UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-8622 For the Period Ended March 31, 1998
MainStreet BankGroup Incorporated
(Exact Name of Registrant as Specified in its Charter)
Virginia 54-1046817
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
P. O. Box 4831 Martinsville, Virginia 24115
- --------------------------------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
(540) 666-6724
--------------
(Registrant's Telephone Number, Including Area Code)
N/A
- --------------------------------------------------------------------------------
Former Name, Former Address, and Formal Fiscal Year,
if Changed Since Last Report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- ---------
Indicate the number of shares outstanding at each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT APRIL 30, 1998
- ---------------------------- -----------------------------
COMMON STOCK $5.00 PAR VALUE 13,334,241
- ---------------------------- -----------------------------
<PAGE>
MAINSTREET BANKGROUP INCORPORATED
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Consolidated Balance Sheets -- March 31, 1998 and 3
December 31, 1997
Consolidated Statements of Income -- Three Months 4
Ended March 31, 1998 and 1997
Consolidated Statements of Cash Flows -- Three Months 5
Ended March 31, 1998 and 1997
Notes to Consolidated Financial Statements 6 - 11
Item 2. Management's Discussion and Analysis of Financial 11 - 14
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14 - 15
Item 6(b). Reports on Form 8-K 15
2
<PAGE>
<TABLE>
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Unaudited
(In 000's Except Share Data)
<CAPTION>
<S> <C>
March 31 December 31
ASSETS 1998 1997
---- ----
Cash and Due From Banks $ 69,685 $ 47,202
Interest-Earning Deposits in Domestic Banks 644 494
Mortgage Loans Held for Sale 5,638 3,048
Federal Funds Sold 17,585 5,144
Securities Available for Sale (Amortized Costs of $804,336 as
of March 1998, and $689,193 as of December, 1997) 806,877 693,957
Securities Held to Maturity (Approximate Market Values of $58,625
as of March 1998 and $74,321 as of December, 1997)
Taxable 26,466 38,170
Nontaxable 30,637 34,073
---------- ----------
57,103 72,243
Loans, Net of Unearned Income and Deferred Fees 998,630 925,718
Less: Allowance for Loan Losses ( 13,832) ( 12,375)
---------- ----------
Loans, Net 984,798 913,343
Bank Premises and Equipment, Net 18,392 17,003
Other Real Estate Owned 1,595 1,424
Other Assets 52,331 40,384
---------- ----------
TOTAL ASSETS $2,014,648 $1,794,242
========== ==========
LIABILITIES
Deposits:
Demand Deposits (Noninterest-Bearing) $ 191,026 $ 149,940
Interest Checking Accounts 137,684 121,470
Savings Deposits 119,077 115,929
Money Market Investment Accounts 136,945 104,478
Time Deposits
Certificates of Deposit $100,000 and Over 161,441 154,982
Other 445,264 416,933
---------- ----------
TOTAL DEPOSITS 1,191,437 1,063,732
Repurchase Agreements Short-Term 214,176 213,871
Other Short -Term Debt 46,933 149,767
Repurchase Agreements Long-Term 185,784 63,466
Other Long-Term Debt 151,898 102,134
Corporation-Obligated Mandatorily Redeemable Capital Securities 50,000 50,000
Accrued Interest Payable 7,830 5,977
Other Liabilities 11,309 9,576
---------- ----------
TOTAL LIABILITIES 1,859,367 1,658,523
SHAREHOLDERS' EQUITY
Preferred Stock, (Par Value $5 Per Share, Authorized 1,000,000
Shares; None Outstanding)
Common Stock, (Par Value $5 Per Share, Authorized 20,000,000
Shares; Issued and Outstanding 13,330,991 Shares as of March,
1998 and 12,661,212 as of December, 1997) 66,655 63,306
Capital in Excess of Par 22,971 12,399
Retained Earnings 64,225 57,501
Unearned Compensation (135) (176)
Accumulated Other Comprehensive Income 1,565 2,689
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 155,281 135,719
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,014,648 $1,794,242
========== ==========
See Notes to Consolidated Financial Statements.
