As filed with the Securities and Exchange Commission on August 28, 1996
Registration No. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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MAINSTREET BANKGROUP INCORPORATED
(Exact name of registrant as specified in its charter)
VIRGINIA 6711 54-1046817
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation) Classification Code Number) Identification No.)
200 East Church Street
Martinsville, Virginia 24112
(540) 666-6724
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Rebecca J. Jenkins
Senior Vice President, General Counsel and Secretary
200 East Church Street
Martinsville, Virginia 24112
(540) 666-3272
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-----------------------------
Copies to:
Lathan M. Ewers, Jr. Wayne A. Whitham, Jr.
Hunton & Williams Williams, Mullen, Christian & Dobbins
951 East Byrd Street Two James Center, 16th Floor
Richmond, Virginia 23219 Richmond, Virginia 23219
Approximate date of commencement of proposed sale to the public:
From time to time after the effective date of this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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Proposed Proposed maximum
Title of each class Amount to be maximum offering aggregate offering Amount of
of securities to be registered registered(1) price per unit(2) price(2) registration fee
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<S> <C>
Common Stock(3) 1,521,568 shs. $5.75 $8,755,000 $3,019
=========================================================================================================
</TABLE>
(1) This Registration Statement covers the maximum number of shares of common
stock of the Registrant which are expected to be issued in connection with
the transactions described herein.
(2) Estimated in accordance with Rule 457(f)(2) for the purpose of calculating
the registration fee, with the value of Bank Common Stock being exchanged in
the transaction for BankGroup Common Stock being based upon the book value
of Bank Common Stock at June 30, 1996, the latest practicable date prior to
filing.
(3) The Rights to purchase Participating Cumulative Preferred Stock, Series A
will be attached to and will trade with shares of the Common Stock of
MainStreet BankGroup Incorporated.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
<PAGE>
MAINSTREET BANKGROUP INCORPORATED
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Item of Form S-4 Location in Prospectus
<S> <C>
1. Forepart of Facing Page; Cross Reference
Registration Statement Sheet; Outside Front Cover
and Outside Front Cover Page of Prospectus
Page of Prospectus
2. Inside Front and Inside Front Cover Page of
Outside Back Cover Prospectus; Table of Contents;
Pages of Prospectus Available Information;
Incorporation of Certain
Information by Reference
3. Risk Factors, Ratio of Summary; Comparative Per Share
Earnings to Fixed Data
Charges and Other
Information
4. Terms of the Summary; The Bank Merger;
Transaction Comparative Rights of
Shareholders; Annex I; Annex II
5. ProForma Financial BankGroup, Bank and First
Information National Bank of Clifton Forge
-- Unaudited Financial Data
and Unaudited Proforma
Accounts; BankGroup and Bank
-- Pro forma Consolidated
Financial Information;
BankGroup, Bank and First
National Bank of Clifton Forge
-- Pro forma Condensed
Consolidated Statement of
Financial Condition
6. Material Contracts with Not Applicable
the Company Being
Acquired
7. Additional Information Not Applicable
Required for Reoffering
by Persons and Parties
Deemed to be
Underwriters
8. Interests of Named Not Applicable
Experts and Counsel
<PAGE>
9. Disclosure of Not Applicable
Commission's Position
on Indemnification for
Securities Act
Liabilities
10. Information with Available Information;
Respect to S-3 Incorporation of Certain
Registrants Information by Reference;
Summary
11. Incorporation of Incorporation of Certain
Certain Information by Information by Reference
Reference
12. Information with Not Applicable
Respect to S-2 or S-3
Registrants
13. Incorporation of Not Applicable
Certain Information by
Reference
14. Information with Not Applicable
Respect to Registrants
Other than S-2 or S-3
Registrants
15. Information with Not Applicable
Respect to S-3
Companies
16. Information with Not Applicable
Respect to S-2 or S-3
Companies
17. Information with Summary; Supervision and
Respect to Companies Regulation; Hanover Bank;
other than S-2 or S-3 Market for and Dividends Paid
Companies on Bank Common Stock; Experts;
Financial Statements of
Hanover Bank
18. Information if Proxies, Incorporation of Certain
Consents or Information By Reference;
Authorizations are to Summary -- Shareholder
be Solicited Meeting; The Bank Merger
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<PAGE>
19. Information if Proxies, Not Applicable
Consents or
Authorizations are not
to be Solicited, or in
an Exchange Offer
</TABLE>
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<PAGE>
Dear Shareholders:
You are cordially invited to attend the Special Meeting of Shareholders
of Hanover Bank ("Bank") on __________ __, 1996 at __:__ a.m., Eastern Time, at
________________________, located at ____________________. This is a very
important meeting regarding your investment in the Bank.
The purpose of the meeting is to consider and vote upon the Agreement
and Plan of Reorganization, dated as of May 10, 1996, by and among the Bank,
MainStreet BankGroup Incorporated ("BankGroup") and BH Acquisition Subsidiary,
Inc. ("Acquisition") and the related Revised Plan of Merger (together, the
"Agreement"), pursuant to which, among other things, Bank will be merged with
and into Acquisition (the "Bank Merger") and become a subsidiary of BankGroup.
In the Bank Merger, each share of Common Stock of the Bank, other than shares
exchanged for cash, will be converted into the right to receive shares of Common
Stock of BankGroup, as described in the accompanying Proxy Statement/Prospectus.
Your Board of Directors unanimously recommends that you vote in favor of the
Agreement and the Bank Merger, which the Board believes is in the best interests
of shareholders of the Bank.
Enclosed is a Notice of the Special Meeting of Shareholders, a Proxy
Statement/Prospectus containing a discussion of the Agreement and the Bank
Merger, a proxy card, and a cash option form, which is described in the Proxy
Statement/Prospectus. Please complete, sign and date the enclosed proxy card and
return it as soon as possible in the envelope provided.
If you decide to attend the Special Meeting, you may vote your shares in
person whether or not you have previously submitted a proxy. It is important
that you understand that the Agreement and Bank Merger must be approved by the
holders of more than two-thirds of all outstanding shares of Common Stock of the
Bank, and that the failure to vote will have the same effect as a vote against
the proposal. On behalf of the Board, thank you for your attention to this
important matter.
_____________ __, 1996 Very truly yours,
Jay T. Thompson, III
Chairman of the Board
<PAGE>
HANOVER BANK
7021 Mechanicsville Turnpike
Mechanicsville, Virginia 23111
804-746-2878
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on _________ __, 1996
TO THE SHAREHOLDERS OF HANOVER BANK:
NOTICE IS HEREBY GIVEN that a Special Meeting of shareholders has been
called by the Board of Directors of Hanover Bank (the "Bank") and will be held
at _________________________, located at ________________________, on __________
__, 1996 at __:__ a.m., Eastern Time for the purpose of considering and voting
upon the following matter:
Proposed Bank Merger. To consider and vote upon the Agreement and Plan
of Reorganization dated as of May 10, 1996 and the related Revised Plan of
Merger (together, the "Agreement") providing for the merger of the Bank with and
into BH Acquisition Subsidiary, Inc., a wholly-owned subsidiary of MainStreet
BankGroup Incorporated (the "Bank Merger"). The Agreement is attached to the
accompanying Proxy Statement/Prospectus as Annex I.
Only those holders of shares of Common Stock of the Bank ("Bank Common
Stock") of record at the close of business on ___________ __, 1996 are entitled
to notice of and to vote at the meeting.
Mechanicsville, Virginia By Order of the Board of Directors,
__________ __, 1996
Carol B. Godsey
Secretary
THE BOARD OF DIRECTORS OF THE BANK UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF
BANK COMMON STOCK VOTE TO APPROVE THE BANK MERGER PROPOSAL.
YOU ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING. IT IS IMPORTANT THAT
YOUR SHARES BE REPRESENTED AT THE MEETING. PLEASE SIGN, DATE AND RETURN THE
ENCLOSED PROXY CARD IN THE ACCOMPANYING POSTAGE-PAID ENVELOPE SO THAT YOUR
SHARES WILL BE REPRESENTED AT THE MEETING. SHAREHOLDERS ATTENDING THE MEETING
MAY PERSONALLY VOTE ON ALL MATTERS WHICH ARE CONSIDERED, IN WHICH EVENT THE
SIGNED PROXIES ARE REVOKED. ANY PROXY MAY BE REVOKED BY YOU IN WRITING OR IN
PERSON AT ANY TIME PRIOR TO THE EXERCISE THEREOF.
<PAGE>
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS
OF
HANOVER BANK
To Be Held On _________ __, 1996
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PROSPECTUS OF
MAINSTREET BANKGROUP INCORPORATED
Common Stock
---------------
This Proxy Statement/Prospectus is being furnished to the holders of
Common Stock, par value $2.50 per share ("Bank Common Stock"), of Hanover Bank,
a Virginia banking corporation (the "Bank"), in connection with the solicitation
of proxies by the Board of Directors of Bank (the "Bank Board") for use at the
Special Meeting of Bank Shareholders to be held at __:__ a.m., Eastern Time on
________ __, 1996, at ____________________, located at _______________ (the
"Bank Shareholder Meeting" or the "Special Meeting").
At the Bank Shareholder Meeting, shareholders of record of Bank Common
Stock as of the close of business on ________ __, 1996, will consider and vote
upon a proposal to approve the Agreement and Plan of Reorganization, dated as of
May 10, 1996, and the related Revised Plan of Merger (together, the "Agreement")
by and among MainStreet BankGroup Incorporated, a Virginia corporation
("BankGroup"), BH Acquisition Subsidiary, Inc., an interim Virginia banking
corporation wholly owned by BankGroup ("Acquisition"), and Bank, pursuant to
which, among other things, Bank will merge into Acquisition (the "Bank Merger").
Upon consummation of the Bank Merger, which is expected to occur on or about
October 31, 1996, each outstanding share of Bank Common Stock (other than shares
held by BankGroup) shall be converted into and represent the right to receive
(upon a shareholder's election) either (i) a number of shares of BankGroup
Common Stock, determined by the Exchange Ratio, subject to adjustment as set
forth in the Agreement, or (ii) $15.25 cash per share of Bank Common Stock (the
"Common Stock Price Per Share"), subject to all applicable withholding taxes.
The number of shares of Bank Common Stock for which shareholders elect to
receive cash and cash paid in lieu of fractional shares may not exceed 9.90% of
outstanding Bank Common Stock. See "The Bank Merger -- Determination of
Exchange Ratio; Exchange of Bank Common Stock for BankGroup Common Stock." For a
description of the Agreement, which is included herein as Annex I to this Proxy
Statement/Prospectus, see "The Bank Merger."
---------------
This Proxy Statement/Prospectus and the accompanying proxy card are
first being mailed to shareholders of Bank on or about __________ __, 1996.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF BANKGROUP COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS,
DEPOSITS OR OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
---------------
The date of this Proxy Statement/Prospectus is ________ __, 1996.
<PAGE>
TABLE OF CONTENTS
Page
AVAILABLE INFORMATION................................................ 1
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.................... 2
SUMMARY ............................................................. 3
Parties to the Bank Merger................................... 3
Shareholder Meeting.......................................... 3
Vote Required; Record Date................................... 3
The Bank Merger.............................................. 4
The Exchange Ratio........................................... 4
Recommendation of the Board of Directors of Bank;
Reasons for the Bank Merger.......................................... 5
Cash Election................................................ 5
Effective Time of the Bank Merger............................ 6
Rights of Appraisal.......................................... 7
Opinion of Financial Advisor................................. 7
Conditions to Consummation................................... 7
Conduct of Business Pending the Bank Merger.................. 7
Interests of Certain Persons in the Bank Merger.............. 7
Resale of BankGroup Common Stock............................. 8
Certain Federal Income Tax Consequences of the Bank
Merger................................................ 8
Market Prices Prior to Announcement of the Bank Merger....... 8
Comparative Per Share Data................................... 9
SELECTED FINANCIAL DATA.............................................. 10
GENERAL INFORMATION.................................................. 43
THE BANK MERGER...................................................... 45
Opinion of Financial Advisor................................. 45
Effective Time of the Bank Merger............................ 49
Lock-Up Option............................................... 49
Determination of Exchange Ratio; Exchange of Bank
Common Stock for BankGroup Common Stock............... 50
Cash Election; Election Procedures........................... 52
Business of Bank Pending the Bank Merger..................... 53
Conditions to Consummation of the Bank Merger................ 53
Termination.................................................. 54
Accounting Treatment......................................... 54
Operations After the Bank Merger............................. 54
Interests of Certain Persons in the Bank Merger.............. 54
Certain Federal Income Tax Consequences...................... 56
Rights of Appraisal.......................................... 59
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MAINSTREET BANKGROUP INCORPORATED.................................... 60
General...................................................... 60
The Banks.................................................... 61
Recent Development........................................... 63
PRICE RANGE OF BANKGROUP COMMON STOCK AND DIVIDENDS.................. 64
HANOVER BANK......................................................... 64
General...................................................... 64
Competition.................................................. 65
Regulation and Supervision................................... 66
Properties................................................... 66
MARKET FOR AND DIVIDENDS PAID ON BANK COMMON STOCK................... 67
Market Information........................................... 67
Holders...................................................... 67
Stock Dividends.............................................. 68
Cash Dividends............................................... 68
OWNERSHIP BY CERTAIN BENEFICIAL OWNERS OF BANK STOCK................. 68
REGULATION AND SUPERVISION........................................... 70
Bank Holding Companies....................................... 70
Capital Requirements......................................... 72
Limits on Dividends and Other Payments....................... 73
Banks ...................................................... 74
Deposit Insurance............................................ 75
Other Safety and Soundness Regulations....................... 75
DESCRIPTION OF CAPITAL STOCK OF BANKGROUP............................ 76
Preferred Stock.............................................. 76
Common Stock................................................. 76
Rights ...................................................... 77
Virginia Stock Corporation Act............................... 78
Reports to Shareholders...................................... 80
Transfer Agent............................................... 80
COMPARATIVE RIGHTS OF SHAREHOLDERS................................... 80
Capitalization............................................... 80
Amendment of Articles or Bylaws.............................. 81
Required Shareholder Vote for Certain Actions................ 81
Director Nominations......................................... 82
Directors and Classes of Directors; Vacancies and
Removal of Directors.................................. 82
Anti-Takeover Provisions..................................... 83
Preemptive Rights............................................ 83
Assessment................................................... 83
Conversion; Redemption; Sinking Fund......................... 84
Liquidation Rights........................................... 84
Dividends and Other Distributions............................ 84
Indemnification.............................................. 85
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<PAGE>
Shareholder Proposals........................................ 85
Shareholder Inspection Rights; Shareholder Lists............. 86
Shareholder Rights Plan...................................... 86
Dissenters' Rights........................................... 87
RESALE OF BANKGROUP COMMON STOCK..................................... 87
EXPERTS ............................................................. 89
LEGAL OPINIONS....................................................... 89
OTHER MATTERS........................................................ 90
ANNEX I -- Agreement and Plan of Reorganization dated May 10, 1996;
Revised Plan of Merger
ANNEX II -- Fairness Opinion of Scott & Stringfellow, Inc.
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<PAGE>
AVAILABLE INFORMATION
BankGroup is subject to the reporting and informational requirements of
the Securities Exchange Act of 1934 (the "Exchange Act") and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). Reports, proxy statements and
other information filed with the SEC can be inspected and copied at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its Regional Offices located at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60611-2511
or Seven World Trade Center (13th Floor), New York, New York 10048. Copies of
such material can be obtained from the Public Reference Section of the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The SEC
also maintains a web site that contains reports, proxy statements, information
statements and other information regarding registrants that file electronically,
including BankGroup, with the SEC at HTTP:\\www.SEC.GOV. Such reports, proxy
statements and other information also may be inspected at the offices of the
National Association of Securities Dealers, Inc. located at 1735 K Street, N.W.,
Washington, D.C. 20006 for BankGroup. As permitted by the Rules and Regulations
of the SEC, this Proxy Statement/Prospectus does not contain all the information
set forth in the Registration Statement on Form S-4, of which this Proxy
Statement/Prospectus is a part, and exhibits thereto (together with the
amendments thereto, the "Registration Statement"), which has been filed by
BankGroup with the SEC under the Securities Act of 1933 (the "1933 Act") with
respect to BankGroup Common Stock and to which reference is hereby made.
No person has been authorized to give any information or to make any
representation other than as contained herein in connection with the offer
contained in this Proxy Statement/Prospectus, and if given or made, such
information or representation must not be relied upon as having been authorized
by BankGroup or Bank. This Proxy Statement/Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any securities other than the
securities to which it relates, nor does it constitute an offer to or
solicitation of any person in any jurisdiction to whom it would be unlawful to
make such an offer or solicitation. Neither the delivery of this Proxy
Statement/Prospectus nor the distribution of any of the securities to which this
Proxy Statement/Prospectus relates shall, at any time, imply that the
information herein is correct as of any time subsequent to the date hereof.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE CERTAIN
DOCUMENTS RELATING TO BANKGROUP THAT ARE NOT PRESENTED HEREIN OR DELIVERED
HEREWITH. BANKGROUP DOCUMENTS ARE AVAILABLE
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<PAGE>
WITHOUT CHARGE UPON REQUEST FROM REBECCA J. JENKINS, GENERAL COUNSEL AND
SECRETARY, MAINSTREET BANKGROUP INCORPORATED, 200 EAST CHURCH STREET,
MARTINSVILLE, VIRGINIA 24112, (540) 666-6724. IN ORDER TO ENSURE TIMELY DELIVERY
OF THE DOCUMENTS, ANY REQUESTS SHOULD BE MADE BY ___________ __, 1996.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by BankGroup are incorporated by reference
in this Proxy Statement/Prospectus: (i) BankGroup's Annual Report on Form 10-K
for the year ended December 31, 1995; (ii) BankGroup's Quarterly Report on Form
10-Q for the periods ended March 31, 1996 and June 30, 1996; (iii) the
description of BankGroup Common Stock in BankGroup's registration statement
filed under the Exchange Act with respect to BankGroup Common Stock, including
all amendments and reports filed for the purpose of updating such description;
and (iv) BankGroup's Current Report on Form 8-K, dated April 19, 1996.
All documents filed by BankGroup pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date hereof and prior to the date
of the Bank Shareholder Meeting are hereby incorporated by reference in this
Proxy Statement/ Prospectus and shall be deemed a part hereof from the date of
filing of such documents. Any statement contained in any supplement hereto or in
a document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of the Registration
Statement and this Proxy Statement/Prospectus to the extent that a statement
contained herein, in any supplement hereto or in any subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of the
Registration Statement, this Proxy Statement/Prospectus or any supplement
hereto.
Also incorporated by reference herein is the Agreement and Plan of
Reorganization among BankGroup, Acquisition and Bank, dated May 10, 1996, which
is attached to this Proxy Statement/Prospectus as Annex I.
The 10-K SB for December 31, 1995 for Hanover Bank is incorporated by
reference in this Proxy Statement/Prospectus.
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<PAGE>
SUMMARY
The following summary is not intended to be a complete description of
all material facts regarding BankGroup, Bank and the matters to be considered at
the Bank Shareholder Meeting and is qualified in all respects by the information
appearing elsewhere or incorporated by reference in this Proxy
Statement/Prospectus, the Annexes hereto and the documents referred to herein.
Shareholders are urged to read carefully all such information.
Parties to the Bank Merger
BankGroup. The main office of BankGroup is located at 200 East Church
Street, Martinsville, Virginia 24112. See "MainStreet BankGroup Incorporated."
BH Acquisition Subsidiary, Inc. is owned by BankGroup and has no business
operations.
Bank. The main office of Bank is located at 7021 Mechanicsville
Turnpike, Mechanicsville, Virginia 23111. See "Hanover Bank."
Shareholder Meeting
The Bank Shareholder Meeting will be held on __________ __, 1996 at
__:__ a.m., Eastern Time, at ____________________ located at
______________________, for the purpose of considering and voting upon a
proposal to approve the Agreement and the related Revised Plan of Merger; and
such other business as may properly come before the meeting.
Vote Required; Record Date
Only Bank shareholders of record at the close of business on __________
__, 1996 (the "Record Date") are entitled to vote at the Bank Shareholder
Meeting. The affirmative vote of the holders of more than two-thirds of the
shares outstanding on such date is required to approve the Bank Merger. As of
the Record Date, there were _______ shares of Bank Common Stock entitled to be
voted, held by approximately ___ shareholders of record.
Directors of Bank and their affiliates beneficially owned, as of the
Record Date, ______ shares or approximately ____% of the _______ outstanding
shares of Bank Common Stock. Directors of Bank have agreed with BankGroup to
recommend approval of the Bank Merger to shareholders of Bank and to vote the
shares of Bank Common Stock beneficially owned by them, and with respect to
which they have the power to vote, in favor of the Bank Merger. None of the
Directors of Bank are expected to exercise the cash option described below. See
"Ownership by Certain Beneficial Owners of Bank Common Stock."
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<PAGE>
The Board of Directors of BankGroup has approved the Bank Merger.
Approval of the Bank Merger by BankGroup shareholders is not required by
applicable law or regulation.
The Bank Merger
Pursuant to the Agreement, at the Effective Time of the Bank Merger, as
defined herein under the heading "The Bank Merger -- Effective Time of the Bank
Merger," Bank will merge into Acquisition in accordance with the Revised Plan of
Merger. At the Effective Time of the Bank Merger, each outstanding share of Bank
Common Stock (other than shares held by BankGroup) will be converted into the
right to receive (upon a shareholder's election) either (i) a number of shares
of BankGroup Common Stock, determined by the Exchange Ratio, subject to
adjustment as set forth in the Agreement, or (ii) $15.25 cash per share of Bank
Common Stock (the "Common Stock Price Per Share"), subject to all applicable
withholding taxes and provided that the number of shares of Bank Common Stock
for which shareholders elect to receive cash and for which cash is paid in lieu
of fractional shares may not exceed 9.90% of the outstanding shares of Bank
Common Stock.
The Exchange Ratio
For the purpose of determining the Exchange Ratio, each share of Bank
Common Stock has been valued at $15.25, the Common Stock Price Per Share,
sometimes referred to as "Merger Consideration." The number of shares of
BankGroup Common Stock to be delivered for each share of Bank Common Stock will
be determined by dividing $15.25 per share of Bank Common Stock by the average
of the closing sales price (the "BankGroup Stock Price") for BankGroup Common
Stock as reported on the Nasdaq National Market for the 10 trading day period
ending on the 20th day prior to the Closing Date (as defined in the Agreement)
(the "Exchange Ratio"). If such quotient is less than 0.884, the Exchange Ratio
shall be 0.884; provided that if the BankGroup Stock Price exceeds $20.50, the
Exchange Ratio shall be adjusted to equal the quotient of $18.125 divided by the
BankGroup Stock Price. If such quotient is greater than 1.034, the Exchange
Ratio shall be 1.034. The Exchange Ratio will be adjusted to reflect any
consolidation, split-up, other subdivisions or combinations of BankGroup Common
Stock, any dividend payable in BankGroup Common Stock, or any capital
reorganization involving the reclassification of BankGroup Common Stock. See
"The Bank Merger -- Determination of Exchange Ratio; Exchange of Bank Common
Stock for BankGroup Common Stock."
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<PAGE>
Recommendation of the Board of Directors of Bank;
Reasons for the Bank Merger
The Bank Board has determined that the Bank Merger is in the best
interests of Bank and its shareholders. The Bank Board was influenced by a
number of factors in arriving at this determination, though it did not assign
any specific or relative weight to these factors in its consideration. Among the
factors considered were:
(i) The Bank Board believes that the Exchange Ratio provides a fair
price to Bank's shareholders for their shares of Bank Common Stock. Scott &
Stringfellow, Inc., Bank's financial advisor, concluded that the consideration
to be received by Bank shareholders in the Bank Merger was fair to Bank
shareholders from a financial point of view. See "The Bank Merger -- Opinion of
Financial Advisor".
(ii) The Bank Merger is anticipated to be tax-free for federal income
tax purposes for the shareholders of Bank Common Stock (other than in respect to
shares exchanged for cash, and cash paid in lieu of fractional shares).
(iii) BankGroup Common Stock to be received by Bank shareholders is
expected to afford greater market liquidity when compared to the current trading
of Bank Common Stock.
(iv) The Bank Merger will provide Bank's customers access to a
broader range of financial services and products.
(v) The Bank Board's review of the provisions of the Agreement and
the related Revised Plan of Merger was favorable.
(vi) The Bank Merger will allow Bank to continue its community bank
philosophy.
Based on these matters, and such other matters as the Bank Board deemed
relevant, the Bank Board unanimously adopted the Agreement and the Revised Plan
of Merger as being in the best interests of Bank and its shareholders.
THE BANK BOARD RECOMMENDS THAT BANK SHAREHOLDERS VOTE FOR APPROVAL OF
THE PROPOSAL.
Cash Election
Each holder of shares of Bank Common Stock will be given the option of
exchanging all, but not less than all, of his or her shares for $15.25 cash per
share of Bank Common Stock (the "Common Stock Price Per Share"), subject to all
applicable withholding taxes and provided that the number of shares of Bank
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<PAGE>
Common Stock for which shareholders elect to receive cash and for which cash is
paid in lieu of fractional shares may not exceed 9.90% of the outstanding shares
of Bank Common Stock. A shareholder electing the cash option must exchange all
of his or her shares for cash to preserve the "pooling of interests" accounting
treatment for the Bank Merger.
Because the number of shares exchanged for cash may not exceed 9.90% of
the outstanding shares of Bank Common Stock, the extent to which the cash
elections will be accommodated will depend upon the number of holders of shares
of Bank Common Stock who elect to receive cash. If the aggregate of the shares
with respect to which a cash election is made and for which cash is to be paid
in lieu of fractional shares exceeds 9.90% of the outstanding shares of Bank
Common Stock, shares submitted for cash purchase will be chosen by lot to
accommodate the "pooling of interests" accounting requirement that a shareholder
who chooses the cash election must have all of his or her shares purchased for
cash. Shareholders whose shares are submitted for cash purchase and are not
chosen in the lottery will have their shares exchanged for BankGroup Common
Stock (plus cash in lieu of fractional shares) at the Exchange Ratio.
IF A HOLDER OF SHARES OF BANK COMMON STOCK ELECTS TO SURRENDER ALL OF
HIS SHARES FOR CASH, HE MUST FILE THE CASH OPTION FORM ACCOMPANYING THIS PROXY
STATEMENT/PROSPECTUS PRIOR TO OR AT THE BANK SHAREHOLDER MEETING. ANY HOLDER OF
SHARES OF BANK COMMON STOCK WHO DOES NOT COMPLETE AND RETURN A CASH OPTION FORM
PRIOR TO OR AT THE BANK SHAREHOLDER MEETING CAN ONLY RECEIVE BANKGROUP COMMON
STOCK IN THE BANK MERGER. ONCE THE VOTE ON THE BANK MERGER HAS BEEN TAKEN AT THE
BANK SHAREHOLDER MEETING, THE CASH ELECTION IS IRREVOCABLE. THE CASH OPTION FORM
MUST BE ACCOMPANIED BY THE STOCK CERTIFICATES TO BE EXCHANGED FOR CASH. Bank
will hold the certificates for safekeeping pending the Effective Time of the
Bank Merger, at which time they will be exchanged for cash. If the Bank Merger
is not consummated, Bank will return the certificates. See "The Bank Merger --
Cash Election; Election Procedures."
Effective Time of the Bank Merger
The Bank Merger is expected to be consummated around October 31, 1996.
Subject to the terms and conditions set forth herein, including receipt of all
required regulatory approvals, the Bank Merger shall become effective at the
time Articles of Merger relating to the Bank Merger are made effective (the
"Effective Time of the Bank Merger") by the State Corporation Commission of
Virginia (the "SCC"). Bank and BankGroup each has the right, acting
unilaterally, to terminate the Agreement should the Bank Merger not be completed
by February 28, 1997. See "The Bank Merger -- Termination."
-6-
<PAGE>
Rights of Appraisal
As provided in Virginia Code ss. 6.1-43, holders of Bank Common Stock do
not have the right to dissent and demand payment of fair value for their shares.
Opinion of Financial Advisor
Bank has received the opinion of Scott & Stringfellow, Inc. ("Scott &
Stringfellow") that the Merger Consideration to be received by the holders of
Bank Common Stock pursuant to the terms of the Bank Merger is fair to Bank
shareholders from a financial point of view. Scott & Stringfellow's opinion is
directed only to the Merger Consideration to be received by the holders of Bank
Common Stock and does not constitute a recommendation to any holders of Bank
Common Stock as to how such holders of Bank Common Stock should vote at the Bank
Shareholder Meeting or as to any other matter. Scott & Stringfellow will be paid
a fee for its services at the closing of the Bank Merger. For additional
information concerning Scott & Stringfellow and its opinion, see "The Bank
Merger -- Opinion of Financial Advisor" and the opinion of such firm attached as
Annex II to this Proxy Statement/Prospectus.
Conditions to Consummation
Consummation of the Bank Merger will be accomplished by the statutory
merger of Bank into Acquisition. The Bank Merger is contingent upon the
approvals of the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") and the SCC, which approvals have been applied for and are
expected to be received. The Bank Merger is also subject to other usual
conditions. See "The Bank Merger -- Conditions to Consummation of the Bank
Merger."
Conduct of Business Pending the Bank Merger
Pursuant to the terms of the Agreement, Bank has agreed not to take
certain actions relating to the operation of its business pending consummation
of the Bank Merger, without the prior approval of BankGroup, except as otherwise
permitted by the Agreement. See "The Bank Merger -- Business of Bank Pending the
Bank Merger."
Interests of Certain Persons in the Bank Merger
Certain members of Bank's management and the Bank Board have interests
in the Bank Merger in addition to their interests as shareholders of Bank
generally. These include, among other things, the election of Phillip W. Dean to
BankGroup's Board of
-7-
<PAGE>
Directors, indemnification and directors' and officers' liability insurance for
Bank directors and officers, eligibility of Bank employees for certain BankGroup
employee benefits, and conversion of options to acquire Bank Common Stock by
directors and officers of Bank into options to acquire BankGroup Common Stock.
See "The Bank Merger -- Interests of Certain Persons in the Bank Merger."
Resale of BankGroup Common Stock
Shares of BankGroup Common Stock received in the Bank Merger will be
freely transferable by the holders thereof, except for those shares held by
those holders who may be deemed to be "affiliates" (generally including
directors, certain executive officers and 10% or greater shareholders) of Bank
or BankGroup under applicable federal securities laws. See "Resale of BankGroup
Common Stock."
Certain Federal Income Tax Consequences of the Bank Merger
The Bank Merger is intended to be a tax-free "reorganization" as defined
in Section 368(a) of the Internal Revenue Code of 1986 (the "Code"), but the
receipt of cash by a Bank shareholder for any shares of Bank Common Stock,
including cash received in lieu of a fractional share of BankGroup Common Stock,
will be a taxable transaction. A condition to consummation of the Bank Merger is
the receipt by BankGroup and Bank of an opinion from Hunton & Williams, counsel
to BankGroup, as to the qualification of the Bank Merger as a tax-free
reorganization and certain other federal income tax consequences of the Bank
Merger. See "The Bank Merger -- Certain Federal Income Tax Consequences."
Market Prices Prior to Announcement of the Bank Merger
The following is information regarding the last reported closing price
per share of BankGroup Common Stock on the National Association of Securities
Dealers, Inc. National Market System on May 2, 1996, the date immediately
preceding delivery of an indication of interest to Bank on May 3, 1996, which
was superseded by the Agreement on May 10, 1996. See "Market for and Dividends
Paid on Bank Common Stock" for information concerning recent market prices of
Bank Common Stock.
Bank
Historical Equivalent
BankGroup (a) Bank Pro Forma(a)
Common Stock $16.75 $9.75 $15.25
-8-
<PAGE>
- ---------------
(a) The equivalent price for Bank Common Stock is the product of multiplying
an assumed Exchange Ratio of .9104 shares of BankGroup Common Stock
times $16.75.
Comparative Per Share Data
The following table presents historical and pro forma per share data for
BankGroup, and historical and equivalent pro forma per share data for Bank. The
pro forma combined amounts give effect to an assumed Exchange Ratio of .938
shares of BankGroup Common Stock for each share of Bank Common Stock (based on
the last sale price of BankGroup Common Stock on June 30, 1996 of $16.25). The
equivalent pro forma Bank share amounts allow comparison of historical
information about one share of Bank Common Stock to the corresponding data about
what one share of Bank Common Stock will equate to in the combined corporation
and are computed by multiplying the pro forma combined amounts by an assumed
Exchange Ratio of .938. As discussed in "The Bank Merger -- Determination of
Exchange Ratio and Exchange for BankGroup Common Stock," the final Exchange
Ratio will be determined based on the average closing sales price for BankGroup
Common Stock as reported on the Nasdaq National Market for the 10 trading day
period ending on the 20th day prior to the Closing Date (as defined in the
Agreement). The following table is based on the assumption that all issued and
outstanding shares of Bank Common Stock are converted into shares of BankGroup
Common Stock. The Bank Merger is reflected under the pooling of interests method
of accounting and pro forma information is derived accordingly.
The per share data included in the following table should be read in
conjunction with the consolidated financial statements of BankGroup incorporated
by reference herein and the financial statements of Bank included herein and the
notes accompanying all such financial statements. The data presented below are
not necessarily indicative of the results of operations which would have been
obtained if the Bank Merger had been consummated in the past or which may be
obtainable in the future.
-9-
<PAGE>
COMPARATIVE PER SHARE DATA(6)
<TABLE>
<CAPTION>
As of or For Six As of or For Years
Months Ended June 30, Ended December 31,
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C>
Book Value Per Share at Period End:(4)
BankGroup historical....................................$ 9.12 $ 8.02 $ 8.87 $ 6.86 $ 7.70
Bank historical........................................ 5.95 5.31 5.65 4.93 4.32
Pro forma combined per BankGroup common share(1)........ 8.73 7.65 8.48 6.61 7.22
Equivalent pro forma per Bank common share ............ 8.19 7.19 7.95 6.20 6.77
Cash Dividends Declared Per Share:(4)
BankGroup historical....................................$ .23 $ .19 $ .39 $ .33 $ .29
Bank historical......................................... .11 .08 .18 .03 --
Pro forma combined per BankGroup common share(2)........ .21 .17 .33 .28 .25
Equivalent pro forma per Bank common share ............. .20 .16 .31 .26 .23
Net Income Per Share:(4)(5)
BankGroup historical....................................$ .77 $ .57 $ 1.29 $ .53 $ .87
Bank historical........................................ .43 .38 .80 .66 .41
Pro forma combined per BankGroup common share(3)........ .72 .54 1.20 .51 .76
Equivalent pro forma per Bank common share.............. .68 .51 1.13 .48 .71
</TABLE>
- ---------------
(1) Pro forma combined book value per BankGroup common share represents
combined common shareholders' equity amounts, divided by pro forma
combined period-end common shares outstanding.
(2) Pro forma combined dividends per BankGroup common share represent
combined common dividends declared, divided by pro forma combined
average common shares outstanding.
(3) Pro forma combined net income per BankGroup common share represents
combined net income available to common shareholders, divided by pro
forma combined average common shares outstanding.
(4) BankGroup's fiscal year ends December 31 and Bank's fiscal year ends
December 31. Bank's book value per share is as of the dates presented,
and net income and dividend data reflect results for the periods
presented.
(5) Net Income Per Share Data is based on fully diluted shares.
(6) On September 15, 1993 the Bank's Board of Directors declared a
two-for-one stock split payable on September 30, 1993. All share and per
share data retroactively reflect the stock split noted.
SELECTED FINANCIAL DATA
MAINSTREET BANKGROUP INCORPORATED
AND HANOVER BANK
The following BankGroup consolidated financial data and Bank financial
data is qualified in its entirety by the information included in the documents
incorporated in this Proxy Statement/Prospectus by reference. Interim financial
results, in the opinion of BankGroup and Bank management, reflect all
adjustments necessary for a fair presentation of the results of operations,
including adjustments related to completed acquisitions. All such adjustments
are of a normal nature. The results of operations for an interim period are not
necessarily indicative of results that may be expected for a full year or any
other interim period.
-10-
<PAGE>
<TABLE>
<CAPTION>
As of or For
Six Months
Ended As of or For
June 30, Years ended December 31,
1996 1995 1995 1994 1993 1992 1991
(Dollars in 000s, except per share data)
<S> <C>
Earnings:
Net Interest Income
MainStreet BankGroup..................$ 20,346 $ 18,056 $ 37,300 $ 34,299 $ 32,621 $ 29,975 $ 25,869
Hanover............................... 2,021 1,826 3,937 3,421 2,690 1,887 1,194
MainStreet and Hanover ProForma....... 22,367 19,882 41,237 37,720 35,311 31,862 27,063
Provision for Loan Losses
MainStreet BankGroup.................. 1,332 657 1,319 2,827 1,370 2,397 5,424
Hanover............................... 90 55 100 261 293 200 110
MainStreet and Hanover ProForma....... 1,422 712 1,419 3,088 1,663 2,597 5,534
Net Interest Income after provision for
loan losses
MainStreet BankGroup.................. 19,014 17,399 35,981 31,472 31,251 27,578 20,445
Hanover............................... 1,931 1,771 3,837 3,160 2,397 1,687 1,084
MainStreet and Hanover ProForma....... 20,945 19,170 39,818 34,632 33,648 29,265 21,529
Noninterest Income
MainStreet BankGroup.................. 5,453 3,800 7,975 1,175 6,414 6,386 5,580
Hanover............................... 287 254 300 261 218 286 110
MainStreet and Hanover ProForma....... 5,740 4,054 8,275 1,436 6,632 6,672 5,690
Noninterest Expense
MainStreet BankGroup.................. 14,949 14,691 28,817 28,713 28,254 24,101 22,337
Hanover............................... 1,288 1,221 2,382 2,013 1,768 1,370 1,048
MainStreet and Hanover ProForma....... 16,237 15,912 31,199 30,726 30,022 25,471 23,385
Income before income taxes
MainStreet BankGroup.................. 9,518 6,508 15,139 3,934 9,411 9,863 3,688
Hanover............................... 930 804 1,755 1,408 847 603 146
MainStreet and Hanover ProForma....... 10,448 7,312 16,894 5,342 10,258 10,466 3,834
Net Income
MainStreet BankGroup.................. 6,578 4,629 10,740 4,088 6,881 7,128 2,984
Hanover............................... 657 567 1,228 1,018 628 435 118
MainStreet and Hanover ProForma....... 7,235 5,196 11,968 5,106 7,509 7,563 3,102
Net income applicable to common shares
MainStreet BankGroup.................. 6,578 4,629 10,740 4,088 6,881 7,128 2,984
Hanover............................... 657 567 1,228 1,018 628 435 118
MainStreet and Hanover ProForma....... 7,235 5,196 11,968 5,106 7,509 7,563 3,102
Extraordinary Item
MainStreet BankGroup.................. -- -- -- -- -- -- --
Hanover............................... -- -- -- -- -- -- 16
MainStreet and Hanover ProForma....... -- -- -- -- -- -- 16
Net Income After Extraordinary Item
MainStreet BankGroup.................. 6,578 4,629 10,740 4,088 6,881 7,128 2,984
Hanover............................... 657 567 1,228 1,018 628 435 134
MainStreet and Hanover ProForma....... 7,235 5,196 11,968 5,106 7,509 7,563 3,118
Per Common Share Data:
Net Income (primary): (1)
MainStreet BankGroup.................. $ 0.77 $ 0.61 $ 1.37 $ 0.54 $ 0.93 $ 0.97 $ 0.41
Hanover............................... 0.43 0.38 0.80 0.66 0.41 0.30 0.09
MainStreet and Hanover ProForma (2)... 0.72 0.58 1.29 0.57 0.85 0.87 0.36
Net Income (fully diluted): (1)
MainStreet BankGroup.................. 0.77 0.57 1.29 0.53 0.87 0.91 0.41
Hanover............................... 0.43 0.38 0.80 0.66 0.41 0.30 0.09
MainStreet and Hanover ProForma (2)... 0.72 0.54 1.20 0.51 0.76 0.82 0.36
Cash Dividends declared: (1)
MainStreet BankGroup.................. 0.23 0.19 0.39 0.33 0.29 0.22 0.27
Hanover............................... 0.11 0.08 0.18 0.03 -- -- --
MainStreet and Hanover ProForma (2)... 0.21 0.17 0.33 0.28 0.25 0.19 0.23
Book value: (1)
MainStreet BankGroup.................. 9.12 8.02 8.87 6.86 7.70 7.05 6.30
Hanover............................... 5.95 5.31 5.65 4.93 4.32 3.88 3.94
MainStreet and Hanover ProForma....... 8.73 7.65 8.48 6.61 7.22 6.59 6.00
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
As of or For
Six Months
Ended As of or For
June 30, Years ended December 31,
1996 1995 1995 1994 1993 1992 1991
(Dollars in 000's, except per share data)
<S> <C>
Average primary shares (thousands): (1)
MainStreet BankGroup.................. 8,598 7,580 7,842 7,510 7,384 7,336 7,280
Hanover............................... 1,529 1,512 1,541 1,538 1,542 1,450 1,478
MainStreet and Hanover ProForma (2)... 10,032 8,998 9,287 8,953 8,830 8,696 8,666
Average fully diluted shares (thousands):
MainStreet BankGroup(1)............... 8,598 8,546 8,548 8,516 8,414 8,380 7,280
Hanover .............................. 1,529 1,512 1,541 1,538 1,542 1,450 1,478
MainStreet and Hanover ProForma (2)... 10,032 9,964 9,993 9,959 9,860 9,740 8,666
Selected Period-End Balances:
Total Assets
MainStreet BankGroup.................. $967,666 $857,525 $895,801 $794,957 $774,193 $743,590 $691,228
Hanover............................... 99,212 85,824 94,389 77,166 64,563 48,281 29,525
MainStreet and Hanover ProForma.......1,066,878 943,349 990,190 872,123 838,756 791,871 720,753
Loans (Net of unearned income)
MainStreet BankGroup.................. 621,719 529,458 565,784 499,751 449,411 444,631 451,617
Hanover............................... 74,842 63,038 69,185 57,649 45,342 34,145 19,118
MainStreet and Hanover ProForma....... 696,561 592,496 634,969 557,400 494,753 478,776 470,735
Allowance for loan losses
MainStreet BankGroup.................. 8,680 8,124 8,076 8,191 8,351 8,610 8,559
Hanover............................... 833 764 738 750 465 314 225
MainStreet and Hanover ProForma....... 9,513 8,888 8,814 8,941 8,816 8,924 8,784
Nonperforming Assets (3)
MainStreet BankGroup.................. 4,202 7,345 6,987 6,963 9,282 12,988 15,764
Hanover............................... 738 515 520 218 -- 444 248
MainStreet and Hanover ProForma....... 4,940 7,860 7,507 7,181 9,282 13,432 16,012
Total Deposits
MainStreet BankGroup.................. 713,357 710,014 700,513 704,570 679,714 655,121 606,831
Hanover............................... 88,031 77,732 85,751 69,580 58,146 41,856 24,161
MainStreet and Hanover ProForma....... 801,388 787,746 786,264 774,150 737,860 696,977 630,992
Long-term debt
MainStreet BankGroup.................. 70,857 8,493 929 8,918 9,194 9,455 9,555
Hanover............................... -- -- -- -- -- -- --
MainStreet and Hanover ProForma....... 70,857 8,493 929 8,918 9,194 9,455 9,555
Common shareholders' equity
MainStreet BankGroup.................. 78,284 60,762 75,717 51,491 57,124 51,729 46,004
Hanover............................... 8,755 7,699 8,195 7,153 6,265 5,627 5,192
MainStreet and Hanover ProForma....... 87,039 68,461 83,912 58,644 63,389 57,356 51,196
Total shareholders' equity
MainStreet BankGroup.................. 78,284 60,762 75,717 51,491 57,124 51,729 46,004
Hanover............................... 8,755 7,699 8,195 7,153 6,265 5,627 5,192
MainStreet and Hanover ProForma....... 87,039 68,461 83,912 58,644 63,389 57,356 51,196
Average Balances:
Total assets
MainStreet BankGroup.................. $916,086 $804,202 $838,057 $787,200 $753,018 $712,988 $677,272
Hanover............................... 97,285 80,605 85,778 70,865 56,422 38,720 25,863
MainStreet and Hanover ProForma.......1,013,371 884,807 923,835 858,065 809,440 751,708 703,135
Loans (net of unearned income)
MainStreet BankGroup.................. 586,955 508,033 526,311 474,216 456,393 445,614 462,413
Hanover............................... 70,593 60,328 63,417 51,496 39,744 26,745 16,482
MainStreet and Hanover ProForma....... 657,548 568,361 589,728 525,712 496,137 472,359 478,895
Total deposits
MainStreet BankGroup.................. 704,997 705,718 704,661 697,337 665,579 632,361 601,214
Hanover............................... 87,339 72,071 77,665 63,863 50,000 32,996 20,279
MainStreet and Hanover ProForma....... 792,336 777,789 782,326 761,200 715,579 665,357 621,493
</TABLE>
-12-
<PAGE>
<TABLE>
<CAPTION>
As of or For
Six Months
Ended As of or For
June 30, Years ended December 31,
1996 1995 1995 1994 1993 1992 1991
(Dollars in 000's, except per share data)
<S> <C>
Long-term debt
MainStreet BankGroup.................. 46,393 8,877 7,398 9,167 9,394 9,463 9,555
Hanover............................... -- -- -- -- -- -- --
MainStreet and Hanover ProForma....... 46,393 8,877 7,398 9,167 9,394 9,463 9,555
Common shareholders' equity
MainStreet BankGroup.................. 78,866 56,366 62,279 55,777 55,529 49,804 46,371
Hanover............................... 8,663 7,176 7,673 6,709 5,945 5,403 5,139
MainStreet and Hanover ProForma....... 87,529 63,542 69,952 62,486 61,474 55,207 51,510
Total shareholders' equity
MainStreet BankGroup.................. 78,866 56,366 62,279 55,777 55,529 49,804 46,371
Hanover............................... 8,663 7,176 7,673 6,709 5,945 5,403 5,139
MainStreet and Hanover ProForma....... 87,529 63,542 69,952 62,486 61,474 55,207 51,510
Ratios:
Return on average assets
MainStreet BankGroup.................. 1.44% 1.16% 1.28% 0.52% 0.91% 1.00% 0.44%
Hanover............................... 1.35 1.42 1.43 1.44 1.11 1.12 0.52
MainStreet and Hanover ProForma....... 1.43 1.18 1.30 .60 .93 1.01 .44
Return on average shareholders' equity
MainStreet BankGroup.................. 16.73 16.56 17.24 7.33 12.39 14.31 6.44
Hanover............................... 15.21 15.93 16.00 15.18 10.56 8.04 2.60
MainStreet and Hanover ProForma....... 16.58 16.49 17.11 8.17 12.21 13.70 6.05
Return on average common shareholders' equity
MainStreet BankGroup.................. 16.73 16.56 17.24 7.33 12.39 14.31 6.44
Hanover............................... 15.21 15.93 16.00 15.18 10.56 8.04 2.60
MainStreet and Hanover ProForma....... 16.58 16.49 17.11 8.17 12.21 13.70 6.05
Dividend Payout Ratio
MainStreet BankGroup.................. 29.87 31.15 28.10 60.55 31.18 22.68 65.85
Hanover............................... 25.58 21.05 22.50 4.55 -- -- --
MainStreet and Hanover ProForma....... 29.17 29.31 25.58 49.12 29.41 21.84 63.89
Net interest margin (4)
MainStreet BankGroup.................. 4.78 4.96 4.84 4.81 4.72 4.60 4.23
Hanover............................... 4.86 5.28 5.15 5.38 5.29 5.43 5.18
MainStreet and Hanover ProForma....... 4.79 4.96 4.87 4.86 4.78 4.64 4.26
Nonperforming assets to loans and
foreclosed properties at period end (3)
MainStreet BankGroup.................. 0.67 1.38 1.23 1.39 2.04 2.88 3.46
Hanover............................... 0.98 0.82 0.75 0.38 -- 1.30 1.28
MainStreet and Hanover Proforma....... 0.71 1.32 1.18 1.28 1.86 2.77 3.38
Net charge-offs to average loans
MainStreet BankGroup.................. 0.25 0.29 0.27 0.63 0.36 0.53 0.79
Hanover............................... (.01) 0.14 0.18 (.05) 0.36 0.42 0.13
MainStreet and Hanover ProForma....... 0.22 0.27 0.26 0.56 0.36 0.52 0.77
Allowance for loan losses to loans at
period end
MainStreet BankGroup.................. 1.40 1.53 1.43 1.64 1.86 1.94 1.90
Hanover............................... 1.11 1.21 1.07 1.30 1.03 .92 1.18
MainStreet and Hanover ProForma....... 1.37 1.50 1.39 1.60 1.78 1.86 1.87
Allowance for loan losses to nonperforming
loans at period end
MainStreet BankGroup.................. 261.52 155.84 153.65 185.48 198.31 122.48 69.84
Hanover............................... 144.12 148.35 205.00 344.04 -- 70.72 225.00
MainStreet and Hanover ProForma....... 244.11 155.17 156.94 192.94 209.36 119.40 71.67
Allowance for loan losses to nonperforming
assets at period end
MainStreet BankGroup.................. 206.57 110.61 115.59 117.64 89.97 66.29 54.29
Hanover............................... 112.87 148.35 141.92 344.04 -- 70.72 90.73
MainStreet and Hanover ProForma....... 192.57 113.08 117.41 124.51 94.98 66.44 54.86
-13-
<PAGE>
Total shareholders' equity to total
assets at period end
MainStreet BankGroup.................. 8.09 7.09 8.45 6.48 7.38 6.96 6.66
Hanover............................... 8.82 8.97 8.68 9.27 9.70 11.65 17.59
MainStreet and Hanover ProForma....... 8.16 7.26 8.47 6.72 7.56 7.24 7.10
Capital ratios at period end:
Tier 1 risk-adjusted capital
MainStreet BankGroup.................. 13.38% 11.80% 13.57% 11.45% 10.94% 10.36% 9.62%
Hanover............................... 13.66 14.68 13.76 15.09 15.99 18.68 24.86
MainStreet and Hanover ProForma....... 13.41 12.05 13.59 11.76 11.30 10.84 10.27
Total risk-adjusted capital
MainStreet BankGroup.................. 14.63 14.64 14.82 14.43 13.98 13.55 12.90
Hanover............................... 14.91 15.93 15.00 16.34 17.18 19.72 25.94
MainStreet and Hanover ProForma....... 14.66 14.75 14.84 14.60 14.22 13.90 13.46
Tier 1 leverage
MainStreet BankGroup.................. 8.37 7.33 8.49 7.39 7.25 6.77 6.55
Hanover............................... 8.84 8.95 8.68 9.36 9.69 11.65 17.60
MainStreet and Hanover ProForma....... 8.41 7.47 8.51 7.56 7.43 7.07 7.00
</TABLE>
-14-
<PAGE>
NOTES TO SELECTED FINANCIAL DATA -
MAINSTREET BANKGROUP INCORPORATED AND
HANOVER BANK
(1) PER SHARE DATA FOR HANOVER HAS BEEN RETROACTIVELY ADJUSTED TO REFLECT A
10% STOCK DIVIDEND TO SHAREHOLDERS OF RECORD ON NOVEMBER 10, 1992 AND A
TWO-FOR-ONE STOCK SPLIT TO SHAREHOLDERS OF RECORD ON SEPTEMBER 15, 1993.
