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 (Fee Required)

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995

                          COMMISSION FILE NUMBER 0-8622


                        MAINSTREET BANKGROUP INCORPORATED
             (Exact name of Registrant as specified in its charter)

                               Virginia 54-1046817
        ----------------------------- -----------------------------------
     (State or other jurisdiction of       (I.R.S. Employer Identification
      incorporation or organization)                    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)632-2971

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

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

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

Common Stock, Par Value $5.00 a Share                                  NASDAQ

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

                       Yes (X)                    No (_)

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K (229.405 of this chapter) is not contained  herein,  and will
not be contained,  to the best of Registrant's knowledge, in definitive proxy or
information  statements  incorporated by reference in Part III of this Form 10-K
or any amendment of this Form 10-K. [ ]

The  aggregate  market  value of the voting stock held by  nonaffiliates  of the
Registrant as of January 31, 1996 was $103,748,243.

(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, 1996
----------------------------------    --------------------------------
COMMON STOCK $5.00 Par Value                     8,570,194
-----------------------------------   ---------------------------------


<PAGE>


                       MainStreet BankGroup Incorporated

                                   Form 10-K

                                     Index

                                     PART I

<TABLE>
<CAPTION>
<S>               <C>                                                                                   <C>
Item 1            Business                                                                                3-12
Item 2            Properties                                                                                12
Item 3            Legal Proceedings                                                                         13
Item 4            Submission of Matters to a Vote of Shareholders                                           13
                  Executive Officers of Registrant                                                       13-14


                                    PART II

Item 5            Market for Registrant's Common Equity and Related Shareholder Matters                      14
Item 6            Selected Financial Data                                                                    15
Item 7            Management's Discussion and Analysis of Financial Condition and Results of Operations   16-25
Item 8            Financial Statements and Supplementary Data                                             26-50
Item 9            Changes In and Disagreements With Accountants on Accounting and Financial Disclosure       50


                                    PART III

Item 10           Directors and Executive Officers of the Registrant                                         50
Item 11           Executive Compensation                                                                     50
Item 12           Security Ownership of Certain Beneficial Owners and Management                             50
Item 13           Certain Relationships and Related Transactions                                             50


                                    PART IV

Item 14           Exhibits, Financial Statement Schedules, and Reports on Form 8-K                        50-51
</TABLE>

                      DOCUMENTS INCORPORATED BY REFERENCE

    Proxy Statement, dated March 22, 1996 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  bank,  consumer  banking  and trust  services  to a
variety of businesses and individual  customers.  The Banks seek customers whose
total financial  requirements  they can serve.  As a result,  most of the Banks'
business  customers  are  small and  medium-sized  entities.  While 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.

         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  approach in management  providing direction to the Banks
and performing selected services in the compliance,  data processing,  financial
management, human resources, investment,  accounting, marketing, mortgage, trust
and audit areas. The Banks 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 six branches
in Martinsville  and Henry County.  Its primary service area has a population of
approximately  73,000 and its economy is oriented toward the textile,  furniture
and prebuilt housing industries.  It is insured by the Federal Deposit Insurance
Corporation  and is  supervised  and  examined by the Board of  Governors of the
Federal  Reserve  System and the State  Corporation  Commission of Virginia.  It
engages in a general commercial banking business and offers the range of banking
services  that  can be  expected  of a  banking  organization  of its  size.  In
addition,  Piedmont has a Trust  Department  with assets of $574  million  under
management  at  December  31,  1995.   Piedmont  is  the  largest  bank  in  the
Martinsville  trade  area with total  assets of  approximately  $454.9  million,
deposits of approximately  $307.9 million and net loans of approximately  $284.7
million at December 31, 1995.

         BANK OF  CARROLL.  Bank of Carroll  ("Carroll"),  incorporated  in 1971
under the laws of Virginia,  was acquired in 1977.  At December 31, 1995, it had
total  assets of  approximately  $55.7  million.  Its main  office is located in
Hillsville,  Carroll  County,  Virginia,  and it has branches in Cana and Galax,
Virginia.  Its primary  service area has a population of  approximately  33,000.
Carroll is  supervised  and  examined by the Board of  Governors  of the Federal
Reserve System and the State Corporation Commission of Virginia and engages in a
general commercial banking business.

         BANK OF FERRUM.  Bank of Ferrum ("Ferrum"),  incorporated in 1917 under
the laws of Virginia and  converted  during the 1920's to a national  bank,  was
acquired in 1981. In 1995, Bank of Ferrum converted back to a state charter.  At
December 31, 1995, it has total assets of approximately $77.6 million.  Its main
banking  office is located in Ferrum,  Virginia,  with branches at Oak Level and
Rocky Mount,  Virginia.  An additional branch is currently under construction in
the northern  part of Rocky Mount which is scheduled to open in March 1996.  Its
primary  service  area has a  population  of  approximately  40,000.  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 OF FOREST.  First  Community Bank  ("Community"),
incorporated  in 1978  under the laws of  Virginia,  was  acquired  in 1983.  At
December  31,  1995,  it has  total  assets  of  approximately  $111.4  million.
Community's  main office is located in Forest,  Virginia,  and it operates seven
branches  in the  Lynchburg  and Forest  area.  Its primary  service  area has a
population of approximately  112,000.  First Community is regulated 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 1920 as a national bank and acquired in 1986.  In 1995,  Stuart
converted  to a state  charter.  At December  31,  1995,  it had total assets of
approximately $117.0 million. It main office is located in Stuart, Virginia, and
has six 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  17,500.  Stuart  is  supervised  and  examined  by the  Board  of
Governors of the Federal Reserve System and the State Corporation  Commission of
Virginia and engages in general commercial banking business.

         FIRST  COMMUNITY BANK OF SALTVILLE.  First  Community Bank of Saltville
("Saltville")  was  established  in 1903  under  the  Laws of  Virginia  and was
incorporated in 1918 as a national bank and acquired in 1986. In 1995, Saltville
converted back to a state charter.  At December 31, 1995, it had total assets of
approximately $89.9 million. Its main office is located in Saltville,  Virginia,
and it has two other  offices  located in Smyth  County.  Saltville is the third
largest  of the four  banks in Smyth  County.  Its  primary  service  area has a
population of approximately  32,000.  Saltville engages in a general  commercial
banking business and is 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.


Trust Services

         Piedmont's Trust  Department  offers a full range of trust services for
both individual and corporate  customers.  Such services include personal trust,
investment  management,  financial  and tax  counseling,  employee  benefits and
custodial.

         The  Trust  Department  assets  have  increased  from $530  million  at
December 31, 1994 to $574 million at December 31, 1995.


Competition

         The principal  methods of competition in the bank 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 an approximate two hundred mile radius of Martinsville,
Virginia,  the corporate  headquarters.  Other bank holding company  competitors
have  greater  geographic  coverage  and  some  offer a number  of  bank-related
services which the Registrant does not presently offer.

         Piedmont,  with its six branch offices,  is the largest of five banking
institutions in the Martinsville trade area. Principal competition is offered by
the other commercial  banks, but competition is also offered by savings and loan
associations, finance companies and credit unions.

         Carroll  is one of six banks in Carroll  County  and  Galax,  Virginia.
Competition is offered primarily by these banks.

         Ferrum  is the  only  financial  institution  located  in  Ferrum,  but
competition  is offered  through four other  commercial  banks  located in Rocky
Mount, Virginia, approximately nine miles away.

         Community  is the only  financial  institution  located in Forest,  but
competition  is offered by four other banks located in Lynchburg,  four banks in
Bedford, four banks in Amherst, and five in Campbell.  Competition also includes
some savings and loan associations, and credit unions.

         Stuart is the  largest  bank in  Patrick  County,  but  competition  is
offered through two other commercial banks located in the area.

         Saltville is one of four banks in Smyth County.  Competition is offered
primarily by these banks.


Employees

          The total  number of  full-time  equivalent  persons  employed  by the
Registrant and its  subsidiaries as of December 31, 1995 was 440. The Registrant
believes that its relationship  with its employees is good, and no employees are
represented by a labor union.


Information as to Classes of Service

         The  following  table sets  forth,  for the three  fiscal  years  ended
December 31, 1995, the  percentage of total  operating  revenues  contributed by
each class of similar services which  contributed 15% or more of total operating
revenue of the Registrant and its subsidiaries in either of the last three year.



<TABLE>
<CAPTION>

 YEARS ENDED                                                                  PERCENTAGE
<S>                        <C>                                                <C>
December 31, 1993          Interest & Fees on Loans                             66.1%

December 31, 1994          Interest & Fees on Loans                             71.5

December 31, 1995          Interest & Fees on Loans                             66.6

December 31, 1993          Interest & Dividends on
                           Securities Held to Maturity and
                           Securities Available for Sale                        22.9

December 31, 1994          Interest & Dividends on
                           Securities Held to Maturity and
                           Securities Available for Sale                        25.8

December 31, 1995          Interest & Dividends on
                           Securities Held to Maturity and
                           Securities Available for Sale                        22.9
</TABLE>


<PAGE>


SELECTED STATISTICAL INFORMATION OF MAINSTREET BANKGROUP INCORPORATED AND
SUBSIDIARIES (REGISTRANT)

         The  following   statistical   information  is  consolidated   for  the
Registrant and its six bank subsidiaries.  Information is based on daily average
balances.  Nonaccrual  loans are  included  in loans,  net of  unearned  income.
Mortgage loans held for sale are broken out  separately  from loans for 1995 and
1994's  distribution  of assets;  however,  they are included with loans for all
periods in the rate volume analysis.  Information related to mortgage loans held
for sale is being  accumulated  for present and future  filings,  however,  1993
comparative data is unavailable.

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
                                                                     (DOLLARS IN 000'S)

                                                    1995                                          1994
                                      --------------------------------------        --------------------------------------

                                      AVERAGE                         YIELD/        AVERAGE                         YIELD/
                                      BALANCE         INTEREST        RATE          BALANCE        INTEREST         RATE
                                      -------         --------        ----          -------        --------          ----
<S>                                   <C>             <C>             <C>           <C>            <C>             <C>
Loans, Net of Unearned Income (1)     $526,311        $51,020          9.69%        $474,216       $42,954           9.06%
Mortgage Loans Held for Sale               813            144         17.71            3,503           514          14.67
Securities Available for Sale          148,274          9,689          6.53          205,197        13,119           6.39
Taxable Securities Held to Maturity     77,969          5,705          7.32            3,256           244           7.49
Nontaxable Securities Held to
 Maturity (1)                           37,074          3,122          8.42           39,733         3,417           8.60
Interest-earning Deposits in
 Other Banks                               682              5           .73               50             2           4.00
Federal Funds Sold                       1,131             66          5.84           11,427           460           4.03
                                       -------        -------        ------         --------       -------           ----
Total Interest Earning Assets          792,254         69,751          8.80%         737,382        60,710           8.23%
Cash and Due from Banks                 22,681                                        22,226
Other Assets                            31,325                                        35,871
Reserve for Loan Losses                 (8,203)                                      ( 8,279)
                                      --------                                      --------
Total Assets                          $838,057                                      $787,200
                                      ========                                      ========

Interest Checking Accounts            $ 73,783        $ 2,269          3.08%        $ 73,568       $ 2,095           2.85%
Savings Deposits                       123,952          3,937          3.18          163,593         5,429           3.32
Money Market Investment Accounts        59,722          2,212          3.70           71,807         2,292           3.19
Other Time Deposits                    356,616         19,244          5.40          302,964        14,164           4.68
Borrowed Funds                          64,948          3,713          5.72           27,382         1,237           4.52
                                      --------        -------        ------         --------       -------           ----
Total Interest-bearing Liabilities     679,021         31,375          4.62%         639,314        25,217           3.94%
Demand Deposits                         90,588                                        85,405
Other Liabilities                        6,169                                         6,704
                                      --------                                      -----------
Total Liabilities                      775,778                                       731,423
Shareholders' Equity                    62,279                                        55,777
                                      --------                                      --------
Total Liabilities and Shareholders'
      Equity                          $838,057                                      $787,200
                                      ========                                      ========

Net Interest Earnings/Margin                          $38,376          4.18%                       $35,493           4.29%
                                                      =======          ====                        =======           ====
Net Yield on Interest-earning Assets
      on a Taxable Equivalent
      Basis (2)                                                        4.84%                                         4.81%
                                                                       ====                                          ====
</TABLE>

<TABLE>
<CAPTION>



                                                                  YEARS ENDED DECEMBER 31
                                                                     (DOLLARS IN 000'S)

                                                                          1993
                                                       ---------------------------------------

                                                         AVERAGE                       YIELD/
                                                         BALANCE        INTEREST        RATE
                                                         -------        --------        ----
<S>                                                    <C>              <C>             <C>

Loans, Net of Unearned Income (1)                      $456,393          $42,410         9.29%
Mortgage Loans Held for Sale                                ---              ---          ---
Securities Available for Sale                           194,429           12,347         6.35
Taxable Securities Held to Maturity                       2,216              174         7.85
Nontaxable Securities Held to
 Maturity (1)                                            35,803            3,254         9.09
Interest-earning Deposits in
 Other Banks                                                 50                1         2.00
Federal Funds Sold                                       22,868              676         2.96
                                                       --------          -------         ----
Total Interest Earning Assets                           711,759           58,862         8.27%
Cash and Due from Banks                                  20,833
Other Assets                                             29,265
Reserve for Loan Losses                                 ( 8,839)
                                                       --------
Total Assets                                           $753,018
                                                       ========

Interest Checking Accounts                             $ 65,301          $ 1,850        2.83%
Savings Deposits                                        153,767            4,901        3.19
Money Market Investment Accounts                         77,777            2,523        3.24
Other Time Deposits                                     291,774           14,732        5.05
Borrowed Funds                                           26,443            1,285        4.86
                                                       --------          -------        ----
Total Interest-bearing Liabilities                      615,062           25,291        4.11%
Demand Deposits                                          76,960
Other Liabilities                                         5,467
                                                       --------
Total Liabilities                                       697,489
Shareholders' Equity                                     55,529
                                                       --------
Total Liabilities and Shareholders'
      Equity                                           $753,018
                                                       ========

Net Interest Earnings/Margin                                             $33,571        4.16%
                                                                         =======
Net Yield on Interest-earning Assets
      on a Taxable Equivalent
      Basis (2)                                                                         4.72%
                                                                                        ====

</TABLE>







         (1)  Interest  income  includes  the  effects  of  taxable   equivalent
adjustments  using  a tax  rate  of  34% in  adjusting  interest  on  tax-exempt
securities and loans to a fully taxable  basis.  Loan fees are included in total
interest    income    as    follows:     1995--$1,745,000;     1994--$1,900,000;
1993--$2,607,000.  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.

                                       6


<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 due to both
rate and volume 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>

                                                     1995 Compared to 1994 Increase            1994 Compared to 1993 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:
   Loans*                                           $4,921         $3,145       $8,066       $1,953      $  (895)      $1,058
   Securities Held to Maturity
       Taxable                                       5,467             (6)       5,461           78           (8)          70
       Nontaxable                                     (225)           (70)        (295)         344         (181)         163
   Mortgage Loans Held for Sale                       (459)            89         (370)         ---          ---          ---
   Securities Available for Sale*                   (3,714)           284       (3,430)         688           84          772
   Interest-Bearing Deposits in Other Banks              6             (3)           3            0            1            1
   Federal Funds Sold                                 (539)           145         (394)        (409)         193         (216)
                                                     ------        ------       ------        -----      -------       ------
             Total Interest Income                   5,457          3,584        9,041        2,654         (806)       1,848
Interest Expense:
   Interest Checking Accounts                            6            168          174          235           10          245
   Savings Deposits                                 (1,268)          (224)      (1,492)         321          207          528
   Money Market Investment Accounts                   (417)           337          (80)        (191)         (40)        (231)
   Other Time Deposits                               2,715          2,365        5,080          551       (1,119)        (568)
   Other Borrowed Funds                              2,075            401        2,476           41          (89)         (48)
                                                     ------        ------       ------       ------      --------      ------

             Total Interest Funds                    3,112          3,047        6,158          957       (1,031)         (74)
                                                     ------        ------       ------       ------      -------       ------

Net Interest Income                                 $2,346        $   537       $2,883       $1,697      $   225       $1,922
                                                    ======        =======       ======       ======      =======       ======
</TABLE>

*Fully Taxable-Equivalent Basis

SECURITIES AVAILABLE FOR SALE PORTFOLIO DATA

         The carrying and approximate market value and gross unrealized gains
and losses of securities available for sale appear on  page 35 of Part II, Item
8, Note 3 of this report and are herein incorporated by reference.

