MAINSTREET BANKSHARES, INC. 

1075 Spruce Street

Martinsville, Virginia 24112

 

Dear Shareholders:

 

The Directors of MainStreet BankShares, Inc. invite you to attend our 2012 Annual Meeting of Shareholders to be held at Ferrum College, Franklin Hall, 445 Ferrum Mountain Road, Ferrum, Virginia, 24088, on Thursday May 10, 2012 at 2:00 p.m.

 

The attached Notice of 2012 Annual Meeting and Proxy Statement describes the formal business to be transacted at the Meeting. At the Meeting, shareholders will vote to elect three directors of MainStreet BankShares, Inc. and to ratify the appointment of the Corporation’s independent registered public accounting firm.

 

Whether or not you plan to attend in person, it is important that your shares be represented at the Meeting. Please complete, sign, date and return promptly the enclosed proxy. A postage-paid envelope is enclosed for your convenience. If you later decide to attend the Meeting and vote in person, or if you wish to revoke your proxy for any reason prior to the vote at the Meeting, you may do so and your proxy will have no further effect.

 

The Board of Directors and management of MainStreet BankShares, Inc. appreciate your continued support and look forward to seeing you at the Annual Meeting.

 

	Sincerely,
	Larry A. Heaton
	President and Chief Executive Officer

 

Martinsville, Virginia 

March 30, 2012

 

   

MAINSTREET BANKSHARES, INC. 

1075 Spruce Street

Martinsville, Virginia 24112

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

NOTICE IS HEREBY GIVEN that the Annual Meeting of the holders of shares of Common Stock of MainStreet BankShares, Inc. will be held on Thursday, May 10, 2012, at 2:00 p.m., at Ferrum College, Franklin Hall, 445 Ferrum Mountain Road, Ferrum, Virginia, 24088 for the following purposes:

 

1.

Election of Directors

 

To elect: three (3) members of Class B directors to serve until the 2015 Annual Meeting of Shareholders, or in the case of each director, until his or her successor is duly elected and qualifies;

 

2.

Ratification of Independent Registered Public Accounting Firm

 

To ratify the appointment of Yount, Hyde, & Barbour, P. C. as the Corporation’s independent registered public accounting firm for the year ending December 31, 2012.

 

3.

Other Business

 

To transact such other business as may properly be brought before the Meeting or any adjournment thereof.

 

The Board of Directors has fixed the close of business on March 16, 2012 as the record date for the determination of shareholders entitled to notice of and to vote at the Annual Meeting or any adjournment thereof.

 

	By Order of the Board of Directors
	Larry A. Heaton
	President and Chief Executive Officer

 

Martinsville, Virginia 

March 30, 2012

 

 

MAINSTREET BANKSHARES, INC.

PROXY STATEMENT

ANNUAL MEETING OF SHAREHOLDERS

May 10, 2012

 

GENERAL INFORMATION

 

This Proxy Statement is furnished to holders of Common Stock of MainStreet BankShares, Inc. (“BankShares” or “the Company” or “MainStreet”) in connection with the solicitation by and on behalf of the Board of Directors of the enclosed proxy to be used at the 2012 Annual Meeting of Shareholders of BankShares to be held at Ferrum College, Franklin Hall, 445 Ferrum Mountain Road, Ferrum, Virginia, 24088, on Thursday, May 10, 2012, at 2:00 p.m., and at any adjournment thereof. The principal executive offices of BankShares are located at 1075 Spruce Street, Martinsville, Virginia 24112. The approximate mailing date of this Proxy Statement, the accompanying proxy and the Annual Report to Shareholders (which is not part of BankShares’ soliciting materials) is March 30, 2012. This Proxy Statement and the annual Form 10-K, which is included in your materials, for MainStreet BankShares, Inc. can also be found on the internet at http://www.cfpproxy.com/6043 .

 

The cost of solicitation of proxies will be borne by BankShares. Such costs include charges by brokers, fiduciaries and custodians for forwarding proxy materials to beneficial owners of BankShares’ stock held in their names. Solicitations will be made only by use of the mail, except that if necessary, officers, directors and employees of BankShares may without additional compensation solicit proxies by telephone or personal contact.

 

VOTING OF PROXIES

 

The proxy solicited hereby, if properly signed and returned to BankShares and not revoked prior to its use, will be voted in accordance with the instructions contained thereon. If no choice is specified and/or no contrary instructions are given on an executed and returned proxy, the proxy will be voted in favor of the nominees listed in Item 1 of the proxy, in favor of the ratification listed in Item 2, and in the discretion of the proxies on any other matter which may properly come before the Meeting and all adjournments or postponements of the Meeting. Any shareholder giving a proxy has the power to revoke it at any time before it is exercised by (i) filing written notice thereof with the Corporate Secretary of BankShares (Corporate Secretary, MainStreet BankShares, Inc., 1075 Spruce Street, Martinsville, Virginia 24112); (ii) submitting a duly executed proxy bearing a later date with the Corporate Secretary of BankShares; or (iii) appearing at the Annual Meeting or at any adjournment thereof and giving the Corporate Secretary notice of his or her intention to vote in person. Presence at the Annual Meeting does not of itself revoke the proxy. Proxies solicited hereby may be exercised only at the Annual Meeting and at any adjournment thereof and will not be used for any other meeting.

 

VOTING SHARES AND VOTING RIGHTS

 

Only holders of record of Common Stock at the close of business on March 16, 2012 (the “Record Date”) are entitled to notice of and to vote at the Annual Meeting and any adjournments thereof. As of March 16, 2012, BankShares had 1,713,375 shares of Common Stock outstanding (not including 161,272 unexercised vested stock options). A majority of the outstanding shares of Common Stock must be represented at the Annual Meeting in person or by proxy in order to constitute a quorum for the transaction of business. Each share of Common Stock is entitled to one vote on each matter voted upon at the Annual Meeting. For the purpose of determining the presence of a quorum, shares represented on any matter will be counted as present and represented on all matters to be acted upon, including any matter with respect to which the holder of such shares abstains from voting (“abstentions”). Broker non-votes (in which brokers do not vote shares on behalf of the beneficial owners thereof) will not be treated as present or represented at the Meeting, and will not be included in determining whether a quorum is present. If your broker holds shares in your name and delivers this Proxy Statement to you, the broker generally has the authority to vote the shares on certain “routine” matters. Proposal #2 is considered “routine”; even if the broker does not receive voting instructions from you, the broker is entitled to vote your shares in connection with the proposal. Proposal #1 is a matter that is considered “non-routine”; the broker is not entitled to vote your shares on such proposals without your instructions.

 

 

 

Election of Directors. Directors are elected by a plurality of the votes of the shares represented in person or by proxy at the Annual Meeting. “Plurality” means that the individuals who receive the largest number of votes cast are elected as directors up to the maximum number of directors to be chosen at the Meeting. Only shares that are voted in favor of a nominee will be counted toward that nominee’s achievement of a plurality. Abstentions will not be counted toward a nominee’s achievement of a plurality. As discussed above, if your broker holds shares in your name and delivers this Proxy Statement to you, the broker is not entitled to vote your shares without your specific instructions.

 

Ratification of Registered Independent Public Accounting Firm. The ratification of the Registered Independent Public Accounting Firm will require the affirmative vote of a majority of the shares represented at the Meeting and entitled to vote on the particular matter. In tabulating votes cast on any such other matter, abstentions will be considered votes cast, and accordingly will have the same effect as a negative vote. Broker non-votes, on the other hand, will not be counted as shares entitled to be voted on the particular matter, and therefore will have no impact on the outcome of the vote.

 

Other Matters. Approval of any other matter that properly comes before the Meeting will require the affirmative vote of a majority of the shares represented at the Meeting and entitled to vote on the particular matter. In tabulating votes cast on any such other matter, abstentions will be considered votes cast, and accordingly will have the same effect as a negative vote. Broker non-votes, on the other hand, will not be counted as shares entitled to be voted on the particular matter, and therefore will have no impact on the outcome of the vote.

