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, 1997
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 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.
OUTSTANDING AT
CLASS OCTOBER 31, 1997
- ---------------------------- ----------------
COMMON STOCK $5.00 PAR VALUE 11,481,834
- ---------------------------- -----------------
MAINSTREET BANKGROUP INCORPORATED
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -- September 30, 1997 and
December 31, 1996
Consolidated Statements of Income -- Three Month and
Nine Months Ended September 30, 1997 and 1996
Consolidated Statements of Cash Flow -- Nine Months
Ended September 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
(IN 000'S EXCEPT SHARE DATA)
(UNAUDITED) (AUDITED)
SEPTEMBER 30 DECEMBER 31
1997 1996
---- ----
<CAPTION>
<S> <C> <C>
ASSETS
Cash and Due From Banks $ 42,065 $ 37,972
Interest-Earning Deposits in Domestic Banks 657 518
Mortgage Loans Held for Sale 3,005 742
Securities Available for Sale (Amortized Cost
of $462,274 in September 30, 1997, and
$333,770 in December, 1996) 467,379 335,023
Securities Held to Maturity (Approximate
Market Values of $80,091 in
September 30, 1997 and
$92,709 in December, 1996)
Taxable 43,603 52,314
Nontaxable 34,511 38,205
--------- -------
78,114 90,519
Loans, Net of Unearned Income 824,000 784,367
Less: Allowance for Loan Losses (10,942) (10,195)
---------- --------
Loans, Net 813,058 774,172
Bank Premises and Equipment, Net 15,158 14,932
Other Real Estate Owned 1,023 905
Other Assets 35,072 34,054
---------- ----------
TOTAL ASSETS $ 1,455,531 $ 1,288,837
========== ==========
LIABILITIES
Deposits:
Demand Deposits (Noninterest-Bearing) $ 127,970 $ 120,989
Interest Checking Accounts 91,419 99,834
Savings Deposits 114,717 121,336
Money Market Investment Accounts 81,951 81,946
Time Deposits
Certificates of Deposit $100,000 and Over 110,948 90,189
Other 403,489 372,225
---------- ---------
Total Deposits 930,494 886,519
Short -Term Debt 314,367 213,799
FHLB Advances, Callable 2/97 --- 45,000
Long-Term Debt 76,873 26,029
Accrued Interest Payable 5,514 4,002
Other Liabilities 7,623 5,012
---------- --------
TOTAL LIABILITIES 1,334,871 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 11,411,834 Shares in September,
1997 and 11,342,248 in December, 1996) 57,059 56,711
Capital in Excess of Par 6,637 5,799
Retained Earnings 54,315 46,115
Unearned Compensation (216) (338)
Unrealized Gains on Securities, Net of Tax 2,865 189
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 120,660 108,476
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,455,531 $ 1,288,837
========== ==========
See Notes to Considated Financial Statements
</TABLE>
<PAGE>
<TABLE>
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN 000'S EXCEPT PER SHARE DATA)
UNAUDITED
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
1997 1996 1997 1996
---- ---- ---- ----
<CAPTION>
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans:
Taxable $ 19,197 $ 17,921 $ 56,322 $ 51,007
Nontaxable 16 21 67 73
Interest on Mortgage Loans
Held for Sale 97 36 181 134
Interest and Dividends on
Securities Available
for Sale 7,781 4,744 20,589 11,386
Interest and Dividends on
Securities Held to
Maturity
Taxable 822 751 2,639 3,341
Nontaxable 468 587 1,444 1,713
Other Interest Income 11 108 31 586
-------- -------- -------- --------
Total Interest Income 28,392 24,168 81,273 68,240
INTEREST EXPENSE
Deposits 9,240 8,422 26,762 25,050
Short-Term Borrowings 4,346 1,684 11,777 3,647
Long-Term Debt 1,052 910 2,709 2,246
-------- -------- -------- --------
Total Interest Expense 14,638 11,016 41,248 30,943
-------- -------- -------- --------
Net Interest Income 13,754 13,152 40,025 37,297
Provisions for Loan Losses 962 946 2,805 2,369
-------- -------- -------- --------
Net Interest Income After
Provision for Loan Losses 12,792 12,206 37,220 34,928
NONINTEREST INCOME
Service Charges, Fees
and Other 2,249 1,852 6,584 5,473
Trust Income 883 675 2,496 2,118
Securities Gains, Net 37 (1) 916 638
