FILED PURSUANT TO RULE 424(B)(3)
FILE NO. 333-06181
[BANK LETTERHEAD]
Dear Shareholders:
You are cordially invited to attend the Special Meeting of Shareholders of The
First National Bank of Clifton Forge ("Bank") on Thursday, September 5, 1996, at
10:00 a.m., Eastern Time, at the Bank's office located at 511 Main Street,
Clifton Forge, Virginia. 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 April 17, 1996, by and among the Bank, MainStreet
BankGroup Incorporated ("BankGroup") and CF Acquisition Subsidiary, N.A.
("Acquisition") and the related Revised Plan of Merger (together, the
"Agreement"), pursuant to which, among other things, the 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, fractional shares and dissenters' shares, 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.
August 6, 1996 Very truly yours,
/s/ GEORGE J. KOSTEL
George J. Kostel
Chairman of the Board
and President
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THE FIRST NATIONAL BANK OF CLIFTON FORGE
511 MAIN STREET
CLIFTON FORGE, VIRGINIA 24422
540-862-4251
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 5, 1996
TO THE SHAREHOLDERS OF THE FIRST NATIONAL BANK OF CLIFTON FORGE:
NOTICE IS HEREBY GIVEN that a Special Meeting of shareholders has been called by
the Board of Directors of The First National Bank of Clifton Forge ("the Bank")
and will be held at the Bank's office, located at 511 Main Street, Clifton
Forge, Virginia, on Thursday, September 5, 1996, at 10:00 a.m. Eastern Time for
the purpose of considering and voting upon the following matters:
1. Proposed Bank Merger. To consider and vote upon the Agreement and Plan of
Reorganization dated as of April 17, 1996 and a related Revised Plan of Merger
(together, the "Agreement") providing for the merger of the Bank with and into
CF Acquisition Subsidiary, N.A., a wholly-owned subsidiary of MainStreet
BankGroup Incorporated (the "Bank Merger"). The Agreement is attached to the
accompanying Proxy Statement/Prospectus as Annex I; and
2. Other Business. To consider and vote upon such other matters as may properly
come before the meeting.
Only those holders of shares of Common Stock of the Bank ("Bank Common Stock")
of record at the close of business on July 31, 1996 are entitled to notice of
and to vote at the meeting.
Clifton Forge, Virginia By Order of the Board of Directors,
August 6, 1996
/s/ REBA H. MANDEVILLE
Reba H. Mandeville
Corporate 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.
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PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS
OF
THE FIRST NATIONAL BANK OF CLIFTON FORGE
TO BE HELD ON SEPTEMBER 5, 1996
PROSPECTUS OF
MAINSTREET BANKGROUP INCORPORATED
COMMON STOCK
This Proxy Statement/Prospectus is being furnished to the holders of Common
Stock, par value $5.00 per share ("Bank Common Stock"), of The First National
Bank of Clifton Forge, a national banking association (the "Bank"), in
connection with the solicitation of proxies by the Board of Directors of the
Bank (the "Bank Board") for use at the Special Meeting of Bank Shareholders to
be held at 10:00 a.m. Eastern Time on September 5, 1996, at the Bank's office,
located at 511 Main Street, Clifton Forge, Virginia (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 July 31, 1996, will consider and vote upon a
proposal to approve the Agreement and Plan of Reorganization, dated as of April
17, 1996, and a related Revised Plan of Merger (together, the "Agreement") by
and among MainStreet BankGroup Incorporated, a Virginia corporation
("BankGroup"), CF Acquisition Subsidiary, N.A., an interim national banking
association (in organization) wholly owned by BankGroup ("Acquisition"), and The
First National Bank of Clifton Forge, a national banking association ("Bank"),
pursuant to which, among other things, the Bank will merge into Acquisition (the
"Bank Merger"). Upon consummation of the Bank Merger, which is expected to occur
on or about September 30, 1996, each outstanding share of Bank Common Stock
(other than shares as to which the holder exercises and perfects the statutory
right to an appraisal ("Dissenting Shares") 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) $83.20 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, when added to the number of Dissenting
Shares as defined in Section 2.4 of the Agreement and fractional shares settled
in cash, may not exceed 9.9% of outstanding Bank Common Stock. See "The Bank
Merger -- Determination of Exchange Ratio and Exchange 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 the Bank on or about August 6, 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 July 12, 1996.
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TABLE OF CONTENTS
Page
AVAILABLE INFORMATION..................................................... 1
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE........................... 1
SUMMARY..................................................................... 2
Parties to the Bank Merger............................................ 2
Shareholder Meeting................................................... 2
Vote Required; Record Date............................................ 2
The Bank Merger....................................................... 2
The Exchange Ratio.................................................... 3
Recommendation of the Board of Directors of Bank; Reasons for the
Bank Merger........................................................ 3
Cash Election......................................................... 4
Effective Time of the Bank Merger..................................... 4
Rights of Shareholders Electing to Exercise their Rights of Appraisal. 4
Opinion of Financial Advisor.......................................... 5
Conditions to Consummation............................................ 5
Conduct of Business Pending the Bank Merger........................... 5
Interests of Certain Persons in the Bank Merger....................... 5
Resale of BankGroup Common Stock...................................... 5
Certain Federal Income Tax Consequences of the Bank Merger............ 5
Market Prices Prior to Announcement of the Bank Merger................ 6
Comparative Per Share Data............................................ 6
SELECTED FINANCIAL DATA..................................................... 8
THE FIRST NATIONAL BANK OF CLIFTON FORGE
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS....................... 12
BANKGROUP, BANK AND HANOVER BANK............................................ 15
GENERAL INFORMATION......................................................... 26
THE BANK MERGER............................................................. 27
Opinion of Financial Advisor.......................................... 27
Effective Time of the Bank Merger..................................... 29
Determination of Exchange Ratio; Exchange of Bank Stock for
BankGroup Common Stock............................................ 30
Cash Election; Election Procedures.................................... 31
Business of the Bank Pending the Bank Merger.......................... 32
Conditions to Consummation of the Bank Merger......................... 32
Termination........................................................... 32
Accounting Treatment.................................................. 32
Operations After the Bank Merger...................................... 32
Interests of Certain Persons in the Bank Merger....................... 32
Effect on the Bank Employee Benefits Plans............................ 33
Certain Federal Income Tax Consequences............................... 33
Rights of Shareholders Electing to Exercise their Right of Appraisal.. 36
MAINSTREET BANKGROUP INCORPORATED........................................... 37
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General............................................................... 37
The Banks............................................................. 37
Recent Developments................................................... 38
PRICE RANGE OF BANKGROUP COMMON STOCK AND DIVIDENDS......................... 39
THE FIRST NATIONAL BANK OF CLIFTON FORGE.................................... 39
General............................................................... 39
MARKET FOR AND DIVIDENDS PAID ON BANK COMMON STOCK.......................... 40
OWNERSHIP BY CERTAIN BENEFICIAL OWNERS OF BANK STOCK........................ 40
REGULATION AND SUPERVISION.................................................. 41
Bank Holding Companies................................................ 41
Capital Requirements.................................................. 42
Limits on Dividends and Other Payments................................ 43
Banks ................................................................ 43
Deposit Insurance..................................................... 44
Other Safety and Soundness Regulations................................ 44
DESCRIPTION OF CAPITAL STOCK OF BANKGROUP................................... 44
Preferred Stock....................................................... 44
Common Stock.......................................................... 45
Rights................................................................ 45
Virginia Stock Corporation Act........................................ 46
Reports to Shareholders............................................... 47
Transfer Agent........................................................ 47
COMPARATIVE RIGHTS OF SHAREHOLDERS.......................................... 47
Capitalization........................................................ 47
Amendment of Articles or Bylaws....................................... 47
Required Shareholder Vote for Certain Actions......................... 47
Director Nominations.................................................. 48
Directors and Classes of Directors; Vacancies and Removal of Directors 48
Anti-Takeover Provisions.............................................. 49
Preemptive Rights..................................................... 49
Assessment............................................................ 49
Conversion; Redemption; Sinking Fund.................................. 49
Liquidation Rights.................................................... 49
Dividends and Other Distributions..................................... 49
Indemnification....................................................... 50
Shareholder Proposals................................................. 50
Shareholder Inspection Rights; Shareholder Lists...................... 50
Shareholder Rights Plan............................................... 51
Dissenters' Rights.................................................... 51
RESALE OF BANKGROUP COMMON STOCK............................................ 51
EXPERTS..................................................................... 52
LEGAL OPINIONS.............................................................. 52
OTHER MATTERS............................................................... 52
<PAGE>
ANNEX I -- Agreement and Plan of Reorganization dated April 17, 1996; Revised
Plan of Merger
ANNEX II -- Fairness Opinion of Scott & Stringfellow, Inc.
ANNEX III-- 12 U.S.C.A. ss. 215a relating to Dissenters' Rights
<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. 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 the 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 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 AUGUST
28, 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 period ended March 31, 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.
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Also incorporated by reference herein is the Agreement and Plan of
Reorganization among BankGroup, Acquisition and the Bank, dated April 17, 1996,
which is attached to this Proxy Statement/Prospectus as Annex I.
SUMMARY
THE FOLLOWING SUMMARY IS NOT INTENDED TO BE A COMPLETE DESCRIPTION OF ALL
MATERIAL FACTS REGARDING BANKGROUP, THE 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 CAREFULLY READ 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 "Business of BankGroup." CF Acquisition
Subsidiary, N.A., is owned by BankGroup and has no business operations.
The Bank. The main office of the Bank is located at 511 Main Street, Clifton
Forge, Virginia 24422. See "Business of the Bank."
Shareholder Meeting
The Bank Shareholders Meeting will be held on Thursday, September 5, 1996, at
10:00 a.m. Eastern Time at the Bank's office located at 511 Main Street, Clifton
Forge, Virginia, for the purpose of considering and voting upon a proposal to
approve the Agreement and a 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 July 31, 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 315,000 shares of Bank Common Stock entitled to be
voted, held by approximately 420 shareholders of record.
Directors of the Bank and their affiliates beneficially owned, as of the Record
Date, 48,185 shares or approximately 15.30% of the 315,000 outstanding shares of
Bank Common Stock. Directors of the Bank have agreed with BankGroup to recommend
approval of the Bank Merger to shareholders of the 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
the Bank are expected to exercise the cash option described below. See
"Ownership by Certain Beneficial Owners of Bank Stock."
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,"
the 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 or Dissenting Shares) 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) $83.20 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
2
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of Bank Common Stock for which shareholders elect to receive cash, when added to
the number of Dissenting Shares as defined in Section 2.4 of the Agreement and
fractional shares settled in cash, does not exceed 9.9% 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 $83.20, 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 $83.20 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 days preceding the last to
occur of (i) approval of the Bank Merger by shareholders of Bank or (ii) receipt
of the last of all regulatory approvals prerequisite to consummation of the Bank
Merger (the "Exchange Ratio"). If such quotient is less than 4.89, the Exchange
Ratio shall be 4.89. If such quotient is greater than 5.55, the Exchange Ratio
shall be 5.55. 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 and Exchange for BankGroup
Common Stock."
Recommendation of the Board of Directors of Bank; Reasons for the Bank Merger
The Board of Directors of Bank has determined that the Bank Merger is in the
best interests of Bank and its shareholders. The 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 Board of Directors of Bank believes that the Exchange Ratio provides a
fair price to Bank's shareholders for their shares of Bank Common Stock. Scott &
Stringfellow, Inc., the Bank's financial advisor, concluded that the
consideration to be received by the Bank's 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 or to
dissenting shareholders).
(iii) BankGroup Common Stock to be received by Bank shareholders is expected to
afford greater market liquidity when compared to the current minimal trading of
Bank's Common Stock.
(iv) The Bank Merger will provide Bank's customers access to a broader range of
financial services and products.
(v) Bank's Board of Directors review of the provisions of the Agreement and
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 Board deemed relevant,
Bank's Board of Directors unanimously adopted the Agreement and Revised Plan of
Merger as being in the best interests of Bank and its shareholders.
BANK'S BOARD OF DIRECTORS RECOMMENDS THAT BANK SHAREHOLDERS VOTE FOR APPROVAL OF
THE PROPOSAL.
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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 $83.20 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, when added to the
number of Dissenting Shares as defined in Section 2.4 of the Agreement, and
fractional shares settled in cash, does not exceed 9.9% of the outstanding
shares of Bank Common Stock. A shareholder selecting 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 9.9% 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 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, 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 Stock (plus cash
in lieu of fractional shares).
IF A HOLDER OF SHARES OF BANK COMMON STOCK ELECTS TO SURRENDER ALL OF HIS OR HER
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. The 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, the 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 September 30, 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 Office of the Comptroller of the
Currency (the "OCC"). The Bank and BankGroup each has the right, acting
unilaterally, to terminate the Agreement should the Bank Merger not be completed
by December 31, 1996. See "The Bank Merger -- Termination."
Rights of Shareholders Electing to Exercise their Rights of Appraisal
Holders of Bank Common Stock entitled to vote on approval of the Agreement and
the related Revised Plan of Merger have the right to dissent from the Bank
Merger and, upon consummation of the Bank Merger and the satisfaction of certain
specified procedures, to receive payment of the fair value of each such holder's
shares of Bank Common Stock in cash in accordance with 12 U.S.C.A. ss. 215a. The
procedures to be followed by a shareholder electing to perfect his or her right
of appraisal are summarized under "The Bank Merger -- Rights of Shareholders
Electing to Exercise Their Right of Appraisal" and a copy of 12 U.S.C.A. ss.
215a(a), (b) and (c) is set forth in Annex III to this Proxy
Statement/Prospectus. FAILURE TO FOLLOW SUCH PROVISIONS PRECISELY MAY RESULT IN
LOSS OF SUCH APPRAISAL RIGHTS.
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Opinion of Financial Advisor
The Bank has received the opinion of Scott & Stringfellow, Inc. ("Scott &
Stringfellow") that the Merger Consideration to be received by the holders of
the 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 the
Bank Common Stock and does not constitute a recommendation to any holders of the
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
the 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"), the OCC and the State Corporation Commission of Virginia (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, the 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 the Bank Pending
the Bank Merger."
Interests of Certain Persons in the Bank Merger
Certain members of the Bank's management and the Bank Board have interests in
the Bank Merger in addition to their interests as shareholders of the Bank
generally. These include, among other things, the election of George J. Kostel
to BankGroup's Board of Directors, indemnification and directors' and officers'
liability insurance for Bank directors and officers, and eligibility of Bank
employees for certain BankGroup employee benefits. 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 the 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 as a result of the perfection of dissenters' rights, or
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 the 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."
5
<PAGE>
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 (the "NASDAQ/NMS") on March 6, 1996, the date
immediately preceding delivery of an indication of interest to the Bank on March
7, 1996, which was superseded by the Agreement on April 17, 1996. See "Price
Range of Bank Common Stock and Dividend Policy" for information concerning
recent market prices of the Bank Common Stock.
Bank
Historical Equivalent
BankGroup (a) Bank Pro Forma(a)
Common Stock $16.125 $62.50 $83.20
(a) The equivalent price for Bank Common Stock is the product of
multiplying an assumed Exchange Ratio of 5.16 shares of BankGroup
Common Stock times $16.125.
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 the Bank.
The pro forma combined amounts give effect to an assumed Exchange Ratio of 5.20
shares of BankGroup Common Stock for each share of Bank Common Stock (based on
the last sale price of BankGroup Common Stock on March 31, 1996 of $16.00). 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 5.20. As discussed in "The Bank Merger -- Determination of
Exchange Ratios and Exchange for BankGroup Common Stock," the final Exchange
Ratio will be determined based on the average closing price for BankGroup Common
Stock as reported on NASDAQ for each of the 10 trading days preceding the last
to occur of (i) approval of the Bank Merger by shareholders of Bank or (ii)
receipt of the last of all regulatory approvals prerequisite to consummation of
the Bank Merger (the "Exchange Ratio"). 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.
6
<PAGE>
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 the 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.
COMPARATIVE PER SHARE DATA
<TABLE>
<CAPTION>
As of or For
Three Months Ended As of or For Years
March 31, Ended December 31,
1996 1995 1995 1994 1993
<S> <C>
Book Value Per Share at Period End:(4)
BankGroup historical $ 9.04 $ 7.38 $ 8.87 $ 6.86 $ 7.70
Bank historical 46.86 43.36 46.81 42.38 40.21
Pro forma combined per BankGroup common share(1) 9.03 7.55 8.89 7.09 7.71
Equivalent pro forma per Bank common share 46.96 39.26 46.23 36.87 40.09
Cash Dividends Declared Per Share:(4)
BankGroup historical $ .115 $ .09 $ .39 $ .33 $ .29
Bank historical .57 .53 2.18 2.27 1.80
Pro forma combined per BankGroup common share(2) .114 .10 .39 .35 .30
Equivalent pro forma per Bank common share .59 .52 2.03 1.82 1.56
Net Income Per Share:(4)
BankGroup historical $ .37 $ .29 $ 1.37 $ .54 $ .93
Bank historical 1.27 1.17 4.84 4.73 5.33
Pro forma combined per BankGroup common share(3) .35 .28 1.29 .61 .95
Equivalent pro forma per Bank common share 1.82 1.46 6.71 3.17 4.94
</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 the Bank's fiscal year
ends December 31. In the above table, the Bank financial data is
presented consistent with the fiscal year of BankGroup. The Bank's book
value per share is as of the dates presented, and net income and
dividend data reflect results for the periods presented.
7
<PAGE>
SELECTED FINANCIAL DATA
MAINSTREET BANKGROUP INCORPORATED
AND THE FIRST NATIONAL BANK OF CLIFTON FORGE
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.
