UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549


                                    FORM 10-K


              Annual Report Pursuant to Section 13 or 15(d) of the
                        Securities Exchange Act of 1934

                   For the Fiscal Year Ended December 31, 1996

                          Commission File Number 0-8622


                        MainStreet BankGroup Incorporated
             (Exact name of Registrant as specified in its charter)

          Virginia                                     54-1046817
--------------------------------------------------------------------------------
(State or other jurisdiction of                     (I.R.S. Employer 
incorporation or organization)                      Identification No.)


                                 P. O. Box 4831
                           Church & Ellsworth Streets
                          Martinsville, Virginia 24115
--------------------------------------------------------------------------------
                (Address of principal executive office) Zip Code

Registrant's telephone number, including area code     (540)  666-6724

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class                   Name of Each Exchange on Which Registered
-------------------                   ------------------------------------------
       None                                             NASDAQ

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, Par Value $5.00 a Share                                 

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                        Yes  [ X ]         No   [  ]  

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K (229.405 of this chapter) is not contained  herein,  and will
not be contained,  to the best of Registrant's knowledge, in definitive proxy or
information  statements  incorporated by reference in Part III of this Form 10-K
or any amendment of this Form 10-K. [X]
<PAGE>
The  aggregate  market  value of the voting stock held by  nonaffiliates  of the
Registrant as of January 31, 1997 was $190,943,122.

(In determining this figure the Registrant assumes that all of its directors and
principal executive officers are affiliates. Such assumption shall not be deemed
conclusive for any other purposes.)

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

              Class                             Outstanding at January 31, 1997
  ------------------------------               ---------------------------------
   COMMON STOCK $5.00 Par Value                             11,353,559
  ------------------------------               ---------------------------------
<PAGE>


                        MainStreet BankGroup Incorporated

                                    Form 10-K

                                      Index

                                     PART I

Item 1            Business                           
Item 2            Properties                                                    
Item 3            Legal Proceedings                                             
Item 4            Submission of Matters to a Vote of Shareholders               
                  Executive Officers of Registrant                              


                                     PART II

Item 5            Market  for   Registrant's   Common   Equity  and   Related
                  Shareholder Matters
Item 6            Selected Financial Data
Item 7            Management's  Discussion and Analysis of Financial Condition
                  and Results of Operations
Item 8            Financial Statements and Supplementary Data
Item 9            Changes In and Disagreements  With Accountants on Accounting
                  and Financial Disclosure


                                    PART III

Item 10           Directors and Executive Officers of the Registrant            
Item 11           Executive Compensation                                        
Item 12           Security Ownership of Certain Beneficial Owners and Management
Item 13           Certain Relationships and Related Transactions                


                                     PART IV

Item 14           Exhibits,  Financial  Statement  Schedules,  and Reports on
                  Form 8-K
                  Index to Exhibits                                             
                  Signatures                                                    
                  Exhibits                                                      


                       DOCUMENTS INCORPORATED BY REFERENCE

    Proxy Statement, dated March 24, 1997 for Annual Meeting of Shareholders

                         PART III - Items 10 through 13

<PAGE>
                                     PART I




Item 1.  Business

General

         MainStreet  BankGroup   Incorporated  (the  "Company,"   "Corporation,"
"BankGroup," or "Registrant"),  through its subsidiary Banks ("Banks"), provides
a full range of commercial  banking,  consumer  banking and trust  services to a
variety of businesses  and  individual  customers.  All Banks are insured by the
Federal Deposit  Insurance  Corporation and seek customers whose total financial
requirements they can serve. As a result,  most of the Banks' business customers
are small and  medium-sized  entities.  While the Company  considers this middle
market to be its primary business market,  it has banking relations with many of
the larger  textile and furniture  manufacturing  companies  with  manufacturing
facilities in the Martinsville, Virginia, trade area.

         During  1996,   BankGroup   acquired  two  banks  as   subsidiaries  in
transactions   accounted   for  as  pooling  of   interests.   An  aggregate  of
approximately  2,708,000 shares of stock were issued in these transactions.  All
prior year data has been restated to reflect these  acquisitions.  All financial
data is presented in thousands, unless otherwise noted.

         The  Company,  through  the  Banks,  actively  competes  for  deposits,
discount brokerage,  loans and trust accounts with other financial institutions,
including large regional bank holding companies with greater financial resources
headquartered  elsewhere in Virginia and North Carolina.  Principal  competitive
factors are interest rates, services and lending limitations.

         It is the  Company's  policy to operate the Banks as  separate  banking
institutions retaining their names and boards of directors. However, the Company
utilizes a centralized  management  approach in providing direction to the Banks
and performing selected services in the compliance,  data processing,  financial
management, human resources, investment,  accounting, marketing, mortgage, trust
and audit areas. The Banks approve loans up to a specified  credit limit,  above
which central  credit  administration  approves the loans.  The Banks also still
must approve investments and other activities consistent with past practices and
the needs of their communities. To coordinate the activities of the Banks and to
maintain  internal  controls,  the  Company  utilizes a planning  and  budgeting
process which involves Company officers,  presidents of the Banks, and principal
department  heads.  Performance  targets and budget goals are developed for each
Bank on an annual  basis,  with  financial and  operating  results  reported and
reviewed periodically during the year.

Subsidiaries

         Piedmont Trust Bank.  Piedmont Trust Bank ("Piedmont") was incorporated
in 1921 under the laws of  Virginia.  Piedmont's  main  office is in the City of
Martinsville,  a  commercial  center  in  southwest  Virginia,  and it has  five
branches  in  Martinsville  and Henry  County.  Its primary  service  area has a
population  of  approximately  72,400  and its  economy is  oriented  toward the
textile,  furniture  and  prebuilt  housing  industries.  It is  supervised  and
<PAGE>
examined by the Board of Governors of the Federal  Reserve  System and the State
Corporation  Commission of Virginia.  It engages in general  commercial  banking
business  and offers the range of banking  services  that can be  expected  of a
banking  organization  of  its  size.  Piedmont  is  the  largest  bank  in  the
Martinsville  trade  area with total  assets of  approximately  $495.5  million,
deposits of approximately  $317.6 million and net loans of approximately  $333.1
million at December 31, 1996.

         MainStreet Trust Company,  N.A.  MainStreet Trust Company ("Trust") was
established as a national  banking  subsidiary late in 1996 and began offering a
full range of trust services  including personal trust,  investment  management,
financial  and tax  counseling,  employee  benefits  and  custodial  services on
January 2, 1997.  Trust assets under  management  increased from $575 million at
December 31, 1995 (as the former  Piedmont Trust Bank trust  department) to $664
million  at  December  31,  1996.  Trust  is  supervised  and  examined  by  the
Comptroller of the Currency.

         Bank of  Carroll.  Bank of Carroll  ("Carroll"),  incorporated  in 1971
under the laws of Virginia,  was acquired in 1977.  At December 31, 1996, it had
total  assets of  approximately  $64.2  million.  Its main  office is located in
Hillsville,  Carroll  County,  Virginia,  and it has branches in Cana and Galax,
Virginia.  Its primary  service area has a population of  approximately  34,000.
Carroll is  supervised  and  examined by the Board of  Governors  of the Federal
Reserve System and the State  Corporation  Commission of Virginia and engages in
general commercial banking business.

         Bank of Ferrum.  Bank of Ferrum ("Ferrum"),  incorporated in 1917 under
the laws of Virginia and  converted  during the 1920's to a national  bank,  was
acquired in 1981. In 1995, Bank of Ferrum converted back to a state charter.  At
December 31, 1996, it had total assets of approximately $117.5 million. Its main
banking  office is located in Ferrum,  Virginia,  with branches at Oak Level and
Rocky  Mount,   Virginia.   Its  primary   service  area  has  a  population  of
approximately  43,000.  Ferrum  is  supervised  and  examined  by the  Board  of
Governors of the Federal Reserve System and the State Corporation  Commission of
Virginia and engages in general commercial banking business.

         First Community Bank. First Community Bank ("Community"),  incorporated
in 1978 under the laws of Virginia,  was acquired in 1983. At December 31, 1996,
it had total assets of approximately $141.4 million.  Community's main office is
located in Forest,  Virginia,  and it operates six branches in the Lynchburg and
Forest area. Its primary service area has a population of approximately 130,000.
First  Community  is  supervised  and  examined by the Board of Governors of the
Federal Reserve System and the State Corporation Commission of Virginia.  Retail
and commercial  banking services are provided for customers in Forest,  Bedford,
Campbell and Amherst Counties and the City of Lynchburg, Virginia.

         The First  Bank of  Stuart.  The First  Bank of Stuart  ("Stuart")  was
incorporated  in 1921 as a national bank and acquired in 1986.  In 1995,  Stuart
converted  to a state  charter.  At December  31,  1996,  it had total assets of
approximately  $151.8 million.  Its main office is located in Stuart,  Virginia,
and it has five other offices all located in Patrick County, Virginia. Stuart is
the largest bank in Patrick County. Its primary service area has a population of
approximately  17,600.  Stuart  is  supervised  and  examined  by the  Board  of
Governors of the Federal Reserve System and the State Corporation  Commission of
Virginia and engages in general commercial banking business.
<PAGE>
         First  Community Bank of Saltville.  First  Community Bank of Saltville
("Saltville")  was  established  in 1903  under  the  Laws of  Virginia  and was
incorporated in 1918 as a national bank and acquired in 1986. In 1995, Saltville
converted back to a state charter.  At December 31, 1996, it had total assets of
approximately $124.7 million. Its main office is located in Saltville, Virginia,
and it has two other  offices  located in Smyth  County.  Saltville is the third
largest  of the four  banks in Smyth  County.  Its  primary  service  area has a
population of  approximately  33,300.  Saltville  engages in general  commercial
banking business and is supervised and examined by the Board of Governors of the
Federal Reserve System and the State Corporation Commission of Virginia.

         The First  National Bank of Clifton  Forge.  The First National Bank of
Clifton  Forge was  incorporated  as a national bank in 1901 and was acquired in
1996. At December 31, 1996, it had total assets of $101.5  million.  Its primary
service area has a population  of 22,600 and includes the city of Clifton  Forge
and Alleghany and Bath counties. Clifton Forge is supervised and examined by the
Comptroller of the Currency and engages in general commercial banking business.

         Hanover Bank.  Hanover Bank was incorporated under the laws of Virginia
in 1988 and was acquired in 1996.  At December 31, 1996, it had assets of $110.2
million.  Hanover's  main  office is located in  Mechanicsville  and it has four
branches  in Hanover  and  Henrico  counties.  Its  primary  service  area has a
population of 305,000.  Hanover engages in general  commercial  banking business
and is supervised and examined by the Board of Governors of the Federal  Reserve
System and the State Corporation Commission of Virginia.


Competition

         The  principal  methods of  competition  in the  banking  industry  are
service,  rates  offered on loans and  deposits  and  convenience  of  location.
Competition also comes from financial service firms such as brokerage houses and
mortgage companies. The Registrant has historically restricted its activities to
a geographical area within the states of Virginia and North Carolina. Other bank
holding company competitors have greater geographic coverage and some offer bank
and bank-related services which the Registrant does not offer.

         The banking and trust  subsidiaries of BankGroup compete primarily with
other financial institutions and financial  intermediaries for deposits,  loans,
and trust accounts.


Employees

          The total  number of  full-time  equivalent  persons  employed  by the
Registrant and its  subsidiaries as of December 31, 1996 was 551. The Registrant
believes that its relationship  with its employees is good, and no employees are
represented by a labor union.
<PAGE>
Information as to Classes of Service

         The  following  table sets  forth,  for the three  fiscal  years  ended
December 31, 1996, the  percentage of total  operating  revenues  contributed by
each class of similar services which  contributed 10% or more of total operating
revenue  of the  Registrant  and its  subsidiaries  in either of the last  three
years.
<TABLE>
<CAPTION>
      Years Ended                                                             Percentage
      -----------                                                             ----------
<S>                                  <C>                                         <C>
   December 31, 1994                 Interest & Fees on Loans                    71.3%

   December 31, 1995                 Interest & Fees on Loans                    67.5

   December 31, 1996                 Interest & Fees on Loans                    66.8


   December 31, 1994                 Interest & Dividends on
                                     Securities Held to Maturity and
                                     Securities Available for Sale               25.3

   December 31, 1995                 Interest & Dividends on
                                     Securities Held to Maturity and
                                     Securities Available for Sale               22.3


   December 31, 1996                 Interest & Dividends on
                                     Securities Held to Maturity and
                                     Securities Available for Sale               22.0

</TABLE>
 
SELECTED  STATISTICAL  INFORMATION  OF  MAINSTREET  BANKGROUP  INCORPORATED  AND
SUBSIDIARIES (REGISTRANT)

         The  following   statistical   information  is  consolidated   for  the
Registrant  and its  eight  bank  subsidiaries.  Information  is  based on daily
average  balances.  Nonaccrual  loans are  included  in loans,  net of  unearned
income.
<PAGE>
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST RATES AND
INTEREST DIFFERENTIALS

         The table below shows the major categories of  interest-earning  assets
and  interest-bearing  liabilities,  the average balance, the interest earned or
paid, the average yield/rate on daily average balances outstanding, net interest
earnings and net yields on interest-earning assets for the periods indicated:
<TABLE>
<CAPTION>
                                                                            Years Ended December 31
                                            ------------------------------------------------------------------------------------
                                                          1996                                         1995                     
                                            --------------------------------------         -------------------------------------   
                                              Average                       Yield/          Average                       Yield/   
                                              Balance         Interest       Rate           Balance       Interest         Rate   
                                             ----------        -------       ------         --------       -------         ----    
<S>                                         <C>              <C>           <C>             <C>             <C>            <C>
Loans, Net of Unearned Income (1)           $  730,753       $ 69,602        9.52%         $627,166        $60,490         9.64%   
Mortgage Loans Held for Sale                       966            168       17.39               813            144        17.71    
Securities Available for Sale (1)              256,372         16,382        6.39           174,795         10,274         5.88    
Taxable Securities Held to Maturity             58,631          4,346        7.41            86,428          7,075         8.19    
Nontaxable Securities Held to Maturity (1)      41,754          3,312        7.93            41,055          3,881         9.45   
Interest-Earning Deposits in Other Banks         1,325             72        5.43               682              5          .73    
Federal Funds Sold                               9,494            525        5.53            10,871            643         5.91    
                                             ----------        -------      -----          --------        -------         ----    
Total Interest-Earning Assets                1,099,295         94,407        8.59%          941,810         82,512         8.76%  
Cash and Due from Banks                         30,372                                       27,294                                
Other Assets                                    34,000                                       35,968                               
Reserve for Loan Losses                         (9,648)                                      (9,176)                               
                                            ----------                                     --------                             
Total Assets                                $1,154,019                                     $995,896                             
                                            ==========                                     ========                             

Interest Checking Accounts                  $   91,921       $  2,644        2.88%         $ 88,062        $ 2,696         3.06%   
Savings Deposits                               125,947          3,731        2.96           142,491          4,575         3.21    
Money Market Investment Accounts                80,198          2,764        3.45            82,801          3,082         3.72    
Other Time Deposits                            451,675         24,406        5.40           419,831         22,691         5.40    
Borrowed Funds                                 177,770          9,310        5.24            65,079          3,713         5.71    
                                            ----------       --------       -----          --------        -------         ----    
Total Interest-Bearing Liabilities             927,511         42,855        4.62%          798,264         36,757         4.60%   
Demand Deposits                                113,065                                      106,294                                
Other Liabilities                                8,650                                        7,378                                
                                            ----------                                     --------                                
Total Liabilities                            1,049,226                                      911,936                                
Shareholders' Equity                           104,793                                       83,960                               
                                            ----------                                     --------                                
Total Liabilities and Shareholders'
      Equity                                $1,154,019                                     $995,896                                
                                            ==========                                     ========                                

Net Interest Earnings/Margin                                 $51,552         3.97%                         $45,755         4.16%   
                                                             =======         ====                          =======         ====    
Net Yield on Interest-Earning Assets
    on a Taxable Equivalent Basis (2)                                        4.68%                                         4.86%   
                                                                             ====                                          ====    
<PAGE>
<CAPTION>
                                                                      1994                  
                                                    --------------------------------------                  
                                                     Average                        Yield/  
                                                     Balance        Interest         Rate   
                                                     -------        --------         ----   
<S>                                                  <C>             <C>            <C>
Loans, Net of Unearned Income (1)                    $562,272        $50,771         9.03%  
Mortgage Loans Held for Sale                            3,503            514        14.67   
Securities Available for Sale (1)                     221,114         14,432         6.53   
Taxable Securities Held to Maturity                    18,479            847         4.58   
Nontaxable Securities Held to Maturity (1)             49,706          4,276         8.60   
Interest-Earning Deposits in Other Banks                   50              2         4.00   
Federal Funds Sold                                     17,538            716         4.08   
                                                     --------        -------        -----   
Total Interest-Earning Assets                         872,662         71,558         8.20%  
Cash and Due from Banks                                26,697                               
Other Assets                                           39,045                               
Reserve for Loan Losses                                (9,106)                              
                                                     --------                               
Total Assets                                         $929,298                               
                                                     ========                               
                                                                                            
Interest Checking Accounts                           $ 87,930        $ 2,504         2.85%  
Savings Deposits                                      184,304          6,122         3.32   
Money Market Investment Accounts                       98,890          3,192         3.23   
Other Time Deposits                                   349,017         16,142         4.62   
Borrowed Funds                                         27,442          1,237         4.51   
                                                     --------        -------        -----   
Total Interest-Bearing Liabilities                    747,583         29,197         3.91%  
Demand Deposits                                        98,580                               
Other Liabilities                                       7,518                               
                                                     --------                               
Total Liabilities                                     853,681                               
Shareholders' Equity                                   75,617                               
                                                     --------                               
Total Liabilities and Shareholders'                                                         
      Equity                                         $929,298                               
                                                      ========                              
                                                                                            
Net Interest Earnings/Margin                                         $42,361         4.29%  
                                                                     =======         ====   
Net Yield on Interest-Earning Assets                                                        
    on a Taxable Equivalent Basis (2)                                                4.85%  
                                                                                     ====   
                                                   
       (1)  Interest   income   includes  the  effects  of  taxable   equivalent
adjustments  using a tax  rate of 35% for  1996  and 34% for  1995  and  1994 in
adjusting interest on tax-exempt  securities and loans to a fully taxable basis.
Loan fees are included in total  interest  income as follows:  1996--$2,528,000;
1995--$1,969,000;  1994--$2,110,000. The average balance of nonaccrual assets is
included in the calculation of asset yields.

       (2) Net yield on interest-earning assets represents net interest earnings
divided by average amounts of total interest-earning assets.
</TABLE>
<PAGE>
         The  following  table sets forth for the period  indicated a summary of
the change in interest  earned on a taxable  equivalent  basis and interest paid
resulting from changes in volume and rates. The change in interest  attributable
to both rate and volume changes has been allocated to rate and volume changes in
proportion to the  relationship  of the absolute dollar amounts of the change in
each.
<TABLE>
<CAPTION>
                                                1996 Compared to 1995 Increase               1995 Compared to 1994 Increase
                                                (Decrease) Due To Change In                  (Decrease) Due To Change In
                                            -------------------------------------       -----------------------------------------
                                                                          Total                                          Total
                                             Average       Average       Increase       Average        Average          Increase
                                             Volume          Rate       (Decease)       Volume           Rate          (Decrease)
                                             ------          ----       ---------       ------           ----          ----------
<S>                                         <C>            <C>           <C>           <C>             <C>              <C>
Interest Income:
   Investment Securities:
      Taxable                               $(2,109)       $ (620)       $(2,729)       $5,131         $ 1,097          $ 6,228
      Nontaxable*                                65          (634)          (569)         (791)            396             (395)
   Securities Available for Sale              5,147           961          6,108        (2,819)         (1,339)          (4,158)
   Loans, Net of Unearned*                    9,875          (763)         9,112         6,111           3,608            9,719
   Mortgage Loans Held for Sale                  27            (3)            24          (459)             89             (370)
   Interest-Bearing Deposits in Other Banks       8            59             67             6              (3)               3    
   Federal Funds Sold                           (78)          (40)          (118)         (328)            255              (73)
                                             ------        ------        -------       -------         -------          -------
         Total Interest Income               12,935        (1,040)        11,895         6,851           4,103           10,954

Interest Expense:
   Interest Checking Accounts                   115          (167)           (52)            4             188              192    
   Savings Deposits                            (507)         (337)          (844)       (1,348)           (199)          (1,547)   
   Money Market Investment Accounts             (95)         (223)          (318)         (560)            450             (110)   
   Other Time Deposits                        1,721            (6)         1,715         3,577           2,972            6,549
   Other Borrowed Funds                       5,926          (329)         5,597         2,074             402            2,476
                                             ------        ------        -------       -------         -------          -------

         Total Interest Expense               7,160        (1,062)         6,098         3,747           3,813            7,560
                                             ------         -----        -------        ------         -------          -------

Net Interest Income                         $ 5,775        $   22        $ 5,797        $3,104         $   290          $ 3,394
                                            =======        ======        =======        ======         =======          =======

*Fully Taxable-Equivalent Basis
</TABLE>


SECURITIES AVAILABLE FOR SALE PORTFOLIO DATA

         The carrying and approximate  market value and gross  unrealized  gains
and losses of  securities  available for sale appear on page 36 of Part II, Item
8, Note 3 of this report and are herein incorporated by reference.

         Proceeds  from the sale of these  securities  appear on page 32 of Part
II, Item 8,  Statement of Cash Flows of this report and are herein  incorporated
by reference.  Gross gains and losses and pledged  information appear on page 36
of Part  II,  Item 8,  Note 3 of this  report  and are  herein  incorporated  by
reference.
<PAGE>
         The following  table shows the  maturities of securities  available for
sale as of December 31, 1996 and the weighted average yields of such securities.
Mortgage  backed  securities  are  included in each of the  categories  based on
forecasted average life. The weighted average yields are calculated on the basis
of the cost and effective  yields  weighted for the  scheduled  maturity of each
security.  Weighted average yields on tax-exempt  obligations have been computed
on a taxable  equivalent basis using a tax rate of 35%. Expected  maturities may
differ from contractual  maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
                                                                        Maturing
                                                             After One              After Five
                                     Within                  But Within             But Within            After
                                    One Year                 Five Years             Ten Years           Ten Years
                               Amount     Yield        Amount        Yield      Amount    Yield    Amount      Yield       Total
                               ------     -----        ------        -----      ------    -----    ------      -----       -----
<S>                           <C>         <C>         <C>            <C>      <C>         <C>      <C>         <C>       <C>
U.S. Treasury Securities      $ 4,014     5.50%       $  2,032       5.85%    $   ---      ---%    $   ---      ---%     $  6,046
Obligations of U.S.
   Government Agencies            723     5.52          21,758       6.22       7,072     7.01         ---      ---        29,553
Mortgage Backed Securities     40,907     7.30         120,545       7.27      22,018     7.00      37,053     7.16       220,523
Collateralized Mortgage
   Obligations and REMICs       2,070     6.48           7,343       6.21       3,500     6.29      34,421     6.05        47,334
Corporate Bonds                 1,814     6.23           4,342       6.44       6,078     7.10         292     7.30        12,526
Other Securities                  ---      ---             ---        ---         ---      ---       9,329     7.08         9,329
Obligations of State &
   Political Subdivisions         ---      ---           5,373       7.52       3,015     9.27       1,324     7.86         9,712
                              -------                 --------                -------             --------               --------
                              $49,528                 $161,393                $41,683              $82,419               $335,023
                              =======                 ========                =======              =======               ========

</TABLE>

         All Mortgage Backed Securities and Collateralized  Mortgage Obligations
held at December 31, 1996 were backed by U.S. Agencies.  It is the Corporation's
practice to review on a periodic  basis those CMO's and REMIC's that do not pass
the Federal  Financial  Institutions  Examination  Council's  (FFIEC)  high risk
mortgage security test. Securities are tested at time of purchase and thereafter
at quarterly intervals.  The test addresses possible fluctuations in the average
life and price sensitivity which are the primary risks associated with this type
of security. Tests of these securities are subject to regulatory review.

