Mainstreet Bankshares (MREE) 10-Q 2013 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended                    March 31, 2013                                 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the transition period from                                       to                                             

Commission file number            333-86993

MainStreet BankShares, Inc.

(Exact name of registrant as specified in its charter)

Virginia	54-1956616
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1075 Spruce Street, Martinsville, Virginia	24112
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number         (276) 632-8054

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant has (1) 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 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 x        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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨__	Smaller reporting companyx

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes¨        No x

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:           1,713,375 as of May 9, 2013              

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Form 10-Q

Index

		Page No.
	PART I FINANCIAL INFORMATION
Item 1	Financial Statements	1-28
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29-47
Item 3	Quantitative and Qualitative Disclosures About Market Risk N/A	47
Item 4	Controls and Procedures	47
	PART II OTHER INFORMATION
Item 1	Legal Proceedings	48
Item 1A	Risk Factors	48
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3	Defaults Under Senior Securities	48
Item 4	Mine Safety Disclosures	48
Item 5	Other Information	48
Item 6	Exhibits	48
	Signatures	49
	Index to Exhibits	50

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

PART I.FINANCIAL INFORMATION

Item 1. Financial Statements

The financial statements filed as part of Item 1 of Part I are as follows:

1. Consolidated Balance Sheets as of March 31, 2013 (unaudited) and December 31, 2012 (audited).

2. Consolidated Statements of Income for the quarters ended March 31, 2013 (unaudited) and March 31, 2012 (unaudited).

3. Consolidated Statements of Comprehensive Income for the quarters ended March 31, 2013 (unaudited) and March 31, 2012 (unaudited)

4. Consolidated Statements of Cash Flows for the quarters ended March 31, 2013 (unaudited) and March 31, 2012 (unaudited).

5. Notes to Consolidated Financial Statements.

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

	(Unaudited)			(Audited)
	March 31, 2013			December 31, 2012
ASSETS
Cash and due from banks	$	3,253,615		$	3,076,535
Interest-bearing deposits in banks		18,855,530			11,546,938
Federal funds sold		5,382,341			9,414,880
Total Cash and Cash Equivalents		27,491,486			24,038,353
Securities available-for-sale, at fair value		16,882,585			18,836,561
Restricted equity securities		654,600			741,000
Loans held for sale		595,000			432,000
Loans:
Total Gross Loans		130,908,391			134,414,366
Unearned deferred fees and costs, net		69,978			78,300
Loans, net of unearned deferred fees and costs		130,978,369			134,492,666
Less: Allowance for loan losses		(2,430,856	)		(2,602,098	)
Net Loans		128,547,513			131,890,568
Bank premises and equipment, net		1,578,717			1,566,987
Accrued interest receivable		493,928			552,402
Bank owned life insurance		1,070,879			1,061,440
Other real estate owned, net of valuation allowance		649,859			1,441,722
Other assets		2,337,369			2,549,955
TOTAL ASSETS	$	180,301,936		$	183,110,988
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing demand deposits	$	27,907,591		$	22,819,544
Interest bearing deposits		125,786,207			127,759,824
Total Deposits		153,693,798			150,579,368
Repurchase agreements		—			6,000,000
Accrued interest payable and other liabilities		2,160,518			2,281,247
Total Liabilities		155,854,316			158,860,615
Commitments and contingencies		—			—
Shareholders’ Equity:
Preferred stock, no par value, authorized  10,000,000 shares; none issued		—			—
Common stock, no par value, authorized 10,000,000 shares; issued and outstanding 1,713,375 shares at March 31, 2013 and December 31, 2012, respectively		17,866,890			17,866,890
Retained earnings		6,192,783			5,956,926
Accumulated other comprehensive income		387,947			426,557
Total Shareholders’ Equity		24,447,620			24,250,373
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	180,301,936		$	183,110,988

See accompanying notes to consolidated financial statements.

2

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

	Three Months Ended March 31, 2013		Three Months Ended March 31, 2012
Interest and Dividend Income:
Interest and fees on loans	$	1,770,038	$	1,943,378
Interest on interest-bearing deposits		7,140		8,480
Interest on federal funds sold		1,586		3,978
Interest on securities available-for-sale:
Taxable		77,132		133,441
Nontaxable		16,644		9,870
Dividends on restricted equity securities		8,309		7,820
Total Interest and Dividend Income		1,880,849		2,106,967
Interest Expense:
Interest on deposits		286,609		383,948
Interest on repurchase agreements		595		134,149
Total Interest Expense		287,204		518,097
Net Interest Income		1,593,645		1,588,870
Provision for loan losses		187,605		201,283
Net Interest Income After Provision for Loan Losses		1,406,040		1,387,587
Noninterest Income:
Service charges on deposit accounts		69,988		65,001
Mortgage commissions		73,986		29,974
Electronic card fees		43,766		42,131
Investment fee income		41,244		65,338
Income on bank owned life insurance		9,439		27,603
Other fee income and miscellaneous income		27,456		30,495
Total Noninterest Income		265,879		260,542
Noninterest Expense:
Salaries and employee benefits		664,329		724,477
Occupancy and equipment expense		190,187		211,002
Professional fees		60,141		67,988
Outside processing		104,793		128,389
FDIC assessment		53,929		67,067
Franchise tax		54,000		50,001
Regulatory examination fees		26,303		27,700
Other real estate and repossessions		62,238		143,002
Other expenses		113,450		102,411
Total Noninterest Expense		1,329,370		1,522,037
Net Income Before Tax	$	342,549	$	126,092
Income Tax Expense		106,692		28,797
Net Income	$	235,857	$	97,295
Basic Net Income Per Common Share	$	.14	$	.06
Diluted Net Income Per Common Share	$	.14	$	.06

See accompanying notes to consolidated financial statements.

3

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

	Three Months Ended March 31, 2013			Three Months Ended March 31, 2012
Net Income	$	235,857		$	97,295
Other Comprehensive Income (Loss):
Net unrealized holding losses on securities available for sale during the period		(58,500	)		(57,953	)
Deferred income tax benefit on unrealized holding losses on securities available for sale		19,890			19,705
Other Comprehensive Loss		(38,610	)		(38,248	)
Total Comprehensive Income	$	197,247		$	59,047

See accompanying notes to consolidated financial statements.

4

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended March 31, 2013			Three Months Ended March 31, 2012
Cash Flows From Operating Activities
Net income	$	235,857		$	97,295
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		187,605			201,283
Depreciation and amortization		38,711			48,577
Amortization of discounts and premiums, net		51,126			46,597
Payments on executive retirement plan		(140,628	)		—
Loss and impairment on other real estate owned and  repossessions		33,385			122,095
Deferred tax expense		488,201			251,765
Change in loans held for sale		(163,000	)		(578,571	)
(Increase) decrease in accrued interest receivable		58,474			(2,431	)
Increase in other assets		(288,225	)		(260,978	)
Increase in value of bank owned life insurance		(9,439	)		(27,603	)
Change in reserve for unfunded lending commitments		3,970			—
Increase in executive retirement plan accrual		30,180			34,952
Increase (decrease) in accrued interest payable and other liabilities		(14,251	)		106,333
Net cash provided by operating activities		511,966			39,314
Cash Flows From Investing Activities
Purchases of bank premises and equipment		(50,441	)		(104,958	)
Purchases of securities available for sale		(250,000	)		(7,320,842	)
Calls/maturities/repayments of securities available for sale		2,094,350			3,681,755
Redemptions of restricted equity securities		86,400			—
Proceeds from sale of other real estate owned and repossessions		839,728			756,979
Loan originations and principal collections, net		3,106,700			1,895,890
Net cash provided by (used in) investing activities		5,826,737			(1,091,176	)
Cash Flows From Financing Activities
Increase in non-interest bearing deposits		5,088,047			3,062,283
Decrease in interest bearing deposits		(1,973,617	)		(8,225,462	)
Repayment of repurchase agreement		(6,000,000	)		—
Net cash used in financing activities		(2,885,570	)		(5,163,179	)
Net increase (decrease) in cash and cash equivalents	$	3,453,133		$	(6,215,041	)
Cash and cash equivalents at beginning of period		24,038,353			30,471,513
Cash and cash equivalents at end of period	$	27,491,486		$	24,256,472
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	345,068		$	553,025
Cash paid during the period for taxes	$	—		$	—
Unrealized loss on securities available for sale	$	(58,500	)	$	(57,953	)
Transfers between loans, other real estate & other assets	$	48,750		$	2,109,599

See accompanying notes to consolidated financial statements.

5

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

March 31, 2013

Note 1 – Summary of Accounting Policies

(a)      General

The accompanying consolidated financial statements of MainStreet BankShares, Inc. are unaudited. However, in the opinion of management, all adjustments necessary for a fair presentation of the financial statements have been included. All adjustments were of a normal recurring nature, except as otherwise disclosed herein. The consolidated financial statements conform to generally accepted accounting principles and general banking industry practices. The information contained in the footnotes included in MainStreet BankShares, Inc.’s 2012 Annual Report on Form 10-K should be referred to in connection with the reading of these unaudited interim consolidated financial statements.

MainStreet BankShares, Inc. (the “Corporation”, “MainStreet”, or “BankShares”) was incorporated in Virginia on January 14, 1999. The Corporation was primarily organized to serve as a bank holding company. Its first wholly-owned subsidiary was located in Martinsville, Virginia and was sold on March 23, 2005. In 2002, MainStreet organized a second bank subsidiary, Franklin Community Bank, National Association (“Franklin Bank”). On February 8, 2007, MainStreet formed a wholly-owned real estate company, MainStreet RealEstate, Inc. (“MainStreet RE”) for the sole purpose of owning the real estate of the Corporation.

Franklin Bank was organized as a nationally chartered commercial bank and member of the Federal Reserve Bank of Richmond. Franklin Bank opened for business on September 16, 2002. Franklin Bank operates as a locally owned and operated commercial bank emphasizing personal customer service and other advantages incident to banking with a locally owned community bank. Franklin Bank’s primary service area is Franklin County, Town of Rocky Mount and surrounding areas. It currently has three banking offices including its main office.

The Corporation reports its activities as a single business segment. In determining the appropriateness of segment definition, the Corporation considered components of the business about which financial information is available and will evaluate it regularly relative to resource allocation and performance assessment.

(b)      Our accounting policies and basic principles have not changed since the summary disclosure of these in our Annual Report on Form 10-K. Please refer to the Form 10-K for these policies.

Note 2 – Securities

The amortized costs, unrealized gains and losses and approximate market values of investment securities at March 31, 2013 and December 31, 2012 are shown in the following tables. The entire investment portfolio is classified as available-for-sale to preserve maximum liquidity for funding needs.

6

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

March 31, 2013

	March 31, 2013
			Gross		Gross
	Amortized		Unrealized		Unrealized			Approximate
	Cost		Gains		Losses			Market Value
U.S. government sponsored agencies	$	710,735	$	3,440	$	—		$	714,175
Mortgage backed securities		10,753,437		445,351		—			11,198,788
States and political subdivisions		4,916,398		62,694		(9,470	)		4,969,622
Total securities available for sale	$	16,380,570	$	511,485	$	(9,470	)	$	16,882,585

	December 31, 2012
			Gross		Gross
	Amortized		Unrealized		Unrealized			Approximate
	Cost		Gains		Losses			Market Value
U. S. government sponsored agencies	$	1,464,102	$	7,671	$	—		$	1,471,773
Mortgage backed securities		12,130,273		507,264		—			12,637,537
States and political subdivisions		4,681,671		53,683		(8,103	)		4,727,251
Total securities available-for-sale	$	18,276,046	$	568,618	$	(8,103	)	$	18,836,561

All of our mortgage backed securities are either guaranteed by U.S. government agencies or issued by U. S. government sponsored agencies.

The amortized costs and market values of securities available for sale at March 31, 2013, by contractual maturity, are shown in the following table. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Approximate
	Cost		Market Value
Due in one year or less	$	—	$	—
Due after one year but within five years		—		—
Due after five years but within ten years		6,430,215		6,523,465
Due after ten years		9,950,355		10,359,120
	$	16,380,570	$	16,882,585

There were no gross gains or losses recorded on sales and calls of securities available for sale for the three month periods ending March 31, 2013 and March 31, 2012.

7

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

March 31, 2013

Following demonstrates the unrealized loss position of securities available for sale at March 31, 2013 and December 31, 2012.

	March 31, 2013
	Less Than 12 Months					12 Months or More				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Losses			Value		Losses		Value		Losses
States and political  subdivisions	$	1,473,353	$	(9,470	)	$	—	$	—	$	1,473,353	$	(9,470	)
Total temporary Impaired securities	$	1,473,353	$	(9,470	)	$	—	$	—	$	1,473,353	$	(9,470	)

	December 31, 2012
	Less Than 12 Months					12 Months or More				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Losses			Value		Losses		Value		Losses
States and political subdivisions	$	1,182,824	$	(8,103	)	$	—	$	—	$	1,182,824	$	(8,103	)
Total temporarily impaired securities	$	1,182,824	$	(8,103	)	$	—	$	—	$	1,182,824	$	(8,103	)

An impairment is considered “other than temporary” if any of the following conditions are met: the Corporation intends to sell the security, it is more likely than not that the Corporation will be required to sell the security before the recovery of its amortized cost basis, or the Corporation does not expect to recover the security’s entire amortized cost basis (even if the Bank does not intend to sell). At March 31, 2013 and December 31, 2012, there were $1.5 million comprising four securities and $1.2 million comprising three securities, respectively, in securities with unrealized losses based on market prices at the respective dates. Declines in fair value are due to interest rate fluctuations and not due to credit deterioration of the issuers. The Corporation does not have any securities that are considered “other than temporarily impaired” at March 31, 2013 and December 31, 2012.

Federal Reserve Bank stock is included in restricted equity securities and totaled $435,100 at March 31, 2013 and December 31, 2012. The Corporation’s investment in Federal Home Loan Bank (“FHLB”) stock totaled $219,500 and $305,900 at March 31, 2013 and December 31, 2012, respectively, and is also included in restricted equity securities. FHLB stock is generally viewed as a long term investment and as a restricted investment security which is carried at cost, because there is no market for the stock other than the FHLB or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on ultimate recoverability of the par value rather than by recognizing temporary declines in value. Despite the FHLB’s temporary suspension of the repurchases of excess capital stock in earlier years, the Corporation does not consider this investment to be other than temporarily impaired at March 31, 2013 and no impairment has been recognized. FHLB has repurchased excess capital stock during 2013 and 2012 and there is no excess stock at March 31, 2013.