<TABLE>
<CAPTION>
As of or for
Three Months
Ended As of or for
March 31, 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 $9,980 $8,979 $37,300 $34,299 $32,621 $29,975 $25,869
Clifton Forge. 814 804 3,175 3,160 3,333 3,141 2,671
MainStreet and Clifton Forge ProForma. 10,794 9,783 40,475 37,459 35,954 33,116 28,540
Provision for Loan Losses
MainStreet BankGroup 822 328 1,319 2,827 1,370 2,397 5,424
Clifton Forge. 1 -- -- 3 27 46 62
MainStreet and Clifton Forge ProForma. 823 328 1,319 2,830 1,397 2,443 5,486
Net Interest Income after provision for
loan losses
MainStreet BankGroup 9,158 8,651 35,981 31,472 31,251 27,578 20,445
Clifton Forge. 813 804 3,175 3,157 3,306 3,095 2,609
MainStreet and Clifton Forge ProForma. 9,971 9,455 39,156 34,629 34,557 30,673 23,054
Noninterest Income
MainStreet BankGroup 2,778 1,707 7,975 1,175 6,414 6,386 5,580
Clifton Forge. 53 38 251 288 359 378 384
MainStreet and Clifton Forge ProForma. 2,831 1,745 8,226 1,463 6,773 6,764 5,964
Noninterest Expense
MainStreet BankGroup 7,435 7,315 28,817 28,713 28,254 24,101 22,337
Clifton Forge. 294 317 1,262 1,347 1,329 1,337 1,228
MainStreet and Clifton Forge ProForma. 7,729 7,632 30,079 30,060 29,583 25,438 23,565
Income before income taxes
MainStreet BankGroup 4,501 3,043 15,139 3,934 9,411 9,863 3,688
Clifton Forge. 572 525 2,164 2,098 2,336 2,136 1,766
MainStreet and Clifton Forge ProForma. 5,073 3,568 17,303 6,032 11,747 11,999 5,454
Net Income
MainStreet BankGroup 3,164 2,175 10,740 4,088 6,881 7,128 2,984
Clifton Forge. 401 369 1,524 1,491 1,678 1,553 1,261
MainStreet and Clifton Forge ProForma. 3,565 2,544 12,264 5,579 8,559 8,681 4,245
Net income applicable to common shares
MainStreet BankGroup 3,164 2,175 10,740 4,088 6,881 7,128 2,984
Clifton Forge. 401 369 1,524 1,491 1,678 1,553 1,261
MainStreet and Clifton Forge ProForma. 3,565 2,544 12,264 5,579 8,559 8,681 4,245
PER COMMON SHARE DATA:
Net Income (primary): (1)
MainStreet BankGroup 0.37 0.29 1.37 0.54 0.93 0.97 0.41
Clifton Forge. 1.27 1.17 4.84 4.73 5.33 4.93 4.00
MainStreet and Clifton Forge ProForma (2) 0.35 0.28 1.29 0.61 0.95 0.97 0.48
Net Income (fully diluted): (1)
MainStreet BankGroup 0.37 0.27 1.29 0.53 0.87 0.91 0.41
Clifton Forge. 1.27 1.17 4.84 4.73 5.33 4.93 4.00
MainStreet and Clifton Forge ProForma (2) $0.35 $0.26 $1.23 $0.59 $0.90 $0.91 $0.48
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
As of or for
Three Months
Ended As of or for
March 31, Years ended December 31,
------------------- ------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
(Dollars in 000s, except per share data)
<S> <C>
Dividends declared: (1)
MainStreet BankGroup $0.115 $0.09 $0.39 $0.33 $0.29 $0.22 $0.27
Clifton Forge. 0.57 0.53 2.18 2.27 1.80 1.58 1.43
MainStreet and Clifton Forge ProForma (2) 0.114 0.10 0.36 0.35 0.30 0.24 0.27
Book value: (1)
MainStreet BankGroup 9.04 7.38 8.87 6.86 7.70 7.05 6.30
Clifton Forge. 46.86 43.36 46.81 42.38 40.21 36.69 33.34
MainStreet and Clifton Forge ProForma. 9.03 7.55 8.89 7.09 7.71 7.05 6.32
Average primary shares (thousands): (1)
MainStreet BankGroup 8,590 7,564 7,842 7,510 7,384 7,336 7,280
Clifton Forge. 315 315 315 315 315 315 315
MainStreet and Clifton Forge ProForma (2) 10,228 9,202 9,480 9,148 9,022 8,974 8,918
Average fully diluted shares (thousands):(1)
MainStreet BankGroup. 8,590 8,542 8,548 8,516 8,414 8,380 7,280
Clifton Forge 315 315 315 315 315 315 315
MainStreet and Clifton Forge ProForma (2) 10,228 10,180 10,186 10,154 10,052 10,018 8,918
SELECTED PERIOD-END BALANCES:
Total Assets
MainStreet BankGroup 909,827 804,501 895,801 794,957 774,193 743,590 691,228
Clifton Forge. 74,192 70,324 74,682 70,262 71,973 68,135 64,373
MainStreet and Clifton Forge ProForma. 984,019 874,825 970,483 865,219 846,166 811,725 755,601
Loans (Net of unearned income)
MainStreet BankGroup 583,121 508,894 565,784 499,751 449,411 444,631 451,617
Clifton Forge. 38,982 37,466 38,710 37,787 34,702 32,581 29,386
MainStreet and Clifton Forge ProForma. 622,103 546,360 604,494 537,538 484,113 477,212 481,003
Allowance for loan losses
MainStreet BankGroup 8,449 8,034 8,076 8,191 8,351 8,610 8,559
Clifton Forge. 217 220 222 219 219 242 246
MainStreet and Clifton Forge ProForma. 8,666 8,254 8,298 8,410 8,570 8,852 8,805
Nonperforming Assets (3)
MainStreet BankGroup 5,792 7,011 6,987 6,963 9,282 12,988 15,764
Clifton Forge. 410 109 163 30 925 88 251
MainStreet and Clifton Forge ProForma. 6,202 7,120 7,150 6,993 10,207 13,076 16,015
Total Deposits
MainStreet BankGroup 711,703 709,520 700,513 704,570 679,714 655,121 606,831
Clifton Forge. 58,690 56,001 59,313 56,447 58,915 56,160 53,376
MainStreet and Clifton Forge ProForma. 770,393 765,521 759,826 761,017 738,629 711,281 660,207
Long-term debt
MainStreet BankGroup 70,928 8,918 929 8,918 9,194 9,455 9,555
Clifton Forge. -- -- -- -- -- -- --
MainStreet and Clifton Forge ProForma. 70,928 8,918 929 8,918 9,194 9,455 9,555
Common shareholders' equity
MainStreet BankGroup 77,479 55,488 75,717 51,491 57,124 51,729 46,004
Clifton Forge. 14,762 13,657 14,745 13,350 12,666 11,556 10,502
MainStreet and Clifton Forge ProForma. 92,241 69,145 90,462 64,841 69,790 63,285 56,506
Total shareholders' equity
MainStreet BankGroup 77,479 55,488 75,717 51,491 57,124 51,729 46,004
Clifton Forge. 14,762 13,657 14,745 13,350 12,666 11,556 10,502
MainStreet and Clifton Forge ProForma. 92,241 69,145 90,462 64,841 69,790 63,285 56,506
AVERAGE BALANCES:
Total assets
MainStreet BankGroup 892,679 793,426 838,057 787,200 753,018 712,988 677,272
Clifton Forge. 74,274 70,262 71,958 71,131 70,322 67,072 62,389
MainStreet and Clifton Forge ProForma. $966,953 $863,688 $910,015 $858,331 $823,340 $780,060 $739,661
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
As of or for
Three Months
Ended As of or for
March 31, Years ended December 31,
------------------ ----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
(Dollars in 000s, except per share data)
<S> <C>
Loans (net of unearned income)
MainStreet BankGroup $571,939 $501,081 $526,311 $474,216 $456,393 $445,614 $462,413
Clifton Forge. 39,114 37,515 37,889 35,968 33,699 30,820 27,804
MainStreet and Clifton Forge ProForma. 611,053 538,596 564,200 510,184 490,092 476,434 490,217
Total deposits
MainStreet BankGroup 697,929 701,240 704,661 697,337 665,579 632,361 601,214
Clifton Forge. 58,745 56,256 57,474 57,483 57,655 55,431 51,638
MainStreet and Clifton Forge ProForma. 756,674 757,496 762,135 754,820 723,234 687,792 652,852
Long-term debt
MainStreet BankGroup 21,917 8,918 7,398 9,167 9,394 9,463 9,555
Clifton Forge. -- -- -- -- -- -- --
MainStreet and Clifton Forge ProForma. 21,917 8,918 7,398 9,167 9,394 9,463 9,555
Common shareholders' equity
MainStreet BankGroup 78,423 53,888 62,279 55,777 55,529 49,804 46,371
Clifton Forge. 14,762 13,398 13,801 13,026 12,063 10,998 10,051
MainStreet and Clifton Forge ProForma. 93,185 67,286 76,080 68,803 67,592 60,802 56,422
Total shareholders' equity
MainStreet BankGroup 78,423 53,888 62,279 55,777 55,529 49,804 46,371
Clifton Forge. 14,762 13,398 13,801 13,026 12,063 10,998 10,051
MainStreet and Clifton Forge ProForma. 93,185 67,286 76,080 68,803 67,592 60,802 56,422
RATIOS:
Return on average assets
MainStreet BankGroup 1.42% 1.11% 1.28% 0.52% 0.91% 1.00% 0.44%
Clifton Forge. 2.17 2.13 2.12 2.10 2.39 2.32 2.02
MainStreet and Clifton Forge ProForma. 1.48 1.19 1.35 0.65 1.04 1.11 0.57
Return on average shareholders' equity
MainStreet BankGroup 16.18 16.37 17.24 7.33 12.39 14.31 6.44
Clifton Forge. 10.90 11.17 11.04 11.45 13.91 14.12 12.55
MainStreet and Clifton Forge ProForma. 15.35 15.33 16.12 8.11 12.66 14.28 7.52
Return on average common shareholders' equity
MainStreet BankGroup 16.18 16.37 17.24 7.33 12.39 14.31 6.44
Clifton Forge. 10.90 11.17 11.04 11.45 13.91 14.12 12.55
MainStreet and Clifton Forge ProForma. 15.35 15.33 16.12 8.11 12.66 14.28 7.52
Net interest margin (4)
MainStreet BankGroup 4.82 5.05 4.84 4.81 4.72 4.60 4.23
Clifton Forge. 4.75 5.10 4.83 4.90 5.28 5.25 4.74
MainStreet and Clifton Forge ProForma. 4.82 5.05 4.84 4.82 4.79 4.66 4.27
Nonperforming assets to loans and foreclosed
properties at period end (3)
MainStreet BankGroup 0.99 1.37 1.23 1.39 2.04 2.88 3.46
Clifton Forge. 1.05 0.29 0.42 0.08 2.67 0.27 0.85
MainStreet and Clifton Forge Proforma. 0.99 1.30 1.18 1.29 2.09 2.71 3.30
Net charge-offs to average loans
MainStreet BankGroup 0.31 0.39 0.27 0.63 0.36 0.53 0.79
Clifton Forge. 0.06 -- (0.01) 0.01 0.15 0.16 0.07
MainStreet and Clifton Forge ProForma. 0.30 0.37 0.25 0.59 0.34 0.50 0.75
Allowance for loan losses to loans at period end
MainStreet BankGroup 1.45 1.58 1.43 1.64 1.86 1.94 1.90
Clifton Forge. 0.56 0.59 0.57 0.58 0.63 0.74 0.84
MainStreet and Clifton Forge ProForma. 1.39 1.51 1.37 1.56 1.77 1.85 1.83
Allowance for loan losses to nonperforming
loans at period end
MainStreet BankGroup 186.92 167.93 153.65 185.48 198.31 122.48 69.84
Clifton Forge. 52.93 201.83 136.20 730.00 23.68 403.33 155.70
MainStreet and Clifton Forge ProForma. 175.78 168.69 153.13 189.16 166.86 124.85 70.93
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
As of or for
Three Months
Ended As of or for
March 31, Years ended December 31,
------------------- -----------------------------------------------
1996 1995 1995 1994 1993 1992 1991
(Dollars in 000s, except per share data)
<S> <C>
Allowance for loan losses to nonperforming
assets at period end
MainStreet BankGroup 145.87% 114.59% 115.59% 117.64% 89.97% 66.29% 54.29%
Clifton Forge. 52.93 201.83 136.20 730.00 23.68 275.00 98.01
MainStreet and Clifton Forge ProForma. 139.73 115.93 116.06 120.26 83.96 67.70 54.98
Total shareholders' equity to total
assets at period end
MainStreet BankGroup 8.52 6.90 8.45 6.48 7.38 6.96 6.66
Clifton Forge. 19.90 19.42 19.74 19.00 17.60 16.96 16.31
MainStreet and Clifton Forge ProForma. 9.37 7.90 9.32 7.49 8.25 7.80 7.48
CAPITAL RATIOS AT PERIOD END:
Tier 1 risk-adjusted capital. 13.26 11.70 13.57 11.45 10.94 10.36 9.62
MainStreet BankGroup
Clifton Forge. 42.39 40.10 41.29 38.67 39.47 37.49 36.72
MainStreet and Clifton Forge ProForma. 14.85 13.45 15.18 13.17 12.62 11.98 11.17
Total risk-adjusted capital
MainStreet BankGroup 14.51 14.67 14.82 14.43 13.98 13.55 12.90
Clifton Forge. 43.03 40.75 41.93 39.30 40.15 38.27 37.58
MainStreet and Clifton Forge ProForma. 16.09 16.31 16.42 16.05 15.56 15.05 14.33
Tier 1 leverage
MainStreet BankGroup 8.62 7.53 8.49 7.39 7.25 6.77 6.55
Clifton Forge. 19.64 19.41 19.24 19.11 17.60 16.96 16.31
MainStreet and Clifton Forge ProForma. 9.45% 8.48% 9.32% 8.34% 8.13% 7.63% 7.38%
</TABLE>
NOTES TO SELECTED FINANCIAL DATA -
MAINSTREET BANKGROUP INCORPORATED AND
FIRST NATIONAL BANK OF CLIFTON FORGE
(1) PER SHARE DATA FOR THE FIRST NATIONAL BANK OF CLIFTON FORGE HAS BEEN
RETROACTIVELY ADJUSTED TO REFLECT A 50% STOCK DIVIDEND TO SHAREHOLDERS
OF RECORD ON APRIL 1, 1992. 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 5.20 FOR CONVERSION OF THE FIRST NATIONAL
BANK OF CLIFTON FORGE COMMON STOCK INTO MAINSTREET BANKGROUP COMMON
STOCK. SEE "THE BANK MERGER" AND "THE EXCHANGE RATIO" 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
MAINSTREET BANKGROUP. THE FIRST NATIONAL BANK OF CLIFTON FORGE
CALCULATIONS WERE CALCULATED BASED ON 34% FOR ALL YEARS PRESENTED.
11
<PAGE>
THE FIRST NATIONAL BANK OF CLIFTON FORGE
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
March 31, 1996 vs. March 31, 1995
Overview
Net income for the first quarter of 1996 was $401,000, or $1.27 per primary
share, compared with $369,000, or $1.17 per primary share for the same period in
1995. This reflects an 8.67% increase from the prior year. The return on average
assets were 2.17% and 2.13% for the first quarter of 1996 and 1995,
respectively. The return on average shareholders' equity for the two periods
were 10.90% at March 31, 1996 and 11.17% at March 31, 1995.
Statement of Income
Net Interest Income
Net interest income remained relatively stable when comparing the first quarter
of 1996 to 1995. Interest income saw an increase of 6.36% over prior year, while
interest expense rose 14.34%. These fluctuations resulted in a 1.24% increase in
net interest income over 1995 numbers for the first quarter. The net interest
margin declined from 5.10% at March 31, 1995 to 4.75% at March 31, 1996. As net
interest income increased from prior year, this declining ratio is due to an
increase in average earning assets of 7.32%. Average earning assets for the
first quarter of 1995 were $66.9 million, compared to $71.7 million for the
first quarter of 1996, an increase of $4.8 million. The chief components of this
dollar amount increase were fed funds sold, $3.4 million and loans, net of
unearned income, $1.6 million.
Provision for Loan Losses
There was no provision for loan losses made during the first quarter of 1995,
compared to $1,000 in provision for the same period in 1996. The allowance for
loan losses is evaluated quarterly and was considered to be adequate for this
period in 1996.
Noninterest Income
Noninterest income for the first quarter of 1996 increased 39.47%, or $15,000,
over the first quarter in 1995. The two chief components of this fluctuation
were $38,000 in securities losses during the first quarter of 1995, compared
with no gains or losses in the same period of 1996 and a $25,000 decline in
trust department income from 1995 to 1996.
Noninterest Expense
Noninterest expenses declined $23,000, or 7.26%, for the first quarter of 1996
in comparison to the same period in 1995. Salaries and employee benefits
expenses along with net occupancy and equipment costs each remained constant
from the prior period. The largest fluctuation within the other noninterest
expense category was in F.D.I.C. Assessment. This expense declined $31,000 from
the first quarter of 1995 to the first quarter of 1996. This expense will
continue to be minimal as the Bank continues to accrue the minimum annual
statutory requirement.
12
<PAGE>
March 31, 1996 vs. December 31, 1995
Balance Sheet
Investment Portfolio
The entire investment portfolio was classified as available for sale at December
31, 1995 and March 31, 1996. The portfolio declined 10.07% from $26.5 million at
year end 1995 to $23.8 million at the end of first quarter. The decline was
chiefly in the U.S. Government Agencies category, due to maturities and calls of
this security type.
Loans and Credit Quality
Average gross loans, net of unearned income, increased from $37.9 million at
December 31, 1995 to $39.1 million at March 31, 1996, up 3.2%. This increased
volume was chiefly due to an improving economy and increased loan demand for
installments and real estate loans.
During 1995, the Bank's ratio of net charge-offs to average loans was (.01%),
compared to .06% for the first quarter in 1996. At December 31, 1995, the
allowance for loan losses to nonperforming assets was approximately 136.20%,
compared with 52.93% at March 31, 1996. This declining percentage is due to an
increase in the level of nonperforming assets from $163,000 at December 31, 1995
to $410,000 at March 31, 1996.
Deposits
Total deposits at December 31, 1995 were $59.3 million, compared to $58.7
million at March 31, 1996. This 1.05% decline in deposits was chiefly in the
noninterest bearing category which saw a 15.47% decline. This was partially
offset by a .52% increase in interest bearing deposits. These changes were due
to the normal fluctuation of checking account deposits.
In comparison of average deposit balances, we experienced a 2.2% increase from
year end 1995 to March 31, 1996. The breakdown of the increases/(decreases)
among deposit categories were as follows: Time Deposits, up 6.4%, Savings
accounts, down (2.2%), Money Market accounts, down (11.9%), NOW accounts, up
6.9%, and Demand Deposits, up 1.5%. These fluctuations were chiefly due to a
continuing shift of funds from short term accounts to higher yielding long term
accounts.
Shareholders' Equity
Total shareholders' equity, excluding unrealized gains on securities, increased
from $14.3 million to $14.5 million, or 1.5% from December 31, 1995 to March 31,
1996, respectively. Dividends per share for 1995 were $2.18 per share. The
dividend for the first quarter of 1996 was $.57 per share. When annualized, this
results in a dividend for 1996 of $2.28 per share. Total capital to risk based
assets was 41.93% at December 31, 1995, compared to 43.03% at March 31, 1996.
Financial reporting in accordance with SFAS No. 115 requires an adjustment to
shareholders' equity for net unrealized gains/(losses) in the
"available-for-sale" securities portfolio. This adjustment at December 31, 1995
and March 31, 1996, was $466,000 and $261,000, respectively.
Effects of Inflation
Over the past few years, the rate of inflation has been relatively mild.
However, because interest rates and the level of loans and deposits generally
increase as the rate of inflation increases, the financial statements reflect
these effects of inflation.
13
<PAGE>
1995 vs. 1994
Overview
Net income for 1995 was $1.5 million, stable with 1994 net income. The return on
average assets and return on average equity for 1995 were 2.12% and 11.04%,
respectively. For the comparable period in 1994, the return on average assets
and the return on average equity were 2.10% and 11.44%, respectively.
Statement of Income
Net Interest Income
Net interest income for 1995 was relatively stable at $3.2 million in comparison
to 1994. Both interest income and interest expense increased in dollars. Average
interest earning assets increased approximately $1.0 million while average
interest bearing deposits decreased $309 thousand. The net interest margin
declined to 4.83% in 1995 compared to 4.90% in 1994 because of an increase of
17% in interest expense versus a 7% increase in the interest income. Some of the
increase in interest expense resulted from the shift in deposits from lower
yielding accounts (savings and money markets) to higher yielding certificates of
deposit.
Noninterest Income
Total noninterest income for 1995 was $251 thousand compared to $288 thousand in
1994, a decline of 12.85%. Service charges dropped $25 thousand, or 10.50%.
Security losses were a net of $3 thousand in 1995 compared to security gains of
$18 thousand in 1994.
Noninterest Expense
Total noninterest expense for 1995 declined $85 thousand in comparison to 1994.
Salaries and occupancy expenses remained relatively stable with the biggest
deviation in the other noninterest expense area. This was due to the decline of
$65 thousand in FDIC premiums. During 1995, the Federal Deposit Insurance
Corporation (FDIC) determined that the Bank Insurance Fund (BIF) was fully
recapitalized. As a result, the Bank received a refund of its second and third
quarter premiums and the fourth quarter premium was substantially reduced.
