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 0-862 For the Period Ended June 30, 1997
MAINSTREET BANKGROUP INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Virginia 54-046817
- -------------------------- ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or 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 JULY 31,1997
- -----------------------------------------------------------------
COMMON STOCK $5.00 PAR VALUE 11,396,976
- -----------------------------------------------------------------
MAINSTREET BANKGROUP INCORPORATED
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -- June 30, 1997 and
December 31, 1996
Consolidated Statements of Income -- Six Months and
Three Months Ended June 30, 1997 and 1996
Consolidated Statements of Cash Flow -- Six Months
Ended June 30, 1997 and 1996
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 EXCEPT SHARE DATA)
<CAPTION>
<S> <C> <C>
ASSETS JUNE 30 DECEMBER 31
1997 1996
---------- ----------
Cash and Due From Banks $ 38,424 $ 37,972
Interest-Earning Deposits in Domestic Banks 507 518
Mortgage Loans Held for Sale 2,339 742
Securities Available for Sale (Amortized
Cost of $454,252 in June 30, 1997, and $333,770
in December, 1996) 456,889 335,023
Securities Held to Maturity (Approximate Market
Values of $84,136 in June 30, 1997 and $92,709
in December, 1996)
Taxable 47,100 52,314
Nontaxable 35,254 38,205
---------- ----------
82,354 90,519
Loans, Net of Unearned Income 810,216 784,367
Less: Allowance for Loan Losses (10,749) (10,195)
---------- ----------
Loans, Net 799,467 774,172
Bank Premises and Equipment, Net 15,326 14,932
Other Real Estate Owned 798 905
Other Assets 35,240 34,054
---------- ----------
TOTAL ASSETS $1,431,344 $1,288,837
========== ==========
LIABILITIES
Deposits:
Demand Deposits (Noninterest-Bearing) $ 128,595 $ 120,989
Interest Checking Accounts 88,710 99,834
Savings Deposits 116,094 121,336
Money Market Investment Accounts 79,237 81,946
Time Deposits
Certificates of Deposit $100,000 and Over 105,640 90,189
Other 396,124 372,225
---------- ----------
Total Deposits 914,400 886,519
Short -Term Debt 317,167 213,799
FHLB Advances, Callable 2/97 --- 45,000
Long-Term Debt 73,284 26,029
Accrued Interest Payable 4,815 4,002
Other Liabilities 6,049 5,012
---------- ----------
TOTAL LIABILITIES 1,315,715 1,180,361
---------- ----------
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 11,396,576
Shares in June, 1997 and 11,342,248 in December, 1996) 56,983 56,711
Capital in Excess of Par 6,379 5,799
Retained Earnings 51,362 46,115
Unearned Compensation (256) (338)
Unrealized Gains on Securities, Net of Tax 1,161 189
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 115,629 108,476
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,431,344 $1,288,837
========== ==========
</TABLE>
<PAGE>
<TABLE>
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN 000's EXCEPT PER SHARE DATA)
UNAUDITED
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ -----------------
JUNE 30 JUNE 30 JUNE 30 JUNE 30
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans:
Taxable $18,845 $16,816 $37,125 $33,086
Nontaxable 19 22 51 52
Interest on Mortgage Loans Held for Sale 51 40 84 98
Interest and Dividends on Securities
Available for Sale 7,386 3,532 12,808 6,642
Interest and Dividends on Securities Held
to Maturity
Taxable 891 1,276 1,817 2,590
Nontaxable 479 560 976 1,126
Other Interest Income 7 230 20 478
------- -------- -------- -------
Total Interest Income 27,678 22,476 52,881 44,072
INTEREST EXPENSE
Deposits 8,967 8,325 17,522 16,628
Short-Term Borrowings 4,365 965 7,431 1,963
Long-Term Debt 730 900 1,657 1,336
------- -------- -------- -------
Total Interest Expense 14,062 10,190 26,610 19,927
------- -------- -------- -------
Net Interest Income 13,616 12,286 26,271 24,145