8

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

March 31, 2013

Note 3 – Loans Receivable

The major components of gross loans in the consolidated balance sheets at March 31, 2013 and December 31, 2012 are as follows:

	March 31, 2013		December 31, 2012
Commercial	$	11,090,828	$	10,439,173
Real Estate:
Construction and land development		18,907,816		21,268,316
Residential 1-4 families:
First liens		35,047,422		35,490,285
Junior liens		7,145,878		7,633,851
Home equity lines		6,059,678		6,093,783
Commercial real estate		51,209,907		51,861,252
Consumer		1,446,862		1,627,706
Total Gross Loans	$	130,908,391	$	134,414,366
Unearned deferred fees and costs, net		69,978		78,300
Recorded Investment	$	130,978,369	$	134,492,666

Overdrafts reclassified to loans at March 31, 2013 and December 31, 2012 were $7,089 and $5,287, respectively.

Loan Origination/Risk Management: Franklin Bank’s Board of Directors annually approves and reviews policies and procedures to be utilized as tools by account officers for the purpose of making sound and prudent credit decisions. Every loan transaction is closely evaluated from the perspective of profitability realizing that there is no profit in a loan that becomes a loss. Each credit decision is based on merit and no other factors. Account officers carry a heavy burden of accountability in being assigned the responsibility for the development of Franklin Bank’s loan portfolio by meeting the legitimate credit needs of our customers while also exercising prudence and seasoned judgment. A comprehensive reporting system has been developed to provide senior management timely information related to portfolio performance including growth, delinquency, adversely risk rated, and credit concentrations. The portfolio is constantly reviewed based on segments of concern, past due status, extension of credits along with stress testing the portfolio’s collateral values and debt service coverages for a significant portion of loans within defined loan concentrations. Annually, a loan review plan is developed to identify and mitigate potential weakness in the loan portfolio. Scope is determined based upon a risk assessment of various concentrations and loan product types in which higher risk may exist. The developed plan is presented to the Loan Committee of Franklin Bank’s Board of Directors each year for approval. Overall, the goal is to review 33% of the entire loan portfolio annually. Review segments vary from year to year to ensure a complete cycle of all significant loan product types. Results of each review segment are communicated to the Loan Committee of the Board of Directors of Franklin Bank with a response from Franklin Bank’s senior lender or head of retail lending depending on the product type reviewed.

In general all loans exceeding $100,000 are documented by three years of financial reports in conjunction with review and analysis by a credit analyst independent of the lending approval process. Generally all real estate loans are underwritten based on verified income, or cash flow, and margined at 80% or less depending upon the regulatory supervisory limit. All loans are underwritten based upon analysis of all identified primary and secondary repayment sources.

9

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

March 31, 2013

Construction & Land Development: Emphasis is placed on the estimated absorption period of the project based on the intimate knowledge of local demand and geographic concentrations by appraisers and account officers. Projects are monitored by Franklin Bank’s in-house construction inspector to ensure adherence to project specifications and timely completion. Loan to values are manually tracked to ensure conforming collateral coverage is maintained throughout the development phase. Interest carry abilities are determined by analyzing global cash flow and available liquidity. Due to their complex nature, loans for speculative housing and speculative lot requests are underwritten by Franklin Bank’s business lending group. Terms at origination for speculative lot loans are based on collateral margins and on qualifying the borrower to policy requirements based on a ten year amortization period. Speculative housing loan terms generally are held to eighteen months with allowance made for substantial curtailments.

Commercial Real Estate: Loans are generally underwritten based on verified income or cash flow to ensure a global coverage ratio of at least 1.25. In general, collateral margin is determined based on appraisal or evaluation market value not to exceed 80 percent of appraised market value or cost, which ever is less. All properties receive proper environmental due diligence prior to funding of the credit. Account officers perform and document a market analysis which may include data on competing businesses and projects. When applicable, market analysis data may be obtained from independent sources. Cash flows and collateral margins are appropriately stress tested. Terms generally range from five to fifteen years, however, may be longer based on approval from Franklin Bank’s President and Chief Credit Officer.

Commercial Loans: Loans are generally underwritten based on verified income or cash flow to ensure global debt service coverage ratio of at least 1.25. Terms can range up to seven years based on loan purpose and collateral offered. Based on policy, credit lines have maturities of one year. Generally inventory loans are margined at 50% while equipment loans, depending on age of collateral, range from 90%, if new, to 80%, if used. Receivables are margined at 80% based on the aging of receivables outstanding sixty days or less.

Consumer /Residential 1-4 Families and Equity Lines: Loans are generally underwritten based on a maximum debt to income ratio of 40 percent gross. Incomes are verified for all secured loans exceeding $35,000 and unsecured loans totaling $10,000 or more. Policy requires income verification to be documented for all real estate loans. Collateral margins and terms for non-real estate collateral are determined and made available to retail lenders by Franklin Bank’s Chief Credit Officer. Cash flows for all self employed borrowers are determined by Franklin Bank’s independent credit analyst. Policy defines unsecured loan terms at a maximum of thirty six months while individual unsecured lines are underwritten to maturities of less than one year with the line amount being based on a percentage of available liquidity and net worth. Construction loans for individuals are underwritten to policy based on cost overruns of at least fifteen percent. Debt to income ratios for equity lines are underwritten based on the borrower paying 1.5% of the total available line monthly. All equity lines are reviewed annually and filtered based on updated credit scores, average percentage drawn and delinquency. “Watch” accounts are identified based on filters and then individually reviewed by the responsible account officer.

Note 4 – Allowance for Loan Losses

Changes in the allowance for loan losses for the threemonths ended March 31, 2013 and 2012are as follows:

	2013			2012
Balance at beginning of year	$	2,602,098		$	3,272,945
Provision for loan losses		187,605			201,283
Recoveries		10,741			6,094
Charge-offs		(369,588	)		(859,543	)
Balance at period end	$	2,430,856		$	2,620,779

10

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

March 31, 2013

A breakdown of the allowance by loan segment for the three months ended March 31, 2013 is as follows:

				Real Estate
				Construction			Residential 1-4 Families						Home			Commercial
				and Land			First			Junior			Equity			Real
	Commercial			Development			Liens			Liens			Lines			Estate			Consumer			Unallocated		Total
Beginning Balance	$	108,336		$	767,018		$	701,668		$	134,847		$	88,411		$	740,073		$	11,745		$	50,000	$	2,602,098
Charge-offs		(10,226	)		(282,261	)		—			(372	)		(3,281	)		—			(73,448	)		—		(369,588	)
Recoveries		—			4,023			—			3,205			796			—			2,717			—		10,741
Provision		56,530			102,671			(31,585	)		(26,964	)		10,098			(22,769	)		69,624			30,000		187,605
Ending Balance	$	154,640		$	591,451		$	670,083		$	110,716		$	96,024		$	717,304		$	10,638		$	80,000	$	2,430,856

			March 31, 2013
			Real Estate
			Construction			Residential 1-4 Families				Home	Commercial
			and Land			First	Junior			Equity	Real
	Commercial		Development			Liens	Liens			Lines	Estate		Consumer		Unallocated		Total
Allowance for loan losses:
Ending Balance:
Individually evaluated for impairment	$	—	$	75,489	$	9,960	$	—	$	9,052	$	—	$	—	$	—	$	94,501
Ending Balance:
Collectively evaluated for impairment		154,640		515,962		660,123		110,716		86,972		717,304		10,638		80,000		2,336,355
	$	154,640	$	591,451	$	670,083	$	110,716	$	96,024	$	717,304	$	10,638	$	80,000	$	2,430,856

11

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

March 31, 2013

			March 31, 2013 Real Estate
			Construction		Residential 1-4 Families				Home		Commercial
			and Land		First		Junior		Equity		Real				Gross
	Commercial		Development		Liens		Liens		Lines		Estate		Consumer		Loans
Recorded investment in loans:
Ending Balance:
Individually evaluated for impairment	$	207,679	$	1,255,442	$	1,420,882	$	565,162	$	82,125	$	342,806	$	—	$	3,874,096
Ending Balance:
Collectively evaluated for impairment		10,883,149		17,652,374		33,626,540		6,580,716		5,977,553		50,867,101		1,446,862		127,034,295
	$	11,090,828	$	18,907,816	$	35,047,422	$	7,145,878	$	6,059,678	$	51,209,907	$	1,446,862	$	130,908,391

A breakdown of the allowance for loan losses by loan segment for the year ended December 31, 2012 is as follows:

				Real Estate
				Construction			Residential 1-4 Families						Home			Commercial
				and Land			First			Junior			Equity			Real
	Commercial			Development			Liens			Liens			Lines			Estate			Consumer			Unallocated		Total
Beginning Balance	$	154,991		$	902,644		$	1,100,139		$	174,809		$	98,582		$	824,759		$	11,911		$	5,110	$	3,272,945
Charge-offs		(186	)		(257,796	)		(911,535	)		(143,849	)		—			—			(16,785	)		—		(1,330,151	)
Recoveries		1,842			8,377			134,305			11,525			3,374			—			13,624			—		173,047
Provision		(48,311	)		113,793			378,759			92,362			(13,545	)		(84,686	)		2,995			44,890		486,257
Ending Balance	$	108,336		$	767,018		$	701,668		$	134,847		$	88,411		$	740,073		$	11,745		$	50,000	$	2,602,098

12

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

March 31, 2013

			December 31, 2012 Real Estate
			Construction		Residential 1-4 Families				Home		Commercial
			and Land		First		Junior		Equity		Real
	Commercial		Development		Liens		Liens		Lines		Estate		Consumer		Unallocated		Total
Allowance for loan losses:
Ending Balance:
Individually evaluated for impairment	$	—	$	268,850	$	23,122	$	31	$	—	$	—	$	—	$	—	$	292,003
Ending Balance:
Collectively evaluated for impairment		108,336		498,168		678,546		134,816		88,411		740,073		11,745		50,000		2,310,095
	$	108,336	$	767,018	$	701,668	$	134,847	$	88,411	$	740,073	$	11,745	$	50,000	$	2,602,098

			December 31, 2012 Real Estate
			Construction		Residential 1-4 Families				Home		Commercial
			and Land		First		Junior		Equity		Real				Gross
	Commercial		Development		Liens		Liens		Lines		Estate		Consumer		Loans
Recorded investment in loans:
Ending Balance:
Individually evaluated for impairment	$	212,738	$	1,100,584	$	938,556	$	225,669	$	—	$	346,807	$	—	$	2,824,354
Ending Balance:
Collectively evaluated for impairment		10,226,435		20,167,732		34,551,729		7,408,182		6,093,783		51,514,445		1,627,706		131,590,012
	$	10,439,173	$	21,268,316	$	35,490,285	$	7,633,851	$	6,093,783	$	51,861,252	$	1,627,706	$	134,414,366

13

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

March 31, 2013

An age analysis of past due loans as of March 31, 2013 is as follows:

													Accruing Loans
	Loans		Loans		Loans 90								90 or More Days		Nonaccrual Loans
	30-59 Days Past Due		60-89 Days Past Due		Or More Days Past Due		Total Past Due Loans		Current Loans		Gross Loans		Past Due (Included in Past Dues)		(Included in Past Dues & Current)
Commercial	$	49,238	$	—	$	—	$	49,238	$	11,041,590	$	11,090,828	$	—	$	—
Real Estate:
Construction and land development		726,878		—		471,386		1,198,264		17,709,552		18,907,816		—		688,064
Residential 1-4 Families
First Liens		1,170,680		—		784,933		1,955,613		33,091,809		35,047,422		397,723		790,045
Junior Liens		119,503		394,934		—		514,437		6,631,441		7,145,878		—		74,326
Home Equity lines		—		—		—		—		6,059,678		6,059,678		—		82,125
Commercial Real Estate		406,590		—		—		406,590		50,803,317		51,209,907		—		—
Consumer		4,718		—		—		4,718		1,442,144		1,446,862		—		—
	$	2,477,607	$	394,934	$	1,256,319	$	4,128,860	$	126,779,531	$	130,908,391	$	397,723	$	1,634,560

An age analysis of past due loans as of December 31, 2012 is as follows:

													Accruing Loans
													90 or More Days
	Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Loans 90 Or More Days Past Due		Total Past Due Loans		Current Loans		Gross Loans		Past Due (Included in Past Dues)		Nonaccrual Loans (Included in Past Dues & Current)
Commercial	$	1,612	$	—	$	—	$	1,612	$	10,437,561	$	10,439,173	$	—	$	—
Real Estate:
Construction and land development		338,195		88,022		364,099		790,316		20,478,000		21,268,316		3,485		447,542
Residential 1-4 Families
First Liens		751,946		—		291,682		1,043,628		34,446,657		35,490,285		—		938,556
Junior Liens		19,000		—		128,905		147,905		7,485,946		7,633,851		—		129,591
Home Equity lines		—		—		—		—		6,093,783		6,093,783		—		—
Commercial Real Estate		329,921		—		—		329,921		51,531,331		51,861,252		—		—
Consumer		4,262		—		—		4,262		1,623,444		1,627,706		—		—
	$	1,444,936	$	88,022	$	784,686	$	2,317,644	$	132,096,722	$	134,414,366	$	3,485	$	1,515,689

14

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

March 31, 2013

Impaired loans at March 31, 2013 are as follows:

	Unpaid		Recorded		Recorded
	Contractual		Investment		Investment				Average		Interest
	Principal		with Related		with No Related		Related		Recorded		Income
	Balance		Allowance		Allowance		Allowance		Investment		Recognized
Commercial	$	207,679	$	—	$	207,679	$	—	$	210,208	$	—
Real Estate:
Construction and land development		1,264,183		525,900		729,542		75,489		1,178,014		—
Residential 1-4 Families
First Liens		1,426,323		142,910		1,277,972		9,960		1,179,718		—
Junior Liens		568,793		—		565,162		—		395,415		—
Home Equity lines		82,125		82,125		—		9,052		41,063		263
Commercial Real Estate		342,806		—		342,806		—		344,807		—
Consumer		—		—		—		—		—		—
	$	3,891,909	$	750,935	$	3,123,161	$	94,501	$	3,349,225	$	263

Impaired loans at December 31, 2012 are as follows:

	Unpaid		Recorded		Recorded
	Contractual		Investment		Investment				Average		Interest
	Principal		with Related		with No Related		Related		Recorded		Income
	Balance		Allowance		Allowance		Allowance		Investment		Recognized
Commercial	$	212,738	$	—	$	212,738	$	—	$	170,618	$	14,359
Real Estate:
Construction and land  development		1,345,286		268,850		831,735		268,850		1,044,368		17,765
Residential 1-4 Families
First Liens		943,996		238,722		699,833		23,122		2,700,973		17,067
Junior Liens		229,886		52,031		173,638		31		390,654		10,898
Home Equity lines		—		—		—		—		77,775		—
Commercial Real Estate		346,807		—		346,807		—		1,259,284		13,608
Consumer		—		—		—		—		20,098		—
	$	3,078,713	$	559,603	$	2,264,751	$	292,003	$	5,663,770	$	73,697

15

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

March 31, 2013

There were no additional loans designated as troubled debt restructuring in the first quarter of 2013 or 2012. There were no troubled debt restructurings modified during the prior twelve months that defaulted during the periods ended March 31, 2013 and March 31, 2012.