         Proceeds from the sale of these securities, gross gains and losses, and
pledged  information appear on page 35 of Part II, Item 8, Note 3 of this report
and are herein incorporated by reference.

         The following  table shows the  maturities of securities  available for
sale as of December 31, 1995 and the weighted average yields of such securities.
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 34%.  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
                                ------   ------     ------     -----        ------     -----      ------     -----      -----
                                                     (In 000's)
<S>                           <C>        <C>        <C>        <C>           <C>       <C>       <C>        <C>        <C>
Obligations of U.S.
    Government Agencies       $3,485      6.50       $31,863       5.81       $ 7,549    7.01     $   ---      ---      $ 42,897
Mortgage Backed Securities       912      7.16         1,390       7.66         6,072    6.70       18,767     7.00       27,141
Collateralized Mortgage
    Obligations and REMICs       ---      ---          5,505       5.80        2,410     5.61       88,337     6.31       96,252
Corporate Bonds                1,757      5.61         4,415       9.14        5,386     7.36          500     9.50       12,058
Other Securities                 ---      ---            ---                     ---                 5,195     6.16        5,195
Obligations of State &
     Political Subdivision       ---                     373       5.59          253     8.38        ---          ---        626
                              ------                 -------                  -------             --------                --------
                              $6,154                 $43,546                  $21,670             $112,799               $184,169
                              ======                 =======                  =======             ========               ========
</TABLE>


         All Mortgage Backed Securities and Collateralized  Mortgage Obligations
held at December 31, 1995 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 36 of Part II, Item 8,
Note 4 of this report and are herein incorporated by reference.

         Proceeds  from  sales and calls of these  securities,  gross  gains and
losses and pledged  information  appear on page 36 of Part II, Item 8, Note 4 of
this report and are herein incorporated by reference.

         The following table shows the maturities of securities held to maturity
at December 31, 1995, and the weighted  average yields of such  securities.  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 34%.  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         $ 2,987    8.00      $ 1,938    5.79      $    ---     ---       $  ---       ---      $ 4,925
Obligations of U.S.
     Government Agencies             ---     ---        16,669    6.34        13,302     7.21         989      8.75       30,960
Mortgage Backed Securities           ---     ---           200    7.50        16,958     7.53       5,170      7.35       22,328
Obligations of State and
     Political Subdivisions         2,685    8.66       11,841     8.83       20,158     8.46       5,095      8.19       39,779
                                   -------             -------               -------               -------    -------    -------

                                  $ 5,672              $30,648               $50,418              $11,254                $97,992
                                  =======              =======               =======              =======                =======
</TABLE>

         All Mortgage Backed  Securities in the  held-to-maturity  portfolio are
backed by U.S. Agencies at December 31, 1995.

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

                                      1995             1994              1993             1992             1991
                                      ----             ----              ----             ----             ----
<S>                                 <C>              <C>               <C>              <C>
Commercial, Financial
     and Agricultural               $264,924         $235,205          $209,908         $195,289          $198,406
Real Estate-Mortgage*                135,830          115,106           102,460          112,932           120,998
Installment                          176,110          157,857           143,957          144,099           141,493
                                    --------         --------          --------         --------          --------
Total Loans                          576,864          508,168           456,325          452,320           460,897
Less:   Unearned Income and
          Deferred Fees               11,080            8,417             6,914            7,689             9,280
                                    --------         --------          --------         --------          --------
Loans, Net of Unearned Income
       and Deferred Fees             565,784          499,751           449,411          444,631           451,617
Less:  Allowance for Loan
       Losses                          8,076            8,191             8,351            8,610             8,559
                                    --------         --------          --------         --------          --------
Loans, Net                          $557,708         $491,560          $441,060         $436,021          $443,058
                                    ========         ========          ========         ========          ========

</TABLE>

* The amounts for 1991 include mortgage loans held for sale.

         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  central  and  western  part  of  southern  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 bank's 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, 1995,  acquisition and development  construction  loans account for
$24.5 million of the commercial portfolio.  In addition,  other commercial loans
secured by real estate  total  $86.7  million.  The real  estate loan  portfolio
consists almost  entirely of 1-4 family  residential  property.  At December 31,
1995,  BankGroup  was the creditor for  approximately  $88.3 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.

         The  following  table  shows the amount of  commercial,  financial  and
agricultural loans outstanding as of December 31, 1995 which mature or reprice:

<TABLE>
                                                                       After
                                                                      One But
                                                  Within               Within            After
                                                 One Year            Five Years        Five Years         Total
                                                ----------          -----------       ------------       ----------
<S>                                              <C>                <C>                <C>               <C>

Commercial, financial and agricultural           $168,315             $ 65,489          $ 31,120           $264,924

Interest rates are floating or adjustable         104,952                ---               ---              104,952

Interest rates are fixed or predetermined          63,363               65,489            31,120            159,972
</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
                                                                                        -------------
                                                         1995             1994               1993            1992              1991
                                                         ----             ----               ----            ----              ----
<S>                                                   <C>               <C>               <C>              <C>              <C>
Consumer Loans:
   Loans accounted for on a nonaccrual basis          $   95            $    9            $    12          $  233            $  259
   Loans contractually past due 90 days or
    more as to interest or principal payments
    (but not included in nonaccrual loans)               575               479                364             631               998
All Other Loans:
   Loans accounted for on a nonaccrual basis           3,288             2,727              2,553           5,231             8,822
   Loans contractually past due 90 days or
    more as to interest or principal payments
    (but not included in nonaccrual loans)             1,298             1,201              1,282             935             2,177
</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 .93% of loans, net of unearned income
at December 31, 1995 and .88% at December 31, 1994.

      The effect of nonaccrual  loans on interest income for 1995, 1994 and 1993
appears  on page 37 of Part II,  Item 8,  Note 5 of this  report  and is  herein
incorporated by reference.

      At December  31, 1995,  1994,  and 1993  BankGroup  had other real estate,
 which represents  foreclosed properties totaling $1.6 million, $2.5 million and
 5.0 million, respectively, which is carried at the lower of cost or fair market
 value.

SUMMARY OF LOAN LOSS EXPERIENCE

      The  description of the allowance for loan losses required by Part I, Item
I, of Form 10-K appears on page 33 of Part II, Item 8, Note 1 of this report and
is herein  incorporated  by  reference.  The following  table shows  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
                                                 1995           1994                 1993            1992             1991
                                                 ----           -----                ----            ----             ----
<S>                                            <C>              <C>              <C>               <C>               <C>
Average amount of loans, net of unearned
    income, outstanding during the year (1)    $526,311         $474,216          $456,393         $445,614          $462,413
                                               ========         ========          ========         ========          ========
Balance of allowance for loan losses at
    beginning of period                        $  8,191         $  8,351          $  8,610         $  8,559          $  6,810
Loans charged off:
    Commercial, financial and agricultural          777            2,566               592            1,221             2,002
    Real estate - mortgage                          179              318               810            1,009             1,012
    Installment                                     900              680               796              582             1,114
                                               --------         --------          --------         --------          --------
Total loans charged off                           1,856            3,564             2,198            2,812             4,128
                                               --------         --------          --------         --------          --------
Recoveries of loans previously charged of:
    Commercial, financial and agricultural          181              357                94              159               162
    Real estate - mortgage                            6               18               366               16                43
    Installment                                     235              202               109              291               248
                                               --------         --------          --------         --------          --------
Total recoveries                                    422              577               569              466               453
                                               --------         --------          --------         --------          --------
Net loans charged off                             1,434            2,987             1,629            2,346             3,675
Additions to allowance charged to
    operating expense                             1,319            2,827             1,370            2,397             5,424
                                               --------         --------          --------         --------          --------
Balance at end of period                       $  8,076         $  8,191          $  8,351         $  8,610          $  8,559
                                               ========         ========          ========         ========          ========
Ratio of net chargeoffs during period
    to average loans outstanding                    .27%             .63%             .36%              .53%              .79%
                                               ========         ========          ========         ========          ========

</TABLE>

(1)  The average amount of loans, net of unearned income for 1991 includes
mortgage loans held for sale.

     Management  has  allocated  the  allowance  for loan  losses  for the years
indicated by loan category.  This allocation of the allowance for loan losses is
based upon the previous five years' loan loss  experience and is not intended to
be  management's  judgment as to future loan  losses to be  experienced  by loan
type:
<TABLE>
<CAPTION>


                           December 31, 1995       December 31, 1994    December 31, 1993   December 31, 1992    December 31, 1991
                            -----------------       -----------------    -----------------   -----------------    -----------------
                           % of Loans In           % of Loans In        % of Loans In        % of Loans In        %  of Loans In
                           Each Category           Each Category        Each Category        Each Category         Each Category
                             To Total                To Total             To Total              To Total              To Total
                           Amount   Loans         Amount     Loan      Amount     Loans    Amount      Loans     Amount    Loans
                           ------   -----         ------     -----     ------      -----    ------      -----    ------    ------
<S>                        <C>      <C>          <C>        <C>        <C>         <C>      <C>        <C>        <C>       <C>
Balance at end of period
     applicable to:
Commercial, Financial
    and Agricultural       $3,392     46%         $6,061       46%        $3,842      46%     $3,702     43%         $3,681   43%
Real Estate                   969     23             819       23          1,837      22       2,153     25           2,225   26
Installment                 3,715     31           1,311       31          2,672      32       2,755     32           2,653   31
Unallocated                    --     --              --       --            --       --         --     --               --   --
                           ------    ---           -----      ----        ------    -----     ------   ----         ------- ----
Total                      $8,076    100%         $8,191      100%        $8,351     100%     $8,610    100%         $8,559  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
                                                 1995                     1994                    1993
                                                -----                    -----                    ----
<S>                                            <C>                      <C>                      <C>
Return on Average Shareholders Equity          17.24%                     7.33%                  12.39%
Return on Average Assets                        1.28                       .52                     .91
Dividend Payout Ratio                          28.10                     60.55                   31.18
Average Equity to Average Total Assets          7.43                      7.09                    7.37
</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 pages 45 and 46 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 transactions.

         The details of these  categories for the years 1995,  1994 and 1993 are
presented in the table below:

<TABLE>
<CAPTION>
                                                              1995              1994                 1993
                                                              ----              ----                 ----
                                                                             (In 000's)
<S>                                                       <C>              <C>                   <C>
Short-Term Borrowings:

Federal Funds Purchased and
  Corporate Cash Management:
     Balance at end of year                                $42,111           $16,677               $ 9,969
     Average during the year                                18,677            13,544                12,383
     Maximum month-end balance                              42,110            21,138                17,341
     Weighted average rate during the year                    4.63%             3.15%                 2.63%
     Weighted average rate at December 31                     5.36%             4.35%                 2.81%

Repurchase Agreements:
     Balance at end of year                                $37,127           $   ---               $   ---
     Average during the year                                26,978               ---                   ---
     Maximum month-end balance                              63,956               ---                   ---
     Weighted average rate during the year                    6.00%              ---                   ---
     Weighted average rate at December 31                     5.85%              ---                   ---

FHLB Borrowings:
     Balance at end of year                                $32,350           $ 4,000               $   ---
     Average during the year                                 7,660               495                   ---
     Maximum month-end balance                              33,279             4,000                   ---
     Weighted average rate during the year                    6.50%             2.02%                  ---
     Weighted average rate at December 31                     5.76%             6.35%                  ---

</TABLE>

         The weighted  average rates paid in aggregate on these  borrowed  funds
for 1995, 1994 and 1993 were 5.58%, 3.26%, and 2.68% respectively.


DEPOSITS

         Average total  deposits of the Banks for 1995 were  approximately  $705
million,  an increase of 1% from $697 million for 1994. 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.

         The average  amounts of deposits are  summarized  below for the periods
indicated:

<TABLE>
<CAPTION>
                                                                                  Years Ended December 31
                                                                                         (In 000's)

                                                              1995                        1994                           1993
                                                              ----                        ----                           ----
<S>                                                        <C>                         <C>                            <C>

Demand deposits (Noninterest-Bearing)                      $ 90,588                    $ 85,405                       $ 76,960
Interest checking accounts                                   73,783                      73,568                         65,301
Savings deposits                                            123,952                     163,593                        153,767
Money market investment accounts                             59,722                      71,807                         77,777
Time deposits                                               356,616                     302,964                        291,774
                                                           --------                    --------                       --------
Total                                                      $704,661                    $697,337                       $665,579
                                                           ========                    ========                       ========


</TABLE>


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, 1995:

<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                          $     875             $   ---           $   ---            $   ---           $    875
Mortgage Loans Held for Sale                     1,780                 ---               ---                ---              1,780
Securities Available for Sale                   42,492                1,278             5,487            134,912           184,169
Securities Held to Maturity                      6,798                3,796             7,355             80,043            97,992
Loans                                          195,945               32,910            63,091            273,838           565,784
                                             ---------             --------          --------           --------          --------

Total Interest Earning Assets                $ 247,890             $ 37,984          $ 75,933           $488,793          $850,600
                                             =========             ========          ========           ========          ========

Cumulative Total Interest-Earning Assets     $ 247,890             $285,874          $361,807           $850,600          $850,600
                                             =========             ========          ========           ========          ========

Interest-Bearing Liabilities

NOW, Money Market and Savings                $ 247,019             $   ---           $   ---            $   ---           $247,019
Time Deposits $100,000 and Over                 15,366               11,783            13,528             27,757            68,434
Other Time Deposits                             72,463               41,239            51,743            123,951           289,396
                                             ---------             --------          --------           --------          --------
Total Interest-Bearing Deposits                334,848               53,022            65,271            151,708           604,849

Short-Term Debt                                111,736                 ---               ---                ---            111,736
Long-Term Debt                                    ---                    71                71                787               929
                                             ---------             --------          --------           --------          --------

Total Borrowings                               111,736                   71                71                787           112,665
                                             ---------             --------          --------           --------          --------

Total Interest-Bearing Liabilities           $ 446,584             $ 53,093          $ 65,342           $152,495          $717,514
                                             =========             ========          ========           ========          ========

Management's Elasticity Adjustment
     for Nonmaturing Deposits (1)            $(202,284)            $   ---           $   ---            $202,284          $   ---
                                             ---------             --------          --------           --------          -------

Adjusted Interest-Bearing Liabilities        $ 244,300             $ 53,093          $ 65,342           $354,779          $717,514
                                             =========             ========          ========           ========          ========

Cumulative Total Interest-Bearing
     Liabilities                             $ 244,300             $297,393          $362,735           $717,514          $717,514
                                             =========             ========          ========           ========          ========

Net Total Assets/Liabilities after
     Elasticity Adjustment                   $   3,590             $(15,109)         $ 10,591           $134,014          $133,086
                                             =========             ========          ========           ========          ========

Cumulative Net Total Assets/Liabilities
     after Elasticity Adjustment             $   3,590             $(11,519)         $   (928)          $133,086          $133,086
                                             =========             ========          ========           ========          ========

</TABLE>


(1)   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,
1995, the Registrant's subsidiaries conduct business through twenty-eight office
locations,  eleven  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, 1995 was  approximately  $1.6  million  which
approximates fair market value.

         With respect to the leased  properties,  leases expire at various dates
from  1996  through  2009,  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
49 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,
1996.

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  (43)                      Chairman of the Board, President                                         06/94
                                                   and Chief Executive Officer and
                                                   Director of BankGroup

James E. Adams  (51)                         Group Executive, Chief Financial                                         10/94
                                                   Officer, Treasurer and Director of
                                                   The First Bank of Stuart

Rebecca J. Jenkins  (45)                     Group Executive, General Counsel                                         09/94
                                                   and Secretary

S. Richard Bagby (55)                        Senior Vice President and Chief                                          03/94
                                                   Credit Officer

William D. Kerr (47)                         Senior Vice President and Chief                                          07/77
                                                   Information Officer

Beverly L. Mitchell (48)                     Senior Vice President, Chief Market Manager                               8/95

</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, functional title of Group
Executive  added in October 1995.  Before coming to MSBG, 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, General Counsel and Corporate Secretary, functional title
of Group  Executive  added in October 1995.  Until Ms. Jenkins came to MSBG, 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.

