UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
___________________________
FORM 10-KSB
|
[ X ]
|
ANNUAL REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31,
2007
OR
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|
[ ]
|
TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission File Number:
000-52298
MAINSTREET FINANCIAL
CORPORATION
(Exact name of small business issuer as
specified in its charter)
|
United
States
|
|
20-1867479
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer Identification
No.)
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|
629 W. State Street, Hastings
Michigan
|
|
49058-1643
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(Address of principal executive
offices)
|
|
|
Issuer's telephone number, including
area code:
(269)
945-9561
Securities registered under Section
12(b) of the Act:
None
|
Securities registered under
Section 12(g)of the Act:
|
Common Stock, par value $0.01 per share
|
|
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(Title of
Class)
|
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. ______
Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such
shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90
days.
YES
X
NO
___
Check
if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendments
to this Form 10-KSB.
_____
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.
_____
State
issuer's revenues for its most recent fiscal year.
$ 7,379,000
.
As
of March 14, 2008, there were issued and outstanding 756,068 shares of the
issuer's common stock. The aggregate market value of the voting stock held by
non-affiliates of the issuer on that date, computed by reference to the average
of the high and low bid price of such stock, was $1.8 million, based
on 291,064 shares at $6.20, which was the closing price on March 14, 2008. (The
exclusion from such amount of the market value of the shares owned by any person
shall not be deemed an admission by the issuer that such person is its
affiliate.)
DOCUMENTS INCORPORATED BY
REFERENCE
Part
II of Form 10-KSB - Annual Report to Shareholders for the year ended December
31, 2007.
Part
III of Form 10-KSB - Portions of the Proxy Statement for the 2008 Annual Meeting
of Shareholders.
Transitional
Small Business Disclosure Format (check one) YES ___ NO
X
General
Since
being formed in November 2004, MainStreet Financial Corporation (the "Company")
has not engaged in any business other than through MainStreet Savings Bank, FSB
(the "Bank") and the management of its cash and investment
portfolio. The Company neither owns nor leases any property, but we
use the premises, equipment and furniture of the Bank. We employ only persons
who are executive officers of the Bank as our executive officers, and we also
use the support staff of the Bank from time to time. We currently do
not separately compensate any employees or directors. MainStreet
Financial Corporation, MHC, a federal mutual holding company (the"MHC"), owns
53% of the Company's stock.
The
Company has continued to experience operating losses, which has reduced our
capital. Our net loss of $1,345,543 for the year ended December 31,
2007, includes a $436,585 valuation allowance established at year-end to reduce
our net deferred tax asset to zero. The remainder of the net loss for
2007 is largely attributable to the continuing slowdown in the Michigan
economy. See our financial statements and Management’s Discussion and
Analysis of Financial Condition and Results of Operations in Exhibit 13 to this
Form 10-KSB for additional information on our operating results and financial
condition.
The
Company is registered with and regulated by the OTS. The Bank is subject to
extensive regulatory supervision and examination by the OTS and the FDIC, which
administers the deposit insurance fund that insures its deposits. The
Bank is a member of, and owns capital stock in the Federal Home Loan Bank of
Indianapolis, which is one of the twelve regional banks that comprise the
Federal Home Loan Bank System.
Primarily
as a result of the continuing operating losses, our subsidiary, MainStreet
Savings Bank, FSB (the “Bank’) received a letter from the OTS dated February 5,
2008,
stating
that
the Bank is deemed by the OTS to be in troubled condition, and, as a result, is
subject to specified operating restrictions.
These
operating restrictions provide that: (1) the Bank must limit its quarterly asset
growth to net interest credited on deposit liabilities during the quarter
(unless additional asset growth is permitted by the OTS); (2) the Bank must
obtain prior OTS approval prior to appointing any new director or senior
executive officer; (3) the Bank’s ability to enter into certain severance
agreements or make certain severance payments is limited by 12 C.F.R. § 359; (4)
the Bank must receive OTS approval of any new, renewed or amended arrangements
providing compensation or benefits to its directors and officers; (5) the Bank
must obtain OTS approval of all third-party contracts outside the normal course
of business; and (6) the Bank must provide the OTS with 30-days notice of all
proposed transactions with affiliates.
On
March 18, 2008, the OTS asked the Bank to enter into a supervisory agreement to
address the OTS’s concerns regarding the financial condition of the
Bank. Among other things, the supervisory agreement would require the
Bank to: (1) prepare and submit a three-year business plan; (2) revise its
liquidity management policy; (3) enhance compliance training; (4) prepare and
submit quarterly reports on classified assets; and (4) continue to abide by the
limits in the February 5, 2008 “troubled condition” letter. The Bank
is discussing the provisions of the proposed supervisory agreement with its
counsel and the OTS, and it expects that it will enter into a supervisory
agreement with the OTS early in the second quarter.
On
June 15, 2005, the Company obtained a $2 million loan from a commercial bank to
be drawn down as desired. The purpose of this bank loan was to obtain
funds to contribute to the Bank to increase its capital level in order to
support growth and increased consumer and commercial lending
activities. The bank loan has a five-year term and requires quarterly
interest-only payments during the five years. The interest rate,
which adjusts monthly, is 300 basis points over the three-month LIBOR, which was
a loan rate of 6.49% at origination of the loan and 8.37% at December 31,
2007. The loan has a 1% prepayment fee. At origination, we
drew down $1 million, of which $65,000 was for fees and a pledged deposit at the
lender. The remaining $935,000 was used to contribute $848,000 to the
Bank as a capital contribution and to pay a $84,000
dividend
to MHC.
In
June 2006, we drew down the additional $1 million, of which $500,000 was
contributed to the Bank.
On
December 22, 2006, in connection
with
the closing of the Company's initial public stock offering, the Company made a
$1,300,000 payment on the loan. The balance of the loan at December 31, 2007 was
$700,000.
The
loan agreement requires that we meet certain financial covenants quarterly (with
a six-month cure period)
or
trigger an event of default, which allows the lender to accelerate the
loan.
We
are not in compliance with certain of these covenants,
including
a return on assets greater than 0% and
a
combined
total of non-accrual loans and other real estate owned of
no
more than
20.0%
of Tier 1 capital and 1.5% of total loans
.
Our
continuing operating losses are a violation of the financial covenant on
earnings. At December 31, 2007, the combined total of non-accrual
loans and other real estate owned of $2.9 million was 43.9% of our Tier 1
capital and 2.9% of total loans, which violat
es
these
two
other loan covenants
. We
expect to violate these three loan covenants in 2008. On March 31, 2008,
our
lender has provided us with a letter indicating that it will refrain and forbear
from taking any action to enforce its remedies with respect to these
covena
nts
through December 31, 2008, so long as we otherwise remain in compliance with the
loan documents, the forbearance letter and the other loan the lender made to our
employee stock ownership plan ("ESOP").
The
Company completed an initial public stock offering on December 22, 2006. It sold
355,352 shares of common stock in that offering for $10.00 per share. The
Company's ESOP purchased 28,428 shares with the proceeds of a loan from the
same third party bank that made our other loan described above. The
loan covenants on that loan are the same as for the other loan and as a result,
we are in violation of the same three covenants on the ESOP loan. On March
31, 2008, the lender gave us a similar forbearance letter for the ESOP loan. The
Company received net proceeds of $2,897,238 in the public offering, 50% of which
was contributed to the Bank and $1,300,000 of which was used to reduce the
outstanding balance of the bank loan. Upon completion of the offering, the
Company issued 400,716 shares of common stock to MHC, so that MHC owns 53% of
its outstanding common stock.
Our
wholly owned subsidiary, MainStreet Savings Bank, FSB was chartered in 1924 as
Hastings Building and Loan Association by a group of Barry County businessmen
who believed that a banking institution focused on mortgage lending would
increase the number of homeowners in the community and therefore the stability,
quality of life, growth and prosperity of our communities. While our name has
changed, our market area has grown and our banking services have expanded
significantly, we remain true to our community and family focus and continue to
be an independent, locally owned and managed bank. In November 2004, MainStreet
Financial Corporation was formed as part of the reorganization of MainStreet
Savings Bank into a federal stock savings bank in a two-tier mutual holding
company structure.
The
Bank is a community-oriented institution primarily engaged in the business of
attracting retail deposits from the general public and investing those funds
primarily in permanent loans secured by first mortgages on owner-occupied, one-
to four-family residences, home equity lines of credit and construction and
development loans on residential and commercial properties located in our market
area. We also invest in commercial business, commercial real estate and a
variety of consumer loans. Our consumer loans consist primarily of auto and
recreational vehicle loans. At December 31, 2007, approximately 79.12% of our
loan portfolio consisted of residential mortgage loans and home equity lines of
credit, 2.03% consisted of construction and development loans in residential and
commercial properties, 6.11% consisted of consumer loans and 12.74% consisted of
commercial loans.
Forward
Looking Statements
This
document, including information incorporated by reference, contains
forward-looking statements about the Company and its subsidiaries which we
believe are within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements include, without
limitation, statements with respect to anticipated future operating and
financial performance, growth opportunities, interest rates, cost savings and
funding advantages expected or anticipated to be realized by management. Words
such as "may," "could," "should," "would," "believe," "anticipate," "estimate,"
"expect," "intend," "plan" and similar expressions are intended to identify
these forward looking statements. Forward-looking statements by the
Company and its management are based on beliefs, plans, objectives, goals,
expectations, anticipations, estimates and the intentions of management and are
not guarantees of future performance. The Company disclaims any
obligation to update or revise any forward-looking statements based on the
occurrence of future events, the receipt of new information, or
otherwise. The important factors we discuss below, as well as other
factors discussed under the caption "Management's
Discussion and Analysis of Financial
Condition and Results of Operations" and identified in our filings with the SEC
and those presented elsewhere by our management from time to time, could cause
actual results to differ materially from those indicated by the forward-looking
statements made in this document:
|
|
·
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further developments in the
Company's ongoing review of and efforts to resolve the problem credit
relationship described in this report, which could result in, among other
things, further downgrades of aforementioned loans, additions to the
allowance for loan losses and the incurrence of other material non-cash
and cash charges;
|
|
|
·
|
the strength of the United States
economy in general and the strength of the local economies in which we
conduct operations including the demand for mortgage and other loans and
adverse changes to the value of the collateral securing our
loans;
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|
|
·
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the effects of, and changes in,
trade, monetary and fiscal policies and laws, including interest rate
policies of the Federal Reserve Board, including changes in the
relationship of short-term and long-term
rates;
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·
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inflation, interest rate, market
and monetary fluctuations;
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·
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the timely development of and
acceptance of our new products and services and the perceived overall
value of these products and services by users, including the features,
pricing and quality compared to competitors' products and
services;
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·
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the willingness of users to
substitute our products and services for products and services of our
competitors;
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·
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the impact of changes in financial
services' laws and regulations (including laws concerning taxes, banking,
securities and insurance);
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·
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the impact of technological
changes;
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·
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changes in consumer spending and
saving habits; and
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·
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our success at managing the risks
involved in the foregoing.
|
The Company disclaims any obligation to
update or revise any forward-looking statements based on the occurrence of
future events, the receipt of new information, or otherwise.
We are headquartered in Hastings,
Michigan with two offices in Hastings and one in Lake Odessa,
Michigan. Our primary market area is Barry County. Our Lake Odessa
office is located in Ionia County, Michigan, and we also serve Kalamazoo, Eaton,
Allegan, Kent, Calhoun and Van Buren counties in southwest
Michigan. Our lending business outside of Barry County consists
primarily of residential mortgages; however, we have some commercial real estate
and commercial business loans in Kalamazoo. Substantially all other
types of loan originations are in Barry County.
Barry County is centrally located
between Battle Creek, Grand Rapids, Kalamazoo and Lansing, Michigan. Hastings
and the surrounding area is becoming a commuter area for these cities,
especially Grand Rapids, which is one of the fastest growing metropolitan areas
in Michigan.
As a
result, Barry County is one of the few rural counties in Michigan to experience
growth over the past decade and is expected to experience continued
growth.
The
local economy historically has been rural; however, small industrial companies
are an increasing contributor to the local economy. Median household
income and per capita income for our market area are below the state and
national averages, reflecting the rural nature of the market and limited
availability of high paying white collar and technical jobs. The
largest employer in our market area is Pennock Hospital.