3
<PAGE>
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In 000's Except Per Share Data)
Unaudited
<CAPTION>
Three Months Ended
------------------
March 31 March 31
1998 1997
---- ----
INTEREST INCOME
Interest and Fees on Loans:
Taxable $21,838 $20,462
Nontaxable 86 32
Interest on Mortgage Loans Held for Sale 136 33
Interest and Dividends on Securities
Available for Sale 12,794 5,698
Interest and Dividends on Securities Held
to Maturity
Taxable 589 1,013
Nontaxable 428 497
Other Interest Income 198 128
------- -------
Total Interest Income 36,069 27,863
------- -------
INTEREST EXPENSE
Deposits 10,613 9,590
Short-Term Borrowings 4,064 3,173
Long-Term Debt 5,125 927
------- -------
Total Interest Expense 19,802 13,690
------- -------
Net Interest Income 16,267 14,173
Provisions for Loan Losses 1,084 963
------- -------
Net Interest Income After Provision
for Loan Losses 15,183 13,210
NONINTEREST INCOME
Service Charges, Fees and Other 2,832 2,282
Trust Income 904 806
Securities Gains (Losses), Net 40 876
------- -------
Total Noninterest Income 3,776 3,964
------- -------
NONINTEREST EXPENSE
Salaries 4,605 4,204
Employee Benefits 2,009 1,666
Net Occupancy Expense 652 573
Equipment 987 931
Stationery and Supplies 254 252
Advertising 143 216
Other 3,117 3,077
------- -------
Total Noninterest Expense 11,767 10,919
------- -------
Income Before Income Taxes 7,192 6,255
Income Tax Expense 2,294 1,971
------- -------
NET INCOME $ 4,898 $ 4,284
======= =======
Per Share
Basic:
NET INCOME $ .38 $ .34
======= =======
Dividends Per Share $ .15 $ .13
======= =======
Average Shares Outstanding 12,904 12,552
======= =======
Diluted:
NET INCOME $ .38 $ .34
======= =======
Average Shares Outstanding 12,946 12,595
======= =======
See Notes to Consolidated Financial Statements.
4
<PAGE>
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In 000's)
Three Months Ended
------------------
March March
Cash Flows From Operating Activities: 1998 1997
---- ----
Net Income $ 4,898 $ 4,284
Adjustments to Reconcile Net Income to Net Cash Provided (Used)
by Operating Activities:
Provision for Loan Losses 1,084 963
Depreciation and Amortization 600 622
Amortization of Securities Premiums and Discounts, Net 555 581
Provision for Deferred Income Taxes (863) (388)
Gain on Sale of Securities, Net (40) (876)
Amortization of Intangibles 95 48
Mortgage Loan Originations Held for Sale (14,445) (4,788)
Mortgage Loans Sold 11,855 3,313
Changes in Other Assets and Other Liabilities:
Other Assets 199 (576)
Accrued Interest 1,687 (269)
Other Liabilities 1,025 4,379
-------- --------
Net Cash Provided by Operating Activities 6,650 7,293
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash Acquired upon Acquisition 22,690 ---
(Increase) Decrease in Interest-Earning Deposits (50) 13
Purchases of Securities Available for Sale (158,097) (232,343)
Purchases of Securities Held to Maturity --- (4,777)
Proceeds from Sale of Securities Available for Sale 5,251 133,153
Proceeds from Calls and Maturities of Securities Available for Sale 51,374 27,885
Proceeds from Calls and Maturities of Securities Held to Maturity 15,674 10,006
Net Increase in Loans (10,173) (8,942)
Purchases of Bank Premises and Equipment (1,500) (1,126)
Proceeds From Sale of Bank Premises and Equipment 243 2
Net Increase (Decrease) in Other Real Estate (171) 83
Increase in Other Assets (219) (205)
-------- --------
Net Cash Used in Investing Activities (74,978) (76,251)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 38,237 35,366
Net Increase in Repurchase Agreements Short-Term 305 13,178
Net Increase (Decrease) in Other Short-Term Debt (106,178) 93,598
Net Decrease in FHLB Advances, Callable 2/97 --- (45,000)
Net Increase in Repurchase Agreements Long-Term 122,318 ---
Net Increase (Decrease) in Other Long-Term Debt 49,764 (25,013)
Cash Dividends (2,136) (1,591)
Proceeds from Issuance of Common Stock 942 320
-------- --------
Net Cash Provided by Financing Activities 103,252 70,858
-------- --------
Net Increase in Cash and Cash Equivalents 34,924 1,900
Cash and Cash Equivalents at Beginning of Period 52,346 58,265
-------- --------
Cash and Cash Equivalents at End of Period $ 87,270 $ 60,165
======== ========
See Notes to Consolidated Financial Statements.
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements of MainStreet BankGroup Incorporated,
("MainStreet"), and its subsidiaries conform to generally accepted accounting
principles and to general banking industry practices. The interim period
consolidated financial statements are unaudited; however, in the opinion of
management, all adjustments of a normal and recurring nature which are necessary
for a fair presentation of the consolidated financial statements herein have
been included. The financial statements herein should be read in conjunction
with the notes to financial statements included in the corporation's 1997 Form
10-K to the SEC. MainStreet completed its acquisition of Regency Financial
Shares on March 10, 1998 which was accounted for using the pooling of interests
method of accounting. All prior year data has been restated to reflect this
acquisition. The results of the interim period are not necessarily indicative of
year-end results.
