UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
___________________________
FORM 10-K
|
[ X ]
|
ANNUAL REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31,
2008
OR
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|
[ ]
|
TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___
to ____
|
Commission File Number:
000-52298
MAINSTREET FINANCIAL
CORPORATION
(Exact Name of Registrant as Specified
in its Charter)
|
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer Identification
No.)
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|
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629 W. State Street, Hastings
Michigan
(Address of principal executive
offices)
|
|
(Zip
Code)
|
Registrant’s telephone
number, including area code:
(269)
945-9561
Securities Registered Pursuant to
Section 12(b) of the Act:
None
Securities Registered Pursuant to
Section 12(g) of the Act:
Title of each
class
Name of each exchange on which
registered
Common Stock, par
value $.01 per
share
None
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. YES [ ] NO
[X]
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. YES [ ] NO
[X]
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. YES [ X ] NO
[ ]
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this
chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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 “accelerated
filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Act. (Check one)
Large accelerated filer
Accelerate
d 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 ]
The aggregate market value of the voting
and non-voting common equity held by non-affiliates as of June 30, 2008, the
last business day of the registrant’s most recently completed second fiscal
quarter, was $873,192.
As of March 17, 2009
, there were 756,068 shares of the
registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY
REFERENCE
Part II of Form 10-K - Annual Report to
Shareholders for the year ended December 31, 2008.
Part III of Form 10-K - Portions of the
Proxy Statement for the 2008 Annual Meeting of Shareholders.
Item
1. Business
General
Since being formed in November 2004,
MainStreet Financial Corporation (the "Company") has not engaged in any business
other than through MainStreet Savings Bank, FSB (the "Bank") and the management
of its cash and investment portfolio. The Company neither owns nor
leases any property, but we use the premises, equipment and furniture of the
Bank. We employ only persons who are executive officers of the Bank as our
executive officers, and we also use the support staff of the Bank from time to
time. We currently do not separately compensate any employees or
directors. MainStreet Financial Corporation, MHC, a federal mutual
holding company (the"MHC"), owns 53% of the Company's stock.
The Company has continued to experience
operating losses, which has reduced our capital. Our net loss of
$1,982,322 for the year ended December 31, 2008, includes a $929,901 loan loss
provision which recognizes the economic downturn in our market area. The
remainder of the net loss for 2008 is largely attributable to the continuing
slowdown in the Michigan economy. See our financial statements and
Management’s Discussion and Analysis of Financial Condition and Results of
Operations in Exhibit 13 to this Form 10-K for additional
information on our operating results and
financial condition; these declining economic conditions and
legislative and regulatory initiatives address these difficult economic
conditions.
As a result of the Bank’s continuing
operating losses and reductions in capital, it became adequately capitalized as
of June 30, 2008. We anticipate that the Bank will continue to
experience operating losses in 2009, which will continue to reduce its capital
level. The Bank may become undercapitalized during 2009, which would
subject it to additional regulatory limitations and requirements and would
require the Company to guarantee that the Bank will return to adequately
capitalized status. The Company may not be able to fulfill this
requirement. See “How We Are Regulated
–
Prompt Corrective
Action" for the implications of being adequately capitalized and
undercapitalized.
The Company is registered with and
regulated by the OTS. The Bank is subject to extensive regulatory supervision
and examination by the OTS and the FDIC, which administers the deposit insurance
fund that insures its deposits. The Bank is a member of, and owns
capital stock in the Federal Home Loan Bank of Indianapolis, which is one
of the
twelve regional banks that comprise the
Federal Home Loan Bank System.
Primarily as a result of the continuing
operating losses, our subsidiary, MainStreet Savings Bank, FSB (the
“Bank") received a letter from the OTS
dated February 5, 2008,
stating
that the Bank is deemed by the OTS to be
in troubled condition, and, as a result, is subject to specified operating
restrictions.
These operating restrictions provide
that: (1) the Bank must limit its quarterly asset growth to net interest
credited on deposit liabilities during the quarter (unless additional asset
growth is permitted by the OTS); (2) the Bank must obtain prior OTS approval
prior to appointing any new director or senior executive officer; (3) the Bank’s
ability to enter into certain severance agreements or make certain severance
payments is limited by 12 C.F.R. § 359; (4) the Bank must receive OTS approval
of any new, renewed or amended arrangements providing compensation or benefits
to its directors and officers; (5) the Bank must obtain OTS approval of all
third-party contracts outside the normal course of business; and (6) the Bank
must provide the OTS with 30-days notice of all proposed transactions with
affiliates.
On 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 (4) continue to abide by the limits in the February 5,
2008 “troubled condition” letter. These limits include restrictions
on growth and third party contracts.
The continuing decline in the Bank’s
capital since the execution of the supervisory agreement could result in the OTS
pursuing additional enforcement and regulatory actions against the Bank and the
Company. Unless the Bank is acquired or receives significant capital
infusion in 2009, such additional actions could include placing the Bank in
receivership.
On June 15, 2005, the Company obtained a
$2 million loan from a commercial bank to be drawn down as
desired. The purpose of this bank loan was to obtain funds to
contribute to the Bank to increase its capital level in order to support growth
and increased consumer and commercial lending activities. The bank
loan has a five-year term and requires quarterly interest-only payments during
the five years. The interest rate, which adjusts quarterly, is 300
basis points over the three-month LIBOR, which was a loan rate of 6.49% at
origination of the loan and 7.15% at December 31, 2008. The loan has a 1%
prepayment fee. At origination, we drew down $1 million, of which
$65,000 was for fees and a pledged deposit at the lender. The
remaining $935,000 was used to contribute $848,000 to the Bank as a capital
contribution and to pay a $84,000
dividend to MHC.
In June 2006, we drew down the
additional $1 million, of which $500,000 was contributed to the Bank.
On December 22, 2006, in
connection
with the closing
of the Company's initial public stock offering, the Company made a $1,300,000
payment on the loan. The balance of the loan at December 31, 2008
was
$700,000.
The loan agreement requires that we meet
certain financial covenants quarterly (with a six-month cure period)
or trigger an event of default, which
allows the lender to accelerate the loan.
We are not in compliance
with certain of these covenants,
including remaining well-capitalized, a
return on assets greater than 0% and
a
combined total of non-accrual loans and
other real estate owned of
no more than
20.0% of Tier 1 capital and 1.5% of
total loans
.
Our continuing operating losses are a
violation of the financial covenant on earnings. At
December 31, 2008
, the combined total of non-accrual
loans and other real estate owned of $
4.2
million was
84.0
% of our Tier 1 capital and
4.40
% of total loans, which
violat
es these
two other loan covenants
. We expect to violate these four
loan covenants in 2009. On April 1, 2009,
our lender
has
provide
d
us with a letter indicating that it
will refrain and forbear from taking any action to enforce its remedies with
respect to these covena
nts
through June 30, 2009, so long as we otherwise remain in compliance with the
loan documents, the forbearance letter and the other loan the lender made to our
employee stock ownership plan (“ESOP”).
The Company completed an initial public
stock offering on December 22, 2006. It sold 355,352 shares of common stock in
that offering for $10.00 per share. The Company's ESOP purchased 28,428 shares
with the proceeds of a loan from the same third party bank that made our other
loan described above. The loan covenants on that loan are the same as
for the other loan and, as a result, we are in violation of the same three
covenants on the ESOP loan. On February 6, 2009, the lender gave us a
similar forbearance letter for the ESOP loan. The Company received
net proceeds of $2,897,238 million in the public offering, 50% of which was
contributed to the Bank and $1,300,000 of which was used to reduce the
outstanding balance of the bank loan. Upon completion of the offering, the
Company issued 400,716 shares of common stock to MHC, so that MHC owns 53% of
its outstanding common stock.
Our wholly owned subsidiary, MainStreet
Savings Bank, FSB was chartered in 1924 as Hastings Building and Loan
Association by a group of Barry County businessmen who believed that a banking
institution focused on mortgage lending would increase the number of homeowners
in the community and therefore the stability, quality of life, growth and
prosperity of our communities. While our name has changed, our market area has
grown and our banking services have expanded significantly, we remain true to
our community and family focus and continue to be an independent, locally owned
and managed bank. In November 2004, MainStreet Financial Corporation was formed
as part of the reorganization of MainStreet Savings Bank into a federal stock
savings bank in a two-tier mutual holding company structure.
The Bank is a community-oriented
institution primarily engaged in the business of attracting retail deposits from
the general public and investing those funds primarily in permanent loans
secured by first mortgages on owner-occupied, one- to four-family residences,
home equity lines of credit and construction and development loans on
residential and commercial properties located in our market area. We also invest
in commercial business, commercial real estate and a variety of consumer loans.
Our consumer loans consist primarily of auto and recreational vehicle loans. At
December 31, 2008, approximately 79.99% of our loan portfolio consisted of
residential mortgage loans and home equity lines of credit, 2.26% consisted of
construction and development loans
in residential and commercial
properties, 5.75% consisted of consumer loans and 11.99% consisted of commercial
loans.
Forward Looking
Statements
This document, including information
incorporated by reference, contains forward-looking statements about the Company
and its subsidiaries which we believe are within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking
statements include, without limitation, statements with respect to anticipated
future operating and financial performance, growth opportunities, interest
rates, cost savings and funding advantages expected or anticipated to be
realized by management. Words such as "may," "could," "should," "would,"
"believe," "anticipate," "estimate," "expect," "intend," "plan" and similar
expressions are intended to identify these forward looking
statements. Forward-looking statements by the Company and its
management are based on beliefs, plans, objectives, goals, expectations,
anticipations, estimates and the intentions of management and are not guarantees
of future performance. The Company disclaims any obligation to update
or revise any forward-looking statements based on the occurrence of future
events, the receipt of new information, or otherwise. The important
factors we discuss below, as well as other factors discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and identified in our filings with the SEC and those presented
elsewhere by our management from time to time, could cause actual results to
differ materially from those indicated by the forward-looking statements made in
this document:
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·
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further developments in the
Company's ongoing review of and efforts to resolve the problem credit
relationship described in this report, which could result in, among other
things, further downgrades of aforementioned loans, additions to the
allowance for loan losses and the incurrence of other material non-cash
and cash charges;
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·
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the strength of the United States
economy in general and the strength of the local economies in which we
conduct operations including the demand for mortgage and other loans and
adverse changes to the value of the collateral securing our
loans;
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·
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the effects of, and changes in,
trade, monetary and fiscal policies and laws, including interest rate
policies of the Federal Reserve Board, including changes in the
relationship of short-term and long-term
rates;
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·
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inflation, interest rate, market
and monetary fluctuations;
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·
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the timely development of and
acceptance of our new products and services and the perceived overall
value of these products and services by users, including the features,
pricing and quality compared to competitors' products and
services;
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·
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the willingness of users to
substitute our products and services for products and services of our
competitors;
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·
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the impact of changes in financial
services' laws and regulations (including laws concerning taxes, banking,
securities and insurance);
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·
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the impact of technological
changes;
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·
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changes in consumer spending and
saving habits; and
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·
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our success at managing the risks
involved in the foregoing.
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The Company disclaims any obligation to
update or revise any forward-looking statements based on the
Market
Area
We are headquartered in Hastings,
Michigan with one office in Hastings and one in Lake Odessa,
Michigan. The Bank closed a supermarket branch in Hastings as of
December 31, 2009 due to the relocation of the supermarket and the owners’
inability to lease space to the Bank in the new location because of restrictions
in their lease. The new store location is in very close proximity to
the Bank’s main office therefore we expect to retain most of the customers of
the closed branch. Our primary market area is Barry County. Our Lake
Odessa office is located in Ionia County, Michigan, and we also serve Kalamazoo,
Eaton, Allegan, Kent, Calhoun and Van Buren counties in southwest
Michigan. Our lending business outside of Barry County consists
primarily of residential mortgages; however, we have some commercial real estate
and commercial business loans in Kalamazoo. Substantially all other
types of loan originations are in Barry County.
Barry County is centrally located
between Battle Creek, Grand Rapids, Kalamazoo and Lansing, Michigan. Hastings
and the surrounding area is becoming a commuter area for these cities,
especially Grand Rapids, which is one of the fastest growing metropolitan areas
in Michigan. As a result, Barry County is one of the few rural
counties in Michigan to experience growth over the past decade and is expected
to experience continued growth.
The local economy historically has been
rural; however, small industrial companies are an increasing contributor to the
local economy. Median household income and per capita income for our
market area are below the state and national averages, reflecting the rural
nature of the market and limited availability of high paying white collar and
technical jobs. The largest employer in our market area is Pennock
Hospital.
