UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-8622
For the Period Ended September 30, 1996
MAINSTREET BANKGROUP INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Virginia 54-1046817
- ------------------------------- --------------------
(State or Other Jurisdiction of I.R.S. Employer
Incorporation of Organization) Identification No.)
P. O. Box 4831 Martinsville, Virginia 24115
- -----------------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
(540) 666-6724
-------------------
(Registrant's Telephone Number, Including Area Code)
N/A
- ---------------------------------------------------------------
Former Name, Former Address, and Formal Fiscal Year, if Changed
Since Last Report
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 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 the number of shares outstanding at each of the issuer's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT SEPTEMBER 30, 1996
- ---------------------------- ---------------------------------
COMMON STOCK $5.00 PAR VALUE 10,079,148
<PAGE>
MAINSTREET BANKGROUP INCORPORATED
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -- September 30,
1996 and December 31, 1995
Consolidated Statements of Income -- Three Months
and Nine Months Ended September 30, 1996 and 1995
Consolidated Statements of Cash Flow -- Nine Months
Ended September 30, 1996 and 1995
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6(b). Reports on Form 8-K
<PAGE>
<TABLE>
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Unaudited
(In 000's)
<CAPTION>
<S> <C> <C>
September 30 December 31
ASSETS 1996 1995
---- ----
Cash and Due From Banks $ 30,435 $ 28,180
Interest-Earning Deposits in Domestic Banks 494 875
Federal Funds Sold 3,315 5,960
Mortgage Loans Held for Sale 975 1,780
Securities Available for Sale (Approximate Cost
of $298,927 in September, 1996, and $209,652
in December, 1995) 296,805 210,624
Securities Held to Maturity (Approximate Market
Values of $92,698 in September, 1996 and
$102,484 in December, 1995)
Taxable 55,835 61,184
Nontaxable 35,540 36,808
-------- --------
91,375 97,992
Loans, Net of Unearned Income 684,831 604,494
Less: Allowance for Loan Losses ( 9,086) ( 8,298)
-------- --------
Loans, Net 675,745 596,196
Bank Premises and Equipment, Net 10,911 11,226
Other Real Estate Owned 547 1,583
Other Assets 17,980 16,067
--------- --------
TOTAL ASSETS $1,128,582 $970,483
LIABILITIES
Deposits:
Demand Deposits (Noninterest-Bearing) $ 107,881 $101,506
Interest Checking Accounts 77,955 84,625
Savings Deposits 117,234 125,342
Money Market Investment Accounts 60,130 61,852
Time Deposits
Certificates of Deposit $100,000 and Over 77,773 71,413
Other 343,639 315,088
--------- --------
TOTAL DEPOSITS 784,612 759,826
Short -Term Debt 167,189 111,736
FHLB Advances, Callable 2/97 45,000 ---
Other Long-Term FHLB Advances 25,857 929
Accrued Interest Payable 3,789 3,266
Other Liabilities 6,403 4,264
--------- --------
TOTAL LIABILITIES 1,032,850 880,021
--------- --------
SHAREHOLDERS' EQUITY
Preferred Stock, (Par Value $5 Per Share,
Authorized 1,000,000 Shares; None Outstanding) --- ---
Common Stock, (Par Value $5 Per Share,
Authorized 20,000,000 Shares; Issued and
Outstanding 10,079,148 Shares in September,
1996 and 10,075,422 in December, 1995) 50,396 50,375
Capital in Excess of Par 8,206 7,190
Retained Earnings 39,536 33,493
Unearned Compensation ( 365) ---
Unrealized Gains (Losses) on Securities Net ( 2,041) ( 596)
--------- --------
TOTAL SHAREHOLDERS' EQUITY 95,732 90,462
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,128,582 $970,483
========== ========
</TABLE>
<PAGE>
<TABLE>
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In 000's Except Per Share Data) Unaudited
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 30 Sept. 30 Sept.30 Sept.30
INTEREST INCOME 1996 1995 1996 1995
---- ---- ---- ----