During the third quarter, the most
recent time period for which data is available, total employment in the six
metropolitan areas in west Michigan rose by 0.2%. However, this
slight increase was not enough to halt west Michigan’s unemployment rate from
clinging to 6.3%. The region’s economic indicators were mixed for the
quarter, which suggests that employment conditions will remain unchanged in the
coming months. Unemployment in the Grand Rapids and Kalamazoo areas
remains lower than that of the State as a whole but consumers in the region
remain uncertain about the economy and their financial well-being, which has
perpetuated the slowdown in residential real estate sales and consumer spending
that has negatively impacted our operations.
Competition
We face strong competition in
originating real estate and other loans and in attracting deposits from seven
other banks and credit unions in our market area. Competition in
originating real estate loans comes primarily from other savings institutions,
commercial banks, credit unions and mortgage bankers. In 2007 the
Bank was one of the top five residential mortgage originators in Barry County,
Michigan. We have the second largest deposit market share among banks
and savings institutions in Barry County. Other savings institutions,
commercial banks, credit unions and finance companies provide vigorous
competition in consumer lending. Commercial business competition is
primarily from local and regional commercial banks. The depressed
economy has effectively increased competition for both deposits and all types of
loans as financial institutions struggle to attain desired
growth.
We attract our deposits through our
branch office system and the internet. Competition for those deposits
is principally from other savings institutions, commercial banks and credit
unions located in the same community, as well as mutual funds and other
alternative investments. We compete for these deposits by offering
superior service and a variety of deposit accounts at competitive
rates. Based on the most recent branch deposit data provided by the
FDIC, MainStreet Savings Bank's share of deposits was 21.21% and 1.46% in Barry
and Ionia counties, respectively.
Internet
Website
The Company maintains a website at
www.mainstreetsavingsbank.com. The information contained on that
website is not included as part of, or incorporated by reference into, this
Annual Report on Form 10-KSB. The Company's annual report on Form
10-KSB, Quarterly Reports on Form 10-QSB and Current Reports on Form 8-K or
amendments to these reports are available free of charge on the Securities and
Exchange Commission's website at www.sec.gov.
The following table presents information
concerning the composition of our loan portfolio in dollar amounts and in
percentages (before deductions for loans in process, deferred fees and discounts
and allowances for losses) at the dates indicated.
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Real
estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family
|
|
$
|
74,464
|
|
|
|
73.70
|
%
|
|
$
|
74,328
|
|
|
|
72.17
|
%
|
|
$
|
64,298
|
|
|
|
68.39
|
%
|
|
$
|
55,656
|
|
|
|
73.68
|
%
|
|
Home
equity
|
|
|
5,477
|
|
|
|
5.42
|
|
|
|
5,944
|
|
|
|
5.77
|
|
|
|
6,442
|
|
|
|
6.85
|
|
|
|
4,613
|
|
|
|
6.11
|
|
|
Commercial
(1)
|
|
|
9,093
|
|
|
|
9.00
|
|
|
|
9,292
|
|
|
|
9.02
|
|
|
|
8,825
|
|
|
|
9.39
|
|
|
|
5,599
|
|
|
|
7.41
|
|
|
Construction
or development
|
|
|
2,054
|
|
|
|
2.03
|
|
|
|
3,691
|
|
|
|
3.58
|
|
|
|
8,382
|
|
|
|
8.92
|
|
|
|
4,598
|
|
|
|
6.09
|
|
|
Total
real estate loans
|
|
|
91,088
|
|
|
|
90.15
|
|
|
|
93,255
|
|
|
|
90.54
|
|
|
|
87,947
|
|
|
|
93.55
|
|
|
|
70,466
|
|
|
|
93.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile
|
|
|
1,668
|
|
|
|
1.65
|
|
|
|
1,575
|
|
|
|
1.53
|
|
|
|
842
|
|
|
|
0.90
|
|
|
|
699
|
|
|
|
0.93
|
|
|
Recreational
vehicles
(2)
|
|
|
3,044
|
|
|
|
3.01
|
|
|
|
2,969
|
|
|
|
2.88
|
|
|
|
3,292
|
|
|
|
3.50
|
|
|
|
2,892
|
|
|
|
3.83
|
|
|
Unsecured
|
|
|
1,116
|
|
|
|
1.10
|
|
|
|
1,181
|
|
|
|
1.15
|
|
|
|
1,423
|
|
|
|
1.51
|
|
|
|
621
|
|
|
|
.82
|
|
|
Other
(3)
|
|
|
345
|
|
|
|
0.34
|
|
|
|
386
|
|
|
|
0.37
|
|
|
|
507
|
|
|
|
0.56
|
|
|
|
857
|
|
|
|
1.13
|
|
|
Total
consumer loans
|
|
|
6,173
|
|
|
|
6.11
|
|
|
|
6,111
|
|
|
|
5.94
|
|
|
|
6,064
|
|
|
|
6.45
|
|
|
|
5,069
|
|
|
|
6.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business loans:
(1)
|
|
|
3,775
|
|
|
|
3.74
|
|
|
|
3,624
|
|
|
|
3.52
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
|
101,036
|
|
|
|
100.00
|
%
|
|
|
102,990
|
|
|
|
100.00
|
%
|
|
|
94,011
|
|
|
|
100.00
|
%
|
|
|
75,535
|
|
|
|
100.00
|
%
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
in process
|
|
|
419
|
|
|
|
|
|
|
|
1,816
|
|
|
|
|
|
|
|
2,399
|
|
|
|
|
|
|
|
2,069
|
|
|
|
|
|
|
Deferred
fees and discounts
|
|
|
(41
|
)
|
|
|
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
(27
|
)
|
|
|
|
|
|
Allowance
for losses
|
|
|
508
|
|
|
|
|
|
|
|
538
|
|
|
|
|
|
|
|
476
|
|
|
|
|
|
|
|
413
|
|
|
|
|
|
|
Total
loans, net
|
|
$
|
100,150
|
|
|
|
|
|
|
$
|
100,653
|
|
|
|
|
|
|
$
|
91,143
|
|
|
|
|
|
|
$
|
73,080
|
|
|
|
|
|
____________________
(1)
Prior to 2006, commercial business loans not secured by real estate were not
separately recorded. They were included in commercial real estate
loans.
(2)
Includes loans secured by recreational vehicles and boats.
(3)
Includes loans secured by deposits.
The following table shows the
composition of our loan portfolio in dollar amounts and in percentages (before
deductions for loans in process, deferred fees and discounts and allowances for
losses) at the dates indicated.
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Fixed-
rate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family
|
|
$
|
73,846
|
|
|
|
73.09
|
%
|
|
$
|
73,550
|
|
|
|
71.42
|
%
|
|
$
|
63,578
|
|
|
|
67.63
|
%
|
|
$
|
54,887
|
|
|
|
72.66
|
%
|
|
Commercial
(1)
|
|
|
8,092
|
|
|
|
8.01
|
|
|
|
8,315
|
|
|
|
8.07
|
|
|
|
7,358
|
|
|
|
7.83
|
|
|
|
5,123
|
|
|
|
6.78
|
|
|
Construction
or development
|
|
|
2,055
|
|
|
|
2.03
|
|
|
|
3,691
|
|
|
|
3.58
|
|
|
|
8,382
|
|
|
|
8.91
|
|
|
|
4,598
|
|
|
|
6.09
|
|
|
Total
real estate loans
|
|
|
83,993
|
|
|
|
83.13
|
|
|
|
85,556
|
|
|
|
83.08
|
|
|
|
79,318
|
|
|
|
84.37
|
|
|
|
64,608
|
|
|
|
85.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
loans
|
|
|
5,897
|
|
|
|
5.84
|
|
|
|
5,854
|
|
|
|
5.68
|
|
|
|
5,818
|
|
|
|
6.19
|
|
|
|
4,813
|
|
|
|
6.37
|
|
|
Commercial
business loans
(1)
|
|
|
1,717
|
|
|
|
1.70
|
|
|
|
1,714
|
|
|
|
1.66
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
fixed-rate loans
|
|
|
91,607
|
|
|
|
90.67
|
|
|
|
93,124
|
|
|
|
90.42
|
|
|
|
85,136
|
|
|
|
90.56
|
|
|
|
69,421
|
|
|
|
91.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable-
rate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family
|
|
|
618
|
|
|
|
0.61
|
|
|
|
778
|
|
|
|
0.76
|
|
|
|
720
|
|
|
|
0.77
|
|
|
|
769
|
|
|
|
1.02
|
|
|
Home
equity
|
|
|
5,477
|
|
|
|
5.42
|
|
|
|
5,944
|
|
|
|
5.77
|
|
|
|
6,442
|
|
|
|
6.85
|
|
|
|
4,613
|
|
|
|
6.10
|
|
|
Commercial
(1)
|
|
|
1,001
|
|
|
|
0.99
|
|
|
|
977
|
|
|
|
0.95
|
|
|
|
1,467
|
|
|
|
1.56
|
|
|
|
476
|
|
|
|
0.63
|
|
|
Total
real estate loans
|
|
|
7,095
|
|
|
|
7.02
|
|
|
|
7,699
|
|
|
|
7.48
|
|
|
|
8,629
|
|
|
|
9.18
|
|
|
|
5,858
|
|
|
|
7.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
loans
|
|
|
276
|
|
|
|
0.27
|
|
|
|
257
|
|
|
|
0.25
|
|
|
|
246
|
|
|
|
0.26
|
|
|
|
256
|
|
|
|
0.34
|
|
|
Commercial
business loans
(1)
|
|
|
2,058
|
|
|
|
2.04
|
|
|
|
1,910
|
|
|
|
1.85
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
adjustable-rate loans
|
|
|
9,429
|
|
|
|
9.33
|
|
|
|
9,866
|
|
|
|
9.58
|
|
|
|
8,875
|
|
|
|
9.44
|
|
|
|
6,114
|
|
|
|
8.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
|
101,036
|
|
|
|
100.00
|
%
|
|
|
102,990
|
|
|
|
100.00
|
%
|
|
|
94,011
|
|
|
|
100.00
|
%
|
|
|
75,535
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
in process
|
|
|
419
|
|
|
|
|
|
|
|
1,816
|
|
|
|
|
|
|
|
2,399
|
|
|
|
|
|
|
|
2,069
|
|
|
|
|
|
|
Deferred
fees and discounts
|
|
|
(41
|
)
|
|
|
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
(27
|
)
|
|
|
|
|
|
Allowance
for losses
|
|
|
508
|
|
|
|
|
|
|
|
538
|
|
|
|
|
|
|
|
476
|
|
|
|
|
|
|
|
413
|
|
|
|
|
|
|
Total
loans, net
|
|
$
|
100,150
|
|
|
|
|
|
|
$
|
100,653
|
|
|
|
|
|
|
$
|
91,143
|
|
|
|
|
|
|
$
|
73,080
|
|
|
|
|
|
____________________
(1)
Prior to 2006, commercial business loans not secured by real estate were not
separately recorded. They were included in commercial real estate
loans.
The following schedule illustrates the
contractual maturity of our loan portfolio at December 31,
2007. Mortgages that have adjustable or renegotiable interest rates
are shown as maturing in the period during which the contract is
due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
|
|
|
Real
Estate Mortgages
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family
and
Home Equity
|
|
|
Commercial
|
|
|
Construction
or
Development
|
|
|
Consumer
|
|
|
Commercial
Business
|
|
|
Total
|
|
|
|
|
Amount
|
|
|
Weighted
Average
Rate
|
|
|
Amount
|
|
|
Weighted
Average
Rate
|
|
|
Amount
|
|
|
Weighted
Average
Rate
|
|
|
Amount
|
|
|
Weighted
Average
Rate
|
|
|
Amount
|
|
|
Weighted
Average
Rate
|
|
|
Amount
|
|
|
Weighted
Average
Rate
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Due
during years endin
g
December
31,
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200
8
(2)
|
|
$
|
10,535
|
|
|
|
6.83
|
%
|
|
$
|
2,758
|
|
|
|
7.78
|
%
|
|
$
|
1,023
|
|
|
|
7.96
|
%
|
|
$
|
447
|
|
|
|
10.96
|
%
|
|
$
|
2,210
|
|
|
|
8.39
|
%
|
|
$
|
16,973
|
|
|
|
7.36
|
%
|
|
200
9
to
201
2
|
|
|
49,825
|
|
|
|
5.98
|
%
|
|
|
4,900
|
|
|
|
7.24
|
%
|
|
|
667
|
|
|
|
6.56
|
%
|
|
|
3,448
|
|
|
|
8.51
|
%
|
|
|
1,565
|
|
|
|
7.41
|
%
|
|
|
60,405
|
|
|
|
6.27
|
%
|
|
201
3
and
following
|
|
|
19,581
|
|
|
|
6.60
|
%
|
|
|
1,435
|
|
|
|
7.61
|
%
|
|
|
364
|
|
|
|
5.69
|
%
|
|
|
2,278
|
|
|
|
6.50
|
%
|
|
|
---
|
|
|
|
---
|
|
|
|
23,658
|
|
|
|
6.64
|
%
|
|
Total
|
|
$
|
79,941
|
|
|
|
6.25
|
%
|
|
$
|
9,093
|
|
|
|
7.46
|
%
|
|
$
|
2,054
|
|
|
|
7.10
|
%
|
|
$
|
6,173
|
|
|
|
7.94
|
%
|
|
$
|
3,775
|
|
|
|
7.98
|
%
|
|
$
|
101,036
|
|
|
|
6.54
|
%
|
____________________
(1)
The total amount of loans due after December 31, 2008, which have predetermined
fixed interest rates is $79.2 million, while the total amount of loans due after
such date, which have floating or adjustable interest rates is $4.8
million.
