Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
MREE > SEC Filings for MREE > Form 10-Q on 14-Nov-2013All Recent SEC Filings

Show all filings for MAINSTREET BANKSHARES INC

Form 10-Q for MAINSTREET BANKSHARES INC


14-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those reflected in such forward-looking statements, which are representative only on the date hereof. Readers of this report should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed throughout this report. The Corporation takes no obligation to update any forward-looking statements contained herein. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) competitive pressures among depository and other financial institutions may increase significantly; (2) changes in the interest rate environment may reduce margins;
(3) general economic conditions, either nationally or regionally, may be less favorable than expected that could result in a deterioration of credit quality or a reduced demand for credit; and (4) legislative or regulatory changes including changes in accounting standards, may adversely affect the business.

General

We use the term "MainStreet" or "Corporation" to refer to MainStreet BankShares, Inc. We use the term "Bank" or "Franklin Bank" to refer to Franklin Community Bank, National Association. We use "we", "us", or "our" to refer to the consolidated businesses of the Corporation and its subsidiaries unless the content indicates otherwise. MainStreet was incorporated on January 14, 1999 in the Commonwealth of Virginia and is the bank holding company for Franklin Bank which serves the Franklin County area of Virginia. MainStreet provides a wide variety of banking services through Franklin Bank. Franklin Bank operates as a locally-owned and operated commercial bank emphasizing personal customer service and other advantages incident to banking with a locally owned community bank. It relies on local advertising and the personal contacts of its directors, employees, and shareholders to attract customers and business to the Bank. Franklin Bank has three banking offices in Rocky Mount and Franklin County. MainStreet also has a wholly-owned real estate company, MainStreet RealEstate, Inc. which owns the real estate of the Corporation. MainStreet RealEstate, Inc. owns the Union Hall (Southlake) branch of Franklin Bank.

On April 16, 2009, Franklin Bank entered into a formal agreement ("Agreement") with The Comptroller of the Currency ("OCC"). The Agreement required Franklin Bank to perform certain actions within designated time frames. The Agreement was intended to demonstrate the Bank's commitment to review/enhance certain aspects of various policies and practices related to credit administration and liquidity. Franklin Bank achieved full compliance with the Agreement. The Agreement was terminated in August 2013.

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

September 30, 2013

On June 17, 2009, MainStreet BankShares, Inc. entered into a Memorandum of Understanding ("MOU") with the Federal Reserve Bank of Richmond ("Federal Reserve"). The MOU required the bank holding company to utilize its financial and managerial resources to assist Franklin Bank in functioning in a safe and sound manner and restricted MainStreet from conducting various activities. On January 26, 2011, we entered into a new MOU with the Federal Reserve which contained the same terms of the previous MOU (which was terminated) but added provisions regarding compliance with certain laws and regulations. This MOU was terminated in September 2013. There are no longer any restrictions or stipulations attributable to the MOU.

Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The financial information contained within our statements is, to a significant extent, based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability.

Allowance for Loan Losses
We use historical loss factors, peer comparisons, regulatory factors, concentrations of credit, past dues, and the trend in the economy as factors in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use in estimating risk. The allowance for loan losses reflects our best estimate of the losses inherent in our loan portfolio. The allowance is based on two basic principles of accounting: (i) losses are accrued when they are probable of occurring and are capable of estimation and (ii) losses are accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. The allowance for loan losses is maintained at a level, which reflects management's best estimate of probable credit losses inherent in the loan portfolio and is, therefore, believed to be appropriate.

The amount of the allowance is based on management's evaluation of the collectability of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, economic conditions and other risks inherent in the portfolio. Management reviews the past due reports and risk-rated loans and discusses individually the loans on these reports with the responsible loan officers. Management uses these tools and provides a quarterly analysis of the allowance based on our historical loan loss experience, risk-rated loans, past dues, concentrations of credit, unsecured loans, loan exceptions, and the economic trend. These are generally grouped by homogeneous loan pools. Impaired loans are reviewed individually to determine possible impairment based on one of the three recognized methods which are fair value of collateral, present value of expected cash flows, or observable market price. A specific reserve is allocated for the amount of the impairment. Although management uses available information to recognize losses on loans, the substantial uncertainties associated with local economic conditions, collateral values, and future cash flows on impaired loans, make it possible that a material change in the allowance for loan losses in the near term may be appropriate. However, the amount of the change cannot be estimated. The allowance is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Past due status is determined based on contractual terms.