At March 31, 2013 and December 31, 2012 the balance in loans under the terms of troubled debt restructurings not included in nonaccrual loans was $1,442,336 and $1,305,180, respectively. Troubled debt restructurings (not on nonaccrual) actually increased from December 31, 2012 to March 31, 2013 due to the placement of one restructured credit back to accrual status in March of 2013. These loans did not have any additional commitments at March 31, 2013 and December 31, 2012, respectively. Loan restructurings generally occur when a modification that would otherwise not be considered is granted to the borrower having financial difficulties. These loans may continue to accrue interest as long as the borrower complies with the revised terms and conditions and has demonstrated repayment performance with the modified terms. The borrowers were complying with the modified terms of their contracts at March 31, 2013 and December 31, 2012, respectively. Troubled debt restructurings are included in the impaired loan disclosures.

The following table describes the interest earned, reflected in income and lost for the periods.

	March 31, 2013		March 31, 2012
Interest that would have been  earned	$	33,087	$	111,091
Interest reflected in income		263		73
Lost interest	$	32,824	$	111,018

The Corporation’s internally assigned grades for credit quality are as follows:

Prime (1.00)

Exceptional credits are of the highest quality. These loans are supported by large, well-established borrowers with excellent financial stability and strength, and may be secured by cash or cash equivalents. Where applicable, guarantors have substantial net worth and personal cash flow, and could easily fulfill their obligation should the need arise.

Good (2.00)

Superior credits are supported by well-established borrowers with excellent financial stability and strength. The borrower’s cash flow, liquidity, and equity are more than ample. These credits may be secured by cash or cash equivalents. For loans with personal guarantees, the guarantors are high net worth individuals, and have the resources available to satisfy their obligation if necessary.

Acceptable (3.00)

Loans in this category are supported by borrowers and guarantors that are financially sound. Cash flow, liquidity and equity are sufficient to provide a comfortable margin in the event of short-term economic disturbances. Assets pledged as collateral would provide a dependable secondary source of repayment.

Pass/Watch (4.00)

Credits in this category present the maximum acceptable risk for new facilities. Borrowers generate enough cash for debt service needs, but may not have sufficient resources to weather short-term market fluctuations. Management may lack depth or experience, and industry volatility may be an issue. Where applicable, guarantors have sufficient resources to provide an additional margin of protection.

16

MAINSTREET BANKSHARES, INC.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

March 31, 2013

Special Mention (5.00)

Assets in this category demonstrate signs of potential weakness, which, if uncorrected, could result in default. The borrower’s liquidity or equity may be marginal, trends in cash flow and profitability may point to a weakening financial condition, or the borrower’s industry may be slightly unstable or showing early indications of decline. Collateral may be illiquid or provide only a relatively small margin. Migration analysis data is performed and updated quarterly on these loans. It is based on loans downgraded originally into this category. Our loss factor is determined based on charge-offs during the quarter divided by the balance of special mention loans at the beginning of the quarter. This is then increased by the qualitative factors which increases the applied loss factor to 3%.

Substandard (6.00)

Loans in this category present an unacceptable credit risk. Borrowers and guarantors may be financially weak, and may lack the sufficient resources to adequately service debt. The abilities of management and industry stability may also be of concern. Collateral may be lacking in quality or liquidity, and offers little additional protection. Migration analysis data is performed and updated quarterly on these loans. It is based on loans downgraded originally into this category. Our loss factor is determined based on charge-offs during the quarter divided by the balance of substandard loans at the beginning of the quarter. This is then increased by the qualitative factors which increases the applied loss factor to 8%. This does not apply to impaired loans where a specific reserve is determined based on the loss, if any, that is calculated.

Doubtful (7.00)

These loans have an extremely high probability of loss, though the timing and magnitude of the loss may remain unclear. Borrowers and guarantors exhibit major financial shortcomings, and clearly lack the sufficient resources to adequately service debt or honor their commitments. Collateral is lacking in quality or liquidity, and offers little, if any, additional protection.

Loss (8.00)

The probability of collection on these credits is so low that they may be properly classified as uncollectible.

Generally, consumer loans, home equity lines, and residential 1-4 family loans are not risk rated and considered a pass credit unless they are related to a risk rated commercial loan relationship or exhibit criticized asset characteristics.

17

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

March 31, 2013

			March 31, 2013 Real Estate
			Construction		Residential 1-4 Families				Home		Commercial				Gross Loans by
Internal Risk Rating Grades	Commercial		And Land Development		First Liens		Junior Liens		Equity Lines		Real Estate		Consumer		Internal Risk Rating Grade
Grade:
Pass	$	10,171,800	$	14,821,481	$	31,233,247	$	6,302,958	$	5,972,683	$	44,560,962	$	1,444,497	$	114,507,628
Special Mention		183,741		564,509		579,877		193,089		—		4,387,833		—		5,909,049
Substandard		735,287		2,995,926		3,091,388		649,831		4,870		2,261,112		2,365		9,740,779
Doubtful		—		525,900		142,910		—		82,125		—		—		750,935
Loss		—		—		—		—		—		—		—		—
	$	11,090,828	$	18,907,816	$	35,047,422	$	7,145,878	$	6,059,678	$	51,209,907	$	1,446,862	$	130,908,391

			December 31, 2012 Real Estate
			Construction		Residential 1-4 Families				Home		Commercial				Gross Loans by
Internal Risk Rating Grades	Commercial		And Land Development		First Liens		Junior Liens		Equity Lines		Real Estate		Consumer		Internal Risk Rating Grade
Grade:
Pass	$	10,077,178	$	18,038,151	$	32,046,560	$	6,719,907	$	5,984,847	$	45,339,487	$	1,624,080	$	119,830,210
Special Mention		169,616		658,199		943,993		228,364		—		4,014,141		—		6,014,313
Substandard		192,379		2,571,966		2,261,010		685,580		108,936		2,507,624		3,626		8,331,121
Doubtful		—		—		238,722		—		—		—		—		238,722
Loss		—		—		—		—		—		—		—		—
	$	10,439,173	$	21,268,316	$	35,490,285	$	7,633,851	$	6,093,783	$	51,861,252	$	1,627,706	$	134,414,366

18

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

March 31, 2013

Note 5 – Borrowings

The Corporation has the ability to borrow from Federal Home Loan Bank of Atlanta (“FHLB”). Borrowing capacity is secured by a blanket lien on loans secured by commercial real estate and loans secured by 1-4 family first liens, second liens, and equity lines. There were no FHLB advances outstanding at March 31, 2013 and December 31, 2012.

There were no overnight federal funds purchased at March 31, 2013 and December 31, 2012.

The Corporation has an internal Corporate Cash Management account for customers to sweep their excess demand deposit accounts on an overnight basis in order to earn interest. This account is not FDIC insured but the Corporation is required to pledge agency funds at 100% towards these balances. There were no Corporate Cash Management sweep accounts at March 31, 2013 and December 31, 2012, respectively.

Note 6 – Repurchase Agreements

The Corporation entered into a repurchase agreement with Barclays Capital on January 2, 2008 in the amount of $6,000,000. The repurchase date was January 2, 2013. The interest rate was fixed at 3.57% until maturity or until it was called. Beginning January 2, 2009 the repurchase agreement became callable and could have been called quarterly with two business days prior notice. Interest was payable quarterly. The repurchase agreement was collateralized by agency mortgage backed securities.

Note 7 – Net Income Per Share

The following tables show the weighted average number of shares used in computing earnings per common share and the effect on weighted average number of shares of diluted potential common stock. Potential dilutive common stock had no effect on income available to common shareholders.

	Three Months Ended				Three Months Ended
	March 31, 2013				March 31, 2012
	Shares		Per Share Amount		Shares		Per Share Amount
Earnings per common share, basic		1,713,375	$	.14		1,713,375	$	.06
Effect of dilutive securities:		—				—
Stock options and warrants
Earnings per common share, diluted		1,713,375	$	.14		1,713,375	$	.06

Options and warrants not included in the calculation of diluted earnings per share because they were anti-dilutive were 161,272 for the year-to-date periods ending March 31, 2013 and 2012, respectively.

Note 8 – Stock Options and Warrants

The shareholders of MainStreet approved the 2004 Key Employee Stock Option Plan, (the “Plan”), at its Annual Meeting on April 15, 2004. The Plan permitted the grant of Non-Qualified Stock Options and Incentive Stock Options to persons designated as “Key Employees” of BankShares or its subsidiaries. The Plan was approved by the Board of Directors as of January 21, 2004 and terminated on January 21, 2009, except with respect to awards made prior to and outstanding on that date which remain valid in accordance with their terms. Option awards were granted with an exercise price equal to the market value of MainStreet’s stock at the date of grant. The options

19

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

March 31, 2013

issued in 2007 and 2006 had a vesting period of three years and have a ten year contractual term. The options issued in 2005 vested immediately upon grant and have a ten year contractual term. All share awards provided for accelerated vesting if there was a change in control (as defined in the Plan). The maximum number of shares that could have been issued under the Plan could not exceed 150,700. As of March 31, 2013, there were 136,527 stock options granted under this Plan of which 822 have been exercised and 7,433 were forfeited.

Options in the amount of 33,000, all of which are vested and exercisable, have been granted at the then fair market value of $9.55 to a former employee.

As of March 31, 2013 the Corporation has reserved 161,272 shares of authorized but unissued shares of common stock related to the stock option agreements.

Following is a status and summary of changes in stock options during the three months ended March 31, 2013:

					Weighted
			Weighted		Average
	Three Month		Average		Remaining		Aggregate
	Period Ended		Exercise		Contractual		Intrinsic
	March 31, 2013		Price		Term		Value
Outstanding at Beginning of year		161,272	$	12.17
Granted		—		—
Exercised		—		—
Forfeited		—		—
Expired		—		—
Outstanding at March 31, 2013		161,272	$	12.17		1.58	$	—
Exercisable at March 31, 2013		161,272	$	12.17		1.58	$	—

The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on March 31, 2013. This amount changes based on changes in the market value of the Corporation’s stock.

As of March 31, 2013 and 2012, there was no unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan.

As of March 31, 2013, stock options and warrants outstanding and exercisable are summarized as follows:

		Stock Options
Range of		and Warrants		Remaining
Exercise		Outstanding		Contractual
Prices		And Exercisable		Life
	9.55		33,000		.25
	12.09		49,403		.75
	12.09		43,977		2.65
	12.09		9,066		2.75
	15.00		5,796		.75
	15.00		7,464		4.70
	16.75		6,050		.75
	16.75		6,516		3.75
$	9.55 - $16.75		161,272

20

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

March 31, 2013

Note 9 – Financial Instruments With Off-Balance-Sheet Risk

In the normal course of business to meet the financing needs of its customers, BankShares is a party to financial instruments with off-balance-sheet risk. These financial instruments involve commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.

The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit is represented by the contractual amount of those instruments. The same credit policy is used in making commitments as is used for on-balance-sheet risk. At March 31, 2013, and December 31, 2012 outstanding commitments to extend credit including letters of credit were$17,070,903 and $15,726,309, respectively.

	March 31, 2013		December 31, 2012
Commercial	$	3,732,297	$	3,507,973
Real Estate:
Construction and land development		1,703,475		1,496,661
Residential 1-4 families
First liens		1,539,192		1,046,761
Junior liens		248,603		209,253
Home Equity lines		7,709,318		7,979,295
Commercial real estate		1,694,111		1,062,715
Consumer		443,907		423,651
Total Outstanding Commitments	$	17,070,903	$	15,726,309

There are no commitments to extend credit on impaired loans.  Commitments to extend credit are agreements to lend to a customer as long as there is no breach of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  The commitments may expire without ever being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash outlays for the Corporation.

21

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

March 31, 2013

Note 10 – Fair Value Measurements

Generally accepted accounting principles specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect MainStreet’s market assumptions. The three levels of the fair value hierarchy based on these two types of inputs are as follows:

Level 1 –	Valuation is based on quoted prices in active markets for identical assets and liabilities.
Level 2 –	Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
Level 3 –	Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

The following describes the valuation techniques used by MainStreet to measure certain assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). We only utilize third party vendors to provide fair value data for the purposes of recording amounts related to our fair value measurements of our securities available for sale portfolio. We obtain SSAE16 reports from our third party vendor on an annual basis. Our third party vendor also utilizes a reputable pricing company for security market data that utilizes a matrix pricing model. For government sponsored agencies the model gathers information from market sources and integrates relative credit information, observed market movements and sector news. For agency mortgage backed securities the model incorporates the current weighted average maturity and takes into account additional pool level information supplied directly by the agency or government sponsored enterprise. The third party vendor system has controls and edits in place for month-to-month market checks and zero pricing. We make no adjustments to the pricing service data received for our securities available for sale.

