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, 1998
Commission file number 0-24159
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 Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
None n/a
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $5.00 per share
(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. [ ]
The issuer's gross income for its most recent fiscal year was
$15,953,000.
<PAGE>
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the average of the closing bid and asked prices of such
stock as of March 22, 1999 was approximately $24,946,808. (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 22, 1999
was 1,778,994.
(This report also covers 276,600 Contractual Rights to Contingent
Merger Consideration, which are registered under the Securities Act of 1933, as
amended, pursuant to a registration statement declared effective on June 27,
1997.)
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 1999 Annual Meeting of Shareholders - Part III
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TABLE OF CONTENTS
PART I
Page
ITEM 1. DESCRIPTION OF BUSINESS............................................ 4
ITEM 2. DESCRIPTION OF PROPERTY............................................ 9
ITEM 3. LEGAL PROCEEDINGS.................................................. 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS.............................................. 10
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.............................................. 10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION............................... 11
ITEM 7. FINANCIAL STATEMENTS............................................... 33
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE........................... 33
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT........................................ 33
ITEM 10. EXECUTIVE COMPENSATION............................................. 34
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT............................................ 34
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................... 34
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K............................. 34
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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 150,000 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
800,000 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, internet banking, 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, 1998, ICBI had a total of 76 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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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, 1998, 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.
Supervision and Regulation
Banks and their holding companies are extensively regulated. ICBI is a
bank holding company subject to supervision and regulation by the Board of
Governors of the Federal Reserve System (the "Federal Reserve") and the Virginia
State Corporation Commission (the "SCC"). ICBI's sole bank subsidiary is the
Bank, a Virginia chartered bank that is subject to supervision and regulation by
the Federal Reserve and the SCC. Tredegar is a Virginia chartered trust company
regulated by the SCC and the Federal Reserve.
The regulatory discussion is divided into two major subject areas, each
of which has three subsections. First, the discussion addresses the general
regulatory considerations governing holding companies and focuses on the primary
regulatory considerations applicable to ICBI as a bank holding company. Second,
the discussion addresses the general regulatory provisions governing financial
institutions and focuses on the regulatory considerations of the Bank and
Tredegar.
The discussion below is only a summary of the principal laws and
regulations that comprise the regulatory framework. The descriptions of these
laws and regulations, as well as descriptions of laws and regulations contained
elsewhere herein, do not purport to be complete and are qualified in their
entirety by reference to applicable laws and regulations.
Bank Holding Companies
General. The Federal Reserve has jurisdiction under the Bank Holding
Company Act of 1956, as amended (the "BHC Act"), to approve any bank or nonbank
acquisition, merger or consolidation proposed by a bank holding company. The BHC
Act generally limits the activities of a bank holding company and its
subsidiaries to that of banking, managing or controlling banks, or any other
activity which is so closely related to banking or to managing or controlling
banks as to be a proper incident thereto.
Formerly the BHC Act prohibited the Federal Reserve from approving an
application from a bank holding company to acquire shares of a bank located
outside the state in which the operations of the holding company's banking
subsidiaries are principally conducted, unless such an acquisition was
authorized by
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statute of the state where the bank whose shares were to be acquired was
located. However, under federal legislation enacted in 1994, the restriction on
interstate acquisitions was abolished, effective September 1995. A bank holding
company from any state now may acquire banks and bank holding companies located
in any other state, subject to certain conditions, including nationwide and
state imposed concentration limits. Effective June 1, 1997, banks were able to
branch across state lines by acquisition, merger or de novo (unless state law
would permit such interstate branching at an earlier date), provided certain
conditions are met, including that applicable state law must expressly permit
such interstate branching.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries that are
designed to reduce potential loss exposure to the depositors of the depository
institutions and to the Federal Deposit Insurance Corporation ("FDIC") insurance
fund. For example, under a policy of the Federal Reserve with respect to bank
holding company operations, a bank holding company is required to serve as a
source of financial strength to its subsidiary depository institutions and to
commit resources to support such institutions in circumstances where it might
not do so absent such policy. In addition, the "cross-guarantee" provisions of
federal law require insured depository institutions under common control to
reimburse the FDIC for any loss suffered or reasonably anticipated by the FDIC
as a result of the default of a commonly controlled insured depository
institution or for any assistance provided by the FDIC to a commonly controlled
insured depository institution in danger of default. The FDIC may decline to
enforce the cross-guarantee provisions if it determines that a waiver is in the
best interest of the Bank Insurance Fund ("BIF"). The FDIC's claim for damages
is superior to claims of shareholders of the insured depository institution or
its holding company but is subordinate to claims of depositors, secured
creditors and holders of subordinated debt (other than affiliates) of the
commonly controlled insured depository institutions.
Banking laws also provide that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or shareholder. This
provision would give depositors a preference over general and subordinated
creditors and shareholders in the event a receiver is appointed to distribute
the assets of any bank subsidiaries.
Regulatory Capital Requirements. All financial institutions are
required to maintain minimum levels of regulatory capital. The federal bank
regulatory agencies have established substantially similar risked based and
leverage capital standards for financial institutions they regulate. These
regulatory agencies also may impose capital requirements in excess of these
standards on a case-by-case basis for various reasons, including financial
condition or actual or anticipated growth. Under the risk-based capital
requirements of these regulatory agencies, ICBI is required to maintain a
minimum ratio of total capital to risk-weighted assets of at least 8%. At least
half of the total capital is required to be "Tier 1 capital" which consists
principally of common and certain qualifying preferred stockholders' equity,
less certain intangibles and other adjustments. The remainder ("Tier 2 capital")
consists of a limited amount of subordinated and other qualifying debt
(including certain hybrid capital instruments) and a limited amount of the
general loan loss allowance. Based upon the applicable Federal Reserve
regulations, at December 31, 1998, ICBI would be considered "well capitalized."
In addition, the federal regulatory agencies have established a minimum
leverage capital ratio (Tier 1 capital to tangible assets). These guidelines
provide for a minimum leverage capital ratio of 3% for banks and their
respective holding companies that meet certain specified criteria, including
that they have the highest regulatory examination rating and are not
contemplating significant growth or expansion. All
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<PAGE>
other institutions are expected to maintain a leverage ratio of at least 100 to
200 basis points above that minimum. The guidelines also provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets.
Each federal regulatory agency is required to revise its risk-based
capital standards to ensure that those standards take adequate account of
interest rate risk, concentration of credit risk and the risks of nontraditional
activities, as well as reflect the actual performance and expected risk of loss
on multifamily mortgages. The Federal Reserve and the FDIC have jointly
solicited comments on a proposed framework for implementing the interest rate
risk component of the risk-based capital guidelines. Under the proposal, an
institution's assets, liabilities, and off-balance sheet positions would be
weighed by risk factors that approximate the instruments' price sensitivity to a
100 basis point change in interest rates. Institutions with interest rate risk
exposure in excess of a threshold level would be required to hold additional
capital proportional to that risk. In 1994, the federal bank regulatory agencies
solicited comments on a proposed revision to the risk-based capital guidelines
to take account of concentration of credit risk and the risk of nontraditional
activities. The revision proposed to amend each agency's risk-based capital
standards by explicitly identifying concentration of credit risk and the risk
arising from nontraditional activities, as well as an institution's ability to
manage those risks, as important factors to be taken into account by the agency
in assessing an institution's overall capital adequacy. The proposal was adopted
as a final rule by the federal bank regulatory agencies and subsequently became
effective on January 17, 1995. ICBI does not expect the final rule to have a
material impact on its capital requirements; however, the federal regulatory
agencies may, as an integral part of their examination process, require ICBI to
provide additional capital based on such agency's judgments of information
available at the time of examination.
Limits on Dividends and Other Payments. Certain state law restrictions
are imposed on distributions of dividends to shareholders of ICBI. ICBI
shareholders are entitled to receive dividends as declared by the ICBI Board of
Directors. However, no such distribution may be made if, after giving effect to
the distribution, it would not be able to pay its debts as they became due in
the usual course of business or its total assets would be less than its total
liabilities. There are similar restrictions with respect to stock repurchases
and redemptions.
The Bank is subject to legal limitations on capital distributions
including the payment of dividends, if, after making such distribution, the
institution would become "undercapitalized" (as such term is used in the
statute). For all state member banks of the Federal Reserve seeking to pay
dividends, the prior approval of the applicable Federal Reserve Bank is required
if the total of all dividends declared in any calendar year will exceed the sum
of the bank's net profits for that year and its retained net profits for the
preceding two calendar years.
Federal law also generally prohibits a depository institution from
making any capital distribution (including payment of a dividend or payment of a
management fee to its holding company) if the depository institution would
thereafter fail to maintain capital above regulatory minimums. Federal Reserve
Banks are also authorized to limit the payment of dividends by any state member
bank if such payment may be deemed to constitute an unsafe or unsound practice.
In addition, under Virginia law no dividend may be declared or paid that would
impair a Virginia chartered bank's paid-in capital. The SCC has general
authority to prohibit payment of dividends by a Virginia chartered bank if it
determines that the limitation is in the public interest and is necessary to
ensure the bank's financial soundness.
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<PAGE>
The Bank
General. In addition to the regulatory provisions regarding holding
companies addressed above, the Bank is subject to extensive regulation as well.
The following discussion addresses certain primary regulatory considerations
affecting the Bank.
The Bank is regulated extensively under both federal and state law. The
Bank is organized as a Virginia chartered banking corporation and is regulated
and supervised by the Bureau of Financial Institutions of the SCC. As a member
of the Federal Reserve System as well, the Bank is regulated and supervised by
the Federal Reserve Bank of Richmond. The SCC and the Federal Reserve Bank of
Richmond conduct regular examinations of the Bank, reviewing such matters as the
adequacy of loan loss reserves, quality of loans and investments, management
practices, compliance with laws, and other aspects of their operations. In
addition to these regular examinations, the Bank must furnish the SCC and the
Federal Reserve with periodic reports containing a full and accurate statement
of its affairs. Supervision, regulation and examination of banks by these
agencies are intended primarily for the protection of depositors rather than
shareholders.
Insurance of Accounts, Assessments and Regulation by the FDIC. The
Bank's deposits are insured up to $100,000 per insured depositor (as defined by
law and regulation) through the BIF. The BIF is administered and managed by the
FDIC. As insurer, the FDIC is authorized to conduct examinations of and to
require reporting by BIF-insured institutions. The actual assessment to be paid
by each BIF member is based on the institution's assessment risk classification
and whether the institution is considered by its supervisory agency to be
financially sound or to have supervisory concerns.
The FDIC is authorized to prohibit any BIF-insured institution from
engaging in any activity that the FDIC determines by regulation or order to pose
a serious threat to the respective insurance fund. Also, the FDIC may initiate
enforcement actions against banks, after first giving the institution's primary
regulatory authority an opportunity to take such action. The FDIC may terminate
the deposit insurance of any depository institution, including the Bank, if it
determines, after a hearing, that the institution has engaged or is engaging in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, order or any
condition imposed in writing by the FDIC. It also may suspend deposit insurance
temporarily during the hearing process for the permanent termination of
insurance, if the institution has no tangible capital. If deposit insurance is
terminated, the deposits at the institution at the time of termination, less
subsequent withdrawals, shall continue to be insured for a period from six
months to two years, as determined by the FDIC. Management is aware of no
existing circumstances that could result in termination of the Bank's deposit
insurance.
Other Safety and Soundness Regulations. The federal banking agencies
have broad powers under current federal law to take prompt corrective action to
resolve problems of insured depository institutions. The extent of these powers
depends upon whether the institutions in question are "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized," as such terms are defined under uniform
regulations defining such capital levels issued by each of the federal banking
agencies.
In addition, FDIC regulations require that management report on the
institution's responsibility to prepare financial statements, and to establish
and to maintain an internal control structure and procedures for financial
reporting and compliance with designated laws and regulations concerning safety
and soundness; and that independent auditors attest to and report separately on
assertions in management's reports concerning compliance with such laws and
regulations, using FDIC-approved audit procedures.
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Each of the federal banking agencies also must develop regulations
addressing certain safety and soundness standards for insured depository
institutions and depository institution holding companies, including
compensation standards, operational and managerial standards, asset quality,
earnings and stock valuation. The federal banking agencies have issued a joint
notice of proposed rulemaking, which requested comment on the implementation of
these standards. The proposed rule sets forth general operational and managerial
standards in the areas of internal controls, information systems and internal
audit systems, loan documentation, credit underwriting, interest rate exposure,
asset growth and compensation, fees and benefits. The proposal contemplates that
each federal agency would determine compliance with these standards through the
examination process, and if necessary to correct weaknesses, require an
institution to file a written safety and soundness compliance plan. ICBI has not
yet determined the effect that the proposed rule would have on its operations
and the operations of its depository institution subsidiary if it is enacted
substantially as proposed.
Community Reinvestment. The requirements of the Community Reinvestment
Act ("CRA") affect the Bank. The CRA imposes on financial institutions an
affirmative and ongoing obligation to meet the credit needs of their local
communities, including low and moderate income neighborhoods, consistent with
the safe and sound operation of those institutions. Each financial institution's
efforts in meeting community credit needs currently are evaluated as part of the
examination process pursuant to twelve assessment factors. These factors also
are considered in evaluating mergers, acquisitions and applications to open a
branch or facility. The Bank is meeting its obligations under the CRA.
Tredegar operates as a subsidiary trust company pursuant to the
Virginia Banking Act. As such, it is subject to supervision and regulation by
the Federal Reserve and by the SCC and its Bureau of Financial Institutions,
which have authority over Virginia banks and savings institutions and other
financial institutions, including independent trust companies. As a subsidiary
trust company, it is subject to periodic investigations and examinations by the
SCC and the Federal Reserve.
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 three drive-up
facilities 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 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 $44,000 in the fiscal year ending December 31,
1998.
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All of the Company's properties are in good operating condition and are
adequate for the Company's present and anticipated future needs.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the company is
a party or of which the property of the Company subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders of the Company.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since October 1997, the Company's Common Stock has traded on the OTC
Bulletin Board under the symbol "ICBX." Prior to October 1997, the Common Stock
was neither listed on any stock exchange nor quoted on the Nasdaq Stock Market
and traded infrequently. During that time, the Common Stock had periodically
been sold in a limited number of privately negotiated transactions. The prices
set forth below do not necessarily reflect the price that would be paid in an
active and liquid market.
Market Price and Dividends
<TABLE>
<CAPTION>
Sales Price ($) (1) Dividends ($) (1)
------------------- -----------------
High Low
---- ---
<S> <C> <C> <C>
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
1998:
1st quarter................................... 28.50 21.00 .15
2nd quarter................................... 29.00 27.75 .15
3rd quarter................................... 29.50 25.50 .15
4th quarter................................... 25.50 22.00 .15
</TABLE>
__________________
(1) All prices and dividends are adjusted for a two-for-one stock split as
of November 24, 1997.
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,
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the financial condition of ICBI and other factors, including general economic
conditions and applicable governmental regulations and policies. ICBI or the
Bank has paid regular cash dividends for over 200 consecutive quarters.
As of March 3, 1999, ICBI had 950 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 Company's consolidated financial statements and notes
thereto.
Overview
ICBI is headquartered in Middleburg, Virginia and has two wholly owned
subsidiaries, The Middleburg Bank (TMB) and The Tredegar Trust Company
(Tredegar). The Middleburg Bank is a community bank serving Western Loudoun
County, Virginia with three branches. The Tredegar Trust Company is a trust
company subsidiary headquartered in Richmond, Virginia with a branch office in
Middleburg, Virginia. Tredegar was acquired by ICBI in August 1997 and accounted
for using the purchase method of accounting.
ICBI's performance for 1998 marked another year of growth in earnings
and assets. Results were favorably affected by the growing momentum in revenues
from the newer branch offices and the addition of the mortgage origination
department in April 1998. By December 31, 1998 total assets were $205.4 million
an increase of 11.1% over the $184.9 million at December 31, 1997. In September
1998 ICBI repurchased and retired 33,600 shares at $24.50 per share. This
reduced capital by $823 thousand and marginally improved returns on equity and
earnings per share. ICBI remains well capitalized with risk-adjusted core
capital and total capital ratios well above regulatory minimums. Asset quality
measures also remained strong throughout the year.