PER SHARE DATA FOR MAINSTREET BANKGROUP HAS BEEN RETROACTIVELY ADJUSTED
TO REFLECT A 2-FOR-1 STOCK SPLIT IN THE FORM OF A STOCK DIVIDEND TO
SHAREHOLDERS OF RECORD ON MARCH 4, 1996 AND A 5-FOR-4 STOCK SPLIT IN THE
FORM OF A STOCK DIVIDEND TO SHAREHOLDERS OF RECORD ON JULY 15, 1993.
(2) BASED ON AN EXCHANGE RATIO OF .938 FOR CONVERSION OF HANOVER COMMON
STOCK INTO BANKGROUP COMMON STOCK. SEE "THE BANK MERGER -- DETERMINATION
OF EXCHANGE RATIO; EXCHANGE OF BANK COMMON STOCK FOR BANKGROUP COMMON
STOCK" FOR ADDITIONAL DISCUSSION REGARDING CALCULATION OF THE EXCHANGE
RATIO.
(3) NONPERFORMING ASSETS INCLUDE NONACCRUAL LOANS, LOANS PAST DUE 90 DAYS
AND GREATER, OTHER REAL ESTATE AND OTHER REPOSSESSED ASSETS.
(4) NET INTEREST MARGIN IS CALCULATED ON A TAXABLE EQUIVALENT BASIS, USING A
TAX RATE OF 35% FOR 1996 AND 34% FOR ALL PRECEDING YEARS FOR BANKGROUP.
HANOVER CALCULATIONS WERE CALCULATED BASED ON 34% FOR ALL YEARS
PRESENTED EXCEPT 1991, WHEN THE RATE WAS 31%.
-15-
<PAGE>
<TABLE>
<CAPTION>
HANOVER BANK
Selected Financial Data for Years Ended
The following data is presented for: 1995 1994 1993 1992 1991
<S> <C>
Total Interest Income $ 7,045,966 $5,460,128 $4,389,522 $3,227,596 $2,434,908
Total Interest Expense 3,109,130 2,038,491 1,699,697 1,340,407 1,240,805
----------------------------------------------------------------
Net Interest Income 3,936,836 3,421,637 2,689,825 1,887,189 1,194,103
Provision for Loan Loss 100,210 261,330 292,561 199,819 110,435
----------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 3,836,626 3,160,307 2,397,264 1,687,370 1,083,668
Other Operating Income 300,033 261,000 218,072 285,907 109,614
Other Operating Expense 2,381,441 2,013,224 1,768,277 1,370,333 1,047,625
---------------------------------------------------------------
Income Before Income Taxes 1,755,218 1,408,083 847,059 602,944 145,657
Income Taxes (1) 527,039 389,631 219,470 168,010 27,315
-----------------------------------------------------------------
Net income before
extraordinary item 1,228,179 1,018,452 627,589 434,934 118,342
Extraordinary Item: Reduction of
Income Tax Expense From Operating
Loss Carryforward -- -- -- -- 15,366
-----------------------------------------------------------------
Net Income 1,228,179 1,018,452 627,589 434,934 133,708
----------------------------------------------------------------
Net Income Per Share(2) 0.80 0.66 0.41 0.30 0.09
Cash Dividends Per Share (2) 0.18 0.03 -- -- --
Balance Sheet Data
Total Assets at Year-End 94,388,788 77,166,225 64,562,888 48,281,315 29,524,532
Net Loans at Year-End 68,446,516 56,898,731 44,877,441 33,830,721 18,893,460
Total Deposits at Year-End 85,750,527 69,579,793 58,145,761 41,855,991 24,160,955
Total Equity at Year-End 8,195,133 7,153,463 6,264,659 5,626,528 5,191,987
Financial Performance Ratios
Return on Average Assets (ROA) 1.43% 1.44% 1.11% 1.12% 0.52%
Return on Average Equity (ROE) 16.00% 15.18% 10.56% 8.04% 2.60%
Equity to Assets Ratio (year-end) 8.68% 9.27% 9.70% 11.65% 17.59%
</TABLE>
(1) For Federal income tax purposes, the Bank uses the cash receipts and
disbursements method of reporting. At December 31, 1990 the Bank had $39,685 in
net operating loss carryovers to be used to offset future income tax
liabilities. In 1991, the Bank exhausted all net operating loss carryover. The
Bank's statutory rate for income tax purposes is 34%.
(2) On September 15, 1993 the Bank's Board of Directors declared a two-for-one
stock split payable on September 30, 1993. All share and per share data
retroactively reflects the stock split noted.
-16-
<PAGE>
HANOVER BANK
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Six-months ended June 30, 1996 Compared With
Six-months ended June 30, 1995
General
Year-to-date net income for the six-month period ended June 30, 1996
amounted to $657,431, or earnings per share of $.43, compared to $567,029 and
per share earnings of $.38 for the period ended June 30, 1995, representing an
increase of 15.9%. With regard to Bank growth for the comparable periods, assets
increased 15.6% to $99.2 million, deposits increased 13.2% to $88.0 million,
while net loans increased 18.8% to $74.0 million.
For the second quarter of 1996, the Bank recorded net income of $315,898
and earnings per share of $.21, an increase of 15.6% over earnings and a 10.5%
increase over earnings per share of $273,263 and $.19 respectively for the
quarter ended June 30, 1995.
The noted earnings represent a year-to-date return on average assets
(ROA) and return on average equity (ROE) of 1.35% and 15.21% respectively for
1996, compared to an ROA and ROE of 1.42% and 15.93%, respectively, for the
six-month period ended June 30, 1995.
Net Interest Income
At June 30, 1996, year-to-date net interest income increased 10.6% to
$2,021,316, compared to $1,826,584 for the first six months of 1995. The Bank
realized both strong increases in interest income and interest expense due to a
favorable mix of core deposit growth that has continued to fuel steady earning
asset growth. Average earning assets increased from $76,343,140 for the period
ended June 30, 1995 to $90,850,743 for the period ended June 30, 1996, an
increase of 19.0%. The Bank's net interest margin dropped to 4.86% for the
period ended June 30, 1996 from 5.28% at June 30, 1995, due to an overall
increase in cost of funds and lower yields generated from commercial and
consumer credits.
Noninterest Income
For the quarter ended June 30, 1996, year-to-date non-interest income
amounted to $287,361, compared to 253,508 for the quarter ended June 30, 1995,
an increase of 13.4%. As the Bank continues to grow and expand its core deposit
base, increased
-17-
<PAGE>
fees have resulted from a greater volume of transactions deposits processed.
Increased fee income has also been realized from the collection of delinquent
loan late charges collected for the comparable periods. For the first two
quarters of 1996, it should be noted that the Bank did not increase its fee
structure for either loans or deposits. For both comparative periods, no gains
were recorded from the sale of capital assets or securities.
Noninterest income increased 13.4% to $287,361 for the six-month period
ended June 30, 1996.
Noninterest Expense
For the quarter ended June 30, 1996, year-to-date noninterest expense
amounted to $1,287,857, compared to $1,220,634 for the corresponding period in
1995, an increase of 5.5%. On a year-to-date comparative basis, total
noninterest expense increased from $1,220,634 in 1995 to $1,287,857 in 1996, an
increase of 5.5%. Salaries and occupancy expense remained relatively stable for
the comparable periods, but increased costs associated with processing an
overall greater volume of accounts, both loans and deposits, led to the noted
increases. In addition, the Bank engaged a human resource consultant in the
first two quarters of 1996 to develop policies and procedures to better manage
staffing requirements, which also increased noninterest expense.
Balance Sheet:
Investment Portfolio
To continue to augment income generated from the Bank's loan portfolio,
deposited funds not committed to loans were used to increase the Bank's
securities portfolio. At June 30, 1996, total securities, including securities
both available for sale and held to maturity, increased 48.3% to $18,540,473,
compared to $12,500,745 at June 30, 1995. The increase was due to weakening
credit demands in the fourth quarter of 1995 and the first quarter of 1996. As a
result of sluggish credit volume in the fourth quarter of 1995 and the first
quarter of 1996, management aggressively sought to retain a strong net interest
margin by reducing the amount of federal funds sold to correspondents with low
rates of return by replacing the same with short and medium term fixed-income
securities with stronger yields. At June 30, 1996, the Bank held securities with
a market value of approximately $1,329,740 available for sale, compared to
$1,346,654 at June 30, 1995.
-18-
<PAGE>
Loans and Provision for Loan Loss
Net loan balances increased 18.8% to $74,008,778 at June 30, 1996,
compared to $62,274,350 at June 30, 1995. Average net loans increased 19.5% to
$71,227,647 for the same comparative periods. At June 30, 1996, net loans
outstanding represented 84.1% of total deposits, compared to 80.1% at June 30,
1995. Net loans represented 74.6% of the assets at June 30, 1996, compared to
72.3% at June 30, 1995.
At June 30, 1996, the Bank's allowance for loan loss was $832,497,
representing a ratio of 1.11% to loans. At June 30, 1995, the allowance was
$764,439, representing a ratio of 1.21% to loans. For the second quarter of
1996, the provision for possible loan loss was $45,000, compared to $25,000 for
the comparable quarter in 1995. Year-to-date 1996, the Bank increased the
provision by $90,000, compared to $55,000 in 1995. The steady increase in the
allowance resulted from overall increased credits originated for the two
comparative periods. For 1996, year-to-date charge-offs and recoveries amounted
to $7,477 and $11,974 respectively, compared to charge-offs and recoveries of
$43,709 and $3,148, respectively, in 1995.
Other Assets
Other assets at June 30, 1996 were $1,417,073, representing an increase
of 61.0% over other assets of $880,113 at June 30, 1995. The large increase
resulted primarily from prepaid construction costs associated with the Bank's
fifth office, which management believes will be opened for business by
mid-September, 1996. All costs have been deferred from depreciation and/or
amortizable expense until commencement of operations. Estimated costs currently
being deferred were $425,000 at June 30, 1996.
Deposits
Total deposits increased from $77,731,658 at June 30, 1995 to
$88,031,391 at June 30, 1996, an increase of 13.3%. Average deposits increased
from $72,071,038 for the six months ended June 30, 1995 to $87,338,578 for the
six months ended June 30, 1996, an increase of 21.2%. In particular, the Bank
realized an approximate increase of 21.7% in demand deposit accounts, while
money market accounts increased by 39.1%. Aggressive pricing of money market
accounts, and continued development of core commercial account activity, were
the primary factors for the Bank's overall deposit growth. Management's
continuing intent has been to grow core deposits without utilizing brokered
funding sources.
-19-
<PAGE>
Stockholders' Equity
Stockholders' equity increased 13.7% to $8,754,568 at June 30, 1996,
compared to $7,699,647 at June 30, 1995. The noted increase was the result of
retained earnings growth generated from operations, reduced by dividends paid
during the comparative periods. Unrealized losses, net of tax, from securities
available for sale amounted to $17,416 at June 30, 1996, compared to unrealized
gains of $19,293 at June 30, 1995. For 1996, stockholders' equity also increased
$80,080 as a result of the exercise of options for 22,000 shares of common stock
during the Bank's first quarter of calendar 1996.
-20-
<PAGE>
Year-ended December 31, 1995 Compared With
Year-ended December 31, 1994
General
The Bank completed its seventh full year of operation in 1995. For the
year ended December 31, 1995, the Bank's primary focus was to build upon its
core retail banking strengths for enhanced profitability and capital growth.
Aggressive pricing of deposits and credits, while maintaining a net interest
margin of nearly five percent, led to strong balance sheet growth and improved
profitability compared to 1994.
With four retail branches serving over 10,000 accounts in the Richmond,
Virginia metropolitan area (which includes Hanover and Henrico Counties),
management's intent will be to continue to look for opportunities that will
enable the Bank to enhance shareholder value while strengthening the communities
in which the corporation conducts its business.
Results of Operations
In 1995, the Bank experienced asset growth of $17.2 million (22.3%),
compared to $12.6 million (19.5%) in the previous twelve months. The Bank
generated net income and earnings per share of $1,228,179 and $.80,
respectively, in 1995, compared to net income of $1,018,452 and per share
earnings of $.66 in 1994. The Bank recognized an increased level in earning
assets and strong loan demand in particular that helped offset declines in the
spread between cost of funds and return on earning assets.
Profitability as measured by the Bank's return on average assets (ROA)
was 1.43% in 1995, while its return on average equity (ROE) was 16.00%. This
compares favorably to an ROA and ROE of 1.44% and 15.18%, respectively, in 1994.
Loans
Consistent with the prior year's performance, strong demand for loan
products continued in 1995. Net loan balances increased from $56,898,731 at
December 31, 1994 to $68,446,516 at December 31, 1995, an increase of 20.3%. The
increase was structured and controlled by management through the use of a
conservative loan policy and diligent review process which emphasized strong
Bank/customer relationships to ensure good loan quality. At December 31, 1995,
net loans outstanding represented 79.8% of total deposits, compared to 81.8% at
December 31, 1994. Net loans represented 72.5% of assets at year-end 1995,
compared to 73.7% at December 31, 1994.
-21-
<PAGE>
The composition of the Bank's loan portfolio continued to change in 1995
with a greater percent of funded credits secured by residential and commercial
real estate. This change can be attributed to the continued industry decline in
consumer installment credit demand. The Bank's earnings performance was improved
in 1995 due to increased commitment and origination fees booked on real property
related loans. All fees and expense related to the origination and
administration of the Bank's portfolio, in accordance with the Statement of
Financial Accounting Standards Board No. 91 ("SFAS 91"), are amortized over the
life of each credit originated through subsequent payouts. Total fees amortized
and recorded as income in 1995 amounted to $177,604. For 1994, total fees
amortized and recorded as income for the year amounted to $162,443.
Investments
To augment income generated from the Bank's loan portfolio, deposited
funds not committed to earning loans are invested in fixed-rate term securities
and open/overnight funds markets. Investment decisions are made in a manner so
as to avoid concentration in any one similar security or institution, thereby
maintaining an acceptable level of liquidity and risk.
The carrying value of the Bank's investment portfolio, adjusted for
market values on securities available for sale, but not including federal funds
sold balances to correspondent banks, increased 22.2% to $15,370,442 at December
31, 1995 from $12,578,009 at December 31, 1994. The Bank experienced an increase
of 30.5% in fixed-income securities and federal funds sold from year-end 1994 to
December 31, 1995. For 1995, interest rates in the money markets steadily
decreased as a result of the Federal Reserve Bank's initiative to boost growth
in the economy. As a result, yields associated with fixed-income securities
decreased to lower levels throughout the year.
Deposits
Total deposits increased from $69,579,793 at December 31, 1994 to
$85,750,527 at December 31, 1995, an increase of 23.2%. Average deposits
increased from $63,862,777 in 1994 to $77,665,157 in 1995, an increase of 21.6%.
The 1995 increase was due to strong growth in each category of deposits and was
a result of an aggressive interest rate pricing policy carried through the year,
excluding rates paid and growth of passbook and statement savings accounts.
-22-
<PAGE>
In reviewing the breakdown of percentage growth rates from 1994 to 1995,
non-interest bearing demand accounts increased 1.9%, interest bearing demand
accounts increased 1.9%, interest bearing transaction accounts and money market
accounts increased 12.9%, savings accounts decreased 18.9%, while overall time
certificates of deposit increased 58.2%.
Net Interest Income
Net interest income, the largest component of the Bank's earnings, is
the difference between the interest and yield- related fee income generated by
earning assets and the expense associated with funding those assets. Average
earning assets increased from $66,483,998 in 1994 to $80,313,241 in 1995, an
increase of 20.8%. The Bank's earning assets consist primarily of loans, which
accounted for 78.3% of earning assets in 1995, compared to 79.5% of earning
assets for the year ended December 31, 1994.
The yield on average interest earning assets increased to 8.71% in 1995
compared to 8.14% in 1994. As a result of management's decision to take an
aggressive stance in pricing deposit products in 1995, the Bank's total cost of
funds increased to 4.65% in 1995 compared to 3.66% in 1994. This was primarily
the result of rates paid on money market and time deposits. But due to the
increase in total funds under management, the Bank realized an improvement to
overall earnings.
For 1995, the Bank's net interest margin (the difference between the
average annual yield of earning assets less the average annual cost of funds to
support earning assets) was 4.87%, compared to 5.10% in 1994. The noted decline
in the Bank's margin is a concern to management and will be of increasing
significance to future earnings and capital growth. Critical monitoring of the
Bank's margin and spread will continue to be a priority of management for future
prosperity.
Non-interest Income
Total non-interest income increased to $300,033 in 1995 compared to
$261,000 for 1994, an increase of 14.9%. The basis for growth in this component
of earnings reflects management's efforts to monitor and collect late charges on
delinquent loans, as well as collecting additional fees in servicing a larger
volume of deposit transaction accounts during the year. For 1995, the Bank did
not increase the cost of services charged to manage any class of depository
accounts.
-23-
<PAGE>
Non-interest Expense
Total non-interest expense increased to $2,381,441 for the year ended
December 31, 1995, compared to $2,013,224 in 1994, an increase of 18.3%. The
increasing rate of growth from 1994 to 1995 resulted principally from the Bank's
leasing of property to house its credit administration and executive offices,
and the additional costs associated with operating the facility. Key support
positions were added to the Bank's employee roster during 1995 to manage an
increasing volume of loans held in the Bank's credit portfolio, while additional
data processing equipment and software, as well as furniture and fixtures were
purchased to operate the facility as a non-retail bank support site.
Provision/Allowance for Loan Losses
The provision for loan losses is the annual cost of providing an
allowance for anticipated or possible losses on loans. The amount of the
provision expense each year, as well as the allowance, is dependent upon but not
limited to numerous factors including loan growth, current and anticipated
delinquencies, economic related factors and management's assessment of future
events.
At December 31, 1995 the allowance, as a percent of gross loans
outstanding, was 1.07%, compared to 1.30% at December 31, 1994. During 1995, the
Bank provided $100,210 to the reserve for loan losses, compared to $261,330 in
1994. During late 1994, management installed a formal analysis to determine the
adequacy of the reserve with regard to inherent problems in the Bank's
portfolio. As a result of this action, management perceived that a marginal
cushion had been provided for in prior year's allocation to the reserve and thus
reduced the provision in 1995.
Total charge-offs for 1995 amounted to $116,167, compared to $66,048 for
the year ended December 31, 1994. For 1995 and 1994, net recoveries to
outstanding charge-offs amounted to $3,957 and $89,718 respectively. Loans are
placed on a non-accrual status when management anticipates that the interest
will not be collected. It is management's intent to continually evaluate the
Bank's credit portfolio to identify potential problem loans. At December 31,
1995, the Bank had no non-accrual loans. At December 31, 1994, the Bank had
non-accrual loans of $163,020.
Stockholders' Equity
Stockholders' equity increased 14.6% to $8,195,133 at December 31, 1995,
resulting from the capitalization of retained earnings from operations and
diluted by the Bank's payment of four quarterly dividends. As a result of
dividends paid during the year, capital was diluted by $260,916.
-24-
<PAGE>
Stockholders' equity, as a percent of total assets, was 8.7% at December
31, 1995, compared to 9.3% at December 31, 1994. Adjusted for prior year's stock
splits and cumulative dividends paid through year-end 1995, the Bank's book
value of a share of common stock was $5.65 at December 31, 1995, compared to
$4.94 at December 31, 1994.
-25-
<PAGE>
BANKGROUP, BANK AND THE FIRST NATIONAL BANK OF CLIFTON FORGE
The following consolidated financial data presents on a historical basis
selected unaudited financial data for BankGroup and Bank, and unaudited pro
forma amounts for both (a) BankGroup and Bank combined, and (b) BankGroup, Bank
and The First National Bank of Clifton Forge combined as of June 30, 1996. The
Agreement with The First National Bank of Clifton Forge will involve the
acquisition of The First National Bank of Clifton Forge in a transaction to be
accounted for as a "pooling of interests." It is expected to be completed during
the third quarter of 1996. Interim financial results, in the opinion of the
management of the three companies, reflect all adjustments necessary for a fair
presentation of the results of operations. All such adjustments are of the
normal recurring nature. The results of operations for an interim period are not
necessarily indicative of results that may be expected for a full year or any
other interim period.
The Bank Merger is reflected under the "pooling of interests" method of
accounting, and the pro forma selected financial data is derived accordingly.
-26-
<PAGE>
SELECTED FINANCIAL DATA MAINSTREET BANKGROUP INCORPORATED,
HANOVER BANK AND THE FIRST NATIONAL BANK OF CLIFTON FORGE
As of June 30, 1996
(In 000's)
Selected Period-End Balances:
Total Assets
MainStreet BankGroup........................................... $ 967,666
Hanover........................................................ 99,212
MainStreet and Hanover ProForma................................ 1,066,878
MainStreet, Hanover and Clifton Forge ProForma................. 1,167,523
Loans (Net of unearned income)
MainStreet BankGroup........................................... 621,719
Hanover........................................................ 74,842
MainStreet and Hanover ProForma................................ 696,561
MainStreet, Hanover and Clifton Forge ProForma................. 735,975
Allowance for loan losses
MainStreet BankGroup........................................... 8,680
Hanover........................................................ 833
MainStreet and Hanover ProForma................................ 9,513
MainStreet, Hanover and Clifton Forge ProForma................. 9,730
Nonperforming Assets (1)
MainStreet BankGroup........................................... 4,202
Hanover........................................................ 738
MainStreet and Hanover ProForma................................ 4,940
MainStreet, Hanover and Clifton Forge ProForma................. 5,108
Total Deposits
MainStreet BankGroup........................................... 713,357
Hanover........................................................ 88,031
MainStreet and Hanover ProForma................................ 801,388
MainStreet, Hanover and Clifton Forge ProForma................. 861,593
Long-term debt
MainStreet BankGroup........................................... 70,857
Hanover........................................................ --
MainStreet and Hanover ProForma................................ 70,857
MainStreet, Hanover and Clifton Forge ProForma................. 70,857
Common shareholders' equity
MainStreet BankGroup........................................... 78,284
Hanover........................................................ 8,755
MainStreet and Hanover ProForma................................ 87,039
MainStreet, Hanover and Clifton Forge ProForma................. 101,817
Total shareholders' equity
MainStreet BankGroup........................................... 78,284
Hanover........................................................ 8,755
MainStreet and Hanover ProForma................................ 87,039
MainStreet, Hanover and Clifton Forge ProForma................. 101,817
Selected Ratios:
Nonperforming assets to loans and foreclosed properties at period end (1)
MainStreet BankGroup........................................... 0.67%
Hanover........................................................ 0.98
MainStreet and Hanover ProForma................................ 0.71
MainStreet, Hanover and Clifton Forge ProForma................. 0.69
Allowance for loan losses to loans at period end
MainStreet BankGroup........................................... 1.40
Hanover........................................................ 1.11
MainStreet and Hanover ProForma................................ 1.37
MainStreet, Hanover and Clifton Forge ProForma................. 1.32
Allowance for loan losses to nonperforming loans at period end
MainStreet BankGroup........................................... 261.52
Hanover........................................................ 144.12
MainStreet and Hanover ProForma................................ 244.17
MainStreet, Hanover and Clifton Forge ProForma................. 239.42
Allowance for loan losses to nonperforming assets at period end (1)
MainStreet BankGroup........................................... 206.57
Hanover........................................................ 112.87
MainStreet and Hanover ProForma................................ 192.57
MainStreet, Hanover and Clifton Forge ProForma................. 190.49
-27-
<PAGE>
Total shareholders' equity to total assets at period end
MainStreet BankGroup........................................... 8.09%
Hanover........................................................ 8.82
MainStreet and Hanover ProForma................................ 8.16
MainStreet, Hanover and Clifton Forge ProForma................. 8.72
Capital ratios at period end:
Tier 1 risk-adjusted capital
MainStreet BankGroup........................................... 13.38
Hanover........................................................ 13.66
MainStreet and Hanover ProForma................................ 13.41
MainStreet, Hanover and Clifton Forge ProForma................. 14.73
Total risk-adjusted capital
MainStreet BankGroup........................................... 14.63
Hanover........................................................ 14.91
MainStreet and Hanover ProForma................................ 14.66
MainStreet, Hanover and Clifton Forge ProForma................. 15.98
Tier 1 leverage
MainStreet BankGroup........................................... 8.37
Hanover........................................................ 8.84
MainStreet and Hanover ProForma................................ 8.41
MainStreet, Hanover and Clifton Forge ProForma................. 8.94
NOTES TO SELECTED FINANCIAL DATA -
MAINSTREET BANKGROUP INCORPORATED,
HANOVER BANK AND THE FIRST NATIONAL BANK OF CLIFTON FORGE
(1) NONPERFORMING ASSETS INCLUDE NONACCRUAL LOANS, LOANS PAST DUE 90 DAYS
AND GREATER, OTHER REAL ESTATE AND OTHER REPOSSESSED ASSETS.
-28-
<PAGE>
MAINSTREET BANKGROUP INCORPORATED AND HANOVER BANK
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF FINANCIAL CONDITION
JUNE 30, 1996
(in 000's)
<TABLE>
<CAPTION>
ADJUSTMENTS
MAINSTREET HANOVER INCREASE
BANKGROUP BANK (DECREASE) CONSOLIDATED
<S> <C>
ASSETS
Cash and Due From Banks $ 26,319 $ 2,799 $ $ 29,118
Interest-Earning Deposits in Domestic Banks 506 -- 506
Federal Funds Sold 1,735 -- 1,735
Mortgage Loans Held for Sale 1,329 -- 1,329
Securities Available for Sale 203,404 1,504 204,908
Securities Held to Maturity 93,645 17,037 110,682
Loans, Net of Unearned Income 621,719 74,842 696,561
Less: Allowance for Loan Losses (8,680) (833) (9,513)
--------- -------- ---------
Loans, Net 613,039 74,009 -- 687,048
--------- -------- ---------
Bank Premises and Equipment, Net 10,563 2,286 12,849
Other Real Estate Owned 823 160 983
Other Assets 16,303 1,417 -- 17,720
--------- -------- -------- ---------
TOTAL ASSETS $ 967,666 $ 99,212 $ -- $ 1,066,878
========= ======== ======== ==========
LIABILITIES
Deposits:
Demand Deposits (Noninterest-Bearing) $ 96,371 $ 2,532 $ $ 98,903
Interest Bearing Deposits 616,986 85,499 -- 702,485
--------- -------- -------- ----------
TOTAL DEPOSITS 713,357 88,031 -- 801,388
--------- -------- -------- ----------
Short - Term Debt $ 95,323 $ 1,735 $ $ 97,058
Long - Term Debt 70,857 -- 70,857
Other Liabilities 9,845 691 -- 10,536
--------- -------- -------- ---------
TOTAL LIABILITIES 889,382 90,457 -- 979,839
--------- -------- -------- ---------
SHAREHOLDERS' EQUITY
Common Stock 42,936 3,679 (1) 3,221 49,836
Capital in Excess of Par 12,325 2,051 (1) (3,221) 11,155
Retained Earnings 26,874 3,042 29,916
Unearned Compensation (405) -- (405)
Unrealized Gains (Losses) on Securities, Net (3,446) (17) (3,463)
--------- -------- ----------
TOTAL SHAREHOLDERS' EQUITY 78,284 8,755 -- 87,039
--------- -------- -------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 967,666 $ 99,212 $ -- $ 1,066,878
========= ======== ======== ==========
</TABLE>
(1) Based on an Exchange Ratio of .938 for conversion of Bank Common Stock
into BankGroup Common Stock. See "The Bank Merger -- Determination of
Exchange Ratio; Exchange of Bank Common Stock for BankGroup Common Stock"
for further discussion of the calculation of the Exchange Ratio.
-29-
<PAGE>
MAINSTREET BANKGROUP INCORPORATED AND HANOVER BANK
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
SIX MONTHS ENDED JUNE 30, 1996
(IN 000'S EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MAINSTREET HANOVER CONSOLIDATED
BANKGROUP BANK PROFORMA
<S> <C>
INTEREST INCOME
Interest and Fees on Loans $ 28,009 $ 3,183 $ 31,192
Interest on Mortgage Loans Held for Sale 98 -- 98
Interest and Dividends on Securities Available for Sale 5,798 34 5,832
Interest and Dividends on Securities Held to Maturity 3,251 561 3,812
Other Interest Income 160 -- 160
-------- ------- --------
Total Interest Income 37,316 3,778 41,094
INTEREST EXPENSE
Deposits 13,696 1,754 15,450
Short-Term Borrowings 1,938 3 1,941
Long-Term Debt 1,336 -- 1,336
-------- ------- --------
Total Interest Expense 16,970 1,757 18,727
Net Interest Income 20,346 2,021 22,367
Provisions for Loan Losses 1,332 90 1,422
-------- ------- --------
Net Interest Income after Provision for Loan Losses 19,014 1,931 20,945
NONINTEREST INCOME
Service Charges, Fees and Other 3,383 287 3,670
Trust Department Income 1,431 -- 1,431
Securities Gains (Losses), Net 639 -- 639
-------- ------- --------
5,453 287 5,740
NONINTEREST EXPENSE
Salaries and Employee Benefits 8,188 493 8,681
Net Occupancy and Equipment Costs 2,364 215 2,579
Other Noninterest Expense 4,397 580 4,977
-------- ------- --------
14,949 1,288 16,237
-------- ------- --------
Income Before Income Taxes 9,518 930 10,448
Income Tax Expense 2,940 273 3,213
-------- ------- --------
NET INCOME $ 6,578 $ 657 $ 7,235
======== ======= ========
PER COMMON SHARE DATA (1) Net Income per Share:
Primary $ 0.77 $ 0.43 $ 0.72
Fully Diluted $ 0.77 $ 0.43 $ 0.72
Weighted Average Shares Outstanding
Primary 8,598 1,529 10,032
Fully Diluted 8,598 1,529 10,032
</TABLE>
(1) Based on an Exchange Ratio of .938 for conversion of Bank Common Stock
into BankGroup Common Stock. See "The Bank Merger -- Determination of
Exchange Ratio; Exchange of Bank Common Stock for BankGroup Common Stock"
for further discussion of the calculation of the Exchange Ratio.
-30-
<PAGE>
MAINSTREET BANKGROUP INCORPORATED AND HANOVER BANK
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
SIX MONTHS ENDED JUNE 30, 1995
(IN 000'S EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MAINSTREET HANOVER CONSOLIDATED
BANKGROUP BANK PROFORMA
<S> <C>
INTEREST INCOME
Interest and Fees on Loans $ 24,333 $ 2,758 $ 27,091
Interest on Mortgage Loans Held for Sale 48 -- 48
Interest and Dividends on Securities Available for Sale 4,186 34 4,220
Interest and Dividends on Securities Held to Maturity 4,039 404 4,443
Other Interest Income 41 -- 41
-------- ------- --------
Total Interest Income 32,647 3,196 35,843
INTEREST EXPENSE
Deposits 13,578 1,363 14,941
Short-Term Borrowings 701 7 708
Long-Term Debt 312 -- 312
-------- ------- --------
Total Interest Expense 14,591 1,370 15,961
Net Interest Income 18,056 1,826 19,882
Provisions for Loan Losses 657 55 712
-------- ------- --------
Net Interest Income after Provision for Loan Losses 17,399 1,771 19,170
NONINTEREST INCOME
Service Charges, Fees and Other 2,751 254 3,005
Trust Department Income 1,030 -- 1,030
Securities Gains (Losses), Net 19 -- 19
-------- ------- --------
3,800 254 4,054
NONINTEREST EXPENSE
Salaries and Employee Benefits 8,087 510 8,597
Net Occupancy and Equipment Costs 2,160 210 2,370
Other Noninterest Expense 4,444 501 4,945
-------- ------- --------
14,691 1,221 15,912
-------- ------- --------
Income Before Income Taxes 6,508 804 7,312
Income Tax Expense 1,879 237 2,116
-------- ------- --------
NET INCOME $ 4,629 $ 567 $ 5,196
======== ======= ========
PER COMMON SHARE DATA (1) Net Income per Share:
Primary $ 0.61 $ 0.38 $ 0.58
Fully Diluted $ 0.57 $ 0.38 $ 0.54
Weighted Average Shares Outstanding
Primary 7,580 1,512 8,998
Fully Diluted 8,546 1,512 9,964
</TABLE>
(1) Based on an Exchange Ratio of .938 for conversion of Bank Common Stock
into BankGroup Common Stock. See "The Bank Merger -- Determination of
Exchange Ratio; Exchange of Bank Common Stock for BankGroup Common Stock"
for further discussion of the calculation of the Exchange Ratio.
-31-
<PAGE>
MAINSTREET BANKGROUP INCORPORATED AND HANOVER BANK
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
YEAR ENDED DECEMBER 31, 1995
(IN 000'S EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MAINSTREET HANOVER CONSOLIDATED
BANKGROUP BANK PROFORMA
<S> <C>
INTEREST INCOME
Interest and Fees on Loans $ 50,943 $ 6,018 $ 56,961
Interest on Mortgage Loans Held for Sale 144 -- 144
Interest and Dividends on Securities Available for Sale 9,689 68 9,757
Interest and Dividends on Securities Held to Maturity 7,828 486 8,314
Other Interest Income 71 474 545
-------- ------- --------
Total Interest Income 68,675 7,046 75,721
INTEREST EXPENSE
Deposits 27,662 3,109 30,771
Short-Term Borrowings 3,196 -- 3,196
Long-Term Debt 517 -- 517
-------- ------- --------
Total Interest Expense 31,375 3,109 34,484
Net Interest Income 37,300 3,937 41,237
Provisions for Loan Losses 1,319 100 1,419
-------- ------- --------
Net Interest Income after Provision for Loan Losses 35,981 3,837 39,818
NONINTEREST INCOME
Service Charges, Fees and Other 5,529 300 5,829
Trust Department Income 2,400 -- 2,400
Securities Gains (Losses), Net 46 -- 46
-------- ------- --------
7,975 300 8,275
NONINTEREST EXPENSE
Salaries and Employee Benefits 15,704 961 16,665
Net Occupancy and Equipment Costs 4,428 621 5,049
Other Noninterest Expense 8,685 800 9,485
-------- ------- --------
28,817 2,382 31,199
-------- ------- --------
Income Before Income Taxes 15,139 1,755 16,894
Income Tax Expense 4,399 527 4,926
-------- ------- --------
NET INCOME $ 10,740 $ 1,228 $ 11,968
======== ======= ========
PER COMMON SHARE DATA (1) Net Income per Share:
Primary $ 1.37 $ 0.80 $ 1.29
Fully Diluted $ 1.29 $ 0.80 $ 1.20
Weighted Average Shares Outstanding
Primary 7,842 1,541 9,287
Fully Diluted 8,548 1,541 9,993
</TABLE>
(1) Based on an Exchange Ratio of .938 for conversion of Bank Common Stock
into BankGroup Common Stock. See "The Bank Merger -- Determination of
Exchange Ratio; Exchange of Bank Common Stock for BankGroup Common Stock"
for further discussion of the calculation of the Exchange Ratio.
-32-
<PAGE>
MAINSTREET BANKGROUP INCORPORATED AND HANOVER BANK
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
YEAR ENDED DECEMBER 31, 1994
(IN 000'S EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MAINSTREET HANOVER CONSOLIDATED
BANKGROUP BANK PROFORMA
<S> <C>
INTEREST INCOME
Interest and Fees on Loans $ 42,864 $ 4,615 $ 47,479
Interest on Mortgage Loans Held for Sale 514 -- 514
Interest and Dividends on Securities Available for Sale1 3,108 69 13,177
Interest and Dividends on Securities Held to Maturity 2,568 504 3,072
Other Interest Income 462 272 734
-------- ------- --------
Total Interest Income 59,516 5,460 64,976
INTEREST EXPENSE
Deposits 23,980 2,039 26,019
Short-Term Borrowings 594 -- 594
Long-Term Debt 643 -- 643
-------- ------- --------
Total Interest Expense 25,217 2,039 27,256
Net Interest Income 34,299 3,421 37,720
Provisions for Loan Losses 2,827 261 3,088
-------- ------- --------
Net Interest Income after Provision for Loan Losses 31,472 3,160 34,632
NONINTEREST INCOME
Service Charges, Fees and Other 4,865 261 5,126
Trust Department Income 1,993 -- 1,993
Securities Gains (Losses), Net (5,683) -- (5,683)
-------- ------- --------
1,175 261 1,436
NONINTEREST EXPENSE
Salaries and Employee Benefits 14,441 786 15,227
Net Occupancy and Equipment Costs 4,142 562 4,704
Other Noninterest Expense 10,130 665 10,795
-------- ------- --------
28,713 2,013 30,726
-------- ------- --------
Income Before Income Taxes 3,934 1,408 5,342
Income Tax Expense (154) 390 236
-------- ------- --------
NET INCOME $ 4,088 $ 1,018 $ 5,106
======== ======= ========
PER COMMON SHARE DATA (1) Net Income per Share:
Primary $ 0.54 $ 0.66 $ 0.57
Fully Diluted $ 0.53 $ 0.66 $ 0.51
Weighted Average Shares Outstanding
Primary 7,510 1,538 8,953
Fully Diluted 8,516 1,538 9,959
</TABLE>
(1) Based on an Exchange Ratio of .938 for conversion of Bank Common Stock
into BankGroup Common Stock. See "The Bank Merger -- Determination of
Exchange Ratio; Exchange of Bank Common Stock for BankGroup Common Stock"
for further discussion of the calculation of the Exchange Ratio.
-33-
<PAGE>
MAINSTREET BANKGROUP INCORPORATED AND HANOVER BANK
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
YEAR ENDED DECEMBER 31, 1993
(IN 000'S EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MAINSTREET HANOVER CONSOLIDATED
BANKGROUP BANK PROFORMA
<S> <C>
INTEREST INCOME
Interest and Fees on Loans $ 42,519 $ 3,636 $ 46,155
Interest on Mortgage Loans Held for Sale -- -- --
Interest and Dividends on Securities Available for Sale 12,329 51 12,380
Interest and Dividends on Securities Held to Maturity 2,387 485 2,872
Other Interest Income 677 218 895
-------- ------- --------
Total Interest Income 57,912 4,390 62,302
INTEREST EXPENSE
Deposits 24,006 1,700 25,706
Short-Term Borrowings 630 -- 630
Long-Term Debt 655 -- 655
-------- ------- --------
Total Interest Expense 25,291 1,700 26,991
Net Interest Income 32,621 2,690 35,311
Provisions for Loan Losses 1,370 293 1,663
-------- ------- --------
Net Interest Income after Provision for Loan Losses 31,251 2,397 33,648
NONINTEREST INCOME
Service Charges, Fees and Other 4,000 196 4,196
Trust Department Income 2,137 -- 2,137
Securities Gains (Losses), Net 277 22 299
-------- ------- --------
6,414 218 6,632
NONINTEREST EXPENSE
Salaries and Employee Benefits 13,176 679 13,855
Net Occupancy and Equipment Costs 3,959 515 4,474
Other Noninterest Expense 11,119 574 11,693
-------- ------- --------
28,254 1,768 30,022
-------- ------- --------
Income Before Income Taxes 9,411 847 10,258
Income Tax Expense 2,530 219 2,749
-------- ------- --------
NET INCOME $ 6,881 $ 628 $ 7,509
======== ======= ========
PER COMMON SHARE DATA (1) Net Income per Share:
Primary $ 0.93 $ 0.41 $ 0.85
Fully Diluted $ 0.87 $ 0.41 $ 0.76
Weighted Average Shares Outstanding
Primary 7,384 1,542 8,830
Fully Diluted 8,414 1,542 9,860
</TABLE>
(1) Based on an Exchange Ratio of .938 for conversion of Bank Common Stock
into BankGroup Common Stock. See "The Bank Merger -- Determination of
Exchange Ratio; Exchange of Bank Common Stock for BankGroup Common Stock"
for further discussion of the calculation of the Exchange Ratio.
-34-
<PAGE>
The following table sets forth the capitalization of MainStreet BankGroup
Incorporated and Hanover Bank at June 30, 1996 and as adjusted to give effect to
the acquisition of Hanover Bank in a transaction accounted for as a "Pooling of
Interest" transaction.
MAINSTREET BANKGROUP INCORPORATED AND HANOVER BANK
PRO FORMA CAPITALIZATION
JUNE 30, 1996
(IN 000'S)
<TABLE>
<CAPTION>
MAINSTREET HANOVER ADJUSTMENTS CONSOLIDATED
<S> <C>
Long-term Debt and Capital Lease Obligations
MainStreet BankGroup:
FHLB Long-Term Obligations Due on February 1, 1999
Callable on February 1, 1997 $ 45,000 $ $ $ 45,000
FHLB Long-Term Obligations Due on March 14, 1997 25,000 25,000
FHLB Long-Term Obligations Due on April 17, 2002 857 857
Hanover Bank
None
Total Long-Term Debt and Capital Lease Obligations 70,857 -- -- 70,857
-------- -------- -------- ---------
Shareholders' Equity:
MainStreet BankGroup:
Preferred Stock, Authorized 1,000,000 Shares; None Outstanding -- --
Common Stock, $5 Par Value, Authorized 20,000,000 Shares;
Issued and Outstanding 8,587,245 Shares 42,936 -- 6,900 49,836
Capital in Excess of Par 12,325 -- (1,170) 11,155
Retained Earnings 26,874 3,042 29,916
Unearned Compensation (405) -- (405)
Net Unrealized Gains (Losses) on Securities, Net (3,446) (17) (3,463)
Hanover Bank:
Common Stock, $2.50 Par Value, Authorized 3,000,000 Shares;
Issued and Outstanding 1,471,536 Shares 3,679 (3,679)
Capital in Excess of Par 2,051 (2,051)
Retained Earnings 3,042 (3,042)
Unearned Compensation --
Net Unrealized Gains (Losses) on Securities, Net (17) 17
-------- -------- -------- --------
Total Shareholders' Equity 78,284 8,755 -- 87,039
-------- -------- -------- --------
Total Long-Term Debt, Capital Lease Obligations
and Shareholders' Equity $ 149,141 $ 8,755 $ -- $ 157,896
======== ======== ======== ========
</TABLE>
-35-
<PAGE>
MAINSTREET BANKGROUP INCORPORATED,
HANOVER BANK AND THE FIRST NATIONAL BANK OF CLIFTON FORGE
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
JUNE 30, 1996
(IN 000'S)
<TABLE>
<CAPTION>
MAINSTREET
ADJUSTMENTS & HANOVER
MAINSTREET HANOVER INCREASE PRO FORMA CLIFTON INCREASE
BANKGROUP BANK (DECREASE) COMBINED FORGE (DECREASE) CONSOLIDATED
<S> <C>
ASSETS
Cash and Due From Banks $ 26,319 $ 2,799 $ $ 29,118 $ 1,876 $ $ 30,994
Interest-Earning Deposits in
Domestic Banks 506 -- 506 -- 506
Federal Funds Sold 1,735 -- 1,735 5,350 7,085
Mortgage Loans Held for Sale 1,329 -- 1,329 -- 1,329
Securities Available for Sale 203,404 1,504 204,908 52,678 257,586
Securities Held to Maturity 93,645 17,037 110,682 -- 110,682
Loans, Net of Unearned Income 621,719 74,842 696,561 39,414 735,975
Less: Allowance for Loan
Losses (8,680) (833) (9,513) (217) (9,730)
-------- ------- ------ --------- ------- -------- -------
Loans, Net 613,039 74,009 -- 687,048 39,197 -- 726,245
-------- ------- ------ --------- ------- -------- -------
Bank Premises and
Equipment, Net 10,563 2,286 12,849 438 13,287
Other Real Estate Owned 823 160 983 -- 983
Other Assets 16,303 1,417 17,720 1,106 18,826
-------- ------- ------ --------- ------- ---------
TOTAL ASSETS $967,666 $ 99,212 $ -- $1,066,878 $100,645 $ -- $1,167,523
======== ======= ====== ========= ======= ======== =========
LIABILITIES
Deposits:
Demand Deposits
(Noninterest-Bearing) $ 96,371 $ 2,532 $ $ 98,903 $ 5,541 $ $ 104,444
Interest Bearing Deposits 616,986 85,499 702,485 54,664 757,149
-------- ------- ------ --------- ------- -------- ---------
TOTAL DEPOSITS 713,357 88,031 -- 801,388 60,205 -- 861,593
-------- ------- ------ --------- ------- -------- ---------
Short - Term Debt 95,323 1,735 97,058 25,000 122,058
Long - Term Debt 70,857 -- 70,857 -- 70,857
Other Liabilities 9,845 691 10,536 662 11,198
------- ------- ------ --------- ------ -------- ---------
TOTAL LIABILITIES 889,382 90,457 -- 979,839 85,867 -- 1,065,706
------- ------- ------ --------- ------ -------- ---------
SHAREHOLDERS' EQUITY
Common Stock 42,936 3,679(1) 3,221 49,836 1,575(2) 6,489 57,900
Capital in Excess of Par 12,325 2,051(1) (3,221) 11,155 1,575(2) (6,489) 6,241
Retained Earnings 26,874 3,042 29,916 11,523 41,439
Unearned Compensation (405) -- (405) -- (405)
Unrealized Gains (Losses)
on Securities, Net (3,446) (17) (3,463) 105 (3,358)
-------- ------- ------ --------- ------ -------- ---------
TOTAL SHAREHOLDERS' EQUITY 78,284 8,755 -- 87,039 14,778 -- 101,817
-------- ------- ------ --------- ------ -------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $967,666 $ 99,212 $ -- $1,066,878 $ 100,645 $ -- $1,167,523
======= ======= ====== ========= ======== ======== =========
</TABLE>
(1) Based on an Exchange Ratio .938 for conversion of Bank Common Stock into
BankGroup Common Stock. See "The Bank Merger - Determination of the
Exchange Ratio; Exchange of Bank Common Stock for BankGroup Common
Stock" for further discussion of the calculation of the Exchange Ratio.
