DRAFT 6/13/96
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 17, 1996
REGISTRATION NO. 333-_____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
MAINSTREET BANKGROUP INCORPORATED
(Exact name of registrant as specified in its charter)
VIRGINIA 6711 54-1046817
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation) Classification Code Number) Identification No.)
200 EAST CHURCH STREET
MARTINSVILLE, VIRGINIA 24112
(540) 666-6724
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
REBECCA J. JENKINS
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
200 EAST CHURCH STREET
MARTINSVILLE, VIRGINIA 24112
(540) 666-3272
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
-----------------------------
Copies to:
LATHAN M. EWERS, JR. TALFOURD H. KEMPER
HUNTON & WILLIAMS WOODS, ROGERS & HAZELGROVE, PLC
951 EAST BYRD STREET 10 SOUTH JEFFERSON STREET, SUITE 1400
RICHMOND, VIRGINIA 23219 ROANOKE, VIRGINIA 24011
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
If the securities being registered on this form are being offered in connection
with the formation of a holding company, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================================
PROPOSED PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE MAXIMUM OFFERING AGGREGATE OFFERING AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER UNIT(3) PRICE(3) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Common Stock(2) 1,748,250 shs. $ 8.44 $ 14,762,000 $5,091
===================================================================================================================
</TABLE>
(1) This Registration Statement covers the maximum number of shares of common
stock of the Registrant which are expected to be issued in connection with
the transactions described herein.
(2) Estimated in accordance with Rule 457(f)(2) for the purpose of calculating
the registration fee, with the value of the Bank Common Stock being
exchanged in the transaction for BankGroup Common Stock being based upon the
book value of Bank Common Stock at March 31, 1996, the latest practicable
data prior to filing.
(3) The Rights to purchase Participating Cumulative Preferred Stock, Series A
will be attached to and will trade with shares of the Common Stock of
MainStreet BankGroup Incorporated.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
<PAGE>
MAINSTREET BANKGROUP INCORPORATED
CROSS REFERENCE SHEET
ITEM OF FORM S-4 LOCATION IN PROSPECTUS
1. Forepart of Facing Page; Cross Reference
Registration Statement Sheet; Outside Front Cover
and Outside Front Cover Page of Prospectus
Page of Prospectus
2. Inside Front and Inside Front Cover Page of
Outside Back Cover Prospectus; Table of Contents;
Pages of Prospectus Available Information;
Incorporation of Certain
Information by Reference
3. Risk Factors, Ratio of Summary; Comparative Per Share
Earnings to Fixed Data
Charges and Other
Information
4. Terms of the Summary; The Bank Merger;
Transaction Comparative Rights of
Shareholders; Annex I; Annex
II; Annex III
5. ProForma Financial BankGroup, Bank and Hanover
Information Bank -- Unaudited Financial
Data and Unaudited Proforma
Accounts; BankGroup and Bank
-- Proforma Consolidated
Financial Information;
BankGroup, Bank and Hanover
Bank -- Proforma Condensed
Statement of Financial
Condition
6. Material Contracts with Not Applicable
the Company Being
Acquired
7. Additional Information Not Applicable
Required for Reoffering
by Persons and Parties
Deemed to be Underwriters
8. Interests of Named Not Applicable
Experts and Counsel
9. Disclosure of Not Applicable
Commission's Position
on Indemnification for
Securities Act Liabilities
10. Information with Available Information;
Respect to S-3 Incorporation of Certain
Registrants Information by Reference;
Summary
11. Incorporation of Incorporation of Certain
Certain Information by Information by Reference
Reference
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<PAGE>
12. Information with Not Applicable
Respect to S-2 or S-3
Registrants
13. Incorporation of Not Applicable
Certain Information by
Reference
14. Information with Not Applicable
Respect to Registrants
Other than S-2 or S-3
Registrants
15. Information with Not Applicable
Respect to S-3
Companies
16. Information with Not Applicable
Respect to S-2 or S-3
Companies
17. Information with Summary; Supervision and
Respect to Companies Regulation; The First National
other than S-2 or S-3 Bank of Clifton Forge Market
Companies for and Dividends of Common
Stock; Experts; Financial
Statements of the First
National Bank of Clifton Forge
18. Information if Proxies, Incorporation of Certain
Consents or Information By Reference;
Authorizations are to Summary -- Shareholder
be Solicited Meeting; The Bank Merger;
Summary of Rights of
Shareholders Electing to
Exercise Their Right of
Appraisal; Annex III
19. Information if Proxies, Not Applicable
Consents or
Authorizations are not
to be Solicited, or in
an Exchange Offer
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DRAFT - 6/13/96
Dear Shareholders:
You are cordially invited to attend the Special Meeting of
Shareholders of The First National Bank of Clifton Forge ("Bank") on , 1996 at
a.m., Eastern Time, at the ____________________, located at
____________________. This is a very important meeting regarding your investment
in the Bank.
The purpose of the meeting is to consider and vote upon the Agreement
and Plan of Reorganization, dated as of April 17, 1996, by and among the Bank,
MainStreet BankGroup Incorporated ("BankGroup") and CF Acquisition Subsidiary,
N.A. ("Acquisition") and the related Revised Plan of Merger (together, the
"Agreement"), pursuant to which, among other things, the Bank will be merged
with and into Acquisition (the "Bank Merger") and become a subsidiary of
BankGroup. In the Bank Merger, each share of Common Stock of the Bank, other
than shares exchanged for cash and dissenters' shares, will be converted into
the right to receive shares of Common Stock of BankGroup, as described in the
accompanying Proxy Statement/Prospectus. YOUR BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT YOU VOTE IN FAVOR OF THE AGREEMENT AND THE BANK MERGER, WHICH
THE BOARD BELIEVES IS IN THE BEST INTERESTS OF SHAREHOLDERS OF THE BANK.
Enclosed is a Notice of the Special Meeting of Shareholders, a Proxy
Statement/Prospectus containing a discussion of the Agreement and the Bank
Merger, a proxy card, and a cash option form, which is described in the Proxy
Statement/ Prospectus. Please complete, sign and date the enclosed proxy card
and return it as soon as possible in the envelope provided.
If you decide to attend the Special Meeting, you may vote your shares
in person whether or not you have previously submitted a proxy. It is important
that you understand that the Agreement and Bank Merger must be approved by the
holders of more than two-thirds of all outstanding shares of Common Stock of the
Bank, and that the failure to vote will have the same effect as a vote against
the proposal. On behalf of the Board, thank you for your attention to this
important matter.
___________________, 1996 Very truly yours,
George J. Kostel
Chairman of the Board
and President
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<PAGE>
THE FIRST NATIONAL BANK OF CLIFTON FORGE
511 MAIN STREET
CLIFTON FORGE, VIRGINIA 24422
540-862-4251
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 1996
TO THE SHAREHOLDERS OF THE FIRST NATIONAL BANK OF CLIFTON FORGE:
NOTICE IS HEREBY GIVEN that a Special Meeting of shareholders has been
called by the Board of Directors of The First National Bank of Clifton Forge
("the Bank") and will be held at the ____________________, located at
_______________, on , 1996 at a.m. Eastern Time for the purpose of
considering and voting upon the following matters:
1. Proposed Bank Merger. To consider and vote upon the Agreement
and Plan of Reorganization dated as of April 17, 1996 and a related Revised Plan
of Merger (together, the "Agreement") providing for the merger of the Bank with
and into CF Acquisition Subsidiary, N.A., a wholly-owned subsidiary of
MainStreet BankGroup Incorporated (the "Bank Merger"). The Agreement is
attached to the accompanying Proxy Statement/Prospectus as Annex I; and
2. Other Business. To consider and vote upon such other matters as
may properly come before the meeting.
Only those holders of shares of Common Stock of the Bank ("Bank Common
Stock") of record at the close of business on _______________, 1996 are entitled
to notice of and to vote at the meeting.
Clifton Forge, Virginia By Order of the Board of Directors,
____________, 1996
------------------------
Secretary
THE BOARD OF DIRECTORS OF THE BANK UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF
BANK COMMON STOCK VOTE TO APPROVE THE BANK MERGER PROPOSAL.
YOU ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING. IT IS IMPORTANT THAT
YOUR SHARES BE REPRESENTED AT THE MEETING. PLEASE SIGN, DATE AND RETURN THE
ENCLOSED PROXY CARD IN THE ACCOMPANYING POSTAGE-PAID ENVELOPE SO THAT YOUR
SHARES WILL BE REPRESENTED AT THE MEETING. SHAREHOLDERS ATTENDING THE MEETING
MAY PERSONALLY VOTE ON ALL MATTERS WHICH ARE CONSIDERED, IN WHICH EVENT THE
SIGNED PROXIES ARE REVOKED. ANY PROXY MAY BE REVOKED BY YOU IN WRITING OR IN
PERSON AT ANY TIME PRIOR TO THE EXERCISE THEREOF.
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<PAGE>
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS
OF
THE FIRST NATIONAL BANK OF CLIFTON FORGE
TO BE HELD ON , 1996
---------------
PROSPECTUS OF
MAINSTREET BANKGROUP INCORPORATED
COMMON STOCK
---------------
This Proxy Statement/Prospectus is being furnished to the holders of
Common Stock, par value $5.00 per share ("Bank Common Stock"), of The First
National Bank of Clifton Forge, a national banking association (the "Bank"), in
connection with the solicitation of proxies by the Board of Directors of the
Bank (the "Bank Board") for use at the Special Meeting of Bank Shareholders to
be held at a.m. Eastern Time on , 1996, at ____________________, located at
_______________ (the "Bank Shareholder Meeting" or the "Special Meeting").
At the Bank Shareholder Meeting, shareholders of record of Bank Common
Stock as of the close of business on , 1996, will consider and vote upon a
proposal to approve the Agreement and Plan of Reorganization, dated as of April
17, 1996, and a related Revised Plan of Merger (together, the "Agreement") by
and among MainStreet BankGroup Incorporated, a Virginia corporation
("BankGroup"), CF Acquisition Subsidiary, N.A., an interim national banking
association (in organization) wholly owned by BankGroup ("Acquisition"), and The
First National Bank of Clifton Forge, a national banking association ("Bank"),
pursuant to which, among other things, the Bank will merge into Acquisition (the
"Bank Merger"). Upon consummation of the Bank Merger, which is expected to occur
on or about September 30, 1996, each outstanding share of Bank Common Stock
(other than shares as to which the holder exercises and perfects the statutory
right to an appraisal ("Dissenting Shares") shall be converted into and
represent the right to receive (upon a shareholder's election) either (i) a
number of shares of BankGroup Common Stock, determined by the Exchange Ratio,
subject to adjustment as set forth in the Agreement, or (ii) $83.20 cash per
share of Bank Common Stock (the "Common Stock Price Per Share"), subject to all
applicable withholding taxes. The number of shares of Bank Common Stock for
which shareholders elect to receive cash, when
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<PAGE>
added to the number of Dissenting Shares as defined in Section 2.4 of the
Agreement and fractional shares settled in cash, may not exceed 9.9% of
outstanding Bank Common Stock. See "The Bank Merger -- Determination of Exchange
Ratio and Exchange for BankGroup Common Stock." For a description of the
Agreement, which is included herein as Annex I to this Proxy
Statement/Prospectus, see "The Bank Merger."
---------------
This Proxy Statement/Prospectus and the accompanying proxy card are
first being mailed to shareholders of the Bank on or about , 1996.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF BANKGROUP COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS,
DEPOSITS OR OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
---------------
The date of this Proxy Statement/Prospectus is , 1996.
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<PAGE>
TABLE OF CONTENTS
Page
AVAILABLE INFORMATION.................................................. 1
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE...................... 2
SUMMARY ............................................................... 3
Parties to the Bank Merger..................................... 3
Shareholder Meeting............................................ 3
Vote Required; Record Date..................................... 3
The Bank Merger................................................ 4
The Exchange Ratio............................................. 4
Cash Election.................................................. 5
Effective Time of the Bank Merger.............................. 6
Rights of Shareholders Electing to Exercise Their
Rights of Appraisal..................................... 7
Opinion of Financial Advisor................................... 7
Conditions to Consummation..................................... 7
Conduct of Business Pending the Bank Merger.................... 7
Interests of Certain Persons in the Bank Merger................ 8
Resale of BankGroup Common Stock............................... 8
Certain Federal Income Tax Consequences of the Bank
Merger.................................................. 8
Market Prices Prior to Announcement of the Bank Merger......... 8
Comparative Per Share Data..................................... 9
Selected Financial Data........................................ 10
The First National Bank of Clifton Forge --
Management's Discussion and Analysis of Operations......... 15
BankGroup, Bank and Hanover Bank -- Unaudited
Financial Data and Unaudited Proforma Accounts.............. 20
BankGroup and Bank -- Proforma Condensed
Financial Information....................................... 23
BankGroup, Bank and Hanover Bank --
Proforma Condensed Statement of Financial Condition......... 30
GENERAL INFORMATION.................................................... 31
THE BANK MERGER........................................................ 33
Opinion of Financial Advisor................................... 33
Effective Time of the Bank Merger.............................. 37
Determination of Exchange Ratio; Exchange of Bank Stock
for BankGroup Common Stock.............................. 37
Cash Election; Election Procedures............................. 39
Business of the Bank Pending the Bank Merger................... 40
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Conditions to Consummation of the Bank Merger.................. 41
Termination.................................................... 41
Accounting Treatment........................................... 41
Operations After the Bank Merger....................................... 42
Interests of Certain Persons in the Bank Merger................ 42
Effect on the Bank Employee Benefits Plans............................. 43
Certain Federal Income Tax Consequences........................ 43
Rights of Shareholders Electing to Exercise Their Right
of Appraisal............................................ 47
MAINSTREET BANKGROUP INCORPORATED...................................... 49
General........................................................ 49
The Banks...................................................... 50
Recent Development............................................. 51
PRICE RANGE OF BANKGROUP COMMON STOCK AND DIVIDENDS.................... 53
THE FIRST NATIONAL BANK OF CLIFTON FORGE............................... 53
General........................................................ 53
MARKET FOR AND DIVIDENDS PAID ON BANK COMMON STOCK..................... 54
OWNERSHIP BY CERTAIN BENEFICIAL OWNERS OF BANK STOCK................... 54
REGULATION AND SUPERVISION............................................. 57
Bank Holding Companies......................................... 57
Capital Requirements........................................... 59
Limits on Dividends and Other Payments......................... 60
Banks ........................................................ 61
Deposit Insurance...................................................... 62
Other Safety and Soundness Regulations................................. 62
DESCRIPTION OF CAPITAL STOCK OF BANKGROUP.............................. 63
Preferred Stock................................................ 63
Common Stock................................................... 63
Rights ........................................................ 64
Virginia Stock Corporation Act................................. 65
Reports to Shareholders........................................ 67
Transfer Agent................................................. 67
COMPARATIVE RIGHTS OF SHAREHOLDERS..................................... 67
Capitalization................................................. 67
Amendment of Articles or Bylaws................................ 67
Required Shareholder Vote for Certain Actions.................. 68
Director Nominations........................................... 68
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Directors and Classes of Directors; Vacancies and
Removal of Directors.................................... 69
Anti-Takeover Provisions....................................... 70
Preemptive Rights.............................................. 70
Assessment..................................................... 70
Conversion; Redemption; Sinking Fund........................... 71
Liquidation Rights............................................. 71
Dividends and Other Distributions.............................. 71
Indemnification................................................ 72
Shareholder Proposals.......................................... 72
Shareholder Inspection Rights; Shareholder Lists............... 73
Shareholder Rights Plan........................................ 73
Dissenters' Rights............................................. 73
RESALE OF BANKGROUP COMMON STOCK....................................... 74
EXPERTS ............................................................... 75
LEGAL OPINIONS......................................................... 75
OTHER MATTERS.......................................................... 76
ANNEX I -- Agreement and Plan of Reorganization dated April
17, 1996; Revised Plan of Merger
ANNEX II -- Fairness Opinion of Scott & Stringfellow, Inc.
ANNEX III -- 12 U.S.C.A. ss. 215a relating to Dissenters' Rights
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<PAGE>
AVAILABLE INFORMATION
BankGroup is subject to the reporting and informational requirements of
the Securities Exchange Act of 1934 (the "Exchange Act") and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). Reports, proxy statements and
other information filed with the SEC can be inspected and copied at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its Regional Offices located at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60611-2511
or Seven World Trade Center (13th Floor), New York, New York 10048. Copies of
such material can be obtained from the Public Reference Section of the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such
reports, proxy statements and other information also may be inspected at the
offices of the National Association of Securities Dealers, Inc. located at 1735
K Street, N.W., Washington, D.C. 20006 for BankGroup. As permitted by the Rules
and Regulations of the SEC, this Proxy Statement/Prospectus does not contain all
the information set forth in the Registration Statement on Form S-4, of which
this Proxy Statement/Prospectus is a part, and exhibits thereto (together with
the amendments thereto, the "Registration Statement"), which has been filed by
BankGroup with the SEC under the Securities Act of 1933 (the "1933 Act") with
respect to BankGroup Common Stock and to which reference is hereby made.
No person has been authorized to give any information or to make any
representation other than as contained herein in connection with the offer
contained in this Proxy Statement/Prospectus, and if given or made, such
information or representation must not be relied upon as having been authorized
by BankGroup or the Bank. This Proxy Statement/Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any securities other than the
securities to which it relates, nor does it constitute an offer to or
solicitation of any person in any jurisdiction to whom it would be unlawful to
make such an offer or solicitation. Neither the delivery of this Proxy
Statement/Prospectus nor the distribution of any of the securities to which this
Proxy Statement/Prospectus relates shall, at any time, imply that the
information herein is correct as of any time subsequent to the date hereof.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE CERTAIN
DOCUMENTS RELATING TO BANKGROUP THAT ARE NOT PRESENTED HEREIN OR DELIVERED
HEREWITH. BANKGROUP DOCUMENTS ARE AVAILABLE WITHOUT CHARGE UPON REQUEST FROM
REBECCA J. JENKINS, GENERAL COUNSEL AND SECRETARY, MAINSTREET BANKGROUP
INCORPORATED, 200 EAST CHURCH STREET, MARTINSVILLE, VIRGINIA 24112, (540)
666-6724. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUESTS
SHOULD BE MADE BY _______________, 1996.
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<PAGE>
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by BankGroup are incorporated by reference
in this Proxy Statement/Prospectus: (i) BankGroup's Annual Report on Form 10-K
for the year ended December 31, 1995; (ii) BankGroup's Quarterly Report on Form
10-Q for the period ended March 31, 1996; (iii) the description of BankGroup
Common Stock in BankGroup's registration statement filed under the Exchange Act
with respect to BankGroup Common Stock, including all amendments and reports
filed for the purpose of updating such description; and (iv) BankGroup's Current
Report on Form 8-K, dated April 19, 1996.
All documents filed by BankGroup pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date hereof and prior to the date
of the Bank Shareholder Meeting are hereby incorporated by reference in this
Proxy Statement/ Prospectus and shall be deemed a part hereof from the date of
filing of such documents. Any statement contained in any supplement hereto or in
a document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of the Registration
Statement and this Proxy Statement/Prospectus to the extent that a statement
contained herein, in any supplement hereto or in any subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of the
Registration Statement, this Proxy Statement/Prospectus or any supplement
hereto.
Also incorporated by reference herein is the Agreement and Plan of
Reorganization among BankGroup, Acquisition and the Bank, dated April 17, 1996,
which is attached to this Proxy Statement/Prospectus as Annex I.
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SUMMARY
THE FOLLOWING SUMMARY IS NOT INTENDED TO BE A COMPLETE DESCRIPTION OF
ALL MATERIAL FACTS REGARDING BANKGROUP, THE BANK AND THE MATTERS TO BE
CONSIDERED AT THE BANK SHAREHOLDER MEETING AND IS QUALIFIED IN ALL RESPECTS BY
THE INFORMATION APPEARING ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT/PROSPECTUS, THE ANNEXES HERETO AND THE DOCUMENTS REFERRED TO HEREIN.
SHAREHOLDERS ARE URGED TO CAREFULLY READ ALL SUCH INFORMATION.
PARTIES TO THE BANK MERGER
BankGroup. The main office of BankGroup is located at 200 East Church
Street, Martinsville, Virginia 24112. See "Business of BankGroup." CF
Acquisition Subsidiary, N.A., is owned by BankGroup and has no business
operations.
The Bank. The main office of the Bank is located at 511 Main Street,
Clifton Forge, Virginia 24422. See "Business of the Bank."
SHAREHOLDER MEETING
The Bank Shareholders Meeting will be held on , 1996 at a.m. Eastern
Time, at ____________________ located at _______________, for the purpose of
considering and voting upon a proposal to approve the Agreement and a related
Revised Plan of Merger; and such other business as may properly come before the
meeting.
VOTE REQUIRED; RECORD DATE
Only Bank shareholders of record at the close of business on , 1996 (the
"Record Date") are entitled to vote at the Bank Shareholder Meeting. The
affirmative vote of the holders of more than two-thirds of the shares
outstanding on such date is required to approve the Bank Merger. As of the
Record Date, there were 315,000 shares of Bank Common Stock entitled to be
voted, held by approximately 420 shareholders of record.
Directors of the Bank and their affiliates beneficially owned, as of the
Record Date, 47,385 shares or approximately 15.0% of the 315,000 outstanding
shares of Bank Common Stock. Directors of the Bank have agreed with BankGroup to
recommend approval of the Bank Merger to shareholders of the Bank and to vote
the shares of Bank Common Stock beneficially owned by them, and with respect to
which they have the power to vote, in favor of the Bank Merger. None of the
Directors of the Bank are expected to exercise the cash option described below.
See "Ownership by Certain Beneficial Owners of Bank Stock."
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The Board of Directors of BankGroup has approved the Bank Merger.
Approval of the Bank Merger by BankGroup shareholders is not required by
applicable law or regulation.
THE BANK MERGER
Pursuant to the Agreement, at the Effective Time of the Bank Merger, as
defined herein under the heading "The Bank Merger -- Effective Time of the Bank
Merger," the Bank will merge into Acquisition in accordance with the Revised
Plan of Merger. At the Effective Time of the Bank Merger, each outstanding share
of Bank Common Stock (other than shares held by BankGroup or Dissenting Shares)
will be converted into the right to receive (upon a shareholder's election)
either (i) a number of shares of BankGroup Common Stock, determined by the
Exchange Ratio, subject to adjustment as set forth in the Agreement, or (ii)
$83.20 cash per share of Bank Common Stock (the "Common Stock Price Per Share"),
subject to all applicable withholding taxes and provided that the number of
shares of Bank Common Stock for which shareholders elect to receive cash, when
added to the number of Dissenting Shares as defined in Section 2.4 of the
Agreement and fractional shares settled in cash, does not exceed 9.9% of the
outstanding shares of Bank Common Stock.
THE EXCHANGE RATIO
For the purpose of determining the Exchange Ratio, each share of Bank
Common Stock has been valued at $83.20, the Common Stock Price Per Share,
sometimes referred to as "Merger Consideration." The number of shares of
BankGroup Common Stock to be delivered for each share of Bank Common Stock will
be determined by dividing $83.20 per share of Bank Common Stock by the average
of the closing sales price (the "BankGroup Stock Price") for BankGroup Common
Stock as reported on the Nasdaq National Market for the 10 trading days
preceding the last to occur of (i) approval of the Bank Merger by shareholders
of Bank or (ii) receipt of the last of all regulatory approvals prerequisite to
consummation of the Bank Merger (the "Exchange Ratio"). If such quotient is less
than 4.89, the Exchange Ratio shall be 4.89. If such quotient is greater than
5.55, the Exchange Ratio shall be 5.55. The Exchange Ratio will be adjusted to
reflect any consolidation, split-up, other subdivisions or combinations of
BankGroup Common Stock, any dividend payable in BankGroup Common Stock, or any
capital reorganization involving the reclassification of BankGroup Common Stock.
See "The Bank Merger -- Determination of Exchange Ratio and Exchange for
BankGroup Common Stock."
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RECOMMENDATION OF THE BOARD OF DIRECTORS OF BANK;
REASONS FOR THE BANK MERGER
The Board of Directors of Bank has determined that the Bank Merger is in
the best interests of Bank and its shareholders. The Board was influenced by a
number of factors in arriving at this determination, though it did not assign
any specific or relative weight to these factors in its consideration. Among the
factors considered were:
(i) The Board of Directors of Bank believes that the Exchange Ratio
provides a fair price to Bank's shareholders for their shares of Bank Common
Stock. Scott & Stringfellow, Inc., the Bank's financial advisor, concluded that
the consideration to be received by the Bank's shareholders in the Bank Merger
was fair to Bank shareholders from a financial point of view. See "The Bank
Merger -- Opinion of Financial Advisor".
(ii) The Bank Merger is anticipated to be tax-free for federal income
tax purposes for the shareholders of Bank Common Stock (other than in respect to
shares exchanged for cash, and cash paid in lieu of fractional shares or to
dissenting shareholders).
(iii) BankGroup Common Stock to be received by Bank shareholders is
expected to afford greater market liquidity when compared to the current minimal
trading of Bank's Common Stock.
(iv) The Bank Merger will provide Bank's customers access to a broader
range of financial services and products.
(v) Bank's Board of Directors review of the provisions of the Agreement
and related Revised Plan of Merger was favorable.
(vi) The Bank Merger will allow Bank to continue its community bank
philosophy.
Based on these matters, and such other matters as the Board deemed
relevant, Bank's Board of Directors unanimously adopted the Agreement and
Revised Plan of Merger as being in the best interests of Bank and its
shareholders.
BANK'S BOARD OF DIRECTORS RECOMMENDS THAT BANK SHAREHOLDERS VOTE FOR
APPROVAL OF THE PROPOSAL.
CASH ELECTION
Each holder of shares of Bank Common Stock will be given the option of
exchanging all, but not less than all, of his or her shares for $83.20 cash per
share of Bank Common Stock (the "Common Stock Price Per Share"), subject to all
applicable withholding taxes and provided that the number of shares of Bank
Common Stock for which shareholders elect to receive cash, when
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<PAGE>
added to the number of Dissenting Shares as defined in Section 2.4 of the
Agreement, and fractional shares settled in cash, does not exceed 9.9% of the
outstanding shares of Bank Common Stock. A shareholder selecting the cash option
must exchange all of his or her shares for cash to preserve the "pooling of
interests" accounting treatment for the Bank Merger.
Because the number of shares exchanged for cash may not exceed 9.9% of
the outstanding shares of Bank Common Stock, the extent to which the cash
elections will be accommodated will depend upon the number of holders of shares
of Bank Common Stock who elect to receive cash. If the aggregate of the
Dissenting Shares, fractional shares settled for cash and shares with respect to
which a cash election is made exceeds 9.9% of the outstanding shares of Bank
Common Stock, shares submitted for cash purchase will be chosen by lot to
accommodate the "pooling of interests" accounting requirement that a shareholder
who chooses the cash election must have all of his or her shares purchased for
cash. Shareholders who submit their shares for cash purchase but are not chosen
in the lottery will have their shares exchanged for BankGroup Common Stock (plus
cash in lieu of fractional shares).
IF A HOLDER OF SHARES OF BANK COMMON STOCK ELECTS TO SURRENDER ALL OF
HIS OR HER SHARES FOR CASH, HE MUST FILE THE CASH OPTION FORM ACCOMPANYING THIS
PROXY STATEMENT/PROSPECTUS PRIOR TO OR AT THE BANK SHAREHOLDER MEETING. ANY
HOLDER OF SHARES OF BANK COMMON STOCK WHO DOES NOT COMPLETE AND RETURN A CASH
OPTION FORM PRIOR TO OR AT THE BANK SHAREHOLDER MEETING CAN ONLY RECEIVE
BANKGROUP COMMON STOCK IN THE BANK MERGER. ONCE THE VOTE ON THE BANK MERGER HAS
BEEN TAKEN AT THE BANK SHAREHOLDER MEETING, THE CASH ELECTION IS IRREVOCABLE.
THE CASH OPTION FORM MUST BE ACCOMPANIED BY THE STOCK CERTIFICATES TO BE
EXCHANGED FOR CASH. The Bank will hold the certificates for safekeeping pending
the Effective Time of the Bank Merger, at which time they will be exchanged for
cash. If the Bank Merger is not consummated, the Bank will return the
certificates. See "The Bank Merger -- Cash Election; Election Procedures."
EFFECTIVE TIME OF THE BANK MERGER
The Bank Merger is expected to be consummated around September 30, 1996.
Subject to the terms and conditions set forth herein, including receipt of all
required regulatory approvals, the Bank Merger shall become effective at the
time Articles of Merger relating to the Bank Merger are made effective (the
"Effective Time of the Bank Merger") by the Office of the Comptroller of the
Currency (the "OCC"). The Bank and BankGroup each has the right, acting
unilaterally, to terminate the Agreement should the Bank Merger not be completed
by December 31, 1996. See "The Bank Merger -- Termination."
-6-
<PAGE>
RIGHTS OF SHAREHOLDERS ELECTING TO EXERCISE THEIR RIGHTS OF
APPRAISAL
Holders of Bank Common Stock entitled to vote on approval of the
Agreement and the related Revised Plan of Merger have the right to dissent from
the Bank Merger and, upon consummation of the Bank Merger and the satisfaction
of certain specified procedures, to receive payment of the fair value of each
such holder's shares of Bank Common Stock in cash in accordance with 12 U.S.C.A.
ss. 215a. The procedures to be followed by a shareholder electing to perfect his
or her right of appraisal are summarized under "The Bank Merger -- Rights of
Shareholders Electing to Exercise Their Right of Appraisal" and a copy of 12
U.S.C.A. ss. 215a(a), (b) and (c) is set forth in Annex III to this Proxy
Statement/Prospectus. FAILURE TO FOLLOW SUCH PROVISIONS PRECISELY MAY RESULT IN
LOSS OF SUCH APPRAISAL RIGHTS.
OPINION OF FINANCIAL ADVISOR
The Bank has received the opinion of Scott & Stringfellow, Inc. ("Scott
& Stringfellow") that the Merger Consideration to be received by the holders of
the Bank Common Stock pursuant to the terms of the Bank Merger is fair to Bank
shareholders from a financial point of view. Scott & Stringfellow's opinion is
directed only to the Merger Consideration to be received by the holders of the
Bank Common Stock and does not constitute a recommendation to any holders of the
Bank Common Stock as to how such holders of Bank Common Stock should vote at the
Bank Shareholder Meeting or as to any other matter. Scott & Stringfellow will be
paid a fee for its services at the closing of the Bank Merger. For additional
information concerning Scott & Stringfellow and its opinion, see "The Bank
Merger -- Opinion of Financial Advisor" and the opinion of such firm attached as
Annex II to this Proxy Statement/Prospectus.
CONDITIONS TO CONSUMMATION
Consummation of the Bank Merger will be accomplished by the statutory
merger of the Bank into Acquisition. The Bank Merger is contingent upon the
approvals of the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"), the OCC and the State Corporation Commission of Virginia (the
"SCC") which approvals have been applied for and are expected to be received.
The Bank Merger is also subject to other usual conditions. See "The Bank Merger
- -- Conditions to Consummation of the Bank Merger."
-7-
<PAGE>
CONDUCT OF BUSINESS PENDING THE BANK MERGER
Pursuant to the terms of the Agreement, the Bank has agreed not to take
certain actions relating to the operation of its business pending consummation
of the Bank Merger, without the prior approval of BankGroup, except as otherwise
permitted by the Agreement. See "The Bank Merger -- Business of the Bank Pending
the Bank Merger."
INTERESTS OF CERTAIN PERSONS IN THE BANK MERGER
Certain members of the Bank's management and the Bank Board have
interests in the Bank Merger in addition to their interests as shareholders of
the Bank generally. These include, among other things, the election of George J.
Kostel to BankGroup's Board of Directors, indemnification and directors' and
officers' liability insurance for Bank directors and officers, and eligibility
of Bank employees for certain BankGroup employee benefits. See "The Bank Merger
- -- Interests of Certain Persons in the Bank Merger."
RESALE OF BANKGROUP COMMON STOCK
Shares of BankGroup Common Stock received in the Bank Merger will be
freely transferable by the holders thereof, except for those shares held by
those holders who may be deemed to be "affiliates" (generally including
directors, certain executive officers and 10% or greater shareholders) of the
Bank or BankGroup under applicable federal securities laws. See "Resale of
BankGroup Common Stock."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE BANK MERGER
The Bank Merger is intended to be a tax-free "reorganization" as defined
in Section 368(a) of the Internal Revenue Code of 1986 (the "Code"), but the
receipt of cash by a Bank shareholder for any shares of Bank Common Stock,
including cash received as a result of the perfection of dissenters' rights, or
in lieu of a fractional share of BankGroup Common Stock, will be a taxable
transaction. A condition to consummation of the Bank Merger is the receipt by
BankGroup and the Bank of an opinion from Hunton & Williams, counsel to
BankGroup, as to the qualification of the Bank Merger as a tax-free
reorganization and certain other federal income tax consequences of the Bank
Merger. See "The Bank Merger -- Certain Federal Income Tax Consequences."
MARKET PRICES PRIOR TO ANNOUNCEMENT OF THE BANK MERGER
The following is information regarding the last reported closing price
per share of BankGroup Common Stock on the National Association of Securities
Dealers, Inc. National Market System (the "NASDAQ/NMS") on March 6, 1996, the
date immediately preceding delivery of an indication of interest to the Bank on
March 7, 1996, which was superseded by the Agreement on April 17, 1996. See
"Price Range of Bank Common Stock and Dividend Policy"
-8-
<PAGE>
for information concerning recent market prices of the Bank Common Stock.
Bank
Historical Equivalent
BankGroup (a) Bank Pro Forma(a)
Common Stock $16.125 $62.50 $83.20
- ---------------
(a) The equivalent price for Bank Common Stock is the product of multiplying
an assumed Exchange Ratio of 5.16 shares of BankGroup Common Stock times
$16.125.
COMPARATIVE PER SHARE DATA
The following table presents historical and pro forma per share data for
BankGroup, and historical and equivalent pro forma per share data for the Bank.
The pro forma combined amounts give effect to an assumed Exchange Ratio of 5.20
shares of BankGroup Common Stock for each share of Bank Common Stock (based on
the last sale price of BankGroup Common Stock on March 31, 1996 of $16.00). The
equivalent pro forma Bank share amounts allow comparison of historical
information about one share of Bank Common Stock to the corresponding data about
what one share of Bank Common Stock will equate to in the combined corporation
and are computed by multiplying the pro forma combined amounts by an assumed
Exchange Ratio of 5.20. As discussed in "The Bank Merger -- Determination of
Exchange Ratios and Exchange for BankGroup Common Stock," the final Exchange
Ratio will be determined based on the average closing price for BankGroup Common
Stock as reported on NASDAQ for each of the 10 trading days preceding the last
to occur of (i) approval of the Bank Merger by shareholders of Bank or (ii)
receipt of the last of all regulatory approvals prerequisite to consummation of
the Bank Merger (the "Exchange Ratio"). The following table is based on the
assumption that all issued and outstanding shares of Bank Common Stock are
converted into shares of BankGroup Common Stock. The Bank Merger is reflected
under the pooling of interests method of accounting and pro forma information is
derived accordingly.
The per share data included in the following table should be read in
conjunction with the consolidated financial statements of BankGroup incorporated
by reference herein and the financial statements of the Bank included herein and
the notes accompanying all such financial statements. The data presented below
are not necessarily indicative of the results of operations which would have
been obtained if the Bank Merger had been consummated in the past or which may
be obtainable in the future.
COMPARATIVE PER SHARE DATA
-9-
<PAGE>
<TABLE>
<CAPTION>
As of or For
Three Months Ended As of or For Years
March 31, Ended December 31,
1996 1995 1995 1994 1993
<S> <C>
Book Value Per Share at Period End:(4)
BankGroup historical....................................$ 9.04 $ 7.38 $ 8.87 $ 6.86 $ 7.70
Bank historical......................................... 46.86 43.36 46.81 42.38 40.21
Pro forma combined per BankGroup common share(1)........ 9.03 7.55 8.89 7.09 7.71
Equivalent pro forma per Bank common share ............. 46.96 39.26 46.23 36.87 40.09
Cash Dividends Declared Per Share:(4)
BankGroup historical....................................$ .115 $ .09 $ .39 $ .33 $ .29
Bank historical......................................... .57 .53 2.18 2.27 1.80
Pro forma combined per BankGroup common share(2)........ .114 .10 .39 .35 .30
Equivalent pro forma per Bank common share ............. .59 .52 2.03 1.82 1.56
Net Income Per Share:(4)
BankGroup historical....................................$ .37 $ .29 $ 1.37 $ .54 $ .93
Bank historical......................................... 1.27 1.17 4.84 4.73 5.33
Pro forma combined per BankGroup common share(3)........ .35 .28 1.29 .61 .95
Equivalent pro forma per Bank common share.............. 1.82 1.46 6.71 3.17 4.94
</TABLE>
- ---------------
(1) Pro forma combined book value per BankGroup common share represents
combined common shareholders' equity amounts, divided by pro forma
combined period-end common shares outstanding.
(2) Pro forma combined dividends per BankGroup common share represent
combined common dividends declared, divided by pro forma combined
average common shares outstanding.
(3) Pro forma combined net income per BankGroup common share represents
combined net income available to common shareholders, divided by pro
forma combined average common shares outstanding.
(4) BankGroup's fiscal year ends December 31 and the Bank's fiscal year ends
December 31. In the above table, the Bank financial data is presented
consistent with the fiscal year of BankGroup. The Bank's book value per
share is as of the dates presented, and net income and dividend data
reflect results for the periods presented.
SELECTED FINANCIAL DATA
MAINSTREET BANKGROUP INCORPORATED
AND THE FIRST NATIONAL BANK OF CLIFTON FORGE
The following BankGroup consolidated financial data and Bank financial
data is qualified in its entirety by the information included in the documents
incorporated in this Proxy Statement/Prospectus by reference. Interim financial
results, in the opinion of BankGroup and Bank management, reflect all
adjustments necessary for a fair presentation of the results of operations,
including adjustments related to completed acquisitions. All such adjustments
are of a normal nature. The results of operations for an interim period are not
necessarily indicative of results that may be expected for a full year or any
other interim period.