Interest and Fees on Loans:
Taxable $16,086 $13,978 $ 45,810 $ 39,946
Nontaxable 21 41 73 132
Interest on Mortgage Loans
Held for Sale 36 39 134 87
Interest and Dividends on
Securities Available for Sale 4,215 2,769 10,882 7,137
Interest and Dividends on
Securities Held to Maturity
Taxable 1,053 1,675 3,312 5,089
Nontaxable 494 596 1,486 1,850
Other Interest Income 106 109 487 295
------- ------- --------- --------
Total Interest Income 22,011 19,207 62,184 54,536
INTEREST EXPENSE
Deposits 7,535 7,785 22,410 22,445
Short-Term Borrowings 1,653 1,078 3,613 1,741
Long-Term Debt 910 20 2,246 58
7% Convertible Subordinated
Debenture --- 156 --- 468
------- ------- -------- --------
Total Interest Expense 10,098 9,039 28,269 24,712
------- ------- -------- --------
Net Interest Income 11,913 10,168 33,915 29,824
Provisions for Loan Losses 866 328 2,199 986
------- ------- -------- --------
Net Interest Income After
Provision for Loan Losses 11,047 9,840 31,716 28,838
NONINTEREST INCOME
Service Charges, Fees
and Other 1,740 1,412 5,193 4,234
Trust Department Income 675 641 2,118 1,708
Securities Gains (Losses), Net ( 1) 19 638 ---
-------- ------- -------- --------
2,414 2,072 7,949 5,942
NONINTEREST EXPENSE
Salaries 3,219 3,137 9,340 9,175
Employee Benefits 1,288 1,066 3,679 3,412
Net Occupancy Expense 358 332 1,080 1,030
Equipment 836 805 2,553 2,346
FDIC Assessment 6 ( 35) 14 880
Stationery and Supplies 179 189 587 575
Advertising 121 85 442 314
Other 2,180 2,053 6,145 5,238
------- ------- -------- --------
8,187 7,632 23,804 22,970
------- ------- -------- --------
Income Before Income Taxes 5,274 4,280 15,861 11,810
Income Tax Expense 1,741 1,188 4,994 3,369
------- -------- -------- --------
NET INCOME $ 3,533 $ 3,092 $ 10,867 $ 8,441
======= ======== ======== ========
Per Share
Primary:
NET INCOME $ .35 $ .34 1.07 .92
======= ======= ======== ========
Dividends Per Share $ .137 $ .10 .37 .29
======= ======= ======== ========
Average Shares Outstanding 10,150 9,220 10,142 9,148
======= ======= ======== ========
Fully Diluted:
NET INCOME $ .35 $ .32 1.07 .86
======= ======= ======== ========
Average Shares Outstanding 10,150 10,094 10,142 10,084
======= ======= ======== ========
</TABLE>
<PAGE>
<TABLE>
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In 000's)
<CAPTION>
<S> <C> <C>
Nine Months Ended
-----------------
September September
Cash Flows From Operating Activities: 1996 1995
---- ----
Net Income $ 10,867 $ 8,441
Adjustments to Reconcile Net Income to
Net Cash Provided (Used)by Operating
Activities:
Provision for Loan Losses 2,199 986
Depreciation and Amortization 1,640 1,469
Amortization of Securities Premiums
and Discounts, Net (20) (220)
Provision for Deferred Income Taxes (332) 25
Unearned Compensation (365) ---
Gain on Sale of Securities, Net (638) ---
Amortization of Intangibles 170 201
Mortgage Loan Originations Held for
Sale (11,840) (5,928)
Mortgage Loans Sold 12,645 4,901
Changes in Other Assets and Other
Liabilities:
Other Assets (959) 3,368
Accrued Interest 523 1,114
Other Liabilities 2,139 630
------- -------
Net Cash Provided by Operating
Activities: 16,029 14,987
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net Increase in Federal Funds Sold 2,645 (2,345)
(Increase) Decrease in Interest-
Earning Deposits 381 (882)
Purchases of Securities Available for
Sale (204,214) (67,891)
Purchases of Securities Held to
Maturity (14,602) (5,970)
Proceeds from Sale of Securities
Available for Sale 86,790 2,378
Proceeds from Calls and Maturiies of
Securities Available for Sale 28,613 20,171
Proceeds from Calls and Maturities of
Securities Held to Maturity 22,270 14,076
Net Increase in Loans (81,748) (49,662)
Purchases of Bank Premises and
Equipment (1,325) (1,065)
Net Decrease in Other Real Estate 1,036 684
------- -------
Net Cash Used in Investing Activities (160,154) (90,506)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 24,786 10,538