(2) Based on an Exchange Ratio of 5.12 for conversion of First National Bank
of Clifton Forge Common Stock into MainStreet BankGroup Common Stock.
See "MainStreet BankGroup Incorporated -- Recent Developments" for
further discussion of the calculation of the exchange ratio.
-36-
<PAGE>
MAINSTREET BANKGROUP INCORPORATED, THE FIRST NATIONAL
BANK OF CLIFTON FORGE AND HANOVER BANK
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
JUNE 30, 1996
(IN 000'S)
<TABLE>
<CAPTION>
MAINSTREET &
ADJUSTMENTS CLIFTON FORGE ADJUSTMENTS
MAINSTREET CLIFTON INCREASE PRO FORMA HANOVER INCREASE
BANKGROUP FORGE (DECREASE) COMBINED BANK (DECREASE) CONSOLIDATED
<S> <C>
ASSETS
Cash and Due From Banks $ 26,319 $ 1,876 $ $ 28,195 $ 2,799 $ $ 30,994
Interest-Earning Deposits in
Domestic Banks 506 -- 506 -- 506
Federal Funds Sold 1,735 5,350 7,085 -- 7,085
Mortgage Loans Held for Sale 1,329 -- 1,329 -- 1,329
Securities Available for Sale 203,404 52,678 256,082 1,504 257,586
Securities Held to Maturity 93,645 -- 93,645 17,037 110,682
Loans, Net of Unearned Income 621,719 39,414 661,133 74,842 735,975
Less: Allowance for
Loan (8,680) (217) (8,897) (833) (9,730)
-------- ------- ------ --------- ------- ------- --------
Loans, Net 613,039 39,197 -- 652,236 74,009 -- 726,245
-------- ------- ------ --------- ------- ------- --------
Bank Premises and Equipment, Net 10,563 438 11,001 2,286 13,287
Other Real Estate Owned 823 -- 823 160 983
Other Assets 16,303 1,106 17,409 1,417 18,826
-------- ------- ------ --------- ------- -------
TOTAL ASSETS $967,666 $ 100,645 $ -- $1,068,311 $99,212 $ -- $1,167,523
======= ======= ====== ========= ====== ======= =========
LIABILITIES
Deposits:
Demand Deposits
(Noninterest-Bearing) $ 96,371 $ 5,541 $ $ 101,912 $ 2,532 $ $ 104,444
Interest Bearing Deposits 616,986 54,664 671,650 85,499 757,149
-------- ------- ------ --------- ------- ------- ---------
TOTAL DEPOSITS 713,357 60,205 -- 773,562 88,031 -- 861,593
-------- ------- ------ --------- ------- ------- ---------
Short - Term Debt 95,323 25,000 120,323 1,735 122,058
Long - Term Debt 70,857 -- 70,857 -- 70,857
Other Liabilities 9,845 662 10,507 691 11,198
------- ------- ------ --------- ------ ------- ---------
TOTAL LIABILITIES 889,382 85,867 -- 975,249 90,457 -- 1,065,706
------- ------- ------ --------- ------ ------- ---------
SHAREHOLDERS' EQUITY
Common Stock 42,936 1,575(2) 6,489 51,000 3,679(1) 3,221 57,900
Capital in Excess of Par 12,325 1,575(2) (6,489) 7,411 2,051(1) (3,221) 6,241
Retained Earnings 26,874 11,523 38,397 3,042 41,439
Unearned Compensation (405) -- (405) -- (405)
Unrealized Gains (Losses)
on Securities, Net (3,446) 105 (3,341) (17) (3,358)
-------- ------- ------ --------- ------- ------- --------
TOTAL SHAREHOLDERS' EQUITY 78,284 14,778 -- 93,062 8,755 -- 101,817
-------- ------- ------ --------- ------- ------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $967,666 $ 100,645 $ -- $1,068,311 $ 99,212 $ -- $1,167,523
======= ======== ====== ========= ======== ====== =========
</TABLE>
(1) Based on an Exchange Ratio .938 for conversion of Bank Common Stock into
BankGroup Common Stock. See "The Bank Merger - Determination of the
Exchange Ratio; Exchange of Bank Common Stock for BankGroup Common
Stock" for further discussion of the calculation of the Exchange Ratio.
(2) Based on an Exchange Ratio of 5.12 for conversion of First National Bank
of Clifton Forge Common Stock into MainStreet BankGroup Common Stock.
See "MainStreet BankGroup Incorporated -- Recent Developments" for
further discussion of the calculation of the exchange ratio.
-37-
<PAGE>
MAINSTREET BANKGROUP INCORPORATED,
THE FIRST NATIONAL BANK OF CLIFTON FORGE, AND HANOVER BANK
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
SIX MONTHS ENDED JUNE 30, 1996
(IN 000'S EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MAINSTREET CLIFTON HANOVER CONSOLIDATED
BANKGROUP FORGE PROFORMA BANK PROFORMA
<S> <C>
INTEREST INCOME
Interest and Fees on Loans $ 28,009 $ 1,826 $ 29,835 $ 3,183 $ 33,018
Interest on Mortgage Loans
Held for Sale 98 -- 98 -- 98
Interest and Dividends on
Securities Available for Sale 5,798 810 6,608 34 6,642
Interest and Dividends on
Securities Held to Maturity 3,251 -- 3,251 561 3,812
Other Interest Income 160 221 381 -- 381
-------- ------- ------- ------ -------
Total Interest Income 37,316 2,857 40,173 3,778 43,951
INTEREST EXPENSE
Deposits 13,696 1,179 14,875 1,754 16,629
Short-Term Borrowings 1,938 22 1,960 3 1,963
Long-Term Debt 1,336 -- 1,336 -- 1,336
-------- ------ ------- ------ -------
Total Interest Expense 16,970 1,201 18,171 1,757 19,928
Net Interest Income 20,346 1,656 22,002 2,021 24,023
Provisions for Loan Losses 1,332 1 1,333 90 1,423
-------- ------ ------- ------ -------
Net Interest Income after
Provision for Loan Losses 19,014 1,655 20,669 1,931 22,600
NONINTEREST INCOME
Service Charges, Fees and Other 3,383 70 3,453 287 3,740
Trust Department Income 1,431 12 1,443 -- 1,443
Securities Gains (Losses), Net 639 -- 639 -- 639
-------- ------- ------- ------ -------
5,453 82 5,535 287 5,822
NONINTEREST EXPENSE
Salaries and Employee Benefits 8,188 282 8,470 493 8,963
Net Occupancy and Equipment Costs 2,364 48 2,412 215 2,627
Other Noninterest Expense 4,397 338 4,735 580 5,315
-------- ------- ------- ------- -------
14,949 668 15,617 1,288 16,905
-------- ------- ------- ------- -------
Income Before Income Taxes 9,518 1,069 10,587 930 11,517
Income Tax Expense 2,940 313 3,253 273 3,526
-------- ------- ------- ------- -------
NET INCOME $ 6,578 $ 756 $ 7,334 $ 657 $ 7,991
======== ======= ======= ======= =======
PER COMMON SHARE DATA (1)(2)
Net Income per Share:
Primary $ 0.77 $ 2.40 $ 0.72 $ 0.43 $ 0.69
Fully Diluted $ 0.77 $ 2.40 $ 0.72 $ 0.43 $ 0.69
Weighted Average Shares Outstanding
Primary 8,598 315 10,210 1,529 11,644
Fully Diluted 8,598 315 10,210 1,529 11,644
</TABLE>
(1) Based on an Exchange Ratio of .938 for conversion of Bank Common Stock
into BankGroup Common Stock. See "The Bank Merger - Determination of
Exchange Ratio; Exchange of Bank Common Stock for BankGroup Common Stock"
for further discussion of the calculation of the Exchange Ratio.
(2) Based on an Exchange Ratio of 5.12 for conversion of First National Bank
of Clifton Forge Common Stock into MainStreet BankGroup Common Stock. See
"MainStreet BankGroup, Incorporated - Recent Developments" for further
discussion of the calculation of the exchange ratio.
-38-
<PAGE>
MAINSTREET BANKGROUP INCORPORATED,
THE FIRST NATIONAL BANK OF CLIFTON FORGE, AND HANOVER BANK
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
SIX MONTHS ENDED JUNE 30, 1995
(IN 000'S EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MAINSTREET CLIFTON HANOVER CONSOLIDATED
BANKGROUP FORGE PROFORMA BANK PROFORMA
<S> <C>
INTEREST INCOME
Interest and Fees on Loans $ 24,333 $ 1,726 $ 26,059 $ 2,758 $ 28,817
Interest on Mortgage Loans
Held for Sale 48 -- 48 -- 48
Interest and Dividends on
Securities Available for Sale 4,186 811 4,997 34 5,031
Interest and Dividends on
Securities Held to Maturity 4,039 -- 4,039 404 4,443
Other Interest Income 41 145 186 -- 186
-------- ------- ------- ------ -------
Total Interest Income 32,647 2,682 35,329 3,196 38,525
INTEREST EXPENSE
Deposits 13,578 1,082 14,660 1,363 16,023
Short-Term Borrowings 701 -- 701 7 708
Long-Term Debt 312 -- 312 -- 312
-------- ------ ------- ------ -------
Total Interest Expense 14,591 1,082 15,673 1,370 17,043
Net Interest Income 18,056 1,600 19,656 1,826 21,482
Provisions for Loan Losses 657 1 658 55 713
-------- ------ ------- ------ -------
Net Interest Income after
Provision for Loan Losses 17,399 1,599 18,998 1,771 20,769
NONINTEREST INCOME
Service Charges, Fees and Other 2,751 71 2,822 254 3,076
Trust Department Income 1,030 37 1,067 -- 1,067
Securities Gains (Losses), Net 19 (38) (19) -- (19)
-------- -------- -------- ------ -------
3,800 70 3,870 254 4,124
NONINTEREST EXPENSE
Salaries and Employee Benefits 8,087 290 8,377 510 8,887
Net Occupancy and Equipment Costs 2,160 48 2,208 210 2,418
Other Noninterest Expense 4,444 309 4,753 501 5,254
-------- ------- --------- ------- -------
14,691 647 15,338 1,221 16,559
-------- ------- --------- ------- -------
Income Before Income Taxes 6,508 1,022 7,530 804 8,334
Income Tax Expense 1,879 302 2,181 237 2,418
-------- ------- --------- ------- -------
NET INCOME $ 4,629 $ 720 $ 5,349 $ 567 $ 5,916
======== ======= ========= ======= =======
PER COMMON SHARE DATA (1)(2)
Net Income per Share:
Primary $ 0.61 $ 2.29 $ 0.58 $ 0.38 $ 0.56
Fully Diluted $ 0.57 $ 2.29 $ 0.53 $ 0.38 $ 0.51
Weighted Average Shares Outstanding
Primary 7,580 315 9,192 1,512 10,610
Fully Diluted 8,546 315 10,158 1,512 11,576
</TABLE>
(1) Based on an Exchange Ratio of .938 for conversion of Bank Common Stock
into BankGroup Common Stock. See "The Bank Merger - Determination of
Exchange Ratio; Exchange of Bank Common Stock for BankGroup Common Stock"
for further discussion of the calculation of the Exchange Ratio.
(2) Based on an Exchange Ratio of 5.12 for conversion of First National Bank
of Clifton Forge Common Stock into MainStreet BankGroup Common Stock. See
"MainStreet BankGroup, Incorporated - Recent Developments" for further
discussion of the calculation of the exchange ratio.
-39-
<PAGE>
MAINSTREET BANKGROUP INCORPORATED,
THE FIRST NATIONAL BANK OF CLIFTON FORGE, AND HANOVER BANK
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1995
(IN 000'S EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MAINSTREET CLIFTON HANOVER CONSOLIDATED
BANKGROUP FORGE PROFORMA BANK PROFORMA
<S> <C>
INTEREST INCOME
Interest and Fees on Loans $ 50,943 $ 3,452 $ 54,395 $ 6,018 $ 60,413
Interest on Mortgage Loans
Held for Sale 144 -- 144 -- 144
Interest and Dividends on
Securities Available for Sale 9,689 491 10,180 68 10,248
Interest and Dividends on
Securities Held to Maturity 7,828 1,179 9,007 486 9,493
Other Interest Income 71 326 397 474 871
-------- ------- ------- ------ -------
Total Interest Income 68,675 5,448 74,123 7,046 81,169
INTEREST EXPENSE
Deposits 27,662 2,273 29,935 3,109 33,044
Short-Term Borrowings 3,196 -- 3,196 -- 3,196
Long-Term Debt 517 -- 517 -- 517
-------- ------ ------- ------ -------
Total Interest Expense 31,375 2,273 33,648 3,109 36,757
Net Interest Income 37,300 3,175 40,475 3,937 44,412
Provisions for Loan Losses 1,319 -- 1,319 100 1,419
-------- ------ ------- ------ -------
Net Interest Income after
Provision for Loan Losses 35,981 3,175 39,156 3,837 42,993
NONINTEREST INCOME
Service Charges, Fees and Other 5,529 213 5,742 300 6,042
Trust Department Income 2,400 41 2,441 -- 2,441
Securities Gains (Losses), Net 46 (3) 43 -- 43
-------- -------- ------- ------ -------
7,975 251 8,226 300 8,526
NONINTEREST EXPENSE
Salaries and Employee Benefits 15,704 582 16,286 961 17,247
Net Occupancy and Equipment Costs 4,428 166 4,594 621 5,215
Other Noninterest Expense 8,685 514 9,199 800 9,999
-------- ------- --------- ------- -------
28,817 1,262 30,079 2,382 32,461
-------- ------- --------- ------- -------
Income Before Income Taxes 15,139 2,164 17,303 1,755 19,058
Income Tax Expense 4,399 640 5,039 527 5,566
-------- ------- --------- ------- -------
NET INCOME $ 10,740 $ 1,524 $ 12,264 $ 1,228 $ 13,492
======== ======= ========= ======= =======
PER COMMON SHARE DATA (1)(2)
Net Income per Share:
Primary $ 1.37 $ 4.84 $ 1.30 $ 0.80 $ 1.24
Fully Diluted $ 1.29 $ 4.84 $ 1.21 $ 0.80 $ 1.16
Weighted Average Shares Outstanding
Primary 7,842 315 9,454 1,541 10,899
Fully Diluted 8,548 315 10,160 1,541 11,605
(1) Based on an Exchange Ratio of .938 for conversion of Bank Common Stock
into BankGroup Common Stock. See "The Bank Merger - Determination of
Exchange Ratio; Exchange of Bank Common Stock for BankGroup Common Stock"
for further discussion of the calculation of the Exchange Ratio.
(2) Based on an Exchange Ratio of 5.12 for conversion of First National Bank
of Clifton Forge Common Stock into MainStreet BankGroup Common Stock. See
"MainStreet BankGroup, Incorporated - Recent Developments" for further
discussion of the calculation of the exchange ratio.
-40-
<PAGE>
MAINSTREET BANKGROUP INCORPORATED,
THE FIRST NATIONAL BANK OF CLIFTON FORGE, AND HANOVER BANK
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
YEAR ENDED DECEMBER 31, 1994
(IN 000'S EXCEPT PER SHARE DATA)
</TABLE>
<TABLE>
<CAPTION>
MAINSTREET CLIFTON HANOVER CONSOLIDATED
BANKGROUP FORGE PROFORMA BANK PROFORMA
<S> <C>
INTEREST INCOME
Interest and Fees on Loans $ 42,864 $ 3,202 $ 46,066 $ 4,615 $ 50,681
Interest on Mortgage Loans
Held for Sale 514 -- 514 -- 514
Interest and Dividends on
Securities Available for Sale 13,108 1,230 14,338 69 14,407
Interest and Dividends on
Securities Held to Maturity 2,568 493 3,061 504 3,565
Other Interest Income 462 176 638 272 910
----------------------------------------------------------------------
Total Interest Income 59,516 5,101 64,617 5,460 70,077
INTEREST EXPENSE
Deposits 23,980 1,941 25,921 2,039 27,960
Short-Term Borrowings 594 -- 594 -- 594
Long-Term Debt 643 -- 643 -- 643
----------------------------------------------------------------------
Total Interest Expense 25,217 1,941 27,158 2,039 29,197
Net Interest Income 34,299 3,160 37,459 3,421 40,880
Provisions for Loan Losses 2,827 3 2,830 261 3,091
---------------------------------------------------------------------
Net Interest Income after
Provision for Loan Losses 31,472 3,157 34,629 3,160 37,789
NONINTEREST INCOME
Service Charges, Fees and Other 4,865 238 5,103 261 5,364
Trust Department Income 1,993 32 2,025 -- 2,025
Securities Gains (Losses), Net (5,683) 18 (5,665) -- (5,665)
---------------------------------------------------------------------
1,175 288 1,463 261 1,724
NONINTEREST EXPENSE
Salaries and Employee Benefits 14,441 564 15,005 786 15,791
Net Occupancy and Equipment 4,142 177 4,319 562 4,881
Other Noninterest Expense 10,130 606 10,736 665 11,401
---------------------------------------------------------------------
28,713 1,347 30,060 2,013 32,073
---------------------------------------------------------------------
Income Before Income Taxes 3,934 2,098 6,032 1,408 7,440
Income Tax Expense (154) 607 453 390 843
----------------------------------------------------------------------
NET INCOME $ 4,088 $ 1,491 $ 5,579 $ 1,018 $ 6,597
======================================================================
PER COMMON SHARE DATA (1)(2)
Net Income per Share:
Primary $ 0.54 $ 4.73 $ 0.61 $ 0.66 $ 0.62
Fully Diluted $ 0.53 $ 4.73 $ 0.55 $ 0.66 $ 0.57
Weighted Average Shares Outstanding
Primary 7,510 315 9,122 1,538 10,565
Fully Diluted 8,516 315 10,128 1,538 11,571
</TABLE>
(1) Based on an Exchange Ratio of .938 for conversion of Bank Common Stock
into BankGroup Common Stock. See "The Bank Merger - Determination of
Exchange Ratio; Exchange of Bank Common Stock for BankGroup Common Stock"
for further discussion of the calculation of the Exchange Ratio.
(2) Based on an Exchange Ratio of 5.12 for conversion of First National Bank
of Clifton Forge Common Stock into MainStreet BankGroup Common Stock. See
"MainStreet BankGroup, Incorporated - Recent Developments" for further
discussion of the calculation of the exchange ratio.
-41-
<PAGE>
MAINSTREET BANKGROUP INCORPORATED,
THE FIRST NATIONAL BANK OF CLIFTON FORGE, AND HANOVER BANK
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
YEAR ENDED DECEMBER 31, 1993
(IN 000'S EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MAINSTREET CLIFTON HANOVER CONSOLIDATED
BANKGROUP FORGE PROFORMA BANK PROFORMA
<S> <C>
INTEREST INCOME
Interest and Fees on Loans $ 42,519 $ 3,222 $ 45,741 $ 3,636 $ 49,377
Interest on Mortgage Loans
Held for Sale -- -- -- -- --
Interest and Dividends on
Securities Available for Sale 12,329 -- 12,329 51 12,380
Interest and Dividends on
Securities Held to Maturity 2,387 1,872 4,259 485 4,744
Other Interest Income 677 196 873 218 1,091
----------------------------------------------------------------------
Total Interest Income 57,912 5,290 63,202 4,390 67,592
INTEREST EXPENSE
Deposits 24,006 1,957 25,963 1,700 27,663
Short-Term Borrowings 630 -- 630 -- 630
Long-Term Debt 655 -- 655 -- 655
----------------------------------------------------------------------
Total Interest Expense 25,291 1,957 27,248 1,700 28,948
Net Interest Income 32,621 3,333 35,954 2,690 38,644
Provisions for Loan Losses 1,370 27 1,397 293 1,690
---------------------------------------------------------------------
Net Interest Income after
Provision for Loan Loss 31,251 3,306 34,557 2,397 36,954
NONINTEREST INCOME
Service Charges, Fees and Other 4,000 276 4,276 196 4,472
Trust Department Income 2,137 23 2,160 -- 2,160
Securities Gains (Losses), Net 277 60 337 22 359
---------------------------------------------------------------------
6,414 359 6,773 218 6,991
NONINTEREST EXPENSE
Salaries and Employee Benefits 13,176 592 13,768 679 14,447
Net Occupancy and Equipment Costs 3,959 183 4,142 515 4,657
Other Noninterest Expense 11,119 554 11,673 574 12,247
---------------------------------------------------------------------
28,254 1,329 29,583 1,768 31,351
---------------------------------------------------------------------
Income Before Income Taxes 9,411 2,336 11,747 847 12,594
Income Tax Expense 2,530 658 3,188 219 3,407
----------------------------------------------------------------------
NET INCOME $ 6,881 $ 1,678 $ 8,559 $ 628 $ 9,187
======================================================================
PER COMMON SHARE DATA (1)(2)
Net Income per Share:
Primary $ 0.93 $ 5.33 $ 0.95 $ 0.41 $ 0.88
Fully Diluted $ 0.87 $ 5.33 $ 0.85 $ 0.41 $ 0.80
Weighted Average Shares Outstanding
Primary 7,384 315 8,996 1,542 10,442
Fully Diluted 8,414 315 10,026 1,542 11,472
</TABLE>
(1) Based on an Exchange Ratio of .938 for conversion of Bank Common Stock
into BankGroup Common Stock. See "The Bank Merger - Determination of
Exchange Ratio; Exchange of Bank Common Stock for BankGroup Common Stock"
for further discussion of the calculation of the Exchange Ratio.
(2) Based on an Exchange Ratio of 5.12 for conversion of First National Bank
of Clifton Forge Common Stock into MainStreet BankGroup Common Stock. See
"MainStreet BankGroup, Incorporated - Recent Developments" for further
discussion of the calculation of the exchange ratio.
-42-
<PAGE>
GENERAL INFORMATION
This Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies by the Bank Board, to be voted at the Bank Shareholder
Meeting to be held at ____________________ located at
_______________________________, on ________ __, 1996, at __:__ a.m., Eastern
Time and at any adjournment thereof. At the Bank Shareholder Meeting,
shareholders will consider and vote upon the Agreement and the related Revised
Plan of Merger, pursuant to which Bank will merge into Acquisition. Only
shareholders of record of Bank at the close of business on ________ __, 1996 are
entitled to notice of and to vote at the Bank Shareholder Meeting. This Proxy
Statement/Prospectus is being mailed to all such holders of record of Bank
Common Stock on or about __________ __, 1996.
Holders of Bank Common Stock are entitled to one vote for each share
standing in such holder's name on the books of Bank. The affirmative vote of the
holders of more than two-thirds of the outstanding shares entitled to vote is
required for approval of the Bank Merger.
Under rules of the National Association of Securities Dealers, Inc., the
proposal to adopt the Agreement is considered a "non-discretionary item" whereby
brokerage firms may not vote in their discretion on behalf of their clients if
such clients have not furnished voting instructions. Abstentions and such broker
"non-votes" will be considered in determining the presence of a quorum at the
Special Meeting but will not be counted as a vote cast for a proposal. Because
the proposal to adopt the Agreement is required to be approved by the holders of
two-thirds of the outstanding shares of Bank Common Stock, abstentions and
broker "non-votes" will have the same effect as a vote against this proposal.
The proxies solicited hereby, if properly signed and returned and not
revoked prior to their use, will be voted in accordance with the instructions
given thereon by the shareholders. If no instructions are so specified, the
proxies will be voted FOR the proposed Bank Merger. Any shareholder giving a
proxy has the power to revoke it at any time before it is exercised by (i)
filing written notice of revocation addressed to Gail C. Thomas, Cashier,
Hanover Bank, 7021 Mechanicsville Turnpike, Mechanicsville, Virginia 23111; (ii)
submitting a duly executed proxy bearing a later date; or (iii) appearing at the
Bank Shareholder Meeting and notifying the Secretary of his or her intention to
vote in person. Attendance at the Special Meeting will not, in and of itself,
constitute revocation of a proxy. Proxies solicited by this Proxy
Statement/Prospectus may be exercised only at the Bank Shareholder Meeting and
any
-43-
<PAGE>
adjournment of the Bank Shareholder Meeting and will not be used for any other
meeting.
The accompanying proxy is being solicited by the Bank Board. The cost of
such solicitation will be borne by Bank. In addition to the use of the mails,
proxies may be solicited by personal interview, telephone or telegram by
directors, officers and employees of Bank or BankGroup without additional
compensation. Arrangements may also be made with brokerage houses and
custodians, nominees and fiduciaries for forwarding of solicitation material to
beneficial owners of stock held of record by such persons and obtaining proxies
from the beneficial owners of Bank Common Stock entitled to vote at the Special
Meeting, and Bank will reimburse such persons for their reasonable expenses
incurred in doing so.
Under Virginia law, no other matters may be brought before the meeting.
As of the Record Date, directors and executive officers of Bank and their
affiliates beneficially owned a total of 294,559 shares (representing 18.22% of
the outstanding shares of Bank Common Stock), and the directors of BankGroup
owned no Bank Common Stock. Bank directors have agreed with BankGroup to
recommend that Bank shareholders vote in favor of the Bank Merger and to vote
shares beneficially owned by such directors, and shares with respect to which
they have the power to vote, in favor of the Bank Merger. See "Ownership of
Certain Beneficial Owners of Bank Common Stock."
For the reasons described below, the Bank Board has adopted the Agreement,
believes the Bank Merger is in the best interest of Bank and its shareholders
and recommends that shareholders of Bank vote FOR approval of the Agreement. In
making its recommendation, the Bank Board considered, among other things, the
opinion of Scott & Stringfellow that the Merger Consideration was fair to Bank
Common Stock shareholders from a financial point of view. See "The Bank Merger
- -- Recommendations of the Board of Directors of Bank; Reasons for the Bank
Merger," and "-- Opinion of Financial Advisor."
The address of BankGroup is 200 East Church Street, Martinsville, Virginia
24112, and its telephone number is (540) 666-6724. The address of Bank is 7021
Mechanicsville Turnpike, Mechanicsville, Virginia 23111 and its telephone number
is (804) 746-2878.
-44-
<PAGE>
THE BANK MERGER
The detailed terms of the Bank Merger are contained in the Agreement and
Plan of Reorganization, attached as Annex I to this Proxy Statement/Prospectus.
The following discussion describes the more important aspects of the Bank Merger
and the terms of the Agreement. This description is not complete and is
qualified by reference to the Agreement which is incorporated by reference
herein.
Opinion of Financial Advisor
Bank has retained Scott & Stringfellow to act as its financial advisor in
connection with rendering a fairness opinion with respect to the Bank Merger.
Scott & Stringfellow is a full service investment banking and brokerage firm
headquartered in Richmond, Virginia, that provides a broad array of services to
corporations, financial institutions, individuals and state and local
governments. The Financial Institutions Group of Scott & Stringfellow actively
works with financial institutions in Virginia, North Carolina, the District of
Columbia, Maryland, and West Virginia on these and other matters. As part of its
investment banking practice, it is continually engaged in the valuation of
financial institutions and their securities in connection with mergers and
acquisitions, negotiated underwritings, and secondary distributions of listed
and unlisted securities. Scott & Stringfellow was selected by the Bank Board
based upon its expertise and reputation in providing valuation and merger and
acquisition and advisory services to financial institutions. Scott &
Stringfellow's analysts follow and publish reports about Bank and BankGroup.
On May 10, 1996, at the meeting at which the Bank Board approved and
adopted the Agreement, Scott & Stringfellow delivered a written opinion
("Opinion") to the Bank Board that as of such date, the Merger Consideration to
be received by Bank Common Stock shareholders in cash or BankGroup Common Stock
(subject to certain limitations on the cash component of the consideration), was
fair to the Bank Common Stock shareholders from a financial point of view. Such
Opinion was updated as of the date of this Proxy Statement/Prospectus. No
instructions or limitations were given or imposed by the Bank Board upon Scott &
Stringfellow with respect to the investigations made or procedures followed by
them in rendering the Opinion.
The full text of the Opinion, which sets forth the assumptions made,
matters considered and limits on the review undertaken, is set forth and
attached hereto in Annex II to this Proxy Statement/Prospectus and is
incorporated herein by reference. Bank shareholders are urged to read the
Opinion in its entirety. The following is a summary of certain analyses
-45-
<PAGE>
performed by Scott & Stringfellow which were the bases of such Opinion.
In developing its Opinion, Scott & Stringfellow reviewed and analyzed: (i)
the Agreement; (ii) the Registration Statement and this Proxy
Statement/Prospectus; (iii) Bank's audited financial statements for the three
years ended December 31, 1995; (iv) Bank's unaudited financial statements for
the quarters ended June 30, 1996 and 1995, and other internal information
relating to Bank prepared by Bank's management; (v) information regarding the
trading market for Bank Common Stock and BankGroup Common Stock and the price
ranges within which the respective stocks have traded; (vi) the relationship of
prices paid to relevant financial data such as net worth, earnings, deposits and
assets in certain bank and bank holding company mergers and acquisitions in
Virginia in recent years; (vii) BankGroup's annual reports to shareholders and
its audited financial statements for the three years ended December 31, 1995;
and (viii) BankGroup's unaudited financial statements for the quarters ended
June 30, 1996 and 1995, and other internal information relating to BankGroup
prepared by BankGroup's management. Scott & Stringfellow has discussed with
members of Bank's and BankGroup's management past and current business
operations, the background of the Bank Merger, the reasons and basis for the
Bank Merger, results of regulatory examinations, and the business and future
prospects of Bank and BankGroup individually and as combined entity, as well as
other matters relevant to its inquiry. Scott & Stringfellow has conducted such
other studies, analysis and investigations particularly of the banking industry,
and considered such other information as it deemed appropriate, the material
portion of which is described below. Finally, Scott & Stringfellow also took
into account its assessment of general economic, market and financial conditions
and its experience in other transactions, as well as its experience in
securities valuations and knowledge of the commercial banking industry
generally.
Scott & Stringfellow relied without independent verification upon the
accuracy and completeness of all of the financial and other information reviewed
by it and discussed with it for purposes of its Opinion. With respect to
financial forecasts reviewed by Scott & Stringfellow in rendering its Opinion,
Scott & Stringfellow assumed that such financial forecasts were reasonably
prepared on the basis reflecting the best currently available estimates and
judgment of the managements of Bank and BankGroup as to the future financial
performance of Bank and BankGroup, respectively. Scott & Stringfellow did not
make an independent evaluation or appraisal of the assets or liabilities of Bank
and BankGroup nor was it furnished with any such appraisal.
-46-
<PAGE>
Scott & Stringfellow evaluated the financial terms of the transaction
using standard valuation methods, including a discounted cash flow analysis, a
market comparable analysis, a comparable acquisition analysis, and a dilution
analysis.
Discounted Cash Flow Analysis. Scott & Stringfellow performed a discounted
cash flow analysis under various projections to estimate the fair market value
of Bank Common Stock. Among other things, Scott & Stringfellow considered a
range of asset and earnings growth for Bank of between 6.0% and 10.0% and a
required equity capital level of 8.0%. A range of discount rates from 11.2% to
13.2% was applied to the cash flows resulting from the projections during the
first five years and the residual values. The residual values were estimated by
capitalizing the projected final year earnings by the discount rates, less the
projected long-term growth rate of Bank's earnings. The discount rates, growth
rates and capital levels were chosen based on what Scott & Stringfellow, in its
judgment, considered to be appropriate taking into account, among other things,
Bank's past and current financial performance and conditions, the general level
of inflation, rates of return for fixed income and equity securities in the
marketplace generally and particularly in the banking industry. The discounted
cash flow analysis indicated a reference range of $9.31 to $11.66 per share for
Bank Common Stock. These values compare to the value of $15.25 per share of
consideration for each share of Bank Common Stock. Accordingly, the present
value of Bank Common Stock was calculated at less than the value of the
consideration to be received from BankGroup pursuant to the Agreement.
Comparable Acquisition Analysis. Scott & Stringfellow compared the
relationship of prices paid to relevant financial data such as tangible net
worth, assets, deposits and earnings in 19 bank and bank holding company mergers
and acquisitions in Virginia since January 1, 1993, representing all such
transactions known to Scott & Stringfellow to have occurred during this period
with the proposed Bank Merger and found the consideration to be received from
BankGroup to be within the relevant pricing ranges acceptable for such recent
transactions. Specifically, based upon the most recent transactions announced in
Virginia since January 1, 1993, other than the Bank Merger, the average price to
tangible book value in these transactions was 2.04x, compared with 2.83x for the
Bank Merger; the average price to earnings ratio was 18.9x, compared with 18.9x
for the Bank Merger; the average deal price to deposits was 20.5%, compared with
27.1% for the Bank Merger; the average deal price to assets was 18.2%, compared
with 24.6% for the Bank Merger; and the average tangible book premium to core
deposits was 11.5%, compared to 18.7% for the Bank Merger. For purposes of
computing the information with respect to the Bank Merger, $15.25 per share of
consideration for each share of Bank Common Stock was used.
-47-
<PAGE>
Analysis of BankGroup and Virginia Bank Group. Scott & Stringfellow
analyzed the performance and financial condition of BankGroup relative to the
Virginia Bank Group consisting of Crestar Financial Corporation, Central
Fidelity Banks, Inc., F&M National Corp., First Virginia Banks, Inc., George
Mason Bankshares, Inc., Jefferson Bankshares, Inc., Premier Bankshares, Corp.,
and Signet Banking Corp. Certain financial information compared was, among other
things, information relating to tangible equity to assets, loans to deposits,
net interest margin, nonperforming assets, total assets, and efficiency ratio.
Additional valuation information compared for the trailing twelve month period
ended June 30, 1996, and stock prices as of August 19, 1996, was (i) price to
tangible book value ratio which was 1.89x for BankGroup, compared to an average
of 1.77x for the Virginia Bank Group, (ii) price to last twelve months earnings
ratio which was 11.11x for BankGroup, compared to an average of 12.88x for the
Virginia Bank Group; (iii) return on average assets which was 1.42% for
BankGroup, compared to an average of 1.19% for the Virginia Bank Group; (iv)
return on average equity which was 17.48% for BankGroup, compared to an average
of 12.92% for the Virginia Bank Group; and (v) a dividend yield of 3.29% for
BankGroup, compared to an average of 3.32% for the Virginia Bank Group. Overall,
in the opinion of Scott & Stringfellow, BankGroup's operating performance and
financial condition were better than the Virginia Bank Group average and
BankGroup's market value was reasonable when compared to the Virginia Bank
Group.
Dilution Analysis. Based upon publicly available financial information on
Bank and BankGroup, Scott & Stringfellow considered the effect of the
transaction on the book value, earnings, and market value of Bank and BankGroup.
The immediate effect on BankGroup -- assuming cost savings of 10% of Bank's
non-interest expense, was to decrease earnings per share by $.06 or 3.99% and to
decrease book value per share by $.31 or 3.45%. The effect on Bank under the
same assumptions is to increase earnings by $.52 per share or 60.48%, to
increase book value per share by $1.84 or 30.30%, to increase dividends per
share by $.19 or 87.57%, and to increase the May 2, 1996 market value of Bank of
$10.00 per share to $15.25. This dilution analysis does not take into account
the long-term benefits for the combined companies resulting from the
combination. Scott & Stringfellow concluded from this analysis that the
transaction would have a positive effect on Bank and Bank Common Stock
shareholders in that historical dividends per share, net income per share and
market value per share of BankGroup Common Stock to be received by Bank
shareholders would represent a substantial increase, after giving effect of the
Exchange Ratio. See "Summary -- Comparative Per Share Data."
-48-
<PAGE>
The summary set forth above includes the material factors considered, but
does not purport to be a complete description of the presentation by Scott &
Stringfellow to the Bank Board or of the analyses performed by Scott &
Stringfellow. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of these methods to the particular circumstances
and, therefor, such an opinion is not readily susceptible to summary
description. Accordingly, notwithstanding the separate factors discussed above,
Scott & Stringfellow believes that its analysis must be considered as a whole
and that selecting portions of its analysis and of the factors considered by it,
without considering all analyses and factors, could create an incomplete view of
the evaluation process underlying its Opinion. As a whole, these various
analyses contributed to Scott & Stringfellow's opinion that the terms of the
Agreement are fair from a financial point of view to Bank's shareholders.
Pursuant to an engagement letter dated April 23, 1996 between Bank and
Scott & Stringfellow, in exchange for its services, Scott & Stringfellow will
receive a fee equal to .60% of the total market value of the consideration
received by Bank shareholders, which equates to a fee of approximately $135,000
and is payable at closing. If the Bank Merger is not consummated, Bank also has
agreed to reimburse Scott & Stringfellow for its reasonable out-of-pocket
expenses.
Effective Time of the Bank Merger
Subject to the terms and conditions set forth herein, including receipt of
all required regulatory approvals, the Bank Merger shall become effective at the
time Articles of Merger relating to the Bank Merger are made effective by the
SCC (the "Effective Time of the Bank Merger"). The Effective Time of the Bank
Merger is expected to occur on or about October 31, 1996, or as soon thereafter
as is practicable. Either Bank or BankGroup may terminate the Agreement if the
Bank Merger has not been consummated by February 28, 1997.
Until the Effective Time of the Bank Merger, Bank shareholders will retain
their rights as shareholders to vote on matters submitted to them by the Bank
Board.
Lock-Up Option
In addition to the Agreement, Bank and BankGroup have entered into an
agreement, dated as of May 3, 1996, providing for BankGroup to have an option to
purchase the Common Stock of Bank under certain conditions (the "Lock-up
Option"). Specifically, the Lock-up Option provides that BankGroup shall have
the option purchase 19.9% of the issued and outstanding shares of Bank's
-49-
<PAGE>
Common Stock at a price of $11.00 per share. The Lock-up Option is exercisable
only under limited circumstances.
The Lock-up Option provides that BankGroup has an option to purchase Bank
Common Stock only upon the occurrence of the following events: (i) Bank enters
into an agreement with a third party to engage in a merger, consolidation, sale
of substantially all of its assets, or sale of securities representing 9.9% or
more of the voting power of Bank; or (ii) a third party acquires beneficial
ownership or the right to acquire beneficial ownership of 9.9% or more of
outstanding Bank Common Stock. BankGroup's right to exercise the Lock-up Option
has not been triggered as of the date of this Proxy Statement/Prospectus.
Determination of Exchange Ratio; Exchange of Bank Common Stock
for BankGroup Common Stock
Each share of Bank Common Stock issued and outstanding at the Effective
Time of the Bank Merger (other than shares held by BankGroup and shares to be
exchanged for cash) shall, and without any action by the holder thereof, be
converted into a number of shares of BankGroup Common Stock equal to the
quotient (rounded to the nearest one one-thousandth) of $15.25 divided by the
average of the closing sales price (the "BankGroup Stock Price") for BankGroup
Common Stock as reported on the Nasdaq National Market for the 10 trading day
period ending on the 20th day prior to the Closing Date (as defined in the
Agreement) (the "Exchange Ratio"). If such quotient is less than 0.884, the
Exchange Ratio shall be 0.884; provided that if the BankGroup Stock Price
exceeds $20.50, the Exchange Ratio shall be adjusted to equal the quotient of
$18.125 divided by the BankGroup Stock Price. If such quotient is greater than
1.034, the Exchange Ratio shall be 1.034. All such shares of BankGroup Common
Stock shall be validly issued, fully paid and nonassessable.
The Exchange Ratio at the Effective Time of the Bank Merger shall be
adjusted to reflect any consolidation, split-up, other subdivisions or
combinations of BankGroup Common Stock, any dividend payable in BankGroup Common
Stock, or any capital reorganization involving the reclassification of BankGroup
Common Stock subsequent to the date of the Agreement.
After the Effective Time of the Bank Merger, each holder of a certificate
theretofore representing outstanding shares of Bank Common Stock, upon surrender
of such certificate to Registrar and Transfer Company (which shall act as
exchange agent) (the "Exchange Agent"), unless previously surrendered to Bank in
connection with exercise of the cash election, accompanied by a Letter of
Transmittal shall be entitled to receive in exchange therefor a certificate or
certificates representing the number of full shares of BankGroup Common Stock
for which shares of Bank
-50-
<PAGE>
Common Stock theretofore represented by the certificate or certificates so
surrendered shall have been exchanged as provided (plus cash in lieu of any
fractional share), or cash, if such shares of Bank Common Stock are to be
exchanged for cash pursuant to the cash election. Until so surrendered, each
outstanding certificate which, prior to the Effective Time of the Bank Merger,
represented Bank Common Stock will be deemed to evidence the right to receive
the number of full shares of BankGroup Common Stock into which the shares of
Bank Common Stock represented thereby may be converted, or $15.25 cash if the
cash election provided in Section 2.2 of the Agreement was chosen, and, after
the Effective Time of the Bank Merger (unless the cash election was chosen),
will be deemed for all corporate purposes of BankGroup to evidence ownership of
the number of full shares of BankGroup Common Stock into which the shares of
Bank Common Stock represented thereby were converted. Until such outstanding
certificates formerly representing Bank Common Stock are surrendered, no
dividend payable to holders of record of BankGroup Common Stock for any period
as of any date subsequent to the Effective Time of the Bank Merger shall be paid
to the holder of such outstanding certificates in respect thereof. After the
Effective Time of the Bank Merger there shall be no further registry of transfer
on the records of Bank of shares of Bank Common Stock. If a certificate
representing such shares is presented to the exchange agent, it shall be
canceled and exchanged for a certificate representing shares of BankGroup Common
Stock as herein provided. BankGroup will also issue a certificate in exchange
for shares evidenced by lost certificate(s) provided the record owner thereof
provides BankGroup with such substantiation, indemnification and security as
BankGroup may reasonably require.
Upon surrender of certificates of Bank Common Stock in exchange for
BankGroup Common Stock, there shall be paid to the recordholder of the
certificates of BankGroup Common Stock issued in exchange thereof (i) the amount
of dividends theretofore paid with respect to such full shares of BankGroup
Common Stock as of any date subsequent to the Effective Time of the Bank Merger
which have not yet been paid to a public official pursuant to abandoned property
laws and (ii) at the appropriate payment date the amount of dividends with a
record date after the Effective Time of the Bank Merger, but prior to surrender,
and payment date subsequent to surrender. No interest shall be payable with
respect to such dividends upon surrender of outstanding certificates.
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Cash Election; Election Procedures
Each holder of Bank Common Stock will be given the option of exchanging
all, but not less than all, of his shares for $15.25 cash per share (subject to
all applicable withholding taxes). The number of shares that may be exchanged
for cash and for which cash is paid in lieu of fractional shares cannot exceed
9.90% of the outstanding shares of Bank Common Stock to preserve the "pooling of
interests" accounting treatment of the Bank Merger. The cash election must be
made at the time Bank shareholders vote on the Bank Merger, and, once the Bank
Merger vote has been taken, cash elections will be irrevocable. If the aggregate
of the shares for which a cash election is made and for which cash is to be paid
in lieu of factional shares exceeds 9.90% of the outstanding shares of Bank
Common Stock, shares submitted for cash purchase will be chosen by lot to
accommodate the "pooling of interests" accounting requirement that a shareholder
who chooses the cash election must have all of his or her shares purchased for
cash. Shareholders whose shares are submitted for cash purchase but are not
chosen in the lottery will have their shares exchanged for BankGroup Common
Stock (plus cash in lieu of fractional shares). Shares not exchanged for cash
will be exchanged for BankGroup Common Stock at the Exchange Ratio. If the
aggregate of the shares for which a cash election is made and for which cash is
to be paid in lieu of fractional shares does not exceed 9.90% of the outstanding
shares of Bank Common Stock, all shares submitted for cash will be exchanged for
cash.
An election to receive cash will be properly made only if Bank has
received a properly completed Cash Option Form in accordance with the procedures
and within the time period set forth in the form. A Cash Option Form will be
properly completed only if accompanied by certificates representing all shares
of Bank Common Stock covered thereby.
IF A BANK SHAREHOLDER ELECTS TO SURRENDER ALL OF HIS SHARES FOR CASH, HE
MUST FILE THE CASH OPTION FORM ACCOMPANYING THIS PROXY STATEMENT/PROSPECTUS
PRIOR TO OR AT THE BANK SHAREHOLDER MEETING. ANY BANK SHAREHOLDER WHO DOES NOT
COMPLETE AND RETURN A CASH OPTION FORM PRIOR TO OR AT THE BANK SHAREHOLDER
MEETING CAN ONLY RECEIVE BANKGROUP COMMON STOCK IN THE BANK MERGER. ONCE THE
VOTE ON THE MERGER HAS BEEN TAKEN AT THE BANK SHAREHOLDER MEETING, THE CASH
ELECTION IS IRREVOCABLE. Bank will hold the certificates in safekeeping pending
the Effective Time of the Bank Merger, at which time they will be exchanged for
cash by BankGroup, or in the event of choice of shares for cash purchase by lot,
cash or BankGroup Common Stock. If the Bank Merger is not consummated, Bank will
return the certificates.