During the third quarter, the most
recent time period for which data is available, total employment in the six
metropolitan areas in west Michigan declined by 0.3% bringing west Michigan’s
unemployment rate to 7.7%. The region’s economic indicators were
negative for the year, which suggests that employment conditions will continue
to deteriorate in the coming months. Unemployment in the Grand Rapids
and Kalamazoo areas remains lower than that of the State as a whole, but
consumers in the region remain uncertain about the economy and their financial
well-being, which has perpetuated the slowdown in residential real estate sales
and consumer spending that has negatively impacted our
operations.
Competition
We face strong competition in
originating real estate and other loans and in attracting deposits from seven
other banks and credit unions in our market area. Competition in
originating real estate loans comes primarily from other savings institutions,
commercial banks, credit unions and mortgage bankers. In 2008 the
Bank was one of the top five residential mortgage originators in Barry County,
Michigan. We have the second largest deposit market share among banks
and savings institutions in Barry County. Other savings institutions,
commercial banks, credit unions and finance companies provide vigorous
competition in consumer lending. Commercial business competition is
primarily from local and regional commercial banks. The depressed
economy has effectively increased competition for both deposits and all types of
loans as financial institutions struggle to attain desired
growth.
We attract our deposits through our
branch office system and the internet. Competition for those deposits
is principally from other savings institutions, commercial banks and credit
unions located in the same community, as well as mutual funds and other
alternative investments. We compete for these deposits by offering
superior service and a variety of deposit accounts at competitive
rates. Based on the most recent branch deposit data provided by the
FDIC, MainStreet Savings Bank's share of deposits was 17.10% and 1.16% in Barry
and Ionia counties, respectively.
Internet
Website
The Company maintains a website at
www.mainstreetsavingsbank.com. The information contained on that
website is not included as part of, or incorporated by reference into, this
Annual Report on Form 10-K. The Company's annual report on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K or amendments to
these reports are available free of charge on the Securities and Exchange
Commission's website at www.sec.gov.
The following table presents information
concerning the composition of our loan portfolio in dollar amounts and in
percentages (before deductions for loans in process, deferred fees and discounts
and allowances for losses) at the dates indicated.
|
|
December
31,
|
|
|
200
8
|
200
7
|
200
6
|
200
5
|
|
|
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|
|
|
(Dollars in
thousands)
|
|
Real estate
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to
four-family
|
$69,823
|
|
73.05
|
%
|
$74,464
|
|
73.70
|
%
|
$74,328
|
|
72.17
|
%
|
$64,298
|
|
68.39
|
%
|
|
|
Home equity
|
6,634
|
|
6.94
|
|
5,477
|
|
5.42
|
|
5,944
|
|
5.77
|
|
6,442
|
|
6.85
|
|
|
|
Commercial
(1)
|
8,350
|
|
8.74
|
|
9,093
|
|
9.00
|
|
9,292
|
|
9.02
|
|
8,825
|
|
9.39
|
|
|
|
Construction or
development
|
2,163
|
|
2.26
|
|
2,054
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|
2.03
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|
3,691
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|
3.58
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|
8,382
|
|
8.92
|
|
|
|
Total real estate
loans
|
86,970
|
|
90.99
|
|
91,088
|
|
90.15
|
|
93,255
|
|
90.54
|
|
87,947
|
|
93.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Automobile
|
1,232
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|
1.29
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|
1,668
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1.65
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|
1,575
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1.53
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|
842
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|
0.90
|
|
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|
R
ecreational vehicles
(2)
|
2,813
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|
2.94
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|
3,044
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3.01
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|
2,969
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|
2.88
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|
3,292
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|
3.50
|
|
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Unsecured
|
1,127
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|
1.18
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|
1,116
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1.10
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|
1,181
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|
1.15
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|
1,423
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|
1.51
|
|
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|
Other
(3)
|
322
|
|
0.34
|
|
345
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|
0.34
|
|
386
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|
0.37
|
|
507
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|
0.56
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|
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Total
consumer loans
|
5,494
|
|
5.75
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|
6,173
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|
6.11
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|
6,111
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|
5.94
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|
6,064
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|
6.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business loans:
(1)
|
3,113
|
|
3.26
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|
3,775
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|
3.74
|
|
3,624
|
|
3.52
|
|
---
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
95,577
|
|
100.
0
0
|
%
|
101,036
|
|
100.00
|
%
|
102,990
|
|
100.00
|
%
|
94,011
|
|
100.00
|
%
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in
process
|
903
|
|
|
|
419
|
|
|
|
1,816
|
|
|
|
2,399
|
|
|
|
|
|
Deferred fees and
discounts
|
(64)
|
|
|
|
(41)
|
|
|
|
(17)
|
|
|
|
(7)
|
|
|
|
|
|
Allowance for
losses
|
858
|
|
|
|
508
|
|
|
|
538
|
|
|
|
476
|
|
|
|
|
|
Total
loans, net
|
$ 93,880
|
|
|
|
$100,150
|
|
|
|
$100,653
|
|
|
|
$91,143
|
|
|
|
|
____________________
(1)
Prior to 2006, commercial business loans not secured by real estate were not
separately recorded. They were included in commercial real estate
loans.
(2)
Includes loans secured by recreational vehicles and
boats.
(3)
Includes loans secured by deposits.
The following table shows the
composition of our loan portfolio in dollar amounts and in percentages (before
deductions for loans in process, deferred fees and discounts and allowances for
losses) at the dates indicated.
|
|
December
31,
|
|
|
200
8
|
200
7
|
200
6
|
200
5
|
|
|
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|
|
|
(Dollars in
thousands)
|
|
Fixed- rate
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to
four-family
|
$69,310 10
|
|
72.52
|
%
|
$73,846
|
|
73.09
|
%
|
$73,550
|
|
71.42
|
%
|
$63,578
|
|
67.63
|
%
|
|
|
Commercial
(1)
|
7,032
|
|
7.36
|
|
8,092
|
|
8.01
|
|
8,315
|
|
8.07
|
|
7,358
|
|
7.83
|
|
|
|
Construction or
development
|
2,163
|
|
2.26
|
|
2,055
|
|
2.03
|
|
3,691
|
|
3.58
|
|
8,382
|
|
8.91
|
|
|
|
Total
real estate loans
|
78,505
|
|
82.14
|
|
83,993
|
|
83.13
|
|
85,556
|
|
83.08
|
|
79,318
|
|
84.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
loans
|
5,314
|
|
5.56
|
|
5,897
|
|
5.84
|
|
5,854
|
|
5.68
|
|
5,818
|
|
6.19
|
|
|
|
Commercial business
loans
(1)
|
1,372
|
|
1.43
|
|
1,717
|
|
1.70
|
|
1,714
|
|
1.66
|
|
---
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
fixed-rate loans
|
85,191
|
|
89.13
|
|
91,607
|
|
90.67
|
|
93,124
|
|
90.42
|
|
85,136
|
|
90.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable- rate
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to
four-family
|
513
|
|
0.54
|
|
618
|
|
0.61
|
|
778
|
|
0.76
|
|
720
|
|
0.77
|
|
|
|
Home equity
|
6,634
|
|
6.94
|
|
5,477
|
|
5.42
|
|
5,944
|
|
5.77
|
|
6,442
|
|
6.85
|
|
|
|
Commercial
(1)
|
1,318
|
|
1.38
|
|
1,001
|
|
0.99
|
|
977
|
|
0.95
|
|
1,467
|
|
1.56
|
|
|
|
Total
real estate loans
|
8,465
|
|
8.86
|
|
7,095
|
|
7.02
|
|
7,699
|
|
7.48
|
|
8,629
|
|
9.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
loans
|
180
|
|
0.19
|
|
276
|
|
0.27
|
|
257
|
|
0.25
|
|
246
|
|
0.26
|
|
|
|
Commercial business
loans
(1)
|
1,741
|
|
1.82
|
|
2,058
|
|
2.04
|
|
1,910
|
|
1.85
|
|
---
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
adjustable-rate loans
|
10,386
|
|
10.87
|
|
9,429
|
|
9.33
|
|
9,866
|
|
9.58
|
|
8,875
|
|
9.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
95,577
|
|
100.
0
0
|
%
|
101,036
|
|
100.
0
0
|
%
|
102,990
|
|
100.00
|
%
|
94,011
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in
process
|
903
|
|
|
|
419
|
|
|
|
1,816
|
|
|
|
2,399
|
|
|
|
|
|
Deferred fees and
discounts
|
(64)
|
|
|
|
(41)
|
|
|
|
(17)
|
|
|
|
(7)
|
|
|
|
|
|
Allowance for
losses
|
858
|
|
|
|
508
|
|
|
|
538
|
|
|
|
476
|
|
|
|
|
|
Total
loans, net
|
$93,880
|
|
|
|
$100,150
|
|
|
|
$100,653
|
|
|
|
$91,143
|
|
|
|
|
____________________
(1)
Prior to 2006, commercial business loans not secured by real estate were not
separately recorded. They were included in commercial real estate
loans.
The following schedule illustrates the
contractual maturity of our loan portfolio at December 31, 2008.
Mortgages that have
adjustable or renegotiable interest rates are shown as maturing in the period
during which the contract is due. The schedule does not reflect the
effects of possible prepayments or enforcement of due-on-sale
clauses.
|
|
Real
Estate Mortgages
|
|
|
|
|
|
|
|
|
One-
to four-family
and
Home Equity
|
Commercial
|
Construction
or
Development
|
Consumer
|
Commercial
Business
|
Total
|
|
|
Amount
|
Weighted
Average
Rate
|
Amount
|
Weighted
Average
Rate
|
Amount
|
Weighted
Average
Rate
|
Amount
|
Weighted
Average
Rate
|
Amount
|
Weighted
Average
Rate
|
Amount
|
Weighted
Average
Rate
|
|
|
(Dollars
in thousands)
|
|
Due
during years endin
g
December
31,
(1)
|
|
2009(2)
|
$11,559
|
6.02%
|
$5,373
|
5.89%
|
$704
|
4.93%
|
$846
|
10.02%
|
$1,787
|
4.88%
|
$20,269
|
6.01%
|
|
2010
to 2013
|
48,158
|
6.12%
|
2,108
|
7.13%
|
1,257
|
6.13%
|
2,630
|
8.52%
|
1,326
|
6.72%
|
55,479
|
6.28%
|
|
2014
and following
|
16,740
|
5.70%
|
869
|
7.49%
|
202
|
6.13%
|
2,018
|
6.50%
|
--
|
--%
|
19,829
|
5.87%
|
|
Total
|
$76,457
|
6.01%
|
$8,350
|
6.37%
|
$2,163
|
5.74%
|
$5,494
|
8.01%
|
$3,113
|
5.67%
|
$95,577
|
6.14%
|
__________________________
(1)
The total amount of loans due after December 31, 2009, which have predetermined
fixed interest rates is $69.8 million, while the total amount of loans due after
such date, which have floating or adjustable interest rates is $5.5
million.
(2)
Includes demand loans, loans having no stated maturity and overdraft
loans.
At December
31, 2008
the maximum amount under federal law
that we could loan to any one borrower and the borrower’s related entities was
$752,000.
See “How We Are Regulated – MainStreet
Savings Bank – OTS Regulations
.” Our five
largest
lending
relationships are with commercial borrowers and totaled
$4.5
million in the aggregate, or
4.
8
% of our $
93.9 million
total loan portfolio, at
December 31, 2008. The
largest relationship involves one of our directors and consists of $1,004,000 in
eight loans secured by a restaurant, corporate assets, first and second
mortgages on the borrowers’ primary and secondary residences and overdraft
protection loans. All of these loans were current at December 31,
2008. The second largest relationship at December 31, 2008 was
$900,000, secured by a residential development,
a speculative construction single family
home, second mortgage on the borrower’s primary residence and a real estate
secured line of credit. All of these loans were current
at
December 31, 2008
.
The third largest
relationship at December 31, 2008 was $876,000 secured by nine loans on the
borrower’s primary residence, commercial real estate and one-to-four family
non-owner-occupied properties with all these loans being current at December 31,
2008. The next two largest relationships at December 31, 2008 were
$858,000 consisting of two loans secured by commercial real estate and single
family investment properties and $819,000 secured by commercial real estate and
non owner occupied one-to-four family properties. Both of these
lending relationships were current at December 31, 2008.
These loans were in compliance with our
lending limit at the time they were made and are considered to be non-conforming
under OTS regulations so long as the loan amounts remain above our current
lending limit.
One-
to Four-Family Residential Real Estate Lending.
We originate loans secured by first and
second mortgages on owner-occupied, one- to four-family residences in our market
area. Some of these loans are funded by us and retained in our
portfolio, and others are originated and sold to an independent mortgage company
with servicing released. See "- Loan Originations, Purchases, Sales,
Repayments and Servicing." At December 31, 2008, one- to four-family residential
mortgage loans totaled $69.8 million, or 73.05% of our gross loan portfolio.
