SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission file number 033-70920
INDEPENDENT COMMUNITY BANKSHARES, INC.
(Name of Small Business Issuer in its Charter)
Virginia 54-1696103
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation) Identification No.)
111 West Washington Street 20117
Middleburg, Virginia (Zip Code)
(Address of Principal Executive Offices)
(540) 687-6377
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
None n/a
Securities registered under Section 12(g) of the Act:
None
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 past 90 days.
Yes _X_ No ___
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's gross income for its most recent fiscal year was
$138,341.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the average bid and asked prices of such stock as of
March 30, 1998 was approximately $28,822,535. (The exclusion from such amount of
the market value of the shares owned by any person shall not be deemed an
admission by the registrant that such person is an affiliate of the registrant.)
The number of outstanding shares of Common Stock as of March 30, 1998
was 1,812,594.
<PAGE>
TABLE OF CONTENTS
PART I
Page
ITEM 1. DESCRIPTION OF BUSINESS........................................... 3
ITEM 2. DESCRIPTION OF PROPERTY........................................... 4
ITEM 3. LEGAL PROCEEDINGS................................................. 5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS.................................. 5
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.................................. 5
ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION................... 6
ITEM 7. FINANCIAL STATEMENTS............................................. 25
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.............. 26
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT........................... 26
ITEM 10. EXECUTIVE COMPENSATION........................................... 27
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT............................... 30
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 31
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K........................... 31
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<PAGE>
Part I
ITEM 1. DESCRIPTION OF BUSINESS
General
Independent Community Bankshares, Inc. ("ICBI" or the "Company") is a
bank holding company that was incorporated under the laws of the Commonwealth of
Virginia in 1993. The Company owns all of the stock of its subsidiaries, The
Middleburg Bank (the "Bank"), an independent commercial bank, and The Tredegar
Trust Company ("Tredegar"), an independent trust company, both of which are
chartered under the laws of Commonwealth of Virginia.
The Bank has three branches. The Bank has its main office at 111 West
Washington Street, Middleburg, Virginia 20117, and has branch offices in
Purcellville and Leesburg, Virginia. The Bank opened for business on July 1,
1924.
Tredegar has its main office at Riverfront Plaza, 901 E. Byrd Street,
Suite 190, Richmond, Virginia 23219, and a branch office in Middleburg,
Virginia. Tredegar opened for business in January 1994.
The local community that is served by the Bank is defined as Western
Loudoun County. Loudoun County is in Northwestern Virginia and included in the
Washington-Baltimore Metropolitan statistical area, the fourth largest market in
the United States. Loudoun County's population is approximately 120,000 with
slightly over one-third of the population located in the markets served by the
Bank and Tredegar. The local economy is driven by service industries requiring a
higher skill level, self-employed individuals, the equine industry and the
independently wealthy. Tredegar serves primarily the greater Richmond area
including the counties of Henrico, Chesterfield, Hanover, Goochland and Powhatan
as well as Loudoun County. However, Tredegar does have customers outside of its
primary market. Richmond is the state capital of Virginia and is home to over 20
Fortune 500 Companies. The greater Richmond area has a population in excess of
750,000 people.
The Company, through its subsidiaries, offers a wide range of banking,
fiduciary and investment management services available to both individuals and
small businesses. The banking services include various types of checking and
savings deposit accounts, and the making of business, real estate, development,
mortgage, home equity, automobile and other installment, demand and term loans.
Also, the Bank offers ATM's at all locations, travelers' checks, money orders,
safe deposit rentals, collections, notary public, wire services and other
traditional bank services to its customers. Tredegar provides a variety of
investment management and fiduciary services including trust and estate
settlement. Tredegar can also serve as escrow agent, attorney-in-fact, guardian
of property or trustee of an IRA.
The Bank has one wholly owned subsidiary, Middleburg Bank Service
Corporation, which is incorporated under the laws of the Commonwealth of
Virginia. Middleburg Bank Service Corporation is a partner in a limited
liability company, Bankers Title Shenandoah, LLC, which sells title insurance to
its members.
As of December 31, 1997, ICBI had a total of 62 full time equivalent
employees. The Company considers relations with its employees to be excellent.
The Company's employees are not represented by a collective bargaining unit.
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<PAGE>
Competition
ICBI faces significant competition both in making loans and in
attracting deposits. Competition for loans comes from commercial banks, savings
and loan associations and savings banks, mortgage banking subsidiaries of
regional commercial banks, subsidiaries of national mortgage bankers, insurance
companies, and other institutional lenders. Its most direct competition for
deposits has historically come from savings and loan associations and savings
banks, commercial banks, credit unions and other financial institutions. Based
upon total assets at June 30, 1996, ICBI is the second largest banking
organization operating in Loudoun County, Virginia. ICBI may face an increase in
competition, as a result of the continuing reduction in the restrictions on the
interstate operations of financial institutions. ICBI also faces competition for
deposits from short-term money market mutual funds and other corporate and
government securities funds.
Tredegar competes for customers and accounts with banks and other
financial institutions. Even though many of these institutions have been engaged
in the trust or investment management business for a considerably longer period
of time than Tredegar and have significantly greater resources, Tredegar has
grown through its commitment to quality trust services and a local community
approach to business.
The Company and its subsidiaries are subject to regulation and
examination by the Federal Reserve Bank and the State Corporation Commission.
The Company is also under the jurisdiction of the Securities and Exchange
Commission and certain state securities commissions with respect to matters
relating to the offer and sale of its securities. In addition, the Bank is
subject to regulation and examination by the Federal Deposit Insurance
Corporation.
ITEM 2. DESCRIPTION OF PROPERTY
The headquarters building of the Company and the Bank, which also
serves as a branch office for Tredegar was completed in 1981 and is a two-story
building of brick construction, with approximately 18,000 square feet of floor
space located at 111 West Washington Street, Middleburg, Virginia 20117. The
office operates nine teller windows, including three drive-up facilities and one
stand-alone automatic teller machine. The Bank owns the headquarters building.
The Purcellville Bank branch was purchased in 1994 and is a one-story
building with a basement of brick construction, with approximately 3,000 square
feet of floor space located at 431 East Main Street, Purcellville, Virginia
20132. The office operates four teller windows, including one drive-up facility
and one stand-alone automatic teller machine. The Bank owns this branch
building.
The Leesburg Bank branch was completed in 1997 and is a two-story
building with a basement of brick construction, with approximately 6,000 square
feet of floor space located at 102 Catoctin Circle, S.E., Leesburg, Virginia
20175. The office operates five teller windows, including three drive-up
facilities and one drive-up automatic teller machine. The Bank also owns this
branch building.
Tredegar has leased its main office in Richmond, Virginia. Rental
expense for this location totaled $20,000 for the five months included in the
fiscal year ending December 31, 1997.
All of the Company's properties are in good operating condition and are
adequate for the Company's present and anticipated future needs.
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the company is
a party or of which the property of the Company subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders of the Company.
Part II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since October 1997, the Company's Common Stock has traded on the OTC
Bulletin Board under the symbol "ICBX". Prior to October 1997, the Common Stock
was neither listed on any stock exchange nor quoted on the Nasdaq Stock Market
and trades infrequently. During that time, the Common Stock had periodically
been sold in a limited number of privately negotiated transactions. The prices
set forth below do not necessarily reflect the price that would be paid in an
active and liquid market.
Market Price and Dividends
Sales Price Dividends
High Low
1996:
1st quarter................. 14.00 14.00 .09
2nd quarter................. 14.00 14.00 .11
3rd quarter................. 14.50 14.00 .11
4th quarter................. 14.00 14.00 .11
1997:
1st quarter................. 14.00 14.00 .09
2nd quarter................. 14.50 14.00 .11
3rd quarter................. 16.00 15.50 .12
4th quarter................. 22.00 16.75 .12
________________
(1) All prices and dividends are adjusted for a two-for-one stock split as of
November 24, 1997.
(2) Beginning with the first quarter of 1997, ICBI began paying dividends for
the respective quarter immediately following the end of that quarter.
ICBI historically has paid cash dividends on a quarterly basis. The
final determination of the timing, amount and payment of dividends on the Common
Stock is at the discretion of ICBI's Board of Directors and will depend upon the
earnings of ICBI and its subsidiaries, principally, its subsidiary bank, the
financial condition of ICBI and other factors, including general economic
conditions and applicable
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<PAGE>
governmental regulations and policies. ICBI or the Bank has paid regular cash
dividends for over 200 consecutive quarters.
As of December 31, 1997, ICBI had 483 shareholders of record.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following discussion provides information about the major
components of the results of operations and financial condition, liquidity and
capital resources of ICBI. This discussion and analysis should be read in
conjunction with the "Selected Financial Information" and the Consolidated
Financial Statements and Notes to Consolidated Financial Statements.
On August 1, 1997, ICBI completed its acquisition of The Tredegar Trust
Company ("Tredegar"), an independent trust company headquartered in Richmond,
Virginia. Management believes that the acquisition of Tredegar will enhance
among other things, ICBI's noninterest income. Noninterest income for the year
ended December 31, 1996. Trust fees increased $310,000 from the 1996 balance.
This is a result of the acquisition of Tredegar, which provided $292,000 of such
fees. The acquisition of Tredegar is a key part of ICBI's strategy to increase
noninterest income. The acquisition was accounted for using the purchase method
of accounting.
Overview
ICBI's performance for 1997 showed improvement over the previous year.
Continued high quality asset growth, an improved net interest margin and
management efficiencies contributed to net income of $2,631,305 for 1997,
compared to $2,030,946 in 1996 and $1,706,494 in 1995. Return on average assets
continued to increase during 1997 to 1.52% compared to 1.35% and 1.26% for 1996
and 1995, respectively. Return on average equity also increased during 1997 to
13.54%, up from 11.83% for 1996 and 9.72% for 1995.
Net interest margin increased during 1997 to 4.98% on a tax-equivalent
basis. Net interest margin for 1996 and 1995 was 4.90% and 4.84%, respectively.
Net interest margin and net interest income are influenced by fluctuations in
market rates and changes in both the volume and mix of average earning assets
and the liabilities that fund those assets. Loan demand was relatively strong
during each of the three years (1995 - 1997). The average cost of funds remained
somewhat flat during the same three year period beginning with 4.06% in 1995,
rising to 4.16% in 1996 and declining in 1997 to 4.05%. The average yield on
earning assets increased from 8.11% in 1995 to 8.23% in 1996 but experienced a
slight decline of 2 basis points to 8.21% in 1997.
Loans, net of unearned income, were $104.2 million at December 31,
1997. This is a 10.15% growth over the 1996 balance of $94.6 million. Loans, net
of unearned income increased 16.93% in 1996 to $94.6 million from $80.9 million
in 1995. ICBI's investment portfolio continues to grow as excess deposits over
loans are placed in high-quality securities. At December 31, 1997, ICBI's
securities portfolio represented 37.90% of average earning assets and had
increased by 22.40% over the level at December 31, 1996. Total securities were
$63.7 million in 1997, $52.4 million in 1996 and $48.2 million in 1995.
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<PAGE>
ICBI's efficiency ratio, a measure of its performance based upon the
relationship between non-interest expense and income less securities gains,
compares favorably to other Virginia financial institutions. ICBI's efficiency
ratio for 1997, 1996 and 1995 was 53.70%, 59.50% and 59.00%, respectively. A
lower percentage of the efficiency ratio represents greater control of
non-interest related costs. A fluctuation in the efficiency ratio can be
attributed to relative changes in both non-interest income and net interest
income.
ICBI is not aware of any current recommendations by any regulatory
authorities which, if they were implemented, would have a material effect on the
registrant's liquidity, capital resources, or results of operations.
Net Interest Income
Net interest income represents the principal source of earnings for
ICBI. Net interest income equals the amount by which interest income exceeds
interest expense. Changes in the volume and mix of interest earning assets and
interest bearing liabilities, as well as their respective yields and rates, have
a significant impact on the level of net interest income.
Net interest income was $7.5 million in 1997, up 15.40% over the $6.5
million reported for the same period in 1996 and up 12.07% over the $5.8 million
reported for 1995. Net interest income in 1997 was affected primarily by growth
in both the securities and loan portfolios and secondarily affected by a
strategy to restructure a portion of the securities portfolio out of government
agencies to municipals to maximize yield without increasing risk. Loans grew
$9.6 million in 1997, providing $843,000 in additional interest income.
Investment securities grew $11.3 million to $63.7 million at December 31, 1997.
The growth in securities from 1996 to 1997 provided $820,000 in additional net
interest income. In 1997, interest bearing deposits provided a majority of the
source of funds by increasing to $129.9 million, up $14.4 million (12.50%) from
$115.5 million in 1996. Interest bearing deposits increased $11.9 million in
1996 from $103.6 million in 1995 to $115.5 million in 1996. The growth in
deposits was a result of the recent addition of two de nova branches as well as
offering attractive market rates coupled with customers' desire to place their
deposits in a locally managed, high performing and well capitalized financial
corporation. Management anticipates growth in net interest income, loans and
deposits to remain strong in 1998.
Net interest income for 1996 was $6.5 million, compared to $5.8 million
in 1995. Like 1997, net interest income was affected by growth in the loan and
securities portfolios. Loans grew $13.7 million to $94.6 million in 1996,
providing $872,000 in additional interest income. Investment securities grew
$4.1 million to $52.4 million at December 31, 1996, providing $452,000 of
additional interest income. While deposits grew $11.9 million in 1996 to $115.5
million, the interest expense grew by only $400,000.
The Average Balances, Income and Expenses, Yields and Rates table
depicts interest income on earning assets and related average yields as well as
interest expense on interest bearing liabilities and related average rates paid
for the periods indicated. Loans placed on nonaccrual status are included in the
balances and were included in the computations of yields, upon which they had no
material effect. The average balances used for the purposes of this table and
other statistical calculation disclosures are calculated using daily average
balances.
