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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NUMBER 000-25128
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MAIN STREET BANKS, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 58-2104977
(State of Incorporation) (I.R.S. Employer Identification No.)
676 CHASTAIN ROAD, KENNESAW, GA 30144
(Address of principal executive (Zip Code)
offices)
770-422-2888
(Registrant's telephone number)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, NO PAR VALUE
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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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of March 30, 2001, registrant had outstanding 15,621,755 shares of common
stock. As of March 28, 2001, the aggregate market value of the voting stock held
by nonaffiliates of the registrant was approximately $137,181,882.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 2001 Annual
Meeting of Shareholders are incorporated by reference into Part III.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 10
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 11
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockhnolder Matters........................................ 11
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
Item Quantitative and Qualitative Disclosure about Market Risk...
7a. 32
Item 8. Financial Statements and Supplementary Data................. 32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 33
PART
III
Item Directors and Executive Officers of the Registrant..........
10. 33
Item Executive Compensation......................................
11. 33
Item Security Ownership of Certain Beneficial Owners and
12. Management.................................................. 33
Item Certain Relationships and Related Transaction...............
13. 33
PART IV
Item Exhibits, Financial Statements, Schedules and Reports on
14. Form 8-K.................................................... 33
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K may contain or incorporate by reference
statements which may constitute "forward looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21 of the
Securities Exchange Act of 1934, as amended, including statements relating to
present or future trends or factors generally affecting the banking industry and
specifically affecting Main Street Banks, Inc. (the "Company") operations,
markets and products. Without limiting the foregoing, the words "believes",
"anticipates", "intends", expects" or similar expressions are intended to
identify forward-looking statements. These forward-looking statements involve
certain risks and uncertainties. Actual results could differ materially from
those projected for many reasons including, without limitation, changing events
and trends that have influenced the Company's assumptions. These trends and
events include (i) changes in the interest rate environment which may reduce
margins, (ii) non-achievement of expected growth (iii) less favorable than
anticipated changes in national and local business environment and securities
markets (iv) adverse changes in the regulatory requirements affecting the
Company (v) greater competitive pressures among financial institutions in
Company's market and (vi) greater than expected loan losses. Additional
information and other factors that could affect future financial results are
included in the Company's filings with the Securities and Exchange Commission,
including the Annual Report on Form 10-K for 2000.
PART I
ITEM 1. BUSINESS
Main Street Banks, Inc. (the "Company" or "Main Street") is a financial
holding company which engages through its subsidiaries, Main Street Bank (the
"Bank" or "Main Street Bank") and Williamson, Musselwhite & Main Street
Insurance, Inc. ("Williamson"), in providing a full range of banking, mortgage
banking, investment and insurance services to its retail and commercial
customers located primarily in Barrow, Clarke, Cobb, DeKalb, Gwinnett, Newton,
Rockdale and Walton counties in Georgia. The Bank, a commercial bank, provides
traditional deposit, lending and mortgage and securities brokerage services.
Prior to January 2, 2001, the Company was known as First Sterling Banks, Inc. On
December 29, 2000, former bank subsidiaries, The Westside Bank and Trust Company
("Westside"), The Eastside Bank and Trust Company ("Eastside") and Community
Bank of Georgia ("Community") were merged into the Bank. The Company was
incorporated on March 16, 1994 as a Georgia business corporation. The Company's
executive offices are located at 676 Chastain Road, Kennesaw, Georgia 30144, and
its telephone number is 770-422-2888. Neither the Company nor the Bank has any
foreign activities.
Since 1995, the Company has been reviewing and analyzing possible
acquisition opportunities in the Atlanta metropolitan area. Its strategic plan
has been to enhance shareholder value by creating a larger organization in North
Georgia. The goal has been to provide broader and more comprehensive services to
its customers, create efficiencies in the administration and service functions,
and provide a larger shareholder base with a more liquid security trading in a
national market.
The first merger occurred in 1996 when the Company merged with Eastside
Holding Corporation, a one-bank holding company located in Snellville, Gwinnett
County, Georgia. In 1999, the Company consummated a merger with Georgia
Bancshares, Inc. and thereby acquired Community located in DeKalb County,
Georgia. In May of 2000, the Company consummated a merger with the former Main
Street Banks Incorporated, the former parent of the Bank. In December of 2000,
the Company consummated a merger with Williamson Insurance Agency, Inc. and
Williamson and Musselwhite Insurance Agency, Inc. (collectively "Williamson").
In January of 2001, the Company consummated a merger with Walton Bank and Trust
Company.
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RECENT DEVELOPMENTS
Effective November 17, 2000, the Company became a financial holding company
under the provisions of the Gramm-Leach-Bliley Act of 1999, which amended the
Bank Holding Company Act and expands the activities in which the Company may
engage. After becoming a financial holding company, in December 2000 the Company
acquired Williamson. Upon consummation of the acquisition, the two insurance
companies were combined with the Main Street Insurance division and the name was
changed to the Williamson, Musselwhite & Main Street Insurance, Inc.
MARKET AREA AND COMPETITION
The Bank encounters vigorous competition from other commercial banks,
savings and loan associations and other financial institutions and
intermediaries in the Bank's primary service areas.
The Bank competes with other banks in their primary service area in
obtaining new deposits and accounts, making loans, obtaining branch banking
locations and providing other banking services. The Bank also competes with
savings and loan associations and credit unions for savings and transaction
deposits, certificates of deposit and various types of retail and commercial
loans.
Competition for loans is also offered by other financial intermediaries,
including savings and loan associations, mortgage banking firms and real estate
investment trusts, small loan and finance companies, insurance companies, credit
unions, leasing companies, and certain government agencies. Competition for time
deposits and, to a more limited extent, demand and transaction deposits is also
offered by a number of other financial intermediaries and investment
alternatives, including money market mutual funds, brokerage firms, government
and corporate bonds and other securities.
Competition for banking services in the State of Georgia is not limited to
institutions headquartered in the State. A number of large interstate banks,
bank holding companies, and other financial institutions and intermediaries have
established loan production offices, small loan companies, and other offices and
affiliates in the State of Georgia. Many of the interstate financial
organizations that compete in the Georgia market engage in regional, national or
international operations and have greater financial resources than the Company.
Since July 1, 1995, numerous interstate acquisitions involving Georgia based
financial institutions have been announced or consummated. Though interstate
banking has resulted in significant changes in the structure of financial
institutions in the southeastern region, including the Bank's primary service
areas, management does not feel that such changes have had or will have a
significant impact upon its operations or the results therefrom.
The Company's marketing strategy emphasizes its local nature and involvement
in the communities located in its' primary service area.
Management expects that competition will remain intense in the future due to
State and Federal laws and regulations, and the entry of additional bank and
nonbank competitors.
EMPLOYEES
As of March 15, 2001, the Company had a total of 368 full-time equivalent
employees. These employees are provided with fringe benefits in varying
combinations, including health, accident, disability and life insurance plans.
None of the Company's employees is subject to a collective bargaining agreement,
and the Company has never experienced a work stoppage. In the opinion of
management, the Company enjoys excellent relations with its employees.
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PRODUCTS AND SERVICES
The Company provides a full range of traditional banking, mortgage banking,
investment and insurance services to individual and corporate customers.
LENDING
The Company's primary lending activities include real estate loans (mortgage
and construction), commercial and industrial loans to small and medium sized
businesses and consumer loans. The Company originates first mortgage loans for
sale, with the servicing rights, in the secondary market. The Company limits its
interest rate risk on such loans originated by selling individual loans
immediately after the customers lock-in to their rate.
DEPOSITS
The Company offers a full range of depository accounts and services to both
individuals and businesses. These deposit accounts have a wide range of interest
rates and terms and consist of demand, savings, money market and time accounts.
INSURANCE SERVICES
The Company provides insurance services to individuals and businesses
through its subsidiary, Williamson. Williamson provides a variety of insurance
products for consumers including life, health, homeowners, automobile and
umbrella liability coverage. Commercial products include coverage for property,
general liability, worker's compensation, and group life and health.
INVESTMENT SERVICES
The Company, through a division of the Bank, provides its customers with
comprehensive investment and brokerage services through an arrangement with SAL
Financial, an affiliate of Sterne, Agee & Leach, Inc. Products and services
include stocks and bonds, mutual funds, annuities, 401(k) plans, life insurance,
individual retirement accounts, simplified employee pension accounts, estate
planning and financial needs analysis.
SUPERVISION AND REGULATION
GENERAL
The Company is a financial holding company registered with the Federal
Reserve Board ("Federal Reserve") and the Georgia Department of Banking and
Finance under the Bank Holding Company Act of 1956 as amended ("Holding Company
Act") and the Georgia Bank Holding Company Act, respectively. As a result, it is
subject to the supervision, examination and reporting requirements of these acts
and the regulations of the Federal Reserve and the Georgia Department of Banking
and Finance issued under these acts. To qualify as a financial holding company,
a bank holding company must demonstrate that each of its bank subsidiaries is
well-capitalized and well-managed and has a rating of "satisfactory" or better
under the Community Reinvestment Act of 1977 ("CRA"). The Bank is a Georgia
chartered commercial bank and subject to the supervision, examination and
reporting requirements of the Georgia Department of Banking and Finance and the
FDIC.
The Holding Company Act requires every bank holding company to obtain the
prior approval of the Federal Reserve before:
- it may acquire direct or indirect ownership or control of any voting
shares of any bank if, after the acquisition, the bank holding company
will directly or indirectly own or control more than five (5%) percent of
the voting shares of the bank;
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- it or any of its subsidiaries, other than a bank, may acquire all or
substantially all of the assets of any bank; or
- it may merge or consolidate with any other bank holding company.
The Bank Holding Company Act generally prohibits a bank holding company from
engaging in activities other than:
- banking;
- managing or controlling banks or other permissible subsidiaries; and
- acquiring or retaining direct or indirect control of any company engaged
in any activities other than activities closely related to banking or
managing or controlling banks.
