UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 (Fee Required)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
COMMISSION FILE NUMBER 0-8622
MAINSTREET BANKGROUP INCORPORATED
(Exact name of Registrant as specified in its charter)
Virginia 54-1046817
----------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
P. O. Box 4831
Church & Ellsworth Streets
Martinsville, Virginia 24115
------------------------------------------------------------------
(Address of principal executive office) Zip Code
Registrant's telephone number, including area code (540)632-2971
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
--------------------- -----------------------------------------
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $5.00 a Share NASDAQ
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No (_)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment of this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of January 31, 1996 was $103,748,243.
(In determining this figure the Registrant assumes that all of its directors and
principal executive officers are affiliates. Such assumption shall not be deemed
conclusive for any other purposes.)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at January 31, 1996
- ---------------------------------- --------------------------------
COMMON STOCK $5.00 Par Value 8,570,194
- ----------------------------------- ---------------------------------
<PAGE>
MainStreet BankGroup Incorporated
Form 10-K
Index
PART I
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1 Business 3-12
Item 2 Properties 12
Item 3 Legal Proceedings 13
Item 4 Submission of Matters to a Vote of Shareholders 13
Executive Officers of Registrant 13-14
PART II
Item 5 Market for Registrant's Common Equity and Related Shareholder Matters 14
Item 6 Selected Financial Data 15
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 16-25
Item 8 Financial Statements and Supplementary Data 26-50
Item 9 Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 50
PART III
Item 10 Directors and Executive Officers of the Registrant 50
Item 11 Executive Compensation 50
Item 12 Security Ownership of Certain Beneficial Owners and Management 50
Item 13 Certain Relationships and Related Transactions 50
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 50-51
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement, dated March 22, 1996 for Annual Meeting of Shareholders
PART III - Items 10 through 13
<PAGE>
PART I
Item 1. Business
General
MainStreet BankGroup Incorporated (the "Company," "Corporation,"
"BankGroup," or "Registrant"), through its subsidiary Banks ("Banks"), provides
a full range of commercial bank, consumer banking and trust services to a
variety of businesses and individual customers. 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 the Company
considers this middle market to be its primary business market, it has banking
relations with many of the larger textile and furniture manufacturing companies
with manufacturing facilities in the Martinsville, Virginia, trade area.
The Company, through the Banks, actively competes for deposits,
discount brokerage, loans and trust accounts with other financial institutions,
including large regional bank holding companies with greater financial resources
headquartered elsewhere in Virginia and North Carolina. Principal competitive
factors are interest rates, services and lending limitations.
It is the Company's policy to operate the Banks as separate banking
institutions retaining their names and boards of directors. However, the Company
utilizes 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 approve loans up to a specified credit limit, above
which central credit administration approves the loans. 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, the Company utilizes a planning and budgeting
process which involves Company officers, presidents of the Banks, and principal
department heads. Performance targets and budget goals are developed for each
Bank on an annual basis, with financial and operating results reported and
reviewed periodically during the year.
Subsidiaries
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. It is insured by the Federal Deposit Insurance
Corporation and is supervised and examined by the Board of Governors of the
Federal Reserve System and the State Corporation Commission of Virginia. 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 of $574 million under
management at December 31, 1995. Piedmont is the largest bank in the
Martinsville trade area with total assets of approximately $454.9 million,
deposits of approximately $307.9 million and net loans of approximately $284.7
million at December 31, 1995.
BANK OF CARROLL. Bank of Carroll ("Carroll"), incorporated in 1971
under the laws of Virginia, was acquired in 1977. At December 31, 1995, it had
total assets of approximately $55.7 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 Board of Governors of the Federal
Reserve System and the State Corporation Commission of Virginia 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 in 1981. In 1995, Bank of Ferrum converted back to a state charter. At
December 31, 1995, it has total assets of approximately $77.6 million. Its main
banking office is located in Ferrum, Virginia, with branches at Oak Level and
Rocky Mount, Virginia. An additional branch is currently under construction in
the northern part of Rocky Mount which is scheduled to open in March 1996. Its
primary service area has a population of approximately 40,000. Ferrum is
supervised and examined by the Board of Governors of the Federal Reserve System
and the State Corporation Commission of Virginia and engages in general
commercial banking business.
FIRST COMMUNITY BANK OF FOREST. First Community Bank ("Community"),
incorporated in 1978 under the laws of Virginia, was acquired in 1983. At
December 31, 1995, it has total assets of approximately $111.4 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. First Community is regulated by the Board
of Governors of the Federal Reserve System and the State Corporation Commission
of Virginia. 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 in 1986. In 1995, Stuart
converted to a state charter. At December 31, 1995, it had total assets of
approximately $117.0 million. It main office is located in Stuart, Virginia, and
has six other offices all located in Patrick County, Virginia. Stuart is the
largest bank in Patrick County. Its primary service area has a population of
approximately 17,500. Stuart is supervised and examined by the Board of
Governors of the Federal Reserve System and the State Corporation Commission of
Virginia and engages in general commercial banking business.
FIRST COMMUNITY BANK OF SALTVILLE. First Community Bank of Saltville
("Saltville") was established in 1903 under the Laws of Virginia and was
incorporated in 1918 as a national bank and acquired in 1986. In 1995, Saltville
converted back to a state charter. At December 31, 1995, it had total assets of
approximately $89.9 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 supervised and examined by the Board of Governors of the
Federal Reserve System and the State Corporation Commission of Virginia and
engages in general commercial banking business.
Trust Services
Piedmont's Trust Department offers a full range of trust services for
both individual and corporate customers. Such services include personal trust,
investment management, financial and tax counseling, employee benefits and
custodial.
The Trust Department assets have increased from $530 million at
December 31, 1994 to $574 million at December 31, 1995.
Competition
The principal methods of competition in the bank industry are service,
rates offered on loans and deposits and convenience of location. Competition
also comes from financial service firms such as brokerage houses and mortgage
companies. The Registrant has historically restricted its activities to a
geographical area within an approximate two hundred mile radius of Martinsville,
Virginia, the corporate headquarters. Other bank holding company competitors
have greater geographic coverage and some offer a number of bank-related
services which the Registrant does not presently offer.
Piedmont, with its six branch offices, is the largest of five banking
institutions in the Martinsville trade area. Principal competition is offered by
the other commercial banks, but competition is also offered by savings and loan
associations, finance companies and credit unions.
Carroll is one of six banks in Carroll County and Galax, Virginia.
Competition is offered primarily by these banks.
Ferrum is the only financial institution located in Ferrum, but
competition is offered through four other commercial banks located in Rocky
Mount, Virginia, approximately nine miles away.
Community is the only financial institution located in Forest, but
competition is offered by four other banks located in Lynchburg, four banks in
Bedford, four banks in Amherst, and five in Campbell. Competition also includes
some savings and loan associations, and credit unions.
Stuart is the largest bank in Patrick County, but competition is
offered through two other commercial banks located in the area.
Saltville is one of four banks in Smyth County. Competition is offered
primarily by these banks.
Employees
The total number of full-time equivalent persons employed by the
Registrant and its subsidiaries as of December 31, 1995 was 440. The Registrant
believes that its relationship with its employees is good, and no employees are
represented by a labor union.
Information as to Classes of Service
The following table sets forth, for the three fiscal years ended
December 31, 1995, the percentage of total operating revenues contributed by
each class of similar services which contributed 15% or more of total operating
revenue of the Registrant and its subsidiaries in either of the last three year.
<TABLE>
<CAPTION>
YEARS ENDED PERCENTAGE
<S> <C> <C>
December 31, 1993 Interest & Fees on Loans 66.1%
December 31, 1994 Interest & Fees on Loans 71.5
December 31, 1995 Interest & Fees on Loans 66.6
December 31, 1993 Interest & Dividends on
Securities Held to Maturity and
Securities Available for Sale 22.9
December 31, 1994 Interest & Dividends on
Securities Held to Maturity and
Securities Available for Sale 25.8
December 31, 1995 Interest & Dividends on
Securities Held to Maturity and
Securities Available for Sale 22.9
</TABLE>
<PAGE>
SELECTED STATISTICAL INFORMATION OF MAINSTREET BANKGROUP INCORPORATED AND
SUBSIDIARIES (REGISTRANT)
The following statistical information is consolidated for the
Registrant and its six bank subsidiaries. Information is based on daily average
balances. Nonaccrual loans are included in loans, net of unearned income.
Mortgage loans held for sale are broken out separately from loans for 1995 and
1994's distribution of assets; however, they are included with loans for all
periods in the rate volume analysis. Information related to mortgage loans held
for sale is being accumulated for present and future filings, however, 1993
comparative data is unavailable.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST RATES
AND INTEREST DIFFERENTIALS
The table below shows the major categories of interest-earning assets
and interest-bearing liabilities, the average balance, the interest earned or
paid, the average yield/rate on daily average balances outstanding, net interest
earnings and net yields on interest-earning assets for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
(DOLLARS IN 000'S)
1995 1994
-------------------------------------- --------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Loans, Net of Unearned Income (1) $526,311 $51,020 9.69% $474,216 $42,954 9.06%
Mortgage Loans Held for Sale 813 144 17.71 3,503 514 14.67
Securities Available for Sale 148,274 9,689 6.53 205,197 13,119 6.39
Taxable Securities Held to Maturity 77,969 5,705 7.32 3,256 244 7.49
Nontaxable Securities Held to
Maturity (1) 37,074 3,122 8.42 39,733 3,417 8.60
Interest-earning Deposits in
Other Banks 682 5 .73 50 2 4.00
Federal Funds Sold 1,131 66 5.84 11,427 460 4.03
------- ------- ------ -------- ------- ----
Total Interest Earning Assets 792,254 69,751 8.80% 737,382 60,710 8.23%
Cash and Due from Banks 22,681 22,226
Other Assets 31,325 35,871
Reserve for Loan Losses (8,203) ( 8,279)
-------- --------
Total Assets $838,057 $787,200
======== ========
Interest Checking Accounts $ 73,783 $ 2,269 3.08% $ 73,568 $ 2,095 2.85%
Savings Deposits 123,952 3,937 3.18 163,593 5,429 3.32
Money Market Investment Accounts 59,722 2,212 3.70 71,807 2,292 3.19
Other Time Deposits 356,616 19,244 5.40 302,964 14,164 4.68
Borrowed Funds 64,948 3,713 5.72 27,382 1,237 4.52
-------- ------- ------ -------- ------- ----
Total Interest-bearing Liabilities 679,021 31,375 4.62% 639,314 25,217 3.94%
Demand Deposits 90,588 85,405
Other Liabilities 6,169 6,704
-------- -----------
Total Liabilities 775,778 731,423
Shareholders' Equity 62,279 55,777
-------- --------
Total Liabilities and Shareholders'
Equity $838,057 $787,200
======== ========
Net Interest Earnings/Margin $38,376 4.18% $35,493 4.29%
======= ==== ======= ====
Net Yield on Interest-earning Assets
on a Taxable Equivalent
Basis (2) 4.84% 4.81%
==== ====
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
(DOLLARS IN 000'S)
1993
---------------------------------------
AVERAGE YIELD/
BALANCE INTEREST RATE
------- -------- ----
<S> <C> <C> <C>
Loans, Net of Unearned Income (1) $456,393 $42,410 9.29%
Mortgage Loans Held for Sale --- --- ---
Securities Available for Sale 194,429 12,347 6.35
Taxable Securities Held to Maturity 2,216 174 7.85
Nontaxable Securities Held to
Maturity (1) 35,803 3,254 9.09
Interest-earning Deposits in
Other Banks 50 1 2.00
Federal Funds Sold 22,868 676 2.96
-------- ------- ----
Total Interest Earning Assets 711,759 58,862 8.27%
Cash and Due from Banks 20,833
Other Assets 29,265
Reserve for Loan Losses ( 8,839)
--------
Total Assets $753,018
========
Interest Checking Accounts $ 65,301 $ 1,850 2.83%
Savings Deposits 153,767 4,901 3.19
Money Market Investment Accounts 77,777 2,523 3.24
Other Time Deposits 291,774 14,732 5.05
Borrowed Funds 26,443 1,285 4.86
-------- ------- ----
Total Interest-bearing Liabilities 615,062 25,291 4.11%
Demand Deposits 76,960
Other Liabilities 5,467
--------
Total Liabilities 697,489
Shareholders' Equity 55,529
--------
Total Liabilities and Shareholders'
Equity $753,018
========
Net Interest Earnings/Margin $33,571 4.16%
=======
Net Yield on Interest-earning Assets
on a Taxable Equivalent
Basis (2) 4.72%
====
</TABLE>
(1) Interest income includes the effects of taxable equivalent
adjustments using a tax rate of 34% in adjusting interest on tax-exempt
securities and loans to a fully taxable basis. Loan fees are included in total
interest income as follows: 1995--$1,745,000; 1994--$1,900,000;
1993--$2,607,000. The average balance of nonaccrual assets is included in the
calculation of asset yields.
(2) Net yield on interest-earning assets represents net interest
earnings divided by average amounts of total interest-earning assets.
6
<PAGE>
The following table sets forth for the period indicated a summary of
the change in interest earned on a taxable equivalent basis and interest paid
resulting from changes in volume and rates. The change in interest due to both
rate and volume has been allocated to rate and volume changes in proportion to
the relationship of the absolute dollar amounts of the change in each.
<TABLE>
<CAPTION>
1995 Compared to 1994 Increase 1994 Compared to 1993 Increase
(Decrease) Due To Change In (Decrease) Due To Change In
Total Total
Average Average Increase Average Average Increase
Volume Rate (Decease) Volume Rate (Decrease)
------- ---- --------- ------ ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans* $4,921 $3,145 $8,066 $1,953 $ (895) $1,058
Securities Held to Maturity
Taxable 5,467 (6) 5,461 78 (8) 70
Nontaxable (225) (70) (295) 344 (181) 163
Mortgage Loans Held for Sale (459) 89 (370) --- --- ---
Securities Available for Sale* (3,714) 284 (3,430) 688 84 772
Interest-Bearing Deposits in Other Banks 6 (3) 3 0 1 1
Federal Funds Sold (539) 145 (394) (409) 193 (216)
------ ------ ------ ----- ------- ------
Total Interest Income 5,457 3,584 9,041 2,654 (806) 1,848
Interest Expense:
Interest Checking Accounts 6 168 174 235 10 245
Savings Deposits (1,268) (224) (1,492) 321 207 528
Money Market Investment Accounts (417) 337 (80) (191) (40) (231)
Other Time Deposits 2,715 2,365 5,080 551 (1,119) (568)
Other Borrowed Funds 2,075 401 2,476 41 (89) (48)
------ ------ ------ ------ -------- ------
Total Interest Funds 3,112 3,047 6,158 957 (1,031) (74)
------ ------ ------ ------ ------- ------
Net Interest Income $2,346 $ 537 $2,883 $1,697 $ 225 $1,922
====== ======= ====== ====== ======= ======
</TABLE>
*Fully Taxable-Equivalent Basis
SECURITIES AVAILABLE FOR SALE PORTFOLIO DATA
The carrying and approximate market value and gross unrealized gains
and losses of securities available for sale appear on page 35 of Part II, Item
8, Note 3 of this report and are herein incorporated by reference.
Proceeds from the sale of these securities, gross gains and losses, and
pledged information appear on page 35 of Part II, Item 8, Note 3 of this report
and are herein incorporated by reference.
The following table shows the maturities of securities available for
sale as of December 31, 1995 and the weighted average yields of such securities.
The weighted average yields are calculated on the basis of the cost and
effective yields weighted for the scheduled maturity of each security. Weighted
average yields on tax-exempt obligations have been computed on a taxable
equivalent basis using a tax rate of 34%. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Maturing
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield Total
------ ------ ------ ----- ------ ----- ------ ----- -----
(In 000's)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Obligations of U.S.
Government Agencies $3,485 6.50 $31,863 5.81 $ 7,549 7.01 $ --- --- $ 42,897
Mortgage Backed Securities 912 7.16 1,390 7.66 6,072 6.70 18,767 7.00 27,141
Collateralized Mortgage
Obligations and REMICs --- --- 5,505 5.80 2,410 5.61 88,337 6.31 96,252
Corporate Bonds 1,757 5.61 4,415 9.14 5,386 7.36 500 9.50 12,058
Other Securities --- --- --- --- 5,195 6.16 5,195
Obligations of State &
Political Subdivision --- 373 5.59 253 8.38 --- --- 626
------ ------- ------- -------- --------
$6,154 $43,546 $21,670 $112,799 $184,169
====== ======= ======= ======== ========
</TABLE>
All Mortgage Backed Securities and Collateralized Mortgage Obligations
held at December 31, 1995 were backed by U.S. Agencies. It is the Corporation's
practice to review on a periodic basis those CMO's and REMIC's that do not pass
the Federal Financial Institutions Examination Council's (FFIEC) high risk
mortgage security test. Securities are tested at time of purchase and thereafter
at quarterly intervals. The test addresses possible fluctuations in the average
life and price sensitivity which are the primary risks associated with this type
of security. Tests of these securities are subject to regulatory review.
SECURITIES HELD TO MATURITY PORTFOLIO DATA
The carrying and approximate market value and gross unrealized gains
and losses of securities held to maturity appear on page 36 of Part II, Item 8,
Note 4 of this report and are herein incorporated by reference.
Proceeds from sales and calls of these securities, gross gains and
losses and pledged information appear on page 36 of Part II, Item 8, Note 4 of
this report and are herein incorporated by reference.
The following table shows the maturities of securities held to maturity
at December 31, 1995, and the weighted average yields of such securities. The
weighted average yields are calculated on the basis of the cost and effective
yields weighted for the scheduled maturity of each security. Weighted average
yields on tax-exempt obligations have been computed on a taxable equivalent
basis using a tax rate of 34%. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Maturing
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years
-------- ---------- --------- ---------
Amount Yield Amount Yield Amount Yield Amount Yield Total
------ ----- ------ ----- ------ ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Treasury Securities $ 2,987 8.00 $ 1,938 5.79 $ --- --- $ --- --- $ 4,925
Obligations of U.S.
Government Agencies --- --- 16,669 6.34 13,302 7.21 989 8.75 30,960
Mortgage Backed Securities --- --- 200 7.50 16,958 7.53 5,170 7.35 22,328
Obligations of State and
Political Subdivisions 2,685 8.66 11,841 8.83 20,158 8.46 5,095 8.19 39,779
------- ------- ------- ------- ------- -------
$ 5,672 $30,648 $50,418 $11,254 $97,992
======= ======= ======= ======= =======
</TABLE>
All Mortgage Backed Securities in the held-to-maturity portfolio are
backed by U.S. Agencies at December 31, 1995.
LOAN PORTFOLIO
The amounts of loans outstanding at the indicated dates are shown in
the following table according to type of loan:
<TABLE>
<CAPTION>
December 31
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Commercial, Financial
and Agricultural $264,924 $235,205 $209,908 $195,289 $198,406
Real Estate-Mortgage* 135,830 115,106 102,460 112,932 120,998
Installment 176,110 157,857 143,957 144,099 141,493
-------- -------- -------- -------- --------
Total Loans 576,864 508,168 456,325 452,320 460,897
Less: Unearned Income and
Deferred Fees 11,080 8,417 6,914 7,689 9,280
-------- -------- -------- -------- --------
Loans, Net of Unearned Income
and Deferred Fees 565,784 499,751 449,411 444,631 451,617
Less: Allowance for Loan
Losses 8,076 8,191 8,351 8,610 8,559
-------- -------- -------- -------- --------
Loans, Net $557,708 $491,560 $441,060 $436,021 $443,058
======== ======== ======== ======== ========
</TABLE>
* The amounts for 1991 include mortgage loans held for sale.
