UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1996
Commission File Number 0-8622
MainStreet BankGroup Incorporated
(Exact name of Registrant as specified in its charter)
Virginia 54-1046817
- - --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 4831
Church & Ellsworth Streets
Martinsville, Virginia 24115
- - --------------------------------------------------------------------------------
(Address of principal executive office) Zip Code
Registrant's telephone number, including area code (540) 666-6724
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- - ------------------- ------------------------------------------
None NASDAQ
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $5.00 a Share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment of this Form 10-K. [X]
<PAGE>
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of January 31, 1997 was $190,943,122.
(In determining this figure the Registrant assumes that all of its directors and
principal executive officers are affiliates. Such assumption shall not be deemed
conclusive for any other purposes.)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at January 31, 1997
------------------------------ ---------------------------------
COMMON STOCK $5.00 Par Value 11,353,559
------------------------------ ---------------------------------
<PAGE>
MainStreet BankGroup Incorporated
Form 10-K
Index
PART I
Item 1 Business
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Shareholders
Executive Officers of Registrant
PART II
Item 5 Market for Registrant's Common Equity and Related
Shareholder Matters
Item 6 Selected Financial Data
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 8 Financial Statements and Supplementary Data
Item 9 Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure
PART III
Item 10 Directors and Executive Officers of the Registrant
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management
Item 13 Certain Relationships and Related Transactions
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
Index to Exhibits
Signatures
Exhibits
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement, dated March 24, 1997 for Annual Meeting of Shareholders
PART III - Items 10 through 13
<PAGE>
PART I
Item 1. Business
General
MainStreet BankGroup Incorporated (the "Company," "Corporation,"
"BankGroup," or "Registrant"), through its subsidiary Banks ("Banks"), provides
a full range of commercial banking, consumer banking and trust services to a
variety of businesses and individual customers. All Banks are insured by the
Federal Deposit Insurance Corporation and seek customers whose total financial
requirements they can serve. As a result, most of the Banks' business customers
are small and medium-sized entities. While the Company considers this middle
market to be its primary business market, it has banking relations with many of
the larger textile and furniture manufacturing companies with manufacturing
facilities in the Martinsville, Virginia, trade area.
During 1996, BankGroup acquired two banks as subsidiaries in
transactions accounted for as pooling of interests. An aggregate of
approximately 2,708,000 shares of stock were issued in these transactions. All
prior year data has been restated to reflect these acquisitions. All financial
data is presented in thousands, unless otherwise noted.
The Company, through the Banks, actively competes for deposits,
discount brokerage, loans and trust accounts with other financial institutions,
including large regional bank holding companies with greater financial resources
headquartered elsewhere in Virginia and North Carolina. Principal competitive
factors are interest rates, services and lending limitations.
It is the Company's policy to operate the Banks as separate banking
institutions retaining their names and boards of directors. However, the Company
utilizes a centralized management approach in providing direction to the Banks
and performing selected services in the compliance, data processing, financial
management, human resources, investment, accounting, marketing, mortgage, trust
and audit areas. The Banks approve loans up to a specified credit limit, above
which central credit administration approves the loans. The Banks also still
must approve investments and other activities consistent with past practices and
the needs of their communities. To coordinate the activities of the Banks and to
maintain internal controls, the Company utilizes a planning and budgeting
process which involves Company officers, presidents of the Banks, and principal
department heads. Performance targets and budget goals are developed for each
Bank on an annual basis, with financial and operating results reported and
reviewed periodically during the year.
Subsidiaries
Piedmont Trust Bank. Piedmont Trust Bank ("Piedmont") was incorporated
in 1921 under the laws of Virginia. Piedmont's main office is in the City of
Martinsville, a commercial center in southwest Virginia, and it has 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. It is supervised and
<PAGE>
examined by the Board of Governors of the Federal Reserve System and the State
Corporation Commission of Virginia. It engages in 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 $495.5 million,
deposits of approximately $317.6 million and net loans of approximately $333.1
million at December 31, 1996.
MainStreet Trust Company, N.A. MainStreet Trust Company ("Trust") was
established as a national banking subsidiary late in 1996 and began offering a
full range of trust services including personal trust, investment management,
financial and tax counseling, employee benefits and custodial services on
January 2, 1997. Trust assets under management increased from $575 million at
December 31, 1995 (as the former Piedmont Trust Bank trust department) to $664
million at December 31, 1996. Trust is supervised and examined by the
Comptroller of the Currency.
Bank of Carroll. Bank of Carroll ("Carroll"), incorporated in 1971
under the laws of Virginia, was acquired in 1977. At December 31, 1996, it had
total assets of approximately $64.2 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 Board of Governors of the Federal
Reserve System and the State Corporation Commission of Virginia and engages in
general commercial banking business.
Bank of Ferrum. Bank of Ferrum ("Ferrum"), incorporated in 1917 under
the laws of Virginia and converted during the 1920's to a national bank, was
acquired in 1981. In 1995, Bank of Ferrum converted back to a state charter. At
December 31, 1996, it had total assets of approximately $117.5 million. Its main
banking office is located in Ferrum, Virginia, with branches at Oak Level and
Rocky Mount, Virginia. Its primary service area has a population of
approximately 43,000. Ferrum is supervised and examined by the Board of
Governors of the Federal Reserve System and the State Corporation Commission of
Virginia and engages in general commercial banking business.
First Community Bank. First Community Bank ("Community"), incorporated
in 1978 under the laws of Virginia, was acquired in 1983. At December 31, 1996,
it had total assets of approximately $141.4 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.
First Community is supervised and examined by the Board of Governors of the
Federal Reserve System and the State Corporation Commission of Virginia. Retail
and commercial banking services are provided for customers in Forest, Bedford,
Campbell and Amherst Counties and the City of Lynchburg, Virginia.
The First Bank of Stuart. The First Bank of Stuart ("Stuart") was
incorporated in 1921 as a national bank and acquired in 1986. In 1995, Stuart
converted to a state charter. At December 31, 1996, it had total assets of
approximately $151.8 million. Its main office is located in Stuart, Virginia,
and it has five other offices all located in Patrick County, Virginia. Stuart is
the largest bank in Patrick County. Its primary service area has a population of
approximately 17,600. Stuart is supervised and examined by the Board of
Governors of the Federal Reserve System and the State Corporation Commission of
Virginia and engages in general commercial banking business.
<PAGE>
First Community Bank of Saltville. First Community Bank of Saltville
("Saltville") was established in 1903 under the Laws of Virginia and was
incorporated in 1918 as a national bank and acquired in 1986. In 1995, Saltville
converted back to a state charter. At December 31, 1996, it had total assets of
approximately $124.7 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 supervised and examined by the Board of Governors of the
Federal Reserve System and the State Corporation Commission of Virginia.
The First National Bank of Clifton Forge. The First National Bank of
Clifton Forge was incorporated as a national bank in 1901 and was acquired in
1996. At December 31, 1996, it had total assets of $101.5 million. Its primary
service area has a population of 22,600 and includes the city of Clifton Forge
and Alleghany and Bath 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 December 31, 1996, it had assets of $110.2
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.
Competition
The principal methods of competition in the banking industry are
service, rates offered on loans and deposits and convenience of location.
Competition also comes from financial service firms such as brokerage houses and
mortgage companies. The Registrant has historically restricted its activities to
a geographical area within the states of Virginia and North Carolina. Other bank
holding company competitors have greater geographic coverage and some offer bank
and bank-related services which the Registrant does not offer.
The banking and trust subsidiaries of BankGroup compete primarily with
other financial institutions and financial intermediaries for deposits, loans,
and trust accounts.
Employees
The total number of full-time equivalent persons employed by the
Registrant and its subsidiaries as of December 31, 1996 was 551. The Registrant
believes that its relationship with its employees is good, and no employees are
represented by a labor union.
<PAGE>
Information as to Classes of Service
The following table sets forth, for the three fiscal years ended
December 31, 1996, the percentage of total operating revenues contributed by
each class of similar services which contributed 10% or more of total operating
revenue of the Registrant and its subsidiaries in either of the last three
years.
<TABLE>
<CAPTION>
Years Ended Percentage
----------- ----------
<S> <C> <C>
December 31, 1994 Interest & Fees on Loans 71.3%
December 31, 1995 Interest & Fees on Loans 67.5
December 31, 1996 Interest & Fees on Loans 66.8
December 31, 1994 Interest & Dividends on
Securities Held to Maturity and
Securities Available for Sale 25.3
December 31, 1995 Interest & Dividends on
Securities Held to Maturity and
Securities Available for Sale 22.3
December 31, 1996 Interest & Dividends on
Securities Held to Maturity and
Securities Available for Sale 22.0
</TABLE>
SELECTED STATISTICAL INFORMATION OF MAINSTREET BANKGROUP INCORPORATED AND
SUBSIDIARIES (REGISTRANT)
The following statistical information is consolidated for the
Registrant and its eight bank subsidiaries. Information is based on daily
average balances. Nonaccrual loans are included in loans, net of unearned
income.
<PAGE>
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST RATES AND
INTEREST DIFFERENTIALS
The table below shows the major categories of interest-earning assets
and interest-bearing liabilities, the average balance, the interest earned or
paid, the average yield/rate on daily average balances outstanding, net interest
earnings and net yields on interest-earning assets for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------------------------------------------------------
1996 1995
-------------------------------------- -------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- ------- ------ -------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Loans, Net of Unearned Income (1) $ 730,753 $ 69,602 9.52% $627,166 $60,490 9.64%
Mortgage Loans Held for Sale 966 168 17.39 813 144 17.71
Securities Available for Sale (1) 256,372 16,382 6.39 174,795 10,274 5.88
Taxable Securities Held to Maturity 58,631 4,346 7.41 86,428 7,075 8.19
Nontaxable Securities Held to Maturity (1) 41,754 3,312 7.93 41,055 3,881 9.45
Interest-Earning Deposits in Other Banks 1,325 72 5.43 682 5 .73
Federal Funds Sold 9,494 525 5.53 10,871 643 5.91
---------- ------- ----- -------- ------- ----
Total Interest-Earning Assets 1,099,295 94,407 8.59% 941,810 82,512 8.76%
Cash and Due from Banks 30,372 27,294
Other Assets 34,000 35,968
Reserve for Loan Losses (9,648) (9,176)
---------- --------
Total Assets $1,154,019 $995,896
========== ========
Interest Checking Accounts $ 91,921 $ 2,644 2.88% $ 88,062 $ 2,696 3.06%
Savings Deposits 125,947 3,731 2.96 142,491 4,575 3.21
Money Market Investment Accounts 80,198 2,764 3.45 82,801 3,082 3.72
Other Time Deposits 451,675 24,406 5.40 419,831 22,691 5.40
Borrowed Funds 177,770 9,310 5.24 65,079 3,713 5.71
---------- -------- ----- -------- ------- ----
Total Interest-Bearing Liabilities 927,511 42,855 4.62% 798,264 36,757 4.60%
Demand Deposits 113,065 106,294
Other Liabilities 8,650 7,378
---------- --------
Total Liabilities 1,049,226 911,936
Shareholders' Equity 104,793 83,960
---------- --------
Total Liabilities and Shareholders'
Equity $1,154,019 $995,896
========== ========
Net Interest Earnings/Margin $51,552 3.97% $45,755 4.16%
======= ==== ======= ====
Net Yield on Interest-Earning Assets
on a Taxable Equivalent Basis (2) 4.68% 4.86%
==== ====
<PAGE>
<CAPTION>
1994
--------------------------------------
Average Yield/
Balance Interest Rate
------- -------- ----
<S> <C> <C> <C>
Loans, Net of Unearned Income (1) $562,272 $50,771 9.03%
Mortgage Loans Held for Sale 3,503 514 14.67
Securities Available for Sale (1) 221,114 14,432 6.53
Taxable Securities Held to Maturity 18,479 847 4.58
Nontaxable Securities Held to Maturity (1) 49,706 4,276 8.60
Interest-Earning Deposits in Other Banks 50 2 4.00
Federal Funds Sold 17,538 716 4.08
-------- ------- -----
Total Interest-Earning Assets 872,662 71,558 8.20%
Cash and Due from Banks 26,697
Other Assets 39,045
Reserve for Loan Losses (9,106)
--------
Total Assets $929,298
========
Interest Checking Accounts $ 87,930 $ 2,504 2.85%
Savings Deposits 184,304 6,122 3.32
Money Market Investment Accounts 98,890 3,192 3.23
Other Time Deposits 349,017 16,142 4.62
Borrowed Funds 27,442 1,237 4.51
-------- ------- -----
Total Interest-Bearing Liabilities 747,583 29,197 3.91%
Demand Deposits 98,580
Other Liabilities 7,518
--------
Total Liabilities 853,681
Shareholders' Equity 75,617
--------
Total Liabilities and Shareholders'
Equity $929,298
========
Net Interest Earnings/Margin $42,361 4.29%
======= ====
Net Yield on Interest-Earning Assets
on a Taxable Equivalent Basis (2) 4.85%
====
(1) Interest income includes the effects of taxable equivalent
adjustments using a tax rate of 35% for 1996 and 34% for 1995 and 1994 in
adjusting interest on tax-exempt securities and loans to a fully taxable basis.
Loan fees are included in total interest income as follows: 1996--$2,528,000;
1995--$1,969,000; 1994--$2,110,000. The average balance of nonaccrual assets is
included in the calculation of asset yields.
(2) Net yield on interest-earning assets represents net interest earnings
divided by average amounts of total interest-earning assets.
</TABLE>
<PAGE>
The following table sets forth for the period indicated a summary of
the change in interest earned on a taxable equivalent basis and interest paid
resulting from changes in volume and rates. The change in interest attributable
to both rate and volume changes has been allocated to rate and volume changes in
proportion to the relationship of the absolute dollar amounts of the change in
each.
<TABLE>
<CAPTION>
1996 Compared to 1995 Increase 1995 Compared to 1994 Increase
(Decrease) Due To Change In (Decrease) Due To Change In
------------------------------------- -----------------------------------------
Total Total
Average Average Increase Average Average Increase
Volume Rate (Decease) Volume Rate (Decrease)
------ ---- --------- ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Investment Securities:
Taxable $(2,109) $ (620) $(2,729) $5,131 $ 1,097 $ 6,228
Nontaxable* 65 (634) (569) (791) 396 (395)
Securities Available for Sale 5,147 961 6,108 (2,819) (1,339) (4,158)
Loans, Net of Unearned* 9,875 (763) 9,112 6,111 3,608 9,719
Mortgage Loans Held for Sale 27 (3) 24 (459) 89 (370)
Interest-Bearing Deposits in Other Banks 8 59 67 6 (3) 3
Federal Funds Sold (78) (40) (118) (328) 255 (73)
------ ------ ------- ------- ------- -------
Total Interest Income 12,935 (1,040) 11,895 6,851 4,103 10,954
Interest Expense:
Interest Checking Accounts 115 (167) (52) 4 188 192
Savings Deposits (507) (337) (844) (1,348) (199) (1,547)
Money Market Investment Accounts (95) (223) (318) (560) 450 (110)
Other Time Deposits 1,721 (6) 1,715 3,577 2,972 6,549
Other Borrowed Funds 5,926 (329) 5,597 2,074 402 2,476
------ ------ ------- ------- ------- -------
Total Interest Expense 7,160 (1,062) 6,098 3,747 3,813 7,560
------ ----- ------- ------ ------- -------
Net Interest Income $ 5,775 $ 22 $ 5,797 $3,104 $ 290 $ 3,394
======= ====== ======= ====== ======= =======
*Fully Taxable-Equivalent Basis
</TABLE>
SECURITIES AVAILABLE FOR SALE PORTFOLIO DATA
The carrying and approximate market value and gross unrealized gains
and losses of securities available for sale appear on page 36 of Part II, Item
8, Note 3 of this report and are herein incorporated by reference.
Proceeds from the sale of these securities appear on page 32 of Part
II, Item 8, Statement of Cash Flows of this report and are herein incorporated
by reference. Gross gains and losses and pledged information appear on page 36
of Part II, Item 8, Note 3 of this report and are herein incorporated by
reference.
<PAGE>
The following table shows the maturities of securities available for
sale as of December 31, 1996 and the weighted average yields of such securities.
Mortgage backed securities are included in each of the categories based on
forecasted average life. The weighted average yields are calculated on the basis
of the cost and effective yields weighted for the scheduled maturity of each
security. Weighted average yields on tax-exempt obligations have been computed
on a taxable equivalent basis using a tax rate of 35%. Expected maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Maturing
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield Total
------ ----- ------ ----- ------ ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities $ 4,014 5.50% $ 2,032 5.85% $ --- ---% $ --- ---% $ 6,046
Obligations of U.S.
Government Agencies 723 5.52 21,758 6.22 7,072 7.01 --- --- 29,553
Mortgage Backed Securities 40,907 7.30 120,545 7.27 22,018 7.00 37,053 7.16 220,523
Collateralized Mortgage
Obligations and REMICs 2,070 6.48 7,343 6.21 3,500 6.29 34,421 6.05 47,334
Corporate Bonds 1,814 6.23 4,342 6.44 6,078 7.10 292 7.30 12,526
Other Securities --- --- --- --- --- --- 9,329 7.08 9,329
Obligations of State &
Political Subdivisions --- --- 5,373 7.52 3,015 9.27 1,324 7.86 9,712
------- -------- ------- -------- --------
$49,528 $161,393 $41,683 $82,419 $335,023
======= ======== ======= ======= ========
</TABLE>
All Mortgage Backed Securities and Collateralized Mortgage Obligations
held at December 31, 1996 were backed by U.S. Agencies. It is the Corporation's
practice to review on a periodic basis those CMO's and REMIC's that do not pass
the Federal Financial Institutions Examination Council's (FFIEC) high risk
mortgage security test. Securities are tested at time of purchase and thereafter
at quarterly intervals. The test addresses possible fluctuations in the average
life and price sensitivity which are the primary risks associated with this type
of security. Tests of these securities are subject to regulatory review.
SECURITIES HELD TO MATURITY PORTFOLIO DATA
The carrying and approximate market value and gross unrealized gains
and losses of securities held to maturity appear on page 37 of Part II, Item 8,
Note 4 of this report and are herein incorporated by reference.
Proceeds from sales and calls of these securities appear on page 32 of
Part II, Item 8, Statement of Cash Flows of this report and are herein
incorporated by reference. Gross gains and losses and pledged information appear
on page 37 of Part II, Item 8, Note 4 of this report and are herein incorporated
by reference.
<PAGE>
The following table shows the maturities of securities held to maturity
at December 31, 1996, and the weighted average yields of such securities.
Mortgage backed securities are included in each of the categories based on
forecasted average life. The weighted average yields are calculated on the basis
of the cost and effective yields weighted for the scheduled maturity of each
security. Weighted average yields on tax-exempt obligations have been computed
on a taxable equivalent basis using a tax rate of 35%. Expected maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Maturing
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield Total
------ ----- ------ ----- ------ ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Treasury Securities $2,494 5.64% $ --- ---% $ --- ---% $ --- ---% $ 2,494
Obligations of U.S.
