UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
[
X
] QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
quarterly period ended
September 30,
2008
OR
[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
For the
transition period from _______ to ________
Commission
file number:
005-82164
MAINSTREET FINANCIAL
CORPORATION
(Exact
name of small business issuer as specified in its charter)
|
United
States
|
|
20-1867479
|
|
(State or other
jurisdiction of
incorporation
of organization
|
|
(IRS Employer
Identification No.)
|
|
629
W. State Street, Hastings, Michigan 49058-1643
|
|
(Address of
principal executive offices)
|
|
(269)
945-9561
|
|
(Issuer's telephone
number)
|
|
None
|
|
(former name, former
address and former fiscal year, if changed since last
report)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 and 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
[
X
] No
[ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the
Act. (Check one)
Large
accelerated filer _____
Accelerated
filer _____
Non-accelerated
filer _____
Smaller
reporting company
X
(Do
not check if smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
[ ] No
[
X
]
Indicate
the number of shares outstanding of each issuer's classes of common equity, as
of the latest practicable date:
At
October 31, 2008, there were 756,068 shares of the issuers' common stock
outstanding.
MAINSTREET
FINANCIAL CORPORATION
Index
|
|
|
Page
Number
|
|
PART
I FINANCIAL
INFORMATION
|
|
|
Item
1. Financial
Statements
|
|
|
Consolidated Balance Sheets as
of September 30, 2008 and December 31, 2007
|
1
|
|
Consolidated Statements of
Operations for the Three-Month and Nine-Month Periods ended September 30,
2008 and 2007
|
2
|
|
Consolidated Statements of
Changes in Shareholders' Equity for the Nine-Month Periods ended September
30, 2008
|
3
|
|
Consolidated Statements of Cash
Flows for the Nine-Month Periods ended September 30, 2008 and
2007
|
4
|
|
Notes to Consolidated Financial
Statements
|
6
|
|
Item
2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
|
8
|
|
Item 3.
Quantitative and
Qualitative Disclosures about Market Risk
|
18
|
|
Item
4T.
Controls and
Procedures
|
18
|
|
PART
II
OTHER
INFORMATION
|
|
|
Item
1.
Legal
Proceedings
|
20
|
|
Item
1A
Risk Factors
|
20
|
|
Item 2.
Unregistered Sales of
Equity Securities and Use of Proceeds
|
20
|
|
Item 3.
Defaults Upon Senior
Securities
|
20
|
|
Item 4.
Submission of Matters
to a Vote of Security Holders
|
20
|
|
Item 5.
Other
Information
|
20
|
|
Item 6.
Exhibits
|
21
|
|
SIGNATURES
|
|
|
EXHIBITS
|
|
PART
I FINANCIAL INFORMATION
Item
1 Financial
Statements
MAINSTREET
FINANCIAL CORPORATION
Consolidated
Balance Sheets as of
September
30, 2008 and December 31, 2007
(Unaudited)
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Cash
and due from financial institutions
|
|
$
|
1,965,852
|
|
|
$
|
1,995,698
|
|
|
Interest-bearing
deposits
|
|
|
1,207,023
|
|
|
|
3,175,605
|
|
|
Cash and cash
equivalents
|
|
|
3,172,875
|
|
|
|
5,171,303
|
|
|
Securities
available for sale
|
|
|
1,694,630
|
|
|
|
1,924,413
|
|
|
Loans,
net of allowance of $675,397 at September 30, 2008
and $508,364 at December 31,
2007
|
|
|
93,668,735
|
|
|
|
100,149,716
|
|
|
Federal
Home Loan Bank (FHLB) stock
|
|
|
1,680,000
|
|
|
|
1,589,000
|
|
|
Accrued
interest receivable
|
|
|
537,096
|
|
|
|
605,241
|
|
|
Premises
and equipment, net
|
|
|
3,422,815
|
|
|
|
3,557,518
|
|
|
Intangible
assets
|
|
|
736,529
|
|
|
|
856,035
|
|
|
Other
real estate owned
|
|
|
1,877,461
|
|
|
|
910,846
|
|
|
Other
assets
|
|
|
205,185
|
|
|
|
264,076
|
|
|
|
|
$
|
106,995,326
|
|
|
$
|
115,028,148
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
5,107,282
|
|
|
$
|
5,278,694
|
|
|
Interest-bearing
|
|
|
60,082,359
|
|
|
|
74,126,373
|
|
|
|
|
|
65,189,641
|
|
|
|
79,405,067
|
|
|
FHLB
advances
|
|
|
33,600,000
|
|
|
|
26,400,000
|
|
|
Note
payable
|
|
|
700,000
|
|
|
|
700,000
|
|
|
ESOP
note payable
|
|
|
255,852
|
|
|
|
255,852
|
|
|
Accrued
interest payable
|
|
|
102,926
|
|
|
|
189,015
|
|
|
Advance
payments by borrowers for taxes and insurance
|
|
|
334,753
|
|
|
|
100,412
|
|
|
Deferred
compensation liability
|
|
|
519,007
|
|
|
|
506,737
|
|
|
Accrued
expenses and other liabilities
|
|
|
259,749
|
|
|
|
316,796
|
|
|
Total
liabilities
|
|
|
100,961,928
|
|
|
|
107,873,879
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
|
|
|
|
|
|
|
Common stock - $.01 par value,
9,000,000 shares authorized,
756,068 shares
issued and outstanding
|
|
|
7,561
|
|
|
|
7,561
|
|
|
Additional paid in
capital
|
|
|
2,806,803
|
|
|
|
2,821,602
|
|
|
Unearned ESOP
shares
|
|
|
(222,267
|
)
|
|
|
(247,856
|
)
|
|
Retained
earnings
|
|
|
3,447,273
|
|
|
|
4,603,116
|
|
|
Accumulated other comprehensive
income (loss)
|
|
|
(5,972
|
)
|
|
|
(30,154
|
)
|
|
Total
shareholders’ equity
|
|
|
6,033,398
|
|
|
|
7,154,269
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
106,995,326
|
|
|
$
|
115,028,148
|
|
See
accompanying notes to consolidated financial statements.
