10-Q

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 September 30, 2012

¨ 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 company x

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 November 12, 2012          

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Form 10-Q

Index

		Page No.
	PART I   FINANCIAL INFORMATION
Item 1	Financial Statements	1-33
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34-54
Item 3	Quantitative and Qualitative Disclosures About Market Risk N/A	55
Item 4	Controls and Procedures	55
	PART II OTHER INFORMATION
Item 1	Legal Proceedings	55
Item 1A	Risk Factors	55
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3	Defaults Under Senior Securities	55
Item 4	Mine Safety Disclosures	55
Item 5	Other Information	55
Item 6	Exhibits	55
	Signatures	56
	Index to Exhibits	57

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:

2.	Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011 (audited).
3.	Consolidated Statements of Operations for the quarters ended September 30, 2012 (unaudited) and September 30, 2011 (unaudited).
4.	Consolidated Statements of Operations for the year-to-date periods ended September 30, 2012 (unaudited) and September 30, 2011 (unaudited).
5.	Consolidated Statements of Comprehensive Income for the quarters ended September 30, 2012 and September 30, 2011 (unaudited)
6.	Consolidated Statements of Comprehensive Income for the year-to-date periods ended September 30, 2012 and September 30, 2011 (unaudited)
7.	Consolidated Statements of Cash Flows for the year-to-date periods ended September 30, 2012 (unaudited) and September 30, 2011 (unaudited).
8.	Notes to Consolidated Financial Statements.

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

	(Unaudited)			(Audited)
	September 30, 2012			December 31, 2011
ASSETS
Cash and due from banks	$	2,110,177		$	2,767,395
Interest-bearing deposits in banks		14,788,491			17,091,438
Federal funds sold		3,933,876			10,612,680
Total Cash and Cash Equivalents		20,832,544			30,471,513
Securities available for sale, at fair value		21,166,091			21,199,884
Restricted equity securities		740,500			830,000
Loans:
Total Gross Loans		136,665,146			143,134,494
Unearned deferred fees and costs, net		81,572			89,510
Loans, net of unearned deferred fees and costs		136,746,718			143,224,004
Less:  Allowance for loan losses		(2,408,989	)		(3,272,945	)
Net Loans		134,337,729			139,951,059
Bank premises and equipment, net		1,609,783			1,654,496
Accrued interest receivable		569,559			547,905
Bank owned life insurance		3,133,550			3,049,696
Other real estate owned, net of valuation allowance		1,453,654			3,572,518
Other assets		2,348,041			2,578,240
TOTAL ASSETS	$	186,191,451		$	203,855,311
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest bearing demand deposits	$	24,125,962		$	20,975,660
Interest bearing deposits		132,279,275			146,107,182
Total Deposits		156,405,237			167,082,842
Repurchase agreements		6,000,000			13,500,000
Accrued interest payable and other liabilities		1,247,422			1,031,680
Total Liabilities		163,652,659			181,614,522
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 September 30, 2012 and December 31, 2011		17,866,890			17,866,890
Retained earnings		4,172,793			3,986,150
Accumulated other comprehensive income		499,109			387,749
Total Shareholders’ Equity		22,538,792			22,240,789
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	186,191,451		$	203,855,311

See accompanying notes to consolidated financial statements.

2

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

	Three Months			Three Months
	Ended			Ended
	September 30, 2012			September 30, 2011
Interest and Dividend Income:
Interest and fees on loans	$	1,931,274		$	2,128,874
Interest on interest-bearing deposits		7,888			7,586
Interest on federal funds sold		3,619			3,062
Interest on securities available for sale:
Taxable		110,406			187,054
Nontaxable		16,602			—
Dividends on restricted equity securities		7,817			7,501
Total Interest and Dividend Income		2,077,606			2,334,077
Interest Expense:
Interest on deposits		330,791			472,588
Interest on repurchase agreements		124,195			135,623
Total Interest Expense		454,986			608,211
Net Interest Income		1,622,620			1,725,866
Provision for (recovery of) loan losses		(207,119	)		435,000
Net Interest Income After Provision for (Recovery of) Loan Losses		1,829,739			1,290,866
Noninterest Income:
Service charges on deposit accounts		62,449			66,873
Mortgage brokerage income		80,564			42,569
Electronic card fees		45,742			41,271
Investment fee income		44,806			37,144
Income on bank owned life insurance		28,279			27,771
Other fee income and miscellaneous income		54,454			23,412
Total Noninterest Income		316,294			239,040
Noninterest Expense:
Salaries and employee benefits		702,270			696,539
Occupancy and equipment expense		193,973			208,882
Professional fees		73,373			60,895
Outside processing		128,194			107,214
FDIC assessment		61,840			70,555
Franchise tax		50,001			37,500
Regulatory examination fees		27,390			27,728
Other real estate and repossessions		821,318			102,683
Other expenses		161,734			122,231
Total Noninterest Expense		2,220,093			1,434,227
Net Income (Loss) Before Tax	$	(74,060	)	$	95,679
Income Tax Expense (Benefit)		(41,359	)		21,367
Net Income (Loss)	$	(32,701	)	$	74,312
Net Income (Loss) Per Share Basic	$	(.02	)	$	.04
Net Income  (Loss) Per Share Diluted	$	(.02	)	$	.04

See accompanying notes to consolidated financial statements.

3

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

	Nine Months Ended September 30, 2012			Nine Months Ended September 30, 2011
Interest and Dividend Income:
Interest and fees on loans	$	5,798,527		$	6,559,400
Interest on interest-bearing deposits		22,371			17,605
Interest on federal funds sold		10,630			7,082
Interest on securities available for sale:
Taxable		377,573			611,090
Nontaxable		40,291			—
Dividends on restricted equity securities		23,646			22,815
Total Interest and Dividend Income		6,273,038			7,217,992
Interest Expense:
Interest on deposits		1,063,162			1,571,469
Interest on short-term borrowings		1			5
Interest on repurchase agreements		392,493			402,447
Total Interest Expense		1,455,656			1,973,921
Net Interest Income		4,817,382			5,244,071
Provision for (recovery of) loan losses		(33,249	)		1,344,113
Net Interest Income After Provision for (Recovery of) Loan Losses		4,850,631			3,899,958
Noninterest Income:
Service charges on deposit accounts		187,992			220,442
Mortgage brokerage income		180,459			100,991
Electronic card fees		134,614			120,629
Investment fee income		145,265			113,070
Income on bank owned life insurance		83,854			82,336
Gain on securities sold/called		1,848			—
Other fee income and miscellaneous income		113,889			69,191
Total Noninterest Income		847,921			706,659
Noninterest Expense:
Salaries and employee benefits		2,123,014			2,122,587
Occupancy and equipment expense		607,723			635,128
Professional fees		201,347			187,563
Outside processing		387,920			317,024
FDIC assessment		193,965			288,624
Franchise tax		150,003			142,500
Regulatory examination fees		82,790			83,603
Other real estate and repossessions		1,315,850			890,237
Other expenses		421,976			371,469
Total Noninterest Expense		5,484,588			5,038,735
Net Income (Loss) Before Tax	$	213,964		$	(432,118	)
Income Tax Expense (Benefit)		27,321			(178,027	)
Net Income (Loss)	$	186,643		$	(254,091	)
Net Income (Loss) Per Share Basic	$	.11		$	(.15	)
Net Income (Loss) Per Share Diluted	$	.11		$	(.15	)

See accompanying notes to consolidated financial statements.

4

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

	Three Months Ended September 30, 2012			Three Months Ended September 30, 2011
Net Income  (Loss)	$	(32,701	)	$	74,312
Other Comprehensive Income:
Net unrealized holding gains on securities available for sale during the period		145,449			224,084
Deferred income tax expense on unrealized holding gains on securities available for sale		(49,453	)		(76,188	)
Other Comprehensive Income		95,996			147,896
Total Comprehensive Income	$	63,295		$	222,208

See accompanying notes to consolidated financial statements.

5

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

	Nine Months Ended September 30, 2012			Nine Months Ended September 30, 2011
Net Income (Loss)	$	186,643		$	(254,091	)
Other Comprehensive Income:
Net unrealized holding gains on securities available for sale during the period		170,574			726,420
Deferred income tax expense on unrealized holding gains on securities available for sale		(57,994	)		(246,983	)
Less reclassification adjustments for gains included in net income		(1,848	)		—
Tax related to realized gain on securities sold		628			—
Other Comprehensive Income		111,360			479,437
Total Comprehensive Income	$	298,003		$	225,346

See accompanying notes to consolidated financial statements.

6

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30, 2012			Nine Months Ended September 30, 2011
Cash Flows From Operating Activities
Net income (loss)	$	186,643		$	(254,091	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for (recovery of) loan losses		(33,249	)		1,344,113
Depreciation and amortization		141,431			159,114
Amortization of discounts and premiums, net		148,145			108,218
Gain on sale of securities		(1,848	)		—
Loss and impairment on other real estate owned and repossessions		1,210,464			828,596
Deferred tax expense (benefit)		(5,439	)		88,216
(Increase) decrease in accrued interest receivable		(21,654	)		136,519
Decrease in other assets		178,272			7,611
Increase in value of bank owned life insurance		(83,854	)		(82,335	)
Change in reserve for unfunded lending commitments		23,586			—
Increase in accrued interest payable and other liabilities		192,156			1,899
Net cash provided by operating activities		1,934,653			2,337,860
Cash Flows From Investing Activities
Purchases of bank premises and equipment		(96,718	)		(51,660	)
Purchases of securities available for sale		(9,862,042	)		—
Calls/maturities/repayments of securities available for sale		9,918,264			5,377,730
Redemptions of restricted equity securities		89,500			122,900
Capital improvements to other real estate owned		—			(23,750	)
Proceeds from sale of other real estate owned and repossessions		3,130,449			4,632,082
Loan originations and principal collections, net		3,424,530			2,641,144
Net cash provided by investing activities		6,603,983			12,698,446
Cash Flows From Financing Activities
Increase in non-interest bearing deposits		3,150,302			2,715,394
Decrease in interest bearing deposits		(13,827,907	)		(11,096,569	)
Repayment of repurchase agreement		(7,500,000	)		—
Net cash used in financing activities		(18,177,605	)		(8,381,175	)
Net increase (decrease) in cash and cash equivalents	$	(9,638,969	)	$	6,655,131
Cash and cash equivalents at beginning of period		30,471,513			18,765,347
Cash and cash equivalents at end of period	$	20,832,544		$	25,420,478
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	1,494,677		$	2,072,220
Cash paid during the period for taxes	$	—		$	—
Unrealized gain on securities available for sale	$	168,726		$	726,420
Transfers between loans, other real estate & other assets	$	2,222,049		$	3,433,127

See accompanying notes to consolidated financial statements.

7

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

September 30, 2012

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 2011 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. When MainStreet sold Smith River Bank, the capital was redeployed to Franklin Bank.

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 carrying values, unrealized gains and losses and approximate market values of investment securities at September 30, 2012 and December 31, 2011 are shown in the following tables. The entire investment portfolio is classified as available-for-sale to preserve maximum liquidity for funding needs.

8

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

September 30, 2012

	September 30, 2012
			Gross		Gross
	Amortized		Unrealized		Unrealized			Approximate
	Cost		Gains		Losses			Market Value
U.S. government sponsored agencies	$	2,217,487	$	11,956	$	—		$	2,229,443
Mortgage backed securities		13,557,686		648,932		—			14,206,618
States and political subdivisions		4,697,047		46,701		(13,718	)		4,730,030
Total securities available for sale	$	20,472,220	$	707,589	$	(13,718	)	$	21,166,091

	December 31, 2011
			Gross		Gross
	Amortized		Unrealized		Unrealized			Approximate
	Cost		Gains		Losses			Market Value
U. S. government sponsored agencies	$	2,804,763	$	7,497	$	(1,478	)	$	2,810,782
Mortgage backed securities		16,758,613		496,577		—			17,255,190
States and political subdivisions		1,111,363		22,549		—			1,133,912
Total securities available-for-sale	$	20,674,739	$	526,623	$	(1,478	)	$	21,199,884

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 September 30, 2012, 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		7,843,183		7,928,369
Due after ten years		12,629,037		13,237,722
	$	20,472,220	$	21,166,091

There were $1,848 in gross gains and no gross losses recorded on calls of securities available for sale for the nine month period ending September 30, 2012. There were no gains or losses recorded on securities available for sale for the quarter ending September 30, 2012. There were no gross gains or losses recorded on sales and calls of securities available for sale for the quarter and nine month periods ending September 30, 2011.

9

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

September 30, 2012

Following demonstrates the unrealized loss position of securities available for sale at September 30, 2012 and December 31, 2011.

	September 30, 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	$	2,306,820	$	(13,718	)	$	—	$	—	$	2,306,820	$	(13,718	)
Total securities available-for-sale	$	2,306,820	$	(13,718	)	$	—	$	—	$	2,306,820	$	(13,718	)

	December 31, 2011
	Less Than 12 Months					12 Months or More				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Losses			Value		Losses		Value		Losses
U. S. government sponsored agencies	$	2,248,523	$	(1,478	)	$	—	$	—	$	2,248,523	$	(1,478	)
Total temporarily impaired securities	$	2,248,523	$	(1,478	)	$	—	$	—	$	2,248,523	$	(1,478	)

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 September 30, 2012 and December 31, 2011, there were $2.3 million and $2.2 million, 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 September 30, 2012 and December 31, 2011.

Federal Reserve Bank stock is included in restricted equity securities and totaled $435,100 at September 30, 2012 and December 31, 2011. The Corporation’s investment in Federal Home Loan Bank (“FHLB”) stock totaled $305,400 and $394,900 at September 30, 2012 and December 31, 2011, 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 September 30, 2012 and no impairment has been recognized. FHLB has repurchased excess capital stock during 2012 and 2011 and there is no excess stock at September 30, 2012.

10

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

September 30, 2012

Note 3 – Loans Receivable

The major components of gross loans in the consolidated balance sheets at September 30, 2012 and December 31, 2011 are as follows:

	September 30, 2012		December 31, 2011
Commercial	$	9,650,317	$	11,061,471
Real Estate:
Construction and land development		21,731,841		26,102,914
Residential 1-4 families:
First liens		37,430,946		37,735,618
Junior liens		8,187,067		8,486,594
Home equity lines		6,169,719		7,639,785
Commercial real estate		51,758,246		50,272,002
Consumer		1,737,010		1,836,110
Total Gross Loans	$	136,665,146	$	143,134,494
Unearned deferred fees and costs, net		81,572		89,510
Recorded Investment	$	136,746,718	$	143,224,004

Overdrafts reclassified to loans at September 30, 2012 and December 31, 2011 were $10,801 and $4,916, 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.

11

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

September 30, 2012

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 nine months ended September 30, 2012 and 2011 are as follows:

	2012			2011
Balance at beginning of year	$	3,272,945		$	3,584,180
Provision for (recovery of) loan losses		(33,249	)		1,344,113
Recoveries		158,553			86,545
Charge-offs		(989,260	)		(1,720,824	)
Balance at period end	$	2,408,989		$	3,294,014

12

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

September 30, 2012

A breakdown of the allowance by loan segment for the nine months ended September 30, 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		(187	)		(245,248	)		(649,961	)		(93,578	)		—			—			(286	)		—		(989,260	)
Recoveries		1,842			5,976			126,333			10,332			3,374			—			10,696			—		158,553
Provision		(49,511	)		(155,228	)		236,636			66,467			(8,802	)		(129,756	)		(4,945	)		11,890		(33,249	)
Ending Balance	$	107,135		$	508,144		$	813,147		$	158,030		$	93,154		$	695,003		$	17,376		$	17,000	$	2,408,989

			September 30, 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	$	—	$	—	$	123,000	$	—	$	—	$	—	$	—	$	—	$	123,000
Ending Balance: Collectively evaluated for impairment		107,135		508,144		690,147		158,030		93,154		695,003		17,376		17,000		2,285,989
	$	107,135	$	508,144	$	813,147	$	158,030	$	93,154	$	695,003	$	17,376	$	17,000	$	2,408,989

13

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

September 30, 2012

			September 30, 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	$	235,466	$	991,764	$	2,511,464	$	415,466	$	—	$	709,198	$	—	$	4,863,358
Ending Balance: Collectively evaluated for impairment		9,414,851		20,740,077		34,919,482		7,771,601		6,169,719		51,049,048		1,737,010		131,801,788
	$	9,650,317	$	21,731,841	$	37,430,946	$	8,187,067	$	6,169,719	$	51,758,246	$	1,737,010	$	136,665,146

A breakdown of the allowance for loan losses by loan segment for the year ended December 31, 2011 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	$	138,449		$	1,086,183		$	1,065,683		$	243,526		$	217,063		$	793,308		$	39,968		$	—	$	3,584,180
Charge-offs		(482,651	)		(922,440	)		(311,265	)		(164,907	)		(34,745	)		(205,824	)		(21,670	)		—		(2,143,502	)
Recoveries		32,312			62,883			62,755			1,232			—			—			12,302			—		171,484
Provision		466,881			676,018			282,966			94,958			(83,736	)		237,275			(18,689	)		5,110		1,660,783
Ending Balance	$	154,991		$	902,644		$	1,100,139		$	174,809		$	98,582		$	824,759		$	11,911		$	5,110	$	3,272,945

14

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

September 30, 2012

			December 31, 2011 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	$	2,075	$	292,323	$	413,354	$	—	$	—	$	110,820	$	—	$	—	$	818,572
Ending Balance: Collectively evaluated for impairment		152,916		610,321		686,785		174,809		98,582		713,939		11,911		5,110		2,454,373
	$	154,991	$	902,644	$	1,100,139	$	174,809	$	98,582	$	824,759	$	11,911	$	5,110	$	3,272,945

			December 31, 2011 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	$	136,680	$	1,624,238	$	4,852,061	$	424,795	$	131,439	$	1,533,473	$	50,694	$	8,753,380
Ending Balance: Collectively evaluated for impairment		10,924,791		24,478,676		32,883,557		8,061,799		7,508,346		48,738,529		1,785,416		134,381,114
	$	11,061,471	$	26,102,914	$	37,735,618	$	8,486,594	$	7,639,785	$	50,272,002	$	1,836,110	$	143,134,494

15

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

September 30, 2012

An age analysis of past due loans as of September 30, 2012 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	$	86,308	$	—	$	21,684	$	107,992	$	9,542,325	$	9,650,317	$	21,684	$	—
Real Estate:
Construction and land development		601,226		—		530,616		1,131,842		20,599,999		21,731,841		—		668,278
Residential 1-4 Families
First Liens		756,722		112,800		1,856,124		2,725,646		34,705,300		37,430,946		38,504		2,233,924
Junior Liens		113,380		81,191		318,424		512,995		7,674,072		8,187,067		180,215		138,209
Home Equity lines		—		—		—		—		6,169,719		6,169,719		—		—
Commercial Real Estate		153,085		—		359,807		512,892		51,245,354		51,758,246		359,807		—
Consumer		5,620		—		—		5,620		1,731,390		1,737,010		—		—
	$	1,716,341	$	193,991	$	3,086,655	$	4,996,987	$	131,668,159	$	136,665,146	$	600,210	$	3,040,411

An age analysis of past due loans as of December 31, 2011 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	$	150,390	$	4,287	$	88,350	$	243,027	$	10,818,444	$	11,061,471	$	—	$	104,579
Real Estate:
Construction and land development		52,406		43,274		1,526,501		1,622,181		24,480,733		26,102,914		—		1,624,238
Residential 1-4 Families
First Liens		836,919		1,674,264		2,689,459		5,200,642		32,534,976		37,735,618		—		4,852,061
Junior Liens		208,807		—		—		208,807		8,277,787		8,486,594		—		156,490
Home Equity lines		26,773		—		—		26,773		7,613,012		7,639,785		—		131,439
Commercial Real Estate		—		—		148,221		148,221		50,123,781		50,272,002		—		148,221
Consumer		2,103		—		—		2,103		1,834,007		1,836,110		—		50,694
	$	1,277,398	$	1,721,825	$	4,452,531	$	7,451,754	$	135,682,740	$	143,134,494	$	—	$	7,067,722

16

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

September 30, 2012

Impaired loans at September 30, 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	$	235,466	$	—	$	235,466	$	—	$	152,165	$	73
Real Estate:
Construction and land development		1,013,204		—		991,764		—		1,030,313		—
Residential 1-4 Families
First Liens		2,568,678		691,116		1,820,348		123,000		3,141,578		3,236
Junior Liens		415,466		—		415,466		—		364,857		185
Home Equity lines		—		—		—		—		97,219		—
Commercial Real Estate		709,198		—		709,198		—		1,142,338		—
Consumer		86,494		—		—		—		25,122		—
	$	5,028,506	$	691,116	$	4,172,242	$	123,000	$	5,953,592	$	3,494

Impaired loans at December 31, 2011 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	$	170,080	$	36,388	$	100,292	$	2,075	$	327,051	$	593
Real Estate:
Construction and land  development		1,664,551		1,263,551		360,687		292,323		2,163,855		24,174
Residential 1-4 Families
First Liens		4,901,815		2,474,255		2,377,806		413,354		3,618,240		122,856
Junior Liens		424,795		—		424,795		—		570,365		15,383
Home Equity lines		163,703		—		131,439		—		177,972		3,520
Commercial Real Estate		1,533,473		1,385,252		148,221		110,820		809,181		105,266
Consumer		142,188		—		50,694		—		56,639		653
	$	9,000,605	$	5,159,446	$	3,593,934	$	818,572	$	7,723,303	$	272,445

17

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

September 30, 2012

Troubled debt restructurings occurred as follows for the year-to-date periods ending September 30, 2012 and 2011:

	2012		2011
Commercial	$	97,502	$	68,225
Real Estate:
Construction and land development		323,487		—
Residential 1-4 families:
First liens		—		275,000
Junior liens		—		171,638
Home Equity Lines		—		—
Commercial Real Estate		353,177		148,221
Consumer		—		—
	$	774,166	$	663,084

For the nine months ended September 30, 2012, below describes the troubled debt restructurings at the time of modification:

	Pre-Modification				Post-Modification
	Number				Number
	of Loans		Balance		of Loans		Balance
Commercial		1	$	97,502		1	$	97,502
Real Estate:
Construction and land development		1		323,487		1		323,487
Residential 1-4 families:
First liens		—		—		—		—
Junior liens		—		—		—		—
Home Equity Lines		—		—		—		—
Commercial Real Estate		1		354,156		1		354,156
Consumer		—		—		—		—
		3	$	775,145		3	$	775,145

The commercial loan restructured was a renewal of an existing loan for a short period of time to allow the borrower to come up with an action plan. The borrower’s debt service ratio had declined moving the credit to a criticized asset. The construction and land development loan was the renewal of a criticized credit for a short term to allow the borrower to sell assets. The commercial real estate loan was the restructure of a stale line of credit into an amortizing loan of a criticized asset.

