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MSFN Mainstreet Financial Corp (CE)

0.0001
0.00 (0.00%)
14 Jun 2024 - Closed
Delayed by 15 minutes
Share Name Share Symbol Market Type
Mainstreet Financial Corp (CE) USOTC:MSFN OTCMarkets Common Stock
  Price Change % Change Share Price Bid Price Offer Price High Price Low Price Open Price Shares Traded Last Trade
  0.00 0.00% 0.0001 0.00 01:00:00

- Quarterly Report (10-Q)

13/11/2009 8:19pm

Edgar (US Regulatory)



UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

 (Mark One)

[ X ]             QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September  30, 2009

OR

[  ]           TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from _______ to ________

Commission file number:       005-82164

MAINSTREET FINANCIAL CORPORATION
(Exact name of small business issuer as specified in its charter)

United States
 
20-1867479
(State or other jurisdiction of incorporation of organization)
 
(IRS Employer Identification No.)

629 W. State Street, Hastings, Michigan 49058-1643
(Address of principal executive offices)

(269) 945-9561
(Registrant’s telephone number, including area code)

None
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 and 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 whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [   ]     No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Act.  (Check one)

 
Large accelerated filer [    ]
 
Accelerated filer [   ]
 
Non-accelerated filer [   ]
 
Smaller reporting company [ X ]
 
(Do not check if smaller reporting company)
   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 Yes [   ]         No [ X ]

Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:

At October 31, 2009, there were 756,068 shares of the issuer’s common stock outstanding.



 
 
 
 

MAINSTREET FINANCIAL CORPORATION

Index
 
Page Number
PART I      FINANCIAL INFORMATION
 
 
Item 1.       Financial Statements
 
 
Consolidated Balance Sheets as of September 30, 2009 (unaudited) and December 31, 2008
 
 
1
Consolidated Statements of Operations for the Three-Month and Nine-Month Periods ended September 30, 2009 and 2008 (unaudited)
 
 
2
Consolidated Statements of Changes in Shareholders' Equity for the Nine-Month Period ended September 30, 2009 (unaudited)
 
 
3
Consolidated Statements of Cash Flows for the Nine-Month Periods ended September 30, 2009 and 2008 (unaudited)
 
 
4
Notes to Consolidated Financial Statements
 
6
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
15
Item 3.Quantitative and Qualitative Disclosures and Market Risk
 
25
Item 4T.     Controls and Procedures
 
25
PART II     OTHER INFORMATION
 
 
Item 1.        Legal Proceedings
 
26
Item 1A       Risk Factors
 
26
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
 
26
Item 3.Defaults Upon Senior Securities
 
26
Item 4.Submission of Matters to a Vote of Security Holders
 
26
Item 5.Other Information
 
26
Item 6.Exhibits
 
27
SIGNATURES
 
 
EXHIBITS
 


 
2
 
 

PART I      FINANCIAL INFORMATION

Item 1 Financial Statements

MAINSTREET FINANCIAL CORPORATION

Consolidated Balance Sheets as of
September 30, 2009 (unaudited) and December 31, 2008

   
September 30, 2009
   
December 31, 2008
 
ASSETS
           
Cash and due from financial institutions
  $ 1,406,608     $ 2,336,048  
Interest-bearing deposits
    9,728,266       5,587,338  
Cash and cash equivalents
    11,134,874       7,923,386  
Securities available for sale
    1,304,213       1,584,990  
Loans, net of allowance of $913,406 at September 30, 2009
and $858,370 at December 31, 2008
    82,883,231       93,879,925  
Federal Home Loan Bank (FHLB) stock
    1,785,000       1,785,000  
Accrued interest receivable
    532,288       550,079  
Premises and equipment, net
    3,290,595       3,389,961  
Intangible assets
    581,470       697,764  
Other real estate owned
    2,359,487       1,830,519  
Other assets
    311,623       166,490  
    $ 104,182,781     $ 111,808,114  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Liabilities
               
Deposits
               
Noninterest-bearing
  $ 4,243,259     $ 4,742,394  
Interest-bearing
    63,141,622       64,664,994  
      67,384,881       69,407,388  
FHLB advances
    30,900,000       35,700,000  
Note payable
    700,000       700,000  
ESOP note payable
    227,424       227,424  
Accrued interest payable
    25,974       64,329  
Advance payments by borrowers for taxes and insurance
    216,205       137,073  
Accrued expenses and other liabilities
    417,973       369,853  
Total liabilities
    99,872,457       106,606,067  
                 
                 
Shareholders’ equity
               
Common stock - $.01 par value, 9,000,000 shares
authorized, 756,068 shares issued and outstanding
    7,561       7,561  
Additional paid in capital
    2,777,073       2,799,766  
Unearned ESOP shares
    (189,537 )     (213,738 )
Retained earnings
    1,693,201       2,620,794  
Accumulated other comprehensive income (loss)
    22,026       (12,336 )
Total shareholders’ equity
    4,310,324       5,202,047  
Total liabilities and shareholders’ equity
  $ 104,182,781     $ 111,808,114  
See accompanying notes to consolidated financial statements.


 
3
 
 

MAINSTREET FINANCIAL CORPORATION
Consolidated Statements of Operations for the
Three-Month and Nine-Month Periods Ended
September 30, 2009 and 2008 (unaudited)
   
Three Months
Ended September 30,
   
Nine months
Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Interest income
                       
Loans, including related fees
  $ 1,242,284     $ 1,412,681     $ 3,932,609       4,525,613  
Taxable securities
    28,655       40,771       69,516       128,299  
Other
    1,808       10,415       5,593       52,047  
      1,272,747       1,463,867       4,007,718       4,705,959  
                                 
Interest expense
                               
Deposits
    370,457       493,520       1,265,184       1,769,553  
FHLB advances
    128,614       292,382       444,174       939,956  
Other
    6,429       10,351       21,792       34,219  
      505,500       796,253       1,731,150       2,743,728  
                                 
Net interest income
    767,247       667,614       2,276,568       1,962,231  
                                 
Provision for loan losses
    299,000       161,000       571,054       296,000  
                                 
Net interest income after provision for loan losses
    468,247       506,614       1,705,514       1,666,231  
                                 
Non-interest income
                               
Fees and service charges
    94,960       86,547       239,591       241,023  
Other than temporary impairment losses recognized in earnings
    ---       (86,227 )     (31,786 )     (188,632 )
Gain on sale of securities
    8,597       ---       8,597       ---  
Gain on sale of loans
    161,218       7,394       184,282       23,003  
Loss on sale of repossessed assets
    (2,248 )     ---       (32,450 )     (36,954 )
Other
    22,654       12,500       36,540       37,121  
      285,181       20,214       404,774       75,561  
Non-interest expenses
                               
Salaries and employee benefits
    413,217       459,226       1,253,112       1,355,077  
Premises and equipment, net
    98,052       112,957       304,955       371,542  
Administrative and general
    185,391       152,544       535,604       401,786  
Data processing through service bureau
    67,874       62,547       197,735       194,087  
Amortization of intangible assets
    38,765       38,765       116,294       119,507  
Regulatory assessments
    130,924       82,565       350,976       165,266  
Professional services
    99,946       120,229       247,808       235,530  
Advertising and public relations
    9,392       22,966       31,397       54,840  
      1,043,561       1,051,799       3,037,881       2,897,635  
                                 
Loss before taxes
    (290,133 )     (524,971 )     (927,593 )     (1,155,843 )
                                 
Income tax benefit
    ---       ---       ---       ---  
                                 
Net loss
  $ (290,132 )   $ (524,971 )   $ (927,594 )   $ (1,155,843 )
Comprehensive loss
  $ (266,737 )   $ (524,485 )   $ (893,231 )   $ (1,131,661 )
Basic and diluted loss per share
  $ (0.39 )   $ (0.72 )   $ (1.26 )   $ (1.58 )
See accompanying notes to consolidated financial statements.