SECURITIES HELD TO MATURITY PORTFOLIO DATA

         The carrying and approximate  market value and gross  unrealized  gains
and losses of securities  held to maturity appear on page 37 of Part II, Item 8,
Note 4 of this report and are herein incorporated by reference.

         Proceeds from sales and calls of these securities  appear on page 32 of
Part  II,  Item  8,  Statement  of Cash  Flows  of this  report  and are  herein
incorporated by reference. Gross gains and losses and pledged information appear
on page 37 of Part II, Item 8, Note 4 of this report and are herein incorporated
by reference.
<PAGE>
         The following table shows the maturities of securities held to maturity
at December  31,  1996,  and the  weighted  average  yields of such  securities.
Mortgage  backed  securities  are  included in each of the  categories  based on
forecasted average life. The weighted average yields are calculated on the basis
of the cost and effective  yields  weighted for the  scheduled  maturity of each
security.  Weighted average yields on tax-exempt  obligations have been computed
on a taxable  equivalent basis using a tax rate of 35%. Expected  maturities may
differ from contractual  maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
                                                               Maturing
                                                   After One              After Five
                                 Within            But Within             But Within                 After
                                One Year           Five Years             Ten Years               Ten Years
                           Amount     Yield     Amount     Yield     Amount       Yield       Amount       Yield        Total
                           ------     -----     ------     -----     ------       -----       ------       -----        -----
<S>                        <C>        <C>       <C>        <C>       <C>          <C>         <C>          <C>        <C>
U. S. Treasury Securities  $2,494     5.64%     $   ---     ---%     $   ---       ---%       $   ---       ---%      $ 2,494
Obligations of U.S.
   Government Agencies        ---      ---        4,623    6.40       13,769      7.22            987       8.91       19,379
Mortgage Backed Securities  4,076     7.46       15,438    7.43        4,221      7.13          3,760       6.77       27,495
Obligations of State and
   Political Subdivisions   3,276     8.75       15,044    8.36       17,099      8.12          5,732       7.88       41,151
                           ------               -------              -------                  -------                 -------

                           $9,846               $35,105              $35,089                  $10,479                 $90,519       
                           ======               =======              =======                  =======                 =======      
</TABLE>
         All Mortgage Backed  Securities in the  held-to-maturity  portfolio are
backed by U.S. Agencies at December 31, 1996.

LOAN PORTFOLIO

         The amounts of loans  outstanding  at the indicated  dates are shown in
the following table according to type of loan:
<TABLE>
<CAPTION>
                                                      December 31
                                   1996       1995       1994       1993       1992
                                --------   --------   --------   --------   --------
<S>                             <C>        <C>        <C>        <C>        <C>
Commercial, Financial
         and Agricultural ...   $349,834   $276,532   $245,077   $218,454   $203,280
Real Estate-Mortgage ........    206,453    212,182    183,488    160,473    161,974
Consumer ....................    242,211    197,188    176,003    158,298    154,554
                                --------   --------   --------   --------   --------
Total Loans .................    798,498    685,902    604,568    537,225    519,808
Less:  Unearned Income and
       Deferred Fees ........     14,131     12,224      9,381      7,770      8,451
                                --------   --------   --------   --------   --------
Loans, Net of Unearned Income
       and Deferred Fees ....    784,367    673,678    595,187    529,455    511,357
Less:  Allowance for Loan
       Losses ...............     10,195      9,036      9,160      9,035      9,166
                                --------   --------   --------   --------   --------
Loans, Net ..................   $774,172   $664,642   $586,027   $520,420   $502,191
                                ========   ========   ========   ========   ========
</TABLE>
<PAGE>
         Commercial  loans in recent periods have been made largely to small and
medium size businesses, including forest products and building supply companies,
real estate  developers,  small textile and furniture  manufacturers and general
contractors.  In addition,  this portfolio  includes  participations in loans to
larger manufacturers in the area.


CONCENTRATIONS OF CREDIT RISK

         Virtually all of BankGroup's  subsidiaries'  business  activity is with
customers  located in the  southwestern,  central  and east  central  regions of
Virginia.  Accordingly,  operating  results  are  closely  correlated  with  the
economic trends within the region and influenced by the  significant  industries
within the region including textile, furniture and pre-built housing, as well as
agriculture.  In  addition,  the  ultimate  collectibility  of the  Banks'  loan
portfolios and the recovery of the carrying amounts of repossessed  property are
susceptible to changes in the market conditions of this geographic  region.  The
commercial  portfolio  is  diversified  with no  significant  concentrations  of
credit.  At December 31, 1996,  acquisition and development  construction  loans
account  for $40.2  million of the  commercial  portfolio.  In  addition,  other
commercial  loans secured by real estate total $116.6  million.  The real estate
loan portfolio consists almost entirely of 1-4 family residential  property.  At
December 31, 1996,  BankGroup was the creditor for approximately  $128.3 million
of  consumer  loans for  automobiles  and mobile  homes  generated  directly  or
purchased  from  established  dealers  (indirect).  These  loans  are  generally
collateralized  by the related  property  and are either  endorsed or subject to
mandatory dealer repurchase agreements.

         The individual banks have established  operating  policies  relating to
the credit process and collateral in loan originations.
Loans to purchase real and personal property are generally collateralized by the
related  property  with loan  amounts  established  based on certain  percentage
limitations of the property's total stated or appraised  value.  Credit approval
is primarily a function of collateral and the evaluation of the creditworthiness
of the individual borrower or project based on pertinent  financial  information
and the amount to be financed.

         The Banks pursue an asset liability  management  program which seeks to
minimize the impact of interest rate  fluctuations on the results of operations.
Emphasis  is placed on  floating  rate  business  loans  with  relatively  short
maturities and adjustable  rate real estate and consumer  loans. In addition the
Banks make long-term  fixed rate real estate  mortgage loans and fixed rate real
estate loans with a three or five year balloon payment  requirement.  Generally,
the Banks will  maintain  the  variable  rate or  balloon  payment  real  estate
mortgages in their  portfolios  while long-term fixed rate loans are sold in the
secondary market.
<PAGE>
         The  following  table  shows the amount of  commercial,  financial  and
agricultural loans outstanding as of December 31, 1996 which mature or reprice:
<TABLE>
<CAPTION>

                                                                        After
                                                                       One But
                                                   Within               Within            After
                                                  One Year            Five Years        Five Years           Total
                                                  --------            ----------        ----------           -----
<S>                                              <C>                  <C>               <C>                <C>
Commercial, financial and agricultural           $239,891             $ 93,661          $16,282            $349,834

Interest rates are floating or adjustable         176,329                  ---             ---              176,329

Interest rates are fixed or predetermined          63,562               93,661           16,282             173,505
</TABLE>

         The following table presents  aggregate loan amounts for nonaccrual and
past due loans as of the date indicated. Past due loans comprise loans which are
contractually past due ninety days or more as to interest or principal payments.
<TABLE>
<CAPTION>
                                                                   December 31
                                                --------------------------------------------
                                                   1996      1995     1994     1993     1992
                                                   ----      ----     ----     ----     ----
<S>                                             <C>        <C>      <C>      <C>      <C>
Consumer Loans:
   Loans accounted for on a nonaccrual basis    $    131   $   95   $  172   $   12   $  233
   Loans contractually past due 90 days or
    more as to interest or principal payments
    (but not included in nonaccrual loans) ...       987      606      500      364      932
All Other Loans:
   Loans accounted for on a nonaccrual basis .     2,944    3,288    2,727    2,553    5,263
   Loans contractually past due 90 days or
    more as to interest or principal payments
    (but not included in nonaccrual loans) ...     2,074    1,790    1,265    2,207    1,106
</TABLE>

         It is the Company's  policy to  discontinue  the accrual of interest on
loans   once   they   become   more   than  90  days   past   due  and  are  not
well-collateralized  or earlier when it becomes doubtful that the full principal
and interest  will be  collected.  Once a loan is placed on  nonaccrual  status,
interest is  generally  recorded on a cash basis until the loan is  satisfied in
full or circumstances have changed to such an extent that the collection of both
principal and interest is probable.

         Nonaccrual  and 90-day past due loans are  considered by the Company to
be  nonperforming  loans.  Such assets  totaled  .78% of loans,  net of unearned
income at December 31, 1996 and .86% at December 31, 1995.

         The effect of nonaccrual  loans on interest  income for 1996,  1995 and
1994  appears on page 38 of Part II, Item 8, Note 5 of this report and is herein
incorporated by reference.
<PAGE>
         At December 31, 1996,  1995,  and 1994 BankGroup had other real estate,
 which represents  foreclosed  properties totaling $.9 million, $1.7 million and
 $2.7  million,  respectively,  which is  carried  at the  lower of cost or fair
 market value.

         The  discussion  of the  recorded  investment  in loans which have been
identified as impaired loans at December 31, 1996 and 1995 appears on page 38 of
Part II, Item 8, Note 5 of this report and is herein incorporated by reference.


SUMMARY OF LOAN LOSS EXPERIENCE

         The  description  of the allowance for loan losses  required by Part I,
Item I, of Form  10-K  appears  on page 34 of Part  II,  Item 8,  Note 1 of this
report and is herein  incorporated  by  reference.  The  following  table  shows
BankGroup's average loan balances for each period,  changes in the allowance for
loan losses  arising from loans charged off and  recoveries on loans  previously
charged off by loan  category,  and additions to the  allowance  which have been
charged to operating expense.
<TABLE>
<CAPTION>
                                                                         Years Ended December 31
                                               ------------------------------------------------------------------------------
                                                 1996             1995              1994              1993             1992
                                                 ----             ----              ----              ----             ----
<S>                                            <C>              <C>               <C>              <C>               <C>
Average amount of loans, net of unearned
   income, outstanding during the year         $730,753         $627,166          $562,272         $530,763          $503,178
                                               ========         ========          ========         ========          ========
Balance of Allowance for Loan Losses at
   beginning of period                         $  9,036         $  9,160          $  9,035         $  9,166          $  9,030
Loans charged off:
   Commercial, Financial and Agricultural         1,185              868             2,571              759             1,366
   Real Estate - Mortgage                            56              179               321              832             1,009
   Consumer                                       1,968              928               747              839               630
                                               --------         --------          --------         --------          --------
Total loans charged off                           3,209            1,975             3,639            2,430             3,005
                                               --------         --------          --------         --------          --------
Recoveries of loans previously charged of:
   Commercial, Financial and Agricultural           737              181               362              124               170
   Real Estate - Mortgage                             1                6                18              366                36
   Consumer                                         354              245               293              119               292
                                               --------         --------          --------         --------          --------
Total recoveries                                  1,092              432               673              609               498
                                               --------         --------          --------         --------          --------
Net loans charged off                             2,117            1,543             2,966            1,821             2,507
Additions to allowance charged to
   operating expense                              3,276            1,419             3,091            1,690             2,643
                                               --------         --------          --------         --------          --------
Balance at end of period                       $ 10,195         $  9,036          $  9,160         $  9,035          $  9,166
                                               ========         ========          ========         ========          ========
Ratio of net chargeoffs during period
   to average loans outstanding                     .29%             .25%              .53%             .34%              .50%
                                               ========         ========          ========         ========          ========

</TABLE>
<PAGE>
         Management  has  allocated  the allowance for loan losses for the years
indicated by loan category. This allocation of the allowance for loan losses for
1996 is based upon the  previous  five  years'  loan loss  experience,  specific
reserves,  and unallocated  amounts.  Prior years allowance for loan losses were
based solely upon previous loan experience. This allowance is not intended to be
management's  judgment as to future loan losses to be  experienced by loan type.
The  amount of the loan loss  reserve by  category  and the  percentage  of each
category to total loans is as follows:
<TABLE>
<CAPTION>

                           December 31, 1996     December 31, 1995    December 31, 1994      December 31, 1993    December 31, 1992
                           -----------------     -----------------    -----------------      -----------------    -----------------
                           Amount      %          Amount      %         Amount      %          Amount     %         Amount       %
                           ------      -          ------      -         ------      -          ------     -         ------       -
<S>                       <C>        <C>         <C>        <C>        <C>        <C>          <C>       <C>        <C>        <C>
Balance at end of period
   applicable to:
Commercial, Financial
   and Agricultural       $ 1,083     44%        $4,023      40%       $6,822      41%         $3,149     41%       $4,374      39%
Real Estate                 1,010     26          1,013      31           936      30           2,311     30         3,559      31
Installment                 1,335     30          4,000      29         1,402      29           3,575     29         1,233      30
Specific Reserves           1,477     --            ---      --           ---      --             ---     --           ---      -- 
Unallocated                 5,290     --            ---      --           ---      --             ---     --           ---      -- 
                          -------    ---         ------     ---        ------     ---          ------    ---        ------     ---
Total                     $10,195    100%        $9,036     100%       $9,160     100%         $9,035    100%       $9,166     100%
                          =======    ===         ======     ===        ======     ===          ======    ===        ======     ===
</TABLE>


RETURN ON EQUITY AND ASSETS

         The ratio of net income to average  shareholders' equity and to average
total assets, and certain other ratios, is presented below:
<TABLE>
<CAPTION>
                                                                      Years Ended December 31
                                                    -------------------------------------------------------
                                                     1996                      1995                    1994
                                                     ----                      ----                    ----
<S>                                                 <C>                       <C>                     <C>
Return on Average Shareholders Equity               15.01%                    16.07%                   8.72%
Return on Average Assets                             1.36                      1.35                     .71
Dividend Payout Ratio                               35.77                     29.37                   49.21
Average Shareholders' Equity to Average Assets       9.08                      8.43                    8.14
</TABLE>

FINANCIAL INSTRUMENTS WITH OFF-BALANCE -SHEET RISK

    The  information  required  by this  section  of Part I, Item I of Form 10-K
appears  on page 47 of Part II,  Item 8,  Note 17 of this  report  and is herein
incorporated by reference.

SHORT-TERM BORROWINGS

    Federal funds  purchased and corporate cash  management  accounts  generally
represent  overnight  borrowing  transactions.  Repurchase  agreements  and FHLB
borrowings generally represent monthly borrowing tansactions.
<PAGE>
         The details of these  categories for the years 1996,  1995 and 1994 are
presented in the table below:
<TABLE>
<CAPTION>

                                                 1996         1995         1994
                                                 ----         ----         ----
<S>                                           <C>          <C>          <C>
Short-Term Borrowings:

Federal Funds Purchased and
   Corporate Cash Management:
     Balance at end of year ..............    $ 33,728     $ 42,111     $ 16,677
     Average during the year .............      21,026       18,808       13,604
     Maximum month-end balance ...........      56,720       42,110       21,138
     Weighted average rate during the year        4.58%        4.64%        3.16%
     Weighted average rate at December 31         5.91%        5.36%        4.35%

Repurchase Agreements:
     Balance at end of year ..............    $145,356     $ 37,127     $   --
     Average during the year .............      62,972       26,978         --
     Maximum month-end balance ...........     147,922       63,956         --
     Weighted average rate during the year        5.49%        6.00%        --
     Weighted average rate at December 31         5.78%        5.85%        --

FHLB Borrowings:
     Balance at end of year ..............    $ 27,350     $ 32,350     $  4,000
     Average during the year .............      31,449        7,660          495
     Maximum month-end balance ...........      32,488       32,350        4,000
     Weighted average rate during the year        5.01%        6.50%        2.02%
     Weighted average rate at December 31         5.59%        5.76%        6.35%
</TABLE>

    The weighted  average  rates paid in aggregate on these  borrowed  funds for
1996, 1995 and 1994 were 5.17%, 5.58%, and 3.27%, respectively.


LONG-TERM BORROWINGS

    FHLB borrowings represent long-term borrowings.

         The details of these  categories for the years 1996,  1995 and 1994 are
presented in the table below:
<TABLE>
<CAPTION>
                                                   1996        1995      1994
                                                   ----        ----      ----
<S>                                              <C>         <C>         <C>
Long-Term Borrowings:
FHLB Borrowings and Advances:
     Balance at end of year .................    $70,786     $   929     $  --
     Average during the year ................     58,677         735        --
     Maximum month-end balance ..............     70,929       1,000        --
     Weighted average rate during the year ..       5.38%       7.75%       --
     Weighted average rate at December 31 ...       5.07%       7.75%       --
</TABLE>
<PAGE>
DEPOSITS

         Average total  deposits of the Banks for 1996 were  approximately  $863
million,  an increase of 3% from $839 million for 1995. The Banks generally have
a large,  stable base of time deposits,  principally  certificates  of deposits,
money market  investment  accounts and individual  retirement  accounts obtained
primarily  from  customers  in Virginia.  The Banks have not  utilized  brokered
deposits.

INTEREST RATE SENSITIVITY

         The  following  table sets forth  maturity/repricing  information  with
respect to the major categories of Interest-Earning  Assets and Interest-Bearing
Liabilities as of December 31, 1996:
<TABLE>
<CAPTION>
                                                                                  Maturing/Repricing In
                                                      --------------------------------------------------------------------------
Interest-Earning Assets                               Under 3 Mos.        3-6 Mos.       6-12 Mos.      Over 1 Yr.       Total
-----------------------                               ------------        --------       ---------      ----------       -----
<S>                                                   <C>             <C>             <C>             <C>            <C>
Time Balances Banks ..............................    $       518     $      --       $      --       $      --      $       518
Mortgage Loans Held for Sale .....................            742            --              --              --              742
Securities Available for Sale ....................         73,054          50,789          90,957         120,223        335,023
Securities Held to Maturity ......................         17,609           3,698          11,550          57,662         90,519
Loans ............................................        284,266          41,198          86,389         372,514        784,367
                                                      -----------     -----------     -----------     -----------    -----------

Total Interest Earning Assets ....................    $   376,189     $    95,685     $   188,896     $   550,399    $ 1,211,169
                                                      ===========     ===========     ===========     ===========    ===========

Cumulative Total Interest-Earning Assets..........    $   376,189     $   471,874     $   660,770     $ 1,211,169    $ 1,211,169
                                                      ===========     ===========     ===========     ===========    ===========
Interest-Bearing Liabilities
NOW, Money Market and Savings ....................        123,467           3,219           6,435         169,995        303,116
Time Deposits $100,000 and Over ..................         24,443          15,337          20,449          29,960         90,189
Other Time Deposits ..............................         78,461          61,774          96,779         135,211        372,225
                                                      -----------     -----------     -----------     -----------    -----------
Total Interest-Bearing Deposits ..................        226,371          80,330         123,663         335,166        765,530

Short-Term Debt ..................................        213,799            --              --              --          213,799
FHLB Advances ....................................         45,000            --              --              --           45,000
Long-Term Debt ...................................         25,000              71              71             887         26,029
                                                      -----------     -----------     -----------     -----------    -----------

Total Borrowings .................................        283,799              71              71             887        284,828
                                                      -----------     -----------     -----------     -----------    -----------

Total Interest-Bearing Liabilities ...............    $   510,170     $    80,401     $   123,734     $   336,053    $ 1,050,358
                                                      ===========     ===========     ===========     ===========    ===========

Cumulative Total Interest-Bearing Liabilities ....    $   510,170     $   590,571     $   714,305     $ 1,050,358    $ 1,050,358
                                                      ===========     ===========     ===========     ===========    ===========

Net Total Assets/Liabilities .....................    $  (133,981)    $    15,284     $    65,162     $   214,346    $   160,811
                                                      ===========     ===========     ===========     ===========    ===========

Cumulative Net Total Assets/Liabilities ..........    $  (133,981)    $  (118,697)    $   (53,535)    $   160,811    $   160,811
                                                      ===========     ===========     ===========     ===========    ===========
</TABLE>
<PAGE>
Management  reviews the behavior of infrequently  repriced deposit products with
indefinite   maturities  and  accordingly  adjusts  the  overall  interest  rate
sensitivity position for non rate sensitive core balances.

Item 2.  Properties

         Registrant maintains its corporate headquarters at Church and Ellsworth
Streets in  Martinsville,  Virginia in a six-story  office  building  complex of
Piedmont Trust Bank. In addition,  the Registrant  and its  subsidiaries  own or
lease other  properties for their general banking  business.  As of December 31,
1996, the Registrant's  subsidiaries conduct business through thirty-five office
locations,  fourteen  of which are  leased  from  non-affiliated  owners and the
remainder are owned by the subsidiaries.

         The Registrant's  subsidiaries own several parcels of other real estate
which represent  foreclosed  dwellings and several acres of land. The book value
of this  property  at  December  31, 1996 was  approximately  $.9 million  which
approximates fair market value.

         With respect to the leased  properties,  leases expire at various dates
from  1997  through  2007,  all of which  are  renewable  at the  option  of the
Registrant.


Item 3.  Legal Proceedings

    The  information  required by Part I, Item 3 of Form 10-K appears on page 50
of Part  II,  Item 8,  Note 21 of this  report  and is  herein  incorporated  by
reference.

Item 4.  Submission of Matters to a Vote of Shareholders
         None.

                      EXECUTIVE OFFICERS OF THE REGISTRANT

Pursuant to General Instruction G(3) of Form 10-K the following list is included
as an  unnumbered  item in Part I of this  report in lieu of being  included  in
Proxy  Statement for the Annual Meeting of  Shareholders to be held on April 23,
1997.

The  following  is a list of names  and ages of all  executive  officers  of the
registrant;  terms  of  office  as  officers;  positions  and  offices  with the
registrant  held by each  officer and each  person's  principal  occupations  or
employment during the past five years.
<TABLE>
<CAPTION>
                                                                                                                 First Elected
   Name (Age)                                   Offices and Positions Held                                       As An Officer
   ----------                                   --------------------------                                       -------------
<S>                                          <C>                                                                      <C>
Michael R. Brenan  (44)                      Chairman of the Board, President,                                        06/94
                                                   Chief Executive Officer and
                                                   Director of BankGroup

James E. Adams  (52)                         Executive Vice President, Chief Financial                                10/94
                                                   Officer, Treasurer, Director of The
                                                   First Bank of Stuart and Director
                                                   of MainStreet Trust Company, N.A.
<PAGE>
Rebecca J. Jenkins  (46)                     Executive Vice President, Corporate                                      09/94
                                                   Secretary and Director of MainStreet
                                                   Trust Company, N.A.