However, the activities permissible to bank holding companies and their
affiliates were substantially expanded by the Gramm-Leach-Bliley Act, which the
President signed on November 12, 1999. Gramm-Leach-Bliley repeals the
anti-affiliation provisions of the Glass-Steagall Act to permit the common
ownership of commercial banks, investment banks and insurance companies. The
Holding Company Act was amended to permit a financial holding company to engage
in any activity and acquire and retain any company that the Federal Reserve
determines to be (a) financial in nature or incidental to such financial
activity or (b) complementary to a financial activity and does not pose a
substantial risk to the safety and soundness of depository institutions or the
financial system generally.
The Bank is subject to regulation, supervision, and examination by the FDIC
and the Georgia Department of Banking and Finance. The FDIC and the Georgia
Department of Banking and Finance regularly examine the operations of the bank
and are given the authority to approve or disapprove mergers, consolidations,
and the establishment of branches and similar corporate actions. The FDIC and
the Georgia Department of Banking and Finance also have the power to prevent the
continuance or development of unsafe or unsound banking practices or other
violations of law.
CAPITAL ADEQUACY
The Company and the Bank are required to comply with the capital adequacy
standards established by the Federal Reserve and the FDIC. There are two basic
measures of capital adequacy for bank holding companies that have been
promulgated by the Federal Reserve: a risk-based measure and a leverage measure.
All applicable capital standards must be satisfied for a bank holding company to
be considered in compliance.
The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profile among banks and bank
holding companies, to account for off-balance sheet exposure, and to minimize
disincentives for holding liquid assets. Assets and off-balance sheet items are
assigned to broad risk categories, each with appropriate weights. The resulting
capital ratios represent capital as a percentage of total risk-weighted assets
and off-balance sheet items.
The minimum guideline for the ratio of total capital ("Total Capital") to
risk-weighted assets (including certain off-balance sheet items, such as standby
letters of credit) is 8.0%. At least half of the Total Capital must be composed
of common equity, undivided profits, minority interests in the equity accounts
of consolidated subsidiaries, noncumulative perpetual preferred stock, and a
limited amount of cumulative perpetual preferred stock, less goodwill and
certain other intangible assets ("Tier 1 Capital"). The remainder may consist of
subordinated debt, other preferred stock, and a limited amount of loan loss
reserves. The minimum guideline for Tier 1 Capital ratio is 4.0%. At
December 31, 2000, the Company's consolidated Tier 1 Capital and Total Capital
ratios were 11.37% and 12.62%, respectively.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio of Tier 1 Capital to average assets,
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less goodwill and certain other intangible assets (the "Leverage Ratio"), of
3.0% for bank holding companies that meet certain specified criteria, including
having the highest regulatory rating. All other bank holding companies generally
are required to maintain a Leverage Ratio of at least 3.0%, plus an additional
cushion of 100 to 200 basis points. The Company's Leverage Ratio at
December 31, 2000, was 8.51%. The guidelines also provide that bank holding
companies experiencing internal growth or making acquisitions will be expected
to maintain strong capital positions substantially above the minimum supervisory
levels without significant reliance on intangible assets. Furthermore, the
Federal Reserve has indicated that it will consider a "tangible Tier 1 Capital
leverage ratio" (deducting all intangibles) and other indicators of capital
strength in evaluating proposals for expansion or new activities.
The Bank is subject to risk-based and leverage capital requirements adopted
by the FDIC, which are substantially similar to those adopted by the Federal
Reserve. The Bank was in compliance with applicable minimum capital requirements
as of December 31, 2000. Neither the Company nor the Bank has been advised by
any federal banking agency of any specific minimum capital ratio requirement
applicable to it.
Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including the termination of deposit insurance by the
FDIC, and to certain restrictions on its business. See "Prompt Corrective
Action."
SUPPORT OF SUBSIDIARY BANK
Under Federal Reserve policy, the Company is expected to act as a source of
financial strength to, and to commit resources to support, the Bank. This
support may be required at times when, absent such Federal Reserve policy, the
Company may not be inclined to provide it. In addition, any capital loans by a
bank holding company to the bank are subordinate in right of payment to deposits
and to certain other indebtedness of such subsidiary bank. In the event of a
bank holding company's bankruptcy, any commitment by the bank holding company to
a federal bank regulatory agency to maintain the capital of a subsidiary bank
will be assumed by the bankruptcy trustee and entitled to a priority of payment.
PROMPT CORRECTIVE ACTION
FDICIA establishes a system of prompt corrective action to resolve the
problems of undercapitalized institutions. Under this system, which became
effective in December 1992, the federal banking regulators are required to
establish five capital categories ("well capitalized, "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized") and to take certain mandatory supervisory actions, and are
authorized to take other discretionary actions, with respect to institutions in
the three undercapitalized categories, the severity of which will depend upon
the capital category in which the institution is placed. Generally, subject to a
narrow exception, FDICIA requires the banking regulator to appoint a receiver or
conservator for an institution that is critically undercapitalized. The federal
banking agencies have specified by regulation the relevant capital level for
each category.
Under the agency rule implementing the prompt corrective action provisions,
an institution that (i) has a Total Capital ratio of 10.0% or greater, a Tier 1
Capital ratio of 6.0% or greater, and a Leverage Ratio of 5.0% or greater and
(ii) is not subject to any written agreement, order, capital directive, or
prompt corrective action directive issued by the appropriate federal banking
agency is deemed to be "well capitalized." An institution with a Total Capital
ratio of 8.0% or greater, a Tier 1 Capital ratio of 4.0% or greater, and a
Leverage Ratio of 4.0% or greater is considered to be "adequately capitalized."
A depository institution that has a Total Capital ratio of less than 8.0%, a
Tier 1 Capital ratio of less than 4.0%, or a Leverage Ratio of less than 4.0% is
considered to be "undercapitalized." A depository institution that has a Total
Capital ratio of less than 6.0%, a Tier 1
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Capital ratio of less than 3.0%, or a Leverage Ratio of less than 3.0% is
considered to be "significantly undercapitalized," and an institution that has a
tangible equity capital to assets ratio equal to or less than 2.0% is deemed to
be "critically undercapitalized." For purposes of the regulation, the term
"tangible equity" includes core capital elements counted as Tier 1 Capital for
purposes of the risk-based capital standards plus the amount of outstanding
cumulative perpetual preferred stock (including related surplus), minus all
intangible assets with certain exceptions. A depository institution may be
deemed to be in a capitalization category that is lower than is indicated by its
actual capital position if it receives an unsatisfactory examination rating.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency.
Under FDICIA, a bank holding company must guarantee that a subsidiary depository
institution meets its capital restoration plan, subject to certain limitations.
The obligation of a controlling bank holding company under FDICIA to fund a
capital restoration plan is limited to the lesser of 5.0% of an undercapitalized
subsidiary's assets and the amount required to meet regulatory capital
requirements. An undercapitalized institution is also generally prohibited from
increasing its average total assets, making acquisitions, establishing any
branches, or engaging in any new line of business, except in accordance with an
accepted capital restoration plan or with the approval of the FDIC. In addition,
the appropriate federal banking agency is given authority with respect to any
undercapitalized depository institution to take any of the actions it is
required to or may take with respect to a significantly undercapitalized
institution as described below if it determines "that those actions are
necessary to carry out the purpose" of FDICIA.
For those institutions that are significantly undercapitalized or
undercapitalized and either fail to submit an acceptable capital restoration
plan or fail to implement an approved capital restoration plan, the appropriate
federal banking agency must require the institution to take one or more of the
following actions: (i) sell enough shares, including voting shares, to become
adequately capitalized; (ii) merge with (or be sold to) another institution (or
holding company), but only if grounds exist for appointing a conservator or
receiver; (iii) restrict certain transactions with banking affiliates as if the
"sister bank" exception to the requirements of Section 23A of the Federal
Reserve Act did not exist; (iv) otherwise restrict transactions with bank or
nonbank affiliates; (v) restrict interest rates that the institution pays on
deposits to "prevailing rates" in the institution's "region"; (vi) restrict
asset growth or reduce total assets; (vii) alter, reduce, or terminate
activities; (viii) hold a new election of directors; (ix) dismiss any director
or senior executive officer who held office for more than 180 days immediately
before the institution became undercapitalized, provided that in requiring
dismissal of a director or senior officer, the agency must comply with certain
procedural requirements, including the opportunity for an appeal in which the
director or officer will have the burden of proving his or her value to the
institution; (x) employ "qualified" senior executive officers; (xi) cease
accepting deposits from correspondent depository institutions; (xii) divest
certain nondepository affiliates which pose a danger to the institution; or
(xiii) be divested by a parent holding company. In addition, without the prior
approval of the appropriate federal banking agency, a significantly
undercapitalized institution may not pay any bonus to any senior executive
officer or increase the rate of compensation for such an officer without
regulatory approval.
At December 31, 2000, the Bank had the requisite capital levels to qualify
as well capitalized.
FDIC INSURANCE ASSESSMENTS
Pursuant to FDICIA, the FDIC adopted a risk-based assessment system for
insured depository institutions that takes into account the risks attributable
to different categories and concentrations of assets and liabilities. The
risk-based system, which went into effect on January 1, 1994, assigns an
institution to one of three capital categories: (i) well capitalized; (ii)
adequately capitalized; and (iii) undercapitalized. These three categories are
substantially similar to the prompt corrective action
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categories described above, with the "undercapitalized" category including
institutions that are undercapitalized, significantly undercapitalized, and
critically undercapitalized for prompt corrective action purposes. An
institution is also assigned by the FDIC to one of three supervisory subgroups
within each capital group. The supervisory subgroup to which an institution is
assigned is based on a supervisory evaluation provided to the FDIC by the
institution's primary federal regulator and information which the FDIC
determines to be relevant to the institution's financial condition and the risk
posed to the deposit insurance funds (which may include, if applicable,
information provided by the institution's state supervisor). An institution's
insurance assessment rate is then determined based on the capital category and
supervisory category to which it is assigned. Under the final risk-based
assessment system, there are nine assessment risk classifications (i.e.,
combinations of capital groups and supervisory subgroups) to which different
assessment rates are applied.