22

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

March 31, 2013

The following table presents the balances of financial assets measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012:

			Fair Value Measurements at March 31, 2013 Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Balance as of		Assets		Inputs		Inputs
Description	March 31, 2013		(Level 1)		(Level 2)		(Level 3)
Available-for-sale securities:
U. S. government sponsored agencies	$	714,175	$	—	$	714,175	$	—
Mortgage backed securities		11,198,788		—		11,198,788		—
States and political subdivisions		4,969,622		—		4,969,622		—
Total available-for-sale securities		16,882,585		—		16,882,585		—
Total assets at fair value	$	16,882,585	$	—	$	16,882,585	$	—

			Fair Value Measurements at December 31, 2012 Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Balance as of		Assets		Inputs		Inputs
Description	December 31, 2012		(Level 1)		(Level 2)		(Level 3)
Available-for-sale securities:
U. S. government sponsored agencies	$	1,471,773	$	—	$	1,471,773	$	—
Mortgage backed securities		12,637,537		—		12,637,537		—
States and political  subdivisions		4,727,251		—		4,727,251		—
Total available-for-sale securities		18,836,561		—		18,836,561		—
Total assets at fair value	$	18,836,561	$	—	$	18,836,561	$	—

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following describes the valuation techniques used by MainStreet to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:

23

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

March 31, 2013

Loans held for sale: Loans held for sale are recorded at fair value on a nonrecurring basis which is the carrying value. Loans held for sale, generally, are closed and sold within two weeks.

Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing recent appraisals conducted by an independent, licensed appraiser outside of MainStreet using observable market data (Level 2). However, if the appraisal of the real estate property is not current, or has been discounted, then the fair value is considered Level 3. It is also considered Level 3 if an evaluation is conducted by Franklin Bank, rather than by a third party. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

Other Real Estate Owned (OREO): Foreclosed assets are adjusted to fair value upon transfer of the loans to OREO. Subsequently, OREO is carried at the lower of carrying value or fair market value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on a recent appraisal conducted by an independent licensed appraisal using observable market data, the Corporation records the OREO as nonrecurring Level 2. When the appraisal of the real estate property is not current, or as been discounted, the Corporation records the OREO as nonrecurring Level 3. It is also considered Level 3 if an evaluation is conducted by Franklin Bank, rather than by a third party. Any fair value adjustments are recorded as other real estate and repossessions expense on the Consolidated Statements of Income.

The following table summarizesMainStreet’s assets that were measured at fair value on a nonrecurring basis as of March 31, 2013 and December 31, 2012.

			Carrying value at March 31, 2013
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Balance as of		Assets		Inputs		Inputs
Description	March 31, 2013		(Level 1)		(Level 2)		(Level 3)
Loans held for sale	$	595,000	$	—	$	595,000	$	—
Impaired loans		910,008		—		523,483		386,525
Other real estate owned		649,859		—		—		649,859
Total assets at fair value	$	2,154,867	$	—	$	1,118,483	$	1,036,384

24

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

March 31, 2013

			Carrying value at December 31, 2012
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Balance as of		Assets		Inputs		Inputs
Description	December 31, 2012		(Level 1)		(Level 2)		(Level 3)
Loans held for sale	$	432,000	$	—	$	432,000	$	—
Impaired loans		455,820		—		—		455,820
Other real estate owned		1,441,722		—		—		1,441,722
Total assets at fair value	$	2,329,542	$	—	$	432,000	$	1,897,542

The following table displays quantitative information about Level 3 Fair Value Measurements for March 31, 2013:

	Quantitative information about Level 3 Fair Value Measurements for March 31, 2013
	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Assets
Impaired loans	$	386,525	Internal evaluations	Internal evaluations		6%-29%    (15%)
Other real estate owned	$	478,399	Discounted appraised value	Selling cost/discount		57% - 59%  (57%)
	$	171,460	Internal evaluations	Market discount		52% - 84%  (61%)

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

(a) Short-Term Financial Instruments

The carrying value of short-term financial instruments including cash and cash equivalents, federal funds sold and interest-bearing deposits in domestic banks approximate the fair value of these instruments. These financial instruments generally expose the Corporation to limited credit risk and have no stated maturity or have an average maturity of 30-45 days and carry interest rates which approximate market value.

(b) Securities Available-for-Sale

The fair value of investments is estimated based on quoted market prices or dealer quotes.

(c) Restricted Equity Securities

The carrying value of restricted equity securities approximates fair value based on the redemption provisions of the appreciable entities.

(d) Loans Held for Sale

The carrying value of these loans approximates the fair value. These loans close in our name but are generally sold within a two-week period.

(e) Loans

Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, real estate – commercial, real estate – construction, real estate – mortgage and other consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories. The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan as well as estimates for operating expenses and prepayments. The estimate of maturity is based on management’s assumptions with repayment for each loan classification, modified, as required, by an estimate of the effect of current economic and lending

conditions.

25

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

March 31, 2013

(f) Accrued Interest

The carrying amounts of accrued interest approximate fair value.

(g) Bank Owned Life Insurance

The carrying amount is a reasonable estimate of fair value.

(h) Deposits

The fair value of demand, interest checking, savings and money market deposits is the amount payable on demand. The fair value of fixed maturity time deposits and certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities and repayment characteristics.

(i) Repurchase Agreements

The fair value of repurchase agreements is estimated using a discounted cash flow calculation that applies contracted interest rates being paid on the debt to the current market interest rate of similar debt.

(j) Commitments to Extend Credit and Standby Letters of Credit

The only amounts recorded for commitments to extend credit and standby letters of credit are the fees arising from these unrecognized financial instruments. The fair value of these commitments has been determined to be immaterial.

The carrying values and estimated fair values of financial instruments at March 31, 2013 and December 31, 2012 are as follows:

			Fair Value Measurements at March 31, 2013 using
			Quoted  Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying Value		Level 1		Level 2		Level 3		Fair Value
FINANCIAL ASSETS:
Cash and due from banks	$	3,253,615	$	3,253,615	$	—	$	—	$	3,253,615
Interest-bearing deposits in banks		18,855,530		18,855,530		—		—		18,855,530
Federal funds sold		5,382,341		5,382,341		—		—		5,382,341
Securities available-for-sale		16,882,585		—		16,882,585		—		16,882,585
Restricted equity securities		654,600		—		654,600		—		654,600
Loans held for sale		595,000		—		595,000		—		595,000
Loans, net		128,547,513		—		523,483		128,414,362		128,937,845
Accrued interest receivable		493,928		—		493,928		—		493,928
Bank owned life insurance		1,070,879		—		1,070,879		—		1,070,879
FINANCIAL LIABILITIES:
Deposits:
Non-interest bearing demand deposits	$	27,907,591	$	—	$	27,907,591	$	—	$	27,907,591
Interest bearing deposits		125,786,207		—		126,319,738		—		126,319,738
Accrued interest payable		118,272		—		118,272		—		118,272

26

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

March 31, 2013

			Fair Value measurements at December 31, 2012 using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Carrying Value		Level 1		Level 2		Level 3		Fair Value
FINANCIAL ASSETS:
Cash and due from banks	$	3,076,535	$	3,076,535	$	—	$	—	$	3,076,535
Interest-bearing deposits in other banks		11,546,938		11,546,938		—		—		11,546,938
Federal funds sold		9,414,880		9,414,880		—		—		9,414,880
Securities available-for-sale		18,836,561		—		18,836,561		—		18,836,561
Restricted equity securities		741,000		—		741,000		—		741,000
Loans held for sale		432,000		—		432,000		—		432,000
Loans, net		131,890,568		—		—		132,468,434		132,468,434
Accrued interest receivable		552,402		—		552,402		—		552,402
Bank owned life insurance		1,061,440		—		1,061,440		—		1,061,440
FINANCIAL LIABILITIES:
Deposits:
Non-interest bearing demand deposits	$	22,819,544		—		22,819,544		—	$	22,819,544
Interest bearing deposits		127,759,824		—		128,335,646		—		128,335,646
Repurchase agreements		6,000,000		—		6,001,070		—		6,001,070
Accrued interest payable		176,136		—		176,136		—		176,136

Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Corporation’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on-and-off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.

The Corporation assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Corporation’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Corporation. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Corporation’s overall interest rate risk.

27

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

March 31, 2013

Note 11 – Contingencies and Other Matters

The Corporation currently is not involved in any litigation matters outside the normal operations associated with problem credits.

Note 12 – Subsequent Events

In preparing these financial statements, the Corporation has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.

Note 13 – Regulatory

On April 16, 2009, Franklin Bank entered into a formal agreement (“Agreement”) with The Comptroller of the Currency (“OCC”). The Agreement required Franklin Bank to perform certain actions within designated time frames. The Agreement is intended to demonstrate the Bank’s commitment to review/enhance certain aspects of various policies. The Agreement describes Franklin Bank’s commitment to enhance practices related to credit administration and liquidity. While Franklin Bank expects to achieve full compliance and has submitted the responses required in the respective time frames, we are required to show sustained performance with various requirements under the Agreement and compliance with certain obligations are dependent, in part, on factors that we may not control. Therefore, we cannot assume that we will be able to achieve full compliance.

On June 17, 2009, MainStreet BankShares, Inc. entered into a Memorandum of Understanding (“MOU”) with the Federal Reserve Bank of Richmond (“Federal Reserve”). The MOU required the bank holding company to utilize its financial and managerial resources to assist Franklin Bank in functioning in a safe and sound manner. The MOU restricted MainStreet from declaring or paying any dividends without the prior written approval of the Federal Reserve. Under the MOU, MainStreet cannot incur or guarantee any debt or redeem or purchase any shares of its common stock without the prior written consent of the Federal Reserve. On January 26, 2011, we entered into a new MOU with the Federal Reserve which contained the same terms of the previous MOU (which was terminated) but added provisions regarding compliance with certain laws and regulations as follows. The bank holding company is required to comply with the restrictions on indemnification and severance payments of section 18(k) of the FDI Act (12 U.S.C. 1828(k)) and Part 359 of the Federal Deposit Insurance Corporation’s regulations (12 C.F.R. Part 359). Also, the Corporation may not appoint any individual to the board or employ or change the responsibilities of any individual as senior executive officer if the Federal Reserve notifies the Corporation of disapproval within the required time limits. MainStreet has not paid or declared any dividends or incurred or guaranteed any debt. Management believes the holding company is appropriately using its financial and managerial resources to assist Franklin Bank to function in a safe and sound manner.

Note 14 – Changes in Accumulated Other Comprehensive Income

	Net Unrealized			Adjustments		Accumulated
	Gains on Securities  available for sale			Related to Post Retirement Benefits		Other Comprehensive Income
Balance at December 31, 2012	$	369,940		$	56,617	$	426,557
Other comprehensive loss		(38,610	)		—		(38,610	)
Balance at March 31, 2013	$	331,330		$	56,617	$	387,947

28

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

March 31, 2013

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those reflected in such forward-looking statements, which are representative only on the date hereof. Readers of this report should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed throughout this report. The Corporation takes no obligation to update any forward-looking statements contained herein. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) competitive pressures among depository and other financial institutions may increase significantly; (2) changes in the interest rate environment may reduce margins; (3) general economic conditions, either nationally or regionally, may be less favorable than expected that could result in a deterioration of credit quality or a reduced demand for credit; and (4) legislative or regulatory changes including changes in accounting standards, may adversely affect the business.

General

We use the term “MainStreet” or “Corporation” to refer to MainStreet BankShares, Inc. We use the term “Bank” or “Franklin Bank” to refer to Franklin Community Bank, National Association. We use “we”, “us”, or “our” to refer to the consolidated businesses of the Corporation and its subsidiaries unless the content indicates otherwise. MainStreet was incorporated on January 14, 1999 in the Commonwealth of Virginia and is the bank holding company for its subsidiary bank, Franklin Community Bank, National Association (“Franklin Bank’) which serves the Franklin County area of Virginia. MainStreet provides a wide variety of banking services through Franklin Bank. Franklin Bank operates as a locally-owned and operated commercial bank emphasizing personal customer service and other advantages incident to banking with a locally owned community bank. It relies on local advertising and the personal contacts of its directors, employees, and shareholders to attract customers and business to the Bank. Franklin Bank has three banking offices in Rocky Mount and Franklin County. MainStreet also has a wholly-owned real estate company, MainStreet RealEstate, Inc. which owns the real estate of the Corporation. MainStreet RealEstate, Inc. owns the Union Hall (Southlake) branch of Franklin Bank.

On April 16, 2009, Franklin Bank entered into a formal agreement (“Agreement”) with The Comptroller of the Currency (“OCC”). The Agreement required Franklin Bank to perform certain actions within designated time frames. The Bank must comply with the Agreement while it is outstanding. The Bank submitted the responses required in the respective time frames described below. The Bank continues to submit periodic reports and take other actions as required by the Agreement to achieve sustained performance.

Within 30 days, Franklin Bank was required to adopt sublimits for concentrations in acquisition and development loans, speculative lot loans, and speculative single-family housing construction loans and determine if any action was necessary to reduce these concentrations. Franklin Bank reviewed and amended these limits and certain concentrations were lowered.

Within 60 days, Franklin Bank was required to do the following:

§ Franklin Bank was required to establish an effective program for early identification of emerging and potential problem credits to include accurate ratings, accrual status, continued financial analyses, and formal work out plans. Franklin Bank developed an attestation process monthly for loan officers to include risk rating and the accrual status of their loan portfolios. Franklin Bank has a Problem Loan Committee made up of senior management and one Board Loan Committee director that meets monthly. Criticized loan worksheets were enhanced and expanded to include a summary of the most recent financial analysis; most recent collateral valuation factoring possible liquidation and timing discount; and enhanced action plans with target dates. Primary and secondary repayment sources are detailed on the worksheets. Franklin Bank’s internal loan review function reports to the loan committee of the board of directors rather than to management. This committee of the board meets quarterly and reporting has been enhanced to include the overall quality of the loan portfolio; the identification, type, rating, and amount of problem loans; the identification and amount of delinquent loans; credit and collateral documentation exceptions; the identification and status of credit-related violations of law; the identification of the loan officer who originated each loan reported; concentrations of credit; and loans to executive officers and directors.