(2)
Includes demand loans, loans having no stated maturity and overdraft
loans.
At December 31, 2007, the maximum amount
under federal law that we could have loaned to any one borrower and the
borrower’s related entities was $1,007,400
.
See “How We Are Regulated – MainStreet
Savings Bank – OTS Regulations.” Our five largest lending
relationships are with commercial borrowers and totaled $4.5 million in the
aggregate, or 4.5% of our $100
million
total loan portfolio, at December 31,
2007
.
The largest relationship involves a
residential developer with loans totaling $1,041,000
. The loans in this relationship
were in compliance with our lending limit at the time they were made and are
considered to be nonconforming under OTS regulations so long as the amount
remains above our current lending limit.
These loans are secured by a residential
development, a speculative construction single family home, second mortgages on
the borrower’s primary residence and investment properties and a real estate
secured line of credit. All of these loans were current
at
December 31, 2007. The
second largest relationship at December 31, 2007 was $924,000, secured by the
borrower’s primary residence, commercial real estate, all corporate assets of an
auto parts dealership and two vehicle loans, with all these loans being current
at
December 31, 2007. The third
largest relationship involves one of our directors and consists of $878,000 in
loans secured by a downtown Hastings storefront and restaurant, corporate assets
and the borrower’s primary and secondary residences. The next two
largest relationships at December 31, 2007 were $823,000 secured by commercial
real estate and single family investment properties and $835,000 secured by
single family properties where the borrower is a human service agency using the
dwellings as group homes. Both of these lending relationships were
current at December 31, 2007.
One-
to Four-Family Residential Real Estate Lending.
We originate loans secured by first and
second mortgages on owner-occupied, one- to four-family residences in our market
area. Some of these loans are funded by us and retained in our
portfolio, and others are originated and sold to an independent mortgage company
with servicing released. See "- Loan Originations, Purchases, Sales,
Repayments and Servicing." At December 31, 2007, one- to four-family residential
mortgage loans totaled $74.4 million, or 73.7% of our gross loan
portfolio. At December 31, 2007, we had $63.6 million in loans
secured by owner-occupied one- to four-family residences and $10.8 million in
loans secured by nonowner-occupied, one- to four-family residences, of which
$73.8 million were fixed-rate loans and $618,000 were adjustable-rate
loans
We generally
underwrite our one- to four-family owner-occupied loans based on the applicant's
employment and credit history and the appraised value of the subject
property. Presently, we lend up to 103% of the lesser of the
appraised value or purchase price for one- to four-family residential loans,
although most of these loans have a loan-to-value ratio of 80%. For
loans with loan-to-value ratios in excess of 80%, we generally require private
mortgage insurance in order to reduce our exposure to risk, although our
underwriting guidelines allow loans to be granted up to 89% of appraised value
without private mortgage insurance. Properties securing our one- to
four-family loans are appraised by independent fee appraisers approved by the
board of directors or we utilize the value for tax assessment
purposes. Borrowers are required to obtain title insurance and hazard
insurance, including flood insurance, where appropriate, insuring the Bank
against potential loss.
We currently originate
one-to
four
-
family mortgage loans on either a fixed
or adjustable rate basis, as consumer demand dictates. Our pricing
strategy for mortgage loans includes setting interest rates that are competitive
with other local financial institutions and consistent with our internal
needs. Fixed-rate first mortgage loans have a five to seven year
term, with a balloon payment and up to 30-year
amortization. Fixed-rate second mortgages have similar terms with
rates 100 to 150 basis points higher than first mortgages. Fifteen to
thirty year fixed-rate mortgages and adjustable rate loans with one to seven
year re-pricing (using LIBOR index) are originated for immediate sale under
pre-existing commitments. It is our intent to only retain in our
portfolio five to seven year balloon loans to ensure earlier
re-pricing.
Our one- to four-family loans are not
assumable. Our real estate loans generally contain a "due on sale"
clause allowing us to declare the unpaid principal balance due and payable upon
the sale of the security property.
We generally underwrite our
nonowner-occupied, one- to four-family loans based on a 1.25 debt service
coverage ratio, placing an emphasis on the applicant's creditworthiness and the
appraised value of the property. Presently, we lend up to 80% of the
lesser of the appraised value or purchase price for the residence (or 90% with
private mortgage insurance). These loans are offered with a fixed
rate or an adjustable rate at rates one percentage point higher than
owner-occupied residential mortgages and with a 1% origination
fee. These loans have terms of up to 5 years and are not
assumable.
Commercial
Real Estate Lending.
We offer a variety of commercial real
estate loans. These loans are secured primarily by local
service/retail establishments and small office or commercial buildings located
in our market areas, primarily in Barry County. Through the end of
2005 our commercial real estate portfolio included our commercial business
loans. See " Commercial Business Lending." At December 31, 2007
commercial real estate loans totaled $9.1 million or 9.0%, of our gross loan
portfolio.
Our loans secured by commercial real
estate are originated with a fixed or adjustable interest rate, adjusted
quarterly or monthly, with a three-or five-year term and balloon payment and up
to a 25 year amortization calculation. The interest rate on
adjustable rate loans is based on a variety of indices, generally determined
through negotiation with the borrower. Loan-to-value ratios on our
multi-family and commercial real estate loans typically do not exceed 80% of the
appraised value of the property securing the loan.
Loans secured by commercial real estate
are underwritten based on the income producing potential of the property and the
financial strength of the borrower. The net operating income, which
is the income derived from the operation of the property less all operating
expenses, must be sufficient to cover the payments related to the outstanding
debt. We generally require personal guarantees of the borrowers and
an assignment of rents or leases in order to be assured that the cash flow from
the project will be used to repay the debt. Appraisals on properties
securing multi-family and commercial real estate loans are performed by
independent state certified or licensed fee appraisers approved by the board of
directors. See " Loan Originations, Purchases, Sales and
Repayments."
We do not generally maintain a tax or
insurance escrow account for loans secured by commercial real
estate. In order to monitor the adequacy of cash flows on income
producing properties, the borrower is generally required to provide periodic
financial information.
Loans secured by commercial real estate
properties generally involve a greater degree of credit risk than one- to
four-family residential mortgage loans. These loans typically involve
large balances to single borrowers or groups of related
borrowers. Because payments on loans secured by commercial real
estate properties are often dependent on the successful operation or management
of the properties, repayment of these loans may be subject to adverse conditions
in the real estate market or the economy. If the cash flow from the
project is reduced, or if leases are not obtained or renewed, the borrower's
ability to repay the loan may be impaired. See "Asset Quality -
Non-performing Loans." The largest commercial real estate lending relationship
at December 31, 2007, was $1,041,000 secured by a single family development,
one-to four-family real estate properties, a lien against all corporate assets
and a second mortgage against the borrower’s primary
residence.
Construction
or Development Lending.
Our construction loan portfolio consists
of loans for the construction of one- to four-family residences and commercial
properties, including land loans for development of these
properties. The weak housing market in our market area has reduced
the demand for speculative residential construction loans. We hope to
increase our construction lending business, particularly with residential
contractors, once this market improves. Construction and development
lending generally affords us an opportunity to receive interest at rates higher
than those obtainable from residential lending and to receive higher origination
and other loan fees. In addition, construction and development loans,
excluding land loans, are generally made with adjustable rates of interest for
commercial properties and fixed rates for residential
properties. These loans have six-to nine-month terms and
interest-only payments during the construction period. Land loans are
generally for residential developments. They are three-year balloon,
non-amortizing loans with an 85% maximum loan-to-value ratio and a fixed or
adjustable rate of interest. At December 31, 2007, we had $2.1
million in construction and development loans outstanding, representing 2.0% of
our gross loan portfolio and consisting of: $1.1 million in construction loans
to the prospective owners of the one- to four-family residences being
constructed and $1.0 million in construction loans to builders for pre-sold and
spec homes under construction.
Commercial
Business Lending.
We originate commercial business loans
and at December 31, 2007, we had $3.8 million in commercial business loans,
which was 3.7% of our loan portfolio. Prior to 2006, our commercial
business portfolio was reported as part of our commercial real estate
portfolio. Our commercial business lending activities encompass loans
with a variety of purposes and security including loans to finance inventory and
equipment. These are believed to carry higher credit risk than more
traditional single family loans.
Unlike residential mortgage loans,
commercial business loans are typically made on the basis of the borrower's
ability to make repayment from the cash flow of the borrower's business and,
therefore, are of higher risk. Commercial business loans are
generally secured by business assets, such as accounts receivable, equipment and
inventory. This collateral may depreciate over time, may be difficult
to appraise and may fluctuate in value based on the success of the
business. As a result, the availability of funds for the repayment of
commercial business loans is dependent on the success of the business itself
(which, in turn, is often dependent in part upon general economic
conditions).
Our management recognizes the generally
increased risks associated with our commercial business lending. Our
commercial lending policy emphasizes complete credit file documentation and
analysis of the borrower's character, capacity to repay the loan, the adequacy
of the borrower's capital and collateral as well as an evaluation of the
industry conditions affecting the borrower. Review of the borrower's
past, present and future cash flows is also
an important aspect of
our credit analysis. In addition, we generally obtain personal
guarantees from the borrowers on these types of loans. The majority
of the Bank's commercial loans have been to borrowers in Barry and Kalamazoo
counties, Michigan.
Consumer
Lending.
We
offer a variety of secured consumer loans, including loans secured by new and
used auto loans, boats, trailers and other recreational vehicles, unsecured
consumer loans and loans secured by savings deposits. We originate
our consumer loans primarily in our market areas. At December 31,
2007, our consumer loan portfolio totaled $6.2 million, or 6.1% of our gross
loan portfolio. Consumer loan terms vary according to the type of
collateral, length of contract and creditworthiness of the
borrower.
We originate auto loans on a direct and
indirect basis. Auto loans totaled $1.7 million at December 31, 2007,
or 1.7% of our gross loan portfolio of which $854,000 were direct loans and
$814,000 were indirect loans. We have a relationship with five local
car dealerships for indirect lending under an arrangement providing a reserve
fee to the referring dealer. Auto loans may be written for up to six
years and have fixed rates of interest. Loan-to-value ratios are up
to 100% of the sales price and or the retail value on new and late model used
autos and the lesser of 90% of NADA or the sales price on other used
autos.
We originate loans secured by boats,
trailers and other recreational vehicles. These loans totaled $3.0
million at December 31, 2007, or 3.0% of our gross loan portfolio. We
have a relationship with two local boat dealers for indirect lending which
provides for a reserve fee to the referring dealer. These secured
consumer loans are written with terms up to 15 years and usually have fixed
interest rates. Loan to value ratios are 100% of the sales prices for
new collateral and the lesser of 90% of NADA value or the sales price for used
collateral.
We also make unsecured loans to
consumers based on the creditworthiness of the borrower. These loans
are written for up to three years and usually have fixed rates of
interest.
Consumer and other loans may entail
greater risk than do one- to four-family residential mortgage loans,
particularly in the case of consumer loans that are secured by rapidly
depreciable assets such as automobiles and recreational vehicles. In
these cases, any repossessed collateral for a defaulted loan may not provide an
adequate source of repayment of the outstanding loan balance. As a
result, consumer loan collections are dependent on the borrower's continuing
financial stability and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy.
Loan Originations,
Purchases, Sales, Repayments and Servicing
We originate one- to four-family
residential mortgage loans primarily through referrals from real estate agents,
builders and from existing customers. We actively solicit business
from these referral sources and strive to create strong relationships with them
through the quality of service and program selections we
offer. Walk-in customers are another important source of loan
originations. We also have a loan production office in a real estate
broker's office in Kalamazoo, Michigan, to increase our residential mortgage
originations in that metropolitan area.