The Bank is assessed at the well-capitalized level where the premium rate is
currently zero. Like all insured banks, the Bank also must pay a quarterly
assessment of approximately $.02 per $100 of assessable deposits to pay off
bonds that were issued in the late 1980's by a government corporation, the
financing corporation, to raise funds to cover costs of the resolution of the
savings and loan crisis.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe and unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order, or condition imposed by the FDIC.
SAFETY AND SOUNDNESS STANDARDS
The FDIA, as amended by FDICIA and the Riegle Community Development and
Regulatory Improvement Act of 1994, requires the federal bank regulatory
agencies to prescribe standards, by regulations or guidelines, relating to
internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate risk exposure, asset growth,
asset quality, earnings, stock valuation and compensation, fees and benefits and
such other operational and managerial standards as the agencies deem
appropriate. The federal bank regulatory agencies adopted in 1995, a set of
guidelines prescribing safety and soundness standards pursuant to FDICIA, as
amended. The guidelines establish general standards relating to internal
controls and information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth and compensation, fees
and benefits. In general, the guidelines require, among other things,
appropriate systems and practices to identify and manage the risk and exposures
specified in the guidelines. The guidelines prohibit excessive compensation as
an unsafe and unsound practice and describe compensation as excessive when the
amounts paid are unreasonable or disproportionate to the services performed by
an executive officer, employee, director, or principal stockholder. In addition,
the agencies adopted regulations that authorize, but do not require, an agency
to order an institution that has been given notice by an agency that it is not
satisfying any of such safety and soundness standards to submit a compliance
plan. If, after being so notified, an institution fails to submit an acceptable
compliance plan or fails in any material respect to implement an acceptable
compliance plan, the agency must issue an order directing action to correct the
deficiency and may issue an order directing other actions of the types to which
an undercapitalized institution is subject under the "prompt corrective action"
provisions of FDICIA. See "Prompt Corrective Action." If an institution fails to
comply with such an order, the agency may seek to enforce such order in judicial
proceedings and to impose civil money penalties. The federal bank regulatory
agencies also proposed guidelines for asset quality and earnings standards.
DEPOSITOR PREFERENCE
The Omnibus Budget Reconciliation Act of 1993 provides that deposits and
certain claims for administrative expenses and employee compensation against an
insured depository institution would be
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afforded a priority over other general unsecured claims against such an
institution in the "liquidation or other resolution" of such an institution by
any receiver.
OTHER
The United States Congress continues to consider a number of wide-ranging
proposals for altering the structure, regulation, and competitive relationships
of the nation's financial institutions. It cannot be predicted whether or in
what form further legislation may be adopted or the extent to which the business
of the Company may be affected thereby.
RISK FACTORS
CREDIT RISK AND LOAN CONCENTRATION
A major risk facing lenders is the risk of losing principal and interest as
a result of a borrower's failure to perform according to the terms of the loan
agreement, or "credit risk." Real estate loans include residential mortgages and
construction and commercial loans secured by real estate. The Company's credit
risk with respect to its real estate loans relates principally to the value of
the underlying collateral. The Company's credit risk with respect to its
commercial loans relates principally to the general creditworthiness of the
borrowers, who primarily are individuals and small and medium-sized businesses
in the Company's primary service areas. There can be no assurance that the
allowance for loan losses will be adequate to cover future losses in the
existing loan portfolios. Loan losses exceeding the Company's historical rates
could have a material adverse affect on the results of operations and financial
condition of the Company.
POTENTIAL IMPACT OF CHANGE IN INTEREST RATES
The potential of the Company depends to a large extent upon its net interest
income, which is the difference between interest income on interest-earning
assets, such as loans and investments, and interest expense on interest-bearing
liabilities, such as deposits and borrowings. The net interest income of the
Company would be adversely affected if changes in market interest rates resulted
in the cost of interest-bearing liabilities rising at a faster rate than the
yields on interest earning assets of the Company. In addition, a decline in
interest rates may result in greater than normal prepayments of the higher
interest-bearing obligations held by the Company.
MANAGEMENT INFORMATION SYSTEMS
The sophistication and level of risk of the Company's business requires the
utilization of thorough and accurate management information systems. Failure of
management to effectively implement, maintain, update and utilize updated
management information systems could prevent management from recognizing in a
timely manner deterioration in the performance of its business, particularly its
loan portfolios. Such failure to effectively implement, maintain, update and
utilize comprehensive management information systems could have a material
adverse effect on the results of operations and financial condition of the
Company.
ADVERSE ECONOMIC CONDITIONS
The Company's major lending activities are real estate and commercial loans.
Residential mortgage loans are also produced for resale. An increase in interest
rates could have a material adverse effect on the housing industries and
consumer spending generally. In addition, an increase in interest rates could
cause a decline in the value of residential mortgages. These events could
adversely affect the results of operations and financial condition of the
Company.
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GOVERNMENTAL REGULATION--BANKING
The Company and the Bank are subject to extensive supervision, regulation
and control by several Federal and state governmental agencies, including the
Federal Reserve, FDIC, and the Georgia Department of Banking and Finance. Future
legislation, regulations and government policy could adversely affect the
Company and the financial institutions industry as a whole, including the cost
of doing business. Although the impact of such legislation, regulation and
policies cannot be predicted, future changes may alter the structure of and
competitive relationships among financial institutions and the cost of doing
business.
CONSUMER AND DEBTOR PROTECTION LAWS
The Company is subject to numerous Federal and state consumer protection
laws that impose requirements related to offering and extending credit. The
United States Congress and state governments may enact laws and amend existing
laws to regulate further the consumer industry or to reduce finance charges or
other fees or charges applicable to credit card and other consumer revolving
loan accounts. Such laws, as well as any new laws or rulings which may be
adopted, may adversely affect the Company's ability to collect on account
balances or maintain previous levels of finance charges and other fees and
charges with respect to the accounts. Any failure by the Company to comply with
such legal requirements also could adversely affect its ability to collect the
full amount of the account balances. Changes in Federal and state bankruptcy and
debtor relief laws could adversely affect the results of operations and
financial condition of the Company if such changes result in, among other
things, additional administrative expenses and accounts being written off as
uncollectable.
COMPOSITION OF REAL ESTATE LOAN PORTFOLIO
The real estate loan portfolio of the Company includes residential mortgages
and construction and commercial loans secured by real estate. The Company
generates all of its real estate mortgage loans in Georgia. Therefore,
conditions of these real estate markets could strongly influence the level of
the Company's non-performing mortgage loans and the results of operations and
financial condition of the Company. Real estate values and the demand for
mortgages and construction loans are affected by, among other things, changes in
general or local economic conditions, changes in governmental rules or policies,
the availability of loans to potential purchasers, and acts of nature. Although
the Company's underwriting standards are intended to protect the Company against
adverse general and local real estate trends, declines in real estate markets
could adversely impact the demand for new real estate loans, the value of the
collateral securing the Company's loans and the results of operations and
financial condition of the Company.
MONETARY POLICY
The operating results of the Bank are affected by credit policies of
monetary authorities, particularly the Federal Reserve. The instruments of
monetary policy employed by the Federal Reserve include open market operations
in U.S. Government securities, changes in the discount rate on bank borrowings
and changes in reserve requirements against bank deposits. In view of changing
conditions in the national economy and in the money markets, as well as the
effect of action by monetary and fiscal authorities, including the Federal
Reserve, no prediction can be made as to possible future changes in interest
rates, deposit levels and loan demand on the results of operations and business
of the Company.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located at 676 Chastain Road,
Kennesaw, Georgia. The main office of the Bank is located at 1134 Clark Street,
Covington, Georgia. The Bank leases
10
space for its corporate headquarters and various support functions. The Bank has
21 branch offices located in Barrow, Clarke, Cobb, DeKalb, Gwinnett, Newton,
Rockdale and Walton counties, Georgia, 18 of which are owned and three of which
are leased. Deposit and loan operations, proof and purchasing are located in
leased space at 2118 Usher Street in Covington. Human resources and training are
in a bank owned building at 1122 Pace Street in Covington. The Bank's corporate
headquarters and marketing division are in leased space at 1121 Floyd Street,
Covington, Georgia. The bank also leases a building in Covington, adjacent to
the owned facility on Pace Street, which serves as the accounting department.
CERTAIN TRANSACTIONS
The Company's directors and certain business organizations and individuals
associated with them are customers of and have banking transactions with the
Bank in the ordinary course of business. Such transactions include loans,
commitments, lines of credit and letters of credit. All of those transactions
were made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons, and did not and do not involve more than normal risk of
collectibility or present any other unfavorable features. Additional
transactions with these persons and businesses are anticipated in the future.
Robert R. Fowler, III, chairman of the board, has entered into three lease
agreements with the Company, through which he leases to the Company buildings
that it uses for its operations center, corporate and marketing offices, and
accounting and card services facilities. Main Street Banks believes that the
terms of the lease agreements are at least as favorable to it as terms available
from unrelated third parties.
ITEM 3. LEGAL PROCEEDINGS
Neither the registrant nor its subsidiaries are a party to, nor is any of
their property the subject of, any material pending legal proceedings, other
than ordinary routine proceedings incidental to the business of the Company, nor
to the knowledge of the management of the registrant are any such proceedings
contemplated or threatened against it or its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during the
quarter ended December 31, 2000.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) The Company's common stock is traded on the Nasdaq National Market under
the symbol MSBK.
