SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Date Report (Date of earliest event report): October 23, 1998
MAINSTREET FINANCIAL CORPORATION
- ------------------------------------------------------------------------------
(Exact name of as specified in charter)
Virginia 0-8622 54-1046817
- ------------------- ------------------- ------------------
(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification No.)
incorporation)
P. O. Box 4831, Martinsville, Virginia 24115-4831
------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 540-666-6724
<PAGE>
Item. 5 Other Events
On August 26, 1998, MainStreet Financial Corporation, ("MainStreet"), entered
into a definitive agreement with BB&T Corporation, ("BB&T"), in which MainStreet
will be acquired by BB&T. A registration statement will be filed with the
Securities Exchange Commission in accordance with this transaction. In March
1998, MainStreet consummated its acquisition of Regency Financial Shares,
Incorporated, ("Regency"), in Richmond, Virginia which was accounted for using
the pooling of interests method of accounting. In order to reference
MainStreet's 1998 Form 10-K in the registration statement to be filed with BB&T,
MainStreet is submitting this Form 8-K to restate its consolidated financial
statements for the years ended December 31, 1997, 1996 and 1995 to include
Regency.
INDEX TO EXHIBITS
No. Description
23 Consent of Independent Accountants
27 Financial Data Schedule
99.1 Report of Independent Accountants
99.2 Financial Statements and Footnotes
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MAINSTREET FINANICAL CORPORATION
Date: October 23, 1998 By: /s/ James E. Adams
----------------------------------
James E. Adams
Executive Vice President,
Chief Financial Officer/Treasurer
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
MainStreet Financial Corporation on Forms S-8 of our report dated October 22,
1998 on our audits of the consolidated financial statements of MainStreet
Financial Corporation as of December 31, 1997 and 1996, and for the years ended
December 31, 1997, 1996 and 1995, which report is included in this Report on
Form 8-K.
PricewaterhouseCoopers LLP
Greensboro, North Carolina
October 22, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 47,202
<INT-BEARING-DEPOSITS> 494
<FED-FUNDS-SOLD> 5,144
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 693,957
<INVESTMENTS-CARRYING> 72,243
<INVESTMENTS-MARKET> 74,321
<LOANS> 925,718
<ALLOWANCE> 12,375
<TOTAL-ASSETS> 1,794,242
<DEPOSITS> 1,063,732
<SHORT-TERM> 363,638
<LIABILITIES-OTHER> 15,553
<LONG-TERM> 215,600
0
0
<COMMON> 63,306
<OTHER-SE> 72,413
<TOTAL-LIABILITIES-AND-EQUITY> 1,794,242
<INTEREST-LOAN> 84,382
<INTEREST-INVEST> 35,919
<INTEREST-OTHER> 1,003
<INTEREST-TOTAL> 121,304
<INTEREST-DEPOSIT> 40,435
<INTEREST-EXPENSE> 61,554
<INTEREST-INCOME-NET> 59,750
<LOAN-LOSSES> 4,652
<SECURITIES-GAINS> 926
<EXPENSE-OTHER> 43,727
<INCOME-PRETAX> 25,250
<INCOME-PRE-EXTRAORDINARY> 25,250
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,098
<EPS-PRIMARY> 1.36
<EPS-DILUTED> 1.35
<YIELD-ACTUAL> 4.15
<LOANS-NON> 3,934
<LOANS-PAST> 3,764
<LOANS-TROUBLED> 263
<LOANS-PROBLEM> 11,600
<ALLOWANCE-OPEN> 11,496
<CHARGE-OFFS> 4,596
<RECOVERIES> 823
<ALLOWANCE-CLOSE> 12,375
<ALLOWANCE-DOMESTIC> 12,375
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,391
</TABLE>
Exhibit 99.1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders MainStreet Financial Corporation:
We have audited the accompanying consolidated balance sheets of MainStreet
Financial Corporation and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
MainStreet Financial Corporation and Subsidiaries as of December 31, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
PRICEWATERHOUSECOOPERS LLP
Greensboro, North Carolina
October 22, 1998
Exhibit 99.2
FINANCIAL STATEMENTS AND FOOTNOTES
<PAGE>
MAINSTREET FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In 000's Except Share Data)
<TABLE>
<CAPTION>
December 31
1997 1996
------- ---------
<S> <C>
ASSETS
Cash and Due From Banks $ 47,202 $ 47,792
Interest-Earning Deposits In Domestic Banks 494 518
Mortgage Loans Held for Sale 3,048 742
Federal Funds Sold 5,144 10,473
Securities Available for Sale (Aggregate
Costs of $689,193 and $352,188
in 1997 and 1996, respectively) 693,957 353,398
Securities Held to Maturity (Aggregate
Market Values of $74,321 and
$100,100 in 1997 and 1996, respectively)
Taxable 38,170 59,717
Nontaxable 34,073 38,205
----------- -----------
72,243 97,922
Loans, Net of Unearned Income and Deferred Fees 925,718 878,160
Less: Allowance for Loan Losses (12,375) (11,496)
----------- -----------
Loans, Net 913,343 866,664
Bank Premises and Equipment, Net 17,003 16,229
Other Real Estate Owned 1,424 905
Other Assets 40,384 35,482
----------- -----------
TOTAL ASSETS $ 1,794,242 $ 1,430,125
=========== ===========
LIABILITIES
Deposits:
Demand Deposits (Noninterest-Bearing) $ 149,940 $ 142,001
Interest Checking Accounts 121,470 115,688
Savings Deposits 115,929 122,883
Money Market Investment Accounts 104,478 106,499
Time Deposits:
Certificates of Deposit $100,000 and Over 154,982 119,507
Other 416,933 393,506
----------- -----------
Total Deposits 1,063,732 1,000,084
Repurchase Agreements Short-Term 213,871 145,356
Other Short-Term Debt 149,767 82,764
FHLB Borrowings, Callable 2/97 -- 45,000
Repurchase Agreements Long-Term 63,466 --
Other Long-Term Debt 102,134 26,029
Corporation-Obligated Mandatorily Redeemable Capital Securities 50,000 --
Accrued Interest Payable 5,977 4,423
Other Liabilities 9,576 5,332
----------- -----------
TOTAL LIABILITIES 1,658,523 1,308,988
----------- -----------
SHAREHOLDERS' EQUITY
Preferred Stock, $5 Par Value. Authorized 1,000,000 Shares;
None Outstanding -- --
Common Stock, $5 Par Value. Authorized 20,000,000 Shares;
Issued and Outstanding 12,661,212 and 12,535,271 Shares in
1997 and 1996, respectively 63,306 62,676
Capital in Excess of Par 12,399 11,223
Retained Earnings 57,501 47,415
Unearned Compensation (176) (338)
Unrealized Gains on Securities, Net of Taxes 2,689 161
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 135,719 121,137
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,794,242 $ 1,430,125
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MAINSTREET FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In 000's Except Per Share Data)
<TABLE>
<CAPTION>
Years Ended December 31
INTEREST INCOME 1997 1996 1995
---- ---- ----
<S> <C>
Interest and Fees on Loans:
Taxable $ 84,249 $ 77,834 $ 68,017
Nontaxable 133 92 163
Interest on Mortgage Loans Held for Sale 313 168 144
Interest and Dividends on Securities Available for Sale 30,654 17,479 11,178
Interest and Dividends on Securities Held to Maturity:
Taxable 3,359 4,731 7,284
Nontaxable 1,906 2,252 2,641
Other Interest Income 690 1,067 984
-------- -------- --------
Total Interest Income 121,304 103,623 90,411
-------- -------- --------
INTEREST EXPENSE
Deposits 40,435 37,395 36,486
Short-Term Debt 16,583 6,612 3,594
Long-Term Debt 4,536 3,155 63
7% Convertible Subordinated Debentures -- -- 454
-------- -------- --------
Total Interest Expense 61,554 47,162 40,597
-------- -------- --------
Net Interest Income 59,750 56,461 49,814
Provision for Loan Losses 4,652 3,510 1,813
-------- -------- --------
Net Interest Income After Provision for Loan Losses 55,098 52,951 48,001
-------- -------- --------
NONINTEREST INCOME
Service Charges, Fees and Other 9,582 8,230 6,712
Trust Income 3,371 2,942 2,441
Securities Gains, Net 926 610 43
-------- -------- --------
Total Noninterest Income 13,879 11,782 9,196
-------- -------- --------
NONINTEREST EXPENSE
Salaries 17,066 15,308 14,497
Employee Benefits 6,358 5,871 4,604
Net Occupancy 2,253 2,099 2,129
Equipment 3,895 3,977 3,669
FDIC Assessment 129 66 1,125
Stationery and Supplies 921 1,014 1,009
Advertising 519 636 347
Other 12,586 10,311 8,686
-------- -------- --------
Total Noninterest Expense 43,727 39,282 36,066
-------- -------- --------
Income Before Income Taxes 25,250 25,451 21,131
Income Tax Expense 8,152 8,054 6,297
-------- -------- --------
NET INCOME $ 17,098 $ 17,397 $ 14,834
======== ======== ========
Per Share:
Basic:
NET INCOME $ 1.36 $ 1.38 $ 1.26
======== ======== ========
Average Shares Outstanding 12,602 12,585 11,800
======== ======== ========
Diluted:
NET INCOME $ 1.35 $ 1.38 $ 1.17
======== ======== ========
Average Shares Outstanding 12,641 12,649 12,911
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MAINSTREET FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In 000's Except for Share and Per Share Data)
<TABLE>
<CAPTION>
Unrealized
Capital In Gains (Losses)
Common Excess Retained Unearned on Securities,
Stock of Par Earnings Compensation Net Total
--------- --------- --------- --------- -------------- ------
<S> <C>
Year Ended December 31, 1995
Balance at January 1, 1995 as previously reported $ 32,884 $ (417) $ 47,844 $ -- $ (8,317) $ 71,994
Adjustments for Pooling of Interests 5,794 5,317 (1,144) -- (210) 9,757
Balance at January 1, 1995 as restated 38,678 4,900 46,700 -- (8,527) 81,751
Net Income -- -- 14,834 -- -- 14,834
Cash Dividends ($.34 Per Share) -- -- (4,217) -- -- (4,217)
Sale of 42,007 Shares Though Dividend
Reinvestment Plan and Stock Option Plan 211 462 -- -- -- 673
Conversion of Subordinated Debentures
(489,910 Shares) 2,450 6,436 -- -- -- 8,886
Change in unrealized gains (losses) on securities,
net of deferred income tax expense of $4,316 -- -- -- -- 8,027 8,027
Stock Split Effected in the Form of a Stock Dividend 21,336 -- (21,336) -- -- --
-------- --------- --------- --------- --------- ---------
Balance at December 31, 1995 62,675 11,798 35,981 -- (500) 109,954
Year Ended December 31, 1996
Net Income -- -- 17,397 -- -- 17,397
Cash Dividends ($.47 Per Share) -- -- (5,867) -- -- (5,867)
Cash Paid for Cash Election and Fractional
Shares for Mergers (666) (1,632) -- -- -- (2,298)
Sale of 133,543 Shares Through Dividend