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Average Balances, Income and Expenses, Yields and Rates
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- ----------------------------- --------- --------- --------
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 $ 31,657 $ 1,804 5.70% $ 41,242 $ 2,469 5.99% $ 34,550 $ 2,023 5.86%
Tax-exempt (1) (2) 28,931 2,204 7.62% 19,721 1,574 7.98% 15,238 1,200 7.87%
--------- -------- --------- --------- --------- --------
Total Securities 60,588 4,008 6.62% 60,963 4,043 6.63% 49,788 3,223 6.47%
Loans
Taxable 112,281 10,181 9.07% 96,179 8,956 9.31% 87,358 8,137 9.31%
Tax-exempt 416 36 8.74% 376 24 6.38% - -
--------- -------- --------- --------- --------- --------
Total Loans 112,697 10,217 9.07% 96,555 8,980 9.30% 87,358 8,137 9.31%
Federal Funds Sold 3,842 211 5.49% 2,928 160 5.46% 2,431 130 5.35%
Money Market investments 1,817 90 4.95% 365 13 3.56% 125 5 4.00%
Interest Bearing Deposits in
other financial institutions 134 7 5.22% 84 8 9.52% 15 1 6.67%
--------- -------- --------- --------- --------- --------
Total earning assets 179,078 14,533 8.12% 160,895 13,204 8.21% 139,717 11,496 8.23%
Less: allowances for credit
Losses (1,044) (952) (894)
Total nonearning assets 15,084 12,730 10,340
--------- --------- ---------
Total assets $ 193,118 $ 172,673 $ 149,163
========= ========= =========
Liabilities (1):
Interest-bearing deposits:
Checking $ 23,853 $ 306 1.28% $ 19,886 $ 360 1.81% $ 18,348 $ 390 2.13%
Regular savings 17,075 602 3.53% 15,631 577 3.69% 14,562 561 3.85%
Money market savings 34,195 1,002 2.93% 30,071 883 2.94% 28,735 869 3.02%
Time deposits:
$100,000 and over 18,151 949 5.23% 16,480 936 5.68% 12,013 738 6.14%
Under $100,000 38,557 2,044 5.30% 40,100 2,130 5.31% 34,760 1,898 5.46%
--------- -------- --------- --------- --------- --------
Total interest-bearing
Deposits 131,831 4,903 3.72% 122,168 4,886 4.00% 108,418 4,456 4.11%
Federal Home Loan Bank
Advances 1,319 70 5.31% 2,999 172 5.74% 3,188 187 5.87%
Securities sold under agreements
to repurchase 2,833 125 4.41% 2,662 119 4.47% 8 - -
Long-term debt 3,740 206 5.51% - - - - - -
Federal Funds Purchased 146 9 6.16% 272 15 5.51% 73 4 5.48%
--------- -------- --------- --------- --------- --------
Total interest-bearing
Liabilities 139,869 5,313 3.80% 128,101 5,192 4.05% 111,687 4,647 4.16%
Non-interest bearing liabilities
Demand Deposits 29,782 24,025 19,211
Other liabilities 997 1,112 923
Total liabilities 170,648 153,238 131,821
Shareholders' equity 22,470 19,435 17,342
Total liabilities and shareholders'
Equity $ 193,118 $ 172,673 $ 149,163
========= ========= =========
Net interest income $ 9,220 $ 8,012 $ 6,849
======== ========= ========
Interest rate spread 4.32% 4.16% 4.07%
Interest expense as a percent of
average earning assets 2.97% 3.23% 3.33%
Net interest margin 5.15% 4.98% 4.90%
</TABLE>
____________________________
(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.
-12-
<PAGE>
Results of Operations
Net income for 1998 was $3.0 million, an increase of 13.0% over 1997's
net income of $2.6 million and a 29.6% increase in 1997 over 1996's net income
of $2.0 million. For 1998 earnings per diluted share were $1.63 compared to
$1.51 per diluted share for 1997 and $1.18 per diluted share for 1996. The
September 1998 stock repurchase increased earnings per diluted share by $.01 for
1998.
Return on average assets (ROA) measures how effectively ICBI employs
its assets to produce net income. ICBI's ROA increased slightly during 1998 to
1.54% compared to 1.52% and 1.35% for 1997 and 1996, respectively. Return on
average equity (ROE) is another measure of earnings performance, indicates the
amount of net income earned in relation to the total equity capital invested.
ICBI's ROE was 13.24% for 1998, a decrease compared to 13.54% for 1997 and an
increase compared to 11.83% for 1996.
Net interest margin increased during 1998 to 5.15% on a tax-equivalent
basis. Net interest margin for 1997 and 1996 was 4.98% and 4.90%, respectively.
Net interest margin and net interest income are influenced by fluctuations in
market rates and changes in both volume and mix of average earning assets and
the liabilities that fund those assets. Loan growth was particularly strong with
an increase of 21.0%. The average yield on earning assets declined 9 basis
points to 8.12% for 1998 compared to 8.21% and 8.23% for 1997 and 1996,
respectively. The average cost of funds continued to decrease in 1998 to 3.80%
compared to 4.05% in 1997 and 4.16% in 1996.
ICBI's efficiency ratio, a measure of its performance based upon the
relationship between non-interest expense and income excluding securities gains
and losses, compares favorably to other Virginia institutions. ICBI's efficiency
ratio for 1998, 1997 and 1996 was 58.49%, 53.70% and 59.50%, 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.
Loans, net of unearned income, were $124.9 million at December 31,
1998, a 21.0% growth over the 1997 balance of $104.2 million. Loans, net of
unearned income increased 10.15% in 1997 to $104.2 million from $94.6 million at
December 31, 1996. ICBI's investment portfolio declined during 1998 as it used
funds from matured investments to fund loan growth. At December 31, 1998, ICBI's
securities portfolio represented 28.13% of earning assets as compared to 34.46%
at December 31, 1997. Total securities were $57.8 million in 1998, $63.7 million
in 1997 and $52.4 million in 1996.
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.
Income Statement Analysis
Net Interest Income
Net interest income represents the principal source of earnings for
ICBI. Net interest income equals the amount by which interest generated from
earning assets exceeds the expense associated with funding those assets. Changes
in the volume and mix of interest earning assets and interest bearing
-13-
<PAGE>
liabilities, as well as their respective yields and rates, have a significant
impact on the level of net interest income.
Net interest income on a fully tax-equivalent basis was $9.2 million in
1998, up 15.08% over the $8.0 million reported in 1997. Net interest income in
1997 increased 16.98% over the $6.8 million reported for 1996. When net interest
income is presented on a fully tax-equivalent basis, interest income from
tax-exempt earning assets is increased by the amount of equivalent to the
federal income taxes which would have been paid if this income were taxable at
the statutory federal tax rate of 34%.
The increase in net interest income in 1998 resulted primarily from a
11.30% increase volume of average earning assets from 1997 to 1998 and
secondarily by the reduction of funding costs in a declining interest rate
environment. The 16.72% increase in average loans outstanding during 1998
provided $1.5 million in additional interest income while a decrease of 23 basis
points in yield from 9.30% in 1997 to 9.07% in 1998 decreased interest income on
average loans by $214 thousand. The yield on the investment securities portfolio
decreased 1 basis point to 6.62% in 1998 from 6.63% in 1997, on a tax-equivalent
basis and the average securities portfolio decreased $375 thousand, decreasing
tax equivalent interest income $35 thousand from 1997 to 1998. During 1998
excess funds were temporarily invested in federal funds sold or money market
accounts. The $2.4 million increase in average balances in those temporary
investments provided $128 thousand in additional interest income.
Average interest bearing deposits increased 7.91% during 1998, while
the average rate paid on these deposits decreased 28 basis points to 3.72% in
1998 from 4.0% in 1997. The increase in interest expense on interest bearing
deposits in 1998 was $17 thousand. The control of interest expense on deposits
in 1998 resulted from a pricing strategy to grow core deposit relationships
rather than those affected by interest rate alone. During 1998 ICBI's reliance
on other fundings sources on average increased 35.48%, increasing the expense
associated with those sources by $104 thousand.
In 1997, the increase in fully tax-equivalent interest income was the
result of both the growth in the average balances in the investment portfolio
and the loan portfolio as well as the increase in average yield on the
investment portfolio. The 22.45% increase in average securities from 1996 to
1997 provided $757 thousand in additional tax equivalent interest income while
the 16 basis point increase in yield provided another $63 thousand in tax
equivalent interest income. The 10.53% increase in average loan outstandings for
1997 increased tax equivalent interest income in 1997 by $843 thousand compared
to 1996. During 1997, the average balances in interest bearing deposits
increased by 12.68% which would have caused ICBI to pay $546 thousand in
additional interest expense had the average rate paid on those deposit not
decreased by 11 basis points saving ICBI $116 thousand in interest expense. In
1997, ICBI introduced the securities sold under a agreement to repurchase
product for its larger business customers which increased the average of other
interest bearing liabilities by $2.7 million causing $119 thousand in additional
interest expense. Tax equivalent net interest income increased $1.2 million in
1997 compared to 1996. A stable interest rate environment during 1997 allowed
for the growth in average earning assets to provide additional interest income
which exceeded the cost of additional interest bearing liabilities.
-14-
<PAGE>
The following table analyzes changes in net interest income
attributable to changes in the 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 the averages outstandings.
Volume and Rate Analysis
(Tax equivalent basis)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------------------
1998 vs 1997 1997 vs 1996
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 $ (550) $ (115) $ (665) $ 400 $ 46 $ 446
Tax-exempt 697 (67) 630 357 17 374
Loans:
Taxable 1,448 (223) 1,225 819 - 819
Tax-exempt 3 9 12 24 - 24
Federal funds sold 49 2 51 28 2 30
Interest on money market investments
79 (2) 77 8 - 8
Interest bearing deposits in other
financial institutions (4) 3 (1) 6 1 7
--------- -------- --------- --------- -------- ---------
Total earning assets $ 1,722 $ (393) $ 1,329 $ 1,642 $ 66 $ 1,708
Interest-Bearing Liabilities:
Interest checking $ 115 $ (169) (54) $ 38 $ (68) (30)
Regular savings deposits 47 (22) 25 37 (21) 16
Money market deposits 122 (3) 119 33 (19) 14
Time deposits
$100,000 and over 17 (4) 13 (103) 31 (72)
Under $100,000 (58) (28) (86) 541 (39) 502
--------- -------- --------- --------- -------- ---------
Total interest bearing deposits $ 243 $ (226) $ 17 $ 546 $ (116) $ 430
Federal Home Loan Bank
Advances (90) (12) (102) (11) (4) (15)
Securities sold under agree-
ment to repurchase 8 (2) 6 119 - 119
Long-term debt 206 - 206 - - -
Federal Funds Purchased (8) 2 (6) 11 - 11
--------- -------- --------- --------- -------- ---------
Total interest bearing
Liabilities $ 359 $ (238) $ 121 $ 665 $ (120) $ 545
Change in net interest income $ 1,363 $ (155) $ 1,208 $ 977 $ 186 $ 1,163
========= ======== ========= ========= ======== =========
</TABLE>
-15-
<PAGE>
Non-interest Income
Non-interest income has been and will continue to be an important
factor for increasing profitability. Management recognizes this and continues to
review and consider areas where non-interest income can be increased. One
initiative towards the goal of increasing non-interest income was achieved by
TMB which opened its mortgage department in April 1998. Total non-interest
income increased by $1.0 million or 88.77% in 1998 compared to 1997, which
follows a $407 thousand increase in 1997 over 1996. The increase is due
primarily to the increase in trust fees, fees on loans held for sale and service
charges on deposit accounts. In 1998, trust fees increased to $855 thousand, an
increase of $517 thousand over 1997. The increase resulted from the acquisition
of Tredegar in August 1997. In its first nine months of operation the mortgage
banking department generated $241 thousand of fees accounting for 23.63% of the
increase in non-interest income. Service charges, commissions and fees on
deposit accounts were $916 thousand for 1998, an increase of $135 thousand over
1997, due primarily to growth in transaction based deposit accounts. Other
operating income increased $55 thousand in 1998 to $175 thousand, primarily due
to the increase in sales of alternative investment products. Net securities
losses were $18 thousand in 1998 compared to $91 thousand in 1997. These
securities were sold as a part of a plan to reinvest the proceeds into higher
yielding investments. In 1997 non-interest income increased 54.85% or $407
thousand to $1.1 million from $742 thousand. Trust fees increased $310 thousand
from the 1996 balance accounting for 76.17% of the increase.
Noninterest Income
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------
1998 1997 1996
----------------- ----------------- ------------------
<S> <C> <C> <C>
Service charges, commissions and fees $ 916 $ 781 $ 677
Trust fee income 855 339 29
Fees on loans held for sale 241 - -
Other operating income 175 120 16
----------------- ----------------- ------------------
Noninterest income $ 2,187 $ 1,240 $ 722
Profits (losses) on securities available
for sale, net (18) (93) 22
Securities gains (losses), net - 2 (2)
================= ================= ==================
Total noninterest income $ 2,169 $ 1,149 $ 742
================= ================= ==================
</TABLE>
Non-Interest Expense
Improving operating efficiency is as important to management as
enhancing non-interest income. Total non-interest expense increased 34.27% or
$1.7 million to $6.7 million in 1998. This increase resulted primarily from a
full year of Tredegar's expenses, the new mortgage banking department and
expansion of staffing within the bank branches. Salaries and employee benefits
were $3.8 million for 1998, an increase of $887 thousand. An increase in
Tredegar's salaries and benefit expense for a full calendar year of $453
thousand accounted for 51.07% of the increase. The new mortgage department
within TMB accounted for another $254 thousand of the overall increase from 1997
to 1998. Net occupancy and equipment expense increased $179 thousand or 30.19%
to $772 thousand in 1998 compared to $593 thousand in 1997. During 1998, TMB
upgraded its computer network and at the same time, adopted a shorter time
period in which to depreciate those assets, causing $95 thousand in additional
depreciation
-16-
<PAGE>
expense. The remaining increase in net occupancy and equipment expense is
related to branch expansion and the Tredegar acquisition. Advertising expense
increased 60.27% in 1998 to $234 thousand. TMB implemented a new image
advertising campaign in Loudoun County to raise awareness throughout the County,
anticipating future branch expansion. Computer operations expense increased
78.99% during 1998 to $247 thousand compared to $138 thousand in 1997. This
increase is related to the remediation process for the Year 2000 issue and
upgrading of the computer network at TMB. Other operating expenses were $1.7
million in 1998, an increase of 35.77% compared to $1.2 million for 1997.
Tredegar accounted for $187 thousand or 42.50% of the $440 thousand increase
from 1997 to 1998. Non-interest expense increased 13.42% to $5.0 million in 1997
compared to $4.4 million in 1996. The increase in 1997 was related primarily to
a $331 thousand increase in salaries and benefit as the result of hiring
additional support staff for TMB's branching efforts, as well as the acquisition
of Tredegar.
Noninterest Expense
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1998 1997 1996
------------- -------------- -------------
<S> <C> <C> <C>
Salaries and employee benefits $ 3,751 $ 2,864 $ 2,533
Net occupancy and equipment expense 772 593 562
Advertising 234 146 164
Computer operations 247 138 90
Other operating expenses 1,670 1,230 1,034
============= ============== =============
$ 6,674 $ 4,971 $ 4,383
============= ============== =============
</TABLE>
Income Taxes
Reported income tax expense was $857 thousand for 1998, an decrease of
$5 thousand compared to $862 thousand in 1997 and an increase of $129 thousand
compared to $728 thousand for 1996. While pretax income increased 9.67% in 1998,
the decrease in income taxes is the result of an increased emphasis on investing
in tax exempt securities. The effective tax rate for 1998 was 22.36% compared to
24.68% in 1997 and 26.39% in 1996. Note 12 of the Consolidated Financial
Statements provides a reconciliation between the amount of income tax expense
computed using the federal statutory rate and ICBI's actual income tax expense.
Also included in Note 12 to the Consolidated Financial Statements is information
regarding the principal items giving rise to deferred taxes for the three years
ended December 31, 1998.
Market and Interest Rate Risk
Market risk is the risk of loss in a financial instrument arising from
adverse changes in market rates/prices such as interest rates, foreign currency
exchange rates, commodity prices, and equity prices. ICBI's primary market risk
exposure is interest rate risk. The ongoing monitoring and management of this
risk is an important component of ICBI's asset/liability management process
which is governed by policies established by its Board of Directors that are
reviewed and approved annually. The Board of Directors delegates responsibility
for carrying out the asset/liability management policies to the Asset/Liability
Committee (ALCO) of TMB. In this capacity ALCO develops guidelines and
strategies that govern ICBI's asset/liability management related activities,
based upon estimated market risk sensitivity, policy limits and overall market
interest rate levels and trends.