----- ------ ------ ------
3,169 2,526 9,996 8,229
NONINTEREST EXPENSE
Salaries 3,837 3,459 11,360 9,996
Employee Benefits 1,509 1,466 4,348 3,863
Net Occupancy Expense 466 421 1,350 1,251
Equipment 922 872 2,674 2,757
FDIC Assessment 28 5 80 14
Stationery and Supplies 224 216 617 670
Advertising 44 71 386 411
Other 2,255 2,483 7,464 6,938
-------- ------- -------- -------
9,285 8,993 28,279 25,900
-------- ------- -------- -------
Income Before Income Taxes 6,676 5,739 18,937 17,257
Income Tax Expense 2,126 1,874 5,955 5,401
-------- ------- -------- -------
NET INCOME $ 4,550 $ 3,865 $ 12,982 $ 11,856
======== ======= ======== ========
Per Share
Primary:
NET INCOME $ .40 $ .34 $ 1.14 $ 1.03
======== ======= ======== ========
Dividends Per Share $ .14 $ .13 $ .42 $ .35
======== ======= ======== ========
Average Shares Outstanding 11,444 11,487 11,421 11,476
======== ======= ======== ========
Fully Diluted:
NET INCOME $ .40 $ .34 $ 1.14 $ 1.03
======== ======= ======== ========
Average Shares Outstanding 11,445 11,488 11,424 11,477
======== ======= ======== ========
See Notes to Considated Financial Statements
</TABLE>
<PAGE>
<TABLE>
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN 000'S)
NINE MONTHS ENDED
-----------------
SEPTEMBER 30 SEPTEMBER 30
1997 1996
---- ----
<CAPTION>
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 12,982 $ 11,856
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating
Activities:
Provision for Loan Losses 2,805 2,369
Depreciation and Amortization 1,731 1,786
Amortization of Securities Premiums
and Discounts, Net 1,450 ( 19)
Provision for Deferred Income Taxes (603) (387)
Gain on Sale of Securities, Net (916) (638)
Amortization of Intangibles 123 170
Mortgage Loan Originations Held for Sale (16,491) (11,840)
Mortgage Loans Sold 14,228 12,645
Changes in Other Assets and Other
Liabilities:
Other Assets (1,326) (1,133)
Accrued Interest 1,512 955
Other Liabilities 2,611 1,838
-------- --------
Net Cash Provided by Operating Activities: 18,106 17,602
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) Decrease in Interest-Earning
Deposits in Domestic Banks (139) 381
Purchases of Securities Available
for Sale (337,885) (204,390)
Purchases of Securities Held to Maturity --- (18,269)
Proceeds from Sale of Securities Available
for Sale 133,153 86,790
Proceeds from Calls and Maturities of
Securities Available for Sale 75,573 28,613
Proceeds from Calls and Maturities of
Securities Held to Maturity 12,790 23,171
Net Increase in Loans (41,691) (93,554)
Purchases of Bank Premises and Equipment (2,021) (2,092)
Proceeds From Sale of Bank Premises
and Equipment 64 22
Net ( Increase) Decrease in Other
Real Estate (118) 886
Increase in Other Assets (653) ---
-------- --------
Net Cash Used in Investing Activities: (160,927) (178,442)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 43,975 32,915
Net Increase in Short-Term Debt 100,568 58,768
Net Increase (Decrease) in FHLB Advances,
Callable 2/97 (45,000) 45,000
Net Increase in Other Long-Term Debt 50,844 24,928
Cash Dividends (4,781) (3,973)
Cash in Lieu of Common Stock
at Acquisition --- (999)
Proceeds from Issuance of Common Stock 1,308 650
-------- --------
Net Cash Provided by Financing Activities: 146,914 157,289
-------- --------
Net Increase in Cash and Cash Equivalents 4,093 (3,551)
Cash and Cash Equivalents at Beginning
of Period 37,972 41,057
-------- --------
Cash and Cash Equivalents at End of Period $ 42,065 $ 37,506
======== ========
See Notes to Considated Financial Statements
</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. Cash Equivalents
----------------
For purposes of the Statements of Cash Flow, BankGroup considers
all Cash and Due From Bank accounts and Federal Funds Sold 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, 1997:
<TABLE>
Gross Gross Approx.
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<CAPTION>
<S> <C> <C> <C> <C>
U. S. Treasury Securities $ 3,489 $ 37 $ --- $ 3,526
Obligations of U.S.