2. Supplemental Cash Flow Data
For purposes of the Statements of Cash Flow, MainStreet considers all Cash and
Due from Bank Accounts and Federal Funds Sold to be cash equivalents.
Supplemental Cash Flow Data at the date of consummation of the purchase of
Tysons Financial Corporation included in the March 31, 1998 cash flow statement
is as follows:
(In 000's)
ASSETS
Interest-Earning Deposits in Domestic Banks $ 100
Securities Available for Sale 14,231
Loans, Net of Unearned Income and Deferred Fees 63,318
Less: Allowance for Loan Losses (952)
-------
Loans, Net 62,366
Bank Premises and Equipment, Net 732
Other Assets 10,551
-------
TOTAL ASSETS 87,980
LIABILITIES
Deposits:
Demand (Noninterest-Bearing) 23,770
Certificates of Deposit $100,000 and over 9,481
Other Time Deposits 56,217
-------
Total Deposits 89,468
Other Short-Term Debt 3,344
Other Liabilities 874
-------
TOTAL LIABILITIES 93,686
SHAREHOLDERS' EQUITY
Total Shareholders' Equity 16,984
-------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 110,718
-------
NET CASH AND CASH EQUIVALENTS ACQUIRED UPON $ 22,690
ACQUISITION OF TYSONS FINANCIAL CORPORATION ========
6
<PAGE>
<TABLE>
3. Securities Available for Sale
The following sets forth the composition of securities available for sale, which
are carried at approximate market value at March 31, 1998:
<CAPTION>
Gross Gross Approx.
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C>
U. S. Treasury Securities $ 15,731 $ 73 $ (1) $ 15,803
Obligations of U.S.
Government Agencies 52,201 225 (284) 52,142
Mortgage-Backed Securities 352,729 2,784 (1,015) 354,498
Collateralized Mortgage
Obligations and REMICs 305,969 1,560 (1,438) 306,091
Corporate Bonds 50,546 864 (905) 50,505
Other Securities 12,747 185 --- 12,932
Obligations of States and
Political Subdivisions 14,413 493 --- 14,906
-------- ------- -------- --------
Total Securities
Available for Sale $804,336 $ 6,184 $ (3,643) $806,877
======== ======= ======== ========
Gross gains and losses of $18,000 and $6,000, respectively, were realized on
sales and calls of securities available for sale.
4. Securities Held to Maturity
The carrying and approximate market values and gross unrealized gains and losses
of securities held to maturity are as follows at March 31, 1998:
<CAPTION>
Gross Gross Approx.
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Obligations of U.S.
Government Agencies $ 1,802 $ 240 $ (12) $ 2,030
Mortgage-Backed Securities 21,757 439 (52) 22,144
Obligations of State and
Political Subdivisions 33,544 922 (15) 34,451
-------- ------- -------- --------
Total Securities Held to Maturity $ 57,103 $ 1,601 $ (79) $ 58,625
======== ======= ======== ========
</TABLE>
Gross gains and losses of $30,000 and $2,000, respectively, were realized on
calls of securities held to maturity.
7
<PAGE>
<TABLE>
5. Loan Portfolio
Major classifications of loans at March 31, 1998 and December 31, 1997 are
summarized below:
<CAPTION>
(In 000's)
March 1998 December 1997
------------ -------------
<S> <C>
Commercial $ 496,139 $ 459,319
Real Estate 231,426 220,928
Consumer 283,197 257,901
--------- ---------
Total Loans 1,010,762 938,148
Less: Unearned Income and Deferred Fees (12,132) (12,430)
--------- ---------
Loans, Net of Unearned Income and
Deferred Fees 998,630 925,718
Less: Allowance for Loan Losses (13,832) (12,375)
--------- ---------
Loans, Net $ 984,798 $ 913,343
========= =========
</TABLE>
Interest on loans is computed by methods which generally result in level rates
of return on principal amounts outstanding. Loans are placed on nonaccrual
status when it becomes probable that the borrower will have difficulty meeting
either interest or principal payments and the loan is not in the process of
collection and is not well collateralized. For loans placed on nonaccrual, all
interest accrued in the current fiscal year is reversed against income while
prior year accrued interest is charged against the allowance for loan losses.
For payments on nonaccrual loans and impaired loans, amounts are applied first
as a recovery of principal and then as interest under the cost recovery method.
MainStreet considers a loan to be impaired when, based upon current information
and events, it believes it is probable that MainStreet will be unable to collect
all amounts due according to the contractual terms of the loan agreement.