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<PAGE>
Average Balances, Income and Expenses, Yields and Rates
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- ----------------------------- --------- --------- --------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
--------- --------- -------- --------- --------- -------- --------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets :
Securities:
Taxable $41,242 $2,469 5.99% $34,550 $2,023 5.86% $30,953 $1,832 5.92%
Tax-exempt (1) (2) 19,721 1,574 7.98% 15,238 1,200 7.87% 12,452 939 7.54%
--------- -------- -------- ------- -------- --------
Total Securities 60,963 4,043 6.63% 49,788 3,223 6.47% 43,405 2,771 6.38%
Loans
Taxable 96,179 8,956 9.31% 87,358 8,137 9.31% 79,639 7,265 9.12%
Tax-exempt 376 24 6.38% - - - -
--------- -------- -------- ------- -------- --------
Total Loans 96,555 8,980 9.30% 87,358 8,137 9.31% 79,639 7,265 9.12%
Federal Funds Sold 2,928 160 5.46% 2,431 130 5.35% 2,470 138 5.59%
Interest on Money Market investments 365 13 3.56% 125 5 4.00% - - -
Interest Bearing Deposits in
other financial institutions 84 8 9.52% 15 1 6.67% - - -
--------- -------- -------- ------- -------- --------
Total earning assets 160,895 13,204 8.21% 139,717 11,496 8.23% 125,514 10,174 8.11%
Less: allowances for credit
Losses (952) (894) (931)
Total nonearning assets 12,730 10,340 9,345
--------- -------- --------
Total assets $172,673 $149,163 $133,928
========= ======== ========
Liabilities (1):
Interest-bearing deposits:
Checking $19,886 360 1.81% $18,348 $390 2.13% $17,919 $436 2.43%
Regular savings 15,631 577 3.69% 14,562 561 3.85% 14,003 534 3.81%
Money market savings 30,071 883 2.94% 28,735 869 3.02% 26,980 834 3.09%
Time deposits:
$100,000 and over 16,480 936 5.68% 12,013 738 6.14% 12,523 689 5.50%
Under $100,000 40,100 2,130 5.31% 34,760 1,898 5.46% 28,775 1,563 5.43%
--------- -------- -------- ------- -------- --------
Total interest-bearing
Deposits 122,168 4,886 4.00% 108,418 4,456 4.11% 100,200 4,056 4.05%
Federal Home Loan Bank
Advances 2,999 172 5.74% 3,188 187 5.87% 514 31 6.03%
Securities sold under agreements
To repurchase 2,662 119 4.47% 8
- -
Federal Funds Purchased 272 15 5.51% 73 4 5.48% 145 9 6.21%
--------- -------- -------- ------- -------- --------
Total interest-bearing
Liabilities 128,101 5,192 4.05% 111,687 4,647 4.16% 100,859 4,096 4.06%
Non-interest bearing liabilities
Demand Deposits 24,025 19,211 15,691
Other liabilities 1,112 923 751
Total liabilities 153,238 131,821 117,301
Shareholders' equity 19,435 17,342 16,627
Total liabilities and shareholders'
Equity $172,673 $149,163 $133,928
========= ======== ========
Net interest income $8,012 $6,849 $6,078
======== ======= ========
Interest rate spread 4.16% 4.07% 4.05%
Interest expense as a percent of
Average earning assets 3.23% 3.33% 3.26%
Net interest margin 4.98% 4.90% 4.84%
</TABLE>
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(1) Income and yields are reported on tax equivalent basis assuming a federal
tax rate of 34%
(2) Income and yields include dividends on preferred bonds which are 70%
excludable for tax purposes.
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<PAGE>
The following table analyzes changes in net interest income
attributable to changes in volume of interest-bearing assets and liabilities
compared to changes in interest rates. The change in interest due to both volume
and rate has been allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts of the change in each. Nonaccruing
loans are included in average loans outstanding:
<TABLE>
<CAPTION>
Volume and Rate Analysis
(Tax equivalent basis)
Years Ended December 31,
---------------------------------------------------------------
1997 vs 1996 1996 vs 1995
Increase (Decrease) Due Increase (Decrease) Due
to Changes in: to Changes in:
------------------------------- ------------------------------
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Securities:
Taxable $ 400 $ 46 $ 446 $ 209 $ (18) $ 191
Tax-exempt 357 17 374 218 43 261
Loans:
Taxable 819 - 819 718 154 872
Tax-exempt 24 - 24 -
24 - -
Federal funds sold 28 2 30 (2) (6) (8)
Interest on money market
investments 8 - 8 5 - 5
Interest bearing deposits in other
Financial institutions 6 1 7 1 - 1
------- ------- ------- ------- ------- -------
Total earning assets $ 1,642 $ 66 $ 1,708 $ 1,149 $ 173 $ 1,322
Interest-Bearing Liabilities:
Interest checking $ 38 $ (68) (30) $ 11 (57) (46)
Regular savings deposits (21) 16 21
37 6 27
Money market deposits (19) 14 54 (19)
33 35
Time deposits
$100,000 and over (103) 31 (72) (26) 75 49
Under $100,000 541 (39) 502 326 9 335
------- ------- ------- ------- ------- -------
Total interest bearing deposits $ 546 $ (116) $ 430 $ 386 $ 14 $ 400
Federal Home Loan Bank
Advances (11) (4) (15) 157 (1) 156
Securities sold under agree-
ment to repurchase 119 - 119 - - -
Federal Funds Purchased 11 - 11 (4) (1) (5)
------- ------- ------- ------- ------- -------
Total interest bearing
Liabilities $ 665 $ (120) $ 545 $ 539 $ 12 $ 551
Change in net interest income $ 977 $ 186 $ 1,163 $ 610 $ 161 $ 771
======= ======= ======= ======= ======= =======
</TABLE>
ICBI's Asset/Liability Committee (ALCO) is responsible for reviewing
the Corporation's liquidity requirements and maximizing the Corporation's net
interest income consistent with capital requirements, liquidity, interest rate
and economic outlooks, competitive factors and customer needs. Liquidity
requirements are also reviewed in detail at the banking subsidiary of ICBI and
overall asset/liability management is performed at the banking subsidiary level
with participation from management of the holding company as well as the
non-banking subsidiary.
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<PAGE>
Interest Rate Risk
Interest rate risk represents the sensitivity of earnings to changes in
market interest rates. As interest rates change the interest income and expense
streams associated with the Company's financial instruments also change thereby
impacting net interest income (NII), the primary component of the Company's
earnings. ALCO utilizes the results of a detailed and dynamic simulation model
to quantify the estimated exposure of NII to sustained interest rate changes.
While ALCO routinely monitors simulated NII sensitivity over a rolling two-year
horizon, it also utilizes additional tools to monitor potential longer-term
interest rate risk.
The simulation model captures the impact of changing interest rates on
the interest income received and interest expense paid on all assets and
liabilities reflected on the Company's balance sheet. This sensitivity analysis
is compared to ALCO policy limits which specify a maximum tolerance level for
NII exposure over a one year horizon, assuming no balance sheet growth, given
both a 200 basis point (bp) upward and downward shift in interest rates. A
parallel and pro rata shift in rates over a 12 month period is assumed. The
following reflects the range of the Company's NII sensitivity analysis during
the fiscal year 1997 as compared to the 10% Board approved policy limit.
Estimated
Rate Change NII Sensitivity
----------- ---------------
High Low Average
---- --- -------
+200 bp 1.32% .22% .80%
-200 bp (2.06%) (.65%) .27%
Based on the averages presented in the table above, had the interest
rates shifted upwards 200 basis points, then the effect to net interest income
of the banking subsidiary could have been an increase of $60,000 for the fiscal
year 1997. If interest rates had decreased 200 basis points during fiscal year
1997, then the effect to net interest income of the banking subsidiary could
have been an increase of $20,000.
The preceding sensitivity analysis does not represent a Company
forecast and should not be relied upon as being indicative of expected operating
results. These hypothetical estimates are based upon numerous assumptions
including: the nature and timing of interest rate levels including yield curve
shape, prepayments on loans and securities, deposit decay rates, pricing
decisions on loans and deposits, reinvestment/replacement of asset and liability
cashflows, and others. While assumptions are developed based upon current
economic and local market conditions, the Company cannot make any assurances as
to the predictive nature of these assumptions including how customer preferences
or competitor influences might change.
Also, as market conditions vary from those assumed in the sensitivity
analysis, actual results will also differ due to: prepayment/refinancing levels
likely deviating from those assumed, the varying impact of interest rate change
caps or floors on adjustable rate assets, the potential effect of changing debt
service levels on customers with adjustable rate loans, depositor early
withdrawals and product preference changes, and other internal/external
variables. Furthermore, the sensitivity analysis does not reflect actions that
ALCO might take in responding to or anticipating changes in interest rates.
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<PAGE>
Noninterest Income
Noninterest income for the year ended December 31, 1997, increased
$407,000, or 54.85% from the $742,000 balance at December 31, 1996. Trust fees
increased $310,000 from the 1996 balance. This is a result of the acquisition of
Tredegar, which provided $292,000 of such fees. Service charges, commissions and
fees, the largest single item of noninterest income were $887,000 for 1997, up
31.48% over the comparable period a year ago. The increase in this category for
1997 results mostly from the increase in fees earned by the non-deposit
investment sales. 1996 noninterest income increased $48,000, or 6.91% over the
December 31, 1995 balance. Other operating income decreased $2,000 from the 1996
balance of $16,000. The 1995 balance of other income reflects the recognition of
a $150,000 gain on other real estate sold. Net securities losses were
approximately $91,000 in 1997, compared to the $20,000 of securities gains in
1996.
<TABLE>
<CAPTION>
Noninterest Income
Years Ended December 31,
-------------------------------------------------------
1997 1996 1995
----------------- ---------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
Service charges, commissions and fees $ 887 $ 677 $ 651
Trust fee income 339 29 -
Other operating income 14 16 166
----------------- ---------------- ----------------
Noninterest income $ 1,240 $ 722 $ 817
Profits (losses) on securities available for sale, net (93) 22 (123)
Securities gains (losses), net 2 (2) -
----------------- ---------------- ----------------
Total noninterest income $ 1,149 $ 742 $ 694
================= ================ ================
</TABLE>
Noninterest Expense
Total noninterest expense for the year ended December 31, 1997,
increased $588,000, or 13.42% from the December 31, 1996, balance of $4,383,000.
This increase was primarily due to a $331,000 or 13.07% increase in salaries and
employee benefits resulting from the hiring of additional staff to support the
lending efforts at the Company's Middleburg and Leesburg branches. In addition,
salaries of Tredegar employees earned subsequent to the acquisition date are
reflected in the December 31,1997, salary expense balance. Net occupancy
expenses increased $31,000 or 5.52% over the 1996 $562,000 balance. This
increase is primarily due to the depreciation expense related to the newly
constructed and furnished Leesburg branch building as well as additional
expenses for Tredegar's main office in Richmond. The $129,000 increase in
occupancy expenses from 1995 to 1996 also relates to the addition of the
Company's temporary Leesburg branch site. The advertising expenses decreased
$18,000 or 10.98% from the December 31, 1996, balance of $164,000. The Company's
December 31, 1997, FDIC insurance increased $15,000 from the $2,000 balance at
December 31, 1996. The December 31, 1996, balance had decreased 98.52% or
$133,000 form the December 31, 1995, balance. The Company's computer services
expense had increased $48,000 or 53.33% during 1997. The increase results mostly
from the Company's additional efforts to utilize technology to operate more
efficiently. Computer services increased $12,000 during 1996.
-11-
<PAGE>
Noninterest Expense
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1997 1996 1995
------------- ------------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
Salaries and employee benefits $ 2,864 $ 2,533 $ 2,163
Net occupancy expense of premises 593 562 433
Advertising 146 164 106
FDIC insurance 17 2 135
Computer services 138 90 78
Other operating expenses 1,213 1,032 1,152
------------- ------------- ------------
Total $ 4,971 $ 4,293 $ 3,989
============= ============= ============
</TABLE>
Income Taxes
Reported income tax expense at December 31, 1997, was $862,000, up from
$728,000 in 1996, and $625,000in 1995. The increase in income taxes is
attributable to increased taxable earnings at the federal statutory rate of 34%.
Note 11 to the Consolidated Financial Statements provides a reconciliation
between the amount of income tax expense computed using the federal statutory
rate and the Company's actual income tax expense. Also included in Note 11 to
the Consolidated Financial Statements is information regarding the principal
items giving rise to deferred taxes for the three years ended December 31, 1997.
Loan Portfolio
Loans, net of unearned income, were $104.2 million at December 31,
1997, up 10.15% from the $94.6 million at December 31, 1996. The Company has
experienced continued loan growth from 1993. Loans had increased $13.7 million
from 1995 to 1996, $1.2 million from 1994 to 1995, and $8.5 million from 1993 to
1994, an increase of 16.93%, 1.50%, and 11.93%, respectively.
At December 31, 1997, real estate residential (1 to 4 family) loans
comprised 43.40% of the total loan portfolio. Non-farm, non-residential loans
provided 25.0% of total loans at December 31, 1997. Construction real estate
loans comprised 3.64% of the total portfolio at that same date. Home equity
lines and agricultural loans made up 3.04% and 2.05% of total loans,
respectively, at December 31, 1997.
The Company's commercial, financial and agricultural loan portfolio
consists mostly of secured and unsecured loans extended to small businesses. At
December 31, 1997, these loans comprised 14.50% of total loans. The consumer
portion of the loan portfolio is comprised of mostly unsecured installment
credit.
Consistent with its focus on providing community-based financial
services, the Company generally does not extend loans outside its principle
market area, which encompasses Fauquier and Loudoun Counties, Virginia.
The Company's unfunded loan commitments totaled $12.4 million at
December 31, 1997, and $6.6 million at December 31, 1996. This increase is
attributed to an increase in customer demand.
-12-
<PAGE>
At December 31, 1997, the Company had no concentration of loans in any
one industry in excess of 10 percent of its total loan portfolio. However,
because of the nature of the Company's market, loan collateral is predominantly
real estate related.
