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, 1998
MainStreet Financial Corporation
(Exact Name of Registrant as Specified in its Charter)
Virginia 54-1046817
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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 OCTOBER 31, 1998
COMMON STOCK $5.00 PAR VALUE 14,137,199
- ---------------------------- -------------------------------
<PAGE>
<TABLE>
MAINSTREET FINANCIAL CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets -- September 30, 1998 and
December 31, 1997 3
Consolidated Statements of Income -- Three Months and
Nine Months Ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows -- Nine Months
Ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6(a). Exhibits 20
Item 6(b). Reports on Form 8-K 20
</TABLE>
<PAGE>
<TABLE>
MAINSTREET FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Unaudited
(In 000's Except Share Data)
<CAPTION>
September 30 December 31
ASSETS 1998 1997
- ------ ---- ----
<S> <C> <C>
Cash and Due From Banks $ 52,677 $ 47,202
Interest-Earning Deposits in Domestic Banks 2,750 494
Mortgage Loans Held for Sale 3,898 3,048
Federal Funds Sold 8,986 5,144
Securities Available for Sale (Amortized Cost of $860,808 at
September 30, 1998, and $689,193 at December 31, 1997) 868,418 693,957
Securities Held to Maturity (Approximate Market Values of
$52,636 at September 30, 1998 and $74,321 at December 31, 1997)
Taxable 23,643 38,170
Nontaxable 27,325 34,073
----------- -----------
50,968 72,243
Loans, Net of Unearned Income and Deferred Fees 1,032,857 925,718
Less: Allowance for Loan Losses (14,476) (12,375)
----------- -----------
Loans, Net 1,018,381 913,343
Bank Premises and Equipment, Net 19,003 17,003
Other Real Estate Owned 1,208 1,424
Other Assets 54,333 40,384
----------- -----------
TOTAL ASSETS $ 2,080,622 $ 1,794,242
=========== ===========
LIABILITIES
Deposits:
Demand Deposits (Noninterest-Bearing) $ 224,199 $ 149,940
Interest Checking Accounts 130,906 121,470
Savings Deposits 119,692 115,929
Money Market Investment Accounts 137,565 104,478
Time Deposits
Certificates of Deposit $100,000 and Over 161,153 154,982
Other 454,839 416,933
----------- -----------
Total Deposits 1,228,354 1,063,732
Repurchase Agreements Short-Term 160,733 213,871
Other Short -Term Debt 48,753 149,767
Repurchase Agreements Long-Term 220,597 63,466
Other Long-Term Debt 178,167 102,134
Corporation-Obligated Mandatorily Redeemable Capital
Securities 50,000 50,000
Accrued Interest Payable 9,193 5,977
Other Liabilities 9,241 9,576
----------- -----------
TOTAL LIABILITIES 1,905,038 1,658,523
----------- -----------
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 14,126,914
Shares in September, 1998 and 12,661,212 in December, 1997) 70,635 63,306
Capital in Excess of Par 34,360 12,399
Retained Earnings 65,653 57,501
Unearned Compensation (54) (176)
Accumulated Other Comprehensive Income 4,990 2,689
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 175,584 135,719
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,080,622 $ 1,794,242
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
<TABLE>
MAINSTREET FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In 000's Except Per Share Data)
Unaudited
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30 September 30
September 30
INTEREST INCOME 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest and Fees on Loans:
Taxable $23,673 $21,357 $ 70,245 $ 62,864
Nontaxable 100 16 283 67
Interest on Mortgage Loans Held for Sale 200 97 529 181
Interest and Dividends on Securities
Available for Sale 14,001 8,037 40,902 21,419
Interest and Dividends on Securities Held
to Maturity
Taxable 451 978 1,513 2,984
Nontaxable 380 468 1,216 1,444
Other Interest Income 151 201 786 460
------- ------- -------- --------
Total Interest Income 38,956 31,154 115,474 89,419
INTEREST EXPENSE
Deposits 11,382 10,352 33,998 29,963
Short-Term Borrowings 3,119 4,456 10,636 12,083
Long-Term Debt 6,596 1,052 17,906 2,709
------- ------- ------- --------
Total Interest Expense 21,097 15,860 62,540 44,755
------- ------- ------- --------
Net Interest Income 17,859 15,294 52,934 44,664
Provisions for Loan Losses 1,214 1,025 3,397 3,550
------- ------- ------- --------
Net Interest Income After Provision
for Loan Losses 16,645 14,269 49,537 41,114
NONINTEREST INCOME
Service Charges, Fees and Other 2,953 2,462 9,252 7,224
Trust Income 999 883 2,879 2,496
Securities Gains, Net 55 37 200 916
------- ------- ------- --------
4,007 3,382 12,331 10,636
------- ------- ------- --------
NONINTEREST EXPENSE
Salaries 4,938 4,317 14,761 12,784
Employee Benefits 1,961 1,585 5,816 4,646
Net Occupancy Expense 831 579 2,308 1,695
Equipment 1,036 979 3,136 2,838
Stationery and Supplies 257 253 777 697
Advertising 249 44 631 429
Other 4,479 2,714 12,148 8,585
------- ------- ------- --------
13,751 10,471 39,577 31,674
------- ------- ------- --------
Income Before Income Taxes 6,901 7,180 22,291 20,076
Income Tax Expense 2,207 2,347 7,238 6,452
------- ------- ------- --------
NET INCOME $ 4,694 $ 4,833 $15,053 $ 13,624
======= ======= ======= ========
Per Share
Basic:
NET INCOME $ .33 $ .38 $ 1.08 $ 1.08
======= ======= ======= ========
Dividends Per Share $ .15 $ .16 $ .45 $ .42
======= ======= ======= ========
Average Shares Outstanding 14,107 12,624 13,921 12,604
======= ======= ======= ========
Diluted:
NET INCOME $ .34 $ .38 $ 1.09 1.08
======= ======= ======= ========
Average Shares Outstanding 14,134 12,667 13,960 12,646
======= ======= ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
<TABLE>
MAINSTREET FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In 000's)
<CAPTION>
Nine Months Ended
Cash Flows From Operating Activities: September 30, 1998 September 30, 1997
------------------ -------------------
<S> <C> <C>
Net Income $ 15,053 $ 13,624
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Provision for Loan Losses 3,397 3,550
Depreciation and Amortization 1,972 1,881