Government Agencies --- --- 4,623 6.40 13,769 7.22 987 8.91 19,379
Mortgage Backed Securities 4,076 7.46 15,438 7.43 4,221 7.13 3,760 6.77 27,495
Obligations of State and
Political Subdivisions 3,276 8.75 15,044 8.36 17,099 8.12 5,732 7.88 41,151
------ ------- ------- ------- -------
$9,846 $35,105 $35,089 $10,479 $90,519
====== ======= ======= ======= =======
</TABLE>
All Mortgage Backed Securities in the held-to-maturity portfolio are
backed by U.S. Agencies at December 31, 1996.
LOAN PORTFOLIO
The amounts of loans outstanding at the indicated dates are shown in
the following table according to type of loan:
<TABLE>
<CAPTION>
December 31
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial, Financial
and Agricultural ... $349,834 $276,532 $245,077 $218,454 $203,280
Real Estate-Mortgage ........ 206,453 212,182 183,488 160,473 161,974
Consumer .................... 242,211 197,188 176,003 158,298 154,554
-------- -------- -------- -------- --------
Total Loans ................. 798,498 685,902 604,568 537,225 519,808
Less: Unearned Income and
Deferred Fees ........ 14,131 12,224 9,381 7,770 8,451
-------- -------- -------- -------- --------
Loans, Net of Unearned Income
and Deferred Fees .... 784,367 673,678 595,187 529,455 511,357
Less: Allowance for Loan
Losses ............... 10,195 9,036 9,160 9,035 9,166
-------- -------- -------- -------- --------
Loans, Net .................. $774,172 $664,642 $586,027 $520,420 $502,191
======== ======== ======== ======== ========
</TABLE>
<PAGE>
Commercial loans in recent periods have been made largely to small and
medium size businesses, including forest products and building supply companies,
real estate developers, small textile and furniture manufacturers and general
contractors. In addition, this portfolio includes participations in loans to
larger manufacturers in the area.
CONCENTRATIONS OF CREDIT RISK
Virtually all of BankGroup's subsidiaries' business activity is with
customers located in the southwestern, central and east central regions of
Virginia. Accordingly, operating results are closely correlated with the
economic trends within the region and influenced by the significant industries
within the region including textile, furniture and pre-built housing, as well as
agriculture. In addition, the ultimate collectibility of the Banks' loan
portfolios and the recovery of the carrying amounts of repossessed property are
susceptible to changes in the market conditions of this geographic region. The
commercial portfolio is diversified with no significant concentrations of
credit. At December 31, 1996, acquisition and development construction loans
account for $40.2 million of the commercial portfolio. In addition, other
commercial loans secured by real estate total $116.6 million. The real estate
loan portfolio consists almost entirely of 1-4 family residential property. At
December 31, 1996, BankGroup was the creditor for approximately $128.3 million
of consumer loans for automobiles and mobile homes generated directly or
purchased from established dealers (indirect). These loans are generally
collateralized by the related property and are either endorsed or subject to
mandatory dealer repurchase agreements.
The individual banks have established operating policies relating to
the credit process and collateral in loan originations.
Loans to purchase real and personal property are generally collateralized by the
related property with loan amounts established based on certain percentage
limitations of the property's total stated or appraised value. Credit approval
is primarily a function of collateral and the evaluation of the creditworthiness
of the individual borrower or project based on pertinent financial information
and the amount to be financed.
The Banks pursue an asset liability management program which seeks to
minimize the impact of interest rate fluctuations on the results of operations.
Emphasis is placed on floating rate business loans with relatively short
maturities and adjustable rate real estate and consumer loans. In addition the
Banks make long-term fixed rate real estate mortgage loans and fixed rate real
estate loans with a three or five year balloon payment requirement. Generally,
the Banks will maintain the variable rate or balloon payment real estate
mortgages in their portfolios while long-term fixed rate loans are sold in the
secondary market.
<PAGE>
The following table shows the amount of commercial, financial and
agricultural loans outstanding as of December 31, 1996 which mature or reprice:
<TABLE>
<CAPTION>
After
One But
Within Within After
One Year Five Years Five Years Total
-------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $239,891 $ 93,661 $16,282 $349,834
Interest rates are floating or adjustable 176,329 --- --- 176,329
Interest rates are fixed or predetermined 63,562 93,661 16,282 173,505
</TABLE>
The following table presents aggregate loan amounts for nonaccrual and
past due loans as of the date indicated. Past due loans comprise loans which are
contractually past due ninety days or more as to interest or principal payments.
<TABLE>
<CAPTION>
December 31
--------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consumer Loans:
Loans accounted for on a nonaccrual basis $ 131 $ 95 $ 172 $ 12 $ 233
Loans contractually past due 90 days or
more as to interest or principal payments
(but not included in nonaccrual loans) ... 987 606 500 364 932
All Other Loans:
Loans accounted for on a nonaccrual basis . 2,944 3,288 2,727 2,553 5,263
Loans contractually past due 90 days or
more as to interest or principal payments
(but not included in nonaccrual loans) ... 2,074 1,790 1,265 2,207 1,106
</TABLE>
It is the Company's policy to discontinue the accrual of interest on
loans once they become more than 90 days past due and are not
well-collateralized or earlier when it becomes doubtful that the full principal
and interest will be collected. Once a loan is placed on nonaccrual status,
interest is generally recorded on a cash basis until the loan is satisfied in
full or circumstances have changed to such an extent that the collection of both
principal and interest is probable.
Nonaccrual and 90-day past due loans are considered by the Company to
be nonperforming loans. Such assets totaled .78% of loans, net of unearned
income at December 31, 1996 and .86% at December 31, 1995.
The effect of nonaccrual loans on interest income for 1996, 1995 and
1994 appears on page 38 of Part II, Item 8, Note 5 of this report and is herein
incorporated by reference.
<PAGE>
At December 31, 1996, 1995, and 1994 BankGroup had other real estate,
which represents foreclosed properties totaling $.9 million, $1.7 million and
$2.7 million, respectively, which is carried at the lower of cost or fair
market value.
The discussion of the recorded investment in loans which have been
identified as impaired loans at December 31, 1996 and 1995 appears on page 38 of
Part II, Item 8, Note 5 of this report and is herein incorporated by reference.
SUMMARY OF LOAN LOSS EXPERIENCE
The description of the allowance for loan losses required by Part I,
Item I, of Form 10-K appears on page 34 of Part II, Item 8, Note 1 of this
report and is herein incorporated by reference. The following table shows
BankGroup's average loan balances for each period, changes in the allowance for
loan losses arising from loans charged off and recoveries on loans previously
charged off by loan category, and additions to the allowance which have been
charged to operating expense.
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average amount of loans, net of unearned
income, outstanding during the year $730,753 $627,166 $562,272 $530,763 $503,178
======== ======== ======== ======== ========
Balance of Allowance for Loan Losses at
beginning of period $ 9,036 $ 9,160 $ 9,035 $ 9,166 $ 9,030
Loans charged off:
Commercial, Financial and Agricultural 1,185 868 2,571 759 1,366
Real Estate - Mortgage 56 179 321 832 1,009
Consumer 1,968 928 747 839 630
-------- -------- -------- -------- --------
Total loans charged off 3,209 1,975 3,639 2,430 3,005
-------- -------- -------- -------- --------
Recoveries of loans previously charged of:
Commercial, Financial and Agricultural 737 181 362 124 170
Real Estate - Mortgage 1 6 18 366 36
Consumer 354 245 293 119 292
-------- -------- -------- -------- --------
Total recoveries 1,092 432 673 609 498
-------- -------- -------- -------- --------
Net loans charged off 2,117 1,543 2,966 1,821 2,507
Additions to allowance charged to
operating expense 3,276 1,419 3,091 1,690 2,643
-------- -------- -------- -------- --------
Balance at end of period $ 10,195 $ 9,036 $ 9,160 $ 9,035 $ 9,166
======== ======== ======== ======== ========
Ratio of net chargeoffs during period
to average loans outstanding .29% .25% .53% .34% .50%
======== ======== ======== ======== ========
</TABLE>
<PAGE>
Management has allocated the allowance for loan losses for the years
indicated by loan category. This allocation of the allowance for loan losses for
1996 is based upon the previous five years' loan loss experience, specific
reserves, and unallocated amounts. Prior years allowance for loan losses were
based solely upon previous loan experience. This allowance is not intended to be
management's judgment as to future loan losses to be experienced by loan type.
The amount of the loan loss reserve by category and the percentage of each
category to total loans is as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995 December 31, 1994 December 31, 1993 December 31, 1992
----------------- ----------------- ----------------- ----------------- -----------------
Amount % Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
Commercial, Financial
and Agricultural $ 1,083 44% $4,023 40% $6,822 41% $3,149 41% $4,374 39%
Real Estate 1,010 26 1,013 31 936 30 2,311 30 3,559 31
Installment 1,335 30 4,000 29 1,402 29 3,575 29 1,233 30
Specific Reserves 1,477 -- --- -- --- -- --- -- --- --
Unallocated 5,290 -- --- -- --- -- --- -- --- --
------- --- ------ --- ------ --- ------ --- ------ ---
Total $10,195 100% $9,036 100% $9,160 100% $9,035 100% $9,166 100%
======= === ====== === ====== === ====== === ====== ===
</TABLE>
RETURN ON EQUITY AND ASSETS
The ratio of net income to average shareholders' equity and to average
total assets, and certain other ratios, is presented below:
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Return on Average Shareholders Equity 15.01% 16.07% 8.72%
Return on Average Assets 1.36 1.35 .71
Dividend Payout Ratio 35.77 29.37 49.21
Average Shareholders' Equity to Average Assets 9.08 8.43 8.14
</TABLE>
FINANCIAL INSTRUMENTS WITH OFF-BALANCE -SHEET RISK
The information required by this section of Part I, Item I of Form 10-K
appears on page 47 of Part II, Item 8, Note 17 of this report and is herein
incorporated by reference.
SHORT-TERM BORROWINGS
Federal funds purchased and corporate cash management accounts generally
represent overnight borrowing transactions. Repurchase agreements and FHLB
borrowings generally represent monthly borrowing tansactions.
<PAGE>
The details of these categories for the years 1996, 1995 and 1994 are
presented in the table below:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Short-Term Borrowings:
Federal Funds Purchased and
Corporate Cash Management:
Balance at end of year .............. $ 33,728 $ 42,111 $ 16,677
Average during the year ............. 21,026 18,808 13,604
Maximum month-end balance ........... 56,720 42,110 21,138
Weighted average rate during the year 4.58% 4.64% 3.16%
Weighted average rate at December 31 5.91% 5.36% 4.35%
Repurchase Agreements:
Balance at end of year .............. $145,356 $ 37,127 $ --
Average during the year ............. 62,972 26,978 --
Maximum month-end balance ........... 147,922 63,956 --
Weighted average rate during the year 5.49% 6.00% --
Weighted average rate at December 31 5.78% 5.85% --
FHLB Borrowings:
Balance at end of year .............. $ 27,350 $ 32,350 $ 4,000
Average during the year ............. 31,449 7,660 495
Maximum month-end balance ........... 32,488 32,350 4,000
Weighted average rate during the year 5.01% 6.50% 2.02%
Weighted average rate at December 31 5.59% 5.76% 6.35%
</TABLE>
The weighted average rates paid in aggregate on these borrowed funds for
1996, 1995 and 1994 were 5.17%, 5.58%, and 3.27%, respectively.
LONG-TERM BORROWINGS
FHLB borrowings represent long-term borrowings.
The details of these categories for the years 1996, 1995 and 1994 are
presented in the table below:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Long-Term Borrowings:
FHLB Borrowings and Advances:
Balance at end of year ................. $70,786 $ 929 $ --
Average during the year ................ 58,677 735 --
Maximum month-end balance .............. 70,929 1,000 --
Weighted average rate during the year .. 5.38% 7.75% --
Weighted average rate at December 31 ... 5.07% 7.75% --
</TABLE>
<PAGE>
DEPOSITS
Average total deposits of the Banks for 1996 were approximately $863
million, an increase of 3% from $839 million for 1995. The Banks generally have
a large, stable base of time deposits, principally certificates of deposits,
money market investment accounts and individual retirement accounts obtained
primarily from customers in Virginia. The Banks have not utilized brokered
deposits.
INTEREST RATE SENSITIVITY
The following table sets forth maturity/repricing information with
respect to the major categories of Interest-Earning Assets and Interest-Bearing
Liabilities as of December 31, 1996:
<TABLE>
<CAPTION>
Maturing/Repricing In
--------------------------------------------------------------------------
Interest-Earning Assets Under 3 Mos. 3-6 Mos. 6-12 Mos. Over 1 Yr. Total
- - ----------------------- ------------ -------- --------- ---------- -----
<S> <C> <C> <C> <C> <C>
Time Balances Banks .............................. $ 518 $ -- $ -- $ -- $ 518
Mortgage Loans Held for Sale ..................... 742 -- -- -- 742
Securities Available for Sale .................... 73,054 50,789 90,957 120,223 335,023
Securities Held to Maturity ...................... 17,609 3,698 11,550 57,662 90,519
Loans ............................................ 284,266 41,198 86,389 372,514 784,367
----------- ----------- ----------- ----------- -----------
Total Interest Earning Assets .................... $ 376,189 $ 95,685 $ 188,896 $ 550,399 $ 1,211,169
=========== =========== =========== =========== ===========
Cumulative Total Interest-Earning Assets.......... $ 376,189 $ 471,874 $ 660,770 $ 1,211,169 $ 1,211,169
=========== =========== =========== =========== ===========
Interest-Bearing Liabilities
NOW, Money Market and Savings .................... 123,467 3,219 6,435 169,995 303,116
Time Deposits $100,000 and Over .................. 24,443 15,337 20,449 29,960 90,189
Other Time Deposits .............................. 78,461 61,774 96,779 135,211 372,225
----------- ----------- ----------- ----------- -----------
Total Interest-Bearing Deposits .................. 226,371 80,330 123,663 335,166 765,530
Short-Term Debt .................................. 213,799 -- -- -- 213,799
FHLB Advances .................................... 45,000 -- -- -- 45,000
Long-Term Debt ................................... 25,000 71 71 887 26,029
----------- ----------- ----------- ----------- -----------
Total Borrowings ................................. 283,799 71 71 887 284,828
----------- ----------- ----------- ----------- -----------
Total Interest-Bearing Liabilities ............... $ 510,170 $ 80,401 $ 123,734 $ 336,053 $ 1,050,358
=========== =========== =========== =========== ===========
Cumulative Total Interest-Bearing Liabilities .... $ 510,170 $ 590,571 $ 714,305 $ 1,050,358 $ 1,050,358
=========== =========== =========== =========== ===========
Net Total Assets/Liabilities ..................... $ (133,981) $ 15,284 $ 65,162 $ 214,346 $ 160,811
=========== =========== =========== =========== ===========
Cumulative Net Total Assets/Liabilities .......... $ (133,981) $ (118,697) $ (53,535) $ 160,811 $ 160,811
=========== =========== =========== =========== ===========
</TABLE>
<PAGE>
Management reviews the behavior of infrequently repriced deposit products with
indefinite maturities and accordingly adjusts the overall interest rate
sensitivity position for non rate sensitive core balances.
Item 2. Properties
Registrant maintains its corporate headquarters at Church and Ellsworth
Streets in Martinsville, Virginia in a six-story office building complex of
Piedmont Trust Bank. In addition, the Registrant and its subsidiaries own or
lease other properties for their general banking business. As of December 31,
1996, the Registrant's subsidiaries conduct business through thirty-five office
locations, fourteen of which are leased from non-affiliated owners and the
remainder are owned by the subsidiaries.
The Registrant's subsidiaries own several parcels of other real estate
which represent foreclosed dwellings and several acres of land. The book value
of this property at December 31, 1996 was approximately $.9 million which
approximates fair market value.
With respect to the leased properties, leases expire at various dates
from 1997 through 2007, all of which are renewable at the option of the
Registrant.
Item 3. Legal Proceedings
The information required by Part I, Item 3 of Form 10-K appears on page 50
of Part II, Item 8, Note 21 of this report and is herein incorporated by
reference.
Item 4. Submission of Matters to a Vote of Shareholders
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K the following list is included
as an unnumbered item in Part I of this report in lieu of being included in
Proxy Statement for the Annual Meeting of Shareholders to be held on April 23,
1997.
The following is a list of names and ages of all executive officers of the
registrant; terms of office as officers; positions and offices with the
registrant held by each officer and each person's principal occupations or
employment during the past five years.
<TABLE>
<CAPTION>
First Elected
Name (Age) Offices and Positions Held As An Officer
---------- -------------------------- -------------
<S> <C> <C>
Michael R. Brenan (44) Chairman of the Board, President, 06/94
Chief Executive Officer and
Director of BankGroup
James E. Adams (52) Executive Vice President, Chief Financial 10/94
Officer, Treasurer, Director of The
First Bank of Stuart and Director
of MainStreet Trust Company, N.A.
<PAGE>
Rebecca J. Jenkins (46) Executive Vice President, Corporate 09/94
Secretary and Director of MainStreet
Trust Company, N.A.
Mark J. Wenick (37) Director of Trust Services 04/96
S. Richard Bagby (56) Senior Vice President and Chief 03/94
Credit Officer
William D. Kerr (48) Senior Vice President and Chief 07/77
Information Officer
Kenneth E. Lust (46) Senior Vice President and 09/94
Chief Operations Officer
Beverly L. Mitchell (49) Senior Vice President and Chief Market Manager 08/95
</TABLE>
Mr. Brenan joined MainStreet BankGroup Incorporated as President and Chief
Executive Officer in June of 1994. From January 1992 until that time, he served
as President and Chief Operating Officer of Bank One, Youngstown, N.A.,
Youngstown, Ohio. From July 1988 through December 1991, Mr. Brenan served as
President and Chief Executive Officer of Bank One, Portsmouth, N.A., Portsmouth,
Ohio.
Mr. Adams joined MainStreet BankGroup Incorporated in October of 1994 as Senior
Vice President, Chief Financial Officer and Treasurer. Mr. Adams was promoted to
Executive Vice President in June of 1996. Before coming to BankGroup, he was
Executive Vice President and Chief Financial Officer for Dominion Bankshares
Corporation, Roanoke, Virginia, from September 1991 to March 1993. Prior to this
position, he was the Chief Financial Officer for Shawmut National Corporation,
Hartford, Connecticut, from August 1987 through September 1991.
Ms. Jenkins joined MainStreet BankGroup Incorporated in September of 1994 as
Senior Vice President and Corporate Secretary. Ms. Jenkins was promoted to
Executive Vice President in June of 1996. Until Ms. Jenkins came to BankGroup,
she served in various capacities at Bank One, Youngstown, N.A., Youngstown,
Ohio, beginning as General Counsel in July 1989. In January 1994, she was
appointed to Regional Counsel Banc One Ohio Corporation. Disclosure of family
relationships between executive officers is required by Regulation S-K, Item 401
(d). Ms. Jenkins is the wife of Mr. Lust.
Mr. Wenick joined MainStreet BankGroup Incorporated in April of 1996 as Director
of Trust Services. In December, 1996, Mr. Wenick was elected Chairman and Chief
Executive Officer of MainStreet Trust Company, N.A. Prior to that time, Mr.
Wenick served as Senior Vice President and Market Manager for Bank One Trust
Company, N.A., Youngstown, Ohio, from February 1993 to April 1996. From December
1987 to February 1993, he served as Vice President and Trust Officer for the
Dollar Savings and Trust Company, Youngstown, Ohio.