-17-
<PAGE>
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 ICBI's financial instruments also change, affecting net
interest income (NII), the primary component of ICBI'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
employs 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 ICBI'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 ICBI's NII sensitivity analysis during the fiscal years of
1998 and 1997 as compared to the 10% Board approved policy limit.
1998
Rate Change Estimated NII Sensitivity
----------- -------------------------
High Low Average
---- --- -------
+200 bp (.91%) .02% (.27%)
- 200 bp 1.55% (.01%) .52%
1997
Rate Change Estimated NII Sensitivity
----------- -------------------------
High Low Average
---- --- -------
+200 bp 1.32% .22% .80%
- 200 bp (2.06%) (.65%) .27%
Based on the averages presented in the tables above, had interest rates
increased 200 basis points (bp) in each year independently, then the effect to
net interest income of ICBI could have been a decrease of $23 thousand in 1998
and for 1997 an increase of $60 thousand. If interest rates had decreased 200
basis points during fiscal years 1998 and 1997, then the effect to net interest
income of the banking subsidiary could have been an increase of $44 thousand and
$20 thousand, respectively.
The preceding sensitivity analysis does not represent an ICBI 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 or replacement of asset and liability
cashflows, and others. While assumptions are developed based upon current
economic and local market conditions, ICBI cannot make any assurances about
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 and refinancing
levels likely deviating from those assumed, the varying
-18-
<PAGE>
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 and external variables. Furthermore, the sensitivity analysis
does not reflect actions that ALCO might take in response to or anticipation of
changes in interest rates.
Loan Portfolio
ICBI's loan portfolio is its largest and most profitable component of
average earning assets, totalling 62.93% of average earning assets in 1998. ICBI
continues to emphasize loan portfolio growth as a means of increasing earnings.
Loans, net of unearned income, were $126.0 million at December 31, 1998, up
20.89% from the $104.2 million at December 31, 1997. The increase in total loans
in 1998 is largely related to the maturation of TMB's bank branches in its
newest markets and the new mortgage banking department. Loans increased $9.6
million from 1996 to 1997, $13.7 million from 1995 to 1996 and $1.2 million from
1994 to 1995, increases of 10.18%, 16.91%, 1.51%, respectively. The loan to
deposit ratio has maintained its upward trend in 1998, ending the year at
72.96%. This ratio compares to 66.58% at December 31, 1997 and 68.16% at
December 31, 1996.
At December 31, 1998, residential real estate (1 to 4 family) loans
constituted 44.1% of the total loan portfolio with an increase of $10.4 million
or 22.91% over 1997. This increase is the result of the TMB's niche in funding
jumbo real estate loans within its market. Non- farm, non-residential real
estate loans provided 22.73% of total loans at December 31, 1998 with a 9.94%
increase over 1997. ICBI has continued to broaden its focus on the small
business financing market with additional commercial lending staff and several
new products. Construction real estate loans comprised 4.31% of the total
portfolio at that same date. Loans held for sale, home equity lines and
agricultural real estate loans made up 3.70%, 2.87% and 0.84% of total loans,
respectively, at December 31, 1998.
ICBI's commercial, financial and agricultural loan portfolio consists
mostly of secured and unsecured loans extended to small businesses. At December
31, 1998, these loans comprised 15.0% of the loan portfolio. This portfolio
increased 24.94% in 1998 to $18.9 million. The consumer portion of the loan
portfolio consists of mostly unsecured installment credit and accounts for 6.42%
of the loan portfolio.
Consistent with its focus on providing community-based financial
services, ICBI generally does not extend loans outside its principal market
area. ICBI's market area encompasses Fauquier and Loudoun Counties, Virginia.
ICBI's unfunded loan commitments totaled $17.1 million at December 31,
1998, and $12.4 million at December 31, 1997. The increase in the amount of the
unfunded commitments is attributed to an increase in customer demand.
At December 31, 1998, ICBI had no concentration of loans in any one
industry in excess of 10% of its total loan portfolio. However, because of the
nature of the ICBI's market, loan collateral is predominantly real estate
related.
-19-
<PAGE>
Loan Portfolio
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 18,880 $ 15,111 $ 11,648 $ 10,215 $ 9,064
Real estate construction 5,436 3,798 4,182 1,791 2,432
Real estate mortgage:
Residential (1-4 family) 55,595 45,231 41,246 34,490 38,029
Loans held for resale 4,672 - - - -
Home equity lines 3,617 3,165 2,614 2,188 1,512
Multifamily - - - - 3
Non-farm, non-residential (1) 28,643 26,054 24,774 21,697 18,271
Agricultural 1,057 2,140 2,105 1,549 1,040
Consumer installment 8,095 8,738 8,061 9,170 9,837
--------- --------- -------- -------- --------
Total loans 125,995 104,237 94,630 81,100 80,188
Less unearned income - 10 35 186 481
--------- --------- -------- -------- --------
Loans-net of unearned income $ 125,995 $ 104,227 $ 94,595 $ 80,914 $ 79,707
========= ========= ======== ======== ========
</TABLE>
The following table reflects the maturity distribution of selected
loans:
Remaining Maturities of Selected Loans
December 31, 1998
----------------------------------
Commercial, Real
Financial and Estate
Agricultural Construction
----------------- ----------------
(Dollars in thousands)
Within 1 year $ 8,671 $ 3,586
----------------- ----------------
Variable Rate:
1 to 5 years 608 76
After 5 years 800 -
----------------- ----------------
Total $ 1,408 $ 76
----------------- ----------------
Fixed Rate:
1 to 5 years 7,294 1,774
After 5 years 1,507 -
----------------- ----------------
Total $ 8,801 $ 1,774
----------------- ----------------
Total Maturities $ 18,880 $ 5,436
================= ================
-20-
<PAGE>
Asset Quality
Overall asset quality for the year was sound. Total nonperforming
assets, which consist of nonaccrual and restructured loans and foreclosed
property, were $609 thousand at December 31, 1998, an increase of $366 thousand
from the December 31, 1997 balance. Total nonperforming assets as a ratio to
total loans was .48% at December 31, 1998. The increase in nonperforming assets
for 1998 results from a slight increase in ICBI's nonaccrual loans and the
foreclosure on one real estate loan previously in nonaccrual status during 1997.
However, net charge-offs to average loans decreased 5 basis points from .09% in
1997 to .04% in 1998.
Nonperforming Assets
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ -------------- ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 409 $ 243 $ 76 $ 1,654 $ 1,700
Restructured loans - - - - -
Foreclosed property 200 - - - 917
------------ ------------ -------------- ------------ ------------
Total nonperforming assets $ 609 $ 243 $ 76 $ 1,654 $ 2,617
============ ============ ============== ============ ============
Allowance for loan losses
to period end loans 0.84% 0.93% 0.93% 1.07% 1.18%
Allowance for loan losses
to nonperforming assets 175% 401% 1163% 52% 36%
Nonperforming assets to
Period end loans 0.48% 0.23% 0.08% 2.04% 3.28%
Net charge offs to
Average loans 0.04% 0.09% 0.05% 0.16% -0.11%
</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 interest are discontinued until it becomes certain
that both principal and interest can be repaid. Finally, there may be actual
losses that may require that additional provisions for loan losses be charged
against earnings. For real estate loans, upon foreclosure, the balance of the
loan is transferred to "Other Real Estate Owned" (OREO) and carried at the lower
of the outstanding loan balance or the fair market value of the property based
on current appraisals and other current market trends. If a writedown of the
OREO property is necessary at the time of foreclosure, the amount is charged off
against the allowance for loan losses. A review of recorded property value is
performed in conjunction with normal loan reviews, and if market conditions
indicate that the recorded value exceeds the fair market value, additional
writedowns of the property value are charged directly to operations.
-21-
<PAGE>
During 1998, approximately $4 thousand 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 1997, approximately $15 thousand
of additional interest income would have been recorded if ICBI's nonaccrual
loans had been current and in accordance with their original terms.
At December 31, 1998, potential problem loans totaled $409 thousand.
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, 1998 are unsecured consumer loans. However, real estate and
other collateral secure most of the balance of problem loans.
The allowance for loan losses is an estimate of the amount that will be
adequate to provide for potential losses in ICBI'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 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.
ICBI's loans are subject to independent review by its external
auditors. ICBI's Loan Committee and Board of Directors take an active role in
the monthly review of any problem credits and their affect on the allowance for
loan losses. In management's opinion, the allowance for loan losses is adequate
to absorb the current estimated risk of loss in the existing loan portfolio.
ICBI's management continually evaluates the adequacy of the allowance for loan
losses and changes in the annual provision are based on the analyzed inherent
risk of the loan portfolio. While ICBI experienced considerable loan growth
during 1998, 1997 and 1996, the credit quality of the portfolio has improved
over the years prior to 1996, as evidenced by a low level of nonperforming
assets and the low level of net charges-offs during those years.
-22-
<PAGE>
Allowance for Loan Losses
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $ 974 $ 884 $ 866 $ 940 $ 859
Loans charged off:
Commercial, financial, and agricultural 8 42 6 13 38
Real estate construction - - - - -
Real estate mortgage - - 79 115 36
Consumer installment 78 86 40 83 142
------------ ------------ ------------ ------------ ------------
Total loans charged off $ 86 $ 128 $ 125 $ 211 $ 216
------------ ------------ ------------ ------------ ------------
Recoveries:
Commercial, financial, and agricultural $ 1 $ 12 $ 5 $ 43 $ 210
Real estate construction - - - - -
Real estate mortgage 6 7 26 4 -
Consumer installment 33 21 47 35 87
------------ ------------ ------------ ------------ ------------
Total recoveries $ 40 $ 40 $ 78 $ 82 $ 297
------------ ------------ ------------ ------------ ------------
Net charge offs (recoveries) 46 88 47 129 (81)
Provision for loan losses 135 178 65 55 -
------------ ------------ ------------ ------------ ------------
Balance, end of period $ 1,063 $ 974 $ 884 $ 866 $ 940
============ ============ ============ ============ ============
Ratio of allowance for loan losses
to loans outstanding at end of period 0.84% 0.93% 0.93% 1.07% 1.18%
Ratio of net charge offs (recoveries)to
average loans outstanding during period 0.04% 0.09% 0.05% 0.16% -0.11%
</TABLE>
The allowance for loan losses was $1.1 million at December 31, 1998, an
increase of $89 thousand from the $974 thousand at December 31, 1997. The
allowance was $884 thousand at December 31, 1996. In 1998, ICBI's net loan
charge offs had decreased $42 thousand from the previous year's net charge offs
of $88 thousand. The decrease was primarily experienced in the commercial,
financial, and agricultural loan category. Net loan charge offs to average loans
were 0.04% and 0.09% for 1998 and 1997, respectively. The provision to the
allowance for loan losses was $135 thousand for 1998. A provision of $178
thousand was made in 1997.
The ratio of allowance for loan losses to nonperforming assets totaled
175% at December 31, 1998, 401% at December 31, 1997, and 1163% at December 31,
1996. 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 ICBI's
allowance for loan losses is adequate.
-23-
<PAGE>
The following table shows the balance and percentage of the Company's
allowance for loan losses allocated to each major category of loan:
Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31,
1998 $442 14.98% $100 4.31% $144 74.28% $378 6.43%
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%
1994 363 11.37% 17 3.05% 342 73.84% 218 11.74%
</TABLE>
ICBI 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 proportion 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 total portfolio.
Securities Portfolio and Other Earning Assets
The carrying value of the securities portfolio was $57.8 million at
December 31, 1998, a decrease of $5.9 million, or 9.0% from the carrying value
of $63.7 million at December 31, 1997. The decrease results from both
accelerated paydowns experienced on the mortgage backed securities held in the
portfolio and ICBI's intentional use of those funds from paydowns and maturities
to help fund the loan growth during 1998. The majority of investments purchased
during the year were in the form of municipal bonds. ICBI holds bonds issued
from the State of Virginia and its political subdivisions with an aggregate book
value of $3.3 million and an aggregate market value of $3.4 million. These
aggregate holdings exceed 10% of ICBI's stockholder's equity at December 31,
1998. At December 31, 1997, ICBI held bonds issued from the State of Virginia
and its political subdivisions, which had an aggregate book value of $3.5
million and an aggregate market value of $3.5 million. These aggregate holdings
exceeded 10% of ICBI's stockholder's equity at December 31, 1997.
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 had the intent and ICBI 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, increase in
loan demand, general liquidity needs and other similar factors.
-24-
<PAGE>
Financial Accounting Standards Board Pronouncement No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," effective January 1,
1994, requires ICBI to show the effect of market changes in the value of
securities designated as available for sale (AFS). The market value of AFS
securities at December 31, 1998, was $44.9 million. The unrealized gain on the
AFS securities totaled $180 thousand at December 31,1998. At December 31, 1997,
the unrealized loss on the AFS securities was $199 thousand. The unrealized gain
or loss is reflected, net of income taxes, as a separate line item in
shareholder's equity. All other securities are classified as held to maturity or
investment securities. As of December 31, 1998, 77.77% of the securities
portfolio was classified as AFS. ICBI's approach in recent years has been to
classify new purchases as AFS to increase the potential liquidity of the
securities portfolio. ICBI does not have any securities classified as trading
and it has no plans to establish such classification at the present time.
During 1997 and 1998, ICBI has increased its holdings of tax-exempt
securities by $12.6 million and $4.4 million, respectively. The lower interest
rate environment has made tax-exempt securities a more attractive investment in
spite of the unfavorable laws relating to investments in tax-exempt assets and
corporate minimum tax. Future investments in tax-exempt securities will
generally depend upon comparisons to taxable yields and the liquidity needs of
ICBI.
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)
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
U.S. Government securities $ 502 $ 2,006 $ 3,012
States and political subdivisions 12,183 13,849 13,396
Mortgaged-backed securities 162 571 958
------------- ------------- -------------
Total $ 12,847 $ 16,426 $ 17,366
============= ============= =============
</TABLE>
The carrying value of securities available for sale at the dates
indicated was:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
(Dollars in thousands)
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
U.S. Government securities $ 2,678 $ 2,464 $ 4,950
States and political subdivisions 18,189 12,136 -
Mortgaged-backed securities 20,878 29,579 26,521
Other securities 3,196 3,091 3,565
------------- ------------- -------------
Total $ 44,941 $ 47,270 $ 35,036
============= ============= =============
</TABLE>
-25-
<PAGE>
The following table indicates the increased favorable return
experienced by ICBI with the lengthening of the maturity of the portfolio.
Securities with maturities greater than 5 years total $32.7 million or 57.29% of
the portfolio. The securities portfolio is managed first for investment
performance and secondly for proper matching with interest rate risk guidelines.
Maturity Distribution and Yields of Securities
December 31, 1998
Taxable-Equivalent Basis
<TABLE>
<CAPTION>
Due in 1 year Due after 1 year Due after 5 years Due after 10 years
or less through 5 years through 10 years and Equities 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 $ 502 5.34% $ - 0.00% $ - - $ - - $ 502 5.34%
Mortgage backed securities 78 2.43% 13 4.56% 10 7.25% 60 7.25% 161 4.70%
Other taxable securities - - - - - - - - - -
------- ------- ------- ------- -------
Total taxable 580 4.96% 13 4.57% 10 7.25% 60 7.25% 663 5.18%
Tax-exempt securities (1) 1,150 7.20% 5,456 6.84% 4,922 7.58% 655 7.77% 12,183 7.22%
------- ------- ------- ------- -------
Total $ 1,730 6.45% $ 5,469 6.83% $ 4,932 7.58% $ 715 7.73% $12,846 7.12%
------- ------- ------- ------- -------
Securities available for sale:
U.S. Government securities $ 469 7.66% $ 1,709 6.28% $ - - $ 500 6.52% $ 2,678 6.57%
Mortgage backed securities 4,057 5.55% 10,522 5.99% 2,642 6.23% 3,656 6.19% 20,877 5.97%
Corporate preferred - - - - - - 2,426 8.20% 2,426 8.20%
------- ------- ------- ------- -------
Total taxable $ 4,526 5.75% $12,231 6.19% $ 2,642 6.01% $ 6,582 7.29% $25,981 6.24%
Tax-exempt securities (1) - - 398 7.62% 1,746 6.91% 16,045 7.41% 18,189 7.37%
------- ------- ------- ------- -------
Total $ 4,526 5.75% $12,629 6.24% $ 4,388 6.37% $22,627 7.38% $44,170 6.71%
------- ------- ------- ------- -------
Total securities $ 6,256 5.94% $18,098 6.42% $ 9,320 7.01% $23,342 7.15% $57,016 6.62%
======= ======= ======= ======= =======
</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 $635,300
It is ICBI'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. ICBI holds 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.