Amortization of Securities Premiums and Discounts, Net 2,192 1,077
Provision for Deferred Income Taxes (1,237) (603)
Gain on Sale of Securities, Net (200) (916)
Amortization of Intangibles 531 144
Mortgage Loan Originations Held for Sale (48,336) (16,491)
Mortgage Loans Sold 47,486 14,228
Changes in Other Assets and Other Liabilities:
Other Assets (1,824) (1,440)
Accrued Interest 2,720 1,499
Other Liabilities (1,169) 2,708
--------- ---------
Net Cash Provided by Operating Activities 20,585 19,261
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash Acquired upon Acquisition Due to Purchase 22,690 --
Cash Acquired upon Acquisition Due to Pooling Not Restated 19,054 --
(Increase) Decrease in Interest-Earning Deposits in Domestic Banks 333 (139)
Purchases of Securities Available for Sale (379,257) (353,328)
Purchases of Securities Held to Maturity -- (9,619)
Proceeds from Sale of Securities Available for Sale 42,779 133,153
Proceeds from Calls and Maturities of Securities Available for Sale 193,139 87,073
Proceeds from Calls and Maturities of Securities Held to Maturity 21,996 21,290
Net Increase in Loans (5,378) (41,843)
Purchases of Bank Premises and Equipment (2,884) (2,120)
Proceeds From Sale of Bank Premises and Equipment 243 64
Net (Increase) Decrease in Other Real Estate 216 (118)
Increase in Other Assets (668) (653)
--------- ---------
Net Cash Used in Investing Activities (87,737) (166,240)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 10,110 66,907
Net Increase (Decrease) in Repurchase Agreements Short-Term (53,138) 82,192
Net Increase (Decrease) in Other Short-Term Debt (110,248) 18,865
Net Increase in Repurchase Agreements Long-Term 157,131 --
Net Decrease in FHLB Advances, Callable 2/97 -- (45,000)
Net Increase in Other Long-Term Debt 75,351 50,844
Cash Dividends (6,338) (5,249)
Proceeds from Issuance of Common Stock 3,601 1,485
--------- ---------
Net Cash Provided by Financing Activities 76,469 170,044
--------- ---------
Net Increase in Cash and Cash Equivalents 9,317 23,065
Cash and Cash Equivalents at Beginning of Period 52,346 58,265
--------- ---------
Cash and Cash Equivalents at End of Period $ 61,663 $ 81,330
========= =========
See Notes to Consolidated Financial Statements.
</TABLE>
5
<PAGE>
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements of MainStreet Financial Corporation,
("MainStreet"), 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 1997 Form
10-K to the SEC. Mainstreet completed its acquisition of Regency Financial
Shares, ("Regency"), on March 10, 1998 which was accounted for using the pooling
of interests method of accounting. All prior year data has been restated to
reflect this acquisition. MainStreet completed its acquisition of Ballston
Bancorp, Incorporated on July 17, 1998, which was accounted for using the
pooling of interests method of accounting. Prior year data has not being
restated for this acquisition due to immateriality. The results of the interim
period are not necessarily indicative of year-end results.
2. Supplemental Cash Flow Data
For purposes of the Statements of Cash Flow, MainStreet considers all Cash and
Due from Bank Accounts and Federal Funds Sold to be cash equivalents.
Supplemental Cash Flow Data at the date of consummation of the purchase of
Tysons Financial Corporation, ("Tysons"), and as of December 31, 1997 for the
pooling of Ballston Bancorp Incorporated included in the September 30, 1998 cash
flow statement is as follows:
<CAPTION>
(In 000's)
NON-CASH ASSETS Tysons Ballston
- --------------- ------ --------
<S> <C> <C>
Interest-Earning Deposits in Domestic Banks $ 100 $ 2,489
Securities Available for Sale 14,231 16,132
Loans, Net of Unearned Income and Deferred Fees 63,318 41,293
Less: Allowance for Loan Losses (952) (602)
-------- --------
Loans, Net 62,366 40,691
Bank Premises and Equipment, Net 732 599
Other Assets 10,551 1,371
-------- --------
TOTAL ASSETS 87,980 61,282
-------- ---------
LIABILITIES
Deposits:
Demand (Noninterest Bearing) 23,770 12,596
Certificates of Deposit $100,000 and over 9,481 14,631
Other Time Deposits 56,217 37,817
--------- --------
Total Deposits 89,468 65,044
Other Short-Term Debt 3,344 5,890
Other Long-Term Debt --- 681
Other Liabilities 874 457
--------- --------
TOTAL LIABILITIES 93,686 72,072
SHAREHOLDERS' EQUITY
Total Shareholders' Equity 16,984 8,264
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 110,670 80,336
-------- --------
NET CASH AND CASH EQUIVALENTS ACQUIRED UPON $ 22,690 $ 19,054
ACQUISITION ======== ========
</TABLE>
6
<PAGE>
<TABLE>
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, 1998:
<CAPTION>
Gross Gross Approx.
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U. S. Treasury Securities $ 7,538 $ 156 $ 10 $ 7,684
Obligations of U.S.
Government Agencies 53,551 656 26 54,181
Mortgage-Backed Securities 682,095 7,356 1,742 687,709
Collateralized Mortgage
Obligations and REMICs 9,753 136 --- 9,889
Corporate Bonds 73,557 1,618 1,460 73,715
Other Securities 16,721 197 69 16,849
Obligations of States and
Political Subdivisions 17,593 798 --- 18,391
-------- -------- -------- ---------
Total Securities
Available for Sale $860,808 $ 10,917 $ 3,307 $868,418
======== ======== ======== ========
Gross gains and losses of $224,000 and $64,000, respectively, were realized on
sales and calls of securities available for sale for year-to-date September 30,
1998.
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, 1998:
<CAPTION>
Gross Gross Approx.
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Obligations of U.S.
Government Agencies $ 1,989 $ 50 $ --- $ 2,039
Mortgage-Backed Securities 19,014 548 --- 19,562
Obligations of State and
Political Subdivisions 29,965 1,082 12 31,035
-------- -------- -------- --------
Total Securities Held to Maturity $ 50,968 $ 1,680 $ 12 $ 52,636
======== ======== ======== ========
</TABLE>
Gross gains and losses of $42,000 and $2,000, respectively, were realized on
calls of securities held to maturity for year-to-date September 30, 1998.