At
December 31,
2008, we had $58.4 million in loans
secured by owner-occupied one- to four-family residences and
$11.4 million in loans secured by
nonowner-occupied, one- to four-family residences, of which $69.3 million were
fixed-rate loans and $513,000 were adjustable-rate loans.
We generally underwrite
our one- to four-family owner-occupied
loans based on the applicant's employment and credit history and the appraised
value of the subject property. Presently, we lend up to 103% of the
lesser of the appraised value or purchase price for one- to four-family
residential loans, although most of these loans have a loan-to-value ratio of
80% or less. For loans with loan-to-value ratios in excess of 80%, we
generally require private mortgage insurance in order to reduce our exposure to
risk, although our underwriting guidelines allow loans to be granted up to 89%
of appraised value without private mortgage insurance. Properties
securing our one- to four-family loans are appraised by independent fee
appraisers approved by the board of directors or we utilize the value for tax
assessment purposes. Borrowers are required to obtain title insurance
and hazard insurance, including flood insurance, where appropriate, insuring the
Bank against potential loss.
We currently originate
one-to
four
-
family mortgage loans on either a fixed
or adjustable rate basis, as consumer demand dictates. Our pricing
strategy for mortgage loans includes setting interest rates that are competitive
with other local financial institutions and consistent with our internal
needs. Fixed-rate first mortgage loans have a five to seven year
term, with a balloon payment and up to 30-year
amortization. Fixed-rate second mortgages have similar terms with
rates 100 to 150 basis points higher than first mortgages. Fifteen to
thirty year fixed-rate mortgages and adjustable rate loans with one to seven
year re-pricing (using LIBOR index) are originated for immediate sale under
pre-existing commitments. It is our intent to only retain in our
portfolio five to seven year balloon loans to ensure earlier
re-pricing.
Our one- to four-family loans are not
assumable. Our real estate loans generally contain a "due on sale"
clause allowing us to declare the unpaid principal balance due and payable upon
the sale of the security property.
We generally underwrite our
nonowner-occupied, one- to four-family loans based on a 1.25 debt service
coverage ratio, placing an emphasis on the applicant's creditworthiness and the
appraised value of the property. Presently, we lend up to 80% of the
lesser of the appraised value or purchase price for the residence (or 90% with
private mortgage insurance). These loans are offered with a fixed
rate or an adjustable rate at rates one percentage point higher than
owner-occupied residential mortgages and with a 1% origination
fee. These loans have terms of up to 5 years and are not
assumable.
Commercial
Real Estate Lending.
We
offer a variety of commercial real
estate loans. These loans are secured primarily by local
service/retail establishments and small office or commercial buildings located
in our market areas, primarily in Barry County. Through the end of
2005 our commercial real estate portfolio included our commercial business
loans. See "Commercial Business Lending." At December 31, 2008
commercial real estate loans totaled $8.4 million or 8.74%, of our gross loan
portfolio.
Our loans secured by commercial real
estate are originated with a fixed or adjustable interest rate, adjusted
quarterly or monthly, with a three-or five-year term and balloon payment and up
to a 25 year amortization calculation. The interest rate on
adjustable rate loans is based on a variety of indices, generally determined
through negotiation with the borrower. Loan-to-value ratios on our
multi-family and commercial real estate loans typically do not exceed 80% of the
appraised value of the property securing the loan.
Loans secured by commercial real estate
are underwritten based on the income producing potential of the property and the
financial strength of the borrower. The net operating income, which
is the income derived from the
operation of the property less all
operating expenses, must be sufficient to cover the payments related to the
outstanding debt. We generally require personal guarantees of the
borrowers and an assignment of rents or leases in order to be assured that the
cash flow from the project will be used to repay the debt. Appraisals
on properties securing multi-family and commercial real estate loans are
performed by independent state certified or licensed fee appraisers approved by
the board of directors. See "Loan Originations, Purchases, Sales and
Repayments."
We do not generally maintain a tax or
insurance escrow account for loans secured by commercial real
estate. In order to monitor the adequacy of cash flows on income
producing properties, the borrower is generally required to provide periodic
financial information.
Loans secured by commercial real estate
properties generally involve a greater degree of credit risk than one- to
four-family residential mortgage loans. These loans typically involve
large balances to single borrowers or groups of related
borrowers. Because payments on loans secured by commercial real
estate properties are often dependent on the successful operation or management
of the properties, repayment of these loans may be subject to adverse conditions
in the real estate market or the economy. If the cash flow from the
project is reduced, or if leases are not obtained
or renewed, the borrower's ability to
repay the loan may be impaired. See "Asset Quality - Non-performing
Loans." The largest commercial real estate lending relationship
at December 31, 2008, was $1,004,000
secured by a restaurant, corporate assets, first and second mortgages on the
borrowers’ primary and secondary residences and overdraft protection
loans.
Construction
or Development Lending.
O
ur construction loan portfolio consists
of loans for the construction of one- to four-family residences and commercial
properties, including land loans for development of these
properties. The weak housing market in our market area has reduced
the demand for speculative residential construction loans. We hope to
increase our construction lending business, particularly with residential
contractors, once this market improves. Construction and development
lending generally affords us an opportunity to receive interest at rates higher
than those obtainable from residential lending and to receive higher origination
and other loan fees. In addition, construction and development loans,
excluding land loans, are generally made with adjustable rates of interest for
commercial properties and fixed rates for residential
properties. These loans have six-to nine-month terms and
interest-only payments during the construction period. Land loans are
generally for residential developments. They are three-year balloon,
non-amortizing loans with an 85% maximum loan-to-value ratio and a fixed or
adjustable rate of interest. At December 31, 2008, we had $2.2
million in construction and development loans outstanding, representing 2.26% of
our gross loan portfolio and consisting of
$1.5 million in construction loans to
the prospective owners of the one- to four-family residences being
cons
tructed and $700,000 in
construction loans to builders for pre-sold and spec homes under
construction.
Commercial
Business Lending.
We originate commercial business loans
and at December 31, 2008, we had $3.1 million in commercial business loans,
which was 3.26% of our loan portfolio. Prior to 2006, our commercial business
portfolio was reported as part of our commercial real estate
portfolio. Our commercial business lending activities encompass loans
with a variety of purposes and security including loans to finance inventory and
equipment. These are believed to carry higher credit risk than more
traditional single family loans.
Unlike residential mortgage loans,
commercial business loans are typically made on the basis of the borrower's
ability to make repayment from the cash flow of the borrower's business and,
therefore, are of higher risk. Commercial business loans are
generally secured by business assets, such as accounts receivable, equipment and
inventory. This collateral may depreciate over time, may be difficult
to appraise and may fluctuate in value based on the success of the
business. As a result, the availability of funds for the repayment of
commercial business
loans is dependent on the success of the
business itself (which, in turn, is often dependent in part upon general
economic conditions).
Our management recognizes the generally
increased risks associated with our commercial business lending. Our
commercial lending policy emphasizes complete credit file documentation and
analysis of the borrower's character, capacity to repay the loan, the adequacy
of the borrower's capital and collateral as well as an evaluation of the
industry conditions affecting the borrower. Review of the borrower's
past, present and future cash flows is also an important aspect of our credit
analysis. In addition, we generally obtain personal guarantees from
the borrowers on these types of loans. The majority of the Bank's
commercial loans have been to borrowers in Barry and Kalamazoo counties,
Michigan.
Consumer
Lending.
We offer a variety of secured consumer
loans, including loans secured by new and used auto loans, boats, trailers and
other recreational vehicles, unsecured consumer loans and loans secured by
savings deposits. We originate our consumer loans primarily in our
market areas. At December 31, 2008, our consumer loan portfolio
totaled $5.5 million, or 5.8% of our gross loan portfolio. Consumer
loan terms vary according to the type of collateral, length of contract and
creditworthiness of the borrower.
We originate auto loans on a direct and
indirect basis. Auto loans totaled $1.2 million at December 31, 2008,
or 1.3% of our gross loan portfolio of which $722,000 were direct loans and
$510,000were indirect loans. We have a relationship with two local used car
dealerships for indirect lending under an arrangement providing a reserve fee to
the referring dealer. Auto loans may be written for up to
six
years and have fixed
rates of interest. Loan-to-value ratios are up to 100% of the sales
price and or the retail value on new and late model used autos and the lesser of
90% of NADA or the sales price on other used autos.
We originate loans secured by boats,
trailers and other recreational vehicles. These loans totaled $2.8
million at December 31, 2008, or 2.9% of our gross loan portfolio. We have a
relationship with two local boat dealers for indirect lending which provides for
a reserve fee to the referring dealer. These secured consumer loans
are written with terms up to 15 years and usually have fixed interest
rates. Loan to value ratios are 100% of the sales prices for new
collateral and the lesser of 90% of NADA value or the sales price for used
collateral.
We also make unsecured loans to
consumers based on the creditworthiness of the borrower. These loans
are written for up to three years and usually have fixed rates of
interest.
Consumer and other loans may entail
greater risk than do one- to four-family residential mortgage loans,
particularly in the case of consumer loans that are secured by rapidly
depreciable assets such as automobiles and recreational vehicles. In
these cases, any repossessed collateral for a defaulted loan may not provide an
adequate source of repayment of the outstanding loan balance. As a
result, consumer loan collections are dependent on the borrower's continuing
financial stability and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy.
Loan Originations,
Purchases, Sales, Repayments and Servicing
We originate one- to four-family
residential mortgage loans primarily through referrals from real estate agents,
builders and from existing customers. We actively solicit business
from these referral sources and strive to create strong relationships with them
through the quality of service and program selections we
offer. Walk-in customers are another important source of loan
originations. We also have a loan production office in a real estate
broker's office in Kalamazoo, Michigan, to increase our residential mortgage
originations in that metropolitan area.
The Bank promotes its consumer loan
products to existing customers, primarily through in-branch promotions, direct
mailing, statement stuffers and to the community through newspaper and radio
advertising. We also work closely with area boat dealers and are
present at shows they participate in and open houses to promote our
products. In addition to working closely with the boat dealers, we
maintain and continue to develop vendor relationships with area consumer product
dealers providing financing that are secured by the consumer goods being
purchased.
The Bank has built its commercial loan
portfolio primarily through working with business owners and managers that are
customers, direct calling on referral sources, accountants and attorneys and
through direct calling on other businesses that have been targeted by our
management team.
Economic conditions and aggressive
pricing by new competitors in the Bank’s primary market area have combined to
significantly reduce opportunities to originate new commercial loans at this
time. We expect that such opportunities will return as the economy
improves and the competitive environment stabilizes.
The Bank has worked diligently to
identify qualified builders to solicit loans for both speculative construction
and contract construction for either new homes or remodeling
projects. We are an active member of the Barry County Homebuilders
Association and make contacts with builders through joint sponsorship of various
activities with building supply vendors. The stagnant real estate
market currently
severely
limits
opportunities for originating
such loans.
While we are qualified to sell one- to
four- family residential mortgage loans to Freddie Mac; we are currently selling
fixed and adjustable rate loans with servicing released to
independent
purchasers.
These loans must comply with prescribed
terms and conditions as defined by the correspondent relationship with
underwriting, approval and commitment to buy being made
prior to our approval and closing of
these loans with our borrowers. These loans are originated as
Bank
loans and assigned to the purchaser at
closing. The
Bank
typically receives at least 1% of the
loan principal as an origination fee. During the year ended
December 31,
2008
, we earned
$
31,000
in these origination fees
.
During 2008, we sold residential
mortgage loans to other financial institutions for asset liability and capital
management purposes.
While we originate adjustable-rate and
fixed-rate loans, our ability to originate loans is dependent upon customer
demand for loans in our market areas. Demand is affected by
competition, economic conditions and the interest rate
environment. Loans and participations purchased must conform to our
underwriting guidelines and be acceptable to the senior officer loan
committee. Furthermore, during the past few years, we, like many
other financial institutions, have experienced significant prepayments on loans
due to the low interest rate environment prevailing in the United
States. In periods of economic uncertainty, the ability of financial
institutions, including us, to originate or purchase large dollar volumes of
real estate loans may be substantially reduced or restricted, with a resultant
decrease in interest income.
In addition to interest earned on loans
and loan origination fees, we receive fees for loan commitments, late payments
and other miscellaneous services. The fees vary from time to time,
generally depending on the supply of funds and other competitive conditions in
the market. Because of competition in our market, this is not a
material source of income for us.
When a borrower fails to make a required
payment on a loan, the Bank attempts to cause the delinquency to be cured by
contacting the borrower. In the case of loans secured by residential
real estate, a late notice is sent 15 days after the due date and every 15 days
thereafter until the delinquency is resolved. When the loan is 45
days past due a delinquency letter is mailed to the borrower. If the
account becomes 90 days delinquent and an acceptable repayment plan has not been
agreed upon, a 30-day notice of our intent to foreclose is forwarded to the
borrower. Foreclosure proceedings are initiated after that 30-day
period unless a repayment plan has been approved.