Mr. Bagby joined Piedmont Trust Bank in June of 1980 as Vice President -
Commercial Loans and was elected Senior Vice President of Credit Administration
for MainStreet BankGroup Incorporated in March of 1994.
<PAGE>
Executive officer William D. Kerr has served the registrant or its subsidiary in
various executive capacities for the past seven years.
Mr. Lust joined MainStreet BankGroup Incorporated in September 1994 as Vice
President in Credit Administration. In July 1996, he was named Senior Vice
President and Chief Operations Officer. Prior to joining BankGroup, he was Vice
President at Bank One, Youngstown, N.A., Youngstown, Ohio, for five years.
Disclosure of family relationships between executive officers is required by
Regulation S-K, Item 401 (d). Mr. Lust is the husband of Ms. Jenkins.
Ms. Mitchell joined MainStreet BankGroup Incorporated in August of 1995. Prior
to that time, Ms. Mitchell served as Vice President and Chief Quality Officer
for Bank One, Youngstown, N.A., Youngstown, Ohio, from December 1991 to August
1995. From July 1985 to December 1991, she held various positions with the First
National Bank of Pennsylvania, Erie, Pennsylvania.
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
MainStreet BankGroup Incorporated common stock is traded on the over-the-counter
(OTC) market and quoted on the NASDAQ (National Association of Securities
Dealers Automated Quotations) National Market System. Price and volume
information are given in major newspapers in the "Over-The Counter Markets"
section under the National Market System listings.
MainStreet BankGroup Incorporated is now traded under the symbol MSBC. Prior to
January 1, 1996, our common stock was traded under the symbol PBGI.
During calendar year 1996, 1,415,664 shares of MSBC stock were traded through
NASDAQ. As of December 31, 1996, MSBC was owned by 3,405 shareholders of record
not including nominee holders which would increase the total. At year end,
11,342,248 shares were outstanding. All common stock in subsidiary affiliate
Banks is owned entirely by MainStreet BankGroup.
<PAGE>
The following table sets forth the cash dividends paid per share and information
regarding the market prices per share of common stock for MSBC for the periods
indicated. The price ranges are based on actual high and low bid transactions as
reported on the NASDAQ National Market System.
<TABLE>
<CAPTION>
1996 High Low Close Dividend
---- ---- --- ----- --------
<S> <C> <C> <C> <C>
4th 19-1/2 16-3/4 19 .14
3rd 19-1/2 16-1/4 18-1/2 .13
2nd 17 15-1/2 16-1/4 .11
1st 17 12-3/4 16 .11
<CAPTION>
1995 High Low Close Dividend
---- ---- --- ----- --------
<S> <C> <C> <C> <C>
4th 13-3/4 12-5/8 13 .10
3rd 13-1/8 11-7/8 12-5/8 .09
2nd 13-1/8 11 12-53/100 .10
1st 11-3/4 9-3/8 11-1/4 .08
</TABLE>
On February 20, 1996, MainStreet BankGroup declared a two-for-one stock split,
in the form of a 100% stock dividend, payable March 15, 1996 to stockholders of
record March 4, 1996. Shareholders received one additional share of common stock
for each share held on the record date.
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data and Ratios)
Years Ended December 31
----------------------------------------------------------------------------
SUMMARY OF OPERATIONS 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest Income $ 93,302 $ 81,169 $ 70,077 $ 67,592 $ 68,203
Interest Expense 42,855 36,757 29,197 28,948 33,200
--------- -------- -------- -------- --------
Net Interest Income 50,447 44,412 40,880 38,644 35,003
Provision for Loan Losses 3,276 1,419 3,091 1,690 2,643
--------- -------- -------- -------- --------
Net Interest Income After Provision
For Loan Losses 47,171 42,993 37,789 36,954 32,360
Noninterest Income 11,028 8,526 1,724 6,991 7,050
Noninterest Expense 35,348 32,461 32,073 31,351 26,808
--------- -------- -------- -------- --------
Income Before Income Taxes 22,851 19,058 7,440 12,594 12,602
Income Tax Expense 7,118 5,566 843 3,407 3,486
--------- -------- -------- -------- --------
NET INCOME $ 15,733 $ 13,492 $ 6,597 $ 9,187 $ 9,116
========== ======== ======== ======== ========
PER SHARE DATA
Net Income:
Primary $ 1.37 $ 1.26 $ .63 $ .89 $ .89
Fully Diluted 1.37 1.21 .62 .85 .85
Cash Dividends .49 .37 .31 .27 .21
Net Book Value 9.55 8.74 7.77 7.43 6.78
Net Book Value GAAP 9.56 8.69 6.97 7.43 6.78
DAILY AVERAGES
Total Assets $1,154,019 $995,896 $929,298 $880,050 $818,780
Interest-Earning Assets 1,099,295 941,810 872,662 832,625 777,851
Securities Available for Sale 256,372 174,795 221,114 223,377 193,581
Securities Held to Maturity 100,385 127,483 68,185 48,520 42,639
Loans, Net of Unearned Income 730,753 627,166 562,272 530,763 503,178
Allowance for Loan Losses 9,648 9,176 9,106 9,498 9,700
Deposits 862,806 839,479 818,721 773,546 720,797
Interest-Bearing Liabilities 927,511 798,264 747,583 712,500 670,972
Shareholders' Equity 106,285 88,546 81,114 73,560 66,205
Shareholders' Equity GAAP 104,793 83,960 75,617 73,560 66,205
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31
AT YEAR END 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Assets $1,288,837 $1,064,872 $942,385 $910,729 $860,006
Interest-Earning Assets 1,211,169 1,010,044 880,312 857,082 813,101
Securities Available for Sale 335,023 211,970 127,030 203,851 184,538
Securities Held to Maturity 90,519 112,181 152,214 80,297 74,544
Loans, Net of Unearned Income 784,367 673,678 595,187 529,455 511,357
Allowance for Loan Losses 10,195 9,036 9,160 9,035 9,166
Deposits 886,519 845,577 830,597 796,775 753,137
Interest-Bearing Liabilities 1,050,358 844,825 754,789 732,311 697,149
Shareholders' Equity 108,287 99,254 80,311 76,044 68,912
Shareholders' Equity GAAP 108,476 98,657 71,994 76,055 68,912
RATIOS
Return on Average Assets 1.36% 1.35% .71% 1.04% 1.11%
Return on Average Shareholders' Equity 15.01 16.07 8.72 12.49 13.77
Average Shareholders' Equity to Average Assets 9.08 8.43 8.14 8.36 8.09
Efficiency Ratio 56.98 59.43 61.86 61.51 62.57
Net Interest Margin 4.68 4.86 4.85 4.82 4.69
CREDIT QUALITY RATIOS
Allowance for Loan Losses to Nonperforming Loans 166.15% 156.36% 196.40% 175.92% 121.66%
Allowance for Loan Losses to Nonperforming Assets 141.40 117.81 127.03 88.52 67.80
Allowance for Loan Losses to Year-End Loans, Net
of Unearned Income 1.30 1.34 1.54 1.71 1.79
Net Charge-Offs to Average Loans, Net of Unearned
Income .29 .25 .53 .34 .50
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
1996 vs. 1995
Overview
MainStreet BankGroup Incorporated reported record earnings of $15.7
million in 1996 compared to $13.5 million in 1995, an increase of 16.6%. This
translates to $1.37 per share on a fully diluted basis for 1996 compared to
$1.21 per share for 1995. These earnings produced a return on average assets of
1.36% and a return on average shareholders' equity of 15.01% in 1996 compared to
a return on average assets of 1.35% and a return on average shareholders equity
of 16.07% in 1995. In 1996, a two-for-one stock split, in the form of a 100%
stock dividend, was paid. Also, effective in the fourth quarter, the quarterly
dividend was raised to $0.14 per share. Cash dividends increased from $0.37 in
1995 to $0.49 in 1996. Market capitalization increased to approximately $216
million at December 31, 1996 compared with $148 million at December 31, 1995.
Average interest-earning assets increased $157.5 million with upward increases
in both loans and investments and funded principally by borrowed funds and
higher costing deposit liabilities. The provision for loan losses increased $1.9
million in 1996 over 1995 primarily driven by increased loan volume and higher
net charge-off levels. Noninterest income, excluding securities gains, increased
$1.9 million in 1996 over 1995. Securities gains totaled $610 thousand in 1996
compared with $43 thousand in 1995. Noninterest expense rose $2.9 million over
1995 expenses.
1996 was a year of expansion for the Corporation. Two acquisitions were
completed during the year. In September 1996, the Corporation consummated the
acquisition of The First National Bank of Clifton Forge, Clifton Forge, Virginia
for approximately $26.2 million of common stock. In November 1996, Hanover Bank
in Mechanicsville, Virginia was acquired for approximately $22.5 million of
common stock. Each transaction was valued at the time of consummation.
STATEMENT OF INCOME
Net Interest Income
Net interest income, the difference between total interest income and
total interest expense, is the Corporation's principal source of earnings. The
amount of net interest income is determined by the volume of interest-earning
assets, the level of rates earned on those assets and the cost of supporting
funds. The difference between rates earned on interest-earning assets (with an
adjustment made to tax-exempt income to provide comparability with taxable
income) and the cost of supporting funds is measured by the net interest margin.
The distribution of assets, liabilities, and shareholders' equity for
the last three years, along with the related levels of fully taxable-equivalent
interest income and expense, is presented on page 6 of this report. The
variances in interest income and expense caused by differences in average
balances and rates are shown on page 7 of this report.
The general level of interest rates declined in the first quarter of
1996 as the Federal Reserve eased monetary policy. The prime rate decreased in
tandem with the drop in short-term interest rates, maintaining a favorable 300
basis points spread between prime and the Federal funds rate. This change in
<PAGE>
market rates, along with management's expansion of investment alternatives to
better employ capital and enhance shareholder returns, resulted in a 18 basis
points decline in the Corporation's net interest margin to 4.68% for 1996
compared to the 4.86% achieved in 1995. Average earning assets increased $157.5
million, or 16.7%, with higher yielding loans accounting for $103.6 million of
the total growth. The overall cost of interest-bearing liabilities increased by
2 basis points, due largely to the increased mix of earning assets funded by
higher cost borrowed funds. The favorable growth in earning assets, partially
offset by the compression in the net interest margin, resulted in an increase in
net interest income of $6.0 million, or approximately 13.6% above 1995.
Provision for Loan Losses
A provision for loan losses is charged to earnings for the purpose of
establishing an allowance for loan losses. Losses are, in turn, charged to this
allowance rather than being reported as a direct expense. In 1996, $3.3 million
was expensed as a loan loss provision, compared with $1.4 million in 1995, an
increase of $1.9 million, or 130.9%. Net loan charge-offs were $2.1 million
compared with $1.5 million in 1995. The ratio of charge-offs to average loans,
net of unearned income, for 1996 was .29% compared to 1995's level of .25%. The
amount of the allowance for loan losses is established based on a continual
review of the overall quality of the loan portfolio. In this analysis,
consideration is given to nonaccrual, past due and other problem loans,
historical loan loss experience and the growth and mix of the loan portfolio.
Current and projected economic conditions are also variables that must be
considered in establishing the allowance. At year-end 1996, the ratio of the
allowance to loans, net of unearned income, was 1.30% compared with the 1.34% at
December 31, 1995. The allowance for loan losses at December 31, 1996
represented 166.15% of nonperforming loans, compared with 156.36% at December
31, 1995. The allowance for loan losses is evaluated on a quarterly basis and
was considered adequate at December 31, 1996. A discussion concerning credit
quality is included in the "Loans and Credit Quality" section of this
discussion.
Noninterest Income
Noninterest income, excluding gains on securities transactions, totaled
$10.4 million for 1996 compared to $8.5 million in 1995, an increase of $1.9
million, or 22.8%. Of this increase $.7 million was due to an increase in
service charges. Higher volume related activity charges associated with
transaction accounts and the full year impact of revised service charge fee
schedules introduced during the latter half of 1995 contributed to this
increase. Other fee income increased $.8 million in 1996 over 1995 due to gains
on other real estate, credit card fees, and other income. Trust income increased
$.5 million in 1996, or 20.5% over 1995 income. Total trust assets under
management increased to $664 million at December 31, 1996 from $575 million at
December 31, 1995.
Investment Securities Gains
Securities gains totaled $610 thousand in 1996 compared to $43 thousand
in 1995. During 1996, the Corporation sold its investments in certain bank
stocks that were deemed to be no longer compatible with its merger and
acquisition strategies. These divestitures, which totaled $373 thousand, along
with calls of various higher yielding securities accounted for the bulk of the
1996 securities gains.
<PAGE>
Noninterest Expense
Total noninterest expense was $35.3 million at December 31, 1996
compared to $32.5 million at December 31, 1995, an increase of $2.9 million, or
8.9%. Of this increase, salaries and employee benefits increased $1.8 million or
10.5%. The opening of two new branch locations during the year as well as sales
staff additions necessary to produce additional earning asset volumes and staff
support required to process the additional production resulted in an increase in
full-time equivalent employees from 492 at year-end 1995 to 551 at year-end
1996. The category of other noninterest expense increased $1.5 million, or 19.9%
over 1995 levels. Included in other expenses were approximately $943 thousand of
costs directly associated with the two acquisitions completed during the year.
FDIC insurance expense dropped $1.0 million in 1996 compared with 1995 levels as
a result of the new assessment rate schedule adopted by the Federal Deposit
Insurance Corporation (FDIC) during 1995.
Provision for Income Taxes
Current tax expense was $7.1 million in 1996 compared to $5.6 million
in 1995. This increase was primarily due to acquisition expenses which are
considered nondeductible capital expenditures rather than current business
expenses. Although tax exempt interest in total declined from prior year, it
remains the major component in reducing the effective tax rate. The Company's
effective tax rate was 31.1% in 1996 and 29.2% in 1995.
BALANCE SHEET
Investment Portfolio
Investments including securities available for sale and securities held
to maturity totaled $425.5 million on December 31, 1996, compared to $324.2
million at December 31, 1995. The increase occurred in the available for sale
position and was comprised principally of adjustable rate mortgage backed
securities funded with floating rate debt. As of December 31, 1996, 78.7% of the
Corporation's investment portfolio was classified in the "available for sale"
category, with the remaining 21.3% of investment securities classified as "held
to maturity." This distribution allows flexibility in the management of interest
rate risk, credit, liquidity and capital adequacy. The maturity distribution of
all securities and average taxable equivalent yields as of December 31, 1996 are
shown on page 8 of this report. The investment portfolio is well positioned to
protect against interest rate risk, with 44.1% of total investments in
adjustable rate securities. The weighted average duration of the portfolio was
2.43 years with an average life of 3.99 years, as of December 31, 1996.
The available for sale portfolio is periodically stress tested to
monitor the sensitivity to interest rate movements. This testing is performed by
an outside third party who uses a combination of information from Bloomberg and
GAT (Global Advanced Technology), in order to apply consensus prepayment
assumptions to the mortgage backed instruments. Based on this information, as of
December 31, 1996, the available for sale portfolio could be expected to rise
4.23% in market value given a 300 basis point decline in interest rates and
decline 7.85% in market value given a 300 basis point rise in interest rates.
<PAGE>
Loans and Credit Quality
Average loans, net of unearned income, increased $103.6 million in 1996
to $730.8 million, an increase of 16.5%. Continued low interest rates during
1996 prompted increases in consumer and mortgage loan volume. The majority of
long-term fixed rate mortgages are sold in the secondary market. Those retained
in the portfolio are generally either variable rate instruments or carry three
to five year balloon maturities.
Centralized credit risk management provides more uniform levels of
standardization and underwriting among BankGroup affiliates. The Corporation
manages credit risk through a number of methods including loan grading, industry
type, and underwriting collateral. A formal loan review function provides an
independent assessment of credit ratings, credit quality, and credit process.
Management believes that early detection of credit problems through regular
reviews of borrowers' collateral and financial performance is an important
factor in overall credit quality.
Although there were no large concentrations of credit to any particular
industry, the economic trends of the areas served by BankGroup affiliates are
influenced by the significant industries within the region including textiles,
furniture, pre-built housing and agriculture. Virtually all of our business
activity is with customers located in the central and western part of southern
Virginia. The ultimate collectibility of the Banks' loan portfolios and the
recovery of the carrying amounts of repossessed property are susceptible to
changes in the market conditions of this geographic region. The Commercial
portfolio is diversified with no significant concentrations of credit at
December 31, 1996. Acquisition and development construction loans account for
$40.2 million and $30.8 million of the commercial portfolio at December 31, 1996
and 1995, respectively. In addition, other commercial loans secured by real
estate totaled $116.6 million and $96.5 million at December 31, 1996 and 1995,
respectively. The real estate loan portfolio consists almost entirely of 1-4
family residential property. BankGroup was the creditor for approximately $128.3
million and $97.9 million at December 31, 1996 and 1995, respectively, of
consumer loans for automobiles and mobile homes generated directly or purchased
from established dealers (indirect). These loans are generally collateralized by
the related property and many are either endorsed or subject to mandatory dealer
repurchase agreements.
During 1996, the Corporation's ratio of net charge-offs to average
loans was .29% compared with .25% in 1995. At December 31, 1996, the allowance
for loan losses to nonperforming assets was approximately 141.4% compared with
117.8% last year. The allowance for loan losses to nonperforming loans ratio was
166.2% at year end 1996, compared to 156.4% the previous year. On December 31,
1996, the allowance for loan losses to loans ratio was 1.30% compared with 1.34%
in 1995. The Corporation believes that the allowance for loan losses of $10.2
million provides adequate coverage of potential loss exposure in the credit
portfolio at December 31, 1996.
Other Assets
Other assets at December 31, 1996 totaled $34.1 million compared to
$17.0 million at December 31, 1995, an increase of $17.0 million. Bank Owned
Life Insurance (BOLI) was purchased in the fourth quarter of 1996 at a one time
premium of $15.0 million. The covered insurance is on individuals in the various
Banks. The Banks are the owners and beneficiaries of the insurance policies.
<PAGE>
This program will provide an additional, cost-effective source of funds that
will help finance BankGroup's employee benefit programs. It is also a way for
the Company to partner with the employees to reduce costs and improve
profitability in an ever increasing competitive environment. Interest earned not
collected increased $2.5 million in 1996 in comparison to 1995. This increase
was primarily due to the increase in the interest earned not collected on
mortgage backed securities. Mortgage backed securities increased with the
continued implementation of leveraging transactions. Many of these securities
had the 45 day delay payment schedules, therefore, increasing the interest
earned not collected.
Deposits
Total deposits at December 31, 1996 were $886.5 million compared to $845.6
million at December 31, 1995. The Corporation continues to experience a shift in
deposit mix from savings deposits to time deposits, a trend begun in 1994. From
year-end 1995 to year-end 1996, time deposits increased $35.7 million, while
savings balances declined $11.7 million. Interest checking and money market
accounts increased $9.4 million. Management attributes the shift in deposit mix
to the relative flat interest rate environment and the continuation of deposit
customers' preference for longer-term, higher yielding time deposits.
Comparing average deposit balances to the previous year, the Corporation
experienced an increase of $23.3 million, with $6.8 million of the increase
occurring in noninterest-bearing demand deposit accounts. Average time deposits
were up $31.8 million, while combined savings, interest-bearing checking and
money market accounts decreased $15.3 million.
