As filed with the Securities and Exchange Commission on October 16, 1997
Registration No. 333 - 35831
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
AMENDMENT NO. 1 TO
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
Executive Vice President 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)
<PAGE>
-----------------------------
Copies to:
Douglas W. Densmore Milton D. Jernigan, II
Flippin, Densmore, Morse, McNamee, Hosea, Jernigan & Kim, P.A.
Rutherford & Jessee 6411 Ivy Lane, Suite 200
300 First Campbell Square Greenbelt, Maryland 20770
Roanoke, Virginia 24011 (301) 441-2420
(540) 510-3000
<PAGE>
Dear Common Stock Shareholders:
You are cordially invited to attend the Special Meeting of
Shareholders of Commerce Bank Corporation ("Bank") on --------- --,
1997 at --:-- a.m., Eastern Time, at the main offices of the Bank at 9658
Baltimore Avenue, College Park, Maryland, 20740. 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 Share Exchange, dated as of July 3, 1997, by and
between the Bank and MainStreet BankGroup Incorporated ("BankGroup")
(the "Agreement") pursuant to which, among other things, Bank will
become a wholly owned subsidiary of BankGroup through an exchange of
all the issued and outstanding shares of Common Stock of Bank for the
right to receive Common Stock of BankGroup according to the Exchange
Ratio (the "Share Exchange") as detailed in the Agreement. In the Share
Exchange, each share of Common Stock of the Bank 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
Share Exchange, 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
Share Exchange and a proxy card. 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 Share Exchange
must be approved by the holders of at least 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.
- --------- ---, 1997 Very truly yours,
Alvin R. Maier
Chairman of the Board
<PAGE>
COMMERCE BANK CORPORATION
9658 Baltimore Avenue
College Park, Maryland 20740
301-220-1575
NOTICE OF SPECIAL MEETING OF COMMON STOCK SHAREHOLDERS
To Be Held on ---------- --, 1997
TO THE COMMON STOCK SHAREHOLDERS OF COMMERCE BANK
CORPORATION:
NOTICE IS HEREBY GIVEN that a Special Meeting of Common
Stock shareholders has been called by the Board of Directors of Commerce
Bank Corporation (the "Bank") and will be held at the main offices of the
Bank at 9658 Baltimore Avenue, College Park, Maryland, 20740, on
- -------- --, 1997 at --:-- a.m., Eastern Time for the purpose of
considering and voting upon the following matter:
Proposed Share Exchange. To consider and vote upon the
Agreement and Plan of Share Exchange (the "Agreement") dated as of July
3, 1997 providing for the acquisition of the Bank by MainStreet BankGroup
Incorporated through an exchange of all the issued and outstanding shares
of Common Stock of Bank for the right to receive Common Stock of
BankGroup according to the Exchange Ratio as detailed within the
Agreement (the "Share Exchange"). The Agreement is attached to the
accompanying Proxy Statement/Prospectus as Annex A.
Only those holders of shares of Common Stock of the Bank ("Bank
Common Stock") of record at the close of business on ---------- --,
1997 are entitled to notice of and to vote at the meeting.
College Park, Maryland Order of the Board of Directors,
- ------------- --, 1997
Candace M. Springmann
Secretary
<PAGE>
THE BOARD OF DIRECTORS OF THE BANK UNANIMOUSLY
RECOMMENDS THAT THE HOLDERS OF BANK COMMON
STOCK VOTE TO APPROVE THE SHARE EXCHANGE 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.
PROXY STATEMENT
FOR
SPECIAL MEETING OF COMMON STOCK SHAREHOLDERS
OF
COMMERCE BANK CORPORATION
To Be Held On ----------- --, 1997
---------------
PROSPECTUS OF
MAINSTREET BANKGROUP INCORPORATED
Common Stock
---------------
This Proxy Statement/Prospectus is being furnished to the holders
of Common Stock, par value $10 per share ("Bank Common Stock"), of
Commerce Bank Corporation, a Maryland banking corporation (the
"Bank"), in connection with the solicitation of proxies by the Board of
Directors of Bank (the "Bank Board") for use at the Special Meeting of
Bank Shareholders to be held at --:-- a.m., Eastern Time on --------- --,
1997, at the main offices of the Bank, located at 9658 Baltimore Avenue,
College Park, Maryland, 20740 (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 --------- --, 1997, will
consider and vote upon a proposal to approve the Agreement and Plan of
Share Exchange, dated as of July 3, 1997, by and between MainStreet
BankGroup Incorporated, a Virginia corporation ("BankGroup"), and Bank,
pursuant to which, among other things, Bank will become a wholly owned
subsidiary of BankGroup through the exchange of all issued and
outstanding shares of Common Stock of Bank for the right to receive
Common Stock of BankGroup according to the Exchange Ratio as detailed
<PAGE>
within the Agreement. Upon consummation of the Share Exchange, which
is expected to occur on or about November 30, 1997, or as soon thereafter as
is practicable, each outstanding share of Bank Common Stock (other than
Excluded Shares as defined in the Agreement) shall be converted into and
represent the right to receive a number of shares of BankGroup Common
Stock, determined by the Exchange Ratio, subject to adjustment as set forth
in the Agreement.
This Prospectus is also being furnished to the holder of Preferred
Stock of the Bank, par value $10 per share ("Bank Preferred Stock"), and to
holders of warrants for Bank Common Stock and to the holder of warrants
for Bank Preferred Stock ("Warrants") for review in connection with the
request by the Bank Board for their agreement to redeem their Preferred
Stock and Warrants for BankGroup Common Stock in accordance with the
terms of the Agreement. Upon the agreement of the holder of Bank
Preferred Stock, each outstanding share of Bank Preferred Stock shall be
converted into and represent the right to receive a number of shares of
BankGroup Common Stock determined by the Exchange Ratio, subject to
adjustment as set forth in the Agreement, and upon the agreement of the
holders of Bank Warrants each outstanding Bank Warrant (with the possible
exception of certain excluded Warrants) shall be converted into and
represent the right to receive a number of shares of BankGroup Common
Stock determined by the Warrant Redemption Ratio, subject to adjustment,
as detailed within the Agreement. For a description of the Agreement,
which is included herein as Annex A to this Proxy Statement/Prospectus, see
"The Share Exchange."
---------------
This Proxy Statement/Prospectus and the accompanying proxy card
are first being mailed to holders of Bank Common Stock shareholders of
Bank on or about ----------- --, 1997. The Prospectus is first being
mailed to the holder of Bank Preferred Stock and the holders of Warrants
on or about ---------------, 1997.
---------------
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 ----------- --, 1997.
<PAGE>
TABLE OF CONTENTS
Page
AVAILABLE INFORMATION
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
SUMMARY
Parties to the Share Exchange
Common Stock Shareholder Meeting
Vote Required; Record Date
Redemption of Bank Preferred Stock and Warrants
The Share Exchange
The Exchange Ratio
The Warrant Redemption Ratio
Recommendation of the Board of Directors of Bank;
Reasons for the Transaction
Effective Time of the Share Exchange
Rights of Appraisal
Opinion of Financial Advisor
Conditions to Consummation
Conduct of Business Pending the Transaction
Interests of Certain Persons in the Transaction
Resale of BankGroup Common Stock
Certain Federal Income Tax Consequences of the
Transaction
Market Prices Prior to Announcement of the Share
Exchange
Comparative Per Share Data
SELECTED FINANCIAL DATA
GENERAL INFORMATION
THE TRANSACTION
Opinion of Financial Advisor
Effective Time of the Share Exchange
Lock-Up Option
Determination of Exchange Ratio and Warrant
Redemption Ratio; Exchange of Bank
Common Stock for BankGroup Common Stock
Business of Bank Pending the Transaction
Conditions to Consummation of the Transaction
Termination
Accounting Treatment
Operations After the Share Exchange
Interests of Certain Persons in the Share Exchange
Certain Federal Income Tax Consequences
Rights of Appraisal
MAINSTREET BANKGROUP INCORPORATED
General
The Banks
Recent Development
PRICE RANGE OF BANKGROUP COMMON STOCK AND
DIVIDENDS
COMMERCE BANK CORPORATION
General
Competition
Regulation and Supervision
Properties
MARKET FOR AND DIVIDENDS PAID ON BANK COMMON STOCK
Market Information
Holders
Cash Dividends
OWNERSHIP BY CERTAIN BENEFICIAL OWNERS OF BANK STOCK
REGULATION AND SUPERVISION
Bank Holding Companies
Capital Requirements
Limits on Dividends and Other Payments
Subsidiaries
Deposit Insurance
Other Safety and Soundness Regulations
DESCRIPTION OF CAPITAL STOCK OF BANKGROUP
Preferred Stock
Common Stock
Rights
Virginia Stock Corporation Act
Reports to Shareholders
Transfer Agent
COMPARATIVE RIGHTS OF SHAREHOLDERS
Capitalization
Amendment of Articles or Bylaws
Required Shareholder Vote for Certain Actions
Director Nominations
Directors and Classes of Directors; Vacancies and
Removal of Directors
Anti-Takeover Provisions
Preemptive Rights
Assessment
Conversion; Redemption; Sinking Fund
Liquidation Rights
Dividends and Other Distributions
Indemnification
Shareholder Proposals
Shareholder Inspection Rights; Shareholder Lists
Shareholder Rights Plan
Dissenters' Rights
RESALE OF BANKGROUP COMMON STOCK
EXPERTS
LEGAL OPINIONS
OTHER MATTERS
ANNEX A -- Agreement and Plan of Share Exchange dated
July 3, 1997;
ANNEX B -- Fairness Opinion of Scott & Stringfellow, Inc.
dated September 17, 1997
<PAGE>
AVAILABLE INFORMATION
BankGroup is subject to the reporting and informational requirements
of the Securities Exchange Act of 1934 (the "Exchange Act") and in
accordance therewith files reports, proxy statements and other information
with the Securities and Exchange Commission (the "SEC"). Reports, proxy
statements and other information filed with the SEC can be inspected and
copied at the public reference facilities maintained by the SEC at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
Regional Offices located at Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60611-2511 or Seven World
Trade Center (13th Floor), New York, New York 10048. Copies of such
material can be obtained from the Public Reference Section of the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
SEC also maintains a web site that contains reports, proxy statements,
information statements and other information regarding registrants that file
electronically, including BankGroup, with the SEC at HTTP:\\www.SEC.GOV.
Such reports, proxy statements and other information also may be inspected
at the offices of the National Association of Securities Dealers, Inc.
located at 1735 K Street, N.W., Washington, D.C. 20006 for BankGroup.
As permitted by the Rules and Regulations of the SEC, this Proxy
Statement/Prospectus does not contain all the information set forth in
the Registration Statement on Form S-4, of which this Proxy Statement/
Prospectus is a part, and exhibits thereto (together with the amendments
thereto, the "Registration Statement"), which has been filed by BankGroup
with the SEC under the Securities Act of 1933 (the "1933 Act") with
respect to BankGroup Common Stock and to which reference is hereby
made.
No person has been authorized to give any information or to make any
representation other than as contained herein in connection with the offer
contained in this Proxy Statement/Prospectus, and if given or made, such
information or representation must not be relied upon as having been
authorized by BankGroup or Bank. This Proxy Statement/Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
securities other than the securities to which it relates, nor does it
constitute an offer to or solicitation of any person in any jurisdiction
to whom it would be unlawful to make such an offer or solicitation.
Neither the delivery of this Proxy Statement/ Prospectus nor the
distribution of any of the securities to which this Proxy Statement/
Prospectus relates shall, at any time, imply that the information herein
is correct as of any time subsequent to the date hereof.
1
<PAGE>
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, EXECUTIVE VICE PRESIDENT
AND SECRETARY, MAINSTREET BANKGROUP INCORPORATED, 200
EAST CHURCH STREET, MARTINSVILLE, VIRGINIA 24112,
(540) 666-3272. IN ORDER TO ENSURE TIMELY DELIVERY OF
THE DOCUMENTS, ANY REQUESTS SHOULD BE MADE BY
- -------------- ---, 1997.
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, 1996; (ii)
BankGroup's Quarterly Reports on Form 10-Q for the periods ended March
31, 1997 and June 30, 1997; (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 Reports on Form 8-K, filed July 8, 1997 and August
5, 1997.
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
Share Exchange between BankGroup and Bank, dated July 3, 1997, which
is attached to this Proxy Statement/Prospectus as Annex A.
2
<PAGE>
SUMMARY
The following summary is not intended to be a complete description of
all material facts regarding BankGroup, Bank and the matters to be
considered at the Bank Shareholder Meeting and by the holders of Bank
Preferred Stock and Bank Warrants 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 and Warrant holders are urged to read carefully all
such information.
Parties to the Share Exchange
BankGroup. The main office of BankGroup is located at 200 East
Church Street, Martinsville, Virginia 24112. See "MainStreet BankGroup
Incorporated."
Bank. The main office of Bank is located at 9658 Baltimore Avenue,
College Park, Maryland 20740. See "Commerce Bank Corporation."
Common Stock Shareholder Meeting
The Bank Common Stock Shareholder Meeting will be held on
- --------- --, 1997 at --:-- a.m., Eastern Time, at the main offices of the
Bank located at 9658 Baltimore Avenue, College Park, Maryland, 20740,
for the purpose of considering and voting upon a proposal to approve the
Agreement and such other business as may properly come before the
meeting.
Vote Required; Record Date
Only shareholders of Bank Common Stock of record at the close of
business on ----------- --, 1997 (the "Record Date") are entitled to vote
at the Bank Shareholder Meeting. The affirmative vote of the holders of at
least two-thirds of the Bank Common Stock shares outstanding on such date
is required to approve the Share Exchange. As of the Record Date, there
were 192,216 shares of Bank Common Stock entitled to be voted, held by
approximately 229 shareholders of record.
Directors of Bank and their affiliates beneficially owned, as of the
Record Date, 77,261 shares or approximately 40.195% of the 192,216
outstanding shares of Bank Common Stock. Directors of Bank have agreed
with BankGroup to recommend approval of the Share Exchange to
shareholders of Bank and to vote the shares of Bank Common Stock
beneficially owned by them, and with respect to which they have the power
3
<PAGE>
to vote, in favor of the Share Exchange. See "Ownership by Certain
Beneficial Owners of Bank Common Stock."
The Board of Directors of BankGroup has approved the Share Exchange
as well as the redemption of outstanding Bank Preferred Stock and
Warrants (the "Transaction"). See "Redemption of Bank Preferred Stock and
Warrants". Approval of the Transaction by BankGroup shareholders is
not required by applicable law or regulation.
Redemption of Bank Preferred Stock and Warrants
The Agreement provides that as part of the Transaction, the Bank shall
seek to obtain from the holders of Bank Preferred Stock and Warrants,
agreements with the Bank and for the benefit of BankGroup for such
holders to redeem their Bank Preferred Stock and Warrants for shares of
BankGroup Common Stock according to the Exchange Ratio and Warrant
Redemption Ratio, as applicable, and subject to adjustment as detailed
within the Agreement. It is a condition to the Transaction (waivable by
BankGroup) that the holder of Bank Preferred Stock and the holders of
Warrants (with the possible exception of Warrants held by Joseph O.
Hansen and any other Warrants as to which BankGroup shall have
executed an express written waiver meeting certain requirements) enter into
these agreements. Pursuant to the Agreement and if separately agreed by
the holder of the Bank Preferred Stock and by the holders of the Warrants
(with the possible exception of certain excluded Warrants) at the Effective
Time of the Share Exchange, as defined herein under the heading "The
Transaction -- Effective Time of Share Exchange," each share of Bank
Preferred Stock shall be redeemed and the holder thereof shall be entitled
to receive therefor that number of shares of BankGroup Common Stock
determined by the Exchange Ratio, subject to adjustment as set forth in the
Agreement and each outstanding Warrant (with the possible exception of
certain excluded Warrants) shall be redeemed and the holder thereof
entitled to receive therefor that number of shares of BankGroup
Common Stock determined by the Warrant Redemption Ratio, subject to
adjustment as set forth in the Agreement.
The Share Exchange
Pursuant to the Agreement, at the Effective Time of the Share Exchange
(as defined herein under the heading "The Transaction -- Effective
Time of the Share Exchange") Bank will become a wholly owned
subsidiary of BankGroup in accordance with the Agreement and Plan of
Share Exchange. At the Effective Time of the Share Exchange, each
outstanding share of Bank Common Stock (other than Excluded Shares as
defined in the Agreement) will be converted into the right to receive a
number of shares of BankGroup Common Stock, determined by the
Exchange Ratio, subject to adjustment as set forth in the Agreement.
4
<PAGE>
The Exchange Ratio
For the purpose of determining the Exchange Ratio, each share of Bank
Common Stock (and for purposes of redemption each share of Bank
Preferred Stock) has been valued at $52.00, the Common Stock Price Per
Share, sometimes referred to as "Exchange Consideration." The number of
shares of BankGroup Common Stock to be delivered for each share of Bank
Common Stock (and in consideration of the redemption of each share of
Bank Preferred Stock) will be determined by dividing $52.00 per share of
Bank Common Stock (or per share of Bank Preferred Stock, as the case
may be) by the average of the bid/ask price per share (the "Average BankGroup
Stock Price") for BankGroup Common Stock as reported on the Nasdaq
National Market for each of the 20 trading days preceding the later to occur
of (i) the shareholder approval(s) contemplated by Paragraph A of Article
VI of the Agreement and (ii) the financial institution regulatory approvals
(but not the statutory waiting periods) contemplated by Paragraph B of
Article VI of the Agreement (the "Exchange Ratio"). If such quotient is
less than 2.059, the Exchange Ratio shall be 2.059. If such quotient is
greater than 2.506, the Exchange Ratio shall be 2.506. 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 Transaction --
Determination of Exchange Ratio and Warrant Redemption Ratio; Exchange of
Bank Common Stock for BankGroup Common Stock."
The Warrant Redemption Ratio
Each Warrant subject to redemption in the Transaction shall, by
agreement between the holder and Bank, be redeemed at the Effective Time
and the holder shall be entitled to receive for each such Warrant that
number of shares of BankGroup Common Stock equal to the quotient
obtained by dividing $31.00 by the Average BankGroup Stock Price
("Warrant Redemption Ratio"). If the Warrant Redemption Ratio computed
in accordance with the immediately preceding sentence is less than 1.228,
the Warrant Redemption Ratio shall be 1.228 ("Lower Collar"); if the Warrant
Redemption Ratio computed in accordance with the immediately preceding
sentence is greater than 1.494, the Warrant Redemption Ratio shall be 1.494
("Upper Collar"); provided, however, that if the Warrant Redemption Ratio
determined in accordance with the immediately preceding clause equals either
the Lower Collar or the Upper Collar, the Warrant Redemption Ratio shall be
further adjusted, if necessary, so that shares of MSBC Common Stock to be
issued for each CB Warrant pursuant thereto shall be equal in value to the
difference obtained by subtracting $21.00 from the product of the Average
MSBC Share Price times the Exchange Ratio (as defined in Article II, Paragraph
B).
5
<PAGE>
Recommendation of the Board of Directors of Bank;
Reasons for the Transaction
The Transaction is intended to result in the Bank becoming a wholly
owned banking subsidiary of BankGroup. The Bank Board has determined
that the Transaction is in the best interests of Bank, its shareholders, and
Warrant holders. The Bank Board was influenced by a number of factors in
arriving at this determination, though it did not assign any specific or
relative weight to these factors in its consideration. Among the factors
considered were:
(i) The Bank Board believes that the Exchange Ratio provides a fair
price to Bank's shareholders for their shares of Bank Common and
Preferred Stock, and that the Warrant Redemption Ratio provides a
fair price to Bank's Warrant holders for their Warrants. Scott &
Stringfellow, Inc., Bank's financial advisor, concluded that the
consideration to be received by holders of Bank Common Stock,
the holder of Bank Preferred Stock and the Warrant holders in
the Transaction was fair to bank shareholders from a financial
point of view. See "The Transaction -- Opinion of Financial
Advisor."
(ii) The Share Exchange is anticipated to be tax free for federal
income tax purposes for the shareholders of Bank Common Stock and the
exchange of BankGroup Common Stock for Bank Preferred Stock is
anticipated to be tax free for federal income tax purposes for the
holder of Bank Preferred Stock (other than in respect to cash paid
in lieu of fractional shares).
(iii) The Transaction will broaden the range of financial services and
products which the Bank offers and enhance its ability to provide
credit and other financial products in its market area.
(iv) The Transaction will enhance the Bank's delivery system
capability, thus improving its services to its customers,
including enhancing response time to credit requests.
(v) The Transaction will strengthen the Bank's operational systems
and allow economies of scale to be achieved in administrative
and related functions which will be shared with other affiliates
of BankGroup.
(vi) The Bank Board's review of the provisions of the Agreement was
favorable.
(vii) The Transaction will allow Bank to continue its community bank
philosophy.
Based on these matters, and such other matters as the Bank Board
deemed relevant, the Bank Board unanimously adopted the Agreement as
being in the best interests of Bank, its shareholders and its Warrant
holders.
6
<PAGE>
THE BANK BOARD RECOMMENDS THAT BANK COMMON STOCK SHAREHOLDERS
VOTE FOR APPROVAL OF THE PROPOSAL.
Effective Time of the Share Exchange
The Share Exchange is expected to be consummated around November
30, 1997, or as soon thereafter as practicable. Subject to the terms and
conditions set forth herein, including receipt of all required regulatory
approvals, the Share Exchange shall become effective on the date and time
the Articles of Share Exchange are accepted by the Maryland Department
of Assessments and Taxation, (the "Share Exchange Effective Date"). Bank
and BankGroup each has the right, acting unilaterally, to terminate the
Agreement should the Share Exchange not be completed by December 31, 1997.
See "The Transaction -- Termination."
Rights of Appraisal
Under the applicable provisions of the Maryland General Corporation Law,
each holder of Bank Common and Preferred stock will be entitled to demand and
receive payment of the fair value of his shares, if he (i) prior to or at the
meeting, files with the Bank a written objection to the Share Exchange, (ii)
does not vote in favor of the Share Exchange, and (iii) within 20 days after
Articles of Share Exchange have been accepted for record by the Maryland
Department of Assessments and Taxation (the "Department"), makes written demand
on Bank for payment of his shares, stating the number of shares for which
payment is demanded. A direction in the stockholder's proxy to vote against
the Share Exchange will not in itself constitute a written objection or demand
that satisfies the requirements described above. Any stockholder who fails to
comply with the requirements described above will be bound by the terms of the
Share Exchange.
Bank will promptly deliver or mail to each objecting stockholder written
notice of the date of acceptance of the Articles of Share Exchange for record
by the Department. Bank may also deliver or mail to each objecting stockholder
a written offer to pay for his stock at a price deemed by Bank to be the fair
value thereof. Within 50 days after acceptance of the Articles of Share
Exchange for record by the Department, either Bank or any objecting stockholder
who has not received payment for his shares may petition the court in Prince
George's County, Maryland, for an appraisal to determine the fair value
of such shares. If the court finds that an objecting stockholder is entitled
to appraisal of his stock, the court will appoint three disinterested appraisers
to determine the fair market value of such shares on terms and conditions the
court determines proper, and such appraisers will, within 60 days after
appointment (or such longer period as the) court may direct), file with the
court and mail to each party to the proceeding their report stating their
conclusion as to the fair value of such shares. Within 15 days after the filing
of such report, any party may object to such report and request a hearing
thereon. The court will, upon motion of any party, enter an order either
confirming, modifying or rejecting such report and, if confirmed or modified,
enter judgment directing the time within which payment will be made. If the
appraisers' report is rejected, the court may determine the fair value of the
shares of the objecting stockholders or may remit the proceeding to the same or
other appraisers. Any judgment entered pursuant to a court proceeding will
include interest from the date of the stockholder's vote on the action to which
objection was made. Costs of the proceeding shall be determined by the court
and may be assessed against Bank or, under certain circumstances, the objecting
stockholder, or both.
7
<PAGE>
At any time after the filing of a petition for appraisal, the court may
require objecting stockholders to submit their certificates representing shares
to the clerk of the court for notation of the pendency of the appraisal
proceedings. A stockholder demanding payment for shares will not have the right
to receive any dividends or distributions payable to holders of record after the
close of business on the date of the stockholders' vote and will cease to have
any rights as a stockholder with respect to such shares except the right to
receive payment of the fair value thereof.
Opinion of Financial Advisor
Bank has received the opinion of Scott & Stringfellow, Inc. ("Scott &
Stringfellow") that the Exchange Consideration to be received by the
holders of Bank Common Stock, the holder of Preferred Stock and the Warrant
Holders pursuant to the terms of the Agreement is fair to Bank shareholders
from a financial point of view. Scott & Stringfellow's opinion is directed
only to the Exchange Consideration to be received by the holders of Bank
Common Stock, the holder of Preferred Stock and the Warrant Holders and does
not constitute a recommendation 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 Share
Exchange. For additional information concerning Scott & Stringfellow
and its opinion, see "The Transaction -- Opinion of Financial Advisor" and
the opinion of such firm attached as Annex B to this Proxy Statement/
Prospectus.
Conditions to Consummation
Consummation of the Share Exchange will be accomplished by a
statutory share exchange resulting in the acquisition of Bank by
BankGroup. The Share Exchange is contingent upon the approvals of the
Board of Governors of the Federal Reserve System (the "Federal Reserve
Board"), the Maryland Commission of Financial Regulation and the Bureau of
Financial Institutions of the Virginia State Corporation Commission
("Virginia Bank Regulator"), which approvals have been applied for and are
expected to be received. The Share Exchange is also subject to other usual
conditions. See "The Transaction -- Conditions to Consummation of
the Transaction."
Conduct of Business Pending the Transaction
Pursuant to the terms of the Agreement, Bank has agreed not to take
certain actions relating to the operation of its business pending
consummation of the Transaction, without the prior approval of
BankGroup, except as otherwise permitted by the Agreement. See "The
Transaction -- Business of Bank Pending the Transaction."
Interests of Certain Persons in the Transaction
Certain members of Bank's management and the Bank Board have
interests in the Transaction in addition to their interests as shareholders
of Bank generally. These include, among other things, indemnification and
directors' and officers' liability insurance for Bank directors and officers,
8
<PAGE>
eligibility of Bank employees for certain BankGroup employee benefits,
and redemption of Warrants held by directors and officers. See "The
Transaction -- Interests of Certain Persons in the Transaction."
Resale of BankGroup Common Stock
Shares of BankGroup Common Stock received in the Transaction will be
freely transferable by the holders thereof, except for those shares held by
those holders who may be deemed to be "affiliates" (generally including
directors, certain executive officers and 10% or greater shareholders) of
Bank or BankGroup under applicable federal securities laws. See "Resale
of BankGroup Common Stock."
Certain Federal Income Tax Consequences of the Transaction
BankGroup and Bank have received an opinion (the "Opinion") of
Flippin, Densmore, Morse, Rutherford & Jessee, counsel to BankGroup, to the
effect that for federal income tax purposes the proposed Share Exchange
and the proposed exchange of solely BankGroup Common Stock for Bank
Preferred Stock will qualify as a reorganization under 368(a)(1)(B) of the
Internal Revenue Code of 1986 (the "Code"), and, consequently, that no
gain or loss will be recognized by Bank Common or Preferred shareholders
on the receipt of BankGroup Common Stock solely in exchange for their
Bank Common or Preferred Stock. HOWEVER, THE OPINION ALSO STATES THAT
THE RECEIPT OF CASH BY A BANK SHAREHOLDER, INCLUDING THE RECEIPT OF
CASH BY A DISSENTING SHAREHOLDER AND THE RECEIPT OF CASH IN LIEU OF A
FRACTIONAL SHARE OF BANKGROUP COMMON STOCK, WILL BE A TAXABLE TRANSACTION
AND THE EXCHANGE OF BANK COMMON OF PREFERRED STOCK WARRANTS FOR BANKGROUP
COMMON STOCK WILL BE A TAXABLE TRANSACTION. The Opinion is based on
the assumption that the Transaction as it relates to Bank Preferred Stock
and Warrants will be treated for federal income tax purposes as an
exchange of such Preferred Stock and Warrants for solely BankGroup common
stock as part of or pursuant to a plan of reorganization. The Opinion
is also based on certain customary assumptions and representations
regarding, among other things, the lack of previous dealings between
BankGroup and Bank, the existing and future ownership of BankGroup Common
and Bank stock and Warrants and the future business plans for BankGroup.
The Opinion is not binding upon the Internal Revenue Service or any
tax authority or court. No assurance can be given that a position
contrary to that expressed in the Opinion will not be asserted by
the Internal Revenue Service or any other tax authority. The receipt
of substantially the same opinion as of the Share Exchange Effective
Date is a condition to the consummation of the Transaction.
For a more complete description of the federal income tax
consequences of the Transaction, see "The Transaction--Certain Federal
Income Tax Consequences." Due to the individual nature of the tax
consequences of the Transaction, it is recommended that each Bank
shareholder or Warrant holder consult his or her own tax advisor
concerning the tax consequences of the Transaction.
Market Prices Prior to Announcement of the Share Exchange
The following is information regarding the last reported closing
price per share of BankGroup Common Stock on the National Association
of Securities Dealers, Inc. National Market System on June 23, 1997, the
date immediately preceding delivery of an indication of interest to Bank on
June 24, 1997, which was superseded by the Agreement on July 3, 1997. Bank
Common Stock is not publicly traded. The last trade made was early 1996
for the price set forth below. Bank Preferred Stock and Warrants are not
publicly traded and there have been no known trades of Bank Preferred
Stock or Warrants. See "Market for and Dividends Paid on Bank Stock" for
information concerning recent market prices of Bank Stock.
9
<PAGE>
<TABLE>
<CAPTION> Bank
Historical Equivalent
------------------------ ------------
BankGroup Bank Pro Forma(a)
--------- ------- ------------
<S> <C> <C> <C>
Common Stock $25.75 $20.00 $52.00
</TABLE>
(a) The equivalent price for Bank Common Stock is the product of
multiplying an assumed Exchange Ratio of 2.019 shares of BankGroup
Common Stock times $25.75.
- ----------------
Comparative Per Share Data
The following table presents historical and pro forma per share data
for BankGroup, and historical and equivalent pro forma per share data
for Bank. The pro forma combined amounts give effect to an assumed
Exchange Ratio of 2.059 shares of BankGroup Common Stock for each
share of Bank Common Stock and Bank Preferred Stock and a Warrant
Redemption Ratio of 1.228 shares of BankGroup Common Stock for each
outstanding Warrant (assuming that all shares of Bank Preferred Stock and
Warrants are redeemed in the Transaction) (based on the last sale price of
BankGroup Common Stock on June 30, 1997 of $27.50). 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 2.059 and a Warrant
Redemption Ratio of 1.228 (ratably apportioned). As discussed in "The
Transaction -- Determination of Exchange Ratio and Warrant Redemption
Ratio; Exchange of Bank Common Stock for BankGroup Common Stock,"
the final Exchange Ratio and Warrant Redemption Ratio will be determined
based on the average of the bid/ask price per share for BankGroup
Common Stock as reported on the Nasdaq National Market for each of the
20 trading days preceding the later to occur of (i) the shareholder
approval(s) contemplated by paragraph A of Article VI of the Agreement
and (ii) the financial institution regulatory approvals (but not the
statutory waiting periods) contemplated by paragraph B of Article VI of the
Agreement. The following table is based on the assumption that all issued
and outstanding shares of Bank Common Stock and of Bank Preferred
Stock and all Warrants are converted into shares of BankGroup Common
Stock. The Transaction is reflected under the pooling of interests method
of accounting and proforma information is derived accordingly.
The per share data included in the following table should be read in
conjunction with the consolidated financial statements of BankGroup
incorporated by reference herein and the financial statements of Bank
included herein and the notes accompanying all such financial statements.
The date presented below are not necessarily indicative of the results
of operations which would have been obtained if the Transaction had
been consummated in the past or which may be obtainable in the future.
10
<PAGE>
COMPARATIVE PER SHARE DATA
<TABLE>
<CAPTION>
As Of Or For Six As Of Or For
Months Ended Years Ended
June 30, December 31,
---------------- -----------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Book Value GAAP Per Share at
Period End: (4)(6)
BankGroup Historical $10.15 $ 8.91 $ 9.56 $ 8.69 $ 6.97
Bank Historical 28.10 24.57 25.71 22.50 20.55
Proforma Combined per
BankGroup Common
Share (1) 10.17 8.94 9.58 8.69 7.03
Equivalent Proforma per
Bank Common Share 20.94 18.41 19.73 17.89 14.47
Cash Dividends Declared
per Share: (4)(6)
BankGroup Historical $ 0.28 $ 0.22 $ 0.49 $ 0.37 $ 0.31
Bank Common Historical - - 1.25 1.00 -
Bank Preferred
Historical - - 2.10 2.10 -
Proforma Combined per
BankGroup Common
Share (2) 0.27 0.20 0.49 0.35 0.30
Equivalent Proforma per Bank
Common Share 0.56 0.41 1.01 0.72 0.62
Net Income Per Share: (4)(5)(6)
BankGroup Historical $ 0.74 $ 0.69 $ 1.37 $ 1.21 $ 0.62
Bank Historical 2.16 1.96 4.47 3.24 2.27
Proforma Combined per
BankGroup Common
Share (3) 0.74 0.70 1.38 1.18 0.59
Equivalent Proforma per
Bank Common Share 1.52 1.44 2.84 2.43 1.21
</TABLE>
11
<PAGE>
(1) Proforma combined book value per BankGroup common share
represents combined common shareholders' equity amounts, divided by
proforma combined period-end common shares outstanding.
(2) Proforma combined dividends per BankGroup common share represent
combined common dividends declared, divided by proforma combined
average common shares outstanding.
(3) Proforma combined net income per BankGroup common share
represents combined net income available to common shareholders,
divided by proforma combined average common shares outstanding.
(4) BankGroup's and Bank's fiscal years end December 31. Bank's book
value per share is as of the dates presented, and net income and
dividend data reflect results for the periods presented.
(5) Net income per share data is based on fully diluted shares. Common
stock equivalents were utilized in the calculation of fully diluted
shares. The common stock equivalents for Bank were preferred stock,
preferred stock warrants and common stock warrants. The common
stock equivalents for BankGroup were common stock options. The
effect of common stock equivalents for Bank for the year ended
December 31, 1994 would have been antidilutive.
(6) All BankGroup share and per share data have been restated to reflect
a 2-for-1 stock split in the form of a stock dividend to shareholders
of record on March 4, 1996.
12
<PAGE>
SELECTED FINANCIAL DATA
MAINSTREET BANKGROUP INCORPORATED
AND COMMERCE BANK CORPORATION
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 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.