Mark J. Wenick (37)                          Director of Trust Services                                               04/96


S. Richard Bagby (56)                        Senior Vice President and Chief                                          03/94
                                                   Credit Officer

William D. Kerr (48)                         Senior Vice President and Chief                                          07/77
                                                   Information Officer

Kenneth E. Lust (46)                         Senior Vice President and                                                09/94
                                                     Chief Operations Officer

Beverly L. Mitchell (49)                     Senior Vice President and Chief Market Manager                           08/95
</TABLE>


Mr.  Brenan  joined  MainStreet  BankGroup  Incorporated  as President and Chief
Executive  Officer in June of 1994. From January 1992 until that time, he served
as  President  and  Chief  Operating  Officer  of Bank  One,  Youngstown,  N.A.,
Youngstown,  Ohio.  From July 1988 through  December  1991, Mr. Brenan served as
President and Chief Executive Officer of Bank One, Portsmouth, N.A., Portsmouth,
Ohio.

Mr. Adams joined MainStreet BankGroup  Incorporated in October of 1994 as Senior
Vice President, Chief Financial Officer and Treasurer. Mr. Adams was promoted to
Executive  Vice  President in June of 1996.  Before coming to BankGroup,  he was
Executive Vice  President and Chief  Financial  Officer for Dominion  Bankshares
Corporation, Roanoke, Virginia, from September 1991 to March 1993. Prior to this
position,  he was the Chief Financial Officer for Shawmut National  Corporation,
Hartford, Connecticut, from August 1987 through September 1991.

Ms. Jenkins joined  MainStreet  BankGroup  Incorporated  in September of 1994 as
Senior Vice  President  and  Corporate  Secretary.  Ms.  Jenkins was promoted to
Executive Vice  President in June of 1996.  Until Ms. Jenkins came to BankGroup,
she served in various  capacities  at Bank One,  Youngstown,  N.A.,  Youngstown,
Ohio,  beginning  as  General  Counsel in July 1989.  In January  1994,  she was
appointed to Regional  Counsel Banc One Ohio  Corporation.  Disclosure of family
relationships between executive officers is required by Regulation S-K, Item 401
(d). Ms. Jenkins is the wife of Mr. Lust.

Mr. Wenick joined MainStreet BankGroup Incorporated in April of 1996 as Director
of Trust Services. In December,  1996, Mr. Wenick was elected Chairman and Chief
Executive  Officer of MainStreet  Trust  Company,  N.A.  Prior to that time, Mr.
Wenick  served as Senior Vice  President  and Market  Manager for Bank One Trust
Company, N.A., Youngstown, Ohio, from February 1993 to April 1996. From December
1987 to February  1993,  he served as Vice  President  and Trust Officer for the
Dollar Savings and Trust Company, Youngstown, Ohio.

Mr.  Bagby  joined  Piedmont  Trust  Bank in June  of 1980 as Vice  President  -
Commercial Loans and was elected Senior Vice President of Credit  Administration
for MainStreet BankGroup Incorporated in March of 1994.
<PAGE>
Executive officer William D. Kerr has served the registrant or its subsidiary in
various executive capacities for the past seven years.

Mr. Lust joined  MainStreet  BankGroup  Incorporated  in September  1994 as Vice
President  in Credit  Administration.  In July 1996,  he was named  Senior  Vice
President and Chief Operations Officer. Prior to joining BankGroup,  he was Vice
President  at Bank One,  Youngstown,  N.A.,  Youngstown,  Ohio,  for five years.
Disclosure of family  relationships  between  executive  officers is required by
Regulation S-K, Item 401 (d). Mr. Lust is the husband of Ms. Jenkins.

Ms. Mitchell joined MainStreet  BankGroup  Incorporated in August of 1995. Prior
to that time, Ms.  Mitchell  served as Vice President and Chief Quality  Officer
for Bank One, Youngstown,  N.A., Youngstown,  Ohio, from December 1991 to August
1995. From July 1985 to December 1991, she held various positions with the First
National Bank of Pennsylvania, Erie, Pennsylvania.


                                     PART II

Item 5.  Market  for the  Registrant's  Common  Equity and  Related  Shareholder
Matters

MainStreet BankGroup Incorporated common stock is traded on the over-the-counter
(OTC)  market and  quoted on the  NASDAQ  (National  Association  of  Securities
Dealers  Automated   Quotations)   National  Market  System.  Price  and  volume
information  are given in major  newspapers  in the "Over-The  Counter  Markets"
section under the National Market System listings.

MainStreet BankGroup  Incorporated is now traded under the symbol MSBC. Prior to
January 1, 1996, our common stock was traded under the symbol PBGI.

During  calendar year 1996,  1,415,664  shares of MSBC stock were traded through
NASDAQ. As of December 31, 1996, MSBC was owned by 3,405  shareholders of record
not  including  nominee  holders  which would  increase the total.  At year end,
11,342,248  shares were  outstanding.  All common stock in subsidiary  affiliate
Banks is owned entirely by MainStreet BankGroup.
<PAGE>
The following table sets forth the cash dividends paid per share and information
regarding  the market  prices per share of common stock for MSBC for the periods
indicated. The price ranges are based on actual high and low bid transactions as
reported on the NASDAQ National Market System.
<TABLE>
<CAPTION>
   1996        High              Low               Close              Dividend
   ----        ----              ---               -----              --------
<S>            <C>               <C>               <C>                  <C>
   4th         19-1/2            16-3/4            19                   .14
   3rd         19-1/2            16-1/4            18-1/2               .13
   2nd         17                15-1/2            16-1/4               .11
   1st         17                12-3/4            16                   .11
<CAPTION>

   1995        High              Low               Close              Dividend
   ----        ----              ---               -----              --------
<S>            <C>               <C>               <C>                  <C>

   4th         13-3/4            12-5/8            13                   .10
   3rd         13-1/8            11-7/8            12-5/8               .09
   2nd         13-1/8            11                12-53/100            .10
   1st         11-3/4             9-3/8            11-1/4               .08
</TABLE>

On February 20, 1996,  MainStreet  BankGroup declared a two-for-one stock split,
in the form of a 100% stock dividend,  payable March 15, 1996 to stockholders of
record March 4, 1996. Shareholders received one additional share of common stock
for each share held on the record date.

<PAGE>
Item 6.  Selected Financial Data
<TABLE>
<CAPTION>

(In Thousands, Except Per Share Data and Ratios)


                                                                                Years Ended December 31
                                                  ----------------------------------------------------------------------------
SUMMARY OF OPERATIONS                                 1996              1995              1994           1993            1992
                                                      ----              ----              ----           ----            ----
<S>                                               <C>                <C>               <C>             <C>            <C>
Interest Income                                   $   93,302         $ 81,169          $ 70,077        $ 67,592       $ 68,203
Interest Expense                                      42,855           36,757            29,197          28,948         33,200
                                                   ---------         --------          --------        --------       --------

Net Interest Income                                   50,447           44,412            40,880          38,644         35,003
Provision for Loan Losses                              3,276            1,419             3,091           1,690          2,643
                                                   ---------         --------          --------        --------       --------
Net Interest Income After Provision
     For Loan Losses                                  47,171           42,993            37,789          36,954         32,360
Noninterest Income                                    11,028            8,526             1,724           6,991          7,050
Noninterest Expense                                   35,348           32,461            32,073          31,351         26,808
                                                   ---------         --------          --------        --------       --------

Income Before Income Taxes                            22,851           19,058             7,440          12,594         12,602
Income Tax Expense                                     7,118            5,566               843           3,407          3,486
                                                   ---------         --------          --------        --------       --------
NET INCOME                                        $   15,733         $ 13,492          $  6,597        $  9,187       $  9,116
                                                  ==========         ========          ========        ========       ========

PER SHARE DATA
Net Income:
     Primary                                      $     1.37         $   1.26          $    .63        $    .89       $    .89
     Fully Diluted                                      1.37             1.21               .62             .85            .85
Cash Dividends                                           .49              .37               .31             .27            .21
Net Book Value                                          9.55             8.74              7.77            7.43           6.78
Net Book Value GAAP                                     9.56             8.69              6.97            7.43           6.78

DAILY AVERAGES
Total Assets                                      $1,154,019         $995,896          $929,298        $880,050       $818,780
Interest-Earning Assets                            1,099,295          941,810           872,662         832,625        777,851
Securities Available for Sale                        256,372          174,795           221,114         223,377        193,581
Securities Held to Maturity                          100,385          127,483            68,185          48,520         42,639
Loans, Net of Unearned Income                        730,753          627,166           562,272         530,763        503,178
Allowance for Loan Losses                              9,648            9,176             9,106           9,498          9,700
Deposits                                             862,806          839,479           818,721         773,546        720,797
Interest-Bearing Liabilities                         927,511          798,264           747,583         712,500        670,972
Shareholders' Equity                                 106,285           88,546            81,114          73,560         66,205
Shareholders' Equity GAAP                            104,793           83,960            75,617          73,560         66,205
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                               Years Ended December 31
AT YEAR END                                           1996              1995             1994            1993            1992
                                                      ----              ----             ----            ----            ----
<S>                                               <C>              <C>                 <C>             <C>            <C>
Total Assets                                      $1,288,837       $1,064,872          $942,385        $910,729       $860,006
Interest-Earning Assets                            1,211,169        1,010,044           880,312         857,082        813,101
Securities Available for Sale                        335,023          211,970           127,030         203,851        184,538
Securities Held to Maturity                           90,519          112,181           152,214          80,297         74,544
Loans, Net of Unearned Income                        784,367          673,678           595,187         529,455        511,357
Allowance for Loan Losses                             10,195            9,036             9,160           9,035          9,166
Deposits                                             886,519          845,577           830,597         796,775        753,137
Interest-Bearing Liabilities                       1,050,358          844,825           754,789         732,311        697,149
Shareholders' Equity                                 108,287           99,254            80,311          76,044         68,912
Shareholders' Equity GAAP                            108,476           98,657            71,994          76,055         68,912

RATIOS
Return on Average Assets                               1.36%           1.35%               .71%          1.04%           1.11%
Return on Average Shareholders' Equity                15.01           16.07               8.72          12.49           13.77
Average Shareholders' Equity to Average Assets         9.08            8.43               8.14           8.36            8.09
Efficiency Ratio                                      56.98           59.43              61.86          61.51           62.57
Net Interest Margin                                    4.68            4.86               4.85           4.82            4.69

CREDIT QUALITY RATIOS
Allowance for Loan Losses to Nonperforming Loans     166.15%         156.36%            196.40%        175.92%         121.66%
Allowance for Loan Losses to Nonperforming Assets    141.40          117.81             127.03          88.52           67.80
Allowance for Loan Losses to Year-End Loans, Net
    of Unearned Income                                 1.30            1.34               1.54           1.71            1.79
Net Charge-Offs to Average Loans, Net of Unearned
    Income                                              .29             .25                .53            .34             .50

</TABLE>
<PAGE>
Item 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operations


1996 vs. 1995

Overview

         MainStreet  BankGroup  Incorporated  reported  record earnings of $15.7
million in 1996 compared to $13.5  million in 1995,  an increase of 16.6%.  This
translates  to $1.37 per share on a fully  diluted  basis for 1996  compared  to
$1.21 per share for 1995. These earnings  produced a return on average assets of
1.36% and a return on average shareholders' equity of 15.01% in 1996 compared to
a return on average assets of 1.35% and a return on average  shareholders equity
of 16.07% in 1995.  In 1996, a  two-for-one  stock split,  in the form of a 100%
stock dividend,  was paid. Also,  effective in the fourth quarter, the quarterly
dividend was raised to $0.14 per share.  Cash dividends  increased from $0.37 in
1995 to $0.49 in 1996.  Market  capitalization  increased to approximately  $216
million at December  31, 1996  compared  with $148 million at December 31, 1995.
Average  interest-earning  assets increased $157.5 million with upward increases
in both loans and  investments  and funded  principally  by  borrowed  funds and
higher costing deposit liabilities. The provision for loan losses increased $1.9
million in 1996 over 1995  primarily  driven by increased loan volume and higher
net charge-off levels. Noninterest income, excluding securities gains, increased
$1.9 million in 1996 over 1995.  Securities  gains totaled $610 thousand in 1996
compared with $43 thousand in 1995.  Noninterest  expense rose $2.9 million over
1995 expenses.

         1996 was a year of expansion for the Corporation. Two acquisitions were
completed  during the year. In September 1996, the  Corporation  consummated the
acquisition of The First National Bank of Clifton Forge, Clifton Forge, Virginia
for approximately  $26.2 million of common stock. In November 1996, Hanover Bank
in  Mechanicsville,  Virginia was acquired for  approximately  $22.5  million of
common stock. Each transaction was valued at the time of consummation.

STATEMENT OF INCOME

Net Interest Income

         Net interest income,  the difference  between total interest income and
total interest expense, is the Corporation's  principal source of earnings.  The
amount of net interest  income is determined  by the volume of  interest-earning
assets,  the level of rates  earned on those  assets and the cost of  supporting
funds. The difference between rates earned on  interest-earning  assets (with an
adjustment  made to  tax-exempt  income to provide  comparability  with  taxable
income) and the cost of supporting funds is measured by the net interest margin.

         The distribution of assets,  liabilities,  and shareholders' equity for
the last three years, along with the related levels of fully  taxable-equivalent
interest  income  and  expense,  is  presented  on  page 6 of this  report.  The
variances  in  interest  income and  expense  caused by  differences  in average
balances and rates are shown on page 7 of this report.

         The general  level of interest  rates  declined in the first quarter of
1996 as the Federal Reserve eased monetary  policy.  The prime rate decreased in
tandem with the drop in short-term  interest rates,  maintaining a favorable 300
basis points spread  between  prime and the Federal  funds rate.  This change in
<PAGE>
market rates,  along with management's  expansion of investment  alternatives to
better employ capital and enhance  shareholder  returns,  resulted in a 18 basis
points  decline  in the  Corporation's  net  interest  margin  to 4.68% for 1996
compared to the 4.86% achieved in 1995.  Average earning assets increased $157.5
million,  or 16.7%,  with higher yielding loans accounting for $103.6 million of
the total growth. The overall cost of interest-bearing  liabilities increased by
2 basis points,  due largely to the  increased  mix of earning  assets funded by
higher cost borrowed funds.  The favorable  growth in earning assets,  partially
offset by the compression in the net interest margin, resulted in an increase in
net interest income of $6.0 million, or approximately 13.6% above 1995.

Provision for Loan Losses

         A provision  for loan losses is charged to earnings  for the purpose of
establishing an allowance for loan losses.  Losses are, in turn, charged to this
allowance rather than being reported as a direct expense.  In 1996, $3.3 million
was expensed as a loan loss  provision,  compared  with $1.4 million in 1995, an
increase of $1.9  million,  or 130.9%.  Net loan  charge-offs  were $2.1 million
compared with $1.5 million in 1995.  The ratio of  charge-offs to average loans,
net of unearned income,  for 1996 was .29% compared to 1995's level of .25%. The
amount of the  allowance  for loan  losses is  established  based on a continual
review  of the  overall  quality  of  the  loan  portfolio.  In  this  analysis,
consideration  is  given  to  nonaccrual,  past  due and  other  problem  loans,
historical  loan loss  experience and the growth and mix of the loan  portfolio.
Current  and  projected  economic  conditions  are also  variables  that must be
considered in  establishing  the  allowance.  At year-end 1996, the ratio of the
allowance to loans, net of unearned income, was 1.30% compared with the 1.34% at
December  31,  1995.  The  allowance  for  loan  losses  at  December  31,  1996
represented  166.15% of nonperforming  loans,  compared with 156.36% at December
31, 1995.  The allowance  for loan losses is evaluated on a quarterly  basis and
was  considered  adequate at December 31, 1996. A discussion  concerning  credit
quality  is  included  in  the  "Loans  and  Credit  Quality"  section  of  this
discussion.

Noninterest Income

         Noninterest income, excluding gains on securities transactions, totaled
$10.4  million for 1996  compared to $8.5  million in 1995,  an increase of $1.9
million,  or 22.8%.  Of this  increase  $.7  million  was due to an  increase in
service  charges.   Higher  volume  related  activity  charges  associated  with
transaction  accounts  and the full year  impact of revised  service  charge fee
schedules  introduced  during  the  latter  half  of  1995  contributed  to this
increase.  Other fee income increased $.8 million in 1996 over 1995 due to gains
on other real estate, credit card fees, and other income. Trust income increased
$.5  million in 1996,  or 20.5%  over 1995  income.  Total  trust  assets  under
management  increased  to $664 million at December 31, 1996 from $575 million at
December 31, 1995.

Investment Securities Gains

         Securities gains totaled $610 thousand in 1996 compared to $43 thousand
in 1995.  During 1996,  the  Corporation  sold its  investments  in certain bank
stocks  that  were  deemed  to be no  longer  compatible  with  its  merger  and
acquisition strategies.  These divestitures,  which totaled $373 thousand, along
with calls of various higher yielding  securities  accounted for the bulk of the
1996 securities gains.
<PAGE>
Noninterest Expense

         Total  noninterest  expense  was $35.3  million at  December  31,  1996
compared to $32.5 million at December 31, 1995, an increase of $2.9 million,  or
8.9%. Of this increase, salaries and employee benefits increased $1.8 million or
10.5%.  The opening of two new branch locations during the year as well as sales
staff additions  necessary to produce additional earning asset volumes and staff
support required to process the additional production resulted in an increase in
full-time  equivalent  employees  from 492 at  year-end  1995 to 551 at year-end
1996. The category of other noninterest expense increased $1.5 million, or 19.9%
over 1995 levels. Included in other expenses were approximately $943 thousand of
costs directly  associated with the two acquisitions  completed during the year.
FDIC insurance expense dropped $1.0 million in 1996 compared with 1995 levels as
a result of the new  assessment  rate  schedule  adopted by the Federal  Deposit
Insurance Corporation (FDIC) during 1995.


Provision for Income Taxes

         Current tax expense was $7.1  million in 1996  compared to $5.6 million
in 1995.  This  increase was  primarily due to  acquisition  expenses  which are
considered  nondeductible  capital  expenditures  rather than  current  business
expenses.  Although tax exempt  interest in total  declined  from prior year, it
remains the major  component in reducing the effective  tax rate.  The Company's
effective tax rate was 31.1% in 1996 and 29.2% in 1995.


BALANCE SHEET


Investment Portfolio

         Investments including securities available for sale and securities held
to maturity  totaled  $425.5  million on December 31,  1996,  compared to $324.2
million at December 31, 1995.  The increase  occurred in the  available for sale
position and was  comprised  principally  of  adjustable  rate  mortgage  backed
securities funded with floating rate debt. As of December 31, 1996, 78.7% of the
Corporation's  investment  portfolio was  classified in the "available for sale"
category,  with the remaining 21.3% of investment securities classified as "held
to maturity." This distribution allows flexibility in the management of interest
rate risk, credit,  liquidity and capital adequacy. The maturity distribution of
all securities and average taxable equivalent yields as of December 31, 1996 are
shown on page 8 of this report.  The investment  portfolio is well positioned to
protect  against  interest  rate  risk,  with  44.1%  of  total  investments  in
adjustable rate  securities.  The weighted average duration of the portfolio was
2.43 years with an average life of 3.99 years, as of December 31, 1996.

         The  available  for sale  portfolio is  periodically  stress  tested to
monitor the sensitivity to interest rate movements. This testing is performed by
an outside third party who uses a combination of information  from Bloomberg and
GAT  (Global  Advanced  Technology),  in  order to  apply  consensus  prepayment
assumptions to the mortgage backed instruments. Based on this information, as of
December 31, 1996,  the available for sale  portfolio  could be expected to rise
4.23% in market  value  given a 300 basis point  decline in  interest  rates and
decline 7.85% in market value given a 300 basis point rise in interest rates.
<PAGE>
Loans and Credit Quality

         Average loans, net of unearned income, increased $103.6 million in 1996
to $730.8  million,  an increase of 16.5%.  Continued low interest  rates during
1996 prompted  increases in consumer and mortgage  loan volume.  The majority of
long-term fixed rate mortgages are sold in the secondary market.  Those retained
in the portfolio are generally  either variable rate  instruments or carry three
to five year balloon maturities.

         Centralized  credit risk  management  provides  more uniform  levels of
standardization  and underwriting  among BankGroup  affiliates.  The Corporation
manages credit risk through a number of methods including loan grading, industry
type, and  underwriting  collateral.  A formal loan review function  provides an
independent  assessment of credit ratings,  credit quality,  and credit process.
Management  believes that early  detection of credit  problems  through  regular
reviews of  borrowers'  collateral  and  financial  performance  is an important
factor in overall credit quality.

         Although there were no large concentrations of credit to any particular
industry,  the economic  trends of the areas served by BankGroup  affiliates are
influenced by the significant  industries within the region including  textiles,
furniture,  pre-built  housing and  agriculture.  Virtually  all of our business
activity is with  customers  located in the central and western part of southern
Virginia.  The ultimate  collectibility  of the Banks' loan  portfolios  and the
recovery of the carrying  amounts of  repossessed  property are  susceptible  to
changes in the market  conditions  of this  geographic  region.  The  Commercial
portfolio  is  diversified  with no  significant  concentrations  of  credit  at
December 31, 1996.  Acquisition and development  construction  loans account for
$40.2 million and $30.8 million of the commercial portfolio at December 31, 1996
and 1995,  respectively.  In addition,  other  commercial  loans secured by real
estate  totaled  $116.6 million and $96.5 million at December 31, 1996 and 1995,
respectively.  The real estate loan portfolio  consists  almost  entirely of 1-4
family residential property. BankGroup was the creditor for approximately $128.3
million  and $97.9  million at  December  31,  1996 and 1995,  respectively,  of
consumer loans for automobiles and mobile homes generated  directly or purchased
from established dealers (indirect). These loans are generally collateralized by
the related property and many are either endorsed or subject to mandatory dealer
repurchase agreements.

         During 1996,  the  Corporation's  ratio of net  charge-offs  to average
loans was .29% compared  with .25% in 1995. At December 31, 1996,  the allowance
for loan losses to nonperforming  assets was approximately  141.4% compared with
117.8% last year. The allowance for loan losses to nonperforming loans ratio was
166.2% at year end 1996,  compared to 156.4% the previous  year. On December 31,
1996, the allowance for loan losses to loans ratio was 1.30% compared with 1.34%
in 1995.  The  Corporation  believes that the allowance for loan losses of $10.2
million  provides  adequate  coverage of potential  loss  exposure in the credit
portfolio at December 31, 1996.


Other Assets

         Other  assets at December 31, 1996 totaled  $34.1  million  compared to
$17.0  million at December 31, 1995,  an increase of $17.0  million.  Bank Owned
Life Insurance  (BOLI) was purchased in the fourth quarter of 1996 at a one time
premium of $15.0 million. The covered insurance is on individuals in the various
Banks.  The Banks are the owners and  beneficiaries  of the insurance  policies.
<PAGE>
This  program will provide an  additional,  cost-effective  source of funds that
will help finance  BankGroup's  employee benefit programs.  It is also a way for
the  Company  to  partner  with  the  employees  to  reduce  costs  and  improve
profitability in an ever increasing competitive environment. Interest earned not
collected  increased  $2.5 million in 1996 in comparison to 1995.  This increase
was  primarily  due to the  increase in the  interest  earned not  collected  on
mortgage  backed  securities.  Mortgage  backed  securities  increased  with the
continued  implementation of leveraging  transactions.  Many of these securities
had the 45 day delay  payment  schedules,  therefore,  increasing  the  interest
earned not collected.


Deposits

    Total deposits at December 31, 1996 were $886.5  million  compared to $845.6
million at December 31, 1995. The Corporation continues to experience a shift in
deposit mix from savings deposits to time deposits,  a trend begun in 1994. From
year-end 1995 to year-end 1996,  time deposits  increased  $35.7 million,  while
savings  balances  declined  $11.7 million.  Interest  checking and money market
accounts increased $9.4 million.  Management attributes the shift in deposit mix
to the relative flat interest rate  environment and the  continuation of deposit
customers' preference for longer-term, higher yielding time deposits.