Deferred Tax Assets

The Corporation uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance may be established.

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

September 30, 2013

Management considers the determination of this valuation allowance to be a critical accounting policy due to the need to exercise significant judgment in evaluating the amount and timing of recognition of deferred tax liabilities and assets, including projections of future taxable income.

These judgments and estimates are reviewed on a continual basis as regulatory and business factors change. A valuation allowance for deferred tax assets may be required if the amounts of taxes recoverable through loss carry backs decline, or if we project lower levels of future taxable income. If such a valuation allowance is deemed necessary in the future, it would be established through a charge to income tax expense that would adversely affect our operating results.

Overview

We continue 2013 with a low interest rate environment and flat loan demand in our market, which has negatively impacted our net interest margin. Despite these continued challenges and an increase in our nonaccrual loans, we are pleased to report a dramatic improvement in our other real estate properties. Our aggressive approach has allowed us to move large dollars in foreclosed assets off our balance sheet. We will continue to maintain an aggressive posture in resolving problem assets throughout 2013. We believe this strategy will strengthen the Corporation's position and prepare us for future growth.

Total assets at September 30, 2013 were $174.6 million compared to $183.1 million at year-end December 31, 2012, a decline of $8.5 million. Our balance sheet has declined since year-end due to our continued strategy to lower our deposit costs and due to the repayment of our $6.0 million repurchase agreement in January 2013. Due to the maturity and repayment of all repurchase agreements, we now have additional securities that can be utilized and pledged for other purposes as needed. In addition, the resolution of problem credits and soft loan demand have caused our loans to decline. At September 30, 2013, loans, net of unearned deferred fees and costs, declined $9.5 million from year-end 2012. Securities available for sale increased $3.8 million from December 31, 2012 primarily due to purchases during 2013, offset by calls of securities, pay downs on mortgage backed securities, and sales of securities. Deposits decreased $2.2 million. Our higher cost time deposits have declined since year end 2012. Other real estate owned has declined by $1.0 million due to sales, net of transfers into other real estate from loans, of properties under a continued aggressive approach to rid the balance sheet of nonperforming assets. The intentional shrinkage in our balance sheet has had a positive impact on our capital ratios. Total cash and cash equivalents decreased from year-end 2012 by $0.7 million. Liquidity continues to be an important focus for our Corporation during these tumultuous times and our liquid assets were 29.82% of total liabilities at September 30, 2013 which remains strong. We monitor our liquidity daily to ensure we have prudent levels of liquidity while we strive to lower our deposit costs. This strategy also resulted in a lowering of our overall interest bearing deposits. We maintained our core relationships as can be evidenced by the increase in demand deposits which are our free funds.

We continue to focus on our asset quality due to the elevated level of nonperforming loans, criticized and classified assets, economic uncertainty and unemployment levels. Nonperforming loans increased $3.9 million from year end 2012 to September 30, 2013. This increase is primarily due to an increase in nonaccrual loans in the amount of $3.3 million. Troubled debt restructurings (not on nonaccrual) increased by $0.6 million during the first nine months of 2013. Our loans rated special mention and lower (excluding troubled debt restructurings and those in nonaccrual status) actually declined at September 30, 2013 as compared to year end 2012. We transferred $417,673 of loans into other real estate and other repossessed assets during the first nine months of 2013. Our other real estate properties declined to $398,459 at September 30, 2013 compared to $1.4 million at December 31, 2012. A substantial amount of our foreclosed properties have been sold as of September 30, 2013. Of the remaining properties in our portfolio at September 30, 2013, two lots were under contract. We are taking a continued aggressive approach to our other real estate properties to rid our balance sheet of nonperforming assets. Total shareholders' equity was $24.0 million at September 30, 2013. MainStreet and Franklin Bank were well capitalized at September 30, 2013 under bank regulatory capital classifications. The book value of shareholders' equity at September 30, 2013 was $14.00 per share.

