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, 1997
Commission File Number 0-8622
MainStreet BankGroup Incorporated
(Exact name of Registrant as specified in its charter)
Virginia 54-1046817
----------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $5.00 a Share NASDAQ
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment of this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of January 31, 1998 was $287,928,730.06.
(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, 1998
COMMON STOCK $5.00 Par Value 12,019,480
<PAGE>
MainStreet BankGroup Incorporated
Form 10-K
Index
PART I
<TABLE>
<S> <C>
Item 1 Business 3 - 13
Item 2 Properties 13
Item 3 Legal Proceedings 13
Item 4 Submission of Matters to a Vote of Shareholders 13
Executive Officers of Registrant 14 - 15
PART II
Item 5 Market for Registrant's Common Equity and Related Shareholder Matters 15
Item 6 Selected Financial Data 16
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 17 - 26
Item 8 Financial Statements and Supplementary Data 27 - 53
Item 9 Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 53
PART III
Item 10 Directors and Executive Officers of the Registrant 53
Item 11 Executive Compensation 53
Item 12 Security Ownership of Certain Beneficial Owners and Management 53
Item 13 Certain Relationships and Related Transactions 53
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 53 - 54
Index to Exhibits 54
Signatures 55
Exhibits 56 - 82
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement, dated March 27, 1998 for Annual Meeting of Shareholders
PART III - Items 10 through 13
<PAGE>
PART I
Item 1. Business
General
MainStreet BankGroup Incorporated (the "Corporation," "MainStreet," 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 Corporation 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 1997, MainStreet acquired one bank as a subsidiary in a transaction
accounted for as a pooling of interests. An aggregate of approximately 572,717
shares of stock was issued in this transaction. All prior year data has been
restated to reflect this acquisition. All financial data is presented in
thousands, unless otherwise noted.
The Corporation, 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 has been the Corporation's practice to operate the Banks as separate banking
institutions retaining their names and boards of directors. However, the
Corporation 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, audit, and credit administration 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
Corporation utilizes a planning and budgeting process which involves Corporation
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
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 $552.6 million,
deposits of approximately $332.5 million and net loans of approximately $342.7
million at December 31, 1997.
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 $664 million at
December 31, 1996 to $728 million at December 31, 1997. 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, 1997, it had total
assets of approximately $71.4 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, 1997, it had total assets of approximately
$134.4 million. Its main banking office is located in Ferrum, Virginia, with
branches at Oak Level, Route 220 North and Rocky Mount, Virginia. An additional
branch, Westlake, opened in February, 1998. 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, 1997, it had
total assets of approximately $157.5 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, 1997, it had total assets of approximately $154.7
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.
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, 1997, it had total assets of
approximately $137.5 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, 1997, it had total assets of $126.3 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, 1997, it had assets of $136.5 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.
Commerce Bank. Commerce Bank ("Commerce"), incorporated in 1989 under the laws
of Maryland, was acquired in 1997. At December 31, 1997, it had total assets of
approximately $76.5 million. Its main office and two additional branches are
located in College Park and Prince George's County, Maryland. Its primary
service area has a population of approximately 743,000. Commerce is supervised
and examined by the Board of Governors of the Federal Reserve System and the
State Corporation Commission of Maryland and engages in general commercial
banking business.
MainStreet Capital Trust I. MainStreet Capital Trust I was formed as a trust
under the laws of the State of Delaware, exclusively for the purpose of issuing
Trust Securities and investing the proceeds in 8.90% Junior Subordinated
Deferrable Interest Debentures issued by the Corporation.
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 Corporation has historically restricted its activities to a
geographical area within the states of Virginia and North Carolina. Other bank
holding corporation competitors have greater geographic coverage and some offer
bank and bank-related services which the Corporation does not offer.
The banking and trust subsidiaries of MainStreet 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 Corporation and
its subsidiaries as of December 31, 1997 was 598. The Corporation believes that
its relationship with its employees is good, and no employees are represented by
a labor union.
Information as to Classes of Service
The following table sets forth, for the three fiscal years ended
December 31, 1997, the percentage of total operating revenues contributed by
each class of similar services which contributed 10% or more of total operating
revenue of the Corporation and its subsidiaries in either of the last three
years.
<TABLE>
<CAPTION>
Years Ended Percentage
----------- ----------
<S> <C>
December 31, 1995 Interest & Fees on Loans 68.1%
December 31, 1996 Interest & Fees on Loans 67.1
December 31, 1997 Interest & Fees on Loans 62.0
December 31, 1995 Interest & Dividends on
Securities Held to Maturity and
Securities Available for Sale 21.5
December 31, 1996 Interest & Dividends on
Securities Held to Maturity and
Securities Available for Sale 21.4
December 31, 1997 Interest & Dividends on
Securities Held to Maturity and
Securities Available for Sale 27.0
</TABLE>
<PAGE>
SELECTED STATISTICAL INFORMATION OF MAINSTREET BANKGROUP INCORPORATED AND
SUBSIDIARIES (REGISTRANT) The following statistical information is consolidated
for the Corporation and its eleven subsidiaries. Information is based on daily
average balances.
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
--------------------------------------------------------------------------------------
1997 1996
---------------------------------------- -------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C>
Loans, Net of Unearned Income (1) $ 853,418 $ 79,853 9.36% $ 773,252 $ 73,569 9.51%
Mortgage Loans Held for Sale 2,117 313 14.79 966 168 17.39
Securities Available for Sale (1) 456,566 29,861 6.54 259,779 16,728 6.44
Taxable Securities Held to Maturity 45,736 3,359 7.34 65,815 4,731 7.19
Nontaxable Securities Held to
Maturity (1) 35,468 2,803 7.90 41,754 3,304 7.91
Interest-Earning Deposits in
Other Banks 462 48 10.39 1,325 72 5.43
Federal Funds Sold 7,445 412 5.53 16,346 887 5.43
---------- ------- ----- ---------- -------- -----
Total Interest-Earning Assets 1,401,212 116,649 8.32% 1,159,237 99,459 8.58%
Cash and Due from Banks 38,139 35,157
Other Assets 53,422 34,686
Reserve for Loan Losses (11,505) (10,327)
---------- ----------
Total Assets $1,481,268 $1,218,753
========== ==========
Interest Checking Accounts $ 102,607 $ 2,983 2.91% $ 98,190 $ 2,773 2.82%
Savings Deposits 116,534 3,408 2.92 126,766 3,755 2.96
Money Market Investment Accounts 91,962 3,163 3.44 90,414 3,108 3.44
Other Time Deposits 520,366 28,316 5.44 471,878 25,583 5.42
Repurchase Agreements Short-Term 206,832 11,745 5.68 62,972 3,455 5.49
Other Short-Term Borrowings 90,482 4,628 5.11 64,262 2,947 4.59
Repurchase Agreements Long-Term 2,773 167 6.02 --- --- ---
Other Long-Term Borrowings 68,801 3,862 5.61 58,678 3,154 5.38
Corporation Obligated Mandatorily
Redeemable Capital Securities 5,890 507 8.61 --- --- ---
---------- -------- ---- ---------- -------- ----
Total Interest-Bearing Liabilities 1,206,247 58,779 4.87% 973,160 44,775 4.60%
Demand Deposits 139,026 126,410
Other Liabilities 12,586 8,978
---------- ----------
Total Liabilities 1,357,859 1,108,548
Shareholders' Equity 123,409 110,205
---------- ----------
Total Liabilities and Shareholders'
Equity $1,481,268 $1,218,753
========== ==========
Net Interest Earnings $ 57,870 3.45% $ 54,684 3.98%
======== ===== ======== =====
Net Yield on Interest-Earning Assets
on a Taxable Equivalent Basis (2) 4.13% 4.72%
</TABLE>
Years Ended December 31
---------------------------------------
1995
---------------------------------------
Average Yield/
Balance Interest Rate
------- -------- ----
Loans, Net of Unearned Income (1) $ 666,222 $64,254 9.64%
Mortgage Loans Held for Sale 813 144 17.71
Securities Available for Sale (1) 176,995 10,395 5.87
Taxable Securities Held to Maturity 90,253 7,284 8.07
Nontaxable Securities Held to Maturity (1) 41,055 3,881 9.45
Interest-Earning Deposits in Other Banks 682 5 .73
.73 13,435 794 5.91
Federal Funds Sold ---------- ------- -----
989,455 86,757 8.77%
Total Interest-Earning Assets 31,694
Cash and Due from Banks 36,685
Other Assets (9,668)
Reserve for Loan Losses ----------
$1,048,166
Total Assets ==========
$ 91,630 $ 2,787 3.04%
Interest Checking Accounts 143,132 4,593 3.21
Savings Deposits 90,221 3,354 3.72
Money Market Investment Accounts 438,078 23,755 5.42
Other Time Deposits 26,978 1,618 6.00
Repurchase Agreements Short-Term 37,647 1,843 4.89
Other Short-Term Borrowings --- --- ---
Repurchase Agreements Long-Term 6,666 454 6.81
Other Long-Term Borrowings
Corporation Obligated Mandatorily --- --- ---
Redeemable Capital Securities ---------- ------- ----
834,352 38,404 4.60%
Total Interest-Bearing Liabilities 117,038
Demand Deposits 7,816
Other Liabilities ----------
959,206
Total Liabilities 88,960
Shareholders' Equity ----------
Total Liabilities and Shareholders' $1,048,166
Equity ==========
$48,353 4.17%
Net Interest Earnings ======= =====
Net Yield on Interest-Earning Assets 4.89%
on a Taxable Equivalent Basis (2)
(1) Interest income includes the effects of taxable equivalent
adjustments using a tax rate of 35% for 1997 and 1996 and 34% for 1995 in
adjusting interest on tax-exempt securities and loans to a fully taxable basis.
Loan fees are included in total interest income as follows: 1997--$2,418,000;
1996--$2,470,000; 1995--$1,913,000. 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.
<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>
1997 Compared to 1996 Increase 1996 Compared to 1995 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>
Interest Income:
Investment Securities:
Taxable $(1,473) $ 101 $ (1,372) $(1,819) $ (734) $(2,553)
Nontaxable* (497) (4) (501) 65 (642) (577)
Securities Available for Sale* 12,867 266 13,133 5,251 1,082 6,333
Loans, Net of Unearned* 7,518 (1,234) 6,284 10,194 (879) 9,315
Mortgage Loans Held for Sale 174 (29) 145 27 (3) 24
Interest-Bearing Deposits in Other Banks (65) 41 (24) 9 58 67
Federal Funds Sold (492) 17 (475) 162 (69) 93
------- -------- -------- ------- ------ -------
Total Interest Income* 18,032 (842) 17,190 13,889 (1,187) 12,702
Interest Expense:
Interest Checking Accounts 127 83 210 192 (206) (14)
Savings Deposits (300) (47) (347) (501) (337) (838)
Money Market Investment Accounts 53 2 55 7 (253) (246)
Other Time Deposits 2,638 95 2,733 1,832 (4) 1,828
Repurchase Agreements Short-Term 8,165 125 8,290 1,986 (149) 1,837
Other Short-Term Borrowings 1,311 370 1,681 1,388 (284) 1,104
Repurchase Agreements Long-Term 167 --- 167 --- --- ---
Other Long-Term Borrowings 563 145 708 2,815 (115) 2,700
Corporate Obligated Mandatorily
Redeemable Capital Securities 507 --- 507 --- --- ---
------- ------- -------- ------- ------ -------
Total Interest Expense 13,231 773 14,004 7,719 (1,348) 6,371
------- ------- -------- ------- ------ -------
Net Interest Income* $ 4,801 $(1,615) $ 3,186 $ 6,170 $ 161 $ 6,331
======= ======= ======== ======= ====== =======
</TABLE>
*Fully Taxable-Equivalent Basis
SECURITIES AVAILABLE FOR SALE PORTFOLIO DATA
The carrying and approximate market value and gross unrealized gains and losses
of securities available for sale appear on pages 35 and 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 31 of Part II, Item 8,
Consolidated Statements 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.
The following table shows the maturities of securities available for sale as of
December 31, 1997 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>
U.S. Treasury Securities $ 12,801 10.10% $ 1,019 5.72% $ --- % $ --- % $ 13,820
Obligations of U.S.
Government Agencies --- 15,569 6.15 10,882 6.58 --- 26,451
Mortgage Backed Securities 49,176 7.29 99,415 7.15 28,813 7.09 199,403 7.33 376,807
Collateralized Mortgage
Obligations and REMICs 19,530 7.01 53,390 6.99 20,008 6.86 97,658 6.76 190,586
Corporate Bonds 748 6.13 5,487 6.32 4,230 6.90 26,305 8.79 36,770
Other Securities --- --- --- 13,815 7.14 13,815
Obligations of State &
Political Subdivision 661 8.96 4,072 9.22 2,498 8.75 8,046 7.79 15,277
-------- -------- ------- -------- --------
$ 82,916 $178,952 $66,431 $345,227 $673,526
======== ======== ======= ======== ========
</TABLE>
All Mortgage Backed Securities and Collateralized Mortgage Obligations held at
December 31, 1997 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. There were no securities at December 31, 1997 that did not pass
this 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 pages 36 and 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 31 of Part II,
Item 8, Consolidated Statements 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.
The following table shows the maturities of securities held to maturity at
December 31, 1997, 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>
Obligations of U.S.
Government Agencies $ --- % $ 5,351 6.34% $ 6,012 6.34% $ 984 8.91% $12,347
Mortgage Backed Securities 4,180 7.32 11,998 7.30 5,621 7.23 1,118 6.59 22,917
Obligations of State and
Political Subdivisions 2,770 9.03 16,660 8.37 12,386 7.85 5,163 7.92 36,979
------- ------- ------- ------- -------
$ 6,950 $34,009 $24,019 $ 7,265 $72,243
======= ======= ======= ======= =======
</TABLE>
All Mortgage Backed Securities in the held-to-maturity portfolio are backed by
U.S. Agencies at December 31, 1997.
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
-------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C>
Commercial, Financial
and Agricultural $425,437 $386,307 $307,843 $273,825 $239,083
Real Estate-Mortgage 219,337 208,684 217,214 187,350 163,241
Consumer 246,433 249,098 201,613 181,193 162,316
-------- -------- -------- -------- --------
Total Loans 891,207 844,089 726,670 642,368 564,640
Less: Unearned Income and
Deferred Fees (12,430) (14,110) (12,217) (9,397) (7,785)
-------- -------- -------- -------- --------
Loans, Net of Unearned Income
and Deferred Fees 878,777 829,979 714,453 632,971 556,855
Less: Allowance for Loan (11,786) (10,903) (9,605) (9,547) (9,329)
-------- -------- -------- -------- --------
Losses
Loans, Net $866,991 $819,076 $704,848 $623,424 $547,526
======== ======== ======== ======== ========
</TABLE>
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 MainStreet's subsidiaries' business activity is with customers
located in the southwestern, central and east central regions of Virginia and
southeastern Maryland. Accordingly, operating results are closely correlated
with the economic trends within these regions and influenced by the significant
industries within the southwest 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 these geographic regions. The commercial portfolio is diversified
with no significant concentrations of credit. At December 31, 1997, acquisition
and development construction loans account for $41.2 million of the commercial
portfolio. In addition, other commercial loans secured by real estate total
$163.6 million. The remainder of the loans secured by real estate consists
almost entirely of 1-4 family residential property. At December 31, 1997,
MainStreet was the creditor for approximately $122.1 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 many 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 the
creditworthiness of the individual borrower or project based on pertinent
financial information, the amount to be financed and collateral.
The Banks pursue an asset liability management program which seeks to minimize
the impact of interest rate fluctuations on the results of operations. Emphasis
is placed on floating rate business loans with relatively short maturities and
adjustable rate real estate and consumer loans. In addition, the Banks make
long-term fixed rate real estate mortgage loans and fixed rate real estate loans
with a three or five year balloon payment requirement. Generally, the Banks will
maintain the variable rate or balloon payment real estate mortgages in their
portfolios while long-term fixed rate loans are sold in the secondary market.
The following table shows the amount of commercial, financial and agricultural
loans outstanding as of December 31, 1997 which mature or reprice:
<TABLE>
<CAPTION>
After
One But
Within Within After
One Year Five Years Five Years Total
-------- ---------- ---------- -----
<S> <C>
Commercial, financial and agricultural $277,103 $134,735 $ 13,599 $425,437
Interest rates are floating or adjustable 206,782 --- --- 206,782
Interest rates are fixed or predetermined 70,321 134,735 13,599 218,655
</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
---------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C>
Consumer Loans:
Loans accounted for on a nonaccrual basis $ 208 $ 131 $ 95 $ 172 $ 162
Loans contractually past due 90 days or
more as to interest or principal payments
(but not included in nonaccrual loans) 760 987 612 505 368
All Other Loans:
Loans accounted for on a nonaccrual basis 3,584 3,160 3,396 2,801 2,584
Loans contractually past due 90 days or
more as to interest or principal payments
(but not included in nonaccrual loans) 1,676 2,074 1,790 1,265 2,232
</TABLE>
It is the Corporation'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 Corporation to be
nonperforming loans. Such assets totaled .71% of loans, net of unearned income
at December 31, 1997 and .77% at December 31, 1996.
The effect of nonaccrual loans on interest income for 1997, 1996 and 1995
appears on page 38 of Part II, Item 8, Note 5 of this report and is herein
incorporated by reference.
At December 31, 1997 and 1996 MainStreet had other real estate, which represents
foreclosed properties totaling $1.4 million and $.9 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, 1997 and 1996 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 33 of Part II, Item 8, Note 1 of this report and is
herein incorporated by reference. The following table shows MainStreet'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
-------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C>
Average amount of loans, net of unearned
income, outstanding during the year $853,418 $773,252 $666,222 $595,645 $556,192
======== ======== ======== ======== ========
Balance of Allowance for Loan Losses at
beginning of year $ 10,903 $ 9,605 $ 9,547 $ 9,329 $ 9,432
Loans charged off:
Commercial, Financial and Agricultural 1,098 1,215 992 2,796 860
Real Estate - Mortgage 124 56 179 383 832
Consumer 2,584 1,974 928 757 1,139
-------- -------- -------- -------- --------
Total loans charged off 3,806 3,245 2,099 3,936 2,831
-------- -------- -------- -------- --------
Recoveries of loans previously charged of:
Commercial, Financial and Agricultural 332 737 181 362 124
Real Estate - Mortgage --- 1 6 18 366
Consumer 346 354 245 299 122
-------- -------- -------- -------- --------
Total recoveries 678 1,092 432 679 612
-------- -------- -------- -------- --------
Net loans charged off 3,128 2,153 1,667 3,257 2,219
Additions to allowance charged to
operating expense 4,011 3,451 1,725 3,475 2,116
-------- -------- -------- -------- --------
Balance at end of year $ 11,786 $ 10,903 $ 9,605 $ 9,547 $ 9,329
======== ======== ======== ======== ========
Ratio of net chargeoffs during period
to average loans outstanding .37% .28% .25% .55% .40%
======== ======== ======== ======== ========
</TABLE>
Management has allocated the allowance for loan losses for the years indicated
by loan category. This allocation of the allowance for loan losses for 1997 and
1996 is based upon the previous five years' loan loss experience, specific
reserves, and unallocated amounts. The allowance for loan losses for years prior
to 1996 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, 1997 December 31, 1996 December 31, 1995 December 31, 1994 December 31, 1993
----------------- ----------------- ----------------- ----------------- -----------------
Amount % Amount % Amount % Amount % Amount %
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C>
Balance at end of period
applicable to:
Commercial, Financial
and Agricultural $ 1,190 48% $ 1,483 46% $4,344 42% $7,041 43% $3,315 42%
Real Estate 681 24 1,062 25 1,055 30 964 29 2,333 29
Installment 1,402 28 1,591 29 4,206 28 1,542 28 3,681 29
Specific Reserves 2,129 --- 1,477 --- --- --- --- --- --- ---
Unallocated 6,384 --- 5,290 --- --- --- --- --- --- ---
------- --- ------- --- ------ --- ------ --- ------ ---
Total $11,786 100% $10,903 100% $9,605 100% $9,547 100% $9,329 100%
======= === ======= === ====== === ====== === ====== ===
</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
-------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C>
Return on Average Shareholders' Equity 13.98% 15.11% 15.88%
Return on Average Assets 1.17 1.37 1.35
Dividend Payout Ratio 39.58 35.25 27.78
Average Shareholders' Equity to Average Assets 8.33 9.04 8.49
</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 49 of Part II, Item 8, Note 21 of this report and is herein incorporated
by reference.
SHORT-TERM BORROWINGS
Federal funds purchased and corporate cash management accounts generally
represent overnight borrowing transactions. Repurchase agreements and FHLB
borrowings generally represent monthly borrowing transactions.
The details of these categories for the years 1997, 1996 and 1995 are presented
in the table below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C>
Short-Term Borrowings:
Federal Funds Purchased and
Corporate Cash Management:
Balance at end of year $ 63,359 $ 42,503 $47,618
Average during the year 43,150 28,625 24,400
Maximum month-end balance 64,954 54,185 47,619
Weighted average rate during the year 4.60% 4.12% 4.27%
Weighted average rate at December 31 4.73% 5.26% 5.08%
Repurchase Agreements:
Balance at end of year $213,871 $145,356 $37,127
Average during the year 206,832 62,972 26,978
Maximum month-end balance 254,288 147,922 63,956
Weighted average rate during the year 5.68% 5.49% 6.00%
Weighted average rate at December 31 6.04% 5.78% 5.85%
FHLB Borrowings:
Balance at end of year $ 61,000 $ 27,350 $32,350
Average during the year 37,776 31,449 7,660
Maximum month-end balance 97,350 32,488 32,350
Weighted average rate during the year 5.55% 5.01% 6.50%
Weighted average rate at December 31 5.63% 5.59% 5.76%
</TABLE>
The weighted average rates paid in aggregate on these borrowed funds for 1997,
1996 and 1995 were 5.51%, 5.03%, and 5.26%, respectively.
LONG-TERM BORROWINGS
The details of these categories for the years 1997, 1996 and 1995 are presented
in the table below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C>
Long-Term Borrowings:
FHLB Borrowings:
Balance at end of year $101,936 $ 70,786 $ 929
Average during the year 68,130 58,677 735
Maximum month-end balance 101,936 70,929 1,000
Weighted average rate during the year 5.63% 5.38% 7.75%
Weighted average rate at December 31 5.65% 5.07% 7.75%
Long-Term Repurchase Agreements
Balance at end of year $ 63,466 $ --- $ ---
Average during the year 2,772 --- ---
Maximum month-end balance 63,466 --- ---
Weighted average rate during the year 6.02% --- ---
Weighted average rate at December 31 5.62% --- ---
</TABLE>
The weighted average rates paid in aggregate on these borrowed funds for 1997,
1996 and 1995 were 5.63%, 5.38% and 7.75%, respectively.
DEPOSITS
Average total deposits of the Banks for 1997 were approximately $970.5 million,
an increase of 6.2% from $913.7 million for 1996. 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. With the exception of Commerce Bank, 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, 1997:
<TABLE>
<CAPTION>
Maturing/Repricing In
Interest-Earning Assets Under 3 Mos. 3-6 Mos. 6-12 Mos. Over 1 Yr. Total
- - ----------------------- ------------ -------- --------- ---------- -----
<S> <C>
Time Balances Banks $ 494 $ --- $ --- $ --- $ 494
Mortgage Loans Held for Sale 3,048 --- --- --- 3,048
Securities Available for Sale 85,986 59,143 79,670 448,727 673,526
Securities Held to Maturity 18,771 2,541 6,123 44,808 72,243
Loans 304,669 48,733 100,257 425,118 878,777
--------- --------- --------- ---------- ----------
Total Interest Earning Assets $ 412,968 $ 110,417 $ 186,050 $ 918,653 $1,628,088
========= ========= ========= ========== ==========
Cumulative Total Interest-Earning Assets $ 412,968 $ 523,385 $ 709,435 $1,628,088 $1,628,088
========= ========= ========= ========== ==========
Interest-Bearing Liabilities
- - ----------------------------
NOW, Money Market and Savings $ 135,805 $ 2,264 $ 4,528 $ 174,730 $ 317,327
Time Deposits $100,000 and Over 38,504 25,155 32,144 43,238 139,041
Other Time Deposits 85,049 66,824 97,383 150,500 399,756
--------- --------- --------- ---------- ----------
Total Interest-Bearing Deposits 259,358 94,243 134,055 368,468 856,124
Repurchase Agreements Short-Term 213,871 --- --- --- 213,871
Other Short-Term Debt 144,562 --- --- --- 144,562
Repurchase Agreement Long-Term --- --- --- 63,466 63,466
Other Long-Term Debt 72,350 --- --- 29,784 102,134
Capital Securities --- --- --- 50,000 50,000
--------- --------- --------- ---------- ----------
Total Borrowings 430,783 --- --- 143,250 574,033
--------- --------- --------- ---------- ----------
Total Interest-Bearing Liabilities $ 690,141 $ 94,243 $ 134,055 $ 511,718 $1,430,157
========= ========= ========= ========== ==========
Cumulative Total Interest-Bearing
Liabilities $ 690,141 $ 784,384 $ 918,439 $1,430,157 $1,430,157
========= ========= ========= ========= ==========
Net Total Assets/Liabilities $(277,173) $ 16,174 $ 51,995 $ 406,935 $ 197,931
========= ========= ========= ========== ==========
Cumulative Net Total Assets/Liabilities $(277,173) $(260,999) $(209,004) $ 197,931 $ 197,931
========= ========= ========= ========== ==========
</TABLE>
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
MainStreet 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 Corporation and its subsidiaries own or lease other
properties for their general banking business. As of December 31, 1997, the
Corporation's subsidiaries conduct business through thirty-eight office
locations, fifteen of which are leased from non-affiliated owners and the
remainder are owned by the subsidiaries. There are also two additional
operational facilities that are leased.
The Corporation'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, 1997 was approximately $1.4 million which approximates
fair market value.
With respect to the leased properties, leases expire at various dates from 1998
through 2007, all of which are renewable at the option of the Corporation.
Item 3. Legal Proceedings
The information required by Part I, Item 3 of Form 10-K appears on page 52 of
Part II, Item 8, Note 25 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 29,
1998.
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
Corporation 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>
Michael R. Brenan (45) Chairman of the Board, President, 06/94
Chief Executive Officer and
Director of MainStreet
James E. Adams (53) Executive Vice President, Chief Financial 10/94
Officer, Treasurer, Director of The
First Bank of Stuart and Director
of MainStreet Trust Company, N.A.
Rebecca J. Jenkins (47) Executive Vice President, Corporate 09/94
Secretary and Director of MainStreet
Trust Company, N.A.
