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, 1999
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)
(703) 777-6327
(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
$18,468,000.
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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 February 17, 2000 was approximately $28,103,826. (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 February 17,
2000 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 2000 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............................................. 30
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.............. 30
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT........................... 30
ITEM 10. EXECUTIVE COMPENSATION........................................... 30
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT............................... 30
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 31
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K............................31
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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 Virginia law in 1993. The
Company owns all of the stock of its subsidiaries, The Middleburg Bank (the
"Bank") and The Tredegar Trust Company ("Tredegar"), both of which are chartered
under Virginia law.
The Bank has four full service branches and one limited service
facility. The Bank has its main office at 111 West Washington Street,
Middleburg, Virginia 20117, and has offices in Purcellville, Leesburg and
Ashburn, 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 Bank's market is western Loudoun County. Loudoun County is in
northwestern Virginia and included in the Washington-Baltimore Metropolitan
statistical area. 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 capital of Virginia, and 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 to individuals and small
businesses. The banking services include various types of checking and savings
accounts, and business, real estate, development, mortgage, home equity,
automobile and other installment, demand and term loans. The Bank also offers
ATMs 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. Middleburg Bank Service Corporation is a partner in a limited
liability company, Bankers Title Shenandoah, LLC, which sells title insurance to
its members. It has also invested in another limited liability company, Virginia
Bankers Insurance Center, LLC, which acts as a broker for insurance sales for
its member banks.
At December 31, 1999, ICBI had a total of 95 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.
Competition
ICBI faces significant competition for both loans and deposits.
Competition for loans comes from commercial banks, savings and loan associations
and savings banks, mortgage banking subsidiaries
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of regional commercial banks, subsidiariesof 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, 1999, the Company is
the largest banking organization in terms of deposits operating in Loudoun
County, Virginia. The Company 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, other
financial institutions and money managers. 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 banking 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
also 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.
The activities permissible to bank holding companies and their
affiliates were substantially expanded by the Gramm-Leach-Bliley Act, which the
President signed on November 12, 1999. Gramm-Leach-Bliley repeals the
anti-affiliation provisions of the Glass-Steagall Act to permit the common
ownership of commercial banks, investment banks and insurance companies. Under
Gramm-Leach-Bliley, a bank holding company can elect to be treated as a
financial holding company. A financial holding company may engage in any
activity and acquire and retain any company that the Federal Reserve determines
to be financial in nature. A financial holding company also may engage in any
activity that is complementary to a financial activity and does not pose a
substantial risk to the safety and soundness of depository institutions or the
financial system generally. The Federal Reserve must consult
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with the Secretary of the Treasury in determining whether an activity is
financial in nature or incidental to a financial activity.
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, 1999, 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 4% 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 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
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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.
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.
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.
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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.
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.
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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 drive-up 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.
The Leesburg limited service facility, located at 200 North King
Street, was leased beginning April 1999. The leased space consists of 200 square
feet with one teller window and a stand-alone automated teller machine.
Transactions in this branch are limited to paying and receiving teller
functions. The initial term of this lease is five years with two additional
renewal periods of five years each. The annual lease expense associated with
this location is $5,400.
The Ashburn bank branch was leased beginning January 1999 and consists
of 24,969 rentable square feet at 20955 Professional Plaza, Suite 100, Ashburn,
Virginia 20147. The office is a full service branch with five teller windows,
three drive-up facilities and a drive-up automated teller machine. The initial
term of the lease is 15 years with two five-year renewal options. The annual
lease expense associated with this location is $68,000.
The mortgage banking department of The Middleburg Bank leased office
space in June 1999. The space includes 1,822 rentable square feet used primarily
for mortgage banking operations and loan originator office space. The initial
term of the lease is for five years with no renewal options. The annual lease
expense associated with this location is $35,000.
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Tredegar has leased its main office in Richmond, Virginia. Rental
expense for this location totaled $44,000 in the fiscal year ended December 31,
1999.
All of the Company's properties are in good operating condition and are
adequate for the Company's present and anticipated future needs.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the company is
a party or of which the property of the Company is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders of the Company.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since October 1997, the Company's common stock has traded on the OTC
Bulletin Board under the symbol "ICBX." The following table sets forth, for the
quarters indicated, the high and low sales prices for the common stock and per
share dividends for the periods indicated.
Market Price and Dividends
Sales Price ($) Dividends ($)
--------------- -------------
High Low
---- ---
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
1999:
1st quarter........................ 23.88 20.00 .17
2nd quarter........................ 24.00 23.25 .17
3rd quarter........................ 29.25 22.00 .17
4th quarter........................ 26.25 21.75 .17
ICBI historically has paid cash dividends on a quarterly basis. The
final determination of the timing, amount and payment of dividends on the Common
Stock is at the discretion of ICBI's Board of Directors and will depend upon the
earnings of ICBI and its subsidiaries, principally, its subsidiary bank, the
financial condition of ICBI and other factors, including general economic
conditions and applicable governmental regulations and policies. ICBI or the
Bank has paid regular cash dividends for over 200 consecutive quarters.
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As of March 1, 2000, 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 to
Consolidated Financial Statements.
Overview
ICBI is headquartered in Middleburg, Virginia and has two wholly owned
subsidiaries, the Bank and Tredegar. The Bank is a community bank serving
Western Loudoun County, Virginia with four full service branches and one limited
service facility. Tredegar 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.
In 1999, ICBI realized growth in assets and net earnings exceeding that
of the previous two years. Results for 1999 were favorably affected by the
growth in revenues from Tredegar and the Bank's mortgage banking operation, as
well as significant branch banking growth. By December 31, 1999, total assets
were $243.9 million, an increase of 18.7% over total assets at December 31,
1998, which were $205.4 million. Net loans grew 17.9% from $120.3 million at
December 31, 1998 to $141.8 million at December 31, 1999. Total deposits
experienced the same growth rate as assets and loans with a $31.2 million
increase from $172.7 million at December 31, 1998 to $203.8 million at December
31, 1999. In light of the growth experienced in 1999, ICBI remains well
capitalized with risk-adjusted core capital and total capital ratios well above
the regulatory minimums. Asset quality measures also remained strong throughout
the year.
On August 9, 1999, ICBI purchased one percent of the issued and
outstanding capital stock of Gilkison Patterson Investment Advisors, Inc.
("GPIA"), an investment advisory firm based in Alexandria, Virginia. In
connection with this purchase, ICBI acquired the right to purchase all of the
remaining authorized, issued and outstanding shares of GPIA capital stock on or
after July 1, 2001. The consideration for these shares and the merger option
consisted of $1.2 million in cash. Upon exercise of the merger option, ICBI will
purchase all the remaining issued and outstanding shares of GPIA capital stock
for an additional $4.8 million in cash and shares of the Company's common stock.
ICBI is not aware of any current recommendations by any regulatory
authorities that, if they were implemented, would have a material effect on the
registrant's liquidity, capital resources or results of operations.
Results of Operations
Net Income
Net income for 1999 was $3.6 million, an increase of 19.9% over 1998's
net income of $3.0 million. Net income for 1998 increased 13.0% over 1997's net
income of $2.6 million. For 1999 earnings per diluted share were $1.99 compared
to $1.63 and $1.51 for 1998 and 1997, respectively.
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Return on average assets ("ROA") measures how effectively ICBI employs
its assets to produce net income. ICBI increased its ROA to 1.60% for the year
ended December 31, 1999 from 1.54% for the same period in 1998. An increased net
interest margin, growth in earning assets as well as a 35.8% increase in
non-interest income contributed to the growth in the ROA. The ROA for 1997 was
1.52%. Return on average equity ("ROE"), another measure of earnings
performance, indicates the amount of net income earned in relation to the total
equity capital invested. ROE increased to 15.48% for the year ended December 31,
1999. ROE was 13.24% and 13.54% for the years ended December 31, 1998 and 1997,
respectively.
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Average Balances, Income and Expenses, Yields and Rates
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Years Ended December 31,
----------------------------------------------------------------------------------------
1999 1998 1997
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Securities:
Taxable $ 30,368 $ 1,937 6.38% $ 31,657 $ 1,804 5.70% $ 41,242 $2,469 5.99%
Tax-exempt (1) (2) 30,291 2,264 7.47% 28,931 2,204 7.62% 19,721 1,574 7.98%
----------------------- ---------------------- ---------------------
Total securities 60,659 4,201 6.93% 60,588 4,008 6.62% 60,963 4,043 6.63%
Loans
Taxable 135,735 11,677 8.60% 112,281 10,181 9.07% 96,179 8,956 9.31%
Tax-exempt 371 26 7.01% 416 36 8.74% 376 24 6.38%
----------------------- ---------------------- ---------------------
Total loans 136,106 11,703 8.60% 112,697 10,217 9.07% 96,555 8,980 9.30%
Federal funds sold 6,030 290 4.81% 3,842 211 5.49% 2,928 160 5.46%
Interest on money market investments 1,884 98 5.20% 1,817 90 4.95% 365 13 3.56%
Interest-bearing deposits in
other financial institutions 24 1 4.17% 134 7 5.22% 84 8 9.52%
----------------------- ---------------------- ---------------------
Total earning assets 204,703 16,293 7.96% 179,078 14,533 8.12% 160,895 13,204 8.21%
Less: Allowance for credit losses (1,223) (1,044) (952)
Total nonearning assets 18,979 15,084 12,730
------------- ------------ -----------
$
Total assets $ 222,459 $193,118 172,673
============= ============ ===========
Liabilities (1):
Interest-bearing deposits:
Checking $ 29,583 292 0.99% $ 23,853 306 1.28% $ 19,886 360 1.81%
Savings and IRA's 19,000 570 3.00% 17,075 602 3.53% 15,631 577 3.69%
Money market savings 41,701 1,139 2.73% 34,195 1,002 2.93% 30,071 883 2.94%
Time deposits:
$100,000 and over 21,965 1,094 4.98% 18,151 949 5.23% 16,480 936 5.68%
Under $100,000 35,707 1,703 4.77% 38,557 2,044 5.30% 40,100 2,130 5.31%
----------------------- ---------------------- ---------------------
Total interest-bearing
deposits 147,956 4,798 3.24% 131,831 4,903 3.72% 122,168 4,886 4.00%
Federal Home Loan Bank advances 56 3 5.36% 1,319 70 5.31% 2,999 172 5.74%
Securities sold under agreements
to repurchase 5,863 253 4.32% 2,833 125 4.41% 2,662 119 4.47%
Long-term debt 5,000 281 5.62% 3,740 206 5.51% - - -
Federal funds purchased 179 10 5.59% 146 9 6.16% 272 15 5.51%
----------------------- ---------------------- ---------------------
Total interest-bearing
liabilities 159,054 5,345 3.36% 139,869 5,313 3.80% 128,101 5,192 4.05%
Non-interest bearing liabilities
Demand deposits 39,154 29,782 24,025
Other liabilities 1,213 997 1,112
Total liabilities 199,421 170,648 153,238
Shareholders' equity 23,038 22,470 19,435
Total liabilities and
shareholders' equity $ 222,459 $193,118 $172,673
============= ============ ===========
Net interest income $ 10,948 $ 9,220 $8,012
=========== ========== ==========
Interest rate spread 4.60% 4.32% 4.16%
Interest expense as a percent
of average earning assets 2.61% 2.97% 3.23%
Net interest margin 5.35% 5.15% 4.98%
</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.