MainStreet's impaired loans within the scope of SFAS 114 include nonaccrual
loans (excluding those collectively reviewed for impairment), troubled debt
restructurings, and certain other nonperforming loans. For collateral dependent
loans, MainStreet bases the measurement of these impaired loans on the fair
value of the loan's collateral properties. For all other loans, MainStreet bases
the measurement of these impaired loans on the more readily determinable of the
present value of expected future cash flows discounted at the loan's effective
interest rate or the observable market price. Impairment losses are recognized
through an increase in the allowance for loan losses and a corresponding charge
to the provision for loan losses. Adjustments to impairment losses due to
changes in the fair value of impaired loans' collateral properties are included
in the provision for loan losses. When an impaired loan is either sold,
transferred to other real estate owned or written down, any related valuation
allowance is charged off against the allowance for loan losses.
An allowance for loan losses is maintained in order to provide for losses in
collection of loans that can be currently estimated. The level of the allowance
for loan losses is based upon the quality of the loan portfolios as determined
by management after consideration of historical loan loss experience,
diversification as to the type of loans in the portfolios, the amount of
collateralized as compared to uncollateralized loans, banking industry standards
and averages, and general economic conditions. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
consolidated balance sheet and income and expense for the period. Actual results
could differ significantly from these estimates. In connection with the
determination of the allowance for loan losses and the valuation of real estate
owned, management obtains independent appraisals for significant properties.
Management believes that the allowance for loan losses and the valuation of real
estate owned are adequate. While management uses available information to
recognize losses on loans and real estate owned, future additions to the
allowance for loan losses and additional write-downs in the valuation of real
estate owned may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review MainStreet's allowance for loan losses and
8
<PAGE>
<TABLE>
valuation of real estate owned. The following table shows the changes in the
allowance for loan losses arising from loans charged off and recoveries on loans
previously charged off by loan category; and additions to the allowance which
have been charged to operating expenses:
<CAPTION>
<S> <C>
(In 000's)
March 31 March 31
1998 1997
-------- --------
Balance at December 31, 1997 and 1996 $ 12,375 $ 11,497
Changes in Allowance due to Purchase Acquisition 952 ---
Charge-offs:
Commercial, Financial and Agricultural (149) (94)
Real Estate - Mortgage (41) (34)
Installment (576) (474)
-------- --------
(766) (602)
Recoveries:
Commercial, Financial and Agricultural 12 89
Real Estate - Mortgage 1 ---
Installment 174 150
-------- --------
187 239
-------- --------
Net Charge-offs (579) (363)
Provision for Loan Losses 1,084 963
-------- --------
Balance at March 31, 1998 and March 31, 1997 $ 13,832 $ 12,097
======== ========
The change in the allowance for loan losses due to purchase acquisition was due
to the consummation of the purchase of Tysons Financial Corporation on February
28, 1998.
Nonaccrual loans and loans 90-days past due or more as to interest or principal
payments are considered by BankGroup to be nonperforming loans. Nonperforming
loans were 1.00% of loans, net of unearned income at March 31, 1998.
9
<PAGE>
The following table presents aggregate loan amounts for nonaccrual and 90-day
due loans as of March 31, 1998 and 1997:
<CAPTION>
1998 1997
---- ----
Nonaccrual Loans $ 4,773 $ 4,245
Loans Past Due 90 Days or More 5,103 2,136
-------- --------
Total Nonperforming Loans 9,876 6,381
-------- --------
Other Real Estate Owned 1,595 822
Other Repossessed Assets 345 53
-------- --------
Total Foreclosed/Repossessed Assets 1,940 875
-------- --------
Total Nonperforming Loans and Foreclosed/Repossessed Assets $ 11,816 $ 7,256
======== ========
The effect of nonaccrual loans on interest income for the three months ended
March 31, 1998 and 1997 was as follows:
1998 1997
---- ----
Gross Amount of Interest That Would Have Been Recorded
at Original Rate $ 235 $ 106
Interest That Was Reflected in Income 7 ---
-------- -------
Net Impact on Interest Income $ 228 $ 106
======== =======
</TABLE>
At March 31, 1998, the recorded investment in loans which have been identified
by BankGroup as impaired loans in accordance with Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of
A Loan", totaled $4.5 million. The portion of the allowance for loan losses
related to such loans was $.4 million.
6. Contingencies and Other Matters
On March 11, 1998, MainStreet agreed to acquire Ballston Bancorp, Inc.
("Ballston"), subject to regulatory approval and approval by the shareholders of
Ballston and certain other specified conditions. Under terms of the agreement,
MainStreet has agreed to pay the equivalent of $12.04 per share for each
outstanding share of Ballston common stock in the form of MainStreet common
stock. MainStreet has agreed to exchange a maximum of .4920 and a minimum of
.4025 shares of its common stock for each of the 1,619,474 outstanding shares of
Ballston common stock. These exchange ratios are subject to adjustment under
certain circumstances. If the maximum exchange ratio is used 796,781 shares of
10
<PAGE>
MainStreet common stock will be issued in the transaction. This transaction is
valued at approximately $19.5 million. Ballston was organized under the laws of
Delaware, and serves the Arlington, Virginia area with three offices. A fourth
office will be opened in the Falls Church, Virginia area in the near future.