 
4
 
 


 
MAINSTREET FINANCIAL CORPORATION
Consolidated Statements of Changes in Shareholders' Equity
For the Nine-Month Period Ended September 30, 2009 (unaudited)
 
   
Common
Stock
   
Additional
Paid-In
Capital
   
Retained
Earnings
   
Unearned
ESOP
Shares
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Total
Shareholders’
Equity
 
                                     
Balance – January 1, 2009
  $ 7,561     $ 2,799,766     $ 2,620,794     $ (213,738 )   $ (12,336 )   $ 5,202,047  
                                                 
Net loss
    ---       ---       ( 927,593 )     ---       ---       (927,593 )
                                                 
Change in unrealized gain/loss on
     securities available for sale,
     net of reclassifications
    ---       ---       ---       ---       34,362       34,362  
                                                 
Earned ESOP shares
    ---       (22,693 )      ---       24,201       ---       1,508  
                                                 
Balance – September 30, 2009
  $ 7,561     $ 2,777,073     $ 1,693,201     $ (189,537 )   $ 22,026     $ 4,310,324  

See accompanying notes to consolidated financial statements.

 
5
 
 

MAINSTREET FINANCIAL CORPORATION
Consolidated Statements of Cash Flows for the
Nine-Month Periods Ended September 30, 2009 and 2008 (unaudited)

   
Nine Months
Ended September 30,
 
   
2009
   
2008
 
       
Cash flows from operating activities
           
Net loss
  $ (927,594 )   $ (1,155,843 )
Adjustments to reconcile net loss to net cash
from operating activities
               
Depreciation
    109,917       141,539  
Amortization, net of accretion
               
Securities
    2,297       2,282  
Loans
    9,346       (1,267 )
Intangible assets
    116,294       119,506  
Provision for loan losses
    571,054       296,000  
Loans originated for sale
    (3,050,050 )     (2,276,300 )
Proceeds from sales of loans originated for sale
    3,234,332       2,299,303  
Other–than–temporary impairment of securities
    31,786       188,632  
Gain on sale of securities
    (8,597 )     ---  
Gain on sale of loans
    (184,282 )     (23,003 )
ESOP expense
    1,508       10,790  
(Gain) loss on sale of repossessed real estate
    32,450       36,954  
Change in assets and liabilities
               
Change in deferred fees and discounts
    (5,721 )     18,985  
Accrued interest receivable
    17,792       68,145  
Other assets
    (145,132 )     58,891  
Accrued interest payable
    (38,355 )     (86,089 )
Other liabilities
    48,120       (44,777 )
Net cash from (used in) operating activities
    (184,835 )     (346,252 )
                 
Cash flows from investing activities
               
Activity in available-for-sale securities:
               
Principal repayments, maturities, sales and calls
    39,654       63,051  
Purchases of FHLB stock
    ---       (91,000 )
Partial redemption of a mutual fund
    250,000       ---  
Loan originations and payments, net
    2,570,908       1,266,396  
Loans sold from portfolio
    6,276,017       3,874,571  
Sales of other real estate owned
    1,092,803       257,068  
(Purchases) sales of premises and equipment, net
    (10,551 )     (6,836 )
Net cash used in investing activities
    10,218,831       5,363,250  


(Continued)

 
6
 
 

MAINSTREET FINANCIAL CORPORATION
Consolidated Statements of Cash Flows for the
Nine-Month Periods Ended September 30, 2009 and 2008 (unaudited)

   
Nine Months
Ended September 30,
 
   
2009
   
2008
 
       
             
Cash flows from financing activities
           
Net change in deposits
  $ (2,022,508 )   $ (14,215,426 )
Proceeds from FHLB advances
    181,000,000       29,780,000  
Repayment of FHLB advances
    (185,800,000 )     (22,580,000 )
Net cash from (used for) financing activities
    (6,822,508 )     (7,015,426 )
                 
Net change in cash and cash equivalents
    3,211,488       (1,998,428 )
                 
Cash and cash equivalents at beginning of period
    7,923,386       5,171,303  
                 
Cash and cash equivalents at end of period
  $ 11,134,874     $ 3,172,875  
                 
Supplemental disclosures of cash flow information
               
Cash paid during the year for
               
Interest
  $ 1,777,505     $ 2,861,317  
Taxes
  $ ---     $ ---  
Supplemental disclosures of non cash activities
               
Transfer of loans to other real estate
  $ 1,654,221     $ 1,260,637  
                 
 
               

See accompanying notes to consolidated financial statements.

 
7
 
 

MAINSTREET FINANCIAL CORPORATION

Notes to Consolidated Financial Statements


1.  
BASIS OF PRESENTATION:
 
The unaudited, consolidated financial statements include the consolidated results of operations of MainStreet Financial Corporation ("Company"), MainStreet Savings Bank ("Bank") and MainStreet Financial Services, Inc., a wholly owned subsidiary of the Bank.  These financial statements do not include the accounts of the Company’s parent company, Mainstreet Financial Corporation, (“MHC”).  These consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and Article 8 of Regulation S-X and do not include all disclosures required by generally accepted accounting principles for a complete presentation of the Company's financial condition and results of operations.  In the opinion of management, the information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary in order to make the financial statements not misleading and for a fair representation of the results of operations for such periods.  The results for the periods ended September 30, 2009, should not be considered as indicative of results for a full year.  For further information, refer to the consolidated financial statements and footnotes included in the Company's Form 10-K for the year ended December 31, 2008.
 
2.  
EARNINGS PER SHARE:
 
Basic earnings (loss) per share is net income (loss) divided by the weighted average number of common shares outstanding during the periods which were 736,039 and 732,204 shares for the nine months ended September 30, 2009 and 2008, respectively. For the three months ended September 30, 2009 and 2008, the weighted shares outstanding were 736,846 and 733,557 respectively. ESOP shares are considered outstanding for this calculation, unless unearned.  There are currently no potentially dilutive common shares issuable under stock options or other programs.  Earnings (loss) and dividends per share are restated for all stock splits and dividends through the date of the financial statements.
 
3.  
RECENT ACCOUNTING DEVELOPMENTS:
 
Adoption of New Accounting Standards
 
In March 2008, the FASB issued  guidance impacting ASC Topic 815, “Disclosures about Derivative and Hedging,” an amendment of SFAS No. 133.”  This guidance amends and expands the disclosure requirements for derivative instruments and hedging activities.  ASC 815 requires qualitative disclosure about objectives and strategies for using derivative and hedging instruments, quantitative disclosures about fair value amounts of the instruments and gains and losses on such instruments, as well as disclosures about credit-risk features in derivative agreements.  This guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged.  The adoption of this standard did not have a material effect on the Company’s results of operations or financial position.
 
In April 2009, the FASB issued guidance impacting ASC 320 Topic, Investments-Debt and Equity Investments, Recognition and Presentation of Other-Than-Temporary Impairments, which amends existing guidance for determining whether impairment is other-than-temporary for debt securities.  The Topic requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis.  If either of these criteria is met, the entire difference between amortized cost and fair value is recognized in earnings.  For debt securities that do not meet the aforementioned criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income.    Additionally, the Topic expands and increases the
 
 
 
8
 
 
 
 
frequency of existing disclosures about other-than-temporary impairments for debt and equity securities.  This guidance is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  The Company adopted this guidance in the second quarter and the impact was to add additional disclosures to the Notes to the consolidated financial statements.
 
 In April 2009, the FASB issued guidance impacting ASC Topic 820 Fair Value Measurements and Disclosures.  This guidance emphasizes that even if there has been a significant decrease in the volume and level of activity, the objective of a fair value measurement remains the same.  Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants.  The Topic provides a number of factors to consider when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity.   In addition, when transactions or quoted prices are not considered orderly, adjustments to those prices based on the weight of available information may be needed to determine the appropriate fair value.  The Topic also requires increased disclosures.  This guidance is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively.  Early adoption is permitted for periods ending after March 15, 2009.  The adoption of this guidance at June 30, 2009, did not have a material impact on the results of operations or financial position.
 
In April 2009, the FASB issued guidance impacting ASC Topic 825 Financial Instruments.  This Topic require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies that were previously only required in annual financial statements.  This guidance is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  The adoption of this guidance at June 30, 2009 did not have an impact on the results of operations or financial position as it only required disclosures which are included in Note 5.
 
In May, 2009, the FASB issued ASC Topic 855 Subsequent Events.  This Topic adopts part of the auditing literature regarding subsequent event transactions into the accounting standards.  Though the criteria used to measure subsequent events did not change, the relevant terms of Type 1 and Type 2 subsequent events were changed to ‘recognized subsequent events’ and ‘nonrecognized subsequent events’ respectively.  This standard also requires public companies to disclose the date upon which subsequent events were measured, which is the date the financial statements are filed with the Securities and Exchange Commission (SEC).
 
The Company evaluated subsequent events as of and through the date November 13, 2009, the date these financial statements were issued.
 