Commercial loans in recent periods have been made largely to small and
medium size businesses, including forest products and building supply companies,
real estate developers, small textile and furniture manufacturers and general
contractors. In addition, this portfolio includes participations in loans to
larger manufacturers in the area.
CONCENTRATIONS OF CREDIT RISK
Virtually all of BankGroup's subsidiaries' business activity is with
customers located in the central and western part of southern Virginia.
Accordingly, operating results are closely correlated with the economic trends
within the region and influenced by the significant industries within the region
including textile, furniture and pre-built housing, as well as agriculture. In
addition, the ultimate collectibility of the bank's loan portfolios and the
recovery of the carrying amounts of repossessed property are susceptible to
changes in the market conditions of this geographic region. The commercial
portfolio is diversified with no significant concentrations of credit. At
December 31, 1995, acquisition and development construction loans account for
$24.5 million of the commercial portfolio. In addition, other commercial loans
secured by real estate total $86.7 million. The real estate loan portfolio
consists almost entirely of 1-4 family residential property. At December 31,
1995, BankGroup was the creditor for approximately $88.3 million of consumer
loans for automobiles and mobile homes generated directly or purchased from
established dealers (indirect). These loans are generally collateralized by the
related property and are either endorsed or subject to mandatory dealer
repurchase agreements.
The individual banks have established operating policies relating to
the credit process and collateral in loan originations.
Loans to purchase real and personal property are generally collateralized by the
related property with loan amounts established based on certain percentage
limitations of the property's total stated or appraised value. Credit approval
is primarily a function of collateral and the evaluation of the creditworthiness
of the individual borrower or project based on pertinent financial information
and the amount to be financed.
The Banks pursue an asset liability management program which seeks to
minimize the impact of interest rate fluctuations on the results of operations.
Emphasis is placed on floating rate business loans with relatively short
maturities and adjustable rate real estate and consumer loans. In addition the
Banks make long-term fixed rate real estate mortgage loans and fixed rate real
estate loans with a three or five year balloon payment requirement. Generally,
the Banks will maintain the variable rate or balloon payment real estate
mortgages in their portfolios while long-term fixed rate loans are sold in the
secondary market.
The following table shows the amount of commercial, financial and
agricultural loans outstanding as of December 31, 1995 which mature or reprice:
<TABLE>
After
One But
Within Within After
One Year Five Years Five Years Total
---------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $168,315 $ 65,489 $ 31,120 $264,924
Interest rates are floating or adjustable 104,952 --- --- 104,952
Interest rates are fixed or predetermined 63,363 65,489 31,120 159,972
</TABLE>
The following table presents aggregate loan amounts for nonaccrual and
past due loans as of the date indicated. Past due loans comprise loans which are
contractually past due ninety days or more as to interest or principal payments.
<TABLE>
<CAPTION>
December 31
-------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consumer Loans:
Loans accounted for on a nonaccrual basis $ 95 $ 9 $ 12 $ 233 $ 259
Loans contractually past due 90 days or
more as to interest or principal payments
(but not included in nonaccrual loans) 575 479 364 631 998
All Other Loans:
Loans accounted for on a nonaccrual basis 3,288 2,727 2,553 5,231 8,822
Loans contractually past due 90 days or
more as to interest or principal payments
(but not included in nonaccrual loans) 1,298 1,201 1,282 935 2,177
</TABLE>
It is the Company's policy to discontinue the accrual of interest on
loans once they become more than 90 days past due and are not
well-collateralized or earlier when it becomes doubtful that the full principal
and interest will be collected. Once a loan is placed on nonaccrual status,
interest is generally recorded on a cash basis until the loan is satisfied in
full or circumstances have changed to such an extent that the collection of both
principal and interest is probable.
Nonaccrual and 90-day past due loans are considered by the Company to be
nonperforming loans. Such assets totaled .93% of loans, net of unearned income
at December 31, 1995 and .88% at December 31, 1994.
The effect of nonaccrual loans on interest income for 1995, 1994 and 1993
appears on page 37 of Part II, Item 8, Note 5 of this report and is herein
incorporated by reference.
At December 31, 1995, 1994, and 1993 BankGroup had other real estate,
which represents foreclosed properties totaling $1.6 million, $2.5 million and
5.0 million, respectively, which is carried at the lower of cost or fair market
value.
SUMMARY OF LOAN LOSS EXPERIENCE
The description of the allowance for loan losses required by Part I, Item
I, of Form 10-K appears on page 33 of Part II, Item 8, Note 1 of this report and
is herein incorporated by reference. The following table shows BankGroup's
average loan balances for each period, changes in the allowance for loan losses
arising from loans charged off and recoveries on loans previously charged off by
loan category, and additions to the allowance which have been charged to
operating expense.
<TABLE>
<CAPTION>
Years Ended December 31
1995 1994 1993 1992 1991
---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average amount of loans, net of unearned
income, outstanding during the year (1) $526,311 $474,216 $456,393 $445,614 $462,413
======== ======== ======== ======== ========
Balance of allowance for loan losses at
beginning of period $ 8,191 $ 8,351 $ 8,610 $ 8,559 $ 6,810
Loans charged off:
Commercial, financial and agricultural 777 2,566 592 1,221 2,002
Real estate - mortgage 179 318 810 1,009 1,012
Installment 900 680 796 582 1,114
-------- -------- -------- -------- --------
Total loans charged off 1,856 3,564 2,198 2,812 4,128
-------- -------- -------- -------- --------
Recoveries of loans previously charged of:
Commercial, financial and agricultural 181 357 94 159 162
Real estate - mortgage 6 18 366 16 43
Installment 235 202 109 291 248
-------- -------- -------- -------- --------
Total recoveries 422 577 569 466 453
-------- -------- -------- -------- --------
Net loans charged off 1,434 2,987 1,629 2,346 3,675
Additions to allowance charged to
operating expense 1,319 2,827 1,370 2,397 5,424
-------- -------- -------- -------- --------
Balance at end of period $ 8,076 $ 8,191 $ 8,351 $ 8,610 $ 8,559
======== ======== ======== ======== ========
Ratio of net chargeoffs during period
to average loans outstanding .27% .63% .36% .53% .79%
======== ======== ======== ======== ========
</TABLE>
(1) The average amount of loans, net of unearned income for 1991 includes
mortgage loans held for sale.
Management has allocated the allowance for loan losses for the years
indicated by loan category. This allocation of the allowance for loan losses is
based upon the previous five years' loan loss experience and is not intended to
be management's judgment as to future loan losses to be experienced by loan
type:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994 December 31, 1993 December 31, 1992 December 31, 1991
----------------- ----------------- ----------------- ----------------- -----------------
% of Loans In % of Loans In % of Loans In % of Loans In % of Loans In
Each Category Each Category Each Category Each Category Each Category
To Total To Total To Total To Total To Total
Amount Loans Amount Loan Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
Commercial, Financial
and Agricultural $3,392 46% $6,061 46% $3,842 46% $3,702 43% $3,681 43%
Real Estate 969 23 819 23 1,837 22 2,153 25 2,225 26
Installment 3,715 31 1,311 31 2,672 32 2,755 32 2,653 31
Unallocated -- -- -- -- -- -- -- -- -- --
------ --- ----- ---- ------ ----- ------ ---- ------- ----
Total $8,076 100% $8,191 100% $8,351 100% $8,610 100% $8,559 100%
====== === ====== ==== ====== ==== ====== ==== ====== ====
</TABLE>
RETURN ON EQUITY AND ASSETS
The ratio of net income to average shareholders' equity and to average
total assets, and certain other ratios, is presented below:
<TABLE>
<CAPTION>
Years Ended December 31
1995 1994 1993
----- ----- ----
<S> <C> <C> <C>
Return on Average Shareholders Equity 17.24% 7.33% 12.39%
Return on Average Assets 1.28 .52 .91
Dividend Payout Ratio 28.10 60.55 31.18
Average Equity to Average Total Assets 7.43 7.09 7.37
</TABLE>
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The information required by this section of Part I, Item I of Form 10-K
appears on pages 45 and 46 of Part II, Item 8, Note 17 of this report and is
herein incorporated by reference.
SHORT-TERM BORROWINGS
Federal funds purchased and corporate cash management accounts
generally represent overnight borrowing transactions. Repurchase agreements and
FHLB borrowings generally represent monthly borrowing transactions.
The details of these categories for the years 1995, 1994 and 1993 are
presented in the table below:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(In 000's)
<S> <C> <C> <C>
Short-Term Borrowings:
Federal Funds Purchased and
Corporate Cash Management:
Balance at end of year $42,111 $16,677 $ 9,969
Average during the year 18,677 13,544 12,383
Maximum month-end balance 42,110 21,138 17,341
Weighted average rate during the year 4.63% 3.15% 2.63%
Weighted average rate at December 31 5.36% 4.35% 2.81%
Repurchase Agreements:
Balance at end of year $37,127 $ --- $ ---
Average during the year 26,978 --- ---
Maximum month-end balance 63,956 --- ---
Weighted average rate during the year 6.00% --- ---
Weighted average rate at December 31 5.85% --- ---
FHLB Borrowings:
Balance at end of year $32,350 $ 4,000 $ ---
Average during the year 7,660 495 ---
Maximum month-end balance 33,279 4,000 ---
Weighted average rate during the year 6.50% 2.02% ---
Weighted average rate at December 31 5.76% 6.35% ---
</TABLE>
The weighted average rates paid in aggregate on these borrowed funds
for 1995, 1994 and 1993 were 5.58%, 3.26%, and 2.68% respectively.
DEPOSITS
Average total deposits of the Banks for 1995 were approximately $705
million, an increase of 1% from $697 million for 1994. The Banks generally have
a large, stable base of time deposits, principally certificates of deposits,
money market investment accounts and individual retirement accounts obtained
primarily from customers in Virginia. The Banks have not utilized brokered
deposits.
The average amounts of deposits are summarized below for the periods
indicated:
<TABLE>
<CAPTION>
Years Ended December 31
(In 000's)
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Demand deposits (Noninterest-Bearing) $ 90,588 $ 85,405 $ 76,960
Interest checking accounts 73,783 73,568 65,301
Savings deposits 123,952 163,593 153,767
Money market investment accounts 59,722 71,807 77,777
Time deposits 356,616 302,964 291,774
-------- -------- --------
Total $704,661 $697,337 $665,579
======== ======== ========
</TABLE>
INTEREST RATE SENSITIVITY
The following table sets forth maturity/repricing information with
respect to the major categories of Interest Earning Assets and Interest-Bearing
Liabilities as of December 31, 1995:
<TABLE>
<CAPTION>
Maturing/Repricing In
Interest Earning Assets Under 3 Mos. 3-6 Mos. 6-12 Mos. Over 1 Yr. Total
- ----------------------- ------------ -------- --------- ---------- -----
<S> <C> <C> <C> <C> <C>
Time Balances Banks $ 875 $ --- $ --- $ --- $ 875
Mortgage Loans Held for Sale 1,780 --- --- --- 1,780
Securities Available for Sale 42,492 1,278 5,487 134,912 184,169
Securities Held to Maturity 6,798 3,796 7,355 80,043 97,992
Loans 195,945 32,910 63,091 273,838 565,784
--------- -------- -------- -------- --------
Total Interest Earning Assets $ 247,890 $ 37,984 $ 75,933 $488,793 $850,600
========= ======== ======== ======== ========
Cumulative Total Interest-Earning Assets $ 247,890 $285,874 $361,807 $850,600 $850,600
========= ======== ======== ======== ========
Interest-Bearing Liabilities
NOW, Money Market and Savings $ 247,019 $ --- $ --- $ --- $247,019
Time Deposits $100,000 and Over 15,366 11,783 13,528 27,757 68,434
Other Time Deposits 72,463 41,239 51,743 123,951 289,396
--------- -------- -------- -------- --------
Total Interest-Bearing Deposits 334,848 53,022 65,271 151,708 604,849
Short-Term Debt 111,736 --- --- --- 111,736
Long-Term Debt --- 71 71 787 929
--------- -------- -------- -------- --------
Total Borrowings 111,736 71 71 787 112,665
--------- -------- -------- -------- --------
Total Interest-Bearing Liabilities $ 446,584 $ 53,093 $ 65,342 $152,495 $717,514
========= ======== ======== ======== ========
Management's Elasticity Adjustment
for Nonmaturing Deposits (1) $(202,284) $ --- $ --- $202,284 $ ---
--------- -------- -------- -------- -------
Adjusted Interest-Bearing Liabilities $ 244,300 $ 53,093 $ 65,342 $354,779 $717,514
========= ======== ======== ======== ========
Cumulative Total Interest-Bearing
Liabilities $ 244,300 $297,393 $362,735 $717,514 $717,514
========= ======== ======== ======== ========
Net Total Assets/Liabilities after
Elasticity Adjustment $ 3,590 $(15,109) $ 10,591 $134,014 $133,086
========= ======== ======== ======== ========
Cumulative Net Total Assets/Liabilities
after Elasticity Adjustment $ 3,590 $(11,519) $ (928) $133,086 $133,086
========= ======== ======== ======== ========
</TABLE>
(1) Management reviews the behavior of infrequently repriced deposit products
with indefinite maturities and accordingly adjusts the overall interest
rate sensitivity position for non rate sensitive core balances.
Item 2. Properties
Registrant maintains its corporate headquarters at Church and Ellsworth
Streets in Martinsville, Virginia in a six-story office building complex of
Piedmont Trust Bank. In addition, the Registrant and its subsidiaries own or
lease other properties for their general banking business. As of December 31,
1995, the Registrant's subsidiaries conduct business through twenty-eight office
locations, eleven of which are leased from non-affiliated owners and the
remainder are owned by the subsidiaries.
The Registrant's subsidiaries own several parcels of other real estate
which represent foreclosed dwellings and several acres of land. The book value
of this property at December 31, 1995 was approximately $1.6 million which
approximates fair market value.
With respect to the leased properties, leases expire at various dates
from 1996 through 2009, all of which are renewable at the option of the
Registrant.
Item 3. Legal Proceedings
The information required by Part I, Item 3 of Form 10-K appears on page
49 of Part II, Item 8, Note 21 of this report and is herein incorporated by
reference.
Item 4. Submission of Matters to a Vote of Shareholders
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K the following list is included
as an unnumbered item in Part I of this report in lieu of being included in
Proxy Statement for the Annual Meeting of Shareholders to be held on April 23,
1996.
The following is a list of names and ages of all executive officers of the
registrant; terms of office as officers; positions and offices with the
registrant held by each officer and each person's principal occupations or
employment during the past five years.
<TABLE>
<CAPTION>
First Elected
Name (Age) Offices and Positions Held As An Officer
---------- ---------------------------- ---------------
<S> <C> <C>
Michael R. Brenan (43) Chairman of the Board, President 06/94
and Chief Executive Officer and
Director of BankGroup
James E. Adams (51) Group Executive, Chief Financial 10/94
Officer, Treasurer and Director of
The First Bank of Stuart
Rebecca J. Jenkins (45) Group Executive, General Counsel 09/94
and Secretary
S. Richard Bagby (55) Senior Vice President and Chief 03/94
Credit Officer
William D. Kerr (47) Senior Vice President and Chief 07/77
Information Officer
Beverly L. Mitchell (48) Senior Vice President, Chief Market Manager 8/95
</TABLE>
Mr. Brenan joined MainStreet BankGroup Incorporated as President and Chief
Executive Officer in June of 1994. From January 1992 until that time, he served
as President and Chief Operating Officer of Bank One, Youngstown, N.A.,
Youngstown, Ohio. From July 1988 through December 1991, Mr. Brenan served as
President and Chief Executive Officer of Bank One, Portsmouth, N.A., Portsmouth,
Ohio.
Mr. Adams joined MainStreet BankGroup Incorporated in October of 1994 as Senior
Vice President, Chief Financial Officer and Treasurer, functional title of Group
Executive added in October 1995. Before coming to MSBG, he was Executive Vice
President and Chief Financial Officer for Dominion Bankshares Corporation,
Roanoke, Virginia, from September 1991 to March 1993. Prior to this position, he
was the Chief Financial Officer for Shawmut National Corporation, Hartford,
Connecticut, from August 1987 through September 1991.
Ms. Jenkins joined MainStreet BankGroup Incorporated in September of 1994 as
Senior Vice President, General Counsel and Corporate Secretary, functional title
of Group Executive added in October 1995. Until Ms. Jenkins came to MSBG, she
served in various capacities at Bank One, Youngstown, N.A., Youngstown, Ohio,
beginning as General Counsel in July 1989. In January 1994, she was appointed to
Regional Counsel Banc One Ohio Corporation.
Mr. Bagby joined Piedmont Trust Bank in June of 1980 as Vice President -
Commercial Loans and was elected Senior Vice President of Credit Administration
for MainStreet BankGroup Incorporated in March of 1994.
Executive officer William D. Kerr has served the registrant or its subsidiary in
various executive capacities for the past six years.
Ms. Mitchell joined MainStreet BankGroup Incorporated in August of 1995. Prior
to that time, Ms. Mitchell served as Vice President and Chief Quality Officer
for Bank One, Youngstown, N.A., Youngstown, Ohio, from December 1991 to August
1995. From July 1985 to December 1991, she held various positions with the First
National Bank of Pennsylvania, Erie, Pennsylvania.
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
MainStreet BankGroup Incorporated common stock is traded on the over-the-counter
(OTC) market and quoted on the NASDAQ (National Association of Securities
Dealers Automated Quotations) National Market System. Price and volume
information are given in major newspapers in the "Over-The Counter Markets"
section under the National Market System listings.
MainStreet BankGroup Incorporated is now traded under the symbol MSBC. Prior to
January 1, 1996, our common stock was traded under the symbol PBGI.
During calendar year 1995, 1,486,366 shares of MSBC stock were traded through
NASDAQ. As of December 31, 1995, MSBC was owned by 2,262 shareholders of record
not including nominee holders which would increase the total. At year end,
8,535,072 shares were outstanding. All common stock in subsidiary affiliate
Banks is owned entirely by MainStreet BankGroup.
The following table sets forth the cash dividends paid per share and information
regarding the market prices per share of common stock for MSBC for the periods
indicated. The price ranges are based on actual high and low bid transactions as
reported on the NASDAQ National Market System.
<TABLE>
<CAPTION>
1995 High Low Close Dividend
---- ---- --- ----- --------
<S> <C> <C> <C> <C>
4th 13-3/4 12-5/8 13 .10
3rd 13-1/8 11-7/8 12-5/8 .10
2nd 13-1/8 11 12-53/100 .10
1st 11-3/4 9-3/8 11-1/4 .09
<CAPTION>
1994 High Low Close Dividend
---- ---- --- ----- --------
<S> <C> <C> <C> <C>
4th 12-1/2 9 9-3/8 .09
3rd 12-3/4 10 12 .08
2nd 11-1/4 10 10-3/8 .08
1st 11 10-1/16 11 .08
</TABLE>
On February 20, 1996, MainStreet BankGroup declared a two-for-one stock split,
in the form of a 100% stock dividend, payable March 15, 1996 to stockholders of
record March 4, 1996. Shareholders will receive one additional share of common
stock for each share held on the record date.