-13-
<PAGE>
Net Interest Income
Net interest income represents the principal source of earnings of
ICBI. Net interest income equals the amount by which interest generated from
earning assets exceeds the expense associated with funding those assets. Changes
in volume and mix of interest earning assets and interest bearing liabilities,
as well as their respective yields and rates, have a significant impact on the
level of net interest income.
Net interest income on a fully tax-equivalent basis was $10.9 million
for the year ended December 31, 1999. This represents an increase of 18.7% over
the $9.2 million reported for the same period in 1998. Net interest income for
1998 increased 15.1% over the $8.0 million reported for 1997. When net interest
income is presented on a fully tax-equivalent basis, interest income from
tax-exempt earning assets is increased by an amount equivalent to the federal
income taxes that would have been paid if this income were taxable at the
statutory federal tax rate of 34%.
The increase in net interest income in 1999 resulted primarily from
continued growth in average earning assets and reduction of funding costs. The
combination of these two factors contributed to the strengthening of the net
interest margin, which increased 20 basis points to 5.35% for 1999. The average
balance in the portfolio of securities did not increase. The tax-equivalent
yield; however, increased 31 basis points to 6.93%. The asset/liability
strategies employed by management increased the investment portfolio yield. The
average loan portfolio increased 20.8% during 1999, potentially providing $2.0
million in interest income. Average yield on the loan portfolio, however,
decreased 47 basis points. The net effect to interest income provided by the
loan portfolio was an increase of $1.5 million in 1999. Excess deposit growth
over loan growth was placed in temporary investments including federal funds
sold and money market investments. The average balances in those accounts
increased $2.1 million during 1999 and provided $81,000 in additional interest
income.
ICBI enjoyed significant growth in 1999 in core deposits, which
contributed to the 48 basis point decrease in cost of funds. Management's
strategy to continue attracting core deposits resulted in a 20.2% increase in
checking, savings and money market deposit accounts and only a $91,000 increase
in interest expense. The average balances in certificates of deposits increased
$964,000 while the interest expense associated with these deposits decreased
$196,000. ICBI's reliance on other funding sources increased on average by $3.1
million with a related increase in interest expense of $137,000. Total interest
expense for 1999 was $5.3 million, an increase of $32,000 compared to 1998.
The increase in net interest income in 1998 resulted primarily from an
11.3% increase in the volume of average earning assets from 1997 to 1998 and
secondarily by the reduction of funding costs in a declining interest rate
environment. The 16.7% 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 $214,000. The yield on the investment securities portfolio
decreased one basis point to 6.62% in 1998 from 6.63% in 1997, on a
tax-equivalent basis. The average investment securities portfolio decreased
$375,000, decreasing tax-equivalent interest income by $35,000 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 $128,000 in additional interest income.
Average interest bearing deposits increased 7.91% during 1998, while
the average rate paid on those 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 $17,000. 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
funding sources on average increased 35.48%, increasing expense associated with
those sources by $104,000.
-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 average outstanding loans.
<TABLE>
<CAPTION>
Volume and Rate Analysis
(Tax Equivalent Basis)
Years Ended December 31,
----------------------------------------------------------------------------------
1999 vs 1998 1998 vs 1997
Increase (Decrease) Due Increase (Decrease) Due
to Changes in: to Changes in:
----------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Securities:
Taxable $ (69) $ 202 $ 133 $ (550) $ (115) $ (665)
Tax-exempt 103 (43) 60 697 (67) 630
Loans:
Taxable 1,990 (494) 1,496 1,448 (223) 1,225
Tax-exempt (4) (6) (10) 3 9 12
Federal funds sold 101 (22) 79 49 2 51
Interest on money market investments 3 5 8 79 (2) 77
Interest bearing deposits in other
financial institutions (5) (1) (6) (4) 3 (1)
------------ ------------- ------------ ------------- ----------- -------------
Total earning assets $ 2,119 $ (359) $ 1,760 $ 1,722 $ (393) $ 1,329
Interest-Bearing Liabilities:
Interest checking $ (246) $ 232 $ (14) $ 115 $ (169) $ (54)
Regular savings deposits 96 (128) (32) 47 (22) 25
Money market deposits 199 (62) 137 122 (3) 119
Time deposits
$100,000 and over 188 (43) 145 17 (4) 13
Under $100,000 (145) (196) (341) (58) (28) (86)
------------ ------------- ------------ ------------- ----------- -------------
Total interest bearing deposits $ 92 $ (197) $ (105) $ 243 $ (226) $ 17
Federal Home Loan Bank
Advances (68) 1 (67) (90) (12) (102)
Securities sold under agreement
to repurchase 130 (2) 128 8 (2) 6
Long-term debt 71 4 75 206 - 206
Federal Funds Purchased 2 (1) 1 (8) 2 (6)
------------ ------------- ------------ ------------- ----------- -------------
Total interest bearing
liabilities $ 227 $ (195) $ (32) $ 359 $ (238) $ 121
Change in net interest income $ 1,892 $ (164) $ 1,728 $ 1,363 $ (155) $ 1,208
============ ============= ============ ============= =========== =============
</TABLE>
Provision for Loan Losses
ICBI's loan loss provision during 1999 was $420,000, an increase of
$285,000 from 1998. The increase is reflective of the growth of ICBI's loan
portfolio. ICBI is committed to making loan loss
-15-
<PAGE>
provisions which maintain an allowance that adequately reflects the risk
inherent in the loan portfolio. See "-- Asset Quality" below.
Other Income
Other 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. Other income includes
fees generated by the mortgage banking department of the Bank as well as
Tredegar. Trust fee income increased 34.3% during 1999 to $1.1 million. Strong
business development efforts at Tredegar during 1999 resulted in a 24.0%
increase in assets under management and accountability. Typically, trust fees
are generated based upon a percentage of the assets; thus, any increases in
assets under management and accountability result in a similar increase in fees.
The mortgage banking department contributed an additional $320,000 of fees on
loans held for sale during 1999, an increase of 132.8% over the contribution for
1998. The growth in transaction deposit accounts also provided additional
service charge and fee income. The service charges and fees associated with
deposit accounts increased 17.5% during 1999. Other operating income for 1999
includes $20,000 of fees received from GPIA for accounting and business
services. Total other income for 1999 was $2.9 million compared to $2.2 million
for 1998.
Other income for 1998 increased 88.7% to $2.2 million from $1.1 million
in 1997. The increase is due primarily to the increase in trust fee income, fees
on loans held for sale and service charges on deposit accounts. In 1998, trust
fee income increased to $855,000, an increase of $517,000 over 1997. The
increase resulted from the acquisition of Tredegar in August 1997. The Bank's
mortgage banking department opened in April 1998 and contributed $241,000 to
other income by generating fees on loans held for sale. Service charges,
commission and fees on deposit accounts were $916,000 for 1998, an increase of
$135,000 over 1997. The increase in these fees was due primarily to deposit
growth.
Other Income
<TABLE>
<CAPTION>
-------------------------------------------------------------
Years Ended December 31,
-------------------------------------------------------------
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Services, commission and fees $ 1.076 $ 916 $ 781
Trust fee income 1,148 855 339
Fees on loans held for sale 561 241 -
Other operating income 174 175 122
-------------------- ------------------- ------------------
Noninterest income $ 2,959 $ 2,187 $ 1,242
(Losses) on securities available for sale, net (13) (18) (93)
-------------------- ------------------- ------------------
Total noninterest income $ 2,946 $ 2,169 $ 1,149
==================== =================== ==================
</TABLE>
Other Expenses
Improving operating efficiency is as important to management as
enhancing other income. Total other expenses increased 20.4% or $1.4 million to
$8.0 million in 1999. Salaries and employee benefits increased $708,000 or 18.4%
due to additions of management and staff related to expanding the branch
network, increased trust operations and enhancing the internal infrastructure to
facilitate this larger network. In Loudoun County, Virginia, the unemployment
rates hover around 1.5%, causing increased pressures to provide competitive
salary and benefit programs. This situation also factors into the increased
salary and benefit cost for 1999. Occupancy and equipment expense increased
$241,000 or
-16-
<PAGE>
31% to $1.0 million. During 1999, the Bank opened one full service branch and a
limited service facility and moved its mortgage banking operation to its own
offices. The Bank entered into lease contracts for these endeavors. The
Purcellville branch was remodeled during 1999 to include interior enhancements
and expanded drive-through capabilities. These investments have positioned the
Bank for future growth and productivity. Advertising expenses increased $91,000
to $325,000 for 1999. During the latter part of 1998, the Bank began a new
marketing program to promote the awareness of the bank. The campaign was very
successful, and management believes that it contributed to the significant
deposit growth the Bank experienced during 1999. Computer operations expense
increased 25.5% to $310,000 during 1999. The increase in this expense was
related to the remediation process for Year 2000, as well as customer awareness
campaigns about the progress of the Company. Other operating expenses increased
$263,000 to $1.8 million for 1999, compared to $1.6 million for 1998.
Other expenses 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 staff within the bank
branches.
Other Expenses
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------
1999 1998 1997
---------------------- ------------------------- --------------------------
(In thousands)
<S> <C> <C> <C>
Salaries and employee benefits $ 4,547 $ 3,839 $ 2,864
Net occupancy and equipment expense 1,013 772 593
Advertising 325 234 146
Computer operations 310 247 138
Other operating expenses 1,845 1,582 1,230
---------------------- ------------------------- --------------------------
Total $ 8,040 $ 6,674 $ 4,971
====================== ========================= ==========================
</TABLE>
Income Taxes
Reported income tax expense was $1.1 million for 1999, an increase of
$240,000 compared to $857,000 for 1998. The effective tax rate for 1999 was
23.5% compared to 22.4% in 1998 and 24.7% in 1997. The increase in the effective
tax rate for 1999 was influenced by the change in the mix of the investment
securities portfolio as well as the increased provision for allowance for loan
losses. Note 12 of the Company's 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, 1999.
Market and Interest Rate Risk
Market risk is the risk of loss in a financial instrument arising from
adverse changes in market rates or prices such as interest rates, foreign
currency exchange rates, commodity prices and equity prices. ICBI's primary
market risk exposure is interest rate risk, while the assets under management by
Tredegar are affected by equity price 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 asset/liability management policies to
the Asset/Liability Committee ("ALCO") of the Bank. In this capacity, ALCO
develops guidelines and strategies that govern ICBI's
-17-
<PAGE>
asset/liability management related activities, based upon estimated market risk
sensitivity, policy limits and overall market interest rate levels and trends.
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 uses 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
1999 and 1998 as compared to the 10% policy limit approved by the Board of
Directors.