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Before or promptly after the Effective Time of the Bank Merger, the
Exchange Agent, will mail the Letter of Transmittal to each person who, as of
the Effective Time of the Bank Merger, holds shares of Bank Common Stock. The
Letter of Transmittal will permit holders of shares of Bank Common Stock to
exchange their shares based on the Exchange Ratio for shares of BankGroup Common
Stock, see "The Bank Merger -- Determination of Exchange Ratio and Exchange for
BankGroup Common Stock."
A request to receive BankGroup Common Stock will be properly made only if
the Exchange Agent has received a properly completed Letter of Transmittal in
accordance with the procedures and within the time period set forth in the
Letter of Transmittal. A Letter of Transmittal will be properly completed only
if accompanied by certificates representing all shares of Bank Common Stock
thereby.
BANK SHAREHOLDERS WHO WISH TO RECEIVE SHARES OF BANKGROUP COMMON STOCK
SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE THE LETTER OF
TRANSMITTAL AND INSTRUCTIONS.
Business of Bank Pending the Bank Merger
Bank has agreed that prior to the Effective Time of the Bank Merger, it
will operate its business substantially as presently operated and in the
ordinary course, and, consistent with such operation, will use its best efforts
to preserve intact its present business organization and relationships with
persons having business dealings with it. The Agreement contains a description
of certain specified actions to be taken or refrained from by Bank in satisfying
this undertaking.
Bank further has agreed that, prior to the Effective Time of the Bank
Merger, it will consult and reasonably cooperate with BankGroup regarding (i)
loan portfolio management, including management and work-out of nonperforming
assets, and credit review and approval procedures; (ii) securities portfolio and
funds management, including management of interest rate risk; and (iii) expense
management, all with the objective of achieving appropriate operating synergies
and appropriate accruals prior to the Effective Time of the Bank Merger.
Conditions to Consummation of the Bank Merger
Consummation of the Bank Merger is conditioned upon the approval of the
holders of more than two-thirds of the outstanding Bank Common Stock entitled to
vote at the Bank Shareholder Meeting. The Bank Merger must be approved by the
Federal Reserve Board and the SCC, applications for which have been filed and
approvals for which are expected to be received. The obligations of Bank and
BankGroup to consummate the Bank
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Merger are further conditioned upon the satisfaction of terms and conditions
contained in the Agreement usual for transactions of this type, including
continued accuracy of representations and warranties made by Bank and BankGroup,
the absence of material adverse change in Bank's and BankGroup's businesses, the
receipt of legal and accounting opinions, and the transaction being accounted
for as a "pooling of interests". See Article V of the Agreement (Annex I).
Termination
The Agreement will be terminated, and the Bank Merger abandoned, if
shareholders of Bank do not approve the Bank Merger. Notwithstanding such
approval by such shareholders, the Agreement also may be terminated at any time
prior to the Effective Time of the Bank Merger by mutual consent, upon breach of
the Agreement, if the Bank Merger is not effective by February 28, 1997, and
upon the occurrence of certain other events specified in the Agreement. See
Article VII of the Agreement (Annex I).
Accounting Treatment
BankGroup and Bank have agreed to use their best efforts to cause the Bank
Merger to be accounted for as a "pooling of interests" and this accounting
treatment is a condition to BankGroup's obligation to complete the Bank Merger.
Operations After the Bank Merger
After consummation of the Bank Merger, BankGroup will continue generally
to conduct the business presently conducted by Bank.
Interests of Certain Persons in the Bank Merger
Certain members of Bank and Bank's management may be deemed to have
interests in the Bank Merger in addition to their interests as shareholders of
Bank generally. In each case, the Bank Board or Bank was aware of their
potential interests, and considered them, among other matters, in approving the
Agreement and the transactions contemplated thereby.
Indemnification; Liability Insurance. After the Effective Time of the Bank
Merger, BankGroup has agreed to provide indemnification to the directors and
officers of Bank following the Closing Date (as defined in the Agreement) to the
same extent as it provides indemnification to directors and officers of
BankGroup and its Subsidiaries and to provide them officers and directors
liability insurance coverage, whether or not they become part of the BankGroup
organization after the Bank Merger.
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Additionally, the Bank shall have the power to indemnify its Directors and
officers against liability for acts or omissions before the Effective Time of
the Bank Merger to the extent permitted under Virginia law. The Bank may
purchase a "tail" policy of insurance to cover acts and omissions of its
Directors and officers occurring prior to the Effective Time of the Bank Merger.
BankGroup Board of Directors. BankGroup has agreed to elect Phillip W.
Dean, a director of Bank, as a member of BankGroup's Board of Directors. Mr.
Dean's eligibility for and election at BankGroup's next following Annual Meeting
of Shareholders will be governed by BankGroup's Bylaws, and for purposes of
eligibility he will be treated as are the BankGroup Directors who were age 68 at
the 1995 Annual Meeting.
Employee Benefits. All employees of Bank immediately prior to the
Effective Time of the Bank Merger ("Transferred Employees") will be covered by
BankGroup's employee benefit plans based on their length of service,
compensation, job classification and position with Bank. BankGroup will
recognize all such employees' service with Bank for eligibility to participate,
for early retirement and for vesting under BankGroup's benefit plans. Except as
described in Schedule T to the Agreement, as of the Effective Time of the Bank
Merger, employees of Bank who become employees of Acquisition, as the surviving
bank, will be entitled to immediate coverage under BankGroup's employee benefit
plans without any waiting period.
Conversion of Stock Options. The Effective Time of the Bank Merger,
outstanding options to acquire Bank Common Stock which have not been exercised
before the Effective Time, shall be converted based on the Exchange Ratio, into
options to acquire BankGroup common stock. Such BankGroup options shall have the
same terms and conditions as the Bank options, except that the exercise price
per share shall be equal to the exercise price per share of Bank Common Stock
divided by the Exchange Ratio and the number of shares of BankGroup common stock
issuable upon the exercise of each BankGroup option shall be equal to the number
of shares covered by each Bank option, multiplied by the Exchange Ratio.
Bank Board of Directors. Except for Mr. Dean, who will become a Director
of BankGroup, the Directors of the Bank are expected to continue to serve on the
Bank's Board of Directors and Board Committees. Such Directors of the Bank are
expected to continue to receive fees for serving as members of the Board of
Directors and its Committees.
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Other than as set forth above, no director or executive officer of Bank or
BankGroup has any direct or indirect material interest in the Bank Merger,
except in the case of directors and executive officers of Bank insofar as
ownership of Bank Common Stock might be deemed such an interest.
Certain Federal Income Tax Consequences
BankGroup and Bank have received an opinion of Hunton & Williams, counsel
to BankGroup, to the effect that for federal income tax purposes the Bank Merger
will be a reorganization under Section 368(a) of the Code, and, consequently,
(i) none of BankGroup, Acquisition or Bank will recognize any taxable gain or
loss upon consummation of the Bank Merger (but income may be recognized as a
result of other possible changes in tax accounting methods), and (ii) the Bank
Merger will result in the tax consequences summarized below for Bank
shareholders who receive BankGroup Common Stock in exchange for Bank Common
Stock pursuant to the Bank Merger. Receipt of substantially the same opinion of
Hunton & Williams as of the Effective Time of the Bank Merger is a condition to
consummation of the Bank Merger. The opinion of Hunton & Williams is based on,
and the opinion to be given as of the Effective Time of the Bank Merger will be
based on, certain customary assumptions and representations regarding, among
other things, the lack of previous dealings between Bank and BankGroup, the
existing and future ownership of Bank Common Stock and BankGroup Common Stock,
and the future business plans for BankGroup.
As described below, the federal income tax consequences to a Bank
shareholder will depend on whether the shareholder exchanges shares of Bank
Common Stock for BankGroup Common Stock or cash and, if the shareholder
exchanges shares of Bank Common Stock for cash, on whether certain related
shareholders receive BankGroup Common Stock or cash. The following summary does
not discuss all potentially relevant federal income tax matters, consequences to
any shareholders subject to special tax treatment (for example, tax-exempt
organizations and foreign persons), or consequences to shareholders who acquired
their Bank Common Stock through the exercise of employee stock options or
otherwise as compensation.
Exchange of Bank Common Stock for BankGroup Common Stock
A holder of shares of Bank Common Stock who receives solely BankGroup
Common Stock in exchange for all his or her shares of Bank Common Stock will not
recognize any gain or loss on the exchange. If a shareholder receives BankGroup
Common Stock and cash in lieu of a fractional share of BankGroup Common Stock,
the shareholder will recognize taxable gain or loss solely with respect to such
fractional share as if the fractional share had been received and then redeemed
for the cash. A shareholder who
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exchanges his or her shares of Bank Common Stock for BankGroup Common Stock will
have an aggregate tax basis in the shares of BankGroup Common Stock (including
any fractional share interest) equal to his or her tax basis in the shares of
Bank Common Stock exchanged therefor. A shareholder's holding period for shares
of BankGroup Common Stock (including any fractional share interest) received in
the Bank Merger will include his or her holding period for the shares of Bank
Common Stock exchanged therefor if they are held as a capital asset at the
Effective Time of the Bank Merger.
Exchange of Bank Common Stock for Cash
The exchange of shares of Bank Common Stock for cash pursuant to the cash
election will be a taxable transaction. Any holder of shares of Bank Common
Stock who exchanges his or her shares of Bank Common Stock for cash should
consult his or her tax advisor to determine whether the exchange is to be taxed
as a sale of stock, which usually would be the case, or whether the cash
received is to be taxed as a dividend. In addition, any shareholder who makes an
election to receive cash for his or her shares should be aware that he may, in
fact, receive BankGroup Common Stock instead of cash if it becomes necessary to
choose by lot shares to be exchanged for cash. Such a holder should therefore be
familiar with the rules, described above, that apply to a holder who receives
BankGroup Common Stock.
The criteria for determining the tax treatment of exchanging a
shareholder's shares of Bank Common Stock for cash are not certain. The United
States Supreme Court's decision in Clark v. Commissioner, which involved a
shareholder's receipt of both cash and stock in exchange for stock of a merging
corporation, suggests that a holder of shares of Bank Common Stock who receives
solely cash for his or her shares of Bank Common Stock should be treated as
receiving shares of BankGroup Common Stock in the Bank Merger, rather than the
cash actually received, and then receiving cash from BankGroup in a hypothetical
redemption of those shares. The treatment of the cash received in that
hypothetical redemption then would depend first on whether the shareholder is
treated as owning any shares of BankGroup Common Stock (taking into account the
constructive ownership rules of Section 318 of the Code, summarized below). If a
shareholder receiving solely cash in the Bank Merger does not actually or
constructively own any shares of BankGroup Common Stock, the shareholder should
recognize gain or loss equal to the difference between the amount of cash
received and his or her tax basis in his or her shares of Bank Common Stock
surrendered in the Bank Merger. If the shareholder actually or constructively
owns shares of BankGroup Common Stock, the cash received in a hypothetical
redemption still should result in the recognition of gain or loss as described
above unless the redemption is treated
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as a dividend distribution. The redemption should not be treated as a dividend
distribution if it meets the requirements to be (i) not essentially equivalent
to a dividend within the meaning of Section 302(b)(1) of the Code or (ii) a
substantially disproportionate redemption of BankGroup Common Stock within the
meaning of Section 302(b)(2) of the Code.
Whether the hypothetical redemption of shares of BankGroup Common Stock
will be essentially equivalent to a dividend depends on the individual
shareholder's circumstances; to avoid dividend treatment in any case, the
hypothetical redemption must result in a "meaningful reduction" in the
percentage of BankGroup Common Stock actually and constructively owned by the
shareholder (including any BankGroup Common Stock deemed received in the Bank
Merger). The Internal Revenue Service has indicated in a published ruling that
any reduction in percentage ownership of a publicly-held corporation by a small
minority shareholder who exercises no control over corporate affairs constitutes
a meaningful reduction. The hypothetical redemption of shares of BankGroup
Common Stock will be substantially disproportionate if the percentage of
BankGroup Common Stock actually and constructively owned by the shareholder
after that redemption is less than 80% of the percentage of BankGroup Common
Stock actually and constructively owned by the shareholder (including BankGroup
Common Stock deemed received in the Bank Merger) immediately before the
hypothetical redemption.
Despite the Clark decision, the Internal Revenue Service might assert that
the receipt of solely cash in the Bank Merger is to be treated as a distribution
in redemption of the shareholder's Bank Common Stock before, and separate from,
the Bank Merger. The Internal Revenue Service apparently has taken such a
position in private letter rulings, which are not legal precedent, issued after
the Clark decision. Under that position, if a holder of shares of Bank Common
Stock receiving solely cash does not constructively own (within the meaning of
Section 318 of the Code) shares of Bank Common Stock held by another shareholder
who exchanges such shares for BankGroup Common Stock, the shareholder receiving
solely cash generally will recognize gain or loss equal to the difference
between the amount of cash received and his or her tax basis in his or her
shares of Bank Common Stock. If the holder of shares of Bank Common Stock does
constructively own shares of Bank Common Stock exchanged for BankGroup Common
Stock, the cash received in a hypothetical redemption of Bank Common Stock
generally will be taxable as a dividend unless the redemption meets the
requirements to be (i) not essentially equivalent to a dividend within the
meaning of Section 302(b)(1) of the Code or (ii) a substantially
disproportionate redemption of Bank Common Stock within the meaning of Section
302(b)(2) of the Code. Those requirements would be applied to the shareholder's
actual and constructive
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ownership of Bank Common Stock, in contrast to the approach discussed above
where they are applied to the shareholder's actual and constructive ownership of
BankGroup Common Stock.
Section 318 of the Code
Under Section 318(a) of the Code, a shareholder is treated as owning (i)
stock that the shareholder has an option or other right to acquire, (ii) stock
owned by the shareholder's spouse, children, grandchildren, and parents, and
(iii) stock owned by certain trusts of which the shareholder is a beneficiary,
any estate of which the shareholder is a beneficiary, any partnership or "S
corporation" in which the shareholder is a partner or shareholder, and any non-S
corporation of which the shareholder owns at least 50% in value of the stock. A
shareholder that is a partnership or S corporation, estate, trust, or non-S
corporation is treated as owning stock owned (as the case may be) by partners or
S corporation shareholders, by estate beneficiaries, by certain trust
beneficiaries, and by 50% shareholders of a non-S corporate shareholder. Stock
constructively owned by a person generally is treated as being owned by that
person for the purpose of attributing ownership to another person. In certain
cases, a shareholder who will actually own no BankGroup Common Stock may be able
to avoid application of the family attribution rules of Section 318 of the Code
by filing a timely waiver agreement with the Internal Revenue Service pursuant
to Section 302(c)(2) of the Code and applicable regulations.
The preceding discussion summarizes for general information the material
federal income tax consequences of the Bank Merger to Bank shareholders. The tax
consequences to any particular shareholder may depend on the shareholder's
circumstances. Bank shareholders are urged to consult their own tax advisors
with regard to federal, state, and local tax consequences.
THE BANK BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE BANK MERGER.
Rights of Appraisal
As provided in Virginia Code ss. 6.1-43, holders of Bank Common Stock do
not have the right to dissent and demand payment of fair value for their shares.
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MAINSTREET BANKGROUP INCORPORATED
General
MainStreet BankGroup Incorporated is a multi-bank holding company
headquartered in Martinsville, Virginia, with total assets of $967.7 million at
June 30, 1996. Organized in 1977, BankGroup through its six affiliate banks (the
"Banks"), engages in a general banking business and provides a broad spectrum of
full-service banking to consumers, businesses, institutions and governments,
including accepting demand, savings and time deposits; making commercial,
personal, installment, mortgage and construction loans; issuing letters of
credit; and providing discount brokerage, trust services, bank-card services,
mortgage banking and investment services.
The Banks seek customers whose total financial requirements they can
serve. As a result, most of the Banks' business customers are small and
medium-sized entities. While BankGroup considers this middle market to be its
primary business market, BankGroup's lead bank, Piedmont Trust Bank, has banking
relationships with many of the larger textile and furniture manufacturing
companies located in its market area.
Principal markets served are the City of Martinsville and Henry County;
the Towns of Hillsville and Galax, and Carroll and Grayson Counties; the Towns
of Ferrum and Rocky Mount and Franklin County; the Town of Forest, City of
Lynchburg, and Bedford, Campbell and Amherst Counties; the Town of Stuart and
Patrick County; the Towns of Saltville and Chilhowie and Smyth County, Virginia
and contiguous areas. BankGroup's affiliate Banks operate a total of 29 offices.
BankGroup continually seeks acquisition opportunities for banks and bank
related financial institutions. BankGroup's acquisition philosophy permits the
Banks to operate as separately incorporated banks with their historical names
and board of directors. BankGroup believes that this philosophy maintains
community loyalty at the Banks and has a positive effect on operating
performance. BankGroup seeks to capitalize on the local identity of the Banks
while providing the services and efficiencies of a larger bank holding company.
During 1994, BankGroup moved to a centralized approach in management,
providing direction to the Banks and performing selected services in the
compliance, data processing, financial management, human resources, investment,
accounting, marketing, mortgage, trust and audit areas. The Banks are still
permitted to approve loans up to a certain credit limit, above which central
credit administration must consent. The Banks also still must approve
investments and other activities consistent with
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past practices and the needs of their communities. To coordinate the activities
of the Banks and to maintain internal controls, BankGroup utilizes a planning
and budgeting process which involves Company officers, presidents of the Banks,
and principal department heads. Performance targets and budget goals are
developed for each Bank on an annual basis, with financial and operating results
reported and reviewed periodically during the year.
The Banks
Piedmont Trust Bank. Piedmont Trust Bank ("Piedmont") was incorporated in
1921 under the laws of Virginia. Piedmont's main office is in the City of
Martinsville, a commercial center in southwest Virginia, and it has six branches
in Martinsville and Henry County. Its primary service area has a population of
approximately 73,000 and its economy is oriented toward the textile, furniture
and prebuilt housing industries. Piedmont is insured by the Federal Deposit
Insurance Corporation (the "FDIC") and is supervised and examined by the Federal
Reserve Board and the SCC. It engages in a general commercial banking business
and offers the range of banking services that can be expected of a banking
organization of its size. In addition, Piedmont has a Trust Department with
assets in excess of $627.5 million under management, which includes custodial
accounts, at June 30, 1996. Piedmont is the largest bank in the Martinsville
trade area with total assets of approximately $467.1 million, deposits of
approximately $310.0 million and net loans, net of unearned income, of
approximately $317.4 million at June 30, 1996.
Bank of Carroll. Bank of Carroll ("Carroll"), incorporated in 1971 under
the laws of Virginia, was acquired by BankGroup in 1977. At June 30, 1996, it
had total assets of approximately $60.5 million. Its main office is located in
Hillsville, Carroll County, Virginia, and it has branches in Cana and Galax,
Virginia. Its primary service area has a population of approximately 33,000.
Carroll is supervised and examined by the Federal Reserve Board and the SCC and
engages in a general commercial banking business.
Bank of Ferrum. Bank of Ferrum ("Ferrum"), incorporated in 1917 under the
laws of Virginia and converted during the 1920's to a national bank, was
acquired by BankGroup in 1981. As of June 1, 1995, Ferrum converted its charter
to a state bank under the laws of Virginia. When Ferrum converted to a state
charter on June 1, 1995, the name changed from First National Bank of Ferrum to
Bank of Ferrum. At June 30, 1996, it had total assets of approximately $92.4
million. Its main banking office is located at Ferrum, Virginia, with branches
at Oak Level and two offices located in Rocky Mount, Virginia. Its primary
service area has a population of approximately 40,000. Ferrum is
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supervised and examined by the Federal Reserve Board and the SCC and engages in
a general commercial banking business.
First Community Bank. First Community Bank ("Community"), incorporated in
1978 under the laws of Virginia, was acquired by BankGroup in 1983. At June 30,
1996, it had total assets of approximately $115.7 million. Community's main
office is located in Forest, Virginia, and it operates seven branches in the
Lynchburg and Forest area. Its primary service area has a population of
approximately 112,000. Community is regulated by the Federal Reserve Board and
the SCC. Retail and commercial banking services are provided for customers in
Forest, Bedford, Campbell and Amherst Counties and the City of Lynchburg,
Virginia.
The First Bank of Stuart. The First Bank of Stuart ("Stuart") was
incorporated in 1920 as a national bank and acquired by BankGroup in 1986.
Stuart converted its charter to a state bank and began operating as a state
banking corporation on September 1, 1995. When Stuart was converted to a state
charter on September 1, 1995, the name changed from The First National Bank of
Stuart to The First Bank of Stuart. At June 30, 1996, it had total assets of
approximately $125.1 million. Its main office is located in Stuart, Virginia,
and it has six other offices all located in Patrick County, Virginia. It's
primary service area has a population of approximately 17,500. Stuart is the
largest bank in Patrick County. Stuart is regulated by the Federal Reserve Board
and the SCC.
The First Community Bank of Saltville. The First Community Bank of
Saltville ("Saltville") was established in 1903 as a state bank under the laws
of Virginia and was incorporated in 1918 as a national bank and acquired by
BankGroup in 1986. As of August 1, 1995, Saltville completed its conversion from
a national bank to a Virginia banking corporation. When Saltville converted to a
state charter on August 1, 1995, the name changed from The First National Bank
of Saltville to The First Community Bank of Saltville. At June 30, 1996, it had
total assets of approximately $118.4 million. Its main office is located in
Saltville, Virginia, and it has two other offices located in Smyth County.
Saltville is the third largest of the four banks in Smyth County. Its primary
service area has a population of approximately 32,000. Saltville engages in a
general commercial banking business and is regulated by the Federal Reserve
Board and the SCC.
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Recent Development
On April 17, 1996, BankGroup announced that it had reached agreement to
acquire The First National Bank of Clifton Forge, a national banking association
located in Clifton Forge, Virginia, subject to shareholder and regulatory
approval. Under terms of the agreement, BankGroup agreed to pay shareholders of
The First National Bank of Clifton Forge the equivalent of $83.20 per share for
each share of The First National Bank of Clifton Forge Common Stock outstanding.
The transaction is valued at approximately $26.2 million, which will be paid in
BankGroup Common Stock. The exchange ratio will be determined during a
measurement period prior to consummation of the transaction, which is expected
around September 30, 1996.
The First National Bank of Clifton Forge serves Clifton Forge, Alleghany
County, Bath County and northern Botetourt, Virginia. The First National Bank of
Clifton Forge operates one office in Clifton Forge. At June 30, 1996, The First
National Bank of Clifton Forge reported total assets of $100.6 million.
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PRICE RANGE OF BANKGROUP COMMON STOCK AND DIVIDENDS
BankGroup's Common Stock is traded in the over-the-counter market and is
quoted on The Nasdaq National Market under the symbol MSBC. The following table
sets forth for the periods indicated the high and low closing prices per share
of Common Stock as reported on The Nasdaq National Market, and the cash
dividends paid per share of Common Stock. Information in the table gives effect
to a 5-for-4 stock split in the form of a stock dividend effective July 15, 1993
and a two-for-one stock split in the form of a stock dividend effective March 4,
1996.
Price Range
High Low Dividends
1994
First Quarter........................ $ 11.00 10.0625 .08
Second Quarter........................ 11.25 10.00 .08
Third Quarter......................... 12.75 10.00 .08
Fourth Quarter........................ 12.50 9.00 .09
1995
First Quarter......................... 11.75 9.375 .09
Second Quarter........................ 13.125 11.00 .10
Third Quarter......................... 13.125 11.875 .10
Fourth Quarter........................ 13.375 12.625 .10
1996
First Quarter......................... 17.00 12.75 .115
Second Quarter ....................... 17.00 15.50 .115
As of June 30, 1996 there were approximately 2,364 holders of record of
the outstanding shares of BankGroup Common Stock.
The payment of future dividends will depend upon future earnings of
BankGroup, its financial condition and other relevant factors, including the
amount of dividends payable to BankGroup by the Banks. Various federal and state
laws, regulations and policies limit the ability of BankGroup's subsidiary banks
to pay dividends to BankGroup, which affects BankGroup's ability to pay
dividends to shareholders. See "Regulation and Supervision."
HANOVER BANK
General
The Bank is a Virginia commercial banking corporation that was organized
and chartered under the laws of the Commonwealth of Virginia on October 7, 1987
and commenced business on April 4, 1988.
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The Bank is a state member bank of the Federal Reserve System and is
examined by that agency and the Virginia banking regulatory authorities. The
Bank conducts its commercial banking business under a variety of federal and
state laws and regulations, some of which relate to interest rates, required
reserves, restrictions on loans to officers, the use of correspondent balances,
the establishment of branches, and the acquisition of subsidiaries. The Federal
Reserve Board and the Virginia State Corporation Commission's Bureau of
Financial Affairs has statutory authority to issue "cease and desist" orders to
the Bank with respect to actions deemed to constitute a serious threat to the
safety, soundness and stability of the Bank.
The Bank offers most services normally offered by a full-service
community bank, including commercial and consumer demand and time deposit
accounts, commercial and consumer loans, Visa and MasterCard revolving credit
accounts, drive-in banking services and automated teller machine transactions.
No material portion of the Bank's deposits has been obtained from a single or
small group of customers and the loss of the deposits of any one customer or of
a group of customers would not have an adverse material effect on the business
of the Bank.
Bank operations are conducted in four locations in the county of
Hanover, Virginia. In addition, the Bank operates a full-service branch office
in the adjacent County of Henrico, Virginia. On June 30, 1996 Hanover Bank had
thirty-three full-time and six part-time employees.
Competition
The Bank's primary service area is the County of Hanover, Virginia with
particular emphasis on the eastern and central markets within the County. The
Bank also operates an office in the adjacent county of Henrico, Virginia. The
Board of Directors, the majority of whom are residents of the Bank's primary
service area, believes that the existing and future market in this service area
presents a beneficial opportunity for a locally operated bank.
The banking business in Virginia, as elsewhere, is highly competitive.
Other Virginia banking institutions with substantially greater financial
resources than the Bank are aggressively competing in the Bank's service area
for loans, deposit and other banking services. At June 30, 1996 there were
eleven commercial banks with twenty-eight branch offices and three savings and
loan associations with three offices in the Bank's primary service area in
Hanover County. In addition, one commercial credit union competes with the Bank
within the county. Of the total number of commercial banks noted, there are four
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other independent community banks operating within Hanover County, with five
branch offices located in Mechanicsville, Virginia and one located in the Town
of Ashland, Virginia.
Regulation and Supervision
The operations of Hanover Bank are subject to federal and state statutes
which apply to state member banks of the Federal Reserve System. The Bank, as a
state member bank, is supervised and regularly examined by the Department of
Bank Supervision and Regulation of the Federal Reserve Bank. At the state level,
the Bank is subject to supervision and examination by the Virginia State
Corporation Commission's Bureau of Financial Institutions.
Properties
The Bank owns or leases buildings that are used in the normal course of
business. The Bank's principal or main office is located within owned property
at 7021 Mechanicsville Turnpike, Hanover County, Virginia. A combined branch
office and operations center are located within leased property at 8071
Mechanicsville Turnpike, also located in Hanover County. The Bank's third office
in Hanover County is located within owned property at 300 England Street,
Ashland, Virginia. The Bank's fourth office is located at 8001 W. Broad Street
in Henrico County, Virginia. This property, including land and improvements, was
purchased by the Bank in May 1995 for $240,000.
The Bank's depository branch and operations center is leased at fair
market value from Jay T. and Page G. Thompson, parents of the Bank's Chairman of
the Board, Jay T. Thompson, III. The lease agreement has a fixed term of three
years expiring in April 1997. The current annual lease expense is $23,400. In
late 1994 the Bank leased additional space to house its credit administration
and executive offices from a Virginia general partnership. Located within
Hanover County at 7502 Lee Davis Road and leased at fair market value under a
twenty-four month term expiring in October 1996, the current annual lease
expense is $16,800. The partnership includes one of the Bank's Board of
Directors, John T. Wash.
The Bank purchased land in mid 1995 to develop its fifth retail branch
office, also in Henrico County, Virginia for $400,000. The property is
approximately a one acre parcel situated in a multi-use development project in
the western part of the county known as the Concourse At Wyndham. With
regulatory approval obtained in late 1995 to develop this site as a commercial
banking facility, Bank management believes the branch office will open for
business by Fall 1996.
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MARKET FOR AND DIVIDENDS PAID ON BANK COMMON STOCK
Market Information
Hanover Bank's common stock is currently traded on a limited basis as an
Over-The-Counter issue on the NASDAQ Bulletin Board. Reported sales of Bank's
stock have been in the $9.00 to $14.50 range. The known trading ranges for the
Bank's common stock in 1994, 1995 and 1996 are as follows:
HIGH LOW
1994 1st Quarter $ 10.00 $ 9.00
---- 2nd Quarter 10.25 9.25
3rd Quarter 9.75 9.00
4th Quarter 10.00 9.25
1995 1st Quarter $ 10.63 $ 9.50
---- 2nd Quarter 11.00 10.00
3rd Quarter 11.50 10.25
4th Quarter 11.50 9.50
1996 1st Quarter $ 10.50 $ 9.50
---- 2nd Quarter 14.50 9.75
Due to a limited scope of trading activity in the Bank's stock, the
aforementioned trading ranges were derived from inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent overall actual
transactions. The source of high and low price trading activity was derived from
the Richmond, Virginia brokerage firm of Anderson and Strudwick.
Holders
On August 23, 1993 the Bank's Board of Directors approved a two-for-one
stock split payable to stockholders of record on September 15, 1993, with a
payment date of September 30, 1993. No change in stockholders' equity resulted
from this transaction.
On ____________, 1996 there were _____ holders of Hanover Bank common
stock. As of __________, 1996, the total number of outstanding shares of common
stock was 1,471,536.
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Stock Dividends
On December 10, 1992, the Bank's Board of Directors declared a ten
percent stock dividend to shareholders of record. This transaction had the
effect of increasing the number of shares from 658,922 to 724,768 and resulted
in the transfer of $560,084 (the par value of the additional shares issued) from
undivided profits to common stock and surplus.
Cash Dividends
On September 27, 1994 the Board of Directors declared the Bank's first
quarterly cash dividend of three cents per share payable to all shareholders of
record at December 20, 1994. A second quarterly dividend of three cents per
share was distributed for the first quarter of 1995. At the Bank's 1995 Annual
Meeting of Shareholders in May 1995, management announced an increase in the
quarterly dividend rate to five cents per share for all shareholders of record
at May 30, 1995. Additional cash dividends of five cents per share were paid for
the remaining two quarters of 1995. As a result of dividends paid in 1995,
undivided profits were diluted by $260,916. For the first quarter of 1996, the
Bank's cash dividend rate with a record date of March 30, 1996 was five cents
per share. For the second quarter of 1996, the Bank's cash dividend rate with a
record date of June 30, 1996 was increased to six cents per share. As a result
of the two quarterly dividends paid in 1996, undivided profits were diluted by
$161,869.
OWNERSHIP BY CERTAIN BENEFICIAL OWNERS OF BANK STOCK
The following table sets forth certain information regarding the
beneficial ownership of Bank Common Stock as of June 30, 1996 by each of the
Bank's directors and by all directors and executive officers of the Bank as a
group.
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Shares Beneficially Owned
as of June 30, 1996(1)
Name No. of Shares Percent
Thomas C. Bishop 3,200 .20
E. Wincel Brooks 29,700 1.84
E. Tyree Chappell 50,832 3.12
Phillip W. Dean 17,840 1.10
Carol B. Godsey 19,510 1.20
Stewart R. Hargrove 19,800 1.22
James A. Hill 40,138 2.33
Jay T. Thompson, III 48,490 2.91
Ted N. Tussey 17,396 1.08
John T. Wash 18,608 1.16
------- -----
All directors and executive 294,599 18.22%
officers as a group (15 individuals)
represent 18.22 percent of stock.
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(1) For the purposes of this table, pursuant to rules promulgated under the
Exchange Act, an individual is considered to "beneficially own" any shares of
Bank Common Stock if he or she has or shares, (a) voting power, which includes
the power to vote or direct the voting of the shares; or (b) investment power,
which includes the power to dispose or direct the disposition of the shares. A
person is deemed to have beneficial ownership of any shares of Bank Common Stock
which may be acquired within 60 days pursuant to the exercise of stock options.
Unless otherwise indicated, a director has sole voting power and sole investment
power with respect to the indicated shares. Shares of Common Stock which may be
acquired within 60 days of the Record Date are deemed to be outstanding shares
of Bank Common Stock beneficially owned by such person(s) but are not deemed to
be outstanding for the purposes of computing the percentage of Bank Common Stock
owned by any other person or group.
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REGULATION AND SUPERVISION
Bank holding companies and banks operate in a highly regulated
environment and are regularly examined by federal and state regulators. The
following description briefly discusses certain provisions of federal and state
laws and certain regulations and the potential impact of such provisions on
BankGroup and the Banks. These federal and state laws and regulations have been
enacted for the protection of depositors in national and state banks and not for
the protection of shareholders of bank holding companies such as BankGroup.
References to "Banks" means the current subsidiary banks of BankGroup.
Bank Holding Companies
As a bank holding company registered under the Bank Holding Company Act
of 1956, as amended (the "BHCA"), BankGroup is subject to regulation by the
Federal Reserve Board. The Federal Reserve Board has jurisdiction under the BHCA
to approve any bank or nonbank acquisition, merger or consolidation proposed by
a bank holding company. The BHCA generally limits the activities of a bank
holding company and its subsidiaries to that of banking, managing or controlling
banks, or any other activity which is so closely related to banking or to
managing or controlling banks as to be a proper incident thereto.
Federal law permits bank holding companies from any state to acquire
banks and bank holding companies located in any other state. Effective June 1,
1997, the law will allow interstate bank mergers, subject to earlier "opt-in" or
"opt-out" action by individual states. The law currently allows interstate
branch acquisitions and de novo branching if permitted by the host state.
Virginia has adopted early "opt-in" legislation that allows interstate bank
mergers. These laws also permit interstate branch acquisitions and de novo
branching in Virginia by out-of-state banks if reciprocal treatment is accorded
Virginia banks in the state of the acquiror.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries by federal law
and regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance fund in the
event the depository institution becomes in danger of default or in default. For
example, under a policy of the Federal Reserve Board with respect to bank
holding company operations, a bank holding company is required to serve as a
source of financial strength to its subsidiary depository institutions and to
commit resources to support such institutions in circumstances where it might
not do so otherwise. In addition, the "cross-
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guarantee" provisions of federal law require insured depository institutions
under common control to reimburse the FDIC for any loss suffered or reasonably
anticipated by either the Savings Association Insurance Fund ("SAIF") or the
Bank Insurance Fund ("BIF") as a result of the default of a commonly controlled
insured depository institution or for any assistance provided by the FDIC to a
commonly controlled insured depository institution in danger of default. The
FDIC may decline to enforce the cross- guarantee provisions if it determines
that a waiver is in the best interest of the SAIF or the BIF or both. The FDIC's
claim for reimbursement is superior to claims of shareholders of the insured
depository institution or its holding company but is subordinate to claims of
depositors, secured creditors and holders of subordinated debt (other than
affiliates) of the commonly controlled insured depository institution.
The Federal Deposit Insurance Act ("FDIA") also provides that amounts
received from the liquidation or other resolution of any insured depository
institution by any receiver must be distributed (after payment of secured
claims) to pay the deposit liabilities of the institution prior to payment of
any other general or unsecured senior liability, subordinated liability, general
creditor or shareholder. This provision would give depositors a preference over
general and subordinated creditors and shareholders in the event a receiver is
appointed to distribute the assets of any of the Banks.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring more than 5% of the voting shares of any company that is not a
bank and from engaging in any business other than banking or managing or
controlling banks. Under the BHCA, the Federal Reserve Board is authorized to
approve the ownership of shares by a bank holding company in any company the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or to managing or controlling banks as to be a proper
incident thereto. The Federal Reserve Board has by regulation determined that
certain activities are closely related to banking within the meaning of the
BHCA. These activities include: operating a mortgage company, finance company,
credit card company or factoring company; performing certain data processing
operations; providing investment and financial advice; and acting as an
insurance agent for certain types of credit-related insurance.
BankGroup is registered under the bank holding company laws of Virginia.
Accordingly, BankGroup and the Banks are subject to further regulation and
supervision by the SCC.
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Capital Requirements
The Federal Reserve Board and the FDIC have issued substantially similar
risk-based and leverage capital guidelines applicable to United States banking
organizations. In addition, those regulatory agencies may from time to time
require that a banking organization maintain capital above the minimum levels
because of its financial condition or actual or anticipated growth. Under the
risk-based capital requirements of these federal bank regulatory agencies,
BankGroup and the Banks are required to maintain a minimum ratio of total
capital to risk- weighted assets of at least 8%. At least half of the total
capital is required to be "Tier 1 capital", which consists principally of common
and certain qualifying preferred shareholders' equity, less certain intangibles
and other adjustments. The remainder "Tier 2 capital" consists of a limited
amount of subordinated and other qualifying debt (including certain hybrid
capital instruments) and a limited amount of the general loan loss allowance.
The Tier 1 and total capital to risk-weighted asset ratios of BankGroup as of
June 30, 1996 were 13.38% and 14.63%, respectively, exceeding the minimums
required.
In addition, each of the federal regulatory agencies has established a
minimum leverage capital ratio (Tier 1 capital to average tangible assets).
These guidelines provide for a minimum ratio of 3% for banks and bank holding
companies that meet certain specified criteria, including that they have the
highest regulatory examination rating and are not contemplating significant
growth or expansion. All other institutions are expected to maintain a leverage
ratio of at least 100 to 200 basis points above the minimum. The Tier 1 capital
leverage ratio of BankGroup as of June 30, 1996, was 8.37%. The guidelines also
provide that banking organizations experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels, without significant reliance on intangible
assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires each federal banking agency to revise its risk-based capital
standards to ensure that those standards take adequate account of interest rate
risk, concentration of credit risk and the risks of nontraditional activities,
as well as reflect the actual performance and expected risk of loss on
multi-family mortgages. Rules have been promulgated with respect to
concentration of credit risk and the risks of non-traditional activities, and
also as to the risk of loss on multi-family mortgages. A proposed rule with
respect to interest rate risk is still under consideration. The proposal would
allow institutions to use internal risk models to measure interest rate risk (if
the models are acceptable to examiners) and would require additional
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capital of institutions identified as having excess interest rate risk.
BankGroup does not expect any of these rules, either individually or in the
aggregate, to have a material impact on its capital requirements.
Limits on Dividends and Other Payments
BankGroup is a legal entity separate and distinct from its subsidiary
institutions. Most of BankGroup's revenues come from dividends paid by the
Banks. Each of the Banks is a state member bank of the Federal Reserve System.
As a result, the Banks are regulated by the Federal Reserve Board and the SCC.
There are various regulatory limitations applicable to the payment of dividends
by the Banks as well as the payment of dividends by BankGroup to its
shareholders. Under applicable laws of Virginia to the Banks, prior approval
from the bank regulatory agencies is required if cash dividends declared in any
given year exceed net income for that year plus net income for the prior two
years less all dividends paid during the current year and two prior years. Under
existing supervisory practices, at June 30, 1996, the Banks could have paid
additional dividends of approximately $14.5 million, without obtaining prior
regulatory approval. The payment of dividends by the Banks or BankGroup may also
be limited by other factors, such as requirements to maintain capital above
regulatory guidelines. Bank regulatory agencies have authority to prohibit any
Bank or BankGroup from engaging in an unsafe or unsound practice in conducting
their business. The payment of dividends, depending upon the financial condition
of the Bank in question, or BankGroup, could be deemed to constitute such an
unsafe or unsound practice. The Federal Reserve Board has stated that, as a
matter of prudent banking, a bank or bank holding company should not maintain
its existing rate of cash dividends on common stock unless (1) the
organization's net income available to common shareholders over the past year
has been sufficient to fund fully the dividends and (2) the prospective rate of
earnings retention appears consistent with the organization's capital needs,
asset quality, and overall financial condition.
Under the FDIA, insured depository institutions such as the Banks are
prohibited from making capital distributions, including the payment of
dividends, if, after making such distribution, the institution would become
"undercapitalized" (as such term is used in the statute). Based on the Banks
current financial condition, BankGroup does not expect that this provision will
have any impact on its ability to obtain dividends from the Banks.
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In addition to limitations on dividends, the Banks are limited in the
amount of loans and other extensions of credit that may be extended to
BankGroup, and any such loans or extensions of credit are subject to collateral
security requirements. Generally, up to 10% of the Banks' regulatory capital,
surplus, undivided profits, allowance for loan losses and contingency reserves
may be loaned to BankGroup. As of June 30, 1996, approximately $8.4 million of
credit was available to BankGroup under this limitation.
Banks
The Banks are supervised and regularly examined by the Federal Reserve
Board and the SCC. The Banks are also subject to various requirements and
restrictions under federal and state law such as limitations on the types of
services that they may offer, the nature of investments that they make, and the
amounts of loans that may be granted. Various consumer and compliance laws and
regulations also affect the operations of the Banks. In addition to the impact
of regulation, the Banks are affected significantly by actions of the Federal
Reserve Board in attempting to control the money supply and the availability of
credit.
The Banks also are subject to the requirements of the Community
Reinvestment Act (the "CRA"). The CRA imposes on financial institutions an
affirmative and ongoing obligation to meet the credit needs of their local
communities, including low- and moderate-income neighborhoods, consistent with
the safe and sound operation of those institutions. Each financial institution's
efforts in meeting community credit needs currently are evaluated as part of the
examination process pursuant to twelve assessment factors. These factors also
are considered in evaluating mergers, acquisitions and applications to open
branches. The Banks have attained either an "outstanding" or "satisfactory"
rating on their most recent CRA performance evaluations.
As a result of a 1993 Presidential initiative, each of the federal
banking agencies recently approved a final rule establishing a new framework for
the implementation of CRA. The new rule, which will become fully effective on
July 1, 1997, will emphasize an institution's performance in meeting community
credit needs. Institutions will be evaluated on the basis of a three pronged
lending, investment and service test, with lending being of primary importance.
CRA ratings will continue to be a matter of public record, and CRA performance
will continue to be evaluated in connection with mergers, acquisitions and
branch applications. Although the new rule is likely to have some impact on
BankGroup's business practices, it is not anticipated that any changes will be
material.
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Deposit Insurance
As institutions with deposits insured by BIF, the Banks also are subject
to insurance assessments imposed by the FDIC. Currently, a risk-based assessment
schedule imposes assessments on BIF deposits, ranging from an annual minimum
payment of $2,000 for well-capitalized institutions to .27% of deposits for
under- capitalized institutions. All banks in BankGroup currently are assessed
as well-capitalized.
Other Safety and Soundness Regulations
The federal banking agencies have broad powers under current federal law
to take prompt corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the institutions
in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized," as such terms are defined under uniform regulations defining
such capital levels issued by each of the federal banking agencies.
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DESCRIPTION OF CAPITAL STOCK OF BANKGROUP
BankGroup has authority to issue 1,000,000 shares of Preferred Stock, of
which no shares are issued and outstanding, and 20,000,000 shares of Common
Stock, of which 8,587,245 shares were issued and outstanding as of June 30, 1996
held by approximately 2,364 holders of record. BankGroup Common Stock is traded
in the over-the-counter market and quoted on The Nasdaq National Market under
the symbol "MSBC".
The following summary description of capital stock of BankGroup is
qualified in its entirety by reference to BankGroup's Articles of Incorporation,
a copy of which has been incorporated by reference as an exhibit to the
Registration Statement.
Preferred Stock
The Board of Directors, without further action by the shareholders, is
authorized to designate and issue in series Preferred Stock and to fix as to any
series the dividend rate, redemption prices, preferences on dissolution, the
terms of any sinking fund, conversion rights, voting rights, and any other
preferences or special rights and qualifications. Holders of the Preferred
Stock, if and when issued, will be entitled to vote as required under applicable
Virginia law. Such law includes provisions for the voting of the Preferred Stock
in the case of any amendment to the Articles of Incorporation affecting the
rights of holders of Preferred Stock, the payment of certain stock dividends,
merger or consolidation, sale of all or substantially all of BankGroup's assets,
and dissolution. The Board of Directors without shareholder approval can issue
Preferred Stock with voting and conversion rights which would adversely affect
the voting power of the common shareholders. In addition, the Preferred Stock
could be used in a manner which would discourage or make more difficult an
attempt to acquire control of BankGroup. BankGroup's Board of Directors has
designated a series of 1,000,000 shares of Participating Convertible Preferred
Stock, Series A (the "Series A Preferred Stock"), no shares of which have been
issued. The Series A Preferred Stock was created in connection with the
shareholder rights plan described below.
Common Stock
Holders of Common Stock are entitled to one vote per share on each
matter to be voted upon by the shareholders. Directors are elected by a vote of
the holders of Common Stock. Dividends may be paid to the holders of Common
Stock when, as and if declared by the Board of Directors of out of funds legally
available for such purposes. The principal source of funds for
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dividend payments is dividends received from the Banks. Payment of dividends to
BankGroup by the Banks, without prior regulatory approval, is also subject to
various state and federal regulatory limitations. Holders of Common Stock have
no conversion, redemption, cumulative voting or preemptive rights. There is no
sinking fund obligation with respect to the Common Stock. In the event of any
liquidation, dissolution or winding up of BankGroup, after payment or provision
for payment of the debts and other liabilities and the preferential amounts to
which the holders of Preferred Stock, if any, are entitled, the holders of
Common Stock will be entitled to share ratably in any remaining assets.
All outstanding shares of Common Stock are, and the shares of Common
Stock to be issued in the Bank Merger will be, when issued, duly and validly
issued, fully paid and nonassessable.
Rights
Pursuant to a Rights Agreement (the "Rights Agreement") dated as of
January 18, 1990, BankGroup distributed as a dividend one Right for each
outstanding share of Common Stock. The number of Rights associated with each
share of Common Stock outstanding as of June 30, 1993 was adjusted
proportionately for the five-for-four stock split effected in the form of a
dividend paid July 30, 1993 and the two-for-one stock split effected in the form
of a stock dividend paid March 15, 1996. Each Right entitles the holder to buy
fractional shares of Participating Cumulative Preferred Stock, Series A, par
value $5.00 per share, at an exercise price of $24, subject to adjustment. The
Rights will become exercisable only if a person or group acquires or announces a
tender offer for 15% or more of the outstanding Common Stock. When exercisable,
BankGroup may issue a share of Common Stock in exchange for each Right other
than those held by such person or group. If a person or group acquires 30% or
more of the outstanding Common Stock, each Right will entitle the holder, other
than the acquiring person, upon payment of the exercise price, to acquire
Preferred Stock or, at the option of BankGroup, Common Stock, having a value
equal to twice the Right's exercise price. If BankGroup is acquired in a merger
or other business combination or if 50% of its earnings power is sold, each
Right will entitle the holder, other than the acquiring person, to purchase
securities of the surviving company having a market value equal to twice the
exercise price of the Right. The Rights will expire on January 18, 2000, and may
be redeemed by BankGroup at any time prior to the tenth day after an
announcement that a 10% position has been acquired, unless such time period has
been extended by the Board of Directors.
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Until such time as a person or group acquires or announces a tender
offer for 15% or more of the Common Stock, (i) the Rights will be evidenced by
the Common Stock certificates and will be transferred with and only with such
Common Stock certificates, and (ii) the surrender for transfer of any
certificate for Common Stock will also constitute the transfer of the Rights
associated with the Common Stock represented by such certificate. Rights may not
be transferred, directly or indirectly (i) to any person or group that has
acquired, or obtained the right to acquire, beneficial ownership of 10% or more
of the Rights (an "Acquiring Person"), (ii) to any person in connection with a
transaction in which such person becomes an Acquiring Person or (iii) to any
affiliate or associate of any such person. Any Right that is the subject of a
purported transfer to any such person will be null and void.