BankGroup also resolved to amend the Articles of Incorporation to increase the
authorized shares of common stock from 10,000,000 to 20,000,000.
All share and per share data, within this Form 10-K, has been restated to
reflect the stock split.
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data and Ratios) Years Ended December 31
--------------------------------------------------------------------
SUMMARY OF OPERATIONS 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest Income $ 68,675 $ 59,516 $ 57,912 $ 59,486 $ 64,132
Interest Expense 31,375 25,217 25,291 29,511 38,263
-------- -------- -------- -------- --------
Net Interest Income 37,300 34,299 32,621 29,975 25,869
Provision for Loan Losses 1,319 2,827 1,370 2,397 5,424
-------- -------- -------- ------- --------
Net Interest Income After Provision
For Loan Losses 35,981 31,472 31,251 27,578 20,445
Noninterest Income 7,975 1,175 6,414 6,386 5,580
Noninterest Expense 28,817 28,713 28,254 24,101 22,337
-------- -------- -------- -------- --------
INCOME BEFORE INCOME TAXES 15,139 3,934 9,411 9,863 3,688
Income Tax Expense (Benefit) 4,399 (154) 2,530 2,735 704
-------- ------- -------- -------- --------
NET INCOME $ 10,740 $ 4,088 $ 6,881 $ 7,128 $ 2,984
======== ======== ======== ======== ========
PER SHARE DATA
Net Income:
Primary $ 1.37 $ .54 $ .93 $ .97 $ .41
Fully Diluted 1.29 .53 .87 .91 .41
Cash Dividends Declared .39 .33 .29 .22 .27
Net Book Value Tier 1 9.00 7.94 7.70 7.05 6.30
Net Book Value GAAP 8.87 6.86 7.70 7.05 6.30
DAILY AVERAGES
Total Assets $838,057 $787,200 $753,018 $712,988 $677,272
Interest-Earning Assets 792,254 737,382 711,759 677,626 642,566
Securities Available for Sale 148,274 205,197 194,429 167,197 ---
Securities Held to Maturity 115,043 42,989 38,019 33,813 157,338
Loans, Net of Unearned Income 526,311 474,216 456,393 445,614 462,413
Allowance for Loan Losses 8,203 8,279 8,839 9,158 8,068
Deposits 704,661 697,337 665,579 632,361 601,214
Interest-Bearing Liabilities 679,021 639,314 615,062 590,709 565,349
Shareholders' Equity Tier 1 66,874 61,317 55,529 49,804 46,371
Shareholders' Equity GAAP 62,279 55,777 55,529 49,804 46,371
</TABLE>
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data and Ratios) Ended December 31
----------------------------------------------------------------------
AT YEAR END 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Assets $895,801 $794,957 $774,193 $743,590 $691,228
Interest-Earning Assets 850,600 741,130 726,559 703,065 653,572
Securities Available for Sale 184,169 119,029 202,283 184,538 ---
Securities Held to Maturity 97,992 121,779 40,921 34,335 178,985
Loans, Net of Unearned Income 565,784 499,751 449,411 444,631 451,617
Allowance for Loan Losses 8,076 8,191 8,351 8,610 8,559
Deposits 700,513 704,570 679,714 655,121 606,831
Interest-Bearing Liabilities 717,514 645,131 627,145 607,872 575,577
Shareholders' Equity Tier I 76,779 59,640 57,124 51,729 46,004
Shareholders' Equity GAAP 75,717 51,491 57,124 51,729 46,004
RATIOS
Return on Average Assets 1.28% .52% .91% 1.00% .44%
Return on Average Shareholders' Equity 17.24 7.33 12.39 14.31 6.44
Average Shareholders' Equity
to Average Assets 7.43 7.09 7.37 6.99 6.85
Efficiency Ratio 61.35 64.78 64.26 65.35 67.42
Net Interest Margin 4.84 4.81 4.72 4.60 4.23
CREDIT QUALITY RATIOS
Allowance for Loan Losses to Nonperforming
Loans 153.65% 185.48% 198.31% 122.48% 69.84%
Allowance for Loan Losses to Nonperforming
Assets 115.59 117.64 89.97 66.29 54.29
Allowance for Loan Losses to Year-End Loans,
Net of Unearned Income 1.43 1.64 1.86 1.94 1.90
Net Charge-Offs to Average Loans, Net of
Unearned Income .27 .63 .36 .53 .79
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
1995 VS 1994
OVERVIEW
MainStreet BankGroup Incorporated reported earnings of $10.7 million,
or $1.29 per share on a fully diluted basis for 1995 compared to $4.1 million,
or $.53 per share on a fully diluted basis, for 1994. During 1994 the
Corporation's financial results were impacted by actions taken to restructure
the balance sheet though security sales, an additional loan loss provision in
order to maintain adequate loan loss reserve coverage and certain other less
significant anomalies. Excluding these items, MainStreet's earnings would have
been approximately $8.3 million in 1994. Return on average assets was 1.28% in
1995 compared with .52% in 1994. Return on average shareholders' equity was
17.24% in 1995 and 7.33% in 1994. Net interest income rose in 1995 driven by a
higher level of earning assets. Average earning assets grew $55 million of which
$52 million was related to loan volume. Strong loan demand contributed
positively to the net interest margin funded mainly by higher costing deposit
liabilities and other sources of borrowed funds and, in part, by an increase in
average non-interest bearing deposits of $5 million. Late in the second quarter
and continuing throughout the remainder of 1995, the Corporation invested in
adjustable rate collateralized mortgage obligations (CMO's) funded by repurchase
agreements which also added to the net interest margin. Consumers continued to
shift their deposits from interest checking, money market, and savings accounts
into higher interest paying time deposit accounts. The provision for loan losses
in 1995 declined $1.5 million or 53.3% in comparison to 1994. This decline can
be attributed to increased credit quality driven by new policies and procedures
for commercial lending. Noninterest income, excluding securities gains (losses),
was $7.9 million, an increase of 15.6% over 1994 levels. During 1995, the
Corporation implemented additional service charges on deposit accounts along
with increased rates on existing charges. Noninterest expense for 1995 was $28.8
million and relatively stable when compared to the $28.7 million in 1994. During
the third quarter of 1995, the Federal Deposit Insurance Corporation (FDIC)
determined the Bank Insurance Fund (BIF) was fully recapitalized. As a result,
the banks received a refund of their second and third quarter FDIC assessments.
During the fourth quarter, BIF assessment rates for 1996 were reduced to the
minimum annual statutory requirement. Also, during the fourth quarter, the
Corporation called for redemption all of its outstanding 7% Convertible
Subordinated Debentures for common stock. This reduced long-term debt by
approximately $6.2 million with a corresponding increase in total shareholders'
equity. Income tax expense was $4.4 million in 1995 compared to ($.2) in 1994.
The previously mentioned restructuring of the balance sheet was the main cause
of the tax position in 1994. The 1994 rate was also attributable to a reduction
in expense of approximately $600 thousand. This was due to an agreement, during
the second quarter of 1994, that BankGroup entered into with the Internal
Revenue Service which settled a matter associated with the tax accounting for
core deposit intangibles.
STATEMENT OF INCOME
NET INTEREST INCOME
Net interest income, the difference between total interest income and
total interest expense, is the Corporation's principal source of earnings. The
amount of net interest income is determined by the volume of interest-earning
assets, the level of rates earned on those assets and the cost of supporting
funds. The difference between rates earned on interest-earning assets (with an
adjustment made to tax-exempt income to provide comparability with taxable
income) and the cost of supporting funds is measured by the net interest margin.
The distribution of assets, liabilities, and shareholders' equity for
the last three years, along with the related levels of fully taxable-equivalent
interest income and expense, is presented on Page 6 of this report. The
variances in interest income and expense caused by differences in average
balances and rates are shown on Page 7 of this report.
The general level of interest rates declined in the second half of 1995
as the Federal Reserve eased monetary policy. The prime rate decreased in tandem
with the drop in short-term interest rates, maintaining a 300 basis point spread
between prime and federal funds rate. The impact on the Corporation's net
interest margin was favorable, rising 3 basis points to 4.84% for 1995 compared
to the 4.81% achieved in 1994. Average earning assets increased $54.9 million,
or 7.44%, with higher yielding loans accounting for $52.1 million of the total
growth. While the overall cost of interest-bearing liabilities increased, due
largely to the upward repricing of time deposits generated during the low rate
cycle of 1992 and 1993, a higher percentage of earning assets were funded by
noninterest-bearing liabilities. The combination of an increasing net interest
margin, a more profitable asset mix and growth in earning assets in 1995
generated an increase in net interest income of $3.0 million, or approximately
9%.
PROVISION FOR LOAN LOSSES
A provision for loan losses is charged to earnings for the purpose of
establishing an allowance for loan losses. Losses are, in turn, charged to this
allowance rather than being reported as a direct expense. In 1995, $1.3 million
was expensed as a loan loss provision, compared with $2.8 million in 1994, a
reduction of $1.5 million, or 53.3%. Net loan charge-offs were $1.4 million
compared with $3.0 million in 1994. The ratio of charge-offs to average loans,
net of unearned income, for 1995 was .27% compared to 1994's level of .63%. The
amount of the allowance for loan losses is established based on a continual
review of the overall quality of the loan portfolio. In this analysis,
consideration is given to nonaccrual, past due and other problem loans,
historical loan loss experience and the growth and mix of the loan portfolio.
Current and projected economic conditions are also variables that must be
considered in establishing the allowance. At year-end 1995, the ratio of the
allowance to loans was 1.43% compared with the 1.64% at December 31, 1994. The
allowance for loan losses at December 31, 1995 represented 153.65% of
nonperforming loans, compared with 185.48% at December 31, 1994. The allowance
for loan losses is evaluated on a quarterly basis and was considered adequate at
December 31, 1995. A discussion concerning credit quality is included in the
"Loans and Credit Quality" section of this discussion.
NONINTEREST INCOME
Noninterest income, excluding gains or losses on securities
transactions, totaled $7.9 million in 1995 compared with $6.9 million in 1994,
an increase of 15.6%. Trust income increased $407 thousand, or 20.4% over 1994
levels due to increased business development and an increased fee structure.
Service charges on deposit accounts totaled $2.4 million, increasing 15.0% over
1994 levels. During 1995, the Corporation implemented additional service charges
on deposit accounts along with increased rates on existing charges. Other
noninterest income amounted to $3.1 million in 1995 compared to $2.8 million in
1994. This rise was due to increases in card services income, insurance
commissions, discount income, and other small accounts.
INVESTMENT SECURITIES GAINS (LOSSES)
Securities gains were $46 thousand in 1995 compared to losses of $5.7
million in 1994. During the fourth quarter of 1994, management restructured the
Corporation's balance sheet, through the sale of that portion of collateralized
mortgage obligations (securities) most sensitive to a rising rate environment.
This action resulted in an after-tax charge to earnings of approximately $4.0
million.
NONINTEREST EXPENSE
Total noninterest expenses in 1995 were $28.8 million and stable with
1994 levels of $28.7 million. Salaries expense was $11.7 million in 1995
compared to $10.8 million in 1994, an increase of 8.4%. Part of this is
attributable to staffing of key Holding Company positions in the latter part of
1994. Also, the Corporation accrued an estimate for separation costs associated
with the consolidation of certain back office activities at the holding company
level in accordance with its out-placement policy, which impacted total salary
and benefit costs for 1995. Full time equivalent employees totaled 440 at
year-end 1995 compared with 485 at year-end 1994. The remainder of the increase
was due to normal salary increases. Employee benefit costs totaled $4.0 million
in 1995 up 9.89% in comparison to 1994. These increases were due to rises in
pension expense due to a new defined benefit plan along with a matching 401-K
plan implemented by the Corporation. Increases in the stock price which affects
the compensation expense accrued for stock options outstanding also contributed
to the rise in 1995 expense.
Net occupancy expense experienced a $70 thousand decrease in 1995 in
comparison to 1994. Equipment costs were $3.2 million at year-end 1995 compared
to $2.8 million in 1994, an increase of 12.7%. During 1995, the Corporation
invested in new technology and equipment to enhance our capabilities to more
efficiently respond to our customers. A new mainframe computer was installed and
high speed data communication lines to each affiliate bank which has increased
our speed of processing along with positioning us for growth and expansion. FDIC
insurance expense dropped from $1.6 million in 1994 to $870 thousand in 1995 due
to the refund received during the third quarter of 1995 and the reduced
assessment rate for the remainder of 1995. FDIC insurance expenses for 1996 will
be reduced further by a significant amount as the Corporation's subsidiary banks
accrue to the minimum annual statutory requirement.
Other noninterest expenses were $7.8 million for 1995 compared to $8.5
million for 1994, a decline of 8.5%. The Corporation concentrated on its
processing activities during 1995 and continued to consolidate functions which
positively impacted noninterest expense. This can also be seen in the decline of
the efficiency ratio to 61.35% from 64.78% in 1994. The efficiency ratio is a
measure of on-going operating expenses as they relate to tax-equivalent net
interest income and noninterest income. All this was achieved while at the
same time three of the bank subsidiaries moved from national to state bank
charters.
PROVISION FOR INCOME TAXES
Current income tax expense increased in 1995, primarily due to the
settlement with the Internal Revenue Service regarding tax treatment of core
deposit intangibles and the tax benefit derived from realized losses on the
investment portfolio that occurred in 1994. Income tax expense amounted to $4.4
million in 1995, compared to $154 thousand income tax benefit in 1994, and $2.6
million income tax expense in 1993. The Company's effective tax rate was 29.7%
in 1995, (3.9%) in 1994, and 27.7% in 1993.
Effective January 1, 1994, BankGroup adopted SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires
that securities be classified into three categories which are held-to-maturity,
available-for-sale and trading securities. BankGroup has securities in the
held-to-maturity portfolio and the available-for-sale portfolio. Debt and equity
securities in the available-for-sale category are to be reported at fair value
with unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity, net of the related deferred tax
effect.
BALANCE SHEET
INVESTMENT PORTFOLIO
Investments, including securities available for sale and securities
held to maturity totaled $282.2 million on December 31, 1995, compared to $240.8
million the prior year. The increase occurred in the available for sale position
and was comprised principally of adjustable rate Collateralized Mortgage
Obligations (CMO's) funded with floating rate debt of the same index and
repricing frequency. During fourth quarter of 1995, the Financial Accounting
Standards Board allowed financial institutions a one time opportunity to
restructure their investment portfolios under the designations of SFAS No. 115.
Management took advantage of this opportunity by redesignating $15.8 million of
"held to maturity" as "available for sale" without any penalty or tainting of
the remaining "held to maturity" portfolio. As of December 31, 1995, 65.3% of
the Corporation's investment portfolio was classified in the "available for
sale" category, with the remaining 34.7% of investment securities classified as
"held to maturity." This distribution allows more flexibility in the management
of interest rate risk, credit, liquidity and capital adequacy. The maturity
distribution of all securities and average taxable equivalent yields as of
December 31, 1995, are shown on Pages 7 and 8 of this report.
All CMO's are classified as "available for sale." At least on a
quarterly basis, and more often in times of heightened interest rate volatility,
these securities are tested to monitor their sensitivity to movements in
interest rates and the effects of prepayments on their market price. This review
is conducted utilizing the "FFIEC High Risk Test", under which securities are
analyzed on the assumption of an immediate and parallel shift of 300 basis
points in the yield curve. At December 31, 1995, the Corporation's CMO portfolio
has an average life of 9.17 years. Were rates to rise or fall by 300 basis
points, the average life of the portfolio would extend to 9.36 years, or decline
to 8.48 years, respectively. The market price of the CMO portfolio would decline
by approximately 12.01% or increase by approximately 9.11% were rates to rise or
fall by 300 basis points, respectively. The overwhelming majority of the
Corporation's CMO portfolio are issued by the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation and are backed by
collateral issued by these agencies. Management believes there is no material
credit risk inherent in these investments.
LOANS AND CREDIT QUALITY
Average loans, net of unearned income, increased from $474.2 million in
1994 to $526.3 million in 1995, up 11%. Average gross loan categories increased
as follows: Commercial up 10.2%; Consumer up 10.5%; Real Estate up 14.2% and
Credit Card up 15.5%. Credit Card loans outstanding at the end of 1995 of $4.1
million, up from $3.5 million in 1994 are low in comparison to other loan
categories.
Declining interest rates during 1995 prompted double digit percentage
increases in consumer and mortgage loan volume. The majority of long-term fixed
rate mortgages are sold in the secondary market. Those retained in the portfolio
are generally either variable rate instruments or carry three to five year
balloon maturities.
Credit risk management is centralized providing more uniform levels of
standardization and underwriting among BankGroup affiliates. The Corporation
manages credit risk through a variety of methods including loan grading,
industry type, and underwriting collateral. A formal loan review function
provides an independent assessment of credit ratings, credit quality, and credit
process. Management believes that early detection of credit problems through
regular reviews of borrowers' collateral and financial performance is an
important factor in overall credit quality.
Although there were no large concentrations of credit to any particular
industry, the economic trends of the areas served by BankGroup affiliates are
influenced by the significant industries within the region including textiles,
furniture, pre-built housing and agriculture. Virtually all of our business
activity is with customers located in the central and western part of southern
Virginia. The ultimate collectibility of the Banks' loan portfolios and the
recovery of the carrying amounts of repossessed property are susceptible to
changes in the market conditions of this geographic region. The Commercial
portfolio is diversified with no significant concentrations of credit at
December 31, 1995. Acquisition and development construction loans account for
$24.5 million and $26.6 million of the commercial portfolio at December 31, 1995
and 1994, respectively. In addition, other commercial loans secured by real
estate totaled $86.7 million and $63.1 million at December 31, 1995 and 1994,
respectively. The real estate loan portfolio consists almost entirely of 1-4
family residential property. MainStreet BankGroup was the creditor for
approximately $88.3 million and $74.4 million at December 31, 1995 and 1994,
respectively, of consumer loans for automobiles and mobile homes generated
directly or purchased from established dealers (indirect). These loans are
generally collateralized by the related property and many are either endorsed or
subject to mandatory dealer repurchase agreements.
During 1995, the Corporation's ratio of net charge-offs to average
loans was .27% compared with .63% in 1994. At December 31, 1995, the allowance
for loan losses to nonperforming assets was approximately 115.6% compared with
117.6% last year. The allowance for loan losses to nonperforming loans ratio was
153.7% at year end 1995, compared to 185.5% the previous year. On December 31,
1995, the allowance for loan losses to loans ratio was 1.43% compared with 1.64%
in 1994. The Corporation believes that the allowance for loan losses of $8.1
million provides adequate coverage of potential loss exposure in the credit
portfolio at December 31, 1995.
OTHER ASSETS
Other assets at December 31, 1995 were $15.2 million compared to $23.6
million at December 31, 1994, a decline of 35.5%. In 1993, a subsidiary bank,
Piedmont Trust Bank, (PTB) experienced a Trust Department defalcation involving
misappropriation of customer funds by a former Trust Department employee at PTB.
PTB filed a lawsuit against its insurance carriers to collect on a disputed
claim for $5.5 million arising out of the defalcation. At December 31, 1994, PTB
had other assets of $3.8 million on its balance sheet representing a receivable
from insurance carriers. This dispute was settled on February 28, 1995 and final
settlement payments on the agreement were received in accordance with the
agreement in April, 1995.