The following table lists the high and low stock price for each quarter
in 2000 and 1999:
FISCAL YEAR 2000 FISCAL YEAR 1999
------------------- -------------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
First quarter........................... $12.125 $ 8.063 $11.813 $10.688
Second quarter.......................... 11.625 8.625 12.500 10.438
Third quarter........................... 12.188 11.000 12.250 9.250
Fourth quarter.......................... 12.500 11.125 14.500 9.250
11
(b) As of March 8, 2001, there were approximately 2,451 shareholders of the
Company's common stock.
(c) During 2000, dividends of $ 0.04 per share were paid in the first and
second quarters and dividends of $.08 per share were paid in the third
and fourth quarters. The Company currently intends to continue paying
regular cash dividends on a quarterly basis.
Neither the Company's articles of incorporation nor the bylaws set forth
any restriction on the ability of the Company to issue dividends to its
shareholders. The Georgia Business Corporation Code, though, forbids any
distribution which, after being given effect, would leave the Company
unable to pay its debts as they become due in the usual course of
business. Additionally, the Georgia Business Corporation Code provides
that no distribution shall be made if, after giving it effect, the
corporation's total assets would be less than the sum of its total
liabilities plus the amount that would be needed to satisfy any
preferential dissolution rights.
The Company is a legal entity separate and distinct from its subsidiaries.
Substantially all of the Company's revenues result from amounts paid as
dividends to the Company by its subsidiaries. The Bank is subject to statutory
and regulatory limitations on the payment of dividends to the Company, and the
Company is subject to statutory and regulatory limitations on dividend payments
to its shareholders.
If in the opinion of the Federal banking regulators, a depository
institution under its jurisdiction is engaged in or is about to engage in an
unsafe or unsound practice, the regulatory authority may require, after notice
and hearing, that the institution cease and desist from the practice. The
Federal banking agencies have indicated that paying dividends that deplete a
depository institution's capital base to an inadequate level would be an unsafe
and unsound banking practice. Under the Federal Deposit Insurance Corporation
Improvement Act of 1991, a depository institution may not pay any dividend if
payment would cause it to become undercapitalized or if it already is
undercapitalized. The Federal agencies have also issued policy statements that
provide that bank holding companies and insured banks should generally only pay
dividends out of current operating earnings.
The Georgia Financial Institutions Code and the Georgia Banking Department's
regulations provide:
- that dividends of cash or property may be paid only out of the bank's
retained earnings;
- that dividends may not be paid if the banks' paid-in capital and retained
earnings which are set aside for dividend payment and other distributions
do not, in combination, equal at least 20% of the bank's capital stock;
and
- that dividends may not be paid without prior approval of the Georgia
Banking Department if:
- the bank's total classified assets at its most recent examination
exceed 80% of its equity capital;
- the aggregate amount of dividends to be declared exceeds 50% of the
bank's net profits after taxes but before dividends for the previous
calendar year; or
- the ratio of equity capital total adjusted assets is less than 6%.
The payment of dividends by the Company may also be affected or limited by
other factors, such as a requirement by the Federal Reserve to maintain adequate
capital above regulatory guidelines.
12
ITEM 6. SELECTED FINANCIAL DATA
2000 1999 1998 1997 1996
---------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
EARNINGS
Interest income....................................... $ 80,232 64,185 57,279 52,347 44,347
Interest expense...................................... $ 34,970 24,643 22,586 21,033 18,620
Net interest income................................... $ 45,262 39,542 34,693 31,314 25,727
Non-interest income................................... $ 9,908 9,846 8,837 7,137 5,916
Non-interest expense.................................. $ 33,108 30,543 27,442 23,912 21,080
Operating income(1)................................... $ 14,144 11,211 9,980 8,487 6,489
Net income............................................ $ 12,833 11,232 9,980 8,487 6,489
SELECTED AVERAGE BALANCES
Assets................................................ $ 920,873 788,492 682,530 629,500 536,805
Earning assets........................................ $ 857,120 721,045 624,119 575,046 487,489
Loans................................................. $ 672,174 580,693 480,155 414,712 355,802
Total deposits........................................ $ 776,330 670,669 598,764 564,012 475,737
Shareholders' equity.................................. $ 76,998 70,873 64,970 57,166 52,809
Diluted common shares outstanding..................... 14,494 14,481 14,361 14,272 14,058
YEAR-END BALANCES
Assets................................................ $1,008,801 852,412 715,505 649,268 560,011
Earning assets........................................ $ 940,000 785,539 657,159 593,837 503,267
Loans................................................. $ 694,607 630,990 515,147 450,167 374,197
Total deposits........................................ $ 831,901 706,229 619,176 579,684 499,840
Shareholders' equity.................................. $ 86,422 73,839 68,966 61,309 55,729
Common shares outstanding............................. 14,268 14,179 14,145 13,960 13,917
PER COMMON SHARE
Earnings per share--basic............................. $ 0.90 0.79 0.71 0.61 0.47
Earnings per share--diluted........................... $ 0.89 0.78 0.69 0.59 0.46
Book value............................................ $ 6.06 5.21 4.88 4.39 4.00
Cash dividends paid................................... $ 0.24 0.16 0.15 0.13 0.10
Market price:
Close............................................... $ 12.43 12.06 10.88 9.33 6.513
High................................................ $ 12.50 14.50 13.17 9.72 6.611
Low................................................. $ 8.06 9.25 9.23 6.02 5.444
OPERATING INCOME DATA(1)
Earnings per share--basic............................. $ 0.99 0.79 0.71 0.61 0.47
Earnings per share--diluted........................... $ 0.98 0.77 0.69 0.59 0.46
Operating return on average assets.................... 1.54% 1.42 1.46 1.35 1.21
Operating return on average equity.................... 18.4% 15.8 15.4 14.8 12.3
Price to earnings..................................... 12.7 15.6 15.7 15.7 14.1
FINANCIAL RATIOS
Return on average assets.............................. 1.39% 1.42 1.46 1.35 1.21
Return on average equity.............................. 16.7% 15.8 15.4 14.8 12.3
Average equity to average assets...................... 8.36% 8.99 9.52 9.08 9.84
Dividend payout ratio................................. 24.5% 20.8 21.7 22.0 21.7
Price to earnings..................................... 14.0 15.6 15.7 15.7 14.1
Price to book value................................... 2.05 2.32 2.23 2.13 1.63
NONFINANCIAL
Shareholders.......................................... 2,451 1,582 928 10 989
Employees............................................. 379 380 400 377 344
Banking offices....................................... 21 21 18 22 22
ATMs.................................................. 23 23 21 22 21
- --------------------------
(1) Excludes non-recurring merger related expenses and one-time gains (losses)
pertaining to restructuring the investment portfolio and sales of property
of ($1,311) and $21 in 2000 and 1999, respectively.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations analyzes the major elements of Main Street's consolidated statements
of financial condition and consolidated statements of income. This section
should be read in conjunction with Main Street Banks' consolidated financial
statements and accompanying notes and other detailed information appearing
elsewhere herein.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
The following discussion contains certain forward-looking statements which
are based on certain assumptions and describe future plans, strategies, and our
expectations. These forward-looking statements include statements identified by
use of the words "may," "should," "will," "contemplate," "continue," "possible,"
"believe," "expect," "intend," "anticipate," "estimate," "project," or similar
expressions. Our ability to predict results or the actual effect of future plans
or strategies is inherently uncertain and involve five risks and uncertainties
that may cause actual results, performance or such investments to be materially
different from those expressed or implied from such forward looking statements.
Factors which could have a material adverse effect on our operations include,
but are not limited to, changes in interest rates and the level and composition
of deposits, loan demand and the values of loan collateral, mortgages,
securities and other interest sensitive assets and liabilities, general economic
conditions, legislation and regulation, monetary and fiscal policies of the
federal government, including policies of the Treasury Department and the
Federal Reserve Board, competition, demand for financial services in our market
area, accounting principles and guidelines, and the failure of assumptions
underlying the establishment of the reserve for loan losses. You should consider
these risks and uncertainties in evaluating forward-looking statements and
should not place undue reliance on such statements. We will not publicly release
the result of any revisions which may be made to any forward-looking statements
to reflect events or circumstances after the date of such statements or to
reflect the occurrence of anticipated or unanticipated events. All written or
oral forward statements attributable to Main Street are qualified in their
entirety by these cautionary statements.
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
OVERVIEW
Main Street's net income was $12.8 million, $11.2 million and $10.0 million
for the years ended December 31, 2000, 1999 and 1998, respectively. Basic
earnings per share were $0.90, $0.79 and $0.71 for the same periods,
respectively, and diluted earnings per share were $0.89, $0.78 and $0.69 for the
same periods. Earnings growth from 1998 to 1999 and from 1999 to 2000 resulted
principally from an increase in earning assets in a rising interest rate
environment. Earnings growth was further augmented by an increase in
non-interest income which resulted from the addition and growth of several
fee-based business lines.
On an operating basis, which excludes the impact of merger-related expenses
and other onetime gains (losses) pertaining to restructuring the investment
portfolio and sales of property, the Company's net earnings were $14.1 million,
$11.2 million and $10.0 million for the years ended December 31, 2000, 1999 and
1998, respectively. Diluted earnings per share on an operating basis were $0.98,
$0.77 and $0.69 for the same periods, respectively. Also on an operating basis,
the Company posted returns on average assets of 1.54%, 1.42% and 1.46% for the
same three years, as well as returns on average equity of 18.4%, 15.8% and
15.4%.
14
Total assets at December 31, 2000 and 1999 were $1.0 billion and $852.4
million, respectively. At the same time, total deposits were $831.9 million and
$706.2 million. Loans, net of unearned income, totaled $694.6 million and $631.0
million for the two year-end dates. From year-end 1999 to year-end 2000, the
Company experienced loan and deposit growth of $63.6 million, or 10.1%, and
$125.7 million, or 17.8%, respectively. Shareholder's equity was $86.4 million
and $73.8 million December 31, 2000 and 1999, respectively.