Reinvestment Plan and Stock Option Plan
including effect of stock split 667 1,057 (96) -- -- 1,628
Unearned Compensation -- -- -- (338) -- (338)
Change in unrealized gains (losses) on securities,
net of deferred income tax expense of $491 -- -- -- -- 661 661
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1996 62,676 11,223 47,415 (338) 161 121,137
Year Ended December 31, 1997
Net Income -- -- 17,098 -- -- 17,098
Cash Dividends ($.57 Per Share) -- -- (6,906) -- -- (6,906)
Cash Paid for Cash Election and Fractional
Shares for Mergers -- -- (12) -- -- (12)
Sale of 125,942 Shares Through Dividend
Reinvestment Plan and Stock Option Plan 630 1,176 (94) -- -- 1,712
Unearned Compensation -- -- -- 162 -- 162
Change in unrealized gains (losses) on securities,
net of deferred income tax expense of $1,359 -- -- -- -- 2,528 2,528
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 $ 63,306 $ 12,399 $ 57,501 $ (176) $ 2,689 $ 135,719
========= ========= ========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MAINSTREET FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In 000's)
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------------
1997 1996 1995
---- ---- ----
<S> <C>
Cash Flows From Operating Activities:
Net Income $ 17,098 $ 17,397 $ 14,834
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Provision for Loan Losses 4,652 3,510 1,813
Depreciation and Amortization 2,515 2,603 2,357
Loss on Disposal of Fixed Assets 32 -- --
Amortization of Securities Premiums and Discounts, Net 1,378 (312) (517)
Deferred Income Tax Provision (Benefit) (824) (503) 620
Securities Gains, Net (926) (610) (43)
Amortization of Intangibles 238 227 267
Mortgage Loan Originations Held for Sale (23,155) (12,943) (10,914)
Mortgage Loans Sold 20,849 13,981 9,655
Changes in Other Assets and Other Liabilities:
Other Assets (4,801) (2,223) 3,415
Accrued Interest 1,554 1,009 818
Accrued Loss Contingencies -- -- (1,341)
Other Liabilities 4,244 (380) 1,178
--------- --------- ---------
Net Cash Provided by Operating Activities 22,854 21,756 22,142
--------- --------- ---------
Cash Flows From Investing Activities:
(Increase) Decrease in Interest-Earning Deposits 24 357 (825)
Purchases of Securities Available for Sale (691,091) (301,116) (105,013)
Purchases of Securities Held to Maturity -- (12,545) (18,791)
Proceeds from Sale of Securities Available for Sale 227,708 124,445 28,915
Proceeds from Calls and Maturities of Securities Available for Sale 125,770 56,179 29,615
Proceeds from Calls and Maturities of Securities Held to Maturity 26,170 31,707 26,855
Net Increase in Loans (51,331) (123,831) (85,119)
Purchases of Bank Premises and Equipment (3,386) (4,763) (2,486)
Proceeds from Sale of Bank Premises and Equipment 65 3 3
Net (Increase) Decrease in Other Real Estate (519) 838 709
Increase in Other Assets (876) (15,167) --
--------- --------- ---------
Net Cash Used in Investing Activities (367,466) (243,893) (126,137)
--------- --------- ---------
Cash Flows From Financing Activities:
Net Increase in Deposits 63,648 49,245 35,363
Net Increase in Repurchase Agreements Short-Term 68,515 108,229 37,127
Net Increase (Decrease) in Other Short-Term Debt 67,003 (1,658) 51,047
Net Increase (Decrease) in FHLB Borrowings, Callable 2/97 (45,000) 45,000 --
Net Increase in Repurchase Agreements Long-Term 63,466 -- --
Net Increase in Other Long-Term Debt 76,105 25,100 929
Increase in Corporation-Obligated Mandatorily Redeemable Capital Securities 50,000 -- --
Cash Dividends (6,906) (5,867) (4,217)
Cash Paid in Lieu of Common Stock at Acquisition (12) (2,298) --
Net Expenses Incurred for Debenture Conversion -- -- (32)
Proceeds From Issuance of Common Stock, Net of Amortization 1,874 1,290 673
--------- --------- ---------
Net Cash Provided by Financing Activities 338,693 219,041 120,890
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents (5,919) (3,096) 16,895
Cash and Cash Equivalents at Beginning of Year 58,265 61,361 44,466
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 52,346 $ 58,265 $ 61,361
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MAINSTREET FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996 and For Each of the
Three Years in the Period Ended December 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include the
accounts of MainStreet Financial Corporation and its subsidiaries (MainStreet).
All significant intercompany accounts and transactions have been eliminated. The
financial statements and footnotes also include Regency Financial Shares,
Incorporated which was acquired March 10, 1998 and accounted for using the
pooling of interest method of accounting.
Cash Equivalents. For purposes of the Statement of Cash Flows, MainStreet
considers all Cash and Due From Bank accounts and Federal Funds Sold to be cash
equivalents.
Mortgage Loans Held for Sale. Mortgage loans held for sale are carried at the
lower of aggregate cost or market value. Adjustments to market and realized
gains and losses are classified as other income in the accompanying consolidated
statements of income.
Loan Servicing. Mortgage loans serviced for others are not included in the
accompanying consolidated statements of condition. The unpaid principal balances
of mortgage loans serviced for others was $89,511,000, $89,599,000 and
$97,639,000 at December 31, 1997, 1996 and 1995, respectively. Beginning January
1, 1996, MainStreet adopted Statement of Financial Accounting Standards (SFAS)
No. 122, "Accounting for Mortgage Servicing Rights". The effect of SFAS No. 122,
superseded by SFAS No. 125, was immaterial for 1997 and 1996.
Securities. MainStreet classifies and accounts for its investments in debt and
equity securities as follows:
- - Debt securities that MainStreet has the positive intent and ability to hold
to maturity are classified as held to maturity securities and reported at
amortized cost.
- - Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings. MainStreet does not currently engage in any
securities trading activity.
- Debt and equity securities not classified as either held to maturity
securities or trading securities are classified as securities available for
sale and reported at fair value, with unrealized gains and losses excluded
from earnings and reported as a separate component of shareholders' equity,
net of taxes.
Securities are classified at purchase date under the specific identification
method.
Gains and losses on securities sales are recognized in the period in which
incurred. Amortization and accretion of premiums and discounts are included in
income over the contractual life of the securities.
Loans. 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 collectively reviews for impairment all consumer loans, single family
loans and performing multi-family and non-residential real estate loans,
excluding loans which have entered into the "workout process". 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 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.
<PAGE>
Securities Sold Under Repurchase Agreements. Securities sold under agreements to
repurchase are treated as collateralized financing transactions and are recorded
at the amounts at which securities were sold. It is MainStreet's policy to
maintain control of the securities sold under these agreements.
Loan Fees and Cost. Loan origination and commitment fees and certain direct
origination costs are deferred and are amortized over the contractual life of
the related loans using the level yield method.
Other Real Estate Owned. Other real estate owned comprises properties acquired
through foreclosure proceedings or acceptance of a deed in lieu of foreclosure.
The properties are carried at the lower of cost or fair market value less
selling costs, based on appraised value. Loan losses arising from the
acquisition of such properties are charged against the allowance for loan
losses. Any subsequent write-downs are charged to expense.
Allowance for Loan Losses and Valuation of Real Estate Owned. 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 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.
Bank Premises and Equipment. Bank premises and equipment are stated at cost less
accumulated depreciation and amortization. Provisions for depreciation are
computed using the straight-line and accelerated methods over estimated useful
lives of 30 to 50 years for building shells, 5 to 15 years for building
components and 3 to 10 years for furniture and equipment. Leasehold improvements
are amortized using the straight-line method over the shorter of the estimated
useful lives or the terms of the related leases. Maintenance, repairs and minor
improvements are charged to operations as incurred, and significant improvements
are capitalized. Any gains or losses on disposition are reflected in operations.
Income Taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Income Per Share. The Financial Accounting Standards Board has issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Accounting for Earnings Per
Share". This new standard requires dual presentation of basic and diluted
earnings per share (EPS) on the face of the statements of income and requires a
reconciliation of the numerators and denominators of the basic and diluted EPS
calculations. The Bank adopted SFAS No. 128 retroactively during 1997, to all
periods presented. Basic income per share is calculated based on the weighted
average number of shares of common stock outstanding during each period. Diluted
income per share is computed using weighted average shares outstanding adjusted
to reflect the dilutive effect of all potential common shares that were
outstanding during the period. For 1995, diluted income per share also included
the effect of the weighted average number of shares that would result from
assuming that all of the 7% convertible subordinated debentures were converted
into common stock at the conversion price of $9.10 as of the issuance date.
