-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HJmmt73RbAKzwDk6sHFXIaUoyQ0p5RfKMOZrsQYmXtU7dxQBbFCeGTf/m3MWUXYy 7VUh2O8f05X0WkfHrmfgMw== 0001002105-98-000044.txt : 19980401 0001002105-98-000044.hdr.sgml : 19980401 ACCESSION NUMBER: 0001002105-98-000044 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: INDEPENDENT COMMUNITY BANKSHARES INC CENTRAL INDEX KEY: 0000914138 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 541696103 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 033-70920 FILM NUMBER: 98584021 BUSINESS ADDRESS: STREET 1: 111 W WASHINGTON ST STREET 2: C/O MIDDLEBURG BANK CITY: MIDDLEBURG STATE: VA ZIP: 22117 BUSINESS PHONE: 5406876377 MAIL ADDRESS: STREET 1: 111 WEST WASHINGTON STREET STREET 2: C/O MIDDLEBURG BANK CITY: MIDDLEBURG STATE: VA ZIP: 22117 10KSB 1 10KSB FILED BY INDEPENDENT COMMUNITY BANKSHARES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 Commission file number 033-70920 INDEPENDENT COMMUNITY BANKSHARES, INC. (Name of Small Business Issuer in its Charter) Virginia 54-1696103 (State or Other Jurisdiction (I.R.S. Employer of Incorporation) Identification No.) 111 West Washington Street 20117 Middleburg, Virginia (Zip Code) (Address of Principal Executive Offices) (540) 687-6377 (Issuer's Telephone Number, Including Area Code) Securities registered under Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ------------------- --------------------- None n/a Securities registered under Section 12(g) of the Act: None (Title of Class) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes _X_ No ___ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] The issuer's gross income for its most recent fiscal year was $138,341. The aggregate market value of the voting stock held by non-affiliates computed by reference to the average bid and asked prices of such stock as of March 30, 1998 was approximately $28,822,535. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.) The number of outstanding shares of Common Stock as of March 30, 1998 was 1,812,594. TABLE OF CONTENTS PART I Page ITEM 1. DESCRIPTION OF BUSINESS........................................... 3 ITEM 2. DESCRIPTION OF PROPERTY........................................... 4 ITEM 3. LEGAL PROCEEDINGS................................................. 5 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................. 5 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................................. 5 ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION................... 6 ITEM 7. FINANCIAL STATEMENTS............................................. 25 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.............. 26 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT........................... 26 ITEM 10. EXECUTIVE COMPENSATION........................................... 27 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................... 30 ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 31 ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K........................... 31 -2- Part I ITEM 1. DESCRIPTION OF BUSINESS General Independent Community Bankshares, Inc. ("ICBI" or the "Company") is a bank holding company that was incorporated under the laws of the Commonwealth of Virginia in 1993. The Company owns all of the stock of its subsidiaries, The Middleburg Bank (the "Bank"), an independent commercial bank, and The Tredegar Trust Company ("Tredegar"), an independent trust company, both of which are chartered under the laws of Commonwealth of Virginia. The Bank has three branches. The Bank has its main office at 111 West Washington Street, Middleburg, Virginia 20117, and has branch offices in Purcellville and Leesburg, Virginia. The Bank opened for business on July 1, 1924. Tredegar has its main office at Riverfront Plaza, 901 E. Byrd Street, Suite 190, Richmond, Virginia 23219, and a branch office in Middleburg, Virginia. Tredegar opened for business in January 1994. The local community that is served by the Bank is defined as Western Loudoun County. Loudoun County is in Northwestern Virginia and included in the Washington-Baltimore Metropolitan statistical area, the fourth largest market in the United States. Loudoun County's population is approximately 120,000 with slightly over one-third of the population located in the markets served by the Bank and Tredegar. The local economy is driven by service industries requiring a higher skill level, self-employed individuals, the equine industry and the independently wealthy. Tredegar serves primarily the greater Richmond area including the counties of Henrico, Chesterfield, Hanover, Goochland and Powhatan as well as Loudoun County. However, Tredegar does have customers outside of its primary market. Richmond is the state capital of Virginia and is home to over 20 Fortune 500 Companies. The greater Richmond area has a population in excess of 750,000 people. The Company, through its subsidiaries, offers a wide range of banking, fiduciary and investment management services available to both individuals and small businesses. The banking services include various types of checking and savings deposit accounts, and the making of business, real estate, development, mortgage, home equity, automobile and other installment, demand and term loans. Also, the Bank offers ATM's at all locations, travelers' checks, money orders, safe deposit rentals, collections, notary public, wire services and other traditional bank services to its customers. Tredegar provides a variety of investment management and fiduciary services including trust and estate settlement. Tredegar can also serve as escrow agent, attorney-in-fact, guardian of property or trustee of an IRA. The Bank has one wholly owned subsidiary, Middleburg Bank Service Corporation, which is incorporated under the laws of the Commonwealth of Virginia. Middleburg Bank Service Corporation is a partner in a limited liability company, Bankers Title Shenandoah, LLC, which sells title insurance to its members. As of December 31, 1997, ICBI had a total of 62 full time equivalent employees. The Company considers relations with its employees to be excellent. The Company's employees are not represented by a collective bargaining unit. -3- Competition ICBI faces significant competition both in making loans and in attracting deposits. Competition for loans comes from commercial banks, savings and loan associations and savings banks, mortgage banking subsidiaries of regional commercial banks, subsidiaries of national mortgage bankers, insurance companies, and other institutional lenders. Its most direct competition for deposits has historically come from savings and loan associations and savings banks, commercial banks, credit unions and other financial institutions. Based upon total assets at June 30, 1996, ICBI is the second largest banking organization operating in Loudoun County, Virginia. ICBI may face an increase in competition, as a result of the continuing reduction in the restrictions on the interstate operations of financial institutions. ICBI also faces competition for deposits from short-term money market mutual funds and other corporate and government securities funds. Tredegar competes for customers and accounts with banks and other financial institutions. Even though many of these institutions have been engaged in the trust or investment management business for a considerably longer period of time than Tredegar and have significantly greater resources, Tredegar has grown through its commitment to quality trust services and a local community approach to business. The Company and its subsidiaries are subject to regulation and examination by the Federal Reserve Bank and the State Corporation Commission. The Company is also under the jurisdiction of the Securities and Exchange Commission and certain state securities commissions with respect to matters relating to the offer and sale of its securities. In addition, the Bank is subject to regulation and examination by the Federal Deposit Insurance Corporation. ITEM 2. DESCRIPTION OF PROPERTY The headquarters building of the Company and the Bank, which also serves as a branch office for Tredegar was completed in 1981 and is a two-story building of brick construction, with approximately 18,000 square feet of floor space located at 111 West Washington Street, Middleburg, Virginia 20117. The office operates nine teller windows, including three drive-up facilities and one stand-alone automatic teller machine. The Bank owns the headquarters building. The Purcellville Bank branch was purchased in 1994 and is a one-story building with a basement of brick construction, with approximately 3,000 square feet of floor space located at 431 East Main Street, Purcellville, Virginia 20132. The office operates four teller windows, including one drive-up facility and one stand-alone automatic teller machine. The Bank owns this branch building. The Leesburg Bank branch was completed in 1997 and is a two-story building with a basement of brick construction, with approximately 6,000 square feet of floor space located at 102 Catoctin Circle, S.E., Leesburg, Virginia 20175. The office operates five teller windows, including three drive-up facilities and one drive-up automatic teller machine. The Bank also owns this branch building. Tredegar has leased its main office in Richmond, Virginia. Rental expense for this location totaled $20,000 for the five months included in the fiscal year ending December 31, 1997. All of the Company's properties are in good operating condition and are adequate for the Company's present and anticipated future needs. -4- ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the company is a party or of which the property of the Company subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders of the Company. Part II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Since October 1997, the Company's Common Stock has traded on the OTC Bulletin Board under the symbol "ICBX". Prior to October 1997, the Common Stock was neither listed on any stock exchange nor quoted on the Nasdaq Stock Market and trades infrequently. During that time, the Common Stock had periodically been sold in a limited number of privately negotiated transactions. The prices set forth below do not necessarily reflect the price that would be paid in an active and liquid market. Market Price and Dividends Sales Price Dividends High Low 1996: 1st quarter................. 14.00 14.00 .09 2nd quarter................. 14.00 14.00 .11 3rd quarter................. 