29

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

March 31, 2013

§ Franklin Bank was required to develop a written underwriting program to include reasonable amortization of speculative lot and single family housing construction loans and ensure updated appraisals are documented. Our credit policy was amended to address the amortization periods. Personnel have been designated to ensure the reporting system has updated appraisals and evaluations. All files were reviewed to ensure correct appraisal information. A credit analyst position was created in December 2008. The analyst performs required financial analysis on all loans $100,000 and over at origination or renewal and at the receipt of new financial statements. In addition, new software was purchased to assist with this process and to assist the credit analyst and lenders in the risk rating of loans.

§ Franklin Bank also had to eliminate the basis of criticism of assets criticized by the OCC. Franklin Bank has dedicated an experienced employee to work through problem assets. The other actions described above also assist in achieving compliance with this requirement. Franklin Bank continually strives to lower its problem assets.

§ Franklin Bank was required to enhance its asset liability management policy to ensure monitoring of its liquidity position which included more detailed reporting to the Board. The Agreement also required Franklin Bank to increase its liquidity immediately and to take action to ensure adequate sources of liquidity. Franklin Bank increased its sources by adding correspondent bank lines; becoming a member of QwickRate (an internet certificate of deposit program); becoming a member of the Certificate of Deposit Account Registry Service (“CDARS”); and partnering with certain institutions to acquire brokered deposits. According to the Agreement, brokered deposits cannot exceed 15% of total deposits. At March 31, 2013 and December 31, 2012, brokered deposits were $5.2 million and $5.3 million, respectively, and were less than 5% of total deposits in both comparisons. Franklin Bank also participated loans during the first half of 2009 which improved our liquidity. Franklin Bank revised its Contingency Liquidity Plan to include crises relevant to current balance sheet composition. New reports created to assist with asset liability and liquidity include a maturity schedule of certificates of deposit; the volatility of demand deposits; loan commitments and letters of credit; borrowing lines and continued availability; an analysis of the impact of decreased cash flow from the loss of income from nonperforming loans and loans sold or participated; rolling sources and uses report; rollover risk analysis; and prioritization of funding sources and uses. Franklin Bank was required to review and enhance the analysis of the allowance for loan losses. The Bank has continued to review and enhance the process.

Within 90 days, Franklin Bank was required to develop and implement a three-year detailed capital plan. The Plan was put in place and is continually updated as appropriate. The plan includes detailed projections for growth and capital requirements; projections for primary sources and secondary sources of capital; and a revised dividend policy. The Agreement prohibits the Bank from paying dividends until compliance with the program and certain other conditions are met.

Under the Agreement, a Compliance Committee of three members of the Franklin Bank’s Board of Directors was formed to monitor the progress and make regular reports to the OCC. Failure to comply with the provisions of the Agreement could subject Franklin Bank and its directors to additional enforcement actions. The Compliance Committee of Franklin Bank continues to meet monthly to ensure adherence and compliance with the Agreement.

30

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

March 31, 2013

The Compliance Committee reviews the Agreement by article in detail at each meeting along with the corresponding actions of Franklin Bank within each article. The Committee reports monthly to the full board of directors. While Franklin Bank intends to continue to take such actions as may be necessary to enable it to comply with the requirements of the Agreement, there can be no assurance that it will be able to comply fully with the provisions of the Agreement. Such compliance is costly and affects the operations of Franklin Bank and the Corporation. Franklin Bank has met all of the required time lines for submission of information to the OCC along with regular reporting. Franklin Bank must demonstrate sustained performance under the Agreement.

On June 17, 2009, MainStreet BankShares, Inc. entered into a Memorandum of Understanding (“MOU”) with the Federal Reserve Bank of Richmond (“Federal Reserve”). The MOU required the bank holding company to utilize its financial and managerial resources to assist Franklin Bank in functioning in a safe and sound manner. The MOU restricted MainStreet from declaring or paying any dividends without the prior written approval of the Federal Reserve. Under the MOU, MainStreet cannot incur or guarantee any debt or redeem or purchase any shares of its common stock without the prior written consent of the Federal Reserve. Since then, MainStreet has not paid or declared any dividends or incurred or guaranteed any debt. On January 26, 2011, the MOU with the Federal Reserve was replaced with a new MOU which includes the same provisions as the prior MOU and also requires MainStreet to comply with the restrictions on indemnification and severance payments of section 18(k) of the FDI Act (12 U.S.C. 1828(k)) and Part 359 of the Federal Deposit Insurance Corporation’s regulations (12 C.F.R. Part 359). Also, the Corporation may not appoint any individual to the board or employ or change the responsibilities of any individual as senior executive officer if the Federal Reserve notifies the Corporation of disapproval within the required time limits. Management believes the holding company is appropriately using its financial and managerial resources to assist Franklin Bank to function in a safe and sound manner.

Critical Accounting Policies

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The financial information contained within our statements is, to a significant extent, based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss factors, peer comparisons, regulatory factors, concentrations of credit, past dues, and the trend in the economy as factors in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use in estimating risk.

The allowance for loan losses reflects our best estimate of the losses inherent in our loan portfolio. The allowance is based on two basic principles of accounting: (i) losses are accrued when they are probable of occurring and are capable of estimation and (ii) losses are accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. The allowance for loan losses is maintained at a level, which reflects management’s best estimate of probable credit losses inherent in the loan portfolio and is, therefore, believed to be appropriate.

The amount of the allowance is based on management’s evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, economic conditions and other risks inherent in the portfolio. Management reviews the past due reports and risk-rated loans and discusses individually the loans on these reports with the responsible loan officers. Management uses these tools and provides a quarterly analysis of the allowance based on our historical loan loss experience, risk-rated loans, past dues, concentrations of credit, unsecured loans, loan exceptions, and the economic trend. These are generally grouped by homogeneous loan pools. Impaired loans are reviewed individually to determine possible impairment based on one of the three recognized methods which are fair value of collateral, present value of expected cash flows, or observable market price. A specific reserve is, then, allocated for the amount of the impairment. Although management uses available information to recognize losses on loans, the substantial uncertainties associated with local economic conditions, collateral values, and future cash flows on impaired loans, make it possible that a material change in the allowance for loan losses in the near term may be appropriate. However, the amount of the change cannot be estimated. The allowance is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Past due status is determined based on contractual terms.

31

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

March 31, 2013

Overview

Total assets at March 31, 2013 were $180.3 million compared to $183.1 million at year-end December 31, 2012, a decline of $2.8 million. Our balance sheet has declined since year-end due to our continued strategy to lower our deposit costs and due to the repayment of our $6.0 million repurchase agreement in January 2013. Due to the maturity and repayment of all repurchase agreements, we now have additional securities that can be utilized and pledged for other purposes as needed. In addition, the resolution of problem credits and soft loan demand have caused our loans to decline. At March 31, 2013, loans, net of unearned deferred fees and costs, declined $3.5 million from year-end 2012. Securities available for sale declined $2.0 million from December 31, 2012 primarily due to calls of securities and pay downs on mortgage backed securities. Deposits increased $3.1 million. Although total deposits increased, our higher cost time deposits declined offset by an increase in demand deposits. Other real estate owned has declined by $791,863 due to sales, net of transfers into other real estate from loans, of properties under a continued aggressive approach to rid the balance sheet of nonperforming assets. The intentional shrinkage in our balance sheet has had a positive impact on our capital ratios. Total cash and cash equivalents increased from year-end 2012 by $3.5 million. Liquidity continues to be an important focus for our Company during these tumultuous times and our liquid assets were 28.16% of total liabilities at March 31, 2013 which remains strong. We monitor our liquidity daily to ensure we have prudent levels of liquidity while we strive to lower our deposit costs. This strategy also resulted in a lowering of our overall interest bearing deposits. We maintained our core relationships as can be evidenced by the increase in demand deposits which are our free funds.

We continue to focus on our asset quality due to the elevated level of nonperforming loans, criticized and classified assets, economic uncertainty and unemployment levels. Nonperforming loans increased $1,049,742 from year end 2012 to March 31, 2013. Also, loans rated special mention and lower increased during the first quarter from December 31, 2012. We transferred $48,750 of loans into other real estate and other repossessed assets during the first three months of 2013. Our other real estate properties declined to $649,859 at March 31, 2013 compared to $1.4 million at December 31, 2012. During the quarter, approximately $.8 million in properties were sold. We are taking a continued aggressive approach to our other real estate properties to rid our balance sheet of nonperforming assets. We also have approximately $.5 million in additional properties under contract at March 31, 2013.

Total shareholders’ equity was $24.4 million at March 31, 2013. MainStreet and Franklin Bank were well capitalized at March 31, 2013 under bank regulatory capital classifications. The book value of shareholders’ equity at March 31, 2013 was $14.27 per share.

Our year-to-date net income at March 31, 2013 was $235,857, or $.14 per common basic share. This income equated to an annualized return on average assets of .54% and an annualized return on average shareholders’ equity of 3.92%. Net income for the same period in 2012 was $97,295, or $.06 per common basic share. This equated to an annualized return on average assets and annualized return on average shareholders’ equity of .20% and 1.74%, respectively. Credit related expenses such as losses on sales of other real estate properties, impairment losses on other real estate properties, and loss of interest on nonaccrual loans continue to negatively impact our operating results. In addition, the lack of loan volume has negatively impacted loan fee income and interest income. Provision expense, other real estate and repossession expenses, write downs and losses on sales together accounted for $249,843 and $344,285 in expense for the three month periods ending March 31, 2013 and March 31, 2012, respectively.

32

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

March 31, 2013

Results of Operations

Net interest income is the difference between total interest income and total interest expense. The amount of net interest income is determined by the volume of interest-earning assets, the level of interest rates earned on those assets, and the cost of supporting funds. The difference between rates earned on interest-earning assets and the cost of supporting funds is measured by the net interest margin.

Net interest income for the three month period ending March 31, 2013 and 2012 was $1,593,645 and $1,588,870, respectively, a modest increase of $4,775, or 0.30%.Both interest income and interest expense dollars dropped in comparison to last year, primarily due to volume and the lowering of deposit costs. The decline in interest income was also due to lost interest income on continued elevated levels of nonaccrual loans.For the three months ending March 31, 2013 and 2012, the net interest margin was 3.84% and 3.39%, respectively, a 45 basis point increase. The yield on interest earning assets for the year-to-date period ending March 31, 2013 was4.53% compared to4.49% for the year-to-date period ending March 31, 2012, an increase of 4 basis points. However, the funding side of the interest margin also dropped during this time period by a favorable 41 basis points in the year-to-year comparison. The maturity of our repurchase agreements has had a positive impact on our net interest margin this quarter and will continue going forward. We engaged a consultant to assist us in the lowering of our deposit costs. We have realized the positive impact of our strategic effort.

The yield on interest earning assets increased for the first quarter of 2013 compared to the first quarter of 2012. Lost interest on loans improved during this time period. Lost interest for the period ending March 31, 2013 and 2012 was $32,824 and $111,018, respectively. Franklin Bank’s growth is also quite dependent on the recovery in consumer and real estate based lending and there is concern over the timing of recoveries in these markets given the current economic environment. Franklin Bank’s future growth and earnings may be negatively affected if real estate and consumer based markets remain depressed or deteriorate further.

The low interest rate environment continues with the Federal Reserve leaving short-term interest rates within a range of 0% - .25%. This low rate environment has been in effect since 2008. The Federal Reserve has also indicated that interest rates will remain at this level throughout mid 2015. Franklin Bank has a portfolio of variable rate loans. A rising interest rate environment generally has a positive impact on the net interest margin because deposits rates are slower to increase. Although low interest rates have been beneficial for our cost of funds, with prime presently at 3.25% which is the interest rate basis for many of our loans, MainStreet’s net interest margin has been adversely affected by the prolonged, recessionary low interest rate environment.

The net interest margin and net interest income have shown improvement with the maturity of our repurchase agreements. The rates on these are above current market rates. Of these repurchase agreements, $7.5 million matured in September 2012 and $6.0 million matured in early January 2013.

Provision for Loan Losses

A provision for loan losses is charged to earnings for the purpose of establishing an allowance for loan losses that is maintained at a level which reflects management’s best estimate of probable credit losses inherent in the loan portfolio and is, therefore, believed to be appropriate. The amount of the allowance is based on management’s evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, economic conditions, and other risks inherent in the portfolio. Management reviews the past due reports and risk ratings and discusses individually the loans on these reports with the responsible loan officers. Management provides a detailed quarterly analysis of the allowance based on homogenous loan pools, identifying impairment, historical losses, credit concentrations, economic conditions, and other risks. As the allowance is maintained losses are, in turn, charged to this allowance rather than being reported as a direct expense.

33

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

March 31, 2013

Our methodology for determining the allowance is based on two basic principles of accounting as follows: i) losses are accrued when they are probable of occurring and are capable of estimation and (ii) losses are accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. Our analysis is based on an individual review of all credits rated Pass/Watch and lower in our risk rating system by account officers in addition to a review of management information system reports on numerous portfolio segments. The analysis of the allowance is solely based on historical and qualitative factors with historical losses adjusted to higher factors for our criticized and classified loans compared to similar banks with comparable real estate concentrations nationally. Our process allows loan groups to be identified and properly categorized. Our impaired loans are individually reviewed to determine possible impairment based on one of three recognized methods which are fair value of collateral, present value of expected cash flows, or observable market price. A specific reserve is then allocated for the amount of the impairment. Impairment is defined as a loan in which we feel it is probable (meaning likely, not virtually certain) that we will be unable to collect all amounts due under the contractual terms of the loan agreement. Possible loss for loans risk rated special mention or lower are then allocated based on a historical loss migration and adjusted for qualitative factors. Remaining loans are pooled based on homogenous loan groups and allocated based on Franklin Bank’s historical net loss experience. These pools are as follows: 1) commercial loans; 2) construction and land development; 3) residential 1-4 family first liens; 4) residential 1-4 family junior liens; 5) home equity lines; 6) commercial real estate; and 7) consumer loans. Historical loss is calculated based on a three-year average (twelve quarters) history. Historical net loss data is adjusted and applied to pooled loans based on qualitative factors. We utilize the following qualitative factors: 1) changes in the value of underlying collateral such as loans not conforming to supervisory loan to value limits; 2) national and local economic conditions; 3) changes in portfolio volume and nature such as borrower’s living outside our primary trade area; 4) changes in past dues, nonaccruals; and 5) quality and impact and effects of defined credit concentrations. The methodology has continued to evolve as our company has grown and our loan portfolio has grown and become more diverse.