MAINSTREET FINANCIAL
CORPORATION
Consolidated Statements of Operations
for the
Three-Month and Nine-Month Periods
Ended
September 30
, 2008 and 2007
(Unaudited)
|
|
|
Three
Months
Ended
September 30,
|
|
|
Nine
months
Ended
September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
including related fees
|
|
$
|
1,412,681
|
|
|
$
|
1,625,617
|
|
|
$
|
4,525,613
|
|
|
$
|
4,880,446
|
|
|
Taxable
securities
|
|
|
40,771
|
|
|
|
47,429
|
|
|
|
128,299
|
|
|
|
145,571
|
|
|
Other
|
|
|
10,415
|
|
|
|
75,348
|
|
|
|
52,047
|
|
|
|
163,506
|
|
|
|
|
|
1,463,867
|
|
|
|
1,748,394
|
|
|
|
4,705,959
|
|
|
|
5,189,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
504,020
|
|
|
|
798,834
|
|
|
|
1,801,053
|
|
|
|
2,352,927
|
|
|
FHLB
advances
|
|
|
292,382
|
|
|
|
293,947
|
|
|
|
939,956
|
|
|
|
874,886
|
|
|
Other
|
|
|
10,351
|
|
|
|
14,955
|
|
|
|
34,219
|
|
|
|
42,105
|
|
|
|
|
|
806,753
|
|
|
|
1,107,736
|
|
|
|
2,775,228
|
|
|
|
3,269,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
657,114
|
|
|
|
640,658
|
|
|
|
1,930,731
|
|
|
|
1,919,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
161
,000
|
|
|
|
45,000
|
|
|
|
296,000
|
|
|
|
173,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after provision for loan losses
|
|
|
496,114
|
|
|
|
595,658
|
|
|
|
1,634,731
|
|
|
|
1,746,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
and service charges
|
|
|
97,047
|
|
|
|
103,733
|
|
|
|
272,523
|
|
|
|
283,567
|
|
|
Loss
on securities
|
|
|
(86,227
|
)
|
|
|
|
|
|
|
(188,632
|
)
|
|
|
|
|
|
Gain
on
sale of loans
|
|
|
7,394
|
|
|
|
2,773
|
|
|
|
23,003
|
|
|
|
21,786
|
|
|
Gain
/
(
loss
)
on
sale of repossessed assets
|
|
|
|
|
|
|
13,466
|
|
|
|
(36,954
|
)
|
|
|
50,712
|
|
|
Other
|
|
|
12,500
|
|
|
|
7,346
|
|
|
|
37,121
|
|
|
|
25,375
|
|
|
|
|
|
30,714
|
|
|
|
127,318
|
|
|
|
107,061
|
|
|
|
381,440
|
|
|
Non-interest
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
459,226
|
|
|
|
418,858
|
|
|
|
1,355,077
|
|
|
|
1,303,191
|
|
|
Premises
and equipment, net
|
|
|
112,957
|
|
|
|
124,104
|
|
|
|
371,542
|
|
|
|
428,685
|
|
|
Administrative
and general
|
|
|
152,544
|
|
|
|
124,688
|
|
|
|
401,786
|
|
|
|
388,018
|
|
|
Data
processing through service bureau
|
|
|
62,547
|
|
|
|
63,955
|
|
|
|
194,087
|
|
|
|
190,618
|
|
|
Amortization
of intangible assets
|
|
|
38,765
|
|
|
|
40,491
|
|
|
|
119,507
|
|
|
|
122,887
|
|
|
Regulatory
assessments
|
|
|
82,565
|
|
|
|
28,352
|
|
|
|
165,266
|
|
|
|
61,394
|
|
|
Professional
services
|
|
|
120,229
|
|
|
|
67,855
|
|
|
|
235,530
|
|
|
|
201,223
|
|
|
Advertising
and public relations
|
|
|
22,966
|
|
|
|
23,575
|
|
|
|
54,840
|
|
|
|
58,251
|
|
|
|
|
|
1,051,799
|
|
|
|
891,878
|
|
|
|
2,897,635
|
|
|
|
2,754,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before
taxes
|
|
|
(524,971
|
)
|
|
|
(168,902
|
)
|
|
|
(1,155,843
|
)
|
|
|
(626,222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit
|
|
|
--
-
|
|
|
|
(56,712
|
)
|
|
|
--
-
|
|
|
|
(212,194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(524,971
|
)
|
|
$
|
(112,190
|
)
|
|
$
|
(1,155,843
|
)
|
|
$
|
(414,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
$
|
(524,485
|
)
|
|
$
|
(120,243
|
)
|
|
$
|
(1,131,661
|
)
|
|
$
|
(
422
,
261
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(
0
.72
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(
1.58
|
)
|
|
$
|
(0.57
|
)
|
See accompanying notes to consolidated
financial statements.
MAINSTREET FINANCIAL
CORPORATION
Consolidated Statements of Changes in
Shareholders' Equity
For the Nine-Month Period Ended
September 30, 2008 (Unaudited)
|
|
|
Common
Stock
|
|
|
Additional
Paid-In
Capital
|
|
|
Retained
Earnings
|
|
|
Unearned
ESOP
Shares
|
|
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
|
|
Total
Shareholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance – January 1,
2008
|
|
$
|
7,561
|
|
|
$
|
2,821,602
|
|
|
$
|
4,603,116
|
|
|
$
|
(247,856
|
)
|
|
$
|
(30,154
|
)
|
|
$
|
7,154,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
---
|
|
|
|
---
|
|
|
|
(1,155,843
|
)
|
|
|
---
|
|
|
|
---
|
|
|
|
(1,155,843
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain/loss
on
securities available for
sale,
net of
reclassifications
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
24,182
|
|
|
|
24,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned ESOP
shares
|
|
|
---
|
|
|
|
(14,799
|
)
|
|
|
---
|
|
|
|
25,589
|
|
|
|
---
|
|
|
|
10,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance –
September
30, 2008
|
|
$
|
7,561
|
|
|
$
|
2,806,803
|
|
|
$
|
3,447,273
|
|
|
$
|
(222,267
|
)
|
|
$
|
(5,972
|
)
|
|
$
|
6,033,398
|
|
See accompanying notes to consolidated
financial statements.
MAINSTREET FINANCIAL
CORPORATION
Notes to Consolidated Statements of Cash
Flows for the
Nine-Month Periods Ended September 30,
2008 and 2007 (Unaudited)
|
|
|
Nine Months
Ended September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,155,843
|
)
|
|
$
|
(414,028
|
)
|
|
Adjustments to reconcile net loss
to net cash from operating activities
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
141,539
|
|
|
|
191,383
|
|
|
Amortization, net of
accretion
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
2,282
|
|
|
|
2,913
|
|
|
Loans
|
|
|
(1,267
|
)
|
|
|
(167
|
)
|
|
Intangible
assets
|
|
|
119,506
|
|
|
|
122,887
|
|
|
Provision for loan
losses
|
|
|
296,000
|
|
|
|
173,000
|
|
|
Loans originated for
sale
|
|
|
(2,276,300
|
)
|
|
|
(1,724,640
|
)
|
|
Proceeds from sales of loans
originated for sale
|
|
|
2,299,303
|
|
|
|
1,746,425
|
|
|
Other–than–temporary
impairment of securities
|
|
|
188,632
|
|
|
|
---
|
|
|
Gain on sale of
loans
|
|
|
(23,003
|
)
|
|
|
(21,786
|
)
|
|
ESOP
expense
|
|
|
10,790
|
|
|
|
24,255
|
|
|
(Gain)
loss on sale of repossessed real estate
|
|
|
36,954
|
|
|
|
(50,712
|
)
|
|
Change in assets and
liabilities
|
|
|
|
|
|
|
|
|
|
Change in deferred fees and
discounts
|
|
|
18,985
|
|
|
|
30,948
|
|
|
Accrued interest
receivable
|
|
|
68,145
|
|
|
|
68,590
|
|
|
Other
assets
|
|
|
58,891
|
|
|
|
(236,836
|
)
|
|
Accrued interest
payable
|
|
|
(86,089
|
)
|
|
|
62,621
|
|
|
Other
liabilities
|
|
|
(44,777
|
)
|
|
|
183,120
|
|
|
Net cash from (used in) operating
activities
|
|
|
(
346,252
|
)
|
|
|
157
,
973
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities
|
|
|
|
|
|
|
|
|
|
Activity in available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
Principal repayments, maturities,
sales and calls
|
|
|
63,051
|
|
|
|
115,969
|
|
|
Purchases
of FHLB stock
|
|
|
(91,000
|
)
|
|
|
---
|
|
|
Loan originations and payments,
net
|
|
|
1,
266,396
|
|
|
|
976,057
|
|
|
Loans sold from
portfolio
|
|
|
3,874,571
|
|
|
|
---
|
|
|
Sales of other real estate
owned
|
|
|
257,068
|
|
|
|
466,230
|
|
|
(Purchases) sales of premises and
equipment, net
|
|
|
(6,836
|
)
|
|
|
(120,212
|
)
|
|
Net cash used in investing
activities
|
|
|
5,
363,250
|
|
|
|
1,438,044
|
|
(Continued)
MAINSTREET FINANCIAL
CORPORATION
Consolidated Statements of Cash Flows
for the
Nine-Month Periods Ended September 30,
2008 and 2007 (Unaudited)
|
|
|
Nine Months
Ended September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities
|
|
|
|
|
|
|
|
Net change in
deposits
|
|
|
(14,215,426
|
)
|
|
|
(1,883,189
|
)
|
|
Proceeds from FHLB
advances
|
|
|
29,780,000
|
|
|
|
13,000,000
|
|
|
Repayment of FHLB
advances
|
|
|
(22,580,000
|
)
|
|
|
(10,000,000
|
)
|
|
Public offering
costs
|
|
|
---
|
|
|
|
(114,993
|
)
|
|
Net cash from (used for) financing
activities
|
|
|
(7,015,426
|
)
|
|
|
1,001,818
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash
equivalents
|
|
|
(1,998,428
|
)
|
|
|
2,597,835
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at
beginning of period
|
|
|
5,171,303
|
|
|
|
3,840,265
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of period
|
|
$
|
3,172,875
|
|
|
$
|
6,438,100
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash
flow information
|
|
|
|
|
|
|
|
|
|
Cash paid during the year
for
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
2,861,317
|
|
|
$
|
3
,207,297
|
|
|
Taxes
|
|
|
---
|
|
|
|
---
|
|
|
Supplemental disclosures of non
cash activities
|
|
|
|
|
|
|
|
|
|
Transfer of loans to other real
estate
|
|
$
|
1,260,637
|
|
|
$
|
687
,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated
financial statements.