There were no additional loans designated as troubled debt restructuring in the third quarter of 2012.

At September 30, 2012 and December 31, 2011 the balance in loans under the terms of troubled debt restructurings not included in nonaccrual loans was $1,222,737 and $1,685,658, respectively. These loans did not have any additional commitments at September 30, 2012 and December 31, 2011, respectively. Loan restructurings generally occur when a modification that would otherwise not be considered is granted to the borrower. 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 September 30, 2012 and December 31, 2011, respectively. Troubled debt restructurings are included in the impaired loan disclosures.

18

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

September 30, 2012

There were no troubled debt restructurings modified during the prior twelve months that defaulted during the three and nine month period ended September 30, 2012.

For the nine months ended September 30, 2011, below describes the troubled debt restructurings at the time of modification:

	Pre-Modification				Post-Modification
	Number				Number
	of Loans		Balance		of Loans		Balance
Commercial		2	$	370,735		2	$	68,940
Real Estate:
Construction and land development		—		—		—		—
Residential 1-4 families:
First liens		1		275,000		1		275,000
Junior liens		1		518,719		1		175,000
Home Equity Lines		—		—		—		—
Commercial Real Estate		1		152,235		1		152,235
Consumer		—		—		—		—
		5	$	1,316,689		5	$	671,175

The commercial loans restructured had one loan modified due to the company going out of business. Loan renewed interest only until other sources of income were obtained. The second loan consisted of property taken into other real estate with a charge off and the deficit balance added into a new note. The 1-4 family residential first lien loan was modified from a home equity loan to a term loan over thirty years. The junior lien was a credit for a lot loan where the borrower had financial difficulty and lot had lost value. The lot was taken into other real estate and the deficit was put into a new note secured by a second on his home. The new note was also set up interest only for two years and then amortizing but to allow for time to sell the property. Commercial real estate loan was modified and termed out over thirty years. Interest to date was forgiven.

Of the $663,084 in loans restructured year-to-date September 2011, $319,859 are on nonaccrual and are included in the nonaccrual and impaired loan disclosures.

There were no troubled debt restructuring occurrences in the third quarter of 2011.

There were no troubled debt restructurings modified during the prior twelve months that were in default as of September 30, 2011.

19

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

September 30, 2012

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

	September 30, 2012		September 30, 2011
Interest that would have been  earned	$	216,209	$	470,512
Interest reflected in income		3,494		93,198
Lost interest	$	212,715	$	377,314

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.

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.

20

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

September 30, 2012

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.

21

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

September 30, 2012

			September 30, 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	$	9,330,704	$	18,306,735	$	32,622,870	$	7,019,935	$	6,143,006	$	47,564,233	$	1,644,164	$	122,631,647
Special Mention		73,889		869,098		716,868		275,520		—		1,824,120		39,096		3,798,591
Substandard		245,724		2,556,008		4,091,208		891,612		26,713		2,369,893		53,750		10,234,908
Doubtful		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—
	$	9,650,317	$	21,731,841	$	37,430,946	$	8,187,067	$	6,169,719	$	51,758,246	$	1,737,010	$	136,665,146

			December 31, 2011 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	$	9,869,976	$	21,364,943	$	30,016,743	$	7,251,555	$	7,486,498	$	43,885,034	$	1,782,754	$	121,657,503
Special Mention		878,058		1,067,783		492,941		—		—		1,611,592		—		4,050,374
Substandard		312,325		3,377,865		6,812,580		1,235,039		153,287		4,775,376		53,356		16,719,828
Doubtful		1,112		292,323		413,354		—		—		—		—		706,789
Loss		—		—		—		—		—		—		—		—
	$	11,061,471	$	26,102,914	$	37,735,618	$	8,486,594	$	7,639,785	$	50,272,002	$	1,836,110	$	143,134,494

22

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

September 30, 2012

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 September 30, 2012 and December 31, 2011.

There were no overnight federal funds purchased at September 30, 2012 and December 31, 2011.

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 September 30, 2012 and December 31, 2011, respectively.

Note 6 – Repurchase Agreements

The Corporation 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. Beginning September 18, 2008, the repurchase agreement became callable by CBMI 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.

The Corporation entered into a repurchase agreement with Barclays Capital on January 2, 2008 in the amount of $6,000,000. The repurchase date is January 2, 2013. The interest rate is fixed at 3.57% until maturity or until it is called. Beginning January 2, 2009 the repurchase agreement became callable and can be called quarterly with two business days prior notice. Interest is payable quarterly. The repurchase agreement is collateralized by agency mortgage backed securities. The interest rate remained at 3.57% at September 30, 2012.

Note 7 – Net Income (Loss) Per Share

The following tables show the weighted average number of shares used in computing earnings (loss) per 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.

	Nine Months Ended				Nine Months Ended
	September 30, 2012				September 30, 2011
	Shares		Per Share Amount		Shares		Per Share Amount
Earnings (loss) per share, basic		1,713,375	$	.11		1,713,375	$	(.15	)
Effect of dilutive securities:
Stock options and warrants		—				—
Earnings (loss) per share, diluted		1,713,375	$	.11		1,713,375	$	(.15	)

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 September 30, 2012 and 2011, respectively.

23

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

September 30, 2012

The following tables show the weighted average number of shares used in computing earnings (loss) per 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
	September 30, 2012					September 30, 2011
	Shares		Per Share Amount			Shares		Per Share Amount
Earnings (loss) per share, basic		1,713,375	$	(.02	)		1,713,375	$	.04
Effect of dilutive securities:
Stock options and warrants		—					—
Earnings (loss) per share, diluted		1,713,375	$	(.02	)		1,713,375	$	.04

Options and warrants not included in the calculation of diluted earnings per share because they were anti-dilutive were 161,272 for the quarters ending September 30, 2012 and 2011, 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 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 September 30, 2012, 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 September 30, 2012 the Corporation has reserved 161,272 shares of authorized but unissued shares of common stock related to the stock option agreements.

The Black-Scholes model was utilized to calculate the fair-value of the stock options on the date of grant for grants prior to 2008 using the assumptions of risk-free interest rate; expected life of options; expected volatility of the stock price and expected dividend yield. Expected volatilities are based on the historical volatility of MainStreet’s stock. Stock options granted in 2006 and forward were included in the calculation of compensation cost. The risk-free rate for the period within the contractual life of the option is based upon the ten year Treasury rate at the date of the grant. Expected life was calculated using the simplified method based on the average of the vesting period and contractual life of the options.

24

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

September 30, 2012

Following is a status and summary of changes in stock options during the nine months ended September 30, 2012:

					Weighted
			Weighted		Average
	Nine Month		Average		Remaining		Aggregate
	Period Ended		Exercise		Contractual		Intrinsic
	September 30, 2012		Price		Term		Value
Outstanding at Beginning of year		161,272	$	12.17
Granted		—		—
Exercised		—		—
Forfeited		—		—
Expired		—		—
Outstanding at September 30, 2012		161,272	$	12.17		2.92	$	—
Exercisable at September 30, 2012		161,272	$	12.17		2.92	$	—

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 September 30, 2012. This amount changes based on changes in the market value of the Corporation’s stock.

As of September 30, 2012 and 2011, there was no unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. The original unrecognized compensation cost was recognized over a weighted-average period of three years.

As of September 30, 2012, 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		.75
12.09		85,147		3.15
12.09		17,299		3.25
15.00		13,260		5.20
16.75		12,566		4.25
$9.55 - $16.75		161,272

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.

25

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

September 30, 2012

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 September 30, 2012, outstanding commitments to extend credit including letters of credit were $17,669,422. 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.

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.

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

26

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

September 30, 2012

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011:

			Fair Value Measurements at September 30, 2012 Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Balance as of		Assets		Inputs		Inputs
Description	September 30, 2012		(Level 1)		(Level 2)		(Level 3)
Available-for-sale securities:
U. S. government sponsored agencies	$	2,229,443	$	—	$	2,229,443	$	—
Mortgage backed securities		14,206,618		—		14,206,618		—
States and political subdivisions		4,730,030		—		4,730,030		—
Total available-for-sale securities		21,166,091		—		21,166,091		—
Total assets at fair value	$	21,166,091	$	—	$	21,166,091	$	—

			Fair Value Measurements at December 31, 2011 Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Balance as of		Assets		Inputs		Inputs
Description	December 31, 2011		(Level 1)		(Level 2)		(Level 3)
Available-for-sale securities:
U. S. government sponsored agencies	$	2,810,782	$	—	$	2,810,782	$	—
Mortgage backed securities		17,255,190		—		17,255,190		—
States and political subdivisions		1,133,912		—		1,133,912		—
Total available-for-sale securities	$	21,199,884	$	—	$	21,199,884	$	—
Total assets at fair value	$	21,199,884	$	—	$	21,199,884	$	—

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:

27

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

September 30, 2012

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 an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of MainStreet using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. 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 Operations.

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 an observable market price or a current appraised value, the Corporation records the OREO as nonrecurring Level 2. When the appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Corporation records the OREO as nonrecurring Level 3. Any fair value adjustments are recorded as other real estate and repossessions expense on the Consolidated Statements of Operations.

The following table summarizes MainStreet’s assets that were measured at fair value on a nonrecurring basis as of September 30, 2012 and December 31, 2011.

			Carrying value at September 30, 2012
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Balance as of		Assets		Inputs		Inputs
Description	September 30, 2012		(Level 1)		(Level 2)		(Level 3)
Impaired Loans	$	1,208,375	$	—	$	402,593	$	805,782
Other real estate owned		1,453,654		—		—		1,453,654
Total assets at fair value	$	2,662,029	$	—	$	402,593	$	2,259,436

			Carrying value at December 31, 2011
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Balance as of		Assets		Inputs		Inputs
Description	December 31, 2011		(Level 1)		(Level 2)		(Level 3)
Impaired Loans	$	4,867,822	$	—	$	4,218,384	$	649,438
Other real estate owned		3,572,518		—		1,596,190		1,976,328
Total assets at fair value	$	8,440,340	$	—	$	5,814,574	$	2,625,766

28

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

September 30, 2012

The changes in Level 3 assets measured at estimated fair value on a nonrecurring basis during the period ended September 30, 2012 were as follows:

	Fair Value Measurements at September 30, 2012
	Impaired Loans			Other Real Estate Owned
Balance – January 1, 2012	$	649,438		$	1,976,328
Total gains (losses) realized/unrealized
Included in earnings (write downs)		—			(376,537	)
Newly Impaired / New OREO		832,833			1,565,729
Sales		(88,350	)		(2,644,615	)
Settlements / Foreclosures / Paydowns / charge offs		(201,725	)		—
Transfers into Level 3		1,781,403			932,749
Transfers out of Level 3		(2,167,817	)		—
Balance – September 30, 2012	$	805,782		$	1,453,654

The following table displays quantitative information about Level 3 Fair Value Measurements for September 30, 2012:

	Quantitative information about Level 3 Fair Value Measurements for September 30, 2012
	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Assets
Impaired loans	$	568,116	Discounted appraised value	Selling cost	18%            (18%)
	$	237,666	Internal evaluations	Internal evaluations	6%              (6%)
Other real estate owned	$	922,256	Discounted appraised value	Selling cost	45% - 51% (49%)
	$	531,398	Internal evaluations	Internal evaluations	25% - 68% ( 32%)

29

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

September 30, 2012

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.

(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) Short-term Borrowings

The carrying amount is a reasonable estimate of fair value.

30

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

September 30, 2012

(k) Long-term Borrowings

The fair value of long-term borrowings 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.

(l) 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 carrying values and estimated fair values of financial instruments at September 30, 2012 and December 31, 2011 are as follows:

			Fair Value Measurements at September 30, 2012 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	$	2,110,177	$	2,110,177	$	—	$	—	$	2,110,177
Interest-bearing deposits in banks		14,788,491		14,788,491		—		—		14,788,491
Federal funds sold		3,933,876		3,933,876		—		—		3,933,876
Securities available-for-sale		21,166,091		—		21,166,091		—		21,166,091
Restricted equity securities		740,500		—		740,500		—		740,500
Loans, net		134,337,729		—		132,172,997		805,782		132,978,779
Accrued interest receivable		569,559		—		569,559		—		569,559
Bank owned life insurance		3,133,550		—		3,133,550		—		3,133,550
FINANCIAL LIABILITIES:
Deposits:
Non-interest bearing demand deposits	$	24,125,962	$	—	$	24,125,962	$	—	$	24,125,962
Interest bearing deposits		132,279,275		—		132,880,521		—		132,880,521
Repurchase agreements		6,000,000		—		6,050,234		—		6,050,234
Accrued interest payable		186,590		—		186,590		—		186,590

31

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

September 30, 2012

	December 31, 2011
	Carrying Value		Fair Value
FINANCIAL ASSETS:
Cash and due from banks	$	2,767,395	$	2,767,395
Interest-bearing deposits in other banks		17,091,438		17,091,438
Federal funds sold		10,612,680		10,612,680
Securities available-for-sale		21,199,884		21,199,884
Restricted equity securities		830,000		830,000
Loans, net		139,951,059		138,716,777
Accrued interest receivable		547,905		547,905
Bank owned life insurance		3,049,696		3,049,696
FINANCIAL LIABILITIES:
Deposits:
Non-interest bearing demand deposits	$	20,975,660	$	20,975,660
Interest bearing deposits		146,107,182		146,767,245
Repurchase agreements		13,500,000		13,874,422
Accrued interest payable		225,611		225,611

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.

Note 11 – Contingencies and Other Matters

The Corporation currently is not involved in any litigation.

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.

32

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

September 30, 2012

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.

33

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

September 30, 2012

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.

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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

September 30, 2012

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.

§ 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 September 30, 2012 and December 31, 2011, brokered deposits were $5.3 million and $6.9 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.

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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

September 30, 2012

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.

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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

September 30, 2012

Overview

Total assets at September 30, 2012 were $186.2 million compared to $203.9 million at year-end December 31, 2011, a decline of $17.7 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 $7.5 million repurchase agreement in September 2012. In addition, the resolution of problem credits and soft loan demand have caused our loans to decline. At September 30, 2012, loans, net of unearned deferred fees and costs, declined $6.5 million from year-end 2011 and $1.9 million from the prior quarter end. Securities available for sale remained stable with year end balances despite purchases of $9.9 million; however, the purchases were offset by pay downs on mortgage backed securities and called securities. Deposits declined $10.7 million. The intentional shrinkage in our balance sheet has had a positive impact on our capital ratios. Total cash and cash equivalents decreased from year-end 2011 by $9.6 million, primarily due to the purchase of securities, offset by pay downs on mortgage backed securities and called securities, and the repayment of our $7.5 million repurchase agreement. Liquidity continues to be an important focus for our Company during these tumultuous times and our liquid assets were 20.75% of total liabilities at September 30, 2012 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 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; however, these asset quality levels have improved significantly since year-end 2011 and since the first quarter of 2012. We transferred $2.2 million of loans into other real estate and other repossessed assets during the first nine months of 2012. None the less, our other real estate properties declined to $1.5 million at September 30, 2012 compared to $3.6 million at December 31, 2011. As can be seen by the addition of properties, but overall decline in balance at quarter end, we have sold approximately $4.3 million of properties in other real estate and have approximately $.9 million in additional properties under contract.

Total shareholders’ equity was $22.5 million at September 30, 2012. MainStreet and Franklin Bank were well capitalized at September 30, 2012 under bank regulatory capital classifications. The book value of shareholders’ equity at September 30, 2012 was $13.15 per share.

Our year-to-date net income at September 30, 2012 was $186,643, or $.11 per basic share. This income equated to an annualized return on average assets of .13% and an annualized return on average shareholders’ equity of 1.10%. Net loss for the same period in 2011 was $(254,091), or $(.15) per basic share. This equated to an annualized loss on average assets and annualized loss on average shareholders’ equity of (.16%) and (1.53%), 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 $1,282,601 and $2,234,350 in expense for the nine month periods ending September 30, 2012 and September 30, 2011, respectively.

Net loss for the third quarter of 2012 was $(32,701), or $(.02) per basic share compared to net income of $74,312, or $.04 per basic share, for the third quarter of 2011. Provision expense and other real estate and repossession expenses, write-downs and losses on sale together were $614,199 for the third quarter of 2012 compared to $537,683 for the third quarter of 2011. Credit related issues continue to have a negative impact on our Company’s net income.

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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

September 30, 2012

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 nine month period ending September 30, 2012 and 2011 was $4,817,382 and $5,244,071, respectively, a decline of $426,689, or 8.14%. 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 an increase in lost interest income on nonaccrual loans. For the nine months ending September 30, 2012 and 2011, the net interest margin was 3.49% and 3.55%, respectively, a 6 basis point decrease. The yield on interest earning assets for the year-to-date period ending September 30, 2012 was 4.53% compared to 4.89% for the year-to-date period ending September 30, 2011, a decline of 36 basis points. However, the funding side of the interest margin also dropped during this time period by a favorable 30 basis points in the year-to-year comparison. 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 has declined due to the interest rate environment, lack of loan demand reducing loan fee income, and continued lost interest on nonaccrual loans. Lost interest for the period ending September 30, 2012 and 2011 was $212,715 and $377,314, 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 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 should show improvement with the maturity of the 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 matures in early January 2013.

Net interest income for the three month period ending September 30, 2012 and 2011 was $1,622,620 and $1,725,866, respectively, a decline of $103,246, or 5.98%. This equated to a net interest margin of 3.52% and 3.57% at September 30, 2012 and 2011, respectively.

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.