MAINSTREET BANKGROUP INCORPORATED
SELECTED FINANCIAL DATA
(In 000's except per share data)
<TABLE>
<CAPTION>
Six Months Ended Years Ended
June 30, December 31,
------------------- ----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Interest Income $ 52,881 $ 44,072 $ 93,302 $ 81,169 $ 70,077 $ 67,592 $ 68,203
Interest Expense 26,610 19,927 42,855 36,757 29,197 28,948 33,200
-------- -------- -------- -------- -------- -------- --------
Net Interest Income 26,271 24,145 50,447 44,412 40,880 38,644 35,003
Provision for Loan
Losses 1,843 1,423 3,276 1,419 3,091 1,690 2,643
-------- -------- -------- -------- -------- -------- --------
Net Interest Income
After Provision For
Loan Losses 24,428 22,722 47,171 42,993 37,789 36,954 32,360
Noninterest Income 6,827 5,703 11,028 8,526 1,724 6,991 7,050
Noninterest Expense 18,994 16,907 35,348 32,461 32,073 31,351 26,808
-------- -------- -------- -------- -------- -------- --------
Income Before
Income Taxes 12,261 11,518 22,851 19,058 7,440 12,594 12,602
Income Taxes 3,829 3,527 7,118 5,566 843 3,407 3,486
-------- -------- -------- -------- -------- -------- --------
Net Income $ 8,432 $ 7,991 $ 15,733 $ 13,492 $ 6,597 $ 9,187 $ 9,116
======== ======== ======== ======== ======== ======== ========
Per Share Data:
Net Income (Primary):(1) $ 0.74 $ 0.69 $ 1.37 $ 1.26 $ 0.63 $ 0.89 $ 0.89
Net Income (Fully
Diluted):(1) 0.74 0.69 1.37 1.21 0.62 0.85 0.85
Dividends Declared(1) 0.28 0.22 0.49 0.37 0.31 0.27 0.21
Book Value:(1) 10.15 8.91 9.56 8.69 6.97 7.43 6.78
Average Primary Shares
(Thousands):(1) 11,412 11,471 11,460 10,744 10,410 10,287 10,158
Average Fully Diluted
Shares
(Thousands)(1) 11,415 11,472 11,463 11,450 11,416 11,317 11,202
Selected Period-End
Balances:
Total Assets $1,431,344 $1,167,426 $1,288,837 $1,064,872 $942,385 $910,729 $860,006
Interest-Earning
Assets 1,352,305 1,113,168 1,211,169 1,010,044 880,312 857,082 813,101
13
<PAGE>
Loans (Net of
Unearned Income) 810,216 735,977 784,367 673,678 595,187 529,455 511,357
Allowance for Loan
Losses 10,749 9,729 10,195 9,036 9,160 9,035 9,166
Total Deposits 914,400 861,595 886,519 845,577 830,597 796,775 753,137
Long-Term Debt
(Includes 7%
Subordinated
Debentures) 73,284 70,857 71,029 929 8,918 9,194 9,455
Common Shareholders'
Equity 115,629 101,817 108,476 98,657 71,994 76,055 68,912
Total Shareholders'
Equity 115,629 101,817 108,476 98,657 71,994 76,055 68,912
Average Balances:
Total Assets $1,357,830 $1,088,971 $1,154,019 $995,896 $929,298 $880,050 $818,780
Interest-Earning
Assets 1,285,555 1,037,884 1,099,295 941,810 872,662 832,625 777,851
Loans (Net of
Unearned Income) 795,910 696,389 730,753 627,166 562,272 530,763 503,178
Allowance for Loan
Losses 10,637 9,368 9,648 9,176 9,106 9,498 9,700
Total Deposits 901,267 851,275 862,806 839,479 818,721 773,546 720,797
Long-Term Debt
(Includes 7%
Subordinated
Debentures) 60,236 46,393 58,678 7,398 9,167 9,394 9,463
Common Shareholders'
Equity 112,852 102,251 104,793 83,960 75,617 73,560 66,205
Total Shareholders'
Equity 112,852 102,251 104,793 83,960 75,617 73,560 66,205
Ratios:
Return on Average Assets 1.25% 1.47% 1.36% 1.35% 0.71% 1.04% 1.11%
Return on Average
Shareholders' Equity 15.07 15.67 15.01 16.07 8.72 12.49 13.77
Return on Average Common
Shareholders' Equity 15.07 15.67 15.01 16.07 8.72 12.49 13.77
Net Interest
Margin(4) 4.21 4.79 4.68 4.86 4.85 4.82 4.69
Total Shareholders'
Equity to Total Assets
at Period End 8.08 8.72 8.42 9.26 7.64 8.35 8.01
Credit Quality Ratios:
Net Charge-Offs to
Average Loans, Net
of Unearned Income 0.33% 0.21% 0.29% 0.25% 0.53% 0.34% 0.50%
Allowance for Loan Losses
to Loans at Period End,
Net of Unearned Income 1.33 1.32 1.30 1.34 1.54 1.71 1.79
Allowance for Loan Losses
to Nonperforming Loans
at Period End 208.60 239.34 166.15 156.36 196.40 175.92 121.66
Allowance for Loan Losses
to Nonperforming
Assets at
Period End(3) 179.18 190.47 141.40 117.81 127.03 88.52 67.80
Capital ratios at
period end:
Tier I Risk-Adjusted
Capital 13.64% 14.71% 13.58% 15.04% 13.19% 12.83% 12.34%
Total Risk-Adjusted
Capital 14.89 15.96 14.83 16.29 15.93 15.65 15.29
Tier I Leverage 7.98 8.94 8.37 9.26 8.35 8.24 7.85
</TABLE>
14
<PAGE>
COMMERCE BANK
SELECTED FINANCIAL DATA
(In 000's except per share data)
<TABLE>
<CAPTION>
Six Months Ended Years Ended
June 30, December 31,
------------------ -----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Interest Income $ 2,438 $ 2,418 $ 4,899 $ 4,245 $ 3,279 $ 2,465 $ 2,173
Interest Expense 924 988 1,920 1,647 1,113 889 919
------- ------- ------- ------- ------- ------- -------
Net Interest
Income 1,514 1,430 2,979 2,598 2,166 1,576 1,254
Provision for
Loan Losses 30 138 175 306 385 425 224
------- ------- ------- ------- ------- ------- -------
Net Interest
Income After
Provison For
Loan Losses 1,484 1,292 2,804 2,292 1,781 1,151 1,030
Noninterest
Income 347 281 589 543 463 282 189
Noninterest
Expense 1,047 910 1,906 1,829 1,495 1,198 1,067
------- ------- ------- ------- ------- ------- -------
Income Before
Income Taxes 784 663 1,487 1,006 749 235 152
Income Taxes 326 265 567 368 314 78 47
------- ------- ------- ------- ------- ------- -------
Income Before
Extraordinary Item
and Cumulative
Effect Of
Accounting
Change 458 398 920 638 435 157 105
Cumulative Effect
of Accounting
Change - - - - - 318 47
------- ------- ------- ------- ------- ------- -------
Net Income $ 458 $ 398 $ 920 $ 638 $ 435 $ 475 $ 152
======= ======= ======= ======= ======= ======= =======
Per Share Data:
Income Before
Extraordinary Item
and Cumulative
Effect Of Accounting
Change (Primary)(2) $ 2.18 $ 1.97 $ 4.51 $ 3.26 $ 2.27 $ 0.82 $ 0.55
Income Before
Extraordinary Item
and Cumulative
Effect Of Accounting
Change (Fully Diluted)(2) 2.16 1.96 4.47 3.24 2.27 0.82 0.55
Net Income (Primary)(2) 2.18 1.97 4.51 3.26 2.27 2.47 0.79
Net Income (Fully
Diluted)(2) 2.16 1.96 4.47 3.24 2.27 2.47 0.79
Common Dividends Declared - - 1.25 1.00 - - -
Preferred Dividends
Declared - - 2.10 2.10 - - -
Book Value 28.10 24.57 25.71 22.50 20.55 18.29 15.82
Average Primary Shares
(Thousands)(2) 210 202 204 196 192 192 192
Average Fully Diluted
Shares (Thousands)(2) 212 203 206 197 192 192 192
15
<PAGE>
Selected Period-End
Balances:
Total Assets $74,520 $63,439 $69,290 $64,728 $47,784 $43,800 $33,552
Interest-Earning Assets 65,877 59,537 63,228 60,179 43,835 40,540 32,237
Loans (Net of Unearned
Income) 44,628 42,892 45,612 40,775 37,784 27,400 24,326
Allowance for Loan Losses 700 707 708 569 387 294 266
Total Deposits 58,691 50,278 54,172 53,200 37,138 34,638 26,941
Common Shareholders' Equity 5,401 4,722 4,942 4,324 3,950 3,515 3,040
Total Shareholders' Equity 6,052 5,373 5,593 4,975 4,601 4,166 3,691
Average Balances:
Total Assets $65,184 $63,465 $64,734 $52,270 $43,673 $35,770 $29,577
Interest-Earning Assets 60,080 58,685 59,942 47,645 40,345 33,476 28,019
Loans (Net of Unearned
Income) 44,513 41,821 42,499 39,056 33,373 25,429 20,858
Allowance for Loan Losses 707 639 679 492 371 304 246
Total Deposits 52,401 50,246 50,852 40,620 34,309 28,737 23,213
Common Shareholders' Equity 5,238 4,559 4,761 4,349 3,720 3,149 2,971
Total Shareholders' Equity 5,889 5,210 5,412 5,000 4,371 3,800 3,622
Ratios:
Return on
Average Total Assets 1.42% 1.26% 1.42% 1.22% 1.00% 1.33% 0.51%
Return on Average
Shareholders' Equity 15.68 15.32 17.01 12.76 9.96 12.51 4.20
Return on Average Common
Shareholders' Equity 17.63 17.51 19.32 14.67 11.69 15.08 5.12
Net Interest Margin(4) 5.08 4.89 4.97 5.45 5.37 4.71 4.48
Total Shareholders' Equity
to Total Assets at
Period End 8.12 8.47 8.07 7.69 9.63 9.51 11.00
Credit Quality Ratios:
Net Charge-Offs to
Average Loans, Net of
Unearned Income 0.17% -- 0.09% 0.32% 0.87% 1.56% 0.72%
Allowance for Loan Losses
to Loans, Net of Unearned
Income, at Period End 1.57 1.65 1.55 1.40 1.02 1.07 1.10
Allowance for Loan Losses
to Nonperforming Loans,
at Period End 92.84 2,142.42 327.62 499.16 489.70 139.87 88.83
Allowance for Loan Losses
to Nonperforming Assets
at Period End(3) 92.84 2,142.42 327.62 499.16 489.70 139.87 88.83
Capital ratios at
period end:
Tier I Risk-Adjusted Capital 13.22% 12.84% 12.43% 12.32% 12.72% 14.22% 14.83%
Total Risk-Adjusted Capital 14.47 14.09 13.68 13.57 13.79 15.22 15.89
Tier I Leverage 8.13 8.48 8.08 7.70 9.63 9.51 11.09
</TABLE>
16
<PAGE>
Notes to Selected Financial Data-
MainStreet BankGroup Incorporated and Commerce Bank
1. Per Share Data for 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. The effect of common stock equivalents in the calculation of average
shares outstanding and earnings per share for Bank would have been
antidilutive for the years ending December 31, 1994, 1993 and 1992.
3. Nonperforming assets include nonaccrual loans, loans past due 90 days
and greater, other real estate and other repossessed assets.
4. Net interest margin is calculated on a taxable equivalent basis,
using a tax rate of 35% for 1996 and 34% for all preceding years for
BankGroup. Bank did not have any nontaxable income for the years
presented.
COMMERCE BANK CORPORATION
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Six months ended June 30, 1997, compared with
six months ended June 30, 1996
Overview
Bank reported year-to-date earnings at June 30, 1997 of $458 thousand
which compares to $398 thousand at June 30, 1996, an increase of $60
thousand, or 15.08%. These 1997 earnings produced a return on average
assets and a return on average equity of 1.42% and 15.68%, respectively.
The 1996 year-to-date earnings equated to a return on average assets and a
return on average equity of 1.26% and 15.32%, respectively. Net interest
income and noninterest income increased over 1996 numbers and were
offset somewhat by increases in noninterest expense. The provision for
loan losses declined significantly from the same period in 1996.
Net income for Bank in the second quarter of 1997 was $215 thousand
compared to $218 thousand in the second quarter of 1996, a decrease of $3
thousand, or 1.38%. The 1997 quarterly income translates into a return on
17
<PAGE>
average assets and a return on average equity of 1.34% and 14.50%,
respectively. The 1996 income for the same period produced a return on
average assets and a return on average equity of 1.12% and 13.62%,
respectively.
Net Interest Income
Net interest income was $1.5 million year-to-date June 30, 1997, compared
to $1.4 million for the same period in 1996, an increase of 5.87%. Total
interest income increased $20 thousand over prior year levels, while interest
expense declined $64 thousand. The net interest margin for the year-to-date
earnings in 1997 and 1996 was 5.08% and 4.90%, respectively.
Declines in the average volume NOW accounts, $312 thousand, jumbo
certificates of deposit, $353 thousand, and consumer certificates of deposit
$1.2 million, were offset in part by an increase in the volume of money
market deposits, $1.3 million, resulting in a net decline of interest
expenses related to deposits of $42 thousand. The volume of repurchase
agreements also declined from the same period in 1996, approximately $1.2
million, resulting in a decline in the related interest expense of
approximately $24 thousand.
Net interest income for the second quarter of 1997 was $768 thousand in
comparison to $739 thousand for the same period in 1996. The largest
component of the increased net income was a result of the decline in
interest expense on repurchase agreements of $25 thousand for the quarter.
Net interest margin for the second quarter of 1997 was 5.16% compared to
4.99% for the second quarter of 1996.
Provision for Loan Losses
The provision for loan losses for year-to-date June 30, 1997 was $30
thousand compared to $138 thousand June 30, 1996, a decline of $108
thousand or 78.26%. This year-to-date decline was divided between the
first and second quarters, with $75 thousand in the first quarter and $33
thousand in the second. The decline was primarily due to the reserve being
at an adequate level.
Noninterest Income
Total noninterest income year-to-date was $347 thousand compared to $281
thousand for the year to date 1996, an increase of $66 thousand, or 23.49%.
The largest part of this variance was split between service charges on
deposit accounts, $39 thousand, and collection fees, $24 thousand.
18
<PAGE>
Noninterest income for the second quarter of 1997 was $184 thousand
compared to $142 thousand for the same period in 1996, an increase of $42
thousand, or $29.58%. This increase was also within service charges on
deposit accounts and other fee income with variances of $28 thousand and
$14 thousand, respectively.
Noninterest Expense
Total noninterest expense year-to-date June 30, 1997 was $1,047 thousand
compared to $910 thousand for the same period in 1996, an increase of
$137 thousand, or 15.05%. Salaries and employee benefits accounted for
$83 thousand of the increase. The balance of the increase over 1996 could
be found within legal fees and certain acquisition costs which had variances
of $34 thousand and $29 thousand, respectively. These acquisition costs are
related to the proposed transaction with BankGroup Incorporated.
Total noninterest expense for the second quarter of 1997 was $544 thousand
compared to $454 thousand for the same period in 1996, an increase of $90
thousand, or 19.82%. This increase can be found in the salaries and
employee benefits category of $44 thousand, legal fees of $23 thousand,
and acquisition fees, $29 thousand.
June 30, 1997 vs. December 31, 1996
Balance Sheet
Total assets at June 30, 1997 were $74.5 million, an increase of $5.2 million
or 7.55%, from year end December 31, 1996. The largest components of
this variance is within Cash and Due from Banks and Fed Funds Sold, with
increases of $2.5 million and $5.2 million, respectively.
Loans, net of unearned income at June 30, 1997 were $44.6 million, a
decline of $1.0 million from year end 1996. This change was found
primarily in the Commercial loan category, with a volume decrease of $1.1
million from year end.
Total deposits at June 30, 1997 were $ 58.7 million compared to $54.2
million at December 31, 1996, an increase of $4.5 million or 8.34%. The
variances from year end were within the demand deposit category with a
positive variance of $5.0 million. There was also a positive variance of
$2.5 million in the time deposits greater than $100 thousand category, with
an equal offset within the money market deposits. Other time deposits
declined approximately $1.5 million from December 31, 1996.
Nonperforming assets, consisting entirely of nonperforming loans, were
$754 thousand at June 30, 1997, compared to $216 thousand at December
19
<PAGE>
31, 1996. Nonaccrual loans comprised $681 thousand of the nonperforming
loans at June 30, 1997 compared to $216 thousand at December 31, 1996.
The net charge-off ratio at June 30, 1997 was .17%, up from .09% at
December 31, 1996. The allowance for loan losses to actual loans, net of
unearned income, was 1.57% and 1.55% at June 30, 1997 and December
31, 1996, respectively.
Total Shareholders' Equity
Total shareholders' equity, excluding unrealized gains (losses) on securities,
at June 30, 1997 was $6.1 million, an increase of $.5 million from year-end
December 31, 1996. At June 30, 1997, the Tier I Leverage and Total Risk-
Based Capital ratios were 8.13% and 14.47%, respectively. The same ratios
at December 31, 1996 were 8.08% and 13.68%, respectively.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Year ended December 31, 1996 compared with
year ended December 31, 1995
Overview
Net income for 1996 was $.9 million in comparison to $.6 million in 1995,
an increase of $.3 million, or 44.28%. The return on average assets and
return on average equity for 1996 were 1.42% and 17.01%, respectively.
For the comparable period in 1995, the return on average assets and the
return on average equity were 1.22% and 12.76%, respectively.
Net Interest Income
Net interest income for 1996 was $3.0 million in comparison to $2.6 million
in 1995, an increase of $.4 million, or 14.67%. Both interest income and
interest expense increased. Average interest earning assets increased $12.3
million while average interest bearing deposits increased $7.6 million and
average short term borrowings increased $1.9 million. The net interest
margin declined to 4.97% in 1996 compared to 5.45% in 1995 because of
an increase of 16.58% in interest expense versus a 15.41% increase in
interest income. Of the $12.3 million increase in interest earning assets,
only $3.4 million was in loan volume. The remainder of the increase in
interest income was from lower earning federal funds sold and securities.
This shift from loans to lower interest earning deposits was a primary
factor in the decline of the net interest margin. Some of the increase
in interest expense resulted from the shift in deposits from lower
yielding accounts to higher yielding certificates of deposit along
with additional borrowings.
20
<PAGE>
Provision for Loan Losses
A provision for loan losses is charged to earnings for the purpose of
establishing an allowance for loan losses. Losses are, in turn, charged to
this allowance rather than being reported as a direct expense. The
provision for loan losses for 1996 was $175 thousand compared to $306
thousand in 1995, a decrease of 42.81%. The 1995 expense was due to
increased volumes and charge-offs.
Noninterest Income
Total noninterest income for 1996 was $589 thousand compared to $543
thousand in 1995, an increase of 8.52%. The increase in noninterest income
was split between increases in deposit accounts along with other
miscellaneous fee income.
Noninterest Expense
Total noninterest expense for 1996 increased $77.7 thousand , or 4.25%,
over the 1995 expense. Salaries and employee benefits were the largest
categories of increase at $144.5 thousand, or 15.14% over 1995 expense.
Occupancy expense also increased in 1996 over 1995 expense $15.9
thousand, or 6.68%. These expenses were offset by declines in FDIC and
state assessments along with other miscellaneous expenses.
Balance Sheet
Total assets at December 31, 1996 were $69.3 million, an increase of $4.6
million, or 7.05% over total assets of $64.7 million at December 31, 1995.
Federal funds sold at December 31, 1996 were $6.1 million, a decline of
$3.9 million from the $10.0 million at December 31, 1995. Average
federal funds sold, however, increased $4.3 million to $6.9 million for the
1996 year in comparison to 1995.
Investment Securities
Period end total securities at December 31, 1996 increased $2.1 million, or
22.45%, over the same period in 1995. At year end 1996, $4.0 million of
securities were in the available for sale category and $7.5 million were in
the held to maturity category. At December 31, 1995, $4.5 million of
securities were in the available for sale category and $4.9 million were in
the held to maturity category. The increase between the two years has been
in the held to maturity category. All securities at December 31, 1996 and
1995 were U. S. Government securities and Federal Reserve Bank stock.
21
<PAGE>
Loans and the Allowance for Loan Losses
Loans, net of unearned income at year-end 1996 were $45.6 million, an
increase of $4.8 million, or 11.86%. Average loans, net of unearned
income increased $3.4 million, or 8.82% over 1995. During 1996, the ratio
of net charge-offs to average loans, net of unearned income declined to
.09% compared to .32% in 1995. At year-end 1996, the allowance for loan
losses to nonperforming loans was 327.62% compared to 499.16% at year-
end 1995. The allowance for loan losses to period-end loans at December
31, 1996 and 1995 was 1.55% and 1.40%, 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 1996 were $716 thousand compared to $736
thousand at year-end 1995, a decline of $20 thousand, or 2.79%. This was
primarily due to the decline in bank premises and equipment, due to
depreciation, along with accrued interest on securities and loans.
Deposits
Total deposits at December 31, 1996 were $54.2 million compared to $53.2
million at December 31, 1995, an increase of $1.0 million, or 1.83%.
Average deposits for 1996, however, increased $10.2 million over 1995
average volumes and were $50.8 million. Interest bearing deposits
comprised $7.6 million of the year to year increase. These increases were
attributed to bank growth.
Borrowings
Borrowings at December 31, 1996 were $9.3 million compared to $6.0
million at December 31, 1995, an increase of $3.3 million, or 55.10%.
These borrowings consisted of demand repurchase agreements and U. S.
Treasury demand notes of $8.8 million and $.5 million, respectively, at
December 31, 1996. At December 31, 1995, the demand repurchase
agreements and U. S. Treasury demand notes were $5.5 million and $.5
million, respectively.
22
<PAGE>
Shareholders' Equity
Shareholders' equity at December 31, 1996 was $5.6 million compared to
$5.0 million at year-end 1995. Unrealized losses, net of tax, on securities
were $4 thousand at year-end 1996 compared to $7 thousand at year-end
1995.
Effects of Inflation
Over the past few years, the rate of inflation has been relatively mild.
Loan and deposit rates normally increase along with inflation. Financial
statements presented reflect these effects.
GENERAL INFORMATION
This Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies by the Bank Board, to be voted at the Bank
Shareholder Meeting to be held at the main offices of the Bank located at
9658 Baltimore Avenue, College Park, Maryland, 20740, on ------------ --,
1997, at --:-- a.m., Eastern Time and at any adjournment thereof. At the
Bank Shareholder Meeting, shareholders will consider and vote upon the
Agreement, pursuant to which BankGroup will acquire Bank through a
Share Exchange. Only shareholders of record of Bank at the close of
business on ------------- --, 1997 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
- ----------- --, 1997.
Holders of Bank Common Stock are entitled to one vote for each share
standing in such holder's name on the books of Bank. The affirmative vote
of the holders of at least two-thirds of the outstanding shares entitled to
vote is required for approval of the Share Exchange.
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.
23
<PAGE>
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 Share Exchange. 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 Alvin R. Maier,
Chairman, Commerce Bank, 9658 Baltimore Avenue, College Park,
Maryland 20740; (ii) submitting a duly executed proxy bearing a later date;
or (iii) appearing at the Bank Shareholder Meeting and notifying the
Secretary of his or her intention to vote in person. Attendance at the
Special Meeting will not, in and of itself, constitute revocation of a proxy.
Proxies solicited by this Proxy Statement/Prospectus may be exercised only
at the Bank Shareholder Meeting and any adjournment of the Bank
Shareholder Meeting and will not be used for any other meeting.
The accompanying proxy is being solicited by the Bank Board. The cost
of such solicitation will be borne by Bank. In addition to the use of the
mails, proxies may be solicited by personal interview, telephone or telegram
by directors, officers and employees of Bank or BankGroup without
additional compensation. Arrangements may also be made with brokerage
houses and custodians, nominees and fiduciaries for forwarding of
solicitation material to beneficial owners of stock held of record by such
persons and obtaining proxies from the beneficial owners of Bank Common
Stock entitled to vote at the Special Meeting, and Bank will reimburse such
persons for their reasonable expenses incurred in doing so.
Under Maryland law, the purpose of the meeting must be included in the
notice of the special meeting.
This Prospectus will also be used by the Bank Board in their
solicitation of agreements by the holders of all Bank Preferred Stock and
Bank Warrants to redeem their Preferred Stock and Warrants for
BankGroup Common Stock according to the ratios set forth within
the Agreement. See "Redemption of Bank Preferred Stock and Warrants."
As of the Record Date, directors and executive officers of Bank and
their affiliates beneficially owned a total of 77,836 shares (representing
40.494% of the outstanding shares of Bank Common Stock), and the
directors of BankGroup owned no Bank Common Stock. Bank directors have
agreed with BankGroup to recommend that Bank shareholders vote in favor of
the Share Exchange 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 Share Exchange. See "Ownership of Certain Beneficial Owners of
Bank Stock."
For the reasons described herein, the Bank Board has adopted the
Agreement, believes the Transaction is in the best interest of Bank, its
24
<PAGE>
shareholders and Warrant holders and recommends that Common Stock
shareholders of Bank vote FOR approval of the Agreement. The Bank
Board additionally will seek to obtain agreements in compliance with the
requirements of the Agreement from holders of Bank Preferred Stock and
Warrants for the redemption of their Bank Preferred Stock and Warrants.
Upon redemption, holders of Bank Preferred Stock and Warrants shall
receive BankGroup Common Stock according to the Exchange Ratio (as to
shares of Bank Preferred Stock) and Warrant Redemption Ratio (as to
Warrants) set forth in the Agreement. In making its recommendation, the
Bank Board considered, among other things, the opinion of Scott &
Stringfellow that the Exchange Consideration was fair to Bank
shareholders and warrant holders from a financial point of view. See
"The Transaction -- Recommendations of the Board of Directors of Bank;
Reasons for the Transaction," and "Opinion of Financial Advisor."
The address of BankGroup is 200 East Church Street, Martinsville,
Virginia 24112, and its telephone number is (540) 666-6724. The address
of Bank is 9658 Baltimore Avenue, College Park, Maryland 20740 and its
telephone number is 301-220-1575.
THE TRANSACTION
The detailed terms of the Transaction are contained in the
Agreement and Plan of Share Exchange, attached as Annex A to this Proxy
Statement/Prospectus. The following discussion describes the more
important aspects of the Transaction and the terms of the Agreement.
This description is not complete and is qualified by reference to the
Agreement which is incorporated by reference herein.
Opinion of Financial Advisor
Bank has retained Scott & Stringfellow to act as its financial advisor
in connection with rendering a fairness opinion with respect to the
Transaction. Scott & Stringfellow is a full service investment banking and
brokerage firm headquartered in Richmond, Virginia, that provides a broad
array of services to corporations, financial institutions, individuals and
state and local governments. The Financial Institutions Group of Scott &
Stringfellow actively works with financial institutions in Virginia, North
Carolina, the District of Columbia, Maryland, and West Virginia on these
and other matters. As part of its investment banking practice, it is
continually engaged in the valuation of financial institutions and their
securities in connection with mergers and acquisitions, negotiated
underwritings, and secondary distributions of listed and unlisted securities.
Scott & Stringfellow was selected by the Bank Board based upon its
expertise and reputation in providing valuation and merger and acquisition
and advisory services to financial institutions. Scott & Stringfellow's
analysts follow and publish reports about Bank and BankGroup.
25
<PAGE>
On October 14, 1997, Scott & Stringfellow delivered a written opinion
("Opinion") to the Bank Board that as of such date, the Exchange
Consideration to be received by Bank Common Stock shareholders, by the
Bank Preferred Stock Shareholders and by the Warrant holders in
BankGroup Common Stock was fair to the Bank Common Stock shareholders
from a financial point of view. 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 B to this Proxy Statement/Prospectus and is
incorporated herein by reference. Bank shareholders are urged to read the
Opinion in its entirety. The following is a summary of certain analyses
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, 1996; (iv) the Bank's unaudited financial statements
for the quarters ended June 30, 1997 and 1996, 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 Maryland in
recent years; (vii) BankGroup's annual reports to shareholders and its
audited financial statements for the three fiscal years ended December 31,
1996; and (viii) BankGroup's unaudited financial statements for the quarters
ended June 30, 1997 and 1996 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 Share
Exchange, the reasons and basis for the Share Exchange, results of
regulatory examinations, and the business and future prospects of the Bank
and BankGroup individually and as a 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
26
<PAGE>
accuracy and completeness of all of the financial and other information
reviewed by it and discussed with it for purposes of its Opinion. With
respect to financial forecasts reviewed by Scott & Stringfellow in rendering
its Opinion, Scott & Stringfellow assumed that such financial forecasts
were reasonably prepared on the basis reflecting the best currently available
estimates and judgment of the managements of the Bank and BankGroup as
to the future financial performance of the Bank and BankGroup,
respectively. Scott & Stringfellow did not make an independent evaluation
or appraisal of the assets or liabilities of the Bank and BankGroup nor was
it furnished with any such appraisal.
Scott & Stringfellow evaluated the financial terms of the Transaction
using standard valuation methods, including a discounted cash flow
analysis, a market comparable analysis, a comparable acquisition analysis,
and a dilution analysis.
Discounted Cash Flow Analysis. Scott & Stringfellow performed a
discounted cash flow analysis under various projections to estimate the fair
market value of Bank Common Stock. Among other things, Scott &
Stringfellow considered a range of asset and earnings growth for the Bank
of between 4.00% and 6.00% and a required equity capital level of 8.00%
of total assets. 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 $37.50 to $50.00 per share for Bank Common
Stock. These values compare to the value of $52.00 and $60.74 per share of
consideration for each share of Bank Common Stock as of the date of the
Agreement and October 9, 1997, respectively. 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 12 bank and bank holding company
mergers and acquisitions in Maryland since June 30, 1994, representing all
such transactions known to Scott & Stringfellow to have occurred during
this period with the proposed Share Exchange 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 Maryland since June 30, 1994, other than
27
<PAGE>
the Bank Merger, the average price to tangible book value in these
transactions is 2.19x, compared with 2.45x for the Share Exchange; the
average price to earnings ratio was 21.27x, compared with 15.20x for the
Share Exchange; the average deal price to deposits was 23.02%, compared
with 26.00% for the Share Exchange; the average deal price to assets was
19.63%, compared with 20.13% for the Share Exchange; and the average
tangible book premium to core deposits was 13.51%, compared to 21.29%
for the Share Exchange. For purposes of computing the information with
respect to the Share Exchange, $52.00 per share of consideration for each
share of Bank Common Stock was used.
Analysis of BankGroup and Bank Peer Group. Scott & Stringfellow
analyzed the performance and financial condition of BankGroup relative to
the Bank Peer Group consisting of Crestar Financial Corp., F&M National
Corp., First Virginia Banks, Mason-Dixon Bankshares, Mercantile Bankshares,
Provident Bankshares and Union Bankshares. Certain financial information
compared was, among other things, information relating to tangible equity
to assets, loans to deposits, net interest margin, nonperforming assets,
total assets, and efficiency ratio. Additional valuation information compared
for the trailing twelve month period ended June 30, 1997, and stock prices as
of October 9, 1997, was (i) price to tangible book value ratio which was 2.9x
for BankGroup, compared to an average of 2.46x for the Bank Peer Group, (ii)
price to last twelve months earnings ratio which was 20.6x for BankGroup,
compared to an average of 9.3x for the Bank Peer Group; (iii) return on
average assets which was 1.25% for BankGroup, compared to an average of 1.25%
for the Bank Peer Group; (iv) return on average equity which was 14.69% for
BankGroup, compared to an average of 13.36% for the Bank Peer Group;
and (v) a dividend yield of 1.92% for BankGroup, compared to an average
of 2.19% for the Bank Peer Group. Overall, in the opinion of Scott &
Stringfellow, BankGroup's operating performance and financial condition
were better than the Bank Peer Group average and BankGroup's market
value was reasonable when compared to the Bank Peer Group.
Dilution Analysis. Based upon publicly available financial information
on the Bank and BankGroup, Scott & Stringfellow considered the effect of
the transaction on BankGroup and Bank. The immediate effect on
BankGroup was to increase earnings per share by $0.02 or 0.33% and to
increase book value per share by $0.02 or 0.26%. The effect on Bank under
the same assumptions results in dividends per share of $1.15 and to
increase the July 2, 1997 market value of Bank of $20.00 per share to
$52.00 and $60.74, as of the date of the Agreement and October 9, 1997,
respectively. 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 and market value per share of BankGroup
Common Stock to be received by Bank shareholders would represent an
increase, after giving effect of the exchange ratio. See "Summary --
Comparative Per Share Data."
28
<PAGE>
The summary set forth above includes the material factors considered,
but does not purport to be a complete description of the presentation by
Scott & Stringfellow to the Bank Board or of the analyses performed by
Scott & Stringfellow. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the particular
circumstances and, therefor, such an opinion is not readily susceptible to
summary description. Accordingly, notwithstanding the separate factors
discussed above, Scott & Stringfellow believes that its analyses 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 October 14, 1996 between the
Bank and Scott & Stringfellow, in exchange for its services, Scott &
Stringfellow will receive a fee equal to 1.00% of the total market value of
the consideration received by Bank shareholders, which equates to a fee of
approximately $165,000 and is payable at closing.
Effective Time of the Share Exchange
Subject to the terms and conditions set forth herein, including receipt
of all required regulatory approvals, the Share Exchange shall become
effective at the time Articles of Share Exchange relating to the Share
Exchange are accepted and made effective by the Maryland State
Department of Assessments and Taxation, (the "Effective Time of the Share
Exchange"). The Effective Time of the Share Exchange is expected to occur
on or about November 30, 1997, or as soon thereafter as is practicable. Either
Bank or BankGroup may terminate the Agreement if the Share Exchange has not
been consummated by December 31, 1997.
Until the Effective Time of the Share Exchange, holders of Bank
Common Stock will retain their rights as shareholders to vote on matters
submitted to them by the Bank Board.
Lock-Up Option
In addition to the Agreement, Bank and BankGroup have entered into an
agreement, dated as of June 24, 1997, providing for BankGroup to have an
option to purchase the Common Stock of Bank under certain conditions (the
29
<PAGE>
"Lock-up Option"). Specifically, the Lock-up Option provides that
BankGroup shall have the option to purchase 19.9% of the issued and
outstanding shares of Bank's Common Stock at a price of $26 per share.
The Lock-up Option is exercisable only under limited circumstances.
The Lock-up Option provides that BankGroup has an option to purchase
Bank Common Stock only upon the occurrence of the following events: (i)
without BankGroup's prior written consent, Bank authorizes, recommends,
publicly proposes or publicly announces an intention to authorize, recommend,
propose or enter into an agreement with a third party to engage in (a) a
merger, consolidation, share exchange or similar transaction; (b) the
disposition by sale, lease, exchange or otherwise of its assets; or (c) the
issuance, sale or other disposition of securities representing 20% or more
of the voting power of Bank; or (ii) a third party any "group" (as defined
under the Exchange Act) acquires beneficial ownership or the right to
acquire beneficial ownership of, 25% or more of outstanding Bank Common
Stock. BankGroup's right to exercise the Lock-up Option has not been
triggered as of the date of this Proxy Statement/Prospectus.
By Resolution dated June 23, 1997, the Bank Board exempted the Share
Exchange from the special voting requirement for extraordinary actions
contained in Sections 3-602(a) and 3-602(b) of the Corporations and
Associations Article of the Annotated Code of Maryland which might
otherwise have applied as a result of the grant of the Lock-up Option to
BankGroup.
Determination of Exchange Ratio and Warrant Redemption Ratio;
Exchange of Bank Common Stock for BankGroup Common Stock
Each share of Bank Common Stock issued and outstanding at the
Effective Time of the Share Exchange shall, and without any action by the
holder thereof, be converted into a number of shares of BankGroup
Common Stock equal to the quotient (rounded to the nearest one one-
thousandth) of $52.00 divided by the average of the bid/ask price (the
"BankGroup Stock Price") for BankGroup Common Stock as reported on
the Nasdaq National Market for the 20 trading days preceding the later to
occur of (i) such approval(s) contemplated by Paragraph A of Article VI of
the Agreement and (ii) the financial institution regulatory approvals (but
not the statutory waiting periods) contemplated by Paragraph B of Article
VI of the Agreement (the "Exchange Ratio"). If such quotient is less than
2.059, the Exchange Ratio shall be 2.059. If such quotient is greater than
2.506, the Exchange Ratio shall be 2.506. All such shares of BankGroup
Common Stock shall be validly issued, fully paid and nonassessable.
The Exchange Ratio at the Effective Time of the Share Exchange shall
be adjusted to reflect any consolidation, split-up, other subdivisions or
combinations of BankGroup Common Stock, any dividend payable in
30
<PAGE>
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 Share Exchange, each holder of a
certificate theretofore representing outstanding shares of Bank Common
Stock, upon surrender of such certificate to Registrar and Transfer
Company (which shall act as exchange agent) (the "Exchange Agent"),
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 previously represented by the certificate or certificates so
surrendered shall have been exchanged as provided plus cash in lieu of any
fractional share. Until so surrendered, each outstanding certificate which,
prior to the Effective Time of the Share Exchange, represented Bank Common
Stock will be deemed to evidence the right to receive the number of full
shares of BankGroup Common Stock into which the shares of Bank Common Stock
represented thereby may be converted, and, after the Effective Time of the
Share Exchange, 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 Share Exchange shall be paid to the
holder of such outstanding certificates in respect thereof. After the
Effective Time of the Share Exchange there shall be no further registry of
transfer on the records of Bank of shares of Bank Common Stock. If a
certificate representing such shares is presented to the Exchange Agent, it
shall be canceled and exchanged for a certificate representing shares of
BankGroup Common Stock as herein provided. BankGroup will also issue
a certificate in exchange for shares evidenced by lost certificate(s)
provided the record owner thereof provides BankGroup with such
substantiation, indemnification and security as BankGroup may reasonably
require.
Upon surrender of certificates of Bank Common Stock in exchange for
BankGroup Common Stock, there shall be paid to the recordholder of the
certificates of BankGroup Common Stock issued in exchange thereof (i) the
amount of dividends theretofore paid with respect to such full shares of
BankGroup Common Stock as of any date subsequent to the Effective Time
of the Share Exchange 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 Share Exchange, 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.
Each Warrant subject to redemption in the Transaction shall, by
agreement between the holder and Bank, be redeemed at the Effective Time
of the Share Exchange and the holder shall be entitled to receive for each
such Warrant that number of shares of BankGroup Common Stock equal to the
quotient obtained by dividing $31.00 by the Average BankGroup Stock Price
("Warrant Redemption Ratio"). If the Warrant Redemption Ratio computed
in accordance with the immediately preceding sentence is less than 1.228,
the Warrant Redemption Ratio shall be 1.228 ("Lower Collar"); if the Warrant
Redemption Ratio computed in accordance with the immediately preceding
sentence is greater than 1.494, the Warrant Redemption Ratio shall be 1.494
("Upper Collar"); provided, however, that if the Warrant Redemption Ratio
determined in accordance with the immediately preceding clause equals either
the Lower Collar or the Upper Collar, the Warrant Redemption Ratio shall be
further adjusted, if necessary, so that shares of MSBC Common Stock to be
issued for each CB Warrant pursuant thereto shall be equal in value to the
difference obtained by subtracting $21.00 from the product of the Average
MSBC Share Price times the Exchange Ratio (as defined in Article II, Paragraph
B).
As of a date which is no later than 30 days before the Share Exchange
Closing, Bank shall deposit in escrow with an escrow agent mutually
satisfactory to it and BankGroup all outstanding shares of Bank Preferred
Stock and all Warrants to be redeemed under the terms of the Agreement
together with all other documents necessary to accomplish the redemption
thereof including the agreements of the holders thereof to redeem as of the
Share Exchange Closing all issued and outstanding shares of Bank Preferred
Stock and Warrants in return for the shares of BankGroup Common Stock to
which they are entitled under the terms of the Agreement. As of the Share
Exchange Closing, the holders of Bank Preferred Stock and Warrants shall be
entitled to receive from BankGroup the shares of BankGroup Common Stock as
provided in the Agreement and their individual agreements shall have no
further rights under the terms of the Bank Preferred Stock and Bank Warrants,
which shall be considered redeemed as of the Share Exchange Closing.
31
<PAGE>
Business of Bank Pending the Transaction
Bank has agreed that prior to the Effective Time of the Share Exchange,
it will operate its business substantially as presently operated and in the
ordinary course, and, consistent with such operation, will use its best
efforts to preserve intact its present business organization and
relationships with persons having business dealings with it. The Agreement
contains a description of certain specified actions to be taken or
refrained from by Bank in satisfying this undertaking.
Bank further has agreed that, prior to the Effective Time of the Share
Exchange, 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 Share Exchange.
Conditions to Consummation of the Transaction
Consummation of the Transaction is conditioned upon the approval of
the Share Exchange by the holders of at least two-thirds of the outstanding
Bank Common Stock entitled to vote at the Bank Shareholder Meeting.
The Transaction must be approved by the Federal Reserve Board, the
Bureau of Financial Institutions of the Virginia State Corporation
Commission and the Maryland Commission of Financial Regulations,
applications for which have been filed and approvals for which are expected
to be received. The Transaction is also conditioned on the holder of Bank
Preferred Stock and the holders of all outstanding Warrants for Bank
Common Stock and Bank Preferred Stock (with certain limited exceptions)
agreeing at least thirty (30) days in advance of the closing of the Share
Exchange to accept shares of BankGroup Common Stock in redemption of
their Bank Preferred Stock (based on the Exchange Ratio also applicable to
the Share Exchange) and in satisfaction of their Warrant rights (based on
the Warrant Redemption Ratio). Under certain circumstances, the Bank
Board may notify BankGroup of an election to terminate the Transaction
made during the ten (10) day period preceding the closing if the average
bid/ask price for BankGroup Common Stock during the 20 trading day
period preceding the tenth day prior to closing is less than $20.75 and if
the percentage reduction in the price of BankGroup Common Stock obtained by
subtracting the 20 trading day average price from $23.625 (the average of
bid and ask price for BankGroup Common Stock on June 18, 1997) is at
least 10 percentage points greater than the percentage reduction in the SNL
Southeast Bank Index for the same period. In this event BankGroup may
either allow termination of the transaction or increase the consideration to
be received by Bank shareholders and Warrant holders to a quotient, the
32
<PAGE>
numerator of which is $20.75 multiplied by the applicable Exchange or
Warrant Redemption Ratio and the denominator of which is the 20 day
trading day average price. If BankGroup elects to do so, then the
Transaction does not terminate or account of the Bank Board's earlier
election. The obligations of Bank and BankGroup to consummate the Share
Exchange are further conditioned upon the satisfaction of terms and
conditions contained in the Agreement usual for transactions of this type,
including continued accuracy of representations and warranties made by
Bank and BankGroup, the absence of material adverse change in Bank's and
BankGroup's businesses, the receipt of legal and accounting opinions, and
the Transaction being accounted for as a "pooling of interests." See
Article VI of the Agreement (Annex A).