MAINSTREET FINANCIAL
CORPORATION
Notes to Consolidated Financial
Statements
1.
BASIS OF
PRESENTATION:
The unaudited, consolidated financial
statements include the consolidated results of operations of MainStreet
Financial Corporation ("Company"), MainStreet Savings Bank ("Bank") and
MainStreet Financial Services, Inc., a wholly owned subsidiary of the
Bank. These financial statements do not include the accounts of the
Company’s parent company, Mainstreet Financial Corporation,
MHC. These consolidated financial statements have been prepared in
accordance with the instructions for Form 10-Q and Article 8 of Regulation S-X
and do not include all disclosures required by generally accepted accounting
principles for a complete presentation of the Company's financial condition and
results of operations. In the opinion of management, the information
reflects all adjustments (consisting only of normal recurring adjustments) which
are necessary in order to make the financial statements not misleading and for a
fair representation of the results of operations for such
periods. The results for the period ended September 30, 2008, should
not be considered as indicative of results for a full year. For
further information, refer to the consolidated financial statements and
footnotes included in the Company's Form 10-KSB for the year ended December 31,
2007.
2.
EARNINGS PER SHARE:
Basic earnings (loss) per share is net
income (loss) divided by the weighted average number of common shares
outstanding during the periods which were 732,704 and 729,142 shares for the
nine months ended September 30, 2008 and 2007 respectively. For the three months
ended September 30, 2008 and 2007 the weighted shares outstanding were 733,557
and 730,040, respectively. ESOP shares are considered outstanding for this
calculation, unless unearned. There are currently no potentially
dilutive common shares issuable under stock options or other
programs. Earnings (loss) and dividends per share are restated for
all stock splits and dividends through the date of the financial
statements.
3
RECENT ACCOUNTING
DEVELOPMENTS:
In September 2006, the FASB issued
Statement No. 157,
Fair Value
Measurements
. This Statement defines fair
value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. This Statement establishes a fair
value hierarchy about the assumptions used to measure fair value and clarifies
assumptions about risk and the effect of a restriction on the sale or use of an
asset. The standard is effective for fiscal years beginning after
November 15, 2007. In February 2008, the FASB issued Staff Position
(FSP) 157-2,
Effective Date of
FASB Statement No. 157
. This FSP delays the
effective date of FAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value on a
recurring basis (at least annually) to fiscal years beginning after November 15,
2008, and interim periods within those fiscal years. The Bank adopted
the standard and disclosures have been added to Note 4.
In February 2007, the FASB issued
Statement No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities. The standard provides companies with an option to report
selected financial assets and liabilities at fair value and establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types
of assets and liabilities. The new standard is effective for the
Company on January 1, 2008. The Company did not elect the fair value
option for any financial assets or financial liabilities as of January 1,
2008, and therefore this standard did not have a material effect on
the Bank as of September 30, 2008.
4.
FAIR
VALUE MEASUREMENTS:
Statement 157 establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of
inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for
identical assets or liabilities in active markets that the entity has the
ability to access as of the measurement date.
Level 2: Significant other observable
inputs other than Level 1 prices such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market
data.
Level 3: Significant unobservable inputs
that reflect a reporting entity’s own assumptions about the value that market
participants would use in pricing an asset or liability.
The fair values of securities available
for sale are determined by obtaining quoted prices on nationally recognized
securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical
technique widely used in the industry to value debt securities without relying
exclusively on quoted prices for the specific securities but rather by relying
on the securities’ relationship to other benchmark quoted securities (Level 2
inputs).
Assets and
Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair
value on a recurring basis are summarized below:
|
|
|
|
|
|
Fair Value Measurements at
September 30, 2008 Using
|
|
|
|
|
September
30,
2008
|
|
|
Quoted Prices in Active Markets
for Identical Assets
(Level 1)
|
|
|
Significant Other Observable
Inputs
(Level
2)
|
|
|
Significant Unobservable
Inputs
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
securities
|
|
$
|
1,694,630
|
|
|
|
---
|
|
|
$
|
1,694,630
|
|
|
|
---
|
|
Assets and
Liabilities Measured on a Non-Recurring Basis
Assets and liabilities measured at fair
value on a non-recurring basis are summarized below:
|
|
|
|
|
Fair Value Measurements at
September 30, 2008 Using
|
|
|
|
|
September 30,
2008
|
|
Quoted Prices in Active Markets
for Identical Assets
(Level 1)
|
Significant Other Observable
Inputs (Level 2)
|
|
Significant Unobservable
Inputs
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$
|
1,082
,000
|
|
|
|
|
$
|
1,082
,000
|
|
The following represent impairment
charges recognized during the period ended September 30,
2008.
Impaired loans, which are measured for
impairment using the fair value of the collateral for collateral dependent
loans, had a carrying amount of $1,082,000, with a valuation allowance of
$160
,000
, resulting in an additional provision
for loan losses of $160
,000
for
the nine month period
ended September 30, 2008.
The fair value of impaired loans is
estimated using one of several methods, including collateral value or market
value of similar debt. At September
30, 2008, substantially all of the total
impaired loans were evaluated based on the fair value of the
collateral. When the fair value of the collateral is based on an
observable market price or a current appraised value, we classify the impaired
loan as nonrecurring Level 2.
When an appraised value is not available
or management determines the fair value of the collateral is further impaired
below the appraised value and there is no observable market price, we classify
the impaired loan as nonrecurring Level 3.
Item
2
Management’s Discussion
and
Analysis of Financial Condition and
Results of Operations
Forward-Looking
Statements
This report contains certain
‘forward-looking statements’ that may be identified by the use of such words as
“believe,” “expect,” “anticipate,” “should,” “planned,” and “estimated” with
respect to our financial condition. Results of operations and business are
subject to various factors which could cause actual results to differ materially
from these estimates and most other statements that are not historical in
nature. These factors include, but are not limited to, general and local
economic conditions, changes in interest rates and the relationship between
short- and long-term interest rates, deposit flows, demand for mortgage,
consumer and other loans, real estate values, competition, changes in accounting
principles, policies or guidelines, changes in legislation or regulation, and
other economic, competitive, governmental, regulatory and technological factors
affecting our operations, pricing, products and services.