In July 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162.”  The objective of this statement is to replace SFAS No. 162 “The Hierarchy of Generally Accepted Accounting Principles,” and to establish the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”).  Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009.
 
 
 
9
 
 
 
 
4.  
INVESTMENT SECURITIES
 
The following table summarizes the amortized cost and fair value of the available-for-sale investment securities portfolio at September 30, 2009, and the corresponding amounts of unrealized gains and losses therein:
 
   
September 30, 2009
 
                         
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
   
(In thousands)
 
Available-for sale
                       
Mortgage-backed securities –
                       
  residential
  $ 705     $ 9     $ 10     $ 704  
Equity securities
    577       23       -       600  
Total
  $ 1,282     $ 32     $ 10     $ 1,304  

The amortized cost and fair value of the debt securities portfolio are shown by expected maturity. Expected maturities may differ from contractual maturities, if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
 
   
September 30, 2009
 
   
Amortized
   
Fair
 
   
Cost
   
Value
 
   
(In thousands)
 
Maturity
           
Available-for-sale
           
Within one year
  $ -     $ -  
One to five years
    -       -  
Five to ten years
    480       473  
Beyond ten years
    225       231  
                 
Total
  $ 705     $ 704  

The following table summarizes the available-for-sale investment securities with unrealized losses at September 30, 2009, by aggregated major security type and length of time in a continuous unrealized loss position:
 
     
September 30, 2009
     
Less Than 12 Months
 
12 Months or Longer
 
Total
     
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
     
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
     
(In thousands)
Available-for-sale
                       
    Mortgage-backed
 
                       
    securities – residential
 
 
$24
 
$1
 
$306
 
$9
 
$330
 
$10

There were no sales and calls of securities available for sale for the nine months ended September 30, 2008.  During the quarter ended September 30, 2009 the Company redeemed $250,000 of available-for-sale mutual fund equity securities.  A gain of $8,600 was realized upon the redemption.
 

 
10
 
 

Other-Than-Temporary Impairment
 
Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by applying ASC Topic 320, Investments-Debt and Equity Investments.
 
In determining OTTI, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost; (2) the financial condition and near-term prospects of the issuer; (3) whether the market decline was affected by macroeconomic conditions; and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
 
When OTTI occurs, the amount of the OTTI recognized in earnings for debt securities depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss.  If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date.  If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors.  The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings.  The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes.  The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.
 
As of September 30, 2009, the Company’s security portfolio consisted of 35 securities, 8 of which were in an unrealized loss position.
 
Mortgage-backed Securities
 
At September 30, 2009, 100% of the mortgage-backed securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae and Ginnie Mae, institutions that the government has affirmed its commitment to support.  Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2009.
 
Other Securities
 
The Company’s other securities relate primarily to its investment in mutual fund equity securities. Declines in fair value are attributable to pricing of these mutual funds by illiquidity and the financial crisis affecting these markets and in some cases the expected cash flows of the individual securities.  Due to the illiquidity in the market and the nature of these investments, the Company recorded OTTI charges of $31,786 for the nine-month period ended September 30, 2009.  However, no OTTI was recorded during the three-months then ended, as there was no unrealized loss at September 30, 2009.  During the period ended September 30, 2009, 34,388 shares of the mutual fund were redeemed and a gain of $8,597 was realized.
 
 
 
11
 
 
 
 
 
5.  
FAIR VALUE MEASUREMENTS:
 
Statement 157 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The standard describes three levels of inputs that may be used to measure fair value:
 
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
 
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
 
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the value that market participants would use in pricing and asset or liability.
 
The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used to in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).
 
Assets and Liabilities Measured on a Recurring Basis
 
         
Fair Value Measurements at September 30, 2009 Using
 
   
September 30,
2009
   
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Assets:
                       
  Available-for-sale
     Mortgage-backed securities – residential
  $ 704,694       ---     $ 704,694       ---  
     Equity securities
    599,519               599,519          
               
           
Fair Value Measurements at December 31, 2008 Using
 
   
December 31,
2008
   
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Assets:
                               
  Available-for-sale
     Mortgage-backed securities – residential
  $ 760,735       ---     $ 760,735       ---  
     Equity securities
    824,255               824,255          


 
12
 
 

Assets and Liabilities Measured on a Non-Recurring Basis
 
Assets and liabilities measured at fair value on a non-recurring basis are summarized below:
 
         
Fair Value Measurements at September 30, 2009 Using
 
   
September 30, 2009
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Assets:
                       
Impaired loans
  $ 428,865       ---       ---     $ 428,865  
Other real estate owned
  $ 887,031       ---       ---     $ 887,031  
               
           
Fair Value Measurements at December 31, 2008 Using
 
   
December 31, 2008
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Assets:
                               
Impaired loans
  $ 638,592       ---       ---     $ 638,592  

The following represent impairment charges recognized during the period.
 
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a September 30, 2009 carrying amount of $598,920, with a valuation allowance of $170,055, resulting in an insignificant amount of additional loan losses for 2009.  At December 31, 2008 the fair value of the collateral dependent impaired loans was $808,647 with a valuation allowance of $170,055 resulting in an additional provision for loan losses of $111,000 for 2008.
 
Other real estate owned, which is measured for impairment using the fair value of the collateral, had a September 30, 2009 carrying amount of $1,113,431 with valuation write-downs of $226,400, which were taken as expense during 2009.
 
The fair value of impaired loans with specific allocations of the allowance for loan losses and other real estate owened is generally based on recent real estate appraisals.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available.  Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.
 

 
13
 
 

The carrying amounts and estimated fair values of financial instruments, at September 30, 2009 are as follows:
 
(Dollars in thousands)
   
Carrying
   
Fair
 
September 30, 2009
 
Amount
   
Value
 
Financial assets
           
Cash, due from banks, federal funds sold
           
  and money market investments
  $ 11,135     $ 11,135  
Securities available-for-sale
    1,304       1,304  
Federal Home Loan Bank stock
    1,785       N/A  
Loans, net
    82,883       82,897  
Loans held for sale
    3,171       3,171  
Accrued interest receivable
    532       532  
                 
Financial liabilities
               
Deposits
  $ 67,385     $ 68,095  
Short-term borrowings
    30,900       31,033  
Other borrowings
    927       927  
Accrued interest payable
    26       26  

The methods and assumptions used to estimate fair value are described as follows:
 
Carrying amount is the estimated fair value for cash and cash equivalents, interest-bearing deposits, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully.  The methods for determining the fair values for securities were described previously.  For fixed-rate loans or deposits and for variable-rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk.  For loans held for sale, fair value is based on third party pricing of such loans.  Fair value of debt is based on current rates for similar financing.  It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.  The fair value of off-balance-sheet items is not consider material (or is based on the current fees or cost that would be charged to enter into or terminate such arrangements).
 
6.  
REGULATORY MATTERS
 
Capital
 
The Bank is subject to minimum regulatory capital requirements imposed by the OTS of at least an 8.0% core capital ratio and 12% total risk-based capital ratio under its cease and desist order.  (See “OTS Enforcement Actions” below.)  The Bank’s ratios at September 30, 2009 were 4.13% core capital and 8.10% risk based capital.  Because it fails to meet its required capital levels, the Bank is adequately capitalized under the OTS’s prompt corrective action standards.  The Bank was undercapitalized under those prompt corrective action standards as of June 30, 2009, but returned to adequately capitalized status a few days later as a result of gains in a loan sale.  Because of this undercapitalized status, the Bank submitted a capital plan under Section 38 of the Federal Deposit Insurance Act, which included its previously submitted business plan, contingency plan to seek an acquiror and a holding company performance guarantee.  The implications of being adequately capitalized and undercapitalized are included in the Company’s Form 10-K for the year ended December 31, 2008 under “Item 1. Business – How We Are Regulated – Regulatory Capital Requirements --- Prompt Corrective Action.”  The plan focused on the completed and contemplated loan sales as the basis for returning to and maintaining
 
 
 
14
 
 
 
 
adequately capitalized status.  The Bank does not expect to return to well-capitalized status this year.  There can be no assurance that it will remain adequately capitalized during the remainder of 2009.  Currently management is attempting to stabilize its capital levels by reducing costs, maximizing the use of the lowest cost of funds, diligently working with customers to reduce delinquencies and foreclosures and is seeking out potential acquirers.
 