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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

September 30, 2012

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 nine months of 2012 and 2011 was $(33,249) and $1,344,113, respectively. Our loan portfolio, net of unearned deferred fees and costs, declined $6.5 million or 4.52% from year-end 2011. Due to the decline in volumes of our adverse rated and impaired loans offset by the increase in collectively evaluated pools, we have not provided any additional dollars this year to our loan loss reserve based on our quarterly detailed allowance calculation as discussed above. Gross charge-offs year-to-date 2012 were $989,260 compared to $1,720,824 year-to-date 2011. We transferred $2.2 million from loans to other real estate and other repossessed assets during the year-to-date period ending September 30, 2012. Based on updated appraisals we received on these properties, along with other loans, we charged off the balance noted above. The allowance for loan losses was $2.4 million at September 30, 2012 and $3.3 million at December 31, 2011, a decline of $.9 million due to charge offs, declining provision expense and some modest recoveries. The allowance for loan losses was 1.76% and 2.29% of loans net of unearned at September 30, 2012 and December 31, 2011, respectively. Our criticized and classified loans that are evaluated by historical loss migration declined $3.8 million at September 30, 2012 compared to year-end 2011. The loans evaluated collectively by pools increased $1.2 million at September 30, 2012 versus December 31, 2011. Impaired loans evaluated individually were $4.9 million and $8.8 million at September 30, 2012 and December 31, 2011, respectively, with specific reserves of $123,000 and $818,572, respectively. The decline in the allowance for loan losses to loans, net of unearned deferred fees, from year end 2011 was primarily because the volumes of our adverse rated loans and our impaired loans declined. The allowance for loan losses was not replenished by $989,260 of gross charge offs because the loans were provided for in our allowance for loan losses at year-end 2011. The unallocated amount increased $11,890 from year-end 2011. Net charge-offs of $830,707 and $1,634,279 for the nine months of 2012 and 2011 equated to .80% and 1.41%, 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.

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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

September 30, 2012

Provision expense for the third quarter of 2012 and 2011 was ($207,119) and $435,000, respectively. We had a modest recovery of reserve during the third quarter of 2012 primarily due to the improvement in our criticized and classified loan totals. Qualitative factors also noted an improvement in our allowance calculation. The allowance for loan losses was $2.4 million at September 30, 2012 and $2.6 million at June 30, 2012. The allowance for loan losses was 1.76% and 1.85% of loans net of unearned at September 30, 2012 and June 30, 2012, respectively. Our criticized and classified loans that are evaluated by historical loss migration declined $629.5 thousand at September 30, 2012 compared to prior quarter end. The loans evaluated collectively by pools increased $116.7 thousand at September 30, 2012 versus June 30, 2012. Impaired loans evaluated individually were $4.9 million and $6.3 million at September 30, 2012 and June 30, 2012, respectively, with specific reserves of $123,000 and $337,757, respectively. The decline in the allowance for loan losses to loans, net of unearned deferred fees, from year end 2011 was primarily because the volumes of loans declined in our adverse rated loans and our impaired loans and due to the level of charge offs provided at year end and charged off in 2012. The unallocated amount increased $17,000 during the third quarter. Gross charges offs and recoveries for the third quarter of 2012 were $33,810 and $86,089, respectively. Net charge-offs of $(52,279) for the three months of the third quarter of 2012 equated to (.15%), of quarterly average loans outstanding net of unearned income and deferred fees.

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

	September 30, 2012		December 31, 2011
Commercial	$	235,466	$	136,680
Real Estate:
Construction and land development		991,764		1,624,238
Residential 1-4 families:
First liens		2,511,464		4,852,061
Junior liens		415,466		424,795
Home equity loans		—		131,439
Commercial real estate		709,198		1,533,473
Consumer		—		50,694
Total Nonperforming Loans	$	4,863,358	$	8,753,380

Total nonperforming loans showed significant improvement by declining $3.9 million, or 44.44%, at the end of September 2012 compared to year-end 2011. Nonaccrual loans (included in the impaired loans above) were $3,040,411 and $7,067,722 at September 30, 2012 and December 31, 2011, respectively, which represented 2.22% and 4.93%, 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 accruing troubled debt restructurings. 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 September 30, 2012 and December 31, 2011, loans secured by residential 1-4 family first liens were the largest category of impaired loans at $2.5 million and $4.9 million, respectively. Construction and land development loans at $1.0 million and $1.6 million at September 30, 2012 and December 31, 2011, respectively, were the next largest of the impaired loan categories.

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 5.8%. 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.

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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

September 30, 2012

Noninterest Income

Total noninterest income was $847,921 and $706,659 for the nine months ending September 30, 2012 and 2011, respectively, an increase of $141,262, or 19.99%. The following chart demonstrates the categories of change:

Noninterest Income	YTD 9/30/12		YTD 9/30/11		Dollar Change			Percentage Change
Service charges on deposit accounts	$	187,992	$	220,442	$	(32,450	)		(14.72	)%
Mortgage brokerage income		180,459		100,991		79,468			78.69
Electronic card fees		134,614		120,629		13,985			11.59
Investment fee income		145,265		113,070		32,195			28.47
Income on bank owned life insurance		83,854		82,336		1,518			1.84
Gain on securities sold/called		1,848		—		1,848			100.00
Other fee income & miscellaneous		113,889		69,191		44,698			64.60

As noted above, total noninterest income increased $141,262 for the nine months ending September 30, 2012 compared to the nine months ending September 30, 2011. Service charges on deposit accounts declined $32,450 in the year to year comparison. This decline is primarily due to a decline in NSF charges. Mortgage brokerage demonstrated a substantial increase in the year to year comparison by $79,468, or 78.69%; 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 $13,985 or 11.59% for the nine months ended September 30, 2012 as compared to September 30, 2011. 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 nine months of 2012 and 2011was $145,265 and $113,070, respectively, an increase of $32,195, or 28.47%. Franklin Bank has bank owned life insurance on the lives of the two executive officers. The balance at September 30, 2012 was $3.1 million. Income on this investment was stable with a slight increase compared to the prior year. There were gains of $1,848 on called securities during the second quarter of 2012. Other fee income and miscellaneous income experienced an increase of $44,698, or 64.60%. This increase is primarily due to modest increases in title fee income, evaluation fee income, and checkbook charges. Title fee income is generated from a small interest purchased in a title insurance company by Franklin Bank. The remainder of the increase is primarily attributable to the recordation in the third quarter of the derivative impact of our mortgage loans held for sale.

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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

September 30, 2012

Total noninterest income was $316,294 and $239,040 for the three months ending September 30, 2012 and 2011, respectively, an increase of $77,254, or 32.32%. The following chart demonstrates the categories of change:

Noninterest Income	QTD 9/30/12		QTD 9/30/11		Dollar Change			Percentage Change
Service charges on deposit accounts	$	62,449	$	66,873	$	(4,424	)		(6.62	)%
Mortgage brokerage income		80,564		42,569		37,995			89.26
Electronic card fees		45,742		41,271		4,471			10.83
Investment fee income		44,806		37,144		7,662			20.63
Income on bank owned life insurance		28,279		27,771		508			1.83
Other fee income & miscellaneous		54,454		23,412		31,042			132.59

The same comments concerning noninterest income in the year to year comparison also apply to the variances that occurred in the quarter to quarter comparison. Overall noninterest income increased in all of the categories with the exception of service charges on deposit accounts which declined primarily due to a decline in NSF fee income.

Noninterest Expense

Total noninterest expense was $5,484,588 and $5,038,735 for the nine month period ending September 30, 2012 and 2011, respectively, an increase of $445,853, or 8.85%. Excluding the nonrecurring expenses of other real estate and repossessions, noninterest expense increased $20,240, or 0.49%. The following chart shows the categories of noninterest expenses for the nine month period ending September 30, 2012 and 2011, the dollar change, and the percentage change:

Expense	YTD 9/30/12		YTD 9/30/11		Dollar Change			Percentage   Change
Salaries and employee benefits	$	2,123,014	$	2,122,587	$	427			0.02	%
Occupancy and equipment		607,723		635,128		(27,405	)		(4.31	)
Professional  fees		201,347		187,563		13,784			7.35
Outside processing		387,920		317,024		70,896			22.36
FDIC Assessment		193,965		288,624		(94,659	)		(32.80	)
Franchise tax		150,003		142,500		7,503			5.27
Regulatory examination fees		82,790		83,603		(813	)		(0.97	)
Other real estate and repossessions		1,315,850		890,237		425,613			47.81
Other expenses		421,976		371,469		50,507			13.60

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 38.71% and 42.13%, respectively, of total noninterest expense for the nine-month period ending September 30, 2012 and 2011. Our overall costs have remained stable in the year-to-year comparison primarily because we elected to freeze employees’ salaries in 2011 and 2012. Occupancy and equipment costs comprise the next 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 $27,405 which was attributable to a decline in depreciation expense, utilities, and service maintenance expense, all offset by a slight increase in repairs and maintenance. Professional fees include fees for audit, legal, and other professional fees and showed a modest increase in the year to year comparison. Outside processing expenses increased $70,896, or 22.36% in the year to year comparison primarily due to an increase in data processing fees and in our bank insurance costs for our bond and director and officer insurance. FDIC assessment declined $94,659 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. Other expenses increased $50,507 or 13.60% in the year to year comparison primarily due to the recordation in the third quarter of the derivative impact of its mortgage loans held for sale. Other real estate and repossessions represent the second largest category of noninterest expense but are nonrecurring. The losses, write-downs and expenses associated with our other real estate properties experienced a significant increase of $425,613, or 47.81%, compared to the same period in 2011. The Company has taken a more aggressive approach to disposing of its other real estate properties to rid its balance sheet of nonperforming assets as we move toward 2013.

42

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

September 30, 2012

Total noninterest expense was $2,220,093 and $1,434,227 for the three month period ending September 30, 2012 and 2011, respectively, an increase of $785,866, or 54.79%. Excluding the nonrecurring expenses of other real estate and repossessions, noninterest expense increased $67,231, or 5.05%. The following chart shows the categories of noninterest expenses for the three month period ending September 30, 2012 and 2011, the dollar change, and the percentage change:

Expense	QTD 9/30/12		QTD 9/30/11		Dollar Change			Percentage  Change
Salaries and employee benefits	$	702,270	$	696,539	$	5,731			0.82	%
Occupancy and equipment		193,973		208,882		(14,909	)		(7.14	)
Professional  fees		73,373		60,895		12,478			20.49
Outside processing		128,194		107,214		20,980			19.57
FDIC Assessment		61,840		70,555		(8,715	)		(12.35	)
Franchise tax		50,001		37,500		12,501			33.34
Regulatory examination fees		27,390		27,728		(338	)		(1.22	)
Other real estate and repossessions		821,318		102,683		718,635			699.86
Other expenses		161,734		122,231		39,503			32.32

Overall, the same explanations for the year to date comparisons are applicable to the quarterly comparisons of noninterest expense.

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 September 30, 2012 and September 30, 2011. 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 an income tax benefit in the amount of $41,359 for the three month period ending September 30, 2012 and income tax expense of $27,321 for the nine month period ending September 30, 2012. MainStreet recorded income tax expense of $21,367 for the three month period ending September 30, 2011 and an income tax benefit of $178,027 for the nine month period ending September 30, 2011.

43

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

September 30, 2012

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 sale at September 30, 2012 and 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 project based on pertinent financial information, the amount to be financed, and collateral. The loan portfolio was as follows:

	September 30, 2012				December 31, 2011
Commercial	$	9,650,317	7.06	%	$	11,061,471	7.73	%
Real Estate:
Construction & land development		21,731,841	15.90			26,102,914	18.24
Residential 1-4 families:
First liens		37,430,946	27.39			37,735,618	26.36
Junior liens		8,187,067	5.99			8,486,594	5.93
Home equity lines		6,169,719	4.52			7,639,785	5.34
Commercial real estate		51,758,246	37.87			50,272,002	35.12
Consumer		1,737,010	1.27			1,836,110	1.28
Total Gross Loans	$	136,665,146	100.00	%	$	143,134,494	100.00	%
Unearned deferred fees & costs, net		81,572				89,510
Recorded Investment	$	136,746,718			$	143,224,004

44

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

September 30, 2012

Gross loans declined $6,469,348, or 4.52% at September 30, 2012 compared to December 31, 2011. As can be seen by the chart above, Franklin Bank has a high concentration in real estate loans. These loans represented 91.67% and 90.99% of gross loans at September 30, 2012 and December 31, 2011, 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 September 30, 2012 was 87.43% compared to 85.72% at December 31, 2011, 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.

We have reviewed and revised numerous components and conditions within our credit policies over the last three years. Concentration limits were revised to better reflect the current economic environment and we are within our established limits. 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.

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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

September 30, 2012

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 25% 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.

	September 30, 2012
			Loans for
			Construction of		Loans for
	Loans for		Heavy & Civil		Real Estate
	Construction		Engineering		Including
	of Buildings		Buildings		Construction		Total
Commercial	$	312,971	$	561,175	$	762,355	$	1,636,501
Real Estate
Construction and land development		3,017,956		4,753,158		2,889,057		10,660,171
Residential, 1-4 families
First Liens		5,034,597		848,763		7,445,058		13,328,418
Junior Liens		878,871		—		642,362		1,521,233
Home Equity Lines		9,938		—		—		9,938
Commercial real estate		3,665,684		—		23,159,786		26,825,470
Consumer		8,264		—		—		8,264
Total	$	12,928,281	$	6,163,096	$	34,898,618	$	53,989,995

46

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

September 30, 2012

	December 31, 2011
			Loans for
			Construction of		Loans for
	Loans for		Heavy & Civil		Real Estate
	Construction		Engineering		Including
	of Buildings		Buildings		Construction		Total
Commercial	$	1,253,591	$	483,320	$	1,498,370	$	3,235,281
Real Estate
Construction and land development		2,492,124		5,301,322		3,623,938		11,417,384
Residential, 1-4 families
First Liens		5,496,770		1,301,934		6,179,892		12,978,596
Junior Liens		577,046		124,413		763,513		1,464,972
Home Equity Lines		9,845		—		—		9,845
Commercial real estate		3,995,367		315,979		23,396,327		27,707,673
Consumer		10,602		—		—		10,602
Total	$	13,835,345	$	7,526,968	$	35,462,040	$	56,824,353

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.

	September 30, 2012
	Total Concentration		Concentrations Included Above		Net Addition to Concentrations
Acquisition & development	$	374,979	$	374,979	$	—
Speculative lot loans		5,013,491		3,423,536		1,589,955
Speculative single-family housing construction		4,460,800		2,217,964		2,242,836

	December 31, 2011
	Total Concentration		Concentrations Included Above		Net Addition to Concentrations
Acquisition & development	$	498,228	$	223,228	$	275,000
Speculative lot loans		7,267,049		3,223,647		4,043,402
Speculative single-family housing construction		6,200,835		4,194,489		2,006,346

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
	September 30, 2012		December 31, 2011
Nonaccrual loans and leases	$	3,040,411	$	7,067,722
Loans past due 90 days or more and still accruing		600,210		—
Troubled debt restructurings (not on nonaccrual)		1,222,737		1,685,658
Other impaired loans		—		—
Total nonperforming loans		4,863,358		8,753,380
Foreclosed real estate		1,453,654		3,572,518
Other foreclosed property		103,649		103,649
Total foreclosed property		1,557,303		3,676,167
Total nonperforming assets	$	6,420,661	$	12,429,547

47

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

September 30, 2012

Impaired loans totaled $4,863,358 and $8,753,380 at September 30, 2012 and December 31, 2011, respectively. Nonaccrual loans declined $4.0 million at September 30, 2012 compared to year end 2011. Troubled debt restructurings (not on nonaccrual) decreased $.5 million in the year to year comparison. 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 a full-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 September 30, 2012 and December 31, 2011 were $156,405,237 and $167,082,842, respectively, a decline of $10,677,605, or 6.39%. The decline in deposits is largely attributable to the continued implementation of our strategy to lower deposit costs. The deposit mix was as follows:

	September 30, 2012				December 31, 2011
Demand	$	24,125,962	15.42	%	$	20,975,660	12.56	%
Interest checking		7,897,105	5.05			7,472,911	4.47
Money markets		23,735,966	15.18			24,651,034	14.75
Savings		14,229,847	9.10			14,093,416	8.44
Time deposits $100,000 and over		37,056,193	23.69			42,776,337	25.60
Other time deposits		49,360,164	31.56			57,113,484	34.18
Total	$	156,405,237	100.00	%	$	167,082,842	100.00	%

The largest components of deposits continues to be time deposits including those $100,000 and over representing 55.25% of total deposits at September 30, 2012 compared to 59.78% at December 31, 2011. 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 15.42% of total deposits as compared to 12.56% at December 31, 2011. The dollar amount of our demand deposits has also increased $3.2 million from year end 2011. A further increase in demand deposits would improve the net interest margin and the total yield on interest bearing deposits. Interest checking and savings accounts remained stable as a percentage of total deposits along with the dollar amount. Money market deposits declined $915,068 since year end 2011. Our total deposits have declined $10.7 million since year end 2011 primarily caused by 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 as they experienced a $13.5 million decrease since year end.

48

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

September 30, 2012

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 to maintain 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 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 1.04% and 1.38%, respectively, for the nine months ended September 30, 2012 and September 30, 2011. This decline of 34 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 September 30, 2012 and December 31, 2011, 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 September 30, 2012 and December 31, 2011 were $102,907,778 and $103,468,835, 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 September 30, 2012 and December 31, 2011.

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. Beginning September 18, 2008, the repurchase agreement became callable by CBMI and could have been called quarterly with two business days prior notice. 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 is January 2, 2013. The interest rate is fixed at 3.57% until maturity or until it is called. Beginning January 2, 2009 the repurchase agreement became callable by Barclays and can be called quarterly with two business days prior notice. Interest is payable quarterly. The repurchase agreement is collateralized by federal agency and agency mortgage backed securities. The interest rate remained at 3.57% at September 30, 2012.

Shareholders’ Equity

Total shareholders’ equity was $22,538,792 and $22,240,789 at September 30, 2012 and December 31, 2011, respectively. Book value per share was $13.15 and $12.98 at September 30, 2012 and December 31, 2011, respectively.

49

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

September 30, 2012

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 MainStreet and Franklin Bank were considered well-capitalized under established regulatory classifications at September 30, 2012 and December 31, 2011, 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:

	September 30, 2012			December 31, 2011
Tier I Leverage Ratio (Actual)		11.87	%		10.74	%
Tier I Leverage Ratio (Quarterly Ave.)		11.40			10.68
Tier I Risk-Based Capital Ratio		16.44			15.09
Tier II Risk-Based Capital Ratio		17.69			16.36

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.

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 amount of $17,669,422 at September 30, 2012. 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 September 30, 2012 and December 31, 2011, we had available credit from borrowing in the amount of $45,951,767, and $45,091,542, respectively. Our ratio of liquid assets to total liabilities at September 30, 2012 and December 31, 2011 was 20.75% and 19.17%, 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. Franklin Bank has experienced shrinkage in deposits from year end due to the strategic efforts to reduce deposit costs. 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. The Bank receives the deposits and forwards them to CDARS and receives deposits back if wanted is called a reciprocal transaction. CDARS deposits are also considered brokered deposits. Franklin Bank had accepted brokered deposits, including CDARS deposits, in the amount of $5.3 million as of September 30, 2012 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 September 30, 2012, this would allow the Bank to gather an additional $18.3 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 September 30, 2012, Franklin Bank had $5.8 million in internet certificates of deposit.

50

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

September 30, 2012

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 September 30, 2012 in a rising and declining 100, 200, 300, and 400 basis point interest rate environment, as applicable:

Net Interest Income Percentage Change From Level Rates

Rate Shift	Prime Rate			Change From Level Ramp			Change from Level Shock
+400 bp		7.25	%		8.00	%		15.00	%
+300 bp		6.25			6.00			11.00
+200 bp		5.25			4.00			7.00
+100 bp		4.25			2.00			3.00
-100 bp		2.25			—			—
-200 bp		1.25			—			-1.00
-300 bp		.25			-1.00			-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 and the assumed repricing of our interest bearing liabilities.

51

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

September 30, 2012

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 April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements.” The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this ASU are effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of the new guidance did not have a material impact on the Corporation’s consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU is the result of joint efforts by the FASB and International Accounting Standards Board (IASB) to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application. Early application is not permitted. The Corporation has included the required disclosures in its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Corporation has included the required disclosures in its consolidated financial statements.