The Rights can be expected to have certain anti-takeover effects if an
acquisition transaction not approved by the Board of Directors is proposed by a
person or group. In such event, the Rights will cause substantial dilution to
any person or group that acquires more than 15% of the outstanding shares of
Common Stock of BankGroup if certain events thereafter occur without the Rights
having been redeemed. For example, if thereafter such acquiring person acquires
30% of BankGroup's outstanding Common Stock, or effects a business combination
with BankGroup, the Rights permit shareholders to acquire securities having a
value equal to twice the amount of the purchase price specified in the Rights,
but rights held by such "acquiring person" are void to the extent permitted by
law and may not be exercised. Further, other shareholders may not transfer
rights to such "acquiring person" above his or her 15% ownership threshold.
Because of these provisions, it is unlikely that any person or group will
propose an acquisition transaction that is not approved by the Board of
Directors. Thus, the Rights could have the effect of discouraging acquisition
transactions not approved by the Board of Directors. The Rights do not interfere
with any merger or other business combination approved by the Board of Directors
and shareholders because the rights are redeemable with the concurrence of a
majority of the "Continuing Directors," defined as directors in office when the
Rights Agreement was adopted or any person added thereafter to the Board with
the approval of the Continuing Directors.
Virginia Stock Corporation Act
The Virginia Stock Corporation Act ("VSCA") contains provisions
governing "Affiliated Transactions." These provisions, with several exceptions
discussed below, require approval of material acquisition transactions between a
Virginia corporation and any holder of more than 10% of any class of its
outstanding voting shares (an "Interested Shareholder") by the holders of at
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least two-thirds of the remaining voting shares. Affiliated Transactions subject
to this approval requirement include mergers, share exchanges, material
dispositions of corporate assets not in the ordinary course of business, any
dissolution of the corporation proposed by or on behalf of an Interested
Shareholder, or any reclassification, including reverse stock splits,
recapitalization or merger of the corporation with its subsidiaries which
increases the percentage of voting shares owned beneficially by an Interested
Shareholder by more than 5%.
For three years following the time that an Interested Shareholder
becomes an owner of more than 10% of the outstanding voting shares, a Virginia
corporation cannot engage in an Affiliated Transaction with such Interested
Shareholder without approval of two-thirds of the voting shares other than those
shares beneficially owned by the Interested Shareholder, and majority approval
of the "Disinterested Directors." A Disinterested Director means, with respect
to a particular Interested Shareholder, a member of BankGroup's Board of
Directors who was (1) a member on the date on which an Interested Shareholder
became an Interested Shareholder and (2) recommended for election by, or was
elected to fill a vacancy and received the affirmative vote of, a majority of
the Disinterested Directors then on the Board. At the expiration of the three
year period, the statute requires approval of Affiliated Transactions by
two-thirds of the voting shares other than those beneficially owned by the
Interested Shareholder.
The principal exceptions to the special voting requirement apply to
transactions proposed after the three year period has expired and require either
that the transaction be approved by a majority of the corporation's
Disinterested Directors or that the transaction satisfy the fair-price
requirements of the statute. In general, the fair-price requirement provides
that in a two-step acquisition transaction, the Interested Shareholder must pay
the shareholders in the second step either the same amount of cash or the same
amount and type of consideration paid to acquire the Virginia corporation's
shares in the first step.
None of the foregoing limitations and special voting requirements
applies to a transaction with an Interested Shareholder whose acquisition of
shares making such person an Interested Shareholder was approved by a majority
of the Virginia corporation's Disinterested Directors.
These provisions were designed to deter certain takeovers of Virginia
corporations. In addition, the statute provides that, by affirmative vote of a
majority of the voting shares other than shares owned by any Interested
Shareholder, a corporation can adopt an amendment to its articles of
incorporation or bylaws providing that the Affiliated Transactions provisions
shall not
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apply to the corporation. BankGroup has not "opted out" of the Affiliated
Transactions provisions.
Virginia law also provides that shares acquired in a transaction that
would cause the acquiring person's voting strength to meet or exceed any of
three thresholds (20%, 331/3% or 50%) have no voting rights unless granted by a
majority vote of shares not owned by the acquiring person or any officer or
employee-director of the Virginia corporation. This provision empowers an
acquiring person to require the Virginia corporation to hold a special meeting
of shareholders to consider the matter within 50 days of its request.
Reports to Shareholders
BankGroup furnishes shareholders with written annual reports containing
consolidated financial statements audited by an independent certified public
accountant and with written quarterly reports containing an unaudited balance
sheet at the end of each of the first three quarterly periods and an income
statement for the period from the beginning of the current fiscal year to the
end of such quarterly period.
Transfer Agent
Registrar and Transfer Company, Post Office Box 1010, Cranford, New
Jersey, is transfer agent for BankGroup Common Stock.
COMPARATIVE RIGHTS OF SHAREHOLDERS
At the Effective Time of the Bank Merger, shareholders of Bank will
become shareholders of BankGroup, and their rights as shareholders will be
determined by BankGroup's Articles of Incorporation and Bylaws and the VSCA. The
following is a summary of the material differences in the rights of shareholders
of BankGroup and Bank. This summary does not purport to be a complete discussion
of, and is qualified in its entirety by reference to, the governing law and the
Articles of Incorporation and Bylaws of each entity.
Capitalization
Bank. Bank's Articles of Incorporation authorize the issuance of up to
3,000,000 shares of capital stock, par value $2.50 per share, 1,471,536 of which
are issued and outstanding.
BankGroup. BankGroup's authorized capital is described under
"Description of BankGroup Capital Stock."
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Amendment of Articles or Bylaws
Bank. Under the VSCA, the Bank's Articles may be amended if the
amendment is adopted by the Bank Board and approved by a vote of the holders of
more than two-thirds of the votes entitled to be cast on the amendment by each
voting group entitled to vote thereon.
Bank's Bylaws may be amended by its Board of Directors by majority vote.
BankGroup. As permitted by the VSCA, BankGroup's Articles provide that,
unless a greater vote is required by law, by BankGroup's Articles or by a
resolution of the Board of Directors, BankGroup's Articles may be amended if the
amendment is adopted by the Board of Directors and approved by a vote of the
holders of a majority of the votes entitled to be cast on the amendment by each
voting group entitled to vote thereon.
BankGroup's Bylaws generally provide that the Board of Directors may, by
a majority vote, amend its Bylaws.
Required Shareholder Vote for Certain Actions
Bank. The VSCA generally requires the approval of a majority of a
corporation's Board of Directors and the holders of more than two-thirds of all
the votes entitled to be cast thereon by each voting group entitled to vote on
any plan of merger or consolidation, plan of share exchange or sale of
substantially all of the assets of a corporation not in the ordinary course of
business. The VSCA also specifies additional voting requirements for Affiliated
Transactions and transactions that would cause an acquiring person's voting
power to meet or exceed specified thresholds.
BankGroup. The VSCA generally requires the approval of a majority of a
corporation's Board of Directors and the holders of more than two-thirds of all
the votes entitled to be cast thereon by each voting group entitled to vote on
any plan of merger or consolidation, plan of share exchange or sale of
substantially all of the assets of a corporation not in the ordinary course of
business. The VSCA also specifies additional voting requirements for Affiliated
Transactions and transactions that would cause an acquiring person's voting
power to meet or exceed specified thresholds, as discussed under "Description of
BankGroup Capital Stock -- Virginia Stock Corporation Act."
None of the additional voting requirements contained in the VSCA are
applicable to the Bank Merger since it is not an "Affiliated Transaction."
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<PAGE>
Director Nominations
Bank. The Bank's Bylaws do not address or restrict nominations of
Directors by shareholders.
BankGroup. BankGroup's Bylaws provide that any nomination for director
made by a shareholder must be made in writing to the Secretary of BankGroup not
less than 90 days prior to the meeting of shareholders at which directors are to
be elected. Any such shareholder's notice shall include (i) the name and address
of the shareholder and of each person to be nominated, (ii) a representation
that the shareholder is a holder of record of stock of BankGroup entitled to
vote at such meeting and intends to appear in person or by proxy at the meeting
to nominate each person specified, (iii) a description of all arrangements or
understandings between the shareholder and each nominee and any other person
(naming such person) pursuant to which the nomination is made by the
shareholder, (iv) such other information regarding each nominee as would be
required to be included in a proxy statement filed pursuant to the proxy rules
of the SEC had the nominee been nominated by the Board, and (v) the consent of
each nominee to serve as a director of BankGroup if so elected.
Directors and Classes of Directors; Vacancies and Removal of Directors
Bank. The Bank's Articles of Incorporation provide that the Board of
Directors will consist of not less than seven nor more than fifteen members. The
Board currently has fixed the number of Directors at eleven. The Board of
Directors is divided into three groups, as nearly equal in number as possible.
At each Annual Meeting of Shareholders, one group of Directors is elected to a
term of three years. Under the Bank's Bylaws, any vacancy occurring on the Board
of Directors may be filled by the affirmative vote of a majority of the
remaining Directors, though less than a quorum of the Board. No decrease in the
number of Directors may have the effect of shortening the term of any incumbent
Director. Any Director may be removed, with or without cause, by a vote of the
shareholders holding a majority of the shares entitled to vote at an election of
Directors.
BankGroup. The number of Directors is set forth in BankGroup's Bylaws.
The Board currently has fixed the number of directors at 11. Any vacancy
occurring on the Board of Directors, including a vacancy resulting from an
increase in the number of Directors, may be filled by the affirmative vote of a
majority of the remaining directors, though less than a quorum of the Board of
Directors. Directors so chosen shall hold office for a term expiring at the next
following annual meeting of shareholders at which directors are elected. No
decrease in the
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<PAGE>
number of directors constituting the Board of Directors shall shorten the term
of any incumbent director. Subject to the rights of the holders of preferred
stock then outstanding, any director may be removed by the affirmative vote of
the holders of at least two-thirds of outstanding voting shares.
Anti-Takeover Provisions
Bank. The Bank's Articles of Incorporation provide that the Board of
Directors, when evaluating any offer to acquire the Bank shall, in connection
with the exercise of its judgment in determining what is in the best interests
of the Corporation and its shareholders, give due consideration to all relevant
factors including, without limitation, the social and economic effects of the
proposed transaction on the depositors, employees, suppliers, customers and
other constituents of the Bank and on the communities in which the Bank
operates, the business reputation of the party or entity involved and the Board
of Directors' evaluation of the value of the Bank in a freely negotiated sale
and of the future prospects of the Bank as an independent entity.
For a description of certain provisions of the VSCA which may be deemed
to have an anti-takeover effect, see "Description of BankGroup Stock -- Virginia
Stock Corporation Act."
BankGroup. For a description of certain provisions of VSCA which may be
deemed to have an anti-takeover effect, see "Description of BankGroup Capital
Stock -- Virginia Stock Corporation Act."
Preemptive Rights
Neither the shareholders of BankGroup nor the shareholders of Bank have
preemptive rights. Thus, if additional shares of BankGroup Common Stock,
BankGroup preferred stock or Bank Common Stock are issued, holders of such
stock, to the extent they do not participate in such additional issuance of
shares, would own proportionately smaller interests in a larger amount of
outstanding capital stock.
Assessment
All outstanding shares of Bank Common Stock are fully paid and
nonassessable.
All shares of BankGroup Common Stock presently issued are, and those to
be issued pursuant to the Agreement will be, fully paid and nonassessable.
-83-
<PAGE>
Conversion; Redemption; Sinking Fund
Neither BankGroup Common Stock nor Bank Common Stock is convertible,
redeemable or entitled to any sinking fund.
Liquidation Rights
Bank. The VSCA generally provides that a corporation's board of
directors may propose dissolution for submission to shareholders and that to be
authorized, the dissolution must be approved by the holders of more than
two-thirds of all votes entitled to be cast on the proposal, unless the articles
of incorporation of the corporation require a greater or lesser vote. There are
no provisions in Bank's Articles which would modify the statutory requirements
for dissolution under the VSCA.
BankGroup. The VSCA generally provides that a corporation's board of
directors may propose dissolution for submission to shareholders and that to be
authorized, the dissolution must be approved by the holders of more than
two-thirds of all votes entitled to be cast on the proposal, unless the articles
of incorporation of the corporation require a greater or lesser vote. There are
no provisions in BankGroup's Articles which would modify the statutory
requirements for dissolution under the VSCA.
Dividends and Other Distributions
Bank. The VSCA generally provides that a corporation may make
distributions to its shareholders unless, after giving effect to the
distribution, (i) the corporation would not be able to pay its debts as they
become due in the usual course of business or (ii) the corporation's total
assets would be less than the sum of its total liabilities plus (unless the
articles of incorporation permit otherwise, which BankGroup's Articles do not)
the amount that would be needed, if the corporation were to be dissolved at the
time of the distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution. These requirements are applicable to Bank as a Virginia
corporation.
BankGroup. The VSCA generally provides that a corporation may make
distributions to its shareholders unless, after giving effect to the
distribution, (i) the corporation would not be able to pay its debts as they
become due in the usual course of business or (ii) the corporation's total
assets would be less than the sum of its total liabilities plus (unless the
articles of incorporation permit otherwise, which BankGroup's Articles do not)
the amount that would be needed, if the corporation were to be dissolved at the
time of the distribution, to satisfy the preferential rights upon dissolution of
shareholders whose
-84-
<PAGE>
preferential rights are superior to those receiving the distribution. These
requirements are applicable to BankGroup as a
Virginia corporation.
In addition to the limitations set forth in the VSCA, there are various
regulatory requirements which are applicable to distributions by bank holding
companies. For a description of the regulatory limitations on distributions by
BankGroup, see "Supervision and Regulation Limits on Dividends and Other
Payments."
Indemnification
Bank. Under the Bank's Articles of Incorporation, the Bank is required
to indemnify a Director or Officer of the Bank who is or was a party to any
proceeding by reason of the fact that he is or was such a Director or Officer,
or is or was serving at the request of the Bank as a Director, trustee, partner
or officer of another bank, partnership, joint venture, trust, employee benefit
plan or other enterprise, against any liability incurred by him in connection
with such proceeding if he believed, in the case of conduct in his official
capacity, that his conduct was in the best interests of the Bank and in all
other cases that his conduct was at least not opposed to its best interests,
and, in the case of any criminal proceeding, had no reasonable cause to believe
his conduct was unlawful and he was not guilty of gross negligence or willful
misconduct. The Articles of Incorporation also provide that no indemnification
shall be made in connection with any proceeding by or in the right of the Bank
or in connection with any proceeding charging the applicant with improper
benefit to himself, whether or not involving action in his official capacity, in
which he was adjudged liable on the basis that personal benefit was improperly
received by him or adjudged grossly negligent or guilty of willful misconduct.
BankGroup. To the full extent permitted by the VSCA and any other
applicable law, BankGroup shall indemnify a director or officer of BankGroup who
is or was a party to any proceeding by reason of the fact that he is or was such
a director or officer or is or was serving at the request of the corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise.
The Board of Directors is empowered, by majority vote of a quorum of
disinterested directors, to contract in advance to indemnify any director or
officer.
Shareholder Proposals
Bank. Neither Bank's Articles of Incorporation nor Bylaws contain
requirements that must be followed for a shareholder to submit a proposal to a
vote for the shareholders.
-85-
<PAGE>
BankGroup. BankGroup's Bylaws provide that at any meeting of
shareholders of BankGroup, only that business that is properly brought before
the meeting may be presented to and acted upon by the shareholders. To be
properly brought before the meeting, business must be brought (a) by or at the
direction of the Board of Directors or (b) by a shareholder who has given
written notice of business he expects to bring before the meeting to the
Secretary of BankGroup not less than 90 days prior to the meeting. A
shareholder's notice to the Secretary shall set forth as to each matter the
shareholder proposes to bring before the meeting (a) a brief description of the
business to be brought before the meeting and the reasons for conducting such
business at the meeting, (b) the name and address, as they appear on BankGroup's
books, of the shareholder proposing such business, (c) the class and number of
shares of BankGroup's stock beneficially owned by the shareholder, and (d) any
material interest of the shareholder in such business. No business shall be
conducted at a meeting of shareholders except in accordance with the procedures
set forth in BankGroup's Bylaws.
Shareholder Inspection Rights; Shareholder Lists
Under the VSCA, the shareholder of a Virginia corporation are entitled
to inspect and copy certain books and records, including the articles of
incorporation and bylaws of the corporation if he gives the corporation written
notice of his or her demand at least five business days before the date on which
he wishes to inspect and copy. The shareholder of a Virginia corporation is
entitled to inspect and copy certain other books and records, including a list
of shareholders, minutes of any meeting of the board of directors and accounting
records of the corporation, if (i) the shareholder has been a shareholder of
record for at least six months immediately preceding his or her written demand
or is the holder of at least 5% of the corporation's outstanding shares, (ii)
the shareholder's demand is made in good faith and for a proper purpose, (iii)
the shareholder describes with reasonable particularity the purpose of the
request and the records desired to be inspected and (iv) the records are
directly connected with the stated purpose, and if he gives the corporation
written notice of his or her demand at least five business days before the date
on which he wishes to inspect and copy. The VSCA also provides that a
corporation shall make available for inspection by any shareholder during usual
business hours, at least 10 days before each meeting of shareholders, a complete
list of the shareholders entitled to vote at such meeting.
Shareholder Rights Plan
Bank. Bank has not implemented a shareholder rights plan.
-86-
<PAGE>
BankGroup. For a description of a shareholder rights plan which has been
adopted by BankGroup, see "Description of BankGroup Capital Stock -- Rights."
Dissenters' Rights
Bank. The provisions of Article 15 of the VSCA which provides
shareholders of a Virginia corporation the right to dissent from and obtain
payment of the fair value of their shares in the event of mergers consolidations
and certain other corporate transactions, are applicable to the Bank as a
Virginia corporation, except that under the Virginia Banking Act, shareholders
of a bank have no dissenters' rights in a merger of banks.
BankGroup. The provisions of Article 15 of the VSCA which provide
shareholders of a Virginia corporation the right to dissent from, and obtain
payment of the fair value of their shares in the event of, mergers,
consolidations and certain other corporate transactions are applicable to
BankGroup as a Virginia corporation. However, because BankGroup has more than
2,000 record shareholders, shareholders of BankGroup generally do not have
rights to dissent from mergers, consolidations and certain other corporate
transactions to which BankGroup is a party because Article 15 of the VSCA
provides that holders of shares of a Virginia corporation which has shares
listed on a national securities exchange or which has at least 2,000 record
shareholders are not entitled to dissenters' rights unless certain requirements
are met.
RESALE OF BANKGROUP COMMON STOCK
BankGroup Common Stock issuable in the Bank Merger has been registered
under the 1933 Act, thereby allowing such shares to be traded freely and without
restriction by those holders of Bank Common Stock who receive such shares
following consummation of the Bank Merger and who are not deemed to be
"affiliates" (as defined under the 1933 Act, but generally including directors,
certain executive officers and 10% or more shareholders) of Bank or BankGroup.
Each holder of Bank Common Stock who is deemed by Bank to be an affiliate of it
has entered into an agreement with BankGroup prior to the Effective Time of the
Bank Merger providing, among other things, that (A) such affiliate acknowledges
and agrees to support and vote such shares of Bank Common Stock beneficially
owned by him to ratify and confirm the Agreement and the Bank Merger, (B) such
affiliate acknowledges and agrees beginning 30 days prior to the Effective Time
of the Bank Merger, that he will not sell, pledge, transfer or otherwise dispose
of shares of Bank Common Stock or BankGroup Common Stock except in compliance
with the applicable provisions of the 1933 Act and rules and regulations
thereunder and until such time as
-87-
<PAGE>
financial results covering at least 30 days of combined operations of BankGroup
and Bank have been published within the meaning of Section 201.01 of the SEC's
Codification of Financial Reporting Policies, and (C) the certificates
representing said shares may bear a legend referring to the foregoing
restrictions. This Proxy Statement/Prospectus does not cover any resales of
BankGroup Common Stock received by affiliates of Bank.
-88-
<PAGE>
EXPERTS
The consolidated financial statements of MainStreet BankGroup
Incorporated and Subsidiaries (formerly Piedmont BankGroup Incorporated and
Subsidiaries) for the year ended December 31, 1995, incorporated in this Proxy
Statement/Prospectus by reference to BankGroup's Annual Report on Form 10-K for
the year ended December 31, 1995 have been so incorporated in reliance upon the
report of Coopers & Lybrand L.L.P., independent accountants, incorporated herein
by reference, and upon the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of MainStreet BankGroup
Incorporated and Subsidiaries (formerly Piedmont BankGroup Incorporated and
Subsidiaries) as of December 31, 1994, and for each of the years in the two year
period ended December 31, 1994, included in BankGroup's Annual Report on Form
10-K for the year ended December 31, 1995, have been incorporated by reference
herein and in the registration statement in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing. Their report refers to changes in accounting for impaired loans
and certain investments in debt and equity securities.
The consolidated financial statements of Hanover Bank and subsidiary as
of December 31, 1995 and 1994 and for each of the three years in the period
ended December 31, 1995 included in this Prospectus and the Registration
Statement, have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein and elsewhere in the Registration
Statement and are included in reliance upon the report of such firm given their
authority as experts in accounting and auditing.
LEGAL OPINIONS
The legality of BankGroup Common Stock to be issued in the Bank Merger
will be passed on for BankGroup by Hunton & Williams, Richmond, Virginia.
Certain legal matters will be passed on for Bank by Williams, Mullen,
Christian & Dobbins, Richmond, Virginia.
A condition to consummation of the Bank Merger is the delivery to
BankGroup and Bank by Hunton & Williams of an opinion concerning certain federal
income tax consequences of the Bank Merger. See "The Bank Merger -- Certain
Federal Income Tax Consequences."
-89-
<PAGE>
OTHER MATTERS
As of the date of this Proxy Statement/Prospectus, the Bank Board does
not know of any other matters to be presented for action at the Bank Shareholder
Meeting other than procedural matters incident to the conduct of the meeting. If
any other matters not now known are properly brought before the Bank Shareholder
Meeting, the persons named in the accompanying proxy will vote such proxy in
accordance with the determination of a majority of the Bank Board.
By Order of the Board of Directors,
-------------------------------------
Corporate Secretary
-90-
<PAGE>
Independent Auditors' Report
To the Board of Directors and
Stockholders of Hanover Bank
We have audited the accompanying consolidated balance sheets of Hanover
Bank and subsidiary as of December 31, 1995 and 1994, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1995. These consolidated
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Hanover Bank and subsidiary
as of December 31, 1995 and 1994, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Richmond, Virginia
January 12, 1996
F-1
<PAGE>
HANOVER BANK
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Years Ended December 31, 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C>
Assets
Cash and due from banks $ 3,317,353 $ 3,107,258
Federal funds sold 3,600,000 2,010,000
------------------------------
Total cash and cash equivalents 6,917,353 5,117,258
Investment securities (Note 2):
Available for sale at fair value, amortized
cost of $1,350,950 and $1,351,522, respectively 1,346,229 1,252,027
Held to maturity at amortized cost, fair
value of $14,176,395 and $10,961,941, respectively 14,019,492 11,226,487
Federal Reserve Bank stock 169,500 169,500
Loans receivable, net (Notes 3 and 4) 68,446,516 56,898,731
Bank premises and equipment, net (Note 5) 2,363,458 1,754,447
Accrued interest receivable 644,294 502,568
Other real estate 160,000 --
Other assets 321,946 245,207
------------------------------
Total assets $ 94,388,788 $ 77,166,225
==============================
Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing demand $ 11,909,609 $ 11,685,539
Interest bearing deposits:
NOW and money market 25,920,890 22,963,268
Savings 7,733,280 9,533,515
Certificate of deposit $100,000 and over 5,552,409 2,712,780
Other certificates 34,634,339 22,684,691
------------------------------
Total deposits 85,750,527 69,579,793
------------------------------
Accrued interest payable 276,222 142,270
Other liabilities 166,906 290,699
------------------------------
Total liabilities 86,193,655 70,012,762
------------------------------
Commitments and contingent liabilities (Note 7)
Stockholders' Equity (Note 6):
Common stock of $2.50 par value per share--authorized,
3,000,000 shares; issued and outstanding, 1,449,536 shares 3,623,840 3,623,840
Surplus 2,025,535 2,025,535
Undivided profits 2,546,971 1,579,708
Net unrealized losses on securities available for sale,
net of tax benefit of $625 in 1995 and $23,875 in 1994 (1,213) (75,620)
------------------------------
Total stockholders' equity 8,195,133 7,153,463
------------------------------
Total liabilities and
stockholders' equity $ 94,388,788 $ 77,166,225
==============================
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
HANOVER BANK
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31, 1995 1994 1993
- -----------------------------------------------------------------------------------
<S> <C>
Interest Income
Loans receivable $6,017,709 $4,615,393 $3,635,984
Investment securities 554,188 573,036 536,483
Federal funds sold 244,421 80,073 37,528
Other investments 229,648 191,626 179,527
---------------------------------------
Total interest income 7,045,966 5,460,128 4,389,522
---------------------------------------
Interest Expense on Deposits 3,109,130 2,038,491 1,699,697
---------------------------------------
Net Interest Income 3,936,836 3,421,637 2,689,825
Provision For Loan Losses 100,210 261,330 292,561
---------------------------------------
Net Interest Income After Provision
For Loan Losses 3,836,626 3,160,307 2,397,264
---------------------------------------
Other Income:
Service charges on deposit accounts 253,683 223,402 165,494
Gain on sale of investments -- -- 21,955
Other income 46,350 37,598 30,623
---------------------------------------
Total other income 300,033 261,000 218,072
---------------------------------------
Other Expenses
Salaries and employee benefits $ 961,305 $ 786,108 $ 679,301
Occupancy 369,586 375,306 345,948
Equipment 251,376 186,569 169,064
Advertising 15,123 17,639 11,225
Office supplies and printing 108,841 90,237 104,277
Other expenses 675,210 557,365 458,462
----------------------------------------
Total other expenses 2,381,441 2,013,224 1,768,277
----------------------------------------
Income Before Income Taxes 1,755,218 1,408,083 847,059
----------------------------------------
Income Tax Expense (Note 9) 527,039 $389,631 219,470
----------------------------------------
Net Income $1,228,179 $1,018,452 $ 627,589
----------------------------------------
Earnings Per Common Share $ .80 $ .66 $ .41
----------------------------------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
HANOVER BANK
Consolidated Statements of Shareholders' Equity
Years Ended December 31,
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss)
Common Undivided on Securities
Stock Surplus Profits Available for Sale Total
---------------------------------------------------------------------
<S> <C>
Balance-January 1, 1993 $3,623,840 $2,025,535 $ (22,847) $ -- $5,626,528
Cumulative effect of adopting
SFAS No. 115 at December 31,
1993 (Note 1) -- -- -- 10,542 10,542
Net income -- -- 627,589 -- 627,589
---------------------------------------------------------------------
Balance--December 31, 1993 3,623,840 2,025,535 604,742 10,542 6,264,659
Net unrealized loss on securities
available for sale, net of tax -- -- -- (86,162) (86,162)
Dividends declared -- -- (43,486) -- (43,486)
Net income -- -- 1,018,452 -- 1,018,452
---------------------------------------------------------------------
Balance--December 31, 1994 3,623,840 2,025,535 1,579,708 (75,620) 7,153,463
Net unrealized gain on securities
available for sale, net of tax -- -- -- 74,407 74,407
Dividends declared -- -- (260,916) -- (260,916)
Net income -- -- 1,228,179 -- 1,228,179
---------------------------------------------------------------------
Balance--December 31, 1995 $3,623,840 $2,025,535 $2,546,971 $ (1,213) $8,195,133
---------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
HANOVER BANK
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
<S> <C>
Operating Activities:
Net income $ 1,228,179 $ 1,018,452 $ 627,589
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 200,856 175,589 159,249
Discount accretion on securities (3,323) (1,799) (5,022)
Premium amortization on securities 16,847 23,250 5,764
Net realized gains on investment securities -- -- (21,955)
Gain on sale of bank premises and equipment (7,362) -- --
Provision for loan losses 100,210 261,330 292,561
Deferred income tax benefit (24,152) (59,355) (4,921)
Increase in accrued interest receivable (142,500) (86,556) (78,958)
Increase in other real estate (160,000) -- --
Increase in other assets, net (72,180) (7,759) (37,126)
Increase in accrued interest payable 133,952 21,108 5,629
Increase (decrease) in other liabilities, net (152,784) 215,908 (216,958)
-----------------------------------------
Net cash provided by operating activities 1,117,743 1,560,168 725,852
-----------------------------------------
Investing Activities:
Proceeds from sales and maturities of securities
available for sale -- 200,000 1,316,403
Proceeds from maturities of securities held
for investment 1,692,514 1,699,832 3,694,999
Purchases of securities held for investment (4,498,471) (1,680,527) (6,536,785)
Net increase in loans (11,647,995) (12,282,620) (11,339,281)
Proceeds from sale of bank premises and equipment 7,362 -- 312
Purchases of bank premises and equipment (809,867) (856,450) (190,549)
------------------------------------------
Net cash used in investing activities (15,256,457) (12,919,765) (13,054,901)
------------------------------------------
Financing Activities:
Net increase in deposit accounts 16,170,734 11,434,032 16,289,771
Net (decrease) increase in Federal funds purchased -- -- (435,000)
Dividends paid (231,925) -- --
Net cash provided by financing activities 15,938,809 11,434,032 15,854,771
-----------------------------------------
Net Increase in Cash and Cash Equivalents 1,800,095 74,435 3,525,722
-----------------------------------------
Cash and Cash Equivalents, Beginning of Year 5,117,258 5,042,823 1,517,101
-----------------------------------------
Cash and Cash Equivalents, End of Year $ 6,917,353 $ 5,117,258 $ 5,042,823
-----------------------------------------
Supplemental Information:
Interest paid during the year $ 2,975,178 $ 2,017,384 $ 1,694,068
-----------------------------------------
Income taxes paid during the year $ 722,623 $ 224,400 $ 414,599
-----------------------------------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
HANOVER BANK
Notes To Consolidated Financial Statements
Years Ended December 31, 1995 and 1994
Note 1
Summary of Significant Accounting Policies
The accounting and reporting policies of Hanover Bank and subsidiary (the Bank)
conform to generally accepted accounting principles and general practices within
the banking industry. The following is a summary of the more significant of
those policies:
Nature of Operations
Hanover Bank operates under a state bank charter and provides full banking
services, including commercial and consumer demand and time deposit accounts,
commercial and consumer loans, Visa and Mastercard revolving credit accounts,
drive-in banking services and automated teller machine transactions. As a state
bank, the Bank is subject to regulation of the Federal Reserve System, and the
Virginia State Corporation Commission's Bureau of Financial Affairs. The area
served by Hanover Bank is primarily Hanover County and services are provided at
four branch offices.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Hanover Bank, and its wholly-owned subsidiary, H.B. Services, Inc., which was
organized in 1994 to facilitate investment and financial related services.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Investment Securities
Effective December 31, 1993, the Bank adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115") and revised its accounting policy for investments. This
pronouncement requires that investments in debt and equity securities with
readily determinable fair values shall be classified as either held to maturity,
available for sale or trading. Management has reviewed the securities portfolio
and classified securities as either held to maturity or available for sale. The
Bank does not have any securities classified as trading securities. Securities
classified as held to maturity will be accounted for at amortized cost, and
require the Bank to have both the positive intent and ability to hold those
securities to maturity. All other securities were classified as available for
sale and carried at fair value with unrealized gains and losses included in
stockholders' equity on an after tax basis. Realized gains or losses on the sale
of investments are recognized at the time of sale using the amortized cost of
the specific security sold. The adoption of SFAS 115, which has not been applied
retroactively to 1993's financial statements, resulted in an increase in
stockholders' equity of $10,542 for the unrealized gain, net of income taxes of
$5,430, on investments classified as available for sale at December 31, 1993.
Prior to December 31, 1993, the Bank had the intent and ability to hold all
investments to maturity and carried all investments at amortized costs.
F-6
<PAGE>
Federal Reserve Bank Stock
Federal Reserve Bank stock is stated at cost. No ready market exists for this
stock, and it has no quoted market value. For presentation purposes, such stock
is assumed to have market value which is equal to cost.
Interest Income
Interest on installment loans is recognized based on the interest method.
Interest on all other major categories of loans is computed and recognized based
on the principal amounts outstanding. The Bank discontinues the accrual of
interest on loans after a delinquency period of 90 days. When interest accruals
are discontinued, interest credited to income in the current year is reversed.
Loan Origination and Commitment Fees
Loan origination and commitment fees, net of certain expenses related to loan
acquisition, are deferred and amortized over the contractual life of the loans
as an adjustment to yield using a method that approximates the level yield
method.
Allowance for Loan Losses
An allowance is maintained for losses on loans. Loan losses, net of recoveries
on loans previously charged off, are charged to the allowance. The allowance for
loan losses is based upon management's periodic evaluation of the portfolio with
consideration given to the overall loss experience, delinquency data, financial
condition of the borrowers, and such other factors that, in management's
judgment, warrant recognition in providing an adequate allowance.
Impaired Loans
Effective January 1, 1995, the Bank adopted Statement of Financial Accounting
Standard No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS
114"), as amended by SFAS 118. These pronouncements require that an impaired
loan be measured based on the present value of expected future cash flows
discounted at the effective interest rate of the loan, or at fair value of the
loan's collateral for "collateral dependent" loans. The Bank considers a loan
impaired when it is probable that the Bank will be unable to collect all
interest and principal payments as scheduled in the loan agreement. A loan is
not considered impaired during a period of delay in payment if the ultimate
collectibility of all amounts due is expected. A valuation allowance is required
to the extent that the measure of the impaired loan is less than the recorded
investment. Consistent with the Bank's method for nonaccrual loans, interest
receipts for impaired loans are recognized on the cash basis. The Bank had no
impaired loans as of December 31, 1995.
Bank Premises and Equipment
Bank premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is charged to expense over the estimated useful lives of the assets
and is computed using the straight-line method for financial reporting purposes.
Depreciation for tax purposes is computed based on accelerated methods. The
costs of major renewals or improvements are capitalized while the costs of
ordinary maintenance and repairs are charged to expense as incurred.
F-7
<PAGE>
Other Real Estate
Property acquired through foreclosure is stated at the lower of the recorded
cost or the estimated fair value of the property. At the time of foreclosure,
any excess of cost over estimated fair value is charged to the allowance for
loan losses. Subsequent declines in the fair value are recorded in a valuation
account and are reflected in operations in the year in which the decline
occurred.
Income Taxes
In 1993, the Bank adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which requires an asset and liability approach to
financial accounting and reporting for income taxes and resulted in a change in
accounting principle. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. 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.
Earnings Per Common Share
Earnings per common share is based upon the weighted average number of shares
outstanding during the period plus dilutive common stock equivalents applicable
to stock options. The number of shares used in computing earnings per common
share was 1,541,215, 1,538,416 and 1,541,936 for 1995, 1994 and 1993,
respectively.
Cash Flow Statement
The Bank's definition of cash and cash equivalents includes short-term, highly
liquid investments with maturities of three months or less at date of purchase,
including Federal funds sold. As a result of a loan foreclosure, other real
estate increased $160,000 in 1995.
F-8
<PAGE>
Note 2
Investment Securities
The following is a comparison of amortized cost and estimated fair values of
investment securities at December 31:
<TABLE>
<CAPTION>
1995
---------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
- --------------------------------------------------------------------------------------------------------
<S> <C>
Available for Sale:
Obligations of U.S. Government agencies $ 751,067 $ -- $ 10,318 $ 740,749
State and political subdivisions 599,883 7,797 2,200 605,480
------------------------------------------------
Total 1,350,950 7,797 12,518 1,346,229
-------------------------------------------------
Held to Maturity:
Obligations of U.S. Government agencies 5,165,083 40,294 24,581 5,180,796
State and political subdivisions 5,518,064 114,380 13,691 5,618,753
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation (FHLMC) 668,332 20,098 10,195 678,235
Federal National Mortgage Association (FNMA) 480,177 24,500 -- 504,677
Government National Mortgage Association (GNMA) 66,956 -- 170 66,786
Corporate debt securities 2,120,880 11,463 5,195 2,127,148
-------------------------------------------------
Total 14,019,492 210,735 53,832 14,176,395
-------------------------------------------------
Total Investment Securities $15,370,442 $ 218,532 $ 66,350 $15,522,624
=================================================
</TABLE>
<TABLE>
<CAPTION>
1994
----------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Available for Sale:
Obligations of U.S. Government agencies $ 751,467 $ -- $ 70,220 $ 681,247
State and political subdivisions 600,055 -- 29,275 570,780
------------------------------------------------
Total 1,351,522 -- 99,495 1,252,027
-------------------------------------------------
Held to Maturity:
U.S. Treasury securities 305,515 615 -- 306,130
Obligations of U.S. Government agencies 2,966,377 1,971 70,441 2,897,907
State and political subdivisions 5,322,989 26,386 197,359 5,152,016
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation (FHLMC) 786,636 20,098 10,193 796,541
Federal National Mortgage Association (FNMA) 560,999 24,498 -- 585,497
Government National Mortgage Association (GNMA) 75,343 -- 171 75,172
Corporate debt securities 1,208,628 -- 59,950 1,148,678
-------------------------------------------------
Total 11,226,487 73,568 338,114 10,961,941
-------------------------------------------------
Total Investment Securities $12,578,009 $ 73,568 $ 437,609 $12,213,968
=================================================
</TABLE>
F-9
<PAGE>
The amortized cost and estimated fair value of debt securities at December 31,
1995 by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity Total
----------------------------------------------------------------------------
Estimated Estimated Estimated
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
<S> <C>
Due in one year or less $ -- $ -- $ 715,000 $ 708,550 $ 715,000 $ 708,550
Due after one year through
five years 951,067 938,549 6,741,397 6,772,336 7,692,464 7,710,885
Due after five years through
ten years 399,883 407,680 4,546,862 4,624,161 4,946,745 5,031,841
Due after ten years -- -- 800,768 821,650 800,768 821,650
Mortgage backed securities -- -- 1,215,465 1,249,698 1,215,465 1,249,698
- --------------------------------------------------------------------------------------------------------
Total $1,350,950 $1,346,229 $14,019,492 $14,176,395 $15,370,442 $15,522,624
===========================================================================
</TABLE>
Proceeds from sales and maturities of investments in available for sale
securities were $200,000 and $1,316,403 during 1994 and 1993, respectively.
Gross gains of $21,955 were realized on those sales in 1993. There were no gross
losses. Securities with an amortized cost of $300,000 and an estimated fair
value of $301,025 at December 1995 were pledged to collateralize public funds as
required by law.
Note 3
Loans Receivable
The following is a summary of loans receivable by type which were outstanding at
December 31:
1995 1994
- -----------------------------------------------------
Real estate loans $46,921,184 $39,055,373
Commercial, industrial
and agricultural loans 8,479,200 6,552,750
Loans to individuals for
household, family, and
other consumer
expenditures 13,784,132 12,040,608
----------------------------
Total gross loans 69,184,516 57,648,731
Less allowance for loan
losses (738,000) (750,000)
-------------------------------
Total net loans $68,446,516 $56,898,731
Loans to directors and officers totaled $4,080,044 and $3,419,839 at December
31, 1995 and 1994, respectively. New advances to directors and officers totaled
$1,395,357 and repayments totaled $735,152 for the year ended December 31, 1995.
Note 4
Allowances for Loan Losses
The following is a summary of the activity in the allowance for loan losses:
1995 1994 1993
- -----------------------------------------------------
Balance at beginning
of year $750,000 $465,000 $314,000
Provisions charged
against income 100,210 261,330 292,561
Loans charged off (116,167) (66,048) (175,588)
Recoveries of loans
charged off 3,957 89,718 34,027
------------------------------
Balance at end of year $738,000 $750,000 $465,000
==============================
<PAGE>
Note 5
Bank Premises and Equipment
The following is a summary of bank premises and equipment:
1995 1994
- -----------------------------------------------------
Cost:
Land $ 894,122 $ 395,866
Buildings 1,103,711 1,008,752
Leasehold improvements 194,049 48,949
Furniture, fixtures and
equipment 965,302 893,750
-------------------------
3,157,184 2,347,317
-------------------------
Less accumulated depreciation:
Buildings 117,612 85,332
Leasehold improvements 96,067 68,906
Furniture, fixtures and
equipment 580,047 438,632
-------------------------
793,726 592,870
-------------------------
Bank premises & equipment $2,363,458 $1,754,447
=========================
Note 6
Stock Option Plan
In 1990, the Bank adopted a non-qualified stock option plan which made 220,000
shares of common stock available for stock options. At December 31, 1995,
186,361 shares of common stock had been granted at the market price at the time
the options were granted and were exercisable. Both the shares and option price
have been adjusted to reflect the stock dividend and stock split. No options had
been exercised at December 31, 1995. The options generally expire ten years from
the date of grant. Details of the stock options are as follows:
Number Option
of Shares Price
Outstanding at January 1, 1993 145,500 $ 3.64
Granted 24,700 9.50
Exercised - -
Canceled - -
--------------------
Outstanding December 31, 1993 170,200 3.64-9.50
Granted 6,276 9.75
Exercised - -
Canceled (300) 3.64.-9.75
--------------------
Outstanding at December 31, 1994 176,176 3.64-9.75
Granted 10,185 10.25
Exercised - -
Canceled - -
--------------------
Outstanding at December 31, 1995 186,361 $3.64-10.25
====================
Note 7
Commitments and Contingent Liabilities
The Bank leases its data processing equipment, operations center and village
branch under noncancellable leases which expire in 1996 and 1997, and require
minimum annual rentals. The Bank also leases premises which serve as the Bank's
administrative offices. Rent expense with respect to operating leases was
$103,426, $152,541 and $149,835 for the years ended December 31, 1995, 1994 and
1993, respectively.
The following is a schedule of minimum rental payments due under operating
leases as of December 31, 1995:
1996 $ 74,966
1997 51,216
--------
Total minimum lease payments $126,182
========
Note 8
Financial Instruments With Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off- balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve elements of credit and interest rate risk
in excess of the amount recognized on the consolidated balance sheet. The
contract amounts of these instruments reflect the extent of involvement the Bank
has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit written is represented by the contractual amount of these
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. Collateral
is obtained based on management's credit assessment of the customer.
The Bank had outstanding loan commitments totaling $17,661,022 at December 31,
1995. The total contract amount of standby letters of credit, whose contract
amounts represent credit risk, total $1,838,927 at December 31, 1995.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments may expire without being
completely drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Bank evaluates each customer's creditworthiness on
a case-by-case basis.
<PAGE>
Standby letters of credit written are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loans to customers.
Note 9
Income Taxes
The current and deferred income taxes as follows:
1995 1994 1993
- -----------------------------------------------------------------------------
Federal taxes:
Current provision $551,191 $448,986 $224,391
Deferred income tax benefit (24,152) (59,355) (4,921)
----------------------------------------
$527,039 $389,631 $219,470
=======================================
The following is a reconciliation of the expected tax expense with the reported
expense for the years ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
-----------------------------------------------------------------
% of % of % of
Pre-tax Pre-tax Pre-Tax
Amount Income Amount Income Amount Income
<S> <C>
Expected tax expense
at statutory rate $ 596,774 34.00% $461,359 34.00% $ 288,000 34.00%
(Reduction) addition to income
taxes resulting from:
Tax exempt interest (89,282) (5.09) (94,343) (6.70) (79,494) (9.38)
Amortization of organization
start-up costs - - - - (1,608) (.19)
Disallowed interest expense 12,618 .72 10,982 .78 9,250 1.09
Other 6,929 .39% 11,633 .83 3,322 .39
----------------------------------------------------------------
Total $ 527,039 30.02% $389.631 28.91% $ 219,470 25.91%
================================================================
</TABLE>
The components of the deferred income tax asset are as follows:
1995 1994
- -------------------------------------------------------
Deferred tax asset:
Net unrealized loss on
securities available for sale $ 625 $ 23,875
Deferred loan fees 26,213 32,767
Allowance for loan losses 211,617 213,665
Other 4,515 1,632
----------------------
Deferred tax asset 242,970 271,939
----------------------
Deferred tax liability:
Depreciation (3,199) (14,292)
Cash conversion (103,939) (122,717)
Deferred tax liability (107,138) (137,009)
Net deferred tax asset $135,832 $134,930
======================
Note 10
Related Party Transactions
The Bank leases both its operations center and adjacent village branch from an
individual related to the Chairman of the Board of the Bank. These leases have
concurrent terms which expire in May 1996. Lease payments under these agreements
totaled $23,410, $23,150 and $22,525 in 1995, 1994 and 1993, respectively, and
future lease commitments total $9,500. The Bank also leases its administrative
facility from a partnership that is one-third owed by a Bank director. The lease
expires on October 31, 1996. Lease payments under this agreement totaled $16,800
and $2,800 in 1995 and 1994, respectively, with future lease commitments of
$14,000 for the remainder of the lease term. Bank management considers both of
these leases, which have been approved by the Board of Directors, to be at fair
market terms.
<PAGE>
Note 11
Regulatory Requirements and Restrictions
The Bank is subject to certain requirements imposed by state and federal banking
statutes and regulations. These requirements, among other things, establish
minimum levels for capital, restrict the amount of dividends that may be
distributed and require that the Bank maintain a minimum reserve balance with
the Federal Reserve Bank. At December 31, 1995, the Bank is required to have
minimum Tier 1 and Total risk-based capital ratios of 4.00% and 8.00%,
respectively. The Bank's actual ratios at that date were 12.83% and 13.98%,
respectively. The Bank's leverage ratio at December 31, 1995 was 8.68%.
Note 12
Savings Plan
The Bank has a voluntary 401(k) savings plan which permits eligible employees to
contribute up to 9% of their compensation. Bank contributions are discretionary
and are determined annually by the Board of Directors. Contributions to the
savings plan were $29,953 in 1995, $17,908 in 1994 and $15,024 in 1993.
Note 13
Disclosures Concerning the
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS 107, "Disclosures about Fair
Value of Financial Instruments." The estimated fair value amounts have been
determined by the Bank using available market information and appropriate
valuation methodologies. Loan commitments are conditional and subject to market
pricing and therefore do not reflect a gain or loss of market value. The fair
value of standby letters of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counterparties at the reporting date. However,
considerable judgment is required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Bank could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
Cash and short-term investments.
The nature of these instruments and their relatively short maturities provides
for the reporting of fair value equal to the historical cost.
Investment securities.
The fair value of investment securities is based on quoted market prices.
Loans.
The estimate of the fair value of the loan portfolio is estimated based on
present values using applicable spreads to the U.S. Treasury curve.
Deposits.
The fair value of all demand accounts is the amount payable at the report date.
For all other deposits, the fair value is determined using the discounted cash
flow method. The discount rate was equal to the rate currently offered on
similar products.