Government Agencies 29,534 61 (241) 29,354
Mortgage-Backed Securities 225,028 4,105 (199) 228,934
Collateralized Mortgage
Obligations and REMICs 170,949 1,283 (903) 171,329
Corporate Bonds 11,042 328 (37) 11,333
Other Securities 9,844 275 --- 10,119
Obligations of States and
Political Subdivisions 12,388 398 (2) 12,784
-------- ------- ------- --------
Total Securities
Available for Sale $462,274 $ 6,487 $ (1,382) $ 467,379
======== ======== ======== ========
</TABLE>
Gross gains and losses of $1,004,000 and $107,000, respectively,
were realized on sales and calls of securities available for sale
for year-to-date September 30, 1997.
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, 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 $ 16,426 $ 844 $ (85) $ 17,185
Mortgage-Backed
Securities 24,271 458 (127) 24,602
Obligations of State and
Political Subdivisions 37,417 921 (34) 38,304
-------- -------- ------- --------
Total Securities Held
to Maturity $ 78,114 $ 2,223 $ (246) $ 80,091
======== ======== ======= ========
</TABLE>
Gross gains and losses of $22,000 and $3,000, respectively, were
realized on calls of securities held to maturity for year-to-date
September 30, 1997.
5. Loan Portfolio
--------------
Major classifications of loans at September 30, 1997 and December
31, 1996 are summarized below:
<TABLE>
(In 000's)
September 1997 December 1996
-------------- -------------
<CAPTION>
<S> <C> <C>
Commercial $ 376,440 $ 349,834
Real Estate 215,946 206,453
Consumer 244,799 242,211
--------- ---------
Total Loans 837,185 798,498
Less: Unearned Income and
Deferred Fees 13,185 14,131
--------- ---------
Loans, Net of Unearned Income
and Deferred Fees 824,000 784,367
Less: Allowance for Loan Losses 10,942 10,195
--------- ---------
Loans, Net $ 813,058 $ 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:
<TABLE>
(In 000's)
September 30 September 30
1997 1996
---- ----
<CAPTION>
<S> <C> <C>
Balance at December 31, 1996 and 1995 $ 10,195 $ 9,036
Charge-offs:
Commercial, Financial and Agricultural 816 924
Real Estate - Mortgage 102 95
Installment 1,637 1,258
-------- --------
2,555 2,277
Recoveries:
Commercial, Financial and Agricultural 239 477
Real Estate - Mortgage --- 1
Installment 258 264
-------- --------
497 742
Net Charge-offs 2,058 1,535
Provision for Loan Losses 2,805 2,369
-------- --------
Balance at September 30, 1997 and
September 30, 1996 $ 10,942 $ 9,870
======== ========
</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 .60% of loans, net
of unearned income at September 30, 1997.
The following table presents aggregate loan amounts for
nonaccrual and 90-day due loans as of September 30, 1997 and
December 31, 1996:
<TABLE>
1997 1996
---- ----
<CAPTION>
<S> <C> <C>
Nonaccrual Loans $ 3,093 $ 3,075
Loans Past Due 90 Days or More 1,871 3,061
------- -------
Total Nonperforming Loans 4,964 6,136
------- -------
Other Real Estate Owned 1,023 905
Other Repossessed Assets 97 169
------- -------
Total Foreclosed/Repossessed Assets 1,120 1,074
------- -------
Total Nonperforming Loans and
Foreclosed/Repossessed Assets $ 6,084 $ 7,210
</TABLE> ======= =======
The effect of nonaccrual loans on interest income for the nine
months ended September 30, 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 $ 290 $ 202
Interest That Was Reflected in Income --- 102
------- -------
Net Impact on Interest Income $ 290 $ 100
======= =======
</TABLE>
At September 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 $3.0 million and $3.1 million,
respectively. The portion of the allowance for loan losses
related to such loans was $.5 and $.4 million for September 30,
1997 and December 31, 1996, respectively.
6. Contingencies and Other Matters
-------------------------------
As reported in prior forms, Registrant has entered into
agreements to acquire Commerce Bank, College Park, Maryland,
Tysons Financial Corporation, McLean, Virginia and Regency
Financial Shares, Richmond, Virginia; subject to regulatory
approval and approval by the shareholders of the respective banks
and certain other conditions. The acquisition of Commerce Bank
and Regency Financial Shares will be accounted for using the
poolings 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, it is a condition of the merger that Tysons'
outstanding 228,250 directors' warrants be exercised prior to the
closing for the difference between the exercise price per warrant
and $14.50 in the form of Tysons' Common Stock. 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 .23 shares and a minimum exchange ratio
of .07 shares per option purchased. If the maximum exchange
ratios are used, 730,016 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
$17.2 million.