14.50 14.00 .11 4th quarter................. 14.00 14.00 .11 1997: 1st quarter................. 14.00 14.00 .09 2nd quarter................. 14.50 14.00 .11 3rd quarter................. 16.00 15.50 .12 4th quarter................. 22.00 16.75 .12 ________________ (1) All prices and dividends are adjusted for a two-for-one stock split as of November 24, 1997. (2) Beginning with the first quarter of 1997, ICBI began paying dividends for the respective quarter immediately following the end of that quarter. ICBI historically has paid cash dividends on a quarterly basis. The final determination of the timing, amount and payment of dividends on the Common Stock is at the discretion of ICBI's Board of Directors and will depend upon the earnings of ICBI and its subsidiaries, principally, its subsidiary bank, the financial condition of ICBI and other factors, including general economic conditions and applicable -5- governmental regulations and policies. ICBI or the Bank has paid regular cash dividends for over 200 consecutive quarters. As of December 31, 1997, ICBI had 483 shareholders of record. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following discussion provides information about the major components of the results of operations and financial condition, liquidity and capital resources of ICBI. This discussion and analysis should be read in conjunction with the "Selected Financial Information" and the Consolidated Financial Statements and Notes to Consolidated Financial Statements. On August 1, 1997, ICBI completed its acquisition of The Tredegar Trust Company ("Tredegar"), an independent trust company headquartered in Richmond, Virginia. Management believes that the acquisition of Tredegar will enhance among other things, ICBI's noninterest income. Noninterest income for the year ended December 31, 1996. Trust fees increased $310,000 from the 1996 balance. This is a result of the acquisition of Tredegar, which provided $292,000 of such fees. The acquisition of Tredegar is a key part of ICBI's strategy to increase noninterest income. The acquisition was accounted for using the purchase method of accounting. Overview ICBI's performance for 1997 showed improvement over the previous year. Continued high quality asset growth, an improved net interest margin and management efficiencies contributed to net income of $2,631,305 for 1997, compared to $2,030,946 in 1996 and $1,706,494 in 1995. Return on average assets continued to increase during 1997 to 1.52% compared to 1.35% and 1.26% for 1996 and 1995, respectively. Return on average equity also increased during 1997 to 13.54%, up from 11.83% for 1996 and 9.72% for 1995. Net interest margin increased during 1997 to 4.98% on a tax-equivalent basis. Net interest margin for 1996 and 1995 was 4.90% and 4.84%, respectively. Net interest margin and net interest income are influenced by fluctuations in market rates and changes in both the volume and mix of average earning assets and the liabilities that fund those assets. Loan demand was relatively strong during each of the three years (1995 - 1997). The average cost of funds remained somewhat flat during the same three year period beginning with 4.06% in 1995, rising to 4.16% in 1996 and declining in 1997 to 4.05%. The average yield on earning assets increased from 8.11% in 1995 to 8.23% in 1996 but experienced a slight decline of 2 basis points to 8.21% in 1997. Loans, net of unearned income, were $104.2 million at December 31, 1997. This is a 10.15% growth over the 1996 balance of $94.6 million. Loans, net of unearned income increased 16.93% in 1996 to $94.6 million from $80.9 million in 1995. ICBI's investment portfolio continues to grow as excess deposits over loans are placed in high-quality securities. At December 31, 1997, ICBI's securities portfolio represented 37.90% of average earning assets and had increased by 22.40% over the level at December 31, 1996. Total securities were $63.7 million in 1997, $52.4 million in 1996 and $48.2 million in 1995. -6- ICBI's efficiency ratio, a measure of its performance based upon the relationship between non-interest expense and income less securities gains, compares favorably to other Virginia financial institutions. ICBI's efficiency ratio for 1997, 1996 and 1995 was 53.70%, 59.50% and 59.00%, respectively. A lower percentage of the efficiency ratio represents greater control of non-interest related costs. A fluctuation in the efficiency ratio can be attributed to relative changes in both non-interest income and net interest income. ICBI is not aware of any current recommendations by any regulatory authorities which, if they were implemented, would have a material effect on the registrant's liquidity, capital resources, or results of operations. Net Interest Income Net interest income represents the principal source of earnings for ICBI. Net interest income equals the amount by which interest income exceeds interest expense. Changes in the volume and mix of interest earning assets and interest bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income. Net interest income was $7.5 million in 1997, up 15.40% over the $6.5 million reported for the same period in 1996 and up 12.07% over the $5.8 million reported for 1995. Net interest income in 1997 was affected primarily by growth in both the securities and loan portfolios and secondarily affected by a strategy to restructure a portion of the securities portfolio out of government agencies to municipals to maximize yield without increasing risk. Loans grew $9.6 million in 1997, providing $843,000 in additional interest income. Investment securities grew $11.3 million to $63.7 million at December 31, 1997. The growth in securities from 1996 to 1997 provided $820,000 in additional net interest income. In 1997, interest bearing deposits provided a majority of the source of funds by increasing to $129.9 million, up $14.4 million (12.50%) from $115.5 million in 1996. Interest bearing deposits increased $11.9 million in 1996 from $103.6 million in 1995 to $115.5 million in 1996. The growth in deposits was a result of the recent addition of two de nova branches as well as offering attractive market rates coupled with customers' desire to place their deposits in a locally managed, high performing and well capitalized financial corporation. Management anticipates growth in net interest income, loans and deposits to remain strong in 1998. Net interest income for 1996 was $6.5 million, compared to $5.8 million in 1995. Like 1997, net interest income was affected by growth in the loan and securities portfolios. Loans grew $13.7 million to $94.6 million in 1996, providing $872,000 in additional interest income. Investment securities grew $4.1 million to $52.4 million at December 31, 1996, providing $452,000 of additional interest income. While deposits grew $11.9 million in 1996 to $115.5 million, the interest expense grew by only $400,000. The Average Balances, Income and Expenses, Yields and Rates table depicts interest income on earning assets and related average yields as well as interest expense on interest bearing liabilities and related average rates paid for the periods indicated. Loans placed on nonaccrual status are included in the balances and were included in the computations of yields, upon which they had no material effect. The average balances used for the purposes of this table and other statistical calculation disclosures are calculated using daily average balances. -7- Average Balances, Income and Expenses, Yields and Rates
Years Ended December 31, --------------------------------------------------------------------------------------- 1997 1996 1995 --------------------------- ----------------------------- --------- --------- -------- Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate --------- --------- -------- --------- --------- -------- --------- --------- -------- (Dollars in thousands) Assets : Securities: Taxable $41,242 $2,469 5.99% $34,550 $2,023 5.86% $30,953 $1,832 5.92% Tax-exempt (1) (2) 19,721 1,574 7.98% 15,238 1,200 7.87% 12,452 939 7.54% --------- -------- -------- ------- -------- -------- Total Securities 60,963 4,043 6.63% 49,788 3,223 6.47% 43,405 2,771 6.38% Loans Taxable 96,179 8,956 9.31% 87,358 8,137 9.31% 79,639 7,265 9.12% Tax-exempt 376 24 6.38% - - - - --------- -------- -------- ------- -------- -------- Total Loans 96,555 8,980 9.30% 87,358 8,137 9.31% 79,639 7,265 9.12% Federal Funds Sold 2,928 160 5.46% 2,431 130 5.35% 2,470 138 5.59% Interest on Money Market investments 365 13 3.56% 125 5 4.00% - - - Interest Bearing Deposits in other financial institutions 84 8 9.52% 15 1 6.67% - - - --------- -------- -------- ------- -------- -------- Total earning assets 160,895 13,204 8.21% 139,717 11,496 8.23% 125,514 10,174 8.11% Less: allowances for credit Losses (952) (894) (931) Total nonearning assets 12,730 10,340 9,345 --------- -------- -------- Total assets $172,673 $149,163 $133,928 ========= ======== ======== Liabilities (1): Interest-bearing deposits: Checking $19,886 360 1.81% $18,348 $390 2.13% $17,919 $436 2.43% Regular savings 15,631 577 3.69% 14,562 561 3.85% 14,003 534 3.81% Money market savings 30,071 883 2.94% 28,735 869 3.02% 26,980 834 3.09% Time deposits: $100,000 and over 16,480 936 5.68% 12,013 738 6.14% 12,523 689 5.50% Under $100,000 40,100 2,130 5.31% 34,760 1,898 5.46% 28,775 1,563 5.43% --------- -------- -------- ------- -------- -------- Total interest-bearing Deposits 122,168 4,886 4.00% 108,418 4,456 4.11% 100,200 4,056 4.05% Federal Home Loan Bank Advances 2,999 172 5.74% 3,188 187 5.87% 514 31 6.03% Securities sold under agreements To repurchase 2,662 119 4.47% 8 - - Federal Funds Purchased 272 15 5.51% 73 4 5.48% 145 9 6.21% --------- -------- -------- ------- -------- -------- Total interest-bearing Liabilities 128,101 5,192 4.05% 111,687 4,647 4.16% 100,859 4,096 4.06% Non-interest bearing liabilities Demand Deposits 24,025 19,211 15,691 Other liabilities 1,112 923 751 Total liabilities 153,238 131,821 117,301 Shareholders' equity 19,435 17,342 16,627 Total liabilities and shareholders' Equity $172,673 $149,163 $133,928 ========= ======== ======== Net interest income $8,012 $6,849 $6,078 ======== ======= ======== Interest rate spread 4.16% 4.07% 4.05% Interest expense as a percent of Average earning assets 3.23% 3.33% 3.26% Net interest margin 4.98% 4.90% 4.84%