1999
Rate Change Estimated NII Sensitivity
----------- -------------------------
High Low Average
---- --- -------
+200 bp (-1.07%) .15% .09%
- 200 bp 1.66% (-.08%) .64%
1998
Rate Change Estimated NII Sensitivity
----------- -------------------------
High Low Average
---- --- -------
+200 bp (.91%) .02% (.27%)
- 200 bp 1.55% (.01%) .52%
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 increase of $4,000 in 1999 and an
decrease of $23,000 in 1998. If interest rates had decreased 200 basis points
during fiscal years 1998 and 1998, then the effect to net interest income of the
banking subsidiary could have been an increase of $34,000 and $44,000,
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 such as 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.
Financial Condition
ICBI's total assets were $243.9 million as of December 31, 1999, up
$38.5 million or 18.7% from the $205.4 million level at December 31, 1998.
Investment securities increased $9.9 million or 17.2% from 1998 to 1999. Loans
increased by $18.5 million or 14.7% from 1998 to 1999, while deposits increased
$31.2 million or 18.0% during the same period. Total shareholders' equity at
year end 1999 and 1998 was $23.1 and $22.9 million, respectively.
Loans
ICBI's loan portfolio is its largest and most profitable component of
average earning assets, totaling 66.5% of average earning assets in 1999. ICBI
continues to emphasize loan portfolio growth and diversification as a means of
increasing earnings while minimizing credit risk. Loans, net of unearned income,
were $144.5 million at December 31, 1999, an increase of 14.7% from the total of
$126.0 million at December 31, 1998. Proactive sales efforts, competitive
pricing and the branch network supported the increase in loans during 1999.
Loans increased 20.9% from $104.2 million at December 31, 1997 to $126.0 million
at December 31, 1998. The loan to deposit ratio decreased to 70.9% at December
31, 1999 compared to 73.0% at December 31, 1998 and 66.6% at December 31, 1997.
The strong growth in deposits during 1999 affected this ratio.
Loan Portfolio
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 19,055 $ 18,880 $ 15,111 $ 11,648 $ 10,215
Real estate construction 12,151 5,436 3,798 4,182 1,791
Real estate mortgage:
Residential (1-4 family) 61,062 55,595 45,231 41,246 34,490
Loans held for sale 1,232 4,672 - - -
Home equity lines 4,382 3,617 3,165 2,614 2,188
Non-farm, non-residential (1) 36,361 28,643 26,054 24,774 21,697
Agricultural 379 1,057 2,140 2,105 1,549
Consumer installment 9,845 8,095 8,738 8,061 9,170
------------- -------------------------------------------------------
Total loans 144,467 125,995 104,237 94,630 81,100
Less unearned income - - 10 35 186
------------- -------------------------------------------------------
Loans-net of unearned income $144,467 $ 125,995 $ 104,227 $ 94,595 $ 80,914
============= =======================================================
</TABLE>
- --------------------------------------------
(1) This category generally consists of commercial and industrial loans where
real estate constitutes a source of collateral.
At December 31, 1999, residential real estate (1-4 family) portfolio
loans constituted 42.3% of the total portfolio and increased $5.5 million during
the year. Real estate construction loans consists primarily of pre-sold 1-4
family residential loans along with a marginal amount of commercial
-19-
<PAGE>
construction. Real estate construction increased to $12.2 million at December
31, 1999 and is 8.4% of the total loan portfolio. ICBI's construction product
competes successfully in a high growth market like Loudoun County because ICBI
is local and can respond quickly to inspections and construction draw requests.
Non-farm, non-residential loans are typically owner-occupied commercial
buildings. Non-farm, non-residential loans were 25.2% of the total loan
portfolio at December 31, 1999. The branch network has helped to support the
loan portfolio diversification, such as increased commercial real estate loans.
Loans held for sale, home equity lines and agricultural real estate loans were
0.9%, 3.0% and 0.3% of total loans, respectively, at December 31, 1999.
ICBI's commercial, financial and agricultural loan portfolio consists
of secured and unsecured loans extended to small businesses. At December 31,
1999, these loans comprised 13.2% of the loan portfolio. This portfolio
increased 0.9% in 1999 to $19.1 million. Consumer installment loans primarily
consists of unsecured installment credit and accounts for 6.8% 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 for its lending services encompasses Fauquier and
Loudoun Counties, Virginia, where it operates full service branches.
ICBI's unfunded loan commitments totaled $26.7 million at December 31,
1999 and $17.1 million at December 31, 1998. The increase in the amount of
unfunded commitments is attributed in part to the increase in real estate
construction financing as well as customer demand for line of credit type of
products (i.e., home equity lines).
At December 31, 1999, 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 ICBI's market, loan collateral is predominantly real estate related.
The following table reflects the maturity distribution of selected loan
categories:
Remaining Maturities of Selected Loan Categories
December 31, 1999
----------------------------------------
Commercial, Real
Financial and Estate
Agricultural Construction
----------------------------------------
(Dollars in thousands)
Within 1 year $ 8,324 $ 8,869
----------------------------------------
Variable Rate:
1 to 5 years 664 73
After 5 years 1,073 -
----------------------------------------
Total $ 1,737 $ 73
----------------------------------------
Fixed Rate:
1 to 5 years 8,482 2,511
After 5 years 512 698
----------------------------------------
Total $ 8,994 $ 3,209
----------------------------------------
Total Maturities $ 19,055 $ 12,151
========================================
-20-
<PAGE>
Asset Quality
ICBI has policy and procedures designed to control credit risk and to
maintain the quality of its loan portfolio. These policy and procedures include
underwriting standards for new originations and ongoing monitoring and reporting
of asset quality and adequacy of reserve for loan losses. Total nonperforming
assets, which consist of nonaccrual, restructured loans and foreclosed property,
were $531,000 at December 31, 1999. This amount represents a decrease of 13.0%
from the December 31, 1998 balance of $609,000. Nonperforming assets at December
31, 1998 increased $366,000 from $243,000 at December 31, 1997. Total
nonperforming assets as a percentage of total loans were .4% at December 31,
1999. The decrease in nonperforming assets for 1999 was the result of the sale
of 1998 foreclosures in 1999.
Nonperforming Assets
Loans are placed on nonaccrual status when collection of principal and
interest is doubtful, generally when a loan becomes 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 that 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 write down 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 the 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 write downs of the property value are charged directly to
operations.
Nonperforming Assets
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 530 $ 409 $ 243 $ 76 $ 1,654
Restructured loans - - - - -
Foreclosed property - 200 - - -
------------ ------------- ------------- ------------- -------------
Total nonperforming assets $ 530 $ 609 $ 243 $ 76 $ 1,654
============ ============= ============= ============= =============
Allowance for loan losses
to period end loans 1.01% 0.84% 0.93% 0.93% 1.07%
Allowance for loan losses
to nonperforming assets 274% 175% 401% 1163% 52%
Nonperforming assets to
period end loans 0.37% 0.48% 0.23% 0.08% 2.04%
</TABLE>
-21-
<PAGE>
During 1999 and 1998, approximately $12,000 and $4,000, respectively,
in 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, 1999, potential problem loans totaled $531,000. These
loans are subject to regular management attention and their status is reviewed
on a regular basis. Several of the potential problem loans at December 31, 1999
are unsecured consumer loans. However, real estate and other collateral secure
most of the balance of the problem loans.
The allowance for loan losses was 274% of nonperforming loans at
December 31, 1999. At December 31, 1998 and 1997, the allowance for loan losses
was 175% and 401% of nonperforming loans. Management evaluates nonperforming
loans relative to their collateral value and makes appropriate reductions in the
carrying value of those loans based on that review.
Allowance For Loan Losses
The allowance for loan losses is an estimate of the amount that will be
adequate to provide for potential future losses in ICBI's loan portfolio.
Management's methodology in evaluating the adequacy of the allowance for loan
losses considers potential specific losses, past loan loss experience, and the
volume, growth and composition of the current portfolio. General economic trends
as well as any conditions affecting individual borrowers may also 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 Loan Committee and Board of Directors take an active role in the
monthly review of any problem loans and their effect 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 has experienced considerable loan growth in 1999,
1998 and 1997, the credit quality of the portfolio has improved since 1995, as
evidenced by a low level of nonperforming assets and net charge-offs during
those years.
-22-
<PAGE>
The following table depicts the transactions, in summary form, which
occurred to the allowance for loan losses in each year presented:
Allowance for Loan Losses
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $ 1,064 $ 974 $ 884 $ 866 $ 940
Loans charged off:
Commercial, financial, and
agricultural 26 8 42 6 13
Real estate construction - - - - -
Real estate mortgage 29 - - 79 115
Consumer installment 96 77 86 40 83
------------ -------------------------- --------------------------
Total loans charged off $ 151 $ 85 $ 128 $ 125 $ 211
------------ -------------------------- --------------------------
Recoveries:
Commercial, financial, and
agricultural $ 7 $ 1 $ 12 $ 5 $ 43
Real estate construction - - - - -
Real estate mortgage 79 6 7 26 4
Consumer installment 34 33 21 47 35
------------ -------------------------- --------------------------
Total recoveries $ 120 $ 40 $ 40 $ 78 $ 82
------------ -------------------------- --------------------------
Net charge offs (recoveries) 31 45 88 47 129
Provision for loan losses 420 135 178 65 55
------------ -------------------------- --------------------------
Balance, end of period $ 1,453 $ 1,064 $ 974 $ 884 $ 866
============ ========================== ==========================
Ratio of allowance for loan losses
to loans outstanding at end of period 1.01% 0.84% 0.93% 0.93% 1.07%
Ratio of net charge offs (recoveries)to
average loans outstanding during
period 0.02% 0.04% 0.09% 0.05% 0.16%
</TABLE>
The allowance for loan losses was $1.5 million at December 31, 1999, an
increase of $389,000 from $1.1 million at December 31, 1998. The allowance was
$974,000 at December 31, 1997. In 1999, ICBI's net charge-offs decreased $14,000
from the previous year's net charge-offs of $45,000. ICBI experienced higher
consumer loan charge-offs during 1999, which were offset by a large recovery in
real estate mortgages. Net charge-offs as a percentage of average loans were
0.02% and 0.04% for 1999 and 1998, respectively. The provision for loan losses
was $420,000 for 1999 and $135,000 for 1998.
-23-
<PAGE>
The following table shows the balance and percentage of the ICBI'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
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> <C>
December 31,
1999 $ 580 13.19% $ 350 8.41% $ 178 71.58% $ 345 6.82%
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%
</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
ICBI manages its investment securities portfolio consistent with
established policies, which include guidelines for earnings, rate sensitivity,
liquidity and pledging needs. ICBI holds bonds issued from the Commonwealth of
Virginia and its political subdivisions with an aggregate book value of $3.9
million and an aggregate market value of $3.8 million at December 31, 1999. At
December 31, 1998, ICBI held the bonds issued by the Commonwealth of Virginia
and its political subdivision, which had an aggregate book value of $3.3 million
and market value of $3.4 million. In both years the aggregate holdings of these
bonds exceeded 10% of ICBI's shareholders' equity.