7
<PAGE>
5. Loan Portfolio
Major classifications of loans at September 30, 1998 and December 31, 1997 are
summarized below:
(In 000's)
1998 1997
---- ----
Commercial $ 506,896 $ 459,319
Real Estate 244,912 220,928
Consumer 293,226 257,901
---------- -----------
Total Loans 1,045,034 938,148
Less: Unearned Income and Deferred Fees (12,177) (12,430)
---------- ----------
Loans, Net of Unearned Income and
Deferred Fees 1,032,857 925,718
Less: Allowance for Loan Losses (14,476) (12,375)
---------- ----------
Loans, Net $1,018,381 $ 913,343
========== ===========
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.
MainStreet considers a loan to be impaired when, based upon current information
and events, it believes it is probable that MainStreet will be unable to collect
all amounts due according to the contractual terms of the loan agreement.
MainStreet'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, MainStreet bases the measurement of these impaired loans on the fair
value of the loan's collateral properties. For all other loans, MainStreet 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 MainStreet'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:
8
<PAGE>
<TABLE>
<CAPTION>
(In 000's)
September 30 September 30
1998 1997
---- ----
<S> <C> <C>
Balance at December 31, 1997 and 1996 $ 12,375 $ 11,496
Change in Allowance due to Pooling Not Restated 602 ---
Change in Allowance due to Purchase Acquisition 952 ---
Charge-offs:
Commercial, Financial and Agricultural 1,471 1,777
Real Estate - Mortgage 259 102
Installment 1,627 1,644
-------- --------
3,357 3,523
Recoveries:
Commercial, Financial and Agricultural 77 383
Real Estate - Mortgage 1 ---
Installment 429 259
-------- --------
507 642
Net Charge-offs 2,850 2,881
Provision for Loan Losses 3,397 3,550
-------- --------
Balance at September 30, 1998 and Septembere 30, 1997 $ 14,476 $ 12,165
======== ========
Nonaccrual loans and loans 90-days past due or more as to interest or principal
payments are considered by MainStreet to be nonperforming loans. Nonperforming
loans were .97% of loans, net of unearned income at September 30, 1998.
The following table presents aggregate loan amounts for nonaccrual and 90-day
due loans as of September 30, 1998 and December 31, 1997:
<CAPTION>
1998 1997
---- ----
Nonaccrual Loans $ 5,829 $ 3,934
Loans Past Due 90 Days or More 4,226 3,764
-------- --------
Total Nonperforming Loans 10,055 7,698
-------- --------
Other Real Estate Owned 1,208 1,424
Other Repossessed Assets 347 190
-------- --------
Total Foreclosed/Repossessed Assets 1,555 1,614
-------- --------
Total Nonperforming Loans and Foreclosed/Repossessed Assets $ 11,610 $ 9,312
======== ========
The effect of nonaccrual loans on interest income for the nine months ended
September 30, 1998 and 1997 was as follows:
1998 1997
---- ----
Gross Amount of Interest That Would Have Been Recorded
at Original Rate $ 534 $ 302
Interest That Was Reflected in Income 69 4
----- -----
Net Impact on Interest Income $ 465 $ 298
</TABLE>
At September 30, 1998 and December 31, 1997, the recorded investment in loans
which have been identified by MainStreet as impaired loans in accordance with
Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by
Creditors for Impairment of A Loan", totaled $4.1 million and $3.6 million,
respectively. The portion of the allowance for loan losses related to such loans
was $1.6 million and .6 million for September 30, 1998 and December 31, 1997.
9
<PAGE>
6. Contingencies and Other Matters
MainStreet completed its acquisition of Tysons Financial Corporation,
("Tysons"), McLean, Virginia, effective February 28, 1998 at 11:59 p.m. having
received all required regulatory and shareholder approvals. Under terms of the
agreement, each shareholder of Tysons common stock received the equivalent of
$14.50 per share of MainStreet stock for each share held of Tysons stock. This
resulted in an exchange ratio of .527 shares of MainStreet's common stock for
each share of Tysons stock. Also under terms of the agreement, MainStreet agreed
to purchase Tyson's outstanding directors' warrants for the difference between
the exercise price per warrant and $14.50 . The warrants initially were
converted into Tysons' common stock. After this initial conversion, the common
stock exchange ratio, .527, was to be applied. In addition, MainStreet agreed to
purchase Tysons' directors' options for the difference between the exercise
price per option and $14.50 in MainStreet common stock. The outstanding
directors' options were at exercise prices of $9.125 and $12.50 and resulted in
an exchange ratio of .193 and .073, respectively. The outstanding shares of
Tysons common stock, directors' warrants, and directors' options of Tysons were
exchanged for approximately 611,175 shares of MainStreet's common stock.
MainStreet Financial Corporation completed its acquisition of Regency Financial
Shares, Incorporated, ("Regency"), Richmond, Virginia on March 10, 1998, having
received all required regulatory and shareholder approvals. Under terms of the
agreement, each shareholder of Regency common stock received the equivalent of
$13.00 per share of each share held of Regency stock. This resulted in an
exchange ratio of .474 shares of MainStreet's common stock for each share of
Regency stock. Each Regency director received the difference between the
exercise price per option and $13.00. This resulted in respective exchange
ratios of .237 and .219 shares of MainStreet's common stock for each Regency
director option, taking into consideration exercise prices of $6.50 and $7.00,
respectively. Each fractional share resulting from the conversion was settled at
$27.42 per share. The outstanding 1,430,134 shares of Regency common stock, and
the outstanding 5,500 directors' options were exchanged for approximately
678,993 shares of MainStreet's common stock.
MainStreet completed its acquisition of Ballston Bancorp, Incorporated,
("Ballston"), on July 17, 1998 at 11:59 p.m. having received all required
regulatory and shareholder approvals. This acquisition was accounted for using
the pooling of interests method of accounting. Prior periods have not been
restated due to immateriality. Under terms of the agreement, each shareholder of
Ballston common stock was to receive the equivalent of $12.04 per share for each
share held of Ballston common stock. This resulted in an exchange ratio of .4310
shares of MainStreet's common stock for each share of Ballston stock. The
outstanding shares of Ballston common stock were exchanged for approximately
697,938 of MainStreet common stock.