<TABLE>
<CAPTION>
Loan Portfolio
December 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 15,111 $ 11,648 $ 10,215 $ 9,064 $ 10,928
Real estate construction 3,798 4,182 1,791 2,432 1,488
Real estate mortgage:
Residential (1-4 family) 45,231 41,246 34,490 38,029 33,138
Home equity lines 3,165 2,614 2,188 1,512 1,271
Multifamily - - - 3 6
Non-farm, non-residential (1) 26,054 24,774 21,697 18,271 17,093
Agricultural 2,140 2,105 1,549 1,040 1,098
Consumer installment 8,738 8,061 9,170 9,837 6,773
----------- --------- ---------- -------- ---------
Total loans 104,237 94,630 81,100 80,188 71,795
Less unearned income 10 35 186 481 597
----------- --------- ---------- -------- ---------
Loans-net of unearned income $ 104,227 $ 94,595 $ 80,914 $ 79,707 $ 71,198
======================================================================
</TABLE>
- ----------------------------
(1) This category generally consists of commercial and industrial loans where
real estate constitutes a source of collateral.
-13-
<PAGE>
The following table reflects the maturity distribution of selected
loans:
Remaining Maturities of Selected Loans
December 31, 1997
-----------------------------
Commercial, Real
Financial and Estate
Agricultural Construction
(in thousands)
Within 1 year $ 6,225 $ 642
------------- -------------
Variable Rate:
1 to 5 years 234 -
After 5 years 764 -
------------- -------------
Total $ 998 $ -
------------- -------------
Fixed Rate:
1 to 5 years 6,638 3156
After 5 years 1,250 -
------------- -------------
Total $ 7,888 $ 3,156
------------- -------------
Total Maturities $ 15,111 $ 3,798
============= =============
Asset Quality
The allowance for loan losses is an estimate of the amount that will be
adequate to provide for potential losses in the Company's loan portfolio.
General economic trends as well as any conditions affecting individual borrowers
affect the level of loan losses. The allowance is subject to regulatory
examinations and determinations as to its adequacy, which may take into account
such factors as the methodology used to calculate the allowance and the size of
the allowance in comparison to peer financial institutions identified by the
regulatory agencies.
The Company's loans are subject to independent review by the Company's
external auditors. The Company's Loan Committee and Board of Directors take an
active role in the monthly review of the Company's problem credits and their
affect on the allowance for loan losses.
-14-
<PAGE>
<TABLE>
<CAPTION>
Allowance for Loan Losses
(In thousands)
December 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $ 884 $ 866 $ 940 $ 859 $ 853
Loans charged off:
Commercial, financial, and agricultural 42 6 13 38 119
Real estate construction - - - - -
Real estate mortgage - 79 115 36 99
Consumer installment 86 40 83 142 77
----------- ---------- ---------- ---------- ----------
Total loans charged off $ 128 $ 125 $ 211 $ 216 $ 295
----------- ---------- ---------- ---------- ----------
Recoveries:
Commercial, financial, and agricultural $ 12 $ 5 $ 43 $ 210 $ 25
Real estate construction - - - - -
Real estate mortgage 7 26 4 - -
Consumer installment 21 47 35 87 48
----------- ---------- ---------- ---------- ----------
Total recoveries $ 40 $ 78 $ 82 $ 297 $ 73
----------- ---------- ---------- ---------- ----------
Net charge offs (recoveries) 88 47 129 (81) 222
Provision for loan losses 178 65 55 - 228
----------- ---------- ---------- ---------- ----------
Balance, end of period $ 974 $ 884 $ 866 $ 940 $ 859
=========== ========== ========== ========== ==========
Ratio of allowance for loan lossess
to loans outstanding at end of period 0.93% 0.93% 1.07% 1.18% 1.21%
Ratio of net charge offs (recoveries)to
Average loans outstanding during period 0.09% 0.05% 0.16% -0.11% 0.32%
</TABLE>
Loan classifications for regulatory purposes as loss, doubtful,
substandard, or special mention, do not represent or result from trends or
uncertainties which management reasonably expects will materially impact future
operating results, liquidity, or capital resources or represent material credits
about which management is aware of any information which causes management to
have serious doubt as to the ability of such borrowers to comply with the loan
repayment terms.
The Company's charge offs had increased $41,000 from the previous
year's net charge offs of $47,000. The increase experienced results mostly from
the increase charge offs of consumer loans. Net charge offs to average loans
were 0.09% and 0.05% for 1997 and 1996, respectively.
-15-
<PAGE>
The provision to the allowance for loan losses was $178,000 for 1997. A
provision of $65,000 was made in 1996, and one of $55,000 was made for 1995. The
ratio of the allowance for loan losses to total loans , net of unearned income,
has decreased over the past four years. There was no change in the ratio from
1996 to 1997. The decreases experienced in the ratio in recent years were
attributed to the significant loan growth experienced by the Company.
The allowance for loan losses was $974,000 at December 31, 1997, an
increase of $90,000 from the $884,000 balance at December 31, 1996. The
allowance was $866,000 at December 31, 1995.
The ratio of allowance for loan losses to nonperforming assets totaled
401% at December 31, 1997, 1163% at December 31, 1996, and 52% at December 31,
1995. Management evaluates nonperforming loans relative to their collateral
value and makes appropriate reductions in the carrying value of those loans
based on that review. Management believes, based on its review, that the Company
has adequate reserves to absorb any necessary future write-down on these loans.
The following table shows the balance and percentage of the Company's
allowance for loan losses allocated to each major category of loan:
<TABLE>
<CAPTION>
Allocation of Allowance for Loan Losses
Commercial, Financial, Real Estate Real Estate
And Agricultural Construction Mortgage Consumer
------------------------ -------------------------- ---------------------------- -------------------------
Reserve Percent of Reserve Percent of Reserve Percent of Reserve Percent of
For Loan in For Loan in for Loan in for Loan in
Credit Category to Credit Category to Credit Category to Credit Category to
Losses Total Loans Losses Total Loans Losses Total Loans Losses Total Loans
------ ----------- ------ ----------- ------ ----------- ------ -----------
(In thousands)
December 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $362 14.50% $107 3.64% $159 73.49% $346 8.37%
1996 244 12.31% 101 4.42% 182 74.79% 357 8.48%
1995 246 12.62% 23 2.21% 346 74.07% 251 11.10%
</TABLE>
The Company has allocated the allowance according to the amount deemed
reasonably necessary to provide for the possibility of losses being incurred
within each of the above categories of loans. The allocation of the allowance as
shown in the table above should not be interpreted as an indication that loan
losses in future years will occur in the same proportions or that the allocation
indicates future loan loss trends. Additionally, the portion allocated to each
loan category is not the total amount that may be available for the future
losses that could occur within such categories since the total allowance is a
general allowance applicable to the entire portfolio.
Nonperforming Assets
Total nonperfroming assets, which consist of nonaccrual and
restructured loans and foreclosed property, were $243,000 at December 31, 1997,
an increase of $167,000 from the December 31, 1996, balance. Nonperforming
assets at December 31, 1995 decreased $963,000 from the $2.6 million balance at
December 31, 1994. The increase in nonperforming assets in 1997 resulted from a
real estate loan being placed on nonaccrual status during the year.
-16-
<PAGE>
<TABLE>
<CAPTION>
Nonperforming Assets
December 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ---------- ----------- ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 243 $ 76 $ 1,654 $ 1,700 $ 2,138
Restructured loans - - - - -
Foreclosed property - - - 917 960
----------- ---------- ----------- ------------ ------------
Total nonperforming assets $ 243 $ 76 $ 1,654 $ 2,617 $ 3,098
========================================================================
Allowance for loan losses
to period end loans 0.93% 0.93% 1.07% 1.18% 1.21%
Allowance for loan losses
to nonperforming assets 401% 1163% 52% 36% 28%
Nonperforming assets to
Period end loans 0.23% 0.08% 2.04% 3.28% 4.35%
Net charge offs to
Average loans 0.09% 0.05% 0.16% -0.11% 0.32%
</TABLE>
Loans are placed on nonaccrual status when collection of principal and
interest is doubtful, generally when loans become 90 days past due. There are
three negative implications for earnings when a loan is placed on nonaccrual
status. All interest accrued but unpaid at the date the loan is placed on
nonaccrual status is either deducted from interest income or written off as a
loss. Secondly, accruals of interests are discontinued until it becomes certain
that both principal and interest can be repaid. Finally, there may be actual
losses which may require that additional provisions for loan losses charged
against earnings.
During 1997, approximately $15,000 in additional interest income would
have been recorded if the Company's nonaccrual loans had been current and in
accordance with their original terms. During 1996, approximately $2,000 of
additional interest income would have been recorded if the Company's nonaccrual
loans had been current and in accordance with their original terms.
At December 31, 1997, potential problem loans were approximately
$408,000. These loans are subject to regular management attention and their
status is reviewed on a regular basis. Several of the potential problem loans
identified at December 31, 1997, are unsecured consumer loans. However, the
majority of the balance is secured by real estate.
The Company expects loan growth to continue at rates similar to those
experienced during 1997.
-17-
<PAGE>
Securities
The carrying value of the securities portfolio was $63.7 million at
December 31, 1997, an increase of $11.3 million, or 21.56% from the carrying
value of $52.4 million at December 31, 1996. The increase results primarily from
the Company's intentional investing of surplus funds into securities. The
majority of the investments purchased were in the form of municipal bonds. The
Company holds bonds issued from the State of Virginia and its political
subdivisions having an aggregate book value of $3.5 million and an aggregate
market value of $3.5 million. These aggregate holdings exceed 10% of the
Company's stockholders' equity at December 31, 1997. At December 31, 1996, the
Company held bonds issued from the State of Virginia and its political
subdivisions, which had an aggregate book value of $4.9 million and an aggregate
market value of $4.1 million. These aggregate holdings exceeded 10% of the
Company's stockholders' equity at December 31, 1996.
The securities portfolio consists of two components, securities held to
maturity and securities available for sale. Securities are classified as held to
maturity when management has the intent and the Company has the ability at the
time of purchase to hold the securities to maturity. Securities held to maturity
are carried at cost adjusted for amortization of premiums and accretion of
discounts. Securities to be held for indefinite periods of time are classified
as available for sale and accounted for at fair market value. Securities
available for sale include securities that may be sold in response to changes in
market interest rates, changes in the security's prepayment risk, increases in
loan demand, general liquidity needs and other similar factors.
Financial Accounting Standards Board Pronouncement No. 115, effective
January 1, 1994, required the Company to show the effect of market changes in
the value of securities available for sale (AFS). The market value of AFS
securities at December 31, 1997, was $47.3 million. The unrealized loss on the
AFS securities amounted to $199,000 and $519,000 for December 31, 1997, and
December 31, 1996, respectively. This loss is reflected, net of income taxes, as
a separate line item in shareholders' equity.
It is the Company's policy not to engage in activities considered to be
derivative in nature, such as futures, options, contracts, swaps, caps, floors,
collars, or forward commitments. The Company does hold in its loan and security
portfolios investments that adjust or float according to changes in "prime"
lending rate. These holdings are not considered speculative but instead
necessary for good asset/liability management.
-18-
<PAGE>
Investment Portfolio and Securities Available for Sale
The carrying value of investment securities at the dates indicated was:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
(Dollars in thousands)
1997 1996 1995
--------------- ---------------- ----------------
<S> <C> <C> <C>
U.S. Government securities $ 2,006 $ 3,012 $ 4,367
States and political subdivisions 13,849 13,396 11,396
Mortgaged-backed securities 571 958 1,248
--------------- ---------------- ----------------
Total $ 16,426 $ 17,366 $ 17,011
=============== ================ ================
</TABLE>
The carrying value of securities available for sale at the dates indicated was:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
(Dollars in thousands)
1997 1996 1995
---------------- ----------------- --------------
<S> <C> <C> <C>
U.S. Government securities $ 2,464 $ 4,950 $ 3,874
States and political subdivisions 12,136 - -
Mortgaged-backed securities 29,579 26,521 23,886
Other securities 3,091 3,565 3,519
---------------- ----------------- ---------------
Total $ 47,270 $ 35,036 $ 31,279
================ ================= ===============
</TABLE>
-19-
<PAGE>
Maturity Distribution and Yields of Securities
December 31, 1997
Taxable-Equivalent Basis
<TABLE>
<CAPTION>
Due in 1 year Due after 1 through Due after 5 Through Due after 10 years and
Or Less 5 years 10 Years Equity Securities Total
--------------- -------------------- -------------------- ---------------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities held for investment:
U.S. Government securities $ 1,500 3.43% $ 506 5.28% $ - - $ - - $ 2,006 3.90%
Mortgage backed securities 86 7.73% - - 30 7.73% 455 7.04% 571 7.18%
Other taxable securities - - - - - - - - - -
------- ------- ------- ------- -------
Total taxable 1,586 3.66% 506 5.28% 30 7.73% 455 7.04% 2,577 4.63%
Tax-exempt securities (1) 574 7.61% 4,885 6.84% 6,277 7.33% 2,114 7.86% 13,850 7.25%
------- ------- ------- ------- -------
Total $ 2,160 4.71% $ 5,391 6.69% $ 6,307 7.34% $ 2,569 7.72% $16,427 6.84%
Securities available for sale:
U.S. Government securities $ 639 4.99% $ 1,580 5.85 $ 244 7.45% $ - - $ 2,463 5.78%
Mortgage backed securities - - 2,137 5.19% 5,546 5.88% 21,896 6.45% 29,579 6.25%
Corporate preferred - - - - - 2,383 12.71% 2,383 12.71%
------- ------- ------- ------- -------
Total taxable $ 639 4.99% $ 3,717 5.47% $ 5,790 5.95% $24,279 7.07% $34,425 6.65%
Tax-exempt securities (1) - - - - - - 12,136 7.82% 12,136 7.82%
------- ------- ------- ------- -------
Total $ 639 4.99% $ 3,717 5.47% $ 5,790 5.95% $36,415 7.32% $46,561 6.96%
------- ------- ------- ------- -------
Total securities $ 2,799 4.77% $ 9,108 6.19% $12,097 6.67% $38,984 7.35% $62,988 6.63%
======= ======= ======= ======= =======
</TABLE>
(1) Yields on tax- exempt securities have been computed on a tax - equivalent
basis
(2) Excludes Federal Reserve Stock of $134,400 and Federal Home Loan Bank Stock
of $573,600
-20-
<PAGE>
Deposits
The Company has made an effort in recent years to increase core
deposits and control cost of funds. Deposits provide funding for the Company's
investments in loans and securities. The interest paid for deposits must be
managed carefully to control the level of interest expense.