Deferred taxes on securities were $.5 million at December 31, 1995 a
decline of $3.7 million, or 87.0%, from December 31, 1994 figures. This is the
related tax effect of the unrealized losses in the securities portfolio and is
netted against these losses in the shareholders' equity section of the balance
sheet. Deferred taxes, other than securities, decreased $.8 million, or 16.2%,
in 1995 compared to 1994.
DEPOSITS
Total deposits at December 31, 1995 were $700.5 million compared to
$704.6 million at December 31, 1994. The Corporation continued to experience a
shift in deposit mix from savings deposits to time deposits, a trend begun the
previous year. From year-end 1994 to year-end 1995, time deposits increased
$46.5 million, while savings account balances declined $37.8 million. Interest
checking and money market accounts decreased by $16.8 million. Management
attributes the shift in deposit mix to the generally higher interest rate
environment of 1994 and early 1995, attracting deposit customers into
longer-term, higher yielding time deposits.
Comparing average deposit balances to the previous year, the
Corporation experienced an increase of $7.3 million, with $5.2 million of the
increase occurring in noninterest-bearing demand deposit accounts. Average time
deposits were up $53.7 million, while savings, interest-bearing checking and
money market accounts decreased $51.5 million.
OTHER INTEREST-BEARING LIABILITIES
Short-term debt includes Federal funds purchased, securities sold under
repurchase agreements, Treasury tax and loan notes and Federal Home Loan Bank
advances. Total short-term debt at year-end 1995 was $111.7 million, compared to
$23.2 million at December 31, 1994. Long-term debt was in the form of a seven
year principal reducing credit (Federal Home Loan Bank advance) acquired in 1995
as an offset to specific fixed rate lending at one affiliate bank. As of
December 31, 1995, long-term debt totaled $929 thousand.
7% CONVERTIBLE SUBORDINATED DEBENTURES
On September 12, 1995, MainStreet BankGroup Incorporated called for the
redemption, on October 13, 1995, of all of its outstanding 7% Convertible
Subordinated Debentures Due 2011 (the "debentures"). At such date, $8,043,000
principal amount of Debentures were outstanding. The redemption price was
$1,014.00 plus accrued interest of $34.61 from April 15, 1995 to the redemption
date, for a total of $1,048.61 for each $1,000 of principal amount of
Debentures. No interest would accrue on the Debentures from and after October
13, 1995 and holders of outstanding Debentures would not have any rights as such
holders other than the right to receive the redemption price, without additional
interest, upon surrender of their Debentures.
The Debentures were convertible at any time on and prior to October 5,
1995 into shares of the Company's Common Stock at a conversion rate of 109.89
shares of common stock for each $1,000 principal amount of Debentures
(equivalent to a conversion price of $9.10 per share). Holders converting
Debentures were not entitled to receive interest from April 15, 1995.
The Corporation also entered into a Standby Agreement with Scott and
Stringfellow, Incorporated, a broker/dealer headquartered in Richmond, Virginia
providing that Debentures not converted by the holders would, in effect, be
converted by Scott and Stringfellow and the resulting Common Stock sold in a
public offering. All debentures were converted into 883,678 shares of the
Corporation's Common Stock.
The Corporation registered Common Stock offered in conversion of the
Debentures with the Securities and Exchange Commission (Registration No.
33-62557).
SHAREHOLDERS' EQUITY
Total shareholders' equity, excluding unrealized losses on securities,
increased by $17.1 million in 1995 to $76.8 million at year-end. Dividends per
share for 1995 were $.39 compared to $.33 for 1994. At year-end 1995, core
capital (Tier 1) was 8.51% of assets against 7.43% at December 31, 1994. Total
capital to risk based assets was 14.78% versus 14.32% the prior year. Our
capital position remains strong with ratios substantially above regulatory
prescribed minimums.
Financial reporting in accordance with Statement of Financial Account
Standards (SFAS) No. 115 requires an adjustment to shareholders' equity for net
unrealized losses in the "available-for-sale" securities portfolio. This
adjustment at December 31, 1995 and 1994, was $1.1 million and $8.1 million,
respectively. After the adjustment, total shareholders' equity was $75.7 million
and $51.5 million at December 31, 1995 and 1994, respectively.
ASSET/LIABILITY MANAGEMENT
The role of the asset/liability management function within the
Corporation is to maximize profitability within established guidelines for
liquidity, capital adequacy and interest rate risk. Management seeks to minimize
the risks to earnings and equity associated with movements in market interest
rates. Measurement and monitoring of liquidity, capital adequacy and interest
rate risk are performed centrally for the Corporation and the subsidiary banks,
and reported relative to guidelines established by management, the Boards of
Directors and regulators.
Interest rate sensitivity is traditionally measured in three ways: the
difference, or gap, between interest sensitive earning assets and interest
sensitive bearing liabilities, the resultant change in net interest income due
to market interest rate fluctuations, and the effect of interest rate movements
on the market value of assets, liabilities and capital. Because of the
shortcomings of gap reporting, the Corporation also utilizes an asset/liability
management simulation model to measure potential earnings and capital risk. The
simulation model, because of its dynamic nature, can capture the effects of
future balance sheet trends, differing patterns of rate movement and changing
relationships between rates (basis risk). Additionally, the model captures the
impact of varying levels of prepayment risk on certain loan and investment
categories relative to movements in market rates. While most assets and
liabilities reprice either at maturity or in accordance with their contractual
terms, several balance sheet components demonstrate characteristics that require
adjustments to more accurately reflect their repricing behavior. Assumptions
based on historical pricing relationships and anticipated market are made to
certain core deposits to reflect the elasticity of the changes in their interest
rates relative to changes in market rates. Year-end 1995 simulations which
forecast changes in net interest income that may result from movements in
interest rates over the forward twelve month time horizon, indicate that net
interest income would increase by approximately 1.04% given a parallel rise of
300 basis points in market rates and decrease of approximately 3.11% given a
decline of 300 basis points.
A longer term measure of interest rate risk exposure is market value of
portfolio equity, which simulates the magnitude of change in the market values
of assets, liabilities and capital resulting from movements in interest rates.
While the Corporation utilizes its asset/liability management simulation model
to measure shifts in market value, no specific policy limits have been
established. The process of developing an understanding of all the issues raised
in the measurement and interpretation of this risk is still evolving. The
Corporation separately utilized outside sources to measure the effects of rising
and declining rates on our mortgage-backed securities portfolios, with respect
to both market value and prepayment assumptions. According to these sources, the
market value of these securities would decrease by approximately 11.58% with an
average life extension of .2 years, given a 300 basis point rise in market
rates, and increase by approximately 8.96% with an average life decrease of 1.2
years under a 300 basis point decrease in market rates.
Management believes that measurement of interest rate risk based on the
one year impact on net interest income and the longer term effect on portfolio
equity are complimentary, and should be used together to provide a more complete
picture than would be provided by either perspective alone.
The measurement of liquidity is performed by monitoring ratios that
indicate the level of liquid assets relative to liabilities, the dependence on
potentially volatile funding sources, and the relationship of loans to deposits.
While relying on core deposit relationships as the basis of liquidity, increased
loan demand over the year has resulted in the Corporation seeking alternative
sources of liquidity and utilizing existing sources to a higher level with
established liquidity guidelines. It is anticipated this trend will continue in
1996. To meet future liquidity needs, the Corporation and its subsidiary banks
have expanded funding sources, primarily with the Federal Home Loan Bank, and
continue to seek other alternative funding sources.
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.
1994 VS. 1993
OVERVIEW
Net income for 1994 was $4.1 million or $.54 per primary share,
compared with $6.9 million or $.93 per primary share for the year 1993. During
the fourth quarter, management restructured the Corporation's balance sheet,
through the sale of that portion of the holdings of collateralized mortgage
obligations (securities) most sensitive to a continued rising rate environment,
which resulted in an after-tax charge of approximately $4.0 million.
Additionally, a pre-tax increase of $1.5 million in loan loss provision was
recorded during 1994 in order to cover net loan charge-offs occurring in the
fourth quarter and to maintain adequate reserve coverages. Net interest income
continued to improve throughout 1994, driven by a higher level of earning assets
and a widening of 9 basis points in the net interest margin. During 1994, the
Corporation's balance sheet was slightly asset sensitive which resulted in a
favorable impact as a result of the rising interest rate environment through the
year. The higher level of service charges, fees and other income in 1994 was
partially distorted by a pre-tax $500 thousand recovery from previous litigation
settled on more favorable terms than anticipated for the Corporation. Although
noninterest expense levels benefited in 1994 through the elimination of the loss
contingency accrued for in 1993, significant legal, audit and other professional
fees were incurred as a result of the pending Trust Department litigation. In
addition, during 1994 the Commonwealth of Virginia clarified its instructions
related to the calculation of the Virginia Bank Franchise Tax. As was the case
with many other financial institutions in the state of Virginia, this
clarification resulted in an additional franchise tax assessment for the years
1992, 1993 and 1994 and resulted in a pre-tax increase in noninterest expenses
of approximately $300 thousand. Other volume related costs, primarily credit
card and outside processing, also continued to increase during 1994 over 1993
levels. During the second quarter of 1994, BankGroup entered into an agreement
with the Internal Revenue Service which settled a matter associated with the tax
accounting for core deposit intangibles. This settlement reduced book tax
expense by approximately $600 thousand. Adjusting for the impact of the balance
sheet restructuring, the additional loan loss provision and the other less
significant anomalies identified above, BankGroup's core earnings for 1994 would
have been approximately $8.3 million, an increase of 21 percent from 1993.
STATEMENT OF INCOME
NET INTEREST INCOME
Net interest income, the difference between total interest income and
total interest expense, is our principal source of earnings. The amount of net
interest income is determined by the volume of interest-earning assets, the
level of rates earned on those assets and the cost of supporting funds. The
difference between rates earned on interest-earning assets (with an adjustment
made to tax-exempt income to provide comparability with taxable income) and the
cost of supporting funds is measured by the net interest margin.
The distribution of assets, liabilities, and shareholders' equity are
detailed on Page 6 of this report for the last three years, along with the
related levels of fully taxable-equivalent interest income and expense. The
variances in interest income and expense caused by differences in average
balances and rates are shown on Page 7 of this report.
The general level of interest rates increased in 1994 as we saw the
Federal Reserve tighten monetary policy by way of 6 increases in both the
discount rate and the federal funds rate. We also saw the prime rate increase in
tandem with the increase in short-term interest rates, maintaining a 300 basis
point spread between Prime and Fed Funds. The impact on our net interest margin
was favorable, with approximately 30% of our loan portfolio repriceable within
30 days based on prime rate. In 1994, net interest margin increased by an
additional 9 basis points over the 1993 level. We also experienced a $25.6
million increase in average earning assets, of which, higher yielding loan
volume accounted for $25.4 million of the increase. Additionally, funding was
derived from a higher percentage of noninterest-bearing liabilities. The
combination of an increasing net interest margin, a more profitable asset mix
and growth in earning assets in 1994 generated an increase in net interest
income of $1.7 million, or approximately 5%.
PROVISION FOR LOAN LOSSES
In 1994, $2.8 million was expensed as a loan loss provision, compared
with $1.4 million in 1993. Net loan charge-offs were $3.0 million compared with
$1.6 million in 1993. The ratio of charge-offs to average loans, net of unearned
income, for 1994 was .63% compared to 1993's level of .36%. At year-end 1994,
the ratio of the allowance to loans was 1.64%, compared with the 1.86% at
December 31, 1993. The allowance for loan losses at December 31, 1994
represented 185.5% of nonperforming loans, compared with 198.3% at December 31,
1993. A discussion concerning credit quality is included in the "Loans and
Credit Quality" section of this discussion.
NONINTEREST INCOME
Noninterest income, excluding gains or losses on securities
transactions, totaled $6.9 million in 1994 compared with $6.1 million in 1993.
During 1994 BankGroup received a settlement of approximately $500 thousand
relating to previous litigation which was recorded in other income. Trust fees
declined approximately $144 thousand during the year totaling almost $2.0
million. Adverse publicity involving the Trust Department defalcation and the
internal focus by management to strengthen internal controls in this area, which
left little time for business development, were the principal reasons for this
decline. Service charges on deposit accounts totaled $2.1 million, increasing
8.0% from 1993. Other noninterest income which included the previously mentioned
litigation settlement in 1994 amounted to $2.8 million compared to $2.0 million
in 1993.
NONINTEREST EXPENSE
Total noninterest expenses were $28.7 million, up 1.62% over 1993,
which followed a $4.2 million or 17.23% increase over 1992. The increase in 1993
was primarily due to a provision for loss contingencies. The loss contingencies
were related to matters involving a Trust Department diversion, a lawsuit
settlement, and a bond loss, all of which involved subsidiary Piedmont Trust
Bank. Charges for these three items totaled $2.7 million ($1.8 million after
tax). Noninterest expenses were dramatically affected by this provision, as well
as by legal and audit fees related to this matter. As of February 28, 1995, all
of these matters have been resolved and no additional provisions were required
during 1995.
Salary and employee benefit expenses totaled $14.4 million, a 10% rise
over year ago levels. The 1994 rise was mainly attributable to the
implementation of a new corporate salary administration program, additional
staffing attributable to the implementation of the Credit Administration
function and the staffing of other key Holding Company positions. The efficiency
ratio is a measure of on-going operating expenses as they relate to
tax-equivalent net interest income and non-interest income. Excluding
nonrecurring charges, our efficiency ratio for 1994 was 64.78% compared to
64.26% in 1993. The efficiency ratio has remained relatively level over the last
three years, as rising net interest income offset rising noninterest expenses
levels. Management intends to focus on the efficiency ratio as a key to
productivity measurement.
Occupancy expense over the last two years experienced an $86 thousand
increase in 1994 over 1993 levels. Other noninterest expenses increased $1.6
million, or 23.4% during 1994. Although the Corporation accrued for the
previously mentioned loss contingency during 1993, significant legal, audit and
professional fees associated with the preparation for this pending litigation
were incurred and accrued for during 1994. Other volume related costs, primarily
credit card and outside processing continued to increase during 1994. Federal
deposit insurance increased by $103 thousand in 1994 over 1993 levels.
INVESTMENT SECURITIES GAINS (LOSSES)
Management's decision to restructure the investment portfolio through
the sale of $30 million of collateralized mortgage obligations resulted in a
securities loss of $5.7 million for 1994. This figure compares to a gain of $.3
million in 1993. Along with the rise in interest rates in 1994, the market value
of our securities portfolio fell, thus increasing the unrealized and realized
losses on our portfolio.
PROVISION FOR INCOME TAXES
Current income tax expense decreased in 1994, primarily due to the
settlement with the Internal Revenue Service regarding tax treatment of core
deposit intangibles and the tax benefit derived from realized losses on the
investment portfolio. Due to the aforementioned issues, there was an income tax
benefit in the amount of $154 thousand in 1994, compared to $2.6 million income
tax expense in 1993. The Company's effective tax rate was 27.7% in 1993.
Effective January 1, 1993, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
causing a $75 thousand increase in income, which is reported in the consolidated
statement of income for the twelve months ended December 31, 1993 as a
cumulative effect of change in the method of accounting for income taxes. Prior
periods' financial statements have not been restated to retroactively apply the
provisions of SFAS No. 109.
Effective January 1, 1994, BankGroup adopted FAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires
that securities be classified into three categories which are held-to-maturity,
available-for-sale and trading securities. BankGroup has securities in the
held-to-maturity portfolio and the available-for-sale portfolio. Debt and equity
securities in the available-for-sale category are to be reported at fair value
with unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity, net of the related deferred tax
effect.
At December 31, 1994, BankGroup had a net deferred tax asset of
approximately $9.0 million, $4.2 million of which relates to unrealized losses
on securities accounted for in accordance with SFAS No. 115.
BALANCE SHEET
INVESTMENT PORTFOLIO
Investments, including securities available for sale and securities
held to maturity totaled $240.8 million on December 31, 1994, compared to $243.2
million the prior year. The decrease was the result of moderate growth in loan
volume, coupled with slightly less growth in deposits. From year-end 1993 to
year-end 1994, average loans, net of unearned income, grew at a rate of 5.7%,
whereas average deposits grew 4.8%. During the fourth quarter of 1994, we
restructured our investment portfolio resulting in a net reduction of $13.6
million in the book value of securities. We sold $31.4 million of CMO's/REMIC's
with a book value of $37.4 million resulting in a $6.0 million before tax loss.
Utilizing a portion of the proceeds, we purchased $23.8 million of U.S. agency
debentures and mortgage backed securities.
With the implementation on January 1, 1994 of SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," our investments have
been placed in two of the three categories as defined in that statement. As of
December 31, 1994, 50.6% of our investments were classified in the
"held-to-maturity" category. The remainder of our investment portfolio, or
49.4%, were "available-for-sale" thus giving us the ability to effectively
manage interest rate risk, credit, liquidity and capital positions. The
accounting treatment for SFAS No. 115 requires that the unrealized gain or loss
positions in the "available-for-sale" category be reported as a separate
component of shareholders' equity, net of any related income tax effect. On
December 31, 1994, the unrealized losses, net of applicable deferred income
taxes, was $8.1 million.
All Collateralized Mortgage Obligations (CMO's) are classified as
"available-for-sale." At least on a quarterly basis, these securities are tested
to monitor their sensitivity to movements in interest rates and the effects of
prepayments on their market price. This review is conducted utilizing the "FFIEC
high risk test," whereby securities are analyzed on the assumption of an
immediate and parallel shift of 300 basis points in the yield curve. On December
31, 1994, our CMO portfolio had an average life of 6.42 years. If rates were to
rise or fall by 300 basis points, the average life of the portfolio would extend
to 6.66 years, or fall to 3.88 years, respectively. The market price of that
portfolio would experience an approximate 12% decline or 14% increase if rates
were to rise or fall by 300 basis points, respectively. Most of our CMO's are
issued by the Federal National Mortgage Association or the Federal Home Loan
Mortgage Corporation and are backed by collateral issued by these agencies. We
feel there is no material credit risk inherent in these investments.
LOANS AND CREDIT QUALITY
Average gross loans, net of unearned income, increased from $456.4
million in 1993 to $474.2 million in 1994, up 3.9%. The breakdown of
increases/decreases by loan categories are as follows: Commercial, up 11.1%;
Consumer down 1.17%; Real Estate, up 3.8%; and Credit Card up 24.7%. While
credit card volume outstanding is low in comparison to other loan categories,
average balances increased from $2.8 million in 1993 to $3.5 million in 1994.
Higher interest rates dampened the enthusiasm of home buyers, resulting
in an overall drop in mortgage loan volume. While the majority of long-term
fixed rate mortgages are sold in the secondary market, the mortgage loans being
retained in the portfolio are generally either variable rate instruments or
three to five year balloon balance loans.
During 1994 BankGroup reorganized the credit administration process.
Credit risk management was centralized and staffing levels were increased.
Policies and procedures were rewritten to provide higher levels of
standardization and underwriting among BankGroup affiliates. The Corporation
manages credit risk through a variety of methods including loan grading, loan
type and underwriting. The loan review function provides an independent
assessment of credit ratings and credit quality. Management believes that early
detection of developing credit problems identified through regular reviews of
borrowers' collateral and financial performance is proving to be an important
factor in improving credit quality.