Other Interest-Bearing Liabilities
Short-term debt includes federal funds purchased, securities sold under
repurchase agreements, treasury tax and loan notes and Federal Home Loan Bank
borrowings and advances. Total short-term debt at year-end 1996 was $213.8
million, compared to $111.7 million at December 31, 1995. As of December 31,
1996 long-term debt totaled $71.0 million. This was comprised of $70.8 million
in FHLB borrowings and advances. The remaining $.2 million was a five year
capital lease on telephone equipment. The year-end to year-end increases in
borrowings were primarily associated with wholesale leverage transactions and
increases in loan demand.
Shareholders' Equity
Total shareholders' equity, excluding unrealized gains (losses) on
securities, increased by $9.0 million in 1996 to $108.3 million at year-end.
Dividends per share for 1996 were $.49 compared to $.37 for 1995. At year-end
1996, core capital (Tier 1) was 8.37% of assets against 9.26% at December 31,
1995. Total capital to risk based assets was 14.84% versus 16.30% the prior
year. Our capital position remains strong with ratios substantially above
regulatory prescribed minimums.
<PAGE>
Asset/Liability Management
Asset/liability management functions to maximize profitability within
established guidelines for liquidity, capital adequacy and interest rate risk.
Management seeks to minimize the risks to earnings and equity associated with
movements in market interest rates. Measurement and monitoring of liquidity,
capital adequacy and interest rate risk are performed centrally for the
Corporation and the subsidiary banks, and reported under guidelines established
by management, the Board of Directors and regulators.
Interest rate sensitivity is traditionally measured in three ways: the
difference, or gap, between interest sensitive earning assets and interest
sensitive interest bearing liabilities, the resultant change in net interest
income due to market interest rate fluctuations, and the effect of interest rate
movements on the market, or economic value of assets, liabilities and equity.
Management believes that the three measurement techniques are complimentary and
are used together for management of interest rate risk with the Corporation. The
Corporation utilizes an asset/liability management simulation model to measure
potential earnings and economic value of equity risk. The simulation model,
because of its dynamic nature, can capture the effects of present and future
balance sheet trends, differing patterns of interest rate movement and changing
relationships between rates (basis risk). Additionally, the model captures the
impact of varying levels of prepayment risk on certain loan and investment
categories and embedded options risk on deposits and alternative funding sources
relative to movements in market rates. While most assets and liabilities reprice
either at maturity or in accordance with their contractual terms, several
balance sheet components demonstrate characteristics that require adjustments to
more accurately reflect their repricing behavior. Assumptions based on
historical pricing relationships and anticipated market conditions are made to
certain core deposits to reflect the elasticity of the changes in their interest
rates relative to changes in market rates. The Corporation separately utilizes
outside sources to measure the effects of rising and declining rates on its
mortgage-backed securities portfolios. This data is incorporated into the
simulation model. According to these sources, the market value of these
securities would decrease by approximately 3.2% with an average life extension
of 1.9 years given a 200 basis point rise in market rates, and increase by
approximately 3.5% with an average life decrease of 3.4 years under a 200 basis
point decrease in market rates.
Year-end 1996 simulations which forecast changes in net interest income
that may result from movements in interest rates over the forward twelve month
time horizon indicate that net interest income would decrease by approximately
6.38% given a rise of 300 basis points in market rates over the forward period
and an increase of approximately 2.51% given a decline of 300 basis points.
Likewise, the economic value of equity would decrease by approximately 1.21% and
increase by approximately 8.9% under immediate and sustained 200 basis point
market rate increases and decreases, respectively.
The measurement of liquidity is performed by monitoring ratios that
indicate the level of liquid assets relative to liabilities, the dependence on
potential volatile funding sources, and the relationship of loans to deposits.
While relying on core deposit relationships as the basis of liquidity, increased
loan demand over the year has resulted in the Corporation seeking alternative
sources of liquidity and utilizing existing sources to a higher level within
established liquidity guidelines. It is anticipated that this trend will
continue in 1997. To meet future liquidity needs, the Corporation and its
subsidiary banks have expanded funding sources, primarily with the Federal Home
Loan Bank, and continue to seek other alternative funding sources.
<PAGE>
Effects of Inflation
Over the past few years, the rate of inflation has been relatively
moderate. However, because interest rates and the level of loans and deposits
generally increase as the rate of inflation increases, the financial statements
reflect these effects of inflation.
Recent Accounting Developments
The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". BankGroup
adopted the applicable portions of this statement effective January 1, 1997
which had no material effect on financial statements.
1995 VS 1994
Overview
Net income was $13.5 million, or $1.21 per share on a fully diluted basis
for 1995 compared to $6.6 million, or $.62 per share on a fully diluted basis,
for 1994. During 1994 the Corporation's financial results were impacted by
actions taken to restructure the balance sheet through security sales, an
additional loan loss provision in order to maintain adequate loan loss reserve
coverage and certain other less significant anomalies. Excluding these items,
MainStreet's earnings would have been approximately $10.8 million in 1994.
Return on average assets was 1.35% in 1995 compared with .71% in 1994. Return on
average shareholders' equity was 16.07% in 1995 and 8.72% in 1994. Net interest
income rose in 1995 driven by a higher level of earning assets. The provision
for loan losses in 1995 declined $1.7 million or 54.1% in comparison to 1994.
This decline can be attributed to increased credit quality driven by new
policies and procedures for commercial lending. Noninterest income, excluding
securities gains (losses), was $8.5 million, an increase of 14.8% over 1994
levels. During 1995, the Corporation implemented additional service charges on
deposit accounts along with increased rates on existing charges. Noninterest
expense for 1995 was $32.5 million and relatively stable when compared to the
$32.1 million in 1994. During the fourth quarter, the Corporation called for
redemption all of its outstanding 7% Convertible Subordinated Debentures for
common stock. This reduced long-term debt by approximately $6.2 million with a
corresponding increase in total shareholders' equity. Income tax expense was
$5.6 million in 1995 compared to $.8 million in 1994. The previously mentioned
restructuring of the balance sheet was the main cause of the tax position in
1994. The 1994 rate was also attributable to a reduction in expense of
approximately $600 thousand. This was due to an agreement, during the second
quarter of 1994, that BankGroup entered into with the Internal Revenue Service
which settled a matter associated with the tax accounting for core deposit
intangibles.
STATEMENT OF INCOME
Net Interest Income
Net interest income, the difference between total interest income and total
interest expense, is the Corporation's principal source of earnings. The amount
of net interest income is determined by the volume of interest-earning assets,
<PAGE>
the level of rates earned on those assets and the cost of supporting funds. The
difference between rates earned on interest-earning assets (with an adjustment
made to tax-exempt income to provide comparability with taxable income) and the
cost of supporting funds is measured by the net interest margin.
The distribution of assets, liabilities, and shareholders' equity for the
last three years, along with the related levels of fully taxable-equivalent
interest income and expense, is presented on page 6 of this report. The
variances in interest income and expense caused by differences in average
balances and rates are shown on page 7 of this report.
The general level of interest rates declined in the second half of 1995 as
the Federal Reserve eased monetary policy. The prime rate decreased in tandem
with the drop in short-term interest rates, maintaining a 300 basis point spread
between prime and federal funds rate. The impact on the Corporation's net
interest margin was favorable, rising 1 basis point to 4.86% for 1995 compared
to the 4.85% achieved in 1994. Average earning assets increased $69.1 million,
or 7.92%. While the overall cost of interest-bearing liabilities increased, due
largely to the upward repricing of time deposits generated during the low rate
cycle of 1992 and 1993, a higher percentage of earning assets were funded by
noninterest-bearing liabilities. The combination of an increasing net interest
margin, a more profitable asset mix and growth in earning assets in 1995
generated an increase in net interest income of $3.5 million, or approximately
8.6%.
Provision for Loan Losses
In 1995, $1.4 million was expensed as a loan loss provision, compared with
$3.1 million in 1994, a reduction of $1.7 million, or 54.1%. Net loan
charge-offs were $1.5 million compared with $3.0 million in 1994. The ratio of
charge-offs to average loans, net of unearned income, for 1995 was .25% compared
to 1994's level of .53%. At year-end 1995, the ratio of the allowance to loans
was 1.34% compared with the 1.54% at December 31, 1994. The allowance for loan
losses at December 31, 1995 represented 156.36% of nonperforming loans, compared
with 196.40% at December 31, 1994. The allowance for loan losses is evaluated on
a quarterly basis and was considered adequate at December 31, 1995. A discussion
concerning credit quality is included in the "Loans and Credit Quality" section
of this discussion.
Noninterest Income
Noninterest income, excluding gains or losses on securities transactions,
totaled $8.5 million in 1995 compared with $7.4 million in 1994, an increase of
14.8%. Trust income increased $416 thousand, or 20.5% over 1994 levels due to
increased business development and an increased fee structure. Service charges
on deposit accounts totaled $2.7 million, increasing 13.3% over 1994 levels.
During 1995, the Corporation implemented additional service charges on deposit
accounts along with increased rates on existing charges. Other noninterest
income amounted to $3.3 million in 1995 compared to $2.9 million in 1994. This
rise was due to increases in card services income, insurance commissions,
discount income, and other small accounts.
<PAGE>
Investment Securities Gains (Losses)
Securities gains were $43 thousand in 1995 compared to losses of $5.7
million in 1994. During the fourth quarter of 1994, management restructured the
Corporation's balance sheet, through the sale of that portion of collateralized
mortgage obligations (securities) most sensitive to a rising rate environment.
This action resulted in an after-tax charge to earnings of approximately $4.0
million.
Noninterest Expense
Total noninterest expenses in 1995 were $32.5 million and stable with 1994
levels of $32.1 million. Salaries expense was $13.0 million in 1995 compared to
$11.9 million in 1994, an increase of 9.0%. Part of this is attributable to
staffing of key Holding Company positions in the latter part of 1994. Also, the
Corporation accrued an estimate for separation costs associated with the
consolidation of certain back office activities at the holding company level in
accordance with its out-placement policy, which impacted total salary and
benefit costs for 1995. Full time equivalent employees totaled 492 at year-end
1995 compared with 532 at year-end 1994. The remainder of the increase was due
to normal salary increases. Employee benefit costs totaled $4.3 million in 1995
up 9.8% in comparison to 1994. These increases were due to rises in pension
expense due to a new defined benefit plan along with a matching 401-K plan
implemented by the Corporation. Increases in the stock price which affects the
compensation expense accrued for stock options outstanding also contributed to
the rise in 1995 expense.
Net occupancy expense experienced a $70 thousand decrease in 1995 in
comparison to 1994. Equipment costs were $3.5 million at year-end 1995 compared
to $3.1 million in 1994, an increase of 13.1%. During 1995, the Corporation
invested in new technology and equipment to enhance our capabilities to more
efficiently respond to our customers. A new mainframe computer was installed and
high speed data communication lines to each affiliate bank which has increased
our speed of processing along with positioning us for growth and expansion. FDIC
insurance expense dropped from $1.9 million in 1994 to $1.0 million in 1995 due
to the refund received during the third quarter of 1995 and the reduced
assessment rate for the remainder of 1995. FDIC insurance expenses for 1996 will
be reduced further by a significant amount as the Corporation's subsidiary banks
accrue to the minimum annual statutory requirement.
Other noninterest expenses were $7.8 million for 1995 compared to $8.3
million for 1994, a decline of 6.8%. The Corporation concentrated on its
processing activities during 1995 and continued to consolidate functions which
positively impacted noninterest expense. This can also be seen in the decline of
the efficiency ratio to 59.43% from 61.86% in 1994. The efficiency ratio is a
measure of on-going operating expenses as they relate to tax-equivalent net
interest income and noninterest income. All this was achieved while at the same
time three of the bank subsidiaries moved from national to state bank charters.
Provision for Income Taxes
Current income tax expense increased in 1995, primarily due to the
settlement with the Internal Revenue Service regarding tax treatment of core
deposit intangibles and the tax benefit derived from realized losses on the
investment portfolio that occurred in 1994. Income tax expense amounted to $5.6
million in 1995, compared to $843 thousand in 1994. The Company's effective tax
rate was 29.2% in 1995 and 11.3% in 1994.
<PAGE>
BALANCE SHEET
Investment Portfolio
Investments, including securities available for sale and securities held to
maturity totaled $324.1 million on December 31, 1995, compared to $279.2 million
the prior year. The increase occurred in the available for sale position and was
comprised principally of adjustable rate Collateralized Mortgage Obligations
(CMO's) funded with floating rate debt of the same index and repricing
frequency. During fourth quarter of 1995, the Financial Accounting Standards
Board allowed institutions a one time opportunity to restructure their
investment portfolios under the designations of SFAS No. 115. Management took
advantage of this opportunity by redesignating $35.7 million of "held to
maturity" as "available for sale" without any penalty or tainting of the
remaining "held to maturity" portfolio. As of December 31, 1995, 65.4% of the
Corporation's investment portfolio was classified in the "available for sale"
category, with the remaining 34.6% of investment securities classified as "held
to maturity." This distribution allows more flexibility in the management of
interest rate risk, credit, liquidity and capital adequacy.
All CMO's are classified as "available for sale." At least on a quarterly
basis, and more often in times of heightened interest rate volatility, these
securities are tested to monitor their sensitivity to movements in interest
rates and the effects of prepayments on their market price. This review is
conducted utilizing the "FFIEC High Risk Test", under which securities are
analyzed on the assumption of an immediate and parallel shift of 300 basis
points in the yield curve. At December 31, 1995, the Corporation's CMO portfolio
has an average life of 9.17 years. Were rates to rise or fall by 300 basis
points, the average life of the portfolio would extend to 9.36 years, or decline
to 8.48 years, respectively. The market price of the CMO portfolio would decline
by approximately 12.01% or increase by approximately 9.11% were rates to rise or
fall by 300 basis points, respectively. The overwhelming majority of the
Corporation's CMO portfolio are issued by the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation and are backed by
collateral issued by these agencies. Management believes there is no material
credit risk inherent in these investments.
Loans and Credit Quality
Average loans, net of unearned income, increased from $562.3 million in 1994
to $627.2 million in 1995, up 11.5%. Declining interest rates during 1995
prompted double digit percentage increases in consumer and mortgage loan volume.
Although there were no large concentrations of credit to any particular
industry, the economic trends of the areas served by BankGroup affiliates are
influenced by the significant industries within the region including textiles,
furniture, pre-built housing and agriculture. Virtually all of our business
activity is with customers located in the central and western part of southern
Virginia. The ultimate collectibility of the Banks' loan portfolios and the
recovery of the carrying amounts of repossessed property are susceptible to
changes in the market conditions of this geographic region. The Commercial
portfolio is diversified with no significant concentrations of credit at
<PAGE>
December 31, 1995. Acquisition and development construction loans account for
$30.8 million and $31.0 million of the commercial portfolio at December 31, 1995
and 1994, respectively. In addition, other commercial loans secured by real
estate totaled $96.5 million and $72.0 million at December 31, 1995 and 1994,
respectively. The real estate loan portfolio consists almost entirely of 1-4
family residential property. MainStreet BankGroup was the creditor for
approximately $97.9 million and $82.4 million at December 31, 1995 and 1994,
respectively, of consumer loans for automobiles and mobile homes generated
directly or purchased from established dealers (indirect). These loans are
generally collateralized by the related property and many are either endorsed or
subject to mandatory dealer repurchase agreements.
During 1995, the Corporation's ratio of net charge-offs to average loans was
.25% compared with .53% in 1994. At December 31, 1995, the allowance for loan
losses to nonperforming assets was approximately 117.8% compared with 127.0%
last year. The allowance for loan losses to nonperforming loans ratio was
156.36% at year end 1995, compared to 196.4% the previous year. On December 31,
1995, the allowance for loan losses to loans ratio was 1.34% compared with 1.54%
in 1994. The Corporation believes that the allowance for loan losses of $9.0
million provides adequate coverage of potential loss exposure in the credit
portfolio at December 31, 1995.
Other Assets
Other assets at December 31, 1995 were $17.0 million compared to $25.3
million at December 31, 1994, a decline of 32.8%. In 1993, a subsidiary bank,
Piedmont Trust Bank, (PTB) experienced a Trust Department defalcation involving
misappropriation of customer funds by a former Trust Department employee at PTB.
PTB filed a lawsuit against its insurance carriers to collect on a disputed
claim for $5.5 million arising out of the defalcation. At December 31, 1994, PTB
had other assets of $3.8 million on its balance sheet representing a receivable
from insurance carriers. This dispute was settled on February 28, 1995 and final
settlement payments on the agreement were received in accordance with the
agreement in April, 1995.
Deferred taxes on securities were $.3 million at December 31, 1995 a decline
of $4.0 million, or 92.8%, from December 31, 1994 figures. This is the related
tax effect of the unrealized losses in the securities portfolio and is netted
against these losses in the shareholders' equity section of the balance sheet.
Deferred taxes, other than securities, decreased $.9 million, or 17.3%, in 1995
compared to 1994.
Deposits
Total deposits at December 31, 1995 were $845.6 million compared to $830.6
million at December 31, 1994. From year- end 1994 to year-end 1995, time
deposits increased $65.5 million, while savings account balances declined $49.8
million. Interest checking and money market accounts decreased by $6.1 million.
Management attributes the shift in deposit mix to the generally higher interest
rate environment of 1994 and early 1995, attracting deposit customers into
longer-term, higher yielding time deposits.
Comparing average deposit balances to the previous year, the Corporation
experienced an increase of $20.8 million.
<PAGE>
Other Interest-Bearing Liabilities
Short-term debt includes Federal funds purchased, securities sold under
repurchase agreements, Treasury tax and loan notes and Federal Home Loan Bank
advances. Total short-term debt at year-end 1995 was $111.7 million, compared to
$23.2 million at December 31, 1994. Long-term debt was in the form of a seven
year principal reducing credit (Federal Home Loan Bank advance) acquired in 1995
as an offset to specific fixed rate lending at one affiliate bank. As of
December 31, 1995, long-term debt totaled $929 thousand.
7% Convertible Subordinated Debentures
On September 12, 1995, MainStreet BankGroup Incorporated called for the
redemption, on October 13, 1995, of all of its outstanding 7% Convertible
Subordinated Debentures Due 2011 (the "debentures"). At such date, $8,043,000
principal amount of Debentures were outstanding. The redemption price was
$1,014.00 plus accrued interest of $34.61 from April 15, 1995 to the redemption
date, for a total of $1,048.61 for each $1,000 of principal amount of
Debentures. No interest would accrue on the Debentures from and after October
13, 1995 and holders of outstanding Debentures would not have any rights as such
holders other than the right to receive the redemption price, without additional
interest, upon surrender of their Debentures.
The Debentures were convertible at any time on and prior to October 5, 1995
into shares of the Company's Common Stock at a conversion rate of 109.89 shares
of common stock for each $1,000 principal amount of Debentures (equivalent to a
conversion price of $9.10 per share). Holders converting Debentures were not
entitled to receive interest from April 15, 1995.
The Corporation also entered into a Standby Agreement with Scott and
Stringfellow, Incorporated, a broker/dealer headquartered in Richmond, Virginia
providing that Debentures not converted by the holders would, in effect, be
converted by Scott and Stringfellow and the resulting Common Stock sold in a
public offering. All debentures were converted into 883,678 shares of the
Corporation's Common Stock.