As shown below, average total deposits grew by 14.54% during 1997,
10.13% in 1996, and 5.70% during 1995. The growth of both non-interest bearing
deposits and the certificate of deposits greater than $100,000 were large
contributors of 1997's increased balance. During the Spring of 1997, the Company
had held a certificate of deposit promotion. The promotion generated nearly $10
million in new deposit money for the Company.
The Company will continue funding assets deposit liability accounts and
focus on core deposit growth as the primary source for liquidity and stability.
The Company offers individuals and small to medium sized businesses a variety of
deposit accounts, including demand deposit, interest checking, money market,
savings and time deposits accounts.
The following table is a summary of average deposits and average rates
paid.
Deposits and Rates Paid
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------- -------------------------
Amount Rate Amount Rate Amount Rate
------------- ---------- ----------- ----------- ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
Deposits $ 24,025 - $ 19,211 - $ 15,691 -
Interest-bearing accounts:
Interest checking 19,886 1.81% 18,348 2.13% 17,919 2.43%
Regular savings 15,631 3.69% 14,562 3.85% 14,003 3.81%
Money market accounts 30,071 2.94% 28,735 3.02% 26,980 3.09%
Time deposits:
$ 100,000 and over 16,480 5.46% 12,013 6.14% 12,523 5.50%
Under $ 100,000 40,100 5.40% 34,760 5.46% 28,775 5.43%
------------- ----------- -----------
Total interest-bearing deposits 122,168 4.00% 108,418 4.11% 100,200 4.05%
------------- ------------- -----------
Total $ 146,193 $ 127,629 $ 115,891
============= ============= ===========
</TABLE>
The Company neither purchases brokered deposits nor solicits deposits
from sources outside its primary market area. In 1998, deposit levels are
expected to continue to increase over those at the end of December 31, 1997.
-21-
<PAGE>
The following is a summary of the maturity distribution of certificates
of deposit equal to or greater than $100,000 as December 31, 1997:
Maturities of Certificates of Deposit of $100,000 and Over
<TABLE>
<CAPTION>
Within Three to Six to Over Percent
Three Six Twelve One of Total
Months Months Months Year Total Deposits
-------------- -------------- --------------- -------------- ------------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1997 $ 1,675 $ 4,474 $ 5,157 $ 5,963 $ 17,269 11.0%
</TABLE>
Capital Resources
The adequacy of the Company's capital is reviewed by management on an
ongoing basis with reference to the size, composition and quality of the
Company's asset and liability levels and is consistent with regulatory
requirements and industry standards. Management seeks to maintain a capital
structure that will assure an adequate level of capital to support anticipated
asset growth and absorb potential losses.
The Federal Reserve, along with the Federal Deposit Insurance
Corporation, has adopted capital guidelines to supplement the definitions of
capital for regulatory purposes and to establish minimum capital standards.
Specifically, the guidelines categorize assets and off-balance sheet items into
four risk-weighted categories. The minimum ratio of qualifying total capital to
risk-weighted assets is 8.0%, of which at least 4.0% must be Tier I capital,
composed of common equity and retained earnings. The Company had a ratio of
risk-weighted assets to total capital of 19.7% at December 31, 1997, and 20.2%
at December 31, 1996. The ratio of risk-weighted assets to Tier I capital was
18.8% at December 31, 1997, and 19.3% at December 31, 1996. Both ratios exceed
the minimum capital requirements adopted by the federal bank regulatory
agencies.
-22-
<PAGE>
Analysis of Capital
December 31,
-----------------------------
1997 1996
-------------- ------------
Tier 1 Capital:
Common stock $ 9,063 $ 4,299
Capital surplus 1,948 1,411
Retained earnings 10,874 12,817
Unrealized net loss on
Equity securities (1,181) (35)
-------------- ------------
Total Tier 1 capital 20,704 18,492
Tier 2 Capital:
Allowance for loan losses 974 884
-------------- ------------
Total tier 2 capital 974 884
Total risk-based capital $ 21,678 $ 19,376
============== ============
Risk weighted assets $ 110,041 $ 95,921
CAPITAL RATIOS:
Tier 1 risk-based capital ratio 18.8% 19.3%
Total risk-based capital ratio 19.7% 20.2%
Tier 1 capital to average total assets 11.8% 11.7%
Liquidity
Liquidity represents an institution's ability to meet present and
future financial obligations through either the sale or maturity of existing
assets or the acquisition of additional funds through liability management.
Liquid assets include cash, interest-bearing deposits with banks, federal funds
sold, securities classified as available for sale and loan and investments
maturing within one year. As a result of the Company's management of liquid
assets and the ability to generate liquidity through liability funding,
management believes the Company maintains overall liquidity sufficient to
satisfy its depositors' requirements and meet its customers' credit needs.
-23-
<PAGE>
The Company also maintains additional sources of liquidity through a
variety of borrowing arrangements. The Company maintains federal fund lines with
large regional and money-center banking institutions. These available lines
total in excess of $8 million, of which none had been outstanding at December
31, 1997. Federal funds purchased during 1997 averaged $2,934,000. During 1996,
average federal funds borrowed totaled $73,000. At December 31, 1997, the
Company had $3.0 million of outstanding borrowings pursuant to securities
repurchase agreement transactions, with maturities of one day. Securities
repurchase agreement transactions totaled $1.4 million at December 31, 1996. The
Company has a credit line in the amount of $16 million at the Federal Home Loan
Bank. This line may be utilized for short and/or long-term borrowing. The
Company joined the Federal Home Loan Bank system in 1995 in order to enter a
program of long term and short term borrowing which is restricted to be invested
in Residential Housing Finance Assets (RHFA). RHFA are defined as (1) Loans
secured by residential real property; (2) Mortgage-backed securities; (3)
Participations in loans secured by residential real property; (4) Loans financed
by Community Investment Program advances; (5) Loans secured by manufactured
housing, regardless of whether such housing qualifies as residential real
property; or (6) Any loans or investments which the Federal Housing Finance
Board and the Company, in their discretion, otherwise determine to be
residential housing finance assets. In 1997, short-term borrowings from the
Federal Home Loan Bank system for RHFA investments were $2,800,000 maturing in
1998.
At December 31, 1997, cash, interest bearing deposits with financial
institutions, federal funds sold, securities available for sale, investments and
loans maturing within one year were 26.41% of total deposits and other
liabilities.
Year 2000
ICBI has established a committee within the banking subsidiary to
address and evaluate problems that may be encountered within all of the
subsidiaries with respect to the Year 2000. The committee is charged with
identifying potential problems and uncertainties that would cause financial
reporting to be inaccurate, addressing the cost associated with resolving any
Year 2000 problems, and compiling of documentation relating to testing of
computer programs and equipment. The committee has prepared a written plan
detailing the steps to be taken for Year 2000 readiness that is being reviewed
by the Board of Directors.
Each subsidiary utilizes and is dependent upon data processing systems
and software to conduct its business. The data processing systems and software
include a mainframe processing system and various software packages, licensed to
the subsidiaries by an outside vendor, which are run on in-house computer
equipment. The subsidiaries' mainframe software vendor and the majority of the
other vendors (including vendors for systems and equipment other than for data
processing) which have been contacted have indicated that their hardware and/or
software will be Year 2000 ready.
Upgrading and replacing personal computers throughout the subsidiaries
is expected to be a large part of the Year 2000 readiness plan. The cost of such
expense is not expected to have a material effect on the Corporation's
consolidated financial statements.
Forward-Looking Statements
Certain information contained in this discussion may include
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements are generally identified by phrases
such as "the Company expects," "the Company believes" or words of similar
import. Such forward-
-24-
<PAGE>
looking statements involve known and unknown risks including, but not limited
to, changes in general economic and business conditions, interest rate
fluctuations, competition within and from outside the banking industry, new
products and services in the banking industry, risks values, changing trends in
customer profiles and changes in laws and regulations applicable to the Company.
Although the Company believes that its expectations with respect to
forward-looking statements are based upon reasonable assumptions within the
bounds of its knowledge of its business and operations, there can be no
assurance that actual results, performance or achievements of the Company will
not differ materially from any future results, performance or achievements
expressed or implied by such forward-looking statements.
Recent Accounting Pronouncements
In 1997, the Corporation adopted FASB Statement No. 128, "Earnings per
Share." Statement 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share, unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earning per share is very
similar to the previously reported fully diluted earnings per share. This
statement had no effect on the Corporation's earnings per share for any period
presented.
In June 1996, the FASB issued FASB No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. Those
standards are based on consistent application of a financial components approach
that focuses on control of the affected asset or liability that it controls or
surrenders. This Statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996, and
is to be applied prospectively.
In October 1996, the FASB issued FASB Statement No. 127, which deferred
for one year paragraphs 9-12 (Accounting for Transfers and Servicing of
Financial Assets) under FASB No. 125 for securities lending, repurchase
agreements, dollar rolls, and other secured transactions. The FASB also agreed
to defer for one year paragraph 15 (Secured Borrowings and Collateral) under
FASB No. 125 for all transactions.
During June 1997, the FASB issued FASB No. 130, "Reporting
Comprehensive Income." This pronouncement established standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general purpose financial statements. FASB
No. 130 is effective for financial statements beginning after December 15, 1997.
Additionally during June of 1997, the FASB issued FASB No. 131,
"Disclosures about Segments of an Enterprise and Related Information." FASB No.
131 establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement becomes effective for financial statements for periods
beginning after December 31, 1997.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are filed as a part of this report
following Item 13 below:
-25-
<PAGE>
Independent Auditor's Report
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the Years Ended December 31,
1997, 1996 and 1995
Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on
accounting and financial disclosure during the last two fiscal years.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors
Howard M. Armfield, 55, has been a director since 1984. Mr. Armfield is
Executive Vice President and owner of Armfield, Harrison & Thomas, Inc., an
independent insurance agency in Leesburg, Virginia.
Joseph L. Boling, 53, has been a director since 1993. Mr. Boling has
been the Chairman and Chief Executive Officer of the Company and The Middleburg
Bank, a subsidiary of the Company (the "Bank"), since April 1997. From February
1993 to April 1997, he was President and Chief Executive Officer of the Company
and the Bank. Prior to employment by the Company and the Bank, he was a Senior
Vice President of Crestar Bank in Richmond, Virginia.
Childs Frick Burden, 47, has been a director since 1997. Mr. Burden is
a partner with Secor Group, an investment firm in Washington, D.C.
J. Lynn Cornwell, Jr., 73, has been a director since 1984. Mr. Cornwell
is President and owner of J. Lynn Cornwell, Inc., a real estate development
company in Loudoun County.
William F. Curtis, 69, has been a director since 1962. Mr. Curtis is
currently retired. Until February 1993, he had served as President and Chief
Executive Officer of the Bank for 25 years.
F. E. Deacon, III, 42, has been a director since 1997. Mr. Deacon is
President and Chief Executive Officer of The Tredegar Trust Company, a trust
company in Richmond, Virginia and a subsidiary of the Company ("Tredegar").
George A. Horkan, Jr., 75, has been a director since 1961. Mr. Horkan
is President of George A. Horkan, Jr., P.C., a law firm in Upperville, Virginia.
-26-
<PAGE>
C. Oliver Iselin, III, 68, has been a director since 1975. Mr. Iselin
is owner and operator of the Wolver Hill Farm.
William S. Leach, 69, has been a director since 1970. Mr. Leach is a
retired businessman with over 30 years experience. Most recently he served a
three year term as Town Administrator for the Town of Middleburg.
Thomas W. Nalls, 56, has been a director since 1997. Mr. Nalls is a
partner with Hazel & Thomas, P.C., a law firm in Leesburg, Virginia.
John C. Palmer, 62, has been a director since 1974. Mr. Palmer retired
as Senior Vice President of the Bank in 1995 after 27 years of service.
John Sherman, 57, has been a director since 1997. Mr. Sherman is owner
and operator of The Ashley Inn in Paris, Virginia.
Millicent W. West, 76, has been a director since 1975. Ms. West has
served in many volunteer positions in the Garden Club of America and Garden Club
of Virginia.
Edward T. Wright, 61, has been a director since 1972. Mr. Wright is
Senior Vice President of the Bank and his principal duties include
administration of the loan portfolio, marketing and branch management.
Executive Officers Who Are Not Directors
Alice P. Frazier, 33, has served as Senior Vice President and Chief
Financial Officer since April 1993. From May 1991 until April 1993, she served
as the Bank's Loan Review Officer. From December 1988 until May 1991 she was
employed by Yount, Hyde & Barbour, P.C., certified public accountants.
Arch A. Moore, 46, has served as Senior Vice President and Senior
Lender since February 1995. From March 1983 to February 1995, he served in
various positions, the last of which was Manager of the Northern Virginia
Business Banking Group, with First American/First Union.
William E. Doyle, 45, has served as Senior Vice President, Mortgage and
Retail Services, since November 1997. From 1996 to 1997, he was a private
consultant in the banking industry, and, from 1982 to 1996, he was a Senior Vice
President with Crestar Bank.