Net Increase (Decrease) in Short-Term
Debt 55,453 66,475
Net Increase in FHLB Advances,
Callable 2/97 45,000 ---
Net Increase in Other Long-Term FHLB
Advances 24,928 1,000
Cash Dividends (3,723) (2,669)
Cash in lieu of Common Stock at
Acquisition (999) ---
Proceeds from Issuance of Common Stock 935 392
------- -------
Net Cash Provided by Financing
Activities 146,380 75,736
------- -------
Net Increase in Cash and Due From Banks 2,255 217
Cash and Due From Banks at Beginning
of Year 28,180 26,785
------- -------
Cash and Due From Banks at End of Year $ 30,435 $ 27,002
======= =======
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements of MainStreet
BankGroup Incorporated and its subsidiaries conform to generally
accepted accounting principles and to general banking industry
practices. The interim period consolidated financial statements
are unaudited; however, in the opinion of management, all
adjustments of a normal and recurring nature which are necessary
for a fair presentation of the consolidated financial statements
herein have been included. The financial statements herein
should be read in conjunction with the notes to financial
statements included in the corporation's 1995 Form 10-K to the
SEC.
2. Cash Equivalents
For purposes of the Statements of Cash Flow, BankGroup considers
all Cash and Due From Bank Accounts to be cash equivalents.
3. Securities Available for Sale
The following sets forth the composition of securities available
for sale, which are carried at approximate market value at
September 30, 1996:
<TABLE>
<S> <C> <C> <C> <C>
Gross Gross Approx.
Carrying Unrealized Unrealized Market
Value Gains Losses Value
----- ----- ------ ------
U. S. Treasury Securities $ 5,475 $ 54 $ (2) $ 5,527
Obligations of U.S.
Government Agencies 32,549 25 (689) 31,885
Mortgage-Backed Securities 155,549 533 (635) 155,447
Collateralized Mortgage
Obligations and REMICs 76,772 81 (1,983) 74,870
Corporate Bonds 10,696 281 (133) 10,844
Other Securities 11,677 118 --- 11,795
Obligations of States and
Political Subdivisions 6,209 232 (4) 6,437
-------- ------- --------- --------
Total Securities Available for Sale $298,927 $ 1,324 $ (3,446) $296,805
======== ======= ========= ========
</TABLE>
At September 30, 1996 net unrealized losses of $2.0 million, net
of tax, are reflected in shareholders' equity.
Gross gains and losses of $ 830,000 and $ 239,000, respectively,
were realized on sales, calls and maturities of securities
available for sale.
4. Securities Held to Maturity
The carrying and approximate market values and gross unrealized
gains and losses of securities held to maturity are as follows at
September 30, 1996:
<TABLE>
<S> <C> <C> <C> <C>
Gross Gross Approx.
Carrying Unrealized Unrealized Market
Value Gains Losses Value
----- ----- ------ -------
U. S. Treasury Securities $ 4,977 $ 24 $ --- $ 5,001
Obligations of U.S.
Government Agencies 19,323 1,226 (314) 20,235
Mortgage-Backed Securities 28,564 282 (456) 28,390
Obligations of State and
Political Subdivisions 38,511 779 (218) 39,072
-------- ------- -------- -------
Total Securities Held to Maturity $ 91,375 $ 2,311 $ (988) $ 92,698
======== ======= ======== ========
</TABLE>
At December 31, 1994, BankGroup transferred securities available
for sale with an approximate market value of $72.5 million and a
carrying value of $76.5 million to securities held to maturity.
The unrealized loss of approximately $4,038,000, included as a
separate component of shareholders' equity, is being amortized
over the remaining life of the securities. This separate
component of shareholders' equity at September 30, 1996, net of
the related tax effect, was $.7 million.
Gross gains and losses of $ 60,000 and $ 13,000, respectively,
were realized on calls and maturities of securities held to
maturity.
