real estate owned,
and the fair value of financial instruments.
The determination of the adequacy of the allowance for loan
losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions.
In connection with the determination of the estimated losses on loans, management periodically obtains independent appraisals for
significant collateral.
The Corporation’s loans are generally secured by specific
items of collateral including real property, consumer assets, and business assets. Although the Corporation has a diversified loan
portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent on local economic conditions.
While management uses available information to recognize
losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in local economic
conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the
estimated losses on loans. Such agencies may require the Corporation to recognize additional losses based on their judgments
about information available to them at the time of their examination. Because of these factors, it is reasonably possible
that the estimated losses on loans may change materially in the near term. However, the amount of the change that is
reasonably possible cannot be estimated.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Note 2 – Securities
The carrying values, unrealized gains and losses and approximate
market values of investment securities at December 31, 2011 and 2010 are shown in the following tables. The entire investment portfolio
is classified as available-for-sale to preserve maximum liquidity for funding needs.
|
|
2011
|
|
|
|
Amortized
Cost
|
|
|
Gross Unrealized
Gains
|
|
|
Gross Unrealized
Losses
|
|
|
Approximate
Market Value
|
|
U. S. government sponsored agencies
|
|
$
|
2,804,763
|
|
|
$
|
7,497
|
|
|
$
|
(1,478
|
)
|
|
$
|
2,810,782
|
|
Mortgage backed securities
|
|
|
16,758,613
|
|
|
|
496,577
|
|
|
|
---
|
|
|
|
17,255,190
|
|
States and political subdivisions
|
|
|
1,111,363
|
|
|
|
22,549
|
|
|
|
---
|
|
|
|
1,133,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available-for-sale
|
|
$
|
20,674,739
|
|
|
$
|
526,623
|
|
|
$
|
(1,478
|
)
|
|
$
|
21,199,884
|
|
|
|
2010
|
|
|
|
Amortized
Cost
|
|
|
Gross Unrealized
Gains
|
|
|
Gross Unrealized
Losses
|
|
|
Approximate
Market Value
|
|
U.S. government sponsored agencies
|
|
$
|
3,375,529
|
|
|
$
|
33,938
|
|
|
$
|
(43,260
|
)
|
|
$
|
3,366,207
|
|
Mortgage backed securities
|
|
|
23,592,541
|
|
|
|
287,034
|
|
|
|
(191,255
|
)
|
|
|
23,688,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available-for-sale
|
|
$
|
26,968,070
|
|
|
$
|
320,972
|
|
|
$
|
(234,515
|
)
|
|
$
|
27,054,527
|
|
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 December 31, 2011, 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 Cost
|
|
|
Approximate Market Value
|
|
Due in one year or less
|
|
$
|
---
|
|
|
$
|
---
|
|
Due after one year but within five years
|
|
|
750,000
|
|
|
|
749,138
|
|
Due after five years but within ten years
|
|
|
3,741,343
|
|
|
|
3,793,408
|
|
Due after ten years
|
|
|
16,183,396
|
|
|
|
16,657,338
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,674,739
|
|
|
$
|
21,199,884
|
|
There were gross gains of $116,734 and $650,626 and no losses
recorded on sales and calls of securities available for sale at December 31, 2011 and 2010, respectively.
Securities available-for-sale with carrying values approximating
$15,802,309 and $16,325,648 at December 31, 2011 and
December 31, 2010, respectively, were pledged to secure public
deposits and for other purposes as required or permitted by law.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Following demonstrates the unrealized loss position of securities
available for sale at December 31, 2011 and 2010.
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
|
12 Months or More
|
|
|
|
Total
|
|
|
|
|
Fair
Value
|
|
|
|
Unrealized
Losses
|
|
|
|
Fair
Value
|
|
|
|
Unrealized
Losses
|
|
|
|
Fair
Value
|
|
|
|
Unrealized
Losses
|
|
U. S. government sponsored agencies
|
|
$
|
2,248,523
|
|
|
$
|
(1,478
|
)
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
2,248,523
|
|
|
$
|
(1,478
|
)
|
Total temporarily impaired securities
|
|
$
|
2,248,523
|
|
|
$
|
(1,478
|
)
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
2,248,523
|
|
|
$
|
(1,478
|
)
|
|
|
|
|
|
|
|
December
31, 2010
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
|
12 Months or More
|
|
|
|
Total
|
|
|
|
|
Fair
Value
|
|
|
|
Unrealized
Losses
|
|
|
|
Fair
Value
|
|
|
|
Unrealized
Losses
|
|
|
|
Fair
Value
|
|
|
|
Unrealized
Losses
|
|
U. S. government sponsored agencies
|
|
$
|
1,706,740
|
|
|
$
|
(43,260
|
)
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
1,706,740
|
|
|
$
|
(43,260
|
)
|
Mortgage backed securities
|
|
|
8,655,226
|
|
|
|
(191,255
|
)
|
|
|
---
|
|
|
|
---
|
|
|
|
8,655,226
|
|
|
|
(191,255
|
)
|
Total temporarily impaired securities
|
|
$
|
10,361,966
|
|
|
$
|
(234,515
|
)
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
10,361,966
|
|
|
$
|
(234,515
|
)
|
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 December 31, 2011, $2.2 million
securities had unrealized losses and at December 31, 2010, $10.4 million securities had 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 December
31, 2011 and December 31, 2010.
Federal Reserve Bank stock is included in restricted
equity securities and totaled $435,100 at December 31, 2011 and December 31, 2010. Federal Home Loan Bank
(“FHLB”) stock makes up the remainder of the balance in restricted equity securities and totaled $394,900 and
$561,500 at December 31, 2011 and 2010, respectively. 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. Despite the FHLB’s temporary suspension of cash
dividend payments and repurchases of excess capital stock in earlier years, the Corporation does not consider this investment
to be other than temporarily impaired at December 31, 2011 and no impairment has been recognized. FHLB repurchased some
excess capital stock during 2011 and 2010 and has paid some dividends.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Note 3 – Loans Receivable
The major components of gross loans in the consolidated
balance sheets at December 31, 2011 and 2010 are as follows:
|
|
|
2011
|
|
|
|
2010
|
|
Commercial
|
|
$
|
11,061,471
|
|
|
$
|
10,874,581
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
26,102,914
|
|
|
|
31,397,922
|
|
Residential 1-4 families
|
|
|
|
|
|
|
|
|
First liens
|
|
|
37,735,618
|
|
|
|
39,509,829
|
|
Junior liens
|
|
|
8,486,594
|
|
|
|
9,537,112
|
|
Home Equity lines
|
|
|
7,639,785
|
|
|
|
10,650,365
|
|
Commercial real estate
|
|
|
50,272,002
|
|
|
|
54,455,674
|
|
Consumer
|
|
|
1,836,110
|
|
|
|
2,320,162
|
|
Total Gross Loans
|
|
|
143,134,494
|
|
|
|
158,745,645
|
|
Unearned fees and costs, net
|
|
|
89,510
|
|
|
|
79,176
|
|
Recorded Investment
|
|
$
|
143,224,004
|
|
|
$
|
158,824,821
|
|
Overdrafts reclassified to loans at December 31, 2011
and 2010 were $4,916 and $23,852, 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 the Corporation’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
coverages 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 Loan Committee of Franklin Bank’s
Board of Directors each year for approval. 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 with a response
from the 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.
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 the complex nature of loans for spec housing and
spec 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. Spec housing terms generally are held to eighteen months with allowance made for substantial curtailments.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Commercial Real Estate
: Loans are generally
underwritten based on verified income or cash flow to ensure a global coverage ratio of at least 1.25x. In general,
collateral margin is determined based on appraisal or evaluation market value not to exceed 80 percent of appraised market
value or cost, which ever 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 1.25x. 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 exceeding $35,000 and unsecured loans totaling $10,000 or more. 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.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Note 4 – Allowance for Loan Losses
Changes in the allowance for loan losses for the years ended
December 31, 2011 and 2010 are as follows:
|
|
|
2011
|
|
|
|
2010
|
|
Balance at beginning of year
|
|
$
|
3,584,180
|
|
|
$
|
3,277,559
|
|
Provision for loan losses
|
|
|
1,660,783
|
|
|
|
1,292,100
|
|
Losses charged to allowance
|
|
|
(2,143,502
|
)
|
|
|
(1,155,235
|
)
|
Recoveries credited to allowance
|
|
|
171,484
|
|
|
|
169,756
|
|
Balance at end of year
|
|
$
|
3,272,945
|
|
|
$
|
3,584,180
|
|
A breakdown of the allowance for loan losses by loan segment
for the year ended December 31, 2011 is as follows:
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
Residential 1-4 Families
|
|
|
Home
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
and Land
Development
|
|
|
First
Liens
|
|
|
Junior
Liens
|
|
|
Equity
Lines
|
|
|
Real
Estate
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Beginning Balance
|
|
$
|
138,449
|
|
|
$
|
1,086,183
|
|
|
$
|
1,065,683
|
|
|
$
|
243,526
|
|
|
$
|
217,063
|
|
|
$
|
793,308
|
|
|
$
|
39,968
|
|
|
$
|
---
|
|
|
$
|
3,584,180
|
|
Charge-offs
|
|
|
(482,651
|
)
|
|
|
(922,440
|
)
|
|
|
(311,265
|
)
|
|
|
(164,907
|
)
|
|
|
(34,745
|
)
|
|
|
(205,824
|
)
|
|
|
(21,670
|
)
|
|
|
---
|
|
|
|
(2,143,502
|
)
|
Recoveries
|
|
|
32,312
|
|
|
|
62,883
|
|
|
|
62,755
|
|
|
|
1,232
|
|
|
|
---
|
|
|
|
---
|
|
|
|
12,302
|
|
|
|
---
|
|
|
|
171,484
|
|
Provision
|
|
|
466,881
|
|
|
|
676,018
|
|
|
|
282,966
|
|
|
|
94,958
|
|
|
|
(83,736
|
)
|
|
|
237,275
|
|
|
|
(18,689
|
)
|
|
|
5,110
|
|
|
|
1,660,783
|
|
Ending Balance
|
|
$
|
154,991
|
|
|
$
|
902,644
|
|
|
$
|
1,100,139
|
|
|
$
|
174,809
|
|
|
$
|
98,582
|
|
|
$
|
824,759
|
|
|
$
|
11,911
|
|
|
$
|
5,110
|
|
|
$
|
3,272,945
|
|
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
A breakdown of the allowance for loan losses and the recorded
investment in loans by individually and collectively evaluated for impairment at December 31, 2011 is shown below.
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
Residential 1-4 Families
|
|
|
Home
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
and Land
Development
|
|
|
First
Liens
|
|
|
Junior
Liens
|
|
|
Equity
Lines
|
|
|
Real
Estate
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
2,075
|
|
|
$
|
292,323
|
|
|
$
|
413,354
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
110,820
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
818,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
|
152,916
|
|
|
|
610,321
|
|
|
|
686,785
|
|
|
|
174,809
|
|
|
|
98,582
|
|
|
|
713,939
|
|
|
|
11,911
|
|
|
|
5,110
|
|
|
|
2,454,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
154,991
|
|
|
$
|
902,644
|
|
|
$
|
1,100,139
|
|
|
$
|
174,809
|
|
|
$
|
98,582
|
|
|
$
|
824,759
|
|
|
$
|
11,911
|
|
|
$
|
5,110
|
|
|
$
|
3,272,945
|
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
Residential 1-4 Families
|
|
|
Home
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
and Land
Development
|
|
|
First
Liens
|
|
|
Junior
Liens
|
|
|
Equity
Lines
|
|
|
Real
Estate
|
|
|
Consumer
|
|
|
Total
|
|
Recorded investment in loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
136,680
|
|
|
$
|
1,624,238
|
|
|
$
|
4,852,061
|
|
|
$
|
424,795
|
|
|
$
|
131,439
|
|
|
$
|
1,533,473
|
|
|
$
|
50,694
|
|
|
$
|
8,753,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
|
10,924,791
|
|
|
|
24,478,676
|
|
|
|
32,883,557
|
|
|
|
8,061,799
|
|
|
|
7,508,346
|
|
|
|
48,738,529
|
|
|
|
1,785,416
|
|
|
|
134,381,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,061,471
|
|
|
$
|
26,102,914
|
|
|
$
|
37,735,618
|
|
|
$
|
8,486,594
|
|
|
$
|
7,639,785
|
|
|
$
|
50,272,002
|
|
|
$
|
1,836,110
|
|
|
$
|
143,134,494
|
|
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
A breakdown of the allowance for loan losses
and the recorded investment in loans by individually and collectively evaluated for impairment at December 31, 2010 is shown below.