ITEM 10. EXECUTIVE COMPENSATION
Executive Compensation
The following table shows, for the fiscal years ended December 31,
1997, 1996 and 1995, the cash compensation paid by the Company and its
subsidiaries, as well as certain other compensation paid or accrued for those
years, to each of the named executive officers in all capacities in which they
served:
-27-
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
Securities
Name and Other Annual Underlying All Other
Principal Position Year Salary ($) Bonus ($) Compensation ($) Options Compensation ($)(1)
------------------ ---- ---------- --------- ---------------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Joseph L. Boling 1997 184,045 17,000 * 20,000 13,000
Chairman and Chief Executive 1996 186,980 20,000 * - 21,433
Officer 1995 178,820 15,000 * - 21,363
Edward T. Wright 1997 122,873 5,105 * 2,000 8,638
Senior Vice President 1996 119,294 8,350 * - 7,821
1995 107,150 8,929 * - 7,748
Arch A. Moore, III 1997 105,430 4,217 * 10,000 17,000
Senior Vice President 1996 101,375 7,096 * - 8,967
1995 91,711 7,500 21,712 (2) - 8,943
F. E. Deacon, III (3) 1997 52,333 3,900 * 10,000 -
President and Chief Executive
Officer of Tredegar
</TABLE>
* All benefits that might be considered of a personal nature did not exceed
the lesser of $50,000 or 10% of total annual salary and bonus for all the
officers named in the table.
(1) Amounts presented represent gross value of payments made by the Bank during
such fiscal year pursuant to split-dollar life insurance agreements between
the Company and the named executive officers.
(2) Amount presented includes $12,500 paid by the Bank for Mr. Moore's
initiation fees for the Middleburg Tennis Club and the Loudoun Golf and
Country Club and $7,883 paid by the Bank for the increase in Mr. Moore's
income tax associated with such benefits.
(3) The Company acquired Tredegar on August 1, 1997, and the amount presented
reflects the amount earned by Mr. Deacon from August 1, 1997 to December
31, 1997. Mr. Deacon's annual salary is $130,000.
Director Compensation
As compensation for their services, each member of the Board of
Directors receives a fee of $300 for each meeting of the Board and $250 for each
Committee meeting attended. Board members who are also officers do not receive
any additional compensation above their regular salary for attending committee
meetings. In 1997, directors received $84,050 in the aggregate as compensation
for their services as directors.
Stock Options
The following table sets forth for the year ended December 31, 1997,
the grants of stock options to the named executive officers:
-28-
<PAGE>
Option Grants In Last Fiscal Year
<TABLE>
<CAPTION>
Percent of Total
Number of Securities Options Granted to
Underlying Options Employees in Fiscal Exercise or Base
Granted (#) (1) Year (%) (2) Price ($/Share) Expiration Date
--------------- ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Joseph L. Boling 20,000 37.0 17.00 November 12, 2007
Edward T. Wright 2,000 3.7 17.00 November 12, 2007
Arch A. Moore, III 10,000 18.5 17.00 November 12, 2007
F. E. Deacon, III 10,000 18.5 17.00 November 12, 2007
</TABLE>
- --------------------
(1) Stock options were awarded at or above the fair market value of the shares
of Common Stock at the date of award.
(2) Options to purchase 54,000 shares of Common Stock were granted to employees
during the year ended December 31, 1997.
Employment Agreements
Effective as of January 1, 1997, the Bank and Joseph L. Boling, who
serves as Chairman of the Bank, entered into an employment contract. Mr.
Boling's employment contract is for five years at a base annual salary of
$194,086 and he is eligible for bonuses as determined by the executive
committee, in the discretion of the Board of Directors. Mr. Boling's employment
may be terminated by the Bank, with or without cause. If he is terminated
without cause, however, he is entitled to payment for the greater of the
remainder of his contract or three years. If there is a change in control of the
Bank and Mr. Boling's employment terminates, he is entitled to severance pay
equal to his salary and benefits for the longer of the remainder of his contract
or three years, unless he is offered and accepts a position with the acquiror.
Mr. Boling's contract contains a covenant not to compete if, for any reason, his
employment terminates.
A deferred compensation plan has been adopted for the Chairman and
Chief Executive Officer. Benefits are to be paid in monthly installments for 15
years following retirement or death. The agreement provides that, if employment
is terminated for reasons other than death or disability prior to age 65, the
amount of benefits would be reduced. The deferred compensation expense for 1997,
1996 and 1995, based on the present value of the retirement benefits, was
$16,627, $15,539 and $14,522, respectively. The plan is unfunded. However, life
insurance has been acquired on the life of the employee in an amount sufficient
to discharge the obligation.
Effective as of March 27, 1997, Tredegar and F. E. Deacon, III, who
serves as President and Chief Executive Officer of Tredegar, entered into an
employment agreement that will expire on August 1, 2000. Under his employment
agreement, Mr. Deacon's base annual salary is $119,000, and he will be entitled
to a bonus, up to a maximum of $27,000 in any year, if Tredegar's cumulative net
earnings equal or exceed certain levels as described in the agreement. This
employment agreement does not provide for any additional compensation in the
event of a change in control of the Company and does prohibit Mr. Deacon from
competing with Tredegar for a period of one year following a termination of his
employment by Tredegar for any reason.
-29-
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Management
The following table sets forth, as of March 11, 1998 certain
information with respect to beneficial ownership of Common Stock by the members
of the Board of Directors and by all directors and executive officers as a
group. Beneficial ownership includes shares, if any, held in the name of the
spouse, minor children or other relatives of a director living in such person's
home, as well as shares, if any, held in the name of another person under an
arrangement whereby the director or executive officer can vest title in himself
at once or at some future time.
Amount and Nature of
Name Beneficial Ownership Percent of Class (%)
Howard M. Armfield 18,104 1.00
Joseph L. Boling (1) 26,526 1.45
Childs Frick Burden 5,760 *
J. Lynn Cornwell, Jr. 3,644 *
William F. Curtis (2) 88,844 4.90
F. E. Deacon, III (1) 15,250 *
George A. Horkan, Jr. 72,000 3.97
C. Oliver Iselin, III 42,400 2.34
William S. Leach (2) 46,784 2.58
Thomas W. Nalls 400 *
John C. Palmer 24,526 1.35
John Sherman 30 *
Millicent W. West 262,504 14.48
Edward T. Wright (1) 60,420 3.33
Directors and executive officers
as a group (17 persons) (1) 688,164 36.91
_______________
* Percentage of ownership is less than one percent of the outstanding shares
of Common Stock.
(1) Amounts disclosed include shares of Common Stock issuable upon the exercise
of stock options exercisable within 60 days of March 11, 1998.
(2) Amounts disclosed include shares of Common Stock beneficially owned by a
trust of which Messrs. Curtis and Leach serve as trustees.
Security Ownership of Certain Beneficial Owners
Millicent W. West, P.O. Box 236, Upperville, Virginia, owns 262,504
shares, or 14.48% of the outstanding shares of Common Stock. To the Company's
knowledge, no other person owns five percent of more of the outstanding shares
of Common Stock.
-30-
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of the directors and officers of the Company are at present, as in
the past, customers of the Company, and the Company has had, and expects to have
in the future, banking transactions in the ordinary course of its business with
directors, officers, principal shareholders and their associates, on
substantially the same terms, including interest rates and collateral on loans,
as those prevailing at the same time for comparable transactions with others.
These transactions do not involve more than the normal risk of collectibility or
present other unfavorable features. The balance of loans to directors, executive
officers and their associates totaled $2,783,606 at December 31, 1997, or 12.8%
of the Company's equity capital at that date.
There were no transactions during 1997 between the Company's directors
or officers and the Company's retirement or profit sharing plans, nor are there
any proposed transactions. Additionally, there are no legal proceedings to which
any director, officer, principal shareholder or associate is a party that would
be material and adverse to the Company.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1 Articles of Incorporation of Independent Community
Bankshares, Inc. (restated in electronic format),
attached as Exhibit 3.1 to the Registration Statement
on Form S-4, Registration No. 333-24523, filed with
the Commission on April 4, 1997 (the "Form S-4"),
incorporated herein by reference.
3.2 Bylaws of Independent Community Bankshares, Inc.,
attached as Exhibit 3.2 to the Form S-4, incorporated
herein by reference.
10.1 Revised Employment Agreement, dated January 1, 1997,
between The Middleburg Bank and Joseph L. Boling,
attached as Exhibit 10.1 to the Form S-4,
incorporated herein by reference.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule (filed electronically only).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company
during the last quarter of the period covered by this report.
-31-
<PAGE>
INDEPENDENT COMMUNITY BANKSHARES, INC.
Middleburg, Virginia
FINANCIAL REPORT
DECEMBER 31, 1997
<PAGE>
C O N T E N T S
Page
INDEPENDENT AUDITOR'S REPORT ON THE
CONSOLIDATED FINANCIAL STATEMENTS 1
FINANCIAL STATEMENTS
Consolidated balance sheets 2
Consolidated statements of income 3
Consolidated statements of changes in shareholders' equity 4
Consolidated statements of cash flows 5 and 6
Notes to consolidated financial statements 7-25
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Independent Community Bankshares, Inc.
Middleburg, Virginia
We have audited the accompanying consolidated balance sheets of
Independent Community Bankshares, Inc. and Subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for the years ended December 31, 1997, 1996
and 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Independent Community Bankshares, Inc. and Subsidiaries as of December 31, 1997
and 1996, and the results of its operations and its cash flows for the years
ended December 31, 1997, 1996 and 1995, in conformity with generally accepted
accounting principles.
Winchester, Virginia
January 26, 1998
1
<PAGE>
INDEPENDENT COMMUNITY BANKSHARES, INC.
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
--------------- ---------------
<S> <C> <C>
Cash and due from banks $ 6 128 036 $ 6 348 208
Interest-bearing deposits in banks 455 919 29 859
Temporary investments:
Federal funds sold 1 300 000 3 400 000
Other money market investments 725 385 141 011
Securities (fair value: 1997, $63,957,868;
1996, $52,375,995) (Notes 1 and 2) 63 695 792 52 402 253
Loans, net (Notes 1, 3, 4 and 12) 103 253 407 93 710 819
Bank premises and equipment, net (Notes 1 and 5) 5 527 103 4 698 586
Accrued interest receivable and other assets 3 774 064 2 235 220
--------------- ---------------
Total assets $ 184 859 706 $ 162 965 956
=============== ===============
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest-bearing demand deposits $ 26 601 922 $ 23 242 448
Savings and interest-bearing demand deposits 72 702 285 64 434 102
Time deposits (Note 6) 57 249 943 51 113 590
--------------- ---------------
Total deposits $ 156 554 150 $ 138 790 140
Securities sold under agreements to repurchase 3 048 481 1 444 697
Federal Home Loan Bank advances (Note 7) 2 800 000 4 000 000
Accrued interest and other liabilities 770 947 723 252
Commitments and contingent liabilities (Notes 13 and 15) - - - -
--------------- ---------------
Total liabilities $ 163 173 578 $ 144 958 089
--------------- ---------------
Shareholders' Equity
Common stock, par value $5 per share, authorized
10,000,000 shares; issued 1997, 1,812,594 shares;
issued 1996, 859,838 shares $ 9 062 970 $ 4 299 190
Capital surplus 1 948 246 1 411 174
Retained earnings (Notes 8 and 14) 10 873 617 12 816 782
Unrealized gain (loss) on securities
available for sale, net (198 705) (519 279)
---------------- ----------------
Total shareholders' equity $ 21 686 128 $ 18 007 867
--------------- ---------------
Total liabilities and shareholders' equity $ 184 859 706 $ 162 965 956
=============== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
INDEPENDENT COMMUNITY BANKSHARES, INC.
Consolidated Statements of Income
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Interest Income
Interest and fees on loans $ 8 972 418 $ 8 137 263 $ 7 264 647
Interest and dividends on investment securities:
Taxable interest income 121 314 194 506 314 910
Interest income exempt from federal income taxes 686 140 588 431 620 429
Interest and dividends on securities available for sale:
Taxable interest income 2 292 662 1 786 669 1 503 322
Interest income exempt from federal income taxes 151 183 - - - -
Dividends 280 645 267 791 13 884
Interest on deposits in banks 7 970 804 - -
Interest income on federal funds sold and other money
market investments 172 568 135 765 137 514
------------- ------------- -------------
Total interest income $ 12 684 900 $ 11 111 229 $ 9 854 706
------------- ------------- -------------
Interest Expense
Interest on deposits $ 4 886 480 $ 4 455 684 $ 4 055 755
Interest on short-term borrowings 134 457 4 580 9 016
Interest on Federal Home Loan Bank advances 171 509 186 513 31 185
------------- ------------- -------------
Total interest expense $ 5 192 446 $ 4 646 777 $ 4 095 956
------------- ------------- -------------
Net interest income $ 7 492 454 $ 6 464 452 $ 5 758 750
Provision for loan losses (Note 4) 177 602 65 000 54 950
------------- ------------- -------------
Net interest income after provision
for loan losses $ 7 314 852 $ 6 399 452 $ 5 703 800
------------- ------------- -------------
Other Income
Service charges, commissions and fees $ 886 720 $ 676 655 $ 651 327
Trust fee income 338 613 29 316 - -
Investment securities gain (loss) 2 055 (1 875) - -
Profits (losses) on securities available for sale, net (92 602) 22 496 (122 698)
Other 14 415 15 551 165 932
------------- ------------- -------------
Total other income $ 1 149 201 $ 742 143 $ 694 561
------------- ------------- -------------
Other Expenses
Salaries and employees' benefits (Notes 1, 9 and 10) $ 2 863 878 $ 2 532 777 $ 2 163 447
Net occupancy and equipment expense 593 246 561 760 433 269
Advertising 146 009 164 189 105 590
FDIC insurance 16 999 2 000 134 787
Computer services 138 138 90 062 77 728
Other operating expenses 1 212 256 1 031 782 1 152 317
------------- ------------- -------------
Total other expenses $ 4 970 526 $ 4 382 570 $ 4 067 138
------------- ------------- -------------
Income before income taxes $ 3 493 527 $ 2 759 025 $ 2 331 223
Income tax expense (Notes 1 and 11) 862 167 728 079 624 729
------------- ------------- -------------
Net income $ 2 631 360 $ 2 030 946 $ 1 706 494
============= ============= =============
Earnings per Share, basic and diluted (Note 1) $ 1.51 $ 1.18 $ .96
============= ============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
INDEPENDENT COMMUNITY BANKSHARES, INC.