-10-
<PAGE>
<TABLE>
<CAPTION>
As of or for
Three Months
Ended As or for
March 31, Years ended December 31,
1996 1995 1995 1994 1993 1992 1991
(Dollars in 000s, except per share data)
<S> <C>
EARNINGS:
Net Interest Income
MainStreet BankGroup.................. $ 9,980 $ 8,979 $37,300 $34,299 $32,621 $29,975 $25,869
Clifton Forge......................... 814 804 3,175 3,160 3,333 3,141 2,671
MainStreet and Clifton Forge ProForma. 10,794 9,783 40,475 37,459 35,954 33,116 28,540
Provision for Loan Losses
MainStreet BankGroup.................. 822 328 1,319 2,827 1,370 2,397 5,424
Clifton Forge......................... 1 -- -- 3 27 46 62
MainStreet and Clifton Forge ProForma. 823 328 1,319 2,830 1,397 2,443 5,486
Net Interest Income after provision for
loan losses
MainStreet BankGroup.................. 9,158 8,651 35,981 31,472 31,251 27,578 20,445
Clifton Forge......................... 813 804 3,175 3,157 3,306 3,095 2,609
MainStreet and Clifton Forge ProForma. 9,971 9,455 39,156 34,629 34,557 30,673 23,054
Noninterest Income
MainStreet BankGroup.................. 2,778 1,707 7,975 1,175 6,414 6,386 5,580
Clifton Forge......................... 53 38 251 288 359 378 384
MainStreet and Clifton Forge ProForma. 2,831 1,745 8,226 1,463 6,773 6,764 5,964
Noninterest Expense
MainStreet BankGroup.................. 7,435 7,315 28,817 28,713 28,254 24,101 22,337
Clifton Forge......................... 294 317 1,262 1,347 1,329 1,337 1,228
MainStreet and Clifton Forge ProForma. 7,729 7,632 30,079 30,060 29,583 25,438 23,565
Income before income taxes
MainStreet BankGroup.................. 4,501 3,043 15,139 3,934 9,411 9,863 3,688
Clifton Forge......................... 572 525 2,164 2,098 2,336 2,136 1,766
MainStreet and Clifton Forge ProForma. 5,073 3,568 17,303 6,032 11,747 11,999 5,454
Net Income
MainStreet BankGroup.................. 3,164 2,175 10,740 4,088 6,881 7,128 2,984
Clifton Forge......................... 401 369 1,524 1,491 1,678 1,553 1,261
MainStreet and Clifton Forge ProForma. 3,565 2,544 12,264 5,579 8,559 8,681 4,245
Net income applicable to common shares
MainStreet BankGroup.................. 3,164 2,175 10,740 4,088 6,881 7,128 2,984
Clifton Forge......................... 401 369 1,524 1,491 1,678 1,553 1,261
MainStreet and Clifton Forge ProForma. $ 3,565 $ 2,544 $12,264 $ 5,579 $ 8,559 $ 8,681 $ 4,245
PER COMMON SHARE DATA:
Net Income (primary): (1)
MainStreet BankGroup.................. $ 0.37 $ 0.29 $ 1.37 $ 0.54 $ 0.93 $ 0.97 $ 0.41
Clifton Forge......................... 1.27 1.17 4.84 4.73 5.33 4.93 4.00
MainStreet and Clifton Forge ProForma (2) 0.35 0.28 1.29 0.61 0.95 0.97 0.48
Net Income (fully diluted): (1)
MainStreet BankGroup.................. 0.37 0.27 1.29 0.53 0.87 0.91 0.41
Clifton Forge......................... 1.27 1.17 4.84 4.73 5.33 4.93 4.00
MainStreet and Clifton Forge ProForma (2) 0.35 0.26 1.23 0.59 0.90 0.91 0.48
Dividends declared: (1)
MainStreet BankGroup.................. 0.115 0.09 0.39 0.33 0.29 0.22 0.27
Clifton Forge......................... 0.57 0.53 2.18 2.27 1.80 1.58 1.43
MainStreet and Clifton Forge ProForma (2) 0.114 0.10 0.36 0.35 0.30 0.24 0.27
Book value: (1)
MainStreet BankGroup.................. 9.04 7.38 8.87 6.86 7.70 7.05 6.30
Clifton Forge......................... 46.86 43.36 46.81 42.38 40.21 36.69 33.34
MainStreet and Clifton Forge ProForma. 9.03 7.55 8.89 7.09 7.71 7.05 6.32
Average primary shares (thousands): (1)
MainStreet BankGroup.................. 8,590 7,564 7,842 7,510 7,384 7,336 7,280
Clifton Forge......................... 315 315 315 315 315 315 315
MainStreet and Clifton Forge ProForma (2) 10,228 9,202 9,480 9,148 9,022 8,974 8,918
Average fully diluted shares (thousands):
MainStreet BankGroup(1)............... 8,590 8,542 8,548 8,516 8,414 8,380 7,280
Clifton Forge ........................ 315 315 315 315 315 315 315
MainStreet and Clifton Forge ProForma (2) $10,228 $10,180 $10,186 $10,154 $10,052 $10,018 $ 8,918
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended As or for
March 31, Years ended December 31,
1996 1995 1995 1994 1993 1992 1991
(Dollars in 000s, except per share data)
<S> <C>
SELECTED PERIOD-END BALANCES:
Total Assets
MainStreet BankGroup.................. $909,827 $804,501 $895,801 $794,957 $774,193 $743,590 $691,228
Clifton Forge......................... 74,192 70,324 74,682 70,262 71,973 68,135 64,373
MainStreet and Clifton Forge ProForma. 984,019 874,825 970,483 865,219 846,166 811,725 755,601
Loans (Net of unearned income)
MainStreet BankGroup.................. 583,121 508,894 565,784 499,751 449,411 444,631 451,617
Clifton Forge......................... 38,982 37,466 38,709 37,787 34,702 32,581 29,386
MainStreet and Clifton Forge ProForma. 622,103 546,360 604,493 537,538 484,113 477,212 481,003
Allowance for loan losses
MainStreet BankGroup.................. 8,449 8,034 8,076 8,191 8,351 8,610 8,559
Clifton Forge......................... 217 220 222 219 219 242 246
MainStreet and Clifton Forge ProForma. 8,666 8,254 8,298 8,410 8,570 8,852 8,805
Nonperforming Assets (3)
MainStreet BankGroup.................. 5,792 7,011 6,987 6,963 9,282 12,988 15,764
Clifton Forge......................... 410 109 163 30 925 88 251
MainStreet and Clifton Forge ProForma. 6,202 7,120 7,150 6,993 10,207 13,076 16,015
Total Deposits
MainStreet BankGroup.................. 711,703 709,520 700,513 704,570 679,714 655,121 606,831
Clifton Forge......................... 58,690 56,001 59,313 56,447 58,915 56,160 53,376
MainStreet and Clifton Forge ProForma. 770,393 765,521 759,826 761,017 738,629 711,281 660,207
Long-term debt
MainStreet BankGroup.................. 70,928 8,918 929 8,918 9,194 9,455 9,555
Clifton Forge......................... -- -- -- -- -- -- --
MainStreet and Clifton Forge ProForma. 70,928 8,918 929 8,918 9,194 9,455 9,555
Common shareholders' equity
MainStreet BankGroup.................. 77,479 55,488 75,717 51,491 57,124 51,729 46,004
Clifton Forge......................... 14,762 13,657 14,745 13,350 12,666 11,556 10,502
MainStreet and Clifton Forge ProForma. 92,241 69,145 90,462 64,841 69,790 63,285 56,506
Total shareholders' equity
MainStreet BankGroup.................. 77,479 55,488 75,717 51,491 57,124 51,729 46,004
Clifton Forge......................... 14,762 13,657 14,745 13,350 12,666 11,556 10,502
MainStreet and Clifton Forge ProForma. $ 92,241 $ 69,145 $ 90,462 $ 64,841 $ 69,790 $ 63,285 $ 56,506
AVERAGE BALANCES:
Total assets
MainStreet BankGroup.................. $892,679 $793,426 $838,057 $787,200 $753,018 $712,988 $677,272
Clifton Forge......................... 74,274 70,262 71,958 71,131 70,322 67,072 62,389
MainStreet and Clifton Forge ProForma. 966,953 863,688 910,015 858,331 823,340 780,060 739,661
Loans (net of unearned income)
MainStreet BankGroup.................. 571,939 501,081 526,311 474,216 456,393 445,614 462,413
Clifton Forge......................... 39,114 37,515 37,889 35,968 33,699 30,820 27,804
MainStreet and Clifton Forge ProForma. 611,053 538,596 564,200 510,184 490,092 476,434 490,217
Total deposits
MainStreet BankGroup.................. 697,929 701,240 704,661 697,337 665,579 632,361 601,214
Clifton Forge......................... 58,745 56,256 57,474 57,483 57,655 55,431 51,638
MainStreet and Clifton Forge ProForma. 756,674 757,496 762,135 754,820 723,234 687,792 652,852
Long-term debt
MainStreet BankGroup.................. 21,917 8,918 7,398 9,167 9,394 9,463 9,555
Clifton Forge......................... -- -- -- -- -- -- --
MainStreet and Clifton Forge ProForma. 21,917 8,918 7,398 9,167 9,394 9,463 9,555
Common shareholders' equity
MainStreet BankGroup.................. 78,423 53,888 62,279 55,777 55,529 49,804 46,371
Clifton Forge......................... 14,762 13,398 13,801 13,026 12,063 10,998 10,051
MainStreet and Clifton Forge ProForma. 93,185 67,286 76,080 68,803 67,592 60,802 56,422
Total shareholders' equity
MainStreet BankGroup.................. 78,423 53,888 62,279 55,777 55,529 49,804 46,371
Clifton Forge......................... 14,762 13,398 13,801 13,026 12,063 10,998 10,051
MainStreet and Clifton Forge ProForma. $ 93,185 $ 67,286 $ 76,080 $ 68,803 $ 67,592 $ 60,802 $ 56,422
</TABLE>
-12-
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended
March 31, Years ended December 31,
1996 1995 1995 1994 1993 1992 1991
(Dollars in 000s, except per share data)
<S> <C>
RATIOS:
Return on average assets
MainStreet BankGroup.................. 1.42% 1.11% 1.28% 0.52% 0.91% 1.00% 0.44%
Clifton Forge......................... 2.17 2.13 2.12 2.10 2.39 2.32 2.02
MainStreet and Clifton Forge ProForma. 1.48 1.19 1.35 0.65 1.04 1.11 0.57
Return on average shareholders' equity
MainStreet BankGroup.................. 16.18 16.37 17.24 7.33 12.39 14.31 6.44
Clifton Forge......................... 10.90 11.17 11.04 11.45 13.91 14.12 12.55
MainStreet and Clifton Forge ProForma. 15.35 15.33 16.12 8.11 12.66 14.28 7.52
Return on average common shareholders' equity
MainStreet BankGroup.................. 16.18 16.37 17.24 7.33 12.39 14.31 6.44
Clifton Forge......................... 10.90 11.17 11.04 11.45 13.91 14.12 12.55
MainStreet and Clifton Forge ProForma. 15.35 15.33 16.12 8.11 12.66 14.28 7.52
Net interest margin (4)
MainStreet BankGroup.................. 4.82 5.05 4.84 4.81 4.72 4.60 4.23
Clifton Forge......................... 4.75 5.10 4.83 4.90 5.28 5.25 4.74
MainStreet and Clifton Forge ProForma. 4.82 5.05 4.84 4.82 4.79 4.66 4.27
Nonperforming assets to loans and
foreclosed properties at period end (3)
MainStreet BankGroup.................. 0.99 1.37 1.23 1.39 2.04 2.88 3.46
Clifton Forge......................... 1.05 0.29 0.42 0.08 2.67 0.27 0.85
MainStreet and Clifton Forge Proforma. 0.99 1.30 1.18 1.29 2.09 2.71 3.30
Net charge-offs to average loans
MainStreet BankGroup.................. 0.31 0.39 0.27 0.63 0.36 0.53 0.79
Clifton Forge......................... 0.06 -- (0.01) 0.01 0.15 0.16 0.07
MainStreet and Clifton Forge ProForma. 0.30 0.37 0.25 0.59 0.34 0.50 0.75
Allowance for loan losses to loans at
period end
MainStreet BankGroup.................. 1.45 1.58 1.43 1.64 1.86 1.94 1.90
Clifton Forge......................... 0.56 0.59 0.57 0.58 0.63 0.74 0.84
MainStreet and Clifton Forge ProForma. 1.39 1.51 1.37 1.56 1.77 1.85 1.83
Allowance for loan losses to nonperforming
loans at period end
MainStreet BankGroup.................. 186.92 167.93 153.65 185.48 198.31 122.48 69.84
Clifton Forge......................... 52.93 201.83 136.20 730.00 23.68 403.33 155.70
MainStreet and Clifton Forge ProForma. 175.78 168.69 153.13 189.16 166.86 124.85 70.93
Allowance for loan losses to nonperforming
assets at period end
MainStreet BankGroup.................. 145.87 114.59 115.59 117.64 89.97 66.29 54.29
Clifton Forge......................... 52.93 201.83 136.20 730.00 23.68 275.00 98.01
MainStreet and Clifton Forge ProForma. 139.73 115.93 116.06 120.26 83.96 67.70 54.98
Total shareholders' equity to total
assets at period end
MainStreet BankGroup.................. 8.52 6.90 8.45 6.48 7.38 6.96 6.66
Clifton Forge......................... 19.90 19.42 19.74 19.00 17.60 16.96 16.31
MainStreet and Clifton Forge ProForma. 9.37% 7.90% 9.32% 7.49% 8.25% 7.80% 7.48%
CAPITAL RATIOS AT PERIOD END:
Tier 1 risk-adjusted capital............. 13.26% 11.70% 13.57% 11.45% 10.94% 10.36% 9.62%
MainStreet BankGroup..................
Clifton Forge......................... 42.39 40.10 41.29 38.67 39.47 37.49 36.72
MainStreet and Clifton Forge ProForma. 14.85 13.45 15.18 13.17 12.62 11.98 11.17
Total risk-adjusted capital
MainStreet BankGroup.................. 14.51 14.67 14.82 14.43 13.98 13.55 12.90
Clifton Forge......................... 43.03 40.75 41.93 39.30 40.15 38.27 37.58
MainStreet and Clifton Forge ProForma. 16.09 16.31 16.42 16.05 15.56 15.05 14.33
Tier 1 leverage
MainStreet BankGroup.................. 8.62 7.53 8.49 7.25 7.25 6.77 6.55
Clifton Forge......................... 19.64 19.41 19.24 19.11 17.60 16.96 16.31
MainStreet and Clifton Forge ProForma. 9.45% 8.48% 9.32% 8.34% 8.13% 7.63% 7.38%
</TABLE>
-13-
<PAGE>
NOTES TO SELECTED FINANCIAL DATA -
MAINSTREET BANKGROUP INCORPORATED AND
FIRST NATIONAL BANK OF CLIFTON FORGE
(1) PER SHARE DATA FOR THE FIRST NATIONAL BANK OF CLIFTON FORGE HAS BEEN
RETROACTIVELY ADJUSTED TO REFLECT A 50% STOCK DIVIDEND TO SHAREHOLDERS
OF RECORD ON APRIL 1, 1992. PER SHARE DATA FOR MAINSTREET BANKGROUP HAS
BEEN RETROACTIVELY ADJUSTED TO REFLECT A 2-FOR-1 STOCK SPLIT IN THE FORM
OF A STOCK DIVIDEND TO SHAREHOLDERS OF RECORD ON MARCH 4, 1996 AND A
5-FOR-4 STOCK SPLIT IN THE FORM OF A STOCK DIVIDEND TO SHAREHOLDERS OF
RECORD ON JULY 15, 1993.
(2) BASED ON AN EXCHANGE RATIO OF 5.20 FOR CONVERSION OF THE FIRST NATIONAL
BANK OF CLIFTON FORGE COMMON STOCK INTO MAINSTREET BANKGROUP COMMON
STOCK. SEE "THE BANK MERGER" AND "THE EXCHANGE RATIO" FOR ADDITIONAL
DISCUSSION REGARDING CALCULATION OF THE EXCHANGE RATIO.
(3) NONPERFORMING ASSETS INCLUDE NONACCRUAL LOANS, LOANS PAST DUE 90 DAYS
AND GREATER, OTHER REAL ESTATE AND OTHER REPOSSESSED ASSETS.
(4) NET INTEREST MARGIN IS CALCULATED ON A TAXABLE EQUIVALENT BASIS, USING A
TAX RATE OF 35% FOR 1996 AND 34% FOR ALL PRECEDING YEARS FOR MAINSTREET
BANKGROUP. THE FIRST NATIONAL BANK OF CLIFTON FORGE CALCULATIONS WERE
CALCULATED BASED ON 34% FOR ALL YEARS PRESENTED.
-14-
<PAGE>
THE FIRST NATIONAL BANK OF CLIFTON FORGE
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
MARCH 31, 1996 VS. MARCH 31, 1995
OVERVIEW
Net income for the first quarter of 1996 was $401,000, or $1.27 per primary
share, compared with $369,000, or $1.17 per primary share for the same period in
1995. This reflects an 8.67% increase from the prior year. The return on average
assets were 2.17% and 2.13% for the first quarter of 1996 and 1995,
respectively. The return on average shareholders' equity for the two periods
were 10.90% at March 31, 1996 and 11.17% at March 31, 1995.
STATEMENT OF INCOME
NET INTEREST INCOME
Net interest income remained relatively stable when comparing the first quarter
of 1996 to 1995. Interest income saw an increase of 6.36% over prior year, while
interest expense rose 14.34%. These fluctuations resulted in a 1.24% increase in
net interest income over 1995 numbers for the first quarter. The net interest
margin declined from 5.10% at March 31, 1995 to 4.75% at March 31, 1996. As net
interest income increased from prior year, this declining ratio is due to an
increase in average earning assets of 7.32%. Average earning assets for the
first quarter of 1995 were $66.9 million, compared to $71.7 million for the
first quarter of 1996, an increase of $4.8 million. The chief components of this
dollar amount increase were fed funds sold, $3.4 million and loans, net of
unearned income, $1.6 million.
PROVISION FOR LOAN LOSSES
There was no provision for loan losses made during the first quarter of 1995,
compared to $1,000 in provision for the same period in 1996. The allowance for
loan losses is evaluated quarterly and was considered to be adequate for this
period in 1996.
NONINTEREST INCOME
Noninterest income for the first quarter of 1996 increased 39.47%, or $15,000,
over the first quarter in 1995. The two chief components of this fluctuation
were $38,000 in securities losses during the first quarter of 1995, compared
with no gains or losses in the same period of 1996 and a $25,000 decline in
trust department income from 1995 to 1996.
-15-
<PAGE>
NONINTEREST EXPENSE
Noninterest expenses declined $23,000, or 7.26%, for the first quarter of 1996
in comparison to the same period in 1995. Salaries and employee benefits
expenses along with net occupancy and equipment costs each remained constant
from the prior period. The largest fluctuation within the other noninterest
expense category was in F.D.I.C. Assessment. This expense declined $31,000 from
the first quarter of 1995 to the first quarter of 1996. This expense will
continue to be minimal as the bank continues to accrue the minimum annual
statutory requirement.
MARCH 31, 1996 vs. DECEMBER 31, 1995
BALANCE SHEET
INVESTMENT PORTFOLIO
The entire investment portfolio was classified as available for sale at December
31, 1995 and March 31, 1996. The portfolio declined 10.07% from $26.5 million at
year end 1995 to $23.8 million at the end of first quarter. The decline was
chiefly in the U.S. Government Agencies category, due to maturities and calls of
this security type.
LOANS AND CREDIT QUALITY
Average gross loans, net of unearned income, increased from $37.9 million at
December 31, 1995 to $39.1 million at March 31, 1996, up 3.2%. This increased
volume was chiefly due to an improving economy and increased loan demand for
installments and real estate loans.
During 1995, the Bank's ratio of net charge-offs to average loans was (.01%),
compared to .06% for the first quarter in 1996. At December 31, 1995, the
allowance for loan losses to nonperforming assets was approximately 136.20%,
compared with 52.93% at March 31, 1996. This declining percentage is due to an
increase in the level of nonperforming assets from $163,000 at December 31, 1995
to $410,000 at March 31, 1996.
DEPOSITS
Total deposits at December 31, 1995 were $59.3 million, compared to $58.7
million at March 31, 1996. This 1.05% decline in deposits was chiefly in the
noninterest bearing category which saw a 15.47% decline. This was partially
offset by a .52% increase in interest bearing deposits. These changes were due
to the normal fluctuation of checking account deposits.
In comparison of average deposit balances, we experienced a 2.2% increase from
year end 1995 to March 31, 1996. The breakdown of the increases/(decreases)
among deposit categories were as follows: Time Deposits, up 6.4%, Savings
accounts, down (2.2%), Money Market accounts, down (11.9%), NOW accounts, up
6.9%, and Demand Deposits,
-16-
<PAGE>
up 1.5%. These fluctuations were chiefly due to a continuing shift of funds from
short term accounts to higher yielding long term accounts.
SHAREHOLDERS' EQUITY
Total shareholders' equity, excluding unrealized gains on securities, increased
from $14.3 million to $14.5 million, or 1.5% from December 31, 1995 to March 31,
1996, respectively. Dividends per share for 1995 were $2.18 per share. The
dividend for the first quarter of 1996 was $.57 per share. When annualized, this
results in a dividend for 1996 of $2.28 per share. Total capital to risk based
assets was 41.93% at December 31, 1995, compared to 43.03% at March 31, 1996.
Financial reporting in accordance with SFAS No. 115 requires an adjustment to
shareholders' equity for net unrealized gains/(losses) in the
"available-for-sale" securities portfolio. This adjustment at December 31, 1995
and March 31, 1996, was $466,000 and $261,000, respectively.
EFFECTS OF INFLATION
Over the past few years, the rate of inflation has been relatively mild.
However, because interest rates and the level of loans and deposits generally
increase as the rate of inflation increases, the financial statements reflect
these effects of inflation.
-17-
<PAGE>
THE FIRST NATIONAL BANK OF CLIFTON FORGE
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
1995 VS. 1994
OVERVIEW
Net income for 1995 was $1.5 million, stable with 1994 net income. The return on
average assets and return on average equity for 1995 were 2.12% and 11.04%,
respectively. For the comparable period in 1994, the return on average assets
and the return on average equity were 2.10% and 11.44%, respectively.
NET INTEREST INCOME
Net interest income for 1995 was relatively stable at $3.2 million in comparison
to 1994. Both interest income and interest expense increased in dollars. Average
interest earning assets increased approximately $1.0 million while average
interest bearing deposits decreased $309 thousand. The net interest margin
declined to 4.83% in 1995 compared to 4.90% in 1994 because of an increase of
17% in interest expense versus a 7% increase in the interest income. Some of the
increase in interest expense resulted from the shift in deposits from lower
yielding accounts (savings and money markets) to higher yielding certificates of
deposit.
NONINTEREST INCOME
Total noninterest income for 1995 was $251 thousand compared to $288 thousand in
1994, a decline of 12.85%. Service charges dropped $25 thousand, or 10.50%.
Security losses were a net of $3 thousand in 1995 compared to security gains of
$18 thousand in 1994.
NONINTEREST EXPENSE
Total noninterest expense for 1995 declined $85 thousand in comparison to 1994.
Salaries and occupancy expenses remained relatively stable with the biggest
deviation in the other noninterest expense area. This was due to the decline of
$65 thousand in FDIC premiums. During 1995, the Federal Deposit Insurance
Corporation (FDIC) determined that the Bank Insurance Fund (BIF) was fully
recapitalized. As a result, the Bank received a refund of its second and third
quarter premiums and the fourth quarter premium was substantially reduced.
-18-
<PAGE>
BALANCE SHEET
INVESTMENT PORTFOLIO
Period end total securities at December 31, 1995 increased $667 thousand, or
3.50%, over the same period in 1994. At year end 1994, 73.83% of the securities
portfolio were in the held to maturity category. During 1995, the Financial
Accounting Standards Board gave a one time opportunity to transfer securities
from the held to maturity category into the available for sale category without
a penalty or tainting the portfolio. The Bank moved all securities in the held
to maturity category into the available for sale category. This allowed for more
flexibility in managing liquidity and credit.
LOANS AND PROVISION FOR LOAN LOSSES
Loans, net of unearned income at year-end 1995 were $38.7 million, an increase
of $923 thousand, or 2.44%, over year-end 1994. Average loans, net of unearned
income increased $1.9 million, or 5.34% over 1994. During 1995, the ratio of net
charge-offs to average loans, net of unearned income was (.01%) compared to .01%
in 1994. At year-end 1995, the allowance of loan losses to nonperforming loans
was 136.20% compared to 730.00% at year-end 1994. The allowance for loan losses
to period-end loans at 1995 and 1994 was .57% and .58%, respectively. The
allowance for loan losses is established based on a continual review of the
overall loan portfolio. Management believes the allowance for loan losses is
adequate at year-end.
OTHER ASSETS
Other assets at year-end 1995 were $.8 million, a decrease of 20% in comparison
to year-end 1994. This was primarily due to the decline in deferred taxes due to
the increase in the unrealized gains on the securities portfolio from year-end
1994 to year-end 1995.
DEPOSITS
Total deposits at December 31, 1995 increased $2.9 million, or 5.08% in
comparison to the same period in 1994. The largest swings were the decline in
savings accounts with the offsetting increase into time deposits. This shift was
very prevalent in the banking industry during 1995. Demand deposits, however,
increased $1.2 million, or 24.75% over 1994 dollars.
SHAREHOLDERS' EQUITY
Shareholders' equity at December 31, 1995 was $14.7 million compared to $13.3
million at year-end 1994. Unrealized gains on securities were $466 thousand at
year-end 1995 compared to an unrealized loss of $92 thousand at year-end 1994.
EFFECTS OF INFLATION
Inflation has been mild over the last several years. Loan and deposit rates
normally increase along with inflation. Financial statements presented reflect
these effects.
-19-
<PAGE>
BANKGROUP, BANK AND HANOVER BANK
The following consolidated financial data presents on a historical basis
selected unaudited financial data for BankGroup and the Bank, and unaudited pro
forma amounts for both (a) BankGroup and the Bank combined, and (b) BankGroup,
the Bank and Hanover Bank combined as of March 31, 1996. The Agreement with
Hanover Bank will involve the acquisition of Hanover Bank in a transaction to be
accounted for as a "pooling of interests." It is expected to be completed during
the fourth quarter of 1996. Interim financial results, in the opinion of the
management of the three companies, reflect all adjustments necessary for a fair
presentation of the results of operations. All such adjustments are of the
normal recurring nature. The results of operations for an interim period are not
necessarily indicative of results that may be expected for a full year or any
other interim period.
The Bank Merger is reflected under the "pooling of interest" method of
accounting, and the pro forma selected financial data is derived accordingly.
-20-
<PAGE>
SELECTED FINANCIAL DATA MAINSTREET BANKGROUP INCORPORATED,
THE FIRST NATIONAL BANK OF CLIFTON FORGE AND HANOVER BANK
As of March 31, 1996
SELECTED PERIOD-END BALANCES:
Total Assets
MainStreet, BankGroup.......................................... $ 909,827
Clifton Forge.................................................. 74,192
MainStreet and Clifton Forge ProForma.......................... 984,019
MainStreet, Clifton Forge and Hanover ProForma................. 1,080,939
Loans (Net of unearned income)
MainStreet BankGroup........................................... 583,121
Clifton Forge.................................................. 38,982
MainStreet and Clifton Forge ProForma.......................... 622,103
MainStreet, Clifton Forge and Hanover ProForma................. 691,391
Allowance for loan losses
MainStreet BankGroup........................................... 8,449
Clifton Forge.................................................. 217
MainStreet and Clifton Forge ProForma.......................... 8,666
MainStreet, Clifton Forge and Hanover ProForma................. 9,460
Nonperforming Assets (1)
MainStreet BankGroup........................................... 5,792
Clifton Forge.................................................. 410
MainStreet and Clifton Forge ProForma.......................... 6,202
MainStreet, Clifton Forge and Hanover ProForma................. 6,562
Total Deposits
MainStreet BankGroup........................................... 711,703
Clifton Forge.................................................. 58,690
MainStreet and Clifton Forge ProForma.......................... 770,393
MainStreet, Clifton Forge and Hanover ProForma................. 858,222
Long-term debt
MainStreet BankGroup........................................... 70,928
Clifton Forge.................................................. --
MainStreet and Clifton Forge ProForma.......................... 70,928
MainStreet, Clifton Forge and Hanover ProForma................. 70,928
Common shareholders' equity
MainStreet BankGroup........................................... 77,479
Clifton Forge.................................................. 14,762
MainStreet and Clifton Forge ProForma.......................... 92,241
MainStreet, Clifton Forge and Hanover ProForma................. 100,851
Total shareholders' equity
MainStreet BankGroup........................................... 77,479
Clifton Forge.................................................. 14,762
MainStreet and Clifton Forge ProForma.......................... 92,241
MainStreet, Clifton Forge and Hanover ProForma................. $ 100,851
SELECTED RATIOS:
Nonperforming assets to loans and foreclosed properties at period end (1)
MainStreet BankGroup........................................... 0.99%
Clifton Forge.................................................. 1.05
MainStreet and Clifton Forge ProForma.......................... 0.99
MainStreet, Clifton Forge and Hanover ProForma................. 0.95
Allowance for loan losses to loans at period end
MainStreet BankGroup........................................... 1.45
Clifton Forge.................................................. 0.56
MainStreet and Clifton Forge ProForma.......................... 1.39
MainStreet, Clifton Forge and Hanover ProForma................. 1.37
Allowance for loan losses to nonperforming loans at period end
MainStreet BankGroup........................................... 186.92
Clifton Forge.................................................. 52.93
MainStreet and Clifton Forge ProForma.......................... 175.78
MainStreet, Clifton Forge and Hanover ProForma................. 178.83
Allowance for loan losses to nonperforming assets at period end (1)
MainStreet BankGroup........................................... 145.87
Clifton Forge.................................................. 52.93
MainStreet and Clifton Forge ProForma.......................... 139.73
MainStreet, Clifton Forge and Hanover ProForma................. 144.16
Total shareholders' equity to total assets at period end
MainStreet BankGroup........................................... 8.52
Clifton Forge.................................................. 19.90
MainStreet and Clifton Forge ProForma.......................... 9.37
MainStreet, Clifton Forge and Hanover ProForma................. 9.33%
-21-
<PAGE>
CAPITAL RATIOS AT PERIOD END:
Tier 1 risk-adjusted capital
MainStreet BankGroup........................................... 13.26%
Clifton Forge.................................................. 42.39
MainStreet and Clifton Forge ProForma.......................... 14.85
MainStreet, Clifton Forge and Hanover ProForma................. 14.81
Total risk-adjusted capital
MainStreet BankGroup........................................... 14.51
Clifton Forge.................................................. 43.03
MainStreet and Clifton Forge ProForma.......................... 16.09
MainStreet, Clifton Forge and Hanover ProForma................. 16.05
Tier 1 leverage
MainStreet BankGroup........................................... 8.62
Clifton Forge.................................................. 19.64
MainStreet and Clifton Forge ProForma.......................... 9.45
MainStreet, Clifton Forge and Hanover ProForma................. 9.40%
NOTES TO SELECTED FINANCIAL DATA -
MAINSTREET BANKGROUP INCORPORATED,
THE FIRST NATIONAL BANK OF CLIFTON FORGE AND HANOVER BANK
(1) NONPERFORMING ASSETS INCLUDE NONACCRUAL LOANS, LOANS PAST DUE 90 DAYS
AND GREATER, OTHER REAL ESTATE AND OTHER REPOSSESSED ASSETS.
-22-
<PAGE>
MAINSTREET BANKGROUP INCORPORATED AND
THE FIRST NATIONAL BANK OF CLIFTON FORGE
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF FINANCIAL CONDITION
MARCH 31, 1996
(IN 000'S)
<TABLE>
<CAPTION>
ADJUSTMENTS
MAINSTREET CLIFTON INCREASE
BANKGROUP FORGE (DECREASE) CONSOLIDATED
<S> <C>
ASSETS
Cash and Due From Banks $ 26,592 $ 2,111 $ $ 28,703
Interest-Earning Deposits in Domestic Banks 1,318 -- 1,318
Federal Funds Sold 13,050 8,280 21,330
Mortgage Loans Held for Sale 1,037 -- 1,037
Securities Available for Sale 170,587 23,791 194,378
Securities Held to Maturity 95,350 -- 95,350
--
Loans, Net of Unearned Income 583,121 38,982 622,103
Less: Allowance for Loan Losses (8,449) (217) (8,666)
--------- --------- --------- ---------
Loans, Net 574,672 38,765 -- 613,437
--------- --------- --------- ---------
Bank Premises and Equipment, Net 10,668 449 11,117
Other Real Estate Owned 1,091 -- 1,091
Other Assets 15,462 796 16,258
--------- --------- --------- ---------
TOTAL ASSETS $ 909,827 $ 74,192 $ -- $ 984,019
========= ========= ========= =========
LIABILITIES
Deposits:
Demand Deposits (Noninterest-Bearing) $ 94,763 $ 4,940 $ $ 99,703
Interest Bearing Deposits 616,940 53,750 670,690
--------- --------- --------- ---------
TOTAL DEPOSITS 711,703 58,690 -- 770,393
--------- --------- --------- ---------
Short - Term Debt 40,290 -- 40,290
Long - Term Debt 70,928 -- 70,928
Other Liabilities 9,427 740 10,167
--------- --------- --------- ---------
TOTAL LIABILITIES 832,348 59,430 -- 891,778
--------- --------- --------- ---------
SHAREHOLDERS' EQUITY
Common Stock 42,870 1,575(1) 6,615 51,060
Capital in Excess of Par 12,174 1,575(1) (6,615) 7,134
Retained Earnings 24,446 11,351 35,797
Unearned Compensation (446) -- (446)
Unrealized Gains (Losses) on Securities, Net (1,565) 261 (1,304)
--------- --------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 77,479 14,762 -- 92,241
--------- --------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 909,827 $ 74,192 $ -- $ 984,019
========= ========= ========= =========
</TABLE>
(1) Based on an Exchange Ratio of 5.20 for conversion of The First National Bank
of Clifton Forge Common Stock into MainStreet BankGroup Common Stock. See
"The Bank Merger" and "The Exchange Ratio" for further discussion of the
calculation of the Exchange Ratio.
-23-
<PAGE>
MAINSTREET BANKGROUP INCORPORATED
AND THE FIRST NATIONAL BANK OF CLIFTON FORGE
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED MARCH 31, 1996
(IN 000'S)
<TABLE>
<CAPTION>
MAINSTREET CLIFTON CONSOLIDATED
BANKGROUP FORGE PRO FORMA
<S> <C>
INTEREST INCOME
Interest and Fees on Loans $ 13,736 $ 907 $ 14,643
Interest on Mortgage Loans Held for Sale 58 -- 58
Interest and Dividends on Securities Available for Sale 2,698 395 3,093
Interest and Dividends on Securities Held to Maturity 1,667 -- 1,667
Other Interest Income 91 102 193
--------- -------- ---------
Total Interest Income 18,250 1,404 19,654
INTEREST EXPENSE
Deposits 6,836 590 7,426
Short-Term Borrowings 998 -- 998
Long-Term Debt 436 -- 436
--------- -------- ---------
Total Interest Expense 8,270 590 8,860
Net Interest Income 9,980 814 10,794
Provisions for Loan Losses 822 1 823
--------- -------- ---------
Net Interest Income after Provision for Loan Losses 9,158 813 9,971
NONINTEREST INCOME
Service Charges, Fees and Other 1,835 41 1,876
Trust Department Income 725 12 737
Securities Gains (Losses), Net 218 -- 218
--------- -------- ---------
2,778 53 2,831
NONINTEREST EXPENSE
Salaries and Employee Benefits 4,092 136 4,228
Net Occupancy and Equipment Costs 1,198 25 1,223
Other Noninterest Expense 2,145 133 2,278
--------- -------- ---------
7,435 294 7,729
--------- -------- ---------
Income Before Income Taxes 4,501 572 5,073
Income Tax Expense 1,337 171 1,508
--------- -------- ---------
NET INCOME $ 3,164 $ 401 $ 3,565
========= ======== =========
PER COMMON SHARE DATA (1) Net Income per Share:
Primary $ 0.37 $ 1.27 $ 0.35
Fully Diluted $ 0.37 $ 1.27 $ 0.35
Weighted Average Shares Outstanding:
Primary 8,590 315 10,228
Fully Diluted 8,590 315 10,228
</TABLE>
(1) Based on an Exchange Ratio of 5.20 for conversion of First National Bank of
Clifton Forge Common Stock into MainStreet BankGroup Common Stock. See "The
Bank Merger" and "The Exchange Ratio" for further discussion of the
calculation of the Exchange Ratio.
-24-
<PAGE>
MAINSTREET BANKGROUP INCORPORATED AND
THE FIRST NATIONAL BANK OF CLIFTON FORGE
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED MARCH 31, 1995
(IN 000'S)
<TABLE>
<CAPTION>
MAINSTREET CLIFTON
BANKGROUP FORGE CONSOLIDATED
<S> <C>
INTEREST INCOME
Interest and Fees on Loans $ 11,850 $ 855 $ 12,705
Interest on Mortgage Loans Held for Sale 19 -- 19
Interest and Dividends on Securities Available for Sale 2,004 97 2,101
Interest and Dividends on Securities Held to Maturity 2,035 306 2,341
Other Interest Income 14 62 76
--------- -------- ---------
Total Interest Income 15,922 1,320 17,242
INTEREST EXPENSE
Deposits 6,510 516 7,026
Short-Term Borrowings 277 -- 277
Long-Term Debt 156 -- 156
--------- -------- ---------
Total Interest Expense 6,943 516 7,459
Net Interest Income 8,979 804 9,783
Provisions for Loan Losses 328 -- 328
--------- ------ ---------
Net Interest Income after Provision for Loan Losses 8,651 804 9,455
NONINTEREST INCOME
Service Charges, Fees and Other 1,205 39 1,244
Trust Department Income 495 37 532
Securities Gains (Losses), Net 7 (38) (31)
--------- -------- ---------
1,707 38 1,745
NONINTEREST EXPENSE
Salaries and Employee Benefits 4,035 135 4,170
Net Occupancy and Equipment Costs 1,085 25 1,110
Other Noninterest Expense 2,195 157 2,352
--------- -------- ---------
7,315 317 7,632
--------- -------- ---------
Income Before Income Taxes 3,043 525 3,568
Income Tax Expense 868 156 1,024
--------- -------- ---------
NET INCOME $ 2,175 $ 369 $ 2,544
========= ======== =========
PER COMMON SHARE DATA (1)
Net Income per Share:
Primary $ 0.29 $ 1.17 $ 0.28
Fully Diluted $ 0.27 $ 1.17 $ 0.26
Weighted Average Shares Outstanding:
Primary 7,564 315 9,202
Fully Diluted 8,542 315 10,180
</TABLE>
(1) Based on an Exchange Ratio of 5.20 for conversion of First National Bank of
Clifton Forge Common Stock into MainStreet BankGroup Common Stock. See "The
Bank Merger" and "The Exchange Ratio" for further discussion of the
calculation of the Exchange Ratio.
-25-
<PAGE>
MAINSTREET BANKGROUP INCORPORATED
AND THE FIRST NATIONAL BANK OF CLIFTON FORGE
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
YEAR ENDED DECEMBER 31, 1995
(IN 000'S)
<TABLE>
<CAPTION>
MAINSTREET CLIFTON
BANKGROUP FORGE CONSOLIDATED
<S> <C>
INTEREST INCOME
Interest and Fees on Loans $ 50,943 $ 3,452 $ 54,395
Interest on Mortgage Loans Held for Sale 144 -- 144
Interest and Dividends on Securities Available for Sale 9,689 491 10,180
Interest and Dividends on Securities Held to Maturity 7,828 1,179 9,007
Other Interest Income 71 326 397
--------- --------- ---------
Total Interest Income 68,675 5,448 74,123
INTEREST EXPENSE
Deposits 27,662 2,273 29,935
Short-Term Borrowings 3,196 -- 3,196
Long-Term Debt 517 -- 517
--------- --------- ---------
Total Interest Expense 31,375 2,273 33,648
Net Interest Income 37,300 3,175 40,475
Provisions for Loan Losses 1,319 -- 1,319
--------- --------- ---------
Net Interest Income after Provision for Loan Losses 35,981 3,175 39,156
NONINTEREST INCOME
Service Charges, Fees and Other 5,529 213 5,742
Trust Department Income 2,400 41 2,441
Securities Gains (Losses), Net 46 (3) 43
--------- --------- ---------
7,975 251 8,226
NONINTEREST EXPENSE
Salaries and Employee Benefits 15,704 582 16,286
Net Occupancy and Equipment Costs 4,428 166 4,594
Other Noninterest Expense 8,685 514 9,199
--------- --------- ---------
28,817 1,262 30,079
--------- --------- ---------
Income Before Income Taxes 15,139 2,164 17,303
Income Tax Expense 4,399 640 5,039
--------- --------- ---------
NET INCOME $ 10,740 $ 1,524 $ 12,264
========= ========= =========
PER COMMON SHARE DATA (1)
Net Income per Share:
Primary $ 1.37 $ 4.84 $ 1.29
Fully Diluted $ 1.29 $ 4.84 $ 1.23
Weighted Average Shares Outstanding:
Primary 7,842 315 9,480
Fully Diluted 8,548 315 10,186
</TABLE>
(1) Based on an Exchange Ratio of 5.20 for conversion of First National Bank of
Clifton Forge Common Stock into MainStreet BankGroup Common Stock. See "The
Bank Merger" and "The Exchange Ratios" for further discussion of the
calculation of the Exchange Ratio.
-26-
<PAGE>
MAINSTREET BANKGROUP INCORPORATED AND
THE FIRST NATIONAL BANK OF CLIFTON FORGE
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
YEAR ENDED DECEMBER 31, 1994
(IN 000'S)
<TABLE>
<CAPTION>
MAINSTREET CLIFTON
BANKGROUP FORGE CONSOLIDATED
<S> <C>
INTEREST INCOME
Interest and Fees on Loans $ 42,864 $ 3,202 $ 46,066
Interest on Mortgage Loans Held for Sale 514 -- 514
Interest and Dividends on Securities Available for Sale 13,108 1,230 14,338
Interest and Dividends on Securities Held to Maturity 2,568 493 3,061
Other Interest Income 462 176 638
--------- -------- ---------
Total Interest Income 59,516 5,101 64,617
INTEREST EXPENSE
Deposits 23,980 1,941 25,921
Short-Term Borrowings 594 -- 594
Long-Term Debt 643 -- 643
--------- -------- ---------
Total Interest Expense 25,217 1,941 27,158
Net Interest Income 34,299 3,160 37,459
Provisions for Loan Losses 2,827 3 2,830
--------- -------- ---------
Net Interest Income after Provision for Loan Losses 31,472 3,157 34,629
NONINTEREST INCOME
Service Charges, Fees and Other 4,865 238 5,103
Trust Department Income 1,993 32 2,025
Securities Gains (Losses), Net (5,683) 18 (5,665)
--------- -------- ---------
1,175 288 1,463
NONINTEREST EXPENSE
Salaries and Employee Benefits 14,441 564 15,005
Net Occupancy and Equipment Costs 4,142 177 4,319
Other Noninterest Expense 10,130 606 10,736
--------- -------- ---------
28,713 1,347 30,060
--------- -------- ---------
Income Before Income Taxes 3,934 2,098 6,032
Income Tax Expense (154) 607 453
--------- -------- ---------
NET INCOME $ 4,088 $ 1,491 $ 5,579
========= ======== =========
PER COMMON SHARE DATA (1)
Net Income per Share:
Primary $ 0.54 $ 4.73 $ 0.61
Fully Diluted $ 0.53 $ 4.73 $ 0.59
Weighted Average Shares Outstanding:
Primary 7,510 315 9,148
Fully Diluted 8,516 315 10,154
</TABLE>
(1) Based on an Exchange Ratio of 5.20 for conversion of First National Bank of
Clifton Forge Common Stock into MainStreet BankGroup Common Stock. See "The
Bank Merger" and "The Exchange Ratio" for further discussion of the
calculation of the Exchange Ratio.
-27-
<PAGE>
MAINSTREET BANKGROUP INCORPORATED AND
THE FIRST NATIONAL BANK OF CLIFTON FORGE
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
YEAR ENDED DECEMBER 31, 1993
(IN 000'S)
<TABLE>
<CAPTION>
MAINSTREET CLIFTON
BANKGROUP FORGE CONSOLIDATED
<S> <C>
INTEREST INCOME
Interest and Fees on Loans $ 42,519 $ 3,222 $ 45,741
Interest on Mortgage Loans Held for Sale -- -- --
Interest and Dividends on Securities Available for Sale 12,329 -- 12,329
Interest and Dividends on Securities Held to Maturity 2,387 1,872 4,259
Other Interest Income 677 196 873
--------- --------- ---------
Total Interest Income 57,912 5,290 63,202
INTEREST EXPENSE
Deposits 24,006 1,957 25,963
Short-Term Borrowings 630 -- 630
Long-Term Debt 655 -- 655
--------- --------- ---------
Total Interest Expense 25,291 1,957 27,248
Net Interest Income 32,621 3,333 35,954
Provisions for Loan Losses 1,370 27 1,397
--------- --------- ---------
Net Interest Income after Provision for Loan Losses 31,251 3,306 34,557
NONINTEREST INCOME
Service Charges, Fees and Other 4,000 276 4,276
Trust Department Income 2,137 23 2,160
Securities Gains (Losses), Net 277 60 337
--------- --------- ---------
6,414 359 6,773
NONINTEREST EXPENSE
Salaries and Employee Benefits 13,176 592 13,768
Net Occupancy and Equipment Costs 3,959 183 4,142
Other Noninterest Expense 11,119 554 11,673
--------- --------- ---------
28,254 1,329 29,583
--------- --------- ---------
Income Before Income Taxes 9,411 2,336 11,747
Income Tax Expense 2,530 658 3,188
--------- --------- ---------
NET INCOME $ 6,881 $ 1,678 $ 8,559
========= ========= =========
PER COMMON SHARE DATA (1)
Net Income per Share:
Primary $ 0.93 $ 5.33 $ 0.95
Fully Diluted $ 0.87 $ 5.33 $ 0.90
Weighted Average Shares Outstanding:
Primary 7,384 315 9,022
Fully Diluted 8,414 315 10,052
</TABLE>
(1) Based on an Exchange Ratio of 5.20 for conversion of First National Bank of
Clifton Forge Common Stock into MainStreet BankGroup Common Stock. See "The
Bank Merger" and "The Exchange Ratio" for further discussion of the
calculation of the Exchange Ratio.
-28-
<PAGE>
MAINSTREET BANKGROUP INCORPORATED AND
THE FIRST NATIONAL BANK OF CLIFTON FORGE
PRO FORMA CAPITALIZATION
MARCH 31, 1996
(IN 000'S)
<TABLE>
<CAPTION>
MAINSTREET &
CLIFTON FORGE
PROFORMA
MAINSTREET CLIFTON FORGE ADJUSTMENTS COMBINED
<S> <C>
Long-term Debt and Capital Lease Obligations
MainStreet Bank Group:
FHLB Long-Term Obligations Due on February 1, 1999
Callable on February 1, 1997 $ 45,000 $ $ $ 45,000
FHLB Long-Term Obligations Due on March 14, 1997 25,000 25,000
FHLB Long-Term Obligations Due on April 17, 2002 928 928
Clifton Forge:
None __________ ___________ ___________ __________
Total Long-Term Debt and Capital Lease Obligations 70,928 -- -- 70,928
---------- ----------- ----------- ----------
Shareholders' Equity:
MainStreet BankGroup:
Preferred Stock, Authorized 1,000,000 Shares; None
Outstanding -- --
Common Stock, $5 Par Value, Authorized 20,000,000
Shares;
Issued and Outstanding 8,574,044 Shares 42,870 8,190 51,060
Capital in Excess of Par 12,174 (5,040) 7,134
Retained Earnings 24,446 11,351 35,797
Unearned Compensation (446) -- (446)
Net Unrealized Gains (Losses) on Securities, Net (1,565) 261 (1,304)
Clifton Forge:
Common Stock, $5 Par Value, Authorized 315,000 Shares;
Issued and Outstanding 315,000 Shares 1,575 (1,575) --
Capital in Excess of Par 1,575 (1,575) --
Retained Earnings 11,351 (11,351) --
Unearned Compensation -- --
Net Unrealized Gains (Losses) on Securities, Net 261 (261) --
---------- ----------- ----------- ----------
Total Shareholders' Equity 77,479 14,762 -- 92,241
---------- ----------- ----------- ----------
Total Long-Term Debt, Capital Lease Obligations and
Shareholders' Equity $ 148,407 $ 14,762 $ $ 163,169
========== =========== =========== ==========
</TABLE>
-29-
<PAGE>
PROFORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
MAINSTREET BANKGROUP INCORPORATED, THE FIRST NATIONAL BANK OF CLIFTON FORGE
AND HANOVER BANK
MARCH 31, 1996
(IN 000'S)
<TABLE>
<CAPTION>
MAINSTREET &
ADJUSTMENTS CLIFTON FORGE ADJUSTMENTS
MAINSTREET CLIFTON INCREASE PRO FORMA INCREASE
BANKGROUP FORGE (DECREASE) COMBINED HANOVER (DECREASE) CONSOLIDATED
<S> <C>
ASSETS
Cash and Due From Banks $ 26,592 $ 2,111 $ $ 28,703 $ 2,977 $ $ 31,680
Interest-Earning Deposits in
Domestic Banks1,318 -- 1,318 -- 1,318
Federal Funds Sold 13,050 8,280 21,330 5,105 26,435
Mortgage Loans Held for Sale 1,037 -- 1,037 -- 1,037
Securities Available for Sale 170,587 23,791 194,378 1,514 195,892
Securities Held to Maturity 95,350 -- 95,350 15,292 110,642
-- --
Loans, Net of Unearned Income 583,121 38,982 622,103 69,288 691,391
Less: Allowance for Loan Losses (8,449) (217) (8,666) (794) (9,460)
-------- -------- -------- --------- -------- --------- ----------
Loans, Net 574,672 38,765 -- 613,437 68,494 -- 681,931
-------- -------- -------- --------- -------- ---------
Bank Premises and Equipment, Net 10,668 449 11,117 2,247 13,364
Other Real Estate Owned 1,091 -- 1,091 160 1,251
Other Assets 15,462 796 16,258 1,131 17,389
-------- -------- -------- --------- -------- --------- ----------
TOTAL ASSETS $909,827 $74,192 $ -- $ 984,019 $ 96,920 $ -- $1,080,939
======== ======== ======== ========= ======== ========= ==========
LIABILITIES
Deposits:
Demand Deposits (Noninterest-Bearing)$ 94,763 $ 4,940 $ $ 99,703 $ 10,538 $ $ 110,241
Interest Bearing Deposits 616,940 53,750 670,690 77,291 747,981
-------- -------- -------- -------- -------- --------- ----------
TOTAL DEPOSITS 711,703 58,690 -- 770,393 87,829 -- 858,222
-------- -------- -------- -------- -------- --------- ----------
Short-Term Debt 40,290 -- 40,290 -- 40,290
Long-Term Debt 70,928 -- 70,928 -- 70,928
Other Liabilities 9,427 740 10,167 481 10,648
-------- -------- -------- -------- -------- --------- ----------
TOTAL LIABILITIES 832,348 59,430 -- 891,778 88,310 -- 980,088
-------- -------- -------- -------- -------- --------- ----------
SHAREHOLDERS' EQUITY
Common Stock 42,870 1,575(1) 6,615 51,060 3,679(2) 3,331 58,070
Capital in Excess of Par 12,174 1,575(1) (6,615) 7,134 2,051(2) (3,331) 5,854
Retained Earnings 24,446 11,351 35,797 2,888 38,685
Unearned Compensation (446) -- (446) -- (446)
Unrealized Gains (Losses) on
Securities, Net (1,565) 261 (1,304) (8) (1,312)
-------- -------- -------- -------- -------- --------- ----------
TOTAL SHAREHOLDERS' EQUITY 77,479 14,762 -- 92,241 8,610 -- 100,851
-------- -------- -------- -------- -------- --------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $909,827 $74,192 $ -- $984,019 $ 96,920 $ -- $1,080,939
======== ======== ======== ======== ======== ========= ==========
</TABLE>
(1) Based on an Exchange Ratio of 5.20 for conversion of The First National
Bank of Clifton Forge Common Stock into MainStreet BankGroup Common
Stock. See "The Bank Merger" and "The Exchange Ratio" for further
discussion of the calculation of the Exchange Ratio.