S. Richard Bagby (57) Senior Vice President and Chief 03/94
Credit Officer
William D. Kerr (49) Senior Vice President and Chief 07/77
Information Officer
Kenneth E. Lust (47) Senior Vice President and 09/94
Chief Operations Officer
Beverly L. Mitchell (50) 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 MainStreet, 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 MainStreet,
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. Bagby joined Piedmont Trust Bank in June of 1980 as Vice President -
Commercial Loans and was elected Senior Vice President of Credit Administration
for MainStreet BankGroup Incorporated in March of 1994.
Executive officer William D. Kerr has served the Corporation or its subsidiary
in various executive capacities for the past eight 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 MainStreet, 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 1997, 2,457,841 shares of MSBC stock were traded through
NASDAQ. As of December 31, 1997, MSBC was owned by 3,649 shareholders of record
not including nominee holders which would increase the total. At year end,
11,996,165 shares were outstanding. All common stock in subsidiary affiliate
Banks is owned entirely by MainStreet BankGroup.
The following table sets forth the cash dividends paid per share and information
regarding the market prices per share of common stock for MSBC for the periods
indicated. The price ranges are based on actual high and low bid transactions as
reported on the NASDAQ National Market System.
<TABLE>
<CAPTION>
1997 High Low Close Dividend*
---- ---- --- ----- --------
<S> <C>
4th 30-1/4 26-3/8 27-7/8 .15
3rd 29-1/2 24-3/4 29 .16
2nd 28 18-3/4 27-1/2 .13
1st 23-1/4 18 20-1/8 .13
1996 High Low Close Dividend*
---- ---- --- ----- --------
4th 19-1/2 16-3/4 19 .16
3rd 19-1/2 16-1/4 18-1/2 .12
2nd 17 15-1/2 16-1/4 .11
1st 17 12-3/4 16 .10
</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.
* Dividends per share have been restated for the acquisition of Commerce Bank.
During the third quarter of 1997 and the fourth quarter of 1996, Commerce Bank
paid an annual dividend.
Item 6. Selected Financial Data
(In Thousands, Except Per Share Data and Ratios)
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C>
SUMMARY OF OPERATIONS
Interest Income $ 115,425 $ 98,201 $ 85,414 $ 73,356 $ 70,057
Interest Expense 58,779 44,775 38,404 30,310 29,837
---------- -------- ---------- -------- --------
Net Interest Income 56,646 53,426 47,010 43,046 40,220
Provision for Loan Losses 4,011 3,451 1,725 3,476 2,115
---------- -------- ---------- -------- --------
Net Interest Income After Provision
For Loan Losses 52,635 49,975 45,285 39,570 38,105
Noninterest Income 13,726 11,617 9,069 2,187 7,273
Noninterest Expense 40,952 37,254 34,290 33,568 32,549
---------- -------- ---------- -------- --------
Income Before Income Taxes 25,409 24,338 20,064 8,189 12,829
Income Tax Expense 8,152 7,685 5,934 1,157 3,167
---------- -------- ---------- -------- --------
NET INCOME $ 17,257 $ 16,653 $ 14,130 $ 7,032 $ 9,662
========== ======== ========== ======== ========
PER SHARE DATA
Net Income:
Basic $ 1.44 $ 1.39 $ 1.26 $ .65 $ .90
Diluted 1.44 1.38 1.17 .62 .85
Cash Dividends .57 .49 .35 .30 .27
Net Book Value 10.72 9.57 8.69 7.02 7.42
DAILY AVERAGES
Total Assets $1,481,268 $1,218,753 $1,048,166 $972,971 $915,820
Interest-Earning Assets 1,401,212 1,159,237 989,455 913,007 866,101
Securities Available for Sale 456,566 259,779 176,995 214,092 223,493
Securities Held to Maturity 81,204 107,569 131,308 80,490 52,542
Loans, Net of Unearned Income 853,418 773,252 666,222 595,645 556,192
Allowance for Loan Losses 11,505 10,327 9,668 9,477 9,802
Deposits 970,495 913,658 880,099 853,030 802,283
Interest-Bearing Liabilities 1,206,247 973,160 834,352 778,243 738,535
Shareholders' Equity 123,409 110,205 88,960 79,988 77,360
AT YEAR END
Total Assets $1,716,410 $1,358,127 $1,129,600 $990,169 $954,529
Interest-Earning Assets 1,628,088 1,274,397 1,070,223 924,147 897,622
Securities Available for Sale 673,526 339,136 216,504 127,166 203,967
Securities Held to Maturity 72,243 97,922 117,052 158,130 85,771
Loans, Net of Unearned Income 878,777 829,979 714,453 632,971 556,855
Allowance for Loan Losses 11,786 10,903 9,605 9,547 9,329
Deposits 998,862 940,691 898,777 867,735 831,413
Interest-Bearing Liabilities 1,430,157 1,099,369 890,737 787,145 764,691
Shareholders' Equity 128,652 114,069 103,632 76,595 80,221
RATIOS
Return on Average Assets 1.17% 1.37% 1.35% .72% 1.06%
Return on Average Shareholders' Equity 13.98 15.11 15.88 8.79 12.49
Average Shareholders' Equity to Average Assets 8.33 9.04 8.49 8.22 8.45
Efficiency Ratio 57.59 56.65 59.26 61.60 61.60
Net Interest Margin 4.13 4.72 4.89 4.88 4.81
CREDIT QUALITY RATIOS
Allowance for Loan Losses to Nonperforming Loans 189.24% 171.65% 162.99% 201.29% 174.50%
Allowance for Loan Losses to Nonperforming Assets 150.29 146.82 123.39 130.96 89.56
Allowance for Loan Losses to Year-End Loans, Net
of Unearned Income 1.34 1.31 1.34 1.51 1.68
Net Charge-Offs to Average Loans, Net of Unearned
Income .37 .28 .25 .55 .40
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
1997 VS 1996
Overview
MainStreet BankGroup Incorporated reported earnings of $17.3 million in 1997
compared to $16.7 million in 1996, an increase of 3.6%. These earnings
translated into $1.44 per share on a diluted basis for 1997 compared to $1.38
per share on a diluted basis for 1996. This produced a return on average assets,
("ROA"), and a return on average equity, ("ROE"), of 1.17% and 13.98%,
respectively, for 1997 compared to a ROA and a ROE of 1.37% and 15.11%,
respectively, for 1996. The cash dividend paid in 1997 was $.57 compared to $.49
in 1996, an increase of 16.3%. Total market capitalization increased $108.0
million, or 47.7%, to $334.4 million at December 31, 1997 from year end 1996.
Total average interest earning assets increased $242.0 million, or 20.9% over
1996 levels with upward increases in loans and investments principally funded by
an increase in average interest bearing liabilities of $233.1 million which were
mostly borrowed funds and other time deposits. In order to enhance the
Corporation's earnings and to utilize to the fullest extent possible the
Corporation's strong capital position, the Corporation has expanded its
wholesale leveraging strategy. The intent of employing this strategy is to
increase ROE. Experience has proven that there is a strong correlation between,
ROE, earnings per share and, ultimately stock price. The leverage positions as
of December 31, 1997 and 1996 were $375.7 million and $116.0 million,
respectively. The approximate overall increase in ROE resulting from this
strategy was 1.41% and .31% for 1997 and 1996, respectively. The provision for
loan losses increased $.6 million, or 16.2% to $4.0 million for the year ended
December 31, 1997. This increase was primarily driven by increased loan volume.
Average loans were $853.4 million at December 31, 1997 compared to $773.3
million at December 31, 1996, an increase of $80.1 million, or 10.4%.
Noninterest income, excluding securities gains, was $12.8 million for the year
ended December 31, 1997 compared to $11.0 million for the year ended December
31, 1996, an increase of 16.3%. Securities gains totaled $926 thousand in 1997
compared to $610 thousand in 1996. Noninterest expense rose $3.7 million, or
9.9%, over 1996 levels.
The year of 1997 was also a year of expansion for MainStreet BankGroup
Incorporated. The acquisition of Commerce Bank in College Park, Maryland was
completed in December, 1997. This transaction was accounted for using the
pooling of interest method of accounting and was valued at approximately $14.3
million.
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 rose in the first quarter of 1997 as the
Federal Reserve modestly tightened monetary policy as a preemptive move against
increasing inflation. The prime rate increased in tandem with the rise in
short-term interest rates, maintaining a favorable 300 basis point spread
between prime and the Fed funds rate. This change in market rates, coupled with
the flattening of the Treasury yield curve in the second half of the year and
management's continued expansion of its leverage strategy to better employ
capital and enhance shareholder returns, resulted in a 59 basis point decline in
the Corporation's taxable equivalent net interest margin to 4.13% for 1997
compared to the 4.72% achieved in 1996. Average earning assets increased $242.0
million, or 20.9%, with higher yielding loans accounting for $80.2 million of
the total growth and leverage strategy investments accounting for $166.2 million
of the growth. The overall cost of interest-bearing liabilities increased by 27
basis points, due largely to the increased level of earning assets funded by
higher cost borrowed funds and a continued mix shift of core deposits from lower
cost interest-bearing transaction and savings accounts into higher cost time
deposits. Additionally, the percentage of earning assets funded with
interest-free funds, primarily demand deposit balances, declined from 16.1% in
1996 to 13.9% for 1997. 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 $3.2 million, or approximately 5.8% above 1996. Excluding the
effect of the leveraging strategy from both years, net interest income rose $1.1
million, or 2.0% above 1996.
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 1997, $4.0 million
was expensed as a loan loss provision, compared with $3.5 million in 1996, an
increase of $.6 million, or 16.2%. Net loan charge-offs were $3.1 million
compared with $2.2 million in 1996. The ratio of net charge-offs to average
loans, net of unearned income, for 1997 was .37% compared to 1996's level of
.28%. 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 1997, the ratio of the
allowance to loans, net of unearned income, was 1.34% compared with the 1.31% at
December 31, 1996. The allowance for loan losses at December 31, 1997
represented 189.24% of nonperforming loans, compared with 171.65% at December
31, 1996. The allowance for loan losses is evaluated on a quarterly basis and
was considered adequate at December 31, 1997. A discussion concerning credit
quality is included in the "Loans and Credit Quality" section of this
discussion.
Noninterest Income
Noninterest income, excluding securities gains, was $12.8 million for the year
ended December 31, 1997 compared to $11.0 million for the year ended December
31, 1996, an increase of $1.8 million, or 16.3%. The majority of the increase
was in service charges, fees, and other income which increased $1.4 million. Of
this $1.4 million, an entire year of income on Bank Owned Life Insurance was
recorded at $.9 million compared to $.2 million in 1996. Bank Owned Life
Insurance was purchased in the latter part of 1996 to effectively reduce the
long term costs of employee benefits. Service charges on deposit accounts
increased $.2 million, or 5.5%, to $3.7 million for the year ended December 31,
1997 due to higher volume related activity charges and the implementation of new
transaction charges. The remainder of the increase in noninterest income was due
to increased income in credit cards, ATM income, and insurance income. These
were offset to some degree by gains on other real estate of approximately $400
thousand in 1996. Trust income increased $.4 million, or 14.5%, and was $3.4
million for the year ended December 31, 1997.
Investment Securities Gains
Securities gains totaled $.9 million in 1997 compared to $.6 million in 1996, an
increase of $.3 million, or 51.8%. During 1997 the prepayment speeds on certain
adjustable rate mortgage securities accelerated as a result of falling long-term
interest rates. MainStreet BankGroup elected to sell the impacted securities
which were principally used to support its wholesale leverage program.
Noninterest Expense
Total noninterest expense was $41.0 million for 1997 compared to $37.3 million
in 1996, an increase of $3.7 million, or 9.9%. Excluding approximately $1.1
million of acquisition costs and a $635 thousand write-off associated with a
check-kiting scheme in 1997 and approximately $943 thousand of acquisition costs
incurred in 1996, noninterest expenses would have increased 8.0% over year ago
levels.
Salary and employee benefit costs were $22.3 million in 1997, an increase of
$2.1 million, or 10.6% over the 1996 expense. Normal salary increases, which
averaged 4.0%, the implementation of incentive plans, the incorporation of
salary programs relating to acquisitions in 1997 and the increase in the FICA
base from 1996 to 1997 accounted for the bulk of the increase. Net occupancy
expense was $2.1 million for 1997 compared to $1.9 million in 1996, an increase
of $.2 million, or 6.9%. Two new branches opened in the latter part of 1996,
therefore, 1997 expense had the full impact of the new branches. Equipment costs
were $3.7 million for the year ended December 31, 1997, a decline of $.2
million, or 3.8% due to the completion of major platform initiatives in 1996. It
is anticipated that the upcoming year will have increased equipment costs
associated with our pending acquisitions which were announced in 1997. Supplies
expense was $.9 million for 1997, a decline of $.1 million from the 1996 level.
1996 expense included expenses associated with two acquisitions. Other
noninterest expense was $11.4 million for 1997 compared to $9.7 million for
1996, an increase of $1.7 million, or 18.0%. As mentioned previously, excluding
approximately $1.1 million of acquisition costs and a $635 thousand write-off
associated with a check-kiting scheme in 1997 and approximately $943 thousand of
acquisition costs incurred in 1996, other noninterest expense would have
increased $1.0 million, or 10.9%.
Provision for Income Taxes
Income tax expense was $8.2 million in 1997 compared to $7.7 million in 1996.
This increase was primarily due to an increase in net income before tax.
Although tax exempt interest in total declined from prior year, it remains the
major component in reducing the effective tax rate. The Corporation's effective
tax rate was 32.1% in 1997 and 31.6% in 1996.
BALANCE SHEET
Investment Portfolio
Investments, including securities available for sale and securities held to
maturity, totaled $745.8 million on December 31, 1997, compared to $437.1
million on December 31, 1996. The growth in the securities portfolio during the
year was funded by a combination of term borrowings and the issuance of $50
million in junior subordinated debentures. These debentures were sold to the
subsidiary MainStreet Capital Trust I, a Delaware statutory business trust
subsidiary. This subsidiary was created to issue $50 million in
corporation-obligated mandatorily redeemable capital securities to certain
qualified institutional investors. See Footnote No. 13 of Notes to Consolidated
Financial Statements for further discussion on this transaction. Included in the
growth of the portfolio was an increase of $259.7 million in the corporation's
wholesale leverage position. The wholesale leverage strategy involves the
acquisition of investment securities using funds obtained from borrowings from
the Federal Home Loan Bank and other market sources. The assets generally
involve a blend of fixed and adjustable rate mortgage-backed securities and are
classified as AFS. As of December 31, 1997 the aggregate leverage asset position
was $375.7 million with a weighted average yield of 7.05%, compared to $116.0
million with a weighted average yield of 6.70% on December 31, 1996. As of
December 31, 1997, the leverage assets had a weighted average life of 4.9 years
and a duration of 3.1 years. During 1997, the average balance of assets
outstanding was $211.9 million and contributed $2.6 million to the company's net
interest income. This compares with an average position of $45.7 million,
contributing $0.5 million in 1996.
As of December 31, 1997, 90.3% of the Corporation's investment portfolio was
classified in the "available for sale" category, with the remaining 9.7% of
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, 1997 is shown on page 6 of this
report. During the year, MainStreet sold a significant portion of its adjustable
rate mortgage backed securities, anticipating that higher prepayments would
negatively affect the yield on this sector of the investment portfolio. The
largest growth segment of the investment portfolio during 1997 was in fixed-rate
mortgage backed securities and shorter duration fixed rate collateralized
mortgage obligations. The index duration of the investment portfolio was 3.1
years with a weighted average life of 4.9 years, as of December 31, 1997, which
was the same as the segmented leverage position.
The available for sale portfolio is periodically stress tested to monitor the
sensitivity to interest rate movements. The 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, 1997,
the available for sale portfolio could be expected to rise 2.80% in market value
given a 200 basis point decline in interest rates and decline 7.97% in market
value given a 200 basis point rise in interest rates.
Loans and Credit Quality
Average loans, net of unearned income, increased $80.2 million in 1997 to $853.4
million, an increase of 10.4%. Continued low interest rates during 1997 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 MainStreet 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' financial performance and collateral values 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 MainStreet affiliates are
influenced by the significant industries within the southwest region including
textiles, furniture, pre-built housing and agriculture. Virtually all of our
business activity is with customers located in the southwestern, central and
western part of southern Virginia and southeastern Maryland. 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 these geographic regions. The Commercial portfolio is diversified
with no significant concentrations of credit at December 31, 1997. Acquisition
and development construction loans account for $41.2 million and $40.2 million
of the commercial portfolio at December 31, 1997 and 1996, respectively. In
addition, other commercial loans secured by real estate totaled $163.6 million
and $133.5 million at December 31, 1997 and 1996, respectively. The remainder of
the loans secured by real estate consists almost entirely of 1-4 family
residential property. MainStreet was the creditor for approximately $122.1
million and $128.3 million at December 31, 1997 and 1996, respectively, of
consumer loans for automobiles and mobile homes generated directly by 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 1997, the Corporation's ratio
of net charge-offs to average loans was .37% compared with .28% in 1996. At
December 31, 1997, the allowance for loan losses to nonperforming loans was
approximately 189.24% compared with 171.65% last year. On December 31, 1997, the
allowance for loan losses to loans ratio was 1.34% compared with 1.31% in 1996.
The Corporation believes that the allowance for loan losses of $11.8 million
provides adequate coverage of potential loss exposure in the credit portfolio at
December 31, 1997.
Other Assets
Other assets at December 31, 1997 were $39.4 million, an increase of $4.9
million, or 14.1%. The majority of the increase, $2.3 million, is in interest
earned not collected which is primarily due to increased volume in mortgage
backed securities and CMO/REMIC investments. These investments usually pay on
delay from 15 days to 45 days. The Bank Owned Life Insurance has also increased
$.9 million due to the accrued income for 1997. The remainder of the increase
was spread throughout various accounts such as prepaid expenses and cash values.
Deposits
Total deposits at December 31, 1997 were $998.9 million compared to $940.7
million at December 31, 1996, an increase of $58.2 million, or 6.2%. The
Corporation continued to see the shift in the deposit mix into the higher
interest bearing time deposit accounts. Certificates of deposit $100,000 and
over were $139.0 million at December 31, 1997 in comparison to $100.8 million at
December 31,1996. Other time deposits increased to $399.8 million at December
31, 1997, a rise of $19.7 million from year end 1996.
Average deposits for 1997 were $970.5 million compared to $913.7 million for
1996, an increase of $56.8 million, or 6.2%. All categories increased with the
largest categories being certificates of deposit $100,000 and over increasing
$26.9 million and other time deposits increasing $21.6 million. Average demand
accounts also increased $12.6 million while average savings accounts increased
$10.2 million.
Short-Term and Long-Term Borrowings
Short-term borrowings, including short-term repurchase agreements, were $358.4
million at December 31, 1997 compared to $223.1 million, at December 31, 1996,
an increase of $135.3 million, or 60.7%. This increase was primarily due to the
continued expansion of the wholesale leveraging strategy. The components of
short-term borrowings at December 31, 1997 were $213.9 million in repurchase
agreements; $61.0 million in FHLB borrowings; $38.0 million in federal funds
purchased; $25.3 million in corporate cash management accounts; and $20.2 in
treasury tax and loan notes. These same components at December 31, 1996 were
$145.4 million in repurchase agreements; $27.3 million in FHLB borrowings; $23.2
million in federal funds purchased; $19.3 million in corporate cash management
accounts; $5.6 million in treasury tax and loan notes; and $2.3 million in other
borrowings.
Long-term borrowings, including long-term repurchase agreements, were $165.6
million at year end 1997 compared to $71.0 million at year end 1996. This
increase was also primarily due to the continued expansion of the wholesale
leveraging strategy. The components of long-term debt at December 31, 1997 were
$101.9 million in FHLB borrowings; $63.5 million in repurchase agreements; and
$.2 million in capital lease. At year end 1996, the components of long term
borrowings were $70.8 million in FHLB borrowings and $.2 million in a capital
lease.
Corporation-Obligated Mandatorily Redeemable Capital Securities
In November 1997, MainStreet BankGroup Incorporated created a Delaware statutory
business trust subsidiary ("MainStreet Capital Trust I") which issued
corporation-obligated mandatorily redeemable capital securities (`trust
securities") in the amount of $50 million to qualified institutional investors,
and $1.5 million in trust common securities to the Corporation. The trust
securities have a maturity of thirty years, pay dividends at the rate of 8.90%,
and may be treated as Tier I capital for regulatory purposes. MainStreet Capital
Trust I, then in turn, used the proceeds from the sale of the trust securities
to acquire Junior Subordinated Debentures of the Corporation which have the same
rate, payment of dividends and maturity. Holders of the trust securities are
entitled to receive preferential cash dividends accumulating from the date of
original issuance, November 19, 1997, and payable semi-annually in arrears on
the first day of June and December of each year. The proceeds from the Junior
Subordinated Debentures of the Corporation will be used for general corporate
purposes, including, without limitation, increasing the Corporation's investment
in the Banks for the possible acquisition of additional branch facilities, the
financing of one or more future acquisitions by the Corporation and the funding
of repurchases of the Corporation's common stock, which may be made from time to
time. Initially, the net proceeds were invested in available for sale
securities.
Shareholders' Equity
Total shareholders' equity at December 31, 1997 was $128.7 million, an increase
of $14.6 million, or 12.8%. Cash dividends paid in 1997 were $.57 per share
compared to $.49 per share in 1996. The subsidiary 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 MainStreet's consolidated
financial statements. MainStreet and the Banks are well capitalized and well
above regulatory prescribed minimums. To be categorized as such, MainStreet and
the Banks must maintain minimum Tier 1 capital to adjusted average annual assets
ratios of 4.0%; Tier 1 Capital to risk weighted assets of 4.0%; and total
capital ratios of 8.0%. These ratios on a consolidated basis were 10.61%,
16.74%, and 17.99%, respectively.
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 7.97% with an average life extension
of 2.5 years given a 200 basis point rise in market rates, and increase by
approximately 2.80% with an average life decrease of 2.7 years under a 200 basis
point decrease in market rates.
Year-end 1997 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, including the impact of the
Corporation's leverage strategy, would decrease by approximately 8.63% given a
rise of 300 basis points in market rates over the forward period and an increase
of approximately 5.13% give a decline of 300 basis points. Likewise, the
economic value of equity would decline by approximately 26.9% and 3.8% 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 potentially
volatile funding sources, and the relationship of loans to deposits. While
relying on core deposit relationships as the basis of liquidity, increased loan
demand and the expansion of discretionary investments 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. To
meet future liquidity needs, the Corporation and its subsidiary banks have
expanded funding sources, primarily with the Federal Home Loan Bank, regional
and super-regional banks and top tier investment banking firms.
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 statement reflect
these effects of inflation.
Recent Accounting Developments
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" and
Statement of Financial Accounting Standards No. 131 "Disclosures About Segments
of an Enterprise and Related Information." MainStreet adopted these statements
effective January 1, 1998 which had no material effect on financial statements.
Year 2000
The Year 2000 technology problem represents risks to all corporations due to the
potential failure of date related systems. To address this potential threat,
MainStreet BankGroup is devoting significant time and resources to manage our
Year 2000 project. The Year 2000 Task Force has been established, an ad hoc
committee comprised of representatives from the following corporate activities:
Corporate Risk Management; Information Services; Legal; Credit
Administration/Loan Review; Internal Audit; Facilities
Management/Security/Purchasing; Electronic Banking/Operations/Card Services;
Financial Systems and Accounting. This committee provides management with
guidance and oversight in addressing the Corporation's Year 2000 initiatives.
Activities and recommendations of this committee are provided to the CEOs of all
affiliate organizations and the Board of Directors of the holding Corporation
and all affiliate organizations and other related parties. MainStreet's Year
2000 plan includes the evaluation of our systems and facilities as well as an
intensive review of the risks posed by vendors, capitalized business partners
and major loan customers.
MainStreet's core applications deemed mission critical are provided by an
outside vendor, Information Technology Incorporated. This vendor has indicated
that the ITI software is Year 2000 compliant and MainStreet BankGroup intends to
test this software in conjunction with existing hardware during 1998 to verify
compliance. We have identified certain non-mission critical applications that
are not Year 2000 compliant. These non-mission critical systems are currently
scheduled for replacement during 1998 and 1999. The availability and continued
use of these automated processes is dependent on the Corporation's ability to
meet these schedules. Costs associated with the purchase and installation of
these systems are considered to be normal technology improvements that are
consistent with the planned growth of the Corporation and a part of the normal
budgetary process.
In addition, we have implemented several highly successful education programs
that focus on providing current, accurate information on the problem to
employees, local industry, small businesses and community leaders in an effort
to encourage others to also become proactive. MainStreet BankGroup believes
these initiatives will ensure we successfully meet the Year 2000 challenges
faced by our Corporation and our communities.
Recent Developments
At December 31, 1997, MainStreet had two acquisitions pending which are
anticipated to be completed within the first quarter of 1998. The first
acquisition is Tysons Financial Corporation ("Tysons"), which will be accounted
for as a purchase. The second acquisition is Regency Financial Shares
("Regency"), which will be accounted for as a pooling of interests.
Under the terms of the Plan of Merger with Tysons, MainStreet agreed to pay
shareholders of Tysons the equivalent of $14.50 per share for each share of
Tysons common stock outstanding. In addition, as a condition of the merger,
Tysons' outstanding Directors' Warrants shall be exercised prior to the closing
for the difference between the exercise price per warrant and $14.50 in the form
of Tysons' common stock. MainStreet also agreed to redeem Tysons' outstanding
Directors' Options for the difference between the exercise price per option and
$14.50 in the form of MainStreet common stock. MainStreet will assume the
employee options outstanding. The transaction is valued at approximately $17.2
million, which will be paid in MainStreet common stock. Total assets,
liabilities and shareholders' equity for Tysons at December 31, 1997 were $101.9
million, $93.4 million and $8.5 million, respectively.
Under the terms of the agreement with Regency, MainStreet has agreed to pay the
equivalent of $13.00 per share for each outstanding share of Regency common
stock in the form of MainStreet common stock, subject to adjustments under
certain conditions. The maximum and minimum exchange ratios are .500 and .406,
respectively, for Regency's outstanding shares of common stock. MainStreet has
also agreed to exchange the balance of Regency's outstanding Directors' Options
which have not been exercised as of the consummation of the merger for the
difference between the exercise price per option and $13.00 in the form of
MainStreet common stock, resulting in a maximum exchange ratio of .250 shares
and a minimum exchange ratio of .188 shares per option exchanged. MainStreet has
also agreed to assume the outstanding employee stock options of Regency. This
transaction is valued at approximately $18.2 million. At December 31, 1997,
total assets, liabilities and shareholders' equity for Regency were $77.8
million, $70.8 million and $7.1 million, respectively.