Balance Sheet
Investment Portfolio
Period end total securities at December 31, 1995 increased $667 thousand, or
3.50%, over the same period in 1994. At year end 1994, 73.83% of the securities
portfolio were in the held to maturity category. During 1995, the Financial
Accounting Standards Board gave a one time opportunity to transfer securities
from the held to maturity category into the available for sale category without
a penalty or tainting the portfolio. The Bank moved all securities in the held
to maturity category into the available for sale category. This allowed for more
flexibility in managing liquidity and credit.
Loans and Provision for Loan Losses
Loans, net of unearned income at year-end 1995 were $38.7 million, an increase
of $923 thousand, or 2.44%, over year-end 1994. Average loans, net of unearned
income increased $1.9 million, or 5.34% over 1994. During 1995, the ratio of net
charge-offs to average loans, net of unearned income was (.01%) compared to .01%
in 1994. At year-end 1995, the allowance of loan losses to nonperforming loans
was 136.20% compared to 730.00% at year-end 1994. The allowance for loan losses
to period-end loans at 1995 and 1994 was .57% and .58%, respectively. The
allowance for loan losses is established based on a continual review of the
overall loan portfolio. Management believes the allowance for loan losses is
adequate at year-end.
14
<PAGE>
Other Assets
Other assets at year-end 1995 were $.8 million, a decrease of 20% in comparison
to year-end 1994. This was primarily due to the decline in deferred taxes due to
the increase in the unrealized gains on the securities portfolio from year-end
1994 to year-end 1995.
Deposits
Total deposits at December 31, 1995 increased $2.9 million, or 5.08% in
comparison to the same period in 1994. The largest swings were the decline in
savings accounts with the offsetting increase into time deposits. This shift was
very prevalent in the banking industry during 1995. Demand deposits, however,
increased $1.2 million, or 24.75% over 1994 dollars.
Shareholders' Equity
Shareholders' equity at December 31, 1995 was $14.7 million compared to $13.3
million at year-end 1994. Unrealized gains on securities were $466 thousand at
year-end 1995 compared to an unrealized loss of $92 thousand at year-end 1994.
Effects of Inflation
Inflation has been mild over the last several years. Loan and deposit rates
normally increase along with inflation. Financial statements presented reflect
these effects.
BANKGROUP, BANK AND HANOVER BANK
The following consolidated financial data presents on a historical basis
selected unaudited financial data for BankGroup and the Bank, and unaudited pro
forma amounts for both (a) BankGroup and the Bank combined, and (b) BankGroup,
the Bank and Hanover Bank combined as of March 31, 1996. The Agreement with
Hanover Bank will involve the acquisition of Hanover Bank in a transaction to be
accounted for as a "pooling of interests." It is expected to be completed during
the fourth 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 interest" method of
accounting, and the pro forma selected financial data is derived accordingly.
15
<PAGE>
SELECTED FINANCIAL DATA
MAINSTREET BANKGROUP INCORPORATED,
THE FIRST NATIONAL BANK OF CLIFTON FORGE AND HANOVER BANK
As of March 31, 1996
SELECTED PERIOD-END BALANCES:
Total Assets
MainStreet, BankGroup $ 909,827
Clifton Forge 74,192
MainStreet and Clifton Forge ProForma 984,019
MainStreet, Clifton Forge and Hanover ProForma 1,080,939
Loans (Net of unearned income)
MainStreet BankGroup 583,121
Clifton Forge 38,982
MainStreet and Clifton Forge ProForma 622,103
MainStreet, Clifton Forge and Hanover ProForma 691,391
Allowance for loan losses
MainStreet BankGroup 8,449
Clifton Forge 217
MainStreet and Clifton Forge ProForma 8,666
MainStreet, Clifton Forge and Hanover ProForma 9,460
Nonperforming Assets (1)
MainStreet BankGroup 5,792
Clifton Forge 410
MainStreet and Clifton Forge ProForma 6,202
MainStreet, Clifton Forge and Hanover ProForma 6,562
Total Deposits
MainStreet BankGroup 711,703
Clifton Forge 58,690
MainStreet and Clifton Forge ProForma 770,393
MainStreet, Clifton Forge and Hanover ProForma 858,222
Long-term debt
MainStreet BankGroup 70,928
Clifton Forge --
MainStreet and Clifton Forge ProForma 70,928
MainStreet, Clifton Forge and Hanover ProForma 70,928
Common shareholders' equity
MainStreet BankGroup 77,479
Clifton Forge 14,762
MainStreet and Clifton Forge ProForma 92,241
MainStreet, Clifton Forge and Hanover ProForma 100,851
Total shareholders' equity
MainStreet BankGroup 77,479
Clifton Forge 14,762
MainStreet and Clifton Forge ProForma 92,241
MainStreet, Clifton Forge and Hanover ProForma $100,851
16
<PAGE>
As of March 31, 1996
SELECTED RATIOS:
Nonperforming assets to loans and foreclosed properties at period end (1)
MainStreet BankGroup 0.99%
Clifton Forge 1.05
MainStreet and Clifton Forge ProForma 0.99
MainStreet, Clifton Forge and Hanover ProForma 0.95
Allowance for loan losses to loans at period end
MainStreet BankGroup 1.45
Clifton Forge 0.56
MainStreet and Clifton Forge ProForma 1.39
MainStreet, Clifton Forge and Hanover ProForma 1.37
Allowance for loan losses to nonperforming loans at period end
MainStreet BankGroup 186.92
Clifton Forge 52.93
MainStreet and Clifton Forge ProForma 175.78
MainStreet, Clifton Forge and Hanover ProForma 178.83
Allowance for loan losses to nonperforming assets at period end (1)
MainStreet BankGroup 145.87
Clifton Forge 52.93
MainStreet and Clifton Forge ProForma 139.73
MainStreet, Clifton Forge and Hanover ProForma 144.16
Total shareholders' equity to total assets at period end
MainStreet BankGroup 8.52
Clifton Forge 19.90
MainStreet and Clifton Forge ProForma 9.37
MainStreet, Clifton Forge and Hanover ProForma 9.33%
CAPITAL RATIOS AT PERIOD END:
Tier 1 risk-adjusted capital
MainStreet BankGroup 13.26%
Clifton Forge 42.39
MainStreet and Clifton Forge ProForma 14.85
MainStreet, Clifton Forge and Hanover ProForma 14.81
Total risk-adjusted capital
MainStreet BankGroup 14.51
Clifton Forge 43.03
MainStreet and Clifton Forge ProForma 16.09
MainStreet, Clifton Forge and Hanover ProForma 16.05
Tier 1 leverage
MainStreet BankGroup 8.62
Clifton Forge 19.64
MainStreet and Clifton Forge ProForma 9.45
MainStreet, Clifton Forge and Hanover ProForma 9.40%
NOTES TO SELECTED FINANCIAL DATA -
MAINSTREET BANKGROUP INCORPORATED,
THE FIRST NATIONAL BANK OF CLIFTON FORGE AND HANOVER BANK
(1) NONPERFORMING ASSETS INCLUDE NONACCRUAL LOANS, LOANS PAST DUE 90 DAYS
AND GREATER, OTHER REAL ESTATE AND OTHER REPOSSESSED ASSETS.
17
<PAGE>
MAINSTREET BANKGROUP INCORPORATED AND
THE FIRST NATIONAL BANK OF CLIFTON FORGE
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF FINANCIAL CONDITION
MARCH 31, 1996
(IN 000'S)
<TABLE>
<CAPTION>
ADJUSTMENTS
MAINSTREET CLIFTON INCREASE
BANKGROUP FORGE (DECREASE) CONSOLIDATED
<S> <C>
ASSETS
Cash and Due From Banks $ 26,592 $ 2,111 $ $ 28,703
Interest-Earning Deposits in Domestic Banks 1,318 -- 1,318
Federal Funds Sold 13,050 8,280 21,330
Mortgage Loans Held for Sale 1,037 -- 1,037
Securities Available for Sale 170,587 23,791 194,378
Securities Held to Maturity 95,350 -- 95,350
Loans, Net of Unearned Income 583,121 38,982 622,103
Less: Allowance for Loan Losses (8,449) (217) (8,666)
--------- -------- ---------- ---------
Loans, Net 574,672 38,765 -- 613,437
-------- ------- ---------- --------
Bank Premises and Equipment, Net 10,668 449 11,117
Other Real Estate Owned 1,091 -- 1,091
Other Assets 15,462 796 16,258
--------- -------- ---------- ---------
TOTAL ASSETS $909,827 $74,192 $ -- $984,019
======== ======= ========== ========
LIABILITIES
Deposits:
Demand Deposits (Noninterest-Bearing) $ 94,763 $ 4,940 $ $ 99,703
Interest Bearing Deposits 616,940 53,750 670,690
-------- ------- --------
TOTAL DEPOSITS 711,703 58,690 -- 770,393
-------- ------- ---------- --------
Short - Term Debt 40,290 -- 40,290
Long - Term Debt 70,928 -- 70,928
Other Liabilities 9,427 740 10,167
--------- -------- ---------- --------
TOTAL LIABILITIES 832,348 59,430 -- 891,778
-------- ------- ---------- --------
SHAREHOLDERS' EQUITY
Common Stock 42,870 1,575(1) 6,615 51,060
Capital in Excess of Par 12,174 1,575(1) (6,615) 7,134
Retained Earnings 24,446 11,351 35,797
Unearned Compensation (446) -- (446)
Unrealized Gains (Losses) on Securities, Net (1,565) 261 (1,304)
-------- -------- ---------- --------
TOTAL SHAREHOLDERS' EQUITY 77,479 14,762 -- 92,241
-------- ------- ---------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $909,827 $74,192 $ -- $984,019
======== ======= ========== ========
</TABLE>
(1) Based on an Exchange Ratio of 5.20 for conversion of The First National
Bank of Clifton Forge Common Stock into MainStreet BankGroup Common
Stock. See "The Bank Merger" and "The Exchange Ratio" for further
discussion of the calculation of the Exchange Ratio.
18
<PAGE>
MAINSTREET BANKGROUP INCORPORATED
AND THE FIRST NATIONAL BANK OF CLIFTON FORGE
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED MARCH 31, 1996
(IN 000'S EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MAINSTREET CLIFTON
BANKGROUP FORGE CONSOLIDATED
<S> <C>
INTEREST INCOME
Interest and Fees on Loans $13,736 $ 907 $14,643
Interest on Mortgage Loans Held for Sale 58 -- 58
Interest and Dividends on Securities Available for Sale 2,698 395 3,093
Interest and Dividends on Securities Held to Maturity 1,667 -- 1,667
Other Interest Income 91 102 193
-------- ------ --------
Total Interest Income 18,250 1,404 19,654
INTEREST EXPENSE
Deposits 6,836 590 7,426
Short-Term Borrowings 998 -- 998
Long-Term Debt 436 -- 436
------- ------- -------
Total Interest Expense 8,270 590 8,860
Net Interest Income 9,980 814 10,794
Provisions for Loan Losses 822 1 823
------ ------- -------
Net Interest Income after Provision for Loan Losses 9,158 813 9,971
NONINTEREST INCOME
Service Charges, Fees and Other 1,835 41 1,876
Trust Department Income 725 12 737
Securities Gains (Losses), Net 218 -- 218
------ ------- -------
2,778 53 2,831
NONINTEREST EXPENSE
Salaries and Employee Benefits 4,092 136 4,228
Net Occupancy and Equipment Costs 1,198 25 1,223
Other Noninterest Expense 2,145 133 2,278
------ ----- ------
7,435 294 7,729
------ ----- ------
Income Before Income Taxes 4,501 572 5,073
Income Tax Expense 1,337 171 1,508
------ ----- ------
NET INCOME $ 3,164 $ 401 $ 3,565
======= ======= =======
PER COMMON SHARE DATA (1) Net Income per Share:
Primary $ 0.37 $ 1.27 $ 0.35
Fully Diluted $ 0.37 $ 1.27 $ 0.35
Weighted Average Shares Outstanding:
Primary 8,590 315 10,228
Fully Diluted 8,590 315 10,228
</TABLE>
(1) Based on an Exchange Ratio of 5.20 for conversion of First National
Bank of Clifton Forge Common Stock into MainStreet BankGroup Common
Stock. See "The Bank Merger" and "The Exchange Ratio" for further
discussion of the calculation of the Exchange Ratio.
19
<PAGE>
MAINSTREET BANKGROUP INCORPORATED AND
THE FIRST NATIONAL BANK OF CLIFTON FORGE
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED MARCH 31, 1995
(IN 000'S EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MAINSTREET CLIFTON
BANKGROUP FORGE CONSOLIDATED
<S> <C>
INTEREST INCOME
Interest and Fees on Loans $11,850 $ 855 $12,705
Interest on Mortgage Loans Held for Sale 19 -- 19
Interest and Dividends on Securities Available for Sale 2,004 97 2,101
Interest and Dividends on Securities Held to Maturity 2,035 306 2,341
Other Interest Income 14 62 76
-------- ------ --------
Total Interest Income 15,922 1,320 17,242
INTEREST EXPENSE
Deposits 6,510 516 7,026
Short-Term Borrowings 277 -- 277
Long-Term Debt 156 -- 156
-------- ------- -------
Total Interest Expense 6,943 516 7,459
Net Interest Income 8,979 804 9,783
Provisions for Loan Losses 328 -- 328
------- ------- -------
Net Interest Income after Provision for Loan Losses 8,651 804 9,455
NONINTEREST INCOME
Service Charges, Fees and Other 1,205 39 1,244
Trust Department Income 495 37 532
Securities Gains (Losses), Net 7 (38) (31)
--------- ----- ------
1,707 38 1,745
NONINTEREST EXPENSE
Salaries and Employee Benefits 4,035 135 4,170
Net Occupancy and Equipment Costs 1,085 25 1,110
Other Noninterest Expense 2,195 157 2,352
------ ------ ------
7,315 317 7,632
------ ------ ------
Income Before Income Taxes 3,043 525 3,568
Income Tax Expense 868 156 1,024
------ ------ ------
NET INCOME $ 2,175 $ 369 $ 2,544
======= ====== =======
PER COMMON SHARE DATA (1)
Net Income per Share:
Primary $ 0.29 $ 1.17 $ 0.28
Fully Diluted $ 0.27 $ 1.17 $ 0.26
Weighted Average Shares Outstanding:
Primary 7,564 315 9,202
Fully Diluted 8,542 315 10,180
</TABLE>
(1) Based on an Exchange Ratio of 5.20 for conversion of First National
Bank of Clifton Forge Common Stock into MainStreet BankGroup Common
Stock. See "The Bank Merger" and "The Exchange Ratio" for further
discussion of the calculation of the Exchange Ratio.
20
<PAGE>
MAINSTREET BANKGROUP INCORPORATED
AND THE FIRST NATIONAL BANK OF CLIFTON FORGE
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
YEAR ENDED DECEMBER 31, 1995
(IN 000'S EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MAINSTREET CLIFTON
BANKGROUP FORGE CONSOLIDATED
<S> <C>
INTEREST INCOME
Interest and Fees on Loans $50,943 $3,452 $54,395
Interest on Mortgage Loans Held for Sale 144 -- 144
Interest and Dividends on Securities Available for Sale 9,689 491 10,180
Interest and Dividends on Securities Held to Maturity 7,828 1,179 9,007
Other Interest Income 71 326 397
------- ------- -------
Total Interest Income 68,675 5,448 74,123
INTEREST EXPENSE
Deposits 27,662 2,273 29,935
Short-Term Borrowings 3,196 -- 3,196
Long-Term Debt 517 -- 517
------- -------- -------
Total Interest Expense 31,375 2,273 33,648
Net Interest Income 37,300 3,175 40,475
Provisions for Loan Losses 1,319 -- 1,319
------ -------- ------
Net Interest Income after Provision for Loan Losses 35,981 3,175 39,156
NONINTEREST INCOME
Service Charges, Fees and Other 5,529 213 5,742
Trust Department Income 2,400 41 2,441
Securities Gains (Losses), Net 46 (3) 43
------- ------- -------
7,975 251 8,226
NONINTEREST EXPENSE
Salaries and Employee Benefits 15,704 582 16,286
Net Occupancy and Equipment Costs 4,428 166 4,594
Other Noninterest Expense 8,685 514 9,199
------ ------- ------
28,817 1,262 30,079
------ ------ ------
Income Before Income Taxes 15,139 2,164 17,303
Income Tax Expense 4,399 640 5,039
------ ------- ------
NET INCOME $10,740 $1,524 $12,264
======= ====== =======
PER COMMON SHARE DATA (1)
Net Income per Share:
Primary $ 1.37 $ 4.84 $ 1.29
Fully Diluted $ 1.29 $ 4.84 $ 1.23
Weighted Average Shares Outstanding:
Primary 7,842 315 9,480
Fully Diluted 8,548 315 10,186
</TABLE>
(1) Based on an Exchange Ratio of 5.20 for conversion of First National
Bank of Clifton Forge Common Stock into MainStreet BankGroup Common
Stock. See "The Bank Merger" and "The Exchange Ratio" for further
discussion of the calculation of the Exchange Ratio.
21
<PAGE>
MAINSTREET BANKGROUP INCORPORATED AND
THE FIRST NATIONAL BANK OF CLIFTON FORGE
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
YEAR ENDED DECEMBER 31, 1994
(IN 000'S EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MAINSTREET CLIFTON
BANKGROUP FORGE CONSOLIDATED
<S> <C>
INTEREST INCOME
Interest and Fees on Loans $42,864 $3,202 $46,066
Interest on Mortgage Loans Held for Sale 514 -- 514
Interest and Dividends on Securities Available for Sale 13,108 1,230 14,338
Interest and Dividends on Securities Held to Maturity 2,568 493 3,061
Other Interest Income 462 176 638
------- ------ -------
Total Interest Income 59,516 5,101 64,617
INTEREST EXPENSE
Deposits 23,980 1,941 25,921
Short-Term Borrowings 594 -- 594
Long-Term Debt 643 -- 643
------- -------- -------
Total Interest Expense 25,217 1,941 27,158
Net Interest Income 34,299 3,160 37,459
Provisions for Loan Losses 2,827 3 2,830
------ -------- ------
Net Interest Income after Provision for Loan Losses 31,472 3,157 34,629
NONINTEREST INCOME
Service Charges, Fees and Other 4,865 238 5,103
Trust Department Income 1,993 32 2,025
Securities Gains (Losses), Net (5,683) 18 (5,665)
------ ------- ------
1,175 288 1,463
NONINTEREST EXPENSE
Salaries and Employee Benefits 14,441 564 15,005
Net Occupancy and Equipment Costs 4,142 177 4,319
Other Noninterest Expense 10,130 606 10,736
------ ------- ------
28,713 1,347 30,060
------ ----- ------
Income Before Income Taxes 3,934 2,098 6,032
Income Tax Expense (154) 607 453
------- ------- -------
NET INCOME $ 4,088 $ 1,491 $ 5,579
======= ======= =======
PER COMMON SHARE DATA (1)
Net Income per Share:
Primary $ 0.54 $ 4.73 $ 0.61
Fully Diluted $ 0.53 $ 4.73 $ 0.59
Weighted Average Shares Outstanding:
Primary 7,510 315 9,148
Fully Diluted 8,516 315 10,154
</TABLE>
(1) Based on an Exchange Ratio of 5.20 for conversion of First National
Bank of Clifton Forge Common Stock into MainStreet BankGroup Common
Stock. See "The Bank Merger" and "The Exchange Ratio" for further
discussion of the calculation of the Exchange Ratio.