 

ITEM 1 – ELECTION OF DIRECTORS

 

BankShares’ Articles of Incorporation divide the Board of Directors into three classes (A, B and C) as nearly equal in number as possible, with the terms of office of each class ending in successive years. The current term of office of the Class B directors expires at this 2012 Annual Meeting. The terms of office of the Class C and Class A directors will expire in 2013 and 2014, respectively.

 

Except when consented to by unanimous vote of the other Directors, no person shall stand for election or re-election to the Board who has reached the age of 70 years prior to the date of the regular Annual Meeting of the shareholders at which an election of directors is held, and no person who has reached the age of 70 years may be elected to fill a vacancy on or as an addition to the Board. There are no directors that may not stand for re-election at the 2012 Annual Meeting of Shareholders due to the age requirement for retirement. At the Annual Meeting, three (3) Directors are to be elected to hold office. If elected, Joseph F. Clark, C. Laine Dalton and Joel R. Shepherd shall become the members of Class B and shall hold office until the 2015 Annual Meeting of Shareholders or until their respective successors are duly elected and qualify. It is the intention of the named proxies, unless otherwise directed, to vote in favor of the election of the three (3) nominees for director named in this paragraph for the terms set out herein.

 

 

It is the intention of the current Board of Directors of BankShares, which includes all of the nominees for the directorships, to vote for the election of the three (3) nominees for director named in the preceding paragraph for the terms set out therein.

 

Each nominee has agreed to serve if elected. In the event any named nominee shall unexpectedly be unable to serve, proxies will be voted for the remaining named nominees and such other person or persons as may be designated by the Board of Directors.

 

INFORMATION CONCERNING DIRECTORS AND NOMINEES

 

The following information, including the principal occupation during the past five years, is given with respect to the nominees for election to the Board at the Annual Meeting, and for the directors who will continue in office after the Annual Meeting. All of the nominees for election as directors currently serve as directors of BankShares. Joseph F. Clark, C. Laine Dalton and Joel R. Shepherd are independent directors of MainStreet BankShares, Inc.

 

NOMINEES FOR DIRECTOR – CLASS B (TERM EXPIRES 2012)

 

Directors (Age) (Tenure)		Business Experiences and Other Qualifications
Joseph F. Clark (49) Stuart, Virginia Director since July 2001 Independent Executive Committee		Mr. Clark is President and partial owner of Clark Brothers Company, Inc. He is a member and partial owner of Highland Park, LLC, Fairview Group, LLC and CBC, LLC. He is a member and owner of Laurel Creek, LLC and member and manager of Fulton Farms, LLC.   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.   Because of the financial, management and entrepreneurial skills listed above, the Company believes this nominee to be qualified for re-election to the Board of Directors.

 

Directors (Age) (Tenure)		Business Experiences and Other Qualifications
C. Laine Dalton (48) Stuart, Virginia Director since July 2001 Independent Audit & Human Resources Committees		Mr. Dalton is Vice President, General Manager and partial owner of Dalton Insurance Agency where he has been employed since 1991. Member/Partial owner Stuart Laurel Court, LLC.   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 having 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 Insurance Agents of Virginia and is active in the Patrick County American Legion Baseball.   Because of the financial, management and entrepreneurial skills listed above, the Company believes this nominee to be qualified for re-election to the Board of Directors.

 

 

Directors (Age) (Tenure)		Business Experiences and Other Qualifications
Joel R. Shepherd (48) Roanoke, Virginia Director since December 2002 Independent Chairman of the Board, Audit, Executive & Nominating Committees		Mr. Shepherd is President & partial owner of Virginia Home Furnishings, Inc., Blue Ridge Antique Center, inc., & 220 Self Storage, Inc. He is partial owner of Shepherd Properties, LLC, Orient Bay, LLC, Wirtz Properties, LLC, Wirtz Lot 2, LLC, Wirtz Corner, LLC, Lake Marina, LLC, Kyle Avenue, LLC, FFH Operations, Inc., FFH Investors, LLC, and the Franklin LLC. Prior to developing his current businesses, he 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 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. Mr. Shepherd is also active in the United Way which provides additional community input with Franklin Bank.   Because of the financial, management and entrepreneurial skills listed above, the Company believes this nominee to be qualified for re-election to the Board of Directors.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT THE NOMINEES LISTED ABOVE BE ELECTED AS DIRECTORS OF BANKSHARES

 

ITEM 2 – RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

For 2012 the Audit Committee of the Board of Directors has selected Yount, Hyde & Barbour, P. C., an independent registered public accounting firm, to perform the audit of the Company’s financial statements and its internal controls over financial reporting.

 

The selection of Yount, Hyde & Barbour, P. C. as the Company’s independent auditors is not required to be submitted to a vote of the shareholders for ratification. The Company is doing so because it believes that is a matter of good corporate practice. If the shareholders fail to vote on an advisory basis in favor of the selection of Yount, Hyde & Barbour, P. C., the Audit Committee will reconsider whether or not to retain Yount, Hyde & Barbour, P. C., and may retain that firm or another firm without re-submitting the matter to the shareholders. Even if the shareholders ratify the appointment, the Audit Committee may, in its discretion, direct the appointment of a different independent registered public accounting firm at any time during the year if it determines that a change would be in the Company’s best interests.

 

A representative of Yount, Hyde & Barbour, P. C. is expected to be at the Annual Meeting of Shareholders. That representative will have the opportunity to make a statement at the meeting and will be available to respond to appropriate questions.

 

   

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF YOUNT, HYDE & BARBOUR, P. C. AS THE INDEPENDENT AUDITORS FOR THE YEAR 2012

 

ITEM 3 – OTHER BUSINESS

 

The Board of Directors does not know of any matters which may be presented for consideration at the Meeting other than those specifically set forth in the Notice of Annual Meeting. However, in the event that any other matters are properly presented for action at the Meeting or any adjournment thereof, it is the intention of the proxy holders named in the enclosed Proxy to take such action as shall be in accordance with their best judgment with respect to such matters.

 

DIRECTORS CONTINUING IN OFFICE

 

DIRECTORS – CLASS C (TERM EXPIRES 2013) 

 

Directors (Age) (Tenure)		Business Experiences and Other Qualifications
William L. Cooper, III (58) Rocky Mount, Virginia Director since February 2007 Independent Human Resources Committee		Mr. Cooper is owner & President of Cooper Classics, Inc., of which he has been employed since 1981. He is also owner and CEO of CWP, Inc. and a managing partner of Grassyhill Investment. Prior to that he worked for the American College of Radiology and prior to that he worked five years for a congressman.   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. He currently serves on the finance committee of his church. He has been a trustee of North Cross School and is Vice Chairman of the Rocky Mount Historic Foundation.
J. Mac Deekens (64) Stuart, Virginia Director since July 2001 Independent Audit & Human Resources Committees		Mr. Deekens is 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 served as the Quality Control Manager for Hooker Furniture Corporation for seven years.   Mr. Deekens brings managerial and financial skills to the Board of Directors. He served as Mayor of Stuart for eight years and was a member of the Town Council for an additional four years. He also served on a Bi-County Economic Commission for four years and held various offices in the Stuart Rotary Club. He currently serves as chairman of the finance committee of the church he attends and is a member. Through his community services, he also contributes this experience to BankShares’ Board.