- -------------------------- (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. -8- The following table analyzes changes in net interest income attributable to changes in volume of interest-bearing assets and liabilities compared to changes in interest rates. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. Nonaccruing loans are included in average loans outstanding:
Volume and Rate Analysis (Tax equivalent basis) Years Ended December 31, --------------------------------------------------------------- 1997 vs 1996 1996 vs 1995 Increase (Decrease) Due Increase (Decrease) Due to Changes in: to Changes in: ------------------------------- ------------------------------ Volume Rate Total Volume Rate Total Earning Assets: Securities: Taxable $ 400 $ 46 $ 446 $ 209 $ (18) $ 191 Tax-exempt 357 17 374 218 43 261 Loans: Taxable 819 - 819 718 154 872 Tax-exempt 24 - 24 - 24 - - Federal funds sold 28 2 30 (2) (6) (8) Interest on money market investments 8 - 8 5 - 5 Interest bearing deposits in other Financial institutions 6 1 7 1 - 1 ------- ------- ------- ------- ------- ------- Total earning assets $ 1,642 $ 66 $ 1,708 $ 1,149 $ 173 $ 1,322 Interest-Bearing Liabilities: Interest checking $ 38 $ (68) (30) $ 11 (57) (46) Regular savings deposits (21) 16 21 37 6 27 Money market deposits (19) 14 54 (19) 33 35 Time deposits $100,000 and over (103) 31 (72) (26) 75 49 Under $100,000 541 (39) 502 326 9 335 ------- ------- ------- ------- ------- ------- Total interest bearing deposits $ 546 $ (116) $ 430 $ 386 $ 14 $ 400 Federal Home Loan Bank Advances (11) (4) (15) 157 (1) 156 Securities sold under agree- ment to repurchase 119 - 119 - - - Federal Funds Purchased 11 - 11 (4) (1) (5) ------- ------- ------- ------- ------- ------- Total interest bearing Liabilities $ 665 $ (120) $ 545 $ 539 $ 12 $ 551 Change in net interest income $ 977 $ 186 $ 1,163 $ 610 $ 161 $ 771 ======= ======= ======= ======= ======= =======
ICBI's Asset/Liability Committee (ALCO) is responsible for reviewing the Corporation's liquidity requirements and maximizing the Corporation's net interest income consistent with capital requirements, liquidity, interest rate and economic outlooks, competitive factors and customer needs. Liquidity requirements are also reviewed in detail at the banking subsidiary of ICBI and overall asset/liability management is performed at the banking subsidiary level with participation from management of the holding company as well as the non-banking subsidiary. -9- Interest Rate Risk Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change the interest income and expense streams associated with the Company's financial instruments also change thereby impacting net interest income (NII), the primary component of the Company's earnings. ALCO utilizes the results of a detailed and dynamic simulation model to quantify the estimated exposure of NII to sustained interest rate changes. While ALCO routinely monitors simulated NII sensitivity over a rolling two-year horizon, it also utilizes additional tools to monitor potential longer-term interest rate risk. The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all assets and liabilities reflected on the Company's balance sheet. This sensitivity analysis is compared to ALCO policy limits which specify a maximum tolerance level for NII exposure over a one year horizon, assuming no balance sheet growth, given both a 200 basis point (bp) upward and downward shift in interest rates. A parallel and pro rata shift in rates over a 12 month period is assumed. The following reflects the range of the Company's NII sensitivity analysis during the fiscal year 1997 as compared to the 10% Board approved policy limit. Estimated Rate Change NII Sensitivity ----------- --------------- High Low Average ---- --- ------- +200 bp 1.32% .22% .80% -200 bp (2.06%) (.65%) .27% Based on the averages presented in the table above, had the interest rates shifted upwards 200 basis points, then the effect to net interest income of the banking subsidiary could have been an increase of $60,000 for the fiscal year 1997. If interest rates had decreased 200 basis points during fiscal year 1997, then the effect to net interest income of the banking subsidiary could have been an increase of $20,000. The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cashflows, and others. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change. Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to: prepayment/refinancing levels likely deviating from those assumed, the varying impact of interest rate change caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other internal/external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates. -10- Noninterest Income Noninterest income for the year ended December 31, 1997, increased $407,000, or 54.85% from the $742,000 balance at December 31, 1996. Trust fees increased $310,000 from the 1996 balance. This is a result of the acquisition of Tredegar, which provided $292,000 of such fees. Service charges, commissions and fees, the largest single item of noninterest income were $887,000 for 1997, up 31.48% over the comparable period a year ago. The increase in this category for 1997 results mostly from the increase in fees earned by the non-deposit investment sales. 1996 noninterest income increased $48,000, or 6.91% over the December 31, 1995 balance. Other operating income decreased $2,000 from the 1996 balance of $16,000. The 1995 balance of other income reflects the recognition of a $150,000 gain on other real estate sold. Net securities losses were approximately $91,000 in 1997, compared to the $20,000 of securities gains in 1996.
Noninterest Income Years Ended December 31, ------------------------------------------------------- 1997 1996 1995 ----------------- ---------------- ---------------- (Dollars in thousands) Service charges, commissions and fees $ 887 $ 677 $ 651 Trust fee income 339 29 - Other operating income 14 16 166 ----------------- ---------------- ---------------- Noninterest income $ 1,240 $ 722 $ 817 Profits (losses) on securities available for sale, net (93) 22 (123) Securities gains (losses), net 2 (2) - ----------------- ---------------- ---------------- Total noninterest income $ 1,149 $ 742 $ 694 ================= ================ ================
Noninterest Expense Total noninterest expense for the year ended December 31, 1997, increased $588,000, or 13.42% from the December 31, 1996, balance of $4,383,000. This increase was primarily due to a $331,000 or 13.07% increase in salaries and employee benefits resulting from the hiring of additional staff to support the lending efforts at the Company's Middleburg and Leesburg branches. In addition, salaries of Tredegar employees earned subsequent to the acquisition date are reflected in the December 31,1997, salary expense balance. Net occupancy expenses increased $31,000 or 5.52% over the 1996 $562,000 balance. This increase is primarily due to the depreciation expense related to the newly constructed and furnished Leesburg branch building as well as additional expenses for Tredegar's main office in Richmond. The $129,000 increase in occupancy expenses from 1995 to 1996 also relates to the addition of the Company's temporary Leesburg branch site. The advertising expenses decreased $18,000 or 10.98% from the December 31, 1996, balance of $164,000. The Company's December 31, 1997, FDIC insurance increased $15,000 from the $2,000 balance at December 31, 1996. The December 31, 1996, balance had decreased 98.52% or $133,000 form the December 31, 1995, balance. The Company's computer services expense had increased $48,000 or 53.33% during 1997. The increase results mostly from the Company's additional efforts to utilize technology to operate more efficiently. Computer services increased $12,000 during 1996. -11- Noninterest Expense
Years Ended December 31, ------------------------------------------ 1997 1996 1995 ------------- ------------- ------------ (Dollars in thousands) Salaries and employee benefits $ 2,864 $ 2,533 $ 2,163 Net occupancy expense of premises 593 562 433 Advertising 146 164 106 FDIC insurance 17 2 135 Computer services 138 90 78 Other operating expenses 1,213 1,032 1,152 ------------- ------------- ------------ Total $ 4,971 $ 4,293 $ 3,989 ============= ============= ============
Income Taxes Reported income tax expense at December 31, 1997, was $862,000, up from $728,000 in 1996, and $625,000in 1995. The increase in income taxes is attributable to increased taxable earnings at the federal statutory rate of 34%. Note 11 to the Consolidated Financial Statements provides a reconciliation between the amount of income tax expense computed using the federal statutory rate and the Company's actual income tax expense. Also included in Note 11 to the Consolidated Financial Statements is information regarding the principal items giving rise to deferred taxes for the three years ended December 31, 1997. Loan Portfolio Loans, net of unearned income, were $104.2 million at December 31, 1997, up 10.15% from the $94.6 million at December 31, 1996. The Company has experienced continued loan growth from 1993. Loans had increased $13.7 million from 1995 to 1996, $1.2 million from 1994 to 1995, and $8.5 million from 1993 to 1994, an increase of 16.93%, 1.50%, and 11.93%, respectively. At December 31, 1997, real estate residential (1 to 4 family) loans comprised 43.40% of the total loan portfolio. Non-farm, non-residential loans provided 25.0% of total loans at December 31, 1997. Construction real estate loans comprised 3.64% of the total portfolio at that same date. Home equity lines and agricultural loans made up 3.04% and 2.05% of total loans, respectively, at December 31, 1997. The Company's commercial, financial and agricultural loan portfolio consists mostly of secured and unsecured loans extended to small businesses. At December 31, 1997, these loans comprised 14.50% of total loans. The consumer portion of the loan portfolio is comprised of mostly unsecured installment credit. Consistent with its focus on providing community-based financial services, the Company generally does not extend loans outside its principle market area, which encompasses Fauquier and Loudoun Counties, Virginia. The Company's unfunded loan commitments totaled $12.4 million at December 31, 1997, and $6.6 million at December 31, 1996. This increase is attributed to an increase in customer demand. -12- At December 31, 1997, the Company had no concentration of loans in any one industry in excess of 10 percent of its total loan portfolio. However, because of the nature of the Company's market, loan collateral is predominantly real estate related.