22
<PAGE>
MAINSTREET BANKGROUP INCORPORATED AND
THE FIRST NATIONAL BANK OF CLIFTON FORGE
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
YEAR ENDED DECEMBER 31, 1993
(IN 000'S EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MAINSTREET CLIFTON
BANKGROUP FORGE CONSOLIDATED
<S> <C>
INTEREST INCOME
Interest and Fees on Loans $42,519 $3,222 $45,741
Interest on Mortgage Loans Held for Sale -- -- --
Interest and Dividends on Securities Available for Sale 12,329 -- 12,329
Interest and Dividends on Securities Held to Maturity 2,387 1,872 4,259
Other Interest Income 677 196 873
------- ------ -------
Total Interest Income 57,912 5,290 63,202
INTEREST EXPENSE
Deposits 24,006 1,957 25,963
Short-Term Borrowings 630 -- 630
Long-Term Debt 655 -- 655
------- -------- -------
Total Interest Expense 25,291 1,957 27,248
Net Interest Income 32,621 3,333 35,954
Provisions for Loan Losses 1,370 27 1,397
------ ------ ------
Net Interest Income after Provision for Loan Losses 31,251 3,306 34,557
NONINTEREST INCOME
Service Charges, Fees and Other 4,000 276 4,276
Trust Department Income 2,137 23 2,160
Securities Gains (Losses), Net 277 60 337
------- ------ -------
6,414 359 6,773
NONINTEREST EXPENSE
Salaries and Employee Benefits 13,176 592 13,768
Net Occupancy and Equipment Costs 3,959 183 4,142
Other Noninterest Expense 11,119 554 11,673
------ ------ ------
28,254 1,329 29,583
------ ----- ------
Income Before Income Taxes 9,411 2,336 11,747
Income Tax Expense 2,530 658 3,188
------ ------ ------
NET INCOME $ 6,881 $ 1,678 $ 8,559
======= ======= =======
PER COMMON SHARE DATA (1)
Net Income per Share:
Primary $ 0.93 $ 5.33 $ 0.95
Fully Diluted $ 0.87 $ 5.33 $ 0.90
Weighted Average Shares Outstanding:
Primary 7,384 315 9,022
Fully Diluted 8,414 315 10,052
</TABLE>
(1) Based on an Exchange Ratio of 5.20 for conversion of First National
Bank of Clifton Forge Common Stock into MainStreet BankGroup Common
Stock. See "The Bank Merger" and "The Exchange Ratio" for further
discussion of the calculation of the Exchange Ratio.
23
<PAGE>
MAINSTREET BANKGROUP INCORPORATED AND
THE FIRST NATIONAL BANK OF CLIFTON FORGE
PRO FORMA CAPITALIZATION
MARCH 31, 1996
(IN 000'S EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MAINSTREET CLIFTON FORGE ADJUSTMENTS CONSOLIDATED
<S> <C>
Long-term Debt and Capital Lease Obligations
MainStreet Bank Group:
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 928 928
Clifton Forge:
None
Total Long-Term Debt and Capital Lease Obligations 70,928 -- -- 70,928
------- ---------- ---------- -------
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 8,574,044 Shares 42,870 8,190 51,060
Capital in Excess of Par 12,174 (5,040) 7,134
Retained Earnings 24,446 11,351 35,797
Unearned Compensation (446) -- -- (446)
Net Unrealized Gains (Losses) on Securities, Net (1,565) -- 261 (1,304)
Clifton Forge:
Common Stock, $5 Par Value, Authorized 315,000 Shares;
Issued and Outstanding 315,000 Shares 1,575 (1,575) --
Capital in Excess of Par 1,575 (1,575) --
Retained Earnings 11,351 (11,351) --
Unearned Compensation -- --
Net Unrealized Gains (Losses) on Securities, Net 261 (261) --
---------- -------- -------- ----------
Total Shareholders' Equity 77,479 14,762 -- 92,241
------ ------ ---------- ------
Total Long-Term Debt, Capital Lease Obligations
and Shareholders' Equity $148,407 $14,762 $ -- $163,169
======== ======= =========== ========
</TABLE>
24
<PAGE>
MAINSTREET BANKGROUP INCORPORATED,
THE FIRST NATIONAL BANK OF CLIFTON FORGE AND HANOVER BANK
PROFORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
MARCH 31, 1996
(IN 000'S)
<TABLE>
<CAPTION>
MAINSTREET &
ADJUSTMENTS CLIFTON FORGE ADJUSTMENTS
MAINSTREET CLIFTON INCREASE PRO FORMA INCREASE
BANKGROUP FORGE (DECREASE) COMBINED HANOVER (DECREASE) CONSOLIDATED
<S> <C>
ASSETS
Cash and Due From Banks $ 26,592 $ 2,111 $ $ 28,703 $ 2,977 $ $ 31,680
Interest-Earning Deposits in
Domestic Banks 1,318 -- 1,318 -- 1,318
Federal Funds Sold 13,050 8,280 21,330 5,105 26,435
Mortgage Loans Held for Sale 1,037 -- 1,037 -- 1,037
Securities Available for Sale 170,587 23,791 194,378 1,514 195,892
Securities Held to Maturity 95,350 -- 95,350 15,292 110,642
Loans, Net of Unearned Income 583,121 38,982 622,103 69,288 691,391
Less: Allowance for Loan Losses (8,449) (217) (8,666) (794) (9,460)
-------- -------- ---------- -------- -------- ---------- ----------
Loans, Net 574,672 38,765 -- 613,437 68,494 -- 681,931
------- ------ ---------- ------- ------ ---------- ---------
Bank Premises and Equipment, Net 10,668 449 11,117 2,247 13,364
Other Real Estate Owned 1,091 -- 1,091 160 1,251
Other Assets 15,462 796 16,258 1,131 17,389
-------- -------- ---------- ------- ------ ----------
TOTAL ASSETS $909,827 $74,192 $ -- $984,019 $96,920 $ -- $1,080,939
======== ======= ========== ======== ======= ========== ==========
LIABILITIES
Deposits:
Demand Deposits
(Noninterest-Bearing) $ 94,763 $ 4,940 $ $ 99,703 $10,538 $ $ 110,241
Interest Bearing Deposits 616,940 53,750 670,690 77,291 747,981
------- -------- ---------- ------- ------ ---------- ----------
TOTAL DEPOSITS 711,703 58,690 -- 770,393 87,829 -- 858,222
------- -------- ---------- ------- ------ ---------- ----------
Short-Term Debt 40,290 -- 40,290 -- 40,290
Long-Term Debt 70,928 -- 70,928 -- 70,928
Other Liabilities 9,427 740 10,167 481 10,648
-------- -------- ---------- ------- -------- ---------- -----------
TOTAL LIABILITIES 832,348 59,430 -- 891,778 88,310 -- 980,088
------- -------- ---------- ------- ------ ---------- ---------
SHAREHOLDERS' EQUITY
Common Stock 42,870 1,575(1) 6,615 51,060 3,679(2) 3,331 58,070
Capital in Excess of Par 12,174 1,575(1) (6,615) 7,134 2,051(2) (3,331) 5,854
Retained Earnings 24,446 11,351 35,797 2,888 38,685
Unearned Compensation (446) -- (446) -- (446)
Unrealized Gains (Losses) on
Securities, Net (1,565) 261 (1,304) (8) (1,312)
-------- -------- ---------- -------- --------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY 77,479 14,762 -- 92,241 8,610 -- 100,851
------- -------- ---------- ------- ------ ---------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $909,827 $74,192 $ -- $984,019 $96,920 $ -- $1,080,939
======== ======= ========== ======== ======= ========== ==========
</TABLE>
(1) Based on an Exchange Ratio of 5.20 for conversion of The First National
Bank of Clifton Forge Common Stock into MainStreet BankGroup Common
Stock. See "The Bank Merger" and "The Exchange Ratio" for further
discussion of the calculation of the Exchange Ratio.
(2) Based on an exchange ratio of .953 for conversion of Hanover Bank
Common Stock into MainStreet BankGroup Common Stock. See "Recent
Developments".
25
<PAGE>
GENERAL INFORMATION
This Proxy Statement/Prospectus is furnished in connection with the solicitation
of proxies by the Board of Directors of the Bank (the "Bank Board"), to be voted
at the Bank Shareholder Meeting to be held at the Bank's office located at 511
Main Street, Clifton Forge, Virginia, on Thursday, September 5, 1996 at 10:00
a.m. Eastern Time and at any adjournment thereof. At the Bank Shareholder
Meeting, shareholders will consider and vote upon: (i) the Agreement and the
related Revised Plan of Merger, pursuant to which the Bank will merge into
Acquisition and (ii) such other matters as may properly come before such Special
Meeting. Only shareholders of record of the Bank at the close of business on
July 31, 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 August 6, 1996.
Holders of Bank Common Stock are entitled to one vote for each share standing in
such holder's name on the books of the 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 Reba H. Mandeville, Corporate Secretary, The
First National Bank of Clifton Forge, 511 Main Street, Clifton Forge, Virginia
24422; (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 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 the 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 the 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 the Bank will reimburse such persons for their reasonable expenses
incurred in doing so.
The Bank Board has no information that other matters will be brought before the
meeting. If, however, other matters are presented, the accompanying proxy will
be voted in the discretion of the proxies with respect to such matters.
As of the Record Date, directors and executive officers of the Bank and their
affiliates beneficially owned a total of 49,681 shares (representing 15.8% of
the outstanding shares of Bank Common Stock), and the directors of BankGroup
owned no Bank Common Stock. The Bank directors have agreed with BankGroup to
recommend that the 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 Stock."
26
<PAGE>
For the reasons described below, the Bank Board has adopted the Agreement,
believes the Bank Merger is in the best interest of the Bank and its
shareholders and recommends that shareholders of the 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" "-- 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 the Bank is
511 Main Street, Clifton Forge, Virginia 24422 and its telephone number is (540)
862-4251.
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
The 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 the Bank and BankGroup.
On April 17, 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, BankGroup Common Stock, or a mix thereof
(subject to certain limitations on the cash component of the consideration), was
fair to the Bank Common 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. THE BANK SHAREHOLDERS ARE URGED TO READ THE OPINION IN ITS ENTIRETY.
THE FOLLOWING IS A SUMMARY OF CERTAIN ANALYSES 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) the Bank's audited financial statements for the three years ended December
31, 1995; (iv) the Bank's unaudited financial statements for the quarters ended
March 31, 1996 and 1995, and other internal information relating to the Bank
prepared by the Bank's management; (v) information regarding the trading market
for the Bank Common Stock and the 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
27
<PAGE>
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 March
31, 1996 and 1995, and other internal information relating to BankGroup prepared
by BankGroup's management. Scott & Stringfellow has discussed with members of
the 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 the
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 the Bank and BankGroup as to the future financial performance of
the Bank and BankGroup, respectively. Scott & Stringfellow did not make an
independent evaluation or appraisal of the assets or liabilities of the Bank and
BankGroup nor was it furnished with any such appraisal.
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 the Bank of between 4.00% and 6.00% and a
required equity capital level of 8.00%. A range of discount rates from 11.50% to
13.50% 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 the 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, the 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
$64.60 to $74.00 per share for Bank Common Stock. These values compare to the
value of $83.20 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, the average price to tangible book value in
these transactions was 2.02x, compared with 1.78x for the Bank Merger; the
average price to earnings ratio was 18.92x, compared with 17.20x for the Bank
Merger; the average deal price to deposits was 20.56%, compared with 44.19% for
the Bank Merger; the average deal price to assets was 18.18%, compared with
35.09% for the Bank Merger; and the average tangible book premium to core
deposits was 11.52%, compared to 20.35% for the Bank Merger. For purposes of
computing the information with respect to the Bank Merger, $83.20 per share of
consideration for each share of Bank Common Stock was used.
28
<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 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 March 31, 1996, and stock prices as
of May 31, 1996, was (i) price to tangible book value ratio which was 1.77x for
BankGroup, compared to an average of 1.79x for the Virginia Bank Group, (ii)
price to last twelve months earnings ratio which was 11.43x for BankGroup,
compared to an average of 13.12x for the Virginia Bank Group; (iii) return on
average assets which was 1.35% for BankGroup, compared to an average of 1.20%
for the Virginia Bank Group; (iv) return on average equity which was 17.37% for
BankGroup, compared to an average of 13.32% for the Virginia Bank Group; and (v)
a dividend yield of 2.86% for BankGroup, compared to an average of 3.24% 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 the
Bank and BankGroup, Scott & Stringfellow considered the effect of the
transaction on the book value, earnings, and market value of the Bank and
BankGroup. The immediate effect on BankGroup -- assuming pretax cost savings of
$378,000 and revenue enhancements of $100,000, was to decrease earnings per
share by $0.03 or 2.28% and to increase book value per share by $0.02 or 0.23%.
The effect on Bank under the same assumptions is to increase earnings by $1.85
per share or 37.37%, to decrease book value per share by $0.57 or 1.23%, to
increase dividends per share by $0.02 or 0.65%, and to increase the April 17,
1996 market value of Bank of $65.00 per share to $83.20. 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 the 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."
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 the Bank's shareholders.
Pursuant to an engagement letter dated April 17, 1996 between the Bank and Scott
& Stringfellow, in exchange for its services, Scott & Stringfellow will receive
a fee equal to 0.80% of the total market value of the consideration received by
Bank shareholders, which equates to a fee of approximately $210,000 and is
payable at closing. If the Bank Merger is not consummated, the 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
OCC (the "Effective Time of the Bank Merger"). The Effective Time of the Bank
Merger is expected to occur on or about September 30, 1996, or as soon
thereafter as is practicable. Either the Bank or BankGroup may terminate the
Agreement if the Bank Merger has not been consummated by December 31, 1996.
29
<PAGE>
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.
Determination of Exchange Ratio; Exchange of Bank 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 or in Bank's treasury and
other than Dissenting Shares as defined in Section 2.4 of the Agreement 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-hundredth) of $83.20 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 days
preceding the last to occur of (i) approval of the Bank Merger by the
shareholders of Bank or (ii) receipt of the last of all regulatory approvals
prerequisite to the consummation of the Bank Merger (the "Exchange Ratio"). If
such quotient is less than 4.89, the Exchange Ratio shall be 4.89. If such
quotient is greater than 5.55, the Exchange Ratio shall be 5.55. 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), 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 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 (other than Dissenting Shares referred to
in Section 2.4 of the Agreement) 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 $83.20 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.
30
<PAGE>
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 $83.20 cash per share (subject to all
applicable withholding taxes). The number of shares that may be exchanged for
cash, when added to the number of Dissenting Shares as defined in Section 2.4 of
the Agreement and fractional shares settled in cash, cannot exceed 9.9% 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
Dissenting Shares, fractional shares settled for cash and shares for which a
cash election is made exceed 9.9% 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 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
Dissenting Shares, fractional shares settled for cash and shares for which a
cash election is made does not exceed 9.9% of the outstanding shares of Bank
Common Stock, all shares submitted for cash will be exchanged for cash. Shares
not exchanged for cash as a consequence of not being chosen by lottery will be
exchanged for BankGroup Common Stock at the Exchange Ratio.
An election to receive cash will be properly made only if the 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 OR HER 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 MERGER. ONCE THE VOTE ON
THE MERGER HAS BEEN TAKEN AT THE BANK SHAREHOLDER MEETING, THE CASH ELECTION IS
IRREVOCABLE. The 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,
the Bank will return the certificates.
Before or promptly after the Effective Time of the Bank Merger, Registrar and
Transfer Company, acting in the capacity of exchange agent for BankGroup (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.
31
<PAGE>
Business of the Bank Pending the Bank Merger
The 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 the Bank in
satisfying this undertaking.
The 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 has been approved by the Federal
Reserve Board, the OCC and the SCC. The obligations of the Bank and BankGroup to
consummate the Bank 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 the 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 the 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 December 31, 1996, 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 the Bank.
Interests of Certain Persons in the Bank Merger
Certain members of the Bank and the Bank's management may be deemed to have
interests in the Bank Merger in addition to their interests as shareholders of
the Bank generally. In each case, the Bank Board or the Bank was aware of their
potential interests, and considered them, among other matters, in approving the
Agreement and the transactions contemplated thereby.
32
<PAGE>
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 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.
BankGroup Board of Directors. BankGroup has agreed to elect George J. Kostel,
Chairman of the Board, President and Chief Executive Officer of the Bank, as a
member of BankGroup's Board of Directors. Mr. Kostel'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 65 at the 1995 Annual
Meeting. Mr. Kostel has agreed to continue to serve as a director and president
of the Bank until January 1, 1997.
Employee Benefits. Following the Bank Merger, employees who continue to be
employees of Acquisition will be eligible for BankGroup's benefit plans based on
their length of service, compensation, job classification and position with the
Bank. BankGroup will recognize all such employees' service with the Bank for
eligibility to participate, for early retirement and for vesting under
BankGroup's benefit plans.
Other than as set forth above, no director or executive officer of the Bank or
BankGroup has any direct or indirect material interest in the Bank Merger,
except in the case of directors and executive officers of the Bank and the Bank
insofar as ownership of Bank Common Stock might be deemed such an interest.
Effect on the Bank Employee Benefits Plans
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 of 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 Employee
Plans without any waiting period.
Certain Federal Income Tax Consequences
BankGroup and the 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 the Bank will recognize any taxable gain
or loss upon consummation of the Bank Merger (but income may be recognized as a
result of (a) the termination of the bad-debt reserve maintained by the Bank for
federal income tax purposes and (b) other possible changes in tax accounting
methods), and (ii) the Bank Merger will result in the tax consequences
summarized below for the 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 Date 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 Date will be based
on, certain customary assumptions and representations regarding, among other
things, the lack of previous dealings between the 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
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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 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 ("Clark"), 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 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
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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 the 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 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.
Shareholders Electing to Exercise Their Right of Appraisal
The receipt of cash for shares of Bank Common Stock pursuant to the exercise of
the right to an appraisal will be a taxable transaction. The analysis of whether
the transaction would be taxable as a sale of stock or as a dividend
distribution should be the same as for a shareholder who receives cash for his
or her shares of Bank Common Stock pursuant to the cash election, which is
discussed above. Any shareholder considering the exercise of such right should
consult his or her tax advisor about the tax consequences of receiving cash for
his or her shares.
THE PRECEDING DISCUSSION SUMMARIZES FOR GENERAL INFORMATION THE MATERIAL FEDERAL
INCOME TAX CONSEQUENCES OF THE BANK MERGER TO THE BANK SHAREHOLDERS. THE TAX
CONSEQUENCES TO ANY PARTICULAR SHAREHOLDER MAY DEPEND ON THE SHAREHOLDER'S
CIRCUMSTANCES. THE BANK SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
WITH REGARD TO FEDERAL, STATE, AND LOCAL TAX CONSEQUENCES.
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Rights of Shareholders Electing to Exercise their Right of Appraisal
Holders of Bank Common Stock entitled to vote on the approval of the Agreement
and the related Revised Plan of Merger will be entitled to have the fair value
of each such holder's shares of Bank Common Stock immediately prior to
consummation of the Bank Merger paid to such holder in cash, together with
interest, if any, by complying with the provisions of 12 U.S.C.A. ss. 215a.