Under terms of the agreement with Regency Financial Shares,
Registrant has agreed to pay the equivalent of $13.00 per share
for each outstanding share of Regency Common Stock in the form of
MainStreet Common Stock, subject to adjustment under certain
conditions. Registrant has agreed to exchange a maximum of .500
and a minimum of .406 shares of its Common Stock for each share
purchased of Regency 1,389,096 shares of Common Stock. In
addition, MainStreet has agreed to purchase the balance of
Regency's outstanding 15,000 directors' options which have not
been exercised as of the consummation of the merger for the
difference between the exercise price per option and $13.00 in
the form of MainStreet Common Stock, resulting in a maximum
exchange ratio of .250 shares and a minimum exchange ratio of
.188 shares per option purchased. If the maximum exchange ratios
are used and all directors' options are exercised prior to the
merger, 702,048 shares of Registrant's Common Stock will be
issued in the transaction. MainStreet has also agreed to assume
the outstanding employee stock options of Regency. The purchase
price of this transaction is valued at approximately $18.2
million.
In all three transactions, Registrant was granted an option to
acquire up to 19.9% of Commerce's, Tysons', and Regency'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.
7. 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 nine month period
ended September 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>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<CAPTION>
<S> <C> <C>
Basic income per common share:
Net Income $ 12,982 $ 11,856
======== ========
Weighted average shares:
Common shares outstanding 11,381 11,415
======== ========
Basic income per common share $ 1.14 $ 1.04
======== ========
Diluted income per common share:
Net Income $ 12,982 $ 11,856
======== ========
Weighted average shares:
Common shares outstanding 11,381 11,415
Dilutive effect of stock options 40 61
-------- -------
Total Shares 11,421 11,476
-------- --------
Diluted income per common share $ 1.14 $ 1.03
======== ========
</TABLE>
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Quarter Report and the documents incorporated herin
by reference constitute "forward-lloking statements" within the meaning
of the United States Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance or achievements of the Company, or industry results,
to be materially different from any future results, performance, or
achievements expressed or implied by such forward-looking statements.
Such factors include, among others, the following: general economic
and business conditions in the Company's market area, inflation,
fluctuations in interest rates, changes in government regulations
and competition, which will, among other things, impact demand
for loans and banking services: the ability of the Company to
implement its business strategy; and changes in, or the failure to
comply with, government regulations.
Forward-looking statements are intended to apply only at the
time they are made. Moreover, whether or not stated in connection
with a forward-looking statement, the Company undertakes no obligation
to correct or update a forward-looking statement should the Company
later become aware that it is not likely to be achieved. If the
Company were to update or correct a forward-looking statement, investors
and others should not conclude that the Company will make additional
updates or corrections thereafter.
Item 2. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Conditions and Results of Operations
------------------------------------
OVERVIEW
- --------
MainStreet BankGroup Incorporated reported year-to-date earnings
at September 30, 1997 of $13.0 million in comparison to $11.9
million at September 30, 1996, an increase of $1.1 million, or
9.50%. This contributed to a $1.14 and $1.03 fully diluted per
share calculation for 1997 and 1996, respectively. These 1997
earnings resulted in a return on average assets and a return on
average equity of 1.25% and 15.07%, respectively. The 1996
earnings produced a return on average assets and a return on
average equity of 1.41% and 15.29%, respectively. Net interest
income and noninterest increased over the prior year and were
partially offset 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 third quarter of 1997 was
$4.6 million as compared to $3.9 million in the same quarter of
1996, an increase of $.7 million, or 17.72%. This quarterly
income contributed to a $.40 and $.34 fully diluted per share
calculation for 1997 and 1996, respectively. These 1997
quarterly earnings resulted in a return on average assets and a
return on average equity of $1.26% and $15.06%, respectively.
The 1996 quarterly earnings produced a return on average assets
and a return on average equity of $1.30% and $14.54%,
respectively.
NET INTEREST INCOME
- -------------------
Net interest income was $40.0 million year-to-date as of
September 30, 1997 as compared to $37.3 million for the same
period in 1997, an increase of $2.7 million, or 7.31%. Total
interest income increased $13.0 million over the equivalent 1996
period while total interest expense increased $10.3 million. The
net interest margin for the year to date earnings was 4.17% and
4.77% for the years ended 1997 and 1996, respectively.