These debentures were called in 1995. For the purposes of calculating diluted
income per share for 1995, net income was increased by eliminating interest
expense and amortization of debt issuance expense, less the related tax effect
relating to the debentures. Stock options outstanding have been considered
common stock equivalents for 1997, 1996 and 1995. Share and per share data has
been restated to reflect the stock split effected in March 1996.
New Accounting Pronouncements. In June of 1997, the Financial Accounting
Standards Board issued two new Statements of Financial Accounting Standards
(SFAS), No. 130, "Reporting of Comprehensive Income" and No. 131, "Disclosures
about Segments of an Enterprise and Related Information". SFAS No. 130,
"Reporting of Comprehensive Income," establishes standards of reporting and
displaying comprehensive income and its components. This standard will be
effective for MainStreet's 1998 fiscal year. MainStreet will comply with the
standard's required disclosures. SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," establishes guidelines in reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
standard will be effective for MainStreet's 1998 fiscal year. MainStreet will
comply with the standard's required disclosures. The adoption of these two
standards will have no material effect on net income or financial position.
<PAGE>
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (FAS 133). FAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1,
2000 for MainStreet). FAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. Currently, MainStreet
does not have any investments in derivative instruments or any hedging
activities.
Trust. Trust income is recognized on the accrual basis of accounting and assets
held by Trust in a fiduciary or agency capacity are not included in the
Consolidated Financial Statements as they are not assets of MainStreet.
Amortization of Intangibles. Identified intangible assets and the excess of cost
over the fair value of net tangible and identified intangible assets acquired
are included in other assets in the consolidated balance sheets and are being
amortized over periods ranging from three to twenty years, using accelerated and
straight-line methods. Net intangible assets amounted to $ .7 million and $1.0
million at December 31, 1997 and 1996, respectively.
Supplemental Cash Flow Information. Total interest paid in cash was $60.1
million, $46.1 million and $39.7 million for the years ended December 31, 1997,
1996 and 1995, respectively. Cash paid for income taxes was $8.9 million, $9.5
million and $5.3 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Repossessed and foreclosed properties transferred to Other Real
Estate Owned and Other Assets from Loans amounted to $3.7 million, $3.2 million
and $1.2 million in 1997, 1996 and 1995, respectively. During 1995, debentures
in the amount of $8,918,000 were converted into 979,820 shares of common stock
and are included as noncash financing activities. Unrealized gains on securities
of $4.8 million and $1.2 million are included as noncash investing activities in
1997 and 1996, respectively. During 1997, stock awards were granted with
unearned compensation at December 31, 1997 and 1996 of $176 thousand and $338
thousand, respectively, and are included as noncash financing activities.
Reclassifications. Certain reclassifications have been made to the prior years'
financial statements to conform to the 1997 presentation.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Impairment of Long-Lived Assets. In the event that facts and circumstances
indicate that the cost of the Corporation's long-lived assets may be impaired,
an evaluation of recoverability would be performed. If an evaluation were
required, the estimated future undiscounted cash flows associated with the asset
would be compared to the assets carrying amount to determine if a write-down to
market value or discounted cash flow value is required.
<PAGE>
NOTE 2 - MERGERS AND ACQUISITIONS
During 1997, MainStreet acquired Commerce Bank Corporation ("Commerce") in a
transaction accounted for as a pooling of interests which was effective December
1, 1997.
The acquisition of Commerce was completed by converting the 192,216 shares of
Commerce common stock outstanding and the 30,984 shares of Commerce preferred
stock outstanding into approximately 459,569 shares of MainStreet common stock
based on a 2.059 exchange ratio. The 86,505 Commerce warrants outstanding were
converted into approximately 113,148 shares of MainStreet common stock based on
a 1.308 exchange ratio. Approximately $12 thousand in cash was paid in lieu of
fractional shares.
At December 31, 1997, MainStreet had an acquisition pending with Regency
Financial Shares, ("Regency"), which was completed in the first quarter of 1998.
This acquisition was accounted for using the pooling of interests method of
accounting. These consolidated statements have been restated from the financial
statements originally filed by MainStreet for fiscal year 1997 to include the
effect of pooling Regency for all periods presented. Under the terms of the
agreement with Regency, each shareholder of Regency common stock was to receive
the equivalent of $13.00 per share for each share held of Regency stock. This
resulted in an exchange ratio of .474 shares of Registrant's common stock for
each share of Regency stock. Each Regency director was to receive 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.
Separate results of the pooled entities for the nine months ended September 30,
1997 and for the years ended December 31, 1996 and 1995 are as follows:
September 30, 1997 1996 1995
------------------ ------ ------
(unaudited)
Total Income
MainStreet $ 91,269 $104,330 $89,695
Commerce 4,270 5,488 4,788
Regency 4,516 5,587 5,124
-------- -------- -------
Combined $100,055 $115,405 $99,607
======== ======== =======
Net Interest Income
MainStreet $ 40,025 $50,447 $44,412
Commerce 2,305 2,979 2,598
Regency 2,334 3,035 2,804
-------- ------- -------
Combined $ 44,664 $56,461 $49,814
======== ======= =======
Net Income
MainStreet $ 12,982 $15,733 $13,492
Commerce 571 920 638
Regency 71 744 704
-------- ------- -------
Combined $ 13,624 $17,397 $14,834
======== ======= =======
At December 31, 1997, MainStreet had an acquisition pending with Tysons
Financial Corporation, ("Tysons"), which was completed within the first quarter
of 1998. This acquisition was accounted for as a purchase. Under the terms of
the agreement with Tysons, each shareholder of Tysons common stock was to
receive 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 Tysons' 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 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.
On March 11, 1998, MainStreet announced an agreement to acquire Ballston
Bancorp, Inc. ("Ballston"), subject to regulatory approval and approval by the
shareholders of Ballston and certain other specified conditions which was
completed July 17, 1998. 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 stock. This resulted in an exchange ratio of .4310 shares
of MainStreet's common stock for each share of Ballston stock. The outstanding
1,619,474 shares of Ballston were exchanged for approximately 697,938 shares of
MainStreet's common stock. This acquisition, because of its immaterial size, is
not being restated at this time.
On August 26, 1998, MainStreet executed 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. Based upon a
BB&T closing price of $32.94 on August 25, 1998, the transaction will be valued
at approximately $554.3 million or $38.87 per MainStreet share. 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.
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.
<PAGE>
NOTE 3 - SECURITIES AVAILABLE FOR SALE
The following sets forth the composition of securities available for sale at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Market Value
-------- -------- -------- --------
<S> <C>
U. S. Treasury Securities $ 19,361 $ 65 $ (8) $ 19,418
Obligations of U. S. Government Agencies 41,014 183 (203) 40,994
Mortgage Backed Securities 374,047 2,996 (236) 376,807
Collateralized Mortgage Obligations and REMICs 189,967 1,114 (495) 190,586
Corporate Bonds 36,153 633 (16) 36,770
Other Securities 13,933 172 -- 14,105
Obligations of State and
Political Subdivisions 14,718 559 -- 15,277
-------- -------- -------- --------
Total Securities Available for Sale $689,193 $ 5,722 $ (958) $693,957
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Market Value
--------- -------- -------- --------
<S> <C>
U. S. Treasury Securities $ 16,005 $ 99 $ (19) $ 16,085
Obligations of U. S. Government Agencies 37,905 66 (473) 37,498
Mortgage Backed Securities 218,451 2,236 (164) 220,523
Collateralized Mortgage Obligations and REMICs 48,601 36 (1,303) 47,334
Corporate Bonds 12,240 364 (78) 12,526
Other Securities 9,588 132 -- 9,720
Obligations of State and Political Subdivisions 9,398 319 (5) 9,712
-------- -------- -------- --------
Total Securities Available for Sale $352,188 $ 3,252 $ (2,042) $353,398
======== ======== ======== ========
</TABLE>
As permitted under Financial Accounting Standards Board Statement No. 115,
MainStreet transferred securities with net book values of approximately $11.8
million and $13.8 million from the held to maturity portfolio to the available
for sale portfolio upon acquisition of Commerce and Hanover, respectively. The
unrealized net loss on these securities at acquisition was approximately $26
thousand and $66 thousand, respectively.
The amortized costs and approximate market values of securities available for
sale at December 31, 1997, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
Amortized Approximate
Cost Market Value
--------- ------------
Due in one year or less $ 17,186 $ 17,710
Due after one year but within five years 35,817 35,664
Due after five years but within ten years 24,480 24,734
Due after ten years 47,696 48,456
Mortgage-Backed Securities 374,047 376,807
CMOs/REMICs 189,967 190,586
-------- --------
Total Securities Available for Sale $689,193 $693,957
======== ========
Gross gains of $1,398,000, $864,000 and $81,000 and gross losses of $497,000,
$295,000 and $64,000 were realized on sales and calls of securities available
for sale for 1997, 1996 and 1995, respectively. Securities available for sale
with carrying values approximating $294 million and $164 million at December 31,
1997 and 1996, respectively, were pledged to secure public deposits, debt and
for other purposes as required or permitted by law.