Provisions for Loan Losses 959 555 1,843 1,423
------- -------- ------- -------
Net Interest Income After Provision
for Loan Losses 12,657 11,731 24,428 22,722
NONINTEREST INCOME
Service Charges, Fees and Other 2,265 1,670 4,335 3,621
Trust Income 807 706 1,613 1,443
Securities Gains, Net 3 421 879 639
------- -------- ------- -------
3,075 2,797 6,827 5,703
NONINTEREST EXPENSE
Salaries 3,773 3,330 7,523 6,537
Employee Benefits 1,309 1,140 2,839 2,397
Net Occupancy Expense 423 405 884 830
Equipment 880 922 1,752 1,885
FDIC Assessment 28 7 52 9
Stationery and Supplies 161 218 393 454
Advertising 139 198 342 340
Other 2,433 2,341 5,209 4,455
------- -------- ------- -------
9,146 8,561 18,994 16,907
------- -------- ------- ------
Income Before Income Taxes 6,586 5,967 12,261 11,518
Income Tax Expense 2,080 1,883 3,829 3,527
------ -------- ------- -------
NET INCOME $ 4,506 $ 4,084 $ 8,432 $ 7,991
======= ======= ======= =======
Per Share
Primary:
NET INCOME $ .40 $ .35 $ .74 $ .69
======= ======= ======= ========
Dividends Per Share $ .14 $ .11 $ .28 $ .22
======= ======= ======= ========
Average Shares Outstanding 11,422 11,480 11,412 11,471
======= ======= ======= =======
Fully Diluted:
NET INCOME $ .40 $ .35 $ .74 $ .69
======= ======= ======= =======
Average Shares Outstanding 11,426 11,481 11,415 11,472
======= ======= ======= =======
</TABLE>
<PAGE>
<TABLE>
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN 000's)
<CAPTION>
SIX MONTHS ENDED
----------------
JUNE 30 JUNE 30
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 8,432 $ 7,991
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Provision for Loan Losses 1,843 1,423
Depreciation and Amortization 1,152 1,179
Amortization of Securities Premiums and Discounts, Net 1,114 (83)
Provision for Deferred Income Taxes (749) (48)
Gain on Sale of Securities, Net (879) (639)
Amortization of Intangibles 83 115
Mortgage Loan Originations Held for Sale (11,294) (7,114)
Mortgage Loans Sold 9,697 7,565
Changes in Other Assets and Other Liabilities:
Other Assets (618) (336)
Accrued Interest 813 539
Other Liabilities 1,037 2,587
------- --------
Net Cash Provided by Operating Activities 10,631 13,179
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net Decrease in Federal Funds Sold --- 2,475
Decrease in Interest-Earning Deposits in Domestic Banks 11 369
Purchases of Securities Available for Sale (298,249) (125,538)
Purchases of Securities Held to Maturity --- (17,203)
Proceeds from Sale of Securities Available for Sale 133,153 55,097
Proceeds from Calls and Maturities of Securities
Available for Sale 44,304 20,388
Proceeds from Calls and Maturities of Securities
Held to Maturity 8,351 19,601
Net Increase in Loans (27,138) (63,029)
Purchases of Bank Premises and Equipment (1,610) (832)
Proceeds From Sale of Bank Premises and Equipment 64 22
Net Decrease in Other Real Estate 107 760
Increase in Other Assets (425) --
-------- ---------
Net Cash Used in Investing Activities (141,432) (107,890)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 27,881 16,018
Net Increase in Short-Term Debt 103,368 10,322
Net Increase (Decrease) in FHLB Advances, Callable 2/97 (45,000) 45,000
Net Increase in Other Long-Term Debt 47,255 24,928
Cash Dividends (3,185) (2,497)
Proceeds from Issuance of Common Stock 934 437
-------- --------
Net Cash Provided by Financing Activities 131,253 94,208
-------- --------
Net Increase (Decrease) in Cash and Due From Banks 452 (503)
Cash and Due From Banks at Beginning of Period 37,972 31,497
-------- --------
Cash and Due From Banks at End of Period $ 38,424 $ 30,994
======== ========
</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 1996 Form 10-K to the SEC. The results of the interim period
are not necessarily indicative of year-end results.