General and Recent
Regulatory Matters
The principal business of MainStreet
Financial Corporation (“Company”) is operating our wholly owned subsidiary,
MainStreet Savings Bank (“Bank”). The Bank is a community oriented
institution primarily engaged in attracting retail deposits from the general
public and originating one- to four-family residential loans in its primary
market area, including construction loans and home equity lines of
credit. The Bank also originates a limited amount of construction or
development, consumer and commercial loans. The Company is in a
mutual holding company structure and 53% of its stock is owned by MainStreet
Financial Corporation, MHC (“MHC”).
Our results of operations depend
primarily on our net interest income. Net interest income is the
difference between the interest income we earn on our interest-earning assets,
consisting primarily of loans, investments and mortgage-backed securities, and
the interest we pay on our interest-bearing liabilities, consisting of savings
and checking accounts, money market accounts, time deposits and
borrowings. Our results of operations also are affected by our
provision for loan losses, non-interest income and non-interest
expense
. As a
result of the slower economy, declining household net worth and an overall
decline in consumer and business activity
,
loan originations have
decreased. Non-interest income consists primarily of service charges
on deposit accounts, transaction fees and commissions from investment
services. Non-interest expense consists primarily of salaries and
employee benefits, occupancy, equipment and data processing, advertising
and
other
costs. Our results of operations also may be affected significantly
by general and local economic and competitive conditions, changes in market
interest rates, governmental policies and actions of regulatory
authorities.
During
the first nine months of 2008, the Company’s earnings continued to be negatively
impacted by decreased interest income, due to a lower volume of loan
originations and the slower economy in southwest Michigan. The
economic environment significantly reduced loan demand and increased loan
delinquencies and associated losses, particularly due to decreased property
values. We have experienced a $1,156,000 loss in the first nine
months of 2008, which reduced our capital. This continuing weak
economy has caused a $752,000 increase in other real estate owned during the
quarter ended September 30, 2008. During the first nine months of
2008, $1,301,000 in delinquent real estate loans were converted to other real
estate owned, as compared to only $687,000 during the first nine months of
2007. We experienced a $37,000 loss on the sale of repossessed
properties during the first nine months of 2008, compared to a $51,000 gain
during the first nine months of 2007.
The allowance for loan losses has
increased to $
675
,000 at September 30, 2008 from $508,000
at December 31, 2007. The increase during the nine months is the
result
of a $296,000 provision for loan losses and recoveries of $16,000,
less charge-offs of $145,000. These charge offs include a $36,000
loss attributable to the sale of property by a borrower, which was security for
a delinquent land development loan. Additionally, there were $26,000
in write downs experienced on two other real estate owned (“OREO”) properties
which are currently listed for sale by the bank, $56,000 in charge offs on six
consumer loans, four of which were unsecured and two secured by vehicles in the
process of being repossessed, a $14,000 write down of a
repossessed vehicle and a $13,000 charge off on a commercial loan secured by a
vehicle. Management believes the allowance at September 30,
2008 is adequate given the collateralization of delinquent and non-performing
loans.
Primarily
as a result of our continuing operating losses, our bank subsidiary received a
letter from the OTS dated February 5, 2008, stating 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 April
4, 2008, the Bank entered into a supervisory agreement with the OTS to address
the OTS’s concerns regarding the financial condition of the
Bank. Among other things, the supervisory agreement requires 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 (5) continue to abide by the limits
in the February 5, 2008 “troubled condition” letter.
On August
8, 2008 the Bank lost well capitalized status under prompt corrective action
regulations of the OTS and became adequately capitalized effective June 30,
2008. See “Capital.”
Difficult
market conditions and economic trends have adversely affected our industry and
our business.
Dramatic declines in the housing
market, with decreasing home prices and increasing delinquencies and
foreclosures, have negatively impacted the credit performance of mortgage and
construction loans and resulted in significant writedowns of assets by many
financial institutions. General downward economic trends, reduced
availability of commercial credit and increasing unemployment have negatively
impacted the credit performance of commercial and consumer credit, resulting in
additional writedowns. Concerns over the stability of the financial
markets and the economy
have
resulted in decreased lending by financial institutions to their customers and
to each other. This market turmoil and tightening of credit has led
to increased commercial and consumer deficiencies, lack of customer confidence,
increased market volatility and widespread reduction in general business
activity. Southwestern Michigan has experienced the adverse impact of
these economic trends for over two years. Financial institutions have
experienced decreased access to deposits or borrowings. Our access to
Federal Home Loan Bank advances has decreased in recent months as the required
collateral level has increased.
The resulting economic pressure on
consumers and businesses and the lack of confidence in the financial markets has
adversely affected our business, financial condition, results of operations and
stock price.
Our ability to assess the
creditworthiness of customers and to estimate the losses inherent in our credit
exposure is made more difficult and complex under these difficult market and
economic conditions. We also expect to face increased regulation and
government oversight as a result of these downward trends. This
increased government action may increase our costs and limit our ability to
pursue certain business opportunities. We also may be required to pay
even higher FDIC premiums than the recently increased level, because financial
institution failures resulting from the depressed market conditions have and may
continue to deplete the insurance fund of the FDIC and reduce the FDIC’s ratio
of reserves to insured deposits.
We do not expect these difficult
conditions to likely improve in the near future. A worsening of these
conditions would likely exacerbate the adverse effects of these difficult market
and economic conditions on us, our customers and the other financial
institutions in our market. We may experience increases in
foreclosures, delinquencies and customer bankruptcies, as well as more
restricted access to funds.
Recent
legislative and regulatory initiatives to address these difficult market and
economic conditions may not stabilize the U.S. banking system.
The recently enacted Emergency Economic
Stabilization Act of 2008 (“EESA”) authorizes the Treasury Department to
purchase from financial institutions and their holding companies up to $700
billion in mortgage loans, mortgage-related securities and certain other
financial instruments, including debt and equity securities issued by financial
institutions and their holding companies in a troubled asset relief program
(”TARP”). The purpose of TARP was to restore confidence and stability
to the U.S. banking system and to encourage financial institutions to increase
their lending to customers and to each other. The Treasury Department
has allocated $250 billion towards the TARP Capital Purchase Program
(“CPP”). Under the CPP, Treasury will purchase debt or equity
securities from participating institutions. The TARP also will
include direct purchases or guarantees of troubled asset of financial
institutions.
EESA also increased FDIC deposit
insurance on most accounts from $100,000 to $250,000. This increase
is in place until the end of 2009 and is not covered by deposit insurance
premiums paid by the banking industry. In addition, the FDIC has
implemented two temporary programs to provide deposit insurance for the full
amount of most non-interest bearing transaction accounts through the end of 2009
and to guarantee certain unsecured debt of financial institutions and their
holding companies through June 2012. Financial institutions have
until November 12, 2008 to opt out of these two programs. The purpose
of these legislative and regulatory actions was to stabilize the volatility in
the U.S. banking system.
EESA, TARP and the FDIC’s recent
regulatory initiatives may not stabilize the U.S. banking system and financial
markets. If the volatility in the market and the economy continue or
worsen, our business, financial condition, results of operations, access to
funds and the price of our stock could be materially and adversely
impacted.
Evolution
of Business Strategy
The Bank’s business strategy has been
modified to reflect the continued weakness in the West Michigan economy,
including the real estate market, the growth limitations imposed by the Bank’s
capital position and the regulatory constraints imposed by OTS. We
continue initiatives to improve net interest margin and attract core deposits
and have undertaken a series of new initiatives to reduce operating
expenses. New loan production, to the extent that it increases to the
point where it exceeds the normal monthly decrease in the portfolio due to
amortization and prepayments, will be offset by the sale of newly originated
loans and/or the sale of participation interests in existing loans in the
portfolio. Cash from loan sales will be used to increase liquidity
and/or reduce the reliance on brokered deposits.