ICBI accounts for securities under Financial Accounting Standards Board
("FASB") Statement No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." This standard requires classification of investments into
three categories, "held to maturity" ("HTM"), "available for sale" ("AFS"), or
"trading," as further defined in Note 1 to the Company's Consolidated Financial
Statements. ICBI does not maintain a trading account and has classified no
securities in this category. HTM securities are required to be carried on the
financial statements at amortized cost. AFS securities are carried on the
financial statements at fair value. The unrealized gains or losses, net of
deferred income taxes, are reflected in shareholders' equity. The HTM
classification places restrictions on ICBI's ability to sell securities or to
transfer securities into the AFS classification. Since ICBI want the flexibility
to respond to changing balance sheet needs through investment portfolio
management, it has chosen to classify only a small portion of its portfolio in
this category. At December 31, 1999, 11.5% of the portfolio was classified as
HTM.
-24-
<PAGE>
FASB Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities", requires companies to record derivatives on the balance
sheet as assets and liabilities, measured at fair market 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. However this statement also allowed, upon adoption, a one time
re-allocation of securities from HTM to AFS without penalty to the company. In
December 1999, ICBI adopted FASB Statement No. 133 and elected to transfer
certain municipal securities with a book value and market value of $3.1 million
from the HTM classification to the AFS classification.
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 securities 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.
The carrying value of the securities portfolio was $67.7 million at
December 31, 1999, an increase of $9.9 million or 17.1% from the carrying value
of $57.8 million at December 31, 1998. During 1999, excess deposit growth over
loan growth was invested within the securities portfolio to maximize interest
income. The market value of the AFS securities at December 31, 1999 was $59.9
million. The unrealized loss on the AFS securities was $3.0 million and offset
slightly by an unrealized gain of $14,000 at December 31, 1999. The net market
value loss at December 31, 1999 is reflective of the increase in interest rates
in comparison to the rates on the securities held within the portfolio. The
unrealized gain on the AFS securities was $272,000 at December 31, 1998.
Investment Securities Portfolio
The carrying value of securities held to maturity at the dates indicated were:
<TABLE>
<CAPTION>
-------------------------------------------
December 31,
1999 1998 1997
-------------------------------------------
(In thousands)
<S> <C> <C> <C>
U.S. Government securities $ 250 $ 502 $ 2,006
State and political subdivision obligations 7,433 12,182 13,849
Mortgage-backed securities 112 162 571
----------------------------- -------------
$ 7,795 $ 12,846 $ 16,426
============================= =============
</TABLE>
The carrying value of securities available for sale at the dates indicated were:
<TABLE>
<CAPTION>
-------------------------------------------
December 31,
1999 1998 1997
-------------------------------------------
(In thousands)
<S> <C> <C> <C>
U.S. Government securities $ 4,824 $ 2,678 $ 2,464
State and political subdivision obligations 22,261 18,189 12,136
Mortgage-backed securities 26,789 20,878 29,579
Other securities 6,070 3,195 3,091
-------------------------------------------
$ 59,944 $ 44,940 $ 47,270
===========================================
</TABLE>
-25-
<PAGE>
The following table indicates the increased favorable return
experienced by ICBI with the lengthening of the maturity of the investment
securities portfolio. Securities with maturities greater than five years total
$40.4 million and have an average yield greater than 7.0%. The securities
portfolio is managed first for proper matching with interest rate risk
guidelines and secondarily for investment performance.
Maturity Distribution and Yields of Investment Securities
December 31, 1999
Taxable-Equivalent Basis
<TABLE>
<CAPTION>
Due in 1 year Due after 1 Due after 5 Due after 10 years
year years
or less through 5 years through 10 years and Equities Total
-------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities held for investment:
U.S. Government securities $ - - $ - - $ - - $ 250 7.00% $ 250 7.00%
Mortgage backed securities 5 6.83% 14 7.43% 15 7.53% 78 7.52% 112 7.48%
---------- --------- ---------- ----------- ----------
Total taxable $ 5 6.83% $ 14 7.43% $ 15 7.53% $ 328 7.52% $ 362 7.15%
Tax-exempt securities (1) 822 7.10% 3,358 7.45% 3,153 7.77% 100 7.20% 7,433 7.54%
---------- --------- ---------- ----------- ----------
Total $ 827 7.10% $ 3,372 7.45% $ 3,168 7.77% $ 428 7.45% $ 7,795 7.53%
---------- --------- ---------- ----------- ----------
Securities available for sale (2):
U.S. Government securities $ 192 5.61% $ 2,579 6.52% $ 1,413 7.09% $ 640 6.66% $ 4,824 6.67%
Mortgage backed securities 3,101 6.28% 10,578 6.60% 6,111 6.56% 6,999 5.45% 26,789 6.25%
Other - - 2,893 7.44% 434 7.01% 460 6.77% 3,787 7.31%
Corporate preferred - - - - - - 2,603 8.66% 2,603 8.66%
---------- --------- ---------- ----------- ----------
Total taxable $ 3,293 5.75% $16,050 6.19% $ 7,958 6.01% $ 10,702 7.29% $ 38,003 6.58%
Tax-exempt securities (1) - - 2,875 6.70% 5,448 7.18% 12,703 7.39% 21,026 7.24%
---------- --------- ---------- ----------- ----------
Total $ 3,293 5.75% $18,925 6.27% $ 13,406 6.49% $ 23,405 7.34% $ 59,029 6.81%
---------- --------- ---------- ----------- ----------
Total securities $ 4,120 5.94% $22,297 6.42% $ 16,574 7.01% $ 23,833 7.15% $ 66,824 6.90%
========== ========= ========== =========== ==========
</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 $780,500
Other Earning Assets
ICBI's average investments in federal funds sold and money market
investments in 1999 were $6.0 million and $1.9 million, an increase of $2.2
million and $67,000, respectively. Average investments in federal funds sold and
money market investments in 1998 were $3.8 million and $1.8 million,
respectively. Fluctuations in federal funds sold and money market investments
reflect excess deposit growth over loan growth as well as management's goal to
maximize asset yields while maintaining proper asset/liability structure.
Deposits
Deposits continue to be an important funding source and primary supply
of ICBI's growth. ICBI's strategy has been to increase its core deposits at the
same time controlling its cost of funds. The continued maturation of the branch
network as well as the increased advertising campaigns have contributed to the
significant growth in deposits over the last several years. By monitoring
interest rates
-26-
<PAGE>
within the local market and then pricing the deposits within the range of the
local market, ICBI has developed a core base of deposits in each branch.
The following table is a summary of average deposits and average rates
paid on those deposits:
Average Deposits and Rates Paid
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1999 1998 1997
Amount Rate Amount Rate Amount Rate
--------------------- ----------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing deposits $ 39,154 - $ 29,782 - $ 24,025 -
Interest-bearing accounts:
Interest checking 29,583 0.99% 23,853 1.28% 19,886 1.81%
Regular savings 19,000 3.00% 17,075 3.53% 15,631 3.69%
Money market accounts 41,701 2.73% 34,195 2.93% 30,071 2.94%
Time deposits:
$ 100,000 and over 21,965 4.98% 18,151 5.23% 16,480 5.68%
Under $ 100,000 35,707 4.77% 38,557 5.30% 40,100 5.31%
------------- ------------- -------------
Total interest-bearing deposits 147,956 3.24% 131,831 3.72% 122,168 4.00%
------------- ------------- -------------
Total $187,110 $161,613 $146,193
============= ============= =============
</TABLE>
Average total deposits increased 15.8% during 1999, 10.5% during 1998
and 14.5% during 1997. During 1999, the average balance of non-interest bearing
deposits grew 31.5%. The average balance in interest checking and money market
accounts grew 24.0% and 21.9% during 1999.
ICBI will continue to fund assets primarily with deposits and will
focus on core deposit growth as the primary source of liquidity and stability.
ICBI offers individuals and small to medium-sized businesses a variety of
deposit accounts, including demand and interest checking, money market, savings
and time deposit accounts. ICBI neither purchases brokered deposits nor solicits
deposits from sources outside its primary market area.
The following table is a summary of the maturity distribution of
certificates of deposit equal to or greater than $100,000 as of December 31,
1999:
Maturities of Certificates of Deposit of $100,000 and Greater
<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, 1999 $9,347 $8,012 $6,613 $2,682 $26,654 13.1%
</TABLE>
-27-
<PAGE>
Capital Resources and Dividends
ICBI has an ongoing strategic objective of maintaining a capital base,
which supports the pursuit of profitable business opportunities, provides
resources to absorb risks inherent in its activities and meets or exceeds all
regulatory requirements.
The Federal Reserve, along with the FDIC, has established minimum
regulatory capital standards. The regulatory capital guidelines categorize
assets and off-balance sheet items into four categories, which weight balance
sheet assets according to risk, 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 14.8% at December 31, 1999 compared to 17.9% at December 31, 1998. The ratio
of risk-weighted assets to Tier 1 capital was 14.0% and 17.1% at December 31,
1999 and 1998, respectively. Both ratios exceed the minimum capital requirements
adopted by the federal bank regulatory agencies.
Analysis of Capital
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1999 1998
---------------- -----------------
<S> <C> <C>
Tier 1 Capital:
Common stock $ 8,895 $ 8,895
Capital surplus 1,293 1,293
Retained earnings 14,852 12,496
Goodwill (1,060) (1,121)
---------------- -----------------
Total Tier 1 capital $ 23,980 $ 21,563
Tier 2 Capital:
Allowance for loan losses 1,453 1,063
---------------- -----------------
Total Tier 2 capital 1,453 1,063
Total risk-based capital $ 25,433 $ 22,626
================ =================
Risk weighted assets $ 171,324 $ 126,398
CAPITAL RATIOS:
Tier 1 risk-based capital ratio 14.0% 17.1%
Total risk-based capital ratio 14.8% 17.9%
Tier 1 capital to average total assets 10.8% 11.2%
</TABLE>
ICBI's equity to asset ratio decreased to 9.5% at December 31, 1999
compared to 11.1% at December 31, 1998. The equity to asset ratio for December
31, 1997 was 11.7%. The growth that ICBI experienced, as well as the market
value decline of the investment securities portfolio, reduced this ratio in
1999.
The primary source of funds for dividends paid by ICBI to its
shareholders is the dividends received from its subsidiaries. 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>
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 loans 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 that 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. The Bank maintains federal funds lines with large
regional and money-center banking institutions. These available lines total in
excess of $8 million, none of which were outstanding at December 31, 1999.
Federal funds purchased during 1999 averaged $179,000 compared to an average of
$146,000 during 1998. At December 31, 1999 and 1998, the Bank had $10.8 million
and $2.5 million, respectively, of outstanding borrowings pursuant to securities
sold under agreement to repurchase transactions, with maturities of one day. The
Bank has a credit line in the amount of $38 million at the Federal Home Loan
Bank of Atlanta. This line may be utilized for both short- and long-term
borrowing.
The Bank 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 1999, 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, 1999, 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 58.0 % of total
deposits and liabilities.
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
There are no recent accounting pronouncements that will have an effect
on ICBI.
-29-
<PAGE>
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, 1999 and 1998
Consolidated Statements of Income for the Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997
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"
in the Company's Proxy Statement for the 2000 Annual Meeting of Shareholders is
incorporated herein by reference.