ICBI's average investments in federal funds sold and money market
investments during 1998 were $3.8 million and $1.8 million, an increase of $914
thousand and $1.5 million, respectively. Average investments in federal funds
sold and money market investments in 1997 were $2.9 million and $365
-26-
<PAGE>
thousand. Fluctuations in federal funds sold and money market investments
reflect management's goal to maximize asset yields while maintaining proper
asset/liability structure.
Deposits
Deposits provide funding for ICBI's investments in loans and
securities. ICBI's strategy has been to continue to increase its core deposits
at the same time controlling its cost of funds. The maturation of the two
branches added in 1994 and 1996 have provided a majority of the growth in the
years 1996 through 1998. By monitoring interest rates within the local market
and then pricing the deposits within the range of the local market, TMB has
developed a core base of deposits in each branch.
Average total deposits increased 10.5% during 1998, 14.5% during 1997,
and 10.1% during 1996. During 1998, the average balance of non-interest bearing
checking accounts grew 23.96%. The average balance in interest bearing checking
and money market accounts grew 19.95 and 13.71% during 1998. The growth in 1997
and 1998 can be attributed to branch expansion, increased market awareness of
TMB as well as continued market turmoil as the result of bank mergers.
The following table is a summary of average deposits and average rates
paid.
Average Deposits and Rates Paid
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
Amount Rate Amount Rate Amount Rate
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
Deposits $ 29,782 - $ 24,025 - $ 19,211 -
Interest-bearing accounts:
Interest checking 23,853 1.28% 19,886 1.81% 18,348 2.13%
Regular savings 17,075 3.53% 15,631 3.69% 14,562 3.85%
Money market accounts 34,195 2.93% 30,071 2.94% 28,735 3.02%
Time deposits:
$ 100,000 and over 18,151 5.23% 16,480 5.68% 12,013 6.14%
Under $ 100,000 38,557 5.30% 40,100 5.31% 34,760 5.46%
----------- ------------ ------------
Total interest-bearing deposits 131,831 3.72% 122,168 4.00% 108,418 4.11%
----------- ------------ ------------
Total $ 161,613 $ 146,193 $ 127,629
=========== ============ ============
</TABLE>
ICBI will continue funding assets primarily with deposits and will
focus on core deposit growth as the primary source for liquidity and stability.
ICBI offers individuals and small to medium sized businesses a variety of
deposit accounts, including demand deposits, interest checking, money market,
savings and time deposit accounts.
ICBI neither purchases brokered deposits nor solicits deposits from
sources outside its primary market area.
-27-
<PAGE>
The following is a summary of the maturity distribution of certificates
of deposit equal to or greater than $100 thousand as December 31, 1998:
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, 1998 $ 2,847 $ 3,517 $ 5,278 $ 6,515 $ 18,157 10.5%
</TABLE>
Capital Resources
The adequacy of ICBI's capital is reviewed by management on an ongoing
basis with reference to the amount, composition and quality of ICBI's asset and
liability levels, as well for consistency with regulatory requirements and
industry standards. Management seeks to maintain 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 established minimum regulatory capital standards. The
regulatory capital guidelines categorize assets and off-balance sheet items into
categories which weight balance sheet assets according to risk, and requiring
more capital for holding higher risk assets. The minimum ratio of qualifying
total capital to risk-weighted assets is 8.0%, of which at least 4.0% must be
Tier 1 capital, composed of common equity and retained earnings. ICBI had a
ratio of risk-weighted assets to total capital of 17.90% at December 31, 1998
compared to 19.70% at December 31, 1997. The ratio of risk-weighted assets to
Tier 1 capital was 17.06% and 18.80% at December 31, 1998 and 1997,
respectively. Both ratios exceed the minimum capital requirements adopted by the
federal bank regulatory agencies.
The primary source of funds for dividends paid by ICBI to its
shareholders is the dividends received from its subsidiary banks. Federal
regulatory agencies impose certain restrictions on the payment of dividends and
the transfer of assets from the banking subsidiaries to the holding company.
Historically, these restrictions have not had an adverse impact on ICBI's
dividend policy, and it is not anticipated that they will in the future.
-28-
<PAGE>
Analysis of Capital
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Tier 1 Capital:
Common stock $ 8,895 $ 9,063 $ 4,299
Capital surplus 1,293 1,948 1,411
Retained earnings 12,496 10,874 12,817
Goodwill (1,121) (1,181) -
----------- ----------- -----------
Total Tier 1 capital $ 21,563 $ 20,704 $ 18,527
Tier 2 Capital:
Allowance for loan losses 1,063 974 884
----------- ----------- -----------
Total tier 2 capital 1,063 974 884
----------- ----------- -----------
Total risk-based capital $ 22,626 $ 21,678 $ 19,411
=========== =========== ===========
Risk weighted assets $ 126,398 $ 110,041 $ 95,921
CAPITAL RATIOS:
Tier 1 risk-based capital ratio 17.1% 18.8% 19.3%
Total risk-based capital ratio 17.9% 19.7% 20.2%
Tier 1 capital to average total assets 11.2% 11.8% 11.7%
</TABLE>
ICBI's equity to assets ratio decreased to 11.13% at December 31, 1998
compared to 11.73% at December 31, 1997. The equity to assets ratio for December
31, 1996 was 11.05%. The increase in 1997 was the result of the issuance of new
capital in the acquisition of Tredegar. The growth in assets as well as a stock
repurchase of 33,600 shares reduced this ratio in 1998.
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, short-term investments, securities classified as available for sale as
well as loan and securities maturing within one year. As a result of ICBI's
management of liquid assets and the ability to generate liquidity through
liability funding, management believes ICBI maintains overall liquidity
sufficient to satisfy its depositors' requirements and meet its customers'
credit needs.
ICBI also maintains additional sources of liquidity through a variety
of borrowing arrangements. TMB maintains federal funds lines with large regional
and money-center banking institutions. These available lines total in excess of
$8 million, of which none was outstanding at December 31, 1998. Federal funds
purchased during 1998 averaged $146 thousand compared to an average of $272
thousand during 1997. At December 31, 1998 and 1997, ICBI had $2.5 million and
$3.0 million, respectively, of outstanding borrowings pursuant to securities
sold under agreement to repurchase transactions, with maturities of one day.
ICBI has a credit line in the amount of $27 million at the Federal Home Loan
Bank
-29-
<PAGE>
of Atlanta. 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 support of residential real estate loans. In 1998, long-term borrowings from
the Federal Home Loan Bank system were $5.0 million maturing in 2003 with a call
feature in 2000.
At December 31, 1998, cash, interest-bearing deposits with financial
institutions, federal funds sold, short-term investments, securities available
for sale, loans and securities maturing within one year were 55.82% of total
deposits and liabilities.
Year 2000
In recent months, there has been increasing public awareness and
attention paid to the year 2000 problem, which stems from the inability of
certain computerized devices (hardware, software and equipment) to process
year-dates properly after 1999. Leap years and other dates may be included as
related to the year 2000 problem. Affected devices may fail or malfunction
unless repaired or replaced. Although the actual magnitude and effect of the
issue cannot be reasonably determined in advance, ICBI has given it high
priority by appointing a Year 2000 team.
In 1997 the Year 2000 team began its analysis of the possible
implications to ICBI of the year 2000 problem and the development of a plan to
prevent the problem from adversely affecting its operations. ICBI's year 2000
plans are subject to guidelines promulgated by the Federal Financial
Institutions Examination Council ("FFIEC"). The Federal Reserve Bank of Richmond
periodically measures the status of the Company's plans and progress, as
outlined in the FFIEC guidelines.
The plan as adopted and refined by ICBI to handle year 2000 issues can
be divided into two principal areas:
(1) Resolution of the internal aspects of the year 2000 problem.
The focus of this area includes the effects of the year 2000
problem on ICBI's technology, including computer hardware and
software systems. ICBI's internal technology plan includes (a)
locating, listing and prioritizing the specific technology
that is potentially subject to the year 2000 problem (referred
to as the "inventory" phase), (b) assessing the actual
exposure of such technology to the year 2000 problem by
inquiry, research, testing and other means (the "assessment"
phase), (c) selecting the method necessary to resolve the year
2000 problems that were identified, including replacement,
upgrade, repair or abandonment and implementing the selected
resolution method (the "remediation" phase), and (d) testing
the remediated or converted technology to determine the
efficacy of the resolutions (the "testing" phase).
(2) Determination and control of the external aspects of the year
2000 problem. The focus of this area includes (a) assessing
the potential for credit and liquidity problems within ICBI as
a result of the investments in, loans to and deposits from our
significant customers as well as the risk of possible business
interruption by relying on vendors of goods and services due
to year 2000 problems affecting their technology or business,
and (b) developing contingency plans to address failures by
external parties to remediate fully any year 2000 problems
that are material to ICBI. Assessment of external parties is
accomplished by written and verbal inquiry, and by research to
the extent that reliable information is available.
-30-
<PAGE>
ICBI had substantially completed both the internal and external testing
by December 31, 1998 and plans to further test its computer systems during 1999
to confirm compliance with year 2000 data processing standards. ICBI considers
its current state of readiness in addressing the year 2000 problem to be
adequate and expects to meet the timetable. The total cost of remediation and
testing is estimated to be between $250 thousand and $350 thousand, with a
majority of the costs being incurred during 1998. This estimate includes some
costs, such as the purchase of computer hardware and software that qualifies as
a depreciable or amortizable assets for accounting purposes, with the related
depreciation or amortization recognized over the estimated lives of the related
assets. However, the majority of the costs will be expensed as incurred. Through
December 31, 1998, the Company had incurred approximately $175 thousand in
noninterest expense associated with the year 2000 problem.
ICBI has concluded that customer awareness about year 2000 and banking
is the key factor in minimizing customer concerns about ICBI's progress in
planning for the year 2000. During 1999, ICBI plans to inform its customers
about its progress through question and answer brochures, seminars and direct
mailings.
The Year 2000 team of has developed a preliminary contingency plan for
areas deemed "mission critical" for continual operation. The preliminary
contingency plan considers the likelihood of problem occurrences based on test
results. ICBI's preliminary and final contingency plan addresses operational
issues, including communication links with other entities and the utility and
availability of alternative sources among key vendor relationships. The Year
2000 team anticipates presenting its preliminary contingency plan to the Board
of Directors early in 1999 with final contingency plan tested and complete by
mid 1999. The Year 2000 team will monitor the status of each item as well .
At this time, ICBI believes that the most likely worst case year 2000
scenario would not have a material effect on ICBI's results of operations,
liquidity and financial condition for the year ending December 31, 2000. ICBI
does not foresee a material loss of revenue due to the year 2000 problem. ICBI's
contingency plan, however, is based on assessments of the likelihood of a
problematic occurrence; ICBI believes that no entity can address the virtually
unlimited possible circumstances relating to year 2000 issues, including risks
outside of the ICBI's primary marketplace of Loudoun County, Virginia. While
considered unlikely, the failure of ICBI to successfully implement its year 2000
plan, including modifications and conversions, or to adequately assess the
likelihood of various events relating to the year 2000 issue, could have a
material adverse effect on ICBI's results of operations and financial condition.
Additionally, there can be no assurances that the federal regulators
will not issue new regulatory requirements that require additional work by ICBI
and, if issued, that new regulatory requirements will not increase the cost or
delay the completion of ICBI's year 2000 plan.
The cost of the project and the date on which ICBI plans to complete
the year 2000 modifications are based on management's best estimates, which are
based on numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. There can be no guarantee that these estimates will be achieved and
actual results could differ materially from our plans. Specific factors that
might cause such material differences include, but are not limited to, the
availability of personnel trained in this area, the ability of third party
vendors to correct their software and hardware, the ability of significant
customers to remedy their year 2000 issues and similar uncertainties.
-31-
<PAGE>
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-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, risk
inherent in making loans such as repayment risks and fluctuating collateral
values, problems with technology utilized by the Company, 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 the
forward-looking statements are based upon reliable 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 October 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise,
an amendment of FASB Statement No. 65." FASB Statement No. 65, as amended,
requires that, after securitization of a mortgage loan held for sale, an entity
engaged in mortgage banking activities classify the resulting mortgage-backed
security as a trading security. This Statement further amends Statement No. 65
to require that after the securitization of mortgage loans held for sale, an
entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interests based on its ability and
intent to sell or hold those investments. This Statement conforms the subsequent
accounting for securities retained after the securitization of mortgage loans by
a mortgage banking enterprise with the subsequent accounting for securities
retained after securitization of other types of assets by a non-mortgage banking
enterprise. This Statement is effective beginning in 1999.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers Disclosures
about Pensions and Other Post Retirement Benefits." This statement revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. This statement
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable, requires additional information on changes
in the benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures. Restatement of
disclosures for earlier periods is required. This statement is effective for the
Company's financial statements for the year ended December 31, 1998.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to record
derivatives on the balance sheet as assets and liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. This statement is not expected to have a
material impact on the Company's financial statements. This statement is
effective for
-32-
<PAGE>
fiscal years beginning after June 15, 1999, with earlier adoption encouraged.
The Company will adopt this accounting standard as required by January 1, 2000.
In March 1998, the American Institute of Certified Public Accountants
(the "AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This SOP
provides guidance on accounting for the costs of computer software developed or
obtained for internal use. This SOP requires that entities capitalize certain
internal use software costs once certain criteria are met. This SOP is not
expected to have a material impact on the Company's financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities," which requires the costs of start-up activities and
organization costs to be expensed as incurred. This SOP is not expected to have
a material impact on the Company's financial statements.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are filed as a part of this report
following Item 13 below:
Independent Auditor's Report
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the Years Ended December 31,
1998, 1997 and 1996
Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996
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
Pursuant to General Instruction E(3) of Form 10-KSB, the information
contained under the headings "Election of Directors," "Executive Officers Who
Are Not Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance"
on pages 3 through 5 of the Company's Proxy Statement for the 1999 Annual
Meeting of Shareholders is incorporated herein by reference.
-33-
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Pursuant to General Instruction E(3) of Form 10-KSB, the information
contained under the headings "Director Compensation," "Executive Compensation,"
"Stock Options," and "Employment Agreements" on pages 6 through 9 of the
Company's Proxy Statement for the 1999 Annual Meeting of Shareholders is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to General Instruction E(3) of Form 10-KSB, the information
contained under the headings "Security Ownership of Management" and "Security
Ownership of Certain Beneficial Owners" on pages 4 and 5 of the Company's Proxy
Statement for the 1999 Annual Meeting of Shareholders is incorporated herein by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction E(3) of Form 10-KSB, the information
contained under the heading "Transactions with Management" on page 9 of the
Company's Proxy Statement for the 1999 Annual Meeting of Shareholders is
incorporated herein by reference.
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 Employment Agreement, dated as of January 1, 1998, between
Independent Community Bankshares, Inc. and Joseph L. Boling.
10.2 Independent Community Bankshares, Inc. 1997 Stock Option
Plan.
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.
-34-
<PAGE>
INDEPENDENT COMMUNITY BANKSHARES, INC.
Middleburg, Virginia
FINANCIAL REPORT
DECEMBER 31, 1998
<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 and 5
Consolidated statements of cash flows 6 and 7
Notes to consolidated financial statements 8-29
<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, 1998
and 1997, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for the years ended December 31, 1998, 1997
and 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Independent
Community Bankshares, Inc. and Subsidiaries as of December 31, 1998 and 1997,
and the results of their operations and their cash flows for the years ended
December 31, 1998, 1997 and 1996, in conformity with generally accepted
accounting principles.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
January 22, 1999
<PAGE>
INDEPENDENT COMMUNITY BANKSHARES, INC.