Loan Portfolio December 31, ---------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------------------------------------------------------------------- (In thousands) Commercial, financial and agricultural $ 15,111 $ 11,648 $ 10,215 $ 9,064 $ 10,928 Real estate construction 3,798 4,182 1,791 2,432 1,488 Real estate mortgage: Residential (1-4 family) 45,231 41,246 34,490 38,029 33,138 Home equity lines 3,165 2,614 2,188 1,512 1,271 Multifamily - - - 3 6 Non-farm, non-residential (1) 26,054 24,774 21,697 18,271 17,093 Agricultural 2,140 2,105 1,549 1,040 1,098 Consumer installment 8,738 8,061 9,170 9,837 6,773 ----------- --------- ---------- -------- --------- Total loans 104,237 94,630 81,100 80,188 71,795 Less unearned income 10 35 186 481 597 ----------- --------- ---------- -------- --------- Loans-net of unearned income $ 104,227 $ 94,595 $ 80,914 $ 79,707 $ 71,198 ======================================================================
- ---------------------------- (1) This category generally consists of commercial and industrial loans where real estate constitutes a source of collateral. -13- The following table reflects the maturity distribution of selected loans: Remaining Maturities of Selected Loans December 31, 1997 ----------------------------- Commercial, Real Financial and Estate Agricultural Construction (in thousands) Within 1 year $ 6,225 $ 642 ------------- ------------- Variable Rate: 1 to 5 years 234 - After 5 years 764 - ------------- ------------- Total $ 998 $ - ------------- ------------- Fixed Rate: 1 to 5 years 6,638 3156 After 5 years 1,250 - ------------- ------------- Total $ 7,888 $ 3,156 ------------- ------------- Total Maturities $ 15,111 $ 3,798 ============= ============= Asset Quality The allowance for loan losses is an estimate of the amount that will be adequate to provide for potential losses in the Company's loan portfolio. General economic trends as well as any conditions affecting individual borrowers affect the level of loan losses. The allowance is subject to regulatory examinations and determinations as to its adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance in comparison to peer financial institutions identified by the regulatory agencies. The Company's loans are subject to independent review by the Company's external auditors. The Company's Loan Committee and Board of Directors take an active role in the monthly review of the Company's problem credits and their affect on the allowance for loan losses. -14-
Allowance for Loan Losses (In thousands) December 31, -------------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------- ---------- ---------- ---------- ---------- Balance, beginning of period $ 884 $ 866 $ 940 $ 859 $ 853 Loans charged off: Commercial, financial, and agricultural 42 6 13 38 119 Real estate construction - - - - - Real estate mortgage - 79 115 36 99 Consumer installment 86 40 83 142 77 ----------- ---------- ---------- ---------- ---------- Total loans charged off $ 128 $ 125 $ 211 $ 216 $ 295 ----------- ---------- ---------- ---------- ---------- Recoveries: Commercial, financial, and agricultural $ 12 $ 5 $ 43 $ 210 $ 25 Real estate construction - - - - - Real estate mortgage 7 26 4 - - Consumer installment 21 47 35 87 48 ----------- ---------- ---------- ---------- ---------- Total recoveries $ 40 $ 78 $ 82 $ 297 $ 73 ----------- ---------- ---------- ---------- ---------- Net charge offs (recoveries) 88 47 129 (81) 222 Provision for loan losses 178 65 55 - 228 ----------- ---------- ---------- ---------- ---------- Balance, end of period $ 974 $ 884 $ 866 $ 940 $ 859 =========== ========== ========== ========== ========== Ratio of allowance for loan lossess to loans outstanding at end of period 0.93% 0.93% 1.07% 1.18% 1.21% Ratio of net charge offs (recoveries)to Average loans outstanding during period 0.09% 0.05% 0.16% -0.11% 0.32%
Loan classifications for regulatory purposes as loss, doubtful, substandard, or special mention, do not represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources or represent material credits about which management is aware of any information which causes management to have serious doubt as to the ability of such borrowers to comply with the loan repayment terms. The Company's charge offs had increased $41,000 from the previous year's net charge offs of $47,000. The increase experienced results mostly from the increase charge offs of consumer loans. Net charge offs to average loans were 0.09% and 0.05% for 1997 and 1996, respectively. -15- The provision to the allowance for loan losses was $178,000 for 1997. A provision of $65,000 was made in 1996, and one of $55,000 was made for 1995. The ratio of the allowance for loan losses to total loans , net of unearned income, has decreased over the past four years. There was no change in the ratio from 1996 to 1997. The decreases experienced in the ratio in recent years were attributed to the significant loan growth experienced by the Company. The allowance for loan losses was $974,000 at December 31, 1997, an increase of $90,000 from the $884,000 balance at December 31, 1996. The allowance was $866,000 at December 31, 1995. The ratio of allowance for loan losses to nonperforming assets totaled 401% at December 31, 1997, 1163% at December 31, 1996, and 52% at December 31, 1995. Management evaluates nonperforming loans relative to their collateral value and makes appropriate reductions in the carrying value of those loans based on that review. Management believes, based on its review, that the Company has adequate reserves to absorb any necessary future write-down on these loans. The following table shows the balance and percentage of the Company's allowance for loan losses allocated to each major category of loan:
Allocation of Allowance for Loan Losses Commercial, Financial, Real Estate Real Estate And Agricultural Construction Mortgage Consumer ------------------------ -------------------------- ---------------------------- ------------------------- Reserve Percent of Reserve Percent of Reserve Percent of Reserve Percent of For Loan in For Loan in for Loan in for Loan in Credit Category to Credit Category to Credit Category to Credit Category to Losses Total Loans Losses Total Loans Losses Total Loans Losses Total Loans ------ ----------- ------ ----------- ------ ----------- ------ ----------- (In thousands) December 31, 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%
The Company has allocated the allowance according to the amount deemed reasonably necessary to provide for the possibility of losses being incurred within each of the above categories of loans. The allocation of the allowance as shown in the table above should not be interpreted as an indication that loan losses in future years will occur in the same proportions or that the allocation indicates future loan loss trends. Additionally, the portion allocated to each loan category is not the total amount that may be available for the future losses that could occur within such categories since the total allowance is a general allowance applicable to the entire portfolio. Nonperforming Assets Total nonperfroming assets, which consist of nonaccrual and restructured loans and foreclosed property, were $243,000 at December 31, 1997, an increase of $167,000 from the December 31, 1996, balance. Nonperforming assets at December 31, 1995 decreased $963,000 from the $2.6 million balance at December 31, 1994. The increase in nonperforming assets in 1997 resulted from a real estate loan being placed on nonaccrual status during the year. -16-
Nonperforming Assets December 31, ------------------------------------------------------------------------ 1997 1996 1995 1994 1993 ----------- ---------- ----------- ------------ ------------ (In thousands) Nonaccrual loans $ 243 $ 76 $ 1,654 $ 1,700 $ 2,138 Restructured loans - - - - - Foreclosed property - - - 917 960 ----------- ---------- ----------- ------------ ------------ Total nonperforming assets $ 243 $ 76 $ 1,654 $ 2,617 $ 3,098 ======================================================================== Allowance for loan losses to period end loans 0.93% 0.93% 1.07% 1.18% 1.21% Allowance for loan losses to nonperforming assets 401% 1163% 52% 36% 28% Nonperforming assets to Period end loans 0.23% 0.08% 2.04% 3.28% 4.35% Net charge offs to Average loans 0.09% 0.05% 0.16% -0.11% 0.32%