RESULTS OF OPERATIONS
NET INTEREST INCOME. Net interest income for 2000 was $45.3 million
compared to $39.5 million in 1999, an increase of 14.7% or $5.8 million. The
increase in net interest income was largely the result of overall balance sheet
growth and the corresponding increase in average interest earning assets which
grew 18.8% over the December 31, 1999 level. Growth in average loans of 15.8%
provided the bulk of the increase in earning assets and contributed most
significantly to the growth in net interest income. In a rising interest rate
environment, yields on earning assets climbed throughout the year, but did not
rise sufficiently to offset the increased cost of deposits and borrowings. The
resulting shrinkage in net interest spread and net interest margin was due to
intense competition for time deposits in the Company's local markets and an
increasing mix of time deposits required to fund asset growth. While interest
earning assets yielded 9.36% in 2000 versus 8.90% in 1999 (a 46 basis point
increase), the cost of interest bearing liabilities increased 82 basis points
from 4.21% to 5.03%.
Net interest income for 1999 was $39.5 million compared to $34.7 million in
1998, an increase of $4.8 million or 13.8%. This increase was produced solely by
growth in interest-earning assets, as the relatively stable interest rate
environment allowed the Company to maintain its relatively constant spreads and
margins. Average earning assets grew 15.5% from $624.1 million to $721.0
million, an increase which was driven significantly by 20.9% average loan growth
from 1998 to 1999.
15
The following table presents the total dollar amount of average balances,
interest income from average interest-earning assets and the resultant yields,
as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates.
YEARS ENDED DECEMBER 31
------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------ ------------------------------ ------------------------------
YIELD YIELD YIELD
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
AVERAGE ASSETS INTEREST-EARNING
ASSETS:
Loans, net of unearned
income(1).................. $672,174 $ 68,793 10.23% $580,693 $56,178 9.67% $480,155 $48,834 10.17%
Mortgage loans held for
sale....................... 1,519 124 8.16 1,741 135 7.75 1,563 103 6.59
Investment securities:
Taxable.................... 103,020 6,733 6.54 90,746 5,508 6.07 84,653 5,303 6.26
Non-taxable(3)............. 25,601 1,091 6.46 22,428 1,073 7.25 19,735 1,037 7.96
Interest-bearing deposits.... 1,429 77 5.39% 941 40 4.25% 177 12 6.78%
Federal funds sold........... 53,377 3,414 6.40 24,496 1,251 5.11 37,836 1,990 5.29
-------- -------- ----- -------- ------- ---- -------- ------- -----
Total interest-earning
assets....................... 857,120 80,232 9.36% 721,045 64,185 8.90% 624,119 57,279 9.18%
Non-interest-earning assets
Cash and due from banks...... 36,595 35,513 30,494
Allowance for loan losses.... (9,991) (8,864) (7,681)
Premises and equipment....... 25,960 24,729 23,265
Other real estate owned...... 1,210 1,419 1,046
Other assets................. 9,979 14,650 11,287
-------- -------- --------
Total assets............... $920,873 $788,492 $682,530
======== ======== ========
AVERAGE LIABILITIES AND
SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES:
Demand and money market
deposits..................... $181,830 $ 5,406 2.97% $171,771 $ 3,875 2.25% $152,883 $ 3,950 2.59%
Savings deposits............... 42,595 1,061 2.49 43,159 1,093 2.53 35,567 1,023 2.88
Time deposits.................. 409,090 24,888 6.08 330,311 17,502 5.30 301,227 16,883 5.60
FHLB advances.................. 52,290 3,187 6.09 32,353 1,605 4.96 10,860 586 5.40
Federal funds purchased and
other borrowings............. 9,243 428 4.63 7,682 568 7.39 1,891 144 7.62
-------- -------- ----- -------- ------- ---- -------- ------- -----
Total interest-bearing
Liabilities.................. 695,048 34,970 5.03% 585,276 24,643 4.21% 502,428 22,586 4.50%
Non-interest-bearing:
Demand deposits............ 142,815 125,428 109,087
Other liabilities.......... 6,012 6,915 6,045
-------- -------- --------
Total liabilities.......... 843,875 717,619 617,560
Shareholders' equity........... 76,998 70,873 64,970
-------- -------- --------
Total liabilities and
shareholders' equity....... $920,873 $788,492 $682,530
======== ======== ========
Net interest rate spread....... 4.33% 4.69% 4.68%
Net interest income and
margin(4).................... $ 45,262 5.28% $39,542 5.48% $34,693 5.56%
- ------------------------------
(1) Fee income related to loans of $4,627, $4,463 and $3,909 for the years ended
December 31, 2000, 1999, and 1998, respectively, is included in interest
income.
(2) Non-accrual loans were $924, $1,700 and $1,600 at December 31, 2000, 1999
and 1998, respectively, are included in the average loan balances.
(3) To make pre-tax income and resultant yields on tax-exempt investments
comparable to those on taxable investments, a tax-equivalent adjustment has
been computed using a federal income tax rate of 34%.
(4) The net interest margin is equal to net interest income divided by average
interest-earning assets.
16
The following schedule presents the dollar amount of changes in interest
income and interest expense for the major components of interest-earning assets
and interest-bearing liabilities and distinguishes between the change related to
higher outstanding balances and the change in interest rates. For purposes of
this table, changes attributable to both rate and volume which cannot be
segregated have been allocated to rate.
2000 VS. 1999 1999 VS. 1998
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
------------------------------ ------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans................................. $ 8,824 $3,791 $12,615 $10,243 $ (2,899) $7,344
Mortgage Loans Held for Sale.......... (17) 6 (11) 12 20 32
Investment securities:
Taxable............................... 745 480 1,225 381 (176) 205
Non-taxable........................... 230 (212) 18 214 (178) 36
Interest-bearing deposits............. 21 16 37 52 (24) 28
Federal funds sold.................... 1,522 641 2,163 (706) (33) (739)
------- ------ ------- ------- -------- ------
Total increase (decrease) in
interest income................... 11,325 4,722 16,047 10,196 (3,290) 6,906
------- ------ ------- ------- -------- ------
Interest-bearing liabilities:
Demand and money market deposits...... 226 1,305 1,531 665 (740) (75)
Savings deposits...................... (13) (19) (32) 219 (149) 70
Time deposits......................... 4,175 3,211 7,386 1,629 (1,010) 619
FHLB advances......................... 989 593 1,582 1,161 (142) 1,019
Federal funds purchased and other
borrowings.......................... 115 (255) (140) 441 (17) 424
------- ------ ------- ------- -------- ------
Total increase (decrease) in interest
expense............................... 5,492 4,835 10,327 4,115 (2,058) 2,057
------- ------ ------- ------- -------- ------
Increase (decrease) in net interest
income................................ $ 5,833 $ (113) $ 5,720 $ 6,081 $ (1,232) $4,849
======= ====== ======= ======= ======== ======
PROVISION FOR LOAN LOSSES. Management's policy is to maintain the allowance
for loan losses at a level sufficient to absorb estimated losses inherent in the
loan portfolio. The allowance is increased by the provision for loan losses and
decreased by charge-offs, net of recoveries. In determining inherent losses,
management considers financial services industry trends, conditions of
individual borrowers, historical loan loss experience and the general economic
environment. As these factors change, the level of loan loss provision changes.
The allowance for loan losses at December 31, 2000 was $10.4 million,
representing 1.50% of outstanding loans, compared to $9.3 million or 1.48% of
outstanding loans as of December 31, 1999. The provision for loan losses charged
against earnings was $2.1 million in 2000 compared to $1.7 million in 1999, an
increase of $400,000.
Net loans charged off in 2000 was $971,000 compared to $629,000 in 1999 and
$376,000 in 1998. The 1999 provision of $1.7 million was $300,000 higher than
the provision of $1.4 million made in 1998.
NON-INTEREST INCOME. For 2000, non-interest income totaled $9.9 million, an
increase of $100,000 over non-interest income of $9.8 million in 1999. Excluding
a merger related restructuring of the Company's investment portfolio and the
resulting pretax loss of $509,000, non-interest income totaled $10.4 million
which represented a 10.2% increase over 1999. The growth in fee income is mainly
a result of higher service charges on and the growth in number of demand deposit
accounts. The increase is also attributed to the growth in the Company's
investment brokerage and insurance services. Non-interest income in 1999
increased $1.0 million over the $8.8 million total for 1998. This increase is
17
again the result of growth in demand deposit accounts, increased pricing on
these accounts and growth in the Company's investment and insurance business
lines.
The following table presents the major categories of non-interest income:
YEARS ENDED DECEMBER 31
------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Service charges on deposit accounts......................... $4,688 $4,300 $3,838
Mortgage fee income......................................... 1,066 1,213 1,346
Investment fee income....................................... 428 278 123
Insurance fee income........................................ 2,308 1,764 1,527
Gain on sale of SBA loans................................... 68 42 200
Net realized gains (losses) on securities................... (509) 9 41
Other non-interest income................................... 1,859 2,240 1,762
------ ------ ------
Total non-interest income......................... $9,908 $9,846 $8,837
====== ====== ======
NON-INTEREST EXPENSE. For the years ended 2000, 1999 and 1998, non-interest
expense totaled $33.1 million, $30.5 million and $27.4 million, respectively.
The following table presents the major categories of non-interest expense:
YEARS ENDED DECEMBER 31
------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Salaries and employee benefits.............................. $17,947 $16,590 $15,425
Occupancy and equipment expense............................. 4,580 4,230 3,754
Data processing fees........................................ 555 477 361
Professional fees........................................... 855 970 350
Regulatory assessments...................................... 317 241 161
Intangible amortization..................................... 439 439 439
Other....................................................... 8,415 7,596 6,952
------- ------- -------
Total non-interest expense................................ $33,108 $30,543 $27,442
======= ======= =======
For 2000, non-interest expense increased 8.5% or $2.6 million over 1999.
Salaries and employee benefits grew from $16.6 million to $17.9 million, a 7.8%
increase, due to the opening of two new banking offices and growth throughout
the Company, including the investment, insurance and mortgage business lines.