Section 215a gives any shareholder of a national bank the right to dissent from
the merger of such bank into another national bank if he votes against such
merger or has given notice in writing to the national bank prior to the meeting
of shareholders at which the merger is considered that he dissents from the plan
of merger. Failure to vote against the merger or to give written notice of
dissent constitutes waiver of dissenter's rights. The shareholder is entitled to
receive, in cash, the value of the shares held by him when the merger is
consummated upon written request to the resulting national bank at any time
before 30 days after consummation of the merger, such notice to be accompanied
by his or her stock certificates. The value of the dissenting shares is to be
determined as of the date on which the shareholders' meeting is held by a
committee of three persons, one selected by unanimous vote of dissenting
shareholders, one by the directors of the resulting national bank, and the third
by the two so chosen. The valuation agreed upon by any two of the three
appraisers shall govern, but if the value so fixed is not satisfactory to any
dissenting shareholder, he may within five days after being notified of such
appraised value appeal to the Comptroller of the Currency, who shall cause a
reappraisal to be made, which will be final and binding. If for any reason,
within 90 days of the consummation of the merger, one or more appraisers has not
been selected, or the appraisers fail to determine the value of the shares, the
Comptroller, upon written request of any interested party, shall cause an
appraisal to be made which shall be final and binding. The Comptroller's
expenses in making any reappraisal or appraisal, as the case may be, are to be
paid by the resulting national bank.
THE FOREGOING IS ONLY A SUMMARY OF THE RIGHTS OF A DISSENTING HOLDER OF BANK
COMMON STOCK. ANY HOLDER OF BANK COMMON STOCK WHO INTENDS TO DISSENT FROM THE
BANK MERGER SHOULD CAREFULLY REVIEW THE TEXT OF SUBSECTIONS (B), (C) AND (D) OF
12 U.S.C.A. SS. 215A SET FORTH IN ANNEX III TO THIS PROXY STATEMENT/PROSPECTUS
AND SHOULD ALSO CONSULT WITH SUCH HOLDER'S LAWYER. THE FAILURE OF A HOLDER OF
BANK COMMON STOCK TO FOLLOW PRECISELY THE PROCEDURES SUMMARIZED ABOVE, AND SET
FORTH IN ANNEX III, MAY RESULT IN LOSS OF DISSENTERS' RIGHTS. NO FURTHER NOTICE
OF THE EVENTS GIVING RISE TO DISSENTER'S RIGHTS OR ANY STEPS ASSOCIATED
THEREWITH WILL BE FURNISHED TO HOLDERS OF BANK COMMON STOCK, EXCEPT AS INDICATED
ABOVE OR OTHERWISE REQUIRED BY LAW.
In general, any dissenting shareholder who perfects such holder's right to be
paid the fair value of such holder's Bank Common Stock in cash will recognize
taxable gain or loss for federal income tax purposes upon receipt of such cash.
See "-- Certain Federal Income Tax Consequences."
THE BANK BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE BANK MERGER.
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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 $909.8 million at March 31,
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 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
BankGroup 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 Board
of Governors of the Federal Reserve System (the "Federal Reserve Board") and the
State Corporation Commission of Virginia (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 $617.0 million under management, which
includes custodial accounts, at March 31, 1996. Piedmont is the largest bank in
the Martinsville trade area with total assets of approximately $422.8 million,
deposits of approximately $314.3 million and net loans, net of unearned income,
of approximately $295.0 million at March 31, 1996.
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Bank of Carroll. Bank of Carroll ("Carroll"), incorporated in 1971 under the
laws of Virginia, was acquired by BankGroup in 1977. At March 31, 1996, it had
total assets of approximately $57.9 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 March 31, 1996, it had total assets of approximately $85.3 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 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 March 31,
1996, it had total assets of approximately $117.1 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 March 31, 1996, it had total assets of approximately $118.0
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 March 31, 1996, it had
total assets of approximately $115.6 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.
Recent Developments
On May 3, 1996, BankGroup announced that it had reached agreement to acquire
Hanover Bank, a Virginia state bank located in Mechanicsville, Virginia, subject
to shareholder and regulatory approval. Under terms of the agreement, BankGroup
agreed to pay shareholders of Hanover Bank the equivalent of $15.25 per share
for each share of Hanover Bank Common Stock outstanding. The transaction is
valued at approximately $24.6 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 October 31, 1996.
Hanover Bank serves Hanover and Henrico counties in Central Virginia with four
existing branches, and a fifth under construction. At March 31, 1996, Hanover
Bank reported total assets of $96.9 million.
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On June 3, 1996, BankGroup filed an application with the Comptroller of the
Currency to charter a national bank with powers limited to fiduciary activities.
The new bank will be a wholly owned subsidiary of BankGroup and maintain its
main office at 200 East Church Street, Martinsville, with a branch office
located in Lynchburg. It is anticipated that existing affiliate bank trust
departments will be combined into the new affiliate.
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 June 30, 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
Third Quarter (through July 31) 17.25 16.25 --
As of March 31, 1996 there were approximately 2,296 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."
THE FIRST NATIONAL BANK OF CLIFTON FORGE
General
The First National Bank of Clifton Forge is a national banking association
providing deposit, loan and commercial banking and trust services in Clifton
Forge, Covington, Alleghany County, Bath County and northern Botetourt County.
The Bank operates one office in Clifton Forge. At March 31, 1996, the Bank had
assets of $74.2 million, deposits of $58.7 million, and shareholders equity of
$14.8 million. The Bank serves approximately 6,000 customers in its market area.
Its lending activities focus on meeting the needs of its market area by offering
residential mortgage loans, equity lines of credit, consumer loans, automobile
loans, and business loans to local individuals and businesses.
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The Bank reinvests deposits raised in its market area with loans that meet the
residential mortgage, personal and business financial needs of the community.
The Bank has achieved a "satisfactory" rating from the OCC for its community
reinvestment activities.
The Bank is subject to examination and comprehensive regulations by the OCC and
to regulations of the Federal Reserve Board relating to reserves required to be
maintained against deposits and certain other matters.
MARKET FOR AND DIVIDENDS PAID ON BANK COMMON STOCK
There is no established public market for Bank Common Stock. Bank's management
is aware of transactions in Bank Common Stock which occurred during 1995 and
thus far in 1996 at prices ranging from $61 to $67.50 per share. In 1994 and
1995, Bank paid quarterly cash dividends aggregating $715,050 and $686,700. Bank
paid a cash dividend for the first quarter and second quarter of 1996 of $0.57
and $0.58, per share, respectively and is permitted by the Agreement to pay a
quarterly cash dividend on August 15 of $0.59 per share. If the Bank Merger has
not been consummated by November 15, on November 15 the Bank is permitted to pay
a cash dividend of $0.60 per share. If the Bank Merger is consummated prior to
that date, Bank shareholders will be eligible for BankGroup's fourth quarter
dividend.
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 March 31, 1996 by each of the Bank's
directors and by all directors and executive officers of the Bank as a group.
Shares Beneficially Owned
As of March 31, 1996 (1)
Name No. of Shs. Percent
Ernest D. Adams 1,350 (3) *
Harvey B. Albert, Jr. 3,000 (4) 1.0
Stephen A. Bennett 375 *
Caius M. Carpenter 5,912 (3) 2.0
Raymond L. Claterbaugh, Jr. 8,576 (5) 3.0
George J. Kostel 17,462 (3) 5.5
A. Goodwin Perkins 5,828 2.0
James D. Snyder 1,782 (3) *
Thomas N. Warren 3,900 (3) 1.0
All directors and executive 49,681 (2) 15.73%
officers as a group (13 persons)
represent 15.77 percent of stock.
* Represents less than 1%.
(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.
(2) Includes four officers of the Bank who are not Directors.
(3) Includes shares owned by spouse.
(4) Shares owned jointly with spouse.
(5) Includes shares owned jointly.
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The following table sets forth information as to Bank Common Stock beneficially
owned, as of March 31, 1996, by the only persons or entities known to the Bank
to be the beneficial owners of more than 5% of Bank Common Stock.
Amount and Nature of
Name and Address of Beneficial Ownership Percent of
Beneficial Owner as of , 1996 (1) Outstanding Shares
George J. Kostel 17,462 (2) 5.54
All directors and executive officers as a 17,462 (3) 5.54%
group (1 person)
(1) Except as indicated otherwise, based on information furnished by
the respective individuals or entity. Under applicable regulations, shares
are deemed to be beneficially owned by a person if he or she directly or
indirectly has or shares the power to vote or dispose of the shares, whether
or not he or she has any economic interest in the shares. Unless otherwise
indicated, the named beneficial owner has sole voting and dispositive power
with respect to the shares.
(2) Includes 8,186 shares owned by spouse.
(3) Includes 8,186 shares owned by spouse.
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.
The BHCA currently prohibits the Federal Reserve Board from approving an
application from a bank holding company to acquire shares of a bank located
outside the state in which the operations of the holding company's banking
subsidiaries are principally conducted, unless such an acquisition is
specifically authorized by statute of the state in which the bank whose shares
are to be acquired is located. Under recently enacted federal legislation, the
restriction on interstate acquisitions was abolished effective September 29,
1995. Bank holding companies from any state are now able 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 also 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.
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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-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.
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
March 31, 1996 were 13.26% and 14.51% 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
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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 March 31, 1996, was 8.62%. 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 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 retained earnings at period end
less nonaccrual loans for current year and prior year. Under existing
supervisory practices, at March 31, 1996, the Banks could have paid additional
dividends of approximately $50.4 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.
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 March 31, 1996, approximately $8.6 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.
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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.
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.
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 8,574,044 shares were issued and outstanding as of March 31, 1996 held by
approximately 2,296 holders of record. The 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
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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 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.
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
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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 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 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 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%, 33 1/3% 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.
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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 as of 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 the BankGroup Articles of Incorporation and BankGroup Bylaws and the VCSA.
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 or Articles of Association and
Bylaws of each entity.
Capitalization
Bank. The Bank's Articles authorize the issuance of up to 315,000 shares of
capital stock, par value $5.00 per share, all of which are issued as
outstanding.
BankGroup. BankGroup's authorized capital is described under "Description of
BankGroup Capital Stock."
Amendment of Articles or Bylaws
Bank. Under the Articles of Association of Bank and federal law, the Articles of
Association of Bank may be amended at a regular or special meeting of the
stockholders, by the vote of the holders of a majority of the outstanding voting
shares of Bank Common Stock.
The Bylaws of Bank may be amended by its Board of Directors by majority vote.
BankGroup. As permitted by the VSCA, the BankGroup Articles provide that, unless
a greater vote is required by law, by the BankGroup Articles or by a resolution
of the Board of Directors, the BankGroup 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 approval of a majority of Bank's Board of Directors is generally
required under federal law on any plan of merger, consolidation or sale of
substantially all of the assets of Bank. The approval of shareholders holding
more than two-thirds (2/3) of all votes entitled to be cast is required for a
merger, consolidation or sale of substantially all of the assets of Bank.
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
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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."
Director Nominations
Bank. Neither Bank's Articles nor Bylaws establish any procedures that must be
followed for shareholders to nominate individuals for election to the Board of
Directors. Federal law provides for the election of directors annually by the
shareholders. Directors hold office for one year, and until their successors are
elected and have qualified.
Federal law permits cumulative voting by shareholders for the election of
directors. This means that each shareholder is entitled to one vote for each
share of stock he owns times the number of directors being elected at the
meeting. Each shareholder may cumulate his votes and cast the total number for
one candidate or divide the total number of votes among candidates as he deems
appropriate. Without cumulative voting, a shareholder may cast only as many
votes for a candidate as that shareholder has shares of stock. Generally,
minority shareholders have a greater chance of electing one or more directors if
cumulative voting is permitted than if it is not permitted.
BankGroup. The Bylaws of BankGroup 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 Securities and Exchange Commission 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. Bank's Articles and Bylaws provide that the number of directors shall not
be more than 25, nor less than five directors and shall be fixed by the
shareholders of Bank. The current number of Bank directors is fixed at nine.
Federal law permits a majority of remaining directors to fill vacancies on the
board of directors created by death, resignation, or other causes, including an
increase in the number of directors brought about by amendment of the Bylaws.
Federal law limits the number of directors that can be appointed by Bank's
remaining directors, in the event of an increase, to two if the board consists
of 15 or fewer directors and four directors if the Board consists of 16 or more
directors.
BankGroup. The number of Directors is set forth in the 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 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.
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Anti-Takeover Provisions
Bank. Neither the Bank's Articles nor Bylaws contain any provisions that may be
deemed to have any anti-takeover effect.
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.
Conversion; Redemption; Sinking Fund
Neither BankGroup Common Stock nor Bank Common Stock is convertible, redeemable
or entitled to any sinking fund.
Liquidation Rights
Bank. Federal law generally provides that the Bank may go into liquidation and
be closed by the vote of the holders of more than two-thirds of shares
outstanding.
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 the BankGroup's Articles which would modify the statutory
requirements for dissolution under the VSCA.
Dividends and Other Distributions
Bank. Federal law permits the declaration of dividends by the Board of Directors
of the Bank from the net profits of the Bank with a number of limitations. No
dividends or other distributions may be paid which would impair the capital of
Bank. The approval of the Comptroller of the Currency is required if dividends
for a year exceed certain calculations involving the accumulation of net
profits. In addition, unless the Bank's surplus equals or exceeds the capital of
Bank, 10% of net profits each year must be transferred to surplus before
dividends may be paid.
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 the BankGroup 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 BankGroup as a Virginia
corporation.
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In addition to the limitations set forth in the VSCA, there are various
regulatory requirements which are applicable to distributions by bank holding
companies such as and by national banks such as Bank. For a description of the
regulatory limitations on distributions by BankGroup, see "Supervision and
Regulation Limits on Dividends and Other Payments." For a description of the
regulatory limitations on capital distributions by Bank, see "Price Range of
Bank Common Stock and Dividend Policy."
Indemnification
Bank. Federal law prohibits indemnification of directors of Bank for actions
taken on behalf of, or at the request of, Bank in line with the VSCA if the
indemnification provisions are set forth in the Articles of Association.
Indemnification may not be permitted for fines or penalties imposed by bank
regulatory authorities. Bank's Articles of Association do not provide for
indemnification of directors or officers.
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 Association nor Bylaws contain requirements
that must be followed for a shareholder to submit a proposal to a vote for the
shareholders.
BankGroup. The Bylaws of BankGroup 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
Bank. Under federal law, the president and cashier of the Bank are required to
maintain a correct list of the names and residences of the shareholders of Bank,
and the number of shares held by each. Bank shareholders are permitted under
federal law to inspect, on any business day, the list of shareholders of Bank.
Any other request on the part of a Bank shareholder to inspect books and records
of Bank would have to be made pursuant to normal judicial procedures under
Virginia law.
BankGroup. Under the VSCA, the shareholder of a Virginia corporation is 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
50
<PAGE>
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.
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. Provisions of Title 12 of the United States Code give shareholders of a
national bank the right to dissent from, and obtain payment of the "fair value"
of their shares in mergers and consolidations. For a description of dissenter's
rights the Bank's shareholders have in connection with a Bank Merger, see "The
Bank Merger -- Rights of Shareholders Electing to Exercise Their Right of
Appraisal".
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 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 Date 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 Date
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 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.
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.
51
<PAGE>
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 the Company'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 financial statements of The First National Bank of Clifton Forge included in
this Proxy Statement/Prospectus have been included in reliance upon the report
of Persinger & Company, L.L.C., independent auditors, incorporated herein by
reference, and upon the authority of said firm as experts in accounting and
auditing.
LEGAL OPINIONS
The legality of the 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 Woods, Rogers & Hazlegrove,
P.L.C., Roanoke, Virginia.
A condition to consummation of the 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."
OTHER MATTERS
As of the date of this Prospectus/Proxy Statement, 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.
August 6, 1996 By Order of the Board of Directors,
/s/ REBA H. MANDEVILLE
Reba H. Mandeville
Corporate Secretary
52
<PAGE>
INDEX TO
THE FIRST NATIONAL BANK OF CLIFTON FORGE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
AND THE THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1995
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditor's Report................................................................................. F-2
Balance Sheets For the Years
Ended December 31, 1995 and 1994............................................................................ F-3
Statements of Income for the Years Ended
December 31, 1995 and 1994................................................................................... F-4
Statements of Stockholders' Equity for
the Years Ended December 31, 1995 and 1994................................................................... F-5
Statements of Cash Flows for the Years Ended
December 31, 1995 and 1994................................................................................... F-6
Notes to Financial Statements................................................................................ F-8
Balance Sheets at March 31, 1996 and
December 31, 1995 (Unaudited)................................................................................F-20
Statements of Income for the Three Months
Ended March 31, 1996 and March 31, 1995
(Unaudited)..................................................................................................F-21
Statements of Cash Flow for the Three Months
Ended March 31, 1996 and March 1995
(Unaudited)..................................................................................................F-22
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
The First National Bank of Clifton Forge
Clifton Forge, Virginia
We have audited the accompanying balance sheets of The First National Bank of
Clifton Forge as of December 31, 1995 and 1994, and the related statements of
income, shareholders' equity, and cash flows for the years then ended. These
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
amounts and disclosures in the financial statements. An audit also includes
assessing accounting principles used and significant estimates made by
management, as well as evaluating overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The First National Bank of
Clifton Forge as of December 31, 1995 and 1994, and results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
PERSINGER & COMPANY, L.L.C.