Mr.  Bagby  joined  Piedmont  Trust  Bank in June  of 1980 as Vice  President  -
Commercial Loans and was elected Senior Vice President of Credit  Administration
for MainStreet BankGroup Incorporated in March of 1994.

Executive officer William D. Kerr has served the registrant or its subsidiary in
various executive capacities for the past six years.

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 1995,  1,486,366  shares of MSBC stock were traded through
NASDAQ. As of December 31, 1995, MSBC was owned by 2,262  shareholders of record
not  including  nominee  holders  which would  increase the total.  At year end,
8,535,072  shares were  outstanding.  All common stock in  subsidiary  affiliate
Banks is owned entirely by MainStreet BankGroup.

The following table sets forth the cash dividends paid per share and information
regarding  the market  prices per share of common stock for MSBC for the periods
indicated. The price ranges are based on actual high and low bid transactions as
reported on the NASDAQ National Market System.

<TABLE>
<CAPTION>


     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               .10
     2nd              13-1/8            11                12-53/100            .10
     1st              11-3/4             9-3/8            11-1/4               .09
<CAPTION>
     1994               High            Low                Close             Dividend
     ----               ----            ---                -----             --------
     <S>              <C>               <C>               <C>                  <C>
     4th              12-1/2             9                 9-3/8               .09
     3rd              12-3/4            10                12                   .08
     2nd              11-1/4            10                10-3/8               .08
     1st              11                10-1/16           11                   .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  will receive one additional share of common
stock for each share held on the record date.

BankGroup also resolved to amend the Articles of  Incorporation  to increase the
authorized shares of common stock from 10,000,000 to 20,000,000.

All share and per share  data,  within  this Form  10-K,  has been  restated  to
reflect the stock split.



Item 6.  Selected Financial Data

<TABLE>
<CAPTION>

(In Thousands, Except Per Share Data and Ratios)                            Years Ended December 31
                                                     --------------------------------------------------------------------
SUMMARY OF OPERATIONS                               1995                1994             1993            1992            1991
                                                    ----                ----             ----            ----            ----
<S>                                               <C>                <C>               <C>             <C>             <C>
Interest Income                                   $ 68,675           $ 59,516          $ 57,912        $ 59,486        $ 64,132
Interest Expense                                    31,375             25,217            25,291          29,511          38,263
                                                  --------           --------          --------        --------        --------

Net Interest Income                                 37,300             34,299            32,621          29,975          25,869
Provision for Loan Losses                            1,319              2,827             1,370           2,397           5,424
                                                  --------           --------          --------         -------        --------
Net Interest Income After Provision
     For Loan Losses                                35,981             31,472            31,251          27,578          20,445
Noninterest Income                                   7,975              1,175             6,414           6,386           5,580
Noninterest Expense                                 28,817             28,713            28,254          24,101          22,337
                                                  --------           --------          --------        --------        --------

INCOME BEFORE INCOME TAXES                          15,139              3,934             9,411           9,863           3,688
Income Tax Expense (Benefit)                         4,399               (154)            2,530           2,735             704
                                                  --------            -------          --------        --------        --------
NET INCOME                                        $ 10,740           $  4,088          $  6,881        $  7,128        $  2,984
                                                  ========           ========          ========        ========        ========

PER SHARE DATA
Net Income:
     Primary                                      $   1.37           $    .54          $    .93        $    .97        $    .41
     Fully Diluted                                    1.29                .53               .87             .91             .41
Cash Dividends Declared                                .39                .33               .29             .22             .27
Net Book Value Tier 1                                 9.00               7.94              7.70            7.05            6.30
Net Book Value GAAP                                   8.87               6.86              7.70            7.05            6.30

DAILY AVERAGES
Total Assets                                      $838,057           $787,200          $753,018        $712,988        $677,272
Interest-Earning Assets                            792,254            737,382           711,759         677,626         642,566
Securities Available for Sale                      148,274            205,197           194,429         167,197            ---
Securities Held to Maturity                        115,043             42,989            38,019          33,813         157,338
Loans, Net of Unearned Income                      526,311            474,216           456,393         445,614         462,413
Allowance for Loan Losses                            8,203              8,279             8,839           9,158           8,068
Deposits                                           704,661            697,337           665,579         632,361         601,214
Interest-Bearing Liabilities                       679,021            639,314           615,062         590,709         565,349
Shareholders' Equity Tier 1                         66,874             61,317            55,529          49,804          46,371
Shareholders' Equity GAAP                           62,279             55,777            55,529          49,804          46,371

</TABLE>

<TABLE>
<CAPTION>


(In Thousands, Except Per Share Data and Ratios)                                    Ended December 31
                                                           ----------------------------------------------------------------------
AT YEAR END                                    1995               1994              1993             1992             1991
                                               ----               ----              ----             ----             ----
<S>                                          <C>                <C>               <C>             <C>               <C>
Total Assets                                 $895,801           $794,957          $774,193        $743,590          $691,228
Interest-Earning Assets                       850,600            741,130           726,559         703,065           653,572
Securities Available for Sale                 184,169            119,029           202,283         184,538              ---
Securities Held to Maturity                    97,992            121,779            40,921          34,335           178,985
Loans, Net of Unearned Income                 565,784            499,751           449,411         444,631           451,617
Allowance for Loan Losses                       8,076              8,191             8,351           8,610             8,559
Deposits                                      700,513            704,570           679,714         655,121           606,831
Interest-Bearing Liabilities                  717,514            645,131           627,145         607,872           575,577
Shareholders' Equity Tier I                    76,779             59,640            57,124          51,729            46,004
Shareholders' Equity GAAP                      75,717             51,491            57,124          51,729            46,004

RATIOS
Return on Average Assets                         1.28%               .52%              .91%           1.00%              .44%
Return on Average Shareholders' Equity          17.24               7.33             12.39           14.31              6.44
Average Shareholders' Equity
   to Average Assets                             7.43               7.09              7.37            6.99              6.85
Efficiency Ratio                                61.35              64.78             64.26           65.35             67.42
Net Interest Margin                              4.84               4.81              4.72            4.60              4.23

CREDIT QUALITY RATIOS
Allowance for Loan Losses to Nonperforming
   Loans                                       153.65%            185.48%           198.31%         122.48%            69.84%
Allowance for Loan Losses to Nonperforming
   Assets                                      115.59             117.64             89.97           66.29             54.29
Allowance for Loan Losses to Year-End Loans,
   Net of Unearned Income                        1.43               1.64              1.86            1.94              1.90
Net Charge-Offs to Average Loans, Net of
   Unearned Income                                .27                .63               .36             .53               .79

</TABLE>


Item 7.  Management's Discussion and Analysis of Financial Condition and Results
of Operations


1995 VS 1994

OVERVIEW

         MainStreet BankGroup  Incorporated  reported earnings of $10.7 million,
or $1.29 per share on a fully  diluted  basis for 1995 compared to $4.1 million,
or $.53  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 though  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  $8.3 million in 1994. Return on average assets was 1.28% in
1995  compared  with .52% in 1994.  Return on average  shareholders'  equity was
17.24% in 1995 and 7.33% in 1994.  Net interest  income rose in 1995 driven by a
higher level of earning assets. Average earning assets grew $55 million of which
$52  million  was  related  to  loan  volume.  Strong  loan  demand  contributed
positively to the net interest  margin funded mainly by higher  costing  deposit
liabilities  and other sources of borrowed funds and, in part, by an increase in
average non-interest bearing deposits of $5 million.  Late in the second quarter
and continuing  throughout the remainder of 1995,  the  Corporation  invested in
adjustable rate collateralized mortgage obligations (CMO's) funded by repurchase
agreements which also added to the net interest margin.  Consumers  continued to
shift their deposits from interest checking,  money market, and savings accounts
into higher interest paying time deposit accounts. The provision for loan losses
in 1995 declined  $1.5 million or 53.3% 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 $7.9  million,  an  increase of 15.6% 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 $28.8
million and relatively stable when compared to the $28.7 million in 1994. During
the third quarter of 1995,  the Federal  Deposit  Insurance  Corporation  (FDIC)
determined the Bank Insurance Fund (BIF) was fully  recapitalized.  As a result,
the banks received a refund of their second and third quarter FDIC  assessments.
During the fourth  quarter,  BIF  assessment  rates for 1996 were reduced to the
minimum annual  statutory  requirement.  Also,  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 $4.4 million in 1995  compared to ($.2) 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,  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 3 basis points to 4.84% for 1995 compared
to the 4.81% achieved in 1994.  Average earning assets  increased $54.9 million,
or 7.44%,  with higher yielding loans  accounting for $52.1 million of the total
growth. 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 $3.0 million,  or  approximately
9%.




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 1995, $1.3 million
was  expensed as a loan loss  provision,  compared  with $2.8 million in 1994, a
reduction of $1.5  million,  or 53.3%.  Net loan  charge-offs  were $1.4 million
compared with $3.0 million in 1994.  The ratio of  charge-offs to average loans,
net of unearned income,  for 1995 was .27% compared to 1994's level of .63%. 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 1995, the ratio of the
allowance to loans was 1.43%  compared with the 1.64% at December 31, 1994.  The
allowance  for  loan  losses  at  December  31,  1995  represented   153.65%  of
nonperforming  loans,  compared with 185.48% 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 $7.9 million in 1995  compared with $6.9 million in 1994,
an increase of 15.6%.  Trust income increased $407 thousand,  or 20.4% over 1994
levels due to increased  business  development  and an increased fee  structure.
Service charges on deposit accounts totaled $2.4 million,  increasing 15.0% 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 $3.1 million in 1995 compared to $2.8 million in
1994.  This  rise  was due to  increases  in  card  services  income,  insurance
commissions, discount income, and other small accounts.


INVESTMENT SECURITIES GAINS (LOSSES)

         Securities  gains were $46 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 $28.8 million and stable with
1994  levels  of $28.7  million.  Salaries  expense  was $11.7  million  in 1995
compared  to  $10.8  million  in 1994,  an  increase  of  8.4%.  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  440 at
year-end 1995 compared with 485 at year-end  1994. The remainder of the increase
was due to normal salary increases.  Employee benefit costs totaled $4.0 million
in 1995 up 9.89% 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 $3.2 million at year-end 1995 compared
to $2.8  million in 1994,  an increase of 12.7%.  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 $1.6 million in 1994 to $870 thousand 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 $8.5
million  for 1994,  a  decline  of 8.5%.  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 61.35% from 64.78% 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 $4.4
million in 1995,  compared to $154 thousand income tax benefit in 1994, and $2.6
million income tax expense in 1993.  The Company's  effective tax rate was 29.7%
in 1995, (3.9%) in 1994, and 27.7% in 1993.

         Effective January 1, 1994,  BankGroup adopted SFAS No. 115, "Accounting
for Certain  Investments in Debt and Equity  Securities."  SFAS No. 115 requires
that securities be classified into three categories which are  held-to-maturity,
available-for-sale  and trading  securities.  BankGroup  has  securities  in the
held-to-maturity portfolio and the available-for-sale portfolio. Debt and equity
securities in the  available-for-sale  category are to be reported at fair value
with  unrealized  gains and losses  excluded  from  earnings  and  reported as a
separate  component of  shareholders'  equity,  net of the related  deferred tax
effect.



BALANCE SHEET


INVESTMENT PORTFOLIO

         Investments,  including  securities  available for sale and  securities
held to maturity totaled $282.2 million on December 31, 1995, compared to $240.8
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  financial  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  $15.8 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,  65.3% of
the  Corporation's  investment  portfolio was  classified in the  "available for
sale" category,  with the remaining 34.7% 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.  The maturity
distribution  of all  securities  and average  taxable  equivalent  yields as of
December 31, 1995, are shown on Pages 7 and 8 of this report.

         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 $474.2 million in
1994 to $526.3 million in 1995, up 11%. Average gross loan categories  increased
as follows:  Commercial  up 10.2%;  Consumer up 10.5%;  Real Estate up 14.2% and
Credit Card up 15.5%.  Credit Card loans  outstanding at the end of 1995 of $4.1
million,  up from  $3.5  million  in 1994 are low in  comparison  to other  loan
categories.

         Declining  interest rates during 1995 prompted double digit  percentage
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.

         Credit risk management is centralized  providing more uniform levels of
standardization  and underwriting  among BankGroup  affiliates.  The Corporation
manages  credit  risk  through a variety  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, 1995.  Acquisition and development  construction  loans account for
$24.5 million and $26.6 million of the commercial portfolio at December 31, 1995
and 1994,  respectively.  In addition,  other  commercial  loans secured by real
estate  totaled  $86.7  million and $63.1 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  $88.3  million and $74.4  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 .27% compared  with .63% in 1994. At December 31, 1995,  the allowance
for loan losses to nonperforming  assets was approximately  115.6% compared with
117.6% last year. The allowance for loan losses to nonperforming loans ratio was
153.7% at year end 1995,  compared to 185.5% the previous  year. On December 31,
1995, the allowance for loan losses to loans ratio was 1.43% compared with 1.64%
in 1994.  The  Corporation  believes  that the allowance for loan losses of $8.1
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 $15.2 million  compared to $23.6
million at December 31, 1994,  a decline of 35.5%.  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 $.5 million at December 31, 1995 a
decline of $3.7 million,  or 87.0%, 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 $.8 million, or 16.2%,
in 1995 compared to 1994.


DEPOSITS

         Total  deposits at December  31, 1995 were $700.5  million  compared to
$704.6 million at December 31, 1994. The  Corporation  continued to experience a
shift in deposit mix from savings  deposits to time deposits,  a trend begun the
previous  year.  From year-end 1994 to year-end  1995,  time deposits  increased
$46.5 million,  while savings account balances declined $37.8 million.  Interest
checking  and money  market  accounts  decreased  by $16.8  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 $7.3 million,  with $5.2 million of the
increase occurring in noninterest-bearing  demand deposit accounts. Average time
deposits were up $53.7  million,  while savings,  interest-bearing  checking and
money market accounts decreased $51.5 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
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 $17.1 million in 1995 to $76.8  million at year-end.  Dividends per
share for 1995 were $.39  compared  to $.33 for 1994.  At  year-end  1995,  core
capital (Tier 1) was 8.51% of assets  against 7.43% at December 31, 1994.  Total
capital  to risk  based  assets was 14.78%  versus  14.32% 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 $1.1  million and $8.1  million,
respectively. After the adjustment, total shareholders' equity was $75.7 million
and $51.5 million at December 31, 1995 and 1994, respectively.


ASSET/LIABILITY MANAGEMENT

         The  role  of  the  asset/liability   management  function  within  the
Corporation  is 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  relative to guidelines  established by  management,  the Boards 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 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  value  of  assets,  liabilities  and  capital.  Because  of the
shortcomings of gap reporting,  the Corporation also utilizes an asset/liability
management  simulation model to measure potential earnings and capital risk. The
simulation  model,  because of its  dynamic  nature,  can capture the effects of
future  balance sheet trends,  differing  patterns of 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  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 are made to
certain core deposits to reflect the elasticity of the changes in their interest
rates  relative to changes in market  rates.  Year-end  1995  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 increase by  approximately  1.04% given a parallel rise of
300 basis  points in market rates and  decrease of  approximately  3.11% given a
decline of 300 basis points.

         A longer term measure of interest rate risk exposure is market value of
portfolio  equity,  which simulates the magnitude of change in the market values
of assets,  liabilities and capital  resulting from movements in interest rates.
While the Corporation utilizes its asset/liability  management  simulation model
to  measure  shifts  in  market  value,  no  specific  policy  limits  have been
established. The process of developing an understanding of all the issues raised
in the  measurement  and  interpretation  of this  risk is still  evolving.  The
Corporation separately utilized outside sources to measure the effects of rising
and declining rates on our mortgage-backed  securities portfolios,  with respect
to both market value and prepayment assumptions. According to these sources, the
market value of these securities would decrease by approximately  11.58% with an
average  life  extension  of .2 years,  given a 300 basis  point  rise in market
rates, and increase by approximately  8.96% with an average life decrease of 1.2
years under a 300 basis point decrease in market rates.

         Management believes that measurement of interest rate risk based on the
one year impact on net  interest  income and the longer term effect on portfolio
equity are complimentary, and should be used together to provide a more complete
picture than would be provided by either perspective alone.