The Bank promotes its consumer loan
products to existing customers, primarily through in-branch promotions, direct
mailing, statement stuffers and to the community through newspaper and radio
advertising. We also work closely with area boat dealers and are
present at shows they participate in and open houses to promote our
products. In addition to working closely with the boat dealers, we
maintain and continue to develop vendor relationships with area consumer product
dealers providing financing that is secured by the consumer goods being
purchased.
The Bank has built its commercial loan
portfolio primarily through working with business owners and managers that are
customers, direct calling on referral sources, accountants and attorneys and
through direct calling on other businesses that have been targeted by our
management team.
Economic conditions and aggressive
pricing by new competitors in the Bank’s primary market area have combined to
significantly reduce opportunities to originate new commercial loans at this
time. We expect that such opportunities will return as the economy
improves and the competitive environment stabilizes.
The Bank has worked diligently to
identify qualified builders to solicit loans for both speculative construction
and contract construction for either new homes or remodeling
projects. We are an active member of the Barry County Homebuilders
Association and make contacts with builders through joint sponsorship of various
activities with building supply vendors.
The stagnant real estate market
currently limits opportunities for originating construction loans. We
expect that such opportunities will return as the economy and the housing market
eventually improve.
While we are qualified to sell one- to
four- family residential mortgage loans to Freddie Mac; we are currently selling
fixed and adjustable rate loans with servicing released to
independent
purchasers.
These loans must comply with prescribed
terms and conditions as defined by the correspondent relationship with
underwriting, approval and commitment to buy being made
prior to our approval and closing of
these loans with our borrowers. These loans are originated as
Bank
loans and assigned to the purchaser at
closing. The
Bank
typically receives at least 1% of the
loan principal as an origination fee. During the year ended December
31, 2007, we earned $22,000 in these origination fees.
During the fourth quarter of 2007, we
sold residential mortgage loans to other financial institution for asset
liability and capital management purposes.
While we originate adjustable-rate and
fixed-rate loans, our ability to originate loans is dependent upon customer
demand for loans in our market areas. Demand is affected by
competition, economic conditions and the interest rate
environment. Loans and participations purchased must conform to our
underwriting guidelines and be acceptable to the senior officer loan
committee. Furthermore, during the past few years, we, like many
other financial institutions, have experienced significant prepayments on loans
due to the low interest rate environment prevailing in the United
States. In periods of economic uncertainty, the ability of financial
institutions, including us, to originate or purchase large dollar volumes of
real estate loans may be substantially reduced or restricted, with a resultant
decrease in interest income.
In addition to interest earned on loans
and loan origination fees, we receive fees for loan commitments, late payments
and other miscellaneous services. The fees vary from time to time,
generally depending on the supply of funds and other competitive conditions in
the market. Because of competition in our market, this is not a
material source of income for us.
When a borrower fails to make a required
payment on a loan, the Bank attempts to cause the delinquency to be cured by
contacting the borrower. In the case of loans secured by residential
real estate, a late notice is sent 15 days after the due date and every 15 days
thereafter until the delinquency is resolved. When the loan is 45
days past due a delinquency letter is mailed to the borrower. If the
account becomes 90 days delinquent and an acceptable repayment plan has not been
agreed upon, a 30-day notice of our intent to foreclose is forwarded to the
borrower. Foreclosure proceedings are initiated after that 30-day
period unless a repayment plan has been approved.
Delinquent secured consumer loans are
handled with a 15-day late notice followed by the issuance of a delinquency
letter 30-45 days after the due date requesting payment within 10
days. If the loan is not current or under an approved repayment plan
within that time period, repossession and sale of consumer collateral is
initiated, subject to various requirements under the applicable consumer
protection laws as well as other applicable laws and the determination by us
that it would be beneficial from a cost basis. Borrowers on
delinquent unsecured consumer loans are sent a delinquency notice 30 days after
the due date. If no payment plan is agreed to within the next 30
days, the loan is sent to small claims court or to an attorney for
collection.
Delinquent commercial business loans and
loans secured by multi-family and commercial real estate are initially handled
by the collection officer who is responsible for contacting the
borrower. The collection department also works with the commercial
loan officers to see that necessary steps are taken to collect delinquent
loans. In addition, we have a senior officer loan review committee
that meets monthly and reviews past due and criticized loans, as well as other
loans that management feels may present possible collection problems or risk to
the Bank. If an acceptable workout of a delinquent commercial loan
cannot be agreed upon, we generally initiate foreclosure or repossession
proceedings on any collateral securing the loan.
Delinquent
Loans.
The
following table sets forth our loan delinquencies for 60 days and over by type,
number and amount at December 31, 2007.
|
|
|
Loans Delinquent
For:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60-89 Days
|
|
|
90 Days and
Over
|
|
|
Total Delinquent
Loans
|
|
|
|
|
Number
|
|
|
Amount
|
|
|
Percent
of Total
Loans
(1)
|
|
|
Number
|
|
|
Amount
|
|
|
Percent
of Total
Loans
(1)
|
|
|
Number
|
|
|
Amount
|
|
|
Percent
of Total
Loans
(1)
|
|
|
|
|
(Dollars in
thousands)
|
|
Real
Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to
four- family
|
|
|
18
|
|
|
$
|
2,379
|
|
|
|
2.36
|
%
|
|
|
10
|
|
|
$
|
1,089
|
|
|
|
1.08
|
%
|
|
|
28
|
|
|
$
|
3,468
|
|
|
|
3.44
|
|
%
|
|
Commercial
|
|
|
3
|
|
|
|
122
|
|
|
|
0.12
|
|
|
|
7
|
|
|
|
938
|
|
|
|
0.93
|
|
|
|
10
|
|
|
|
1,060
|
|
|
|
1.05
|
|
|
|
|
|
|
21
|
|
|
|
2,501
|
|
|
|
2.48
|
|
|
|
17
|
|
|
|
2,027
|
|
|
|
2.01
|
|
|
|
38
|
|
|
|
4,528
|
|
|
|
4.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
3
|
|
|
|
4
|
|
|
|
0.01
|
|
|
|
1
|
|
|
|
5
|
|
|
|
0.01
|
|
|
|
4
|
|
|
|
9
|
|
|
|
0.01
|
|
|
|
Total
|
|
|
24
|
|
|
$
|
2,505
|
|
|
|
2.49
|
%
|
|
|
18
|
|
|
$
|
2,032
|
|
|
|
2.02
|
%
|
|
|
42
|
|
|
$
|
4,537
|
|
|
|
4.50
|
|
%
|
____________________
(1)
As a percentage of total gross loans of $101.0 million at December 31,
2007.
At December 31, 2006, we had 16
delinquent loans, totaling $1,779,000 or 1.73% of total loans. Loan
delinquencies increased during 2007 primarily as the result of more difficult
economic conditions in our market and borrowers' difficulty in making increased
payments due to upward rate adjustments. We expect delinquencies to
increase during 2008.
Non-performing
Assets.
The table below sets forth the amounts
and categories of non-performing assets in our loan portfolio. Loans
are
generally
placed on non-accrual status at
90
days past due or when the collection of
principal and/or interest becomes doubtful.
The increase in non-performing loans in
2007 is the result of further deterioration in economic conditions in southwest
Michigan and higher
market
interest
rates
,
which caused certain borrowers to
become delinquent on loan payments.
We expect
non-performing loans
to
increase during
2008.
At December 31, 2007 we had
eight
troubled debt
restructurings
totaling $
901,000
or
0.
90% of total net loans
, substantially all of
which
were residential mortgage loans in
foreclosure proceedings.
S
even of these loans were for single
family residences and one was secured by an attached single family condominium
unit. At December 31, 2007, we had
seven
non-accruing loans which totaled
$
1,
479
,
000
or 1.
50
% of total net loans. This
total
includes: (1) a
$371,000
loan
for the development of residential
lots
; (2) a
$
411,00
0
loan for the development of residential
lots, which is in foreclosure and for which we have received an offer that would
not result in a material loss to the Bank; (3) a
$421,000 first mortgage on a single
family home
; (4)
a participation loan of
$147,000 for the construction of a single family home
; (5)
a $36,000
bridge loan on a single family home; (6)
a $87,600 loan on vacant land;
and
(7)
an unsecured loan of
$12,700.
For a
dditional disclosure
of significant non-performing assets,
see "Management's Discussion and Analysis of Financial Cond
ition and Results of
Operations
"
in Exhibit 13 to this Form
10-KSB.
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(Dollars in
thousands)
|
|
|
Accruing loans delinquent more
than 90 days:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to
four-family
|
|
$
|
404
|
|
|
$
|
561
|
|
|
$
|
79
|
|
|
$
|
44
|
|
|
Commercial real
estate
|
|
|
144
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
Consumer
|
|
|
5
|
|
|
|
7
|
|
|
|
---
|
|
|
|
13
|
|
|
Total
|
|
|
553
|
|
|
|
568
|
|
|
|
79
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled debt
restructuring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to
four-family
|
|
|
901
|
|
|
|
326
|
|
|
|
275
|
|
|
|
73
|
|
|
Total
|
|
|
901
|
|
|
|
326
|
|
|
|
275
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to
four-family
|
|
|
---
|
|
|
|
453
|
|
|
|
411
|
|
|
|
520
|
|
|
Consumer
|
|
|
10
|
|
|
|
12
|
|
|
|
18
|
|
|
|
---
|
|
|
Total
|
|
|
1
0
|
|
|
|
465
|
|
|
|
429
|
|
|
|
520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to
four-family
|
|
|
685
|
|
|
|
160
|
|
|
|
---
|
|
|
|
---
|
|
|
Commercial
|
|
|
794
|
|
|
|
371
|
|
|
|
---
|
|
|
|
---
|
|
|
Total
|
|
|
1,479
|
|
|
|
531
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing
assets
|
|
$
|
2,943
|
|
|
$
|
1,890
|
|
|
$
|
783
|
|
|
$
|
650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total as a percentage of total
assets
|
|
|
2.56
|
%
|
|
|
1.65
|
%
|
|
|
0.74
|
%
|
|
|
0.74
|
%
|
Other
Loans of Concern.
On December 31, 2007, the
Bank
was monitoring other loans of concern
classified as
s
ubstandard loans on the
Bank
’s monthly delinquency
report. These loans consisted of one loan for $218,000 secured by a
single family home where the borrower has requested to
d
eed
the property to the Bank;
f
ive loans totaling $284,000, secured by
first mortgages o
n single
family homes that are
in
the process of foreclosure
;
t
wo first mortgages
totaling $219,000
;
one second mortgage for $30,000,
secured by single family homes
;
and four consumer loans totaling
$13,000. All these loans are being actively
monitored and
collect
i
on
efforts are proceeding
.
Past due loans classified as Special
Mention that are being monitored by the
Bank
’s loan review committee
include
: (1)
five commercial loans
to
a landscaping company that are secured
by
vehicles and equipment
and
total $
178
,000
; and (2)
four loans
to a real estate developer that are
secured by
12 non-owner occupied,
one
-
to four
-
family
unit apartments
and attached condominiums
and
total $
730
,000
.
The Bank
also is monitoring three construction
loans on single family homes
, which are
current
and
total $745,000
.
Construction has been completed, but
there are disputes between the borrowers and the
contractors. O
ne
borrower
has a law suit pending
by a subcontractor
,
another borrower
has disputed a draw made to the
contractor and all three properties have liens placed on the properties by
subcontractors.
Classified
Assets.
Federal
regulations provide for the classification of loans and other assets, such as
debt and equity securities considered to be of lesser quality, as "substandard,"
"doubtful" or "loss". An asset is considered "substandard" if it is
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets
include those characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard", with the added characteristic that
the weaknesses present make "collection or liquidation in full", on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable". Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not
warranted.
We regularly review the problem loans in
our portfolio to determine whether any loans require classification in
accordance with applicable regulations. On the basis of management's
review of our loans, at December 31, 2007, we had $1.8 million in loans
classified as substandard, $421,000 classified as doubtful and none as
loss. The total amount classified represented 31.2% of our equity
capital and 1.95% of our assets at December 31, 2007. On the basis of
management's review of our loans, at December 31, 2006, we had $442,000 in loans
classified as substandard, $1.1 million classified as doubtful and none as
loss. The total amount classified represented 17.9% of our equity
capital and 1.35% of our assets at December 31, 2006.
Allowance
for Loan Losses.