Delinquent secured consumer loans are
handled with a 15-day late notice followed by the issuance of a delinquency
letter 30-45 days after the due date requesting payment within 10
days. If the loan is not current or under an approved repayment plan
within that time period, repossession and sale of consumer collateral is
initiated, subject to various requirements under the applicable consumer
protection laws as well as other applicable laws and the determination by us
that it would be beneficial from a cost basis. Borrowers on
delinquent unsecured consumer loans are sent a delinquency notice 30 days after
the due date. If no payment plan is agreed to within the next 30
days, the loan is sent to small claims court or to an attorney for
collection.
Delinquent commercial business loans and
loans secured by multi-family and commercial real estate are initially handled
by the collection officer who is responsible for contacting the
borrower. The collection department also works with the commercial
loan officers to see that necessary steps are taken to collect delinquent
loans. In addition, we have a senior officer loan review committee
that meets monthly and reviews past due and criticized loans, as well as other
loans that management feels may present possible collection problems or risk to
the Bank. If an acceptable workout of a delinquent commercial loan
cannot be agreed upon, we generally initiate foreclosure or repossession
proceedings on any collateral securing the loan.
Delinquent
Loans.
The
following table sets forth our loan delinquencies for 60 days and over by type,
number and amount at December 31, 2008.
|
|
|
Loans
Delinquent For:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60-89
Days
|
|
|
90
Days and Over
|
|
|
Total
Delinquent Loans
|
|
|
|
|
Number
|
|
|
Amount
|
|
|
Percent
of
Total
Loans(1)
|
|
|
Number
|
|
|
Amount
|
|
|
Percent
of
Total
Loans(1)
|
|
|
Number
|
|
|
Amount
|
|
|
Percent
of
Total
Loans(1)
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Real
Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four- family
|
|
|
8
|
|
|
$
|
502
|
|
|
|
0.53
|
%
|
|
|
14
|
|
|
$
|
1,636
|
|
|
|
1.71
|
%
|
|
|
22
|
|
|
$
|
2,138
|
|
|
|
2.24
|
%
|
|
Commercial
|
|
|
3
|
|
|
|
834
|
|
|
|
0.87
|
|
|
|
11
|
|
|
|
1,695
|
|
|
|
1.77
|
|
|
|
14
|
|
|
|
2,529
|
|
|
|
2.64
|
|
|
|
|
|
11
|
|
|
|
1,336
|
|
|
|
1.40
|
|
|
|
25
|
|
|
|
3,331
|
|
|
|
3.48
|
|
|
|
36
|
|
|
|
4,667
|
|
|
|
4.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
4
|
|
|
|
2
|
|
|
|
0.01
|
|
|
|
1
|
|
|
|
7
|
|
|
|
0.01
|
|
|
|
5
|
|
|
|
9
|
|
|
|
0.02
|
|
|
Total
|
|
|
15
|
|
|
$
|
1,338
|
|
|
|
1.41
|
%
|
|
|
26
|
|
|
$
|
3,338
|
|
|
|
3.49
|
%
|
|
|
41
|
|
|
$
|
4,676
|
|
|
|
4.90
|
%
|
___________________________
(1)
As a percentage of total gross loans of $95.6 million at December 31,
2008.
At December 31, 2008, we had 41
delinquent loans, totaling $4.7 million or 4.9% of total loans. At December 31,
2007 we had 16 delinquent loans totaling $1.8 million. Loan delinquencies
increased during 2008 primarily as the result of continuing difficult economic
conditions including increasing unemployment in our market and borrowers'
difficulty in making increased payments due to upward rate
adjustments. We expect delinquencies to increase during 2009 for the
same reasons.
Non-performing
Assets.
The table below sets forth the amounts
and categories of non-performing assets in our loan portfolio. Loans
are
generally
placed on non-accrual status at
90 to 105
days past due or when the collection of
principal and/or interest becomes doubtful.
The increase in non-performing loans in
200
8
is the result of
continuing
deterioration in economic conditions in
southwest Michigan
which
has increased unemployment and under-employment rates as well as reduced the
earnings of many self employed individuals. Collectively this has
caused certain borrowers to become delinquent on loan
payments.
We
expect
non-performing loans
to
increase
during 2009.
The declining real estate values in our
market have substantially increased the probability and magnitude of losses on
foreclosed real estate.
At December 31, 2008 we had
24
troubled debt
restructurings
totaling $
2.5 million
or
2.7
% of total net loans
, substantially all of
which
were residential mortgage loans in
foreclosure proceedings
.
Two of these loans were secured by
commercial real estate. Eighteen were single family residences.
One was secured by an attached single
family condominium. Three were consumer loans secured by a car, boat
and travel trail
e
r.
At December 31, 2008 we had seventeen
non-accruing loans which totaled $2.3
million
or 2.4% of total net
loans. This total includes
four
commercial loans: (1) a
$412,000 loan for the development of
a
residential plat; (2) a $217,000
participation loan for multi family units, which is in the process of being
deeded in lieu of foreclosure; (3) a $39,000 loan secured by corporate
assets
and real estate;
and
(4) a $25,000
l
ine of credit
secured by corporate assets and real
estate
. Residential loans
include: (5)
ten
one- to-four family homes totaling
$1,268,000; (6) $289,000
for two
construction spec loans; and (7) a
participation loan of $100,000.
For a
dditional disclosure
of significant non-performing assets,
see "Management's Discussion and Analysis of Financial Cond
ition and Results of
Operations
"
in Exhibit 13 to this Form
10-K.
|
|
December
31,
|
|
|
2008
|
2007
|
2006
|
2005
|
|
|
(Dollars in
thousands)
|
|
Accruing loans delinquent more
than 90 days:
|
|
|
|
|
|
|
|
|
|
One- to
four-family
|
$268
|
|
$404
|
|
$561
|
|
$79
|
|
|
Commercial real
estate
|
713
|
|
144
|
|
---
|
|
---
|
|
|
Consumer
|
7
|
|
5
|
|
7
|
|
---
|
|
|
Total
|
988
|
|
553
|
|
568
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled debt
restructuring:
|
|
|
|
|
|
|
|
|
|
One- to
four-family
|
2,490
|
|
901
|
|
326
|
|
275
|
|
|
Total
|
2,490
|
|
901
|
|
326
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed
assets:
|
|
|
|
|
|
|
|
|
|
One- to
four-family
|
---
|
|
---
|
|
453
|
|
411
|
|
|
Consumer
|
---
|
|
10
|
|
12
|
|
18
|
|
|
Total
|
---
|
|
1
0
|
|
465
|
|
429
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual
Loans:
|
|
|
|
|
|
|
|
|
|
One- to
four-family
|
1,368
|
|
685
|
|
160
|
|
---
|
|
|
Commercial
|
982
|
|
794
|
|
371
|
|
---
|
|
|
Total
|
2,350
|
|
1,479
|
|
531
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing
assets
|
$5,828
|
|
$2,943
|
|
$1,890
|
|
$783
|
|
|
|
|
|
|
|
|
|
|
|
|
Total as a percentage of total
assets
|
5.21
|
%
|
2.56
|
%
|
1.65
|
%
|
0.74
|
%
|
Other
Loans of Concern
.
On
December 31, 2008
, the
Bank
was monitoring other loans of concern
classified as
s
ubstandard loans on the
Bank
’s monthly delinquency
report. These loans consisted of
commercial loans that
include: three loans totaling $408,000 secured by one- to-four family
first mortgages; three loans totaling $205,000 secured by commercial real
estate; a $205,000 line of credit for land development; and a $540,000 land
development loan. Residential loans that include: two
loans totaling $232,000 secured by one- to-four family real estate; three second
mortgage HELOC loans totaling $129,000; and two loans for vacant land with a
total of $134,000. Consumer loans include: five secured
loans totaling $18,000; three unsecured loans totaling $14,000. Loans
classified as doubtful include: a $25,000 second mortgage secured by
one-to four family real estate and a $7,000 secured consumer
loan.
Past due loans classified as Special
Mention that are being monitored by the
Bank
’s loan review committee
include
: (1)
three
commercial loans
to
a landscaping company that are secured
by
vehicles and equipment
total
ing
$
63,000; (2) two
loans
to a real estate developer that are
secured by
a single family real estate development
and a second mortgage HELOC on the developer’s primary residence that totals
$313,000; (3) two loans that include a first and second
mortgage secured by a single family home totaling $214,000; and a
$71,000 first mortgage loan secured by a one- to four family residential
property.
Classified
Assets
.
Federal regulations provide for the
classification of loans and other assets, such as debt and equity securities
considered to be of lesser quality, as "substandard," "doubtful" or
"loss". An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the insured institution will
sustain "some loss" if the deficiencies are not corrected. Assets
classified as "doubtful" have all of the weaknesses inherent in those classified
"substandard", with the added characteristic that the weaknesses present make
"collection or liquidation in full", on the basis of currently existing facts,
conditions and values, "highly questionable and improbable". Assets
classified as "loss" are those considered "uncollectible" and of such little
value that their continuance as assets without the establishment of a specific
loss reserve is not warranted.
We regularly
review the problem loans in our
portfolio to determine whether any loans require classification in accordance
with applicable regulations. On the basis of management's review of
our loans, at December 31, 2008, we had $3.9 million in loans classified as
substandard, $921,000 classified as doubtful and none as loss. The
total amount classified represented 92.7% of our equity capital and 4.3% of our
assets at December 31, 2008. This is a significant increase from
classified assets of $1.8 million substandard and $
421,000 doubtful at the end of 2007,
which was 17.9% of equity capital and 1.35% of assets at December 31,
2007. The increase is attributable to the further weakening of the
Michigan economy and deterioration of collateral values.
Allowance
for Loan Losses.
We maintain an allowance for loan losses
to absorb probable incurred losses in the loan portfolio. The
allowance is based on ongoing, monthly assessments of the estimated probable
incurred losses in the loan portfolio. In evaluating the level of the
allowance for loan losses, management considers the types of loans and the
amount of loans in the loan portfolio, peer group information, historical loss
experience, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral and prevailing economic
conditions. Large groups of smaller balance homogeneous loans such as
residential real estate, small commercial real estate, home equity and consumer
loans are evaluated in the aggregate using historical loss factors and peer
group data adjusted for current economic conditions. Geographic peer
group data is obtained by general loan type and adjusted to reflect known
differences between peers and the Bank such as loan seasoning, underwriting
experience, local economic conditions and customer
characteristics. More complex loans such as multi-family and
commercial real estate loans and commercial business loans are evaluated
individually for impairment primarily through the evaluation of collateral
values.
At December 31, 2008, our allowance for
loan losses was $858,000 or 0.91% of the total loan portfolio. The
increase in the allowance of $350,000, or 0.35% of the total loan portfolio at
December 31, 2007, reflects the $598,000 in charge-offs during the year and the
current economic conditions in our market area. Assessing the allowance for loan
losses is inherently subjective as it requires making material estimates,
including the amount and timing of future cash flows expected to be received on
impaired loans that may be susceptible to significant change. In the
opinion of management, the allowance, when taken as a whole, reflects estimated
probable loan losses in our loan portfolios. The allowance is
discussed further in Notes 1 and 3 of the Notes to Consolidated Financial
Statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following table sets forth an
analysis of the Bank's allowance for loan losses.
|
|
Year ended December
31,
|
|
|
2008
|
2007
|
2006
|
2005
|
|
|
(Dollars in
thousands)
|
|
Balance at beginning of
period
|
$508
|
|
$538
|
|
$476
|
|
$413
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
One-
to four-family
|
430
|
|
225
|
|
22
|
|
---
|
|
|
Consumer
|
168
|
|
119
|
|
105
|
|
63
|
|
|
Total
|
598
|
|
344
|
|
127
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
One-to
four-family
Consumer
|
---
18
|
|
26
30
|
|
---
27
|
|
---
24
|
|
|
|
18
|
|
56
|
|
27
|
|
24
|
|
|
Net charge-offs
(recoveries)
|
580
|
|
288
|
|
100
|
|
39
|
|
|
Additions charged to
operations
|
930
|
|
258
|
|
162
|
|
102
|
|
|
Balance at end of
period
|
$858
|
|
$
508
|
|
$538
|
|
$476
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs during the period
as a percentage of average loans
outstanding
during the period
|
0.61
|
%
|
0.30
|
%
|
0.10
|
%
|
0.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs (recoveries)
during the period as a
percentage
of average loans outstanding during the period
|
0.57
|
%
|
0.