On August 26, 1998, MainStreet signed a definitive agreement with BB&T
Corporation, ("BB&T"), in which MainStreet will be acquired by BB&T. The
transaction will be a stock for stock exchange in which 1.18 shares of BB&T
stock will be exchanged for each share of MainStreet common stock. The
transaction is subject to both regulatory and MainStreet shareholder approval
and will be accounted for as a pooling of interests.
MainStreet 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 MainStreet's financial position.
7. Comprehensive Income
On January 1, 1998, MainStreet adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income". As required by the SFAS No.
130, prior year information has been modified to conform with the new
presentation.
Comprehensive income includes net income and all other changes to MainStreet's
equity, with the exception of transactions with shareholders ("other
comprehensive income"). MainStreet's only component of other comprehensive
income is the change in unrealized gains and losses on available for sale
securities.
MainStreet's total comprehensive income for the three month periods ended
September 30, 1998 and 1997 was $7,604,000 and $6,592,000, respectively.
Comprehensive income for the nine months ended September 30, 1998 and 1997 was
$17,354,000 and $16,346,000, respectively. Information concerning MainStreet's
other comprehensive income for the three month periods ended September 30, 1998
and 1997 and for the nine months ended September 30, 1998 and 1997 is as
follows:
<PAGE>
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Change in unrealized gains/(losses)
on available for sale securities $ 4,637 $ 2,728 $ 3,584 $ 5,085
Reclassification to realized gain
included in net income (160) (22) (44) (897)
Income tax expense relating to the change
in unrealized gains/(losses) on available
for sale securities (1,567) (947) (1,239) (1,466)
-------- -------- -------- --------
Other comprehensive income gain (loss) $ 2,910 $ 1,759 $ 2,301 $ 2,722
======== ======== ======== ========
8. Income Per Share
The following tables reconcile the numerator and denominator of the basic and
diluted computations for net income per share for the periods ended September
30, 1998 and 1997.
<CAPTION>
Three Months Ended September 30, 1998
-------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Income available to common shareholders $ 4,694 14,107 $ .33
Effect of Stock Options 68 27 ========
----------- ------
Diluted EPS
Income available to common
shareholders and assumed conversions $ 4,762 14,134 $ .34
=========== ========== ========
<CAPTION>
Three Months Ended September 30, 1997
-------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Income available to common shareholders $ 4,833 12,624 $ .38
Effect of Stock Options --- 43 ========
----------- ----------
Diluted EPS
Income available to common
shareholders and assumed conversions $ 4,833 12,667 $ .38
=========== ========= ========
Nine Months Ended September 30, 1998
-------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Income available to common shareholders $ 15,053 13,921 $ 1.08
Effect of Stock Options 165 39 ========
----------- ----------
Diluted EPS
Income available to common
shareholders and assumed conversions $ 15,218 13,960 $ 1.09
=========== ========= ========
11
<PAGE>
<CAPTION>
Nine Months Ended September 30, 1997
-------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Income available to common shareholders $ 13,624 12,604 $ 1.08
Effect of Stock Options --- 42 ========
----------- ----------
Diluted EPS
Income available to common
shareholders and assumed conversions $ 13,624 12,646 $ 1.08
=========== ========= ========
</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 herein by reference constitute
"forward-looking 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 Corporation, 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, amount others, the following: general economic and business
conditions in the Corporation's market area, inflation, fluctuations in interest
rates, changes in government regulations and competition, which will, amount
other things, impact demand for loans and banking services: the ability of the
Corporation 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 Corporation undertakes no obligation to correct or update a forward-looking
statement should the Corporation later become aware that it is not likely to be
achieved. If the Corporation were to update or correct a forward-looking
statement, investors and others should not conclude that the Corporation will
make additional updates or corrections thereafter.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Overview
MainStreet Financial Corporation reported year-to-date earnings of $15.1 million
at September 30, 1998 compared to $13.6 million at September 30, 1997, an
increase of $1.4 million, or 10.5%. These year-to-date earnings for 1998
produced a return on average assets of .99% and a return on average equity of
12.19%. This compares to a return on average assets of 1.19% and a return on
average equity of 14.20% for the same period in 1997. The earnings per diluted
share for the nine months ended September 30, 1998 were $1.09, compared to $1.08
for the same period in 1997.
Earnings for the third quarter of 1998 were $4.7 million compared to $4.8
million for the same period in 1997, relatively stable. These earnings equate to
$.34 and $.38 per diluted share for the third quarter of 1998 and 1997,
respectively. The return on average assets and the return on average equity for
the third quarter of 1998 were .90% and 10.73%, respectively. The return on
average assets and the return on average equity for the third quarter of 1997
were 1.21% and 14.42%, respectively.
The principal reasons for the increase in the year-to-date earnings were higher
levels of net interest income and noninterest income, excluding securities
gains. The increase in net interest income for the nine months of 1998 was
principally attributable to acquiring and maintaining a higher level of earning
assets compared with the same periods a year ago. The year-to-date earnings for
1998 would have been greater except that the third quarter included
approximately $710,000 of pre-tax expenses associated with MainStreet's overall
efforts to reorganize and restructure the Corporation. It also included expenses
associated with the acquisition of Ballston. These noninterest expenses are
principally the reason for the decrease in net income for the third quarter of
1998 compared to the third quarter of 1997.
During the first quarter of 1998, MainStreet completed the acquisitions of
Regency Financial Shares in Richmond, Virginia and Tysons Financial Corporation
in McLean, Virginia. The acquisition of Regency was accounted for using the
pooling of interests method of accounting. All prior year data has been restated
to reflect this acquisition. The acquisition of Tysons was accounted for as a
purchase and was effective after the close of business on February 28, 1998.
Accordingly, none of Tysons' financial history is reflected in prior period
MainStreet financial results. During the second quarter of 1998, MainStreet
completed its acquisition of Ballston Bancorp, Incorporated, which was accounted
for using the pooling of interests method of accounting. Prior year data has not
been restated at this time to reflect this acquisition. Ballston Bancorp,
Incorporated was a one bank holding company which merged into MainStreet
Financial Corporation, leaving the bank, The Bank of Northern Virginia, as a
subsidiary of MainStreet. For more detail on the acquisitions of Regency and
Ballston, see Notes 2 and 6 to The Consolidated Financial Statements.