MainStreet completed its acquisition of Tysons Financial Corporation, McLean,
Virginia, effective February 28, 1998 at 11:59 p.m. having received all required
regulatory and shareholder approvals. Under terms of the agreement, each
shareholder of Tysons common stock was to receive the equivalent of $14.50 per
share of MainStreet BankGroup stock for each share held of Tysons stock. This
resulted in an exchange ratio of .527 shares of MainStreet's common stock for
each share of Tysons stock. Also under terms of the agreement, MainStreet agreed
to purchase Tyson's outstanding directors' warrants for the difference between
the exercise price per warrant and $14.50 . The warrants initially were
converted into Tysons' common stock. After this initial conversion, the common
stock exchange ratio, .527, was to be applied. In addition, MainStreet agreed to
purchase Tysons' directors' options for the difference between the exercise
price per option and $14.50 in MainStreet common stock. The outstanding
directors' options were at exercise prices of $9.125 and $12.50 and resulted in
an exchange ratio of .193 and .073, respectively. The outstanding shares of
Tysons common stock, directors' warrants, and directors' options of Tysons will
exchange for approximately 610,254 shares of MainStreet's common stock.
MainStreet BankGroup Incorporated completed its acquisition of Regency Financial
Shares, Incorporated, Richmond, Virginia on March 10, 1998, having received all
required regulatory and shareholder approvals. Under terms of the agreement,
each shareholder of Regency common stock was to receive the equivalent of $13.00
per share of each share held of Regency stock. This resulted in an exchange
ration of .474 shares of MainStreet'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 will be settled at $27.42 per
share. The outstanding 1,430,134 shares of Regency common stock, and the
outstanding 5,500 directors' options will exchange for approximately 678,993
shares of MainStreet's common stock.
MainStreet and its subsidiaries, in the normal course of business, are involved
in various legal actions and proceedings. It is the opinion of management that
any liabilities arising from these matters and not covered by insurance, would
not have a material effect on MainStreet's financial position.
7. Comprehensive Income
On January 1, 1998, MainStreet adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income". As required by the SFAS No.
130, prior year information has been modified to conform with the new
presentation.
Comprehensive income includes net income and all other changes to MainStreet's
equity, with the exception of transactions with shareholders ("other
comprehensive income"). MainStreet's only component of other comprehensive
income is the change in unrealized gains and losses on available for sale
securities.
MainStreet's total comprehensive income for the three month periods ended March
31, 1998 and 1997 was $3,774,000 and $1,762,000, respectively. Information
concerning MainStreet's other comprehensive income for the three month periods
ended March 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 1997
---- ----
Change in unrealized gains/(losses) on available for sale securities $ (1,717) $ (3,010)
Reclassification to realized gain included in net income (12) (870)
Income tax expense relating to the change in unrealized 605 1,358
gains/(losses) on available for sale securities --------- ---------
Other comprehensive income loss $ (1,124) $ (2,522)
========= =========
</TABLE>
11
<PAGE>
<TABLE>
8. Income Per Share
The following tables reconcile the numerator and denominator of the basic and
diluted computations for net income per share for the periods ended March 31,
1998 and 1997.
<CAPTION>
<S> <C>
March 31, 1998
---------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Income available to common shareholders $ 4,898 $ 12,904 $ .38
========
Effect of Stock Options 49 42
----------- ----------
Diluted EPS
Income available to common
shareholders and assumed conversions $ 4,947 $ 12,946 $ .38
=========== =========== ========
<CAPTION>
March 31, 1997
---------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Income available to common shareholders $ 4,284 $ 12,552 $ .34
========
Effect of Stock Options --- 43
----------- ----------
Diluted EPS
Income available to common
shareholders and assumed conversions 4,284 $ 12,595 $ .34
=========== ========== ========
</TABLE>
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this Quarter
Report and the documents incorporated herein by reference constitute
"forward-looking statements" within the meaning of the United States Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance of achievements of the Corporation, or industry
results, to be materially different from any future results, performance, or
achievements expressed or implied by such forward-looking statements. Such
factors include, amount others, the following: general economic and business
conditions in the Corporation's market area, inflation, fluctuations in interest
rates, changes in government regulations and competition, which will, amount
other things, impact demand for loans and banking services: the ability of the
Corporation to implement its business strategy; and changes in, or the failure
to comply with, government regulations.