52

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

September 30, 2012

In September 2011, the FASB issued ASU 2011-08, “Intangible – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment.”  The amendments in this ASU permit an entity to first assess qualitative factors related to goodwill to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill test described in Topic 350.  The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent.  Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount.  The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued.  The adoption of the new guidance did not have a material impact on the Corporation’s consolidated financial statements.

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 Corporation does not expect the adoption of ASU 2011-11 to have a material impact on its consolidated financial statements.

In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” The amendments are being made to allow the Board time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the Board is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. All other requirements in ASU 2011-05 are not affected by ASU 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Corporation has included the required disclosures in its consolidated financial statements.

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 Corporation does not expect the adoption of ASU 2012-02 to have a material impact on its consolidated financial statements.

53

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

September 30, 2012

In October 2012, the FASB issued ASU 2012-06, “Business Combinations (Topic 805): Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution.” The amendments in this ASU clarify the applicable guidance for subsequently measuring an indemnification asset recognized as a result of a government-assisted acquisition of a financial institution. In addition, the amendments should resolve current diversity in practice on the subsequent measurement of these types of indemnification assets. The amendments are effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. Early adoption is permitted. The amendments should be applied prospectively to any new indemnification assets acquired after the date of adoption and to indemnification assets existing as of the date of adoption arising from a government-assisted acquisition of a financial institution. The Corporation does not expect the adoption of ASU 2012-06 to have a material impact on its consolidated financial statements.

54

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

September 30, 2012

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 have 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.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

N/A

Item 1A Risk Factors

Not Required.

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.

55

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:	November 13, 2012	By	/s/ Larry A. Heaton
			Larry A. Heaton
			President and Chief Executive Officer
Date:	November 13, 2012	By	/s/ Brenda H. Smith
			Brenda H. Smith
			Executive Vice President, Chief Financial Officer and Corporate Secretary

56

Index to Exhibits

Number	Description of Exhibit
3(i)*	Restated Articles 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 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.
31.2	Certification of 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.

57

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Larry A. Heaton, certify that:

1. I have reviewed this quarterly report on Form 10-Q of MainStreet BankShares, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision; to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial

reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in the report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d ) Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 13, 2012	/s/ Larry A. Heaton
	Larry A. Heaton
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Brenda H. Smith, certify that:

1. I have reviewed this quarterly report on Form 10-Q of MainStreet BankShares, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision; to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial

reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in the report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d ) Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 13, 2012	/s/ Brenda H. Smith
	Brenda H. Smith
	Executive Vice President
	Chief Financial Officer
	Corporate Secretary

EX-32

Exhibit 32

The undersigned, as the chief executive officer and chief financial officer of MainStreet BankShares, Inc., certify that to the best of our knowledge and belief the Form 10-Q for the quarter ended September 30, 2012, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of MainStreet BankShares, Inc. at the dates and for the periods indicated. The foregoing certification is made solely for purposes of 18 USC, Section 1350 of the United States Code and is subject to the knowledge and willfulness qualifications contained in Title 18, Chapter 63, Section 1350(c).

Date: November 13, 2012	/s/ Larry A. Heaton
	Larry A. Heaton
	President and Chief Executive Officer
Date: November 13, 2012	/s/ Brenda H. Smith
	Brenda H. Smith
	Executive Vice President
	Chief Financial Officer

XML

Allowance for Loan Losses (Details 7) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Total Gross Loans	$ 136,665,146	$ 143,134,494
Pass [Member]
Total Gross Loans	122,631,647	121,657,503
Special Mention [Member]
Total Gross Loans	3,798,591	4,050,374
Substandard [Member]
Total Gross Loans	10,234,908	16,719,828
Doubtful [Member]
Total Gross Loans	0	706,789
Unlikely To Be Collected Financing Receivable [Member]
Total Gross Loans	0	0
Home Equity [Member]
Total Gross Loans	6,169,719	7,639,785
Home Equity [Member] | Pass [Member]
Total Gross Loans	6,143,006	7,486,498
Home Equity [Member] | Special Mention [Member]
Total Gross Loans	0	0
Home Equity [Member] | Substandard [Member]
Total Gross Loans	26,713	153,287
Home Equity [Member] | Doubtful [Member]
Total Gross Loans	0	0
Home Equity [Member] | Unlikely To Be Collected Financing Receivable [Member]
Total Gross Loans	0	0
Commercial Real Estates [Member]
Total Gross Loans	51,758,246	50,272,002
Commercial Real Estates [Member] | Pass [Member]
Total Gross Loans	47,564,233	43,885,034
Commercial Real Estates [Member] | Special Mention [Member]
Total Gross Loans	1,824,120	1,611,592
Commercial Real Estates [Member] | Substandard [Member]
Total Gross Loans	2,369,893	4,775,376
Commercial Real Estates [Member] | Doubtful [Member]
Total Gross Loans	0	0
Commercial Real Estates [Member] | Unlikely To Be Collected Financing Receivable [Member]
Total Gross Loans	0	0
Consumer Loans [Member]
Total Gross Loans	1,737,010	1,836,110
Consumer Loans [Member] | Pass [Member]
Total Gross Loans	1,644,164	1,782,754
Consumer Loans [Member] | Special Mention [Member]
Total Gross Loans	39,096	0
Consumer Loans [Member] | Substandard [Member]
Total Gross Loans	53,750	53,356
Consumer Loans [Member] | Doubtful [Member]
Total Gross Loans	0	0
Consumer Loans [Member] | Unlikely To Be Collected Financing Receivable [Member]
Total Gross Loans	0	0
Commercial [Member]
Total Gross Loans	9,650,317	11,061,471
Commercial [Member] | Pass [Member]
Total Gross Loans	9,330,704	9,869,976
Commercial [Member] | Special Mention [Member]
Total Gross Loans	73,889	878,058
Commercial [Member] | Substandard [Member]
Total Gross Loans	245,724	312,325
Commercial [Member] | Doubtful [Member]
Total Gross Loans	0	1,112
Commercial [Member] | Unlikely To Be Collected Financing Receivable [Member]
Total Gross Loans	0	0
Construction and Land Develolpment [Member]
Total Gross Loans	21,731,841	26,102,914
Construction and Land Develolpment [Member] | Pass [Member]
Total Gross Loans	18,306,735	21,364,943
Construction and Land Develolpment [Member] | Special Mention [Member]
Total Gross Loans	869,098	1,067,783
Construction and Land Develolpment [Member] | Substandard [Member]
Total Gross Loans	2,556,008	3,377,865
Construction and Land Develolpment [Member] | Doubtful [Member]
Total Gross Loans	0	292,323
Construction and Land Develolpment [Member] | Unlikely To Be Collected Financing Receivable [Member]
Total Gross Loans	0	0
First Liens [Member]
Total Gross Loans	37,430,946	37,735,618
First Liens [Member] | Pass [Member]
Total Gross Loans	32,622,870	30,016,743
First Liens [Member] | Special Mention [Member]
Total Gross Loans	716,868	492,941
First Liens [Member] | Substandard [Member]
Total Gross Loans	4,091,208	6,812,580
First Liens [Member] | Doubtful [Member]
Total Gross Loans	0	413,354
First Liens [Member] | Unlikely To Be Collected Financing Receivable [Member]
Total Gross Loans	0	0
Junior Liens [Member]
Total Gross Loans	8,187,067	8,486,594
Junior Liens [Member] | Pass [Member]
Total Gross Loans	7,019,935	7,251,555
Junior Liens [Member] | Special Mention [Member]
Total Gross Loans	275,520	0
Junior Liens [Member] | Substandard [Member]
Total Gross Loans	891,612	1,235,039
Junior Liens [Member] | Doubtful [Member]
Total Gross Loans	0	0
Junior Liens [Member] | Unlikely To Be Collected Financing Receivable [Member]
Total Gross Loans	$ 0	$ 0

XML

Regulatory (Details Textual)	9 Months Ended
	Sep. 30, 2012
Formal Agreement Date	Apr. 16, 2009
Memorandum of Understanding Date	Jun. 17, 2009

XML

Financial Instruments With Off-Balance-Sheet Risk (Details Textual) (USD $)	Sep. 30, 2012
Fair Value Disclosure, Off-balance Sheet Risks, Amount, Liability	$ 17,669,422

XML

Stock Options and Warrants (Details 1) (USD $)	9 Months Ended
	Sep. 30, 2012
Exercise Price Nine Point Five Five [Member]
Range of Exercise Prices (in dollars per share)	$ 9.55
Stock Options and Warrants Outstanding And Exercisable (in shares)	33,000
Remaining Contractual Life	9 months
Exercise Price Twelve Point Zero Nine Series One [Member]
Range of Exercise Prices (in dollars per share)	$ 12.09
Stock Options and Warrants Outstanding And Exercisable (in shares)	85,147
Remaining Contractual Life	3 years 1 month 24 days
Exercise Price Twelve Point Zero Nine Series Two [Member]
Range of Exercise Prices (in dollars per share)	$ 12.09
Stock Options and Warrants Outstanding And Exercisable (in shares)	17,299
Remaining Contractual Life	3 years 3 months
Exercise Price Range Fifteen [Member]
Range of Exercise Prices (in dollars per share)	$ 15.00
Stock Options and Warrants Outstanding And Exercisable (in shares)	13,260
Remaining Contractual Life	5 years 2 months 12 days
Exercise Price Sixteen Point Seven Five [Member]
Range of Exercise Prices (in dollars per share)	$ 16.75
Stock Options and Warrants Outstanding And Exercisable (in shares)	12,566
Remaining Contractual Life	4 years 3 months
Exercise Price Range Nine Point Five Five To Sixteen Point Seven Five [Member]
Lower Limit Range of Exercise Prices (in dollars per share)	$ 9.55
Upper Limit Range of Exercise Prices (in dollars per share)	$ 16.75
Stock Options and Warrants Outstanding And Exercisable (in shares)	161,272

XML

Allowance for Loan Losses (Details 1) (USD $)	9 Months Ended		12 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011
Balance at beginning of year	$ 3,272,945	$ 3,584,180	$ 3,584,180
Charge-offs	(989,260)	(1,720,824)	(2,143,502)
Recoveries	158,553	86,545	171,484
Provision	(33,249)	1,344,113	1,660,783
Balance at period end	2,408,989	3,294,014	3,272,945
Allowance for loan losses:
Ending Balance: Individually evaluated for impairment	123,000		818,572
Ending Balance: Collectively evaluated for impairment	2,285,989		2,454,373
Total imparied financing receivable allowance for loan losses	2,408,989		3,272,945
Recorded investment in loans:
Ending Balance: Individually evaluated for impairment	4,863,358		8,753,380
Ending Balance: Collectively evaluated for impairment	131,801,788		134,381,114
Total imparied financing receivable for recorded invesment	136,665,146		143,134,494
Home Equity [Member]
Balance at beginning of year	98,582	217,063	217,063
Charge-offs	0		(34,745)
Recoveries	3,374		0
Provision	(8,802)		(83,736)
Balance at period end	93,154		98,582
Allowance for loan losses:
Ending Balance: Individually evaluated for impairment	0		0
Ending Balance: Collectively evaluated for impairment	93,154		98,582
Total imparied financing receivable allowance for loan losses	93,154		98,582
Recorded investment in loans:
Ending Balance: Individually evaluated for impairment	0		131,439
Ending Balance: Collectively evaluated for impairment	6,169,719		7,508,346
Total imparied financing receivable for recorded invesment	6,169,719		7,639,785
Commercial Real Estates [Member]
Balance at beginning of year	824,759	793,308	793,308
Charge-offs	0		(205,824)
Recoveries	0		0
Provision	(129,756)		237,275
Balance at period end	695,003		824,759
Allowance for loan losses:
Ending Balance: Individually evaluated for impairment	0		110,820
Ending Balance: Collectively evaluated for impairment	695,003		713,939
Total imparied financing receivable allowance for loan losses	695,003		824,759
Recorded investment in loans:
Ending Balance: Individually evaluated for impairment	709,198		1,533,473
Ending Balance: Collectively evaluated for impairment	51,049,048		48,738,529
Total imparied financing receivable for recorded invesment	51,758,246		50,272,002
Consumer Loans [Member]
Balance at beginning of year	11,911	39,968	39,968
Charge-offs	(286)		(21,670)
Recoveries	10,696		12,302
Provision	(4,945)		(18,689)
Balance at period end	17,376		11,911
Allowance for loan losses:
Ending Balance: Individually evaluated for impairment	0		0
Ending Balance: Collectively evaluated for impairment	17,376		11,911
Total imparied financing receivable allowance for loan losses	17,376		11,911
Recorded investment in loans:
Ending Balance: Individually evaluated for impairment	0		50,694
Ending Balance: Collectively evaluated for impairment	1,737,010		1,785,416
Total imparied financing receivable for recorded invesment	1,737,010		1,836,110
Unallocated Financing Receivables [Member]
Balance at beginning of year	5,110	0	0
Charge-offs	0		0
Recoveries	0		0
Provision	11,890		5,110
Balance at period end	17,000		5,110
Allowance for loan losses:
Ending Balance: Individually evaluated for impairment	0		0
Ending Balance: Collectively evaluated for impairment	17,000		5,110
Total imparied financing receivable allowance for loan losses	17,000		5,110
Commercial [Member]
Balance at beginning of year	154,991	138,449	138,449
Charge-offs	(187)		(482,651)
Recoveries	1,842		32,312
Provision	(49,511)		466,881
Balance at period end	107,135		154,991
Allowance for loan losses:
Ending Balance: Individually evaluated for impairment	0		2,075
Ending Balance: Collectively evaluated for impairment	107,135		152,916
Total imparied financing receivable allowance for loan losses	107,135		154,991
Recorded investment in loans:
Ending Balance: Individually evaluated for impairment	235,466		136,680
Ending Balance: Collectively evaluated for impairment	9,414,851		10,924,791
Total imparied financing receivable for recorded invesment	9,650,317		11,061,471
Construction and Land Develolpment [Member]
Balance at beginning of year	902,644	1,086,183	1,086,183
Charge-offs	(245,248)		(922,440)
Recoveries	5,976		62,883
Provision	(155,228)		676,018
Balance at period end	508,144		902,644
Allowance for loan losses:
Ending Balance: Individually evaluated for impairment	0		292,323
Ending Balance: Collectively evaluated for impairment	508,144		610,321
Total imparied financing receivable allowance for loan losses	508,144		902,644
Recorded investment in loans:
Ending Balance: Individually evaluated for impairment	991,764		1,624,238
Ending Balance: Collectively evaluated for impairment	20,740,077		24,478,676
Total imparied financing receivable for recorded invesment	21,731,841		26,102,914
First Liens [Member]
Balance at beginning of year	1,100,139	1,065,683	1,065,683
Charge-offs	(649,961)		(311,265)
Recoveries	126,333		62,755
Provision	236,636		282,966
Balance at period end	813,147		1,100,139
Allowance for loan losses:
Ending Balance: Individually evaluated for impairment	123,000		413,354
Ending Balance: Collectively evaluated for impairment	690,147		686,785
Total imparied financing receivable allowance for loan losses	813,147		1,100,139
Recorded investment in loans:
Ending Balance: Individually evaluated for impairment	2,511,464		4,852,061
Ending Balance: Collectively evaluated for impairment	34,919,482		32,883,557
Total imparied financing receivable for recorded invesment	37,430,946		37,735,618
Junior Liens [Member]
Balance at beginning of year	174,809	243,526	243,526
Charge-offs	(93,578)		(164,907)
Recoveries	10,332		1,232
Provision	66,467		94,958
Balance at period end	158,030		174,809
Allowance for loan losses:
Ending Balance: Individually evaluated for impairment	0		0
Ending Balance: Collectively evaluated for impairment	158,030		174,809
Total imparied financing receivable allowance for loan losses	158,030		174,809
Recorded investment in loans:
Ending Balance: Individually evaluated for impairment	415,466		424,795
Ending Balance: Collectively evaluated for impairment	7,771,601		8,061,799
Total imparied financing receivable for recorded invesment	$ 8,187,067		$ 8,486,594

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Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2012

Fair Value Disclosures [Abstract]

Fair Value, Assets Measured on Recurring Basis [Table Text Block]

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011:

			Fair Value Measurements at September 30, 2012 Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Balance as of		Assets		Inputs		Inputs
Description	September 30, 2012		(Level 1)		(Level 2)		(Level 3)
Available-for-sale securities:
U. S. government sponsored agencies	$	2,229,443	$	—	$	2,229,443	$	—
Mortgage backed securities		14,206,618		—		14,206,618		—
States and political subdivisions		4,730,030		—		4,730,030		—
Total available-for-sale securities		21,166,091		—		21,166,091		—
Total assets at fair value	$	21,166,091	$	—	$	21,166,091	$	—

			Fair Value Measurements at December 31, 2011 Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Balance as of		Assets		Inputs		Inputs
Description	December 31, 2011		(Level 1)		(Level 2)		(Level 3)
Available-for-sale securities:
U. S. government sponsored agencies	$	2,810,782	$	—	$	2,810,782	$	—
Mortgage backed securities		17,255,190		—		17,255,190		—
States and political subdivisions		1,133,912		—		1,133,912		—
Total available-for-sale securities	$	21,199,884	$	—	$	21,199,884	$	—
Total assets at fair value	$	21,199,884	$	—	$	21,199,884	$	—

Fair Value, Assets and Liabilities Measured on Nonrecurring Basis [Table Text Block]

The following table summarizes MainStreet’s assets that were measured at fair value on a nonrecurring basis as of September 30, 2012 and December 31, 2011.