Although there were no large concentrations of credit to any particular
industry, the economic trends of the area are influenced by the significant
industries within the region including textiles, furniture, pre-built housing
and agriculture. Virtually all of our business activity is with customers
located in the central and western part of southern Virginia. The ultimate
collectibility of the bank's loan portfolios and the recovery of the carrying
amounts of repossessed property are susceptible to changes in the market
conditions of this geographic region. The Commercial portfolio is diversified
with no significant concentrations of credit at December 31, 1994. Acquisition
and development construction loans account for $26.6 million and $23.4 million
of the commercial portfolio at December 31, 1994 and 1993, respectively. In
addition, other commercial loans secured by real estate totaled $63.1 and $53.7
million at December 31, 1994 and 1993, respectively. The real estate loan
portfolio consists almost entirely of 1-4 family residential property.
MainStreet BankGroup was the creditor for approximately $74.4 million and $80.3
million at December 31, 1994 and 1993, respectively, of consumer loans for
automobiles and mobile homes generated directly or purchased from established
dealers (indirect). These loans are generally collateralized by the related
property and are either endorsed or subject to mandatory dealer repurchase
agreements.
During 1994, the Corporation's ratio of net charge-offs to average
loans was .63% compared with .36% in 1993. At December 31, 1994, the allowance
for loan losses to nonperforming assets was approximately 117.6% compared with
90.0% at December 31, 1993. The level of nonperforming assets declined from $9.3
million at year-end 1993 to $7.0 million at December 31, 1994. The allowance for
loan losses to nonperforming loans was 185.5% at year-end 1994, compared to
198.3% the previous year. On December 31, 1994, the allowance for loan losses to
loans was 1.64% compared with 1.86% in 1993. The Corporation believes that the
allowance for loan losses of $8.2 million provides adequate coverage of
potential loss exposure in the credit portfolio at December 31, 1994.
DEPOSITS
Total deposits at December 31, 1994, were $704.6 million compared to
$679.7 million at December 31, 1993. With the higher interest rate environment,
we saw a modest shift in deposit mix from savings deposits to CD's. From
year-end 1993 to year-end 1994, time deposits were up $27.6 million, while
savings accounts decreased $15.7 million. Interest checking and money market
accounts increased modestly by $3.1 million. During 1994, we experienced a shift
in deposit mix trends of the previous two years, which management attributes to
a function of the interest rate environment. With falling interest rates during
1992 and 1993, there was a shift from longer-term time deposits to shorter-term
savings deposits. The rising rate environment of 1994 attracted customers to
longer-term, higher yielding time deposits while shifting funds away from
shorter-term savings accounts.
In comparison of average deposit balances from the previous year, we
experienced an increase of $31.8 million, with $8.4 million of that increase
occurring in noninterest-bearing demand deposit accounts. Average time deposits
were up $11.2 million, while savings interest checking and money market accounts
increased $12.2 million.
OTHER INTEREST-BEARING LIABILITIES
Short-term debt includes federal funds purchased, securities sold under
repurchase agreements, Treasury tax and loan notes and other borrowed funds.
Total short-term debt at year-end 1994 was $23.2 million, compared to $20.0
million at December 31, 1993. Long-term debt was in the form of a convertible
debenture issued in 1986 for the purposes of a bank acquisition and other
general corporate purposes. As of December 31, 1994, long-term debt totaled $8.9
million, compared to $9.2 million the previous year.
SHAREHOLDERS' EQUITY
Total shareholders' equity, excluding unrealized losses on securities,
increased by $2.5 million in 1994 to $59.6 million at year end. Dividends per
share for 1994 were $.33 compared to $.29 for 1993. At year-end 1994, core
capital (Tier I) was 7.43% of assets against 7.38% at December 31, 1993. Total
capital to risk based assets was 14.32% versus 13.46% the prior year. Our
capital position remains strong with ratios substantially above regulatory
prescribed minimums.
As previously mentioned, financial reporting in accordance with SFAS
No. 115 requires an adjustment to shareholders' equity for net unrealized losses
in the "available-for-sale" securities portfolio. This adjustment as of December
31, 1994, was $8.1 million, bringing total shareholders' equity to $51.5
million.
<PAGE>
Item 8. Financial Statements and Supplementary Data
Report of Independent Accountants
To the Board of Directors and Shareholders MainStreet BankGroup Incorporated:
We have audited the accompanying consolidated balance sheet of MainStreet
BankGroup Incorporated and subsidiaries (formerly Piedmont BankGroup
Incorporated and subsidiaries) ("BankGroup" ) as of December 31, 1995 and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for the year then ended. These consolidated financial statements are
the responsibility of the BankGroup's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit. The consolidated financial statements of MainStreet BankGroup
Incorporated as of and for each of the two years in the period ended December
31, 1994 were audited by other auditors, whose report, dated January 20, 1995,
except for Note 21 as to which the date was February 28, 1995, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MainStreet BankGroup
Incorporated and subsidiaries as of December 31, 1995 and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
As discussed in Notes 3 and 5 to the consolidated financial statements, the
BankGroup changed its methods of accounting for certain securities and impaired
loans in 1994.
COOPERS & LYBRAND L.L.P.
Greensboro, North Carolina
January 19, 1996
<PAGE>
Independent Auditors' Report
To the Board of Directors and Shareholders
MainStreet BankGroup Incorporated:
We have audited the accompanying consolidated balance sheet of MainStreet
BankGroup Incorporated and subsidiaries (formerly Piedmont BankGroup
Incorporated and subsidiaries) (BankGroup) as of December 31, 1994, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the years in the two-year period ended December 31, 1994.
These consolidated financial statements are the responsibility of BankGroup's
management. Our responsibility is to express an opinion on these consolidated
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 audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MainStreet BankGroup
Incorporated and subsidiaries as of December 31, 1994, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
As discussed in Notes 1 and 3 to the consolidated financial statements,
BankGroup adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," on January 1, 1994. As discussed in Notes 1 and 5 to the
consolidated financial statements, BankGroup adopted the provisions of SFAS no.
114, "Accounting by Creditors for Impairment of Loan," as subsequently amended
by SFAS No. 118," Accounting by Creditor for Impairment of a Loan - Income
Recognition and Disclosures," on January 1, 1994.
KPMG PEAT MARWICK LLP
Roanoke, Virginia
January 20, 1995, except as to Note 21
which is as of February 28, 1995
<PAGE>
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN 000'S EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31
1995 1994
---- ----
<S> <C> <C>
ASSETS
Cash and Due From Banks $ 25,680 $ 24,680
Interest-Earning Deposits In Domestic Banks 875 50
Mortgage Loans Held for Sale 1,780 521
Securities Available for Sale (Approximate
Cost of $183,904 and $127,337
in 1995 and 1994, respectively) 184,169 119,029
Securities Held to Maturity (Approximate
Market Values of $102,484 and
$121,041 in 1995 and 1994, respectively)
Taxable 61,184 81,491
Nontaxable 36,808 40,288
-------- --------
97,992 121,779
Loans, Net of Unearned Income and Deferred Fees 565,784 499,751
Less: Allowance for Loan Losses (8,076) (8,191)
--------- --------
Loans, Net 557,708 491,560
Bank Premises and Equipment, Net 10,767 11,240
Other Real Estate Owned 1,583 2,452
Other Assets 15,247 23,646
-------- --------
TOTAL ASSETS $895,801 $794,957
======== ========
LIABILITIES
Deposits:
Demand Deposits (Noninterest-Bearing) $ 95,664 $ 91,570
Interest Checking Accounts 76,802 78,567
Savings Deposits 115,202 152,990
Money Market Investment Accounts 55,015 70,087
Time Deposits:
Certificates of Deposit $100,000 and Over 68,434 49,743
Other 289,396 261,613
-------- --------
Total Deposits 700,513 704,570
Short-Term Debt 111,736 23,213
Long-Term Debt 929 ---
7% Convertible Subordinated Debentures --- 8,918
Accrued Interest Payable 2,674 2,141
Accrued Loss Contingencies --- 1,341
Other Liabilities 4,232 3,283
-------- --------
TOTAL LIABILITIES 820,084 743,466
-------- --------
SHAREHOLDERS' EQUITY
Preferred Stock, $5 Par Value. Authorized 1,000,000 Shares;
None Outstanding --- ---
Common Stock, $5 Par Value. Authorized 20,000,000 Shares;
Issued and Outstanding 8,535,072 and 3,755,012 Shares in
1995 and 1994, respectively 42,675 18,775
Capital in Excess of Par 11,740 4,893
Retained Earnings 22,364 35,972
Unrealized Gains (Losses) on Securities, Net of Deferred
Income Tax Benefit of $.5 million and $4.2 million in 1995
and 1994, respectively (1,062) (8,149)
--------- --------
TOTAL SHAREHOLDERS' EQUITY 75,717 51,491
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $895,801 $794,957
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN 000'S EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Years Ended December 31
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans:
Taxable $50,780 $42,673 $42,291
Nontaxable 163 191 228
Interest on Mortgage Loans Held for Sale 144 514 ---
Interest and Dividends on Securities Available for Sale 9,689 13,108 12,329
Interest and Dividends on Securities Held to Maturity:
Taxable 5,705 244 174
Nontaxable 2,123 2,324 2,213
Other Interest Income 71 462 677
------- ------- -------
Total Interest Income 68,675 59,516 57,912
------- ------- -------
INTEREST EXPENSE
Deposits 27,662 23,980 24,006
Short-Term Debt 3,196 594 630
Long-Term Debt 63 --- ---
7% Convertible Subordinated Debentures 454 643 655
------- ------- -------
Total Interest Expense 31,375 25,217 25,291
------- ------- -------
Net Interest Income 37,300 34,299 32,621
Provision for Loan Losses 1,319 2,827 1,370
------- ------- -------
Net Interest Income After Provision for Loan Losses 35,981 31,472 31,251
------- ------- -------
NONINTEREST INCOME
Service Charges, Fees and Other 5,529 4,865 4,000
Trust Department Income 2,400 1,993 2,137
Securities Gains (Losses), Net 46 (5,683) 277
------- ------- -------
7,975 1,175 6,414
------- ------- -------
NONINTEREST EXPENSE
Salaries 11,669 10,769 9,694
Employee Benefits 4,035 3,672 3,482
Net Occupancy 1,265 1,335 1,249
Equipment 3,163 2,807 2,710
FDIC Assessment 870 1,588 1,485
Stationery and Supplies 755 647 651
Advertising 312 432 444
Provision for Loss Contingencies --- --- 2,713
Other 6,748 7,463 5,826
------- ------- -------
28,817 28,713 28,254
------- ------- -------
Income Before Income Taxes and Cumulative Effect of Change
in Accounting Principle 15,139 3,934 9,411
Income Tax Expense (Benefit) 4,399 (154) 2,605
------- ------- -------
Income Before Cumulative Effect of Change in Accounting
Principle 10,740 4,088 6,806
Cumulative Effect at January 1, 1993 of Change in Accounting
for Income Taxes --- --- 75
------- ------- -------
NET INCOME $10,740 $ 4,088 $ 6,881
======= ======= =======
Per Share:
Primary:
Income Before Cumulative Effect of Change in Accounting Principle $ 1.37 $ .54 $ .92
Cumulative Effect at January 1, 1993 of Change in Accounting for
Income Taxes --- --- $ .01
------ ------- -------
NET INCOME $ 1.37 $ .54 $ .93
======= ======= =======
Average Shares Outstanding 7,842 7,510 7,384
======= ======= =======
Fully Diluted:
Income Before Cumulative Effect of Change in Accounting Principle $ 1.29 $ .53 $ .86
Cumulative Effect at January 1, 1993 of Change in Accounting for
Income Taxes --- --- $ .01
------- ------- -------
NET INCOME $ 1.29 $ .53 $ .87
======= ======= =======
Average Shares Outstanding 8,548 8,516 8,414
======= ======= =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN 000'S EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
Unrealized
Gains
Common Capital In Retained (Losses) on
Stock Excess of Par Earnings Securities, Net Total
------ ------------- --------- ---------------- -----
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1993
Balance at January 1, 1993 $14,683 $ 3,709 $33,337 $ --- $51,729
Net Income --- --- 6,881 --- 6,881
Cash Dividends ($.29 Per Share) --- --- (2,170) --- (2,170)
Sale of 69,948 Shares Through Dividend
Reinvestment Plan and Stock Option Plan 175 522 --- --- 697
Stock Split Effected in the Form of a Stock
Dividend including cash paid in lieu of
fractional shares 3,690 --- (3,703) --- (13)
------- ------ ------- ------- -------
Balance at December 31, 1993 18,548 4,231 34,345 --- 57,124
YEAR ENDED DECEMBER 31, 1994
Cumulative effect of change in accounting
for securities at January 1, 1994, net
of deferred income tax expense of $1,110 --- --- --- 2,154 2,154
Net Income --- --- 4,088 --- 4,088
Cash Dividends ($.33 Per Share) --- --- (2,461) --- (2,461)
Sale of 52,566 Shares Through Dividend
Reinvestment Plan and Stock Option Plan 131 400 --- --- 531
Stock Grants Awarded (8,000 Shares) 20 62 --- --- 82
Conversion of Subordinated Debentures
(30,318 Shares) 76 200 --- --- 276
Change in unrealized gains (losses) on
securities, net of deferred income
tax benefit of $5,307 --- --- --- (10,303) (10,303)
------ ------ ------- ------- -------
Balance at December 31, 1994 18,775 4,893 35,972 (8,149) 51,491
YEAR ENDED DECEMBER 31, 1995
Net Income --- --- 10,740 --- 10,740
Cash Dividends ($.39 Per Share) --- --- (3,012) --- (3,012)
Sale of 45,228 Shares Though Dividend
Reinvestment Plan and Stock Option Plan 114 411 --- --- 525
Conversion of Subordinated Debentures
(979,820 Shares) 2,450 6,436 --- --- 8,886
Change in unrealized gains (losses) on
securities, net of deferred income tax
expense of $3,650 --- --- --- 7,087 7,087
Stock Split Effected in the Form of a
Stock Dividend 21,336 --- (21,336) --- ---
------- ------- ------- -------- -------
Balance at December 31, 1995 $42,675 $11,740 $22,364 $(1,062) $75,717
======= ======= ======= ======== =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN 000'S)
<TABLE>
<CAPTION>
Years Ended December 31
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 10,740 $ 4,088 $ 6,881
Adjustments to Reconcile Net Income to Net Cash Provided (Used)
by Operating Activities:
Provision for Loan Losses 1,319 2,827 1,370
Depreciation and Amortization 1,954 1,855 1,806
Amortization of Securities Premiums and Discounts, Net (299) 21 (64)
Amortization of Purchase Discounts --- --- 111
Provision for Deferred Income Taxes 772 (1,315) (537)
(Gain) Loss on Sale of Securities, Net (46) 5,683 (277)
Amortization of Intangibles 267 295 271
Mortgage Loan Originations Held for Sale (10,914) (10,651) (47,495)
Mortgage Loans Sold 9,655 21,214 40,568
Changes in Other Assets and Other Liabilities:
Other Assets 3,707 589 (8,086)
Accrued Interest 533 274 (179)
Accrued Loss Contingencies (1,341) --- 1,341
Other Liabilities 949 (1,701) 2,725
-------- -------- --------
Net Cash Provided (Used) by Operating Activities: 17,296 23,179 (1,565)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net Decrease in Federal Funds Sold --- 22,810 12,545
Increase in Interest-Earning Deposits (825) --- ---
Purchases of Securities Available for Sale (88,344) (26,556) (183,588)
Purchases of Securities Held to Maturity (4,947) (86,714) (11,553)
Proceeds from Sale of Securities Available for Sale 26,954 87,464 112,337
Proceeds from Sale of Securities Held to Maturity --- --- 175
Proceeds from Calls and Maturities of Securities Available for Sale 20,715 8,291 54,748
Proceeds from Calls and Maturities of Securities Held to Maturity 15,354 1,860 3,891
Net Increase in Loans (67,467) (53,327) (6,409)
Purchases of Bank Premises and Equipment (1,481) (2,815) (1,000)
Net Decrease in Other Real Estate 869 2,566 846
-------- -------- --------
Net Cash Used in Investing Activities (99,172) (46,421) (18,008)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase (Decrease) in Deposits (4,057) 24,856 24,593
Net Increase (Decrease) in Short-Term Debt 88,523 3,244 (3,011)
Net Increase in Long-Term Debt 929 --- ---
Cash Dividends (3,012) (2,461) (2,170)
Cash Paid in Lieu of Fractional Shares for Stock Split --- --- (13)
Net Expenses Incurred for Debenture Conversion (32) --- ---
Proceeds From Issuance of Common Stock 525 613 697
Cash Used to Purchase Subordinated Debentures --- --- (261)
-------- -------- --------
Net Cash Provided by Financing Activities 82,876 26,252 19,835
-------- -------- --------
Net Increase in Cash and Due From Banks 1,000 3,010 262
Cash and Due From Banks at Beginning of Year 24,680 21,670 21,408
-------- -------- --------
Cash and Due From Banks at End of Year $ 25,680 $ 24,680 $ 21,670
======== ======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994 AND FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of MainStreet BankGroup Incorporated and its subsidiaries (BankGroup).
All significant intercompany accounts and transactions have been eliminated.
CASH EQUIVALENTS. For purposes of the Statement of Cash Flows, BankGroup
considers all Cash and Due From Bank accounts to be cash equivalents.
MORTGAGE LOANS HELD FOR SALE. Mortgage loans held for sale are carried at the
lower of aggregate cost or market value. Adjustments to market and realized
gains and losses are classified as other income in the accompanying consolidated
statements of income.
SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY. In May 1993, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No., 115, "Accounting for Certain Investments in Debt and
Equity Securities," which was adopted by BankGroup beginning January 1, 1994.
SFAS No. 115 addresses the accounting and reporting for investments in debt and
equity securities by requiring such investments be classified in three
categories and accounted for as follows:
- - Debt securities that BankGroup has the positive intent and ability to hold
to maturity are classified as held-to-maturity securities and reported at
amortized cost.
- - Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings.
- - Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as securities
available-for-sale and reported at fair value, with unrealized gains and
losses excluded from earnings and reported as a separate component of
shareholders' equity.
Securities are classified at purchase date under the specific identification
method. The adoption of SFAS No. 115 (see Notes 3 and 4) did not impact
BankGroup earnings as BankGroup does not have trading securities. Mortgage
backed securities along with CMO/REMIC's are included in the available-for-sale
category, and accordingly, unrealized gains and losses are reported as a
separate component of shareholders' equity.
Gains and losses on securities sales are realized in period in which incurred.
Amortization and accretion of premiums and discounts are included in income over
the contractual life of the securities.
LOANS. Interest on loans is computed by methods which generally result in level
rates of return on principal amounts outstanding. Loans are placed on nonaccrual
status when it becomes probable that the borrower will have difficulty meeting
either interest or principal payments and the loan is not in the process of
collection and is not well collateralized. For loans placed on nonaccrual, all
interest accrued in the current fiscal year is reversed against income while
prior year accrued interest is charged against the allowance for loan losses.
For payments on nonaccrual loans and impaired loans, amounts are applied first
as a recovery of principal and then as interest under the cost recovery method.