Occupancy and equipment costs also rose due to the new banking facilities. With
rapid growth in its market, the Company believes that the opening of de novo
banking facilities is a prudent strategy to employ on a limited basis.
Comparing 1999 to 1998, non-interest expenses rose 11.3% with higher
salaries and employee benefits constituting the largest portion of this
increase. Personnel related costs rose from $15.4 million to $16.6 million or a
7.8% increase. Occupancy and equipment increased $12.7%. These increases were
mainly the result of new banking offices and the construction and opening of a
new operations center. Professional fees grew from $350,000 to $970,000 due
largely to the Company's use of consulting firms to conduct a staffing
efficiency study, a margin improvement program and a review of interest-bearing
product profitability.
INCOME TAXES. Income tax expense includes both federal income tax and
Georgia state income tax. The amount of federal income tax expense is influenced
by the amount of taxable income, the amount of tax-exempt income and the amount
of non-deductible expenses. In 2000, income tax expense was $7.2 million
compared to $5.9 million in 1999. In 1998, income tax expense was $4.7 million.
The Company's effective tax rates in 2000, 1999 and 1998, respectively, were
35.9%, 34.4% and 31.9%.
18
FINANCIAL CONDITION
LOANS. At December 31, 2000, loans, net of unearned income, were $694.6
million, an increase of $63.6 million or 10.1% over net loans at December 31,
1999 of $631.0 million. The growth in the loan portfolio was attributable to a
consistent focus on quality loan production and strong loan markets in the state
and region. The bank's loan portfolio experienced growth in all major categories
of loans at December 31, 2000. Real estate-construction loans increased $19.3
million or 17% from December 31, 1999. There was also a strong increase in
commercial and industrial loans from December 31, 1999 to December 31, 2000,
with an increase of $22.2 million or 31.1%. The company continues to monitor the
composition of the loan portfolio to ensure that the market risk to the balance
sheet is not adversely affected by the impact of changes in the economic
environment on any one segment of the portfolio.
The following table summarizes the loan portfolio of Main Street Banks by
type of loan:
DECEMBER 31
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Commercial and industrial................. $ 93,819 $ 71,589 $ 52,643 $ 50,898 $ 39,125
Real estate--construction................. 136,372 117,047 93,887 81,908 53,674
Real estate--mortgage..................... 405,227 379,650 316,531 269,303 232,352
Consumer and other........................ 59,189 62,704 52,086 48,058 49,046
-------- -------- -------- -------- --------
$694,607 $630,990 $515,147 $450,167 $374,197
======== ======== ======== ======== ========
Mortgage loans held for sale.............. $ 2,248 $ 1,357 $ 4,283 0 0
======== ======== ======== ======== ========
Percent of loans by category to total
loans (Excluding loans held for sale):
Commercial and industrial................. 13.51% 11.35% 10.22% 11.31% 10.46%
Real estate--construction................. 19.63% 18.55% 18.23% 18.20% 14.34%
Real estate--mortgage..................... 58.34% 60.16% 61.44% 59.81% 62.09%
Consumer and other........................ 8.52% 9.94% 10.11% 10.68% 13.11%
-------- -------- -------- -------- --------
100.00% 100.00% 100.00% 100.00% 100.00%
======== ======== ======== ======== ========
To accomplish Main Street's lending objectives, management seeks to achieve
consistent loan growth within its primary market areas while maximizing loan
yields and maintaining a high quality loan portfolio. Main Street Banks monitors
its lending objectives primarily through its eastern and western division senior
loan committees. In addition to the senior loan committees, larger credits are
reviewed by the banks' executive loan committee. Main Street's lending
objectives are clearly defined in its Lending Policy, which is reviewed annually
and approved by the board of directors. The senior loan committee in each
division is chaired by that division's credit officer. Members of the senior
loan committee include the president of Main Street Bank, regional executives
from the respective divisions, its risk management officer and various lending
officers. The executive loan committee is chaired by the president of the bank,
and it includes the division senior credit officers and the risk management
officer.
Generally, all loans with total related debt of between $250,000 and
$2,500,000 are reviewed for approval by the senior loan committee. However, for
certain loans that have been identified as low risk loans, i.e., residential
mortgage loans and consumer loans, the division executives have approval
authority up to $500,000. The next level of approval authority rests with the
executive loan committee, which has approval authority for loan relationships
with committed debt of $5,000,000. The company has established an internal limit
of $5,000,000, and any relationship which exceeds this limit must be approved by
the board of directors. The board of directors is generally responsible for
ratifying the actions of the senior loan committee and the executive loan
committee and serving as the ultimate
19
approval authority for single advances or total commitments over $5 million.
Additionally, Main Street Banks' board of directors is responsible for approving
all new loan requests for which a borrower's total debt exceeds $5 million.
Main Street Banks primarily focuses on the following loan categories:
(1) commercial, (2) real estate construction, (3) real estate mortgage and
(4) consumer loans. Main Street Banks' management has strategically located its
branches in high growth markets and has taken advantage of a surge in
residential and industrial growth in northeastern Georgia.
Real estate mortgage lending has significantly contributed to Main Street's
loan growth during the past several years. Generally, these loans are
owner-occupied and are amortized over a 15 year to 20 year period with a three
to five year maturity. The underwriting criteria for these loans is very similar
to the underwriting criteria used in the mortgage industry. Typically, a
borrower's debt to income ratio can not exceed 36% and the loan to appraised
value ratio cannot exceed 89.9%. However, Main Street's knowledge of its
customers and its market allows the company to be more flexible in meeting its
customers' needs. Main Street also underwrites commercial mortgage loans. Loans
included in this category are primarily for the acquisition or refinancing of
owner-occupied commercial buildings. These loans are underwritten on the
borrower's ability to meet certain minimum debt service requirements and the
value of the underlying collateral to meet certain loan to value guidelines.
Main Street Banks also perfects its interest in equipment or other business
assets of the borrower and obtains personal guaranties.
Main Street also underwrites loans to finance the construction of
residential and non-residential properties which include speculative and
pre-sale loans. Speculative construction loans involve a higher degree of risk,
as these are made on the basis that a borrower will be able to sell the project
to a potential buyer after a project is completed. Pre-sale construction loans
usually have a pre-qualified buyer under contract before construction is to
begin. The major risk for pre-sale loans is getting the project completed in a
timely manner and according to plan specifications. Non-residential construction
loans include construction loans for churches, commercial buildings, strip
shopping centers, and acquisition and development loans. These loans also carry
a higher degree of risk and require strict underwriting guidelines. All
construction loans are secured by first liens on real estate and generally have
floating interest rates. Main Street conducts periodic inspections either
directly or through an agent prior to approval of periodic draws on these loans.
As an underwriting guideline, management focuses on the borrower's past
experience in completing projects in a timely manner and the borrowers financial
condition with special emphasis placed on liquidity ratios. Although
construction loans are deemed to be of higher risk, Main Street believes that it
can monitor and manage this risk properly.
Main Street also underwrites commercial and industrial loans. Generally,
these loans are for working capital purposes and are secured by inventory,
accounts receivable or equipment. Main Street maintains strict underwriting
standards for this type of lending. Potential borrowers must meet certain
working capital and debt ratios as well as generate positive cash flow from
operations. Borrowers in this category will generally have a debt service
coverage ratio of at least 1.3 to 1. Main Street will also perfect its interest
in equipment or other business assets of the borrower and obtain personal
guaranties. Main Street Banks does not originate and does not currently hold in
its portfolio any foreign loans. Main Street is also an active participant in
the origination of Small Business Administration (SBA) loans. These loans are
solicited from the company's market areas, and are generally underwritten in the
same manner as conventional loans generated for the company's portfolio. The
portion of loans that are secured by the guaranty of the SBA may from time to
time be sold in the secondary market to provide additional liquidity, and to
provide a source for fee income.
Consumer loans include automobile loans, recreational vehicle loans, boat
loans, home improvement loans, home equity loans, personal loans (collateralized
and uncollateralized) and deposit account collateralized loans. The terms of
these loans typically range from 12 to 120 months and vary
20
based upon the nature of collateral and size of the loan. Consumer loans involve
greater risk than residential mortgage loans. This is due to the fact that these
loans may be unsecured or secured by rapidly depreciating assets such as
automobiles. Repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment for the outstanding loan balance. The
remaining deficiency often does not warrant further substantial collection
efforts against the borrower beyond obtaining a deficiency judgment. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws may limit the amount which can be recovered on
such loans.
The contractual maturity ranges of the commercial and industrial and real
estate-construction portfolios and the amount of such loans with predetermined
interest rates and floating rates in each maturity range as of December 31, 2000
are summarized as follows:
AFTER ONE
ONE YEAR OR YEAR THROUGH AFTER FIVE
LESS FIVE YEARS YEARS TOTAL
----------- ------------ ---------- --------
(DOLLARS IN THOUSANDS)
Commercial and industrial......................... $ 44,227 $35,957 $13,635 $ 93,819
Real estate--construction......................... 131,661 3,150 1,561 136,372
-------- ------- ------- --------
Total........................................... $175,888 $39,107 $15,196 $230,191
======== ======= ======= ========
Loans with a predetermined interest rate.......... $ 89,353 $32,218 $14,125 $135,696
Loans with a floating interest rate............... 86,535 6,889 1,071 94,495
-------- ------- ------- --------
Total......................................... $175,888 $39,107 $15,196 $230,191
======== ======= ======= ========
NON-PERFORMING ASSETS. Main Street has formal procedures in place to assist
management in maintaining the overall quality of its loan portfolio. Main Street
has established written guidelines contained in its Lending Policy for the
collection of past due loan accounts. These guidelines explain in detail Main
Street's policy on the collection of loans over 30, 60, and 90 days delinquent.
Generally, loans over 90 days delinquent are placed in a non-accrual status.