Interest and dividend income on securities increased $8.2 million
in 1997 over the same period in 1996 due to increased volume
primarily due to leveraging transactions. These transactions
increased interest-earning assets and were funded primarily by
short-term repurchase agreements. High prepayment speed in the
adjustable rate mortgage backed securities negatively impacted
the net interest margin in 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 during the first quarter to realize the
gains which offset the amortization in the net interest margin.
Interest income on loans increased $5.3 million over the same
period in 1996 due to an increase in average loan volume in the
amount of $86.7 million. The increase in interest expense in
1997 over 1996 levels in the amount of $10.3 million was
primarily due to the short-term repurchase agreements used to
fund the leveraging transactions previously mentioned.
Net interest income for the third quarter of 1997 increased $.6
million as compared to the same period in 1996. Total interest
income for the third quarter increased $4.2 million over the same
period in 1996 while total interest expense increased $3.6
million. The net interest margin was 4.09% for the third quarter
of 1997 while the net interest margin was 4.73% for the
equivalent period in 1996. Average repurchase agreement volume
increased $165.7 million over the volume at September 30, 1996.
The increased volume has increased interest income, but has
compressed the margin somewhat during the last year. A larger
function of the margin decline is the narrowing of the margin
between loans and deposits due to the competitive environment.
Prepayments on the mortgage backed securities continued during
the third quarter, although not at the first quarter levels.
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses for year-to-date 1997 was $2.8
million as compared to $2.4 million for year-to-date 1996. This
provision equates to a $.4 million increase, or 18.40%. 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 this increase.
NONINTEREST INCOME
- ------------------
Total noninterest income, excluding securities gains and losses,
was $9.1 million and $7.6 million for the year-to-date periods of
1997 and 1996, respectively. The increase was $1.5 million, or
19.62% over the same period in 1996. The Corporation purchased
bank owned life insurance in the fourth quarter of 1996. This
income accounts for $.7 million of the increase year-to-date.
Trust income increased $.4 million over year-to-date 1996.
Service charges on deposit accounts and ATM income increased $.1
and $.2 million, respectively over year-to-date 1996. The
remainder of the increase in the 1997 noninterest income over
1996 was due to increased credit card income and credit life
insurance commissions.
Noninterest income, excluding securities gains, for the third
quarter of 1997 was $3.1 million compared to $2.5 million for the
third quarter of 1996, an increase of $.6 million, or 23.94%.
The largest component of this 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 1997 were $.9 million as
compared with $.6 million for the same period in 1996. This
increase was $.3 million, or 43.57% over the same period in 1996.
Activity in the third quarter was not substantial. As mentioned
in the net interest margin section of this discussion, bonds with
high prepayment speeds were sold in the first quarter to realize
market gains to offset the accelerated expense related to the
amortization of the bond premiums.
NONINTEREST EXPENSE
- -------------------
Total noninterest expense for 1997 year-to-date was $28.3 million
as compared to $25.9 million, an increase of $2.4 million, or
9.19%. Salaries and employee benefits accounted for $1.8 million
of the increase. This increase in salaries and 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 third quarter was $9.3 million
compared to $9.0 million in the same period of 1996, an increase
of $.3 million or 3.25%. This increase was primarily in the
salaries and benefits categories due to the above-referenced
initiatives undertaken by the Corporation.
FINANCIAL CONDITION
- -------------------
Total assets at September 30, 1997 were $1.5 billion, an increase
of $166.7 million over the year ended December 31, 1996, or
12.93%. The largest component of the increase was in securities
available for sale which were primarily funded by short-term
repurchase agreements. Securities available for sale at
September 30, 1997 were $467.4 million as compared to $335.0
million at December 31, 1996, an increase of $132.4 million, or
39.51%.
Loans, net of unearned income at September 30, 1997 were $824.0
million as compared to $784.4 million at December 31, 1996, an
increase of $39.6 million, or 5.05%. This increase has been
materially 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 September 30, 1997 were $930.5 million as
compared to $886.5 million at December 31, 1996, an increase of
$44.0 million, or 4.96%. Demand deposits increased $7.0 million,
certificates of deposit $100 thousand and over increased $20.8
million, and other time deposits increased $31.3 million.