Forward-looking statements are intended to apply only at the time they are made.
Moreover, whether or not stated in connection with a forward-looking statements,
the Corporation undertakes no obligation to correct or update a forward-looking
statement should the Corporation later become aware that it is not likely to be
achieved. If the Corporation were to update or correct a forward-looking
statement, investors and others should not conclude that the Corporation will
make additional updates or corrections thereafter.
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Overview
MainStreet BankGroup Incorporated, ("MainStreet"), reported first quarter
earnings of $4.9 million in 1998 compared to $4.3 million for the same period in
1997, an increase of $.6 million, or 14.3%. These first quarter earnings in 1998
produced a return on average assets and a return on average equity of 1.01% and
12.63%, respectively. These same ratios for 1997 were 1.20% and 13.92% for the
return on average assets and the return on average equity, respectively.
Earnings per diluted share for 1998 were $.38 compared to $.34 in 1997. Net
interest income and noninterest income, excluding securities gains, increased
over 1997 levels, but were offset somewhat by an increase in noninterest
expense.
12
<PAGE>
During the first quarter of 1998, MainStreet completed its acquisitions of
Regency Bank in Richmond, Virginia and Tysons Financial Corporation in McLean,
Virginia. The acquisition of Regency was accounted for using the pooling of
interests method; therefore, all prior year data has been restated to reflect
this acquisition. The acquisition of Tysons Financial Corporation was accounted
for as a purchase and was effective at the close of business on February 28,
1998. Accordingly, none of Tysons' financial history is reflected in prior
period MainStreet financial results. For more detail on the acquisitions of
Regency and Tysons, see Notes 2 and 6 to the consolidated financial statements.
Net Interest Income
Net interest income, the difference between total interest income and total
interest expense is MainStreet's principal source of earnings. The amount of net
interest income is determined by the volume of interest-earning assets, the
level of rates earned on those assets, and the cost of supporting funds. The
difference between rates earned on interest-earning assets (with an adjustment
made to tax exempt income to provide comparability with taxable income) and the
cost of supporting funds is measured by the net interest margin.
Net interest income for the first quarter of 1998 was $16.3 million compared to
$14.2 million for the first quarter of 1997, an increase of $2.1 million, or
14.8%. Total interest income increased $8.2 million while total interest expense
increased $6.1 million. The acquisition of Tysons Financial Corporation
attributed to $366.1 thousand of the increase in the net interest margin, or
2.6%. The net interest margin was 3.61% for the first quarter of 1998 compared
to 4.29% for 1997. Average interest-earning assets increased $494.5 million from
first quarter 1997 to first quarter 1998. Average loans increased $110.3 million
with the remainder of the increase primarily in investments. These increases in
loans and investments were primarily funded by an increase in average
interest-bearing liabilities of $447.8 million. During 1997 and in 1998
MainStreet continued its leveraging strategy in order to enhance earnings and to
utilize, to the greatest extent possible, MainStreet's strong capital position.
Also, included in this strategy, was a transfer of borrowing from short-term to
long-term borrowings which increased the long-term expense approximately $3.1
million. In addition $1.1 million was added to expense in 1998 due to the issue
of the corporation-obligated mandatorily redeemable capital securities in
November, 1997. The acquisition of Tysons Financial Corporation added $95.6
million to average interest-earning assets and $71.1 million to average
interest-bearing liabilities.
Provision for Loan Losses
A provision for loan losses is charged to earnings for the purpose of
establishing an allowance for loan losses. Losses are, in turn, charged to this
allowance rather than being reported as a direct expense. For the first quarter
of 1998, the provision for loan losses was $1.1 million, relatively stable
compared to $1.0 for the first quarter of 1997.
Noninterest Income
Total noninterest income, excluding securities gains, was $3.7 million for the
first quarter of 1998, compared to $3.1 million for the same period in 1997, an
increase of $.6 million, or 21.0%. Fee income increased $.5 million or 24.1% in
1998 over 1997 levels while trust income increased $.1 million , or 12.2% in
1998 over 1997 income. Both of these increases were due to increased charges.
The acquisition of Tysons Financial Corporation had no material impact on the
increase in noninterest income.
Securities Gains
Securities gains for the quarter ended March 31, 1998 were $40 thousand compared
to $876 thousand for the quarter ended March 31, 1997. The gains in 1997 were
attributed to sales of adjustable rate mortgage backed securities due to the
high level of prepayments on those securities which accelerated expense related
to amortization of bond premiums.