    Comparing  average  deposit  balances to the previous year, the  Corporation
experienced  an increase of $23.3  million,  with $6.8  million of the  increase
occurring in noninterest-bearing  demand deposit accounts. Average time deposits
were up $31.8 million,  while combined  savings,  interest-bearing  checking and
money market accounts decreased $15.3 million.


Other Interest-Bearing Liabilities

         Short-term debt includes federal funds purchased, securities sold under
repurchase  agreements,  treasury  tax and loan notes and Federal Home Loan Bank
borrowings  and  advances.  Total  short-term  debt at year-end  1996 was $213.8
million,  compared to $111.7  million at December 31,  1995.  As of December 31,
1996 long-term  debt totaled $71.0 million.  This was comprised of $70.8 million
in FHLB  borrowings  and  advances.  The  remaining  $.2 million was a five year
capital  lease on telephone  equipment.  The  year-end to year-end  increases in
borrowings were primarily  associated with wholesale  leverage  transactions and
increases in loan demand.


Shareholders' Equity

         Total  shareholders'  equity,  excluding  unrealized  gains (losses) on
securities,  increased  by $9.0  million in 1996 to $108.3  million at year-end.
Dividends  per share for 1996 were $.49  compared to $.37 for 1995.  At year-end
1996,  core capital  (Tier 1) was 8.37% of assets  against 9.26% at December 31,
1995.  Total  capital to risk based  assets was 14.84%  versus  16.30% the prior
year.  Our capital  position  remains  strong with  ratios  substantially  above
regulatory prescribed minimums.
<PAGE>
Asset/Liability Management

         Asset/liability  management functions to maximize  profitability within
established  guidelines for liquidity,  capital adequacy and interest rate risk.
Management  seeks to minimize the risks to earnings and equity  associated  with
movements in market  interest  rates.  Measurement  and monitoring of liquidity,
capital  adequacy  and  interest  rate  risk  are  performed  centrally  for the
Corporation and the subsidiary banks, and reported under guidelines  established
by management, the Board of Directors and regulators.

         Interest rate sensitivity is traditionally  measured in three ways: the
difference,  or gap,  between  interest  sensitive  earning  assets and interest
sensitive  interest  bearing  liabilities,  the resultant change in net interest
income due to market interest rate fluctuations, and the effect of interest rate
movements on the market,  or economic value of assets,  liabilities  and equity.
Management believes that the three measurement  techniques are complimentary and
are used together for management of interest rate risk with the Corporation. The
Corporation utilizes an asset/liability  management  simulation model to measure
potential  earnings and economic  value of equity risk.  The  simulation  model,
because of its  dynamic  nature,  can  capture the effects of present and future
balance sheet trends,  differing patterns of interest rate movement and changing
relationships between rates (basis risk).  Additionally,  the model captures the
impact of  varying  levels of  prepayment  risk on certain  loan and  investment
categories and embedded options risk on deposits and alternative funding sources
relative to movements in market rates. While most assets and liabilities reprice
either at  maturity  or in  accordance  with their  contractual  terms,  several
balance sheet components demonstrate characteristics that require adjustments to
more  accurately  reflect  their  repricing   behavior.   Assumptions  based  on
historical  pricing  relationships and anticipated market conditions are made to
certain core deposits to reflect the elasticity of the changes in their interest
rates relative to changes in market rates. The Corporation  separately  utilizes
outside  sources to measure  the  effects of rising and  declining  rates on its
mortgage-backed  securities  portfolios.  This  data is  incorporated  into  the
simulation  model.  According  to  these  sources,  the  market  value  of these
securities would decrease by  approximately  3.2% with an average life extension
of 1.9 years  given a 200 basis  point rise in market  rates,  and  increase  by
approximately  3.5% with an average life decrease of 3.4 years under a 200 basis
point decrease in market rates.

         Year-end 1996 simulations which forecast changes in net interest income
that may result from  movements in interest  rates over the forward twelve month
time horizon  indicate that net interest income would decrease by  approximately
6.38% given a rise of 300 basis points in market  rates over the forward  period
and an increase  of  approximately  2.51%  given a decline of 300 basis  points.
Likewise, the economic value of equity would decrease by approximately 1.21% and
increase by  approximately  8.9% under  immediate  and sustained 200 basis point
market rate increases and decreases, respectively.

         The  measurement  of liquidity is performed by  monitoring  ratios that
indicate the level of liquid assets relative to  liabilities,  the dependence on
potential  volatile funding sources,  and the relationship of loans to deposits.
While relying on core deposit relationships as the basis of liquidity, increased
loan demand over the year has resulted in the  Corporation  seeking  alternative
sources of liquidity  and  utilizing  existing  sources to a higher level within
established  liquidity  guidelines.  It is  anticipated  that  this  trend  will
continue in 1997.  To meet  future  liquidity  needs,  the  Corporation  and its
subsidiary banks have expanded funding sources,  primarily with the Federal Home
Loan Bank, and continue to seek other alternative funding sources.
<PAGE>
Effects of Inflation

         Over the past few  years,  the rate of  inflation  has been  relatively
moderate.  However,  because  interest rates and the level of loans and deposits
generally increase as the rate of inflation increases,  the financial statements
reflect these effects of inflation.

Recent Accounting Developments

         The Financial  Accounting Standards Board ("FASB") has issued Statement
of  Financial  Accounting  Standards  No. 125,  "Accounting  for  Transfers  and
Servicing of Financial Assets and  Extinguishments  of  Liabilities".  BankGroup
adopted the  applicable  portions of this  statement  effective  January 1, 1997
which had no material effect on financial statements.


1995 VS 1994

Overview

    Net income was $13.5  million,  or $1.21 per share on a fully  diluted basis
for 1995 compared to $6.6 million,  or $.62 per share on a fully diluted  basis,
for 1994.  During 1994 the  Corporation's  financial  results  were  impacted by
actions  taken to  restructure  the balance  sheet through  security  sales,  an
additional  loan loss provision in order to maintain  adequate loan loss reserve
coverage and certain other less  significant  anomalies.  Excluding these items,
MainStreet's  earnings  would  have been  approximately  $10.8  million in 1994.
Return on average assets was 1.35% in 1995 compared with .71% in 1994. Return on
average  shareholders' equity was 16.07% in 1995 and 8.72% in 1994. Net interest
income rose in 1995 driven by a higher level of earning  assets.  The  provision
for loan losses in 1995  declined  $1.7 million or 54.1% in  comparison to 1994.
This  decline  can be  attributed  to  increased  credit  quality  driven by new
policies and procedures for commercial lending.  Noninterest  income,  excluding
securities  gains  (losses),  was $8.5  million,  an increase of 14.8% over 1994
levels. During 1995, the Corporation  implemented  additional service charges on
deposit  accounts along with increased  rates on existing  charges.  Noninterest
expense for 1995 was $32.5  million and  relatively  stable when compared to the
$32.1 million in 1994.  During the fourth quarter,  the  Corporation  called for
redemption all of its  outstanding 7%  Convertible  Subordinated  Debentures for
common stock. This reduced  long-term debt by approximately  $6.2 million with a
corresponding  increase in total  shareholders'  equity.  Income tax expense was
$5.6 million in 1995 compared to $.8 million in 1994. The  previously  mentioned
restructuring  of the  balance  sheet was the main cause of the tax  position in
1994.  The  1994  rate  was also  attributable  to a  reduction  in  expense  of
approximately  $600  thousand.  This was due to an agreement,  during the second
quarter of 1994, that BankGroup  entered into with the Internal  Revenue Service
which  settled a matter  associated  with the tax  accounting  for core  deposit
intangibles.


STATEMENT OF INCOME

Net Interest Income

    Net interest income,  the difference between total interest income and total
interest expense, is the Corporation's  principal source of earnings. The amount
of net interest income is determined by the volume of  interest-earning  assets,
<PAGE>
the level of rates earned on those assets and the cost of supporting  funds. The
difference between rates earned on  interest-earning  assets (with an adjustment
made to tax-exempt income to provide  comparability with taxable income) and the
cost of supporting funds is measured by the net interest margin.

    The distribution of assets,  liabilities,  and shareholders'  equity for the
last three  years,  along with the  related  levels of fully  taxable-equivalent
interest  income  and  expense,  is  presented  on  page 6 of this  report.  The
variances  in  interest  income and  expense  caused by  differences  in average
balances and rates are shown on page 7 of this report.

    The general level of interest  rates  declined in the second half of 1995 as
the Federal  Reserve eased monetary  policy.  The prime rate decreased in tandem
with the drop in short-term interest rates, maintaining a 300 basis point spread
between  prime and  federal  funds  rate.  The impact on the  Corporation's  net
interest  margin was favorable,  rising 1 basis point to 4.86% for 1995 compared
to the 4.85% achieved in 1994.  Average earning assets  increased $69.1 million,
or 7.92%. While the overall cost of interest-bearing  liabilities increased, due
largely to the upward  repricing of time deposits  generated during the low rate
cycle of 1992 and 1993,  a higher  percentage  of earning  assets were funded by
noninterest-bearing  liabilities.  The combination of an increasing net interest
margin,  a more  profitable  asset  mix and  growth  in  earning  assets in 1995
generated an increase in net interest income of $3.5 million,  or  approximately
8.6%.


Provision for Loan Losses

    In 1995, $1.4 million was expensed as a loan loss  provision,  compared with
$3.1  million  in  1994,  a  reduction  of $1.7  million,  or  54.1%.  Net  loan
charge-offs  were $1.5 million  compared with $3.0 million in 1994. The ratio of
charge-offs to average loans, net of unearned income, for 1995 was .25% compared
to 1994's level of .53%. At year-end  1995,  the ratio of the allowance to loans
was 1.34%  compared with the 1.54% at December 31, 1994.  The allowance for loan
losses at December 31, 1995 represented 156.36% of nonperforming loans, compared
with 196.40% at December 31, 1994. The allowance for loan losses is evaluated on
a quarterly basis and was considered adequate at December 31, 1995. A discussion
concerning  credit quality is included in the "Loans and Credit Quality" section
of this discussion.

Noninterest Income

    Noninterest  income,  excluding gains or losses on securities  transactions,
totaled $8.5 million in 1995  compared with $7.4 million in 1994, an increase of
14.8%.  Trust income  increased $416 thousand,  or 20.5% over 1994 levels due to
increased business  development and an increased fee structure.  Service charges
on deposit  accounts  totaled $2.7 million,  increasing  13.3% over 1994 levels.
During 1995, the Corporation  implemented  additional service charges on deposit
accounts  along with  increased  rates on existing  charges.  Other  noninterest
income  amounted to $3.3 million in 1995 compared to $2.9 million in 1994.  This
rise  was due to  increases  in card  services  income,  insurance  commissions,
discount income, and other small accounts.
<PAGE>
Investment Securities Gains (Losses)

    Securities  gains  were $43  thousand  in 1995  compared  to  losses of $5.7
million in 1994. During the fourth quarter of 1994, management  restructured the
Corporation's  balance sheet, through the sale of that portion of collateralized
mortgage  obligations  (securities) most sensitive to a rising rate environment.
This action resulted in an after-tax  charge to earnings of  approximately  $4.0
million.


Noninterest Expense

    Total  noninterest  expenses in 1995 were $32.5 million and stable with 1994
levels of $32.1 million.  Salaries expense was $13.0 million in 1995 compared to
$11.9  million in 1994,  an increase of 9.0%.  Part of this is  attributable  to
staffing of key Holding Company  positions in the latter part of 1994. Also, the
Corporation  accrued  an  estimate  for  separation  costs  associated  with the
consolidation of certain back office  activities at the holding company level in
accordance  with its  out-placement  policy,  which  impacted  total  salary and
benefit costs for 1995. Full time equivalent  employees  totaled 492 at year-end
1995 compared with 532 at year-end  1994.  The remainder of the increase was due
to normal salary increases.  Employee benefit costs totaled $4.3 million in 1995
up 9.8% in  comparison  to 1994.  These  increases  were due to rises in pension
expense  due to a new  defined  benefit  plan along  with a matching  401-K plan
implemented by the  Corporation.  Increases in the stock price which affects the
compensation  expense accrued for stock options  outstanding also contributed to
the rise in 1995 expense.

    Net  occupancy  expense  experienced  a $70  thousand  decrease  in  1995 in
comparison to 1994.  Equipment costs were $3.5 million at year-end 1995 compared
to $3.1  million in 1994,  an increase of 13.1%.  During 1995,  the  Corporation
invested in new  technology  and equipment to enhance our  capabilities  to more
efficiently respond to our customers. A new mainframe computer was installed and
high speed data  communication  lines to each affiliate bank which has increased
our speed of processing along with positioning us for growth and expansion. FDIC
insurance  expense dropped from $1.9 million in 1994 to $1.0 million in 1995 due
to the  refund  received  during  the  third  quarter  of 1995  and the  reduced
assessment rate for the remainder of 1995. FDIC insurance expenses for 1996 will
be reduced further by a significant amount as the Corporation's subsidiary banks
accrue to the minimum annual statutory requirement.

    Other  noninterest  expenses  were $7.8  million  for 1995  compared to $8.3
million  for 1994,  a  decline  of 6.8%.  The  Corporation  concentrated  on its
processing  activities during 1995 and continued to consolidate  functions which
positively impacted noninterest expense. This can also be seen in the decline of
the efficiency  ratio to 59.43% from 61.86% in 1994.  The efficiency  ratio is a
measure of on-going  operating  expenses as they  relate to  tax-equivalent  net
interest income and noninterest  income. All this was achieved while at the same
time three of the bank subsidiaries moved from national to state bank charters.


Provision for Income Taxes

    Current  income  tax  expense  increased  in  1995,  primarily  due  to  the
settlement  with the Internal  Revenue  Service  regarding tax treatment of core
deposit  intangibles  and the tax benefit  derived from  realized  losses on the
investment  portfolio that occurred in 1994. Income tax expense amounted to $5.6
million in 1995,  compared to $843 thousand in 1994. The Company's effective tax
rate was 29.2% in 1995 and 11.3% in 1994.
<PAGE>
BALANCE SHEET


Investment Portfolio

    Investments,  including securities available for sale and securities held to
maturity totaled $324.1 million on December 31, 1995, compared to $279.2 million
the prior year. The increase occurred in the available for sale position and was
comprised  principally of adjustable rate  Collateralized  Mortgage  Obligations
(CMO's)  funded  with  floating  rate  debt  of the  same  index  and  repricing
frequency.  During fourth  quarter of 1995, the Financial  Accounting  Standards
Board  allowed   institutions  a  one  time  opportunity  to  restructure  their
investment  portfolios under the  designations of SFAS No. 115.  Management took
advantage  of this  opportunity  by  redesignating  $35.7  million  of  "held to
maturity"  as  "available  for sale"  without  any  penalty or  tainting  of the
remaining "held to maturity"  portfolio.  As of December 31, 1995,  65.4% of the
Corporation's  investment  portfolio was  classified in the "available for sale"
category,  with the remaining 34.6% of investment securities classified as "held
to maturity."  This  distribution  allows more  flexibility in the management of
interest rate risk, credit, liquidity and capital adequacy.

    All CMO's are  classified as  "available  for sale." At least on a quarterly
basis,  and more often in times of heightened  interest rate  volatility,  these
securities  are tested to monitor  their  sensitivity  to  movements in interest
rates and the  effects of  prepayments  on their  market  price.  This review is
conducted  utilizing  the "FFIEC High Risk Test",  under  which  securities  are
analyzed on the  assumption  of an  immediate  and  parallel  shift of 300 basis
points in the yield curve. At December 31, 1995, the Corporation's CMO portfolio
has an  average  life of 9.17  years.  Were  rates to rise or fall by 300  basis
points, the average life of the portfolio would extend to 9.36 years, or decline
to 8.48 years, respectively. The market price of the CMO portfolio would decline
by approximately 12.01% or increase by approximately 9.11% were rates to rise or
fall  by 300  basis  points,  respectively.  The  overwhelming  majority  of the
Corporation's  CMO  portfolio  are  issued  by  the  Federal  National  Mortgage
Association  or the Federal  Home Loan  Mortgage  Corporation  and are backed by
collateral  issued by these agencies.  Management  believes there is no material
credit risk inherent in these investments.


Loans and Credit Quality

    Average loans, net of unearned income, increased from $562.3 million in 1994
to $627.2  million in 1995,  up 11.5%.  Declining  interest  rates  during  1995
prompted double digit percentage increases in consumer and mortgage loan volume.
Although  there  were  no  large  concentrations  of  credit  to any  particular
industry,  the economic  trends of the areas served by BankGroup  affiliates are
influenced by the significant  industries within the region including  textiles,
furniture,  pre-built  housing and  agriculture.  Virtually  all of our business
activity is with  customers  located in the central and western part of southern
Virginia.  The ultimate  collectibility  of the Banks' loan  portfolios  and the
recovery of the carrying  amounts of  repossessed  property are  susceptible  to
changes in the market  conditions  of this  geographic  region.  The  Commercial
portfolio  is  diversified  with no  significant  concentrations  of  credit  at
<PAGE>
December 31, 1995.  Acquisition and development  construction  loans account for
$30.8 million and $31.0 million of the commercial portfolio at December 31, 1995
and 1994,  respectively.  In addition,  other  commercial  loans secured by real
estate  totaled  $96.5  million and $72.0 million at December 31, 1995 and 1994,
respectively.  The real estate loan portfolio  consists  almost  entirely of 1-4
family  residential   property.   MainStreet  BankGroup  was  the  creditor  for
approximately  $97.9  million and $82.4  million at December  31, 1995 and 1994,
respectively,  of consumer  loans for  automobiles  and mobile  homes  generated
directly or  purchased  from  established  dealers  (indirect).  These loans are
generally collateralized by the related property and many are either endorsed or
subject to mandatory dealer repurchase agreements.

    During 1995, the Corporation's ratio of net charge-offs to average loans was
 .25% compared  with .53% in 1994.  At December 31, 1995,  the allowance for loan
losses to  nonperforming  assets was  approximately  117.8% compared with 127.0%
last year.  The  allowance  for loan  losses to  nonperforming  loans  ratio was
156.36% at year end 1995,  compared to 196.4% the previous year. On December 31,
1995, the allowance for loan losses to loans ratio was 1.34% compared with 1.54%
in 1994.  The  Corporation  believes  that the allowance for loan losses of $9.0
million  provides  adequate  coverage of potential  loss  exposure in the credit
portfolio at December 31, 1995.


Other Assets

    Other  assets at  December  31,  1995 were $17.0  million  compared to $25.3
million at December 31, 1994,  a decline of 32.8%.  In 1993, a subsidiary  bank,
Piedmont Trust Bank, (PTB) experienced a Trust Department  defalcation involving
misappropriation of customer funds by a former Trust Department employee at PTB.
PTB filed a lawsuit  against  its  insurance  carriers  to collect on a disputed
claim for $5.5 million arising out of the defalcation. At December 31, 1994, PTB
had other assets of $3.8 million on its balance sheet  representing a receivable
from insurance carriers. This dispute was settled on February 28, 1995 and final
settlement  payments  on the  agreement  were  received in  accordance  with the
agreement in April, 1995.

    Deferred taxes on securities were $.3 million at December 31, 1995 a decline
of $4.0 million,  or 92.8%, from December 31, 1994 figures.  This is the related
tax effect of the unrealized  losses in the  securities  portfolio and is netted
against these losses in the  shareholders'  equity section of the balance sheet.
Deferred taxes, other than securities,  decreased $.9 million, or 17.3%, in 1995
compared to 1994.

Deposits

    Total deposits at December 31, 1995 were $845.6  million  compared to $830.6
million at  December  31,  1994.  From  year- end 1994 to  year-end  1995,  time
deposits increased $65.5 million,  while savings account balances declined $49.8
million.  Interest checking and money market accounts decreased by $6.1 million.
Management  attributes the shift in deposit mix to the generally higher interest
rate  environment  of 1994 and early 1995,  attracting  deposit  customers  into
longer-term, higher yielding time deposits.

    Comparing  average  deposit  balances to the previous year, the  Corporation
experienced an increase of $20.8 million.
<PAGE>
Other Interest-Bearing Liabilities

    Short-term  debt includes  Federal funds  purchased,  securities  sold under
repurchase  agreements,  Treasury  tax and loan notes and Federal Home Loan Bank
advances. Total short-term debt at year-end 1995 was $111.7 million, compared to
$23.2  million at December 31, 1994.  Long-term  debt was in the form of a seven
year principal reducing credit (Federal Home Loan Bank advance) acquired in 1995
as an offset to  specific  fixed  rate  lending  at one  affiliate  bank.  As of
December 31, 1995, long-term debt totaled $929 thousand.


7% Convertible Subordinated Debentures

    On September  12, 1995,  MainStreet  BankGroup  Incorporated  called for the
redemption,  on October  13,  1995,  of all of its  outstanding  7%  Convertible
Subordinated  Debentures Due 2011 (the "debentures").  At such date,  $8,043,000
principal  amount of  Debentures  were  outstanding.  The  redemption  price was
$1,014.00 plus accrued  interest of $34.61 from April 15, 1995 to the redemption
date,  for a  total  of  $1,048.61  for  each  $1,000  of  principal  amount  of
Debentures.  No interest would accrue on the  Debentures  from and after October
13, 1995 and holders of outstanding Debentures would not have any rights as such
holders other than the right to receive the redemption price, without additional
interest, upon surrender of their Debentures.

    The Debentures were  convertible at any time on and prior to October 5, 1995
into shares of the Company's  Common Stock at a conversion rate of 109.89 shares
of common stock for each $1,000 principal amount of Debentures  (equivalent to a
conversion  price of $9.10 per share).  Holders  converting  Debentures were not
entitled to receive interest from April 15, 1995.

    The  Corporation  also  entered  into a  Standby  Agreement  with  Scott and
Stringfellow,  Incorporated, a broker/dealer headquartered in Richmond, Virginia
providing  that  Debentures not converted by the holders  would,  in effect,  be
converted by Scott and  Stringfellow  and the  resulting  Common Stock sold in a
public  offering.  All  debentures  were  converted  into 883,678  shares of the
Corporation's Common Stock.

    The  Corporation  registered  Common  Stock  offered  in  conversion  of the
Debentures  with  the  Securities  and  Exchange  Commission  (Registration  No.
33-62557).


Shareholders' Equity

    Total  shareholders'  equity,  excluding  unrealized  losses on  securities,
increased by $18.9 million in 1995 to $99.3  million at year-end.  Dividends per
share for 1995 were $.37  compared  to $.31 for 1994.  At  year-end  1995,  core
capital (Tier 1) was 9.26% of assets  against 8.43% at December 31, 1994.  Total
capital  to risk  based  assets was 16.30%  versus  16.07% the prior  year.  Our
capital  position  remains  strong with ratios  substantially  above  regulatory
prescribed minimums.