We maintain an allowance for loan losses
to absorb probable incurred losses in the loan portfolio. The
allowance is based on ongoing, monthly assessments of the estimated probable
incurred losses in the loan portfolio. In evaluating the level of the
allowance for loan losses, management considers the types of loans and the
amount of loans in the loan portfolio, peer group information, historical loss
experience, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral and prevailing economic
conditions. Large groups of smaller balance homogeneous loans such as
residential real estate, small commercial real estate, home equity and consumer
loans are evaluated in the aggregate using historical loss factors and peer
group data adjusted for current economic conditions. Geographic peer
group data is obtained by general loan type and adjusted to reflect known
differences between peers and the Bank such as loan seasoning, underwriting
experience, local economic conditions and customer
characteristics. More complex loans such as multi-family and
commercial real estate loans and commercial business loans are evaluated
individually for impairment primarily through the evaluation of collateral
values.
At December 31, 2007, our allowance for
loan losses was $508,000, or 0.51% of the total loan portfolio. The
decrease in the allowance from $538,000, or 0.53% of the total loan portfolio at
December 31, 2006, reflects our decreased loan portfolio and the $344,000 in
charge-offs during the year. Assessing the allowance for loan losses
is inherently subjective as it requires making material estimates, including the
amount and timing of future cash flows expected to be received on impaired loans
that may be susceptible to significant change. In the opinion of
management, the allowance, when taken as a whole, reflects estimated probable
loan losses in our loan portfolios. The allowance is discussed
further in Notes 1 and 3 of the Notes to Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
|
|
|
Year ended December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(Dollars in
thousands)
|
|
|
Balance at beginning of
period
|
|
$
|
538
|
|
|
$
|
476
|
|
|
$
|
413
|
|
|
$
|
385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family
|
|
|
225
|
|
|
|
22
|
|
|
|
---
|
|
|
|
1
|
|
|
Consumer
|
|
|
119
|
|
|
|
105
|
|
|
|
63
|
|
|
|
29
|
|
|
Total
|
|
|
344
|
|
|
|
127
|
|
|
|
63
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to
four-family
|
|
|
26
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
Consumer
|
|
|
30
|
|
|
|
27
|
|
|
|
24
|
|
|
|
49
|
|
|
|
|
|
56
|
|
|
|
27
|
|
|
|
24
|
|
|
|
49
|
|
|
Net charge-offs
(recoveries)
|
|
|
288
|
|
|
|
100
|
|
|
|
39
|
|
|
|
(19
|
)
|
|
Additions charged to
operations
|
|
|
258
|
|
|
|
162
|
|
|
|
102
|
|
|
|
9
|
|
|
Balance at end of
period
|
|
$
|
508
|
|
|
$
|
538
|
|
|
$
|
476
|
|
|
$
|
413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net charge-offs
(recoveries) during the period to
average
loans outstanding during the period
|
|
|
0.30
|
%
|
|
|
0.10
|
%
|
|
|
0.05
|
%
|
|
|
(0.03
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance as a percentage of
non-performing
loans
|
|
|
25.02
|
%
|
|
|
48.90
|
%
|
|
|
602.53
|
%
|
|
|
724.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance as a percentage of total
loans
(end
of period)
|
|
|
0.51
|
%
|
|
|
0.53
|
%
|
|
|
0.52
|
%
|
|
|
0.56
|
%
|
In 2004, we did not have a significant
provision because our growth was slower and we recorded net recoveries during
the year. In 2005, we increased the allowance primarily in response
to loan growth as quality indicators remained positive. In 2006 the
provision was increased in response to loan growth as well as economic
conditions in our local market. In 2007, we increased the provision
in response to the current local economic conditions.
The distribution of the Bank's allowance
for losses on loans at the dates indicated is summarized as
follows:
|
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
Amount
|
|
|
Percent
of
loans
in
each
category
to
total
loans
|
|
Amount
|
|
|
Percent
of
loans
in
each
category
to
total
loans
|
|
Amount
|
|
|
Percent
of
loans
in
each
category
to
total
loans
|
|
Amount
|
|
|
Percent
of
loans
in
each
category
to
total
loans
|
|
|
|
(Dollars
in thousands)
|
|
Allocated
at end of
period
to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family and home
equity
|
|
$
|
175
|
|
|
|
79.12
|
%
|
|
$
|
141
|
|
|
|
77.94
|
%
|
|
$
|
98
|
|
|
|
75.24
|
%
|
|
$
|
107
|
|
|
|
79.79
|
%
|
|
Commercial
real estate
|
|
|
99
|
|
|
|
9.00
|
|
|
|
114
|
|
|
|
9.02
|
|
|
|
160
|
|
|
|
9.39
|
|
|
|
104
|
|
|
|
7.41
|
|
|
Construction
or development
|
|
|
19
|
|
|
|
2.03
|
|
|
|
35
|
|
|
|
3.58
|
|
|
|
39
|
|
|
|
8.92
|
|
|
|
35
|
|
|
|
6.09
|
|
|
Consumer
|
|
|
156
|
|
|
|
6.11
|
|
|
|
201
|
|
|
|
5.94
|
|
|
|
179
|
|
|
|
6.45
|
|
|
|
167
|
|
|
|
6.71
|
|
|
Commercial
business
|
|
|
59
|
|
|
|
3.74
|
|
|
|
47
|
|
|
|
3.52
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
Total
|
|
$
|
508
|
|
|
|
100.00
|
%
|
|
$
|
538
|
|
|
|
100.00
|
%
|
|
$
|
476
|
|
|
|
100.00
|
%
|
|
$
|
413
|
|
|
|
100.00
|
%
|
Federal savings banks have the authority
to invest in various types of liquid assets, including United States Treasury
obligations, securities of various federal, state and local agencies and
jurisdictions, including callable agency securities, certain certificates of
deposit of insured banks and savings institutions, certain bankers' acceptances,
repurchase agreements and federal funds. Subject to various
restrictions, Federal savings banks also may invest their assets in investment
grade commercial paper and corporate debt securities and mutual funds whose
assets conform to the investments that a federal savings bank is otherwise
authorized to make directly. See "How We Are Regulated - MainStreet
Savings Bank - - OTS Regulation" for a discussion of additional restrictions on
our investment activities.
The Treasurer has the basic
responsibility for the management of our investment portfolio, subject to the
direction and guidance of the President. The Treasurer considers
various factors when making decisions, including the marketability, maturity and
tax consequences of the proposed investment. The maturity structure
of investments will be affected by various market conditions, including the
current and anticipated slope of the yield curve, the level of interest rates,
the trend of new deposit inflows and the anticipated demand for funds via
deposit withdrawals and loan originations and purchases.
The general objectives of our investment
portfolio are to provide liquidity when loan demand is high, to assist in
maintaining earnings when loan demand is low and to maximize earnings while
satisfactorily managing risk, including credit risk, reinvestment risk,
liquidity risk and interest rate risk. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Asset and
Liability Management and Market Risk." Our investment securities currently
consist of mortgage backed securities. Prior to 2005, our investment
portfolio also included federal agency securities and corporate debt
securities. See Note 2 of the Notes to Consolidated Financial
Statements. The corporate debt was acquired to increase the yield in
our investment securities portfolio.
As a member of the Federal Home Loan
Bank of Indianapolis, we had $1.6 million in stock of the Federal Home Loan Bank
of Indianapolis at December 31, 2007. For the year ended December 31,
2007, we received $73,000 in dividends from the Federal Home Loan Bank of
Indianapolis.
The following table sets forth the
composition of our securities portfolio and other investments at the dates
indicated, which included no securities held to maturity. At December
31, 2007, our securities portfolio did not contain securities of any issuer with
an aggregate book value in excess of 10% of our equity capital, excluding those
issued by the United States Government or its agencies.
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Amortized
cost
|
|
|
Fair
Value
|
|
|
Amortized
cost
|
|
|
Fair
Value
|
|
|
Amortized
cost
|
|
|
Fair
Value
|
|
|
|
|
(In
thousands)
|
|
|
Securities
available for sale, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed,
including mutual funds
|
|
$
|
1,954
|
|
|
$
|
1,924
|
|
|
$
|
2,108
|
|
|
$
|
2,088
|
|
|
$
|
2,294
|
|
|
$
|
2,275
|
|
|
Total
investment securities
|
|
|
1,954
|
|
|
|
1,924
|
|
|
|
2,108
|
|
|
|
2,088
|
|
|
|
2,294
|
|
|
|
2,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank stock
|
|
|
1,589
|
|
|
|
1,589
|
|
|
|
1,589
|
|
|
|
1,589
|
|
|
|
1,725
|
|
|
|
1,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
securities
|
|
$
|
3,543
|
|
|
$
|
3,513
|
|
|
$
|
3,697
|
|
|
$
|
3,677
|
|
|
$
|
4,019
|
|
|
$
|
4,000
|
|
|
|
|
1
year or less
|
|
|
Over
1 to 5 years
|
|
|
Over
5 to 10 years
|
|
|
Over
10 years
|
|
|
Total
securities
|
|
|
|
|
Amortized
cost
|
|
|
Weighted
average
yield
|
|
|
Amortized
cost
|
|
|
Weighted
average
yield
|
|
|
Amortized
cost
|
|
|
Weighted
average
yield
|
|
|
Amortized
cost
|
|
|
Weighted
average
yield
|
|
|
Amortized
cost
|
|
|
Weighted
average
yield
|
|
|
Fair
value
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Securities
available for sale, at fair value
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed,
including
mutual
funds
|
|
$
|
1,062
|
|
|
|
5.02
|
%
|
|
|
---
|
|
|
|
---
|
|
|
$
|
119
|
|
|
|
6.52
|
%
|
|
$
|
773
|
|
|
|
6.59
|
%
|
|
$
|
1,954
|
|
|
|
6.59
|
%
|
|
$
|
1,924
|
|
Sources of
Funds
General.
Our sources of funds are deposits,
borrowings, payment of principal and interest on loans, interest earned on or
maturation of other investment securities and funds provided from
operations.
Deposits.
We offer a variety of deposit accounts
to both consumers and businesses having a wide range of interest rates and
terms, including special accounts for children and IRA accounts. Our
deposits consist of savings and checking accounts, money market deposit
accounts, NOW and demand accounts and certificates of deposit. We
solicit deposits primarily in our market areas and from financial
institutions. We also solicit deposits over the Internet through
cdrate/line.com, which is used primarily by other banks, and we accept brokered
deposits through Depository Trust Co. for a fee of approximately
one-fourth of a basis point. At December 31, 2007, our total brokered
and wholesale deposits were $24.4 million, or 31.1% of all deposits on that
date. We primarily rely on competitive pricing policies, marketing
and customer service to attract and retain deposits. Our ability to
accept brokered and wholesale deposits will be restricted if we become
adequately capitalized, unless we receive a waiver from the
FDIC.
The flow of deposits is influenced
significantly by general economic conditions, changes in money market and
prevailing interest rates and competition. The variety of deposit
accounts we offer has allowed us to be competitive in obtaining funds and to
respond with flexibility to changes in consumer demand. We have
become
more susceptible to short-term
fluctuations in deposit flows, as customers have become more interest rate
conscious. We try to manage the pricing of our deposits in keeping
with our asset and liability management, liquidity and profitability objectives,
subject to competitive factors. Based on our experience, we believe
that our deposits are relatively stable sources of funds. Despite
this stability, our ability to attract and maintain these deposits and the rates
paid on them has been and will continue to be significantly affected by market
conditions.
Under regulations of the Board of
Governors of the Federal Reserve System, we are required to maintain
non-interest bearing reserves at specified levels against our transaction
accounts, primarily checking and NOW accounts. At December 31, 2007,
the Bank was in compliance with these Federal Reserve
requirements.