On March 11, 1998, MainStreet announced an agreement to acquire Ballston
Bancorp, Inc. ("Ballston"), subject to regulatory approval and approval by the
shareholders of Ballston and certain other specified conditions. Under terms of
the agreement, MainStreet has agreed to pay the equivalent of $12.04 per share
for each outstanding share of Ballston common stock in the form of MainStreet
Common Stock, subject to adjustment under certain conditions. MainStreet has
agreed to exchange a maximum of .4920 and a minimum of .4025 shares of its
Common Stock for each share purchased of Ballston 1,619,474 shares of Common
Stock. If the maximum exchange ratios are used, 796,781 shares of MainStreet
Common Stock will be issued in the transaction. This transaction is valued at
approximately $19.5 million.
1996 vs. 1995
Overview
MainStreet BankGroup Incorporated reported record earnings of $16.7 million in
1996 compared to $14.1 million in 1995, an increase of 17.9%. This translates to
$1.38 per share on a fully diluted basis for 1996 compared to $1.17 per share
for 1995. These earnings produced a return on average assets of 1.37% and a
return on average shareholders' equity of 15.11% in 1996 compared to a return on
average assets of 1.35% and a return on average shareholders equity of 15.88% 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 $0.16 per share. Cash dividends increased from $0.35 in 1995 to $0.49
in 1996. Market capitalization increased to approximately $226 million at
December 31, 1996 compared with $155 million at December 31, 1995. Average
interest-earning assets increased $169.8 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 $1.7
million in 1996 over 1995 primarily driven by increased loan volume and higher
net charge-off levels. Noninterest income, excluding securities gains, increased
$2.0 million in 1996 over 1995. Securities gains totaled $610 thousand in 1996
compared with $43 thousand in 1995. Noninterest expense rose $3.0 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
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 market rates,
along with management's expansion of investment alternatives to better employ
capital and enhance shareholder returns, resulted in a 17 basis points decline
in the Corporation's net interest margin to 4.72% for 1996 compared to the 4.89%
achieved in 1995. Average earning assets increased $169.8 million, or 17.2%,
with higher yielding loans accounting for $107.0 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 $6.4 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, $3.5 million
was expensed as a loan loss provision, compared with $1.7 million in 1995, an
increase of $1.8 million, or 100.1%. Net loan charge-offs were $2.2 million
compared with $1.7 million in 1995. The ratio of net charge-offs to average
loans, net of unearned income, for 1996 was .28% 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 1.31% compared with the 1.34% at
December 31, 1995. The allowance for loan losses at December 31, 1996
represented 171.65% of nonperforming loans, compared with 162.99% 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 $11.0
million for 1996 compared to $9.0 million in 1995, an increase of $2.0 million,
or 21.9%. 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
non-interest income increases in 1996 over 1995 were 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.
Noninterest Expense
Total noninterest expense was $37.3 million at December 31, 1996 compared to
$34.3 million at December 31, 1995, an increase of $3.0 million, or 8.6%. Of
this increase, salaries and employee benefits increased $1.9 million or 10.7%.
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 513 at year-end 1995 to 574 at year-end
1996. The category of other noninterest expense increased $1.5 million, or 18.7%
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
Income tax expense was $7.7 million in 1996 compared to $5.9 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 Corporation's effective
tax rate was 31.6% in 1996 and 29.6% in 1995.
BALANCE SHEET
Investment Portfolio
Investments including securities available for sale and securities held to
maturity totaled $437.1 million on December 31, 1996, compared to $333.6 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, 77.6% of the
Corporation's investment portfolio was classified in the "available for sale"
category, with the remaining 22.4% 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 investment portfolio is
well positioned to protect against interest rate risk, with 40.3% 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.
Loans and Credit Quality
Average loans, net of unearned income, increased $107.0 million in 1996 to
$773.3 million, an increase of 16.1%. 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.
Although there were no large concentrations of credit to any particular
industry, the economic trends of the areas served by MainStreet affiliates are
influenced by the significant industries within the southwest region including
textiles, furniture, pre-built housing and agriculture. Virtually all of our
business activity is with customers located in the southwestern, central and
western part of southern Virginia and southeastern Maryland. 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 these geographic regions. 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 $133.5 million
and $108.6 million at December 31, 1996 and 1995, respectively. The remainder of
the loans secured by real estate consists almost entirely of 1-4 family
residential property. MainStreet 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
.28% compared with .25% in 1995. At December 31, 1996, the allowance for loan
losses to nonperforming assets was approximately 146.82% compared with 123.39%
last year. The allowance for loan losses to nonperforming loans ratio was
171.65% at year end 1996, compared to 162.99% the previous year. On December 31,
1996, the allowance for loan losses to loans ratio was 1.31% compared with 1.34%
in 1995. The Corporation believes that the allowance for loan losses of $10.9
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 $34.6 million compared to $17.5
million at December 31, 1995, an increase of $17.1 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.
This program will provide an additional, cost-effective source of funds that
will help finance MainStreet's employee benefit programs. It is also a way for
the Corporation to partner with the employees to reduce costs and improve
profitability in an ever increasing competitive environment. Interest earned not
collected increased $1.3 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 $940.7 million compared to $898.8
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 $31.0 million, while
savings balances decreased $11.6 million. Interest checking and money market
accounts increased $13.8 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 $33.6 million, with $9.4 million of the increase
occurring in noninterest-bearing demand deposit accounts. Average time deposits
were up $33.8 million, while combined savings, interest-bearing checking and
money market accounts decreased $9.6 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 $223.1
million, compared to $117.7 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 $9.6 million in 1996 to $113.9 million at year-end. Dividends per
share for 1996 were $.49 compared to $.35 for 1995. At year-end 1996, core
capital (Tier 1) was 9.31% of average annual assets against 9.89% at December
31, 1995. Total capital to risk based assets was 14.76% versus 16.14% the prior
year. Our capital position remains strong with ratios substantially above
regulatory prescribed minimums.
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". MainStreet adopted the
applicable portions of this statement effective January 1, 1997 which had no
material effect on financial statements.
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, 1997 and 1996, and
the related consolidated statements of income, changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Corporation'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, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Greensboro, North Carolina
January 16, 1998
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In 000's Except Share Data)
<TABLE>
<CAPTION>
December 31
--------------------------------
1997 1996
---- ----
<S> <C>
ASSETS
Cash and Due From Banks $ 43,255 $ 44,026
Interest-Earning Deposits In Domestic Banks 494 518
Mortgage Loans Held for Sale 3,048 742
Federal Funds Sold --- 6,100
Securities Available for Sale (Aggregate
Costs of $668,860 and $337,890
in 1997 and 1996, respectively) 673,526 339,136
Securities Held to Maturity (Aggregate
Market Values of $74,321 and
$100,100 in 1997 and 1996, respectively)
Taxable 38,170 59,717
Nontaxable 34,073 38,205
---------- ---------
72,243 97,922
Loans, Net of Unearned Income and Deferred Fees 878,777 829,979
Less: Allowance for Loan Losses (11,786) (10,903)
---------- ---------
Loans, Net 866,991 819,076
Bank Premises and Equipment, Net 15,992 15,140
Other Real Estate Owned 1,424 905
Other Assets 39,437 34,562
---------- ----------
TOTAL ASSETS $1,716,410 $1,358,127
========== ==========
LIABILITIES
Deposits:
Demand Deposits (Noninterest-Bearing) $ 142,738 $ 135,445
Interest Checking Accounts 110,725 107,119
Savings Deposits 115,413 122,118
Money Market Investment Accounts 91,189 95,091
Time Deposits:
Certificates of Deposit $100,000 and Over 139,041 100,846
Other 399,756 380,072
---------- ----------
Total Deposits 998,862 940,691
Repurchase Agreements Short-Term 213,871 145,356
Other Short-Term Debt 144,562 77,738
FHLB Borrowings, Callable 2/97 --- 45,000
Repurchase Agreements Long-Term 63,466 ---
Other Long-Term Debt 102,134 26,029
Corporation-Obligated Mandatorily Redeemable Capital Securities 50,000 ---
Accrued Interest Payable 5,589 4,066
Other Liabilities 9,274 5,178
---------- ----------
TOTAL LIABILITIES 1,587,758 1,244,058
---------- ----------
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 11,996,165 and 11,914,965 Shares in
1997 and 1996, respectively 59,981 59,575
Capital in Excess of Par 8,514 7,461
Retained Earnings 57,708 47,186
Unearned Compensation (176) (338)
Unrealized Gains on Securities, Net of Taxes 2,625 185
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 128,652 114,069
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,716,410 $1,358,127
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In 000's Except Per Share Data)
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------------------------
INTEREST INCOME 1997 1996 1995
---- ---- ----
<S> <C>
Interest and Fees on Loans:
Taxable $ 79,657 $ 73,433 $ 64,014
Nontaxable 133 92 163
Interest on Mortgage Loans Held for Sale 313 168 144
Interest and Dividends on Securities Available for Sale 29,597 16,566 10,369
Interest and Dividends on Securities Held to Maturity:
Taxable 3,359 4,731 7,284
Nontaxable 1,906 2,252 2,641
Other Interest Income 460 959 799
-------- -------- --------
Total Interest Income 115,425 98,201 85,414
-------- -------- --------
INTEREST EXPENSE
Deposits 37,870 35,219 34,489
Short-Term Debt 16,373 6,401 3,398
Long-Term Debt 4,536 3,155 63
7% Convertible Subordinated Debentures --- --- 454
-------- -------- --------
Total Interest Expense 58,779 44,775 38,404
-------- -------- --------
Net Interest Income 56,646 53,426 47,010
Provision for Loan Losses 4,011 3,451 1,725
-------- -------- --------
Net Interest Income After Provision for Loan Losses 52,635 49,975 45,285
-------- -------- --------
NONINTEREST INCOME
Service Charges, Fees and Other 9,430 8,065 6,585
Trust Income 3,370 2,942 2,441
Securities Gains, Net 926 610 43
-------- -------- --------
Total Noninterest Income 13,726 11,617 9,069
-------- -------- --------
NONINTEREST EXPENSE
Salaries 16,140 14,487 13,783
Employee Benefits 6,154 5,663 4,418
Net Occupancy 2,073 1,940 1,975
Equipment 3,737 3,885 3,601
FDIC Assessment 121 22 1,062
Stationery and Supplies 863 967 959
Advertising 438 606 333
Other 11,426 9,684 8,159
-------- -------- --------
Total Noninterest Expense 40,952 37,254 34,290
-------- -------- --------
Income Before Income Taxes 25,409 24,338 20,064
Income Tax Expense 8,152 7,685 5,934
-------- -------- --------
NET INCOME $ 17,257 $ 16,653 $ 14,130
======== ======== ========
Per Share:
Basic:
NET INCOME $ 1.44 $ 1.39 $ 1.26
======== ======== ========
Average Shares Outstanding 11,962 11,970 11,208
======== ======== ========
Diluted:
NET INCOME $ 1.44 $ 1.38 $ 1.17
======== ======== ========
Average Shares Outstanding 12,001 12,033 12,323
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In 000's Except for Share and Per Share Data)
<TABLE>
<CAPTION>
Unrealized
Gains
Common Capital In Retained Unearned (Losses) on
Stock Excess of Par Earnings Compensation Securities, Net Total
------ ------------- -------- ------------ ------------ ----------
<S> <C>
Year Ended December 31, 1995
Balance at January 1, 1995 as previously reported $ 32,884 $ (417) $ 47,844 $ --- $ (8,317) $71,994
Adjustments for Pooling of Interests 2,864 1,662 75 --- --- 4,601
------- -------- -------- -------- -------- -------
Balance at January 1, 1995 as restated 35,748 1,245 47,919 --- (8,317) 76,595
Net Income --- --- 14,130 --- --- 14,130
Cash Dividends ($.35 Per Share) --- --- (4,217) --- --- (4,217)
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 $4,153 --- --- --- --- 7,713 7,713
Stock Split Effected in the Form of a Stock Dividend 21,336 --- (21,336) --- --- ---
------- -------- -------- -------- -------- --------
Balance at December 31, 1995 59,648 8,092 36,496 --- (604) 103,632
Year Ended December 31, 1996
Net Income --- --- 16,653 --- --- 16,653
Cash Dividends ($.49 Per Share) --- --- (5,867) --- --- (5,867)
Cash Paid for Cash Election and Fractional
Shares for Mergers (666) (1,632) --- --- --- (2,298)
Sale of 118,638 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 $425 --- --- --- --- 789 789
-------- -------- -------- --------- -------- --------
Balance at December 31, 1996 59,575 7,461 47,186 (338) 185 114,069
Year Ended December 31, 1997
Net Income --- --- 17,257 --- --- 17,257
Cash Dividends ($.57 Per Share) --- --- (6,723) --- --- (6,723)
Cash Paid for Cash Election and Fractional
Shares for Mergers --- --- (12) --- --- (12)
Sale of 81,200 Shares Through Dividend
Reinvestment Plan and Stock Option Plan 406 1,053 --- --- --- 1,459
Unearned Compensation --- --- --- 162 --- 162
Change in unrealized gains (losses) on securities,
net of deferred income tax expense of $1,315 --- --- --- --- 2,440 2,440
-------- -------- -------- -------- -------- --------
Balance at December 31, 1997 $ 59,981 $ 8,514 $ 57,708 $ (176) $ 2,625 $128,652
======== ======== ======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In 000's)
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------------
1997 1996 1995
----- ----- -----
Cash Flows From Operating Activities:
<S> <C>
Net Income $ 17,257 $ 16,653 $ 14,130
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Provision for Loan Losses 4,011 3,451 1,725
Depreciation and Amortization 2,387 2,525 2,300
Loss on Disposal of Fixed Assets 32 --- ---
Amortization of Securities Premiums and Discounts, Net 1,307 (360) (547)
Deferred Income Tax Provision (Benefit) (824) (505) 683
Securities Gains, Net (926) (610) (43)
Amortization of Intangibles 164 227 267
Mortgage Loan Originations Held for Sale (23,155) (12,943) (10,914)
Mortgage Loans Sold 20,849 13,981 9,655
Changes in Other Assets and Other Liabilities:
Other Assets (4,654) (2,030) 3,399
Accrued Interest 1,523 895 731
Accrued Loss Contingencies --- --- (1,341)
Other Liabilities 4,096 (184) 1,197
-------- -------- --------
Net Cash Provided by Operating Activities 22,067 21,100 21,242
-------- -------- --------
Cash Flows From Investing Activities:
(Increase) Decrease in Interest-Earning Deposits 24 357 (825)
Purchases of Securities Available for Sale (672,582) (295,979) (98,086)
Purchases of Securities Held to Maturity --- (12,545) (18,791)
Proceeds from Sale of Securities Available for Sale 227,708 122,806 28,915
Proceeds from Calls and Maturities of Securities Available for Sale 120,770 52,679 25,115
Proceeds from Calls and Maturities of Securities Held to Maturity 18,767 31,707 26,855
Net Increase in Loans (51,926) (117,679) (83,149)
Purchases of Bank Premises and Equipment (3,336) (3,804) (2,394)
Proceeds from Sale of Bank Premises and Equipment 65 --- 2
Net (Increase) Decrease in Other Real Estate (519) 838 709
Increase in Other Assets (876) (15,167) ---
-------- -------- --------
Net Cash Used in Investing Activities (361,905) (236,787) (121,649)
-------- -------- --------
Cash Flows From Financing Activities:
Net Increase in Deposits 58,171 41,914 31,042
Net Increase in Repurchase Agreements Short-Term 68,515 108,229 37,127
Net Increase (Decrease) in Other Short-Term Debt 66,824 (2,864) 51,627
Net Increase (Decrease) in FHLB Borrowings, Callable 2/97 (45,000) 45,000 ---
Net Increase in Repurchase Agreements Long-Term 63,466 --- ---
Net Increase in Other Long-Term Debt 76,105 25,100 929
Increase in Corporation-Obligated Mandatorily Redeemable Capital Securities 50,000 --- ---
Cash Dividends (6,723) (5,867) (4,217)
Cash Paid in Lieu of Common Stock at Acquisition (12) (2,298) ---
Net Expenses Incurred for Debenture Conversion --- --- (32)
Proceeds From Issuance of Common Stock, Net of Amortization 1,621 1,160 525
-------- -------- --------
Net Cash Provided by Financing Activities 332,967 210,374 117,001
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents (6,871) (5,313) 16,594
Cash and Cash Equivalents at Beginning of Year 50,126 55,439 38,845
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 43,255 $ 50,126 $ 55,439
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996 and For Each of the
Three Years in the Period Ended December 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include the
accounts of MainStreet BankGroup Incorporated and its subsidiaries (MainStreet).
All significant intercompany accounts and transactions have been eliminated.
Cash Equivalents. For purposes of the Statement of Cash Flows, MainStreet
considers all Cash and Due From Bank accounts and Federal Funds Sold 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 $89,511,000, $89,599,000 and
$97,639,000 at December 31, 1997, 1996 and 1995, respectively. Beginning
January 1, 1996, MainStreet adopted Statement of Financial Accounting Standards
(SFAS) No. 122, "Accounting for Mortgage Servicing Rights". The effect of SFAS
No. 122, superseded by SFAS No. 125, was immaterial for 1997 and 1996.
Securities. MainStreet classifies and accounts for its investments in debt and
equity securities as follows:
- - - Debt securities that MainStreet 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. MainStreet 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,
net of taxes.
Securities are classified at purchase date under the specific identification
method.
Gains and losses on securities sales are recognized in the period in which
incurred. Amortization and accretion of premiums and discounts are included in
income over the contractual life of the securities.
Loans. 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.
MainStreet 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". MainStreet
considers a loan to be impaired when, based upon current information and events,
it believes it is probable that MainStreet will be unable to collect all amounts
due according to the contractual terms of the loan agreement. MainStreet's
impaired loans include nonaccrual loans (excluding those collectively reviewed
for impairment), troubled debt restructurings, and certain other nonperforming
loans. For collateral dependent loans, MainStreet bases the measurement of these
impaired loans on the fair value of the loan's collateral properties. For all
other loans, MainStreet 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. Securities Sold Under Repurchase Agreements. Securities sold under
agreements to repurchase are treated as collateralized financing transactions
and are recorded at the amounts at which securities were sold. It is
MainStreet's policy to maintain control of the securities sold under these
agreements.
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 Owned. Other real estate owned 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.
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. The Financial Accounting Standards Board has issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Accounting for Earnings Per
Share". This new standard requires dual presentation of basic and diluted
earnings per share (EPS) on the face of the statements of income and requires a
reconciliation of the numerators and denominators of the basic and diluted EPS
calculations. The Bank adopted SFAS No. 128 retroactively during 1997, to all
periods presented. Basic income per share is calculated based on the weighted
average number of shares of common stock outstanding during each period. Diluted
income per share is computed using weighted average shares outstanding adjusted
to reflect the dilutive effect of all potential common shares that were
outstanding during the period. For 1995, diluted income per share also included
the effect of the 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 the purposes of calculating diluted
income per share for 1995, 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 1997, 1996 and 1995. Share and per share data has
been restated to reflect the stock split effected in March 1996.
New Accounting Pronouncements. In June of 1997, the Financial Accounting
Standards Board issued two new Statements of Financial Accounting Standards
(SFAS), No. 130, "Reporting of Comprehensive Income" and No. 131, "Disclosures
about Segments of an Enterprise and Related Information". SFAS No. 130,
"Reporting of Comprehensive Income," establishes standards of reporting and
displaying comprehensive income and its components. This standard will be
effective for MainStreet's 1998 fiscal year. MainStreet will comply with the
standard's required disclosures. SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," establishes guidelines in reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
standard will be effective for MainStreet's 1998 fiscal year. MainStreet will
comply with the standard's required disclosures. The adoption of these two
standards will have no material effect on net income or financial position.
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 MainStreet.
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 $ .7 million and $.9
million at December 31, 1997 and 1996, respectively.
Supplemental Cash Flow Information. Total interest paid in cash was $57.3
million, $43.8 million and $37.6 million for the years ended December 31, 1997,
1996 and 1995, respectively. Cash paid for income taxes was $8.9 million, $8.9
million and $5.1 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Repossessed and foreclosed properties transferred to Other Real
Estate Owned and Other Assets from Loans amounted to $3.7 million, $3.2 million
and $1.2 million in 1997, 1996 and 1995, 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 $4.7 million and $1.3 million are included as noncash investing activities in
1997 and 1996, respectively. During 1997, stock awards were granted with
unearned compensation at December 31, 1997 and 1996 of $176 thousand and $338
thousand, respectively, and are included as noncash financing activities.
Reclassifications. Certain reclassifications have been made to the prior years'
financial statements to conform to the 1997 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 Corporation'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 1997, MainStreet acquired Commerce Bank Corporation ("Commerce") in a
transaction accounted for as a pooling of interests which was effective December
1, 1997.
The acquisition of Commerce was completed by converting the 192,216 shares of
Commerce common stock outstanding and the 30,984 shares of Commerce preferred
stock outstanding into approximately 459,569 shares of MainStreet common stock
based on a 2.059 exchange ratio. The 86,505 Commerce warrants outstanding were
converted into approximately 113,148 shares of MainStreet common stock based on
a 1.308 exchange ratio. Approximately $12 thousand in cash was paid in lieu of
fractional shares.
Separate results of the pooled entities for the nine months ended September 30,
1997 and for the years ended December 31, 1996 and 1995 are as follows:
September 30, 1997 1996 1995
------------------ ---- ----
(unaudited)
Total Income
MainStreet $91,269 $104,330 $89,695
Commerce 4,270 5,488 4,788
------- -------- -------
Combined $95,539 $109,818 $94,483
======= ======== =======
Net Interest Income
MainStreet $40,025 $50,447 $44,412
Commerce 2,305 2,979 2,598
------- ------- -------
Combined $42,330 $53,426 $47,010
======= ======= =======
Net Income
MainStreet $12,982 $15,733 $13,492
Commerce 571 920 638
------- ------- -------
Combined $13,553 $16,653 $14,130
======= ======= =======
At December 31, 1997, MainStreet had two acquisitions pending which are
anticipated to be completed within the first quarter of 1998. The first
acquisition is Tysons Financial Corporation ("Tysons"), which will be accounted
for as a purchase. The second acquisition is Regency Financial Shares
("Regency"), which will be accounted for as a pooling of interests.
Under the terms of the Plan of Merger with Tysons, MainStreet agreed to pay
shareholders of Tysons the equivalent of $14.50 per share for each share of
Tysons common stock outstanding. In addition, as a condition of the merger,
Tysons' outstanding Directors' Warrants shall be exercised prior to the closing
for the difference between the exercise price per warrant and $14.50 in the form
of Tysons' common stock. MainStreet also agreed to redeem Tysons' outstanding
Directors' Options for the difference between the exercise price per option and
$14.50 in the form of MainStreet common stock. MainStreet will assume the
employee options outstanding. The transaction is valued at approximately $17.2
million, which will be paid in MainStreet common stock. Total assets,
liabilities and shareholders' equity for Tysons at December 31, 1997 were $101.9
million, $93.4 million and $8.5 million, respectively.
Under the terms of the agreement with Regency, MainStreet agreed to pay the
equivalent of $13.00 per share for each outstanding share of Regency common
stock in the form of MainStreet common stock, subject to adjustments under
certain conditions. The maximum and minimum exchange ratios are .500 and .406,
respectively, for Regency's outstanding shares of common stock. MainStreet has
also agreed to exchange the balance of Regency's outstanding Directors' Options
which have not been exercised as of the consummation of the merger for the
difference between the exercise price per option and $13.00 in the form of
MainStreet common stock, resulting in a maximum exchange ratio of .250 shares
and minimum exchange ratio of .188 shares per option exchanged. MainStreet has
also agreed to assume the outstanding employee stock options of Regency. This
transaction is valued at approximately $18.2 million. At December 31, 1997,
total assets, liabilities and shareholders' equity for Regency were $77.8
million, $70.8 million and $7.1 million, respectively.
On March 11, 1998, MainStreet announced an agreement to acquire Ballston
Bancorp, Inc. ("Ballston"), subject to regulatory approval and approval by the
shareholders of Ballston and certain other specified conditions. Under terms of
the agreement, MainStreet has agreed to pay the equivalent of $12.04 per share
for each outstanding share of Ballston common stock in the form of MainStreet
Common Stock, subject to adjustment under certain conditions. MainStreet has
agreed to exchange a maximum of .4920 and a minimum of .4025 shares of its
Common Stock for each share purchased of Ballston 1,619,474 shares of Common
Stock. If the maximum exchange ratios are used, 796,781 shares of MainStreet
Common Stock will be issued in the transaction. This transaction is valued at
approximately $19.5 million.
NOTE 3 - SECURITIES AVAILABLE FOR SALE
The following sets forth the composition of securities available for sale at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Market Value
---------- ---------- ---------- ------------
<S> <C>
U. S. Treasury Securities $ 13,805 $ 22 $ (7) $ 13,820
Obligations of U. S. Government Agencies 26,527 114 (190) 26,451
Mortgage Backed Securities 374,047 2,996 (236) 376,807
Collateralized Mortgage Obligations and REMICs 189,967 1,114 (495) 190,586
Corporate Bonds 36,153 633 (16) 36,770
Other Securities 13,643 172 --- 13,815
Obligations of State and
Political Subdivisions 14,718 559 --- 15,277
-------- -------- -------- --------
Total Securities Available for Sale $668,860 $ 5,610 $ (944) $673,526
======== ======== ======== ========
1996
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Market Value
---------- ---------- ---------- ------------
U. S. Treasury Securities $ 9,962 $ 69 $ (8) $ 10,023
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 9,333 132 --- 9,465
Obligations of State and Political Subdivisions 9,398 319 (5) 9,712
-------- ------- ------- -------
Total Securities Available for Sale $337,890 $ 3,208 $(1,962) $339,136
======== ======= ======= ========
</TABLE>
As permitted under Financial Accounting Standards Board Statement No. 115,
MainStreet transferred securities with net book values of approximately $11.8
million and $13.8 million from the held to maturity portfolio to the available
for sale portfolio upon acquisition of Commerce and Hanover, respectively. The
unrealized net loss on these securities at acquisition was approximately $26
thousand and $66 thousand, respectively.
The amortized costs and approximate market values of securities available for
sale at December 31, 1997, 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.
Amortized Approximate
Cost Market Value
---------- ------------
Due in one year or less $ 14,208 $ 14,210
Due after one year but within five years 25,841 26,147
Due after five years but within ten years 17,391 17,610
Due after ten years 47,406 48,166
Mortgage-Backed Securities 374,047 376,807
CMOs/REMICs 189,967 190,586
-------- --------
Total Securities Available for Sale $668,860 $673,526
======== ========
Gross gains of $1,398,000, $855,000 and $81,000 and gross losses of $497,000,
$295,000 and $64,000 were realized on sales and calls of securities available
for sale for 1997, 1996 and 1995, respectively. Securities available for sale
with carrying values approximating $285 million and $154 million at December 31,
1997 and 1996, respectively, were pledged to secure public deposits and for
other purposes as required or permitted by law.