(2) Based on an Exchange Ratio of .953 for conversion of Hanover Bank Common
Stock into MainStreet BankGroup Common Stock. See "Recent Developments"
for further discussion of the calculation of the Exchange Ratio.
-30-
<PAGE>
GENERAL INFORMATION
This Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies by the Board of Directors of the Bank (the "Bank
Board"), to be voted at the Bank Shareholder Meeting to be held at
____________________ located at _______________, on , 1996, at a.m. Eastern Time
and at any adjournment thereof. At the Bank Shareholder Meeting, shareholders
will consider and vote upon: (i) the Agreement and the related Revised Plan of
Merger, pursuant to which the Bank will merge into Acquisition and (ii) such
other matters as may properly come before such Special Meeting. Only
shareholders of record of the Bank at the close of business on , 1996 are
entitled to notice of and to vote at the Bank Shareholder Meeting. This Proxy
Statement/Prospectus is being mailed to all such holders of record of Bank
Common Stock on or about , 1996.
Holders of Bank Common Stock are entitled to one vote for each share
standing in such holder's name on the books of the Bank. The affirmative vote of
the holders of more than two-thirds of the outstanding shares entitled to vote
is required for approval of the Bank Merger.
Under rules of the National Association of Securities Dealers, Inc., the
proposal to adopt the Agreement is considered a "non-discretionary item" whereby
brokerage firms may not vote in their discretion on behalf of their clients if
such clients have not furnished voting instructions. Abstentions and such broker
"non-votes" will be considered in determining the presence of a quorum at the
Special Meeting but will not be counted as a vote cast for a proposal. Because
the proposal to adopt the Agreement is required to be approved by the holders of
two-thirds of the outstanding shares of Bank Common Stock, abstentions and
broker "non-votes" will have the same effect as a vote against this proposal.
The proxies solicited hereby, if properly signed and returned and not
revoked prior to their use, will be voted in accordance with the instructions
given thereon by the shareholders. If no instructions are so specified, the
proxies will be voted FOR the proposed Bank Merger. Any shareholder giving a
proxy has the power to revoke it at any time before it is exercised by (i)
filing written notice of revocation addressed to Reba H. Mandeville, Corporate
Secretary, The First National Bank of Clifton Forge, 511 Main Street, Clifton
Forge, Virginia 24422; (ii) submitting a duly executed proxy bearing a later
date; or (iii) appearing at the Bank Shareholder Meeting and notifying the
Secretary of his or her intention to vote in person. Attendance at the Special
Meeting will not, in and of itself, constitute revocation of a proxy. Proxies
solicited by this Proxy Statement/Prospectus may be exercised only at the Bank
-31-
<PAGE>
Shareholder Meeting and any adjournment of the Bank Shareholder Meeting and will
not be used for any other meeting.
The accompanying proxy is being solicited by the Bank Board. The cost of
such solicitation will be borne by the Bank. In addition to the use of the
mails, proxies may be solicited by personal interview, telephone or telegram by
directors, officers and employees of the Bank or BankGroup without additional
compensation. Arrangements may also be made with brokerage houses and
custodians, nominees and fiduciaries for forwarding of solicitation material to
beneficial owners of stock held of record by such persons and obtaining proxies
from the beneficial owners of Bank Common Stock entitled to vote at the Special
Meeting, and the Bank will reimburse such persons for their reasonable expenses
incurred in doing so.
The Bank Board has no information that other matters will be brought
before the meeting. If, however, other matters are presented, the accompanying
proxy will be voted in the discretion of the proxies with respect to such
matters.
As of the Record Date, directors and executive officers of the Bank and
their affiliates beneficially owned a total of 28,818 shares (representing 15.5%
of the outstanding shares of Bank Common Stock), and the directors of BankGroup
owned no Bank Common Stock. The Bank directors have agreed with BankGroup to
recommend that the Bank shareholders vote in favor of the Bank Merger and to
vote shares beneficially owned by such directors, and shares with respect to
which they have the power to vote, in favor of the Bank Merger. See "Ownership
of Certain Beneficial Owners of Bank Stock."
For the reasons described below, the Bank Board has adopted the
Agreement, believes the Bank Merger is in the best interest of the Bank and its
shareholders and recommends that shareholders of the Bank vote FOR approval of
the Agreement. In making its recommendation, the Bank Board considered, among
other things, the opinion of Scott & Stringfellow that the Merger Consideration
was fair to Bank Common Stock shareholders from a financial point of view. See
"The Bank Merger" "-- Reasons for the Bank Merger," and "-- Opinion of Financial
Advisor."
The address of BankGroup is 200 East Church Street, Martinsville,
Virginia 24112, and its telephone number is (540) 666-6724. The address of the
Bank is 511 Main Street, Clifton Forge, Virginia 24422 and its telephone number
is (540) 862-4251.
-32-
<PAGE>
THE BANK MERGER
The detailed terms of the Bank Merger are contained in the Agreement and
Plan of Reorganization, attached as Annex I to this Proxy Statement/Prospectus.
The following discussion describes the more important aspects of the Bank Merger
and the terms of the Agreement. This description is not complete and is
qualified by reference to the Agreement which is incorporated by reference
herein.
OPINION OF FINANCIAL ADVISOR
The Bank has retained Scott & Stringfellow to act as its financial
advisor in connection with rendering a fairness opinion with respect to the Bank
Merger. Scott & Stringfellow is a full service investment banking and brokerage
firm headquartered in Richmond, Virginia, that provides a broad array of
services to corporations, financial institutions, individuals and state and
local governments. The Financial Institutions Group of Scott & Stringfellow
actively works with financial institutions in Virginia, North Carolina, the
District of Columbia, Maryland, and West Virginia on these and other matters. As
part of its investment banking practice, it is continually engaged in the
valuation of financial institutions and their securities in connection with
mergers and acquisitions, negotiated underwritings, and secondary distributions
of listed and unlisted securities. Scott & Stringfellow was selected by the Bank
Board based upon its expertise and reputation in providing valuation and merger
and acquisition and advisory services to financial institutions. Scott &
Stringfellow's analysts follow and publish reports about the Bank and BankGroup.
On April 17, 1996, at the meeting at which the Bank Board approved and
adopted the Agreement, Scott & Stringfellow delivered a written opinion
("Opinion") to the Bank Board that as of such date, the Merger Consideration to
be received by Bank Common Stock shareholders in cash, BankGroup Common Stock,
or a mix thereof (subject to certain limitations on the cash component of the
consideration), was fair to the Bank Common shareholders from a financial point
of view. Such Opinion was updated as of the date of this Proxy Statement/
Prospectus. No instructions or limitations were given or imposed by the Bank
Board upon Scott & Stringfellow with respect to the investigations made or
procedures followed by them in rendering the Opinion.
THE FULL TEXT OF THE OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITS ON THE REVIEW UNDERTAKEN, IS SET FORTH AND
ATTACHED HERETO IN ANNEX II TO THIS PROXY STATEMENT/PROSPECTUS AND IS
INCORPORATED HEREIN BY REFERENCE. THE BANK SHAREHOLDERS ARE URGED TO READ THE
OPINION IN ITS ENTIRETY. THE FOLLOWING IS A SUMMARY OF CERTAIN ANALYSES
-33-
<PAGE>
PERFORMED BY SCOTT & STRINGFELLOW WHICH WERE THE BASES OF SUCH OPINION.
In developing its Opinion, Scott & Stringfellow reviewed and analyzed:
(i) the Agreement; (ii) the Registration Statement and this Proxy
Statement/Prospectus; (iii) the Bank's audited financial statements for the
three years ended December 31, 1995; (iv) the Bank's unaudited financial
statements for the quarters ended March 31, 1996 and 1995, and other internal
information relating to the Bank prepared by the Bank's management; (v)
information regarding the trading market for the Bank Common Stock and the
BankGroup Common Stock and the price ranges within which the respective stocks
have traded; (vi) the relationship of prices paid to relevant financial data
such as net worth, earnings, deposits and assets in certain bank and bank
holding company mergers and acquisitions in Virginia in recent years; (vii)
BankGroup's annual reports to shareholders and its audited financial statements
for the three years ended December 31, 1995; and (viii) BankGroup's unaudited
financial statements for the quarters ended March 31, 1996 and 1995, and other
internal information relating to BankGroup prepared by BankGroup's management.
Scott & Stringfellow has discussed with members of the Bank's and BankGroup's
management past and current business operations, the background of the Bank
Merger, the reasons and basis for the Bank Merger, results of regulatory
examinations, and the business and future prospects of the Bank and BankGroup
individually and as combined entity, as well as other matters relevant to its
inquiry. Scott & Stringfellow has conducted such other studies, analysis and
investigations particularly of the banking industry, and considered such other
information as it deemed appropriate, the material portion of which is described
below. Finally, Scott & Stringfellow also took into account its assessment of
general economic, market and financial conditions and its experience in other
transactions, as well as its experience in securities valuations and knowledge
of the commercial banking industry generally.
Scott & Stringfellow relied without independent verification upon the
accuracy and completeness of all of the financial and other information reviewed
by it and discussed with it for purposes of its Opinion. With respect to
financial forecasts reviewed by Scott & Stringfellow in rendering its Opinion,
Scott & Stringfellow assumed that such financial forecasts were reasonably
prepared on the basis reflecting the best currently available estimates and
judgment of the managements of the Bank and BankGroup as to the future financial
performance of the Bank and BankGroup, respectively. Scott & Stringfellow did
not make an independent evaluation or appraisal of the assets or liabilities of
the Bank and BankGroup nor was it furnished with any such appraisal.
-34-
<PAGE>
Scott & Stringfellow evaluated the financial terms of the transaction
using standard valuation methods, including a discounted cash flow analysis, a
market comparable analysis, a comparable acquisition analysis, and a dilution
analysis.
Discounted Cash Flow Analysis. Scott & Stringfellow performed a
discounted cash flow analysis under various projections to estimate the fair
market value of Bank Common Stock. Among other things, Scott & Stringfellow
considered a range of asset and earnings growth for the Bank of between 4.00%
and 6.00% and a required equity capital level of 8.00%. A range of discount
rates from 11.50% to 13.50% was applied to the cash flows resulting from the
projections during the first five years and the residual values. The residual
values were estimated by capitalizing the projected final year earnings by the
discount rates, less the projected long-term growth rate of the Bank's earnings.
The discount rates, growth rates and capital levels were chosen based on what
Scott & Stringfellow, in its judgment, considered to be appropriate taking into
account, among other things, the Bank's past and current financial performance
and conditions, the general level of inflation, rates of return for fixed income
and equity securities in the marketplace generally and particularly in the
banking industry. The discounted cash flow analysis indicated a reference range
of $64.60 to $74.00 per share for Bank Common Stock. These values compare to the
value of $83.20 per share of consideration for each share of Bank Common Stock.
Accordingly, the present value of Bank Common Stock was calculated at less than
the value of the consideration to be received from BankGroup pursuant to the
Agreement.
Comparable Acquisition Analysis. Scott & Stringfellow compared the
relationship of prices paid to relevant financial data such as tangible net
worth, assets, deposits and earnings in 17 bank and bank holding company mergers
and acquisitions in Virginia since January 1, 1993, representing all such
transactions known to Scott & Stringfellow to have occurred during this period
with the proposed Bank Merger and found the consideration to be received from
BankGroup to be within the relevant pricing ranges acceptable for such recent
transactions. Specifically, based upon the most recent transactions announced in
Virginia since January 1, 1993, other than the Bank Merger, the average price to
tangible book value in these transactions was 2.01x, compared with 1.78x for the
Bank Merger; the average price to earnings ratio was 19.05x, compared with
17.20x for the Bank Merger; the average deal price to deposits was 19.56%,
compared with 44.19% for the Bank Merger; the average deal price to assets was
17.31%, compared with 35.09% for the Bank Merger; and the average tangible book
premium to core deposits was 10.72%, compared to 20.35% for the Bank Merger. For
purposes of computing the information with respect to the Bank Merger, $83.20
per share of consideration for each share of Bank Common Stock was used.
-35-
<PAGE>
Analysis of BankGroup and Virginia Bank Group. Scott & Stringfellow
analyzed the performance and financial condition of BankGroup relative to the
Virginia Bank Group consisting of Central Fidelity Banks, Inc., F&M National
Corp., First Virginia Banks, Inc., George Mason Bankshares, Inc., Jefferson
Bankshares, Inc., Premier Bankshares, Corp., and Signet Banking Corp. Certain
financial information compared was, among other things, information relating to
tangible equity to assets, loans to deposits, net interest margin, nonperforming
assets, total assets, and efficiency ratio. Additional valuation information
compared for the trailing twelve month period ended March 31, 1996, and stock
prices as of May 31, 1996, was (i) price to tangible book value ratio which was
1.77x for BankGroup, compared to an average of 1.79x for the Virginia Bank
Group, (ii) price to last twelve months earnings ratio which was 11.43x for
BankGroup, compared to an average of 13.12x for the Virginia Bank Group; (iii)
return on average assets which was 1.35% for BankGroup, compared to an average
of 1.20% for the Virginia Bank Group; (iv) return on average equity which was
17.37% for BankGroup, compared to an average of 13.32% for the Virginia Bank
Group; and (v) a dividend yield of 2.86% for BankGroup, compared to an average
of 3.24% for the Virginia Bank Group. Overall, in the opinion of Scott &
Stringfellow, BankGroup's operating performance and financial condition were
better than the Virginia Bank Group average and BankGroup's market value was
reasonable when compared to the Virginia Bank Group.
Dilution Analysis. Based upon publicly available financial information
on the Bank and BankGroup, Scott & Stringfellow considered the effect of the
transaction on the book value, earnings, and market value of the Bank and
BankGroup. The immediate effect on BankGroup -- assuming pretax cost savings of
$378,000 and revenue enhancements of $100,000, was to decrease earnings per
share by $0.03 or 2.28% and to increase book value per share by $0.02 or 0.23%.
The effect on Bank under the same assumptions is to increase earnings by $1.85
per share or 37.37%, to decrease book value per share by $0.57 or 1.23%, to
increase dividends per share by $0.02 or 0.65%, and to increase the April 17,
1996 market value of Bank of $65.00 per share to $83.20. This dilution analysis
does not take into account the long-term benefits for the combined companies
resulting from the combination. Scott & Stringfellow concluded from this
analysis that the transaction would have a positive effect on the Bank and Bank
Common Stock shareholders in that historical dividends per share, net income per
share and market value per share of BankGroup Common Stock to be received by
Bank shareholders would represent a substantial increase, after giving effect of
the Exchange Ratio. See "Summary -- Comparative Per Share Data."
The summary set forth above includes the material factors considered,
but does not purport to be a complete description of the presentation by Scott &
Stringfellow to the Bank Board or of
-36-
<PAGE>
the analyses performed by Scott & Stringfellow. The preparation of a fairness
opinion involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of these methods to the
particular circumstances and, therefor, such an opinion is not readily
susceptible to summary description. Accordingly, notwithstanding the separate
factors discussed above, Scott & Stringfellow believes that its analysis must be
considered as a whole and that selecting portions of its analysis and of the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the evaluation process underlying its Opinion. As a
whole, these various analyses contributed to Scott & Stringfellow's opinion that
the terms of the Agreement are fair from a financial point of view to the Bank's
shareholders.
Pursuant to an engagement letter dated April 17, 1996 between the Bank
and Scott & Stringfellow, in exchange for its services, Scott & Stringfellow
will receive a fee equal to 0.80% of the total market value of the consideration
received by Bank shareholders, which equates to a fee of approximately $210,000
and is payable at closing. If the Bank Merger is not consummated, the Bank also
has agreed to reimburse Scott & Stringfellow for its reasonable out-of-pocket
expenses.
EFFECTIVE TIME OF THE BANK MERGER
Subject to the terms and conditions set forth herein, including receipt
of all required regulatory approvals, the Bank Merger shall become effective at
the time Articles of Merger relating to the Bank Merger are made effective by
the OCC (the "Effective Time of the Bank Merger"). The Effective Time of the
Bank Merger is expected to occur on or about September 30, 1996, or as soon
thereafter as is practicable. Either the Bank or BankGroup may terminate the
Agreement if the Bank Merger has not been consummated by December 31, 1996.
Until the Effective Time of the Bank Merger, Bank shareholders will
retain their rights as shareholders to vote on matters submitted to them by the
Bank Board.
DETERMINATION OF EXCHANGE RATIO; EXCHANGE OF BANK STOCK FOR
BANKGROUP COMMON STOCK
Each share of Bank Common Stock issued and outstanding at the Effective
Time of the Bank Merger (other than shares held by BankGroup or in Bank's
treasury and other than Dissenting Shares as defined in Section 2.4 of the
Agreement and shares to be exchanged for cash) shall, and without any action by
the holder thereof, be converted into a number of shares of BankGroup Common
Stock equal to the quotient (rounded to the nearest one one-hundredth) of $83.20
divided by the average of the closing sales price (the "BankGroup Stock Price")
for BankGroup Common Stock as
-37-
<PAGE>
reported on the Nasdaq National Market for the 10 trading days preceding the
last to occur of (i) approval of the Bank Merger by the shareholders of Bank or
(ii) receipt of the last of all regulatory approvals prerequisite to the
consummation of the Bank Merger (the "Exchange Ratio"). If such quotient is less
than 4.89, the Exchange Ratio shall be 4.89. If such quotient is greater than
5.55, the Exchange Ratio shall be 5.55. All such shares of BankGroup Common
Stock shall be validly issued, fully paid and nonassessable.
The Exchange Ratio at the Effective Time of the Bank Merger shall be
adjusted to reflect any consolidation, split-up, other subdivisions or
combinations of BankGroup Common Stock, any dividend payable in BankGroup Common
Stock, or any capital reorganization involving the reclassification of BankGroup
Common Stock subsequent to the date of the Agreement.
After the Effective Time of the Bank Merger, each holder of a
certificate theretofore representing outstanding shares of Bank Common Stock,
upon surrender of such certificate to Registrar and Transfer Company (which
shall act as exchange agent), unless previously surrendered to Bank in
connection with exercise of the cash election, accompanied by a Letter of
Transmittal shall be entitled to receive in exchange therefor a certificate or
certificates representing the number of full shares of BankGroup Common Stock
for which shares of Bank Common Stock theretofore represented by the certificate
or certificates so surrendered shall have been exchanged as provided (plus cash
in lieu of any fractional share), or cash, if such shares of Bank Common Stock
are to be exchanged for cash pursuant to the cash election. Until so
surrendered, each outstanding certificate which, prior to the Effective Time of
the Bank Merger, represented Bank Common Stock (other than Dissenting Shares
referred to in Section 2.4 of the Agreement) will be deemed to evidence the
right to receive the number of full shares of BankGroup Common Stock into which
the shares of Bank Common Stock represented thereby may be converted, or $83.20
cash if the cash election provided in Section 2.2 of the Agreement was chosen,
and, after the Effective Time of the Bank Merger (unless the cash election was
chosen), will be deemed for all corporate purposes of BankGroup to evidence
ownership of the number of full shares of BankGroup Common Stock into which the
shares of Bank Common Stock represented thereby were converted. Until such
outstanding certificates formerly representing Bank Common Stock are
surrendered, no dividend payable to holders of record of BankGroup Common Stock
for any period as of any date subsequent to the Effective Time of the Bank
Merger shall be paid to the holder of such outstanding certificates in respect
thereof. After the Effective Time of the Bank Merger there shall be no further
registry of transfer on the records of Bank of shares of Bank Common Stock. If a
certificate representing such shares is presented to the exchange agent, it
shall be canceled and
-38-
<PAGE>
exchanged for a certificate representing shares of BankGroup Common Stock as
herein provided. BankGroup will also issue a certificate in exchange for shares
evidenced by lost certificate(s) provided the record owner thereof provides
BankGroup with such substantiation, indemnification and security as BankGroup
may reasonably require.
Upon surrender of certificates of Bank Common Stock in exchange for
BankGroup Common Stock, there shall be paid to the recordholder of the
certificates of BankGroup Common Stock issued in exchange thereof (i) the amount
of dividends theretofore paid with respect to such full shares of BankGroup
Common Stock as of any date subsequent to the Effective Time of the Bank Merger
which have not yet been paid to a public official pursuant to abandoned property
laws and (ii) at the appropriate payment date the amount of dividends with a
record date after the Effective Time of the Bank Merger, but prior to surrender,
and payment date subsequent to surrender. No interest shall be payable with
respect to such dividends upon surrender of outstanding certificates.
CASH ELECTION; ELECTION PROCEDURES
Each holder of Bank Common Stock will be given the option of exchanging
all, but not less than all, of his shares for $83.20 cash per share (subject to
all applicable withholding taxes). The number of shares that may be exchanged
for cash, when added to the number of Dissenting Shares as defined in Section
2.4 of the Agreement and fractional shares settled in cash, cannot exceed 9.9%
of the outstanding shares of Bank Common Stock to preserve the "pooling of
interests" accounting treatment of the Bank Merger. The cash election must be
made at the time Bank shareholders vote on the Bank Merger, and, once the Bank
Merger vote has been taken, cash elections will be irrevocable. If the aggregate
of the Dissenting Shares, fractional shares settled for cash and shares for
which a cash election is made exceed 9.9% of the outstanding shares of Bank
Common Stock, shares submitted for cash purchase will be chosen by lot to
accommodate the "pooling of interests" accounting requirement that a shareholder
who chooses the cash election must have all of his or her shares purchased for
cash. Shareholders who submit their shares for cash purchase but are not chosen
in the lottery will have their shares exchanged for Bankgroup Common Stock (plus
cash in lieu of fractional shares). Shares not exchanged for cash will be
exchanged for BankGroup Common Stock at the Exchange Ratio. If the aggregate of
the Dissenting Shares, fractional shares settled for cash and shares for which a
cash election is made does not exceed 9.9% of the outstanding shares of Bank
Common Stock, all shares submitted for cash will be exchanged for cash. Shares
not exchanged for cash as a consequence of not being chosen by lottery will be
exchanged for BankGroup Common Stock at the Exchange Ratio.
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An election to receive cash will be properly made only if the Bank has
received a properly completed Cash Option Form in accordance with the procedures
and within the time period set forth in the form. A cash option form will be
properly completed only if accompanied by certificates representing all shares
of Bank Common Stock covered thereby.
IF A BANK SHAREHOLDER ELECTS TO SURRENDER ALL OF HIS OR HER SHARES FOR
CASH, HE MUST FILE THE CASH OPTION FORM ACCOMPANYING THIS PROXY
STATEMENT/PROSPECTUS PRIOR TO OR AT THE BANK SHAREHOLDER MEETING. ANY BANK
SHAREHOLDER WHO DOES NOT COMPLETE AND RETURN A CASH OPTION FORM PRIOR TO OR AT
THE BANK SHAREHOLDER MEETING CAN ONLY RECEIVE BANKGROUP COMMON STOCK IN THE
MERGER. ONCE THE VOTE ON THE MERGER HAS BEEN TAKEN AT THE BANK SHAREHOLDER
MEETING, THE CASH ELECTION IS IRREVOCABLE. The Bank will hold the certificates
in safekeeping pending the Effective Time of the Bank Merger, at which time they
will be exchanged for cash by BankGroup, or in the event of choice of shares for
cash purchase by lot, cash or BankGroup Common Stock. If the Bank Merger is not
consummated, the Bank will return the certificates.
Before or promptly after the Effective Time of the Bank Merger,
Registrar and Transfer Company, acting in the capacity of exchange agent for
BankGroup (the "Exchange Agent"), will mail the Letter of Transmittal to each
person who, as of the Effective Time of the Bank Merger, holds shares of Bank
Common Stock. The Letter of Transmittal will permit holders of shares of Bank
Common Stock to exchange their shares based on the Exchange Ratio for shares of
BankGroup Common Stock, see "The Bank Merger -- Determination of Exchange Ratio
and Exchange for BankGroup Common Stock."
A request to receive BankGroup Common Stock will be properly made only
if the Exchange Agent has received a properly completed Letter of Transmittal in
accordance with the procedures and within the time period set forth in the
Letter of Transmittal. A Letter of Transmittal will be properly completed only
if accompanied by certificates representing all shares of Bank Common Stock
thereby.
BANK SHAREHOLDERS WHO WISH TO RECEIVE SHARES OF BANKGROUP COMMON STOCK
SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE THE LETTER OF
TRANSMITTAL AND INSTRUCTIONS.
BUSINESS OF THE BANK PENDING THE BANK MERGER
The Bank has agreed that prior to the Effective Time of the Bank Merger,
it will operate its business substantially as presently operated and in the
ordinary course, and, consistent with such operation, will use its best efforts
to preserve intact its present business organization and relationships with
persons having business dealings with it. The Agreement contains a
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description of certain specified actions to be taken or refrained from by the
Bank in satisfying this undertaking.
The Bank further has agreed that, prior to the Effective Time of the
Bank Merger, it will consult and reasonably cooperate with BankGroup regarding
(i) loan portfolio management, including management and work-out of
nonperforming assets, and credit review and approval procedures, (ii) securities
portfolio and funds management, including management of interest rate risk; and
(iii) expense management, all with the objective of achieving appropriate
operating synergies and appropriate accruals prior to the Effective Time of the
Bank Merger.
CONDITIONS TO CONSUMMATION OF THE BANK MERGER
Consummation of the Bank Merger is conditioned upon the approval of the
holders of more than two-thirds of the outstanding Bank Common Stock entitled to
vote at the Bank Shareholder Meeting. The Bank Merger must be approved by the
Federal Reserve Board, the OCC and the SCC, applications for which have been
filed and approvals for which are expected to be received. The obligations of
the Bank and BankGroup to consummate the Bank Merger are further conditioned
upon the satisfaction of terms and conditions contained in the Agreement usual
for transactions of this type, including continued accuracy of representations
and warranties made by Bank and BankGroup, the absence of material adverse
change in the Bank's and BankGroup's businesses, the receipt of legal and
accounting opinions, and the transaction being accounted for as a "pooling of
interests". See Article V of the Agreement (Annex I).
TERMINATION
The Agreement will be terminated, and the Bank Merger abandoned, if
shareholders of the Bank do not approve the Bank Merger. Notwithstanding such
approval by such shareholders, the Agreement also may be terminated at any time
prior to the Effective Time of the Bank Merger by mutual consent, upon breach of
the Agreement, if the Bank Merger is not effective by December 31, 1996, and
upon the occurrence of certain other events specified in the Agreement. See
Article VII of the Agreement (Annex I).
ACCOUNTING TREATMENT
BankGroup and Bank have agreed to use their best efforts to cause the
Bank Merger to be accounted for as a "pooling of interests" and this accounting
treatment is a condition to BankGroup's obligation to complete the Bank Merger.
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OPERATIONS AFTER THE BANK MERGER
After consummation of the Bank Merger, BankGroup will continue generally
to conduct the business presently conducted by the Bank.
INTERESTS OF CERTAIN PERSONS IN THE BANK MERGER
Certain members of the Bank and the Bank's management may be deemed to
have interests in the Bank Merger in addition to their interests as shareholders
of the Bank generally. In each case, the Bank Board or the Bank was aware of
their potential interests, and considered them, among other matters, in
approving the Agreement and the transactions contemplated thereby.
Indemnification; Liability Insurance. After the Effective Time of the
Bank Merger, BankGroup has agreed to provide indemnification to the directors
and officers of Bank following the Closing Date to the same extent as it
provides indemnification to directors and officers of BankGroup and its
Subsidiaries and to provide them officers and directors liability insurance
coverage, whether or not they become part of the BankGroup organization after
the Bank Merger.
BankGroup Board of Directors. BankGroup has agreed to elect George J.
Kostel, Chairman of the Board, President and Chief Executive Officer of the
Bank, as a member of BankGroup's Board of Directors. Mr. Kostel's eligibility
for and election at BankGroup's next following Annual Meeting of Shareholders
will be governed by BankGroup's Bylaws, and for purposes of eligibility he will
be treated as are the BankGroup Directors who were age 65 at the 1995 Annual
Meeting. Mr. Kostel has agreed to continue to serve as a director and president
of the Bank until January 1, 1997.
Employee Benefits. Following the Bank Merger, employees who continue to
be employees of the Resulting Bank will be eligible for BankGroup's benefit
plans based on their length of service, compensation, job classification and
position with the Bank. BankGroup will recognize all such employees' service
with the Bank for eligibility to participate, for early retirement and for
vesting under BankGroup's benefit plans.
Other than as set forth above, no director or executive officer of the
Bank or BankGroup has any direct or indirect material interest in the Bank
Merger, except in the case of directors and executive officers of the Bank and
the Bank insofar as ownership of Bank Common Stock might be deemed such an
interest.
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EFFECT ON THE BANK EMPLOYEE BENEFITS PLANS
All employees of Bank immediately prior to the Effective Time of the
Bank Merger ("Transferred Employees") will be covered by BankGroup's employee
benefit plans as to which they are eligible based on their length of service,
compensation, job classification, and position with Bank. BankGroup's benefits
plans will recognize for purposes of eligibility to participate and for early
retirement and for vesting, all Transferred Employees' service with Bank,
subject to applicable break in service rules. Bank's employee benefit plans will
be merged into BankGroup's plans.
Except as described in Schedule T of the Agreement, as of the Effective
Time of the Bank Merger employees of Bank who become employees of Acquisition as
the Surviving Bank will be entitled to immediate coverage under BankGroup
Employee Plans without any waiting period.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
BankGroup and the Bank have received an opinion of Hunton & Williams,
counsel to BankGroup, to the effect that for federal income tax purposes the
Bank Merger will be a reorganization under Section 368(a) of the Code, and,
consequently, (i) none of BankGroup, Acquisition or the Bank will recognize any
taxable gain or loss upon consummation of the Bank Merger (but income may be
recognized as a result of (a) the termination of the bad-debt reserve maintained
by the Bank for federal income tax purposes and (b) other possible changes in
tax accounting methods), and (ii) the Bank Merger will result in the tax
consequences summarized below for the Bank shareholders who receive BankGroup
Common Stock in exchange for Bank Common Stock pursuant to the Bank Merger.
Receipt of substantially the same opinion of Hunton & Williams as of the
Effective Date is a condition to consummation of the Bank Merger. The opinion of
Hunton & Williams is based on, and the opinion to be given as of the Effective
Date will be based on, certain customary assumptions and representations
regarding, among other things, the lack of previous dealings between the Bank
and BankGroup, the existing and future ownership of Bank Common Stock and
BankGroup Common Stock, and the future business plans for BankGroup.
As described below, the federal income tax consequences to a the Bank
shareholder will depend on whether the shareholder exchanges shares of Bank
Common Stock for BankGroup Common Stock or cash and, if the shareholder
exchanges shares of Bank Common Stock for cash, on whether certain related
shareholders receive BankGroup Common Stock or cash. The following summary does
not discuss all potentially relevant federal income tax matters, consequences to
any shareholders subject to special tax treatment (for example, tax-exempt
organizations and foreign persons), or
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consequences to shareholders who acquired their Bank Common Stock through the
exercise of employee stock options or otherwise as compensation.
Exchange of Bank Common Stock for BankGroup Common Stock
A holder of shares of Bank Common Stock who receives solely BankGroup
Common Stock in exchange for all his or her shares of Bank Common Stock will not
recognize any gain or loss on the exchange. If a shareholder receives BankGroup
Common Stock and cash in lieu of a fractional share of BankGroup Common Stock,
the shareholder will recognize taxable gain or loss solely with respect to such
fractional share as if the fractional share had been received and then redeemed
for the cash. A shareholder who exchanges his or her shares of Bank Common Stock
for BankGroup Common Stock will have an aggregate tax basis in the shares of
BankGroup Common Stock (including any fractional share interest) equal to his or
her tax basis in the shares of Bank Common Stock exchanged therefor. A
shareholder's holding period for shares of BankGroup Common Stock (including any
fractional share interest) received in the Bank Merger will include his or her
holding period for the shares of Bank Common Stock exchanged therefor if they
are held as a capital asset at the Effective Time of the Bank Merger.
Exchange of Bank Common Stock for Cash
The exchange of shares of Bank Common Stock for cash pursuant to the
cash election will be a taxable transaction. Any holder of shares of Bank Common
Stock who exchanges his or her shares of Bank Common Stock for cash should
consult his or her tax advisor to determine whether the exchange is to be taxed
as a sale of stock, which usually would be the case, or whether the cash
received is to be taxed as a dividend. In addition, any shareholder who makes an
election to receive cash for his or her shares should be aware that he may, in
fact, receive BankGroup Common Stock instead of cash if it becomes necessary to
choose by lot shares to be exchanged for cash. Such a holder should therefore be
familiar with the rules, described above, that apply to a holder who receives
BankGroup Common Stock.
The criteria for determining the tax treatment of exchanging a
shareholder's shares of Bank Common Stock for cash are not certain. The United
States Supreme Court's decision in Clark v. Commissioner, which involved a
shareholder's receipt of both cash and stock in exchange for stock of a merging
corporation, suggests that a holder of shares of Bank Common Stock who receives
solely cash for his or her shares of Bank Common Stock should be treated as
receiving shares of BankGroup Common Stock in the Bank Merger, rather than the
cash actually received, and then receiving cash from BankGroup in a hypothetical
redemption of those shares. The treatment of the cash received in that
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hypothetical redemption then would depend first on whether the shareholder is
treated as owning any shares of BankGroup Common Stock (taking into account the
constructive ownership rules of Section 318 of the Code, summarized below). If a
shareholder receiving solely cash in the Bank Merger does not actually or
constructively own any shares of BankGroup Common Stock, the shareholder should
recognize gain or loss equal to the difference between the amount of cash
received and his or her tax basis in his or her shares of Bank Common Stock
surrendered in the Bank Merger. If the shareholder actually or constructively
owns shares of BankGroup Common Stock, the cash received in a hypothetical
redemption still should result in the recognition of gain or loss as described
above unless the redemption is treated as a dividend distribution. The
redemption should not be treated as a dividend distribution if it meets the
requirements to be (i) not essentially equivalent to a dividend within the
meaning of Section 302(b)(1) of the Code or (ii) a substantially
disproportionate redemption of BankGroup Common Stock within the meaning of
Section 302(b)(2) of the Code.
Whether the hypothetical redemption of shares of BankGroup Common Stock
will be essentially equivalent to a dividend depends on the individual
shareholder's circumstances; to avoid dividend treatment in any case, the
hypothetical redemption must result in a "meaningful reduction" in the
percentage of BankGroup Common Stock actually and constructively owned by the
shareholder (including any BankGroup Common Stock deemed received in the Bank
Merger). The Internal Revenue Service has indicated in a published ruling that
any reduction in percentage ownership of a publicly-held corporation by a small
minority shareholder who exercises no control over corporate affairs constitutes
a meaningful reduction. The hypothetical redemption of shares of BankGroup
Common Stock will be substantially disproportionate if the percentage of
BankGroup Common Stock actually and constructively owned by the shareholder
after that redemption is less than 80% of the percentage of BankGroup Common
Stock actually and constructively owned by the shareholder (including BankGroup
Common Stock deemed received in the Bank Merger) immediately before the
hypothetical redemption.
Despite the Clark decision, the Internal Revenue Service might assert
that the receipt of solely cash in the Bank Merger is to be treated as a
distribution in redemption of the shareholder's Bank Common Stock before, and
separate from, the Bank Merger. The Internal Revenue Service apparently has
taken such a position in private letter rulings, which are not legal precedent,
issued after the Clark decision. Under that position, if a holder of shares of
Bank Common Stock receiving solely cash does not constructively own (within the
meaning of Section 318 of the Code) shares of Bank Common Stock held by another
shareholder who exchanges such shares for BankGroup Common Stock, the
shareholder receiving solely cash generally will recognize gain
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or loss equal to the difference between the amount of cash received and his or
her tax basis in his or her shares of Bank Common Stock. If the holder of shares
of Bank Common Stock does constructively own shares of Bank Common Stock
exchanged for BankGroup Common Stock, the cash received in a hypothetical
redemption of the Bank Common Stock generally will be taxable as a dividend
unless the redemption meets the requirements to be (i) not essentially
equivalent to a dividend within the meaning of Section 302(b)(1) of the Code or
(ii) a substantially disproportionate redemption of Bank Common Stock within the
meaning of Section 302(b)(2) of the Code. Those requirements would be applied to
the shareholder's actual and constructive ownership of Bank Common Stock, in
contrast to the approach discussed above where they are applied to the
shareholder's actual and constructive ownership of BankGroup Common Stock.
Section 318 of the Code
Under Section 318(a) of the Code, a shareholder is treated as owning (i)
stock that the shareholder has an option or other right to acquire, (ii) stock
owned by the shareholder's spouse, children, grandchildren, and parents, and
(iii) stock owned by certain trusts of which the shareholder is a beneficiary,
any estate of which the shareholder is a beneficiary, any partnership or "S
corporation" in which the shareholder is a partner or shareholder, and any non-S
corporation of which the shareholder owns at least 50% in value of the stock. A
shareholder that is a partnership or S corporation, estate, trust, or non-S
corporation is treated as owning stock owned (as the case may be) by partners or
S corporation shareholders, by estate beneficiaries, by certain trust
beneficiaries, and by 50% shareholders of a non-S corporate shareholder. Stock
constructively owned by a person generally is treated as being owned by that
person for the purpose of attributing ownership to another person. In certain
cases, a shareholder who will actually own no BankGroup Common Stock may be able
to avoid application of the family attribution rules of Section 318 of the Code
by filing a timely waiver agreement with the Internal Revenue Service pursuant
to Section 302(c)(2) of the Code and applicable regulations.
Shareholders Electing to Exercise Their Right of Appraisal
The receipt of cash for shares of Bank Common Stock pursuant to the
exercise of the right to an appraisal will be a taxable transaction. The
analysis of whether the transaction would be taxable as a sale of stock or as a
dividend distribution should be the same as for a shareholder who receives cash
for his or her shares of Bank Common Stock pursuant to the cash election, which
is discussed above. Any shareholder considering the exercise of such right
should consult his or her tax advisor about the tax consequences of receiving
cash for his or her shares.
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THE PRECEDING DISCUSSION SUMMARIZES FOR GENERAL INFORMATION THE MATERIAL
FEDERAL INCOME TAX CONSEQUENCES OF THE BANK MERGER TO THE BANK SHAREHOLDERS. THE
TAX CONSEQUENCES TO ANY PARTICULAR SHAREHOLDER MAY DEPEND ON THE SHAREHOLDER'S
CIRCUMSTANCES. THE BANK SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
WITH REGARD TO FEDERAL, STATE, AND LOCAL TAX CONSEQUENCES.
RIGHTS OF SHAREHOLDERS ELECTING TO EXERCISE THEIR RIGHT OF
APPRAISAL
Holders of Bank Common Stock entitled to vote on the approval of the
Agreement and the related Revised Plan of Merger will be entitled to have the
fair value of each such holder's shares of Bank Common Stock immediately prior
to consummation of the Bank Merger paid to such holder in cash, together with
interest, if any, by complying with the provisions of 12 U.S.C.A. ss. 215a.
Section 215a gives any shareholder of a national bank the right to dissent from
the merger of such bank into another national bank if he votes against such
merger or has given notice in writing to the national bank prior to the meeting
of shareholders at which the merger is considered that he dissents from the plan
of merger. Failure to vote against the merger or to give written notice of
dissent constitutes waiver of dissenter's rights. The shareholder is entitled to
receive, in cash, the value of the shares held by him when the merger is
consummated upon written request to the resulting national bank at any time
before 30 days after consummation of the merger, such notice to be accompanied
by his or her stock certificates. The value of the dissenting shares is to be
determined as of the date on which the shareholders' meeting is held by a
committee of three persons, one selected by unanimous vote of dissenting
shareholders, one by the directors of the resulting national bank, and the third
by the two so chosen. The valuation agreed upon by any two of the three
appraisers shall govern, but if the value so fixed is not satisfactory to any
dissenting shareholder, he may within five days after being notified of such
appraised value appeal to the Comptroller of the Currency, who shall cause a
reappraisal to be made, which will be final and binding. If for any reason,
within 90 days of the consummation of the merger, one or more appraisers has not
been selected, or the appraisers fail to determine the value of the shares, the
Comptroller, upon written request of any interested party, shall cause an
appraisal to be made which shall be final and binding. The Comptroller's
expenses in making any reappraisal or appraisal, as the case may be, are to be
paid by the resulting national bank.
THE FOREGOING IS ONLY A SUMMARY OF THE RIGHTS OF A DISSENTING HOLDER OF
BANK COMMON STOCK. ANY HOLDER OF BANK COMMON STOCK WHO INTENDS TO DISSENT FROM
THE BANK MERGER SHOULD CAREFULLY REVIEW THE TEXT OF SUBSECTIONS (B), (C) AND (D)
OF 12 U.S.C.A. SS. 215A SET FORTH IN ANNEX III TO THIS PROXY
STATEMENT/PROSPECTUS AND SHOULD ALSO CONSULT WITH SUCH HOLDER'S
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LAWYER. THE FAILURE OF A HOLDER OF BANK COMMON STOCK TO FOLLOW PRECISELY THE
PROCEDURES SUMMARIZED ABOVE, AND SET FORTH IN ANNEX III, MAY RESULT IN LOSS OF
DISSENTERS' RIGHTS. NO FURTHER NOTICE OF THE EVENTS GIVING RISE TO DISSENTER'S
RIGHTS OR ANY STEPS ASSOCIATED THEREWITH WILL BE FURNISHED TO HOLDERS OF BANK
COMMON STOCK, EXCEPT AS INDICATED ABOVE OR OTHERWISE REQUIRED BY LAW.
In general, any dissenting shareholder who perfects such holder's right
to be paid the fair value of such holder's Bank Common Stock in cash will
recognize taxable gain or loss for federal income tax purposes upon receipt of
such cash. See "-- Certain Federal Income Tax Consequences."
THE BANK BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE BANK
MERGER.
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MAINSTREET BANKGROUP INCORPORATED
GENERAL
MainStreet BankGroup Incorporated is a multi-bank holding company
headquartered in Martinsville, Virginia, with total assets of $909.8 million at
March 31, 1996. Organized in 1977, BankGroup through its six affiliate banks
(the "Banks"), engages in a general banking business and provides a broad
spectrum of full-service banking to consumers, businesses, institutions and
governments, including accepting demand, savings and time deposits; making
commercial, personal, installment, mortgage and construction loans; issuing
letters of credit; and providing discount brokerage, trust services, bank-card
services, mortgage banking and investment services.
The Banks seek customers whose total financial requirements they can
serve. As a result, most of the Banks' business customers are small and
medium-sized entities. While BankGroup considers this middle market to be its
primary business market, BankGroup's lead bank, Piedmont Trust Bank, has banking
relationships with many of the larger textile and furniture manufacturing
companies located in its market area.
Principal markets served are the City of Martinsville and Henry County;
the Towns of Hillsville and Galax, and Carroll and Grayson Counties; the Towns
of Ferrum and Rocky Mount and Franklin County; the Town of Forest, City of
Lynchburg, and Bedford, Campbell and Amherst Counties; the Town of Stuart and
Patrick County; the Towns of Saltville and Chilhowie and Smyth County, Virginia
and contiguous areas. BankGroup's affiliate Banks operate a total of 29 offices.
BankGroup continually seeks acquisition opportunities for banks and bank
related financial institutions. BankGroup's acquisition philosophy permits the
Banks to operate as separately incorporated banks with their historical names
and board of directors. BankGroup believes that this philosophy maintains
community loyalty at the Banks and has a positive effect on operating
performance. BankGroup seeks to capitalize on the local identity of the Banks
while providing the services and efficiencies of a larger bank holding company.