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
Residential 1-4 Families
|
|
|
Home
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
and Land
Development
|
|
|
First
Liens
|
|
|
Junior
Liens
|
|
|
Equity
Lines
|
|
|
Real
Estate
|
|
|
Consumer
|
|
|
Total
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
1,686
|
|
|
$
|
321,053
|
|
|
$
|
193,563
|
|
|
$
|
12,020
|
|
|
$
|
11,838
|
|
|
$
|
7,232
|
|
|
$
|
18,312
|
|
|
$
|
565,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
|
136,763
|
|
|
|
765,130
|
|
|
|
872,120
|
|
|
|
231,506
|
|
|
|
205,225
|
|
|
|
786,076
|
|
|
|
21,656
|
|
|
|
3,018,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
138,449
|
|
|
$
|
1,086,183
|
|
|
$
|
1,065,683
|
|
|
$
|
243,526
|
|
|
$
|
217,063
|
|
|
$
|
793,308
|
|
|
$
|
39,968
|
|
|
$
|
3,584,180
|
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
Residential 1-4 Families
|
|
|
Home
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
and Land
Development
|
|
|
First
Liens
|
|
|
Junior
Liens
|
|
|
Equity
Lines
|
|
|
Real
Estate
|
|
|
Consumer
|
|
|
Loans, Net of Unearned Fees And Costs
|
|
Recorded investment in loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
352,156
|
|
|
$
|
3,710,600
|
|
|
$
|
3,378,390
|
|
|
$
|
196,970
|
|
|
$
|
147,978
|
|
|
$
|
272,534
|
|
|
$
|
18,312
|
|
|
$
|
8,076,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
|
10,522,425
|
|
|
|
27,687,322
|
|
|
|
36,131,439
|
|
|
|
9,340,142
|
|
|
|
10,502,387
|
|
|
|
54,183,140
|
|
|
|
2,301,850
|
|
|
|
150,668,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,874,581
|
|
|
$
|
31,397,922
|
|
|
$
|
39,509,829
|
|
|
$
|
9,537,112
|
|
|
$
|
10,650,365
|
|
|
$
|
54,455,674
|
|
|
$
|
2,320,162
|
|
|
$
|
158,745,645
|
|
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
An age analysis of past due loans as of December 31, 2011 is
as follows:
|
|
Loans
30-59 Days Past Due
|
|
|
Loans
60-89 Days Past Due
|
|
|
Loans
90
Or More Days Past Due
|
|
|
Total
Past
Due Loans
|
|
|
Current
Loans
|
|
|
Gross
Loans
|
|
|
Accruing
Loans 90 or
More Days
Past Due
|
|
|
Nonaccrual
Loans
|
|
Commercial
|
|
$
|
150,390
|
|
|
$
|
4,287
|
|
|
$
|
88,350
|
|
|
$
|
243,027
|
|
|
$
|
10,818,444
|
|
|
$
|
11,061,471
|
|
|
$
|
---
|
|
|
$
|
104,579
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
and land development
|
|
|
52,406
|
|
|
|
43,274
|
|
|
|
1,526,501
|
|
|
|
1,622,181
|
|
|
|
24,480,733
|
|
|
|
26,102,914
|
|
|
|
---
|
|
|
|
1,624,238
|
|
Residential
1-4
Families
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Liens
|
|
|
836,919
|
|
|
|
1,674,264
|
|
|
|
2,689,459
|
|
|
|
5,200,642
|
|
|
|
32,534,976
|
|
|
|
37,735,618
|
|
|
|
---
|
|
|
|
4,852,061
|
|
Junior Liens
|
|
|
208,807
|
|
|
|
---
|
|
|
|
---
|
|
|
|
208,807
|
|
|
|
8,277,787
|
|
|
|
8,486,594
|
|
|
|
---
|
|
|
|
156,490
|
|
Home Equity
lines
|
|
|
26,773
|
|
|
|
---
|
|
|
|
---
|
|
|
|
26,773
|
|
|
|
7,613,012
|
|
|
|
7,639,785
|
|
|
|
---
|
|
|
|
131,439
|
|
Commercial
Real
Estate
|
|
|
---
|
|
|
|
---
|
|
|
|
148,221
|
|
|
|
148,221
|
|
|
|
50,123,781
|
|
|
|
50,272,002
|
|
|
|
---
|
|
|
|
148,221
|
|
Consumer
|
|
|
2,103
|
|
|
|
---
|
|
|
|
---
|
|
|
|
2,103
|
|
|
|
1,834,007
|
|
|
|
1,836,110
|
|
|
|
---
|
|
|
|
50,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,277,398
|
|
|
$
|
1,721,825
|
|
|
$
|
4,452,531
|
|
|
$
|
7,451,754
|
|
|
$
|
135,682,740
|
|
|
$
|
143,134,494
|
|
|
$
|
---
|
|
|
$
|
7,067,722
|
|
An age analysis of past due loans as of December 31, 2010 is
as follows:
|
|
Loans
30-59 Days Past Due
|
|
|
Loans
60-89 Days Past Due
|
|
|
Loans
90
Or More Days Past Due
|
|
|
Total
Past
Due Loans
|
|
|
Current
Loans
|
|
|
Gross
Loans
|
|
|
Accruing
Loans 90 or
More Days
Past Due
|
|
|
Nonaccrual
Loans
|
|
Commercial
|
|
$
|
133,113
|
|
|
$
|
8,504
|
|
|
$
|
46,763
|
|
|
$
|
188,380
|
|
|
$
|
10,686,201
|
|
|
$
|
10,874,581
|
|
|
$
|
1,969
|
|
|
$
|
352,156
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
and land development
|
|
|
920,167
|
|
|
|
350,816
|
|
|
|
2,467,750
|
|
|
|
3,738,733
|
|
|
|
27,659,189
|
|
|
|
31,397,922
|
|
|
|
125,129
|
|
|
|
3,710,600
|
|
Residential
1-4
Families
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Liens
|
|
|
936,689
|
|
|
|
847,000
|
|
|
|
2,007,009
|
|
|
|
3,790,698
|
|
|
|
35,719,131
|
|
|
|
39,509,829
|
|
|
|
677,178
|
|
|
|
3,027,892
|
|
Junior Liens
|
|
|
65,130
|
|
|
|
178,710
|
|
|
|
150,250
|
|
|
|
394,090
|
|
|
|
9,143,022
|
|
|
|
9,537,112
|
|
|
|
---
|
|
|
|
172,871
|
|
Home Equity
lines
|
|
|
|
|
|
|
|
|
|
|
147,978
|
|
|
|
147,978
|
|
|
|
10,502,387
|
|
|
|
10,650,365
|
|
|
|
---
|
|
|
|
147,978
|
|
Commercial
Real
Estate
|
|
|
242,412
|
|
|
|
---
|
|
|
|
530,433
|
|
|
|
772,845
|
|
|
|
53,682,829
|
|
|
|
54,455,674
|
|
|
|
257,898
|
|
|
|
272,534
|
|
Consumer
|
|
|
34,228
|
|
|
|
2,407
|
|
|
|
---
|
|
|
|
36,635
|
|
|
|
2,283,527
|
|
|
|
2,320,162
|
|
|
|
---
|
|
|
|
18,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,331,739
|
|
|
$
|
1,387,437
|
|
|
$
|
5,350,183
|
|
|
$
|
9,069,359
|
|
|
$
|
149,676,286
|
|
|
$
|
158,745,645
|
|
|
$
|
1,062,174
|
|
|
$
|
7,702,343
|
|
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Impaired loans at December 31, 2011 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
|
|
$
|
170,080
|
|
|
$
|
36,388
|
|
|
$
|
100,292
|
|
|
$
|
2,075
|
|
|
$
|
327,051
|
|
|
$
|
593
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
and land
development
|
|
|
1,664,551
|
|
|
|
1,263,551
|
|
|
|
360,687
|
|
|
|
292,323
|
|
|
|
2,163,855
|
|
|
|
24,174
|
|
Residential
1-4 Families
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Liens
|
|
|
4,901,815
|
|
|
|
2,474,255
|
|
|
|
2,377,806
|
|
|
|
413,354
|
|
|
|
3,618,240
|
|
|
|
122,856
|
|
Junior
Liens
|
|
|
424,795
|
|
|
|
---
|
|
|
|
424,795
|
|
|
|
---
|
|
|
|
570,365
|
|
|
|
15,383
|
|
Home Equity
lines
|
|
|
163,703
|
|
|
|
---
|
|
|
|
131,439
|
|
|
|
---
|
|
|
|
177,972
|
|
|
|
3,520
|
|
Commercial
Real Estate
|
|
|
1,533,473
|
|
|
|
1,385,252
|
|
|
|
148,221
|
|
|
|
110,820
|
|
|
|
809,181
|
|
|
|
105,266
|
|
Consumer
|
|
|
142,188
|
|
|
|
---
|
|
|
|
50,694
|
|
|
|
---
|
|
|
|
56,639
|
|
|
|
653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,000,605
|
|
|
$
|
5,159,446
|
|
|
$
|
3,593,934
|
|
|
$
|
818,572
|
|
|
$
|
7,723,303
|
|
|
$
|
272,445
|
|
Impaired loans at December 31, 2010 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
|
|
$
|
493,422
|
|
|
$
|
103,649
|
|
|
$
|
248,507
|
|
|
$
|
1,686
|
|
|
$
|
216,718
|
|
|
$
|
7,256
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
and land
development
|
|
|
3,845,257
|
|
|
|
1,393,123
|
|
|
|
2,317,477
|
|
|
|
321,053
|
|
|
|
2,885,989
|
|
|
|
56,859
|
|
Residential
1-4 Families
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Liens
|
|
|
3,378,390
|
|
|
|
1,106,931
|
|
|
|
2,271,458
|
|
|
|
193,563
|
|
|
|
1,849,504
|
|
|
|
157,609
|
|
Junior Liens
|
|
|
196,970
|
|
|
|
150,250
|
|
|
|
46,721
|
|
|
|
12,020
|
|
|
|
192,966
|
|
|
|
8,233
|
|
Home Equity
lines
|
|
|
147,978
|
|
|
|
147,978
|
|
|
|
---
|
|
|
|
11,838
|
|
|
|
36,995
|
|
|
|
6,289
|
|
Commercial
Real Estate
|
|
|
272,534
|
|
|
|
272,534
|
|
|
|
---
|
|
|
|
7,232
|
|
|
|
328,458
|
|
|
|
4,636
|
|
Consumer
|
|
|
18,312
|
|
|
|
18,312
|
|
|
|
---
|
|
|
|
18,312
|
|
|
|
20,356
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,352,863
|
|
|
$
|
3,192,777
|
|
|
$
|
4,884,163
|
|
|
$
|
565,704
|
|
|
$
|
5,530,986
|
|
|
$
|
240,882
|
|
MAINSTREET BANKSHARES, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Impaired loans on nonaccrual were $7,067,722 and $7,702,343
at December 31, 2011 and December 31, 2010, respectively. The average balance for impaired loans was approximately $7,723,303 and
$5,530,986 for the years ending December 31, 2011 and December 31, 2010, respectively. Of the impaired loans at December 31, 2011,
$5,159,446 had specific reserves of $818,572 included in the allowance for loan losses and $526,948 had portions of the loan charged
off. Of the impaired loans at December 31, 2010, $3,192,777 had specific reserves of $565,704 included in the allowance for loan
losses and an additional $329,587 had portions of the loan charged off. Following is a breakdown of the interest for impaired loans
for the years ending December 31, 2011 and 2010, respectively.
|
|
|
December 2011
|
|
|
|
December 2010
|
|
Interest that would have been earned
|
|
$
|
794,174
|
|
|
$
|
523,063
|
|
Interest reflected in income
|
|
|
272,445
|
|
|
|
240,882
|
|
Lost interest
|
|
$
|
521,729
|
|
|
$
|
282,181
|
|
All interest in income on impaired loans had been received in
2011 and 2010. No additional interest was reflected in income for 2011 and 2010 on impaired loans.