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
on Securities
Common Capital Retained Available for
Stock Surplus Earnings Sale, Net Total
----- ------- -------- --------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 4 468 415 $ 2 180 971 $ 10 509 004 $ (1 498 139) $ 15 660 251
Net income - 1995 - - - - 1 706 494 - - 1 706 494
Cash dividends - 1995
($0.40 per share) - - - - (707 398) - - (707 398)
Purchase of common stock
(36,162 shares) (180 810) (831 726) - - - - (1 012 536)
Sale of common stock
(2,317 shares) 11 585 61 929 - - - - 73 514
Change in unrealized gain
(loss) on securities available
for sale, net of deferred
income taxes of $669,740 - - - - - - 1 232 296 1 232 296
------------ ------------- ------------- ------------ -------------
Balance, December 31, 1995 $ 4 299 190 $ 1 411 174 $ 11 508 100 $ (265 843) $ 16 952 621
Net income - 1996 - - - - 2 030 946 - - 2 030 946
Cash dividends - 1996
($0.42 per share) - - - - (722 264) - - (722 264)
Change in unrealized gain
(loss) on securities available
for sale, net of deferred
income taxes of $130,558 - - - - - - (253 436) (253 436)
------------ ------------- ------------- ------------ -------------
Balance, December 31, 1996 $ 4 299 190 $ 1 411 174 $ 12 816 782 $ (519 279) $ 18 007 867
Net income - 1997 - - - - 2 631 360 - - 2 631 360
Cash dividends - 1997
($0.32 per share) - - - - (574 525) - - (574 525)
Purchase of common stock
(22,691 shares) (113 455) (521 893) - - - - (635 348)
Issuance of common stock -
stock split effected in the
form of 100% stock dividend
(906,297 shares) 4 531 485 (4 531 485) - - - - - -
Issuance of common stock in
acquisition of subsidiary
(69,150 shares) (Note 8) 345 750 1 590 450 - - - - 1 936 200
Discretionary transfer from
retained earnings - - 4 000 000 (4 000 000) - - - -
Change in unrealized gain
(loss) on securities available
for sale, net of deferred
income taxes of $165,144 - - - - - - 320 574 320 574
------------ ------------- ------------- --------------- -------------
Balance, December 31, 1997 $ 9 062 970 $ 1 948 246 $ 10 873 617 $ (198 705) $ 1 686 128
============ ============= ============= ============== =============
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
INDEPENDENT COMMUNITY BANKSHARES, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------------- -------------- --------------
Cash Flows from Operating Activities
<S> <C> <C> <C>
Net income $ 2 631 360 $ 2 030 946 $ 1 706 494
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 396 833 301 497 251 390
Amortization 41 617 16 487 16 487
Provision for loan losses 177 602 65 000 54 950
Net (gain) loss on investment securities (2 055) 1 875 - -
Net (gain) loss on securities available for sale 92 602 (22 496) 122 698
Net (gain) loss on sale of assets 7 343 - - (6 437)
Net (gain) on sale of other real estate - - - - (97 624)
Discount accretion and premium amortization
on securities, net 180 181 157 657 69 601
Deferred income taxes (19 508) 68 349 82 137
Changes in assets and liabilities:
(Increase) in other assets (669 146) (289 041) (138 836)
Increase in other liabilities 57 100 195 847 226 173
Net cash provided by operating activities $ 2 893 929 $ 2 526 121 $ 2 287 033
-------------- -------------- --------------
Cash Flows from Investing Activities
Proceeds from maturity, principal paydowns
and calls of investment securities $ 2 750 431 $ 2 455 501 $ 1 015 276
Proceeds from maturity, principal paydowns
and calls of securities available for sale 2 742 602 2 149 662 1 216 149
Proceeds from sale of securities
available for sale 26 500 686 24 282 770 15 539 612
Purchase of investment securities (1 848 566) (2 846 520) (3 442 091)
Purchase of securities available for sale (40 572 390) (30 673 806) (19 499 409)
Proceeds on sale of other real estate - - - - 1 015 000
Proceeds from sale of equipment 36 335 - - 15 000
Purchases of bank premises and equipment (1 221 354) (1 623 530) (1 142 864)
Net (increase) in loans (9 720 190) (13 727 421) (1 336 510)
Cash acquired in acquisition 170 858 - - - -
-------------- -------------- --------------
Net cash (used in) investing activities $ (21 161 588) $ (19 983 344) $ (6 619 837)
-------------- -------------- --------------
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
INDEPENDENT COMMUNITY BANKSHARES, INC.
Consolidated Statements of Cash Flows
(Continued)
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- ---------------
<S> <C> <C> <C>
Cash Flows from Financing Activities
Net increase (decrease) in noninterest-bearing
and interest-bearing demand deposits and
savings accounts $ 11 627 657 $ 9 896 598 $ (3 681 539)
Net increase in certificates of deposit 6 136 353 7 371 472 7 119 273
Increase in securities sold under agreements
to repurchase 1 603 784 1 444 697 - -
Proceeds from Federal Home Loan Bank advances 2 800 000 3 000 000 3 000 000
Repayment of Federal Home Loan Bank advances (4 000 000) (2 000 000) - -
Purchase of common stock (635 348) - - (1 012 536)
Proceeds from sale of common stock - - - - 73 514
Cash dividends paid (574 525) (722 264) (707 398)
-------------- -------------- --------------
Net cash provided by financing activities $ 16 957 921 $ 18 990 503 $ 4 791 314
-------------- -------------- --------------
Increase (decrease) in cash and cash equivalents $ (1 309 738) $ 1 533 280 $ 458 510
Cash and Cash Equivalents
Beginning 9 919 078 8 385 798 7 927 288
-------------- -------------- --------------
Ending $ 8 609 340 $ 9 919 078 $ 8 385 798
============== ============== ==============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors $ 4 822 840 $ 4 425 048 $ 3 964 454
Interest paid on short-term obligations 131 500 4 580 9 016
Interest paid on Federal Home Loan
Bank advances 176 242 153 894 31 185
-------------- -------------- --------------
$ 5 130 582 $ 4 583 522 $ 4 004 655
============== ============== ==============
Income taxes $ 849 000 $ 863 723 $ 272 447
============== ============== ==============
Supplemental Disclosure of Noncash Transactions
Issuance of common stock - stock split effected in the
form of 100% stock dividend $ 4 531 485 $ - - $ - -
============== ============== ==============
Issuance of common stock in acquisition of subsidiary $ 1 936 200 $ - - $ - -
============== ============== ==============
Unrealized gain (loss) on securities available for sale $ 485 718 $ (383 994) $ 1 902 036
============== =============== ==============
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
INDEPENDENT COMMUNITY BANKSHARES, INC.
Notes to Consolidated Financial Statements
Note 1. Nature of Banking Activities and Significant Accounting Policies
Independent Community Bankshares' banking subsidiary grants
commercial, financial, agricultural, residential and consumer
loans to customers principally in Loudoun County and Fauquier
County, Virginia. The loan portfolio is well diversified and
generally is collateralized by assets of the customers. The loans
are expected to be repaid from cash flow or proceeds from the
sale of selected assets of the borrowers. The non-banking
subsidiary offers a comprehensive range of fiduciary and
investment management services to individuals and businesses.
The accounting and reporting policies of the Company conform to
generally accepted accounting principles and to accepted practice
within the banking industry.
Principles of Consolidation
The consolidated financial statements of Independent
Community Bankshares, Inc. and its wholly-owned
subsidiaries, The Middleburg Bank, The Tredegar Trust
Company and Middleburg Bank Service Corporation, include
the accounts of all four companies. All material
intercompany balances and transactions have been
eliminated in consolidation.
Securities
The Company adopted FASB No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". This statement
addresses the accounting and reporting for investments in
equity securities that have readily determinable fair
values and for all investments in debt securities. Those
investments are classified in three categories and
accounted for as follows:
a. Securities Held to Maturity
Securities classified as held to maturity are those
debt securities the Company has both the intent and
ability to hold to maturity regardless of changes in
market conditions, liquidity needs or changes in
general economic conditions. These securities are
carried at cost adjusted for amortization of premium
and accretion of discount, computed by the interest
method over their contractual lives.
b. Securities Available for Sale
Securities classified as available for sale are those
debt and equity securities that the Company intends
to hold for an indefinite period of time, but not
necessarily to maturity. Any decision to sell a
security classified as available for sale would be
based on various factors, including significant
movements in interest rates, changes in the maturity
mix of the Company's assets and liabilities,
liquidity needs, regulatory capital considerations,
and other similar factors. Securities available for
sale are carried at fair value. Unrealized gains or
losses are reported as increases or decreases in
shareholders' equity, net of the related deferred tax
effect. Realized gains or losses, determined on the
basis of the cost of specific securities sold, are
included in earnings.
7
<PAGE>
Notes to Consolidated Financial Statements
c. Trading Securities
Trading securities, which are generally held for the
short term in anticipation of market gains, are
carried at fair value. Realized and unrealized gains
and losses on trading account assets are included in
interest income on trading account securities. The
Company had no trading securities at December 31,
1997 and 1996.
Loans
Loans are shown on the balance sheets net of unearned
discounts and the allowance for loan losses. Interest is
computed by methods which result in level rates of return
on principal. Loans are charged off when in the opinion of
management they are deemed to be uncollectible after
taking into consideration such factors as the current
financial condition of the customer and the underlying
collateral and guarantee.
Interest is computed on the loan balance outstanding for
all loans.
On January 1, 1995, the Company adopted FASB No. 114,
"Accounting by Creditors for Impairment of a Loan." This
statement has been amended by FASB No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition
and Disclosures." Statement 114, as amended, requires that
the impairment of loans that have been separately
identified for evaluation is to be measured based on the
present value of expected future cash flows or,
alternatively, the observable market price of the loans or
the fair value of the collateral. However, for those loans
that are collateral dependent (that is, if repayment of
those loans is expected to be provided solely by the
underlying collateral) and for which management has
determined foreclosure is probable, the measure of
impairment of those loans is to be based on the fair value
of the collateral. Statement 114, as amended, also
requires certain disclosures about investments in impaired
loans and the allowance for credit losses and interest
income recognized on loans.
The Company considers all consumer installment loans and
residential mortgage loans to be homogeneous loans. These
loans are not subject to impairment under FASB 114. A loan
is considered impaired when it is probable that the
Company will be unable to collect all principal and
interest amounts according to the contractual terms of the
loan agreement. Factors involved in determining impairment
include, but are not limited to, expected future cash
flows, financial condition of the borrower, and current
economic conditions. A performing loan may be considered
impaired, if the factors above indicate a need for
impairment. A loan on nonaccrual status may not be
impaired if in the process of collection or there is an
insignificant shortfall in payment. An insignificant delay
of less than 30 days or a shortfall of less than 5% of the
required principal and interest payment generally does not
indicate an impairment situation, if in management's
judgment the loan will be paid in full. Loans that meet
the regulatory definitions of doubtful or loss generally
qualify as impaired loans under FASB 114. Charge-offs for
impaired loans occur when the loan, or portion of the loan
is determined to be uncollectible, as is the case for all
loans. The Company had no loans subject to FASB 114 at
December 31, 1997 and 1996.
8
<PAGE>
Notes to Consolidated Financial Statements
Loans are placed on nonaccrual when a loan is specifically
determined to be impaired or when principal or interest is
delinquent for 90 days or more. Any unpaid interest
previously accrued on those loans is reversed from income.
Interest income generally is not recognized on specific
impaired loans unless the likelihood of further loss is
remote. Interest payments received on such loans are
applied as a reduction of the loan principal balance.
Interest income on other nonaccrual loans is recognized
only to the extent of interest payments received.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level
which, in management's judgment, is adequate to absorb
credit losses inherent in the loan portfolio. The amount
of the allowance is based on management's evaluation of
the collectibility of the loan portfolio, credit
concentrations, trends in historical loss experience,
specific impaired loans, and economic conditions.
Allowances for impaired loans are generally determined
based on collateral values or the present value of
estimated cash flows. The allowance is increased by a
provision for loan losses, which is charged to expense and
reduced by charge-offs, net of recoveries. Changes in the
allowances relating to impaired loans are charged or
credited to the provision for loan losses. Because of
uncertainties inherent in the estimation process,
management's estimate of credit losses inherent in the
loan portfolio and the related allowance may change in the
near term.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less
accumulated depreciation. Depreciation of property and
equipment is computed principally on the straight-line
method over the following estimated useful lives:
Years
-----
Buildings and improvements 31.5-39
Furniture and equipment 3-10
Maintenance and repairs of property and equipment are
charged to operations and major improvements are
capitalized. Upon retirement, sale or other disposition of
property and equipment, the cost and accumulated
depreciation are eliminated from the accounts and gain or
loss is included in operations.
Other Real Estate
Real estate acquired by foreclosure is carried at the
lower of cost or fair market value less an allowance for
estimated selling expenses on the future disposition of
the property.
Goodwill
Goodwill is amortized using the straight-line method over
20 years.
9
<PAGE>
Notes to Consolidated Financial Statements
Income Taxes
Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible
temporary differences, operating loss carryforwards, and
tax credit carryforwards. Deferred tax liabilities are
recognized for taxable temporary differences. Temporary
differences are the differences between the reported
amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share." Statement 128
replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per
share. Basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. The
Company had no potential common stock as of December 31,
1997, 1996 and 1995. Computations are based on the
weighted average number of shares outstanding during each
year after giving retroactive effect to the 100% stock
dividend declared in 1997. Weighted average shares were
1,740,966, 1,719,676 and 1,778,000 for the years ended
1997, 1996 and 1995, respectively.
Pension Plan
The Company has a trusteed, noncontributory, defined
benefit pension plan covering substantially all full-time
employees. The Company computes the net periodic pension
cost of the plan in accordance with FASB No. 87,
"Employers' Accounting For Pensions."
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks,
other temporary investments and federal funds sold.
Generally, federal funds are purchased and sold for
one-day periods.
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.
Advertising Costs
The Company follows the policy of charging the costs of
advertising to expense as incurred.