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

September 30, 2013

Our year-to-date net income at September 30, 2013 was $94,379, or $.06 per common basic share. This net income equated to an annualized return on average assets of 0.07% and an annualized return on average shareholders' equity of 0.52%. Net income for the same period in 2012 was $186,643, or $.11 per common basic share. This net income equated to an annualized return on average assets and annualized return on average shareholders' equity of .13% and 1.10%, respectively. Credit related expenses such as the provision for loan losses, realized losses on sales of other real estate properties, impairment losses on other real estate properties, and loss of interest on nonaccrual loans continue to negatively impact our operating results. In addition, the lack of loan volume has negatively impacted loan fee income and interest income. Provision expense, other real estate and repossession expenses, write downs and losses on sales together accounted for $1,452,665 and $1,282,601 in expense for the nine month periods ending September 30, 2013 and September 30, 2012, respectively.

Net income for the third quarter of 2013 was $194,062, or $.11 per common basic share as compared to net loss in the amount of $(32,701), or $(.02) per common basic share for the third quarter of 2012. Provision expense, other real estate and repossession expenses, write downs and losses on sales together accounted for $95,164 and $614,199 for the quarters ended September 30, 2013 and 2012, respectively. Credit related issues continue to have a negative impact on our Corporation's net income.

Results of Operations

Net interest income is the difference between total interest income and total interest expense. The amount of net interest income is determined by the volume of interest-earning assets, the level of interest rates earned on those assets, and the cost of supporting funds. The difference between rates earned on interest-earning assets and the cost of supporting funds is measured by the net interest margin.

Net interest income for the nine month periods ending September 30, 2013 and 2012 was $4,623,767 and $4,817,382, respectively, a modest decrease of $193,615, or 4.02%. Both interest income and interest expense dollars dropped in comparison to last year, primarily due to volume and the lowering of deposit costs. The decline in interest income was also due to lost interest income on continued elevated levels of nonaccrual loans. For the nine months ending September 30, 2013 and 2012, the net interest margin was 3.64% and 3.49%, respectively, a 15 basis point increase. The yield on interest earning assets for the year-to-date period ending September 30, 2013 was 4.28% compared to 4.53% for the year-to-date period ending September 30, 2012, a decrease of 25 basis points. However, the funding side of the interest margin also dropped during this time period by a favorable 40 basis points in the year-to-year comparison. The maturity of our repurchase agreements has had a positive impact on our net interest margin this year and will continue going forward. We engaged a consultant to assist us in the lowering of our deposit costs. We have realized the positive impact of our strategic effort.

The yield on interest earning assets has declined due to the interest rate environment, lack of loan demand reducing loan fee income, and continued lost interest on nonaccrual loans. Lost interest on loans improved during this time period. Lost interest for the nine month periods ending September 30, 2013 and 2012 was $158,204 and $212,715, respectively. Franklin Bank's growth is also quite dependent on the recovery in consumer and real estate based lending and there is concern over the timing of recoveries in these markets given the current economic environment. Franklin Bank's future growth and earnings may be negatively affected if real estate and consumer based markets remain depressed or deteriorate further.

The low interest rate environment continues with the Federal Reserve leaving short-term interest rates within a range of 0% - .25%. This low rate environment has been in effect since 2008. The Federal Reserve has also indicated that interest rates will remain at this level throughout mid 2015. Franklin Bank has a portfolio of variable rate loans. A rising interest rate environment generally has a positive impact on the net interest margin because deposits rates are slower to increase. Although low interest rates have been beneficial for our cost of funds, with prime presently at 3.25% which is the interest rate basis for many of our loans, MainStreet's net interest margin has been adversely affected by the prolonged, recessionary low interest rate environment.

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

September 30, 2013

The net interest margin and net interest income have shown improvement with the maturity of our repurchase agreements. The rates on these repurchase agreements were above current market rates. Of these repurchase agreements, $7.5 million matured in September 2012 and $6.0 million matured in early January 2013.

Net interest income for the three month periods ending September 30, 2013 and 2012 was $1,483,989 and $1,622,620, respectively, a decline of $138,631, or 8.54%. This equated to a net interest margin of 3.48% and 3.52% at September 30, 2013 and 2012, respectively.