Covington, Virginia
January 4, 1996, except for Note 14,
as to which is dated April 17, 1996
F-2
<PAGE>
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C>
ASSETS
Cash and due from banks (Note 2) $ 2,500,296 $ 2,105,339
Securities held to maturity (Note 3) - 19,039,038
Securities available for sale (Note 3) 26,454,583 6,749,126
Federal funds sold 5,960,000 3,300,000
Loans, net (Notes 4 and 5) 38,487,606 37,568,022
Bank premises and equipment, net (Note 6) 459,036 475,891
Accrued income receivable 572,854 574,915
Deferred tax asset (Note 8) - 158,054
Other assets (Note 10) 247,440 291,116
------------ ------------
$74,681,815 $70,261,501
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 7):
Interest bearing $53,470,388 $51,763,536
Noninterest bearing 5,842,299 4,683,271
----------- -----------
59,312,687 56,446,807
Accrued interest and other liabilities 500,026 464,767
Deferred income taxes (Note 8) 123,717 -
----------- -----------
59,936,430 56,911,574
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY
Capital stock:
Common, $5.00 par value; authorized
and issued 315,000 shares 1,575,000 1,575,000
Surplus 1,575,000 1,575,000
Retained earnings (Note 13) 11,129,004 10,292,020
Unrealized gain (loss) on securities
available for sale, net 466,381 (92,093)
------------ ------------
$14,745,385 $13,349,927
----------- -----------
$74,681,815 $70,261,501
=========== ===========
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C>
Interest income on:
Loans $3,451,649 $3,201,856
Securities held to maturity 1,179,420 1,230,247
Securities available for sale 490,737 493,221
Federal funds sold 325,738 165,600
Deposits in banks - 10,275
------------- -----------
$5,447,544 $5,101,199
Interest on deposits 2,272,437 1,941,447
---------- ----------
Net interest income $3,175,107 $3,159,752
Provision for loan losses (Note 5) - 2,876
------------- ------------
Net interest income after provision for loan losses $3,175,107 $3,156,876
---------- ----------
Other income:
Trust department income $ 41,432 $ 32,023
Service fees 162,103 183,289
Securities gains (losses) (3,455) 17,675
Other 51,289 55,233
------------ ------------
$ 251,369 $ 288,220
----------- -----------
Other expenses:
Salaries (Note 9) $ 506,683 $ 503,339
Pensions and other employee benefits (Note 10) 75,280 60,809
Occupancy expenses 100,997 96,289
Equipment rentals, depreciation and maintenance 64,929 81,474
Other operating expenses 514,709 605,557
----------- -----------
$1,262,598 $1,347,468
---------- ----------
Income before income taxes $2,163,878 $2,097,628
Federal income taxes (Note 8) 640,194 606,985
----------- -----------
Net income $1,523,684 $1,490,643
========== ==========
Earnings per common share $ 4.84 $ 4.73
============ ============
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON SECURITIES
CAPITAL RETAINED AVAILABLE
STOCK SURPLUS EARNINGS FOR SALE, NET TOTAL
<S> <C>
Balance,
December 31, 1993 $1,575,000 $1,575,000 $9,516,427 $ - $12,666,427
Net income - - 1,490,643 - 1,490,643
Cash dividends declared
($2.27 per share) - - (715,050) - (715,050)
Net change in unrealized
gain (loss) on securities
available for sale, net - - - (92,093) (92,093)
------------- ------------- ------------- ---------- ----------
Balance,
December 31, 1994 $1,575,000 $1,575,000 $10,292,020 $ (92,093) $13,349,927
Net income - - 1,523,684 - 1,523,684
Cash dividends declared
($2.18 per share) - - (686,700) - (686,700)
Net change in unrealized
gain (loss) on securities
available for sale, net - - - 558,474 558,474
------------- ------------- ------------- ---------- ----------
Balance,
December 31, 1995 $1,575,000 $1,575,000 $11,129,004 $ 466,381 $14,745,385
========== ========== =========== ========== ===========
</TABLE>
See Notes to Financial Statements.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $1,523,684 $1,490,643
---------- ----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation $ 48,046 $ 61,728
Provision for loan losses - 2,876
Provision for deferred income taxes (5,927) (17,868)
Securities (gains) losses 3,455 (17,675)
Amortization (accretion) on securities (44,566) 115,803
(Increase) decrease in accrued income receivable 2,061 111,971
(Increase) decrease in other assets 43,676 (46,505)
Increase (decrease) in accrued interest payable
and other liabilities 35,259 73,676
------------ ------------
Total adjustments $ 82,004 $ 284,006
----------- -----------
Net cash provided by operating activities $1,605,688 $1,774,649
---------- ----------
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
STATEMENTS OF CASH FLOWS
(CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest bearing deposits in banks $ - $ 250,298
Maturities of securities held to maturity 4,809,100 1,400,500
Purchase of securities to be held to maturity (5,499,251) (2,299,854)
Sales of securities available for sale 1,960,781 1,495,156
Maturities of securities available for sale 1,400,000 4,622,190
Purchase of securities available for sale (2,449,766) (3,298,784)
Loans made to customers, net (919,584) (3,087,987)
Purchase of premises and equipment (31,191) (23,770)
------------ ------------
Net cash used in investing activities $ (729,911) $ (942,251)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in interest bearing deposits $ 1,706,852 $ (2,108,996)
Net increase (decrease) in noninterest bearing deposits 1,159,028 (359,388)
Dividends paid (686,700) (715,050)
-------- --------
Net cash provided (used in) by financing activities $ 2,179,180 $ (3,183,434)
----------- ------------
Increase (decrease) in cash and cash equivalents $ 3,054,957 $ (2,351,036)
Cash and cash equivalents:
Beginning 5,405,339 7,756,375
---------- ----------
Ending $ 8,460,296 $ 5,405,339
----------- ------------
Cash and cash equivalents, ending:
Cash and due from banks $ 2,500,296 $ 2,105,339
Federal funds sold 5,960,000 3,300,000
---------- ----------
$ 8,460,296 $ 5,405,339
----------- ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest paid depositors $ 2,238,580 $ 1,942,853
Income taxes $ 601,200 $ 627,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Transfer of securities held to maturity to securities
available for sale $20,312,427 $ -
Net change in unrealized holding gains (losses) on
available for sale securities $ 558,474 $ (92,093)
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Organization:
The First National Bank of Clifton Forge was incorporated in 1901 in the state
of Virginia as a national banking institution. The Bank operates under the
federal reserve banking regulations.
Nature of business:
The First National Bank of Clifton Forge grants commercial, residential and
consumer loans to customers located primarily in the Virginia counties of
Alleghany and Bath. The loan portfolio is well-diversified and does not depend
on any one sector of the economy.
A summary of significant accounting policies follows:
Cash and cash equivalents:
For purposes of reporting cash flows, cash and due from banks includes cash on
hand, amounts due from banks (including cash items in the process of clearing)
and federal funds sold. Cash flows from loans originated by the Bank and
deposits are reported net.
The Bank maintains amounts due from banks which, at times, may exceed federally
insured limits. The Bank has not experienced any losses in such accounts.
Trust assets:
Assets of the trust department, other than trust cash on deposit at the Bank,
are not included in these financial statements because they are not assets of
the Bank.
Investment in debt and marketable securities and accounting change:
The Bank has investments in debt and marketable equity securities. Debt
securities consist primarily of obligations of the U.S. government, state
governments and domestic corporations. Marketable equity securities consist
primarily of Federal Reserve Bank stock.
The Bank adopted the provisions of FASB Statement No. 115. Accounting for
Certain Investments in Debt and Equity Securities, as of January 1, 1994.
Statement 115 requires that management determine the appropriate classification
of securities at the date of adoption, and thereafter at the date individual
investment securities are acquired, and that the appropriateness of such
classification be reassessed at each balance sheet date.
Securities classified as held to maturity are those debt securities the Bank has
both the intent and the ability to hold to maturity regardless of changes in
market conditions, liquidity needs or changes in general economic conditions.
Securities available for sale are those debt securities that the Bank intends to
hold for an indefinite period of time, but not necessarily to maturity. Any
decision to sell a security classified as available for sale would be based on
various factors, including significant movements in interest rates, changes in
the maturity mix of the Bank's assets and liabilities, liquidity needs,
regulatory capital considerations, and other similar factors. Securities
available for sale are carried at fair value. Unrealized gains or losses are
reported as increases or decreases in stockholders' equity, net of the related
deferred tax effect.
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Trading securities, which are generally held for the short term in anticipation
of market gains, are carried at fair value. Realized and unrealized gains and
losses on trading account assets are included in interest income on trading
account securities. The Bank does not classify any securities as trading
securities at this time.
Prior to the adoption of Statement 115, the Bank stated its debt securities at
the lower of amortized cost or fair value. The marketable equity securities were
stated at the lower of their aggregate cost or market. Under both the newly
adopted standard and the Bank's former accounting practices, premiums and
discounts on investments in debt securities are amortized over their contractual
lives. The method of amortization results in a constant effective yield on those
securities (the interest method). Interest on debt securities is recognized in
income as accrued, and dividends on marketable equity securities are recognized
in income when declared. Realized gains and losses, including losses from
declines in value of specific securities determined by management to be
other-than-temporary, are included in income. Realized gains and losses are
determined on the basis of specific securities sold.
Note 3 to the financial statements provides further information about the effect
of adopting Statement 115.
Loans:
On January 1, 1995, the Company adopted FASB Statement No. 114, Accounting by
Creditors for Impairment of a Loan. Statement No. 114 has been amended by FASB
Statement No. 118, Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures. Statement 114, as amended, requires that the
impairment of loans that have been separately identified for evaluation is to be
measured based on the present value of expected future cash flows or,
alternatively, the observable market price of the loans or the fair value of the
collateral. However, for those loans that are collateral dependent (that is, if
repayment of those loans is expected to be provided solely by the underlying
collateral) and for which management has determined foreclosure is probable, the
measure of impairment of those loans is to be based on the fair value of the
collateral. Statement 114, as amended, also requires certain disclosures about
investments in impaired loans and the allowance for loan losses and interest
income recognized on those loans. At December 31, 1995, the Bank had no loans
which it considered to be impaired, as defined by Statement 114.
Loans are stated at amount of unpaid principal, reduced by unearned discount and
fees and an allowance for loan losses.
The allowance for loan losses is increased through a provision for loan losses
charged to income, and decreased by charge-offs, net of recoveries, when
management determines that collectability of all amounts when due is unlikely.
The allowance is based on management's estimate of the amount necessary to
absorb losses on existing loans. Management's estimate is based on a review of
specific loans and, for smaller balance homogeneous loans, on the Bank's past
loan loss experience, known and inherent risks in the entire loan portfolio,
overall portfolio quality, estimated fair value of any underlying collateral,
and current economic conditions that may affect the borrowers' ability to repay.
For those loans that are separately evaluated for collectability, when
management determines that it is probable that principal and interest on those
loans will not be collected according to their contractual terms, the impairment
of those loans is recognized in the allowance account based on the present value
of expected future cash flows discounted at the loans's effective rate, except
for those loans where foreclosure is probable, on which impairment is based on
the fair value of the collateral. Cash collections on loans that are impaired
are credited to the loan balance, and no interest income is recognized on those
loans until the principal balance has been collected.
Unearned interest on discounted loans is amortized to income over the life of
the loans, using a method that approximates the level yield method. For all
other loans, interest is accrued daily on the outstanding balances. Accrual of
interest is discontinued on a loan when management believes, after considering
collection efforts and other factors, that the borrower's financial condition is
such that collection of interest is doubtful. Upon such discontinuance, all
unpaid accrued interest is reversed.
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Loan origination and commitment fees and certain direct loan origination costs
are being deferred and the net amount amortized as an adjustment of the related
loan's yield. These amounts are generally amortized over the contractual life.
Bank premises and equipment:
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed principally by the straight-line method over the
following estimated useful lives:
Years
Buildings and improvements 10-50
Furniture and equipment 5-10
Acquired properties:
Real estate acquired through foreclosure and personal property acquired through
repossession are held for sale and are recorded at the lower of the recorded
amount of the loan or fair value of the properties less estimated costs of
disposal. Any write-down to fair value at the time of transfer to acquired
properties is charged to the allowance for loan losses. Property is evaluated
regularly to ensure the recorded amount is supported by its current fair value.
Valuation allowances to reduce the carrying amount to fair value less estimated
costs to dispose are recorded as necessary. Depreciation is recorded based on
the recorded amount of depreciable assets after they have been owned for one
year. Depreciation and additions to or reductions from valuation allowances are
recorded in income.
Income taxes:
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
Employment benefit plan:
A noncontributory defined benefit pension plan covers all employees who meet the
eligibility requirements. Eligible employees must be between the ages of 21 and
60 with at least one year of service. The funding policy is the maximum annual
contribution deductible for federal income tax purposes.
Earnings per share:
Earnings per share are computed on the weighted average number of shares
outstanding.
Fair value of financial instruments:
On January 1, 1995, the Bank adopted FASB Statement No. 107, Disclosures About
Fair Value of Financial Instruments, and Statement No. 119, Disclosure About
Derivative Financial Instruments and Fair Value of Financial Instruments, which
became effective for years ending after December 15, 1995. These Statements
require disclosures of the fair value about financial instruments, whether or
not recognized in the balance sheet, for which it is practicable to estimate
that value. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of
the instrument. Statement 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented do not represent the underlying
value of the Bank.
The following methods and assumptions were used by the Bank in estimating the
fair value of its financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and due from banks and federal funds sold approximate their fair
values.
Investment securities (including mortgage-backed securities): Fair values for
investment securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair values
for fixed-rate loans are determined using estimated future cash flows,
discounted at the interest rates currently being offered for loans with similar
terms to borrowers with similar credit quality. The carrying amount of accrued
interest receivable approximates its fair value.
Off-balance-sheet instruments: Fair values for the Bank's off-balance-sheet
instruments (loan commitments, unused lines of credit and standby letters of
credit) are based on fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the
counterparties' credit standing.
Deposit liabilities: The fair values of demand deposits equal their carrying
amounts which represents the amount payable on demand. The carrying amounts for
variable-rate, fixed-term money market accounts approximate their fair values at
the reporting date. Fair values for certificates of deposit are estimated using
a discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on time deposits.
Reclassifications:
Certain reclassifications have been made to the prior year's financial
statements to conform to the 1995 presentation.
Use of 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. The most significant estimates
and assumptions are those required in the determination of the allowance for
loan losses.
Impairment of Long-Lived Assets:
In the event that facts and circumstances indicate that the cost of the Bank's
long-lived assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation were required, the estimated future undiscounted
cash flows associated with the asset would be compared to the assets carrying
amount to determine if a write-down to market value or discounted cash flow
value is required.
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve balances in cash with Federal Reserve
Banks. The total of those reserve balances was approximately $253,000 and
$236,000 at December 31, 1995 and 1994, respectively.
NOTE 3. SECURITIES
As discussed in Note 1, the Bank adopted FASB Statement No. 115 as of January 1,
1994. The January 1, 1994 cumulative effect of adopting Statement 115 was
immaterial.
On December 1, 1995, the Bank designated all of its securities being held to
maturity as available for sale, as permissible under guidelines for
implementation of Statement 115. The amortized cost of these securities amounted
to $19,781,124. The unrealized gain at the time of transfer was $531,303.
Carrying amounts and fair values of securities being held to maturity as of
December 31, 1994 are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
1994
<S> <C>
U.S. Treasury securities $ 499,398 $ $ 3,617 $ 495,781
U.S. Government agencies
and corporations 8,738,166 309,541 8,428,625
State and political subdivisions 6,172,601 59,091 42,201 6,189,491
Corporate securities 2,133,389 6,723 74,957 2,065,155
Mortgage-backed securities 1,495,484 - 102,656 1,392,828
----------- ----------- -------- -----------
$19,039,038 $ 65,814 $532,972 $18,571,880
=========== ======== ======== ===========
</TABLE>
The amortized cost and fair value of securities being held to maturity as of
December 31, 1994 by contractual maturity are shown below. Maturities may differ
from contractual maturities in mortgage-backed securities because the mortgages
underlying the securities may be called or repaid without any penalties.
Therefore, these securities are not included in the maturity categories in the
following maturity summary.
<TABLE>
<CAPTION>
1994
AMORTIZED FAIR
COST VALUE
<S> <C>
Due in one year or less $ 514,986 $ 516,181
Due after one year through five years 9,218,030 8,985,519
Due after five years through ten years 6,745,870 6,609,575
Due after ten years 1,064,668 1,067,777
Mortgage-backed securities 1,495,484 1,392,828
----------- -----------
$19,039,038 $18,571,880
=========== ===========
</TABLE>
Securities being held to maturity with a carrying amount of $4,205,843 at
December 31, 1994 were pledged as collateral on public deposits and for other
purposes as required or permitted by law.
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Carrying amounts and fair values of securities available for sale as of December
31, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
1995
<S> <C>
U.S. Treasury securities $ 5,464,681 $ 140,703 $ 4,712 $ 5,600,672
U.S. Government agencies
and corporations 8,225,672 48,829 - 8,274,501
State and political subdivisions 6,039,811 382,739 76 6,422,474
Corporate securities 2,384,578 131,111 - 2,515,689
Mortgage-backed securities 3,538,704 21,349 13,306 3,546,747
Other 94,500 - - 94,500
----------- ----------- ----------- -----------
$25,747,946 $ 724,731 $ 18,094 $26,454,583
=========== ========= ======== ===========
<CAPTION>
1994
<S> <C>
U.S. Treasury securities $ 4,995,610 $ 7,494 $155,135 $ 4,847,969
U.S. Government agencies
and corporations 699,119 9,975 - 709,094
State and political subdivisions - - - -
Corporate securities 1,099,431 4,222 6,090 1,097,563
Mortgage-backed securities - - - -
Other 94,500 - - 94,500
----------- ----------- ----------- -----------
$ 6,888,660 $ 21,691 $161,225 $ 6,749,126
=========== ========= ======== ===========
</TABLE>
The amortized cost and fair value of securities available for sale as of
December 31, 1995 and 1994 by contractual maturity are shown in the following
summary.
<TABLE>
<CAPTION>
1995 1994
---------------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
<S> <C>
Due in one year or less $ 1,159,494 $ 1,175,447 $1,500,421 $1,479,844
Due after one year through five years 14,566,903 14,909,577 5,093,739 4,977,282
Due after five years through ten years 5,820,061 6,114,928 294,500 292,000
Due after ten years 662,784 707,884 - -
Mortgage-backed securities 3,538,704 3,546,747 - -
---------- ---------- ---------- ----------
$25,747,946 $26,454,583 $6,888,660 $6,749,126
=========== =========== ========== ==========
</TABLE>
Gross realized gains and losses for the years ended December 31, 1995 and 1994
are as follows:
1995 1994
---- ----
Realized gains $34,100 $30,315
Realized losses (37,555) (12,640)
Securities available for sale with a carrying amount of $5,527,437 and $709,719
at December 31, 1995 and 1994 were pledged as collateral on public deposits and
for other purposes as required or permitted by law.
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4. LOANS
Net loans are composed of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
---- ----
<S> <C>
Commercial $ 3,130,526 $ 3,334,320
Real Estate 29,431,326 29,327,221
Installment 7,117,061 5,922,566
----------- -----------
$39,678,913 $38,584,107
----------- -----------
<CAPTION>
DECEMBER 31,
1995 1994
---- ----
<S> <C>
Deduct:
Unearned discount $ 839,104 $ 667,854
Unearned net loan fees 130,316 129,672
Allowance for loan losses 221,887 218,559
----------- -----------
$ 1,191,307 $ 1,016,085
----------- -----------
$38,487,606 $37,568,022
=========== ===========
Estimated fair value $38,827,477
===========
</TABLE>
There were no nonaccrual loans at December 31, 1995 and 1994, and no interest
was collected on nonaccrual loans for the years then ended.
There were no nonperforming assets at December 31, 1995 and 1994, except for
$163,000 and $30,000, respectively, which were loans past due 90 days.
NOTE 5. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994
---- ----
<S> <C>
Balance, beginning $218,559 $218,654
Provision charged to operating expenses - 2,876
Recoveries of amount charged off 6,167 7,378
--------- ---------
$224,726 $228,908
Amounts charged off 2,839 10,349
--------- ---------
Balance, ending $221,887 $218,559
======== ========
</TABLE>
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 6. BANK PREMISES AND EQUIPMENT
The major classes of bank premises and equipment and the total accumulated
depreciation are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
---- ----
<S> <C>
Land $ 48,930 $ 48,930
Buildings and improvements 787,516 787,516
Furniture and equipment 778,345 747,154
----------- -----------
$1,614,791 $ 1,583,600
Less accumulated depreciation 1,155,755 1,107,709
----------- -----------
$ 459,036 $ 475,891
=========== ===========
</TABLE>
NOTE 7. DEPOSITS
The composition of deposits is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
---- ----
<S> <C>
Demand $ 5,842,299 $ 4,683,271
NOW accounts 7,822,942 6,903,784
Savings 16,976,563 20,400,217
Time certificates, $100,000 or more 2,978,727 2,017,909
Other time certificates 25,692,156 22,441,626
----------- -----------
$59,312,687 $56,446,807
=========== ===========
Estimated fair value $59,431,086
===========
</TABLE>
NOTE 8. INCOME TAX MATTERS
The Federal income tax provision charged to continuing operations was as
follows:
YEARS ENDED DECEMBER 31,
1995 1994
---- ----
Current $646,121 $624,853
Deferred (5,927) (17,868)
--------- ---------
$640,194 $606,985
======== ========
A reconciliation of expected income tax expense computed at 34% to the income
tax expense included in the statement of income is as follows:
YEARS ENDED DECEMBER 31,
1995 1994
---- ----
Computed "expected" tax expense $735,717 $713,194
Tax exempt interest (105,318) (105,112)
Other - Net 9,795 (1,097)
--------- ---------
$640,194 $606,985
======== ========
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Net deferred tax assets (liabilities) consist of the following items:
YEARS ENDED DECEMBER 31,
1995 1994
---- ----
Deferred tax assets:
Unrealized loss on securities $ - $ 47,442
Deferred loan fees 44,307 44,088
Deferred compensation 116,915 107,406
--------- ---------
$ 161,222 $ 198,936
--------- ---------
Deferred tax liabilities:
Unrealized gain on securities $ 240,257 $ -
Accretion on securities 12,067 9,133
Prepaid pension cost 11,802 13,866
Property and equipment 20,813 17,883
---------- ----------
$ 284,939 $ 40,882
--------- ---------
$(123,717) $ 158,054
========== =========
NOTE 9. DEFERRED COMPENSATION
The deferred compensation agreement with the President and Chief Executive
Officer provides benefits over a period of one hundred and eighty months
beginning at the earlier of age seventy, date of retirement, or date of death.