Loans are placed on nonaccrual status when collection of principal and interest is doubtful, generally when loans become 90 days past due. There are three negative implications for earnings when a loan is placed on nonaccrual status. All interest accrued but unpaid at the date the loan is placed on nonaccrual status is either deducted from interest income or written off as a loss. Secondly, accruals of interests are discontinued until it becomes certain that both principal and interest can be repaid. Finally, there may be actual losses which may require that additional provisions for loan losses charged against earnings. During 1997, approximately $15,000 in additional interest income would have been recorded if the Company's nonaccrual loans had been current and in accordance with their original terms. During 1996, approximately $2,000 of additional interest income would have been recorded if the Company's nonaccrual loans had been current and in accordance with their original terms. At December 31, 1997, potential problem loans were approximately $408,000. These loans are subject to regular management attention and their status is reviewed on a regular basis. Several of the potential problem loans identified at December 31, 1997, are unsecured consumer loans. However, the majority of the balance is secured by real estate. The Company expects loan growth to continue at rates similar to those experienced during 1997. -17- Securities The carrying value of the securities portfolio was $63.7 million at December 31, 1997, an increase of $11.3 million, or 21.56% from the carrying value of $52.4 million at December 31, 1996. The increase results primarily from the Company's intentional investing of surplus funds into securities. The majority of the investments purchased were in the form of municipal bonds. The Company holds bonds issued from the State of Virginia and its political subdivisions having an aggregate book value of $3.5 million and an aggregate market value of $3.5 million. These aggregate holdings exceed 10% of the Company's stockholders' equity at December 31, 1997. At December 31, 1996, the Company held bonds issued from the State of Virginia and its political subdivisions, which had an aggregate book value of $4.9 million and an aggregate market value of $4.1 million. These aggregate holdings exceeded 10% of the Company's stockholders' equity at December 31, 1996. The securities portfolio consists of two components, securities held to maturity and securities available for sale. Securities are classified as held to maturity when management has the intent and the Company has the ability at the time of purchase to hold the securities to maturity. Securities held to maturity are carried at cost adjusted for amortization of premiums and accretion of discounts. Securities to be held for indefinite periods of time are classified as available for sale and accounted for at fair market value. Securities available for sale include securities that may be sold in response to changes in market interest rates, changes in the security's prepayment risk, increases in loan demand, general liquidity needs and other similar factors. Financial Accounting Standards Board Pronouncement No. 115, effective January 1, 1994, required the Company to show the effect of market changes in the value of securities available for sale (AFS). The market value of AFS securities at December 31, 1997, was $47.3 million. The unrealized loss on the AFS securities amounted to $199,000 and $519,000 for December 31, 1997, and December 31, 1996, respectively. This loss is reflected, net of income taxes, as a separate line item in shareholders' equity. It is the Company's policy not to engage in activities considered to be derivative in nature, such as futures, options, contracts, swaps, caps, floors, collars, or forward commitments. The Company does hold in its loan and security portfolios investments that adjust or float according to changes in "prime" lending rate. These holdings are not considered speculative but instead necessary for good asset/liability management. -18- Investment Portfolio and Securities Available for Sale The carrying value of investment securities at the dates indicated was:
December 31, -------------------------------------------------- (Dollars in thousands) 1997 1996 1995 --------------- ---------------- ---------------- U.S. Government securities $ 2,006 $ 3,012 $ 4,367 States and political subdivisions 13,849 13,396 11,396 Mortgaged-backed securities 571 958 1,248 --------------- ---------------- ---------------- Total $ 16,426 $ 17,366 $ 17,011 =============== ================ ================
The carrying value of securities available for sale at the dates indicated was:
December 31, -------------------------------------------------- (Dollars in thousands) 1997 1996 1995 ---------------- ----------------- -------------- U.S. Government securities $ 2,464 $ 4,950 $ 3,874 States and political subdivisions 12,136 - - Mortgaged-backed securities 29,579 26,521 23,886 Other securities 3,091 3,565 3,519 ---------------- ----------------- --------------- Total $ 47,270 $ 35,036 $ 31,279 ================ ================= ===============
-19- Maturity Distribution and Yields of Securities December 31, 1997 Taxable-Equivalent Basis
Due in 1 year Due after 1 through Due after 5 Through Due after 10 years and Or Less 5 years 10 Years Equity Securities Total --------------- -------------------- -------------------- ---------------------- --------------- Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield (Dollars in thousands) Securities held for investment: U.S. Government securities $ 1,500 3.43% $ 506 5.28% $ - - $ - - $ 2,006 3.90% Mortgage backed securities 86 7.73% - - 30 7.73% 455 7.04% 571 7.18% Other taxable securities - - - - - - - - - - ------- ------- ------- ------- ------- Total taxable 1,586 3.66% 506 5.28% 30 7.73% 455 7.04% 2,577 4.63% Tax-exempt securities (1) 574 7.61% 4,885 6.84% 6,277 7.33% 2,114 7.86% 13,850 7.25% ------- ------- ------- ------- ------- Total $ 2,160 4.71% $ 5,391 6.69% $ 6,307 7.34% $ 2,569 7.72% $16,427 6.84% Securities available for sale: U.S. Government securities $ 639 4.99% $ 1,580 5.85 $ 244 7.45% $ - - $ 2,463 5.78% Mortgage backed securities - - 2,137 5.19% 5,546 5.88% 21,896 6.45% 29,579 6.25% Corporate preferred - - - - - 2,383 12.71% 2,383 12.71% ------- ------- ------- ------- ------- Total taxable $ 639 4.99% $ 3,717 5.47% $ 5,790 5.95% $24,279 7.07% $34,425 6.65% Tax-exempt securities (1) - - - - - - 12,136 7.82% 12,136 7.82% ------- ------- ------- ------- ------- Total $ 639 4.99% $ 3,717 5.47% $ 5,790 5.95% $36,415 7.32% $46,561 6.96% ------- ------- ------- ------- ------- Total securities $ 2,799 4.77% $ 9,108 6.19% $12,097 6.67% $38,984 7.35% $62,988 6.63% ======= ======= ======= ======= =======
(1) Yields on tax- exempt securities have been computed on a tax - equivalent basis (2) Excludes Federal Reserve Stock of $134,400 and Federal Home Loan Bank Stock of $573,600 -20- Deposits The Company has made an effort in recent years to increase core deposits and control cost of funds. Deposits provide funding for the Company's investments in loans and securities. The interest paid for deposits must be managed carefully to control the level of interest expense. As shown below, average total deposits grew by 14.54% during 1997, 10.13% in 1996, and 5.70% during 1995. The growth of both non-interest bearing deposits and the certificate of deposits greater than $100,000 were large contributors of 1997's increased balance. During the Spring of 1997, the Company had held a certificate of deposit promotion. The promotion generated nearly $10 million in new deposit money for the Company. The Company will continue funding assets deposit liability accounts and focus on core deposit growth as the primary source for liquidity and stability. The Company offers individuals and small to medium sized businesses a variety of deposit accounts, including demand deposit, interest checking, money market, savings and time deposits accounts. The following table is a summary of average deposits and average rates paid. Deposits and Rates Paid
December 31, ---------------------------------------------------------------------------------- 1997 1996 1995 ------------------------- ------------------------- ------------------------- Amount Rate Amount Rate Amount Rate ------------- ---------- ----------- ----------- ------------ ----------- (Dollars in thousands) Noninterest-bearing Deposits $ 24,025 - $ 19,211 - $ 15,691 - Interest-bearing accounts: Interest checking 19,886 1.81% 18,348 2.13% 17,919 2.43% Regular savings 15,631 3.69% 14,562 3.85% 14,003 3.81% Money market accounts 30,071 2.94% 28,735 3.02% 26,980 3.09% Time deposits: $ 100,000 and over 16,480 5.46% 12,013 6.14% 12,523 5.50% Under $ 100,000 40,100 5.40% 34,760 5.46% 28,775 5.43% ------------- ----------- ----------- Total interest-bearing deposits 122,168 4.00% 108,418 4.11% 100,200 4.05% ------------- ------------- ----------- Total $ 146,193 $ 127,629 $ 115,891 ============= ============= ===========
The Company neither purchases brokered deposits nor solicits deposits from sources outside its primary market area. In 1998, deposit levels are expected to continue to increase over those at the end of December 31, 1997. -21- The following is a summary of the maturity distribution of certificates of deposit equal to or greater than $100,000 as December 31, 1997: Maturities of Certificates of Deposit of $100,000 and Over
Within Three to Six to Over Percent Three Six Twelve One of Total Months Months Months Year Total Deposits -------------- -------------- --------------- -------------- ------------- ------------ (In thousands) At December 31, 1997 $ 1,675 $ 4,474 $ 5,157 $ 5,963 $ 17,269 11.0%