Provision for Loan Losses

A provision for loan losses is charged to earnings for the purpose of establishing an allowance for loan losses that is maintained at a level which reflects management's best estimate of probable credit losses inherent in the loan portfolio and is, therefore, believed to be appropriate. The amount of the allowance is based on management's evaluation of the collectability of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, economic conditions, and other risks inherent in the portfolio. Management reviews the past due reports and risk ratings and discusses individually the loans on these reports with the responsible loan officers. Management provides a detailed quarterly analysis of the allowance based on homogenous loan pools, identifying impairment, historical losses, credit concentrations, economic conditions, and other risks. As the allowance is maintained losses are, in turn, charged to this allowance rather than being reported as a direct expense.

Our methodology for determining the allowance is based on two basic principles of accounting as follows: i) losses are accrued when they are probable of occurring and are capable of estimation and (ii) losses are accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. Our analysis is based on an individual review of all credits rated Pass/Watch and lower in our risk rating system by account officers in addition to a review of management information system reports on numerous portfolio segments. The analysis of the allowance is solely based on historical and qualitative factors with historical losses adjusted to higher factors for our criticized and classified loans compared to similar banks with comparable real estate concentrations nationally. Our process allows loan groups to be identified and properly categorized. Our impaired loans are individually reviewed to determine possible impairment based on one of three recognized methods which are fair value of collateral, present value of expected cash flows, or observable market price. A specific reserve is then allocated for the amount of the impairment. Impairment is defined as a loan in which we feel it is probable (meaning likely, not virtually certain) that we will be unable to collect all amounts due under the contractual terms of the loan agreement. Possible loss for loans risk rated special mention or lower are then allocated based on a historical loss migration and adjusted for qualitative factors. Remaining loans are pooled based on homogenous loan groups and allocated based on Franklin Bank's historical net loss experience. These pools are as follows: 1) commercial loans; 2) construction and land development; 3) residential 1-4 family first liens; 4) residential 1-4 family junior liens; 5) home equity lines; 6) commercial real estate; and 7) consumer loans. Historical loss is calculated based on a three-year average (twelve quarters) history. Historical net loss data is adjusted and applied to pooled loans based on qualitative factors. We utilize the following qualitative factors: 1) changes in the value of underlying collateral such as loans not conforming to supervisory loan to value limits; 2) national and local economic conditions; 3) changes in portfolio volume and nature such as borrower's living outside our primary trade area; 4) changes in past dues, nonaccruals; and 5) quality and impact and effects of defined credit concentrations. The methodology has continued to evolve as our company has grown and our loan portfolio has grown and become more diverse.

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

September 30, 2013

Provision expense for the first nine months of 2013 was $1,326,161 as compared to a recovery of provision expense in the amount of $(33,249) for the first nine months of 2012. Our loan portfolio, net of unearned deferred fees and costs, declined $9.5 million or 7.09% from year-end 2012. Gross charge-offs year-to-date 2013 were $1,251,460 compared to $989,260 year-to-date 2012. We transferred $417,673 from loans to other real estate and other repossessed assets during the year-to-date period ending September 30, 2013. The allowance for loan losses was $2.7 million at September 30, 2013 and $2.6 million at December 31, 2012, an increase of $.1 million, which is discussed below. The allowance for loan losses was 2.18% and 1.93% of loans net of unearned deferred fees and costs at September 30, 2013 and December 31, 2012, respectively. Our criticized and classified loans that are evaluated by historical loss migration decreased $6,402,211 at September 30, 2013 compared to year-end 2012. The loans evaluated collectively by pools decreased $7.1 million at September 30, 2013 versus December 31, 2012. Impaired loans evaluated individually were $6.7 million and $2.8 million at September 30, 2013 and December 31, 2012, respectively, with specific reserves of $759,262 and $292,003, respectively. The increase in the allowance for loan losses to loans, net of unearned deferred fees, from year end 2012 was primarily due to higher specific reserves on nonaccrual loans, all offset by a decrease in adverse rated loans and lower loan volumes evaluated collectively by pools. The allowance for loan losses was not replenished by the full $1,251,460 of gross charge offs because $268,850 of that total gross charge off amount was provided for in our allowance for loan losses at year-end 2012 as a specific reserve. The unallocated amount remained the same from year end 2012. Net charge-offs of $1,198,483 and $830,707 for the first nine months of 2013 and 2012 equated to 1.24% and 0.80%, respectively, of average loans outstanding net of unearned income and deferred fees. The amount of charge-offs can fluctuate substantially based on the financial condition of the borrowers, business conditions in the borrower's market, collateral values and other factors which are not capable of precise projection at any point in time.