December 31, 1995
Carrying Estimated
Amount Fair Value
(000's) (000')
Financial Assets:
Cash and short term investments $ 6,917 $ 6,917
Investment securities 15,370 15,365
Net loans 68,447 68,771
Financial Liabilities:
Demand deposits 45,564 45,564
Time deposits 40,187 40,283
<PAGE>
ANNEX I
AGREEMENT AND PLAN OF REORGANIZATION
among
MAINSTREET BANKGROUP INCORPORATED
BH ACQUISITION SUBSIDIARY, INC.,
and
HANOVER BANK
May 10, 1996
<PAGE>
ARTICLE I
General
1.1 Bank Merger........................................................ 2
1.2 Issuance of BankGroup Common Stock................................. 2
1.3 Taking of Necessary Action......................................... 2
1.4 Directors and Officers............................................. 2
ARTICLE II
Effect of Transaction on Common Stock of Bank
2.1 Conversion of Stock................................................ 3
2.2 Cash Election...................................................... 4
2.3 Manner of Exchange................................................. 4
2.4 Bank Options....................................................... 6
2.5 Dissenting Shares.................................................. 7
2.6 No Fractional Shares............................................... 7
ARTICLE III
Representations and Warranties
3.1 Representations and Warranties of Bank............................. 7
(a) Organization, Standing and Power.............................. 7
(b) Capital Structure; Subsidiaries............................... 8
(c) Authority..................................................... 8
(d) Investments................................................... 9
(e) Financial Statements.......................................... 9
(f) Absence of Undisclosed Liabilities............................ 10
(g) Tax Matters................................................... 11
(h) Options, Warrants and Related Matters......................... 12
(i) Property; Leases.............................................. 12
(j) Employees..................................................... 13
(k) Certain Contracts............................................. 14
(l) Employment Contracts and Related Matters...................... 14
(m) Real Estate................................................... 14
(n) Affiliates.................................................... 14
(o) Agreements in Force and Effect................................ 14
(p) Legal Proceedings; Compliance with Laws....................... 15
(q) Employee Benefit Plans........................................ 16
(r) Insurance..................................................... 18
-i-
<PAGE>
(s) Loan Portfolio................................................ 19
(t) Absence of Changes............................................ 20
(u) Brokers and Finders........................................... 20
(v) Securities Portfolio.......................................... 20
(w) Reports....................................................... 20
(x) Environmental Matters......................................... 21
(y) Disclosure.................................................... 23
3.2 Representations and Warranties of BankGroup........................ 23
(a) Organization, Standing and Power.............................. 23
(b) Capital Structure............................................. 23
(c) Authority..................................................... 24
(d) Financial Statements.......................................... 25
(e) Absence of Undisclosed Liabilities............................ 26
(f) Absence of Changes............................................ 26
(g) Brokers and Finders........................................... 26
(h) Options, Warrants and Related Matters......................... 27
(i) Reports....................................................... 27
(j) Legal Proceedings; Compliance with Laws....................... 27
(k) Employee Benefits Plan........................................ 28
(l) Insurance..................................................... 29
(m) Loan Portfolio................................................ 30
(n) Absence of Changes............................................ 30
(o) Securities Portfolio.......................................... 30
(p) Environmental Matters......................................... 31
(q) Disclosure.................................................... 31
ARTICLE IV
Conduct and Transactions Prior to
Effective Time of the Bank Merger
4.1 Access to Records and Properties of BankGroup and Bank............. 32
4.2 Registration Statement; Proxy Statement; Shareholder Approval...... 33
4.3 Operation of the Business of Bank.................................. 34
4.4 No Solicitation.................................................... 36
4.5 Dividends.......................................................... 37
4.6 Regulatory Filings................................................. 37
4.7 Tax Opinion........................................................ 37
4.8 Public Announcements............................................... 37
4.9 Transactions in BankGroup Common Stock............................. 37
4.10 BankGroup Rights Agreement......................................... 38
4.11 Accounting Treatment............................................... 38
-ii-
<PAGE>
4.12 Agreement as to Efforts to Consummate.............................. 38
4.13 Adverse Changes in Condition....................................... 38
4.14 Updating of Schedules.............................................. 39
ARTICLE V
Conditions of Transaction
5.1 Conditions of Obligations of BankGroup............................. 39
(a) Representations and Warranties; Performance of
Obligations; No Adverse Change................................ 39
(b) Authorization of Transaction.................................. 40
(c) Opinion of Counsel............................................ 40
(d) Registration Statement........................................ 43
(e) Tax Opinion................................................... 43
(f) Regulatory Approvals.......................................... 44
(g) Affiliate Letters............................................. 44
(h) Provision for Loan Losses..................................... 45
(i) Accounting Treatment.......................................... 45
(j) Acceptance by BankGroup Counsel............................... 45
5.2 Conditions of Obligations of Bank.................................. 45
(a) Representations and Warranties; Performance of
Obligations; No Adverse Change................................ 45
(b) Authorization of Transaction.................................. 46
(c) Opinion of Counsel............................................ 46
(d) Registration Statement........................................ 48
(e) Regulatory Approvals.......................................... 49
(f) Tax Opinion................................................... 49
(g) Fairness Opinion.............................................. 49
(h) Acceptance by Bank's Counsel.................................. 49
ARTICLE VI
Closing Date; Effective Time of the
Holding Company Merger
6.1 Closing Date....................................................... 50
6.2 Filings at Closing................................................. 50
6.3 Effective Time..................................................... 50
-iii-
<PAGE>
ARTICLE VII
Termination; Survival of Representations
Warranties and Covenants; Waiver and Amendment
7.1 Termination........................................................ 51
7.2 Effect of Termination.............................................. 53
7.3 Survival of Representations, Warranties and Covenants.............. 54
7.4 Waiver and Amendment............................................... 54
ARTICLE VIII
Additional Covenants
8.1 Registration Statement............................................. 54
8.2 Employee Benefits.................................................. 55
8.3 Indemnification.................................................... 55
ARTICLE IX
Miscellaneous
9.1 Expenses........................................................... 56
9.2 Entire Agreement................................................... 56
9.3 Descriptive Headings............................................... 56
9.4 Notices............................................................ 56
9.5 Counterparts....................................................... 57
9.6 Governing Law...................................................... 57
Exhibit A - Plan of Merger
-iv-
<PAGE>
SCHEDULE DESCRIPTION SECTION IN AGREEMENT
A Bank Articles of Association 3.1(a)
B Bank Bylaws 3.1(a)
C Securities Owned by Bank 3.1(b), 3.1(d), 3.1(d)
D Bank Conflicts, Breaches or 3.1(c)
Defaults
E Bank Financial Statements 3.1(e)
F Bank Tax Matters 3.1(g), 3.1(g), 3.1(g)
G Salary Rates and Bank Common 3.1(j)
Stock Owned by Employees and
Directors of Bank; Owners of
5% of Bank Common Stock;
Outstanding Unexercised
Options, Warrants, Calls,
Commitments or Agreements
H Notes, Bonds, Mortgages, 3.1(k), 5.1(c)(vi),
Indentures, Licenses, Lease 5.1(c)(viii)
Agreements and Other Contracts
of Bank
I Employment Contracts and 3.1(l), 3.1(q)(i),
Related Matters of Bank 3.1(q)(i), 3.1(q)(vii),
3.1(q)(viii)
J Real Estate Owned or Leased 3.1(m)
by Bank
-v-
<PAGE>
K Bank Affiliates 3.1(n), 5.1(c)(iv)
L Bank Legal Proceedings 3.1(p), 3.1(p),
3.1(p)
M Bank Insurance 3.1(r)
N Bank Loans 3.1(s), 3.1(s)
O Bank Material Adverse Changes 3.1(t)
P Bank Environmental Matters 3.1(x)
Q BankGroup Options, Warrants 3.2(h)
Calls, etc.
R BankGroup Litigation 3.2(j), 5.2(c)(viii)
S BankGroup Environmental
Matters 3.2(p)
T BankGroup Contingencies 3.2(e)
U Bank Salary Adjustments 4.3
V Waiting Periods for BankGroup 8.2
Employee Plans
-vi-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement"), dated as of May
10, 1996 by and among MainStreet BankGroup Incorporated, a Virginia corporation
("BankGroup"), BH Acquisition Subsidiary, Inc., a Virginia banking corporation
wholly-owned by BankGroup ("Acquisition"), and Hanover Bank, a Virginia banking
corporation ("Bank"), recites and provides:
A. The boards of directors of BankGroup and Bank deem it advisable to merge
Acquisition into Bank (the "Bank Merger") pursuant to this Agreement, the Plan
of Merger attached as Exhibit A (the "Plan of Merger") and the provisions of Va.
Code ss. 6.1-43 whereby the holders of shares of common stock of Bank ("Bank
Common Stock") will receive common stock of BankGroup ("BankGroup Common Stock")
or cash in exchange therefor.
B. To effectuate the foregoing, the parties desire to adopt a plan of
reorganization in accordance with the provisions of Section 368(a) of the United
States Internal Revenue Code, as amended (the "Code").
C. BankGroup and Bank have entered into a Stock Option Agreement dated May
3, 1996 (the "Option Agreement") pursuant to which Bank has granted BankGroup an
option to purchase shares of Bank Common Stock in accordance with the terms of
such Option Agreement.
NOW, THEREFORE, in consideration of the mutual benefits to be derived from
this Agreement, and of the representations, warranties, conditions and promises
herein contained, BankGroup, Acquisition and Bank adopt this Agreement whereby
at the "Effective Time of the Bank Merger" (as defined in Article VI)
Acquisition shall be merged into Bank in accordance
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with the Plan of Merger. The outstanding shares of Bank Common Stock shall be
converted into shares of BankGroup Common Stock or cash on the basis, terms and
conditions contained herein and in the Plan of Merger. In connection therewith,
the parties hereto agree as follows:
ARTICLE I
General
1.1 Bank Merger. Subject to the provisions of this Agreement, the
Revised Plan of Merger and Va. Code ss. 6.1-43, at the Effective Time of the
Bank Merger, Bank shall be merged with and into Acquisition and the separate
existence of the Bank shall cease.
1.2 Issuance of BankGroup Common Stock. BankGroup agrees that at the
Effective Time of the Bank Merger, it will issue BankGroup Common Stock to the
extent set forth in, and in accordance with, the terms of this Agreement and the
Plan of Merger.
1.3 Taking of Necessary Action. Prior to and after the Effective Time of
the Bank Merger, subject to the provisions of this Agreement, BankGroup,
Acquisition and Bank, respectively, each shall take all such action as may be
necessary or appropriate to effect the Bank Merger. Such "necessary action"
shall include, without limitation, the adoption by Acquisition of Bank's then
existing Bylaws and Articles, of Bank's then existing Board of Directors, and
the name "Hanover Bank".
1.4 Directors and Officers. At its first meeting following the Effective
Time of the Bank Merger, BankGroup agrees to increase the number of members of
BankGroup's Board of Directors by one and to elect Phillip W. Dean to fill the
resulting vacancy. Mr. Dean's eligibility for and election at BankGroup's next
following Annual Meeting of Shareholders will be governed by BankGroup's Bylaws.
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ARTICLE II
Effect of Transaction on Common Stock of Bank
2.1 Conversion of Stock. At the Effective Time of the Bank Merger:
(a) Each share of Bank Common Stock issued and outstanding at the
Effective Time of the Bank Merger (other than shares held by BankGroup and
shares to be exchanged for cash) shall, and without any action by the holder
thereof, be converted into a number of shares of BankGroup Common Stock equal to
the quotient (rounded to the nearest one one-thousandth) of $15.25 divided by
the average of the closing sales price (the "BankGroup Stock Price") for
BankGroup Common Stock as reported on the Nasdaq National Market for the 10
trading day period ending on the 20th day prior to the Closing Date (as defined
herein) (the "Exchange Ratio"). If such quotient is less than 0.884, the
Exchange Ratio shall be 0.884; provided that if the BankGroup Stock Price
exceeds $20.50, the Exchange Ratio shall be adjusted to equal the quotient of
$18.125 divided by the BankGroup Stock Price. If such quotient is greater than
1.034, the Exchange Ratio shall be 1.034. All such shares of BankGroup Common
Stock shall be validly issued, fully paid and nonassessable. The Exchange Ratio
shall be subject to adjustment as provided in Section 7.1(g).
(b) The Exchange Ratio at the Effective Time of the Bank Merger
shall be adjusted to reflect any consolidation, split-up, other subdivisions or
combinations of BankGroup Common Stock, any dividend payable in BankGroup Common
Stock, or any capital reorganization involving the reclassification of BankGroup
Common Stock subsequent to the date of this Agreement.
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2.2 Cash Election. Each holder of Bank Common Stock will be given the
option of exchanging all, but not less than all, of his or her shares for $15.25
cash per share (subject to all applicable withholding taxes). The number of
shares that may be exchanged for cash, when added to fractional shares settled
in cash, cannot exceed 9.90% of outstanding shares of Bank Common Stock to
preserve the "pooling of interests" accounting treatment of the Bank Merger. The
cash election must be made at the time Bank shareholders vote on the Merger,
and, once the Merger vote has been taken, cash elections shall be irrevocable.
If the aggregate of fractional shares settled for cash and shares as respects
which a cash election is made exceeds 9.90% of the outstanding shares of Bank
Common Stock, shares submitted for cash purchase will be chosen by lot to
accommodate the "pooling of interests" accounting requirement that a shareholder
who chooses the cash election must have all of his or her shares purchased for
cash. Shareholders who submit their shares for cash purchase but are not chosen
in the lottery will have his or her shares exchanged for BankGroup Common Stock
(plus cash in lieu of fractional shares) at the Exchange Ratio. If the aggregate
of fractional shares settled for cash and shares as respects which a cash
election is made does not exceed 9.90% of the outstanding shares of Bank Common
Stock, all shares submitted for cash will be exchanged for cash.
2.3 Manner of Exchange. Bank shareholders who elect to exchange all of
their shares of Bank Common Stock for cash must submit certificates for the
shares being exchanged for cash at or prior to the meeting of Bank's
shareholders referred to in Section 4.2. After the Effective Date of the Bank
Merger, each holder of a certificate theretofore representing outstanding shares
of Bank Common Stock, shall surrender such certificate to Registrar and Transfer
Company (which shall act as exchange agent), unless previously surrendered to
Bank in
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connection with exercise of the cash election. All Bank shareholders must
complete a Letter of Transmittal in order to be entitled to receive in exchange
a certificate or certificates representing the number of full shares of
BankGroup Common Stock for which shares of Bank Common Stock theretofore
represented by the certificate or certificates so surrendered shall have been
exchanged as provided in this Article II, or cash. Until so surrendered, each
outstanding certificate which, prior to the Effective Date of the Bank Merger,
represented Bank Common Stock will be deemed to evidence the right to receive
the number of full shares of BankGroup Common Stock into which the shares of
Bank Common Stock represented thereby may be converted, or $15.25 cash if the
cash election provided in Section 2.2 was chosen, and, after the Effective Date
of the Bank Merger (unless the cash election was chosen), will be deemed for all
corporate purposes of BankGroup to evidence ownership of the number of full
shares of BankGroup Common Stock into which the shares of Bank Common Stock
represented thereby were converted. Until such outstanding certificates formerly
representing Bank Common Stock are surrendered, no dividend payable to holders
of record of BankGroup Common Stock for any period as of any date subsequent to
the Effective Date of the Bank Merger shall be paid to the holder of such
outstanding certificates in respect thereof. After the Effective Date of the
Bank Merger there shall be no further registry of transfer on the records of
Bank of shares of Bank Common Stock. If a certificate representing such shares
is presented to the exchange agent, it shall be canceled and exchanged for a
certificate representing shares of BankGroup Common Stock as herein provided.
BankGroup will also issue a certificate in exchange for shares evidenced by lost
certificate(s) provided the record owner thereof provides BankGroup with such
substantiation, [continues on page six]
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indemnification and security as BankGroup may reasonably require. Upon surrender
of certificates of Bank Common Stock in exchange for BankGroup Common Stock,
there shall be paid to the recordholder of the certificates of BankGroup Common
Stock issued in exchange thereof (i) the amount of dividends theretofore paid
with respect to such full shares of BankGroup Common Stock as of any date
subsequent to the Effective Date of the Bank Merger which have not yet been paid
to a public official pursuant to abandoned property laws and (ii) at the
appropriate payment date the amount of dividends with a record date after the
Effective Date of the Bank Merger, but prior to surrender and payment date
subsequent to surrender. No interest shall be payable with respect to such
dividends upon surrender of outstanding certificates.
2.4 Bank Options. At the Effective Time of the Bank Merger, as provided
in the Plan of Merger, outstanding options to acquire Bank Common Stock ("Bank
Options"), which options are identified on Schedule G and which have not been
exercised before the Effective Time of the Bank Merger, shall be converted,
based on the Exchange Ratio, into options to acquire BankGroup Common Stock
("BankGroup Options"). The BankGroup Options shall have the same terms and
conditions as the Bank Options, except that the exercise price per share of
BankGroup Common Stock under a BankGroup Option shall be equal to the exercise
price per share of Bank Common Stock under the Bank Option divided by the
Exchange Ratio (rounded up to the nearest cent), and the number of shares of
BankGroup Common Stock issuable upon the exercise of each BankGroup Option shall
be equal to the number of shares covered by each Bank Option, multiplied by the
Exchange Ratio.
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2.5 Dissenting Shares. Holders of Bank Common Stock do not have the
right to dissent and demand payment of fair value, as provided in Va. Code ss.
6.1-43.
2.6 No Fractional Shares. No certificates or scrip for fractional shares
of BankGroup Common Stock will be issued. In lieu thereof, BankGroup will pay
the value of such fractional shares in cash (subject to all applicable
withholding taxes), for which purpose BankGroup Common Stock shall be valued at
the BankGroup Stock Price.
ARTICLE III
Representations and Warranties
3.1 Representations and Warranties of Bank. Bank represents and
warrants to BankGroup as follows:
(a) Organization, Standing and Power. Bank is a Virginia banking
corporation duly organized, validly existing and in good standing under the laws
of Virginia and has all requisite power and authority to own, lease and operate
its properties and to carry on its business as now being conducted and, subject
to the approval of the Plan of Merger by shareholders of Bank as contemplated by
Section 4.2, to perform this Agreement and to effect the transactions
contemplated hereby. Bank's Articles of Incorporation and all amendments thereto
to the date hereof and Bank's Bylaws as amended to the date hereof are attached
hereto as Schedule A and Schedule B, respectively. Bank's deposits are insured
by the Bank Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC")
to the maximum extent permitted by law. Bank is a member bank of the Federal
Reserve System.
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(b) Capital Structure; Subsidiaries. Bank's authorized capital
stock at March 31, 1996 consists of 3,000,000 shares of Common Stock. As of the
Effective Time of the Bank Merger, no more than 1,616,836 shares of Bank Common
Stock will be issued and outstanding, which number reflects the potential
exercise of all outstanding Bank Options, and all of the issued and outstanding
shares of Bank Common Stock are and will be validly issued, fully paid and
nonassessable. Bank has no subsidiaries, except HB Services, Inc., a Virginia
corporation.
Except as disclosed on Schedule C, Bank knows of no person who
beneficially owns 5% or more of outstanding Bank Common Stock.
(c) Authority. Subject to the approval of the Plan of Merger by
shareholders of Bank as contemplated by Section 4.2 hereof, the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby and by the Plan of Merger have been duly and validly authorized by all
necessary action on the part of Bank, and this Agreement is a valid and binding
obligation of Bank, enforceable in accordance with its terms. The execution and
delivery of this Agreement, the consummation of the transactions contemplated
hereby and by the Plan of Merger and compliance by Bank with any of the
provisions hereof will not, except as noted on Schedule D, (i) conflict with or
result in a breach of any provision of Bank's Articles of Incorporation or
Bylaws or a default (or give rise to any right of termination, cancellation or
acceleration) under any of the terms, conditions or provisions of any note,
bond, debenture, mortgage, indenture, license, material agreement or other
material instrument or obligation to which Bank is a party, by which Bank or any
of its properties or assets may be bound (except for such conflict, breach or
default, as to which requisite waivers or consents shall have been obtained by
Bank prior to the Effective Time of the Bank Merger
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or the obtaining of which shall have been waived by BankGroup); or (ii) violate
any order, writ, injunction, decree, statute, rule or regulation applicable to
Bank or any of its properties or assets. No consent or approval by any
governmental authority, other than compliance with applicable federal and state
corporate, securities and banking laws, and regulations of the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"), and the
State Corporation Commission of Virginia ("SCC"), is required in connection with
the execution and delivery by Bank of this Agreement or the consummation by Bank
of the transactions contemplated hereby or by the Plan of Merger.
(d) Investments. All securities owned by Bank of record and
beneficially are free and clear of all mortgages, liens, pledges, encumbrances
or any other restriction, whether contractual or statutory, which would
materially impair the ability of Bank freely to dispose of any such security at
any time, except as noted on Schedule C. Any securities owned of record by Bank
in an amount equal to 5% or more of the issued and outstanding voting securities
of the issuer thereof have been noted on Schedule C. There are no voting trusts
or other agreements or undertakings with respect to the voting of such
securities. With respect to all repurchase agreements to which Bank is a party,
Bank has a valid, perfected first lien or security interest in the government
securities or other collateral securing the repurchase agreement, and the value
of the collateral securing each such repurchase agreement equals or exceeds the
amount of the debt secured by such collateral under such agreement.
(e) Financial Statements. Schedule E contains copies of the
following financial statements of Bank (the "Bank Financial Statements"):
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(i) Balance Sheets as of March 31, 1996 and December
31, 1995 and 1994;
(ii) Statements of Income for each of the quarters ended
March 31, 1996 and 1995 and each of the three years ended December 31, 1995,
1994 and 1993;
(iii) Statements of Changes in Stockholders' Equity for
each of the quarters ended March 31, 1996 and 1995 and each of the three years
ended December 31, 1995, 1994 and 1993; and
(iv) Statements of Cash Flows for each of the three
years ended December 31, 1995, 1994 and 1993.
Such financial statements and the notes thereto have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods indicated. Each of such statements of financial
condition, together with the notes thereto, presents fairly as of its date the
financial condition and assets and liabilities of Bank. Such statements of
operations, statements of stockholders' equity and statements of cash flows,
together with the notes thereto, present fairly the results of operations of
Bank for the periods indicated.
Subject to the limitations imposed by federal and Virginia laws
applicable to state banks, and except as disclosed in the Bank Financial
Statements, there are no restrictions precluding Bank from paying dividends
when, as, and if declared by its board of directors.
(f) Absence of Undisclosed Liabilities. At December 31, 1995,
and at March 31, 1996, Bank had no obligations or liabilities (contingent or
otherwise) of any nature that were not reflected in the Bank Financial
Statements as of such date, or disclosed in the notes thereto,
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except for those which in the aggregate are immaterial or disclosed in Schedules
specifically referred to herein.
(g) Tax Matters. Bank has filed or (in the case of returns or
reports not yet due) will file all tax returns and reports required to have been
filed by or for it before the Effective Time of the Bank Merger, and all
information set forth in such returns or reports is or (in the case of such
returns or reports not yet due) will be accurate and complete in all material
respects. Bank has paid or made adequate provision in all material respects for
(or with respect to returns or reports not filed before the Effective Time of
the Bank Merger will pay or make adequate provision for) all taxes, additions to
tax, penalties, and interest for all periods covered by those returns or
reports. Except as disclosed on Schedule F, there are, and at the Effective Time
of the Bank Merger will be, no unpaid taxes, additions to tax, penalties, or
interest due and payable by Bank or by any other person that are or could become
a lien on any asset or otherwise adversely affect the business, property or
financial condition of Bank. Bank has collected or withheld, or will collect or
withhold before the Effective Time of the Bank Merger, all amounts required to
be collected or withheld by it for any taxes, and all such amounts have been, or
before the Effective Time of the Bank Merger will have been, paid to the
appropriate governmental agencies or set aside in appropriate accounts for
future payment when due. Bank is in material compliance with, and its records
contain all information and documents (including, without limitation, properly
completed IRS Forms W-9) necessary to comply in all material respects with, all
information reporting and tax withholding requirements under federal, state, and
local laws, rules, and regulations, and such records identify with specificity
all accounts subject to backup withholding under Section 3406 of the Code. The
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balance sheets contained in the Bank Financial Statements fully and properly
reflect, as of the dates thereof, the aggregate liabilities of Bank for all
accrued taxes, additions to tax, penalties and interest. For periods ending
after December 31, 1995, the books and records of Bank fully and properly
reflect its liability for all accrued taxes, additions to tax, penalties and
interest. Except as disclosed in Schedule F, no tax return or report of Bank is
under examination by any taxing authority or the subject of any administrative
or judicial proceeding, Bank has not granted (nor is it subject to) any waiver
of the period of limitations for the assessment of tax for any currently open
taxable period, and no unpaid tax deficiency has been asserted against or with
respect to Bank by any taxing authority. Bank has not made or entered into, and
holds no asset subject to, a consent filed pursuant to Section 341(f) of the
Code and the regulations thereunder or a "safe harbor lease" subject to former
Section 168(f)(8) of the Code and the regulations thereunder. Schedule F
describes all tax elections, consents and agreements affecting Bank for any tax
period beginning on or after January 1, 1989, and all such material elections,
consents and agreements for any prior period. To the best knowledge of Bank, no
Bank shareholder is a "foreign person" for purposes of Section 1445 of the Code.
(h) Options, Warrants and Related Matters. There are no
outstanding unexercised options, warrants, calls, commitments or agreements of
any character to which Bank is a party or by which it is bound calling for the
issuance of securities of Bank or any security representing the right to
purchase or otherwise receive any such security, except (i) as set forth on
Schedule G and (ii) the Option Agreement.
(i) Property; Leases. Bank owns (or enjoys use of under
capital leases) all property reflected on the Bank Financial Statements as of
December 31, 1995 and March 31,
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1996 (except personal property sold or otherwise disposed of in the ordinary
course of business). All property shown as being owned is owned free and clear
of all mortgages, liens, pledges, charges or encumbrances of any nature
whatsoever, except those referred to in the notes to the Bank Financial
Statements, liens for current taxes not yet due and payable, any unfiled
mechanics' liens and such encumbrances and imperfections of title, if any, as
are not substantial in character or amount or otherwise materially impair
business operations.
The capital leases, if any, relating to leased property are valid and
subsisting and there does not exist with respect to Bank's obligations
thereunder any material default or event or condition which, after notice or
lapse of time or both, would constitute a material default thereunder. There is
no condemnation proceeding pending or threatened which would preclude or impair
the use of any property as presently being used in the conduct of Bank's
business. Such leases are reflected in the Bank Financial Statements.
All property and assets material to the business or operations of Bank
are in substantially good operating condition and repair and such property and
assets are adequate for the business and operations of Bank as currently
conducted.
No notice of violation of zoning laws, building or fire codes or other
statutes, ordinances or regulations relating to the operations of Bank has been
received by Bank.
(j) Employees. Schedule G lists (A) name of, current annual
salary rates for, and the number of shares of Bank Common Stock owned
beneficially by, all present employees of Bank who each are presently scheduled
to receive a salary in excess of $50,000 during the year ending December 31,
1996; (B) the number of shares of Bank Common Stock owned beneficially by each
director of Bank; (C) the names of and the number of shares of Bank
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Common Stock owned by each person who, to the knowledge of Bank, beneficially
owns 5% or more of the outstanding Bank Common Stock; and (D) the names of all
holders of Bank Options and the number of Bank Options held by each such person
and the exercise price of each such Bank Option.
(k) Certain Contracts. Schedule H lists all notes, bonds,
mortgages, indentures, licenses, lease agreements and other contracts and
obligations to which Bank is a party, except for loans made by Bank, commitments
to lend by Bank and those entered into by Bank in the ordinary course of
business consistent with prior practices and that do not involve more than
$50,000.
(l) Employment Contracts and Related Matters. Except in all cases
as set forth on Schedule I, Bank is not a party to (A) any employment contract
not terminable at the option of Bank without liability; (B) any retirement,
stock option, profit sharing or pension plan or thrift plan or agreement or
employee benefit plan (as defined in Section 3 of the Employee Retirement Income
Security Act of 1974); (C) any management or consulting agreement not terminable
at the option of Bank without liability; or (D) any union or labor agreement.
(m) Real Estate. Schedule J describes all interests in real
property owned, leased or otherwise claimed by Bank, including "other real
estate owned."
(n) Affiliates. Schedule K sets forth the names and number of
shares of Bank Common Stock owned beneficially or of record by any persons Bank
considers to be affiliates ("Bank Affiliates") as that term is defined for
purposes of Rule 145 under the 1933 Act.
(o) Agreements in Force and Effect. All material contracts,
agreements, plans, leases, policies and licenses referred to in any Schedule of
Bank referred to herein are
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valid and in full force and effect, and Bank has not breached any material
provision of, nor are in default in any material respect under the terms of, any
such contract, agreement, plan, lease, policy or license.
(p) Legal Proceedings; Compliance with Laws. Except as set forth
in Schedule L, there is no legal, administrative, arbitration or other
proceeding or governmental investigation pending (including any legal,
administrative, arbitration or other proceeding or governmental investigation
pending involving a violation of the federal antitrust laws), or, to the
knowledge of Bank's management, threatened or probable of assertion, which might
result in money damages payable by Bank in excess of insurance coverage, which
might result in a permanent injunction against Bank, which might result in a
change in the zoning or building ordinances materially affecting the property or
leasehold interests of Bank, or which otherwise, either individually or in the
aggregate, is likely to have a material adverse affect on Bank. Except as set
forth in Schedule L, Bank has complied in all material respects with any laws,
ordinances, requirements, regulations or orders applicable to its business
(including environmental laws, ordinances, requirements, regulations or orders).
Bank has all licenses, permits, orders or approvals of any federal, state, local
or foreign governmental or regulatory body (collectively, "Permits") that are
material to or necessary for the conduct of the business of Bank; the Permits
are in full force and effect; no violations are or have been recorded in respect
of any Permits, nor has Bank received notice of any such violation; and no
proceeding is pending or, to the knowledge of Bank, threatened or probable of
assertion to revise, revoke or limit any Permit. Except as set forth in Schedule
L, Bank has not entered into any agreements or written understandings with the
SCC, the FDIC, the Federal Reserve Board or
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any other regulatory authority. Bank is not subject to any judgment, order,
writ, injunction or decree which materially adversely affects, or might
reasonably be expected to materially adversely affect, the condition (financial
or otherwise), business or prospects of Bank.
(q) Employee Benefit Plans.
(i) Schedule I includes a correct and complete list of,
and BankGroup has been furnished a true and correct copy of, (A) all qualified
pension and profit-sharing plans, all deferred compensation, consultant,
severance, thrift, option, bonus and group insurance contracts and all other
incentive, welfare and employee benefit plans, trust, annuity or other funding
agreements, and all other agreements that are presently in effect, or have been
approved prior to the date hereof, for the benefit of employees or former
employees of Bank, or the dependents or beneficiaries of any employee or former
employee of Bank, whether or not subject to ERISA (the "Employee Plans"); (B)
the most recent actuarial and financial reports prepared or required to be
prepared with respect to any Employee Plan; and (C) the most recent annual
reports filed with any governmental agency, the most recent favorable
determination letter issued by the Internal Revenue Service, and any open
requests for rulings or determination letters, that pertain to any such
qualified Employee Plan. Schedule I identifies each Employee Plan that is
intended to be qualified under Section 401(a) of the Code and each such plan is
qualified.
(ii) Neither Bank nor any employee pension benefit plan
(as defined in Section 3(2) of ERISA (a "Pension Plan")) maintained or
previously maintained by it, has incurred any material liability to the Pension
Benefit Guaranty Corporation ("PBGC") or to the Internal Revenue Service with
respect to any Pension Plan. There is not currently pending with
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the PBGC any filing with respect to any reportable event under Section 4043 of
ERISA nor has any reportable event occurred as to which a filing is required and
has not been made.
(iii) Full payment has been made (or proper accruals have
been established) of all contributions which are required for periods prior to
the Closing Date under the terms of each Employee Plan, ERISA, or a collective
bargaining agreement. No accumulated funding deficiency (as defined in Section
302 of ERISA or Section 412 of the Code) whether or not waived, exists with
respect to any Pension Plan (including any Pension Plan previously maintained by
Bank). There is no "unfunded current liability" (as defined in Section 412 of
the Code) with respect to any Pension Plan.
(iv) No Employee Plan is a "multiemployer plan" (as
defined in Section 3(37) of ERISA). Bank has not incurred any liability under
Section 4201 of ERISA for a complete or partial withdrawal from a multiemployer
plan (as defined in Section 3(37) of ERISA). Bank has not participated in or
agreed to participate in, a multiemployer plan (as defined in Section 3(37) of
ERISA).
(v) All Employee Plans that are "employee benefit
plans", as defined in Section 3(3) of ERISA, that are maintained by or were
previously maintained by Bank comply and have been administered in compliance in
all material respects with ERISA and all other legal requirements, including the
terms of such plans, collective bargaining agreements and securities laws. Bank
does not have any material liability under any such plan that is not reflected
in the Bank Financial Statements.
(vi) No prohibited transaction has occurred with respect
to any Employee Plan that is an "employee benefit plan" (as defined in Section
3(3) of ERISA)
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maintained by Bank or any "employee benefit plan" previously maintained by Bank
that would result, directly or indirectly, in material liability under ERISA or
in the imposition of a material excise tax under Section 4975 of the Code.
(vii) Schedule I identifies each Employee Plan that is an
"employee welfare benefit plan" (as defined in Section 3(1) of ERISA) and which
is funded. The funding under each such plan does not exceed the limitations
under Section 419A(b) or 419A(c) of the Code. Bank is not subject to taxation on
the income of any such plan or any such plan previously maintained by Bank.
(viii) Schedule I identifies the method of funding
(including any individual accounting) and funded status for all post-retirement
medical or life insurance benefits for the employees of Bank.
(r) Insurance. All policies or binders of fire, liability,
product liability, workmen's compensation, vehicular and other insurance held by
or on behalf of Bank are described on Schedule M and are valid and enforceable
in accordance with their terms, are in full force and effect, and insure against
risks and liabilities to the extent and in the manner customary for the industry
and are deemed appropriate and sufficient by Bank. Bank is not in default with
respect to any provision contained in any such policy or binder and has not
failed to give any notice or present any claim under any such policy or binder
in due and timely fashion. Bank has not received notice of cancellation or
non-renewal of any such policy or binder. Bank has no knowledge of any
inaccuracy in any application for such policies or binders, any failure to pay
premiums when due or any similar state of facts that might form the basis for
termination of any such insurance. Bank has no knowledge of any state of facts
or of
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the occurrence of any event that is reasonably likely to form the basis for any
material claim against it not fully covered (except to the extent of any
applicable deductible) by the policies or binders referred to above. Bank has
not received notice from any of its insurance carriers that any insurance
premiums will be materially increased in the future or that any such insurance
coverage will not be available in the future on substantially the same terms as
now in effect.
(s) Loan Portfolio. Each loan outstanding on the books of Bank is
reflected correctly in all material respects by the loan documentation, was made
in all material respects in the ordinary course of business, was not known to be
uncollectible at the time it was made, and was made in all material respects in
accordance with Bank's standard loan policies. The records of Bank regarding all
loans outstanding on its books are accurate in all material respects. The
reserves for possible loan losses on the outstanding loans of Bank and the
reserves for "other real estate owned" by Bank as reflected in the Bank
Financial Statements, have been established in accordance with generally
accepted accounting principles and with the requirements of the SCC, and, in the
best judgment of the management of Bank, are adequate to absorb all material
known and anticipated loan losses in the loan portfolio of Bank, and any losses
associated with "other real estate owned" or held by Bank. Except as identified
on Schedule N, no loan in excess of $50,000 has been classified as of the date
hereof by Bank or regulatory examiners as "Other Loans Specifically Mentioned",
"Substandard", "Doubtful" or "Loss". Except as identified on Schedule N, each
loan reflected as an asset on the Bank balance sheets is, to the knowledge of
Bank, the legal, valid and binding obligation of the obligor and any guarantor,
enforceable in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent conveyance and other laws of general applicability relating to or
affecting creditor's
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rights and to general equity principles, and no defense, offset or counterclaim
has been asserted with respect to any such loan which, if successful, would have
a material adverse effect on the financial condition, results of operations,
business or prospects of Bank.
(t) Absence of Changes. Except as set forth in Schedule O, since
December 31, 1995 and March 31, 1996, there has not been any material adverse
change in the condition (financial or otherwise), aggregate assets or
liabilities, earnings or business of Bank. Since such date the business of Bank
has been conducted only in the ordinary course.
(u) Brokers and Finders. Neither Bank nor any of its officers,
directors or employees have employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finders' fees in connection
with the transaction contemplated herein except that Bank has retained Scott &
Stringfellow, Inc. as its financial advisor. If the Bank Merger is consummated,
Bank shall pay, at the closing provided for in Section 6.1, a fee (which shall
be inclusive of expenses) to Scott & Stringfellow equal to 0.60% of the sum of
(i) the product obtained by multiplying the BankGroup Stock Price by the number
of shares of BankGroup Common Stock issued in the Bank Merger and (ii) the cash
paid to shareholders in the cash exchange.
(v) Securities Portfolio. Since December 31, 1995 and March
31, 1996, there has been no material deterioration in the quality of the
portfolio of securities of Bank.
(w) Reports. Bank has filed all reports and statements, together
with any amendments required to be made with respect thereto, that were required
to be filed with (i) the SCC; (ii) the FDIC; (iii) the Federal Reserve Board;
and (iv) any other governmental or regulatory authority or agency having
jurisdiction over its operations. None of such reports or
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statements, or any amendments thereto, contains any statement that, at the time
and in the light of the circumstances under which it was made, was false or
misleading with respect to any material fact necessary in order to make the
statements contained therein not false or misleading.
(x) Environmental Matters. For purposes of this Agreement,
the following terms shall have the indicated meaning:
"Environmental Law" means any federal, state or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization, approval,
consent, order, judgment, decree, injunction or agreement with any governmental
entity relating to (i) the protection, preservation or restoration of the
environment (including, without limitation, air, water vapor, surface water,
groundwater, drinking water supply, surface soil, subsurface soil, plant and
animal life or any other natural resource), and/or (ii) the use, storage,
recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of Hazardous Substances. The term
"Environmental Law" includes without limitation (i) the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C.
ss. 9601, et seq; the Resource Conservation and Recovery Act, as amended, 42
U.S.C. ss. 6901, et seq; the Clean Air Act, as amended, 42 U.S.C. ss. 7401, et
seq; the Federal Water Pollution Control Act, as amended, 33 U.S.C. ss. 1251, et
seq; the Toxic Substances Control Act, as amended, 15 U.S.C. ss. 9601, et seq;
the Emergency Planning and Community Right to Know Act, 42 U.S.C. ss. 11001, et
seq; the Safe Drinking Water Act, 42 U.S.C. ss. 300f, et seq; and all comparable
state and local laws, and (ii) any common law (including without limitation
common law that may impose strict liability) that may impose liability or
obligations for injuries or damages due to, or threatened as a result of, the
presence of or exposure to any Hazardous Substance.
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"Hazardous Substance" means any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated, under any Environmental Law, whether by type or by
quantity, including any material containing any such substance as a component.
Hazardous Substances include without limitation petroleum or any derivative or
by-product thereof, asbestos, radioactive material, and polychlorinated
biphenyls.
"Loan Portfolio Properties and Other Properties Owned" means those
properties owned or operated by Bank, including those properties serving as
collateral for any loans made by Bank.
To the best knowledge of Bank, except as set forth in Schedule R,
(i) Bank has not been or is in violation of or liable
under any Environmental Law;
(ii) none of the Loan Portfolio Properties and Other
Properties Owned has been or is in violation of or liable under any
Environmental Law; and
(iii) there are no actions, suits, demands, notices,
claims, investigations or proceedings pending or threatened relating to the
liability of the Loan Portfolio Properties and Other Properties Owned under any
Environmental Law, including without limitation any notices, demand letters or
requests for information from any federal or state environmental agency relating
to any such liabilities under or violations of Environmental Law, except in the
case of clauses (i), (ii) and (iii) above for such violations and liabilities,
and actions, suits, demands, notices, claims, investigations or proceedings,
which would not singly or in the aggregate have a material adverse effect on the
financial condition, results of operations, business or prospects of Bank.
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(y) Disclosure. Except to the extent of any subsequent correction
or supplement with respect thereto furnished prior to the date hereof, no
written statement, certificate, schedule, list or other written information
furnished by or on behalf of Bank at any time to BankGroup, in connection with
this Agreement when considered as a whole, contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary in order to make the statements herein or therein, in light of the
circumstances under which they were made, not misleading. Each document
delivered or to be delivered by Bank to BankGroup is or will be a true and
complete copy of such document, unmodified except by another document delivered
by Bank.
3.2 Representations and Warranties of BankGroup. BankGroup
represents and warrants to Bank as follows:
(a) Organization, Standing and Power. (i) BankGroup is a
corporation duly organized, validly existing and in good standing under the laws
of Virginia and has all requisite corporate power and authority to own, lease
and operate its properties, to effect this transaction and to carry on its
business as now being conducted. BankGroup has delivered to Bank complete and
correct copies of (i) its Articles of Incorporation and all amendments thereto
to the date hereof, and (ii) its Bylaws as amended to the date hereof.
(ii) Acquisition is a corporation duly organized,
validly existing and in good standing under the laws of Virginia. Acquisition
was formed as an "interim" Virginia banking corporation solely to facilitate the
Merger and has had no prior business operations.
(b) Capital Structure. As of March 31, 1996, the authorized
capital stock of BankGroup consisted of 1,000,000 shares of Preferred Stock and
20,000,000 shares of Common
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Stock, of which 8,574,044 shares of BankGroup Common Stock were issued and
outstanding. All of such issued and outstanding shares of BankGroup Common Stock
were validly issued, fully paid and nonassessable at such date.
BankGroup owns all of the issued and outstanding common stock of
Acquisition free and clear of any liens, claims, encumbrances, charges or rights
of third parties of any kind whatsoever.
BankGroup also owns all of the issued and outstanding capital stock of
Piedmont Trust Bank, Bank of Carroll, Bank of Ferrum, First Community Bank of
Forest, The First Bank of Stuart and First Community Bank of Saltville (each a
"Subsidiary" and together the "Subsidiaries"). The Subsidiaries are duly
organized, validly existing and in good standing under the laws of their
jurisdiction of incorporation and have all requisite corporate power and
authority to own, lease and operate their properties and to carry on their
business as now being conducted.
(c) Authority. Subject to the approval of the issuance of
BankGroup Common Stock in the Merger as contemplated by Section 4.2 hereof (if
such approval is required by the rules of The Nasdaq Stock Market), the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by all
necessary action on the part of BankGroup and Acquisition, and this Agreement is
a valid and binding obligation of BankGroup and Acquisition, enforceable in
accordance with its terms. The execution and delivery of this Agreement, the
consummation of the transactions contemplated hereby and compliance by BankGroup
and Acquisition with any of the provisions hereof will not (i) conflict with or
result in a breach of any provision of BankGroup's, Acquisition's or a
Subsidiary's Articles of Incorporation, or any of their respective Bylaws or
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result in a default (or give rise to any right of termination, cancellation or
acceleration) under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, license, agreement or other instrument or to which
BankGroup, Acquisition or a Subsidiary is a party, or by which any of them or
any of their properties or assets may be bound; or (ii) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to BankGroup,
Acquisition or a Subsidiary or any of their properties or assets. No consent or
approval by any government authority, other than compliance with applicable
federal and state corporate, securities and banking laws, and regulations of the
United States Securities and Exchange Commission ("SEC"), the Federal Reserve
Board, and the SCC are required in connection with the execution and delivery by
BankGroup or Acquisition of this Agreement or the consummation by BankGroup and
Acquisition of the Bank Plan of Merger.
(d) Financial Statements. BankGroup has delivered to Bank
copies of the following financial statements of BankGroup (the "BankGroup
Financial Statements"):
(i) Consolidated Balance Sheets as of March 31, 1996
and December 31, 1995 and 1994;
(ii) Consolidated Statements of Income for each of the
quarters ended March 31, 1996 and 1995 and each of the three years ended
December 31, 1995, 1994 and 1993;
(iii) Consolidated Statements of Changes in Stockholders'
Equity for each of the quarters ended March 31, 1996 and 1995 and each of the
three years ended December 31, 1995, 1994 and 1993; and
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(iv) Consolidated Statements of Cash Flows for each of
the quarters ended March 31, 1996 and 1995 and each of the three years ended
December 31, 1995, 1994 and 1993.
Such consolidated financial statements and the notes thereto have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods indicated. Each of such
consolidated balance sheets, together with the notes thereto, presents fairly as
of its date the financial condition and assets and liabilities of BankGroup and
the Subsidiaries. The consolidated statements of income, statements of changes
in shareholders' equity and statements of cash flows, together with the notes
thereto, present fairly the consolidated results of operations of BankGroup and
the Subsidiaries for the periods indicated.
(e) Absence of Undisclosed Liabilities. Except as disclosed on
Schedule T, at December 31, 1995 and March 31, 1996, BankGroup and the
Subsidiaries had no material liabilities (contingent or otherwise) of any nature
which were not reflected on the BankGroup Financial Statements or disclosed in
the notes thereto at such date except for those which in the aggregate are
immaterial.
(f) Absence of Changes. Since December 31, 1995 and March 31,
1996, there has not been any material adverse change in the condition (financial
or otherwise), aggregate assets or liabilities, earnings or business of
BankGroup as reflected on its consolidated financial statements as of such date
and for the period then ended.
(g) Brokers and Finders. Neither BankGroup nor any of its
officers, directors or employees has employed any broker or finder or incurred
any liability for any brokerage fees, commissions or finders' fees in connection
with the Merger.
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(h) Options, Warrants and Related Matters. There are no
outstanding unexercised options, warrants, calls, commitments or agreements of
any character to which BankGroup is a party or by which it is bound calling for
the issuance of securities of BankGroup or any security representing the right
to purchase or otherwise receive any such security, except as set forth in
Schedule Q.
(i) Reports. BankGroup and the Subsidiaries have filed all
reports and statements, together with any amendments required to be made with
respect thereto, that were required to be filed with (i) United States
Securities and Exchange Commission (the "SEC"); (ii) the Federal Reserve Board;
(iii) the OCC; (iv) the FDIC; (v) the Bureau of Financial Institutions of the
State Corporation Commission of Virginia; and (vi) any other governmental or
regulatory authority or agency having jurisdiction over their operations. Each
of such reports and documents, including the financial statements, exhibits and
schedules thereto, which was filed with the SEC was in form and substance in
compliance with the Securities Act of 1933 (the "1933 Act") or the Securities
Exchange Act of 1934 (the "1934 Act"), as the case may be. No such report or
statement, or any amendments thereto, contains any statement which, at the time
and in the light of the circumstances under which it was made, was false or
misleading with respect to any material fact necessary in order to make the
statements contained therein not false or misleading.
(j) Legal Proceedings; Compliance with Laws. Except as set forth
in Schedule R, there is no legal, administrative, arbitration or other
proceeding or governmental investigation pending (including any legal,
administrative, arbitration or other proceeding or governmental investigation
pending involving a violation of the federal antitrust laws), or, to the
knowledge of BankGroup's management, threatened or probable of assertion, which
might result
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in damages payable by BankGroup or any Subsidiary in excess of insurance
coverage, which might result in a permanent injunction against Bank or a
Subsidiary, which might result in a change in the zoning or building ordinances
materially affecting the property or leasehold interests of BankGroup or a
Subsidiary, or which otherwise, either individually or in the aggregate, is
likely to have a material adverse affect on BankGroup or any Subsidiary. Except
as set forth in Schedule R, BankGroup and each Subsidiary has complied in all
material respects with any laws, ordinances, requirements, regulations or orders
applicable to its business (including environmental laws, ordinances,
requirements, regulations or orders). BankGroup and each Subsidiary has all
licenses, permits, orders or approvals of any federal, state, local or foreign
governmental or regulatory body (collectively, "Permits") that are material to
or necessary for the conduct of its business; the Permits are in full force and
effect; no violations are or have been recorded in respect of any Permits, nor
has BankGroup or any Subsidiary received notice of any such violation; and no
proceeding is pending or, to the knowledge of BankGroup or any Subsidiary,
threatened or probable of assertion to revise, revoke or limit any Permit.