At December 31, 2011 and December 31, 2010 the balance in loans
under the terms of troubled debt restructurings not included in nonaccrual loans was $1,685,658 and $374,597, respectively. These
loans did not have any additional commitments at December 31, 2011 and December 31, 2010, respectively. Loan restructurings generally
occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near-term. Consequently, a modification
that would otherwise not be considered is granted to the borrower. 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 December 31, 2011 and December 31, 2010, respectively. Troubled debt
restructurings are included in the impaired loan disclosures.
Of the $1,965,318 in troubled debt restructurings modified during
the year ended December 31, 2011, $279,660 are on nonaccrual and are also included in the nonaccrual loan disclosures. For the
year-to-date period ended December 31, 2011, below describes the troubled debt restructurings at the time of modification:
|
|
Pre-Modification
|
|
|
Post-Modification
|
|
|
|
|
Number
of Loans
|
|
|
|
Balance
|
|
|
|
Number
of Loans
|
|
|
|
Balance
|
|
Commercial
|
|
|
1
|
|
|
$
|
34,940
|
|
|
|
1
|
|
|
$
|
34,940
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Residential 1-4 families:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First liens
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Junior liens
|
|
|
3
|
|
|
|
616,249
|
|
|
|
3
|
|
|
|
272,921
|
|
Home Equity Lines
|
|
|
1
|
|
|
|
165,744
|
|
|
|
1
|
|
|
|
133,480
|
|
Commercial Real Estate
|
|
|
3
|
|
|
|
1,535,647
|
|
|
|
3
|
|
|
|
1,535,647
|
|
Consumer
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
8
|
|
|
$
|
2,352,580
|
|
|
|
8
|
|
|
$
|
1,976,988
|
|
The commercial loan restructured represents the deficiency balance
remaining after foreclosure. There were three junior lien troubled debt restructurings during 2011. One of the credits was a lot
loan where the borrower suffered financial difficulty and the lot lost value. The lot was taken into other real estate and the
deficit was put into a new note secured by a second lien on the borrower’s home. The new note is interest only for two years
to allow for time to sell the property. On another junior lien the borrower had lost his job and taken another job with significantly
less income. The rate was reduced to assist the borrower. The third credit was renewed for a borrower that had consolidated debt
and the loan to value was greater than 100%. The home equity line was renewed for six months to allow the borrower additional time
to sell property. The loan to value was greater than 100%. Commercial real estate loans consisted of three loans and two relationships.
One relationship consisted of two loans modified with a lower interest rate and a longer amortization
period where the borrower was experiencing financial difficulty due to increased vacancies and reduced cash flow. The second relationship
was a credit reworked after part of the collateral was sold. This borrower is continuing to have difficulty with making payments.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
The table below details the troubled debt restructurings that
originated in 2011 and subsequently defaulted.
|
|
2011
|
|
|
|
|
Number
of Loans
|
|
|
|
Balance
|
|
Commercial
|
|
|
---
|
|
|
$
|
---
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
---
|
|
|
|
---
|
|
Residential 1-4 families:
|
|
|
|
|
|
|
|
|
First liens
|
|
|
---
|
|
|
|
---
|
|
Junior liens
|
|
|
---
|
|
|
|
---
|
|
Home Equity Lines
|
|
|
---
|
|
|
|
---
|
|
Commercial Real Estate
|
|
|
1
|
|
|
|
148,221
|
|
Consumer
|
|
|
---
|
|
|
|
---
|
|
|
|
|
1
|
|
|
$
|
148,221
|
|
Of the credits modified during 2011, one commercial real estate
loan totaling $148,221 has defaulted during the year. The loan was individually evaluated for impairment at year end. 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.
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.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
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,
which is then increased by qualitative factors resulting in an applied loss factor of 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. For nonimpaired substandard loans, 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 substandard
loans’ qualitative factors resulting in an applied loss factor of 8%.
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
December 31, 2011 and 2010
The tables below represent the balances in the risk rating categories
at December 31, 2011 and 2010.
December 31, 2011
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 Families
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal Risk Rating Grades
|
|
Commercial
|
|
|
Construction And Land Development
|
|
|
First
Liens
|
|
|
Junior
Liens
|
|
|
Home Equity
Lines
|
|
|
Commercial Real
Estate
|
|
|
Consumer
|
|
|
Totals by Internal Risk
Rating Grade
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
9,869,976
|
|
|
$
|
21,364,943
|
|
|
$
|
30,016,743
|
|
|
$
|
7,251,555
|
|
|
$
|
7,486,498
|
|
|
$
|
43,885,034
|
|
|
$
|
1,782,754
|
|
|
$
|
121,657,503
|
|
Special Mention
|
|
|
878,058
|
|
|
|
1,067,783
|
|
|
|
492,941
|
|
|
|
---
|
|
|
|
---
|
|
|
|
1,611,592
|
|
|
|
---
|
|
|
|
4,050,374
|
|
Substandard
|
|
|
312,325
|
|
|
|
3,377,865
|
|
|
|
6,812,580
|
|
|
|
1,235,039
|
|
|
|
153,287
|
|
|
|
4,775,376
|
|
|
|
53,356
|
|
|
|
16,719,828
|
|
Doubtful
|
|
|
1,112
|
|
|
|
292,323
|
|
|
|
413,354
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
706,789
|
|
Loss
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,061,471
|
|
|
$
|
26,102,914
|
|
|
$
|
37,735,618
|
|
|
$
|
8,486,594
|
|
|
$
|
7,639,785
|
|
|
$
|
50,272,002
|
|
|
$
|
1,836,110
|
|
|
$
|
143,134,494
|
|
December 31, 2010
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 Families
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal Risk Rating Grades
|
|
Commercial
|
|
|
Construction And Land Development
|
|
|
First
Liens
|
|
|
Junior
Liens
|
|
|
Home Equity
Lines
|
|
|
Commercial Real
Estate
|
|
|
Consumer
|
|
|
Totals by Internal Risk
Rating Grade
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
10,025,118
|
|
|
$
|
23,635,182
|
|
|
$
|
30,668,053
|
|
|
$
|
6,960,663
|
|
|
$
|
9,687,608
|
|
|
$
|
48,984,057
|
|
|
$
|
2,207,956
|
|
|
$
|
132,168,637
|
|
Special Mention
|
|
|
83,794
|
|
|
|
1,582,130
|
|
|
|
1,177,611
|
|
|
|
1,430,907
|
|
|
|
314,779
|
|
|
|
1,714,482
|
|
|
|
---
|
|
|
|
6,303,703
|
|
Substandard
|
|
|
662,020
|
|
|
|
5,306,206
|
|
|
|
7,362,676
|
|
|
|
1,145,542
|
|
|
|
647,978
|
|
|
|
3,484,601
|
|
|
|
93,894
|
|
|
|
18,702,917
|
|
Doubtful
|
|
|
103,649
|
|
|
|
874,404
|
|
|
|
301,489
|
|
|
|
---
|
|
|
|
---
|
|
|
|
272,534
|
|
|
|
18,312
|
|
|
|
1,570,388
|
|
Loss
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,874,581
|
|
|
$
|
31,397,922
|
|
|
$
|
39,509,829
|
|
|
$
|
9,537,112
|
|
|
$
|
10,650,365
|
|
|
$
|
54,455,674
|
|
|
$
|
2,320,162
|
|
|
$
|
158,745,645
|
|
Note 5 – Related Party Loans
Directors, executive officers and related interests provide
the corporation with business and many are among its significant depositors and borrowers. Total amounts outstanding at December
31, 2011 and 2010 for all such loans are summarized below:
|
|
|
2011
|
|
|
|
2010
|
|
Balance at beginning of year
|
|
$
|
11,714,823
|
|
|
$
|
10,784,389
|
|
Additions
|
|
|
10,140,995
|
|
|
|
11,618,982
|
|
Payments
|
|
|
(10,691,135
|
)
|
|
|
(10,688,548
|
)
|
Balance at end of year
|
|
$
|
11,164,683
|
|
|
$
|
11,714,823
|
|
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
These loans, in the opinion of management, were made in the
ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the
time for comparable loans with persons not related to the lender and did not involve more than the normal risk of collectibility
or present other unfavorable features. Total unfunded commitments to related persons were $3,378,002 and $3,554,547 at December
31, 2011 and 2010, respectively.
Note 6 – Bank premises and Equipment
Bank premises and equipment at December 31, 2011 and 2010 are
as follows:
|
|
|
2011
|
|
|
|
2010
|
|
Buildings and land
|
|
$
|
1,306,410
|
|
|
$
|
1,306,410
|
|
Furniture and equipment
|
|
|
1,317,906
|
|
|
|
1,300,740
|
|
Computer software
|
|
|
249,773
|
|
|
|
249,773
|
|
Leasehold improvements
|
|
|
425,865
|
|
|
|
406,917
|
|
Automobiles
|
|
|
20,284
|
|
|
|
20,284
|
|
|
|
|
3,320,238
|
|
|
|
3,284,124
|
|
Accumulated depreciation and amortization
|
|
|
(1,665,742
|
)
|
|
|
(1,472,451
|
)
|
Bank premises and equipment, net
|
|
$
|
1,654,496
|
|
|
$
|
1,811,673
|
|
Depreciation expense was $209,718 and $231,716 for 2011 and
2010, respectively.
Note 7 – Deposits
The maturities of time deposits $100,000 and over and other
time deposits at December 31, 2011 and 2010 are as follows:
|
|
2011
|
|
|
|
|
Time Deposits
$100,000
and
Over
|
|
|
|
Other Time Deposits
|
|
2012
|
|
$
|
21,785,790
|
|
|
$
|
38,665,254
|
|
2013
|
|
|
8,191,446
|
|
|
|
5,449,180
|
|
2014
|
|
|
5,755,154
|
|
|
|
4,532,309
|
|
2015
|
|
|
4,144,806
|
|
|
|
6,051,865
|
|
2016
|
|
|
2,899,141
|
|
|
|
2,414,876
|
|
Total
|
|
$
|
42,776,337
|
|
|
$
|
57,113,484
|
|
|
|
2010
|
|
|
|
|
Time Deposits
$100,000
and Over
|
|
|
|
Other Time Deposits
|
|
2011
|
|
$
|
30,351,293
|
|
|
$
|
47,763,591
|
|
2012
|
|
|
6,037,160
|
|
|
|
4,726,875
|
|
2013
|
|
|
4,586,750
|
|
|
|
2,912,002
|
|
2014
|
|
|
5,797,992
|
|
|
|
4,546,561
|
|
2015
|
|
|
3,899,187
|
|
|
|
5,896,486
|
|
Total
|
|
$
|
50,672,382
|
|
|
$
|
65,845,515
|
|
Total deposit dollars from executive officers, directors, and
their related interests at December 31, 2011 and 2010 were $7,129,598 and $7,775,963, respectively. Brokered deposits totaled $6.9
million and $6.5 million at December 31, 2011 and 2010, respectively.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Note 8 – 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. There were no FHLB advances outstanding at
December 31, 2011 and December 31, 2010.
There were no overnight federal funds purchased at December
31, 2011 and December 31, 2010.
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 December 31, 2011 and December 31, 2010.