During 1994, BankGroup moved to a centralized approach in management,
providing direction to the Banks and performing selected services in the
compliance, data processing, financial management, human resources, investment,
accounting, marketing, mortgage, trust and audit areas. The Banks are still
permitted to approve loans up to a certain credit limit, above which central
credit administration must consent. The Banks also still must approve
investments and other activities consistent with past practices and the needs of
their communities. To coordinate
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the activities of the Banks and to maintain internal controls, BankGroup
utilizes a planning and budgeting process which involves Company officers,
presidents of the Banks, and principal department heads. Performance targets and
budget goals are developed for each Bank on an annual basis, with financial and
operating results reported and reviewed periodically during the year.
THE BANKS
PIEDMONT TRUST BANK. Piedmont Trust Bank ("Piedmont") was incorporated
in 1921 under the laws of Virginia. Piedmont's main office is in the City of
Martinsville, a commercial center in southwest Virginia, and it has seven
branches in Martinsville and Henry County. Its primary service area has a
population of approximately 73,000 and its economy is oriented toward the
textile, furniture and prebuilt housing industries. Piedmont is insured by the
Federal Deposit Insurance Corporation (the "FDIC") and is supervised and
examined by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") and the State Corporation Commission of Virginia (the "SCC"). It
engages in a general commercial banking business and offers the range of banking
services that can be expected of a banking organization of its size. In
addition, Piedmont has a Trust Department with assets in excess of $617.0
million under management, which includes custodial accounts, at March 31, 1996.
Piedmont is the largest bank in the Martinsville trade area with total assets of
approximately $423.8 million, deposits of approximately $314.3 million and
net loans, net of unearned income, of approximately $295.0 million at March
31, 1996.
BANK OF CARROLL. Bank of Carroll ("Carroll"), incorporated in 1971 under
the laws of Virginia, was acquired by BankGroup in 1977. At March 31, 1996, it
had total assets of approximately $57.9 million. Its main office is located in
Hillsville, Carroll County, Virginia, and it has branches in Cana and Galax,
Virginia. Its primary service area has a population of approximately 33,000.
Carroll is supervised and examined by the Federal Reserve Board and the SCC and
engages in a general commercial banking business.
BANK OF FERRUM. Bank of Ferrum ("Ferrum"), incorporated in 1917 under
the laws of Virginia and converted during the 1920's to a national bank, was
acquired by BankGroup in 1981. As of June 1, 1995, Ferrum converted its charter
to a state bank under the laws of Virginia. When Ferrum converted to a state
charter on June 1, 1995, the name changed from First National Bank of Ferrum to
Bank of Ferrum. At March 31, 1996, it had total assets of approximately $85.3
million. Its main banking office is located at Ferrum, Virginia, with branches
at Oak Level and two offices located in Rocky Mount, Virginia. Its primary
service area has a population of approximately 40,000. Ferrum is
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supervised and examined by the Federal Reserve Board and the SCC and engages in
a general commercial banking business.
FIRST COMMUNITY BANK. First Community Bank ("Community"), incorporated
in 1978 under the laws of Virginia, was acquired by BankGroup in 1983. At March
31, 1996, it had total assets of approximately $117.1 million. Community's
main office is located in Forest, Virginia, and it operates seven branches in
the Lynchburg and Forest area. Its primary service area has a population of
approximately 112,000. Community is regulated by the Federal Reserve Board and
the SCC. Retail and commercial banking services are provided for customers in
Forest, Bedford, Campbell and Amherst Counties and the City of Lynchburg,
Virginia.
THE FIRST BANK OF STUART. The First Bank of Stuart ("Stuart") was
incorporated in 1920 as a national bank and acquired by BankGroup in 1986.
Stuart converted its charter to a state bank and began operating as a state
banking corporation on September 1, 1995. When Stuart was converted to a state
charter on September 1, 1995, the name changed from The First National Bank of
Stuart to The First Bank of Stuart. At March 31, 1996, it had total assets of
approximately $118.0 million. Its main office is located in Stuart, Virginia,
and it has six other offices all located in Patrick County, Virginia. It's
primary service area has a population of approximately 17,500. Stuart is the
largest bank in Patrick County. Stuart is regulated by the Federal Reserve Board
and the SCC.
THE FIRST COMMUNITY BANK OF SALTVILLE. The First Community Bank of
Saltville ("Saltville") was established in 1903 as a state bank under the laws
of Virginia and was incorporated in 1918 as a national bank and acquired by
BankGroup in 1986. As of August 1, 1995, Saltville completed its conversion from
a national bank to a Virginia banking corporation. When Saltville converted to a
state charter on August 1, 1995, the name changed from The First National Bank
of Saltville to The First Community Bank of Saltville. At March 31, 1996, it had
total assets of approximately $115.6 million. Its main office is located in
Saltville, Virginia, and it has two other offices located in Smyth County.
Saltville is the third largest of the four banks in Smyth County. Its primary
service area has a population of approximately 32,000. Saltville engages in a
general commercial banking business and is regulated by the Federal Reserve
Board and the SCC.
RECENT DEVELOPMENT
On May 3, 1996, BankGroup announced that it had reached agreement to
acquire Hanover Bank, a Virginia state bank located in Mechanicsville, Virginia,
subject to shareholder and regulatory approval. Under terms of the agreement,
BankGroup
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agreed to pay shareholders of Hanover Bank the equivalent of $15.25 per share
for each share of Hanover Bank Common Stock outstanding. The transaction is
valued at approximately $24.6 million, which will be paid in BankGroup Common
Stock. The exchange ratio will be determined during a measurement period prior
to consummation of the transaction, which is expected around October 31, 1996.
Hanover Bank serves Hanover and Henrico counties in Central Virginia
with four existing branches, and a fifth under construction. At March 31, 1996,
Hanover Bank reported total assets of $96.9 million.
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PRICE RANGE OF BANKGROUP COMMON STOCK AND DIVIDENDS
BankGroup's Common Stock is traded in the over-the-counter market and is
quoted on The Nasdaq National Market under the symbol MSBC. The following
table sets forth for the periods indicated the high and low closing prices per
share of Common Stock as reported on The Nasdaq National Market, and the cash
dividends paid per share of Common Stock. Information in the table gives effect
to a 5-for-4 stock split in the form of a stock dividend effective June 30, 1993
and a two-for-one stock split in the form of a stock dividend effective
March 4, 1996.
<TABLE>
<CAPTION>
PRICE RANGE
HIGH LOW DIVIDENDS
<S> <C>
1994
First Quarter........................ $11.00 $10.0625 $ .08
Second Quarter........................ 11.25 10.00 .08
Third Quarter......................... 12.75 10.00 .08
Fourth Quarter........................ 12.50 9.00 .09
1995
First Quarter......................... 11.75 9.375 .09
Second Quarter........................ 13.125 11.00 .10
Third Quarter......................... 13.125 11.875 .10
Fourth Quarter........................ 13.375 12.625 .10
1996
First Quarter......................... 17.00 15.25 .115
Second Quarter (through June ____, 1996)
</TABLE>
As of March 31, 1996 there were approximately 2,296 holders of record of
the outstanding shares of BankGroup Common Stock.
The payment of future dividends will depend upon future earnings of
BankGroup, its financial condition and other relevant factors, including the
amount of dividends payable to BankGroup by the Banks. Various federal and state
laws, regulations and policies limit the ability of BankGroup's subsidiary banks
to pay dividends to BankGroup, which affects BankGroup's ability to pay
dividends to shareholders. See "Regulation and Supervision."
THE FIRST NATIONAL BANK OF CLIFTON FORGE
GENERAL
The First National Bank of Clifton Forge is a national banking
association providing deposit, loan and commercial banking and trust services in
Clifton Forge, Covington, Alleghany County, Bath County and northern Botetourt
County. The Bank operates one office in Clifton Forge. At March 31, 1996, the
Bank had assets of $74.2 million, deposits of $58.7 million, and shareholders
equity of $14.8 million. The Bank serves approximately 6,000 customers in its
market area. Its lending activities focus on meeting the needs of its market
area by
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offering residential mortgage loans, equity lines of credit, consumer loans,
automobile loans, and business loans to local individuals and businesses.
The Bank reinvests deposits raised in its market area with loans that
meet the residential mortgage, personal and business financial needs of the
community. The Bank has achieved a "satisfactory" rating from the OCC for its
community reinvestment activities.
The Bank is subject to examination and comprehensive regulations by the
OCC and to regulations of the Federal Reserve Board relating to reserves
required to be maintained against deposits and certain other matters.
MARKET FOR AND DIVIDENDS PAID ON BANK COMMON STOCK
There is no established public market for Bank Common Stock. Bank's
management is aware of transactions in Bank Common Stock which occurred during
1995 and thus far in 1996 at prices ranging from $61 to $67.50 per share. In
1994 and 1995, Bank paid quarterly cash dividends aggregating $715,050 and
$686,700. Bank paid a cash dividend for the first quarter and second quarter of
1996 of $0.57 and $0.58, per share, respectively and is permitted by the
Agreement to pay a quarterly cash dividend on August 15 of $0.59 per share. If
the Bank Merger has not been consummated by November 15, on November 15 the Bank
is permitted to pay a cash dividend of $0.60 per share. If the Bank Merger is
consummated prior to that date, Bank shareholders will be eligible for
BankGroup's fourth quarter dividend.
OWNERSHIP BY CERTAIN BENEFICIAL OWNERS OF BANK STOCK
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The following table sets forth certain information regarding the
beneficial ownership of Bank Common Stock as of March 31, 1996 by each of the
Bank's directors and by all directors and executive officers of the Bank as a
group.
Shares Beneficially Owned
As of March 31, 1996 1/
---------------------------
Name No. of Shs. Percent
- -------------------------- -------------- ---------
Ernest D. Adams 1,350 *
Harvey B. Albert, Jr. 3,000 1.0
Stephen A. Bennett 375 *
Caius M. Carpenter 6,112 2.0
Raymond L. Claterbaugh, Jr. 8,576 3.0
George J. Kostel 17,462 5.5
A. Goodwin Perkins 5,828 2.0
James D. Snyder 982 *
Thomas N. Warren 3,900 1.0
All directors and executive 48,881 2/ 15.52%
officers as a group (13 persons)
represent 15.52 percent of stock.
- -------------------------
* Represents less than 1%.
1/ For the purposes of this table, pursuant to rules promulgated under the
Exchange Act, an individual is considered to "beneficially own" any shares of
Bank Common Stock if he or she has or shares, (a) voting power, which includes
the power to vote or direct the voting of the shares; or (b) investment power,
which includes the power to dispose or direct the disposition of the shares. A
person is deemed to have beneficial ownership of any shares of Bank Common Stock
which may be acquired within 60 days pursuant to the exercise of stock options.
Unless otherwise indicated, a director has sole voting power and sole investment
power with respect to the indicated shares. Shares of Common Stock which may be
acquired within 60 days of the Record Date are deemed to be outstanding shares
of Bank Common Stock beneficially owned by such person(s) but are not deemed to
be outstanding for the purposes of computing the percentage of Bank Common Stock
owned by any other person or group.
2/ Includes four officers of the Bank who are not Directors.
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The following table sets forth information as to Bank Common Stock beneficially
owned, as of March 31, 1996, by the only persons or entities known to the Bank
to be the beneficial owners of more than 5% of Bank Common Stock.
<TABLE>
<CAPTION>
Amount and Nature of
Name and Address of Beneficial Ownership as of Percent of
Beneficial Owner , 1996 1/ Outstanding Shares
- ----------------------------- ----------------------------- -----------------------------
<S> <C>
George J. Kostel 17,462 2/ 5.54
All directors and executive officers as a 17,462 3/ 5.54%
group (1 person)
</TABLE>
- --------
1/ Except as indicated otherwise, based on information furnished by the
respective individuals or entity. Under applicable regulations, shares are
deemed to be beneficially owned by a person if he or she directly or indirectly
has or shares the power to vote or dispose of the shares, whether or not he or
she has any economic interest in the shares. Unless otherwise indicated, the
named beneficial owner has sole voting and dispositive power with respect to the
shares.
2/ Includes 8,186 shares owned by spouse.
3/ Includes 8,186 shares owned by spouse.
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REGULATION AND SUPERVISION
Bank holding companies and banks operate in a highly regulated
environment and are regularly examined by federal and state regulators. The
following description briefly discusses certain provisions of federal and state
laws and certain regulations and the potential impact of such provisions on
BankGroup and the Banks. These federal and state laws and regulations have been
enacted for the protection of depositors in national and state banks and not for
the protection of shareholders of bank holding companies such as BankGroup.
References to "Banks" means the current subsidiary banks of BankGroup.
BANK HOLDING COMPANIES
As a bank holding company registered under the Bank Holding Company Act
of 1956, as amended (the "BHCA"), BankGroup is subject to regulation by the
Federal Reserve Board. The Federal Reserve Board has jurisdiction under the BHCA
to approve any bank or nonbank acquisition, merger or consolidation proposed by
a bank holding company. The BHCA generally limits the activities of a bank
holding company and its subsidiaries to that of banking, managing or controlling
banks, or any other activity which is so closely related to banking or to
managing or controlling banks as to be a proper incident thereto.
The BHCA currently prohibits the Federal Reserve Board from approving an
application from a bank holding company to acquire shares of a bank located
outside the state in which the operations of the holding company's banking
subsidiaries are principally conducted, unless such an acquisition is
specifically authorized by statute of the state in which the bank whose shares
are to be acquired is located. Under recently enacted federal legislation, the
restriction on interstate acquisitions was abolished effective September 29,
1995. Bank holding companies from any state are now able to acquire banks and
bank holding companies located in any other state. Effective June 1, 1997, the
law will allow interstate bank mergers, subject to earlier "opt-in" or "opt-out"
action by individual states. The law also allows interstate branch acquisitions
and de novo branching if permitted by the host state. Virginia has adopted early
"opt-in" legislation that allows interstate bank mergers. These laws also permit
interstate branch acquisitions and de novo branching in Virginia by out-of-state
banks if reciprocal treatment is accorded Virginia banks in the state of the
acquiror.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries by federal law
and regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance fund in
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the event the depository institution becomes in danger of default or in default.
For example, under a policy of the Federal Reserve Board with respect to bank
holding company operations, a bank holding company is required to serve as a
source of financial strength to its subsidiary depository institutions and to
commit resources to support such institutions in circumstances where it might
not do so otherwise. In addition, the "cross-guarantee" provisions of federal
law require insured depository institutions under common control to reimburse
the FDIC for any loss suffered or reasonably anticipated by either the Savings
Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF") as a
result of the default of a commonly controlled insured depository institution or
for any assistance provided by the FDIC to a commonly controlled insured
depository institution in danger of default. The FDIC may decline to enforce the
cross- guarantee provisions if it determines that a waiver is in the best
interest of the SAIF or the BIF or both. The FDIC's claim for reimbursement is
superior to claims of shareholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institution.
The Federal Deposit Insurance Act ("FDIA") also provides that amounts
received from the liquidation or other resolution of any insured depository
institution by any receiver must be distributed (after payment of secured
claims) to pay the deposit liabilities of the institution prior to payment of
any other general or unsecured senior liability, subordinated liability, general
creditor or shareholder. This provision would give depositors a preference over
general and subordinated creditors and shareholders in the event a receiver is
appointed to distribute the assets of any of the Banks.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring more than 5% of the voting shares of any company that is not a
bank and from engaging in any business other than banking or managing or
controlling banks. Under the BHCA, the Federal Reserve Board is authorized to
approve the ownership of shares by a bank holding company in any company the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or to managing or controlling banks as to be a proper
incident thereto. The Federal Reserve Board has by regulation determined that
certain activities are closely related to banking within the meaning of the
BHCA. These activities include: operating a mortgage company, finance company,
credit card company or factoring company; performing certain data processing
operations; providing investment and financial advice; and acting as an
insurance agent for certain types of credit-related insurance.
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BankGroup is registered under the bank holding company laws of Virginia.
Accordingly, BankGroup and the Banks are subject to further regulation and
supervision by the SCC.
CAPITAL REQUIREMENTS
The Federal Reserve Board and the FDIC have issued substantially similar
risk-based and leverage capital guidelines applicable to United States banking
organizations. In addition, those regulatory agencies may from time to time
require that a banking organization maintain capital above the minimum levels
because of its financial condition or actual or anticipated growth. Under the
risk-based capital requirements of these federal bank regulatory agencies,
BankGroup and the Banks are required to maintain a minimum ratio of total
capital to risk- weighted assets of at least 8%. At least half of the total
capital is required to be "Tier 1 capital", which consists principally of common
and certain qualifying preferred shareholders' equity, less certain intangibles
and other adjustments. The remainder "Tier 2 capital" consists of a limited
amount of subordinated and other qualifying debt (including certain hybrid
capital instruments) and a limited amount of the general loan loss allowance.
The Tier 1 and total capital to risk-weighted asset ratios of BankGroup as of
March 31, 1996 were 13.26% and 14.51% respectively, exceeding the minimums
required.
In addition, each of the federal regulatory agencies has established a
minimum leverage capital ratio (Tier 1 capital to average tangible assets).
These guidelines provide for a minimum ratio of 3% for banks and bank holding
companies that meet certain specified criteria, including that they have the
highest regulatory examination rating and are not contemplating significant
growth or expansion. All other institutions are expected to maintain a leverage
ratio of at least 100 to 200 basis points above the minimum. The Tier 1 capital
leverage ratio of BankGroup as of March 31, 1996, was 8.62%. The guidelines also
provide that banking organizations experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels, without significant reliance on intangible
assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires each federal banking agency to revise its risk-based capital
standards to ensure that those standards take adequate account of interest rate
risk, concentration of credit risk and the risks of nontraditional activities,
as well as reflect the actual performance and expected risk of loss on
multi-family mortgages. Rules have been promulgated with respect to
concentration of credit risk and the risks of non-traditional activities, and
also as to the risk of loss on multi-family mortgages. A proposed rule with
respect to interest rate risk is
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still under consideration. The proposal would allow institutions to use internal
risk models to measure interest rate risk (if the models are acceptable to
examiners) and would require additional capital of institutions identified as
having excess interest rate risk. BankGroup does not expect any of these rules,
either individually or in the aggregate, to have a material impact on its
capital requirements.
LIMITS ON DIVIDENDS AND OTHER PAYMENTS
BankGroup is a legal entity separate and distinct from its subsidiary
institutions. Most of BankGroup's revenues come from dividends paid by the
Banks. Each of the Banks is a state member bank of the Federal Reserve System.
As a result, the Banks are regulated by the Federal Reserve Board and the SCC.
There are various regulatory limitations applicable to the payment of dividends
by the Banks as well as the payment of dividends by BankGroup to its
shareholders. Under applicable laws of Virginia to the Banks, prior approval
from the bank regulatory agencies is required if cash dividends declared in any
given year exceed net income for that year plus retained earnings at period end
less nonaccrual loans for current year and prior year. Under existing
supervisory practices, at March 31, 1996, the Banks could have paid additional
dividends of approximately $50.4 million, without obtaining prior regulatory
approval. The payment of dividends by the Banks or BankGroup may also be limited
by other factors, such as requirements to maintain capital above regulatory
guidelines. Bank regulatory agencies have authority to prohibit any Bank or
BankGroup from engaging in an unsafe or unsound practice in conducting their
business. The payment of dividends, depending upon the financial condition of
the Bank in question, or BankGroup, could be deemed to constitute such an unsafe
or unsound practice. The Federal Reserve Board has stated that, as a matter of
prudent banking, a bank or bank holding company should not maintain its existing
rate of cash dividends on common stock unless (1) the organization's net income
available to common shareholders over the past year has been sufficient to fund
fully the dividends and (2) the prospective rate of earnings retention appears
consistent with the organization's capital needs, asset quality, and overall
financial condition.
Under the FDIA, insured depository institutions such as the Banks are
prohibited from making capital distributions, including the payment of
dividends, if, after making such distribution, the institution would become
"undercapitalized" (as such term is used in the statute). Based on the Banks
current financial condition, BankGroup does not expect that this provision will
have any impact on its ability to obtain dividends from the Banks.
In addition to limitations on dividends, the Banks are limited in the
amount of loans and other extensions of credit
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that may be extended to BankGroup, and any such loans or extensions of credit
are subject to collateral security requirements. Generally, up to 10% of the
Banks' regulatory capital, surplus, undivided profits, allowance for loan losses
and contingency reserves may be loaned to BankGroup. As of March 31, 1996,
approximately $8.6 million of credit was available to BankGroup under this
limitation.
BANKS
The Banks are supervised and regularly examined by the Federal Reserve
Board and the SCC. The Banks are also subject to various requirements and
restrictions under federal and state law such as limitations on the types of
services that they may offer, the nature of investments that they make, and the
amounts of loans that may be granted. Various consumer and compliance laws and
regulations also affect the operations of the Banks. In addition to the impact
of regulation, the Banks are affected significantly by actions of the Federal
Reserve Board in attempting to control the money supply and the availability of
credit.
The Banks also are subject to the requirements of the Community
Reinvestment Act (the "CRA"). The CRA imposes on financial institutions an
affirmative and ongoing obligation to meet the credit needs of their local
communities, including low- and moderate-income neighborhoods, consistent with
the safe and sound operation of those institutions. Each financial institution's
efforts in meeting community credit needs currently are evaluated as part of the
examination process pursuant to twelve assessment factors. These factors also
are considered in evaluating mergers, acquisitions and applications to open
branches. The Banks have attained either an "outstanding" or "satisfactory"
rating on their most recent CRA performance evaluations.
As a result of a 1993 Presidential initiative, each of the federal
banking agencies recently approved a final rule establishing a new framework for
the implementation of CRA. The new rule, which will become fully effective on
July 1, 1997, will emphasize an institution's performance in meeting community
credit needs. Institutions will be evaluated on the basis of a three pronged
lending, investment and service test, with lending being of primary importance.
CRA ratings will continue to be a matter of public record, and CRA performance
will continue to be evaluated in connection with mergers, acquisitions and
branch applications. Although the new rule is likely to have some impact on
BankGroup's business practices, it is not anticipated that any changes will be
material.
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DEPOSIT INSURANCE
As institutions with deposits insured by BIF, the Banks also are subject
to insurance assessments imposed by the FDIC. Currently, a risk-based assessment
schedule imposes assessments on BIF deposits, ranging from an annual minimum
payment of $2,000 for well-capitalized institutions to .27% of deposits for
under-capitalized institutions. All banks in BankGroup currently are assessed
as well-capitalized.
OTHER SAFETY AND SOUNDNESS REGULATIONS
The federal banking agencies have broad powers under current federal law
to take prompt corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the institutions
in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized," as such terms are defined under uniform regulations defining
such capital levels issued by each of the federal banking agencies.
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DESCRIPTION OF CAPITAL STOCK OF BANKGROUP
BankGroup has authority to issue 1,000,000 shares of Preferred Stock, of
which no shares are issued and outstanding, and 20,000,000 shares of Common
Stock, of which 8,574,044 shares were issued and outstanding as of March 31,
1996 held by approximately 2,296 holders of record. The Common Stock is traded
in the over-the-counter market and quoted on The Nasdaq National Market under
the symbol "MSBC".
The following summary description of capital stock of BankGroup is
qualified in its entirety by reference to BankGroup's Articles of Incorporation,
a copy of which has been incorporated by reference as an exhibit to the
Registration Statement.
PREFERRED STOCK
The Board of Directors, without further action by the shareholders, is
authorized to designate and issue in series Preferred Stock and to fix as to any
series the dividend rate, redemption prices, preferences on dissolution, the
terms of any sinking fund, conversion rights, voting rights, and any other
preferences or special rights and qualifications. Holders of the Preferred
Stock, if and when issued, will be entitled to vote as required under applicable
Virginia law. Such law includes provisions for the voting of the Preferred Stock
in the case of any amendment to the Articles of Incorporation affecting the
rights of holders of Preferred Stock, the payment of certain stock dividends,
merger or consolidation, sale of all or substantially all of BankGroup's assets,
and dissolution. The Board of Directors without shareholder approval can issue
Preferred Stock with voting and conversion rights which would adversely affect
the voting power of the common shareholders. In addition, the Preferred Stock
could be used in a manner which would discourage or make more difficult an
attempt to acquire control of BankGroup. BankGroup's Board of Directors has
designated a series of 1,000,000 shares of Participating Convertible Preferred
Stock, Series A (the "Series A Preferred Stock"), no shares of which have been
issued. The Series A Preferred Stock was created in connection with the
shareholder rights plan described below.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on each
matter to be voted upon by the shareholders. Directors are elected by a vote of
the holders of Common Stock. Dividends may be paid to the holders of Common
Stock when, as and if declared by the Board of Directors of out of funds legally
available for such purposes. The principal source of funds for dividend
payments is dividends received from the Banks. Payment
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of dividends to BankGroup by the Banks, without prior regulatory approval, is
also subject to various state and federal regulatory limitations. Holders of
Common Stock have no conversion, redemption, cumulative voting or preemptive
rights. There is no sinking fund obligation with respect to the Common Stock. In
the event of any liquidation, dissolution or winding up of BankGroup, after
payment or provision for payment of the debts and other liabilities and the
preferential amounts to which the holders of Preferred Stock, if any, are
entitled, the holders of Common Stock will be entitled to share ratably in any
remaining assets.
All outstanding shares of Common Stock are, and the shares of Common
Stock to be issued in the Bank Merger will be, when issued, duly and validly
issued, fully paid and nonassessable.
RIGHTS
Pursuant to a Rights Agreement (the "Rights Agreement") dated as of
January 18, 1990, BankGroup distributed as a dividend one Right for each
outstanding share of Common Stock. The number of Rights associated with each
share of Common Stock outstanding as of June 30, 1993 was adjusted
proportionately for the five-for-four stock split effected in the form of a
dividend paid July 30, 1993 and the two-for-one stock split effected in the form
of a stock dividend paid March 15, 1996. Each Right entitles the holder to buy
fractional shares of Participating Cumulative Preferred Stock, Series A, par
value $5.00 per share, at an exercise price of $24, subject to adjustment. The
Rights will become exercisable only if a person or group acquires or announces a
tender offer for 15% or more of the outstanding Common Stock. When exercisable,
BankGroup may issue a share of Common Stock in exchange for each Right other
than those held by such person or group. If a person or group acquires 30% or
more of the outstanding Common Stock, each Right will entitle the holder, other
than the acquiring person, upon payment of the exercise price, to acquire
Preferred Stock or, at the option of BankGroup, Common Stock, having a value
equal to twice the Right's exercise price. If BankGroup is acquired in a merger
or other business combination or if 50% of its earnings power is sold, each
Right will entitle the holder, other than the acquiring person, to purchase
securities of the surviving company having a market value equal to twice the
exercise price of the Right. The Rights will expire on January 18, 2000, and may
be redeemed by BankGroup at any time prior to the tenth day after an
announcement that a 10% position has been acquired, unless such time period has
been extended by the Board of Directors.
Until such time as a person or group acquires or announces a tender
offer for 15% or more of the Common Stock, (i) the Rights will be evidenced by
the Common Stock certificates and will be transferred with and only with such
Common Stock certificates, and (ii) the surrender for transfer of any
certificate for Common
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Stock will also constitute the transfer of the Rights associated with the Common
Stock represented by such certificate. Rights may not be transferred, directly
or indirectly (i) to any person or group that has acquired, or obtained the
right to acquire, beneficial ownership of 10% or more of the Rights (an
"Acquiring Person"), (ii) to any person in connection with a transaction in
which such person becomes an Acquiring Person or (iii) to any affiliate or
associate of any such person. Any Right that is the subject of a purported
transfer to any such person will be null and void.
The Rights can be expected to have certain anti-takeover effects if an
acquisition transaction not approved by the Board of Directors is proposed by a
person or group. In such event, the Rights will cause substantial dilution to
any person or group that acquires more than 15% of the outstanding shares of
Common Stock of BankGroup if certain events thereafter occur without the Rights
having been redeemed. For example, if thereafter such acquiring person acquires
30% of BankGroup's outstanding Common Stock, or effects a business combination
with BankGroup, the Rights permit shareholders to acquire securities having a
value equal to twice the amount of the purchase price specified in the Rights,
but rights held by such "acquiring person" are void to the extent permitted by
law and may not be exercised. Further, other shareholders may not transfer
rights to such "acquiring person" above his or her 15% ownership threshold.
Because of these provisions, it is unlikely that any person or group will
propose an acquisition transaction that is not approved by the Board of
Directors. Thus, the Rights could have the effect of discouraging acquisition
transactions not approved by the Board of Directors. The Rights do not interfere
with any merger or other business combination approved by the Board of Directors
and shareholders because the rights are redeemable with the concurrence of a
majority of the "Continuing Directors," defined as directors in office when the
Rights Agreement was adopted or any person added thereafter to the Board with
the approval of the Continuing Directors.
VIRGINIA STOCK CORPORATION ACT
The Virginia Stock Corporation Act contains provisions governing
"Affiliated Transactions." These provisions, with several exceptions discussed
below, require approval of material acquisition transactions between a Virginia
corporation and any holder of more than 10% of any class of its outstanding
voting shares (an "Interested Shareholder") by the holders of at least
two-thirds of the remaining voting shares. Affiliated Transactions subject to
this approval requirement include mergers, share exchanges, material
dispositions of corporate assets not in the ordinary course of business, any
dissolution of the corporation proposed by or on behalf of an Interested
Shareholder, or any reclassification, including reverse stock
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splits, recapitalization or merger of the corporation with its subsidiaries
which increases the percentage of voting shares owned beneficially by an
Interested Shareholder by more than 5%.
For three years following the time that an Interested Shareholder
becomes an owner of more than 10% of the outstanding voting shares, a Virginia
corporation cannot engage in an Affiliated Transaction with such Interested
Shareholder without approval of two-thirds of the voting shares other than those
shares beneficially owned by the Interested Shareholder, and majority approval
of the "Disinterested Directors." A Disinterested Director means, with respect
to a particular Interested Shareholder, a member of BankGroup's Board of
Directors who was (1) a member on the date on which an Interested Shareholder
became an Interested Shareholder and (2) recommended for election by, or was
elected to fill a vacancy and received the affirmative vote of, a majority of
the Disinterested Directors then on the Board. At the expiration of the three
year period, the statute requires approval of Affiliated Transactions by
two-thirds of the voting shares other than those beneficially owned by the
Interested Shareholder.
The principal exceptions to the special voting requirement apply to
transactions proposed after the three year period has expired and require either
that the transaction be approved by a majority of the corporation's
Disinterested Directors or that the transaction satisfy the fair-price
requirements of the statute. In general, the fair-price requirement provides
that in a two-step acquisition transaction, the Interested Shareholder must pay
the shareholders in the second step either the same amount of cash or the same
amount and type of consideration paid to acquire the Virginia corporation's
shares in the first step.
None of the foregoing limitations and special voting requirements
applies to a transaction with an Interested Shareholder whose acquisition of
shares making such person an Interested Shareholder was approved by a majority
of the Virginia corporation's Disinterested Directors.
These provisions were designed to deter certain takeovers of Virginia
corporations. In addition, the statute provides that, by affirmative vote of a
majority of the voting shares other than shares owned by any Interested
Shareholder, a corporation can adopt an amendment to its articles of
incorporation or bylaws providing that the Affiliated Transactions provisions
shall not apply to the corporation. BankGroup has not "opted out" of the
Affiliated Transactions provisions.
Virginia law also provides that shares acquired in a transaction that
would cause the acquiring person's voting strength to meet or exceed any of
three thresholds (20%, 33 1/3% or 50%) have no voting rights unless granted by a
majority vote
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of shares not owned by the acquiring person or any officer or employee-director
of the Virginia corporation. This provision empowers an acquiring person to
require the Virginia corporation to hold a special meeting of shareholders to
consider the matter within 50 days of its request.
REPORTS TO SHAREHOLDERS
BankGroup furnishes shareholders with written annual reports containing
consolidated financial statements audited by an independent certified public
accountant and with written quarterly reports containing an unaudited balance
sheet as of the end of each of the first three quarterly periods and an income
statement for the period from the beginning of the current fiscal year to the
end of such quarterly period.
TRANSFER AGENT
Registrar and Transfer Company, Post Office Box 1010, Cranford, New
Jersey, is transfer agent for BankGroup Common Stock.
COMPARATIVE RIGHTS OF SHAREHOLDERS
At the Effective Time of the Bank Merger, shareholders of Bank will
become shareholders of BankGroup, and their rights as shareholders will be
determined by the BankGroup Articles of Incorporation and BankGroup Bylaws and
the VCSA. The following is a summary of the material differences in the rights
of shareholders of BankGroup and Bank. This summary does not purport to be a
complete discussion of, and is qualified in its entirety by reference to, the
governing law and the Articles of Incorporation or Articles of Association and
Bylaws of each entity.
CAPITALIZATION
Bank. The Bank's Articles authorize the issuance of up to 315,000
shares of capital stock, par value $5.00 per share, all of which are issued as
outstanding.
BankGroup. BankGroup's authorized capital is described under
"Description of BankGroup Capital Stock."
AMENDMENT OF ARTICLES OR BYLAWS
Bank. Under the Articles of Association of Bank and federal law, the
Articles of Association of Bank may be amended at a regular or special meeting
of the stockholders, by the vote of the holders of a majority of the outstanding
voting shares of Bank Common Stock.
-67-
<PAGE>
The Bylaws of Bank may be amended by its Board of Directors by majority
vote.
BankGroup. As permitted by the VSCA, the BankGroup Articles provide
that, unless a greater vote is required by law, by the BankGroup Articles or by
a resolution of the Board of Directors, the BankGroup Articles may be amended if
the amendment is adopted by the Board of Directors and approved by a vote of the
holders of a majority of the votes entitled to be cast on the amendment by each
voting group entitled to vote thereon.
BankGroup's Bylaws generally provide that the Board of Directors may, by
a majority vote, amend its Bylaws.
REQUIRED SHAREHOLDER VOTE FOR CERTAIN ACTIONS
Bank. The approval of a majority of Bank's Board of Directors is
generally required under federal law on any plan of merger, consolidation or
sale of substantially all of the assets of Bank. The approval of shareholders
holding more than two-thirds (2/3) of all votes entitled to be cast is required
for a merger, consolidation or sale of substantially all of the assets of Bank.
BankGroup. The VSCA generally requires the approval of a majority of a
corporation's Board of Directors and the holders of more than two-thirds of all
the votes entitled to be cast thereon by each voting group entitled to vote on
any plan of merger or consolidation, plan of share exchange or sale of
substantially all of the assets of a corporation not in the ordinary course of
business. The VSCA also specifies additional voting requirements for Affiliated
Transactions and transactions that would cause an acquiring person's voting
power to meet or exceed specified thresholds, as discussed under "Description of
BankGroup Capital Stock -- Virginia Stock Corporation Act."
None of the additional voting requirements contained in the VSCA are
applicable to the Bank Merger since it is not an "Affiliated Transaction."
DIRECTOR NOMINATIONS
Bank. Neither Bank's Articles nor Bylaws establish any procedures that
must be followed for shareholders to nominate individuals for election to the
Board of Directors. Federal law provides for the election of directors annually
by the shareholders. Directors hold office for one year, and until their
successors are elected and have qualified.
Federal law permits cumulative voting by shareholders for the election
of directors. This means that each shareholder is
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<PAGE>
entitled to one vote for each share of stock he owns times the number of
directors being elected at the meeting. Each shareholder may cumulate his votes
and cast the total number for one candidate or divide the total number of votes
among candidates as he deems appropriate. Without cumulative voting, a
shareholder may cast only as many votes for a candidate as that shareholder has
shares of stock. Generally, minority shareholders have a greater chance of
electing one or more directors if cumulative voting is permitted than if it is
not permitted.
BankGroup. The Bylaws of BankGroup provide that any nomination for
director made by a shareholder must be made in writing to the Secretary of
BankGroup not less than 90 days prior to the meeting of shareholders at which
directors are to be elected. Any such shareholder's notice shall include (i) the
name and address of the shareholder and of each person to be nominated, (ii) a
representation that the shareholder is a holder of record of stock of BankGroup
entitled to vote at such meeting and intends to appear in person or by proxy at
the meeting to nominate each person specified, (iii) a description of all
arrangements or understandings between the shareholder and each nominee and any
other person (naming such person) pursuant to which the nomination is made by
the shareholder, (iv) such other information regarding each nominee as would be
required to be included in a proxy statement filed pursuant to the proxy rules
of the Securities and Exchange Commission had the nominee been nominated by the
Board, and (v) the consent of each nominee to serve as a director of BankGroup
if so elected.
DIRECTORS AND CLASSES OF DIRECTORS; VACANCIES AND REMOVAL OF
DIRECTORS
Bank. Bank's Articles and Bylaws provide that the number of directors
shall not be more than 25, nor less than five directors and shall be fixed by
the shareholders of Bank. The current number of Bank directors is fixed at nine.
Federal law permits a majority of remaining directors to fill vacancies on the
board of directors created by death, resignation, or other causes, including an
increase in the number of directors brought about by amendment of the Bylaws.
Federal law limits the number of directors that can be appointed by Bank's
remaining directors, in the event of an increase, to two if the board consists
of 15 or fewer directors and four directors if the Board consists of 16 or more
directors.
BankGroup. The number of Directors is set forth in the Bylaws. The Board
currently has fixed the number of directors at 11. Any vacancy occurring on the
Board of Directors, including a vacancy resulting from an increase in the number
of Directors, may be filled by the affirmative vote of a majority of the
remaining directors, though less than a quorum of the Board of
-69-
<PAGE>
Directors. Directors so chosen shall hold office for a term expiring at the next
following annual meeting of shareholders at which directors are elected. No
decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director. Subject to the rights of the holders
of preferred stock then outstanding, any director may be removed by the
affirmative vote of the holders of at least two-thirds of outstanding voting
shares.
ANTI-TAKEOVER PROVISIONS
Bank. Neither the Bank's Articles nor Bylaws contain any provisions that
may be deemed to have any anti-takeover effect.
BankGroup. For a description of certain provisions of VSCA which may be
deemed to have an anti-takeover effect, see "Description of BankGroup Capital
Stock Virginia Stock Corporation Act."
PREEMPTIVE RIGHTS
Neither the shareholders of BankGroup nor the shareholders of Bank
have preemptive rights. Thus, if additional shares of BankGroup Common Stock,
BankGroup preferred stock or Bank Common Stock are issued, holders of such
stock, to the extent they do not participate in such additional issuance of
shares, would own proportionately smaller interests in a larger amount of
outstanding capital stock.
ASSESSMENT
All outstanding shares of Bank Common Stock are fully paid and
nonassessable.
All shares of BankGroup Common Stock presently issued are, and those to
be issued pursuant to the Agreement will be, fully paid and nonassessable.
-70-
<PAGE>
CONVERSION; REDEMPTION; SINKING FUND
Neither BankGroup Common Stock nor Bank Common Stock is convertible,
redeemable or entitled to any sinking fund.
LIQUIDATION RIGHTS
Bank. Federal law generally provides that the Bank may go into
liquidation and be closed by the vote of the holders of more than two-thirds of
shares outstanding.
BankGroup. The VSCA generally provides that a corporation's board of
directors may propose dissolution for submission to shareholders and that to be
authorized, the dissolution must be approved by the holders of more than
two-thirds of all votes entitled to be cast on the proposal, unless the articles
of incorporation of the corporation require a greater or lesser vote. There are
no provisions in the BankGroup's Articles which would modify the statutory
requirements for dissolution under the VSCA.
DIVIDENDS AND OTHER DISTRIBUTIONS
Bank. Federal law permits the declaration of dividends by the Board of
Directors of the Bank from the net profits of the Bank with a number of
limitations. No dividends or other distributions may be paid which would impair
the capital of Bank. The approval of the Comptroller of the Currency is required
if dividends for a year exceed certain calculations involving the accumulation
of net profits. In addition, unless the Bank's surplus equals or exceeds the
capital of Bank, 10% of net profits each year must be transferred to surplus
before dividends may be paid.
BankGroup. The VSCA generally provides that a corporation may make
distributions to its shareholders unless, after giving effect to the
distribution, (i) the corporation would not be able to pay its debts as they
become due in the usual course of business or (ii) the corporation's total
assets would be less than the sum of its total liabilities plus (unless the
articles of incorporation permit otherwise, which the BankGroup Articles do not)
the amount that would be needed, if the corporation were to be dissolved at the
time of the distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution. These requirements are applicable to BankGroup as a Virginia
corporation.
In addition to the limitations set forth in the VSCA, there are various
regulatory requirements which are applicable to distributions by bank holding
companies such as and by national banks such as Bank. For a description of the
regulatory
-71-
<PAGE>
limitations on distributions by BankGroup, see "Supervision and Regulation
Limits on Dividends and Other Payments." For a description of the regulatory
limitations on capital distributions by Bank, see "Price Range of Bank Common
Stock and Dividend Policy."
INDEMNIFICATION
Bank. Federal law prohibits indemnification of directors of Bank for
actions taken on behalf of, or at the request of, Bank in line with the VSCA if
the indemnification provisions are set forth in the Articles of Association.
Indemnification may not be permitted for fines or penalties imposed by bank
regulatory authorities. Bank's Articles of Association do not provide for
indemnification of directors or officers.
BankGroup. To the full extent permitted by the VSCA and any other
applicable law, BankGroup shall indemnify a director or officer of BankGroup who
is or was a party to any proceeding by reason of the fact that he is or was such
a director or officer or is or was serving at the request of the corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise.
The Board of Directors is empowered, by majority vote of a quorum of
disinterested directors, to contract in advance to indemnify any director or
officer.
SHAREHOLDER PROPOSALS
Bank. Neither Bank's Articles of Association nor Bylaws contain
requirements that must be followed for a shareholder to submit a proposal to a
vote for the shareholders.
BankGroup. The Bylaws of BankGroup provide that at any meeting of
shareholders of BankGroup, only that business that is properly brought before
the meeting may be presented to and acted upon by the shareholders. To be
properly brought before the meeting, business must be brought (a) by or at the
direction of the Board of Directors or (b) by a shareholder who has given
written notice of business he expects to bring before the meeting to the
Secretary of BankGroup not less than 90 days prior to the meeting. A
shareholder's notice to the Secretary shall set forth as to each matter the
shareholder proposes to bring before the meeting (a) a brief description of the
business to be brought before the meeting and the reasons for conducting such
business at the meeting, (b) the name and address, as they appear on BankGroup's
books, of the shareholder proposing such business, (c) the class and number of
shares of BankGroup's stock beneficially owned by the shareholder, and (d) any
material interest of the shareholder in such business. No business shall be
conducted at a meeting of shareholders except in accordance with the procedures
set forth in BankGroup's Bylaws.
-72-
<PAGE>
SHAREHOLDER INSPECTION RIGHTS; SHAREHOLDER LISTS
Bank. Under federal law, the president and cashier of the Bank are
required to maintain a correct list of the names and residences of the
shareholders of Bank, and the number of shares held by each. Bank shareholders
are permitted under federal law to inspect, on any business day, the list of
shareholders of Bank. Any other request on the part of a Bank shareholder to
inspect books and records of Bank would have to be made pursuant to normal
judicial procedures under Virginia law.
BankGroup. Under the VSCA, the shareholder of a Virginia corporation is
entitled to inspect and copy certain books and records, including the articles
of incorporation and bylaws of the corporation if he gives the corporation
written notice of his or her demand at least five business days before the date
on which he wishes to inspect and copy. The shareholder of a Virginia
corporation is entitled to inspect and copy certain other books and records,
including a list of shareholders, minutes of any meeting of the board of
directors and accounting records of the corporation, if (i) the shareholder has
been a shareholder of record for at least six months immediately preceding his
or her written demand or is the holder of at least 5% of the corporation's
outstanding shares, (ii) the shareholder's demand is made in good faith and for
a proper purpose, (iii) the shareholder describes with reasonable particularity
the purpose of the request and the records desired to be inspected and (iv) the
records are directly connected with the stated purpose, and if he gives the
corporation written notice of his or her demand at least five business days
before the date on which he wishes to inspect and copy. The VSCA also provides
that a corporation shall make available for inspection by any shareholder during
usual business hours, at least 10 days before each meeting of shareholders, a
complete list of the shareholders entitled to vote at such meeting.
SHAREHOLDER RIGHTS PLAN
Bank. Bank has not implemented a shareholder rights plan.
BankGroup. For a description of a shareholder rights plan which has been
adopted by BankGroup, see "Description of BankGroup Capital Stock -- Rights."
DISSENTERS' RIGHTS
Bank. Provisions of Title 12 of the United States Code give shareholders
of a national bank the right to dissent from, and obtain payment of the "fair
value" of their shares in mergers and consolidations. For a description of
dissenter's rights the Bank's shareholders have in connection with a Bank
Merger, see
-73-
<PAGE>
"The Bank Merger -- Rights of Shareholders Electing to Exercise Their Right of
Appraisal".