Except as set forth in Schedule R, neither BankGroup nor any Subsidiary has
entered into any agreements or written understandings with the State Corporation
Commission of Virginia, the Federal Reserve Board, the FDIC or any other
regulatory authority. Neither BankGroup nor any Subsidiary is subject to any
judgment, order, writ, injunction or decree which materially adversely affects,
or might reasonably be expected to materially adversely affect, its condition
(financial or otherwise), business or prospects.
(k) Employee Benefits Plan.
(i) With respect to qualified pension and
profit-sharing plans, all deferred compensation, consultant, severance, thrift,
option, bonus and group insurance contracts
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and all other incentive, welfare and employee benefit plans, trust, annuity or
other funding agreements, and all other agreements that are presently in effect,
for the benefit of employees of BankGroup or any Subsidiary, or the dependents
or beneficiaries of any employee thereof, whether or not subject to ERISA (the
"BankGroup Employee Plans") full payment has been made (or proper accruals have
been established) of all contributions which are required for periods prior to
the Closing Date under the terms of each BankGroup Employee Plan, ERISA, or a
collective bargaining agreement. No accumulated funding deficiency (as defined
in Section 302 of ERISA or Section 412 of the Code) whether or not waived,
exists with respect to any such pension plan. There is no "unfunded current
liability" (as defined in Section 412 of the Code) with respect to any such
pension plan;
(ii) All BankGroup Employee Plans that are "employee
benefit plans", as defined in Section 3(3) of ERISA, that are maintained by
BankGroup or any Subsidiary comply and have been administered in compliance in
all material respects with ERISA and all other legal requirements, including the
terms of such plans, collective bargaining agreements and securities laws.
Neither BankGroup nor any of its Subsidiaries has any material liability under
any such plan that is not reflected in the BankGroup Financial Statements; and
(iii) No prohibited transaction has occurred with respect
to any BankGroup Employee Plan that is an "employee benefit plan" (as defined in
Section 3(3) of ERISA) maintained by BankGroup or any Subsidiary that would
result, directly or indirectly, in material liability under ERISA or in the
imposition of a material excise tax under Section 4975 of the Code.
(l) Insurance. BankGroup or its Subsidiaries maintain and
hold valid and enforceable policies or binders of fire, liability, product
liability, workmen's compensation,
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vehicular and other insurance insuring against risks and liabilities to the
extent and in the manner customary for the industry and are deemed appropriate
and sufficient by BankGroup.
(m) Loan Portfolio. Each loan outstanding on the books of the
Subsidiaries is reflected correctly in all material respects by the loan
documentation, was made in, in all material respects, the ordinary course of
business, was not known to be uncollectible at the time it was made, and was
made in all material respects in accordance with the Subsidiary's standard loan
policies. The records of the Subsidiaries regarding all loans outstanding on its
books are accurate in all material respects. The reserves for possible loan
losses on the outstanding loans of the Subsidiaries and the reserves for other
real estate owned by the Subsidiaries as reflected in the BankGroup Financial
Statements, have been established in accordance with generally accepted
accounting principles and with the requirements of the applicable regulatory
authority, and, in the best judgment of the management of BankGroup, are
adequate to absorb all material known and anticipated loan losses in the loan
portfolio of the Subsidiaries, and any losses associated with other real estate
owned or held by them.
(n) Absence of Changes. Since December 31, 1995 and March 31,
1996, there has not been any material adverse change in the condition (financial
or otherwise), aggregate assets or liabilities, earnings or business of
BankGroup and its Subsidiaries. Since such date the business of BankGroup and
each of its Subsidiaries has been conducted only in the ordinary course.
(o) Securities Portfolio. Since December 31, 1995 and March
31, 1996, there has been no material deterioration in the quality of the
portfolio of securities of BankGroup and its Subsidiaries.
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(p) Environmental Matters. To the best knowledge of
BankGroup, except as set forth in Schedule S,
(i) Neither BankGroup nor any Subsidiary has been or is
in violation of or liable under any Environmental Law;
(ii) None of the properties owned or operated by
BankGroup or any Subsidiary has been or is in violation of or liable under any
Environmental Law; and
(iii) There are no actions, suits, demands, notices,
claims, investigations or proceedings pending or threatened relating to the
liability of the properties owned or operated by BankGroup or any Subsidiary
under any Environmental Law, including without limitation any notices, demand
letters or requests for information from any federal or state environmental
agency relating to any such liabilities under or violations of Environmental
Law, except in the case of clauses (i), (ii) and (iii) above for such violations
and liabilities, and actions, suits, demands, notices, claims, investigations or
proceedings, which would not singly or in the aggregate have a material adverse
effect on the financial condition, results of operations, business or prospects
of BankGroup and its Subsidiaries.
(q) Disclosure. This Agreement, and, except to the extent of any
subsequent correction or supplement with respect thereto furnished prior to the
date hereof, no written statement, certificate, schedule, list or other written
information furnished by or on behalf of BankGroup to Bank, in connection with
this Agreement when considered as a whole, contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary in order to make the statements herein or therein, in light of the
circumstances under which they are made, not misleading.
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ARTICLE IV
Conduct and Transactions Prior to
Effective Time of the Bank Merger
4.1 Access to Records and Properties of BankGroup and Bank. Between the
date of this Agreement and the Effective Time of the Bank Merger, BankGroup (for
itself and for each of its Subsidiaries) on the one hand, and Bank, on the
other, agrees to give to the other reasonable access to all its premises and
books and records and to cause its officers to furnish the other with such
financial and operating data and other information with respect to the business
and properties as the other shall from time to time request for the purposes of
verifying the warranties and representations set forth herein, preparing the
Registration Statement (as defined in Section 4.2) and applicable regulatory
filings and preparing financial statements of Bank as of a date prior to the
Effective Time of the Merger in order to facilitate BankGroup's performance of
its post-Closing Date financial reporting requirements; provided, that any such
investigation shall be conducted in such manner as not to interfere unreasonably
with the operation of the respective business of the other. BankGroup and Bank
shall each maintain the confidentiality of all confidential information
furnished to them by the other parties hereto concerning the business,
operations, and financial condition of the party furnishing such information,
and shall not use any such information except in furtherance of the Bank Merger.
If this Agreement is terminated, each party hereto shall promptly return all
documents and copies of, and all workpapers containing, confidential information
received from the other party hereto. The obligations of confidentiality under
this Section 4.1 shall survive any such termination of this Agreement and shall
remain in effect, except to the extent that (a) one party shall have
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directly or indirectly acquired the assets and business of the other party; (b)
as to any particular confidential information with respect to one party, such
information (i) shall become generally available to the public other than as a
result of an unauthorized disclosure by the other party or (ii) was available to
the other party on a nonconfidential basis prior to its disclosure by the first
party; or (c) disclosure by any party is required by subpoena or order of a
court of competent jurisdiction or by order of a regulatory authority of
competent jurisdiction.
4.2 Registration Statement; Proxy Statement; Shareholder Approval. Each
of Bank and, if required by the rules of The Nasdaq Stock Market, BankGroup will
duly call and will hold a meeting of its shareholders as soon as practicable for
the purpose of approving the Bank Merger or, with respect to BankGroup,
BankGroup's issuance of BankGroup Common Stock pursuant to the Bank Merger, and
in connection therewith will recommend to and encourage shareholders that they
vote in favor of the Bank Merger or, with respect to BankGroup, BankGroup's
issuance of BankGroup Common Stock pursuant to the Bank Merger, and will comply
fully with the provisions of the Virginia Stock Corporation Act, its Articles of
Incorporation and By-laws relating to the call and holding of a meeting of
shareholders for such purpose. Provided that BankGroup has not given any notice
to Bank under Section 4.13 and subject to action taken by its Board of Directors
in accordance with the final clause to the first sentence of Section 4.4, the
Board of Directors of Bank will recommend and encourage shareholders that they
vote in favor of the Bank Merger. BankGroup and Bank will jointly prepare the
proxy statement-prospectus to be used in connection with such meeting (the
"Proxy Statement-Prospectus") and BankGroup will prepare and file with the SEC a
Registration Statement on Form S-4 (the "Registration Statement"), of which such
Proxy Statement-Prospectus shall be a part, and use its best efforts promptly
to have the Registration Statement
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declared effective. In connection with the foregoing, BankGroup will comply with
the requirements of the 1933 Act and the 1934 Act and the rules and regulations
of the SEC under such Acts with respect to the offering and sale of BankGroup
Common Stock in connection with the Bank Merger and with all applicable state
Blue Sky and securities laws. The notices of such meetings and the Proxy
Statement-Prospectus shall not be mailed to Bank or BankGroup shareholders until
the Registration Statement shall have become effective under the 1933 Act. Bank
covenants that none of the information supplied by Bank, and BankGroup covenants
that none of the information supplied by BankGroup, for inclusion in the Proxy
Statement-Prospectus will, at the time of the mailing of the Proxy
Statement-Prospectus to Bank shareholders, contain any untrue statement of a
material fact nor will any such information omit any material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances in which they were made, not misleading; and at all times
subsequent to the time of the mailing of the Proxy Statement-Prospectus,
including the dates of the meetings of Bank and BankGroup shareholders to which
the statement relates and the Effective Time of the Bank Merger, none of such
information in the Proxy Statement-Prospectus, as amended or supplemented, will
contain an untrue statement of a material fact or omit any material fact
required to be stated therein in order to make the statements therein, in light
of the circumstances in which they were made, not misleading.
BankGroup, as the sole shareholder of Acquisition, hereby approves this
Agreement and the Plan of Merger.
4.3 Operation of the Business of Bank. Bank agrees that from the date
hereof to the Effective Time of the Bank Merger, it will operate its business
substantially as presently operated and only in the ordinary course, and,
consistent with such operation, will use its best
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efforts to preserve intact its present business organization and relationships
with persons having business dealings with it. Without limiting the generality
of the foregoing, Bank agrees that it will not, without the prior written
consent of BankGroup, unless required by regulatory authorities (i) make any
change in the compensation or title of any executive officer; (ii) make any
change in the compensation or title of any other employee, other than those set
forth on Schedule 4.3 and other than those permitted by current employment
policies in the ordinary course of business, any of which changes shall be
promptly reported to BankGroup; (iii) enter into any bonus, incentive
compensation, deferred compensation, profit sharing, thrift, retirement,
pension, group insurance or other benefit plan or (except as otherwise
specifically contemplated in this Agreement) any employment or consulting
agreement or amend any such plan or agreement to increase the benefits accruing
or payable thereunder; (iv) create or otherwise become liable with respect to
any indebtedness for money borrowed or purchase money indebtedness except in the
ordinary course of business; (v) amend Bank's Articles of Association or Bylaws;
(vi) issue or contract to issue any shares of Bank capital stock or securities
exchangeable for or convertible into capital stock, other than upon exercise of
stock options previously granted; (vii) purchase any shares of Bank capital
stock; (viii) enter into or assume any material contract or obligation, except
in the ordinary course of business; (ix) waive any right of substantial value;
(x) propose or take any other action which would make any representation or
warranty in Section 3.1 hereof untrue; (xi) introduce any new products or
services or change the rate of interest on any deposit instrument to
above-market interest rates; (xii) make any change in policies respecting
extensions of credit or loan charge-offs; (xiii) change reserve requirement
policies; (xiv) change securities portfolio policies; (xv) change financial or
tax accounting methods or practices; (xvi) enter into any new agreement,
amendment
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or endorsement or make any changes relating to insurance coverage, including
coverage for its directors and officers, which would result in an additional
payment obligation of $50,000 or more; or (xvii) propose or take any action with
respect to the closing of any branches.
Bank further agrees that, between the date of this Agreement and the
Effective Time of the Bank Merger, it will consult and reasonably cooperate with
BankGroup regarding (i) loan portfolio management, including management and
work-out of nonperforming assets, and credit review and approval procedures;
(ii) securities portfolio and funds management, including management of interest
rate risk; and (iii) expense management, all with the objective of achieving
appropriate operating synergies and appropriate accruals prior to the Effective
Time of the Bank Merger.
4.4 No Solicitation. Unless and until this Agreement shall have been
terminated pursuant to its terms, neither Bank nor any of its officers,
directors, representatives, agents or affiliates shall, directly or indirectly,
encourage, solicit or initiate discussions or negotiations with any person
(other than BankGroup) concerning any merger, sale of substantial assets, tender
offer, sale of shares of stock or similar transaction involving Bank or
disclose, directly or indirectly, any information not customarily disclosed to
the public concerning Bank, afford to any other person access to the properties,
books or records of Bank or otherwise assist any person preparing to make or who
has made such an offer, or enter into any agreement with any third party
providing for a business combination transaction, equity investment or sale of
significant amount of assets, except in a situation in which a majority of the
full Board of Directors of Bank has determined in good faith, upon advice of
counsel, that such Board has a fiduciary duty to consider and respond to a bona
fide proposal by a third party (which proposal was not directly or indirectly
solicited by Bank or any of its officers, directors, representatives,
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agents or affiliates) and provides written notice of its intention to consider
such proposal and the material terms thereof to BankGroup at least five days
before responding to the proposal. Bank will promptly communicate to BankGroup
the terms of any proposal which it may receive in respect to any of the
foregoing transactions.
4.5 Dividends. Bank agrees that in the remainder of 1996 it will declare
and pay only regular quarterly cash dividends of $0.06 per share for each of the
second and third quarters, and will pay a $0.06 per share dividend for the
fourth quarter only if the Effective Time of the Bank Merger is subsequent to
the record date for BankGroup's fourth quarter cash dividend.
4.6 Regulatory Filings. BankGroup and Bank shall jointly prepare all
regulatory filings required to consummate the transactions contemplated by the
Agreement and the Bank Plan of Merger and submit the filings for approval with
the Federal Reserve Board and the SCC as soon as practicable after the date
hereof. BankGroup and Bank shall use their best efforts to obtain approvals of
such filings.
4.7 Tax Opinion. BankGroup and Bank shall each use their best
efforts to obtain the tax opinion referred to in paragraph (e) of Section 5.1
and paragraph (f) of Section 5.2.
4.8 Public Announcements. Each party will consult with the other before
issuing any press release or otherwise making any public statements with respect
to the Bank Merger and shall not issue any press release or make any such public
statement prior to such consultations except as may be required by law.
4.9 Transactions in BankGroup Common Stock. Other than the issuance of
BankGroup Common Stock upon the exercise of stock options granted pursuant to
employee benefit plans of BankGroup, or in connection with the operation in the
ordinary course of BankGroup's dividend reinvestment plan, neither BankGroup nor
Bank will purchase, sell or
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otherwise acquire or dispose of any shares of BankGroup Common Stock during the
period of calculation of the BankGroup Stock Price.
4.10 BankGroup Rights Agreement. BankGroup agrees that any rights issued
pursuant to the Rights Agreement adopted by it in 1990 shall be issued with
respect to each share of BankGroup Common Stock issued pursuant to the terms
hereof and the Plan of Merger, regardless whether there has occurred a
Distribution Date under the terms of such Rights Agreement prior to the
occurrence of the Effective Time of the Bank Merger.
4.11 Accounting Treatment. BankGroup and Bank shall use their best
efforts to cause the Bank Merger to be accounted for as a "pooling of
interests."
4.12 Agreement as to Efforts to Consummate. Subject to the terms and
conditions of this Agreement, BankGroup and Bank each agrees to use all
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective, as soon as practicable
after the date of this Agreement, the transactions contemplated by this
Agreement, including, without limitation, using reasonable effort to lift or
rescind any injunction or restraining order or other order adversely affecting
the ability of the parties to consummate the transactions contemplated herein.
BankGroup and Bank each shall use its best efforts to obtain consents of all
third parties and governmental bodies necessary or desirable for the
consummation of the transactions contemplated by this Agreement.
4.13 Adverse Changes in Condition. BankGroup and Bank each agrees to
give written notice promptly to the other concerning any material adverse change
in its condition from the date of this Agreement until the Effective Time of the
Bank Merger that might adversely affect the consummation of the transactions
contemplated hereby or upon becoming aware of the
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occurrence or impending occurrence of any event or circumstance which would
cause or constitute a material breach of any of the representations, warranties
or covenants of such party contained herein. BankGroup and Bank each shall use
its best efforts to prevent or promptly to remedy the same.
4.14 Updating of Schedules. From the date of execution of this Agreement
until the consummation of the Bank Merger, each party agrees to keep up to date
all of the Schedules applicable to it and to provide notification to the other
of any changes or additions or events which have caused, or after the lapse of
time may cause, any such change or addition in any of such Schedules. No
updating of Schedules or notification made pursuant to this Section 4.14 shall
be deemed to cure any breach of any representation or warranty made in the
Agreement or any Schedule or exhibit unless the other party specifically agrees
thereto in writing, nor shall any such updating of Schedules or notification be
considered to constitute or give rise to a waiver by the other party of any
condition set forth in this Agreement.
ARTICLE V
Conditions of Transaction
5.1 Conditions of Obligations of BankGroup. The obligations of BankGroup
to perform this Agreement are subject to the satisfaction of the following
conditions unless waived by BankGroup.
(a) Representations and Warranties; Performance of Obligations;
No Adverse Change. The representations and warranties of Bank set forth in
Section 3.1 shall be true and correct as of the date of this Agreement and as of
the Effective Time of the Bank Merger as though made on and as of the Effective
Time of the Bank Merger; Bank shall have performed
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all obligations required to be performed by it under this Agreement prior to the
Effective Time of the Bank Merger; there shall have occurred no material adverse
change in the condition (financial or otherwise), assets, liabilities,
properties, business or prospects of Bank from December 31, 1995 to the
Effective Time of the Bank Merger; and BankGroup shall have received a
certificate of the chief executive officer and chief financial officer of Bank
to such effects.
BankGroup may, at its expense, conduct a pre-Merger audit to determine
that the conditions described in the preceding paragraph are satisfied as of the
Effective Time of the Bank Merger.
(b) Authorization of Transaction. All action necessary to
authorize the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated herein (including the shareholder
action referred to in Section 4.2) shall have been duly and validly taken by the
board of directors of Bank and by the shareholders of Bank, and Bank shall have
full power and right to merge on the terms provided herein.
(c) Opinion of Counsel. BankGroup shall have received an opinion
of Williams, Mullen, Christian & Dobbins, P.C., counsel to Bank, dated the
Closing Date, and satisfactory in form and substance to counsel to BankGroup, to
the effect that:
(i) Bank is a Virginia banking corporation organized
and in good standing under the laws of Virginia and has all requisite corporate
power to own, lease and operate its properties and to carry on its business as
now being conducted as described in the Registration Statement and Proxy
Statement--Prospectus;
(ii) Bank has full power to carry out the transactions
provided for in the Agreement; all corporate and other proceedings required to
be taken by or on the part of
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Bank to authorize it to execute and deliver the Agreement and to consummate the
transactions contemplated thereby and by the Plan of Merger have been duly and
validly taken; the Agreement has been duly and validly authorized, executed and
delivered by Bank and constitutes a valid and binding obligation of Bank
enforceable in accordance with its terms except as same (A) may be limited by
bankruptcy, insolvency, reorganization or other similar laws relating to the
rights of creditors, and (B) is subject to general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or law); and the Agreement and the Plan of Merger has been approved by
the Board of Directors and the shareholders of Bank;
(iii) All outstanding shares of Bank Common Stock to be
exchanged for shares of BankGroup Common Stock at the Effective Time of the Bank
Merger have been duly authorized;
(iv) To the best knowledge of such counsel, except as
listed in Schedule K to the Agreement, there are no persons who may be deemed to
be Bank Affiliates;
(v) Except as disclosed in Schedule G to the Agreement,
to the best knowledge of such counsel, Bank is not a party to or bound by any
outstanding option or agreement (other than this Agreement) to sell, issue, buy
or otherwise dispose of or acquire any shares of Bank Common Stock or other
security of Bank;
(vi) The execution and delivery by Bank of the
Agreement, consummation by Bank of the transactions contemplated hereby, and
compliance by Bank with the provisions hereof will not conflict with or result
in a breach of any provision of the Articles of Association or Bylaws of Bank,
as applicable, or result in a default (or give rise to rights of termination,
cancellation or acceleration) under any of the terms, conditions, or provisions
of any note, bond, mortgage, indenture, license, agreement or any other
instrument or listed in
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Schedule H (such counsel having no knowledge of any item called for by such
schedule which is not disclosed therein), or violate any court order, writ,
injunction or decree applicable to Bank or any of its properties or assets, of
which such counsel has knowledge after making inquiry of Bank's President with
respect thereto;
(vii) Except as set forth in Schedule L, if any, such
counsel does not know of any litigation that is pending or threatened which
might result in money damages payable by Bank in excess of insurance coverage,
which might result in a permanent injunction against Bank or which, individually
or in the aggregate, otherwise might have a material adverse effect on Bank or
the transactions contemplated by this Agreement;
(viii) Except as disclosed in Schedule C to the Agreement,
such counsel does not know of any default under, or the occurrence of any event
which with the lapse of time, action or inaction by a third party would result
in a default under any outstanding indenture, contract or agreement listed in
Schedule H to the Agreement (such counsel having no knowledge of any item called
for by Schedule which is not disclosed therein) or under any governmental
license or permit or a breach of any provision of the Articles of Association or
Bylaws of Bank;
(ix) All legal matters pertaining to consummation of the
Bank Merger under the laws of the United States and Virginia, including receipt
of all required regulatory approvals, other than the filing of the Articles of
Merger relating to the Plan of Merger with the SCC, have been completed to the
satisfaction of such counsel in all material respects; and
(x) On the basis of facts within their knowledge, such
counsel have no reason to believe that (except as to financial statements and
other financial data, or as to material relating to, and supplied by, BankGroup
for inclusion in the Proxy Statement-Prospectus as to
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which no belief need be expressed) the Proxy Statement-Prospectus (as amended or
supplemented, if so amended or supplemented) contained any untrue statement of a
material fact or omitted any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading as of (A) the time the Registration
Statement became effective, (B) the time of the meeting of Bank shareholders
referred to in Section 4.2 of the Agreement, or (C) at the Closing Date.
(d) Registration Statement. The Registration Statement shall be
effective under the 1933 Act and BankGroup shall have received all state
securities laws or "blue sky" permits and other authorizations or there shall be
exemptions from registration requirements necessary to offer and issue the
BankGroup Common Stock in connection with the Bank Merger, and neither the
Registration Statement nor any such permit, authorization or exemption shall be
subject to a stop order or threatened stop order by the SEC or any state
securities authority.
(e) Tax Opinion. BankGroup and Bank shall have received, in form
and substance reasonably satisfactory to them, an opinion of Hunton & Williams
to the effect, for federal income tax purposes, that consummation of the Merger
will constitute a "reorganization" as defined in Section 368(a) of the Code;
that no taxable gain or loss will be recognized by BankGroup, Acquisition or
Bank upon consummation of the Merger; that no taxable gain will be recognized by
a Bank shareholder on the exchange by such shareholder of shares of Bank Common
Stock solely for shares of BankGroup Common Stock; that a Bank Shareholder who
receives both shares of BankGroup Common Stock and, as a result of making a cash
election, cash in exchange for shares of Bank Common Stock will recognize
taxable gain to the extent of the amount of such cash, but will not recognize
any loss; that the basis of BankGroup Common Stock (including any fractional
share interest) received in the Bank Merger will be the same as
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the basis of the Bank Common Stock surrendered in exchange therefor, decreased
by the amount of any cash received pursuant to the cash election and increased
by the amount of gain recognized; that the holding period of such BankGroup
Common Stock for such a Bank shareholder will include the holding period of the
Bank Common Stock surrendered in exchange therefor, if such Bank Common Stock is
a capital asset in the hands of the shareholder at the Effective Time of the
Bank Merger; and that a Bank shareholder who receives cash in lieu of a
fractional share of BankGroup Common Stock will recognize gain or loss equal to
any difference between the amount of cash received and the shareholder's basis
in the fractional share interest.
(f) Regulatory Approvals. All required approvals from federal and
state regulatory authorities having jurisdiction to permit BankGroup and
Acquisition to consummate the Bank Merger and to issue BankGroup Common Stock to
Bank shareholders shall have been received and all related waiting periods shall
have expired, all applicable federal and state laws governing the Merger shall
have been complied with, and there shall not be in any order or decree of any
regulatory authority any condition or requirement reasonably deemed
objectionable to BankGroup.
(g) Affiliate Letters. Each shareholder of Bank who is a Bank
Affiliate shall have executed and delivered a commitment and undertaking to the
effect that such shareholder will dispose of the shares of BankGroup Common
Stock received by him in connection with the Bank Merger only in accordance with
the provisions of paragraph (d) of Rule 145; (ii) such shareholder will not
dispose of any of such shares until BankGroup has received an opinion of counsel
acceptable to it that such proposed disposition will not violate the provisions
of any applicable securities laws; (iii) that they will not sell or reduce their
risk with respect to the
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BankGroup shares acquired in the Bank Merger until after the publication of
combined financial results covering 30 days of combined operations; and (iv) the
certificates representing said shares may bear a legend referring to the
foregoing restrictions.
(h) Provision for Loan Losses. On the Closing Date, Bank's
reserve for loan losses on outstanding loans and reserve for other real estate
owned shall, in the reasonable judgment of BankGroup, be adequate to absorb all
known or anticipated loan losses in Bank's loan portfolio and Bank's known or
anticipated losses associated with other real estate owned.
(i) Accounting Treatment. BankGroup shall have received, in
form and substance satisfactory to it, a letter dated the Effective Time of the
Bank Merger from Coopers & Lybrand, L.L.P. to the effect that the Transaction
will qualify for "pooling-of-interests" accounting treatment.
(j) Acceptance by BankGroup Counsel. The form and substance of
all legal matters contemplated hereby and of all papers delivered hereunder
shall be reasonably acceptable to counsel for BankGroup.
5.2 Conditions of Obligations of Bank. The obligations of Bank to
perform this Agreement are subject to the satisfaction of the following
conditions unless waived by Bank:
(a) Representations and Warranties; Performance of
Obligations; No Adverse Change. The representations and warranties of BankGroup
and Acquisition set forth in Section 3.2 shall be true and correct in all
material respects as of the date of this Agreement and as of the Effective Time
of the Bank Merger as though made on and as of the Effective Time of the Bank
Merger; BankGroup and Acquisition shall have performed all obligations required
to be performed by them under this Agreement prior to the Effective Time of the
Bank Merger; there shall have occurred no material adverse change in the
condition (financial or otherwise), assets,
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liabilities, properties, business or prospects of BankGroup from December 31,
1995 and March 31, 1996 to the Effective Time of the Bank Merger; and Bank shall
have received a certificate of the chief executive officer and the chief
financial officer of BankGroup to such effects.
(b) Authorization of Transaction. All action necessary to
authorize the execution, delivery and performance of this Agreement by BankGroup
and Acquisition and the consummation of the transactions contemplated hereby
shall have been duly and validly taken by the boards of directors of BankGroup
and Acquisition and the shareholders of Bank, and BankGroup and Acquisition
shall have full power and right to merge and to acquire and assume on the terms
provided herein.
(c) Opinion of Counsel. Bank shall have received an opinion of
Hunton & Williams, counsel to BankGroup and Acquisition, dated the Closing Date
and satisfactory in form and substance to counsel to Bank, to the effect that:
(i) BankGroup and Acquisition are corporations
organized and in good standing under the laws of Virginia, and have all
requisite corporate power to own, lease and operate their respective properties
and to carry on their respective businesses as now being conducted as described
in the Registration Statement and Proxy Statement-Prospectus;
(ii) BankGroup and Acquisition have full power to carry
out the transactions provided for in the Agreement; all corporate and other
proceedings required to be taken by or on the part of BankGroup and Acquisition
to authorize them to execute and deliver the Agreement and to consummate the
transactions contemplated thereby and by the Plan of Merger have been duly and
validly taken; the Agreement has been duly and validly authorized, executed and
delivered by BankGroup and Acquisition and constitutes a valid and binding
obligation of BankGroup and Acquisition enforceable in accordance with its terms
except as
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same (A) may be limited by bankruptcy, insolvency, reorganization or other
similar laws relating to the rights of creditors; and (B) is subject to general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or law); the Plan of Merger has been approved by the
board of directors of Acquisition; and the shares of BankGroup Common Stock to
be issued in the Bank Merger in exchange for shares of BankGroup Common Stock
have been duly authorized and when so issued will be validly issued, fully paid
and nonassessable;
(iii) All outstanding shares of BankGroup Common Stock
have been duly authorized and are fully paid and nonassessable;
(iv) Execution and delivery by BankGroup and Acquisition
of the Agreement, consummation by BankGroup and Acquisition of the transactions
contemplated thereby, and compliance by BankGroup and Acquisition with the
provisions thereof will not conflict with or result in a breach of any
provisions of either BankGroup's or Acquisition's Articles of Incorporation or
Articles of Association, respectively, or either of their Bylaws or result in a
default (or give rise to rights or termination, cancellation or acceleration)
under any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, license, agreement or any other instrument or of BankGroup,
Acquisition or any Subsidiary known to such counsel, or violate any court order,
writ, injunction or decree applicable to BankGroup, Acquisition or any
Subsidiary or any of their properties or assets, of which such counsel has
knowledge after making inquiry with respect thereto.
(v) The shares of BankGroup Common Stock to be issued
pursuant to the Agreement have been duly registered under the 1933 Act;
(vi) All legal matters pertaining to consummation of the
Bank Merger under the laws of the United States and Virginia, including the
receipt of all regulatory
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approvals, other than the filing of the Articles of Merger relating to the Bank
Merger with the SCC, have been completed to the satisfaction of such counsel in
all material respects;
(vii) On the basis of facts within their knowledge, such
counsel have no reason to believe that (except as to financial statements and
other financial data, or as to material relating to, and supplied by, Bank for
inclusion in the Proxy Statement-Prospectus, as to which no belief need be
expressed) the Proxy Statement-Prospectus (as amended or supplemented, if so
amended or supplemented) contained any untrue statement of a material fact or
omitted any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading (A) as of the time the Registration Statement became
effective; (B) as of the time of the special meeting of shareholders of Bank
mentioned in Section 4.2 of the Agreement; or (C) as of the Closing Date;
(viii) Except as set forth in Schedule R, such counsel
does not know of any litigation that is pending or threatened which might result
in money damages payable by BankGroup, Acquisition or any Subsidiary in excess
of insurance coverage, which might result in a permanent injunction against any
of them or which, individually or in the aggregate, otherwise might have a
material adverse effect on BankGroup or the transactions contemplated by this
Agreement; and
(ix) Such counsel does not know of any default under, or
the occurrence of any event which with the lapse of time, action or inaction by
a third party would result in a default under any governmental license or permit
or a breach of any provision of the Articles of Incorporation or Bylaws of
BankGroup, Acquisition or any Subsidiary.
(d) Registration Statement. The Registration Statement shall
be effective under the 1933 Act and BankGroup shall have received all state
securities laws or "blue sky" permits
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and other authorizations or there shall be exemptions from registration
requirements necessary to offer and issue the BankGroup Common Stock in
connection with the Bank Merger, and neither the Registration Statement nor any
such permit, authorization or exemption shall be subject to a stop order or
threatened stop order by the SEC or any state securities authority.
(e) Regulatory Approvals. All required approvals from federal and
state regulatory authorities having jurisdiction to permit BankGroup and
Acquisition to consummate the Bank Merger and to permit BankGroup to issue
BankGroup Common Stock to Bank shareholders shall have been received and all
related waiting periods shall have expired.
(f) Tax Opinion. BankGroup and Bank shall have received, in
form and substance reasonably satisfactory to them, an opinion of Hunton &
Williams to the effect set forth in Section 5.1(e).
(g) Fairness Opinion. Bank shall have received, immediately prior
to mailing the Proxy Statement/Prospectus, in form and substance reasonably
satisfactory to it, an opinion of Scott & Stringfellow, Inc. that the
consideration to be received by the Bank's shareholders in the Bank Merger is
fair to them from a financial point of view.
(h) Acceptance by Bank's Counsel. The form and substance of
all legal matters contemplated hereby and of all papers delivered hereunder
shall be reasonably acceptable to counsel for Bank.
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ARTICLE VI
Closing Date; Effective Time of the
Holding Company Merger
6.1 Closing Date. Unless another date or place is agreed to in writing
by the parties, the closing of the transactions contemplated in this Agreement
shall take place at the offices of Hunton & Williams, Richmond, Virginia, at
10:00 A.M., local time, on such date as BankGroup shall designate to Bank and is
reasonably acceptable to Bank; provided, that the date so designated shall not
be earlier than 30 days (or 15 days if permitted under the Bank Merger Act) or
later than 60 days following the date of the decision of the Federal Reserve
Board, and the SCC, whichever decision occurs later, approving the Merger (the
"Closing Date"). BankGroup and Bank agree that the target Closing Date is
September 30, 1996, and each agrees to use its best efforts to cause closing to
occur on that date.
6.2 Filings at Closing. Subject to the provisions of Article , at the
Closing Date, BankGroup shall cause the Articles of Merger relating to the Bank
Merger to be filed in accordance with the Virginia Stock Corporation Act, and
each of BankGroup and Bank shall take any and all lawful actions to cause the
Bank Merger to become effective.
6.3 Effective Time. Subject to the terms and conditions set forth
herein, including receipt of all required regulatory approvals, the Bank Merger
shall become effective at the time Articles of Merger relating to the Bank
Merger are made effective by the SCC (the "Effective Time of the Bank Merger").
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ARTICLE VII
Termination; Survival of Representations
Warranties and Covenants; Waiver and Amendment
7.1 Termination. This Agreement shall be terminated, and the Merger
abandoned, if the shareholders of Bank shall not have given the approval
required by Section 5.1(b). Notwithstanding such approval by such shareholders,
this Agreement may be terminated in writing at any time prior to the Effective
Time of the Bank Merger by:
(a) The mutual consent of BankGroup and Bank, as expressed by
their respective boards of directors;
(b) Either BankGroup or Bank, as expressed by their respective
boards of directors, after February 28, 1997;
(c) BankGroup, in writing authorized by its Board of Directors,
if Bank has, or by Bank, in writing authorized by its Board of Directors, if
BankGroup has, in any material respect, breached (i) any covenant or agreement
contained herein, or (ii) any representation or warranty contained herein, in
any case if such breach has not been cured by the earlier of 30 days after the
date on which written notice of such breach is given to the party committing
such breach or the Closing Date; provided that it is understood and agreed that
either party may terminate this Agreement on the basis of any such material
breach of any representation or warranty contained herein notwithstanding any
qualification therein relating to the knowledge of the other party;
(d) Either BankGroup or Bank, in writing authorized by their
respective boards of directors, in the event that any of the conditions
precedent to the obligations of such party to consummate the Bank Merger have
not been satisfied or fulfilled or waived by the party entitled
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to so waive on or before the Closing Date, provided that neither party shall be
entitled to terminate this Agreement pursuant to this subparagraph (d) if the
condition precedent or conditions precedent which provide the basis for
termination can reasonably be and are satisfied within a reasonable period of
time, in which case, the Closing Date shall be appropriately postponed;
(e) BankGroup or Bank, if the Board of Directors of either
corporation shall have determined in their sole discretion, exercised in good
faith, that the Merger has become inadvisable or impracticable by reason of the
threat or the institution of any litigation, proceeding or investigation to
restrain or prohibit the consummation of the transactions contemplated by this
Agreement or to obtain other relief in connection with this Agreement;
(f) Either BankGroup or Bank, if either the Federal Reserve Board
or the SCC deny approval of the Bank Merger and the time period for all appeals
or requests for reconsideration has run; and
(g) By Bank, if its Board of Directors so determines at any time
during the 10-day period ending on the tenth day prior to the Closing Date, if
both of the following conditions are satisfied:
(1) if the average of the closing sales price for
BankGroup Common Stock as reported on the Nasdaq
National Market for the 10 trading days preceding the
beginning of such 10-day period ("Average Closing
Price") is less than $12.80; and
(2) if the percentage by which BankGroup Common Stock's
trading price has decreased from (a) $16.375 (the
average of the bid and asked prices of BankGroup
Common Stock on May 8, 1996) when
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compared to (b) the Average Closing Price exceeds (y)
the percentage by which the SNL Bank Index has
decreased from the SNL Bank Index at May 6, 1996 when
compared to (z) the SNL Bank Index reported most
recently prior to the last trading day in the
measuring period for calculating the Average Closing
Price, by 10 percentage points.
subject, however, to the following four sentences. If Bank elects to exercise
its termination right pursuant to this Paragraph (g), it shall give prompt
written notice to BankGroup (provided that such notice of election to terminate
may be withdrawn at any time within the aforementioned 10-day period). During
the seven-day period commencing with its receipt of such notice, BankGroup shall
have the option of increasing the consideration to be received by the holders of
Bank Common Stock by adjusting the Exchange Ratio to a number equal to a
quotient, the numerator of which is $12.80 multiplied by the Exchange Ratio (as
then in effect) and the denominator of which is the Average Closing Price. If
BankGroup makes an election contemplated by the preceding sentence, within such
seven-day period, it shall give prompt written notice to Bank of such election
and the revised Exchange Ratio, whereupon no termination shall have occurred
pursuant to this Paragraph (g) and this Agreement shall remain in effect in
accordance with its terms (except as the Exchange Ratio shall have been so
modified), and any references in this Plan to "Exchange Ratio" shall thereafter
be deemed to refer to the Exchange Ratio as adjusted pursuant to this Paragraph
(g).
7.2 Effect of Termination. In the event of the termination and
abandonment of this Agreement and the Bank Merger pursuant to Section 7.1, this
Agreement, other than the
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provisions of Sections 4.1 (last sentence) and 9.1, shall become void and have
no effect, without any liability on the part of any party or its directors,
officers or shareholders.
7.3 Survival of Representations, Warranties and Covenants. The
respective representations and warranties, covenants and agreements (except for
those contained in Sections 1.2, 1.3, 2.1, 2.2, 2.3, 2.5, 2.6, 2.5, 4.1 (last
sentence), 8.2, 8.3, 9.1, 9.2, 9.3, 9.4, 9.5 and 9.6, which shall survive the
effectiveness of the Bank Merger indefinitely) of BankGroup, Acquisition and
Bank contained herein shall survive for one year following the Effective Time of
the Bank.
7.4 Waiver and Amendment. Any term or provision of this Agreement may be
waived in writing at any time by the party which is, or whose shareholders are,
entitled to the benefits thereof and this Agreement may be amended or
supplemented by written instructions duly executed by all parties hereto at any
time, whether before or after the meeting of Bank shareholders referred to in
Section 4.2 hereof, except statutory requirements and requisite approvals of
shareholders and regulatory authorities.
ARTICLE VIII
Additional Covenants
8.1 Registration Statement. BankGroup, Acquisition and Bank acknowledge
and agree that the Bank Merger is a transaction to which the 1933 Act is
applicable. Each of the parties agrees to comply with the provisions of the 1933
Act and all rules and regulations of the SEC promulgated pursuant to the 1933
Act and cooperate in connection with the preparation and filing by BankGroup of
a Registration Statement under the 1933 Act relating to the Bank Merger. Bank
agrees (a) to give the representatives of BankGroup access to the books, records
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and files of Bank at any reasonable time for the purpose of preparing such
Registration Statement; (b) to provide to BankGroup upon request such
information relating to Bank, its business and financial condition, as shall be
appropriate in connection with the preparation of the Registration Statement;
and (c) to submit to BankGroup for its prior approval all press releases or
other oral or written statements made or issued by Bank and its officers or
directors, which relate to the Merger in any manner.
8.2 Employee Benefits. All employees of Bank immediately prior to the
Effective Time of the Bank Merger ("Transferred Employees") will be covered by
BankGroup's employee benefit plans as to which they are eligible based on their
length of service, compensation, job classification, and position with Bank.
BankGroup's benefits plans will recognize for purposes of eligibility to
participate and for early retirement and for vesting, all Transferred Employees'
service with Bank, subject to applicable break in service rules. Bank's employee
benefit plans will be merged into BankGroup's plans.
Except as described in Schedule T, as of the Effective Time of the Bank
Merger employees of Bank who become employees of Acquisition as the Surviving
Bank will be entitled to immediate coverage under BankGroup Employee Plans
without any waiting period.
8.3 Indemnification. BankGroup agrees to provide indemnification to the
directors and officers of Bank following the Closing Date to the same extent as
it provides indemnification to directors and officers of BankGroup and its
Subsidiaries and to provide them officers and directors liability insurance
coverage, whether or not they become part of the BankGroup organization after
the Bank Merger. The obligations to indemnify and to provide insurance coverage
shall apply to acts or omissions occurring subsequent to the Effective Time of
the Bank Merger. Bank shall have the power to indemnify its directors and
officers against liability for
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acts or omissions before the Effective Time of the Bank Merger to the extent
permitted under Virginia laws. Bank may purchase, at reasonable cost (or, if it
is determined to be less costly, BankGroup will provided), a "tail" policy of
insurance to cover acts and omissions of its directors and officers occurring
prior to the Effective Time of the Bank Merger.
ARTICLE IX
Miscellaneous
9.1 Expenses. If the Bank Merger is consummated, all of the costs will
be borne by BankGroup. If the Bank Merger is not consummated, each party shall
bear its own expenses. If the Bank Merger is not consummated because of a
party's failure to satisfy a condition (other than the failure of Bank's
shareholders to approve the Bank Merger) then the party failing to satisfy the
condition will pay the other party's expenses up to $50,000. For purposes of
this Section 9.1, "expenses" shall mean all filing fees and fees and expenses of
legal counsel, accountants, printers, and other advisers and consultants
retained by a party.
9.2 Entire Agreement. This Agreement contains the entire agreement among
BankGroup, Acquisition, and Bank with respect to the Merger and the related
transactions and supersedes all prior arrangements or understandings with
respect thereto.
9.3 Descriptive Headings. Descriptive headings are for convenience only
and shall not control or affect the meaning or construction of any provisions of
this Agreement.
9.4 Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered personally
or sent by registered or certified mail, postage prepaid, addressed as follows:
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If to BankGroup or Acquisition:
MainStreet BankGroup Incorporated
Church & Ellsworth Streets
Martinsville, Virginia 24115
Attention: Rebecca J. Jenkins
General Counsel and Secretary
Copy to:
Lathan M. Ewers, Jr.
Hunton & Williams
951 East Byrd Street
Richmond, Virginia 23219
If to Bank:
Hanover Bank
7502 Lee Davis Road
Mechanicsville, Virginia [ ] 23111
Attention: Jay T. Thompson, III
Chairman and Chief Executive Officer
Copy to:
Wayne A. Whitham, Jr.
Williams, Mullen, Christian & Dobbins
2 James Center, 16th Floor
Richmond, Virginia 23219
9.5 Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart hereof shall be deemed to be an original
instrument, but all such counterparts together shall constitute one agreement.
9.6 Governing Law. Except as may otherwise be required by the laws of
the United States, this Agreement shall be governed by and construed in
accordance with the laws of Virginia.
-57-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto have caused this
Agreement to be executed on their behalf, all as of the day and year first above
written.
MAINSTREET BANKGROUP INCORPORATED
By ________________________________
James E. Adams
Senior Vice President/Chief Financial
Officer/Treasurer
BH ACQUISITION SUBSIDIARY, INC.
By ________________________________
James E. Adams
Senior Vice President/Chief Financial
Officer/Treasurer
HANOVER BANK
By ________________________________
Jay T. Thompson, III
Chairman of the Board and
Chief Executive Officer
-58-
<PAGE>
Each Director of Hanover Bank signs for the purpose of agreeing to vote all
shares of Bank Common Stock beneficially owned by him or her and with respect to
which he or she has power to vote in favor of the Bank Merger; provided that
such agreement shall not apply to shares of Bank Common Stock with respect to
which a Director has power to vote solely as a result of being a trustee or
similar fiduciary for an account holding such shares of Bank Common Stock. The
Directors of Hanover Bank sign further for the purpose of agreeing to cause the
Bank Merger to be recommended by the Board of Directors of Bank to the
shareholders of Bank in the proxy statement sent to shareholders in connection
with such shareholders' meeting; provided that such agreement shall be subject
to the final clause of the first sentence of Section 4.4.
-59-
<PAGE>
Exhibit A
REVISED PLAN OF MERGER
OF
HANOVER BANK
INTO
BH ACQUISITION SUBSIDIARY, INC.
Section 1. Hanover Bank, a Virginia banking corporation ("Bank"),
shall upon the time that the Articles of Merger are made effective by the State
Corporation Commission of Virginia (the "Effective Time of the Bank Merger"), be
merged (the "Bank Merger") into BH Acquisition Subsidiary, Inc., a Virginia
banking corporation ("Acquisition"), which is a subsidiary of MainStreet
BankGroup Incorporated ("BankGroup"), and which shall be the Surviving Bank.
Section 2. Conversion of Stock. At the Effective Time of the
Bank Merger:
(i) Each share of Bank Common Stock ("Bank Common Stock") issued
and outstanding at the Effective Time of the Bank Merger (other than shares held
by BankGroup and shares to be exchanged for cash, shall, and without any action
by the holder thereof, be converted into a number of shares of BankGroup Common
Stock ("BankGroup Common Stock") equal to the quotient (rounded to the nearest
one one-thousandth) of $15.25 divided by the average of the closing sales price
(the "BankGroup Stock Price") for BankGroup Common Stock as reported on The
Nasdaq Stock Market for the 10 trading day period ending on the 20th day prior
to the Closing Date (as defined in the Agreement, which is defined below) (the
"Exchange Ratio"). If such quotient is less than 0.884, the Exchange Ratio shall
be 0.884; provided that if the BankGroup Stock Price exceeds $20.50, the
Exchange Ratio shall be adjusted to equal the quotient of $18.125 divided by the
BankGroup Stock Price. If such quotient is greater than 1.034, the Exchange
Ratio shall be 1.034. The Exchange Ratio shall be subject to adjustment as
provided in Section 5.
(ii) Each share of Acquisition Common Stock issued and
outstanding immediately prior to the Effective Time of the Bank Merger shall
remain outstanding as one share of common stock of the Surviving Bank.
(iii) Each share of Bank Common Stock issued and outstanding
immediately prior to the Effective Time of the Bank Merger and held by BankGroup
shall be canceled.
<PAGE>
(iv) All rights with respect to Bank Common Stock existing
pursuant to outstanding Bank stock options ("Bank Options") which are
outstanding at the Effective Time of the Bank Merger, whether or not then
exercisable, shall be converted, based on the Exchange Ratio, into and become
options to acquire BankGroup Common Stock, and BankGroup shall assume each Bank
Option. From and after the Effective Time of the Bank Merger (i) each such Bank
Option may be exercised solely for shares of BankGroup Common Stock, (ii) the
number of shares of BankGroup Common Stock subject to such Bank Option shall be
equal to the number of shares of Bank Common Stock subject to such Bank Option
immediately prior to the Effective Time of the Bank Merger times the Exchange
Ratio, and (iii) the per share exercise price under each Bank Option shall be
adjusted by dividing the per share exercise price, under each such Bank Option,
by the Exchange Ratio (rounded up to the nearest cent). The adjustment provided
herein with respect to any options which are "incentive stock options" (as
defined in Section 422 of the Internal Revenue Code of 1986 (the "Code") shall
be and is intended to be effected in a manner which is consistent with Section
424(a) of the Code.