2. Securities Available for Sale
-----------------------------
The following sets forth the composition of securities available for sale,
which are carried at approximate market value at June 30, 1997:
<TABLE>
Gross Gross Approx.
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<CAPTION>
<S> <C> <C> <C> <C>
U. S. Treasury Securities $ 3,485 $ 38 $ --- $ 3,523
Obligations of U.S.
Government Agencies 30,515 24 (432) 30,107
Mortgage-Backed Securities 222,126 3,054 (325) 224,855
Collateralized Mortgage
Obligations and REMICs 163,571 801 (1,147) 163,225
Corporate Bonds 11,340 299 (78) 11,561
Commercial Paper 3,494 --- (1) 3,493
Other Securities 9,742 98 --- 9,840
Obligations of States and
Political Subdivisions 9,979 306 --- 10,285
-------- ------- -------- --------
Total Securities
Available for Sale $454,252 $ 4,620 $(1,983) $ 456,889
======== ======= ======== ========
</TABLE>
Gross gains and losses of $982,000 and $107,000, respectively, were
realized on sales and calls of securities available for sale for year-to-
date June 30, 1997.
3. 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 June 30, 1997:
<TABLE>
Gross Gross Approx.
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<CAPTION>
<S> <C> <C> <C> <C>
Obligations of U.S.
Government Agencies $ 18,750 $ 1,033 $ (173) $ 19,610
Mortgage-Backed Securities 25,404 407 (249) 25,562
Obligations of State and
Political Subdivisions 38,200 842 (78) 38,964
-------- -------- ------- --------
Total Securities Held
to Maturity $ 82,354 $ 2,282 (500) $ 84,136
======== ======== ======= ========
</TABLE>
Gross gains and losses of $7,000 and $3,000, respectively, were realized on
calls of securities held to maturity for year-to-date June 30, 1997.
4. Loan Portfolio
--------------
Major classifications of loans at June 30, 1997 and December 31, 1996 are
summarized below:
(In 000's)
<TABLE>
June 1997 December 1996
--------- -------------
<CAPTION>
<S> <C> <C>
Commercial $364,284 $349,834
Real Estate 213,174 206,453
Consumer 246,407 242,211
-------- --------
Total Loans 823,865 798,498
Less: Unearned Income and Deferred Fees 13,649 14,131
-------- --------
Loans, Net of Unearned Income and
Deferred Fees 810,216 784,367
Less: Allowance for Loan Losses 10,749 10,195
-------- --------
Loans, Net $799,467 $774,172
======== ========
</TABLE>
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>
June 30 June 30
1997 1996
---- ----
<CAPTION>
<S> <C> <C>
Balance at December 31, 1996 and 1995 $10,195 $ 9,036
Charge-offs:
Commercial, Financial and Agricultural 699 572
Real Estate - Mortgage 58 19
Installment 895 730
------- ------
1,652 1,321
Recoveries:
Commercial, Financial and Agricultural 150 409
Real Estate - Mortgage --- 1
Installment 213 181
------- ------
363 591
Net Charge-offs 1,289 730
Provision for Loan Losses 1,843 1,423
------- -------
Balance at June 30, 1997 and June 30, 1996 $10,749 $ 9,729
======= =======
</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 .64% of loans, net of unearned income at June 30,
1997.