The following table indicates the amount
of our certificates of deposit and other deposits by time remaining until
maturity as of December 31, 2007.
|
|
|
Maturing
|
|
|
|
|
3 months
or less
|
|
|
Over 3 to
6 months
|
|
|
Over 6 to
12 months
|
|
|
Over 12
months
|
|
|
Total
|
|
|
|
|
(In
thousands)
|
|
|
Certificates of
deposit less than $100,000
|
|
$
|
65
|
|
|
$
|
4,636
|
|
|
$
|
12,837
|
|
|
$
|
7,342
|
|
|
$
|
24,880
|
|
|
Certificates of
deposit of $100,000 or more
|
|
|
437
|
|
|
|
1,112
|
|
|
|
11,869
|
|
|
|
16,746
|
|
|
|
30,164
|
|
|
Public
funds
(1)
|
|
|
186
|
|
|
|
590
|
|
|
|
342
|
|
|
|
272
|
|
|
|
1,590
|
|
|
Total
certificates of deposit
|
|
$
|
688
|
|
|
$
|
6,338
|
|
|
$
|
25,248
|
|
|
$
|
24,360
|
|
|
$
|
56,634
|
|
____________________
(1)
Deposits from governmental and other public entities.
|
|
December
31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
Amount
|
|
Percent
of
total
|
|
Amount
|
|
Percent
of
total
|
|
Amount
|
|
Percent
of
total
|
|
Amount
|
|
Percent
of
total
|
|
|
(Dollars
in thousands)
|
|
Transactions
and Savings Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
interest-bearing demand
|
$5,523
|
|
6.94
|
%
|
|
$
6,511
|
|
7.87
|
%
|
|
$
6,852
|
|
10.56
|
%
|
|
$
5,688
|
|
9.81
|
%
|
|
Interest-bearing
demand
|
4,241
|
|
5.33
|
|
|
4,446
|
|
5.37
|
|
|
5,283
|
|
8.14
|
|
|
5,470
|
|
9.43
|
|
|
Statement
savings
|
7,152
|
|
8.99
|
|
|
8,374
|
|
10.12
|
|
|
9,019
|
|
13.90
|
|
|
9,749
|
|
16.81
|
|
|
Money
market
|
5,844
|
|
7.35
|
|
|
6,047
|
|
7.30
|
|
|
6,322
|
|
9.74
|
|
|
7,897
|
|
13.62
|
|
|
IRA
|
12
|
|
0.02
|
|
|
16
|
|
.02
|
|
|
21
|
|
0.03
|
|
|
140
|
|
0.24
|
|
|
Total
non-certificates
|
22,772
|
|
28.63
|
|
|
25,394
|
|
30.68
|
|
|
27,497
|
|
42.36
|
|
|
28,944
|
|
49.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.00
- 1.99%
|
---
|
|
---
|
|
|
---
|
|
---
|
|
|
1,920
|
|
2.96
|
|
|
12,505
|
|
21.56
|
|
|
2.00
- 3.99%
|
8,906
|
|
11.20
|
|
|
10,822
|
|
13.07
|
|
|
23,065
|
|
35.53
|
|
|
14,153
|
|
24.41
|
|
|
4.00
- 5.99%
|
47,72
7
|
|
60.01
|
|
|
46,485
|
|
56.15
|
|
|
12,413
|
|
19.12
|
|
|
2,380
|
|
4.10
|
|
|
6.00
- 7.99%
|
---
|
|
---
|
|
|
---
|
|
---
|
|
|
---
|
|
---
|
|
|
---
|
|
---
|
|
|
Total
certificates
|
$
5
6,633
|
|
71.21
|
|
|
57,307
|
|
69.22
|
|
|
37,398
|
|
57.62
|
|
|
29,038
|
|
50.07
|
|
|
Accrued
interest
|
128
|
|
0.16
|
|
|
82
|
|
0.10
|
|
|
13
|
|
0.02
|
|
|
10
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deposits
|
$ 79,533
|
|
100.00
|
%
|
|
$
82,783
|
|
100.00
|
%
|
|
$64,908
|
|
100.00
|
%
|
|
$57,992
|
|
100.00
|
%
|
Borrowings.
Although deposits are our primary source
of funds, we may utilize borrowings when they are a less costly source of funds
and can be invested at a positive interest rate spread, when we desire
additional capacity to fund loan demand or when they meet our asset/liability
management goals. Our borrowings consist of advances from the Federal
Home Loan Bank of Indianapolis and a loan from a commercial bank. See
Note 7 of the Notes to Consolidated Financial Statements and the
description of the loan under "General" above.
We are a member of and may obtain
advances from the Federal Home Loan Bank of Indianapolis, which is part of the
Federal Home Loan Bank System. The twelve regional Federal Home Loan
Banks provide a central credit facility for their member
institutions. These advances are provided upon the security of
certain of our mortgage loans and mortgage-backed and other
securities. These advances may be made pursuant to several different
credit programs, each of which has its own interest rate, range of maturities
and call features, and all long-term advances are required to be used to provide
funds for residential home financing. At December 31, 2007, we had
$26.4 million in Federal Home Loan Bank advances outstanding and the ability to
borrow an additional $7.4 million from the Federal Home Loan Bank of
Indianapolis. At that same date, we had $40.7 million in residential
mortgages pledged as collateral for our advances and an additional $38.7 million
in residential mortgages and mortgage-backed securities available to serve as
collateral for additional advances. We are required to own stock in
our Federal Home Loan Bank based on the amount of our advances. At
December 31, 2007, we had $1.6 million in such stock.
The Bank is authorized to borrow from
the Federal Reserve Bank of Chicago "discount window" after it has exhausted
other reasonable alternative sources of funds, including Federal Home Loan Bank
borrowings. We have never borrowed from the Federal Reserve
Bank.
|
|
|
For the year ended December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(Dollars in
thousands)
|
|
|
Maximum month-end
balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank
advances
|
|
$
|
26,400
|
|
|
$
|
30,450
|
|
|
$
|
32,000
|
|
|
$
|
22,600
|
|
|
Bank loan
|
|
|
700
|
|
|
|
2,000
|
|
|
|
1,000
|
|
|
|
---
|
|
|
Total
|
|
$
|
27,100
|
|
|
$
|
32,450
|
|
|
$
|
33,000
|
|
|
$
|
22,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank
advances
|
|
$
|
22,730
|
|
|
$
|
27,146
|
|
|
$
|
27,171
|
|
|
$
|
21,500
|
|
|
Bank loan
|
|
|
700
|
|
|
|
1,800
|
|
|
|
583
|
|
|
|
---
|
|
|
Total
|
|
$
|
23,430
|
|
|
$
|
28,946
|
|
|
$
|
27,754
|
|
|
$
|
21,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average interest rate
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank
advances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.28
|
%
|
|
|
5.35
|
%
|
|
|
4.25
|
%
|
|
|
3.63
|
%
|
|
Bank loan
|
|
|
8.10
|
|
|
|
8.62
|
|
|
|
3.91
|
|
|
|
---
|
|
|
All
borrowings
|
|
|
4.33
|
%
|
|
|
5.56
|
%
|
|
|
4.24
|
%
|
|
|
3.63
|
%
|
The following table sets forth certain
information about our borrowings at the dates indicated.
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(Dollars in
thousands)
|
|
|
Federal Home Loan Bank
advances
|
|
$
|
26,400
|
|
|
$
|
21,400
|
|
|
$
|
32,000
|
|
|
$
|
22,600
|
|
|
Bank loan
|
|
|
700
|
|
|
|
700
|
|
|
|
1,000
|
|
|
|
---
|
|
|
Total
|
|
$
|
27,100
|
|
|
$
|
22,100
|
|
|
$
|
33,000
|
|
|
$
|
22,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average interest rate
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank
advances
|
|
|
4.86
|
%
|
|
|
5.30
|
%
|
|
|
4.46
|
%
|
|
|
3.96
|
%
|
|
Bank loan
|
|
|
8.10
|
|
|
|
8.37
|
|
|
|
7.08
|
|
|
|
---
|
|
|
Total
borrowings
|
|
|
4.94
|
%
|
|
|
5.40
|
%
|
|
|
4.54
|
%
|
|
|
3.96
|
%
|
Subsidiary and Other
Activities
The Bank has one active subsidiary,
MainStreet Financial Services, Inc., a licensed insurance agency. The
subsidiary has an investment in MBT Title Company, which is jointly owned by
members of the Michigan Bankers Association. At December 31, 2007,
our total investment in the subsidiary was $2,400. For 2007, earnings
were $4,000.
The Bank has a contract with Regal
Financial Services, a third party broker-dealer that offers securities brokerage
services to our customers at a separate location in our main banking
office. We receive compensation from them for the use of the office
space and certain administrative services. We earned $12,800 in
2007.
Employees
At December 31, 2007, we had a total of
30 full-time employees and 15 part-time employees. Our employees are
not represented by any collective bargaining group. Management
considers its employee relations to be good.
Set forth below is a brief description
of certain laws and regulations that are applicable to the Company, the Bank and
MHC. The description of these laws and regulations, as well as
descriptions of laws and regulations contained elsewhere in this Report, does
not purport to be complete and is qualified in its entirety by reference to the
applicable laws and regulations. Legislation is introduced from time
to time in the United States Congress that may affect the operations of the
Company and the Bank. In addition, the regulations governing the
Company and the Bank may be amended from time to time by the OTS, the FDIC or
the SEC, as appropriate. Any legislative or regulatory changes in the
future could adversely affect the Company and the Bank. No assurance
can be given as to whether or in what form any such changes may
occur.
The Bank received a letter from the OTS
dated February 5, 2008, indicating that the Bank is deemed to be in troubled
condition, and, as a result, is subject to specified operating
restrictions. These operating restrictions provide that: (1)
the Bank must limit its quarterly asset growth to net interest credited on
deposit liabilities during the quarter (unless additional asset growth is
permitted by the OTS); (2) the Bank must obtain prior OTS approval prior to
appointing any new director or senior executive officer; (3) the Bank’s ability
to enter into certain severance agreements or make certain severance payments is
limited by 12 C.F.R. § 359; (4) the Bank must receive OTS approval of any new,
renewed or amended arrangements providing compensation or benefits to its
directors and officers; (5) the Bank must obtain OTS approval of all third-party
contracts outside the normal course of business; and (6) the Bank must provide
the OTS with 30-days notice of all proposed transactions with
affiliates.
On March 18, 2008, the OTS asked the
Bank to enter into a supervisory agreement to address the OTS’s concerns
regarding the financial condition of the Bank. Among other things,
the supervisory agreement would require the Bank to: (1) prepare and submit a
three-year business plan; (2) revise its liquidity management policy; (3)
enhance compliance training; (4) prepare and submit quarterly reports on
classified assets; and (4) continue to abide by the limits in the February 5,
2008 “troubled condition” letter. The Bank is discussing the
provisions of the proposed supervisory agreement with its counsel and the OTS,
and it expects that it will enter into a supervisory agreement with the OTS
early in the second quarter.
MainStreet
Savings Bank.
The Bank, as a federally chartered
savings bank, is subject to regulation and periodic examination by the
OTS. This regulation extends to all aspects of its
operations. The Bank is required to maintain minimum levels of
regulatory capital and is subject to limitations on the payment of dividends to
the Company. See "- Regulatory Capital Requirements" and "-
Limitations on Dividends and Other Capital Distributions." Federal laws and
regulations of the OTS prescribe the investment and lending authority and
activities of federally chartered savings banks. The Bank is required
to file periodic reports with the OTS. The FDIC also insures the
deposits of the Bank to the maximum extent permitted by law. This
regulation of the Bank is intended for the protection of depositors and the
insurance of accounts fund and not for the purpose of protecting
shareholders.
OTS
Regulation.
Our
relationship with our depositors and borrowers is regulated to a great extent by
federal laws and OTS regulations, especially in such matters as the ownership of
savings accounts and the form and content of our mortgage
requirements. In addition, the branching authority of the Bank is
regulated by the OTS. The Bank is generally authorized to branch
nationwide. The investment and lending authority of the Bank is
prescribed by federal laws and regulations and it is prohibited from engaging in
any activities not permitted by these laws and regulations.
As a
federal savings bank, the Bank is required to meet a qualified thrift lender
test
.
This test requires the Bank to have at
least 65% of its portfolio assets, as defined by regulation, in qualified thrift
investments on a monthly average for nine out of every 12 months on a rolling
basis
.
As an alternative, we may maintain 60%
of our assets in those assets specified in Section 7701(a)(19) of the Internal
Revenue Code
.
Under either test, we are required to
maintain a significant portion of our assets in residential housing related
loans and investments
.
Any institution that fails to meet the
qualified thrift lender test becomes subject to certain restrictions on its
operations and must convert to a national bank charter, unless it re-qualifies
as, and thereafter remains, a qualified thrift lender
.
If such an institution has not
requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank
.
As of December 31, 2007, the Bank met
this requirement with a qualified thrift lender percentage of
86.89%.
Under OTS regulations, the Bank is
subject to a lending limit for loans to one borrower or group of related
borrowers. This lending limit is equal to the greater of $500,000 or
15% of unimpaired capital and surplus (except for loans fully secured by certain
readily marketable collateral, in which case the limit is increased to 25% of
unimpaired capital and surplus). At December 31, 2007, our lending
limit under this restriction was $1,007,400 and our largest loan relationship at
that date involves a residential developer with loans totaling $1,041,000.