The Corporation registered Common Stock offered in conversion of the
Debentures with the Securities and Exchange Commission (Registration No.
33-62557).
Shareholders' Equity
Total shareholders' equity, excluding unrealized losses on securities,
increased by $18.9 million in 1995 to $99.3 million at year-end. Dividends per
share for 1995 were $.37 compared to $.31 for 1994. At year-end 1995, core
capital (Tier 1) was 9.26% of assets against 8.43% at December 31, 1994. Total
capital to risk based assets was 16.30% versus 16.07% the prior year. Our
capital position remains strong with ratios substantially above regulatory
prescribed minimums.
Financial reporting in accordance with Statement of Financial Account
Standards (SFAS) No. 115 requires an adjustment to shareholders' equity for net
unrealized losses in the "available-for-sale" securities portfolio. This
adjustment at December 31, 1995 and 1994, was $.6 million and $8.3 million,
respectively. After the adjustment, total shareholders' equity was $98.7 million
and $72.0 million at December 31, 1995 and 1994, respectively.
<PAGE>
Item 8. Financial Statements and Supplementary Data
Report of Independent Accountants
To the Board of Directors and Shareholders
MainStreet BankGroup Incorporated:
We have audited the accompanying consolidated balance sheets of MainStreet
BankGroup Incorporated and Subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of income, changes in shareholders' equity,
and cash flows for each of the two years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company'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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
MainStreet BankGroup Incorporated and Subsidiaries as of December 31, 1996 and
1995, and the consolidated results of their operations and their cash flows for
each of the two years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Separate financial statements of MainStreet BankGroup Incorporated and
Subsidiaries, Hanover Bank, and The First National Bank of Clifton Forge for the
year ended December 31, 1994, which have been combined to reflect the 1996
pooling of interests described in Note 2, were audited and reported on
separately by other auditors prior to their combination herein. We audited the
combination of the accompanying consolidated statements of income, changes in
shareholders' equity and cash flows for the year ended December 31, 1994; in our
opinion, such consolidated statements have been properly combined on the basis
described in Note 2 of notes to consolidated financial statements.
/s/Coopers & Lybrand L.L.P.
---------------------------
COOPERS & LYBRAND L.L.P.
Greensboro, North Carolina
January 17, 1997
<PAGE>
Independent Auditors' Report
To the Board of Directors and Shareholders MainStreet BankGroup Incorporated:
We have audited the consolidated statements of income, changes in shareholders'
equity, and cash flows of MainStreet BankGroup Incorporated and subsidiaries
(formerly Piedmont BankGroup Incorporated and subsidiaries) (BankGroup) 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 the annual
report on Form 10-K. These consolidated financial statements are the
responsibility of BankGroup's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above (not
presented herein) present fairly, in all material respects, the results of
operations and cash flows of MainStreet BankGroup Incorporated and subsidiaries
for the year ended December 31, 1994, in conformity with generally accepted
accounting principles.
/s/KPMG Peat Marwick LLP
------------------------
KPMG PEAT MARWICK LLP
Roanoke, Virginia
January 20, 1995, except as to Note 21
to the December 31, 1994 consolidated
financial statements which is as of
February 28, 1995
<PAGE>
Independent Auditors' Report
To the Board of Directors
The First National Bank of Clifton Forge:
We have audited the statements of income, stockholders' equity, and cash flows
of The First National Bank of Clifton Forge for the year ended December 31,
1994. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
amounts and disclosures in the financial statements. An audit also includes
assessing accounting principles used and significant estimates made by
management, as well as evaluating overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of The First
National Bank of Clifton Forge for the year ended December 31, 1994 in
conformity with generally accepted accounting principles.
/s/Persinger & Company, L.L.C.
------------------------------
Persinger & Company, L.L.C.
Covington, Virginia
January 5, 1995
<PAGE>
Independent Auditors' Report
To the Board of Directors of Hanover Bank:
We have audited the consolidated balance sheet of Hanover Bank and subsidiary as
of December 31, 1994 and the related consolidated statements of income,
stockholders' equity, and cash flow for the year then ended. These consolidated
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Hanover Bank and subsidiary as of
December 31, 1994, and the results of their operations and their cash flow for
the year then ended in conformity with generally accepted accounting principles.
/s/Deloitte & Touche LLP
------------------------
Deloitte & Touche LLP
Richmond, Virginia
January 12, 1995
<PAGE>
<TABLE>
<CAPTION>
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In 000's Except Share Data)
December 31
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Cash and Due From Banks ..................................... $ 37,972 $ 31,497
Interest-Earning Deposits In Domestic Banks ................. 518 875
Mortgage Loans Held for Sale ................................ 742 1,780
Federal Funds Sold .......................................... -- 9,560
Securities Available for Sale (Aggregate
Costs of $333,770 and $211,003
in 1996 and 1995, respectively) .......................... 335,023 211,970
Securities Held to Maturity (Aggregate
Market Values of $92,709 and
$116,830 in 1996 and 1995, respectively)
Taxable ............................................... 52,314 70,379
Nontaxable ............................................ 38,205 41,802
----------- -----------
90,519 112,181
Loans, Net of Unearned Income and Deferred Fees ............. 784,367 673,678
Less: Allowance for Loan Losses .......................... (10,195) (9,036)
----------- -----------
Loans, Net ............................................ 774,172 664,642
Bank Premises and Equipment, Net ............................ 14,932 13,589
Other Real Estate Owned ..................................... 905 1,743
Other Assets ................................................ 34,054 17,035
----------- -----------
TOTAL ASSETS .......................................... $ 1,288,837 $ 1,064,872
=========== ===========
LIABILITIES
Deposits:
Demand Deposits (Noninterest-Bearing) .................... $ 120,989 $ 113,417
Interest Checking Accounts ............................... 99,834 93,478
Savings Deposits ......................................... 121,336 133,074
Money Market Investment Accounts ......................... 81,946 78,920
Time Deposits:
Certificates of Deposit $100,000 and Over ............. 90,189 76,965
Other ................................................. 372,225 349,723
----------- -----------
Total Deposits ......................................... 886,519 845,577
Short-Term Debt ............................................. 213,799 111,736
FHLB Advances, Callable 2/97 ................................ 45,000 --
Long-Term Debt .............................................. 26,029 929
Accrued Interest Payable .................................... 4,002 3,095
Other Liabilities ........................................... 5,012 4,878
----------- -----------
TOTAL LIABILITIES ..................................... 1,180,361 966,215
----------- -----------
<PAGE>
<CAPTION>
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In 000's Except Share Data)(continued)
December 31
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
SHAREHOLDERS' EQUITY
Preferred Stock, $5 Par Value. Authorized 1,000,000 Shares;
None Outstanding ......................................... -- --
Common Stock, $5 Par Value. Authorized 20,000,000 Shares;
Issued and Outstanding 11,342,248 and 11,356,811 Shares in
1996 and 1995, respectively .............................. 56,711 56,784
Capital in Excess of Par .................................... 5,799 6,430
Retained Earnings ........................................... 46,115 36,040
Unearned Compensation ....................................... (338) --
Unrealized Gains (Losses) on Securities, Net of Taxes ....... 189 (597)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ............................ 108,476 98,657
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............ $ 1,288,837 $ 1,064,872
=========== ===========
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In 000's Except Per Share Data)
Years Ended December 31
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans:
Taxable ............................................ $ 69,465 $ 60,250 $ 50,490
Nontaxable ......................................... 92 163 191
Interest on Mortgage Loans Held for Sale .............. 168 144 514
Interest and Dividends on Securities Available for Sale 16,382 10,248 14,407
Interest and Dividends on Securities Held to Maturity:
Taxable ............................................ 4,346 7,075 847
Nontaxable ......................................... 2,252 2,641 2,910
Other Interest Income ................................. 597 648 718
-------- -------- --------
Total Interest Income .............................. 93,302 81,169 70,077
-------- -------- --------
INTEREST EXPENSE
Deposits .............................................. 33,545 33,044 27,960
Short-Term Debt ....................................... 6,155 3,196 594
Long-Term Debt ........................................ 3,155 63 --
7% Convertible Subordinated Debentures ................ -- 454 643
-------- -------- --------
Total Interest Expense ................................ 42,855 36,757 29,197
-------- -------- --------
Net Interest Income ................................ 50,447 44,412 40,880
Provision for Loan Losses ............................. 3,276 1,419 3,091
-------- -------- --------
Net Interest Income After Provision for Loan Losses 47,171 42,993 37,789
-------- -------- --------
NONINTEREST INCOME
Service Charges, Fees and Other ....................... 7,476 6,042 5,364
Trust Department Income ............................... 2,942 2,441 2,025
Securities Gains (Losses), Net ........................ 610 43 (5,665)
-------- -------- --------
Total Noninterest Income .............................. 11,028 8,526 1,724
-------- -------- --------
<PAGE>
<CAPTION>
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In 000's Except Per Share Data)(continued)
Years Ended December 31
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
NONINTEREST INCOME
Salaries .............................................. 13,573 12,976 11,901
Employee Benefits ..................................... 5,478 4,271 3,890
Net Occupancy ......................................... 1,685 1,736 1,806
Equipment ............................................. 3,778 3,479 3,075
FDIC Assessment ....................................... 14 1,014 1,852
Stationery and Supplies ............................... 922 898 768
Advertising ........................................... 600 329 453
Other ................................................. 9,298 7,758 8,328
-------- -------- --------
Total Noninterest Expense ............................. 35,348 32,461 32,073
-------- -------- --------
Income Before Income Taxes ..................... 22,851 19,058 7,440
Income Tax Expense .................................... 7,118 5,566 843
-------- -------- --------
NET INCOME ............................................ $15,733 $ 13,492 $ 6,597
======== ======== ========
Per Share:
Primary:
NET INCOME ......................................... $ 1.37 $ 1.26 $ .63
======== ======== ========
Average Shares Outstanding ......................... 11,460 10,744 10,410
======== ======== ========
Fully Diluted:
NET INCOME ......................................... $ 1.37 $ 1.21 $ .62
======== ======== ========
Average Shares Outstanding ......................... 11,463 11,450 11,416
======== ======== ========
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In 000's Except for Share and Per Share Data)
Unrealized
Gains
Common Capital In Retained Unearned (Losses) on
Stock Excess of Par Earnings Compensation Securities, Net Total
----- ------------- -------- ------------ --------------- -----
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1994
Balance at January 1, 1994 as
previously reported ..................... $ 18,548 $ 4,231 $ 34,345 $ -- $ -- $ 57,124
Adjustments for Pooling of Interests ..... 14,109 (5,310) 10,121 -- 11 18,931
--------- --------- --------- --------- --------- ---------
Balance at January 1, 1994 as restated ... 32,657 (1,079) 44,466 -- 11 76,055
Cumulative effect of change in accounting
for securities at January 1, 1994, net of
deferred income tax expense of $1,515 ... -- -- -- -- 2,941 2,941
Net Income ............................... -- -- 6,597 -- -- 6,597
Cash Dividends ($.31 Per Share) .......... -- -- (3,219) -- -- (3,219)
Sale of 52,566 Shares Through Dividend
Reinvestment Plan and Stock Option Plan 131 400 -- -- -- 531
Stock Grants Awarded (8,000 Shares) ...... 20 62 -- -- -- 82
Conversion of Subordinated Debentures
(30,318 Shares) ....................... 76 200 -- -- -- 276
Change in unrealized gains (losses) on
securities, net of deferred income tax
benefit of $5,805 ....................... -- -- -- -- (11,269) (11,269)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1994 ............. 32,884 (417) 47,844 -- (8,317) 71,994
Year Ended December 31, 1995
Net Income ............................... -- -- 13,492 -- -- 13,492
Cash Dividends ($.37 Per Share) .......... -- -- (3,960) -- -- (3,960)
Sale of 45,228 Shares Though Dividend
Reinvestment Plan and Stock Option Plan 114 411 -- -- -- 525
Conversion of Subordinated Debentures
(979,820 Shares) ...................... 2,450 6,436 -- -- -- 8,886
Change in unrealized gains (losses) on
securities, net of deferred income tax
expense of $3,977 ....................... -- -- -- -- 7,720 7,720
Stock Split Effected in the Form of
a Stock Dividend ....................... 21,336 -- (21,336) -- -- --
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1995 ............. 56,784 6,430 36,040 -- (597) 98,657
<PAGE>
<CAPTION>
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In 000's Except for Share and Per Share Data)
(continued)
Unrealized
Gains
Common Capital In Retained Unearned (Losses) on
Stock Excess of Par Earnings Compensation Securities, Net Total
----- ------------- -------- ------------ --------------- -----
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1996
Net Income ............................... -- -- 15,733 -- -- 15,733
Cash Dividends ($.49 Per Share) .......... -- -- (5,562) -- -- (5,562)
Cash Paid for Cash Election and Fractional
Shares for Mergers .................. (666) (1,632) -- -- -- (2,298)
Sale of 99,490 Shares Through Dividend
Reinvestment Plan and Stock Option Plan
including effect of stock split ....... 593 1,001 (96) -- -- 1,498
Unearned Compensation .................... -- -- -- (338) -- (338)
Change in unrealized gains (losses) on
securities, net of deferred income
tax expense of $423 ..................... -- -- -- -- 786 786
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1996 ............. $ 56,711 $ 5,799 $ 46,115 $ (338) $ 189 $ 108,476
========= ========= ========= ========= ========= =========
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
-------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income ........................................................ $ 15,733 $ 13,492 $ 6,597
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Provision for Loan Losses .................................... 3,276 1,419 3,091
Depreciation and Amortization ................................ 2,426 2,203 2,093
Amortization of Securities Premiums and Discounts, Net ....... 162 (326) 159
Provision for Deferred Income Taxes .......................... (431) 743 (1,392)
(Gain) Loss on Sale of Securities, Net ....................... (610) (43) 5,665
Amortization of Intangibles .................................. 227 267 295
Mortgage Loan Originations Held for Sale ..................... (12,943) (10,914) (10,651)
Mortgage Loans Sold .......................................... 13,981 9,655 21,214
Changes in Other Assets and Other Liabilities:
Other Assets .............................................. (2,058) 3,409 516
Accrued Interest .......................................... 907 701 294
Accrued Loss Contingencies ................................ -- (1,341) --
Other Liabilities ......................................... 134 950 (1,324)
--------- --------- ---------
Net Cash Provided by Operating Activities: ........................ 20,804 20,215 26,557
--------- --------- ---------
Cash Flows From Investing Activities:
Net (Increase) Decrease in Federal Funds Sold ..................... 9,560 (4,250) 26,785
(Increase) Decrease in Interest-Earning Deposits .................. 357 (825) 250
Purchases of Securities Available for Sale ........................ (292,043) (90,796) (29,855)
Purchases of Securities Held to Maturity .......................... (2,396) (14,944) (90,695)
Proceeds from Sale of Securities Available for Sale ............... 122,806 28,915 89,159
Proceeds from Calls and Maturities of Securities Available for Sale 46,679 22,115 12,913
Proceeds from Calls and Maturities of Securities Held to Maturity . 25,207 21,855 4,961
Net Increase in Loans ............................................. (112,806) (80,034) (68,698)
Purchases of Bank Premises and Equipment .......................... (3,769) (2,322) (3,695)
Proceeds from Sale of Bank Premises and Equipment ................. -- 2 --
Net Decrease in Other Real Estate ................................. 838 709 2,566
Increase in Other Assets .......................................... (15,167) -- --
--------- --------- ---------
Net Cash Used in Investing Activities ............................. (220,734) (119,575) (56,309)
--------- --------- ---------
<PAGE>
<CAPTION>
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
-------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows From Financing Activities:
Net Increase in Deposits .......................................... 40,942 14,980 33,822
Net Increase in Short-Term Debt ................................... 102,063 88,523 3,244
Increase in FHLB Advances Callable 2/97 ........................... 45,000 -- --
Increase in Long-Term Debt ........................................ 25,100 929 --
Cash Dividends .................................................... (5,562) (3,960) (3,219)
Cash Paid in Lieu of Common Stock at Acquisition .................. (2,298) -- --
Net Expenses Incurred for Debenture Conversion .................... -- (32) --
Proceeds From Issuance of Common Stock ............................ 1,160 525 613
--------- --------- ---------
Net Cash Provided by Financing Activities ......................... 206,405 100,965 34,460
--------- --------- ---------
Net Increase in Cash and Due From Banks ........................... 6,475 1,605 4,708
Cash and Due From Banks at Beginning of Year ...................... 31,497 29,892 25,184
--------- --------- ---------
Cash and Due From Banks at End of Year ............................ $ 37,972 $ 31,497 $ 29,892
========= ========= =========
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995 and For Each of the
Three Years in the Period Ended December 31, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include the
accounts of MainStreet BankGroup Incorporated and its subsidiaries (BankGroup).
All significant intercompany accounts and transactions have been eliminated.
Cash Equivalents. For purposes of the Statement of Cash Flows, BankGroup
considers all Cash and Due From Bank accounts to be cash equivalents.
Mortgage Loans Held for Sale. Mortgage loans held for sale are carried at the
lower of aggregate cost or market value. Adjustments to market and realized
gains and losses are classified as other income in the accompanying consolidated
statements of income.
Loan Servicing. Mortgage loans serviced for others are not included in the
accompanying consolidated statements of condition. The unpaid principal balances
of mortgage loans serviced for others was $89,599,000, $97,639,000 and
$105,510,000 at December 31, 1996, 1995 and 1994, respectively. Beginning
January 1, 1996, BankGroup adopted Statement of Financial Accounting Standards
(SFAS) No. 122, "Accounting for Mortgage Servicing Rights". The effect of SFAS
No. 122 was immaterial for 1996.
Securities. BankGroup classifies and accounts for its investments in debt and
equity securities as follows:
- - - Debt securities that BankGroup has the positive intent and ability to hold
to maturity are classified as held to maturity securities and reported at
amortized cost.
- - - Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings. BankGroup does not currently engage in any securities
trading activity.
- Debt and equity securities not classified as either held to maturity
securities or trading securities are classified as securities available for
sale and reported at fair value, with unrealized gains and losses excluded
from earnings and reported as a separate component of shareholders' equity.
Securities are classified at purchase date under the specific identification
method.
Gains and losses on securities sales 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.
<PAGE>
Loans. Interest on loans is computed by methods which generally result in level
rates of return on principal amounts outstanding. Loans are placed on nonaccrual
status when it becomes probable that the borrower will have difficulty meeting
either interest or principal payments and the loan is not in the process of
collection and is not well collateralized. For loans placed on nonaccrual, all
interest accrued in the current fiscal year is reversed against income while
prior year accrued interest is charged against the allowance for loan losses.
For payments on nonaccrual loans and impaired loans, amounts are applied first
as a recovery of principal and then as interest under the cost recovery method.
BankGroup collectively reviews for impairment all consumer loans, single family
loans and performing multi-family and non-residential real estate loans,
excluding loans which have entered into the "workout process". BankGroup
considers a loan to be impaired when, based upon current information and events,
it believes it is probable that BankGroup will be unable to collect all amounts
due according to the contractual terms of the loan agreement. BankGroup's
impaired loans include nonaccrual loans (excluding those collectively reviewed
for impairment), troubled debt restructurings, and certain other nonperforming
loans. For collateral dependent loans, BankGroup bases the measurement of these
impaired loans on the fair value of the loan's collateral properties. For all
other loans, BankGroup bases the measurement of these impaired loans on the more
readily determinable of the present value of expected future cash flows
discounted at the loan's effective interest rate or the observable market price.