<PAGE>
NOTE 4 - SECURITIES HELD TO MATURITY
The amortized costs and approximate market values and gross unrealized gains and
losses of securities held to maturity at December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Market Value
-------- ------- ------- -------
<S> <C>
Obligations of U. S. Government Agencies $12,347 $ 745 $ (51) $13,041
Mortgage Backed Securities 22,917 455 (63) 23,309
Obligations of State and Political Subdivisions 36,979 1,011 (19) 37,971
-------- ------- ------- -------
Total Securities Held to Maturity $72,243 $ 2,211 $ (133) $74,321
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Market Value
-------- ------- --------- -------------
<S> <C>
U. S. Treasury Securities $ 9,897 $ 4 $ (12) $ 9,889
Obligations of U. S. Government Agencies 19,379 1,212 (142) 20,449
Mortgage Backed Securities 27,495 521 (286) 27,730
Obligations of State and Political Subdivisions 41,151 977 (96) 42,032
-------- -------- -------- --------
Total Securities Held to Maturity $ 97,922 $ 2,714 $ (536) $100,100
========= ======== ======== ========
</TABLE>
At December 31, 1994, MainStreet transferred securities available for sale with
an approximate market value of $72.5 million and a carrying value of $76.5
million to securities held to maturity. The unrealized loss of approximately
$4,038,000, included as a separate component of shareholders equity, is being
amortized over the remaining life of the securities. At December 31, 1997 this
unrealized loss was $.7 million. During the fourth quarter of 1995, the
Financial Accounting Standards Board allowed all institutions a one time
opportunity to restructure their investment portfolios under the designations of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Management took advantage of this opportunity by redesignating
$35.7 million of "held to maturity" as "available for sale" without any penalty
or tainting of the remaining "held to maturity" portfolio. These securities
transferred had a net unrealized gain of approximately $279 thousand.
The amortized costs and approximate market values of securities held to maturity
at December 31, 1997, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
Amortized Approximate
Cost Market Value
--------- ------------
Due in one year or less $ 2,770 $ 2,800
Due after one year but within five years 22,011 22,570
Due after five years but within ten years 18,398 19,305
Due after ten years 6,147 6,337
Mortgage-Backed Securities 22,917 23,309
--------- --------
$ 72,243 $ 74,321
========= =========
Gross gains of $32,000, $63,000, and $31,000 and gross losses of $7,000,
$13,000, and $5,000 were realized on calls of securities held to maturity for
1997, 1996, and 1995, respectively. Securities with carrying values
approximating $55 million and $43 million at December 31, 1997 and 1996,
respectively, were pledged to secure public deposits and for other purposes as
required or permitted by law.
<PAGE>
NOTE 5 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Major classifications of loans at December 31, 1997 and 1996 are summarized
below:
1997 1996
---- ----
Commercial $ 451,916 $ 414,119
Real Estate 234,694 224,100
Consumer 251,538 254,051
--------- ---------
Total Loans 938,148 892,270
Less: Unearned Income and Deferred Fees (12,430) (14,110)
--------- ---------
Loans, Net of Unearned Income and Deferred Fees 925,718 878,160
Less: Allowance for Loan Losses (12,375) (11,496)
--------- ---------
Loans, Net $ 913,343 $ 866,664
========= =========
A summary of changes in the allowance for loan losses for each of the three
years in the period ended December 31, 1997 follows:
1997 1996 1995
---- ---- ----
Balance at Beginning of Year $11,496 $10,129 $10,015
Provision for Loan Losses 4,652 3,510 1,813
Losses Charged to Allowance (4,596) (3,256) (2,133)
Recoveries Credited to Allowance 823 1,113 434
------- ----- -------
Balance at End of Year $12,375 $11,496 $10,129
======= ======= =======
Nonperforming assets at December 31, 1997 and 1996 are as follows:
1997 1996
---- ----
Nonaccrual Loans $3,934 $3,291
Loans Past Due 90 Days or More 3,764 3,148
------ -----
Total Nonperforming Loans 7,698 6,439
------ ------
Other Real Estate Owned 1,424 905
Other Repossessed Assets 190 169
------ ------
Total Foreclosed/Repossessed Assets 1,614 1,074
------ ------
Total Nonperforming Loans and Foreclosed/
Repossessed Assets $9,312 $7,513
====== ======
Nonperforming loans were .83% and .73% of loans, net of unearned income and
deferred fees, at December 31, 1997 and 1996, respectively.
The effect of nonaccrual loans on interest income was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C>
Gross amount of interest that would have been
recorded at original rate $ 446 $ 482 $ 337
Interest that was reflected in income (34) (253) (36)
----- ----- -----
Net impact on interest income $ 412 $ 229 $ 301
===== ===== =====
</TABLE>
At December 31, 1997 and 1996, the recorded investment in loans which have been
identified by MainStreet as impaired loans in accordance with SFAS 114 totaled
$3.6 million and $3.3 million, respectively, and the total allowance for loan
losses related to such loans was $.6 million and $.4 million, respectively. The
average balance during 1997, 1996 and 1995 for impaired loans was approximately
$4.2 million, $2.8 million and $3.8 million, respectively. The total interest
income related to impaired loans reflected in the 1997, 1996 and 1995 statements
of income was approximately $20,000, $248,000 and $6,000, respectively.
<PAGE>
NOTE 6 - RELATED PARTY TRANSACTIONS
Directors, officers and related interests provide the subsidiary Banks with
substantial amounts of business and many are among its most significant
depositors and borrowers. Total amounts outstanding for all such loans that
exceeded $60,000 individually are summarized below:
1997 1996
---- ----
Balance at Beginning of Year $ 33,179 $ 30,405
Additions 14,912 14,696
Payments (19,144) (11,922)
-------- --------
Balance at End of Year $ 28,947 $ 33,179
======== ========
These loans, in the opinion of management, involve no more than normal risk of
collectibility. Total unfunded commitments at December 31, 1997 were $6.9
million.
NOTE 7 - BANK PREMISES AND EQUIPMENT
Bank premises and equipment at December 31, 1997 and 1996 consist of:
1997 1996
---- ----
Land $ 2,515 $ 2,470
Buildings and Improvements 12,485 12,595
Capital Lease 193 243
Furniture and Equipment 20,473 22,937
Construction in Progress 1,743 88
Leasehold Improvements 1,353 1,269
-------- --------
38,762 39,602
Accumulated Depreciation and Amortization (21,759) (23,373)
-------- --------
Total Bank Premises and Equipment $ 17,003 $ 16,229
======== ========
NOTE 8 - INCOME TAXES
The components of income tax expense for the years ended December 31, 1997, 1996
and 1995 are as follows:
1997 1996 1995
---- ---- ----
Current Tax Expense $ 8,976 $ 8,556 $ 5,677
Deferred Tax Expense (Benefit) (824) (503) 620
------- ------- -------
Income Tax Expense $ 8,152 $ 8,053 $ 6,297
======= ======= =======
The reasons for the differences in income tax expense and the statutory Federal
income tax rate for the years ended 1997, 1996 and 1995 are as follows:
1997 1996 1995
---- ---- ----
Federal Income Tax Expense Rate 35.0% 35.0% 35.0%
Tax Exempt Interest (3.6) (3.7) (4.7)
Change in Marginal Tax Rate -- (.5) (1.1)
Acquisition Costs 1.0 .9 --
Other (.1) (.1) .6
------ ------- --------
Effective Income Tax Rate 32.3 31.6% 29.8%
====== ======= ========
The components of net deferred tax assets at December 31, 1997 and 1996 are
presented below:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C>
Deferred Tax Assets:
Allowance for Loan Losses and Unearned Fees $4,635 $4,166
Other Real Estate Owned 28 1
Intangibles 949 967
Interest Earned Not Collected on Nonaccrual Loans Not
Recognized for Financial Reporting Purposes 216 116
Securities Available for Sales, Due to Unrealized Losses -- 12
Miscellaneous Accruals not Deductible for Tax Purposes 1,237 921
Net Operating Loss 79 --
------ ------
Total Gross Deferred Tax Assets 7,144 6,183
Deferred Tax Liabilities:
Bank Premises and Equipment 368 386
Securities, Due to Differences in Discount Accretion 339 243
Prepaid Expenses, Principally Due to Deduction Taken for
Tax Purposes 227 275
Unrealized Gain on Securities Available for Sale 1,436 99
Other 371 252
------ ------
Total Gross Deferred Liabilities 2,741 1,255
------ ------
Net Deferred Tax Assets $4,403 $4,928
====== ======
</TABLE>
<PAGE>
NOTE 9 - SHORT-TERM DEBT
At December 31, 1997 and 1996, short-term debt consists of the following:
1997 1996
---- ----
Corporate Cash Management $ 30,195 $ 23,506
Federal Funds Purchased 38,000 23,200
Repurchase Agreements 213,871 145,356
Treasury Tax and Loan Notes 20,572 6,408
FHLB Borrowings 61,000 27,350
Other Borrowings -- 2,300
-------- --------
Total Short-Term Debt $363,638 $228,120
======== ========
The average outstanding total short-term borrowings were $301.4 million, $131.5
million and $67.9 million for 1997, 1996 and 1995, respectively. The weighted
average interest rates were 5.5%, 5.03% and 5.31% for 1997, 1996 and 1995,
respectively. The weighted average interest rates in effect at year end were
5.69%, 5.42% and 5.52% at December 31, 1997, 1996 and 1995, respectively.
The maximum month-end balance of short-term debt was $363.4 million and $241.1
million for 1997 and 1996, respectively. Securities held to maturity and
securities available for sale were pledged as collateral for securities sold
under repurchase agreements.
NOTE 10 - LONG-TERM DEBT
At December 31, 1997 and 1996, long-term debt consists of the following:
1997 1996
---- ----
FHLB Borrowings $101,936 $ 70,786
Repurchase Agreements 63,466 --
Capital Lease 198 243
-------- --------
Total Long-Term Debt $165,600 $ 71,029
======== ========
The average outstanding total long-term borrowings were $71.6 million, $58.7
million and $.7 million for 1997, 1996 and 1995, respectively. The weighted
average interest rates were 5.63%, 5.38% and 7.75% for 1997, 1996 and 1995,
respectively. The weighted average interest rates in effect at year end were
5.64%, 5.07% and 7.75% for 1997, 1996 and 1995, respectively. The maximum
month-end balance of long-term debt was $165.6 million and $70.9 million for
1997 and 1996, respectively.