NOTE 4 - SECURITIES HELD TO MATURITY
The amortized costs and approximate market values and gross unrealized gains and
losses of securities held to maturity at December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Market Value
--------- ---------- ---------- ------------
<S> <C>
Obligations of U. S. Government Agencies $ 12,347 $ 745 $ (51) $ 13,041
Mortgage Backed Securities 22,917 455 (63) 23,309
Obligations of State and Political Subdivisions 36,979 1,011 (19) 37,971
-------- -------- ------- --------
Total Securities Held to Maturity $ 72,243 $ 2,211 $ (133) $ 74,321
======== ======== ======= ========
1996
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Market Value
--------- ---------- ---------- ------------
U. S. Treasury Securities $ 9,897 $ 4 $ (12) $ 9,889
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 $ 97,922 $ 2,714 $ (536) $100,100
======== ======= ======= ========
</TABLE>
At December 31, 1994, MainStreet 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, 1997 this
unrealized loss was $.7 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.
The amortized costs and approximate market values of securities held to maturity
at December 31, 1997, 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.
Amortized Approximate
Cost Market Value
----------- ------------
Due in one year or less $ 2,770 $ 2,800
Due after one year but within five years 22,011 22,570
Due after five years but within ten years 18,398 19,305
Due after ten years 6,147 6,337
Mortgage-Backed Securities 22,917 23,309
-------- --------
$ 72,243 $ 74,321
======== ========
Gross gains of $32,000, $63,000, and $31,000 and gross losses of $7,000,
$13,000, and $5,000 were realized on calls of securities held to maturity for
1997, 1996, and 1995, respectively. Securities with carrying values
approximating $55 million and $43 million at December 31, 1997 and 1996,
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, 1997 and 1996 are summarized
below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C>
Commercial $425,437 $386,307
Real Estate 219,337 208,684
Consumer 246,433 249,098
-------- -------
Total Loans 891,207 844,089
Less: Unearned Income and Deferred Fees (12,430) (14,110)
-------- -------
Loans, Net of Unearned Income and Deferred Fees 878,777 829,979
Less: Allowance for Loan Losses (11,786) (10,903)
-------- --------
Loans, Net $866,991 $819,076
======== ========
</TABLE>
A summary of changes in the allowance for loan losses for each of the three
years in the period ended December 31, 1997 follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C>
Balance at Beginning of Year $10,903 $ 9,605 $ 9,547
Provision for Loan Losses 4,011 3,451 1,725
Losses Charged to Allowance (3,806) (3,245) (2,099)
Recoveries Credited to Allowance 678 1,092 432
------- ------- -------
Balance at End of Year $11,786 $10,903 $ 9,605
======= ======= =======
</TABLE>
Nonperforming assets at December 31, 1997 and 1996 are as follows:
1997 1996
---- ----
Nonaccrual Loans $3,792 $3,291
Loans Past Due 90 Days or More 2,436 3,061
------ ------
Total Nonperforming Loans 6,228 6,352
------ ------
Other Real Estate Owned 1,424 905
Other Repossessed Assets 190 169
------ ------
Total Foreclosed/Repossessed Assets 1,614 1,074
------ ------
Total Nonperforming Loans and Foreclosed/
Repossessed Assets $7,842 $7,426
====== ======
Nonperforming loans were .71% and .77% of loans, net of unearned income and
deferred fees, at December 31, 1997 and 1996, respectively.
The effect of nonaccrual loans on interest income was as follows:
1997 1996 1995
---- ---- ----
Gross amount of interest that would have been
recorded at original rate $ 446 $ 482 $ 337
Interest that was reflected in income (34) (253) (36)
----- ----- -----
Net impact on interest income $ 412 $ 229 $ 301
===== ===== =====
At December 31, 1997 and 1996, the recorded investment in loans which have been
identified by MainStreet as impaired loans in accordance with SFAS 114 totaled
$3.6 million and $3.3 million, respectively, and the total allowance for loan
losses related to such loans was $.6 million and $.4 million, respectively. The
average balance during 1997, 1996 and 1995 for impaired loans was approximately
$3.8 million, $2.8 million and $3.8 million, respectively. The total interest
income related to impaired loans reflected in the 1997, 1996 and 1995 statements
of income was approximately $20,000, $248,000 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:
1997 1996
---- ----
Balance at Beginning of Year $ 28,620 $25,838
Additions 12,612 13,539
Payments (16,924) (10,757)
-------- -------
Balance at End of Year $ 24,308 $28,620
======== =======
These loans, in the opinion of management, involve no more than normal risk of
collectibility. Total unfunded commitments at December 31, 1997 were $5.8
million.
NOTE 7 - BANK PREMISES AND EQUIPMENT
Bank premises and equipment at December 31, 1997 and 1996 consist of:
1997 1996
---- ----
Land $ 2,351 $ 2,306
Buildings and Improvements 11,957 12,096
Capital Lease 193 243
Furniture and Equipment 19,756 22,068
Construction in Progress 1,743 88
Leasehold Improvements 1,312 1,229
-------- --------
37,312 38,030
Accumulated Depreciation and Amortization (21,320) (22,890)
-------- --------
Total Bank Premises and Equipment $ 15,992 $ 15,140
======== ========
NOTE 8 - INCOME TAXES
The components of income tax expense for the years ended December 31, 1997, 1996
and 1995 are as follows:
1997 1996 1995
---- ---- ----
Current Tax Expense $ 8,976 $ 8,181 $5,269
Deferred Tax Expense (Benefit) (824) (496) 665
------- ------- ------
Income Tax Expense $ 8,152 $ 7,685 $5,934
======= ======= ======
The reasons for the differences in income tax expense and the statutory Federal
income tax rate for the years ended 1997, 1996 and 1995 are as follows:
1997 1996 1995
---- ---- ----
Federal Income Tax Expense Rate 35.0% 35.0% 35.0%
Tax Exempt Interest (3.0) (3.3) (4.4)
Change in Marginal Tax Rate --- (.2) (1.1)
Acquisition Costs .7 .9 ---
Other (.6) (.8) .1
---- ---- ----
Effective Income Tax Rate 32.1% 31.6% 29.6%
==== ==== ====
The components of net deferred tax assets at December 31, 1997 and 1996 are
presented below:
1997 1996
---- ----
(In 000's)
Deferred Tax Assets:
Allowance for Loan Losses and Unearned Fees $4,479 $4,045
Other Real Estate Owned 28 1
Intangibles 949 967
Interest Earned Not Collected on Nonaccrual Loans Not
Recognized for Financial Reporting Purposes 216 116
Miscellaneous Accruals not Deductible for Tax Purposes 1,231 914
------ ------
Total Gross Deferred Tax Assets 6,903 6,043
------ ------
Deferred Tax Liabilities:
Bank Premises and Equipment 340 358
Securities, Due to Differences in Discount Accretion 339 243
Prepaid Expenses, Principally Due to Deduction Taken for
Tax Purposes 212 261
Unrealized Gain on Securities Available for Sale 1,414 99
Other 247 240
------ ------
Total Gross Deferred Liabilities 2,552 1,201
------ ------
Net Deferred Tax Assets $4,351 $4,842
====== ======
NOTE 9 - SHORT-TERM DEBT
At December 31, 1997 and 1996, short-term debt consists of the following:
1997 1996
---- ----
Corporate Cash Management $ 25,359 $ 19,303
Federal Funds Purchased 38,000 23,200
Repurchase Agreements 213,871 145,356
Treasury Tax and Loan Notes 20,203 5,585
FHLB Borrowings 61,000 27,350
Other Borrowings --- 2,300
-------- --------
Total Short-Term Debt $358,433 $223,094
======== ========
The average outstanding total short-term borrowings were $297.3 million, $127.2
million and $64.6 million for 1997, 1996 and 1995, respectively. The weighted
average interest rates were 5.51%, 5.03% and 5.26% for 1997, 1996 and 1995,
respectively. The weighted average interest rates in effect at year end were
5.70%, 5.45% and 5.51% at December 31, 1997, 1996 and 1995, respectively.
The maximum month-end balance of short-term debt was $358.4 million and $234.3
million for 1997 and 1996, respectively. Securities held to maturity and
securities available for sale were pledged as collateral for securities sold
under repurchase agreements.
NOTE 10 - LONG-TERM DEBT
At December 31, 1997 and 1996, long-term debt consists of the following:
1997 1996
------ ------
FHLB Borrowings $101,936 $ 70,786
Repurchase Agreements 63,466 ---
Capital Lease 198 243
-------- --------
Total Long-Term Debt $165,600 $ 71,029
======== ========
The average outstanding total long-term borrowings were $71.6 million, $58.7
million and $.7 million for 1997, 1996 and 1995, respectively. The weighted
average interest rates were 5.63%, 5.38% and 7.75% for 1997, 1996 and 1995,
respectively. The weighted average interest rates in effect at year end were
5.64%, 5.07% and 7.75% for 1997, 1996 and 1995, respectively. The maximum
month-end balance of long-term debt was $165.6 million and $70.9 million for
1997 and 1996, respectively.
Long-term FHLB borrowings consist of fixed and variable rate instruments. Of the
fixed rate borrowings which have principal reductions (PRC), $4.0 million have
quarterly principal reductions, while the remaining $.6 million has semi-annual
principal reductions. The rates charged on the variable rate instruments which
reprice quarterly are tied to the three-month LIBOR less twenty-two basis
points. The rates charged on the variable rate instruments which reprice monthly
are tied to the one-month LIBOR less fifteen basis points. The following table
details the maturity and repricing information of these FHLB borrowings:
<TABLE>
<CAPTION>
Original Repricing Balance
Maturity Date Term Frequency Outstanding
------------- -------- --------- -----------
<S> <C>
Variable Rate May 22, 2000 3 years Monthly $ 27,350
Variable Rate April 9, 2001 4 years Quarterly 45,000
Fixed Rate - PRC April 17, 2002 7 years N/A 643
Fixed Rate December 16, 2002 5 years N/A 25,000
Fixed Rate - PRC July 14, 2002 7 years N/A 579
Fixed Rate - PRC December 11, 2017 20 years N/A 3,364
</TABLE>
The long-term repurchase agreements are all fixed rate instruments with original
terms of 5 years. They are scheduled to mature in December, 2002 and are
callable in December, 1999. The capital lease of $.2 million matures October 31,
2001 and interest is calculated based on a fixed rate.
The principal payments on long-term debt are as follows:
<TABLE>
<CAPTION>
Within After 1 Year But After 2 Years But After 3 Years But After 4 Years But After
1 Year Within 2 Years Within 3 Years Within 4 Years Within 5 Years 5 Years
---------- ------------------ ----------------- ------------- ----------------- ---------
<S> <C>
$ 340 $ 351 $ 362 $ 359 $ 249 $ 3,123
</TABLE>
NOTE 11 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The following table shows the maturities of the repurchase agreements at
December 31, 1997:
<TABLE>
<CAPTION>
Up to 30 Days 30 to 90 Days Over 90 Days
- - ----------------------- ---------------------- ------------------------
Amount Rate Amount Rate Amount Rate
- - ---------- ------ ---------- ----- ---------- -----
<S> <C>
$ 24,253 5.85% $ 21,987 5.85% $ 16,000 5.51%
12,473 6.10 9,130 5.86 20,000 5.64
74,411 6.13 16,993 5.88 27,466 5.66
37,254 6.25 17,370 5.91 --- ---
- - -------- -------- -------
$148,391 $ 65,480 $ 63,466
======== ======== ========
</TABLE>
The following table shows the securities underlying the repurchase agreements at
December 31, 1997 in their corresponding maturity categories:
<TABLE>
<CAPTION>
Up to 30 days 30 to 90 Days
------------------------------ -----------------------
Amortized Approximate Amortized Approximate
Cost Market Value Cost Market Value
--------- ------------ --------- ------------
<S> <C>
Obligations of U.S. Government Agencies $ 788 $ 790 $ 2,300 $ 2,286
Mortgage Backed Securities 104,732 105,295 55,330 55,934
Collateralized Mortgage Obligations
and REMICs 44,584 45,004 8,994 9,010
-------- -------- -------- --------
$150,104 $151,089 $ 66,624 $ 67,230
======== ======== ======== ========
Over 90 Days Total Securities
---------------------------- -----------------------
Amortized Approximate Amortized Approximate
Cost Market Value Cost Market Value
--------- ------------
Obligations of U.S. Government Agencies $ --- $ --- $ 3,088 $ 3,076
Mortgage Backed Securities 63,869 64,010 223,931 225,239
Collateralized Mortgage Obligations
and REMICs 4,623 4,637 58,201 58,651
-------- -------- -------- --------
$ 68,492 $ 68,647 $285,220 $286,966
======== ======== ======== ========
</TABLE>
There were no maturities of repurchase agreements or their underlying securities
within the overnight or demand categories.
NOTE 12 - REDEMPTION OF 7% CONVERTIBLE SUBORDINATED DEBENTURES
On September 12, 1995, MainStreet 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
MainStreet's common stock which were subsequently registered with the Securities
and Exchange Commission.
NOTE 13 - CORPORATION-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES
In November 1997, MainStreet BankGroup Incorporated created a Delaware statutory
business trust subsidiary ("MainStreet Capital Trust I") which issued
corporation-obligated mandatorily redeemable capital securities ("trust
securities") in the amount of $50 million to qualified institutional investors,
and $1.5 million in trust common securities to the Corporation. The trust
securities have a maturity of thirty years, pay dividends at the rate of 8.9%,
and may be treated as Tier I capital for regulatory purposes. MainStreet Capital
Trust I, then in turn, used the proceeds from the sale of the trust securities
to acquire Junior Subordinated Debentures of the Corporation which have the same
rate, payment of dividends and maturity. Holders of the trust securities are
entitled to receive preferential cash dividends accumulating from the date of
original issuance, November 19, 1997, and payable semi-annually in arrears on
the first day of June and December of each year. The proceeds from the Junior
Subordinated Debentures of the Corporation will be used for general corporate
purposes, including, without limitation, increasing the Corporation's investment
in the Banks for the possible acquisition of additional branch facilities, the
financing of one or more future acquisitions by the Corporation and the funding
of repurchases of the Corporation's common stock, which may be made from time to
time. Initially, the net proceeds were invested in available for sale
securities.
NOTE 14 - INCOME PER SHARE
The following tables reconcile the numerator and denominator of the basic and
diluted computations for net income per share for the years ended December 31,
1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ------------- ---------
<S> <C>
Basic EPS
Income available to common shareholders $ 17,257 $ 11,962 $ 1.44
========
Effect of Stock Options --- 39
----------- ----------
Diluted EPS
Income available to common
shareholders and assumed conversions $ 17,257 $ 12,001 $ 1.44
=========== =========== =======
1996
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ------------- ---------
Basic EPS
Income available to common shareholders $ 16,653 $ 11,970 $ 1.39
========
Effect of Stock Options --- 63
----------- ----------
Diluted EPS
Income available to common
shareholders and assumed conversions $ 16,653 $ 12,033 $ 1.38
=========== =========== =======
1995
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ------------- ---------
Basic EPS
Income available to common shareholders $ 14,130 $ 11,208 $ 1.26
========
Effect of Stock Options --- 109
Effect of Debentures 310 1,006
----------- ----------
Diluted EPS
Income available to common
shareholders and assumed conversions $ 14,440 $ 12,323 $ 1.17
=========== =========== ========
</TABLE>
NOTE 15 - EMPLOYEE BENEFIT PLANS
MainStreet maintains a defined benefit retirement plan ("Pension Plan") for the
benefit of its employees (not directors). This was a new plan effective May 1,
1995. The Pension Plan's 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. The following table sets
forth the Pension Plan's funded status and amounts recognized in the
consolidated financial statements:
<TABLE>
<CAPTION>
December 31 December 31
1997 1996
---- ----
<S> <C>
Actuarial present value of benefit obligation:
Accumulated benefit obligation (including vested benefits
of $1,751,000 and $1,386,000 in 1997 and 1996, respectively) $ 2,050 $ 1,558
======= =======
Projected benefit obligation for service rendered to date $(3,214) $(2,257)
Plan assets at fair value 2,876 1,719
------- -------
Funded status (338) (538)
Unrecognized transition obligation 145 146
Unrecognized prior service costs 193 213
Unrecognized net gain (246) (91)
------- -------
Accrued pension costs $ (246) $ (270)
======= =======
</TABLE>
Net pension cost for the defined benefit plan included the following expense
components:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C>
Service cost $ 823 757 455
Interest cost 168 111 61
Actual Return on Assets (170) (102) (70)
Amortization of transition obligation 18 29 11
------- ------- ------
Net pension expense included in employee benefits $ 839 $ 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% and 8.00%, respectively, in all three years 1997, 1996 and 1995. The
assumed rate of increase in future compensation levels used was 5.00%.
Effective October 1, 1995, MainStreet amended its discretionary profit sharing
plan. All profit sharing contributions ceased as of September 30, 1995.
Contributions continued as a matching of the 401-K deferral plan for the benefit
of the employees. Under the amended plan, MainStreet 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
expense for the matching 401-K plan was $287,000, $287,000 and $109,000 for
1997, 1996 and 1995, respectively.
MainStreet provides supplemental executive retirement policies for its senior
executive officers. These policies include cash value life insurance and
deferred compensation. MainStreet 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. MainStreet's policy is to fund the costs of medical benefits in
amounts determined at the discretion of management. MainStreet has elected to
amortize the initial transition obligation of $1.2 million over 20 years.
The following table sets forth the Postretirement Benefit Plans' funded status
and amounts recognized in the consolidated financial statements at December 31,
1997 and 1996:
1997 1996
---- ----
Accumulated postretirement benefit obligations:
Retirees $ (867) $ (817)
Fully eligible active plan participants (1,084) (779)
------- -------
Accumulated postretirement benefit obligation
at December 31, 1997 and 1996 (1,951) (1,596)
Plan assets at fair value at December 31, 1997
and 1996 --- ---
------- -------
Accumulated postretirement benefit obligation in
excess of plan assets (1,951) (1,596)
Unrecognized transition obligation 903 963
Unrecognized net (gain) loss 233 (19)
------- -------
Accrued postretirement benefit costs included in
other liabilities $ (815) $ (652)
======= =======
Net periodic postretirement benefit costs for 1997, 1996 and 1995 include the
following components:
1997 1996 1995
---- ---- ----
Service cost $ 80 $ 61 $ 51
Interest cost 120 79 82
Amortization of transition obligation 60 60 61
Amortization of net gain 1 (6) (14)
------ ------- -------
Net periodic postretirement benefit costs $ 261 $ 194 $ 180
====== ======= =======
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% for December 31, 1997, 1996 and 1995.
For measurement purposes, the assumed health care costs trend rates of increase
were 8.00%, 9.00% and 10% for 1997, 1996 and 1995, respectively, with gradually
declining percentages to 5.50% 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; however, for years ended December 31, 1997, 1996
and 1995, the impact on the accumulative postretirement benefit and the net
periodic postretirement benefit costs would have been immaterial.
NOTE 16 - STOCK OPTION PLAN
In April 1991, the shareholders approved a stock option plan that had been
previously approved by the Board of Directors in November, 1990. The plan, known
as the 1990 Plan, gives MainStreet 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. SARs entitle
the holder to receive payment equal to the increase in market value of
MainStreet's common stock from date of grant to the date exercised.
In June 1994, a stock award of 8,000 shares was granted under the 1990 Plan. In
1996, stock awards were granted for 35,072 and 2,000 shares in January and
April, respectively, from this plan. A stock award of 3,000 shares was made from
the plan in April 1997. At December 31, 1997, unearned compensation of $176
thousand remained relating to the unvested portion of the stock award granted in
January, 1996.
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 MainStreet, the outstanding
options were converted based on the exchange ratio of .884 into options to
acquire MainStreet common stock. The maximum number of shares subject to
purchase under the plan was 194,480.
In April 1997, the shareholders approved a stock option plan that had been
previously approved by the Board on February 26, 1997. This plan, known as the
1997 Plan, permits the grant of options to purchase shares of Common Stock from
MainStreet, Stock Appreciation Rights ("SARs"), Stock Awards and/or Performance
Shares. A maximum of 550,000 shares are subject to purchase or grant under the
plan. At December 31, 1997 there were no grants made from this plan.
On January 1, 1996, MainStreet adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"). As
permitted by SFAS 123, MainStreet 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 MainStreet'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 MainStreet's net income and net income per share would not have been
material. The assumptions used with regard to volatility, dividend rate and
risk-free interest rate were 29.138%, 2.2% and 5.680%, respectively.
A summary of the status of MainStreet's Plans as of December 31, 1997, 1996 and
1995 and changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
<S> <C>
Outstanding at beginning of year 151,308 $ 6.9558 226,467 $ 6.8469 232,488 $ 6.8277
Granted 59 ,407 19.5000 1,768 11.4530 9,003 11.5950
Exercised (42,646) 5.5548 (58,041) 5.2889 (8,344) 8.5096
Forfeited (464) 10.6403 (18,886) 11.1959 (6,680) 10.5000
------- ------- -------
Outstanding at year-end 167,605 11.7481 151,308 6.9558 226,467 6.8469
======= ======= =======
Options exercisable at year-end 124,006 9.3210 143,308 6.7717 214,467 6.6565
======= ======= =======
</TABLE>
The following table summarizes the information about the Plan's stock options at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Number Weighted-Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
- - ------------------------ ----------- ---------------- --------------- ------------- ---------------
<S> <C>
$4.1176 51,026 2.42 years $ 4.1176 51,026 $ 4.1176
$10.25 - $11.453 57,172 3.49 years 10.5035 53,172 10.5225
$19.50 59,407 9.00 years 19.5000 19,808 19.5000
------- -------
167,605 124,006
======= =======
</TABLE>
NOTE 17 - 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 MainStreet 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 MainStreet common stock.
The Rights are not exercisable until the distribution date and will expire on
January 18, 2000, unless earlier redeemed by MainStreet. 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, MainStreet 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 MainStreet after which MainStreet 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 MainStreet 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 Corporation 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, MainStreet 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 MainStreet.
These statements are qualified in their entirety by reference to the Rights
Agreement, a copy of which was filed with the Securities and Exchange
Commission.
NOTE 18 - 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 $1,122,000, $1,093,000 and $872,000 for the years ended
December 31, 1997, 1996 and 1995, 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, 1997:
Capital Operating
Lease Leases
-------- ---------
1998 $ 63 $ 1,031
1999 63 850
2000 63 337
2001 48 213
2002 --- 135
Thereafter --- 281
------ --------
Total Minimum Lease Payments 237 $ 2,847
------ ========
Less Amounts Representing Interest 39
Present Value of Minimum Lease Payments $ 198
NOTE 19 - REGULATORY REQUIREMENTS AND RESTRICTIONS
MainStreet'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 MainStreet'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, 1997, retained net profits, which were free of such restriction,
amounted to $2.5 million. Under the applicable laws of Virginia (relating to
MainStreet's subsidiary banks which were organized under the laws of Virginia),
$69.9 million of undivided profits at December 31, 1997 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.
Furthermore, dividends paid in excess of $34.0 million by MainStreet's state
organized subsidiaries must have prior approval by the Federal Reserve Board.
Substantially all the retained earnings of MainStreet (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
$11.3 million and $9.4 million at December 31, 1997 and 1996, respectively.
MainStreet 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 MainStreet's consolidated financial statements. Quantitative
measures established by regulation to ensure capital adequacy require MainStreet
and the Banks to maintain minimum amounts and ratios, as set forth in the table
below. As of December 31, 1997, MainStreet and the Banks are well above capital
adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notification from the FDIC categorized
MainStreet and the Banks as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized MainStreet 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 MainStreet and the Banks categories.
MainStreet'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, 1997: Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C>
Total Capital (to Risk Weighted Assets) $168,911 17.99% $ 75,110 8.0% $ 93,888 10.0%
Tier I Capital (to Risk Weighted Assets) 157,174 16.74 37,555 4.0 56,333 6.0
Tier I Capital (to Annual Adjusted Average
Assets) 157,174 10.61 59,251 4.0 74,063 5.0
As of December 31, 1996:
Total Capital (to Risk Weighted Assets) $123,956 14.76% $ 67,168 8.0% $ 83,960 10.0%
Tier I Capital (to Risk Weighted Assets) 113,461 13.51 33,584 4.0 50,376 6.0
Tier I Capital (to Annual Adjusted Average
Assets) 113,461 9.31 48,750 4.0 60,938 5.0
</TABLE>
NOTE 20 - PARENT COMPANY FINANCIALS
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
-----------------------------------
1997 1996
---- ----
(In 000's)
<S> <C>
Assets:
Cash (Includes $7,338 and $1,896 in 1997 and 1996,
respectively with affiliates) $ 7,338 $ 1,896
Investments in Subsidiary Banks 128,169 112,042
Securities Available for Sale 196,184 72
Other Assets (Includes $35 and $44 in 1997 and
1996, respectively, invested with affiliates) 7,466 3,944
-------- --------
Total Assets $339,157 $117,954
======== ========
Liabilities and Shareholders' Equity
Repurchase Agreements Short-Term 91,781 ---
Other Short-Term Debt --- 2,300
Repurchase Agreements Long-Term 63,466 ---
Other Long-Term Debt 198 243
Corporation-Obligated Mandatorily Redeemable
Capital Securities 51,547 ---
Other Liabilities 3,513 1,342
Common Shareholders' Equity 128,652 114,069
-------- --------
Total Liabilities and Shareholders' Equity $339,157 $117,954
========= ========
CONDENSED STATEMENTS OF INCOME
Years Ended December 31
-------------------------------------------------------------
1997 1996 1995
---- ---- ----
(In 000's)
Revenue:
Dividends From Subsidiary Banks $ 9,388 $ 7,694 $ 4,025
Equity in Undistributed Income of Subsidiary Banks 8,683 9,928 10,830
Management Fees From Subsidiary Banks 12,558 9,682 8,034
Interest Income From Subsidiary Banks 11 --- ---
Interest Income 895 27 78
Other Noninterest Income 439 985 42
------- ------- -------
31,974 28,316 23,009
------- ------- -------
Expenses:
Interest on Short-Term Debt 530 39 ---
Interest on Long-Term Debt 194 2 454
Interest on Corporation-Obligated Mandatorily
Redeemable Capital Securities 507 --- ---
Salaries and Employee Benefits 7,877 6,862 4,967
Net Occupancy 2,513 2,479 1,758
Other Noninterest Expense 3,251 2,740 2,126
------- ------- -------
14,872 12,122 9,305
------- ------- -------
Income Before Income Tax Benefit 17,102 16,194 13,704
Income Tax Benefit 155 459 426
------- ------- -------
Net Income $17,257 $16,653 $14,130
======= ======= =======
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31
-----------------------------------------------------------
1997 1996 1995
---- ---- ----
(In 000's)
Cash Flows From Operating Activities:
Net Income $17,257 $16,653 $14,130
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Amortization of Intangibles, Net 118 176 210
Equity in Undistributed Income of Subsidiary Banks (8,401) (8,825) (9,625)
Net Increase in Other Assets (3,758) (654) (627)
Net Decrease in Other Liabilities 2,171 215 603
(Gain) Loss on Sales of Securities 47 (479) (15)
Loss on Disposal of Fixed Assets 57 --- ---
Gain on Sale of OREO --- --- 22
-------- -------- -------
Net Cash Provided by Operating Activities 7,491 7,086 4,698
Cash Flows From Investing Activities:
Net (Increase) Decrease in Interest-Bearing Deposits 9 701 (712)
Purchases of Securities Available for Sale (195,326) --- ---
Proceeds From the Sale of Securities Available for Sale --- 852 820
Purchases of Bank Premises and Equipment (120) (976) (826)
Capital Contributed to Subsidiary Banks (5,947) (1,783) ---
-------- -------- --------
Net Cash Used In Investing Activities (201,384) (1,206) (718)
Cash Flows From Financing Activities:
Cash Dividends (6,723) (5,867) (4,217)
Cash Paid in Lieu of Fractional Shares and Cash Election (12) (2,298) ---
Net Expenses Incurred for Debenture Conversion --- --- (32)
Proceeds From Issuance of Common Stock 1,621 1,160 525
Increase in Short-Term Debt 89,481 2,300 ---
Increase in Long-Term Debt 63,421 243 ---
Issuance of Junior Subordinated Debenture 51,547 --- ---
-------- -------- --------
Net Cash Provided By (Used in) Financing Activities 199,335 (4,462) (3,724)
-------- -------- --------
Net Increase in Cash 5,442 1,418 256
Cash at Beginning of Year 1,896 478 222
-------- -------- --------
Cash at End of Year $ 7,338 $ 1,896 $ 478
======== ======== ========
</TABLE>
Noncash investing activities include $4.7 million and $1.3 million of unrealized
gains on securities available for sale in 1997 and 1996, respectively. Noncash
financing activities include $8,918,000 of debentures converted into 979,820
shares of common stock in 1995.