Current charges to income are based upon present values of future cash payments
and totaled $18,458 in 1995 and $27,275 in 1994, after providing for tax
benefits.
The Bank is owner and beneficiary of a $180,000 life insurance contract on the
President's life which has been purchased to fund the agreement.
NOTE 10. EMPLOYEE BENEFIT PLAN
Net pension cost for the defined benefit pension plan consists of the following
components:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994
---- ----
<S> <C>
Service cost $24,892 $24,510
Interest cost on projected benefit obligation 49,843 56,635
Actual return on plan assets (69,365) (84,691)
Net amortization and deferral 702 (4,169)
-------- --------
$ 6,072 $ (7,715)
======== =========
</TABLE>
F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
The following table sets forth the funded status and amounts recognized in the
accompanying balance sheets:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994
---- ----
<S> <C>
Actuarial present value of benefit obligations:
Vested benefits $ 597,858 $ 542,166
--------- ---------
Accumulated benefits $ 598,421 $ 542,422
--------- ---------
Projected benefits $(721,444) $(672,870)
Plan assets at fair value 890,490 779,022
--------- ---------
Plan assets in excess of projected benefit obligation $ 169,046 $ 106,152
Unrecognized net gain (215,153) (150,722)
Unrecognized prior service cost 134,025 147,428
Unrecognized net asset at beginning of year (53,207) (62,075)
--------- ---------
Amount included in other assets $ 34,711 $ 40,783
========== ==========
</TABLE>
Assumptions used by the Bank in determination of pension plan information at
December 31, 1995 and 1994 consisted of the following:
Discount rate 7.5%
Rate of increase in compensation levels 6.0%
Expected long-term rate of return
on plan assets 9.0%
NOTE 11. COMMITMENTS AND CONTINGENCIES
Financial instruments with off-balance-sheet risk:
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of customers. These
financial instruments include commitments to extend credit and involve, to
varying degrees, elements of credit risk in excess of the amount recognized in
the balance sheets.
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 is
represented by the contractual amount of those instruments. The Bank uses the
same credit policies in making commitments as they do for on-balance-sheet
instruments. A summary of the Bank's commitments is as follows:
DECEMBER 31,
1995 1994
---- ----
Commitments to extend credit $1,908,435 $1,506,500
Standby letters of credit 23,700 26,600
----------- -----------
$1,932,135 $1,533,100
========== ==========
Estimated fair value $1,932,135
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 and represent
the undrawn portion of the total commitment. The commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the party. Collateral held varies, but may
include accounts receivable, crops, livestock, inventory, property and
equipment, residential real estate and income-producing commercial properties.
F-16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above and is required in instances which the Bank deems necessary.
Concentration of credit risk:
All of the Bank's loans and commitments to extend credit have been granted to
customers in the Bank's market area. Investments in securities issued by state
and political subdivisions (see Note 3) include some governmental entities
within the Bank's market area. The concentrations of credit by type of loan are
set forth in Note 4. The distribution of commitments to extend credit
approximates the distribution of loans outstanding. The Bank, as a matter of
policy, does not extend credit to any single borrower or group of related
borrowers in excess of its legal lending limit. The loan portfolio is well
diversified and is not concentrated in any one business sector or industry.
Contingencies:
In the normal course of business, the Bank is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the Bank's financial
statements.
NOTE 12. TRANSACTIONS WITH RELATED PARTIES
The Bank has executed, and may be expected to do so in the future, banking
transactions in the ordinary course of business with directors, principal
officers, their immediate families and affiliated companies in which they are
principal stockholders (commonly referred to as related parties), all of which
have been, in the opinion of management, on the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with others.
Aggregate loan transactions with related parties were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994
---- ----
<S> <C>
Balance, beginning $807,747 $ 62,824
New loans 917,648 1,205,320
Repayments (883,491) (460,397)
--------- -----------
Balance, ending $841,904 $ 807,747
======== ===========
Maximum balance during the year $841,904 $ 807,747
======== ===========
</TABLE>
NOTE 13. RETAINED EARNINGS
Dividends paid amounted to $686,700 in 1995 and $715,050 in 1994. Under
applicable Federal law, the Comptroller of the Currency restricts total dividend
payments in any calendar year to net profit of that year, as defined, combined
with retained net profits for the two preceding years. At December 31, 1995,
retained net profits for 1995 and 1994 which were free of such restriction,
amounted to $1,612,577. The Comptroller also has authority under the Financial
Institutions Supervisory Act to prohibit a national bank from engaging in an
unsafe or unsound practice in conducting its business. It is possible, under
certain circumstances, the Comptroller could assert that dividends or other
payments would be an unsafe or unsound practice.
Banking regulations require the Bank to maintain certain minimum capital levels
in relation to Bank assets. Capital is measured using a leverage ratio as well
as based on risk-weighing assets according to regulatory guidelines. The Bank's
regulatory capital is as follows:
F-17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
Minimum Requirements
1995 Well Adequately
Actual Capitalized Capitalized
<S> <C>
Tier I risk-based capital 41.29% 6.00% 4.00%
Total risk-based capital 41.93% 10.00% 8.00%
Leverage ratio 19.24% 5.00% 3.00%
</TABLE>
NOTE 14. SUBSEQUENT EVENTS
The Bank has agreed in principle to be acquired by MainStreet BankGroup
Incorporated, subject to regulatory approval and approval by Bank shareholders
in an Agreement dated April 17, 1996. Under terms of the agreement, MainStreet
BankGroup Incorporated has agreed to exchange a maximum of 5.55 shares and a
minimum of 4.89 shares of its Common Stock for each share of Bank's 315,000
shares of Common Stock.
F-18
<PAGE>
THE FIRST NATIONAL BANK OF CLIFTON FORGE
BALANCE SHEET
(IN 000'S EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1996 1995
---- ----
<S> <C>
ASSETS
Cash and Due From Banks $ 2,111 $ 2,500
Federal Funds Sold 8,280 5,960
Securities Available for Sale 23,791 26,455
Securities Held to Maturity - -
Loans, Net of Unearned Income 38,982 38,710
Less: Allowance for Loan Losses (217) (222)
-------- --------
Loans, Net 38,765 38,488
Bank Premises and Equipment, Net 449 459
Other Real Estate Owned - -
Other Assets 796 820
-------- --------
TOTAL ASSETS $74,192 $74,682
======= =======
LIABILITIES
Deposits:
Demand Deposits $ 4,940 $ 5,842
Now Accounts 7,782 7,823
Savings 16,710 16,977
Certificates of Deposit $100,000 or more 3,393 2,979
Other Time Deposits 25,865 25,692
-------- --------
Total Deposits 58,690 59,313
Other Liabilities 740 624
-------- --------
TOTAL LIABILITIES 59,430 59,937
------- -------
SHAREHOLDER'S EQUITY
Common Stock ($5.00 Par Value, 315,000 shares
Authorized, Issued and Outstanding) 1,575 1,575
Capital in Excess of Par 1,575 1,575
Retained Earnings 11,351 11,129
Unrealized Gains (Losses) on Securities 261 466
-------- --------
TOTAL SHAREHOLDERS EQUITY 14,762 14,745
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY $74,192 $74,682
======= =======
</TABLE>
F-19
<PAGE>
THE FIRST NATIONAL BANK OF CLIFTON FORGE
STATEMENTS OF INCOME
(IN 000'S EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH MARCH
1996 1995
---- ----
<S> <C>
INTEREST INCOME
Interest and Fees on Loans $ 907 $ 855
Interest and Dividends on Securities Available for Sale 395 97
Interest and Dividends on Securities Held to Maturity - 306
Other Interest Income 102 62
------- -------
Total Interest Income 1,404 1,320
INTEREST EXPENSE
Deposits 590 516
------- -------
Total Interest Expense 590 516
Net Interest Income 814 804
Provision for Loan Losses 1 -
------- -------
Net Interest Income After provision for Loan Losses 813 804
NONINTEREST INCOME
Service Charges, Fees and Other 41 39
Trust Department Income 12 37
Securities Gains (Losses), Net - (38)
------- ------
53 38
NONINTEREST EXPENSE
Salaries and Employee Benefits 136 135
Net Occupancy and Equipment Costs 25 25
Other Noninterest Expense 133 157
------- -------
294 317
Income Before Income Taxes 572 525
Income Tax Expense 171 156
------- -------
NET INCOME $ 401 $ 369
======= =======
PER COMMON SHARE DATA
Earnings Per Common Share $ 1.27 $ 1.17
======= =======
Dividends Per Share $ 0.57 $ 0.53
======= =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: 315,000 315,000
======= =======
</TABLE>
F-20
<PAGE>
THE FIRST NATIONAL BANK OF CLIFTON FORGE
STATEMENTS OF CASH FLOWS
(IN 000'S)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH MARCH
1996 1995
---- ----
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 401 $ 369
Adjustments to Reconcile Net Income to Net
Cash Provided (Used) by Operating Activities:
Depreciation and Amortization 11 12
Amortization of Securities Premiums and Discounts, Net (6) (4)
Loss on Sale of Securities, Net 0 38
Changes in Other Assets and Other Liabilities:
Other Assets 51 (215)
Other Liabilities 195 359
------- -------
Net Cash Provided by Operating Activities 652 559
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Securities Held to Maturity - (701)
Proceeds from Sale of Securities Available for Sale - 1,963
Proceeds from Calls and Maturities of Securities
Available for Sale 2,359 -
Proceeds from Calls and Maturities of Securities
Held to Maturity - 315
Net (Increase) Decrease in Loans (277) 322
Purchases of Bank Premises and Equipment (1) (2)
------- -------
Net Cash Provided by Investing Activities 2,081 1,897
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits (623) (445)
Cash Dividends (179) (167)
------ ------
Net Cash Used in Financing Activities (802) (612)
------ ------
Net Increase in Cash and Cash Equivalents 1,931 1,844
Beginning 8,460 5,405
------ ------
Ending $10,391 $7,249
======= ======
</TABLE>
Note to Unaudited Financials:
The interim period financial statements are unaudited; however, in the opinion
of management, all adjustments of a normal and recurring nature which are
necessary for a fair presentation have been included.
F-21
<PAGE>
ANNEX I
AGREEMENT AND PLAN OF REORGANIZATION
among
MAINSTREET BANKGROUP INCORPORATED
CF ACQUISITION SUBSIDIARY, N.A.,
(In Organization)
and
THE FIRST NATIONAL BANK OF CLIFTON FORGE
April 17, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
ARTICLE I
General
<S> <C>
1.1 Bank Merger................................................................................... 1
1.2 Issuance of BankGroup Common Stock............................................................ 1
1.3 Taking of Necessary Action.................................................................... 1
1.4 Directors and Officers........................................................................ 2
<CAPTION>
ARTICLE II
Effect of Transaction on Common Stock of Bank
<S> <C>
2.1 Conversion of Stock........................................................................... 2
2.2 Cash Election................................................................................. 2
2.3 Manner of Exchange............................................................................ 3
2.4 Dissenting Shares............................................................................. 4
2.5 No Fractional Shares.......................................................................... 4
<CAPTION>
ARTICLE III
Representations and Warranties
<S> <C>
3.1 Representations and Warranties of Bank........................................................ 5
(a) Organization, Standing and Power..................................................... 5
(b) Capital Structure; Subsidiaries...................................................... 5
(c) Authority............................................................................ 5
(d) Investments.......................................................................... 6
(e) Financial Statements................................................................. 6
(f) Absence of Undisclosed Liabilities................................................... 7
(g) Tax Matters.......................................................................... 7
(h) Options, Warrants and Related Matters................................................ 8
(i) Property; Leases..................................................................... 8
(j) Employees............................................................................ 9
(k) Certain Contracts.................................................................... 9
(l) Employment Contracts and Related Matters............................................. 9
(m) Real Estate.......................................................................... 9
(n) Affiliates........................................................................... 9
(o) Agreements in Force and Effect....................................................... 9
(p) Legal Proceedings; Compliance with Laws.............................................. 9
(q) Employee Benefit Plans............................................................... 10
(r) Insurance............................................................................ 12
(s) Loan Portfolio....................................................................... 12
(t) Absence of Changes................................................................... 13
(u) Brokers and Finders.................................................................. 13
(v) Securities Portfolio................................................................. 13
(w) Reports.............................................................................. 13
(x) Environmental Matters................................................................ 13
(y) Disclosure........................................................................... 15
<PAGE>
3.2 Representations and Warranties of BankGroup................................................... 15
(a) Organization, Standing and Power..................................................... 15
(b) Capital Structure.................................................................... 15
(c) Authority............................................................................ 16
(d) Financial Statements................................................................. 16
(e) Absence of Undisclosed Liabilities................................................... 17
(f) Absence of Changes................................................................... 17
(g) Brokers and Finders.................................................................. 17
(h) Options, Warrants and Related Matters................................................ 17
(i) Reports.............................................................................. 17
(j) Legal Proceedings; Compliance with Laws.............................................. 18
(k) Employee Benefits Plan............................................................... 18
(l) Insurance............................................................................ 19
(m) Loan Portfolio....................................................................... 19
(n) Absence of Changes................................................................... 20
(o) Securities Portfolio................................................................. 20
(p) Environmental Matters................................................................ 20
(q) Disclosure........................................................................... 20
<CAPTION>
ARTICLE IV
Conduct and Transactions Prior to
Effective Time of the Bank Merger
<S> <C>
4.1 Access to Records and Properties of BankGroup and Bank........................................ 21
4.2 Registration Statement; Proxy Statement; Shareholder Approval................................. 21
4.3 Operation of the Business of Bank............................................................. 22
4.4 No Solicitation............................................................................... 23
4.5 Dividends..................................................................................... 23
4.6 Regulatory Filings............................................................................ 24
4.7 Tax Opinion................................................................................... 24
4.8 Public Announcements.......................................................................... 24
4.9 Transactions in BankGroup Common Stock........................................................ 24
4.10 BankGroup Rights Agreement.................................................................... 24
4.11 Accounting Treatment.......................................................................... 24
4.12 Agreement as to Efforts to Consummate......................................................... 24
4.13 Adverse Changes in Condition.................................................................. 25
4.14 Updating of Schedules......................................................................... 25
<CAPTION>
ARTICLE V
Conditions of Transaction
<S> <C>
5.1 Conditions of Obligations of BankGroup........................................................ 25
(a) Representations and Warranties; Performance of Obligations; No Adverse
Change............................................................................... 25
(b) Authorization of Transaction......................................................... 26
(c) Opinion of Counsel................................................................... 26
(d) Registration Statement............................................................... 28
(e) Tax Opinion.......................................................................... 28
(f) Regulatory Approvals................................................................. 28
(g) Affiliate Letters.................................................................... 29
(h) Provision for Loan Losses............................................................ 29
<PAGE>
(i) Accounting Treatment................................................................. 29
(j) Acceptance by BankGroup Counsel...................................................... 29
5.2 Conditions of Obligations of Bank............................................................. 29
(a) Representations and Warranties; Performance of Obligations; No Adverse
Change............................................................................... 29
(b) Authorization of Transaction......................................................... 30
(c) Opinion of Counsel................................................................... 30
(d) Registration Statement............................................................... 32
(e) Regulatory Approvals................................................................. 32
(f) Tax Opinion.......................................................................... 32
(g) Fairness Opinion..................................................................... 32
(h) Acceptance by Bank's Counsel......................................................... 32
<CAPTION>
ARTICLE VI
Closing Date; Effective Time of the
Holding Company Merger
<S> <C>
6.1 Closing Date.................................................................................. 32
6.2 Filings at Closing............................................................................ 33
6.3 Effective Time................................................................................ 33
<CAPTION>
ARTICLE VII
Termination; Survival of Representations
Warranties and Covenants; Waiver and Amendment
<S> <C>
7.1 Termination................................................................................... 33
7.2 Effect of Termination......................................................................... 34
7.3 Survival of Representations, Warranties and Covenants......................................... 34
7.4 Waiver and Amendment.......................................................................... 34
<CAPTION>
ARTICLE VIII
Additional Covenants
<S> <C>
8.1 Registration Statement........................................................................ 35
8.2 Employee Benefits............................................................................. 35
8.3 Indemnification............................................................................... 35
<CAPTION>
ARTICLE IX
Miscellaneous
<S> <C>
9.1 Expenses; Termination Fee..................................................................... 36
9.2 Entire Agreement.............................................................................. 36
9.3 Descriptive Headings.......................................................................... 36
9.4 Notices....................................................................................... 36
9.5 Counterparts.................................................................................. 37
9.6 Governing Law................................................................................. 37
</TABLE>
Exhibit A - Plan of Merger
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE DESCRIPTION SECTION IN AGREEMENT
<S> <C>
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), 3.1(d)
D Bank Conflicts, Breaches or Defaults 3.1(c)
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 Stock Owned by 3.1(j)
Employees and Directors of Bank; Owners of 5%
of Bank Common Stock; Outstanding Unexercised
Options, Warrants, Calls, Commitments or
Agreements
H Notes, Bonds, Mortgages, Indentures, Licenses, 3.1(k), 5.1(c)(vi),5.1(c)(viii)
Lease Agreements and Other Contracts of Bank
I Employment Contracts and Related Matters of 3.1(l), 3.1(q)(i),3.1(q)(vii), 3.1(q)(viii)
Bank
J Real Estate Owned or Leased by Bank 3.1(m)
K Bank Affiliates 3.1(n), 5.1(c)(iv)
L Bank Legal Proceedings 3.1(p), 3.1(p), 3.1(p), 5.1(c)(vii)
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 [no schedule p mentioned in doc.]
Q BankGroup Options, Warrants Calls, etc. 3.2(h)
R BankGroup Litigation 3.1(x), 3.2(j), 3.2(j), 3.2(j), 5.2(c)(viii)
S BankGroup Environmental Matters 3.2(p)
4.3 Bank Salary Adjustments 4.3
T Waiting Periods for BankGroup Employee Plans 8.2
</TABLE>
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement"), dated as of April
17, 1996 by and among MainStreet BankGroup Incorporated, a Virginia corporation
("BankGroup"), CF Acquisition Subsidiary, N.A., an interim national banking
association (in organization) wholly-owned by BankGroup ("Acquisition"), and The
First National Bank of Clifton Forge, a national banking association ("Bank"),
recites and provides:
A. The boards of directors of BankGroup and Bank deem it advisable to merge Bank
into Acquisition (the "Bank Merger") pursuant to this Agreement, the Plan of
Merger attached as Exhibit A (the "Plan of Merger") and the provisions of 12
U.S.C. ss. 215a 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 shall cause Acquisition to become a party to this Agreement upon
its organization and prior to consummation of the Bank Merger.