 
Actual at
September 30, 2009
Minimum Required
for  Adequately
Capitalized Status(1)
Excess Over (Under)
Adequately
Capitalized Status
 
Amount
Percent
of
Assets (2)
Amount
Percent
of
Assets (2)
Amount
Percent
of
Assets (1)
Tier 1 leverage (core) capital ratio
$4,270
4.13%
$ 8,272
8.00%
$ (4,262)
(4.2)%
Tier 1 risk-based capital ratio
5,048
6.85    
   2,492
4.00    
    2,556  
2.5     
Total risk-based capital ratio
5,048
8.10    
   7,476
12.00    
   (2,428)
(2.3)     

  (1)  
Reflects ratios required in cease-and-desist order.
  (2)  
Ratio is a percent of adjusted total assets of $103.4 million for the Tier 1 leverage capital ratio and a percent of risk-weighted assets of $62..3 million for the Tier 1 and total risk-based capital ratios.
       

Because the Bank is not well-capitalized, it may not accept or renew brokered deposits without regulatory approval from the Federal Deposit Insurance Corporation.  The Bank applied for but did not receive permission to accept brokered deposits.
 
OTS Enforcement Actions
 
Primarily as a result of our continuing operating losses, the Bank received a letter from the OTS dated February 5, 2008, stating that the Bank was deemed to be in troubled condition, and, as a result, became subject to operating restrictions, including: (1) the Bank must limit its quarterly asset growth to net interest credited on deposit liabilities during the quarter (unless additional asset growth is permitted by the OTS); (2) the Bank must obtain OTS approval prior to appointing any new director or senior executive officer; (3) the Bank’s ability to enter into certain severance agreements or make certain severance payments is limited by 12 C.F.R. § 359; (4) the Bank must receive OTS approval of any new, renewed or amended arrangements providing compensation or benefits to its directors and officers; (5) the Bank must obtain OTS approval of all third-party contracts outside the normal course of business; and (6) the Bank must provide the OTS with 30-days notice of all proposed transactions with affiliates.  Effective April 4, 2008, the Bank entered into a supervisory agreement with the OTS to address the OTS’s concerns regarding the financial condition of the Bank.  Among other things, the supervisory agreement requires the Bank to: (1) prepare and submit a three-year business plan; (2) revise its liquidity management policy; (3) enhance compliance training; (4) prepare and submit quarterly reports on classified assets; and (5) continue to abide by the limits in the February 5, 2008 “troubled condition” letter.
 
Effective May 29, 2009, the Bank consented to the issuance of a cease-and-desist order (“Bank Order”) by the OTS to address the OTS’s concerns regarding the financial condition of the Bank.  Among other things, the Bank Order requires the Bank to: (1) increase its capital ratios to a core capital ratio of 8% and a total risk-based capital ratio of 12% by August 27, 2009; (2) prepare a contingency plan for a merger, acquisition or liquidation of the Bank if it falls below adequately capitalized status; (3) limit its lending to one-to-four family residential real estate first lien, prime loans with a loan-to- value ratio of no more than 80% without private mortgage insurance, a principal amount of no more than $275,000, and
 
 
 
15
 
 
 
 
conforming in all other respects with government-sponsored enterprise or government agency purchase requirements, fully collateralized savings account loans, modifications of existing loans with no new disbursements of funds and other loans as approved by the OTS; (4) revise its business plan and liquidity management policy; (5) prepare and submit quarterly reports on classified assets; (6) limit its quarterly asset growth to net interest credited on deposit liabilities during the quarter (unless additional asset growth is permitted by the OTS); (7) obtain OTS approval prior to appointing any new director or senior executive officer; (8) enter into certain severance agreements or make certain severance payments only if they comply with 12 C.F.R. § 359; (9) receive OTS approval of any new, renewed or amended arrangements providing compensation or benefits to its directors and officers; (10) obtain OTS approval of all third-party contracts outside the normal course of business; and (11) provide the OTS with 30-days notice of all new transactions with affiliates.
 
On June 19, 2009, MHC, which owns 53% of the common stock of the Company consented to the issuance of a cease-and-desist order ("MHC Order") by the OTS to address the OTS's concerns regarding the insufficient earnings and inadequate capital level of MHC.   Among other things, the Order requires MHC to:  (1) adopt and implement a capital plan to increase the capital ratios of MainStreet Savings Bank, FSB, to a core capital ratio of 8% and a total risk-based capital ratio of 12% by August 31, 2009; (2) not incur, renew or rollover any debt; (3) receive OTS approval of any new, renewed or amended arrangements providing compensation or benefits to its directors and officers; and (4) obtain OTS approval of any changes in directors or senior executive officers. 
 
The Bank’s continuing losses and reductions in capital could result in the OTS pursuing additional enforcement and regulatory actions against the Bank, the Company and the MHC.  Unless the Bank is acquired or receives a significant capital infusion in 2009, such additional actions could include, a capital directive, a prompt corrective action order and, ultimately, placing the Bank in receivership.
 
Events of Default
 
The Bank’s loss of well-capitalized status, operating losses and level of non-accrual loans and other real estate owned all are violations of financial covenants and events of default for the Company’s and the Bank’s ESOP loans from a third party bank.  That lending bank has provided letters agreeing to forbear from enforcing those covenants against the Company and the ESOP through December 31, 2009, so long as the Company and ESOP otherwise remain in compliance with the loan documents and the forbearance letters. The lending bank also may declare an event of default if it believes a material adverse change has occurred in the Company’s financial condition, the prospect of payment or performance of the loan is impaired or it is insecure.
 

 
16
 
 


Item 2    Management’s Discussion and Analysis
 
Forward-Looking Statements
 
This report contains certain ‘forward-looking statements’ that may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” or “estimated.”  Our financial condition, results of operations and business are subject to various factors that could cause actual results to differ materially from these estimates.  These factors include, but are not limited to, general and local economic conditions, changes in interest rates (particularly the relationship of short-term rates to long-term rates), deposit flows, demand for mortgage, consumer and other loans, real estate values, local levels of unemployment and underemployment, competition, changes in accounting principles, policies or guidelines, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services.  Our ability to predict results or the actual effect of future plans or strategies is uncertain.   We do not undertake, and specifically disclaim, any obligation to publicly revise 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.
 
Overview of Quarter and Recent Regulatory Matters
 
The principal business of the Company is operating the Bank, its wholly owned subsidiary.  The Bank is a community oriented institution primarily engaged in attracting retail deposits from the general public and originating one- to four-family residential loans in its primary market area, including construction loans and home equity lines of credit.  The Bank also originates a limited amount of construction or development, consumer and commercial loans.  The Company is in a mutual holding company structure and 53% of its stock is owned by the MHC.
 
Our results of operations depend primarily on our net interest income.  Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans and investment and mortgage-backed securities, and the interest we pay on our interest-bearing liabilities, consisting of savings and checking accounts, money market accounts, time deposits and borrowings.  Our results of operations also are affected by our provision for loan losses, non-interest income and non-interest expense.  As a result of the slower economy in southwest Michigan, loan originations have decreased.  Non-interest income consists primarily of service charges on deposit accounts, transaction fees and commissions from investment services.  Non-interest expense consists primarily of salaries and employee benefits, occupancy, equipment and data processing, advertising and other costs.  Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.
 
During the first nine months of 2009, the Company’s earnings continued to be negatively impacted by decreased interest income, due to a lower volume of loan originations and the slower economy in southwest Michigan.  This activity significantly reduced loan demand and increased loan delinquencies and associated losses, particularly due to decreased property values.  We have experienced a $928,000 loss in the first nine months of 2009, which reduced our capital.  This continuing weak economy has caused a $2,700,000 increase in our non-performing assets during the nine months ended September 30, 2009.  See “Difficult market conditions and economic trends have adversely affected our industry and our business” in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2008, for additional information about recent economic conditions.
 
 
 
17
 
 
 
 
The allowance for loan losses has increased to $913,000 at September 30, 2009 from $858,000 at December 31, 2008.  The increase during the first nine months is the result of a $571,000 provision for loan losses and recoveries of $18,000, less charge-offs of $534,000.  These charge-offs include a $65,000 loss attributable to the write-down of a multi-family property, which had been previously allocated in the allowance and $412,000 in additional charge-offs related to collateral valuation changes of certain nonperforming loans. Management believes the allowance at September 30, 2009, is adequate given the collateralization of delinquent and non-performing loans.
 
As of September 30, 2009, the Bank did not meet its minimum capital requirements under a regulatory cease and desist order, and was considered “adequately capitalized” under the OTS prompt corrective action standards.  See “Capital.”
 