NOTE 21 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business to meet the financing needs of its customers,
MainStreet 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.
MainStreet'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. MainStreet uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
As of December 31, 1997 and 1996, outstanding financial instruments whose
contract amounts represent potential credit risk were as follows:
1997 1996
---- ----
Financial Instruments Whose Contract Amounts
Represent Credit Risk:
Commitments to Extend Credit $150,205 $136,849
Standby and Performance
Letters of Credit 9,293 6,928
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. Many commitments either expire without being drawn
upon or are not fully drawn; therefore, the total commitment amounts do not
necessarily represent future cash requirements. MainStreet evaluates each
customer's creditworthinesss on a case-by-case basis. The amount of collateral
obtained is generally based on management's credit and financial evaluation of
the customer.
Standby and performance letters of credit are conditional commitments issued by
MainStreet 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.
MainStreet 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 22 - CONCENTRATIONS OF CREDIT RISK
Virtually all of MainStreet's business activity is with customers located in the
southwestern, central and east central regions of Virginia and southeastern
Maryland. Accordingly, operating results are closely correlated with the
economic trends within these regions and influenced by the significant
industries within the southwest 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 these geographic regions. The commercial portfolio is diversified
with no significant concentrations of credit at December 31, 1997. Acquisition
and development construction loans account for $41.2 million and $40.2 million
of the commercial portfolio at December 31, 1997 and 1996, respectively. In
addition, other commercial loans secured by real estate totaled $163.6 million
and $133.5 million at December 31, 1997 and 1996, respectively. The remainder of
the loans secured by real estate consists almost entirely of 1-4 family
residential property. MainStreet was the creditor for approximately $122.1
million and $128.3 million at December 31, 1997 and 1996, respectively, of
consumer loans for automobiles and mobile homes generated directly by 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.
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, the underlying transaction to be financed and collateral.
NOTE 23 - 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) Short-Term Financial Instruments The carrying values of short-term
financial instruments including cash and cash equivalents, federal
funds sold, interest-bearing deposits in domestic banks, and short-term
borrowings approximate the fair value of these instruments. These
financial instruments generally expose the Corporation to limited
credit risk and have no stated maturity or have an average maturity of
30-45 days and carry interest rates which approximate market value.
(b) 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.
(c) 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.
(d) 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 MainStreet'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.
(e) Deposits
The fair value of demand, interest checking, savings and money market
deposits is the amount payable on demand. 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.
(f) 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.
(g) 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, 1997 and December 31, 1996, and as such the related fair values
have not been estimated.
The estimated fair values of MainStreet's financial instruments at December 31,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------------- ----------------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
<S> <C>
FINANCIAL ASSETS
Cash and Due From Banks $ 43,255 $ 43,255 $ 44,026 $ 44,026
Interest-Bearing Deposits in Domestic Banks 494 494 518 518
Mortgage Loans Held for Sale 3,048 3,048 742 745
Federal Funds Sold --- --- 6,100 6,100
Securities Available for Sale 673,526 673,526 339,136 339,136
Securities Held to Maturity 72,243 74,321 97,922 100,100
Loans, Net of Unearned Income 878,777 883,377 829,979 833,903
---------- ---------- ---------- ----------
TOTAL FINANCIAL ASSETS $1,671,343 $1,678,021 $1,318,423 $1,324,528
========== ========== ========== ==========
FINANCIAL LIABILITIES
Deposits:
Demand Deposits (Noninterest-Bearing) $ 142,738 $ 142,738 $ 135,445 $ 135,445
Interest Checking Accounts 110,725 110,725 107,119 107,119
Savings Deposits 115,413 115,413 122,118 122,118
Money Market Investment Accounts 91,189 91,189 95,091 95,091
Time Deposits:
Certificates of Deposit $100,000 and Over 139,041 139,638 100,846 102,057
Other 399,756 401,156 380,072 387,362
---------- ---------- ---------- ---------
TOTAL DEPOSITS 998,862 1,000,859 940,691 949,192
Repurchase Agreements Short-Term 213,871 213,871 145,356 145,356
Other Short-Term Debt 144,562 144,562 77,738 77,738
FHLB Borrowings, Callable 2/97 --- --- 45,000 44,968
Corporation-Obligated Mandatorily
Redeemable Capital Securities 50,000 51,100 --- ---
Repurchase Agreements Long-Term 63,466 63,466 --- ---
Other Long-Term Debt 102,134 84,514 26,029 26,055
---------- ---------- ---------- ----------
TOTAL FINANCIAL LIABILITIES $1,572,895 $1,558,372 $1,234,814 $1,243,309
========== ========== ========== ==========
</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 MainStreet's entire holdings of a particular financial instrument. Because
no market exists for a significant portion of MainStreet's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing on-and-off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets that are not considered financial
assets include deferred tax assets and bank premises and equipment. In addition,
the tax ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in the estimates.
NOTE 24 - STOCK DIVIDEND
On February 20, 1996, MainStreet 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 $21,336,000 was transferred from retained earnings to the common
stock account.
NOTE 25 - CONTINGENCIES AND OTHER MATTERS
MainStreet 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 MainStreet's financial position.
At December 31, 1997, MainStreet had two acquisitions pending which are
anticipated to be completed within the first quarter of 1998. The first
acquisition is Tysons Financial Corporation ("Tysons"), which will be accounted
for as a purchase. The second acquisition is Regency Financial Shares
("Regency"), which will be accounted for as a pooling of interests.
Under the terms of the Plan of Merger with Tysons, MainStreet agreed to pay
shareholders of Tysons the equivalent of $14.50 per share for each share of
Tysons common stock outstanding. In addition, as a condition of the merger,
Tysons' outstanding Directors' Warrants shall be exercised prior to the closing
for the difference between the exercise price per warrant and $14.50 in the form
of Tysons' common stock. MainStreet also agreed to redeem Tysons' outstanding
Directors' Options for the difference between the exercise price per option and
$14.50 in the form of MainStreet common stock. MainStreet will assume the
employee options outstanding. The transaction is valued at approximately $17.2
million, which will be paid in MainStreet common stock. Total assets,
liabilities and shareholders' equity for Tysons at December 31, 1997 were $101.9
million, $93.4 million and $8.5 million, respectively.
Under the terms of the agreement with Regency, MainStreet has agreed to pay the
equivalent of $13.00 per share for each outstanding share of Regency common
stock in the form of MainStreet common stock, subject to adjustments under
certain conditions. The maximum and minimum exchange ratios are .500 and .406,
respectively, for Regency's outstanding shares of common stock. MainStreet has
also agreed to exchange the balance of Regency's outstanding Directors' Options
which have not been exercised as of the consummation of the merger for the
difference between the exercise price per option and $13.00 in the form of
MainStreet common stock, resulting in a maximum exchange ratio of .250 shares
and a minimum exchange ratio of .188 shares per option exchanged. MainStreet has
also agreed to assume the outstanding employee stock options of Regency. This
transaction is valued at approximately $18.2 million. At December 31, 1997,
total assets, liabilities and shareholders' equity for Regency were $77.8
million, $70.8 million and $7.1 million, respectively.
On March 11, 1998, MainStreet announced an agreement to acquire Ballston
Bancorp, Inc. ("Ballston"), subject to regulatory approval and approval by the
shareholders of Ballston and certain other specified conditions. Under terms of
the agreement, MainStreet has agreed to pay the equivalent of $12.04 per share
for each outstanding share of Ballston common stock in the form of MainStreet
Common Stock, subject to adjustment under certain conditions. MainStreet has
agreed to exchange a maximum of .4920 and a minimum of .4025 shares of its
Common Stock for each share purchased of Ballston 1,619,474 shares of Common
Stock. If the maximum exchange ratios are used, 796,781 shares of MainStreet
Common Stock will be issued in the transaction. This transaction is valued at
approximately $19.5 million.
<TABLE>
<CAPTION>
Quarterly Financial Results (Unaudited)
(In Thousands, Except Per Share Data) Fourth Third Second First
1997 Quarter Quarter Quarter Quarter
- - ---- ------- ------- ------- -------
<S> <C>
Interest Income $30,407 $29,699 $28,910 $26,409
Interest Expense 16,091 15,154 14,526 13,008
------- ------- ------- -------
Net Interest Income 14,316 14,545 14,384 13,401
Provision for Loan Losses 1,086 1,052 989 884
------- ------- ------- -------
Net Interest Income After Provision 13,230 13,493 13,395 12,517
Noninterest Income 3,205 3,347 3,259 3,915
Noninterest Expense 10,993 9,918 9,690 10,351
------- ------- ------- -------
Income Before Income Taxes 5,442 6,922 6,964 6,081
Income Tax Expense 1,738 2,259 2,243 1,912
------- ------- ------- -------
Net Income $ 3,704 $ 4,663 $ 4,721 $ 4,169
======= ======= ======= =======
Per Share:
Net Income:
Primary $ .31 $ .39 $ .39 $ .35
======= ======= ======= =======
Fully Diluted $ .31 $ .39 $ .39 $ .35
======= ======= ======= =======
Cash Dividends Declared $ .15 $ .16 $ .13 $ .13
======= ======= ======= =======
Quarterly Financial Results (Unaudited)
(In Thousands, Except Per Share Data) Fourth Third Second First
1996 Quarter Quarter Quarter Quarter
- - ---- ------- ------- ------- -------
Interest Income $26,319 $25,392 $23,697 $22,793
Interest Expense 12,383 11,477 10,672 10,243
------- ------- ------- -------
Net Interest Income 13,936 13,915 13,025 12,550
Provision for Loan Losses 907 983 618 943
------- ------- ------- -------
Net Interest Income After Provision 13,029 12,932 12,407 11,607
Noninterest Income 2,963 2,670 2,939 3,045
Noninterest Expense 9,955 9,482 9,015 8,802
------- ------- ------- -------
Income Before Income Taxes 6,037 6,120 6,331 5,850
Income Tax Expense 1,867 2,026 2,029 1,763
------- ------- ------- -------
Net Income $ 4,170 $ 4,094 $ 4,302 $ 4,087
======= ======= ======= =======
Per Share:
Net Income:
Primary $ .35 $ .34 $ .36 $ .34
======= ======= ======= =======
Fully Diluted $ .35 $ .34 $ .35 $ .34
======= ======= ======= =======
Cash Dividends Declared $ .16 $ .12 $ .11 $ .10
======= ======= ======= =======
</TABLE>
Item 9. Changes In and Disagreements With Accounting and Financial
Disclosures
None
PART III
Item 10. Directors and Executive Officers of the Registrant
With respect to the directors of the Corporation, the information
required by Item 10 of Form 10-K appears on pages 4 and 5 of the
Corporation's 1998 Proxy Statement and is incorporated herein by
reference. With respect to the executive officers of the Corporation,
the information required by Item 10 of Form 10-K appears in Part I of
this report on pages 10 through 13.
Item 11. Executive Compensation
The information required by Item 11 of Form 10-K appears on pages 8
through 14 of the Corporation's 1998 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 6 of the Corporation's 1998 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 pages 14
and 15 of the Corporation's 1998 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 27 through 53.
(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 on July 8, 1997 regarding acquisition of Commerce
Bank.
Form 8-K filed on August 5, 1997 regarding acquisition of Tysons
Financial Corporation.
Form 8-K filed on November 7, 1998 regarding acquisition of Regency
Financial Shares.
Form 8-K filed on November 25, 1997 regarding 144A Private Offering
of Corporation-Obligated Mandatorily Redeemable Capital Securities.
Form 8-K filed on December 4, 1997 regarding consummation of
acquisition of Commerce Bank.
Form 8-K/A filed on December 5, 1997 to amend Form 8-K filed on
December 4, 1997.
Form 8-K filed March 5, 1998 regarding consummation of acquisition of
Tysons Financial Corporation.
Form 8-K filed March 13, 1998 regarding consummation of acquisition
of Regency Financial Shares.
Form 8-K filed March 13, 1998 regarding acquisition of Ballston
Bancorp, Inc.
(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 Corporation are herein
incorporated by reference to the Form 8-A filed electronically
on March 18, 1996.
3(ii) Bylaws of the Corporation are presented herein.
4 Preferred Share Rights Plan (Incorporated by reference to
Corporation's Form 8-K dated January 18, 1990).
10(iii)(b)(6) 1. Material Contracts of the Corporation for Michael R.
Brenan, James E. Adams and Rebecca J. Jenkins.
2. Material Contracts of the Corporation for S. Richard Bagby,
James H. Campbell, William S. Clark, James W. Clement, Larry
A. Heaton, William D. Kerr, Kenneth E. Lust, Reba H.
Mandeville, John D. Meade, III, Beverly L. Mitchell, William
O. Turner, R. Bruce Valley, Mark J. Wenick and John L.
Wynne.
21 Statement of Subsidiaries of the Corporation is included as an
Exhibit to this report.
23 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Corporation has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MAINSTREET BANKGROUP INCORPORATED
<TABLE>
<S> <C>
By: /s/Michael R. Brenan /s/James E. Adams
-------------------------------------- -----------------------------------------
Michael R. Brenan, President, Chairman James E. Adams, Executive Vice President,
of the Board and Chief Executive Officer Chief Financial Officer and Treasurer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Corporation and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
<S> <C>
/s/W. Christopher Beeler, Jr. 3/3/98
- - ------------------------------------ ---------
W. Christopher Beeler, Jr. Director Date
/s/Thomas B. Bishop 3/3/98
- - ------------------------------------ ---------
Thomas B. Bishop Director Date
/s/Michael R. Brenan 3/3/98
- - ------------------------------------ ---------
Michael R. Brenan President, Chairman of the Board Date
and Chief Executive Officer
/s/Alfred J. T. Byrne 3/3/98
- - ------------------------------------ ---------
Alfred J. T. Byrne Director Date
/s/William L. Cooper, III 3/3/98
- - ------------------------------------ ---------
William L. Cooper, III Director Date
/s/Billy P. Craft 3/3/98
- - ------------------------------------ ---------
Billy P. Craft Director Date
/s/Phillip W. Dean 3/3/98
- - ------------------------------------ ---------
Phillip W. Dean Director Date
/s/I. Patricia Henry 3/3/98
- - ------------------------------------ ---------
I. Patricia Henry Director Date
/s/Larry E. Hutchens 3/3/98
- - ------------------------------------ ---------
Larry E. Hutchens Director Date
/s/George J. Kostel 3/3/98
- - ------------------------------------ ---------
George J. Kostel Director Date
/s/William O. McCabe, Jr., MD 3/3/98
- - ------------------------------------ ---------
William O. McCabe, Jr., MD Director Date
/s/Albert L. Prillaman 3/3/98
- - ------------------------------------ ---------
Albert L. Prillaman Director Date
</TABLE>
Exhibit 3 (ii)
Bylaws
of
MAINSTREET BANKGROUP INCORPORATED
Incorporated Under The Laws
Of The Commonwealth Of Virginia
Adopted February 9, 1977
(And Including Amendments Adopted
Thereto Through August 20, 1997)
<PAGE>
MainStreet BankGroup Incorporated
Bylaws
Article I
Meetings Of Stockholders
1.1 Places of Meetings. All meetings of the stockholders shall be held at
such place, either within or without the State of Virginia, as from time to
time may be designated by the Board of Directors.
1.2 Annual Meeting. The annual meeting of stockholders, for the election of
Directors and transaction of such other business as may come before the meeting,
shall be held in each year at a date and time annually fixed by the Board of
Directors.
1.3 Special Meetings. Special meetings of the stockholders for any purpose or
purposes may be called at any time by the Chairman of the Board, by the
Vice-Chairman of the Board, the President, or by a majority of the Board of
Directors. No business shall be transacted and no corporate action shall be
taken at a special meeting other than that stated in the notice of the meeting.
1.4 Notice of Meeting. Unless waived in the manner prescribed by law, notice of
each meeting of stockholders shall be given in writing, and shall state the
place, day and hour of every meeting of the stockholders and, in case of a
special meeting, such notice shall be mailed not less than ten nor more than
sixty days before the date of the meeting to each stockholder of record entitled
to vote at such meeting at his address which appears in the stock transfer books
of the Company.
1.5 Quorum. Any number of stockholders together holding a majority of the
outstanding shares of capital stock entitled to vote with respect to the
business to be transacted, who shall be present in person or represented by
proxy at any meeting duly called, shall constitute a quorum for the transaction
of business. If less than a quorum shall be in attendance at the time for which
a meeting shall have been called, the meeting may be adjourned from time to time
by a majority of the stockholders present or represented by proxy without notice
other than by announcement at the meeting until a quorum shall attend.
1.6 Voting. At any meeting of the stockholders, each stockholder of a class
entitled to vote on any matter coming before the meeting shall, as to such
matter, have one vote, in person or by proxy, for each share of capital stock of
such class standing in his or her name on the stock transfer books of the
Corporation on the date, not more than seventy days prior to such meeting, as
designated by the Board of Directors, for the purpose of determining
stockholders entitled to vote, as the date on which the stock transfer books of
the Corporation are to be closed or as the record date. Every proxy shall be in
writing, dated and signed by the stockholder entitled to vote or his or her duly
authorized attorney-in-fact. At a meeting where a quorum is present the
affirmative vote of the majority of the shares represented at the meeting and
entitled to vote shall be the act of the stockholders.
1.7 Conduct of Meeting. At each meeting of the stockholders the Chairman of the
Board, or the President, shall act as chairman and preside. In their absence,
the Chairman of the Board may designate another officer of the Corporation who
need not be a Director to preside. The Secretary of the Corporation or an
Assistant Secretary or in their absence, a person whom the chairman of such
meeting shall appoint, shall act as secretary of such meeting.
1.8 Inspectors. An appropriate number of inspectors for any meeting of
stockholders may be appointed by the chairman of such meeting. Inspectors so
appointed will open and close the polls, will receive and take charge of proxies
and ballots, and will decide all questions as to the qualifications of voters,
validity of proxies and ballots, and the number of votes properly cast.
<PAGE>
1.9 Shareholder Proposals. To be properly brought before an annual meeting of
shareholders, business must be (i) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (ii)
otherwise properly brought before the meeting by or at the direction of the
Board of Directors, or (iii) otherwise properly brought before the meeting by a
shareholder. In addition to any other applicable requirements for business to be
properly brought before an annual meeting by a shareholder, the shareholder must
have given notice thereof in writing either by personal delivery or by United
States mail, postage prepaid, to the Secretary of the Corporation by the first
day of December of the year preceding the Annual Meeting at which the proposal
is sought to be presented. A shareholder's notice to the Secretary of the
Corporation shall set forth as to each matter the shareholder proposes to bring
before the annual meeting: (i) a brief description of the business desired to be
brought before the annual meeting (including the specific proposal to be
presented) and the reasons for conducting such business at the annual meeting;
(ii) the name and record address of the shareholder proposing such business;
(iii) the class and number of shares of the Corporation that are beneficially
owned by the shareholder; and (iv) any material interest of the shareholder in
such business. In the event that a shareholder attempts to bring business before
an annual meeting without complying with the provisions of this Article 1.9, the
Chairman of the meeting shall declare to the meeting that the business was not
properly brought before the meeting in accordance with the foregoing procedures,
and such business shall not be transacted. No business shall be conducted at the
annual meeting except in accordance with the procedures set forth in this
Article 1.9, provided, however, that nothing in this Article 1.9 shall be deemed
to preclude discussion by any shareholder of any business properly brought
before the annual meeting.
ARTICLE II
Directors
2.1 General Powers. The property, business and affairs of the Corporation shall
be managed by the Board of Directors, and, except as otherwise expressly
provided by law, in accordance with the Articles of Incorporation or these
Bylaws, all of the powers of the Corporation shall be vested in such Board.
2.2 Number of Directors. The number of Directors constituting the Board of
Directors shall be twelve (12).
2.3 Election and removal of Directors. Directors shall be elected at each annual
meeting of the stockholders to succeed those Directors whose terms have expired
and to fill any vacancies then existing. Directors shall hold their offices for
terms of one year and until their successors are elected and qualified. Any
vacancy occurring in the Board of Directors, including a vacancy resulting from
an increase in the number of authorized Directors, may be filled by the
affirmative majority vote of the remaining Directors, though less than a quorum
of the Board, and the term of office of any Director so elected shall expire on
the date fixed for the expiration of the term of office of the Director to which
such Director was so elected unless the vacancy is sooner filled by the
stockholders. Any Director may be removed from office at a meeting of
stockholders called expressly for that purpose by the vote of stockholders
constituting a majority of the votes entitled to be cast at an election of
Directors.
2.4 Term of Office. Each Director (unless he sooner dies resigns, or is removed
from office) shall hold office until the next annual meeting of stockholders or
until his successor shall have been elected and qualifies.
2.5 Quorum. Except with regard to the approval of a plan of merger or a sale of
all or substantial part of the Company's assets, a majority of the number of
Directors pursuant to these Bylaws at the time of the meeting, shall constitute
a quorum for the transaction of business. The act of a majority of Directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors. A plan of merger or sale of all or a substantial portion of the
assets of the company shall require the presence and action of at least
two-thirds (2/3) of the Directors. Any one or more members of the Board of
Directors may participate in a meeting of the Board by means of a conference
telephone or similar communication equipment allowing all persons participating
in the meeting to hear each other at the same time and participation by such
means shall constitute presence in person. Less than a quorum may adjourn any
meeting.
<PAGE>
2.6 Meetings of Directors.
(a) Place of Meeting. Meetings of the Board of Directors shall
be held at such place and at such time, either within or
without the State of Virginia as may be designated by the
Board, or upon call of the Chairman of the Board or the
President.
(b) Organizational Meeting. An organizational meeting shall be
held as soon as practicable after the adjournment of the
annual meeting of stock-holders at which the Board of
Directors is elected, for the purpose of electing officers,
and for transacting such other business as may properly come
before the meeting.
(c) Regular Meeting. Regular meetings of the Board of
Directors shall be held at such time and place as the Board
may designate, or upon call of the Chairman of the Board, or
the President, and no notice thereof need be given.
(d) Special Meeting. Special meetings of the Board of
Directors may be held at any time or place upon the call of
the Chairman of the Board or the President, or any three
members of the Board. Notice of each such meeting shall be
given to each Director by mail at his business or residence
address at least twenty-four hours before the meeting, or by
telephoning or telegraphing notice to him at least twenty-four
hours before the meeting. Meetings may be held at any time
without notice if all of the Directors are present, or if
those not present waive notice in writing either before or
after the meeting.
The notice of meetings of the Board need not state the purpose
of the meeting.
(e) Conduct of Meetings. At each meeting of the Board of
Directors, the Chairman of the Board, or the President, shall
act as chairman and preside. In their absence, the Chairman of
the Board may designate another officer of the Corporation who
need not be a Director, to preside. The Secretary of the
Corporation or an Assistant Secretary, or in their absence, a
person whom the chairman of such meeting shall appoint, shall
act as secretary of such meeting.
Any action required or permitted to be taken by the Board may be taken
without a meeting if all Directors consent in writing to the adoption of a
resolution authorizing the action. The resolution and the written consents of
the directors shall be filed with the minutes of the proceedings of the Board
meetings. Unless otherwise provided by the Board of Directors, the regular
meetings of the Board shall be held in the Board Room of the Church and
Ellsworth Office of Piedmont Trust Bank, Martinsville, Virginia on the third
Wednesday of February, June, August, October and December at 11:00 a.m.
2.7 Compensation. Directors, and members of any committee of the Board who are
not officers of the Corporation or subsidiaries thereof, shall be paid such
compensation as the Board of Directors from time to time may determine, by
resolution, for services as a Director, or as Chairman or a member of any
committee of the Board, and shall, in addition, be reimbursed for personal
automobile mileage expense and/or airline travel expense incurred by reason of
attendance at Board Meetings. The reimbursement rate for automobile travel will
be at the same rate paid to employees of the Corporation. Directors may be
allowed a fee and expenses for attendance at all meetings, but nothing herein
shall preclude Directors and members of any committee of the Board who are not
otherwise officers of the Corporation from serving the Corporation in other
capacities and receiving compensation for such other services.
2.8 Eligibility for Service as a Director. No person shall be eligible to serve
as a Director unless, when his term commences, he is not less than twenty-one
(21) years of age nor more than sixty-eight (68) years of age. No Director shall
be eligible for re-election after he has attained the age of sixty-eight (68)
years. No Director who is an officer of the Corporation or any subsidiary shall
be eligible for election after he has retired from the Corporation. Any person
serving as a Director on the date of the adoption of this Section who will be
sixty-five (65) years of age or older as of the date of the 1995 annual meeting
shall be entitled to serve as a Director until he has attained the age of
seventy (70) years of age.