Long-term FHLB borrowings consist of fixed and variable rate instruments. Of the
fixed rate borrowings which have principal reductions (PRC), $4.0 million have
quarterly principal reductions, while the remaining $.6 million has semi-annual
principal reductions. The rates charged on the variable rate instruments which
reprice quarterly are tied to the three-month LIBOR less twenty-two basis
points. The rates charged on the variable rate instruments which reprice monthly
are tied to the one-month LIBOR less fifteen basis points. The following table
details the maturity and repricing information of these FHLB borrowings:
<TABLE>
<CAPTION>
Original Repricing Balance
Maturity Date Term Frequency Outstanding
------------- ------ --------- -----------
<S> <C>
Variable Rate May 22, 2000 3 years Monthly $ 27,350
Variable Rate April 9, 2001 4 years Quarterly 45,000
Fixed Rate - PRC April 17, 2002 7 years N/A 643
Fixed Rate December 16, 2002 5 years N/A 25,000
Fixed Rate - PRC July 14, 2002 7 years N/A 579
Fixed Rate - PRC December 11, 2017 20 years N/A 3,364
</TABLE>
The long-term repurchase agreements are all fixed rate instruments with original
terms of 5 years. They are scheduled to mature in December, 2002 and are
callable in December, 1999. The capital lease of $.2 million matures October 31,
2001 and interest is calculated based on a fixed rate.
The principal payments on long-term debt are as follows:
<TABLE>
<CAPTION>
Within After 1 Year But After 2 Years But After 3 Years But After 4 Years But After
1 Year Within 2 Years Within 3 Years Within 4 Years Within 5 Years 5 Years
- ------------- ---------------- ------------------ ------------------ ---------------- -----------
<S> <C>
$ 340 $ 351 $ 362 $ 359 $ 249 $ 3,123
</TABLE>
<PAGE>
NOTE 11 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The following table shows the maturities of the repurchase agreements at
December 31, 1997:
<TABLE>
<CAPTION>
Up to 30 Days 30 to 90 Days Over 90 Days
- -------------------------- ------------------------ -------------- -----------
Amount Rate Amount Rate Amount Rate
- ------------ ----------- ---------- ---------- ---------- ----------
<S> <C>
$ 24,253 5.85% $ 21,987 5.85% $ 16,000 5.51%
12,473 6.10 9,130 5.86 20,000 5.64
74,411 6.13 16,993 5.88 27,466 5.66
37,254 6.25 17,370 5.91 --- ---
- -------- -------- -------
$148,391 $ 65,480 $ 63,466
======== ======== ========
</TABLE>
The following table shows the securities underlying the repurchase agreements at
December 31, 1997 in their corresponding maturity categories:
<TABLE>
<CAPTION>
Up to 30 days 30 to 90 Days
------------------------------ ----------------------------
Amortized Approximate Amortized Approximate
Cost Market Value Cost Market Value
---------- ------------ ----------- ------------
<S> <C>
Obligations of U.S. Government Agencies $ 788 $ 790 $ 2,300 $ 2,286
Mortgage Backed Securities 104,732 105,295 55,330 55,934
Collateralized Mortgage Obligations
and REMICs 44,584 45,004 8,994 9,010
-------- -------- -------- --------
$150,104 $151,089 $ 66,624 $ 67,230
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Over 90 Days Total Securities
------------------------------ ----------------------------
Amortized Approximate Amortized Approximate
Cost Market Value Cost Market Value
---------- ------------ ----------- ------------
<S> <C>
Obligations of U.S. Government Agencies $ -- $ -- $ 3,088 $ 3,076
Mortgage Backed Securities 63,869 64,010 223,931 225,239
Collateralized Mortgage Obligations
and REMICs 4,623 4,637 58,201 58,651
-------- -------- -------- --------
$ 68,492 $ 68,647 $285,220 $286,966
======== ======== ======== ========
</TABLE>
There were no maturities of repurchase agreements or their underlying securities
within the overnight or demand categories.
<PAGE>
NOTE 12 - REDEMPTION OF 7% CONVERTIBLE SUBORDINATED DEBENTURES
On September 12, 1995, MainStreet called for redemption on October 13, 1995 all
of its outstanding 7% Convertible Subordinated Debentures Due 2011 (the
"debentures"). At such date, $8,043,000 principal amount of Debentures were
outstanding. The redemption price was $1,014.00 plus accrued interest of $34.61
from April 15, 1995 to the redemption date, for a total of $1,048.61 for each
$1,000 of principal amount of Debentures. No interest would accrue on the
Debentures from and after October 13, 1995 and holders of outstanding Debentures
would not have any rights as such holders other than the right to receive the
redemption price, without additional interest, upon surrender of their
Debentures. All debentures were converted into 883,678 shares of the
MainStreet's common stock which were subsequently registered with the Securities
and Exchange Commission.
NOTE 13 - CORPORATION-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES
In November 1997, MainStreet Financial Corporation created a Delaware statutory
business trust subsidiary ("MainStreet Capital Trust I") which issued
corporation-obligated mandatorily redeemable capital securities ("trust
securities") in the amount of $50 million to qualified institutional investors,
and $1.5 million in trust common securities to the Corporation. The trust
securities have a maturity of thirty years, pay dividends at the rate of 8.9%,
and may be treated as Tier I capital for regulatory purposes. MainStreet Capital
Trust I, then in turn, used the proceeds from the sale of the trust securities
to acquire Junior Subordinated Debentures of the Corporation which have the same
rate, payment of dividends and maturity. Holders of the trust securities are
entitled to receive preferential cash dividends accumulating from the date of
original issuance, November 19, 1997, and payable semi-annually in arrears on
the first day of June and December of each year. The proceeds from the Junior
Subordinated Debentures of the Corporation will be used for general corporate
purposes, including, without limitation, increasing the Corporation's investment
in the Banks for the possible acquisition of additional branch facilities, the
financing of one or more future acquisitions by the Corporation and the funding
of repurchases of the Corporation's common stock, which may be made from time to
time. Initially, the net proceeds were invested in available for sale
securities.
NOTE 14 - INCOME PER SHARE
The following tables reconcile the numerator and denominator of the basic and
diluted computations for net income per share for the years ended December 31,
1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997
------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------------- -------------- ----------
<S> <C>
Basic EPS
Income available to common shareholders $ 17,098 $ 12,602 $ 1.36
========
Effect of Stock Options --- 39
----------- ----------
Diluted EPS
Income available to common
shareholders and assumed conversions $ 17,098 $ 12,641 $ 1.35
=========== =========== =======
</TABLE>
<TABLE>
<CAPTION>
1996
------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------------- -------------- ----------
<S> <C>
Basic EPS
Income available to common shareholders $ 17,397 $ 12,586 $ 1.38
========
Effect of Stock Options --- 63
----------- ----------
Diluted EPS
Income available to common
shareholders and assumed conversions $ 17,397 $ 12,649 $ 1.38
=========== =========== =======
</TABLE>
<TABLE>
<CAPTION>
1995
------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------------- -------------- ----------
<S> <C>
Basic EPS
Income available to common shareholders $ 14,834 $ 11,800 $ 1.26
========
Effect of Stock Options --- 105
Effect of Debentures 310 1,006
----------- ----------
Diluted EPS
Income available to common
shareholders and assumed conversions $ 15,144 $ 12,911 $ 1.17
=========== =========== ========
</TABLE>
<PAGE>
NOTE 15 - EMPLOYEE BENEFIT PLANS
MainStreet maintains a defined benefit retirement plan ("Pension Plan") for the
benefit of its employees (not directors). This was a new plan effective May 1,
1995. The Pension Plan's benefit formulas generally base payments to retired
employees upon their length of service and a percentage of qualifying
compensation during their final years of employment. The following table sets
forth the Pension Plan's funded status and amounts recognized in the
consolidated financial statements:
<TABLE>
<CAPTION>
December 31 December 31
1997 1996
---- ----
<S> <C>
Actuarial present value of benefit obligation:
Accumulated benefit obligation (including vested benefits
of $1,751,000 and $1,386,000 in 1997 and 1996, respectively) $ 2,050 $ 1,558
======= =======
Projected benefit obligation for service rendered to date $(3,214) $(2,257)
Plan assets at fair value 2,876 1,719
------- -------
Funded status (338) (538)
Unrecognized transition obligation 145 146
Unrecognized prior service costs 193 213
Unrecognized net gain (246) (91)
------- -------
Accrued pension costs $ (246) $ (270)
======= =======
</TABLE>
Net pension cost for the defined benefit plan included the following expense
components:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C>
Service cost $ 823 757 455
Interest cost 168 111 61
Actual Return on Assets (170) (102) (70)
Amortization of transition obligation 18 29 11
----- ----- -----
Net pension expense included in employee benefits $ 839 $ 795 $ 457
===== ===== =====
</TABLE>
The discount rate used in determining the actuarial present value of the
projected benefit obligation and the expected long-term rate of return on assets
was 7.5% and 8.00%, respectively, in all three years 1997, 1996 and 1995. The
assumed rate of increase in future compensation levels used was 5.00%.
Effective October 1, 1995, MainStreet amended its discretionary profit sharing
plan. All profit sharing contributions ceased as of September 30, 1995.
Contributions continued as a matching of the 401-K deferral plan for the benefit
of the employees. Under the amended plan, MainStreet will contribute an amount
equal to 50% of the first 6% of the compensation deferred by the employee.
Total profit sharing expense under the ceased plan for 1995 was $565,000. Total
expense for the matching 401-K plan was $287,000, $287,000 and $109,000 for
1997, 1996 and 1995, respectively.
Effective January 1, 1992, Regency Financial Shares, Inc. established a 401(k)
savings plan. The plan is open to all full-time employees who have completed at
least one year of service. The Company matches twenty-five percent of each
employee's contribution to the plan up to six percent of that employee's salary.