Critical Accounting
Policies
We consider accounting policies
involving significant judgments and assumptions by management that have, or
could have, a material impact on the carrying value of certain assets or on
income to be critical accounting policies. We consider our critical accounting
policies to be those related to our allowance for loan losses and deferred
income taxes. The allowance for loan losses is maintained to cover
losses that are probable and can be estimated on the date of the evaluation in
accordance with U.S. generally accepted accounting principles. It is
our estimate of probable incurred credit losses that are in our loan
portfolio. Our methodologies for analyzing the allowance for loan
losses and determining our net deferred tax assets is described in our Form
10-KSB for the year ended December 31, 2007.
Comparison of Financial Condition at
September 30, 2008 and December 31, 2007
General
.
Total assets
decreased by $8.0 million, or 7.01%, to $107.0 million at September 30, 2008,
from $115.0 million at December 31, 2007. A significant reason for
this decrease was a sale of $3.8 million in residential real estate loans during
the first quarter of 2008, in order to maintain the Bank’s then well-capitalized
status and to comply with the growth limits in the supervisory directive and
supervisory agreement. These sold loans had balloon notes with an
average remaining term of less than five years and contained terms typical of
current offerings and portfolio averages. Our cash and securities
decreased $2.2 million during the first nine months of 2008. Our loan
portfolio decreased $6.4 million after the loan sale due to delinquent loans
converting to other real estate owned, decreased demand for loans and the
retention of the proceeds of loan repayments for liquidity
purposes.
Cash and
Securities.
Cash and cash equivalents decreased by $2.0 million during
the period, to $3.2 million at September 30, 2008. Though our current liquidity
strategy is to maintain higher levels of available funds to meet expenses and
commitments, we experienced this decrease because of the use of cash in part to
fund maturing wholesale deposits. Our securities portfolio decreased
by $230,000 during the nine months, which primarily was a result of a $189,000
other-than-temporary impairment adjustment on a mutual fund
investment
.
That portfolio is designated as
available for sale and we have substantially all of our securities investments
in shorter-term instruments. Cash and securities were
4.6
% and 6.2% of total assets at
September
30, 2008, and December 31, 2007,
respectively. See
also
“
Liquidity
”
and
“
Off-Balance Sheet
Commitments.”
Loans
.
Our loan portfolio decreased
$
6.5 million or
6.5
%, from $100.2 million
at December 31, 2007 to $9
3.7
million at
September
30, 2008. In March 2008, we
sold $3.8 million in residential loans in order to comply with the OTS growth
limit and to maintain the Bank’s well
-
capitalized
status.
The slower economy in
southwest Michigan has significantly reduced loan demand, particularly for
residential
purchase
mortgage,
construction and
development loans.
That slower economy also has resulted in
increased foreclosures described below. Additionally, new competitors
in our primary market are pursuing new lending opportunities with aggressive
pricing
.
The
decrease in our loan portfolio consisted of a 5.1% decrease in one- to
four-family residential mortgages (including the $3.8 million in loans
sold),
a 9.6%
decrease in commercial real estate and business loans, a 6.2% decrease in
consumer loans, a 2.0% decrease in home equity lines of credit and a 37.7%
decrease in construction and development loans.
Other Real Estate
Owned.
Other real estate owned (“OREO”) increased by $967,000
or 108.6% from $911,000 at December 31, 2007 to $1.9 million at September 30,
2008. During the first nine months of 2008, $1.3 million in delinquent real
estate loans were converted to other real estate owned, as compared to only
$687,000 during the first nine months of 2007. This increase in 2008
reflects foreclosures or properties deeded in lieu of foreclosure on nine single
family homes with loan balances totaling $1.3 million. The bank is in
the process of foreclosing on four additional one-to-four-family residential
loans with balances of $415,000, one vacant land loan with a balance of $90,000,
and one commercial land development loan with a balance of
$411,000.
Allowance
for Loan Losses
.
Our allowance for loan
losses at September 30, 2008, was $675,000 or 0.72% of gross loans, compared to
$508,000 or 0.51% of loans at December 31, 2007. The increase in the
allowance for loan losses from year end was in response to the continuing
stagnation in our local economy, including increases in non-performing
assets.
The following table is an analysis of
the activity in the allowance for loan losses for the periods
shown.
|
|
|
Nine Months
Ended
September
30
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Balance at beginning of
period
|
|
$
|
508,000
|
|
|
$
|
538,000
|
|
|
Provision charged to
income
|
|
|
296,000
|
|
|
|
173,000
|
|
|
Recoveries
|
|
|
16,000
|
|
|
|
48,000
|
|
|
Charge-offs
|
|
|
(145,000
|
)
|
|
|
(198,000
|
)
|
|
Balance at end of
period
|
|
$
|
675,000
|
|
|
$
|
561,000
|
|
Nonperforming loans remained similar to
those at December 31, 2007 with a balance of $2.0 million. Our
overall nonperforming loans to total loans ratio increased from 2.02% at
December 31, 2007, to 2.13%
at
September 30, 2008. At
September 30, 2008, we had 17 nonperforming loans as
follows:
|
|
·
|
One large
commercial relationship – A $411,000 loan for the development of
residential lots, which is in non-accrual status and in the process of
foreclosure. We believe the value of the
collateral for this land
development loan currently exceeds the outstanding balance
.
|
|
|
·
|
Four
commercial loans - One participation loan secured by multi unit housing
for $217,000 that is in non-accrual status. One loan for
$39,000 secured by corporate assets and two loans to a landscaping company
totaling $17,000, secured by vehicles and
equipment.
|
|
|
·
|
Ten
one-to-four-family mortgage loans totaling $1,231,000, nine of which are
in various stages of foreclosure. Six of these loans totaling
$830,000 are in non-accrual status. Five of the ten loans
totaling $501,000 are believed to be adequately collateralized with
respect to the outstanding balances and the bank expects no material loss
related to these loans. Two of the loans totaling $239,000 have
insufficient collateral values on which the bank expects to incur a
loss. The other three loans totaling $491,000 are to the same
borrower and these properties have a pending purchase offer that would
result in a short sale and a loss to the
bank.
|
|
|
·
|
A
$90,000
vacant land
loan
that is
in the process of
foreclosure.
|
|
|
·
|
One consumer loan
totaling
$1,000
.
|
The
Bank has purchased participation interests in two loans to a commercial real
estate development company, both of which are now classified troubled debt
restructured. One loan in the amount of $476,000 is for the
development of residential lots in a now partially completed condominium
project. The lead bank has provided construction financing for all of
the homes in the project. The second loan of $153,000 is secured by a
commercial building in Lansing, Michigan. The lead lender, with our
concurrence, has reduced the interest rate of these loans, as they did on all of
this borrower’s loans held in their own portfolio, in order to reduce the
required payments to a level that can be supported by the borrower’s current
cash flow. Both loans are considered to be adequately secured and no
specific reserves have been established.
Our loan delinquencies decreased during
the nine months to $3.4 million, or 3.6% of total loans, at September 30, 2008,
compared to $4.5 million, or 4.5% of total loans, at December 31,
2007. The decrease in loan delinquencies during the first nine months
of 2008 was primarily the result of borrowers making payments and bringing loans
current. This is attributed to income tax refunds and the government
stimulus payouts. Included in this trend was the pay-off of a
$371,000 land development loan, ten one-to
-
four
-
family foreclosed real estate loans
moving to ORE
O
totaling $1,300,000 and $79,000 in
charged-off consumer loans.