5. Loan Portfolio
Major classifications of loans at September 30, 1996 and December
31, 1995 are summarized below:
(In 000's)
September 1996 December 1995
-------------- -------------
Commercial $297,883 $268,055
Real Estate 188,288 165,261
Consumer 212,557 183,227
-------- --------
Total Loans 698,728 616,543
Less: Unearned Income and
Deferred Fees (13,897) (12,049)
-------- --------
Loans, Net of Unearned Income
and Deferred Fees 684,831 604,494
Less: Allowance for Loan Losses (9,086) (8,298)
-------- --------
Loans, Net $675,745 $596,196
======== ========
Interest on loans is computed by methods which generally result
in level rates of return on principal amounts outstanding. Loans
are placed on nonaccrual status when it becomes probable that the
borrower will have difficulty meeting either interest or
principal payments and the loan is not in the process of
collection and is not well collateralized. For loans placed on
nonaccrual, all interest accrued in the current fiscal year is
reversed against income while prior year accrued interest is
charged against the allowance for loan losses. For payments on
nonaccrual loans and impaired loans, amounts are applied first as
a recovery of principal and then as interest under the cost
recovery method.
BankGroup considers a loan to be impaired when, based upon
current information and events, it believes it is probable that
BankGroup will be unable to collect all amounts due according to
the contractual terms of the loan agreement. BankGroup's
impaired loans within the scope of SFAS 114 include nonaccrual
loans (excluding those collectively reviewed for impairment),
troubled debt restructurings, and certain other nonperforming
loans. For collateral dependent loans, BankGroup bases the
measurement of these impaired loans on the fair value of the
loan's collateral properties. For all other loans, BankGroup
bases the measurement of these impaired loans on the more readily
determinable of the present value of expected future cash flows
discounted at the loan's effective interest rate or the
observable market price. Impairment losses are recognized
through an increase in the allowance for loan losses and a
corresponding charge to the provision for loan losses.
Adjustments to impairment losses due to changes in the fair value
of impaired loans' collateral properties are included in the
provision for loan losses. When an impaired loan is either sold,
transferred to other real estate owned or written down, any
related valuation allowance is charged off against the allowance
for loan losses.
An allowance for loan losses is maintained in order to provide
for losses in collection of loans that can be currently
estimated. The level of the allowance for loan losses is based
upon the quality of the loan portfolios as determined by
management after consideration of historical loan loss
experience, diversification as to the type of loans in the
portfolios, the amount of collateralized as compared to
uncollateralized loans, banking industry standards and averages,
and general economic conditions. In preparing the consolidated
financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated balance sheet and
income and expense for the period. Actual results could differ
significantly from these estimates. In connection with the
determination of the allowance for loan losses and the valuation
of real estate owned, management obtains independent appraisals
for significant properties. Management believes that the
allowance for loan losses and the valuation of real estate owned
are adequate. While management uses available information to
recognize losses on loans and real estate owned, future additions
to the allowance for loan losses and additional write-downs in
the valuation of real estate owned may be necessary based on
changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process,
periodically review BankGroup's allowance for loan losses and
valuation of real estate owned. The following table shows the
changes in the allowance for loan losses arising from loans
charged off and recoveries on loans previously charged off by
loan category; and additions to the allowance which have been
charged to operating expenses:
(In 000's)
<TABLE>
<S> <C> <C>
September 30 September 30
1996 1995
---- ----
Balance at December 31, 1995 and
December 1994 $ 8,298 $ 8,410
Charge-offs:
Commercial, Financial and Agricultural 921 556
Real Estate - Mortgage 21 45
Installment 1,158 561
-------- --------
2,100 1,162
Recoveries:
Commercial, Financial and Agricultural 477 149
Real Estate - Mortgage 1 4
Installment 248 165
-------- --------
726 318
Other 37 ---
Net Charge-offs 1,411 844
Provision for Loan Losses 2,199 986
-------- --------
Balance at September 30, 1996 and
September 30, 1995 $ 9,086 $ 8,552
======== ========
</TABLE>
Nonaccrual loans and loans 90-days past due or more as to
interest or principal payments are considered by BankGroup to be
nonperforming loans. Nonperforming loans were .63% of loans, net
of unearned income at September 30, 1996.