However, if the loan is deemed to be in process of collection, it may be
maintained on an accrual basis. Main Street's Management has effective credit
management processes to make officers aware of its lending policy and the
collection policy contained therein on a continuous basis. Main Street's
Management has also staffed its collection department with properly trained
staff to assist lenders with collection efforts and to maintain records and
develop reports on delinquent borrowers. Main Street's lending approach, as well
as a healthy local economy, has resulted in strong asset quality. Main Street
had non-performing assets of $2.9 million, $2.6 million, and $2.3 million as of
December 31, 2000, 1999 and 1998, respectively. For 2000, 1999 and 1998, the
gross amount of interest income that would have been recorded on non-performing
loans, if all such loans had been accruing interest at the original contract
rate, was approximately $109,997, $172,402 and $82,407 respectively. Management
is not aware of any loans that meet the definition of a troubled debt
restructuring as of December 31, 2000 or 1999. Main Street Banks records real
estate acquired through foreclosure at the lesser of the outstanding loan
balance or the fair value at the time of foreclosure, less estimated cost to
sell. Main Street usually disposes of real estate acquired through foreclosure
within one year; however, if it is unable to dispose of the foreclosed property,
the property's value is assessed annually and written down to its fair value
less cost to sell.
21
The following table presents information regarding non-performing assets at
the dates indicated:
DECEMBER 31
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Non-performing Assets
Non-accrual loans................................... $ 924 $1,743 $1,562 $1,006 $1,353
Other real estate and repossessions................. 1,926 964 1,338 1,366 1,189
Total non-performing assets......................... $2,850 $2,707 $2,900 $2,372 $2,542
Loans past due 90 days or more and still accruing... $1,735 $ 426 $ 700 $ 874 $ 156
Ratio of past due loans to loans, net of unearned
income(1)......................................... 0.25% 0.07% 0.14% 0.19% 0.04%
Ratio of non-performing assets to loans, net of
unearned income, and other real estate(1)......... 0.41% 0.43% 0.56% 0.52% 0.68%
- ------------------------
(1) Excludes mortgage loans held for sale.
Management is not aware of any potential problem loans other than those
noted in the table above.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is a reserve
established through charges to earnings in the form of a provision for loan
losses. The provision for loan losses is based on management's evaluation of the
economic environment, the history of charged-off loans and recoveries, size and
composition of the loan portfolio, non-performing and past-due loans, and other
aspects of the loan portfolio. Main Street's management has established an
allowance for loan losses which it believes is adequate for anticipated losses
in its loan portfolio. Based on a continuous credit evaluation of the loan
portfolio, management presents a quarterly review of the allowance for loan
losses to Main Street's board of directors. The review that management has
developed primarily focuses on risk by evaluating the level of loans in certain
risk categories. These categories have also been established by management and
take the form of loan grades. These loan grades closely mirror regulatory
classification guidelines and include pass loan categories 1 through 4 and
special mention, substandard, doubtful, and loss categories of 5 through 8,
respectively. By grading the loan portfolio in this manner, Main Street's
management is able to effectively evaluate the portfolio by risk, which
management believes is the most effective way to analyze the loan portfolio and
thus analyze the adequacy of the reserve for loan losses. Also, Main Street's
management reviews activity in the allowance for loan losses, such as
charge-offs and recoveries, during each quarter to identify trends.
Main Street's credit management processes include a loan review program as
one of the processes to evaluate the credit risk in the loan portfolio. Through
the loan review process, Main Street maintains an internally critized classified
loan list which, along with the delinquency report of loans, which serves as a
tool to assist management assess the overall quality of the loan portfolio and
the adequacy of the allowance for loan losses. Loans classified as "substandard"
are those loans with clear and defined weaknesses such as a highly-leveraged
position, unfavorable financial ratios, uncertain financial ratios, uncertain
repayment sources, or poor financial condition which may jeopardize
recoverability of the debt. Loans classified as "doubtful" are those loans that
have characteristics similar to substandard loans but have an increased risk of
loss, or at least a portion of the loan may require being charged-off. Loans
classified as "loss" are those loans that are in the process of being
charged-off. For the year ended 2000, net charge-offs totaled $970,892 or 0.14%
of average loans outstanding for the period, net of unearned income, compared to
$629,525 or 0.11% in net charge-offs during 1999. Main Street's net charge-offs
totaled $376,697 or 0.08% of average loans, net of unearned income, outstanding
in 1998. Main Street recorded a provision for loan losses of $2,054,000,
$1,730,000 and $1,400,000 in 2000, 1999 and 1998, respectively. At December 31,
2000, the allowance for loan
22
losses totaled $10.4 million, or 1.50% of total loans, net of unearned income.
At December 31, 1999, the allowance for loan losses was $9.32 million, or 1.48%
of total loans, net of unearned income.
The following table presents an analysis of the allowance for loan losses
and other related data:
YEARS ENDED DECEMBER 31
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Average loans outstanding (net of unearned
income)................................. $672,174 $580,693 $480,155 $414,712 $355,802
Total loans, net of unearned income, at
end of period........................... 694,607 630,990 515,147 450,167 374,197
Allowance for loan losses at beginning of
period.................................. 9,318 8,217 7,168 6,062 5,611
Provision for loans losses................ 2,054 1,730 1,426 2,085 1,162
Charge-offs:
Commercial and industrial............... (330) (320) (307) (111) (151)
Real estate............................. (482) (74) (166) (273) (271)
Consumer................................ (511) (582) (337) (885) (558)
Recoveries:
Commercial and industrial............... 48 43 66 39 49
Real estate............................. 95 55 131 38 59
Consumer................................ 209 249 236 213 161
-------- -------- -------- -------- --------
Net charge-offs........................... $ (971) $ (629) $ (377) $ (979) $ (711)
-------- -------- -------- -------- --------
Allowance for loan losses at end of
period.................................. $ 10,401 $ 9,318 $ 8,217 $ 7,168 $ 6,062
======== ======== ======== ======== ========
Ratio of allowance to end of period
loans................................... 1.50% 1.48% 1.60% 1.59% 1.62%
Ratio of net charge-offs to average
loans................................... 0.14% 0.11% 0.08% 0.24% 0.20%
Ratio of allowance to end of period non-
performing Loans........................ 1125.65% 534.60% 526.06% 712.52% 448.04%
The following tables describe the allocation of the allowance for loan
losses among various categories of loans and certain other information. The
allocation is made for analytical purposes and is not necessarily indicative of
the categories in which future losses may occur. The total allowance is
available to absorb losses from any segment of loans.
DECEMBER 31
------------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- ----------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
-------- ----------- -------- ----------- -------- -----------
(DOLLARS IN THOUSANDS)
Balance of allowance for loan
losses applicable to:
Commercial and industrial.......... $ 1,405 13.51% $1,058 11.35% $ 840 10.22%
Real estate........................ 8,110 77.97 7,335 78.72 6,546 79.67
Consumer and other................. 886 8.52 925 9.93 831 10.11
------- ------ ------ ------ ------ ------
Total allowance for loan losses.... $10,401 100.00% $9,318 100.00% $8,217 100.00%
======= ====== ====== ====== ====== ======
23
DECEMBER 31,
-----------------------------------------------
1997 1996
---------------------- ----------------------
PERCENT OF PERCENT OF
LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
-------- ----------- -------- -----------
(DOLLARS IN THOUSANDS)
Balance of allowance for loan losses applicable to:
Commercial and industrial.............................. $ 811 11.31% $ 634 10.46%
Real estate............................................ 5,592 78.02 4,634 76.44
Consumer and other..................................... 765 10.67 794 13.10
------ ------ ------ -------
Total allowance for loan losses........................ $7,168 100.00% $6,062 100.00%
====== ====== ====== =======
Main Street believes that the allocation of its allowance for loan losses is
reasonable. Where management is able to identify specific loans or categories of
loans where specific amounts of reserve are required, allocations are assigned
to those categories. Federal and state bank regulators also require that a bank
maintain a reserve that is sufficient to absorb an estimated amount of
unidentified potential losses based on management's perception of economic
conditions, loan portfolio growth, historical charge-off experience and exposure
concentrations.
Main Street believes that the allowance for loan losses at December 31, 2000
is adequate to cover losses inherent in the portfolio as of such date. There can
be no assurance that Main Street will not sustain losses in future periods which
could be substantial in relation to the size of the allowance at December 31,
2000.
The allowance for loan losses is also subject to regulatory examinations and
determinations as to adequacy, which may take into account such factors as the
methodology used to calculate the allowance and the size of the allowance for
loan losses in comparison to a group of peer banks identified by the regulators.
During their routine examinations of banks, the FDIC and the Georgia Department
of Banking may require a bank to make additional provisions to its allowance for
loan losses when, in the opinion of the regulators, credit evaluations and
allowance for loan loss methodology differ materially from those of management.
While it is the Bank's policy to charge off in the current period loans for
which a loss is considered probable there are additional risks of future losses
which cannot be quantified precisely or attributed to particular loans or
classes of loans. Because these risks include the state of the economy,
management's judgment as to the adequacy of the allowance is necessarily
approximate and imprecise.
INVESTMENT SECURITIES. Main Street uses its securities portfolio both as a
source of income and as a source of liquidity. At December 31, 2000, investment
securities totaled $153.5 million, an increase of $41.3 million from $112.2
million at December 31, 1999. At December 31, 2000, investment securities
represented 15.2% of total assets, compared to 13.6% of total assets at December
31, 1999. The average yield on a fully taxable equivalent basis on the
investment portfolio for the year ended December 31, 2000 was 6.52% compared to
a yield of 6.30% for the year ended December 31, 1999 and 6.58% for the year
ended December 31, 1998. At December 31, 1999, investment securities represented
18.2% of total deposits and 15.7% of total assets. Approximately $28.1 million
or 41.7% of investment securities reprice within one year.
24
The following table summarizes the contractual maturity of investment
securities and their weighted average yields.