Provision expense (recovery) for the third quarter of 2013 and 2012 was $73,659 and $(207,119), respectively. The allowance for loan losses was $2.7 million at September 30, 2013 and $2.9 million at June 30, 2013. The allowance for loan losses was 2.18% and 2.27% of loans net of unearned at September 30, 2013 and June 30, 2013, respectively. Our criticized and classified loans that are evaluated by historical loss migration declined $1.1 million at September 30, 2013 compared to prior quarter end. The loans evaluated collectively by pools decreased $2.8 million at September 30, 2013 versus June 30, 2013. Impaired loans evaluated individually were $6.7 million and $6.3 million at September 30, 2013 and June 30, 2013, respectively, with specific reserves of $759,262 and $789,475, respectively. The decrease in the allowance for loan losses to loans, net of unearned deferred fees, for the third quarter of 2013 over second quarter of 2013 was primarily due to a decrease in adverse rated loans combined with a small decrease in specific reserves on nonaccrual loans and loan volumes evaluated collectively by pools. Gross charges offs and recoveries for the third quarter of 2013 were $278,675 and $17,798, respectively. Net charge-offs of $260,877 for the three months of the third quarter of 2013 equated to .82%, of quarterly average loans outstanding net of unearned income and deferred fees.

Following is a breakdown of our nonperforming loans by balance sheet type which includes nonaccrual loans, loans past due 90 days and still accruing, troubled debt restructurings, and other impaired loans.

                                     September 30, 2013     December 31, 2012
Commercial                          $             96,120   $           212,738
Real Estate:
Construction and land development                805,026             1,100,585
Residential 1-4 families:
First liens                                    1,679,308               938,555
Junior liens                                      45,580               225,669
Home equity loans                                 71,722                     -
Commercial real estate                         3,996,286               346,807
Consumer                                               -                     -
Total Nonperforming Loans           $          6,694,042   $         2,824,354

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

September 30, 2013

Total nonperforming loans experienced an increase in the amount of $3,869,688 or 137.01% at September 30, 2013 as compared to December 31, 2012. Nonaccrual loans (included in the impaired loans above) were $4,783,737 and $1,515,689 at September 30, 2013 and December 31, 2012, respectively, which represented 3.83% and 1.13%, respectively, of loans, net of unearned deferred fees and costs. Management considers these loans impaired along with loans 90 days or more past due and still accruing, troubled debt restructurings (not on nonaccrual), and other impaired loans. Loans once considered impaired are included in the reserve, but if well collateralized, no specific reserve is allocated for them. Please refer to Note 4 to the financial statements for a breakdown of the allowance by category, specific reserves by category, and impaired loans by category. Note 4 also gives information related to which categories of loans and dollar amounts had specific reserves allocated. At September 30, 2013 loans secured by commercial real estate were the largest category of impaired loans at $4.0 million. At December 31, 2012 construction and land development loans were the largest category of impaired loans at $1.1 million. Loans secured by residential 1-4 family first liens were the next largest of the impaired loan categories at September 30, 2013 at $1.7 million. Residential 1-4 family first liens were the next largest of the impaired loan categories at December 31, 2012 at $.9 million.

Many of the asset quality issues in our loan portfolio are the result of our borrowers having to sell various real estate properties at depressed prices to repay the loan. In addition, borrowers' incomes have been reduced which increases their debt to income ratio. The overall economy in Franklin County continues to struggle based on unemployment, a continued slowing of building activity, a slowing of transportation and warehousing, and excessive supply of . . .

  Add MREE to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for MREE - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.