<PAGE>
2.9 Nominations of Directors. Subject to the rights of holders of any class or
series of stock having a preference over the common stock as to dividends or
upon liquidation, nominations for the election of Directors shall be made by the
Board of Directors or a committee appointed by the Board of Directors or by any
shareholder entitled to vote in the election of Directors generally. However,
any shareholder entitled to vote in the election of Directors generally may
nominate one or more persons for election as Directors at a meeting only if
written notice of such shareholder's intent to make such nomination or
nominations has been given, either by personal delivery or by United States
mail, postage prepaid, to the Secretary of the Corporation not later than (i)
with respect to an election to be held at an annual meeting of shareholders,
ninety (90) days in advance of such meeting, and (ii) with respect to an
election to be held at a special meeting of shareholders for the election of
Directors, the close of business on the seventh day following the date on which
notice of such meeting is first given to shareholders. Each notice shall set
forth: (a) the name and address of the shareholder who intends to make the
nomination and of the person or persons to be nominated; (b) a representation
that the shareholder is a holder of record of stock of the Corporation entitled
to vote at such meeting and intends to appear in person or by proxy at the
meeting to nominate the person or persons specified in the notice; (c) a
description of all arrangements or understandings between the shareholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
shareholder; (d) such other information regarding each nominee proposed by such
shareholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission, had the
nominee been nominated, or intended to be nominated, by the Board of Director;
and (e) the consent of each nominee to serve as a Director of the Corporation if
so elected. The Chairman of the meeting may refuse to acknowledge the nomination
of any person not made in compliance with the foregoing procedure.
ARTICLE III
Committees of the Board
3.1 Standing Committees. The standing committees of the Board of Directors, the
membership, frequency of meetings and function of which are set forth below
shall be:
-------------------
(a) Executive Committee
(b) Audit Committee
(c) Corporate Objectives and Finance Committee
(d) Corporate Governance and Nominating Committee
(e) Compensation Committee
(f) Corporate Responsibility and Compliance Committee
3.2 Other Committees. The Board of Directors may appoint such other
committees for such purposes and with such lawful powers as it may determine.
3.3 Members; Quorum. The Chairman of the Board shall appoint the members of each
committee, subject to the approval of the Board of Directors, which members
shall continue to serve on said committees until their successors are appointed;
provided, however, that any member of any Committee may be removed by the Board
upon a majority vote thereof at any regular or special meeting of the Board. The
Chairman of the Board shall fill any vacancy in any committee by the appointment
of another director, subject to the approval of the Board.
A majority of the members of any committee must be present to constitute a
quorum. A majority of those committee members present and voting at any
committee meeting shall decide each matter considered.
3.4 Secretary to Committees. Unless otherwise specifically set forth herein, the
Secretary or an Assistant Secretary of the Corporation shall serve as Secretary
for all meetings of the standing committees. If neither are available, the
committee Chairman shall appoint a member of the committee to serve as
Secretary.
3.5 Ex Officio Status. Unless otherwise specifically provided in this Article
III, the Chief Executive Officer shall be an ex officio member of each standing
committee.
3.6 Executive Committee.
(a) Membership. The Executive Committee shall consist of the
Chairman of the Board, the Chief Executive Officer if the same
person does not hold both the Office of Chairman of the Board
and the Office of Chief Executive Officer and the Chairman of
each of the other standing committees; provided only, that the
membership must at all times include not less than four (4)
outside directors. The Chairman of the Board shall serve as
Chairman of the committee and may at his discretion designate
a Vice-Chairman from among the membership to serve in his
absence.
(b) Frequency of Meetings. The Executive Committee shall meet
at such times as the Chairman or a majority of the committee
deems necessary.
(c) Function. The Executive Committee shall possess and
exercise, when the Board is not in session, all the powers of
the Board of Directors which the Board may lawfully delegate.
The Executive Committee shall keep a record of its proceedings
and report its proceedings and the actions taken by it to the
Board of Directors.
3.7 Audit Committee.
(a) Membership. The Audit Committee shall consist of at least
three (3) and not more than six (6) non-employee directors.
All members of the Audit Committee must be independent of
management and free from any relationship that, in the opinion
of the Board of Directors, would interfere with the exercise
of independent judgment as a committee member. The committee
shall be chaired by a member appointed by the Board of
Directors upon recommendation of the Chairman of the Board.
The committee shall appoint a member of the internal audit
staff to serve as Secretary to the Committee and may in its
discretion appoint one or more Assistant Secretaries. The
Chief Executive Officer shall not be an Ex Officio Member of
this Committee.
(b) Frequency of Meetings. The committee shall meet at least
three (3) times annually and at such other times as may be
necessary for the committee to discharge its duties.
(c) Function. The Audit Committee is charged with the
responsibility of recommending the selection of independent
accountants and auditors; reviewing and approving the scope of
the accountant's examination and any non-audit services to be
performed by the independent accountants; reviewing
examination reports by the independent accountants and
regulatory agencies; approving the internal audit plan and
reviewing the results thereof; ensuring that an adequate
system of internal control has been implemented within the
Corporation and is being effectively followed; reviewing
appropriate standards of proper conduct for the employees of
the Corporation as set forth by the Corporate Responsibility
and Compliance Committee in the Company's Code of Ethics; and
monitoring compliance with such standards. The Audit Committee
shall keep a record of its proceedings and the actions taken
by it and report these proceedings and actions to the Board of
Directors.
3.8 Corporate Objectives and Finance Committee.
(a) Membership. The Corporate Objectives and Finance Committee
shall consist of not less than five (5) or more than eight (8)
directors at least three (3) of which are non-employee outside
directors. The Chairman of the committee shall be appointed by
the Chairman of the Board with the approval of the Board of
Directors. The Corporation's Chief Financial Officer shall be
an ex officio member of the committee. The committee shall
keep a record of its proceedings and report its proceedings to
the Board of Directors.
(b) Frequency of Meetings. The Corporate Objectives and
Finance Committee shall meet at least twice annually and at
such other times as may be necessary in the discharge of its
duties.
(c) Function. The Corporate Objectives and Finance Committee shall be
responsible for: overseeing the strategic planning process and assisting
management with setting a strategic direction for the Corporation; monitoring
the operational and financial results of the Corporation; reviewing and
recommending to the Board of Directors, dividend policies and payments;
reviewing the risk management policy; and recommending to management and the
Board of Directors such financial and other policies as will best advance the
Corporation's operating strategies and financial objectives.
<PAGE>
3.9 Corporate Responsibility and Compliance Committee.
(a) Membership. The Committee shall consist of not less than
three (3) nor more than six (6) Directors one of whom shall
also serve as a member of the Audit Committee. The Chairman of
the committee shall be appointed by the Board upon the
recommendation of the Chairman of the Board. The Chief
Executive Officer shall be an ex officio member of the
committee. The committee shall keep a record of its
proceedings and report its proceedings to the Board of
Directors.
(b) Frequency of Meetings. The committee shall meet at least
twice annually and otherwise as may be necessary for the performance of its
duties.
(c) Function. The Corporate Responsibility and Compliance
Committee shall be responsible for ensuring that ethical
behavior and proper compliance standards are established and
maintained throughout the Corporation. The committee shall
also be responsible for ensuring that management adopts and
enforces policies for the appropriate treatment of employees
and customers and behaves as a responsible corporate citizen.
Further the committee shall review and monitor the
effectiveness of policies and procedures adopted by the
Corporation and its subsidiaries for ensuring compliance with
the Community Reinvestment Act.
3.10 Corporate Governance and Nominating Committee.
(a) Membership. The committee shall consist of not less than
three (3) nor more than six (6) non-employee directors and
either the Chief Executive Officer or the President. The
Chairman of the committee shall be a non-employee director
appointed by the Board of Directors upon the recommendation of
the Chairman of the Board. The committee may meet in executive
session, to evaluate the performance of the Chief Executive
Officer or otherwise, and the Chief Executive Officer or the
President whichever is a member of the committee shall not be
entitled to be present at such a meeting. At such executive
session(s) the absence of the Chief Executive Officer or
President shall not be counted for purposes of determining
whether a quorum exists. The committee shall keep a record of
its proceedings and report its proceedings to the Board of
Directors.
(b) Frequency of Meetings. The committee shall meet at least
twice annually and at such other times as may be necessary for
the committee to discharge its duties.
(c) Function. The Corporate Governance and Nominating
Committee shall be responsible for: conducting the evaluation
of the Chief Executive Officer and the Board itself; the
selection, nomination and orientation of new directors;
education of directors on an on-going basis; creating a
specific succession plan for the Chief Executive officer and
assisting management with the development and implementation
of a comprehensive management succession plan.
3.11 Compensation Committee.
(a) Membership. The membership shall consist of not less than
three (3) nor more than six (6) non-employee directors at
least one of whom shall also be a member of the Corporate
Governance Committee. The Chairman of the committee shall be
appointed by the Board of Directors upon the recommendation of
the Chairman of the Board. The committee shall keep a record
of its proceedings and report its proceedings to the Board of
Directors.
(b) Frequency of Meetings. The Compensation Committee shall
meet at least twice annually and at such other times as may be
necessary for the Committee to discharge its duties.
(c) Function. The Compensation Committee shall be responsible
for creating a performance-based compensation program for the
Executive Officers of the Corporation and the CEOs of the
subsidiaries; assisting management with the development of a
performance-based compensation program for the officers of the
Corporation and its subsidiaries; evaluating management
performance generally and approving a compensation program for
the elected officers of the Corporation. The committee shall
also review and approve any significant changes to the
Corporation's benefits plans whether qualified or
non-qualified and recommend appropriate changes in director
compensation to the Board of Directors.
ARTICLE IV
Officers
4.1 Number and Manner of Election of Officers; Terms of Appointment.
The officers of the Corporation shall include:
----------------------------------------------------------------
(a) A Chairman of the Board, a Chief Executive Officer, a
President, a Secretary, a Chief Financial Officer and
Treasurer, one or more Senior Vice Presidents, one or more
Assistant Secretaries and may include one or more Vice
Chairmen of the Board, each of whom shall be elected by the
Board.
(b) Such other officers as the Chairman of the Board or
President may deem necessary, each of whom shall be appointed
by the Chairman of the Board, President or a Vice Chairman.
Officers of subsidiaries of the Corporation shall be elected
and have their compensation set in the same manner as
comparable officers of the Corporation.
One person may hold more than one office except that the offices of
President and Secretary may not be held by the same person.
4.2 Term of Office. The officers designated in Section 4.l(a) and the Chief
Auditor if any, shall be elected annually by the Board at its organizational
meeting. Such officers unless otherwise removed shall each hold office until the
next organizational meeting of the Board of Directors or until their successors
are elected. The Chairman of the Board, Chief Executive Officer and the
President shall be chosen from among the Directors. The officers designated in
Section 4.l(b) may be appointed at any time by the Chairman of the Board, the
Chief Executive Officer, the President or a Vice Chairman, and shall serve at
the pleasure of the Board of Directors.
4.3 Removal Any officer of the Corporation may be removed from office, with or
without cause, at any time, by the Board of Directors. Any officer appointed by
the Chairman of the Board, the Chief Executive Officer, the President or a Vice
Chairman may be removed from office by him with or without cause at any time.
4.4 Resignations. Any officer may resign at any time by giving written notice to
the Board, Chairman of the Board, President or the Secretary. Such resignation
shall be effective on the date of receipt of such notice or any later date
specified therein, and unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
4.5 Vacancies, New Offices and Promotions. A vacancy for whatever cause in any
office may be filled at any time for the unexpired portion of the term, in the
manner prescribed in these Bylaws for regular election or appointment to such
office. New offices may be created and filled, and the promotions and changes in
officers' titles may be made at any time in the manner prescribed in these
Bylaws for regular election or appointment to such office.
4.6 Chairman of the Board. The Chairman of the Board may also serve as the Chief
Executive Officer if so designated by the Board of Directors and shall have
general supervision of the policies and operations of the Corporation subject to
the direction and control of the Board. He shall preside at all meetings of the
stockholders, the Board of Directors and the Executive Committee. He shall have
the power to sign checks, orders, contracts, leases, notes, drafts and other
documents and instruments in connection with the business of the Corporation,
and have such other powers and perform such other duties as shall be designated
by the Board of Directors or as may be incidental to his office. The Chairman of
the Board shall have the authority to appoint officers of the Corporation below
the rank of Senior Vice President.
4.7 Chief Executive Officer. The Chief Executive Officer shall have supervision
of the policies and management of the Corporation. He shall have the power to
sign checks, orders, contracts, leases, notes, drafts and other documents and
instruments in connection with the business of the Corporation and have such
other powers and perform such other duties as may be assigned to him by Board of
Directors or as may be incidental to his office. In the absence of the Chairman
of the Board, he shall preside at meetings of Stockholders, meetings of the
Board of Directors and the Executive Committee. The Chief Executive Officer
shall have the authority to appoint officers of the Corporation below the rank
of Senior Vice President.
4.8 President. The President shall be the Chief Operating Officer and shall
participate in the supervision of the policies and management of the
Corporation, and may, if so designated by the Board of Directors, be the Chief
Executive Officer of the Corporation. He shall perform all duties incidental to
the office of President and shall perform such other duties as may be assigned
to him from time to time by the Board of Directors or the Chairman of the Board.
In the absence of the Chairman of the Board, he shall preside at meetings of
stockholders, meetings of the Board of Directors and the Executive Committee. He
shall have the same power to sign for the Corporation and to appoint officers as
prescribed in these Bylaws for the Chairman of the Board and the Chief Executive
Officer.
4.9 Vice Chairman of the Board of Directors. A Vice Chairman of the Board shall
participate in the supervision of the policies and operations of the Bank and
shall have such other duties as may be assigned to him from time to time by the
Board of Directors or the Chairman of the Board. In the absence of the Chairman
of the Board and the President, a Vice Chairman, as designated by the Chairman
of the Board, shall preside at meetings of the stockholders and of the Board of
Directors. A Vice Chairman shall have the authority to appoint officers of the
Corporation below the rank of Senior Vice President.
4.10 Secretary. The Secretary shall: a) keep the minutes of all meetings of the
Stockholders, the Board of Directors, the Standing Committees, and such other
Committees as the Board may designate; b) see that all notices of such meetings
required to be given by the Corporation are duly given and served in accordance
with these Bylaws or as required by law; c) be custodian of the corporate
records and of the seal of the Corporation and have authority to affix the seal
to any documents requiring such seal and to attest the same; d) sign with the
Chief Executive Officer certificates for shares of the Corporation the issuance
of which shall have been authorized by resolution of the Board of Directors; and
e) in general perform all duties incident to the office of Secretary and such
other duties as from time to time may be assigned to him by the Board of
Directors or the Chief Executive Officer. In the absence of the Secretary, an
Assistant Secretary shall act in his stead.
4.11 Chief Financial Officer and Treasurer. The Chief Financial Officer and
Treasurer shall have charge of and be responsible for all funds, securities,
receipts and disbursements of the Corporation, and shall deposit all monies and
securities of the Corporation in such banks and depositories as shall be
designated by the Board of Directors or the Chief Executive Officer, and perform
such other duties as may be incidental to the office. The Chief Financial
Officer and Treasurer shall be responsible (i) for maintaining adequate
financial accounts and records in accordance with generally accepted accounting
practices; (ii) for the preparation of appropriate operating budgets and
financial statements; and (iii) for the preparation and filing of all tax
returns required by law. The Chief Financial officer shall have the same power
to sign for the Corporation as prescribed in these By-Laws for the Chairman of
the Board and the Chief Executive Officer.
4.12 Powers and Duties of Other Officers. The powers and duties of all other
officers of the Corporation shall be those usually pertaining to their
respective offices, subject to the direction and control of the Board of
Directors and as otherwise provided in these Bylaws, or as prescribed by the
Chief Executive Officer.
4.13 Execution of Documents. The Chief Executive Officer, Chairman of the Board,
President, any officer being a member of the Corporation's management staff who
is also a person in charge of and responsible for any department within the
Corporation and any other officer to the extent such officer is so designated
and authorized by the Chief Executive Officer, the Chairman of the Board, the
President, or any other officer who is a member of the Corporation's management
staff who is in charge of and responsible for any department within the
Corporation, are hereby authorized on behalf of the Corporation to sell, assign,
lease, mortgage, transfer, deliver and convey any real or personal property now
or hereafter owned by or standing in the name of the Corporation or its nominee,
or held by this Corporation as collateral security, and to execute and deliver
such deeds, contracts, assignments or other papers or documents as may be
appropriate in the circumstances; to purchase and acquire any personal property
including loan portfolios and to execute and deliver such agreements, contracts
or other papers or documents as may be appropriate in the circumstances; to
execute any indemnity and fidelity bonds, proxies or other papers or documents
of like or different character necessary, desirable or incidental to the conduct
of its business; provided, however, that the signature of any such officer shall
be attested in each case by the Secretary, or an Assistant Secretary.
<PAGE>
4.14 Powers of Officers and Management Staff. The Chief Executive Officer, the
President, and those officers so designated and authorized by the Chief
Executive Officer are authorized for and on behalf of the Corporation, and to
the extent permitted by law and by policy; to make loans and discounts; to
purchase or acquire drafts, notes, stocks, bonds, and other securities for
investment of funds held by the Corporation; to execute and purchase
acceptances; to appoint, empower and direct all necessary agents and attorneys;
to sign and give any notice required to be given; to demand payment and/or to
declare due for any default any debt or obligation due or payable to the
Corporation upon demand or authorized to be declared due; to foreclose any
mortgages, to exercise any option, privilege or election to forfeit, terminate,
extend or renew any lease; to authorize and direct any proceedings for the
collection of any money or for the enforcement of any right or obligation; to
adjust, settle and compromise all claims of every kind and description in favor
of or against the Corporation, and to give receipts, releases and discharges
therefor; to borrow money and in connection therewith to make, execute and
deliver notes, bonds or other evidences of indebtedness; to pledge or
hypothecate any securities or any stocks, bonds, notes or any property real or
personal held or owned by the Corporation, or to rediscount any notes or other
obligations held or owned by the Corporation, to employ or direct the employment
of all personnel, including elected and appointed officers, and the dismissal of
them at pleasure, and in furtherance of and in addition to the powers
hereinabove set forth to do all such acts and to take all such proceedings as in
his or her judgment are necessary and incidental to the operation of the
Corporation.
Other persons in the employment of the Corporation, including but not
limited to officers and other members of the management staff, may be authorized
by the Chief Executive Officer, to perform the powers set forth above, subject,
however, to such limitations and conditions as are set forth in the
authorization given to such persons.
4.15 Bonds. Each officer and employee of the Corporation shall give bond
covering the honest and faithful performance of his duties. The form and amount
of such bonds, and the name of the company providing the surety, shall be
approved annually by the Board of Directors at its organizational meeting, the
premiums thereon to be paid by the Corporation.
ARTICLE V
Capital Stock
5.1 Certificates. The shares of capital stock of the Corporation shall be
evidenced by certificates in forms prescribed by the Board of Directors and
executed in any manner permitted by law and stating thereon the information
required by law. Transfer agents and/or registrars for one or more classes of
the stock of the Corporation may be appointed by the Board of Directors and may
be required to countersign certificates representing stock of such class or
classes. If any officer whose signature or facsimile thereof shall have been
used on a stock certificate shall for any reason cease to be an officer of the
Corporation and such certificate shall not then have been delivered by the
Corporation, the Board of Directors may nevertheless adopt such certificate and
it may then be issued and delivered as though such person had not ceased to be
an officer of the Corporation.
5.2 Lost, Destroyed and Stolen Certificated Securities. Holders of the stock of
the Corporation shall immediately notify the Corporation of any loss,
destruction or mutilation of the certificate(s) therefor, and if the Corporation
has not previously received notice that the certificate(s) has/have been
acquired by a bona fide purchaser, the Corporation may cause one or more new
certificates for the same number of shares in the aggregate to be issued to such
stockholder upon the surrender of the mutilated certificate or upon satisfactory
proof of such loss or destruction, and the deposit of a bond in such form and
amount and with such surety as the Corporation may require and the satisfaction
by the stockholder of any other reasonable requirements imposed by the
Corporation.
5.3 Transfer of Stock. The stock of the Corporation shall be transferable or
assignable only on the Books of the Corporation by the holders in person or by
an attorney in fact upon surrender of the Certificate for such shares duly
endorsed and, if sought to be transferred by an attorney in fact, accompanied by
a written power of attorney to have the same transferred on the books of the
Corporation. The Corporation shall recognize, however, the exclusive right of
the person registered on its books as the owner of shares to receive dividends
and to vote as such owner. To the extent that any provision of the Rights
Agreement between the Corporation and Crestar Bank, as Rights Agent, dated as of
January 18, 1990, is deemed to constitute a restriction on the transfer of any
securities of the Corporation, including, without limitation, the Rights, as
defined therein, such restriction is hereby authorized by the bylaws of the
Corporation.
<PAGE>
5.4 Closing of Transfer Books and Fixing Record Date. For the purpose of
determining stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to receive payment of any
dividend, or in order to make a determination of stockholders for any other
proper purpose, the Board of Directors may provide, that the stock transfer
books shall be closed for a stated period but not to exceed in any case, seventy
(70) days or such other number of days as permitted by the Virginia Stock
Corporation Act.
In lieu of closing the stock transfer books, the Board of Directors may
fix in advance a date as the record date for any such determination of
stockholders, such date in any case to be not more than seventy days (70) or
such other number of days as permitted by the Virginia Stock Corporation Act
prior to the date on which the particular action, requiring such determination
of stockholders, is to be taken. If the stock transfer books are not closed and
no record date is fixed for the determination of stockholders entitled to notice
or to vote at a meeting of stockholders, or stockholders entitled to receive
payment of a dividend, the date on which notices of the meeting are mailed or
the date on which the resolution of the Board of Directors declaring such
dividend is adopted, as the case may be, shall be the record date for such
determination of stockholders. When a determination of stockholders entitled to
vote at any meeting of the stockholders has been made as provided in this
section such determination shall apply to any adjournment thereof.
ARTICLE VI
Miscellaneous Provisions
6.1 Seal. The seal of the Corporation shall consist of a flat-face circular die,
of which there may be any number of counterparts, and on which there shall be
engraved the word "Seal" and the name of the Corporation. Any officer of the
Corporation designated in writing by the Chief Executive Officer or Secretary
shall have authority to affix and attest the seal. Failure to use the corporate
seal shall not affect the validity of any instrument.
6.2 Voting of Stock Held. Unless otherwise provided by resolution of the Board
of Directors or of the Executive Committee, the Chairman of the Board, the
President, or any Senior Vice President may from time to time appoint an
attorney or attorneys or agent or agents of this Corporation, in the name and on
behalf of this Corporation, to cast the vote which this Corporation may be
entitled to cast as a stockholder or otherwise in any other corporation, any of
whose stock or securities may be held by this Corporation at meetings of the
holders of the stock or other securities of such other corporation or to consent
in writing to any action by any such other corporation. Such officer shall
instruct the person or persons so appointed as to the manner of casting such
votes or giving such consent and may execute or cause to be executed on behalf
of this Corporation such written proxies, consents, waivers or other instruments
as may be necessary or proper. In lieu of an appointment of an attorney or agent
the officer may himself attend any meetings of the holders of stock of other
securities of any such other corporation and there vote or exercise any or all
power of this Corporation as the holder of such stock or other securities of
such other corporation.
6.3 Checks, Notes and Drafts. Checks, notes, drafts and other orders for the
payment of money shall be signed by the Chairman of the Board, President,
Secretary, Chief Financial Officer and Treasurer, Controller or such other
officer(s) as the Board of Directors from time to time may authorize. The
signature of any such person may be a facsimile.
6.4 Fiscal Year. The fiscal year of the Corporation shall be the calendar year.
ARTICLE VII
Emergency By-Laws
7.1 The Emergency Bylaws provided in this Article VII shall be operative during
any emergency resulting from any catastrophic event including an attack the
United States or any nuclear or atomic disaster notwithstanding any different
provision in the preceding Articles of the Bylaws or in the Articles of
Incorporation of the Corporation or in the Virginia Stock Corporation Act (other
than those provisions relating to emergency Bylaws). To the extent not
inconsistent with these Emergency Bylaws the Bylaws provided in the preceding
articles shall remain in effect during such emergency and upon the termination
of such emergency the Emergency Bylaws shall cease to be operative unless and
until another such emergency shall occur.
During any such emergency:
(a) Any meeting of the Board of Directors may be called by any
officer of the Corporation or by any Director. The notice
thereof shall specify the time and place of the meeting. To
the extent feasible, notice shall be given only to such of the
Directors as it may be feasible to reach at the time, by such
means as may be feasible at the time, including publication or
radio, and at a time less than twenty-four hours before the
meeting if deemed necessary by the person giving notice.
Notice shall be similarly given, to the extent feasible, to
the other persons referred to in (b) below,
(b) At any meeting of the Board of Directors, a quorum shall
consist of a majority of the number of Directors fixed at the
time in accordance with Article II of the Bylaws. If the
Directors present at any particular meeting shall be fewer
than the number required for such quorum, other persons
present may be included in the number necessary to make up
such quorum, and shall be deemed Directors for such particular
meeting as determined by the following provisions and in the
following order of priority:
(i) Officers designated in Section 4.l(a) of
the Bylaws, not already serving as Directors, in the
order of their seniority of first election to such
offices, or if two or more shall have been first
elected to such offices on the same day, in the order
of their seniority in age;
(ii) All other officers of the Corporation
in the order of their seniority of first election to
such offices, or if two or more shall have been first
elected to such offices on the same day, in the order
of their seniority in age; and
(iii) Any other persons that are designated
on a list that shall have been approved by the Board
of Directors before the emergency, such persons to be
taken in such order of priority and subject to such
conditions as may be provided in the resolution
approving the list.
(c) The Board of Directors, during as well as before any such
emergency, may provide, and from time to time modify, lines of
succession in the event that during such an emergency any or
all officers or agents of the Corporation shall for any reason
be rendered incapable of discharging their duties.
(d) The Board of Directors, during as well as before any such
emergency, may, effective in the emergency, change the
principal office, or designate several alternative offices, or
authorize the officers to do so.
No officer, Director or employee acting in accordance with these
Emergency Bylaws shall be liable except for willful misconduct.
These Emergency Bylaws shall be subject to repeal or change by further
action of the Board of Directors or by action of the stockholders, except that
no such repeal or change shall modify the provisions of the next preceding
paragraph with regard to action or inaction prior to the time of such repeal or
change. Any such amendment of these Emergency Bylaws may make any further or
different provision that may be practical and necessary for the circumstances of
the emergency.