DECEMBER 31, 2000
----------------------------------------------------------------------------------------------
AFTER ONE YEAR AFTER FIVE YEARS
BUT WITHIN FIVE BUT WITHIN TEN
WITHIN ONE YEARS YEARS AFTER TEN YEARS
------------------- ------------------- ------------------- -------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
U.S. Treasury
securities......... $ 200 5.51% $ 88 5.83% $ 1,104 5.25% $ -- --% $ 1,392
U.S. government
agencies and
corporations....... 31,276 6.40 49,525 6.36 3,447 6.85 1,565 6.13 85,813
Mortgage-backed
securities......... -- -- 4,665 6.08 9,190 7.14 24,995 6.46 38,850
States and political
subdivisions....... 1,389 5.00 9,061 4.61 6,153 5.17 10,934 5.23 27,537
------- ---- ------- ---- ------- ---- ------- ---- --------
Total................ $32,865 6.27% $63,339 6.11% $19,894 6.38% $37,494 6.08% $153,592
======= ==== ======= ==== ======= ==== ======= ==== ========
The following table presents the amortized costs and fair value of
securities classified as available for sale and held-to-maturity at
December 31, 2000, 1999 and 1998:
2000 1999 1998
-------------------- -------------------- --------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
HELD TO MATURITY SECURITIES
States and political
subdivisions.................. $ 17,852 $ 17,958 $ 15,541 $ 15,182 $ 12,497 $ 13,044
======== ======== ======== ======== ======== ========
AVAILABLE FOR SALE SECURITIES
U.S.Treasury securities......... $ 1,392 $ 1,369 $ 3,992 $ 3,942 $ 3,991 $ 4,041
U.S. Government agencies and
corporations.................. 85,813 86,101 44,496 42,732 34,413 34,501
Mortgage-backed securities...... 38,850 38,601 42,583 40,886 51,242 51,162
States & political
subdivisions.................. 9,685 9,565 9,733 9,092 10,438 10,654
-------- -------- -------- -------- -------- --------
$135,740 $135,636 $100,804 $ 96,652 $100,084 $100,358
======== ======== ======== ======== ======== ========
Mortgage-backed securities are securities which have been developed by
pooling real estate mortgages and are principally issued by federal agencies
such as the Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation. These securities are deemed to have high credit ratings,
and minimum regular monthly cash flows of principal and interest are guaranteed
by the issuing agencies.
At December 31, 2000, 64.3% of the mortgage-backed securities Main Street
held had contractual final maturities of more than ten years. However, unlike
U.S. Treasury and U.S. government agency securities, which have a lump sum
payment at maturity, mortgage-backed securities provide cash flows from regular
principal and interest payments and principal prepayments throughout the lives
of the securities. Mortgage-backed securities which are purchased at a premium
will generally suffer decreasing net yields as interest rates drop because
homeowners tend to refinance their mortgages. Thus, the premium paid must be
amortized over a shorter period. Conversely, these securities purchased at a
discount will obtain higher net yields in a decreasing interest rate
environment. As interest rates rise, the opposite will generally be true. During
a period of increasing interest rates, fixed
25
rate mortgage-backed securities do not tend to experience heavy prepayments of
principal and consequently, the average life of this security will not be unduly
shortened. If interest rates begin to fall, prepayments will increase, and the
average life of these securities will decrease.
Main Street has adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." At the date
of purchase, Main Street is required to classify debt and equity securities into
one of three categories: held-to-maturity, trading or available-for-sale. At
each reporting date, the appropriateness of the classification is reassessed.
Investments in debt securities are classified as held-to-maturity and measured
at amortized cost in the financial statements only if management has the
positive intent and ability to hold those securities to maturity. Securities
that are bought and held principally for the purpose of selling them in the near
term are classified as trading and measured at fair value in the financial
statements with unrealized gains and losses included in earnings. Main Street
does not have any securities classified as trading securities. Investments not
classified as either held-to-maturity or trading are classified as
available-for-sale and measured at fair value in the financial statements with
unrealized gains and losses reported, net of tax, in accumulated other
comprehensive income, a separate component of shareholders' equity, until
realized.
DEPOSITS. Main Street offers a variety of deposit accounts having a wide
range of interest rates and terms. Main Street's deposits consist of demand,
savings, money market and time accounts. Main Street relies primarily on
competitive pricing policies and customer service to attract and retain these
deposits. Main Street has a limited amount of brokered deposits. Main Street's
lending and investing activities are funded principally by deposits,
approximately 44.4% of which are demand, money market and savings deposits.
Deposits at December 31, 2000 were $831.9 million, an increase of $125.7 million
or 17.8% from $706.2 million at December 31, 1999. Non-interest-bearing deposits
were $132.3 million at December 31, 2000, an increase of $7.4 million, or 5.9%
from $124.9 million at December 31, 1999. Certificates of Deposit were $462.9 at
December 31, 2000, an increase of $102.0 million, or 28.3% from $360.8 million
at December 31, 1999.
The daily average balances and weighted average rates paid on deposits for
each of the years ended December 31, 2000, 1999 and 1998 are presented below:
YEARS ENDED DECEMBER 31
---------------------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Non-interest bearing demand deposits...... $142,815 --% $125,428 --% $109,087 --%
Demand and money market deposits.......... 181,830 2.97 171,771 2.25 $152,883 2.58
Savings deposits.......................... 42,595 2.49 43,159 2.53 35,567 2.88
Time deposits............................. 409,090 6.08 330,311 5.30 301,227 5.60
-------- ---- -------- ---- -------- ----
Total deposits........................ $776,330 4.04% $670,669 3.35% $598,764 3.65%
======== ==== ======== ==== ======== ====
The following table sets forth the amount of Main Street's certificates of
deposit that are $100,000 or greater by time remaining until maturity:
DECEMBER 31, 2000
----------------------
(DOLLARS IN THOUSANDS)
Three months or less.................................. $ 24,057
Over three through six months......................... 33,912
Over six through 12 months............................ 56,223
Over 12 months........................................ 31,241
--------
Total............................................. $145,433
========
26
OTHER BORROWINGS. Deposits are the primary source of funds for Main
Street's lending and investment activities. Occasionally, it obtains additional
funds from the Federal Home Loan Bank (FHLB) and correspondent banks. At
December 31, 2000, Main Street Banks had borrowings of $52.1 million in the form
of FHLB advances and $32.6 million in Federal Funds Purchased and securities
sold under repurchase agreements compared to $49.1 million and $18.9 million,
respectively, at December 31, 1999. Main Street Banks' weighted average interest
rate on FHLB advances for the period ended December 31, 2000 was 6.42%. For a
more detailed discussion of the borrowings of Main Street Banks, see note 7 to
Main Street Banks' Consolidated Financial Statements included herein.
INTEREST RATE SENSITIVITY AND LIQUIDITY. Main Street Banks' asset liability
and funds management policy provides management with the necessary guidelines
for effective funds management and a measurement system for monitoring its net
interest rate sensitivity position. Main Street manages its sensitivity position
within established guidelines.
Interest rate risk is managed by the asset liability committee which is
composed of senior officers of Main Street, in accordance with policies approved
by its board of directors. The asset liability committee formulates strategies
based on appropriate levels of interest rate risk. In determining the
appropriate level of interest rate risk, the asset liability committee considers
the impact on earnings and capital of the current outlook on interest rates,
potential changes in interest rates, regional economies, liquidity, business
strategies and other factors. The asset liability committee meets regularly to
review, among other things, the sensitivity of assets and liabilities to
interest rate changes, the book and market values of assets and liabilities,
unrealized gains and losses, purchase and sale activities, commitments to
originate loans and the maturities of investments and borrowings. Additionally,
the asset liability committee reviews liquidity, cash flow flexibility,
maturities of deposits and consumer and commercial deposit activity. Main Street
Banks' management uses two methodologies to manage interest rate risk: (i) an
analysis of relationships between interest-earning assets and interest-bearing
liabilities; and (ii) an interest rate shock simulation model. Main Street
Banks' has traditionally managed its business to reduce its overall exposure to
changes in interest rates.
Main Street manages its exposure to interest rates by structuring its
balance sheet in the ordinary course of business. Main Street Banks has in the
past, and may utilize interest rate swaps, financial options, or financial
futures contracts in order to reduce interest rate risk. No such interest rate
protection instruments were in effect at the end of 2000.
An interest rate sensitive asset or liability is one that, within a defined
time period, either matures or experiences an interest rate change in line with
general market interest rates. The management of interest rate risk is performed
by analyzing the maturity and repricing relationships between interest-earning
assets and interest-bearing liabilities at specific points in time (gap) and by
analyzing the effects of interest rate changes on net interest income over
specific periods of time by projecting the performance of the mix of assets and
liabilities in varied interest rate environments. Interest rate sensitivity
reflects the potential effect on net interest income of a movement in interest
rates. A company is considered to be asset sensitive, or having a positive gap,
when the amount of its interest-earning assets maturing or repricing within a
given period exceeds the amount of its interest-bearing liabilities also
maturing or repricing within that time period. Conversely, a company is
considered to be liability sensitive, or having a negative gap, when the amount
of its interest-bearing liabilities maturing or repricing within a given period
exceeds the amount of its interest-earning assets also maturing or repricing
within that time period. During a period of rising interest rates, a negative
gap would tend to affect net interest income adversely, while a positive gap
would tend to result in an increase in net interest income. During a period of
falling interest rates, a negative gap would tend to result in an increase in
net interest income, while a positive gap would tend to affect net interest
income adversely.
27
The following table sets forth an interest rate sensitivity analysis for
Main Street at December 31, 2000:
VOLUMES SUBJECT TO REPRICING WITHIN
-------------------------------------------------------------
AFTER ONE
0-30 DAYS 31-180 DAYS 181-365 DAYS YEAR TOTAL
--------- ----------- ------------ --------- --------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Investment Securities................ $ 2,111 $ 11,484 $ 15,833 $128,115 $157,543
Loans.......