Termination
The Agreement will be terminated, and the Transaction abandoned, if
shareholders of Bank do not approve the Share Exchange or if the holder
of Bank Preferred Stock and the holders of Warrants (with certain limited
exceptions) do not agree within 30 days of the closing to the redemption
of their shares and Warrants as provided in the Agreement. Notwithstanding
such approval by such shareholders or agreements by Bank Preferred
Stock and Warrant holders, the Agreement also may be terminated at any
time prior to the Effective Time of the Share Exchange by mutual consent,
upon breach of the Agreement, if the Share Exchange is not effective by
December 31, 1997, and upon the occurrence of certain other events
specified in the Agreement. See Article VII of the Agreement (Annex A).
Accounting Treatment
BankGroup and Bank have agreed to use their best efforts to cause the
Transaction to be accounted for as a "pooling of interests" and this
accounting treatment is a condition to BankGroup's obligation to complete
the Transaction.
Operations After the Transaction
After consummation of the Transaction, BankGroup will continue generally
to conduct the business presently conducted by Bank.
Interests of Certain Persons in the Transaction
Certain members of the Bank Board and Bank's management may be deemed to
have interests in the Transaction in addition to their interests as
shareholders of Bank generally. In each case, the Bank Board or Bank was
aware of their potential interests, and considered them, among other
33
<PAGE>
matters, in approving the Agreement and the transactions contemplated
thereby.
Indemnification; Liability Insurance. BankGroup agrees that for the six-
year period following the Share Exchange Effective Date, it shall cause
Bank and any successor thereto to indemnify and hold harmless any person
who has rights to indemnification from Bank to the same extent and on the
same conditions as such person is entitled to indemnification pursuant to
Bank's Articles of Incorporation as in effect on the date of the Agreement,
to the extent legally permitted to do so, with respect to matters
occurring on or prior to the Share Exchange Effective Date (regardless of
whether a claim is asserted in connection therewith on or prior to the
Share Exchange Effective Date or thereafter), as detailed in the Agreement.
BankGroup shall use its reasonable best efforts to provide coverage to the
officers and directors of Bank under BankGroup's policy or policies of
director and officers liability insurance on the same or substantially
similar terms then in effect for the directors and officers of BankGroup
as further detailed in the Agreement.
Additionally, the Bank shall have the power to indemnify its directors
and officers against liability for acts or omissions before the Effective
Time of the Share Exchange to the extent permitted under Maryland law, the
Bank Articles of Incorporation and any applicable federal banking laws and
regulations or regulatory actions pursuant thereto.
Employee Benefits. Upon consummation of the Share Exchange, as soon as
administratively practicable employees of Bank shall be entitled to
participate in BankGroup's pension, severance, benefit and similar plans on
the same terms and conditions as employees of BankGroup and its
subsidiaries. BankGroup shall cause Bank to honor in accordance with their
terms as in effect on the date hereof, or as amended after the date hereof
with the prior written consent of BankGroup, all employment, severance,
consulting and other compensation contracts and agreements and executed
in writing by both Bank on the one hand and any individual current or
former director, officer or employee thereof on the other hand.
Redemption of Warrants. BankGroup has agreed, subject to the agreement
of the Warrant holders with Bank, to issue BankGroup Common Stock in
redemption of all outstanding Warrants for Bank Common Stock based on the
Warrant Redemption Ratio. Members of the Bank Board, bank officers and
affiliates hold a total of 55,747 of such Warrants, or 64.4% of the total
number of such Warrants outstanding.
Bank Board of Directors. The directors of the Bank are expected to
continue to serve on the Bank's Board of Directors and Board Committees.
Such directors of the Bank are expected to continue to receive fees for
serving as members of the Board of Directors and its Committees.
34
<PAGE>
Other than as set forth above, no director or executive officer of Bank
or BankGroup has any direct or indirect material interest in the Transaction,
except in the case of directors and executive officers of Bank insofar as
ownership of Bank Common might be deemed to be such an interest.
Certain Federal Income Tax Consequences
Set forth below is a discussion of certain federal income tax
consequences under the Internal Revenue Code of 1986, as amended (the
"Code")to (i) Bank Common and Preferred shareholders who receive BankGroup
Common Stock solely in exchange for Bank Common or Preferred Stock
as a result of the Transaction, (ii) Bank Warrant holders who
receive BankGroup Common Stock and cash in lieu of fractional shares
solely in exchange for Bank Common or Preferred Stock Warrants as a
result of the Transaction, and (iii) Bank shareholders who receive cash
in lieu of fractional shares or who receive cash for their shares upon
exercise of dissenters' rights. The discussion does not deal with all
aspects of federal taxation that may be relevant to particular Bank
shareholders or Warrant holders. In view of the individual nature of
tax consequences, Bank shareholders and Warrant holders are urged to
consult their own tax advisors as to the specific tax consequences
to them of the Transaction, including the applicability of federal,
state, local and foreign tax laws.
Neither BankGroup nor Bank has requested a ruling from the Internal
Revenue Service ("IRS") in connection with the Transaction. BankGroup
and Bank have received from Flippin, Densmore, Morse, Rutherford &
Jessee, counsel to BankGroup, an opinion as to certain of the
federal income tax consequences of the Transaction (the "Opinion").
The Opinion represents the best judgment of counsel as to the probable
outcome of the tax issues discussed. It is not binding on the IRS or
any tax authority or court. Further, in such Opinion, counsel
gives no assurances that the IRS will not challenge counsel's conclusions
and prevail in the courts in such a matter so as to cause adverse tax
consequences to BankGroup, Bank, and its shareholders and Warrant holders.
In the opinion of counsel, for federal income tax purposes, the
proposed Share Exchange and the proposed exchange of BankGroup Common
35
<PAGE>
Stock for Bank Preferred stock will qualify as a reorganization under
368(a)(1)(B) of the Internal Revenue Code of 1986 (the "Code"), and,
consequently, no gain or loss will be recognized by Bank Common or
Preferred shareholders on the receipt of BankGroup Common Stock
solely in exchange for their Bank Common or Preferred Stock.
HOWEVER, THE RECEIPT OF CASH BY A BANK SHAREHOLDER,
INCLUDING THE RECEIPT OF CASH BY A DISSENTING
SHAREHOLDER AND THE RECEIPT OF CASH IN LIEU OF A
FRACTIONAL SHARE OF BANKGROUP COMMON STOCK, WILL BE
A TAXABLE TRANSACTION AND THE EXCHANGE OF BANK COMMON
OR PREFERRED STOCK WARRANTS FOR BANKGROUP COMMON STOCK
AND CASH IN LIEU OF FRACTIONAL SHARES OF BANKGROUP
COMMON STOCK WILL BE A TAXABLE TRANSACTION.
Specifically, the Opinion states that, among other things:
1. No gain or loss will be recognized by BankGroup on the
receipt of Bank Common Stock and Bank Preferred Stock solely in
exchange for BankGroup Common Stock.
2. No gain or loss will be recognized by the Bank Common
Stock shareholders or the Bank Preferred Stock shareholders on the
receipt of BankGroup Common Stock solely in exchange for their
Bank Common or Preferred Stock.
3. The tax basis of the shares of BankGroup Common Stock to
be received by Bank shareholders in the Transaction in exchange for
their Bank Common or Preferred Stock will be the same as the basis
of the Bank Common or Preferred Stock surrendered in exchange
therefor.
4. The holding period under Section 1223 of the Code for the
shares of BankGroup Common Stock to be received by Bank shareholders
in the Transaction will include the holding period for the shares of
Bank Common or Preferred Stock surrendered in exchange therefor, provided
that the Bank Common or Preferred Stock shareholder held such stock as
a capital asset on the date of the Share Exchange.
5. The tax basis of the Bank Common and Preferred Stock to be
received by BankGroup in the Transaction will be the same as the basis
of such stock in the hands of Bank shareholders immediately prior to
the exchange.
6. The holding period under Section 1223 of the Code of the Bank
Common and Preferred Stock to be received by BankGroup in the Transaction
will include the period during which such Common or Preferred Stock
was held by the Bank shareholders.
7. Any dissenting shareholder of Bank Common Stock who receives
solely cash in exchange for shares of Bank Common Stock will be treated
as receiving a distribution in redemption of such stock subject to
the provisions and limitations of Section 302 of the Code.
36
<PAGE>
8. Any shareholder of Bank stock who receives cash in lieu of
a fractional share interest shall be treated as receiving a payment in
redemption of such fractional interest subject to the provisions and
limitations of Section 302 of the Code. Gain or loss will be realized
and recognized to such shareholder measured by the difference between
the redemption price and the portion of the shareholders' basis in
Bank stock allocable to such fractional share interest.
9. The exchange of the Bank Common Stock Warrants and the
Bank Preferred Stock Warrants for BankGroup Common Stock will be
a taxable transaction. Gain or loss will be recognized by Bank
Common Stock Warrant holders and Bank Preferred Stock Warrant
holders as a result of the exchange of such Warrants in return for
Common Stock of BankGroup and cash in lieu of fractional shares.
The Opinion is based on the assumption that the Transaction as it
relates to Bank Preferred Stock and Warrants will be treated for
federal income tax purposes as an exchange of such Preferred Stock
and Warrants for solely BankGroup Common Stock as part of or pursuant
to a plan of reorganization. The Opinion is also based on certain
customary assumptions and representations regarding, among other things,
the lack of previous dealings between Bank and BankGroup, the
existing and future ownership of BankGroup Common Stock and Bank stock,
whether Common or Preferred, and the future business plans for BankGroup.
Receipt of substantially the same opinion of Flippin, Densmore, Morse,
Rutherford & Jessee as of the Share Exchange Effective Date is a condition
to consummation of the Transaction.
The federal income tax consequences discussed above are necessarily
general as to the various shareholders and Warrant holders of the Bank,
and their applicability may vary depending upon the individual
circumstances. This summary is not intended to be a substitute for
careful tax planning on an individual basis. It is recommended that
each Bank shareholder and Warrant holder consult his or her own tax advisor
to determine whether or not there are any tax consequences of the
Transaction that might be of particular concern due to a
shareholder or Warrant holder's individual tax situation.
THE BANK BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE
SHARE EXCHANGE.
Rights of Appraisal
Under the applicable provisions of the Maryland General Corporation Law,
each holder of Bank stock will be entitled to demand and receive payment of
the fair value of his shares, if he (i) prior to or at the meeting, files with
the Bank a written objection to the Share Exchange, (ii) does not vote in favor
of the Share Exchange, and (iii) within 20 days after Articles of Share Exchange
have been accepted for record by the Maryland Department of Assessments and
Taxation (the "Department"), makes written demand on Bank for payment of his
shares, stating the number of shares for which payment is demanded. A direction
in the stockholder's proxy to vote against the Share Exchange will not in itself
constitute a written objection or demand that satisfies the requirements
described above. Any stockholder who fails to comply with the requirements
described above will be bound by the terms of the Share Exchange.
37
<PAGE>
Bank will promptly deliver or mail to each objecting stockholder written
notice of the date of acceptance of the Articles of Share Exchange for record
by the Department. Bank may also deliver or mail to each objecting stockholder
a written offer to pay for his stock at a price deemed by Bank to be the fair
value thereof. Within 50 days after acceptance of the Articles of Share
Exchange for record by the Department, either Bank or any objecting stockholder
who has not received payment for his shares may petition the court in Prince
George's County, Maryland, for an appraisal to determine the fair value
of such shares. If the court finds that an objecting stockholder is entitled
to appraisal of his stock, the court will appoint three disinterested appraisers
to determine the fair market value of such shares on terms and conditions the
court determines proper, and such appraisers will, within 60 days after
appointment (or such longer period as the) court may direct), file with the
court and mail to each party to the proceeding their report stating their
conclusion as to the fair value of such shares. Within 15 days after the filing
of such report, any party may object to such report and request a hearing
thereon. The court will, upon motion of any party, enter an order either
confirming, modifying or rejecting such report and, if confirmed or modified,
enter judgment directing the time within which payment will be made. If the
appraisers' report is rejected, the court may determine the fair value of the
shares of the objecting stockholders or may remit the proceeding to the same or
other appraisers. Any judgment entered pursuant to a court proceeding will
include interest from the date of the stockholder's vote on the action to which
objection was made. Costs of the proceeding shall be determined by the court
and may be assessed against Bank or, under certain circumstances, the objecting
stockholder, or both.
At any time after the filing of a petition for appraisal, the court may
require objecting stockholders to submit their certificates representing shares
to the clerk of the court for notation of the pendency of the appraisal
proceedings. A stockholder demanding payment for shares will not have the right
to receive any dividends or distributions payable to holders of record after the
close of business on the date of the stockholders' vote and will cease to have
any rights as a stockholder with respect to such shares except the right to
receive payment of the fair value thereof.
MAINSTREET BANKGROUP INCORPORATED
General
MainStreet BankGroup Incorporated is a multi-bank holding company
headquartered in Martinsville, Virginia, with total assets of $1.4 billion
at June 30, 1997. Organized in 1977, BankGroup, through its eight affiliate
banks (the "Banks"), and MainStreet Trust Company, National Association, a
nationally chartered trust company ("Trust Company"), engages in a general
banking business and provides a broad spectrum of full-service banking and
trust services 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.
38
<PAGE>
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 Town of Hillsville and City of 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; the towns of Mechanicsville and Ashland, and Hanover and Henrico
Counties; and the City of Clifton Forge and Allegheny, Bath and northern
Botetourt Counties, Virginia and contiguous areas. BankGroup's affiliate
Banks operate a total of 35 offices.
BankGroup continually seeks acquisition opportunities for banks and
bank related financial institutions. BankGroup's acquisition philosophy
permits the Banks to operate as separately chartered banks with their
historical names and board of directors. BankGroup believes that this
philosophy maintains community loyalty at the Banks and has a positive
effect on operating performance. BankGroup seeks to capitalize on the
local identity of the Banks while providing the services and efficiencies
of a larger bank holding company.
During 1994, BankGroup moved to a centralized approach in management,
providing direction to the Banks and performing selected services in the
compliance, data processing, financial management, human resources,
investment, accounting, marketing, mortgage, trust and audit areas.
The Banks are still permitted to approve loans up to a certain credit
limit, above which central credit administration must consent.
The Banks also still must approve investments and other activities
consistent with past practices and the needs of their communities.
To coordinate the activities of the Banks and to maintain internal
controls, BankGroup utilizes a planning and budgeting process which involves
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.
During 1997, BankGroup organized MainStreet Trust Company to offer
fiduciary services in all the markets served by its affiliate banks and
elsewhere. This centralized approach to fiduciary services allows BankGroup
affiliates to offer to the customer a broader array of more sophisticated
products more efficiently and effectively than could otherwise be
accomplished.
39
<PAGE>
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 five
branches in Martinsville and Henry County. Its primary service area has a
population of approximately 72,400 and its economy is oriented toward the
textile, furniture and prebuilt housing industries. Piedmont is insured by
the Federal Deposit Insurance Corporation (the "FDIC") and is
supervised and examined by the Federal Reserve Board and the SCC. It
engages in a general commercial banking business and offers the range of
banking services that can be expected of a banking organization of its size.
Piedmont is the largest bank in the Martinsville trade area with total
assets of approximately $544.1 million, deposits of approximately $321.2
million and net loans, net of unearned income, of approximately $342.9
million at June 30, 1997.
Bank of Carroll. Bank of Carroll ("Carroll"), incorporated in 1971
under the laws of Virginia, was acquired by BankGroup in 1977. At June 30,
1997, it had total assets of approximately $70.5 million. Its main office
is located in Hillsville, Carroll County, Virginia, and it has branches in
Cana and Galax, Virginia. Its primary service area has a population of
approximately 34,000. Carroll is supervised and examined by the Federal
Reserve Board and the SCC and engages in a general commercial banking
business.
Bank of Ferrum. Bank of Ferrum ("Ferrum"), incorporated in 1917 under
the laws of Virginia and converted during the 1920's to a national bank, was
acquired by BankGroup in 1981. As of June 1, 1995, Ferrum converted its
charter to a state bank under the laws of Virginia. When Ferrum converted
to a state charter on June 1, 1995, the name changed from First National
Bank of Ferrum to Bank of Ferrum. At June 30, 1997, it had total assets of
approximately $128.0 million. Its main banking office is located at
Ferrum, Virginia, with branches at Oak Level and two offices located in
Rocky Mount, Virginia. Ferrum currently has an office under construction
in Franklin County at Smith Mountain Lake. Its primary service area has a
population of approximately 43,000. Ferrum is supervised and examined by
the Federal Reserve Board and the SCC and engages in a general commercial
banking business.
First Community Bank. First Community Bank ("Community"), incorporated
in 1978 under the laws of Virginia, was acquired by BankGroup in 1983. At
June 30, 1997, it had total assets of approximately $151.9 million.
Community's main office is located in Forest, Virginia, and it operates
six branches in the Lynchburg and Forest area. Its primary service area
has a population of approximately 130,000. Community is regulated
by the Federal Reserve Board and the SCC. Retail and commercial banking
40
<PAGE>
services are provided for customers in Forest, Bedford, Campbell and
Amherst Counties and the City of Lynchburg, Virginia.
The First Bank of Stuart. The First Bank of Stuart ("Stuart") was
incorporated in 1920 as a national bank and acquired by BankGroup in 1986.
Stuart converted its charter to a state bank and began operating as a state
banking corporation on September 1, 1995. When Stuart was converted to a
state charter on September 1, 1995, the name changed from The First National
Bank of Stuart to The First Bank of Stuart. At June 30, 1997, it had total
assets of approximately $157.2 million. Its main office is located
in Stuart, Virginia, and it has five other offices all located in Patrick
County, Virginia. Its primary service area has a population of
approximately 17,600. 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 First Community Bank
of Saltville. At June 30, 1997, it had total assets of approximately $133.6
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 33,300. Saltville engages in general commercial banking
business and is regulated by the Federal Reserve Board and the SCC.
The First National Bank of Clifton Forge. The First National Bank
of Clifton Forge ("Clifton Forge") was incorporated as a national bank in
1901 and was acquired in 1996. At June 30, 1997, it had total assets of
$129.5 million. Its primary service area has a population of 22,600 and
includes the city of Clifton Forge and Alleghany, Bath and northern
Botetourt Counties. Clifton Forge is supervised and examined by the
Comptroller of the Currency and engages in general commercial banking
business.
Hanover Bank. Hanover Bank was incorporated under the laws of Virginia
in 1988 and was acquired in 1996. At June 30, 1997, it had assets of $142.8
million. Hanover's main office is located in Mechanicsville and it has four
branches in Hanover and Henrico Counties. Its primary service area has a
population of 305,000. Hanover engages in general commercial banking
business and is supervised and examined by the Board of Governors of the
Federal Reserve System and the State Corporation Commission of Virginia.
41
<PAGE>
MainStreet Trust Company, N.A. MainStreet Trust Company, N.A.
("Trust Company") was incorporated as a national banking association in 1997
with its business limited to trust and related fiduciary services. At June
30, 1997, it had assets in excess of $716.4 million under management
including substantially all of the trust assets of Piedmont Trust Bank
which were transferred to Trust Company on January 1, 1997. Its primary
service area includes the markets of all its affiliate banks. Trust
Company is supervised and examined by the Comptroller of the Currency and
engages solely in the provision of trust and the fiduciary services.
Recent Development
On July 25, 1997, BankGroup announced that it had reached agreement to
acquire Tysons Financial Corporation ("Tysons"), a Virginia corporation,
located in McLean, Virginia, subject to shareholder and regulatory approval.
Under the terms of the agreement, BankGroup agreed to pay shareholders of
Tysons the equivalent of $14.50 per share for each share of Tysons Common
Stock outstanding. The transaction is valued at approximately $17.2 million,
which will be paid in BankGroup Common Stock. The exchange ratio will be
determined during a measurement period prior to consummation of the
transaction, which is expected around January 1, 1998. The transaction
will be treated as a purchase.
In addition, it is a condition of the merger that Tysons' outstanding
228,250 directors' warrants be exercised prior to the closing for the
difference between the exercise price per warrant and $14.50 in the form of
Tysons' common stock. BankGroup has also agreed to redeem Tysons'
outstanding Directors' Options for the difference between the exercise
price per Option and $14.50 in the form of BankGroup Common Stock. It is
a condition to the merger that the holders of Tysons' outstanding Directors'
Options agree to accept this arrangement. It is also a condition to closing
that every holder of an option granted to employees and officers of Tysons
to purchase Tysons Common Stock ("ISO") shall agree to accept the conversion
of such ISO with respect to BankGroup Common Stock as contemplated in the
merger agreement between Tysons and BankGroup.
Tysons has one wholly owned banking subsidiary, Tysons National
Bank ("TNB"), located in the county of Fairfax, Virginia. TNB's main office
and three branches are located in Fairfax County, Virginia. At June 30,
1997, Tysons reported total assets of $86.2 million.
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
42
<PAGE>
per share of Common Stock as reported on The Nasdaq National Market, and
the cash dividends paid per share of Common Stock. Information in the
table gives effect to a 5-for-4 stock split in the form of a stock dividend
effective July 15, 1993 and a 2-for-1 stock split in the form of a stock
dividend effective March 4, 1996.
<TABLE>
<CAPTION>
Price Range
High Low Dividends
<S> <C> <C> <C>
1995
First Quarter $ 11.75 $ 9.375 $ .08
Second Quarter 13.125 11.00 .10
Third Quarter 13.125 11.87 .09
Fourth Quarter 13.75 12.62 .10
1996
First Quarter $ 17.00 $ 12.75 $ .11
Second Quarter 17.00 15.50 .11
Third Quarter 19.50 16.25 .13
Fourth Quarter 19.50 16.75 .14
1997
First Quarter $ 23.25 $ 18.00 $ .14
Second Quarter 28.00 18.75 .14
</TABLE>
As of June 30, 1997 there were approximately 3,537 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."
COMMERCE BANK CORPORATION
General
The Bank is a Maryland banking corporation that was organized and
chartered under the laws of the State of Maryland on December 31, 1987 and
commenced business on September 21, 1989.
The Bank is a state member bank of the Federal Reserve System and is
examined by that agency and the Maryland banking regulatory authorities.
The Bank conducts its commercial banking business under a variety of federal
and state laws and regulations, some of which relate to interest rates,
43
<PAGE>
required reserves, restrictions on loans to officers, the use of
correspondent balances, the establishment of branches and the acquisition of
subsidiaries. The Federal Reserve Board and the Maryland Division of
Financial Regulations has statutory authority to issue "cease and desist"
orders to the Bank with respect to actions deemed to constitute a serious
threat to the safety, soundness and stability of the Bank.
The Bank principally serves the small to mid-size business community,
offering customary commercial demand and time deposit accounts and customary
forms of credit accommodations. No material portion of the Bank's deposits
has been obtained from a single or small group of customers and the loss of
the deposits of any one customer or of a group of customers would not have
an adverse material effect on the business of the Bank.
Bank operations are conducted in three locations in Prince George's
County, Maryland. On August 25, 1997, Commerce Bank had 21 full-time and 5
part-time employees.
Competition
The Bank's primary service area is Prince George's County, Maryland.
The Board of Directors believes that the existing and future market in this
service area presents a beneficial opportunity for a locally operated bank.
The banking business in Maryland, as elsewhere, is highly competitive.
Other Maryland banking institutions with substantially greater financial
resources than the Bank are aggressively competing in the Bank's service
area for loans, deposit and other banking services. At June 30, 1996, there
were 20 commercial banks with 142 branch offices in the Bank's primary
service area in Prince George's County. Of the total number of commercial
banks noted, there are 2 other independent community banks operating within
Prince George's County.
Regulation and Supervision
The operations of Commerce Bank are subject to federal and state
statutes which apply to state member banks of the Federal Reserve System.
The Bank, as a state member bank, is supervised and regularly examined by
the Department of Bank Supervision and Regulation of the Federal Reserve
Bank. At the state level, the Bank is subject to supervision and
examination by the Maryland Division of Financial Regulations.
44
<PAGE>
Properties
The Bank leases quarters that are used in the normal course of business
at locations in Lanham and Hyattsville, Maryland. The Bank's principal or
main office is located within leased property at 9658 Baltimore Avenue,
College Park, Maryland, 20740.
MARKET FOR AND DIVIDENDS PAID ON BANK COMMON STOCK
Market Information
Commerce Bank Common Stock is not publicly traded.
Holders
On March 14, 1997, there were 229 holders of Commerce Bank Common
Stock. As of March 14, 1997, the total number of outstanding shares of Common
Stock was 192,216.
Cash Dividends
The following are the annual cash dividends declared by the Bank Board
of Directors for all shareholders of record as indicated.
<TABLE>
<CAPTION>
Date Common Stock Preferred Stock
- ----------------------------------------------------------------------------
<S> <C> <C>
December 1, 1995 $1.00 $2.10
November 14, 1996 $1.25 $2.10
August 28, 1997 $1.13 $2.10
(for 3 quarters) (for full year)
</TABLE>
45
<PAGE>
OWNERSHIP BY CERTAIN BENEFICIAL OWNERS OF BANK STOCK
The following table sets forth certain information regarding the beneficial
ownership of Bank Common Stock as of June 30, 1997 by each of the Bank's
directors and by all directors and executive officers of the Bank as a group.
Shares/Warrants Beneficially Owned as of June 30, 1997(1)
<TABLE>
<CAPTION> Nature of Ownership
No. of Percentage Total ----------------------------- Percentage of
Name of Shares of Warrants Shares Direct Indirect/JT Spouse Street Shares
- ---- --------- ----------- ------ ------ ----------- --------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Alvin R. Maier 10,381 14.20 17,957 14,012 3,945 9.34
P.O. Box 898
College Park, MD 20740
George Kapusta 2,500 3.42 1,062 121 388 553 **
Patricia J. Bonacorda - - 100 100 **
Susan B. Bryant - - 1,000 50 950 **
Milton D. Jernigan, Sr. 3,066 4.20 6,923 4,041 2,882 3.60
James W. Martin 10,825 14.82 18,155 100 17,055 1,000 9.44
6917 Bradley Blvd.
Bethesda, MD 20817
Robert R. Mitchell 2,600 3.56 5,992 2,996 2,996 3.12
Robert A. Schmuhl(2) 750 1.02 1,576 576 1,000 **
William Sullivan 1,520 2.08 2,205 352 440 1,413 1.14
Lamont Thomas 3,000 4.10 5,112 3,173 576 63 1,300 2.66
Jerome A. Watts 2,246 3.07 5,086 5,086 2.65
Maurice J. Whelan 1,251 1.71 2,500 2,500 1.30
------ ------
Director holdings 38,139 67,668
Candace M. Springmann* - - 575 50 125 400 **
*Vice President & ------ ------
Corporate Secretary
Director & officer
holdings 38,139 68,243
********************************
- --------------------------------
Citizens, Inc.
Jefferson & Jackson Sts.
Evans City, PA 16033
Common 4,163 5.70 9,593 9,593 5.00
Preferred 13,445 100.00 30,984 30,984 100.00
------ ------ ------
Total Director, officer
& affiliate
holdings: 55,747 64.44 108,820 48.75
</TABLE>
46
<PAGE>
- -------------------------
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 Estate of Robert A. Schmuhl; Date of Death: August 31, 1997.
**means less than 1%.
All directors and executive officers as a group (13 individuals) represent
35.503 percent (of 192,216) of common stock.
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 Federal Reserve Board has recently
adopted regulations allowing (under certain circumstances) an expedited
approval process for these transactions for well managed and well
capitalized bank holding companies. 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. This limits their ability to engage in financial
services such as insurance or securities underwriting as well as non-
financial activities. In recent years, however, the Federal Reserve Board
has expanded the range of permissible securities activities of bank holding
companies and their subsidiaries.
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. Well capitalized and well managed bank holding
47
<PAGE>
companies may engage in any activity (subject to certain limitations) that
the Federal Reserve Board has determined by order to be closely related to
banking without prior notice to or approval of the Federal Reserve Board.
Federal law permits bank holding companies from any state to acquire
banks and bank holding companies located in any other state. Effective
June 1, 1997, the law allowed interstate bank mergers, subject to earlier
"opt-in" or "opt-out" action by individual states. The law currently
allows interstate branch acquisitions and de novo branching if permitted by
the host state. Virginia adopted early "opt-in" legislation that
allowed 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
acquirer. Maryland law permits the acquisition of a Maryland bank or a
Maryland bank holding company by out of state banks or bank holding
companies upon the approval by the Maryland Bank Commissioner and as
permitted by federal law.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries by federal
law and regulatory policy that are designed to reduce potential loss
exposure to the depositors of such depository institutions and to the FDIC
insurance fund in the event the depository institution becomes in danger of
default or in default. For example, under a policy of the Federal Reserve
Board with respect to bank holding company operations, a bank holding
company is required to serve as a source of financial strength to its
subsidiary depository institutions and to commit resources to support such
institutions in circumstances where it might not do so otherwise. In
addition, the "cross-guarantee" provisions of federal law require insured
depository institutions under common control to reimburse the FDIC for
any loss suffered or reasonably anticipated by either 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
48
<PAGE>
preference over general and subordinated creditors and shareholders in the
event a receiver is appointed to distribute the assets of any of the Banks.
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 State Corporation Commission ("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
June 30, 1997 were 13.64% and 14.89%, respectively, exceeding the
minimums required. The risk based capital guidelines have been amended
over the years and are likely to be further amended and refined. For
example, the guidelines were amended in 1995 and 1996 to incorporate
country transfer risk (that is, the possibility that an asset cannot be
serviced in the currency of payment because of restraints on or lack of
needed foreign currency in the country of the obligor) and market risk
(applicable to exposure in investments) Banks subject to regulatory market
risk requirements that are mandatory as of January 1, 1998 also will have
a Tier 3 capital component. Tier 3 capital consists of certain
subordinated debt.
In addition, each of the federal regulatory agencies has established a
minimum leverage capital ratio (Tier 1 capital to average tangible assets).
These guidelines provide for a minimum ratio of 3% for banks and bank
holding companies that meet certain specified criteria, including that they
have the highest regulatory examination rating and are not contemplating
significant growth or expansion. All other institutions are expected
to maintain a leverage ratio of at least 100 to 200 basis points above the
minimum. The Tier 1 capital leverage ratio of BankGroup as of June 30,
1997, was 7.98%. 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.
49
<PAGE>
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. In August 1995, the federal bank regulatory agencies revised
their risk-based capital standards to provide explicitly for consideration
of interest rate risk in the overall determination of a bank's minimum
capital requirement. BankGroup does not expect any of these rules and
revisions in the capital adequacy, either individually or in the aggregate,
to have a material impact on its capital requirements. However, the risk
based capital guidelines, as they may be further developed and changed,
could adversely affect an institution's capital portion and subject it to
more stringent regulatory 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 (with the exception of Clifton Forge) is a state
member bank of the Federal Reserve System. As a result, the Banks (with
the exception of Clifton Forge) are regulated by the Federal Reserve Board
and the SCC. Clifton Forge and Trust Company are national banking
associations and are regulated by the Office of the Comptroller of the
Currency, and in addition, Clifton Forge is a member bank of the Federal
Reserve System and regulated by the Federal Reserve Board. There are
various regulatory limitations applicable to the payment of dividends by
the Banks and Trust Company as well as the payment of dividends by BankGroup
to its shareholders. Under laws of Virginia applicable to the Banks (with
the exception of Clifton Forge), prior approval from the bank regulatory
agencies is required if cash dividends declared in any given year exceed
net income for that year plus net income for the prior two years less all
dividends paid during the current year and two prior years. National
banking associations like Clifton Forge and Trust Company are permitted
to pay dividends out of undivided profits but until their surplus equals
their capital, dividends are generally prohibited unless at least a tenth
of their net income for the preceding half year (if the dividend is a
quarterly or semiannual dividend) or for the preceding two consecutive
half year periods (if the dividend is an annual dividend) have been
carried into a surplus. In the case of Clifton Forge, Trust Company and
BankGroup, the payment of dividends may also be limited by other factors,
such as requirements to maintain capital above regulatory guidelines.
Under existing supervisory practices at June 30, 1997 the Banks could
have paid additional dividends of $21.3 million without obtaining prior
regulatory approval. The Trust Company began its operations in 1997 and
50
<PAGE>
is not in a position to pay a dividend without prior regulatory
approval. Bank regulatory agencies have authority to prohibit any Bank
and Trust Company 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, Trust Company or
BankGroup, could be deemed to constitute such an unsafe or unsound
practice. The Federal Reserve Board has stated that, as a matter of
prudent banking, a bank or bank holding company should not maintain its
existing rate of cash dividends on common stock unless (1) the
organization's net income available to common shareholders over the past
year has been sufficient to fund fully the dividends and (2) the prospective
rate of earnings retention appears consistent with the organization's
capital needs, asset quality, and overall financial condition.
Under the FDIA, insured depository institutions such as the Banks are
prohibited from making capital distributions, including the payment of
dividends, if, after making such distribution, the institution would
become "undercapitalized" (as such term is used in the statute). Based on
the Banks current financial condition, BankGroup does not expect
that this provision will have any impact on its ability to obtain dividends
from the Banks.
In addition to limitations on dividends, the Banks are limited in the
amount of loans and other extensions of credit that may be extended to
BankGroup, and any such loans or extensions of credit are subject to
collateral security requirements. Generally, up to 10% of each Bank's
regulatory capital, surplus, undivided profits, allowance for loan losses
and contingency reserves may be loaned to BankGroup. There are other
restrictions applicable to the transactions between the Banks and
BankGroup. As of June 30, 1997, approximately $9.5 million of credit was
available to BankGroup under this limitation.
Subsidiaries
The Banks are supervised and regularly examined by the Federal Reserve
Board and the SCC except that Clifton Forge is regulated by the Federal
Reserve Board and the OCC because it is a national banking association.
Trust Company is regulated by the OCC because it is chartered as a national
banking association, although its business is limited to the operation of a
trust company. The Banks and Trust Company are also subject to various
requirements and restrictions under federal and (which has significantly
more limited application to Clifton Forge and Trust Company as national
banking associations) 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. Federal and
state fiduciary laws and regulations affect the operations of Trust Company.
In addition to the impact of regulation, the Banks are affected
51
<PAGE>
significantly by actions of the Federal Reserve Board in attempting to
ontrol 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. Until July 1,
1997, each financial institution's efforts in meeting community credit needs
currently were evaluated as part of the examination process pursuant to
twelve assessment factors. 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 became fully effective on July 1, 1997, emphasizes an
institution's performance in meeting community credit needs. Institutions
are 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. The Banks have attained either an "outstanding" or
"satisfactory" rating on their most recent CRA performance evaluations.
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 -0- for well-capitalized institutions to .27% of deposits for
under-capitalized institutions. All banks in BankGroup currently are
assessed as well-capitalized.
As a result of the Deposit Insurance Funds Act of 1996, a separate levy
is assessed on all BIF- and SAIF-assessable deposits to bear the cost of
bonds sold by the Financing Corporation (FICO) for 1987-1989 in support of
the former Federal Savings and Loan Insurance Corporation. The 1996 law
makes the FDIC the collection agent for FICO. The FICO rates, subject to
quarterly adjustment, are not tied to the FDIC risk classification. For 1997,
the FICO rate has ranged from 0.13% to .0126% of deposits.
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,"
52
<PAGE>
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized," as such terms are defined under uniform regulations
defining such capital levels issued by each of the federal banking agencies.
DESCRIPTION OF CAPITAL STOCK OF BANKGROUP
BankGroup has authority to issue 1,000,000 shares of Preferred Stock, of
which no shares are issued and outstanding, and 20,000,000 shares of Common
Stock, of which 11,396,976 shares were issued and outstanding as of July 31,
1997 held by approximately 3,537 holders of record. BankGroup Common Stock
is traded in the over-the-counter market and quoted on The Nasdaq National
Market under the symbol "MSBC".
The following summary description of capital stock of BankGroup is
qualified in its entirety by reference to BankGroup's Articles of
Incorporation, a copy of which has been incorporated by reference as an
exhibit to the Registration Statement.
Preferred Stock
The Board of Directors, without further action by the shareholders, is
authorized to designate and issue in series Preferred Stock and to fix as
to any series the dividend rate, redemption prices, preferences on
dissolution, the terms of any sinking fund, conversion rights, voting
rights, and any other preferences or special rights and qualifications.
Holders of the Preferred Stock, if and when issued, will be entitled to vote
as required under applicable Virginia law. Such law includes provisions for
the voting of the Preferred Stock in the case of any amendment to the
Articles of Incorporation affecting the rights of holders of Preferred
Stock, the payment of certain stock dividends, merger or consolidation,
sale of all or substantially all of BankGroup's assets, and dissolution.
The Board of Directors without shareholder approval can issue Preferred
Stock with voting and conversion rights which would adversely affect the
voting power of the common shareholders. In addition, the Preferred Stock
could be used in a manner which would discourage or make more difficult an
attempt to acquire control of BankGroup. BankGroup's Board of Directors has
designated a series of 1,000,000 shares of Participating Convertible
Preferred Stock, Series A (the "Series A Preferred Stock"), no shares of
which have been issued. The Series A Preferred Stock was created in
connection with the shareholder rights plan described below.
Common Stock
Holders of Common Stock are entitled to one vote per share on each
matter to be voted upon by the shareholders. Directors are elected by a
vote of the holders of Common Stock. Dividends may be paid to the holders
53
<PAGE>
of Common Stock when, as and if declared by the Board of Directors out of
funds legally available for such purposes. The principal source of funds
for dividend payments is dividends received from the Banks. Payment of
dividends to BankGroup by the Banks and Trust Company, 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 Share Exchange 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 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
54
<PAGE>
by the Common Stock certificates and will be transferred with and only with
such Common Stock certificates, and (ii) the surrender for transfer of any
certificate for Common Stock will also constitute the transfer of the
Rights associated with the Common Stock represented by such certificate.
Rights may not be transferred, directly or indirectly (i) to any person
or group that has acquired, or obtained the right to acquire, beneficial
ownership of 10% or more of the Rights (an "Acquiring Person"), (ii) to
any person in connection with a transaction in which such person becomes
an Acquiring Person or (iii) to any affiliate or associate of any
such person. Any Right that is the subject of a purported transfer to any
such person will be null and void.
The Rights can be expected to have certain anti-takeover effects if an
acquisition transaction not approved by the Board of Directors is proposed
by a person or group. In such event, the Rights will cause substantial
dilution to any person or group that acquires more than 15% of the
outstanding shares of Common Stock of BankGroup if certain events
thereafter occur without the Rights having been redeemed. For example, if
thereafter such acquiring person acquires 30% of BankGroup's outstanding
Common Stock, or effects a business combination with BankGroup, the Rights
permit shareholders to acquire securities having a value equal to twice
the amount of the purchase price specified in the Rights, but rights held
by such "acquiring person "are void to the extent permitted by law and may
not be exercised. Further, other shareholders may not transfer rights to
such "acquiring person" above his or her 15% ownership threshold. Because
of these provisions, it is unlikely that any person or group will propose an
acquisition transaction that is not approved by the Board of Directors.