Capital Resources The adequacy of the Company's capital is reviewed by management on an ongoing basis with reference to the size, composition and quality of the Company's asset and liability levels and is consistent with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and absorb potential losses. The Federal Reserve, along with the Federal Deposit Insurance Corporation, has adopted capital guidelines to supplement the definitions of capital for regulatory purposes and to establish minimum capital standards. Specifically, the guidelines categorize assets and off-balance sheet items into four risk-weighted categories. The minimum ratio of qualifying total capital to risk-weighted assets is 8.0%, of which at least 4.0% must be Tier I capital, composed of common equity and retained earnings. The Company had a ratio of risk-weighted assets to total capital of 19.7% at December 31, 1997, and 20.2% at December 31, 1996. The ratio of risk-weighted assets to Tier I capital was 18.8% at December 31, 1997, and 19.3% at December 31, 1996. Both ratios exceed the minimum capital requirements adopted by the federal bank regulatory agencies. -22- Analysis of Capital December 31, ----------------------------- 1997 1996 -------------- ------------ Tier 1 Capital: Common stock $ 9,063 $ 4,299 Capital surplus 1,948 1,411 Retained earnings 10,874 12,817 Unrealized net loss on Equity securities (1,181) (35) -------------- ------------ Total Tier 1 capital 20,704 18,492 Tier 2 Capital: Allowance for loan losses 974 884 -------------- ------------ Total tier 2 capital 974 884 Total risk-based capital $ 21,678 $ 19,376 ============== ============ Risk weighted assets $ 110,041 $ 95,921 CAPITAL RATIOS: Tier 1 risk-based capital ratio 18.8% 19.3% Total risk-based capital ratio 19.7% 20.2% Tier 1 capital to average total assets 11.8% 11.7% Liquidity Liquidity represents an institution's ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, securities classified as available for sale and loan and investments maturing within one year. As a result of the Company's management of liquid assets and the ability to generate liquidity through liability funding, management believes the Company maintains overall liquidity sufficient to satisfy its depositors' requirements and meet its customers' credit needs. -23- The Company also maintains additional sources of liquidity through a variety of borrowing arrangements. The Company maintains federal fund lines with large regional and money-center banking institutions. These available lines total in excess of $8 million, of which none had been outstanding at December 31, 1997. Federal funds purchased during 1997 averaged $2,934,000. During 1996, average federal funds borrowed totaled $73,000. At December 31, 1997, the Company had $3.0 million of outstanding borrowings pursuant to securities repurchase agreement transactions, with maturities of one day. Securities repurchase agreement transactions totaled $1.4 million at December 31, 1996. The Company has a credit line in the amount of $16 million at the Federal Home Loan Bank. This line may be utilized for short and/or long-term borrowing. The Company joined the Federal Home Loan Bank system in 1995 in order to enter a program of long term and short term borrowing which is restricted to be invested in Residential Housing Finance Assets (RHFA). RHFA are defined as (1) Loans secured by residential real property; (2) Mortgage-backed securities; (3) Participations in loans secured by residential real property; (4) Loans financed by Community Investment Program advances; (5) Loans secured by manufactured housing, regardless of whether such housing qualifies as residential real property; or (6) Any loans or investments which the Federal Housing Finance Board and the Company, in their discretion, otherwise determine to be residential housing finance assets. In 1997, short-term borrowings from the Federal Home Loan Bank system for RHFA investments were $2,800,000 maturing in 1998. At December 31, 1997, cash, interest bearing deposits with financial institutions, federal funds sold, securities available for sale, investments and loans maturing within one year were 26.41% of total deposits and other liabilities. Year 2000 ICBI has established a committee within the banking subsidiary to address and evaluate problems that may be encountered within all of the subsidiaries with respect to the Year 2000. The committee is charged with identifying potential problems and uncertainties that would cause financial reporting to be inaccurate, addressing the cost associated with resolving any Year 2000 problems, and compiling of documentation relating to testing of computer programs and equipment. The committee has prepared a written plan detailing the steps to be taken for Year 2000 readiness that is being reviewed by the Board of Directors. Each subsidiary utilizes and is dependent upon data processing systems and software to conduct its business. The data processing systems and software include a mainframe processing system and various software packages, licensed to the subsidiaries by an outside vendor, which are run on in-house computer equipment. The subsidiaries' mainframe software vendor and the majority of the other vendors (including vendors for systems and equipment other than for data processing) which have been contacted have indicated that their hardware and/or software will be Year 2000 ready. Upgrading and replacing personal computers throughout the subsidiaries is expected to be a large part of the Year 2000 readiness plan. The cost of such expense is not expected to have a material effect on the Corporation's consolidated financial statements. Forward-Looking Statements Certain information contained in this discussion may include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are generally identified by phrases such as "the Company expects," "the Company believes" or words of similar import. Such forward- -24- looking statements involve known and unknown risks including, but not limited to, changes in general economic and business conditions, interest rate fluctuations, competition within and from outside the banking industry, new products and services in the banking industry, risks values, changing trends in customer profiles and changes in laws and regulations applicable to the Company. Although the Company believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Recent Accounting Pronouncements In 1997, the Corporation adopted FASB Statement No. 128, "Earnings per Share." Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share, unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earning per share is very similar to the previously reported fully diluted earnings per share. This statement had no effect on the Corporation's earnings per share for any period presented. In June 1996, the FASB issued FASB No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Those standards are based on consistent application of a financial components approach that focuses on control of the affected asset or liability that it controls or surrenders. This Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. In October 1996, the FASB issued FASB Statement No. 127, which deferred for one year paragraphs 9-12 (Accounting for Transfers and Servicing of Financial Assets) under FASB No. 125 for securities lending, repurchase agreements, dollar rolls, and other secured transactions. The FASB also agreed to defer for one year paragraph 15 (Secured Borrowings and Collateral) under FASB No. 125 for all transactions. During June 1997, the FASB issued FASB No. 130, "Reporting Comprehensive Income." This pronouncement established standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. FASB No. 130 is effective for financial statements beginning after December 15, 1997. Additionally during June of 1997, the FASB issued FASB No. 131, "Disclosures about Segments of an Enterprise and Related Information." FASB No. 131 establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement becomes effective for financial statements for periods beginning after December 31, 1997. ITEM 7. FINANCIAL STATEMENTS The following financial statements are filed as a part of this report following Item 13 below: -25- Independent Auditor's Report Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with accountants on accounting and financial disclosure during the last two fiscal years. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Directors Howard M. Armfield, 55, has been a director since 1984. Mr. Armfield is Executive Vice President and owner of Armfield, Harrison & Thomas, Inc., an independent insurance agency in Leesburg, Virginia. Joseph L. Boling, 53, has been a director since 1993. Mr. Boling has been the Chairman and Chief Executive Officer of the Company and The Middleburg Bank, a subsidiary of the Company (the "Bank"), since April 1997. From February 1993 to April 1997, he was President and Chief Executive Officer of the Company and the Bank. Prior to employment by the Company and the Bank, he was a Senior Vice President of Crestar Bank in Richmond, Virginia. Childs Frick Burden, 47, has been a director since 1997. Mr. Burden is a partner with Secor Group, an investment firm in Washington, D.C. J. Lynn Cornwell, Jr., 73, has been a director since 1984. Mr. Cornwell is President and owner of J. Lynn Cornwell, Inc., a real estate development company in Loudoun County. William F. Curtis, 69, has been a director since 1962. Mr. Curtis is currently retired. Until February 1993, he had served as President and Chief Executive Officer of the Bank for 25 years. F. E. Deacon, III, 42, has been a director since 1997. Mr. Deacon is President and Chief Executive Officer of The Tredegar Trust Company, a trust company in Richmond, Virginia and a subsidiary of the Company ("Tredegar"). George A. Horkan, Jr., 75, has been a director since 1961. Mr. Horkan is President of George A. Horkan, Jr., P.C., a law firm in Upperville, Virginia. -26- C. Oliver Iselin, III, 68, has been a director since 1975. Mr. Iselin is owner and operator of the Wolver Hill Farm. William S. Leach, 69, has been a director since 1970. Mr. Leach is a retired businessman with over 30 years experience. Most recently he served a three year term as Town Administrator for the Town of Middleburg. Thomas W. Nalls, 56, has been a director since 1997. Mr. Nalls is a partner with Hazel & Thomas, P.C., a law firm in Leesburg, Virginia. John C. Palmer, 62, has been a director since 1974. Mr. Palmer retired as Senior Vice President of the Bank in 1995 after 27 years of service. John Sherman, 57, has been a director since 1997. Mr. Sherman is owner and operator of The Ashley Inn in Paris, Virginia. Millicent W. West, 76, has been a director since 1975. Ms. West has served in many volunteer positions in the Garden Club of America and Garden Club of Virginia. Edward T. Wright, 61, has been a director since 1972. Mr. Wright is Senior Vice President of the Bank and his principal duties include administration of the loan portfolio, marketing and branch management. Executive Officers Who Are Not Directors Alice P. Frazier, 33, has served as Senior Vice President and Chief Financial Officer since April 1993. From May 1991 until April 1993, she served as the Bank's Loan Review Officer. From December 1988 until May 1991 she was employed by Yount, Hyde & Barbour, P.C., certified public accountants. Arch A. Moore, 46, has served as Senior Vice President and Senior Lender since February 1995. From March 1983 to February 1995, he served in various positions, the last of which was Manager of the Northern Virginia Business Banking Group, with First American/First Union. William E. Doyle, 45, has served as Senior Vice President, Mortgage and Retail Services, since November 1997. From 1996 to 1997, he was a private consultant in the banking industry, and, from 1982 to 1996, he was a Senior Vice President with Crestar Bank. ITEM 10. EXECUTIVE COMPENSATION Executive Compensation The following table shows, for the fiscal years ended December 31, 1997, 1996 and 1995, the cash compensation paid by the Company and its subsidiaries, as well as certain other compensation paid or accrued for those years, to each of the named executive officers in all capacities in which they served: -27- Summary Compensation Table