    Financial  reporting in  accordance  with  Statement  of  Financial  Account
Standards (SFAS) No. 115 requires an adjustment to shareholders'  equity for net
unrealized  losses  in  the  "available-for-sale"   securities  portfolio.  This
adjustment  at  December  31, 1995 and 1994,  was $.6 million and $8.3  million,
respectively. After the adjustment, total shareholders' equity was $98.7 million
and $72.0 million at December 31, 1995 and 1994, respectively.
<PAGE>
Item 8.  Financial Statements and Supplementary Data




                        Report of Independent Accountants






To the Board of Directors and Shareholders
MainStreet BankGroup Incorporated:

We have  audited the  accompanying  consolidated  balance  sheets of  MainStreet
BankGroup  Incorporated  and  Subsidiaries as of December 31, 1996 and 1995, and
the related consolidated  statements of income, changes in shareholders' equity,
and cash flows for each of the two years in the period ended  December 31, 1996.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these financial  statements based
on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
MainStreet  BankGroup  Incorporated and Subsidiaries as of December 31, 1996 and
1995, and the consolidated  results of their operations and their cash flows for
each of the two years in the period ended December 31, 1996, in conformity  with
generally accepted accounting principles.

Separate  financial   statements  of  MainStreet   BankGroup   Incorporated  and
Subsidiaries, Hanover Bank, and The First National Bank of Clifton Forge for the
year ended  December  31,  1994,  which have been  combined  to reflect the 1996
pooling  of  interests  described  in Note  2,  were  audited  and  reported  on
separately by other auditors prior to their  combination  herein. We audited the
combination of the accompanying  consolidated  statements of income,  changes in
shareholders' equity and cash flows for the year ended December 31, 1994; in our
opinion,  such consolidated  statements have been properly combined on the basis
described in Note 2 of notes to consolidated financial statements.



                                                    /s/Coopers & Lybrand L.L.P.
                                                    ---------------------------
                                                    COOPERS & LYBRAND L.L.P.


Greensboro, North Carolina
January 17, 1997
<PAGE>





                          Independent Auditors' Report








To the Board of Directors and Shareholders MainStreet BankGroup Incorporated:



We have audited the consolidated  statements of income, changes in shareholders'
equity,  and cash flows of MainStreet  BankGroup  Incorporated  and subsidiaries
(formerly Piedmont BankGroup Incorporated and subsidiaries)  (BankGroup) for the
year ended December 31, 1994 (not presented herein),  prior to their restatement
to reflect the 1996 poolings of interests as described in Note 2 of the notes to
the December 31, 1996 consolidated  financial  statements included in the annual
report  on  Form  10-K.  These   consolidated   financial   statements  are  the
responsibility of BankGroup's  management.  Our  responsibility is to express an
opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance  about  whether  the  consolidated  financial  statements  are free of
material  misstatement.  An audit includes examining,  on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audit  provides a  reasonable  basis for our
opinion.

In our opinion, the  consolidated  financial  statements  referred to above (not
presented  herein)  present  fairly,  in all material  respects,  the results of
operations and cash flows of MainStreet BankGroup  Incorporated and subsidiaries
for the year ended  December 31, 1994, in  conformity  with  generally  accepted
accounting principles.




                                                       /s/KPMG Peat Marwick LLP
                                                       ------------------------
                                                       KPMG PEAT MARWICK LLP


Roanoke, Virginia
January 20, 1995,  except as to Note 21 
to the  December  31, 1994  consolidated
financial statements which is as of
February 28, 1995
<PAGE>








                          Independent Auditors' Report







To the Board of Directors
The First National Bank of Clifton Forge:


We have audited the statements of income,  stockholders'  equity, and cash flows
of The First  National  Bank of Clifton  Forge for the year ended  December  31,
1994.  These  financial   statements  are  the   responsibility  of  the  Bank's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
amounts and  disclosures  in the  financial  statements.  An audit also includes
assessing  accounting   principles  used  and  significant   estimates  made  by
management,  as well as evaluating overall financial statement presentation.  We
believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the results of  operations  and cash flows of The First
National  Bank of  Clifton  Forge  for  the  year  ended  December  31,  1994 in
conformity with generally accepted accounting principles.



                                                  /s/Persinger & Company, L.L.C.
                                                  ------------------------------
                                                  Persinger & Company, L.L.C.



Covington, Virginia
January 5, 1995
<PAGE>






                          Independent Auditors' Report










To the Board of Directors of Hanover Bank:



We have audited the consolidated balance sheet of Hanover Bank and subsidiary as
of  December  31,  1994  and the  related  consolidated  statements  of  income,
stockholders'  equity, and cash flow for the year then ended. These consolidated
financial  statements  are the  responsibility  of the  Bank's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the financial position of Hanover Bank and subsidiary as of
December 31, 1994,  and the results of their  operations and their cash flow for
the year then ended in conformity with generally accepted accounting principles.






                                                        /s/Deloitte & Touche LLP
                                                        ------------------------
                                                        Deloitte & Touche LLP



Richmond, Virginia
January 12, 1995
<PAGE>
<TABLE>
<CAPTION>
                  MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
                              CONSOLIDATED BALANCE SHEETS
                             (In 000's Except Share Data)

                                                                            December 31
                                                                 ---------------------------
                                                                     1996            1995
                                                                 -----------     -----------
<S>                                                              <C>             <C>
ASSETS
Cash and Due From Banks .....................................    $    37,972     $    31,497
Interest-Earning Deposits In Domestic Banks .................            518             875
Mortgage Loans Held for Sale ................................            742           1,780
Federal Funds Sold ..........................................           --             9,560
Securities Available for Sale (Aggregate
   Costs  of $333,770 and $211,003
   in 1996 and 1995, respectively) ..........................        335,023         211,970
Securities Held to Maturity (Aggregate
   Market Values of $92,709 and
   $116,830 in 1996 and 1995, respectively)
      Taxable ...............................................         52,314          70,379
      Nontaxable ............................................         38,205          41,802
                                                                 -----------     -----------
                                                                      90,519         112,181

Loans, Net of Unearned Income and Deferred Fees .............        784,367         673,678
   Less: Allowance for Loan Losses ..........................        (10,195)         (9,036)
                                                                 -----------     -----------
      Loans, Net ............................................        774,172         664,642

Bank Premises and Equipment, Net ............................         14,932          13,589
Other Real Estate Owned .....................................            905           1,743
Other Assets ................................................         34,054          17,035
                                                                 -----------     -----------

      TOTAL ASSETS ..........................................    $ 1,288,837     $ 1,064,872
                                                                 ===========     ===========
LIABILITIES
Deposits:
   Demand Deposits (Noninterest-Bearing) ....................    $   120,989     $   113,417
   Interest Checking Accounts ...............................         99,834          93,478
   Savings Deposits .........................................        121,336         133,074
   Money Market Investment Accounts .........................         81,946          78,920
   Time Deposits:
      Certificates of Deposit $100,000 and Over .............         90,189          76,965
      Other .................................................        372,225         349,723
                                                                 -----------     -----------
     Total Deposits .........................................        886,519         845,577

Short-Term Debt .............................................        213,799         111,736
FHLB Advances, Callable 2/97 ................................         45,000            --
Long-Term Debt ..............................................         26,029             929
Accrued Interest Payable ....................................          4,002           3,095
Other Liabilities ...........................................          5,012           4,878
                                                                 -----------     -----------

      TOTAL LIABILITIES .....................................      1,180,361         966,215
                                                                 -----------     -----------
<PAGE>
<CAPTION>
                       MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
                                  CONSOLIDATED BALANCE SHEETS
                            (In 000's Except Share Data)(continued)

                                                                            December 31
                                                                 ---------------------------
                                                                     1996            1995
                                                                 -----------     -----------
<S>                                                              <C>             <C>

SHAREHOLDERS' EQUITY
Preferred Stock, $5 Par Value.  Authorized 1,000,000 Shares;
   None Outstanding .........................................           --              --
Common Stock, $5 Par Value.  Authorized 20,000,000 Shares;
   Issued and Outstanding 11,342,248 and 11,356,811 Shares in
   1996 and 1995, respectively ..............................         56,711          56,784
Capital in Excess of Par ....................................          5,799           6,430
Retained Earnings ...........................................         46,115          36,040
Unearned Compensation .......................................           (338)           --
Unrealized Gains (Losses) on Securities, Net of Taxes .......            189            (597)
                                                                 -----------     -----------

      TOTAL SHAREHOLDERS' EQUITY ............................        108,476          98,657
                                                                 -----------     -----------

      TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............    $ 1,288,837     $ 1,064,872
                                                                 ===========     ===========



See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                       MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
                               CONSOLIDATED STATEMENTS OF INCOME
                                (In 000's Except Per Share Data)



                                                                    Years Ended December 31
                                                            ----------------------------------
                                                              1996         1995         1994
                                                            --------     --------     --------
<S>                                                         <C>          <C>          <C>
INTEREST INCOME
Interest and Fees on Loans:
   Taxable ............................................     $ 69,465     $ 60,250     $ 50,490
   Nontaxable .........................................           92          163          191
Interest on Mortgage Loans Held for Sale ..............          168          144          514
Interest and Dividends on Securities Available for Sale       16,382       10,248       14,407
Interest and Dividends on Securities Held to Maturity:
   Taxable ............................................        4,346        7,075          847
   Nontaxable .........................................        2,252        2,641        2,910
Other Interest Income .................................          597          648          718
                                                            --------     --------     --------
   Total Interest Income ..............................       93,302       81,169       70,077
                                                            --------     --------     --------

INTEREST EXPENSE
Deposits ..............................................       33,545       33,044       27,960
Short-Term Debt .......................................        6,155        3,196          594
Long-Term Debt ........................................        3,155           63         --
7% Convertible Subordinated Debentures ................         --            454          643
                                                            --------     --------     --------
Total Interest Expense ................................       42,855       36,757       29,197
                                                            --------     --------     --------
   Net Interest Income ................................       50,447       44,412       40,880
Provision for Loan Losses .............................        3,276        1,419        3,091
                                                            --------     --------     --------
   Net Interest Income After Provision for Loan Losses        47,171       42,993       37,789
                                                            --------     --------     --------

NONINTEREST INCOME
Service Charges, Fees and Other .......................        7,476        6,042        5,364
Trust Department Income ...............................        2,942        2,441        2,025
Securities Gains (Losses), Net ........................          610           43       (5,665)
                                                            --------     --------     --------
Total Noninterest Income ..............................       11,028        8,526        1,724
                                                            --------     --------     --------
<PAGE>
<CAPTION>
                       MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
                               CONSOLIDATED STATEMENTS OF INCOME
                          (In 000's Except Per Share Data)(continued) 



                                                                    Years Ended December 31
                                                            ----------------------------------
                                                              1996         1995         1994
                                                            --------     --------     --------
<S>                                                         <C>          <C>          <C>
NONINTEREST INCOME
Salaries ..............................................       13,573       12,976       11,901
Employee Benefits .....................................        5,478        4,271        3,890
Net Occupancy .........................................        1,685        1,736        1,806
Equipment .............................................        3,778        3,479        3,075
FDIC Assessment .......................................           14        1,014        1,852
Stationery and Supplies ...............................          922          898          768
Advertising ...........................................          600          329          453
Other .................................................        9,298        7,758        8,328
                                                            --------     --------     --------
Total Noninterest Expense .............................       35,348       32,461       32,073
                                                            --------     --------     --------
       Income Before Income Taxes .....................       22,851       19,058        7,440
Income Tax Expense ....................................        7,118        5,566          843
                                                            --------     --------     --------

NET INCOME ............................................      $15,733     $ 13,492     $  6,597
                                                            ========     ========     ========

Per Share:
Primary:
   NET INCOME .........................................     $   1.37     $   1.26     $    .63
                                                            ========     ========     ========

   Average Shares Outstanding .........................       11,460       10,744       10,410
                                                            ========     ========     ========

Fully Diluted:
   NET INCOME .........................................     $   1.37     $   1.21     $    .62
                                                            ========     ========     ========

   Average Shares Outstanding .........................       11,463       11,450       11,416
                                                            ========     ========     ========





See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                         MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
                                     CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                           (In 000's Except for Share and Per Share Data)



                                                                                                          Unrealized
                                                                                                           Gains
                                                Common       Capital In      Retained      Unearned      (Losses) on
                                                 Stock      Excess of Par    Earnings     Compensation   Securities, Net     Total
                                                 -----      -------------    --------     ------------   ---------------     -----
<S>                                            <C>            <C>            <C>            <C>            <C>            <C>
Year Ended December 31, 1994
Balance at January 1, 1994 as
 previously reported .....................     $  18,548      $   4,231      $  34,345      $    --        $    --        $  57,124
Adjustments for Pooling of Interests .....        14,109         (5,310)        10,121           --               11         18,931
                                               ---------      ---------      ---------      ---------      ---------      ---------
Balance at January 1, 1994 as restated ...        32,657         (1,079)        44,466           --               11         76,055
Cumulative effect of change in accounting
for securities at January 1, 1994, net of
 deferred income tax expense of $1,515 ...          --             --             --             --            2,941          2,941
Net Income ...............................          --             --            6,597           --             --            6,597
Cash Dividends ($.31 Per Share) ..........          --             --           (3,219)          --             --           (3,219)
Sale of 52,566 Shares Through Dividend
   Reinvestment Plan and Stock Option Plan           131            400           --             --             --              531
Stock Grants Awarded (8,000 Shares) ......            20             62           --             --             --               82
Conversion of Subordinated Debentures
   (30,318 Shares) .......................            76            200           --             --             --              276
Change in unrealized gains (losses) on
securities, net of deferred income tax
benefit of  $5,805 .......................          --             --             --             --          (11,269)       (11,269)
                                               ---------      ---------      ---------      ---------      ---------      ---------
Balance at December 31, 1994 .............        32,884           (417)        47,844           --           (8,317)        71,994



Year Ended December 31, 1995
Net Income ...............................          --             --           13,492           --             --           13,492
Cash Dividends ($.37 Per Share) ..........          --             --           (3,960)          --             --           (3,960)
Sale of 45,228 Shares Though Dividend
   Reinvestment Plan and Stock Option Plan           114            411           --             --             --              525
Conversion of Subordinated Debentures
   (979,820 Shares) ......................         2,450          6,436           --             --             --            8,886
Change in unrealized gains (losses) on
 securities, net of deferred income tax
 expense of $3,977 .......................          --             --             --             --            7,720          7,720
Stock Split Effected in the Form of
  a Stock Dividend .......................        21,336           --          (21,336)          --             --              --
                                               ---------      ---------      ---------      ---------      ---------      ---------
Balance at December 31, 1995 .............        56,784          6,430         36,040           --             (597)        98,657
<PAGE>
<CAPTION>
                                         MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
                                     CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                           (In 000's Except for Share and Per Share Data)
                                                             (continued)


                                                                                                          Unrealized
                                                                                                           Gains
                                                Common       Capital In      Retained      Unearned      (Losses) on
                                                 Stock      Excess of Par    Earnings     Compensation   Securities, Net     Total
                                                 -----      -------------    --------     ------------   ---------------     -----
<S>                                            <C>            <C>            <C>            <C>            <C>            <C>
Year Ended December 31, 1996
Net Income ...............................          --             --           15,733           --             --           15,733
Cash Dividends ($.49 Per Share) ..........          --             --           (5,562)          --             --           (5,562)
Cash Paid for Cash Election and Fractional
     Shares for Mergers ..................          (666)        (1,632)          --             --             --           (2,298)
Sale of 99,490 Shares Through Dividend
   Reinvestment Plan and Stock Option Plan
   including effect of stock split .......           593          1,001            (96)          --             --            1,498
Unearned Compensation ....................          --             --             --             (338)          --             (338)
Change in unrealized gains (losses) on
securities, net of deferred income
 tax expense of $423 .....................          --             --             --             --              786            786
                                               ---------      ---------      ---------      ---------      ---------      ---------
Balance at December 31, 1996 .............     $  56,711      $   5,799      $  46,115      $    (338)     $     189      $ 108,476
                                               =========      =========      =========      =========      =========      =========





See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                              MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
                                    CONSOLIDATED STATEMENTS OF CASH FLOWS



                                                                              Years Ended December 31
                                                                       ------------------------------------- 
                                                                           1996          1995          1994
                                                                       ---------     ---------     ---------
<S>                                                                    <C>           <C>           <C>
Cash Flows From Operating Activities:

Net Income ........................................................    $  15,733     $  13,492     $   6,597
Adjustments to Reconcile Net Income to Net Cash Provided
   by Operating Activities:
     Provision for Loan Losses ....................................        3,276         1,419         3,091
     Depreciation and Amortization ................................        2,426         2,203         2,093
     Amortization of Securities Premiums and Discounts, Net .......          162          (326)          159
     Provision for Deferred Income Taxes ..........................         (431)          743        (1,392)
     (Gain) Loss on Sale of Securities, Net .......................         (610)          (43)        5,665
     Amortization of Intangibles ..................................          227           267           295
     Mortgage Loan Originations Held for Sale .....................      (12,943)      (10,914)      (10,651)
     Mortgage Loans Sold ..........................................       13,981         9,655        21,214
     Changes in Other Assets and Other Liabilities:
        Other Assets ..............................................       (2,058)        3,409           516
        Accrued Interest ..........................................          907           701           294
        Accrued Loss Contingencies ................................         --          (1,341)         --
        Other Liabilities .........................................          134           950        (1,324)
                                                                       ---------     ---------     ---------

Net Cash Provided by Operating Activities: ........................       20,804        20,215        26,557
                                                                       ---------     ---------     ---------


Cash Flows From Investing Activities:

Net (Increase) Decrease in Federal Funds Sold .....................        9,560        (4,250)       26,785
(Increase) Decrease in Interest-Earning Deposits ..................          357          (825)          250
Purchases of Securities Available for Sale ........................     (292,043)      (90,796)      (29,855)
Purchases of Securities Held to Maturity ..........................       (2,396)      (14,944)      (90,695)
Proceeds from Sale of Securities Available for Sale ...............      122,806        28,915        89,159
Proceeds from Calls and Maturities of Securities Available for Sale       46,679        22,115        12,913
Proceeds from Calls and Maturities of Securities Held to Maturity .       25,207        21,855         4,961
Net Increase in Loans .............................................     (112,806)      (80,034)      (68,698)
Purchases of Bank Premises and Equipment ..........................       (3,769)       (2,322)       (3,695)
Proceeds from Sale of Bank Premises and Equipment .................         --               2          --
Net Decrease in Other Real Estate .................................          838           709         2,566
Increase in Other Assets ..........................................      (15,167)         --            --
                                                                       ---------     ---------     ---------

Net Cash Used in Investing Activities .............................     (220,734)     (119,575)      (56,309)
                                                                       ---------     ---------     ---------
<PAGE>
<CAPTION>
                              MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
                                    CONSOLIDATED STATEMENTS OF CASH FLOWS



                                                                              Years Ended December 31
                                                                       ------------------------------------- 
                                                                           1996          1995          1994
                                                                       ---------     ---------     ---------
<S>                                                                    <C>           <C>           <C>
Cash Flows From Financing Activities:

Net Increase in Deposits ..........................................       40,942        14,980        33,822
Net Increase in Short-Term Debt ...................................      102,063        88,523         3,244
Increase in FHLB Advances Callable 2/97 ...........................       45,000          --            --
Increase in Long-Term Debt ........................................       25,100           929          --
Cash Dividends ....................................................       (5,562)       (3,960)       (3,219)
Cash Paid in Lieu of Common Stock at Acquisition ..................       (2,298)         --            --
Net Expenses Incurred for Debenture Conversion ....................         --             (32)         --
Proceeds From Issuance of Common Stock ............................        1,160           525           613
                                                                       ---------     ---------     ---------

Net Cash Provided by Financing Activities .........................      206,405       100,965        34,460
                                                                       ---------     ---------     ---------

Net Increase in Cash and Due From Banks ...........................        6,475         1,605         4,708
Cash and Due From Banks at Beginning of Year ......................       31,497        29,892        25,184
                                                                       ---------     ---------     ---------

Cash and Due From Banks at End of Year ............................    $  37,972     $  31,497     $  29,892
                                                                       =========     =========     =========



See Notes to Consolidated Financial Statements.

</TABLE>
<PAGE>
               MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                 December 31, 1996 and 1995 and For Each of the
                Three Years in the Period Ended December 31, 1996


NOTE 1 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation.  The consolidated  financial statements include the
accounts of MainStreet BankGroup Incorporated and its subsidiaries  (BankGroup).
All significant intercompany accounts and transactions have been eliminated.

Cash  Equivalents.  For  purposes  of the  Statement  of Cash  Flows,  BankGroup
considers all Cash and Due From Bank accounts to be cash equivalents.

Mortgage  Loans Held for Sale.  Mortgage  loans held for sale are carried at the
lower of  aggregate  cost or market  value.  Adjustments  to market and realized
gains and losses are classified as other income in the accompanying consolidated
statements of income.

Loan  Servicing.  Mortgage  loans  serviced  for others are not  included in the
accompanying consolidated statements of condition. The unpaid principal balances
of  mortgage  loans  serviced  for  others  was  $89,599,000,   $97,639,000  and
$105,510,000  at  December  31,  1996,  1995 and 1994,  respectively.  Beginning
January 1, 1996,  BankGroup adopted Statement of Financial  Accounting Standards
(SFAS) No. 122,  "Accounting for Mortgage Servicing Rights".  The effect of SFAS
No. 122 was immaterial for 1996.

Securities.  BankGroup  classifies and accounts for its  investments in debt and
equity securities as follows:

-    Debt  securities that BankGroup has the positive intent and ability to hold
     to maturity are  classified as held to maturity  securities and reported at
     amortized cost.
-    Debt and equity  securities  that are bought and held  principally  for the
     purpose  of  selling  them in the  near  term  are  classified  as  trading
     securities  and reported at fair value,  with  unrealized  gains and losses
     included in earnings. BankGroup does not currently engage in any securities
     trading activity.
 -   Debt and  equity  securities  not  classified  as either  held to  maturity
     securities or trading securities are classified as securities available for
     sale and reported at fair value,  with unrealized gains and losses excluded
     from earnings and reported as a separate component of shareholders' equity.

Securities  are  classified at purchase  date under the specific  identification
method.

Gains  and  losses  on  securities  sales are  realized  in the  period in which
incurred.  Amortization  and accretion of premiums and discounts are included in
income over the contractual life of the securities.
<PAGE>
Loans.  Interest on loans is computed by methods which generally result in level
rates of return on principal amounts outstanding. Loans are placed on nonaccrual
status when it becomes  probable that the borrower will have difficulty  meeting
either  interest  or  principal  payments  and the loan is not in the process of
collection and is not well collateralized.  For loans placed on nonaccrual,  all
interest  accrued in the current  fiscal year is reversed  against  income while
prior year accrued  interest is charged  against the  allowance for loan losses.
For payments on nonaccrual  loans and impaired loans,  amounts are applied first
as a recovery of principal and then as interest under the cost recovery method.

BankGroup  collectively reviews for impairment all consumer loans, single family
loans  and  performing  multi-family  and  non-residential  real  estate  loans,
excluding  loans  which  have  entered  into the  "workout  process".  BankGroup
considers a loan to be impaired when, based upon current information and events,
it believes it is probable that  BankGroup will be unable to collect all amounts
due  according  to the  contractual  terms  of the loan  agreement.  BankGroup's
impaired loans include nonaccrual loans (excluding those  collectively  reviewed
for impairment),  troubled debt restructurings,  and certain other nonperforming
loans. For collateral dependent loans,  BankGroup bases the measurement of these
impaired loans on the fair value of the loan's  collateral  properties.  For all
other loans, BankGroup bases the measurement of these impaired loans on the more
readily  determinable  of the  present  value  of  expected  future  cash  flows
discounted at the loan's effective interest rate or the observable market price.
Impairment  losses are recognized  through an increase in the allowance for loan
losses and a corresponding charge to the provision for loan losses.  Adjustments
to  impairment  losses  due to  changes  in the fair  value of  impaired  loans'
collateral  properties  are included in the provision  for loan losses.  When an
impaired loan is either sold,  transferred to other real estate owned or written
down, any related  valuation  allowance is charged off against the allowance for
loan losses.