On August 26, 1998, MainStreet signed a definitive agreement with BB&T
Corporation, ("BB&T"), in which MainStreet will be acquired by BB&T. The
transaction will be a stock for stock exchange in which 1.18 shares of BB&T
stock will be exchanged for each share of MainStreet common stock. The
transaction is subject to both regulatory and MainStreet shareholder approval
and will be accounted for as a pooling of interests.
Net Interest Income
Net interest income, the difference between total interest income and total
interest expense, is MainStreet's principal source of earnings. The amount of
net interest income is determined by the volume of interest-earning assets, the
level of rates earned on those assets, and the cost of supporting funds. The
difference between rates earned on interest-earning assets (with an adjustment
made to tax exempt income to provide comparability with taxable income) and the
cost of supporting funds is measured by the net interest margin.
13
<PAGE>
Net interest income for the first nine months of 1998 was $52.9 million, an
increase of $8.2 million, or 18.5%, over the $44.7 million for the first nine
months of 1997. The acquisition of Tysons Financial Corporation added $2.8
million in net interest margin and the acquisition of the Bank of Northern
Virginia added $2.6 million in net interest margin for 1998. Total interest
income increased $26.1 million while total interest expense increased $17.8
million for the first nine months of 1998 compared to the first nine months of
1997. The net interest margin was 3.72% and 4.24% for year-to-date September 30,
1998 and September 30, 1997, respectively. Average interest-earning assets
year-to-date increased $495.4 million, or 34.4% in 1998 over 1997 levels.
Average loans, net of unearned income, increased $126.1 million. The remaining
$369.3 million increase in interest-earning assets was primarily due to
investments. These increases in loans and investments were funded primarily by
an increase in average interest-bearing liabilities which increased $430.3
million in 1998 over 1997. MainStreet has continued its leveraging strategy in
order to enhance earnings and to utilize, to the greatest extent possible,
MainStreet's strong capital position. Included in this strategy, was also a
transfer of certain short-term liabilities into long-term liabilities. Interest
expense on long-term debt for the first nine months of 1998 was $17.9 million
compared to $2.7 million for the same period a year ago. Also, in November 1997,
MainStreet issued $50,000,000 in corporation-obligated mandatorily redeemable
capital securities. This expense for the nine months ended September 30, 1998
was $3.3 million. The acquisition of Tysons Financial Corporation added $75.7
million and $54.1 million in average interest-earning assets and average
interest-bearing liabilities, respectively at September 30, 1998. The
acquisition of the Bank of Northern Virginia added $70.7 million and $53.0
million in average interest earning assets and average interest bearing
liabilities, respectively, at September 30, 1998.
Net interest income for the three months ended September 30, 1998 was $17.9
million compared to $15.3 million, an increase of $2.6 million, or 16.8%. The
net interest margin for the third quarter of 1998 was 3.64% and 4.17% for the
third quarter of 1997. Total average interest-earning assets for the third
quarter of 1998 increased $477.5 million over the same period in 1997 primarily
due to increased investments along with an increase in average loans net of
unearned income. Total average interest-bearing liabilities increased $398.4
million in the third quarter of 1998 compared to 1997.
Provision for Loan Losses
A provision for loan losses is charged to earnings for the purpose of
establishing an allowance for loan losses. Losses are in turn, charged to this
allowance rather than being reported as a direct expense. For the first nine
months of 1998 the provision for loan losses was $3.4 million, down $.2 million
in comparison to the first nine months of 1997.
The provision for loan losses for the third quarter of 1998 was $1.2 million in
comparison to $1.0 million in 1997.
14
<PAGE>
Noninterest Income
Noninterest income, excluding securities gains, was $12.1 million and $9.7
million, for the first nine months of 1998 and 1997, respectively, an increase
of $2.4 million, or 24.8%. Service charges, fees and commissions accounted for
$2.0 million with the remaining $.4 million due to increased trust income. Of
the $2.0 million increase in fee incomes, $.5 million was due to the sale of
certain mortgage servicing in the second and third quarters of 1998. The
remainder of the increase, along with the increase in trust income, was
primarily due to increased charges.
Noninterest income, excluding securities gains, for the third quarter of 1998
was $4.0 million compared to $3.3 million for the third quarter of 1997, an
increase of $.7 million, or 18.1%. This increase was primarily due to increased
charges and fees.
Securities Gains
Securities gains year-to-date September 30, 1998 were $.2 million compared to
$.9 million year-to-date September 30, 1997. The gains in 1997 were attributed
to the sales of adjustable rate mortgage backed securities due to the high level
of prepayments on those securities which accelerated expense related to
amortization of bond premiums.
Securities gains for the third quarter of 1998 were $50 thousand compared to $37
thousand for the third quarter of 1997.
Noninterest Expense
Total noninterest expense for the first nine months of 1998 was $39.6 million,
an increase of $7.9 million, or 25.0%, over the first nine months of 1997. Of
this increase, $2.6 million and $1.9 million were operating expenses of Tysons
Financial Corporation and Ballston Bancorp, respectively, both of which are not
included in the prior year's expense. Salaries and employee benefits expenses
rose $3.1 million, or 18.1%, over 1997 levels. Of this amount $1.4 million were
expenses associated with Tysons and Ballston and the remaining $1.7 million was
due to the staffing of a new branch along with additional compensation awards.
Other noninterest expenses were $12.1 million year-to-date September 30, 1998
compared to $8.6 million year-to-date December 30, 1997, an increase of $3.5
million, or 41.5%. Of this amount, Tysons other noninterest expenses were $1.4
million which were mainly associated with professional fees due to the
acquisition, franchise tax expenses, and intangible expenses. Ballston holding
company and Bank of Northern Virginia other noninterest expenses were $1.0
million which included professional fees associated with the acquisition. The
remaining $1.1 million in other noninterest expenses were expenses associated
with acquisitions in 1998 along with separation agreements and other charges due
to restructuring efforts of MainStreet in 1998.