Impairment losses are recognized through an increase in the allowance for loan
losses and a corresponding charge to the provision for loan losses. Adjustments
to impairment losses due to changes in the fair value of impaired loans'
collateral properties are included in the provision for loan losses. When an
impaired loan is either sold, transferred to other real estate owned or written
down, any related valuation allowance is charged off against the allowance for
loan losses.
Loan Fees and Cost. Loan origination and commitment fees and certain direct
origination costs are deferred and are amortized over the contractual life of
the related loans using the level yield method.
Other Real Estate. Other real estate comprises properties acquired through
foreclosure proceedings or acceptance of a deed in lieu of foreclosure. The
properties are carried at the lower of cost or fair market value less selling
costs, based on appraised value. Loan losses arising from the acquisition of
such properties are charged against the allowance for loan losses. Any
subsequent write-downs are charged to expense.
Allowance for Loan Losses and Valuation of Real Estate Owned. An allowance for
loan losses is maintained in order to provide for losses in collection of loans
that can be currently estimated. The level of the allowance for loan losses is
based upon the quality of the loan portfolios as determined by management after
consideration of historical loan loss experience, diversification as to the type
of loans in the portfolios, the amount of collateralized as compared to
uncollateralized loans, banking industry standards and averages, and general
economic conditions. In connection with the determination of the allowance for
loan losses and the valuation of real estate owned, management obtains
independent appraisals for significant properties. Management believes that the
allowance for loan losses and the valuation of real estate owned are adequate.
While management uses available information to recognize losses on loans and
real estate owned, future additions to the allowance for loan losses and
additional write-downs in the valuation of real estate owned may be necessary
based on changes in economic conditions.
<PAGE>
Bank Premises and Equipment. Bank premises and equipment are stated at cost less
accumulated depreciation and amortization. Provisions for depreciation are
computed using the straight-line and accelerated methods over estimated useful
lives of 30 to 50 years for building shells, 5 to 15 years for building
components and 3 to 10 years for furniture and equipment. Leasehold improvements
are amortized using the straight-line method over the shorter of the estimated
useful lives or the terms of the related leases. Maintenance, repairs and minor
improvements are charged to operations as incurred, and significant improvements
are capitalized. Any gains or losses on disposition are reflected in operations.
Income Taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Income Per Share. Primary income per share is calculated based on the weighted
average number of shares of common stock and common stock equivalents
outstanding during each period. Fully diluted income per share is computed using
weighted average shares outstanding increased by common stock equivalents. For
1995 and 1994 fully diluted income per share also included the effect of
weighted average number of shares that would result from assuming that all of
the 7% convertible subordinated debentures were converted into common stock at
the conversion price of $9.10 as of the issuance date. These debentures were
called in 1995. For purposes of calculating fully diluted income per share, net
income was increased by eliminating interest expense and amortization of debt
issuance expense, less the related tax effect relating to the debentures. Stock
options outstanding have been considered common stock equivalents for 1996,
1995, and 1994. Share and per share data has been restated to reflect the stock
split.
Trust. Trust income is recognized on the accrual basis of accounting and assets
held by Trust in a fiduciary or agency capacity are not included in the
Consolidated Financial Statements as they are not assets of BankGroup.
Amortization of Intangibles. Identified intangible assets and the excess of cost
over the fair value of net tangible and identified intangible assets acquired
are included in other assets in the consolidated balance sheets and are being
amortized over periods ranging from three to twenty years, using accelerated and
straight-line methods. Net intangible assets amounted to $.9 million and $1.1
million at December 31, 1996 and 1995, respectively.
Supplemental Cash Flow Information. Total interest paid in cash was $41.9
million, $36.0 million and $29.0 million for the years ended December 31, 1996,
1995 and 1994, respectively. Cash paid for income taxes was $7.9 million, $4.9
million and $3.7 million for the years ended December 31, 1996, 1995 and 1994,
respectively. Repossessed and foreclosed properties transferred to Other Real
Estate and Other Assets from Loans amounted to $3.2 million, $1.2 million and
$2.8 million in 1996, 1995 and 1994, respectively. During 1995, debentures in
the amount of $8,918,000 were converted into 979,820 shares of common stock and
are included as noncash financing activities. Unrealized gains on securities of
$1.2 million and $11.9 million are included as noncash investing activities in
1996 and 1995, respectively. During 1996, stock awards were granted with
unearned compensation at December 31, 1996 of $338 thousand and are included as
noncash financing activities.
<PAGE>
Reclassifications. Certain reclassifications have been made to the prior years'
financial statements to conform to the 1996 presentation.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Impairment of Long-Lived Assets. In the event that facts and circumstances
indicate that the cost of the Company's long-lived assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation were required,
the estimated future undiscounted cash flows associated with the asset would be
compared to the assets carrying amount to determine if a write-down to market
value or discounted cash flow value is required.
NOTE 2 - MERGERS AND ACQUISITIONS
During 1996, BankGroup acquired two banks as subsidiaries in transactions
accounted for as pooling of interests. The first acquisition was The First
National Bank of Clifton Forge ("Clifton Forge") in September, 1996. The
acquisition of Hanover Bank ("Hanover") was completed in November, 1996.
The acquisition of Clifton Forge was completed by converting the 315,000 shares
of common stock outstanding into approximately 1,481,644 shares of BankGroup
common stock based on a 4.89 exchange ratio. Approximately $999 thousand in cash
was paid in lieu of fractional shares and to shareholders who elected to receive
cash in lieu of the Company's common stock.
The acquisition of Hanover was completed by converting 1,471,536 shares of
common stock outstanding into approximately 1,226,304 shares of BankGroup common
stock based on a .884 exchange ratio. Approximately $1,299 thousand in cash was
paid in lieu of fractional shares and to shareholders who elected to receive
cash in lieu of the Company's common stock.
Separate results of the pooled entities for the nine months ended September 30,
1996 and for the years ended December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
September 1996 1995 1994
------- ------- -------
(unaudited)
<S> <C> <C> <C>
Total Income
BankGroup ................. $65,328 $76,650 $60,691
Clifton Forge ............. 4,805 5,699 5,389
Hanover ................... 6,336 7,346 5,721
------- ------- -------
Combined .................. $76,469 $89,695 $71,801
======= ======= =======
<PAGE>
<CAPTION>
September 1996 1995 1994
------- ------- -------
(unaudited)
<S> <C> <C> <C>
Net Interest Income
BankGroup ................. $31,359 $37,300 $34,299
Clifton Forge ............. 2,556 3,175 3,160
Hanover ................... 3,382 3,937 3,421
------- ------- -------
Combined .................. $37,297 $44,412 $40,880
======= ======= =======
Net Income
BankGroup ................. $ 9,879 $10,740 $ 4,088
Clifton Forge ............. 988 1,524 1,491
Hanover ................... 989 1,228 1,018
------- ------- -------
Combined .................. $11,856 $13,492 $ 6,597
======= ======= =======
</TABLE>
NOTE 3 - SECURITIES AVAILABLE FOR SALE
The following sets forth the composition of securities available for sale at
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Market Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
U. S. Treasury Securities ..................... $ 5,978 $ 69 $ (1) $ 6,046
Obligations of U. S. Government Agencies ...... 29,905 52 (404) 29,553
Mortgage Backed Securities .................... 218,451 2,236 (164) 220,523
Collateralized Mortgage Obligations and REMICs 48,601 36 (1,303) 47,334
Corporate Bonds ............................... 12,240 364 (78) 12,526
Other Securities .............................. 9,197 132 -- 9,329
Obligations of State and Political Subdivisions 9,398 319 (5) 9,712
-------- -------- -------- --------
Total Securities Available for Sale ........ $333,770 $ 3,208 $ (1,955) $335,023
======== ======== ======== ========
<PAGE>
<CAPTION>
1995
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Market Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
U. S. Treasury Securities .................... $ 5,465 $ 141 $ (5) $ 5,601
Obligations of U. S. Government Agencies ..... 51,825 396 (308) 51,913
Mortgage Backed Securities ................... 30,267 452 (31) 30,688
Collateralized Mortgage Obligations and REMICs 97,541 156 (1,445) 96,252
Corporate Bonds .............................. 13,908 693 (28) 14,573
Other Securities ............................. 4,727 562 -- 5,289
Obligations of State and
Political Subdivisions .................... 7,270 391 (7) 7,654
-------- -------- -------- --------
Total Securities Available for Sale ....... $211,003 $ 2,791 $ (1,824) $211,970
======== ======== ======== ========
</TABLE>
As permitted under Financial Accounting Standards Board Statement Number 115,
BankGroup transferred securities with a net book value of approximately $13.8
million from the held to maturity portfolio to the available for sale portfolio
upon acquisition of Hanover. The unrealized net loss on these securities at
acquisition was approximately $66 thousand.
The carrying and approximate market values of securities available for sale at
December 31, 1996, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Approximate
Cost Market Value
---- ------------
<S> <C> <C>
Due in one year or less ........................ $ 6,524 $ 6,551
Due after one year but within five years ....... 33,420 33,505
Due after five years but within ten years ...... 15,965 16,165
Due after ten years ............................ 10,809 10,945
Mortgage-Backed Securities ..................... 218,451 220,523
CMOs/REMICs .................................... 48,601 47,334
-------- --------
Total Securities Available for Sale ......... $333,770 $335,023
======== ========
</TABLE>
Gross gains of $855,000, $81,000 and $87,300 and gross losses of $295,000,
$64,000 and $5,757,600 were realized on sales and calls of securities available
for sale for 1996, 1995 and 1994, respectively. Securities available for sale
with carrying values approximating $147 million and $88 million at December 31,
1996 and 1995, respectively, were pledged to secure public deposits and for
other purposes as required or permitted by law.
<PAGE>
NOTE 4 - SECURITIES HELD TO MATURITY
The carrying and approximate market values and gross unrealized gains and losses
of securities held to maturity at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996
--------------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Approximate
Value Gains Losses Market Value
----- ----- ------ ------------
<S> <C> <C> <C> <C>
U. S. Treasury Securities ..................... $ 2,494 $ 4 $ -- $ 2,498
Obligations of U. S. Government Agencies ...... 19,379 1,212 (142) 20,449
Mortgage Backed Securities .................... 27,495 521 (286) 27,730
Obligations of State and Political Subdivisions 41,151 977 (96) 42,032
------- ------- ------- -------
Total Securities Held to Maturity ......... $90,519 $ 2,714 $ (524) $92,709
======= ======= ======= =======
<CAPTION>
1995
--------------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Approximate
Value Gains Losses Market Value
----- ----- ------ ------------
<S> <C> <C> <C> <C>
U. S. Treasury Securities ..................... $ 4,925 $ 111 $ -- $ 5,036
Obligations of U. S. Government Agencies ...... 36,125 2,435 (24) 38,536
Mortgage Backed Securities .................... 23,543 820 (10) 24,353
Obligations of State and Political Subdivisions 45,297 1,448 (137) 46,608
Corporate Bonds ............................... 2,121 11 (5) 2,127
Other Securities .............................. 170 -- -- 170
-------- -------- -------- --------
Total Securities Held to Maturity ......... $112,181 $ 4,825 $ (176) $116,830
======== ======== ======== ========
</TABLE>
At December 31, 1994, BankGroup transferred securities available for sale with
an approximate market value of $72.5 million and a carrying value of $76.5
million to securities held to maturity. The unrealized loss of approximately
$4,038,000, included as a separate component of shareholders equity, is being
amortized over the remaining life of the securities. At December 31, 1996 this
unrealized loss was $1.0 million. During the fourth quarter of 1995, the
Financial Accounting Standards Board allowed all institutions a one time
opportunity to restructure their investment portfolios under the designations of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Management took advantage of this opportunity by redesignating
$35.7 million of "held to maturity" as "available for sale" without any penalty
or tainting of the remaining "held to maturity" portfolio. These securities
transferred had a net unrealized gain of approximately $279 thousand.
<PAGE>
The carrying and approximate market values of securities held to maturity at
December 31, 1996, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Carrying Approximate
Value Market Value
----- ------------
<S> <C> <C>
Due in one year or less .......................... $ 5,770 $ 5,801
Due after one year but within five years ......... 19,667 20,873
Due after five years but within ten years ........ 30,868 31,445
Due after ten years .............................. 6,719 6,860
Mortgage-Backed Securities ....................... 27,495 27,730
------- -------
$90,519 $92,709
======= =======
</TABLE>
Gross gains of $63,000, $31,000, and $5,000 and gross losses $13,000, $5,000,
and $0 were realized on calls of securities held to maturity for 1996, 1995, and
1994, respectively. Securities with carrying values approximating $39 million
and $29 million at December 31, 1996 and 1995, respectively, were pledged to
secure public deposits and for other purposes as required or permitted by law.
NOTE 5 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Major classifications of loans at December 31, 1996 and 1995 are summarized
below:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Commercial ........................................... $349,834 $276,532
Real Estate .......................................... 206,453 212,182
Consumer ............................................. 242,211 197,188
-------- --------
Total Loans ....................................... 798,498 685,902
Less: Unearned Income and Deferred Fees .......... 14,131 12,224
-------- --------
Loans, Net of Unearned Income and Deferred Fees . 784,367 673,678
Less: Allowance for Loan Losses .................. 10,195 9,036
-------- --------
Loans, Net ...................................... $774,172 $664,642
======== ========
</TABLE>
<PAGE>
A summary of changes in the allowance for loan losses for each of the three
years in the period ended December 31, 1996 follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance at Beginning of Year ......... $ 9,036 $ 9,160 $ 9,035
Provision for Loan Losses ............ 3,276 1,419 3,091
Losses Charged to Allowance .......... (3,209) (1,975) (3,639)
Recoveries Credited to Allowance ..... 1,092 432 673
-------- -------- --------
Balance at End of Year ............... $ 10,195 $ 9,036 $ 9,160
======== ======== ========
</TABLE>
Nonperforming assets at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Nonaccrual Loans ..................................... $3,075 $3,383
Loans Past Due 90 Days or More ....................... 3,061 2,396
------ ------
Total Nonperforming Loans ............................ 6,136 5,779
------ ------
Other Real Estate Owned .............................. 905 1,743
Other Repossessed Assets ............................. 169 148
------ ------
Total Foreclosed/Repossessed Assets .................. 1,074 1,891
------ ------
Total Nonperforming Loans and Foreclosed/
Repossessed Assets ............................... $7,210 $7,670
====== ======
</TABLE>
Nonperforming loans were .78% and .86% of loans, net of unearned income and
deferred fees, at December 31, 1996 and 1995, respectively.
The effect of nonaccrual loans on interest income was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Gross amount of interest that would have been
recorded at original rate ................ $ 397 $ 306 $ 270
Interest that was reflected in income ......... (189) (11) (14)
----- ----- -----
Net impact on interest income ................. $ 208 $ 295 $ 256
===== ===== =====
</TABLE>
<PAGE>
At December 31, 1996 and 1995, the recorded investment in loans which have been
identified by BankGroup as impaired loans in accordance with SFAS 114 totaled
$3.1 million and $3.4 million, respectively, and the total allowance for loan
losses related to such loans was $.4 million and $.6 million, respectively. The
average balance during 1996 and 1995 for impaired loans was approximately $2.8
million and $3.8 million, respectively. The total interest income related to
impaired loans reflected in the 1996 and 1995 statements of income was
approximately $184,000 and $6,000, respectively.
NOTE 6 - RELATED PARTY TRANSACTIONS
Directors, officers and related interests provide the subsidiary Banks with
substantial amounts of business and many are among its most significant
depositors and borrowers. Total amounts outstanding for all such loans that
exceeded $60,000 individually are summarized below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Balance at Beginning of Year ............... $ 24,799 $ 28,715
Additions .................................. 13,539 8,133
Payments ................................... (10,587) (12,049)
-------- --------
Balance at End of Year ..................... $ 27,751 $ 24,799
======== ========
</TABLE>
These loans, in the opinion of management, are believed to involve no more than
normal risk of collectibility. Total unfunded commitments at December 31, 1996
were $5.3 million.
NOTE 7 - BANK PREMISES AND EQUIPMENT
Bank premises and equipment at December 31, 1996 and 1995 consist of:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land ............................................. $ 2,306 $ 2,247
Buildings and Improvements ....................... 12,096 10,997
Capital Lease .................................... 243 --
Furniture and Equipment .......................... 21,589 19,713
Construction in Progress ......................... 88 140
Leasehold Improvements ........................... 959 709
-------- --------
37,281 33,806
Accumulated Depreciation and Amortization ........ (22,349) (20,217)
-------- --------
Total Bank Premises and Equipment ................ $ 14,932 $ 13,589
======== ========
</TABLE>
<PAGE>
NOTE 8 - INCOME TAXES
The components of income tax expense for the years ended December 31, 1996, 1995
and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current Tax Expense ............. $ 7,549 $ 4,823 $ 2,235
Deferred Tax Expense ............ (431) 743 (1,392)
------- ------- -------
Income Tax Expense .............. $ 7,118 $ 5,566 $ 843
======= ======= =======
</TABLE>
The reasons for the differences in income tax expense and the statutory Federal
income tax rate for the years ended 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal Income Tax Expense Rate ......... 35.0% 35.0% 34.0%
Tax Exempt Interest ..................... (3.6) (4.5) (12.8)
IRS Intangibles Settlement .............. -- -- (10.3)
Change in Marginal Tax Rate ............. (.5) (1.5) --
Acquisition Costs ....................... 1.0 -- --
Other ................................... (.8) .2 .4
---- ---- ----
Effective Income Tax Rate ...... 31.1% 29.2% 11.3%
==== ==== ====
</TABLE>
<PAGE>
The components of net deferred tax assets at December 31, 1996 and 1995 are
presented below:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In 000's)
<S> <C> <C>
Deferred Tax Assets:
Allowance for Loan Losses and Unearned Fees ................ $3,861 $3,320
Unrealized Loss on Securities Available for Sale ........... -- 308
Other Real Estate Owned .................................... 1 425
Intangibles ................................................ 967 935
Interest Earned Not Collected on Nonaccrual Loans Not
Recognized for Financial Reporting Purposes ........... 116 149
Miscellaneous Accruals not Deductible for Tax Purposes ..... 910 706
------ ------
Total Gross Deferred Tax Assets ............................ 5,855 5,843
------ ------
Deferred Tax Liabilities:
Bank Premises and Equipment ................................ 380 526
Securities, Due to Differences in Discount Accretion ....... 243 254
Prepaid Expenses, Principally Due to Deduction Taken for
Tax Purposes .......................................... 261 204
Unrealized Gain on Securities Available for Sale ........... 102 --
Other ...................................................... 234 291
------ ------
Total Gross Deferred Liabilities ........................... 1,220 1,275
------ ------
Net Deferred Tax Assets .................................... $4,635 $4,568
====== ======
</TABLE>
NOTE 9 - SHORT-TERM AND LONG-TERM DEBT
At December 31, 1996 and 1995, short-term and long- term debt consist of the
following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Corporate Cash Management .......................... $ 10,528 $ 10,801
Federal Funds Purchased ............................ 23,200 31,310
Securities Sold Under Repurchase Agreements ........ 145,356 37,127
Treasury Tax and Loan Notes ........................ 5,065 148
Short-Term FHLB Borrowings ......................... 27,350 32,350
Other Borrowings ................................... 2,300 --
-------- --------
Total Short-Term Debt ......................... $213,799 $111,736
======== ========
Long-Term FHLB Borrowings and Advances ............. $ 70,786 $ 929
Capital Lease ...................................... 243 --
-------- --------
Total Long-Term Debt .......................... $ 71,029 $ 929
======== ========
</TABLE>
<PAGE>
The average outstanding total short-term borrowings were $119.1 million and
$57.4 million for 1996 and 1995, respectively. The weighted average interest
rates were 5.17% and 5.58% for 1996 and 1995, respectively. The weighted average
interest rates in effect at year end were 5.66% and 5.63% at December 31, 1996
and 1995, respectively.