30
|
%
|
0.10
|
%
|
0.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Allowance as a percentage of
non-performing
loans
|
25.71
|
%
|
25.02
|
%
|
48.90
|
%
|
602.53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Allowance as a percentage of total
loans
(end
of period)
|
0.92
|
%
|
0.51
|
%
|
0.53
|
%
|
0.52
|
%
|
In 2005 we increased the allowance
primarily in response to loan growth as quality indicators remained
positive. In 2006 the provision was increased in response to loan
growth as well as economic conditions in our local market. In 2008 we
increased the provision in response to the current local economic
conditions
, deterioration
of collateral values and increased loan delinquencies
.
Th
e distribution of the Bank's allowance
for losses on loans at the dates indicated is summarized as
follows:
|
|
December
31,
|
|
|
2008
|
2007
|
2006
|
2005
|
|
|
Amount
|
Percent
of loans
in each
category
to total
loans
|
Amount
|
Percent
of loans
in each
category
to total
loans
|
Amount
|
Percent
of loans
in each
category
to total
loans
|
Amount
|
Percent
of loans
in each
category
to total
loans
|
|
|
(Dollars in
thousands)
|
|
Allocated at end
of
period
to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family and
home
equity
|
$366
|
79.99
|
%
|
$175
|
79.12
|
%
|
$141
|
77.94
|
%
|
$ 98
|
75.24
|
%
|
|
Commercial real
estate
|
314
|
8.74
|
|
99
|
9.00
|
|
114
|
9.02
|
|
160
|
9.39
|
|
|
Construction or
development
|
40
|
2.26
|
|
19
|
2.03
|
|
35
|
3.58
|
|
39
|
8.92
|
|
|
Consumer
|
76
|
5.75
|
|
156
|
6.11
|
|
201
|
5.94
|
|
179
|
6.45
|
|
|
Commercial
business
|
62
|
3.26
|
|
59
|
3.74
|
|
47
|
3.52
|
|
---
|
---
|
|
|
Total
|
$858
|
100.00
|
%
|
$508
|
100.00
|
%
|
$538
|
100.00
|
%
|
$476
|
100.00
|
%
|
Federal savings banks have the authority
to invest in various types of liquid assets, including United States Treasury
obligations, securities of various federal, state and local agencies and
jurisdictions, including callable agency securities, certain certificates of
deposit of insured banks and savings institutions, certain bankers' acceptances,
repurchase agreements and federal funds. Subject to various
restrictions, Federal savings banks also may invest their assets in investment
grade commercial paper and corporate debt securities and mutual funds whose
assets conform to the investments that a federal savings bank is otherwise
authorized to make directly. See "How We Are Regulated - MainStreet
Savings Bank - - OTS Regulation" for a discussion of additional restrictions on
our investment activities.
The Treasurer has the basic
responsibility for the management of our investment portfolio, subject to the
direction and guidance of the President. The Treasurer considers
various factors when making decisions, including the marketability, maturity and
tax consequences of the proposed investment. The maturity structure
of investments will be affected by various market conditions, including the
current and anticipated slope of the yield curve, the level of interest rates,
the trend of new deposit inflows and the anticipated demand for funds via
deposit withdrawals and loan originations and purchases.
The general objectives of our investment
portfolio are to provide liquidity when loan demand is high, to assist in
maintaining earnings when loan demand is low and to maximize earnings while
satisfactorily managing risk, including credit risk, reinvestment risk,
liquidity risk and interest rate risk. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Asset and
Liability Management and Market Risk." Our investment securities currently
consist of mortgage backed securities. Prior to 2005, our investment
portfolio also included federal agency securities and corporate debt
securities. See Note 2 of the Notes to Consolidated Financial
Statements. The corporate debt was acquired to increase the yield in
our investment securities portfolio.
As a member of the Federal Home Loan
Bank of Indianapolis, we had $1.8 million in stock of the Federal Home Loan Bank
of Indianapolis at December 31, 2008. For the year ended December 31,
2008, we received $81,000 in dividends from the Federal Home Loan Bank of
Indianapolis. The following table sets forth the composition of our
securities portfolio and other investments at the dates indicated which included
no securities held to maturity. At December 31, 2008, our securities
portfolio did not contain securities of any issuer with an
aggregate book value in excess of 10% of
our equity capital, excluding those issued by the United States Government or
its agencies.
|
|
December
31,
|
|
|
2008
|
2007
|
2006
|
|
|
Amortized
cost
|
Fair
Value
|
Amortized
cost
|
Fair
Value
|
Amortized
cost
|
Fair
Value
|
|
|
(In
thousands)
|
|
Securities available for sale, at
fair value:
|
|
|
|
|
|
|
|
Mortgage-backed, including
mutual funds
|
$1,597
|
$1,585
|
$
1,954
|
$
1,924
|
$2,108
|
$2,088
|
|
Total investment
securities
|
1,597
|
1,585
|
1,954
|
1,924
|
2,108
|
2,088
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank
stock
|
1,785
|
1,785
|
1,589
|
1,589
|
1,589
|
1,589
|
|
|
|
|
|
|
|
|
|
Total
securities
|
$3,382
|
$3,370
|
$3,543
|
$3,513
|
$3,697
|
$3,677
|
|
|
1
year or less
|
Over
1 to 5 years
|
Over
5 to 10 years
|
Over
10 years
|
Total
securities
|
|
|
Amortized
cost
|
Weighted
average
yield
|
Amortized
cost
|
Weighted
average
yield
|
Amortized
cost
|
Weighted
average
yield
|
Amortized
cost
|
Weighted
average
yield
|
Amortized
cost
|
Weighted
average
yield
|
Fair
value
|
|
|
(Dollars
in thousands)
|
|
Securities
available
for sale,
at
fair value
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed,
including
mutual
funds
|
$824
|
4.78%
|
$---
|
---%
|
$237
|
4.84%
|
$536
|
4.39%
|
$1,597
|
4.66%
|
$1,585
|
During 2008, management determined its
mutual fund investment was other – than – temporarily impaired. As a
result, management recognized impairment losses of $281,544 during
2008.
Sources of Funds
General.
Our sources of funds are deposits,
borrowings, payment of principal and interest on loans, interest earned on or
maturation of other investment securities and funds provided from
operations.
Deposits.
We offer a variety of deposit accounts
to both consumers and businesses having a wide range of interest rates and
terms, including special accounts for children and IRA accounts. Our
deposits consist of savings and checking accounts, money market deposit
accounts, NOW and demand accounts and certificates of deposit. We
solicit deposits primarily in our market areas and from financial
institutions. We also solicit deposits over the internet through
Qwickrate.com. At December 31, 2008, our total brokered and wholesale deposits
were $13.6 million, or 19.6% of all deposits on that
date.
The
Bank has, and anticipates continuing to, obtained deposits in the national
market via the internet to meet funding needs beyond that satisfied by local
deposits. The interest rates the Bank has paid to obtain national
market deposits have generally ranged from being equivalent to the rate offered
in the local market to 0.5% above the local rate. We primarily rely
on competitive pricing
policies, marketing and customer service to attract and retain
deposits. We have not been able to accept or renew brokered and
wholesale deposits since we became adequately capitalized as of June 30, 2008.
The flow of deposits is influenced significantly by general economic conditions,
changes in money market and prevailing interest rates and
competition. The variety of deposit accounts we offer has allowed us
to be competitive in obtaining funds and to
respond with flexibility to changes in
consumer demand. We have become more susceptible to short-term
fluctuations in deposit flows, as customers have become more interest rate
conscious. We try to manage the pricing of our deposits in keeping
with our asset and liability management, liquidity and profitability objectives,
subject to competitive factors. Based on our experience, we believe
that our deposits are relatively stable sources of funds. Despite
this stability, our ability to attract and maintain these deposits and the rates
paid on them has been and will continue to be significantly affected by market
conditions.
Under regulations of the Board of
Governors of the Federal Reserve System, we are required to maintain
non-interest bearing reserves at specified levels against our transaction
accounts, primarily checking and NOW accounts. At December 31, 2008,
the Bank was in compliance with these Federal Reserve
requirements.
The following table indicates the amount
of our certificates of deposit and other deposits by time remaining until
maturity as of December 31, 2008.
|
|
Maturing
|
|
|
3 months
or less
|
Over 3 to
6 months
|
Over 6 to
12 months
|
Over 12
months
|
Total
|
|
|
(In
thousands)
|
|
Certificates of
deposit less than $100,000
|
$5,446
|
$2,957
|
$
13,885
|
$
5,301
|
$
27,589
|
|
Certificates of
deposit of $100,000 or more
|
6,847
|
1,999
|
4,945
|
859
|
14,650
|
|
Public
funds
(1)
|
442
|
269
|
789
|
---
|
1,500
|
|
Total
certificates of deposit
|
$12,735
|
$5,225
|
$
19,619
|
$
6,160
|
$
43,739
|
____________________
(1)
Deposits from governmental and other public entities.
|
|
December
31,
|
|
|
2008
|
2007
|
2006
|
2005
|
|
|
Amount
|
Percent
of total
|
Amount
|
Percent
of total
|
Amount
|
Percent
of total
|
Amount
|
Percent
of total
|
|
|
(Dollars in
thousands)
|
|
Transactions and Savings
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non interest-bearing
demand
|
$4,742
|
6.83
|
%
|
$5,523
|
6.94
|
%
|
$ 6,511
|
7.87
|
%
|
$ 6,852
|
10.56
|
%
|
|
Interest-bearing
demand
|
5,098
|
7.34
|
|
4,241
|
5.33
|
|
4,446
|
5.37
|
|
5,283
|
8.14
|
|
|
Statement
savings
|
7,106
|
10.23
|
|
7,152
|
8.99
|
|
8,374
|
10.12
|
|
9,019
|
13.90
|
|
|
Money
market
|
8,712
|
12.55
|
|
5,844
|
7.35
|
|
6,047
|
7.30
|
|
6,322
|
9.74
|
|
|
IRA
|
10
|
0.01
|
|
12
|
0.02
|
|
16
|
0.02
|
|
21
|
0.03
|
|
|
Total
non-certificates
|
25,668
|
36.96
|
|
22,772
|
28.63
|
|
25,394
|
30.68
|
|
27,497
|
42.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.00 -
1.99%
|
---
|
---
|
|
---
|
---
|
|
---
|
---
|
|
1,920
|
2.96
|
|
|
2.00 -
3.99%
|
26,479
|
38.14
|
|
8,906
|
11.20
|
|
10,822
|
13.07
|
|
23,065
|
35.53
|
|
|
4.00 -
5.99%
|
17,260
|
24.86
|
|
47,72
7
|
60.01
|
|
46,485
|
56.15
|
|
12,413
|
19.12
|
|
|
6.00 -
7.99%
|
---
|
---
|
|
---
|
---
|
|
---
|
---
|
|
---
|
---
|
|
|
Total
certificates
|
$43,739
|
63.00
|
|
$
5
6,633
|
71.21
|
|
57,307
|
69.22
|
|
37,398
|
57.62
|
|
|
Accrued
interest
|
33
|
0.04
|
|
128
|
0.16
|
|
82
|
0.10
|
|
13
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deposits
|
$69,440
|
100.00
|
%
|
$ 79,533
|
100.00
|
%
|
$ 82,783
|
100.00
|
%
|
$64,908
|
100.00
|
%
|
Money market accounts have increased
from 2007 to 2008 because of the current economic conditions and customers
choosing to hold their money in more secure accounts. Certificates of
deposit have decreased due to maturing brokered and wholesale deposits and our
inability to renew such deposits when we became adequately capitalized in June
2008.
Borrowings.
Although deposits are our primary source
of funds, we may utilize borrowings when they are a less costly source of funds
and can be invested at a positive interest rate spread, when we desire
additional capacity to fund loan demand or when they meet our asset/liability
management goals. Our borrowings consist of advances from the Federal
Home Loan Bank of Indianapolis and a loan from a commercial bank. See
Note 7 of the Notes to Consolidated Financial Statements and the description of
the loan under “General” above.
We are a member of and may obtain
advances from the Federal Home Loan Bank of Indianapolis, which is part of the
Federal Home Loan Bank System. The twelve regional Federal Home Loan
Banks provide a central credit facility for their member
institutions. These advances are provided upon the security of
certain of our mortgage loans and mortgage-backed securities. These
advances may be made pursuant to several different credit programs, each of
which has its own interest rate, range of maturities and call features, and all
long-term advances are required to be used to provide funds for residential home
financing. At December 31, 2008, we had $35.7 million in Federal Home
Loan Bank advances outstanding and the ability to borrow an additional $725,000
from the Federal Home Loan Bank of Indianapolis. At that same date,
we had $49.8 million in residential mortgages pledged as collateral for our
advances and an additional $800,000 of mortgage-backed securities pledged as
collateral for advances. We are required to own stock in our Federal
Home Loan Bank based on the amount of our advances. At December 31,
2008, we had $1.8 million in such stock.