Provision expense for the first three months of 2013 and 2012 was $187,605 and $201,283, respectively. Our loan portfolio, net of unearned deferred fees and costs, declined $3.5 million or 2.61% from year-end 2012. Gross charge-offs year-to-date 2013 were $369,588 compared to $859,543 year-to-date 2012. We transferred $48,750 from loans to other real estate and other repossessed assets during the year-to-date period ending March 31, 2013. The allowance for loan losses was $2.4 million at March 31, 2013 and $2.6 million at December 31, 2012, a decline of $.2 million, which is discussed below. The allowance for loan losses was 1.86% and 1.93% of loans net of unearned deferred fees and costs at March 31, 2013 and December 31, 2012, respectively. Our criticized and classified loans that are evaluated by historical loss migration increased $765,899 at March 31, 2013 compared to year-end 2012. The loans evaluated collectively by pools decreased $5.3 million at March 31, 2013 versus December 31, 2012. Impaired loans evaluated individually were $3.9 million and $2.8 million at March 31, 2013 and December 31, 2012, respectively, with specific reserves of $94,501 and $292,003, respectively. The decline in the allowance for loan losses to loans, net of unearned deferred fees, from year end 2012 was primarily due to lower specific reserves on nonaccrual loans and lower loan volumes evaluated collectively by pools, all offset by an increase in adverse rated loans and an increase in the general reserve. The allowance for loan losses was not replenished by the full $369,588 of gross charge offs because $268,850 of that total gross charge off amount was provided for in our allowance for loan losses at year-end 2012 as a specific reserve. The unallocated amount increased $30,000 from year end 2012. Net charge-offs of $358,847 and $853,449 for the first three months of 2013 and 2012 equated to 1.08% and 2.41%, respectively, of average loans outstanding net of unearned income and deferred fees.The amount of charge-offs can fluctuate substantially based on the financial condition of the borrowers, business conditions in the borrower’s market, collateral values and other factors which are not capable of precise projection at any point in time.

34

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

March 31, 2013

Following is a breakdown of our nonperforming loans by balance sheet type which includes nonaccrual loans, loans past due 90 days and still accruing, troubled debt restructurings, and other impaired loans.

	March 31, 2013		December 31, 2012
Commercial	$	207,679	$	212,738
Real Estate:
Construction and land development		1,255,442		1,100,585
Residential 1-4 families:
First liens		1,420,882		938,555
Junior liens		565,162		225,669
Home equity loans		82,125		—
Commercial real estate		342,806		346,807
Consumer		—		—
Total Nonperforming Loans	$	3,874,096	$	2,824,354

Total nonperforming loans experienced an increase in the amount of $1,049,742 or 37.17% at March 31, 2013 as compared to December 31, 2012. Nonaccrual loans (included in the impaired loans above) were $1,634,560 and $1,515,689 at March 31, 2013 and December 31, 2012, respectively, which represented 1.25% and 1.13%, respectively, of loans, net of unearned deferred fees and costs. Management considers these loans impaired along with loans 90 days or more past due and still accruing, troubled debt restructurings (not on nonaccrual), and other impaired loans. Loans once considered impaired are included in the reserve, but if well collateralized, no specific reserve is allocated for them. Please refer to Note 4 to the financial statements for a breakdown of the allowance by category, specific reserves by category, and impaired loans by category. Note 4 also gives information related to which categories of loans and dollar amounts had specific reserves allocated. At March 31, 2013 loans secured by residential 1-4 family first liens were the largest category of impaired loans at $1.4 million. At December 31, 2012 construction and land development loans were the largest category of impaired loans at $1.1 million. Construction and land development loans were the next largest of the impaired loan categories at March 31, 2013 at $1.3 million. Residential 1-4 family first liens were the next largest of the impaired loan categories at December 31, 2012 at $.9 million.

Many of the asset quality issues in our loan portfolio are the result of our borrowers having to sell various real estate properties at depressed prices to repay the loan. In addition, borrowers’ incomes have been reduced which increases their debt to income ratio. The overall economy in Franklin County continues to struggle based on unemployment, a continued slowing of building activity, a slowing of transportation and warehousing, and excessive supply of real estate in the Smith Mountain Lake resort area as discussed below. There is continued economic pressure on consumers and business enterprises and unemployment is at 6.3%. Absorption analysis in our market place shows increased turnover rates for various inventories. Data obtained also revealed declines in real estate values based on listing prices to selling price. Locally and nationally there has been an overall loss of wealth in real estate and equities. Smith Mountain Lake is a core area for development in Franklin County. It is a resort area and largely follows the national trend rather than the local trend and has been particularly adversely affected as a result. Until unemployment declines and consumer confidence increases, these trends may continue. While we continue to address our asset quality issues and have shown great improvement, no assurance can be given that continuing adverse economic conditions or other circumstances will not result in increased provisions in the future.

Noninterest Income

Total noninterest income was $265,879 and $260,542 for the three months ending March 31, 2013 and 2012, respectively, an increase of $5,337, or 2.05%. The following chart demonstrates the categories of change:

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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

March 31, 2013

Noninterest Income	YTD 3/31/13		YTD 3/31/12		Dollar Change			Percentage Change
Service charges on deposit accounts	$	69,988	$	65,001	$	4,987			7.67	%
Mortgage commissions		73,986		29,974		44,012			146.83
Electronic card fees		43,766		42,131		1,635			3.88
Investment fee income		41,244		65,338		(24,094	)		(36.88	)
Income on bank owned life insurance		9,439		27,603		(18,164	)		(65.80	)
Other fee income & miscellaneous		27,456		30,495		(3,039	)		(9.97	)

As noted above, total noninterest income increased $5,337 for the three months ending March 31, 2013 compared to the three months ending March 31, 2012. Service charges on deposit accounts increased $4,987 in the year to year comparison. This increase is primarily due to an increase in NSF charges. Mortgage commissions demonstrated a substantial increase in the year to year comparison by $44,012, or 146.83%; however, volumes have decreased in part by the economic environment and additional regulatory enactments.Franklin Bank partners with several organizations in which we originate residential mortgage loans that are sold to other companies. Franklin Bank receives the mortgage brokerage commission. Within our partnerships, we have begun to close some mortgage loans in our name and then sell them to our partners within a very short period of days. Our partners provide the underwriting of the loans. This new process allows us to change our commission levels and has increased our income. Electronic card fees experienced an increase of $1,635 or 3.88% for the three months ended March 31, 2013 as compared to March 31, 2012. Franklin Bank has an investment advisor which partners with Infinex Financial Group to advise and manage investment portfolios for our clients. Franklin Bank receives fee income from this partnership based upon volume. Fee income received on investment income during the first three months of 2013 and 2012 was $41,244 and $65,338, respectively, a decrease of $24,094, or 36.88%. Franklin Bank hasbank owned life insurance on the lives of its executive officers. Currently, there is only one executive officer due to the tragic death of Larry Heaton in December 2012. The balance at March 31, 2013 was $1.1 million. Income on this investment declined $18,164 or 65.80% compared to the prior year. Other fee income and miscellaneous income experienced a decrease of $3,039, or 9.97%. This decrease is primarily due to a decline in miscellaneous income offset by an increase in checkbook charges. Title fee income has declined by $429 in the year to year comparison. Title fee income is generated from a small interest purchased in a title insurance company by Franklin Bank.

Noninterest Expense

Total noninterest expense was $1,329,370and $1,522,037for the three month period ending March 31, 2013 and 2012, respectively, a decrease of $192,667,or 12.66%. Excluding the nonrecurring expenses of other real estate and repossessions, noninterest expense decreased $111,903, or 8.11%. The following chart shows the categories of noninterest expenses for the three month period ending March 31, 2013 and 2012, the dollar change, and the percentage change:

36

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

March 31, 2013

Expense	YTD 3/31/13		YTD 3/31/12		Dollar Change			Percentage Change
Salaries and employee benefits	$	664,329	$	724,477	$	(60,148	)		(8.30	)%
Occupancy and equipment		190,187		211,002		(20,815	)		(9.86	)
Professional  fees		60,141		67,988		(7,847	)		(11.54	)
Outside processing		104,793		128,389		(23,596	)		(18.38	)
FDIC Assessment		53,929		67,067		(13,138	)		(19.59	)
Franchise tax		54,000		50,001		3,999			8.00
Regulatory examination fees		26,303		27,700		(1,397	)		(5.04	)
Other real estate and repossessions		62,238		143,002		(80,764	)		(56.48	)
Other expenses		113,450		102,411		11,039			10.78

MainStreet’s employees continue to be its most valuable resource and asset. Salaries and employee benefits expense comprise the largest category of noninterest expense at 49.97% and 47.60%, respectively, of total noninterest expense for the three-month periods ending March 31, 2013 and 2012. Our overall costs have decreased in the year-to-year comparison primarily because of the death of Larry Heaton in December 2012. Salaries were frozen in 2012 and 2011. Occupancy and equipment costs comprise the second largest category of recurring noninterest expense and include rent, utilities, janitorial service, repairs and maintenance, real estate taxes, equipment rent, service maintenance contracts and depreciation expense. This category declined $20,815 which was attributable to a decline in depreciation expense, rent, repairs and maintenance, and service maintenance expense. Rent expense declined due to the termination of the lease on the 220 North building, which was closed in 2010. Professional fees include fees for audit, legal, and other professional fees and showed a $7,847 decrease in the year to year comparison. Outside processing expenses decreased $23,596 or 18.38% in the year to year comparison primarily due to a decrease in data processing fees and bank insurance costs. FDIC assessment declined $13,138 due to the decline in assets and the new method adopted by the FDIC for its calculation using assets as its base; however, the overall premium is still burdensome. The turmoil in the financial services industry resulted in the need to increase prepaid FDIC insurance premiums 3 years ago to sustain the insurance fund. Depending on the length and depth of the recessionary environment, there could be additional increased prepaid assessments depending on the health of the financial services sector. However, as stated above, the expense the company has recognized actually has declined due to the new FDIC assessment calculation based upon assets as the base. Franchise tax and regulatory examination fees remained stable in the year to year comparison. Other real estate and repossessions are nonrecurring expenses in the category of noninterest expense. The losses, write-downs and expenses associated with our other real estate properties experienced a significant decrease of $80,764, or 56.48%, compared to the same period in 2012. The Company has taken a more aggressive approach to disposing of its other real estate properties to rid its balance sheet of nonperforming assets. A substantial amount of properties were either sold or written down in 2012. Other expenses increased $11,039 or 10.78% in the year to year comparison. This increase was primarily due to increases in advertising costs, shareholder costs, miscellaneous expense, and director fees, offset by declines in travel expenses and subscriptions and dues. Miscellaneous expense increased during 2013 as compared to 2012 due to the recordation of a reserve for undrawn lines and letters of credit, offset by the adjustment of the mortgage loan held for sale derivative.

Income Taxes

MainStreet is subject to both federal and state income taxes. Franklin Bank is not subject to state income taxes. A bank in Virginia is required to pay a franchise tax that is based on the capital of the entity. The liability (or balance sheet) approach is used in financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed quarterly for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. No valuation allowances were deemed necessary at March 31, 2013 and March 31, 2012. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.MainStreet recorded income tax expense in the amounts of $106,692 and $28,797 for the three month periods ending March 31, 2013 and March 31, 2012, respectively.

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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

March 31, 2013

BALANCE SHEET

Investment Portfolio

The Corporation’s investment portfolio is used for several purposes as follows:

1) To maintain sufficient liquidity to cover deposit fluctuations and loan demand.

2) To use securities to fulfill pledging collateral requirements.

3) To utilize the maturity/repricing mix of portfolio securities to help balance the overall interest rate risk position of the balance sheet.

4) To make a reasonable return on investments.

Funds not utilized for capital expenditures or lending are invested in securities of the U.S. Government and its agencies, mortgage-backed securities, municipal bonds, corporate debt securities and certain equity securities. Currently, we have invested in U.S. Agencies, mortgage-backed securities, municipal bonds, Federal Reserve Bank stock and Federal Home Loan Bank stock. The value of our investment portfolio is susceptible to the impact of monetary and fiscal policies of the United States, particularly whether and how the current debate over fiscal issues are resolved. Our mortgage backed securities are either guaranteed by U.S. government agencies or issued by U.S. government sponsored agencies. The entire securities portfolio was categorized as available for saleat March 31, 2013and is carried at estimated fair value. Unrealized market valuation gains and losses on securities classified as available for sale are recorded as a separate component of shareholders’ equity. Please refer to Note 2 of the Notes to Consolidated Financial Statements for the breakdown of the securities available for sale portfolio.

Loan Portfolio

We have established a credit policy detailing the credit process and collateral in loan originations. Loans to purchase real estate and personal property are generally collateralized by the related property with loan amounts established based on certain percentage limitations of the property’s total stated or appraised value. Credit approval is primarily a function of the credit worthiness of the individual borrower or projectbased on pertinent financial information, the amount to be financed, and collateral. The loan portfolio was as follows:

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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

March 31, 2013

	March 31, 2013				December 31, 2012
Commercial	$	11,090,828	8.47		$	10,439,173	7.77	%
Real Estate:
Construction & land development		18,907,816	14.44			21,268,316	15.82
Residential 1-4 families:
First liens		35,047,422	26.77			35,490,285	26.41
Junior liens		7,145,878	5.46			7,633,851	5.68
Home equity lines		6,059,678	4.63			6,093,783	4.53
Commercial real estate		51,209,907	39.12			51,861,252	38.58
Consumer		1,446,862	1.11			1,627,706	1.21
Total Gross Loans	$	130,908,391	100.00	%	$	134,414,366	100.00	%
Unearned deferred fees & costs, net		69,978				78,300
Recorded Investment	$	130,978,369			$	134,492,666

Gross loans declined $3,505,975, or 2.61% at March 31, 2013 compared to December 31, 2012. As can be seen by the chart above, Franklin Bank has a high concentration in real estate loans. These loans represented 90.42% and 91.02% of gross loans at March 31, 2013 and December 31, 2012, respectively. Accordingly, the Bank took steps to reduce certain concentrations within the real estate loans, including participating loans. The loan committee of the board of directors reviews all new loans and renewals of loans within our target concentrations for approval. During this economic environment, the credit markets have tightened substantially and the real estate market continues to be soft. These and other factors indicate diminished economic activity, higher risk in these loans, and lower loan demand. Moreover, Franklin Bank’s current concentration in real estate related loans reduces the Bank’s participation in these loan categories. Our loan to deposit ratio for March 31, 2013 was 85.22% compared to 89.32% at December 31, 2012, relatively stable. We lowered our policy loan to deposit ratio thus increasing liquidity and have maintained the lower percentage because of lower loan demand. We will continue to serve our customers, but in doing so will be governed by the necessity of preserving the institution’s history of safety and soundness during these difficult economic times.