The following table presents aggregate loan amounts for nonaccrual and 90-
day due loans as of June 30, 1997 and December 31, 1996:
<TABLE>
1997 1996
----- ----
<CAPTION>
<S> <C> <C>
Nonaccrual Loans $ 3,395 $ 3,075
Loans Past Due 90 Days or More 1,758 3,061
------- ------
Total Nonperforming Loans 5,153 6,136
------- ------
Other Real Estate Owned 798 905
Other Repossessed Assets 48 169
------- -------
Total Foreclosed/Repossessed Assets 846 1,074
------- -------
Total Nonperforming Loans and
Foreclosed/Repossessed Assets $ 5,999 $ 7,210
</TABLE> ======== ========
The effect of nonaccrual loans on interest income for the six months ended
June 31, 1997 and 1996 was as follows:
<TABLE>
1997 1996
---- ----
<CAPTION>
<S> <C> <C>
Gross Amount of Interest That Would Have
Been Recorded at Original Rate $ 223 $ 124
Interest That Was Reflected in Income --- 15
------- -------
Net Impact on Interest Income $ 223 $ 109
======= =======
</TABLE>
At June 30, 1997 and December 31, 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 $3.2 million
and $3.1 million, respectively. The portion of the allowance for loan
losses related to such loans was $.4 million for June 30, 1997 and December
31, 1996.
5. Contingencies and Other Matters
-------------------------------
As reported in prior forms, Registrant has entered into agreements to
acquire Commerce Bank, College Park, Maryland and Tysons Financial
Corporation, McLean, Virginia subject to regulatory approval and approval
by the shareholders of the respective banks and certain other conditions.
The acquisition of Commerce Bank will be accounted for using the pooling of
interests accounting method while Tyson Financial Corporation will be
accounted for using the purchase method of accounting.
Under terms of agreement with Commerce Bank, Registrant agreed to exchange
a maximum of 2.506 and a minimum of 2.059 shares of its Common Stock for
each share of Commerce's 192,216 shares of Common stock and 30,984 shares
of Convertible Preferred Stock. Registrant has also agreed to exchange a
maximum of 1.494 and a minimum of 1.228 shares of its Common Stock for each
of Commerce's 73,060 Common and 13,445 Preferred Stock Warrants. If no
shareholder exercises dissenter's rights and all holders of Preferred Stock
and Warrants agree to exchange them for Registrant's Common Stock and the
maximum exchange ratios of 2.506 per share and 1.494 per warrant are used,
688,577 shares of Registrant's Common Stock will be issued in the
transaction.
Under terms of the agreement with Tysons Financial Corporation, Registrant
agreed to exchange a maximum of .620 and a minimum of .507 shares of its
Common Stock for each share purchased of Tyson Financial Corporation's
1,071,119 shares of Common Stock. In addition, Registrant has agreed to
purchase Tysons' outstanding 228,250 directors' warrants for the difference
between the exercise price per warrant and $14.50 in the form of Registrant
Common Stock, resulting in a maximum exchange ratio of .192 shares and a
minimum exchange ratio of .157 shares per warrant purchased. Also,
MainStreet has agreed to purchase Tysons' outstanding 97,780 directors'
options for the difference between the exercise price per option and $14.50
in the form of MainStreet Common Stock resulting in a maximum exchange
ratio of .30 shares and a minimum exchange ratio of .07 shares per option
purchased. If the maximum exchange ratios are used, 736,607 shares of
Registrant's Common Stock will be issued in the transaction. Also,
Registrant has agreed to assume the outstanding employee stock options of
Tysons. The purchase price of this transaction is valued at approximately
$17.0 million.
In both transactions, Registrant was granted an option to acquire up to
19.9% of Tysons' and Commerce's Common Stock under certain circumstances.
Registrant 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 arising from these matters and not covered
by insurance, would not have a material effect on Registrant's financial
position.
Registrant has reviewed FASB 130 "Reporting Comprehensive Income" and FASB
131 "Disclosures about Segements of an Enterprise and Related Information"
which are effective for years beginning after December 15, 1997, and will
adopt them at that time. There will be no material effect on operations or
balance sheet resulting from the adoption of these additional statements.
6. Earnings Per Share
------------------
The Company will adopt Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share," on December 31, 1997. SFAS No. 128 requires
the Company to change its method of computing, presenting and disclosing
earnings per share informtion. Upon adoption, all prior period data
presented will be restated to conform to the provisions of SFAS No. 128.