The Bank is authorized to borrow from
the Federal Reserve Bank of Chicago "discount window" after it has exhausted
other reasonable alternative sources of funds, including Federal Home Loan Bank
borrowings. We have never borrowed from the Federal Reserve Bank
but have submitted an
application to be approved for such borrowing.
|
|
For the year ended December
31,
|
|
|
2008
|
2007
|
2006
|
2005
|
|
|
(Dollars in
thousands)
|
|
Maximum month-end
balance:
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank
advances
|
$35,700
|
|
$26,400
|
|
$30,450
|
|
$32,000
|
|
|
Bank loan
|
700
|
|
700
|
|
2,000
|
|
1,000
|
|
|
Total
|
$36,400
|
|
$27,100
|
|
$32,450
|
|
$33,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
balances:
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank
advances
|
$31,264
|
|
$22,730
|
|
$27,146
|
|
$27,171
|
|
|
Bank loan
|
700
|
|
700
|
|
1,800
|
|
583
|
|
|
Total
|
$31,964
|
|
$23,430
|
|
$28,946
|
|
$27,754
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average interest rate
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank
advances
|
3.61
|
%
|
5.28
|
%
|
5.35
|
%
|
4.25
|
%
|
|
Bank loan
|
6.69
|
|
8.10
|
|
8.62
|
|
3.91
|
|
|
All
borrowings
|
3.54
|
%
|
4.33
|
%
|
5.56
|
%
|
4.24
|
%
|
The increase in advances was due to our
inability to renew brokered and wholesale deposits which we could not renew due
to the Bank’s becoming adequately capitalized on June 30,
2008.
The following table sets forth certain
information about our borrowings at the dates indicated.
|
|
December
31,
|
|
|
2008
|
2007
|
2006
|
2005
|
|
|
(Dollars in
thousands)
|
|
Federal Home Loan Bank
advances
|
$35,700
|
|
$26,400
|
|
$21,400
|
|
$32,000
|
|
|
Bank loan
|
700
|
|
700
|
|
700
|
|
1,000
|
|
|
Total
|
$36,400
|
|
$27,100
|
|
$22,100
|
|
$33,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average interest rate
of:
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank
advances
|
1.90
|
%
|
4.86
|
%
|
5.30
|
%
|
4.46
|
%
|
|
Bank loan
|
6.69
|
|
8.10
|
|
8.37
|
|
7.08
|
|
|
Total
borrowings
|
3.68
|
%
|
4.94
|
%
|
5.40
|
%
|
4.54
|
%
|
Subsidiary and Other
Activities
The Bank has one active subsidiary,
MainStreet Financial Services, Inc., a licensed insurance agency. The
subsidiary has an investment in MBT Title Company, which is jointly owned by
members of the Michigan Bankers Association. At December 31, 2008,
our total investment in the subsidiary was $2,400. For 2008, earnings
were $10,000.
The Bank has a contract with Regal
Financial Services, a third party broker-dealer that offers securities brokerage
services to our customers at a separate location in our main banking
office. We receive compensation from them for the use of the office
space and certain administrative services. We earned $17,000 in
2008.
Employees
At December 31, 2008, we had a total of
29 full-time employees and 13 part-time employees. Our employees are
not represented by any collective bargaining group. Management
considers its employee relations to be good.
Set forth below is a brief description
of certain laws and regulations that are applicable to the Company, the Bank and
MHC. The description of these laws and regulations, as well as
descriptions of laws and regulations contained elsewhere in this Report, do not
purport to be complete and is qualified in its entirety by reference to the
applicable laws and regulations. Legislation is introduced from time
to time in the United States Congress that may affect the operations of the
Company and the Bank. In addition, the regulations governing the
Company and the Bank may be amended from time to time by the OTS, the FDIC or
the SEC, as appropriate. Any legislative or regulatory changes in the
future could adversely affect the Company and the Bank. No assurance
can be given as to whether or in what form any such changes may
occur.
The Bank received a letter from the OTS
dated February 5, 2008, indicating that the Bank is deemed to be in troubled
condition, and, as a result, is subject to specified operating
restrictions. These operating restrictions provide that: (1)
the Bank must limit its quarterly asset growth to net interest credited on
deposit liabilities during the quarter (unless additional asset growth is
permitted by the OTS); (2) the Bank must obtain prior OTS approval prior to
appointing any new director or senior executive officer; (3) the Bank’s ability
to enter into certain severance agreements or make certain severance payments is
limited by 12 C.F.R. § 359; (4) the Bank must receive OTS approval of any new,
renewed or amended arrangements providing compensation or benefits to its
directors and officers; (5) the Bank must obtain OTS approval of all third-party
contracts outside the normal course of business; and (6) the Bank must provide
the OTS with 30-days notice of all proposed transactions with
affiliates.
Effective April 4, 2008, the Bank
entered into a supervisory agreement 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 (4)
continue to abide by the limits in the February 5, 2008 “troubled condition”
letter, including limits on growth and third party
contracts.
The Bank became adequately capitalized
as of June 30, 2008 and may become undercapitalized in 2009 under prompt
corrective action regulations of the OTS. See
–
“Prompt Corrective
Action”. The continuing decline in the Bank’s capital may result in
additional regulatory actions, including placing the Bank in
receivership.
Recent
Legislative and Regulatory Initiatives to Address Financial and Economic
Crises
.
Th
e
Congress, Treasury Department and
the
federal banking regulators, including
the FDIC, have taken broad action since early September to address volatility in
the U.S. banking system.
The 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 is
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. Participants
in the CPP are subject to executive compensation limits and are encouraged to
expand their lending and mortgage loan modifications.
Because of our poor
financial condition, we are not allowed to participate in the TARP
program.
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 ins
urance premiums paid by the banking
industry.
Following a systemic risk determination,
the FDIC established its Temporary Liquidity Guarantee Program (TLGP) in October
2008. Under the interim rule for the TLGP, there are two parts to the program:
the Debt Guarantee Program (DGP) and the Transaction Account Guarantee Program
(TAGP). Eligible entities continue to participate unless they opted
out on or before December 5, 2008.
For the DGP, eligible entities are
generally US bank holding companies, savings and loan holding companies, and
FDIC-insured institutions. Under the DGP, the FDIC guarantees new
senior unsecured debt of an eligible entity issued not later than June 30, 2009,
and, if an application is approved, guarantees certain mandatory convertible
debt.
The
Company
opted out of the
DGP.
For the TAGP, eligible entities are
FDIC-insured institutions. Under the TAGP, the FDIC provides unlimited deposit
insurance coverage through December 31, 2009 for noninterest-bearing transaction
accounts (typically business checking accounts), NOW accounts bearing interest
at 0.5% or less, and certain funds swept into noninterest-bearing savings
accounts. NOW accounts and money market deposit accounts are not
covered. Participating institutions pay fees of 10 basis points
(annualized) on the balance of each covered account in excess of $250,000 during
the period through December 31, 2009.
The Bank
participates in the
TAGP.
MainStreet
Savings Bank.
The Bank, as a federally chartered
savings bank, is subject to regulation and periodic examination by the
OTS. This regulation extends to all aspects of its
operations. The Bank is required to maintain minimum levels of
regulatory capital and is subject to limitations on the payment of dividends to
the Company. See "- Regulatory Capital Requirements" and "-
Limitations on Dividends and Other Capital Distributions." Federal laws and
regulations of the OTS prescribe the investment and lending authority and
activities of federally chartered savings banks. The Bank is required
to file periodic reports with the OTS. The FDIC also insures the
deposits of the Bank to the maximum extent permitted by law. This
regulation of the Bank is intended for the protection of depositors and the
insurance of accounts fund and not for the purpose of protecting
shareholders.
OTS
Regulation.
Our
relationship with our depositors and borrowers is regulated to a great extent by
federal laws and OTS regulations, especially in such matters as the ownership of
savings accounts and the form and content of our mortgage
requirements. In addition, the branching authority of the Bank is
regulated by the OTS. The Bank is generally authorized to branch
nationwide. The investment and lending authority of the Bank is
prescribed by federal laws and regulations and it is prohibited from engaging in
any activities not permitted by these laws and regulations.
As a federal savings bank, the Bank is
required to meet a qualified thrift lender test
.
This test requires the Bank to have at
least 65% of its portfolio assets, as defined by regulation, in qualified thrift
investments on a monthly average for nine out of every 12 months on a rolling
basis
.
As an alternative, we may maintain 60%
of our assets in those assets specified in Section 7701(a)(19) of the Internal
Revenue Code
.
Under either test, we are required to
maintain a significant portion of our assets in residential housing related
loans and investments
.
Any institution that fails to meet the
qualified thrift lender test becomes subject to certain restrictions on its
operations and must convert to a national bank charter, unless it re-qualifies
as, and thereafter remains, a qualified thrift lender
.
If such an institution has not
requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank
.
As of
December 31, 2008
, the Bank met this requirement with a
qualified thrift lender percentage
of
86.7
%.
Under OTS regulations, the Bank is
subject to a lending limit for loans to one borrower or group of related
borrowers. This lending limit is equal to the greater of $500,000 or
15% of unimpaired capital and surplus (except for loans fully secured by certain
readily marketable collateral, in which case the limit is increased to 25% of
unimpaired capital and surplus). At December 31, 2008, our lending
limit under this restriction was $752,000, and our
largest
loan
relationship
at that date
involves a
director with business and residential
loans totaling
$1.8 million. The loans in
this relationship were in compliance with our lending limit at the time they
were made and are considered to be nonconforming under OTS regulations so long
as the amount remains above our current lending limit. All of our
outstanding loan relationships were in compliance with applicable lending limits
at the time they were originated.
We are subject to periodic examinations
by the OTS. During these examinations, the examiners may require the
Bank to provide for higher general or specific loan loss reserves, which can
impact our capital and earnings. As a federal savings bank, the Bank
is subject to a semi-annual assessment, based upon its total assets, to fund the
operations of the Office of Thrift Supervision.
Transactions between the Bank and its
affiliates generally are required to be on terms as favorable to the institution
as transactions with non-affiliates, and certain of these transactions, such as
loans to an affiliate, are restricted to a percentage of the Bank's
capital. In addition, the Bank may not lend to any affiliate engaged
in activities not permissible for a bank holding company or acquire the
securities of most affiliates. The Company is an affiliate of the
Bank.
The OTS has extensive enforcement
authority over all savings associations and their holding companies, including
the Bank and the Company. This enforcement authority includes, among
other things, the ability to assess civil money penalties, to issue
cease-and-desist or removal orders and to initiate injunctive
actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with the
OTS. Except under certain circumstances, public disclosure of final
enforcement actions by the OTS is required by law.
FDIC
Regulation and Insurance of Accounts.
The
Bank's deposits are insured up to the
applicable limits by the deposit insurance fund administered by the FDIC, and
such insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums
and is authorized to conduct examinations of and to require reporting by
FDIC-insured institutions.
Our deposit insurance premiums for the
year ended December 31, 2008 were $
179,000
.
This is a significant
increase over the $30,000 in FDIC deposit premiums we paid during
2007. This increase reflects the general increases imposed on all
institutions and higher levels required due to our financial
condition.
Those premiums
will
increase in 2009 due to recent strains
on the FDIC deposit insurance fund due to the cost of large bank failures and
increase in the number of
troubled banks.
In February 2009, the FDIC issued new
deposit premium regulations proving for increases or premiums, higher premiums
for institutions with secured debt (including FHLB advances and brokered
deposits) and a special assessment in the second quarter of 2009 to replenish
the fund. Under these new deposit insurance premium
regulations, the FDIC assesses deposit
insurance premiums on all FDIC-insured institutions quarterly based on
annualized rates for four risk categories. Each institution is
assigned to one of four risk categories based on capital, supervisory ratings
and other factors. Well capitalized institutions that are financially
sound with only a few minor weaknesses are assigned to Risk Category
I. Risk Categories II, III and IV present progressively greater risks
to the
DIF. Under FDIC’s
risk-adjustments range from 12 to 16 basis points for Risk Category I, and are
22 basis points for Initial base assessment rates are subject to adjustments
based on an institution’s unsecured debt, secured liabilities and brokered
deposits, such that the total base assessment rate after adjustments range from
7 to 24 basis points for Risk Category I, 17 to 34 basis points Risk Category
II, 27 to 58 basis points for Risk Category III, and 40 to 77.5 basis points for
Risk Category IV. The rule also includes authority for the FDIC to
increase or decrease total base assessment rates in the future by as much as
three basis points without a formal rulemaking proceeding.
In addition to the regular quarterly
assessments, due to losses and projected losses attributed to failed
institutions, the FDIC has adopted a rule imposing on every insured institution
a special assessment equal to 20 basis points of its assessment base as of June
30, 2009 to be collected on September 30, 2009. The FDIC has indicated that if,
its borrowing authority from the United States Treasury is increased, it would
reduce the special assessment to 10 basis points. There is legislation pending
to increase that borrowing authority from $30 billion to $100 billion (and up to
$500 billion under special circumstances
).