Additionally, the Company makes an annual contribution to the plan equal to
three percent of the salaries of eligible employees. The Company contributed
$30,000, $27,000 and $24,000 to plan for the years ended December 31, 1997, 1996
and 1995, respectively.
MainStreet provides supplemental executive retirement policies for its senior
executive officers. These policies include cash value life insurance and
deferred compensation. MainStreet also provides split dollar insurance for
certain key executives of the corporation.
<PAGE>
In addition to pension and profit sharing plans, there is a health care plan
that provides postretirement medical benefits to full-time employees who meet
minimum age and service requirements. The plan is contributory with
contributions adjusted annually and contains other cost sharing features such as
deductibles. MainStreet's policy is to fund the costs of medical benefits in
amounts determined at the discretion of management. MainStreet has elected to
amortize the initial transition obligation of $1.2 million over 20 years. The
following table sets forth the Postretirement Benefit Plans' funded status and
amounts recognized in the consolidated financial statements at December 31, 1997
and 1996:
1997 1996
---- ----
Accumulated postretirement benefit obligations:
Retirees $ (867) $ (817)
Fully eligible active plan participants (1,084) (779)
------- -------
Accumulated postretirement benefit obligation
at December 31, 1997 and 1996 (1,951) (1,596)
Plan assets at fair value at December 31, 1997
and 1996 -- --
------- -------
Accumulated postretirement benefit obligation in
excess of plan assets (1,951) (1,596)
Unrecognized transition obligation 903 963
Unrecognized net (gain) loss 233 (19)
------- -------
Accrued postretirement benefit costs included in
other liabilities $ (815) $ (652)
======= =======
Net periodic postretirement benefit costs for 1997, 1996 and 1995 include the
following components:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C>
Service cost $ 80 $ 61 $ 51
Interest cost 120 79 82
Amortization of transition obligation 60 60 61
Amortization of net gain 1 (6) (14)
----- ----- -----
Net periodic postretirement benefit costs $ 261 $ 194 $ 180
===== ===== =====
</TABLE>
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% for December 31, 1997, 1996 and 1995.
For measurement purposes, the assumed health care costs trend rates of increase
were 8.00%, 9.00% and 10% for 1997, 1996 and 1995, respectively, with gradually
declining percentages to 5.50% by the year 2000 and remaining at that level
thereafter. The health care cost trend rate assumption can have a significant
effect on the amounts reported; however, for years ended December 31, 1997, 1996
and 1995, the impact on the accumulative postretirement benefit and the net
periodic postretirement benefit costs would have been immaterial.
NOTE 16 - STOCK OPTION PLAN
In April 1991, the shareholders approved a stock option plan that had been
previously approved by the Board of Directors in November, 1990. The plan, known
as the 1990 Plan, gives MainStreet the authorization to issue an additional
250,000 stock options. Each option is accompanied by a Stock Appreciation Right
(SAR) issued in tandem with the option so that the employee may elect to
exercise either the option or the SAR, thereby canceling the other. SARs entitle
the holder to receive payment equal to the increase in market value of
MainStreet's common stock from date of grant to the date exercised.
In June 1994, a stock award of 8,000 shares was granted under the 1990 Plan. In
1996, stock awards were granted for 35,072 and 2,000 shares in January and
April, respectively, from this plan. A stock award of 3,000 shares was made from
the plan in April 1997. At December 31, 1997, unearned compensation of $176
thousand remained relating to the unvested portion of the stock award granted in
January, 1996.
In 1990, the Board of Directors of Hanover adopted a Non-Qualified Stock Option
Plan ("Hanover Plan") which provided for incentive stock options to purchase
shares of Hanover common stock at the fair value of the common stock at the time
of the grant. Upon the acquisition of Hanover by MainStreet, the outstanding
options were converted based on the exchange ratio of .884 into options to
acquire MainStreet common stock. The maximum number of shares subject to
purchase under the plan was 194,480.
In April 1997, the shareholders approved a stock option plan that had been
previously approved by the Board on February 26, 1997. This plan, known as the
1997 Plan, permits the grant of options to purchase shares of Common Stock from
MainStreet, Stock Appreciation Rights ("SARs"), Stock Awards and/or Performance
Shares. A maximum of 550,000 shares are subject to purchase or grant under the
plan. At December 31, 1997 there were no grants made from this plan.
<PAGE>
On January 1, 1996, MainStreet adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"). As
permitted by SFAS 123, MainStreet has chosen to continue to apply APB Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its Plans. Accordingly, compensation costs
were recognized for the liability of the SAR's issued in tandem with the stock
options granted, which is the most conservative approach. Had compensation cost
for MainStreet's Plans been determined based on the fair value at the grant
dates for awards under the Plans consistent with the method of SFAS 123, the
impact on MainStreet's net income and net income per share would not have been
material. The assumptions used with regard to volatility, dividend rate and
risk-free interest rate were 29.138%, 2.2% and 5.680%, respectively.
A summary of the status of MainStreet's Plans as of December 31, 1997, 1996 and
1995 and changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
-------- -------------- ------ -------------- ------- ---------------
<S> <C>
Outstanding at beginning of year 240,189 $ 8.6193 325,152 $ 7.8373 351,713 $ 7.3302
Granted 68,650 18.8376 11,722 12.6902 15,781 12.2457
Exercised (110,008) 8.4972 (72,946) 5.9920 (27,737) 7.9296
Forfeited (695) 14.2075 (23,739) 11.0863 (14,605) 9.2628
-------- -------- --------
Outstanding at year-end 198,136 12.2079 240,189 8.3134 325,152 7.4308
========= ======== ========
Options exercisable at year-end 154,536 9.7811 304,576 7.1848 391,223 7.1920
========= ======== =======
</TABLE>
The following table summarizes the information about the Plan's stock options at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Number Weighted-Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
- ------------------------ ----------- ---------------- ---------------- ------------- --------------
<S> <C>
$4.1176 - 6.983 58,941 2.66 years $ 4.4655 58,941 $ 4.4655
$10.25 - $11.453 79,788 4.94 years 11.3099 75,787 11.3658
$19.50 59,407 9.00 years 19.5000 19,808 19.5000
------- -------
198,136 154,536
======= =======
</TABLE>
NOTE 17 - PREFERRED SHARE PURCHASE RIGHTS
On January 18,1990, the Board of Directors declared a dividend distribution of
one Right for each outstanding share of common stock, payable January 29, 1990
to stockholders of record on that date. Each Right entitles the registered
holder to purchase from MainStreet 1/100th of a share of a newly authorized
Participating Cumulative Preferred Stock at an exercise price of $24 subject to
an antidilutive adjustment. Each unit of Preferred Stock is structured to be the
economic equivalent of one share of Common stock. The Rights will not be
exercisable or transferable apart from the common stock until the 10th day after
either a public announcement that a person or group has acquired beneficial
ownership of 15% or more of the common stock or the announcement or commencement
of a tender offer for 15% or more of MainStreet common stock.
The Rights are not exercisable until the distribution date and will expire on
January 18, 2000, unless earlier redeemed by MainStreet. The agreement provides
that if (a) an acquiring person purchases 30% or more of the outstanding common
stock or (b) at any time following the distribution date, MainStreet is the
surviving corporation in a merger with an acquiring person and its common stock
is not changed or exchanged or (c) an acquiring person effects a statutory share
exchange with MainStreet after which MainStreet is not a subsidiary of any
acquiring person, each holder of a Right will have the right to receive, upon
payment of the purchase price, preferred stock or common stock having a value
equal to twice the purchase price.
If MainStreet is acquired or 50% or more of the consolidated assets or earning
power is sold, each holder of a Right will have the right to receive, upon
exercise at the then current exercise price of the Right, that number of shares
of common stock of the acquiring Corporation which has a market value of two
times the exercise price of the Right.
After the acquisition by a person or group of beneficial ownership of 15% or
more of the outstanding common stock, MainStreet may redeem the Rights in whole,
but not in part, at a price of $.01 per Right. The decision to redeem shall
require the concurrence of a majority of the continuing directors. Until a Right
is exercised, the holder will have no rights as a shareholder of MainStreet.
These statements are qualified in their entirety by reference to the Rights
Agreement, a copy of which was filed with the Securities and Exchange
Commission.
<PAGE>
NOTE 18 - LEASE OBLIGATIONS
The consolidated balance sheets include a capitalized lease for telephone
equipment. Also, each affiliate Bank leases certain buildings and equipment
under operating lease arrangements expiring over periods of up to fifteen years.
Rent expense totaled $1,272,000, $1,239,000 and $1,006,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. Future minimum payments, by
years and in the aggregate, under the capital lease and noncancellable operating
leases with initial or remaining terms in excess of one year consisted of the
following at December 31, 1997:
<TABLE>
<CAPTION>
Capital Operating
Lease Leases
--------- ----------
<S> <C>
1998 $ 63 $ 1,172
1999 63 909
2000 63 337
2001 48 213
2002 --- 135
Thereafter --- 281
------ --------
Total Minimum Lease Payments 237 $ 3,047
------ ========
Less Amounts Representing Interest 39
Present Value of Minimum Lease Payments $ 198
=======
</TABLE>
NOTE 19 - REGULATORY REQUIREMENTS AND RESTRICTIONS
MainStreet's principal source of funds for dividend payments is dividends
received from its subsidiary banks. Under the applicable federal laws, the
Comptroller of the Currency (relating to MainStreet's subsidiary banks which are
national banking associations) restricts the total dividend payments of any
calendar year, without prior approval, to the net profits of that year as
defined, combined with retained net profits for the two preceding years. At
December 31, 1997, retained net profits, which were free of such restriction,
amounted to $2.5 million. Under the applicable laws of Virginia (relating to
MainStreet's subsidiary banks which were organized under the laws of Virginia),
$69.9 million of undivided profits at December 31, 1997 were free of dividend
restrictions. However, Virginia regulatory authorities may limit the payment of
dividends by any state bank when it is determined such limitation is in the
public interest and is necessary to ensure the financial soundness of the bank.