If the Company had adopted SFAS No. 128 for the six month period ended June
30, 1997, the following computation would have been used to arrive at basic
income per common share and diluted income per common share that would have
been presented on the consolidated statements of income:
<TABLE>
Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
------------- -------------
<CAPTION>
<S> <C> <C>
Basic income per common share:
Net Income $ 8,432 $ 7,991
========= =========
Weighted average shares:
Common shares outstanding 11,371 11,417
========= =========
Basic income per common share $ .74 $ .70
========= =========
Diluted income per common share:
Net Income $ 8,432 7,991
========= =========
Weighted average shares:
Common shares outstanding 11,371 11,417
Dilutive effect of stock options 41 54
-------- ---------
Total Shares 11,412 11,471
========= =========
Diluted income per common share $ .74 $ .69
========= =========
</TABLE>
Item 2. Management's Discussion and Analysis of Financial
- ------ Conditions and Results of Operations
-------------------------------------------------
OVERVIEW
- --------
MainStreet BankGroup Incorporated reported year-to-date earnings at June
30, 1997 of $8.4 million which compares to $8.0 million at June 30, 1996,
an increase of $.4 million, or 5.52%. This equates to $.74 and $.69 per
fully diluted share for 1997 and 1996, respectively. These 1997 earnings
produced a return on average assets and a return on average equity of 1.25%
and 15.07%, respectively. The 1996 year-to-date earnings equated to a
return on average assets and a return on average equity of 1.47% and
15.67%, respectively. Net interest income and noninterest income increased
over 1997 numbers and were offset somewhat by increases in noninterest
expense and the provision for loan losses. Increases in noninterest
expense for 1997 in comparison to 1996 were due to expenses associated with
two additional branch openings in the latter part of 1996 with little
expense in the first half of 1996. Also, the 1997 income was impacted by a
check-kiting scheme reported at the end of the first quarter.
Net income for the Corporation in the second quarter of 1997 was $4.5
million compared to $4.1 million in the second quarter of 1996, an increase
of 10.33%. This income equates to $.40 and $.35 per fully diluted share
for the quarters ending June 30, 1996 and 1995, respectively. The 1997
quarterly income translates into a return on average assets and a return on
average equity of 1.29% and 15.89%, respectively. The 1996 income produced
a return on average assets and a return on average equity of 1.47% and
15.93%, respectively.
NET INTEREST INCOME
- -------------------
Net interest income was $26.3 million year-to-date June 30, 1997 compared
to $24.1 million for the same period in 1996, an increase of 8.81%. Total
interest income increased $8.8 million over 1996 levels while total
interest expense increased $6.7 million. The net interest margin for the
year to date earnings in 1997 and 1996 was 4.21% and 4.79%, respectively.
High prepayment speeds in the adjustable rate mortgage backed securities
negatively impacted the net interest margin for 1997, particularly in the
first quarter. These bonds were purchased at a premium and with
accelerated prepayments, greater amortization of the premiums were
recorded. The bonds, however, maintained their market values and many were
sold in the first quarter to realize the gains which offset the
amortization in the net interest margin. Interest and dividend income on
securities increased $4.8 million in 1997 over 1996 levels due to increased
volume primarily associated with leveraging transactions. These
transactions increased interest-earning assets and were funded primarily by
short-term repurchase agreements. Interest income on loans year-to-date
June 30, 1997 increased $4.0 million over the same period in 1996 due to
increased loan volumes approximating $99.5 million. The increase in
interest expense in 1997 over 1996 levels of $6.7 million was centered in
short-term borrowings, especially repurchase agreements. As mentioned
before these borrowings were used to fund purchases in securities.
Net interest income for the second quarter of 1997 was $13.6 million in
comparison to $12.2 million for the same period in 1996. Total interest
income for the second quarter in 1997 increased $5.2 million over the 1996
levels while total interest expense increased $3.9 million over the prior
year. The net interest margin for the second quarter of 1997 was 4.20%
compared to 4.76% for the second quarter of 1996. Prepayments on the
mortgaged backed securities continued during the second quarter but not at
the first quarter levels. Increased leveraging transactions during the
second quarter added to net interest income, but have reduced the net
interest margin somewhat.