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" in the Company's Proxy Statement
for the 2000 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" in the Company's Proxy Statement for the
2000 Annual Meeting of Shareholders is incorporated herein by reference.
-30-
<PAGE>
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" in the Company's
Proxy Statement for the 2000 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 the Company (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 the Company, 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 the Company and Joseph L. Boling, attached as
Exhibit 10.1 to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1998,
incorporated herein by reference.
10.2 Independent Community Bankshares, Inc. 1997 Stock
Option Plan, as amended, attached as Exhibit 4.3 to
the Registration Statement on Form S-8, Registration
No. 333-93447, filed with the Commission on December
22, 1999, incorporated herein by reference.
10.3 Agreement and Plan of Reorganization dated as of
August 9, 1999, between GPIA, the Company and
Tredegar, attached as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-QSB for the period ended
September 30, 1999 (the "Form 10-QSB"), incorporated
herein by reference.
10.4 Shareholder Agreement dated as of August 9, 1999,
between Robert C. Gilkison, James H. Patterson, the
Company and GPIA, attached as Exhibit 10.2 to the
Form 10-QSB, incorporated herein by reference.
10.5 Stock Purchase Agreement dated as of August 9, 1999,
between Robert C. Gilkison, James H. Patterson and
the Company, attached as Exhibit 10.3 to the Form
10-QSB, incorporated herein by reference.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule (filed electronically only).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company
during the last quarter of the period covered by this report.
-31-
<PAGE>
INDEPENDENT COMMUNITY BANKSHARES, INC.
Middleburg, Virginia
FINANCIAL REPORT
DECEMBER 31, 1999
<PAGE>
C O N T E N T S
Page
INDEPENDENT AUDITOR'S REPORT ON THE
CONSOLIDATED FINANCIAL STATEMENTS 1
FINANCIAL STATEMENTS
Consolidated balance sheets 2
Consolidated statements of income 3
Consolidated statements of changes in shareholders' equity 4
Consolidated statements of cash flows 5 and 6
Notes to consolidated financial statements 7-30
<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, 1999
and 1998, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for the years ended December 31, 1999, 1998
and 1997. 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, 1999
and 1998, and the results of their operations and their cash flows for the years
ended December 31, 1999, 1998 and 1997, in conformity with generally accepted
accounting principles.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
January 21, 2000
1
<PAGE>
INDEPENDENT COMMUNITY BANKSHARES, INC.
Consolidated Balance Sheets
December 31, 1999 and 1998
(In Thousands, Except for Share Data)
<TABLE>
<CAPTION>
Assets 1999 1998
<S> <C> <C>
Cash and due from banks $ 8,037 $ 8,161
Interest-bearing deposits in banks 87 109
Temporary investments:
Federal funds sold 12,139 1,421
Other money market investments 293 3,122
Securities (fair value: 1999, $ 67,745;
1998, $58,159) 67,739 57,786
Loans, net of allowance for loan losses of $1,453 in 1999
and $1,064 in 1998 141,782 120,259
Loans held for sale 1,232 4,672
Bank premises and equipment, net 6,285 5,853
Accrued interest receivable and other assets 6,331 3,820
Other real estate -- 200
Total assets $ 243,925 $ 205,403
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest-bearing demand deposits $ 44,900 $ 36,883
Savings and interest-bearing demand deposits 97,208 80,427
Time deposits 61,729 55,370
Total deposits $ 203,837 $ 172,680
Securities sold under agreements to repurchase 10,811 2,530
Federal Home Loan Bank advances -- 1,000
Long-term debt 5,000 5,000
Accrued interest and other liabilities 1,202 1,330
Commitments and contingent liabilities -- --
Total liabilities $ 220,850 $ 182,540
Shareholders' Equity
Common stock, par value $5 per share, authorized
10,000,000 shares; issued 1999, 1,778,994 shares;
issued 1998, 1,778,994 shares; $ 8,895 $ 8,895
Capital surplus 1,293 1,293
Retained earnings 14,852 12,496
Accumulated other comprehensive income (loss) (1,965) 179
Total shareholders' equity $ 23,075 $ 22,863
Total liabilities and shareholders' equity $ 243,925 $ 205,403
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
INDEPENDENT COMMUNITY BANKSHARES, INC.
Consolidated Statements of Income
Years Ended December 31, 1999, 1998 and 1997
(In Thousands, Except for Per Share Data)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Interest Income
Interest and fees on loans $11,694 $10,205 $ 8,973
Interest and dividends on investment securities:
Taxable interest income 36 70 121
Interest income exempt from federal income taxes 536 618 686
Interest and dividends on securities available for sale:
Taxable interest income 1,731 1,616 2,293
Interest income exempt from federal income taxes 893 717 151
Dividends 243 252 281
Interest on deposits in banks 1 7 8
Interest on federal funds sold 290 211 159
Interest on other money market investments 98 89 13
------- ------- -------
Total interest income $15,522 $13,785 $12,685
------- ------- -------
Interest Expense
Interest on deposits $ 4,798 $ 4,903 $ 4,886
Interest on short-term borrowings 263 134 134
Interest on Federal Home Loan Bank advances 3 70 172
Interest on long-term debt 281 206 --
------- ------- -------
Total interest expense $ 5,345 $ 5,313 $ 5,192
------- ------- -------
Net interest income $10,177 $ 8,472 $ 7,493
Provision for loan losses 420 135 178
------- ------- -------
Net interest income after provision
for loan losses $ 9,757 $ 8,337 $ 7,315
------- ------- -------
Other Income
Service charges, commissions and fees $ 1,076 $ 91 $ 781
Trust fee income 1,148 855 339
Fees on loans held for sale 561 241 --
(Losses) on securities available for sale, net (13) (18) (93)
Other 174 175 122
------- ------- -------
Total other income $ 2,946 $ 2,169 $ 1,149
------- ------- -------
Other Expenses
Salaries and employees' benefits $ 4,547 $ 3,839 $ 2,864
Net occupancy and equipment expense 1,013 772 593
Advertising 325 234 146
Computer operations 310 247 138
Other operating expenses 1,845 1,582 1,230
------- ------- -------
Total other expenses $ 8,040 $ 6,674 $ 4,971
------- ------- -------
Income before income taxes $ 4,663 $ 3,832 $ 3,493
Income tax expense $ 1,097 $ 857 $ 862
------- ------- -------
Net income $ 3,566 $ 2,975 $ 2,631
------- ------- -------
Earnings per Share, basic $ 2.0 $ 1.6 $ 1.51
======= ======= =======
Earnings per Share, diluted $ 1.9 $ 1.6 $ 1.51
======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
INDEPENDENT COMMUNITY BANKSHARES, INC.
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 1999, 1998 and 1997
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Accumulated
Other
Compre- Compre-
Common Capital Retained hensive hensive
Stock Surplus Earnings Income (Loss) Income Total
----- ------- -------- ------------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 4,299 $ 1,411 $ 12,817 $ (519) $ 18,008
Comprehensive income:
Net income - 1997 -- -- 2,631 -- $ 2,631 2,631
Other comprehensive income net of tax:
Unrealized holding gains arising during the
period (net of tax, $134) -- -- -- -- 259 --
Reclassification adjustment (net of tax, $31) -- -- -- -- 61 --
--------
Other comprehensive income (net of tax, $165) -- -- -- 320 $ 320 320
--------
Total comprehensive income -- -- -- -- $ 2,951 --
========
Cash dividends - 1997 ($0.32 per share) -- -- (574) -- (574)
Purchase of common stock (22,600 shares) (113) (522) -- -- (635)
Issuance of common stock - stock split effected
in the form of 100% stock dividend (906,200 shares) 4,531 (4,531) -- -- --
Issuance of common stock in acquisition of
subsidiary (69,200 shares) 346 1,590 -- -- 1,936
Discretionary transfer from retained earnings -- 4,000 (4,000) -- --
------- ------- -------- ------- --------
Balance, December 31, 1997 $ 9,063 $ 1,948 $ 10,874 $ (199) $ 21,686
Comprehensive income:
Net income - 1998 -- -- 2,975 -- $ 2,975 2,975
Other comprehensive income net of tax:
Unrealized holding gains arising during the
period (net of tax, $189) -- -- -- -- 366 --
Reclassification adjustment (net of tax, $6) -- -- -- -- 12 --
--------
Other comprehensive income (net of tax, $195) -- -- -- 378 $ 378 378
--------
Total comprehensive income -- -- -- -- $ 3,353 --
========
Cash dividends - 1998 ($0.75 per share) -- -- (1,353) -- (1,353)
Purchase of common stock (33,600 shares) (168) (655) -- -- (823)
------- ------- -------- ------- --------
Balance, December 31, 1998 $ 8,895 $ 1,293 $ 12,496 $ 179 $ 22,863
Comprehensive income:
Net income - 1999 -- -- 3,566 -- $ 3,566 3,566
Other comprehensive income net of tax:
Unrealized holding losses arising during the
period (net of tax, $1,100) -- -- -- -- (2,153) --
Reclassification adjustment (net of tax, $4) -- -- -- -- 9 --
--------
Other comprehensive income (net of tax, $1,104) -- -- -- (2,144) $ (2,144) (2,144)
--------
Total comprehensive income -- -- -- -- $ 1,422 --
========
Cash dividends - 1999 ($0.68 per share) -- -- (1,210) -- (1,210)
------- ------- -------- ------- --------
Balance, December 31, 1999 $ 8,895 $ 1,293 $ 14,852 $(1,965) $ 23,075
======= ======= ======== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
INDEPENDENT COMMUNITY BANKSHARES, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
(In Thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 3,566 $ 2,975 $ 2,631
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 605 514 397
Amortization 60 79 42
Provision for loan losses 420 135 178
Net loss on securities available for sale 13 18 93
Net (gain) loss on sale of assets (5) -- 7
Net loss on the sale of other real estate 5 -- --
Discount accretion and premium amortization
on securities, net 64 194 180
Deferred income taxes (benefit) (186) (16) (20)
Origination of loans held for sale 0,744) (11,948) --
Proceeds from sales of loans held for sale 4,184 7,276 --
Changes in assets and liabilities:
(Increase) in other assets (1,372) (125) (669)
Increase (decrease) in other liabilities (71) 113 57
-------- -------- --------
Net cash provided by (used in)
operating activities $ 6,539 $ (785) $ 2,896
-------- -------- --------
Cash Flows from Investing Activities
Proceeds from maturity, principal paydowns
and calls of investment securities $ 1,905 $ 3,496 $ 2,748
Proceeds from maturity, principal paydowns
and calls of securities available for sale 5,300 9,164 2,743
Proceeds from sale of investment securities 850 -- --
Proceeds from sale of securities
available for sale 1,988 9,887 26,501
Purchase of investment securities -- -- (1,849)
Purchase of securities available for sale (22,473) (16,276) (40,572)
Proceeds from sale of equipment 131 -- 36
Purchases of bank premises and equipment (1,164) (839) (1,221)
Net (increase) in loans (21,942) (17,341) (9,720)
Proceeds from the sale of other real estate 195 -- --
Cash acquired in acquisition -- -- 171
-------- -------- --------
Net cash (used in)
investing activities $(36,060) $(11,909) $(21,163)
-------- -------- --------
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
INDEPENDENT COMMUNITY BANKSHARES, INC.