Furthermore, dividends paid in excess of $34.0 million by MainStreet's state
organized subsidiaries must have prior approval by the Federal Reserve Board.
Substantially all the retained earnings of MainStreet (parent) are represented
by undistributed earnings of the subsidiary banks.
The Subsidiary Banks are members of the Federal Reserve System and, as such, are
required to maintain certain of their cash and due from bank balances as
reserves based on regulatory requirements. The reserve requirement approximated
$11.3 million and $9.4 million at December 31, 1997 and 1996, respectively.
MainStreet and the Banks are subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on MainStreet's consolidated financial statements. Quantitative
measures established by regulation to ensure capital adequacy require MainStreet
and the Banks to maintain minimum amounts and ratios, as set forth in the table
below. As of December 31, 1997, MainStreet and the Banks are well above capital
adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notification from the FDIC categorized
MainStreet and the Banks as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized MainStreet and
the Banks must maintain minimum amounts and ratios, as set forth in the table
below. There are no conditions or events since that notification that management
believes have changed MainStreet and the Banks categories.
<PAGE>
MainStreet's actual capital amounts and ratios are also presented in the table
below (dollars in thousands).
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under PromptCorrective
Actual Adequacy Action Provisions
As of December 31, 1997: Amount Ratio Amount Ratio Amount Ratio
-------- ---- ----------- ------ --------------------- -------
<S> <C>
Total Capital (to Risk Weighted Assets) $195,045 19.67% $ 79,338 8.0% $ 99,173 10.0%
Tier I Capital (to Risk Weighted Assets) 182,670 18.42 39,669 4.0 59,504 6.0
Tier I Capital (to Annual Adjusted Average
Assets) 182,670 11.75 62,184 4.0 77,730 5.0
As of December 31, 1996:
Total Capital (to Risk Weighted Assets) $131,600 14.79% $ 71,165 8.0% $ 88,957 10.0%
Tier I Capital (to Risk Weighted Assets) 120,480 13.54 35,583 4.0 53,374 6.0
Tier I Capital (to Annual Adjusted Average
Assets) 120,480 9.37 51,424 4.0 64,280 5.0
</TABLE>
NOTE 20 - PARENT COMPANY FINANCIALS
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
---------------------------
1997 1996
---- ----
(In 000's)
<S> <C>
Assets:
Cash (Includes $7,338 and $1,896 in 1997 and 1996,
respectively with affiliates) $ 7,338 $ 1,896
Investments in Subsidiary Banks 135,236 119,110
Securities Available for Sale 196,184 72
Other Assets (Includes $35 and $44 in 1997 and
1996, respectively, invested with affiliates) 7,466 3,944
-------- --------
Total Assets $346,224 $125,022
======== ========
Liabilities and Shareholders' Equity
Repurchase Agreements Short-Term 91,781 --
Other Short-Term Debt -- 2,300
Repurchase Agreements Long-Term 63,466 --
Other Long-Term Debt 198 243
Corporation-Obligated Mandatorily Redeemable
Capital Securities 51,547 --
Other Liabilities 3,513 1,342
Common Shareholders' Equity 135,719 121,137
-------- --------
Total Liabilities and Shareholders' Equity $346,224 $125,022
======== ========
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------------
1997 1996 1995
---- ---- ----
(In 000's)
<S> <C>
Revenue:
Dividends From Subsidiary Banks $ 9,388 $ 7,694 $ 4,025
Equity in Undistributed Income of Subsidiary Banks 8,524 10,672 11,534
Management Fees From Subsidiary Banks 12,558 9,682 8,034
Interest Income From Subsidiary Banks 11 -- --
Interest Income 895 27 78
Other Noninterest Income 439 985 42
------- ------- -------
31,815 29,060 23,713
------- ------- -------
Expenses:
Interest on Short-Term Debt 530 39 --
Interest on Long-Term Debt 194 2 454
Interest on Corporation-Obligated Mandatorily
Redeemable Capital Securities 507 -- --
Salaries and Employee Benefits 7,877 6,862 4,967
Net Occupancy 2,513 2,479 1,758
Other Noninterest Expense 3,251 2,740 2,126
------- ------- -------
14,872 12,122 9,305
------- ------- -------
Income Before Income Tax Benefit 16,943 16,938 14,408
Income Tax Benefit 155 459 426
------- ------- -------
Net Income $17,098 $17,397 $14,834
======= ======= =======
</TABLE>
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------
1997 1996 1995
---- ---- ----
(In 000's)
<S> <C>
Cash Flows From Operating Activities:
Net Income $ 17,098 $ 17,397 $ 14,834
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Amortization of Intangibles, Net 118 176 210
Equity in Undistributed Income of Subsidiary Banks (8,242) (9,569) (10,329)
Net Increase in Other Assets (3,758) (654) (627)
Net Decrease in Other Liabilities 2,171 215 603
(Gain) Loss on Sales of Securities 47 (479) (15)
Loss on Disposal of Fixed Assets 57 -- --
Gain on Sale of OREO -- -- 22
--------- --------- ---------
Net Cash Provided by Operating Activities 7,491 7,086 4,698
Cash Flows From Investing Activities:
Net (Increase) Decrease in Interest-Bearing Deposits 9 701 (712)
Purchases of Securities Available for Sale (195,326) -- --
Proceeds From the Sale of Securities Available for Sale -- 852 820
Purchases of Bank Premises and Equipment (120) (976) (826)
Capital Contributed to Subsidiary Banks (5,947) (1,783) --
--------- --------- ---------
Net Cash Used In Investing Activities (201,384) (1,206) (718)
Cash Flows From Financing Activities:
Cash Dividends (6,723) (5,867) (4,217)
Cash Paid in Lieu of Fractional Shares and Cash Election (12) (2,298) --
Net Expenses Incurred for Debenture Conversion -- -- (32)
Proceeds From Issuance of Common Stock 1,621 1,160 525
Increase in Short-Term Debt 89,481 2,300 --
Increase in Long-Term Debt 63,421 243 --
Issuance of Junior Subordinated Debenture 51,547 -- --
--------- --------- ---------
Net Cash Provided By (Used in) Financing Activities 199,335 (4,462) (3,724)
--------- --------- ---------
Net Increase in Cash 5,442 1,418 256
Cash at Beginning of Year 1,896 478 222
--------- --------- ---------
Cash at End of Year $ 7,338 $ 1,896 $ 478
========= ========= =========
</TABLE>
Noncash investing activities include $4.7 million and $1.3 million of unrealized
gains on securities available for sale in 1997 and 1996, respectively. Noncash
financing activities include $8,918,000 of debentures converted into 979,820
shares of common stock in 1995.
<PAGE>
NOTE 21 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business to meet the financing needs of its customers,
MainStreet is a party to financial instruments with off-balance-sheet risk.
These financial instruments include commitments to extend credit, standby
letters of credit and financial guarantees written. Those instruments involve,
to varying degrees, elements of credit risk in excess of the amount recognized
in the consolidated balance sheets.
MainStreet's exposure to credit loss in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit, standby
letters of credit and financial guarantees written is represented by the
contractual amount of those instruments. MainStreet uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
As of December 31, 1997 and 1996, outstanding financial instruments whose
contract amounts represent potential credit risk were as follows:
1997 1996
---- ----
Financial Instruments Whose Contract Amounts
Represent Credit Risk:
Commitments to Extend Credit $167,904 $148,161
Standby and Performance
Letters of Credit 9,536 7,392
Commitments to extend credit are agreements to lend to a customer as long as
there is no breach of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Many commitments either expire without being drawn
upon or are not fully drawn; therefore, the total commitment amounts do not
necessarily represent future cash requirements. MainStreet evaluates each
customer's creditworthinesss on a case-by-case basis. The amount of collateral
obtained is generally based on management's credit and financial evaluation of
the customer.
Standby and performance letters of credit are conditional commitments issued by
MainStreet to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private credit
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
MainStreet obtains collateral supporting those commitments for which collateral
is deemed necessary. Collateral held varies but may include accounts receivable,
marketable securities, inventory, property, plant and equipment, and
income-producing commercial properties.
NOTE 22 - CONCENTRATIONS OF CREDIT RISK
Virtually all of MainStreet's business activity is with customers located in the
southwestern, central and east central regions of Virginia and southeastern
Maryland. Accordingly, operating results are closely correlated with the
economic trends within these regions and influenced by the significant
industries within the southwest region including textile, furniture and
pre-built housing as well as agriculture. In addition, the ultimate
collectibility of the Banks' loan portfolios and the recovery of the carrying
amounts of repossessed property are susceptible to changes in the market
conditions of these geographic regions. The commercial portfolio is diversified
with no significant concentrations of credit at December 31, 1997. Acquisition
and development construction loans account for $42.0 million and $41.5 million
of the commercial portfolio at December 31, 1997 and 1996, respectively. In
addition, other commercial loans secured by real estate totaled $163.6 million
and $133.5 million at December 31, 1997 and 1996, respectively. The remainder of
the loans secured by real estate consists almost entirely of 1-4 family
residential property. MainStreet was the creditor for approximately $122.7
million and $128.8 million at December 31, 1997 and 1996, respectively, of
consumer loans for automobiles and mobile homes generated directly by or
purchased from established dealers (indirect). These loans are generally
collateralized by the related property and many are either endorsed or subject
to mandatory dealer repurchase agreements.
The individual banks have operating policies relating to the credit process and
collateral in loan originations. Loans to purchase real and personal property
are generally collateralized by the related property with loan amounts
established based on certain percentage limitations of the property's total
stated or appraised value. Credit approval is primarily a function of the
evaluation of the creditworthiness of the individual borrower based on pertinent
financial information, the underlying transaction to be financed and collateral.