The following table presents aggregate loan amounts for
nonaccrual and 90-day due loans as of September 30, 1996 and
1995:
1996 1995
---- ----
Nonaccrual Loans $ 2,655 $ 3,742
Loans Past Due 90 Days or More 1,663 1,682
-------- --------
Total Nonperforming Loans 4,318 5,424
-------- --------
Other Real Estate Owned 547 1,768
Other Repossessed Assets 61 120
-------- --------
Total Foreclosed/Repossessed Assets 608 1,888
-------- --------
Total Nonperforming Loans and
Foreclosed/Repossessed Assets $ 4,926 $ 7,312
======== ========
The effect of nonaccrual loans on interest income for the nine
months ended September 30, 1996 and 1995 was as follows:
1996 1995
---- ----
Gross Amount of Interest That Would Have
Been Recorded at Original Rate $ 202 $ 251
Interest That Was Reflected in Income 102 10
-------- --------
Net Impact on Interest Income $ 100 $ 241
======== ========
At September 30, 1996, the recorded investment in loans which
have been identified by BankGroup as impaired loans in accordance
with Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of A Loan", totaled $2.3
million. The total allowance for loan losses related to such
loans was $.5 milion.
6. Contingencies and Other Matters
As reported in prior forms, MainStreet BankGroup has entered into
an agreement to acquire Hanover Bank, Mechanicsville, Virginia
using the pooling of interests method of accounting. This
transaction should close within the fourth quarter. Hanover Bank
reported total assets at quarter-end of $106.8 million. The
bank's year-to-date net income at September 30, 1996 was $989
thousand. These earnings produced a return on assets of 1.33%
and a return on equity of 15.94%.
BankGroup and its subsidiaries, in the normal course of business,
are involved in various legal actions and proceedings. It is the
opinion of management that any liabilities, except as disclosed
above, arising from these matters and not covered by insurance,
would not have a material effect on BankGroup's financial
position.
7. Accounting for Stock Based Compensation
On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, Accounting for Stock Based
Compensation. As permitted by SFAS 123, the Company has chosen
to apply APB Opinion 25 and related Interpretations in accounting
for its stock based compensation plans. Accordingly, no
compensation cost has been recognized for its fixed stock plans.
Compensation cost for the Company's stock based compensation
plans based on the fair value at the grant dates for awards under
those plans consistent with the method of SFAS 123 was determined
to be immaterial on an income or per share disclosure basis.
8. Acquisition of the First National Bank of Clifton Forge
The closing of the acquisition of First National Bank of Clifton
Forge by MainStreet BankGroup Incorporated was completed on
September 27, 1996 in a transaction accounted for as a pooling of
interests. All consolidated data as of September 30, 1996
include this acquisition. All prior period data has been
restated to reflect the acquisition. The First National Bank of
Clifton Forge had total assets of $100.3 million at September 30,
1996. Net income year-to-date September 30, 1996 for Clifton
Forge was $988 thousand. These earnings for the bank produced an
ROA and ROE of 1.57% and 8.90%, respectively. MainStreet
BankGroup Incorporated, excluding Clifton Forge, had total assets
of $1.0 billion at September 30, 1996. Net income, excluding
Clifton Forge, was $9.9 million which produced an ROA and ROE of
1.41% and 16.50%, respectively.
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations
Overview
MainStreet BankGroup Incorporated reported record year-to-date
earnings at September 30, 1996 of $10.9 million which was an
increase of $28.7% over year-to-date earnings at September 30,
1995 of $8.4 million. The 1996 and 1995 incomes equated to $1.07
and $.86 per fully diluted shares, respectively. The 1996 year-
to date income produced a return on assets and a return on equity
of 1.42% and 15.31%, respectively. The return on assets and
return on equity for year-to-date 1995 was 1.26% and 15.62%,
respectively. (The Financial data discussed herein includes, or
is restated, for the acquisiton of The First National Bank of
Clifton Forge on September 27, 1996. See Note 8.)
Net income for the three months ended September 30, 1996 was $3.5
million compared to $3.1 million at September 30, 1995, an
increase of 14.3%. These third quarter earnings for 1996
produced a return on assets of 1.30% and a return on equity of
14.53%. The return on assets and return on equity for the same
period in 1995 were 1.31% and 16.00%, respectively.