On
September 30, 2008, the Bank was monitoring other loans of concern classified as
substandard or doubtful on the bank’s monthly delinquency
report. These consist of two participation loans on
commercial real estate totaling $629,000, one second mortgage loan totaling
$25,000 and six consumer loans totaling $28,000. All loans are being
actively monitored and collection efforts are continuing.
Past due
loans classified as special mention that are being monitored by the Bank’s loan
review committee include five commercial loans to a landscaping company that are
secured by vehicles and business equipment totaling $79,000, five commercial
loans totaling $363,000 to a business that are secured by one-to-four-family
real estate and corporate assets and four loans to business partners that are
secured by a land development, commercial real estate and their personal
residences totaling $850,000.
With our market area continuing to
experience sluggish economic conditions, we anticipate high levels of
delinquencies and net charge-offs will continue during the remainder of
2008.
Deposits
.
Total deposits decreased by
$14.2 million, or 17.9%, to $65.2 million at September 30, 2008, from $79.4
million at December 31, 2007. This decrease is primarily the result
of our decision not to renew $13.1 million in wholesale deposits during the nine
months. We have not experienced a material decrease in retail
deposits in our local market.
During the quarter, demand deposits
increased $622,000 and savings and money market accounts increased
$12,000. The amount of time deposits or certificates at September 30,
2008
was $1.6 million less than at the end
of 2007, primarily due to the decision of our customers holding cash in more
liquid accounts.
Borrowings.
Federal Home Loan Bank
advances
increased $7.2
million,
or 27.3%, to $33.6
million at September 30, 2008, from $26.4 million at December 31,
2007. We increased Federal Home Loan Bank borrowings to replace
higher cost wholesale certificates of deposit, which we chose not to
renew. At September 30, 2008, we had the ability to borrow an
additional $4.5 million from the Federal Home Loan Bank.
At September 30, 2008, we had $700,000
outstanding on our loan from another bank, which is secured by 100% of the
outstanding common stock of the Bank. The interest rate on this loan
at September 30, 2008 was 5.8%. Our operating losses and level of
non-accrual loans and other real estate owned have been a violation of financial
covenants of the loan and an event of default. On March 31, 2008, the
lender provided a letter agreeing to forbear from enforcing those covenants for
the balance of 2008 so long as we otherwise remain in compliance with the loan
documents and forbearance letter for this loan and the lender’s other loan to
our
employee stock
ownership plan. At September 30, 2008 we were not in compliance with
these require
ments.
Failure to maintain
well-capitalized status is a default under our bank loan and the 2008
forbearance letters for previous events of default under that
loan. We will ask the lending bank for additional forbearance if the
Bank does not return to well-capitalized status by December 31,
2008. However, that forbearance may not be granted.
Equity.
Total equity decreased $1.0
million, or 15.5%, to $6.0 million at September 30, 2008, from $7.1 million at
December 31, 2007. The decrease in equity was primarily due to a net
loss of $1.2 million for the nine months. On August 8, 2008 the Bank
lost well-capitalized status under prompt corrective action regulations of the
OTS and became adequately capitalized. The
change in status was
effective June 30, 2008. See
“Capital.”
Comparison of Operating Results for the
Three Months and Nine Months Ended September 30, 2008 and
2007
General.
The net loss for the three
months ended September 30, 2008 was $525,000, as compared to a net loss of
$112,000
for the three months ended September
30, 2007. The net loss for the nine months ended September 30, 2008
was $1.2 million as compared to a net loss
of $414,000 for
the same period in 2007
. The net loss
for
the nine months
reflects a $11,000 increase in net interest income primarily attributable to
declining interest rates. Our provision for loan losses increased $123,000 for
the nine months. Regulatory assessments increased
$104,000 and salaries and employee
benefits increased
$52,000
while professional services increased $34,000 during the first nine months of
2008. These increases were offset by a $57,000 decrease in premises
and equipment expense. Non
-interest income decreased during the
nine months by $274,000. The decrease is
primarily attributable to a $189,000
impairment of a mortgage backed mutual fund that was determined to be other than
temporarily impaired
and a
$37,000 loss on the sale of repossessed property. In 2007, we
recognized a tax benefit of $212,000 compared to no tax benefit in
2008.
Interest
Income.
Interest
income decreased by $285,000, or 16.7%, to $1.5 million for the three-month
period ended September 30, 2008, from
$1.7
million for the same period in
2007. Interest income decreased by $484,000, or 9.3% to $4.7 million
for the nine months ended September 30, 2008 from $
5.2
million for the nine months ended
September 30, 2007. The decrease in interest income is primarily
related to the decrease in the weighted average yield of the residential loan
portfolio during the nine months, as well as the decrease in loan
portfolio balances.
The weighted average yield on loans
decreased to 5.57% for the quarter ended September 30, 2008,
from 6.35% for the quarter ended
September 30, 2007. The weighted average yield on loans decreased
from 6.35%
for the nine
months ended September 30, 2007 to 5.91% for the nine months ended September 30,
2008. The decrease was primarily the result of prime rate based
adjustable rate loans, home equity loans and commercial loans re-pricing to
lower rates as the prime rate decreased
from 8.25%
to
5.0%
as the result of Federal Reserve rate
cuts. Interest rates on other types of loans have remained relatively
stable. We anticipate this trend to continue for the shorter
term.
Interest
Expense.
Interest expense decreased
$
301
,000, or
27.4
%, to $
807
,000 for the quarter ended September 30,
2008 from $1.1 million
for
the quarter ended September 30, 2007. Interest expense decreased
$
495,000, or 15.5%, to $2.8
million for the nine months ended September 30, 2008, from $3.2
million for the nine months ended
September 30, 2007. The decrease was a result of a decrease in the
average balance of deposits and a decrease in the average rate paid on both
deposits and Federal Home
Loan Bank advances due to the lower
interest rate environment and our decreased reliance on wholesale and brokered
deposits. We
paid $10,000 and $15,000 in
interest, respectively, on our bank
line of credit during the quarter ended September 30, 2008 and September 30,
2007. We
paid
$34,000 in interest on our bank line of credit during the nine months ended
September 30, 2008 and $42,000 for same period
in 2007. The average cost of
interest-bearing liabilities decreased from 4.40% for the quarter
ended
September 30, 2007
to 3.32% for
the quarter ended September 30,
2008. The average cost of interest-bearing liabilities decreased from
4.32% for the nine months ended September 30
, 2007 to 3.76% for the
nine months ended September 30,
2008
.
Interest paid on deposits
decreased $295,000, or 36.9%, to
$504,000 for the three months ended September 30, 2008 from $799,000 for the
three months ended September 30, 2007. In addition, interest paid on
deposits decreased $552,000, or 23.0%, to $1.8 million for the nine months ended
September 30, 2008 from $2.4 million for the nine months ended September 30,
2007
. This
reflects our decision to replace wholesale and brokered deposits with Federal
Home Loan Bank advances, lower interest rates generally as well as a relative
increase in lower cost demand accounts.
Interest expense on Federal Home Loan
Bank advances decreased
$1,500 or 0.50%, to $
292
,000 for the three months ended
September 30, 2008, from $294,000 for the three months ended September 30,
2007. In addition, interest expense on Federal Home Loan Bank
advances increased $65,000, or 7.4%, from $875,000 for the nine months ended
September 30, 2007 to $940,000 for the nine months ended September 30,
2008. This increase resulted from decreasing rates on the repricing
of our advances and an increase in the average balance of outstanding Federal
Home Loan Bank advances of $28.7 million for the nine months ended September 30,
2008, from $21.9
million
for the nine months ended September 30, 2007.