Effective May 29, 2009, the Bank consented to the issuance of a cease-and-desist order (“Bank Order”) by the OTS to address the OTS’s concerns regarding the financial condition of the Bank.  Among other things, the Bank Order requires the Bank to: (1) increase its capital ratios to a core capital ratio of 8% and a total risk-based capital ratio of 12% by August 27, 2009; (2) prepare a contingency plan for a merger, acquisition or liquidation of the Bank if it falls below adequately capitalized status; (3) limit its lending to one-to-four family residential real estate first lien, prime loans with a loan-to- value ratio of no more than 80% without private mortgage insurance, a principal amount of no more than $275,000, and conforming in all other respects with government-sponsored enterprise or government agency purchase requirements, fully collateralized savings account loans, modifications of existing loans with no new disbursements of funds and other loans as approved by the OTS; (4) revise its business plan and liquidity management policy; (5) prepare and submit quarterly reports on classified assets; (6) limit its quarterly asset growth to net interest credited on deposit liabilities during the quarter (unless additional asset growth is permitted by the OTS); (7) obtain OTS approval prior to appointing any new director or senior executive officer; (8) enter into certain severance agreements or make certain severance payments only if they comply with 12 C.F.R. § 359; (9) receive OTS approval of any new, renewed or amended arrangements providing compensation or benefits to its directors and officers; (10) obtain OTS approval of all third-party contracts outside the normal course of business; and (11) provide the OTS with 30-days notice of all new transactions with affiliates.
 
On June 19, 2009, MHC, which owns 53% of the common stock of the Company consented to the issuance of a cease-and-desist order ("MHC Order") by the OTS to address the OTS's concerns regarding the insufficient earnings and inadequate capital level of MHC.   Among other things, the Order requires MHC to:  (1) adopt and implement a capital plan to increase the capital ratios of MainStreet Savings Bank, FSB, to a core capital ratio of 8% and a total risk-based capital ratio of 12% by August 31, 2009; (2) not incur, renew or rollover any debt; (3) receive OTS approval of any new, renewed or amended arrangements providing compensation or benefits to its directors and officers; and (4) obtain OTS approval of any changes in directors or senior executive officers. 
 
Critical Accounting Policies
 
We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider our critical accounting policies to be those related to our allowance for loan losses and deferred income taxes.  The allowance for loan losses is maintained to cover losses that are probable and can be estimated on the date of the evaluation in accordance with U.S. generally accepted accounting principles.  It is our estimate of probable incurred credit losses that is in our loan portfolio.  Our methodologies for analyzing the allowance for loan losses and determining our net deferred tax assets are described in our Form 10-K for the year ended December 31, 2008.
 
 
 
18
 
 
 
 
 
Comparison of Financial Condition at September 30, 2009 and December 31, 2008
 
General.   Total assets decreased by $7.6 million, or 6.8%, to $104.2 million at September 30, 2009, from $111.8 million at December 31, 2008.  The decrease was primarily attributable to a $3.2 million increase in cash and cash equivalents, which was offset by a $10.9 million decrease in loans during the period, which included the sale of $6.3 million loans from the portfolio.
 
Cash and Securities.   Cash and cash equivalents increased by $3.2 million during the period, to $11.1 million at September 30, 2009, consistent with our current liquidity strategy to maintain higher levels of available funds to meet expenses and commitments.  Our securities portfolio decreased by $281,000 during the period, which was primarily the result of a $32,000 impairment adjustment on a mutual fund investment and a $250,000 partial redemption of a mutual fund.  That portfolio is designated as available-for-sale, and we have substantially all of our securities investments in shorter-term instruments.  Cash and securities were 11.9% and 8.5% of total assets at September 30, 2009, and December 31, 2008, respectively.  See “ Liquidity” and “ Off-Balance Sheet Commitments.”
 
Loans.   Our loan portfolio decreased $11.0 million or 11.7%, from $93.9 million at December 31, 2008 to $82.9 million at September 30, 2009.  The slow economy in southwest Michigan has significantly reduced demand for all types of loans.  Due to both market conditions and regulatory lending constraints, the Bank has limited the types of loans it offers and primarily offers loans salable in the secondary market.  The decrease in our loan portfolio consisted of a 7.9% decrease in one- to four-family residential mortgages, a 7.7% decrease in commercial real estate and business loans, a 71.4% decrease in consumer loans, an 1.8% increase in home equity lines of credit and a 73.2% decrease in construction and development loans.  Additionally, $6.3 million of loans were sold during the quarter.
 
Other Real Estate Owned.   Our other real estate owned (“OREO”) increased by $600,000, or 33.3%, from $1.8 million at December 31, 2008 to $2.4 million at September 30, 2009.  This increase is the result of the sale of eleven single-family homes for $1.1 million, at a net loss of $32,000, which was offset by the acquisition of fifteen single family homes valued at $1.2 million, two vacant land properties valued at $149,000, one multi-family property valued at $155,000, and two commercial real estate properties valued at $255,000.  We believe the value of these acquired properties exceeds the outstanding amount on the related foreclosed loans.  OREO is expected to increase significantly during the quarter ended December 31, 2009, because, as of September 30, 2009, we were in the process of foreclosing on 14 additional one- to four- family residential loans with an aggregate balance of $873,000 and two commercial real estate secured loans totaling $381,000.
 
Allowance for Loan Losses.   Our allowance for loan losses at September 30, 2009, was $913,000 or 1.1% of gross loans, compared to $858,000 or 0.9% of loans at December 31, 2008.
 
The following table is an analysis of the activity in the allowance for loan losses for the periods shown.
 
   
Nine Months
Ended September 30
 
   
2009
   
2008
 
Balance at beginning of period
    858,000     $ 508,000  
Provision charged to income
    571,000       296,000  
Recoveries
    18,000       16,000  
Charge-offs
    (534,000 )     (145,000 )
Balance at end of period
  $ 913,000     $ 675,000  

Nonperforming loans increased during the first nine months by $851,000 or 25.8%, from $3.3 million at December 31, 2008, to $4.2 million at September 30, 2009, primarily as a result of the continuing depressed economy of southwest Michigan economy.  Our overall nonperforming loans to total loans ratio increased from 3.6% at December 31, 2008, to 5.1% at September 30, 2009.  At September 30, 2009, we had 37 nonperforming loans as follows:
 
1.  
Four large commercial loans totaling $1.6 million –Two land development loans for the development of residential lots totaling $948,000.  We believe the value of the collateral for these land development loans currently exceeds the outstanding balances of the loans .    Two commercial real estate secured participation loans to one borrower, which total $629,000 where the lead lender, with our concurrence, has reduced the interest rate of these loans, as they did on all of this borrower’s loans held in their own portfolio, in order to reduce the required payments to a level that can be supported by the borrower’s current cash flow.  Both loans are considered to be adequately secured.
 
2.  
Six commercial loans – Two loans to a landscaping company totaling $29,000, which are secured by commercial vehicles and equipment.  Four loans secured by commercial real estate totaling $562,000, which includes a one- to four - family construction spec loan to a developer totaling $169,000, a $212,000 secured line of credit, and one loan totaling $39,000, which is secured by corporate assets and real estate.  The Bank believes these loans are adequately collateralized and does not anticipate incurring a material loss on these loans.
 
3.  
Twenty-six one-to four-family mortgage loans – The aggregate outstanding balance on these   loans was $2.0 million.  Fourteen of these loans are in various stages of foreclosure.  Twenty three of these loans totaling $1.7 million are in non-accrual status.  Thirteen of these loans totaling $1.1 million are believed to be adequately collateralized with respect to the outstanding loan balances, so the Bank expects no material loss on these loans.  Thirteen of these loans totaling $950,000 have insufficient collateral values and the Bank expects to incur a loss on these loans.
 
4.  
One unsecured consumer loan totaling $3,000.
 
At September 30, 2009, we had forty-two troubled debt restructurings (“TDRS”) totaling $4.3 million or 5.2% of total net loans, which is a $1.8 million increase from the level at December 31, 2008.  Thirty-nine of these are comprised of three vacant land loans totaling $136,000, thirty-four one- to  four- family residential properties totaling $3.2 million, two commercial real estate properties totaling $256,000 and a $155,000 participation interest in one multi unit investment property are loans that are either held in redemption or real estate owned.  The remaining two, totaling $629,000 are participation interests purchased by the Bank in commercial real estate loans to a real estate development company.  One loan in the amount of $476,000 is for the development of residential lots in a now partially completed condominium project.  The lead bank has provided construction financing for all of the homes in the project.  The second loan of $153,000 is secured by a commercial building in Lansing, Michigan.  The lead lender, with our concurrence, has reduced the interest rate of these loans, as they did on all of this borrower’s loans held in their own portfolio, in order to reduce the required payments to a level that can be supported by the borrower’s current cash flow.  Both loans are considered to be adequately secured.
 