Thus, the Rights could have the effect of discouraging acquisition
transactions not approved by the Board of Directors. The Rights do not
interfere with any merger or other business combination approved by
the Board of Directors and shareholders because the rights are redeemable
with the concurrence of a majority of the "Continuing Directors," defined as
directors in office when the Rights Agreement was adopted or any person
added thereafter to the Board with the approval of the Continuing
Directors.
Virginia Stock Corporation Act
The Virginia Stock Corporation Act ("VSCA") contains provisions
governing "Affiliated Transactions." These provisions, with several
exceptions discussed below, require approval of material acquisition
transactions between a Virginia corporation and any holder of more than
10% of any class of its outstanding voting shares (an "Interested
Shareholder") by the holders of at least two-thirds of the remaining voting
shares. Affiliated Transactions subject to this approval requirement
include mergers, share exchanges, material dispositions of corporate
assets not in the ordinary course of business, any dissolution of the
corporation proposed by or on behalf of an Interested Shareholder,
or any reclassification, including reverse stock splits, recapitalization or
55
<PAGE>
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%, 331/3% or 50%) have no voting rights unless granted
by a majority vote of shares not owned by the acquiring person or any
officer or employee-director of the Virginia corporation. This
56
<PAGE>
provision empowers an acquiring person to require the Virginia corporation
to hold a special meeting of shareholders to consider the matter within 50
days of its request.
Reports to Shareholders
BankGroup furnishes shareholders with written annual reports containing
consolidated financial statements audited by an independent certified public
accountant and with written quarterly reports containing an unaudited balance
sheet at the end of each of the first three quarterly periods and an income
statement for the period from the beginning of the current fiscal year to
the end of such quarterly period.
Transfer Agent
Registrar and Transfer Company, Post Office Box 1010, Cranford, New
Jersey, is transfer agent for BankGroup Common Stock.
COMPARATIVE RIGHTS OF SHAREHOLDERS
At the Effective Time of the Share Exchange, shareholders of Bank will
become shareholders of BankGroup, and holders of Bank Preferred Stock and
Warrants (if they agree to do so) will lose their rights as such and will
become entitled to receive the number of shares of BankGroup Common Stock
based on the Exchange Ratio (in the case of Bank Preferred Stock) or the
Warrant Redemption Ratio (in the case of Warrants). As shareholders of
BankGroup, their rights as shareholders will be determined by BankGroup's
Articles of Incorporation and Bylaws and the VSCA. The following is a
summary of the material differences in the rights of shareholders of
BankGroup and Bank. This summary does not purport to be a complete
discussion of, and is qualified in its entirety by reference to, the
governing law and the Articles of Incorporation and Bylaws
of each entity.
Capitalization
Bank. Bank's Articles of Incorporation authorize the issuance of up to
450,000 shares of common stock, par value $10 per share, 192,216 of which
are issued and outstanding, and 50,000 shares of authorized convertible
preferred stock, 30,984 shares of which are issued and outstanding.
BankGroup. BankGroup's authorized capital is described under
"Description of BankGroup Capital Stock."
57
<PAGE>
Amendment of Articles or Bylaws
Bank. The Maryland General Corporate Law ("MDGCL") generally
permits a Maryland corporation to adopt, alter and repeal its bylaws in a
manner not inconsistent with the Maryland law or the corporation's charter.
This authority to amend the bylaws is vested in the stockholders except to
the extent that the charter vests it in the Board.
Bank's Bylaws may be amended by the Board of Directors or by the
majority vote of the shareholders.
BankGroup. As permitted by the VSCA, BankGroup's Articles provide
that, unless a greater vote is required by law, by BankGroup's Articles or
by a resolution of the Board of Directors, BankGroup's Articles may be
amended if the amendment is adopted by the Board of Directors and approved
by a vote of the holders of a majority of the votes entitled to be cast on
the amendment by each voting group entitled to vote thereon.
BankGroup's Bylaws generally provide that the Board of Directors may, by
a majority vote, amend its Bylaws.
Required Shareholder Vote for Certain Actions
Bank. The MDGCL generally requires the approval of a majority of a
corporation's Board of Directors and the holders of at least two-thirds of
all the votes entitled to be cast thereon by each group entitled to vote on
any plan or merger of consolidation, plan of share exchange or sale of all
or substantially all of the assets of a corporation outside the ordinary
course of business.
The MDGCL also specifies additional voting requirements for "Business
Combination" transactions and transactions which would cause certain
acquiring persons voting power to meet or exceed specified thresholds.
Generally speaking, a "Business Combination" is defined under MDGCL as an
acquisition which involves a merger or share exchange with an acquiror
which already owns or controls 10% or more of the voting stock of the
target company. In the event of a "Business Combination," a special
acquisition shareholder voting requirement of 80% applies. However, even
in a situation in which the MDGCL Business Combination statute would apply,
the Board of Directors of the target company is permitted to waive the
extraordinary 80% voting requirement in favor of the usual two-thirds
voting requirement. Such a waiver must be made by the target Board of
Directors prior to entering into a transaction which would cause the
acquiror to become an interested party by acquiring a 10% or more interest
in the target company. The Stock Option Agreement between Bank and
BankGroup entered into June 24, 1997, granted BankGroup the option to
purchase 19.9% of Bank under certain limited circumstances. As a result,
58
<PAGE>
the MDGCL Business Combinations statute would have applied to the Share
Exchange. However, prior to the execution of the Stock Option
Agreement, Bank's Board of Directors passed a resolution waiving the
extraordinary 80% voting requirement.
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 Share Exchange since it is not an "Affiliated Transaction."
Director Nominations
Bank. Bank's Bylaws provide that any nomination for election to the
Board of Directors may be made by the Board of Directors or by any
stockholder of any class of outstanding capital stock of the Bank entitled
to vote for the election of directors. Nominations other than the slate of
nominees proposed by the Board of Directors, or a nomination by a director
at a special meeting called to replace a director, must be made in
writing and must be delivered to the President of the Bank not less than 60
days nor more than 120 days prior to an annual meeting of the stockholders.
The nomination must be on a form approved by the Bank and must specify
certain information about the nominee such as name, address, stock holding,
occupation and must also contain the nominee's signature evidencing his or
her willingness to serve if elected. Written nominations must also be
seconded by another shareholder who is not related to the nominee. No
other nominations for the Board of Director are permitted. The Board of
Directors may disqualify the nomination of an individual whom counsel for
the Bank may determine would not be legally qualified to serve as a director
and certain procedures are outlined in the Bylaws for such disqualification
and the filling of a board seat so vacated.
The Financial Institutions Article of the Annotated Code of Maryland
("MDFI") requires that after the initial issuance of capital stock by a
commercial bank, each of its directors shall own in good faith and of
record unencumbered shares of the capital stock of: (i) the commercial bank,
or (ii) a corporation that owns more than 80 percent of the capital stock
of the commercial bank. The unencumbered capital stock owned by the
59
<PAGE>
director shall be in the amount of at least: (i) $500; or (ii) $250, if the
commercial bank if a State bank that has $50,000 or less in capital stock.
A majority of directors of Bank must be residents of Maryland. In
addition, MDFI requires that each director of Bank shall attend at least one
half of the regularly scheduled board meetings that are held during the
director's term of office. Any directors who fails to attend meetings of
the board of directors as required by MDFI is disqualified automatically
from serving as director for a succeeding term. The Maryland Bank
Commission may waive the disqualification of a director if the director
shows to the Commissioner good cause for the failure to attend the meetings.
BankGroup. BankGroup's Bylaws provide that any nomination for director
made by a shareholder must be made in writing to the Secretary of BankGroup
not less than 90 days prior to the meeting of shareholders at which
directors are to be elected. Any such shareholder's notice shall include
(i) the name and address of the shareholder and of each person to be
nominated, (ii) a representation that the shareholder is a holder of record
of stock of BankGroup entitled to vote at such meeting and intends to appear
in person or by proxy at the meeting to nominate each person specified,
(iii) a description of all arrangements or understandings between the
shareholder and each nominee and any other person (naming such person)
pursuant to which the nomination is made by the shareholder, (iv) such
other information regarding each nominee as would be required to
be included in a proxy statement filed pursuant to the proxy rules of the
SEC had the nominee been nominated by the Board, and (v) the consent of
each nominee to serve as a director of BankGroup if so elected.
There is no requirement that directors of BankGroup own any capital
stock of BankGroup. There are also no residency or meeting attendance
requirements applicable to directors of BankGroup.
Directors and Classes of Directors; Vacancies and Removal of Directors
Bank. The initial number of Directors of the Bank was set at 5.
Thereafter, the number of Directors is set annually by a resolution of the
Board of Directors adopted by a majority vote of the stockholders at a
number not less than 5 nor more than 30. The size of the current Board of
Directors is 12. There are no classes of Directors. MDFI requires
that all Directors serve for a stated term of not more than one year. Any
vacancy occurring on the Board of Directors, including a vacancy resulting
from and increase in the number of Directors and any vacancy approved by
the stockholders (not to exceed 2 board seats), may be filled by the
affirmative vote of the majority of the remaining directors, though less
than a quorum of the Board of Directors. Directors so chosen hold
office for a term expiring at the next following annual meeting of
60
<PAGE>
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.
Any Director or the entire Board of Directors may be removed, with or
without cause, by the holders of a majority of the shares then entitled to
vote at an election of directors.
BankGroup. The number of Directors is set forth in BankGroup's Bylaws.
The Board currently has fixed the number of directors at 11. Any vacancy
occurring on the Board of Directors, including a vacancy resulting from an
increase in the number of Directors, may be filled by the affirmative vote
of a majority of the remaining directors, though less than a quorum of the
Board of Directors. Directors so chosen shall hold office for a term
expiring at the next following annual meeting of shareholders at which
directors are elected. No decrease in the number of directors constituting
the Board of Directors shall shorten the term of any incumbent director.
Subject to the rights of the holders of preferred stock then outstanding,
any director may be removed by the affirmative vote of the holders of at
least two-thirds of outstanding voting shares.
Anti-Takeover Provisions
Bank. The MDGCL specifies additional voting requirements for "Business
Combination" transactions which would cause certain acquiring persons
voting power to meet or exceed specified thresholds. See "Required
Shareholder Vote for Certain Actions" which describes these additional
voting requirements applicable to Bank.
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
Shareholders of BankGroup do not have preemptive rights. Thus, if
additional shares of BankGroup common stock, or BankGroup preferred 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.
Shareholders of Bank have preemptive rights. Unless the charter
provides otherwise, a stockholder does not have any preemptive rights as to
a Maryland commercial bank with respect to: (i) stock issued to obtain any
of the capital required to initiate the enterprise of the State bank or
trust company; (ii) stock issued for at least its fair value in exchange for
61
<PAGE>
consideration other than money; (iii) stock remaining unsubscribed for after
being offered to stockholders; (iv) treasury stock sold for at least its
fair value; (v) stock issued or issuable under an agreement of merger;
(vi) stock which is not presently entitled to be voted in the election of
directors issued for at least its fair value; (vii) stock, including
treasury stock, issued to an officer or other employee of the State bank
or trust company or its subsidiary on terms and conditions approved by the
stockholders by the affirmative vote of two-thirds of all the votes
entitled to be cast on the matter; and (viii) any other issuance of shares
if the applicability of preemptive rights is impracticable. In
the absence of actual fraud or gross disparity in the determination, the fair
value of stock determined by the board of directors and recorded in the
resolution authorizing the issuance is conclusive. Unless the articles of
incorporation provide otherwise, holders of the following securities do not
have any preemptive tights under MDFI: (i) bonds, notes, debentures, or
other obligations convertible into stock; and (ii) stock not presently
entitled to be voted in the election of directors.
The Bank has elected in its Articles of Incorporation to provide
preemptive rights to both holders of common stock and preferred stock.
The terms of preemptive rights are essentially as follows except for the
conversion of preferred stock, or the exercise of warrants or stock options
granted under employment agreements (not to exceed 2,500 shares in the
case of any one individual), whenever the Bank authorizes issuance of any
class of stock or security, the securities shall first be offered ratably
to the existing holders of shares of common or preferred stock, such rate
of offer being the percentage of the total number of then-issued and
outstanding shares of all classes of stock of the Bank held by such
shareholder on the date the Bank authorizes the issuance. The preemptive
right may be exercised only with respect to the whole of the proportionate
share available to the right holder and not as a part thereof. For purposes
of the ratable calculation, common and preferred stock shall be treated
as outstanding stock of equal count. The preemptive rights provided to
stockholders of the Bank permit the purchase of shares on the same terms
and conditions at which the Bank proposes to issue the securities to
third parties, without deduction for any expenses of, or compensation for
underwriting or purchase of such securities by underwriters or dealers.
On the 10th day after the Bank authorizes the issuance of securities, the
Bank shall give notice to each preemptive right holder of the number of
shares available to the right holder and the terms of the proposed offering.
Thereafter, the preemptive right holder has 15 days in which to purchase the
securities at issue. If the preemptive right holder declines to purchase
the shares to which his or her preemptive rights attach, then those shares
may be sold to third parties by the Bank in accordance with the terms of
the offering.
62
<PAGE>
Assessment
All outstanding shares of Bank common stock are fully paid and
nonassessable.
All shares of BankGroup common stock presently issued are, and those to
be issued pursuant to the Agreement will be, fully paid and nonassessable.
Conversion; Redemption; Sinking Fund
Neither BankGroup common stock nor Bank common stock is convertible,
redeemable or entitled to any sinking fund.
Liquidation Rights
Bank. MDFI provides that a commercial bank may dissolve voluntarily,
if the stockholders of the commercial bank and the Commissioner approve the
dissolution. A proposed voluntary dissolution shall be approved by the
affirmative vote of the stockholders of the commercial bank who own two
thirds of its capital stock. After a proposed voluntary dissolution is
approved by the stockholders, the board of directors of the commercial
bank shall give the following notices. The board shall give written notice
to the Commissioner of the intended dissolution. This notice shall be
certified under the corporate seal of the commercial bank by its president
and by its cashier or treasurer. The board also shall give notice to
creditors of the commercial bank to present for payment of any claim
against it. This notice shall be published once each week for 8
consecutive weeks in a newspaper published in the county where the
commercial bank has its principal banking office. The Commissioner may
approve the intended dissolution only if the Commissioner determines that
the commercial bank is solvent.
The holders of the preferred stock of Bank are entitled to a liquidation
preference in the event of a voluntary or involuntary liquidation,
dissolution or winding up of the Bank, or any reduction in its capital
resulting from any distribution of assets to its stockholders. Holders of
Bank preferred stock are entitled to receive in cash out of the assets of
the corporation whether from capital or from earnings, available for
distribution to its stockholders, before any amount is paid to the holders
of common stock or of the stock of any other class ranking junior to the
preferred stock, the sum of $21.00 per share.
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
63
<PAGE>
or lesser vote. There are no provisions in BankGroup's Articles which
would modify the statutory requirements for dissolution under the VSCA.
Dividends and Other Distributions
Bank. The MDGCL 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 the indebtedness
of the corporation as the indebtedness becomes due in the ordinary course
of business, or (ii) the corporation's total assets would be less than the
sum of the corporation's total liabilities plus, unless the charter permits
otherwise, 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 stockholders whose preferential rights are
superior to those receiving the distribution.
The holders of the preferred stock of Bank are entitled to a liquidation
preference in the event of a voluntary or involuntary liquidation,
dissolution or winding up of the bank, or any reduction in its capital
resulting from any distribution of assets to its stockholders. Holders of
Bank preferred stock are entitled to received in cash out of assets of the
corporation whether from capital or from earnings, available for distribution
to its stockholders, before any amount is paid to the holders of common
stock or of the stock of any other class ranking junior to the preferred
stock, the sum of $21.00 per share. In addition to the MDGCL, there are
various regulatory requirement which are applicable to distributions by a
Maryland state-chartered, Federal Reserve member bank.
Further, by its charter, in the event the Board of Directors of Bank
determines to declare dividends, the holders of Bank preferred stock shall
be entitled to receive a non-cumulative dividend at a rate of $2.10 per
share per annum, payable annually if, as and when determined by the Board
of Directors, before any dividend shall be set apart or paid on any other
capital stock for such year. The holders of Bank preferred stock are also
entitled to participate in dividends, if any, declared and paid by the
Board of Directors to the holders of Bank common stock to the extent such
dividends exceed the $2.10 per share preference amount.
BankGroup. The VSCA generally provides that a corporation may make
distributions to its shareholders unless, after giving effect to the
distribution, (i) the corporation would not be able to pay its debts as
they become due in the usual course of business or (ii) the corporation's
total assets would be less than the sum of its total liabilities plus
(unless the articles of incorporation permit otherwise, which BankGroup's
Articles do not) the amount that would be needed, if the corporation were to
be dissolved at the time of the distribution, to satisfy the preferential
rights upon dissolution of shareholders whose preferential rights are
64
<PAGE>
superior to those receiving the distribution. These requirements are
applicable to BankGroup as a Virginia corporation.
In addition to the limitations set forth in the VSCA, there are various
regulatory requirements which are applicable to distributions by bank
holding companies. For a description of the regulatory limitations on
distributions by BankGroup, see "Supervision and Regulation Limits on
Dividends and Other Payments."
Indemnification
Bank. To the full extent permitted by MDGCL, and any other applicable
law, Bank shall indemnify a director or officer of Bank who is or was a
party to any proceeding by reason of the fact that he is or was such a
director or officer or is or was serving at the request of the Bank.
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. Bank's Bylaws do not impose any restriction on matters which may
come before any meeting of shareholders of Bank, provided proper prior
notice of the meeting is given. Written notice of all stockholders'
meetings shall be given. The notice of the annual meeting shall state
that it is called for the purpose of the election of directors and
for the transaction of other business which may properly come before the
meeting and shall (if any other action which could be taken at a special
meeting is to be taken at such annual meeting) state the purpose or
purposes. The notice of a special meeting shall in all instances state the
purpose or purposes for which the meeting is called. If any action is
proposed to be taken which could, if taken, entitle stockholders to receive
payment for their shares of stock, the notice must include a statement of
that purpose and to that effect.
BankGroup. BankGroup's Bylaws provide that at any meeting of
shareholders of BankGroup, only that business that is properly brought
before the meeting may be presented to and acted upon by the shareholders.
To be properly brought before the meeting, business must be brought (a)
by or at the direction of the Board of Directors or (b) by a shareholder
65
<PAGE>
who has given written notice of business he expects to bring before
the meeting to the Secretary of BankGroup not less than 90 days prior to
the meeting. A shareholder's notice to the Secretary shall set forth as
to each matter the shareholder proposes to bring before the meeting (a)
a brief description of the business to be brought before the meeting and
the reasons for conducting such business at the meeting, (b) the name and
address, as they appear on BankGroup's books, of the shareholder proposing
such business, (c) the class and number of shares of BankGroup's stock
beneficially owned by the shareholder, and (d) any material interest of
the shareholder in such business. No business shall be conducted at a
meeting of shareholders except in accordance with the procedures set
forth in BankGroup's Bylaws.
Shareholder Inspection Rights; Shareholder Lists
Bank. Under the MDGCL, any stockholder, holder of a voting trust
certificate in a corporation, or his agent may inspect and copy during
usual business hours any of the following corporate documents:
(i) bylaws; (ii) minutes of the proceedings of the stockholders; (iii)
annual statements of affairs; and (iv) voting trust agreements on
file at the corporation's principal office. In addition, any
stockholder or holder of a voting trust certificate in a corporation
other than an open-ended investment company may present to any
officer or resident agent of the corporation a written request for
a statement showing all stock and securities issued by the corporation
during a specified period of not more than 12 months before the date
of the request. Within 20 days after such a request is made under the
MDGCL, the corporation must prepare and have available on file at its
principal office a sworn statement of its president or treasurer or one of
its vice presidents or assistant treasurers which states: (v) the number of
shares or amounts of each class of stock or other securities issued during
the specified period; (vi) the consideration received per share or unit,
which may be aggregated as to all issuances for the same consideration
per share or unit; and (vii) the value of any consideration other than
money as set in a resolution of the board of directors. Under the
MDGCL, further and additional rights apply to stockholders of five percent
or more of the outstanding stock of a Maryland corporation. One or
more persons who together are and for at least six months have been
stockholders of record or holders of voting trust certificates of at least
five percent of the outstanding stock of any class of a Maryland
corporation may: (viii) in person or by agent, on written request, inspect
and copy during usual business hours the corporation's books of
account and its stock ledger; (ix) present to any officer or resident agent
of the corporation a written request for a statement of its affairs; and (x)
in the case of any corporation which does not maintain the original or a
duplicate stock ledger at its principal office, present to any officer or
resident agent of the corporation a written request for a list of its
stockholders. Within 20 days after a request for information is made by a
five percent or more stockholder, the corporation must prepare and have
available on file at its principal office; (xi) in the case of a request for
a statement of affairs, a statement verified under oath by its president or
treasurer or one of its vice-presidents or assistant treasurers which sets
forth in reasonable detail the corporation's assets and liabilities as of a
reasonably current date; and (xii) in the case of a request for a list of
stockholders, a list verified under oath by one of its officers or its stock
transfer agent or registrar which sets forth the name and address of each
stockholder and the number of shares of each class which the stockholder
holds.
BankGroup. Under the VSCA, the shareholder of a Virginia corporation
are entitled to inspect and copy certain books and records, including the
articles of incorporation and bylaws of the corporation if he gives the
corporation written notice of his or her demand at least five business
days before the date on which he wishes to inspect and copy. The
shareholder of a Virginia corporation is entitled to inspect and copy
certain other books and records, including a list of shareholders,
minutes of any meeting of the board of directors and accounting records
of the corporation, if (i) the shareholder has been a shareholder of
record for at least six months immediately preceding his or her
written demand or is the holder of at least 5% of the corporation's
outstanding shares, (ii) the shareholder's demand is made in good faith
and for a proper purpose, (iii) the shareholder describes with reasonable
particularity the purpose of the request and the records desired to be
inspected and (iv) the records are directly connected with the stated
purpose, and if he gives the corporation written notice of his or her demand
at least five business days before the date on which he wishes to inspect
and copy. The VSCA also provides that a corporation shall make available
for inspection by any shareholder during usual business hours, at least
10 days before each meeting of shareholders, a complete list of the
shareholders entitled to vote at such meeting.
Shareholder Rights Plan
Bank. The Bank does not have in effect any 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."
66
<PAGE>
Dissenters' Rights
Bank. Under the applicable provisions of the Maryland General Corporation
Law, each holder of Bank stock will be entitled to demand and receive payment of
the fair value of his shares, if he (i) prior to or at the meeting, files with
the Bank a written objection to the Share Exchange, (ii) does not vote in favor
of the Share Exchange, and (iii) within 20 days after Articles of Share Exchange
have been accepted for record by the Maryland Department of Assessments and
Taxation (the "Department"), makes written demand on Bank for payment of his
shares, stating the number of shares for which payment is demanded. A direction
in the stockholder's proxy to vote against the Share Exchange will not in itself
constitute a written objection or demand that satisfies the requirements
described above. Any stockholder who fails to comply with the requirements
described above will be bound by the terms of the Share Exchange.
Bank will promptly deliver or mail to each objecting stockholder written
notice of the date of acceptance of the Articles of Share Exchange for record
by the Department. Bank may also deliver or mail to each objecting stockholder
a written offer to pay for his stock at a price deemed by Bank to be the fair
value thereof. Within 50 days after acceptance of the Articles of Share
Exchange for record by the Department, either Bank or any objecting stockholder
who has not received payment for his shares may petition the court in Prince
George's County, Maryland, for an appraisal to determine the fair value
of such shares. If the court finds that an objecting stockholder is entitled
to appraisal of his stock, the court will appoint three disinterested appraisers
to determine the fair market value of such shares on terms and conditions the
court determines proper, and such appraisers will, within 60 days after
appointment (or such longer period as the) court may direct), file with the
court and mail to each party to the proceeding their report stating their
conclusion as to the fair value of such shares. Within 15 days after the filing
of such report, any party may object to such report and request a hearing
thereon. The court will, upon motion of any party, enter an order either
confirming, modifying or rejecting such report and, if confirmed or modified,
enter judgment directing the time within which payment will be made. If the
appraisers' report is rejected, the court may determine the fair value of the
shares of the objecting stockholders or may remit the proceeding to the same or
other appraisers. Any judgment entered pursuant to a court proceeding will
include interest from the date of the stockholder's vote on the action to which
objection was made. Costs of the proceeding shall be determined by the court
and may be assessed against Bank or, under certain circumstances, the objecting
stockholder, or both.
At any time after the filing of a petition for appraisal, the court may
require objecting stockholders to submit their certificates representing shares
to the clerk of the court for notation of the pendency of the appraisal
proceedings. A stockholder demanding payment for shares will not have the right
to receive any dividends or distributions payable to holders of record after the
close of business on the date of the stockholders' vote and will cease to have
any rights as a stockholder with respect to such shares except the right to
receive payment of the fair value thereof.
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 Transaction 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
67
<PAGE>
shares following consummation of the Transaction and who are not deemed to
be "affiliates" (as defined under the 1933 Act, but generally including
directors, certain executive officers and 10% or more shareholders) of
Bank or BankGroup. Each holder of Bank Common Stock who is deemed by Bank
to be an affiliate of it has entered into an agreement with BankGroup
prior to the Effective Time of the Share Exchange 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 Share Exchange, (B) such affiliate
acknowledges and agrees beginning 30 days prior to the Effective Time
of the Share Exchange, that he will not sell, pledge, transfer
or otherwise dispose of shares of Bank Common Stock or BankGroup Common
Stock except in compliance with the applicable provisions of the 1933
Act and rules and regulations thereunder and until such time as financial
results covering at least 30 days of combined operations of BankGroup
and Bank have been published within the meaning of Section 201.01 of the
SEC's Codification of Financial Reporting Policies, and (C)
the certificates representing said shares may bear a legend referring to
the foregoing restrictions. This Proxy Statement/Prospectus does not
cover any resales of BankGroup Common Stock received by affiliates of Bank.
EXPERTS
The consolidated financial statements of MainStreet BankGroup
Incorporated and subsidiaries (formerly Piedmont BankGroup Incorporated
and Subsidiaries) for the years ended December 31, 1996 and 1995, and
the combination of the previously reported financial statements for the
year ended December 31, 1994, incorporated in this Proxy Statement/
Prospectus by reference to BankGroup's Annual Report on Form 10-K for the
year ended December 31, 1996 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 statements of income, changes in shareholders
equity and cash flows of MainStreet BankGroup Incorporated and subsidiaries
(formerly Piedmont BankGroup Incorporated and subsidiaries) for the year
ended December 31, 1994, (not presented herein), prior to their restatement
to reflect the 1996 poolings of interests as described in Note 2 of the
Notes to the December 31, 1996 consolidated financial statements, included
in BankGroup's annual report on Form 10-K for the year ended December 31,
1996, 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.
68
<PAGE>
The consolidated financial statements of Hanover Bank and subsidiary
(prior to their restatement to reflect the 1996 poolings of interests with
MainStreet BankGroup Incorporated) for the year ended December 31, 1994
included in this Prospectus and the Registration Statement have been
audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing herein and elsewhere in the Registration
Statement, and are included in reliance upon the report of such firm given
their authority as experts in accounting and auditing.
The financial statements of The First National Bank of Clifton Forge
(prior to their restatement to reflect the 1996 poolings of interests with
MainStreet BankGroup Incorporated) for the year ended December 31, 1994,
have been incorporated by reference in this Proxy Statement/Prospectus in
reliance upon the report of Persinger & Company, L.L.C., independent
auditors, incorporated herein by reference from the BankGroup's 1996
Annual Report on Form 10-K given the authority of said firm as experts in
accounting and auditing.
The financial statements of Commerce Bank as of December 31, 1996 and
1995, and for each of the three years in the period ended December 31, 1996,
included in this Proxy Statement/Prospectus have been so included in reliance
upon the report of Coopers & Lybrand L.L.P., independent accountants,
included herein, and upon the authority of said firm as experts in
accounting and auditing.
LEGAL OPINIONS
The legality of BankGroup Common Stock to be issued in the Share
Exchange will be passed on for BankGroup by Flippin, Densmore, Morse,
Rutherford & Jessee, Roanoke, Virginia.
Certain legal matters will be passed on for Bank by McNamee, Hosea,
Jernigan & Kim, P.A., Greenbelt, Maryland.
A condition to consummation of the Share Exchange is the delivery to
BankGroup and Bank by Flippin, Densmore, Morse, Rutherford & Jessee of an
opinion concerning certain federal income tax consequences of the
Transaction. See "The Transaction -- Certain Federal Income Tax
Consequences."
69
<PAGE>
OTHER MATTERS
As of the date of this Proxy Statement/Prospectus, the Bank Board does
not know of any other matters to be presented for action at the Bank
Shareholder Meeting other than procedural matters incident to the conduct
of the meeting. If any other matters not now known are properly brought
before the Bank Shareholder Meeting, the persons named in the accompanying
proxy will vote such proxy in accordance with his or her judgment.
By Order of the Board of Directors,
-------------------------------------
Corporate Secretary
70
<PAGE>
INDEX TO
COMMERCE BANK CORPORATION FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AND THE THREE MONTHS AND SIX MONTHS ENDED
JUNE 30, 1997 AND JUNE 30, 1996
Page No.
Interim Financial Statements
- -----------------------------
Balance Sheets at June 30, 1997 (Unaudited) and December
31, 1996
Statements of Income for the Three Months and Six Months
Ended June 30, 1997 and June 30, 1996 (Unaudited)
Statements of Cash Flow for the Six Months Ended June
30, 1997 and June 30, 1996 (Unaudited)
Annual Financial Statements
- ---------------------------
Report of Independent Accountants
Balance Sheets at December 31, 1996 and 1995
Statements of Income for the Years Ended December 31,
1996, 1995 and 1994
Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994
Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994
Notes to Financial Statements
F-1
<PAGE>
<TABLE>
<CAPTION>
COMMERCE BANK CORPORATION
BALANCE SHEETS (IN 000'S)
(unaudited)
JUNE 30 DECEMBER 31
1997 1996
----- -----
<S> <C> <C>
ASSETS
Cash and Due From Banks $ 8,618 $ 6,054
Federal Funds Sold 11,300 6,100
Securities Available for Sale (Amortized 2,126 4,113
Cost of $2,130 in 1997 and $4,120 in 1996)
Securities Held to Maturity (Approximate
Market Values of $7,813 in 1997 and $7,391
in 1996)
Taxable 7,823 7,403
Loans, Net of Unearned Income 44,628 45,612
Less: Allowance for Loan Losses (700) (708)
--------- ---------
Loans, Net 43,928 44,904
Bank Premises and Equipment, Net 171 208
Other Assets 554 508
--------- ---------
TOTAL ASSETS $ 74,520 $ 69,290
========= =========
LIABILITIES
Deposits:
Demand Deposits (Noninterest-Bearing) $ 19,497 $ 14,456
Interest Checking Accounts 7,992 7,285
Savings Deposits 923 782
Money Market Investment Accounts 10,774 13,145
Time Deposits
Certificates of Deposit $100,000
and Over 13,216 10,657
Other 6,289 7,847
--------- ---------
Total Deposits 58,691 54,172
Short - Term Debt 9,381 9,295
Accrued Interest Payable 69 64
Other Liabilities 327 166
--------- ---------
TOTAL LIABILITIES 68,468 63,697
SHAREHOLDERS' EQUITY
Convertible Preferred Stock, Par Value 310 310
$10.00, Authorized 50,000 Shares; Issued and
Outstanding 30,984 in June, 1997 and 30,984
in December, 1996
Common Stock, Par Value $10.00, Authorized 1,922 1,922
450,000 Shares; Issued and Outstanding
192,216 Shares in June, 1997 and 192,216 in
December, 1996
Capital in Excess of Par 2,294 2,294
Retained Earnings 1,529 1,071
Unrealized Gains (Losses) on Securities, Net (3) (4)
--------- --------
TOTAL SHAREHOLDERS' EQUITY 6,052 5,593
--------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 74,520 $ 69,290
========= ========
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
COMMERCE BANK CORPORATION
STATEMENTS OF INCOME
(In 000's Except Share and Per Share Data)
(unaudited)
Three Months Ended Six Months Ended
------------------ ----------------
June 30 June 30 June 30 June 30
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans Taxable $ 1,021 $ 993 $ 2,024 $ 1,966
Interest and Dividends on Securities
Available for Sale 37 55 84 114
Interest and Dividends on Securities
Held to Maturity 101 91 189 156
Other Interest Income 73 82 141 182
-------- -------- -------- --------
Total Interest Income 1,232 1,221 2,438 2,418
INTEREST EXPENSE
Deposits 421 416 828 870
Short-Term Debt 43 66 96 118
-------- -------- -------- --------
Total Interest Expense 464 482 924 988
Net Interest Income 768 739 1,514 1,430
Provision for Loan Losses 30 63 30 138
-------- -------- -------- --------
Net Interest Income After
provision for Loan Losses 738 676 1,484 1,292
NONINTEREST INCOME
Service Charges, Fees and Other 184 142 347 281
Securities Gains (Losses), Net 0 0 0 0
-------- -------- -------- --------
Total Noninterest Income 184 142 347 281
NONINTEREST EXPENSE
Salaries 223 190 448 394
Employee Benefits 68 57 142 113
Net Occupancy Expense 70 68 141 134
Equipment 16 22 32 47
FDIC Assessment 3 2 6 4
Stationery and Supplies 9 13 21 23
Advertising 1 2 2 4
Other 154 100 255 191
-------- -------- -------- --------
Total Noninterest Expense 544 454 1,047 910
-------- -------- -------- --------
Income Before Income Taxes 378 364 784 663
Income Tax Expense 163 146 326 265
-------- -------- -------- --------
NET INCOME $ 215 $ 218 $ 458 $ 398
======== ======== ======== ========
PER SHARE DATA
Net Income Per Share:
Primary $ 1.01 $ 1.07 $ 2.18 $ 1.97
======== ======== ======== ========
Fully Diluted $ 1.01 $ 1.07 $ 2.16 $ 1.96
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Primary 211,512 203,312 210,330 201,762
======== ======== ======== ========
Fully Diluted 211,512 203,312 211,512 203,312
======== ======== ======== ========
</TABLE>
F-3
<PAGE>
COMMERCE BANK CORPORATION
STATEMENTS OF CASH FLOW
for Six Months Ended June 30, 1997 and June 30, 1996
(In 000's) (unaudited)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 458 $ 398
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Provision for Loan Losses 30 138
Depreciation and Amortization 37 53
Accretion of Securities Discounts (269) (235)
Provision for Deferred Income Taxes (27) 3
Changes in Other Assets and Other
Liabilities:
Other Assets (22) 15
Accrued Interest 5 (10)
Other Liabilities 161 (307)
------- -------
Net Cash Provided by Operating Activities 373 55
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (Increase) Decrease in Federal Funds Sold (5,200) 3,800
Purchases of Securities Available for Sale (2,929) (1,967)
Purchases of Securities Held to Maturity (6,731) (3,338)
Proceeds from Calls and Maturities of
Securities Available for Sale 5,000 3,000
Proceeds from Calls and Maturities of
Securities Held to Maturity 6,500 1,500
Net (Increase) Decrease in Loans 946 (2,117)
Purchases of Bank Premises and Equipment - (30)
------- -------
Net Cash Provided by (Used in) Investing
Activities (2,414) 848
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase (Decrease) in Deposits 4,519 (2,922)
Net Increase in Short-Term Debt 86 1,552
------- -------
Net Cash Provided by (Used in) Financing
Activities 4,605 (1,370)
------- -------
Net Increase (Decrease) in Cash and Due
From Banks 2,564 (467)
Cash and Due From Banks at Beginning of Year 6,054 4,382
------- -------
Cash and Due From Banks at End of Year $ 8,618 $ 3,915
======= =======
</TABLE>
The financial statements of Commerce Bank Corporation conform to generally
accepted accounting principles and to general banking industry practices.
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 of the financial statements
herein have been included. The financial statements herein should be read
in conjunction with the notes to the financial statements included in the
corporation's 1996 Financial Statements, included herein. The results
of the interim period are not necessarily indicative of year-end results.
F-4
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and the Board of Directors
Commerce Bank Corporation
We have audited the accompanying balance sheets of Commerce
Bank Corporation (the Bank) as of December 31, 1996 and 1995, and
the related statements of operations, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31,
1996. 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 the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Commerce Bank
Corporation as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
February 28, 1997, except
with respect to Notes 15 and 16,
for which the date is July 3, 1997.