Note 9 – Repurchase Agreements
The Corporation entered into a repurchase agreement with
Citigroup Global Markets, Inc. (“CGMI”) in the amount of $7,500,000 on September 18, 2007. The repurchase date is
September 18, 2012. The interest rate was fixed at 4.22% until maturity or until it is called. Beginning September 18, 2008,
the repurchase agreement became callable by CGMI and can be called quarterly with two business days prior notice. Interest is
payable quarterly. The repurchase agreement is collateralized by agency mortgage backed securities. The interest rate
remained at 4.22% at December 31, 2011.
The Corporation entered into a repurchase agreement with Barclays
Capital on January 2, 2008 in the amount of $6,000,000. The repurchase date is January 2, 2013. The interest rate was fixed at
3.57% until maturity or until it is called. Beginning January 2, 2009 the repurchase agreement became callable and can be called
quarterly with two business days prior notice. Interest is payable quarterly. The repurchase agreement is collateralized by agency
mortgage backed securities. The interest rate remained at 3.57% at December 31, 2011.
Note 10 – Income Taxes
The Corporation files income tax returns in the U.S. federal
jurisdiction and the state of Virginia. With few exceptions, the Corporation is no longer subject to U. S. federal, state and local
income tax examinations by tax authorities for years prior to 2008.
Allocation of federal and state income taxes between current
and deferred portions is as follows:
|
|
|
2011
|
|
|
|
2010
|
|
Current expense (benefit)
|
|
$
|
(193,537
|
)
|
|
$
|
586,331
|
|
Deferred tax expense (benefit)
|
|
|
53,182
|
|
|
|
(220,501
|
)
|
Income tax expense (benefit)
|
|
$
|
(140,355
|
)
|
|
$
|
365,830
|
|
The reasons for the differences between
the statutory federal income tax rate and the effective tax rate are summarized as follows:
|
|
|
2011
|
|
|
|
2010
|
|
Computed at the expected federal statutory rate
|
|
$
|
(97,512
|
)
|
|
$
|
393,505
|
|
Nondeductible meals & entertainment
|
|
|
959
|
|
|
|
1,176
|
|
Bank owned life insurance
|
|
|
(37,436
|
)
|
|
|
(36,753
|
)
|
Tax exempt loan interest
|
|
|
(5,797
|
)
|
|
|
---
|
|
Tax exempt securities income
|
|
|
(569
|
)
|
|
|
---
|
|
Incentive stock option expense
|
|
|
---
|
|
|
|
7,902
|
|
Income Tax Expense
|
|
$
|
(140,355
|
)
|
|
$
|
365,830
|
|
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
The components of deferred tax assets and liabilities are as
follows:
|
|
|
2011
|
|
|
|
2010
|
|
Allowance for loan losses
|
|
$
|
836,020
|
|
|
$
|
1,017,167
|
|
SERP accrual
|
|
|
193,319
|
|
|
|
151,959
|
|
Interest on nonaccrual loans
|
|
|
140,694
|
|
|
|
71,457
|
|
Other
|
|
|
17,718
|
|
|
|
5,216
|
|
Unrealized losses on other real estate
|
|
|
80,179
|
|
|
|
92,769
|
|
Deferred tax assets
|
|
|
1,267,930
|
|
|
|
1,338,568
|
|
Prepaid service contracts and insurance
|
|
|
34,541
|
|
|
|
31,596
|
|
Depreciation and amortization
|
|
|
76,841
|
|
|
|
96,486
|
|
Unrealized gain on securities available-for-sale
|
|
|
178,549
|
|
|
|
29,395
|
|
Other
|
|
|
29,638
|
|
|
|
26,152
|
|
Deferred tax liabilities
|
|
|
319,569
|
|
|
|
183,629
|
|
Net deferred tax assets
|
|
$
|
948,361
|
|
|
$
|
1,154,939
|
|
Note 11 – Net Income (Loss) Per Share
The following table shows the weighted average number of shares
used in computing earnings per 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 stockholders.
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
|
|
|
|
|
Per Share
|
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, basic
|
|
|
1,713,375
|
|
|
$
|
(.09
|
)
|
|
|
1,713,375
|
|
|
$
|
.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and warrants
|
|
|
---
|
|
|
|
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, diluted
|
|
|
1,713,375
|
|
|
$
|
(.09
|
)
|
|
|
1,713,375
|
|
|
$
|
.46
|
|
In 2011 and 2010, stock options representing 161,272 shares
were not included in the calculation of earnings per share because they would have been antidilutive.
Note 12 - Employee Benefit Plans
MainStreet funds certain costs for medical benefits in amounts
determined at the discretion of management. BankShares has a 401-K plan which provides for contributions by employees and a matching
contribution by the Company. Total 401-K match expense was $72,171 and $77,043 for the years ended December 31, 2011 and 2010,
respectively.
In addition, MainStreet has supplemental retirement benefits
provided to its executive officers under a supplemental executive retirement plan (“SERP”) executed in 2007. Although
technically unfunded, a Rabbi Trust and insurance policies on the lives of the covered executives are available to finance future
benefits. The Bank is the owner and beneficiary of these policies. The expense for 2011 and 2010 was $121,647 and $114,621, respectively.
Total expected expense for 2012 is $139,806. The following were significant actuarial assumptions used to determine benefit obligations:
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
Actuarial Assumptions
|
|
|
|
|
|
|
|
|
Weighted average assumed discount rate
|
|
|
6.25
|
%
|
|
|
6.25
|
%
|
Assumed rate of annual compensation increases
|
|
|
4.50
|
|
|
|
4.50
|
|
|
|
|
December 31, 2011
|
|
|
|
December 31, 2010
|
|
Changes in Projected Benefit Obligation
|
|
|
|
|
|
|
|
|
Projected benefit obligation January 1,
|
|
$
|
397,059
|
|
|
$
|
294,046
|
|
Service cost
|
|
|
101,804
|
|
|
|
99,949
|
|
Interest cost
|
|
|
23,790
|
|
|
|
17,477
|
|
Prior (gain) loss amortized
|
|
|
(3,947
|
)
|
|
|
(2,805
|
)
|
Actuarial (gain) loss
|
|
|
(12,474
|
)
|
|
|
(11,608
|
)
|
Benefits paid
|
|
|
---
|
|
|
|
---
|
|
Projected benefit obligation, December 31
|
|
$
|
506,232
|
|
|
$
|
397,059
|
|
The SERP liability, equal to the projected benefit obligation
above, is included in other liabilities on the Corporation’s consolidated balance sheet.
Amounts Recognized in Accumulated Other
Comprehensive Income
|
|
|
|
|
|
|
|
|
Actuarial gains
|
|
$
|
62,354
|
|
|
$
|
49,880
|
|
Deferred income tax expense
|
|
|
(21,200
|
)
|
|
|
(16,959
|
)
|
|
|
$
|
41,154
|
|
|
$
|
32,921
|
|
|
|
|
|
|
|
|
|
|
Components of Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
101,804
|
|
|
$
|
99,949
|
|
Interest cost
|
|
|
23,790
|
|
|
|
17,477
|
|
Actuarial gains
|
|
|
(3,947
|
)
|
|
|
(2,805
|
)
|
Net Periodic Benefit Cost
|
|
$
|
121,647
|
|
|
$
|
114,621
|
|
|
|
|
|
|
|
|
|
|
Other Pre-tax Changes in Benefit Obligations Recognized in Other Comprehensive Income
|
|
|
|
|
|
|
|
|
Actuarial gains
|
|
$
|
(12,474
|
)
|
|
$
|
(11,608
|
)
|
|
|
|
|
|
|
|
|
|
Total Pre-tax Amounts Recognized in Net Periodic
|
|
|
|
|
|
|
|
|
Cost and Other Comprehensive Income
|
|
$
|
109,173
|
|
|
$
|
103,013
|
|
Benefit payments reflecting the appropriate expected future
service are expected to begin in 2023.
Note 13 – Leases and Commitments
The Corporation has a lease agreement for
its facility in Martinsville, Virginia. MainStreet’s executive office and operations area lease, which commenced on November
19, 2010, is for 7,900 square feet of space located at 1075 Spruce Street in Martinsville, Virginia. The lease will expire November
30, 2015.
Franklin Bank’s main office is
located at 400 Old Franklin Turnpike, Suite 100, Rocky Mount, Virginia, in a section of town known as the Rocky Mount
Marketplace. The bank leases a two-story facility with approximately 8,200 square feet of which the Bank provides permanent
financing to the owners. The lease is for a 15-year period and the expiration date of the lease is June 30, 2018. One of the
owners is also a director of Franklin Bank and both owners are shareholders of BankShares. A banking office, Westlake Branch, of
Franklin Bank opened on April 9, 2004 at 12930 Booker T. Washington Highway, Hardy, Virginia. The bank also provides
permanent financing to the owner of this facility, of which a director of the bank is a partner. The lease commenced on April
7, 2004 and will expire April 6, 2019. Franklin Bank’s 220 North banking office was located at 35 Shepherd Drive, Rocky
Mount, Virginia. A director of Franklin Bank is a partner in the ownership of the facility. The lease commenced June 1, 2007
and will expire June 1, 2012. This banking office was closed effective November 13, 2010; however, the lease remains in
effect until its maturity and has a sublease until then. Management deems these leases to be made at comparable market
values.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
In addition to the leases for office space,
the Corporation also leases various pieces of office equipment under short and long-term leases.
Total rent expense approximated $
364,000
and
$326,000 for the years ended December 31, 2011 and 2010, respectively. Future rental payments under non-cancelable
operating leases approximate $346,000
, $341,000, $341,000,
$337,000
and $301,000 for the years ended December 31, 2012, 2013, 2014, 2015 and 2016, respectively. The total
aggregate of lease payments after 2016 total approximately $524,000.
The Corporation and Franklin Bank have an employment agreement
with Larry A. Heaton, President and Chief Executive Officer. This agreement has a rolling one year term that unless terminated
90 days prior to each anniversary date, is extended automatically for an additional year. The Corporation also has an employment
contract with its Executive Vice President and Chief Financial Officer. This agreement has a three-year term and is automatically
extended by one year if not terminated at least 90 days prior to each anniversary.
MainStreet and Franklin Bank entered into change in control
agreements with its Vice Presidents effective November 14, 2007. The agreements shall remain in effect until the termination of
the officers’ employment, other than a termination of employment which results in a payment obligation, at which time it
will become null and void. The Franklin Community Bank agreements provide for a non competition obligation within a 50 mile radius
of the office where the officer was principally located during the twelve months preceding the officer’s termination.
Note 14 - Stock Options and Warrants
Each organizer/director was granted one
warrant for each share of stock that they purchased in the original common stock offering. These warrants were granted on
July 24, 2000 and totaled 96,250 warrants. Each warrant entitled the organizer/director to purchase, at anytime within ten
years from the date of grant, an additional share at $9.09 per share. The right to exercise the warrants vested for one-third
(1/3) of the shares covered by the warrants on each of the first three anniversaries of the date the first banking subsidiary
opened for business, so long as the organizer/director had served continuously as a director of MainStreet or the first
banking subsidiary from its opening until the particular anniversary and had attended a minimum of 75% of the Board of
Directors meetings during the period. The warrants were detachable and the shares with which they were originally issued as a
unit could have been separately transferred. The warrants were generally not transferable except by operation of law.
BankShares had the right, upon notice from any regulatory authority, to require immediate exercise or forfeiture of the
warrants if the exercise was reasonably necessary in order to inject additional capital into the Bank. Of these warrants,
55,916 were fully vested, 12,834 had been forfeited and 27,500 had been exercised as of January 1, 2010. All outstanding
warrants expired on July 24, 2010.
Options in the amount of 33,000, of which all are vested and
exercisable, have been granted at the then fair market value of $9.55 to a former employee and expire in June 2013.