         The  measurement  of liquidity is performed by  monitoring  ratios that
indicate the level of liquid assets relative to  liabilities,  the dependence on
potentially volatile funding sources, and the relationship of loans to deposits.
While relying on core deposit relationships as the basis of liquidity, increased
loan demand over the year has resulted in the  Corporation  seeking  alternative
sources of  liquidity  and  utilizing  existing  sources to a higher  level with
established liquidity guidelines.  It is anticipated this trend will continue in
1996. 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.


EFFECTS OF INFLATION

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


1994 VS. 1993

OVERVIEW

         Net  income  for 1994  was $4.1  million  or $.54  per  primary  share,
compared with $6.9 million or $.93 per primary  share for the year 1993.  During
the fourth quarter,  management  restructured the  Corporation's  balance sheet,
through  the sale of that  portion of the  holdings of  collateralized  mortgage
obligations  (securities) most sensitive to a continued rising rate environment,
which  resulted  in  an  after-tax   charge  of   approximately   $4.0  million.
Additionally,  a pre-tax  increase of $1.5  million in loan loss  provision  was
recorded  during 1994 in order to cover net loan  charge-offs  occurring  in the
fourth quarter and to maintain adequate reserve  coverages.  Net interest income
continued to improve throughout 1994, driven by a higher level of earning assets
and a widening of 9 basis points in the net interest  margin.  During 1994,  the
Corporation's  balance sheet was slightly  asset  sensitive  which resulted in a
favorable impact as a result of the rising interest rate environment through the
year.  The higher  level of service  charges,  fees and other income in 1994 was
partially distorted by a pre-tax $500 thousand recovery from previous litigation
settled on more favorable terms than anticipated for the  Corporation.  Although
noninterest expense levels benefited in 1994 through the elimination of the loss
contingency accrued for in 1993, significant legal, audit and other professional
fees were incurred as a result of the pending Trust  Department  litigation.  In
addition,  during 1994 the  Commonwealth of Virginia  clarified its instructions
related to the  calculation  of the Virginia Bank Franchise Tax. As was the case
with  many  other  financial  institutions  in  the  state  of  Virginia,   this
clarification  resulted in an additional  franchise tax assessment for the years
1992, 1993 and 1994 and resulted in a pre-tax  increase in noninterest  expenses
of  approximately  $300 thousand.  Other volume related costs,  primarily credit
card and outside  processing,  also continued to increase  during 1994 over 1993
levels.  During the second quarter of 1994,  BankGroup entered into an agreement
with the Internal Revenue Service which settled a matter associated with the tax
accounting  for core  deposit  intangibles.  This  settlement  reduced  book tax
expense by approximately $600 thousand.  Adjusting for the impact of the balance
sheet  restructuring,  the  additional  loan loss  provision  and the other less
significant anomalies identified above, BankGroup's core earnings for 1994 would
have been approximately $8.3 million, an increase of 21 percent from 1993.


STATEMENT OF INCOME

NET INTEREST INCOME

         Net interest income,  the difference  between total interest income and
total interest expense,  is our 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 are
detailed  on Page 6 of this  report  for the last  three  years,  along with the
related  levels of fully  taxable-equivalent  interest  income and expense.  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  increased  in 1994 as we saw the
Federal  Reserve  tighten  monetary  policy  by way of 6  increases  in both the
discount rate and the federal funds rate. We also saw the prime rate increase in
tandem with the increase in short-term  interest rates,  maintaining a 300 basis
point spread between Prime and Fed Funds.  The impact on our net interest margin
was favorable,  with approximately 30% of our loan portfolio  repriceable within
30 days based on prime  rate.  In 1994,  net  interest  margin  increased  by an
additional  9 basis  points over the 1993  level.  We also  experienced  a $25.6
million  increase in average  earning  assets,  of which,  higher  yielding loan
volume  accounted for $25.4 million of the increase.  Additionally,  funding was
derived  from  a  higher  percentage  of  noninterest-bearing  liabilities.  The
combination of an increasing net interest  margin,  a more profitable  asset mix
and growth in earning  assets in 1994  generated  an  increase  in net  interest
income of $1.7 million, or approximately 5%.


PROVISION FOR LOAN LOSSES

         In 1994, $2.8 million was expensed as a loan loss  provision,  compared
with $1.4 million in 1993. Net loan  charge-offs were $3.0 million compared with
$1.6 million in 1993. The ratio of charge-offs to average loans, net of unearned
income,  for 1994 was .63% compared to 1993's level of .36%.  At year-end  1994,
the  ratio of the  allowance  to loans  was  1.64%,  compared  with the 1.86% at
December  31,  1993.  The  allowance  for  loan  losses  at  December  31,  1994
represented 185.5% of nonperforming loans,  compared with 198.3% at December 31,
1993.  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 $6.9 million in 1994  compared with $6.1 million in 1993.
During 1994  BankGroup  received a settlement  of  approximately  $500  thousand
relating to previous  litigation which was recorded in other income.  Trust fees
declined  approximately  $144  thousand  during the year  totaling  almost  $2.0
million.  Adverse publicity  involving the Trust Department  defalcation and the
internal focus by management to strengthen internal controls in this area, which
left little time for business  development,  were the principal reasons for this
decline.  Service charges on deposit accounts  totaled $2.1 million,  increasing
8.0% from 1993. Other noninterest income which included the previously mentioned
litigation  settlement in 1994 amounted to $2.8 million compared to $2.0 million
in 1993.




NONINTEREST EXPENSE

         Total  noninterest  expenses  were $28.7  million,  up 1.62% over 1993,
which followed a $4.2 million or 17.23% increase over 1992. The increase in 1993
was primarily due to a provision for loss contingencies.  The loss contingencies
were  related to  matters  involving  a Trust  Department  diversion,  a lawsuit
settlement,  and a bond loss,  all of which involved  subsidiary  Piedmont Trust
Bank.  Charges for these three items  totaled $2.7 million  ($1.8  million after
tax). Noninterest expenses were dramatically affected by this provision, as well
as by legal and audit fees related to this matter.  As of February 28, 1995, all
of these matters have been resolved and no additional  provisions  were required
during 1995.

         Salary and employee benefit expenses totaled $14.4 million,  a 10% rise
over  year  ago  levels.   The  1994  rise  was  mainly   attributable   to  the
implementation  of a new corporate  salary  administration  program,  additional
staffing  attributable  to  the  implementation  of  the  Credit  Administration
function and the staffing of other key Holding Company positions. The efficiency
ratio  is  a  measure  of  on-going   operating   expenses  as  they  relate  to
tax-equivalent   net  interest  income  and   non-interest   income.   Excluding
nonrecurring  charges,  our  efficiency  ratio for 1994 was 64.78%  compared  to
64.26% in 1993. The efficiency ratio has remained relatively level over the last
three years,  as rising net interest income offset rising  noninterest  expenses
levels.  Management  intends  to  focus  on  the  efficiency  ratio  as a key to
productivity measurement.

         Occupancy  expense over the last two years  experienced an $86 thousand
increase in 1994 over 1993 levels.  Other  noninterest  expenses  increased $1.6
million,  or  23.4%  during  1994.  Although  the  Corporation  accrued  for the
previously mentioned loss contingency during 1993,  significant legal, audit and
professional  fees associated  with the preparation for this pending  litigation
were incurred and accrued for during 1994. Other volume related costs, primarily
credit card and outside  processing  continued to increase during 1994.  Federal
deposit insurance increased by $103 thousand in 1994 over 1993 levels.

INVESTMENT SECURITIES GAINS (LOSSES)

         Management's  decision to restructure the investment  portfolio through
the sale of $30 million of  collateralized  mortgage  obligations  resulted in a
securities  loss of $5.7 million for 1994. This figure compares to a gain of $.3
million in 1993. Along with the rise in interest rates in 1994, the market value
of our securities  portfolio  fell,  thus increasing the unrealized and realized
losses on our portfolio.

PROVISION FOR INCOME TAXES

         Current  income tax expense  decreased  in 1994,  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.  Due to the aforementioned issues, there was an income tax
benefit in the amount of $154 thousand in 1994,  compared to $2.6 million income
tax expense in 1993. The Company's effective tax rate was 27.7% in 1993.

         Effective  January  1,  1993,  the  Corporation  adopted  Statement  of
Financial  Accounting  Standards (SFAS) No. 109,  "Accounting for Income Taxes,"
causing a $75 thousand increase in income, which is reported in the consolidated
statement  of  income  for  the  twelve  months  ended  December  31,  1993 as a
cumulative effect of change in the method of accounting for income taxes.  Prior
periods' financial  statements have not been restated to retroactively apply the
provisions of SFAS No. 109.

         Effective January 1, 1994,  BankGroup adopted FAS No. 115,  "Accounting
for Certain  Investments in Debt and Equity  Securities."  SFAS No. 115 requires
that securities be classified into three categories which are  held-to-maturity,
available-for-sale  and trading  securities.  BankGroup  has  securities  in the
held-to-maturity portfolio and the available-for-sale portfolio. Debt and equity
securities in the  available-for-sale  category are to be reported at fair value
with  unrealized  gains and losses  excluded  from  earnings  and  reported as a
separate  component of  shareholders'  equity,  net of the related  deferred tax
effect.

         At  December  31,  1994,  BankGroup  had a net  deferred  tax  asset of
approximately  $9.0 million,  $4.2 million of which relates to unrealized losses
on securities accounted for in accordance with SFAS No. 115.






BALANCE SHEET

INVESTMENT PORTFOLIO

         Investments,  including  securities  available for sale and  securities
held to maturity totaled $240.8 million on December 31, 1994, compared to $243.2
million the prior year.  The decrease was the result of moderate  growth in loan
volume,  coupled with  slightly  less growth in deposits.  From year-end 1993 to
year-end 1994,  average loans, net of unearned  income,  grew at a rate of 5.7%,
whereas  average  deposits  grew 4.8%.  During the  fourth  quarter of 1994,  we
restructured  our  investment  portfolio  resulting in a net  reduction of $13.6
million in the book value of securities.  We sold $31.4 million of CMO's/REMIC's
with a book value of $37.4 million  resulting in a $6.0 million before tax loss.
Utilizing a portion of the proceeds,  we purchased  $23.8 million of U.S. agency
debentures and mortgage backed securities.

         With the implementation on January 1, 1994 of SFAS No. 115, "Accounting
for Certain  Investments in Debt and Equity  Securities,"  our investments  have
been placed in two of the three  categories as defined in that statement.  As of
December  31,  1994,   50.6%  of  our   investments   were   classified  in  the
"held-to-maturity"  category.  The  remainder of our  investment  portfolio,  or
49.4%,  were  "available-for-sale"  thus  giving us the  ability to  effectively
manage  interest  rate  risk,  credit,  liquidity  and  capital  positions.  The
accounting  treatment for SFAS No. 115 requires that the unrealized gain or loss
positions  in  the  "available-for-sale"  category  be  reported  as a  separate
component of  shareholders'  equity,  net of any related  income tax effect.  On
December 31, 1994,  the unrealized  losses,  net of applicable  deferred  income
taxes, was $8.1 million.

         All  Collateralized  Mortgage  Obligations  (CMO's) are  classified  as
"available-for-sale." At least on a quarterly basis, 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,"  whereby  securities  are  analyzed  on the  assumption  of an
immediate and parallel shift of 300 basis points in the yield curve. On December
31, 1994, our CMO portfolio had an average life of 6.42 years.  If rates were to
rise or fall by 300 basis points, the average life of the portfolio would extend
to 6.66 years,  or fall to 3.88 years,  respectively.  The market  price of that
portfolio  would  experience an approximate 12% decline or 14% increase if rates
were to rise or fall by 300 basis  points,  respectively.  Most of our CMO's are
issued by the Federal  National  Mortgage  Association  or the Federal Home Loan
Mortgage  Corporation and are backed by collateral issued by these agencies.  We
feel there is no material credit risk inherent in these investments.

LOANS AND CREDIT QUALITY

         Average  gross loans,  net of unearned  income,  increased  from $456.4
million  in  1993  to  $474.2  million  in  1994,  up  3.9%.  The  breakdown  of
increases/decreases  by loan  categories are as follows:  Commercial,  up 11.1%;
Consumer  down 1.17%;  Real  Estate,  up 3.8%;  and Credit Card up 24.7%.  While
credit card volume  outstanding  is low in comparison to other loan  categories,
average balances increased from $2.8 million in 1993 to $3.5 million in 1994.

         Higher interest rates dampened the enthusiasm of home buyers, resulting
in an overall  drop in mortgage  loan  volume.  While the  majority of long-term
fixed rate mortgages are sold in the secondary market,  the mortgage loans being
retained in the portfolio  are generally  either  variable rate  instruments  or
three to five year balloon balance loans.

         During 1994 BankGroup  reorganized the credit  administration  process.
Credit risk  management  was  centralized  and staffing  levels were  increased.
Policies  and   procedures   were   rewritten  to  provide   higher   levels  of
standardization  and underwriting  among BankGroup  affiliates.  The Corporation
manages credit risk through a variety of methods  including  loan grading,  loan
type  and  underwriting.  The  loan  review  function  provides  an  independent
assessment of credit ratings and credit quality.  Management believes that early
detection of developing  credit problems  identified  through regular reviews of
borrowers'  collateral  and financial  performance is proving to be an important
factor in improving credit quality.

         Although there were no large concentrations of credit to any particular
industry,  the economic  trends of the area 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 bank's 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, 1994.  Acquisition
and development  construction  loans account for $26.6 million and $23.4 million
of the  commercial  portfolio  at December 31, 1994 and 1993,  respectively.  In
addition,  other commercial loans secured by real estate totaled $63.1 and $53.7
million at  December  31,  1994 and 1993,  respectively.  The real  estate  loan
portfolio  consists  almost  entirely  of  1-4  family   residential   property.
MainStreet  BankGroup was the creditor for approximately $74.4 million and $80.3
million at December  31,  1994 and 1993,  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.

         During 1994,  the  Corporation's  ratio of net  charge-offs  to average
loans was .63% compared  with .36% in 1993. At December 31, 1994,  the allowance
for loan losses to nonperforming  assets was approximately  117.6% compared with
90.0% at December 31, 1993. The level of nonperforming assets declined from $9.3
million at year-end 1993 to $7.0 million at December 31, 1994. The allowance for
loan  losses to  nonperforming  loans was 185.5% at year-end  1994,  compared to
198.3% the previous year. On December 31, 1994, the allowance for loan losses to
loans was 1.64% compared with 1.86% in 1993. The  Corporation  believes that the
allowance  for  loan  losses  of $8.2  million  provides  adequate  coverage  of
potential loss exposure in the credit portfolio at December 31, 1994.

DEPOSITS

         Total deposits at December 31, 1994,  were $704.6  million  compared to
$679.7 million at December 31, 1993. With the higher interest rate  environment,
we saw a modest  shift  in  deposit  mix from  savings  deposits  to CD's.  From
year-end  1993 to year-end  1994,  time deposits  were up $27.6  million,  while
savings  accounts  decreased $15.7 million.  Interest  checking and money market
accounts increased modestly by $3.1 million. During 1994, we experienced a shift
in deposit mix trends of the previous two years, which management  attributes to
a function of the interest rate environment.  With falling interest rates during
1992 and 1993,  there was a shift from longer-term time deposits to shorter-term
savings  deposits.  The rising rate  environment of 1994 attracted  customers to
longer-term,  higher  yielding  time  deposits  while  shifting  funds away from
shorter-term savings accounts.

         In comparison of average  deposit  balances from the previous  year, we
experienced  an increase of $31.8  million,  with $8.4 million of that  increase
occurring in noninterest-bearing  demand deposit accounts. Average time deposits
were up $11.2 million, while savings interest checking and money market accounts
increased $12.2 million.

OTHER INTEREST-BEARING LIABILITIES

         Short-term debt includes federal funds purchased, securities sold under
repurchase  agreements,  Treasury tax and loan notes and other  borrowed  funds.
Total  short-term  debt at year-end  1994 was $23.2  million,  compared to $20.0
million at December 31, 1993.  Long-term  debt was in the form of a  convertible
debenture  issued  in 1986 for the  purposes  of a bank  acquisition  and  other
general corporate purposes. As of December 31, 1994, long-term debt totaled $8.9
million, compared to $9.2 million the previous year.