F-5
<PAGE>
<TABLE>
<CAPTION>
COMMERCE BANK CORPORATION
BALANCE SHEETS
December 31, 1996 and 1995
<S> <C> <C>
ASSETS 1996 1995
---- ----
Cash and due from banks $ 6,053,647 $ 4,381,875
Federal funds sold 6,100,000 10,000,000
Investment securities available for sale 4,113,000 4,533,950
Investment securities held to maturity 7,402,991 4,870,840
----------- -----------
Total Investment Securities 11,515,991 9,404,790
Loans 45,590,999 40,767,424
Less: Allowance for possible loan losses (707,659) (569,046)
Unearned income 21,195 7,189
----------- -----------
Loans, Net 44,904,535 40,205,567
Accrued interest 218,126 248,282
Bank premises and equipment, net 207,989 272,130
Deferred income taxes 207,459 134,469
Other assets 81,998 81,238
----------- -----------
TOTAL ASSETS $69,289,745 $64,728,351
=========== ===========
LIABILITIES
Deposits:
Interest bearing - Demand $ 7,285,080 $ 8,779,539
Non-interest bearing - Demand 14,456,226 13,281,447
Savings 13,927,219 7,871,636
Certificates 18,503,957 23,267,107
----------- -----------
TOTAL DEPOSITS 54,172,482 53,199,729
Short-term borrowings 520,153 486,407
Repurchase agreements 8,775,127 5,506,900
Accrued expenses and other liabilities 229,376 560,081
----------- -----------
TOTAL LIABILITIES 63,697,138 59,753,117
----------- -----------
Commitments (Notes 5 and 12)
STOCKHOLDERS' EQUITY
Convertible preferred stock, (liquidation
preference of $650,664), Par Value $10,
Authorized 50,000 shares, Issued and
outstanding 30,984 shares in 1996
and 1995 309,840 309,840
Common stock, Par Value $10, Authorized
450,000 shares, Issued and outstanding
192,216 shares in 1996 and 1995 1,922,160 1,922,160
Paid-in capital in excess of par value 2,294,220 2,294,220
Retained earnings 1,070,750 455,795
Net unrealized loss on available for
sale securities (4,363) (6,781)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 5,592,607 4,975,234
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $69,289,745 $64,728,351
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
COMMERCE BANK CORPORATION
STATEMENTS OF INCOME
for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest on loans $3,968,106 $3,763,826 $2,988,545
Interest on investment
securities 569,009 330,240 225,882
Interest on federal funds sold 362,017 151,005 65,210
---------- ---------- ----------
Total Interest Income 4,899,132 4,245,071 3,279,637
---------- ---------- ----------
Interest expense:
Deposits 1,674,317 1,445,429 995,593
Short-term borrowings 246,039 201,764 117,830
---------- ---------- ----------
Total Interest Expense 1,920,356 1,647,193 1,113,423
---------- ---------- ----------
Net interest income 2,978,776 2,597,878 2,166,214
Provision for loan losses 175,000 306,000 385,000
---------- ---------- ----------
Net interest income after
provision for loan losses 2,803,776 2,291,878 1,781,214
---------- ---------- ----------
Non-interest income:
Fees charged for services 431,845 413,712 329,843
Other 157,529 129,409 133,166
---------- ---------- ----------
Total Non-interest Income 589,374 543,121 463,009
---------- ---------- ----------
Non-interest expenses:
Salaries and employee benefits 1,098,786 954,284 726,870
Occupancy 254,695 238,756 171,052
Furniture and equipment 107,085 121,525 103,609
FDIC and state assessments 8,098 48,130 82,781
Legal fees 20,422 38,910 48,073
Audit fees 54,086 31,580 28,805
Directors fees 53,600 47,700 23,025
Correspondent service charges 10,828 1,063 31,504
Processing fees 39,923 45,365 30,666
Other 258,831 301,332 248,574
---------- ---------- ----------
Total Non-interest
Expenses 1,906,354 1,828,645 1,494,959
---------- ---------- ----------
Income Before Income Taxes 1,486,796 1,006,354 749,264
Income Tax Expense 566,506 368,517 314,000
---------- ---------- ----------
Net Income $ 920,290 $ 637,837 $ 435,264
========== ========== ==========
Per Share Data:
Net Income Per Share:
Primary $ 4.51 $ 3.26 $ 2.27
========== ========== ==========
Fully Diluted $ 4.47 $ 3.24 $ 2.27
========== ========== ==========
Weighted Average Shares Outstanding:
Primary 204,125 196,311 192,216
========== ========== ==========
Fully Diluted 206,206 197,307 192,216
========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
COMMERCE BANK CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1996, 1995 and 1994
Convertible
Preferred Stock Common Stock Paid-in Retained Unrealized
---------------- ------------------- in excess of Earnings loss on
Shares Amount Shares Amount par value (Deficit) Securities, Net Total
------ -------- ------- ---------- ---------- ---------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1993 30,984 $309,840 192,216 $1,922,160 $2,294,220 $ (360,026) $ - $4,166,194
Net income 435,264 435,264
------ -------- ------- ---------- ---------- --------- -------- ----------
Balance at
December 31, 1994 30,984 309,840 192,216 1,922,160 2,294,220 75,238 - 4,601,458
Net income 637,837 637,837
Dividends paid ($1.00
per common share and
$2.10 per convertible
preferred share) (257,280) (257,280)
Net unrealized loss on
available for sale
securities (6,781) (6,781)
------ -------- ------- ---------- ---------- --------- -------- ----------
Balance at
December 31, 1995 30,984 309,840 192,216 1,922,160 2,294,220 455,795 (6,781) 4,975,234
Net income 920,290 920,290
Dividends paid
($1.25 per common
share and $2.10
per convertible
preferred share) (305,335) (305,335)
Net unrealized
gain on available
for sale
securities 2,418 2,418
------ -------- ------- ---------- ---------- ---------- -------- ----------
Balance at
December 31, 1996 30,984 $309,840 192,216 $1,922,160 $2,294,220 $1,070,750 $ (4,363) $5,592,607
====== ======== ======= ========== ========== ========== ======== ==========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-8
<PAGE>
<TABLE>
<CAPTION>
COMMERCE BANK CORPORATION
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 920,290 $ 637,837 $ 435,264
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating
Activities:
Provision for Loan Losses 175,000 306,000 385,000
Depreciation and Amortization 99,171 97,490 73,286
Accretion of Securities Discounts (523,859) (220,704) (36,363)
Provision for Deferred Income
Taxes (73,013) (60,203) 170,000
Changes in Other Assets and Other
Liabilities:
Other Assets 29,396 (6,296) (28,889)
Accrued Interest (12,433) 30,168 10,329
Other Liabilities (318,272) 246,201 34,309
---------- ---------- ----------
Net Cash Provided by Operating
Activities 296,280 1,030,493 1,042,936
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net Increase in Federal Funds Sold 3,900,000 (10,000,000) -
Purchases of Securities Available for
Sale (5,898,828) (7,296,480) (19,850)
Purchases of Securities Held to
Maturity (8,186,073) (3,847,216) (5,854,660)
Proceeds from Calls and Maturities
of Securities Available for Sale 6,000,000 3,000,000 -
Proceeds from Calls and Maturities
of Securities Held to Maturity 6,500,000 5,000,000 5,449,524
Net Increase in Loans (4,873,968) (3,114,906) (10,676,163)
Purchases of Bank Premises and
Equipment (35,030) (70,119) (148,459)
---------- ---------- ----------
Net Cash Used in Investing Activities (2,593,899) (16,328,721) (11,249,608)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 972,753 16,062,212 2,499,444
Net Increase in Short-Term Debt 3,301,973 231,919 1,004,855
Cash Dividends (305,335) (257,280) -
---------- ---------- ----------
Net Cash Provided by Financing
Activities 3,969,391 16,036,851 3,504,299
---------- ---------- ----------
Net Increase (Decrease) in Cash and
Due from Banks 1,671,772 738,623 (6,702,373)
Cash and Due from Banks at Beginning
of Year 4,381,875 3,643,252 10,345,625
---------- ---------- ----------
Cash and Due from Banks at End of
Year $6,053,647 $4,381,875 $3,643,252
========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-9
<PAGE>
COMMERCE BANK CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Nature of Operations:
Commerce Bank Corporation ("Commerce", "The Corporation"
or "The Bank") operates from three locations in the Washington, D.C.,
metropolitan area. Commerce's primary source of revenue is derived from
loans to customers.
Basis of Presentation:
The accounting and reporting policies of Commerce are in accordance
with generally accepted accounting principles and conform to prevailing
practices within the commercial banking industry.
Management Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Investment Securities:
The Bank divides the investment portfolio among three categories:
securities held-to-maturity, securities available for sale and trading
account securities. Debt securities that the Bank has the positive intent
and ability to hold to maturity are reported at amortized cost. Securities
available for sale are so designated for liquidity purposes and are reported
at fair value with unrealized gains and losses shown as a separate component
of stockholders' equity, net of the related tax effect. Debt and equity
securities that are bought and held principally for the purpose of selling
them in the near term are classified as trading securities and reported at
fair value with unrealized gains and losses included in earnings. The cost
of securities sold is determined by the specific identification method. The
Bank did not hold any securities classified as trading securities as of
December 31, 1996 or 1995.
F-10
<PAGE>
COMMERCE BANK CORPORATION
NOTES TO FINANCIAL STATEMENTS, continued
Gains and losses on securities are realized in the period in which
incurred. Amortization and accretion of premiums and discounts are
included in income over the contractual life of the securities.
Loans and Allowance for Possible Loan Losses
Loans are stated at the principal amount outstanding. Interest income
is accrued at the contractual rate on the principal amount outstanding.
When scheduled principal or interest payments are past due 90 days or
more on any loan, the accrual of interest income is discontinued. A loan
remains on non-accrual status until the loan is current as to payment of
both principal and interest and the borrower demonstrates the ability to
pay and remain current.
Loan origination fees, net of origination costs, are deferred and
recognized as an adjustment to interest income over the life of the
related loan.
The Corporation adopted the provisions of Statements of Financial
Accounting Standards No. 114/118 "Accounting by Creditors for
Impairment of a Loan" ("SFAS No. 114/118") on January 1, 1995.
Under SFAS No. 114/118, a loan is considered impaired, based on
current information and events, if it is possible that Commerce will be
unable to collect the scheduled payments of principal or interest when
due according to the contractual terms of the loan agreement. The
measurement of impaired loans is generally based on the present value
of expected future cash flows discounted at the historical effective
interest rate, except that all collateral dependent loans are measured
for impairment based on the fair value of the collateral. Interest income
on impaired loans is recognized on a cash basis. Impaired loans exclude
smaller-balance homogenous loans such as residential mortgage and
consumer installment loans which are collectively evaluated for impairment.
The Bank maintains an allowance for loan losses at an amount which,
in management's judgment, should be adequate to absorb losses on existing
loans that may become uncollectible. Management's judgment in determining
the adequacy of the allowance is based on evaluations of the collectibility
of loans. These evaluations take into consideration such factors as changes
in the nature and volume of the loan portfolio, current economic conditions
that may affect the borrowers' ability to pay, overall portfolio quality
and review of specific problem loans.
The allowance for credit losses is established through charges to earnings in
the form of a provision for credit losses. Increases and decreases in the
allowance due to changes in the measurement of the impaired loans are
F-11
<PAGE>
COMMERCE BANK CORPORATION
NOTES TO FINANCIAL STATEMENTS, continued
included in the provision for credit losses. Loans continued to be classified
as impaired unless they are brought fully current and the collection of
scheduled interest and principal is considered probable.
Bank Premises and Equipment:
Bank premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are
computed using the straight-line method over the estimated useful
lives of the related property. Expenditures for maintenance, repairs
and minor replacements are charged to operating expenses as incurred.
Expenditures for improvements which extend the life of an asset are
capitalized and depreciated over the asset's remaining useful life.
Cash and Cash Equivalents:
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks.
Income Taxes:
Deferred income taxes are provided with respect to temporary differences
between the financial statement and tax basis of assets and liabilities using
presently enacted tax rates.
Reclassifications:
Certain reclassifications have been made to the 1995 amounts to conform
with 1996 presentation.
Short Term Borrowings:
The Banks Federal Funds limit in 1996 and 1995 was $2,400,000.
Earnings Per Share
Net income per share is calculated on the basis of the weighted average
number of common and common equivalent shares outstanding for each
of the three years in the period ended December 31, 1996. Convertible
preferred stock is considered a common stock equivalent in the earnings
F-12
<PAGE>
COMMERCE BANK CORPORATION
NOTES TO FINANCIAL STATEMENTS, continued
per share calculation. Conversion of the stock purchase warrants in 1994
would have been anti-dilutive; therefore, such conversion was not
considered in the calculation for 1994.
Supplemental Cash Flow Information
Total interest paid in cash was $1,932,788, $1,617,025 and
$1,103,094 for the years ended December 31, 1996, 1995
and 1994, respectively. Cash paid for income taxes was
$968,337, $428,720 and $144,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
New Accounting Pronouncements
SFAS No. 128 "Earnings per share" was issued in February 1997 and
establishes standards for computing and presenting earnings per
share and applies to entities with publicly held common stock or
potential common stock. The Statement is effective for financial
statements issued for periods ending after December 15, 1997. The
adoption of the Statement would have changed earnings per share to
basic earnings per share of $4.79 and diluted earnings per share of
$4.51 for the year ended December 31, 1996.
SFAS No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" was issued
in June 1996. The standard had no significant impact on the earnings
or the financial condition of the Corporation.
2. Restrictions on Cash:
The Federal Reserve requires banks to maintain cash reserves based
principally on the amount of deposit liabilities. At December 31, 1996
and 1995, the required reserve balance was $345,000 and $270,000,
respectively.
F-13
<PAGE>
COMMERCE BANK CORPORATION
NOTES TO FINANCIAL STATEMENTS, continued
3. Investment Securities:
The cost and market values of investment securities at December 31
are as follows:
<TABLE>
<CAPTION>
1996
- ----
Gross Gross
Unrealized Unrealized Market
Cost Gains Losses Value
---- ---------- ---------- -----
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury $ 7,402,991 $ - $(12,241) $ 7,390,750
Available for sale:
U.S. Treasury 3,984,308 - (7,108) 3,977,200
Federal Reserve
Bank Stock 135,800 - - 135,800
----------- --------- -------- -----------
Total available
for sale 4,120,108 - (7,108) 4,113,000
----------- --------- -------- -----------
Total investments $11,523,099 $ - $(19,349) $11,503,750
=========== ========= ========= ===========
</TABLE>
<TABLE>
<CAPTION>
1995
- ----
Gross Gross
Unrealized Unrealized Market
Cost Gains Losses Value
---- ---------- ---------- -----
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury $ 4,870,840 $ - $ (5,202) $ 4,865,638
Available for sale:
U.S. Treasury 4,409,197 - (11,047) 4,398,150
Federal Reserve
stock 135,800 - 135,800
----------- --------- -------- -----------
Total available
for sa1e 4,544,997 - (11,047) 4,533,950
----------- --------- -------- -----------
Total investments $ 9,415,837 $ - $(16,249) $ 9,399,588
=========== ========= ======== ===========
</TABLE>
All U.S. Treasury securities held at December 31, 1996 mature within one
year. There were no sales of investment securities during 1996, 1995 and
1994.
At December 31, 1996 and 1995, U.S. Treasury securities with a book value of
$11,387,299 and $9,280,037, respectively, were pledged as collateral for
repurchase agreements (see Note 7) and certain deposits as required or
permitted by law.
F-14
<PAGE>
COMMERCE BANK CORPORATION
NOTES TO FINANCIAL STATEMENTS, continued
4. Loans and Allowance for Possible Loan Losses:
Loans, net of participations, at December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Real estate $19,367,200 $17,082,563
Commercial 9,757,732 7,263,387
Lines of credit 9,579,222 9,467,827
Consumer 6,886,845 6,934,645
Credit cards - 19,002
----------- -----------
$45,590,999 $40,767,424
=========== ===========
</TABLE>
Changes in the allowance for possible loan losses were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 569,046 $ 386,861 $ 293,721
Provision for loan losses 175,000 306,000 385,000
Loans charged off (net of
recovery) (36,387) (123,815) (291,860)
--------- --------- ---------
Balance, end of year $ 707,659 $ 569,046 $ 386,861
========= ========= =========
</TABLE>
At December 31, 1996 and 1995, impaired loans totaled $926,583 and
$243,000, respectively, with a corresponding valuation allowance of
$301,615 and $24,300, respectively. For the years ended December 31,
1996 and 1995, the average recorded investment in impaired loans was
approximately $687,396 and $305,000, respectively. Had all of these
loans performed in accordance with their original terms, interest income
of approximately $85,107 and $30,810 would have been recorded during
1996 and 1995, respectively. Commerce recognized $64,127 and $24,470
in interest on impaired loans during the years 1996 and 1995, respectively.
The above loan portfolio includes three non-accrual loans of approximately
$218,740 at December 31, 1996 and one loan of approximately $107,000 at
December 31, 1995.
In the normal course of banking business loans are made to officers and
directors of the Bank as well as to companies and individuals affiliated
with those officers and directors. At December 31, 1996 and 1995, loans to
officers and directors of the Bank, including loans to their related
interests, totaled $868,555 and $1,039,205, respectively. No new loans
or existing lines of credit were generated to officers and directors and
their related interests during 1996. New loans or increases of existing
lines of credit totaled $204,403 during 1995. Repayments of such loans
amounted to $170,650 and $118,868 during 1996 and 1995, respectively.
F-15
<PAGE>
COMMERCE BANK CORPORATION
NOTES TO FINANCIAL STATEMENTS, continued
5. Bank Premises and Equipment:
Bank premises and equipment at December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Leasehold improvements $270,212 $270,212
Furniture and equipment 479,123 457,685
-------- --------
749,335 727,897
Less: accumulated depreciation
and amortization (541,346) (455,767)
-------- --------
Bank premises and equipment, net $207,989 $272,130
======== ========
</TABLE>
The Bank occupies its headquarters and banking branches under operating
leases. These leases contain escalation clauses providing for annual
increases in rental payments. The principal lease agreement contains a
renewal option for two additional five-year terms. The minimum annual
lease commitments at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Equipment Facilities Total
--------- ---------- -----
<S> <C> <C> <C>
1997 $ 9,296 $216,215 $225,511
1998 10,152 230,307 240,459
1999 10,152 138,384 148,536
2000 1,864 1,380 3,244
2001 - - -
-------- -------- --------
Total $ 31,464 $586,286 $617,750
======== ======== ========
</TABLE>
Facility expenses approximated $221,313, $206,338 and $147,469,
respectively, for the years ended December 31, 1996, 1995 and 1994.
Equipment rental expenses approximated $6,598, $6,686 and
$26,781 for the years ended December 31, 1996, 1995 and 1994,
respectively.
6. Deposits:
Included in deposits are certificates of deposit issued in denominations
of $100,000 or more. At December 31, the maturities of such certificates
are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Three months or less $2,939,000 $6,119,000
Three through twelve months 3,402,000 3,186,000
Over one year through five years 4,316,000 5,360,000
</TABLE>
F-16
<PAGE>
COMMERCE BANK CORPORATION
NOTES TO FINANCIAL STATEMENTS, continued
7. Short-Term Borrowings:
Short-term borrowings at December 31, consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Repurchase agreements $8,775,127 $5,506,900
U.S. Treasury demand note 520,153 486,407
---------- ----------
$9,295,280 $5,993,307
========== ==========
</TABLE>
The repurchase agreements consist of demand "Commerce Bank
Repurchase Loans" which do not exceed ninety days from agreement
date. At December 31, 1996, the outstanding balances represented
overnight borrowing transactions. The Bank pays interest on these
agreements at its daily fund rate (2.75% and 3.75% at December 31,
1996 and 1995, respectively). The average rates on these repurchase
agreements for 1996 and 1995 were 2.86% and 3.05%, respectively.
8. Convertible Preferred Stock:
Each share of the non-voting convertible preferred stock has a
noncumulative dividend preference of $2.10 per share. Subject to
federal and state regulatory approval, the preferred stock may be
converted into common stock on a one-for-one basis. The Bank has
reserved 30,984 shares of common stock for this purpose. The preferred
stock is redeemable by the Bank under certain circumstances. The redemption
price shall equal the greater of: the purchase price of the preferred stock
plus interest accrued at the federal funds rate, fair market value as
determined by an independent appraisal or two times the book value. In the
event of a sale of all or substantially all of the Corporation's common
stock, the acquirer must also purchase all of the preferred stock for the
same price paid to holders of common stock. A related party holds 100% of
the preferred shares of stock outstanding. If converted, the related entity
would hold 18.18% of the outstanding common shares of the corporation.
9. Stock Purchase Warrants:
The Bank issued to its founding investors warrants to acquire shares of
common and convertible preferred stock for $21 per share during a ten-year
period expiring September 1999. Based on their initial investments, founding
investors were issued warrants to acquire 73,000 shares of common stock
and 13,400 shares of convertible preferred stock.
F-17
<PAGE>
COMMERCE BANK CORPORATION
NOTES TO FINANCIAL STATEMENTS, continued
10. Related Party Transactions:
A related entity provides data processing services to the Corporation.
Fees paid to this related entity for data processing services amounted
to $39,923, $45,365 and $30,666 in 1996, 1995 and 1994, respectively.
11. Income Taxes:
The income tax provision for the years ended December 31 is summarized
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $536,449 $342,602 $127,000
State 104,568 86,118 17,000
-------- -------- --------
641,017 428,720 144,000
-------- -------- --------
Deferred:
Federal (61,881) (44,182) 150,000
State (12,630) (16,021) 20,000
-------- -------- --------
(74,511) (60,203) $170,000
-------- -------- --------
Provision for income
taxes $566,506 $368,517 $314,000
======== ======== ========
</TABLE>
The difference between the statutory tax rate and the effective tax rate of
the Company is principally the result of the state income taxes net of the
federal benefit.
The components of the net deferred tax asset recognized in 1996 and 1995
are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net Deferred Tax Assets:
Loan Loss Reserve $ 184,548 $ 129,647
Depreciation 21,957 15,248
Other, nET 954 (10,426)
--------- ---------
$ 207,459 $ 134,469
========= =========
</TABLE>
At December 31, 1996, and 1995, no valuation allowance was
required with respect to deferred tax assets.
Net deferred income tax assets primarily arise from temporary differences
generated from the reserve for loan losses and other accrued liabilities.
F-18
<PAGE>
COMMERCE BANK CORPORATION
NOTES TO FINANCIAL STATEMENTS, continued
12. Credit Risk:
Various commitments to extend credit (lines of credit) are made
in the normal course of banking business. Letters of credit are also
issued for the benefit of customers. These commitments involve, to
varying degrees, elements of credit and market risk which may
exceed any amount recognized in the financial statements. In making
such commitments, the Corporation uses the same underwriting policies
as it uses for loans outstanding.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.
Commitments to extend credit at December 31, 1996 and 1995 totaled
$9,108,000 and $10,433,000, respectively.
Conditional commitments are issued by the Bank in the form of
stand-by letters of credit which guarantee the performance of a customer
to a third-party. At December 31, 1996 and 1995, commitments
under outstanding stand-by letters of credit aggregated $598,340
and $1,007,507, respectively. Of these balances, $97,026 and $814,191
of the outstanding balances are collateralized. The remaining letters of
credit are uncollateralized.
A significant portion of the Bank's loan customers are located within
the State of Maryland, primarily in the College Park area.
At December 31, 1996 and 1995, cash and due from banks includes
$622,091 and $493,163, respectively, on deposit with a single depository
institution insured up to the federal guidelines set for depository financial
institutions.
13. Regulatory Matters:
The Bank is subject to various capital adequacy guidelines imposed by
federal and state regulatory agencies. Under these guidelines, the Bank
must meet specific capital adequacy requirements which are quantitative
measures of the Bank's assets, liabilities and certain off balance sheet
items calculated under regulatory accounting practices. Additionally,
the Bank's capital amounts and classifications are subject to qualitative
judgments by these agencies about components, risk weightings and
other factors. The quantitative measures established by regulation to
ensure capital adequacy require the
F-19
<PAGE>
COMMERCE BANK CORPORATION
NOTES TO FINANCIAL STATEMENTS, continued
Bank to maintain amounts and ratios of total and tier I capital to risk-
weighted assets and tier I capital to average assets, known as the leverage
ratio. The Bank's tier I capital is equal to its common stock, surplus and
retained earnings. Equity for regulatory purposes does not include market
value adjustments for available for sale securities. The calculation of the
Bank's total capital is equal to tier I capital plus the allowance for loan
losses subject to certain limitations. Risk-weighted assets are determined
by applying weighting to asset categories and certain off-balance sheet
commitments based on the level of credit risk inherent in the assets. At
December 31, 1996, the Bank exceeds all regulatory capital requirements.
The most recent notification from the Bank's primary regulators categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. There are no conditions or events since that management
believes have changed the Bank's category. If the Bank is unable to comply
with the minimum capital requirements, it would result in regulatory
actions which could have a material impact on the Bank.
The minimum regulatory guidelines for total capital and tier I capital to
risk weighted assets are 8% and 4%, respectively. Guidelines for the
leverage ratio require the ratio of tier I capital to average assets to be
100 to 200 basis points above a 3% minimum, depending on risk profiles
and other factors. The table below presents the various components used
to calculate the capital adequacy ratios.
<TABLE>
<CAPTION>
December 31
-----------------------
1996 1995
---- ----
<S> <C> <C>
Qualifying Capital
- ------------------
Tier I Capital 5,596 4,982
Total Capital 6,159 5,488
Risk-Weighted Assets 45,032 40,449
Ratios
Leverage Capital 8.08% 7.70%
Tier I Capital 12.43% 12.32%
Total Capital 13.68% 13.57%
</TABLE>
14. Thrift Plan:
Effective January 1, 1994, the Bank has a defined contribution retirement
plan (the Plan) which qualifies under Section 401(k) of the Internal Revenue
Code. Bank employees are eligible to participate in the Plan after completion
of one year of service and attainment of age twenty-one. The Plan allows all
participants to contribute up to 15% of their compensation to the Plan up
to statutory limits. The Bank may also make annual matching
F-20
<PAGE>
COMMERCE BANK CORPORATION
NOTES TO FINANCIAL STATEMENTS, continued
contributions to the Plan at the discretion of the Board of Directors of
the Bank. Employees vest in the Bank's matching contributions at the
rate of 20% for each year of service after the first year of service, with
full vesting upon six years of service. The Bank contributed $25,619,
$21,911 and $16,884 to the Plan for the years ended December 31,
1996, 1995 and 1994, respectively.
15. Subsequent Event:
The Bank entered into an agreement on July 3, 1997 with MainStreet
BankGroup Incorporated ("MSBC") whereby the Bank will become
a wholly owned subsidiary of MSBC through an exchange of all the
issued and outstanding shares of convertible preferred and common stock of
the Bank and the outstanding Warrants for shares of common stock of MSBC.
Upon shareholder and various regulatory approvals, the Bank will be merged
into MSBC using the pooling-of-interest accounting method. The transaction
is expected to be finalized in the fourth quarter of 1997.
16. Fair Value of Financial Instruments
SFAS No. 126, "Exemption from Certain Required Disclosures about
Financial Instruments for Certain Nonpublic Entities", issued in
December, 1996 provided an option to entities meeting certain criteria
to cease disclosures required under SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments". As of December 31, 1996,
Commerce Bank Corporation met these criteria. As of July 3, 1997,
the necessary information as of December 31, 1996 is not practically
available to estimate the fair value of all financial instruments; such as
loans and deposits. The fair value of investments has been disclosed
in Note 3.
F-21
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF SHARE EXCHANGE
among
MAINTSTREET BANKGROUP INCORPORATED
and
COMMERCE BANK
July 3, 1997
A-
<PAGE>
TABLE OF CONTENTS
Recitals
(A) MSBC
(B) CB
(C) Rights, Etc.
(D) This Transaction
(E) Stock Option Agreement
(F) Approvals
(G) NASDAQ
(H) Benefits of Plan
I. The Share Exchange
(A) The Share Exchange
(B) Share Exchange Closing; Share Exchange Effective Date
II. Share Exchange Rights
(A) Outstanding MSBC Common Stock
(B) Outstanding CB Common Stock
(C) Stockholder Rights; Stock Transfers
(D) Fractional Shares
(E) Dissenting Shareholders
A-i
<PAGE>
(F) Exchange Procedures
(G) Shares Held by CB or MSBC
(H) Dividends
III. Actions Pending The Share Exchange
(A) CB Actions
(1) Stock Distributions
(2) Employment Contracts
(3) Employee Benefit Plans
(4) Asset Disposition
(5) Constituent Documents
(6) Material Transactions
(7) Actions Not in Ordinary Court
(8) Agreements
IV. Representations and Warranties
(A) Recitals
(B) Capitalization
(C) General Corporate Power and Ownership of Properties
(D) Specific Corporate Authority
(E) No Default
A-ii
<PAGE>
(F) Financial Reports
(G) Regulatory Reports
(H) Material Events
(I) Litigation
(J) Material Contracts
(K) Commissions
(L) ERISA
(M) Regulatory Approvals
(N) Subsidiaries
(O) Collective Bargaining Contracts
(P) Classified Assets
(Q) Affiliates
(R) Insurance Policies
(S) MSBC Stock
(T) Takeover Laws
(U) Approval of This Transaction
(V) Environmental Laws
(W) Taxes
(X) Legal Compliance
(Y) Certain Interests
(Z) Licenses
A-iii
<PAGE>
(AA) Liabilities
(BB) Pooling of Interests
(CC) Ten Percent Shareholders
(DD) Option Shares
(EE) Dissenters Rights
(FF) Articles and Bylaws
V. Covenants
(A) Best Efforts to Complete Share Exchange
(B) CB Proxy Statement
(C) Registration Statement Contents
(D) Effectiveness of Registration Statement
(E) Public Announcements
(F) Review of Information
(G) No Solicitation
(H) Filing of Registration Statement
(I) Blue Sky
(J) Affiliates
(K) CB Policies and Practices
(L) State Takeover Laws
(M) CB Special Shareholder Rights
A-iv
<PAGE>
(N) CB Shareholder Approval Rights
(O) Best Efforts for Share Exchange
(P) Governmental Applications
(Q) Environmental Tests
VI. Conditions to Share Exchange
(A) Shareholder Approval
(B) Specific Regulatory Approval
(C) General Governmental Approval
(D) No Countervening Orders
(E) Accountants' Reports as to MSBC
(F) Accountants' Reports as to CB
(G) MSBC Legal Opinion
(H) CB Legal Opinion
(I) MSBC Representations and Warranties
(J) CB Representations and Warranties
(K) Registration Statement Effectiveness
(L) Blue Sky Approvals
(M) Tax Free Reorganization Opinion
(N) Listing of MSBC Common Stock
(O) Pooling Letter
A-v
<PAGE>
(P) Affiliate Letters
(Q) CB Fairness Opinion
(R) Redemption of CB Preferred Stock and Redemption of
CB Warrants
VII. Termination
(A) Mutual Consent
(B) On Breach
(C) Failure to Consummate on Time
(D) Failure to Obtain Certain Approvals
(E) Possible Adjustment in the Exchange Rate and Warrant
Redemption Ratio
(F) Failure to Redeem CB Preferred Stock and CB Warrants
VIII. Other Matters
(A) Survival
(B) Waiver, Amendment
(C) Counterparts
(D) Governing Law
(E) Fees and Expenses
(F) Confidentiality
(G) Notices
A-vi
<PAGE>
(H) Definitions
(I) Entire Understanding
(J) Benefit Plans
(K) Indemnification
Exhibits
A. Articles of Share Exchange
annex 1 - Plan of Share Exchange
B. CB Affiliates' Letter
C. Opinion of MSBC Counsel
D. Opinion of CB Counsel
A-vii
<PAGE>
<TABLE>
<CAPTION>
DEFINITION INDEX
Defined Term Location
<S> <C>
Average MSBC Share Price II(B)
Average MSBC Determination Price IV(CC)
Blue Sky Laws V(F)
CB Page 1
CB Asset Classification IV(P)
CB Common Stock Recital B
CB Common Stock Warrants Recital B
CB Delinquent Loan List IV(P)
CB Preferred Stock Recital B
CB Preferred Stock Warrants Recital B
CB Warrants Recital B
Code IV(L)
Determination Date VII(F)
Employees IV(L)
Environmental Law IV(V)
ERISA IV(L)
ERISA Affiliate IV(L)
ERISA Plans IV(L)
Exchange Act Recital B
Exchange Ratio II(B)
Exchange Rights II(B)
Excluded Shares II(B)
FDIC Recital B
Federal Securities Laws IV(Q)
Financial Reports IV(F)
First Percentage VII(F)
First Remainder VII(F)
FRB Recital B
FRB Acquisition Approval V(P)
FRB Holding Company Approval V(P)
Hazardous Material IV(V)
Knowledge VII(H)
Loan Property IV(V)
Maryland Bank Regulator I(B)
Maryland Bank Regulator Acquisition Approval V(P)
Maryland Corporation Authority I(B)
Material Adverse Effect VIII(H)
A-viii
<PAGE>
Meeting V(B)
MSBC Page 1
MSBC Bank Subsidiary Recital A
MSBC Common Stock Recital A
MSBC Preferred Stock Recital A
MSBC Subsidiaries Recital A
MSBC Trust Subsidiary Recital A
NASDAQ/NMS Recital G
Option Shares IV(DD)
Participation Facility IV(V)
Pension Plans IV(L)
Plan Page 1
Plan of Share Exchange I(B)
Previously Disclosed VIII(H)
Proxy Statement V(B)
Recent SNL Bank Index VII(F)
Registration Statement V(B)
Regulatory Reports IV(G)
SEC Recital B
Second Percentage VII(F)
Second Remainder VII(F)
Securities Act IV(Q)
Securities Laws V(F)
Share Exchange I(A)
Share Exchange Closing I(B)
Share Exchange Effective Date I(B)
Stock Option Agreement Recital E
Tax Returns IV(W)
Taxes IV(W)
Virginia Bank Regulator Acquisition Approval V(P)
Warrant Redemption Ratio VI(R)
</TABLE>
A-ix
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF SHARE EXCHANGE, dated as of
the 3rd day of July, 1997 (this "Plan"), by and among MainStreet Bank
Group Incorporated, a Virginia corporation ("MSBC") and Commerce
Bank, a Maryland bank ("CB").
RECITALS:
(A) MSBC. MSBC is a corporation duly organized and existing in
good standing under the laws of the Commonwealth of Virginia, with
its principal executive offices located in Martinsville, Virginia. As of the
date hereof, MSBC has 20,000,000 authorized shares of Common Stock,
each of $5.00 par value ("MSBC Common Stock"), and 1,000,000
authorized shares of Preferred Stock, $5.00 par value ("MSBC Preferred
Stock") (no other class of capital stock being authorized), of which
11,373,417 shares of MSBC Common Stock and no shares of MSBC
Preferred Stock, respectively, are issued and outstanding as of March
31, 1997. MSBC has eight (8) wholly owned bank subsidiaries:
Piedmont Trust Bank, a Virginia bank; Bank of Ferrum, a Virginia
bank; Bank of Carroll, a Virginia bank; First Community Bank, a
Virginia bank; The First Bank of Stuart, a Virginia bank; First Community
Bank of Saltville, a Virginia bank; Hanover Bank, a Virginia bank; and
First National Bank of Clifton Forge, a national banking association
(each of which is referred to as a "MSBC Bank Subsidiary" and all of
which are referred to as "MSBC Bank Subsidiaries"). In addition, MSBC
has one wholly owned nonbanking subsidiary, MainStreet Trust Company,
chartered as a limited purpose national banking association to engage
in the business of a trust company and businesses incidental thereto
("MSBC Trust Subsidiary"). The MSBC Bank Subsidiaries and MSBC
Trust Subsidiary are individually referred to as an "MSBC Subsidiary"
and collectively as "MSBC Subsidiaries".
(B) CB. CB is a corporation duly organized and existing in good
standing under the laws of the State of Maryland, with its principal
executive offices located in College Park, Maryland and is authorized
to do business as a bank in Maryland. CB is an insured bank as defined
in the Federal Deposit Insurance Act, as amended, and is a member of the
Federal Reserve System. As of the date hereof, CB has 450,000 authorized
shares of Common Stock, each of $10.00 par value ("CB Common Stock"),
50,000 shares of authorized convertible Preferred Stock ("CB Preferred
Stock"); 73,060 authorized warrants for CB Common Stock ("CB
Common Stock Warrants") and 13,445 authorized warrants for CB
Preferred Stock ("CB Preferred Stock Warrants"), of which 192,216
shares of CB Common Stock were issued and outstanding as of July 3,
1997; 30,984 shares of CB Preferred Stock were issued and outstanding
as of July 3, 1997; 73,060 CB Common Stock Warrants were outstanding
as of July 3, 1997; and 13,445 CB Preferred Stock Warrants were outstanding
as of July 3, 1997. The CB Common Stock Warrants and CB Preferred
Stock Warrants are collectively called the "CB Warrants". The holders of
A-1
<PAGE>
CB Common Stock have preemptive rights. The holders of CB Preferred
Stock have preemptive rights. CB does not have any subsidiary corporations
or other entities. CB Common Stock is not and never has been subject to
the provisions of Section 12, 13, 14(a), 14(c), 14(d), 15(d) or 16 of the
Securities Exchange Act of 1934, as amended, (together with the rules
and regulations promulgated thereunder, the "Exchange Act") nor has
CB ever been nor is it now subject to Section 12 of the Exchange Act and
the regulations of the Office of the Comptroller of the Currency, the
Board of Governors of the Federal Reserve System ("FRB"), the Federal
Deposit Insurance Corporation ("FDIC") or the Securities and Exchange
Commission ("SEC") thereunder. CB is not subject to regulation under
12 CFR, Section 11, Section 206 or Section 335, and does not file and
has never filed any reports or disclosures pursuant thereto.
(C) Rights, Etc. Except as Previously Disclosed, there are no
shares of MSBC Common Stock or MSBC Preferred Stock authorized
and reserved for issuance, and MSBC has no commitment to authorize,
issue or sell any such shares or any securities or obligations convertible
into or exchangeable for, or giving any person any right to subscribe for or
acquire from MSBC, any such shares and no securities or obligations
representing any such rights are outstanding. Except as Previously
Disclosed, MSBC has not granted or made any commitment to grant any
options or share appreciation rights with respect to the MSBC Common
Stock or MSBC Preferred Stock. Except as Previously Disclosed and
except for shares reserved pursuant to the Stock Option Agreement (as
hereinafter defined), there are no shares of CB Common Stock or CB
Preferred Stock or any CB Warrants authorized and reserved for issuance.
Except as Previously Disclosed, CB has no commitment to authorize,
issue or sell any shares of CB Common Stock or of CB Preferred Stock,
CB Warrants or any other securities or obligations convertible into or
exchangeable for, or giving any right to subscribe for or acquire from
CB any such shares, CB Warrants or securities and no securities or
obligations representing any such rights are outstanding. Except as
Previously Disclosed and except for the Stock Option Agreement (as
hereinafter defined), CB has not granted or made any commitment to grant
any options or share appreciation rights with respect to CB Common Stock
or CB Preferred Stock.
(D) This Transaction. MSBC will, on the Share Exchange Effective
Date, acquire and own 100% of the outstanding shares of CB Common
Stock (which, apart from the shares of CB Preferred Stock escrowed
pursuant to Paragraph (R) of Article VI, shall be the only shares of capital
stock of CB outstanding at the Share Exchange Effective Date) by virtue
of an exchange of shares of MSBC Common Stock for all the issued and
outstanding shares of CB Common Stock (excluding only the Excluded
Shares) as more particularly described in Article I) and the Boards of
Directors of MSBC and CB, respectively, deem it advisable and in the
A-2
<PAGE>
best interests of MSBC and CB and their stockholders that CB be acquired
by MSBC pursuant to this Agreement and Plan of Share Exchange.
(E) Stock Option Agreement. As a condition and inducement to
MSBC's willingness to enter into the letter of intent dated June 24,
1997, contemplating this Plan, CB has entered into a Stock Option
Agreement with MSBC dated June 24, 1997 ("Stock Option Agreement")
pursuant to which CB has granted to MSBC an option to purchase, under
certain circumstances, shares of CB Common Stock.
(F) Approvals. The Board of Directors of each of MSBC and CB has
approved and adopted, at meetings of each of such Board of Directors,
this Plan and the Stock Option Agreement and has authorized, subject to
such further modifications as may be agreed by a member of the Office
of the Chairman of MSBC and the President or Chairman of the Board
of CB, respectively, not inconsistent herewith, the execution hereof in
counterparts. At the meeting of the CB Board of Directors, the Board of
Directors of CB unanimously recommended the Plan as so executed to
its shareholders.