Consolidated Statements of Cash Flows
(Continued)
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Financing Activities
Net increase in noninterest-bearing and interest-
bearing demand deposits and savings accounts $ 24,798 $ 18,005 $ 11,628
Net increase (decrease) in certificates of deposit 6,359 (1,880) 6,136
Increase (decrease) in securities sold under agreements
to repurchase 8,282 (518) 1,604
Proceeds from long-term debt -- 5,000 --
Decrease in short-term borrowings (1,000) (1,800) (1,200)
Purchase of common stock -- (823) (635)
Cash dividends paid (1,175) (1,086) (575)
-------- -------- --------
Net cash provided by
financing activities $ 37,264 $ 16,898 $ 16,958
-------- -------- --------
Increase (decrease) in cash and
cash equivalents $ 7,743 $ 4,204 $ (1,310)
Cash and Cash Equivalents
Beginning 12,813 8,609 9,919
-------- -------- --------
Ending $ 20,556 $ 12,813 $ 8,609
======== ======== ========
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors $ 5,073 $ 5,040 $ 4,823
Interest paid on short-term obligations 10 9 132
Interest paid on Federal Home Loan
Bank advances 276 235 176
-------- -------- --------
$ 5,359 $ 5,284 $ 5,131
-------- -------- --------
Income taxes $ 1,287 $ 835 $ 849
======== ======== ========
Supplemental Disclosure of Noncash Transactions
Issuance of common stock - stock split effected in
the form of 100% stock dividend $ - - $ - - $ 4,531
======== ======== ========
Issuance of common stock in acquisition of subsidiary $ - - $ - - $ 1,936
======== ======== ========
Unrealized gain (loss) on securities available for sale $ (3,248) $ 573 $ 486
======== ======== ========
Loan balances transferred to foreclosed properties $ - - $ 200 $ - -
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
INDEPENDENT COMMUNITY BANKSHARES, INC.
Notes to Consolidated Financial Statements
Note 1. Nature of Banking Activities and Significant Accounting Policies
Independent Community Bankshares' banking subsidiary, The
Middleburg Bank, 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 accounted for as follows:
a. Securities Held to Maturity
Securities classified as held to maturity are those
debt securities the Company has both the intent and
ability to hold to maturity regardless of changes in
market conditions, liquidity needs or changes in
general economic conditions. These securities are
carried at cost adjusted for amortization of premium
and accretion of discount, computed by the interest
method over their contractual lives.
b. Securities Available for Sale
Securities classified as available for sale are those
debt and equity securities that the Company intends
to hold for an indefinite period of time, but not
necessarily to maturity. Any decision to sell a
security classified as available for sale would be
based on various factors, including significant
movements in interest rates, changes in the maturity
mix of the Company's assets and liabilities,
liquidity needs, regulatory capital considerations,
and other similar factors. Securities available for
sale are carried at fair value. Unrealized gains or
losses are reported as increases or decreases in
shareholders' equity, net of the related deferred tax
effect. Realized gains or losses, determined on the
basis of the cost of specific securities sold, are
included in earnings.
7
<PAGE>
Notes to Consolidated Financial Statements
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.
Loans
The Company grants mortgage, commercial and consumer loans
to customers. A substantial portion of the loan portfolio
is represented by mortgage loans throughout Loudoun County
and Fauquier County, Virginia. The ability of the
Company's debtors to honor their contracts is dependent
upon the real estate and general economic conditions in
this area.
Loans that management has the intent and ability to hold
for the foreseeable future or until maturity or pay-off
generally are reported at their outstanding unpaid
principal balances less the allowance for loan losses.
Interest income is accrued on the unpaid principal
balance.
The accrual of interest on mortgage and commercial loans
is discontinued at the time loan is 90 days delinquent
unless the credit is well-secured and in process of
collection. Personal loans are typically charged off no
later than 180 days past due. In all cases, loans are
placed on nonaccrual or charged-off at an earlier date if
collection of principal or interest is considered
doubtful.
All interest accrued but not collected for loans that are
placed on nonaccrual or charged off is reversed against
interest income. The interest on these loans is accounted
for on the cash-basis or cost-recovery method, until
qualifying for return to accrual. Loans are returned to
accrual status when all the principal and interest amounts
contractually due are brought current and future payments
are reasonably assured.
Allowance for Loan Losses
The allowance for loan losses is established as losses are
estimated to have occurred through a provision for loan
losses charged to earnings. Loan losses are charged
against the allowance when management believes the
uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the
allowance.
The allowance for loan losses is evaluated on a regular
basis by management and is based upon management's
periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of
the loan portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic conditions.
This evaluation is inherently subjective, as it requires
estimates that are susceptible to significant revision as
more information becomes available.
A loan is considered impaired when, based on current
information and events, it is probable that the Company
will be unable to collect the scheduled payments of
principal or interest when due according to the
contractual terms of the loan agreement. Factors
considered by management in determining impairment include
payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays
and payment shortfalls generally are not classified as
impaired. Management determines the significance of
payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the
borrower's prior payment record, and the amount of the
shortfall in relation to the principal and interest
8
<PAGE>
Notes to Consolidated Financial Statements
owed Impairment is measured on a loan by loan basis for
commercial and construction loans by either the present
value of expected future cash flows discounted at the
loan's effective interest rate, the loan's obtainable
market price, or the fair value of the collateral if the
loan is collateral dependent.
Large groups of smaller balance homogeneous loans are
collectively evaluated for impairment. Accordingly, the
Company does not separately identify individual consumer
and residential loans for impairment disclosures.
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.
Loan Fees and Costs
Loan origination and commitment fees and direct loan costs
are being recognized as collected and incurred. The use of
this method of recognition does not product results that
are materially different from results which would have
been produced if such costs and fees were deferred and
amortized as an adjustment of the loan yield over the life
of the related loan.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less
accumulated depreciation. Depreciation of property and
equipment is computed principally on the straight-line
method over the following estimated useful lives:
Years
-----
Buildings and improvements 31.5-39
Furniture and equipment 3-10
Maintenance and repairs of property and equipment are
charged to operations and major improvements are
capitalized. Upon retirement, sale or other disposition of
property and equipment, the cost and accumulated
depreciation are eliminated from the accounts and gain or
loss is included in operations.
Other Real Estate
Real estate acquired by foreclosure is carried at the
lower of cost or fair market value less an allowance for
estimated selling expenses on the future disposition of
the property.
Goodwill
Goodwill is amortized using the straight-line method over
20 years.
9
<PAGE>
Notes to Consolidated Financial Statements
Income Taxes
Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible
temporary differences, operating loss carryforwards, and
tax credit carryforwards. Deferred tax liabilities are
recognized for taxable temporary differences. Temporary
differences are the differences between the reported
amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
Earnings Per Share
Basic earnings per share represents income available to
common stockholders divided by the weighted-average number
of common shares outstanding during the period. Diluted
earnings per share reflects additional common shares that
would have been outstanding if dilutive potential common
shares had been issued, as well as any adjustment to
income that would result from the assumed issuance.
Potential common shares that may be issued by the Company
relate solely to outstanding stock options, and are
determined using the treasury stock method.
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. Material
estimates that are particularly susceptible to significant
change in the near term relate to the determination of the
allowance for loan losses and deferred taxes.
Advertising Costs
The Company follows the policy of charging the costs of
advertising to expense as incurred.
Comprehensive Income
The Company adopted SFAS 130, Reporting Comprehensive
Income, as of January 1, 1998. Accounting principles
generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized
gains and losses on available-for-sale securities, are
reported as a separate component of the equity section of
the balance sheet, such items, along with net income are
components of comprehensive income. The adoption of SFAS
130 had no effect on the Company's net income or
shareholders' equity.
10
<PAGE>
Notes to Consolidated Financial Statements
Derivative Financial Instruments
As of October 1, 1999, the Company adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
Statement 133 establishes accounting and reporting standards for
derivative financial instruments and other financial instruments
and for hedging activities. As permitted under SFAS No. 133, the
Company transferred securities held to maturity with a book value
of $3,114,000 and a market value of $3,117,000 to securities
available for sale as of October 1, 1999. The Corporation does
not have any derivative instruments and hedging activities as
defined under this statement.
Note 2. Securities
Amortized costs and fair values of securities being held to
maturity as of December 31, 1999 and 1998 are summarized as
follows:
11
<PAGE>
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---- ----- -------- -----
1999
-----------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 250 $ -- $ (25) $ 225
Obligations of states and
political subdivisions 7,433 40 (8) 7,465
Mortgage-backed securities 112 -- (1) 111
------- ------- ------- -------
$ 7,795 $ 40 $ (34) $ 7,801
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---- ----- -------- -----
1998
-----------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 502 $ 3 $ -- $ 505
Obligations of states and
political subdivisions 12,182 372 -- 12,554
Mortgage-backed securities 162 -- (2) 160
------- ------- ------- -------
$12,846 $ 375 $ (2) $13,219
======= ======= ======= =======
</TABLE>
12
<PAGE>
Notes to Consolidated Financial Statements
The amortized cost and fair value of securities being held to
maturity as of December 31, 1999 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.
Amortized Fair
Cost Value
---- -----
(In Thousands)
Due in one year or less $ 822 $ 823
Due after one year through five years 3,358 3,370
Due after five years through 10 years 3,153 3,171
Due after 10 years 350 325
Mortgage-backed securities 112 112
------- -------
$ 7,795 $ 7,801
======= =======
Amortized costs and fair values of securities available for sale
as of December 31, 1999 and 1998, are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---- ----- -------- -----
1999
-----------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 4,958 $ 2 $ (136) $ 4,824
Obligations of states and
political subdivisions 23,721 3 (1,463) 22,261
Mortgage-backed securities 27,730 -- (941) 26,789
Corporate preferred 2,989 9 (395) 2,603
Other 3,514 -- (47) 3,467
-------- -------- -------- --------
$ 62,912 $ 14 $ (2,982) $ 59,944
======== ======== ======== ========
</TABLE>
13
<PAGE>
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---- ----- -------- -----
1998
-----------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 2,668 $ 1 $ - - $ 2,678
Obligations of states and
political subdivisions $ 17,897 $ 371 $ (79) $ 18,189
Mortgage-backed securities 20,928 55 (105) 20,878
Corporate preferred 2,405 33 (13) 2,425
Other 770 -- -- 770
-------- -------- -------- --------
$ 44,668 $ 469 $ (197) $ 44,940
======== ======== ======== ========
</TABLE>
The amortized cost and fair value of securities available for
sale as of December 31, 1999, 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.
Amortized Fair
Cost Value
---- -----
(In Thousands)
Due in one year or less $ 200 $ 192
Due after one year through five years 5,867 5,800
Due after five years through 10 years 7,628 7,294
Due after 10 years 14,984 13,799
Mortgage-backed securities 27,730 26,789
Corporate preferred 2,989 2,603
Other 3,514 3,467
-------- --------
$ 62,912 $ 59,944
======== ========
Proceeds from sales of securities available for sale during 1999,
1998 and 1997 were $1,988,000, $9,887,000 and $26,501,000,
respectively. Gross gains of $0, $101,567 and $53,384 and gross
losses of $13,000, $119,855 and $145,986 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 $14,814,000 and $8,251,000 at December 31,
1999 and 1998, respectively.