SHAREHOLDERS' EQUITY

         Total shareholders' equity,  excluding unrealized losses on securities,
increased by $2.5 million in 1994 to $59.6  million at year end.  Dividends  per
share for 1994 were $.33  compared  to $.29 for 1993.  At  year-end  1994,  core
capital (Tier I) was 7.43% of assets  against 7.38% at December 31, 1993.  Total
capital  to risk  based  assets was 14.32%  versus  13.46% the prior  year.  Our
capital  position  remains  strong with ratios  substantially  above  regulatory
prescribed minimums.

         As previously  mentioned,  financial  reporting in accordance with SFAS
No. 115 requires an adjustment to shareholders' equity for net unrealized losses
in the "available-for-sale" securities portfolio. This adjustment as of December
31,  1994,  was $8.1  million,  bringing  total  shareholders'  equity  to $51.5
million.


<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  sheet of  MainStreet
BankGroup   Incorporated   and   subsidiaries   (formerly   Piedmont   BankGroup
Incorporated  and  subsidiaries)  ("BankGroup" ) as of December 31, 1995 and the
related consolidated  statements of income,  changes in shareholders' equity and
cash flows for the year then ended. These consolidated  financial statements are
the  responsibility  of the BankGroup's  management.  Our  responsibility  is to
express an  opinion  on these  consolidated  financial  statements  based on our
audit.   The   consolidated   financial   statements  of  MainStreet   BankGroup
Incorporated  as of and for each of the two years in the period  ended  December
31, 1994 were audited by other auditors,  whose report,  dated January 20, 1995,
except for Note 21 as to which the date was  February  28,  1995,  expressed  an
unqualified opinion on those statements.

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, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of MainStreet BankGroup
Incorporated  and  subsidiaries as of December 31, 1995 and the results of their
operations  and their cash flows for the year then  ended,  in  conformity  with
generally accepted accounting principles.

As  discussed in Notes 3 and 5 to the  consolidated  financial  statements,  the
BankGroup changed its methods of accounting for certain  securities and impaired
loans in 1994.


                                                       COOPERS & LYBRAND L.L.P.


Greensboro, North Carolina
January 19, 1996

<PAGE>


                          Independent Auditors' Report



To the Board of Directors and Shareholders
MainStreet BankGroup Incorporated:


We have  audited  the  accompanying  consolidated  balance  sheet of  MainStreet
BankGroup   Incorporated   and   subsidiaries   (formerly   Piedmont   BankGroup
Incorporated  and  subsidiaries)  (BankGroup)  as of December 31, 1994,  and the
related consolidated  statements of income,  changes in shareholders' equity and
cash flows for each of the years in the two-year period ended December 31, 1994.
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 audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards. Those standards require that we plan and perform the audits 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 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 financial position of MainStreet BankGroup
Incorporated  and subsidiaries as of December 31, 1994, and the results of their
operations  and their  cash flows for each of the years in the  two-year  period
ended  December 31, 1994,  in  conformity  with  generally  accepted  accounting
principles.


As  discussed  in  Notes  1  and 3 to  the  consolidated  financial  statements,
BankGroup adopted the provisions of Statement of Financial  Accounting Standards
(SFAS)  No.  115,  "Accounting  for  Certain  Investments  in  Debt  and  Equity
Securities,"  on  January  1,  1994.  As  discussed  in  Notes  1 and  5 to  the
consolidated financial statements,  BankGroup adopted the provisions of SFAS no.
114,  "Accounting by Creditors for Impairment of Loan," as subsequently  amended
by SFAS No.  118,"  Accounting  by Creditor  for  Impairment  of a Loan - Income
Recognition and Disclosures," on January 1, 1994.



                                                       KPMG PEAT MARWICK LLP


Roanoke, Virginia
January 20, 1995, except as to Note 21
   which is as of February 28, 1995


<PAGE>



               MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                          (IN 000'S EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
                                                                                     December 31

                                                                           1995                        1994
                                                                           ----                        ----
<S>                                                                      <C>                         <C>
ASSETS
Cash and Due From Banks                                                  $ 25,680                    $ 24,680
Interest-Earning Deposits In Domestic Banks                                   875                          50
Mortgage Loans Held for Sale                                                1,780                         521
Securities Available for Sale (Approximate
   Cost of $183,904 and $127,337
    in  1995 and 1994, respectively)                                      184,169                     119,029
Securities Held to Maturity (Approximate
    Market Values of $102,484 and
    $121,041 in 1995 and 1994, respectively)
         Taxable                                                           61,184                      81,491
         Nontaxable                                                        36,808                      40,288
                                                                         --------                    --------
                                                                           97,992                     121,779

Loans, Net of Unearned Income and Deferred Fees                           565,784                     499,751
    Less:   Allowance for Loan Losses                                      (8,076)                     (8,191)
                                                                         ---------                   --------
         Loans, Net                                                       557,708                     491,560

Bank Premises and Equipment, Net                                           10,767                      11,240
Other Real Estate Owned                                                     1,583                       2,452
Other Assets                                                               15,247                      23,646
                                                                         --------                    --------

        TOTAL ASSETS                                                     $895,801                    $794,957
                                                                         ========                    ========

LIABILITIES
Deposits:
    Demand Deposits (Noninterest-Bearing)                                $ 95,664                    $ 91,570
    Interest Checking Accounts                                             76,802                      78,567
    Savings Deposits                                                      115,202                     152,990
    Money Market Investment Accounts                                       55,015                      70,087
    Time Deposits:
         Certificates of Deposit $100,000 and Over                         68,434                      49,743
         Other                                                            289,396                     261,613
                                                                         --------                    --------
       Total Deposits                                                     700,513                     704,570

Short-Term Debt                                                           111,736                      23,213
Long-Term Debt                                                                929                        ---
7% Convertible Subordinated Debentures                                        ---                       8,918
Accrued Interest Payable                                                    2,674                       2,141
Accrued Loss Contingencies                                                    ---                       1,341
Other Liabilities                                                           4,232                       3,283
                                                                         --------                    --------

       TOTAL LIABILITIES                                                  820,084                     743,466
                                                                         --------                    --------

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 8,535,072 and 3,755,012 Shares in
  1995 and 1994, respectively                                              42,675                      18,775
Capital in Excess of Par                                                   11,740                       4,893
Retained Earnings                                                          22,364                      35,972
Unrealized Gains (Losses) on Securities,  Net of Deferred
  Income Tax Benefit of $.5 million and $4.2 million in 1995
   and 1994, respectively                                                  (1,062)                     (8,149)
                                                                         ---------                   --------

       TOTAL SHAREHOLDERS' EQUITY                                          75,717                      51,491
                                                                         --------                    --------

       TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                        $895,801                    $794,957
                                                                         ========                    ========


</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>

               MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                        (IN 000'S EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
                                                                                         Years Ended December 31

                                                                           1995                   1994                 1993
                                                                           ----                   ----                 ----
<S>                                                                      <C>                    <C>                  <C>
INTEREST INCOME
Interest and Fees on Loans:
    Taxable                                                              $50,780                $42,673              $42,291
    Nontaxable                                                               163                    191                  228
Interest on Mortgage Loans Held for Sale                                     144                    514                  ---
Interest and Dividends on Securities Available for Sale                    9,689                 13,108               12,329
Interest and Dividends on Securities Held to Maturity:
    Taxable                                                                5,705                    244                  174
    Nontaxable                                                             2,123                  2,324                2,213
Other Interest Income                                                         71                    462                  677
                                                                         -------                -------              -------
    Total Interest Income                                                 68,675                 59,516               57,912
                                                                         -------                -------              -------

INTEREST EXPENSE
Deposits                                                                  27,662                 23,980               24,006
Short-Term Debt                                                            3,196                    594                  630
Long-Term Debt                                                                63                    ---                  ---
7% Convertible Subordinated Debentures                                       454                    643                  655
                                                                         -------                -------              -------
Total Interest Expense                                                    31,375                 25,217               25,291
                                                                         -------                -------              -------
     Net Interest Income                                                  37,300                 34,299               32,621
Provision for Loan Losses                                                  1,319                  2,827                1,370
                                                                         -------                -------              -------
     Net Interest Income After Provision for Loan Losses                  35,981                 31,472               31,251
                                                                         -------                -------              -------

NONINTEREST INCOME
Service Charges, Fees and Other                                            5,529                  4,865                4,000
Trust Department Income                                                    2,400                  1,993                2,137
Securities Gains (Losses), Net                                                46                 (5,683)                 277
                                                                         -------                 -------             -------
                                                                           7,975                  1,175                6,414
                                                                         -------                -------              -------
NONINTEREST  EXPENSE
Salaries                                                                  11,669                 10,769                9,694
Employee Benefits                                                          4,035                  3,672                3,482
Net Occupancy                                                              1,265                  1,335                1,249
Equipment                                                                  3,163                  2,807                2,710
FDIC Assessment                                                              870                  1,588                1,485
Stationery and Supplies                                                      755                    647                  651
Advertising                                                                  312                    432                  444
Provision for Loss Contingencies                                             ---                    ---                2,713
Other                                                                      6,748                  7,463                5,826
                                                                         -------                -------              -------
                                                                          28,817                 28,713               28,254
                                                                         -------                -------              -------
     Income Before Income Taxes and Cumulative Effect of Change
         in Accounting Principle                                          15,139                  3,934                9,411
Income Tax Expense (Benefit)                                               4,399                   (154)               2,605
                                                                         -------                -------              -------
     Income Before Cumulative Effect of Change in Accounting
         Principle                                                        10,740                  4,088                6,806

Cumulative Effect at January 1, 1993 of Change in Accounting
     for Income Taxes                                                        ---                    ---                   75
                                                                         -------                -------              -------

NET INCOME                                                               $10,740                $ 4,088              $ 6,881
                                                                         =======                =======              =======
Per Share:
Primary:
     Income Before Cumulative Effect of Change in Accounting Principle   $  1.37                $   .54              $   .92
     Cumulative Effect at January 1, 1993 of Change in Accounting for
          Income Taxes                                                       ---                    ---              $   .01
                                                                          ------                -------              -------

     NET INCOME                                                          $  1.37                $   .54              $   .93
                                                                         =======                =======              =======

     Average Shares Outstanding                                            7,842                  7,510                7,384
                                                                         =======                =======              =======

Fully Diluted:
     Income Before Cumulative Effect of Change in Accounting Principle   $  1.29                $   .53              $   .86
     Cumulative Effect at January 1, 1993 of Change in Accounting for
           Income Taxes                                                      ---                    ---              $   .01
                                                                         -------                -------              -------

      NET INCOME                                                         $  1.29                $   .53              $   .87
                                                                         =======                =======              =======

      Average Shares Outstanding                                           8,548                  8,516                8,414
                                                                         =======                =======              =======
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>


               MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                      (IN 000'S EXCEPT FOR PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                               Unrealized
                                                                                                  Gains
                                              Common         Capital In     Retained          (Losses) on
                                              Stock        Excess of Par    Earnings         Securities, Net       Total
                                              ------       -------------    ---------       ----------------       -----
<S>                                          <C>            <C>              <C>              <C>                 <C>
YEAR ENDED DECEMBER 31, 1993
Balance at January 1, 1993                   $14,683        $ 3,709          $33,337          $    ---            $51,729
Net Income                                       ---            ---            6,881               ---              6,881
Cash Dividends ($.29 Per Share)                  ---            ---           (2,170)              ---             (2,170)
Sale  of 69,948 Shares Through Dividend
    Reinvestment Plan and Stock Option Plan      175            522              ---               ---                697
Stock Split Effected in the Form of a Stock
    Dividend  including cash paid in lieu of
     fractional shares                         3,690            ---           (3,703)              ---                (13)
                                              -------        ------          -------           -------            -------
Balance at December 31, 1993                  18,548          4,231           34,345               ---             57,124


YEAR ENDED DECEMBER 31, 1994
Cumulative effect of change in accounting
    for securities at January 1, 1994, net
    of deferred income tax expense of $1,110     ---            ---              ---             2,154              2,154
Net Income                                       ---            ---            4,088               ---              4,088
Cash Dividends ($.33 Per Share)                  ---            ---           (2,461)              ---             (2,461)
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 $5,307                        ---            ---              ---           (10,303)           (10,303)
                                              ------         ------          -------            -------           -------
Balance at December 31, 1994                  18,775          4,893           35,972            (8,149)            51,491


YEAR ENDED DECEMBER 31, 1995
Net Income                                       ---            ---           10,740               ---             10,740
Cash Dividends ($.39 Per Share)                  ---            ---           (3,012)              ---             (3,012)
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 $3,650                            ---            ---              ---            7,087              7,087
Stock Split Effected in the Form of a
    Stock Dividend                            21,336            ---          (21,336)             ---                ---
                                             -------        -------          -------           --------            -------
Balance at December 31, 1995                 $42,675        $11,740          $22,364           $(1,062)            $75,717
                                             =======        =======          =======           ========            =======
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>

               MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (IN 000'S)

<TABLE>
<CAPTION>
                                                                                         Years Ended December 31

                                                                                 1995              1994             1993
                                                                                 ----              ----             ----
<S>                                                                          <C>               <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

Net Income                                                                   $ 10,740          $  4,088         $  6,881
Adjustments to Reconcile Net Income to Net Cash Provided (Used)
    by Operating Activities:
         Provision for Loan Losses                                              1,319             2,827            1,370
         Depreciation and Amortization                                          1,954             1,855            1,806
         Amortization of Securities Premiums and Discounts, Net                  (299)               21              (64)
         Amortization of Purchase Discounts                                      ---                ---              111
         Provision for Deferred Income Taxes                                      772            (1,315)            (537)
         (Gain) Loss on Sale of Securities, Net                                   (46)            5,683             (277)
         Amortization of Intangibles                                              267               295              271
         Mortgage Loan Originations Held for Sale                             (10,914)          (10,651)         (47,495)
         Mortgage Loans Sold                                                    9,655            21,214           40,568
         Changes in Other Assets and Other Liabilities:
         Other Assets                                                           3,707               589           (8,086)
         Accrued Interest                                                         533               274             (179)
         Accrued Loss Contingencies                                            (1,341)              ---            1,341
         Other Liabilities                                                        949            (1,701)           2,725
                                                                             --------          --------         --------


Net Cash Provided (Used) by Operating Activities:                              17,296            23,179           (1,565)
                                                                             --------          --------         --------
CASH FLOWS FROM INVESTING ACTIVITIES:

Net Decrease in Federal Funds Sold                                                ---            22,810           12,545
Increase in Interest-Earning Deposits                                            (825)              ---              ---
Purchases of Securities Available for Sale                                    (88,344)          (26,556)        (183,588)
Purchases of Securities Held to Maturity                                       (4,947)          (86,714)         (11,553)
Proceeds from Sale of Securities Available for Sale                            26,954            87,464          112,337
Proceeds from Sale of Securities Held to Maturity                                 ---               ---              175
Proceeds from Calls and Maturities of Securities Available for Sale            20,715             8,291           54,748
Proceeds from Calls and Maturities of Securities Held to Maturity              15,354             1,860            3,891
Net Increase in Loans                                                         (67,467)          (53,327)          (6,409)
Purchases of Bank Premises and Equipment                                       (1,481)           (2,815)          (1,000)
Net Decrease in Other Real Estate                                                 869             2,566              846
                                                                             --------          --------         --------

Net Cash Used in Investing Activities                                         (99,172)          (46,421)         (18,008)
                                                                             --------          --------         --------


CASH FLOWS FROM FINANCING ACTIVITIES:

Net Increase (Decrease) in Deposits                                            (4,057)           24,856           24,593
Net Increase (Decrease) in Short-Term Debt                                     88,523             3,244           (3,011)
Net Increase in Long-Term Debt                                                    929               ---              ---
Cash Dividends                                                                 (3,012)           (2,461)          (2,170)
Cash Paid in Lieu of Fractional Shares for Stock Split                            ---               ---              (13)
Net Expenses Incurred for Debenture Conversion                                    (32)              ---              ---
Proceeds From Issuance of Common Stock                                            525               613              697
Cash Used to Purchase Subordinated Debentures                                     ---               ---             (261)
                                                                             --------          --------         --------

Net Cash Provided by Financing Activities                                      82,876            26,252           19,835
                                                                             --------          --------         --------

Net Increase in Cash and Due From Banks                                         1,000             3,010              262
Cash and Due From Banks at Beginning of Year                                   24,680            21,670           21,408
                                                                             --------          --------         --------

Cash and Due From Banks at End of Year                                       $ 25,680          $ 24,680         $ 21,670
                                                                             ========          ========         ========

</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>


               MAINSTREET BANKGROUP INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 DECEMBER 31, 1995 AND 1994 AND FOR EACH OF THE
                THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995

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.