Net Interest Income
Net interest income at September 30, 1996 was $33.9 million
compared to $29.8 million at September 30, 1995, an increase of
13.7%. The increase in net interest income was principally due
to rising loan demand. Loan income increased $5.8 million, or
14.5% over 1995 dollars. Average loans, net of unearned income
at September 30, 1996 were $641.8 million, an increase of $86.7
million, or 15.6% over the $555.1 million in average volume at
September 30, 1995. Also adding to interest income are the
leveraging transactions. At September 30, 1996 approximately $80
million in repurchase agreements were solely for the purpose of
leveraging the balance sheet to improve equity. The net
interest margin was 4.75% at September 30, 1996 compared to 4.85%
at September 30, 1995. The decline in the margin was partially
due to the shift in deposits away from savings, interest
checking, and money market accounts into time deposits. Yields
on interest earning assets decreased more than costs on interest
bearing deposits and borrowings.
Net interest income for the three months ended September 30, 1996
was $11.9 million compared to $10.2 million for the third quarter
of 1995, producing an increase of 17.2%. The net interest margin
for the third quarter of 1996 and 1995 was 4.65% and 4.62%,
respectively. Average interest-earning assets for the three
months ended September 30, 1996 compared to September 30, 1995
grew $140.9 million, or 15.9%.
Provision for Loan Losses
The provision for loan losses year-to-date September 30, 1996 was
$2.2 million compared to $1.0 million for the same period in
1995. This rise was caused by the increased loan volume. This
expense for the third quarter of 1996 was $.9 million compared to
$.3 million in the third quarter of 1995.
Noninterest Income
Total noninterest income, excluding securities gains, at
September 30, 1996 increased $1.4 million, or 23.0%, over
noninterest income at September 30, 1995. Trust income was $2.1
million in 1996, an increase of 24.0% over the $1.7 million in
1995. Service charges, fees, and other income was $5.2 million
in 1996 compared to $4.2 million in 1995, an increase of 22.6%.
This was caused by several components. Gains on sale of other
real estate at September 30, 1996 were $342 thousand compared to
losses of $28 thousand at September 30, 1995. Service charges on
deposit accounts increased $181 thousand over the prior year.
Discount income on accounts receivable increased to $211 thousand
at September 30, 1996 compared to $66 thousand the prior year.
Also adding to the increase were credit card income and check
book sales.
Noninterest income, excluding securities gains, for the three
months ended September 30, 1996 was $2.4 million, an increase of
$.4 million, or 17.6% over the three months ended September 30,
1995. This increase was caused primarily by the same increases
as the year-to-date income.
Securities Gains
Net securities gains were $638 thousand at the end of the third
quarter of 1996 compared to no net gains or losses at the end of
the third quarter of 1995. For the three months ended September
30, 1996 losses on securities were $1 thousand compared to gains
of $19 thousand for the same period in 1995.
Noninterest Expense
Total noninterest expense at September 30, 1996 was $23.8
million, up $.8 million from the $23.0 million at September 30,
1995. The significant deviations were the $.9 million increase
in other noninterest expense and the $866 thousand decrease in
FDIC insurance premiums. The increase in the other noninterest
expense category was caused by fees associated with the
acquisitions of the First National Bank of Clifton Forge and
Hanover Bank along with new marketing initiatives and
professional fees associated with the new defined benefit plan
and insurance plans.
Total noninterest expense for the three months ended September
30, 1996 was $8.2 million, up $.6 million, or 7.3% over the same
period in 1995. The largest category of increase is employee
benefits of $222 thousand. This is due to compensation expense
recorded on insurance policies effective in 1996 and the latter
part of 1995.
Financial Condition
Total assets at September 30, 1996 were $1.1 billion, up $158.1
million, or 16.3% from December 31, 1995.
Securities available for sale at September 30, 1996 were $296.8
million compared to $210.6 million at December 31, 1995. This
increase of $86.2 million can be contributed to leveraging
transactions to improve equity. Securities held to maturity were
down $6.6 million from year-end due to maturities and calls of
securities.
Loans, net of unearned income, were $684.8 million at the end of
the third quarter compared to $604.5 million at year-end December
31, 1995. This translates into an $80.3 million increase in loan
demand.