The
FDIC also proposed that it could
increase assessment rates in the future without formal
rulemaking.
The FDIC also may prohibit any
FDIC-insured institution from engaging in any activity that it determines by
regulation or order to pose a serious risk to the deposit insurance
fund.
The FDIC
also has the authority to initiate enforcement actions against the Bank and may
terminate our deposit insurance if it determines that we have engaged in unsafe
or unsound practices or is in an unsafe or unsound
condition.
MainStreet
Financial Corporation and MHC.
As the holding companies of the Bank,
the Company and MHC are subject to regulation and examination by the
OTS. The terms of the Company's charter are prescribed by the OTS and
require us to only pursue any or all of the lawful objectives and powers of the
subsidiary of a mutual holding company.
Under regulations of the OTS, MHC must
own a majority of outstanding shares of the Company in order to qualify as a
mutual holding company. Applicable federal law and regulations limit
the activities of MainStreet Financial Corporation and MHC and require the
approval of the OTS for any acquisition or divestiture of a subsidiary,
including another financial institution or holding company.
Under regulations of the OTS, MHC, may
convert to the stock form of ownership, though it has no current intention to do
so. In a stock conversion, the members of MHC would have a right to
subscribe for shares of stock in a new company that would own MHC's shares in
the Company. In addition, each share of stock in the Company not
owned by MHC would convert into shares in that new company in an amount that
preserves the holders' percentage ownership.
Regulatory
Capital Requirements.
Capital
Requirements for the Bank.
The Bank is required to maintain minimum
levels of regulatory capital under regulations of the OTS. The
capital standards require core or Tier 1 capital equal to at least 3.0% of
adjusted total assets for the strongest institutions with the highest
examination rating and 4.0% of adjusted total assets for all other institutions,
unless the OTS requires a higher level based on the particular circumstances or
risk profile of the institution. Core capital generally consists of
tangible capital plus certain intangibles. At December 31, 2008,
MainStreet Savings Bank had core capital equal to $5.0 million, or 4.5% of
adjusted total assets, which was $574,000 above its required level of
4.0
%.
The OTS also requires MainStreet Savings
Bank to have total capital of at least 8.0% of risk-weighted
assets. Total capital consists of core or Tier 1 capital and Tier 2
capital, which for MainStreet Savings Bank at December 31, 2008, consists of
$858,000 of its allowance for possible loan and lease losses. In determining the
amount of risk-weighted assets, all assets, including certain off-balance sheet
items, will be multiplied by a risk weight, ranging from 0% to 100%, based on
the risk inherent in the type of asset. The OTS is authorized to
require
MainStreet Savings Bank to maintain an
additional amount of total capital to account for concentration of credit risk,
level of interest rate risk, equity investments in non-financial companies and
the risk of non-traditional activities. At December 31, 2008,
MainStreet Savings Bank had $70.3 million in risk-weighted assets and total
capital of $5.9 million, or 8.35% of risk-weighted assets, which was $243,000
above the required
level.
Prompt
Corrective Action.
T
he OTS
is authorized and, under certain
circumstances, required to take certain actions against federal savings banks
that fail to meet these capital requirements or that fail to maintain an
additional capital ratio of Tier 1 capital of at least 4.0% of risk
weighted-assets. The OTS is generally required to take action to
restrict the activities of an "undercapitalized institution," which is an
institution with less than either a 4.0% core capital ratio, a 4.0% Tier 1
risked-based capital ratio or an 8.0% total risk-based capital
ratio. Any such institution must submit a capital restoration plan
and until the plan is approved by the OTS may not increase its assets, is
subject to close monitoring, acquire another institution, establish a branch,
increase asset size or engage in any new activities, and generally may not make
capital distributions. In addition, as part of the required capital
restoration plan, the Company must guarantee that the Bank will return to
adequately capitalized status and provide reasonable assurances of performance
of that guarantee. If a capital restoration plan is not approved by
the ORS, the undercapitalized institution is treated as if it were
“significantly under capitalized”.
Any institution that fails to comply
with its capital plan or has Tier 1 risk-based or core capital ratios of less
than 3.0% or a total risk-based capital ratio of less than 6.0% is considered
"significantly undercapitalized" and must be made subject to one or more
additional specified actions and operating restrictions that may cover all
aspects of its operations and may include a forced merger or acquisition of the
institution and forced changes in directors and executive
officers. An institution with tangible equity to total assets of less
than 2.0% is "critically undercapitalized", which subjects it to further
mandatory restrictions and requires the OTS to appoint a conservator or receiver
within 90 days, unless other action furthers the purposes of the law governing
prompt corrective action. The OTS generally is authorized
to reclassify an institution into a lower capital category and impose the
restrictions applicable to that category if the institution is engaged in unsafe
or unsound practices or is in an unsafe or unsound condition. The
imposition by the OTS of any of these measures on the Bank may have a
substantial adverse effect on its operations and
profitability.
Institutions with at least a
4.
0% core capital ratio, a
4.0% Tier 1 risked-based capital ratio and an 8.0% total risk-based capital
ratio are considered "adequately capitalized." An institution is deemed a
"well-capitalized" institution if it has at least a 5% leverage capital ratio, a
6.0% Tier 1 risked-based capital ratio and a 10.0% total risk-based capital
ratio.
At December 31, 2008, MainStreet
Savings Bank was considered an "adequately capitalized"
institution. As a result, the Bank is prohibited from accepting or
renewing brokered deposits.
The Bank may become
undercapitalized in
2009.
Limitations
on Dividends and Other Capital Distributions.
OTS regulations impose various
restrictions on the ability of the Bank to make distributions of capital, which
include dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. The Bank must file a
notice or application with the OTS before making any capital
distribution. The Bank generally may make capital distributions
during any calendar year in an amount up to 100% of net income for the
year-to-date plus retained net income for the two preceding years, so long as it
is well-capitalized after the distribution. If the Bank proposes to
make a
capital distribution when it does not
meet its current minimum capital requirements (or will not following the
proposed capital distribution) or that will exceed these net income limitations,
it must obtain OTS approval prior to making the distribution. The OTS
may always object to any distribution based on safety and
soundness.
MainStreet Financial Corporation will
not be subject to OTS regulatory restrictions on the payment of
dividends. Dividends from MainStreet Financial Corporation, however,
may depend, in part, upon its receipt of dividends from MainStreet Savings
Bank. In addition, MainStreet Savings Bank may not make a
distribution that would constitute a return of capital during the three-year
term of the business plan submitted in connection with this mutual holding
company reorganization and stock issuance. See "Our Policy Regarding
Dividends."
Federal
Securities Laws.
The stock of the Company is registered
with the SEC under the Securities Exchange Act of 1934, as
amended. The Company will be subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Securities Exchange Act of 1934
.
The Company stock held by persons who
are affiliates of the Company may not be resold without registration unless sold
in accordance with certain resale restrictions. Affiliates are
generally considered to be officers, directors and principal
stockholders. If the Company meets specified current public
information requirements, each affiliate of the Company will be able to sell in
the public market, without registration, a limited number of shares in any
three-month period.
The SEC has adopted regulations and
policies under the Sarbanes-Oxley Act of 2002 that apply to the Company as a
public company under the Securities Exchange Act of 1934. The stated
goals of these Sarbanes-Oxley requirements are to increase corporate
responsibility, provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies and to protect investors by improving
the accuracy and reliability of corporate disclosures pursuant to the securities
laws. The SEC Sarbanes-Oxley regulations and policies include very
specific additional disclosure requirements and new corporate governance
rules. The Sarbanes-Oxley Act represents significant federal
involvement in matters traditionally left to state regulatory systems, such as
the regulation of the accounting profession, and to state corporate law, such as
the relationship between a board of directors and management and between a board
of directors and its committees.
General.
The Company, the Bank and MHC are
subject to federal income taxation in the same general manner as other
corporations, with some exceptions discussed below. The following
discussion of federal taxation is intended only to summarize certain pertinent
federal income tax matters and is not a comprehensive description of the tax
rules applicable to the Company or the Bank. The Bank's federal
income tax returns have never been audited.
The Company files a consolidated federal
income tax return with the Bank and MHC. Accordingly, it is
anticipated that any cash distributions made by the Company to its stockholders
would be considered to be taxable dividends and not as a non-taxable return of
capital to stockholders for federal and state tax purposes.
Method
of Accounting.
For federal income tax purposes, the
Bank currently reports its income and expenses on the accrual method of
accounting and uses a fiscal year ending on December 31 for filing its federal
income tax return.
Minimum
Tax.
The
Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on a
base of regular taxable income plus certain tax preferences, called alternative
minimum taxable income. The alternative minimum tax is payable to the
extent alternative minimum tax exceeds regular income tax. Net
operating losses can offset no more than 90% of alternative minimum taxable
income. Certain payments of alternative minimum tax may be used as
credits against regular tax liabilities in future years. The Bank has
not been subject to the alternative minimum tax, nor do we have any amounts
available as credits for carryover.
Net
Operating Loss Carryovers.
A financial institution may carryback
net operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses
incurred in taxable years beginning after August 6, 1997. At December
31, 2008, the Bank had net operating loss carryforwards of $3,587,081 for
federal income tax purposes, which begin expiring in 2021.
Corporate
Dividends-Received Deduction.
Because it files a consolidated return
with its wholly owned subsidiary, the Bank, dividends from the Bank are not
included as income to the Company. The corporate dividends-received
deduction is 100% or 80%, in the case of dividends received from corporations
with which a corporate recipient does not file a consolidated tax return,
depending on the level of stock ownership of the payee of the
dividend. Corporations that own less than 20% of the stock of a
corporation distributing a dividend may deduct 70% of dividends received or
accrued on their behalf.
State Taxation
The Company and the Bank are subject to
a Michigan business activities tax of 1.9% on the sum of their federal taxable
income, compensation paid to employees, tax depreciation expense and certain
other items.
Internet Website
The Company and the
Bank maintain a website,
www.
mainstreetsavingsbank.com
. Information
pertaining to
the Company
, including SEC
filings, can be found by clicking the link on our site called “Investor
Relations.”
This Annual Report on
Form 10-K and our other reports, proxy statements and other information filed
with the SEC are available on that website within the Investor Relations webpage
by clicking the link called “SEC Filings.” The information contained
on our website is not included as a part of, or incorporated by reference into,
this Annual Report on Form 10-K. For more information regarding
access to these filings on our website, please contact our Corporate
Secretary
2005 5th Avenue, Suite
200, Seattle, Washington, 98121 or by calling (206) 448-0884
.
Item
1A.
Risk Factors
Because
; the Company is a smaller reporting
company
it is not required
to provide risk factors. However, the declining capital of the Bank
may result in the Bank being placed in receivership. See “Item 1 –
General" and "How we are Regulated”
.
Item
1B.
Unresolved Staff
Comments
None
Item
2. Properties
At December 31, 2008, we had two
full-service offices
having
closed the Hastings supermarket office as of the close of business on that
date. The main office of the Compa
ny is the main office of the
Bank. The following table sets forth certain information concerning
the main office and each branch office of the Bank at December 31,
2008. The aggregate net book value of the Company's premises and
equipment was $3.4 million at December 31, 2008. See also Note 4 of
the Notes to Consolidated Financial Statements. The office buildings
we own are held substantially free of encumbrances or mortgages. In
the opinion of management, the facilities are adequate and suitable for the
needs of the Company
|
|
Year opened
|
Owned or
leased
|
Lease
expiration
date
|
Net book value
at
December 31,
2008
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Main office:
629 W. State
Street
Hastings, Michigan
49058
|
1998
|
Owned
|
N/A
|
$
2,345
|
|
|
|
|
|
|
|
Branch office:
802 Fourth
Avenue
Lake Odessa, Michigan
48849
|
1977
|
Owned
|
N/A
|
$
18
|
|
|
|
|
|
|
|
Loan production
office:
Cornerstone
Building
Suite 2
407 West Michigan
Avenue
Kalamazoo, Michigan
49007
|
2006
|
Leased
|
5/8/2009
(1)
|
---
|
____________________
(1)
This lease may be terminated by the landlord or us with 90 days written
notice.
No
decision has been made regarding the renewal of this
lease.
Our data processing service provider is
FPS Gold. We maintain depositor and borrower customer files and our
accounting records on an on-line basis, utilizing their online real time
system. The book value of all data processing and computer equipment
utilized by the Bank at December 31, 2008 was $92,000. Management has
a disaster recovery plan in place with respect to the data processing system, as
well as the Bank’s operations as a whole.
Item 3.