  

  

Danny M. Perdue (66) Rocky Mount, Virginia Director since December 2002 Independent Audit & Executive Committees

Mr. Perdue is the owner of the Franklin Shopping Center. He is a partial owner and President of Redwood Minute Markets, Inc. He owns Redwood Petroleum Products, Ferrum Petroleum Products, Franklin Petroleum Products, 604 Petroleum Products & Penhook Petroleum Products. He is partial owner of First Minute Markets, LLC, FFH Operations, Inc., & FFH Investors, LLC. He is Vice President of Perdue Properties, Inc. and a Director of Franklin Community Bank, N.A.   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. He was a founding member of the Burnt Chimney Volunteer Fire Department. He was a past member and President of the Rocky Mount Chamber of Commerce and past President of the United Way in Franklin County. He was past President and board member of the YMCA. Mr. Perdue is currently active in the Rocky Mount Rotary Club and is on the Board of Trustees of Ferrum College.

 

DIRECTORS – CLASS A (TERM EXPIRES 2014)

 

Directors (Age) (Tenure)		Business Experiences and Other Qualifications
Larry A. Heaton (54) Collinsville, Virginia Director since October 2002 Non Independent Executive & Nominating Committees		Mr. Heaton has served as President and CEO of BankShares since May 2006. He has been President, CEO and Chairman of Franklin Community bank, N.A. since September 2002. He is Director, President and Treasurer of MainStreet RealEstate, Inc. He was a consultant to BankShares from October 2000 to 2002. Prior to that, he was Senior Vice President/Regional Retail Banking Manager for BB&T from July 1999 to April 2000. Mr. Heaton began his banking career in 1979 with Piedmont Trust Bank where he held various positions. He was President of Bank of Ferrum (an affiliate of Piedmont Trust Bank) from June 1991 until July 1999, its sale date to BB&T.   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. Mr. Heaton serves as a director of the Franklin County YMCA and the Blue Ridge Foundation. He is also a member of the Rocky Mount Rotary Club. He is also a Board member of Franklin Carillion Memorial Hospital, Board member of the Virginia Bankers Association, former Board member of the Virginia Association of Community Banks and currently serves on the Franklin County Economic Development Advisory Committee.

  

  

Michael A. Turner (58) Penhook, Virginia Director since December 2002 Independent Audit & Human Resources Committees

Mr. Turner has been partial owner & President of Turner’s Building, Inc. since 1976. He has been a partner in T&J Property Associates, LC from 1985 to present. In addition, he was a partner in Deep River Investments (developer of real estate) from 1989 to 2003.   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. He helped organize the Smith Mountain Lake partnership and served on the board for 15 years. He has been a board member of the Smith Mountain Chamber, Franklin County Chamber, Free Clinic and the Cool Branch Rescue Squad for many years.

 

EXECUTIVE OFFICERS

 

Larry A. Heaton, 54 – President, Chief Executive Officer (May 2006) and Director 

Larry A. Heaton is also President, Chief Executive Officer and Chairman of the Board of Franklin Community Bank, N.A. (subsidiary of BankShares) since its inception in September 2002. He is President and Treasurer, and a director of MainStreet RealEstate, Inc. (subsidiary of BankShares) since its inception in 2007. He served as a consultant to BankShares during the formation of Franklin Bank from October 2000 until the bank opened in September 2002. Mr. Heaton has worked in banking his whole career. Prior to joining BankShares, 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, CEO and Director of the Bank of Ferrum from June 1991 to July 1999. Prior to that, he served in various capacities with Piedmont Trust Bank (affiliate bank to Bank of Ferrum)

 

Brenda H. Smith, 52 – Executive Vice President, Chief Financial Officer and Corporate Secretary 

Brenda H. Smith joined BankShares in August 1999 as Senior Vice President and Chief Financial Officer. Ms. Smith was named Corporate Secretary in November 2001 and was promoted to Executive Vice President in September 2002. She is Executive Vice President, Chief Financial Officer and board secretary of Franklin Community Bank, N.A. She is also Executive Vice President and 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 Accounting Officer for Piedmont Trust Bank, a subsidiary of MainStreet Financial Corporation.

 

SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT

 

Principal Shareholders

 

The following table sets forth as of March 16, 2012 certain information regarding those persons (including any “group” as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) who BankShares knows were the beneficial owners of 5% or more of the outstanding shares of BankShares’ Common Stock including vested stock options:

 

 

		Name and Address		Amount and Nature
Title of Class		of Beneficial Owner		of Beneficial Ownership (#)			Percent of Class (%)
Common Stock		TCF Financial Corporation, Inc.		149,539			8.0
		200 East Lake Street, Wayzata, MN 55391
Common Stock		Larry A. Heaton		133,409	(1)		7.1
		P. O. Box 397, Collinsville, VA 24078
Common Stock		Joel R. Shepherd		130,988			7.0
		2320 Maiden Lane, Roanoke, VA 24015

 

(1) Includes 61,249 shares that may be acquired through the 2004 Key Employee Stock Option Plan upon exercise of 61,249 stock options that are fully vested.

 

Management

 

The following table sets forth as of March 16, 2012 the beneficial ownership of BankShares’ Common Stock by all (1) directors, (2) named executive officers and (3) directors and named executive officers as a group. Unless otherwise indicated, based on information furnished by such shareholders, management believes that each person has sole voting and investment power with respect to all shares beneficially owned by such person.

 

				Amount and Nature of Beneficial Ownership
		Name and Address		Sole Voting &					Aggregate		Percent
Title of Class		Of Beneficial Owner		Investment Power (#)		Other (1) (#)			Total (#)		of Class (%)
Common Stock		Joseph F. Clark		6,270		—			6,270		.3
		Stuart, Virginia
Common Stock		William L. Cooper, III		740		660	(2)		1,400		.1
		Rocky Mount, Virginia
Common Stock		C. Laine Dalton		5,297		1,100	(3)		6,397		.3
		Stuart, Virginia
Common Stock		J. Mac Deekens		5,500		—			5,500		.3
		Stuart, Virginia
Common Stock		Larry A. Heaton		72,160		61,249	(4)		133,409		7.1
		Collinsville, Virginia
Common Stock		Danny M. Perdue		50,519		—			50,519		2.7
		Rocky Mount, Virginia
Common Stock		Joel R. Shepherd		130,988		—			130,988		7.0
		Roanoke, Virginia
Common Stock		Brenda H. Smith		440		47,588	(5)		48,028		2.6
		Martinsville, Virginia
Common Stock		Michael A. Turner		34,723		11,000	(6)		45,723		2.4
		Penhook, Virginia
Common Stock		Directors and Officers		306,637		121,597			428,234		22.8
		as a Group (9 persons)

 

(1)

Includes shares owned by relatives and in certain trust relationships, which shares may be deemed to be beneficially owned under rules and regulations of the Securities and Exchange Commission. The inclusion of these shares does not constitute an admission of beneficial ownership.

(2)

Includes 660 shares that the director is custodian for his children.

 

 

(3)

Includes 1,100 shares owned by Dalton Insurance Agency, an insurance agency of which the director is a partial owner.

(4)

Includes 61,249 shares that may be acquired through the 2004 Key Employee Stock Option Plan upon exercise of 61,249 stock options that are fully vested.

(5)

Includes 47,588 shares that may be acquired through the 2004 Key Employee Stock Option plan upon exercise of 47,588 stock options that are fully vested.

(6)

Includes 11,000 shares owned by his spouse.

 

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Section 16(a) of the Securities Exchange Act of 1934 requires that BankShares’ directors and executive officers, and persons who own more than 10% of a registered class of BankShares’ equity securities, file with the Securities and Exchange Commission initial reports of ownership and reports of change in ownership of Common Stock and other equity securities of BankShares. The same persons are also required by Securities and Exchange Commission regulation to furnish BankShares with copies of all Section 16(a) forms that they file. To BankShares’ knowledge, based solely on BankShares’ review of the copies of such reports furnished to it or written representations from certain reporting persons that they have complied with the relevant filing requirements, during the years ended December 31, 2011 and December 31, 2010, all Section 16(a) filing requirements applicable to the BankShares’ executive officers, directors and more than 10% shareholders were complied with except for a late filing by Joel R. Shepherd in 2010.