BankGroup. The provisions of Article 15 of the VSCA which provide
shareholders of a Virginia corporation the right to dissent from, and obtain
payment of the fair value of their shares in the event of, mergers,
consolidations and certain other corporate transactions are applicable to
BankGroup as a Virginia corporation. However, because BankGroup has more than
2,000 record shareholders, shareholders of BankGroup generally do not have
rights to dissent from mergers, consolidations and certain other corporate
transactions to which BankGroup is a party because Article 15 of the VSCA
provides that holders of shares of a Virginia corporation which has shares
listed on a national securities exchange or which has at least 2,000 record
shareholders are not entitled to dissenters' rights unless certain requirements
are met.
RESALE OF BANKGROUP COMMON STOCK
BankGroup Common Stock issuable in the Bank Merger has been registered
under the 1933 Act, thereby allowing such shares to be traded freely and without
restriction by those holders of Bank Common Stock who receive such shares
following consummation of the Merger and who are not deemed to be "affiliates"
(as defined under the 1933 Act, but generally including directors, certain
executive officers and 10% or more shareholders) of Bank or BankGroup. Each
holder of Bank Common Stock who is deemed by Bank to be an affiliate of it has
entered into an agreement with BankGroup prior to the Effective Date of the Bank
Merger providing, among other things, that (A) such affiliate acknowledges and
agrees to support and vote such shares of Bank Common Stock beneficially owned
by him to ratify and confirm the Agreement and the Bank Merger, (B) such
affiliate acknowledges and agrees beginning 30 days prior to the Effective Date
of the Bank Merger, that he will not sell, pledge, transfer or otherwise dispose
of shares of Bank Common Stock or BankGroup Common Stock except in compliance
with the applicable provisions of the 1933 Act and rules and regulations
thereunder and until such time as financial results covering at least 30 days of
combined operations of BankGroup and Bank have been published within the meaning
of Section 201.01 of the SEC's Codification of Financial Reporting Policies, and
(C) the certificates representing said shares may bear a legend referring to the
foregoing restrictions. This Proxy Statement/Prospectus does not cover any
resales of BankGroup Common Stock received by affiliates of Bank.
-74-
<PAGE>
EXPERTS
The consolidated financial statements of MainStreet BankGroup
Incorporated and Subsidiaries (formerly Piedmont BankGroup Incorporated and
Subsidiaries) for the year ended December 31, 1995, incorporated in this Proxy
Statement/Prospectus by reference to BankGroup's Annual Report on Form 10-K for
the year ended December 31, 1995 have been so incorporated in reliance upon the
report of Coopers & Lybrand L.L.P., independent accountants, incorporated herein
by reference, and upon the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of MainStreet BankGroup
Incorporated and Subsidiaries (formerly Piedmont BankGroup Incorporated and
Subsidiaries) as of December 31, 1994, and for each of the years in the two year
period ended December 31, 1994, included in the Company's Annual Report on Form
10-K for the year ended December 31, 1995, have been incorporated by reference
herein and in the registration statement in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing. Their report refers to changes in accounting for impaired loans
and certain investments in debt and equity securities.
The financial statements of The First National Bank of Clifton Forge
included in this Proxy Statement/Prospectus have been included in reliance upon
the report of Persinger & Company, L.L.C., independent auditors, incorporated
herein by reference, and upon the authority of said firm as experts in
accounting and auditing.
LEGAL OPINIONS
The legality of the BankGroup Common Stock to be issued in the Bank
Merger will be passed on for BankGroup by Hunton & Williams, Richmond, Virginia.
Certain legal matters will be passed on for Bank by Woods, Rogers &
Hazlegrove, P.L.C., Roanoke, Virginia.
A condition to consummation of the Merger is the delivery to BankGroup
and Bank by Hunton & Williams of an opinion concerning certain federal income
tax consequences of the Bank Merger. See "The Bank Merger -- Certain Federal
Income Tax Consequences."
-75-
<PAGE>
OTHER MATTERS
As of the date of this Prospectus/Proxy Statement, the Bank Board does
not know of any other matters to be presented for action at the Bank Shareholder
Meeting other than procedural matters incident to the conduct of the meeting. If
any other matters not now known are properly brought before the Bank Shareholder
Meeting, the persons named in the accompanying proxy will vote such proxy in
accordance with the determination of a majority of the Bank Board.
By Order of the Board of Directors,
Reba H. Mandeville
Corporate Secretary
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<PAGE>
INDEX TO
THE FIRST NATIONAL BANK OF CLIFTON FORGE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
AND THE THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1995
Page
Accountant's Report . . . . . . . . . . . . . . . F-2
Balance Sheets at December 31, 1995 and 1994 . . F-3
Statements of Income for the Years Ended
December 31, 1995 and 1994 . . . . . . . . . . . F-4
Statements of Stockholders' Equity for
the Years Ended December 31, 1995 and 1994 . . . F-5
Statements of Cash Flows for the Years Ended
December 31, 1995 and 1994 . . . . . . . . . . . F-5
Notes to Financial Statements . . . . . . . . . F-7
Balance Sheets at March 31, 1996 and
December 31, 1995 (Unaudited) . . . . . . . . . F-19
Statements of Income for the Three Months
Ended March 31, 1996 and March 31, 1995
(Unaudited) . . . . . . . . . . . . . . . . . . F-20
Statements of Cash Flow for the Three Months
Ended March 31, 1996 and March 1995
(Unaudited) . . . . . . . . . . . . . . . . . . F-21
F-1
<PAGE>
ACCOUNTANTS' REPORT
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
The First National Bank of Clifton Forge
Clifton Forge, Virginia
We have audited the accompanying balance sheets of The First National
Bank of Clifton Forge as of December 31, 1995 and 1994, and the related
statements of income, shareholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
amounts and disclosures in the financial statements. An audit also includes
assessing accounting principles used and significant estimates made by
management, as well as evaluating overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The First National
Bank of Clifton Forge as of December 31, 1995 and 1994, and results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
PERSINGER & COMPANY, L.L.C.
Covington, Virginia
January 4, 1996, except for Note 14,
as to which is dated April 17, 1996
F-2
<PAGE>
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---------------- ----------
<S> <C>
ASSETS
Cash and due from banks (Note 2) $ 2,500,296 $ 2,105,339
Securities held to maturity (Note 3) - 19,039,038
Securities available for sale (Note 3) 26,454,583 6,749,126
Federal funds sold 5,960,000 3,300,000
Loans, net (Notes 4 and 5) 38,487,606 37,568,022
Bank premises and equipment, net (Note 6) 459,036 475,891
Accrued income receivable 572,854 574,915
Deferred tax asset (Note 8) - 158,054
Other assets (Note 10) 247,440 291,116
--------------- ---------------
$ 74,681,815 $ 70,261,501
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 7):
Interest bearing $ 53,470,388 $ 51,763,536
Noninterest bearing 5,842,299 4,683,271
--------------- ---------------
$ 59,312,687 $ 56,446,807
Accrued interest and other liabilities 500,026 464,767
Deferred income taxes (Note 8) 123,717 -
---------------- ----------------
$ 59,936,430 $ 56,911,574
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY
Capital stock:
Common, $5.00 par value;
authorized and issued 315,000 shares $ 1,575,000 $ 1,575,000
Surplus 1,575,000 1,575,000
Retained earnings (Note 13) 11,129,004 10,292,020
Unrealized gain (loss) on securities
available for sale, net 466,381 (92,093)
---------------- ----------------
$ 14,745,385 $ 13,349,927
-------------- --------------
$ 74,681,815 $ 70,261,501
-------------- --------------
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---------------- -------------
<S> <C>
Interest income on:
Loans $ 3,451,649 $ 3,201,856
Securities held to maturity 1,179,420 1,230,247
Securities available for sale 490,737 493,221
Federal funds sold 325,738 165,600
Deposits in banks - 10,275
------------------ ----------------
$ 5,447,544 $ 5,101,199
Interest on deposits 2,272,437 1,941,447
--------------- ---------------
Net interest income $ 3,175,107 $ 3,159,752
Provision for loan losses (Note 5) - 2,876
------------------ ----------------
Net interest income after provision for loan losses $ 3,175,107 $ 3,156,876
-------------- --------------
Other income:
Trust department income $ 41,432 $ 32,023
Service fees 162,103 183,289
Securities gains (losses) (3,455)17,675
Other 51,289 55,233
---------------- ----------------
$ 251,369 $ 288,220
--------------- ---------------
Other expenses:
Salaries (Note 9) $ 506,683 $ 503,339
Pensions and other employee benefits (Note 10) 75,280 60,809
Occupancy expenses 100,997 96,289
Equipment rentals, depreciation and maintenance 64,929 81,474
Other operating expenses 514,709 605,557
---------------- ----------------
$ 1,262,598 $ 1,347,468
--------------- ---------------
Income before income taxes $ 2,163,878 $ 2,097,628
Federal income taxes (Note 8) 640,194 606,985
---------------- ----------------
Net income $ 1,523,684 $ 1,490,643
--------------- ---------------
Earnings per common share $ 4.84 $ 4.73
----------------- -----------------
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON SECURITIES
CAPITAL RETAINED AVAILABLE
STOCK SURPLUS EARNINGS FOR SALE, NET TOTAL
<S> <C>
Balance,
December 31, 1993 $ 1,575,000 $ 1,575,000 $ 9,516,427 $ - $ 12,666,427
Net income - - 1,490,643 - 1,490,643
Cash dividends declared
($2.27 per share) - - (715,050) - (715,050)
Net change in unrealized
gain (loss on securities
available for sale, net) - - - (92,093) (92,093)
-------------------------------------------------------------- --------------
Balance,
December 31, 1994 $ 1,575,000 $ 1,575,000 $ 10,292,020 $(92,093) $ 13,349,927
Net income - - 1,523,684 - 1,523,684
Cash dividends declared
($2.18 per share) - - (686,700) - (686,700)
Net change in unrealized
gain (loss) on securities
available for sale, net - - - 558,474 558,474
---------------------------------------------------------------------------
Balance,
December 31, 1995 $ 1,575,000 $ 1,575,000 $ 11,129,004 $466,381 $ 14,745,385
------------ ----------- ------------ ------------- ------------
</TABLE>
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---------------- ----------
<S> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Net Income $ 1,523,684 $ 1,490,643
------------ ------------
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Depreciation $ 48,046 $ 61,728
Provision for loan losses - 2,876
Provision for deferred income taxes (5,927) (17,868)
Securities (gains) losses 3,455 (17,675)
Amortization (accretion) on securities (44,566) 115,803
(Increase) decrease in accrued income receivable 2,061 111,971
(Increase) decrease in other assets 43,676 (46,505)
Increase (decrease) in accrued interest payable and other liabilities 35,259 73,676
----------------------------
Total adjustments $ 82,004 $ 284,006
------------- -------------
Net cash provided (used) by operating activities $ 1,605,688 $ 1,774,649
------------ -------------
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
STATEMENT OF CASH FLOWS
(CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---------------- ----------
<S> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest bearing deposits in banks $ - $ 250,298
Maturities of securities held to maturity 4,809,100 1,400,500
Purchase of securities to be held to maturity (5,499,251) (2,299,854)
Sales of securities available for sale 1,960,781 1,495,156
Maturities of securities available for sale 1,400,000 4,622,190
Purchase of securities available for sale (2,449,766) (3,298,784)
Loans made to customers, net (919,584) (3,087,987)
Purchase of premises and equipment (31,191) (23,770)
-------------- ---------------
Net cash provided (used) by investing activities $ (729,911) $ (942,251)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in interest bearing deposits $ 1,706,852 $ (2,108,996)
Net increase (decrease) in noninterest bearing deposits 1,159,028 (359,388)
Dividends paid (686,700) (715,050)
-------------- ---------------
Net cash provided (used) by financing activities $ 2,179,180 $ (3,183,434)
------------- --------------
Increase (decrease) in cash and cash equivalents $ 3,054,957 $ (2,351,036)
Cash and cash equivalents:
Beginning 5,405,339 7,756,375
-------------- ---------------
Ending $ 8,460,296 $ 5,405,339
------------- --------------
Cash and cash equivalents, ending:
Cash and due from banks $ 2,500,296 $ 2,105,339
Federal funds sold 5,960,000 3,300,000
-------------- ---------------
$ 8,460,296 $ 5,405,339
------------- --------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest paid depositors $ 2,238,580 $ 1,942,853
Income taxes $ 601,200 $ 627,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTMENT
AND FINANCING ACTIVITIES
Transfer of securities held to maturity to securities
available for sale $ 20,312,427 $ -
Net change in unrealized holding gains (losses) on
available for sale securities $ 558,474 $ (92,093)
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Organization:
The First National Bank of Clifton Forge was incorporated in 1901 in
the state of Virginia as a national banking institution. The Bank
operates under the federal reserve banking regulations.
Nature of business:
The First National Bank of Clifton Forge grants commercial,
residential and consumer loans to customers located primarily in the
Virginia counties of Alleghany and Bath. The loan portfolio is
well-diversified and does not depend on any one sector of the
economy.
A summary of significant accounting policies follows:
Cash and cash equivalents:
For purposes of reporting cash flows, cash and due from banks
includes cash on hand, amounts due from banks (including cash items
in the process of clearing) and federal funds sold. Cash flows from
loans originated by the Bank and deposits are reported net.
The Bank maintains amounts due from banks which, at times, may
exceed federally insured limits. The Bank has not experienced any
losses in such accounts.
Trust assets:
Assets of the trust department, other than trust cash on deposit at
the Bank, are not included in these financial statements because
they are not assets of the Bank.
Investment in debt and marketable securities and accounting change:
The Bank has investments in debt and marketable equity securities.
Debt securities consist primarily of obligations of the U.S.
government, state governments and domestic corporations. Marketable
equity securities consist primarily of Federal Reserve Bank stock.
The Bank adopted the provisions of FASB Statement No. 115.
Accounting for Certain Investments in Debt and Equity Securities, as
of January 1, 1994. Statement 115 requires that management determine
the appropriate classification of securities at the date of
adoption, and thereafter at the date individual investment
securities are acquired, and that the appropriateness of such
classification be reassessed at each balance sheet date.
Securities classified as held to maturity are those debt securities
the Bank has both the intent and the ability to hold to maturity
regardless of changes in market conditions, liquidity needs or
changes in general economic conditions.
Securities available for sale are those debt securities that the
Bank intends to hold for an indefinite period of time, but not
necessarily to maturity. Any decision to sell a security classified
as available for sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix
of the Bank's assets and liabilities, liquidity needs, regulatory
capital considerations, and other similar factors. Securities
available for sale are carried at fair value. Unrealized gains or
losses are reported as increases of decreases in stockholders'
equity, net of the related deferred tax effect.
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Trading securities, which are generally held for the short term in
anticipation of market gains, are carried at fair value. Realized
and unrealized gains and losses on trading account assets are
included in interest income on trading account securities. The Bank
does not classify any securities as trading securities at this time.
Prior to the adoption of Statement 115, the Bank stated its debt
securities at the lower of amortized cost or fair value. The
marketable equity securities were stated at the lower of their
aggregate cost or market. Under both the newly adopted standard and
the Bank's former accounting practices, premiums and discounts on
investments in debt securities are amortized over their contractual
lives. The method of amortization results in a constant effective
yield on those securities (the interest method). Interest on debt
securities is recognized in income as accrued, and dividends on
marketable equity securities are recognized in income when declared.
Realized gains and losses, including losses from declines in value
of specific securities determined by management to be
other-than-temporary, are included in income. Realized gains and
losses are determined on the basis of specific securities sold.
Note 3 to the financial statements provides further information
about the effect of adopting Statement 115.
Loans:
On January 1, 1995, the Company adopted FASB Statement No. 114,
Accounting by Creditors for Impairment of a Loan. Statement No. 114
has been amended by FASB Statement No. 118, Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures.
Statement 114, as amended, requires that the impairment of loans
that have been separately identified for evaluation is to be
measured based on the present value of expected future cash flows
or, alternatively, the observable market price of the loans or the
fair value of the collateral. However, for those loans that are
collateral dependent (that is, if repayment of those loans is
expected to be provided solely by the underlying collateral) and for
which management has determined foreclosure is probable, the measure
of impairment of those loans is to be based on the fair value of the
collateral. Statement 114, as amended, also requires certain
disclosures about investments in impaired loans and the allowance
for loan losses and interest income recognized on those loans. At
December 31, 1995, the Bank had no loans which it considered to be
impaired, as defined by Statement 114.
Loans are stated at amount of unpaid principal, reduced by unearned
discount and fees and an allowance for loan losses.
The allowance for loan losses is increased through a provision for
loan losses charged to income, and decreased by charge-offs, net of
recoveries, when management determines that collectability of all
amounts when due is unlikely. The allowance is based on management's
estimate of the amount necessary to absorb losses on existing loans.
Management's estimate is based on a review of specific loans and,
for smaller balance homogeneous loans, on the Bank's past loan loss
experience, known and inherent risks in the entire loan portfolio,
overall portfolio quality, estimated fair value of any underlying
collateral, and current economic conditions that may affect the
borrowers' ability to repay. For those loans that are separately
evaluated for collectability, when management determines that it is
probable that principal and interest on those loans will not be
collected according to their contractual terms, the impairment of
those loans is recognized in the allowance account based on the
present value of expected future cash flows discounted at the
loans's effective rate, except for those loans where foreclosure is
probable, on which impairment is based on the fair value of the
collateral. Cash collections on loans that are impaired are credited
to the loan balance, and no interest income is recognized on those
loans until the principal balance has been collected.
Unearned interest on discounted loans is amortized to income over
the life of the loans, using a method that approximates the level
yield method. For all other loans, interest is accrued daily on the
outstanding balances. Accrual of interest is discontinued on a loan
when management believes, after considering collection efforts and
other factors, that the borrower's financial condition is such that
collection of interest is doubtful. Upon such discontinuance, all
unpaid accrued interest is reversed.
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Loan origination and commitment fees and certain direct loan
origination costs are being deferred and the net amount amortized as
an adjustment of the related loan's yield. These amounts are
generally amortized over the contractual life.
Bank premises and equipment:
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed principally by the
straight-line method over the following estimated useful lives:
Years
Buildings and improvements 10-50
Furniture and equipment 5-10
Acquired properties:
Real estate acquired through foreclosure and personal property
acquired through repossession are held for sale and are recorded at
the lower of the recorded amount of the loan or fair value of the
properties less estimated costs of disposal. Any write-down to fair
value at the time of transfer to acquired properties is charged to
the allowance for loan losses. Property is evaluated regularly to
ensure the recorded amount is supported by its current fair value.
Valuation allowances to reduce the carrying amount to fair value
less estimated costs to dispose are recorded as necessary.
Depreciation is recorded on the recorded amount of depreciable
assets after they have been owned for one year. Depreciation and
additions to or reduction from valuation allowances are recorded in
income.
Income taxes:
Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforward and deferred tax
liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
Employment benefit plan:
A noncontributory defined benefit pension plan covers all employees
who meet the eligibility requirements. Eligible employees must be
between the ages of 21 and 60 with at least one year of service. The
funding policy is the maximum annual contribution deductible for
federal income tax purposes.
Earnings per share:
Earnings per share are computed on the weighted average number of
shares outstanding.
Fair value of financial instruments:
On January 1, 1995, the Bank adopted FASB Statement No. 107,
Disclosures About Fair Value of Financial Instruments, and Statement
No. 119, Disclosure About Derivative Financial Instruments and Fair
Value of Financial Instruments, which became effective for years
ending after December 15, 1995. These Statements require disclosures
of the fair value about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not
available, fair values are based on
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In
that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many
cases, could not be realized in immediate settlement of the
instrument. Statement 107 excludes financial instruments and all
nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Bank.
The following methods and assumptions were used by the Bank in
estimating the fair value of its financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
balance sheet for cash and due from banks and federal funds sold
approximate their fair values.
Investment securities (including mortgage-backed securities): Fair
values for investment securities are based on quoted market prices,
where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
values. The fair values for fixed-rate loans are determined using
estimated future cash flows, discounted at the interest rates
currently being offered for loans with similar terms to borrowers
with similar credit quality. The carrying amount of accrued interest
receivable approximates its fair value.
Off-balance-sheet instruments: Fair values for the Bank's
off-balance-sheet instruments (loan commitments, unused lines of
credit and standby letters of credit) are based on fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit
standing.
Deposit liabilities: The fair values of demand deposits equal their
carrying amounts which represents the amount payable on demand. The
carrying amounts for variable-rate, fixed-term money market accounts
approximate their fair values at the reporting date. Fair values for
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities
on time deposits.
Reclassifications:
Certain reclassifications have been made to the prior 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. The most significant estimates
and assumptions are those required in the determination of the
allowance for loan losses.
Impairment of Long-Lived Assets:
In the event that facts and circumstances indicate that the cost of
the Bank's long-lived assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation were required,
the estimated future undiscounted cash flows associated with the
asset would be compared to the assets carrying amount to determine
if a write-down to market value or discounted cash flow value is
required.
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve balances in cash with Federal
Reserve Banks. The total of those reserve balances was approximately
$253,000 and $236,000 at December 31, 1995 and 1994, respectively.
NOTE 3. SECURITIES
As discussed in Note 1, the Bank adopted FASB Statement No. 115 as of
January 1, 1994. The January 1, 1994 cumulative effect of adopting
Statement 115 was immaterial.
On December 1, 1995, the Bank designated all of its securities being
held to maturity as available for sale, as permissible under guidelines
for implementation of Statement 115. The amortized cost of these
securities amounted to $19,781,124. The unrealized gain at the time of
transfer was $531,303.
Carrying amounts and fair values of securities being held to maturity
as of December 31, 1994 are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
1994
<S> <C>
U.S. Treasury securities $ 499,398 $ $ 3,617 $ 495,781
U.S. Government agencies
and corporations 8,738,166 309,541 8,428,625
State and political
subdivisions 6,172,601 59,091 42,201 6,189,491
Corporate securities 2,133,389 6,723 74,957 2,065,155
Mortgage-backed securities 1,495,484 - 102,656 1,392,828
-------------- ---------------- ------------- ---------------
$ 19,039,038 $ 65,814 $ 532,972 $ 18,571,880
------------- ------------ ------------- --------------
</TABLE>
The amortized cost and fair value of securities being held to maturity
as of December 31, 1994 by contractual maturity are shown below.
Maturities may differ from contractual maturities in mortgage-backed
securities because the mortgages underlying the securities may be
called or repaid without any penalties. Therefore, these securities are
not included in the maturity categories in the following maturity
summary.
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
1994
AMORTIZED FAIR
COST VALUE
<S> <C>
Due in one year or less $ 514,986 $ 516,181
Due after one year through five years 9,218,030 8,985,519
Due after five years through ten years 6,745,870 6,609,575
Due after ten years 1,064,668 1,067,777
Mortgage-backed securities 1,495,484 1,392,828
--------------- --------------
$ 19,039,038 $ 18,571,880
--------------- ---------------
</TABLE>
Securities being held to maturity with a carrying amount of $4,205,843
at December 31, 1994 were pledged as collateral on public deposits and
for other purposes as required or permitted by law.
Carrying amounts and fair values of securities available for sale as of December
31, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
1995
<S> <C>
U.S. Treasury securities $ 5,464,681 $ 140,703 $ 4,712 $ 5,600,672
U.S. Government agencies
and corporations 8,225,672 48,829 - 8,274,501
State and political subdivisions 6,039,811 382,739 76 6,422,474
Corporate securities 2,384,578 131,111 - 2,515,689
Mortgage-backed securities 3,538,704 21,349 13,306 3,546,747
Other 94,500 - - 94,500
-------------- ---------------- --------------- ----------------
$ 25,747,946 $ 724,731 $ 18,094 $ 26,454,583
------------ ------------- ------------ --------------
<CAPTION>
1994
U.S. Treasury securities $ 4,995,610 $ 7,494 $ 155,135 $ 4,847,969
U.S. Government agencies
and corporations 699,119 9,975 - 709,094
State and political subdivisions - - - -
Corporate securities 1,099,431 4,222 6,090 1,097,563
Mortgage-backed securities - - - -
Other 94,500 - - 94,500
-------------- ---------------- --------------- ----------------
$ 6,888,660 $ 21,691 $ 161,225 $ 6,749,126
------------- ------------- ------------- --------------
</TABLE>
The amortized cost and fair value of securities available for sale as of
December 31, 1995 and 1994 by contractual maturity are shown in the following
summary.
F-12
<PAGE>
<TABLE>
<CAPTION>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
1995 1994
-----------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
<S> <C>
Due in one year or less $ 1,159,494 $ 1,175,447 $ 1,500,421 $ 1,479,844
Due after one year through
five years 14,566,903 14,909,577 5,093,739 4,977,282
Due after five years through
ten years 5,820,061 6,114,928 294,500 292,000
Due after ten years 662,784 707,884 - -
Mortgage-backed securities 3,538,704 3,546,747 - -
--------------- -------------- -----------------------------------
$ 25,747,946 $ 26,454,583 $ 6,888,660 $ 6,749,126
------------- ------------ ------------- --------------
</TABLE>
Gross realized gains and losses for the years ended December 31, 1995 and 1994
are as follows:
1995 1994
-------------------------------
Realized gains $ 34,100 $ 30,315
Realized losses (37,555) (12,640)
Securities available for sale with a carrying amount of $5,527,437 and $709,719
at December 31, 1995 and 1994 were pledged as collateral on public deposits and
for other purposes as required or permitted by law.
NOTE 4. LOANS
Net loans are composed of the following:
DECEMBER 31,
1995 1994
---------------- -------------
Commercial $ 3,130,526 $ 3,334,320
Real Estate 29,431,326 29,327,221
Installment 7,117,061 5,922,566
--------------- ---------------
$ 39,678,913 $ 38,584,107
-------------- --------------
DECEMBER 31,
1995 1994
--------------- --------------
Deduct:
Unearned discount $ 839,104 $ 667,854
Unearned net loan fees 130,316 129,672
Allowance for loan losses 221,887 218,559
--------------- --------------
$ 1,191,307 $ 1,016,085
-------------- -------------
$ 38,487,606 $ 37,568,022
-------------- -------------
Estimated fair value $ 38,827,477
--------------
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
There were no nonaccrual loans at December 31, 1995 and 1994, and no
interest was collected on nonaccrual loans for the years then ended.
There were no nonperforming assets at December 31, 1995 and 1994,
except for $163,000 and $30,000, respectively, which were loans past
due 90 days.
NOTE 5. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994
---------------- --------------
<S> <C>
Balance, beginning $ 218,559 $ 218,654
Provision charged to operating expenses - 2,876
Recoveries of amount charged off 6,167 7,378
---------------- ----------------
$ 224,726 $ 228,908
Amounts charged off 2,839 10,349
---------------- ---------------
Balance, ending $ 221,887 $ 218,559
-------------- --------------
</TABLE>
NOTE 6. BANK PREMISES AND EQUIPMENT
The major classes of bank premises and equipment and the total accumulated
depreciation are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
---------------- --------------
<S> <C>
Land $ 48,930 $ 48,930
Buildings and improvements 787,516 787,516
Furniture and equipment 778,345 747,154
--------------- --------------
$ 1,614,791 $ 1,583,600
Less accumulated depreciation 1,155,755 1,107,709
--------------- --------------
$ 459,036 $ 475,891
-------------- -------------
</TABLE>
NOTE 7. DEPOSITS
The composition of deposits is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
---------------- --------------
<S> <C>
Demand $ 5,842,299 $ 4,683,271
NOW accounts 7,822,942 6,903,784
Savings 16,976,563 20,400,217
Time certificates, $100,000 or more 2,978,727 2,017,909
Other time certificates 25,692,156 22,441,626
--------------- ---------------
$ 59,312,687 $ 56,446,807
------------- --------------
Estimated fair value $ 59,431,086
-------------
</TABLE>
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 8. INCOME TAX MATTERS
The Federal income tax provision charged to continuing operations was
as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994
--------------- -------------
<S> <C>
Current $ 646,121 $ 624,853
Deferred (5,927) (17,868)
-------------- -------------
$ 640,194 $ 606,985
-------------- -------------
</TABLE>
A reconciliation of expected income tax expense computed at 34% to the
income tax expense included in the statement of income is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994
--------------- ---------------
<S> <C>
Computed "expected" tax expense $ 735,717 $ 713,194
Tax exempt interest (105,318) (105,112)
Other - Net 9,795 (1,097)
---------------- -----------------
$ 640,194 $ 606,985
---------------- -----------------
</TABLE>
Net deferred tax assets liabilities consist of the following items:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994
---------------- ---------------
Deferred tax assets:
<S> <C>
Unrealized loss on securities $ - $ 47,442
Deferred loan fees 44,307 44,088
Deferred compensation 116,915 107,406
---------------- ---------------
$ 161,222 $ 198,936
--------------- ---------------
Deferred tax liabilities:
Unrealized gain on securities $ 240,257 $ -
Accretion on securities 12,067 9,133
Prepaid pension cost 11,802 13,866
Property and equipment 20,813 17,883
-------------- ---------------
$ 284,939 $ 40,882
------------- ---------------
$ (123,717) $ 158,054
------------- ---------------
</TABLE>
NOTE 9. DEFERRED COMPENSATION
The deferred compensation agreements with the President and Chief
Executive Officer provides benefits over a period of one hundred and
eighty months beginning at the earlier of age seventy, date of
retirement, or date of death. Current charges to income are based upon
present values of future cash payments and totaled $18,458 in 1995 and
$27,275 in 1994, after providing for tax benefits.
The Bank is owner and beneficiary of a $180,000 life insurance contract
on the President's life which has been purchased to fund the agreement.
F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 10. EMPLOYEE BENEFIT PLAN
Net pension cost for the defined benefit pension plan consists of the
following components:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994
---------------- ----------
<S> <C>
Service cost $ 24,892 $ 24,510
Interest cost on projected benefit obligation 49,843 56,635
Actual return on plan assets (69,365) (84,691)
Net amortization and deferral 702 (4,169)
---------------- ------------
$ 6,072 $ (7,715)
----------------- -------------
</TABLE>
The following table sets forth the funded status and amounts recognized
in the accompanying balance sheets:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994
---------------- ---------------
<S> <C>
Actuarial present value of benefit obligations:
Vested benefits $ 597,858 $ 542,166
-------------- -------------
Accumulated benefits $ 598,421 $ 542,422
-------------- -------------
Projected benefits $ (721,444) $ (672,870)
Plan assets at fair value 890,490 779,022
--------------- --------------
Plan assets in excess of projected benefit obligation $ 169,046 $ 106,152
Unrecognized net gain (215,153) (150,722)
Unrecognized prior service cost 134,025 147,428
Unrecognized net asset at beginning of year (53,207) (62,075)
--------------- --------------
Amount included in other assets $ 34,711 $ 40,783
-------------- --------------
</TABLE>
Assumptions used by the Bank in determination of pension plan
information at December 31, 1995 and 1994 consisted of the
following:
Discount rate 7.5%
Rate of increase in compensation levels 6.0%
Expected long-term rate of return
on plan assets 9.0%
NOTE 11. COMMITMENTS AND CONTINGENCIES
Financial instruments with off-balance-sheet risk:
The Bank is party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs
of customers. These financial instruments include commitments to
extend credit and involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the balance sheets.
The Bank's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to
extend credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making
commitments as they do for on-balance-sheet instruments. A summary
of the Bank's commitments is as follows:
F-16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
DECEMBER 31,
1995 1994
---------------- --------------
Commitments to extend credit $ 1,908,435 $ 1,506,500
Standby letters of credit 23,700 26,600
-------------- --------------
$ 1,932,135 $ 1,533,100
------------- -------------
Estimated fair values $ 1,932,135
-------------
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract and represent the undrawn portion of the total
commitment. The commitment amounts do not necessarily represent
future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit,
is based on management's credit evaluation of the party. Collateral
held varies, but may include accounts receivable, crops, livestock,
inventory, property and equipment, residential real estate and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private
borrowing arrangements. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending
loan facilities to customers. Collateral held varies as specified
above and is required in instances which the Bank deems necessary.
Concentration of credit risk:
All of the Bank's loans and commitments to extend credit have been
granted to customers in the Bank's market area. Investments in
securities issued by state and political subdivisions (see Note 3)
include some governmental entities within the Bank's market area.
The concentrations of credit by type of loan are set forth in Note
4. The distribution of commitments to extend credit approximates
the distribution of loans outstanding. The Bank, as a matter of
policy, does not extend credit to any single borrower or group of
related borrowers in excess of its legal lending limit. The loan
portfolio is well diversified and is not concentrated in any one
business sector or industry.
Contingencies:
In the normal course of business, the Bank is involved in various
legal proceedings. In the opinion of management, any liability
resulting from such proceedings would not have a material adverse
effect on the Bank's financial statements.
NOTE 12. TRANSACTIONS WITH RELATED PARTIES
The Bank has executed, and may be expected to do so in the future,
banking transactions in the ordinary course of business with directors,
principal officers, their immediate families and affiliated companies
in which they are principal stockholders (commonly referred to as
related parties), all of which have been, in the opinion of management,
on the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with others.
F-17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Aggregate loan transactions with related parties were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994
---------------- --------------
<S> <C>
Balance, beginning $ 807,747 $ 62,824
New loans 917,648 1,205,320
Repayments (883,491) (460,397)
Relationship changes - -
--------------- --------------
Balance, ending $ 841,904 $ 807,747
-------------- --------------
Maximum balance during the year $ 841,904 $ 807,747
-------------- --------------
</TABLE>
NOTE 13. RETAINED EARNINGS
Dividend paid amounted to $686,700 in 1995 and $715,050 in 1994. Under
applicable Federal law, the Comptroller of the Currency restricts total
dividend payments in any calendar year to net profit of that year, as
defined, combined with retained net profits for the two preceding
years. At December 31, 1995, retained net profits for 1995 and 1994
which were free of such restriction, amounted to $1,612,577. The
Comptroller also has authority under the Financial Institutions
Supervisory Act to prohibit a national bank from engaging in an unsafe
or unsound practice in conducting its business. It is possible, under
certain circumstances, the Comptroller could assert that dividends or
other payments would be an unsafe or unsound practice.
Banking regulations require the Bank to maintain certain minimum
capital levels in relation to Bank assets. Capital is measured using a
leverage ratio as well as based on risk-weighing assets according to
regulatory guidelines. The Bank's regulatory capital is as follows:
Minimum Requirements
1995 Well Adequately
Actual Capitalized Capitalized
Tier I risk-based capital 41.29% 6.00% 4.00%
Total risk-based capital 41.93% 10.00% 8.00%
Leverage ratio 19.24% 5.00% 3.00%
NOTE 14. SUBSEQUENT EVENTS
The Bank has agreed in principle to be acquired by MainStreet BankGroup
Incorporated, subject to regulatory approval and approval by Bank
shareholders in an Agreement dated April 17, 1996. Under terms of the
agreement, MainStreet BankGroup Incorporated has agreed to exchange a
maximum of 5.55 shares and a minimum of 4.89 shares of its Common Stock
for each share of Bank's 315,000 shares of Common Stock.
F-18
<PAGE>
<TABLE>
<CAPTION>
THE FIRST NATIONAL BANK OF CLIFTON FORGE
BALANCE SHEET
(IN 000'S EXCEPT SHARE DATA)
(UNAUDITED)
MARCH 31 DECEMBER 31
1996 1995
-------------- --------------
<S> <C>
ASSETS
Cash and Due From Banks $ 2,111 $ 2,500
Federal Funds Sold 8,280 5,960
Securities Available for Sale 23,791 26,455
Securities Held to Maturity - -
Loans, Net of Unearned Income 38,982 38,710
Less: Allowance for Loan Losses 217 222
------------- -------------
Loans, Net 38,765 38,488
Bank Premises and Equipment, Net 449 459
Other Real Estate Owned - -
Other Assets 796 820
------------- -------------
TOTAL ASSETS $ 74,192 $ 74,682
============ ============
LIABILITIES
Deposits:
Demand Deposits $ 4,940 $ 5,842
Now Accounts 7,782 7,823
Savings 16,710 16,977
Certificates of Deposit $100,000 or more 3,393 2,979
Other Time Deposits 25,865 25,692
------------ ------------
Total Deposits 58,690 59,313
Other Liabilities 740 624
------------- -------------
TOTAL LIABILITIES 59,430 59,937
SHAREHOLDER'S EQUITY
Common Stock ($5.00 Par Value, 315,000 shares
Authorized, Issued and Outstanding) 1,575 1,575
Capital in Excess of Par 1,575 1,575
Retained Earnings 11,351 11,129
Unrealized Gains (Losses) on Securities 261 466
------------- -------------
TOTAL SHAREHOLDERS EQUITY 14,762 14,745
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY $ 74,192 $ 74,682
============ ============
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
THE FIRST NATIONAL BANK OF CLIFTON FORGE
STATEMENTS OF INCOME
(IN 000'S EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH MARCH
1996 1995
-------------- --------------
<S> <C>
INTEREST INCOME
Interest and Fees on Loans $ 907 $ 855
Interest and Dividends on Securities Available for Sale 395 97
Interest and Dividends on Securities Held to Maturity - 306
Other Interest Income 102 62
------------- -------------
Total Interest Income 1,404 1,320
INTEREST EXPENSE
Deposits 590 516
------------- --------------
Total Interest Expense 590 516
Net Interest Income 814 804
Provision for Loan Losses 1 -
-------------- --------------
Net Interest Income After provision for Loan Losses 813 804
NONINTEREST INCOME
Service Charges, Fees and Other 41 39
Trust Department Income 12 37
Securities Gains (Losses), Net - (38)
-------------- --------------
53 38
NONINTEREST EXPENSE
Salaries and Employee Benefits 136 135
Net Occupancy and Equipment Costs 25 25
Other Noninterest Expense 133 157
------------- -------------
294 317
Income Before Income Taxes 572 525
Income Tax Expense 171 156
------------- -------------
NET INCOME $ 401 $ 369
============= =============
Earnings Per Common Share $ 1.27 $ 1.17
============= =============
Dividends Per Share $ 0.57 $ 0.53
============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: 315,000 315,000
============ ===============
</TABLE>
F-20
<PAGE>
<TABLE>
<CAPTION>
THE FIRST NATIONAL BANK OF CLIFTON FORGE
STATEMENTS OF CASH FLOWS
(IN 000'S)
(UNAUDITED)
THREE MONTHS ENDED
MARCH MARCH
1996 1995
-------------- -------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 401 $ 369
Adjustments to Reconcile Net Income to Net
Cash Provided (Used) by Operating Activities:
Depreciation and Amortization 11 12
Amortization of Securities Premiums
and Discounts, Net (6) (4)
Loss on Sale of Securities, Net 0 38
Changes in Other Assets and Other Liabilities:
Other Assets 51 (215)
Other Liabilities 195 359
------------- --------------
Net Cash Provided by Operating Activities: 652 559
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Securities Held to Maturity - (701)
Proceeds from Sale of Securities Available for Sale - 1,963
Proceeds from Calls and Maturities of Securities
Available for Sale 2,359 -
Proceeds from Calls and Maturities of Securities
Held to Maturity - 315
Net (Increase) Decrease in Loans (277) 322
Purchases of Bank Premises and Equipment (1) (2)
Net Cash (Used) Provided by in Investing Activities 2,081 1,897
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits (623) (445)
Cash Dividends (179) (167)
------------- ------------
Net Cash Used in Financing Activities (802) (612)
------------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents 1,931 1,844
Beginning 8,460 5,405
Ending $ 10,391 $ 7,249
=========== ===========
</TABLE>
Note to Unaudited Financials:
The interim period financial statements are unaudited; however, in the opinion
of management, all adjustments of a normal and recurring nature which are
necessary for a fair presentation have been included.
F-21
<PAGE>
ANNEX I
5/29/96
AGREEMENT AND PLAN OF REORGANIZATION
among
MAINSTREET BANKGROUP INCORPORATED
CF ACQUISITION SUBSIDIARY, N.A.,
(In Organization)
and
THE FIRST NATIONAL BANK OF CLIFTON FORGE
April 17, 1996
<PAGE>
ARTICLE I
General
1.1 Bank Merger.......................................................... 2
1.2 Issuance of BankGroup Common Stock................................... 2
1.3 Taking of Necessary Action........................................... 2
1.4 Directors and Officers............................................... 2
ARTICLE II
Effect of Transaction on Common Stock of Bank
2.1 Conversion of Stock.................................................. 3
2.2 Cash Election........................................................ 3
2.3 Manner of Exchange................................................... 4
2.4 Dissenting Shares.................................................... 6
2.5 No Fractional Shares................................................. 7
ARTICLE III
Representations and Warranties
3.1 Representations and Warranties of Bank............................... 7
(a) Organization, Standing and Power................................ 7
(b) Capital Structure; Subsidiaries................................. 7
(c) Authority....................................................... 8
(d) Investments..................................................... 9
(e) Financial Statements............................................ 9
(f) Absence of Undisclosed Liabilities.............................. 10
(g) Tax Matters..................................................... 10
(h) Options, Warrants and Related Matters........................... 12
(i) Property; Leases................................................ 12
(j) Employees....................................................... 13
(k) Certain Contracts............................................... 13
(l) Employment Contracts and Related Matters........................ 13
(m) Real Estate..................................................... 14
(n) Affiliates...................................................... 14
(o) Agreements in Force and Effect.................................. 14
(p) Legal Proceedings; Compliance with Laws......................... 14
(q) Employee Benefit Plans.......................................... 15
(r) Insurance....................................................... 18
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<PAGE>
(s) Loan Portfolio.................................................. 18
(t) Absence of Changes.............................................. 19
(u) Brokers and Finders............................................. 19
(v) Securities Portfolio............................................ 20
(w) Reports......................................................... 20
(x) Environmental Matters........................................... 20
(y) Disclosure...................................................... 22
3.2 Representations and Warranties of BankGroup.......................... 22
(a) Organization, Standing and Power................................ 23
(b) Capital Structure............................................... 23
(c) Authority....................................................... 24
(d) Financial Statements............................................ 25
(e) Absence of Undisclosed Liabilities.............................. 25
(f) Absence of Changes.............................................. 25
(g) Brokers and Finders............................................. 26
(h) Options, Warrants and Related Matters........................... 26
(i) Reports......................................................... 26
(j) Legal Proceedings; Compliance with Laws......................... 27
(k) Employee Benefits Plan.......................................... 28
(l) Insurance....................................................... 29
(m) Loan Portfolio.................................................. 29
(n) Absence of Changes.............................................. 30
(o) Securities Portfolio............................................ 30
(p) Environmental Matters........................................... 30
(q) Disclosure...................................................... 30
ARTICLE IV
Conduct and Transactions Prior to
Effective Time of the Bank Merger
4.1 Access to Records and Properties of BankGroup and Bank............... 31
4.2 Registration Statement; Proxy Statement; Shareholder Approval........ 32
4.3 Operation of the Business of Bank.................................... 33
4.4 No Solicitation...................................................... 35
4.5 Dividends............................................................ 36
4.6 Regulatory Filings................................................... 36
4.7 Tax Opinion.......................................................... 36
4.8 Public Announcements................................................. 36
4.9 Transactions in BankGroup Common Stock............................... 36
4.10 BankGroup Rights Agreement........................................... 36
-ii-
<PAGE>
4.11 Accounting Treatment................................................. 37
4.12 Agreement as to Efforts to Consummate................................ 37
4.13 Adverse Changes in Condition......................................... 37
4.14 Updating of Schedules................................................ 38
ARTICLE V
Conditions of Transaction
5.1 Conditions of Obligations of BankGroup............................... 38
(a) Representations and Warranties; Performance of
Obligations; No Adverse Change.................................. 38
(b) Authorization of Transaction.................................... 39
(c) Opinion of Counsel.............................................. 39
(d) Registration Statement.......................................... 42
(e) Tax Opinion..................................................... 42
(f) Regulatory Approvals............................................ 43
(g) Affiliate Letters............................................... 43
(h) Provision for Loan Losses....................................... 44
(i) Accounting Treatment............................................ 44
(j) Acceptance by BankGroup Counsel................................. 44
5.2 Conditions of Obligations of Bank.................................... 44
(a) Representations and Warranties; Performance of Obligations; No
Adverse Change............................................... 44
(b) Authorization of Transaction.................................... 45
(c) Opinion of Counsel.............................................. 45
(d) Registration Statement.......................................... 47
(e) Regulatory Approvals............................................ 48
(f) Tax Opinion..................................................... 48
(g) Fairness Opinion................................................ 48
(h) Acceptance by Bank's Counsel.................................... 48
ARTICLE VI
Closing Date; Effective Time of the
Holding Company Merger
6.1 Closing Date......................................................... 48
6.2 Filings at Closing................................................... 49
6.3 Effective Time....................................................... 49
-iii-
<PAGE>
ARTICLE VII
Termination; Survival of Representations
Warranties and Covenants; Waiver and Amendment
7.1 Termination.......................................................... 49
7.2 Effect of Termination................................................ 51
7.3 Survival of Representations, Warranties and Covenants................ 51
7.4 Waiver and Amendment................................................. 51
ARTICLE VIII
Additional Covenants
8.1 Registration Statement.............................................. 52
8.2 Employee Benefits................................................... 52
8.3 Indemnification..................................................... 53
ARTICLE IX
Miscellaneous
9.1 Expenses; Termination Fee........................................... 53
9.2 Entire Agreement.................................................... 54
9.3 Descriptive Headings................................................ 54
9.4 Notices............................................................. 54
9.5 Counterparts........................................................ 55
9.6 Governing Law....................................................... 55
Exhibit A - Plan of Merger
-iv-
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE DESCRIPTION SECTION IN AGREEMENT
<S> <C>
A Bank Articles of Association 3.1(a)
B Bank Bylaws 3.1(a)
C Securities Owned by Bank 3.1(b), 3.1(d), 3.1(d)
D Bank Conflicts, Breaches or 3.1(c)
Defaults
E Bank Financial Statements 3.1(e)
F Bank Tax Matters 3.1(g), 3.1(g), 3.1(g)
G Salary Rates and Bank Common 3.1(j)
Stock Owned by Employees and
Directors of Bank; Owners of
5% of Bank Common Stock;
Outstanding Unexercised
Options, Warrants, Calls,
Commitments or Agreements
H Notes, Bonds, Mortgages, 3.1(k), 5.1(c)(vi), 5.1(c)(viii)
Indentures, Licenses, Lease
Agreements and Other Contracts
of Bank
I Employment Contracts and 3.1(l), 3.1(q)(i), 3.1(q)(i)
Related Matters of Bank 3.1(q)(vii), 3.1(q)(viii)
J Real Estate Owned or Leased 3.1(m)
by Bank
-v-
<PAGE>
K Bank Affiliates 3.1(n), 5.1(c)(iv)
L Bank Legal Proceedings 3.1(p), 3.1(p), 3.1(p)
M Bank Insurance 3.1(r)
N Bank Loans 3.1(s), 3.1(s)
O Bank Material Adverse
Changes 3.1(t)
P Bank Environmental Matters 3.1(x)
Q BankGroup Options, Warrants 3.2(h)
Calls, etc.