ARTICLE VIII
Amendments
8.1 These Bylaws may be amended, altered, or repealed at any meeting of the
Board of Directors by affirmative vote of a majority of the number of Directors
fixed by resolution of the Board pursuant to these Bylaws. The stockholders
entitled to vote in an election of Directors, however, shall have the power to
rescind, alter, amend or repeat any Bylaws and to enact Bylaws which, if
expressly so provided, may not be amended, altered or repealed by the Board of
Directors.
Exhibit 10 (iii)(B)(6)1.
SEVERANCE AGREEMENT BETWEEN
MAINSTREET BANKGROUP INCORPORATED
AND _______________________
This Severance Agreement ("Agreement"), dated for purposes of
identification, _______________, is made and entered into between MainStreet
BankGroup Incorporated ("Company"), a Virginia corporation, and
____________________ ("Employee").
WHEREAS, Employee is employed as ______________ of _________________
("Employer"); and
WHEREAS, Company desires to provide Employee with certain benefits in
the event that Employee's employment with Employer is terminated under
the circumstances specified in this Agreement;
WHEREAS, Employee desires to continue employment with Employer and to
accept Company's offer of the benefits specified in this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
and agreements hereinafter set forth, the parties hereto agree as
follows:
SECTION I. DEFINITIONS. As used in this Agreement, the following
capitalized terms have the indicated meanings unless the context clearly
requires otherwise:
A. "Applicable Federal Rate" has the meaning ascribed to that term in
Section 1274(b)(2)(B) of the Code.
B. "Bank Subsidiary" means any one or more of the following: Piedmont
Trust Bank, Bank of Ferrum, First Community Bank of Saltville, First Community
Bank, Bank of Carroll, The First Bank of Stuart, First National Bank of Clifton
Forge, Hanover Bank, MainStreet Trust Company, National Association and any
other bank or subsidiary as to which Company is now or hereafter deemed a bank
holding company under the applicable regulations of the Board of Governors of
the Federal Reserve System.
C. "Board" means the Board of Directors of the Company, unless otherwise
specified.
D. "Cause" means (i) the continued failure by Employee to perform his
duties as an employee of Employer (other than any such failure resulting from
his incapacity due to physical or mental illness) except to the extent such
conduct also constitutes "Cause" under clause D.(ii) below (in which case clause
D.(ii) shall apply) or (ii) the engaging by the Employee in any conduct which
has a material adverse financial effect on or is materially injurious to the
Company or any Bank Subsidiary and which was not done or omitted to be done in
good faith and in the best interests of the Company or any Bank Subsidiary or
the engaging by Employee in any conduct which is illegal or dishonest either in
connection with Employee's duties as an employee of Employer or, if not so
connected, which reflects in a materially adverse way on Employee's fitness to
serve in the capacity employed by Employer; or (iii) the issuance of a removal
order or similar order by a governmental regulatory agency with appropriate
jurisdiction prohibiting Employee from participating in the affairs of the
Company or any Bank Subsidiary. For purposes of determining the existence of
"Cause" under either clause D.(i) or D.(ii) above any act or failure to act
based upon authority given pursuant to a resolution duly adopted in the case of
clause D.(i) above by the Board of Directors of the Employer or, in the case of
clause D.(ii) above, by the Board of Directors of either the Employer or the
Company, if different, or, in the case of either clause D.(i ) or D.(ii) above,
based upon the advice of counsel for the Company shall be conclusively presumed
not to constitute "Cause". In addition, Employee's attention to matters not
directly related to the business of the Employer shall not provide a basis for
termination for Cause under either clause D.(i) or (ii) above so long as either
the Board or the Board of Directors of the Employer has approved Employee's
engagement in such activities. After the Effective Date, Employee's employment
shall not be terminated for Cause unless and until there shall have been
delivered to Employee a copy of a resolution duly adopted by the affirmative
vote of not less than 75% of the entire membership of the Board (excluding
Employee if he is a Board member) at a meeting of such Board called and held for
such purpose (after a reasonable notice to Employee and an opportunity for
Employee, together with his counsel, to be heard before the Board), finding that
in the good faith opinion of the Board Cause exists under clause D.(i), D.(ii)
or D.(iii) above and specifying the particulars thereof in detail. In such
event, Employee shall have a reasonable period of time prior to the adoption by
the Board of the resolution referred to in the immediately preceding sentence in
which to correct the alleged basis for Cause, provided, however, that the
alleged violation is neither dishonest nor criminal or provided that Employee is
not prohibited from correcting the alleged violation by the terms of a removal
or similar order by a governmental agency. For purposes of the immediately
preceding sentence, it is agreed that thirty (30) days after written demand for
performance is delivered to the Employee by the Board (excluding Employee if
Employee is a Board member) specifically identifying the conduct believed to
constitute "Cause" shall be deemed a reasonable time to correct any such alleged
violation but if Employee is unable, after due and diligent efforts, to correct
the alleged failure of performance within such thirty (30) day period, and, if
the Board (excluding Employee if Employee is a Board member) determines that
Employee is using his best efforts to make such correction and that the alleged
violation can be corrected, the Board shall extend the thirty (30) day period by
such time as is reasonably necessary in the Board's good faith judgment for the
Employee to effect expeditiously such correction and shall give Employee written
notice of the date so extended.
E. "Change in Control" or "Change in Control of the Employer" means a
change in control which occurs when: (i) the Incumbent Board ceases for any
reason to constitute at least the majority of the Board, provided that any
person becoming a director subsequent to Effective Date whose election, or
nomination for election by the Company's shareholders, was approved by a vote of
at least 75% of the directors comprising the Incumbent Board (either by a
specific vote or by approval of the proxy statement of the Company in which such
person is named as a nominee for director, without objection to such nomination)
shall be, for purposes of this clause E.(i) considered as though such person
were a member of the Incumbent Board; (ii) all or substantially all of the
assets of the Company are sold, transferred or conveyed by any means, including
but not limited to direct purchase or merger, if the transferee is not
controlled by the Company, control meaning the ownership of more than 50% of the
combined voting power of such entity's voting securities; or (iii) the Company
is merged or consolidated with another corporation or entity and as a result of
such merger or consolidation less than 75% of the outstanding voting securities
of the surviving or resulting corporation or entity shall be owned in the
aggregate by the former shareholders of the Company. Notwithstanding anything in
the foregoing to the contrary, no Change in Control shall be deemed to have
occurred for purposes of this Agreement by virtue of any transaction (w) which
results in the Employee or a group of Persons which includes the Employee,
acquiring, directly or indirectly, 20% or more of the combined voting power of
the Company's voting securities; (x) arranged or caused by a federal bank
regulatory agency possessing appropriate jurisdiction on the grounds of failing
financial condition of the Company or any Subsidiary Bank which results in the
acquisition, directly or indirectly, of 20% or more of the combined voting power
of the Company's voting securities by any Person; (y) initiated, caused,
arranged, promoted, assisted or facilitated in whole or part by the Employee
without the prior express approval of the Incumbent Board (including members of
the Board who are deemed members of the Incumbent Board under the provisions of
clause E(i) above); or (z) which results in the Company, any subsidiary of the
Company or any profit-sharing plan, employee stock ownership plan or employee
benefit plan of the Company or any of its subsidiaries (or any trustee of or
fiduciary with respect to any such plan acting in such capacity) acquiring,
directly or indirectly, 20% or more of the combined voting power of the
Company's voting securities.
F. "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
G. "Date of Termination" means (i) if Employee's employment with
Employer is terminated by Employee for other than Good Reason, sixty (60) days
after Notice of Termination is given by the Company, (ii) if Employee's
employment with Employer is terminated for Disability, thirty (30) days after
Notice of Termination is given by the Company (provided that the Employee shall
not have returned to the performance of his duties with Employer on a full-time
basis during such thirty (30) day period), (iii) except as otherwise provided in
this paragraph, if Employee's employment is to be terminated with Employer for
Cause or by the Employee for Good Reason, the date specified in the Notice of
Termination given by the Company; (iv) the date of Employee's death, or (v) if
Employee's employment is to be terminated with Employer for any reason other
than Cause or Disability, the date specified in the Notice of Termination given
by the Company, which in no event shall be a date earlier than sixty (60) days
after the date on which such Notice of Termination is given by the Company,
unless an earlier date has been expressly agreed to by the Employee in writing
either in advance of, or after, receiving such Notice of Termination. Except for
termination for Cause under clause I. D.(iii) if, after the Effective Date,
Employee has not previously expressly agreed in writing to the termination, then
within thirty (30) days after receipt by the Employee of the Notice of
Termination by Company the Employee may notify the Company that a dispute exists
concerning the termination, in which event the Date of Termination shall be
either the date set by mutual written consent of the parties or the date the
dispute is resolved. During the pendency of any such dispute, the Employee will
continue to be paid his full compensation in effect prior to the time the Notice
of Termination is given and until the dispute is resolved.
H. "Disability" means (i) as a result of Employee's inability due to
physical or mental illness, Employee shall have been absent from the full-time
performance of his duties with the Employer for six (6) consecutive months, and
(ii) within thirty (30) days after Notice of Termination is given Employee shall
not have returned to the full-time performance of his duties.
I. "Effective Date" means the date and time at which a Change in
Control occurs with respect to Company.
J. "Employer" includes the corporation identified as such in this
Agreement and any corporation or other entity which is the surviving or
continuing entity in respect of any merger, consolidation or form of business
combination in which the Employer ceases to exist.
K. "Employment Year" means the 12-month period beginning with the
Effective Date and each 12-month period beginning on the annual anniversary of
such Effective Date thereafter.
L. "Federal Funds Rate" means a rate of interest equal to the average
of (i) the near closing bid and (ii) offered as quoted in the Wall Street
Journal for reserves traded among commercial banks for overnight use in amounts
of $1,000,000 or more. Should such rate of interest ever cease to exist, the
parties shall mutually agree upon a comparable rate of interest. "Average
Federal Funds Rate for the Quarter" shall be the sum of the Federal Funds Rate
for each business day in the quarter (a quarter is a period which begins on
January 1, April 1, July 1 or October 1 and ends on March 31, June 30, September
30 or December 31, respectively) divided by the number of business days in such
quarter.
<PAGE>
M. "Good Reason" means:
(i) An adverse change in Employee's status or position(s) as
an officer or director of the Employer after a Change in Control including,
without limitation, any adverse change in Employee's status or position as a
result of a material diminution of his duties or responsibilities (other than,
if applicable, any such change directly attributable solely to the fact that the
Company is no longer publicly owned) or the assignment to Employee after a
Change in Control of any duties or responsibilities which, in Employee's
reasonable judgment, are inconsistent with such status or position(s), or any
removal of Employee from or any failure to reappoint or reelect Employee after a
Change in Control to such position(s) (except in connection with the termination
of Employee's employment for Cause, Disability or Retirement or as a result of
Employee's death or by Employee other than for Good Reason);
(ii) The failure by the Company to obtain from any
Successor the assent to this Agreement hereinafter required;
(iii) When a Notice of Termination is required hereunder for
termination of Employee under this Agreement, any purported termination of the
Employee's employment after a Change in Control which is not effected pursuant
to a Notice of Termination satisfying the applicable requirements of Section
I.0. hereof (and, if applicable, Section I. D. hereof);
(iv) The failure by Company, Employer or Successor, as the
case may be, to continue in effect after a Change in Control any Plans in which
Employee participates at the time of the Change in Control (or Plans providing
Employee with at least substantially similar benefits) other than as a result of
the normal expiration of any such Plan in accordance with its terms as in effect
at the time of the Change in Control, or the taking of any action, or the
failure to act, by Company, Employer or Successor after a Change in Control
which would adversely affect Employee's continued participation in any of such
Plans on at least as favorable a basis as existing on the date of the Change in
Control or which would materially reduce Employee's benefits in the future under
any such Plans or deprive Employee of any material benefit enjoyed by the
Employee at the time of the Change in Control;
(v) The failure by Company, Employer or Successor, as the case
may be, after a Change in Control to provide and credit Employee with number of
paid vacation days to which Employee would then be entitled in accordance with
this Agreement or in accordance with the vacation policy applicable to Employee
as in effect at the time of the Change in Control, whichever is greater;
(vi) Company, Employer or Successor, as the case may be,
requiring the Employee after a Change in Control to be based anywhere other than
where his office is located immediately prior to the Change in Control except
for required travel on business for the Company, Employer or Successor to an
extent substantially consistent with the business travel obligations which
Employee undertook on behalf of Employer or Company prior to the Change in
Control;
(vii) Any refusal by Company, Employer or Successor, as the
case may be, after a Change in Control to continue to allow Employee to attend
to matters or engage in activities not directly related to the business thereof
which, prior to the Change in Control of the Employer, Employee was permitted by
Employer or Company to attend to or engage in; or
(ix) Notwithstanding anything to the contrary in this
Agreement, a termination by the Executive of employment for any or no reason
during the period beginning on the day which is the 366th day after the
Effective Date and ending at midnight on the day which is the 396th day after
the Effective Date shall be deemed to be a termination for Good Reason for all
purposes of this Agreement.
N. "Incumbent Board" means the Board as constituted on the date
hereof.
O. "Notice of Termination" means a written notice that indicates the
specific termination provision of this Agreement set forth in Section II relied
upon and, if the termination of Employment with Employer is for Good Reason, for
Cause, or Disability, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Employee's
employment under the provision so indicated. No Notice of Termination is
required hereunder in the event of the Employee's death.
P. "Person" has the meaning ascribed to that term in Sections
3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as amended.
Q. "Plan" means any compensation plan such as an incentive, bonus,
stock option or restricted stock plan, any pension or profit sharing plan or any
welfare benefit plan (including, but not limited to health, life or disability
insurance).
R. "Retirement" means Employee's voluntary termination of all
employment hereunder after the attainment of age sixty-five (65) or the
attainment of age fifty-five (55) having worked full time for the Employer for a
period of ten (10) consecutive Employment Years.
S. "Successor" means any Person that succeeds to, or has the practical
ability to control (either immediately or with the passage of time) the
Company's business directly, by merger or consolidation, or indirectly by
purchase of the Company's voting securities, all or substantially all of its
assets or otherwise.
SECTION II. TERMINATION OF EMPLOYMENT AND SEVERANCE.
A. Termination For Death or Disability or by Employer For Cause or by
Employee for Other Than Good Reason. Upon termination by the Employee of his
employment for other than Good Reason after the Effective Date, upon the
termination of Employee's employment by the Employer for Cause after the
Effective Date, upon termination for Disability after the Effective Date, or
upon Employee's death after the Effective Date, the Company shall pay or cause
to be paid to the Employee an amount equal to his full base salary with Employer
through the Date of Termination at the rate in effect at the time Notice of
Termination is given (if required) and all other unpaid amounts, if any, to
which Employee is entitled as of the Date of Termination under any Plan or
arrangement applicable to Employee at the Date of Termination. In the event of
Employee's death and the foregoing amounts shall be determined on the date of
death.
B. Termination Under Certain Other Circumstances. Upon termination of
Employee's employment after the Effective Date, unless such termination is (i)
because of Employee's death or Retirement, (ii) by Employer for Cause or
Disability, or (iii) by Employee other than for Good Reason, Company shall (a)
pay or cause to be paid to Employee as severance pay and in lieu of any further
salary an amount equal to 2.99 multiplied by the Employee's annualized
includable compensation for the base period, within the meaning of Section
280G(d)(1) of the Code, or any successor provision, if such termination occurs
within the first twenty-four (24) months after the Effective Date; and (b)
maintain in full force and effect for the continued benefit of the Employee and
the Employee's dependents for a period terminating on the earliest of: (x) three
years after the Date of Termination, (y) the commencement of equivalent benefits
from a new employer, or (z) Employee's normal retirement date, all insured and
self-insured employee welfare benefit plans in which the Employee was entitled
to participate immediately prior to the Date of Termination, provided that the
Employee's continued participation is possible under the general terms and
provisions of such plans (and any applicable funding medium) and the Employee
continues to pay an amount equal to his regular contribution, if any, under such
plans for such participation. If at the end of three years after the Termination
Date, the Employee has not reached his normal retirement date and has not
previously received or is not then receiving equivalent benefits from a new
employer, the Company shall arrange, at its sole cost and expense, to enable the
Employee to convert his and his dependent's coverage under such plans to
individual policies or programs upon the same terms as employees of the Company
may apply for such conversions. In the event that the Employee's participation
in any such plan is barred, the Company, at its sole cost and expense, shall
arrange to have issued for the benefit of Employee and his dependents individual
policies of insurance providing benefits substantially similar (on an after-tax
basis) to those which the Employee would have been entitled to receive under
such plans pursuant to clause (b) of this Section II. B. or, if such insurance
is not available at a reasonable cost to the Employer, the Company shall
otherwise provide the Employee and the Employee's dependents equivalent benefits
(on an after-tax basis). The Employee shall not be required to pay any premiums
or other charges in an amount greater than that which the Employee would have
paid in order to participate in such plans. Except as provided in this Section
II. B.(b), nothing in this Agreement shall modify, limit or impair the rights or
benefits to which the Employee is otherwise entitled under any other employee
benefit agreement or plan with Employer or the Company. If any of the payment
provided for in this Section II. B. is or will be subject to the excise tax
imposed by Section 4999 of the Code or any similar tax that may hereafter be
imposed ("Excise Tax") such payment shall be reduced to a smaller amount, even
to zero, which smaller amount shall be the largest amount payable under this
paragraph that would not be subject in whole or in part to the Excise Tax after
considering all other payments to Employee required to be considered under
Section 4999 or 280G of the Code. Such payment shall be referred to as the
"Severance Payment."
In the event that the Severance Payment is subsequently determined to
be less than the amount actually paid hereunder, the Employee shall repay the
excess to the Company in sixty (60) equal monthly installments without interest,
beginning on the first day of the first month next following such determination.
In the event that the amount of the Severance Payment is determined to
exceed the amount initially paid, the Company shall pay the Employee such
difference plus interest on such difference at the Applicable Federal Rate at
the time that such determination is made.
C. Offset and Recovery. The amount of any payment provided for in this
Section II shall not be reduced, offset or subject to recovery by the Company or
Successor by reason of any compensation earned by Employee as the result of
employment by another employer after the Date of Termination, or otherwise but
any sums paid to Employee hereunder which were not properly payable to such
Employee may be recovered by or in right of the Company or Successor, together
with interest at the Applicable Federal Rate.
SECTION III. EFFECTIVE DATE.
A. Severance Agreement. Except as expressly provided in Subsection
III.B., no provision of this Agreement other than this Section III, Section IV,
Section V, Section VII.B. through D., Section IX and Section X shall take effect
and no Person shall have any rights or duties under or in connection with this
Agreement until the Effective Date occurs. At the Effective Date, the rights and
duties of the parties hereunder shall automatically vest and become fully
enforceable in accordance with the terms of this Severance Agreement so long as
Employee is, immediately preceding the Effective Date, employed by Employer,
subject only to the provisions of Subsection III.B.
B. Prior to Effective Date. At the time and on the date that the
Incumbent Board (whose membership shall be determined in accordance with clause
I. E.(i) of this Agreement) authorizes Employer to enter into discussions or
negotiations with any Person concerning a Change of Control or authorizes
Employer to seek a Person or Person with which to discuss or negotiate a Change
of Control of Employer ("Change of Control Authorization"), the parties' rights
and duties under their Agreement shall vest immediately if Employee is employed
by Employer at the time of the Change of Control Authorization and shall be
enforceable on an Effective Date occurring within two (2) years and resulting
from such Change of Control Authorization so long as Employee's employment with
Employer has not been terminated prior to the Effective Date (unless terminated
by Employee for Good Reason [as defined in Section I.M. except that for purposes
of this parenthetical clause only, the Change of Control Authorization shall
substitute for the term Change in Control as used in Section I.M.] or by
Employer not for Cause, in which case Employee's employment with Employer shall
for purposes of this Subsection III.B. be deemed to be continuing to the
Effective Date).
SECTION IV. SUCCESSORS; BINDING AGREEMENT.
A. Agreement of Employer's Successor. Upon Employee's written request,
Company will have any Successor, by agreement in form and substance reasonably
satisfactory to Employee, assent to the fulfillment by Company of its
obligations under this Agreement. Failure of Company to obtain such assent at
least ten business days prior to the Effective Date shall constitute Good Reason
for termination by Employee of his employment and, if a Change in Control has
occurred, shall entitle Employee immediately to the benefits provided in Section
II.B. hereof upon delivery by Employee of a Notice of Termination.
B. Binding Agreement. This Agreement shall inure to the benefit of and
be enforceable by Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
Employee should die while any amount would still be payable to Employee
hereunder if the Employee had continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to Employee's beneficiary designated in writing and delivered to
Company, if any, and if none to Employee's estate.
SECTION V. FEES AND EXPENSES.
Each party shall pay its own legal fees and related or other expenses
incurred in connection with this Agreement, whether or not such party prevails,
including, without limitation all such fees and expenses, if any, incurred in
contesting or disputing any termination or seeking to obtain or enforce any
right or benefit provide by this Agreement; provided, however, that, after the
earlier of the Effective Date or any vesting of the parties' rights and duties
hereunder prior to the Effective Date as provided in Section III.B, the Company
shall pay all legal fees and related expenses incurred by Employee in connection
with seeking advice regarding this Agreement, and, all such fees and expenses,
if any, incurred by Employee in contesting or disputing any termination of
Employee or in seeking to obtain or enforce any right or benefit provided by
this Agreement, if Employee prevails.
SECTION VI. TAXES.
All payments to be made to Employee under this Agreement will
be subject to required withholding of federal, state and local and employment
and other taxes.
SECTION VII. MISCELLANEOUS.
A. Survival. The respective obligations of, and benefits afforded to,
Company and Employee in Sections II, IV. B., V, VI, VII, VIII. A., C., and
D., IX and XI of this Agreement shall survive termination
of this Agreement.
B. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered to Employee or the _________ of
Company or mailed by United States registered mail, return receipt requested,
postage prepaid and addressed, in the case of Company, to the attention of the
_________________ at the following address:
MainStreet BankGroup Incorporated
200 E. Church Street
Martinsville, Virginia 24112-5409
or, in the case of Employee, to the address set forth below the Employee's
signature, provided that all notices may be sent to such other address as either
party may have furnished to the other in writing in accordance herewith, except
that notice of change of address shall be effective only upon receipt.
C. Modification; Waiver. No provision of this Agreement may be
modified, waived or discharged unless such modification, waiver or discharge is
agreed to in writing signed by Employee and the __________________ of Company
pursuant to authorization by the Incumbent Board. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of a similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not expressly set
forth in this Agreement. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the Commonwealth
of Virginia.
D. Validity. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
SECTION VIII. CONFIDENTIALITY; COVENANT NOT TO COMPETE.
A. Confidentiality. Employee agrees that subsequent to his period of
employment with Employer, he will not at any time communicate or disclose to any
unauthorized person, without the written consent of the Company, any proprietary
or other confidential information concerning the Company or any subsidiary of
the Company, it being understood, however, that the obligations of this Section
shall not apply to the extent that the aforesaid matters (i) are disclosed in
circumstances where Employee is legally required to do so or (ii) become
generally known to and available for use by the public otherwise than by the
Employee's wrongful act or omission.
B. Covenant Not to Compete. If the Employee's employment with the
Employer is terminated after the Effective Date or any vesting of the parties'
rights and duties hereunder prior to the Effective Date as provided in Section
III.B by Employee other than for Good Reason, the Employee agrees that for a
period of 2 years from the date his employment is terminated, he will not,
without the consent in writing of the Chief Executive Officer of the Company or
Successor, become an officer, employee, agent, partner, director or substantial
stockholder of any entity engaged in the commercial or retail banking, lending,
leasing or trust business within a 100 mile radius of the main office of the
Employer, or become associated in any substantial manner with any entity in the
process of formation to engage in the retail or commercial banking, lending,
leasing or trust business, or any group that intends to form any such entity in
the geographical area described above.
C. Relief. In the event of Employee's actual or threatened breach of
this Section, the Company or Successor, as the case may be, shall be entitled to
a preliminary restraining order and an injunction restraining the Employee from
violating its provisions. In the event the Employee terminates his employment
after the Effective Date for other than Good Reason and his actual date of
terminating his employment is less than sixty (60) days after his Notice of
Termination, the Employee will pay to the Employer, as liquidated damages and
not as a penalty, an amount equal to the Employee's base salary then in effect,
computed on a per diem basis, multiplied by sixty (60) or, in the event that
Employee or his heirs or personal representatives are mistakenly paid any
amounts pursuant to Section II or Section V of this Agreement, the Employee
shall repay such amounts to Company or Successor together with interest at the
Applicable Federal Rate from the date so paid to the Employee to the date of
Employee's repayment to the Company or Successor.
D. Other Remedies. Nothing in this Agreement shall be construed to
prohibit the Company or Successor from pursuing any other available remedies for
such breach or threatened breach, including the recovery of damages from the
Employee. If at the time of enforcement of Subsection VIII.B., the duration,
scope or area restrictions stated herein are held to be unreasonable under the
circumstances then existing and, thus, unenforceable, the Company and Employee
agree that the maximum duration, scope or area reasonable under such
circumstances shall be substituted for the stated duration, scope or area.
SECTION IX. RELATED AGREEMENTS.
To the extent that any provision of any other agreement between Company
or any of its subsidiaries and Employee shall limit, qualify or be inconsistent
with any provision of this Agreement, then for purposes of this Agreement, while
the same shall remain in force, the provision of this Agreement shall control
and such provision of such other agreement shall be deemed to have been
superseded, and to be of no force or effect, as if such other agreement had been
formally amended to the extent necessary to accomplish such purpose.
SECTION X. COUNTERPARTS.
This Agreement may be executed in several counterparts, each of which
shall be deemed to be an original but all of which together will constitute one
and the same instrument.
SECTION XI. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement after the Effective Date shall be settled exclusively by arbitration
in Roanoke, Virginia by three arbitrators in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrators' award in any court having jurisdiction. The arbitration panel shall
be selected as follows: one arbitrator shall be selected by the Employee; one
arbitrator shall be selected by the Company; and one arbitrator shall be
selected by the two other arbitrators. The Company shall bear all costs and
expenses of the arbitration proceeding.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement
as of ________________________, 1997
MAINSTREET BANKGROUP INCORPORATED
By:______________________________
Its:_____________________________
Employee:
- - ---------------------------------
Address:
---------------------------------
---------------------------------
<PAGE>
Exhibit 10 (iii)(B)(6)2.