10
<PAGE>
Notes to Consolidated Financial Statements
Note 2. Securities
Amortized costs and fair values of securities being held to
maturity as of December 31, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------------- ---------------- -------------- ----------------
1997
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 2 005 491 $ - - $ (20 626) $ 1 984 865
Obligations of states and
political subdivisions 13 849 322 282 000 (1 207) 14 130 115
Mortgage-backed securities 571 149 1 909 - - 573 058
--------------- ---------------- ------------- ----------------
$ 16 425 962 $ 283 909 $ (21 833) $ 16 688 038
=============== ================ ============== ================
1996
-----------------------------------------------------------------------
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 3 012 050 $ - - $ (67 845) $ 2 944 205
Obligations of states and
political subdivisions 13 396 166 106 404 (69 500) 13 433 070
Mortgage-backed securities 957 809 9 265 (4 582) 962 492
--------------- ---------------- -------------- ----------------
$ 17 366 025 $ 115 669 $ (141 927) $ 17 339 767
=============== ================ ============== ================
</TABLE>
The amortized cost and fair value of securities being held to
maturity as of December 31, 1997 by contractual maturity are
shown below. Maturities may differ from contractual maturities in
mortgage-backed securities because the mortgages underlying the
securities may be called or repaid without any penalties.
Therefore, these securities are not included in the maturity
categories in the following maturity summary.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------------- ----------------
<S> <C> <C>
Due in one year or less $ 2 073 579 $ 2 059 753
Due after one year through five years 5 390 472 5 430 722
Due after five years through 10 years 6 276 836 6 417 758
Due after 10 years 2 113 926 2 206 747
Mortgage-backed securities 571 149 573 058
--------------- ----------------
$ 16 425 962 $ 16 688 038
=============== ================
</TABLE>
11
<PAGE>
Notes to Consolidated Financial Statements
Amortized costs and fair values of securities available for sale
as of December 31, 1997 and 1996, are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------------- ---------------- -------------- ----------------
1997
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 2 458 729 $ 7 531 $ (2 930) $ 2 463 330
Obligations of states and
political subdivisions 12 081 525 54 937 - - 12 136 462
Mortgage-backed securities 29 945 864 33 893 (400 919) 29 578 838
Corporate preferred 2 376 980 31 766 (25 346) 2 383 400
Other 707 800 - - - - 707 800
--------------- ---------------- -------------- ----------------
$ 47 570 898 $ 128 127 $ (429 195) $ 47 269 830
=============== ================ ============== ================
1996
-----------------------------------------------------------------------
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 4 987 626 $ 745 $ (38 408) $ 4 949 963
Mortgage-backed securities 27 216 393 17 851 (713 390) 26 520 854
Corporate preferred 3 033 996 6 876 (60 461) 2 980 411
Other 585 000 - - - - 585 000
--------------- ---------------- -------------- ----------------
$ 35 823 015 $ 25 472 $ (812 259) $ 35 036 228
=============== ================ ============== ================
</TABLE>
The amortized cost and fair value of securities available for
sale as of December 31, 1997, by contractual maturity are shown
below. Maturities may differ from contractual maturities in
corporate and mortgage-backed securities because the securities
and mortgages underlying the securities may be called or repaid
without any penalties. Therefore, these securities are not
included in the maturity categories in the following maturity
summary.
12
<PAGE>
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------------- ----------------
<S> <C> <C>
Due in one year or less $ 639 120 $ 639 120
Due after one year through five years 1 575 428 1 580 305
Due after five years through 10 years 244 181 243 905
Due after 10 years 12 081 525 12 136 462
Mortgage-backed securities 29 945 864 29 578 838
Corporate preferred 2 376 980 2 383 400
Other 707 800 707 800
--------------- ----------------
$ 47 570 898 $ 47 269 830
=============== ================
</TABLE>
Proceeds from sales of securities available for sale during 1997,
1996 and 1995 were $26,500,686, $24,282,770 and $15,539,612,
respectively. Gross gains of $53,384, $42,269 and $125,906 and
gross losses of $145,986, $19,773 and $248,604 were realized on
those sales, respectively.
The carrying value of securities pledged to qualify for fiduciary
powers, to secure public monies as required by law and for other
purposes amounted to $5,945,089 and $1,430,421 at December 31,
1997 and 1996, respectively.
Note 3. Loans, Net
The composition of the net loans is as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
--------------- ----------------
(in thousands)
<S> <C> <C>
Real estate loans:
Construction and land development $ 3 798 $ 4 182
Secured by farmland 2 140 2 105
Secured by 1-4 family residential 48 396 43 860
Other real estate loans 26 054 24 774
Loans to farmers (except secured by real estate) 961 891
Commercial and industrial loans (except those
secured by real estate) 14 062 10 681
Loans to individuals for personal expenditures 8 738 8 061
All other loans 88 76
--------------- ----------------
Total loans $ 104 237 $ 94 630
Less: Unearned income 10 35
Allowance for loan losses 974 884
--------------- ----------------
Net loans $ 103 253 $ 93 711
=============== ================
</TABLE>
13
<PAGE>
Notes to Consolidated Financial Statements
Note 4. Allowance for Loan Losses
Transactions in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------- --------------
<S> <C> <C> <C>
Balance, beginning $ 883 536 $ 866 173 $ 940 081
Provision charged to operating expense 177 602 65 000 54 950
Recoveries 40 235 77 523 82 860
Loan losses charged to the allowance (127 013) (125 160) (211 718)
-------------- ------------- --------------
$ 974 360 $ 883 536 $ 866 173
============== ============= ==============
</TABLE>
Nonaccrual loans excluded from impaired loan disclosure under
FASB 114 amounted to $242,583 and $76,227 at December 31, 1997
and 1996, respectively. If interest on these loans had been
accrued, such income would have approximated $14,898 and $1,993
for 1997 and 1996, respectively.
Note 5. Bank Premises and Equipment, Net
Bank premises and equipment consists of the following:
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Land $ 1 516 423 $ 989 520
Banking facilities 3 057 340 1 989 570
Furniture, fixtures and equipment 3 141 736 2 706 998
Construction in progress and deposits
on equipment 119 261 1 028 027
---------------- ---------------
$ 7 834 760 $ 6 714 115
Less accumulated depreciation 2 307 657 2 015 529
---------------- ---------------
$ 5 527 103 $ 4 698 586
================ ===============
</TABLE>
Depreciation expense was $396,833, $301,497 and $251,390 for the
years ended December 31, 1997, 1996 and 1995, respectively.
14
<PAGE>
Notes to Consolidated Financial Statements
Note 6. Deposits
The aggregate amount of jumbo time deposits, each with a minimum
denomination of $100,000, was approximately $17,268,984 and
$14,012,755 in 1997 and 1996, respectively.
At December 31, 1997, the scheduled maturities of time deposits
are as follows:
1998 $ 39 137 574
1999 7 210 439
2000 10 186 691
2001 266 688
2002 and thereafter 448 551
----------------
$ 57 249 943
================
Note 7. Federal Home Loan Bank Advances
As of December 31, 1997 and 1996, the Company had borrowed
$2,800,000 and $4,000,000, respectively, on a short-term basis
from its $16,000,000 line of credit with the Federal Home Loan
Bank of Atlanta. The Company has pledged real estate loans and
Federal Home Loan Bank stock as collateral on these borrowings.
Note 8. Business Combination
On August 1, 1997, the Company acquired The Tredegar Trust
Company. The Company issued 69,150 shares of common stock for
all of the outstanding shares of common stock of Tredegar. The
excess of the total acquisition cost over the fair value of the
net assets acquired is being amortized over 20 years by the
straight-line method. The acquisition has been accounted for as
a purchase and results of operations of Tredegar since the date
of acquisition are included in the consolidated financial
statements.
Note 9. Stock Option Plan
In 1997, the Board of Directors approved the 1997 Stock Option
Plan for employees subject to approval by the Company's
shareholders at the 1998 Annual Meeting of Shareholders. The
plan allows for incentive stock options and nonqualified stock
options. 300,000 shares of the Company's common stock have been
reserved for the issuance of stock options under the Employee
Plan. The Board granted 54,000 options (subject to shareholders'
approval of the plan) to key employees of the Bank at $17.00 per
share. Of the 54,000 options, a total of 26,544 were vested
November 13, 1997 with the remaining options vesting 12,548 per
year for 1998 and 1999 and 2,360 vesting in 2000.
15
<PAGE>
Notes to Consolidated Financial Statements
Note 10. Employee Benefits
The amount charged to expense for the Company's pension plan
totaled $113,433, $85,739 and $86,294 for the years ended
December 31, 1997, 1996 and 1995, respectively. The components of
the pension cost charged to expense for 1997, 1996 and 1995
consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------- --------------
<S> <C> <C> <C>
Service cost $ 120 165 $ 103 203 $ 86 803
Interest cost on projected benefit
obligation 121 209 133 703 121 361
Actual return on plan assets (140 632) (163 858) (134 561)
Net amortization and deferral 12 691 12 691 12 691
-------------- ------------- --------------
$ 113 433 $ 85 739 $ 86 294
============== ============= ==============
</TABLE>
The following table sets forth the plan's funded status as of
September 30, 1997 and 1996, and the amount recognized in the
accompanying balance sheets as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------------- -------------
<S> <C> <C>
Actuarial present value of
benefit obligations:
Vested benefits $ 1 065 024 $ 908 635
============== =============
Accumulated benefits $ 1 146 766 $ 998 018
============== =============
Projected benefits $ (1 746 565) $ (1 425 983)
Plan assets at fair value 1 840 995 1 480 340
-------------- -------------
Funded status $ 94 430 $ 54 357
Unrecognized net loss 125 410 88 368
Unrecognized net transition (asset) (43 771) (47 751)
Unrecognized prior service cost 200 049 216 720
-------------- -------------
Asset on balance sheet as of
September 30 $ 376 118 $ 311 694
Fourth quarter entries, employer
contributions 177 947 181 472
-------------- -------------
Asset on balance sheet as of
December 31 $ 554 065 $ 493 166
============== =============
</TABLE>
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present
value of the benefit obligations were 8.5% and 6.0%,
respectively. The expected long-term rate of return on plan
assets was 9.5%.
16
<PAGE>
Notes to Consolidated Financial Statements
Plan assets consist of diversified bond and common stock mutual
funds. Bond funds account for approximately 40% of plan assets
and equity funds approximate 60% of plan assets.
A deferred compensation plan was adopted for the President and
Chief Executive Officer. Benefits are to be paid in monthly
installments for 15 years following retirement or death. The
agreement provides that if employment is terminated for reasons
other than death or disability prior to age 65, the amount of
benefits would be reduced. The deferred compensation expense for
1997 and 1996, based on the present value of the retirement
benefits, was $15,809 and $15,539. The plan is unfunded. However,
life insurance has been acquired on the life of the employee in
an amount sufficient to discharge the obligation.
Note 11. Income Taxes
Net deferred tax assets (liabilities) consist of the following
components as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------- ---------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 216 313 $ 185 432
Deferred compensation 24 655 19 280
Unearned loan fees 2 159 4 607
Interest on nonaccrual loans 4 819 678
Loss on capital assets 28 391 - -
Securities available for sale 102 363 267 508
------------- ----------------
$ 378 700 $ 477 505
------------- ----------------
Deferred tax liabilities:
Property and equipment $ 287 409 $ 259 774
Prepaid pension costs 185 644 166 447
------------- ----------------
$ 473 053 $ 426 221
------------- ----------------
$ (94 353) $ 51 284
============= ================
</TABLE>
The provision for income taxes charged to operations for the
years ended December 31, 1997, 1996 and 1995 consists of the
following:
<TABLE>
<CAPTION>
1997 1996 1995
------------ -------------- --------------
<S> <C> <C> <C>
Current tax expense $ 881 675 $ 659 730 $ 542 592
Deferred tax expense (benefit) (19 508) 68 349 82 137
------------- -------------- --------------
$ 862 167 $ 728 079 $ 624 729
============ ============== ==============
</TABLE>
17
<PAGE>
Notes to Consolidated Financial Statements
The income tax provision differs from the amount of income tax
determined by applying the U.S. federal income tax rate to pretax
income for the years ended December 31, 1997, 1996 and 1995, due
to the following:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Computed "expected" tax expense $ 1 187 799 $ 938 069 $ 792 614
Increase (decrease) in income taxes
resulting from:
Tax exempt interest income (284 689) (175 099) (185 166)
Other, net (40 943) (34 891) 17 281
------------ ------------ ------------
$ 862 167 $ 728 079 $ 624 729
============ ============ ============
</TABLE>
Note 12. Related Party Transactions
The Company has had, and may be expected to have in the future,
banking transactions in the ordinary course of business with
directors, principal officers, their immediate families and
affiliated companies in which they are principal stockholders
(commonly referred to as related parties), on the same terms,
including interest rates and collateral, as those prevailing at
the time for comparable transactions with others. These persons
and firms were indebted to the Company for loans totaling
$2,783,606 and $845,656 at December 31, 1997 and 1996,
respectively. During 1997, total principal additions were
$2,386,733 and total principal payments were $448,783.
Note 13. Contingent Liabilities and Commitments
In the normal course of business, there are outstanding various
commitments and contingent liabilities, which are not reflected
in the accompanying financial statements. The Company does not
anticipate any material loss as a result of these transactions.
See Note 15 with respect to financial instruments with
off-balance-sheet risk.
The Company must maintain a reserve against its deposits in
accordance with Regulation D of the Federal Reserve Act. For the
final weekly reporting period in the years ended December 31,
1997 and 1996, the aggregate amounts of daily average required
reserves were approximately $1,239,000 and $1,073,000,
respectively.
18
<PAGE>
Notes to Consolidated Financial Statements
Note 14. Retained Earnings
Transfers of funds from the banking subsidiary to the parent
corporation in the form of loans, advances and cash dividends are
restricted by federal and state regulatory authorities. As of
December 31, 1997, there were no unrestricted funds which could
be transferred from the banking subsidiary to the parent
corporation, without prior regulatory approval.