Net
Interest Income.
Net interest income before
the provision for loan losses increased by $16,000, or 2.5%, to $657,000 for the
three-month period ended September 30, 2008, compared to $641,000 for the same
period in 2007. Net interest income increased by $11,000, or 0.6%, to
$1.9 million for the nine months ended September 30, 2008, compared to $1.9
million for the nine months ended September 30, 2007. Our net
interest margin
was 2.45%
for the three months ended September 30, 2008, compared to 2.32% for the three
months ended September 30, 2007, and was 2.39
% for the nine months ended September
30, 2008, compared to 2.33% for the nine months
ended September 30,
2007.
Provision
for Loan Losses.
We establish the provision
for loan losses, which is charged to operations, at a level management believes
will adjust the allowance for loan losses to reflect probable incurred credit
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, historical loss experience, adverse
situations that may affect the borrower's ability to repay, estimated value of
any underlying collateral and prevailing economic
conditions.
Based on management’s evaluation of
these factors, provisions of $
161
,000 and $45,000 were made during the
quarters ended September 30, 2008 and 2007, respectively and provisions of
$2
96
,000 and $173,000 were made during the
nine months ended Sept 30, 2008 and 2007 respectively. The increase
in the provision for loan losses was primarily in response to increased
delinquencies in the first nine months of 2008 as compared to the same period in
2007. During the nine months ended September 30, 2008, net
charge-offs were $129,000, compared to $150,000 for the same period in 2007. The
ratio of non-performing loans to total loans
was
2.13% at September 30, 2008, compared
to 2.13% at September 30, 2007, and 2.02% at December 31,
2007. Non-performing loans at September 30, 2008, consisted of
$1.3 million in residential mortgage loans and $685,000 in commercial loans and
$1,000 in consumer loans.
Non-interest
Income.
Non-interest income
decreased $97,000 or 76.4% to $31,000 for the three months ended September 30,
2008, compared to $127,000 for the same period in 2007, and decreased $274,000,
or 71.9%, to $107,000 for the nine months ended September 30, 2008, compared to
$381,000
for the same period in
2007. The decrease in non-interest income during the 2008 period was
primarily due to a $188,000
impairment of a mortgage
-backed mutual fund
and a $37,000 loss on a repossessed
property
compared to a
$
51
,000 gain on the sale of a
property in the same period of
2007.
Non-interest
Expense.
Non-
interest expense increased $160,000, or
14.5%, from $892,000 for
the three-month period ended September 30, 2007 to $1.1 million for the three
months ended September 30, 2008. In addition, non-interest expense
increased $143,000, or 5.1%, from $2.8
million for the nine months ended
September 30, 2007 to $2.9 million for the nine months ended September 30,
2008. Increases in expenses of $104,000 for regulatory assessments,
$52,000 for salaries and
employee benefits, $4,000 for data processing services, $13,000 for
administrative services and $34,000 for professional services were offset by
decreases of $
57,000 for
premises and equipment,
$3,000 in advertising costs and $3,000
for the amortization of intangibles. The increase in regulatory
assessments is primarily due to an increase in the general assessment rate from
2007.
Income
Tax Benefit.
During 2007 management concluded, based
on higher than expected operating losses and a difficult operating environment,
that a valuation allowance should be established to reduce the net deferred tax
asset at December 31, 2007 to zero. This valuation allowance
increased the net loss for the year ended December 31, 2007 and decreased
shareholders’ equity but did not affect regulatory capital. As a
result of the establishment of the valuation allowance, no tax benefit has been
recorded in the income statement at September 30, 2008
.
Liquidity
Liquidity
management is both a daily and long-term function of the management of the
Company and the Bank. Excess liquidity is generally invested in
short-term investments, such as overnight deposits and federal
funds. On a longer term basis, we maintain a strategy of investing in
various lending products and investment securities, including mortgage-backed
securities. The Bank uses its sources of funds primarily to meet its
ongoing commitments, pay maturing deposits, fund deposit withdrawals and to fund
loan commitments. The Bank has adopted the new liquidity management
policy required in its supervisory agreement with the
OTS.
We maintain cash and investments that
qualify as liquid assets to maintain liquidity to ensure safe and sound
operation and meet demands for funds (particularly withdrawals of
deposits
). At September 30, 2008, the Company had $4.9 million
in cash and investment securities available for sale generally available for its
cash needs, of which $4.8 million was available to the Bank on an unconsolidated
basis.
The Bank’s liquidity position at
September
30, 2008 was $
4.9
million compared to $7.1 million at
December 31, 2007.
This reduction reflects
the decrease in wholesale
deposits using the proceeds from the sale of $3.8 million of residential loans,
new Federal Home Loan Bank advances of $7.2 million and decreased
liquidity of $1.9 million. For liquidity management purposes w
e can generate funds from additional
borrowings, deposit gathering activities and loan sales. At
September
30, 2008,
we had $6.4 million in outstanding loan commitments, including unused
lines of credit
. Certificates of deposit
scheduled to mature in one year or less at
September
30, 2008, totaled $3
5
.0 million
. It is
management’s policy to maintain deposit rates that are competitive with other
local financial institutions. Based on this management strategy, we
believe that a majority of maturing deposits will remain with the
Bank. However, because the Bank has become adequately capitalized, it
may not accept or renew brokered deposits without regulatory approval. See
“Capital.” At September 30, 2008, we had $11.6 million in wholesale or brokered
deposits, which is a $17.5 million, or 60.2%, decrease from the level at
September 30, 2007. We plan to continue to decrease wholesale
deposits and replace them with lower cost Federal Home Loan Bank advances to the
extent possible. At September 30, 2008, the Bank had the ability to
borrow an additional $4.5 million in Federal Home Loan Bank
advances.
In the event we experience unexpected
withdrawals of deposits or are unable to renew the majority of our maturing
certificates of deposit at acceptable rates, we could have difficulty funding
our
ongoing
operations. Without FDIC approval to accept or renew brokered
deposits, we have limited access to other sources of liquidity in the current
banking environment.
Off-Balance Sheet Activities and
Commitments
In the normal course of operations, the
Company engages in a variety of financial transactions that are not recorded in
our financial statements. These transactions involve varying degrees
of off-balance sheet credit, interest rate and liquidity risks. These
transactions are used primarily to manage customers’ requests for funding and
take the form of loan commitments and lines of credit. For the nine
months ended September 30, 2008, we engaged in no off-balance sheet transactions
likely to have a material effect on our financial condition, results of
operations or cash flows
. Our liquidity management includes
monitoring our ability to meet outstanding commitments to extend credit.
A summary of our off-balance sheet
commitments to extend credit at September 30, 2008, is as
follows:
|
Off-balance
sheet commitments
:
|
|
|
|
|
Commitments to make
loans
|
|
$
|
161
,000
|
|
|
Undisbursed portion of loans
closed
|
|
|
634,000
|
|
|
Unused lines of
credit
|
|
|
5,635,000
|
|
|
Total loan
commitments
|
|
$
|
6,430,000
|
|
Capital
The Bank is subject to minimum capital
requirements imposed by the OTS. Based on its capital levels at
September 30, 2008,
the Bank
exceeded these requirements as of that
date. Our policy is for MainStreet Savings Bank to maintain a “well-capitalized”
status under the capital categories of the OTS. On August 8, 2008, as
a result of the $78,000 write down of its mortgage backed securities mutual fund
investment due to the declining price of the fund during the quarter, the
Bank’s risk
based
capital fell to 9.8%
and it lost well–capitalized status. The change to adequately capitalized was
effective June 30, 2008. As reflected below, MainStreet Savings
Bank met the minimum capital ratios to be considered adequately-capitalized by
the OTS based on its capital levels at
September 30, 2008.