(G) NASDAQ. Trading of the MSBC Common Stock is presently
reported on the National Association of Securities Dealers Quotations
System National Market System("NASDAQ/NMS"). Trading of the
CB Common Stock is not presently reflected on any exchange, established
market, bulletin board or otherwise. Neither the CB Preferred Stock nor
the CB Warrants are traded on any established market.
(H) Benefits of Plan. MSBC and CB believe the Plan and its
consummation are in the respective best interests of each corporation
and its shareholders for the following reasons, among others: (1) the
Share Exchange will allow them to provide banking and related financial
services more effectively and efficiently; (2) the Share Exchange will
expand the range of banking and related financial services which they
can provide; (3) the Share Exchange will enhance the safety and
soundness of their operations; (4) the Share Exchange will enable them
to expand the market for their banking and related financial services;
and (5) the Share Exchange will expand the number and diversity of
CB's shareholder base and enhance the liquidity of equity investments
in CB.
NOW, THEREFORE, in consideration of their mutual promises and
obligations, the parties hereto adopt and make this Plan and prescribe
the terms and conditions thereof and the manner and basis of carrying
it into effect, which shall be as follows:
I. THE SHARE EXCHANGE
(A) The Share Exchange. On the Share Exchange Effective Date
(as hereinafter defined), CB shall become a wholly owned subsidiary
A-3
<PAGE>
bank of MSBC by virtue of a share exchange in which all of the capital
stock of CB (as represented by all of the issued and outstanding shares
of CB Common Stock (excluding only the Excluded Shares) which,
apart from the shares of CB Preferred Stock escrowed pursuant to
Paragraph (R) of Article VI, shall be the only class or series of stock of
CB outstanding as of Share Exchange Date) shall be acquired from the
holders thereof through a statutory share exchange (the "Share Exchange")
in which each outstanding share of CB Common Stock shall be converted
into the right to receive the consideration described in Paragraph (B)
and (D) of Article II.
(B) Share Exchange Closing; Share Exchange Effective Date. The Share
Exchange shall become effective on the date and time the Maryland
Department of Assessments and Taxation ("Maryland Corporation
Authority") accepts the Articles of Share Exchange as approved by
the Maryland Commission of Financial Regulations ("Maryland Bank
Regulator") (the " Share Exchange Effective Date"). Unless otherwise
agreed upon in writing by a member of the Office of the Chairman of
MSBC and President of CB, subject to the conditions to the obligations
of the parties to effect the Share Exchange as set forth in Article VI and
taking into account Paragraph H of Article II, the parties shall use their
reasonable efforts to cause the Share Exchange Effective Date to occur
as soon as practicable following the satisfaction of the conditions set
forth in Paragraphs (A), (B) and (C) of Article VI. All documents
required by the terms of this Agreement to be delivered at or prior to
consummation of the Share Exchange will be exchanged by the parties
at the closing of the Share Exchange(the "Share Exchange Closing"),
which shall be held on such date as MSBC shall designate to CB (and
which is reasonably acceptable to CB) after the satisfaction of the
conditions set forth in Paragraphs (A), (B) and (C) of Article VI
and taking into account the provisions of Paragraph (H) of Article
II, but no later than the Share Exchange Effective Date. Prior to
the Share Exchange Closing, MSBC and CB shall execute and
deliver to the Maryland Bank Regulator, Articles of Share Exchange
in substantially the form of Exhibit A hereto containing a Plan of
Share Exchange in substantially the form of Annex 1 to Exhibit A
hereto (the "Plan of Share Exchange ") for approval.
II. SHARE EXCHANGE RIGHTS
(A) Outstanding MSBC Common Stock. The shares of MSBC
Common Stock issued and outstanding immediately prior to the Share
Exchange Effective Date shall, on and after the Share Exchange Effective
Date, remain issued and outstanding shares of MSBC Common Stock.
(B) Outstanding CB Common Stock. Each share (excluding shares
held by CB or by MSBC or by any of the MSBC Subsidiaries, in each
case other than in a fiduciary capacity or as a result of debts previously
A-4
<PAGE>
contracted and excluding shares held by stockholders who perfect their
dissenters' rights as provided in Paragraph (F) below (the "Excluded
Shares")) of CB Common Stock issued and outstanding immediately prior
to the Share Exchange Effective Date shall, by virtue of the Share
Exchange, automatically and without any action on the part of the
holder thereof on the Share Exchange Effective Date, become and be
converted into the right to receive ("Exchange Rights") that number of
shares of MSBC Common Stock obtained by dividing the Negotiated
Price per CB Common Share by the average of the bid/asked price per share
for MSBC Common Stock as reported on the NASDAQ/NMS for each
of the twenty (20) trading days preceding the later to occur of (i) the
shareholder approval(s) contemplated by Paragraph A of Article VI
and (ii) the financial institution regulatory approvals (but not the
statutory waiting periods) contemplated by Paragraph B of Article VI
("Average MSBC Share Price"). If the Exchange Ratio computed in accordance
with the immediately preceding sentence is less than 2.059, the Exchange
Ratio shall be 2.059, and if the Exchange Ratio computed in accordance
with the immediately preceding sentence is greater than 2.506, the
Exchange Ratio shall be 2.506 ("Exchange Ratio"). The Negotiated
Price per CB Common Share is $52.00.
(C) Stockholder Rights; Stock Transfers. On the Share Exchange
Effective Date, holders of CB Common Stock shall cease to be, and
shall have no rights as, stockholders of CB other than the Exchange
Rights provided under Paragraph (B) above and the consideration for
fractional shares provided under Paragraph (D) below. After the Share
Exchange Effective Date, there shall be no transfers on the stock transfer
books of CB of the shares of CB Common Stock which were issued and
outstanding immediately prior to the Share Exchange becoming effective.
(D) Fractional Shares. Notwithstanding any other provision hereof,
no fractional shares of MSBC Common Stock and no certificates or scrip
therefor, or other evidence of ownership thereof, will be issued in the
Share Exchange; instead, MSBC shall pay to each holder of CB Common
Stock who would otherwise be entitled to a fractional share an amount in
cash determined by multiplying such fractional share by the Average
MSBC Share Price.
(E) Dissenting Shareholders. Any holder of shares of CB Common
Stock or of CB Preferred (to the extent any such holders as a matter of
law are provided with dissenters' rights) who perfects his dissenters' rights
of appraisal in accordance with and as contemplated by the applicable
provisions of the Maryland Corporation Law shall be entitled to receive
the value of such shares in cash as determined pursuant to such provision
of law; provided, however, that no such payment shall be made to any
dissenting stockholder unless and until such dissenting stockholder has
complied with the applicable provisions of the Maryland Corporation
Law and duly surrendered the certificate or certificates representing the
shares for which payment is being made. In the event that a dissenting
A-5
<PAGE>
stockholder of CB having dissenters' rights as a matter of law fails to
perfect, or effectively withdraws or loses, his right to appraisal and of
payment for his shares, after the Share Exchange Effective Date MSBC
shall issue and deliver the consideration to which such holder of shares
of CB Common Stock is entitled under this Article I (without interest)
upon surrender by such holder of the certificate or certificates representing
shares of CB Common Stock or CB Preferred Stock, as the case may be,
held by him.
(F) Exchange Procedures. As promptly as practicable after the Share
Exchange Effective Date, MSBC shall send or cause to be sent to each
former stockholder of CB of record immediately prior to the Share
Exchange Effective Date transmittal materials for use in exchanging
such stockholder's certificates of CB for the consideration set forth in
Paragraph (C) above. Any fractional share checks which a CB stockholder
shall be entitled to receive in exchange for such stockholder's shares of
CB Common Stock, and any dividends paid on any shares of MSBC
Common Stock, that such stockholder shall be entitled to receive prior to
the delivery to MSBC of such stockholder's certificates representing all
of such stockholder's shares of CB Common Stock will be delivered to
such stockholder only upon delivery to MSBC of the certificates representing
all of such shares (or indemnity satisfactory to MSBC, in its judgment, if
any of such certificates are lost, stolen or destroyed). No interest will be
paid on any such fractional share checks or dividends which the holder of
such shares shall be entitled to receive upon such delivery. After the Share
Exchange Effective Date, to the extent permitted by law, former stockholders
of record of CB Common Stock shall be entitled to vote at any meeting
of holders of MSBC Common Stock, the number of whole shares of
MSBC Common Stock to which they have Exchange Rights, regardless
of whether such holders have exchanged their certificates representing
CB Common Stock for certificates representing MSBC Common
Stock in accordance with the provisions of this Plan.
(G) Shares Held by CB or MSBC. Each of the shares of CB Common
Stock held by CB, by MSBC or any MSBC Subsidiary, in each case other
than in a fiduciary capacity or as a result of debts previously contracted,
shall be canceled and retired at the Share Exchange Effective Date and
no consideration shall be issued in exchange therefor.
(H) Dividends. Shareholders of CB shall not under any circumstances
be entitled to any dividend (cash or otherwise) declared by MSBC with
a record date prior to the Share Exchange Effective Date. MSBC and
CB agree that CB may pay an annual, one time cash dividend per share
on CB Common Stock in 1997 not exceeding $1.50 times the percentage
obtained by dividing four (4) into the number of quarters elapsed in the
year as of the record date for such dividend, including the quarter in
which such record date accrues. In the event that CB declares and pays
a dividend in accordance with the immediately preceding sentence, CB
and MSBC agree that the Share Exchange Effective Date and the Share
A-6
<PAGE>
Exchange Closing may be adjusted so that the holders of CB Common
Stock shall not become entitled as holders of MSBC Common Stock
pursuant to this Plan to any quarterly cash dividend declared or payable
by MSBC for any quarter which was also a quarter for which a CB
dividend was paid using the formula in the immediately preceding sentence.
III. ACTIONS PENDING THE SHARE EXCHANGE
A. CB Actions. Prior to the Share Exchange Effective Date, without
the prior written consent or approval of a proper officer of MSBC, CB
will not:
(1) Stock Distributions. Make, declare or pay any dividend other than
cash dividends on CB Common Stock except as permitted by Paragraph
H of Article II and dividends payable on CB Preferred Stock in accordance
with its terms or declare or make any distribution on, or directly or
indirectly combine, redeem, reclassify, purchase or otherwise acquire, any
shares of its capital stock (other than in a fiduciary capacity in the ordinary
course of its business and consistent with past practice or in connection
with stock received on a debt previously contracted basis) authorize the
creation or issuance of, or issue, any additional shares of its capital stock,
or any options, calls, warrants or commitments relating to its capital
stock or any securities or obligations convertible into or exchangeable
for, or giving any person any right to subscribe for or acquire from its
shares of its capital stock or any securities or obligations convertible
into or exchangeable for shares of its capital stock, or issue any
long-term debt;
(2) Employment Contracts. Enter into any employment contracts with,
increase the rate of compensation of (except in accordance with existing
policy consistent with past practice or pursuant to any agreement
existing and as in effect on the date hereof and Previously Disclosed),
or pay or agree to pay any bonus to, any of its directors, officers or
employees, except in accordance with plans or agreements existing
and as in effect on the date hereof and Previously Disclosed;
(3) Employee Benefit Plans. Enter into or modify (except as may
be required by applicable law) any pension, retirement, stock option,
stock purchase, savings, profit sharing, deferred compensation, consulting,
bonus, group insurance or other employee benefit, incentive or welfare
contract, plan or arrangement, or any trust agreement related thereto, in
respect of any of its directors, officers or other employees, including
without limitation taking any action that accelerates (1) the vesting or
exercise of any benefits payable thereunder, or (2) the right to exercise
any employee stock options or stock appreciation rights outstanding
thereunder;
A-7
<PAGE>
(4) Asset Disposition. Dispose of, grant an encumbrance against or
discontinue any portion of its assets, business operations or properties,
which is material to CB or merge or consolidate with, or acquire all
or any substantial portion of, the business or property of any other
entity (except foreclosures, acquisitions of control in its fiduciary
capacity or securitization transactions, in each case in the ordinary
course of business consistent with past practice);
(5) Constituent Documents. Amend its Articles of Incorporation
or Bylaws as delivered to MSBC in connection with this Plan;
(6) Material Transactions. (a) Settle any material litigation or
(b) enter into any material transaction or make any material
commitment relating to the assets and business of CB, otherwise than
as contemplated hereby or in the ordinary course of business
consistent with past practice;
(7) Actions Not in Ordinary Course. Take any other action not in
the ordinary course of business consistent with past practice; or
(8) Agreements. Agree to take any of the foregoing actions.
IV. REPRESENTATIONS AND WARRANTIES
CB hereby represents and warrants to MSBC, and MSBC
hereby represents and warrants to CB, as follows:
(A) Recitals. The facts set forth in the Recitals of this Plan with
respect to it and, in the case of MSBC, the MSBC Subsidiaries, are
true and correct;
(B) Capitalization. The outstanding shares of it and, in the case
of MSBC, the MSBC Subsidiaries, are validly issued and outstanding,
fully paid and nonassessable, and subject to no preemptive rights;
(C) General Corporate Power and Ownership of Properties.
It, and in the case of MSBC, the MSBC Subsidiaries, has the
corporate power and authority to carry on their respective business
as now being conducted and to own all of their respective material
properties and assets and it and, in the case of MSBC, the MSBC
Subsidiaries, has good and marketable title to or a valid leasehold
interest in all of the material properties and assets thereof reflected
as owned or leased in its balance sheet as of December 31, 1996,
and included in the Financial Reports as hereinafter defined and
in all material properties and assets acquired or leased by it or, in
the case of MSBC, the MSBC Subsidiaries, since December 31,
1996. In the case of CB only, none of such properties is subject to
any mortgage, pledge, lien, security interest, encumbrance, restriction
or charge of any kind except: (1) mechanic's, carrier's, worker's or
similar liens arising in the ordinary course of business; (2) as
Previously Disclosed; (3) imperfections of title, if any, none of
which is material in amount or materially detracts from the value
or impairs the existing use of the property subject thereto or the
operations of CB; and (4) liens of current taxes not due and payable;
(D) Specific Corporate Authority. Subject to any necessary receipt
of approval by its stockholders and the regulatory approvals referred to
in Paragraphs (B) and (C) of Article VI, this Plan has been authorized
by all necessary corporate action of it and is a valid and binding
agreement of it enforceable against it in accordance with its terms,
subject to (1) bankruptcy, insolvency and other laws of general
applicability relating to or affecting creditors' rights; and (2)
general equity principles and, in the case of CB, it represents and
warrants to MSBC that the Stock Option Agreement has been
authorized by all necessary corporate action of it.
(E) No Default. The execution, delivery and performance of this
Plan and, in the case of CB, the Stock Option Agreement and the
consummation of the transactions contemplated hereby and thereby
by it, will not constitute: (1) a breach or violation of, or a default
under, any law, rule or regulation or any judgment, decree, order,
governmental permit or license, franchise or agreement, indenture,
instrument or authorization applicable to, of or held by it, or to which
it or its properties are subject or bound, which breach, violation or
default is reasonably likely to have a Material Adverse Effect on it;
or (2) a breach or violation of, or a default under, its Articles of
Incorporation or Bylaws;
(F) Financial Reports. Except as Previously Disclosed,
(1) in the case of MSBC only, its Annual Report on Form 10-K,
for the fiscal year ended December 31, 1996, and all other documents
filed or to be filed subsequent to December 31, 1996 under Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act in the form filed with
the SEC, all of which have been Previously Disclosed did not contain
any untrue statement of material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
made therein, in light of the circumstances under which they were
made, not misleading; (2) in the case of CB only: (a) its audited
balance sheets and related income, stockholders' equity and changes
in financial position for the fiscal years ended December 31, 1994,
December 31, 1995 and December 31, 1996, all of which have
been Previously Disclosed, and the unaudited statements of
condition and statements of income for the periods thereafter
ending prior to the Share Exchange Effective Date fairly present and
will fairly present the financial position of CB as of their respective
date and the results of operations, changes in stockholders' equity
and changes in cash flows, as the case may be, of CB for the periods
set forth therein, in each case in accordance with generally accepted
accounting principles consistently applied except as may be noted
A-8
<PAGE>
therein, subject to normal and recurring year end audit adjustments
in the case of unaudited statements; and (b) all correspondence and
other reports to CB shareholders during 1994, 1995, 1996, and 1997,
all of which have been Previously Disclosed and all proxy statements
related to CB's meetings of shareholders (whether annual or special)
during 1994, 1995, 1996, and 1997, did not contain untrue, inaccurate
or misleading information, data or statements and complied in all
respects with the laws applicable to them. (All of the foregoing
reports and documents of MSBC and CB, respectively are hereinafter
described as "Financial Reports").
(G) Regulatory Reports. CB has Previously Disclosed to MSBC
copies of (1) CB's "Annual Report of Condition and Income" on
Form FFIEC 034, as delivered to the appropriate bank regulatory
authority for the years ended December 31, 1994, December 31,
1995, and December 31, 1996 and for the period ending March 31,
1997; and (2) all other material reports and documents filed with or
sent to any federal or state regulatory authority by it, during 1994,
1995, 1996 and 1997; and (3) to the extent not prohibited by law, all
reports of any state or federal regulatory authority relating to it and
received during or relating to matters in 1994, 1995, 1996 or 1997
(all of the foregoing reports and documents are hereinafter referred
to as "Regulatory Reports"). CB represents and warrants to MSBC
that, as of their respective dates, the Regulatory Reports referred
to in (1) and (2) above complied in all material respects with all
legal and regulatory requirements applicable thereto and the Regulatory
Reports referred to in (1) above are accurate in all material respects and
fairly present the financial condition and income of the reporting entity
for the period(s) covered thereby.
(H) Material Events. Except as Previously Disclosed, since December
31, 1996, no event has occurred which is reasonably likely to have a Material
Adverse Effect on it;
(I) Litigation. Except as Previously Disclosed, no litigation,
proceeding or controversy before any court or governmental agency is pending
which is reasonably likely to have a Material Adverse Effect on it and, to
the best of its knowledge, no such litigation, proceeding or controversy has
been threatened; and except as Previously Disclosed neither it nor, in the
case of MSBC any of the MSBC Subsidiaries, its properties is a party to or is
subject to any order, decree, agreement, memorandum of understanding
or similar arrangement with, or a commitment letter or similar submission
to, any federal or state governmental agency or authority charged with the
supervision or regulation of depository institutions or engaged in the
insurance of deposits which restricts or purports to restrict in any material
respect the conduct of the business of it or its respective properties, or in
any manner relates to the capital, liquidity, credit policies or management
of it or, in the case of MSBC, any MSBC Subsidiary; and, except as
Previously Disclosed, neither it nor, in the case of MSBC, any MSBC
A-9
<PAGE>
Subsidiary, has been advised by any such regulatory authority that such
authority is contemplating issuing or requesting (or is considering the
appropriateness of issuing or requesting) any such order, decree, agreement,
memorandum of understanding, commitment letter or similar submission;
(J) Material Contracts. Except as Previously Disclosed or as previously
disclosed in the Financial Reports and except for this Plan and the Stock
Option Agreement, neither it nor, in the case of MSBC, any MSBG
Subsidiary is bound by any material contract (as to it and, in the case
of MSBC, it and the MSBC Subsidiaries taken as a whole) to be
performed after the date hereof;
(K) Commissions. All negotiations relative to this Plan and the
transactions contemplated hereby have been carried on by it directly
with the other parties hereto and no action has been taken by it that
would give rise to any valid claim against any party hereto for a brokerage
commission, finder's fee or other like payment, excluding a fee in an
amount Previously Disclosed to be paid to Scott & Stringfellow, who
have acted as financial advisors to CB;
(L) ERISA. Except as Previously Disclosed:
(1) all "employee benefit plans" within the meaning of Section
3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), covering employees or former employees of it
and in the case of MSBC, the MSBC Subsidiaries (the "Employees")
are Previously Disclosed, true and complete copies of which have been
made available to the other party;
(2) all employee benefit plans covering Employees, to the
extent subject to ERISA (the "ERISA Plans"), are in compliance with
ERISA, except for failure to so comply which are not reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect on it;
each ERISA Plan which is an "employee pension benefit plan" within the
meaning of Section 3(2) of ERISA ("Pension Plan") and which is intended
to be qualified under Section 401(a) of the Internal Revenue Code of 1986,
as amended (the "Code"), has either (a) received a favorable determination
letter from the Internal Revenue Service, or (b) is or will be the subject of
an application for a favorable determination letter, and it is not aware of
any circumstances likely to result in the revocation or denial of any such
favorable determination letter; there is no pending or, to the best of its
knowledge, threatened litigation relating to the ERISA Plans which is
reasonably likely, individually or in the aggregate, to have a Material
Adverse Effect on it; and it has not engaged in a transaction with respect
to any ERISA Plan that, assuming the taxable period of such transaction
expired as of the date hereof, would subject it to a tax or penalty imposed
by either Section 4975 of the Code or Section 502(i) of ERISA in an amount
A-10
<PAGE>
which is reasonably likely, individually or in the aggregate, to have a
Material Adverse Effect on it;
(3) no liability under Subtitle C or D of Title IV of ERISA has
been or is expected to be incurred by it with respect to any ongoing, frozen
or terminated "single-employer plan", within the meaning of Section 4001
(a)(15) of ERISA, currently or formerly maintained by any of them or
any entity which is considered one "employer" with it under Section
4001(a)(14) of ERISA or Section 414 of the Code (an "ERISA Affiliate"),
which liability is reasonably likely to have a Material Adverse Effect on
it; it has not incurred and do not expect to incur any withdrawal liability
with respect to a multi-employer plan under Subtitle E of Title IV of
ERISA; and to its knowledge no notice of a "reportable event" within
the meaning of Section 4043 of ERISA for which the 30-day reporting
requirement has not been waived, has been required to be filed for any
Pension Plan or the Pension Plan of an ERISA Affiliate within the 12-month
period ending on the date hereof;
(4) during the current plan year and the immediately preceding
three plan years of such ERISA Plan, all contributions required to be made
under the terms of any ERISA Plan of it or an ERISA Affiliate have been
timely made; and no pension plan of it or an ERISA Affiliate has an
"accumulated funding deficiency" (whether or not waived) within the meaning
of Section 412 of the Code or Section 302 of ERISA which is reasonably
likely, individually or in the aggregate, to have a Material Adverse Effect
on it;
(5) under each Pension Plan which is a single-employer plan,
as of the last day of the most recent plan year ended prior to the date
hereof, the actuarially determined present value of all "benefit
liabilities", within the meaning of Section 4001(a)(16) of ERISA (as
determined on the basis of the actuarial assumptions contained in the ERISA
Plan's most recent actuarial valuation) did not exceed the then current
value of the assets of such ERISA Plan, and there has been no material
adverse change in the financial position of such ERISA Plan since the last
day of the most recent plan year; and
(6) there are no material current or projected liabilities
for retiree health or life insurance benefits;
(M) Regulatory Approvals. It knows of no reason why the regulatory
approvals referred to in Paragraphs (B) and (C) of Article VI should not
be obtained without the imposition of any condition of the type referred
to in the proviso following such Paragraph (C);
A-11
<PAGE>
(N) Subsidiaries. In the case of CB only, it has no subsidiaries. In
the case of MSBC only, its only subsidiaries are the MSBC Subsidiaries
disclosed in the Recitals.
(O) Collective Bargaining Contracts. It (and in the case of MSBC,
any MSBC Subsidiary) is not a party to, or is bound by any collective
bargaining agreement, contract or other agreement or understanding with
a labor union or labor organization, it (and in the case of MSBC, any
MSBC Subsidiary) is not the subject of a proceeding asserting that it
has committed an unfair labor practice (within the meaning of the
National Labor Relations Act) or seeking to compel it to bargain with
any labor organization as to wages and conditions of employment, nor
is there any strike or other labor dispute involving it (or in the case of
MSBC, any MSBC Subsidiary) or to the best of its knowledge, threatened,
nor is it aware of any activity involving its (or in the case of MSBC, any
MSBC Subsidiary's )employees seeking to certify a collective bargaining
unit or engaging in any other organization activity;
(P) Classified Assets. CB has Previously Disclosed a list of the loans,
extensions of credit or other assets of CB that were classified by the
examiners of the FRB or by the Maryland Bank Regulator in its last
respective preceding examination ("CB Asset Classification") and has
Previously Disclosed a list of its loans and extensions of credit by CB
in the respective initial principal amount of $50,000 or more, any
payment of which is, as of the date so disclosed, delinquent ("CB
Delinquent Loan List"). The CB Asset Classification and the CB
Delinquent Loan List are, respectively, accurate and complete in
all material respects and no amounts of loans, extensions of credit
or other assets that have been classified as of the respective date of
the CB Asset Classification by any regulatory examiner as "Other
Loans Specially Mentioned", "Substandard", "Doubtful", "Loss",
or words of similar import are excluded from the amounts disclosed
in the CB Asset Classification as of the respective date thereof other
than amounts of loans, extensions of credit or other assets that were
charged off by CB prior to the respective date of the CB Asset
Classification;
(Q) Affiliates. In the case of CB only, except as Previously
Disclosed, to the best of its knowledge, there is no person who,
as of the date of this Plan, may be deemed to be an "affiliate" of
it as that term is used in Rule 145 under the Securities Act of
1933, as amended (together with the rules and regulations
thereunder, the "Securities Act"; hereinafter the Securities
Act and the Exchange Act are referred to as the "Federal Securities
Laws");
(R) Insurance Policies. In the case of CB only, has made available
to MSBC correct and complete copies of all of its insurance policies
respecting the properties, operations, liabilities, officers, directors
and employees thereof, all of which are in full force and effect or
A-12
<PAGE>
provide coverage to it and its officers, directors and employees.
(S) MSBC Stock. In the case of MSBC only, the shares of MSBC
Common Stock to be issued in exchange for shares of CB Common
Stock upon consummation of the Share Exchange will have been duly
authorized and, when issued in accordance with the terms of this Plan,
will be validly issued, fully paid and nonassessable and subject to
no preemptive rights;
(T) Takeover Laws. In the case of CB only, it has taken all necessary
action to exempt the transactions contemplated by this Plan and the Stock
Option Agreement from, or the transactions contemplated by this Plan
and the Stock Option Agreement are otherwise exempt from, any applicable
state takeover, business combination, control share acquisition and other
similar laws in effect as of the date of this Plan, including, without
limitation, Subtitles 6 and 7 of Title 3 of the Maryland Corporation Law;
(U) Approval of This Transaction. In the case of CB only, it has taken
all action so that the entering into of this Plan and the Stock Option
Agreement and the consummation of the transactions contemplated
hereby and thereby (including without limitation the Share Exchange)
or any other action or combination of actions, or any other transactions,
contemplated hereby or thereby do not and will not (1) require a vote of
stockholders (other than as set forth in Paragraph (A) of Article VI);
or (2) result in the grant of any rights to any person under its Articles
of Incorporation or Bylaws or under any agreement; or (3) except as
set forth in Paragraphs (B) and (C) of Article VI, and Section 8 of the
Stock Option Agreement require any consent or approval under any law,
rule, regulation, judgment, decree, order, governmental permit or license
or, except as Previously Disclosed, the consent or approval of any other
party to any agreement, indenture or instrument.
(V) Environmental Laws. As to CB only, (1) To its knowledge,
it, the Participation Facilities and the Loan Properties (each as defined
below) are, and have been, in compliance with all Environmental Laws
(as defined below), except for instances of noncompliance which are
not reasonably likely, individually or in the aggregate, to have a
Material Adverse Effect on it;
(2) there is no proceeding pending or, to its knowledge,
threatened before any court, governmental agency or board or other
forum in which it or any Participation Facility has been, or with respect
to threatened proceedings, reasonably would be expected to be, named
as a defendant or potentially responsible party (a) for alleged
noncompliance (including by any predecessor) with any Environmental
Law or (b) relating to the release or threatened release into the
environment of any Hazardous Material (as defined below), whether
or not occurring at or on a site owned, leased or operated by it or any
Participation Facility, except for such proceedings pending or threatened
A-13
<PAGE>
that are not reasonably likely, individually or in the aggregate, to have
a Material Adverse Effect on it;
(3) to its knowledge, there is no proceeding pending
or threatened before any court, governmental agency or board or
other forum in which any Loan Property or it is or with respect to
threatened proceedings, reasonably would be expected to be, named
as a defendant or potentially responsible party (a) for alleged
noncompliance (including by any predecessor) with any Environmental
Law or (b) relating to the release or threatened release into the
environment of any Hazardous Material, whether or not occurring at
or on a Loan Property, except for such proceedings pending or threatened
that are not reasonably likely, individually or in the aggregate, to have
a Material Adverse Effect on it;
(4) to its knowledge, there is no reasonable basis for any
proceeding of a type described in subparagraphs (2) or (3) above;
(5) to its knowledge, during the period of (a) its ownership
or operation of any of its current properties, (b) its participation in
the management of any Participation Facility, or (c) its holding of a
security interest in a Loan Property, there have been no releases of
Hazardous Material in, on, under or affecting any such property,
Participation Facility or Loan Property, except for such releases
that are not reasonably likely, individually or in the aggregate, to
have a Material Adverse Effect on it;
(6) to its knowledge, prior to the period of (a) its
ownership or operation of any of its current properties, (b) its
participation in the management of any Participation Facility,
or (c) its holding of a security interest in a Loan Property, there
were no releases of Hazardous Material in, on, under or affecting
any such property, Participation Facility or Loan Property, except
for such releases that are not reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on it;
(7) the following definitions apply for purposes of
this Paragraph (V): "Loan Property" means any property owned
by it or in it which holds a security interest, and, where required
by the context, includes the owner or operator of such property,
but only with respect to such property; "Participation Facility"
means any facility in which it participates in the management and,
where required by the context, includes the owner or operator or
such property, but only with respect to such property; "Environmental
Law" means (a) any federal, state and local law, statute, ordinance,
rule, regulation, code, license, permit, authorization, approval, consent,
legal doctrine, order, judgment, decree, injunction, requirement 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
A-14
<PAGE>
water supply, surface land, subsurface land, plant and animal life
or any other natural resource), or to human health or safety, or (ii)
the exposure to, or the use, storage, recycling, treatment, generation,
transportation, processing, handling, labeling, production, release or
disposal of Hazardous Material, in each case as amended and as
now in effect and includes, without limitation, the federal Comprehensive
Environmental Response, Compensation, and Liability Act of 1980,
the Superfund Amendments and Reauthorization Act, the Federal
Water Pollution Control Act of 1972, the federal Clean Air Act, the
Federal Clean Water Act, the Federal Resource Conservation and
Recovery Act of 1976 (including the Hazardous and Solid Waste
Amendments thereto), the Federal Solid Waste Disposal Act and
the Federal Toxic Substances Control Act, and the Federal Insecticide,
Fungicide and Rodenticide Act, the Federal Occupational Safety
and Health Act of 1970, the Consumer Protection Act, each as
amended and as now in effect, and (b) any common law or equitable
doctrine (including, without limitation, injunctive relief and tort
doctrines such as negligence, nuisance, trespass and 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 Material; "Hazardous Material" 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 quantity, and includes,
without limitation, any oil or other petroleum product, toxic waste,
pollutant, contaminant, hazardous substance, toxic substance, hazardous
waste, special waste or petroleum or any derivative or by-product
thereof, radon, radioactive material, asbestos, asbestos containing
material, urea formaldehyde foam insulation, lead and polychlorinated
biphenyl;
(W) Taxes. Except as Previously Disclosed, (1) all reports and
returns with respect to Taxes (as defined below) that are required to
be filed by or with respect to it (or in the case of MSBC, any MSBC
Subsidiary), including without limitation consolidated federal income
tax returns of it (collectively, the "Tax Returns"), have been duly filed,
or requests for extensions have been timely filed and have not expired,
for periods ended on or prior to March 31, 1997, and on or prior to the
date of the most recent fiscal year end immediately preceding the Share
Exchange Effective Date, except to the extent all such failures to file,
taken together, are not reasonably likely to have a Material Adverse
Effect on it, and such Tax Returns were true, complete and accurate
in all material respects, (2) all taxes (which shall mean federal, state,
local or foreign income, gross receipts, windfall profits, severance,
property, production, sales, use, license, excise, franchise, employment,
withholding or similar taxes imposed on the income, properties or
operations of it (or in the case of MSBC, any MSBC Subsidiary)
together with any interest, additions, or penalties with respect thereto
and any interest in respect of such additions or penalties, collectively
the "Taxes") shown to be due on the Tax Returns have been paid in
full, (3) the Tax Returns have been examined by the Internal Revenue
Service or the appropriate state, local or foreign taxing authority or the
A-15
<PAGE>
period for assessment of the Taxes in respect of which such Tax
Returns were required to be filed has expired, (4) all Taxes due with
respect to completed and settled examinations have been paid in full,
(5) no issues have been raised by the relevant taxing authority in
connection with the examination of any of the Tax Returns which are
reasonably likely to result in a determination that would have a Material
Adverse Effect on it, except as reserved against in its Financial Reports,
and (6) no waivers of statutes of limitations (excluding such statutes
that relate to years currently under examination by the Internal Revenue
Service) have been given by or requested with respect to any Taxes of
it (or in the case of MSBC, any MSBC Subsidiary);
(X) Legal Compliance. It is in substantial compliance with all
applicable laws relating to its business or employment practices or the
ownership of its properties and is in substantial compliance with each
applicable law, ordinance, order, decree or resolution of any governmental
entity applicable to the conduct thereof or the ownership of the properties
thereto in each case which either alone or in the aggregate have or
would have a Material Adverse Effect on it.
(Y) Certain Interests. In the case of CB only, except in arm's
length transactions pursuant to normal commercial terms and
conditions, no executive officer or director of it has any material
interest in any property, real or personal, tangible or intangible,
used in or pertaining to the business of it, except for the usual
rights of a shareholder in it; no such person is indebted to it, except
for normal business expense advances; and it is not indebted to such
person except for amounts due under normal and disclosed
compensation arrangements or reimbursement of ordinary
business expenses.
(Z) Licenses. It has in effect all approvals, authorizations,
consents, licenses, clearances, and orders of and registrations
with all governmental and regulatory authorities the failure to
have and comply with which either alone or in the aggregate
would have a Material Adverse Effect on it.
(AA) Liabilities. Except to the extent reflected or reserved
against in its Financial Reports and except as Previously Disclosed
or incurred in the ordinary course of business since the date of its
most recent Financial Report, it (and, in the case of MSBC, the
MSBC Subsidiaries) have no material liability or obligation of
any nature whether accrued, absolute, contingent or otherwise
and whether due or to become due;
(BB) Pooling of Interests. It has taken no action that
would cause the Share Exchange to fail to qualify for
pooling of interests accounting treatment;
(CC) Ten Percent Shareholders. It has no shareholder who
owns of record or beneficially 10% or more of the outstanding
A-16
<PAGE>
shares of CB Common Stock, or MSBC Common Stock, as the
case may be, and except as Previously Disclosed there is no
person known to it who, directly or indirectly, through any
contract, arrangement, understanding, relationship or otherwise
has or shares (1) voting power which includes the power to vote
or to direct the voting of, such shares and/or (2) investment power,
which includes the power to dispose or to direct the disposition, of
10% or more of the outstanding shares of CB Common Stock or
MSBC Common Stock, as the case may be (all of the foregoing,
"10% Ownership"). There is no person to its knowledge who, directly
or indirectly, has created or uses a trust, proxy, power of attorney,
pooling arrangement or any other contract, arrangement or device
with the purpose or effect of divesting such person of 10% Ownership
or preventing the vesting of 10% Ownership. A person shall also
be deemed to be a beneficial owner for purposes of the foregoing
if that person has the right to acquire beneficial ownership of such
shares within 60 days;
(DD) Option Shares. In the case of CB only, the Option Shares
(as defined in the Stock Option Agreement) when issued upon
exercise of the Option, will be validly issued, fully paid and
nonassessable and subject to no preemptive rights;
(EE) Dissenters Rights. In the case of CB only, the holders
of CB Common Stock and CB Preferred Stock have no dissenters',
appraisal or similar rights in connection with the Stock Option
Agreement or the consummation of any of the transactions
contemplated thereby.
(FF) Articles and Bylaws. In the case of CB only, true and
correct copies of its current Articles of Incorporation and
bylaws have been delivered to MSBC.