The loans in this relationship were in compliance with our lending limit at the
time they were made and are considered to be nonconforming under OTS regulations
so long as the amount remains above our current lending limit. All of our
other outstanding loan relationships are in compliance with this lending
limit.
We are subject to periodic examinations
by the OTS. During these examinations, the examiners may require the
Bank to provide for higher general or specific loan loss reserves, which can
impact our capital and earnings. As a federal savings bank, the Bank
is subject to a semi-annual assessment, based upon its total assets, to fund the
operations of the Office of Thrift Supervision.
Transactions between the Bank and its
affiliates generally are required to be on terms as favorable to the institution
as transactions with non-affiliates, and certain of these transactions, such as
loans to an affiliate, are restricted to a percentage of the Bank's
capital. In addition, the Bank may not lend to any affiliate engaged
in activities not permissible for a bank holding company or acquire the
securities of most affiliates. The Company is an affiliate of the
Bank.
The OTS has adopted guidelines
establishing safety and soundness standards on such matters as loan underwriting
and documentation, asset quality, earnings standards, internal controls and
audit systems, interest rate risk exposure and compensation and other employee
benefits. Any institution regulated by the OTS that fails to comply
with these standards must submit a compliance plan.
The OTS has extensive enforcement
authority over all savings associations and their holding companies, including
the Bank and the Company. This enforcement authority includes, among
other things, the ability to assess civil money penalties, to issue
cease-and-desist or removal orders and to initiate injunctive
actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with the
OTS. Except under certain circumstances, public disclosure of final
enforcement actions by the OTS is required by law.
FDIC
Regulation and Insurance of Accounts.
The Bank's deposits are insured up to
the applicable limits by the deposit insurance fund administered by the FDIC,
and such insurance is backed by the full faith and credit of
the
United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. Under new FDIC regulations,
our deposit insurance premiums will increase in 2008 to 10 basis points of
insured deposits. The FDIC also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the deposit insurance fund. The FDIC
also has the authority to initiate enforcement actions against the Bank and may
terminate our deposit insurance if it determines that we have engaged in unsafe
or unsound practices or is in an unsafe or unsound condition.
MainStreet
Financial Corporation and MHC.
As the holding companies of the Bank,
the Company and MHC are subject to regulation and examination by the
OTS. The terms of the Company's charter are prescribed by the OTS and
require us to only pursue any or all of the lawful objectives and powers of the
subsidiary of a mutual holding company.
Under regulations of the OTS, MHC must
own a majority of outstanding shares of the Company in order to qualify as a
mutual holding company. Applicable federal law and regulations limit
the activities of MainStreet Financial Corporation and MHC and require the
approval of the OTS for any acquisition or divestiture of a subsidiary,
including another financial institution or holding company.
Under regulations of the OTS, MHC, may
convert to the stock form of ownership, though it has no current intention to do
so. In a stock conversion, the members of MHC would have a right to
subscribe for shares of stock in a new company that would own MHC's shares in
the Company. In addition, each share of stock in the Company not
owned by MHC would convert into shares in that new company in an amount that
preserves the holders' percentage ownership.
Regulatory
Capital Requirements
Capital
Requirements for the Bank.
The Bank is required to maintain minimum
levels of regulatory capital under regulations of the OTS. The
capital standards require core or Tier 1 capital equal to at least 3.0% of
adjusted total assets for the strongest institutions with the highest
examination rating and 4.0% of adjusted total assets for all other institutions,
unless the OTS requires a higher level based on the particular circumstances or
risk profile of the institution. Core capital generally consists of
tangible capital plus certain intangibles. At December 31, 2007,
MainStreet Savings Bank had core capital equal to $6.7 million, or 5.87% of
adjusted total assets, which was $2.1 million above its required level of
4.0%.
The OTS also requires MainStreet Savings
Bank to have total capital of at least 8.0% of risk-weighted
assets. Total capital consists of core or Tier 1 capital and Tier 2
capital, which for MainStreet Savings Bank at December 31, 2007, consists of
$508,000 of its allowance for possible loan and lease losses. In
determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet items, will be multiplied by a risk weight, ranging from 0% to
100%, based on the risk inherent in the type of asset. The OTS is
authorized to require MainStreet Savings Bank to maintain an additional amount
of total capital to account for concentration of credit risk, level of interest
rate risk, equity investments in non-financial companies and the risk of
non-traditional activities. At December 31, 2007, MainStreet Savings
Bank had $70.7 million in risk-weighted assets and total capital of $7.2
million, or 10.20% of risk-weighted assets, which was $135,000 above the
required level.
The OTS is authorized and, under certain
circumstances, required to take certain actions against federal savings banks
that fail to meet these capital requirements, or that fail to maintain an
additional capital ratio of Tier 1 capital of at least 4.0% of risk
weighted-assets. The OTS is generally required to take action to
restrict the activities of an "undercapitalized institution," which is an
institution with less than either a 4.0% core capital ratio, a 4.0%
Tier 1 risked-based capital ratio or an
8.0% total risk-based capital ratio. Any such institution must submit
a capital restoration plan and until the plan is approved by the OTS may not
increase its assets, acquire another institution, establish a branch or engage
in any new activities, and generally may not make capital
distributions. The OTS is authorized to impose the additional
restrictions on undercapitalized institutions.
Any institution that fails to comply
with its capital plan or has Tier 1 risk-based or core capital ratios of less
than 3.0% or a total risk-based capital ratio of less than 6.0% is considered
"significantly undercapitalized" and must be made subject to one or more
additional specified actions and operating restrictions that may cover all
aspects of its operations and may include a forced merger or acquisition of the
institution. An institution with tangible equity to total assets of
less than 2.0% is "critically undercapitalized" and becomes subject to further
mandatory restrictions. The OTS generally is authorized to reclassify
an institution into a lower capital category and impose the restrictions
applicable to that category if the institution is engaged in unsafe or unsound
practices or is in an unsafe or unsound condition. The imposition by
the OTS of any of these measures on MainStreet Savings Bank may have a
substantial adverse effect on its operations and
profitability.
Institutions with at least a 4.0% core
capital ratio, a 4.0% Tier 1 risked-based capital ratio and an 8.0% total
risk-based capital ratio are considered "adequately-capitalized." An institution
is deemed "well-capitalized" institution if it has at least a 5.0% leverage
capital ratio, a 6.0% Tier 1 risked-based capital ratio and a 10.0% total
risk-based capital ratio. At December 31, 2007, MainStreet Savings
Bank was considered a "well-capitalized" institution. On that date,
its risked-based capital ratio was 0.19% over the 10.0% requirement for
well-capitalized status. If operating losses continued as
anticipated, this capital ratio may fall below 10.0% in 2008, and the Bank will
become adequately capitalized, which is an event of default under our bank loan
and our forbearance letter for that loan. If that occurs, we will ask
the bank to provide a temporary forbearance for failing this covenant in 2008,
so long as we remain adequately capitalized. There can be no
assurances that the bank will issue a forbearance letter or will agree not to
pursue any of its remedies as a result of our defaults under our loan
covenants. See “General” for more information on our current
forbearance letters from the bank with respect to our violation of other loan
covenants. In addition, the OTS may consider formal or informal
enforcement action against the Bank for not maintaining well-capitalized
status. In addition, our ability to accept brokered and wholesale
deposits will be restricted if we become adequately capitalized, unless we
receive a waiver from the FDIC.
Limitations
on Dividends and Other Capital Distributions.
OTS regulations impose various
restrictions on the ability of the Bank to make distributions of capital, which
include dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. The Bank must file a
notice or application with the OTS before making any capital
distribution. The Bank generally may make capital distributions
during any calendar year in an amount up to 100% of net income for the
year-to-date plus retained net income for the two preceding years, so long as it
is well-capitalized after the distribution. If the Bank proposes to
make a capital distribution when it does not meet its current minimum capital
requirements (or will not following the proposed capital distribution) or that
will exceed these net income limitations, it must obtain OTS approval prior to
making the distribution. The OTS may always object to any
distribution based on safety and soundness.
MainStreet Financial Corporation will
not be subject to OTS regulatory restrictions on the payment of
dividends. Dividends from MainStreet Financial Corporation, however,
may depend, in part, upon its receipt of dividends from MainStreet Savings
Bank. In addition, MainStreet Savings Bank may not make a
distribution that would constitute a return of capital during the three-year
term of the business plan submitted in connection with this mutual holding
company reorganization and stock issuance. See "Our Policy Regarding
Dividends."
Federal Securities
Law
The stock of the Company is registered
with the SEC under the Securities Exchange Act of 1934, as
amended. The Company will be subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Securities Exchange Act of 1934.
The Company stock held by persons who
are affiliates of the Company may not be resold without registration unless sold
in accordance with certain resale restrictions. Affiliates are
generally considered to be officers, directors and principal
stockholders. If the Company meets specified current public
information requirements, each affiliate of the Company will be able to sell in
the public market, without registration, a limited number of shares in any
three-month period.
The SEC has adopted regulations and
policies under the Sarbanes-Oxley Act of 2002 that apply to the Company as a
public company under the Securities Exchange Act of 1934. The stated
goals of these Sarbanes-Oxley requirements are to increase corporate
responsibility, provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies and to protect investors by improving
the accuracy and reliability of corporate disclosures pursuant to the securities
laws. The SEC Sarbanes-Oxley regulations and policies include very
specific additional disclosure requirements and new corporate governance
rules. The Sarbanes-Oxley Act represents significant federal
involvement in matters traditionally left to state regulatory systems, such as
the regulation of the accounting profession, and to state corporate law, such as
the relationship between a board of directors and management and between a board
of directors and its committees.
General.
The Company, the Bank and MHC are
subject to federal income taxation in the same general manner as other
corporations, with some exceptions discussed below. The following
discussion of federal taxation is intended only to summarize certain pertinent
federal income tax matters and is not a comprehensive description of the tax
rules applicable to the Company or the Bank. The Bank's federal
income tax returns have never been audited.
The Company files a consolidated federal
income tax return with the Bank and MHC. Accordingly, it is
anticipated that any cash distributions made by the Company to its stockholders
would be considered to be taxable dividends and not as a non-taxable return of
capital to stockholders for federal and state tax purposes.
Method
of Accounting.
For federal income tax purposes, the
Bank currently reports its income and expenses on the accrual method of
accounting and uses a fiscal year ending on December 31 for filing its federal
income tax return.
Minimum
Tax.
The
Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on a
base of regular taxable income plus certain tax preferences, called alternative
minimum taxable income. The alternative minimum tax is payable to the
extent alternative minimum tax exceeds regular income tax. Net
operating losses can offset no more than 90% of alternative minimum taxable
income. Certain payments of alternative minimum tax may be used as
credits against regular tax liabilities in future years. The Bank has
not been subject to the alternative minimum tax, nor do we have any amounts
available as credits for carryover.
Net
Operating Loss Carryovers.
A financial institution may carryback
net operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses
incurred in taxable years beginning after August 6, 1997. At December
31, 2007, the Bank had net operating loss carryforwards of $1,440,000 for
federal income tax purposes, which begin expiring in 2021.
Corporate
Dividends-Received Deduction.
Because it files a consolidated return
with its wholly owned subsidiary, the Bank, dividends from the Bank are not
included as income to the Company. The corporate dividends-received
deduction is 100% or 80%, in the case of dividends received from corporations
with which a corporate recipient does not file a consolidated tax return,
depending on the level of stock ownership of the payee of the
dividend. Corporations that own less than 20% of the stock of a
corporation distributing a dividend may deduct 70% of dividends received or
accrued on their behalf.
State
Taxation
The Company and the Bank are subject to
a Michigan business activities tax of 1.9% on the sum of their federal taxable
income, compensation paid to employees, tax depreciation expense and certain
other items.
Item 2.
Description of Property
At December 31, 2007, we had three
full-service offices. The main office of the Company is the main
office of the Bank. The following table sets forth certain
information concerning the main office and each branch office of the Bank at
December 31, 2007. The aggregate net book value of the Company's
premises and equipment was $3.6 million at December 31, 2007. See
also Note 4 of the Notes to Consolidated Financial Statements. The
office buildings we own are held substantially free of encumbrances or
mortgages. In the opinion of management, the facilities are adequate
and suitable for the needs of the Company
|
|
Year opened
|
Owned or
leased
|
Lease
expiration
date
|
Net book value
at
December 31,
2007
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Main office:
629 W. State
Street
Hastings, Michigan
49058
|
1998
|
Owned
|
N/A
|
$2,427
|
|
|
|
|
|
|
|
Branch
offices:
127 S. Michigan
Avenue
(Inside Felpausch Food
Center)
Hastings, Michigan
49058
|
1997
|
Leased
|
8/1/2017
|
---
|
|
|
|
|
|
|
|
802 Fourth
Avenue
Lake Odessa, Michigan
48849
|
1977
|
Owned
|
N/A
|
$20
|
|
|
|
|
|
|
|
Loan production
office:
Cornerstone
Building
Suite 2
407 West Michigan
Avenue
Kalamazoo, Michigan
49007
|
2006
|
Leased
|
5/8/2009
(1)
|
---
|
____________________
(1)
This lease may be terminated by the landlord or us with 90 days written
notice.