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Assets 1998 1997
-------------- --------------
<S> <C> <C>
Cash and due from banks $ 8,161,096 $ 6,128,036
Interest-bearing deposits in banks 108,765 455,919
Temporary investments:
Federal funds sold 1,421,000 1,300,000
Other money market investments 3,122,109 725,385
Securities (fair value: 1998, $58,158,915;
1997, $63,957,868) 57,786,149 63,695,792
Loans, net 120,259,410 103,253,407
Loans held for sale 4,672,327 --
Bank premises and equipment, net 5,852,827 5,527,103
Accrued interest receivable and other assets 3,819,424 3,774,064
Other real estate 200,000 --
------------ ------------
Total assets $205,403,107 $184,859,706
============ ============
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest-bearing demand deposits $ 36,882,791 $ 26,601,922
Savings and interest-bearing demand deposits 80,426,910 72,702,285
Time deposits 55,370,288 57,249,943
------------ ------------
Total deposits $172,679,989 $156,554,150
Securities sold under agreements to repurchase 2,530,057 3,048,481
Federal Home Loan Bank advances 1,000,000 2,800,000
Long-term debt 5,000,000 --
Accrued interest and other liabilities 1,329,987 770,947
Commitments and contingent liabilities -- --
------------ ------------
Total liabilities $182,540,033 $163,173,578
------------ ------------
Shareholders' Equity
Common stock, par value $5 per share, authorized
10,000,000 shares; issued 1998, 1,778,994 shares;
issued 1997, 1,812,594 shares $ 8,894,970 $ 9,062,970
Capital surplus 1,293,046 1,948,246
Retained earnings 12,495,550 10,873,617
Accumulated other comprehensive income (loss) 179,508 (198,705)
------------ ------------
Total shareholders' equity $ 22,863,074 $ 21,686,128
------------ ------------
Total liabilities and shareholders' equity $205,403,107 $184,859,706
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
INDEPENDENT COMMUNITY BANKSHARES, INC.
Consolidated Statements of Income
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Interest Income
Interest and fees on loans $ 10,204,989 $ 8,972,418 $ 8,137,263
Interest on investment securities:
Taxable interest income 69,645 121,314 194,506
Interest income exempt from federal income taxes 617,865 686,140 588,431
Interest and dividends on securities available for sale:
Taxable interest income 1,615,719 2,292,662 1,786,669
Interest income exempt from federal income taxes 717,419 151,183 --
Dividends 251,577 280,645 267,791
Interest on deposits in banks 6,975 7,970 804
Interest on federal funds sold 211,021 159,458 134,765
Interest on other money market investments 89,838 13,110 1,000
------------ ------------ ------------
Total interest income $ 13,785,048 $ 12,684,900 $ 11,111,229
------------ ------------ ------------
Interest Expense
Interest on deposits $ 4,903,216 $ 4,886,480 $ 4,455,684
Interest on securities sold under
agreement to repurchase 134,164 134,457 4,580
Interest on Federal Home Loan Bank advances 69,607 171,509 186,513
Interest on long-term debt 206,432 -- --
------------ ------------ ------------
Total interest expense $ 5,313,420 $ 5,192,446 $ 4,646,777
------------ ------------ ------------
Net interest income $ 8,471,628 $ 7,492,454 $ 6,464,452
Provision for loan losses 135,000 177,602 65,000
------------ ------------ ------------
Net interest income after provision
for loan losses $ 8,336,628 $ 7,314,852 $ 6,399,452
------------ ------------ ------------
Other Income
Service charges, commissions and fees $ 916,012 $ 780,998 $ 676,655
Trust fee income 855,483 338,613 29,316
Fees on loans held for sale 240,541 -- --
Investment securities gain (loss) -- 2,055 (1,875)
Profits (losses) on securities available for sale, net (18,288) (92,602) 22,496
Other 175,055 120,137 15,551
------------ ------------ ------------
Total other income $ 2,168,803 $ 1,149,201 $ 742,143
------------ ------------ ------------
Other Expenses
Salaries and employees' benefits $ 3,751,366 $ 2,863,878 $ 2,532,777
Net occupancy and equipment expense 771,696 593,246 561,760
Advertising 234,146 146,009 164,189
Computer operations 246,726 138,138 90,062
Other operating expenses 1,670,042 1,229,255 1,033,782
------------ ------------ ------------
Total other expenses $ 6,673,976 $ 4,970,526 $ 4,382,570
------------ ------------ ------------
Income before income taxes $ 3,831,455 $ 3,493,527 $ 2,759,025
Income tax expense 856,801 862,167 728,079
------------ ------------ ------------
Net income $ 2,974,654 $ 2,631,360 $ 2,030,946
============ ============ ============
Earnings per Share, basic $ 1.65 $ 1.51 $ 1.18
============ ============ ============
Earnings per Share, diluted $ 1.63 $ 1.51 $ 1.18
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
INDEPENDENT COMMUNITY BANKSHARES, INC.
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Common Capital Retained
Stock Surplus Earnings
----------- ----------- -----------
<S> <C> <C> <C>
Balance, December 31, 1995 $ 4,299,190 $ 1,411,174 $11,508,100
Comprehensive income:
Net income - 1996 -- -- 2,030,946
Other comprehensive income net of tax:
Unrealized holding (losses) arising during the
period (net of tax, $122,908) -- -- --
Reclassification adjustment (net of tax, $7,649) -- -- --
Other comprehensive income (net of tax, $130,557) -- -- --
Total comprehensive income -- -- --
Cash dividends - 1996 ($0.42 per share) -- -- (722,264)
----------- ----------- -----------
Balance, December 31, 1996 $ 4,299,190 $ 1,411,174 $12,816,782
Comprehensive income:
Net income - 1997 -- -- 2,631,360
Other comprehensive income net of tax:
Unrealized holding gains arising during the
period (net of tax, $133,660) -- -- --
Reclassification adjustment (net of tax, $31,484) -- -- --
Other comprehensive income (net of tax, $165,144) -- -- --
Total comprehensive income -- -- --
Cash dividends - 1997 ($0.32 per share) -- -- (574,525)
Purchase of common stock (22,691 shares) (113,455) (521,893) --
Issuance of common stock - stock split effected in the
form of a 100% stock dividend (906,297 shares) 4,531,485 (4,531,485) --
Issuance of common stock in acquisition of subsidiary
(69,150 shares) 345,750 1,590,450 --
Discretionary transfer from retained earnings -- 4,000,000 (4,000,000)
----------- ----------- -----------
Balance, December 31, 1997 $ 9,062,970 $ 1,948,246 $10,873,617
Comprehensive income:
Net income - 1998 -- -- 2,974,654
Other comprehensive income net of tax:
Unrealized holding gains arising during the
period (net of tax, $188,619) -- -- --
Reclassification adjustment (net of tax, $6,218) -- -- --
Other comprehensive income (net of tax, $194,776) -- -- --
Total comprehensive income -- -- --
Cash dividends - 1998 ($0.75 per share) -- -- (1,352,721)
Purchase of common stock (33,600 shares) (168,000) (655,200) --
----------- ----------- -----------
Balance, December 31, 1998 $ 8,894,970 $ 1,293,046 $12,495,550
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Comprehensive
Income (Loss) Income Total
------------- ------------- -------------
<S> <C> <C> <C>
Balance, December 31, 1995 $ (265,843) $ 16,952,621
Comprehensive income:
Net income - 1996 -- $ 2,030,946 2,030,946
Other comprehensive income net of tax:
Unrealized holding (losses) arising during the
period (net of tax, $122,908) -- (238,589) --
Reclassification adjustment (net of tax, $7,649) -- (14,847) --
-------------
Other comprehensive income (net of tax, $130,557) (253,436) $ (253,436) (253,436)
-------------
Total comprehensive income -- $ 1,777,510 --
=============
Cash dividends - 1996 ($0.42 per share) -- (722,264)
------------- -------------
Balance, December 31, 1996 $ (519,279) $ 18,007,867
Comprehensive income:
Net income - 1997 -- $ 2,631,360 2,631,360
Other comprehensive income net of tax:
Unrealized holding gains arising during the
period (net of tax, $133,660) -- 259,457 --
Reclassification adjustment (net of tax, $31,484 -- 61,117 --
-------------
Other comprehensive income (net of tax, $165,144) 320,574 $ 320,574 320,574
-------------
Total comprehensive income -- $ 2,951,934 --
=============
Cash dividends - 1997 ($0.32 per share) -- (574,525)
Purchase of common stock (22,691 shares) -- (635,348)
Issuance of common stock - stock split effected in the
form of a 100% stock dividend (906,297 shares) -- --
Issuance of common stock in acquisition of subsidiary
(69,150 shares) -- 1,936,200
Discretionary transfer from retained earnings -- --
------------- -------------
Balance, December 31, 1997 $ (198,705) $ 21,686,128
Comprehensive income:
Net income - 1998 -- $ 2,974,654 2,974,654
Other comprehensive income net of tax:
Unrealized holding gains arising during the
period (net of tax, $188,619) -- 366,143 --
Reclassification adjustment (net of tax, $6,218) -- 12,070 --
-------------
Other comprehensive income (net of tax, $194,776) 378,213 $ 378,213 378,213
-------------
Total comprehensive income -- $ 3,352,867 --
=============
Cash dividends - 1998 ($0.75 per share) -- (1,352,721)
Purchase of common stock (33,600 shares) -- (823,200)
------------- -------------
Balance, December 31, 1998 $ 179,508 $ 22,863,074
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
INDEPENDENT COMMUNITY BANKSHARES, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 2,974,654 $ 2,631,360 $ 2,030,946
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 513,769 396,833 301,497
Amortization 79,548 41,617 16,487
Provision for loan losses 135,000 177,602 65,000
Net (gain) loss on investment securities -- (2,055) 1,875
Net (gain) loss on securities available for sale 18,288 92,602 (22,496)
Net loss on sale of assets -- 7,343 --
Discount accretion and premium amortization
on securities, net 193,609 180,181 157,657
Deferred income taxes (benefit) (15,998) (19,508) 68,349
Origination of loans held for sale (11,947,922) -- --
Proceeds from sales of loans held for sale 7,275,595 -- --
Changes in assets and liabilities:
(Increase) in other assets (124,908) (669,146) (289,041)
Increase in other liabilities 113,414 57,100 195,847
------------ ------------ -------------
Net cash provided by (used in)
operating activities $ (784,951) $ 2,893,929 $ 2,526,121
------------ ------------ -------------
Cash Flows from Investing Activities
Proceeds from maturity, principal paydowns
and calls of investment securities $ 3,495,979 $ 2,750,431 $ 2,455,501
Proceeds from maturity, principal paydowns
and calls of securities available for sale 9,164,066 2,742,602 2,149,662
Proceeds from sale of securities
available for sale 9,886,732 26,500,686 24,282,770
Purchase of investment securities -- (1,848,566) (2,846,520)
Purchase of securities available for sale (16,276,043) (40,572,390) (30,673,806)
Proceeds from sale of equipment -- 36,335 --
Purchases of bank premises and equipment (839,493) (1,221,354) (1,623,530)
Net (increase) in loans (17,341,003) (9,720,190) (13,727,421)
Cash acquired in acquisition -- 170,858 --
------------ ------------ -------------
Net cash (used in)
investing activities $(11,909,762) $(21,161,588) $ (19,983,344)
------------ ------------ -------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
INDEPENDENT COMMUNITY BANKSHARES, INC.
Consolidated Statements of Cash Flows
(Continued)
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Financing Activities
Net increase in noninterest-bearing and interest-
bearing demand deposits and savings accounts $ 18,005,494 $ 11,627,657 $ 9,896,598
Net increase (decrease) in certificates of deposit (1,879,655) 6,136,353 7,371,472
Increase (decrease) in securities sold under agreements
to repurchase (518,424) 1,603,784 1,444,697
Proceeds from long-term debt 5,000,000 -- --
Decrease in short-term borrowings (1,800,000) (1,200,000) (1,000,000)
Purchase of common stock (823,200) (635,348) --
Cash dividends paid (1,085,872) (574,525) (722,264)
------------- ------------ ------------
Net cash provided by
financing activities $ 16,898,343 $ 16,957,921 $ 18,990,503
------------- ------------ ------------
Increase (decrease) in cash and
cash equivalents $ 4,203,630 $ (1,309,738) $ 1,533,280
Cash and Cash Equivalents
Beginning 8,609,340 9,919,078 8,385,798
------------- ------------ ------------
Ending $ 12,812,970 $ 8,609,340 $ 9,919,078
============= ============ ============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors $ 5,039,942 $ 4,822,840 $ 4,425,048
Interest paid on short-term obligations 9,077 131,500 4,580
Interest paid on Federal Home Loan
Bank advances 97,493 176,242 153,894
Interest paid on long-term debt 137,432 -- --
------------- ------------ ------------
$ 5,283,944 $ 5,130,582 $ 4,583,522
============= ============ ============
Income taxes $ 835,000 $ 849,000 $ 863,723
============= ============ ============
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 $ 572,989 $ 485,718 $ 383,994)
============= ============ ============
Loan balances transferred to foreclosed properties $ 200,000 $ -- $ --
============= ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
INDEPENDENT COMMUNITY BANKSHARES, INC.
Notes to Consolidated Financial Statements
Note 1. Nature of Banking Activities and Significant Accounting Policies
The Middleburg Bank, the banking subsidiary of Independent Community
Bankshares, 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 Tredegar Trust Company, a
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
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 a separate component of other comprehensive
income, 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.
<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, 1998 and 1997.
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.
The Company has 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 loan 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.
<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.
Loans Held for Sale
Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or
estimated market value in the aggregate.
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.
<PAGE>
Notes to Consolidated Financial Statements
Goodwill
Goodwill is amortized using the straight-line method over 20
years.
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. 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.
Pension Plan
In 1998, the Company adopted Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This
pronouncement does not change the measurement or recognition
of amounts recognized in the Company's financial statements
applicable to its defined benefit plan. Statement No. 132
revises the existing disclosure requirements by standardizing
the disclosure requirements for pensions requiring certain
additional information on changes in the benefit obligations
and fair values of plan assets, and eliminating certain
disclosures.
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.
<PAGE>
Notes to Consolidated Financial Statements
Advertising Costs
The Company follows the policy of charging the costs of
advertising to expense as incurred.
Comprehensive Income
As of January 1, 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." Statement 130 establishes new rules
for the reporting and display of comprehensive income and its
components; however, the adoption of this Statement had no
impact on the Company's net income or shareholders' equity.
The Statement requires that other comprehensive income
include unrealized gains and losses on securities available
for sale, which prior to adoption were reported separately in
shareholders' equity. The financial statements have been
reclassified to conform to the requirements of SFAS No. 130.
Note 2. Securities
Amortized costs and fair values of securities being held to maturity
as of December 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------- ------------- ------------- -------------
1998
---------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 502,454 $ 2,703 $ -- $ 505,157
Obligations of states and
political subdivisions 12,182,506 371,630 (383) 12,553,753
Mortgage-backed securities 161,513 288 (1,472) 160,329
------------- ------------- ------------- -------------
$ 12,846,473 $ 374,621 $ (1,855) $ 13,219,239
============= ============= ============= =============
1997
---------------------------------------------
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
============= ============= ============= =============
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
The amortized cost and fair value of securities being held to
maturity as of December 31, 1998 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 $ 1,652,054 $ 1,659,705
Due after one year through five years 5,455,911 5,575,746
Due after five years through 10 years 4,922,098 5,135,290
Due after 10 years 654,897 688,169
Mortgage-backed securities 161,513 160,329
------------- -------------
$ 12,846,473 $ 13,219,239
============= =============
</TABLE>
Amortized costs and fair values of securities available for sale as
of December 31, 1998 and 1997, are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------- ------------- ------------- -------------
1998
---------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 2,667,960 $ 9,750 $ -- $ 2,677,710
Obligations of states and
political subdivisions 17,897,337 370,432 (78,869) 18,188,900
Mortgage-backed securities 20,927,905 55,078 (105,397) 20,877,586
Corporate preferred 2,404,854 33,438 (12,512) 2,425,780
Other 769,700 -- -- 769,700
------------- ------------- ------------- -------------
$ 44,667,756 $ 468,698 $ (196,778) $ 44,939,676
============= ============= ============= =============
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
<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) $ 7,269,830
============= ============= ============= =============
</TABLE>
The amortized cost and fair value of securities available for sale as
of December 31, 1998, 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.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less $ 469,150 $ 469,150
Due after one year through five years 2,088,161 2,102,993
Due after five years through 10 years 1,737,088 1,746,526
Due after 10 years 16,270,898 16,547,941
Mortgage-backed securities 20,927,905 20,877,586
Corporate preferred 2,404,854 2,425,780
Other 769,700 769,700
-------------- --------------
$ 44,667,756 $ 44,939,676
============== ==============
</TABLE>
Proceeds from sales of securities available for sale during 1998,
1997 and 1996 were $9,886,732, $26,500,686 and $24,282,770,
respectively. Gross gains of $101,567, $53,384 and $42,269 and gross
losses of $119,855, $145,986 and $19,773 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 $8,250,945 and $5,945,089 at December 31, 1998
and 1997, respectively.