Our loan delinquencies increased $200,000 during the nine months, to $4.9 million, or 5.9% of total loans, at September 30, 2009, compared to $4.7 million, or 5.0% of total loans, at December 31, 2008.  The increase in loan delinquencies during the nine months was primarily the result of the continuing decline in the southwest Michigan economy.
 
 
 
19
 
 
 
 
 
On September 30, 2009, the Bank was monitoring other loans of concern classified as substandard or doubtful on the Bank’s monthly delinquency report.  These loans consisted of five commercial real estate loans totaling $935,000, nineteen one- to four- family residential loans totaling $1.6 million and four consumer loans totaling $39,000.  All these loans are being actively monitored and collection efforts are continuing.
 
Past due and other loans classified as special mention that are being monitored by the Bank’s loan review committee include: (a) two commercial loans to a landscaping company that are secured by vehicles and equipment and total $29,000, (b) three loans to real estate developers totaling $318,000, which are secured by a residential development, commercial real estate and lines of credit against their primary residences; (c) four loans totaling $302,000 secured by the borrowers’ principal residence and  (d) nineteen loans totaling $866,000 to two borrowers secured by one-to-four family rental properties.
 
With our market area continuing to experience difficult economic conditions, we anticipate that delinquencies and net charge-offs will continue to occur during the rest of 2009.
 
Deposits.   Total deposits decreased by $2.0 million, or 2.9%, to $67.4 million at September 30, 2009, from $69.4 million at December 31, 2008.  This decrease is the result of management’s decision to reduce the advances at the Federal Home Loan Bank. During the first nine months, demand deposits decreased $885,000, savings and money market accounts increased $493,000 and time deposits or certificates increased by $1.1 million.
 
Borrowings.   Federal Home Loan Bank advances decreased $4.8 million, or 13.4%, to $30.9 million at September 30, 2009, from $35.7 million at December 31, 2008.  At September 30, 2009, due to increasing collateral requirements and the Banks operating results, we have very limited, if any, additional borrowing capacity from the Federal Home Loan Bank.
 
At September 30, 2009, we had $700,000 outstanding on our loan from another bank, which is secured by 100% of the outstanding common stock of the Bank.  The interest rate on this loan at September 30, 2009 was 3.6%.  Our ESOP also has a $227,424 loan from that same bank under similar terms.  Our loss of well-capitalized status, operating losses and level of non-accrual loans and other real estate owned all are violations of financial covenants and events of default for these loans.  The lending bank has provided letters agreeing to forbear from enforcing those covenants against the Company and the ESOP through December 31, 2009, so long as they otherwise remain in compliance with the loan documents and the forbearance letters.  We will ask the lending bank for additional forbearance if these events of default continue after December 31, 2009.  However, that forbearance may not be granted
 
Equity.   Total equity decreased $891,000, or 17.1%, to $4.3 million at September 30, 2009, from $5.2 million at December 31, 2008.  The decrease in equity was primarily due to a net loss of $928,000 for the nine months.
 
Comparison of Operating Results for the Three Months and Nine Months Ended September 30, 2009 and 2008
 
General.   The net loss for the three months ended September 30, 2009 was $290,000, as compared to a net loss of $525,000 for the three months ended September 30, 2008.  The net loss for the nine months ended September 30, 2009 was $928,000 as compared to a net loss of $1.2 million for the same period in 2008.  The net loss for the nine months reflects a $314,000 increase in net interest income primarily attributable to declining interest rates on deposits. Our provision for loan losses increased $275,000 for the nine months.  Regulatory assessments increased $186,000, administrative and general increased $134,000 and  professional services increased $12,000 during the nine months.  These increases
 
 
 
20
 
 
 
 
were offset by a $102,000 decrease in salaries and employee benefits, a $67,000 decrease in premises and equipment and a $23,000 decrease in advertising costs.  Non-interest income increased during the nine months by $329,000.  The increase is primarily attributable to a $184,000 gain on the sale of loans compared to a $23,000 gain during the same period of 2008 and a $32,000 impairment of a mortgage-backed mutual fund during the first nine months of 2009 compared to a $189,000 impairment in that investment during the same period of 2008.
 
Interest Income.   Interest income decreased by $191,000, or 12.7%, to $1.3 million for the three-month period ended September 30, 2009, from $1.5 million for the same period in 2008.  Interest income decreased by $698,000, or 14.9% to $4.0 million for the nine months ended September 30, 2009 from $4.7 million for the nine months ended September 30, 2008.  The decrease in interest income is primarily related to the decrease in the weighted average yield of the residential loan portfolio during the nine months, as well as the decrease in the loan portfolio due to loan sales and fewer originations.
 
The weighted average yield on loans decreased to 5.50% for the quarter ended September 30, 2009, from 5.57% for the quarter ended September 30, 2008.  The weighted average yield on loans decreased from 5.91% for the nine months ended September 30, 2008 to 5.71% for the nine months ended September 30, 2009. The decrease was primarily the result of prime rate based adjustable rate loans, home equity loans and commercial loans re-pricing to lower rates as the prime rate decreased from 5.0%  to 3.25% as the result of Federal Reserve rate cuts.  Interest rates on other types of loans have remained relatively stable.  We anticipate this trend to continue for the shorter term.  No assurance can be given that the normalization of the yield curve will continue or that a flat yield curve will not return.
 
Interest Expense.   Interest expense decreased $291,000, or 36.6%, to $506,000 for the three months ended September 30, 2009 from $796,000 for the quarter ended September 30, 2008.  Interest expense decreased $1.0 million, or 37.0%, to $1.7 million for the nine months ended September 30, 2009, from $2.7 million for the nine months ended September 30, 2008.  The decrease was a result of a decrease in the average rate paid on both deposits and Federal Home Loan Bank advances due to the lower interest rate environment and our decreased reliance on wholesale and brokered deposits.  We paid $6,000 and $10,000 in interest, respectively, on our bank line of credit during the quarter ended September 30, 2009 and September 30, 2008.  We paid $22,000 in interest on our bank line of credit during the nine months ended September 30, 2009 and $34,000 for same period in 2008.  The average cost of interest-bearing liabilities decreased from 3.32% for the quarter ended September 30, 2008 to 1.92% for the quarter ended September 30, 2009.  The average cost of interest-bearing liabilities decreased from 3.72% for the nine months ended September 30, 2008 to 2.24% for the nine months ended September 30, 2009.  This trend would reverse if interest rates were to increase.
 
Interest paid on deposits decreased $143,000, or 28.4%, to $360,000 for the three months ended September 30, 2009 from $504,000 for the three months ended September 30, 2008.  In addition, interest paid on deposits decreased $534,000, or 29.7%, to $1.3 million for the nine months ended September 30, 2009 from $1.8 million for the nine months ended September 30, 2008.  This reflects lower interest rates generally.  This trend would reverse if interest rates were to increase.
 
Interest expense on Federal Home Loan Bank advances decreased $164,000, or 56.2%, to $129,000 for the three months ended September 30, 2009, from $292,000 for the three months ended September 30, 2008.  In addition, interest expense on Federal Home Loan Bank advances decreased $496,000, or 52.8%, from $940,000 for the nine months ended September 30, 2008 to $444,000 for the nine months ended September 30, 2009.  This decrease resulted from decreasing rates on the repricing of our advances and an increase in the average balance of outstanding Federal Home Loan Bank advances of $35.2 million for the nine months ended September 30, 2009, from $28.7 million for the nine months ended September 30, 2008.
 
 
 
21
 
 
 
 
 
Net Interest Income.   Net interest income before the provision for loan losses increased by $100,000, or 15.0%, to $767,000 for the three-month period ended September 30, 2009, compared to $667,000 for the same period in 2008.  Net interest income increased by $314,000, or 15.7%, to $2.3 million for the nine months ended September 30, 2009, compared to $2.0 million for the nine months ended September 30, 2008.  Our net interest margin was 2.93% for the three months ended September 30, 2009, compared to 2.49% for the three months ended September 30, 2008, and was 2.89% for the nine months ended September 30, 2009, compared to 2.43% for the nine months ended September 30, 2008.
 