If our losses continue,
there can be no assurance that we will continue to meet the
adequately-capitalized standards.
|
|
|
Actual
|
|
|
Minimum Required
to
Be Adequately
Capitalized
Under Prompt
Corrective
Action
Provisions
|
|
|
Minimum Required
to
Be Well
Capitalized
Under Prompt
Corrective
Action
Provisions
|
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
(Dollars in
thousands)
|
|
|
Risk-Based
Capital
(to risk-weighted
assets)
|
|
$
|
6,455
|
|
|
|
9.
26
|
%
|
|
$
|
5,5
81
|
|
|
|
8.0
|
%
|
|
$
|
6,9
76
|
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Capital
(to risk-weighted
assets)
|
|
$
|
5,
780
|
|
|
|
8.
29
|
%
|
|
$
|
2,7
90
|
|
|
|
4.0
|
%
|
|
$
|
4,1
85
|
|
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Capital
(to total
adjusted assets)
|
|
$
|
5,780
|
|
|
|
5.
45
|
%
|
|
$
|
4,24
5
|
|
|
|
4.0
|
%
|
|
$
|
5,3
07
|
|
|
|
5.0
|
%
|
The Bank
is currently under a supervisory directive and supervisory agreement from the
OTS. Because the Bank’s capital level has fallen below
well-capitalized status, the OTS may initiate additional enforcement action
against the Bank. Failure to maintain well-capitalized status is also
a default under our bank loan and the 2008 forbearance letters for previous
events of default under that loan. We will ask the lending bank for
additional forbearance if the Bank does not return to well-capitalized status by
December 31, 2008. However, that forbearance may not be
granted. Because the Bank has fallen below
well-capitalized
status, it may not accept or renew brokered deposits without regulatory approval
from the Federal Deposit Insurance Corporation, which has been applied
for. There can be no assurances when, or if, this FDIC approval will
be received.
Impact of Inflation
The consolidated financial statements
presented herein have been prepared in accordance with accounting principles
generally accepted in the United States of America. These principles
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
Our primary assets and liabilities are
monetary in nature. As a result, interest rates have a more significant impact
on our performance than the effects of general levels of
inflation. Interest rates, however, do not necessarily move in the
same direction or with the same magnitude as the price of goods and services,
since these prices are affected by inflation. In a period of rapidly
rising interest rates the liquidity and maturity structures of our assets and
liabilities are critical to the maintenance of acceptable performance
levels.
The principal effect of inflation, as
distinct from levels of interest rates on earnings, is in the area of
non-interest expense. Employee compensation, employee benefits and
occupancy and equipment costs may be subject to increases as a result of
inflation. An additional effect of inflation is the possible increase
in the dollar value of the collateral securing loans that we have
made. We are unable to determine the extent, if any, to which
properties securing our loans have appreciated in dollar value due to
inflation.
Item
3
Quantitative and Qualitative Disclosures about
Market Risk
Not required, the Company is a smaller reporting company.
Item
4T Controls and Procedures
An evaluation of the Company's
disclosure controls and procedures as defined in Rule 13a -15(e) under the
Securities Exchange Act of 1934 (the "Act") as of September 30, 2008, was
carried out under the supervision and with the participation of the Company's
Chief Executive Officer, Chief Financial Officer and several other members of
the Company's senior management.
The Chief Executive Officer and Chief
Financial Officer concluded that, as of September 30, 2008, the Company's
disclosure controls and procedures were effective in ensuring that the
information required to be disclosed by the Company in the reports it files or
submits under the Act is: (i) accumulated and communicated to the Company's
management (including the Chief Executive Officer and the 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 control over financial reporting (as defined in Rule 13a - 15(f)
under the Act) that occurred during the nine months ended September 30, 2008,
that have materially affected or are likely to materially affect our internal
control over financial reporting.
The Company intends to continually
review and evaluate the design and effectiveness of its disclosure controls and
procedures and to improve its controls and procedures over time and to correct
any deficiencies that it 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 the Company believes the present
design of its 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 is
also 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 and 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.
PART
II
OTHER INFORMATION
Item
1
Legal Proceedings
In the normal course of business, the
Company occasionally becomes involved in various legal
proceedings. In the opinion of management, any liability from such
proceedings would not have a material adverse effect on the business or
financial condition of the Company.
Item
1A
Risk Factors
Not required; the Company is a smaller
reporting company.
Item
2
Unregistered Sales of Equity Securities
and Use of Proceeds
Nothing to report.
Item
3
Defaults Upon Senior
Securities
Nothing to report.
Item
4
Submission of Matters to a Vote of
Security Holders
Nothing to report.
Item
5
Other Information
Nothing to report.
Item
6
Exhibits
|
Regulation
SK
Exhibit
Number
|
Document
|
Reference to
Prior Filing
or Exhibit
Number
Attached
Hereto
|
|
3(i)
|
Charter of Mainstreet Financial
Corporation
|
*
|
|
3(ii)
|
Bylaws of Mainstreet Financial
Corporation
|
*
|
|
|
4
|
Stock Certificate of Mainstreet
Financial Corporation
|
*
|
|
|
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
|
+
|
|
|
10.8
|
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
|
|
|
|
11
|
Statement re Computation of
Earnings
|
None
|
|
|
14
|
Code of Conduct and
Ethics
|
++
|
|
|
15
|
Letter on unaudited interim
financial information
|
None
|
|
|
18
|
Letter re change in accounting
principles
|
None
|
|
|
19
|
Reports furnished to security
holders
|
None
|
|
|
20
|
Other documents to security
holders or incorporated by reference
|
None
|
|
|
22
|
Published report on matters
submitted for shareholder vote
|
None
|
|
|
23
|
Consents
|
None
|
|
|
24
|
Power of
Attorney
|
None
|
|
|
31.1
|
Rule 13a–14(a) Certification of
Chief Executive Officer
|
31.1
|
|
|
31.2
|
Rule 13a–14(a) Certification of
Chief Financial Officer
|
31.2
|
|
|
32
|
Section 1350
Certification
|
32
|
|
|
*
|
Filed
as an exhibit to the Company's Form SB
–
2
registration statement filed on September 22, 2006 (File No.
333
–
137523)
pursuant to Section 5 of the Securities Act of
1933.
|
|
|
|
**
|
Filed
as an exhibit to Pre-effective Amendment No
.
1 to the Company's Form SB
–
2
registration statement filed on November 3, 2006 (File No.
333
–
137523)
pursuant to Section 5 of the Securities Act of
1933.
|
|
|
|
+
|
Filed
as an exhibit to the Company
’
s
Form 10-KSB filed on March 30, 2008 (File No.
000-52298).
|
|
|
|
++
|
Filed
as an exhibit to the Company
’
s
form 10-QSB filed on December 21, 2007 (File No.
000-52298).
|
|
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
|
MAINSTREET FINANCIAL
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date:
|
November 14,
2008
|
By:
|
/s/ David L.
Hatfield
|
|
|
|
|
David L.
Hatfield
|
|
|
|
|
President and Chief Executive
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date:
|
November 14,
2008
|
By:
|
/s/ James R
Toburen
|
|
|
|
|
James R.
Toburen
|
|
|
|
|
Senior Vice President
and
|
|
|
|
|
Chief Financial
Officer
|
Mainstreet Financial (CE) (USOTC:MSFN)
Gráfico Histórico do Ativo
De Jan 2025 até Fev 2025
Mainstreet Financial (CE) (USOTC:MSFN)
Gráfico Histórico do Ativo
De Fev 2024 até Fev 2025