<PAGE>
Notes to Consolidated Financial Statements
Note 3. Loans, Net
The composition of the net loans is as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1997
------------ ------------
(in thousands)
<S> <C> <C>
Real estate loans:
Construction and land development $ 5,436 $ 3,798
Secured by farmland 1,057 2,140
Secured by 1-4 family residential 59,212 48,396
Other real estate loans 28,643 26,054
Loans to farmers (except secured by real estate) 1,489 961
Commercial and industrial loans (except those
secured by real estate) 17,391 14,062
Loans to individuals for personal expenditures 8,043 8,738
All other loans 52 88
------------ ------------
Total loans $ 121,323 $ 104,237
Less: Unearned income -- 10
Allowance for loan losses 1,064 974
------------ ------------
Net loans $ 120,259 $ 103,253
============ ============
</TABLE>
Note 4. Allowance for Loan Losses
Transactions in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Balance, beginning $ 974,360 $ 883,536 $ 866,173
Provision charged to operating expense 135,000 177,602 65,000
Recoveries 40,417 40,235 77,523
Loan losses charged to the allowance (86,219) (127,013) (125,160)
------------- ------------- -------------
$ 1,063,558 $ 974,360 $ 883,536
============= ============= =============
</TABLE>
Impairment of loans having recorded investments of $186,362 at
December 31, 1998, has been recognized in conformity with FASB
Statement No. 114. The average recorded investment in impaired loans
during 1998 was $46,591. The total allowance for loan losses related
to these loans was $66,085 on December 31, 1998. No interest income
on impaired loans was recognized in 1998. There were no impaired
loans under FASB 114 at December 31, 1997.
Nonaccrual loans excluded from impaired loan disclosure under FASB
114 amounted to $223,050 and $242,583 at December 31, 1998 and 1997,
respectively. If interest on these loans had been accrued, such
income would have approximated $3,564 and $14,898 for 1998 and 1997,
respectively.
<PAGE>
Notes to Consolidated Financial Statements
Note 5. Bank Premises and Equipment, Net
Bank premises and equipment consists of the following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Land $ 1,516,423 $ 1,516,423
Banking facilities 3,057,340 3,057,340
Furniture, fixtures and equipment 3,623,595 3,141,736
Construction in progress and deposits
on equipment 471,727 119,261
------------ ------------
$ 8,669,085 $ 7,834,760
Less accumulated depreciation 2,816,258 2,307,657
------------ ------------
$ 5,852,827 $ 5,527,103
============ ============
</TABLE>
Depreciation expense was $513,769, $396,833 and $301,497 for the
years ended December 31, 1998, 1997 and 1996, respectively.
Note 6. Deposits
The aggregate amount of jumbo time deposits, each with a minimum
denomination of $100,000, was approximately $18,157,296 and
$17,268,984 in 1998 and 1997, respectively.
At December 31, 1998, the scheduled maturities of time deposits are
as follows:
1999 $ 35,004,445
2000 14,720,685
2001 4,016,350
2002 660,157
2003 and thereafter 968,651
------------
$ 55,370,288
============
Note 7. Short-Term Borrowings
As of December 31, 1998 and 1997, the Company had borrowed $1,000,000
and $2,800,000, respectively, on a short-term basis from its
$27,000,000 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.
<PAGE>
Notes to Consolidated Financial Statements
Note 8. Long-Term Debt
At December 31, 1998, the Company had borrowings from the Federal
Home Loan Bank system totaling $5,000,000 at an interest rate of
5.52%, maturing April 2, 2003. The FHLB has a blanket lien on real
estate loans as collateral on these borrowings. Interest only is
payable until maturity. The loan is callable after 2 years.
Note 9. 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 10. Stock Option Plan
In 1998, the Company adopted a stock option plan, which provides for
granting of both incentive and nonqualified stock options. 300,000
shares of the Company's common stock have been reserved for the
issuance of stock options under the Plan. Options become exercisable
one-third annually beginning one year after the grant and expire ten
years after grant. As permitted under generally accepted accounting
principles, grants under the plan are accounted for following the
provisions of APB Opinion No. 25 and its related interpretations.
Accordingly, no compensation cost has been recognized for grants made
to date. In determining the pro forma amounts below, the value of
each grant is estimated at the grant date using the Black-Scholes
option-pricing model, with the following weighted-average assumptions
for grants in 1998: dividend rate of .13%; risk-free interest rates
of 4.50%; expected lives of 10 years; and expected price volatility
of 17.37%. Had compensation cost for the plan been determined
consistent with FASB Statement No. 123, "Accounting for Stock-Based
Compensation," the Company's net income and earnings per share would
have been reduced to the following pro forma amounts:
1998
-------------
Net Income: As Reported $ 2,974,654
Pro Forma 2,887,125
Basic EPS: As Reported 1.65
Pro Forma 1.60
Diluted EPS: As Reported 1.63
Pro Forma 1.59
<PAGE>
Notes to Consolidated Financial Statements
No options have been exercised to date and all options granted are
outstanding at December 31, 1998. The following summarizes the number
of grants and their respective exercise prices and grant date fair
values per option, and the number outstanding and exercisable:
Exercise Fair
Shares Price Per Value Per
Granted Share Option
----------- --------- ---------
54,000 $ 17.00 $ 6.77
1,000 27.00 10.76
31,000 23.50 9.39
Options outstanding, exercisable options and average exercise prices
were:
Average
Options Options Exercise
Outstanding Exercisable Price
----------- ----------- ----------
86,000 19,000 $ 19.46
Options outstanding at December 31, 1998 are further summarized as
follows:
Options Outstanding and Exercisable
--------------------------------------------
Weighted Weighted
Range of Remaining Average
Exercise Number Contractual Exercise
Prices Outstanding Life Price
------------- ------------ ----------- --------
$17.00 54,000 8.9 years $ 17.00
27.00 1,000 9.3 27.00
23.50 31,000 10.0 23.50
------------
$17.00-$27.00 86,000 9.3 19.46
============
<PAGE>
Notes to Consolidated Financial Statements
Note 11. Employee Benefit Plans
The Company has a trusteed noncontributory, defined benefit pension
plan covering substantially all full-time employees. The Company
funds pension costs in accordance with the funding provisions of the
Employee Retirement Income Security Act. Information about the plan
follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Change in Benefit Obligation
Benefit obligation, beginning of year $ 1,746,565 $ 1,425,983
Service cost 126,063 120,165
Interest cost 148,458 121,209
Actuarial loss 507,683 241,754
Benefits paid (762,612) (162,546)
------------ ------------
Benefit obligation, end of year $ 1,766,157 $ 1,746,565
============ ============
Change in Plan Assets
Fair value of plan assets, beginning of year $ 1,840,995 $ 1,480,340
Actual return on plan assets (17,220) 345,344
Employer contributions 324,100 177,857
Benefits paid (762,612) (162,546)
------------ ------------
Fair value of plan assets, ending $ 1,385,263 $ 1,840,995
============ ============
Funded status $ (380,894) $ 94,430
Unrecognized net actual loss 825,208 125,410
Unrecognized net obligation at transition (39,791) (43,771)
Unrecognized prior service cost 183,378 200,049
------------ ------------
Accrued benefit cost included in other liabilities $ 587,901 $ 376,118
============ ============
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Components of Net Periodic
Benefit Cost
Service cost $ 126,063 $ 120,165 $ 103,203
Interest cost 148,458 121,209 133,703
Expected return on plan assets (174,895) (140,632) (163,858)
Amortization of prior service cost 16,671 16,671 16,671
Amortization of net obligation
at transition (3,980) (3,980) (3,980)
------------ ------------- ------------
Net periodic benefit cost $ 112,317 $ 113,433 $ 85,739
============ ============= ============
Weighted-Average Assumptions
as of December 31
Discount rate 7.50% 8.50% 8.50%
Expected return on plan assets 9.00% 9.50% 9.50%
Rate of compensation increase 5.00% 5.00% 6.00%
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
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 1998 and 1997, based on the
present value of the retirement benefits, was $17,143 and $15,809.
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 12. Income Taxes
Net deferred tax (liabilities) consist of the following components as
of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 246,589 $ 216,313
Deferred compensation 29,992 24,655
Unearned loan fees -- 2,159
Interest on nonaccrual loans 1,040 4,819
Loss on capital assets 38,213 28,391
Securities available for sale -- 102,363
------------ ------------
$ 315,834 $ 378,700
------------ ------------
Deferred tax liabilities:
Property and equipment $ 296,686 $ 287,409
Prepaid pension costs 199,866 185,644
Securities available for sale 92,413 --
------------ ------------
$ 588,965 $ 473,053
------------ ------------
$ (273,131) $ (94,353)
============ ============
</TABLE>
The provision for income taxes charged to operations for the years
ended December 31, 1998, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current tax expense $ 872,799 $ 881,675 $ 659,730
Deferred tax expense (benefit) (15,998) (19,508) 68,349
------------ ------------ ------------
$ 856,801 $ 862,167 $ 728,079
============ ============ ============
</TABLE>
<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, 1998, 1997 and 1996, due to
the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Computed "expected" tax expense $ 1,302,695 $ 1,187,799 $ 938,069
Increase (decrease) in income taxes
resulting from:
Tax-exempt interest income (409,916) (284,689) (175,099)
Other, net (35,978) (40,943) (34,891)
------------ ------------ ------------
$ 856,801 $ 862,167 $ 728,079
============ ============ ============
</TABLE>
Note 13. 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 $3,246,556 and
$2,783,606 at December 31, 1998 and 1997, respectively. During 1998,
total principal additions were $2,587,147 and total principal
payments were $2,124,197.
Note 14. 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 17 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, 1998
and 1997, the aggregate amounts of daily average required reserves
were approximately $1,207,000 and $1,239,000, respectively.
The Company is conducting a comprehensive review of its computer
systems to identify the systems that could be affected by the Year
2000 Issue, and is developing a remediation plan to resolve the
Issue. The Issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems
that do not properly recognize such information could generate
erroneous data or cause a system to fail. The Company is heavily
dependent on computer processing in the conduct of its business
activities. Failure of these systems could have a significant impact
on the Company's operations.
<PAGE>
Notes to Consolidated Financial Statements
Note 15. Earnings Per Share
The following table shows the weighted average number of shares used
in computing earnings per share and the effect on the weighted
average number of shares of diluted potential common stock. Potential
dilutive common stock has no effect on income available to common
stockholders. Earnings per share amounts for prior periods have been
restated to give effect to the application of Statement 128 which was
adopted by the Company in 1997.
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- ------------------------- -------------------------
Per Per Per
Share Share Share
Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS 1,802,744 $ 1.65 1,740,966 $ 1.51 1,719,676 $ 1.18
=========== =========== ===========
Effect of dilutive
securities:
Stock options 18,511 -- --
----------- ----------- -----------
Diluted EPS 1,821,255 $ 1.63 1,740,966 $ 1.51 1,719,676 $ 1.18
=========== =========== =========== =========== =========== ===========
</TABLE>
Note 16. 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, 1998, the aggregate amount of unrestricted funds which
could be transferred from the Company's subsidiaries to the Parent
Corporation, without prior regulatory approval, totaled $2,868,092,
12.5% of the total consolidated net assets.
Note 17. 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.
<PAGE>
Notes to Consolidated Financial Statements
A summary of the contract or notional amount of the Company's
exposure to off-balance-sheet risk as of December 31, 1998 and 1997,
is as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 17,060,000 $ 12,396,000
Standby letters of credit $ 1,162,184 $ 1,185,514
</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.
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, 1998, varies from 0 percent to 100 percent; the average
amount collateralized is 16 percent.
The Company has approximately $5,319,841 in deposits in financial
institutions in excess of amounts insured by the Federal Deposit
Insurance Corporation (FDIC) at December 31, 1998.
Note 18. 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.
<PAGE>
Notes to Consolidated Financial Statements
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.
Deposits and Borrowings
The fair value of demand deposits, savings accounts, and
certain money market deposits is the amount payable on demand
at the reporting date. For all other deposits and borrowings,
the fair value is determined using the discounted cash flow
method. The discount rate was equal to the rate currently
offered on similar products.
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, 1998 and 1997, the difference between the
carrying amounts and fair values of loan commitments and
standby letters of credit were immaterial.
<PAGE>
Notes to Consolidated Financial Statements
The estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
1998 1998
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 12,813 $ 12,813 $ 8,609 $ 8,609
Securities 57,786 58,159 63,696 63,958
Loans 120,259 122,342 103,253 104,562
Loans held for sale 4,672 4,672 -- --
----------- ----------- ----------- -----------
Total financial assets $ 195,530 $ 197,986 $ 175,558 $ 177,129
=========== =========== =========== ===========
Financial liabilities:
Deposits $ 172,680 $ 173,008 $ 156,554 $ 156,846
Securities sold under agreements
to repurchase 2,530 2,530 3,048 3,048
Federal Home Loan Bank advances 1,000 1,008 2,800 2,800
Long-term debt 5,000 5,000 -- --
----------- ----------- ----------- -----------
Total financial liabilities $ 181,210 $ 181,546 $ 162,402 $ 162,694
=========== =========== =========== ===========
</TABLE>
Note 19. 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.
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, 1998, that the Company meets
all capital adequacy requirements to which it is subject.
As of December 31, 1998, 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.
<PAGE>
Notes to Consolidated Financial Statements
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, 1998:
Total Capital (to Risk
Weighted Assets):
Consolidated $ 22,626 17.9% =>$ 10,112 => 8.0% N/A
The Middleburg Bank $ 18,012 14.4% =>$ 9,977 => 8.0% =>$ 12,471 => 10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $ 21,563 17.1% =>$ 5,056 => 4.0% N/A
The Middleburg Bank $ 16,949 13.6% =>$ 4,988 => 4.0% =>$ 7,482 => 6.0%
Tier 1 Capital (to
Average Assets):
Consolidated $ 21,563 11.2% =>$ 7,723 => 4.0% N/A
The Middleburg Bank $ 16,949 9.0% =>$ 7,499 => 4.0% =>$ 9,374 => 5.0%
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%
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
Note 20. Condensed Financial Information - Parent Corporation Only
INDEPENDENT COMMUNITY BANKSHARES, INC.
(Parent Corporation Only)
Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Assets 1998 1997
---------------- ---------------
<S> <C> <C>
Cash on deposit with subsidiary bank $ 1,161 $ 1,255
Money market fund 1,393,787 713,403
Securities available for sale 2,425,780 2,383,400
Investment in subsidiaries, at cost, plus
equity in undistributed net income 18,088,219 17,343,024
Organizational expenses, net - - 19,236
Goodwill 1,120,798 1,181,110
Other assets 65,044 44,700
---------------- ---------------
Total assets $ 23,094,789 $ 21,686,128
================ ===============
Liabilities and Shareholders' Equity
Liabilities
Other liabilities $ 231,715 $ --
---------------- ---------------
Shareholders' Equity
Common stock $ 8,894,970 $ 9,062,970
Capital surplus 1,293,046 1,948,246
Retained earnings 12,495,550 10,873,617
Accumulated other comprehensive income (loss) 179,508 (198,705)
---------------- ---------------
Total shareholders' equity $ 22,863,074 $ 21,686,128
---------------- ---------------
Total liabilities and shareholders' equity $ 23,094,789 $ 21,686,128
================ ===============
</TABLE>
<PAGE>
INDEPENDENT COMMUNITY BANKSHARES, INC.