Provision for Loan Losses.   We establish the provision for loan losses, which is charged to operations, at a level management believes will adjust the allowance for loan losses to reflect probable incurred credit losses in the loan portfolio.  In evaluating the level of the allowance for loan losses, management considers the types of loans and the amount of loans in the loan portfolio, historical loss experience, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions.
 
Based on management’s evaluation of these factors, provisions of $299,000 and $161,000 were made during the quarters ended September 30, 2009 and 2008, respectively and provisions of $571,000 and $296,000 were made during the nine months ended September 30, 2009 and 2008 respectively.  The increase in the provision for loan losses was primarily in response to increased delinquencies in the first nine months of 2009 as compared to the same period in 2008, due to increasing levels of unemployment and the depressed Michigan economy.  During the nine months ended September 30, 2009, net charge-offs were $516,000, compared to $129,000 for the same period in 2008. The ratio of non-performing loans to total loans increased to 5.1% at September 30, 2009, compared to 2.1% at September 30, 2008, and 3.6% at December 31, 2008.   Non-performing loans at September 30, 2009, consisted of $2.0 million in residential mortgage loans and $2.2 million in commercial loans.  The increase in the level of non-performing loans during the nine months ended September 30, 2009 is a result of continuing economic decline in our west Michigan market.
 
Non-interest Income.   Non-interest income increased $265,000 to $285,000 for the three months ended September 30, 2009, compared to $20,000 for the same period in 2008, and increased $329,000, to $405,000 for the nine months ended September 30, 2009, compared to $76,000 for the same period in 2008.  The increase in non-interest income during the 2009 period was primarily due to a $32,000 impairment of a mortgage-backed mutual fund the first nine months of 2009 compared to a $189,000 impairment for the same period of 2008 and a $184,000 gain on the sale of loans compared to a $23,000 during the same period of 2008.
 
Non-interest Expense.   Non-interest expense decreased $8,000, from $1.1 million for the three-month period ended September 30, 2008 to $1.1 million for the three months ended September 30, 2009.  In addition, non-interest expense increased $140,000, or 8.2%, from $2.9 million for the nine months ended September 30, 2008 to $3.0 million for the nine months ended September 30, 2009. Regulatory assessments increased $186,000, administrative and general increased $134,000 and  professional services increased $12,000 during the nine months.  These increases were offset by a $102,000 decrease in salaries and employee benefits, a $67,000 decrease in premises and equipment and a $23,000 decrease in advertising costs.
 
Income Tax Benefit.   During 2007 management concluded, based on higher than expected operating losses and a difficult operating environment, that a valuation allowance should be established to reduce the net deferred tax asset at December 31, 2007 to zero.  As a result of the establishment of the valuation allowance, no tax benefit has been recorded in the income statement at September 30, 2009 or 2008.
 
 
 
22
 
 
 
 
Liquidity
 
We are required to have enough cash and investments that qualify as liquid assets in order to maintain sufficient liquidity to ensure safe and sound operations.  Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans.  Historically, we have maintained liquid assets at levels believed to be adequate to meet the requirements of normal operations, including potential deposit outflows.  Recently, we decided to maintain higher levels of liquidity due to the current economic and operational environment including our inability to accept or renew brokered deposits, our limited access to Federal Home Loan Bank advances and our continuing losses and declining capital.  Cash flow projections are regularly reviewed and updated to assure that adequate liquidity is maintained.  The consolidated statements of cash flows beginning on page 4 detail cash flows from operating, investing and financing activities.  On an unconsolidated basis at September 30, 2009, the Company had $100,000; all of which $100,000 is held in a pledged interest reserve account related to our loans from another bank.  From this point forward, the reserve account is being used to make required interest payments of the Company’s loan.  The Bank expects to continue to fund principal and interest payments due on the ESOP loan.
 
Liquidity management is both a daily and long-term function of business management.  Excess liquidity is generally invested in short-term investments, such as overnight deposits and federal funds.  On a longer term basis, we maintain a strategy of investing in various lending products and investment securities, including mortgage-backed securities.  The Bank uses its sources of funds primarily to meet its ongoing commitments, pay maturing deposits, fund deposit withdrawals and to fund loan commitments.  The Bank has adopted the new liquidity management policy required in its supervisory agreement with the OTS.
 
The Bank’s primary sources of funds are deposits, amortization, prepayments and maturities of outstanding loans and mortgage-backed securities, maturities of investment securities and other short-term investments and funds provided by operations.  While scheduled payments from the amortization of loans and maturing short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.  In addition, the Bank invests excess funds in short-term interest-earning assets, which provide liquidity to meet lending requirements.  The Bank also generates cash through borrowings, primarily from Federal Home Loan Bank advances, to leverage its capital base, provide funds for its lending and investment activities and enhance its interest rate risk management.
 
We maintain cash and investments that qualify as liquid assets to maintain liquidity to ensure safe and sound operations and meet demands for funds (particularly withdrawals of deposits).  At September 30, 2009, the Company had $11.8 million in cash and investment securities available for sale on a consolidated basis, of which $11.7 million was Bank assets on an unconsolidated basis.
 
The Bank’s liquidity position at September 30, 2009 was $11.8 million compared to $9.5 million at December 31, 2008.  This increase reflects the decision to maintain higher liquidity levels as a result of the current economic and operational environment.  At September 30, 2009, we had $5.8 million in outstanding loan commitments, including unused lines of credit.  Certificates of deposit scheduled to mature in one year or less at September 30, 2009, totaled $35.0 million.  It is management’s policy to maintain deposit rates that are competitive with other local financial institutions.  Based on this management strategy, we believe that a majority of maturing deposits will remain with the Bank.   Because the Bank is not well-capitalized, it may not accept or renew brokered and wholesale deposits without a waiver from the FDIC.  The Bank requested a FDIC waiver in 2008, but the request was denied.  At September 30, 2009, we had $10.3 million in wholesale or brokered deposits, compared to $13.6 million at the end of 2008.  At September 30, 2009, the Bank had the ability to borrow an additional
 
 
 
23
 
 
 
 
$670,000  from the Federal Home Loan Bank of Indianapolis.  Because of the Bank’s limited ability to borrow from the Federal Home Loan Bank and the inability to currently utilize brokered deposits, the Bank has, and anticipates continuing to, obtained deposits in the national market to meet funding needs.  The interest rates the Bank has paid to obtain national market deposits have generally ranged from being equivalent to the rate offered in the local market to 0.5% above the local rate.  The Bank is also maintaining higher levels of liquidity to provide added flexibility due to its limited sources for liquidity.
 
Local deposit flows have been stable over the last twelve months.   Local savings flows do not appear to have been materially impacted by local economic conditions although a continuation of higher unemployment levels and decreased economic activity could result in decreased personal and business savings.  Interest rates on deposits offered in the local market have been above average in relation to national averages due to the competitiveness of the local market.  In the event we experience unexpected withdrawals of deposits or are unable to renew the majority of our maturing certificates of deposit at acceptable rates, we could have difficulty funding our ongoing operations.  
 
Off-Balance Sheet Activities and Commitments
 
In the normal course of operations, the Company engages in a variety of financial transactions that are not recorded in our financial statements.  These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks.  These transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.  For the nine months ended September 30, 2009, we engaged in no off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows.  Due to both market conditions and regulatory lending constraints the Bank has limited the types of loans available, thereby reducing outstanding commitments.  Our liquidity management includes monitoring our ability to meet outstanding commitments to extend credit.
 