BankGroup adopted Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures," as of January 1, 1994. SFAS 114 requires the measurement of
impaired loans based on the present value of expected future cash flows
discounted at the loan's effective rate, or at the loan's observable market
price or the fair value of its collateral. SFAS 114 eliminates the requirement
that a creditor account for certain loans as foreclosed assets prior to the time
the creditor has taken possession of the collateral, resulting in the
reclassification of in-substance foreclosures and related specific valuation
allowances for possible losses from other real estate owned to loans. The net
amount of in-substance foreclosures and related specific valuation allowances
reclassified from other real estate owned to loans totaled approximately $2.4
million at January 1, 1994.
SFAS 114 does not apply to large groups of smaller balance homogeneous loans
that are collectively evaluated for impairment. For BankGroup, loans
collectively reviewed for impairment include all consumer loans, single family
loans and performing multi-family and non-residential real estate loans,
excluding loans which have entered into the "workout process". The adoption of
SFAS 114 did not result in additional provisions for losses or changes in
previously reported net earnings due to BankGroup's continuing policy of
measuring loan impairment based on the fair value of the loan's collateral
property, which is consistent with the methods prescribed in SFAS No. 114. SFAS
118 amended SFAS No. 114 to allow a creditor to use existing methods of
recognizing interest income on an impaired loans.
BankGroup considers a loan to be impaired when, based upon current information
and events, it believes it is probable that BankGroup will be unable to collect
all amounts due according to the contractual terms of the loan agreement.
BankGroup's impaired loans within the scope of SFAS 114 include nonaccrual loans
(excluding those collectively reviewed for impairment), troubled debt
restructurings, and certain other nonperforming loans. For collateral dependent
loans, BankGroup bases the measurement of these impaired loans on the fair value
of the loan's collateral properties. For all other loans, BankGroup bases the
measurement of these impaired loans on the more readily determinable of the
present value of expected future cash flows discounted at the loan's effective
interest rate or the observable market price. Impairment losses are recognized
through an increase in the allowance for loan losses and a corresponding charge
to the provision for loan losses. Adjustments to impairment losses due to
changes in the fair value of impaired loans' collateral properties are included
in the provision for loan losses. When an impaired loan is either sold,
transferred to other real estate owned or written down, any related valuation
allowance is charged off against the allowance for loan losses.
LOAN FEES AND COST. Loan origination and commitment fees and certain direct
origination costs are deferred and are amortized over the contractual life of
the related loans using the level yield method.
ALLOWANCE FOR LOAN LOSSES. An allowance for loan losses is maintained in order
to provide for losses in collection of loans that can be currently estimated.
The level of the allowance for loan losses is based upon the quality of the loan
portfolios as determined by management after consideration of historical loan
loss experience, diversification as to the type of loans in the portfolios, the
amount of collateralized as compared to uncollateralized loans, banking industry
standards and averages, and general economic conditions. In preparing the
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the consolidated balance sheet and income and expenses for the period.
Actual results could differ significantly from these estimates. In connection
with the determination of the allowance for loan losses and the valuation of
real estate owned, management obtains independent appraisals for significant
properties. Management believes that the allowance for loan losses and the
valuation of real estate owned are adequate. While management uses available
information to recognize losses on loans and real estate owned, future additions
to the allowance for loan losses and additional write-downs in the valuation of
real estate owned may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review BankGroup's allowance for loan losses and valuation
of real estate owned. Such agencies may require BankGroup to recognize additions
to the allowance for loan losses and additional write-downs in the valuation of
real estate owned based on their judgments of information available to them at
the time of their examination.
BANK PREMISES AND EQUIPMENT. Bank premises and equipment are stated at cost less
accumulated depreciation and amortization. Provisions for depreciation are
computed using the straight-line and accelerated methods over estimated useful
lives of 30 to 50 years for building shells, 5 to 15 years for building
components and 3 to 10 years for furniture and equipment. Leasehold improvements
are amortized using the straight-line method over the shorter of the estimated
useful lives or the terms of the related leases. Maintenance, repairs and minor
improvements are charged to operations as incurred, and significant improvements
are capitalized. Any gains or losses on disposition are reflected in operations.
OTHER REAL ESTATE. Other real estate comprises properties acquired through
foreclosure proceedings or acceptance of a deed in lieu of foreclosure. The
properties are carried at the lower of cost or fair market value less selling
costs, based on appraised value. Loan losses arising from the acquisition of
such properties are charged against the allowance for loan losses. Any
subsequent write-downs are charged to expense.
INCOME TAXES. BankGroup follows the provisions of Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under the
asset and liability method of SFAS No. 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under SFAS No.
109, the effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
INCOME PER SHARE. Primary income per share is calculated based on the weighted
average number of shares of common stock and common stock equivalents
outstanding during each period. Fully diluted income per share is computed using
weighted average shares outstanding increased by common stock equivalents and
the number of shares that would result from assuming that all of the 7%
convertible subordinated debentures were converted into common stock at the
conversion price of $9.10 as of the issuance date. For purposes of calculating
fully diluted income per share, net income was increased by eliminating interest
expense and amortization of debt issuance expense, less the related tax effect
relating to the debentures. Stock options outstanding have been considered
common stock equivalents for 1995, 1994, and 1993. Share and per share data has
been restated to reflect the stock split.
TRUST DEPARTMENT. Trust Department income is recognized on the accrual basis of
accounting and assets held by the Trust Department in a fiduciary or agency
capacity are not included in the Consolidated Financial Statements as they are
not assets of BankGroup.
AMORTIZATION OF INTANGIBLES. Identified intangible assets and the excess of cost
over the fair value of net tangible and identified intangible assets acquired
are included in other assets in the consolidated balance sheets and are being
amortized over periods ranging from three to twenty years, using accelerated and
straight-line methods. Net intangible assets amounted to $1.1 million and $1.3
million at December 31, 1995 and 1994, respectively.
SUPPLEMENTAL CASH FLOW INFORMATION. Total interest paid in cash was $30.8
million, $25.1 million and $25.5 million for the years ended December 31, 1995,
1994 and 1993, respectively. Cash paid for income taxes was $3.6 million, $2.9
million and $3.3 million for the years ended December 31, 1995, 1994 and 1993,
respectively. Repossessed and foreclosed properties transferred to Other Real
Estate and Other Assets from Loans amounted to $1.0 million, $2.8 million and
$0.9 million in 1995, 1994 and 1993, respectively. During 1995, debentures in
the amount of $8,918,000 were converted into 979,820 shares of common stock.
Unrealized losses on securities of $1.6 million and $12.3 million are included
as noncash investing activities in 1995 and 1994, respectively.
EMPLOYEE BENEFIT PLANS. BankGroup maintains a defined benefit retirement plan
for the benefit of its employees. This plan was effective in 1995. The pension
plans' benefit formulas generally base payments to retired employees upon their
length of service and a percentage of qualifying compensation during their final
years of employment. BankGroup also maintains a 401-K plan for its employees.
The Corporation contributes an amount equal to 50% of the first 6% of the
compensation deferred by the employee. Ending in 1995 was a discretionary profit
sharing plan.
The BankGroup also provides certain health care insurance benefits to active and
retired employees. Effective January 1, 1993, BankGroup adopted the provisions
of Statement of Financial Accounting Standards No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions," which established a new
accounting principle for the cost of retiree health care and other
postretirement benefits (see Note 11). Prior to January 1, 1993, BankGroup
recognized these benefits on a pay-as-you-go method (i.e., cash basis).
BankGroup has elected to amortize the cumulative effect of the change in method
of accounting for postretirement benefits (i.e., transition obligations) over 20
years.
RECLASSIFICATIONS. Certain reclassifications have been made to the prior years'
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.
IMPAIRMENT OF LONG-LIVED ASSETS. In the event that facts and circumstances
indicate that the cost of the Company'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.
NOTE 2 - RESTRICTED CASH BALANCES
The subsidiary Banks are members of the Federal Reserve System and, as such, are
required to maintain certain of their cash and due from bank balances as
reserves based on regulatory requirements. The reserve requirement approximated
$6.9 million and $6.5 million at December 31, 1995 and 1994, respectively.
NOTE 3 - SECURITIES AVAILABLE FOR SALE
The following sets forth the composition of securities available for sale at
December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995
-----------------------------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Approximate
Value Gains Losses Market Value
------------ -------------- ------------- --------------
(In 000's)
<S> <C> <C> <C> <C>
Obligations of U. S. Government Agencies $ 42,848 $ 347 $ (298) $ 42,897
Mortgage Backed Securities 26,728 431 (18) 27,141
Collateralized Mortgage Obligations and REMICs 97,540 157 (1,445) 96,252
Corporate Bonds 11,524 562 (28) 12,058
Other Securities 4,633 562 --- 5,195
Obligations of State and Political Subdivisions 631 --- (5) 626
-------- -------- ---------- --------
Total Securities Available for Sale $183,904 $ 2,059 $ (1,794) $184,169
======== ======== ========== ========
</TABLE>
<TABLE>
<CAPTION>
1994
----------------------------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Approximate
Value Gains Losses Market Value
----------- ----------- ----------- -------------
(In 000's)
<S> <C> <C> <C> <C>
U. S. Treasury Securities $ 1,276 $ --- $ (3) $ 1,273
Obligations of U. S. Government Agencies 49,602 1 (1,926) 47,677
Mortgage Backed Securities 4,641 40 (100) 4,581
Collateralized Mortgage Obligations and REMICs 58,822 29 (6,384) 52,467
Corporate Bonds 11,533 143 (536) 11,140
Other Securities 1,463 428 --- 1,891
-------- -------- ---------- --------
Total Securities Available for Sale $127,337 $ 641 $ (8,949) $119,029
======== ======== ========== ========
</TABLE>
The carrying and approximate market values of securities available for sale at
December 31, 1995, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
1995
--------------------------------------
Carrying Approximate
Value Market Value
--------- -------------
(In 000's)
<S> <C> <C>
Due in one year or less $ 5,210 $ 5,242
Due after one year but within five years 36,451 36,651
Due after five years but within ten years 12,837 13,188
Due after ten years 5,138 5,695
Mortgage-Backed Securities 26,728 27,141
CMOs/REMICs 97,540 96,252
-------- --------
Total Securities Available for Sale $183,904 $184,169
======== ========
</TABLE>
Proceeds from calls and maturities of securities available for sale were $20.7
million, $8.3 million and $54.7 million for 1995, 1994 and 1993, respectively.
Proceeds from sales of securities available for sale during 1995, 1994 and 1993
were $27.0 million, $87.5 million and $112.3 million, respectively. Gross gains
of $47,000, $57,000 and $302,000 and gross losses of $27,000, $5,745,000 and
$35,000 were realized on those sales, calls and maturities for 1995, 1994 and
1993, respectively.
Securities available for sale with carrying values approximating $82 million and
$30 million at December 31, 1995 and 1994, respectively, were pledged to secure
public deposits and for other purposes as required or permitted by law.
NOTE 4 - SECURITIES HELD TO MATURITY
The carrying and approximate market values and gross unrealized gains and losses
of securities held to maturity at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995
--------------------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Approximate
Value Gains Losses Market Value
--------- ----------- ----------- -------------
(In 000's)
<S> <C> <C> <C> <C>
U. S. Treasury Securities $ 4,925 $ 111 $ --- $ 5,036
Obligations of U. S. Government Agencies 30,960 2,395 --- 33,355
Mortgage Backed Securities 22,328 775 --- 23,103
Obligations of State and Political Subdivisions 39,779 1,334 (123) 40,990
-------- ------- -------- --------
Total Securities Held to Maturity $ 97,992 $ 4,616 $ (123) $102,484
======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
1994
--------------------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Approximate
Value Gains Losses Market Value
---------- ----------- ----------- ------------
(In 000's)
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 4,860 $ --- $ --- $ 4,860
Obligations of U. S. Government Agencies 49,704 --- --- 49,704
Mortgage Backed Securities 23,764 --- --- 23,764
Obligations of State and Political Subdivisions 43,451 694 (1,432) 42,713
-------- ------- -------- --------
Total Securities Held to Maturity $121,779 $ 694 $(1,432) $121,041
======== ======= ======= ========
</TABLE>
At December 31, 1994, BankGroup transferred securities available for sale with
an approximate market value of $72.5 million and a carrying value of $76.5
million to securities held to maturity. The unrealized loss of approximately
$4,038,000, included as a separate component of shareholders equity, is being
amortized over the remaining life of the securities. At December 31, 1995 this
unrealized loss was $1.9 million. During the fourth quarter of 1995, the
Financial Accounting Standards Board allowed financial institutions a one time
opportunity to restructure their investment portfolios under the designations of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Management took advantage of this opportunity by redesignating
$15.8 million of "held to maturity" as "available for sale" without any penalty
or tainting of the remaining "held to maturity" portfolio.
The carrying and approximate market values of securities held to maturity at
December 31, 1995, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
1995
-----------------------------------------
Approximate
Carrying Value Market Value
-------------- -------------
(In 000's)
<S> <C> <C>
Due in one year or less $ 5,672 $ 5,758
Due after one year but within five years 30,448 30,997
Due after five years but within ten years 33,460 36,367
Due after ten years 6,084 6,257
Mortgage-Backed Securities 22,328 23,103
-------- --------
$ 97,992 $102,482
======== ========
</TABLE>
Proceeds from the calls and maturities of securities held to maturity were $31.1
million for 1995. These calls and maturities yielded $31,000 in gains and $5,000
in losses. Calls and maturities of $1.9 million during 1994 yielded a $5,000
gain. Proceeds from sales, calls and maturities of securities held to maturity
during 1993 were $4.0 million. Gross gains of $10,000 were realized on those
sales for 1993.
Securities with carrying values approximating $29 million and $20 million at
December 31, 1995 and 1994, respectively, were pledged to secure public deposits
and for other purposes as required or permitted by law.
NOTE 5 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Major classifications of loans at December 31, 1995 and 1994 are summarized
below:
<TABLE>
<CAPTION>
1995 1994
---- ----
(In 000's)
<S> <C> <C>
Commercial $264,924 $235,205
Real Estate 135,830 115,106
Consumer 176,110 157,857
-------- --------
Total Loans 576,864 508,168
Less: Unearned Income and Deferred Fees (11,080) (8,417)
-------- --------
Loans, Net of Unearned Income and Deferred Fees 565,784 499,751
Less: Allowance for Loan Losses (8,076) (8,191)
-------- --------
Loans, Net $557,708 $491,560
======== ========
</TABLE>
A summary of changes in the allowance for loan losses for each of the three
years in the period ended December 31, 1995 follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(In 000's)
<S> <C> <C> <C>
Balance at Beginning of Year $ 8,191 $ 8,351 $ 8,610
Provision for Loan Losses 1,319 2,827 1,370
Losses Charged to Allowance (1,856) (3,564) (2,198)
Recoveries Credited to Allowance 422 577 569
------- ------- -------
Balance at End of Year $ 8,076 $ 8,191 $ 8,351
======= ======= =======
</TABLE>
Nonperforming assets at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
(In 000's)
<S> <C> <C>
Nonaccrual Loans $ 3,383 $ 2,736
Loans Past Due 90 Days or More 1,873 1,680
------- -------
Total Nonperforming Loans 5,256 4,416
Other Real Estate Owned 1,583 2,452
Other Repossessed Assets 148 95
------- -------
Total Foreclosed/Repossessed Assets 1,731 2,547
------- -------
Total Nonperforming Loans and Foreclosed/
Repossessed Assets $ 6,987 $ 6,963
======= =======
</TABLE>
Nonperforming loans were .93% and .88% of loans net of unearned income at
December 31, 1995 and 1994, respectively.
The effect of nonaccrual loans on interest income was as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(In 000's)
<S> <C> <C> <C>
Gross amount of interest that would have been
recorded at original rate $ 306 $ 265 $ 391
Interest that was reflected in income 11 13 23
-------- ------- -------
Net impact on interest income $ 295 $ 252 $ 268
======== ======= =======
</TABLE>
At December 31, 1995 and 1994, the recorded investment in loans which have been
identified by the BankGroup as impaired loans in accordance with SFAS 114
totaled $3.4 million and $3.0 million, respectively, and the total allowance for
loan losses related to such loans was $.6 million and $.7 million, respectively.
The average balance during 1995 and 1994 for impaired loans was approximately
$3.8 million and $4.5 million, respectively. The total interest income related
to impaired loans reflected in the 1995 and 1994 statements of income was $6,000
and $11,000, respectively. The net amount of in-substance foreclosures and
related specific valuation allowances reclassified from other real estate owned
to loans totaled approximately $2.4 million at January 1, 1994.
NOTE 6 - RELATED PARTY TRANSACTIONS
Directors, officers and related interests provide the subsidiary Banks with
substantial amounts of business and many are among its most significant
depositors and borrowers. Total amounts outstanding for all such loans that
exceeded $60,000 individually are summarized below:
<TABLE>
<CAPTION>
1995 1994
---- ----
(In 000's)
<S> <C> <C>
Balance at Beginning of Year $24,167 $22,852
Additions 5,900 9,406
Payments (10,290) (8,091)
------- -------
Balance at End of Year $19,777 $24,167
======= =======
</TABLE>
These loans, in the opinion of management, are believed to involve no more than
normal risk of collectibility. Total unfunded commitments at December 31, 1995
were $3.7 million.
NOTE 7 - BANK PREMISES AND EQUIPMENT
Bank premises and equipment consist of:
<TABLE>
<CAPTION>
1995 1994
---- ----
(In 000's)
<S> <C> <C>
Land $ 1,304 $ 1,301
Buildings and Improvements 9,105 8,873
Furniture and Equipment 17,970 16,887
Construction in Progress 140 183
Leasehold Improvements 515 490
-------- --------
29,034 27,734
Accumulated Depreciation and Amortization (18,267) (16,494)
-------- --------
Total Bank Premises and Equipment $ 10,767 $ 11,240
======== ========
</TABLE>
NOTE 8 - INCOME TAXES
The components of income tax expense for the years ended December 31, 1995, 1994
and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(In 000's)
<S> <C> <C> <C>
Current Tax Expense $3,643 $1,161 $3,067
Deferred Tax (Benefit) Expense 756 (1,315) (462)
------ ------ -------
Income Tax Expense (Benefit) $4,399 $ (154) $2,605
======= ====== ======
</TABLE>
Taxes related to securities transactions include a tax expense of $16,000 on net
securities gains in 1995, tax benefit of $1.9 million on net securities losses
in 1994, and tax expense of $94,000 on net securities gains in 1993.