SECURITIES  AVAILABLE FOR SALE AND HELD TO MATURITY.  In May 1993, the Financial
Accounting  Standards  Board (FASB)  issued  Statement  of Financial  Accounting
Standards  (SFAS) No.,  115,  "Accounting  for Certain  Investments  in Debt and
Equity  Securities,"  which was adopted by BankGroup  beginning January 1, 1994.
SFAS No. 115 addresses the accounting and reporting for  investments in debt and
equity   securities  by  requiring  such  investments  be  classified  in  three
categories and accounted for 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.

-    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.  The  adoption  of SFAS  No.  115  (see  Notes  3 and 4) did not  impact
BankGroup  earnings as  BankGroup  does not have  trading  securities.  Mortgage
backed securities along with CMO/REMIC's are included in the  available-for-sale
category,  and  accordingly,  unrealized  gains and  losses  are  reported  as a
separate component of shareholders' equity.

Gains and losses on securities  sales are realized in period in which  incurred.
Amortization and accretion of premiums and discounts are included in income over
the contractual life of the securities.

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

BankGroup  adopted Statement of Financial  Accounting  Standards (SFAS) No. 114,
"Accounting  by Creditors for Impairment of a Loan," as amended by SFAS No. 118,
"Accounting  by Creditors  for  Impairment  of a Loan - Income  Recognition  and
Disclosures,"  as of January 1,  1994.  SFAS 114  requires  the  measurement  of
impaired  loans  based  on the  present  value of  expected  future  cash  flows
discounted  at the loan's  effective  rate, or at the loan's  observable  market
price or the fair value of its  collateral.  SFAS 114 eliminates the requirement
that a creditor account for certain loans as foreclosed assets prior to the time
the  creditor  has  taken  possession  of  the  collateral,   resulting  in  the
reclassification  of in-substance  foreclosures and related  specific  valuation
allowances  for possible  losses from other real estate owned to loans.  The net
amount of in-substance  foreclosures and related specific  valuation  allowances
reclassified  from other real estate owned to loans totaled  approximately  $2.4
million at January 1, 1994.

SFAS 114 does not apply to large  groups of smaller  balance  homogeneous  loans
that  are   collectively   evaluated  for  impairment.   For  BankGroup,   loans
collectively  reviewed for impairment include 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".  The adoption of
SFAS 114 did not  result in  additional  provisions  for  losses or  changes  in
previously  reported  net  earnings  due to  BankGroup's  continuing  policy  of
measuring  loan  impairment  based on the fair  value of the  loan's  collateral
property,  which is consistent with the methods prescribed in SFAS No. 114. SFAS
118  amended  SFAS No.  114 to  allow a  creditor  to use  existing  methods  of
recognizing interest income on an impaired loans.

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 within the scope of SFAS 114 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.

ALLOWANCE  FOR LOAN LOSSES.  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 preparing  the
consolidated financial statements,  management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the  consolidated  balance sheet and income and expenses for the period.
Actual results could differ  significantly  from these estimates.  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.  In
addition,  various regulatory agencies, as an integral part of their examination
process, periodically review BankGroup's allowance for loan losses and valuation
of real estate owned. Such agencies may require BankGroup to recognize additions
to the allowance for loan losses and additional  write-downs in the valuation of
real estate owned based on their  judgments of information  available to them at
the time of their examination.

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.

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.

INCOME  TAXES.  BankGroup  follows the  provisions  of  Statement  of  Financial
Accounting  Standards  (SFAS) No. 109,  "Accounting for Income Taxes." Under the
asset and liability method of SFAS No. 109,  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.  Under SFAS No.
109, 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 and
the  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. 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 1995, 1994, and 1993. Share and per share data has
been restated to reflect the stock split.

TRUST DEPARTMENT.  Trust Department income is recognized on the accrual basis of
accounting  and assets held by the Trust  Department  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 $1.1 million and $1.3
million at December 31, 1995 and 1994, respectively.

SUPPLEMENTAL  CASH  FLOW  INFORMATION.  Total  interest  paid in cash was  $30.8
million,  $25.1 million and $25.5 million for the years ended December 31, 1995,
1994 and 1993,  respectively.  Cash paid for income taxes was $3.6 million, $2.9
million and $3.3 million for the years ended  December 31, 1995,  1994 and 1993,
respectively.  Repossessed and foreclosed  properties  transferred to Other Real
Estate and Other Assets from Loans  amounted to $1.0  million,  $2.8 million and
$0.9 million in 1995, 1994 and 1993,  respectively.  During 1995,  debentures in
the amount of $8,918,000  were  converted  into 979,820  shares of common stock.
Unrealized  losses on  securities of $1.6 million and $12.3 million are included
as noncash investing activities in 1995 and 1994, respectively.

EMPLOYEE BENEFIT PLANS.  BankGroup  maintains a defined benefit  retirement plan
for the benefit of its  employees.  This plan was effective in 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.  BankGroup  also maintains a 401-K plan for its employees.
The  Corporation  contributes  an  amount  equal  to 50% of the  first 6% of the
compensation deferred by the employee. Ending in 1995 was a discretionary profit
sharing plan.

The BankGroup also provides certain health care insurance benefits to active and
retired employees.  Effective January 1, 1993,  BankGroup adopted the provisions
of Statement of Financial Accounting  Standards No. 106, "Employers'  Accounting
for  Postretirement  Benefits  Other Than  Pensions,"  which  established  a new
accounting   principle   for  the  cost  of  retiree   health   care  and  other
postretirement  benefits  (see Note 11).  Prior to January  1,  1993,  BankGroup
recognized  these  benefits  on  a  pay-as-you-go  method  (i.e.,  cash  basis).
BankGroup has elected to amortize the cumulative  effect of the change in method
of accounting for postretirement benefits (i.e., transition obligations) over 20
years.

RECLASSIFICATIONS.  Certain reclassifications have been made to the prior years'
financial statements to conform to the 1995 presentation.

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

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 - RESTRICTED CASH BALANCES

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
$6.9 million and $6.5 million at December 31, 1995 and 1994, respectively.

NOTE 3 - SECURITIES AVAILABLE FOR SALE

The following  sets forth the  composition  of securities  available for sale at
December 31, 1995 and 1994:

<TABLE>
<CAPTION>
                                                                                            1995
                                                           -----------------------------------------------------------------------
                                                                                 Gross              Gross
                                                            Carrying           Unrealized         Unrealized          Approximate
                                                              Value              Gains              Losses            Market Value
                                                          ------------       --------------      -------------       --------------
                                                                                         (In 000's)
<S>                                                        <C>                <C>                 <C>                  <C>
Obligations of U. S. Government Agencies                   $ 42,848           $    347            $    (298)           $ 42,897
Mortgage Backed Securities                                   26,728                431                  (18)             27,141
Collateralized Mortgage Obligations and REMICs               97,540                157               (1,445)             96,252
Corporate Bonds                                              11,524                562                  (28)             12,058
Other Securities                                              4,633                562                  ---               5,195
Obligations of State and Political Subdivisions                 631                ---                   (5)                626
                                                           --------           --------            ----------           --------
   Total Securities Available for Sale                     $183,904           $  2,059            $  (1,794)           $184,169
                                                           ========           ========            ==========           ========
</TABLE>

<TABLE>
<CAPTION>
                                                                                            1994
                                                           ----------------------------------------------------------------------
                                                                                 Gross              Gross
                                                            Carrying          Unrealized          Unrealized          Approximate
                                                              Value             Gains               Losses            Market Value
                                                           -----------        -----------         -----------         -------------
                                                                                         (In 000's)
<S>                                                        <C>                <C>                 <C>                  <C>
U. S. Treasury Securities                                  $  1,276           $    ---           $       (3)           $  1,273
Obligations of U. S. Government Agencies                     49,602                  1               (1,926)             47,677
Mortgage Backed Securities                                    4,641                 40                 (100)              4,581
Collateralized Mortgage Obligations and REMICs               58,822                 29               (6,384)             52,467
Corporate Bonds                                              11,533                143                 (536)             11,140
Other Securities                                              1,463                428                  ---               1,891
                                                           --------           --------           ----------            --------
   Total Securities Available for Sale                     $127,337           $    641           $   (8,949)           $119,029
                                                           ========           ========           ==========            ========
</TABLE>

The carrying and approximate  market values of securities  available for sale at
December 31, 1995, 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>
                                                                           1995
                                                           --------------------------------------
                                                           Carrying                  Approximate
                                                             Value                   Market Value
                                                           ---------                 -------------
                                                                        (In 000's)
<S>                                                        <C>                         <C>
Due in one year or less                                    $  5,210                    $  5,242
Due after one year but within five years                     36,451                      36,651
Due after five years but within ten years                    12,837                      13,188
Due after ten years                                           5,138                       5,695
Mortgage-Backed Securities                                   26,728                      27,141
CMOs/REMICs                                                  97,540                      96,252
                                                           --------                    --------
   Total Securities Available for Sale                     $183,904                    $184,169
                                                           ========                    ========
</TABLE>

Proceeds from calls and  maturities of securities  available for sale were $20.7
million,  $8.3 million and $54.7 million for 1995, 1994 and 1993,  respectively.
Proceeds from sales of securities  available for sale during 1995, 1994 and 1993
were $27.0 million, $87.5 million and $112.3 million, respectively.  Gross gains
of $47,000,  $57,000 and $302,000 and gross  losses of $27,000,  $5,745,000  and
$35,000 were realized on those sales,  calls and maturities  for 1995,  1994 and
1993, respectively.

Securities available for sale with carrying values approximating $82 million and
$30 million at December 31, 1995 and 1994, respectively,  were pledged to secure
public deposits and for other purposes as required or permitted by law.

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, 1995 and 1994 are as follows:

<TABLE>
<CAPTION>
                                                                                     1995
                                                           --------------------------------------------------------------
                                                                            Gross          Gross
                                                           Carrying       Unrealized     Unrealized         Approximate
                                                            Value           Gains          Losses           Market Value
                                                           ---------      -----------    -----------        -------------
                                                                                   (In 000's)
<S>                                                        <C>             <C>            <C>                 <C>
U. S. Treasury Securities                                  $  4,925        $   111        $    ---            $  5,036
Obligations of U. S. Government Agencies                     30,960          2,395             ---              33,355
Mortgage Backed Securities                                   22,328            775             ---              23,103
Obligations of State and Political Subdivisions              39,779          1,334            (123)             40,990
                                                           --------        -------        --------            --------
    Total Securities Held to Maturity                      $ 97,992        $ 4,616        $   (123)           $102,484
                                                           ========        =======        ========            ========
</TABLE>

<TABLE>
<CAPTION>
                                                                                     1994
                                                          --------------------------------------------------------------

                                                                            Gross          Gross
                                                           Carrying       Unrealized     Unrealized         Approximate
                                                            Value           Gains          Losses           Market Value
                                                          ----------      -----------    -----------        ------------
                                                                                   (In 000's)
<S>                                                        <C>             <C>            <C>                 <C>
U.S. Treasury Securities                                   $  4,860        $   ---          $   ---           $  4,860
Obligations of U. S. Government Agencies                     49,704            ---              ---             49,704
Mortgage Backed Securities                                   23,764            ---              ---             23,764
Obligations of State and Political Subdivisions              43,451            694           (1,432)            42,713
                                                           --------        -------          --------          --------
     Total Securities Held to Maturity                     $121,779        $   694          $(1,432)          $121,041
                                                           ========        =======          =======           ========
</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, 1995 this
unrealized  loss was $1.9  million.  During  the  fourth  quarter  of 1995,  the
Financial Accounting  Standards Board allowed financial  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
$15.8 million of "held to maturity" as "available  for sale" without any penalty
or tainting of the remaining "held to maturity" portfolio.

The carrying and  approximate  market values of  securities  held to maturity at
December 31, 1995, 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>
                                                                            1995
                                                           -----------------------------------------
                                                                                        Approximate
                                                           Carrying Value               Market Value
                                                           --------------              -------------
                                                                          (In 000's)

<S>                                                         <C>                          <C>
Due in one year or less                                     $  5,672                     $  5,758
Due after one year but within five years                      30,448                       30,997
Due after five years but within ten years                     33,460                       36,367
Due after ten years                                            6,084                        6,257
Mortgage-Backed Securities                                    22,328                       23,103
                                                            --------                     --------
                                                            $ 97,992                     $102,482
                                                            ========                     ========
</TABLE>

Proceeds from the calls and maturities of securities held to maturity were $31.1
million for 1995. These calls and maturities yielded $31,000 in gains and $5,000
in losses.  Calls and  maturities  of $1.9 million  during 1994 yielded a $5,000
gain.  Proceeds from sales,  calls and maturities of securities held to maturity
during 1993 were $4.0  million.  Gross gains of $10,000  were  realized on those
sales for 1993.

Securities  with carrying  values  approximating  $29 million and $20 million at
December 31, 1995 and 1994, 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,  1995 and 1994 are  summarized
below:

<TABLE>
<CAPTION>
                                                                   1995                  1994
                                                                   ----                  ----
                                                                           (In 000's)
<S>                                                              <C>                   <C>
Commercial                                                       $264,924              $235,205
Real Estate                                                       135,830               115,106
Consumer                                                          176,110               157,857
                                                                 --------              --------
   Total Loans                                                    576,864               508,168
   Less:  Unearned Income and Deferred Fees                       (11,080)               (8,417)
                                                                 --------              --------
     Loans, Net of Unearned Income and Deferred Fees              565,784               499,751
   Less:  Allowance for Loan Losses                                (8,076)               (8,191)
                                                                 --------              --------
     Loans, Net                                                  $557,708              $491,560
                                                                 ========              ========
</TABLE>

A summary  of  changes in the  allowance  for loan  losses for each of the three
years in the period ended December 31, 1995 follows:

<TABLE>
<CAPTION>
                                                       1995                1994                1993
                                                       ----                ----                ----
                                                                        (In 000's)
<S>                                                  <C>                  <C>                 <C>
Balance at Beginning of Year                         $ 8,191              $ 8,351             $ 8,610
Provision for Loan Losses                              1,319                2,827               1,370
Losses Charged to Allowance                           (1,856)              (3,564)             (2,198)
Recoveries Credited to Allowance                         422                  577                 569
                                                     -------              -------             -------
Balance at End of Year                               $ 8,076              $ 8,191             $ 8,351
                                                     =======              =======             =======
</TABLE>

Nonperforming assets at December 31, 1995 and 1994 are as follows:

<TABLE>
<CAPTION>
                                                              1995                  1994
                                                              ----                  ----
                                                                       (In 000's)
<S>                                                         <C>                   <C>
Nonaccrual Loans                                            $ 3,383               $ 2,736
Loans Past Due 90 Days or More                                1,873                 1,680
                                                            -------               -------
Total Nonperforming Loans                                     5,256                 4,416
Other Real Estate Owned                                       1,583                 2,452
Other Repossessed Assets                                        148                    95
                                                            -------               -------
Total Foreclosed/Repossessed Assets                           1,731                 2,547
                                                            -------               -------
    Total Nonperforming Loans and Foreclosed/
    Repossessed Assets                                      $ 6,987               $ 6,963
                                                            =======               =======
</TABLE>

Nonperforming  loans  were  .93% and .88% of loans  net of  unearned  income  at
December 31, 1995 and 1994, respectively.

The effect of nonaccrual loans on interest income was as follows:

<TABLE>
<CAPTION>

                                                              1995                  1994                  1993
                                                              ----                  ----                  ----
                                                                                 (In 000's)
<S>                                                        <C>                    <C>                   <C>
Gross amount of interest that would have been
     recorded at original rate                             $    306               $   265               $   391
Interest that was reflected in income                            11                    13                    23
                                                           --------               -------               -------
Net impact on interest income                              $    295               $   252               $   268
                                                           ========               =======               =======
</TABLE>

At December 31, 1995 and 1994, the recorded  investment in loans which have been
identified  by the  BankGroup  as  impaired  loans in  accordance  with SFAS 114
totaled $3.4 million and $3.0 million, respectively, and the total allowance for
loan losses related to such loans was $.6 million and $.7 million, respectively.
The average  balance during 1995 and 1994 for impaired  loans was  approximately
$3.8 million and $4.5 million,  respectively.  The total interest income related
to impaired loans reflected in the 1995 and 1994 statements of income was $6,000
and  $11,000,  respectively.  The net amount of  in-substance  foreclosures  and
related specific valuation allowances  reclassified from other real estate owned
to loans totaled approximately $2.4 million at January 1, 1994.