SEVERANCE AGREEMENT BETWEEN
MAINSTREET BANKGROUP INCORPORATED
AND _______________________
This Severance Agreement ("Agreement"), dated for purposes of
identification, _______________, is made and entered into between MainStreet
BankGroup Incorporated ("Company"), a Virginia corporation, and
____________________ ("Employee").
WHEREAS, Employee is employed as ______________ of _________________
("Employer"); and
WHEREAS, Company desires to provide Employee with certain benefits in
the event that Employee's employment with Employer is terminated under
the circumstances specified in this Agreement;
WHEREAS, Employee desires to continue employment with Employer and to
accept Company's offer of the benefits specified in this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
and agreements hereinafter set forth, the parties hereto agree as
follows:
SECTION I. DEFINITIONS. As used in this Agreement, the following
capitalized terms have the indicated meanings unless the context clearly
requires otherwise:
A. "Applicable Federal Rate" has the meaning ascribed to that term in
Section 1274(b)(2)(B) of the Code.
B. "Bank Subsidiary" means any one or more of the following: Piedmont Trust
Bank, Bank of Ferrum, First Community Bank of Saltville, First Community Bank,
Bank of Carroll, The First Bank of Stuart, First National Bank of Clifton Forge,
Hanover Bank, MainStreet Trust Company, National Association and any other bank
or subsidiary as to which Company is now or hereafter deemed a bank holding
company under the applicable regulations of the Board of Governors of the
Federal Reserve System.
C. "Board" means the Board of Directors of the Company, unless otherwise
specified.
D. "Cause" means (i) the continued failure by Employee to perform his
duties as an employee of Employer (other than any such failure resulting from
his incapacity due to physical or mental illness) except to the extent such
conduct also constitutes "Cause" under clause D.(ii) below (in which case clause
D.(ii) shall apply) or (ii) the engaging by the Employee in any conduct which
has a material adverse financial effect on or is materially injurious to the
Company or any Bank Subsidiary and which was not done or omitted to be done in
good faith and in the best interests of the Company or any Bank Subsidiary or
the engaging by Employee in any conduct which is illegal or dishonest either in
connection with Employee's duties as an employee of Employer or, if not so
connected, which reflects in a materially adverse way on Employee's fitness to
serve in the capacity employed by Employer; or (iii) the issuance of a removal
order or similar order by a governmental regulatory agency with appropriate
jurisdiction prohibiting Employee from participating in the affairs of the
Company or any Bank Subsidiary. For purposes of determining the existence of
"Cause" under either clause D.(i) or D.(ii) above any act or failure to act
based upon authority given pursuant to a resolution duly adopted in the case of
clause D.(i) above by the Board of Directors of the Employer or, in the case of
clause D.(ii) above, by the Board of Directors of either the Employer or the
Company, if different, or, in the case of either clause D.(i ) or D.(ii) above,
based upon the advice of counsel for the Company shall be conclusively presumed
not to constitute "Cause". In addition, Employee's attention to matters not
directly related to the business of the Employer shall not provide a basis for
termination for Cause under either clause D.(i) or (ii) above so long as either
the Board or the Board of Directors of the Employer has approved Employee's
engagement in such activities. After the Effective Date, Employee's employment
shall not be terminated for Cause unless and until there shall have been
delivered to Employee a copy of a resolution duly adopted by the affirmative
vote of not less than 75% of the entire membership of the Board (excluding
Employee if he is a Board member) at a meeting of such Board called and held for
such purpose (after a reasonable notice to Employee and an opportunity for
Employee, together with his counsel, to be heard before the Board), finding that
in the good faith opinion of the Board Cause exists under clause D.(i), D.(ii)
or D.(iii) above and specifying the particulars thereof in detail. In such
event, Employee shall have a reasonable period of time prior to the adoption by
the Board of the resolution referred to in the immediately preceding sentence in
which to correct the alleged basis for Cause, provided, however, that the
alleged violation is neither dishonest nor criminal or provided that Employee is
not prohibited from correcting the alleged violation by the terms of a removal
or similar order by a governmental agency. For purposes of the immediately
preceding sentence, it is agreed that thirty (30) days after written demand for
performance is delivered to the Employee by the Board (excluding Employee if
Employee is a Board member) specifically identifying the conduct believed to
constitute "Cause" shall be deemed a reasonable time to correct any such alleged
violation but if Employee is unable, after due and diligent efforts, to correct
the alleged failure of performance within such thirty (30) day period, and, if
the Board (excluding Employee if Employee is a Board member) determines that
Employee is using his best efforts to make such correction and that the alleged
violation can be corrected, the Board shall extend the thirty (30) day period by
such time as is reasonably necessary in the Board's good faith judgment for the
Employee to effect expeditiously such correction and shall give Employee written
notice of the date so extended.
E. "Change in Control" or "Change in Control of the Employer" means a
change in control which occurs when: (i) the Incumbent Board ceases for any
reason to constitute at least the majority of the Board, provided that any
person becoming a director subsequent to Effective Date whose election, or
nomination for election by the Company's shareholders, was approved by a vote of
at least 75% of the directors comprising the Incumbent Board (either by a
specific vote or by approval of the proxy statement of the Company in which such
person is named as a nominee for director, without objection to such nomination)
shall be, for purposes of this clause E.(i) considered as though such person
were a member of the Incumbent Board; (ii) all or substantially all of the
assets of the Company are sold, transferred or conveyed by any means, including
but not limited to direct purchase or merger, if the transferee is not
controlled by the Company, control meaning the ownership of more than 50% of the
combined voting power of such entity's voting securities; or (iii) the Company
is merged or consolidated with another corporation or entity and as a result of
such merger or consolidation less than 75% of the outstanding voting securities
of the surviving or resulting corporation or entity shall be owned in the
aggregate by the former shareholders of the Company. Notwithstanding anything in
the foregoing to the contrary, no Change in Control shall be deemed to have
occurred for purposes of this Agreement by virtue of any transaction (w) which
results in the Employee or a group of Persons which includes the Employee,
acquiring, directly or indirectly, 20% or more of the combined voting power of
the Company's voting securities; (x) arranged or caused by a federal bank
regulatory agency possessing appropriate jurisdiction on the grounds of failing
financial condition of the Company or any Subsidiary Bank which results in the
acquisition, directly or indirectly, of 20% or more of the combined voting power
of the Company's voting securities by any Person; (y) initiated, caused,
arranged, promoted, assisted or facilitated in whole or part by the Employee
without the prior express approval of the Incumbent Board (including members of
the Board who are deemed members of the Incumbent Board under the provisions of
clause E(i) above); or (z) which results in the Company, any subsidiary of the
Company or any profit-sharing plan, employee stock ownership plan or employee
benefit plan of the Company or any of its subsidiaries (or any trustee of or
fiduciary with respect to any such plan acting in such capacity) acquiring,
directly or indirectly, 20% or more of the combined voting power of the
Company's voting securities.
F. "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
G. "Date of Termination" means (i) if Employee's employment with
Employer is terminated by Employee for other than Good Reason, sixty (60) days
after Notice of Termination is given by the Company, (ii) if Employee's
employment with Employer is terminated for Disability, thirty (30) days after
Notice of Termination is given by the Company (provided that the Employee shall
not have returned to the performance of his duties with Employer on a full-time
basis during such thirty (30) day period), (iii) except as otherwise provided in
this paragraph, if Employee's employment is to be terminated with Employer for
Cause or by the Employee for Good Reason, the date specified in the Notice of
Termination given by the Company; (iv) the date of Employee's death, or (v) if
Employee's employment is to be terminated with Employer for any reason other
than Cause or Disability, the date specified in the Notice of Termination given
by the Company, which in no event shall be a date earlier than sixty (60) days
after the date on which such Notice of Termination is given by the Company,
unless an earlier date has been expressly agreed to by the Employee in writing
either in advance of, or after, receiving such Notice of Termination. Except for
termination for Cause under clause I. D.(iii) if, after the Effective Date,
Employee has not previously expressly agreed in writing to the termination, then
within thirty (30) days after receipt by the Employee of the Notice of
Termination by Company the Employee may notify the Company that a dispute exists
concerning the termination, in which event the Date of Termination shall be
either the date set by mutual written consent of the parties or the date the
dispute is resolved. During the pendency of any such dispute, the Employee will
continue to be paid his full compensation in effect prior to the time the Notice
of Termination is given and until the dispute is resolved.
H. "Disability" means (i) as a result of Employee's inability due to
physical or mental illness, Employee shall have been absent from the full-time
performance of his duties with the Employer for six (6) consecutive months, and
(ii) within thirty (30) days after Notice of Termination is given Employee shall
not have returned to the full-time performance of his duties.
I. "Effective Date" means the date and time at which a Change in
Control occurs with respect to Company.
J. "Employer" includes the corporation identified as such in this
Agreement and any corporation or other entity which is the surviving or
continuing entity in respect of any merger, consolidation or form of business
combination in which the Employer ceases to exist.
K. "Employment Year" means the 12-month period beginning with the
Effective Date and each 12-month period beginning on the annual anniversary of
such Effective Date thereafter.
L. "Federal Funds Rate" means a rate of interest equal to the average
of (i) the near closing bid and (ii) offered as quoted in the Wall Street
Journal for reserves traded among commercial banks for overnight use in amounts
of $1,000,000 or more. Should such rate of interest ever cease to exist, the
parties shall mutually agree upon a comparable rate of interest. "Average
Federal Funds Rate for the Quarter" shall be the sum of the Federal Funds Rate
for each business day in the quarter (a quarter is a period which begins on
January 1, April 1, July 1 or October 1 and ends on March 31, June 30, September
30 or December 31, respectively) divided by the number of business days in such
quarter.
<PAGE>
M. "Good Reason" means:
(i) An adverse change in Employee's status or position(s) as
an officer or director of the Employer after a Change in Control including,
without limitation, any adverse change in Employee's status or position as a
result of a material diminution of his duties or responsibilities (other than,
if applicable, any such change directly attributable solely to the fact that the
Company is no longer publicly owned) or the assignment to Employee after a
Change in Control of any duties or responsibilities which, in Employee's
reasonable judgment, are inconsistent with such status or position(s), or any
removal of Employee from or any failure to reappoint or reelect Employee after a
Change in Control to such position(s) (except in connection with the termination
of Employee's employment for Cause, Disability or Retirement or as a result of
Employee's death or by Employee other than for Good Reason);
(ii) The failure by the Company to obtain from any
Successor the assent to this Agreement hereinafter required;
(iii) When a Notice of Termination is required hereunder for
termination of Employee under this Agreement, any purported termination of the
Employee's employment after a Change in Control which is not effected pursuant
to a Notice of Termination satisfying the applicable requirements of Section
I.0. hereof (and, if applicable, Section I. D. hereof);
(iv) The failure by Company, Employer or Successor, as the
case may be, to continue in effect after a Change in Control any Plans in which
Employee participates at the time of the Change in Control (or Plans providing
Employee with at least substantially similar benefits) other than as a result of
the normal expiration of any such Plan in accordance with its terms as in effect
at the time of the Change in Control, or the taking of any action, or the
failure to act, by Company, Employer or Successor after a Change in Control
which would adversely affect Employee's continued participation in any of such
Plans on at least as favorable a basis as existing on the date of the Change in
Control or which would materially reduce Employee's benefits in the future under
any such Plans or deprive Employee of any material benefit enjoyed by the
Employee at the time of the Change in Control;
(v) The failure by Company, Employer or Successor, as the case
may be, after a Change in Control to provide and credit Employee with number of
paid vacation days to which Employee would then be entitled in accordance with
this Agreement or in accordance with the vacation policy applicable to Employee
as in effect at the time of the Change in Control, whichever is greater;
(vi) Company, Employer or Successor, as the case may be,
requiring the Employee after a Change in Control to be based anywhere other than
where his office is located immediately prior to the Change in Control except
for required travel on business for the Company, Employer or Successor to an
extent substantially consistent with the business travel obligations which
Employee undertook on behalf of Employer or Company prior to the Change in
Control;
(vii) Any refusal by Company, Employer or Successor, as the
case may be, after a Change in Control to continue to allow Employee to attend
to matters or engage in activities not directly related to the business thereof
which, prior to the Change in Control of the Employer, Employee was permitted by
Employer or Company to attend to or engage in; or
(ix) Notwithstanding anything to the contrary in this
Agreement, a termination by the Executive of employment for any or no reason
during the period beginning on the day which is the 366th day after the
Effective Date and ending at midnight on the day which is the 396th day after
the Effective Date shall be deemed to be a termination for Good Reason for all
purposes of this Agreement.
N. "Incumbent Board" means the Board as constituted on the date
hereof.
O. "Notice of Termination" means a written notice that indicates the
specific termination provision of this Agreement set forth in Section II relied
upon and, if the termination of Employment with Employer is for Good Reason, for
Cause, or Disability, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Employee's
employment under the provision so indicated. No Notice of Termination is
required hereunder in the event of the Employee's death.
P. "Person" has the meaning ascribed to that term in Sections
3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as amended.
Q. "Plan" means any compensation plan such as an incentive, bonus,
stock option or restricted stock plan, any pension or profit sharing plan or any
welfare benefit plan (including, but not limited to health, life or disability
insurance).
R. "Retirement" means Employee's voluntary termination of all
employment hereunder after the attainment of age sixty-five (65) or the
attainment of age fifty-five (55) having worked full time for the Employer for a
period of ten (10) consecutive Employment Years.
S. "Successor" means any Person that succeeds to, or has the practical
ability to control (either immediately or with the passage of time) the
Company's business directly, by merger or consolidation, or indirectly by
purchase of the Company's voting securities, all or substantially all of its
assets or otherwise.
<PAGE>
SECTION II. TERMINATION OF EMPLOYMENT AND SEVERANCE.
A. Termination For Death or Disability or by Employer For Cause or by
Employee for Other Than Good Reason. Upon termination by the Employee of his
employment for other than Good Reason after the Effective Date, upon the
termination of Employee's employment by the Employer for Cause after the
Effective Date, upon termination for Disability after the Effective Date, or
upon Employee's death after the Effective Date, the Company shall pay or cause
to be paid to the Employee an amount equal to his full base salary with Employer
through the Date of Termination at the rate in effect at the time Notice of
Termination is given (if required) and all other unpaid amounts, if any, to
which Employee is entitled as of the Date of Termination under any Plan or
arrangement applicable to Employee at the Date of Termination. In the event of
Employee's death and the foregoing amounts shall be determined on the date of
death.
B. Termination Under Certain Other Circumstances. Upon termination of
Employee's employment after the Effective Date, unless such termination is (i)
because of Employee's death or Retirement, (ii) by Employer for Cause or
Disability, or (iii) by Employee other than for Good Reason, Company shall (a)
pay or cause to be paid to Employee as severance pay and in lieu of any further
salary an amount equal to the Employee's annualized includable compensation for
the base period, within the meaning of Section 280G(d)(1) of the Code, or any
successor provision, if such termination occurs within the first twenty-four
(24) months after the Effective Date; and (b) maintain in full force and effect
for the continued benefit of the Employee and the Employee's dependents for a
period terminating on the earliest of: (x) one year after the Date of
Termination, (y) the commencement of equivalent benefits from a new employer, or
(z) Employee's normal retirement date, all insured and self-insured employee
welfare benefit plans in which the Employee was entitled to participate
immediately prior to the Date of Termination, provided that the Employee's
continued participation is possible under the general terms and provisions of
such plans (and any applicable funding medium) and the Employee continues to pay
an amount equal to his regular contribution, if any, under such plans for such
participation. If at the end of one year after the Termination Date, the
Employee has not reached his normal retirement date and has not previously
received or is not then receiving equivalent benefits from a new employer, the
Company shall arrange, at its sole cost and expense, to enable the Employee to
convert his and his dependent's coverage under such plans to individual policies
or programs upon the same terms as employees of the Company may apply for such
conversions. In the event that the Employee's participation in any such plan is
barred, the Company, at its sole cost and expense, shall arrange to have issued
for the benefit of Employee and his dependents individual policies of insurance
providing benefits substantially similar (on an after-tax basis) to those which
the Employee would have been entitled to receive under such plans pursuant to
clause (b) of this Section II. B. or, if such insurance is not available at a
reasonable cost to the Employer, the Company shall otherwise provide the
Employee and the Employee's dependents equivalent benefits (on an after-tax
basis). The Employee shall not be required to pay any premiums or other charges
in an amount greater than that which the Employee would have paid in order to
participate in such plans. Except as provided in this Section II. B.(b), nothing
in this Agreement shall modify, limit or impair the rights or benefits to which
the Employee is otherwise entitled under any other employee benefit agreement or
plan with Employer or the Company. If any of the payment provided for in this
Section II. B. is or will be subject to the excise tax imposed by Section 4999
of the Code or any similar tax that may hereafter be imposed ("Excise Tax") such
payment shall be reduced to a smaller amount, even to zero, which smaller amount
shall be the largest amount payable under this paragraph that would not be
subject in whole or in part to the Excise Tax after considering all other
payments to Employee required to be considered under Section 4999 or 280G of the
Code. Such payment shall be referred to as the "Severance Payment."
In the event that the Severance Payment is subsequently determined to
be less than the amount actually paid hereunder, the Employee shall repay the
excess to the Company in sixty (60) equal monthly installments without interest,
beginning on the first day of the first month next following such determination.
In the event that the amount of the Severance Payment is determined to
exceed the amount initially paid, the Company shall pay the Employee such
difference plus interest on such difference at the Applicable Federal Rate at
the time that such determination is made.
C. Offset and Recovery. The amount of any payment provided for in this
Section II shall not be reduced, offset or subject to recovery by the Company or
Successor by reason of any compensation earned by Employee as the result of
employment by another employer after the Date of Termination, or otherwise but
any sums paid to Employee hereunder which were not properly payable to such
Employee may be recovered by or in right of the Company or Successor, together
with interest at the Applicable Federal Rate.
SECTION III. EFFECTIVE DATE.
A. Severance Agreement. Except as expressly provided in Subsection
III.B., no provision of this Agreement other than this Section III, Section IV,
Section V, Section VII.B. through D., Section IX and Section X shall take effect
and no Person shall have any rights or duties under or in connection with this
Agreement until the Effective Date occurs. At the Effective Date, the rights and
duties of the parties hereunder shall automatically vest and become fully
enforceable in accordance with the terms of this Severance Agreement so long as
Employee is, immediately preceding the Effective Date, employed by Employer,
subject only to the provisions of Subsection III.B.
B. Prior to Effective Date. At the time and on the date that the
Incumbent Board (whose membership shall be determined in accordance with clause
I. E.(i) of this Agreement) authorizes Employer to enter into discussions or
negotiations with any Person concerning a Change of Control or authorizes
Employer to seek a Person or Person with which to discuss or negotiate a Change
of Control of Employer ("Change of Control Authorization"), the parties' rights
and duties under their Agreement shall vest immediately if Employee is employed
by Employer at the time of the Change of Control Authorization and shall be
enforceable on an Effective Date occurring within two (2) years and resulting
from such Change of Control Authorization so long as Employee's employment with
Employer has not been terminated prior to the Effective Date (unless terminated
by Employee for Good Reason [as defined in Section I.M. except that for purposes
of this parenthetical clause only, the Change of Control Authorization shall
substitute for the term Change in Control as used in Section I.M.] or by
Employer not for Cause, in which case Employee's employment with Employer shall
for purposes of this Subsection III.B. be deemed to be continuing to the
Effective Date).
SECTION IV. SUCCESSORS; BINDING AGREEMENT.
A. Agreement of Employer's Successor. Upon Employee's written request,
Company will have any Successor, by agreement in form and substance reasonably
satisfactory to Employee, assent to the fulfillment by Company of its
obligations under this Agreement. Failure of Company to obtain such assent at
least ten business days prior to the Effective Date shall constitute Good Reason
for termination by Employee of his employment and, if a Change in Control has
occurred, shall entitle Employee immediately to the benefits provided in Section
II.B. hereof upon delivery by Employee of a Notice of Termination.
B. Binding Agreement. This Agreement shall inure to the benefit of and
be enforceable by Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
Employee should die while any amount would still be payable to Employee
hereunder if the Employee had continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to Employee's beneficiary designated in writing and delivered to
Company, if any, and if none to Employee's estate.
SECTION V. FEES AND EXPENSES.
Each party shall pay its own legal fees and related or other expenses
incurred in connection with this Agreement, whether or not such party prevails,
including, without limitation all such fees and expenses, if any, incurred in
contesting or disputing any termination or seeking to obtain or enforce any
right or benefit provide by this Agreement; provided, however, that, after the
earlier of the Effective Date or any vesting of the parties' rights and duties
hereunder prior to the Effective Date as provided in Section III.B, the Company
shall pay all legal fees and related expenses incurred by Employee in connection
with seeking advice regarding this Agreement, and, all such fees and expenses,
if any, incurred by Employee in contesting or disputing any termination of
Employee or in seeking to obtain or enforce any right or benefit provided by
this Agreement, if Employee prevails.
SECTION VI. TAXES.
All payments to be made to Employee under this Agreement will be
subject to required withholding of federal, state and local and employment and
other taxes.
SECTION VII. MISCELLANEOUS.
A. Survival. The respective obligations of, and benefits afforded to,
Company and Employee in Sections II, IV. B., V, VI, VII, VIII. A., C., and D.,
IX and XI of this Agreement shall survive termination of this Agreement.
B. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered to Employee or the _________ of
Company or mailed by United States registered mail, return receipt requested,
postage prepaid and addressed, in the case of Company, to the attention of the
_________________ at the following address:
MainStreet BankGroup Incorporated
200 E. Church Street
Martinsville, Virginia 24112-5409
or, in the case of Employee, to the address set forth below the Employee's
signature, provided that all notices may be sent to such other address as either
party may have furnished to the other in writing in accordance herewith, except
that notice of change of address shall be effective only upon receipt.
C. Modification; Waiver. No provision of this Agreement may be
modified, waived or discharged unless such modification, waiver or discharge is
agreed to in writing signed by Employee and the __________________ of Company
pursuant to authorization by the Incumbent Board. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of a similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not expressly set
forth in this Agreement. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the Commonwealth
of Virginia.
D. Validity. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
SECTION VIII. CONFIDENTIALITY; COVENANT NOT TO COMPETE.
A. Confidentiality. Employee agrees that subsequent to his period of
employment with Employer, he will not at any time communicate or disclose to any
unauthorized person, without the written consent of the Company, any proprietary
or other confidential information concerning the Company or any subsidiary of
the Company, it being understood, however, that the obligations of this Section
shall not apply to the extent that the aforesaid matters (i) are disclosed in
circumstances where Employee is legally required to do so or (ii) become
generally known to and available for use by the public otherwise than by the
Employee's wrongful act or omission.
B. Covenant Not to Compete. If the Employee's employment with the
Employer is terminated after the Effective Date or any vesting of the parties'
rights and duties hereunder prior to the Effective Date as provided in Section
III.B by Employee other than for Good Reason, the Employee agrees that for a
period of 2 years from the date his employment is terminated, he will not,
without the consent in writing of the Chief Executive Officer of the Company or
Successor, become an officer, employee, agent, partner, director or substantial
stockholder of any entity engaged in the commercial or retail banking, lending,
leasing or trust business within a 100 mile radius of the main office of the
Employer, or become associated in any substantial manner with any entity in the
process of formation to engage in the retail or commercial banking, lending,
leasing or trust business, or any group that intends to form any such entity in
the geographical area described above.
C. Relief. In the event of Employee's actual or threatened breach of
this Section, the Company or Successor, as the case may be, shall be entitled to
a preliminary restraining order and an injunction restraining the Employee from
violating its provisions. In the event the Employee terminates his employment
after the Effective Date for other than Good Reason and his actual date of
terminating his employment is less than sixty (60) days after his Notice of
Termination, the Employee will pay to the Employer, as liquidated damages and
not as a penalty, an amount equal to the Employee's base salary then in effect,
computed on a per diem basis, multiplied by sixty (60) or, in the event that
Employee or his heirs or personal representatives are mistakenly paid any
amounts pursuant to Section II or Section V of this Agreement, the Employee
shall repay such amounts to Company or Successor together with interest at the
Applicable Federal Rate from the date so paid to the Employee to the date of
Employee's repayment to the Company or Successor.
D. Other Remedies. Nothing in this Agreement shall be construed to
prohibit the Company or Successor from pursuing any other available remedies for
such breach or threatened breach, including the recovery of damages from the
Employee. If at the time of enforcement of Subsection VIII. B., the duration,
scope or area restrictions stated herein are held to be unreasonable under the
circumstances then existing and, thus, unenforceable, the Company and Employee
agree that the maximum duration, scope or area reasonable under such
circumstances shall be substituted for the stated duration, scope or area.
SECTION IX. RELATED AGREEMENTS.
To the extent that any provision of any other agreement between Company
or any of its subsidiaries and Employee shall limit, qualify or be inconsistent
with any provision of this Agreement, then for purposes of this Agreement, while
the same shall remain in force, the provision of this Agreement shall control
and such provision of such other agreement shall be deemed to have been
superseded, and to be of no force or effect, as if such other agreement had been
formally amended to the extent necessary to accomplish such purpose.
SECTION X. COUNTERPARTS.
This Agreement may be executed in several counterparts, each of which
shall be deemed to be an original but all of which together will constitute one
and the same instrument.
SECTION XI. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement after the Effective Date shall be settled exclusively by arbitration
in Roanoke, Virginia by three arbitrators in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrators' award in any court having jurisdiction. The arbitration panel shall
be selected as follows: one arbitrator shall be selected by the Employee; one
arbitrator shall be selected by the Company; and one arbitrator shall be
selected by the two other arbitrators. The Company shall bear all costs and
expenses of the arbitration proceeding.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
________________________, 1997.
MAINSTREET BANKGROUP INCORPORATED
By:______________________________
Its:______________________________
Employee:
- - ---------------------------------
Address:
---------------------------------
---------------------------------
<PAGE>
Exhibit 21
SUBSIDIARIES OF REGISTRANT
The registrant has no "parent" as such as defined by the Securities Act of 1933,
as amended. All subsidiaries of the Registrant are included in the consolidated
financial statements:
Percentage Jurisdiction
of of
Ownership Incorporation
Piedmont Trust Bank 100% Virginia
Bank of Carroll 100% Virginia
Bank of Ferrum 100% Virginia
First Community Bank 100% Virginia
The First Bank of Stuart 100% Virginia
First Community Bank of Saltville 100% Virginia
The First National Bank of Clifton Forge 100% United States
Hanover Bank 100% Virginia
MainStreet Trust Company, N.A. 100% United States
MainStreet Capital Trust I 100% Delaware
Commerce Bank 100% Maryland
Subsidiaries acquired after December 31, 1997 that are not included in the
consolidated financial statements:
Regency Bank 100% Virginia
Tysons Financial Corporation 100% Virginia
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement of MainStreet BankGroup Incorporated on Forms S-8 of
our report dated January 16, 1998 on our audits of the consolidated
financial statements of MainStreet BankGroup Incorporated as
of December 31, 1997 and 1996, and for the years ended December 31, 1997,
1996, and 1995, which report is included in this Annual Report on
Form 10-K.
Coopers & Lybrand L.L.P.
Greensboro, North Carolina
March 26, 1998
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