Our loan portfolio is our primary source of profitability; therefore, our underwriting approach is critical and is designed throughout our policies to have an acceptable level of risk. Cash flow adequacy has always been a necessary condition of creditworthiness. If the debt cannot be serviced by the borrower’s cash flow, there must be an additional secondary source of repayment. As we have discussed, many of our loans are real estate based so they are also secured by the underlying collateral, the value of which has been under stress due to economic conditions. We strive to build relationships with our borrowers, so it is very important to continually understand and assess our borrowers’ financial strength and condition.

Our credit policy requires that new loans originated must have a maximum loan-to-value of 80% while certain loans have lower limits as follows: raw land (65%); improved land (75%); non-obsolete inventory (60% of value); used automobiles (75% of purchase price); and stock (75%). We do not require mortgage insurance; however, loans exceeding supervisory loan to value limits are one of our qualitative factors in the allowance for loan loss methodology.

Our credit policy requires updated appraisals to be obtained on existing loans whereby collateral value is critical to the repayment of the loan and market value may have declined by 15% or more. In regard to development projects a new appraisal should be obtained when the project sale out rate is less than 25% of the original assumptions documented by the existing appraisal in the file. Development loans must be reviewed at least annually or sooner in a declining real estate cycle. Once an appraisal exceeds 18 months it must be updated and reviewed before additional funding may occur. An appraisal in file may not be used for additional funding under any circumstances after 36 months. Loan account officers prepare criticized loan workout sheets for the Problem Loan Committee on all loans risk rated special mention or lower and any loan delinquent 60 days or more. Account officers who indicate a loan is impaired are required to determine collateral value by one of three recognized methods which are 1) fair value of collateral; 2) present value of expected cash flows; or 3) observable market value. The difference in the collateral value, less estimate selling expense, compared to the recorded loan balance is allocated as a specific reserve in the loan loss analysis. Any collateral declines dropping loans below supervisory loan to value limits is included in the qualitative factors based on loan pools in the loan loss analysis.

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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Mach 31, 2013

We continue to review and enhance our credit policies. We monitor our concentration limits and have targets that reflect the current environment. Our concentration levels are within the established limits. All new credits that are deemed to be in concentration buckets are reviewed by loan committee. We added floors to our home equity lines and certain commercial loan products. We reduced our maximum debt to income ratio for all retail loans to 40% from 45%. On our retail products, we terminated the use of interest only payments except on construction loans and bridge loans and unsecured retail lines with a one-year term which are underwritten on strict guidelines. The credit policy was modified to reflect new maximum loan-to-values on new loans originated as discussed earlier. We engaged an outside service to perform environmental risk assessments prior to funding. Our home equity line products had a prior maturity of 20 years with a three or five year review feature. The loan policy was modified for these loans to mature in five years and be renewed only upon proper underwriting. Other banks have similarly tightened credit availability, particularly for real estate related loans. Generally this has the effect of reducing qualified buyers for real estate and therefore the value of real estate. This in turn can lead to lower appraisals and additional charge offs within our loan portfolio and other real estate properties as well as increased provision which reduce income.

In addition, we hired an experienced in-house credit analyst and purchased software to assist lenders with cash flow and certain ratio analysis. We also purchased software to assist with the credit ratings of loans upon origination, renewal, and the receipt of new financials. Please refer to Notes #3 and #4 to the financial statements for further discussion of underwriting and risk ratings of loans.

Approximately 23% of our loan portfolio consists of variable rate loans. Variable rate commercial loans are underwritten to the current fully indexed rate at origination with cash flow analysis in underwriting at fully drawn lines. In most cases account officers stress borrowers at 2% over the fully indexed rate. Home equity lines are underwritten at 1.5% of the full committed loan amount.

We monitor our loan portfolio by the loan segments found in Note #3 of the financial statements. In addition, we look at the trends of significant industries within the loan segments. Loan segments are categorized primarily based upon regulatory guidelines, which follows the underlying collateral. For the most part, our business activity is with customers located in our primary market area. Accordingly, operating results are closely correlated with the economic trends within the region and influenced by the significant industries in the region including pre-built housing, real estate development, agriculture, and resort and leisure services. In addition, the ultimate collectability of the loan portfolio is susceptible to changes in the market condition of the region. The real estate market in our area, particularly Smith Mountain Lake, is also affected by the national economy because a substantial portion of our lending is real estate based and dependent on buyers who move into our region. There are three industry concentrations that are broken out in the tables below by our loan segments.

40

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

March 31, 2013

	March 31, 2013
			Loans for
			Construction of		Loans for
	Loans for		Heavy & Civil		Real Estate
	Construction		Engineering		Including
	of Buildings		Buildings		Construction		Total
Commercial	$	390,084	$	587,301	$	757,329	$	1,734,714
Real Estate
Construction and land development		3,142,052		4,309,740		2,329,935		9,781,727
Residential, 1-4 families
First Liens		4,123,004		1,458,171		7,068,738		12,649,913
Junior Liens		683,029		—		604,052		1,287,081
Home Equity Lines		17,138		—		371,491		388,629
Commercial real estate		4,008,714		—		23,009,222		27,017,936
Consumer		5,577		—		3,000		8,577
Total	$	12,369,598	$	6,355,212	$	34,143,767	$	52,868,577

	December 31, 2012
			Loans for
			Construction of		Loans for
	Loans for		Heavy & Civil		Real Estate
	Construction		Engineering		Including
	of Buildings		Buildings		Construction		Total
Commercial	$	383,219	$	580,462	$	758,289	$	1,721,970
Real Estate
Construction and land development		2,776,618		4,364,771		2,669,695		9,811,084
Residential, 1-4 families
First Liens		4,292,479		1,324,124		6,739,075		12,355,678
Junior Liens		900,379		—		616,553		1,516,932
Home Equity Lines		19,881		—		—		19,881
Commercial real estate		3,971,666		—		22,907,145		26,878,811
Consumer		6,457		—		3,000		9,457
Total	$	12,350,699	$	6,269,357	$	33,693,757	$	52,313,813

Disclosed below are concentrations in acquisition and development loans, speculative lot loans, and speculative single-family housing construction. Some of these amounts are also included in the above concentrations as shown below.

	March 31, 2013
	Total Concentration		Concentrations Included Above		Net Addition to Concentrations
Acquisition & development	$	124,964	$	124,964	$	—
Speculative lot loans		4,910,408		3,476,490		1,433,918
Speculative single-family housing construction		2,401,842		1,491,292		910,550

	December 31, 2012
	Total Concentration		Concentrations Included Above		Net Addition to Concentrations
Acquisition & development	$	124,964	$	124,964	$	—
Speculative lot loans		4,912,535		3,086,490		1,826,045
Speculative single-family housing construction		4,275,965		1,802,221		2,473,744

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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

March 31, 2013

Overall, our concentrations continue to decline due to our efforts to lower them and due to the economy.

Following is a breakdown of our nonperforming loans and assets.

	For the Periods Ended
	March 31, 2013		December 31, 2012
Nonaccrual loans and leases	$	1,634,560	$	1,515,689
Loans past due 90 days or more and still accruing		397,723		3,485
Troubled debt restructurings (not on nonaccrual)		1,442,336		1,305,180
Other impaired loans		399,477		—
Total nonperforming loans		3,874,096		2,824,354
Foreclosed real estate		649,859		1,441,722
Other foreclosed property		78,649		111,149
Total foreclosed property		728,508		1,552,871
Total nonperforming assets	$	4,602,604	$	4,377,225

Impaired loans totaled $3,874,096 and $2,824,354 at March 31, 2013 and December 31, 2012, respectively. Nonaccrual loans increased $118,871 at March 31, 2013 compared to year end 2012. Troubled debt restructurings (not on nonaccrual) increased $137,156 from year end 2012. Loans past due more than 90 days, and still accruing, increased by $394,238 at March 31, 2013 as compared to year end 2012. Other impaired loans increased by $399,477 from year end 2012. We are continuing to work with our troubled borrowers. We move quickly to identify and resolve any problem loans. Please refer to Note #4 to the consolidated financial statements for detailed information of nonaccrual loans, impaired loans, and nonperforming assets. Also, please refer to Provision Expense in this Management’s Discussion and Analysis.

To ensure timely identification of nonaccrual loans, loan account officers review monthly their individual portfolios along with past due reports to determine the proper accrual status. Account officers also prepare criticized loan workout sheets for all loans risk rated special mention or lower and all loans 60-days or more delinquent are reported to the Franklin Bank’s Problem Loan Committee made up of senior management. The accrual status of these loans is reviewed and approved by the Problem Loan Committee. Account officers must attest to the accrual status and risk rating of all loans in their portfolio on a monthly basis. Attestations are presented to and reviewed by the Problem Loan Committee. The criticized loan worksheets are presented to the Problem Loan Committee quarterly. The Committee meets monthly to review updates on these loans along with the attestation sheets completed by the account officers. The criticized loan worksheets were expanded to include a summary of the most recent financial analysis; most recent collateral valuation factoring possible liquidation and timing discount; and enhanced action plans with target dates. Primary and secondary repayment sources are detailed. An officer now manages our problem assets on afull-time basis. A credit analyst performs required financial analysis on all loans $100,000 and over at origination or renewal and at the receipt of new financial statements. In addition, software was purchased to assist with this process. Software assists the credit analyst and lender in the risk rating of each loan. We have an internal loan review function that has an annual loan review plan approved by the loan committee and the President. Enhanced reporting includes the overall quality of the loan portfolio; the identification, type, rating, and amount of problem loans; the identification and amount of delinquent loans; credit and collateral documentation exceptions; the identification and status of credit-related violations of law; the loan officer who originated each loan reported; concentrations of credit; and loans to executive officers and directors.

Deposits

Total deposits at March 31, 2013 andDecember 31, 2012 were $153,693,798 and $150,579,368, respectively, an increase of $3,114,430, or 2.07%. We continue in 2013 our strategy to lower overall deposit costs, which is discussed in more detail below. The deposit mix was as follows:

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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

March 31, 2013

	March 31, 2013				December 31, 2012
Demand deposits	$	27,907,591	18.16	%	$	22,819,544	15.15	%
Interest checking deposits		7,913,498	5.15			8,882,374	5.90
Money market deposits		21,174,607	13.78			19,929,905	13.24
Savings deposits		14,502,855	9.43			14,672,674	9.74
Time deposits $100,000 and over		35,799,749	23.29			36,757,507	24.41
Other time deposits		46,395,498	30.19			47,517,364	31.56
Total	$	153,693,798	100.00	%	$	150,579,368	100.00	%

The largest component of deposits continues to be time deposits including those $100,000 and over representing 53.48% of total deposits at March 31, 2013 compared to 55.97% at December 31, 2012. As a percentage of total deposits, the mix continues to change somewhat. The levels and mix of deposits are influenced by such factors as customer service, interest rates paid, service charges, and the convenience of banking locations. Our core deposit relationships remained as can be seen by the increase in demand deposits which do not pay interest. Demand deposits are now 18.16% of total deposits as compared to 15.15% at December 31, 2012. The dollar amount of our demand deposits has also increased $5.1 million from year end 2012. A further increase in demand deposits would improve the net interest margin and the total yield on interest bearing deposits. Savings accounts remained stable as a percentage of total deposits along with the dollar amount. Interest checking accounts declined as a dollar amount and a percentage of total deposits. Money market deposits increased $1,244,702 since year end 2012 and as a percentage of total deposits. Our total deposits have increased $3.1 million since year end 2012 primarily due to an increase in our lower deposit cost accounts, offset by a decline in our time deposits. This is all part of our strategic efforts to lower our deposit costs while maintaining ample liquidity to fill our needs and for contingency planning. As we lowered interest rates, our time deposits especially declined, although at a slower rate than last year, as they experienced a $2.1 million decrease since year end.

Competition remains strong in our market from other depository institutions. Management attempts to identify and implement the pricing and marketing strategies that will help control the overall cost of deposits and tomaintain a stable deposit mix. Our goal has been to strive to gather the whole deposit and loan relationships and not just certificates of deposit. Loan demand has been soft and parallels our deposit strategy. Our strategic plan in 2012, which continues in 2013, also includes continued lowering of our deposit costs to benefit net income, which includes increasing our demand deposits. The overall cost of interest bearing deposits was ..92% and 1.09%, respectively, for the three months ended March 31, 2013 and March 31, 2012. This decline of 17 basis points is due to the continued monitoring of deposit rates and the rollover of many deposits into lower current market interest rates. We monitor this closely to keep deposit costs low, but to maintain ample liquidity. We are a member of the CDARS programs and of QwickRate.

Borrowings

We have several sources for borrowings generally to assist with liquidity. At March 31, 2013 and December 31, 2012, we had no balances outstanding with Federal Home Loan Bank of Atlanta (“FHLB”), overnight federal funds purchased, or corporate cash management accounts. The FHLB holds a blanket lien on loans secured by commercial real estate and loans secured by 1-4 family first liens, second liens, and equity lines, which provide a source of liquidity to the Corporation. Loans included in these portfolios at March 31, 2013 and December 31, 2012 were $99,203,250 and $100,810,587, respectively.