14
<PAGE>
Notes to Consolidated Financial Statements
Note 3. Loans, Net
<TABLE>
<CAPTION>
December 31,
-----------------------------
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Real estate loans:
Construction and land development $ 12,151 $ 5,436
Secured by farmland 379 1,057
Secured by 1-4 family residential 65,444 59,212
Other real estate loans 36,361 28,643
Loans to farmers (except secured by real estate) 1,438 1,489
Commercial and industrial loans (except those
secured by real estate) 17,617 17,391
Loans to individuals for personal expenditures 9,694 8,043
All other loans 151 52
--------- ---------
Total loans $ 143,235 $ 121,323
Less: Allowance for loan losses 1,453 1,064
--------- ---------
Net loans $ 141,782 $ 120,259
========= =========
</TABLE>
Note 4. Allowance for Loan Losses
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Balance, beginning $ 1,064 $ 974 $ 884
Provision charged to operating expense 420 135 177
Recoveries 120 40 40
Loan losses charged to the allowance (151) (85) (127)
-------- --------- ----------
$ 1,453 $ 1,064 $ 974
======== ========= ==========
</TABLE>
Impairment of loans having recorded investments of $67,000 and
$186,000 at December 31, 1999 and 1998 has been recognized in
conformity with FASB Statement No. 114. The average recorded
investment in impaired loans during 1999 and 1998 was $75,000 and
$47,000. The total allowance for loan losses related to these
loans was $67,000 and $66,000 on December 31, 1999 and 1998. No
interest income on impaired loans was recognized in 1999 or 1998.
Nonaccrual loans excluded from impaired loan disclosure under
FASB 114 amounted to $464,000 and $223,000 at December 31, 1999
and 1998, respectively. If interest on these loans had been
accrued, such income would have approximated $12,000 and $4,000
for 1999 and 1998, respectively.
15
<PAGE>
Notes to Consolidated Financial Statements
Note 5. Bank Premises and Equipment, Net
<TABLE>
<CAPTION>
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Land $ 1,516 $ 1,516
Banking facilities 3,894 3,057
Furniture, fixtures and equipment 4,169 3,624
Construction in progress and deposits
on equipment 66 472
-------------- -------------
$ 9,645 $ 8,669
Less accumulated depreciation 3,360 2,816
-------------- -------------
$ 6,285 $ 5,853
============= =============
</TABLE>
Depreciation expense was $605,000, $514,000 and $397,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
Note 6. Deposits
The aggregate amount of jumbo time deposits, each with a minimum
denomination of $100,000, was approximately $26,654,000 and
$18,157,296 in 1999 and 1998, respectively.
At December 31, 1999, the scheduled maturities of time deposits
are as follows:
2000 $ 52,385
2001 6,007
2002 1,953
2003 1,041
2003 and thereafter 343
--------
$ 61,729
========
Note 7. Short-Term Borrowings
As of December 31, 1998, the Company had borrowed $1,000,000 on a
short-term basis from its $38,018,000 line of credit with the
Federal Home Loan Bank of Atlanta. No borrowings were outstanding
at December 31, 1999. The Company has pledged real estate loans
and Federal Home Loan Bank stock as collateral on these
borrowings.
16
<PAGE>
Notes to Consolidated Financial Statements
Note 8. Long-Term Debt
At December 31, 1999 and 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
The Company sponsors a stock option plan, which provides for
granting of both incentive and nonqualified stock options. 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. All options were
granted at fair value at date of grant. 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 1999 and 1998: dividend rate of .22%
and .13%; risk-free interest rates of 6.50% and 4.50%; expected
lives of 10 years; and expected price volatility of 15.97% and
17.40%. Options granted in 1997 are included 1998 calculations
to correspond with shareholder approval of the plan in 1998. 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:
1999 1998
---- ----
Net Income: As Reported $ 3,566 $ 2,975
Pro Forma $ 3,189 $ 2,664
Basic EPS: As Reported $ 2.00 $ 1.65
Pro Forma $ 1.79 $ 1.48
Diluted EPS: As Reported $ 1.99 $ 1.63
Pro Forma $ 1.78 $ 1.46
17
<PAGE>
Notes to Consolidated Financial Statements
Options outstanding at December 31, 1999 and 1998 are summarized
as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------- ------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at
beginning of year 86,000 $ 19.46 - - $ - -
Granted 37,825 $ 24.70 86,000 $ 19.46
Exercised - - - - - - - -
Forfeited (2,000) $ 17.00 - - - -
------- ------
Outstanding at end
of year 121,825 $ 21.13 86,000 $ 19.46
======= ======
Weighted average
fair value of options
granted during the
year $ 11.53 $ 7.76
</TABLE>
As of December 31, 1999, options outstanding and exercisable are
summarized as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- -------------------------
Weighted Weighted Weighted
Range of Remaining Average Average
Exercise Shares Contractual Exercise Shares Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
$ 17.00 52,000 7.9 $ 17.00 46,100 $ 17.00
$ 27.00 1,000 8.3 $ 27.00 1,000 $ 27.00
$ 23.50 31,000 9.0 $ 23.50 18,228 $ 23.50
$ 24.50 6,825 9.7 $ 24.50 6,825 $ 24.50
$ 24.75 31,000 10.0 $ 24.75 10,528 $ 24.75
---------- ----------
121,825 8.8 $ 21.13 82,681 $ 19.69
========== ==========
</TABLE>
18
<PAGE>
Notes to Consolidated Financial Statements
Note 11. Employee Benefit Plans
The Company has a trustee 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:
1999 1998 1997
---- ---- ----
(In Thousands)
Change in Benefit Obligation
Benefit obligation, beginning of year $ 1,766 $ 1,747 $ 1,426
Service cost 180 126 120
Interest cost 132 148 121
Actuarial loss (62) 508 242
Benefits paid (14) (763) (162)
------- ------- -------
Benefit obligation, end of year $ 2,002 $ 1,766 $ 1,747
======= ======= =======
Change in Plan Assets
Fair value of plan assets, beginning of year $ 1,382 $ 1,841 $ 1,480
Actual return on plan assets 194 (17) 345
Employer contributions 189 324 178
Benefits paid (14) (763) (162)
------- ------- -------
Fair value of plan assets, ending $ 1,751 $ 1,385 $ 1,841
======= ======= =======
Funded status $ (251) $ (384) $ 94
Unrecognized net actual loss 648 825 125
Unrecognized net obligation at transition (36) (40) (43)
Unrecognized prior service cost 167 183 200
------- ------- -------
Prepaid benefit cost included in other assets $ 528 $ 584 $ 376
======= ======= =======
Components of Net Periodic
Benefit Cost
Service cost $ 180 $ 126 $ 103
Interest cost 132 148 134
Expected return on plan assets (111) (175) (164)
Amortization of prior service cost 17 17 17
Amortization of net obligation
at transition (4) (4) (4)
Recognized net actuarial loss 32 -- --
------- ------- -------
Net periodic benefit cost $ 246 $ 112 $ 86
======= ======= =======
Weighted-Average Assumptions
as of December 31
Discount rate 7.50% 7.50% 8.50%
Expected return on plan assets 9.00% 9.00% 9.50%
Rate of compensation increase 5.00% 5.00% 6.00%
19
<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
1999, 1998 and 1997, based on the present value of the
retirement benefits, was $19,036, $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 assets (liabilities) consist of the following
components as of December 31, 1999 and 1998:
The provision for income taxes charged to operations for the
years ended December 31, 1999, 1998 and 1997 consists of the
following:
1999 1998
---- ----
(In Thousands)
Deferred tax assets:
Allowance for loan losses $ 379 $ 247
Deferred compensation 36 30
Interest on nonaccrual loans 5 1
Loss on capital assets 40 38
Other 17 - -
Securities available for sale 1,012 - -
----------------------------
$ 1,489 $ 316
-----------------------------
Deferred tax liabilities:
Property and equipment $ 294 $ 297
Prepaid pension costs 177 200
Securities available for sale - - 92
-----------------------------
$ 471 $ 589
-----------------------------
$ 1,018 $ (273)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Current tax expense $ 1,283 $ 873 $ 882
Deferred tax expense (benefit) (186) (16) (20)
------------- ----------- ----------
$ 1,097 $ 857 $ 862
============= =========== ==========
</TABLE>
20
<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, 1999, 1998 and 1997, due
to the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Computed "expected" tax expense $ 1,585 $ 1,303 $ 1,188
Increase (decrease) in income taxes
resulting from:
Tax-exempt interest income (486) (410) (285)
Other, net (2) (36) (41)
------------- ------------- -------------
$ 1,097 $ 857 $ 862
============= ============= =============
</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
$3,233,000 and $3,247,000 at December 31, 1999 and 1998,
respectively. During 1999, total principal additions were
$707,000 and total principal payments were $721,000.
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,
1999 and 1998, the aggregate amounts of daily average required
reserves were approximately $25,000 and $1,207,000, respectively.
21
<PAGE>
Notes to Consolidated Financial Statements
Note 15. Earnings Per Share
The following shows the weighted average number of shares used in
computing earnings per share and the effect on weighted average
number of shares of diluted potential common stock. Potential
dilutive common stock has no effect on income available to common
stockholders.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Per Per Per
Share Share Share
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS 1,779,000 $ 2.00 1,803,000 $ 1.65 1,741,000 $ 1.51
Effect of dilutive
securities:
Stock options 16,000 18,000 - -
--------- --------- ---------
Diluted EPS 1,795,000 $ 1.99 1,821,000 $ 1.63 1,741,000 $ 1.51
========= ========= ========= ========= ========= =========
</TABLE>
In 1999, stock options representing 37,825 shares were not
included in the calculation of earnings per share because they
would have been antidilutive.
Note 16. Retained Earnings
Transfers of funds from the banking subsidiary to the Parent
Company in the form of loans, advances and cash dividends are
restricted by federal and state regulatory authorities. As of
December 31, 1999, the aggregate amount of unrestricted funds
which could be transferred from the Company's subsidiaries to the
Parent Company, without prior regulatory approval, totaled
$3,460,000 or 15.0% 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.
22
<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, 1999 and
1998, is as follows:
1999 1998
---- ----
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 26,725,000 $ 17,060,000
Standby letters of credit 1,328,000 1,162,000
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.
Unfunded commitments under lines of credit are commitments for
possible future extensions of credit to existing customers. Those
lines of credit may not be drawn upon to the total extent to
which the Company is committed.
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, 1999,
varies from 0 percent to 100 percent; the average amount
collateralized is 12.3 percent.
The Company has approximately $3,713,000 in deposits in financial
institutions in excess of amounts insured by the Federal Deposit
Insurance Corporation (FDIC) at December 31, 1999.
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.
Securities
For securities held for investment purposes, fair values are
based on quoted market prices or dealer quotes.