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 on 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 3 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 provide for accelerated vesting
if there is 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 December 31, 2011, there were 136,527 options granted under this Plan of which 822
options have been exercised and 7,433 stock options forfeited.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
The Corporation has reserved 161,272 shares of authorized but
unissued shares of common stock related to these option agreements as of December 31, 2011.
There were no stock option grants during 2011 or 2010. The Black-Scholes
option-pricing model was utilized for grants prior to 2009 using the assumptions of risk-free interest rate; expected life of options;
expected volatility of the stock price and expected dividend yield.
Expected volatilities are based on the historical volatility
of MainStreet’s stock. Stock options granted in 2006 and forward are included in the calculation of compensation cost. The
risk-free rate for the period within the contractual life of the stock option was based upon the ten year Treasury rate at the
date of the grant. Expected life was calculated using the simplified method based on the average of the vesting period and contractual
life of the options.
MainStreet recorded $0 and $23,240 in stock-based compensation
during the years ended December 31, 2011 and 2010, respectively.
MainStreet did not have anyone exercise warrants or stock options
during the years ended December 31, 2011 and 2010.
Following is a status and summary of changes of stock options
and warrants during the year ended December 31, 2011:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
2011
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
Outstanding at beginning of year
|
|
|
161,272
|
|
|
$
|
12.17
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
---
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
---
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
---
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
---
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
Outstanding at year-end
|
|
|
161,272
|
|
|
$
|
12.17
|
|
|
|
3.67
|
|
|
$
|
---
|
|
Exercisable at year-end
|
|
|
161,272
|
|
|
$
|
12.17
|
|
|
|
3.67
|
|
|
$
|
---
|
|
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 December 31, 2011. This amount changes based on changes in the market value of the Corporation’s stock.
As of December 31, 2011 and 2010, there was no unrecognized
compensation cost related to nonvested share-based compensation arrangements granted under the Plan. The original unrecognized
compensation cost was recognized over a weighted-average period of 3.0 years.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
As of December 31, 2011, stock options and warrants outstanding
and exercisable are summarized as follows:
|
|
|
Stock Options
|
|
|
|
|
|
Range of
|
|
|
and Warrants
|
|
|
|
Remaining
|
|
Exercise
|
|
|
Outstanding
|
|
|
|
Contractual
|
|
Prices
|
|
|
And Exercisable
|
|
|
|
Life
|
|
9.55
|
|
|
33,000
|
|
|
|
1.50
|
|
12.09
|
|
|
85,147
|
|
|
|
3.90
|
|
12.09
|
|
|
17,299
|
|
|
|
4.00
|
|
15.00
|
|
|
13,260
|
|
|
|
5.95
|
|
16.75
|
|
|
12,566
|
|
|
|
5.00
|
|
$9.55 - $16.75
|
|
|
161,272
|
|
|
|
|
|
Note 15 – Regulatory Requirements and Restrictions
Under the applicable federal laws, the Comptroller of the Currency
restricts the total dividend payments of any calendar year, without prior approval, to the net profits of that year as defined,
combined with retained net profits for the two preceding years. As of December 31, 2011, the aggregate amount of unrestricted funds
according to the regulation that could be transferred from the Corporation’s bank subsidiary to the Parent Corporation for
payment of dividends to shareholders without prior regulatory approval, totaled $644,545 or .32% of the total consolidated assets;
however, on April 16, 2009, Franklin Bank entered into a formal agreement with the Office of the Comptroller of the Currency that
restricts dividend payments to the holding company.
Franklin Bank is a member of the Federal Reserve System; however,
Franklin Bank processes daily through a correspondent bank, Community Bankers’ Bank. As of December 31, 2011, Franklin Bank
was required to maintain a reserve balance of $250,000 with Community Bankers’ Bank.
B
ankShares
and Franklin Bank are subject to various regulatory capital requirements administered by the federal and state
banking
agencies. 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.
Quantitative measures established by regulations to ensure capital adequacy require BankShares and Franklin Bank to maintain
minimum capital ratios. MainStreet and Franklin Bank were well-capitalized at December 31, 2011 and 2010. On June 17, 2009,
MainStreet entered into an agreement with the Federal Reserve Bank of Richmond which among other things restricted dividend
payments.
Actual capital amounts and ratios for MainStreet at December
31, 2011 and 2010 are presented in the following table:
|
|
|
|
|
For Capital
|
|
|
|
|
|
|
Actual
|
|
|
Adequacy
|
|
|
To Be Well Capitalized
|
|
As of December 31, 2011
|
|
|
Amount
|
|
|
|
Ratio
|
|
|
|
Amount
|
|
|
|
Ratio
|
|
|
|
Amount
|
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk weighted assets)
|
|
$
|
23,680,761
|
|
|
|
16.36
|
%
|
|
$
|
11,582,000
|
|
|
|
8.00
|
%
|
|
$
|
14,477,000
|
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital (to risk weighted assets)
|
|
|
21,853,040
|
|
|
|
15.09
|
|
|
|
5,791,000
|
|
|
|
4.00
|
|
|
|
8,686,000
|
|
|
|
6.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital (to average assets)
|
|
|
21,853,040
|
|
|
|
10.68
|
|
|
|
8,183,000
|
|
|
|
4.00
|
|
|
|
10,229,000
|
|
|
|
5.00
|
|
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
|
|
|
|
|
For Capital
|
|
|
|
|
|
|
Actual
|
|
|
Adequacy
|
|
|
To Be Well Capitalized
|
|
As
of December 31, 2010
|
|
|
Amount
|
|
|
|
Ratio
|
|
|
|
Amount
|
|
|
|
Ratio
|
|
|
|
Amount
|
|
|
|
Ratio
|
|
Total capital (to
risk weighted assets)
|
|
$
|
23,971,123
|
|
|
|
15.35
|
%
|
|
$
|
12,490,000
|
|
|
|
8.00
|
%
|
|
$
|
15,612,000
|
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital (to risk weighted
assets)
|
|
|
21,999,485
|
|
|
|
14.09
|
|
|
|
6,245,000
|
|
|
|
4.00
|
|
|
|
9,367,000
|
|
|
|
6.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital (to average assets)
|
|
|
21,999,485
|
|
|
|
9.99
|
|
|
|
8,805,000
|
|
|
|
4.00
|
|
|
|
11,006,000
|
|
|
|
5.00
|
|
Actual capital amounts and ratios for Franklin Bank at December
31, 2011 and 2010 are presented in the following table:
|
|
|
|
|
For Capital
|
|
|
|
|
|
|
Actual
|
|
|
Adequacy
|
|
|
To Be Well Capitalized
|
|
As
of December 31, 2011
|
|
|
Amount
|
|
|
|
Ratio
|
|
|
|
Amount
|
|
|
|
Ratio
|
|
|
|
Amount
|
|
|
|
Ratio
|
|
Total
capital (to risk weighted assets)
|
|
$
|
22,654,644
|
|
|
|
15.71
|
%
|
|
$
|
11,554,000
|
|
|
|
8.00
|
%
|
|
$
|
14,442,000
|
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital
(to risk weighted assets)
|
|
|
20,833,548
|
|
|
|
14.44
|
|
|
|
5,769,000
|
|
|
|
4.00
|
|
|
|
8,654,000
|
|
|
|
6.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital
(to average assets)
|
|
|
20,833,548
|
|
|
|
10.21
|
|
|
|
8,162,000
|
|
|
|
4.00
|
|
|
|
10,202,000
|
|
|
|
5.00
|
|
|
|
|
Actual
|
|
|
|
For
Capital Adequacy
|
|
|
|
To
Be Well Capitalized Under Prompt
Corrective Action
Provisions
|
|
As
of December 31, 2010
|
|
|
Amount
|
|
|
|
Ratio
|
|
|
|
Amount
|
|
|
|
Ratio
|
|
|
|
Amount
|
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk weighted assets)
|
|
$
|
22,993,883
|
|
|
|
14.77
|
%
|
|
$
|
12,451,000
|
|
|
|
8.00
|
%
|
|
$
|
15,564,000
|
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital (to risk weighted assets)
|
|
|
21,028,170
|
|
|
|
13.51
|
|
|
|
6,226,000
|
|
|
|
4.00
|
|
|
|
9,338,000
|
|
|
|
6.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital (to average assets)
|
|
|
21,028,170
|
|
|
|
9.57
|
|
|
|
8,787,000
|
|
|
|
4.00
|
|
|
|
10,983,000
|
|
|
|
5.00
|
|
Note 16 – Parent Company Financial Information
CONDENSED BALANCE SHEETS
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
158,105
|
|
|
$
|
125,938
|
|
Interest-bearing deposits in other banks
|
|
|
428,503
|
|
|
|
480,346
|
|
Furniture, fixtures and equipment, net
|
|
|
95,441
|
|
|
|
99,014
|
|
Other assets
|
|
|
41,527
|
|
|
|
38,183
|
|
Investment in subsidiaries
|
|
|
21,590,119
|
|
|
|
21,438,802
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
22,313,695
|
|
|
$
|
22,182,283
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest payable and other liabilities
|
|
$
|
72,906
|
|
|
$
|
92,816
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shareholders’ equity
|
|
|
22,240,789
|
|
|
|
22,089,467
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders’ Equity
|
|
$
|
22,313,695
|
|
|
$
|
22,182,283
|
|
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
CONDENSED STATEMENTS OF OPERATIONS
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
Income
|
|
|
|
|
|
|
|
|
Equity (loss) in undistributed income of subsidiaries
|
|
$
|
(146,450
|
)
|
|
$
|
813,360
|
|
Interest income
|
|
|
2,018
|
|
|
|
4,929
|
|
Other income
|
|
|
158
|
|
|
|
(1,107
|
)
|
Affiliate fee income
|
|
|
1,543,560
|
|
|
|
1,270,356
|
|
Total Income
|
|
|
1,399,286
|
|
|
|
2,087,538
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
1,016,713
|
|
|
|
794,697
|
|
Occupancy and equipment expense
|
|
|
143,394
|
|
|
|
117,530
|
|
Professional fees
|
|
|
179,613
|
|
|
|
180,131
|
|
Outside processing
|
|
|
83,145
|
|
|
|
84,559
|
|
Other expenses
|
|
|
122,683
|
|
|
|
118,300
|
|
Total Expenses
|
|
|
1,545,548
|
|
|
|
1,295,217
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Before Tax
|
|
|
(146,262
|
)
|
|
|
792,321
|
|
Income Tax Expense
|
|
|
183
|
|
|
|
783
|
|
Net Income (Loss)
|
|
$
|
(146,445
|
)
|
|
$
|
791,538
|
|
CONDENSED STATEMENTS OF CASH FLOWS
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(146,445
|
)
|
|
$
|
791,538
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
42,294
|
|
|
|
36,513
|
|
Stock option expense
|
|
|
---
|
|
|
|
23,240
|
|
Equity (loss) in undistributed income of subsidiaries
|
|
|
146,450
|
|
|
|
(813,360
|
)
|
Increase in other assets
|
|
|
(3,344
|
)
|
|
|
(3,668
|
)
|
Increase (decrease) in other liabilities
|
|
|
(19,910
|
)
|
|
|
27,709
|
|
Net Cash Provided by Operating Activities
|
|
|
19,045
|
|
|
|
61,972
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in interest-bearing deposits
|
|
|
51,843
|
|
|
|
(4,928
|
)
|
Purchases of furniture and equipment
|
|
|
(38,721
|
)
|
|
|
(47,032
|
)
|
Net Cash Provided By (Used) in Investing Activities
|
|
|
13,122
|
|
|
|
(51,960
|
)
|
Net Increase (Decrease) in Cash
|
|
|
32,167
|
|
|
|
10,012
|
|
Cash at Beginning of Year
|
|
|
125,938
|
|
|
|
115,926
|
|
Cash at End of Year
|
|
$
|
158,105
|
|
|
$
|
125,938
|
|
Note 17 – 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.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
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 December
31, 2011 and 2010, outstanding commitments to extend credit including letters of credit were $18,556,714 and $19,487,404 respectively.