Loan Fees and Cost.  Loan  origination  and  commitment  fees and certain direct
origination  costs are deferred and are amortized over the  contractual  life of
the related loans using the level yield method.

Other Real  Estate.  Other real estate  comprises  properties  acquired  through
foreclosure  proceedings  or  acceptance of a deed in lieu of  foreclosure.  The
properties  are carried at the lower of cost or fair market  value less  selling
costs,  based on appraised  value.  Loan losses arising from the  acquisition of
such  properties  are  charged  against  the  allowance  for  loan  losses.  Any
subsequent write-downs are charged to expense.

Allowance for Loan Losses and  Valuation of Real Estate Owned.  An allowance for
loan losses is  maintained in order to provide for losses in collection of loans
that can be currently  estimated.  The level of the allowance for loan losses is
based upon the quality of the loan portfolios as determined by management  after
consideration of historical loan loss experience, diversification as to the type
of  loans in the  portfolios,  the  amount  of  collateralized  as  compared  to
uncollateralized  loans,  banking industry  standards and averages,  and general
economic  conditions.  In connection with the determination of the allowance for
loan  losses  and  the  valuation  of  real  estate  owned,  management  obtains
independent appraisals for significant properties.  Management believes that the
allowance  for loan losses and the  valuation of real estate owned are adequate.
While  management  uses available  information to recognize  losses on loans and
real  estate  owned,  future  additions  to the  allowance  for loan  losses and
additional  write-downs  in the  valuation of real estate owned may be necessary
based on changes in economic conditions.
<PAGE>
Bank Premises and Equipment. Bank premises and equipment are stated at cost less
accumulated  depreciation  and  amortization.  Provisions for  depreciation  are
computed using the straight-line  and accelerated  methods over estimated useful
lives  of 30 to 50  years  for  building  shells,  5 to 15  years  for  building
components and 3 to 10 years for furniture and equipment. Leasehold improvements
are amortized using the  straight-line  method over the shorter of the estimated
useful lives or the terms of the related leases. Maintenance,  repairs and minor
improvements are charged to operations as incurred, and significant improvements
are capitalized. Any gains or losses on disposition are reflected in operations.

Income Taxes.  Deferred tax assets and liabilities are recognized for the future
tax  consequences  attributable to differences  between the financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases and operating loss and tax credit  carryforwards.  Deferred tax assets and
liabilities  are measured  using enacted tax rates  expected to apply to taxable
income in the years in which  those  temporary  differences  are  expected to be
recovered  or settled.  The effect on deferred tax assets and  liabilities  of a
change in tax rates is  recognized  in income in the period  that  includes  the
enactment date.

Income Per Share.  Primary income per share is calculated  based on the weighted
average  number  of  shares  of  common  stock  and  common  stock   equivalents
outstanding during each period. Fully diluted income per share is computed using
weighted average shares outstanding  increased by common stock equivalents.  For
1995 and 1994  fully  diluted  income  per share  also  included  the  effect of
weighted  average  number of shares that would result from  assuming that all of
the 7% convertible  subordinated  debentures were converted into common stock at
the conversion  price of $9.10 as of the issuance date.  These  debentures  were
called in 1995. For purposes of calculating  fully diluted income per share, net
income was increased by eliminating  interest  expense and  amortization of debt
issuance expense, less the related tax effect relating to the debentures.  Stock
options  outstanding  have been  considered  common stock  equivalents for 1996,
1995, and 1994.  Share and per share data has been restated to reflect the stock
split.

Trust.  Trust income is recognized on the accrual basis of accounting and assets
held by  Trust  in a  fiduciary  or  agency  capacity  are not  included  in the
Consolidated Financial Statements as they are not assets of BankGroup.

Amortization of Intangibles. Identified intangible assets and the excess of cost
over the fair value of net tangible and identified  intangible  assets  acquired
are included in other assets in the  consolidated  balance  sheets and are being
amortized over periods ranging from three to twenty years, using accelerated and
straight-line  methods.  Net intangible  assets amounted to $.9 million and $1.1
million at December 31, 1996 and 1995, respectively.

Supplemental  Cash  Flow  Information.  Total  interest  paid in cash was  $41.9
million,  $36.0 million and $29.0 million for the years ended December 31, 1996,
1995 and 1994,  respectively.  Cash paid for income taxes was $7.9 million, $4.9
million and $3.7 million for the years ended  December 31, 1996,  1995 and 1994,
respectively.  Repossessed and foreclosed  properties  transferred to Other Real
Estate and Other Assets from Loans  amounted to $3.2  million,  $1.2 million and
$2.8 million in 1996, 1995 and 1994,  respectively.  During 1995,  debentures in
the amount of $8,918,000  were converted into 979,820 shares of common stock and
are included as noncash financing activities.  Unrealized gains on securities of
$1.2 million and $11.9 million are included as noncash  investing  activities in
1996 and 1995,  respectively.  During  1996,  stock  awards  were  granted  with
unearned  compensation at December 31, 1996 of $338 thousand and are included as
noncash financing activities.
<PAGE>
Reclassifications.  Certain reclassifications have been made to the prior years'
financial statements to conform to the 1996 presentation.

Use of Estimates.  The  preparation of financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

Impairment  of  Long-Lived  Assets.  In the event that  facts and  circumstances
indicate that the cost of the Company's  long-lived  assets may be impaired,  an
evaluation of recoverability would be performed. If an evaluation were required,
the estimated future  undiscounted cash flows associated with the asset would be
compared to the assets  carrying  amount to determine if a write-down  to market
value or discounted cash flow value is required.


NOTE 2 - MERGERS AND ACQUISITIONS

During  1996,  BankGroup  acquired  two banks as  subsidiaries  in  transactions
accounted  for as  pooling of  interests.  The first  acquisition  was The First
National  Bank of Clifton  Forge  ("Clifton  Forge")  in  September,  1996.  The
acquisition of Hanover Bank ("Hanover") was completed in November, 1996.

The  acquisition of Clifton Forge was completed by converting the 315,000 shares
of common stock  outstanding  into  approximately  1,481,644 shares of BankGroup
common stock based on a 4.89 exchange ratio. Approximately $999 thousand in cash
was paid in lieu of fractional shares and to shareholders who elected to receive
cash in lieu of the Company's common stock.

The  acquisition  of Hanover was  completed by  converting  1,471,536  shares of
common stock outstanding into approximately 1,226,304 shares of BankGroup common
stock based on a .884 exchange ratio.  Approximately $1,299 thousand in cash was
paid in lieu of  fractional  shares and to  shareholders  who elected to receive
cash in lieu of the Company's common stock.

Separate  results of the pooled entities for the nine months ended September 30,
1996 and for the years ended December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>

                                     September 1996        1995            1994
                                         -------         -------         -------
                                      (unaudited)
<S>                                      <C>             <C>             <C>
Total Income
     BankGroup .................         $65,328         $76,650         $60,691
     Clifton Forge .............           4,805           5,699           5,389
     Hanover ...................           6,336           7,346           5,721
                                         -------         -------         -------

     Combined ..................         $76,469         $89,695         $71,801
                                         =======         =======         =======

<PAGE>
<CAPTION>

                                     September 1996        1995            1994
                                         -------         -------         -------
                                      (unaudited)
<S>                                      <C>             <C>             <C>
Net Interest Income
     BankGroup .................         $31,359         $37,300         $34,299
     Clifton Forge .............           2,556           3,175           3,160
     Hanover ...................           3,382           3,937           3,421
                                         -------         -------         -------

     Combined ..................         $37,297         $44,412         $40,880
                                         =======         =======         =======


Net Income
     BankGroup .................         $ 9,879         $10,740         $ 4,088
     Clifton Forge .............             988           1,524           1,491
     Hanover ...................             989           1,228           1,018
                                         -------         -------         -------

     Combined ..................         $11,856         $13,492         $ 6,597
                                         =======         =======         =======
</TABLE>
NOTE 3 - SECURITIES AVAILABLE FOR SALE

The following  sets forth the  composition  of securities  available for sale at
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
                                                                             1996
                                                     -----------------------------------------------------
                                                                     Gross         Gross
                                                     Amortized    Unrealized     Unrealized    Approximate
                                                       Cost          Gains         Losses     Market Value
                                                     --------      --------      --------       --------
<S>                                                  <C>           <C>           <C>            <C>
U. S. Treasury Securities .....................      $  5,978      $     69      $     (1)      $  6,046
Obligations of U. S. Government Agencies ......        29,905            52          (404)        29,553
Mortgage Backed Securities ....................       218,451         2,236          (164)       220,523
Collateralized Mortgage Obligations and REMICs         48,601            36        (1,303)        47,334
Corporate Bonds ...............................        12,240           364           (78)        12,526
Other Securities ..............................         9,197           132          --            9,329
Obligations of State and Political Subdivisions         9,398           319            (5)         9,712
                                                     --------      --------      --------       --------
   Total Securities Available for Sale ........      $333,770      $  3,208      $ (1,955)      $335,023
                                                     ========      ========      ========       ========
<PAGE>
<CAPTION>
                                                                            1995
                                                     -----------------------------------------------------
                                                                    Gross        Gross
                                                    Amortized    Unrealized     Unrealized    Approximate
                                                      Cost          Gains        Losses      Market Value
                                                    --------      --------      --------       --------
<S>                                                 <C>           <C>           <C>            <C>

U. S. Treasury Securities ....................      $  5,465      $    141      $     (5)      $  5,601
Obligations of U. S. Government Agencies .....        51,825           396          (308)        51,913
Mortgage Backed Securities ...................        30,267           452           (31)        30,688
Collateralized Mortgage Obligations and REMICs        97,541           156        (1,445)        96,252
Corporate Bonds ..............................        13,908           693           (28)        14,573
Other Securities .............................         4,727           562          --            5,289
Obligations of State and
   Political Subdivisions ....................         7,270           391            (7)         7,654
                                                    --------      --------      --------       --------

   Total Securities Available for Sale .......      $211,003      $  2,791      $ (1,824)      $211,970
                                                    ========      ========      ========       ========
</TABLE>

As permitted under Financial  Accounting  Standards Board Statement  Number 115,
BankGroup  transferred  securities with a net book value of approximately  $13.8
million from the held to maturity  portfolio to the available for sale portfolio
upon  acquisition of Hanover.  The  unrealized  net loss on these  securities at
acquisition was approximately $66 thousand.

The carrying and approximate  market values of securities  available for sale at
December 31, 1996, by contractual maturity, are shown below. Expected maturities
may differ from contractual  maturities  because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
                                                        Amortized     Approximate
                                                          Cost        Market Value
                                                          ----        ------------
<S>                                                     <C>             <C>
Due in one year or less ........................        $  6,524        $  6,551
Due after one year but within five years .......          33,420          33,505
Due after five years but within ten years ......          15,965          16,165
Due after ten years ............................          10,809          10,945
Mortgage-Backed Securities .....................         218,451         220,523
CMOs/REMICs ....................................          48,601          47,334
                                                        --------        --------
   Total Securities Available for Sale .........        $333,770        $335,023
                                                        ========        ========
</TABLE>


Gross gains of  $855,000,  $81,000 and  $87,300  and gross  losses of  $295,000,
$64,000 and $5,757,600 were realized on sales and calls of securities  available
for sale for 1996, 1995 and 1994,  respectively.  Securities  available for sale
with carrying values  approximating $147 million and $88 million at December 31,
1996 and 1995,  respectively,  were  pledged to secure  public  deposits and for
other purposes as required or permitted by law.
<PAGE>
NOTE 4 - SECURITIES HELD TO MATURITY

The carrying and approximate market values and gross unrealized gains and losses
of securities held to maturity at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>


                                                                                 1996
                                                       --------------------------------------------------------
                                                                        Gross          Gross
                                                       Carrying      Unrealized     Unrealized      Approximate
                                                        Value           Gains         Losses       Market Value
                                                        -----           -----         ------       ------------
<S>                                                    <C>            <C>            <C>             <C>
U. S. Treasury Securities .....................        $ 2,494        $     4        $  --           $ 2,498
Obligations of U. S. Government Agencies ......         19,379          1,212           (142)         20,449
Mortgage Backed Securities ....................         27,495            521           (286)         27,730
Obligations of State and Political Subdivisions         41,151            977            (96)         42,032
                                                       -------        -------        -------         -------
    Total Securities Held to Maturity .........        $90,519        $ 2,714        $  (524)        $92,709
                                                       =======        =======        =======         =======

<CAPTION>
                                                                                 1995

                                                       --------------------------------------------------------
                                                                        Gross          Gross
                                                       Carrying      Unrealized     Unrealized      Approximate
                                                        Value           Gains         Losses       Market Value
                                                        -----           -----         ------       ------------
<S>                                                    <C>            <C>            <C>             <C>
U. S. Treasury Securities .....................        $  4,925       $    111        $   --         $  5,036
Obligations of U. S. Government Agencies ......          36,125          2,435             (24)        38,536
Mortgage Backed Securities ....................          23,543            820             (10)        24,353
Obligations of State and Political Subdivisions          45,297          1,448            (137)        46,608
Corporate Bonds ...............................           2,121             11              (5)         2,127
Other Securities ..............................             170           --              --              170
                                                       --------       --------        --------       --------
    Total Securities Held to Maturity .........        $112,181       $  4,825        $   (176)      $116,830
                                                       ========       ========        ========       ========

</TABLE>

At December 31, 1994, BankGroup  transferred  securities available for sale with
an  approximate  market  value of $72.5  million  and a carrying  value of $76.5
million to securities  held to maturity.  The unrealized  loss of  approximately
$4,038,000,  included as a separate  component of shareholders  equity, is being
amortized over the remaining life of the  securities.  At December 31, 1996 this
unrealized  loss was $1.0  million.  During  the  fourth  quarter  of 1995,  the
Financial  Accounting  Standards  Board  allowed  all  institutions  a one  time
opportunity to restructure their investment portfolios under the designations of
SFAS  No.  115,   "Accounting  for  Certain   Investments  in  Debt  and  Equity
Securities."  Management  took advantage of this  opportunity  by  redesignating
$35.7 million of "held to maturity" as "available  for sale" without any penalty
or tainting of the  remaining  "held to maturity"  portfolio.  These  securities
transferred had a net unrealized gain of approximately $279 thousand.
<PAGE>
The carrying and  approximate  market values of  securities  held to maturity at
December 31, 1996, by contractual maturity, are shown below. Expected maturities
may differ from contractual  maturities  because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>

                                                         Carrying     Approximate
                                                           Value      Market Value
                                                           -----      ------------
<S>                                                       <C>            <C>
Due in one year or less ..........................        $ 5,770        $ 5,801
Due after one year but within five years .........         19,667         20,873
Due after five years but within ten years ........         30,868         31,445
Due after ten years ..............................          6,719          6,860
Mortgage-Backed Securities .......................         27,495         27,730
                                                          -------        -------
                                                          $90,519        $92,709
                                                          =======        =======
</TABLE>


Gross gains of $63,000,  $31,000,  and $5,000 and gross losses $13,000,  $5,000,
and $0 were realized on calls of securities held to maturity for 1996, 1995, and
1994,  respectively.  Securities with carrying values  approximating $39 million
and $29 million at December  31, 1996 and 1995,  respectively,  were  pledged to
secure public  deposits and for other  purposes as required or permitted by law.

NOTE 5 - LOANS AND ALLOWANCE FOR LOAN LOSSES

Major  classifications  of loans at December  31,  1996 and 1995 are  summarized
below:
<TABLE>
<CAPTION>


                                                             1996         1995
                                                           --------     --------
<S>                                                        <C>          <C>
Commercial ...........................................     $349,834     $276,532
Real Estate ..........................................      206,453      212,182
Consumer .............................................      242,211      197,188
                                                           --------     --------
   Total Loans .......................................      798,498      685,902
   Less:  Unearned Income and Deferred Fees ..........       14,131       12,224
                                                           --------     --------
     Loans, Net of Unearned Income and Deferred Fees .      784,367      673,678
   Less:  Allowance for Loan Losses ..................       10,195        9,036
                                                           --------     --------
     Loans, Net ......................................     $774,172     $664,642
                                                           ========     ========
</TABLE>
<PAGE>
A summary  of  changes in the  allowance  for loan  losses for each of the three
years in the period ended December 31, 1996 follows:
<TABLE>
<CAPTION>


                                               1996          1995          1994
                                           --------      --------      --------
<S>                                        <C>           <C>           <C>

Balance at Beginning of Year .........     $  9,036      $  9,160      $  9,035
Provision for Loan Losses ............        3,276         1,419         3,091
Losses Charged to Allowance ..........       (3,209)       (1,975)       (3,639)
Recoveries Credited to Allowance .....        1,092           432           673
                                           --------      --------      --------
Balance at End of Year ...............     $ 10,195      $  9,036      $  9,160
                                           ========      ========      ========

</TABLE>
Nonperforming assets at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
                                                              1996         1995
                                                             ------       ------
<S>                                                          <C>          <C>
Nonaccrual Loans .....................................       $3,075       $3,383
Loans Past Due 90 Days or More .......................        3,061        2,396
                                                             ------       ------
Total Nonperforming Loans ............................        6,136        5,779
                                                             ------       ------
Other Real Estate Owned ..............................          905        1,743
Other Repossessed Assets .............................          169          148
                                                             ------       ------
Total Foreclosed/Repossessed Assets ..................        1,074        1,891
                                                             ------       ------
    Total Nonperforming Loans and Foreclosed/
    Repossessed Assets ...............................       $7,210       $7,670
                                                             ======       ======

</TABLE>

Nonperforming  loans  were .78% and .86% of loans,  net of  unearned  income and
deferred fees, at December 31, 1996 and 1995, respectively.

The effect of nonaccrual loans on interest income was as follows:
<TABLE>
<CAPTION>
                                                     1996       1995       1994
                                                    -----      -----      -----
<S>                                                 <C>        <C>        <C>

Gross amount of interest that would have been
     recorded at original rate ................     $ 397      $ 306      $ 270
Interest that was reflected in income .........      (189)       (11)       (14)
                                                    -----      -----      -----
Net impact on interest income .................     $ 208      $ 295      $ 256
                                                    =====      =====      =====
</TABLE>
<PAGE>
At December 31, 1996 and 1995, the recorded  investment in loans which have been
identified by BankGroup as impaired  loans in  accordance  with SFAS 114 totaled
$3.1 million and $3.4 million,  respectively,  and the total  allowance for loan
losses related to such loans was $.4 million and $.6 million,  respectively. The
average balance during 1996 and 1995 for impaired loans was  approximately  $2.8
million and $3.8 million,  respectively.  The total  interest  income related to
impaired  loans  reflected  in the  1996  and  1995  statements  of  income  was
approximately $184,000 and $6,000, respectively.



NOTE 6 - RELATED PARTY TRANSACTIONS

Directors,  officers and related  interests  provide the  subsidiary  Banks with
substantial  amounts  of  business  and many  are  among  its  most  significant
depositors  and  borrowers.  Total amounts  outstanding  for all such loans that
exceeded $60,000 individually are summarized below:
<TABLE>
<CAPTION>
                                                        1996              1995
                                                        ----              ----
<S>                                                  <C>               <C>
Balance at Beginning of Year ...............         $ 24,799          $ 28,715
Additions ..................................           13,539             8,133
Payments ...................................          (10,587)          (12,049)
                                                     --------          --------
Balance at End of Year .....................         $ 27,751          $ 24,799
                                                     ========          ========

</TABLE>

These loans, in the opinion of management,  are believed to involve no more than
normal risk of collectibility.  Total unfunded  commitments at December 31, 1996
were $5.3 million.


NOTE 7 - BANK PREMISES AND EQUIPMENT

Bank premises and equipment at December 31, 1996 and 1995 consist of:
<TABLE>
<CAPTION>
                                                           1996           1995
                                                           ----           ----
<S>                                                     <C>            <C>
Land .............................................      $  2,306       $  2,247
Buildings and Improvements .......................        12,096         10,997
Capital Lease ....................................           243           --
Furniture and Equipment ..........................        21,589         19,713
Construction in Progress .........................            88            140
Leasehold Improvements ...........................           959            709
                                                        --------       --------
                                                          37,281         33,806
Accumulated Depreciation and Amortization ........       (22,349)       (20,217)
                                                        --------       --------

Total Bank Premises and Equipment ................      $ 14,932       $ 13,589
                                                        ========       ========
</TABLE>
<PAGE>
NOTE 8 - INCOME TAXES

The components of income tax expense for the years ended December 31, 1996, 1995
and 1994 are as follows:
<TABLE>
<CAPTION>
                                            1996            1995            1994
                                            ----            ----            ----
<S>                                      <C>             <C>            <C>
Current Tax Expense .............        $ 7,549         $ 4,823        $ 2,235
Deferred Tax Expense ............           (431)            743         (1,392)
                                         -------         -------        -------
Income Tax Expense ..............        $ 7,118         $ 5,566        $   843
                                         =======         =======        =======
</TABLE>
The reasons for the differences in income tax expense and the statutory  Federal
income tax rate for the years ended 1996, 1995 and 1994 are as follows:

<TABLE>
<CAPTION>
                                                  1996         1995         1994
                                                  ----         ----         ----
<S>                                               <C>          <C>         <C>
Federal Income Tax Expense Rate .........         35.0%        35.0%        34.0%
Tax Exempt Interest .....................         (3.6)        (4.5)       (12.8)
IRS Intangibles Settlement ..............           --           --        (10.3)
Change in Marginal Tax Rate .............          (.5)        (1.5)          --
Acquisition Costs .......................          1.0           --           --
Other ...................................          (.8)          .2           .4
                                                  ----         ----         ----

         Effective Income Tax Rate ......         31.1%        29.2%        11.3%
                                                  ====         ====         ====
</TABLE>
<PAGE>
The  components  of net  deferred  tax assets at December  31, 1996 and 1995 are
presented below:
<TABLE>
<CAPTION>
                                                                  1996      1995
                                                                  ----      ----
                                                                    (In 000's)
<S>                                                             <C>       <C>
Deferred Tax Assets:

Allowance for Loan Losses and Unearned Fees ................    $3,861    $3,320
Unrealized Loss on Securities Available for Sale ...........      --         308
Other Real Estate Owned ....................................         1       425
Intangibles ................................................       967       935
Interest Earned Not Collected on Nonaccrual Loans Not
     Recognized for Financial Reporting Purposes ...........       116       149
Miscellaneous Accruals not Deductible for Tax Purposes .....       910       706
                                                                ------    ------
Total Gross Deferred Tax Assets ............................     5,855     5,843
                                                                ------    ------

Deferred Tax Liabilities:

Bank Premises and Equipment ................................       380       526
Securities, Due to Differences in Discount Accretion .......       243       254
Prepaid Expenses, Principally Due to Deduction Taken for
     Tax Purposes ..........................................       261       204
Unrealized Gain on Securities Available for Sale ...........       102      --
Other ......................................................       234       291
                                                                ------    ------
Total Gross Deferred Liabilities ...........................     1,220     1,275
                                                                ------    ------
Net Deferred Tax Assets ....................................    $4,635    $4,568
                                                                ======    ======
</TABLE>
NOTE 9 - SHORT-TERM AND LONG-TERM DEBT

At December  31, 1996 and 1995,  short-term  and long- term debt  consist of the
following:
<TABLE>
<CAPTION>
                                                             1996          1995
                                                             ----          ----
<S>                                                       <C>           <C>
Corporate Cash Management ..........................      $ 10,528      $ 10,801
Federal Funds Purchased ............................        23,200        31,310
Securities Sold Under Repurchase Agreements ........       145,356        37,127
Treasury Tax and Loan Notes ........................         5,065           148
Short-Term FHLB Borrowings .........................        27,350        32,350
Other Borrowings ...................................         2,300          --
                                                          --------      --------
     Total Short-Term Debt .........................      $213,799      $111,736
                                                          ========      ========

Long-Term FHLB Borrowings and Advances .............      $ 70,786      $    929
Capital Lease ......................................           243          --
                                                          --------      --------
     Total Long-Term Debt ..........................      $ 71,029      $    929
                                                          ========      ========
</TABLE>
<PAGE>
The average  outstanding  total  short-term  borrowings  were $119.1 million and
$57.4 million for 1996 and 1995,  respectively.  The weighted  average  interest
rates were 5.17% and 5.58% for 1996 and 1995, respectively. The weighted average
interest  rates in effect at year end were 5.66% and 5.63% at December  31, 1996
and 1995, respectively.