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>
                                                                      1995                          1994
                                                                      ----                          ----
                                                                                   (In 000's)
<S>                                                                  <C>                          <C>
Balance at Beginning of Year                                         $24,167                      $22,852
Additions                                                              5,900                        9,406
Payments                                                             (10,290)                      (8,091)
                                                                     -------                       -------
Balance at End of Year                                               $19,777                      $24,167
                                                                     =======                       =======
</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, 1995
were $3.7 million.

NOTE 7 - BANK PREMISES AND EQUIPMENT

Bank premises and equipment consist of:

<TABLE>
<CAPTION>
                                                                        1995                             1994
                                                                        ----                             ----
                                                                                   (In 000's)
<S>                                                                  <C>                               <C>
Land                                                                 $  1,304                           $  1,301
Buildings and Improvements                                              9,105                              8,873
Furniture and Equipment                                                17,970                             16,887
Construction in Progress                                                  140                                183
Leasehold Improvements                                                    515                                490
                                                                     --------                           --------
                                                                       29,034                             27,734
Accumulated Depreciation and Amortization                             (18,267)                           (16,494)
                                                                     --------                           --------

Total Bank Premises and Equipment                                    $ 10,767                           $ 11,240
                                                                     ========                           ========
</TABLE>


NOTE 8 - INCOME TAXES

The components of income tax expense for the years ended December 31, 1995, 1994
and 1993 are as follows:
<TABLE>
<CAPTION>

                                                             1995                  1994                  1993
                                                             ----                  ----                  ----
                                                                                 (In 000's)
<S>                                                        <C>                    <C>                   <C>

Current Tax Expense                                        $3,643                 $1,161                $3,067
Deferred Tax (Benefit) Expense                                756                 (1,315)                 (462)
                                                           ------                 ------                -------
Income Tax Expense (Benefit)                               $4,399                 $ (154)               $2,605
                                                           =======                ======                ======
</TABLE>


Taxes related to securities transactions include a tax expense of $16,000 on net
securities  gains in 1995, tax benefit of $1.9 million on net securities  losses
in 1994, and tax expense of $94,000 on net securities gains in 1993.

The reasons for the  differences  in income tax effective rate and the statutory
Federal income tax rate are as follows:

<TABLE>
<CAPTION>
                                                            1995                    1994                    1993
                                                            ----                    ----                    ----
<S>                                                         <C>                   <C>                    <C>

Federal Income Tax Expense Rate                             35.0%                  34.0%                 34.0%
Tax Exempt Interest                                         (5.0)                 (21.6)                 (8.9)
Nondeductible Interest Expense to Carry
     Tax-Exempt Securities                                    .6                    2.2                   0.9
IRS Intangibles Settlement                                   ---                  (19.5)                  ---
Change in Marginal Tax Rate                                 (1.0)                   ---                   ---
Other                                                         .1                    1.0                   1.7
                                                           -----                  -----                 -----

         Effective Income Tax Rate                          29.7%                  (3.9)%                27.7%
                                                           =====                  =====                 =====
</TABLE>


The  components  of net  deferred  tax assets at December  31, 1995 and 1994 are
presented below:

<TABLE>
<CAPTION>
                                                                                   1995                 1994
                                                                                   ----                 ----
                                                                                           (In 000's)
<S>                                                                             <C>                     <C>
Deferred Tax Assets:

Allowance for Loan Losses and Unearned Fees                                     $3,039                  $3,133
Valuation Allowance on Securities Available for Sale                               547                   4,197
Other Real Estate Owned, Principally Due to Write-Downs
     Not Deductible for Tax Purposes                                               425                     422
Intangibles, Due to Differences in Amortization Periods for Tax
     Purposes                                                                      935                     912
Interest Earned Not Collected on Nonaccrual Loans Not
     Recognized for Financial Reporting Purposes                                   149                     194
Miscellaneous Accruals not Deductible for Tax Purposes                             584                     868
                                                                                ------                  ------
Total Gross Deferred Tax Assets                                                 $5,679                  $9,726
                                                                                ======                  ======

Deferred Tax Liabilities:

Bank Premises and Equipment, Principally Due to Differences
     in Depreciation                                                               502                     511
Securities, Due to Differences in Discount Accretion                               242                     120
Prepaid Expenses, Principally Due to Deduction Taken for
       Tax Purposes                                                                204                     117
Other                                                                              175                     ---
                                                                                ------                  ------
Total Gross Deferred Liabilities                                                 1,123                     748
                                                                                ------                  ------
Net Deferred Tax Assets                                                         $4,556                  $8,978
                                                                                ======                  ======
</TABLE>


BankGroup has determined  that a valuation  allowance for the gross deferred tax
assets  is not  considered  necessary  at  December  31,  1995 and  1994,  since
realization  of the entire  gross  deferred  tax assets can be  supported by the
amount of taxes paid during the  carryback  period  available  under current tax
laws.

Effective  January 1, 1993,  BankGroup adopted SFAS No. 109 and has reported the
cumulative effect of this change in the method of accounting for income taxes of
$75,000 separately in the 1993 consolidated statement of income.


NOTE 9 - SHORT-TERM AND LONG-TERM DEBT

Short-term and long-term debt consist of the following:

<TABLE>
<CAPTION>

                                                                                  1995                    1994
                                                                                  ----                    ----
                                                                                            (In 000's)
<S>                                                                             <C>                     <C>

Corporate Cash Management                                                       $ 10,801                $ 11,307
Federal Funds Purchased                                                           31,310                   5,370
Securities Sold Under Repurchase Agreements                                       37,127                     ---
Treasury Tax and Loan Notes                                                          148                   2,536
Short-Term FHLB Borrowings                                                        32,350                   4,000
Long-Term FHLB Borrowings                                                            929                     ---
                                                                                --------                --------
     Total Short-Term and Long-Term Debt                                        $112,665                $ 23,213
                                                                                ========                ========
</TABLE>


The average outstanding total short-term borrowings were $57.3 million and $18.2
million for 1995 and 1994,  respectively.  The average interest rates were 5.58%
and 3.26% for 1995 and 1994, respectively.  The interest rates in effect at year
end were 5.63% and 4.77% at December 31, 1995 and 1994, respectively.

The maximum  month-end  balance of short-term  debt was $110.8 million and $25.4
million  for  1995 and  1994,  respectively.  Securities  Held to  Maturity  and
Securities  Available for Sale were pledged as collateral  for  securities  sold
under repurchase agreements.


NOTE 10 -   REDEMPTION OF 7% CONVERTIBLE SUBORDINATED DEBENTURES

BankGroup's 7% subordinated  debentures were convertible into BankGroup's common
stock  before  October 15, 2011,  at $9.10 a share,  subject to  adjustments  in
certain  events.  The  debentures  were  redeemable,  in whole  or in  part,  at
BankGroup's  option,  initially  at 107% of the  principal  amount plus  accrued
interest,  declining  to par.  Debenture  holders were able to convert up to the
fifth  business  day  prior  to the  redemption  date.  BankGroup  had  reserved
1,050,000 common shares for issuance upon conversion of the debentures. Payments
to a sinking fund were required  beginning  October 15, 1997, which would retire
annually,  at  par,  5% of the  aggregate  principal  amount  of the  debentures
originally issued and 70% of the issue prior to maturity.

On September 12, 1995,  MainStreet BankGroup  Incorporated 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.

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).

The  following  tabulation  sets forth the numbers of shares  used to  determine
earnings per share:

<TABLE>
<CAPTION>
                                                       1995        1994         1993
                                                       ----        ----         ----
                                                                 (In 000's)
<S>                                                  <C>          <C>          <C>
Primary Shares:
     Average Shares Outstanding                      7,800        7,454        7,378
     Common Shares Assumed Outstanding - Options        42           56            6
                                                     -----        -----        -----
         Total Primary Shares                        7,842        7,510        7,384
                                                     =====        =====        =====

Fully Diluted Shares:
     Average Shares Outstanding                      7,800        7,454        7,378
     Common Shares Assumed Outstanding - Options        40           56            6
     Common Shares Assumed Outstanding - Debentures    708        1,006        1,030
                                                     -----        -----        -----
         Total Fully Diluted Shares                  8,548        8,516        8,414
                                                     =====        =====        =====
</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 $451,000 for 1995.  The  following  table sets forth the plans'  funded
status and amounts recognized in the consolidated financial statements:

Actuarial present value of benefit obligation:
     Accumulated benefit obligation at 12/31/95
     (including vested benefits of $319,000 in 1995)                 $  (391)
                                                                     =======

     Projected benefit obligation for service rendered to date          (715)
     Plan assets at fair value at December 31, 1995                      ---
                                                                     -------
     Funded status                                                      (715)
     Unrecognized transition obligation                                  199
     Unrecognized net loss                                                65
     Accrued pension costs at December 31, 1995                      $   451
                                                                     =======


Net pension cost for the defined  benefit plan  included the  following  expense
components:

     Service cost                                                    $  430
     Interest cost                                                       11
     Amortization of transition obligation                               10
                                                                     ------
     Net pension expense included in employee benefits               $  451
                                                                     ======

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 8%. The 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 $57,000.  Total expense related
to all  profit-sharing and pension plans were approximately $.6 million and $1.1
million in 1994 and 1993, respectively.

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.  BankGroup adopted Statement
of  Financial   Accounting   Standards  No.  106,   "Employers   Accounting  for
Postretirement  Benefits Other Than  Pensions,"  effective  January 1, 1993. The
effect of adopting  SFAS No. 106 was a decrease in net income of $110,000  and a
corresponding increase in net periodic  postretirement benefit costs of $166,000
for the year ended December 31, 1993. Net periodic  postretirement benefit costs
were $180,000, 194,000 and $195,000 for years ended December 31, 1995, 1994, and
1993,  respectively.  BankGroup  has elected to amortize the initial  transition
obligation of $1.2 million over 20 years.

The following  table sets forth the plans' funded status and amounts  recognized
in the consolidated financial statements at December 31, 1995 and 1994:


<TABLE>
<CAPTION>
                                                                              1995                                   1994
                                                                              ----                                   ----
                                                                                                  (In 000's)
<S>                                                                         <C>                                    <C>
Accumulated postretirement benefit obligations:
Retirees                                                                     $  (507)                              $   (455)
Fully eligible active plan participants                                         (691)                                  (587)
                                                                             -------                               --------
Accumulated postretirement benefit obligation
     at December 31, 1995 and 1994                                            (1,198)                                (1,042)
Plan assets at fair value at December 31, 1995
     and 1994                                                                    ---                                    ---
                                                                             -------                               --------
Accumulated postretirement benefit obligation in
     excess of plan assets                                                    (1,198)                                (1,042)
Unrecognized transition obligation                                             1,023                                  1,084
Unrecognized net gain                                                           (297)                                  (350)
                                                                             -------                               --------
Accrued postretirement benefit costs included in
     other liabilities                                                       $  (472)                              $   (308)
                                                                             =======                               ========
</TABLE>


Net periodic  postretirement  benefit costs for 1995,  1994 and 1993 include the
following components:

<TABLE>
<CAPTION>

                                                 1995                          1994                                1993
                                                 ----                          ----                                ----
                                                                             (In 000's)
<S>                                             <C>                          <C>
Service Cost                                    $    51                      $    60                               $    53
Interest Cost                                        82                           76                                    82
Amortization of transition obligation                61                           60                                    60
Amortization of Net (Gain)                          (14)                          (2)                                  ---
                                                -------                      -------                               -------
Net periodic postretirement benefit costs       $   180                      $   194                               $   195
                                                =======                      =======                               =======
</TABLE>

The  weighted   average  discount  rate  used  in  determining  the  accumulated
postretirement  benefit obligation was 7.5%,8.25%,  and 7% at December 31, 1995,
1994 and 1993,  respectively.  For measurement purposes, the assumed health care
costs  trend rates of increase  were 10%,  12% and 14% for 1995,  1994 and 1993,
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 $6,000,  $83,000
and  $5,000 as of  December  31,  1995,  1994 and 1993,  respectively.  It would
increase  the net  periodic  postretirement  benefit  cost  for the  year  ended
December 31, 1995, 1994 and 1993 by $1,000, $16,000 and $1,000, respectively.


NOTE 12 - STOCK OWNERSHIP 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 Stock  Appreciation  Right (SAR) issued in tandem
with the option so that the employee may elect to exercise  either the option or
the SARs,  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.

<TABLE>
<CAPTION>
                                                                 Number of Shares                      Price Range
                                                                 ----------------                    ---------------
<S>                                                              <C>                                 <C>

Outstanding at December 31, 1992                                      39,750                         $5.25 to $6.50

1993
Exercised                                                            (28,500)                        $5.25 to $6.50
Expired                                                               (2,250)                             $6.50
                                                                     -------

Outstanding at December 31, 1993                                       9,000                         $5.25 to $6.40

1994
Exercised                                                             (1,250)                        $5.25 to $6.40
                                                                      -------

Outstanding at December 31, 1994                                       7,750                         $5.25 to $6.40


1995
Exercised                                                             (3,700)                        $5.25 to $6.40
                                                                      -------

Outstanding at December 31, 1995                                       4,050                         $5.25 to $6.40
                                                                     =======
</TABLE>


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.

<TABLE>
<CAPTION>
                                                        Number of Shares        Price Range
                                                        ----------------       -------------
<S>                                                     <C>                     <C>
1993
Granted                                                       1,750               $6.50
                                                            -------
Outstanding at December 31, 1993                              1,750               $6.50

1994
Granted                                                      72,000               $10.25 to $10.50
Exercised                                                    (3,000)              $10.50
Expired                                                      (1,750)              $ 6.50
                                                            -------
Outstanding at December 31, 1994                             69,000               $10.25 to $10.50


1995
Exercised                                                    (4,644)              $10.50
Expired                                                      (6,680)              $10.50
                                                            -------

Outstanding at December 31, 1995                             57,676               $10.25 to $10.50
                                                            =======
</TABLE>


In June 1994, a stock award of 8,000 shares was also granted under this plan.


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  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.

NOTE 14 - LEASE OBLIGATIONS

Each affiliate Bank leases certain buildings and equipment under operating lease
arrangements  expiring over periods of up to fifteen years. Rent expense totaled
$561,000,  $486,000 and $481,000 for the years ended December 31, 1995, 1994 and
1993,  respectively.  Future  minimum  payments,  by years and in the aggregate,
under noncancellable  operating leases with initial or remaining terms in excess
of one year consisted of the following at December 31, 1995:

                                Leases (In 000's)
                                -----------------
1996                               $   762
1997                                   704
1998                                   659
1999                                   569
2000                                   432
Thereafter                             278
                                   -------
   Total Minimum Lease Payments    $ 3,404
                                   =======

NOTE 15 - RESTRICTIONS ON FUNDS FLOW

BankGroup's  principal  source  of funds  for  dividend  payments  is  dividends
received from its subsidiary  banks. For the years ended December 31, 1995, 1994
and 1993,  dividends  received from  subsidiary  banks were $4.0  million,  $3.1
million and $2.8 million, respectively.

Under the  applicable  laws of Virginia,  $36.8 million of undivided  profits at
December  31,  1995  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.