13
<PAGE>
Noninterest Expense
Total noninterest expense was $11.8 million and $10.9 million for the first
quarter of 1998 and 1997, respectively. The 1998 expense was $.8 million, or
7.8%, greater than the 1997 expense. The first quarter expenses in 1998 included
$434.5 thousand of operating expenses associated with Tysons Financial
Corporation. Excluding these expenses, the 1998 noninterest expense would have
increased $.4 million, or 3.8% over 1997 levels. The 1997 expense did include
$.6 million of expenses associated with a kiting scheme. The largest areas of
increase in 1998 over 1997 were salaries and employee benefits and other
noninterest expenses. Salaries and employee benefits increased due to the
staffing for the opening of an additional branch along with additional
compensation awards. Other noninterest expenses increased due to the
acquisitions that were completed in the first quarter of 1998 and to some degree
the announcement of the agreement signed to acquire Ballston Bancorp, Inc.
Financial Condition
Total assets at March 31, 1998 were $2.0 billion compared to $1.8 billion at
December 31, 1997, an increase of $220.4 million, or 12.3%. Of this increase at
March 31, 1998 Tysons Financial Corporation was $119.5 million, or 6.7%.
Investments, including securities available for sale and securities held to
maturity, totaled $864.0 million at March 31, 1998 compared to $766.2 million at
December 31, 1997, an increase of $97.8 million, or 12.8% . Of this increase,
$14.8 million, or 1.9% was attributed to Tysons Financial Corporation at March
31, 1998. The remainder of the increase was funded by an increase in deposits
and borrowings. Securities available for sale account for 93.4% of the
investment portfolio at March 31, 1998 and 90.6% of the investment portfolio at
December 31, 1997. All securities acquired in the two acquisitions of Regency
and Tysons were transferred into the securities available for sale portfolio
along with new purchases in 1998. All of Regency's securities were previously
held in the available for sale category. This distribution of the investment
portfolio allows flexibility in the management of interest rate risk, credit,
liquidity, and capital adequacy.
Loans, net of unearned income, at March 31, 1998 were $998.6 million compared to
$925.7 million at December 31, 1998, an increase of $72.9 million, or 7.9%. Of
this increase, the acquisition of Tysons Financial Corporation's loans at March
31, 1998, were $65.6 million or 7.1%. A discussion on credit quality can be
found in the Asset Quality Section of this analysis.
Other assets at March 31, 1998 were $52.3 million, an increase of $11.9 million,
or 29.6%. The primary increase is associated with the other assets of Tysons
Financial Corporation which were $10.5 million at March 31, 1998. Of the $10.5
million, $8.5 million is an intangible asset at March 31, 1998 associated with
the purchase.
Total deposits at March 31, 1998 were $1.2 billion compared to $1.1 billion at
December 31, 1997. Deposits increased $127.7 million from December 31, 1997 of
which $98.5 million was due to Tysons Financial Corporation at March 31, 1998.
Excluding the acquisition of Tysons, deposits would have increased $29.2 million
of which the largest increases were in demand deposits, interest checking, and
money market accounts.
Borrowings at March 31, 1998 and December 31, 1997 were $648.8 million and
$579.2 million, respectively. Borrowings increased $69.6 million at March 31,
1998, or 12.01%, over the outstanding borrowings at December 31, 1997 which were
primarily used in MainStreet's leverage strategy to fund investments. The
acquisition of Tysons Financial Corporation was immaterial to the increase in
borrowings. The following is a breakdown of the borrowings at March 31, 1998 and
December 31, 1997.
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C>
Short-term Repurchase Agreements $ 214,176 $ 213,871
Short-term FHLB Advances --- 61,000
Federal Funds Purchased --- 38,000
Corporate Cash Management Accounts 39,825 30,195
Treasury Tax and Loan Notes 7,108 20,572
Long-Term Repurchase Agreements 185,597 63,466
Long-Term FHLB Advances 151,898 101,936
Corporation-Obligated Mandatorily
Redeemable Capital Securities 50,000 50,000
Capital Lease 187 198
---------- ----------
$ 648,791 $ 579,238
========== ==========
</TABLE>
14
<PAGE>
Asset Quality
Centralized credit risk management provides more uniform levels of
standardization and underwriting among MainStreet affiliates. MainStreet manages
credit risk through a number of methods including loan grading, industry type,
and underwriting collateral. A formal loan review function provides an
independent assessment of credit ratings, credit quality, and credit process.
Management believes that early detection of credit problems through regular
reviews of borrowers' financial performance and collateral values is an
important factor in overall credit quality. Nonperforming assets were $11.8
million at March 31, 1998 compared to $9.3 million at December 31, 1997.
Nonperforming loans were $9.9 million and $7.7 million at March 31, 1998 and
December 31, 1997, respectively. The ratio of nonperforming loans to loans, net
of unearned income, was 1.00% at March 31, 1998 and .83% at December 31, 1997.