			Carrying value at September 30, 2012
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Balance as of		Assets		Inputs		Inputs
Description	September 30, 2012		(Level 1)		(Level 2)		(Level 3)
Impaired Loans	$	1,208,375	$	—	$	402,593	$	805,782
Other real estate owned		1,453,654		—		—		1,453,654
Total assets at fair value	$	2,662,029	$	—	$	402,593	$	2,259,436

			Carrying value at December 31, 2011
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Balance as of		Assets		Inputs		Inputs
Description	December 31, 2011		(Level 1)		(Level 2)		(Level 3)
Impaired Loans	$	4,867,822	$	—	$	4,218,384	$	649,438
Other real estate owned		3,572,518		—		1,596,190		1,976,328
Total assets at fair value	$	8,440,340	$	—	$	5,814,574	$	2,625,766

Fair Value Assets Measured on Non Recurring Basis Unobservable Input Reconciliation [Table Text Block]

The changes in Level 3 assets measured at estimated fair value on a nonrecurring basis during the period ended September 30, 2012 were as follows:

	Fair Value Measurements at September 30, 2012
	Impaired Loans			Other Real Estate Owned
Balance – January 1, 2012	$	649,438		$	1,976,328
Total gains (losses) realized/unrealized
Included in earnings (write downs)		—			(376,537	)
Newly Impaired / New OREO		832,833			1,565,729
Sales		(88,350	)		(2,644,615	)
Settlements / Foreclosures / Paydowns / charge offs		(201,725	)		—
Transfers into Level 3		1,781,403			932,749
Transfers out of Level 3		(2,167,817	)		—
Balance – September 30, 2012	$	805,782		$	1,453,654

Fair Value Inputs, Assets, Quantitative Information [Table Text Block]

The following table displays quantitative information about Level 3 Fair Value Measurements for September 30, 2012:

	Quantitative information about Level 3 Fair Value Measurements for September 30, 2012
	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Assets
Impaired loans	$	568,116	Discounted appraised value	Selling cost	18%            (18%)
	$	237,666	Internal evaluations	Internal evaluations	6%              (6%)
Other real estate owned	$	922,256	Discounted appraised value	Selling cost	45% - 51% (49%)
	$	531,398	Internal evaluations	Internal evaluations	25% - 68% ( 32%)

Fair Value, by Balance Sheet Grouping [Table Text Block]

The carrying values and estimated fair values of financial instruments at September 30, 2012 and December 31, 2011 are as follows:

			Fair Value Measurements at September 30, 2012 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	$	2,110,177	$	2,110,177	$	—	$	—	$	2,110,177
Interest-bearing deposits in banks		14,788,491		14,788,491		—		—		14,788,491
Federal funds sold		3,933,876		3,933,876		—		—		3,933,876
Securities available-for-sale		21,166,091		—		21,166,091		—		21,166,091
Restricted equity securities		740,500		—		740,500		—		740,500
Loans, net		134,337,729		—		132,172,997		805,782		132,978,779
Accrued interest receivable		569,559		—		569,559		—		569,559
Bank owned life insurance		3,133,550		—		3,133,550		—		3,133,550
FINANCIAL LIABILITIES:
Deposits:
Non-interest bearing demand deposits	$	24,125,962	$	—	$	24,125,962	$	—	$	24,125,962
Interest bearing deposits		132,279,275		—		132,880,521		—		132,880,521
Repurchase agreements		6,000,000		—		6,050,234		—		6,050,234
Accrued interest payable		186,590		—		186,590		—		186,590

	December 31, 2011
	Carrying Value		Fair Value
FINANCIAL ASSETS:
Cash and due from banks	$	2,767,395	$	2,767,395
Interest-bearing deposits in other banks		17,091,438		17,091,438
Federal funds sold		10,612,680		10,612,680
Securities available-for-sale		21,199,884		21,199,884
Restricted equity securities		830,000		830,000
Loans, net		139,951,059		138,716,777
Accrued interest receivable		547,905		547,905
Bank owned life insurance		3,049,696		3,049,696
FINANCIAL LIABILITIES:
Deposits:
Non-interest bearing demand deposits	$	20,975,660	$	20,975,660
Interest bearing deposits		146,107,182		146,767,245
Repurchase agreements		13,500,000		13,874,422
Accrued interest payable		225,611		225,611

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Fair Value Measurements (Details 1) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Total assets at fair value	$ 21,166,091	$ 21,199,884
Fair Value, Measurements, Nonrecurring [Member]
Impaired Loans	1,208,375	4,867,822
Other real estate owned	1,453,654	3,572,518
Total assets at fair value	2,662,029	8,440,340
Fair Value, Measurements, Nonrecurring [Member] | Fair Value, Inputs, Level One [Member]
Impaired Loans	0	0
Other real estate owned	0	0
Total assets at fair value	0	0
Fair Value, Measurements, Nonrecurring [Member] | Fair Value, Inputs, Level Two [Member]
Impaired Loans	402,593	4,218,384
Other real estate owned	0	1,596,190
Total assets at fair value	402,593	5,814,574
Fair Value, Measurements, Nonrecurring [Member] | Fair Value, Inputs, Level Three [Member]
Impaired Loans	805,782	649,438
Other real estate owned	1,453,654	1,976,328
Total assets at fair value	$ 2,259,436	$ 2,625,766

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Repurchase Agreements (Details Textual) (USD $)			9 Months Ended		9 Months Ended
	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2012 Citi Group Global Markets Inc [Member]	Sep. 18, 2007 Citi Group Global Markets Inc [Member]	Sep. 30, 2012 Barclays Capital [Member]	Jan. 02, 2008 Barclays Capital [Member]
Securities Sold Under Agreements To Repurchase	$ 6,000,000	$ 13,500,000		$ 7,500,000		$ 6,000,000
Investment Repurchase Agreement, Date of Agreement			Sep. 18, 2008		Jan. 02, 2009
Investment Repurchase Agreement, Repurchase Date			Sep. 18, 2012		Jan. 02, 2013
Investment Repurchase Agreement Interest Rate			4.22%		3.57%
Investment Repurchase Agreement Interest Rate End of Period					3.57%

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Allowance for Loan Losses (Details 5) (USD $)	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Pre-Modification Number of Loans	3	5
Pre-Modification Balance	$ 775,145	$ 1,316,689
Post-Modification Number of Loans	3	5
Post-Modification Balance	775,145	671,175
Home Equity [Member]
Pre-Modification Number of Loans	0	0
Pre-Modification Balance	0	0
Post-Modification Number of Loans	0	0
Post-Modification Balance	0	0
Commercial Real Estates [Member]
Pre-Modification Number of Loans	1	1
Pre-Modification Balance	354,156	152,235
Post-Modification Number of Loans	1	1
Post-Modification Balance	354,156	152,235
Consumer Loans [Member]
Pre-Modification Number of Loans	0	0
Pre-Modification Balance	0	0
Post-Modification Number of Loans	0	0
Post-Modification Balance	0	0
Commercial [Member]
Pre-Modification Number of Loans	1	2
Pre-Modification Balance	97,502	370,735
Post-Modification Number of Loans	1	2
Post-Modification Balance	97,502	68,940
Construction and Land Develolpment [Member]
Pre-Modification Number of Loans	1	0
Pre-Modification Balance	323,487	0
Post-Modification Number of Loans	1	0
Post-Modification Balance	323,487	0
First Liens [Member]
Pre-Modification Number of Loans	0	1
Pre-Modification Balance	0	275,000
Post-Modification Number of Loans	0	1
Post-Modification Balance	0	275,000
Junior Liens [Member]
Pre-Modification Number of Loans	0	1
Pre-Modification Balance	0	518,719
Post-Modification Number of Loans	0	1
Post-Modification Balance	$ 0	$ 175,000

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Fair Value Measurements (Details 3) (USD $)			9 Months Ended
	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2012 Impaired Loans [Member] Internal Evaluations [Member]	Sep. 30, 2012 Impaired Loans [Member] Internal Evaluations [Member] Weighted Average [Member]	Sep. 30, 2012 Impaired Loans [Member] Selling Cost [Member]	Sep. 30, 2012 Impaired Loans [Member] Selling Cost [Member] Weighted Average [Member]	Sep. 30, 2012 Other Real Estate Owned [Member] Internal Evaluations [Member]	Sep. 30, 2012 Other Real Estate Owned [Member] Internal Evaluations [Member] Minimum [Member]	Sep. 30, 2012 Other Real Estate Owned [Member] Internal Evaluations [Member] Maximum [Member]	Sep. 30, 2012 Other Real Estate Owned [Member] Internal Evaluations [Member] Weighted Average [Member]	Sep. 30, 2012 Other Real Estate Owned [Member] Selling Cost [Member]	Sep. 30, 2012 Other Real Estate Owned [Member] Selling Cost [Member] Minimum [Member]	Sep. 30, 2012 Other Real Estate Owned [Member] Selling Cost [Member] Maximum [Member]	Sep. 30, 2012 Other Real Estate Owned [Member] Selling Cost [Member] Weighted Average [Member]
Fair Value	$ 21,166,091	$ 21,199,884	$ 237,666		$ 568,116		$ 531,398				$ 922,256
Fair Value Measurements, Valuation Techniques			Internal evaluations		Discounted appraised value		Internal evaluations				Discounted appraised value
Fair Value Measurement Unobservable Input			Internal evaluations		Selling cost		Internal evaluations				Selling cost
Fair Value Input Prepayment Rate			6.00%	(6.00%)	18.00%	(18.00%)		25.00%	68.00%	(32.00%)		45.00%	51.00%	(49.00%)

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Stock Options and Warrants (Details Textual) (USD $)	9 Months Ended
	Sep. 30, 2012
Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Exercisable, Number	33,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Exercisable, Weighted Average Exercise Price (in dollars per share)	$ 9.55
Employee Service Share-based Compensation, Nonvested Awards, Total Compensation Cost Not yet Recognized, Period for Recognition	3 years
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized (in shares)	161,272
Two Thousand and Four Key Employee Stock Option Plan [Member]
Share-Based Compensation Arrangement By Share-Based Payment Award, Award Vesting Period	3 years
Share Based Compensation Arrangement By Share Based Payment Award Option Grants In Period Gross	136,527
Share Based Compensation Arrangement By Share Based Payment Award Options Grants In Period Exercised	822
Share Based Compensation Arrangement By Share Based Payment Award Options Forfeited In Period	7,433
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized (in shares)	150,700

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Loans Receivable

9 Months Ended

Sep. 30, 2012

Receivables [Abstract]

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note 3 – Loans Receivable

The major components of gross loans in the consolidated balance sheets at September 30, 2012 and December 31, 2011 are as follows:

	September 30, 2012		December 31, 2011
Commercial	$	9,650,317	$	11,061,471
Real Estate:
Construction and land development		21,731,841		26,102,914
Residential 1-4 families:
First liens		37,430,946		37,735,618
Junior liens		8,187,067		8,486,594
Home equity lines		6,169,719		7,639,785
Commercial real estate		51,758,246		50,272,002
Consumer		1,737,010		1,836,110
Total Gross Loans	$	136,665,146	$	143,134,494
Unearned deferred fees and costs, net		81,572		89,510
Recorded Investment	$	136,746,718	$	143,224,004

Overdrafts reclassified to loans at September 30, 2012 and December 31, 2011 were $10,801 and $4,916, 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.

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.

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Net Income (Loss) Per Share (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Earnings (loss) per share, basic (in dollars per share)	$ (0.02)	$ 0.04	$ 0.11	$ (0.15)
Earnings (loss) per share, basic (in shares)	1,713,375	1,713,375	1,713,375	1,713,375
Effect of dilutive securities:Stock options and warrants	0	0	0	0
Earnings (loss) per share, diluted (in shares)	1,713,375	1,713,375	1,713,375	1,713,375
Earnings (loss) per share, diluted (in dollars per share)	$ (0.02)	$ 0.04	$ 0.11	$ (0.15)

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Securities (Details Textual) (USD $)	9 Months Ended
	Sep. 30, 2012	Dec. 31, 2011
Available-for-sale Securities, Gross Realized Gain (Loss), Excluding Other than Temporary Impairments	$ 1,848
Fair Value, Total	2,306,820	2,200,000
Federal Reserve Bank Stock	435,100	435,100
Investment in Federal Home Loan Bank Stock, Fair Value Disclosure	$ 305,400	$ 394,900

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Securities (Details 2) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Fair Value, Less Than 12 Months	$ 2,306,820
Unrealized Losses, Less Than 12 Months	(13,718)
Fair Value, 12 Months or More	0
Unrealized Losses, 12 Months or More	0
Fair Value, Total	2,306,820	2,200,000
Unrealized Losses, Total	(13,718)
Us Government and Government Agencies and Authorities [Member]
Fair Value, Less Than 12 Months		2,248,523
Unrealized Losses, Less Than 12 Months		(1,478)
Fair Value, 12 Months or More		0
Unrealized Losses, 12 Months or More		0
Fair Value, Total		2,248,523
Unrealized Losses, Total		(1,478)
Temporarily Impaired Securities [Member]
Fair Value, Less Than 12 Months		2,248,523
Unrealized Losses, Less Than 12 Months		(1,478)
Fair Value, 12 Months or More		0
Unrealized Losses, 12 Months or More		0
Fair Value, Total		2,248,523
Unrealized Losses, Total		(1,478)
Us States and Political Subdivisions Debt Securities [Member]
Fair Value, Less Than 12 Months	2,306,820
Unrealized Losses, Less Than 12 Months	(13,718)
Fair Value, 12 Months or More	0
Unrealized Losses, 12 Months or More	0
Fair Value, Total	2,306,820
Unrealized Losses, Total	$ (13,718)

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Net Income (Loss) Per Share (Details Textual)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	161,272	161,272	161,272	161,272

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Loans Receivable (Details) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Commercial	$ 9,650,317	$ 11,061,471
Real Estate:
Construction and land development	21,731,841	26,102,914
Residential 1-4 families:
First liens	37,430,946	37,735,618
Junior liens	8,187,067	8,486,594
Home equity lines	6,169,719	7,639,785
Commercial real estate	51,758,246	50,272,002
Consumer	1,737,010	1,836,110
Total Gross Loans	136,665,146	143,134,494
Unearned deferred fees and costs, net	81,572	89,510
Recorded Investment	$ 136,746,718	$ 143,224,004

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Loans Receivable (Details Textual) (USD $)	9 Months Ended
	Sep. 30, 2012	Dec. 31, 2011
Deposit Liabilities Reclassified as Loans Receivable	$ 10,801	$ 4,916
Loan Portfolio Percentage Reviewed	33.00%
Benchmark Amount For Documentation, Review By Independent Credit Analyst	100,000
Real Estate Loans, Margin Percentage	80.00%
Commercial Real Estate Loans Coverage Ratio	1.25
Percentage Of Collateral Margin Of Commercial Real Estate Loan On Appraised Market Value Or Cost	80.00%
Commercial Loans Debt Service Coverage Ratio	1.25
Term Of Commercial Loans Receivable	7 years
Inventory Loan Minimum Margin	50.00%
Equipment Loan Maximum Margin	90.00%
Equipment Loan Minimum Margin	80.00%
Receivables Minimum Margin	80.00%
Debt To Income Ratio, Basis For Underwriting	40.00%
Minimum Loan Amount For Verification Of Income Secured Loans	35,000
Minimum Loan Amount For Verification Of Income Unsecured Loans	$ 10,000
Percentage Of Equity Line Payable Periodically For Underwriting Debt To Income Ratio	1.50%

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Securities

9 Months Ended

Sep. 30, 2012

Securities [Abstract]

Securities and Restricted Equity Securities [Text Block]

Note 2 – Securities

The carrying values, unrealized gains and losses and approximate market values of investment securities at September 30, 2012 and December 31, 2011 are shown in the following tables. The entire investment portfolio is classified as available-for-sale to preserve maximum liquidity for funding needs.

	September 30, 2012
			Gross		Gross
	Amortized		Unrealized		Unrealized			Approximate
	Cost		Gains		Losses			Market Value
U.S. government sponsored agencies	$	2,217,487	$	11,956	$	—		$	2,229,443
Mortgage backed securities		13,557,686		648,932		—			14,206,618
States and political subdivisions		4,697,047		46,701		(13,718	)		4,730,030
Total securities available for sale	$	20,472,220	$	707,589	$	(13,718	)	$	21,166,091

	December 31, 2011
			Gross		Gross
	Amortized		Unrealized		Unrealized			Approximate
	Cost		Gains		Losses			Market Value
U. S. government sponsored agencies	$	2,804,763	$	7,497	$	(1,478	)	$	2,810,782
Mortgage backed securities		16,758,613		496,577		—			17,255,190
States and political subdivisions		1,111,363		22,549		—			1,133,912
Total securities available-for-sale	$	20,674,739	$	526,623	$	(1,478	)	$	21,199,884

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 September 30, 2012, 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		7,843,183		7,928,369
Due after ten years		12,629,037		13,237,722
	$	20,472,220	$	21,166,091

There were $1,848 in gross gains and no gross losses recorded on calls of securities available for sale for the nine month period ending September 30, 2012. There were no gains or losses recorded on securities available for sale for the quarter ending September 30, 2012. There were no gross gains or losses recorded on sales and calls of securities available for sale for the quarter and nine month periods ending September 30, 2011.

Following demonstrates the unrealized loss position of securities available for sale at September 30, 2012 and December 31, 2011.

	September 30, 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	$	2,306,820	$	(13,718	)	$	—	$	—	$	2,306,820	$	(13,718	)
Total securities available-for-sale	$	2,306,820	$	(13,718	)	$	—	$	—	$	2,306,820	$	(13,718	)

	December 31, 2011
	Less Than 12 Months					12 Months or More				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Losses			Value		Losses		Value		Losses
U. S. government sponsored agencies	$	2,248,523	$	(1,478	)	$	—	$	—	$	2,248,523	$	(1,478	)
Total temporarily impaired securities	$	2,248,523	$	(1,478	)	$	—	$	—	$	2,248,523	$	(1,478	)

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 September 30, 2012 and December 31, 2011, there were $2.3 million and $2.2 million, 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 September 30, 2012 and December 31, 2011.

Federal Reserve Bank stock is included in restricted equity securities and totaled $435,100 at September 30, 2012 and December 31, 2011. The Corporation’s investment in Federal Home Loan Bank (“FHLB”) stock totaled $305,400 and $394,900 at September 30, 2012 and December 31, 2011, 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 September 30, 2012 and no impairment has been recognized. FHLB has repurchased excess capital stock during 2012 and 2011 and there is no excess stock at September 30, 2012.

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Allowance for Loan Losses (Details) (USD $)	9 Months Ended		12 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011
Balance at beginning of year	$ 3,272,945	$ 3,584,180	$ 3,584,180
Provision for (recovery of) loan losses	(33,249)	1,344,113	1,660,783
Recoveries	158,553	86,545	171,484
Charge-offs	(989,260)	(1,720,824)	(2,143,502)
Balance at period end	$ 2,408,989	$ 3,294,014	$ 3,272,945

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Allowance for Loan Losses (Details Textual) (USD $)				9 Months Ended
	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2011	Sep. 30, 2012 Special Mention [Member]	Sep. 30, 2012 Substandard [Member]
Financing Receivable Modifications, Not Included In Nonaccurals	$ 1,222,737	$ 1,685,658
Qualitative Factor Increases Applied Loss Factor				3.00%	8.00%
Loans restructured year-to-date	774,166		663,084
Nonaccrual And Impaired Loan			$ 319,859

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Fair Value Measurements (Details 4) (USD $)	Sep. 30, 2012	Dec. 31, 2011
FINANCIAL ASSETS:
Cash and due from banks	$ 2,110,177	$ 2,767,395
Interest-bearing deposits in banks	14,788,491	17,091,438
Federal funds sold	3,933,876	10,612,680
Securities available-for-sale	21,166,091	21,199,884
Restricted equity securities	740,500	830,000
Loans, net	134,337,729	139,951,059
Accrued interest receivable	569,559	547,905
Bank owned life insurance	3,133,550	3,049,696
FINANCIAL LIABILITIES:
Non-interest bearing demand deposits	24,125,962	20,975,660
Interest bearing deposits	132,279,275	146,107,182
Repurchase agreements	6,000,000	13,500,000
Accrued interest payable	186,590	225,611
FINANCIAL ASSETS:
Cash and due from banks, Fair Value	2,110,177	2,767,395
Interest-bearing deposits in banks, Fair Value	14,788,491	17,091,438
Federal funds sold, Fair Value	3,933,876	10,612,680
Securities available-for-sale, Fair Value	21,166,091	21,199,884
Restricted equity securities, Fair Value	740,500	830,000
Loans, net, Fair Value	132,978,779	138,716,777
Accrued interest receivable, Fair Value	569,559	547,905
Bank owned life insurance, Fair Value	3,133,550	3,049,696
FINANCIAL LIABILITIES:
Non-interest bearing demand deposits, Fair Value	24,125,962	20,975,660
Interest bearing deposits, Fair Value	132,880,521	146,767,245
Repurchase agreements, Fair Value	6,050,234	13,874,422
Accrued interest payable, Fair Value	186,590	225,611
Fair Value, Inputs, Level One [Member]
FINANCIAL ASSETS:
Cash and due from banks, Fair Value	2,110,177
Interest-bearing deposits in banks, Fair Value	14,788,491
Federal funds sold, Fair Value	3,933,876
Securities available-for-sale, Fair Value	0	0
Restricted equity securities, Fair Value	0
Loans, net, Fair Value	0
Accrued interest receivable, Fair Value	0
Bank owned life insurance, Fair Value	0
FINANCIAL LIABILITIES:
Non-interest bearing demand deposits, Fair Value	0
Interest bearing deposits, Fair Value	0
Repurchase agreements, Fair Value	0
Accrued interest payable, Fair Value	0
Fair Value, Inputs, Level Two [Member]
FINANCIAL ASSETS:
Cash and due from banks, Fair Value	0
Interest-bearing deposits in banks, Fair Value	0
Federal funds sold, Fair Value	0
Securities available-for-sale, Fair Value	21,166,091	21,199,884
Restricted equity securities, Fair Value	740,500
Loans, net, Fair Value	132,172,997
Accrued interest receivable, Fair Value	569,559
Bank owned life insurance, Fair Value	3,133,550
FINANCIAL LIABILITIES:
Non-interest bearing demand deposits, Fair Value	24,125,962
Interest bearing deposits, Fair Value	132,880,521
Repurchase agreements, Fair Value	6,050,234
Accrued interest payable, Fair Value	186,590
Fair Value, Inputs, Level Three [Member]
FINANCIAL ASSETS:
Cash and due from banks, Fair Value	0
Interest-bearing deposits in banks, Fair Value	0
Federal funds sold, Fair Value	0
Securities available-for-sale, Fair Value	0	0
Restricted equity securities, Fair Value	0
Loans, net, Fair Value	805,782
Accrued interest receivable, Fair Value	0
Bank owned life insurance, Fair Value	0
FINANCIAL LIABILITIES:
Non-interest bearing demand deposits, Fair Value	0
Interest bearing deposits, Fair Value	0
Repurchase agreements, Fair Value	0
Accrued interest payable, Fair Value	$ 0