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 ) Bank shall
be merged into Acquisition in accordance with the Plan of Merger. The
outstanding shares of Bank Common Stock shall be converted into shares of
BankGroup Common Stock 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 Plan of
Merger and 12 U.S.C. ss. 215a, at the Effective Time of the Bank Merger, Bank
shall be merged with and into Acquisition and the separate existence of 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.
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 George J. Kostel to fill the
resulting vacancy. Mr. Kostel'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 65 at the 1995 Annual Meeting. At the Effective Time of
the Bank Merger, Mr. Kostel will resign as a director and president of the Bank.
1
<PAGE>
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 or in
Bank's treasury and other than Dissenting Shares as defined in Section 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-hundredth) of $83.20 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 days
preceding the last to occur of (i) approval of the Bank Merger by the
shareholders of Bank or (ii) receipt of the last of all regulatory approvals
prerequisite to the consummation of the Bank Merger (the "Exchange Ratio"). If
such quotient is less than 4.89, the Exchange Ratio shall be 4.89. If such
quotient is greater than 5.55, the Exchange Ratio shall be 5.55. All such shares
of BankGroup Common Stock shall be validly issued, fully paid and nonassessable.
(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.
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 shares for $83.20 cash per share
(subject to all applicable withholding taxes). The number of shares that may be
exchanged for cash, when added to the number of Dissenting Shares as defined in
Section 2.4 and fractional shares settled in cash, cannot exceed 9.9% 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 the Dissenting
Shares, fractional shares settled for cash and shares as respects which a cash
election is made exceeds 9.9% of 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 the Dissenting
Shares, fractional shares settled for cash and shares as respects which a cash
election is made does not exceed 9.9% 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 some or 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 to theretofore outstanding shares of Bank
Common Stock, upon surrender of such certificate to Registrar and Transfer
Company (which shall act as 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 Common Stock theretofore represented by the certificate
or certificates so surrendered shall have been exchanged as provided in this
Article II, or cash, if the cash election provided in Section 2.2 is chosen.
Until so surrendered, each outstanding certificate which, prior to the Effective
Date of the Bank Merger, represented Bank Common Stock (other than Dissenting
Shares referred to in Section 2.4) 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 $83.20 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
2
<PAGE>
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, 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 Dissenting Shares. Notwithstanding anything in this Agreement to the
contrary, shares of Bank Common Stock which are issued and outstanding
immediately prior to the Effective Time of the Bank Merger and which are held by
a shareholder who has the right (to the extent such right is available by law)
to demand and receive payment of the fair value of his shares of Bank Common
Stock (the "Dissenting Shares") pursuant to 12 U.S.C. ss. 215a, shall not be
converted into or be exchangeable for the right to receive the consideration
provided in Section 2.2 unless and until such holder shall fail to perfect his
or her right to an appraisal or shall have effectively withdrawn or lost such
right under 12 U.S.C. ss. 215a, as the case may be. If such holder shall have so
failed to perfect his right to dissent or shall have effectively withdrawn or
lost such right, each of his shares of Bank Common Stock shall thereupon be
deemed to have been converted into, at the Effective Time of the Bank Merger,
the right to receive shares of BankGroup Common Stock at the Exchange Ratio. The
number of Dissenting Shares, when added to the number of shares that may be
exchanged for cash and fractional shares settled for cash, cannot exceed 9.9% of
the shares of Bank Common Stock to preserve the "pooling of interests"
accounting treatment of the Bank Merger.
2.5 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 national banking
association duly organized, validly existing and in good standing under the laws
of the United States 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 to effect the
transactions contemplated hereby. Bank's Articles of Association 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 to the maximum extent permitted by law.
(b) Capital Structure; Subsidiaries. Bank's authorized capital stock
consists of 315,000 shares of Common Stock, par value $5 per share. As of the
Effective Time of the Bank Merger, 315,000 shares of Bank Common Stock will be
issued and outstanding, 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.
3
<PAGE>
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 Association 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 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 Office of the Comptroller
of the Currency (the "OCC"), 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"):
(i) Balance Sheets as of December 31, 1995 and 1994;
(ii) Statements of Income for each of the three years
ended December 31, 1995, 1994 and 1993;
(iii) Statements of Changes in Stockholders' Equity for
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.
4
<PAGE>
Subject to the limitations imposed by federal laws applicable to national 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 respective board of directors.
(f) Absence of Undisclosed Liabilities. At December 31, 1995, Bank had
no obligations or liabilities (contingent or otherwise) of any nature which were
not reflected in the Bank Financial Statements as of such date, or disclosed in
the notes thereto, 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
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.
(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
(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.
5
<PAGE>
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; and (C) the names of and the number of shares of Bank Common Stock owned
by each person who, to the knowledge of Bank, beneficially owns 5% or more of
the outstanding Bank Common Stock.
(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 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 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, 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;
6
<PAGE>
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 OCC, the FDIC or 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 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) 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
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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 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 their respective 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 OCC, 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,
subject to bankruptcy, insolvency, fraudulent conveyance and other laws of
general applicability relating to or affecting creditor's 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, 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 0.8% 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. No fee shall be payable with respect
to cash paid for Dissenting Shares, if any.
(v) Securities Portfolio. Since December 31, 1995, there has been
no material deterioration in the quality of the portfolio of securities of Bank.
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(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 OCC; (ii) the FDIC; and (iii) any other governmental or
regulatory authority or agency having jurisdiction over its operations. None of
such reports or statements, 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.
(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.
"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.
(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
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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 the United States.
Acquisition was formed as an "interim" national bank solely to
facilitate the Merger and has had no prior business operations.
(b) Capital Structure. As of December 31, 1995, the authorized capital
stock of BankGroup consisted of 1,000,000 shares of Preferred Stock, par value
$5 per share, and 20,000,000 shares of Common Stock, par value $5 per share, of
which 8,535,072 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, and the numbers of shares
stated in this Subsection 3.2(b) give effect to a two-for-one stock split in the
form of a dividend effective March 15, 1996.
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. 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 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"), Federal Reserve Board, the State Corporation Commission of Virginia
("SCC") and the OCC 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.
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(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 December 31, 1995
and 1994;
(ii) Consolidated Statements of Income for each of the
three years ended December 31, 1995, 1994 and 1993;
(iii) Consolidated Statements of Changes in Stockholders'
Equity for each of the three years ended December 31, 1995, 1994 and
1993; and
(iv) Consolidated Statements of Cash Flows for 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. At December 31, 1995, 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, 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 year 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.
(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 in damages
payable by BankGroup or any Subsidiary in excess of insurance coverage, which
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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 OCC, 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 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, 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
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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, 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, there has been no
material deterioration in the quality of the portfolio of securities of
BankGroup and its Subsidiaries.
(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.
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
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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 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. Bank will
duly call and will hold a meeting of its shareholders as soon as practicable for
the purpose of approving the Bank Merger, and in connection therewith will
recommend to and encourage shareholders that they vote in favor of the Bank
Merger and will comply fully with the provisions of Title 12 of the United
States Code and the rules and regulations of the OCC, and its Articles of
Association and By-laws relating to the call and holding of a meeting of
shareholders for such purpose. 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
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 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 date of the meeting of Bank 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 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; (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;
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(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 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. 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 on May 15, on August 15 and, if the Bank
Merger has not been consummated, on November 15 in the respective amounts per
share of $.58, $.59 and $.60.
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, the SCC and the OCC 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 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."
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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 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 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
Woods, Rogers & Hazlegrove PLC, counsel to Bank, dated the Closing Date, and
satisfactory in form and substance to counsel to BankGroup, to the effect that:
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(i) Bank is a national banking association organized and in
good standing under the laws of the United States 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 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
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) 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
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) 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, including receipt of all
required regulatory approvals, other than the filing of the Articles of
Merger relating to the Plan of Merger with the OCC, 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,
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BankGroup 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 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 (including any fractional
share interest); that a Bank Shareholder who receives both shares of BankGroup
Common Stock (including any fractional share interest) 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 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 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.
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(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 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, liabilities, properties, business or prospects of BankGroup
from December 31, 1995 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 the United States,
respectively, 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 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,
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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, including the receipt of
all regulatory approvals, other than the filing of the Articles of
Merger relating to the Bank Merger with the OCC, 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 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, 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 Woods, Rogers & Hazelgrove, P.L.C., Roanoke,
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 OCC, 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 V, at the Closing
Date, BankGroup shall cause the Articles of Merger relating to the Bank Merger
to be filed in accordance with Title 12 of the United States Code, 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 OCC (the "Effective Time of the Bank Merger").
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 December 31, 1996;
(c) By 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 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;
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(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) BankGroup or Bank, if either the Federal Reserve Board or the OCC
deny approval of the Bank Merger and the time period for all appeals or requests
for reconsideration has run;
(g) BankGroup, if holders of more than 9.9% of the outstanding
shares of Bank Common Stock exercise their rights to an appraisal of their
shares pursuant to 12 U.S.C. ss. 215a in connection with the Bank Merger.
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 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, 2.2, 2.3, 2.4, 2.5, 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
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.
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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 Merger. 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; Termination Fee. 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.
If, because of the emergence of a competing offer for Bank Common Stock which
Bank's Board of Directors determines is superior from a financial point of view
to the offer for Bank Common Stock in the Bank Merger as described in this
Agreement, Bank's Board of Directors, in the exercise of its fiduciary duties to
Bank's shareholders, declines to carry out its obligations described in Section
4.2, and as a result BankGroup terminates this Agreement as permitted by Section
7.1(c), then, in addition to the payment of BankGroup's expenses up to $50,000,
Bank shall pay to BankGroup an additional cash payment of $1,050,000 as a
termination fee. Bank agrees that this termination fee is a reasonable
determination, in light of the uncertainty and difficulty of ascertaining the
exact amount thereof, of the loss that BankGroup would actually sustain in
respect to termination of this Agreement for the reasons described in this
paragraph. Nothing contained in this Section 9.1 shall relieve any party from
liability for any breach of this Agreement, except that payment of the
termination fee by Bank and its acceptance by BankGroup shall relieve Bank from
any further liability to BankGroup for breach of the Agreement.
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:
If to BankGroup or Acquisition:
MainStreet BankGroup Incorporated
Church & Ellsworth Streets
Martinsville, Virginia 24115
Attention: Rebecca J. Jenkins
General Counsel and Secretary
<PAGE>
Copy to:
Lathan M. Ewers, Jr.
Hunton & Williams
951 East Byrd Street
Richmond, Virginia 23219
If to Bank:
The First National Bank of Clifton Forge
511 Main Street
Clifton Forge, Virginia 24422
Attention: George J. Kostel, Chairman
of the Board and President
Copy to:
Talfourd H. Kemper
Woods, Rogers & Hazlegrove PLC
10 South Jefferson Street, Suite 1400
Roanoke, Virginia 24011
23
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.
24
<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 /s/ MICHAEL R. BRENAN
Name Michael R. Brenan
Its President
CF ACQUISITION SUBSIDIARY, N.A.
By /s/ MICHAEL R. BRENAN
Name Michael R. Brenan
Its President
THE FIRST NATIONAL BANK
OF CLIFTON FORGE
By /s/ GEORGE J. KOSTEL
Name George J. Kostel
Its President
25
<PAGE>
/s/ A. GOODWIN PERKINS /s/ THOMAS N. WARREN, M.D.
/s/ STEPHEN A. BENNETT /s/ JAMES D. SNYDER
/s/ CAIUS M. CARPENTER /s/ HARVEY B. ALBERT, JR.
/s/ RAYMOND L. CLATERBAUGH, JR. /s/ ERNEST D. ADAMS
/s/ GEORGE J. KOSTEL
The Directors of The First National Bank of Clifton Forge sign for the purpose
of agreeing to vote all shares of Bank Common Stock beneficially owned by them
and with respect to which they have power to vote in favor of the Bank Merger,
and 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.
26
<PAGE>
Exhibit A
REVISED PLAN OF MERGER
OF
THE FIRST NATIONAL BANK OF CLIFTON FORGE
INTO
CF ACQUISITION SUBSIDIARY, N.A.
Section 1. The First National Bank of Clifton Forge, a national banking
association ("Bank"), shall, upon the time that the Articles of Merger are made
effective by the Office of the Comptroller of the Currency (the "Effective Time
of the Bank Merger"), be merged (the "Bank Merger") into CF Acquisition
Subsidiary, N.A., a national banking association (interim) ("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 or
in Bank's treasury and other than Dissenting Shares 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-hundredth) of $83.20 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 days
preceding the last to occur of (i) approval of the Bank Merger by the
shareholders of Bank or (ii) receipt of the last of all regulatory approvals
prerequisite to consummation of the Bank Merger (the "Exchange Ratio"). If such
quotient is less than 4.89, the Exchange Ratio shall be 4.89. If such quotient
is greater than 5.55, the Exchange Ratio shall be 5.55.
(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 or in the
treasury of Bank shall be canceled.
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 $83.20 per share, subject to Sections 4 and 5.
(ii) Each share of Bank Common Stock, other than shares held by BankGroup or in
the treasury of Bank and other than Dissenting Shares 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
27
<PAGE>
BankGroup's exchange agent shall exchange such shares for $83.20 per share,
subject to Section 5, upon receipt of certificates and completed Letters of
Transmittal from Bank. Until surrendered, each outstanding certificate which,
prior to the Effective Time of the Bank Merger, represented such Bank Common
Stock shall be deemed to evidence the owner's right to receive $83.20 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. Dissenting Shares. Notwithstanding anything in this Plan of Merger to
the contrary, shares of Bank Common Stock which are issued and outstanding
immediately prior to the Effective Time of the Bank Merger and which are held by
a shareholder who has the right (to the extent such right is available by law)
to demand and receive payment of the fair value of his shares of Bank Common
Stock pursuant to 12 U.S.C. ss. 215a (the "Dissenting Shares") shall be canceled
and shall not be converted into or by exchangeable for the right to receive the
consideration provided in Section 2 of this Plan of Merger, unless and until
such holder shall fail to perfect his right to dissent or shall have effectively
withdrawn or lost such right under the 12 U.S.C. ss. 215a, as the case may be.
If such holder shall have so failed to perfect or shall have effectively
withdrawn or lost such right, his shares of Bank Common Stock shall thereupon be
deemed to have been converted, at the Effective Time of the Bank Merger, into
the right to receive shares of BankGroup Common Stock.
Section 5. Selection of Shares to be Purchased with Cash. The number of shares
of Bank Common Stock to be exchanged for cash, when added to Dissenting Shares
and fractional shares settled for cash, cannot exceed 9.9% of 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 6. Articles of Association, Bylaws and Directors of the Surviving Bank.
At the Effective Time of the Bank Merger, the Articles of Association, By-laws
and Directors of the Bank shall become the Articles of Incorporation, Bylaws and
Directors of the Surviving Bank.
28
<PAGE>
ANNEX II
SCOTT & STRINGFELLOW LETTERHEAD
August 5, 1996
Board of Directors
First National Bank
Clifton Forge, VA 24422
Gentlemen:
You have asked us to render our opinion relating to the fairness, from a
financial point of view, to the shareholders of First National Bank of Clifton
Forge ("FNB") of the terms of an Agreement and Plan of Reorganization by and
between MainStreet BankGroup Incorporated ("MainStreet") and FNB dated April 17,
1996 (the "Merger Agreement"). The Merger Agreement provides for the merger of
FNB with and into MainStreet (the "Merger") and further provides that each share
of Common Stock of FNB 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 $83.20 divided by the average
of the closing sales price for MainStreet Common Stock as reported on the NASDAQ
National Market for the 10 trading days preceding the last to occur of (I)
approval of the Merger by the shareholders of FNB or (ii) receipt of the last of
all regulatory approvals prerequisite to the consummation of the Merger (the
"Exchange Ratio"). In no case will the Exchange Ratio be less than 4.89 or
greater than 5.55.
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) FNB's financial statements for the three years ended December 31,
1995; (4) FNB's unaudited financial statements for the quarter ended March 31,
1995 and 1996, and other internal information relating to FNB prepared by FNB's
management; (5) information regarding the trading market for the common stocks
of FNB 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 financial statements for the three years
ended December 31, 1995; and (8) MainStreet's unaudited financial statements for
the quarter ended March 31, 1995 and 1996, and other internal information
relating to MainStreet prepared by MainStreet's management. We have discussed
with members of management of FNB and MainStreet the background of the Merger,
reasons and basis for the Merger and the business and future prospects of FNB
and MainStreet 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 FNB and MainStreet. We have not attempted independently to verify
such information, nor have we made any independent appraisal of the assets of
FNB 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
FNB Common Stock.
Very truly yours,
SCOTT & STRINGFELLOW,
By: /s/ GARY S. PENROSE
Gary S. Penrose
Managing Director, Financial Institutions Group
<PAGE>
ANNEX III
12 U.S.C.A. SS. 215A(b), (c) AND (d)
(b) DISSENTING SHAREHOLDERS
If a merger shall be voted for at the called meetings by the necessary
majorities of the shareholders of each association or State bank participating
in the plan of merger, and thereafter the merger shall be approved by the
Comptroller, any shareholder of any association or State bank to be merged into
the receiving association who has voted against such merger at the meeting of
the association or bank of which he is a stockholder, or has given notice in
writing at or prior to such meeting to the presiding officer that he dissents
from the plan of merger, shall be entitled to receive the value of the share so
held by him when such merger shall be approved by the Comptroller upon written
request made to the receiving association at any time before thirty days after
the date of consummation of the merger, accompanied by the surrender of his
stock certificates.
(c) VALUATION OF SHARES
The value of the shares of any dissenting shareholder shall be ascertained, as
of the effective date of the merger, by an appraisal made by a committee of
three persons, composed of (1) one selected by the vote of the holders of the
majority of the stock, the owners of which are entitled to payment in cash; (2)
one selected by the directors of the receiving association; and (3) one selected
by the two so selected. The valuation agreed upon by any two of the three
appraisers shall govern. If the value so fixed shall not be satisfactory to any
dissenting shareholder who has requested payment, that shareholder may, within
five days after being notified of the appraised value of his shares, appeal to
the comptroller, who shall cause a reappraisal to be made which shall be final
and binding as to the value of the shares of the appellant.
(d) APPLICATION TO SHAREHOLDERS OF MERGING ASSOCIATIONS: APPRAISAL BY
COMPTROLLER; EXPENSES OF RECEIVING ASSOCIATION; SALE AND RESALE OF SHARES; STATE
APPRAISAL AND MERGER LAW
If, within ninety days from the date of consummation of the merger, for any
reason one or more of the appraisers is not selected as herein provided, or the
appraisers fail to determine the value of such shares, the Comptroller shall
upon written request of any interested party cause an appraisal to be made which
shall be final and binding on all parties. The expenses of the Comptroller in
making the reappraisal or the appraisal, as the case may be, shall be paid by
the receiving association. The value of the shares ascertained shall be promptly
paid to the dissenting shareholders by the receiving association. The shares of
stock of the receiving association which would have been delivered to such
dissenting shareholders had they not requested payment shall be sold by the
receiving association at an advertised public auction, and the receiving
association shall have the right to purchase any of such shares at such public
auction, if it is the highest bidder therefor, for the purpose of reselling such
shares within thirty days thereafter to such person or persons and at such price
not less than par as its board of directors by resolution may determine. If the
shares are sold at public auction at a price greater than the amount paid to the
dissenting shareholders, the excess in such sale price shall be paid to such
dissenting shareholders. The appraisal of such shares of stock in any State bank
shall be determined in the manner prescribed by the law of the State in such
cases, rather than as provided in this section, if such provision is made in the
State law; and no such merger shall be in contravention of the law of the State
under which such bank is incorporated. The provisions of this subsection shall
apply only to shareholders of (and stock owned by them in) a bank or association
being merged into the receiving association.