 

MEETINGS AND COMMITTEES

 

The Board of Directors held 12 meetings during 2011. In 2011, the Audit/Compliance Committee of the Board met 3 times, the Executive Committee did not meet, the Human Resources Committee met 2 times and the Nominating Committee did not meet. During 2011, each director attended more than 75% of the aggregate of (i) the total number of meetings of the Board held during the period for which the director was on the Board and (ii) the total number of meetings held by all committees of the Board for which each director was a member, with the exception of C. Laine Dalton.

 

Committees of the Board

 

The Board of Directors has a standing Audit/Compliance Committee, Executive Committee, Human Resources Committee, and Nominating Committee.

 

Audit/Compliance Committee

 

The Audit/Compliance Committee is a separately designated, standing committee of the Board of Directors. It assists the Board of Directors in fulfilling its fiduciary responsibilities relating to BankShares’ corporate accounting and reporting practices and legal compliance. The Audit/Compliance Committee is responsible for the appointment of the firm to be employed as its registered independent accountants to audit BankShares’ consolidated financial statements. The Audit/Compliance Committee reviews and approves the fees, scope, purpose and type of audit services to be performed by the internal and external auditors; reviews the activities and findings of the internal and external auditors to determine the effectiveness of the audit function; reviews procedures for ensuring compliance with BankShares; policies on conflict of interest; and renders regular reports to the Board of Directors on its activities and findings. The Audit/Compliance Committee is responsible for ensuring that standards of ethical behavior and proper compliance programs are established and maintained throughout BankShares. The Audit/Compliance Committee oversees BankShares’ internal control procedures. The Audit/Compliance Committee also has the responsibility for establishing procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters, and the confidential, anonymous submissions by employees or contractors of concerns regarding questionable accounting or accounting matters.

 

 

The Audit/Compliance Committee consists of five members. The Board of Directors has determined that each of the five members is independent as defined in the Nasdaq Stock Market Listing Rules.

 

The Audit/Compliance Committee consists of C. Laine Dalton, J. Mac Deekens, Danny M. Perdue, Joel R. Shepherd (Chairman) and Michael A. Turner. The Audit/Compliance Committee met 3 times in 2011.

 

The Board has adopted for the Audit/Compliance Committee a written charter which is reviewed annually. The charter is included as Appendix A to this Proxy Statement.

 

The Committee will perform such other functions as are authorized for this Committee by the Board of Directors.

 

Executive Committee

 

The Executive Committee has all powers of the full Board not prohibited to it under the Virginia Stock Corporation Act and will be called to meet in the event of emergencies, or when action of the Board of Directors is necessary between meetings, and it is not possible or practicable to call a special meeting.

 

The Executive Committee consists of Joseph F. Clark, Larry A. Heaton (Chairman), Danny M. Perdue and Joel R. Shepherd. The Executive Committee did not meet during 2011.

 

Human Resources Committee

 

The Human Resources Committee is a separately designated, standing committee of the Board of Directors. It is responsible for overseeing the compensation structure of BankShares. The Committee reviews the performance and establishes the compensation of the CEO and reviews and approves the performance review and compensation of other BankShares’ executive officers upon recommendation of the CEO. See Report of Human Resources Committee.

 

The Committee also administers the MainStreet BankShares, Inc. 2004 Key Employee Stock Option Plan which expired in January 2009, except for the stock options granted under this Plan.

 

The Human Resources Committee consists of William L. Cooper, III, C. Laine Dalton (Chairman), J. Mac Deekens and Michael A. Turner. The Human Resources Committee met 2 times in 2011.

 

The Human Resources Committee approved the original charter for its committee in October 2006. The Human Resources Charter was included as Appendix A in the 2010 Proxy Statement.

 

 

Nominating Committee

 

BankShares formed a standing Nominating Committee in 2006. BankShares is a relatively young corporation and most directors are among the early board members and the original organizers of BankShares’ subsidiary bank, Franklin Community Bank, N.A. Moreover there has been no perceived need to expand the number of directors. Therefore, there has been no formal process developed for identifying additional director nominees and it is done on an as needed basis. We believe that this is adequate for a small community financial company and institution. We believe the Nominating Committee is capable of evaluating the qualifications of proposed director nominees and of determining the need for additional directors. One of the two present members of the Nominating Committee is independent as defined in the Nasdaq Stock Market Listing Rules. Mr. Heaton is the non-independent director who serves on this Committee. The Nominating Committee will consider Director nominees recommended by shareholders. All candidates including those recommended by shareholders generally should be highly qualified by business, professional or comparable experience, active in the communities MainStreet serves, affirmatively desirous of serving on the Board, and able to represent the short-term and long-term interests of the Company and all shareholders and not merely those of any special interest group. Candidates should also possess high integrity, exceptional ability and judgment, and knowledge of the financial services industry. Candidates should also be able to promote Franklin Bank or BankShares. Shareholders wishing to suggest candidate(s) for consideration at the 2013 Annual Meeting of Shareholders should submit their proposals in accordance with the timeframe and procedures set forth in the paragraph entitled “SUBMISSION OF SHAREHOLDER PROPOSALS” in this Proxy Statement. Shareholder proposals for director nominees should also include the following for the proposed director: name, age, and principal occupation for the past five years, any current directorships held on public companies, number of shares of BankShares stock owned, and a statement from the prospective nominee agreeing to the nomination. All nominees, whether proposed by a shareholder or other, will be evaluated based on the same criteria. The Nominating Committee does not have a charter or a policy on the consideration of diversity in identifying director nominees. Therefore, diversity was not considered in the recommendation of the nominees for re-election as directors. The Nominating Committee currently consists of Larry A. Heaton and Joel R. Shepherd.

 

Board Leadership Structure

 

The Board of Directors is led by the Chairman. The Chairman presides over each Board meeting and performs other duties typically associated with board chairs such as discussing agenda matters with management, as appropriate, prior to board meetings and providing input when requested to senior management with respect to matters to be brought before the Board. The Board of Directors elects the Chairman of the Board annually after each Annual Meeting of Shareholders. BankShares’ Chairman of the Board has always been an independent director. Currently, Joel R. Shepherd is the Chairman of the Board and has been the Chairman since May 2005. Larry A. Heaton is the President and Chief Executive Officer of BankShares.

 

The Board of Directors believes that having a separate Chairman and Chief Executive Officer is appropriate and in the best interests of BankShares and its shareholders. It promotes the independence of the Board of Directors and creates a firm link between management and the Board to enhance corporate strategy and increase overall risk management.

 

 

COMPENSATION AND OTHER MATTERS

 

Executive Compensation

 

The following table presents information relating to the compensation of the Chief Executive Officer, Chief Financial Officer, and Named Executive Officers for the fiscal years ended December 31, 2011 and 2010.

 

																		Non-Equity
														Option				Incentive				All Other
Name and														Awards				Plan				Comp.
Principal Position		Year				Salary ($)				Bonus($)				($)(1)				Comp. ($)				($)				Total ($)
Larry A. Heaton
President, CEO &			2011				227,481				—				—				—				86,851				314,332
Director			2010				227,481				—				—				—				85,893				313,374
President/CEO/Chairman
Franklin Community
Bank, N. A.
Brenda H. Smith
Executive VP, CFO and			2011				116,823				—				—				—				39,881				156,704
Corporate Secretary			2010				116,123				—				—				—				35,190				151,313
Executive VP, CFO and
Board Secretary,
Franklin Community
Bank, N. A.

 

---

(1) Please note the pricing of the stock options is discussed in the Compensation Narrative following this table.