(Parent Corporation Only)
Statements of Income
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- -------------- -------------
<S> <C> <C> <C>
Income
Dividends from subsidiary $ 2,586,000 $ 1,201,074 $ 704,000
Dividends from investments 197,150 224,804 226,896
Interest 33,198 13,110 5,351
(Losses) on securities available
for sale, net (28,889) (83,503) --
------------- -------------- -------------
Total income $ 2,787,459 $ 1,355,485 $ 936,247
------------- -------------- -------------
Expenses
Amortization $ 79,548 $ 41,617 $ 16,487
Legal and professional fees 32,385 21,132 18,620
Printing and supplies 22,605 17,270 8,818
Other 73,310 889 1,124
------------- -------------- -------------
Total expenses $ 207,848 $ 80,908 $ 45,049
------------- -------------- -------------
Income before allocated tax benefits and
undistributed income of subsidiaries $ 2,579,611 $ 1,274,577 $ 891,198
Income tax expense (benefit) (15,593) (18,659) 10,770
------------- -------------- -------------
Income before equity in undistributed
income of subsidiaries $ 2,595,204 $ 1,293,236 $ 880,428
Equity in undistributed income of subsidiaries 379,450 1,338,124 1,150,518
------------- -------------- -------------
Net income $ 2,974,654 $ 2,631,360 $ 2,030,946
============= ============== =============
</TABLE>
<PAGE>
INDEPENDENT COMMUNITY BANKSHARES, INC.
(Parent Corporation Only)
Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 2,974,654 $ 2,631,360 $ 2,030,946
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 79,548 41,617 16,487
Undistributed earnings of subsidiaries (379,450) (1,338,124) (1,150,518)
Loss on sale of securities available for sale 28,889 83,503 --
(Increase) decrease in other assets (20,345) (40,554) 5,709
Decrease in other liabilities (37,170) -- --
---------------- ------------- -------------
Net cash provided by
operating activities $ 2,646,126 $ 1,377,802 $ 902,624
---------------- ------------- -------------
Cash Flows from Investing Activities
Purchase of securities available for sale $ (1,275,000) $ (1,334,984) $ (100,000)
Proceeds from sale of securities available
for sale 1,218,236 1,908,497 --
Purchase of intangibles - - (175,182) --
---------------- ------------- -------------
Net cash provided by (used in)
investing activities $ (56,764) $ 398,331 $ (100,000)
---------------- ------------- -------------
Cash Flows from Financing Activities
Purchase of common stock $ (823,200) $ (635,348) $ --
Cash dividends paid (1,085,872) (574,525) (722,264)
---------------- ------------- -------------
Net cash (used in)
financing activities $ (1,909,072) $ (1,209,873) $ (722,264)
---------------- ------------- -------------
Increase in cash and
cash equivalents $ 680,290 $ 566,260 $ 80,360
Cash and Cash Equivalents
Beginning 714,658 148,398 68,038
---------------- ------------- -------------
Ending $ 1,394,948 $ 714,658 $ 148,398
================ ============= =============
</TABLE>
<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 29, 1999 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 23, 1999
- ------------------------------------------- Officer and Director
Joseph L. Boling (Principal Executive Officer)
/s/ Alice P. Frazier Senior Vice President and Chief Financial March 23, 1999
- ------------------------------------------- Officer (Principal Financial and
Alice P. Frazier Accounting Officer)
Director
- ------------------------------------------- March __, 1999
Howard M. Armfield
/s/ Childs Frick Burden Director March 26, 1999
- -------------------------------------------
Childs Frick Burden
/s/ J. Lynn Cornwell, Jr. Director March 26, 1999
- -------------------------------------------
J. Lynn Cornwell, Jr.
/s/ William F. Curtis Director March 29, 1999
- -------------------------------------------
William F. Curtis
<PAGE>
Director March __, 1999
- -------------------------------------------
F.E. Deacon III
/s/ George A. Horkan, Jr. Director March 26, 1999
- -------------------------------------------
George A. Horkan, Jr.
Director March __, 1999
- -------------------------------------------
C. Oliver Iselin, III
/s/ William S. Leach Director March 26, 1999
- -------------------------------------------
William S. Leach
Director March __, 1999
- -------------------------------------------
Thomas W. Nalls
/s/ John C. Palmer Director March 29, 1999
- -------------------------------------------
John C. Palmer
Director March __, 1999
- -------------------------------------------
John Sherman
/s/ Millicent W. West Director March 29, 1999
- -------------------------------------------
Millicent W. West
/s/ Edward T. Wright Director March 25, 1999
- -------------------------------------------
Edward T. Wright
</TABLE>
<PAGE>
INDEX TO EXHIBITS
Number Document
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 Employment Agreement, dated as of January 1, 1998, between
Independent Community Bankshares, Inc. and Joseph L. Boling.
10.2 Independent Community Bankshares, Inc. 1997 Stock Option Plan.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule (filed electronically only).
Exhibit 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("AGREEMENT"), made as of the 1st day of
January, 1998, by and between INDEPENDENT COMMUNITY BANKSHARES, INC., a Virginia
corporation ("Corporation") and JOSEPH L. BOLING ("Executive").
WHEREAS, it is the desire of the Corporation to have the benefit of
Executive's loyalty, service and counsel; and
WHEREAS, the Executive wishes to continue in the employ of the
Corporation as its Chairman, President and Chief Executive Officer; and
WHEREAS, the Corporation desires to continue to employ the Executive in
his present capacity; and
WHEREAS, Executive possesses certain valuable knowledge, professional
skills and expertise essential to the continued success of the business of the
Corporation; and
WHEREAS, the Corporation desires to continue to utilize the aforesaid
knowledge, professional skills and expertise of the Executive in the conduct of
the business of the Corporation; and
WHEREAS, the Corporation and Executive desire to continue to set forth,
in writing, the terms and conditions of their agreements and understandings;
NOW, THEREFORE, in consideration of the foregoing, of the mutual
promises herein contained, and of other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties, intending
legally to be bound, agree as follows:
1. Employment: The Corporation agrees to continue to employ
the Executive as Chairman, President and Chief Executive Officer and the
Executive agrees to serve the Corporation upon the terms and conditions herein
provided. The Executive also shall serve as the Chairman, President and Chief
Executive Officer of The Middleburg Bank, a wholly owned subsidiary of the
Corporation (the "Bank"). The Executive agrees to perform such managerial duties
and responsibilities as shall be assigned to him by the Boards of Directors of
the Corporation and the Bank. The Executive shall devote his full time and
attention to the discharge of the duties undertaken by him hereunder.
2. Term of Employment: The term of this Agreement and the
employment of the Executive hereunder shall be deemed to have commenced on
January 1, 1998, and shall continue to December 31, 2002, unless sooner
terminated in accordance with the provisions of Section 5. Beginning on December
31, 2000, and on December 31 of each of the succeeding seven (7) years
thereafter, the term of this Agreement and all its terms and provisions shall be
automatically extended for one additional year, unless terminated in accordance
with the
<PAGE>
provisions of Section 5. If Executive's employment by the Corporation
terminates, his employment by the Bank shall terminate automatically at the same
time.
3. Compensation: (a) As compensation for the services to be
rendered by the Executive under this Agreement, the Executive shall receive a
base annual salary of One Hundred Ninety-One Thousand Four Hundred Eight Dollars
($191,408) for the year 1998. The Executive may receive base salary increases
and incentive or bonus compensation in the amounts determined by the Executive
Committee of the Board of Directors of the Corporation in accordance with
performance objectives established by the Board of Directors.
(b) Except as otherwise expressly set forth herein, no compensation
shall be paid pursuant to this Agreement subsequent to any termination of
Executive's employment by the Corporation; provided, however, that Executive's
right to exercise stock options following a termination of employment shall be
governed by the terms of the Corporation's stock option plans and any stock
option agreements between the Corporation and the Executive. No stock options
shall be granted to Executive after his employment terminates.
4. Additional Benefits:
(a) In addition to all the benefits which are provided to all other
senior officers of the Corporation and the Bank, Executive shall be eligible for
participation in annual salary increases and any additional plans, programs or
forms of compensation or benefits that the Board of Directors of the Corporation
might hereafter provide to the employees of the Corporation or its subsidiaries,
to include but not be limited to, major medical and dental insurance, membership
in the Middleburg Tennis Club and in a local golf club.
(b) The Corporation shall provide to Executive an automobile and
payment of all related automobile expenses.
5. Termination:
(a) For Cause. Notwithstanding any other provision hereof, the
Corporation may terminate Executive's employment under this Agreement for cause.
The termination shall be evidenced by written notice thereof to the Executive,
which shall specify the cause of termination. For purposes hereof, the term
"cause" shall mean failure of the Executive to perform his duties under this
Agreement for any reason other than disability; unlawful business conduct;
theft; commission of a felony; or a material breach of this Agreement. The term
"cause" shall also include the failure of Executive for any reason, within ten
(10) days after receipt by Executive of written notice thereof from the Board of
Directors of the Corporation to correct, cease, or otherwise alter any action or
omission that materially or adversely affects the Corporation's profits or
operations.
(b) Resignation. (1) The Executive may resign or voluntarily leave
the employ of the Corporation upon giving the Corporation ninety (90) days
advance notice and on the effective
-2-
<PAGE>
date of such resignation, the Corporation's obligations to Executive under this
Agreement shall terminate and the Corporation shall have no further liability to
Executive under this Agreement.
(2) However, if Executive resigns or voluntarily leaves the
employ of the Corporation for "good reason" (as hereafter defined), then
Executive shall be entitled to the compensation and benefits set forth in
Sections 3 and 4 hereof for the period of time set forth in Section 5(c) hereof.
Notwithstanding anything in this Agreement to the contrary, if Executive
breaches Section 6 or Section 7(a), Executive will not thereafter be entitled to
receive any further compensation or benefits pursuant to this Section 5(b).
For purposes of this Agreement, "good reason" shall mean:
(i) The assignment of duties to the Executive by the
Corporation which result in the Executive having significantly less authority or
responsibility than he has on the date hereof, without his express written
consent;
(ii) The removal of the Executive from or any failure to
re-elect him to the position of Chairman, President and Chief Executive Officer
of the Corporation and the Bank;
(iii) Requiring the Executive to maintain his principal office
outside of Loudoun County, Virginia;
(iv) A reduction by the Corporation of the Executive's base
salary, as the same may have been increased from time to time;
(v) The failure of the Corporation to provide the Executive
with substantially the same fringe benefits that were provided to him
immediately prior to the date hereof;
(vi) The Corporation's failure to comply with any material
term of this Agreement; or
(vii) The failure of the Corporation to obtain the assumption
of and agreement to perform this Agreement by any successor as contemplated in
Section 9 hereof.
(c) Without Cause. The Corporation may at any time, elect to
terminate Executive's employment without "cause" and remove Executive from
employment on thirty (30) days written notice. If the Corporation elects to
terminate Executive's employment without "cause", then Executive shall be
entitled to receive the salary provided under Section 3 and the medical and
dental insurance, automobile and club memberships provided under Section 4 of
this Agreement for a period of time which is the greater of (i) the remaining
term of employment provided for in this Agreement, or (ii) thirty-six (36)
months, commencing on the date of termination. Executive shall not be entitled
to receive any bonuses or other form of incentive compensation following a
termination of employment pursuant to Section 5(b)(2) or this Section 5(c).
Notwithstanding anything in this Agreement to the contrary, if Executive
breaches Section 6 or Section 7(a), Executive will not thereafter be entitled to
receive any further compensation or benefits pursuant
-3-
<PAGE>
to this Section 5(c).
(d) Death. This Agreement shall terminate upon death of the
Executive; provided, however, that in such event the Corporation shall pay to
the estate of the Executive the compensation including salary and accrued bonus,
if any, which otherwise would be payable to the Executive through the end of the
month in which his death occurs.
(e) Disability. The Corporation may terminate this Agreement, after
having established the Executive's disability by giving to the Executive written
notice of its intention to terminate his employment for disability and his
employment with the Corporation shall terminate effective on the 90th day after
receipt of such notice if within 90 days after such receipt the Executive shall
fail to return to full-time performance of the essential functions of his
position (and if the Executive's inability to perform has been established
pursuant to the definition of "disability" set forth below). For purposes of
this Agreement, "disability " means either (i) a physical or mental impairment
which after the expiration of more than 13 consecutive weeks after its
commencement is determined by a physician selected and paid for by the
Corporation or its insurers, and acceptable to the Executive or his legal
representative, which consent shall not be unreasonably withheld, to be such
that the Executive is permanently unable to perform the essential functions of
his position or (ii) disability as defined in the policy of disability insurance
maintained by the Corporation or the Bank for the benefit of the Executive.
Notwithstanding the foregoing, the Corporation shall comply with all
requirements of the Americans with Disabilities Act, 42 U.S.C. ss. 12101 et.
seq.
6. Confidentiality/Nondisclosure Executive covenants and
agrees that any and all information concerning the customers, businesses and
services of the Corporation and its subsidiaries of which he has knowledge or
access as a result of his association with the Corporation in any capacity,
shall be deemed confidential in nature and shall not, without the proper written
consent of the Corporation, be directly or indirectly used, disseminated,
disclosed or published by Executive to third parties other than in connection
with the usual conduct of the business of the Corporation. Such information
shall expressly include, but shall not be limited to, information concerning the
Corporation's and its subsidiaries' trade secrets, business operations, business
records, customer lists or other customer information. Upon termination of
employment the Executive shall deliver to the Corporation all originals and
copies of documents, forms, records or other information, in whatever form it
may exist, concerning the Corporation and its subsidiaries or their business,
customers, products or services. In construing this provision it is agreed that
it shall be interpreted broadly so as to provide the Corporation with the
maximum protection. This Section 6 shall not be applicable to any information
which, through no misconduct or negligence of Executive, has previously been
disclosed to the public by anyone other than Executive.
7. Covenant Not to Compete. (a) During the term of this
Agreement and throughout any further period that he is an officer or employee of
the Corporation, and for a period of twelve (12) months from and after the date
that Executive is (for any reason) no longer employed by the Corporation or for
a period of twelve (12) months from the date of entry by a court of competent
jurisdiction of a final judgment enforcing this covenant in the event of a
breach by Executive, whichever is later, Executive covenants and agrees that he
will not, directly or indirectly, either as a principal, agent, employee,
employer, stockholder, co-partner or in any other individual or
-4-
<PAGE>
representative capacity whatsoever: (i) engage in a Competitive Business
anywhere within a 25 mile radius of any office operated by the Corporation or
the Bank on the date the Executive's employment terminates; or (ii) solicit, or
assist any other person or business entity in soliciting, any depositors or
other customers of the Corporation or the Bank to make deposits in or to become
customers of any other financial institution conducting a Competitive Business;
or (iii) induce any individuals to terminate their employment with the
Corporation or the Bank. As used in this Agreement, the term "Competitive
Business" means all banking and financial products and services that are
substantially similar to those offered by the Corporation or the Bank on the
date that the Executive's employment terminates.
(b) Notwithstanding the foregoing, Section 7(a) shall not apply if
Executive's employment terminates after a Change of Control. A "change of
control" is defined as any of the following: (i) any person, including a "group"
as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, becomes
the owner or beneficial owner of Corporation securities having twenty percent or
more of the combined voting power of the then outstanding Corporation securities
that may be cast for the election of the Corporation's directors, other than as
a result of an issuance of securities initiated by Corporation, or open market
purchases approved by the Board of Directors, as long as the majority of the
Board of Directors approving the purchases is a majority at the time the
purchases are made; (ii) a contested election of directors in which less than a
majority of the individuals nominated by the Board of Directors of the
Corporation are elected; or (iii) a merger or consolidation of Corporation with,
or into, another corporation or the sale, conveyance or other transfer of
substantially all of the assets or stock of Corporation if, immediately
following such transaction, those who were directors of the Corporation
immediately before such transaction do not constitute at least a majority of the
surviving or resulting corporation. In the event that there is a transaction
under a plan which involves a change of control of the Corporation, then the
date of change of control shall be the date that the last step in the plan
causes a change of control of the Corporation to occur.
8. Injunctive Relief. The Executive agrees that given the
nature of the positions held by Executive with the Corporation, that each and
every one of the covenants and restrictions set forth in Sections 6 and 7(a)
above are reasonable in scope, length of time and geographic area and are
necessary for the protection of the significant investment of the Corporation in
developing, maintaining and expanding its business. Accordingly, the parties
hereto agree that in the event of any breach by Executive of any of the
provisions of Sections 6 or 7(a) that monetary damages alone will not adequately
compensate the Corporation for its losses and, therefore, that it may seek any
and all legal or equitable relief available to it, specifically including, but
not limited to, injunctive relief. The covenants contained in Sections 6 and
7(a) shall be construed and interpreted in any judicial proceeding to permit
their enforcement to the maximum extent permitted by law. Should a court of
competent jurisdiction determine that any provision of the covenants and
restrictions set forth in Section 7(a) above is unenforceable as being overbroad
as to time, area or scope, the court may strike the offending provision or
reform such provision to substitute such other terms as are reasonable to
protect the Corporation's legitimate business interests.