Section 3. Manner of Conversion of Bank Common Stock. The manner
in which outstanding shares of Bank Common Stock shall be converted into cash or
BankGroup Common Stock, as specified in Section 2 hereof, after the Effective
Time of the Bank Merger, shall be as follows:
(i) All shares of Bank Common Stock as respects which cash
elections shall have been made shall be paid in cash (subject to all applicable
withholding taxes) at the rate of $15.25 per share, subject to Section 4.
(ii) Each share of Bank Common Stock, other than shares held by
BankGroup and shares to be exchanged for cash, shall be converted into shares of
BankGroup Common Stock as provided in Section 2(i).
(iii) No fractional shares of BankGroup Common Stock shall be
issued, but instead the value of fractional shares shall be paid in cash
(subject to all applicable withholding taxes), for which purpose BankGroup
Common Stock shall be valued at the BankGroup Stock Price.
(iv) Certificates for shares as respects which cash elections are
made must be delivered to Bank prior to the meeting of Bank shareholders at
which the Bank Merger is to be considered, with a completed Letter of
Transmittal furnished by Bank, indicating that the cash election has been made.
If the Bank Merger is approved at such shareholders meeting, a shareholder's
election to receive cash shall be irrevocable, and Bank shall retain
certificates for shares submitted for cash purchase until either (A) termination
of the Agreement (as defined below) after which Bank shall return such
certificates to the shareholder), or (B) the Effective Time of the Bank Merger,
after which BankGroup's exchange agent shall exchange such shares for $15.25 per
share, subject to Section 4, upon receipt of certificates and completed Letters
of Transmittal from Bank. Until surrendered, each outstanding certificate which,
prior to the Effective
- 2 -
<PAGE>
Time of the Bank Merger, represented Bank Common Stock shall be deemed evidence
of the owner's right to receive $15.25 per share (less all applicable
withholding taxes) multiplied by the number of shares as respects which the cash
election has been made, without interest.
(v) Certificates for shares of Bank Common Stock (if not
previously submitted in connection with cash elections) shall be submitted for
exchange for BankGroup Common Stock or cash accompanied by a Letter of
Transmittal to be furnished within 10 business days after the Effective Time of
the Bank Merger to Bank's shareholders of record as of the Effective Time of the
Bank Merger. Until so surrendered, each outstanding certificate which, prior to
the Effective Time of the Bank Merger, represented Bank Common Stock, shall be
deemed to evidence only the right to receive shares of BankGroup Common Stock
determined in accordance with the Exchange Ratio. Until such outstanding shares
formerly representing Bank Common Stock are so surrendered, no dividend payable
to holders of record of BankGroup Common Stock as of any date subsequent to the
Effective Time of the Bank Merger shall be paid to the holder of such
outstanding certificates in respect thereof. Upon such surrender, dividends
accrued or declared on BankGroup Common Stock shall be paid in accordance with
Section 2.2 of the Agreement and Plan of Reorganization among BankGroup,
Acquisition and Bank.
Section 4. Selection of Shares to be Purchased with Cash. The
number of shares of Bank Common Stock to be exchanged for cash, including
fractional shares settled for cash, cannot exceed 9.9% of the outstanding shares
of Bank Common Stock immediately prior to the Effective Time of the Bank Merger.
If shareholders of Bank elect to exchange for cash more than this number of
shares of Bank Common Stock, shares submitted for cash purchase will be chosen
by lot to accommodate the "pooling of interests" accounting requirement that a
shareholder who chooses the cash election must have all of his or her shares
purchased for cash. Shareholders who submit their shares for cash purchase but
are not chosen in the lottery will have his or her shares exchanged for
BankGroup Common Stock (plus cash in lieu of fractional shares) at the Exchange
Ratio.
Section 5. Possible Adjustment in Exchange Ratio. The Agreement
and this Plan of Merger may be terminated by Bank, by action of its Boards of
Directors if its Board of Directors so determines at any time during the 10-day
period ending on the tenth day prior to the Closing Date, if both of the
following conditions are satisfied:
(1) if the average of the closing sales price for BankGroup
Common Stock as reported on the Nasdaq National Market for
the 10 trading days preceding the beginning of such 10-day
period ("Average Closing Price") is less than $12.80; and
(2) if the percentage by which BankGroup Common Stock's
trading price has decreased from (a) $16.75 (the last
reported sales price of BankGroup Common Stock on May 6,
1996) when compared to (b) the Average
- 3 -
<PAGE>
Closing Price exceeds (y) the percentage by which the SNL
Bank Index has decreased from the SNL Bank Index at May 6,
1996 when compared to (z) the SNL Bank Index reported most
recently prior to the last trading in the measuring period
for calculating the Average Closing Price, by 10
percentage points.
subject, however, to the following four sentences. If Bank elects to exercise
its termination right pursuant to this Paragraph (g), it shall give prompt
written notice to BankGroup (provided that such notice of election to terminate
may be withdrawn at any time within the aforementioned 10-day period). During
the seven-day period commencing with its receipt of such notice, BankGroup shall
have the option of increasing the consideration to be received by the holders of
Bank Common Stock by adjusting the Exchange Ratio to a number equal to a
quotient, the numerator of which is $12.80 multiplied by the Exchange Ratio (as
then in effect) and the denominator of which is the Average Closing Price. If
BankGroup makes an election contemplated by the preceding sentence, within such
seven-day period, it shall give prompt written notice to Bank of such election
and the revised Exchange Ratio, whereupon no termination shall have occurred
pursuant to this Paragraph (g) and this Agreement shall remain in effect in
accordance with its terms (except as the Exchange Ratio shall have been so
modified), and any references in this Plan to "Exchange Ratio" shall thereafter
be deemed to refer to the Exchange Ratio as adjusted pursuant to this Paragraph
(g);
Section 6. Name, Articles of Association, Bylaws and Directors of
the Surviving Bank. At the Effective Time of the Bank Merger, the name, Articles
of Association, Bylaws and Directors of Bank shall the name, Articles of
Incorporation, Bylaws and Directors of the Surviving Bank.
- 4 -
<PAGE>
Schedule T
BankGroup Employee Plan Waiting Periods
A. Trigon Health
(Blue Cross/Blue Shield) Plan No Waiting Period
B. Dental Plan No Waiting Period for employees
with 90 calendar days service with
Bank; for others, a waiting period
equal to difference between 90 days
and number of days of calendar
service with Bank.
C. Defined Benefit Retirement Plan
and 401(k) Plan Will Give Credit for all prior
service. Bank Employees with one
year and 1,000 hours of service
immediately eligible to enter plans
on the October 1, January 1, April
1 or July 1 next following the
Effective Time of the Bank Merger.
After the one year/1,000 hour
service test is met, with Bank
service being credited, other
employees may enter the plans on
these entrance dates.
- 5 -
<PAGE>
ANNEX II
[SCOTT & STRINGFELLOW LETTERHEAD]
August 28, 1996
Board of Directors
Hanover Bank
7021 Mechanicsville Turnpike
Mechanicsville, VA 23111
Gentlemen:
You have asked us to render our opinion relating to the fairness, from a
financial point of view, to the shareholders of Hanover Bank ("Hanover") of the
terms of an Agreement and Plan of Reorganization by and between MainStreet
BankGroup Incorporated ("MainStreet") and Hanover dated May 10, 1996 (the
"Merger Agreement"). The Merger Agreement provides for the merger of Hanover
with and into MainStreet (the "Merger") and further provides that each share of
Common Stock of Hanover which is issued and outstanding immediately prior to the
Effective Date of the Merger shall be converted into a number of shares of
MainStreet Common Stock equal to the quotient of $15.25 divided by the average
of the closing sales price for MainStreet Common Stock as reported on the NASDAQ
National Market for the 10 trading day period ending on the 20th day prior to
the Closing Date (as defined in the Merger Agreement)(the "Exchange Ratio"). In
no case will the Exchange Ratio be less than 0.884 or greater than 1.034.
In developing our opinion, we have, among other things, reviewed and
analyzed: (1) the Merger Agreement; (2) the Registration Statement and this
Proxy Statement; (3) Hanover's audited financial statements for the three years
ended December 31, 1995; (4) Hanover's unaudited financial statements for the
quarters and six month periods ended June 30, 1996 and 1995, and other internal
information relating to Hanover prepared by Hanover's management; (5)
information regarding the trading market for the common stocks of Hanover and
MainStreet and the price ranges within which the respective stocks have traded;
(6) the relationship of prices paid to relevant financial data such as net
worth, assets, deposits and earnings in certain bank and bank holding company
mergers and acquisitions in Virginia in recent years; (7) MainStreet's annual
reports to shareholders and its audited financial statements for the three years
ended December 31, 1995; and (8) MainStreet's unaudited financial statements for
the quarters and six month periods ended June 30, 1996 and 1995, and other
internal information relating to MainStreet prepared by MainStreet's management.
We have discussed with members of management of Hanover and MainStreet the
background of the Merger, reasons and basis for the Merger and the business and
future prospects of Hanover and MainStreet
<PAGE>
Board of Directors
Hanover Bank
August 28, 1996
Page 2
individually and as a combined entity. Finally, we have conducted such other
studies, analyses and investigations, particularly of the banking industry, and
considered such other information as we deemed appropriate.
In conducting our review and arriving at our opinion, we have relied
upon and assumed the accuracy and completeness of the information furnished to
us by or on behalf of Hanover and MainStreet. We have not attempted
independently to verify such information, nor have we made any independent
appraisal of the assets of Hanover or MainStreet. We have taken into account our
assessment of general economic, financial market and industry conditions as they
exist and can be evaluated at the date hereof, as well as our experience in
business valuation in general.
On the basis of our analyses and review and in reliance on the accuracy
and completeness of the information furnished to us and subject to the
conditions noted above, it is our opinion that, as of the date hereof the terms
of the Merger Agreement are fair from a financial point of view to the
shareholders of Hanover Common Stock.
Very truly yours,
SCOTT & STRINGFELLOW, INC.
By:
Gary S. Penrose
Managing Director, Financial
Institutions Group
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Officers and Directors
Registrant's Articles of Incorporation implement the provisions of the VSCA,
which provide for the indemnification of Registrant's directors and officers in
a variety of circumstances, which may include indemnification for liabilities
under the Securities Act of 1933. Under sections 13.1-697 and 13.1-702 of the
VSCA, a Virginia corporation generally is authorized to indemnify its directors
and officers in civil or criminal actions if they acted in good faith and
believed their conduct to be in the best interests of the corporation and, in
the case of criminal actions, had no reasonable cause to believe that the
conduct was unlawful. Registrant's Articles of Incorporation require
indemnification of directors and officers with respect to certain liabilities,
expenses and other amounts imposed upon them be reason of having been a director
or officer, except in the case of willful misconduct or a knowing violation of
criminal law. Registrant also carries insurance on behalf of directors,
officers, employees or agents that may cover liabilities under the Securities
Act of 1933. In addition, the VSCA and Registrant's Articles of Incorporation
eliminate the liability of a director or officer of Registrant in a shareholder
or derivative proceeding. This elimination of liability will not apply in the
event of willful misconduct or a knowing violation of the criminal law or any
federal or state securities law. Sections 13.1-692.1 and 13.1-696 to -704 of the
VSCA are hereby incorporated herein by reference.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
2(a) Agreement and Plan of Reorganization dated as of May 10,
1996, among Registrant, BH Acquisition Subsidiary, Inc.
and Hanover Bank (attached to the Proxy
Statement/Prospectus as Annex I)
5 Opinion of Hunton & Williams with respect to legality
8 Opinion of Hunton & Williams with respect to tax
consequences of the Bank Merger
23(a) Consent of KPMG Peat Marwick LLP
23(b) Consent of Coopers & Lybrand L.L.P.
23(c) Consent of Deloitte & Touche LLP
23(d) Consent of Scott & Stringfellow, Inc.
23(e) Consent of Hunton & Williams (included in Exhibit 5 and
Exhibit 8)
25 Power of Attorney of Officers and Directors of
Registrant (included on signature pages of the
Registration Statement)
99(a) Form of Proxy
99(b) Form of Cash Option Election
II-1
<PAGE>
(b) Financial Statement Schedules -- None
(c) Report, Opinion or Appraisal -- (Opinion of Scott & Stringfellow,
Inc. attached to the Proxy Statement/Prospectus as Annex II)
Item 22. Undertakings
(a) The undersigned Registrant hereby undertakes as follows:
1. To file, during any period in which offers or sales are
being made, a post-effective amendment to this
registration statement.
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth
in the registration statement.
(iii) To include any material information with respect
to the plan of distribution not previously
disclosed in the registration statement or any
material change to such information in the
registration statement.
Provided, however, that paragraphs (a)(1)(i) and
(a)(1)(ii) do not apply if the registration
statement is on Form S-3 or Form S-8, and the
information required to be included in a
post-effective amendment by those paragraphs is
contained in periodic reports filed by the
registrant pursuant to Section 13 or Section
15(d) of the Securities Exchange Act of 1934 that
are incorporated by reference in the registration
statement.
2. That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective
amendment will be deemed to be a new registration
statement relating to the securities offered therein, and
the offering of such securities at that time will be
deemed to be the initial bona fide offering thereof.
3. To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
4. That prior to any public reoffering of the securities
registered hereunder through the use of a prospectus which
is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the
meaning of Rule 145(c), the Registrant undertakes that
such reoffering prospectus will contain the information
called for by the applicable registration form with
respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by
the other items of the applicable form.
II-2
<PAGE>
5. That every prospectus (i) that is filed pursuant to the
paragraph immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Act and
is used in connection with an offering of securities
subject to Rule 415, will be filed as part of an amendment
to the registration statement and will not be used until
such amendment is effective, and that, for the purposes of
determining any liability under the Securities Act of
1933, each such post-effective amendment will be deemed to
be a new registration statement relating to the securities
offered therein, and the offering of such securities at
that time will be deemed to be the initial bona fide
offering thereof.
6. Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by
a director, officer or controlling person of the
Registrant in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first-class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of the
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Martinsville, Commonwealth of Virginia, on August 28, 1996.
MAINSTREET BANKGROUP INCORPORATED
(Registrant)
By: /s/ Michael R. Brenan
---------------------------------------------
Michael R. Brenan, President, Chairman of the
Board and Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on August 28, 1996. Each of the directors and/or officers
of MainStreet BankGroup Incorporated whose signature appears below hereby
appoints Michael R. Brenan, James E. Adams, Rebecca J. Jenkins and Lathan M.
Ewers, Jr., and each of them severally, as his attorney-in-fact to sign in his
name and behalf, in any and all capacities stated below and to file with the
Commission, any and all amendments, including post-effective amendments to this
registration statement, making such changes in the registration statement as
appropriate, and generally to do all such things in their behalf in their
capacities as officers and directors to enable MainStreet BankGroup Incorporated
to comply with the provisions of the Securities Act of 1933, and all
requirements of the Securities and Exchange Commission.
Signature Title
/s/ Michael R. Brenan President, Chairman of the Board and Chief
- ------------------------------ Executive Officer
Micheal R. Brenan (Principal Executive Officer)
/s/ James E. Adams Senior Vice President, Chief Financial
- ------------------------------ Officer and Treasurer (Principal Financial
James E. Adams and Accounting Officer)
/s/ W. Christopher Beeler, Jr. Director
- ------------------------------
W. Christopher Beeler, Jr.
Director
- -------------------------------
Thomas B. Bishop
/s/ William L. Cooper Director
- -------------------------------
William L. Cooper, III
II-4
<PAGE>
/s/ Billy P. Craft Director
- -------------------------------
Billy P. Craft
/s/ I. Patricia Henry Director
- -------------------------------
I. Patricia Henry
/s/ Larry E. Hutchens Director
- -------------------------------
Larry E. Hutchens
/s/ William O. McCabe, Jr., MD Director
- -------------------------------
William O. McCabe, Jr., MD
/s/ Albert L. Prillaman Director
- -------------------------------
Albert L. Prillaman
/s/ Richard M. Simmons, Jr. Director
- -------------------------------
Richard M. Simmons, Jr.
Director
- -------------------------------
Thomas B. Stanley, Jr.
II-5
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Page
2(a) Agreement and Plan of Reorganization dated as of May 10, 1996,
among Registrant, BH Acquisition Subsidiary, Inc. and
Hanover Bank (attached to the Proxy Statement/Prospectus
as Annex I)
5 Opinion of Hunton & Williams with respect to legality
8 Opinion of Hunton & Williams with respect to tax consequences
of the Bank Merger
23(a) Consent of KPMG Peat Marwick LLP
23(b) Consent of Coopers & Lybrand L.L.P.
23(c) Consent of Deloitte & Touche LLP
23(d) Consent of Scott & Stringfellow, Inc.
23(e) Consent of Hunton & Williams (included in
Exhibit 5 and Exhibit 8)
25 Power of Attorney of Officers and Directors of Registrant
(included on signature pages of the Registration Statement)
99(a) Form of Proxy
99(b) Form of Cash Option Election
- --------------
* To be filed by amendment.
Exhibit 5
Hunton & Williams
951 East Byrd Street
Richmond, Virginia 23219
FILE NO.: 23679.000039
DIRECT DIAL: (804) 788-8269
August 28, 1996
Board of Directors
MainStreet BankGroup Incorporated
200 East Church Street
Martinsville, Virginia 24112
MainStreet BankGroup Incorporated
Registration Statement on Form S-4
Ladies and Gentlemen:
We are acting as counsel for MainStreet BankGroup Incorporated in
connection with the registration under the Securities Act of 1933 of 1,521,568
shares of its Common Stock. The transaction in which the Common Stock will be
issued is described in the Company's Registration Statement on Form S-4 filed
with the Securities and Exchange Commission and relating to the Company's
acquisition of Hanover Bank. In connection with the filing of the Registration
Statement you have requested our opinion concerning certain corporate matters.
In rendering this opinion, we have relied upon, among other things, our
examination of such records of the Company and certificates of its officers and
of public officials as we have deemed necessary.
Based upon the foregoing, we are of the opinion that:
1. The Company is a corporation duly incorporated, validly existing and
in good standing under the laws of the Commonwealth of Virginia.
2. The Common Stock has been duly authorized and, when shares of Common
Stock have been issued as described in the Registration Statement, they will be
legally issued, fully paid and nonassessable.
We consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement and to the references to us in the
Prospectus included therein.
Very truly yours,
Hunton & Williams
Exhibit 8
August 28, 1996
MainStreet BankGroup Incorporated
BH Acquisition Subsidiary, Inc.
200 East Church Street
Martinsville, Virginia 24112
Hanover Bank
7502 Lee Davis Road
Mechanicsville, Virginia 23111
Merger of Hanover Bank
Into BH Acquisition Subsidiary, Inc.
Certain Federal Income Tax Matters
Ladies and Gentlemen:
We have acted as counsel to MainStreet BankGroup Incorporated
("BankGroup") in connection with the proposed merger of Hanover Bank (the
"Bank") into BH Acquisition Subsidiary, Inc. ("Acquisition"), a wholly-owned
subsidiary of BankGroup formed for purposes of effecting the merger (the "Bank
Merger"). The Bank's only class of stock outstanding is common stock ("Bank
Common Stock"). In the Bank Merger, each outstanding share of Bank Common Stock,
except any shares held by BankGroup, will be converted into the right to
receive, upon a shareholder's election, either (i) a number of shares of common
stock of BankGroup ("BankGroup Common Stock") having a fair market value of
$15.25 or (ii) $15.25 cash.
For purposes of determining the number of shares of BankGroup
Common Stock to be issued for a share of Bank Common Stock (the "Exchange
Ratio"), the per share value of BankGroup Common Stock will be the average of
the closing sales price for BankGroup Common Stock as reported on the Nasdaq
National Market for the ten trading days ending on the twentieth day before the
closing date for the Bank Merger. The Exchange Ratio, however, generally will
not be less than 0.884 or greater than 1.034, subject to adjustment in certain
circumstances. If a Bank shareholder otherwise would be entitled to receive a
fractional share of BankGroup Common Stock upon the exchange of the
shareholder's shares of Bank Common Stock,
<PAGE>
MainStreet BankGroup Incorporated
Hanover Bank
August 28, 1996
Page 2
BankGroup will pay cash in lieu of issuing any fractional share.
A shareholder electing the cash option must exchange all of his
or her shares of Bank Common Stock for cash. However, the number of shares of
Bank Common Stock for which shareholders may receive cash, including shares
exchanged for cash in lieu of a fractional share of BankGroup Common Stock, may
not exceed 9.9% of the outstanding shares of Bank Common Stock. If the 9.9%
ceiling otherwise would be exceeded, shares of Bank Common Stock submitted for
cash pursuant to the cash option will be chosen by lot to determine which shares
will be exchanged for cash; shares not so chosen will be exchanged for BankGroup
Common Stock.
You have requested our opinion concerning certain federal income
tax consequences of the Bank Merger. In giving this opinion, we have reviewed
the Agreement and Plan of Reorganization (including the Revised Plan of Merger),
dated as of May 10, 1996, among BankGroup, Acquisition, and the Bank; the Form
S-4 Registration Statement under the Securities Act of 1933 relating to the Bank
Merger (the "S-4"); and such other documents as we have considered necessary. In
addition, we have assumed the following:
1. The fair market value of the BankGroup Common Stock
(including any fractional share interest) received by a Bank shareholder in
exchange for Bank Common Stock will be approximately equal to the fair market
value of the Bank Common Stock surrendered in the exchange.
2. None of the compensation received by any share-
holder-employee of the Bank will be separate consideration for, or allocable to,
any shares of Bank Common Stock; none of the shares of BankGroup Common Stock
received by any shareholder- employee in the Bank Merger will be separate
consideration for, or allocable to, any employment agreement; and the
compensation paid to any shareholder-employee will be for services actually
rendered and will be commensurate with amounts paid to third parties bargaining
at arm's length for similar services.
3. The payment of cash in lieu of fractional shares of BankGroup
Common Stock is solely for the purpose of avoiding the expense and inconvenience
to BankGroup of issuing fractional shares and does not represent separately
bargained-for consideration. The total cash that will be paid in the Bank Merger
in lieu of fractional shares of BankGroup Common Stock
<PAGE>
MainStreet BankGroup Incorporated
Hanover Bank
August 28, 1996
Page 3
will not exceed one percent of the total consideration that will be issued in
the Bank Merger to Bank shareholders in exchange for their Bank Common Stock.
4. No share of Bank Common Stock has been or will be redeemed in
anticipation of the Bank Merger, and the Bank has not made and will not make any
extraordinary distribution with respect to its stock in anticipation of the Bank
Merger.
5. BankGroup has no plan or intention to reacquire any of its
stock issued in the Bank Merger or to make any extraordinary distribution with
respect to such stock.
6. There is no plan or intention by Bank shareholders to sell,
exchange, or otherwise dispose of a number of shares of BankGroup Common Stock
received in the Bank Merger that would reduce the Bank shareholders' ownership
of BankGroup Common Stock to a number of shares having a fair market value, as
of the effective date of the Bank Merger, of less than 50 percent of the fair
market value of all the formerly outstanding Bank Common Stock as of that date.
For this purpose, shares of Bank Common Stock exchanged for cash in the Bank
Merger or exchanged for cash in lieu of fractional shares of BankGroup Common
Stock are treated as outstanding Bank Common Stock on the effective date of the
Bank Merger. Moreover, shares of Bank Common Stock and shares of BankGroup
Common Stock held by Bank shareholders and otherwise sold, redeemed, or disposed
of before or after the Bank Merger are considered in making the above
determination.
7. Acquisition will acquire at least 90 percent of the fair
market value of the net assets and at least 70 percent of the fair market value
of the gross assets held by the Bank immediately before the Bank Merger. For
this purpose, any amounts paid by the Bank or Acquisition for expenses related
to the Bank Merger and any redemptions and distributions (except for regular,
normal dividends) made by the Bank in connection with the Bank Merger will be
included as assets of the Bank held immediately before the Bank Merger.
8. Following the Bank Merger, Acquisition will continue the
historic business of the Bank or use a significant portion of the Bank's
historic business assets in a business.
9. The liabilities of the Bank that will be assumed by
Acquisition and the liabilities, if any, to which assets of
<PAGE>
MainStreet BankGroup Incorporated
Hanover Bank
August 28, 1996
Page 4
the Bank are subject were incurred by the Bank in the ordinary course of
business.
10. There is no intercorporate indebtedness existing between the
Bank and BankGroup, Acquisition, or any other subsidiary of BankGroup that was
issued or acquired or will be settled at a discount.
11. Neither BankGroup nor any subsidiary of BankGroup (a) has
transferred or will transfer cash or other property to the Bank for less than
fair market value consideration in anticipation of the Bank Merger or (b) has
made or will make any loan to the Bank in anticipation of the Bank Merger.
12. On the effective date of the Bank Merger, the fair market
value of the assets of the Bank transferred to Acquisition will exceed the sum
of the Bank's liabilities assumed by Acquisition plus the amount of liabilities,
if any, to which the transferred assets are subject.
13. BankGroup will pay its expenses, Acquisition's expenses, and,
if the Bank Merger is consummated, the Bank's expenses incurred in connection
with the Bank Merger. The Bank shareholders will pay their expenses, if any,
incurred in connection with the Bank Merger.
14. Acquisition has outstanding only one class of stock, and
BankGroup owns all the outstanding shares of such class. Following the Bank
Merger, Acquisition will not issue additional shares of its stock that would
result in BankGroup's owning less than 80 percent of the total combined voting
power of all classes of Acquisition's voting stock or less than 80 percent of
each class of Acquisition's nonvoting stock.
15. Neither BankGroup nor Acquisition has any plan or intention
to liquidate Acquisition, to merge Acquisition into another corporation, to sell
or otherwise dispose of any stock of Acquisition, or (except for dispositions
made in the ordinary course of business) for Acquisition to sell or otherwise
dispose of any of the assets of the Bank acquired in the Bank Merger.
16. For each of BankGroup, Acquisition, and the Bank, not more
than 25 percent of the fair market value of its adjusted total assets consists
of stock and securities of any one issuer, and not more than 50 percent of the
fair market value of its adjusted total assets consists of stock and
<PAGE>
MainStreet BankGroup Incorporated
Hanover Bank
August 28, 1996
Page 5
securities of five or fewer issuers. For purposes of the preceding sentence, (a)
a corporation's adjusted total assets exclude cash, cash items (including
accounts receivable and cash equivalents), and United States government
securities, (b) a corporation's adjusted total assets exclude stock and
securities issued by any subsidiary at least 50 percent of the voting power or
50 percent of the total fair market value of the stock of which is owned by the
corporation, but the corporation is treated as owning directly a ratable share
(based on the percentage of the fair market value of the subsidiary's stock
owned by the corporation) of the assets owned by any such subsidiary, and (c)
all corporations that are members of the same "controlled group" within the
meaning of section 1563(a) of the Internal Revenue Code (the "Code") are treated
as a single issuer.
17. At all times during the five-year period ending on the
effective date of the Bank Merger, the fair market value of all of the Bank's
United States real property interests has been less than 50 percent of the total
fair market value of (a) its United States real property interests, (b) its
interests in real property located outside the United States, and (c) its other
assets used or held for use in a trade or business. For purposes of the
preceding sentence, (x) United States real property interests include all
interests (other than an interest solely as a creditor) in real property and
associated personal property (such as movable walls and furnishings) located in
the United States or the Virgin Islands and interests in any corporation (other
than a controlled corporation) owning any United States real property interest,
(y) the Bank is treated as owning its proportionate share (based on the relative
fair market value of its ownership interest to all ownership interests) of the
assets owned by any controlled corporation or any partnership, trust, or estate
in which the Bank is a partner or beneficiary, and (z) any such entity in turn
is treated as owning its proportionate share of the assets owned by any
controlled corporation or any partnership, trust, or estate in which the entity
is a partner or beneficiary. As used in this paragraph, "controlled corporation"
means any corporation at least 50 percent of the fair market value of the stock
of which is owned by the Bank, in the case of a first-tier subsidiary of the
Bank, or by a controlled corporation, in the case of a lower-tier subsidiary.
18. No shares of Bank Common Stock, if any, that were acquired
in connection with the performance of services
<PAGE>
MainStreet BankGroup Incorporated
Hanover Bank
August 28, 1996
Page 6
are subject to a substantial risk of forfeiture within the meaning of section
83(c) of the Code.
19. The Bank has not filed, and holds no asset subject to, a
consent pursuant to section 341(f) of the Code and regulations thereunder.
20. The Bank is not a party to, and holds no asset subject to, a
"safe harbor lease" under former section 168(f)(8) of the Code and regulations
thereunder.
On the basis of the foregoing, and assuming that (i) with respect
to any shareholder that is a nonresident alien or foreign entity, the Bank will
comply with all applicable statement and notification requirements of Treasury
Regulation ss. 1.897-2(g) & (h), and (ii) the Bank Merger will be consummated in
accordance with the Revised Plan of Merger, we are of the opinion that (under
existing law) for federal income tax purposes:
1. The Bank Merger will be a reorganization within the meaning
of section 368(a)(1)(A) by reason of section 368(a)(2)(D) of the Code, and
BankGroup, Acquisition, and the Bank each will be a "party to a reorganization"
within the meaning of section 368(b) of the Code.
2. The Bank will not recognize gain or loss (a) on the transfer
of its assets to Acquisition in exchange for BankGroup Common Stock, cash, and
the assumption of the Bank's liabilities, or (b) on the constructive
distribution of Bank- Group Common Stock and cash to the Bank shareholders. (We
note, however, that the Bank or Acquisition may be required to include in income
certain amounts as a result of the termination of any bad-debt reserve
maintained by the Bank for federal income tax purposes and other possible
required changes in accounting methods.)
3. Neither BankGroup nor Acquisition will recognize gain or loss
on the acquisition by Acquisition of the Bank's assets in exchange for BankGroup
Common Stock, cash, and the assumption of the Bank's liabilities. (We note,
however, that the Bank or Acquisition may be required to include in income
certain amounts as a result of the termination of any bad-debt reserve
maintained by the Bank for federal income tax purposes and other possible
required changes in accounting methods.)
<PAGE>
MainStreet BankGroup Incorporated
Hanover Bank
August 28, 1996
Page 7
4. A Bank shareholder will not recognize gain or loss on the
exchange of shares of Bank Common Stock solely for shares of BankGroup Common
Stock (including any fractional share interest) in the Bank Merger.
5. The aggregate basis of shares of BankGroup Common Stock
(including any fractional share interest) received in the Bank Merger by a Bank
shareholder who exchanges shares of Bank Common Stock solely for shares of
BankGroup Common Stock will be the same as the aggregate basis of the shares of
Bank Common Stock exchanged therefor.
6. The holding period for shares of BankGroup Common Stock
(including any fractional share interest) received by a Bank shareholder in the
Bank Merger will include the holding period for the shares of Bank Common Stock
exchanged therefor, if such shares of Bank Common Stock are held as a capital
asset on the effective date of the Bank Merger.
7. Cash received by a Bank shareholder in lieu of a fractional
share of BankGroup Common Stock will be treated as having been received as full
payment in exchange for such fractional share pursuant to section 302(a) of the
Code.
We are also of the opinion that the federal income tax
consequences of the Bank Merger are fairly summarized in the S-4 under the
headings "Summary -- Certain Federal Income Tax Consequences of the Bank Merger"
and "The Bank Merger -- Certain Federal Income Tax Consequences." We consent to
the use of this opinion as an exhibit to the S-4 and to the reference to this
firm under such headings. In giving this consent, we do not admit that we are
within the category of persons whose consent is required by section 7 of the
Securities Act of 1933 or the rules and regulations promulgated thereunder by
the Securities and Exchange Commission.
Very truly yours,
HUNTON & WILLIAMS
Exhibit 23(a)
CONSENT OF KPMG PEAT MARWICK LLP
The Board of Directors
MainStreet BankGroup Incorporated:
We consent to the use of our report incorporated herein by reference and to the
reference to our firm under the heading "Experts" in the prospectus. Our report
refers to changes in accounting for impaired loans and certain investments in
debt and equity securities.
KPMG Peat Marwick LLP
Roanoke, Virginia
August 27, 1996
Exhibit 23(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement of
MainStreet BankGroup Incorporated on Form S-4 for our report dated January 19,
1996, on our audit of the consolidated financial statements of MainStreet
BankGroup Incorporated as of December 31, 1995, and for the year then ended,
which report is included in the Annual Report on Form 10-K. We also consent to
the reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Raleigh, North Carolina
August 27, 1996
Exhibit 23(c)
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of MainStreet BankGroup
Incorporated on Form S-4 of our report dated January 12, 1996 relating to the
consolidated financial statements of Hanover Bank and subsidiary, appearing in
the Prospectus, which is a part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Richmond, Virginia
August 28, 1996
Exhibit 23(d)
[SCOTT & STRINGFELLOW, INC. LETTERHEAD]
August 28, 1996
Lathan M. Ewers, Jr., Esquire
Hunton & Williams
Riverfront Plaza, East Tower
951 East Byrd Street
Richmond, Virginia 23219-4074
CONSENT OF INVESTMENT BANKERS
Gentlemen:
We consent to the use, quotation and summarization in the Registration
Statement on Form S-4 of our fairness opinion dated August 28, 1996, rendered to
the Board of Directors of Hanover Bank in connection with its merger with
MainStreet BankGroup Incorporated and to the use of our name, and the statements
with respect to us, appearing in the Registration Statement.
Sincerely,
SCOTT & STRINGFELLOW, INC.
/s/ Gary S. Penrose
Gary S. Penrose
Managing Director
Financial Institutions Group
Exhibit 99(a)
HANOVER BANK
REVOCABLE PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints ___________________ and
______________________, either one of whom may act with full power of
substitution, to act as proxies for the undersigned and to vote all shares of
Common Stock of Hanover Bank ("Bank") which the undersigned is entitled to vote
at the Special Meeting of Shareholders to be held on __________________, 1996,
at __:__ a.m., local time, at _____________________ located at
____________________________, and at any and all adjournments thereof.
THIS PROXY MAY BE REVOKED AT ANY TIME BEFORE IT IS EXERCISED.
This proxy, when properly executed, will be voted as directed on the
reverse side. If no direction is made, this proxy will be voted FOR each of the
proposals listed. If any other business is properly presented at the Special
Meeting, this proxy will be voted by the proxies in their discretion.
The Board of Directors recommends that shareholders vote FOR Proposal 1.
1. FOR [ ] AGAINST [ ] ABSTAIN [ ]
Approval and adoption of the Agreement and Plan of Reorganization and
related Revised Plan of Merger dated May 10, 1996 (the "Agreement"),
among MainStreet BankGroup Incorporated ("BankGroup), BH Acquisition
Subsidiary, Inc. and Bank, providing for Bank's acquisition by BankGroup
as described in the Proxy Statement/Prospectus and pursuant to which
each share of Common Stock of Bank outstanding as of the Effective Time
of the Merger will be converted into and become the right to receive the
number of shares of Common Stock of BankGroup (and associated stock
rights) or cash as determined in the manner specified in the Proxy
Statement/Prospectus and the Agreement.
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the Special Meeting or any
adjournment thereof.
The undersigned acknowledges receipt prior to the execution of this proxy of a
Notice of Special Meeting of Shareholders dated _____________, 1996, and of a
Proxy Statement/Prospectus dated _______________, 1996.
Please sign exactly as your name appears on this card. When signing as attorney,
executor, administrator, trustee or guardian, please give your full title. If
shares are held jointly, each holder may sign, but only one signature is
required.
Dated ____________________, 1996 ____________________________________
Signature
------------------------------------
Signature
Please Mark, Sign, Date and Return the Proxy Card Promptly
Using the Enclosed Envelope.
Exhibit 99(b)
USE THIS FORM ONLY IF YOU WANT TO RECEIVE CASH INSTEAD
OF MAINSTREET STOCK FOR YOUR BANK SHARES.
MAINSTREET BANKGROUP INCORPORATED
HANOVER BANK
CASH OPTION ELECTION
AND
LETTER OF TRANSMITTAL
IMPORTANT: TO BE EFFECTIVE, THIS ELECTION FORM AND LETTER OF TRANSMITTAL
MUST BE RECEIVED BY HANOVER BANK NO LATER THAN __:__ A.M. ON
____________________, 1996 (THE "ELECTION DEADLINE"), TOGETHER WITH
CERTIFICATE(S) REPRESENTING SHARES OF HANOVER BANK COMMON STOCK TO WHICH THIS
CASH OPTION ELECTION AND LETTER OF TRANSMITTAL RELATES.
To Hanover Bank
7021 Mechanicsville Turnpike
Mechanicsville, Virginia 23111
Gentlemen:
On _______________________, 1996 at a Special Meeting of Shareholders
(the "Special Meeting") of Hanover Bank, shareholders will consider an Agreement
and Plan of Reorganization (the "Agreement") dated as of May 10, 1996 among
MainStreet BankGroup Incorporated ("BankGroup"), BH Acquisition Subsidiary, Inc.
and Hanover Bank ("Bank"). The Agreement provides for the merger of Bank into BH
Acquisition Subsidiary, Inc. (the "Bank Merger") and the conversion of Bank
Common Stock into BankGroup Common Stock or, at the election of the Bank
shareholder, cash. Bank Common Stock is being valued at $15.25 per share in the
Bank Merger.
The Agreement requires Bank shareholders who elect to exchange all, and
not less than all, of their shares of Bank Common Stock in the Bank Merger for
cash to make such election prior to the Special Meeting. Certificates for the
shares being exchanged for cash must be submitted to Bank at or prior to the
Special Meeting. Such certificates are enclosed with this letter. Failure to
return this Cash Option Election Form by the Election Deadline will result in
the conversion of all shares of Bank Common Stock into BankGroup Common Stock,
except fractional shares settled for cash and Dissenting Shares.
I elect to exchange the number of shares of Bank Common Stock designated
below, which constitute all of the Bank shares that I own, for $15.25 cash per
share (subject to all applicable withholding taxes). I enclose the certificates
for such shares.
I understand that the total number of shares of Bank Common Stock that
may be exchanged for cash is limited as described in the Agreement. Because the
number of shares exchanged for cash may not exceed 9.9% of the outstanding
shares of Bank Common Stock, the extent to which the cash elections will be
accommodated will depend on the number of holders of shares of Bank Common Stock
who elect to receive cash. If the aggregate of the Dissenting Shares, fractional
shares settled for cash and shares with respect to which a cash election is made
exceeds 9.9% of the outstanding shares of Bank Common Stock, I understand shares
submitted for cash purchase will be chosen by lot to accommodate the "pooling of
interests" accounting requirement that a shareholder who chooses the cash
election must have ALL of his or her shares purchased for cash. Shareholders who
submit their shares for cash purchase but are not chosen in the lottery will
have their shares exchanged for BankGroup Common
<PAGE>
Stock (plus cash in lieu of fractional shares)."
I understand that if the Bank Merger is approved by Bank shareholders,
this election to receive cash is irrevocable. Bank will retain the certificates
for shares submitted for cash purchase in escrow until either termination of the
Agreement, upon which Bank promptly will return such certificates, or the
Effective Time of the Bank Merger, when Registrar and Transfer Company, as
exchange agent (the "Exchange Agent"), will exchange such certificates for cash.
Description of Shares of Bank Common Stock Submitted for Cash
- -------------------------------------------------------------------------------
Name and Address of Registered Holder(s) Certificate(s) Enclosed
(Kindly note address changes) (Attach list if necessary)
- -------------------------------------------------------------------------------
Nos. of
Certificate # Shares
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
I (We) have, and at the Effective Time of the Bank Merger will have,
full power and authority to sell the shares represented by the certificate(s)
submitted. I (We) certify that the information provided on this form is true,
and that when such shares are accepted for cash exchange by BankGroup will
acquire good and unencumbered title thereto, free and clear of all liens,
restrictions, changes and not subject to any adverse claim. I (we) am not
subject to backup withholding due to notified payee underreporting. It is
understood that this Election is subject to the terms, conditions and
limitations set forth in the Agreement, the Proxy Statement/Prospectus and this
Cash Option Election and Letter of Transmittal. Holders of Bank Common Stock
should consult their own advisors as to the tax consequences of making this cash
election. The undersigned, upon request, will execute and deliver any additional
documents necessary or desirable to complete the exchange of shares for cash
under the Agreement. The undersigned hereby constitutes and appoints the
Exchange Agent as his, her or its true and lawful agent and attorney-in-fact to
effect such surrender of the shares and, if necessary under the Agreement, to
transfer the shares on the books of Bank. The undersigned represents that he,
she or it has read and agreed to all of the terms and conditions set forth
herein and in the Proxy Statement/Prospectus. Delivery of the enclosed
certificate(s) shall be effected, and the risk of loss and title to such
certificate(s) shall pass, only upon proper delivery thereof to the Exchange
Agent. All authority herein conferred shall survive the death or incapacity of
the undersigned, and each of them, and any obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives, successors
and assigns of the undersigned. In no event will Bank, the Exchange Agent or
BankGroup be liable to a holder of shares of Bank Common Stock for any BankGroup
Common Stock or dividends thereon or cash delivered in good faith to a public
official pursuant to any applicable abandoned property, escheat or similar law.
Sign Here: Date Here:
Please insert your Social ________________________ __________, 1996
Security or other tax
identifying number below __________________________________
- --------------------------
(Signature(s) of
Registered Owner(s))
Please sign exactly as
name appears
on stock certificate(s).
See Instruction 2.
<PAGE>
Special Instructions
Fill in only if MAILING is to be made other than in the name or to the address
specified above.
- ----------------------------------------------------
Special Mailing Instructions
Mail To:
Name
- ---------------------------------------------
(Type or print)
- ---------------------------------------------
Address ______________________________________
(Number) (Street)
- ---------------------------------------------
(City) (State) (Zip)
- ----------------------------------------------------
Fill in only if PAYMENT is to be made other than in the name(s) specified above.
- ----------------------------------------------------
Special Payment Instructions
Issue Check To:
Name ________________________________________
(Type or print)
Address ______________________________________
- ---------------------------------------------
Social Security or Taxpayer
Identification Number __________________________
- ---------------------------------------------
- ----------------------------------------------------
<PAGE>
IMPORTANT TAX INFORMATION
PURPOSE OF FORM
Use this form to report the Taxpayer Identification Number of the record
owner of the account to the payer.
Under Federal income tax laws, payers (i.e., BankGroup) must generally
withhold 31% of taxable interest, dividend, and certain other payments if you
fail to furnish payers with the correct Taxpayer Identification Number (this is
referred to as backup withholding).
To prevent backup withholding on these payments, be sure to notify the
payer of the correct Taxpayer Identification Number. You must use this form to
certify that the Taxpayer Identification Number you are giving to the payer is
correct and that you are not subject to backup withholding.
WHAT NUMBER TO GIVE THE PAYER
Give the payer the Social Security number or employer identification
number of the record owner of the account. If the account belongs to you as an
individual, give your Social Security number. If the account is in more than one
name or is not in the name of the actual owner, give the Social Security number
as follows:
Type of Account Social Security Number of:
- - Two or more individuals The actual owner of the account,
including husband and wife or if combined funds, any one
(joint account) of the individuals
- - Custodian account of minor The minor
(Uniform Gift to Minors Act)
- - Adult and minor (joint account) The adult, or if the minor is the
only contributor, the minor
- - Account in the name of a guardian The ward, minor or incompetent
or committee for a designated person
ward, minor, or incompetent
- --------------------------------------------------------------------------------
SUBSTITUTE FORM W-9
Under penalties of perjury, I certify (i) that the number shown below is my
correct Taxpayer Identification Number and (ii) that I am not subject to backup
withholding because: (a) I am exempt from backup withholding, or (b) I have not
been notified that I am subject to backup withholding as a result of a failure
to report all interest or dividends, or (c) the Internal Revenue Service has
notified me that I am no longer subject to backup withholding. (Note: You must
strike out item (ii) above if you have been notified by the Internal Revenue
Service that you are currently subject to backup withholding because of
underreporting interest or dividends on your tax returns.)
Tax Identification or (X)
Social Security Number: Signature
Date: , 199__
- --------------------------------------------------------------------------------
Instructions for Submitting Certificates of Bank Common Stock
1. General. This form must be filled in, dated and signed, and accompanied by
your certificate or certificates for shares of Bank Common Stock prior to the
Election Deadline. Proper delivery is at risk of the owner. If sent by mail,
registered mail is suggested. Mail or deliver to: Hanover Bank, 7021
Mechanicsville Turnpike, Mechanicsville, Virginia, 23111.
<PAGE>
2. Signatures. The signature (or signatures in the case of certificates owned by
two or more joint holders) on the Letter of Transmittal should correspond
exactly with the name(s) as written on the face of the certificates.
If the certificate(s) transmitted hereby is registered in the name of two or
more joint holders, all such holders must sign the Letter of Transmittal.
If surrendered certificates are registered in different ways on several
certificates, it will be necessary to complete, sign and submit as many separate
Letters of Transmittal as there are different registrations of such
certificates.
If the Letter of Transmittal is signed by a person other than the record holder
of the certificate(s) listed, the certificate(s) must be endorsed or accompanied
by appropriate stock powers, in either case signed by the record holder(s) in
the name(s) that appears on the certificate(s) and the signature(s) must be
guaranteed by a member of a national securities exchange or of the National
Association of Securities Dealers, Inc., or a United States commercial bank or
trust company.
3. Fiduciaries and Representatives. If a Letter of Transmittal, an endorsement
or a certificate or a stock power is signed by a trustee, executor,
administrator, guardian, officer of a corporation, attorney-in-fact, or other
person in any representative or fiduciary capacity, the person signing, unless
such person is the record holder of the shares, must give such person's full
title in such capacity and appropriate evidence of authority to act in such
capacity must be forwarded with the Letter of Transmittal.
The certificate(s) may be surrendered by a firm acting as agent for the
registered holder(s) if such firm is a member of a registered national
securities exchange or of the National Association of Securities Dealers or is a
commercial bank or trust company in the United States.
4. Time in Which to Submit Certificates. Certificate(s) for Bank Common Stock
must be submitted prior to Bank's Special Meeting of Shareholders on
_______________, 1996 at __:__ a.m. See "The Bank Merger -- Cash Election;
Election Procedures" in the Proxy Statement/Prospectus.
5. Special Payment Required. If a request is made that the check be made payable
to other than the person or entity whose name is specified above, the person
requesting the issuance of such check must first remit to the Exchange Agent any
transfer or other taxes required by reason of such issuance, or establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
applicable.
6. Lost Certificates. If any certificate representing shares of Bank Common
Stock has been lost, stolen or destroyed, the stockholder should immediately
contact Bank at the telephone number set forth below. This Cash Option Election
cannot be processed until such certificates have been replaced.
7. Determination of Questions. All questions with respect to this Cash Option
Election and Letter of Transmittal will be determined by the Exchange Agent,
whose determination shall be conclusive and binding. The Exchange Agent shall
have the exclusive right to reject any and all Cash Option Elections and Letters
of Transmittal not in proper form or to waive any irregularities in any such
Form, although it does not represent that it will do so.
Questions and Requests for Assistance may be Directed to Bank at
______________________________.