R BankGroup Litigation 3.2(j), 5.2(c)(viii)
S BankGroup Environmental
Matters 3.2(p)
4.3 Bank Salary Adjustments 4.3
T Waiting Periods for 8.2
BankGroup Employee Plans
-vi-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement"), dated
as of April 17, 1996 by and among MainStreet BankGroup Incorporated, a Virginia
corporation ("BankGroup"), CF Acquisition Subsidiary, N.A., an interim national
banking association (in organization) wholly-owned by BankGroup ("Acquisition"),
and The First National Bank of Clifton Forge, a national banking association
("Bank"), recites and provides:
A. The boards of directors of BankGroup and Bank deem it advisable to merge
Bank into Acquisition (the "Bank Merger") pursuant to this Agreement, the Plan
of Merger attached as Exhibit A (the "Plan of Merger") and the provisions of 12
U.S.C. ss. 215a whereby the holders of shares of common stock of Bank ("Bank
Common Stock") will receive common stock of BankGroup ("BankGroup Common Stock")
or cash in exchange therefor.
B. To effectuate the foregoing, the parties desire to adopt a plan of
reorganization in accordance with the provisions of Section 368(a) of the United
States Internal Revenue Code, as amended (the "Code").
C. BankGroup shall cause Acquisition to become a party to this Agreement
upon its organization and prior to consummation of the Bank Merger.
NOW, THEREFORE, in consideration of the mutual benefits to be derived from
this Agreement, and of the representations, warranties, conditions and promises
herein contained, BankGroup, Acquisition and Bank adopt this Agreement whereby
at the "Effective Time of the Bank Merger" (as defined in Article ) Bank shall
be merged into Acquisition in accordance
-1-
<PAGE>
with the Plan of Merger. The outstanding shares of Bank Common Stock shall be
converted into shares of BankGroup Common Stock on the basis, terms and
conditions contained herein and in the Plan of Merger. In connection therewith,
the parties hereto agree as follows:
ARTICLE I
General
1.1 Bank Merger. Subject to the provisions of this Agreement, the
Plan of Merger and 12 U.S.C. ss. 215a, at the Effective Time of the Bank Merger,
Bank shall be merged with and into Acquisition and the separate existence of
Bank shall cease.
1.2 Issuance of BankGroup Common Stock. BankGroup agrees that at the
Effective Time of the Bank Merger, it will issue BankGroup Common Stock to the
extent set forth in, and in accordance with, the terms of this Agreement and the
Plan of Merger.
1.3 Taking of Necessary Action. Prior to and after the Effective Time of
the Bank Merger, subject to the provisions of this Agreement, BankGroup,
Acquisition and Bank, respectively, each shall take all such action as may be
necessary or appropriate to effect the Bank Merger.
1.4 Directors and Officers. At its first meeting following the Effective
Time of the Bank Merger, BankGroup agrees to increase the number of members of
BankGroup's Board of Directors by one and to elect George J. Kostel to fill the
resulting vacancy. Mr. Kostel's eligibility for and election at BankGroup's next
following Annual Meeting of Shareholders will be governed by BankGroup's Bylaws,
and for purposes of eligibility he will be treated as are
-2-
<PAGE>
the BankGroup Directors who were age 65 at the 1995 Annual Meeting. At the
Effective Time of the Bank Merger, Mr. Kostel will resign as a director and
president of the Bank.
ARTICLE II
Effect of Transaction on Common Stock of Bank
2.1 Conversion of Stock. At the Effective Time of the Bank Merger:
(a) Each share of Bank Common Stock issued and outstanding at the
Effective Time of the Bank Merger (other than shares held by BankGroup or in
Bank's treasury and other than Dissenting Shares as defined in Section and
shares to be exchanged for cash) shall, and without any action by the holder
thereof, be converted into a number of shares of BankGroup Common Stock equal to
the quotient (rounded to the nearest one one-hundredth) of $83.20 divided by the
average of the closing sales price (the "BankGroup Stock Price") for BankGroup
Common Stock as reported on the Nasdaq National Market for the 10 trading days
preceding the last to occur of (i) approval of the Bank Merger by the
shareholders of Bank or (ii) receipt of the last of all regulatory approvals
prerequisite to the consummation of the Bank Merger (the "Exchange Ratio"). If
such quotient is less than 4.89, the Exchange Ratio shall be 4.89. If such
quotient is greater than 5.55, the Exchange Ratio shall be 5.55. All such shares
of BankGroup Common Stock shall be validly issued, fully paid and nonassessable.
(b) The Exchange Ratio at the Effective Time of the Bank Merger
shall be adjusted to reflect any consolidation, split-up, other subdivisions or
combinations of BankGroup Common Stock, any dividend payable in BankGroup Common
Stock, or any capital reorganization involving the reclassification of BankGroup
Common Stock subsequent to the date of this Agreement.
-3-
<PAGE>
2.2 Cash Election. Each holder of Bank Common Stock will be given the
option of exchanging all, but not less than all, of his shares for $83.20 cash
per share (subject to all applicable withholding taxes). The number of shares
that may be exchanged for cash, when added to the number of Dissenting Shares as
defined in Section 2.4 and fractional shares settled in cash, cannot exceed 9.9%
of outstanding shares of Bank Common Stock to preserve the "pooling of
interests" accounting treatment of the Bank Merger. The cash election must be
made at the time Bank shareholders vote on the Merger, and, once the Merger vote
has been taken, cash elections shall be irrevocable. If the aggregate of the
Dissenting Shares, fractional shares settled for cash and shares as respects
which a cash election is made exceeds 9.9% of outstanding shares of Bank Common
Stock, shares submitted for cash purchase will be chosen by lot to accommodate
the "pooling of interests" accounting requirement that a shareholder who chooses
the cash election must have all of his or her shares purchased for cash.
Shareholders who submit their shares for cash purchase but are not chosen in the
lottery will have his or her shares exchanged for BankGroup Common Stock (plus
cash in lieu of fractional shares) at the Exchange Ratio. If the aggregate of
the Dissenting Shares, fractional shares settled for cash and shares as respects
which a cash election is made does not exceed 9.9% of the outstanding shares of
Bank Common Stock, all shares submitted for cash will be exchanged for cash.
2.3 Manner of Exchange. Bank shareholders who elect to exchange some or
all of their shares of Bank Common Stock for cash must submit certificates for
the shares being exchanged for cash at or prior to the meeting of Bank's
shareholders referred to in Section 4.2. After the Effective Date of the Bank
Merger, each holder of a certificate to theretofore outstanding shares of Bank
Common Stock, upon surrender of such certificate to Registrar and
-4-
<PAGE>
Transfer Company (which shall act as exchange agent), unless previously
surrendered to Bank in connection with exercise of the cash election,
accompanied by a Letter of Transmittal shall be entitled to receive in exchange
therefor a certificate or certificates representing the number of full shares of
BankGroup Common Stock for which shares of Bank Common Stock theretofore
represented by the certificate or certificates so surrendered shall have been
exchanged as provided in this Article II, or cash, if the cash election provided
in Section 2.2 is chosen. Until so surrendered, each outstanding certificate
which, prior to the Effective Date of the Bank Merger, represented Bank Common
Stock (other than Dissenting Shares referred to in Section 2.4) will be deemed
to evidence the right to receive the number of full shares of BankGroup Common
Stock into which the shares of Bank Common Stock represented thereby may be
converted, or $83.20 cash if the cash election provided in Section 2.2 was
chosen, and, after the Effective Date of the Bank Merger (unless the cash
election was chosen), will be deemed for all corporate purposes of BankGroup to
evidence ownership of the number of full shares of BankGroup Common Stock into
which the shares of Bank Common Stock represented thereby were converted. Until
such outstanding certificates formerly representing Bank Common Stock are
surrendered, no dividend payable to holders of record of BankGroup Common Stock
for any period as of any date subsequent to the Effective Date of the Bank
Merger shall be paid to the holder of such outstanding certificates in respect
thereof. After the Effective Date of the Bank Merger there shall be no further
registry of transfer on the records of Bank of shares of Bank Common Stock. If a
certificate representing such shares is presented to the exchange agent, it
shall be canceled and exchanged for a certificate representing shares of
BankGroup Common
-5-
<PAGE>
Stock as herein provided. BankGroup will also issue a certificate in exchange
for shares evidenced by lost certificate(s) provided the record owner thereof
provides
[Remainder of page intentionally left blank.]
-6-
<PAGE>
BankGroup with such substantiation, indemnification and security as BankGroup
may reasonably require. Upon surrender of certificates of Bank Common Stock in
exchange for BankGroup Common Stock, there shall be paid to the recordholder of
the certificates of BankGroup Common Stock issued in exchange thereof (i) the
amount of dividends theretofore paid with respect to such full shares of
BankGroup Common Stock as of any date subsequent to the Effective Date of the
Bank Merger which have not yet been paid to a public official pursuant to
abandoned property laws and (ii) at the appropriate payment date the amount of
dividends with a record date after the Effective Date of the Bank Merger, but
prior to surrender and payment date subsequent to surrender. No interest shall
be payable with respect to such dividends upon surrender of outstanding
certificates.
2.4 Dissenting Shares. Notwithstanding anything in this Agreement to the
contrary, shares of Bank Common Stock which are issued and outstanding
immediately prior to the Effective Time of the Bank Merger and which are held by
a shareholder who has the right (to the extent such right is available by law)
to demand and receive payment of the fair value of his shares of Bank Common
Stock (the "Dissenting Shares") pursuant to 12 U.S.C. ss. 215a, shall not be
converted into or be exchangeable for the right to receive the consideration
provided in Section 2.2 unless and until such holder shall fail to perfect his
or her right to an appraisal or shall have effectively withdrawn or lost such
right under 12 U.S.C. ss. 215a, as the case may be. If such holder shall have so
failed to perfect his right to dissent or shall have effectively withdrawn or
lost such right, each of his shares of Bank Common Stock shall thereupon be
deemed to have been converted into, at the Effective Time of the Bank Merger,
the right to receive shares of BankGroup Common Stock at the Exchange Ratio. The
number of Dissenting
-7-
<PAGE>
Shares, when added to the number of shares that may be exchanged for cash and
fractional shares settled for cash, cannot exceed 9.9% of the shares of Bank
Common Stock to preserve the "pooling of interests" accounting treatment of the
Bank Merger.
2.5 No Fractional Shares. No certificates or scrip for fractional shares
of BankGroup Common Stock will be issued. In lieu thereof, BankGroup will pay
the value of such fractional shares in cash (subject to all applicable
withholding taxes), for which purpose BankGroup Common Stock shall be valued at
the BankGroup Stock Price.
ARTICLE III
Representations and Warranties
3.1 Representations and Warranties of Bank. Bank represents and warrants to
BankGroup as follows:
(a) Organization, Standing and Power. Bank is a national banking
association duly organized, validly existing and in good standing under the laws
of the United States and has all requisite power and authority to own, lease and
operate its properties and to carry on its business as now being conducted and
subject to the approval of the Plan of Merger by shareholders of Bank as
contemplated by Section , to perform this Agreement to effect the transactions
contemplated hereby. Bank's Articles of Association and all amendments thereto
to the date hereof and Bank's Bylaws as amended to the date hereof are attached
hereto as Schedule A and Schedule B, respectively. Bank's deposits are insured
by the Bank Insurance Fund of the Federal Deposit Insurance Corporation to the
maximum extent permitted by law.
-8-
<PAGE>
(b) Capital Structure; Subsidiaries. Bank's authorized capital
stock consists of 315,000 shares of Common Stock, par value $5 per share. As of
the Effective Time of the Bank Merger, 315,000 shares of Bank Common Stock will
be issued and outstanding, and all of the issued and outstanding shares of Bank
Common Stock are and will be validly issued, fully paid and nonassessable. Bank
has no subsidiaries.
Except as disclosed on Schedule C, Bank knows of no person who
beneficially owns 5% or more of outstanding Bank Common Stock.
(c) Authority. Subject to the approval of the Plan of Merger by
shareholders of Bank as contemplated by Section 4.2 hereof, the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby and by the Plan of Merger have been duly and validly authorized by all
necessary action on the part of Bank, and this Agreement is a valid and binding
obligation of Bank, enforceable in accordance with its terms. The execution and
delivery of this Agreement, the consummation of the transactions contemplated
hereby and by the Plan of Merger and compliance by Bank with any of the
provisions hereof will not, except as noted on Schedule D, (i) conflict with or
result in a breach of any provision of Bank's Articles of Association or Bylaws
or a default (or give rise to any right of termination, cancellation or
acceleration) under any of the terms, conditions or provisions of any note,
bond, debenture, mortgage, indenture, license, material agreement or other
material instrument or obligation to which Bank is a party, by which Bank or any
of its properties or assets may be bound (except for such conflict, breach or
default, as to which requisite waivers or consents shall have been obtained by
Bank prior to the Effective Time of the Bank Merger or the obtaining of which
shall have been waived by BankGroup); or (ii) violate any order, writ,
-9-
<PAGE>
injunction, decree, statute, rule or regulation applicable to Bank or any of its
properties or assets. No consent or approval by any governmental authority,
other than compliance with applicable federal and state corporate, securities
and banking laws, and regulations of the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") and the Office of the Comptroller
of the Currency (the "OCC"), is required in connection with the execution and
delivery by Bank of this Agreement or the consummation by Bank of the
transactions contemplated hereby or by the Plan of Merger.
(d) Investments. All securities owned by Bank of record and
beneficially are free and clear of all mortgages, liens, pledges, encumbrances
or any other restriction, whether contractual or statutory, which would
materially impair the ability of Bank freely to dispose of any such security at
any time, except as noted on Schedule C. Any securities owned of record by Bank
in an amount equal to 5% or more of the issued and outstanding voting securities
of the issuer thereof have been noted on Schedule C. There are no voting trusts
or other agreements or undertakings with respect to the voting of such
securities. With respect to all repurchase agreements to which Bank is a party,
Bank has a valid, perfected first lien or security interest in the government
securities or other collateral securing the repurchase agreement, and the value
of the collateral securing each such repurchase agreement equals or exceeds the
amount of the debt secured by such collateral under such agreement.
(e) Financial Statements. Schedule E contains copies of the
following financial statements of Bank (the "Bank Financial Statements"):
(i) Balance Sheets as of December 31, 1995 and 1994;
-10-
<PAGE>
(ii) Statements of Income for each of the three years
ended December 31, 1995, 1994 and 1993;
(iii) Statements of Changes in Stockholders' Equity for
each of the three years ended December 31, 1995, 1994 and 1993; and
(iv) Statements of Cash Flows for each of the three
years ended December 31, 1995, 1994 and 1993.
Such financial statements and the notes thereto have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods indicated. Each of such statements of financial
condition, together with the notes thereto, presents fairly as of its date the
financial condition and assets and liabilities of Bank. Such statements of
operations, statements of stockholders' equity and statements of cash flows,
together with the notes thereto, present fairly the results of operations of
Bank for the periods indicated.
Subject to the limitations imposed by federal laws applicable to
national banks, and except as disclosed in the Bank Financial Statements, there
are no restrictions precluding Bank from paying dividends when, as, and if
declared by its respective board of directors.
(f) Absence of Undisclosed Liabilities. At December 31, 1995,
Bank had no obligations or liabilities (contingent or otherwise) of any nature
which were not reflected in the Bank Financial Statements as of such date, or
disclosed in the notes thereto, except for those which in the aggregate are
immaterial or disclosed in Schedules specifically referred to herein.
(g) Tax Matters. Bank has filed or (in the case of returns or
reports not yet due) will file all tax returns and reports required to have been
filed by or for it before the
-11-
<PAGE>
Effective Time of the Bank Merger, and all information set forth in such returns
or reports is or (in the case of such returns or reports not yet due) will be
accurate and complete in all material respects. Bank has paid or made adequate
provision in all material respects for (or with respect to returns or reports
not filed before the Effective Time of the Bank Merger will pay or make adequate
provision for) all taxes, additions to tax, penalties, and interest for all
periods covered by those returns or reports. Except as disclosed on Schedule F,
there are, and at the Effective Time of the Bank Merger will be, no unpaid
taxes, additions to tax, penalties, or interest due and payable by Bank or by
any other person that are or could become a lien on any asset or otherwise
adversely affect the business, property or financial condition of Bank. Bank has
collected or withheld, or will collect or withhold before the Effective Time of
the Bank Merger, all amounts required to be collected or withheld by it for any
taxes, and all such amounts have been, or before the Effective Time of the Bank
Merger will have been, paid to the appropriate governmental agencies or set
aside in appropriate accounts for future payment when due. Bank is in material
compliance with, and its records contain all information and documents
(including, without limitation, properly completed IRS Forms W-9) necessary to
comply in all material respects with, all information reporting and tax
withholding requirements under federal, state, and local laws, rules, and
regulations, and such records identify with specificity all accounts subject to
backup withholding under Section 3406 of the Code. The balance sheets contained
in the Bank Financial Statements fully and properly reflect, as of the dates
thereof, the aggregate liabilities of Bank for all accrued taxes, additions to
tax, penalties and interest. For periods ending after December 31, 1995, the
books and records of Bank fully and properly reflect its liability for all
accrued taxes, additions to tax, penalties and interest.
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Except as disclosed in Schedule F, no tax return or report of Bank is under
examination by any taxing authority or the subject of any administrative or
judicial proceeding, Bank has not granted (nor is it subject to) any waiver of
the period of limitations for the assessment of tax for any currently open
taxable period, and no unpaid tax deficiency has been asserted against or with
respect to Bank by any taxing authority. Bank has not made or entered into, and
holds no asset subject to, a consent filed pursuant to Section 341(f) of the
Code and the regulations thereunder or a "safe harbor lease" subject to former
Section 168(f)(8) of the Code and the regulations thereunder. Schedule F
describes all tax elections, consents and agreements affecting Bank for any tax
period beginning on or after January 1, 1989, and all such material elections,
consents and agreements for any prior period. To the best knowledge of Bank, no
Bank shareholder is a "foreign person" for purposes of Section 1445 of the Code.
(h) Options, Warrants and Related Matters. There are no
outstanding unexercised options, warrants, calls, commitments or agreements of
any character to which Bank is a party or by which it is bound calling for the
issuance of securities of Bank or any security representing the right to
purchase or otherwise receive any such security.
(i) Property; Leases. Bank owns (or enjoys use of under capital
leases) all property reflected on the Bank Financial Statements as of December
31, 1995 (except personal property sold or otherwise disposed of in the ordinary
course of business). All property shown as being owned is owned free and clear
of all mortgages, liens, pledges, charges or encumbrances of any nature
whatsoever, except those referred to in the notes to the Bank Financial
Statements, liens for current taxes not yet due and payable, any unfiled
mechanics'
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<PAGE>
liens and such encumbrances and imperfections of title, if any, as are not
substantial in character or amount or otherwise materially impair business
operations.
The capital leases, if any, relating to leased property are valid and
subsisting and there does not exist with respect to Bank's obligations
thereunder any material default or event or condition which, after notice or
lapse of time or both, would constitute a material default thereunder. There is
no condemnation proceeding pending or threatened which would preclude or impair
the use of any property as presently being used in the conduct of Bank's
business. Such leases are reflected in the Bank Financial Statements.
All property and assets material to the business or operations of Bank
are in substantially good operating condition and repair and such property and
assets are adequate for the business and operations of Bank as currently
conducted.
No notice of violation of zoning laws, building or fire codes or other
statutes, ordinances or regulations relating to the operations of Bank has been
received by Bank.
(j) Employees. Schedule G lists (A) name of, current annual
salary rates for, and the number of shares of Bank Common Stock owned
beneficially by, all present employees of Bank who each are presently scheduled
to receive a salary in excess of $50,000 during the year ending December 31,
1996; (B) the number of shares of Bank Common Stock owned beneficially by each
director of Bank; and (C) the names of and the number of shares of Bank Common
Stock owned by each person who, to the knowledge of Bank, beneficially owns 5%
or more of the outstanding Bank Common Stock.
(k) Certain Contracts. Schedule H lists all notes, bonds,
mortgages, indentures, licenses, lease agreements and other contracts and
obligations to which Bank is a
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party, except for those entered into by Bank in the ordinary course of business
consistent with prior practices and that do not involve more than $50,000.
(l) Employment Contracts and Related Matters. Except in all cases
as set forth on Schedule I, Bank is not a party to (A) any employment contract
not terminable at the option of Bank without liability; (B) any retirement,
stock option, profit sharing or pension plan or thrift plan or agreement or
employee benefit plan (as defined in Section 3 of the Employee Retirement Income
Security Act of 1974); (C) any management or consulting agreement not terminable
at the option of Bank without liability; or (D) any union or labor agreement.
(m) Real Estate. Schedule J describes all interests in real
property owned, leased or otherwise claimed by Bank, including "other real
estate owned."
(n) Affiliates. Schedule K sets forth the names and number of
shares of Bank Common Stock owned beneficially or of record by any persons Bank
considers to be affiliates ("Bank Affiliates") as that term is defined for
purposes of Rule 145 under the 1933 Act.
(o) Agreements in Force and Effect. All material contracts,
agreements, plans, leases, policies and licenses referred to in any Schedule of
Bank referred to herein are valid and in full force and effect, and Bank has not
breached any material provision of, nor are in default in any material respect
under the terms of, any such contract, agreement, lease, policy or license.
(p) Legal Proceedings; Compliance with Laws. Except as set forth
in Schedule L, there is no legal, administrative, arbitration or other
proceeding or governmental investigation pending (including any legal,
administrative, arbitration or other proceeding or governmental investigation
pending involving a violation of the federal antitrust laws), or, to the
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knowledge of Bank's management, threatened or probable of assertion, which might
result in money damages payable by Bank in excess of insurance coverage, which
might result in a permanent injunction against Bank, which might result in a
change in the zoning or building ordinances materially affecting the property or
leasehold interests of Bank, or which otherwise, either individually or in the
aggregate, is likely to have a material adverse affect on Bank. Except as set
forth in Schedule L, Bank has complied in all material respects with any laws,
ordinances, requirements, regulations or orders applicable to its business
(including environmental laws, ordinances, requirements, regulations or orders).
Bank has all licenses, permits, orders or approvals of any federal, state, local
or foreign governmental or regulatory body (collectively, "Permits") that are
material to or necessary for the conduct of the business of Bank; the Permits
are in full force and effect; no violations are or have been recorded in respect
of any Permits, nor has Bank received notice of any such violation; and no
proceeding is pending or, to the knowledge of Bank, threatened or probable of
assertion to revise, revoke or limit any Permit. Except as set forth in Schedule
L, Bank has not entered into any agreements or written understandings with the
OCC, the FDIC or any other regulatory authority. Bank is not subject to any
judgment, order, writ, injunction or decree which materially adversely affects,
or might reasonably be expected to materially adversely affect, the condition
(financial or otherwise), business or prospects of Bank.
(q) Employee Benefit Plans.
(i) Schedule I includes a correct and complete list of,
and BankGroup has been furnished a true and correct copy of, (A) all qualified
pension and profit-sharing plans, all deferred compensation, consultant,
severance, thrift, option, bonus and group insurance
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<PAGE>
contracts and all other incentive, welfare and employee benefit plans, trust,
annuity or other funding agreements, and all other agreements that are presently
in effect, or have been approved prior to the date hereof, for the benefit of
employees or former employees of Bank, or the dependents or beneficiaries of any
employee or former employee of Bank, whether or not subject to ERISA (the
"Employee Plans"); (B) the most recent actuarial and financial reports prepared
or required to be prepared with respect to any Employee Plan; and (C) the most
recent annual reports filed with any governmental agency, the most recent
favorable determination letter issued by the Internal Revenue Service, and any
open requests for rulings or determination letters, that pertain to any such
qualified Employee Plan. Schedule I identifies each Employee Plan that is
intended to be qualified under Section 401(a) of the Code and each such plan is
qualified.
(ii) Neither Bank nor any employee pension benefit plan
(as defined in Section 3(2) of ERISA (a "Pension Plan")) maintained or
previously maintained by it, has incurred any material liability to the Pension
Benefit Guaranty Corporation ("PBGC") or to the Internal Revenue Service with
respect to any Pension Plan. There is not currently pending with the PBGC any
filing with respect to any reportable event under Section 4043 of ERISA nor has
any reportable event occurred as to which a filing is required and has not been
made.
(iii) Full payment has been made (or proper accruals have
been established) of all contributions which are required for periods prior to
the Closing Date under the terms of each Employee Plan, ERISA, or a collective
bargaining agreement. No accumulated funding deficiency (as defined in Section
302 of ERISA or Section 412 of the Code) whether or not waived, exists with
respect to any Pension Plan (including any Pension Plan
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previously maintained by Bank). There is no "unfunded current liability" (as
defined in Section 412 of the Code) with respect to any Pension Plan.
(iv) No Employee Plan is a "multiemployer plan" (as
defined in Section 3(37) of ERISA). Bank has not incurred any liability under
Section 4201 of ERISA for a complete or partial withdrawal from a multiemployer
plan (as defined in Section 3(37) of ERISA). Bank has not participated in or
agreed to participate in, a multiemployer plan (as defined in Section 3(37) of
ERISA).
(v) All Employee Plans that are "employee benefit
plans", as defined in Section 3(3) of ERISA, that are maintained by or were
previously maintained by Bank comply and have been administered in compliance in
all material respects with ERISA and all other legal requirements, including the
terms of such plans, collective bargaining agreements and securities laws. Bank
does not have any material liability under any such plan that is not reflected
in the Bank Financial Statements.
(vi) No prohibited transaction has occurred with respect
to any Employee Plan that is an "employee benefit plan" (as defined in Section
3(3) of ERISA) maintained by Bank or any "employee benefit plan" previously
maintained by Bank that would result, directly or indirectly, in material
liability under ERISA or in the imposition of a material excise tax under
Section 4975 of the Code.
(vii) Schedule I identifies each Employee Plan that is an
"employee welfare benefit plan" (as defined in Section 3(1) of ERISA) and which
is funded. The funding under each such plan does not exceed the limitations
under Section 419A(b) or 419A(c) of the
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<PAGE>
Code. Bank is not subject to taxation on the income of any such plan or any such plan
previously maintained by Bank.
(viii) Schedule I identifies the method of funding (including any
individual accounting) and funded status for all post-retirement medical or life
insurance benefits for the employees of Bank.
(r) Insurance. All policies or binders of fire, liability,
product liability, workmen's compensation, vehicular and other insurance held by
or on behalf of Bank are described on Schedule M and are valid and enforceable
in accordance with their terms, are in full force and effect, and insure against
risks and liabilities to the extent and in the manner customary for the industry
and are deemed appropriate and sufficient by Bank. Bank is not in default with
respect to any provision contained in any such policy or binder and has not
failed to give any notice or present any claim under any such policy or binder
in due and timely fashion. Bank has not received notice of cancellation or
non-renewal of any such policy or binder. Bank has no knowledge of any
inaccuracy in any application for such policies or binders, any failure to pay
premiums when due or any similar state of facts that might form the basis for
termination of any such insurance. Bank has no knowledge of any state of facts
or of the occurrence of any event that is reasonably likely to form the basis
for any material claim against it not fully covered (except to the extent of any
applicable deductible) by the policies or binders referred to above. Bank has
not received notice from any of their respective insurance carriers that any
insurance premiums will be materially increased in the future or that any such
insurance coverage will not be available in the future on substantially the same
terms as now in effect.
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<PAGE>
(s) Loan Portfolio. Each loan outstanding on the books of Bank is
reflected correctly in all material respects by the loan documentation, was made
in all material respects in the ordinary course of business, was not known to be
uncollectible at the time it was made, and was made in all material respects in
accordance with Bank's standard loan policies. The records of Bank regarding all
loans outstanding on its books are accurate in all material respects. The
reserves for possible loan losses on the outstanding loans of Bank and the
reserves for other real estate owned by Bank as reflected in the Bank Financial
Statements, have been established in accordance with generally accepted
accounting principles and with the requirements of the OCC, and, in the best
judgment of the management of Bank, are adequate to absorb all material known
and anticipated loan losses in the loan portfolio of Bank, and any losses
associated with other real estate owned or held by Bank. Except as identified on
Schedule N, no loan in excess of $50,000 has been classified as of the date
hereof by Bank or regulatory examiners as "Other Loans Specifically Mentioned",
"Substandard", "Doubtful" or "Loss". Except as identified on Schedule N, each
loan reflected as an asset on the Bank balance sheets is, to the knowledge of
Bank, the legal, valid and binding obligation of the obligor and any guarantor,
subject to bankruptcy, insolvency, fraudulent conveyance and other laws of
general applicability relating to or affecting creditor's rights and to general
equity principles, and no defense, offset or counterclaim has been asserted with
respect to any such loan which if successful would have a material adverse
effect on the financial condition, results of operations, business or prospects
of Bank.
(t) Absence of Changes. Except as set forth in Schedule O, since
December 31, 1995, there has not been any material adverse change in the
condition (financial
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<PAGE>
or otherwise), aggregate assets or liabilities, earnings or business of Bank.
Since such date the business of Bank has been conducted only in the ordinary
course.
(u) Brokers and Finders. Neither Bank nor any of its officers,
directors or employees have employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finders' fees in connection
with the transaction contemplated herein except that Bank has retained Scott &
Stringfellow, Inc. as its financial advisor. If the Bank Merger is consummated,
Bank shall pay, at the closing provided for in Section 6.1, a fee (which shall
be inclusive of expenses) to Scott & Stringfellow equal to 0.8% of the sum of
(i) the product obtained by multiplying the BankGroup Stock Price by the number
of shares of BankGroup Common Stock issued in the Bank Merger and (ii) the cash
paid to shareholders in the cash exchange. No fee shall be payable with respect
to cash paid for Dissenting Shares, if any.
(v) Securities Portfolio. Since December 31, 1995, there has
been no material deterioration in the quality of the portfolio of securities of
Bank.
(w) Reports. Bank has filed all reports and statements, together
with any amendments required to be made with respect thereto, that were required
to be filed with (i) the OCC; (ii) the FDIC; and (iii) any other governmental or
regulatory authority or agency having jurisdiction over its operations. None of
such reports or statements, or any amendments thereto, contains any statement
which, at the time and in the light of the circumstances under which it was
made, was false or misleading with respect to any material fact necessary in
order to make the statements contained therein not false or misleading.
(x) Environmental Matters. For purposes of this Agreement,
the following terms shall have the indicated meaning:
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<PAGE>
"Environmental Law" means any federal, state or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization, approval,
consent, order, judgment, decree, injunction or agreement with any governmental
entity relating to (i) the protection, preservation or restoration of the
environment (including, without limitation, air, water vapor, surface water,
groundwater, drinking water supply, surface soil, subsurface soil, plant and
animal life or any other natural resource), and/or (ii) the use, storage,
recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of Hazardous Substances. The term
"Environmental Law" includes without limitation (i) the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C.
ss. 9601, et seq; the Resource Conservation and Recovery Act, as amended, 42
U.S.C. ss. 6901, et seq; the Clean Air Act, as amended, 42 U.S.C. ss. 7401, et
seq; the Federal Water Pollution Control Act, as amended, 33 U.S.C. ss. 1251, et
seq; the Toxic Substances Control Act, as amended, 15 U.S.C. ss. 9601, et seq;
the Emergency Planning and Community Right to Know Act, 42 U.S.C. ss. 11001, et
seq; the Safe Drinking Water Act, 42 U.S.C. ss. 300f, et seq; and all comparable
state and local laws, and (ii) any common law (including without limitation
common law that may impose strict liability) that may impose liability or
obligations for injuries or damages due to, or threatened as a result of, the
presence of or exposure to any Hazardous Substance.
"Hazardous Substance" means any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated, under any Environmental Law, whether by type or by
quantity, including any material containing any such substance as a component.
Hazardous Substances include without limitation petroleum or any derivative or
by-product thereof, asbestos, radioactive material, and polychlorinated
biphenyls.
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<PAGE>
"Loan Portfolio Properties and Other Properties Owned" means those
properties owned or operated by Bank, including those properties serving as
collateral for any loans made by Bank.
To the best knowledge of Bank, except as set forth in Schedule R,
(i) Bank has not been or is in violation of or liable
under any Environmental Law;
(ii) none of the Loan Portfolio Properties and Other
Properties Owned has been or is in violation of or liable under any
Environmental Law; and
(iii) there are no actions, suits, demands, notices,
claims, investigations or proceedings pending or threatened relating to the
liability of the Loan Portfolio Properties and Other Properties Owned under any
Environmental Law, including without limitation any notices, demand letters or
requests for information from any federal or state environmental agency relating
to any such liabilities under or violations of Environmental Law, except in the
case of clauses (i), (ii) and (iii) above for such violations and liabilities,
and actions, suits, demands, notices, claims, investigations or proceedings,
which would not singly or in the aggregate have a material adverse effect on the
financial condition, results of operations, business or prospects of Bank.
(y) Disclosure. Except to the extent of any subsequent correction
or supplement with respect thereto furnished prior to the date hereof, no
written statement, certificate, schedule, list or other written information
furnished by or on behalf of Bank at any time to BankGroup, in connection with
this Agreement when considered as a whole, contains or will contain any untrue
statement of a material fact or omits or will omit to state a material
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<PAGE>
fact necessary in order to make the statements herein or therein, in light of
the circumstances under which they were made, not misleading. Each document
delivered or to be delivered by Bank to BankGroup is or will be a true and
complete copy of such document, unmodified except by another document delivered
by Bank.
3.2 Representations and Warranties of BankGroup. BankGroup
represents and warrants to Bank as follows:
(a) Organization, Standing and Power. (i) BankGroup is a
corporation duly organized, validly existing and in good standing under the laws
of Virginia and has all requisite corporate power and authority to own, lease
and operate its properties, to effect this transaction and to carry on its
business as now being conducted. BankGroup has delivered to Bank complete and
correct copies of (i) its Articles of Incorporation and all amendments thereto
to the date hereof, and (ii) its Bylaws as amended to the date hereof.
(ii) Acquisition is a corporation duly organized,
validly existing and in good standing under the laws of the United States.
Acquisition was formed as an "interim" national bank solely to facilitate the
Merger and has had no prior business operations.
(b) Capital Structure. As of December 31, 1995, the authorized
capital stock of BankGroup consisted of 1,000,000 shares of Preferred Stock, par
value $5 per share, and 20,000,000 shares of Common Stock, par value $5 per
share, of which 8,535,072 shares of BankGroup Common Stock were issued and
outstanding. All of such issued and outstanding shares of BankGroup Common Stock
were validly issued, fully paid and nonassessable at such date, and the numbers
of shares stated in this Subsection 3.2(b) give effect to a two-for-one stock
split in the form of a dividend effective March 15, 1996.
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<PAGE>
BankGroup owns all of the issued and outstanding common stock of
Acquisition free and clear of any liens, claims, encumbrances, charges or rights
of third parties of any kind whatsoever.
BankGroup also owns all of the issued and outstanding capital stock of
Piedmont Trust Bank, Bank of Carroll, Bank of Ferrum, First Community Bank of
Forest, The First Bank of Stuart and First Community Bank of Saltville (each a
"Subsidiary" and together the "Subsidiaries"). The Subsidiaries are duly
organized, validly existing and in good standing under the laws of their
jurisdiction of incorporation and have all requisite corporate power and
authority to own, lease and operate their properties and to carry on their
business as now being conducted.
(c) Authority. The execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby have been duly and
validly authorized by all necessary action on the part of BankGroup and
Acquisition, and this Agreement is a valid and binding obligation of BankGroup
and Acquisition, enforceable in accordance with its terms. The execution and
delivery of this Agreement, the consummation of the transactions contemplated
hereby and compliance by BankGroup and Acquisition with any of the provisions
hereof will not (i) conflict with or result in a breach of any provision of
BankGroup's, Acquisition's or a Subsidiary's Articles of Incorporation, or any
of their respective Bylaws or result in a default (or give rise to any right of
termination, cancellation or acceleration) under any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, license, agreement or other
instrument or to which BankGroup, Acquisition or a Subsidiary is a party, or by
which any of them or any of their properties or assets may be bound; or (ii)
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to BankGroup, Acquisition
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or a Subsidiary or any of their properties or assets. No consent or approval by
any government authority, other than compliance with applicable federal and
state corporate, securities and banking laws, and regulations of the United
States Securities and Exchange Commission ("SEC"), Federal Reserve Board, the
State Corporation Commission of Virginia ("SCC") and the OCC are required in
connection with the execution and delivery by BankGroup or Acquisition of this
Agreement or the consummation by BankGroup and Acquisition of the Bank Plan of
Merger.
(d) Financial Statements. BankGroup has delivered to Bank
copies of the following financial statements of BankGroup (the "BankGroup
Financial Statements"):
(i) Consolidated Balance Sheets as of December 31, 1995
and 1994;
(ii) Consolidated Statements of Income for each of the
three years ended December 31, 1995, 1994 and 1993;
(iii) Consolidated Statements of Changes in Stockholders'
Equity for each of the three years ended December 31, 1995, 1994 and 1993; and
(iv) Consolidated Statements of Cash Flows for each of
the three years ended December 31, 1995, 1994 and 1993.
Such consolidated financial statements and the notes thereto have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods indicated. Each of such
consolidated balance sheets, together with the notes thereto, presents fairly as
of its date the financial condition and assets and liabilities of BankGroup and
the Subsidiaries. The consolidated statements of income, statements of changes
in shareholders' equity and statements of cash flows, together with the notes
thereto, present
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fairly the consolidated results of operations of BankGroup and the Subsidiaries
for the periods indicated.
(e) Absence of Undisclosed Liabilities. At December 31, 1995,
BankGroup and the Subsidiaries had no material liabilities (contingent or
otherwise) of any nature which were not reflected on the BankGroup Financial
Statements or disclosed in the notes thereto at such date except for those which
in the aggregate are immaterial.
(f) Absence of Changes. Since December 31, 1995, there has not
been any material adverse change in the condition (financial or otherwise),
aggregate assets or liabilities, earnings or business of BankGroup as reflected
on its consolidated financial statements as of such date and for the year then
ended.
(g) Brokers and Finders. Neither BankGroup nor any of its
officers, directors or employees has employed any broker or finder or incurred
any liability for any brokerage fees, commissions or finders' fees in connection
with the Merger.
(h) Options, Warrants and Related Matters. There are no
outstanding unexercised options, warrants, calls, commitments or agreements of
any character to which BankGroup is a party or by which it is bound calling for
the issuance of securities of BankGroup or any security representing the right
to purchase or otherwise receive any such security, except as set forth in
Schedule Q.
(i) Reports. BankGroup and the Subsidiaries have filed all
reports and statements, together with any amendments required to be made with
respect thereto, that were required to be filed with (i) United States
Securities and Exchange Commission (the "SEC"); (ii) the Federal Reserve Board;
(iii) the OCC; (iv) the FDIC; (v) the Bureau of Financial Institutions of the
State Corporation Commission of Virginia; and (vi) any other governmental
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<PAGE>
or regulatory authority or agency having jurisdiction over their operations.
Each of such reports and documents, including the financial statements, exhibits
and schedules thereto, which was filed with the SEC was in form and substance in
compliance with the Securities Act of 1933 (the "1933 Act") or the Securities
Exchange Act of 1934 (the "1934 Act"), as the case may be. No such report or
statement, or any amendments thereto, contains any statement which, at the time
and in the light of the circumstances under which it was made, was false or
misleading with respect to any material fact necessary in order to make the
statements contained therein not false or misleading.
(j) Legal Proceedings; Compliance with Laws. Except as set forth
in Schedule R, there is no legal, administrative, arbitration or other
proceeding or governmental investigation pending (including any legal,
administrative, arbitration or other proceeding or governmental investigation
pending involving a violation of the federal antitrust laws), or, to the
knowledge of BankGroup's management, threatened or probable of assertion, which
might result in damages payable by BankGroup or any Subsidiary in excess of
insurance coverage, which might result in a permanent injunction against Bank or
a Subsidiary, which might result in a change in the zoning or building
ordinances materially affecting the property or leasehold interests of BankGroup
or a Subsidiary, or which otherwise, either individually or in the aggregate, is
likely to have a material adverse affect on BankGroup or any Subsidiary. Except
as set forth in Schedule R, BankGroup and each Subsidiary has complied in all
material respects with any laws, ordinances, requirements, regulations or orders
applicable to its business (including environmental laws, ordinances,
requirements, regulations or orders). BankGroup and each Subsidiary has all
licenses, permits, orders or approvals of any federal, state, local or foreign
governmental or regulatory body (collectively, "Permits") that are material to
or
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<PAGE>
necessary for the conduct of its business; the Permits are in full force and
effect; no violations are or have been recorded in respect of any Permits, nor
has BankGroup or any Subsidiary received notice of any such violation; and no
proceeding is pending or, to the knowledge of BankGroup or any Subsidiary,
threatened or probable of assertion to revise, revoke or limit any Permit.
Except as set forth in Schedule R, neither BankGroup nor any Subsidiary has
entered into any agreements or written understandings with the OCC, the FDIC or
any other regulatory authority. Neither BankGroup nor any Subsidiary is subject
to any judgment, order, writ, injunction or decree which materially adversely
affects, or might reasonably be expected to materially adversely affect, its
condition (financial or otherwise), business or prospects.
(k) Employee Benefits Plan.
(i) With respect to qualified pension and
profit-sharing plans, all deferred compensation, consultant, severance, thrift,
option, bonus and group insurance contracts and all other incentive, welfare and
employee benefit plans, trust, annuity or other funding agreements, and all
other agreements that are presently in effect, for the benefit of employees of
BankGroup or any Subsidiary, or the dependents or beneficiaries of any employee
thereof, whether or not subject to ERISA (the "BankGroup Employee Plans") full
payment has been made (or proper accruals have been established) of all
contributions which are required for periods prior to the Closing Date under the
terms of each BankGroup Employee Plan, ERISA, or a collective bargaining
agreement. No accumulated funding deficiency (as defined in Section 302 of ERISA
or Section 412 of the Code) whether or not waived, exists with respect to any
such pension plan. There is no "unfunded current liability" (as defined in
Section 412 of the Code) with respect to any such pension plan;
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<PAGE>
(ii) All BankGroup Employee Plans that are "employee
benefit plans", as defined in Section 3(3) of ERISA, that are maintained by
BankGroup or any Subsidiary comply and have been administered in compliance in
all material respects with ERISA and all other legal requirements, including the
terms of such plans, collective bargaining agreements and securities laws.
Neither BankGroup nor any of its Subsidiaries has any material liability under
any such plan that is not reflected in the BankGroup Financial Statements; and
(iii) No prohibited transaction has occurred with respect
to any BankGroup Employee Plan that is an "employee benefit plan" (as defined in
Section 3(3) of ERISA) maintained by BankGroup or any Subsidiary that would
result, directly or indirectly, in material liability under ERISA or in the
imposition of a material excise tax under Section 4975 of the Code.