 

Summary of all Other Compensation

 

Name and						401-K				Life
Principal Position		Year				Match($)				Insurance($)				SERP ($)				Other ($)				Total ($)
Larry A. Heaton
President, CEO &			2011				8,604				1,481				75,725				1,041				86,851
Director			2010				8,605				1,790				74,419				1,079				85,893
President/CEO/Chairman
Franklin Community Bank, N.A.
Brenda H. Smith
Executive VP, CFO and			2011				4,730				760				33,448				943				39,881
Corporate Secretary			2010				4,703				887				38,593				1,007				35,190
Executive VP, CFO and
Board Secretary,
Franklin Community Bank, N.A.

 

Compensation Narrative

 

Employment Agreements

 

BankShares and Franklin Community Bank, N.A. have an employment agreement with Larry A. Heaton. The agreement has a rolling one-year term that unless terminated at least 90 days prior to each anniversary date, is extended automatically for an additional one year. If Mr. Heaton’s employment is terminated without cause the Company is obligated to pay Mr. Heaton a lump sum payment equal to: (a) the present value of the total base salary in effect at the time of termination through the remaining term of employment and (b) the present value of Company’s cost of all welfare and pension benefits then being provided to Mr. Heaton calculated as if he continued in employment through the remaining term of employment and (c) any incentive benefits accrued as of the date of termination. If Mr. Heaton’s employment is terminated for cause or he voluntarily terminates employment, Mr. Heaton will receive his full base salary through the date of termination. Upon a change of control, Mr. Heaton may choose either of the following: (a) to enter into a replacement employment agreement mutually satisfactory to him and the company acquiring control which shall replace in full the subject employment agreement or (b) to resign his employment, terminate the employment agreement and, subject to certain limitations, receive as severance benefits the continuation for the 36 months immediately following such written notice his salary and benefits excluding any non-accrued incentives. The agreement provides for a non-competition obligation within a 25 mile radius of the main office of Franklin Bank for one year after termination of employment or during any longer period in which he is receiving severance benefits after a change of control. MainStreet BankShares, Inc. entered into a Memorandum of Understanding with the Federal Reserve Bank of Richmond on June 17, 2009 that was amended on January 26, 2011. The amendment includes compliance with certain regulations which affect the payments Mr. Heaton would receive if his employment is terminated while the Memorandum of Understanding is in effect. The bank holding company intends 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).

 

 

BankShares has an employment agreement with Brenda H. Smith that provides for her employment as Executive Vice President and Chief Financial Officer of MainStreet BankShares, Inc. The agreement has a rolling three-year term that unless terminated at least 90 days prior to each anniversary date, is extended automatically for an additional one year. If Ms. Smith’s employment is terminated without cause BankShares is obligated to pay Ms. Smith a lump sum payment equal to: (a) the present value of the total base salary in effect at the time of termination through the remaining term of employment and (b) the present value of BankShares’ cost of all welfare and pension benefits then being provided to Ms. Smith calculated as if she continued in employment through the remaining term of employment and (c) any incentive benefits accrued as of the date of termination. If Ms. Smith’s employment is terminated for cause or she voluntarily terminates employment, Ms. Smith will receive her full base salary through the date of termination. Upon a change of control, Ms. Smith may choose either of the following: (a) to enter into a replacement employment agreement mutually satisfactory to her and the company acquiring control which shall replace in full the subject employment agreement or (b) to resign her employment, terminate the employment agreement and, subject to certain limitations, receive as severance benefits the continuation for the 24 months immediately following such written notice her salary and benefits excluding any non-accrued incentives. As with Mr. Heaton’s employment agreement, the restrictions on indemnification and severance payments would affect the payments Ms. Smith would receive if her employment is terminated while the Memorandum of Understanding is in effect.

 

Stock Options/Warrants

 

There were no stock option grants during 2011 or 2010. Please refer to Footnote #14 of the Consolidated Financial Statements for complete discussion and disclosure of the Company’s stock options.

 

Option Awards

 

Outstanding Equity Awards at Fiscal Year-End

 

										Equity
										Incentive Plan
		No. of				No. of				Awards:  No.
		Securities				Securities				Of Securities
		Underlying				Underlying				Underlying
		Unexercised				Unexercised				Unexercised				Option				Option
		Options				Options				Unearned				Exercise Price				Expiration
Name		(#) Exercisable				(#) Unexercisable				Options (#)				($)				Date
Larry A. Heaton			41,170				—				—				12.09			12/01/2015
President, CEO &			8,233				—				—				12.09			12/19/2015
Director &			6,050				—				—				16.75			12/20/2016
President/CEO/Chairman			5,796	(1)			—				—				15.00			11/14/2017
Franklin Community
Bank, N.A.
Brenda H. Smith			32,999				—				—				12.09			12/01/2015
Executive VP,			6,600				—				—				12.09			12/19/2015
CFO & Corporate			4,125				—				—				16.75			12/20/2016
Secretary & Executive VP,			3,864	(1)			—								15.00			11/14/2017
CFO & Board Secretary of
Franklin Community
Bank, N.A.

 

---

(1)

These stock options were granted to the named executives in 2007 and vested over a three-year period which ended on November 14, 2010.

 

 

Non Equity Incentive Plan

 

There was no incentive plan in place during 2011 and 2010 based on recommendations by Mr. Heaton and Ms. Smith and adopted by the Board.

 

SERP

 

BankShares instituted a Supplemental Retirement Plan (“SERP”) for Mr. Heaton and Ms. Smith. The funding mechanism for the SERP is Bank Owned Life Insurance (“BOLI”) policies on the lives of the two named executives. Because of the tax advantages of the life insurance policies, the SERP and the BOLI are designed to be profit-neutral to BankShares. The SERP is designed to provide 65% of final average five years base salary less BankShares’ social security contribution. The SERP also has a vesting schedule based on years of service. The SERP has certain provisions for early retirement, death benefits and disability. Normal retirement age under the SERP is 65. The SERP would become 100% vested in the event of a change in control. The Memorandum of Understanding with the Federal Reserve Bank of Richmond would affect these payments. The weighted average assumed discount rate utilized was 6.25% and the assumed rate of annual compensation increases was 4.50% over the life of the SERP. Please refer to Footnote #12 to the Consolidated Financial Statements for full disclosure of the SERP.

 

401-K Plan

 

MainStreet BankShares, Inc. offers a 401-K plan which provides for contributions by employees. The Company provides a matching contribution of 100% for the first 3% contributed by the employee, and an additional 50% for each of the next 2% contributed by the employee for a maximum of 4% based on contributions. Mr. Heaton and Ms. Smith participate in the plan.

 

Director Compensation

 

		Fees Earned or				All Other
Name		Paid in Cash ($)				Compensation ($)				Total ($)
Joseph F. Clark			2,400				—				2,400
C. Laine Dalton			2,700				—				2,700
William L. Cooper, III			2,475				—				2,475
J. Mac Deekens			2,700				—				2,700
Danny M. Perdue			2,625				—				2,625
Joel R. Shepherd			2,625				—				2,625
Michael A. Turner			2,700				—				2,700

 

The Board of Directors were paid $200 for each board meeting, $75 for each committee meeting on the day of a regular board meeting and $150 for each committee meeting that is not held on a regular board day they attended during 2011. There were no retainers paid. Mr. Heaton is not paid director fees for being a board member.

 

 

Risk Management

 

MainStreet’s values and missions are the foundation for the basis of our risk management. The management of our risk is a company-wide goal. The Board of Directors has the responsibility of overseeing the overall risk of the Company and the management of the risk. Risk management begins with each of our employees. We establish policies and procedures employees are expected to follow to minimize our risk. Management and our independent audit function oversee compliance with these policies and procedures. We select products and implement compensation structures that mesh with our risk framework. The Board of Directors approves all incentive plans balancing the risk to our Company with the objective of incenting employees to achieve Board approved objectives. There was no company-wide incentive plan in place for 2010, or for 2011, based on the recommendation of Mr. Heaton and Ms. Smith and adopted by the Board. In place for 2011 and 2010 was a referral fee program for employees to incent them to make referrals to the mortgage and investment departments. This program will continue in 2012. Also, the investment officer participated in a commission based program in 2011 and 2010. The investment officer commission program will continue in 2012. The mortgage loan commission program was in effect in 2010 but eliminated in 2011 due to new regulations. Because substantially all of the Company’s present compensation for employees is salary and incentives, when available, are based largely on subjective individual or company wide performance criteria, we do not believe there is a material risk of compensation inducing the taking of unreasonable risk.