NOTE 16 - PARENT COMPANY FINANCIALS

                            CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                            December 31

                                                                                  1995                       1994
                                                                                  ----                       ----
                                                                                            (In 000's)
<S>                                                                            <C>                       <C>
ASSETS:
Cash (Includes $478 and $222 in 1995 and 1994,
     respectively with affiliates)                                              $    478                  $    222
Investments in Subsidiary Banks                                                   72,481                    58,254
Other Assets (Includes $45 and $133 in 1995 and
     1994, respectively, invested with affiliates)                                 3,885                     2,457
                                                                                --------                  --------
TOTAL ASSETS                                                                    $ 76,844                  $ 60,933
                                                                                ========                  ========

LIABILITIES AND SHAREHOLDERS' EQUITY
7%  Convertible Subordinated Debentures                                         $    ---                  $  8,918
Other Liabilities                                                                  1,127                       524
Common Shareholders' Equity                                                       75,717                    51,491
                                                                                --------                  --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                      $ 76,844                  $ 60,933
                                                                                ========                  ========

</TABLE>


                         CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                                    Years Ended December 31
                                                                       1995                    1994                      1993
                                                                       ----                    ----                      ----
                                                                                            (In 000's)
<S>                                                               <C>                        <C>                      <C>
REVENUE:
Dividends From Subsidiary Banks                                    $ 4,025                   $ 3,102                  $ 2,827
Equity in Undistributed Income of Subsidiary Banks                   7,440                     1,928                    4,856
Management Fees From Subsidiary Banks                                8,034                       407                      ---
Interest Income                                                         78                         2                        2
Other Income                                                            42                        67                       59
                                                                   -------                   -------                  -------
                                                                    19,619                     5,506                    7,744
                                                                   -------                   -------                  -------

EXPENSES:
Interest on Long-Term Debt                                             454                       643                      655
Other                                                                8,851                     1,964                      166
                                                                   -------                   -------                  -------
                                                                     9,305                     2,607                      821
                                                                   -------                   -------                  -------
Income Before Income Tax Benefit and Cumulative
     Effect of Change in Accounting Principle                       10,314                     2,899                    6,923
Income Tax Benefit                                                     426                     1,189                       51
Cumulative Effect at January 1, 1993 of Change in
     Accounting Principle                                              ---                       ---                      (93)
                                                                   -------                    ------                  -------
NET INCOME                                                         $10,740                   $ 4,088                  $ 6,881
                                                                   =======                   =======                  =======
</TABLE>





                       CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                    Years Ended December 31

                                                                       1995                   1994                1993
                                                                       ----                   ----                ----
                                                                                           (In 000's)
<S>                                                                   <C>                   <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income                                                            $10,740                $ 4,088            $ 6,881
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
     Amortization of Intangibles, Net                                     210                    261                144
     Amortization of Securities Premiums and Discounts, Net               ---                     (5)               (11)
     Equity in Undistributed Income of Subsidiary Banks                (7,440)                (1,928)            (4,856)
     Net (Increase) Decrease in Other Assets                             (627)                  (200)               105
     Net Increase (Decrease) in Other Liabilities                         603                 (1,588)               112
     Gain on Purchase of Subordinated Debentures                          ---                    ---                ---
     Gain on Sale of Securities                                           (15)                   (57)               ---
        Gain on Sale of OREO                                               22                    ---                ---
                                                                      -------                -------            -------
     Net Cash Provided by Operating Activities                          3,493                    571              2,375
                                                                      -------                -------            -------

CASH FLOWS FROM INVESTING ACTIVITIES:
Net (Increase) Decrease in Interest-Bearing Deposits                     (712)                    (3)               360
Purchases of Securities Available for Sale                                ---                   (825)               (34)
Proceeds From Maturity of Securities Available for Sale                   ---                    455                ---
Proceeds From Sale of Securities Available for Sale                       820                    837                ---
Purchases of Bank Premises and Equipment                                 (826)                   ---                ---
Capital Contributed to Subsidiary Banks                                   ---                    (85)               ---
                                                                      --------               -------            -------
     Net Cash Provided by Investing Activities                           (718)                   379                326
                                                                      -------                -------            -------

CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Dividends                                                         (3,012)                (2,461)            (2,170)
Cash Paid in Lieu of Fractional Shares for Stock Split                    ---                    ---                (13)
Net Expenses Incurred for Debenture Conversion                            (32)                  ---                ---
Cash Used to Purchase Subordinated Debentures                             ---                    ---               (261)
Proceeds From Issuance of Common Stock                                    525                    613                697
Repurchase of Common Stock                                                ---                    ---                ---
                                                                      -------                -------            -------
Net Cash Used in Financing Activities                                  (2,519)                (1,848)            (1,747)
                                                                      -------                -------            -------
Net Increase (Decrease)  in Cash                                          256                   (898)               954
Cash at Beginning of Year                                                 222                  1,120                166
                                                                      -------                -------            -------
Cash at End of Year                                                   $   478                $   222            $ 1,120
                                                                      =======                =======            =======

</TABLE>

Noncash  investing and  financing  activities  include  $7,087,000 of unrealized
gains on securities  available for sale and  $8,918,000 of debentures  converted
into 979,820  shares of common stock in 1995.  Noncash  investing  and financing
activities include  $8,149,000 of unrealized losses on securities  available for
sale and $276,000 of debentures  converted into 30,318 shares of common stock in
1994.

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.

As of  December  31,  1995 and 1994,  outstanding  financial  instruments  whose
contract amounts represent potential credit risk were as follows:

                                                       1995          1994
                                                       ----          ----
Financial Instruments Whose Contract Amounts
   Represent Credit Risk:
     Commitments to Extend Credit                    $ 90,320      $ 75,816
     Standby Letters of Credit and Financial
             Guarantees Written                         2,684         2,790

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
central and western part of southern  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 bank's 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, 1995.  Acquisition
and development  construction  loans account for $24.5 million and $26.6 million
of the  commercial  portfolio  at December 31, 1995 and 1994,  respectively.  In
addition,  other  commercial  loans secured by real estate totaled $86.7 million
and $63.1 million at December 31, 1995 and 1994,  respectively.  The real estate
loan portfolio  consists  almost  entirely of 1-4 family  residential  property.
BankGroup was the creditor for approximately  $88.3 million and $74.4 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
are either endorsed or subject to mandatory dealer repurchase agreements.

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

NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," requires BankGroup to disclose estimated fair
values of its 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.

(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, 1995 and December 31, 1994.  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)      7% CONVERTIBLE SUBORDINATED DEBENTURES
         Rates currently  available to BankGroup for debt with similar terms and
         remaining maturities were used to estimate fair value of existing debt.

(k)      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,  1995 and
         December  31,  1994,  and as such the related fair values have not been
         estimated.




The estimated fair values of BankGroup's  financial  instruments at December 31,
1995 and 1994 are as follows:
<TABLE>
                                                                                          1995
                                                                  Carrying Amount                      Fair Value
                                                                  ---------------                      ----------
                                                                                       (In 000's)
<S>                                                                   <C>                               <C>
FINANCIAL ASSETS
Cash and Due From Banks                                               $ 25,680                          $ 25,680
Interest-Bearing Deposits in Domestic Banks                                875                               875
Mortgage Loans Held for Sale                                             1,780                             1,788
Securities Available for Sale                                          184,169                           184,169
Securities Held to Maturity                                             97,992                           102,484
Loans, Net                                                             557,708                           568,583
                                                                      --------                          --------
     TOTAL FINANCIAL ASSETS                                           $868,204                          $883,579
                                                                      ========                          ========

FINANCIAL LIABILITIES
Deposits:
   Demand Deposits (Noninterest-Bearing)                              $ 95,664                          $ 95,664
   Interest Checking Accounts                                           76,802                            76,802
   Savings Deposits                                                    115,202                           115,202
   Money Market Investment Accounts                                     55,015                            55,015
   Time Deposits:
   Certificates of Deposit $100,000 and Over                            68,434                            69,221
   Other                                                               289,396                           293,159
                                                                      --------                          --------
   TOTAL DEPOSITS                                                      700,513                           705,063
Short-Term Debt                                                        111,736                           111,736
Long-Term Debt                                                             929                             1,050
7% Convertible Subordinated Debentures                                     ---                               ---
                                                                      --------                          --------
   TOTAL FINANCIAL LIABILITIES                                        $813,178                          $817,849
                                                                      ========                          ========
</TABLE>

<TABLE>
<CAPTION>
                                                                                       1994

                                                                   Carrying Amount                      Fair Value
                                                                   ---------------                      -----------
                                                                                    ( In 000's)
<S>                                                                   <C>                               <C>
FINANCIAL ASSETS
Cash and Due From Banks                                               $ 24,680                          $ 24,680
Interest-Bearing Deposits in Domestic Banks                                 50                                50
Mortgage Loans Held for Sale                                               521                               521
Securities Available for Sale                                          119,029                           119,029
Securities Held to Maturity                                            121,779                           121,041
Loans, Net                                                             491,560                           492,933
                                                                      --------                          --------
     TOTAL FINANCIAL ASSETS                                           $757,619                          $758,254
                                                                      ========                          ========

FINANCIAL LIABILITIES
Deposits:
   Demand Deposits (Noninterest-Bearing)                              $ 91,570                          $ 91,570
   Interest Checking Accounts                                           78,567                            78,567
   Savings Deposits                                                    152,990                           152,990
   Money Market Investment Accounts                                     70,087                            70,087
   Time Deposits:
   Certificates of Deposit $100,000 and Over                            49,743                            49,897
   Other                                                               261,613                           261,652
                                                                      --------                          --------
   TOTAL DEPOSITS                                                      704,570                           704,763
Short-Term Debt                                                         23,213                            23,213
7% Convertible Subordinated Debentures                                   8,918                            10,271
                                                                      --------                          --------
     TOTAL FINANCIAL LIABILITIES                                      $736,701                          $738,247
                                                                      ========                          ========

</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.



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  will receive 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. This stock dividend has been retroactively
applied  to  restate  all share and per share  data for each of the three  years
ended December 31, 1995.

BankGroup also resolved to amend the Articles of  Incorporation  to increase the
authorized shares of common stock from 10,000,000 to 20,000,000.


NOTE 21 - CONTINGENCIES AND OTHER MATTERS

At December 31, 1994, BankGroup had accrued loss contingencies remaining of $1.3
million.  This reserve was a result of expenses accrued in 1993 of $2.7 million.
This  contingency was accrued due to a Trust  Department  defalcation  involving
misappropriation  of customer  funds by a former  Trust  Department  employee at
Piedmont  Trust Bank (PTB).  PTB has settled  with its  insurance  carriers on a
disputed claim for $5.5 million arising out of the defalcation.  On February 28,
1995, the lawsuit was settled on a basis that included no additional loss to PTB
over and above the previously established reserves. Final settlement payments on
the agreement were received in accordance with the agreement in April, 1995, and
with appropriate  entries both the insurance  receivable account and the accrued
loss contingencies were settled.

As a result of the  previously  cited  Trust  Defalcation,  PTB was subject to a
Cease and Desist  Order (the  Order)  issued by the Federal  Reserve.  The Order
required  PTB to  implement  certain  corrective  measures  related to  internal
controls and operating  procedures in the Trust Department and required periodic
progress  reports to appropriate  parties.  PTB has  implemented  the corrective
measures as required by the Order. The Corporation  received  notification  from
the Federal Reserve Bank of Richmond dated October 3, 1995 terminating the Cease
and Desist Order.

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,  except as disclosed above,  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
1995                                                    Quarter             Quarter            Quarter         Quarter
----                                                    -------             -------            -------         -------
<S>                                                   <C>                 <C>               <C>                <C>

Interest Income                                        $18,241             $17,787            $16,725           $15,922
Interest Expense                                         8,336               8,448              7,648             6,943
                                                       -------             -------            -------           -------
     Net Interest Income                                 9,905               9,339              9,077             8,979
Provision for Loan Losses                                  334                 328                329               328
                                                       -------             -------            -------           -------
     Net Interest Income After Provision                 9,571               9,011              8,748             8,651
Noninterest Income                                       2,172               2,003              2,093             1,707
Noninterest Expense                                      6,779               7,347              7,376             7,315
                                                       -------             -------            -------           -------
     Income Before Income Taxes                          4,964               3,667              3,465             3,043
Income Tax Expense                                       1,516               1,004              1,011               868
                                                       -------             -------            -------           -------
     Net Income                                        $ 3,448             $ 2,663            $ 2,454           $ 2,175
                                                       =======             =======            =======           =======

Per Share:
     Net Income:
         Primary                                       $   .41             $   .35            $   .32           $   .29
                                                       =======             =======            =======           =======
         Fully Diluted                                 $   .40             $   .32            $   .30           $   .27
                                                       =======             =======            =======           =======
     Cash Dividends Declared                           $   .10             $   .10            $   .10           $   .09
                                                       =======             =======            =======           =======

</TABLE>

<TABLE>
<CAPTION>

QUARTERLY FINANCIAL RESULTS (UNAUDITED)
(In Thousands, Except Per Share Data)                    Fourth              Third             Second               First
1994                                                    Quarter             Quarter            Quarter            Quarter
----                                                    -------             -------            -------            -------
<S>                                                    <C>              <C>                   <C>               <C>
Interest Income                                        $15,586             $15,074            $14,724           $14,132
Interest Expense                                         6,622               6,008              6,508             6,079
                                                       -------             -------            -------           -------
     Net Interest Income                                 8,964               9,066              8,216             8,053
Provision for Loan Losses                                1,742                 400                358               327
                                                       -------             -------            -------           -------
     Net Interest Income After Provision                 7,222               8,666              7,858             7,726
Noninterest Income                                      (4,283)              1,919              1,912             1,627
Noninterest Expense                                      7,551               7,535              6,894             6,733
                                                       -------             -------            -------           -------
     Income (Loss) Before Income Taxes                  (4,612)              3,050              2,876             2,620
Income Tax Expense (Benefit)                            (1,889)                853                161               721
                                                       --------            -------            -------           -------
     Net Income (Loss)                                 $(2,723)            $ 2,197            $ 2,715           $ 1,899
                                                       =======             =======            =======           =======

Per Share:
     Net Income (Loss):
         Primary                                       $  (.37)            $   .30            $   .36           $   .25
                                                       =======             =======            =======           =======
         Fully Diluted                                 $  (.31)            $   .27            $   .33           $   .24
                                                       =======             =======            =======           =======
     Cash Dividends Declared                           $   .09             $   .08            $   .08           $   .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.


                                    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 page 3 of the  Company's  1996 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 page 9 of
the Company's 1996 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 4
and 5 of the  Company's  1996  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 11
of the Company's 1996 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 26 through 49.



(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.

(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  November  29,  1995,  regarding  the  change  in the
Registrant's Certifying Accountants.

          Form  8-K  filed  January  3,  1996,   regarding  the  change  in  the
Registrant's name.

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

10(b)   Employees Incentive Stock Option Plan (incorporated by reference from
        Exhibit C of the 1985 Proxy Statement of the Company.)  Amendment to
        Employee Incentive Stock Option Plan.  (Incorporated by reference to
        Registrant's 1988 Form 10-K.)

10(c)   Management Contracts for Michael R. Brenan, Rebecca J. Jenkins, James
        E. Adams and S. Richard Bagby incorporated by reference to the
        Registrant's 1994 Form 10-K.

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.

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


<TABLE>
<CAPTION>
<S>                                                       <C>
By:  /s/ MICHAEL R. BRENAN                                /s/ JAMES E. ADAMS
         Michael R. Brenan, President, Chairman               James E. Adams, Group Executive, Senior Vice
          of the Board and Chief Executive Officer              President, Chief Financial Officer and Treasurer
</TABLE>

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

<TABLE>
<CAPTION>

                   NAME                                 TITLE                                  DATE

<S>                                             <C>                                           <C>
/s/ W. CHRISTOPHER BEELER, JR.                                                                 3/7/96
W. Christopher Beeler, Jr.                       Director                                       Date

/s/ THOMAS B. BISHOP                                                                           3/1/96
Thomas B. Bishop                                 Director                                       Date

/s/ MICHAEL R. BRENAN                                                                          2/20/96
Michael R. Brenan                                President, Chairman of the Board               Date
                                                 and Chief Executive Officer

/s/ WILLIAM S. CLARK                                                                           2/28/96
William S. Clark                                 Director                                       Date

/s/ WILLIAM L. COOPER, III                                                                     2/20/96
William L. Cooper, III                           Director                                       Date

/s/ BILLY P. CRAFT                                                                             2/20/96
Billy P. Craft                                   Director                                       Date

/s/ LARRY E. HUTCHENS                                                                          2/20/96
Larry E. Hutchens                                Director                                       Date

/s/ WILLIAM O. MCCABE, JR.                                                                     2/20/96
William O. McCabe, Jr., MD                       Director                                       Date

/s/ ALBERT L. PRILLAMAN                                                                        2/20/96
Albert L. Prillaman                              Director                                       Date

/s/ RICHARD M. SIMMONS, JR.                                                                    2/20/96
Richard M. Simmons, Jr.                          Director                                       Date

/s/ THOMAS B. STANLEY, JR.                                                                     2/26/96
Thomas B. Stanley, Jr.                           Director                                       Date

</TABLE>