Noninterest expense for the third quarter of 1998 was $13.8 million in compared
to $10.5 million for the same period in 1997, an increase of $3.3 million, or
31.3%. Of this amount $1.0 million was the increase in salaries and employee
benefits due to the staffing of a new branch, additional compensation expense,
and the acquisition of Tysons and Bank of Northern Virginia. The other
noninterest expense category increased $1.8 million in the third quarter of 1998
over 1997 primarily due to separation agreements, acquisition costs, and Tysons
and Bank of Northern Virginia expenses, as mentioned in the year-to-date
analysis.
Financial Condition
Total assets at September 30, 1998 were $2.1 billion, an increase of $286.4
million, or 16.0%, over year-end assets of $1.8 billion. A part of this increase
was due to the acquisition of Tysons Financial Corporation, effective at the
close of business on February 28, 1998 and Ballston on July 17, 1998. Tysons'
assets at September 30, 1998 were $113.8 million and the Bank of Northern
Virginia assets at September 30, 1998 were $68.5 million. These two together
make up 10.2% of the increase from year-end.
14
<PAGE>
Investments, including securities available for sale and securities held to
maturity, were $919.4 million at September 30, 1998 compared to $766.2 million
at December 31, 1997, an increase of $153.2 million. Tysons' investments at
September 30, 1998 were $37.1 million and the Bank of Northern Virginia were
$25.0 million. The remainder of the increase was funded by an increase in
deposits and borrowings. At September 30, 1998, securities available for sale
accounted for 94.5% of the investment portfolio while securities held to
maturity accounted for 5.5% of the investment portfolio. All securities acquired
in the acquisitions of Tysons, Regency and Ballston were converted to the
available for sale category along with new purchases in 1998. All of Regency's
securities were previously held in the available for sale category. This
distribution of the investment portfolio allows flexibility in the management of
interest rate risk, liquidity, and capital adequacy.
Loans, net of unearned income, were $1.0 billion at September 30, 1998, an
increase of $107.1 million over December 31, 1997. Tysons' loans, net of
unearned income at September 30, 1998 were $55.7 million and The Bank of
Northern Virginia's loans were $37.2 million at September 30, 1998. A discussion
on credit quality can be found in the Asset Quality section of this analysis.
Other assets at September 30, 1998 were $54.3 million compared to $40.4 million
at December 31, 1997, an increase of $13.9 million, or $34.5%. Of this increase
$10.9 million was the balance of other assets for Tysons' Financial Corporation
at September 30, 1998. The greatest component of other assets for Tysons was the
$9.1 million intangible recorded at the time of the acquisition.
Total deposits at September 30, 1998 were $1.2 billion, up from the $1.1 billion
at year end 1997. Tysons' deposits at September 30, 1998 were $90.3 million. The
Bank of Northern Virginia's deposits at September 30, 1998 were $53.8 million.
The largest increases were in demand deposits, money market accounts, and other
time deposits.
Borrowings at September 30, 1998 and September 30, 1997 were $658.3 million and
$579.2 million, respectively. Borrowings increased $79.0 million at September
30, 1998, or 13.6%, over the outstanding borrowings at December 31, 1997 which
were primarily used in MainStreet's leverage strategy to fund investments. The
acquisition of Tysons Financial Corporation and The Bank of Northern Virginia
were immaterial to the increase in borrowings. The following is a breakdown of
the borrowings at September 30, 1998 and December 31, 1997.
September 30, 1998 December 31, 1997
------------------ -----------------
Short-term Repurchase Agreements $160,733 $213,871
Short-term FHLB Advances --- 61,000
Federal Funds Purchased --- 38,000
Corporate Cash Management Accounts 41,126 30,195
Treasury Tax and Loan Notes 7,627 20,572
Long-Term Repurchase Agreements 220,597 63,466
Long-Term FHLB Advances 178,003 101,936
Corporation-Obligated Mandatorily
Redeemable Capital Securities 50,000 50,000
Capital Lease 164 198
-------- --------
$658,250 $579,238
======== ========
15
<PAGE>
Asset Quality
Centralized credit risk management provides more uniform levels of
standardization and underwriting among MainStreet affiliates. MainStreet manages
credit risk through a number of methods including loan grading, industry type,
and underwriting collateral. A formal loan review function provides an
independent assessment of credit ratings, credit quality, and credit process.
Management believes that early detection of credit problems through regular
reviews of borrowers' financial performance and collateral values is an
important factor in overall credit quality.
Nonperforming assets were $11.6 million at September 30, 1998 compared to $9.3
million at December 31, 1997. Nonperforming loans were $10.1 million and $7.7
million at September 30, 1998 and December 31, 1997, respectively. The ratio of
nonperforming loans to loans, net of unearned income, was .97% at September 30,
1998 and .83% at December 31, 1997. At September 30, 1998 and December 31, 1997,
nonaccrual loans comprised $5.8 million and $3.9 million, respectively of loans,
net of unearned income. The ratio of the allowance for loan losses to
nonperforming loans was 143.97% and 160.76%, at September 30, 1998 and December
31, 1997, respectively. The net charge-off ratio at September 30, 1998 was .57%
versus .42% at December 31, 1997. The allowance for loan losses to actual loans,
net of unearned income, was 1.40% at September 30, 1998 compared to 1.34% at
December 31, 1997.
Shareholders' Equity
Total shareholders' equity at September 30, 1998 was $175.6 million compared to
$135.7 million at December 31, 1997, an increase of $39.9 million of which $16.9
million was associated with the purchase of Tysons Financial Corporation and of
which $8.3 million was associated with the pooling of Ballston Bancorp,
Incorporated not restated in the financials. Dividends per share were $.15 for
the third quarter of 1998 and $.45 year-to-date September 30, 1998. At September
30, 1998, the leverage and risk based capital ratios were 10.18% and 19.20%,
respectively. The capital position remains strong with ratios well 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, MainStreet has
also sought additional sources of liquidity primarily with the Federal Home Loan
Bank, regional and super-regional banks and top tier investment banking firms.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, was issued in June 1998. This Statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that derivatives be recognized as either
assets or liabilities in the statement of financial position and be measured at
fair value. The accounting for changes in the fair value of a derivative depends
on the intended use of the derivative and whether or not the derivative is
designated as a hedging instrument. This Statement is effective for fiscal years
beginning after June 15, 1999 with initial application in the first quarter of
the fiscal year. SFAS No. 133 is not expected to have a material effect on the
Corporation's financial statements.