The maximum month-end balance of short-term debt was $235.9 million and $110.8
million for 1996 and 1995, respectively. Securities held to maturity and
securities available for sale were pledged as collateral for securities sold
under repurchase agreements.
The average outstanding total long-term borrowings were $58.7 million and $.7
million for 1996 and 1995, respectively. The weighted average interest rates
were 5.38% and 7.75% for 1996 and 1995, respectively. The weighted average
interest rates in effect at year end were 5.07% and 7.75% for 1996 and 1995,
respectively. The maximum month-end balance of long-term debt was $70.9 million
and $1.0 million for 1996 and 1995, respectively.
Long-term FHLB advances and borrowings consist of fixed and variable rate
instruments. Fixed rate advances and borrowings balances were $45.8 million and
$929 thousand for 1996 and 1995, respectively. $45.0 million of long-term debt
for 1996 matures February 1, 1999 and is callable February 1, 1997. $.8 million
of the fixed rate long-term debt matures April 17, 2002 and has semi-annual
principal reductions. The balance of the long-term FHLB debt, $25 million,
matures March 14, 1997 and is variable rate based on the monthly LIBOR rate plus
.05%. The capital lease of $.2 million matures October 31, 2001 and interest is
calculated based on a fixed rate.
NOTE 10 - REDEMPTION OF 7% CONVERTIBLE SUBORDINATED DEBENTURES
On September 12, 1995, BankGroup called for redemption on October 13, 1995 all
of its outstanding 7% Convertible Subordinated Debentures Due 2011 (the
"debentures"). At such date, $8,043,000 principal amount of Debentures were
outstanding. The redemption price was $1,014.00 plus accrued interest of $34.61
from April 15, 1995 to the redemption date, for a total of $1,048.61 for each
$1,000 of principal amount of Debentures. No interest would accrue on the
Debentures from and after October 13, 1995 and holders of outstanding Debentures
would not have any rights as such holders other than the right to receive the
redemption price, without additional interest, upon surrender of their
Debentures. All debentures were converted into 883,678 shares of the BankGroup's
common stock which were subsequently registered with the Securities and Exchange
Commission.
<PAGE>
The following tabulation sets forth the numbers of shares used to determine
earnings per share:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Primary Shares:
Average Shares Outstanding ................... 11,397 10,682 10,397
Common Shares Assumed Outstanding-Options .... 63 62 13
------ ------ ------
Total Primary Shares ..................... 11,460 10,744 10,410
====== ====== ======
Fully Diluted Shares:
Average Shares Outstanding ................... 11,397 10,382 10,373
Common Shares Assumed Outstanding - Options .. 66 62 13
Common Shares Assumed Outstanding - Debentures --- 1,006 1,030
------ ------ ------
Total Fully Diluted Shares ............... 11,463 11,450 11,416
====== ====== ======
</TABLE>
For purposes of calculating fully diluted income per share, net income has been
increased by eliminating interest expense and amortization of debt issuance cost
relating to the debentures, less the related tax effect.
NOTE 11 - EMPLOYEE BENEFIT PLANS
BankGroup maintains a defined benefit retirement plan for the benefit of its
employees (not directors). This was a new plan effective May 1, 1995. The
pension plans' benefit formulas generally base payments to retired employees
upon their length of service and a percentage of qualifying compensation during
their final years of employment. Pension expense related to this defined benefit
plan was $795,000 and $457,000 for 1996 and 1995, respectively. The following
table sets forth the plans' funded status and amounts recognized in the
consolidated financial statements:
<TABLE>
<CAPTION>
December 31 December 31
1996 1995
---- ----
<S> <C> <C>
Actuarial present value of benefit obligation:
Accumulated benefit obligation (including vested benefits
of $1,386,000 and $917,000 in 1996 and 1995, respectively) $ 1,558 $ 207
======= =======
Projected benefit obligation for service rendered to date . (2,257) (1,436)
Plan assets at fair value ................................. 1,719 890
------- -------
Funded status ............................................. (538) (546)
Unrecognized transition obligation ........................ 146 146
Unrecognized prior service costs .......................... 213 134
Unrecognized net gain ..................................... (91) (150)
------- -------
Accrued pension costs ..................................... $ (270) $ (416)
======= =======
</TABLE>
<PAGE>
Net pension cost for the defined benefit plan included the following expense
components:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Service cost ....................................... $ 757 $ 455
Interest cost ...................................... 111 61
Actual Return on Assets ............................ (102) (70)
Amortization of transition obligation .............. 29 11
----- -----
Net pension expense included in employee benefits .. $ 795 $ 457
===== =====
</TABLE>
The discount rate used in determining the actuarial present value of the
projected benefit obligation and the expected long-term rate of return on assets
was 7.5% for 1996 and 8% for 1995. The assumed rate of increase in future
compensation levels used was 5.00%.
Effective October 1, 1995, BankGroup amended its discretionary profit sharing
plan. All profit sharing contributions ceased as of September 30, 1995. Pension
contributions continued as a matching of the 401-K deferral plan for the benefit
of the employees. Under the amended plan, BankGroup will contribute an amount
equal to 50% of the first 6% of the compensation deferred by the employee.
Total profit sharing expense under the ceased plan for 1995 was $565,000. Total
pension expense for the matching 401-K plan was $261,000 and $87,000 for 1996
and 1995, respectively. Total expense related to all profit-sharing and pension
plans was approximately $.6 million in 1994.
BankGroup provides supplemental executive retirement policies for its senior
executive officers. These policies include cash value life insurance and
deferred compensation. BankGroup also provides split dollar insurance for
certain key executives of the corporation.
In addition to pension and profit sharing plans, there is a health care plan
that provides postretirement medical benefits to full-time employees who meet
minimum age and service requirements. The plan is contributory with
contributions adjusted annually and contains other cost sharing features such as
deductibles. BankGroup's policy is to fund the costs of medical benefits in
amounts determined at the discretion of management. Net periodic postretirement
benefit costs were $194,000, 180,000 and $194,000 for years ended December 31,
1996, 1995, and 1994, respectively. BankGroup has elected to amortize the
initial transition obligation of $1.2 million over 20 years.
<PAGE>
The following table sets forth the plans' funded status and amounts recognized
in the consolidated financial statements at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Accumulated postretirement benefit obligations:
Retirees ....................................... $ (817) $ (507)
Fully eligible active plan participants ........ (779) (691)
------- -------
Accumulated postretirement benefit obligation
at December 31, 1996 and 1995 ............. (1,596) (1,198)
Plan assets at fair value at December 31, 1996
and 1995 .................................. -- --
------- -------
Accumulated postretirement benefit obligation in
excess of plan assets ..................... (1,596) (1,198)
Unrecognized transition obligation ............. 963 1,023
Unrecognized net gain .......................... (19) (297)
------- -------
Accrued postretirement benefit costs included in
other liabilities ......................... $ (652) $ (472)
======= =======
</TABLE>
Net periodic postretirement benefit costs for 1996, 1995 and 1994 include the
following components:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost ............................ $ 61 $ 51 $ 60
Interest cost ........................... 79 82 76
Amortization of transition obligation ... 60 61 60
Amortization of net gain ................ (6) (14) (2)
----- ----- -----
Net periodic postretirement benefit costs $ 194 $ 180 $ 194
===== ===== =====
</TABLE>
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5%, 7.5%, and 8.25% at December 31,
1996, 1995 and 1994, respectively. For measurement purposes, the assumed health
care costs trend rates of increase were 9.00%, 10% and 12% for 1996, 1995 and
1994, respectively, with gradually declining percentages to 5.50% (6.25% assumed
for 1994) by the year 2000 and remaining at that level thereafter. The health
care cost trend rate assumption can have a significant effect on the amounts
reported. For example, a 1% increase in the medical trend assumption would
increase the accumulated postretirement benefit obligation by $11,000, $6,000
and $83,000 as of December 31, 1996, 1995 and 1994, respectively. It would
increase the net periodic postretirement benefit costs for the years ended
December 31, 1996, 1995 and 1994 by $3,000, $1,000 and $16,000, respectively.
<PAGE>
NOTE 12 - STOCK OPTION PLAN
In April 1985, the shareholders approved a stock option plan which provides for
incentive stock options to purchase shares of common stock of BankGroup at
prices equal to the fair market value of the stock at the date of the grant.
Each option is accompanied by a Stock Appreciation Right (SAR) issued in tandem
with the option so that the employee may elect to exercise either the option or
the SAR, thereby canceling the other. SARs entitle the holder to receive payment
equal to the increase in market value of BankGroup's common stock from date of
grant to the date exercised. The maximum number of shares subject to purchase
under the plan is 75,000.
In April 1991, the shareholders approved another stock option plan that had been
previously approved by the Board of Directors in November, 1990. The plan, known
as the 1990 Plan, gives BankGroup the authorization to issue an additional
250,000 stock options. Each option is accompanied by a Stock Appreciation Right
(SAR) issued in tandem with the option so that the employee may elect to
exercise either the option or the SAR, thereby canceling the other.
In June 1994, a stock award of 8,000 shares was also granted under the 1990
Plan. In 1996, stock awards were granted for 35,072 and 2,000 in January and
April, respectively, from this plan. At December 31, 1996, unearned compensation
of $338 thousand remained relating to the unvested portion of the stock award
granted in January.
On January 1, 1996, BankGroup adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"). As
permitted by SFAS 123, BankGroup has chosen to continue to apply APB Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its Plans. Accordingly, compensation costs
were recognized for the liability of the SAR's issued in tandem with the stock
options granted, which is the most conservative approach. Had compensation cost
for BankGroup's Plans been determined based on the fair value at the grant dates
for awards under the Plans consistent with the method of SFAS 123, the impact on
BankGroup's net income and net income per share would not have been material.
In 1990, the Board of Directors of Hanover adopted a Non-Qualified Stock Option
Plan ("Hanover Plan") which provided for incentive stock options to purchase
shares of Hanover common stock at the fair value of the common stock at the time
of the grant. Upon the acquisition of Hanover by BankGroup, the outstanding
options were converted based on the exchange ratio of .884 into options to
acquire BankGroup common stock. The maximum number of shares subject to purchase
under the plan was 194,480.
<PAGE>
A summary of the status of BankGroup's Plans as of December 31, 1996, 1995 and
1994 and changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 226,467 $ 6.8469 232,488 $ 6.8277 161,206 $ 5.1365
Granted 1,768 11.4530 9,003 11.5950 77,547 10.3702
Exercised (58,041) 5.2889 (8,344) 8.5096 (4,250) 9.0912
Forfeited (18,886) 11.1959 (6,680) 10.5000 (2,015) 7.0585
------- ------- -------
Outstanding at year-end 151,308 6.9558 226,467 6.8469 232,488 6.8277
======= ======= =======
Options exercisable at year-end 143,308 6.7717 214,467 6.6565 216,488 6.5748
======= ======= =======
</TABLE>
The following table summarizes the information about the Plan's stock options at
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ -------------------------------
Number Weighted-Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
- - ------------------------ ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$4.1176 84,156 3.15 years $ 4.1176 84,156 $ 4.1176
$10.25 - $11.453 67,152 3.31 years 10.5122 59,152 10.5476
------- -------
151,308 143,308
======= =======
</TABLE>
<PAGE>
NOTE 13 - PREFERRED SHARE PURCHASE RIGHTS
On January 18,1990, the Board of Directors declared a dividend distribution of
one Right for each outstanding share of common stock, payable January 29, 1990
to stockholders of record on that date. Each Right entitles the registered
holder to purchase from BankGroup 1/100th of a share of a newly authorized
Participating Cumulative Preferred Stock at an exercise price of $24 subject to
an antidilutive adjustment. Each unit of Preferred Stock is structured to be the
economic equivalent of one share of Common stock. The Rights will not be
exercisable or transferable apart from the common stock until the 10th day after
either a public announcement that a person or group has acquired beneficial
ownership of 15% or more of the common stock or the announcement or commencement
of a tender offer for 15% or more of BankGroup common stock.
The Rights are not exercisable until the distribution date and will expire on
January 18, 2000, unless earlier redeemed by BankGroup. The agreement provides
that if (a) an acquiring person purchases 30% or more of the outstanding common
stock or (b) at any time following the distribution date, BankGroup is the
surviving corporation in a merger with an acquiring person and its common stock
is not changed or exchanged or (c) an acquiring person effects a statutory share
exchange with BankGroup after which BankGroup is not a subsidiary of any
acquiring person, each holder of a Right will have the right to receive, upon
payment of the purchase price, preferred stock or common stock having a value
equal to twice the purchase price.
If BankGroup is acquired or 50% or more of the consolidated assets or earning
power is sold, each holder of a Right will have the right to receive, upon
exercise at the then current exercise price of the Right, that number of shares
of common stock of the acquiring company which has a market value of two times
the exercise price of the Right.
After the acquisition by a person or group of beneficial ownership of 15% or
more of the outstanding common stock, BankGroup may redeem the Rights in whole,
but not in part, at a price of $.01 per Right. The decision to redeem shall
require the concurrence of a majority of the continuing directors. Until a Right
is exercised, the holder will have no rights as a shareholder of BankGroup.
These statements are qualified in their entirety by reference to the Rights
Agreement, a copy of which was filed with the Securities and Exchange
Commission.
<PAGE>
NOTE 14 - LEASE OBLIGATIONS
The consolidated balance sheets include a capitalized lease for telephone
equipment. Also, each affiliate Bank leases certain buildings and equipment
under operating lease arrangements expiring over periods of up to fifteen years.
Rent expense totaled $870,700, $664,000 and $639,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. Future minimum payments, by
years and in the aggregate, under the capital lease and noncancellable operating
leases with initial or remaining terms in excess of one year consisted of the
following at December 31, 1996:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------ ------
<S> <C> <C>
1997 $ 63 $ 807
1998 63 678
1999 63 557
2000 63 164
2001 53 124
Thereafter -- 214
------ ------
Total Minimum Lease Payments 305 $2,544
------ ======
Less Amounts Representing Interest 62
------
Present Value of Minimum Lease Payments $ 243
======
</TABLE>
NOTE 15 - REGULATORY REQUIREMENTS AND RESTRICTIONS
BankGroup's principal source of funds for dividend payments is dividends
received from its subsidiary banks. Under the applicable federal laws, the
Comptroller of the Currency (relating to BankGroup's subsidiary banks which are
national banking associations) restricts the total dividend payments of any
calendar year, without prior approval, to the net profits of that year as
defined, combined with retained net profits for the two preceding years. At
December 31, 1996, retained net profits, which were free of such restriction,
amounted to $1.1 million. Under the applicable laws of Virginia (relating to
BankGroup's subsidiary banks which were organized under the laws of Virginia),
$43.1 million of undivided profits at December 31, 1996 were free of dividend
restrictions. However, Virginia regulatory authorities may limit the payment of
dividends by any state bank when it is determined such limitation is in the
public interest and is necessary to ensure the financial soundness of the bank.
Substantially all the retained earnings of BankGroup (parent) are represented by
undistributed earnings of the subsidiary banks.
The Subsidiary Banks are members of the Federal Reserve System and, as such, are
required to maintain certain of their cash and due from bank balances as
reserves based on regulatory requirements. The reserve requirement approximated
$8.9 million and $7.9 million at December 31, 1996 and 1995, respectively.
<PAGE>
BankGroup and the Banks are subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken could have a direct
material effect on BankGroup's consolidated financial statements. Quantitative
measures established by regulation to ensure capital adequacy require BankGroup
and the Banks to maintain minimum amounts and ratios, as set forth in the table
below. As of December 31, 1996, BankGroup and the Banks are well above capital
adequacy requirements to which they are subject.
As of December 31, 1996, the most recent notification from the FDIC categorized
BankGroup and the Banks as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized BankGroup and
the Banks must maintain minimum amounts and ratios, as set forth in the table
below. There are no conditions or events since that notification that management
believes have changed BankGroup and the Banks categories.
BankGroup's actual capital amounts and ratios are also presented in the table
below (dollars in thousands).
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Action Provisions
As of December 31, 1996: Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets) $117,788 14.84% $ 63,506 8.0% $ 79,382 10.0%
Tier I Capital (to Risk Weighted Assets) 107,865 13.59 31,753 4.0 47,629 6.0
Tier I Capital (to Adjusted Average Assets) 107,865 9.33 46,220 4.0 57,775 5.0
As of December 31, 1995:
Total Capital (to Risk Weighted Assets) $106,859 16.30% $ 52,457 8.0% $ 65,571 10.0%
Tier I Capital (to Risk Weighted Assets) 98,663 15.05 26,228 4.0 39,342 6.0
Tier I Capital (to Adjusted Average Assets) 98,663 9.86 40,019 4.0 50,024 5.0
</TABLE>
<PAGE>
NOTE 16 - PARENT COMPANY FINANCIALS
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31
---------------------
1996 1995
-------- --------
(In 000's)
<S> <C> <C>
Assets:
Cash (Includes $1,896 and $478 in 1996 and 1995,
respectively with affiliates) ................... $ 1,896 $ 478
Investments in Subsidiary Banks ...................... 106,449 95,421
Other Assets (Includes $44 and $45 in 1996 and
1995, respectively, invested with affiliates) ... 4,016 3,885
-------- --------
Total Assets ......................................... $112,361 $ 99,784
======== ========
Liabilities and Shareholders' Equity
Other Liabilities .................................... 3,885 1,127
Common Shareholders' Equity .......................... 108,476 98,657
-------- --------
Total Liabilities and Shareholders' Equity ........... $112,361 $ 99,784
======== ========
<CAPTION>
CONDENSED STATEMENTS OF INCOME
Years Ended December 31
-------------------------------
1996 1995 1994
------- ------- -------
(In 000's)
<S> <C> <C> <C>
Revenue:
Dividends From Subsidiary Banks .................. $ 7,694 $ 4,025 $ 3,102
Equity in Undistributed Income of Subsidiary Banks 9,008 10,192 4,437
Management Fees From Subsidiary Banks ............ 9,682 8,034 407
Interest Income .................................. 27 78 2
Other Income ..................................... 985 42 67
------- ------- -------
27,396 22,371 8,015
------- ------- -------
Expenses:
Interest on Long-Term Debt ....................... 2 454 643
Other ............................................ 12,120 8,851 1,964
------- ------- -------
12,122 9,305 2,607
------- ------- -------
Income Before Income Tax Benefit ................. 15,274 13,066 5,408
Income Tax Benefit ............................... 459 426 1,189
------- ------- -------
Net Income ....................................... $15,733 $13,492 $ 6,597
======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31
----------------------------------
1996 1995 1994
---- ---- ----
(In 000's)
<S> <C> <C> <C>
Cash Flows From Operating Activities: .................. $ 9,324 $ 4,441 $ 1,329
Cash Flows From Investing Activities:
Net (Increase) Decrease in Interest-Bearing Deposits ... 701 (712) (3)
Purchases of Securities Available for Sale ............. -- -- (825)
Proceeds From Maturity of Securities Available for Sale -- -- 455
Proceeds From Sale of Securities Available for Sale .... 852 820 837
Purchases of Bank Premises and Equipment ............... (976) (826) --
Capital Contributed to Subsidiary Banks ................ (1,783) -- (85)
------- ------- -------
Net Cash Provided by (Used In) Investing Activities (1,206) (718) 379
Cash Flows From Financing Activities:
Cash Dividends ......................................... (5,562) (3,960) (3,219)
Cash Paid in Lieu of Common Stock at Acquisition ....... (2,298) -- --
Net Expenses Incurred for Debenture Conversion ......... -- (32) --
Proceeds From Issuance of Common Stock ................. 1,498 525 613
Unearned Compensation .................................. (338) -- --
------- ------- -------
Net Cash Used in Financing Activities ............. (6,700) (3,467) (2,606)
------- ------- -------
Net Increase (Decrease) in Cash .................. 1,418 256 (898)
Cash at Beginning of Year ......................... 478 222 1,120
------- ------- -------
Cash at End of Year ............................... $ 1,896 $ 478 $ 222
======= ======= =======
</TABLE>
Noncash investing activities include $1.2 million and $11.9 million of
unrealized gains on securities available for sale in 1996 and 1995,
respectively. Noncash financing activities include $8,918,000 of debentures
converted into 979,820 shares of common stock in 1995.