Other real estate owned declined $1.1 million from December 31,
1995 to $.5 million at September 30, 1996.
At September 30, 1996, deposits increased $24.8 million from year-
end 1995. Of this amount demand deposits increased $6.4 million.
Time deposits increased $34.9 million which were offset by a
decline of $6.7 million in interest checking accounts; $8.1
million in savings accounts; and $1.7 million in money market
accounts. Demand deposits have grown which has helped our
liquidity while at the same time we have seen the shift in
deposits to higher interest-bearing deposits which have
contributed to the decline in the net interest margin.
Short-term debt at September 30, 1996 was $167.2 million compared
to $111.7 million at December 31, 1995, an increase of $55.5
million, or 49.6%. The components of the short-term debt at
quarter-end were $103.3 million of repurchase agreements; $27.4
million in FHLB borrowings; $15.3 million of federal funds
purchased; $11.2 million in corporate cash management accounts;
and $10.0 million of TT&L notes. The components of the short-
term debt at year-end 1995 were $37.1 million in repurchase
agreements; $32.4 million in FHLB borrowings; $31.3 million in
federal funds purchased; $10.8 million in corporate cash
management accounts; and $.1 million in TT&L notes. The largest
increase was in the repurchase agreements which have been used to
fund loan growth and to leverage the balance sheet.
Long-term debt was $70.9 million at September 30, 1996 compared
to $.9 million December 31, 1995. The long-term debt was FHLB
borrowings. Of the amount at quarter end $45.0 million is
callable in February 1997. These borrowings have also been used
to fund loan growth and to leverage the balance sheet.
Asset Quality
Nonperforming loans at the end of September 30, 1996 totaled $4.3
million compared to $5.4 million at December 31, 1995. The ratio
of nonperforming loans to loans, net of unearned income, improved
to .63% at September 30, 1996 compared to .90% at year-end 1995.
Of the September 30, 1996 nonperforming loans, $2.7 million
consisted of nonaccrual loans compared to $3.4 million at
December 31, 1995. The ratio of the allowance for loan loss
reserves to nonperforming loans was 210.42% and 153.13% at
September 30, 1996 and December 31, 1995, respectively. The net
charge-off ratio at September 30, 1996 was .29% of average loans,
net of unearned income, compared to .25% at December 31, 1995.
Shareholders' Equity
Total shareholders' equity at September 30, 1996 was $95.7
million compared to $90.5 million at December 31, 1995. At
September 30, 1996, the leverage and total risk-based capital
ratios were 8.61% and 15.57%, respectively. This compares to the
same ratios of 8.49% and 16.33% at December 31, 1995. Our
capital position remains strong with ratios substantially above
regulatory prescribed minimums.
Financial reporting in accordance with Statement of Financial
Accounting Standards (SFAS) No. 115 requires an adjustment to
shareholders' equity for net unrealized gains/losses in the
available for sale securities portfolio. This unrealized loss,
net of tax, at September 30, 1996 was $2.0 million compared to
$.6 million at year-end 1995.
Liquidity
While the actual loan-to-deposit ratio increased to 86.1% from
78.4% at year-end 1995, liquidity remains adequate. Management
believes the shifting of the deposit mix to time deposits should
ultimately provide a greater level of stability in overall
deposits. Demand deposits at September 30, 1996 were $107.9
million, an increase of $6.4 million from year-end 1995. The
large liability dependency ratio has increased to 28.3% at
September 30, 1996 from 19.58% at December 31, 1995. This was
due to rising loan demand increasing over deposit growth funded
by borrowed funds.
Contingencies and Other Matters
This discussion can be found on page 9, Note 6, of this report.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required by Part II, Item 1, of the Form 10-Q
appears on page 9 of Part I, Item 1, Note 6, of this report and
is herein incorporated by reference.
Item 6(b). Reports on Form 8-K
Form 8-K dated September 27, 1996, regarding the Registrant's
consummation of the acquisition of The First National Bank of
Clifton Forge, Clifton Forge, Virginia.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereof duly authorized.
(Registrant) MAINSTREET BANKGROUP
INCORPORATED
Date November 12, 1996 /S/ JAMES E. ADAMS
-----------------------------
James E. Adams
Chief Financial Officer/
Group Executive/Treasurer
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