Legal Proceedings
From time to time we are involved as
plaintiff or defendant in various legal actions arising in the normal course of
business. We do not anticipate incurring any material legal fees or
other liability as a result of such litigation. In the opinion of
management, the Bank is not a party to any pending claims or lawsuits that are
expected to have a material effect on the Bank’s financial condition or
operations.
Item 4.
Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of
security holders during the quarter ended December 31, 2008.
PART II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters
and Small Business Issuer Purchases of Equity Securities
The information under the heading
“Shareholder Information” in the Company’s 2008 Annual Report to Shareholders,
which is included in Exhibit 13, is incorporated herein by
reference.
The Company made no stock repurchases
during the quarter ended December 31, 2008.
Item
6. Selected Financial Data
The information under the heading
“Selected Consolidated Financial Information” in the Company’s 2008 Annual
Report to Shareholders, which is included in Exhibit 13, is incorporated herein
by reference.
Item
7. Management’s Discussion and Analysis of Financial Condition
and Results of Operation
The information under the heading
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in the Company’s 2008 Annual Report to Shareholders, which is
included in Exhibit 13, is incorporated herein by reference.
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
The information under the heading
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Asset Liability Management” in the Company’s 2008 Annual Report to
Shareholders, which is included in Exhibit 13, is incorporated herein by
reference.
Item
8. Financial Statements and Supplementary Data
The following consolidated financial
statements are in the Company’s 2008 Annual Report to Shareholders, which is
included in Exhibit 13, and are incorporated herein by
reference.
|
|
Page
|
|
Reports of Independent Registered
Public Accounting Firm
|
F-1
|
|
|
|
|
Consolidated Balance
Sheets
|
F-2
|
|
|
|
|
Consolidated Statements of
Operations
|
F-3
|
|
|
|
|
Consolidated Statements of Changes
in Shareholder's Equity
|
F-4
|
|
|
|
|
Consolidated Statements of Cash
Flows
|
F-5
|
|
|
|
|
Notes to Consolidated Financial
Statements
|
F-7
|
|
|
|
Item
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Evaluation of Disclosure Controls and
Procedures
An evaluation of the Company's
disclosure controls and procedures (as defined in Rule13a.15(e) under the
Securities Exchange Act of 1934 (the "Exchange Act")) as of December 31, 2008,
was carried out under the supervision and with the participation of our Chief
Executive Officer, our Chief Financial Officer, and several other members of our
senior management as of the end of the period covered by this
report. Our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures as currently in effect are
effective in ensuring that the information required to be disclosed in the
reports the Company files or submits under the Exchange Act is (i) accumulated
and communicated to our management (including the Chief Executive Officer and
Chief Financial Officer) in a timely manner, and (ii) recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms.
We intend to continually review and
evaluate the design and effectiveness of the Company's disclosure controls and
procedures and to improve the Company's controls and procedures over time and to
correct any deficiencies that we may discover in the future. The goal
is to ensure that senior management has timely access to all material financial
and non.financial information concerning the Company's
business. While we believe the present design of the disclosure
controls and procedures is effective to achieve its goal, future events
affecting its business may cause the Company to modify its disclosure controls
and procedures.
The Company does not expect that its
disclosure controls and procedures will prevent all error and all
fraud. A control procedure, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control procedure are met. Because of the inherent
limitations in all control procedures, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any control procedure also is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time, controls may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control procedure, misstatements due to
error or fraud may occur and not be detected.
Management’s
Report on Internal Control Over Financial Reporting
The management of MainStreet Financial
Corporation is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). The Company’s internal control over financial reporting is
a process designed to provide reasonable assurance to the Company’s management
and board of directors regarding the reliability of financial reporting and the
preparation of the financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of
America.
The Company’s internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America, and that receipts
and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations,
internal controls over financial reporting may not prevent or detect
misstatements. All internal control systems, no matter how well
designed, have inherent limitations, including the possibility of human error
and the circumvention of overriding controls. Accordingly, even
effective internal
control over financial reporting can
provide only reasonable assurance with respect to financial statement
preparation. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Our management assessed the
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2008. In making this assessment, it used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in
Internal
Control-Integrated Framework
. Based on our assessment, we
believe that, as of December 31, 2008, the Company’s internal control over
financial reporting was effective based on those criteria.
This annual report does not include an
attestation of our independent public accounting firm regarding internal
controls over financial reporting. Management’s report was not
subject to attestation by our independent public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the
Company to provide only management’s report in this annual
report.
Change in Internal Control Over
Financial Reporting.
There were no changes in our internal
controls over financial reporting (as defined in Rule 13a.15(f) under the
Exchange Act) that occurred during the quarter ended December 31, 2008, that has
materially effected, or is reasonably likely to materially affect, our internal
control over financial reporting.
Item 9B.
Other Information
None.
Item 10.
Directors, Executive Officers and Corporate Governance
Directors and
Executive Officers
Information concerning the Directors and
Executive Officers of the Company is incorporated herein by reference from the
definitive proxy statement for the annual meeting of shareholders to be held in
May 2009, a copy of which will be filed not later than 120 days after the close
of our fiscal year.
Audit Committee Matters and Audit
Committee Financial Expert
The Board of Directors of the Company
has a standing Audit Committee, which has been established in accordance with
Section 3(a)(58)(A) of the Exchange Act. The members of that
committee are Directors
Carl A. Schoessel, Eric T. Dreisbach,
David L. Jasperse, Gordon F. Fuhr and Mary Lou Hart
all of whom are considered independent
under Nasdaq listing standards. The Board of Directors has determined
that
Carl A.
Schoessel
is an “audit
committee financial expert” as defined in applicable SEC
rules. Additional information concerning the audit committee of the
Company’s Board of Directors is incorporated herein by reference from the
Company’s definitive proxy statement for its Annual Meeting of Shareholders to
be held in May 200
9
, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
Section 16(a)
Compliance
The information concerning compliance
with the reporting requirements of Section 16(a) of the Securities Exchange Act
of 1934 by our directors, officers and ten percent stockholders required by this
item is incorporated
herein by reference from our definitive
proxy statement for our Annual Meeting of Stockholders being held in May 2007, a
copy of which will be filed not later than 120 days after the end of our fiscal
year.
To the Company’s knowledge, based solely
on a review of the copies of such reports furnished to the Company and written
representations that no other reports were required during the fiscal year ended
December 31, 2008, all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10% beneficial owners were complied
with.
Code of Ethics
In 2006, we adopted a Code of Business
Conduct and Ethics based upon the standards set forth under Item 406 of
Regulation S-B of the Securities and Exchange Commission. The Code
applies to our principal executive officer, principal financial officer,
principal accounting officer, and persons performing similar functions, and to
all of our other employees and our directors. A copy of our code of
ethics was included in our form 10-Q for the quarter ended September 31, 2006,
and is available on our internet
website at
www.mainstreetsavingsbank.com.
Nomination
Procedures
There have been no material changes to
the procedures by which shareholders may recommend nominees to the Company’s
Board of Directors.
Item 11.
Executive Compensation
Information concerning executive
compensation is incorporated herein by reference from the definitive proxy
statement for the annual meeting of shareholders to be held in May 2009, a copy
of which will be filed not later than 120 days after the close of the fiscal
year.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Information concerning security
ownership of certain beneficial owners and management is incorporated herein by
reference from the definitive proxy statement for the annual meeting of
shareholders to be held in May 2009, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
The Company has no equity compensation
plans providing for options, warrants or rights.
Item 13.
Certain Relationships and Related Transactions
Information concerning certain
relationships and related transactions and director independence is incorporated
herein by reference from the definitive proxy statement for the annual meeting
of shareholders to be held in May 2009, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
Item 14.
Principal
Account
ing
Fees and
Services
Information concerning principal
accountant fees and services is incorporated herein by reference from the
Company’s definitive proxy statement for its Annual Meeting of Shareholders to
be held in May 200
9
, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
Item 15. Exhibits
(a)(1)
List of Financial
Statements
The following are contained in Item 8 of
this Form 10-K:
|
Report of Independent Registered
Public Accounting Firm
|
|
Consolidated Balance Sheets at
December 31, 200
8
and 200
7
|
|
Consolidated Statements of Income
for the Years Ended December 31, 200
8
and 200
7
|
|
Consolidated Statements of Equity
for the Years Ended December 31, 200
8
and 200
7
|
|
Consolidated Statements of Cash
Flows for the Years Ended December 31, 200
8
and 200
7
|
|
Notes to Consolidated Financial
Statements
|
(a)(2) List of Financial Statement
Schedules:
All financial statement schedules have
been omitted as the information is not required under the related instructions
or is not applicable.
(a)(3) List of
Exhibits:
|
Exhibit Number
from Item 601
of
Regulation
S-B
|
Document
|
Reference to
Prior Filing
or Exhibit
Number
If Attached
Hereto
|
|
3(i)
|
Charter of MainStreet Financial
Corporation
|
*
|
|
3(ii)
|
Bylaws of MainStreet Financial
Corporation
|
*
|
|
|
|
|
|
4
|
Stock Certificate of MainStreet
Financial Corporation
|
*
|
|
|
|
|
|
10
|
Material
contracts:
|
|
|
|
10.1 Loan Agreement
with Independent Bank
|
*
|
|
|
10.4 Employee Stock
Ownership Plan
|
*
|
|
|
10.6 Deferred
Compensation Plan for Directors and Officers
|
*
|
|
|
10.8 Current Director
Fee Arrangements
|
10.8
|
|
|
10.9 Forbearance Letter
from Independent Bank
for Holding
Company
Loan dated April 1, 2009
|
10.9
|
|
|
10.10 Forbearance Letter from
Independent Bank for ESOP Loan
dated
April 1, 2009
|
10.10
|
|
|
|
|
|
13
|
2008 Annual Report to
Shareholders
|
13
|
|
|
|
|
|
14
|
Code of Business Conduct and
Ethics
|
**
|
|
|
|
|
|
21
|
Subsidiaries of the
Company
|
*
|
|
|
|
|
|
24
|
Power of
Attorney
|
***
|
|
|
|
|
|
31
|
Rule 13a-14(a)/15d-14(a)
Certifications
|
31
|
|
|
|
|
|
32
|
Section 1350
Certifications
|
32
|
________________________________
|
*
|
Filed as an exhibit to the
Company’s Registration Statement on Form SB-2 (File No. 333-137523),
declared effective by the Securities and Exchange Commission on November
13, 2006.
|
|
**
|
Filed as an exhibit to the
Issuer's Quarterly Report for the Quarter Ended September 30, 2006 on Form
10-QSB, filed with the Securities and Exchange Commission on December 21,
2006.
|
|
***
|
On signature
page.
|
(b) Exhibits
- Included, see list
in (a)(3).
(c) Financial
Statements Schedules
-
None
SIGNATURES
Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
MAINSTREET FINANCIAL
CORPORATION
|
|
|
|
|
|
|
|
Date
:
April 2,
2009
|
By:
|
David L. Hatfield, President
and
Chief Executive
Officer
(Duly Authorized
Representative)
|
KNOW ALL MEN BY THESE PRESENTS, that
each person whose signature appears below constitutes and appoints David L.
Hatfield his true and lawful attorney-in-fact and agent, with full power of
substitution and re-substitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and all other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all said
attorney-in-fact and agent or his substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
/s/ David L.
Hatfield
David L.
Hatfield
President, Chief Executive
Officer
and
Director
(Principal Executive
Officer)
|
|
/s/ Gordon F.
Fuhr
Gordon F. Fuhr
Chairman of the Board and
Director
|
|
Date: April 2,
2009
|
|
Date: April 2,
2009
|
|
/s/ Eric T.
Dreisbach
Eric T.
Dreisbach
Director
|
|
/s/ Mary Lou
Hart
Mary Lou Hart
Director
|
|
Date: April 2,
2009
|
|
Date: April 2,
2009
|
|
/s/ David L.
Jasperse
David L.
Jasperse
Director
|
|
/s/ James R.
Toburen
James R.
Toburen
Senior Vice President, Treasurer,
Director
and Chief Financial
Officer
(Principal Financial and
Accounting Officer)
|
|
Date: April 2,
2009
|
|
Date: April 2,
2009
|
|
/s/ Carl A.
Schoessel
Carl A.
Schoessel
Director
|
|
|
|
|
|
|
|
Date: April 2,
2009
|
|
|
Index to Exhibits
|
10.8
|
Current Director Fee
Arrangements
|
|
10.9
|
Forbearance Letter from
Independent Bank for Holding Company Loan
|
|
10.10
|
Forbearance Letter from
Independent Bank for ESOP Loan
|
|
13
|
Annual Report to Shareholders for
the Year Ended December 31, 2008
|
|
31.1
|
Rule 13a-14(a)/15d-14(a)
Certifications of Principal Executive Officer
|
|
31.2
|
Rule 13a-14(a)/15d-14(a)
Certifications of Principal Financial officer
|
|
32
|
Section 1350
Certifications
|
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