A summary of our off-balance sheet commitments to extend credit at September 30, 2009, is as follows:
 
Off-balance sheet commitments:
     
Commitments to make loans                                                                         
  $ 336,000  
Undisbursed portion of loans closed                                                                         
    36,000  
Unused lines of credit                                                                         
    5,408,000  
     Total loan commitments                                                                         
  $ 5,780,000  

 
Capital
 
The Bank is subject to minimum regulatory capital requirements imposed by the OTS of at least an 8.0% core capital ratio and 12% total risk-based capital ratio under its cease and desist order.  (See “OTS Enforcement Actions” below.)  The Bank’s ratios at September 30, 2009 were 4.13% core capital and 8.10% risk based capital.  Because it fails to meet its required capital levels, the Bank is adequately capitalized under the OTS’s prompt corrective action standards.  The Bank was undercapitalized under those prompt corrective action standards as of June 30, 2009, but returned to adequately capitalized status a few days later as a result of gains in a loan sale.  Because of this undercapitalized status, the Bank submitted a capital plan under Section 38 of the Federal Deposit Insurance Act, which included its previously submitted business plan, contingency plan to seek an acquiror and a holding company performance guarantee.  The implications of being adequately capitalized and undercapitalized are included in the Company’s Form 10-K for the year ended December 31, 2008 under “Item 1. Business – How We Are Regulated – Regulatory Capital Requirements --- Prompt Corrective Action.”  The plan
 
 
 
24
 
 
 
 
focused on the contemplated loan sales as the basis for returning to and maintaining adequately capitalized status. The Bank does not expect to return to well-capitalized status this year.  There can be no assurance that it will remain adequately capitalized during the remainder of 2009.  Currently management is attempting to stabilize its capital levels by reducing costs, maximizing the use of the lowest cost of funds, diligently working with customers to reduce delinquencies and foreclosures and is seeking out potential acquirers.
 
 
Actual at
September 30, 2009
Minimum Required
for  Adequately
Capitalized Status(1)
Excess Over (Under)
Adequately
Capitalized Status
 
Amount
Percent
of
Assets (2)
Amount
Percent
of
Assets (2)
Amount
Percent
of
Assets (1)
Tier 1 leverage (core) capital ratio
$4,270
4.13%
$ 8,272
8.00%
$ (4,262)
(4.2%)
Tier 1 risk-based capital ratio
5,048
6.85    
   2,492
4.00    
    2,556  
2.5     
Total risk-based capital ratio
5,048
8.10    
   7,476
12.00    
   (2,428)
(2.3)    

  (1)  
Reflects ratios required in cease-and-desist order.
  (2)  
Ratio is a percent of adjusted total assets of $103.4 million for the Tier 1 leverage capital ratio and a percent of risk-weighted assets of 62.3 million for the Tier 1 and total risk-based capital ratios.

Because the Bank is not well-capitalized, it may not accept or renew brokered deposits without regulatory approval from the Federal Deposit Insurance Corporation.  The Bank applied for but did not receive permission to accept brokered deposits.
 
Because the Bank’s capital level has fallen below well-capitalized status, the OTS may initiate additional enforcement action against the Bank, which additional actions could include placing the Bank in receivership.  See, also, “How We Are Regulated – Regulatory Capital Requirements – Capital Requirements for the Bank” in item 1 of our Annual Report on Form 10-K for the year ended December 31, 2008, with regard to other potential regulatory actions resulting form the Bank’s capital level.
 
The Bank’s loss of well-capitalized status, operating losses and level of non-accrual loans and other real estate owned all are violations of financial covenants and events of default for the Company’s and the Bank’s ESOP loans from a third party bank.  That lending bank has provided letters agreeing to forbear from enforcing those covenants against the Company and the ESOP through September 30, 2009, so long as the Company and ESOP otherwise remain in compliance with the loan documents and the forbearance letters. The lending bank also may declare an event of default if it believes a material adverse change has occurred in the Company’s financial condition, the prospect of payment or performance of the loan is impaired or it is insecure.
 
Impact of Inflation
 
The consolidated financial statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America.  These principles require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.
 
Our primary assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation.  Interest rates, however, do not necessarily move in the same direction or with the same magnitude as the price of goods and services, since these prices are affected by inflation.  In a period of rapidly rising interest rates, the liquidity and maturity structures of our assets and liabilities are critical to the maintenance of acceptable performance levels.
 
 
 
25
 
 
 
 
The principal effect of inflation, as distinct from levels of interest rates, on earnings is in the area of non-interest expense.  Employee compensation, employee benefits and occupancy and equipment costs maybe subject to increases as a result of inflation.  An additional effect of inflation is the possible increase in the dollar value of the collateral securing loans that we have made.  We are unable to determine the extent, if any, to which properties securing our loans have appreciated in dollar value due to inflation.
 
Item 3    Quantitative and Qualitative Disclosures About Market Risk
 
Not required; the Company is a smaller reporting company.
 
Item 4T Controls and Procedures
 
An evaluation of the Company's disclosure controls and procedures as defined in Rule 13a -15(e) under the Securities Exchange Act of 1934 (the "Act") as of September 30, 2009, was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and several other members of the Company's senior management.  The Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2009, the Company's disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is: (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and the Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.
 
The Company intends to continually review and evaluate the design and effectiveness of its disclosure controls and procedures and to improve its controls and procedures over time and to correct any deficiencies that it may discover in the future.  The goal is to ensure that senior management has timely access to all material financial and non-financial information concerning the Company's business.  While the Company believes the present design of its disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures.
 
The Company does not expect that its disclosure controls and procedures will prevent all error and all fraud.  A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met.  Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.  The design of any control procedure is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies and procedures may deteriorate.  Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.
 
 
 
26
 
 
 
 
There were no changes in our internal control over financial reporting (as defined in Rule 13a - 15(f) under the Act) that occurred during the nine months ended September 30, 2009, that has materially affected, or is likely to materially affect our internal control over financial reporting.
 
PART II    OTHER INFORMATION
 
Item 1        Legal Proceedings
 
In the normal course of business, the Company occasionally becomes involved in various legal proceedings.  In the opinion of management, any liability from such proceedings would not have a material adverse effect on the business or financial condition of the Company.
 
Item 1A      Risk Factors
 
Because the Company is a smaller reporting company, it is not required to provide risk factors.  Refer to Item 2, “Overview of The Quarter and Recent Regulatory Matters” and “Comparison of Operating Results for the Nine Months Ended September 30, 2009 and 2008, Capital” for additional discussion of risk factors. However, the declining capital of the Bank may result in the Bank being placed in receivership.
 
Item 2         Unregistered Sales of Equity Securities and Use of Proceeds
 
(a)           Recent Sales of Unregistered Securities
 
Nothing to report.
 
(b)           Use of Proceeds
 
Nothing to report.
 
(c)           Stock Repurchases
 
Nothing to report.
 
Item 3         Defaults Upon Senior Securities
 
Nothing to report.
 
Item 4         Submission of Matters to a Vote of Security Holders
 
Nothing to report.
 
Item 5         Other Information:
 
Nothing to report.
 

 
27
 
 

Item 6         Exhibits
 
Regulation SK
Exhibit Number
Document
Reference to
Prior Filing
or Exhibit Number
Attached Hereto
3(i)
Charter of Mainstreet Financial Corporation
*
3(ii)
Bylaws of Mainstreet Financial Corporation
*
4
Stock Certificate of Mainstreet Financial Corporation
*
10.1
Loan Agreement with Independent Bank
*
10.4
Employee Stock Ownership Plan
**
10.8
Current Director Fee Arrangements
+
10.9
Forbearance Letter from Independent Bank for Holding Company Loan
+
10.10
Forbearance Letter from Independent Bank for ESOP Loan
 
11
Statement re Computation of Earnings
None
14
Code of Conduct and Ethics
++
15
Letter on unaudited interim financial information
None
18
Letter re change in accounting principles
None
19
Reports furnished to security holders
None
20
Other documents to security holders or incorporated by reference
None
22
Published report on matters submitted for shareholder vote
None
23
Consents
None
24
Power of Attorney
None
31.1
Rule 13a–14(a) Certification of Chief Executive Officer
31.1
31.2
Rule 13a–14(a) Certification of Chief Financial Officer
31.2
32
Section 1350 Certification
32
 
*
Filed as an exhibit to the Company's Form SB–2 registration statement filed on September 22, 2006 (File No.333–137523) pursuant to Section 5 of the Securities Act of 1933.
**
Filed as an exhibit to Pre-effective Amendment No. 1 to the Company's Form SB–2 registration statement filed on November 3, 2006 (File No.333–137523) pursuant to Section 5 of the Securities Act of 1933.
+
Filed as an exhibit to the Company’s Form 10-KSB filed on March 30, 2008 (File No. 000-52298).
++
Filed as an exhibit to the Company’s form 10-QSB filed on December 21, 2007 (File No. 000-52298).



 
28
 
 


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 

     
MAINSTREET FINANCIAL CORPORATION
       
       
       
Date:  November 13, 2009
 
By:
/s/  David L. Hatfield
     
David L. Hatfield
     
President and Chief Executive Officer
       
       
       
Date:  November 13, 2009
 
By:
/s/  James R Toburen
     
James R. Toburen
     
Senior Vice President and
     
Chief Financial Officer


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