At March 31, 1998 and December 31, 1997, nonaccrual loans comprised $4.8 million
and $3.9 million, respectively of loans, net of unearned income. The ratio of
the allowance for loan losses to nonperforming loans was 140.06% and 160.76%,
respectively. The net charge-off ratio at March 31, 1998 was .24% versus .42% at
December 31, 1997. The allowance for loan losses to actual loans, net of
unearned income, was 1.39% at March 31, 1998 compared to 1.34% at December 31,
1997.
Shareholders' Equity
Total shareholders' equity at March 31, 1998 was $155.3 million compared to
$135.7 million at December 31, 1997, an increase of $19.6 million of which $16.9
million was associated with the acquisition of Tysons Financial Corporation.
Dividends per share were $.15 for the first quarter of 1998. At March 31, 1998,
the leverage and risk based capital ratios were 9.11% and 17.76%, respectively.
The capital position remains strong with ratios well above regulatory prescribed
minimums.
Liquidity
The measurement of liquidity is performed by monitoring ratios that indicate the
level of liquid assets relative to liabilities, the dependence on potential
volatile funding sources, and the relationship of loans to deposits. While
relying on core deposit relationships as the basis of liquidity, MainStreet has
also sough additional sources of liquidity primarily with the Federal Home Loan
Bank, regional and super-regional banks and top tier investment banking firms.
Contingencies and Other Matters
This discussion is found in Note 6 of The Notes to Consolidated Financial
Statements in this report.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required by Part II, Item 1, of the Form 10-Q appears in Note 6
of The Notes to Consolidated Financial Statements in this report.
Item 4. Submission of Matters to a Vote of Security Holders
On April 29, 1998, two matters were submitted to a vote of security holders at
the company's Annual Meeting of Stockholders held in Martinsville, Virginia.
The first matter was the election of directors. The following eleven individuals
were elected as directors of the Registrant.
Director For Withheld
-------- --- --------
C. Leeland Bassett 9,654,451 121,562
W. Christopher Beeler, Jr. 9,693,889 82,124
Michael R. Brenan 9,628,547 147,466
Alfred J. T. Byrne 9,682,962 93,051
William L. Cooper, III 9,693,385 82,628
Billy P. Craft 9,645,781 130,232
Phillip W. Dean 9,685,647 90,366
I. Patricia Henry 9,680,171 95,842
Larry E. Hutchens 9,684,459 91,554
William O. McCabe, Jr., M.D. 9,692,565 83,448
Albert L. Prillaman 9,689,093 86,920
The second matter was the approval of change in the corporation's name from
MainStreeet BankGroup Incorporated to MainStreet Financial Corporation. The name
change was approved with the following breakdown of votes.
For Against Abstain
--- ------- -------
9,155,423 542,323 78,267
Item 6(b). Reports on Form 8-K
None
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereof duly authorized.
(Registrant) MAINSTREET BANKGROUP INCORPORATED
Date May 14, 1998 /s/ James E. Adams
---------------------------------
James E. Adams
Chief Financial Officer/Executive
Vice President/Treasurer
17
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 69,685
<INT-BEARING-DEPOSITS> 644
<FED-FUNDS-SOLD> 17,585
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 806,877
<INVESTMENTS-CARRYING> 57,103
<INVESTMENTS-MARKET> 58,625
<LOANS> 998,630
<ALLOWANCE> 13,832
<TOTAL-ASSETS> 2,014,648
<DEPOSITS> 1,191,437
<SHORT-TERM> 261,109
<LIABILITIES-OTHER> 19,139
<LONG-TERM> 387,682
0
0
<COMMON> 66,655
<OTHER-SE> 88,626
<TOTAL-LIABILITIES-AND-EQUITY> 2,014,648
<INTEREST-LOAN> 21,924
<INTEREST-INVEST> 13,811
<INTEREST-OTHER> 334
<INTEREST-TOTAL> 36,069
<INTEREST-DEPOSIT> 10,613
<INTEREST-EXPENSE> 19,802
<INTEREST-INCOME-NET> 16,267
<LOAN-LOSSES> 1,084
<SECURITIES-GAINS> 40
<EXPENSE-OTHER> 11,767
<INCOME-PRETAX> 7,192
<INCOME-PRE-EXTRAORDINARY> 7,192
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,898
<EPS-PRIMARY> .38
<EPS-DILUTED> .38
<YIELD-ACTUAL> 3.57
<LOANS-NON> 4,773
<LOANS-PAST> 5,103
<LOANS-TROUBLED> 263
<LOANS-PROBLEM> 10,178
<ALLOWANCE-OPEN> 12,375
<CHARGE-OFFS> 766
<RECOVERIES> 187
<ALLOWANCE-CLOSE> 13,832
<ALLOWANCE-DOMESTIC> 13,832
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 7,677
</TABLE>