Statement of Financial Accounting Standards No. 134, Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise, was issued in October 1998. This
Statement amends existing classification and accounting treatment of
mortgage-backed securities, retained after mortgage loans held for sale are
securitized, for entities engaged in mortgage banking activities. These
securities previously were classified and accounted for as trading and now may
be classified as held-to-maturity or available-for-sale, also. This Statement is
effective for the first fiscal quarter beginning after December 15, 1998. SFAS
No. 134 is not expected to have a material effect on the Corporation's financial
statements.
Year 2000 Update
In May 1997, the Federal Financial Institutions Examination Council, ("FFIEC"),
issued an interagency statement to the chief executive officers of all federally
supervised financial institutions regarding Year 2000 project management
awareness. The FFIEC has highly prioritized Year 2000 compliance in order to
avoid major disruptions to the operations of financial institutions and the
country's financial systems. The FFEIC statement provides guidance to financial
16
<PAGE>
institutions, providers of data services, and all examining personnel of the
federal banking agencies regarding the Year 2000 issue. The federal banking
agencies have been conducting Year 2000 compliance examinations, and the failure
to implement an adequate Year 2000 program can be identified as an unsafe and
unsound banking practice. MainStreet was subject to a Year 2000 Phase II adverse
consequences examination.
The Year 2000 issue concerns the potential impact of historic computer software
code that only utilizes two digits to represent the calendar year (e.g. "98" for
"1998"). Software so developed and not corrected, could produce inaccurate or
unpredictable results commencing upon January 1, 2000, when current and future
dates present a lower two digit year number than dates in the prior century.
MainStreet Financial Corporation, similar to most financial services providers,
is subject to the potential impact of the Year 2000 Issue due to the date
related nature of financial information. Potential impacts to MainStreet may
arise from the failure or inaccuracy of data generated by software, computer
hardware, and other equipment both within the Corporation's direct control and
outside of the Corporation's control or ownership, yet with which the
Corporation electronically or operationally interfaces.
MainStreet Financial Corporation is devoting significant time and resources to
manage our Year 2000 project. The Year 2000 Task Force has been established, as
an ad hoc committee comprised of representatives from the following corporation
activities: Corporate Risk Management; Information Services; Legal; Credit
Administration/Loan Review; Internal Audit; Facilities
Management/Security/Purchasing; Electronic Banking/Operations/Card Services;
Financial Systems and Accounting. This committee provides management with
guidance and oversight in addressing the Corporation's Year 2000 initiatives.
Activities and recommendations of this committee are provided to the CEOs of all
the Corporation's subsidiaries; the Board of Directors of the Corporation and
all affiliate organizations; and other related parties.
MainStreet continues to evaluate and address Year 2000 technology issues. The
internal review primarily addresses operational risk and credit risk.
Operational risk is being addressed in five phases which are recommended by the
FFEIC: awareness; assessment; remediation; testing; and implementation. Credit
risk as it relates to Year 2000 is addressed through training and educational
programs with the lenders and key commercial customers. Additional documentation
and assessment requirements have been designed and implemented in the normal
credit administration process to ensure prompt identification of borrowers'
readiness and borrowers' ability to financially handle any Year 2000 issues that
may arise.
Year 2000: Awareness
MainStreet Financial Corporation has developed an extensive Year 2000 program to
promote awareness. The program focuses on three groups: 1) Officers, directors
and employees of the holding company and all of our affiliate subsidiaries; 2)
Customers, vendors and suppliers of the holding company and all of our affiliate
subsidiaries; and, 3) Community leaders, civic groups and individuals in the
markets we serve. Officers, directors and employees of all our companies attend
educational presentations commensurate with their duties and responsibilities.
Customers are made aware of the Year 2000 issues impacting our industry and
communities through newsletters, direct mailings and brochures included in
account statements. Vendors and suppliers have been identified and contacted
with regard to their readiness for Year 2000 and informed on the state of
preparedness of MainStreet Financial Corporation. Public forums have been held
in the majority of our markets providing education on Year 2000 issues. Major
civic groups or local chambers of commerce often host these forums. MainStreet
Financial Corporation and all of our affiliate subsidiaries continue to support
this active awareness approach in the belief that the success of our
organization is directly related to the success of the communities we serve.
Year 2000: Assessment
The Assessment Phase was broken into four sections:
1) Inventory of all internal and external technology in use by MainStreet
as well as all external vendor and supplier relationships providing
services to MainStreet.
2) Determine the impact of each technology or vendor/supplier service as
it relates to the core products and services provided by MainStreet.
Impact is broken into four categories: mission critical; mission
necessary; mission desirable; and mission unrelated. The Year 2000 Task
Force, with the input from holding company and affiliate managers,
assigned all inventoried items into one of these four categories.
Mission Critical
A technology item, service provider, supplier or customer is mission
critical if the absence of that item would cause significant harm to
MainStreet Financial Corporation or an individual affiliate company.
Problems with such a system might cause financial liability, immediate
loss of revenue, customer service problems leading to loss of revenue,
harm to our reputation, unwanted publicity, and so on.
17
<PAGE>
Mission Necessary
A technology item, service provider or supplier that is mission
necessary could cause significant disruption of business and reductions
in productivity or customer service if it were to fail.
Mission Desirable
A technology item, service provider or supplier that is mission
desirable is useful in assisting our organization in accomplishing its
objectives. However, in the absence of such an item, our organization
should be able to function with little noticeable disruption (perhaps
by using alternative applications).
Mission Unrelated
A technology item, service provider or supplier is mission unrelated if
it does not fit into any of the other three categories. This may be an
item that is in use, even though comparable alternatives are available
within the organization.
3) Prioritize each of the technology items within the four mission
categories. This step is dictated by the heavy concentration of
technology items provided by outside vendors and subject to their
timetables for making appropriate conversions.
4) Communicate results.
Year 2000: Remediation
This phase addresses correction of non-compliant systems. As such, this phase
includes three options. Existing systems that are not Year 2000 compliant may
be:
1. Repaired through re-writing of code;
2. Replaced with new systems and software that are year 2000 compliant; or
3. Determined unnecessary to corporate objectives and replaced by manual
processes or eliminated entirely.