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Consolidated Balance Sheets (USD $)	Sep. 30, 2012	Dec. 31, 2011
ASSETS
Cash and due from banks	$ 2,110,177	$ 2,767,395
Interest-bearing deposits in banks	14,788,491	17,091,438
Federal funds sold	3,933,876	10,612,680
Total Cash and Cash Equivalents	20,832,544	30,471,513
Securities available for sale, at fair value	21,166,091	21,199,884
Restricted equity securities	740,500	830,000
Loans:
Total Gross Loans	136,665,146	143,134,494
Unearned deferred fees and costs, net	81,572	89,510
Loans, net of unearned deferred fees and costs	136,746,718	143,224,004
Less: Allowance for loan losses	(2,408,989)	(3,272,945)
Net Loans	134,337,729	139,951,059
Bank premises and equipment, net	1,609,783	1,654,496
Accrued interest receivable	569,559	547,905
Bank owned life insurance	3,133,550	3,049,696
Other real estate owned, net of valuation allowance	1,453,654	3,572,518
Other assets	2,348,041	2,578,240
TOTAL ASSETS	186,191,451	203,855,311
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest bearing demand deposits	24,125,962	20,975,660
Interest bearing deposits	132,279,275	146,107,182
Total Deposits	156,405,237	167,082,842
Repurchase agreements	6,000,000	13,500,000
Accrued interest payable and other liabilities	1,247,422	1,031,680
Total Liabilities	163,652,659	181,614,522
Commitments and contingencies	0	0
Shareholders' Equity:
Preferred stock, no par value, authorized 10,000,000 shares; none issued	0	0
Common stock, no par value, authorized 10,000,000 shares; issued and outstanding 1,713,375 shares at September 30, 2012 and December 31, 2011	17,866,890	17,866,890
Retained earnings	4,172,793	3,986,150
Accumulated other comprehensive income	499,109	387,749
Total Shareholders' Equity	22,538,792	22,240,789
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 186,191,451	$ 203,855,311

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Stock Options and Warrants (Details) (USD $)	9 Months Ended
	Sep. 30, 2012
Stock Option, Outstanding (in shares)	161,272
Stock Option, Granted (in shares)	0
Stock Option, Exercised (in shares)	0
Stock Option, Forfeited (in shares)	0
Stock Option, Expired (in shares)	0
Stock Option, Outstanding (in shares)	161,272
Stock Option, Exercisable (in shares)	161,272
Stock Option Outstanding , Weighted average exercise price (in dollars Per share)	$ 12.17
Stock Option Granted, Weighted average exercise price (in dollars per share)	$ 0
Stock Option Exercised, Weighted average exercise price (in dollars per share)	$ 0
Stock Option Forfeited, Weighted average exercise price (in dollars per share)	$ 0
Stock Option Expired, Weighted average exercise price (in dollars per share)	$ 0
Stock Option Outstanding , Weighted average exercise price (in dollars per share)	$ 12.17
Stock Option Exercisable, Weighted average exercise price (in dollars per share)	$ 12.17
Stock Option Outstanding, Weighted average remaining contractual term	2 years 11 months 1 day
Stock Option Exercisable, Weighted average remaining contractual term	2 years 11 months 1 day
Stock Option Outstanding , Aggregate intrinsic value (in dollars)	$ 0
Stock Option Exercisable, Aggregate intrinsic value (in dollars)	$ 0

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Consolidated Statements of Cash Flows (USD $)	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Cash Flows From Operating Activities
Net income (loss)	$ 186,643	$ (254,091)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for (recovery of) loan losses	(33,249)	1,344,113
Depreciation and amortization	141,431	159,114
Amortization of discounts and premiums, net	148,145	108,218
Gain on sale of securities	(1,848)	0
Loss and impairment on other real estate owned and repossessions	1,210,464	828,596
Deferred tax expense (benefit)	(5,439)	88,216
(Increase) decrease in accrued interest receivable	(21,654)	136,519
Decrease in other assets	178,272	7,611
Increase in value of bank owned life insurance	(83,854)	(82,335)
Change in reserve for unfunded lending commitments	23,586	0
Increase in accrued interest payable and other liabilities	192,156	1,899
Net cash provided by operating activities	1,934,653	2,337,860
Cash Flows From Investing Activities
Purchases of bank premises and equipment	(96,718)	(51,660)
Purchases of securities available for sale	(9,862,042)	0
Calls/maturities/repayments of securities available for sale	9,918,264	5,377,730
Redemptions of restricted equity securities	89,500	122,900
Capital improvements to other real estate owned	0	(23,750)
Proceeds from sale of other real estate owned and repossessions	3,130,449	4,632,082
Loan originations and principal collections, net	3,424,530	2,641,144
Net cash provided by investing activities	6,603,983	12,698,446
Cash Flows From Financing Activities
Increase in non-interest bearing deposits	3,150,302	2,715,394
Decrease in interest bearing deposits	(13,827,907)	(11,096,569)
Repayment of repurchase agreement	(7,500,000)	0
Net cash used in financing activities	(18,177,605)	(8,381,175)
Net increase (decrease) in cash and cash equivalents	(9,638,969)	6,655,131
Cash and cash equivalents at beginning of period	30,471,513	18,765,347
Cash and cash equivalents at end of period	20,832,544	25,420,478
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	1,494,677	2,072,220
Cash paid during the period for taxes	0	0
Unrealized gain on securities available for sale	168,726	726,420
Transfers between loans, other real estate & other assets	$ 2,222,049	$ 3,433,127

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Allowance for Loan Losses (Details 3) (USD $)	9 Months Ended		12 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011
Unpaid Contractual Principal Balance	$ 5,028,506		$ 9,000,605
Recorded Investment with Related Allowance	691,116		5,159,446
Recorded Investment with no Related Allowance	4,172,242		3,593,934
Related Allowance	123,000		818,572
Average Recorded Investment	5,953,592		7,723,303
Interest Income Recognized	3,494	93,198	272,445
Home Equity [Member]
Unpaid Contractual Principal Balance	0		163,703
Recorded Investment with Related Allowance	0		0
Recorded Investment with no Related Allowance	0		131,439
Related Allowance	0		0
Average Recorded Investment	97,219		177,972
Interest Income Recognized	0		3,520
Commercial Real Estates [Member]
Unpaid Contractual Principal Balance	709,198		1,533,473
Recorded Investment with Related Allowance	0		1,385,252
Recorded Investment with no Related Allowance	709,198		148,221
Related Allowance	0		110,820
Average Recorded Investment	1,142,338		809,181
Interest Income Recognized	0		105,266
Consumer Loans [Member]
Unpaid Contractual Principal Balance	86,494		142,188
Recorded Investment with Related Allowance	0		0
Recorded Investment with no Related Allowance	0		50,694
Related Allowance	0		0
Average Recorded Investment	25,122		56,639
Interest Income Recognized	0		653
Commercial [Member]
Unpaid Contractual Principal Balance	235,466		170,080
Recorded Investment with Related Allowance	0		36,388
Recorded Investment with no Related Allowance	235,466		100,292
Related Allowance	0		2,075
Average Recorded Investment	152,165		327,051
Interest Income Recognized	73		593
Construction and Land Develolpment [Member]
Unpaid Contractual Principal Balance	1,013,204		1,664,551
Recorded Investment with Related Allowance	0		1,263,551
Recorded Investment with no Related Allowance	991,764		360,687
Related Allowance	0		292,323
Average Recorded Investment	1,030,313		2,163,855
Interest Income Recognized	0		24,174
First Liens [Member]
Unpaid Contractual Principal Balance	2,568,678		4,901,815
Recorded Investment with Related Allowance	691,116		2,474,255
Recorded Investment with no Related Allowance	1,820,348		2,377,806
Related Allowance	123,000		413,354
Average Recorded Investment	3,141,578		3,618,240
Interest Income Recognized	3,236		122,856
Junior Liens [Member]
Unpaid Contractual Principal Balance	415,466		424,795
Recorded Investment with Related Allowance	0		0
Recorded Investment with no Related Allowance	415,466		424,795
Related Allowance	0		0
Average Recorded Investment	364,857		570,365
Interest Income Recognized	$ 185		$ 15,383

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Allowance for Loan Losses (Tables)

9 Months Ended

Sep. 30, 2012

Receivables [Abstract]

Allowance for Credit Losses on Financing Receivables [Table Text Block]

Changes in the allowance for loan losses for the nine months ended September 30, 2012 and 2011 are as follows:

	2012			2011
Balance at beginning of year	$	3,272,945		$	3,584,180
Provision for (recovery of) loan losses		(33,249	)		1,344,113
Recoveries		158,553			86,545
Charge-offs		(989,260	)		(1,720,824	)
Balance at period end	$	2,408,989		$	3,294,014

Allowance for Credit Losses on Financing Receivables Loan Segment [Table Text Block]

A breakdown of the allowance by loan segment for the nine months ended September 30, 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		(187	)		(245,248	)		(649,961	)		(93,578	)		—			—			(286	)		—		(989,260	)
Recoveries		1,842			5,976			126,333			10,332			3,374			—			10,696			—		158,553
Provision		(49,511	)		(155,228	)		236,636			66,467			(8,802	)		(129,756	)		(4,945	)		11,890		(33,249	)
Ending Balance	$	107,135		$	508,144		$	813,147		$	158,030		$	93,154		$	695,003		$	17,376		$	17,000	$	2,408,989

			September 30, 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	$	—	$	—	$	123,000	$	—	$	—	$	—	$	—	$	—	$	123,000
Ending Balance: Collectively evaluated for impairment		107,135		508,144		690,147		158,030		93,154		695,003		17,376		17,000		2,285,989
	$	107,135	$	508,144	$	813,147	$	158,030	$	93,154	$	695,003	$	17,376	$	17,000	$	2,408,989

			September 30, 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	$	235,466	$	991,764	$	2,511,464	$	415,466	$	—	$	709,198	$	—	$	4,863,358
Ending Balance: Collectively evaluated for impairment		9,414,851		20,740,077		34,919,482		7,771,601		6,169,719		51,049,048		1,737,010		131,801,788
	$	9,650,317	$	21,731,841	$	37,430,946	$	8,187,067	$	6,169,719	$	51,758,246	$	1,737,010	$	136,665,146

A breakdown of the allowance for loan losses by loan segment for the year ended December 31, 2011 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	$	138,449		$	1,086,183		$	1,065,683		$	243,526		$	217,063		$	793,308		$	39,968		$	—	$	3,584,180
Charge-offs		(482,651	)		(922,440	)		(311,265	)		(164,907	)		(34,745	)		(205,824	)		(21,670	)		—		(2,143,502	)
Recoveries		32,312			62,883			62,755			1,232			—			—			12,302			—		171,484
Provision		466,881			676,018			282,966			94,958			(83,736	)		237,275			(18,689	)		5,110		1,660,783
Ending Balance	$	154,991		$	902,644		$	1,100,139		$	174,809		$	98,582		$	824,759		$	11,911		$	5,110	$	3,272,945

			December 31, 2011 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	$	2,075	$	292,323	$	413,354	$	—	$	—	$	110,820	$	—	$	—	$	818,572
Ending Balance: Collectively evaluated for impairment		152,916		610,321		686,785		174,809		98,582		713,939		11,911		5,110		2,454,373
	$	154,991	$	902,644	$	1,100,139	$	174,809	$	98,582	$	824,759	$	11,911	$	5,110	$	3,272,945

			December 31, 2011 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	$	136,680	$	1,624,238	$	4,852,061	$	424,795	$	131,439	$	1,533,473	$	50,694	$	8,753,380
Ending Balance: Collectively evaluated for impairment		10,924,791		24,478,676		32,883,557		8,061,799		7,508,346		48,738,529		1,785,416		134,381,114
	$	11,061,471	$	26,102,914	$	37,735,618	$	8,486,594	$	7,639,785	$	50,272,002	$	1,836,110	$	143,134,494

Past Due Financing Receivables [Table Text Block]

An age analysis of past due loans as of September 30, 2012 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	$	86,308	$	—	$	21,684	$	107,992	$	9,542,325	$	9,650,317	$	21,684	$	—
Real Estate:
Construction and land development		601,226		—		530,616		1,131,842		20,599,999		21,731,841		—		668,278
Residential 1-4 Families
First Liens		756,722		112,800		1,856,124		2,725,646		34,705,300		37,430,946		38,504		2,233,924
Junior Liens		113,380		81,191		318,424		512,995		7,674,072		8,187,067		180,215		138,209
Home Equity lines		—		—		—		—		6,169,719		6,169,719		—		—
Commercial Real Estate		153,085		—		359,807		512,892		51,245,354		51,758,246		359,807		—
Consumer		5,620		—		—		5,620		1,731,390		1,737,010		—		—
	$	1,716,341	$	193,991	$	3,086,655	$	4,996,987	$	131,668,159	$	136,665,146	$	600,210	$	3,040,411

An age analysis of past due loans as of December 31, 2011 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	$	150,390	$	4,287	$	88,350	$	243,027	$	10,818,444	$	11,061,471	$	—	$	104,579
Real Estate:
Construction and land development		52,406		43,274		1,526,501		1,622,181		24,480,733		26,102,914		—		1,624,238
Residential 1-4 Families
First Liens		836,919		1,674,264		2,689,459		5,200,642		32,534,976		37,735,618		—		4,852,061
Junior Liens		208,807		—		—		208,807		8,277,787		8,486,594		—		156,490
Home Equity lines		26,773		—		—		26,773		7,613,012		7,639,785		—		131,439
Commercial Real Estate		—		—		148,221		148,221		50,123,781		50,272,002		—		148,221
Consumer		2,103		—		—		2,103		1,834,007		1,836,110		—		50,694
	$	1,277,398	$	1,721,825	$	4,452,531	$	7,451,754	$	135,682,740	$	143,134,494	$	—	$	7,067,722

Schedule of Impaired Loans Receivable Additional Information [Table Text Block]

Impaired loans at September 30, 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	$	235,466	$	—	$	235,466	$	—	$	152,165	$	73
Real Estate:
Construction and land development		1,013,204		—		991,764		—		1,030,313		—
Residential 1-4 Families
First Liens		2,568,678		691,116		1,820,348		123,000		3,141,578		3,236
Junior Liens		415,466		—		415,466		—		364,857		185
Home Equity lines		—		—		—		—		97,219		—
Commercial Real Estate		709,198		—		709,198		—		1,142,338		—
Consumer		86,494		—		—		—		25,122		—
	$	5,028,506	$	691,116	$	4,172,242	$	123,000	$	5,953,592	$	3,494

Impaired loans at December 31, 2011 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	$	170,080	$	36,388	$	100,292	$	2,075	$	327,051	$	593
Real Estate:
Construction and land  development		1,664,551		1,263,551		360,687		292,323		2,163,855		24,174
Residential 1-4 Families
First Liens		4,901,815		2,474,255		2,377,806		413,354		3,618,240		122,856
Junior Liens		424,795		—		424,795		—		570,365		15,383
Home Equity lines		163,703		—		131,439		—		177,972		3,520
Commercial Real Estate		1,533,473		1,385,252		148,221		110,820		809,181		105,266
Consumer		142,188		—		50,694		—		56,639		653
	$	9,000,605	$	5,159,446	$	3,593,934	$	818,572	$	7,723,303	$	272,445

Troubled Debt Restructurings on Financing Receivables [Table Text Block]

Troubled debt restructurings occurred as follows for the year-to-date periods ending September 30, 2012 and 2011:

	2012		2011
Commercial	$	97,502	$	68,225
Real Estate:
Construction and land development		323,487		—
Residential 1-4 families:
First liens		—		275,000
Junior liens		—		171,638
Home Equity Lines		—		—
Commercial Real Estate		353,177		148,221
Consumer		—		—
	$	774,166	$	663,084

Financing Receivable Modifications Troubled Debt Restructurings [Table Text Block]

For the nine months ended September 30, 2012, below describes the troubled debt restructurings at the time of modification:

	Pre-Modification				Post-Modification
	Number				Number
	of Loans		Balance		of Loans		Balance
Commercial		1	$	97,502		1	$	97,502
Real Estate:
Construction and land development		1		323,487		1		323,487
Residential 1-4 families:
First liens		—		—		—		—
Junior liens		—		—		—		—
Home Equity Lines		—		—		—		—
Commercial Real Estate		1		354,156		1		354,156
Consumer		—		—		—		—
		3	$	775,145		3	$	775,145

For the nine months ended September 30, 2011, below describes the troubled debt restructurings at the time of modification:

	Pre-Modification				Post-Modification
	Number				Number
	of Loans		Balance		of Loans		Balance
Commercial		2	$	370,735		2	$	68,940
Real Estate:
Construction and land development		—		—		—		—
Residential 1-4 families:
First liens		1		275,000		1		275,000
Junior liens		1		518,719		1		175,000
Home Equity Lines		—		—		—		—
Commercial Real Estate		1		152,235		1		152,235
Consumer		—		—		—		—
		5	$	1,316,689		5	$	671,175

Schedule of Valuation Allowance for Impairment of Recognized Servicing Assets [Table Text Block]

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

	September 30, 2012		September 30, 2011
Interest that would have been  earned	$	216,209	$	470,512
Interest reflected in income		3,494		93,198
Lost interest	$	212,715	$	377,314

Financing Receivable Credit Quality Indicators [Table Text Block]

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.

			September 30, 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	$	9,330,704	$	18,306,735	$	32,622,870	$	7,019,935	$	6,143,006	$	47,564,233	$	1,644,164	$	122,631,647
Special Mention		73,889		869,098		716,868		275,520		—		1,824,120		39,096		3,798,591
Substandard		245,724		2,556,008		4,091,208		891,612		26,713		2,369,893		53,750		10,234,908
Doubtful		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—
	$	9,650,317	$	21,731,841	$	37,430,946	$	8,187,067	$	6,169,719	$	51,758,246	$	1,737,010	$	136,665,146

			December 31, 2011 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	$	9,869,976	$	21,364,943	$	30,016,743	$	7,251,555	$	7,486,498	$	43,885,034	$	1,782,754	$	121,657,503
Special Mention		878,058		1,067,783		492,941		—		—		1,611,592		—		4,050,374
Substandard		312,325		3,377,865		6,812,580		1,235,039		153,287		4,775,376		53,356		16,719,828
Doubtful		1,112		292,323		413,354		—		—		—		—		706,789
Loss		—		—		—		—		—		—		—		—
	$	11,061,471	$	26,102,914	$	37,735,618	$	8,486,594	$	7,639,785	$	50,272,002	$	1,836,110	$	143,134,494

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Allowance for Loan Losses (Details 4) (USD $)	Sep. 30, 2012	Sep. 30, 2011
Recorded Investment	$ 774,166	$ 663,084
Home Equity [Member]
Recorded Investment	0	0
Commercial Real Estates [Member]
Recorded Investment	353,177	148,221
Consumer Loans [Member]
Recorded Investment	0	0
Commercial [Member]
Recorded Investment	97,502	68,225
Construction and Land Develolpment [Member]
Recorded Investment	323,487	0
First Liens [Member]
Recorded Investment	0	275,000
Junior Liens [Member]
Recorded Investment	$ 0	$ 171,638

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Stock Options and Warrants (Tables)

9 Months Ended

Sep. 30, 2012

Stock Options and Warrants [Abstract]

Schedule of Share-based Compensation, Stock Options, Activity [Table Text Block]

Following is a status and summary of changes in stock options during the nine months ended September 30, 2012:

					Weighted
			Weighted		Average
	Nine Month		Average		Remaining		Aggregate
	Period Ended		Exercise		Contractual		Intrinsic
	September 30, 2012		Price		Term		Value
Outstanding at Beginning of year		161,272	$	12.17
Granted		—		—
Exercised		—		—
Forfeited		—		—
Expired		—		—
Outstanding at September 30, 2012		161,272	$	12.17		2.92	$	—
Exercisable at September 30, 2012		161,272	$	12.17		2.92	$	—

Schedule of Stock Options and Warrants Outstanding [Table Text Block]

As of September 30, 2012, 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		.75
12.09		85,147		3.15
12.09		17,299		3.25
15.00		13,260		5.20
16.75		12,566		4.25
$9.55 - $16.75		161,272

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Summary of Accounting Policies

9 Months Ended

Sep. 30, 2012

Accounting Policies [Abstract]

Organization, Consolidation and Presentation of Financial Statements Disclosure and Significant Accounting Policies [Text Block]

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 2011 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. When MainStreet sold Smith River Bank, the capital was redeployed to Franklin Bank.