(l) Insurance. BankGroup or its Subsidiaries maintain and hold
valid and enforceable policies or binders of fire, liability, product liability,
workmen's compensation, vehicular and other insurance insuring against risks and
liabilities to the extent and in the manner customary for the industry and are
deemed appropriate and sufficient by BankGroup.
(m) Loan Portfolio. Each loan outstanding on the books of the
Subsidiaries is reflected correctly in all material respects by the loan
documentation, was made in, in all material respects, the ordinary course of
business, was not known to be uncollectible at the time it was made, and was
made in all material respects in accordance with the Subsidiary's standard loan
policies. The records of the Subsidiaries regarding all loans outstanding on its
books are accurate in all material respects. The reserves for possible loan
losses on the outstanding loans of the Subsidiaries and the reserves for other
real estate owned by the Subsidiaries as reflected in the BankGroup Financial
Statements, have been established in accordance with generally
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accepted accounting principles and with the requirements of the applicable
regulatory authority, and, in the best judgment of the management of BankGroup,
are adequate to absorb all material known and anticipated loan losses in the
loan portfolio of the Subsidiaries, and any losses associated with other real
estate owned or held by them.
(n) Absence of Changes. Since December 31, 1995, there has not
been any material adverse change in the condition (financial or otherwise),
aggregate assets or liabilities, earnings or business of BankGroup and its
Subsidiaries. Since such date the business of BankGroup and each of its
Subsidiaries has been conducted only in the ordinary course.
(o) Securities Portfolio. Since December 31, 1995, there has
been no material deterioration in the quality of the portfolio of securities of
BankGroup and its Subsidiaries.
(p) Environmental Matters. To the best knowledge of
BankGroup, except as set forth in Schedule S,
(i) Neither BankGroup nor any Subsidiary has been or is
in violation of or liable under any Environmental Law;
(ii) None of the properties owned or operated by
BankGroup or any Subsidiary has been or is in violation of or liable under any
Environmental Law; and
(iii) There are no actions, suits, demands, notices,
claims, investigations or proceedings pending or threatened relating to the
liability of the properties owned or operated by BankGroup or any Subsidiary
under any Environmental Law, including without limitation any notices, demand
letters or requests for information from any federal or state environmental
agency relating to any such liabilities under or violations of Environmental
Law, except in the case of clauses (i), (ii) and (iii) above for such violations
and liabilities, and actions, suits, demands, notices, claims, investigations or
proceedings, which would not singly or in the
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aggregate have a material adverse effect on the financial condition, results of
operations, business or prospects of BankGroup and its Subsidiaries.
(q) Disclosure. This Agreement, and, except to the extent of any
subsequent correction or supplement with respect thereto furnished prior to the
date hereof, no written statement, certificate, schedule, list or other written
information furnished by or on behalf of BankGroup to Bank, in connection with
this Agreement when considered as a whole, contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary in order to make the statements herein or therein, in light of the
circumstances under which they are made, not misleading.
ARTICLE IV
Conduct and Transactions Prior to
Effective Time of the Bank Merger
4.1 Access to Records and Properties of BankGroup and Bank. Between the
date of this Agreement and the Effective Time of the Bank Merger, BankGroup (for
itself and for each of its Subsidiaries) on the one hand, and Bank, on the
other, agrees to give to the other reasonable access to all its premises and
books and records and to cause its officers to furnish the other with such
financial and operating data and other information with respect to the business
and properties as the other shall from time to time request for the purposes of
verifying the warranties and representations set forth herein, preparing the
Registration Statement (as defined in Section 4.2) and applicable regulatory
filings and preparing financial statements of Bank as of a date prior to the
Effective Time of the Merger in order to facilitate BankGroup's performance of
its post-Closing Date financial reporting requirements; provided, that any such
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investigation shall be conducted in such manner as not to interfere unreasonably
with the operation of the respective business of the other. BankGroup and Bank
shall each maintain the confidentiality of all confidential information
furnished to them by the other parties hereto concerning the business,
operations, and financial condition of the party furnishing such information,
and shall not use any such information except in furtherance of the Bank Merger.
If this Agreement is terminated, each party hereto shall promptly return all
documents and copies of, and all workpapers containing, confidential information
received from the other party hereto. The obligations of confidentiality under
this Section 4.1 shall survive any such termination of this Agreement and shall
remain in effect, except to the extent that (a) one party shall have directly or
indirectly acquired the assets and business of the other party; (b) as to any
particular confidential information with respect to one party, such information
(i) shall become generally available to the public other than as a result of an
unauthorized disclosure by the other party or (ii) was available to the other
party on a nonconfidential basis prior to its disclosure by the first party; or
(c) disclosure by any party is required by subpoena or order of a court of
competent jurisdiction or by order of a regulatory authority of competent
jurisdiction.
4.2 Registration Statement; Proxy Statement; Shareholder Approval. Bank
will duly call and will hold a meeting of its shareholders as soon as
practicable for the purpose of approving the Bank Merger, and in connection
therewith will recommend to and encourage shareholders that they vote in favor
of the Bank Merger and will comply fully with the provisions of Title 12 of the
United States Code and the rules and regulations of the OCC, and its Articles of
Association and By-laws relating to the call and holding of a meeting of
shareholders for such purpose. The Board of Directors of Bank will recommend and
encourage shareholders that they vote in favor of the Bank Merger. BankGroup and
Bank will jointly
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prepare the proxy statement-prospectus to be used in connection with such
meeting (the "Proxy Statement-Prospectus") and BankGroup will prepare and file
with the SEC a Registration Statement on Form S-4 (the "Registration
Statement"), of which such Proxy Statement- Prospectus shall be a part, and use
its best efforts promptly to have the Registration Statement declared effective.
In connection with the foregoing, BankGroup will comply with the requirements of
the 1933 Act and the 1934 Act and the rules and regulations of the SEC under
such Acts with respect to the offering and sale of BankGroup Common Stock in
connection with the Bank Merger and with all applicable state Blue Sky and
securities laws. The notices of such meetings and the Proxy Statement-Prospectus
shall not be mailed to Bank shareholders until the Registration Statement shall
have become effective under the 1933 Act. Bank covenants that none of the
information supplied by Bank, and BankGroup covenants that none of the
information supplied by BankGroup, for inclusion in the Proxy
Statement-Prospectus will, at the time of the mailing of the Proxy
Statement-Prospectus to Bank shareholders, contain any untrue statement of a
material fact nor will any such information omit any material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances in which they were made, not misleading; and at all times
subsequent to the time of the mailing of the Proxy Statement-Prospectus,
including the date of the meeting of Bank shareholders to which the statement
relates and the Effective Time of the Bank Merger, none of such information in
the Proxy Statement-Prospectus, as amended or supplemented, will contain an
untrue statement of a material fact or omit any material fact required to be
stated therein in order to make the statements therein, in light of the
circumstances in which they were made, not misleading.
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BankGroup, as the sole shareholder of Acquisition, hereby approves this
Agreement and the Plan of Merger.
4.3 Operation of the Business of Bank. Bank agrees that from the date
hereof to the Effective Time of the Bank Merger, it will operate its business
substantially as presently operated and only in the ordinary course, and,
consistent with such operation, will use its best efforts to preserve intact its
present business organization and relationships with persons having business
dealings with it. Without limiting the generality of the foregoing, Bank agrees
that it will not, without the prior written consent of BankGroup, unless
required by regulatory authorities (i) make any change in the compensation or
title of any executive officer; (ii) make any change in the compensation or
title of any other employee, other than those set forth on Schedule 4.3 and
other than those permitted by current employment policies in the ordinary course
of business, any of which changes shall be promptly reported to BankGroup; (iii)
enter into any bonus, incentive compensation, deferred compensation, profit
sharing, thrift, retirement, pension, group insurance or other benefit plan or
(except as otherwise specifically contemplated in this Agreement) any employment
or consulting agreement or amend any such plan or agreement to increase the
benefits accruing or payable thereunder; (iv) create or otherwise become liable
with respect to any indebtedness for money borrowed or purchase money
indebtedness except in the ordinary course of business; (v) amend Bank's
Articles of Association or Bylaws; (vi) issue or contract to issue any shares of
Bank capital stock or securities exchangeable for or convertible into capital
stock; (vii) purchase any shares of Bank capital stock; (viii) enter into or
assume any material contract or obligation, except in the ordinary course of
business; (ix) waive any right of substantial value; (x) propose or take any
other action which would make any representation or warranty in Section 3.1
hereof untrue;
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(xi) introduce any new products or services or change the rate of interest on
any deposit instrument to above-market interest rates; (xii) make any change in
policies respecting extensions of credit or loan charge-offs; (xiii) change
reserve requirement policies; (xiv) change securities portfolio policies; (xv)
change financial or tax accounting methods or practices; (xvi) enter into any
new agreement, amendment or endorsement or make any changes relating to
insurance coverage, including coverage for its directors and officers, which
would result in an additional payment obligation of $50,000 or more; or (xvii)
propose or take any action with respect to the closing of any branches.
Bank further agrees that, between the date of this Agreement and the
Effective Time of the Bank Merger, it will consult and reasonably cooperate with
BankGroup regarding (i) loan portfolio management, including management and
work-out of nonperforming assets, and credit review and approval procedures,
(ii) securities portfolio and funds management, including management of interest
rate risk; and (iii) expense management, all with the objective of achieving
appropriate operating synergies and appropriate accruals prior to the Effective
Time of the Bank Merger.
4.4 No Solicitation. Unless and until this Agreement shall have been
terminated pursuant to its terms, neither Bank nor any of its officers,
directors, representatives, agents or affiliates shall, directly or indirectly,
encourage, solicit or initiate discussions or negotiations with any person
(other than BankGroup) concerning any merger, sale of substantial assets, tender
offer, sale of shares of stock or similar transaction involving Bank or
disclose, directly or indirectly, any information not customarily disclosed to
the public concerning Bank, afford to any other person access to the properties,
books or records of Bank or otherwise assist any person preparing to make or who
has made such an offer, or enter into any agreement with any
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third party providing for a business combination transaction, equity investment
or sale of significant amount of assets. Bank will promptly communicate to
BankGroup the terms of any proposal which it may receive in respect to any of
the foregoing transactions.
4.5 Dividends. Bank agrees that in the remainder of 1996 it will declare
and pay only regular quarterly cash dividends on May 15, on August 15 and, if
the Bank Merger has not been consummated, on November 15 in the respective
amounts per share of $.58, $.59 and $.60.
4.6 Regulatory Filings. BankGroup and Bank shall jointly prepare all
regulatory filings required to consummate the transactions contemplated by the
Agreement and the Bank Plan of Merger and submit the filings for approval with
the Federal Reserve Board, the SCC and the OCC as soon as practicable after the
date hereof. BankGroup and Bank shall use their best efforts to obtain approvals
of such filings.
4.7 Tax Opinion. BankGroup and Bank shall each use their best
efforts to obtain the tax opinion referred to in paragraph (e) of Section 5.1
and paragraph (f) of Section 5.2.
4.8 Public Announcements. Each party will consult with the other before
issuing any press release or otherwise making any public statements with respect
to the Bank Merger and shall not issue any press release or make any such public
statement prior to such consultations except as may be required by law.
4.9 Transactions in BankGroup Common Stock. Other than the issuance of
BankGroup Common Stock upon the exercise of stock options granted pursuant to
employee benefit plans of BankGroup, or in connection with the operation in the
ordinary course of BankGroup's dividend reinvestment plan, neither BankGroup nor
Bank will purchase, sell or otherwise acquire or dispose of any shares of
BankGroup Common Stock during the period of calculation of the BankGroup Stock
Price.
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4.10 BankGroup Rights Agreement. BankGroup agrees that any rights issued
pursuant to the Rights Agreement adopted by it in 1990 shall be issued with
respect to each share of BankGroup Common Stock issued pursuant to the terms
hereof and the Plan of Merger, regardless whether there has occurred a
Distribution Date under the terms of such Rights Agreement prior to the
occurrence of the Effective Time of the Bank Merger.
4.11 Accounting Treatment. BankGroup and Bank shall use their best
efforts to cause the Bank Merger to be accounted for as a "pooling of
interests."
4.12 Agreement as to Efforts to Consummate. Subject to the terms and
conditions of this Agreement, BankGroup and Bank each agrees to use all
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective, as soon as practicable
after the date of this Agreement, the transactions contemplated by this
Agreement, including, without limitation, using reasonable effort to lift or
rescind any injunction or restraining order or other order adversely affecting
the ability of the parties to consummate the transactions contemplated herein.
BankGroup and Bank each shall use its best efforts to obtain consents of all
third parties and governmental bodies necessary or desirable for the
consummation of the transactions contemplated by this Agreement.
4.13 Adverse Changes in Condition. BankGroup and Bank each agrees to
give written notice promptly to the other concerning any material adverse change
in its condition from the date of this Agreement until the Effective Time of the
Bank Merger that might adversely affect the consummation of the transactions
contemplated hereby or upon becoming aware of the occurrence or impending
occurrence of any event or circumstance which would cause or constitute a
material breach of any of the representations, warranties or covenants of such
party
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contained herein. BankGroup and Bank each shall use its best efforts to prevent
or promptly to remedy the same.
4.14 Updating of Schedules. From the date of execution of this Agreement
until the consummation of the Bank Merger, each party agrees to keep up to date
all of the Schedules applicable to it and to provide notification to the other
of any changes or additions or events which have caused, or after the lapse of
time may cause, any such change or addition in any of such Schedules. No
updating of Schedules or notification made pursuant to this Section 4.14 shall
be deemed to cure any breach of any representation or warranty made in the
Agreement or any Schedule or exhibit unless the other party specifically agrees
thereto in writing, nor shall any such updating of Schedules or notification be
considered to constitute or give rise to a waiver by the other party of any
condition set forth in this Agreement.
ARTICLE V
Conditions of Transaction
5.1 Conditions of Obligations of BankGroup. The obligations of BankGroup
to perform this Agreement are subject to the satisfaction of the following
conditions unless waived by BankGroup.
(a) Representations and Warranties; Performance of Obligations;
No Adverse Change. The representations and warranties of Bank set forth in
Section 3.1 shall be true and correct as of the date of this Agreement and as of
the Effective Time of the Bank Merger as though made on and as of the Effective
Time of the Bank Merger; Bank shall have performed all obligations required to
be performed by it under this Agreement prior to the Effective Time of the Bank
Merger; there shall have occurred no material adverse change in the condition
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(financial or otherwise), assets, liabilities, properties, business or prospects
of Bank from December 31, 1995 to the Effective Time of the Bank Merger; and
BankGroup shall have received a certificate of the chief executive officer and
chief financial officer of Bank to such effects.
BankGroup may, at its expense, conduct a pre-Merger audit to determine
that the conditions described in the preceding paragraph are satisfied as of the
Effective Time of the Bank Merger.
(b) Authorization of Transaction. All action necessary to
authorize the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated herein (including the shareholder
action referred to in Section 4.2) shall have been duly and validly taken by the
board of directors of Bank and by the shareholders of Bank, and Bank shall have
full power and right to merge on the terms provided herein.
(c) Opinion of Counsel. BankGroup shall have received an opinion
of Woods, Rogers & Hazlegrove PLC, counsel to Bank, dated the Closing Date, and
satisfactory in form and substance to counsel to BankGroup, to the effect that:
(i) Bank is a national banking association organized
and in good standing under the laws of the United States and has all requisite
corporate power to own, lease and operate its properties and to carry on its
business as now being conducted as described in the Registration Statement and
Proxy Statement--Prospectus;
(ii) Bank has full power to carry out the transactions
provided for in the Agreement; all corporate and other proceedings required to
be taken by or on the part of Bank to authorize it to execute and deliver the
Agreement and to consummate the transactions contemplated thereby and by the
Plan of Merger have been duly and validly taken; the
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Agreement has been duly and validly authorized, executed and delivered by Bank
and constitutes a valid and binding obligation of Bank enforceable in accordance
with its terms except as same (A) may be limited by bankruptcy, insolvency,
reorganization or other similar laws relating to the rights of creditors, and
(B) is subject to general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or law); and the Plan of
Merger has been approved by the Board of Directors and the shareholders of Bank;
(iii) All outstanding shares of Bank Common Stock to be
exchanged for shares of BankGroup Common Stock at the Effective Time of the Bank
Merger have been duly authorized;
(iv) To the best knowledge of such counsel, except as
listed in Schedule K to the Agreement, there are no persons who may be deemed to
be Bank Affiliates;
(v) To the best knowledge of such counsel, Bank is not a
party to or bound by any outstanding option or agreement (other than this
Agreement) to sell, issue, buy or otherwise dispose of or acquire any shares of
Bank Common Stock or other security of Bank;
(vi) The execution and delivery by Bank of the
Agreement, consummation by Bank of the transactions contemplated hereby, and
compliance by Bank with the provisions hereof will not conflict with or result
in a breach of any provision of the Articles of Association or Bylaws of Bank,
as applicable, or result in a default (or give rise to rights of termination,
cancellation or acceleration) under any of the terms, conditions, or provisions
of any note, bond, mortgage, indenture, license, agreement or any other
instrument or listed in Schedule H (such counsel having no knowledge of any item
called for by such schedule which is not disclosed therein), or violate any
court order, writ, injunction or decree applicable to Bank
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or any of its properties or assets, of which such counsel has knowledge after
making inquiry of Bank's President with respect thereto;
(vii) Except as set forth in Schedule L, if any, such
counsel does not know of any litigation that is pending or threatened which
might result in money damages payable by Bank in excess of insurance coverage,
which might result in a permanent injunction against Bank or which, individually
or in the aggregate, otherwise might have a material adverse effect on Bank or
the transactions contemplated by this Agreement;
(viii) Such counsel does not know of any default under, or
the occurrence of any event which with the lapse of time, action or inaction by
a third party would result in a default under any outstanding indenture,
contract or agreement listed in Schedule H to the Agreement (such counsel having
no knowledge of any item called for by Schedule which is not disclosed therein)
or under any governmental license or permit or a breach of any provision of the
Articles of Association or Bylaws of Bank;
(ix) All legal matters pertaining to consummation of the
Bank Merger under the laws of the United States, including receipt of all
required regulatory approvals, other than the filing of the Articles of Merger
relating to the Plan of Merger with the OCC, have been completed to the
satisfaction of such counsel in all material respects; and
(x) On the basis of facts within their knowledge, such
counsel have no reason to believe that (except as to financial statements and
other financial data, or as to material relating to, and supplied by, BankGroup
for inclusion in the Proxy Statement-Prospectus as to which no belief need be
expressed) the Proxy Statement-Prospectus (as amended or supplemented, if so
amended or supplemented) contained any untrue statement of a material fact or
omitted any material fact required to be stated therein or necessary in order to
make the
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statements therein, in light of the circumstances under which they were made,
not misleading as of (A) the time the Registration Statement became effective,
(B) the time of the meeting of Bank shareholders referred to in Section 4.2 of
the Agreement, or (C) at the Closing Date.
(d) Registration Statement. The Registration Statement shall be
effective under the 1933 Act and BankGroup shall have received all state
securities laws or "blue sky" permits and other authorizations or there shall be
exemptions from registration requirements necessary to offer and issue the
BankGroup Common Stock in connection with the Bank Merger, and neither the
Registration Statement nor any such permit, authorization or exemption shall be
subject to a stop order or threatened stop order by the SEC or any state
securities authority.
(e) Tax Opinion. BankGroup and Bank shall have received, in form
and substance reasonably satisfactory to them, an opinion of Hunton & Williams
to the effect, for federal income tax purposes, that consummation of the Merger
will constitute a "reorganization" as defined in Section 368(a) of the Code;
that no taxable gain or loss will be recognized by BankGroup, Acquisition or
Bank upon consummation of the Merger; that no taxable gain will be recognized by
a Bank shareholder on the exchange by such shareholder of shares of Bank Common
Stock solely for shares of BankGroup Common Stock (including any fractional
share interest); that a Bank Shareholder who receives both shares of BankGroup
Common Stock (including any fractional share interest) and, as a result of
making a cash election, cash in exchange for shares of Bank Common Stock will
recognize taxable gain to the extent of the amount of such cash, but will not
recognize any loss; that the basis of BankGroup Common Stock (including any
fractional share interest) received in the Bank Merger will be the same as the
basis of the Bank Common Stock surrendered in exchange therefor, decreased by
the amount of any cash received pursuant to the cash election and increased by
the amount of gain
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recognized; that the holding period of such BankGroup Common Stock for such a
Bank shareholder will include the holding period of the Bank Common Stock
surrendered in exchange therefor, if such Bank Common Stock is a capital asset
in the hands of the shareholder at the Effective Time of the Bank Merger; and
that a Bank shareholder who receives cash in lieu of a fractional share of
BankGroup Common Stock will recognize gain or loss equal to any difference
between the amount of cash received and the shareholder's basis in the
fractional share interest.
(f) Regulatory Approvals. All required approvals from federal and
state regulatory authorities having jurisdiction to permit BankGroup and
Acquisition to consummate the Bank Merger and to issue BankGroup Common Stock to
Bank shareholders shall have been received and all related waiting periods shall
have expired, all applicable federal and state laws governing the Merger shall
have been complied with, and there shall not be in any order or decree of any
regulatory authority any condition or requirement reasonably deemed
objectionable to BankGroup.
(g) Affiliate Letters. Each shareholder of Bank who is a Bank
Affiliate shall have executed and delivered a commitment and undertaking to the
effect that such shareholder will dispose of the shares of BankGroup Common
Stock received by him in connection with the Bank Merger only in accordance with
the provisions of paragraph (d) of Rule 145; (ii) such shareholder will not
dispose of any of such shares until BankGroup has received an opinion of counsel
acceptable to it that such proposed disposition will not violate the provisions
of any applicable securities laws; (iii) that they will not sell or reduce their
risk with respect to the BankGroup shares acquired in the Bank Merger until
after the publication of combined financial
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results covering 30 days of combined operations; and (iv) the certificates
representing said shares may bear a legend referring to the foregoing
restrictions.
(h) Provision for Loan Losses. On the Closing Date, Bank's
reserve for loan losses on outstanding loans and reserve for other real estate
owned shall, in the reasonable judgment of BankGroup, be adequate to absorb all
known or anticipated loan losses in Bank's loan portfolio and Bank's known or
anticipated losses associated with other real estate owned.
(i) Accounting Treatment. BankGroup shall have received, in
form and substance satisfactory to it, a letter dated the Effective Time of the
Bank Merger from Coopers & Lybrand, L.L.P. to the effect that the Transaction
will qualify for "pooling-of-interests" accounting treatment.
(j) Acceptance by BankGroup Counsel. The form and substance of
all legal matters contemplated hereby and of all papers delivered hereunder
shall be reasonably acceptable to counsel for BankGroup.
5.2 Conditions of Obligations of Bank. The obligations of Bank to
perform this Agreement are subject to the satisfaction of the following
conditions unless waived by Bank:
(a) Representations and Warranties; Performance of
Obligations; No Adverse Change. The representations and warranties of BankGroup
and Acquisition set forth in Section shall be true and correct in all material
respects as of the date of this Agreement and as of the Effective Time of the
Bank Merger as though made on and as of the Effective Time of the Bank Merger;
BankGroup and Acquisition shall have performed all obligations required to be
performed by them under this Agreement prior to the Effective Time of the Bank
Merger; there shall have occurred no material adverse change in the condition
(financial or otherwise), assets, liabilities, properties, business or prospects
of BankGroup from December 31, 1995 to the
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Effective Time of the Bank Merger; and Bank shall have received a certificate of
the chief executive officer and the chief financial officer of BankGroup to such
effects.
(b) Authorization of Transaction. All action necessary to
authorize the execution, delivery and performance of this Agreement by BankGroup
and Acquisition and the consummation of the transactions contemplated hereby
shall have been duly and validly taken by the boards of directors of BankGroup
and Acquisition and the shareholders of Bank, and BankGroup and Acquisition
shall have full power and right to merge and to acquire and assume on the terms
provided herein.
(c) Opinion of Counsel. Bank shall have received an opinion of
Hunton & Williams, counsel to BankGroup and Acquisition, dated the Closing Date
and satisfactory in form and substance to counsel to Bank, to the effect that:
(i) BankGroup and Acquisition are corporations
organized and in good standing under the laws of Virginia and the United States,
respectively, and have all requisite corporate power to own, lease and operate
their respective properties and to carry on their respective businesses as now
being conducted as described in the Registration Statement and Proxy
Statement-Prospectus;
(ii) BankGroup and Acquisition have full power to carry
out the transactions provided for in the Agreement; all corporate and other
proceedings required to be taken by or on the part of BankGroup and Acquisition
to authorize them to execute and deliver the Agreement and to consummate the
transactions contemplated thereby and by the Plan of Merger have been duly and
validly taken; the Agreement has been duly and validly authorized, executed and
delivered by BankGroup and Acquisition and constitutes a valid and binding
obligation of BankGroup and Acquisition enforceable in accordance with its terms
except as
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same (A) may be limited by bankruptcy, insolvency, reorganization or other
similar laws relating to the rights of creditors; and (B) is subject to general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or law); the Plan of Merger has been approved by the
board of directors of Acquisition; and the shares of BankGroup Common Stock to
be issued in the Bank Merger in exchange for shares of BankGroup Common Stock
have been duly authorized and when so issued will be validly issued, fully paid
and nonassessable;
(iii) All outstanding shares of BankGroup Common Stock
have been duly authorized and are fully paid and nonassessable;
(iv) Execution and delivery by BankGroup and Acquisition
of the Agreement, consummation by BankGroup and Acquisition of the transactions
contemplated thereby, and compliance by BankGroup and Acquisition with the
provisions thereof will not conflict with or result in a breach of any
provisions of either BankGroup's or Acquisition's Articles of Incorporation or
Articles of Association, respectively, or either of their Bylaws or result in a
default (or give rise to rights or termination, cancellation or acceleration)
under any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, license, agreement or any other instrument or of BankGroup,
Acquisition or any Subsidiary known to such counsel, or violate any court order,
writ, injunction or decree applicable to BankGroup, Acquisition or any
Subsidiary or any of their properties or assets, of which such counsel has
knowledge after making inquiry with respect thereto.
(v) The shares of BankGroup Common Stock to be issued
pursuant to the Agreement have been duly registered under the 1933 Act;
(vi) All legal matters pertaining to consummation of the
Bank Merger under the laws of the United States, including the receipt of all
regulatory approvals, other than
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the filing of the Articles of Merger relating to the Bank Merger with the OCC,
have been completed to the satisfaction of such counsel in all material
respects;
(vii) On the basis of facts within their knowledge, such
counsel have no reason to believe that (except as to financial statements and
other financial data, or as to material relating to, and supplied by, Bank for
inclusion in the Proxy Statement-Prospectus, as to which no belief need be
expressed) the Proxy Statement-Prospectus (as amended or supplemented, if so
amended or supplemented) contained any untrue statement of a material fact or
omitted any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading (A) as of the time the Registration Statement became
effective; (B) as of the time of the special meeting of shareholders of Bank
mentioned in Section 4.2 of the Agreement; or (C) as of the Closing Date;
(viii) Except as set forth in Schedule R, such counsel
does not know of any litigation that is pending or threatened which might result
in money damages payable by BankGroup, Acquisition or any Subsidiary in excess
of insurance coverage, which might result in a permanent injunction against any
of them or which, individually or in the aggregate, otherwise might have a
material adverse effect on BankGroup or the transactions contemplated by this
Agreement; and
(ix) Such counsel does not know of any default under, or
the occurrence of any event which with the lapse of time, action or inaction by
a third party would result in a default under any governmental license or permit
or a breach of any provision of the Articles of Incorporation or Bylaws of
BankGroup, Acquisition or any Subsidiary.
(d) Registration Statement. The Registration Statement shall
be effective under the 1933 Act and BankGroup shall have received all state
securities laws or "blue sky" permits
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and other authorizations or there shall be exemptions from registration
requirements necessary to offer and issue the BankGroup Common Stock in
connection with the Bank Merger, and neither the Registration Statement nor any
such permit, authorization or exemption shall be subject to a stop order or
threatened stop order by the SEC or any state securities authority.
(e) Regulatory Approvals. All required approvals from federal and
state regulatory authorities having jurisdiction to permit BankGroup and
Acquisition to consummate the Bank Merger and to permit BankGroup to issue
BankGroup Common Stock to Bank shareholders shall have been received and all
related waiting periods shall have expired.
(f) Tax Opinion. BankGroup and Bank shall have received, in
form and substance reasonably satisfactory to them, an opinion of Hunton &
Williams to the effect set forth in Section 5.1(e).
(g) Fairness Opinion. Bank shall have received, in form and
substance reasonably satisfactory to it, an opinion of Scott & Stringfellow,
Inc. that the consideration to be received by the Bank's shareholders in the
Bank Merger is fair to them from a financial point of view.
(h) Acceptance by Bank's Counsel. The form and substance of
all legal matters contemplated hereby and of all papers delivered hereunder
shall be reasonably acceptable to counsel for Bank.
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<PAGE>
ARTICLE VI
Closing Date; Effective Time of the
Holding Company Merger
6.1 Closing Date. Unless another date or place is agreed to in writing
by the parties, the closing of the transactions contemplated in this Agreement
shall take place at the offices of Woods, Rogers & Hazelgrove, P.L.C., Roanoke,
Virginia, at 10:00 A.M., local time, on such date as BankGroup shall designate
to Bank and is reasonably acceptable to Bank; provided, that the date so
designated shall not be earlier than 30 days (or 15 days if permitted under the
Bank Merger Act) or later than 60 days following the date of the decision of the
Federal Reserve Board and the OCC, whichever decision occurs later, approving
the Merger (the "Closing Date"). BankGroup and Bank agree that the target
Closing Date is September 30, 1996, and each agrees to use its best efforts to
cause closing to occur on that date.
6.2 Filings at Closing. Subject to the provisions of Article , at the
Closing Date, BankGroup shall cause the Articles of Merger relating to the Bank
Merger to be filed in accordance with Title 12 of the United States Code, and
each of BankGroup and Bank shall take any and all lawful actions to cause the
Bank Merger to become effective.
6.3 Effective Time. Subject to the terms and conditions set forth
herein, including receipt of all required regulatory approvals, the Bank Merger
shall become effective at the time Articles of Merger relating to the Bank
Merger are made effective by the OCC (the "Effective Time of the Bank Merger").
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ARTICLE VII
Termination; Survival of Representations
Warranties and Covenants; Waiver and Amendment
7.1 Termination. This Agreement shall be terminated, and the Merger
abandoned, if the shareholders of Bank shall not have given the approval
required by Section 5.1(b). Notwithstanding such approval by such shareholders,
this Agreement may be terminated in writing at any time prior to the Effective
Time of the Bank Merger by:
(a) The mutual consent of BankGroup and Bank, as expressed by
their respective boards of directors;
(b) Either BankGroup or Bank, as expressed by their respective
boards of directors, after December 31, 1996;
(c) By BankGroup, in writing authorized by its Board of
Directors, if Bank has, or by Bank, in writing authorized by its Board of
Directors, if BankGroup has, in any material respect, breached (i) any covenant
or agreement contained herein, or (ii) any representation or warranty contained
herein, in any case if such breach has not been cured by the earlier of 30 days
after the date on which written notice of such breach is given to the party
committing such breach or the Closing Date; provided that it is understood and
agreed that either party may terminate this Agreement on the basis of any such
material breach of any representation or warranty contained herein
notwithstanding any qualification therein relating to the knowledge of the other
party;
(d) Either BankGroup or Bank, in writing authorized by their
respective boards of directors, in the event that any of the conditions
precedent to the obligations of such party to consummate the Bank Merger have
not been satisfied or fulfilled or waived by the party entitled
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to so waive on or before the Closing Date, provided that neither party shall be
entitled to terminate this Agreement pursuant to this subparagraph (d) if the
condition precedent or conditions precedent which provide the basis for
termination can reasonably be and are satisfied within a reasonable period of
time, in which case, the Closing Date shall be appropriately postponed;
(e) BankGroup or Bank, if the Board of Directors of either
corporation shall have determined in their sole discretion, exercised in good
faith, that the Merger has become inadvisable or impracticable by reason of the
threat or the institution of any litigation, proceeding or investigation to
restrain or prohibit the consummation of the transactions contemplated by this
Agreement or to obtain other relief in connection with this Agreement;
(f) BankGroup or Bank, if either the Federal Reserve Board or the
OCC deny approval of the Bank Merger and the time period for all appeals or
requests for reconsideration has run;
(g) BankGroup, if holders of more than 9.9% of the outstanding
shares of Bank Common Stock exercise their rights to an appraisal of their
shares pursuant to 12 U.S.C. ss. 215a in connection with the Bank Merger.
7.2 Effect of Termination. In the event of the termination and
abandonment of this Agreement and the Bank Merger pursuant to Section 7.1, this
Agreement, other than the provisions of Sections 4.1 (last sentence) and 9.1,
shall become void and have no effect, without any liability on the part of any
party or its directors, officers or shareholders.
7.3 Survival of Representations, Warranties and Covenants. The
respective representations and warranties, covenants and agreements (except for
those contained in Sections 1.2, 1.3, ?, 2.2, 2.3, 2.4, 2.5, 2.5, 4.1 (last
sentence), 8.2, 8.3, 9.1, 9.2, 9.3, 9.4, 9.5 and 9.6,
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which shall survive the effectiveness of the Bank Merger indefinitely) of
BankGroup, Acquisition and Bank contained herein shall survive for one year
following the Effective Time of the Bank.
7.4 Waiver and Amendment. Any term or provision of this Agreement may be
waived in writing at any time by the party which is, or whose shareholders are,
entitled to the benefits thereof and this Agreement may be amended or
supplemented by written instructions duly executed by all parties hereto at any
time, whether before or after the meeting of Bank shareholders referred to in
Section 4.2 hereof, except statutory requirements and requisite approvals of
shareholders and regulatory authorities.
ARTICLE VIII
Additional Covenants
8.1 Registration Statement. BankGroup, Acquisition and Bank acknowledge
and agree that the Bank Merger is a transaction to which the 1933 Act is
applicable. Each of the parties agrees to comply with the provisions of the 1933
Act and all rules and regulations of the SEC promulgated pursuant to the 1933
Act and cooperate in connection with the preparation and filing by BankGroup of
a Registration Statement under the 1933 Act relating to the Bank Merger. Bank
agrees (a) to give the representatives of BankGroup access to the books, records
and files of Bank at any reasonable time for the purpose of preparing such
Registration Statement; (b) to provide to BankGroup upon request such
information relating to Bank, its business and financial condition, as shall be
appropriate in connection with the preparation of the Registration Statement;
and (c) to submit to BankGroup for its prior approval all press releases or
other oral or written statements made or issued by Bank and its officers or
directors, which relate to the Merger in any manner.
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<PAGE>
8.2 Employee Benefits. All employees of Bank immediately prior to the
Effective Time of the Bank Merger ("Transferred Employees") will be covered by
BankGroup's employee benefit plans as to which they are eligible based on their
length of service, compensation, job classification, and position with Bank.
BankGroup's benefits plans will recognize for purposes of eligibility to
participate and for early retirement and for vesting, all Transferred Employees'
service with Bank, subject to applicable break in service rules. Bank's employee
benefit plans will be merged into BankGroup's plans.
Except as described in Schedule T, as of the Effective Time of the Bank
Merger employees of Bank who become employees of Acquisition as the Surviving
Bank will be entitled to immediate coverage under BankGroup Employee Plans
without any waiting period.
8.3 Indemnification. BankGroup agrees to provide indemnification to the
directors and officers of Bank following the Closing Date to the same extent as
it provides indemnification to directors and officers of BankGroup and its
Subsidiaries and to provide them officers and directors liability insurance
coverage, whether or not they become part of the BankGroup organization after
the Bank Merger. The obligations to indemnify and to provide insurance coverage
shall apply to acts or omissions occurring subsequent to the Effective Time of
the Merger. Bank may purchase, at reasonable cost (or, if it is determined to be
less costly, BankGroup will provided), a "tail" policy of insurance to cover
acts and omissions of its directors and officers occurring prior to the
Effective Time of the Bank Merger.
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ARTICLE IX
Miscellaneous
9.1 Expenses; Termination Fee. If the Bank Merger is consummated, all of
the costs will be borne by BankGroup. If the Bank Merger is not consummated,
each party shall bear its own expenses. If the Bank Merger is not consummated
because of a party's failure to satisfy a condition (other than the failure of
Bank's shareholders to approve the Bank Merger) then the party failing to
satisfy the condition will pay the other party's expenses up to $50,000. For
purposes of this Section 9.1, "expenses" shall mean all filing fees and fees and
expenses of legal counsel, accountants, printers, and other advisers and
consultants retained by a party.
If, because of the emergence of a competing offer for Bank Common Stock
which Bank's Board of Directors determines is superior from a financial point of
view to the offer for Bank Common Stock in the Bank Merger as described in this
Agreement, Bank's Board of Directors, in the exercise of its fiduciary duties to
Bank's shareholders, declines to carry out its obligations described in Section
4.2, and as a result BankGroup terminates this Agreement as permitted by Section
7.1(c), then, in addition to the payment of BankGroup's expenses up to $50,000,
Bank shall pay to BankGroup an additional cash payment of $1,050,000 as a
termination fee. Bank agrees that this termination fee is a reasonable
determination, in light of the uncertainty and difficulty of ascertaining the
exact amount thereof, of the loss that BankGroup would actually sustain in
respect to termination of this Agreement for the reasons described in this
paragraph. Nothing contained in this Section 9.1 shall relieve any party from
liability for any breach of this Agreement, except that payment of the
termination fee by Bank and its acceptance by BankGroup shall relieve Bank from
any further liability to BankGroup for breach of the Agreement.
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<PAGE>
9.2 Entire Agreement. This Agreement contains the entire agreement among
BankGroup, Acquisition, and Bank with respect to the Merger and the related
transactions and supersedes all prior arrangements or understandings with
respect thereto.
9.3 Descriptive Headings. Descriptive headings are for convenience
only and shall not control or affect the meaning or construction of any
provisions of this Agreement.
9.4 Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered personally
or sent by registered or certified mail, postage prepaid, addressed as follows:
If to BankGroup or Acquisition:
MainStreet BankGroup Incorporated
Church & Ellsworth Streets
Martinsville, Virginia 24115
Attention: Rebecca J. Jenkins
General Counsel and Secretary
Copy to:
Lathan M. Ewers, Jr.
Hunton & Williams
951 East Byrd Street
Richmond, Virginia 23219
If to Bank:
The First National Bank of Clifton Forge
511 Main Street
Clifton Forge, Virginia 24422
Attention: George J. Kostel, Chairman
of the Board and President
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<PAGE>
Copy to:
Talfourd H. Kemper
Woods, Rogers & Hazlegrove PLC
10 South Jefferson Street, Suite 1400
Roanoke, Virginia 24011
9.5 Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart hereof shall be deemed to be an original
instrument, but all such counterparts together shall constitute one agreement.
9.6 Governing Law. Except as may otherwise be required by the laws
of the United States, this Agreement shall be governed by and construed in
accordance with the laws of Virginia.
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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto have caused this
Agreement to be executed on their behalf, all as of the day and year first above
written.
MAINSTREET BANKGROUP INCORPORATED
By ________________________________
Name ______________________________
Its _______________________________
CF ACQUISITION SUBSIDIARY, N.A.
By ________________________________
Name ______________________________
Its _______________________________
THE FIRST NATIONAL BANK
OF CLIFTON FORGE
By ________________________________
Name ______________________________
Its _______________________________
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The Directors of The First National Bank of Clifton Forge sign for the purpose
of agreeing to vote all shares of Bank Common Stock beneficially owned by them
and with respect to which they have power to vote in favor of the Bank Merger,
and to cause the Bank Merger to be recommended by the Board of Directors of Bank
to the shareholders of Bank in the proxy statement sent to shareholders in
connection with such shareholders' meeting.
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Exhibit A
REVISED PLAN OF MERGER
OF
THE FIRST NATIONAL BANK OF CLIFTON FORGE
INTO
CF ACQUISITION SUBSIDIARY, N.A.
Section 1. The First National Bank of Clifton Forge, a national banking
association ("Bank"), shall, upon the time that the Articles of Merger are made
effective by the Office of the Comptroller of the Currency (the "Effective Time
of the Bank Merger"), be merged (the "Bank Merger") into CF Acquisition
Subsidiary, N.A., a national banking association (interim) ("Acquisition"),
which is a subsidiary of MainStreet BankGroup Incorporated ("BankGroup"), and
which shall be the Surviving Bank.
Section 2. Conversion of Stock. At the Effective Time of the Bank
Merger:
(i) Each share of Bank Common Stock ("Bank Common Stock") issued
and outstanding at the Effective Time of the Bank Merger (other than
shares held by BankGroup or in Bank's treasury and other than Dissenting
Shares and shares to be exchanged for cash, shall, and without any
action by the holder thereof, be converted into a number of shares of
BankGroup Common Stock ("BankGroup Common Stock") equal to the quotient
(rounded to the nearest one one-hundredth) of $83.20 divided by the
average of the closing sales price (the "BankGroup Stock Price") for
BankGroup Common Stock as reported on The Nasdaq Stock Market for the 10
trading days preceding the last to occur of (i) approval of the Bank
Merger by the shareholders of Bank or (ii) receipt of the last of all
regulatory approvals prerequisite to consummation of the Bank Merger
(the "Exchange Ratio"). If such quotient is less than 4.89, the Exchange
Ratio shall be 4.89. If such quotient is greater than 5.55, the Exchange
Ratio shall be 5.55.
(ii) Each share of Acquisition Common Stock issued and
outstanding immediately prior to the Effective Time of the Bank Merger
shall remain outstanding as one share of common stock of the Surviving
Bank.
(iii) Each share of Bank Common Stock issued and outstanding
immediately prior to the Effective Time of the Bank Merger and held by
BankGroup or in the treasury of Bank shall be canceled.
Section 3. Manner of Conversion of Bank Common Stock. The manner in
which outstanding shares of Bank Common Stock shall be converted into cash or
BankGroup Common Stock, as specified in Section 2 hereof, after the Effective
Time of the Bank Merger, shall be as follows:
<PAGE>
(i) All shares of Bank Common Stock as respects which cash
elections shall have been made shall be paid in cash (subject to all
applicable withholding taxes) at the rate of $83.20 per share, subject
to Sections 4 and 5.
(ii) Each share of Bank Common Stock, other than shares held by
BankGroup or in the treasury of Bank and other than Dissenting Shares
and shares to be exchanged for cash, shall be converted into shares of
BankGroup Common Stock as provided in Section 2(i).
(iii) No fractional shares of BankGroup Common Stock shall be
issued, but instead the value of fractional shares shall be paid in cash
(subject to all applicable withholding taxes), for which purpose
BankGroup Common Stock shall be valued at the BankGroup Stock Price.
(iv) Certificates for shares as respects which cash elections are
made must be delivered to Bank prior to the meeting of Bank shareholders
at which the Bank Merger is to be considered, with a completed Letter of
Transmittal furnished by Bank, indicating that the cash election has
been made. If the Bank Merger is approved at such shareholders meeting,
a shareholder's election to receive cash shall be irrevocable, and Bank
shall retain certificates for shares submitted for cash purchase until
either (A) termination of the Agreement (as defined below) after which
Bank shall return such certificates to the shareholder), or (B) the
Effective Time of the Bank Merger, after which BankGroup's exchange
agent shall exchange such shares for $83.20 per share, subject to
Section 5, upon receipt of certificates and completed Letters of
Transmittal from Bank. Until surrendered, each outstanding certificate
which, prior to the Effective Time of the Bank Merger, represented such
Bank Common Stock shall be deemed to evidence the owner's right to
receive $83.20 per share (less all applicable withholding taxes)
multiplied by the number of shares as respects which the cash election
has been made, without interest.
(v) Certificates for shares of Bank Common Stock (if not
previously submitted in connection with cash elections) shall be
submitted for exchange for BankGroup Common Stock or cash accompanied by
a Letter of Transmittal to be furnished within 10 business days after
the Effective Time of the Bank Merger to Bank's shareholders of record
as of the Effective Time of the Bank Merger. Until so surrendered, each
outstanding certificate which, prior to the Effective Time of the Bank
Merger, represented Bank Common Stock, shall be deemed to evidence only
the right to receive shares of BankGroup Common Stock determined in
accordance with the Exchange Ratio. Until such outstanding shares
formerly representing Bank Common Stock are so surrendered, no dividend
payable to holders of record of BankGroup Common Stock as of any date
subsequent to the Effective Time of the Bank Merger shall be paid to the
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<PAGE>
holder of such outstanding certificates in respect thereof. Upon such
surrender, dividends accrued or declared on BankGroup Common Stock shall
be paid in accordance with Section 2.2 of the Agreement and Plan of
Reorganization among BankGroup, Acquisition and Bank.