The maximum  month-end  balance of short-term debt was $235.9 million and $110.8
million  for  1996 and  1995,  respectively.  Securities  held to  maturity  and
securities  available for sale were pledged as collateral  for  securities  sold
under repurchase agreements.

The average  outstanding  total long-term  borrowings were $58.7 million and $.7
million for 1996 and 1995,  respectively.  The weighted  average  interest rates
were  5.38%  and 7.75% for 1996 and 1995,  respectively.  The  weighted  average
interest  rates in  effect  at year end were  5.07% and 7.75% for 1996 and 1995,
respectively.  The maximum month-end balance of long-term debt was $70.9 million
and $1.0 million for 1996 and 1995, respectively.

Long-term  FHLB  advances  and  borrowings  consist of fixed and  variable  rate
instruments.  Fixed rate advances and borrowings balances were $45.8 million and
$929 thousand for 1996 and 1995,  respectively.  $45.0 million of long-term debt
for 1996 matures February 1, 1999 and is callable  February 1, 1997. $.8 million
of the fixed rate  long-term  debt  matures  April 17, 2002 and has  semi-annual
principal  reductions.  The balance of the  long-term  FHLB debt,  $25  million,
matures March 14, 1997 and is variable rate based on the monthly LIBOR rate plus
 .05%. The capital lease of $.2 million  matures October 31, 2001 and interest is
calculated based on a fixed rate.

NOTE 10 -   REDEMPTION OF 7% CONVERTIBLE SUBORDINATED DEBENTURES

On September 12, 1995,  BankGroup  called for redemption on October 13, 1995 all
of  its  outstanding  7%  Convertible  Subordinated  Debentures  Due  2011  (the
"debentures").  At such date,  $8,043,000  principal  amount of Debentures  were
outstanding.  The redemption price was $1,014.00 plus accrued interest of $34.61
from April 15, 1995 to the  redemption  date,  for a total of $1,048.61 for each
$1,000 of  principal  amount of  Debentures.  No  interest  would  accrue on the
Debentures from and after October 13, 1995 and holders of outstanding Debentures
would not have any rights as such  holders  other than the right to receive  the
redemption  price,  without  additional   interest,   upon  surrender  of  their
Debentures. All debentures were converted into 883,678 shares of the BankGroup's
common stock which were subsequently registered with the Securities and Exchange
Commission.
<PAGE>
The  following  tabulation  sets forth the numbers of shares  used to  determine
earnings per share:
<TABLE>
<CAPTION>

                                                        1996      1995      1994
                                                        ----      ----      ----
<S>                                                    <C>       <C>       <C>
Primary Shares:
     Average Shares Outstanding ...................    11,397    10,682    10,397
     Common Shares Assumed Outstanding-Options ....        63        62        13
                                                       ------    ------    ------
         Total Primary Shares .....................    11,460    10,744    10,410
                                                       ======    ======    ======
Fully Diluted Shares:
     Average Shares Outstanding ...................    11,397    10,382    10,373
     Common Shares Assumed Outstanding - Options ..        66        62        13
     Common Shares Assumed Outstanding - Debentures       ---     1,006     1,030
                                                       ------    ------    ------
         Total Fully Diluted Shares ...............    11,463    11,450    11,416
                                                       ======    ======    ======

</TABLE>

For purposes of calculating  fully diluted income per share, net income has been
increased by eliminating interest expense and amortization of debt issuance cost
relating to the debentures, less the related tax effect.


NOTE 11 - EMPLOYEE BENEFIT PLANS

BankGroup  maintains a defined  benefit  retirement  plan for the benefit of its
employees  (not  directors).  This was a new plan  effective  May 1,  1995.  The
pension plans'  benefit  formulas  generally base payments to retired  employees
upon their length of service and a percentage of qualifying  compensation during
their final years of employment. Pension expense related to this defined benefit
plan was $795,000 and $457,000 for 1996 and 1995,  respectively.  The  following
table  sets  forth the  plans'  funded  status  and  amounts  recognized  in the
consolidated financial statements:
<TABLE>
<CAPTION>
                                                                       December 31    December 31
                                                                          1996           1995
                                                                          ----           ----
<S>                                                                     <C>             <C>
Actuarial present value of benefit obligation:
     Accumulated benefit obligation (including vested benefits
     of  $1,386,000 and $917,000 in 1996 and 1995, respectively)        $ 1,558         $   207
                                                                        =======         =======

     Projected benefit obligation for service rendered to date .         (2,257)         (1,436)
     Plan assets at fair value .................................          1,719             890
                                                                        -------         -------
     Funded status .............................................           (538)           (546)
     Unrecognized transition obligation ........................            146             146
     Unrecognized prior service costs ..........................            213             134
     Unrecognized net gain .....................................            (91)           (150)
                                                                        -------         -------
     Accrued pension costs .....................................        $  (270)        $  (416)
                                                                        =======         =======
</TABLE>
<PAGE>
Net pension cost for the defined  benefit plan  included the  following  expense
components:
<TABLE>
<CAPTION>
                                                             1996          1995
                                                             ----          ----
<S>                                                         <C>           <C>
Service cost .......................................        $ 757         $ 455
Interest cost ......................................          111            61
Actual Return on Assets ............................         (102)          (70)
Amortization of transition obligation ..............           29            11
                                                            -----         -----
Net pension expense included in employee benefits ..        $ 795         $ 457
                                                            =====         =====
</TABLE>

The  discount  rate  used in  determining  the  actuarial  present  value of the
projected benefit obligation and the expected long-term rate of return on assets
was 7.5% for 1996 and 8% for  1995.  The  assumed  rate of  increase  in  future
compensation levels used was 5.00%.

Effective October 1, 1995,  BankGroup  amended its discretionary  profit sharing
plan. All profit sharing  contributions ceased as of September 30, 1995. Pension
contributions continued as a matching of the 401-K deferral plan for the benefit
of the employees.  Under the amended plan,  BankGroup will  contribute an amount
equal to 50% of the first 6% of the compensation deferred by the employee.

Total profit sharing expense under the ceased plan for 1995 was $565,000.  Total
pension  expense for the  matching  401-K plan was $261,000 and $87,000 for 1996
and 1995, respectively.  Total expense related to all profit-sharing and pension
plans was approximately $.6 million in 1994.

BankGroup provides  supplemental  executive  retirement  policies for its senior
executive  officers.  These  policies  include  cash  value life  insurance  and
deferred  compensation.  BankGroup  also  provides  split dollar  insurance  for
certain key executives of the corporation.

In  addition to pension and profit  sharing  plans,  there is a health care plan
that provides  postretirement  medical benefits to full-time  employees who meet
minimum  age  and  service   requirements.   The  plan  is   contributory   with
contributions adjusted annually and contains other cost sharing features such as
deductibles.  BankGroup's  policy is to fund the costs of  medical  benefits  in
amounts determined at the discretion of management.  Net periodic postretirement
benefit costs were  $194,000,  180,000 and $194,000 for years ended December 31,
1996,  1995,  and 1994,  respectively.  BankGroup  has elected to  amortize  the
initial transition obligation of $1.2 million over 20 years.
<PAGE>
The following  table sets forth the plans' funded status and amounts  recognized
in the consolidated financial statements at December 31, 1996 and 1995:
<TABLE>
<CAPTION>

                                                          1996            1995
                                                          ----            ----
<S>                                                     <C>             <C>

Accumulated postretirement benefit obligations:
Retirees .......................................        $  (817)        $  (507)
Fully eligible active plan participants ........           (779)           (691)
                                                        -------         -------
Accumulated postretirement benefit obligation
     at December 31, 1996 and 1995 .............         (1,596)         (1,198)
Plan assets at fair value at December 31, 1996
     and 1995 ..................................           --              --
                                                        -------         -------
Accumulated postretirement benefit obligation in
     excess of plan assets .....................         (1,596)         (1,198)
Unrecognized transition obligation .............            963           1,023
Unrecognized net gain ..........................            (19)           (297)
                                                        -------         -------
Accrued postretirement benefit costs included in
     other liabilities .........................        $  (652)        $  (472)
                                                        =======         =======

</TABLE>

Net periodic  postretirement  benefit costs for 1996,  1995 and 1994 include the
following components:
<TABLE>
<CAPTION>
                                               1996          1995          1994
                                               ----          ----          ----
<S>                                           <C>           <C>           <C>
Service cost ............................     $  61         $  51         $  60
Interest cost ...........................        79            82            76
Amortization of transition obligation ...        60            61            60
Amortization of net gain ................        (6)          (14)           (2)
                                              -----         -----         -----
Net periodic postretirement benefit costs     $ 194         $ 180         $ 194
                                              =====         =====         =====

</TABLE>

The  weighted   average  discount  rate  used  in  determining  the  accumulated
postretirement  benefit  obligation  was 7.5%,  7.5%,  and 8.25% at December 31,
1996, 1995 and 1994, respectively.  For measurement purposes, the assumed health
care costs trend rates of increase  were 9.00%,  10% and 12% for 1996,  1995 and
1994, respectively, with gradually declining percentages to 5.50% (6.25% assumed
for 1994) by the year 2000 and  remaining at that level  thereafter.  The health
care cost trend rate  assumption  can have a  significant  effect on the amounts
reported.  For  example,  a 1% increase in the medical  trend  assumption  would
increase the accumulated  postretirement  benefit obligation by $11,000,  $6,000
and $83,000 as of  December  31,  1996,  1995 and 1994,  respectively.  It would
increase  the net  periodic  postretirement  benefit  costs for the years  ended
December 31, 1996, 1995 and 1994 by $3,000, $1,000 and $16,000, respectively.
<PAGE>
NOTE 12 - STOCK OPTION PLAN

In April 1985, the shareholders  approved a stock option plan which provides for
incentive  stock  options to purchase  shares of common  stock of  BankGroup  at
prices  equal to the fair  market  value of the stock at the date of the  grant.
Each option is accompanied by a Stock  Appreciation Right (SAR) issued in tandem
with the option so that the employee may elect to exercise  either the option or
the SAR, thereby canceling the other. SARs entitle the holder to receive payment
equal to the increase in market value of  BankGroup's  common stock from date of
grant to the date  exercised.  The maximum  number of shares subject to purchase
under the plan is 75,000.

In April 1991, the shareholders approved another stock option plan that had been
previously approved by the Board of Directors in November, 1990. The plan, known
as the 1990 Plan,  gives  BankGroup  the  authorization  to issue an  additional
250,000 stock options.  Each option is accompanied by a Stock Appreciation Right
(SAR)  issued  in  tandem  with the  option  so that the  employee  may elect to
exercise either the option or the SAR, thereby canceling the other.

In June 1994,  a stock  award of 8,000  shares was also  granted  under the 1990
Plan.  In 1996,  stock  awards were  granted for 35,072 and 2,000 in January and
April, respectively, from this plan. At December 31, 1996, unearned compensation
of $338 thousand  remained  relating to the unvested  portion of the stock award
granted in January.

On  January  1,  1996,  BankGroup  adopted  Statement  of  Financial  Accounting
Standards No. 123,  "Accounting for Stock Based  Compensation"  ("SFAS 123"). As
permitted by SFAS 123, BankGroup has chosen to continue to apply APB Opinion No.
25,   "Accounting  for  Stock  Issued  to  Employees"  ("APB  25")  and  related
Interpretations  in accounting for its Plans.  Accordingly,  compensation  costs
were  recognized  for the liability of the SAR's issued in tandem with the stock
options granted,  which is the most conservative approach. Had compensation cost
for BankGroup's Plans been determined based on the fair value at the grant dates
for awards under the Plans consistent with the method of SFAS 123, the impact on
BankGroup's net income and net income per share would not have been material.

In 1990, the Board of Directors of Hanover adopted a Non-Qualified  Stock Option
Plan  ("Hanover  Plan") which  provided for incentive  stock options to purchase
shares of Hanover common stock at the fair value of the common stock at the time
of the grant.  Upon the  acquisition  of Hanover by BankGroup,  the  outstanding
options  were  converted  based on the  exchange  ratio of .884 into  options to
acquire BankGroup common stock. The maximum number of shares subject to purchase
under the plan was 194,480.
<PAGE>
A summary of the status of BankGroup's  Plans as of December 31, 1996,  1995 and
1994 and changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>

                                               1996                       1995                           1994
                                               ----                       ----                           ----
                                             Weighted                   Weighted                       Weighted
                                              Average                    Average                        Average
                                   Shares   Exercise Price    Shares   Exercise Price     Shares     Exercise Price
                                   ------   --------------    ------   --------------     ------     --------------
<S>                               <C>        <C>            <C>           <C>           <C>            <C>

Outstanding at beginning of year  226,467    $ 6.8469        232,488      $  6.8277      161,206       $ 5.1365

Granted                             1,768     11.4530          9,003       11.5950        77,547        10.3702
Exercised                         (58,041)     5.2889         (8,344)       8.5096        (4,250)        9.0912
Forfeited                         (18,886)    11.1959         (6,680)      10.5000        (2,015)        7.0585
                                  -------                    -------                     -------

Outstanding at year-end           151,308      6.9558        226,467        6.8469       232,488         6.8277
                                  =======                    =======                     =======

Options exercisable at year-end   143,308      6.7717        214,467        6.6565       216,488         6.5748
                                  =======                    =======                     =======

</TABLE>

The following table summarizes the information about the Plan's stock options at
December 31, 1996:
<TABLE>
<CAPTION>
                                            Options Outstanding                           Options Exercisable
                               ------------------------------------------------     -------------------------------
                                  Number      Weighted-Average      Weighted           Number           Weighted
                               Outstanding      Remaining           Average          Exercisable        Average
Range of Exercise Prices       at 12/31/96    Contractual Life   Exercise Price     at 12/31/96      Exercise Price
------------------------       -----------    ----------------   --------------     -----------      --------------
<S>                             <C>            <C>                 <C>                <C>               <C>      
$4.1176                          84,156        3.15 years          $ 4.1176            84,156          $ 4.1176
$10.25 - $11.453                 67,152        3.31 years           10.5122            59,152           10.5476
                                -------                                               -------                  

                                151,308                                               143,308
                                =======                                               =======
</TABLE>
<PAGE>
NOTE 13 - PREFERRED SHARE PURCHASE RIGHTS

On January 18,1990,  the Board of Directors declared a dividend  distribution of
one Right for each outstanding  share of common stock,  payable January 29, 1990
to  stockholders  of record on that date.  Each Right  entitles  the  registered
holder to  purchase  from  BankGroup  1/100th  of a share of a newly  authorized
Participating  Cumulative Preferred Stock at an exercise price of $24 subject to
an antidilutive adjustment. Each unit of Preferred Stock is structured to be the
economic  equivalent  of one  share of  Common  stock.  The  Rights  will not be
exercisable or transferable apart from the common stock until the 10th day after
either a public  announcement  that a person  or group has  acquired  beneficial
ownership of 15% or more of the common stock or the announcement or commencement
of a tender offer for 15% or more of BankGroup common stock.

The Rights are not exercisable  until the  distribution  date and will expire on
January 18, 2000, unless earlier redeemed by BankGroup.  The agreement  provides
that if (a) an acquiring person purchases 30% or more of the outstanding  common
stock or (b) at any time  following  the  distribution  date,  BankGroup  is the
surviving  corporation in a merger with an acquiring person and its common stock
is not changed or exchanged or (c) an acquiring person effects a statutory share
exchange  with  BankGroup  after  which  BankGroup  is not a  subsidiary  of any
acquiring  person,  each holder of a Right will have the right to receive,  upon
payment of the purchase  price,  preferred  stock or common stock having a value
equal to twice the purchase price.

If  BankGroup is acquired or 50% or more of the  consolidated  assets or earning
power is sold,  each  holder of a Right  will have the  right to  receive,  upon
exercise at the then current exercise price of the Right,  that number of shares
of common stock of the  acquiring  company which has a market value of two times
the exercise price of the Right.

After the  acquisition  by a person or group of  beneficial  ownership of 15% or
more of the outstanding common stock,  BankGroup may redeem the Rights in whole,
but not in part,  at a price of $.01 per Right.  The  decision  to redeem  shall
require the concurrence of a majority of the continuing directors. Until a Right
is  exercised,  the holder will have no rights as a  shareholder  of  BankGroup.
These  statements  are  qualified  in their  entirety by reference to the Rights
Agreement,  a  copy  of  which  was  filed  with  the  Securities  and  Exchange
Commission.

<PAGE>
NOTE 14 - LEASE OBLIGATIONS

The  consolidated  balance  sheets  include a  capitalized  lease for  telephone
equipment.  Also,  each affiliate  Bank leases  certain  buildings and equipment
under operating lease arrangements expiring over periods of up to fifteen years.
Rent  expense  totaled  $870,700,  $664,000  and  $639,000  for the years  ended
December 31, 1996,  1995 and 1994,  respectively.  Future minimum  payments,  by
years and in the aggregate, under the capital lease and noncancellable operating
leases with  initial or remaining  terms in excess of one year  consisted of the
following at December 31, 1996:
<TABLE>
<CAPTION>
                                         Capital        Operating
                                         Leases           Leases
                                         ------           ------
                      <S>                 <C>             <C>
                      1997                $   63          $  807
                      1998                    63             678
                      1999                    63             557
                      2000                    63             164
                      2001                    53             124
                      Thereafter              --             214
                                          ------          ------

Total Minimum Lease Payments                 305          $2,544
                                          ------          ======

Less Amounts Representing Interest            62
                                          ------
Present Value of Minimum Lease Payments   $  243 
                                          ====== 

</TABLE>
NOTE 15 - REGULATORY REQUIREMENTS AND RESTRICTIONS

BankGroup's  principal  source  of funds  for  dividend  payments  is  dividends
received from its  subsidiary  banks.  Under the  applicable  federal laws,  the
Comptroller of the Currency (relating to BankGroup's  subsidiary banks which are
national  banking  associations)  restricts the total  dividend  payments of any
calendar  year,  without  prior  approval,  to the net  profits  of that year as
defined,  combined  with retained net profits for the two  preceding  years.  At
December 31, 1996,  retained net profits,  which were free of such  restriction,
amounted to $1.1 million.  Under the  applicable  laws of Virginia  (relating to
BankGroup's  subsidiary  banks which were organized under the laws of Virginia),
$43.1  million of  undivided  profits at December 31, 1996 were free of dividend
restrictions.  However, Virginia regulatory authorities may limit the payment of
dividends  by any state bank when it is  determined  such  limitation  is in the
public interest and is necessary to ensure the financial  soundness of the bank.
Substantially all the retained earnings of BankGroup (parent) are represented by
undistributed earnings of the subsidiary banks.

The Subsidiary Banks are members of the Federal Reserve System and, as such, are
required  to  maintain  certain  of their  cash and due from  bank  balances  as
reserves based on regulatory requirements.  The reserve requirement approximated
$8.9 million and $7.9 million at December 31, 1996 and 1995, respectively.
<PAGE>
BankGroup and the Banks are subject to various regulatory  capital  requirements
administered by the federal and state banking agencies.  Failure to meet minimum
capital  requirements can initiate certain  mandatory,  and possibly  additional
discretionary,  actions by regulators  that,  if undertaken  could have a direct
material effect on BankGroup's  consolidated financial statements.  Quantitative
measures  established by regulation to ensure capital adequacy require BankGroup
and the Banks to maintain minimum amounts and ratios,  as set forth in the table
below.  As of December 31, 1996,  BankGroup and the Banks are well above capital
adequacy requirements to which they are subject.

As of December 31, 1996, the most recent  notification from the FDIC categorized
BankGroup and the Banks as well capitalized  under the regulatory  framework for
prompt corrective  action.  To be categorized as well capitalized  BankGroup and
the Banks must maintain  minimum  amounts and ratios,  as set forth in the table
below. There are no conditions or events since that notification that management
believes have changed BankGroup and the Banks categories.