MainStreet Financial Corporation and its affiliates obtain the vast majority of
our software from vendors. As a result, we have identified the limited number of
programs where we control the code. These applications have no known century
date issues. Conversion of the remaining mission critical applications rests
with the vendors providing the software. The status of these vendors is being
monitored on an ongoing basis. Contact is being maintained with representatives
of the vendors providing mission critical software to ensure that sufficient
steps are being taken to make these software packages Year 2000 compliant.
Software that is not mission critical will continue to be addressed in greater
detail on a priority basis during 1998 and 1999.
The mainframe computer system is considered Year 2000 compliant based upon
information provided by the manufacturer to MainStreet Financial Corporation's
Information Services Department. Network and personal computer compliance will
be addressed through the normal course of technology improvement. Hardware will
be subject to testing in 1998 through the testing of mission critical
applications on which they run. The mainframe operating system will be tested at
the disaster recovery site in December 1998. Hardware that is not mission
critical will continue to be addressed in greater detail on a priority basis
during 1998 and 1999.
Year 2000: Testing
The remediation by itself (conversion of non-compliant technology) is not
considered sufficient to safeguard the Corporation from operational risk.
Therefore, it is deemed prudent to perform complex integrated testing of all
mission critical applications. MainStreet's system and mainframe, along with
core applications, are subject to periodic century date change testing to verify
accurate processing of date related information. This testing is ongoing and
includes the evaluation of the system's ability to handle key dates as required
by the FFIEC (e.g. 09/09/1999, 01/01/2000, 02/29/2000, 12/31/2000, etc.) Other
systems will be tested based on vendor instructions once software remediation
has been completed by the vendor(s).
Year 2000: Contingency Plans
While all of the best efforts are being focused in the initial five steps,
effective risk management includes the creation and evaluation of contingency
plans for mission critical activities. This will be a company-wide effort,
headed up by the Year 2000 Task Force, that will not only address computer
technology, but also include an evaluation of major customer, vendor, supplier
and correspondent relationships. The Information Services Department of
MainStreet Financial Corporation maintains a core application disaster recovery
18
<PAGE>
plan. In addition, Information Services is on-line with our mainframe and
software vendors and will be able to obtain downloads of updated software
immediately upon its release should failure occur. This provides additional
assurance that any additional problems that may be encountered are addressed in
a timely manner. Currently, the Company's Credit Administration function has
instituted a comprehensive program to address Year 2000 issues with major
borrowers. This program is modeled after information provided by Robert Morris
Associates and the FFIEC and encourages heavy lender involvement in
understanding and evaluating the borrower's Year 2000 exposure. Additional
contingency plans will be developed and implemented as this project progresses.
MainStreet Financial Corporation also believes it is an integral part of all of
the communities and markets that it serves. As a service to the affiliate banks
in these markets, the CEOs have been offered the services of the Corporate Risk
Manager in the execution of community-wide educational programs on Year 2000
awareness and project management. These programs are ongoing and have been well
received.
MainStreet Financial Corporation is committed to the Year 2000 issue. The plan
has been assessed and completed which included a complete inventory of all
applications, vendors, and services. Remediation is substantially complete and
testing began May 14, 1998 and will be substantially complete by December 31,
1998. Testing is approximately 50% complete. MainStreet will substantially be
ready for the Year 2000 by December 31, 1998. The Board of Directors of
MainStreet Financial Corporation, all affiliate CEOs and the Boards of Directors
for affiliate organizations receive periodic updates on a quarterly basis on the
progression of these initiatives.
Contingencies and Other Matters
This discussion is found in Note 6 of the Notes to Consolidated Financial
Statements in this report.
19
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required by Part II, Item 1, of the Form 10-Q appears on page 10
of Part I, Item 1, Note 6, of this report and is herein incorporated by
reference.
Item 6(a). Exhibits
99. Financial Data Schedule
Item 6(b). Reports on Form 8-K
Form 8-K filed October 1, 1998, regarding MainStreet Financial Corporation
signing a definitive agreement with BB&T Corporation in which MainStreet will be
acquired by BB&T.
Form 8-K filed October 23, 1998, regarding the restatement of MainStreet's
consolidated financial statements for the years ended 1997, 1996, and 1995.
20
<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 FINANCIAL CORPORATION
Date November 13, 1998 /s/ James E. Adams
------------------------------ ------------------------------------
James E. Adams
Chief Financial Officer/Executive
Vice President/Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 52,677
<INT-BEARING-DEPOSITS> 2,750
<FED-FUNDS-SOLD> 8,986
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 868,418
<INVESTMENTS-CARRYING> 50,968
<INVESTMENTS-MARKET> 52,636
<LOANS> 1,032,857
<ALLOWANCE> 14,476
<TOTAL-ASSETS> 2,080,622
<DEPOSITS> 1,228,354
<SHORT-TERM> 209,486
<LIABILITIES-OTHER> 18,434
<LONG-TERM> 448,754
0
0
<COMMON> 70,635
<OTHER-SE> 104,949
<TOTAL-LIABILITIES-AND-EQUITY> 2,080,622
<INTEREST-LOAN> 70,528
<INTEREST-INVEST> 43,631
<INTEREST-OTHER> 1,315
<INTEREST-TOTAL> 115,474
<INTEREST-DEPOSIT> 33,998
<INTEREST-EXPENSE> 62,540
<INTEREST-INCOME-NET> 52,934
<LOAN-LOSSES> 3,397
<SECURITIES-GAINS> 200
<EXPENSE-OTHER> 39,577
<INCOME-PRETAX> 22,291
<INCOME-PRE-EXTRAORDINARY> 22,291
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,053
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.09
<YIELD-ACTUAL> 3.64
<LOANS-NON> 5,829
<LOANS-PAST> 4,226
<LOANS-TROUBLED> 303
<LOANS-PROBLEM> 12,772
<ALLOWANCE-OPEN> 12,375
<CHARGE-OFFS> 3,357
<RECOVERIES> 507
<ALLOWANCE-CLOSE> 14,476
<ALLOWANCE-DOMESTIC> 14,476
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 8,933
</TABLE>