Section 4. Dissenting Shares. Notwithstanding anything in this Plan of
Merger to the contrary, shares of Bank Common Stock which are issued and
outstanding immediately prior to the Effective Time of the Bank Merger and which
are held by a shareholder who has the right (to the extent such right is
available by law) to demand and receive payment of the fair value of his shares
of Bank Common Stock pursuant to 12 U.S.C. ss. 215a (the "Dissenting Shares")
shall be canceled and shall not be converted into or by exchangeable for the
right to receive the consideration provided in Section 2 of this Plan of Merger,
unless and until such holder shall fail to perfect his right to dissent or shall
have effectively withdrawn or lost such right under the 12 U.S.C. ss. 215a, as
the case may be. If such holder shall have so failed to perfect or shall have
effectively withdrawn or lost such right, his shares of Bank Common Stock shall
thereupon be deemed to have been converted, at the Effective Time of the Bank
Merger, into the right to receive shares of BankGroup Common Stock.
Section 5. Selection of Shares to be Purchased with Cash. The number of
shares of Bank Common Stock to be exchanged for cash, when added to Dissenting
Shares and fractional shares settled for cash, cannot exceed 9.9% of outstanding
shares of Bank Common Stock immediately prior to the Effective Time of the Bank
Merger. If shareholders of Bank elect to exchange for cash more than this number
of shares of Bank Common Stock, shares submitted for cash purchase will be
chosen by lot to accommodate the "pooling of interests" accounting requirement
that a shareholder who chooses the cash election must have all of his or her
shares purchased for cash. Shareholders who submit their shares for cash
purchase but are not chosen in the lottery will have his or her shares exchanged
for BankGroup Common Stock (plus cash in lieu of fractional shares) at the
Exchange Ratio.
Section 6. Articles of Association, Bylaws and Directors of the
Surviving Bank. At the Effective Time of the Bank Merger, the Articles of
Association, By-laws and Directors of the Bank shall become the Articles of
Incorporation, Bylaws and Directors of the Surviving Bank.
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Schedule T
BankGroup Employee Plan Waiting Periods
A. Trigon Health
(Blue Cross/Blue Shield) Plan No Waiting Period
B. Dental Plan No Waiting Period for
employees with 90 calendar
days service with Bank; for
others, a waiting period
equal to difference between
90 days and number of days of
calendar service with Bank.
C. Defined Benefit Retirement Plan
and 401(k) Plan Will Give Credit for all
prior service. Bank
Employees with one year and
1,000 hours of service
immediately eligible to enter
plans on the October 1,
January 1, April 1 or July 1
next following the Effective
Time of the Bank Merger.
After the one year/1,000 hour
service test is met, with
Bank service being credited,
other employees may enter the
plans on these entrance
dates.
<PAGE>
ANNEX II
[SCOTT & STRINGFELLOW LETTERHEAD]
June ____, 1996
Board of Directors
First National Bank
Clifton Forge, VA 24422
Gentlemen:
You have asked us to render our opinion relating to the fairness, from a
financial point of view, to the shareholders of First National Bank of Clifton
Forge ("FNB") of the terms of an Agreement and Plan of Reorganization by and
between MainStreet BankGroup Incorporated ("MainStreet") and FNB dated April 17,
1996 (the "Merger Agreement"). The Merger Agreement provides for the merger of
FNB with and into MainStreet (the "Merger") and further provides that each share
of Common Stock of FNB which is issued and outstanding immediately prior to the
Effective Date of the Merger shall be converted into a number of shares of
MainStreet Common Stock equal to the quotient of $83.20 divided by the average
of the closing sales price for MainStreet Common Stock as reported on the NASDAQ
National Market for the 10 trading days preceding the last to occur of (I)
approval of the Merger by the shareholders of FNB or (ii) receipt of the last of
all regulatory approvals prerequisite to the consummation of the Merger (the
"Exchange Ratio"). In no case will the Exchange Ratio be less than 4.89 or
greater than 5.55.
In developing our opinion, we have, among other things, reviewed and
analyzed: (1) the Merger Agreement; (2) the Registration Statement and this
Proxy Statement; (3) FNB's financial statements for the three years ended
December 31, 1995; (4) FNB's unaudited financial statements for the quarter
ended March 31, 1995 and 1996, and other internal information relating to FNB
prepared by FNB's management; (5) information regarding the trading market for
the common stocks of FNB and MainStreet and the price ranges within which the
respective stocks have traded; (6) the relationship of prices paid to relevant
financial data such as net worth, assets, deposits and earnings in certain bank
and bank holding company mergers and acquisitions in Virginia in recent years;
(7) MainStreet's annual reports to shareholders and its financial statements for
the three years ended December 31, 1995; and (8) MainStreet's unaudited
financial statements for the quarter ended March 31, 1995 and 1996, and other
internal information relating to MainStreet prepared by MainStreet's management.
We have discussed with members of management of FNB and MainStreet the
background of the Merger, reasons and basis for the Merger and the business and
future prospects of FNB and MainStreet individually and as a combined entity.
Finally, we have conducted such other studies, analyses and investigations,
particularly of the banking industry, and considered such other information as
we deemed appropriate.
<PAGE>
In conducting our review and arriving at our opinion, we have relied
upon and assumed the accuracy and completeness of the information furnished to
us by or on behalf of FNB and MainStreet. We have not attempted independently to
verify such information, nor have we made any independent appraisal of the
assets of FNB or MainStreet. We have taken into account our assessment of
general economic, financial market and industry conditions as they exist and can
be evaluated at the date hereof, as well as our experience in business valuation
in general.
On the basis of our analyses and review and in reliance on the accuracy
and completeness of the information furnished to us and subject to the
conditions noted above, it is our opinion that, as of the date hereof the terms
of the Merger Agreement are fair from a financial point of view to the
shareholders of FNB Common Stock.
Very truly yours,
SCOTT & STRINGFELLOW,
By: ____________________________
Gary S. Penrose
Managing Director, Financial Institutions Group
<PAGE>
ANNEX III
12 U.S.C.A. SS. 215A(b), (c) AND (d)
(b) DISSENTING SHAREHOLDERS
If a merger shall be voted for at the called meetings by the necessary
majorities of the shareholders of each association or State bank participating
in the plan of merger, and thereafter the merger shall be approved by the
Comptroller, any shareholder of any association or State bank to be merged into
the receiving association who has voted against such merger at the meeting of
the association or bank of which he is a stockholder, or has given notice in
writing at or prior to such meeting to the presiding officer that he dissents
from the plan of merger, shall be entitled to receive the value of the share so
held by him when such merger shall be approved by the Comptroller upon written
request made to the receiving association at any time before thirty days after
the date of consummation of the merger, accompanied by the surrender of his
stock certificates.
(c) VALUATION OF SHARES
The value of the shares of any dissenting shareholder shall be
ascertained, as of the effective date of the merger, by an appraisal made by a
committee of three persons, composed of (1) one selected by the vote of the
holders of the majority of the stock, the owners of which are entitled to
payment in cash; (2) one selected by the directors of the receiving association;
and (3) one selected by the two so selected. The valuation agreed upon by any
two of the three appraisers shall govern. If the value so fixed shall not be
satisfactory to any dissenting shareholder who has requested payment, that
shareholder may, within five days after being notified of the appraised value of
his shares, appeal to the comptroller, who shall cause a reappraisal to be made
which shall be final and binding as to the value of the shares of the appellant.
(d) APPLICATION TO SHAREHOLDERS OF MERGING ASSOCIATIONS: APPRAISAL BY
COMPTROLLER; EXPENSES OF RECEIVING ASSOCIATION; SALE AND RESALE OF
SHARES; STATE APPRAISAL AND MERGER LAW
If, within ninety days from the date of consummation of the merger, for
any reason one or more of the appraisers is not selected as herein provided, or
the appraisers fail to determine the value of such shares, the Comptroller shall
upon written request of any interested party cause an appraisal to be made which
shall be final and binding on all parties. The expenses of the Comptroller in
making the reappraisal or the appraisal, as the case may be, shall be paid by
the receiving association. The value of the shares ascertained shall be promptly
paid to the dissenting shareholders by the receiving association. The shares of
stock of the receiving association which would have been delivered to such
dissenting shareholders had they not requested payment shall be sold by the
receiving association at an advertised public auction, and the receiving
association shall have the right to purchase any of such shares at such public
auction, if it is the highest bidder therefor, for the purpose of reselling such
shares within thirty days thereafter to such person or persons and at such price
not less than par as its board of directors by resolution may determine. If the
shares are sold at public auction at a price greater than the amount paid to the
dissenting shareholders, the excess in such sale price shall be paid to such
dissenting shareholders. The appraisal of such shares of stock in any State bank
shall be determined in the manner prescribed by the law of the State in such
cases, rather than as provided in this section, if such provision is made in the
State law; and no such merger shall be in contravention of the law of the State
under which such bank is incorporated. The provisions of this subsection shall
apply only to shareholders of (and stock owned by them in) a bank or association
being merged into the receiving association.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Registrant's Articles of Incorporation implement the provisions of the
VSCA, which provide for the indemnification of Registrant's directors and
officers in a variety of circumstances, which may include indemnification for
liabilities under the Securities Act of 1933. Under sections 13.1-697 and
13.1-702 of the VSCA, a Virginia corporation generally is authorized to
indemnify its directors and officers in civil or criminal actions if they acted
in good faith and believed their conduct to be in the best interests of the
corporation and, in the case of criminal actions, had no reasonable cause to
believe that the conduct was unlawful. Registrant's Articles of Incorporation
require indemnification of directors and officers with respect to certain
liabilities, expenses and other amounts imposed upon them be reason of having
been a director or officer, except in the case of willful misconduct or a
knowing violation of criminal law. Registrant also carries insurance on behalf
of directors, officers, employees or agents that may cover liabilities under the
Securities Act of 1933. In addition, the VSCA and Registrant's Articles of
Incorporation eliminate the liability of a director or officer of Registrant in
a shareholder or derivative proceeding. This elimination of liability will not
apply in the event of willful misconduct or a knowing violation of the criminal
law or any federal or state securities law. Sections 13.1-692.1 and 13.1-696 to
- -704 of the VSCA are hereby incorporated herein by reference.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
2(a) Agreement and Plan of Reorganization dated as of April
17, 1996, among Registrant, CF Acquisition Subsidiary,
N.A. and the First National Bank of Clifton Forge
(attached to the Proxy Statement/Prospectus as Annex I)
5 Opinion of Hunton & Williams with respect to legality
8 Opinion of Hunton & Williams with respect to tax
consequences of the Merger
23(a) Consent of KPMG Peat Marwick, LLP
23(b) Consent of Coopers & Lybrand L.L.P.
23(c) Consent of Persinger & Company, L.L.C.
II-1
<PAGE>
23(d) Consent of Scott & Stringfellow, Inc.
23(e) Consent of Hunton & Williams (included in Exhibit 5 and
Exhibit 8)
25 Power of Attorney of Officers and Directors of
Registrant (included on signature pages of the
Registration Statement)
99(a) Form of Proxy
99(b) Form of Cash Option Election
(b) Financial Statement Schedules -- None
(c) Report, Opinion or Appraisal -- (Opinion of Scott &
Stringfellow, Inc. attached to the Proxy
Statement/Prospectus as Annex II)
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes as follows:
1. To file, during any period in which offers or sales are
being made, a post- effective amendment to this
registration statement.
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth
in the registration statement.
(iii) To include any material information with respect
to the plan of distribution not previously
disclosed in the registration statement or any
material change to such information in the
registration statement.
Provided, however, that paragraphs (a)(1)(i) and
(a)(1)(ii) do not apply if the registration
statement is on Form S-3 or Form S-8, and the
information required to be included in a
post-effective amendment by those paragraphs is
contained in periodic reports filed by the
registrant pursuant to Section 13 or Section
15(d) of
II-2
<PAGE>
the Securities Exchange Act of 1934 that are
incorporated by reference in the registration
statement.
2. That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective
amendment will be deemed to be a new registration
statement relating to the securities offered therein, and
the offering of such securities at that time will be
deemed to be the initial bona fide offering thereof.
3. To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
4. That prior to any public reoffering of the securities
registered hereunder through the use of a prospectus which
is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the
meaning of Rule 145(c), the Registrant undertakes that
such reoffering prospectus will contain the information
called for by the applicable registration form with
respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by
the other items of the applicable form.
5. That every prospectus (i) that is filed pursuant to the
paragraph immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Act and
is used in connection with an offering of securities
subject to Rule 415, will be filed as part of an amendment
to the registration statement and will not be used until
such amendment is effective, and that, for the purposes of
determining any liability under the Securities Act of
1933, each such post-effective amendment will be deemed to
be a new registration statement relating to the securities
offered therein, and the offering of such securities at
that time will be deemed to be the initial bona fide
offering thereof.
6. Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by
a director, officer or controlling person of the
Registrant in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or
control- ling person in connection with the securities
being registered, the Registrant will, unless in the
opinion of its counsel the matter has been
II-3
<PAGE>
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first-class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of the
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Martinsville, Commonwealth of Virginia, on June 17, 1996.
MAINSTREET BANKGROUP INCORPORATED
(Registrant)
By: /s/ Michael R. Brenan
Michael R. Brenan, President, Chairman of
the Board and Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on June 17, 1996. Each of the directors and/or officers of
MainStreet BankGroup Incorporated whose signature appears below hereby appoints
Michael R. Brenan, James E. Adams, Rebecca J. Jenkins and Lathan M. Ewers, Jr.,
and each of them severally, as his attorney-in-fact to sign in his name and
behalf, in any and all capacities stated below and to file with the Commission,
any and all amendments, including post-effective amendments to this registration
statement, making such changes in the registration statement as appropriate, and
generally to do all such things in their behalf in their capacities as officers
and directors to enable MainStreet BankGroup Incorporated to comply with the
provisions of the Securities Act of 1933, and all requirements of the Securities
and Exchange Commission.
SIGNATURE TITLE
/s/ Michael R. Brenan President, Chairman of the Board
Michael R. Brenan and Chief Executive Officer
(Principal Executive Officer)
/s/ James E. Adams Senior Vice President, Chief Financial
James E. Adams Officer and Treasurer (Principal
Financial and Accounting Officer)
/s/ W. Christopher Beeler, Jr. Director
W. Christopher Beeler,Jr.
II-5
<PAGE>
_________________________ Director
Thomas B. Bishop
/s/ William L. Cooper Director
William L. Cooper, III
/s/ Billy P. Craft Director
Billy P. Craft
/s/ I. Patricia Henry Director
I. Patricia Henry
/s/ Larry E. Hutchens Director
Larry E. Hutchens
/s/ William O. McCabe, Jr., MD Director
William O. McCabe, Jr., MD
/s/ Albert L. Prillaman Director
Albert L. Prillaman
/s/ Richard M. Simmons, Jr. Director
Richard M. Simmons, Jr.
__________________________ Director
Thomas B. Stanley, Jr.
II-6
</TABLE>
[TO COME]
Exhibit 8
June 13, 1996
MainStreet BankGroup Incorporated
CF Acquisition Subsidiary, N.A.
200 East Church Street
Martinsville, Virginia 24115
The First National Bank of Clifton Forge
511 Main Street
Clifton Forge, Virginia 24422
MERGER OF THE FIRST NATIONAL BANK OF CLIFTON FORGE
INTO CF ACQUISITION SUBSIDIARY, N.A.
CERTAIN FEDERAL INCOME TAX MATTERS
Ladies and Gentlemen:
We have acted as counsel to MainStreet BankGroup Incorporated
("BankGroup") in connection with the proposed merger of The First National Bank
of Clifton Forge (the "Bank") into CF Acquisition Subsidiary, N.A.
("Acquisition"), a wholly-owned subsidiary of BankGroup formed for purposes of
effecting the merger (the "Bank Merger"). The Bank's only class of stock
outstanding is common stock ("Bank Common Stock"). In the Bank Merger, each
outstanding share of Bank Common Stock, except any shares for which the holder
exercises and perfects the statutory right to an appraisal ("Dissenting Shares")
and any shares held by BankGroup, will be converted into the right to receive
either (i) a number of shares of common stock of BankGroup ("BankGroup Common
Stock") having a fair market value of $83.20 or (ii) if the shareholder so
elects, $83.20 cash.
For purposes of determining the number of shares of BankGroup
Common Stock to be issued for a share of Bank Common Stock (the "Exchange
Ratio"), the per share value of BankGroup Common Stock will be the average of
the closing sales price for BankGroup Common Stock as reported on the Nasdaq
National Market for the 10 trading days preceding the later of (i) approval of
the Bank Merger by the Bank's shareholders or (ii) receipt of the last of all
required regulatory approvals. The Exchange Ratio, however, will not be less
than 4.89 or greater than 5.55. If a Bank shareholder otherwise would be
entitled
<PAGE>
MainStreet BankGroup Incorporated
The First National Bank of Clifton Forge
June 13, 1996
Page 2
to receive a fractional share of BankGroup Common Stock upon the exchange of the
shareholder's shares of Bank Common Stock, BankGroup will pay cash in lieu of
issuing any fractional share.
A shareholder electing the cash option must exchange all of his
or her shares of Bank Common Stock for cash. However, the number of shares of
Bank Common Stock for which shareholders may receive cash, including Dissenting
Shares and shares exchanged for cash in lieu of a fractional share of BankGroup
Common Stock, may not exceed 9.9% of the outstanding shares of Bank Common
Stock. If the 9.9% ceiling otherwise would be exceeded, shares of Bank Common
Stock submitted for cash pursuant to the cash option will be chosen by lot to
determine which shares will be exchanged for cash; shares not so chosen will be
exchanged for BankGroup Common Stock.
You have requested our opinion concerning certain federal income
tax consequences of the Bank Merger. In giving this opinion, we have reviewed
the Agreement and Plan of Reorganization (including the Plan of Merger), dated
as of April 17, 1996, among BankGroup, Acquisition, and the Bank; the Form S-4
Registration Statement under the Securities Act of 1933 relating to the Bank
Merger (the "S-4"); and such other documents as we have considered necessary. In
addition, we have assumed the following:
1. The fair market value of the BankGroup Common Stock
(including any fractional share interest) received by a Bank shareholder in
exchange for Bank Common Stock will be approximately equal to the fair market
value of the Bank Common Stock surrendered in the exchange.
2. None of the compensation received by any shareholder-employee
of the Bank will be separate consideration for, or allocable to, any shares of
Bank Common Stock; none of the shares of BankGroup Common Stock received by any
shareholderemployee in the Bank Merger will be separate consideration for, or
allocable to, any employment agreement; and the compensation paid to any
shareholder-employee will be for services actually rendered and will be
commensurate with amounts paid to third parties bargaining at arm's length for
similar services.
3. The payment of cash in lieu of fractional shares of BankGroup
Common Stock is solely for the purpose of avoiding the expense and inconvenience
to BankGroup of issuing fractional shares and does not represent separately
bargained-for
<PAGE>
MainStreet BankGroup Incorporated
The First National Bank of Clifton Forge
June 13, 1996
Page 3
consideration. The total cash that will be paid in the Bank Merger in lieu of
fractional shares of BankGroup Common Stock will not exceed one percent of the
total consideration that will be issued in the Bank Merger to Bank shareholders
in exchange for their Bank Common Stock.
4. No share of Bank Common Stock has been or will be redeemed in
anticipation of the Bank Merger, and the Bank has not made and will not make any
extraordinary distribution with respect to its stock in anticipation of the Bank
Merger.
5. BankGroup has no plan or intention to reacquire any of its
stock issued in the Bank Merger or to make any extraordinary distribution with
respect to such stock.
6. There is no plan or intention by Bank shareholders to sell,
exchange, or otherwise dispose of a number of shares of BankGroup Common Stock
received in the Bank Merger that would reduce the Bank shareholders' ownership
of BankGroup Common Stock to a number of shares having a fair market value, as
of the effective date of the Bank Merger, of less than 50 percent of the fair
market value of all the formerly outstanding Bank Common Stock as of that date.
For this purpose, Dissenting Shares and shares of Bank Common Stock exchanged
for cash in the Bank Merger or exchanged for cash in lieu of fractional shares
of BankGroup Common Stock are treated as outstanding Bank Common Stock on the
effective date of the Bank Merger. Moreover, shares of Bank Common Stock and
shares of BankGroup Common Stock held by Bank shareholders and otherwise sold,
redeemed, or disposed of before or after the Bank Merger are considered in
making the above determination.
7. Acquisition will acquire at least 90 percent of the fair
market value of the net assets and at least 70 percent of the fair market value
of the gross assets held by the Bank immediately before the Bank Merger. For
this purpose, any amounts paid by the Bank or Acquisition (to the extent not
paid with funds contributed by BankGroup) for (a) expenses related to the Bank
Merger and (b) Dissenting Shares, and any redemptions and distributions (except
for regular, normal dividends) made by the Bank in connection with the Bank
Merger will be included as assets of the Bank held immediately before the Bank
Merger.
8. Following the Bank Merger, Acquisition will continue the
historic business of the Bank or use a significant portion of the Bank's
historic business assets in a business.
<PAGE>
MainStreet BankGroup Incorporated
The First National Bank of Clifton Forge
June 13, 1996
Page 4
9. The liabilities of the Bank that will be assumed by
Acquisition and the liabilities, if any, to which assets of the Bank are subject
were incurred by the Bank in the ordinary course of business.
10. There is no intercorporate indebtedness existing between the
Bank and BankGroup, Acquisition, or any other subsidiary of BankGroup that was
issued or acquired or will be settled at a discount.
11. Neither BankGroup nor any subsidiary of BankGroup (a) has
transferred or will transfer cash or other property to the Bank for less than
fair market value consideration in anticipation of the Bank Merger or (b) has
made or will make any loan to the Bank in anticipation of the Bank Merger.
12. On the effective date of the Bank Merger, the fair market
value of the assets of the Bank transferred to Acquisition will exceed the sum
of the Bank's liabilities assumed by Acquisition plus the amount of liabilities,
if any, to which the transferred assets are subject.
13. BankGroup, the Bank, and the Bank shareholders will pay their
respective expenses, if any, incurred in connection with the Bank Merger, except
that BankGroup will pay the Bank's expenses directly related to the Bank Merger
if it is consummated. BankGroup also will pay, or will contribute to Acquisition
funds to pay, Acquisition's expenses incurred in connection with the Bank
Merger.
14. Acquisition has outstanding only one class of stock, and
BankGroup owns all the outstanding shares of such class. Following the Bank
Merger, Acquisition will not issue additional shares of its stock that would
result in BankGroup's owning less than 80 percent of the total combined voting
power of all classes of Acquisition's voting stock or less than 80 percent of
each class of Acquisition's nonvoting stock.
15. Neither BankGroup nor Acquisition has any plan or intention
to liquidate Acquisition, to merge Acquisition into another corporation, to sell
or otherwise dispose of any stock of Acquisition, or (except for dispositions
made in the ordinary course of business) for Acquisition to sell or otherwise
dispose of any of the assets of the Bank acquired in the Bank Merger.
<PAGE>
MainStreet BankGroup Incorporated
The First National Bank of Clifton Forge
June 13, 1996
Page 5
16. For each of BankGroup, Acquisition, and the Bank, not more
than 25 percent of the fair market value of its adjusted total assets consists
of stock and securities of any one issuer, and not more than 50 percent of the
fair market value of its adjusted total assets consists of stock and securities
of five or fewer issuers. For purposes of the preceding sentence, (a) a
corporation's adjusted total assets exclude cash, cash items (including accounts
receivable and cash equivalents), and United States government securities, (b) a
corporation's adjusted total assets exclude stock and securities issued by any
subsidiary at least 50 percent of the voting power or 50 percent of the total
fair market value of the stock of which is owned by the corporation, but the
corporation is treated as owning directly a ratable share (based on the
percentage of the fair market value of the subsidiary's stock owned by the
corporation) of the assets owned by any such subsidiary, and (c) all
corporations that are members of the same "controlled group" within the meaning
of section 1563(a) of the Internal Revenue Code (the "Code") are treated as a
single issuer.
17. At all times during the five-year period ending on the
effective date of the Bank Merger, the fair market value of all of the Bank's
United States real property interests has been less than 50 percent of the total
fair market value of (a) its United States real property interests, (b) its
interests in real property located outside the United States, and (c) its other
assets used or held for use in a trade or business. For purposes of the
preceding sentence, (x) United States real property interests include all
interests (other than an interest solely as a creditor) in real property and
associated personal property (such as movable walls and furnishings) located in
the United States or the Virgin Islands and interests in any corporation (other
than a controlled corporation) owning any United States real property interest,
(y) the Bank is treated as owning its proportionate share (based on the relative
fair market value of its ownership interest to all ownership interests) of the
assets owned by any controlled corporation or any partnership, trust, or estate
in which the Bank is a partner or beneficiary, and (z) any such entity in turn
is treated as owning its proportionate share of the assets owned by any
controlled corporation or any partnership, trust, or estate in which the entity
is a partner or beneficiary. As used in this paragraph, "controlled corporation"
means any corporation at least 50 percent of the fair market value of the stock
of which is owned by the Bank, in the case of a first-
<PAGE>
MainStreet BankGroup Incorporated
The First National Bank of Clifton Forge
June 13, 1996
Page 6
tier subsidiary of the Bank, or by a controlled corporation, in
the case of a lower-tier subsidiary.
18. No shares of Bank Common Stock, if any, that were acquired in
connection with the performance of services are subject to a substantial risk of
forfeiture within the meaning of section 83(c) of the Code.
19. The Bank has not filed, and holds no asset subject to, a
consent pursuant to section 341(f) of the Code and regulations thereunder.
20. The Bank is not a party to, and holds no asset subject to, a
"safe harbor lease" under former section 168(f)(8) of the Code and regulations
thereunder.
On the basis of the foregoing, and assuming that (i) with respect
to any shareholder that is a nonresident alien or foreign entity, the Bank will
comply with all applicable statement and notification requirements of Treasury
Regulation ss. 1.897-2(g) & (h), and (ii) the Bank Merger will be consummated in
accordance with the Plan of Merger, we are of the opinion that (under existing
law) for federal income tax purposes:
1. The Bank Merger will be a reorganization within the meaning
of section 368(a)(1)(A) by reason of section 368(a)(2)(D) of the Code, and
BankGroup, Acquisition, and the Bank each will be a "party to a reorganization"
within the meaning of section 368(b) of the Code.
2. The Bank will not recognize gain or loss (a) on the transfer
of its assets to Acquisition in exchange for BankGroup Common Stock, cash, and
the assumption of the Bank's liabilities, or (b) on the constructive
distribution of BankGroup Common Stock and cash to the Bank shareholders. (We
note, however, that the Bank or Acquisition may be required to include in income
certain amounts as a result of the termination of any bad-debt reserve
maintained by the Bank for federal income tax purposes and other possible
required changes in accounting methods.)
3. Neither BankGroup nor Acquisition will recognize gain or loss
on the acquisition by Acquisition of the Bank's assets in exchange for BankGroup
Common Stock, cash, and the assumption of the Bank's liabilities. (We note,
however, that the Bank or Acquisition may be required to include in income
certain amounts as a result of the termination of any bad-debt
<PAGE>
MainStreet BankGroup Incorporated
The First National Bank of Clifton Forge
June 13, 1996
Page 7
reserve maintained by the Bank for federal income tax purposes and other
possible required changes in accounting methods.)
4. A Bank shareholder will not recognize gain or loss on the
exchange of his shares of Bank Common Stock solely for shares of BankGroup
Common Stock (including any fractional share interest) in the Bank Merger.
5. The aggregate basis of shares of BankGroup Common Stock
(including any fractional share interest) received in the Bank Merger by a Bank
shareholder who exchanges his shares of Bank Common Stock solely for shares of
BankGroup Common Stock will be the same as the aggregate basis of the shares of
Bank Common Stock exchanged therefor.
6. The holding period for shares of BankGroup Common Stock
(including any fractional share interest) received by a Bank shareholder in the
Bank Merger will include the holding period for the shares of Bank Common Stock
exchanged therefor, if such shares of Bank Common Stock are held as a capital
asset on the effective date of the Bank Merger.
7. Cash received by a Bank shareholder in lieu of a fractional
share of BankGroup Common Stock will be treated as having been received as full
payment in exchange for such fractional share pursuant to section 302(a) of the
Code.
We are also of the opinion that the federal income tax
consequences of the Bank Merger are fairly summarized in the S-4 under the
headings "Summary -- Certain Federal Income Tax Consequences of the Bank Merger"
and "The Bank Merger -Certain Federal Income Tax Consequences." We consent to
the use of this opinion as an exhibit to the S-4 and to the reference to this
firm under such headings. In giving this consent, we do not admit that we are
within the category of persons whose consent is required by section 7 of the
Securities Act of 1933 or the rules and regulations promulgated thereunder by
the Securities and Exchange Commission.
Very truly yours,
HUNTON & WILLIAMS
Exhibit 23(a)
CONSENT OF KPMG PEAT MARWICK LLP
The Board of Directors
MainStreet BankGroup Incorporated:
We consent to the use of our report incorporated herein by reference and to the
reference to our firm under the heading "Experts" in the prospectus. Our report
refers to changes in accounting for impaired loans and certain investments in
debt and equity securities.
KPMG Peat Marwick LLP
Roanoke, Virginia
June 7, 1996
Exhibit 23(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement of
MainStreet BankGroup Incorporated on Form S-4 for our report dated January 19,
1996, on our audit of the consolidated financial statements of MainStreet
BankGroup Incorporated as of December 31, 1995, and for the year then ended,
which report is included in the Annual Report on Form 10-K. We also consent to
the reference to our firm under the caption "Experts".
COOPERS & LYBRAND L.L.P.
Greensboro, North Carolina
June 17, 1996
Exhibit 23(c)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
MainStreet BankGroup Incorporated
Martinsville, Virginia
We hereby consent to the use in this S-4 Registration Statement of our report,
dated January 4, 1996, except for note 14, as to which the date is April 17,
1996, relating to the financial statements of The First National Bank of Clifton
Forge as of December 31, 1995 and 1994 and for the years then ended.
PERSINGER & COMPANY, L.L.C.
Covington, Virginia
June 17, 1996
Exhibit 23(d)
[SCOTT & STRINGFELLOW, INC. LETTERHEAD]
June 17, 1996
Lathan M. Ewers, Jr., Esquire
Hunton & Williams
Riverfront Plaza, East Tower
951 East Byrd Street
Richmond, Virginia 23219-4074
CONSENT OF INVESTMENT BANKERS
Gentlemen:
We consent to the use, quotation and summarization in the Registration
Statement on Form S-4 of our fairness opinion dated June 17, 1996, rendered to
the Board of Directors of The First National Bank of Clifton Forge in connection
with its merger with MainStreet BankGroup Incorporated and to the use of our
name, and the statements with respect to us, appearing in the Registration
Statement.
Sincerely,
SCOTT & STRINGFELLOW, INC.
/s/ Gary S. Penrose
Gary S. Penrose
Managing Director
Financial Institutions Group
Exhibit 99(a)
THE FIRST NATIONAL BANK OF CLIFTON FORGE
REVOCABLE PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints _________________ and
___________________, either one of whom may act with full power of substitution,
to act as proxies for the undersigned and to vote all shares of Common Stock of
The First National Bank of Clifton Forge ("Bank") which the undersigned is
entitled to vote at the Special Meeting of Shareholders to be held on
__________, 1996, at 10:00 a.m., local time, at
____________________________________, located at ___________________________,
Clifton Forge, Virginia, and at any and all adjournments thereof.
THIS PROXY MAY BE REVOKED AT ANY TIME BEFORE IT IS EXERCISED.
This proxy, when properly executed, will be voted as directed on the
reverse side. If no direction is made, this proxy will be voted FOR each of the
proposals listed. If any other business is properly presented at the Special
Meeting, this proxy will be voted by the proxies in their discretion.
The Board of Directors recommends that shareholders vote FOR Proposal 1.
1. Approval and adoption of the Agreement and Plan of Reorganization and
related Revised Plan of Merger dated April 17, 1996 (the "Agreement"),
among MainStreet BankGroup Incorporated ("BankGroup), CF Acquisition
Subsidiary, N.A. and Bank, providing for Bank's acquisition by BankGroup
as described in the Proxy Statement/Prospectus and pursuant to which
each share of Common Stock of Bank outstanding as of the Effective Time
of the Merger will be converted into and become the right to receive the
number of shares of Common Stock of BankGroup (and associated stock
rights) or cash as determined in the manner specified in the Proxy
Statement/Prospectus and the Agreement.
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the Special Meeting or any
adjournment thereof.
The undersigned acknowledges receipt prior to the execution of this proxy of a
Notice of Special Meeting of Shareholders and of a Proxy Statement/Prospectus
dated ________________, 1996.
Please sign exactly as your name appears on this card. When signing as attorney,
executor, administrator, trustee or guardian, please give your full title. If
shares are held jointly, each holder may sign, but only one signature is
required.
Dated ____________________, 1996 ____________________________________
Signature
____________________________________
Signature
Please Mark, Sign, Date and Return the Proxy Card Promptly
Using the Enclosed Envelope.
Exhibit 99(b)
MAINSTREET BANKGROUP INCORPORATED
THE FIRST NATIONAL BANK OF CLIFTON FORGE
CASH OPTION ELECTION
AND
LETTER OF TRANSMITTAL
IMPORTANT: TO BE EFFECTIVE, THIS ELECTION FORM AND LETTER OF TRANSMITTAL
MUST BE RECEIVED BY THE FIRST NATIONAL BANK OF CLIFTON FORGE NO LATER THAN 10:00
A.M. ON ___________, 1996 (THE "ELECTION DEADLINE"), TOGETHER WITH
CERTIFICATE(S) REPRESENTING SHARES OF THE FIRST NATIONAL BANK OF CLIFTON FORGE
COMMON STOCK TO WHICH THIS CASH OPTION ELECTION AND LETTER OF TRANSMITTAL
RELATES.
To The First National Bank of Clifton Forge
511 Main Street
Clifton Forge, Virginia 24422
Gentlemen:
On ____________, 1996 at a Special Meeting of Shareholders (the "Special
Meeting") of The First National Bank of Clifton Forge, shareholders will
consider an Agreement and Plan of Reorganization (the "Agreement") dated as of
April 17, 1996 among MainStreet BankGroup Incorporated ("BankGroup"), CF
Acquisition Subsidiary, N.A. and The First National Bank of Clifton Forge
("Bank"). The Agreement provides for the merger of Bank into CF Acquisition
Subsidiary, N.A. (the "Bank Merger") and the conversion of Bank Common Stock
into BankGroup Common Stock or, at the election of the Bank shareholder, cash.
Bank Common Stock is being valued at $83.20 per share in the Bank Merger.
The Agreement requires Bank shareholders who elect to exchange all, and
not less than all, of their shares of Bank Common Stock in the Bank Merger for
cash to make such election prior to the Special Meeting. Certificates for the
shares being exchanged for cash must be submitted to Bank at or prior to the
Special Meeting. Such certificates are enclosed with this letter. Failure to
return this Cash Option Election Form by the Election Deadline will result in
the conversion of all shares of Bank Common Stock into BankGroup Common Stock,
except fractional shares settled for cash and Dissenting Shares.
I elect to exchange the number of shares of Bank Common Stock designated
below, which constitute all of the Bank shares that I own, for $83.20 cash per
share (subject to all applicable withholding taxes). I enclose the certificates
for such shares.
I understand that the total number of shares of Bank Common Stock that
may be exchanged for cash is limited as described in the Agreement. Because the
number of shares exchanged for cash may not exceed 9.9% of the outstanding
shares of Bank Common Stock, the extent to which the cash elections will be
accommodated will depend on the number of holders of shares of Bank Common Stock
who elect to receive cash. If the aggregate of the Dissenting Shares, fractional
shares settled for cash and shares with respect to which a cash election is made
exceeds 9.9% of the outstanding shares of Bank Common Stock, I understand shares
submitted for cash purchase will be chosen by lot to accommodate the "pooling of
interests" accounting requirement that a shareholder who chooses the cash
election must have ALL of his or her shares purchased for cash. Shareholders who
submit their shares for cash purchase but are not chosen in the lottery will
have their shares exchanged for BankGroup Common Stock (plus cash in lieu of
fractional shares)."
<PAGE>
I understand that if the Bank Merger is approved by Bank shareholders,
this election to receive cash is irrevocable. Bank will retain the certificates
for shares submitted for cash purchase in escrow until either termination of the
Agreement, upon which Bank promptly will return such certificates, or the
Effective Time of the Bank Merger, when Registrar and Transfer Company, as
exchange agent (the "Exchange Agent"), will exchange such certificates for cash.
DESCRIPTION OF SHARES OF BANK COMMON STOCK SUBMITTED FOR CASH
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Name and Address of Registered Holder(s) Certificate(s) Enclosed
(Kindly note address changes) (Attach list if necessary)
- -----------------------------------------------------------------------------------------------------
Nos. of
Certificate # Shares
<S> <C>
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
I (We) have, and at the Effective Time of the Bank Merger will have,
full power and authority to sell the shares represented by the certificate(s)
submitted. I (We) certify that the information provided on this form is true,
and that when such shares are accepted for cash exchange by BankGroup will
acquire good and unencumbered title thereto, free and clear of all liens,
restrictions, changes and not subject to any adverse claim. I (we) am not
subject to backup withholding due to notified payee underreporting. It is
understood that this Election is subject to the terms, conditions and
limitations set forth in the Agreement, the Proxy Statement/Prospectus and this
Cash Option Election and Letter of Transmittal. HOLDERS OF BANK COMMON STOCK
SHOULD CONSULT THEIR OWN ADVISORS AS TO THE TAX CONSEQUENCES OF MAKING THIS CASH
ELECTION. The undersigned, upon request, will execute and deliver any additional
documents necessary or desirable to complete the exchange of shares for cash
under the Agreement. The undersigned hereby constitutes and appoints the
Exchange Agent as his, her or its true and lawful agent and attorney-in-fact to
effect such surrender of the shares and, if necessary under the Agreement, to
transfer the shares on the books of Bank. The undersigned represents that he,
she or it has read and agreed to all of the terms and conditions set forth
herein and in the Proxy Statement/Prospectus. Delivery of the enclosed
certificate(s) shall be effected, and the risk of loss and title to such
certificate(s) shall pass, only upon proper delivery thereof to the Exchange
Agent. All authority herein conferred shall survive the death or incapacity of
the undersigned, and each of them, and any obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives, successors
and assigns of the undersigned. In no event will Bank, the Exchange Agent or
BankGroup be liable to a holder of shares of Bank Common Stock for any BankGroup
Common Stock or dividends thereon or cash delivered in good faith to a public
official pursuant to any applicable abandoned property, escheat or similar law.
SIGN HERE: DATE HERE:
Please insert your Social _________________ ___________, 1996
Security or other tax
identifying number below _________________
(Signature(s) of
Registered Owner(s))
Please sign exactly as
name appears
on stock certificate(s).
See Instruction 2.
<PAGE>
SPECIAL INSTRUCTIONS
Fill in only if MAILING is to be made other than in the name or to the address
specified above.
Special Mailing Instructions
Mail To:
Name
- ----------------------------------------------
(Type or print)
- ----------------------------------------------
Address
--------------------------------------
(Number) (Street)
- ----------------------------------------------
(City) (State) (Zip)
- ----------------------------------------------
Fill in only if PAYMENT is to be made other than in the name(s) specified above.
Special Payment Instructions
Issue Check To:
Name
-----------------------------------------
(Type or print)
Address
-------------------------------------
- ---------------------------------------------
Social Security or Taxpayer
Identification Number
-----------------------
- ---------------------------------------------
- ---------------------------------------------
<PAGE>
IMPORTANT TAX INFORMATION
PURPOSE OF FORM
Use this form to report the Taxpayer Identification Number of the record
owner of the account to the payer.
Under Federal income tax laws, payers (i.e., BankGroup) must generally
withhold 31% of taxable interest, dividend, and certain other payments if you
fail to furnish payers with the correct Taxpayer Identification Number (this is
referred to as backup withholding).
To prevent backup withholding on these payments, be sure to notify the
payer of the correct Taxpayer Identification Number. You must use this form to
certify that the Taxpayer Identification Number you are giving to the payer is
correct and that you are not subject to backup withholding.
WHAT NUMBER TO GIVE THE PAYER
Give the payer the Social Security number or employer identification
number of the record owner of the account. If the account belongs to you as an
individual, give your Social Security number. If the account is in more than one
name or is not in the name of the actual owner, give the Social Security number
as follows:
TYPE OF ACCOUNT SOCIAL SECURITY NUMBER OF:
- - Two or more individuals The actual owner of the account,
including husband and wife or if combined funds, any one
(joint account) of the individuals
- - Custodian account of minor The minor
(Uniform Gift to Minors Act)
- - Adult and minor (joint account) The adult, or if the minor is
the only contributor, the minor
- - Account in the name of a guardian The ward, minor or incompetent
or committee for a designated person
ward, minor, or incompetent
- --------------------------------------------------------------------------------
SUBSTITUTE FORM W-9
Under penalties of perjury, I certify (i) that the number shown below is my
correct Taxpayer Identification Number and (ii) that I am not subject to backup
withholding because: (a) I am exempt from backup withholding, or (b) I have not
been notified that I am subject to backup withholding as a result of a failure
to report all interest or dividends, or (c) the Internal Revenue Service has
notified me that I am no longer subject to backup withholding. (Note: You must
strike out item (ii) above if you have been notified by the Internal Revenue
Service that you are currently subject to backup withholding because of
underreporting interest or dividends on your tax returns.)
Tax Identification or (X)
Social Security Number: Signature
Date: , 199__
- -------------------------------------------------------------------------------
INSTRUCTIONS FOR SUBMITTING CERTIFICATES OF BANK COMMON STOCK
1. GENERAL. This form must be filled in, dated and signed, and accompanied
by your certificate or certificates for shares of Bank Common Stock prior to the
Election Deadline. Proper delivery is at risk of the owner. If sent by mail,
registered mail is suggested. Mail or deliver to: The First National Bank of
Clifton Forge, 511 Main Street, Clifton Forge, Virginia, 24422.
<PAGE>
2. SIGNATURES. The signature (or signatures in the case of certificates
owned by two or more joint holders) on the Letter of Transmittal should
correspond exactly with the name(s) as written on the face of the certificates.
If the certificate(s) transmitted hereby is registered in the name of two or
more joint holders, all such holders must sign the Letter of Transmittal.
If surrendered certificates are registered in different ways on several
certificates, it will be necessary to complete, sign and submit as many separate
Letters of Transmittal as there are different registrations of such
certificates.
If the Letter of Transmittal is signed by a person other than the record holder
of the certificate(s) listed, the certificate(s) must be endorsed or accompanied
by appropriate stock powers, in either case signed by the record holder(s) in
the name(s) that appears on the certificate(s) and the signature(s) must be
guaranteed by a member of a national securities exchange or of the National
Association of Securities Dealers, Inc., or a United States commercial bank or
trust company.
3. FIDUCIARIES AND REPRESENTATIVES. If a Letter of Transmittal, an endorsement
or a certificate or a stock power is signed by a trustee, executor,
administrator, guardian, officer of a corporation, attorney-in-fact, or other
person in any representative or fiduciary capacity, the person signing, unless
such person is the record holder of the shares, must give such person's full
title in such capacity and appropriate evidence of authority to act in such
capacity must be forwarded with the Letter of Transmittal.
The certificate(s) may be surrendered by a firm acting as agent for the
registered holder(s) if such firm is a member of a registered national
securities exchange or of the National Association of Securities Dealers or is a
commercial bank or trust company in the United States.
4. TIME IN WHICH TO SUBMIT CERTIFICATES. Certificate(s) for Bank Common
Stock must be submitted prior to Bank's Special Meeting of Shareholders on
____________, 1996 at 10:00 a.m. See "The Bank Merger -- Cash
Election; Election Procedures" in the Proxy Statement/Prospectus.
5. SPECIAL PAYMENT REQUIRED. If a request is made that the check be made payable
to other than the person or entity whose name is specified above, the person
requesting the issuance of such check must first remit to the Exchange Agent any
transfer or other taxes required by reason of such issuance, or establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
applicable.
6. LOST CERTIFICATES. If any certificate representing shares of Bank Common
Stock has been lost, stolen or destroyed, the stockholder should immediately
contact Bank at the telephone number set forth below. This Cash Option Election
cannot be processed until such certificates have been replaced.
7. DETERMINATION OF QUESTIONS. All questions with respect to this Cash Option
Election and Letter of Transmittal will be determined by the Exchange Agent,
whose determination shall be conclusive and binding. The Exchange Agent shall
have the exclusive right to reject any and all Cash Option Elections and Letters
of Transmittal not in proper form or to waive any irregularities in any such
Form, although it does not represent that it will do so.
QUESTIONS AND REQUESTS FOR ASSISTANCE MAY BE DIRECTED TO BANK AT ______________.