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses for year-to-date June 30, 1997 was $1.8
million compared to $1.4 million year-to-date June 30, 1996, an increase of
$.4 million or 29.52%. This increase was in the second quarter comparison
of each year. Increased charge-offs and increased loan volume in the
second quarter of 1997 contributed to the increase.
NONINTEREST INCOME
- ------------------
Total noninterest income, excluding securities gains, year-to-date June 30,
1997 was $6.0 million compared to $5.1 million at June 30, 1996, an
increase of $.9 million, or 17.46%. The 1997 income included net gains of
$7 thousand on other real estate compared to net gains of $373 thousand in
1996. With other real estate also factored out of noninterest income, the
1997 level increased $1.3 million over 1996 income, or 26.65%. The
Corporation purchased bank owned life insurance in the latter part of the
fourth quarter in 1996. This income accounts for $.4 million of the
increase in the year-to-date comparison. Service charges on deposit
accounts increased $.2 million in 1997 over 1996 levels. Trust income also
increased $.2 million in 1997 compared to 1996 income. The remainder of
the increase in the 1997 noninterest income over 1996 was due to increases
in credit card income, ATM income, and credit life insurance commissions.
Noninterest income, excluding securities gains, for the second quarter of
1997 was $3.1 million compared to $2.4 million for the second quarter of
1996, an increase of 29.29%. The largest variance in this quarterly
comparison is the bank owned life insurance, as previously mentioned in the
year-to-date comparison.
SECURITIES GAINS
- ----------------
Net securities gains for year-to-date income at June 30, 1997 were $.9
million compared to $.6 million at June 30, 1996. The second quarter net
securities gains at June 30, 1997 were $3 thousand compared to $.4 million
at June 30, 1996. As mentioned in the net interest margin section of this
discussion, high levels of prepayments on adjustable rate mortgage backed
securities in 1997 accelerated expense related to amortization of bond
premiums. This expense was offset by realizing market gains on these
securities.
NONINTEREST EXPENSE
- -------------------
Total noninterest expense year-to-date June 30, 1997 was $19.0 million
compared to $16.9 million year-to-date June 30, 1996, an increase of $2.1
million, or 12.34%. Salaries and employee benefits accounted for $1.4
million of the increase. This increase in salaries and employee benefits
was due to several initiatives undertaken by the Corporation. Two
additional branches were opened in the latter part of 1996. A new risk
management function was added to the Holding Company in late 1996. Also,
in the latter part of 1996, a telebanking center was established and
staffed which will allow customers access to their accounts twenty-four
hours a day. The other greatest expense in the year-to-date comparisons
was $.6 million associated with a check-kiting scheme that surfaced in the
latter part of the first quarter.
Total noninterest expense for the second quarter of 1997 was $9.1 million
compared to $8.6 million in the second quarter of 1996, an increase of
6.83%. This increase was primarily in the salaries and benefits category
due to the aforementioned initiatives undertaken by the Corporation.
FINANCIAL CONDITION
- -------------------
Total assets at June 30, 1997 were $1.4 billion, an increase of $142.5
million from year end December 31, 1996. The majority of the increase,
$121.9 million was in securities available for sale which were primarily
funded by short-term repurchase agreements. Securities available for sale
at June 30, 1997 were $456.9 million compared to $335.0 million at December
31, 1996.
Loans, net of unearned income at June 30, 1997 were $810.2 million, an
increase of $25.8 million, or 3.30%, from year end 1996. This increase in
loans has been principally funded by a growth in deposits. A discussion on
credit quality can be found in the Asset Quality section of this analysis.
Total deposits at June 30, 1997 were $914.4 million compared to $886.5
million at December 31, 1996, an increase of $27.9 million, or 3.14%.
Demand deposits increased $7.6 million; certificates of deposit $100,000
and over increased $15.5 million; and other time deposits increased $23.9
million. Offsetting this increase somewhat were slight declines in
interest checking, savings, and money market accounts.
Short-term debt at June 30, 1997 was $317.2 million compared to $213.8
million at December 31, 1996, an increase of $103.4 million, or 48.35%.