9. Successors. The Corporation will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business,
-5-
<PAGE>
stock or assets of the Corporation, by agreement in form and substance
reasonably satisfactory to the Executive, to expressly assume and agree to
perform this Agreement in its entirety. Failure of the Corporation to obtain
such agreement prior to the effectiveness of any such succession shall be a
breach of this Agreement and shall entitle the Executive to the compensation
described in Section 5(b)(2). As used in this Agreement, "Corporation" shall
mean Independent Community Bankshares Inc., a Virginia corporation, and any
successor to its respective business, stock or assets as aforesaid which
executes and delivers the agreement provided for in this Section 9 or which
otherwise becomes bound by all the terms and provisions of this Agreement by
operation of law.
10. Limitation Of Benefits: It is the intention of the
parties that no payment be made or benefit provided to the Executive pursuant to
this Agreement that would constitute an "excess parachute payment" within the
meaning of Section 280G of the Code and any regulations thereunder, thereby
resulting in a loss of an income tax deduction by the Corporation or the
imposition of an excise tax on the Executive under Section 4999 of the Code. If
the independent accountants serving as auditors for the Corporation determine
that some or all of the payments or benefits scheduled under this Agreement, as
well as any other payments or benefits to which the Executive is entitled, would
be nondeductible by the Company under Section 280G of the Code, then the
payments scheduled under this Agreement will be reduced to one dollar less than
the maximum amount which may be paid without causing any such payment or benefit
to be nondeductible. The determination made as to the reduction of benefits or
payments required hereunder by the independent accountants shall be binding on
the parties. The Executive shall have the right to designate within a reasonable
period, which payments or benefits will be reduced; provided, however, that if
no direction is received from the Executive, the Corporation shall implement the
reductions in its discretion.
11. Severability: The provisions of this Agreement shall be
deemed severable, and the invalidity or unenforceability of any one or more of
the provisions of this Agreement shall not affect the validity and
enforceability of the other provisions.
12. Miscellaneous: The Corporation, by the signature of all
members of the Board of Directors (except the Executive), hereby approves this
Employment Agreement with the Executive dated as of January 1, 1998.
This Agreement shall be governed by the laws of the Commonwealth of
Virginia except to the extent the federal banking laws may be controlling.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
INDEPENDENT COMMUNITY BANKSHARES, INC.
By: /s/ Howard M. Armfield
--------------------------(SEAL)
Howard M. Armfield
-6-
<PAGE>
By: /s/ Childs Frick Burden
--------------------------(SEAL)
Childs Frick Burden
By: /s/ J. Lynn Cornwell, Jr.
--------------------------(SEAL)
J. Lynn Cornwell, Jr.
By: /s/ William F. Curtis
--------------------------(SEAL)
William F. Curtis
By: /s/ F. E. Deacon, III
--------------------------(SEAL)
F. E. Deacon, III
By: /s/ George A. Horkan, Jr.
--------------------------(SEAL)
George A. Horkan, Jr.
By: /s/ C. Oliver Iselin, III
--------------------------(SEAL)
C. Oliver Iselin, III
By: /s/ William S. Leach
--------------------------(SEAL)
William S. Leach
By: /s/ Thomas W. Nalls
--------------------------(SEAL)
Thomas W. Nalls
By: /s/ John C. Palmer
--------------------------(SEAL)
John C. Palmer
By: /s/ John Sherman
--------------------------(SEAL)
John Sherman
By: /s/ Millicent W. West
--------------------------(SEAL)
Millicent W. West
By: /s/ Edward T. Wright
--------------------------(SEAL)
Edward T. Wright
EXECUTIVE
/s/ Joseph L. Boling
------------------------------(SEAL)
Joseph L. Boling
-7-
Exhibit 10.2
INDEPENDENT COMMUNITY BANKSHARES, INC.
1997 STOCK OPTION PLAN
ARTICLE I
Definitions
1.01 Affiliate means any entity that is a subsidiary corporation of
the Company. For this purpose, "subsidiary corporation" means any corporation
(other than the Company) in an unbroken chain of corporations beginning with the
Company if, at the time of the granting of the Option one or more of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50 percent or more of the total combined voting power of all classes
of stock in such corporation.
1.02 Agreement means a written agreement (including any amendment or
supplement thereto) between the Company and a Participant specifying the terms
and conditions of an Option granted to such Participant.
1.03 Board means the Board of Directors of the Company.
1.04 Code means the Internal Revenue Code of 1986 and any amendments
thereto.
1.05 Common Stock means the common stock of the Company.
1.06 Company means Independent Community Bankshares, Inc.
1.07 Fair Market Value means, on any given date, (i) the mean between
the bid and asked prices of the Common Stock for such date or, if the Common
Stock was not traded on such day, then on the next preceding day that the Common
Stock was so traded, or (ii) in the event the Board determines that the bid and
asked prices for the Common Stock are not available to do not provide an
accurate measure of Fair Market Value, such other amount as the Board shall
determine based upon a good faith method of valuation to be the Fair Market
Value.
1.08 Option means a stock option that entitles the holder to purchase
from the Company a stated number of shares of Common Stock at the price set
forth in an Agreement.
1.09 Participant means an employee of the Company or of an Affiliate
who satisfies the requirements of Article IV and is selected by the Board to
receive an Option.
1.10 Plan means the Independent Community Bankshares, Inc. 1997 Stock
Option Plan.
ARTICLE II
Purposes
The Plan is intended to foster and promote the long-term growth and
financial success of the Company and its Affiliates by assisting the Company in
recruiting and retaining key employees with ability and initiative by enabling
individuals who contribute significantly to the Company or an Affiliate to
participate in its future success and to associate their interests with those of
the Company. The proceeds received by the Company from the sale of Common Stock
pursuant to this Plan shall be used for general corporate purposes. The Plan is
not expected to have any material effect on the value of issued and outstanding
shares of the Company's Common Stock.
<PAGE>
The Plan is intended to enable stock options granted under the Plan to
qualify as incentive stock options ("Incentive Stock Options") under Section
422A of the Internal Revenue Code of 1986, as amended (the "Internal Revenue
Code").
ARTICLE III
Administration
The Plan shall be administered by the Board. The Board shall have
authority to grant Options upon such terms (not inconsistent with the provisions
of this Plan) as the Board may consider appropriate. Such terms may include
conditions (in addition to those contained in the Plan) on the exercisability of
all or any part of an Option. In addition, the Board shall have complete
authority to interpret all provisions of this Plan; to prescribe the form of
Agreements; to adopt, amend and rescind rules and regulations pertaining to the
administration of the Plan; and to make all other determinations necessary or
advisable for the administration of this Plan. The express grant in the Plan of
any specific power to the Board shall not be construed as limiting any power or
authority of the Board. Any decision made, or action taken, by the Board in
connection with the administration of this Plan shall be final and conclusive.
No member of the Board shall be liable for any act done with respect to this
Plan or any Agreement or Option. All expenses of administering this Plan shall
be borne by the Company.
ARTICLE IV
Eligibility
4.01 General. Any employee of the Company or of any Affiliate
(including any corporation that becomes an Affiliate after the adoption of this
Plan) who, in the judgment of the Board, has contributed significantly or can be
expected to contribute significantly to the profits or growth of the Company or
an Affiliate may receive one or more Options.
4.02 Grants. The Board shall designate individuals to whom Options
are to be granted and will specify the number of shares of Common Stock subject
to each grant. All Options granted under this Plan shall be evidenced by
Agreements which shall be subject to applicable provisions of this Plan and to
such other provisions as the Board may adopt.
ARTICLE V
Shares Subject to Plan
Upon the exercise of any Option, the Company shall deliver to the
Participant authorized but unissued shares of Common Stock. The maximum
aggregate number of shares of Common Stock that may be issued pursuant to the
exercise of Options under this Plan is 45,000, subject to the adjustment as
provided in Article XII. If an Option is cancelled by mutual agreement of the
Company and a Participant or terminated, in whole or in part, for any reason
other than its exercise, the number of shares of Common Stock allocated to the
Option or portion thereof may be reallocated to other Options to be granted
under this Plan.
ARTICLE VI
Tax Character of Options
The Board shall have the discretion to designate whether Options shall
be Incentive Stock Options or non-statutory options. To the extent that an
Option exceeds the limitation described in Article X, the Option shall not be an
Incentive Stock Option.
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<PAGE>
ARTICLE VII
Price
The price per share paid by a Participant for Common Stock purchased on
the exercise of an Incentive Stock Option shall be equal to the Fair Market
Value per share of the Company's Common stock on the date the Option is granted.
In the discretion of the Board, the price per share paid by a Participant in
connection with a non-statutory stock Option may be less then at the Fair Market
Value per share of the Company's Common Stock on the date the Option is granted.
ARTICLE VIII
Exercise of Options
8.01 Maximum Option Period. No Option shall be exercisable after the
expiration of ten years from the date Option was granted. The Board, at the time
of grant, may direct that an Option be exercisable for a period of less than
such maximum period.
8.02 Nontransferability. Any Option granted under this Plan shall be
nontransferable except by will or by the laws of descent and distribution.
During the lifetime of the Participant to whom the Option is granted, the Option
may be exercised only by the Participant. No right or interest of the
Participant in any Option shall be liable for, or subject to, any lien,
obligation, or liability of such Participant.
8.03 Employee Status. In the event that the terms of any Option
provide that it may be exercised only during employment or within a specified
period of time after termination of employment, the Board may decide in each
case to what extent leaves of absences for governmental or military service,
illness, temporary disability, or other reason shall not be deemed interruptions
of continuous employment.
ARTICLE IX
Method of Exercise of Options
9.01 Exercise. Subject to the provision of Articles VIII and XIII, an
Option may be exercised in whole at any time or in part from time to time at
such times and in compliance with such requirements as the Board shall
determine. An Option granted under this Plan may be exercised with respect to
any number of whole shares less then the full number for which the Option could
be exercised. Such partial exercise of an Option shall not affect the right to
exercise the Option from time to time in accordance with this Plan with respect
to remaining shares subject to the Option.
9.02 Payment. Unless otherwise provided by the Agreement, payment of
the Option price shall be made in cash or a cash equivalent acceptable to the
Board. If the Agreement provides, payment of all or part of the Option price may
be made by surrendering shares of Common Stock to the Company. If Common Stock
is used to pay all or part of the Option price, the shares surrendered must have
a Fair market Value (determined as of the day preceding the date of exercise)
that is not less than such price or part thereof.
9.03 Shareholder Rights. No Participant shall, as a result of
receiving an Option, have any rights as a shareholder until the date he
exercises such Option.
ARTICLE X
Limitations on Incentive Stock Options
No Incentive Stock Option shall be granted to any optionee which would
cause the aggregate Fair Market Value of the stock with respect to which
Incentive Stock Options are exercisable by such optionee for the first time
during any calendar year to exceed $100,000. For the purposes of this Article,
Incentive Stock Options include all Incentive Stock Options under plans of the
Company and its Affiliates.
3
<PAGE>
ARTICLE XI
Change in Control
11.01 Options. An Agreement may provide that an Option that is
outstanding on a Change in Control Date shall be exercisable in whole or in part
on that date and thereafter during the remainder of the option period stated in
the Agreement.
11.02 Change in Control. A Change in Control occurs if, after the date
of the Agreement, (i) any person who is not a Director of the Company on the
date that this Plan is adopted by the shareholders of the Company, including a
"group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934,
becomes the owner or beneficial owner of Company securities having 20% or more
of the combined voting power of the then outstanding Company securities that may
be cast for the election of the Company's directors (other than as a result of
an issuance of securities initiated by the Company, or open market purchases
approved by the Board, as long as the majority of the Board approving the
purchases is a majority at the time the purchases are made); or (ii) as the
direct or indirect result of, or in connection with, a cash tender or exchange
offer, a merger or other business combination, a sale of assets, a contested
election, or any combination of these transactions, the persons who were
Directors of the Company before such transactions cease to constitute a majority
of the Company's Board, or any successor's board, within two years of the last
of such transactions; or (iii) with respect to a Participant employed by an
Affiliate, an event occurs with respect to the employer such that, after the
event, the employer is no longer an Affiliate and the Participant is not longer
employed by the Company or an Affiliate. For purposes of this Agreement, the
Control Change Date is the date on which an event described in (i), (ii) or
(iii) occurs. If a Change in Control occurs on account of a series of
transactions, the Control Change Date is the date of the last of such
transactions.
ARTICLE XII
Adjustment Upon Change in Common Stock
Should the Company effect one or more stock dividends, stock split-ups,
subdivisions or consolidations of shares, the number of shares as to which
Options may be granted under this Plan shall be proportionately adjusted and the
terms of Options shall be adjusted as the Board shall determine to be equitably
required. Any determination made under this Article XII by the Board shall be
final and conclusive.
The issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, for cash or property
or for labor or services, either upon direct sale or upon the exercise of rights
or warrants to subscribe therefore, or upon conversion of shares or obligations
of the Company convertible into such shares or other securities, shall not
affect, and no adjustment by reason thereof shall be made with respect to,
Options.
ARTICLE XIII
Compliance with Law and
Approval of Regulatory Bodies
No Option shall be exercisable, no Common Stock shall be issued, no
certificates for shares of Common Stock shall be delivered, and no payment shall
be made under this Plan except in compliance with all applicable federal and
state laws and regulations (including, without limitations, withholding tax
requirements) and the rules of all domestic stock exchanges on which the
Company's shares may be listed. The Company shall have the right to rely on an
opinion of its counsel as to such compliance. Any share certificate issued to
evidence Common Stock for which an Option is exercised may bear such legends and
statements as the Board may deem advisable to assure compliance with federal and
state laws and regulations. No Option shall be exercisable, no Common Stock
shall be issued, no certificate for shares shall be delivered, and no payment
shall be made under this Plan until the Company has obtained such
4
<PAGE>
consent or approval as the Board may deem advisable from regulatory bodies
having jurisdiction over such matters.
ARTICLE XIV
General Provisions
14.01 Effect of Employment. Neither the adoption of this Plan, nor any
Agreement or other document describing or referring to this Plan (or any part
thereof) shall confer upon any employee any right to continue in the employ of
the Company or an Affiliate or in any way affect any right and power of the
Company or an Affiliate to terminate the employment of any employee at any time
with or without assigning a reason therefor.
14.02 Unfunded Plan. The Plan, insofar as it provides for grants shall
be unfunded, and neither the Company nor any Affiliate shall be required to
segregate any assets that may at any time be represented by grants under this
Plan. Any liability of the Company or an Affiliate to any person with respect to
any grant under this Plan shall be based solely upon any contractual obligations
that may be created pursuant to this Plan. No such obligation of the Company or
an Affiliate shall be deemed to be secured by any pledge of, or other
encumbrance on, any property of the Company or an Affiliate.
14.03 Rules of Construction. Headings are given to the articles of
this Plan solely as a convenience to facilitate reference. The reference to any
statute, regulations, or other provision of law shall be construed to include
any amendment to or successor of such provision of law.
ARTICLE XV
Amendment
The Board may amend or terminate this Plan from time to time; provided,
however, that if this Plan is approved by the Company's shareholders, no
amendment may become effective until shareholder approval of such amendment is
obtained if the amendment (i) materially increases the aggregate number of
shares that may be issued pursuant to Options, (ii) materially increases the
benefits accruing to Participants under the Plan, or (iii) materially changes
the class of employees eligible to become Participants. No amendment shall,
without a Participant's consent, adversely affect any rights of such Participant
under an Option outstanding at the time such amendment is made.
ARTICLE XVI
Duration of Plan
No Option may be granted under this Plan after November 12, 2007.
Options granted before such date shall remain valid in accordance with their
terms.
5
Exhibit 21
Subsidiaries of Independent Community Bankshares, Inc.
------------------------------------------------------
Name of Subsidiary State of Incorporation
------------------ ----------------------
The Middleburg Bank Virginia
- Middleburg Bank Service Corporation Virginia
The Tredegar Trust Company Virginia
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