<PAGE>
NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value:
(a) Short-Term Financial Instruments
The carrying values of short-term financial instruments including cash
and cash equivalents, federal funds sold, interest- bearing deposits in
domestic banks, and short-term borrowings approximate the fair value of
these instruments. These financial instruments generally expose the
Corporation to limited credit risk and have no stated maturity or have
an average maturity of 30-45 days and carry interest rates which
approximate market value.
(b) Mortgage Loans Held for Sale
The fair value of mortgage loans held for sale is based on current
investor pricing at the close of business on the last business day of
the financial reporting period.
(c) Securities Available for Sale and Securities Held to Maturity
The fair value of investments, except certain state and municipal
securities, is estimated based on bid prices published in financial
newspapers or bid quotations received from securities dealers. The fair
value of certain state and municipal securities is not readily
available through market sources other than dealer quotations, so fair
value estimates are based on quoted market prices of similar
instruments, adjusted for differences between the quoted instruments
and the instruments being valued.
(d) Loans
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
commercial, real estate - commercial, real estate - construction, real
estate - mortgage, credit card and other consumer. Each loan category
is further segmented into fixed and adjustable rate interest terms and
by performing and nonperforming categories.
The fair value of performing loans is calculated by discounting
scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate risk
inherent in the loan as well as estimates for operating expenses and
prepayments. The estimate of maturity is based on MainStreet's
historical experience with repayment for each loan classification,
modified, as required, by an estimate of the effect of current economic
and lending conditions.
Fair value for significant nonperforming loans is based on estimated
cash flows which are discounted using a rate commensurate with the risk
associated with the estimated cash flows. Assumptions regarding credit
risk, cash flows and discount rates are judgmentally determined using
available market information and specific borrower information.
(e) Deposits
The fair value of demand, interest checking, savings and money market
deposits is the amount payable on demand. The fair value of fixed
maturity time deposits and certificates of deposit is estimated using
the rates currently offered for deposits of similar remaining
maturities and repayment characteristics.
(f) Long-Term Debt
The fair value of long-term debt is estimated using the rates currently
offered for borrowings of similar remaining maturities and repayment
characteristics.
(g) Commitments to Extend Credit, Standby Letters of Credit and Financial
Guarantees Written
The only amounts recorded for commitments to extend credit, standby
letters of credit and financial guarantees written are the deferred
fees arising from these unrecognized financial instruments. These
deferred fees are not deemed significant at December 31, 1997 and
December 31, 1996, and as such the related fair values have not been
estimated.
<PAGE>
The estimated fair values of MainStreet's financial instruments at December 31,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------- ------------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
<S> <C> --------------- ---------- --------------- ----------
FINANCIAL ASSETS
Cash and Due From Banks $ 47,202 $ 47,202 $ 47,792 $ 47,792
Interest-Bearing Deposits in Domestic Banks 494 494 518 518
Mortgage Loans Held for Sale 3,048 3,048 742 745
Federal Funds Sold 5,144 5,144 10,473 10,473
Securities Available for Sale 693,957 693,957 353,398 353,398
Securities Held to Maturity 72,243 74,321 97,922 100,100
Loans, Net of Unearned Income 925,718 930,074 878,160 881,763
---------- ----------- ---------- ----------
TOTAL FINANCIAL ASSETS $1,747,806 $1,754,240 $1,389,005 $1,394,789
========== ========== ========== ==========
FINANCIAL LIABILITIES
Deposits:
Demand Deposits (Noninterest-Bearing) $ 149,940 $ 149,940 $ 142,001 $ 142,001
Interest Checking Accounts 121,470 121,470 115,688 115,688
Savings Deposits 115,929 115,929 122,883 122,883
Money Market Investment Accounts 104,478 104,478 106,499 106,499
Time Deposits:
Certificates of Deposit $100,000 and Over 154,982 155,511 119,507 120,706
Other 416,933 418,273 393,506 400,787
---------- ---------- ---------- ----------
TOTAL DEPOSITS 1,063,732 1,065,601 1,000,084 1,008,564
Repurchase Agreements Short-Term 213,871 213,871 145,356 145,356
Other Short-Term Debt 149,767 149,767 82,764 82,764
FHLB Borrowings, Callable 2/97 -- -- 45,000 44,968
Corporation-Obligated Mandatorily
Redeemable Capital Securities 50,000 51,100 -- --
Repurchase Agreements Long-Term 63,466 63,466 -- --
Other Long-Term Debt 102,134 84,514 26,029 26,055
---------- ---------- ---------- ----------
TOTAL FINANCIAL LIABILITIES $1,642,970 $1,628,319 $1,299,233 $1,307,707
========== ========== ========== ==========
</TABLE>
Fair value estimates are made at a specific point in time, based on relevant
market information about the financial instrument. These estimates do not
reflect any premium or discount that could result from offering for sale at one
time MainStreet's entire holdings of a particular financial instrument. Because
no market exists for a significant portion of MainStreet's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing on-and-off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets that are not considered financial
assets include deferred tax assets and bank premises and equipment. In addition,
the tax ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in the estimates.
NOTE 24 - STOCK DIVIDEND
On February 20, 1996, MainStreet declared a two-for-one stock split, in the form
of a 100% stock dividend, payable March 15, 1996 to stockholders of record March
4, 1996. Shareholders received one additional share of common stock for each
share held on the record date. The par value of the 4,267,536 shares issued of
approximately $21,336,000 was transferred from retained earnings to the common
stock account.
NOTE 25 - CONTINGENCIES AND OTHER MATTERS
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.
At December 31, 1997, MainStreet had two acquisitions pending which were
completed within the first quarter of 1998. The first acquisition was Tysons
Financial Corporation ("Tysons"), which was accounted for as a purchase. The
second acquisition was Regency Financial Shares ("Regency"), which was accounted
for as a pooling of interests.
<PAGE>
Under the terms of the agreement with Tysons, each shareholder of Tysons common
stock was to receive 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 Tysons' 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
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.
Under the terms of the agreement with Regency, each shareholder of Regency
common stock was to receive the equivalent of $13.00 per share for each share
held of Regency stock. This resulted in an exchange ratio of .474 shares of
Registrant's common stock for each share of Regency stock. Each Regency director
was to receive the difference between the exercise price per option and $13.00.
This resulted in respective exchange ratios of .237 and .219 shares of
Registrant'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.
On March 11, 1998, MainStreet announced an agreement to acquire Ballston
Bancorp, Inc. ("Ballston"), subject to regulatory approval and approval by the
shareholders of Ballston and certain other specified conditions which was
completed July 17, 1998. 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 stock. This resulted in an exchange ratio of .4310 shares
of MainStreet's common stock for each share of Ballston stock. The outstanding
1,619,474 shares of Ballston were exchanged for approximately 697,938 shares of
MainStreet's common stock.
On August 26, 1998, MainStreet executed 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. Based upon a
BB&T closing price of $32.94 on August 25, 1998, the transaction will be valued
at approximately $554.3 million or $38.87 per MainStreet share. The transaction
is subject to both regulatory and MainStreet shareholder approval and will be
accounted for as a pooling of interests.
<TABLE>
<CAPTION>
Quarterly Financial Results (Unaudited)
(In Thousands, Except Per Share Data) Fourth Third Second First
1997 Quarter Quarter Quarter Quarter
- ---- ------- ------- ------- -------
<S> <C>
Interest Income $31,885 $31,154 $30,402 $27,863
Interest Expense 16,799 15,860 15,205 13,690
------- ------- ------- --------
Net Interest Income 15,086 15,294 15,197 14,173
Provision for Loan Losses 1,102 1,025 1,562 963
------- ------- ------- --------
Net Interest Income After Provision 13,984 14,269 13,635 13,210
Noninterest Income 3,243 3,382 3,290 3,964
Noninterest Expense 12,053 10,471 10,284 10,919
------- ------- ------- --------
Income Before Income Taxes 5,174 7,180 6,641 6,255
Income Tax Expense 1,700 2,347 2,134 1,971
------- ------- ------- --------
Net Income $ 3,474 $ 4,833 $ 4,507 $ 4,284
======= ======= ======= ========
Per Share:
Net Income:
Primary $ .28 $ .38 $ .36 $ .34
======= ======= ======= ========
Fully Diluted $ .27 $ .38 $ .36 $ .34
======= ======= ======= ========
Cash Dividends Declared $ .15 $ .16 $ .13 $ .13
======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
Quarterly Financial Results (Unaudited)
(In Thousands, Except Per Share Data) Fourth Third Second First
1996 Quarter Quarter Quarter Quarter
- ---- ------- ------- ------- -------
<S> <C>
Interest Income $27,758 $26,768 $25,035 $24,062
Interest Expense 13,024 12,066 11,253 10,819
------- ------- ------- --------
Net Interest Income 14,734 14,702 13,782 13,243
Provision for Loan Losses 925 1,001 633 951
------- ------- ------- -------
Net Interest Income After Provision 13,809 13,701 13,149 12,292
Noninterest Income 3,008 2,712 2,982 3,080
Noninterest Expense 10,544 9,975 9,497 9,266
------- ------- ------- -------
Income Before Income Taxes 6,273 6,438 6,634 6,106
Income Tax Expense 1,942 2,130 2,132 1,850
------- ------- ------- -------
Net Income $ 4,331 $ 4,308 $ 4,502 $ 4,256
======= ======= ======= =======
Per Share:
Net Income:
Primary $ .34 $ .34 $ .36 $ .34
======= ======= ======= =======
Fully Diluted $ .34 $ .34 $ .36 $ .34
======= ======= ======= =======
Cash Dividends Declared $ .15 $ .12 $ .10 $ .10
======= ======= ======= =======
</TABLE>