The reasons for the differences in income tax effective rate and the statutory
Federal income tax rate are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Federal Income Tax Expense Rate 35.0% 34.0% 34.0%
Tax Exempt Interest (5.0) (21.6) (8.9)
Nondeductible Interest Expense to Carry
Tax-Exempt Securities .6 2.2 0.9
IRS Intangibles Settlement --- (19.5) ---
Change in Marginal Tax Rate (1.0) --- ---
Other .1 1.0 1.7
----- ----- -----
Effective Income Tax Rate 29.7% (3.9)% 27.7%
===== ===== =====
</TABLE>
The components of net deferred tax assets at December 31, 1995 and 1994 are
presented below:
<TABLE>
<CAPTION>
1995 1994
---- ----
(In 000's)
<S> <C> <C>
Deferred Tax Assets:
Allowance for Loan Losses and Unearned Fees $3,039 $3,133
Valuation Allowance on Securities Available for Sale 547 4,197
Other Real Estate Owned, Principally Due to Write-Downs
Not Deductible for Tax Purposes 425 422
Intangibles, Due to Differences in Amortization Periods for Tax
Purposes 935 912
Interest Earned Not Collected on Nonaccrual Loans Not
Recognized for Financial Reporting Purposes 149 194
Miscellaneous Accruals not Deductible for Tax Purposes 584 868
------ ------
Total Gross Deferred Tax Assets $5,679 $9,726
====== ======
Deferred Tax Liabilities:
Bank Premises and Equipment, Principally Due to Differences
in Depreciation 502 511
Securities, Due to Differences in Discount Accretion 242 120
Prepaid Expenses, Principally Due to Deduction Taken for
Tax Purposes 204 117
Other 175 ---
------ ------
Total Gross Deferred Liabilities 1,123 748
------ ------
Net Deferred Tax Assets $4,556 $8,978
====== ======
</TABLE>
BankGroup has determined that a valuation allowance for the gross deferred tax
assets is not considered necessary at December 31, 1995 and 1994, since
realization of the entire gross deferred tax assets can be supported by the
amount of taxes paid during the carryback period available under current tax
laws.
Effective January 1, 1993, BankGroup adopted SFAS No. 109 and has reported the
cumulative effect of this change in the method of accounting for income taxes of
$75,000 separately in the 1993 consolidated statement of income.
NOTE 9 - SHORT-TERM AND LONG-TERM DEBT
Short-term and long-term debt consist of the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
(In 000's)
<S> <C> <C>
Corporate Cash Management $ 10,801 $ 11,307
Federal Funds Purchased 31,310 5,370
Securities Sold Under Repurchase Agreements 37,127 ---
Treasury Tax and Loan Notes 148 2,536
Short-Term FHLB Borrowings 32,350 4,000
Long-Term FHLB Borrowings 929 ---
-------- --------
Total Short-Term and Long-Term Debt $112,665 $ 23,213
======== ========
</TABLE>
The average outstanding total short-term borrowings were $57.3 million and $18.2
million for 1995 and 1994, respectively. The average interest rates were 5.58%
and 3.26% for 1995 and 1994, respectively. The interest rates in effect at year
end were 5.63% and 4.77% at December 31, 1995 and 1994, respectively.
The maximum month-end balance of short-term debt was $110.8 million and $25.4
million for 1995 and 1994, respectively. Securities Held to Maturity and
Securities Available for Sale were pledged as collateral for securities sold
under repurchase agreements.
NOTE 10 - REDEMPTION OF 7% CONVERTIBLE SUBORDINATED DEBENTURES
BankGroup's 7% subordinated debentures were convertible into BankGroup's common
stock before October 15, 2011, at $9.10 a share, subject to adjustments in
certain events. The debentures were redeemable, in whole or in part, at
BankGroup's option, initially at 107% of the principal amount plus accrued
interest, declining to par. Debenture holders were able to convert up to the
fifth business day prior to the redemption date. BankGroup had reserved
1,050,000 common shares for issuance upon conversion of the debentures. Payments
to a sinking fund were required beginning October 15, 1997, which would retire
annually, at par, 5% of the aggregate principal amount of the debentures
originally issued and 70% of the issue prior to maturity.
On September 12, 1995, MainStreet BankGroup Incorporated called for redemption
on October 13, 1995 all of its outstanding 7% Convertible Subordinated
Debentures Due 2011 (the "debentures"). At such date, $8,043,000 principal
amount of Debentures were outstanding. The redemption price was $1,014.00 plus
accrued interest of $34.61 from April 15, 1995 to the redemption date, for a
total of $1,048.61 for each $1,000 of principal amount of Debentures No interest
would accrue on the Debentures from and after October 13, 1995 and holders of
outstanding Debentures would not have any rights as such holders other than the
right to receive the redemption price; without additional interest, upon
surrender of their Debentures.
The Debentures were convertible at any time on and prior to October 5, 1995 into
shares of the Company's Common Stock at a conversion rate of 109.89 shares of
common stock for each $1,000 principal amount of Debentures (equivalent to a
conversion price of $9.10 per share). Holders converting Debentures were not
entitled to receive interest from April 15, 1995.
The Corporation also entered into a Standby Agreement with Scott and
Stringfellow, Incorporated, a broker/dealer headquartered in Richmond, Virginia
providing that Debentures not converted by the holders would, in effect, be
converted by Scott and Stringfellow and the resulting Common Stock sold in a
public offering. All debentures were converted into 883,678 shares of the
Corporation's Common Stock.
The Corporation registered Common Stock offered in conversion of the Debentures
with the Securities and Exchange Commission (Registration No. 33-62557).
The following tabulation sets forth the numbers of shares used to determine
earnings per share:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(In 000's)
<S> <C> <C> <C>
Primary Shares:
Average Shares Outstanding 7,800 7,454 7,378
Common Shares Assumed Outstanding - Options 42 56 6
----- ----- -----
Total Primary Shares 7,842 7,510 7,384
===== ===== =====
Fully Diluted Shares:
Average Shares Outstanding 7,800 7,454 7,378
Common Shares Assumed Outstanding - Options 40 56 6
Common Shares Assumed Outstanding - Debentures 708 1,006 1,030
----- ----- -----
Total Fully Diluted Shares 8,548 8,516 8,414
===== ===== =====
</TABLE>
For purposes of calculating fully diluted income per share, net income has been
increased by eliminating interest expense and amortization of debt issuance cost
relating to the debentures, less the related tax effect.
NOTE 11 - EMPLOYEE BENEFIT PLANS
BankGroup maintains a defined benefit retirement plan for the benefit of its
employees (not directors). This was a new plan effective May 1, 1995. The
pension plans' benefit formulas generally base payments to retired employees
upon their length of service and a percentage of qualifying compensation during
their final years of employment. Pension expense related to this defined benefit
plan was $451,000 for 1995. The following table sets forth the plans' funded
status and amounts recognized in the consolidated financial statements:
Actuarial present value of benefit obligation:
Accumulated benefit obligation at 12/31/95
(including vested benefits of $319,000 in 1995) $ (391)
=======
Projected benefit obligation for service rendered to date (715)
Plan assets at fair value at December 31, 1995 ---
-------
Funded status (715)
Unrecognized transition obligation 199
Unrecognized net loss 65
Accrued pension costs at December 31, 1995 $ 451
=======
Net pension cost for the defined benefit plan included the following expense
components:
Service cost $ 430
Interest cost 11
Amortization of transition obligation 10
------
Net pension expense included in employee benefits $ 451
======
The discount rate used in determining the actuarial present value of the
projected benefit obligation and the expected long-term rate of return on assets
was 8%. The increase in future compensation levels used was 5.00%.
Effective October 1, 1995, BankGroup amended its discretionary profit sharing
plan. All profit sharing contributions ceased as of September 30, 1995. Pension
contributions continued as a matching of the 401-K deferral plan for the benefit
of the employees. Under the amended plan, BankGroup will contribute an amount
equal to 50% of the first 6% of the compensation deferred by the employee.
Total profit sharing expense under the ceased plan for 1995 was $565,000. Total
pension expense for the matching 401-K plan was $57,000. Total expense related
to all profit-sharing and pension plans were approximately $.6 million and $1.1
million in 1994 and 1993, respectively.
In addition to pension and profit sharing plans, there is a health care plan
that provides postretirement medical benefits to full-time employees who meet
minimum age and service requirements. The plan is contributory with
contributions adjusted annually and contains other cost sharing features such as
deductibles. BankGroup's policy is to fund the costs of medical benefits in
amounts determined at the discretion of management. BankGroup adopted Statement
of Financial Accounting Standards No. 106, "Employers Accounting for
Postretirement Benefits Other Than Pensions," effective January 1, 1993. The
effect of adopting SFAS No. 106 was a decrease in net income of $110,000 and a
corresponding increase in net periodic postretirement benefit costs of $166,000
for the year ended December 31, 1993. Net periodic postretirement benefit costs
were $180,000, 194,000 and $195,000 for years ended December 31, 1995, 1994, and
1993, respectively. BankGroup has elected to amortize the initial transition
obligation of $1.2 million over 20 years.
The following table sets forth the plans' funded status and amounts recognized
in the consolidated financial statements at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
(In 000's)
<S> <C> <C>
Accumulated postretirement benefit obligations:
Retirees $ (507) $ (455)
Fully eligible active plan participants (691) (587)
------- --------
Accumulated postretirement benefit obligation
at December 31, 1995 and 1994 (1,198) (1,042)
Plan assets at fair value at December 31, 1995
and 1994 --- ---
------- --------
Accumulated postretirement benefit obligation in
excess of plan assets (1,198) (1,042)
Unrecognized transition obligation 1,023 1,084
Unrecognized net gain (297) (350)
------- --------
Accrued postretirement benefit costs included in
other liabilities $ (472) $ (308)
======= ========
</TABLE>
Net periodic postretirement benefit costs for 1995, 1994 and 1993 include the
following components:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(In 000's)
<S> <C> <C>
Service Cost $ 51 $ 60 $ 53
Interest Cost 82 76 82
Amortization of transition obligation 61 60 60
Amortization of Net (Gain) (14) (2) ---
------- ------- -------
Net periodic postretirement benefit costs $ 180 $ 194 $ 195
======= ======= =======
</TABLE>
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5%,8.25%, and 7% at December 31, 1995,
1994 and 1993, respectively. For measurement purposes, the assumed health care
costs trend rates of increase were 10%, 12% and 14% for 1995, 1994 and 1993,
respectively, with gradually declining percentages to 5.50% (6.25% assumed for
1994) by the year 2000 and remaining at that level thereafter. The health care
cost trend rate assumption can have a significant effect on the amounts
reported. For example, a 1% increase in the medical trend assumption would
increase the accumulated postretirement benefit obligation by $6,000, $83,000
and $5,000 as of December 31, 1995, 1994 and 1993, respectively. It would
increase the net periodic postretirement benefit cost for the year ended
December 31, 1995, 1994 and 1993 by $1,000, $16,000 and $1,000, respectively.
NOTE 12 - STOCK OWNERSHIP PLAN
In April 1985, the shareholders approved a stock option plan which provides for
incentive stock options to purchase shares of common stock of BankGroup at
prices equal to the fair market value of the stock at the date of the grant.
Each option is accompanied by Stock Appreciation Right (SAR) issued in tandem
with the option so that the employee may elect to exercise either the option or
the SARs, thereby canceling the other. SARs entitle the holder to receive
payment equal to the increase in market value of BankGroup's common stock from
date of grant to the date exercised. The maximum number of shares subject to
purchase under the plan is 75,000.
<TABLE>
<CAPTION>
Number of Shares Price Range
---------------- ---------------
<S> <C> <C>
Outstanding at December 31, 1992 39,750 $5.25 to $6.50
1993
Exercised (28,500) $5.25 to $6.50
Expired (2,250) $6.50
-------
Outstanding at December 31, 1993 9,000 $5.25 to $6.40
1994
Exercised (1,250) $5.25 to $6.40
-------
Outstanding at December 31, 1994 7,750 $5.25 to $6.40
1995
Exercised (3,700) $5.25 to $6.40
-------
Outstanding at December 31, 1995 4,050 $5.25 to $6.40
=======
</TABLE>
In April 1991, the shareholders approved another stock option plan that had been
previously approved by the Board of Directors in November, 1990. The plan, known
as the 1990 Plan, gives BankGroup the authorization to issue an additional
250,000 stock options.
<TABLE>
<CAPTION>
Number of Shares Price Range
---------------- -------------
<S> <C> <C>
1993
Granted 1,750 $6.50
-------
Outstanding at December 31, 1993 1,750 $6.50
1994
Granted 72,000 $10.25 to $10.50
Exercised (3,000) $10.50
Expired (1,750) $ 6.50
-------
Outstanding at December 31, 1994 69,000 $10.25 to $10.50
1995
Exercised (4,644) $10.50
Expired (6,680) $10.50
-------
Outstanding at December 31, 1995 57,676 $10.25 to $10.50
=======
</TABLE>
In June 1994, a stock award of 8,000 shares was also granted under this plan.
NOTE 13 - PREFERRED SHARE PURCHASE RIGHTS
On January 18,1990, the Board of Directors declared a dividend distribution of
one Right for each outstanding share of common stock, payable January 29, 1990
to stockholders of record on that date. Each Right entitles the registered
holder to purchase from BankGroup 1/100th of a share of a newly authorized
Participating Cumulative Preferred Stock at an exercise price of $24 subject to
an antidilutive adjustment. Each unit of Preferred Stock structured to be the
economic equivalent of one share of Common stock. The Rights will not be
exercisable or transferable apart from the common stock until the 10th day after
either a public announcement that a person or group has acquired beneficial
ownership of 15% or more of the common stock or the announcement or commencement
of a tender offer for 15% or more of BankGroup common stock.
The Rights are not exercisable until the distribution date and will expire on
January 18, 2000, unless earlier redeemed by BankGroup. The agreement provides
that if (a) an acquiring person purchases 30% or more of the outstanding common
stock or (b) at any time following the distribution date, BankGroup is the
surviving corporation in a merger with an acquiring person and its common stock
is not changed or exchanged or (c) an acquiring person effects a statutory share
exchange with BankGroup after which BankGroup is not a subsidiary of any
acquiring person, each holder of a Right will have the right to receive, upon
payment of the purchase price, preferred stock or common stock having a value
equal to twice the purchase price.
If BankGroup is acquired or 50% or more of the consolidated assets or earning
power is sold, each holder of a Right will have the right to receive, upon
exercise at the then current exercise price of the Right, that number of shares
of common stock of the acquiring company which has a market value of two times
the exercise price of the Right.
After the acquisition by a person or group of beneficial ownership of 15% or
more of the outstanding common stock, BankGroup may redeem the Rights in whole,
but not in part, at a price of $.01 per Right. The decision to redeem shall
require the concurrence of a majority of the continuing directors. Until a Right
is exercised, the holder will have no rights as a shareholder of BankGroup.
These statements are qualified in their entirety by reference to the Rights
Agreement, a copy of which was filed with the Securities and Exchange
Commission.
NOTE 14 - LEASE OBLIGATIONS
Each affiliate Bank leases certain buildings and equipment under operating lease
arrangements expiring over periods of up to fifteen years. Rent expense totaled
$561,000, $486,000 and $481,000 for the years ended December 31, 1995, 1994 and
1993, respectively. Future minimum payments, by years and in the aggregate,
under noncancellable operating leases with initial or remaining terms in excess
of one year consisted of the following at December 31, 1995:
Leases (In 000's)
-----------------
1996 $ 762
1997 704
1998 659
1999 569
2000 432
Thereafter 278
-------
Total Minimum Lease Payments $ 3,404
=======
NOTE 15 - RESTRICTIONS ON FUNDS FLOW
BankGroup's principal source of funds for dividend payments is dividends
received from its subsidiary banks. For the years ended December 31, 1995, 1994
and 1993, dividends received from subsidiary banks were $4.0 million, $3.1
million and $2.8 million, respectively.
Under the applicable laws of Virginia, $36.8 million of undivided profits at
December 31, 1995 were free of dividend restrictions. However, Virginia
regulatory authorities may limit the payment of dividends by any state bank when
it is determined such limitation is in the public interest and is necessary to
ensure the financial soundness of the bank. Substantially all the retained
earnings of BankGroup (Parent) are represented by undistributed earnings of the
subsidiary banks.
NOTE 16 - PARENT COMPANY FINANCIALS
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
1995 1994
---- ----
(In 000's)
<S> <C> <C>
ASSETS:
Cash (Includes $478 and $222 in 1995 and 1994,
respectively with affiliates) $ 478 $ 222
Investments in Subsidiary Banks 72,481 58,254
Other Assets (Includes $45 and $133 in 1995 and
1994, respectively, invested with affiliates) 3,885 2,457
-------- --------
TOTAL ASSETS $ 76,844 $ 60,933
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
7% Convertible Subordinated Debentures $ --- $ 8,918
Other Liabilities 1,127 524
Common Shareholders' Equity 75,717 51,491
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 76,844 $ 60,933
======== ========
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31
1995 1994 1993
---- ---- ----
(In 000's)
<S> <C> <C> <C>
REVENUE:
Dividends From Subsidiary Banks $ 4,025 $ 3,102 $ 2,827
Equity in Undistributed Income of Subsidiary Banks 7,440 1,928 4,856
Management Fees From Subsidiary Banks 8,034 407 ---
Interest Income 78 2 2
Other Income 42 67 59
------- ------- -------
19,619 5,506 7,744
------- ------- -------
EXPENSES:
Interest on Long-Term Debt 454 643 655
Other 8,851 1,964 166
------- ------- -------
9,305 2,607 821
------- ------- -------
Income Before Income Tax Benefit and Cumulative
Effect of Change in Accounting Principle 10,314 2,899 6,923
Income Tax Benefit 426 1,189 51
Cumulative Effect at January 1, 1993 of Change in
Accounting Principle --- --- (93)
------- ------ -------
NET INCOME $10,740 $ 4,088 $ 6,881
======= ======= =======
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31
1995 1994 1993
---- ---- ----
(In 000's)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $10,740 $ 4,088 $ 6,881
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Amortization of Intangibles, Net 210 261 144
Amortization of Securities Premiums and Discounts, Net --- (5) (11)
Equity in Undistributed Income of Subsidiary Banks (7,440) (1,928) (4,856)
Net (Increase) Decrease in Other Assets (627) (200) 105
Net Increase (Decrease) in Other Liabilities 603 (1,588) 112
Gain on Purchase of Subordinated Debentures --- --- ---
Gain on Sale of Securities (15) (57) ---
Gain on Sale of OREO 22 --- ---
------- ------- -------
Net Cash Provided by Operating Activities 3,493 571 2,375
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (Increase) Decrease in Interest-Bearing Deposits (712) (3) 360
Purchases of Securities Available for Sale --- (825) (34)
Proceeds From Maturity of Securities Available for Sale --- 455 ---
Proceeds From Sale of Securities Available for Sale 820 837 ---
Purchases of Bank Premises and Equipment (826) --- ---
Capital Contributed to Subsidiary Banks --- (85) ---
-------- ------- -------
Net Cash Provided by Investing Activities (718) 379 326
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Dividends (3,012) (2,461) (2,170)
Cash Paid in Lieu of Fractional Shares for Stock Split --- --- (13)
Net Expenses Incurred for Debenture Conversion (32) --- ---
Cash Used to Purchase Subordinated Debentures --- --- (261)
Proceeds From Issuance of Common Stock 525 613 697
Repurchase of Common Stock --- --- ---
------- ------- -------
Net Cash Used in Financing Activities (2,519) (1,848) (1,747)
------- ------- -------
Net Increase (Decrease) in Cash 256 (898) 954
Cash at Beginning of Year 222 1,120 166
------- ------- -------
Cash at End of Year $ 478 $ 222 $ 1,120
======= ======= =======
</TABLE>
Noncash investing and financing activities include $7,087,000 of unrealized
gains on securities available for sale and $8,918,000 of debentures converted
into 979,820 shares of common stock in 1995. Noncash investing and financing
activities include $8,149,000 of unrealized losses on securities available for
sale and $276,000 of debentures converted into 30,318 shares of common stock in
1994.
NOTE 17 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business to meet the financing needs of its customers,
BankGroup is a party to financial instruments with off-balance-sheet risk. These
financial instruments include commitments to extend credit,standby letters of
credit and financial guarantees written. Those instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
consolidated balance sheets.