23
<PAGE>
Notes to Consolidated Financial Statements
Loans Held for Sale
Fair values of loans held for sale are based on commitments on
hand from investors or prevailing market prices.
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.
Accrued Interest
The carrying amounts of accrued interest approximate fair
values.
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, 1999 and 1998, the carrying amounts and fair
values of loan commitments and standby letters of credit were
immaterial
24
<PAGE>
The estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 20,556 $ 20,556 $ 12,813 $ 12,813
Securities 67,739 67,745 57,786 58,159
Loans held for sale 1,232 1,230 4,672 4,672
Loans 141,782 141,436 120,259 122,342
Accrued interest receivable 1,310 1,310 1,155 1,155
Financial liabilities:
Deposits $203,837 $204,009 $172,680 $173,008
Securities sold under agreements
to repurchase 10,811 10,811 2,530 2,530
Federal Home Loan Bank advances -- -- 1,000 1,008
Long-term debt 5,000 4,805 5,000 5,000
Accrued interest payable 500 500 519 519
</TABLE>
Note 19. Capital Requirements
The Company and the Bank are 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 and Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Company and the Bank must meet
specific capital guidelines that involve quantitative measures of
the Company's and the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also
subject to qualitative judgments by the regulators about
components, risk weightings, and other factors. Prompt corrective
action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank 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, 1999,
that the Company and the Bank meet all capital adequacy
requirements to which it is subject.
As of December 31 1999, the most recent notification from the
Federal Reserve Bank categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To
be categorized as well capitalized, an institution 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.
25
<PAGE>
The Company's and the Bank's actual capital amounts and ratios
are also presented in the table.
<TABLE>
<CAPTION>
Minimum
To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirement Action Provisions
Amount Ratio Amount Ratio Amount Ratio
-------------------------- ---------------------------- ----------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital (to Risk
Weighted Assets):
Consolidated $ 25,433 14.8% =>$ 13,706 => 8.0% N/A
The Middleburg Bank $ 18,531 11.9% =>$ 13,393 => 8.0% =>$ 16,741 => 10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $ 23,980 14.0% =>$ 6,853 => 4.0% N/A
The Middleburg Bank $ 18,531 11.1% =>$ 6,696 => 4.0% =>$ 10,044 => 6.0%
Tier 1 Capital (to
Average Assets):
Consolidated $ 23,980 10.8% =>$ 8,907 => 4.0% N/A
The Middleburg Bank $ 18,531 8.6% =>$ 8,645 => 4.0% =>$ 10,807 => 5.0%
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%
</TABLE>
26
<PAGE>
Note 20. Proposed Acquisition
On August 9, 1999, the Company purchased one percent of the
issued and outstanding capital stock of Gilkison Patterson
Investment Advisors, Inc. ("GPIA"), an investment advisory firm
based in Alexandria, Virginia. In addition, the Company acquired
the right to purchase all of the remaining authorized, issued
and outstanding shares of GPIA capital stock on or after July 1,
2001. The consideration for the shares and the merger option
consisted of $2.26 million in cash and other non-stock
consideration. Upon exercise of the merger option, the Company
will purchase all the remaining issued and outstanding shares of
GPIA capital stock for an additional $3.8 million in cash and
shares of the Company's common stock, and GPIA will be merged
into the Company's wholly-owned subsidiary, the Tredegar Trust
Company.
27
<PAGE>
Notes to Consolidated Financial Statements
Note 21. Condensed Financial Information - Parent Corporation Only
INDEPENDENT COMMUNITY BANKSHARES, INC.
(Parent Corporation Only)
Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
Assets 1999 1998
(In Thousands)
<S> <C> <C>
Cash on deposit with subsidiary bank $ 2 $ 1
Money market fund 24 1,394
Securities available for sale 2,205 2,426
Investment in subsidiaries, at cost, plus
equity in undistributed net income 17,962 18,088
Note receivable 1,000 --
Goodwill 1,060 1,121
Other assets 1,602 65
-------- --------
Total assets $ 23,855 $ 23,095
======== ========
Liabilities and Shareholders' Equity
Liabilities
Other liabilities $ 780 $ 232
-------- --------
Shareholders' Equity
Common stock $ 8,895 $ 8,895
Capital surplus 1,293 1,293
Retained earnings 14,852 12,496
Accumulated other comprehensive income (loss) (1,965) 179
-------- --------
Total shareholders' equity $ 23,075 $ 22,863
-------- --------
Total liabilities and shareholders' equity $ 23,855 $ 23,095
======== ========
</TABLE>
28
<PAGE>
Notes to Consolidated Financial Statements
INDEPENDENT COMMUNITY BANKSHARES, INC.
(Parent Corporation Only)
Statements of Income
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Income
Dividends from subsidiary $ 1,865 $ 2,586 $ 1,201
Dividends from investments 178 197 225
Interest on money market 48 33 13
Interest from note receivable 32 -- --
Management fees 40 -- --
(Losses) on securities available
for sale, net (5) (29) $ (84)
--------- ---------- -----------
Total income $ 2,158 $ 2,787 $ 1,355
------- ---------- -----------
Expenses
Salaries and employee benefits $ 132 $ - $ --
Amortization 60 80 42
Legal and professional fees 42 32 21
Printing and supplies 42 23 17
Directors fees 34 -- --
Interest expense on loan from subsidiary 17 -- --
Other 27 73 1
------- ---------- -----------
Total expenses $ 354 $ 208 $ 81
------- ---------- -----------
Income before allocated tax benefits and
undistributed income of subsidiaries $ 1,804 $ 2,579 $ 1,274
Income tax expense (benefit) (20) (16) (19)
------- ---------- -----------
Income before equity in undistributed
income of subsidiaries $ 1,824 $ 2,595 $ 1,293
Equity in undistributed income of subsidiaries 1,742 380 1,338
------- ---------- -----------
Net income $ 3,566 $ 2,975 $ 2,631
======= ========== ===========
</TABLE>
29
<PAGE>
Notes to Consolidated Financial Statements
INDEPENDENT COMMUNITY BANKSHARES, INC.
(Parent Corporation Only)
Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 3,566 $ 2,975 $ 2,631
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 60 79 42
Undistributed earnings of subsidiaries (1,742) (380) (1,338)
Loss on sale of securities available for sale 5 29 83
(Increase) decrease in other assets (1,433) (20) (40)
Decrease in other liabilities 48 (37) --
------- ------- -------
Net cash provided by
operating activities $ 504 $ 2,646 $ 1,378
------- ------- -------
Cash Flows from Investing Activities
Purchase of securities available for sale $ (399) $(1,275) $(1,335)
Proceeds from sale of securities available
for sale 201 1,218 1,908
Increase in note receivable (1,000)
Purchase of intangibles -- -- (175)
------- ------- -------
Net cash provided by (used in)
investing activities $(1,198) $ (57) $ 398
------- ------- -------
Cash Flows from Financing Activities
Purchase of common stock $ -- $ (823) $ (635)
Net proceeds from sale of common stock 500 -- --
Cash dividends paid (1,175) (1,086) (574)
------- ------- -------
Net cash (used in)
financing activities $ (675) $(1,909) $(1,209)
------- ------- -------
Increase in cash and
cash equivalents $(1,369) $ 680 $ 567
Cash and Cash Equivalents
Beginning 1,395 715 148
------- ------- -------
Ending $ 26 $ 1,395 $ 715
======= ======= =======
</TABLE>
30
<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 15, 2000 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 15, 2000
- ------------------------------------------- Officer and Director
Joseph L. Boling (Principal Executive Officer)
/s/ Alice P. Frazier Senior Vice President and Chief Financial March 15, 2000
- ------------------------------------------- Officer (Principal Financial and
Alice P. Frazier Accounting Officer)
/s/ Howard M. Armfield Director
- ------------------------------------------- March 15, 2000
Howard M. Armfield
/s/ Childs Frick Burden Director March 15, 2000
- -------------------------------------------
Childs Frick Burden
/s/ J. Lynn Cornwell, Jr. Director March 15, 2000
- -------------------------------------------
J. Lynn Cornwell, Jr.
/s/ William F. Curtis Director March 15, 2000
- -------------------------------------------
William F. Curtis
<PAGE>
/s/ F.E. Deacon III Director March 15, 2000
- -------------------------------------------
F.E. Deacon III
/s/ Robert C. Gilkison Director March 15, 2000
- -------------------------------------------
Robert C. Gilkison
/s/ C. Oliver Iselin, III Director March 15, 2000
- -------------------------------------------
C. Oliver Iselin, III
/s/ William S. Leach Director March 15, 2000
- -------------------------------------------
William S. Leach
/s/ Thomas W. Nalls Director March 15, 2000
- -------------------------------------------
Thomas W. Nalls
Director March 15, 2000
- -------------------------------------------
John C. Palmer
Director March 15, 2000
- -------------------------------------------
John Sherman
/s/ Millicent W. West Director March 15, 2000
- -------------------------------------------
Millicent W. West
/s/ Edward T. Wright Director March 15, 2000
- -------------------------------------------
Edward T. Wright
</TABLE>
<PAGE>
INDEX TO EXHIBITS
Number Document
3.1 Articles of Incorporation of Independent Community Bankshares, Inc.
(the "Company")(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 the Company, 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 the Company
and Joseph L. Boling, attached as Exhibit 10.1 to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1998,
incorporated herein by reference.
10.2 Independent Community Bankshares, Inc. 1997 Stock Option Plan, as
amended, attached as Exhibit 4.3 to the Registration Statement on Form
S-8, Registration No. 333-93447, filed with the Commission on December
22, 1999, incorporated herein by reference.
10.3 Agreement and Plan of Reorganization dated as of August 9, 1999,
between Gilkison Patterson Investment Advisors, Inc. ("GPIA"), the
Company and The Tredegar Trust Company, attached as Exhibit 10.1
to the Company's Quarterly Report on Form 10-QSB for the period ended
September 30, 1999 (the "Form 10-QSB"), incorporated herein by
reference.
10.4 Shareholder Agreement dated as of August 9, 1999, between Robert C.
Gilkison, James H. Patterson, the Company and GPIA, attached as
Exhibit 10.2 to the Form 10-QSB, incorporated herein by reference.
10.5 Stock Purchase Agreement dated as of August 9, 1999, between Robert C.
Gilkison, James H. Patterson and the Company, attached as Exhibit 10.3
to the Form 10-QSB, incorporated herein by reference.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule (filed electronically only).
Exhibit 21
Subsidiaries of Independent Community Bankshares, Inc.
------------------------------------------------------
Name of Subsidiary State of Incorporation
------------------ ----------------------
The Middleburg Bank Virginia
- Middleburg Bank Service Corporation Virginia
The Tredegar Trust Company Virginia
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 8037
<INT-BEARING-DEPOSITS> 87
<FED-FUNDS-SOLD> 12139
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 59944
<INVESTMENTS-CARRYING> 7795
<INVESTMENTS-MARKET> 7801
<LOANS> 144467
<ALLOWANCE> 1453
<TOTAL-ASSETS> 243925
<DEPOSITS> 203837
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0
0
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</TABLE>