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.

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Consolidated Balance Sheets (Parenthetical)	Sep. 30, 2012	Dec. 31, 2011
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, shares issued	0	0
Common stock, shares authorized	10,000,000	10,000,000
Common stock, shares issued	1,713,375	1,713,375
Common stock, shares outstanding	1,713,375	1,713,375

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Contingencies and Other Matters

9 Months Ended

Sep. 30, 2012

Commitments and Contingencies Disclosure [Abstract]

Legal Matters and Contingencies [Text Block]

Note 11 – Contingencies and Other Matters

The Corporation currently is not involved in any litigation.

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Document and Entity Information	9 Months Ended
	Sep. 30, 2012	Nov. 12, 2012
Entity Registrant Name	MAINSTREET BANKSHARES INC
Entity Central Index Key	0001094742
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Trading Symbol	mree
Entity Common Stock, Shares Outstanding		1,713,375
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2012
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2012

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Subsequent Events

9 Months Ended

Sep. 30, 2012

Subsequent Events [Abstract]

Subsequent Events [Text Block]

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.

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Consolidated Statements of Operations (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Interest and Dividend Income:
Interest and fees on loans	$ 1,931,274	$ 2,128,874	$ 5,798,527	$ 6,559,400
Interest on interest-bearing deposits	7,888	7,586	22,371	17,605
Interest on federal funds sold	3,619	3,062	10,630	7,082
Interest on securities available for sale:
Taxable	110,406	187,054	377,573	611,090
Nontaxable	16,602	0	40,291	0
Dividends on restricted equity securities	7,817	7,501	23,646	22,815
Total Interest and Dividend Income	2,077,606	2,334,077	6,273,038	7,217,992
Interest Expense:
Interest on deposits	330,791	472,588	1,063,162	1,571,469
Interest on short-term borrowings			1	5
Interest on repurchase agreements	124,195	135,623	392,493	402,447
Total Interest Expense	454,986	608,211	1,455,656	1,973,921
Net Interest Income	1,622,620	1,725,866	4,817,382	5,244,071
Provision for (recovery of) loan losses	(207,119)	435,000	(33,249)	1,344,113
Net Interest Income After Provision for (Recovery of) Loan Losses	1,829,739	1,290,866	4,850,631	3,899,958
Noninterest Income:
Service charges on deposit accounts	62,449	66,873	187,992	220,442
Mortgage brokerage income	80,564	42,569	180,459	100,991
Electronic card fees	45,742	41,271	134,614	120,629
Investment fee income	44,806	37,144	145,265	113,070
Income on bank owned life insurance	28,279	27,771	83,854	82,336
Gain on securities sold/called			1,848	0
Other fee income and miscellaneous income	54,454	23,412	113,889	69,191
Total Noninterest Income	316,294	239,040	847,921	706,659
Noninterest Expense:
Salaries and employee benefits	702,270	696,539	2,123,014	2,122,587
Occupancy and equipment expense	193,973	208,882	607,723	635,128
Professional fees	73,373	60,895	201,347	187,563
Outside processing	128,194	107,214	387,920	317,024
FDIC assessment	61,840	70,555	193,965	288,624
Franchise tax	50,001	37,500	150,003	142,500
Regulatory examination fees	27,390	27,728	82,790	83,603
Other real estate and repossessions	821,318	102,683	1,315,850	890,237
Other expenses	161,734	122,231	421,976	371,469
Total Noninterest Expense	2,220,093	1,434,227	5,484,588	5,038,735
Net Income (Loss) Before Tax	(74,060)	95,679	213,964	(432,118)
Income Tax Expense (Benefit)	(41,359)	21,367	27,321	(178,027)
Net Income (Loss)	$ (32,701)	$ 74,312	$ 186,643	$ (254,091)
Net Income (Loss) Per Share Basic (in dollars per share)	$ (0.02)	$ 0.04	$ 0.11	$ (0.15)
Net Income (Loss) Per Share Diluted (in dollars per share)	$ (0.02)	$ 0.04	$ 0.11	$ (0.15)

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Repurchase Agreements

9 Months Ended

Sep. 30, 2012

Brokers and Dealers [Abstract]

Repurchase Agreements, Resale Agreements, Securities Borrowed, and Securities Loaned Disclosure [Text Block]

Note 6 – Repurchase Agreements

The Corporation 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. Beginning September 18, 2008, the repurchase agreement became callable by CBMI 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.

The Corporation entered into a repurchase agreement with Barclays Capital on January 2, 2008 in the amount of $6,000,000. The repurchase date is January 2, 2013. The interest rate is fixed at 3.57% until maturity or until it is called. Beginning January 2, 2009 the repurchase agreement became callable and can be called quarterly with two business days prior notice. Interest is payable quarterly. The repurchase agreement is collateralized by agency mortgage backed securities. The interest rate remained at 3.57% at September 30, 2012.

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Borrowings

9 Months Ended

Sep. 30, 2012

Debt Disclosure [Abstract]

Debt Disclosure [Text Block]

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 September 30, 2012 and December 31, 2011.

There were no overnight federal funds purchased at September 30, 2012 and December 31, 2011.

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 September 30, 2012 and December 31, 2011, respectively.

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Net Income (Loss) Per Share (Tables)

9 Months Ended

Sep. 30, 2012

Earnings Per Share [Abstract]

Schedule of Earnings Per Share Reconciliation [Table Text Block]

The following tables show the weighted average number of shares used in computing earnings (loss) per 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.

	Nine Months Ended				Nine Months Ended
	September 30, 2012				September 30, 2011
	Shares		Per Share Amount		Shares		Per Share Amount
Earnings (loss) per share, basic		1,713,375	$	.11		1,713,375	$	(.15	)
Effect of dilutive securities:
Stock options and warrants		—				—
Earnings (loss) per share, diluted		1,713,375	$	.11		1,713,375	$	(.15	)

The following tables show the weighted average number of shares used in computing earnings (loss) per 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
	September 30, 2012					September 30, 2011
	Shares		Per Share Amount			Shares		Per Share Amount
Earnings (loss) per share, basic		1,713,375	$	(.02	)		1,713,375	$	.04
Effect of dilutive securities:
Stock options and warrants		—					—
Earnings (loss) per share, diluted		1,713,375	$	(.02	)		1,713,375	$	.04

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Regulatory

9 Months Ended

Sep. 30, 2012

Banking and Thrift [Abstract]

Regulatory [Text Block]

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.

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Financial Instruments With Off-Balance-Sheet Risk

9 Months Ended

Sep. 30, 2012

Financial Instruments With Off Balance Sheet Risk [Abstract]

Financial Instruments With Off Balance Sheet Risk [Text Block]

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 September 30, 2012, outstanding commitments to extend credit including letters of credit were $17,669,422. 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.

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Net Income (Loss) Per Share

9 Months Ended

Sep. 30, 2012

Earnings Per Share [Abstract]

Earnings Per Share [Text Block]

Note 7 – Net Income (Loss) Per Share

The following tables show the weighted average number of shares used in computing earnings (loss) per 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.

	Nine Months Ended				Nine Months Ended
	September 30, 2012				September 30, 2011
	Shares		Per Share Amount		Shares		Per Share Amount
Earnings (loss) per share, basic		1,713,375	$	.11		1,713,375	$	(.15	)
Effect of dilutive securities:
Stock options and warrants		—				—
Earnings (loss) per share, diluted		1,713,375	$	.11		1,713,375	$	(.15	)

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 September 30, 2012 and 2011, respectively.

The following tables show the weighted average number of shares used in computing earnings (loss) per 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
	September 30, 2012					September 30, 2011
	Shares		Per Share Amount			Shares		Per Share Amount
Earnings (loss) per share, basic		1,713,375	$	(.02	)		1,713,375	$	.04
Effect of dilutive securities:
Stock options and warrants		—					—
Earnings (loss) per share, diluted		1,713,375	$	(.02	)		1,713,375	$	.04

Options and warrants not included in the calculation of diluted earnings per share because they were anti-dilutive were 161,272 for the quarters ending September 30, 2012 and 2011, respectively.

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Stock Options and Warrants

9 Months Ended

Sep. 30, 2012

Stock Options and Warrants [Abstract]

Stock Options and Warrants [Text Block]

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 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 September 30, 2012, 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 September 30, 2012 the Corporation has reserved 161,272 shares of authorized but unissued shares of common stock related to the stock option agreements.

The Black-Scholes model was utilized to calculate the fair-value of the stock options on the date of grant for grants prior to 2008 using the assumptions of risk-free interest rate; expected life of options; expected volatility of the stock price and expected dividend yield. Expected volatilities are based on the historical volatility of MainStreet’s stock. Stock options granted in 2006 and forward were included in the calculation of compensation cost. The risk-free rate for the period within the contractual life of the option is based upon the ten year Treasury rate at the date of the grant. Expected life was calculated using the simplified method based on the average of the vesting period and contractual life of the options. 

Following is a status and summary of changes in stock options during the nine months ended September 30, 2012:

					Weighted
			Weighted		Average
	Nine Month		Average		Remaining		Aggregate
	Period Ended		Exercise		Contractual		Intrinsic
	September 30, 2012		Price		Term		Value
Outstanding at Beginning of year		161,272	$	12.17
Granted		—		—
Exercised		—		—
Forfeited		—		—
Expired		—		—
Outstanding at September 30, 2012		161,272	$	12.17		2.92	$	—
Exercisable at September 30, 2012		161,272	$	12.17		2.92	$	—

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 September 30, 2012. This amount changes based on changes in the market value of the Corporation’s stock.

As of September 30, 2012 and 2011, there was no unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. The original unrecognized compensation cost was recognized over a weighted-average period of three years.

As of September 30, 2012, 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		.75
12.09		85,147		3.15
12.09		17,299		3.25
15.00		13,260		5.20
16.75		12,566		4.25
$9.55 - $16.75		161,272

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Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

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.

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

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011:

			Fair Value Measurements at September 30, 2012 Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Balance as of		Assets		Inputs		Inputs
Description	September 30, 2012		(Level 1)		(Level 2)		(Level 3)
Available-for-sale securities:
U. S. government sponsored agencies	$	2,229,443	$	—	$	2,229,443	$	—
Mortgage backed securities		14,206,618		—		14,206,618		—
States and political subdivisions		4,730,030		—		4,730,030		—
Total available-for-sale securities		21,166,091		—		21,166,091		—
Total assets at fair value	$	21,166,091	$	—	$	21,166,091	$	—

			Fair Value Measurements at December 31, 2011 Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Balance as of		Assets		Inputs		Inputs
Description	December 31, 2011		(Level 1)		(Level 2)		(Level 3)
Available-for-sale securities:
U. S. government sponsored agencies	$	2,810,782	$	—	$	2,810,782	$	—
Mortgage backed securities		17,255,190		—		17,255,190		—
States and political subdivisions		1,133,912		—		1,133,912		—
Total available-for-sale securities	$	21,199,884	$	—	$	21,199,884	$	—
Total assets at fair value	$	21,199,884	$	—	$	21,199,884	$	—

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:

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 an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of MainStreet using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. 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 Operations.

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 an observable market price or a current appraised value, the Corporation records the OREO as nonrecurring Level 2. When the appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Corporation records the OREO as nonrecurring Level 3. Any fair value adjustments are recorded as other real estate and repossessions expense on the Consolidated Statements of Operations.

The following table summarizes MainStreet’s assets that were measured at fair value on a nonrecurring basis as of September 30, 2012 and December 31, 2011.

			Carrying value at September 30, 2012
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Balance as of		Assets		Inputs		Inputs
Description	September 30, 2012		(Level 1)		(Level 2)		(Level 3)
Impaired Loans	$	1,208,375	$	—	$	402,593	$	805,782
Other real estate owned		1,453,654		—		—		1,453,654
Total assets at fair value	$	2,662,029	$	—	$	402,593	$	2,259,436

			Carrying value at December 31, 2011
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Balance as of		Assets		Inputs		Inputs
Description	December 31, 2011		(Level 1)		(Level 2)		(Level 3)
Impaired Loans	$	4,867,822	$	—	$	4,218,384	$	649,438
Other real estate owned		3,572,518		—		1,596,190		1,976,328
Total assets at fair value	$	8,440,340	$	—	$	5,814,574	$	2,625,766

The changes in Level 3 assets measured at estimated fair value on a nonrecurring basis during the period ended September 30, 2012 were as follows:

	Fair Value Measurements at September 30, 2012
	Impaired Loans			Other Real Estate Owned
Balance – January 1, 2012	$	649,438		$	1,976,328
Total gains (losses) realized/unrealized
Included in earnings (write downs)		—			(376,537	)
Newly Impaired / New OREO		832,833			1,565,729
Sales		(88,350	)		(2,644,615	)
Settlements / Foreclosures / Paydowns / charge offs		(201,725	)		—
Transfers into Level 3		1,781,403			932,749
Transfers out of Level 3		(2,167,817	)		—
Balance – September 30, 2012	$	805,782		$	1,453,654

The following table displays quantitative information about Level 3 Fair Value Measurements for September 30, 2012:

	Quantitative information about Level 3 Fair Value Measurements for September 30, 2012
	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Assets
Impaired loans	$	568,116	Discounted appraised value	Selling cost	18%            (18%)
	$	237,666	Internal evaluations	Internal evaluations	6%              (6%)
Other real estate owned	$	922,256	Discounted appraised value	Selling cost	45% - 51% (49%)
	$	531,398	Internal evaluations	Internal evaluations	25% - 68% ( 32%)

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.

(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) Short-term Borrowings

The carrying amount is a reasonable estimate of fair value.

(k) Long-term Borrowings

The fair value of long-term borrowings 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.

(l) 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 carrying values and estimated fair values of financial instruments at September 30, 2012 and December 31, 2011 are as follows:

			Fair Value Measurements at September 30, 2012 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	$	2,110,177	$	2,110,177	$	—	$	—	$	2,110,177
Interest-bearing deposits in banks		14,788,491		14,788,491		—		—		14,788,491
Federal funds sold		3,933,876		3,933,876		—		—		3,933,876
Securities available-for-sale		21,166,091		—		21,166,091		—		21,166,091
Restricted equity securities		740,500		—		740,500		—		740,500
Loans, net		134,337,729		—		132,172,997		805,782		132,978,779
Accrued interest receivable		569,559		—		569,559		—		569,559
Bank owned life insurance		3,133,550		—		3,133,550		—		3,133,550
FINANCIAL LIABILITIES:
Deposits:
Non-interest bearing demand deposits	$	24,125,962	$	—	$	24,125,962	$	—	$	24,125,962
Interest bearing deposits		132,279,275		—		132,880,521		—		132,880,521
Repurchase agreements		6,000,000		—		6,050,234		—		6,050,234
Accrued interest payable		186,590		—		186,590		—		186,590

	December 31, 2011
	Carrying Value		Fair Value
FINANCIAL ASSETS:
Cash and due from banks	$	2,767,395	$	2,767,395
Interest-bearing deposits in other banks		17,091,438		17,091,438
Federal funds sold		10,612,680		10,612,680
Securities available-for-sale		21,199,884		21,199,884
Restricted equity securities		830,000		830,000
Loans, net		139,951,059		138,716,777
Accrued interest receivable		547,905		547,905
Bank owned life insurance		3,049,696		3,049,696
FINANCIAL LIABILITIES:
Deposits:
Non-interest bearing demand deposits	$	20,975,660	$	20,975,660
Interest bearing deposits		146,107,182		146,767,245
Repurchase agreements		13,500,000		13,874,422
Accrued interest payable		225,611		225,611

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.

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Allowance for Loan Losses (Details 2) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Loans 30-59 Days Past Due	$ 1,716,341	$ 1,277,398
Loans 60-89 Days Past Due	193,991	1,721,825
Loans 90 Or More Days Past Due	3,086,655	4,452,531
Total Past Due Loans	4,996,987	7,451,754
Current Loans	131,668,159	135,682,740
Gross Loans	136,665,146	143,134,494
Accruing Loans 90 or More Days Past Due	600,210	0
Nonaccrual Loans	3,040,411	7,067,722
Home Equity [Member]
Loans 30-59 Days Past Due	0	26,773
Loans 60-89 Days Past Due	0	0
Loans 90 Or More Days Past Due	0	0
Total Past Due Loans	0	26,773
Current Loans	6,169,719	7,613,012
Gross Loans	6,169,719	7,639,785
Accruing Loans 90 or More Days Past Due	0	0
Nonaccrual Loans	0	131,439
Commercial Real Estates [Member]
Loans 30-59 Days Past Due	153,085	0
Loans 60-89 Days Past Due	0	0
Loans 90 Or More Days Past Due	359,807	148,221
Total Past Due Loans	512,892	148,221
Current Loans	51,245,354	50,123,781
Gross Loans	51,758,246	50,272,002
Accruing Loans 90 or More Days Past Due	359,807	0
Nonaccrual Loans	0	148,221
Consumer Loans [Member]
Loans 30-59 Days Past Due	5,620	2,103
Loans 60-89 Days Past Due	0	0
Loans 90 Or More Days Past Due	0	0
Total Past Due Loans	5,620	2,103
Current Loans	1,731,390	1,834,007
Gross Loans	1,737,010	1,836,110
Accruing Loans 90 or More Days Past Due	0	0
Nonaccrual Loans	0	50,694
Commercial [Member]
Loans 30-59 Days Past Due	86,308	150,390
Loans 60-89 Days Past Due	0	4,287
Loans 90 Or More Days Past Due	21,684	88,350
Total Past Due Loans	107,992	243,027
Current Loans	9,542,325	10,818,444
Gross Loans	9,650,317	11,061,471
Accruing Loans 90 or More Days Past Due	21,684	0
Nonaccrual Loans	0	104,579
Construction and Land Develolpment [Member]
Loans 30-59 Days Past Due	601,226	52,406
Loans 60-89 Days Past Due	0	43,274
Loans 90 Or More Days Past Due	530,616	1,526,501
Total Past Due Loans	1,131,842	1,622,181
Current Loans	20,599,999	24,480,733
Gross Loans	21,731,841	26,102,914
Accruing Loans 90 or More Days Past Due	0	0
Nonaccrual Loans	668,278	1,624,238
First Liens [Member]
Loans 30-59 Days Past Due	756,722	836,919
Loans 60-89 Days Past Due	112,800	1,674,264
Loans 90 Or More Days Past Due	1,856,124	2,689,459
Total Past Due Loans	2,725,646	5,200,642
Current Loans	34,705,300	32,534,976
Gross Loans	37,430,946	37,735,618
Accruing Loans 90 or More Days Past Due	38,504	0
Nonaccrual Loans	2,233,924	4,852,061
Junior Liens [Member]
Loans 30-59 Days Past Due	113,380	208,807
Loans 60-89 Days Past Due	81,191	0
Loans 90 Or More Days Past Due	318,424	0
Total Past Due Loans	512,995	208,807
Current Loans	7,674,072	8,277,787
Gross Loans	8,187,067	8,486,594
Accruing Loans 90 or More Days Past Due	180,215	0
Nonaccrual Loans	$ 138,209	$ 156,490

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Fair Value Measurements (Details 2) (USD $)	9 Months Ended
	Sep. 30, 2012
Impaired Loans [Member]
Balance - January 1, 2012	$ 649,438
Total gains (losses) realized/unrealized Included in earnings (write downs)	0
Newly Impaired / New OREO	832,833
Sales	(88,350)
Settlements / Foreclosures / Paydowns / charge offs	(201,725)
Transfers into Level 3	1,781,403
Transfers out of Level 3	(2,167,817)
Balance - September 30, 2012	805,782
Other Real Estate Owned [Member]
Balance - January 1, 2012	1,976,328
Total gains (losses) realized/unrealized Included in earnings (write downs)	(376,537)
Newly Impaired / New OREO	1,565,729
Sales	(2,644,615)
Settlements / Foreclosures / Paydowns / charge offs	0
Transfers into Level 3	932,749
Transfers out of Level 3	0
Balance - September 30, 2012	$ 1,453,654

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Loans Receivable (Tables)

9 Months Ended

Sep. 30, 2012

Receivables [Abstract]

Schedule of Accounts, Notes, Loans and Financing Receivable [Table Text Block]