Offsetting these increases were decreases in interest checking
and savings in the amounts of $8.4 million and $6.6 million,
respectively. The trend continues with the shift from interest
checking and savings into higher earning time deposits.
Short-term debt at September 30, 1997 was $314.4 million as
compared to $213.8 million at December 31, 1996, an increase of
$100.6 million, or 47.04%. The principal component of this
increase was repurchase agreements which provided additional
funding of available for sale securities. Repurchase agreements
were $227.5 million at September 30, 1997 as compared to $145.4
million at December 31, 1996, an increase of $82.2 million, or
56.55%. Corporate management accounts were $17.2 million at
September 30, 1997 as compared to $10.5 million at December 31,
1996, an increase of $6.7 million, or 63.24%. Federal funds
purchased were $19.9 million at September 30, 1997 compared to
$23.2 million at December 31, 1996. Short-term FHLB borrowings
were $25.0 million at September 30, 1997, compared to $27.4
million at year-end 1996. Treasury tax and loan notes were $23.9
million at September 30, 1997 as compared to $5.0 million at
December 31, 1996, an increase of $18.8 million, or 371.06%.
This was mostly due to the increase of the maximum limit of one
of our affiliates in the amount of $10 million. In previous
quarters, only one of the holding company affiliates had treasury
tax and loan notes. During third quarter 1997, all of the
Corporation's affiliates began participating in the notes. This
additional affiliate participation increased the treasury tax and
loan notes by $3.8 million. Other short-term borrowings were $.9
million at September 30, 1997 a decline from the $2.3 million at
year-end 1996. This borrowing is a credit line with First
Tennessee.
Long-term debt at September 30, 1997 was $76.9 million as
compared to $71.0 million at December 31, 1996, an increase of
$5.8 million, or 8.23%. Long-term debt at September 30, 1997
consisted of $73.7 million in FHLB advances, $.2 million in a
capital lease, and $3.0 million borrowed from First Tennessee.
The First Tennessee borrowing is payable over a seven year term
with the interest rate repricing on a quarterly basis.
ASSET QUALITY
- -------------
Nonperforming assets were $6.1 million at September 30, 1997 as
compared to $7.2 million at December 31, 1996. Nonperforming
loans were $5.0 million and $6.1 million at September 30, 1997
and December 31, 1996, respectively. The ratio of nonperforming
loans to loans, net of unearned income, improved slightly to .60%
at September 30, 1997 compared to .78% at December 31, 1996. At
September 30, 1997 and December 31, 1996, nonaccrual loans
comprised $3.1 million of nonperforming loans. The ratio of the
allowance for loan losses to nonperforming loans was 220.43% and
166.15%, respectively. The net charge-off ratio at September 30,
1997 rose slightly to .34% as compared to .29% at December 31,
1996. The allowance for loan losses to actual loans, net of
unearned income, was 1.33% compared to 1.30% at December 31,
1996.
SHAREHOLDERS' EQUITY
- --------------------
Total shareholders' equity, excluding unrealized gains (losses)
on securities, at September 30, 1997 was $117.8 million as
compared to $108.3 million at December 31, 1996, an increase of
$9.5 million, or 8.78%. Dividends per share were $.14 per share
for the quarter ended September 30, 1997 and $.42 per share for
the year-to-date ended September 30, 1997.
Dividends per share were $.13 per share for the quarter ended
September 30, 1996 and $.35 per share for the year-to-date ended
September 30, 1996. At September 30, 1997, the leverage and
total risk-based capital ratios were 8.09% and 14.94%,
respectively. The same ratios were 8.37% and 14.84% at year end
December 31, 1996. The capital position remains strong with
ratios substantially above regulatory prescribed minimums.
The Corporation has been authorized by the Board and is in the
process of issuing Corporation-Obligated Mandatorily Redeemable
Capital Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debentures of the Corporation and expects to close
the transaction in the fourth quarter.
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
September 30, 1997 and December 31, 1996 was 86.95% and 87.44%,
respectively. The large liability dependency ratio was 34.22%
and 28.90% at September 30, 1997 and December 31, 1996,
respectively. The liquidity ratio at September 30, 1997 and
December 31, 1996 was 27.77% 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 November 7, 1997, regarding the definitive
agreement for acquisition of Regency Financial Shares, Richmond,
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 13, 1997 /s/James E. Adams
----------------------- ------------------------------
James E. Adams
Chief Financial Officer/
Executive Vice President/
Treasurer
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