There are no commitments to extend credit on impaired loans.
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 18 – Concentrations of Credit Risk
MainStreet monitors its loan portfolio by the segments
found in Note 3 of these financial statements. In addition, we look at the trends of significant industries within the
segments. Loan segments are categorized primarily based upon regulatory guidelines which follows the underlying collateral.
For the most part, MainStreet’s 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
regional industries within the region including pre-built housing, real estate development, agricultural, and resort and
leisure services. In addition, the ultimate collectibility of the loan portfolio is susceptible to changes in the market
condition of the region. The real estate market in our area is also affected by the national economy because a portion of our
real estate lending is dependent on buyers who move into our region. There are three industry concentrations that are broken
out in the table below by our loan segments.
|
|
December 31, 2011
|
|
|
|
|
|
|
Loans for
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction of
|
|
|
Loans for
|
|
|
|
|
|
|
Loans for
|
|
|
Heavy & Civil
|
|
|
Real Estate
|
|
|
|
|
|
|
Construction
|
|
|
Engineering
|
|
|
Including
|
|
|
|
|
|
|
of Buildings
|
|
|
Buildings
|
|
|
Construction
|
|
|
Total
|
|
Commercial
|
|
$
|
1,253,591
|
|
|
$
|
483,320
|
|
|
$
|
1,498,370
|
|
|
$
|
3,235,281
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
2,492,124
|
|
|
|
5,301,322
|
|
|
|
3,623,938
|
|
|
|
11,417,384
|
|
Residential, 1-4 families
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Liens
|
|
|
5,496,770
|
|
|
|
1,301,934
|
|
|
|
6,179,892
|
|
|
|
12,978,596
|
|
Junior Liens
|
|
|
577,046
|
|
|
|
124,413
|
|
|
|
763,513
|
|
|
|
1,464,972
|
|
Home Equity Lines
|
|
|
9,845
|
|
|
|
---
|
|
|
|
---
|
|
|
|
9,845
|
|
Commercial real estate
|
|
|
3,995,367
|
|
|
|
315,979
|
|
|
|
23,396,327
|
|
|
|
27,707,673
|
|
Consumer
|
|
|
10,602
|
|
|
|
---
|
|
|
|
---
|
|
|
|
10,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,835,345
|
|
|
$
|
7,526,968
|
|
|
$
|
35,462,040
|
|
|
$
|
56,824,353
|
|
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
|
December 31 2010
|
|
|
|
|
|
|
Loans for
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction of
|
|
|
Loans for
|
|
|
|
|
|
|
Loans for
|
|
|
Heavy & Civil
|
|
|
Real Estate
|
|
|
|
|
|
|
Construction
|
|
|
Engineering
|
|
|
Including
|
|
|
|
|
|
|
of Buildings
|
|
|
Buildings
|
|
|
Construction
|
|
|
Total
|
|
Commercial
|
|
$
|
443,013
|
|
|
$
|
614,635
|
|
|
$
|
812,106
|
|
|
$
|
1,869,754
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
4,387,748
|
|
|
|
6,710,224
|
|
|
|
3,955,180
|
|
|
|
15,053,152
|
|
Residential, 1-4 families
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Liens
|
|
|
6,835,289
|
|
|
|
1,331,119
|
|
|
|
7,606,687
|
|
|
|
15,773,095
|
|
Junior Liens
|
|
|
1,164,589
|
|
|
|
281,650
|
|
|
|
1,175,448
|
|
|
|
2,621,687
|
|
Home Equity Lines
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Commercial real estate
|
|
|
5,290,754
|
|
|
|
1,223,308
|
|
|
|
21,838,326
|
|
|
|
28,352,388
|
|
Consumer
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,121,393
|
|
|
$
|
10,160,936
|
|
|
$
|
35,387,747
|
|
|
$
|
63,670,076
|
|
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.
|
|
December 31, 2011
|
|
|
|
Total Concentration
|
|
|
Concentrations Included Above
|
|
|
Net Addition to Concentrations
|
|
Acquisition & development
|
|
$
|
498,228
|
|
|
$
|
223,228
|
|
|
$
|
275,000
|
|
Speculative lot loans
|
|
|
7,267,049
|
|
|
|
3,223,647
|
|
|
|
4,043,402
|
|
Speculative single-family housing construction
|
|
|
6,200,835
|
|
|
|
4,194,489
|
|
|
|
2,006,346
|
|
|
|
December 31, 2010
|
|
|
|
Total Concentration
|
|
|
Concentrations Included Above
|
|
|
Net Addition to Concentrations
|
|
Acquisition & development
|
|
$
|
202,628
|
|
|
$
|
124,899
|
|
|
$
|
77,729
|
|
Speculative lot loans
|
|
|
11,041,891
|
|
|
|
7,696,803
|
|
|
|
3,345,088
|
|
Speculative single-family housing construction
|
|
|
3,073,016
|
|
|
|
2,836,216
|
|
|
|
236,800
|
|
MainStreet has established policies related
to the credit process and collateral in loan originations. Loans to purchase real 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 cash flow, collateral and the evaluation of the creditworthiness
of the individual borrower or project based on pertinent financial information and the amount to be financed.
MainStreet has established policies for correspondent
bank risk to include cash and due from accounts and overnight federal funds sold. Correspondents are monitored on a quarterly basis,
and more frequently if warranted, on several financial and credit ratios. Total exposure is evaluated.
Note 19 – Fair Value Measurements
Generally accepted accounting principles specifies 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
December 31, 2011 and 2010
|
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 financial 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
and liabilities measured at fair value on a recurring basis as of December 31, 2011:
|
|
|
|
|
Fair Value Measurements at December 31, 2011 Using
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
Balance as of
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
December 31,
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
2011
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. government
sponsored agencies
|
|
$
|
2,810,782
|
|
|
$
|
---
|
|
|
$
|
2,810,782
|
|
|
$
|
---
|
|
Mortgage backed securities
|
|
|
17,255,190
|
|
|
|
---
|
|
|
|
17,255,190
|
|
|
|
---
|
|
States and
political subdivisions
|
|
|
1,133,912
|
|
|
|
---
|
|
|
|
1,133,912
|
|
|
|
---
|
|
Total
available-for-sale securities
|
|
$
|
21,199,884
|
|
|
$
|
---
|
|
|
$
|
21,199,884
|
|
|
$
|
---
|
|
Total assets at fair value
|
|
$
|
21,199,884
|
|
|
$
|
---
|
|
|
$
|
21,199,884
|
|
|
$
|
---
|
|
The following table presents the balances of financial
assets and liabilities measured at fair value on a recurring basis as of December 31, 2010:
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
|
|
|
|
|
Fair Value Measurements at December 31, 2010 Using
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
Balance as of
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
December 31,
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
2010
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. government sponsored agencies
|
|
$
|
3,366,207
|
|
|
$
|
---
|
|
|
$
|
3,366,207
|
|
|
$
|
---
|
|
Mortgage backed securities
|
|
|
23,688,320
|
|
|
|
---
|
|
|
|
23,688,320
|
|
|
|
---
|
|
Total available-for-sale securities
|
|
$
|
27,054,527
|
|
|
$
|
---
|
|
|
$
|
27,054,527
|
|
|
$
|
---
|
|
Total assets at fair value
|
|
$
|
27,054,527
|
|
|
$
|
---
|
|
|
$
|
27,054,527
|
|
|
$
|
---
|
|
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:
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 an income or market valuation approach based on an appraisal conducted by an independent,
licensed appraiser outside of MainStreet using observable market data (Level 2). However, if the collateral is a house or
building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair
value is considered Level 3. 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 an
observable market price or a current appraised value, the Corporation records the OREO as nonrecurring Level 2. When the
appraised value is not available or management determines the fair value of the collateral is further impaired below the
appraised value and there is no observable market price, the Corporation records the OREO as nonrecurring Level 3.
The following table summarizes MainStreet’s assets that
were measured at fair value on a nonrecurring basis during the period.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
|
|
|
|
|
Carrying value at December 31, 2011
|
|
|
|
|
|
|
Quoted Prices in Active Markets
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
Balance as of
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
December 31,
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
2011
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Impaired loans, net
|
|
$
|
4,867,822
|
|
|
$
|
---
|
|
|
$
|
4,218,384
|
|
|
$
|
649,438
|
|
Other real estate owned, net
|
|
|
3,572,518
|
|
|
|
---
|
|
|
|
1,596,190
|
|
|
|
1,976,328
|
|
Total assets at fair value
|
|
$
|
8,440,340
|
|
|
$
|
---
|
|
|
$
|
5,814,574
|
|
|
$
|
2,625,766
|
|
The following table summarizes MainStreet’s financial
assets that were measured at fair value on a nonrecurring basis during the period.
|
|
|
|
|
Carrying value at December 31, 2010
|
|
|
|
|
|
|
Quoted Prices in Active Markets
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
Balance as of
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
December 31,
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
2010
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Impaired loans, net
|
|
$
|
2,956,660
|
|
|
$
|
---
|
|
|
$
|
2,433,825
|
|
|
$
|
522,835
|
|
Other real estate owned, net
|
|
|
4,152,667
|
|
|
|
---
|
|
|
|
3,054,695
|
|
|
|
1,097,972
|
|
Total assets at fair value
|
|
$
|
7,109,327
|
|
|
$
|
---
|
|
|
$
|
5,488,520
|
|
|
$
|
1,620,807
|
|
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
values 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.
(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 appreciable entities.
(d)
Loans
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.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2010
(e)
Accrued Interest
The carrying amounts of accrued interest
approximate fair value.
(f)
Bank Owned Life Insurance
The carrying amount is a reasonable estimate
of fair value.
(g)
Deposits
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.
(h)
Repurchase Agreements
The fair value of repurchase agreements is estimated
using a discounted cash flow calculation that applies contracted interest rates being paid on the debt to the current market interest
rate of similar debt.
(i)
Short-term Borrowings
The carrying amount is a reasonable estimate
of fair value.
(j)
Long-term Borrowings
The fair value of long-term borrowings is estimated
using a discounted cash flow calculation that applies contracted interest rates being paid on the debt to the current market interest
rate of similar debt.
(k)
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 estimated fair values of financial instruments at December
31, 2011 are as follows:
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL ASSETS:
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
2,767,395
|
|
|
$
|
2,767,395
|
|
Interest-bearing deposits in other banks
|
|
|
17,091,438
|
|
|
|
17,091,438
|
|
Federal funds sold
|
|
|
10,612,680
|
|
|
|
10,612,680
|
|
Securities available-for-sale
|
|
|
21,199,884
|
|
|
|
21,199,884
|
|
Restricted equity securities
|
|
|
830,000
|
|
|
|
830,000
|
|
Loans, net
|
|
|
139,951,059
|
|
|
|
138,716,777
|
|
Accrued interest receivable
|
|
|
547,905
|
|
|
|
547,905
|
|
Bank owned life insurance
|
|
|
3,049,696
|
|
|
|
3,049,696
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL LIABILITIES:
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non-interest bearing demand deposits
|
|
$
|
20,975,660
|
|
|
$
|
20,975,660
|
|
Interest bearing deposits
|
|
|
146,107,182
|
|
|
|
146,767,245
|
|
Repurchase agreements
|
|
|
13,500,000
|
|
|
|
13,874,422
|
|
Accrued interest payable
|
|
|
225,611
|
|
|
|
225,611
|
|
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
The estimated fair values of financial instruments at December
31, 2010 are as follows:
|
|
|
Carrying Value
|
|
|
|
Fair Value
|
|
FINANCIAL ASSETS:
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
2,238,381
|
|
|
$
|
2,238,381
|
|
Interest-bearing deposits in other banks
|
|
|
8,866,966
|
|
|
|
8,866,966
|
|
Federal funds sold
|
|
|
7,660,000
|
|
|
|
7,660,000
|
|
Securities available-for-sale
|
|
|
27,054,527
|
|
|
|
27,054,527
|
|
Restricted equity securities
|
|
|
996,600
|
|
|
|
996,600
|
|
Loans, net
|
|
|
155,240,641
|
|
|
|
155,042,619
|
|
Accrued interest receivable
|
|
|
725,261
|
|
|
|
725,261
|
|
Bank owned life insurance
|
|
|
2,939,590
|
|
|
|
2,939,590
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL LIABILITIES:
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non-interest bearing demand deposits
|
|
$
|
19,357,378
|
|
|
$
|
19,357,378
|
|
Interest bearing deposits
|
|
|
158,516,586
|
|
|
|
159,302,665
|
|
Repurchase agreements
|
|
|
13,500,000
|
|
|
|
14,422,050
|
|
Accrued interest payable
|
|
|
339,396
|
|
|
|
339,396
|
|
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.