 

Director Independence

 

The list of director nominees and continuing directors can be found in the first section of this Proxy Statement in Information Concerning Directors and Nominees. MainStreet applies the definition of independent director as defined by the Nasdaq Stock Market Listing Rules. In accordance with this guidance, all directors of MainStreet would be considered independent with the exception of Larry A. Heaton, BankShares’ President and Chief Executive Officer.

 

COMMITTEE REPORTS

 

Report of the Audit/Compliance Committee

 

The Audit/Compliance Committee’s Report to the shareholders, which follows, was approved and adopted by the Committee on March 15, 2012 and by the Board of Directors on March 15, 2012.

 

The Audit/Compliance Committee has reviewed and discussed with management the audited financial statements. The Audit/Compliance Committee has discussed with the independent auditors the matters required to be discussed by Public Company Accounting Oversight Board Auditing Standard AU Section 380 – “Communication with Audit Committees”, and Rule 2-07 of Regulation S-X promulgated by the SEC, as modified or supplemented, including their judgments about the quality, not just the acceptability, of the Company’s accounting principles and underlying estimates in the Company’s consolidated financial statements; all critical accounting policies and practices to be used; all alternative treatments within generally accepted accounting principles for policies and practices related to material terms that have been discussed with management of the Company; and other material written communication between the independent accountants and management of the Company, such as any management letter or schedule of unadjusted differences. In addition, the Audit/Compliance Committee had received from the independent auditors the written disclosures and the letter from the independent accountant required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the Audit/Compliance Committee concerning independence, and has discussed with the independent accountant the independent accountant’s independence.

 

Based on the reviews and discussions described above, the Audit/Compliance Committee recommended to the Board of Directors that the audited financial statements be included in BankShares’ Annual Report on Form 10-K for the fiscal year ended December 31, 2011, for filing with the Securities and Exchange Commission. By recommending to the Board of Directors that the audited financial statements be included, the Audit/Compliance Committee is not opining on the accuracy, completeness or presentation of the information contained in the audited financial statements. The auditing firm for BankShares for the years ended December 31, 2011 and 2010 was Yount, Hyde & Barbour, P. C. located in Winchester, Virginia.

 

 

The Audit Committee of the Board of Directors has engaged the firm of Yount, Hyde & Barbour, P. C. as its independent registered public accounting firm to audit the financial statements of the Corporation and its subsidiaries for the year 2012, and to report on the consolidated balance sheets, statements of operations and other related statements of the Corporation and its subsidiaries. The Corporation’s shareholders are being asked to ratify the appointment of Yount, Hyde & Barbour, P. C., which has served as the independent registered public accounting firm for the Corporation since the beginning of 2007. A representative from Yount, Hyde & Barbour, P. C. is expected to be present at the Annual Meeting, will have an opportunity to make a statement if he or she desires to do so and will be available to respond to questions posed by the shareholders. If shareholders do not ratify the decision of the Audit Committee to reappoint Yount, Hyde & Barbour, P. C. as the Corporation’s independent registered public accounting firm for 2012, the Audit Committee will reconsider, but not necessarily reverse, its decision.

 

Under the terms of its charter, the Audit Committee must pre-approve all auditing services and permitted non-audit services (including the fees and terms of such services) to be performed for BankShares by its independent auditor, subject to a de minimis exception for non-audit services which are approved by the Audit Committee prior to the completion of the audit and otherwise in accordance with the terms of applicable SEC rules. To qualify for the de minimis exception, the aggregate amount of all such non-audit services provided to the Company must constitute not more than 5% of the total amount of revenues billed to BankShares from its independent auditors during the fiscal year in which the services are provided; such services were not recognized by the Company at the time of the engagement to be non-audit services; and the non-audit services are promptly brought to the attention of the Audit Committee and approved prior to the completion of the audit by the Audit Committee, or by one or more members of the committee to whom authority to grant such approval has been delegated by the Audit Committee. The following are fees for professional services provided to BankShares by Yount, Hyde & Barbour, P. C. for the fiscal years ended December 31, 2011 and 2010, respectively:

 

		2011				2010
Audit Fees		$	58,500			$	56,510
Audit-related fees			—				—
Tax fees			6,600				6,950
All other fees			—				—
Total fees		$	65,100			$	63,460

 

Audit fees consist of audit and review services, consents, and review of documents filed with the Securities and Exchange Commission. Audited-related fees consist of research and consultation concerning financial accounting and reporting standards. Tax fees consist of preparation of federal and state income tax returns and consultation regarding tax compliance issues. The Audit/Compliance Committee gave prior approval for all Audit Related Fees and Tax Fees and believes that the independent auditor’s provision of the Audit Related and Tax services to BankShares is compatible with the maintenance of the auditor’s independence.

 

We are a relatively small and young corporation located outside of a major metropolitan area. We do not have a board director who qualifies as a “financial expert” (as defined by the Sarbanes Oxley Act of 2002) on the Audit/Compliance Committee. Because of our size and location, we have not actively pursued a financial expert and there is no certainty that one could be found. We believe that the members of the Audit Committee have sufficient financial experience to enable them to provide effective oversight given BankShares’ size and structure.

 

Submitted by the members of the Audit/Compliance Committee:

 

Joel R. Shepherd (Chairman), C. Laine Dalton, J. Mac Deekens, Danny M. Perdue and Michael A. Turner.

 

 

Report of the Human Resources Committee

 

The following is a report from the Human Resources Committee describing the policies pursuant to which compensation was paid to executive officers of BankShares during 2011.

 

The Human Resources Committee is composed of four independent directors and has responsibility for reviewing the performance and establishing the compensation of the CEO, and reviewing and approving the performance review and compensation of the remaining BankShares’ executive officers upon recommendation and informational input by the CEO. The Committee may not delegate its authority.

 

Pursuant to this authority, the Human Resources Committee fixed and approved the 2011 and 2010 compensation paid to Mr. Heaton and approved the 2011 and 2010 performance review and compensation recommended for Ms. Smith by Larry A. Heaton.

 

Compensation Program Components: BankShares’ compensation programs have been established with the primary objectives of maintaining and providing pay levels and incentive opportunities that are competitive and reflect the performance of BankShares and its subsidiary bank as well as the complexity of managing through the current recessionary and regulatory environment. The primary components of compensation for Larry A. Heaton and Brenda H. Smith were base salary, 401-K match, a company-wide incentive program based on specific performance criteria, stock option grants and the SERP. Due to the performance of the Company, there was no incentive plan in place during 2011 or 2010 based on recommendations by Mr. Heaton and Ms. Smith and adopted by the Board. The 2004 Key Employee Stock Option Plan expired in January 2009, except with respect to awards granted prior to that date. There were no stock options granted in 2011 or 2010.

 

Salary: The base salary parameters were established through comparisons with organizations of similar size and complexity to BankShares. Compensation levels were set with the objective of ensuring that executive officer base salaries, when considered as a part of total compensation, were adequate and competitive with the peer group of BankShares and its subsidiary bank, based on asset size. For these purposes, the Committee utilized the Virginia Bankers Association Salary, Benefits and Director Compensation Survey. There was a company-wide salary freeze during 2011. No adjustments were made to the salary of Mr. Heaton and Ms. Smith. Mr. Heaton voluntarily accepted no salary increase at his annual performance review in 2010. Both Mr. Heaton and Ms. Smith voluntarily accepted no salary increase at their annual performance review in 2009.