Note 15. Financial Instruments With Off-Balance-Sheet Risk and Credit Risk
The Company is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers and to reduce its own
exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount
recognized in the balance sheet. The contract or notional amounts
of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is
represented by the contractual notional amount of those
instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for
on-balance-sheet instruments.
A summary of the contract or notional amount of the Company's
exposure to off-balance-sheet risk as of December 31, 1997 and
1996, is as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- ----------------
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 12 396 000 $ 6 617 119
Standby letters of credit $ 1 185 514 $ 606 364
</TABLE>
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each
customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation
of the counterparty. Collateral held varies but may include
accounts receivable, inventory, property and equipment, and
income-producing commercial properties.
19
<PAGE>
Notes to Consolidated Financial Statements
Standby letters of credit are conditional commitments issued by
the Company to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public
and private borrowing arrangements, including commercial paper,
bond financing, and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The
Company holds real estate as collateral supporting those
commitments for which collateral is deemed necessary. The extent
of collateral held for those commitments at December 31, 1997,
varies from 0 percent to 100 percent; the average amount
collateralized is 30 percent.
The Company has approximately $3,712,065 in deposits in financial
institutions in excess of amounts insured by the Federal Deposit
Insurance Corporation (FDIC) at December 31, 1997.
Note 16. Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is
practicable to estimate that value:
Cash and Short-Term Investments
For those short-term instruments, the carrying amount is a
reasonable estimate of fair value.
Securities
For securities held for investment purposes, fair values are
based on quoted market prices or dealer quotes.
Loans
For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on
carrying values. The fair values for other loans were
estimated using discounted cash flow analyses, using interest
rates currently being offered.
Deposit Liabilities
The fair value of demand deposits, savings accounts, and
certain money market deposits is the amount payable on demand
at the reporting date. The fair value of fixed-maturity
certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities.
Short-Term Liabilities
For securities sold under agreements to repurchase and Federal
Home Loan Bank advances, the carrying amount is a reasonable
estimate of fair value.
20
<PAGE>
Notes to Consolidated Financial Statements
Off-Balance-Sheet Financial Instruments
The fair value of commitments to extend credit is estimated
using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the
counterparties. For fixed-rate loan commitments, fair value
also considers the difference between current levels of
interest rates and the committed rates.
The fair value of standby letters of credit is based on fees
currently charged for similar agreements or on the estimated
cost to terminate them or otherwise settle the obligations
with the counterparties at the reporting date.
At December 31, 1997 and 1996, the carrying amounts and fair
values of loan commitments and standby letters of credit were
immaterial.
The estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------- -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 8 609 $ 8 609 $ 9 919 $ 9 919
Securities 63 696 63 958 52 402 52 376
Loans 104 227 104 562 94 595 94 878
Less: allowance for loan losses (974) - - (884) - -
------------- -------------- -------------- -------------
Total financial assets $ 175 558 $ 177 129 $ 156 032 $ 157 173
============ ============== ============= =============
Financial liabilities:
Deposits $ 156 554 $ 156 846 $ 138 790 $ 139 149
Securities sold under agreements
to repurchase 3 048 3 048 1 445 1 445
Federal Home Loan Bank advances 2 800 2 800 4 000 4 000
------------ -------------- ------------- -------------
Total financial liabilities $ 162 402 $ 162 694 $ 144 235 $ 144 594
============ ============== ============= =============
</TABLE>
Note 17. Capital Requirements
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory -
possibly additional discretionary - actions by regulators that,
if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve
quantitative measures of the Company's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory
accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
21
<PAGE>
Notes to Consolidated Financial Statements
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital
to risk-weighted assets, and of Tier 1 capital to average assets.
Management believes, as of December 31, 1997, that the Company
meets all capital adequacy requirements to which it is subject.
As of June 30, 1997, the most recent notification from the
Federal Reserve Bank categorized the Company as well capitalized
under the regulatory framework for prompt corrective action. To
be categorized as well capitalized, the Company must maintain
minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the table. There are no conditions or
events since that notification that management believes have
changed the institution's category.
The Company's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk
Weighted Assets):
Consolidated $ 21 678 19.7% $ 8 803 $ 8.0% N/A
The Middleburg Bank $ 17 558 16.2% $ 8 694 $ 8.0% $ 10 867 $ 10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $ 20 704 18.8% $ 4 401 $ 4.0% N/A
The Middleburg Bank $ 16 584 15.3% $ 4 347 $ 4.0% $ 6 520 $ 6.0%
Tier 1 Capital (to
Average Assets):
Consolidated $ 20 704 11.8% $ 6 994 $ 4.0% N/A
The Middleburg Bank $ 16 584 9.8% $ 6 781 $ 4.0% $ 8 477 $ 5.0%
As of December 31, 1996:
Total Capital (to Risk
Weighted Assets):
Consolidated $ 19 376 20.2% $ 7 680 $ 8.0% N/A
The Middleburg Bank $ 16 187 17.0% $ 7 627 $ 8.0% $ 9 534 $ 10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $ 18 492 19.3% $ 3 840 $ 4.0% N/A
The Middleburg Bank $ 15 303 16.1% $ 3 813 $ 4.0% $ 5 720 $ 6.0%
Tier 1 Capital (to
Average Assets):
Consolidated $ 18 492 11.7% $ 6 307 $ 4.0% N/A
The Middleburg Bank $ 15 303 9.9% $ 6 187 $ 4.0% $ 7 733 $ 5.0%
</TABLE>
22
<PAGE>
Notes to Consolidated Financial Statements
Note 18. Condensed Financial Information - Parent Company Only
Notes to Consolidated Financial Statements
INDEPENDENT COMMUNITY BANKSHARES, INC.
(Parent Corporation Only)
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
Assets ---- ----
<S> <C> <C>
Cash on deposit with subsidiary bank $ 1 255 $ 7 387
Money market fund 713 403 141 011
Securities available for sale 2 383 400 2 980 411
Investment in subsidiaries, at cost, plus
equity in undistributed net income 17 343 024 14 818 885
Organizational expenses, net 19 236 35 723
Goodwill 1 181 110 - -
Other assets 44 700 24 450
-------------- ---------------
Total assets $ 21 686 128 $ 18 007 867
============== ===============
Liabilities and Shareholders' Equity
Liabilities $ - - $ - -
-------------- ---------------
Shareholders' Equity
Common stock $ 9 062 970 $ 4 299 190
Capital surplus 1 948 246 1 411 174
Retained earnings 10 873 617 12 816 782
Unrealized (loss) on securities available
for sale, net (198 705) (519 279)
-------------- ---------------
Total shareholders' equity $ 21 686 128 $ 18 007 867
-------------- ---------------
Total liabilities and shareholders' equity $ 21 686 128 $ 18 007 867
============== ===============
</TABLE>
23
<PAGE>
Notes to Consolidated Financial Statements
INDEPENDENT COMMUNITY BANKSHARES, INC.
(Parent Corporation Only)
Statements of Income
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- -------------- -------------
<S> <C> <C> <C>
Income
Dividends from subsidiary $ 1 201 074 $ 704 000 $ 4 621 374
Dividends from investments 224 804 226 896 - -
Interest 13 110 5 351 - -
Profits (losses) on securities
available for sale, net (83 503) - - - -
-------------- -------------- -------------
Total income $ 1 355 485 $ 936 247 $ 4 621 374
------------- -------------- -------------
Expenses
Amortization $ 41 617 $ 16 487 $ 16 487
Legal and professional fees 21 132 18 620 8 856
Printing and supplies 17 270 8 818 8 601
Other 889 1 124 1 174
------------- -------------- -------------
Total expenses $ 80 908 $ 45 049 $ 35 118
------------- -------------- -------------
Income before allocated tax benefits and
undistributed income of subsidiaries $ 1 274 577 $ 891 198 $ 4 586 256
Income tax expense (benefit) (18 659) 10 770 (11 940)
------------- -------------- --------------
Income before equity (deficit) in
undistributed income of subsidiaries $ 1 293 236 $ 880 428 $ 4 598 196
Equity (deficit) in undistributed
income of subsidiaries 1 338 124 1 150 518 (2 891 702)
------------- -------------- --------------
Net income $ 2 631 360 $ 2 030 946 $ 1 706 494
============= ============== =============
</TABLE>
24
<PAGE>
Notes to Consolidated Financial Statements
INDEPENDENT COMMUNITY BANKSHARES, INC.
(Parent Corporation Only)
Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 2 631 360 $ 2 030 946 $ 1 706 494
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 41 617 16 487 16 487
Undistributed (earnings) deficit of subsidiary (1 338 124) (1 150 518) 2 891 702
Loss on sale of securities available for sale 83 503 - - - -
(Increase) decrease in other assets (40 554) 5 709 5 009
---------------- ------------- ------------
Net cash provided by
operating activities $ 1 377 802 $ 902 624 $ 4 619 692
---------------- ------------- ------------
Cash Flow from Investing Activities
Purchase of securities available for sale $ (1 334 984) $ (100 000) $ (2 933 996)
Proceeds from sale of securities available
for sale 1 908 497 - - - -
Purchase of intangibles (175 182) - - - -
---------------- ------------- ------------
Net cash provided by (used in)
investing activities $ 398 331 $ (100 000) $ (2 933 996)
---------------- ------------- ------------
Cash Flows from Financing Activities
Purchase of common stock $ (635 348) $ - - $(1 012 536)
Net proceeds from sale of common stock - - - - 73 514
Cash dividends paid (574 525) (722 264) (707 398)
---------------- -------------- -------------
Net cash (used in)
financing activities $ (1 209 873) $ (722 264) $ (1 646 420)
Increase in cash and
cash equivalents $ 566 260 $ 80 360 $ 39 276
Cash and Cash Equivalents
Beginning 148 398 68 038 28 762
---------------- ------------- ------------
Ending $ 714 658 $ 148 398 $ 68 038
================ ============= ============
</TABLE>
25
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, as amended, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INDEPENDENT COMMUNITY
BANKSHARES, INC.
Date: March 31, 1998 By: /s/ Joseph L. Boling
-- --------------------------------------
Joseph L. Boling
President and Chief Executive Officer
In accordance with the Exchange Act, 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>
Signature Title Date
<S> <C> <C>
/s/ Joseph L. Boling President and Chief Executive March 31, 1998
- ------------------------------------------- Officer and Director
Joseph L. Boling (Principal Executive Officer)
/s/ Alice P. Frazier Senior Vice President and Chief Financial March 31, 1998
- ------------------------------------------- Officer (Principal Financial and
Alice P. Frazier Accounting Officer)
- ------------------------------------------- Director March __, 1998
Howard M. Armfield
/s/ Childs Frick Burden
- ------------------------------------------- Director March 31, 1998
Childs Frick Burden
- ------------------------------------------- Director March __, 1998
J. Lynn Cornwell, Jr.
/s/ William F. Curtis
- ------------------------------------------- Director March 31, 1998
William F. Curtis
/s/ F.E. Deacon III
- ------------------------------------------- Director March 31, 1998
F.E. Deacon III
/s/ George A. Horkan, Jr.
- ------------------------------------------- Director March 31, 1998
George A. Horkan, Jr.
/s/ C. Oliver Iselin, III
- ------------------------------------------- Director March 31, 1998
C. Oliver Iselin, III
/s/ William S. Leach
- ------------------------------------------- Director March 31, 1998
William S. Leach
- ------------------------------------------- Director March __, 1998
Thomas W. Nalls
- ------------------------------------------- Director March __, 1998
John C. Palmer
- ------------------------------------------- Director March __, 1998
John Sherman
- ------------------------------------------- Director March __, 1998
Millicent W. West
/s/ Edward T. Wright
- ------------------------------------------- Director March 31, 1998
Edward T. Wright
</TABLE>
<PAGE>
INDEX TO EXHIBITS
3.1 Articles of Incorporation of Independent Community
Bankshares, Inc. (restated in electronic format),
attached as Exhibit 3.1 to the Registration Statement
on Form S-4, Registration No. 333-24523, filed with
the Commission on April 4, 1997 (the "Form S-4"),
incorporated herein by reference.
3.2 Bylaws of Independent Community Bankshares, Inc.,
attached as Exhibit 3.2 to the Form S-4, incorporated
herein by reference.
10.1 Revised Employment Agreement, dated January 1, 1997,
between The Middleburg Bank and Joseph L. Boling,
attached as Exhibit 10.1 to the Form S-4,
incorporated herein by reference.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule (filed electronically only).
Exhibit 21
Subsidiaries of Independent Community Bankshares, Inc.
Name of Subsidiary State of Incorporation
------------------ ----------------------
The Middleburg Bank Virginia
The Tredegar Trust Company Virginia
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 6128
<INT-BEARING-DEPOSITS> 129952
<FED-FUNDS-SOLD> 1300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 47270
<INVESTMENTS-CARRYING> 16426
<INVESTMENTS-MARKET> 16688
<LOANS> 104247
<ALLOWANCE> 974
<TOTAL-ASSETS> 184860
<DEPOSITS> 156554
<SHORT-TERM> 5848
<LIABILITIES-OTHER> 771
<LONG-TERM> 0
0
0
<COMMON> 9063
<OTHER-SE> 12623
<TOTAL-LIABILITIES-AND-EQUITY> 184860
<INTEREST-LOAN> 8972
<INTEREST-INVEST> 3713
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 12685
<INTEREST-DEPOSIT> 4886
<INTEREST-EXPENSE> 5192
<INTEREST-INCOME-NET> 7492
<LOAN-LOSSES> 178
<SECURITIES-GAINS> (91)
<EXPENSE-OTHER> 4971
<INCOME-PRETAX> 3494
<INCOME-PRE-EXTRAORDINARY> 3494
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2631
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.51
<YIELD-ACTUAL> 4.98
<LOANS-NON> 243
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 408
<ALLOWANCE-OPEN> 884
<CHARGE-OFFS> 128
<RECOVERIES> 40
<ALLOWANCE-CLOSE> 974
<ALLOWANCE-DOMESTIC> 974
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