The major components of gross loans in the consolidated balance sheets at September 30, 2012 and December 31, 2011 are as follows:

	September 30, 2012		December 31, 2011
Commercial	$	9,650,317	$	11,061,471
Real Estate:
Construction and land development		21,731,841		26,102,914
Residential 1-4 families:
First liens		37,430,946		37,735,618
Junior liens		8,187,067		8,486,594
Home equity lines		6,169,719		7,639,785
Commercial real estate		51,758,246		50,272,002
Consumer		1,737,010		1,836,110
Total Gross Loans	$	136,665,146	$	143,134,494
Unearned deferred fees and costs, net		81,572		89,510
Recorded Investment	$	136,746,718	$	143,224,004

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Securities (Details) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Amortized Cost	$ 20,472,220	$ 20,674,739
Gross Unrealized Gains	707,589	526,623
Gross Unrealized Losses	(13,718)	(1,478)
Approximate Market Value	21,166,091	21,199,884
Us Government and Government Agencies and Authorities [Member]
Amortized Cost	2,217,487	2,804,763
Gross Unrealized Gains	11,956	7,497
Gross Unrealized Losses	0	(1,478)
Approximate Market Value	2,229,443	2,810,782
Mortgage-Backed Securities, Issued By Us Government Sponsored Enterprises [Member]
Amortized Cost	13,557,686	16,758,613
Gross Unrealized Gains	648,932	496,577
Gross Unrealized Losses	0	0
Approximate Market Value	14,206,618	17,255,190
Us States and Political Subdivisions Debt Securities [Member]
Amortized Cost	4,697,047	1,111,363
Gross Unrealized Gains	46,701	22,549
Gross Unrealized Losses	(13,718)	0
Approximate Market Value	$ 4,730,030	$ 1,133,912

XML

Fair Value Measurements (Details) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Securities available for sale, at fair value	$ 21,166,091	$ 21,199,884
Total assets at fair value	21,166,091	21,199,884
Fair Value, Inputs, Level One [Member]
Securities available for sale, at fair value	0	0
Fair Value, Inputs, Level Two [Member]
Securities available for sale, at fair value	21,166,091	21,199,884
Fair Value, Inputs, Level Three [Member]
Securities available for sale, at fair value	0	0
Fair Value, Measurements, Recurring [Member] | Us Government Agencies Debt Securities [Member]
Securities available for sale, at fair value	2,229,443	2,810,782
Fair Value, Measurements, Recurring [Member] | Mortgage-Backed Securities, Issued By Us Government Sponsored Enterprises [Member]
Securities available for sale, at fair value	14,206,618	17,255,190
Fair Value, Measurements, Recurring [Member] | Us States and Political Subdivisions Debt Securities [Member]
Securities available for sale, at fair value	4,730,030	1,133,912
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level One [Member]
Securities available for sale, at fair value	0	0
Total assets at fair value	0	0
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level One [Member] | Us Government Agencies Debt Securities [Member]
Securities available for sale, at fair value	0	0
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level One [Member] | Mortgage-Backed Securities, Issued By Us Government Sponsored Enterprises [Member]
Securities available for sale, at fair value	0	0
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level One [Member] | Us States and Political Subdivisions Debt Securities [Member]
Securities available for sale, at fair value	0	0
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level Two [Member]
Securities available for sale, at fair value	21,166,091	21,199,884
Total assets at fair value	21,166,091	21,199,884
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level Two [Member] | Us Government Agencies Debt Securities [Member]
Securities available for sale, at fair value	2,229,443	2,810,782
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level Two [Member] | Mortgage-Backed Securities, Issued By Us Government Sponsored Enterprises [Member]
Securities available for sale, at fair value	14,206,618	17,255,190
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level Two [Member] | Us States and Political Subdivisions Debt Securities [Member]
Securities available for sale, at fair value	4,730,030	1,133,912
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level Three [Member]
Securities available for sale, at fair value	0	0
Total assets at fair value	0	0
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level Three [Member] | Us Government Agencies Debt Securities [Member]
Securities available for sale, at fair value	0	0
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level Three [Member] | Mortgage-Backed Securities, Issued By Us Government Sponsored Enterprises [Member]
Securities available for sale, at fair value	0	0
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level Three [Member] | Us States and Political Subdivisions Debt Securities [Member]
Securities available for sale, at fair value	$ 0	$ 0

XML

Borrowings (Details Textual) (USD $)	9 Months Ended
	Sep. 30, 2012	Dec. 31, 2011
Pledge Agency Funds Percentage for Demand Deposits Account	100.00%
Corporate Cash Management Sweep Account Balances	$ 0	$ 0

XML

Consolidated Statements of Comprehensive Income (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Net Income (Loss)	$ (32,701)	$ 74,312	$ 186,643	$ (254,091)
Other Comprehensive Income:
Net unrealized holding gains on securities available for sale during the period	145,449	224,084	170,574	726,420
Deferred income tax expense on unrealized holding gains on securities available for sale	(49,453)	(76,188)	(57,994)	(246,983)
Less reclassification adjustments for gains included in net income			(1,848)	0
Tax related to realized gain on securities sold			628	0
Other Comprehensive Income	95,996	147,896	111,360	479,437
Total Comprehensive Income	$ 63,295	$ 222,208	$ 298,003	$ 225,346

XML

Allowance for Loan Losses

9 Months Ended

Sep. 30, 2012

Receivables [Abstract]

Allowance for Credit Losses [Text Block]

Note 4 – Allowance for Loan Losses

Changes in the allowance for loan losses for the nine months ended September 30, 2012 and 2011 are as follows:

	2012			2011
Balance at beginning of year	$	3,272,945		$	3,584,180
Provision for (recovery of) loan losses		(33,249	)		1,344,113
Recoveries		158,553			86,545
Charge-offs		(989,260	)		(1,720,824	)
Balance at period end	$	2,408,989		$	3,294,014

A breakdown of the allowance by loan segment for the nine months ended September 30, 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		(187	)		(245,248	)		(649,961	)		(93,578	)		—			—			(286	)		—		(989,260	)
Recoveries		1,842			5,976			126,333			10,332			3,374			—			10,696			—		158,553
Provision		(49,511	)		(155,228	)		236,636			66,467			(8,802	)		(129,756	)		(4,945	)		11,890		(33,249	)
Ending Balance	$	107,135		$	508,144		$	813,147		$	158,030		$	93,154		$	695,003		$	17,376		$	17,000	$	2,408,989

			September 30, 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	$	—	$	—	$	123,000	$	—	$	—	$	—	$	—	$	—	$	123,000
Ending Balance: Collectively evaluated for impairment		107,135		508,144		690,147		158,030		93,154		695,003		17,376		17,000		2,285,989
	$	107,135	$	508,144	$	813,147	$	158,030	$	93,154	$	695,003	$	17,376	$	17,000	$	2,408,989

			September 30, 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	$	235,466	$	991,764	$	2,511,464	$	415,466	$	—	$	709,198	$	—	$	4,863,358
Ending Balance: Collectively evaluated for impairment		9,414,851		20,740,077		34,919,482		7,771,601		6,169,719		51,049,048		1,737,010		131,801,788
	$	9,650,317	$	21,731,841	$	37,430,946	$	8,187,067	$	6,169,719	$	51,758,246	$	1,737,010	$	136,665,146

A breakdown of the allowance for loan losses by loan segment for the year ended December 31, 2011 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	$	138,449		$	1,086,183		$	1,065,683		$	243,526		$	217,063		$	793,308		$	39,968		$	—	$	3,584,180
Charge-offs		(482,651	)		(922,440	)		(311,265	)		(164,907	)		(34,745	)		(205,824	)		(21,670	)		—		(2,143,502	)
Recoveries		32,312			62,883			62,755			1,232			—			—			12,302			—		171,484
Provision		466,881			676,018			282,966			94,958			(83,736	)		237,275			(18,689	)		5,110		1,660,783
Ending Balance	$	154,991		$	902,644		$	1,100,139		$	174,809		$	98,582		$	824,759		$	11,911		$	5,110	$	3,272,945

			December 31, 2011 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	$	2,075	$	292,323	$	413,354	$	—	$	—	$	110,820	$	—	$	—	$	818,572
Ending Balance: Collectively evaluated for impairment		152,916		610,321		686,785		174,809		98,582		713,939		11,911		5,110		2,454,373
	$	154,991	$	902,644	$	1,100,139	$	174,809	$	98,582	$	824,759	$	11,911	$	5,110	$	3,272,945

			December 31, 2011 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	$	136,680	$	1,624,238	$	4,852,061	$	424,795	$	131,439	$	1,533,473	$	50,694	$	8,753,380
Ending Balance: Collectively evaluated for impairment		10,924,791		24,478,676		32,883,557		8,061,799		7,508,346		48,738,529		1,785,416		134,381,114
	$	11,061,471	$	26,102,914	$	37,735,618	$	8,486,594	$	7,639,785	$	50,272,002	$	1,836,110	$	143,134,494

An age analysis of past due loans as of September 30, 2012 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	$	86,308	$	—	$	21,684	$	107,992	$	9,542,325	$	9,650,317	$	21,684	$	—
Real Estate:
Construction and land development		601,226		—		530,616		1,131,842		20,599,999		21,731,841		—		668,278
Residential 1-4 Families
First Liens		756,722		112,800		1,856,124		2,725,646		34,705,300		37,430,946		38,504		2,233,924
Junior Liens		113,380		81,191		318,424		512,995		7,674,072		8,187,067		180,215		138,209
Home Equity lines		—		—		—		—		6,169,719		6,169,719		—		—
Commercial Real Estate		153,085		—		359,807		512,892		51,245,354		51,758,246		359,807		—
Consumer		5,620		—		—		5,620		1,731,390		1,737,010		—		—
	$	1,716,341	$	193,991	$	3,086,655	$	4,996,987	$	131,668,159	$	136,665,146	$	600,210	$	3,040,411

An age analysis of past due loans as of December 31, 2011 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	$	150,390	$	4,287	$	88,350	$	243,027	$	10,818,444	$	11,061,471	$	—	$	104,579
Real Estate:
Construction and land development		52,406		43,274		1,526,501		1,622,181		24,480,733		26,102,914		—		1,624,238
Residential 1-4 Families
First Liens		836,919		1,674,264		2,689,459		5,200,642		32,534,976		37,735,618		—		4,852,061
Junior Liens		208,807		—		—		208,807		8,277,787		8,486,594		—		156,490
Home Equity lines		26,773		—		—		26,773		7,613,012		7,639,785		—		131,439
Commercial Real Estate		—		—		148,221		148,221		50,123,781		50,272,002		—		148,221
Consumer		2,103		—		—		2,103		1,834,007		1,836,110		—		50,694
	$	1,277,398	$	1,721,825	$	4,452,531	$	7,451,754	$	135,682,740	$	143,134,494	$	—	$	7,067,722

Impaired loans at September 30, 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	$	235,466	$	—	$	235,466	$	—	$	152,165	$	73
Real Estate:
Construction and land development		1,013,204		—		991,764		—		1,030,313		—
Residential 1-4 Families
First Liens		2,568,678		691,116		1,820,348		123,000		3,141,578		3,236
Junior Liens		415,466		—		415,466		—		364,857		185
Home Equity lines		—		—		—		—		97,219		—
Commercial Real Estate		709,198		—		709,198		—		1,142,338		—
Consumer		86,494		—		—		—		25,122		—
	$	5,028,506	$	691,116	$	4,172,242	$	123,000	$	5,953,592	$	3,494

Impaired loans at December 31, 2011 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	$	170,080	$	36,388	$	100,292	$	2,075	$	327,051	$	593
Real Estate:
Construction and land  development		1,664,551		1,263,551		360,687		292,323		2,163,855		24,174
Residential 1-4 Families
First Liens		4,901,815		2,474,255		2,377,806		413,354		3,618,240		122,856
Junior Liens		424,795		—		424,795		—		570,365		15,383
Home Equity lines		163,703		—		131,439		—		177,972		3,520
Commercial Real Estate		1,533,473		1,385,252		148,221		110,820		809,181		105,266
Consumer		142,188		—		50,694		—		56,639		653
	$	9,000,605	$	5,159,446	$	3,593,934	$	818,572	$	7,723,303	$	272,445

Troubled debt restructurings occurred as follows for the year-to-date periods ending September 30, 2012 and 2011:

	2012		2011
Commercial	$	97,502	$	68,225
Real Estate:
Construction and land development		323,487		—
Residential 1-4 families:
First liens		—		275,000
Junior liens		—		171,638
Home Equity Lines		—		—
Commercial Real Estate		353,177		148,221
Consumer		—		—
	$	774,166	$	663,084

For the nine months ended September 30, 2012, below describes the troubled debt restructurings at the time of modification:

	Pre-Modification				Post-Modification
	Number				Number
	of Loans		Balance		of Loans		Balance
Commercial		1	$	97,502		1	$	97,502
Real Estate:
Construction and land development		1		323,487		1		323,487
Residential 1-4 families:
First liens		—		—		—		—
Junior liens		—		—		—		—
Home Equity Lines		—		—		—		—
Commercial Real Estate		1		354,156		1		354,156
Consumer		—		—		—		—
		3	$	775,145		3	$	775,145

The commercial loan restructured was a renewal of an existing loan for a short period of time to allow the borrower to come up with an action plan. The borrower’s debt service ratio had declined moving the credit to a criticized asset. The construction and land development loan was the renewal of a criticized credit for a short term to allow the borrower to sell assets. The commercial real estate loan was the restructure of a stale line of credit into an amortizing loan of a criticized asset.

There were no additional loans designated as troubled debt restructuring in the third quarter of 2012.

At September 30, 2012 and December 31, 2011 the balance in loans under the terms of troubled debt restructurings not included in nonaccrual loans was $1,222,737 and $1,685,658, respectively. These loans did not have any additional commitments at September 30, 2012 and December 31, 2011, respectively. Loan restructurings generally occur when a modification that would otherwise not be considered is granted to the borrower. 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 September 30, 2012 and December 31, 2011, respectively. Troubled debt restructurings are included in the impaired loan disclosures.

There were no troubled debt restructurings modified during the prior twelve months that defaulted during the three and nine month period ended September 30, 2012.

For the nine months ended September 30, 2011, below describes the troubled debt restructurings at the time of modification:

	Pre-Modification				Post-Modification
	Number				Number
	of Loans		Balance		of Loans		Balance
Commercial		2	$	370,735		2	$	68,940
Real Estate:
Construction and land development		—		—		—		—
Residential 1-4 families:
First liens		1		275,000		1		275,000
Junior liens		1		518,719		1		175,000
Home Equity Lines		—		—		—		—
Commercial Real Estate		1		152,235		1		152,235
Consumer		—		—		—		—
		5	$	1,316,689		5	$	671,175

The commercial loans restructured had one loan modified due to the company going out of business. Loan renewed interest only until other sources of income were obtained. The second loan consisted of property taken into other real estate with a charge off and the deficit balance added into a new note. The 1-4 family residential first lien loan was modified from a home equity loan to a term loan over thirty years. The junior lien was a credit for a lot loan where the borrower had financial difficulty and lot had lost value. The lot was taken into other real estate and the deficit was put into a new note secured by a second on his home. The new note was also set up interest only for two years and then amortizing but to allow for time to sell the property. Commercial real estate loan was modified and termed out over thirty years. Interest to date was forgiven.

Of the $663,084 in loans restructured year-to-date September 2011, $319,859 are on nonaccrual and are included in the nonaccrual and impaired loan disclosures.

There were no troubled debt restructuring occurrences in the third quarter of 2011.

There were no troubled debt restructurings modified during the prior twelve months that were in default as of September 30, 2011.

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

	September 30, 2012		September 30, 2011
Interest that would have been  earned	$	216,209	$	470,512
Interest reflected in income		3,494		93,198
Lost interest	$	212,715	$	377,314

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.

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.

			September 30, 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	$	9,330,704	$	18,306,735	$	32,622,870	$	7,019,935	$	6,143,006	$	47,564,233	$	1,644,164	$	122,631,647
Special Mention		73,889		869,098		716,868		275,520		—		1,824,120		39,096		3,798,591
Substandard		245,724		2,556,008		4,091,208		891,612		26,713		2,369,893		53,750		10,234,908
Doubtful		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—
	$	9,650,317	$	21,731,841	$	37,430,946	$	8,187,067	$	6,169,719	$	51,758,246	$	1,737,010	$	136,665,146

			December 31, 2011 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	$	9,869,976	$	21,364,943	$	30,016,743	$	7,251,555	$	7,486,498	$	43,885,034	$	1,782,754	$	121,657,503
Special Mention		878,058		1,067,783		492,941		—		—		1,611,592		—		4,050,374
Substandard		312,325		3,377,865		6,812,580		1,235,039		153,287		4,775,376		53,356		16,719,828
Doubtful		1,112		292,323		413,354		—		—		—		—		706,789
Loss		—		—		—		—		—		—		—		—
	$	11,061,471	$	26,102,914	$	37,735,618	$	8,486,594	$	7,639,785	$	50,272,002	$	1,836,110	$	143,134,494

XML

Securities (Details 1) (USD $)	Sep. 30, 2012
Amortized cost, Due in one year or less	$ 0
Amortizes cost, Due after one year but within five years	0
Amortizes cost, Due after five years but within ten years	7,843,183
Amortizes cost, Due after ten years	12,629,037
Total Amortized cost	20,472,220
Approximate Market Value, Due in one year or less	0
Approximate Market Value, Due after one year but within five years	0
Approximate Market Value, Due after five years but within ten years	7,928,369
Approximate Market Value, Due after ten years	13,237,722
Total Approximate Market Value	$ 21,166,091

XML

Allowance for Loan Losses (Details 6) (USD $)	9 Months Ended		12 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011
Interest that would have been earned	$ 216,209	$ 470,512
Interest reflected in income	3,494	93,198	272,445
Lost interest	$ 212,715	$ 377,314

XML

Securities (Tables)

9 Months Ended

Sep. 30, 2012

Securities [Abstract]

Schedule of Available-for-sale Securities Reconciliation [Table Text Block]

The carrying values, unrealized gains and losses and approximate market values of investment securities at September 30, 2012 and December 31, 2011 are shown in the following tables. The entire investment portfolio is classified as available-for-sale to preserve maximum liquidity for funding needs.

	September 30, 2012
			Gross		Gross
	Amortized		Unrealized		Unrealized			Approximate
	Cost		Gains		Losses			Market Value
U.S. government sponsored agencies	$	2,217,487	$	11,956	$	—		$	2,229,443
Mortgage backed securities		13,557,686		648,932		—			14,206,618
States and political subdivisions		4,697,047		46,701		(13,718	)		4,730,030
Total securities available for sale	$	20,472,220	$	707,589	$	(13,718	)	$	21,166,091

	December 31, 2011
			Gross		Gross
	Amortized		Unrealized		Unrealized			Approximate
	Cost		Gains		Losses			Market Value
U. S. government sponsored agencies	$	2,804,763	$	7,497	$	(1,478	)	$	2,810,782
Mortgage backed securities		16,758,613		496,577		—			17,255,190
States and political subdivisions		1,111,363		22,549		—			1,133,912
Total securities available-for-sale	$	20,674,739	$	526,623	$	(1,478	)	$	21,199,884

Investments Classified by Contractual Maturity Date [Table Text Block]

The amortized costs and market values of securities available for sale at September 30, 2012, 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		7,843,183		7,928,369
Due after ten years		12,629,037		13,237,722
	$	20,472,220	$	21,166,091

Schedule of Temporary Impairment Losses, Investments [Table Text Block]

Following demonstrates the unrealized loss position of securities available for sale at September 30, 2012 and December 31, 2011.

	September 30, 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	$	2,306,820	$	(13,718	)	$	—	$	—	$	2,306,820	$	(13,718	)
Total securities available-for-sale	$	2,306,820	$	(13,718	)	$	—	$	—	$	2,306,820	$	(13,718	)

	December 31, 2011
	Less Than 12 Months					12 Months or More				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Losses			Value		Losses		Value		Losses
U. S. government sponsored agencies	$	2,248,523	$	(1,478	)	$	—	$	—	$	2,248,523	$	(1,478	)
Total temporarily impaired securities	$	2,248,523	$	(1,478	)	$	—	$	—	$	2,248,523	$	(1,478	)