Note 20 – Contingencies and Other Matters
The Corporation currently is not involved in any litigation
matters.
Note 21 - 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 issued.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Note 22 – 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 is intended to demonstrate Franklin Bank’s commitment to review/enhance
certain aspects of various policies. The Agreement describes Franklin Bank’s commitment to enhance practices related to credit
administration and liquidity. While Franklin Bank expects to achieve full compliance and submitted the responses required in the
respective time frames, we are required to show sustained performance with various requirements under the Agreement and compliance
with certain obligations are dependent, in part, on factors that we may not control. Therefore, we cannot assume that we will be
able to achieve full compliance.
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. The MOU restricted MainStreet from declaring or paying any dividends without the prior written approval
of the Federal Reserve. Under the MOU, MainStreet cannot incur or guarantee any debt or redeem or purchase any shares of its common
stock without the prior written consent of the Federal Reserve. 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 respecting compliance with
certain laws and regulations as follows. The bank holding company is required to comply with the restrictions on indemnification
and severance payments of section 18(k) of the FDI Act (12 U.S.C. 1828(k)) and Part 359 of the Federal Deposit Insurance Corporation’s
regulations (12 C.F.R. Part 359). Also, the Corporation may not appoint any individual to the board or employ or change the responsibilities
of any individual as senior executive officer if the Federal Reserve notifies the Corporation of disapproval within the required
time limits. MainStreet has not paid or declared any dividends or incurred or guaranteed any debt. Management believes the holding
company is appropriately using its financial and managerial resources to assist Franklin Bank to function in a safe and sound manner.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
December 31, 2011 and 2010
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
MainStreet’s principal executive officer
and principal financial officer have reviewed MainStreet’s disclosure controls and procedures (as defined in 204.13a-15(e)
and 204.15d-15(e)) as of the end of the period covered by this annual report and based on their evaluation believe that MainStreet’s
disclosure controls and procedures are effective. There have not been any changes in our internal control over financial reporting
that occurred during the period that has materially affected, or is reasonably likely to materially affect, internal control over
financial reporting.
Management’s Report on Internal Control Over Financial
Reporting
To the Stockholders:
Management is responsible for the preparation and fair presentation
of the financial statements included in this annual report. The financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America and reflect management’s judgments and estimates concerning
effects of events and transactions that are accounted for or disclosed.
Management is also responsible for establishing and maintaining
adequate internal control over financial reporting. The Corporation’s internal control over financial reporting includes
those policies and procedures that pertain to the Corporation’s ability to record, process, summarize and report reliable
financial data. Management recognizes that there are inherent limitations in the effectiveness of any internal control over financial
reporting, including the possibility of human error and the circumvention or overriding of internal control. Accordingly, even
effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation.
Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.
In order to ensure that the Company’s internal control
over financial reporting is effective, management regularly assesses such controls and did so most recently for its financial reporting
as of December 31, 2011. This assessment was based on criteria for effective internal control over financial reporting described
in
Internal Control Integrated
Framework
issued by the Committee of Sponsoring Organizations (COSO) of the Treadway
Commission. Based on this assessment, management has concluded that the internal control over financial reporting was effective
as of December 31, 2011.
This annual report does not include an attestation report of
the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report
was not subject to attestation by the Company’s registered public accounting firm pursuant to the Securities and Exchange
Commission final rule effective September 21, 2010 providing this requirement shall not apply with respect to any audit report
prepared for an issuer that is neither an accelerated filer nor a large accelerated filer as defined in Rule 12b-2 under the Securities
Exchange Act of 1934.
Item 9B.
Other Information
None.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
December 31, 2011 and 2010
PART III
Item 10. Directors, Executive
Officers and Corporate Governance
Directors
of the Registrant
MainStreet’s Board of Directors are divided into three
classes that serve staggered three-year terms. The members of one class are elected at each annual meeting of shareholders and
hold office until the third annual meeting following their election or until successors are elected and qualified. The term of
the Class C Directors expires in 2013, the term of the Class A Directors expires in 2011, and the term of the Class B Directors
expires in 2012. The following tables set forth material information about MainStreet’s current executive officers and directors.
Name (Age)
|
|
Offices and Positions Held
|
|
|
|
|
|
Class A Directors – Term Expires 2014
|
|
|
|
Larry A. Heaton (54)
|
|
Director since October 2002
|
|
|
President/CEO of MainStreet BankShares, Inc. since
|
|
|
May 2006. President/CEO/Chairman of Franklin Bank since October
2002.
|
|
|
|
Michael A. Turner (58)
|
|
Director since December 2002
|
|
|
|
|
|
Class B Directors – Term Expires 2012
|
|
|
|
Joseph
F. Clark (49)
|
|
Director since July 2001
|
|
|
|
Charles L. Dalton (48)
|
|
Director since July 2001
|
|
|
|
Joel R. Shepherd (48)
|
|
Director since December 2002
|
|
|
|
|
|
Class C Directors – Terms Expires 2013
|
|
|
|
William L. Cooper, III (58)
|
|
Director since February 2007
|
|
|
|
John M. Deekens (64)
|
|
Director since July 2001
|
|
|
|
Danny M. Perdue (66)
|
|
Director since December 2002
|
Joseph F. Clark is President of Clark Brothers Company, Inc.,
in Stuart, Virginia, of which he is a partial owner. Mr. Clark is also a member and partial owner of CBC, LLC, a management business.
He is a member and partial owner of Highland Park, LLC and Fairview Group, LLC. He is a member and owner of Laurel Creek, LLC and
a member and manager of Fulton Farms, LLC. He is a member of the Stuart United Methodist Church and a past member of the Stuart
Rotary Club. Mr. Clark began ownership of these companies in 1986 which are general contracting, land management, and rental property
companies. He brings entrepreneurial and business building skills to BankShares along with finance and management skills. Mr. Clark
was a board director for First National Bank of Stuart for 5 years until its sale to BB&T which brings financial institution
governance experience to BankShares.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
December 31, 2011 and 2010
William L. Cooper, III is partial owner and President of Cooper
Classics, Inc. He is CEO and partial owner of CWP, Inc. He is a managing partner of Grassy Hill Investment. Mr. Cooper is a former
trustee of North Cross School and is Vice President of the Rocky Mount Historic Foundation. He is a member of the finance committee
of Rocky Mount Methodist Church. Mr. Cooper brings financial, managerial, business building, and corporate governance skills and
experience to BankShares. He has extensive “bank board” experience. He was on the board of MainStreet Financial Corporation
from 1994 – 1999, a public bank holding company. He was on the Corporate Virginia State BB&T board from 1999 –
2007. Mr. Cooper is active in the community in which he lives and which Franklin Bank serves. He has been on many committees and
boards including the Heart Fund and the YMCA. He was chairman of the deacon board of his church for 20 years.
C. Laine Dalton is Vice President, General Manager and partial
owner of Dalton Insurance Agency, Inc. in Stuart, Virginia. He is a Member/Partial owner Stuart Laurel Court, LLC. He has been
a past president of the Stuart Rotary Club. He is a member of the Patrick County Chamber of Commerce where he has been a past
President. He is a member of the Professional Agents of Virginia and is active in the Patrick County American Legion Baseball.
Mr. Dalton brings financial services/insurance industry and management experience to BankShares demonstrated by the success of
his insurance agency. He has been active in his community and through these services, he contributes experience to BankShares’
board.
J. Mac Deekens is a retired General Manager for Stuart Forest
Products in Stuart, Virginia. In addition he held the position of Plant Manager for Stuart Forest Products. Prior to that, he was
the Quality Control Manager for Hooker Furniture Corporation in Martinsville, Virginia. He is a past member of the Stuart Rotary
Club where he held various offices. He served as Mayor of Stuart for eight years and was a member of the Town council for an additional
four years. He currently serves as chairman of the finance committee of the church he attends and is a member. Mr. Deekens brings
managerial and financial skills to the Board of Directors. He also served on a Bi-County Economic Commission for four years and
held various offices in the Stuart Rotary Club. Through his community services, he also contributes this experience to BankShares’
Board.
Larry A. Heaton was appointed President and CEO of MainStreet
BankShares, Inc. where he also serves as a director, upon the retirement of Cecil R. McCullar in May 2006. Mr. Heaton is also the
President, CEO and Chairman of Franklin Community Bank, N.A. He is President, Treasurer, and Director of MainStreet RealEstate,
Inc. From October 2000 until September 2002, Mr. Heaton was a consultant for MainStreet BankShares, Inc. working on the study,
application and organization of Franklin Community Bank, N.A. Prior to that, he was Senior Vice President/Regional Retail Banking
Manager with BB&T from July 1999 through April 2000. Prior to that position, he served as President and CEO and Director of
the Bank of Ferrum from June 1991 to July 1999. He served as Senior Commercial Loan Officer at Piedmont Trust Bank (affiliate bank
of Bank of Ferrum) from 1983 to 1991, and prior to that, in various capacities with Piedmont Trust Bank. Mr. Heaton serves as a
director of the Franklin County YMCA and the Blue Ridge Foundation. He is a Board member of Franklin Carillion Memorial Hospital,
a Board member of the Virginia Bankers Association, and a former Board member of the Virginia Association of Community Banks and
currently serves on the Franklin County Economic Development Advisory Committee. He is also a member of the Rocky Mount Rotary
Club. Through his 33 years of banking experience, Mr. Heaton has a great knowledge and perspective of the banking and financial
services industry which brings financial, risk management, governance, and other banking attributes to BankShares. He is also very
active in the community in which Franklin Bank operates.
Danny M. Perdue is currently the owner of
the Franklin Shopping Center. He is a partial owner and President of Redwood Minute Markets, Inc. He is a partial owner of First
Minute Markets, LLC, FFH Operations, Inc. and FFH Investors, LLC. He is also an owner of Redwood Petroleum Products, Ferrum Petroleum
Products, Franklin Petroleum Products, 604 Petroleum Products and Penhook Petroleum Products. He is Vice President of Perdue Properties,
Inc. Mr. Perdue is also a director of Franklin Community Bank, N.A. He is currently active in the Rocky Mount Rotary Club and is
on the Board of Trustees of Ferrum College. He is a past member and President of the Rocky Mount Chamber of Commerce and the United
Way in Franklin County. He was a founding member of the Burnt Chimney Volunteer Fire Department. Mr. Perdue brings entrepreneurial,
business management and financial skills to BankShares as demonstrated through the successful businesses that he owns and manages.
He also served as a board director for The Bank of Ferrum, a community bank in Franklin County from 1994 – 1999 and an advisory
board member for BB&T in Franklin County from 1999 – 2001 which brings financial institution governance to BankShares’
Board. Mr. Perdue is very active in the community that Franklin Bank serves and brings that experience to the board.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
December 31, 2011 and 2010
Joel R. Shepherd is a partial owner and President
of Virginia Home Furnishings, Inc., Blue Ridge Antique Center, Inc., and 220 Self Storage, Inc. He is also a partial owner of
Shepherd Properties, LLC, Orient Bay, LLC, Wirtz Properties, LLC, Lake Marina, LLC, Kyle Avenue, LLC, FFH Operations, Inc., FFH
Investors, LLC, the Franklin LLC, Wirtz Lot 2, LLC and Wirtz Corner, LLC. Prior to developing his current businesses, Mr. Shepherd
served from 1986 to 1993 as a Vice President and Portfolio Manager in the Funds Management Division of Dominion Bankshares, Inc.