Our data processing service provider is
FPS Gold. We maintain depositor and borrower customer files and our
accounting records on an on-line basis, utilizing their online real time
system. The book value of all data processing and computer equipment
utilized by the Bank at December 31, 2007 was $136,000. Management
has a disaster recovery plan in place with respect to the data processing
system, as well as the Bank’s operations as a whole.
Item 3.
Legal Proceedings
From time to time we are involved as
plaintiff or defendant in various legal actions arising in the normal course of
business. We do not anticipate incurring any material legal fees or
other liability as a result of such litigation. In the opinion of
management, the Bank is not a party to any pending claims or lawsuits that are
expected to have a material effect on the Bank’s financial condition or
operations.
Item 4.
Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of
security holders during the quarter ended December 31, 2007.
Item 5.
Market for Common Equity, Related Stockholder Matters and Small Business Issuer
Purchases of Equity Securities
The information under the heading
“Shareholder Information” in the Company’s 2007 Annual Report to Shareholders,
which is included in Exhibit 13, is incorporated herein by
reference.
The Company made no stock repurchases
during the quarter ended December 31, 2007.
Item 6.
Management’s Discussion and Analysis or Plan of Operation
The information under the heading
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in the Company’s 2007 Annual Report to Shareholders, which is
included in Exhibit 13, is incorporated herein by reference.
Item 7.
Financial Statements
The following consolidated financial
statements are in the Company’s 2007 Annual Report to Shareholders, which is
included in Exhibit 13, and are incorporated herein by
reference.
|
|
Page
|
|
Reports of Independent Registered
Public Accounting Firm
|
F-1
|
|
|
|
|
Consolidated Balance
Sheets
|
F-2
|
|
|
|
|
Consolidated Statements of
Operations
|
F-3
|
|
|
|
|
Consolidated Statements of Changes
in Shareholder's Equity
|
F-4
|
|
|
|
|
Consolidated Statements of Cash
Flows
|
F-5
|
|
|
|
|
Notes to Consolidated Financial
Statements
|
F-7
|
|
|
|
Item 8.
Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
None.
(a) Evaluation of Disclosure Controls
and Procedures
An evaluation of the Company's
disclosure controls and procedures (as defined in Rule13a.15(e) under the
Securities Exchange Act of 1934 (the "Exchange Act")) as of December 31, 2007,
was carried out under the supervision and with the participation of our Chief
Executive Officer, our Chief Financial Officer, and several other members of our
senior management within the 90-day period preceding the filing date of this
annual report. Our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures as currently in
effect are effective in ensuring that the information required to be disclosed
in the reports the Company files or submits under the Exchange Act is (i)
accumulated and communicated to our management (including the Chief Executive
Officer and Chief Financial Officer) in a timely manner, and (ii) recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms.
There were no changes in our internal
controls over financial reporting (as defined in Rule 13a.15(f) under the
Exchange Act) that occurred during the quarter ended December 31, 2007, that has
materially effected, or is reasonably likely to materially affect, our internal
control over financial reporting. The annual report of management on
the effectiveness of internal control over financial reporting is set forth
below under “Management’s Report on Internal Control Over Financial
Reporting.” 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
temporary rules of the Securities and Exchange Commission that permit the
Company to provide only management’s report in this annual
report.
We intend to continually review and
evaluate the design and effectiveness of the Company's disclosure controls and
procedures and to improve the Company's controls and procedures over time and to
correct any deficiencies that we may discover in the future. The goal
is to ensure that senior management has timely access to all material financial
and non.financial information concerning the Company's
business. While we believe the present design of the disclosure
controls and procedures is effective to achieve its goal, future events
affecting its business may cause the Company to modify its disclosure controls
and procedures.
The Company does not expect that its
disclosure controls and procedures will prevent all error and all
fraud. A control procedure, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control procedure are met. Because of the inherent
limitations in all control procedures, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any control procedure also is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time, controls may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control procedure, misstatements due to
error or fraud may occur and not be detected.
Management’s Report on Internal Control
Over Financial Reporting
The management of MainStreet Financial
Corporation is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). The Company’s internal control over financial reporting is
a process designed to provide reasonable assurance to the Company’s management
and board of directors regarding the reliability of financial reporting and the
preparation of the financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of
America.
The Company’s internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America, and that receipts
and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations,
internal controls over financial reporting may not prevent or detect
misstatements. All internal control systems, no matter how well
designed, have inherent limitations, including the possibility of human error
and the circumvention of overriding controls. Accordingly, even
effective internal control over financial reporting can provide only reasonable
assurance with respect to financial statement preparation. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
Our management assessed the
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2007. In making this assessment, it used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in
Internal
Control-Integrated Framework
. Based on our assessment, we
believe that, as of December 31, 2007, the Company’s internal control over
financial reporting was effective based on those criteria.
This annual report does not include an
attestation of our independent public accounting firm regarding internal
controls over financial reporting. Management’s report was not
subject to attestation by our independent public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the
Company to provide only management’s report in this annual
report.
|
Date
: March
31
, 2008
|
By:
|
/s/ David C.
Hatfield
David C.
Hatfield
President and Chief Executive
Officer
|
|
|
By:
|
/s/ James
Toburen
James Toburen
Chief Financial
Officer
|
Item 8B.
Other Information
None.
Item 9.
Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act
Directors and
Executive Officers
Information concerning the Directors and
Executive Officers of the Company is incorporated herein by reference from the
definitive proxy statement for the annual meeting of shareholders to be held in
May 2008, a copy of which will be filed not later than 120 days after the close
of our fiscal year. The incorporation by reference of that proxy
statement here, or anywhere else in this Form 10-KSB, excludes the information
contained under the heading "Report of Audit Committee."
Section 16(a)
Compliance
The information concerning compliance
with the reporting requirements of Section 16(a) of the Securities Exchange Act
of 1934 by our directors, officers and ten percent stockholders required by this
item is incorporated herein by reference from our definitive proxy statement for
our Annual Meeting of Stockholders being held in May 2007, a copy of which will
be filed not later than 120 days after the end of our fiscal
year.
Code of
Ethics
In 2006, we adopted a Code of Business
Conduct and Ethics based upon the standards set forth under Item 406 of
Regulation S-B of the Securities and Exchange Commission. The Code
applies to our principal executive officer, principal financial officer,
principal accounting officer, and persons performing similar functions, and to
all of our other employees and our directors. A copy of our code of
ethics was included in our form 10-QSB for the quarter ended September 31, 2006
and is available on our Internet website at
www.mainstreetsavingsbank.com.
Item 10.
Executive Compensation
Information concerning executive
compensation is incorporated herein by reference from the definitive proxy
statement for the annual meeting of shareholders to be held in May 2008, a copy
of which will be filed not later than 120 days after the close of the fiscal
year.
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Information concerning security
ownership of certain beneficial owners and management is incorporated herein by
reference from the definitive proxy statement for the annual meeting of
shareholders to be held in May 2008, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
The Company has no equity compensation
plans providing for options, warrants or rights.
Item 12.
Certain Relationships and Related Transactions and Director
Independence
Information concerning certain
relationships and related transactions and director independence is incorporated
herein by reference from the definitive proxy statement for the annual meeting
of shareholders to be held in May 2008, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
|
Exhibit Number
from Item 601
of
Regulation
S-B
|
Document
|
Reference to
Prior Filing
or Exhibit
Number
If Attached
Hereto
|
|
|
|
|
|
3(i)
|
Charter of MainStreet Financial
Corporation
|
*
|
|
|
|
|
|
3(ii)
|
Bylaws of MainStreet Financial
Corporation
|
*
|
|
|
|
|
|
4
|
Stock Certificate of MainStreet
Financial Corporation
|
*
|
|
|
|
|
|
10
|
Material
contracts:
|
|
|
|
|
|
|
|
10.1 Loan Agreement
with Independent Bank
|
*
|
|
|
|
|
|
|
10.4 Employee Stock
Ownership Plan
|
*
|
|
|
|
|
|
|
10.6 Deferred
Compensation Plan for Directors and Officers
|
*
|
|
|
|
|
|
|
10.7 Named Executive
Officer Salary and Bonus Arrangements
for
2008
|
10.7
|
|
|
|
|
|
|
10.8 Current Director
Fee Arrangements
|
10.8
|
|
|
|
|
|
|
10.9 Forbearance Letter
from Independent Bank for Holding Company Loan
|
10.9
|
|
|
|
|
|
|
10.10
Forbearance Letter from Independent Bank for ESOP Loan
|
10.10
|
|
|
|
|
|
13
|
2007 Annual Report to
Shareholders
|
13
|
|
|
|
|
|
14
|
Code of Business Conduct and
Ethics
|
**
|
|
|
|
|
|
21
|
Subsidiaries of the
Company
|
*
|
|
|
|
|
|
24
|
Power of
Attorney
|
***
|
|
|
|
|
|
31
|
Rule 13a-14(a)/15d-14(a)
Certifications
|
31
|
|
|
|
|
|
32
|
Section 1350
Certifications
|
32
|
________________________________
|
*
|
Filed as an exhibit to the
Issuer's Registration Statement on Form SB-2 (File No. 333-137523),
declared effective by the Securities and Exchange Commission on November
13, 2006.
|
|
**
|
Filed as an exhibit to the
Issuer's Quarterly Report for the Quarter Ended September 30, 2006 on Form
10-QSB, filed with the Securities and Exchange Commission on December 21,
2006.
|
|
***
|
On signature
page.
|
Item 14.
Principal Accountant Fees and Services
Information concerning fees and services
by our principal accountants is incorporated herein by reference from the
definitive proxy statement for the annual meeting of shareholders to be held in
May 2008, a copy of which will be filed not later than 120 days after the close
of the fiscal year.
SIGNATURES
In accordance with Section 13 or 15(d)
of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
MAINSTREET FINANCIAL
CORPORATION
|
|
Date
: March
31
, 2008
|
By:
|
David L. Hatfield, President
and
Chief Executive
Officer
(Duly Authorized
Representative)
|
KNOW ALL MEN BY THESE PRESENTS, that
each person whose signature appears below constitutes and appoints David L.
Hatfield his true and lawful attorney-in-fact and agent, with full power of
substitution and re-substitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and all other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all said
attorney-in-fact and agent or his substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
/s/
David L. Hatfield
David L.
Hatfield
President, Chief Executive
Officer
and
Director
(Principal Executive
Officer)
|
|
/s/
Gordon F. Fuhr
Gordon F. Fuhr
Chairman of the Board and
Director
|
|
Date:
March
31
, 2008
|
|
Date:
March
31
, 2008
|
|
/s/
Eric T. Dreisbach
Eric T.
Dreisbach
Director
|
|
/s/
Mary Lou Hart
Mary Lou Hart
Director
|
|
Date:
March
31
, 2008
|
|
Date
: March
31
, 2008
|
|
/s/
David L. Jasperse
David L.
Jasperse
Director
|
|
/s/
James R. Toburen
James R.
Toburen
Senior Vice President, Treasurer,
Director
and Chief Financial
Officer
(Principal Financial and
Accounting Officer)
|
|
Date:
March
31
, 2008
|
|
Date
: March
31
, 2008
|
|
/s/
Carl A. Schoessel
Carl A.
Schoessel
Director
|
|
|
|
|
|
|
|
Date:
March
31
, 2008
|
|
|
Index to Exhibits
|
10.7
|
Named Executive Officer Salary and
Bonus Arrangements for 2008
|
|
10.8
|
Current Director Fee
Arrangements
|
|
10.9
|
Forbearance
Letter from Independent Bank for Holding Company Loan
|
|
10.10
|
Forbearance
Letter from Independent Bank for ESOP Loan
|
|
13
|
2007 Annual Report to
Shareholders
|
|
31.1
|
Rule 13a-14(a)/15d-14(a)
Certifications of Principal Executive Officer
|
|
31.2
|
Rule 13a-14(a)/15d-14(a)
Certifications of Principal Financial officer
|
|
32
|
Section 1350
Certifications
|
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