Long Term Annual Compensation Compensation Securities Name and Other Annual Underlying All Other Principal Position Year Salary ($) Bonus ($) Compensation ($) Options Compensation ($)(1) ------------------ ---- ---------- --------- ---------------- ---------- ------------------- Joseph L. Boling 1997 184,045 17,000 * 20,000 13,000 Chairman and Chief Executive 1996 186,980 20,000 * - 21,433 Officer 1995 178,820 15,000 * - 21,363 Edward T. Wright 1997 122,873 5,105 * 2,000 8,638 Senior Vice President 1996 119,294 8,350 * - 7,821 1995 107,150 8,929 * - 7,748 Arch A. Moore, III 1997 105,430 4,217 * 10,000 17,000 Senior Vice President 1996 101,375 7,096 * - 8,967 1995 91,711 7,500 21,712 (2) - 8,943 F. E. Deacon, III (3) 1997 52,333 3,900 * 10,000 - President and Chief Executive Officer of Tredegar
* All benefits that might be considered of a personal nature did not exceed the lesser of $50,000 or 10% of total annual salary and bonus for all the officers named in the table. (1) Amounts presented represent gross value of payments made by the Bank during such fiscal year pursuant to split-dollar life insurance agreements between the Company and the named executive officers. (2) Amount presented includes $12,500 paid by the Bank for Mr. Moore's initiation fees for the Middleburg Tennis Club and the Loudoun Golf and Country Club and $7,883 paid by the Bank for the increase in Mr. Moore's income tax associated with such benefits. (3) The Company acquired Tredegar on August 1, 1997, and the amount presented reflects the amount earned by Mr. Deacon from August 1, 1997 to December 31, 1997. Mr. Deacon's annual salary is $130,000. Director Compensation As compensation for their services, each member of the Board of Directors receives a fee of $300 for each meeting of the Board and $250 for each Committee meeting attended. Board members who are also officers do not receive any additional compensation above their regular salary for attending committee meetings. In 1997, directors received $84,050 in the aggregate as compensation for their services as directors. Stock Options The following table sets forth for the year ended December 31, 1997, the grants of stock options to the named executive officers: -28- Option Grants In Last Fiscal Year
Percent of Total Number of Securities Options Granted to Underlying Options Employees in Fiscal Exercise or Base Granted (#) (1) Year (%) (2) Price ($/Share) Expiration Date --------------- ------------ --------------- --------------- Joseph L. Boling 20,000 37.0 17.00 November 12, 2007 Edward T. Wright 2,000 3.7 17.00 November 12, 2007 Arch A. Moore, III 10,000 18.5 17.00 November 12, 2007 F. E. Deacon, III 10,000 18.5 17.00 November 12, 2007
- -------------------- (1) Stock options were awarded at or above the fair market value of the shares of Common Stock at the date of award. (2) Options to purchase 54,000 shares of Common Stock were granted to employees during the year ended December 31, 1997. Employment Agreements Effective as of January 1, 1997, the Bank and Joseph L. Boling, who serves as Chairman of the Bank, entered into an employment contract. Mr. Boling's employment contract is for five years at a base annual salary of $194,086 and he is eligible for bonuses as determined by the executive committee, in the discretion of the Board of Directors. Mr. Boling's employment may be terminated by the Bank, with or without cause. If he is terminated without cause, however, he is entitled to payment for the greater of the remainder of his contract or three years. If there is a change in control of the Bank and Mr. Boling's employment terminates, he is entitled to severance pay equal to his salary and benefits for the longer of the remainder of his contract or three years, unless he is offered and accepts a position with the acquiror. Mr. Boling's contract contains a covenant not to compete if, for any reason, his employment terminates. A deferred compensation plan has been adopted for the Chairman and Chief Executive Officer. Benefits are to be paid in monthly installments for 15 years following retirement or death. The agreement provides that, if employment is terminated for reasons other than death or disability prior to age 65, the amount of benefits would be reduced. The deferred compensation expense for 1997, 1996 and 1995, based on the present value of the retirement benefits, was $16,627, $15,539 and $14,522, respectively. The plan is unfunded. However, life insurance has been acquired on the life of the employee in an amount sufficient to discharge the obligation. Effective as of March 27, 1997, Tredegar and F. E. Deacon, III, who serves as President and Chief Executive Officer of Tredegar, entered into an employment agreement that will expire on August 1, 2000. Under his employment agreement, Mr. Deacon's base annual salary is $119,000, and he will be entitled to a bonus, up to a maximum of $27,000 in any year, if Tredegar's cumulative net earnings equal or exceed certain levels as described in the agreement. This employment agreement does not provide for any additional compensation in the event of a change in control of the Company and does prohibit Mr. Deacon from competing with Tredegar for a period of one year following a termination of his employment by Tredegar for any reason. -29- ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security Ownership of Management The following table sets forth, as of March 11, 1998 certain information with respect to beneficial ownership of Common Stock by the members of the Board of Directors and by all directors and executive officers as a group. Beneficial ownership includes shares, if any, held in the name of the spouse, minor children or other relatives of a director living in such person's home, as well as shares, if any, held in the name of another person under an arrangement whereby the director or executive officer can vest title in himself at once or at some future time. Amount and Nature of Name Beneficial Ownership Percent of Class (%) Howard M. Armfield 18,104 1.00 Joseph L. Boling (1) 26,526 1.45 Childs Frick Burden 5,760 * J. Lynn Cornwell, Jr. 3,644 * William F. Curtis (2) 88,844 4.90 F. E. Deacon, III (1) 15,250 * George A. Horkan, Jr. 72,000 3.97 C. Oliver Iselin, III 42,400 2.34 William S. Leach (2) 46,784 2.58 Thomas W. Nalls 400 * John C. Palmer 24,526 1.35 John Sherman 30 * Millicent W. West 262,504 14.48 Edward T. Wright (1) 60,420 3.33 Directors and executive officers as a group (17 persons) (1) 688,164 36.91 _______________ * Percentage of ownership is less than one percent of the outstanding shares of Common Stock. (1) Amounts disclosed include shares of Common Stock issuable upon the exercise of stock options exercisable within 60 days of March 11, 1998. (2) Amounts disclosed include shares of Common Stock beneficially owned by a trust of which Messrs. Curtis and Leach serve as trustees. Security Ownership of Certain Beneficial Owners Millicent W. West, P.O. Box 236, Upperville, Virginia, owns 262,504 shares, or 14.48% of the outstanding shares of Common Stock. To the Company's knowledge, no other person owns five percent of more of the outstanding shares of Common Stock. -30- ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Some of the directors and officers of the Company are at present, as in the past, customers of the Company, and the Company has had, and expects to have in the future, banking transactions in the ordinary course of its business with directors, officers, principal shareholders and their associates, on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with others. These transactions do not involve more than the normal risk of collectibility or present other unfavorable features. The balance of loans to directors, executive officers and their associates totaled $2,783,606 at December 31, 1997, or 12.8% of the Company's equity capital at that date. There were no transactions during 1997 between the Company's directors or officers and the Company's retirement or profit sharing plans, nor are there any proposed transactions. Additionally, there are no legal proceedings to which any director, officer, principal shareholder or associate is a party that would be material and adverse to the Company. ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K (a) Exhibits. 3.1 Articles of Incorporation of Independent Community Bankshares, Inc. (restated in electronic format), attached as Exhibit 3.1 to the Registration Statement on Form S-4, Registration No. 333-24523, filed with the Commission on April 4, 1997 (the "Form S-4"), incorporated herein by reference. 