(acquired by First Union). Mr. Shepherd is also a director of Franklin Community Bank, N.A. He is also active in the United Way
of Franklin County. Mr. Shepherd brings entrepreneurial, business building, finance and management skills to BankShares through
the operations of his various companies which are diversified in their business. He also brings financial institution management
and investment skills to BankShares. His involvement in the United Way provides additional community input with Franklin Bank.
Michael A. Turner has served as the partial
owner and President of Turner’s Building, Inc. from 1976 to present. He also serves as a partner in T & J Property Associates,
LC. In addition, Mr. Turner was a partner in Deep River Investments (developer of real estate) from 1989 to 2003. He is also a
director of Franklin Community Bank, N.A. He is also a member of the Cool Branch Volunteer Rescue Squad, and the Smith Mountain
Lake Chamber of Commerce. Mr. Turner is an entrepreneur that brings financial and management experience to BankShares demonstrated
by the building and successfulness of his own construction and real estate development companies. He also served as a board director
for The Bank of Ferrum, a community bank in Franklin County from 1994 – 1999 and an advisory board member for BB&T in
Franklin County from 1999 – 2001 which brings governance to BankShares as a board member. Mr. Turner has been active in the
community where he lives and Franklin Bank operates.
There are no family relationships that need
to be reported, nor are any directors serving as directors on boards of other reporting companies.
Executive Officers Not a Director
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Elected
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Name (Age)
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Offices and Positions Held
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As an Officer
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Brenda H. Smith (53)
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Executive Vice President
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8/99
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Chief Financial Officer
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Corporate Secretary
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Brenda H. Smith joined the Corporation in
August 1999. She is also Executive Vice President, Chief Financial Officer, and board secretary of Franklin Community Bank, N.A.
She is also Executive Vice President, Secretary and a Director of MainStreet RealEstate, Inc. From 1995 to 1999, Ms. Smith was
Vice President, Corporate Controller and Assistant Secretary of MainStreet Financial Corporation, a $2 billion multi-bank holding
company headquartered in Martinsville, Virginia. From 1988 to 1995, she was an Accounting Officer for Piedmont Trust Bank, a subsidiary
of MainStreet Financial Corporation. Ms. Smith is a member of Pleasant Grove Christian Church and serves on the Safetynet Board
of Trustees.
MainStreet has a standing Audit Committee. The Audit Committee
is responsible for the oversight of the Company’s accounting policies, financial reporting and internal control. The Audit
Committee of the Board of Directors is comprised entirely of outside directors who are independent of management. The Audit Committee
is responsible for the appointment and compensation of the independent auditor and approves decisions regarding the appointment
or removal of the Company’s Internal Auditor. It meets periodically with management, the independent auditors and the internal
auditors to ensure that they are carrying out their responsibilities. The Audit Committee is also responsible for performing an
oversight role by reviewing and monitoring the financial, accounting and auditing procedures of the Company in addition to reviewing
the Company’s financial reports. The independent auditors and the internal auditor have full and unlimited access to the
Audit Committee, with or without management, to discuss the adequacy of internal control over financial reporting, and any other
matter which they believe should be brought to the attention of the Audit Committee. The members of the Audit Committee are C.
Laine Dalton, J. Mac Deekens, Joel R. Shepherd (Chairman), Michael A. Turner, and Danny M. Perdue.
MainStreet’s Board of Directors has determined that MainStreet
does not have a financial expert serving on its Audit Committee. MainStreet is a small and relatively young corporation located
outside a major metropolitan area. Because of our size and location, we have not pursued a financial expert and there is no certainty
that one could be found.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
December 31, 2011 and 2010
MainStreet has adopted a Code of Ethics for all of its employees
including its Chief Executive and Chief Accounting Officers. A copy of the Code of Ethics may be obtained without charge upon request
by writing to Brenda H. Smith, Executive Vice President, 1075 Spruce Street, Martinsville, Virginia, 24112.
Other information required by Item 10 of Form 10-K appears on
pages 9 through 11 of the Corporation’s 2012 Proxy Statement and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by Item 11 of Form 10-K appears on
pages 11 through 14 of the Corporation’s 2012 Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
The information required by Item 12 of Form 10-K appears on
pages 7 through 9 of the Corporation’s 2012 Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions,
and Director Independence
MainStreet’s executive officers and directors, and
other corporations, business organizations, and persons with which some of MainStreet’s executive officers and
directors are associated have banking relationships with Franklin Bank. All such transactions were made in the ordinary
course of business on substantially the same terms, including interest rates and security for loans, as those prevailing at
the time in comparable transactions with others and did not involve more than the normal risk of collectibility or present
other unfavorable features. None of such loans are classified as nonaccrual, past due, restructured or potential problem.
Information related to loans to MainStreet’s executive officers and directors and their related interests can be found
in Part II, Item 8, Note 5 of this document. Deposit information related to MainStreet’s executive officers and
directors and their related interests can be found in Part II, Item 8, Note 7 of this document.
Franklin Community Bank, N.A., a subsidiary of MainStreet BankShares,
Inc., leases its main office in Rocky Mount, Virginia, and its Westlake office. The owners of the buildings are directors of Franklin
Bank. The leases were made on market terms for those comparable at the time of the transaction.
The information required by Item 13 of Form 10-K concerning
director independence appears on page 15 of the Corporations’ 2012 Proxy Statement and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by Item 14 of Form 10-K appears in
the Corporation’s 2012 Proxy Statement under the Audit Committee Report and is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
a)
The following documents are filed as part of this report:
1. Financial Statements:
Report of Independent Registered Public
Accounting Firm.
Consolidated Balance Sheets as of December
31, 2011 and 2010.
MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES
December 31, 2011 and 2010
Consolidated Statements of Income for the
Years Ended December 31, 2011 and 2010.
Consolidated Statements of Shareholders’
Equity for the Years Ended December 31, 2011 and 2010.
Consolidated Statements of Cash Flows for
the Years Ended December 31, 2011 and 2010.
Notes to Financial Statements.
2. Financial Statement Schedules:
All schedules are omitted as the required
information is not applicable or the information is presented in
the Financial Statements or related notes.
3. Exhibits and Reports on Form 8-K:
See Index to Exhibits.
SIGNATURES
In accordance with section 13 or 15(d) of
the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MAINSTREET BANKSHARES, INC.
By:
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/s/Larry A. Heaton
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Larry A. Heaton, President and Chief Executive Officer
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In accordance with the Exchange Act, this
report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
NAME
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TITLE
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DATE
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/s/Larry A. Heaton
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President and Chief Executive
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03/15/12
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Larry A. Heaton
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Officer, Director, President/CEO
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Date
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of Franklin Community Bank, N.A.
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/s/Brenda H. Smith
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Executive Vice President
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03/15/12
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Brenda H. Smith
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Chief Financial Officer
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Date
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|
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Corporate Secretary
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|
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/s/Joseph F. Clark
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Director
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03/15/12
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Joseph F. Clark
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Date
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/s/ William L. Cooper, III
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Director
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03/15/12
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William L. Cooper, III
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Date
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/s/Charles L. Dalton
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Director
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03/15/12
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Charles L. Dalton
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Date
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/s/John M. Deekens
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Director
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03/15/12
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John M. Deekens
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Date
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/s/Danny M. Perdue
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Director
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03/15/12
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Danny M. Perdue
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Date
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|
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/s/Joel R. Shepherd
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Chairman of the Board
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03/15/12
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Joel R. Shepherd
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Date
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/s/Michael A. Turner
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Director
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03/15/12
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Michael A. Turner
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Date
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Index to Exhibits
Number
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Description
of Exhibit
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3(i)**
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Restated Articles of
Incorporation of the Corporation, dated March 6, 2001.
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3(ii)
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By-laws of the Corporation,
dated August 5, 1999 amended February 20, 2001; amended October 16, 2002; amended September 17, 2003; amended July 13, 2005;
amended April 20, 2006; and amended October 21, 2009; filed on Form 8-K on October 22, 2009 and herein incorporated by reference.
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4.1
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Warrant Plan and Certificates
as adopted July 27, 1999 and amended August 26, 1999 and amended December 19, 2000 incorporated by reference to the Corporation’s
Quarterly Form 10-QSB for quarter ended September 30, 1999, filed December 20, 1999, and herein incorporated by reference.
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4.2
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Provision in Registrant’s
Articles of Incorporation and Bylaws defining the Rights of Holders of the Registrant’s common stock (included in Exhibits
3.1 and 3.2, respectively).
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4.3*
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Form of Shares Subscription
Agreement.
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4.3.1***
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Form of Shares Subscription
Agreement.
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4.4*
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Form of Units Subscription
Agreement.
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4.5
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2004 Key Employee Stock
option Plan filed March 16, 2005 on Form S-8 and herein incorporated by reference.
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10.1#
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Employment
Agreement by and between MainStreet, Franklin Bank, and Larry A. Heaton (President and CEO of Franklin Bank) dated December
30, 2005 incorporated by reference to the Corporation’s Form 8-K filed January 4, 2006.
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10.2
#
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Employment
agreement with Executive Vice President, Brenda H. Smith, dated October 1, 2002, filed with the Corporation’s Quarterly
Form 10-QSB on November 7, 2002 and herein incorporated by reference. Amendment to employment agreement filed on Form
8-K on April 24, 2006 and herein incorporated by reference.
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10.3#
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Supplemental Executive
Retirement Agreement by and between Franklin Community Bank, N.A. and Larry A. Heaton incorporated by reference to the Corporation’s
Form 10-KSB filed March 6, 2008.
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10.4#
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Supplemental Executive
Retirement Agreement by and between Franklin Community Bank, N.A. and Brenda H. Smith incorporated by reference to the Corporation’s
Form 10-KSB filed March 6, 2008.
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10.5#
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Change in Control Agreement
between MainStreet BankShares, Inc. and Lisa J. Correll incorporated by reference to the Corporation’s Form 10-KSB filed
March 6, 2008.
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10.6#
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Change in Control Agreement
between MainStreet BankShares, Inc., Franklin Community Bank, N.A. and Robert W. Shorter incorporated by reference to the
Corporation’s Form 10-KSB filed March 6, 2008.
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10.7#
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Change in Control Agreement
between MainStreet BankShares, Inc., Franklin Community Bank, N.A. and Debra B. Scott incorporated by reference to the Corporation’s
Form 10-KSB filed March 6, 2008.
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10.8#
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Change in Control Agreement
between MainStreet BankShares, Inc., Franklin Community Bank, N.A. and Linda P. Adams incorporated by reference to the Corporation’s
Form 10-KSB filed March 6, 2008.
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10.9
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Formal agreement by and
between The Comptroller of the Currency and Franklin Community Bank, National Association dated April 16, 2009 incorporated
by reference to the Corporation’s Form 8-K filed April 20, 2009.
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14
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Code of Ethics filed
March 13, 2006 on Form 10-K and herein incorporated by reference.
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21
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Subsidiaries of the Registrant.
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31.1
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Certification of President
and Chief Executive Officer Pursuant to Rule 13a-14(a) or 15(d)-14(a) under the Securities and Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2
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Certification of Executive
Vice President, Chief Financial Officer, and Corporate Secretary Pursuant to Rule 13a-14(a) or 15(d)-14(a) under the Securities
and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32
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Certification Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (18 USC 1350).
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*
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(Incorporated by reference to Registration statement #333-86993 on Form SB-2 filed September 13, 1999.)
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**
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(Incorporated by reference to the Corporation’s Annual Report on Form 10-K filed March 15, 2001.)
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***
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(Incorporated by reference to Registration Statement # 333-63424 on Form SB-2 filed June 20, 2001.)
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#
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Management contract or compensatory plan or agreement required to be filed as an Exhibit to this Form 10-K pursuant to Item 14(c).
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