This increase was principally in repurchase agreements which provided
additional funding of available for sale securities. At June 30, 1997,
short-term debt consisted of $232.4 million in repurchase agreements; $31.8
million in federal funds purchased; $25.0 million in FHLB advances; $13.2
million in corporate cash management accounts; $10.1 million in treasury
tax and loan notes; and $4.7 million in other borrowings. Short-term debt
at December 31, 1996 consisted of $145.4 million in repurchase agreements;
$27.3 million in FHLB advances; $23.2 million in federal funds purchased;
$10.5 million in corporate cash management accounts; $5.1 million in
treasury tax and loan notes; and $2.3 million in other borrowings.
Long-term debt at June 30, 1997 was $73.3 million which consisted of $73.1
million in FHLB advances and $.2 million in a capital lease. Long-term
debt at December 31, 1996 consisted of $45.0 million in callable FHLB
advances, $25.8 million of long-term FHLB advances, and $.2 million in a
capital lease. The FHLB advances were called in February 1997 and the
original long-term FHLB borrowing matured.
ASSET QUALITY
- -------------
Nonperforming assets were $6.0 million at June 30, 1997 compared to $7.2
million at December 31, 1996. Nonperforming loans were $5.2 million and
$6.1 million at June 30, 1997 and December 31, 1996, respectively. The
ratio of nonperforming loans to loans, net of unearned income, improved
slightly to .64% at June 30, 1997 compared to .78% at December 31, 1996.
At June 30, 1997 nonaccrual loans comprised $3.4 million of the
nonperforming loans compared to $3.1 million at December 31, 1996. The
ratio of the allowance for loan losses to nonperforming loans at June 30,
1997 and December 31, 1996 were 208.60% and 166.15% respectively. The net
charge-off ratio at June 30, 1997 rose slightly to .33% in comparison to
.29% at December 31, 1996. The allowance for loan losses to actual loans,
net of unearned income, was 1.33% and 1.30% at June 30, 1997 and December
31, 1996, respectively.
SHAREHOLDERS' EQUITY
- --------------------
Total shareholders' equity, excluding unrealized gains (losses) on
securities, at June 30, 1997 was $114.5 million, an increase of $6.2
million from year-end, December 31, 1996. Dividends per share were $.14
per share for the quarter ended June 30, 1997. At June 30, 1997, the
leverage and total risk-based capital ratios were 7.98% and 14.83%,
respectively. These same ratios at December 31, 1996 were 8.37% and
14.84%, respectively. The capital position remains strong with ratios
substantially above regulatory prescribed minimums.
LIQUIDITY
- ---------
The measurement of liquidity is performed by monitoring ratios that
indicate the level of liquid assets relative to liabilities, the dependence
on potential volatile funding sources, and the relationship of loans to
deposits. While relying on core deposit relationships as the basis of
liquidity, increased loan demand has resulted in the Corporation seeking
alternative sources of liquidity and utilizing existing sources through a
higher level within established guidelines. The loan-to-deposit ratio at
June 30, 1997 and December 31, 1996 was 87.35% and 87.44%, respectively.
The large liability dependency ratio was 34.32% and 28.90% at June 30, 1997
and December 31, 1996, respectively. The liquidity ratio at June 30, 1997
and December 31, 1996 was 27.22% and 21.00%, respectively.
CONTINGENCIES AND OTHER MATTERS
- -------------------------------
This discussion can be found on page 9, Note 5, 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 5, of this report and is herein incorporated
by reference.
ITEM 6(b). REPORTS ON FORM 8-K
- -------- --------------------
Form 8-K filed July 8, 1997, regarding the definitive agreement for
acquisition of Commerce Bank, College Park, Maryland.
Form 8-K filed August 5, 1997, regarding the definitive agreement for
acquisition of Tysons Financial Corporation, McLean, 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 August 13, 1997 /s/James E. Adams
----------------------- ------------------------------
James E. Adams
Chief Financial Officer/
Executive Vice President/
Treasurer
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