BankGroup's exposure to credit loss in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit, standby
letters of credit and financial guarantees written is represented by the
contractual amount of those instruments. BankGroup uses the same credit policies
in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
As of December 31, 1995 and 1994, outstanding financial instruments whose
contract amounts represent potential credit risk were as follows:
1995 1994
---- ----
Financial Instruments Whose Contract Amounts
Represent Credit Risk:
Commitments to Extend Credit $ 90,320 $ 75,816
Standby Letters of Credit and Financial
Guarantees Written 2,684 2,790
Commitments to extend credit are agreements to lend to a customer as long as
there is no breach of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many commitments expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. BankGroup evaluates each customer's creditworthinesss on a
case-by-case basis. The amount of collateral obtained, if necessary, is based on
management's credit and financial evaluation of the customer.
Standby letters of credit and financial guarantees written are conditional
commitments issued by BankGroup to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public and private
credit arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
BankGroup obtains collateral supporting those commitments for which collateral
is deemed necessary. Collateral held varies but may include accounts receivable,
marketable securities, inventory, property, plant and equipment, and
income-producing commercial properties.
NOTE 18 - CONCENTRATIONS OF CREDIT RISK
Virtually all of BankGroup's business activity is with customers located in the
central and western part of southern Virginia. Accordingly, operating results
are closely correlated with the economic trends within the region and influenced
by the significant industries within the region including textile, furniture and
pre-built housing as well as agriculture. In addition, the ultimate
collectibility of the bank's loan portfolios and the recovery of the carrying
amounts of repossessed property are susceptible to changes in the market
conditions of this geographic region. The commercial portfolio is diversified
with no significant concentrations of credit at December 31, 1995. Acquisition
and development construction loans account for $24.5 million and $26.6 million
of the commercial portfolio at December 31, 1995 and 1994, respectively. In
addition, other commercial loans secured by real estate totaled $86.7 million
and $63.1 million at December 31, 1995 and 1994, respectively. The real estate
loan portfolio consists almost entirely of 1-4 family residential property.
BankGroup was the creditor for approximately $88.3 million and $74.4 million at
December 31, 1995 and 1994, respectively, of consumer loans for automobiles and
mobile homes generated directly or purchased from established dealers
(indirect). These loans are generally collateralized by the related property and
are either endorsed or subject to mandatory dealer repurchase agreements.
The individual banks have operating policies relating to the credit process and
collateral in loan originations. Loans to purchase real and personal property
are generally collateralized by the related property with loan amounts
established based on certain percentage limitations of the property's total
stated or appraised value. Credit approval is primarily a function of the
evaluation of the creditworthiness of the individual borrower based on pertinent
financial information and the underlying transaction to be financed.
NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," requires BankGroup to disclose estimated fair
values of its financial instruments.
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value:
(a) CASH AND DUE FROM BANKS
The carrying amount is a reasonable estimate of fair value.
(b) INTEREST-BEARING DEPOSITS IN DOMESTIC BANKS
The carrying amount is a reasonable estimate of fair value.
(c) FEDERAL FUNDS SOLD
The carrying amount is a reasonable estimate of fair value.
(d) MORTGAGE LOANS HELD FOR SALE
The fair value of mortgage loans held for sale is based on current
investor pricing at the close of business on the last business day of
the financial reporting period.
(e) SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY
The fair value of investments, except certain state and municipal
securities, is estimated based on bid prices published in financial
newspapers or bid quotations received from securities dealers. The fair
value of certain state and municipal securities is not readily
available through market sources other than dealer quotations, so fair
value estimates are based on quoted market prices of similar
instruments, adjusted for differences between the quoted instruments
and the instruments being valued.
(f) LOANS
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
commercial, real estate - commercial, real estate - construction, real
estate - mortgage, credit card and other consumer. Each loan category
is further segmented into fixed and adjustable rate interest terms and
by performing and nonperforming categories.
The fair value of performing loans is calculated by discounting
scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate risk
inherent in the loan as well as estimates for operating expenses and
prepayments. The estimate of maturity is based on BankGroup's
historical experience with repayment for each loan classification,
modified, as required, by an estimate of the effect of current economic
and lending conditions.
Fair value for significant nonperforming loans is based on estimated
cash flows which are discounted using a rate commensurate with the risk
associated with the estimated cash flows. Assumptions regarding credit
risk, cash flows and discount rates are judgmentally determined using
available market information and specific borrower information.
(g) DEPOSITS
The fair value of demand, interest checking, savings and money market
deposits is the amount payable on demand at December 31, 1995 and
December 31, 1995 and December 31, 1994. The fair value of fixed
maturity time deposits and certificates of deposit is estimated using
the rates currently offered for deposits of similar remaining
maturities and repayment characteristics.
(h) SHORT-TERM DEBT
The carrying amount is a reasonable estimate of fair value.
(i) LONG-TERM DEBT
The fair value of long-term debt is estimated using the rates currently
offered for borrowings of similar remaining maturities and repayment
characteristics.
(j) 7% CONVERTIBLE SUBORDINATED DEBENTURES
Rates currently available to BankGroup for debt with similar terms and
remaining maturities were used to estimate fair value of existing debt.
(k) COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND FINANCIAL
GUARANTEES WRITTEN
The only amounts recorded for commitments to extend credit, standby
letters of credit and financial guarantees written are the deferred
fees arising from these unrecognized financial instruments. These
deferred fees are not deemed significant at December 31, 1995 and
December 31, 1994, and as such the related fair values have not been
estimated.
The estimated fair values of BankGroup's financial instruments at December 31,
1995 and 1994 are as follows:
<TABLE>
1995
Carrying Amount Fair Value
--------------- ----------
(In 000's)
<S> <C> <C>
FINANCIAL ASSETS
Cash and Due From Banks $ 25,680 $ 25,680
Interest-Bearing Deposits in Domestic Banks 875 875
Mortgage Loans Held for Sale 1,780 1,788
Securities Available for Sale 184,169 184,169
Securities Held to Maturity 97,992 102,484
Loans, Net 557,708 568,583
-------- --------
TOTAL FINANCIAL ASSETS $868,204 $883,579
======== ========
FINANCIAL LIABILITIES
Deposits:
Demand Deposits (Noninterest-Bearing) $ 95,664 $ 95,664
Interest Checking Accounts 76,802 76,802
Savings Deposits 115,202 115,202
Money Market Investment Accounts 55,015 55,015
Time Deposits:
Certificates of Deposit $100,000 and Over 68,434 69,221
Other 289,396 293,159
-------- --------
TOTAL DEPOSITS 700,513 705,063
Short-Term Debt 111,736 111,736
Long-Term Debt 929 1,050
7% Convertible Subordinated Debentures --- ---
-------- --------
TOTAL FINANCIAL LIABILITIES $813,178 $817,849
======== ========
</TABLE>
<TABLE>
<CAPTION>
1994
Carrying Amount Fair Value
--------------- -----------
( In 000's)
<S> <C> <C>
FINANCIAL ASSETS
Cash and Due From Banks $ 24,680 $ 24,680
Interest-Bearing Deposits in Domestic Banks 50 50
Mortgage Loans Held for Sale 521 521
Securities Available for Sale 119,029 119,029
Securities Held to Maturity 121,779 121,041
Loans, Net 491,560 492,933
-------- --------
TOTAL FINANCIAL ASSETS $757,619 $758,254
======== ========
FINANCIAL LIABILITIES
Deposits:
Demand Deposits (Noninterest-Bearing) $ 91,570 $ 91,570
Interest Checking Accounts 78,567 78,567
Savings Deposits 152,990 152,990
Money Market Investment Accounts 70,087 70,087
Time Deposits:
Certificates of Deposit $100,000 and Over 49,743 49,897
Other 261,613 261,652
-------- --------
TOTAL DEPOSITS 704,570 704,763
Short-Term Debt 23,213 23,213
7% Convertible Subordinated Debentures 8,918 10,271
-------- --------
TOTAL FINANCIAL LIABILITIES $736,701 $738,247
======== ========
</TABLE>
Fair value estimates are made at a specific point in time, based on relevant
market information about the financial instrument. These estimates do not
reflect any premium or discount that could result from offering for sale at one
time BankGroup's entire holdings of a particular financial instrument. Because
no market exists for a significant portion of BankGroup's financial instruments,
fair value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing on-and-off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets that are not considered financial
assets include deferred tax assets and bank premises and equipment. In addition,
the tax ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in the estimates.
NOTE 20 - STOCK DIVIDEND
On February 20, 1996, MainStreet BankGroup declared a two-for-one stock split,
in the form of a 100% stock dividend, payable March 15, 1996 to stockholders of
record March 4, 1996. Shareholders will receive one additional share of common
stock for each share held on the record date. The par value of the 4,267,536
shares issued of approximately $21,388,000 was transferred from retained
earnings to the common stock account. This stock dividend has been retroactively
applied to restate all share and per share data for each of the three years
ended December 31, 1995.
BankGroup also resolved to amend the Articles of Incorporation to increase the
authorized shares of common stock from 10,000,000 to 20,000,000.
NOTE 21 - CONTINGENCIES AND OTHER MATTERS
At December 31, 1994, BankGroup had accrued loss contingencies remaining of $1.3
million. This reserve was a result of expenses accrued in 1993 of $2.7 million.
This contingency was accrued due to a Trust Department defalcation involving
misappropriation of customer funds by a former Trust Department employee at
Piedmont Trust Bank (PTB). PTB has settled with its insurance carriers on a
disputed claim for $5.5 million arising out of the defalcation. On February 28,
1995, the lawsuit was settled on a basis that included no additional loss to PTB
over and above the previously established reserves. Final settlement payments on
the agreement were received in accordance with the agreement in April, 1995, and
with appropriate entries both the insurance receivable account and the accrued
loss contingencies were settled.
As a result of the previously cited Trust Defalcation, PTB was subject to a
Cease and Desist Order (the Order) issued by the Federal Reserve. The Order
required PTB to implement certain corrective measures related to internal
controls and operating procedures in the Trust Department and required periodic
progress reports to appropriate parties. PTB has implemented the corrective
measures as required by the Order. The Corporation received notification from
the Federal Reserve Bank of Richmond dated October 3, 1995 terminating the Cease
and Desist Order.
BankGroup and its subsidiaries, in the normal course of business, are involved
in various legal actions and proceedings. It is the opinion of management that
any liabilities, except as disclosed above, arising from these matters and not
covered by insurance, would not have a material effect on BankGroup's financial
position.
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL RESULTS (UNAUDITED)
(In Thousands, Except Per Share Data) Fourth Third Second First
1995 Quarter Quarter Quarter Quarter
- ---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest Income $18,241 $17,787 $16,725 $15,922
Interest Expense 8,336 8,448 7,648 6,943
------- ------- ------- -------
Net Interest Income 9,905 9,339 9,077 8,979
Provision for Loan Losses 334 328 329 328
------- ------- ------- -------
Net Interest Income After Provision 9,571 9,011 8,748 8,651
Noninterest Income 2,172 2,003 2,093 1,707
Noninterest Expense 6,779 7,347 7,376 7,315
------- ------- ------- -------
Income Before Income Taxes 4,964 3,667 3,465 3,043
Income Tax Expense 1,516 1,004 1,011 868
------- ------- ------- -------
Net Income $ 3,448 $ 2,663 $ 2,454 $ 2,175
======= ======= ======= =======
Per Share:
Net Income:
Primary $ .41 $ .35 $ .32 $ .29
======= ======= ======= =======
Fully Diluted $ .40 $ .32 $ .30 $ .27
======= ======= ======= =======
Cash Dividends Declared $ .10 $ .10 $ .10 $ .09
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL RESULTS (UNAUDITED)
(In Thousands, Except Per Share Data) Fourth Third Second First
1994 Quarter Quarter Quarter Quarter
- ---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest Income $15,586 $15,074 $14,724 $14,132
Interest Expense 6,622 6,008 6,508 6,079
------- ------- ------- -------
Net Interest Income 8,964 9,066 8,216 8,053
Provision for Loan Losses 1,742 400 358 327
------- ------- ------- -------
Net Interest Income After Provision 7,222 8,666 7,858 7,726
Noninterest Income (4,283) 1,919 1,912 1,627
Noninterest Expense 7,551 7,535 6,894 6,733
------- ------- ------- -------
Income (Loss) Before Income Taxes (4,612) 3,050 2,876 2,620
Income Tax Expense (Benefit) (1,889) 853 161 721
-------- ------- ------- -------
Net Income (Loss) $(2,723) $ 2,197 $ 2,715 $ 1,899
======= ======= ======= =======
Per Share:
Net Income (Loss):
Primary $ (.37) $ .30 $ .36 $ .25
======= ======= ======= =======
Fully Diluted $ (.31) $ .27 $ .33 $ .24
======= ======= ======= =======
Cash Dividends Declared $ .09 $ .08 $ .08 $ .08
======= ======= ======= =======
</TABLE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
The information required by Item 9 of Form 10-K regarding the
change in accountants is herein incorporated by reference to the Form 8-K
filed electronically on November 29, 1995.
PART III
Item 10. Directors and Executive Officers of the Registrant
With respect to the directors of the Company, the information
required by Item 10 of Form 10-K appears on page 3 of the Company's 1996 Proxy
Statement and is incorporated herein by reference. With respect to the executive
officers of the Company, the information required by Item 10 of Form 10-K
appears in Part I of this report on pages 13 and 14.
Item 11. Executive Compensation
The information required by Item 11 of Form 10-K appears on page 9 of
the Company's 1996 Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 of Form 10-K appears on pages 4
and 5 of the Company's 1996 Proxy Statement and is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 of Form 10-K appears on page 11
of the Company's 1996 Proxy Statement and is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. FINANCIAL STATEMENTS
The information required by Item 10 of Form 10-K appears in Part II,
Item 8, of this report on Pages 26 through 49.
(a). 2. FINANCIAL STATEMENT SCHEDULES
All schedules are omitted, as the required information is inapplicable
or the information is presented in the consolidated financial statements or
related notes.
(a) 3. Exhibits Required to be filed by Item 601 of Regulation S-K
See index to exhibits.
(b) Reports on Form 8-K
Form 8-K filed November 29, 1995, regarding the change in the
Registrant's Certifying Accountants.
Form 8-K filed January 3, 1996, regarding the change in the
Registrant's name.
(c) EXHIBITS
See item 14(a) 3 above.
(d) FINANCIAL STATEMENT SCHEDULES
See item 14(a) 2 above.
INDEX TO EXHIBITS
No. Description
3(i) Articles of Incorporation of the Registrant are herein incorporated by
reference to the Form 8-A filed electronically on March 18, 1996.
3(ii) Bylaws of the Registrant are herein incorporated by reference to the
Form 8-A filed electronically on March 18, 1996.
4(a) Preferred Share Rights Plan (Incorporated by reference to
Registrant's Form 8-K dated January 18, 1990)
10(b) Employees Incentive Stock Option Plan (incorporated by reference from
Exhibit C of the 1985 Proxy Statement of the Company.) Amendment to
Employee Incentive Stock Option Plan. (Incorporated by reference to
Registrant's 1988 Form 10-K.)
10(c) Management Contracts for Michael R. Brenan, Rebecca J. Jenkins, James
E. Adams and S. Richard Bagby incorporated by reference to the
Registrant's 1994 Form 10-K.
16 Letter regarding change in certifying accountant incorporated by
reference to Form 8-K filed on November 29, 1995.
21 Statement of Subsidiaries of the Registrant is included as an Exhibit
to this report.
27 Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MAINSTREET BANKGROUP INCORPORATED
<TABLE>
<CAPTION>
<S> <C>
By: /s/ MICHAEL R. BRENAN /s/ JAMES E. ADAMS
Michael R. Brenan, President, Chairman James E. Adams, Group Executive, Senior Vice
of the Board and Chief Executive Officer President, Chief Financial Officer and Treasurer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
<S> <C> <C>
/s/ W. CHRISTOPHER BEELER, JR. 3/7/96
W. Christopher Beeler, Jr. Director Date
/s/ THOMAS B. BISHOP 3/1/96
Thomas B. Bishop Director Date
/s/ MICHAEL R. BRENAN 2/20/96
Michael R. Brenan President, Chairman of the Board Date
and Chief Executive Officer
/s/ WILLIAM S. CLARK 2/28/96
William S. Clark Director Date
/s/ WILLIAM L. COOPER, III 2/20/96
William L. Cooper, III Director Date
/s/ BILLY P. CRAFT 2/20/96
Billy P. Craft Director Date
/s/ LARRY E. HUTCHENS 2/20/96
Larry E. Hutchens Director Date
/s/ WILLIAM O. MCCABE, JR. 2/20/96
William O. McCabe, Jr., MD Director Date
/s/ ALBERT L. PRILLAMAN 2/20/96
Albert L. Prillaman Director Date
/s/ RICHARD M. SIMMONS, JR. 2/20/96
Richard M. Simmons, Jr. Director Date
/s/ THOMAS B. STANLEY, JR. 2/26/96
Thomas B. Stanley, Jr. Director Date
</TABLE>
EXHIBIT (21)
SUBSIDIARIES OF REGISTRANT
The registrant has no "parent" as such as defined by the Securities Act of
1933, as amended. All subsidiaries of the Registrant are included in the
consolidated financial statements:
Percentage Jurisdiction
of of
Ownership Incorporation
--------- -------------
Piedmont Trust Bank 100% Virginia
Bank of Carroll 100% Virginia
Bank of Ferrum 100% Virginia
First Community Bank 100% Virginia
The First Bank of Stuart 100% Virginia
First Community Bank of Saltville 100% Virginia
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
Mortgage Loans Held for Sale with a balance of 1,780 are not included
in the Loans number. Interest on Mortgage Loans Held for Sale of 144
is included in Interest-Other.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-1-1995
<PERIOD-END> DEC-31-1995
<CASH> 25,680
<INT-BEARING-DEPOSITS> 875
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 184,169
<INVESTMENTS-CARRYING> 97,992
<INVESTMENTS-MARKET> 102,484
<LOANS> 565,784
<ALLOWANCE> 8,076
<TOTAL-ASSETS> 895,801
<DEPOSITS> 700,513
<SHORT-TERM> 111,736
<LIABILITIES-OTHER> 6,906
<LONG-TERM> 929
<COMMON> 42,675
0
0
<OTHER-SE> 33,042
<TOTAL-LIABILITIES-AND-EQUITY> 895,801
<INTEREST-LOAN> 50,943
<INTEREST-INVEST> 17,517
<INTEREST-OTHER> 215
<INTEREST-TOTAL> 68,675
<INTEREST-DEPOSIT> 27,662
<INTEREST-EXPENSE> 31,375
<INTEREST-INCOME-NET> 37,300
<LOAN-LOSSES> 1,319
<SECURITIES-GAINS> 46
<EXPENSE-OTHER> 28,817
<INCOME-PRETAX> 15,139
<INCOME-PRE-EXTRAORDINARY> 15,139
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,740
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 1.29
<YIELD-ACTUAL> 8.80
<LOANS-NON> 3,383
<LOANS-PAST> 1,873
<LOANS-TROUBLED> 263
<LOANS-PROBLEM> 9,226
<ALLOWANCE-OPEN> 8,191
<CHARGE-OFFS> 1,856
<RECOVERIES> 422
<ALLOWANCE-CLOSE> 8,076
<ALLOWANCE-DOMESTIC> 8,076
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