BankGroup's  actual  capital  amounts and ratios are also presented in the table
below (dollars in thousands).
<TABLE>
<CAPTION>
                                                                                                         To Be Well Capitalized
                                                                                     For Capital        Under Prompt Corrective
                                                          Actual                     Adequacy               Action Provisions
As of December 31, 1996:                           Amount       Ratio           Amount       Ratio         Amount        Ratio
                                                   ------       -----           ------       -----         ------        -----
<S>                                               <C>           <C>           <C>             <C>         <C>            <C>
Total Capital (to Risk Weighted Assets)           $117,788      14.84%        $ 63,506        8.0%        $ 79,382       10.0%
Tier I Capital (to Risk Weighted Assets)           107,865      13.59           31,753        4.0           47,629        6.0
Tier I Capital (to Adjusted Average Assets)        107,865       9.33           46,220        4.0           57,775        5.0


As of December 31, 1995:

Total Capital (to Risk Weighted Assets)           $106,859      16.30%        $ 52,457        8.0%        $ 65,571       10.0%
Tier I Capital (to Risk Weighted Assets)            98,663      15.05           26,228        4.0           39,342        6.0
Tier I Capital (to Adjusted Average Assets)         98,663       9.86           40,019        4.0           50,024        5.0

</TABLE>
<PAGE>
NOTE 16 - PARENT COMPANY FINANCIALS
<TABLE>
<CAPTION>

                            CONDENSED BALANCE SHEETS

                                                                 December 31
                                                           --------------------- 
                                                              1996          1995
                                                           --------     --------
                                                                (In 000's)
<S>                                                        <C>          <C>
Assets:
Cash (Includes $1,896 and $478 in 1996 and 1995,
     respectively with affiliates) ...................     $  1,896     $    478
Investments in Subsidiary Banks ......................      106,449       95,421
Other Assets (Includes $44 and $45 in 1996 and
     1995, respectively, invested with affiliates) ...        4,016        3,885
                                                           --------     --------
Total Assets .........................................     $112,361     $ 99,784
                                                           ========     ========

Liabilities and Shareholders' Equity
Other Liabilities ....................................        3,885        1,127
Common Shareholders' Equity ..........................      108,476       98,657
                                                           --------     --------
Total Liabilities and Shareholders' Equity ...........     $112,361     $ 99,784
                                                           ========     ========

<CAPTION>
                         CONDENSED STATEMENTS OF INCOME

                                                            Years Ended December 31
                                                       -------------------------------
                                                         1996        1995        1994
                                                       -------     -------     -------
                                                                  (In 000's)
<S>                                                    <C>         <C>         <C>
Revenue:
Dividends From Subsidiary Banks ..................     $ 7,694     $ 4,025     $ 3,102
Equity in Undistributed Income of Subsidiary Banks       9,008      10,192       4,437
Management Fees From Subsidiary Banks ............       9,682       8,034         407
Interest Income ..................................          27          78           2
Other Income .....................................         985          42          67
                                                       -------     -------     -------
                                                        27,396      22,371       8,015
                                                       -------     -------     -------

Expenses:
Interest on Long-Term Debt .......................           2         454         643
Other ............................................      12,120       8,851       1,964
                                                       -------     -------     -------
                                                        12,122       9,305       2,607
                                                       -------     -------     -------
Income Before Income Tax Benefit .................      15,274      13,066       5,408
Income Tax Benefit ...............................         459         426       1,189
                                                       -------     -------     -------
Net Income .......................................     $15,733     $13,492     $ 6,597
                                                       =======     =======     =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                       CONDENSED STATEMENTS OF CASH FLOWS


                                                                   Years Ended December 31
                                                             ----------------------------------
                                                                1996         1995         1994
                                                                ----         ----         ----
                                                                         (In 000's)
<S>                                                          <C>          <C>          <C>
Cash Flows From Operating Activities: ..................     $ 9,324      $ 4,441      $ 1,329

Cash Flows From Investing Activities:
Net (Increase) Decrease in Interest-Bearing Deposits ...         701         (712)          (3)
Purchases of Securities Available for Sale .............        --           --           (825)
Proceeds From Maturity of Securities Available for Sale         --           --            455
Proceeds From Sale of Securities Available for Sale ....         852          820          837
Purchases of Bank Premises and Equipment ...............        (976)        (826)        --
Capital Contributed to Subsidiary Banks ................      (1,783)        --            (85)
                                                             -------      -------      -------
     Net Cash Provided by (Used In) Investing Activities      (1,206)        (718)         379

Cash Flows From Financing Activities:
Cash Dividends .........................................      (5,562)      (3,960)      (3,219)
Cash Paid in Lieu of Common Stock at Acquisition .......      (2,298)        --           --
Net Expenses Incurred for Debenture Conversion .........        --            (32)        --
Proceeds From Issuance of Common Stock .................       1,498          525          613
Unearned Compensation ..................................        (338)        --           --
                                                             -------      -------      -------
     Net Cash Used in Financing Activities .............      (6,700)      (3,467)      (2,606)
                                                             -------      -------      -------
     Net Increase (Decrease)  in Cash ..................       1,418          256         (898)
     Cash at Beginning of Year .........................         478          222        1,120
                                                             -------      -------      -------
     Cash at End of Year ...............................     $ 1,896      $   478      $   222
                                                             =======      =======      =======
</TABLE>

Noncash  investing   activities  include  $1.2  million  and  $11.9  million  of
unrealized   gains  on   securities   available  for  sale  in  1996  and  1995,
respectively.  Noncash  financing  activities  include  $8,918,000 of debentures
converted into 979,820 shares of common stock in 1995.


NOTE 17 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

In the normal course of business to meet the financing  needs of its  customers,
BankGroup is a party to financial instruments with off-balance-sheet risk. These
financial  instruments include commitments to extend credit,  standby letters of
credit and financial  guarantees written.  Those instruments involve, to varying
degrees,  elements  of credit  risk in excess of the  amount  recognized  in the
consolidated balance sheets.

BankGroup's  exposure to credit loss in the event of nonperformance by the other
party to the financial  instruments  for  commitments to extend credit,  standby
letters  of credit  and  financial  guarantees  written  is  represented  by the
contractual amount of those instruments. BankGroup uses the same credit policies
in   making   commitments   and   conditional   obligations   as  it  does   for
on-balance-sheet instruments.
<PAGE>
As of  December  31,  1996 and 1995,  outstanding  financial  instruments  whose
contract amounts represent potential credit risk were as follows:
<TABLE>
<CAPTION>

                                                           1996           1995
                                                           ----           ----
<S>                                                      <C>            <C>
Financial Instruments Whose Contract Amounts
   Represent Credit Risk:
     Commitments to Extend Credit ................       $128,252       $109,890
     Standby Letters of Credit and Financial
         Guarantees Written ......................          6,330          4,547
</TABLE>

Commitments  to extend  credit are  agreements  to lend to a customer as long as
there is no breach of any condition  established  in the  contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require  payment of a fee.  Since many  commitments  expire  without being drawn
upon, the total  commitment  amounts do not  necessarily  represent  future cash
requirements.   BankGroup  evaluates  each  customer's  creditworthinesss  on  a
case-by-case basis. The amount of collateral obtained, if necessary, is based on
management's credit and financial evaluation of the customer.

Standby  letters of credit and  financial  guarantees  written  are  conditional
commitments  issued by BankGroup to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public and private
credit  arrangements.  The credit risk involved in issuing  letters of credit is
essentially the same as that involved in extending loan facilities to customers.
BankGroup obtains  collateral  supporting those commitments for which collateral
is deemed necessary. Collateral held varies but may include accounts receivable,
marketable   securities,   inventory,   property,   plant  and  equipment,   and
income-producing commercial properties.


NOTE 18 - CONCENTRATIONS OF CREDIT RISK

Virtually all of BankGroup's  business activity is with customers located in the
southwestern,  central  and  east  central  regions  of  Virginia.  Accordingly,
operating  results are closely  correlated  with the economic  trends within the
region and influenced by the significant  industries within the region including
textile,  furniture and pre-built  housing as well as agriculture.  In addition,
the ultimate  collectibility  of the Banks' loan  portfolios and the recovery of
the carrying  amounts of repossessed  property are susceptible to changes in the
market  conditions  of this  geographic  region.  The  commercial  portfolio  is
diversified with no significant  concentrations  of credit at December 31, 1996.
Acquisition  and  development  construction  loans account for $40.2 million and
$30.8  million  of the  commercial  portfolio  at  December  31,  1996 and 1995,
respectively. In addition, other commercial loans secured by real estate totaled
$116.6  million and $96.5  million at December 31, 1996 and 1995,  respectively.
The  real  estate  loan  portfolio   consists  almost  entirely  of  1-4  family
residential  property.  BankGroup  was the  creditor  for  approximately  $128.3
million  and $97.9  million at  December  31,  1996 and 1995,  respectively,  of
consumer loans for automobiles and mobile homes generated  directly or purchased
from established dealers (indirect). These loans are generally collateralized by
the related  property  and are either  endorsed or subject to  mandatory  dealer
repurchase agreements.
<PAGE>
The individual banks have operating  policies relating to the credit process and
collateral in loan  originations.  Loans to purchase real and personal  property
are  generally   collateralized  by  the  related  property  with  loan  amounts
established  based on certain  percentage  limitations of the  property's  total
stated or  appraised  value.  Credit  approval  is  primarily  a function of the
evaluation of the creditworthiness of the individual borrower based on pertinent
financial information and the underlying transaction to be financed.


NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The following  methods and  assumptions  were used to estimate the fair value of
each class of financial  instrument for which it is practicable to estimate that
value:

(a)      Cash and Due From Banks
         The carrying amount is a reasonable estimate of fair value.

(b)      Interest-Bearing Deposits in Domestic Banks
         The carrying amount is a reasonable estimate of fair value.

(c)      Federal Funds Sold
         The carrying amount is a reasonable estimate of fair value.

(d)      Mortgage Loans Held for Sale
         The fair  value of  mortgage  loans  held for sale is based on  current
         investor  pricing at the close of business on the last  business day of
         the financial reporting period.

(e)      Securities Available for Sale and Securities Held to Maturity
         The fair  value of  investments,  except  certain  state and  municipal
         securities,  is  estimated  based on bid prices  published in financial
         newspapers or bid quotations received from securities dealers. The fair
         value  of  certain  state  and  municipal  securities  is  not  readily
         available through market sources other than dealer quotations,  so fair
         value   estimates   are  based  on  quoted  market  prices  of  similar
         instruments,  adjusted for differences  between the quoted  instruments
         and the instruments being valued.

(f)      Loans
         Fair  values  are  estimated  for  portfolios  of  loans  with  similar
         financial  characteristics.  Loans  are  segregated  by  type  such  as
         commercial, real estate - commercial, real estate - construction,  real
         estate - mortgage,  credit card and other consumer.  Each loan category
         is further  segmented into fixed and adjustable rate interest terms and
         by performing and nonperforming categories.

         The  fair  value  of  performing  loans is  calculated  by  discounting
         scheduled  cash flows through the estimated  maturity  using  estimated
         market  discount  rates that reflect the credit and interest  rate risk
         inherent in the loan as well as estimates  for  operating  expenses and
         prepayments.   The  estimate  of  maturity  is  based  on   BankGroup's
         historical  experience  with  repayment  for each loan  classification,
         modified, as required, by an estimate of the effect of current economic
         and lending conditions.

         Fair value for  significant  nonperforming  loans is based on estimated
         cash flows which are discounted using a rate commensurate with the risk
         associated with the estimated cash flows.  Assumptions regarding credit
         risk, cash flows and discount rates are  judgmentally  determined using
         available market information and specific borrower information.
<PAGE>
(g)      Deposits 
         The fair value of demand,  interest checking,  savings and money market
         deposits  is the amount  payable  on demand at  December  31,  1995 and
         December  31,  1996 and  December  31,  1995.  The fair  value of fixed
         maturity time deposits and  certificates  of deposit is estimated using
         the  rates  currently   offered  for  deposits  of  similar   remaining
         maturities and repayment characteristics.

(h)      Short-Term Debt
         The carrying amount is a reasonable estimate of fair value.

(i)      Long-Term Debt
         The fair value of long-term debt is estimated using the rates currently
         offered for  borrowings of similar  remaining  maturities and repayment
         characteristics.

(j)      Commitments to Extend Credit,  Standby  Letters of Credit and Financial
         Guarantees Written
         The only amounts  recorded for  commitments to extend  credit,  standby
         letters of credit and  financial  guarantees  written are the  deferred
         fees  arising  from these  unrecognized  financial  instruments.  These
         deferred  fees are not deemed  significant  at  December  31,  1996 and
         December  31,  1995,  and as such the related fair values have not been
         estimated.

(k)      Accrued Interest
         The carrying amount is a reasonable estimate of fair value.
<PAGE>
The estimated fair values of BankGroup's  financial  instruments at December 31,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>

                                                                 1996                                1995
                                                 -------------------------------     -------------------------------
                                                 Carrying Amount      Fair Value     Carrying Amount      Fair Value
                                                 ---------------      ----------     ---------------      ----------
<S>                                                 <C>               <C>               <C>               <C>
FINANCIAL ASSETS
Cash and Due From Banks ....................        $   37,972        $   37,972        $   31,497        $   31,497
Interest-Bearing Deposits in Domestic Banks                518               518               875               875
Mortgage Loans Held for Sale ...............               742               745             1,780             1,788
Federal Funds Sold .........................              --                --               9,560             9,560
Securities Available for Sale ..............           335,023           335,023           211,970           211,970
Securities Held to Maturity ................            90,519            92,709           112,181           116,830
Loans, Net .................................           774,172           788,294           664,642           676,181
                                                    ----------        ----------        ----------        ----------
     TOTAL FINANCIAL ASSETS ................        $1,238,946        $1,255,261        $1,032,505        $1,048,701
                                                    ==========        ==========        ==========        ==========


FINANCIAL LIABILITIES
Deposits:
Demand Deposits (Noninterest-Bearing) ......        $  120,989        $  120,989        $  113,417        $  113,417
   Interest Checking Accounts ..............            99,834            99,834            93,478            93,478
   Savings Deposits ........................           121,336           121,336           133,074           133,074
   Money Market Investment Accounts ........            81,946            81,946            78,920            78,920
   Time Deposits:
   Certificates of Deposit $100,000 and Over            90,189            91,398            76,965            77,777
   Other ...................................           372,225           379,488           349,723           353,675
                                                    ----------        ----------        ----------        ----------
   TOTAL DEPOSITS ..........................           886,519           894,991           845,577           850,341
Short-Term Debt ............................           213,799           213,799           111,736           111,736
FHLB Callable ..............................            45,000            44,968              --                --
Long-Term Debt .............................            26,029            26,055               929             1,050
                                                    ----------        ----------        ----------        ----------
     TOTAL FINANCIAL LIABILITIES ...........        $1,171,347        $1,179,813        $  958,242        $  963,127
                                                    ==========        ==========        ==========        ==========

</TABLE>

Fair value  estimates  are made at a specific  point in time,  based on relevant
market  information  about the  financial  instrument.  These  estimates  do not
reflect any premium or discount  that could result from offering for sale at one
time BankGroup's entire holdings of a particular financial  instrument.  Because
no market exists for a significant portion of BankGroup's financial instruments,
fair value  estimates  are based on judgments  regarding  future  expected  loss
experience,   current  economic  conditions,  risk  characteristics  of  various
financial  instruments  and other  factors.  These  estimates are  subjective in
nature and  involve  uncertainties  and  matters  of  significant  judgment  and
therefore,  cannot be determined  with precision.  Changes in assumptions  could
significantly affect the estimates.
<PAGE>
Fair value  estimates are based on existing  on-and-off-balance  sheet financial
instruments  without  attempting  to estimate  the value of  anticipated  future
business  and the  value of  assets  and  liabilities  that  are not  considered
financial  instruments.  Significant  assets that are not  considered  financial
assets include deferred tax assets and bank premises and equipment. In addition,
the tax  ramifications  related to the  realization of the unrealized  gains and
losses can have a significant  effect on fair value  estimates and have not been
considered in the estimates.


NOTE 20 - STOCK DIVIDEND

On February 20, 1996,  MainStreet  BankGroup declared a two-for-one stock split,
in the form of a 100% stock dividend,  payable March 15, 1996 to stockholders of
record March 4, 1996. Shareholders received one additional share of common stock
for each share held on the record date.  The par value of the  4,267,536  shares
issued of approximately  $21,388,000 was transferred  from retained  earnings to
the common stock account.


NOTE 21 - CONTINGENCIES AND OTHER MATTERS

BankGroup and its subsidiaries,  in the normal course of business,  are involved
in various legal actions and  proceedings.  It is the opinion of management that
any liabilities  arising from these matters and not covered by insurance,  would
not have a material effect on BankGroup's financial position.
<TABLE>
<CAPTION>
Quarterly Financial Results (Unaudited)
(In Thousands, Except Per Share Data)                   Fourth              Third              Second             First
1996                                                   Quarter             Quarter            Quarter            Quarter
----                                                   -------             -------            -------            -------
<S>                                                    <C>                 <C>                <C>               <C>
Interest Income                                        $25,062             $24,168            $22,476           $21,596
Interest Expense                                        11,912              11,016             10,190             9,737
                                                       -------             -------            -------           -------
     Net Interest Income                                13,150              13,152             12,286            11,859
Provision for Loan Losses                                  907                 946                555               868
                                                       -------             -------            -------           -------
     Net Interest Income After Provision                12,243              12,206             11,731            10,991
Noninterest Income                                       2,799               2,526              2,797             2,906
Noninterest Expense                                      9,448               8,993              8,561             8,346
                                                       -------             -------            -------           -------
     Income Before Income Taxes                          5,594               5,739              5,967             5,551
Income Tax Expense                                       1,717               1,874              1,883             1,644
                                                       -------             -------            -------           -------
     Net Income                                        $ 3,877             $ 3,865            $ 4,084           $ 3,907
                                                       =======             =======            =======           =======

Per Share:
     Net Income:
         Primary                                       $   .34             $   .34            $   .35           $   .34
                                                       =======             =======            =======           =======
         Fully Diluted                                 $   .34             $   .34            $   .35           $   .34
                                                       =======             =======            =======           =======
     Cash Dividends Declared                           $   .14             $   .13            $   .11           $   .11
                                                       =======             =======            =======           =======
<PAGE>
<CAPTION>
Quarterly Financial Results (Unaudited)
(In Thousands, Except Per Share Data)                    Fourth              Third              Second             First
1995                                                    Quarter             Quarter            Quarter            Quarter
----                                                    -------             -------            -------            -------
<S>                                                    <C>                 <C>                <C>               <C>
Interest Income                                        $21,448             $21,089            $19,805           $18,827
Interest Expense                                         9,815               9,899              8,967             8,076
                                                       -------             -------            -------           -------
     Net Interest Income                                11,633              11,190             10,838            10,751
Provision for Loan Losses                                  353                 353                355               358
                                                       -------             -------            -------           -------
     Net Interest Income After Provision                11,280              10,837             10,483            10,393
Noninterest Income                                       2,362               2,147              2,196             1,821
Noninterest Expense                                      7,672               8,230              8,329             8,230
                                                       -------             -------            -------           -------
     Income Before Income Taxes                          5,970               4,754              4,350             3,984
Income Tax Expense                                       1,840               1,308              1,271             1,147
                                                       -------             -------            -------           -------
     Net Income                                        $ 4,130             $ 3,446            $ 3,079           $ 2,837
                                                       =======             =======            =======           =======

Per Share:
     Net Income:
         Primary                                       $   .36             $   .33            $   .30           $   .27
                                                       =======             =======            =======           =======
         Fully Diluted                                 $   .36             $   .31            $   .28           $   .26
                                                       =======             =======            =======           =======
     Cash Dividends Declared                           $   .10             $   .09            $   .10           $   .08
                                                       =======             =======            =======           =======
</TABLE>
Item 9.    Changes in and Disagreements With Accountants on Accounting and
           Financial Disclosure

        The information  required by Item 9 of Form 10-K regarding the change in
        accountants  is herein  incorporated  by reference to the Form 8-K filed
        electronically on November 29, 1995.
<PAGE>
                                    PART III


Item 10.   Directors and Executive Officers of the Registrant

           With  respect  to the  directors  of  the  Company,  the  information
           required  by Item 10 of Form  10-K  appears  on  pages 4 and 5 of the
           Company's  1997  Proxy  Statement  and  is  incorporated   herein  by
           reference. With respect to the executive officers of the Company, the
           information  required  by Item 10 of Form 10-K  appears  in Part I of
           this report on pages 13 and 14.

Item 11.   Executive Compensation

           The  information  required by Item 11 of Form 10-K appears on pages 9
           through 17 of the Company's 1997 Proxy  Statement and is incorporated
           herein by reference.

Item 12.   Security Ownership of Certain Beneficial Owners and Management

           The  information  required by Item 12 of Form 10-K appears on pages 5
           through 7 of the Company's 1997 Proxy  Statement and is  incorporated
           herein by reference.


Item 13.   Certain Relationships and Related Transactions

           The  information  required by Item 13 of Form 10-K appears on page 16
           of the Company's 1997 Proxy Statement and is  incorporated  herein by
           reference.


                                     PART IV


Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)  1.    Financial Statements

           The information  required by Item 10 of Form 10-K appears in Part II,
           Item 8, of this report on pages 25 through 50.

(a). 2.    Financial Statement Schedules

           All  schedules   are  omitted,   as  the  required   information   is
           inapplicable  or the  information  is presented  in the  consolidated
           financial  statements  or  related  notes.  financial  statements  or
           related notes.

(a)  3.    Exhibits Required to be filed by Item 601 of Regulation S-K

           See index to exhibits.

(b)        Reports on Form 8-K

           Form 8-K filed  February 23,  1996,  regarding  the 2-for-1  split in
           Registrant's common stock.
<PAGE>
           Form 8-K filed April 22, 1996, regarding the definitive agreement for
           acquisition   of  The  First   National  Bank  of  Clifton  Forge  by
           Registrant.

           Form 8-K filed  October 3, 1996,  regarding  the  consumation  of the
           acquisition   of  The  First   National  Bank  of  Clifton  Forge  by
           Registrant.

(c)        Exhibits

           See item 14(a) 3 above.

(d)        Financial Statement Schedules

           See item 14(a) 2 above.

                                INDEX TO EXHIBITS

                                No. Description

3(i)       Articles of Incorporation  of the Registrant are herein  incorporated
           by reference to the Form 8-A filed electronically on March 18, 1996.

3(ii)      Bylaws of the Registrant are herein  incorporated by reference to the
           Form 8-A filed electronically on March 18, 1996.

4          Preferred   Share   Rights  Plan   (Incorporated   by   reference  to
           Registrant's Form 8-K dated January 18, 1990)

16         Letter  regarding  change in certifying  accountant  incorporated  by
           reference to Form 8-K filed on November 29, 1995.

21         Statement of Subsidiaries of the Registrant is included as an Exhibit
           to this report.

23         Consent of Coopers & Lybrand L.L.P.

27         Financial Data Schedule
<PAGE>
                                   SIGNATURES


          Pursuant to the  requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                        MAINSTREET BANKGROUP INCORPORATED


By: /s/Michael R. Brenan                          /s/James E. Adams
    --------------------                          -----------------
    Michael R. Brenan, President,                 James E. Adams, Executive Vice
    Chairman of the Board and                     President, Chief Financial 
    Chief Executive Officer                       Officer and Treasurer

          Pursuant to the  requirements of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>

       NAME                                      TITLE                                              DATE
       ----                                      -----                                              ----
<S>                                              <C>                                               <C>
/s/W. Christopher Beeler, Jr.                    Director                                          2/26/97
-----------------------------                                                                      -------
W. Christopher Beeler, Jr.                                                                 

/s/Thomas B. Bishop                              Director                                          2/26/97
-------------------                                                                                ------- 
Thomas B. Bishop                                                                            

/s/Michael R. Brenan                             President, Chairman of the Board                  2/26/97
--------------------                             and Chief Executive Officer                       -------     
Michael R. Brenan                                           

/s/William L. Cooper, III                        Director                                          2/26/97
-------------------------                                                                          -------
William L. Cooper, III                                                                       

/s/Billy P. Craft                                Director                                          2/26/97
-----------------                                                                                  -------
Billy P. Craft                                                                              

/s/Phillip W. Dean                               Director                                          2/26/97
-------------------                                                                                -------
Phillip W. Dean                                                                              

/s/I. Patricia Henry                             Director                                          2/26/97
--------------------                                                                               -------
I. Patricia Henry                                                                           

/s/Larry E. Hutchens                             Director                                          2/26/97
--------------------                                                                               -------
Larry E. Hutchens                                                                        
<PAGE>
/s/George J. Kostel                              Director                                          2/26/97
-------------------                                                                                -------
George J. Kostel                                                                            

/s/William O. McCabe, Jr., MD                    Director                                          2/26/97
-----------------------------                                                                      -------
William O. McCabe, Jr., MD                        

/s/Albert L. Prillaman                           Director                                          2/26/97
----------------------                                                                             -------
Albert L. Prillaman                                                                          

/s/Richard M. Simmons, Jr.                       Director                                          2/26/97
--------------------------                                                                         -------
Richard M. Simmons, Jr.                                                                     

/s/Thomas B. Stanley, Jr.                        Director                                          2/26/97
-------------------------                                                                          -------
Thomas B. Stanley, Jr.                                                                       
</TABLE>