 

Stock Options: There were no grants of stock options to Mr. Heaton and Ms. Smith during 2011 or 2010. Prior grants under the 2004 Key Employee Stock Option Plan remain in place. See the Compensation Narrative for information regarding vesting and expiration dates for all options. All stock options were vested at the end of 2010. Vesting was solely conditioned on the named executive remaining an employee until the end of each vesting period.

 

 

The overall compensation structure of the Company is administered by the Human Resources Committee. The Human Resources Committee ensures that the policies and plans in place are consistent with the risk structure of the overall Company. Base compensation is detailed by salary grades in place for all employees. These salary grades are reviewed annually and are consistent with other similar banks of size and location. Base salary is designed to be competitive in order to retain and attract personnel. The performance of BankShares and the importance of compensating management in light of the current economic and regulatory environment were also considered. It is a challenging economic and regulatory environment which requires increased work times and diligence in dealing with the various complex issues, some of which are out of management’s control. Seasoned and experienced bankers like Mr. Heaton and Ms. Smith are essential during these turbulent times. Our incentive plan targets have changed over the years, but have always had a component of overall Company performance evidenced by the lack of an incentive plan in 2011 and 2010. There was only a semi-annual payout in 2009. There will be no incentive plan for the year 2012 as suggested by Mr. Heaton and Ms. Smith. There is no plan for company-wide salary increases in 2012, but this will be monitored as the year unfolds. A referral program to enhance noninterest income was developed in 2010, which allows for monthly referral income based on strict criteria of referrals. Mr. Heaton and Ms. Smith do not participate in the referral program upon their suggestions. The 2004 Key Employee Stock Option Plan expired in January 2009, except with respect to awards granted prior to that date. No other plan has been created.

 

Submitted by the members of the Human Resources Committee: C. Laine Dalton (Chairman), William L. Cooper, III, J. Mac Deekens, and Michael A. Turner.

 

Report of the Nominating Committee

 

The Nominating Committee was formed in 2006 to select a nominee for a director beginning in 2007. The Nominating Committee did not meet during 2011.

 

Submitted by members of the Nominating Committee: Larry A. Heaton and Joel R. Shepherd.

 

BOARD MEMBER ATTENDANCE AT ANNUAL MEETINGS

 

The Board of Directors recognizes that attendance by directors at annual meetings of the Company’s shareholders benefits BankShares by giving directors an opportunity to meet, talk with and hear the suggestions or concerns of shareholders who attend those meetings, and by giving those shareholders access to BankShares’ directors that they may not have at any other time during the year. The Board of Directors recognizes that directors have their own business interests and are not full-time employees of the Company, and that the Company cannot compel attendance by directors at annual meetings. However, it is the policy of the Board of Directors that directors be strongly encouraged to attend each Annual Meeting of Shareholders. At the 2011 Annual Meeting of Shareholders, all of the eight directors were in attendance.

 

COMMUNICATIONS WITH DIRECTORS

 

The Board of Directors has adopted a policy for shareholders to communicate with directors. Shareholders of BankShares are encouraged to communicate with the full board, or with individual directors, regarding their suggestions, concerns, complaints and other matters pertinent to BankShares’ business. Shareholders should send their communication in writing to the Corporate Secretary, indicating whether it is intended for the Board as a whole, for the Chairman of a committee of the Board, or for one or more individual members of the Board. The Corporate Secretary will review all written communications (unless marked conspicuously “CONFIDENTIAL”) and forward them to the director or directors for whom they appear to be intended. Confidential communications, so marked, will not be opened but will be submitted to the named addressee unopened.

 

 

TRANSACTIONS WITH RELATED PERSONS

 

BankShares’ Officers and Directors, and other corporations, business organizations, and persons with which some of BankShares’ Officers and Directors are associated, customarily have banking transactions with the 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. All loan approvals to directors and executive officers are made in compliance with Regulation O of the Federal Reserve Act. None of such loans are classified as nonaccrual, past due, restructured or potential problems. All outstanding loans to Executive Officers and Directors and their associates are current as to principal and interest. Franklin Community Bank, N.A., a subsidiary of MainStreet BankShares, Inc., leases its main office in Rocky Mount, Virginia and its Westlake office. The 220 North banking office was closed in November 2010, and is being subleased. Rent will be paid until the lease expires. The owners of the buildings are directors of Franklin Bank. One of the owners of the Rocky Mount main office is also a director of MainStreet, which is Michael A. Turner. The lease payments made in 2011 and 2010 were $159,693 and $147,791, respectively for the main office building. The leases were made on market terms for those comparable at the time of the transaction. Please refer to Footnotes #5 and #13 of the consolidated financial statements.

 

CODE OF ETHICS

 

BankShares has adopted a Code of Ethics for all of its employees including its Chief Executive Officer and its Chief Accounting Officer. A copy of the Code of Ethics may be obtained free of charge by writing to Brenda H. Smith, Executive Vice President, 1075 Spruce Street, Martinsville, Virginia, 24112.

 

SUBMISSION OF SHAREHOLDER PROPOSALS

 

Submission of Shareholder Proposals for Inclusion in BankShares Proxy Statement and Form of Proxy for the 2013 Annual Meeting

 

Proposals of shareholders intended to be presented at the 2013 Annual Meeting of Shareholders of BankShares must be received by BankShares not later than November 29, 2012 and comply with all the requirements of Rule 14a-8 of the Securities Exchange Act of 1934, in order to be included in the proxy statement and form of proxy relating to such Annual Meeting. Such proposals, including shareholder nominations of candidates for election as BankShares directors, should be sent to the Corporate Secretary, Brenda H. Smith, at BankShares’ principal office at 1075 Spruce Street, Martinsville, Virginia 24112 by certified mail, return receipt requested. Any proposal that is received by BankShares after November 29, 2012, will be considered untimely for inclusion in the proxy statement and form of proxy for the 2013 Annual Meeting.

 

Submission of Other Shareholder Proposals

 

BankShares’ bylaws provide that only such business which is properly brought before a shareholder meeting will be conducted. For business to be properly brought before a meeting, a shareholder must give timely notice in writing to the President of the Company. To be timely, a shareholder’s notice shall be delivered to, or mailed and received at, the principal executive offices of BankShares not less than sixty days nor more than ninety days prior to the meeting; provided, however, in the event that less than seventy days notice or prior public disclosure of the date of the meeting is given or made to shareholder, notice by the shareholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting or such public disclosure was made. Notice shall be deemed to have been given more than seventy days in advance of an Annual Meeting of Shareholders if the Annual Meeting is called on the second Thursday of May of the year (or if such date falls on a legal holiday, the next business day) without regard to when public disclosure thereof is made. Notice of actions to be brought before a meeting shall set forth, as to each matter the shareholder proposes to bring before the meeting: a brief description of the business desired to be brought before the meeting and the reasons for bringing such business before the meeting; and as to the shareholder giving the notice, (i) the name and address, as they appear on BankShares’ books, of such shareholder, (ii) the classes and number of shares of BankShares’ which are owned of record and beneficially by such shareholder, and (iii) any material interest of such shareholder in such business other than his interest as a shareholder of BankShares.

 

 

2011 ANNUAL REPORT

 

BankShares’ 2011 Annual Report and Form 10-K, which includes audited consolidated balance sheets as of December 31, 2011 and December 31, 2010, consolidated statements of operations, changes in shareholders’ equity and cash flows for the years ending December 31, 2011 and December 31, 2010, along with the related footnotes, is being mailed with this Proxy Statement to shareholders of record as of the close of business on March 16, 2012.

 

Shareholders are urged to complete, sign, date and return promptly the enclosed proxy. Your prompt response and cooperation is appreciated.

 

	By Order of the Board of Directors
	Larry A. Heaton
	President and Chief Executive Officer

 

Dated:  March 30, 2012

 

 

APPENDIX A

 

MAINSTREET BANKSHARES, INC.