V. COVENANTS
CB hereby covenants to MSBC, and MSBC hereby covenants
to CB, that:
(A) Best Efforts to Complete Share Exchange. Subject to the
terms and conditions of this Plan, it shall use its best efforts in
good faith to take, or cause to be taken, all actions, and to do, or
cause to be done, all things necessary, proper or desirable, or
advisable under applicable laws, as promptly as reasonably practicable
so as to permit consummation of the Share Exchange as soon as
reasonably practicable and to otherwise enable consummation of
the transactions contemplated hereby and by the Stock Option
Agreement and shall cooperate fully with the other parties hereto
to that end (it being understood that any amendments to the Registration
Statement (as hereinafter defined) or a resolicitation of proxies as a
consequence of an acquisition agreement by MSBC shall not violate
this covenant), including (1) using its best efforts to lift or rescind any
order adversely affecting its ability to consummate the transactions
contemplated herein and in the Stock Option Agreement and to cause
A-17
<PAGE>
to be satisfied the conditions referred to in Article VI and in the Stock
Option Agreement, and each of CB and MSBC shall use, and
MSBC shall cause the MSBC Subsidiaries to use, their respective best
efforts to obtain all consents (governmental or other) necessary or
desirable for the consummation of the transactions contemplated by this
Plan and the Stock Option Agreement; and (2) in the case of CB, cooperating
with MSBC in supplying such information as MSBC may reasonably request
in connection with any public offerings of securities by MSBC prior to the
Share Exchange Effective Date;
(B) CB Proxy Statement. In the case of CB only, (1) it shall
promptly prepare and provide to MSBC prior to its filing and mailing
a proxy statement (the "Proxy Statement") to be mailed to the holders
of CB Common Stock (and, if required, the holders of CB Preferred
Stock) in connection with the Share Exchange and to be filed by MSBC
in a registration statement (the "Registration Statement") with the SEC,
which shall conform to all applicable legal requirements; (2) without
limiting the foregoing, at the time such Proxy Statement or any
amendment or supplement thereto is mailed to holders of CB Common
Stock (and, if required, the holders of CB Preferred Stock) and at all
times thereafter up to and including the meeting of CB shareholders
referred to in Subparagraph (3) of this Paragraph (B), the Proxy Statement
and such amendments and supplements will comply in all material
respects with the provisions (to the extent applicable) of the Exchange
Act and will not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make
the statements contained therein not misleading; provided, however, in no
event shall any party hereto be liable for any untrue statement of a material
fact or omission to state a material fact in the Proxy Statement made in
reliance upon, and in conformity with, written information concerning
another party furnished by such other party specifically for use in the
Proxy Statement; (3) it shall hold a special meeting (the "Meeting") of
the holders of CB Common Stock (and, if required, the holders of CB
Preferred Stock) as soon as practicable after the Registration Statement
has become effective for purposes of voting upon this Plan, the Plan of
Share Exchange and the Share Exchange contemplated hereby and
thereby, and (4) subject to the fiduciary duties of the Board of Directors
of CB (as advised in writing by its counsel), it shall use its best efforts
to solicit and obtain votes of the holders of CB Common Stock (and,
if required, the holders of CB Preferred Stock) in favor of the above
proposals and shall once, at MSBC's request, recess or adjourn the
Meeting if such recess or adjournment is deemed by MSBC to be
necessary or desirable;
(C) Registration Statement Contents. When the Registration
Statement or any post-effective amendment or supplement thereto
shall become effective, and at all times subsequent to such
effectiveness, up to and including the date of the Meeting, such
Registration Statement and all amendments or supplements thereto,
with respect to all information set forth therein furnished or to be
furnished by CB relating to CB and by MSBC relating to MSBC
and the MSBC Subsidiaries (1) will comply in all material respects
A-18
<PAGE>
with the provisions of the Securities Act and any other applicable
statutory or regulatory requirements, and (2) will not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
contained therein not misleading; provided, however, in no event
shall any party hereto be liable for any untrue statement of a material
fact or omission to state a material fact in the Registration Statement
made in reliance upon, and in conformity with, written information
concerning another party furnished by such other party specifically
for use in the Registration Statement. In connection with the
preparation of the Registration Statement and related Prospectus/Proxy
Statement, each will cooperate with the other and will furnish the
information concerning itself required by law to be included therein;
(D) Effectiveness of Registration Statement. MSBC will advise
CB, promptly after MSBC receives notice thereof, of the time when
the Registration Statement has become effective or any supplement
or amendment has been filed or of the issuance of any stop order
or the suspension of the qualification of the MSBC Common Stock
for offering or sale in any jurisdiction, of the initiation or threat of
any proceeding for any such purpose, or of any request by the SEC
for the amendment or supplement of the Registration Statement
or for additional information;
(E) Public Announcements. It agrees that, unless approved
by the other party hereto in advance, it will not issue any press
release or written statement for general circulation relating to
the transactions contemplated hereby, except as otherwise required
by law or applicable NASD or stock exchange rule;
(F) Review of Information. (1) Upon reasonable notice, it
shall afford the other party hereto, and its officers, employees,
counsel, accountants and other authorized representatives,
access, during normal business hours throughout the period
prior to the Share Exchange Effective Date, to all of its properties,
books contracts, commitments and records and, during such period,
it shall furnish promptly to the other party hereto (a) a copy of
each material report, schedule and other document filed by it
pursuant to the requirements of the Federal Securities Laws or
any state laws, rules and regulations regulating the issuance,
sale or exchange of securities or the markets in which any of
the foregoing occurs ("Blue Sky Law(s)" which together with
the Federal Securities Laws are hereinafter referred to as the
"Securities Laws") or banking laws, and (b) all other information
concerning its business, properties and personnel as the other
parties hereto may reasonably request, provided that no
investigation pursuant to this Paragraph (F) by any party
shall affect or be deemed to modify or waive any representation
or warranty made by any other party hereto or the conditions to
the obligation of the first party to consummate the transactions
contemplated by the Plan; and (2) each party hereto will not use
any information obtained pursuant to this Paragraph (F) for any
purpose unrelated to the consummation of the transactions
A-19
<PAGE>
contemplated by this Plan and the Stock Option Agreement
and, if the Share Exchange is not consummated, will hold all
information and documents obtained pursuant to this paragraph
in confidence (as provided in Paragraph (F) of Article VIII)
unless and until such time as such information or documents
become publicly available other than by reason of any action or
failure to act by such party or as it is advised by counsel that
any such information or document is required by law or applicable
NASD or stock exchange rule to be disclosed, and in the event of
the termination of this Plan, each party will, upon request by the
other party, deliver to the other all documents so obtained by it
or destroy such documents;
(G) No Solicitation. In the case of CB only, (1) it shall not,
and shall direct the officers, directors, employees and other persons
affiliated with it and any investment banker, attorney, accountant
or other representative of it, not to, directly or indirectly, solicit
or encourage inquiries or proposals with respect to, or (except
as required by the fiduciary duties of its Board of Directors as
advised in writing by its counsel) furnish any nonpublic information
relating to or participate in any negotiations or discussion
concerning, any acquisition or purchase of all or a substantial
portion of the assets of, or a substantial equity interest in, it or
any merger or other business combination with it other than as
contemplated by this Plan; and (2) shall notify MSBC immediately
if any such inquiries or proposals are received by, or any such
negotiations or discussions are sought to be initiated with, it;
(H) Filing of Registration Statement. In the case of MSBC
only, it shall, as promptly as practicable following the date of
this Plan, prepare and file the Registration Statement with the
SEC and MSBC shall use its best efforts to cause the Registration
Statement to be declared effective as soon as practicable after
the filing thereof;
(I) Blue Sky. In the case of MSBC only, it shall use its best
efforts to obtain, prior to the effective date of the Registration
Statement, all necessary Blue Sky Law permits and approvals,
provided that MSBC shall not be required by virtue thereof
to submit to general jurisdiction in any state;
(J) Affiliates. In the case of CB only, within 30 days after
the execution of this Plan it will cause each person who may
be deemed to be an "affiliate" of it for purposes of Rule 145
under the Securities Act to execute and deliver to MSBC an
agreement in the form attached hereto as Exhibit B;
(K) CB Policies and Practices. In the case of CB only:
CB shall use its best efforts to modify and change its credit,
investment, litigation, real estate valuation and trust department
policies and practices (including loan classifications and levels
of reserves) prior to the Share Exchange Closing so as to be
A-20
<PAGE>
consistent on a mutually satisfactory basis with those of MSBC
and generally accepted accounting principles. CB shall not be
required to modify or change any policies or practices, however,
until (x) satisfaction of the conditions set forth in Paragraphs (A),
(B) and (C) of Article VI, (y) such time as CB and MSBC shall
reasonably agree that the Share Exchange Closing will occur
prior to public disclosure of such modifications or changes in
regular periodic earnings releases or periodic reports filed with
the SEC or other applicable governmental authority available to
the public, and (2) such time as MSBC acknowledges in writing
that all conditions to MSBC's obligation to consummate the Share
Exchange (and MSBC's rights to terminate this Plan) have been
waived or satisfied; provided, however, that in all circumstances
CB shall make such modifications and changes not later than
immediately prior to the Share Exchange Effective Date. CB's
representations, warranties and covenants contained in the Plan
shall not be deemed to be untrue or breached in any respect for
any purpose as a consequence of any modifications or changes
undertaken solely on account of this Paragraph (K);
(L) State Takeover Laws. In the case of CB only, it shall not
take any action that would cause the transactions contemplated by
this Plan and/or the Stock Option Agreement to be subject to any
applicable state takeover, business combination, control share
acquisition or similar statute in effect as of the date of this Plan
and shall take all necessary steps to exempt (or ensure the continued
exemption of) the transactions contemplated by this Plan and the
Stock Option Agreement from, or if necessary challenge the validity
or applicability of, any applicable state takeover, business combination,
control share acquisition or similar law, as now or hereafter in effect,
including, without limitation, Title 3, Subtitle 6 and Title 3, Subtitle
7, of the Maryland Corporation Law;
(M) CB Special Shareholder Rights. In the case of CB
only: (1) it shall take all necessary steps to ensure that the entering
into of this Plan and the Stock Option Agreement and the consummation
of the transactions contemplated hereby and thereby (including without
limitation the Share Exchange and the exercise of the Option) and any
other action or combination of actions, or any other transactions contemplated
hereby or thereby do not and will not result in the grant of any rights to any
person under the Articles of Incorporation of Bylaws of CB or under any
agreement to which CB is a party (except for employment contracts and
benefits Previously Disclosed); or (2) restrict or impair in any way the
ability of MSBC to exercise the rights granted hereunder or under the
Stock Option Agreement;
(N) CB Shareholder Approval Rights. In the case of CB, only,
it shall not adopt any plan or other arrangement that would adversely
affect in any way MSBC's rights under this Plan or the Stock Option
Agreement;
A-21
<PAGE>
(O) Best Efforts for Share Exchange. It undertakes and agrees to
use its best efforts to cause the Share Exchange to be effected and to
take no action which would cause the Share Exchange to fail to
qualify for pooling of interests accounting treatment;
(P) Government Applications. In the case of MSBC only, it
shall promptly seek the following consents and approvals with
respect to the Share Exchange: (1) approval of the Share Exchange
by the FRB under Section 3 of the Bank Holding Company Act
("FRB Acquisition Approval"); (2) approval of the Share Exchange by
the Maryland Bank Regulator ("Maryland Bank Regulator Acquisition
Approval"); and (3) approval of the Share Exchange by the Bureau of
Financial Institutions of the Virginia State Corporation Commission
("Virginia Bank Regulator Acquisition Approval"). Both MSBC and
CB will use their best efforts to obtain and will cooperate with each
other in making applications for the foregoing approvals or other
actions advisable in the reasonable judgment of MSBC to consummate
the Share Exchange including, but not limited to, promptly furnishing
information relating to it and its subsidiaries required to be set forth
therein; provided, however, that any approval shall not require a
change which materially adversely impacts the economic or business
benefits to either MSBC or CB of the transactions contemplated by
this Plan so as to render inadvisable the consummation of the Share
Exchange;
(Q) Environmental Tests. CB will allow MSBC to conduct,
through designated representatives, environmental and engineering
tests provided that no test or information discovered pursuant thereto
shall be deemed to affect or modify or waive any representation or
warranty made by CB.
VI. CONDITIONS TO CONSUMMATION OF THE SHARE EXCHANGE.
Consummation of the Share Exchange is conditioned upon:
(A) Shareholder Approval. Approval of the Share Exchange
and the other transactions contemplated hereby by the requisite vote
of the stockholders of the parties hereto, as may be required;
(B) Specific Regulatory Approval. Procurement of FRB
Acquisition Approval, Maryland Bank Regulator Acquisition
Approval, Virginia Bank Regulator Acquisition Approval and the
approval of any other financial institutions regulator, as may be
necessary, and the expiration of any statutory waiting period relating thereto;
(C) General Governmental Approval. Procurement of all
other regulatory consents and approvals and satisfaction of all
other requirements prescribed by law which are necessary to the
A-22
<PAGE>
consummation of the Share Exchange; provided, however, that no
approval or consent in Paragraph (B) or (C) of this Article VI shall
have imposed any condition or requirement which would materially
adversely impact the economic or business benefits to either MSBC
or CB of the transactions contemplated by this Plan so as to render
inadvisable the consummation of the Share Exchange;
(D) No Countervening Orders. There shall not be in effect
any order, decree or injunction of any court or agency of competent
jurisdiction that enjoins or prohibits consummation of the Share
Exchange;
(E) Accountants' Reports as to MSBC. CB and its
directors shall have received from Coopers & Lybrand letters,
dated the date of or shortly prior to (i) the mailing of the Proxy
Statement, and (ii) the Share Exchange Effective Date, in form and
substance satisfactory to CB with respect to MSBC's consolidated
financial position and results of operations, which letters shall be
based upon customary specified procedures undertaken by such firm;
(F) Accountants' Reports as to CB. MSBC shall have
received from Coopers & Lybrand, dated the date of or shortly
prior to (1) the mailing of the Proxy Statement, (2) the public
offerings of any securities by MSBC prior to the Share Exchange
Effective Date, and (3) the Share Exchange Effective Date, in form
and substance satisfactory to MSBC with respect to CB's financial
position and results of operations, which letters shall be based upon
customary specified procedures undertaken by such firm, and MSBC
shall have received from Coopers & Lybrand a letter, dated as of the
Share Exchange Effective Date in form and substance satisfactory to
MSBC, to the effect that Coopers & Lybrand are not aware of any
facts or circumstances relating to actions taken by CB or actions that
CB has failed to take that might cause the Share Exchange not to
qualify for pooling of interests accounting treatment;
(G) MSBC Legal Opinion. CB shall have received an
opinion, dated the Share Exchange Effective Date, of Flippin,
Densmore, Morse, Rutherford & Jessee, counsel for MSBC, in
form reasonably satisfactory to CB, which shall cover the matters
contained in Exhibit C hereto;
(H) CB Legal Opinion. MSBC and its directors and officers
who sign the Registration Statement shall have received an opinion,
dated the Share Exchange Effective Date of McNamee, Hosea,
Jernigan & Kim, P.A. in form reasonably satisfactory to MSBC,
which shall cover the matters contained in Exhibit D hereto;
(I) MSBC Representations and Warranties. (1) Each
of the representations and warranties contained herein of MSBC
shall be true and correct as of the date of this Plan and upon the Share
A-23
<PAGE>
Exchange Effective Date with the same effect as though all such
representations and warranties had been made on the Share Exchange
Effective Date, except (a) for any such representations and warranties
made as of a specified date, which shall be true and correct as of
such date, (b) as expressly contemplated by this Plan, or (c) for
representations and warranties (other than the representations and
warranties set forth in Paragraph (A) of Article IV, which shall be
true and correct in all material respects) the inaccuracies of which relate
to matters that, individually or in the aggregate, do not materially
adversely affect the Share Exchange and the other transactions
contemplated by this Plan, and (2) each and all of the agreements and
covenants of MSBC to be performed and complied with pursuant to this
Plan and the other agreements contemplated hereby prior to the Share
Exchange Effective Date shall have been duly performed and complied
with in all material respects, and CB shall have received a certificate or
certificates signed by the Chief Executive Officer and Chief Financial
Officer of MSBC dated the Share Exchange Effective Date, to such effect;
(J) CB Representations and Warranties. (1) Each of the
representations and warranties contained herein of CB shall be true and
correct as of the date of this Plan and upon the Share Exchange Effective
Date with the same effect as though all such representations and warranties
had been made on the Share Exchange Effective Date, except (a) for any
such representations and warranties made as of a specified date, which shall
be true and correct as of such date, (b) as expressly contemplated by this
Plan, or (c) for representations and warranties (other than the representations
and warranties set forth in Paragraph (A) of Article IV, which shall be true
and correct in all material respects) the inaccuracies of which relate to
matters that, individually or in the aggregate, do not materially adversely
affect the Share Exchange and the other transactions contemplated by this
Plan, and (2) each and all of the agreements and covenants of CB to be
performed and complied with pursuant to this Plan and the other agreements
contemplated hereby prior to the Share Exchange Effective Date shall
have been duly performed and complied with in all material respects, and
MSBC shall have received a certificate signed by the Chief Executive
Officer and the Chief Financial Officer of CB dated the Share Exchange
Effective Date, to such effect;
(K) Registration Statement Effectiveness. The Registration
Statement shall have become effective and no stop order suspending
the effectiveness of the Registration Statement shall have been issued
and no proceedings for that purpose shall have been initiated or
threatened by the SEC or any other regulatory authority;
(L) Blue Sky Approvals. MSBC shall have received all
Blue Sky Law approvals, permits and other authorizations
necessary to consummate the Share Exchange;
A-24
<PAGE>
(M) Tax Free Reorganization Opinion. MSBC and CB shall
have received an opinion from Coopers & Lybrand or Flippin,
Densmore, Morse, Rutherford & Jessee (as MSBC may elect) to the effect
that (1) the acquisition of CB Common Stock by MSBC and the Share
Exchange constitutes a reorganization under Section 368 of the Code,
and (2) no gain or loss will be recognized by stockholders of CB who
receive shares of MSBC Common Stock in exchange for their shares
of CB Common Stock except that gain or loss may be recognized as
to cash received in lieu of fractional share interests and, in rendering
their opinion, may require and rely upon representations contained in
certificates of officers of MSBC, CB and others;
(N) Listing of MSBC Common Stock. The shares of MSBC
Common Stock issuable pursuant to the Share Exchange shall have
been approved for listing on the NASDAQ/NMS, subject to official
notice of issuance;
(O) Pooling Letter. MSBC and CB shall have received a letter,
dated as of the Share Exchange Effective Date, in form and substance
reasonably acceptable to MSBC and CB, from Coopers & Lybrand to
the effect that the acquisition of CB Common Stock by MSBC and
the Share Exchange will qualify for pooling of interests accounting
treatment;
(P) Affiliate Letters. MSBC shall have received from each
affiliate of CB the affiliates letter referred to in Paragraph (J) of
Article V, to the extent necessary to assure in the reasonable judgment
of MSBC that the acquisition of CB Common Stock by MSBC and the
Share Exchange will qualify for pooling of interests accounting treatment;
(Q) CB Fairness Opinion. At the time the Proxy Statement is
mailed to the holders of shares of CB Common Stock (and, if necessary,
to the holders of CB Preferred Stock) and on the Share Exchange
Effective Date, the Board of Directors of CB shall have received an
opinion from Scott & Stringfellow that the terms of the Share Exchange
are fair to the shareholders of CB from a financial point of view.
(R) Redemption of CB Preferred Stock and Redemption
of CB Warrants. As of a date which is no later than 30 days before
the Share Exchange Closing, each holder of shares of CB Preferred
Stock shall have entered into a written agreement with CB for the
express benefit of and reasonably satisfactory to MSBC agreeing
to redeem as of the Share Exchange Closing all of his shares of
CB Preferred Stock for that number of shares of MSBC Common
Stock to which he would have been entitled under the Plan if he had
first converted such shares of CB Preferred Stock into CB Common
Stock immediately prior to the Share Exchange Effective Date and
each holder of CB Warrants (excepting only those Warrants held
by Joseph O. Hansen and any other Warrants as to which MSBC
shall have executed an express, written waiver of the requirements
A-25
<PAGE>
hereof, manually signed by a member of the Office of the Chairman
describing specifically the number of Warrants and the holder of the
Warrants covered by such waiver) shall have entered into a written
agreement with CB for the express benefit of and reasonably acceptable
to MSBC to redeem as of the Share Exchange Closing each CB Warrant
in return for that number of shares of MSBC Common Stock equal to
the quotient obtained by dividing $31.00 by the Average MSBC Share
Price ("Warrant Redemption Ratio"). If the Warrant Redemption Ratio
computed in accordance with the immediately preceding sentence is
less than 1.228 the Warrant Redemption Ratio shall be 1.228; if the
Warrant Redemption Ratio computed in accordance with the
immediately preceding sentence is greater than 1.494, the Warrant
Redemption Ratio shall be 1.494. As of a date which is no later
than 30 days before the Share Exchange Closing, CB shall have
caused to be deposited in escrow with an escrow agent mutually
satisfactory to it and MSBC all outstanding shares of CB Preferred
Stock and all CB Warrants required to be redeemed hereunder together
with all other documents necessary to accomplish the redemption thereof
in accordance herewith and to obligate the holders thereof to redeem as
of the Share Exchange Closing all issued and outstanding shares of CB
Preferred Stock and CB Warrants required to be redeemed hereunder in
return for the shares of MSBC Common Stock to which they are entitled
based on this Paragraph. As of the Share Exchange Closing, the holders
of CB Preferred Stock and CB Warrants shall by agreement be entitled
only to receive from MSBC the shares of MSBC Common Stock as
provided in the agreements executed in accordance with this Paragraph
and shall have no further rights under the terms of the CB Preferred Stock
and CB Warrants, which shall be considered redeemed, as the case may
be, as of the Share Exchange Closing, provided, however, that a failure
to satisfy any of the conditions set forth in the proviso following Paragraph
(C) or in Paragraph (F), (H), (J), (L), (P), or (R) of Article VI shall only
constitute conditions if asserted by MSBC and a failure to satisfy any of
the conditions set forth in the proviso following Paragraph (C), Paragraph
(E), (G), (I), or (Q) of this Article VI shall only constitute conditions if
asserted by CB.
VII. TERMINATION.
This Plan may be terminated as follows prior to the Share
Exchange Effective Date, either before or after receipt of required
stockholder approval, provided that termination under this Article VII
shall not relieve any party from liability under Paragraph (E) of Article VIII:
(A) Mutual Consent. By the mutual consent of MSBC and CB,
if the Board of Directors of each so determines by vote of a majority of
the members of its entire Board;
(B) On Breach. By MSBC or CB, if its Board of Directors
so determines by vote of a majority of the members of its entire
A-26
<PAGE>
Board, in the event of (1) a breach by the other party of any representation
or warranty contained herein, which breach cannot be or has not been cured
within thirty (30) days after the giving of written notice to the breaching
party of such breach and which breaches, individually or in the aggregate,
materially adversely affect the Share Exchange and the other transactions
contemplated by this Plan, or (2) a material breach by the other party of
any of the covenants or agreements contained herein, which breach
cannot be or has not been cured within thirty (30) days after the giving
of written notice to the breaching party of such breach; provided, however,
that a breach can only be asserted as a basis for termination pursuant to
this paragraph (B) by a party who is not itself at such time in breach hereof;
(C) Failure to Consummate on Time. By MSBC or CB, if its
Board of Directors so determines by vote of a majority of the members
of its entire Board, in the event that the Share Exchange is not
consummated by December 31, 1997;
(D) Failure to Obtain Certain Approvals. By MSBC or CB, if
its Board of Directors so determines by a vote of a majority of the
members of its entire Board, in the event that (1) any common stockholder
approval contemplated by Paragraph (A) of Article VI is not obtained at
a meeting or meetings called for the purpose of obtaining such approval;
(2) FRB Acquisition Approval, the Maryland Bank Regulator Acquisition
Approval, the Virginia Bank Regulator Acquisition Approval or any
other financial institution regulatory approval, to the extent necessary
to consummate the Share Exchange legally, is finally and unconditionally
denied;
(E) Possible Adjustment in Exchange Rate and Warrant Redemption
Ratio. By CB by vote of a majority of the members of its entire Board
during the ten (10) day period commencing on the Determination Date
if both of the following conditions are satisfied:
(1) if the Average MSBC Determination Price for MSBC
Common Stock on the Determination Date is less than $20.75; and
(2) if the First Percentage exceeds the Second Percentage
by at least ten (10) percentage points; subject, however, to the
immediately following four sentences. If CB elects to exercise its
termination right pursuant to Paragraph (E) of Article VII, it shall
give prompt written notice to MSBC (provided that such notice of
election to terminate may be withdrawn at any time within the
aforementioned ten (10) day period). During the seven (7) day period
commencing with its receipt of such notice, MSBC shall have the
option of increasing the consideration to be received by the holders
of CB Common Stock by adjusting the Exchange Ratio and to increase
the consideration to be received by the holders of the CB Warrants in the
redemption thereof pursuant to Paragraph (R)of the Article VI to equal a
A-27
<PAGE>
quotient, the numerator of which is $20.75 multiplied by the Exchange
Ratio (as then in effect) in the case of the holders of CB Common Stock
or by the Warrant Redemption Ratio in the case of holders of CB
Warrants and the denominator of which is the Average MSBC
Determination Price. If MSBC makes the election contemplated by the
immediately preceding sentence, it shall give prompt written notice to
CB of such election and the revised Exchange Ratio and revised Warrant
Redemption Ratio, whereupon no termination shall have accrued pursuant
to this Paragraph (E) and the Plan shall remain in effect in accordance
with its terms (except as the Exchange Ratio and Warrant Redemption
Ratio shall have been so modified) and any references in this Plan to
"Exchange Ratio" or "Warrant Redemption Ratio" shall thereafter be
deemed to refer to the Exchange Ratio or Warrant Redemption Ratio as
adjusted pursuant to this Paragraph (E).
For purposes of this Paragraph (E) the following terms shall have
the meanings indicated:
"Average MSBC Determination Price" means the average of the
bid/ask price for MSBC Common Stock as reported on the
NASDAQ/NMS for the 20 consecutive full trading days preceding
the Determination Date.
"Determination Date" means the tenth day prior to the Share
Exchange Closing.
"First Percentage" means the percentage resulting from: (a) taking
the remainder ("First Remainder") obtained by subtracting the Average
MSBC Determination Price from $23.625 (the average of the bid and
asked prices of MSBC Common Stock as reported on the NASDAQ/NMS
on June 18, 1997; and (b) dividing the First Remainder by the Average
MSBC Determination Price.
"Second Percentage" means the percentage resulting from: (a) taking
the remainder ("Second Remainder") obtained by subtracting the SNL
Southeast Bank Index reported most recently prior to the last trading day in
the measuring period for calculating the Average MSBC Determination
Price ("Recent SNL Bank Index") from the SNL Southeast Bank Index at
June 18, 1997; and (b) dividing the Second Remainder by the Recent
SNL Bank Index.
(F) Failure to Redeem CB Preferred Stock and CB Warrants.
By MSBC, if, at least 30 days prior to Share Exchange Closing, CB shall
not have caused the holders of all outstanding shares of CB Preferred
Stock and all CB Warrants (excepting only CB Warrants excluded from
the escrow requirements of Paragraph (R) of Article VI expressly by the
terms thereof) to deposit with an escrow agent mutually acceptable to CB
and MSBC all shares of CB Preferred Stock and all CB Warrants required
to be redeemed together with agreements and other documents required by
Paragraph (R) of Article VI necessary and sufficient to enable and require
A-28
<PAGE>
the redemption of the CB Preferred Stock and the CB Warrants and to obligate
the holders thereof to redeem as of the Share Exchange Closing all issued and
outstanding shares of CB Preferred Stock and all such CB Warrants,
respectively, in return for the shares of MSBC Common Stock to which they
are entitled as provided in Paragraph (R) of Article VI.
VIII. OTHER MATTERS.
(A) Survival. If the Share Exchange Effective Date occurs,
the agreements of the parties in Paragraph (H) of Article II, and Paragraphs
(A), (C), (D), (I), (J) and (K) of this Article VIII shall survive the Share
Exchange Effective Date; all other representations, warranties, agreements
and covenants contained in this Plan shall be deemed to be conditions of
the Share Exchange and shall not survive the Share Exchange Effective Date.
If this Plan is terminated prior to the Share Exchange Effective Date, the
agreements and representations of the parties in Paragraph (K) of Article
IV, Paragraphs (F)(2) of Article V and Paragraphs (A), (D), (E), (F), (G)
and (I) of this Article VIII shall survive such termination. In the event of
the termination and abandonment of this Plan pursuant to the provisions of
Article VII, this Plan shall become void and have no effect, except (1) as
provided in the immediately preceding sentence; and (2) no party shall be
relieved or released from any liability arising out of a breach of any
provisions of this Plan except as provided in Paragraph (E) of this Article.
(B) Waiver, Amendment. Prior to the Share Exchange Effective Date,
any provision of this Plan may be (1) waived by the party benefited by the
provision, or (2) amended or modified at any time (including the structure
of the transaction), by an agreement in writing among the parties hereto
approved by their respective Boards of Directors and executed in the same
manner as this Plan, except that, after the vote by the stockholders of CB,
the consideration to be received by the stockholders of CB for each share of
CB Common Stock shall not be decreased (except in accordance with Section
4 of the Plan of Share Exchange).
(C) Counterparts. This Plan may be executed in one or more
counterparts, each of which shall be deemed to constitute an original.
This Plan shall become effective when one counterpart has been signed by
each party hereto.
(D) Governing Law. This Plan shall be governed by, and interpreted in
accordance with, the laws of the State of Virginia.
(E) Fees and Expenses. In the event that the Plan is terminated in
accordance with the provisions of Article VII otherwise than on account of a
breach by MSBC the total documented out-of-pocket costs, expenses and fees
A-29
<PAGE>
incurred by CB and MSBC (regardless of when incurred) in connection
with and arising out of the Share Exchange and the other transactions
contemplated by this Plan (including, without limitation, amounts paid or
payable to investment bankers, to counsel and accountants, and to governmental
and regulatory agencies) shall be aggregated and each party hereto shall
be responsible for paying one-half (1/2) of the same, and shall promptly
make such reimbursement to the other party as is necessary to
effectuate this result.
(2) In the event that Paragraph (1) is not applicable to
allocate the expenses between the parties each party hereto will bear all
expenses incurred by it in connection with this Plan and the transactions
contemplated hereby.
(3) Payments to be made hereunder shall be made in
immediately available funds within thirty (30) days following the day
on which the party entitled to payment notifies the other party in writing that
the events entitling it to payment of the same have occurred and upon failure
to pay the same when due the other party shall be entitled to recover from the
other party all collection costs and expenses, including but not limited to
reasonable legal fees.
(F) Confidentiality. Except as otherwise provided in Paragraph
(F)(2) of Article V, each of the parties hereto and their respective agents,
attorneys and accountants will maintain the confidentiality of all
information provided in connection herewith which has not been
publicly disclosed.
(G) Notices. All notices, requests and other communications
hereunder to a party shall be in writing and shall be deemed to have
been duly given when delivered by hand, telegram or facsimile
(confirmed in writing) to such party at its address set forth below or
such other address as such party may specify by notice to the parties
hereto.
If to MSBC, to:
MainStreet BankGroup Incorporated
200 E. Church Street
Martinsville, VA 24112-5409
Attn: Michael Brenan,
Chief Executive Officer
A-30
<PAGE>
Copy to:
Douglas W. Densmore, Esq.
Flippin, Densmore, Morse, Rutherford & Jessee
300 First Campbell Square
Drawer 1200
Roanoke, Virginia 24006
If to CB, to:
Commerce Bank
9658 Baltimore Avenue
College Park, MD 20740
Attn: George Kapusta, President
Copy to:
Milton D. Jernigan, II
McNamee, Hosea, Jernigan & Kim, P.A.
6411 Ivy Lane, Suite 200
Greenbelt, Maryland 20770
(H) Definitions. Any term defined anywhere in this Plan shall have
the meaning ascribed to it for all purposes of this Plan (unless expressly
noted to the contrary). In addition:
(1) the term "knowledge" when used with respect to a party
shall mean the knowledge, after due inquiry, of any "Executive Officer"
of such party as such term is defined in FRB Regulation O;
(2) the term "Material Adverse Effect," when applied to a
party, shall mean an event, occurrence or circumstance (including
without limitation (a) the making of any provisions for possible loan
and lease losses, write-downs of other real estate and taxes and (b)
any breach of a representation or warranty by such party) which (i)
has or is reasonably likely to have a material adverse effect on the
financial position, results of operations or business of the party and
its subsidiaries, taken as a whole, or (ii) would materially impair the
party's ability to perform its obligations under this Plan or the
consummation of the Share Exchange and the other transactions
contemplated by this Plan; provided, however, that, solely for purposes
of measuring whether an event, occurrence or circumstance has a material
adverse effect on such party's results of operations, the term "results of
operations" shall mean net interest income plus non-interest income
A-31
<PAGE>
(less securities gains) less gross expenses (excluding provisions for
possible loan and lease losses, write-downs of other real estate and
taxes); and provided, further, that material adverse effect and material
impairment shall not be deemed to include the impact of (x) changes
in banking and similar laws of general applicability or interpretations
thereof by courts or governmental authorities, (y) changes in generally
accepted accounting principles or regulatory accounting requirements
applicable to banks and bank holding companies generally and (z) the
effects of Share Exchange on the operating performance of the parties
to this Plan;
(3) the term "Previously Disclosed" by a party shall
mean information set forth in a written disclosure letter that is
delivered by that party to the other party contemporaneously with
the execution of this Plan and specifically designated as information
"Previously Disclosed" pursuant to this Plan; provided, however, that
any information so disclosed shall specify the provision of this Plan
pursuant to which such information is being disclosed and shall not
be deemed to be disclosed pursuant to any other provision of, or for
any other purpose under, this Plan unless otherwise indicated; provided,
further, the mere inclusion of an item in a disclosure letter shall not
be deemed an admission by a party that such item represents a material
exception of fact, event or circumstances or that such item is reasonably
likely to result in a Material Adverse Effect.
(I) Entire Understanding. This Plan represents the entire
understanding of the parties hereto with reference to the transactions
contemplated hereby and supersede any and all other oral or written
agreements heretofore made. Nothing in this Plan expressed or implied,
is intended to confer upon any person, other than the parties hereto or
their respective successors, any rights, remedies, obligations or liabilities
under or by reason of this Plan, other than as provided in Paragraph (K) below.
(J) Benefit Plans. Upon consummation of the Share Exchange, as soon
as administratively practicable employees of CB shall be entitled to
participate in MSBC's pension, severance, benefit and similar plans on the
same terms and conditions as employees of MSBC and its subsidiaries, MSBC
shall cause CB to honor in accordance with their terms as in effect on the date
hereof, or as amended after the date hereof with the prior written consent of
MSBC, all employment, severance, consulting and other compensation
contracts and agreements Previously Disclosed to MSBC and executed in
writing by both CB on the one hand and any individual current or former
director, officer or employee thereof on the other hand, copies of which have
previously been delivered by CB to MSBC.
(K) Indemnification. (1) In the case of MSBC only, it agrees that
for the six-year period following the Share Exchange Effective Date, it shall
cause CB and any successor thereto to indemnify and hold harmless any
A-32
<PAGE>
person who has rights to indemnification from CB to the same extent and
on the same conditions as such person is entitled to indemnification pursuant
to CB's Articles of Incorporation as in effect on the date of this Plan, to the
extent legally permitted to do so, with respect to matters occurring on or
prior to the Share Exchange Effective Date (regardless of whether a claim
is asserted in connection therewith on or prior to the Share Exchange
Effective Date or thereafter). Without limiting the foregoing, in any
case in which approval by CB may be required to effectuate any such
indemnification, MSBC shall cause CB to direct, at the election of the
party to be indemnified, that the determination of any such approval shall
be made by independent counsel mutually agreed upon between MSBC
and the indemnified party. MSBC shall use its reasonable best efforts to
provide coverage to the officers and directors of CB under MSBC policy or
policies of director and officers liability insurance on the same or
substantially similar terms then in effect for the directors and officers of
MSBC and CB shall reimburse MSBC for the additional premium incurred
by it in connection with providing such coverage; (2) If MSBC or any of
its successors or assigns shall consolidate with or merge into any other
entity and shall not be the continuing or surviving entity of such
consolidation or merger or shall transfer all or substantially all of its
assets to any entity, then and in each case, proper provisions shall be made
so that the successors and assigns of MSBC shall assume the obligations set
forth in this Paragraph (K)(1). MSBC shall pay all reasonable costs,
including attorneys' fees, that may be incurred by any Indemnified Party in
enforcing the indemnity and other obligations provided for in this
Paragraph (K)(1).
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed in counterparts by their duly authorized officers, all as of
the day and year first above written.
MainStreet BankGroup Incorporated
By: /s/ Michael Brenan
------------------------------
Michael Brenan
Chief Executive Officer
Commerce Bank
By: /s/ George Kapusta
-------------------------------
George Kapusta
President
A-33
<PAGE>
Exhibit A
ARTICLES OF SHARE EXCHANGE
BETWEEN
COMMERCE BANK
a Maryland corporation
and
MAINSTREET BANKGROUP INCORPORATED
a Virginia Corporation
Pursuant to the provisions of 3-109 of the Corporations and
Associations Article of the Annotated Code of Maryland, Commerce Bank,
a Maryland bank (the "Acquired Corporation"), as the acquired corporation,
and MainStreet BankGroup Incorporated, a Virginia corporation, (the
"Acquiring Corporation") hereby execute and deliver the following articles
of share exchange and set forth:
1. The Plan of Share Exchange (the "Plan") pursuant to which the
shares of the common stock $10.00 par value per share of the
Acquired Corporation will be exchanged for the shares of the
common stock $5.00 par value per share of the Acquiring Corporation
is attached hereto as Annex 1.
2. The Plan was submitted to the shareholders of the Acquired
Corporation by its board of directors in accordance with the
provisions of 3-105 of the Corporations and Associations Article
of the Annotated Code of Maryland;
(a) The designation, number of outstanding shares, and the
number of votes entitled to be cast by each voting group
entitled to vote separately on the Plan were:
No. of
Designation Outstanding Shares No. of Votes
Common
Preferred
(b) The total number of votes cast for and against the Plan by each
voting group entitled to vote separately on the Plan were:
A-34
<PAGE>
Total No. of Votes Total No. of Votes
Voting Group Cast for the Plan Cast Against the Plan
Common
Preferred
4. Pursuant to 3-113 of the Corporations and Associations Article
of the Annotated Code of Maryland, the effective time and date of
the share exchange shall be -------a.m. on ---------------.
The undersigned, President, of Commerce Bank, and Chief Executive
Officer, of MainStreet BankGroup Incorporated, each declare that the facts
herein stated are true as of ----------------, 1997.
COMMERCE BANK
By:________________________________
Its: President
MAINSTREET BANKGROUP
INCORPORATED
By:________________________________
Its: Chief Executive Officer
A-35
<PAGE>
Annex 1 to Exhibit A
PLAN OF SHARE EXCHANGE
A. MainStreet BankGroup Incorporated ("the Acquiring Corporation")
is a corporation organized and existing under the laws of the Commonwealth
of Virginia.
B. Commerce Bank (the "Acquired Corporation") is a Maryland
bank organized and existing under the laws of the State of Maryland.
C. The Acquiring Corporation and the Acquired Corporation,
their respective Boards of Directors, and the shareholders of the Acquired
Corporation have approved a statutory share exchange ("Share Exchange")
of the common stock, $10.00 par value per share, of the Acquired
Corporation ("Acquired Corporation Common Stock") for shares of
the common stock, $5.00 par value per share, of the Acquiring
Corporation ("Acquiring Corporation Common Stock") by which all
of the outstanding capital corporate stock of the Acquired Corporation
as of the Effective Time will be acquired by the Acquiring Corporation.
1. Effective Time. The Share Exchange shall become effective at
the time when the Articles of Share Exchange as approved by the
Maryland Commissioner of Financial Regulations are accepted for
filing by the Maryland Department of Assessments and Taxation (the
"Effective Time") but in no event before the conditions in Article VI
of the Agreement and Plan of Share Exchange between the Acquiring
Corporation and the Acquired Corporation dated as of July 3, 1997
(the "Agreement") shall have been fulfilled or waiver.
2. Manner and Basis of Exchange. The manner and basis of
exchanging the shares of the Acquired Corporation Common Stock
issued and outstanding immediately prior to the Effective Time
(excluding only the Excluded Shares as hereinafter defined) for
shares of the Acquiring Corporation Common Stock are as follows:
(A) Share Exchange Rights. In exchange for their shares
of Acquired Corporation Common Stock, the holders of shares
of the Acquired Corporation Common Stock outstanding immediately
prior to the Effective Time (excluding only the Excluded Shares) on and
after the Effective Time automatically and without any action on the
part of such holders shall be entitled to receive (the "Share Exchange
Rights") that number of shares of the Acquiring Corporation Common
Stock (including the rights attached thereto) obtained by dividing the
Negotiated Price per share of the Acquired Corporation Common
Stock by the average of the average of the bid/asked price per share
A-36
<PAGE>
for the Acquiring Corporation Common Stock as reported on the National
Association of Securities Dealers Quotations System National Market
System ("NASDAQ/NMS) for each of the twenty (20) trading days
preceding the later to occur of (i) the approval of the Share Exchange
and the other transactions contemplated by the Agreement by the
shareholders of the Acquired Corporation; and (ii) the financial
institution regulatory approvals (but not the statutory waiting periods)
necessary for the consummation of the Share Exchange and the
other transactions contemplated by the Agreement, subject to possible
adjustment as set forth in Paragraph (H) below (the "Exchange Ratio").