The Bank has an internal Corporate Cash Management account for customers into which excess demand deposit accounts are swept on an overnight basis in order to earn interest. This account is not FDIC insured but the Bank is required to pledge agency funds at 100% towards these balances. The Corporate Cash Management sweep accounts totaled $0 at March 31, 2013 and December 31, 2012.

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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

March 31, 2013

Repurchase Agreements

The Bank entered into a repurchase agreement with Citigroup Global Markets, Inc. (“CGMI”) in the amount of $7,500,000 on September 18, 2007. The repurchase date was September 18, 2012. The interest rate was fixed at 4.22% until maturity or until it was called. Interest was payable quarterly. The repurchase agreement was collateralized by federal agency and agency mortgage backed securities.

The Bank entered into a repurchase agreement with Barclays Capital (“Barclays”) on January 2, 2008 in the amount of $6,000,000. The repurchase date was January 2, 2013. The interest rate was fixed at 3.57% until maturity or until it is called. Interest was payable quarterly. The repurchase agreement was collateralized by federal agency and agency mortgage backed securities.

Shareholders’ Equity

Total shareholders’ equity was $24,447,620and $24,250,373at March 31, 2013 andDecember 31, 2012, respectively. Book value per share was $14.27 and $14.15 at March 31, 2013 and December 31, 2012, respectively. The maintenance of appropriate levels of capital is a priority and is continually monitored. MainStreet and Franklin Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies.Quantitative measures established by regulations to ensure capital adequacy require MainStreet and Franklin Bank to maintain minimum capital ratios. Failure to meet minimum capital ratios can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the consolidated financial statements. Also, declining capital can impact the ability of Franklin Bank to grow other assets. The required level of capital can also be affected by earnings, asset quality, and other issues. Franklin Bank was required under the Agreement with the OCC to implement a three year capital program which, among other things, required Franklin Bank to plan for adequate capital to meet its current and future needs. While MainStreetand Franklin Bank were considered well-capitalized under established regulatory classifications at March 31, 2013 and December 31, 2012, in the current economic circumstances, capital resources are a focus for the Corporation.Capital adequacy levels are also monitored to support the Bank’s safety and soundness.Should it be necessary or appropriate to obtain additional capital, then the current shareholder base could suffer dilution.The following are MainStreet’s capital ratios at:

	March 31, 2013			December 31, 2012
Tier I Leverage Ratio (Actual)		13.37	%		13.03	%
Tier I Leverage Ratio (Quarterly Ave.)		13.65			13.02
Tier I Risk-Based Capital Ratio		19.05			18.15
Tier II Risk-Based Capital Ratio		20.31			19.41

Under the MOU with the Federal Reserve Bank of Richmond, MainStreet is restricted from declaring or paying any dividends without the prior written approval of the Federal Reserve Bank of Richmond. Also, MainStreet cannot incur or guarantee any debt or redeem or purchase any shares of its common stock without the prior written consent of the Federal Reserve Bank of Richmond.

44

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

March 31, 2013

Liquidity and Asset Liability Management

Asset liability management functions to maximize profitability within established guidelines for liquidity, capital adequacy, and interest rate risk. It also helps to ensure that there is adequate liquidity to meet loan demand or deposit outflows and interest rate fluctuations. Liquidity is the ability to meet maturing obligations and commitments, withstand deposit fluctuations, fund operations, and provide for loan requests. In this economic environment liquidity remains a concern. MainStreet’s material off-balance sheet obligations were primarily loan commitments of the Bank in the amountof $17,070,903at March 31, 2013. We have a liquidity contingency plan that provides guidance on the maintenance of appropriate liquidity and what action is required under various liquidity scenarios. Our liquidity is provided by cash and due from banks, interest-bearing deposits, federal funds sold, securities available for sale, and loan repayments. The Bank has overnight borrowing lines available with their correspondent banks, the ability to borrow from the Federal Reserve Bank’s discount window, and the ability to borrow long-term and short-term from the Federal Home Loan Bank of Atlanta. At March 31, 2013 and December 31, 2012, we had available credit from borrowing in the amount of $47,935,986, and $47,521,700, respectively. Our ratio of liquid assets to total liabilities at March 31, 2013 and December 31, 2012was 28.16% and 22.28%, respectively.

Core deposits are the primary foundation for our Corporation’s liquidity. Competition in our markets is strong and customers seek higher interest rates especially during this low interest rate environment. Lines of credit are essential to our business while other funding sources may be utilized. Due to our strategic efforts to reduce deposit costs, total time deposits have decreased from year end 2012; however, demand deposits increased at a faster rate and total deposits actually increased $3.1 million from year end 2012. The shrinkage of the balance sheet had a positive impact on capital. We have also experienced a decline in our loans which has complemented the decline in deposits. We monitor the deposits and our liquidity daily to ensure we have ample liquidity. The Bank is a member of the Certificate of Deposit Account Registry Service (“CDARS”). This allows us to provide the Bank’s depositors with up to $50 million in FDIC insurance. In a reciprocal transaction, the Bank receives the deposits and forwards them to CDARS and receives deposits back, if wanted. We can also bid on deposits in a one-way buy transactions which would allow for new depositors. Based upon our IDC rating, we are not eligible to conduct one-way buy transactions. CDARS deposits are also considered brokered deposits. Franklin Bank had accepted brokered deposits, including CDARS deposits, in the amount of $5.2 million as of March 31, 2013 which is less than 5% of total deposits. The Bank is restricted by its Agreement with the OCC to not have more than 15% brokered deposits as a percentage of total deposits. We are well within this margin. At March 31, 2013, this would allow the Bank to gather an additional $17.9 million in brokered deposits. Franklin Bank became a member of QwickRate in order to bid for internet certificates of deposit as another source of liquidity. At March 31, 2013, Franklin Bank had $5.5 million in internet certificates of deposit.

Interest rate sensitivity is measured by the difference, or gap, between interest sensitive earning assets and interest sensitive interest bearing liabilities and the resultant change in net interest income due to market rate fluctuations, and the effect of interest rate movements on the market. Management utilizes these techniques to manage interest rate risk in order to minimize change in net interest income with interest rate changes. MainStreet has partnered with Compass Bank using the Sendero model to help measure interest rate risk. The asset liability management process requires a number of key assumptions. Management determines the most likely outlook for the economy and interest rates measuring the effect on net interest income in a rising and declining 100, 200, 300, and 400 interest rate environment, as applicable. A shock report for these rates along with a ramped approach with each is modeled. With the shock, net interest income is modeled assuming that interest rates move the full rate change in the first month. With the ramp, net interest income is modeled assuming rates move one quarter of the full rate change in each quarter. With this approach, management also reviews the economic value of equity which is the net present value of the balance sheet’s cash flows or the residual value of future cash flows ultimately due to shareholders.

The following table demonstrates the percentage change in net interest income from the level prime rate of 3.25% at March 31, 2013 in a rising and declining 100, 200, 300, and 400 basis point interest rate environment, as applicable:

45

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

March 31, 2013

Net Interest Income Percentage Change From Level Rates

Rate Shift	Prime Rate		Change From Level Ramp		Change from Level Shock
+400 bp	7.25	%	11.00	%	20.00	%
+300 bp	6.25		8.00		15.00
+200 bp	5.25		6.00		10.00
+100 bp	4.25		2.00		4.00
-100 bp	2.25		-1.00		-1.00
-200 bp	1.25		-1.00		-3.00
-300 bp	.25		-2.00		-4.00

There is little impact on net interest income in the down interest rate scenarios in both the ramp and shock changes from the level rate scenario. In the upward interest rate scenarios, net interest income experiences positive changes to interest income due to the level of variable rate loans, the short-term of fixed rate loans and the assumed repricing of our interest bearing liabilities.

Inflation

Most of our assets are monetary in nature and therefore are sensitive to interest rate fluctuations. We do not have significant fixed assets or inventories. Fluctuations in interest rates and actions of the Board of Governors of the Federal Reserve Systems (“FRB”) including recently “quantitative easing” as well as whether and how the fiscal issues confronting the United States are resolved can have a great effect on our profitability. Management continually strives to manage the relationship between interest-sensitive assets and liabilities. MainStreet and

Franklin Bank must comply with numerous federal and state laws and regulations. In light of the increasing government involvement in the financial services industry and to address the underlying causes of the recent credit crunch, it is likely that financial institutions like MainStreet and Franklin Bank will have to meet additional legal requirements, all of which add to our cost of doing business. In addition, regulatory concerns over real estate related assets on the balance sheets of financial institutions and liquidity due to deposit fluctuations and other factors are likely to translate into higher regulatory scrutiny of financial institutions. This could impact MainStreet.

Stock Compensation Plans

BankShares approved the 2004 Key Employee Stock Option Plan at its Annual Meeting of Shareholders, April 15, 2004. This plan permitted the granting of Incentive and Non Qualified stock options as determined by BankShares’ Board of Directors to persons designated as “Key Employees” of BankShares and its subsidiaries. The Plan terminated on January 21, 2009. Awards made under the Plan prior to and outstanding on that date remain valid in accordance with their terms.

Recent Accounting Developments

In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.” This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The adoption of the new guidance did not have a material impact on the Corporation’s consolidated financial statements.

46

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

March 31, 2013

In July 2012, the FASB issued ASU 2012-02, “Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” The amendments in this ASU apply to all entities that have indefinite-lived intangible assets, other than goodwill, reported in their financial statements. The amendments in this ASU provide an entity with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. The amendments also enhance the consistency of impairment testing guidance among long-lived asset categories by permitting an entity to assess qualitative factors to determine whether it is necessary to calculate the asset’s fair value when testing an indefinite-lived intangible asset for impairment. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted.The adoption of the new guidance did not have a material impact on the Corporation’s consolidated financial statements.

In January 2013, the FASB issued ASU 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” The amendments in this ASU clarify the scope for derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements and securities borrowing and securities lending transactions that are either offset or subject to netting arrangements. An entity is required to apply the amendments for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The adoption of the new guidance did not have a material impact on the Corporation’s consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The amendments in this ASU require an entity to present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income. In addition, the amendments require a cross-reference to other disclosures currently required for other reclassification items to be reclassified directly to net income in their entirety in the same reporting period. Companies should apply these amendments for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. The Corporation adopted this guidance effective 2013, and has elected to present amounts reclassified out of accumulated other comprehensive income in the footnotes to the consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

N/A

Item 4. Controls and Procedures

MainStreet’s principal executive officer and principal financial officer has reviewed MainStreet’s disclosure controls and procedures (as defined in 240.13a-15(e) and 240.15d-15(e)) as of the end of the period covered by this quarterly report and based on their evaluation believe that MainStreet’s disclosure controls and procedures are effective. There have not been any changes in our internal control over financial reporting that occurred during the period that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

47

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

March 31, 2013

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

N/A

Item 1A Risk Factors

NotRequired.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

N/A

Item 3. Defaults Under Senior Securities

N/A

Item 4 Mine Safety Disclosures

N/A

Item 5. Other Information

None.

Item 6. Exhibits

See index to exhibits.

48

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date:  May 10, 2013	By	/s/ Brenda H. Smith
		Brenda H. Smith
		Acting President and Chief Executive Officer
		Executive Vice President, Chief Financial Officer
		and Corporate Secretary

49

Index to Exhibits

Number	Description of Exhibit
3(i)*	RestatedArticles of Incorporation of the Corporation, dated March 6, 2001.
3(ii)	By-laws of the Corporation, dated August 5, 1999 amended February 20, 2001; amended October 16, 2002;amended September 17, 2003; amended July 13, 2005; amended April 20, 2006;  and amended October 21, 2009 filed on Form 8-K on October 22, 2009 and herein incorporated by reference.
4.1	Provision in Registrant’s Articles of Incorporation and Bylaws defining the Rights of Holders of the Registrant’s common stock (included in Exhibits 3.1 and 3.2, respectively).
4.2	2004 Key Employee Stock option Plan filed March 16, 2005 on Form S-8 and herein incorporated by reference.
10.1#	Employment Agreement by and between MainStreet, Franklin Bank, and Larry A. Heaton (President and CEO of Franklin Bank) dated December 30, 2005 incorporated by reference to the Corporation’s Form 8-K filed January 4, 2006.
10.2#	Employment Agreement with Executive Vice President , Brenda H. Smith, dated October 1, 2002, filed with the Corporation’s Quarterly  Form 10-QSB on November 7, 2002 and herein incorporated by reference.  Amendment to employment agreement filed with on Form 8-K on April 24, 2006 and herein incorporated by reference.
10.3	Supplemental Executive Retirement Agreement by and between Franklin Community Bank, N.A. and Larry A. Heaton incorporated by reference to the Corporation’s Form 10-KSB filed March 6, 2008.
10.4#	Supplemental Executive Retirement Agreement by and between Franklin Community Bank, N.A. and Brenda H. Smith incorporated by reference to the Corporation’s Form 10-KSB filed March 6, 2008.
10.5#	Change in Control Agreement between MainStreet BankShares, Inc. and Lisa J. Correll incorporated by reference to the Corporation’s Form 10-KSB filed March 6, 2008.
10.6#	Change in Control Agreement between MainStreet BankShares, Inc., Franklin Community Bank, N.A. and Robert W. Shorter incorporated by reference to the Corporation’s Form 10-KSB filed March 6, 2008.
10.7#	Change in Control Agreement between MainStreet BankShares, Inc., Franklin Community Bank, N.A. and Debra B. Scott incorporated by reference to the Corporation’s Form 10-KSB filed March 6, 2008.
10.8#	Change in Control Agreement between MainStreet BankShares, Inc., Franklin Community Bank, N.A. and Linda P. Adams incorporated by reference to the Corporation’s Form 10-KSB filed March 6, 2008.
10.9	Formal Agreement by and between The Comptroller of the Currency and Franklin Community Bank, National Association dated April 16, 2009 incorporated by reference to the  Corporation’s Form 8-K filed April 20, 2009.
31.1	Certification of President and Chief Executive Officer, Executive Vice President, Chief Financial Officer and Corporate Secretary Pursuant to Rule 13a-14(a) or 15(d)-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
101	Interactive Data File

* (Incorporated by reference to the Corporation’s Annual Form 10-KSB filed March 15, 2001.)

# Management contract or compensatory plan or agreement required to be filed as an Exhibit to this Form 10-Q.

50