 

AUDIT COMMITTEE CHARTER

 

PURPOSE

 

The Audit Committee (the "Committee") is appointed by the Board of Directors (the "Board") of MainStreet BankShares, Inc. (the "Company" or "BankShares") to assist the Board in monitoring (1) the integrity of the financial reporting processes and internal controls of the Company and its subsidiaries, (2) the compliance by the Company and its subsidiaries with legal and regulatory requirements related to the production of timely and accurate financial reports, (3) the performance of the Company’s internal and independent auditors, and (4) the qualifications and independence of the Company’s independent auditor.

 

COMMITTEE COMPOSITION

 

The Committee shall have a minimum of three directors appointed by the Board. Membership is limited to independent directors. Additional members of the Committee may be appointed at any time by action of the Board. Members of the Committee may be removed at any time with or without cause by action of the Board. The Board of Directors will determine “independence” under the current standards of the Securities and Exchange Commission and NASDAQ Rule 5605(A)(2).

 

AUTHORITY

 

The Committee shall have the full and exclusive authority to take any actions necessary to discharge its duties under this Charter. The Committee may take any actions consistent with this Charter, the Company’s by-laws and Articles of Incorporation as the Committee or the Board deems necessary or appropriate.

 

The Committee shall have the independent authority to retain legal, accounting or other consultants to advise the Committee. The Company shall provide appropriate funding, as determined by the Committee, for compensating any advisors retained independently by the Committee.

 

The Committee may not delegate any of its responsibilities to the Company’s management.

 

OVERSIGHT OF THE INDEPENDENT AUDITOR

The Committee shall:

 

1.          Be directly responsible for approval of the compensation and oversight of the Company’s outside auditor (including resolution of disagreements between management, the outside auditor and the internal audit department regarding financial reporting or internal controls) for the purpose of preparing or issuing an audit report or related work. The Company's outside auditor shall report directly to the Committee and shall have direct access to the Committee as desired.

2.          Ensure that the Company’s outside auditor is and remains independent under all applicable rules and regulations.

3.          Pre-approve audit services and permitted non-audit services to be performed by the Company’s outside auditor. The Committee may establish pre-approval policies and procedures. In the event the Committee pre-approves non-audit services by the Company’s independent auditor, or establishes or changes any previously established pre-approval policies and procedures, it shall notify the Board immediately.

 

 

4.          Report to the Board in time for inclusion in the annual proxy statement all categories of audit fees required under SEC rules, including audit fees, audit-related fees, tax fees and all other fees.

5.          Have periodic (but not less frequently than annual) meetings with the outside auditor without the presence of management and review all substantive communications between the outside auditors and management regarding the Company’s financial reporting, internal controls or other audit related matters.

 

OVERSIGHT OF THE INTERNAL AUDIT FUNCTION

 

The Committee shall:

 

1.          Provide oversight of the Company’s internal audit function (including resolution of disagreements between management, the independent auditor and the internal audit function regarding financial reporting or internal controls). The internal audit function reports to the Committee and shall have direct access to the Committee as desired.

2.          Review with management the appointment, retention and replacement of the senior internal auditing executive or the outsourced internal auditing firm.

3.          Review any significant reports to management prepared by the Company's internal auditors and management's responses.

4.          Review the internal audit schedule and monitor its timely completion or address any failure to complete the schedule.

 

OVERSIGHT OF FINANCIAL MATTERS AND REGULATORY COMPLIANCE

 

The Committee shall:

 

1.          Assist the Board to monitor management in the development of and adherence to a sound system of internal controls and procedures to objectively assess management’s compliance with internal controls systems and processes.

2.          Provide reasonable assurance that outside auditors, through their own review, objectively assess the company’s financial reporting practices.

3.          Make regular reports to the Board addressing the quality and integrity of the Company's financial reporting processes, internal controls, adherence to accounting principles, regulatory compliance, the performance and independence of the independent auditors, and the performance of the Company's internal audit function. Assure that subsidiary bank Presidents receive reports concerning significant internal audit concerns affecting the bank.

4.          Approve the "audit committee report" required by the rules of the SEC to be included in the Company's annual proxy statement.

5.          Review with the Company's counsel any legal matter that could have a significant impact on the preparation and accuracy of the Company's financial statements.

6.          Before the filing of financial statements with the Commission direct the outside auditor to report to the Committee, the Company’s CEO and CFO: (1) all critical accounting policies and practices used by the Company, (2) all alternative accounting treatments of financial information within generally accepted accounting principles (“GAAP”) that have been discussed with management, including the ramifications of the use of such alternative treatments and disclosures and the treatment preferred by the accounting firm, (3) other material written communications between the outside auditor and management, and (4) any matters of concern to the outside auditor with respect to the Company’s internal controls, disclosure controls and procedures, accounting policies and practices or financial reporting.

 

 

7.          Review the Company's annual audited financial statements with management and the outside auditor to examine the effectiveness of the Company’s accounting and auditing principles and practices, disclosure controls and procedures, internal controls and disclosures made in management’s discussion and analysis. Recommend to the Board whether the audited financial statements should be included in the Company's annual reports. Review the Company’s quarterly financial statements with management.

8.          Review with the outside auditor any problems or difficulties the auditor may have encountered and any management letter provided by the auditor and the Company's response to that letter. Such review should address:

a.           Any difficulties encountered in the course of the audit work, including any restrictions on the scope of activities, access to required information or disagreements with management.

b.           Any changes required in the planned scope of the internal audit.

c.           The internal audit department responsibilities, budget and staffing.

9.          Review the reports of the CEO and CFO (in connection with their required certifications) regarding any significant deficiencies or material weaknesses in the design or operation of internal controls, and any fraud that involves management or other employees who have a significant role in the company's internal controls.

10.         Establish procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters, and the confidential, anonymous submissions by employees or contractors of concerns regarding questionable accounting or accounting matters.

 

MANAGING THE AUDIT COMMITTEE

 

The Committee shall:

 

1.          Review and reassess the adequacy of this Audit Committee Charter (the "Charter") annually and recommend any proposed changes to the Board for approval. The Charter will be included as an appendix to the annual stockholders' meeting proxy statement once every three years or in the next annual stockholders' meeting proxy statement after any significant amendment to the Charter.

2.          Review and assess annually the efficiency and effectiveness of the Audit Committee's performance.

 

MEETINGS

 

The Audit Committee shall meet at least quarterly, but as frequently as circumstances may require. Meetings of the Audit Committee may be held with or without notice at such time and place as may be designated from time to time by the Committee ("Regular Meeting"). Meetings which are not Regular Meetings of the Committee may be called from time to time by the Committee chairman, if any, or by request from any Committee member and notice thereof shall be given to all members. Notice of meetings shall be provided in accordance with the applicable sections of the Company’s by-laws.

 

In addition, the Committee shall meet periodically with management, the senior internal auditing executive or outsourced internal audit company and the outside auditor in separate executive sessions.

 

 

ADMINISTRATION

 

The Committee shall keep regular minutes of its proceedings and make reports to the Board upon request or as required. Unless the Board otherwise provides, the Committee may make, alter and repeal rules for the conduct of its business not inconsistent with the Company's by-laws. In the absence of such rules the Committee shall conduct its business in the same manner as the Board conducts its business pursuant to the Company’s by-laws.

 

All Committee members are expected to allocate sufficient time in their schedules to fulfill their fiduciary duties to the Company. All Committee members are expected to participate in the committee meetings regularly, and in no event in fewer than 75% of such meetings annually. They are expected to be prepared for each meeting, by reviewing relevant materials, seeking such additional information and assistance as they determine to be helpful and adequately informing themselves of matters under the Committee's consideration and otherwise to participate actively in the Committee's deliberations.

 

The Committee shall not act through subcommittees but may appoint subcommittees to study and report to it on any matter.