NOTE 17 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business to meet the financing needs of its customers,
BankGroup is a party to financial instruments with off-balance-sheet risk. These
financial instruments include commitments to extend credit, standby letters of
credit and financial guarantees written. Those instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
consolidated balance sheets.
BankGroup's exposure to credit loss in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit, standby
letters of credit and financial guarantees written is represented by the
contractual amount of those instruments. BankGroup uses the same credit policies
in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
<PAGE>
As of December 31, 1996 and 1995, outstanding financial instruments whose
contract amounts represent potential credit risk were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Financial Instruments Whose Contract Amounts
Represent Credit Risk:
Commitments to Extend Credit ................ $128,252 $109,890
Standby Letters of Credit and Financial
Guarantees Written ...................... 6,330 4,547
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no breach of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many commitments expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. BankGroup evaluates each customer's creditworthinesss on a
case-by-case basis. The amount of collateral obtained, if necessary, is based on
management's credit and financial evaluation of the customer.
Standby letters of credit and financial guarantees written are conditional
commitments issued by BankGroup to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public and private
credit arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
BankGroup obtains collateral supporting those commitments for which collateral
is deemed necessary. Collateral held varies but may include accounts receivable,
marketable securities, inventory, property, plant and equipment, and
income-producing commercial properties.
NOTE 18 - CONCENTRATIONS OF CREDIT RISK
Virtually all of BankGroup's business activity is with customers located in the
southwestern, central and east central regions of Virginia. Accordingly,
operating results are closely correlated with the economic trends within the
region and influenced by the significant industries within the region including
textile, furniture and pre-built housing as well as agriculture. In addition,
the ultimate collectibility of the Banks' loan portfolios and the recovery of
the carrying amounts of repossessed property are susceptible to changes in the
market conditions of this geographic region. The commercial portfolio is
diversified with no significant concentrations of credit at December 31, 1996.
Acquisition and development construction loans account for $40.2 million and
$30.8 million of the commercial portfolio at December 31, 1996 and 1995,
respectively. In addition, other commercial loans secured by real estate totaled
$116.6 million and $96.5 million at December 31, 1996 and 1995, respectively.
The real estate loan portfolio consists almost entirely of 1-4 family
residential property. BankGroup was the creditor for approximately $128.3
million and $97.9 million at December 31, 1996 and 1995, respectively, of
consumer loans for automobiles and mobile homes generated directly or purchased
from established dealers (indirect). These loans are generally collateralized by
the related property and are either endorsed or subject to mandatory dealer
repurchase agreements.
<PAGE>
The individual banks have operating policies relating to the credit process and
collateral in loan originations. Loans to purchase real and personal property
are generally collateralized by the related property with loan amounts
established based on certain percentage limitations of the property's total
stated or appraised value. Credit approval is primarily a function of the
evaluation of the creditworthiness of the individual borrower based on pertinent
financial information and the underlying transaction to be financed.
NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value:
(a) Cash and Due From Banks
The carrying amount is a reasonable estimate of fair value.
(b) Interest-Bearing Deposits in Domestic Banks
The carrying amount is a reasonable estimate of fair value.
(c) Federal Funds Sold
The carrying amount is a reasonable estimate of fair value.
(d) Mortgage Loans Held for Sale
The fair value of mortgage loans held for sale is based on current
investor pricing at the close of business on the last business day of
the financial reporting period.
(e) Securities Available for Sale and Securities Held to Maturity
The fair value of investments, except certain state and municipal
securities, is estimated based on bid prices published in financial
newspapers or bid quotations received from securities dealers. The fair
value of certain state and municipal securities is not readily
available through market sources other than dealer quotations, so fair
value estimates are based on quoted market prices of similar
instruments, adjusted for differences between the quoted instruments
and the instruments being valued.
(f) Loans
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
commercial, real estate - commercial, real estate - construction, real
estate - mortgage, credit card and other consumer. Each loan category
is further segmented into fixed and adjustable rate interest terms and
by performing and nonperforming categories.
The fair value of performing loans is calculated by discounting
scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate risk
inherent in the loan as well as estimates for operating expenses and
prepayments. The estimate of maturity is based on BankGroup's
historical experience with repayment for each loan classification,
modified, as required, by an estimate of the effect of current economic
and lending conditions.
Fair value for significant nonperforming loans is based on estimated
cash flows which are discounted using a rate commensurate with the risk
associated with the estimated cash flows. Assumptions regarding credit
risk, cash flows and discount rates are judgmentally determined using
available market information and specific borrower information.
<PAGE>
(g) Deposits
The fair value of demand, interest checking, savings and money market
deposits is the amount payable on demand at December 31, 1995 and
December 31, 1996 and December 31, 1995. The fair value of fixed
maturity time deposits and certificates of deposit is estimated using
the rates currently offered for deposits of similar remaining
maturities and repayment characteristics.
(h) Short-Term Debt
The carrying amount is a reasonable estimate of fair value.
(i) Long-Term Debt
The fair value of long-term debt is estimated using the rates currently
offered for borrowings of similar remaining maturities and repayment
characteristics.
(j) Commitments to Extend Credit, Standby Letters of Credit and Financial
Guarantees Written
The only amounts recorded for commitments to extend credit, standby
letters of credit and financial guarantees written are the deferred
fees arising from these unrecognized financial instruments. These
deferred fees are not deemed significant at December 31, 1996 and
December 31, 1995, and as such the related fair values have not been
estimated.
(k) Accrued Interest
The carrying amount is a reasonable estimate of fair value.
<PAGE>
The estimated fair values of BankGroup's financial instruments at December 31,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------- -------------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and Due From Banks .................... $ 37,972 $ 37,972 $ 31,497 $ 31,497
Interest-Bearing Deposits in Domestic Banks 518 518 875 875
Mortgage Loans Held for Sale ............... 742 745 1,780 1,788
Federal Funds Sold ......................... -- -- 9,560 9,560
Securities Available for Sale .............. 335,023 335,023 211,970 211,970
Securities Held to Maturity ................ 90,519 92,709 112,181 116,830
Loans, Net ................................. 774,172 788,294 664,642 676,181
---------- ---------- ---------- ----------
TOTAL FINANCIAL ASSETS ................ $1,238,946 $1,255,261 $1,032,505 $1,048,701
========== ========== ========== ==========
FINANCIAL LIABILITIES
Deposits:
Demand Deposits (Noninterest-Bearing) ...... $ 120,989 $ 120,989 $ 113,417 $ 113,417
Interest Checking Accounts .............. 99,834 99,834 93,478 93,478
Savings Deposits ........................ 121,336 121,336 133,074 133,074
Money Market Investment Accounts ........ 81,946 81,946 78,920 78,920
Time Deposits:
Certificates of Deposit $100,000 and Over 90,189 91,398 76,965 77,777
Other ................................... 372,225 379,488 349,723 353,675
---------- ---------- ---------- ----------
TOTAL DEPOSITS .......................... 886,519 894,991 845,577 850,341
Short-Term Debt ............................ 213,799 213,799 111,736 111,736
FHLB Callable .............................. 45,000 44,968 -- --
Long-Term Debt ............................. 26,029 26,055 929 1,050
---------- ---------- ---------- ----------
TOTAL FINANCIAL LIABILITIES ........... $1,171,347 $1,179,813 $ 958,242 $ 963,127
========== ========== ========== ==========
</TABLE>
Fair value estimates are made at a specific point in time, based on relevant
market information about the financial instrument. These estimates do not
reflect any premium or discount that could result from offering for sale at one
time BankGroup's entire holdings of a particular financial instrument. Because
no market exists for a significant portion of BankGroup's financial instruments,
fair value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
<PAGE>
Fair value estimates are based on existing on-and-off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets that are not considered financial
assets include deferred tax assets and bank premises and equipment. In addition,
the tax ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in the estimates.
NOTE 20 - STOCK DIVIDEND
On February 20, 1996, MainStreet BankGroup declared a two-for-one stock split,
in the form of a 100% stock dividend, payable March 15, 1996 to stockholders of
record March 4, 1996. Shareholders received one additional share of common stock
for each share held on the record date. The par value of the 4,267,536 shares
issued of approximately $21,388,000 was transferred from retained earnings to
the common stock account.
NOTE 21 - CONTINGENCIES AND OTHER MATTERS
BankGroup and its subsidiaries, in the normal course of business, are involved
in various legal actions and proceedings. It is the opinion of management that
any liabilities arising from these matters and not covered by insurance, would
not have a material effect on BankGroup's financial position.
<TABLE>
<CAPTION>
Quarterly Financial Results (Unaudited)
(In Thousands, Except Per Share Data) Fourth Third Second First
1996 Quarter Quarter Quarter Quarter
- - ---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest Income $25,062 $24,168 $22,476 $21,596
Interest Expense 11,912 11,016 10,190 9,737
------- ------- ------- -------
Net Interest Income 13,150 13,152 12,286 11,859
Provision for Loan Losses 907 946 555 868
------- ------- ------- -------
Net Interest Income After Provision 12,243 12,206 11,731 10,991
Noninterest Income 2,799 2,526 2,797 2,906
Noninterest Expense 9,448 8,993 8,561 8,346
------- ------- ------- -------
Income Before Income Taxes 5,594 5,739 5,967 5,551
Income Tax Expense 1,717 1,874 1,883 1,644
------- ------- ------- -------
Net Income $ 3,877 $ 3,865 $ 4,084 $ 3,907
======= ======= ======= =======
Per Share:
Net Income:
Primary $ .34 $ .34 $ .35 $ .34
======= ======= ======= =======
Fully Diluted $ .34 $ .34 $ .35 $ .34
======= ======= ======= =======
Cash Dividends Declared $ .14 $ .13 $ .11 $ .11
======= ======= ======= =======
<PAGE>
<CAPTION>
Quarterly Financial Results (Unaudited)
(In Thousands, Except Per Share Data) Fourth Third Second First
1995 Quarter Quarter Quarter Quarter
- - ---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest Income $21,448 $21,089 $19,805 $18,827
Interest Expense 9,815 9,899 8,967 8,076
------- ------- ------- -------
Net Interest Income 11,633 11,190 10,838 10,751
Provision for Loan Losses 353 353 355 358
------- ------- ------- -------
Net Interest Income After Provision 11,280 10,837 10,483 10,393
Noninterest Income 2,362 2,147 2,196 1,821
Noninterest Expense 7,672 8,230 8,329 8,230
------- ------- ------- -------
Income Before Income Taxes 5,970 4,754 4,350 3,984
Income Tax Expense 1,840 1,308 1,271 1,147
------- ------- ------- -------
Net Income $ 4,130 $ 3,446 $ 3,079 $ 2,837
======= ======= ======= =======
Per Share:
Net Income:
Primary $ .36 $ .33 $ .30 $ .27
======= ======= ======= =======
Fully Diluted $ .36 $ .31 $ .28 $ .26
======= ======= ======= =======
Cash Dividends Declared $ .10 $ .09 $ .10 $ .08
======= ======= ======= =======
</TABLE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
The information required by Item 9 of Form 10-K regarding the change in
accountants is herein incorporated by reference to the Form 8-K filed
electronically on November 29, 1995.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
With respect to the directors of the Company, the information
required by Item 10 of Form 10-K appears on pages 4 and 5 of the
Company's 1997 Proxy Statement and is incorporated herein by
reference. With respect to the executive officers of the Company, the
information required by Item 10 of Form 10-K appears in Part I of
this report on pages 13 and 14.
Item 11. Executive Compensation
The information required by Item 11 of Form 10-K appears on pages 9
through 17 of the Company's 1997 Proxy Statement and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 of Form 10-K appears on pages 5
through 7 of the Company's 1997 Proxy Statement and is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 of Form 10-K appears on page 16
of the Company's 1997 Proxy Statement and is incorporated herein by
reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
The information required by Item 10 of Form 10-K appears in Part II,
Item 8, of this report on pages 25 through 50.
(a). 2. Financial Statement Schedules
All schedules are omitted, as the required information is
inapplicable or the information is presented in the consolidated
financial statements or related notes. financial statements or
related notes.
(a) 3. Exhibits Required to be filed by Item 601 of Regulation S-K
See index to exhibits.
(b) Reports on Form 8-K
Form 8-K filed February 23, 1996, regarding the 2-for-1 split in
Registrant's common stock.
<PAGE>
Form 8-K filed April 22, 1996, regarding the definitive agreement for
acquisition of The First National Bank of Clifton Forge by
Registrant.
Form 8-K filed October 3, 1996, regarding the consumation of the
acquisition of The First National Bank of Clifton Forge by
Registrant.
(c) Exhibits
See item 14(a) 3 above.
(d) Financial Statement Schedules
See item 14(a) 2 above.
INDEX TO EXHIBITS
No. Description
3(i) Articles of Incorporation of the Registrant are herein incorporated
by reference to the Form 8-A filed electronically on March 18, 1996.
3(ii) Bylaws of the Registrant are herein incorporated by reference to the
Form 8-A filed electronically on March 18, 1996.
4 Preferred Share Rights Plan (Incorporated by reference to
Registrant's Form 8-K dated January 18, 1990)
16 Letter regarding change in certifying accountant incorporated by
reference to Form 8-K filed on November 29, 1995.
21 Statement of Subsidiaries of the Registrant is included as an Exhibit
to this report.
23 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MAINSTREET BANKGROUP INCORPORATED
By: /s/Michael R. Brenan /s/James E. Adams
-------------------- -----------------
Michael R. Brenan, President, James E. Adams, Executive Vice
Chairman of the Board and President, Chief Financial
Chief Executive Officer Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/W. Christopher Beeler, Jr. Director 2/26/97
- - ----------------------------- -------
W. Christopher Beeler, Jr.
/s/Thomas B. Bishop Director 2/26/97
- - ------------------- -------
Thomas B. Bishop
/s/Michael R. Brenan President, Chairman of the Board 2/26/97
- - -------------------- and Chief Executive Officer -------
Michael R. Brenan
/s/William L. Cooper, III Director 2/26/97
- - ------------------------- -------
William L. Cooper, III
/s/Billy P. Craft Director 2/26/97
- - ----------------- -------
Billy P. Craft
/s/Phillip W. Dean Director 2/26/97
- - ------------------- -------
Phillip W. Dean
/s/I. Patricia Henry Director 2/26/97
- - -------------------- -------
I. Patricia Henry
/s/Larry E. Hutchens Director 2/26/97
- - -------------------- -------
Larry E. Hutchens
<PAGE>
/s/George J. Kostel Director 2/26/97
- - ------------------- -------
George J. Kostel
/s/William O. McCabe, Jr., MD Director 2/26/97
- - ----------------------------- -------
William O. McCabe, Jr., MD
/s/Albert L. Prillaman Director 2/26/97
- - ---------------------- -------
Albert L. Prillaman
/s/Richard M. Simmons, Jr. Director 2/26/97
- - -------------------------- -------
Richard M. Simmons, Jr.
/s/Thomas B. Stanley, Jr. Director 2/26/97
- - ------------------------- -------
Thomas B. Stanley, Jr.
</TABLE>
EXHIBIT (21)
SUBSIDIARIES OF REGISTRANT
The registrant has no "parent" as such as defined by the Securities Act of
1933, as amended. All subsidiaries of the Registrant are included in the
consolidated financial statements:
<TABLE>
<CAPTION>
Percentage Jurisdiction
of of
Ownership Incorporation
--------- -------------
<S> <C> <C>
Piedmont Trust Bank 100% Virginia
Bank of Carroll 100% Virginia
Bank of Ferrum 100% Virginia
First Community Bank 100% Virginia
The First Bank of Stuart 100% Virginia
First Community Bank of Saltville 100% Virginia
First National Bank of Clifton Forge 100% United States
Hanover Bank 100% Virginia
MainStreet Trust Company, N.A. 100% United States
</TABLE>
Exhibit (23)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
MainStreet BankGroup Incorporated on Form S-8 (File No. 333-21723) of our report
dated January 17, 1997, on our audits of the consolidated financial statements
of MainStreet BankGroup Incorporated as of December 31, 1996 and 1995 and for
each of the two years in the period ended December 31, 1996, which report is
included in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
Greensboro, North Carolina
March 18, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 37972
<INT-BEARING-DEPOSITS> 518
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 335023
<INVESTMENTS-CARRYING> 90519
<INVESTMENTS-MARKET> 92709
<LOANS> 784367
<ALLOWANCE> 10195
<TOTAL-ASSETS> 1288837
<DEPOSITS> 886519
<SHORT-TERM> 213799
<LIABILITIES-OTHER> 9012
<LONG-TERM> 71029
0
0
<COMMON> 56711
<OTHER-SE> 51765
<TOTAL-LIABILITIES-AND-EQUITY> 1288837
<INTEREST-LOAN> 69725
<INTEREST-INVEST> 22980
<INTEREST-OTHER> 597
<INTEREST-TOTAL> 93302
<INTEREST-DEPOSIT> 33545
<INTEREST-EXPENSE> 42855
<INTEREST-INCOME-NET> 50447
<LOAN-LOSSES> 3276
<SECURITIES-GAINS> 610
<EXPENSE-OTHER> 35348
<INCOME-PRETAX> 22851
<INCOME-PRE-EXTRAORDINARY> 22851
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15733
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 1.37
<YIELD-ACTUAL> 4.68
<LOANS-NON> 3075
<LOANS-PAST> 3061
<LOANS-TROUBLED> 263
<LOANS-PROBLEM> 9447
<ALLOWANCE-OPEN> 9036
<CHARGE-OFFS> 3209
<RECOVERIES> 1092
<ALLOWANCE-CLOSE> 10195
<ALLOWANCE-DOMESTIC> 10195
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5290
</TABLE>