The Negotiated Price per share of the Acquired Company Common Stock is
$52.00.
(B) Stockholder Rights; Stock Transfers. As of the Effective
Time, holders of Acquired Corporation Common Stock shall cease to
be, and shall have no rights as, stockholders of the Acquired Corporation,
other than to receive the Share Exchange Rights provided under Paragraph
(A) above, and the consideration provided in Paragraph (C) below or
to elect to pursue their statutory dissenters' rights as provided under
Paragraph (D) below). After the Effective Time, there shall be no transfers
on the stock transfer books of the Acquired Corporation of the shares of
Acquired Corporation Common Stock which were issued and outstanding
immediately prior to the Effective Time.
(C) Fractional Shares. Notwithstanding any other provision
hereof, no fractional shares of Acquiring Corporation Common Stock and
no certificates or scrip therefor, or other evidence of ownership thereof,
will be issued in the Share Exchange; instead, the Acquiring Corporation
shall pay to each holder of Acquired Corporation Common Stock who would
otherwise be entitled to a fractional share an amount in cash determined
by multiplying such fractional share by the average of the last bid/asked
price of Acquiring Corporation Common Stock on the last trading day prior to
the Effective Time, as reported on the NASDAQ/NMS (as reported by
The Wall Street Journal).
(D) Dissenting Stockholders. Any holder of shares of Acquired
Corporation Common Stock who perfects his dissenters' rights of appraisal
in accordance with and as contemplated by Title 3 Subtitle 2 of the
Corporations and Associations Article of the Annotated Code of Maryland shall
be entitled to receive the value of such shares in cash as determined
pursuant to such provision of law; provided, however, that no such payment
shall be made to any dissenting stockholder unless and until such dissenting
stockholder has complied with the applicable provisions of the Maryland
Corporation Law and duly surrendered the certificate or certificates
representing the shares for which payment is being made. In the event that
a dissenting stockholder of the Acquired Corporation fails to perfect, or
effectively withdraws or loses, his right to appraisal and of payment for
his shares, after the Effective Time Acquiring Corporation shall issue and
deliver the consideration to which such holder of shares of Acquired
Corporation Common Stock is entitled under this Plan of Share Exchange
A-37
<PAGE>
(without interest) upon surrender by such holder of the certificate or
certificates representing shares of Acquired Corporation Common Stock held
by him.
(E) Exchange Procedures. As promptly as practicable after the Effective
Time, Acquiring Corporation shall send or cause to be sent to each former
holder of Acquired Corporation Common Stock of record immediately
prior to the Effective Time transmittal materials for use in exchanging such
stockholder's certificates of Acquired Corporation Common Stock (other than
Excluded Shares) for the consideration set forth in Paragraphs (A) and (C)
above. Any fractional share checks which a Acquired Corporation Company
stockholder shall be entitled to receive in exchange for such stockholder's
shares of Acquired Corporation Common Stock, and any dividends paid on any
shares of Purchaser Common Stock that such stockholder shall be entitled to
receive prior to the delivery to ------------------ (the "Exchange Agent")
of such stockholder's certificates representing all of such stockholder's
share of Acquired Corporation Common Stock will be delivered to such
stockholder only upon delivery to the Exchange Agent of the certificates
representing all of such shares (or indemnity satisfactory to Acquiring
Corporation and the Exchange Agent, in their judgment, if any of such
certificates are lost, stolen or destroyed). No interest will be paid on
any such fractional share checks or dividends to which the holder of such
shares shall be entitled to receive upon such delivery. After the Effective
Time, to the extent permitted by law, former stockholders of record of the
Acquired Corporation shall be entitled to vote at any meeting of holders of
Acquiring Corporation Common Stock the number of whole shares of Acquiring
Corporation Common Stock to which their Exchange Rights entitle them,
regardless of whether such holders have exchanged their Acquired
Corporation Common Stock for certificates representing Acquiring
Corporation Common Stock in accordance with the provisions of this Plan of
Share Exchange.
(F) Anti-Dilution Provisions. In the event Acquiring Corporation
changes the number of shares of Acquiring Corporation Common Stock
issued and outstanding prior to the Effective Time as a result of a stock
split, stock dividend, recapitalization or similar transaction with respect
to the outstanding Acquiring Corporation Common Stock and the record date
therefor shall be prior to the Effective Time, the Exchange Ratio shall be
proportionately adjusted.
(G) Excluded Shares. Each of the shares of Acquired Corporation Common
Stock held by the Acquired Corporation, the Acquiring Corporation or
any of its subsidiaries, in each case other than in a fiduciary capacity or
as a result of debts previously contracted shall be canceled and retired at
the Effective Time. Such shares together with shares as to which the holder
has perfected his dissenter's rights of appraisal in accordance with
Paragraph (D) are "Excluded Shares".
A-38
<PAGE>
(H) Possible Adjustment in Exchange Rate. The Agreement may be
terminated prior to the Effective Time (i) as set forth in 3 below or (ii)
either before or after approval by the stockholders of the Acquired
Corporation, by the Acquired Corporation, by vote of a majority of the
members of its entire Board during the ten (10) day period commencing on the
Determination Date if both of the following conditions are satisfied:
(1) if the Average MSBC Determination Price for MSBG Common
Stock on the Determination Date is less than $20.75; and
(2) if the First Percentage exceeds the Second Percentage by
at least ten (10) percentage points;
subject, however, to the immediately following four sentences. If the
Acquired Corporation elects to exercise its termination right pursuant to
clause (ii), it shall give prompt written notice to the Acquiring Corporation
(provided that such notice of election to terminate may be withdrawn at
any time within the aforementioned ten (10) day period). During the seven
(7) day period commencing with its receipt of such notice, the Acquiring
Corporation shall have the option of increasing the consideration to
be received by the holders of the Acquired Corporation Common Stock
by adjusting the Exchange Ratio to equal a quotient, the numerator of
which is $20.75 multiplied by the Exchange Ratio (as then in effect) and the
denominator of which is the Average MSBC Determination Price. If
the Acquiring Corporation makes an election contemplated by the
immediately preceding sentence, it shall give prompt written notice
to the Acquired Corporation of such election and the revised Exchange
Ratio, whereupon no termination shall have accrued pursuant to clause
(ii) and the Agreement shall remain in effect in accordance with its terms
(except as the Exchange Ratio shall have been so modified) and any
references in this Plan to "Exchange Ratio" shall thereafter be deemed
to refer to the Exchange Ratio as adjusted pursuant to this Subparagraph
(H). For purposes of this Paragraph (H) the following terms shall
have the meanings indicated:
"Average MSBC Determination Price" means the average of the
bid/asked price for Acquiring Corporation Common Stock
as reported on the NASDAQ/NMS for the 20 consecutive full trading
days preceding the Determination Date.
"Determination Date" means the tenth day prior to the Share
Exchange Closing.
"First Percentage" means the percentage resulting from: (a)
taking the remainder ("First Remainder") obtained by subtracting
the Average MSBC Determination Price from $23.625 (the average
A-39
<PAGE>
of the bid and asked prices of Acquiring Corporation Common Stock
as reported on the NASDAQ/NMS on June 18, 1997; and (b) dividing
the First Remainder by the Average MSBC Determination Price.
"Second Percentage" means the percentage resulting from:
(a) taking the remainder ("Second Remainder") obtained by subtracting
the SNL Southeast Bank Index reported most recently prior to the last
trading day in the measuring period for calculating the Average MSBC
Price ("Recent SNL Bank Index") from the SNL Southeast Bank
Index at June 18, 1997; and (b) dividing the Second Remainder by
the Recent SNL Bank Index.
"Share Exchange Closing" means the date designated as
such by the Acquiring Corporation and reasonably acceptable to the
Acquired Corporation after the satisfaction of the conditions to the
Share Exchange set forth in Paragraphs (A), (B) and (C) of Article
VI of the Agreement but no later than the Effective Time.
3. Termination of Abandonment. In addition to the termination
provisions set forth above, this Plan of Share Exchange shall terminate
and the Share Exchange be abandoned at any time prior to the
Effective Time if the Agreement is terminated in accordance with its terms.
4. Amendment. Pursuant to 3-105 of the Corporations and
Associations Article of the Annotated Code of Maryland, the Board
of Directors of the Acquiring Corporation and the Acquired Corporation
reserve the right to amend this Plan of Share Exchange at any time prior
to the acceptance by the Maryland Department of Assessments and
Taxation of the Articles of Share Exchange for filing; provided,
however, that any such amendment made subsequent to the submission
of this Plan of Share Exchange to the shareholders of the Acquired
Corporation, may not: (i) alter or change the amount or kind of
shares, securities, cash, property or rights to be received in exchange
for or in conversion of all or any of the shares of any class or series
of such corporation; (ii) alter or change any of the terms and conditions
of this Plan of Share Exchange if such alteration or change would
adversely affect the shares of any class or series of such corporation;
or (iii) alter or change any term of the articles of incorporation of any
corporation (except as provided herein) whose shareholders must
approve this Plan of Share Exchange.
A-40
<PAGE>
Exhibit B
Form of CB Affiliate's Letter
---------------, 19--
MainStreet BankGroup Incorporated
address
Gentlemen:
Pursuant to the terms of the Agreement and Plan of Share Exchange,
dated as of July 3, 1997, by and between MainStreet BankGroup
Incorporated, a Virginia corporation ("MSBG") and Commerce Bank,
a Maryland bank ("CB"), (the "Agreement") all of the issued and outstanding
shares of the common stock, $10.00 par value of CB, will be acquired by
MSBG. As a result of the Share Exchange, the undersigned may receive
shares of Common Stock, $5.00 par value per share, of MSBG
("MSBG Common Stock"). The undersigned would receive such shares
in exchange for shares owned by the undersigned of Common Stock,
$10.00 par value per share, of CB.
The undersigned hereby represents, warrants to, and covenants with,
MSBG that in the event the undersigned receives any MSBG Common
Stock as a result of the Share Exchange:
(A) The undersigned shall not make any sale, transfer or other
disposition of the MSBG Common Stock in violation of the Securities
Act of 1933, as amended, or the rules and regulations thereunder
(the "Act").
(B) The undersigned has carefully read this letter and discussed
its requirements and other applicable limitations upon the
undersigned's ability to sell, transfer or otherwise dispose of MSBG
Common Stock to the extent the undersigned felt necessary, with the
undersigned's counsel or counsel for CB.
A-41
<PAGE>
(C) The undersigned will not sell, transfer or otherwise dispose
of MSBG Common Stock issued to the undersigned in the Share
Exchange unless (i) such sale, transfer or other disposition has been
registered under the Act, (ii) such sale, transfer or other disposition
is made in conformity with the provisions of Rule 145 under the Act
(as such rule may be hereafter from time to time be amended), or
(iii) in the opinion of counsel in form and substance reasonably
acceptable to MSBG, in which counsel for MSBG concurs, or in
a "no-action" letter obtained by the undersigned from the staff
of the Securities and Exchange Commission (the "Commission"), a
determination is made that such sale, transfer or other disposition will
not violate or is otherwise exempt from registration under the Act.
(D) The undersigned understands that MSBG is under no
obligation to register the sale, transfer or other disposition of shares
of MSBG Common Stock by the undersigned or on the undersigned's
behalf under the Act or to take any other action necessary in order to
make compliance with an exemption from such registration available.
(E) The undersigned also understands that stop transfer
instructions will be given to MSBG's transfer agent with respect to
MSBG Common Stock owned by the undersigned and that there will
be placed on the certificates for the MSBG Common Stock issued to
the undersigned, or any substitutions therefor, a legend stating in
substance:
"The shares represented by this certificate were
issued in a transaction to which Rule 145(d) under the
Securities Act of 1933 applies. The shares represented
by this certificate may only be transferred in accordance
with the terms of a letter agreement dated -------------,
199--- between the registered holder hereof and MainStreet
BankGroup Incorporated, a copy of which agreement is on file
at the principal offices of MainStreet BankGroup
Incorporated."
(F) The undersigned also understands that unless the transfer
by the undersigned of the undersigned's MSBG Common Stock has
been registered under the Act or is a sale made in conformity with the
provisions of Rule 145(d) under the Act, MSBG reserves the right, in
its sole discretion, to place the following legend on the certificates
issued to any transferee of shares from the undersigned:
"The shares represented by this certificate have not
been registered under the Securities Act of 1933 and were
A-42
<PAGE>
acquired from a person who received such shares in a
transaction to which Rule 145 under the Securities Act of
1933 applies. The shares have been acquired by the holder
not with a view to, or for resale in connection with, any
distribution thereof within the meaning of the Securities
Act of 1933 and may not be offered, sold, pledged or otherwise
transferred except in accordance with an exemption from the
registration requirements of the Securities Act of 1933."
It is understood and agreed that the legends set forth in
paragraphs (E) and (F) above shall be removed by delivery of substitute
certificates without such legend if the undersigned shall have
delivered to MSBG (i) a copy of a "no action" letter from the staff of
the Commission, or an opinion of counsel in form and substance
reasonably satisfactory to MSBG, in which counsel for MSBG concurs, to
the effect that such legend is not required for purposes of the Act, or
(ii) reasonably satisfactory evidence or representations that the
shares represented by such certificates are being or have been
transferred in a transaction made in conformity with the provisions of
Rule 145(d).
(G) The undersigned further represents and warrants to, and
covenants with, MSBG that the undersigned will not, within the 30 days
prior to the Share Exchange Effective Date (as defined in this
Agreement), sell, transfer or otherwise dispose of any shares of the
capital stock of either MSBG or CB held by the undersigned, and that
the undersigned will not sell, transfer or otherwise dispose of any
shares of MSBG Common Stock received by the undersigned in the Share
Exchange or other shares of the capital stock of MSBG until after such
time as results covering at least 30 days of combined operations of
MSBG after the Share Exchange have been published by MSBG within the
meaning of section 201.01 of the Commission's Codification of Financial
Reporting Policies.
(H) The undersigned also understands and agrees that this letter
agreement shall apply to all shares of the capital stock of CB and MSBG
that are owned by (i) the undersigned's spouse, (ii) any relative of the
undersigned or of the undersigned's spouse who has the same home as
the undersigned, (iii) any trust or estate in which the undersigned, the
undersigned's spouse, and any such relative collectively own at least a
10% beneficial interest or of which any of the foregoing serves as
trustee, executor, or in any similar fiduciary capacity, and (iv) any
corporation or other organization in which the undersigned, the
undersigned's spouse, and any such relative collectively own at least
10% of any class of equity securities or of the equity interest, or
A-43
<PAGE>
that otherwise are deemed to be beneficially owned by the undersigned
pursuant to Rule 13(d) under the Securities Exchange Act of 1934.
Very truly yours,
-------------------------------
Name:
[add below the signatures of all
registered owners (other than nominee)
of shares deemed beneficially owned by
the affiliate]
-------------------------------
Name:
------------------------------
Name:
------------------------------
Name:
Acknowledged this --- day of
- ------------------, 199---.
MAINSTREET BANKGROUP INCORPORATED
By: ---------------------------
Name:
Title:
A-44
<PAGE>
Exhibit C
The opinion of counsel for MainStreet BankGroup Incorporated
("MSBC") contemplated in Paragraph (G) of Article VI of the Agreement
and Plan of Share Exchange to which this EXHIBIT C is attached (the
"Plan") shall be to the following effect (all terms used herein which are
defined in the Plan have the meanings set forth therein):
(A) MSBC is a corporation duly organized and existing in good
standing under the laws of the Commonwealth of Virginia;
(B) MSBC has the corporate power and authority to carry on its
business as it is now being conducted and to own all its material property
and assets;
(C) the outstanding shares of capital stock of MSBC are validly
issued and outstanding, fully paid and nonassessable and subject to no
preemptive rights. Except as Previously Disclosed, there are no outstanding
options, warrants, rights to subscribe to or securities convertible into shares
of MSBC Common Stock. There are no shares of MSBC Preferred Stock
outstanding and except as Previously Disclosed there are no outstanding
options, warrants, rights to subscribe to or securities or rights convertible
into shares of MSBC Preferred Stock.
(D) MSBC has taken all required corporate action to approve and
adopt the Plan and the Plan is a valid and binding agreement of it
enforceable against it in accordance with the terms of the Plan, subject
A-45
<PAGE>
to bankruptcy, insolvency, fraudulent transfer, moratorium and other laws
of general applicability relating to or affecting creditors' rights in general
and to general equity principles (provided, however, that such counsel
need not render any such opinion with respect to any indemnification
provisions);
(E) the execution, delivery and performance of the Plan by MSBC did
not, and the consummation of the transactions contemplated thereby by it
does not, constitute (i) to the knowledge of such counsel, a breach or
violation of, or a default under, any law, rule or regulation or any
judgment, decree, order, governmental permit or license, or agreement,
indenture or instrument of it or any of its subsidiaries or to which it or
any of its subsidiaries is subject, which breach, violation or default to
the knowledge of such counsel would have a Material Adverse Effect on MSBC
or (ii) a breach or violation of or a default under the Articles of
Incorporation or Bylaws of MSBC; and, (iii) to such counsel's knowledge,
the consummation of the transactions contemplated by the Plan, does not
require any material consent or approval under any such law, rule,
regulation, judgment, decree, order, governmental permit or license or,
except as Previously Disclosed, the material consent or approval of any other
party to any such agreement, indenture or instrument, other than the required
approvals of the appropriate federal and state regulatory authorities, and
required filings under the federal securities laws and under the state "blue
sky" or securities laws which have been made or received and are in full
force and effect;
(F) except as Previously Disclosed or as reflected in the Financial
Reports, (i) to such counsel's knowledge, there is no litigation, proceeding
A-46
<PAGE>
or controversy before any court or governmental agency pending against
MSBC or any of its subsidiaries with respect to the transactions contemplated
by the Plan by a governmental authority which is reasonably likely to have a
Material Adverse Effect on MSBC and, to the knowledge of such counsel, no
such litigation, proceeding or controversy has been threatened or is
contemplated, (ii) neither MSBC nor any of its subsidiaries is subject to
any (as to MSBC and its subsidiaries taken as a whole) order, decree,
agreement, memorandum of understanding or similar arrangement with, or
commitment letter or similar submission to, any federal or state
governmental agency or authority charged with the supervision or regulation
of depository institutions or engaged in the insurance of deposits which
restricts or purports to restrict in any material respect the conduct of the
business of it or any of its subsidiaries or properties, or in any manner
relates to the capital, liquidity, credit policies or management of it or
any of its subsidiaries; and (iii) to the knowledge of such counsel neither
MSBC nor any of its subsidiaries has been advised by any such regulatory
authority that such authority is contemplating issuing or requesting (or is
considering the appropriateness of issuing or requesting) any such order,
decree, agreement, memorandum of understanding, commitment letter or
similar submission;
(G) the regulatory consents set forth in Paragraphs B and C of
Article VI of the Plan, necessary to permit the consummation of the
Plan, have been secured and are in full force and effect;
(H) the Registration Statement and Prospectus included therein, as
of the effective date of the Registration Statement, complied in all material
A-47
<PAGE>
respects as to form with the provisions of the Federal Securities Laws.
Further such counsel does not believe that, insofar as they relate to MSBC
and its subsidiaries, the Registration Statement and Prospectus, on such
effective date, contained any untrue statement of a material fact or omitted
to state any material fact required to be stated therein or necessary to make
the statements therein not misleading. (Such opinion may state that such
counsel does not assume any responsibility for the accuracy or fairness of
the statements contained in the Registration Statement and Prospectus and
that he does not express any opinion or belief as to material in the
Registration Statement insofar as it includes or reflects any information
relating to or supplied by entities other than MSBC or its subsidiaries or
as to any financial statements or other financial data contained in the
Registration Statement and prospectus); and
(I) the shares of MSBC Common Stock to be issued in exchange for
shares of CB Common Stock upon consummation of the Share Exchange
have been duly authorized and, when issued in accordance with the terms of
the Plan, will be validly issued, fully paid and nonassessable and subject to
no preemptive rights.
A-48
<PAGE>
Exhibit D
The opinion of counsel for Commerce Bank contemplated in Paragraph
(H) of Article VI of the Agreement and Plan of Share Exchange to which this
Exhibit D is attached (the "Plan") shall be to the following effect (all
terms used herein which are defined in the Plan have the meanings set forth
therein):
(A) CB is a corporation duly organized and existing in good standing
under the laws of the State of Maryland; and is authorized to do business in
Maryland as a bank;
(B) CB has the corporate power and authority to carry on its business as
it is now being conducted and to own all its material property and assets;
(C) the authorized capital stock of CB consists of 450,000 shares of
common stock, $10.00 par value per share, of which ------------ shares
are issued and outstanding as of the date hereof and ---------- shares are
reserved for issuance as set forth on Schedule I attached hereto and 50,000
shares of convertible preferred stock, $10.00 par value per share, of which
no shares are issued and outstanding as of the date hereof and no shares are
reserved for issuance as set forth on Schedule I attached hereto. The
outstanding shares of CB Common Stock have been duly authorized and
validly issued and are fully paid and nonassessable and are subject to no
preemptive rights. There are no outstanding options, warrants, rights to
subscribe to or securities or rights convertible into shares of CB Common
Stock or CB Preferred Stock.
A-49
<PAGE>
(D) CB has taken all required corporate action to approve and adopt
the Plan, and the Plan is a valid and binding agreement of it enforceable
against it in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer, moratorium and other laws of general applicability
relating to or affecting creditors' rights in general, and to general equity
principles (provided, however, that such counsel need not render any
such opinion with respect to any indemnification provisions);
(E) the execution, delivery and performance of the Plan by CB did
not, and the consummation of the transactions contemplated thereby by
it does not, constitute or result in (i) to the knowledge of such counsel,
a breach or violation of, or a default under any law, rule or regulation
or any judgment, decree, order, governmental permit or license, or
agreement, indenture or instrument of it or to which it is subject, which
breach, violation or default to the knowledge of such counsel would have
a Material Adverse Effect on CB, (ii) a breach or violation of, or a default
under, the Articles of Incorporation or Bylaws of CB; (iii) to the knowledge
of such counsel, the consummation of the transactions contemplated by the
Plan, does not require any material consent or approval under any such
law, rule, regulation, judgment, decree, order, governmental permit or
license or, except as Previously Disclosed, the material consent or approval
of any other party to any such agreement, indenture or instrument, other
than the required approvals or the appropriate federal and state regulatory
authorities, and required filings under the federal securities laws and under
the state "blue sky" or securities laws, and (iv) result in the grant of any
A-50
<PAGE>
rights to any person under the Articles of Incorporation or Bylaws of CB
or, to the knowledge of such counsel, under any agreement to which
CB is a party;
(F) CB has taken all necessary action to exempt the transactions
contemplated by the Plan from any applicable take over, business combination,
control share acquisition or similar law in effect under the laws of the
State of Maryland as of the date hereof, including without limitation
Subtitles 6 and 7 of Title 3 of the Maryland Corporation Law;
(G) except as Previously Disclosed or as reflected in the Financial
Reports, (i) to such counsel's knowledge, there is no litigation, proceeding
or controversy before any court or governmental agency pending against
CB by a governmental authority which is reasonably likely to have a Material
Adverse Effect on CB and, to the knowledge of such counsel, no such litigation,
proceeding or controversy has been threatened or is contemplated, (ii) except
as Previously Disclosed CB is not subject to any order, decree, agreement,
memorandum of understanding or similar arrangement with, or a commitment
letter or similar submission to, any federal or state governmental agency or
authority charged with the supervision or regulation of depository institutions
or engaged in the insurance of deposits which restricts or purports to
restrict in any material respect the conduct of its business or properties,
or in any manner relates to its capital, liquidity, credit policies or
management; and (iii) to the knowledge of such counsel and except as
Previously Disclosed, CB has not been advised by any such regulatory
authority that such authority is contemplating issuing or requesting (or is
considering the appropriateness of issuing or requesting) any such order,
A-51
<PAGE>
decree, agreement, memorandum of understanding, commitment letter or similar
submission;
(H) the Proxy Statement (including any documents relating to CB
incorporated by reference therein), as of the mailing date thereof, complied
in all material respects as to form with the requirements of all applicable
laws, rules, and regulations. Further, such counsel does not believe that,
insofar as it relates to CB, the Proxy Statement, on such mailing date,
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading. (Such opinion may state that such
counsel does not assume any responsibility for the accuracy or fairness of
the statements contained in the Proxy Statement and that he does not express
any opinion or belief as to material in the Proxy Statement insofar as it
includes or reflects any information relating to or supplied by entities
other than CB or as to any financial statements or other financial data
contained in the Proxy Statement);
(I) except as Previously Disclosed, to the knowledge of such counsel
there are no persons who may be deemed to be "affiliate" of CB within the
meaning of Rule 145 under the Securities Act.
A-52
<PAGE>
AMENDMENT TO AGREEMENT AND PLAN
OF SHARE EXCHANGE
This Amendment ("Amendment") dated as of October 14, 1997, to the
Agreement and Plan of Share Exchange dated as of July 3, 1997 ("Plan") is
entered into by and between MainStreet BankGroup Incorporated, a Virginia
corporation ("MSBC") and Commerce Bank (Commerce Bank Corporation)("CB"), a
Maryland bank.
Whereas, MSBC and CB entered into the Plan as of July 3, 1997;
Whereas, MSBC and CB desire to clarify certain provisions of the Plan
relating to the Warrant Redemption Ratio (as defined in the Plan) in order to
insure that the parties' intent with respect thereto is fully and explicitly
set forth in the Plan.
NOW, THEREFORE, in consideration of these premises, the mutual promises
of the parties and good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
1. Definitions. The terms defined in the Plan when used in this
Amendment shall have the same meaning provided in the Plan except as they may
be expressly defined differently in this Amendment.
2. Amedment to Plan.
(a) The second sentence of Paragraph (R) of Article VI shall be
amended to read in its entirety as follows:
"If the Warrant Redemption Ratio computed in accordance
with the immediately preceding sentence is less than 1.228,
the Warrant Redemption Ratio shall be 1.228 ("Lower
Collar"); if the Warrant Redemption Ratio computed in
accordance with the immediately preceding sentence is
greater than 1.494, the Warrant Redemption Ratio shall be
1.494 ("Upper Collar"); provided, however, that if the Warrant
Redemption Ratio determined in accordance with the
immediately preceding clause equals either the Lower Collar
or the Upper Collar, the Warrant Redemption Ratio shall be
further adjusted, if necessary, so that shares of MSBC
Common Stock to be issued for each CB Warrant pursuant
thereto shall be equal in value to the difference obtained by
A-53
<PAGE>
subtracting $21.00 from the product of the Average MSBC
Share Price times the Exchange Ratio (as defined in Article
II, Paragraph B).
(b) The definition of Plan as used in the Plan shall include the
Plan as amended hereby and this Amendment.
3. Except as expressly set forth in this Amendment, the terms and
conditions of the Plan are in full force and effect and have not been amended
or modified in any way. The respective representations and warranties of the
parties as set forth in the Plan are true and correct as of the date of this
Amendment as though made on the date hereof except (a) for any such
representations and warranties made as of a specified date, which shall be true
and correct as of such date, (b) as expressly contemplated by the Plan and (c)
for representations and warranties (other than the representations and
warranties set forth in Paragraph (A) of Article IV of the Plan which shall be
true and correct in all material respects) the inaccuracies of which relate to
matters that individually or in the aggregate do not materially adversely
affect the Share Exchange and the other transactions contemplated by the Plan
and this Amendment. This Amendment has been authorized by all necessary
corporate action of each party and is a valid and binding agreement of it
enforceable against it in accordance with its terms, subject to (1) bankruptcy,
insolvency and other laws of general applicability relating to or affecting
creditors' rights; and (2) general equity principles. This Amendment shall
be governed by and interpreted in accordance with the laws of the State of
Virginia and represents the entire understanding of the parties hereto with
reference to the matters set forth herein. Nothing in this Agreement, express
or implied, is intended to confer upon any person, other than the parties hereto
or their respective successors, any rights, remedies, obligations or liabilities
under or by reason of this Amendment.
In witness whereof, the parties hereto have executed this Amendment as
of the date and year first written above.
MainStreet BankGroup Incorporated
By: /s/ JAMES E. ADAMS
--------------------------------
James E. Adams
Executive Vice President and
Chief Financial Officer
Commerce Bank (Commerce Bank
Corporation)
By: /s/ GEORGE KAPUSTA
--------------------------------
George Kapusta
President
A-54
<PAGE>
ANNEX B
[SCOTT & STRINGFELLOW LETTERHEAD]
September 17, 1997
Board of Directors
Commerce Bank
College Park, MD 20740
Gentlemen:
You have asked us to render our opinion relating to the fairness,
from a financial point of view, to the shareholders of Commerce
Bank ("Commerce") of the terms of an Agreement and Plan of
Share Exchange by and between MainStreet BankGroup Incorporated
("MainStreet") and Commerce dated July 3, 1997 and the Amendment thereto
(the "Share Exchange Agreement"). The Share Exchange Agreement provides
for the acquisition of Commerce by MainStreet through a share exchange
(the "Share Exchange") and further provides that each share of
Common Stock (and Preferred Stock) of Commerce which is issued and
outstanding immediately prior to the Effective Date of the Share Exchange
shall be converted (redeemed) into a number of shares of MainStreet
Common Stock equal to the quotient of $52.00 divided by the average of
the bid/ask price per share for MainStreet Common Stock as reported on
the NASDAQ National Market for the 20 trading days preceding the later
to occur of (the "Average MainStreet Share Price") (i) approval of the
Share Exchange by the shareholders of Commerce or (ii) receipt of the
last of all regulatory approvals prerequisite to the consummation of the
Share Exchange (the "Exchange Ratio"). In no case will the Exchange
Ratio be less than 2.059 or greater than 2.506. In addition, each
Commerce Warrant shall be redeemed in return for that number of
shares of MainStreet Common Stock equal to the quotient obtained by
dividing $31.00 by the Average MainStreet Share Price (the
"Warrant Redemption Ratio"). If the Warrant Redemption Ratio computed
in accordance with the immediately preceding sentence is less than
1.228, the Warrant Redemption Ratio shall be 1.228; if the Warrant
Redemption Ratio computed in accordance with the immediately preceding
sentence is greater than 1.494, the Warrant Redemption Ratio shall be
1.494; provided however, that if the Warrant Redemption Ratio computed
equals either the 1.228 or 1.494, the Warrant Redemption Ratio shall be
further adjusted, if necessary, so that shares of MainStreet Common
Stock to be issued for each Commerce Warrant be equal in value to the
difference obtained by subtracting $21.00 from the product of the
Average MainStreet Share Price times the Exchange Ratio.
In developing our opinion, we have, among other things, reviewed
and analyzed: (1) the Share Exchange Agreement; (2) the Registration
Statement and this Proxy Statement; (3) Commerce's financial
statements for the three years ended December 31, 1996; (4)
Commerce's unaudited financial statements for the quarter ended
June 30, 1997 and 1996, and other internal information relating to
Commerce prepared by Commerce's management; (5) information
B-1
<PAGE>
regarding the trading market for the common stocks of Commerce 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 Maryland in recent years;
(7) MainStreet's annual reports to shareholders and its financial statements
for the three years ended December 31, 1996; and (8) MainStreet's
unaudited financial statements for the quarter ended June 30, 1997
and 1996, and other internal information relating to MainStreet prepared
by MainStreet's management. We have discussed with members
of management of Commerce and MainStreet the background to the
Share Exchange, reasons and basis for the Share Exchange and the
business and future prospects of Commerce and MainStreet
individually and as a combined entity. Finally, we have conducted such
other studies, analyses and investigations, particularly of the
banking industry, and considered such other information as we
deemed appropriate.
In conducting our review and arriving at our opinion, we have
relied upon and assumed the accuracy and completeness of the information
furnished to us by or on behalf of Commerce and MainStreet. We
have not attempted independently to verify such information, nor
have we made any independent appraisal of the assets of Commerce
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 Share Exchange Agreement are fair from
a financial point of view to the shareholders of Commerce Common
Stock, Preferred Stock and the Warrant holders.
Very truly yours,
SCOTT & STRINGFELLOW, INC.
By: /s/ Gary S. Penrose
----------------------------------
Gary S. Penrose
Managing Director, Financial Institutions Group
B-2
<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 by
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 Share Exchange dated as of July 3,
1997, between Registrant and Commerce Bank (attached to the
Proxy Statement/Prospectus as Annex A)
3(i) Articles of Incorporation of Registrant, (incorporated
herein by reference to Form 8-A filed electronically on
March 18, 1996)
3(ii) Bylaws of Registrant (incorporated herein by reference to
Form 8-A filed electronically on March 18, 1996)
II-1
<PAGE>
5 Opinion of Flippin, Densmore, Morse, Rutherford & Jessee with
respect to legality*
8 Opinion of Flippin, Densmore, Morse, Rutherford & Jessee with
respect to tax consequences of the Transaction*
21 Statement of subsidiaries of Registrant (incorporated herein by
reference to Registrant's Form 10-K for the fiscal year ended
December 31, 1996)
23(i) Consent of Coopers & Lybrand L.L.P*
23(ii) Consent of Coopers & Lybrand L.L.P.*
23(iii) Consent of Scott & Stringfellow, Inc.
23(iv) Consent of Flippin, Densmore, Morse, Rutherford & Jessee
(included in Exhibit 5 and Exhibit 8)*
23(v) Consent of KPMG Peat Marwick LLP*
23(vi) Consent of Deloitte & Touche, LLP*
23(vii) Consent of Persinger & Company, L.L.C.*
24 Power of Attorney of Officers and Directors of Registrant*
99(a) Form of Proxy*
(b) Financial Statement Schedules Not Applicable
(c) Report, Opinion or Appraisal -- (Opinion of Scott &
Stringfellow,Inc. attached to the Proxy Statement/Prospectus
as Annex B)
- -----------------------
* Previously Filed
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-2
<PAGE>
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement
(or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a
fundamental change in the information set forth in the
registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
Provided, however, that paragraphs (a)(1)(i) and
(a)(1)(ii) do not apply if the registration statement
is on Form S-3 or Form S-8, and the information required
to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the
registrant pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934 that are incorporated
by reference in the registration statement.
2 That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
will be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time will be deemed to be the initial bona
fide offering thereof.
3 To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
4 That prior to any public reoffering of the securities registered
hereunder through the use of a prospectus which is a part of this
registration statement, by any person or party who is deemed to
be an underwriter within the meaning of Rule 145(c), the
II-3
<PAGE>
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
controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
(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.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment No. 1 to Registration Statement
No. 33-35831 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Martinsville, Commonwealth of Virginia, on
October 16, 1996.
MAINSTREET BANKGROUP INCORPORATED
(Registrant)
By: /s/ Michael R. Brenan
-----------------------------------
Michael R. Brenan, President, Chairman of the
Board and Chief Executive Officer
II-5
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement No. 33-35831 has been signed on its behalf
by the following persons in the capacities indicated on October 16, 1997.
Signature Title
/s/ Michael R. Brenan President, Chairman of the Board and Chief
- ------------------------------ Executive Officer
Michael R. Brenan (Principal Executive Officer)
/s/ James E. Adams Executive Vice President, Chief Financial
- ------------------------------ Officer and Treasurer (Principal Financial
James E. Adams and Accounting Officer)
/s/ W. Christopher Beeler, Jr. Director*
- ------------------------------
W. Christopher Beeler, Jr.
/s/ Thomas B. Bishop Director*
- ------------------------------
Thomas B. Bishop
/s/ William L. Cooper, III 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
II-6
<PAGE>
/s/ William O. McCabe, Jr., MD Director*
- ------------------------------
William O. McCabe, Jr., MD
/s/ Albert L. Prillaman Director*
- ------------------------------
Albert L. Prillaman
/s/ Phillip W. Dean Director*
- ------------------------------
Phillip W. Dean
/s/ George J. Kostel Director*
- ------------------------------
George J. Kostel
*By Rebecca J. Jenkins, Attorney-in-Fact
/s/ Rebecca J. Jenkins
- ------------------------------
Rebecca J. Jenkins
Date: October 16, 1997
II-7
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Page
(a) Exhibits
2(a) Agreement and Plan of Share Exchange dated
as of July 3, 1997, between Registrant and
Commerce Bank (attached to the Proxy
Statement/Prospectus as Annex A)
3(i) Articles of Incorporation of Registrant, as
amended (incorporated herein by reference to
the Form 8-A filed electronically on March
18, 1996)
3(ii) Bylaws of Registrant (incorporated herein by
reference to the Form 8-A filed electronically
on March 18, 1996)
5 Opinion of Flippin, Densmore, Morse, Rutherford
& Jessee with respect to legality*
8 Opinion of Flippin, Densmore, Morse, Rutherford
& Jessee with respect to tax consequences of the
Transaction*
21 Statement of subsidiaries of Registrant
(incorporated herein by reference to Registrant's
Form 10-K for the fiscal year ended December 31, 1996)
23(i) Consent of Coopers & Lybrand L.L.P.*
23(ii) Consent of Coopers & Lybrand L.L.P.*
23(iii) Consent of Scott & Stringfellow, Inc.
23(iv) Consent of Flippin, Densmore, Morse, Rutherford
& Jessee (included in Exhibit 5 and Exhibit 8)*
23(v) Consent of KPMG Peat Marwick LLP*
23(vi) Consent of Deloitte & Touche, LLP*
23(vii) Consent of Persinger & Company, L.L.C.*
II-8
<PAGE>
24 Power of Attorney of Officers and Directors of
Registrant*
99 Form of Proxy*
(b) Financial Statement Schedules -- Not Applicable
(c) Report, Opinion or Appraisal -- (Opinion of
Scott & Stringfellow, Inc. attached to the Proxy
Statement/Prospectus as Annex B)
- -----------------------
* Previously Filed
II-10
Exhibit 23(iii)
CONSENT OF INVESTMENT BANKERS
[SCOTT & STRINGFELLOW, INC. LETTERHEAD]
October 15, 1997
Douglas W. Densmore, Esquire
Flippin, Densmore, Morse, Rutherford & Jessee
300 First Campbell Square
Roanoke, Virginia 24011
Gentlemen:
We consent to the use, quotation and summarization in the
Registration Statement on Form S-4 of our fairness opinion dated
October 14, 1997, rendered to the Board of Directors of Commerce
Bank in connection with its acquisition of Commerce Bank by
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
II-22
<PAGE>