3.2 Bylaws of Independent Community Bankshares, Inc., attached as Exhibit 3.2 to the Form S-4, incorporated herein by reference. 10.1 Revised Employment Agreement, dated January 1, 1997, between The Middleburg Bank and Joseph L. Boling, attached as Exhibit 10.1 to the Form S-4, incorporated herein by reference. 21 Subsidiaries of the Registrant. 27 Financial Data Schedule (filed electronically only). (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the last quarter of the period covered by this report. -31- INDEPENDENT COMMUNITY BANKSHARES, INC. Middleburg, Virginia FINANCIAL REPORT DECEMBER 31, 1997 C O N T E N T S Page INDEPENDENT AUDITOR'S REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS 1 FINANCIAL STATEMENTS Consolidated balance sheets 2 Consolidated statements of income 3 Consolidated statements of changes in shareholders' equity 4 Consolidated statements of cash flows 5 and 6 Notes to consolidated financial statements 7-25 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Independent Community Bankshares, Inc. Middleburg, Virginia We have audited the accompanying consolidated balance sheets of Independent Community Bankshares, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the years ended December 31, 1997, 1996 and 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Independent Community Bankshares, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years ended December 31, 1997, 1996 and 1995, in conformity with generally accepted accounting principles. Winchester, Virginia January 26, 1998 1 INDEPENDENT COMMUNITY BANKSHARES, INC. Consolidated Balance Sheets December 31, 1997 and 1996
Assets 1997 1996 --------------- --------------- Cash and due from banks $ 6 128 036 $ 6 348 208 Interest-bearing deposits in banks 455 919 29 859 Temporary investments: Federal funds sold 1 300 000 3 400 000 Other money market investments 725 385 141 011 Securities (fair value: 1997, $63,957,868; 1996, $52,375,995) (Notes 1 and 2) 63 695 792 52 402 253 Loans, net (Notes 1, 3, 4 and 12) 103 253 407 93 710 819 Bank premises and equipment, net (Notes 1 and 5) 5 527 103 4 698 586 Accrued interest receivable and other assets 3 774 064 2 235 220 --------------- --------------- Total assets $ 184 859 706 $ 162 965 956 =============== =============== Liabilities and Shareholders' Equity Liabilities Deposits: Noninterest-bearing demand deposits $ 26 601 922 $ 23 242 448 Savings and interest-bearing demand deposits 72 702 285 64 434 102 Time deposits (Note 6) 57 249 943 51 113 590 --------------- --------------- Total deposits $ 156 554 150 $ 138 790 140 Securities sold under agreements to repurchase 3 048 481 1 444 697 Federal Home Loan Bank advances (Note 7) 2 800 000 4 000 000 Accrued interest and other liabilities 770 947 723 252 Commitments and contingent liabilities (Notes 13 and 15) - - - - --------------- --------------- Total liabilities $ 163 173 578 $ 144 958 089 --------------- --------------- Shareholders' Equity Common stock, par value $5 per share, authorized 10,000,000 shares; issued 1997, 1,812,594 shares; issued 1996, 859,838 shares $ 9 062 970 $ 4 299 190 Capital surplus 1 948 246 1 411 174 Retained earnings (Notes 8 and 14) 10 873 617 12 816 782 Unrealized gain (loss) on securities available for sale, net (198 705) (519 279) ---------------- ---------------- Total shareholders' equity $ 21 686 128 $ 18 007 867 --------------- --------------- Total liabilities and shareholders' equity $ 184 859 706 $ 162 965 956 =============== ===============
See Notes to Consolidated Financial Statements. 2 INDEPENDENT COMMUNITY BANKSHARES, INC. Consolidated Statements of Income Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995 ------------- ------------- ------------- Interest Income Interest and fees on loans $ 8 972 418 $ 8 137 263 $ 7 264 647 Interest and dividends on investment securities: Taxable interest income 121 314 194 506 314 910 Interest income exempt from federal income taxes 686 140 588 431 620 429 Interest and dividends on securities available for sale: Taxable interest income 2 292 662 1 786 669 1 503 322 Interest income exempt from federal income taxes 151 183 - - - - Dividends 280 645 267 791 13 884 Interest on deposits in banks 7 970 804 - - Interest income on federal funds sold and other money market investments 172 568 135 765 137 514 ------------- ------------- ------------- Total interest income $ 12 684 900 $ 11 111 229 $ 9 854 706 ------------- ------------- ------------- Interest Expense Interest on deposits $ 4 886 480 $ 4 455 684 $ 4 055 755 Interest on short-term borrowings 134 457 4 580 9 016 Interest on Federal Home Loan Bank advances 171 509 186 513 31 185 ------------- ------------- ------------- Total interest expense $ 5 192 446 $ 4 646 777 $ 4 095 956 ------------- ------------- ------------- Net interest income $ 7 492 454 $ 6 464 452 $ 5 758 750 Provision for loan losses (Note 4) 177 602 65 000 54 950 ------------- ------------- ------------- Net interest income after provision for loan losses $ 7 314 852 $ 6 399 452 $ 5 703 800 ------------- ------------- ------------- Other Income Service charges, commissions and fees $ 886 720 $ 676 655 $ 651 327 Trust fee income 338 613 29 316 - - Investment securities gain (loss) 2 055 (1 875) - - Profits (losses) on securities available for sale, net (92 602) 22 496 (122 698) Other 14 415 15 551 165 932 ------------- ------------- ------------- Total other income $ 1 149 201 $ 742 143 $ 694 561 ------------- ------------- ------------- Other Expenses Salaries and employees' benefits (Notes 1, 9 and 10) $ 2 863 878 $ 2 532 777 $ 2 163 447 Net occupancy and equipment expense 593 246 561 760 433 269 Advertising 146 009 164 189 105 590 FDIC insurance 16 999 2 000 134 787 Computer services 138 138 90 062 77 728 Other operating expenses 1 212 256 1 031 782 1 152 317 ------------- ------------- ------------- Total other expenses $ 4 970 526 $ 4 382 570 $ 4 067 138 ------------- ------------- ------------- Income before income taxes $ 3 493 527 $ 2 759 025 $ 2 331 223 Income tax expense (Notes 1 and 11) 862 167 728 079 624 729 ------------- ------------- ------------- Net income $ 2 631 360 $ 2 030 946 $ 1 706 494 ============= ============= ============= Earnings per Share, basic and diluted (Note 1) $ 1.51 $ 1.18 $ .96 ============= ============= =============
See Notes to Consolidated Financial Statements. 3 INDEPENDENT COMMUNITY BANKSHARES, INC. Consolidated Statements of Changes in Shareholders' Equity Years Ended December 31, 1997, 1996 and 1995
Unrealized Gain (Loss) on Securities Common Capital Retained Available for Stock Surplus Earnings Sale, Net Total ----- ------- -------- --------- ----- Balance, December 31, 1994 $ 4 468 415 $ 2 180 971 $ 10 509 004 $ (1 498 139) $ 15 660 251 Net income - 1995 - - - - 1 706 494 - - 1 706 494 Cash dividends - 1995 ($0.40 per share) - - - - (707 398) - - (707 398) Purchase of common stock (36,162 shares) (180 810) (831 726) - - - - (1 012 536) Sale of common stock (2,317 shares) 11 585 61 929 - - - - 73 514 Change in unrealized gain (loss) on securities available for sale, net of deferred income taxes of $669,740 - - - - - - 1 232 296 1 232 296 ------------ ------------- ------------- ------------ ------------- Balance, December 31, 1995 $ 4 299 190 $ 1 411 174 $ 11 508 100 $ (265 843) $ 16 952 621 Net income - 1996 - - - - 2 030 946 - - 2 030 946 Cash dividends - 1996 ($0.42 per share) - - - - (722 264) - - (722 264) Change in unrealized gain (loss) on securities available for sale, net of deferred income taxes of $130,558 - - - - - - (253 436) (253 436) ------------ ------------- ------------- ------------ ------------- Balance, December 31, 1996 $ 4 299 190 $ 1 411 174 $ 12 816 782 $ (519 279) $ 18 007 867 Net income - 1997 - - - - 2 631 360 - - 2 631 360 Cash dividends - 1997 ($0.32 per share) - - - - (574 525) - - (574 525) Purchase of common stock (22,691 shares) (113 455) (521 893) - - - - (635 348) Issuance of common stock - stock split effected in the form of 100% stock dividend (906,297 shares) 4 531 485 (4 531 485) - - - - - - Issuance of common stock in acquisition of subsidiary (69,150 shares) (Note 8) 345 750 1 590 450 - - - - 1 936 200 Discretionary transfer from retained earnings - - 4 000 000 (4 000 000) - - - - Change in unrealized gain (loss) on securities available for sale, net of deferred income taxes of $165,144 - - - - - - 320 574 320 574 ------------ ------------- ------------- --------------- ------------- Balance, December 31, 1997 $ 9 062 970 $ 1 948 246 $ 10 873 617 $ (198 705) $ 1 686 128 ============ ============= ============= ============== =============
See Notes to Consolidated Financial Statements. 4 INDEPENDENT COMMUNITY BANKSHARES, INC. Consolidated Statements of Cash Flows Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995 --------------- -------------- -------------- Cash Flows from Operating Activities Net income $ 2 631 360 $ 2 030 946 $ 1 706 494 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 396 833 301 497 251 390 Amortization 41 617 16 487 16 487 Provision for loan losses 177 602 65 000 54 950 Net (gain) loss on investment securities (2 055) 1 875 - - Net (gain) loss on securities available for sale 92 602 (22 496) 122 698 Net (gain) loss on sale of assets 7 343 - - (6 437) Net (gain) on sale of other real estate - - - - (97 624) Discount accretion and premium amortization on securities, net 180 181 157 657 69 601 Deferred income taxes (19 508) 68 349 82 137 Changes in assets and liabilities: (Increase) in other assets (669 146) (289 041) (138 836) Increase in other liabilities 57 100 195 847 226 173 Net cash provided by operating activities $ 2 893 929 $ 2 526 121 $ 2 287 033 -------------- -------------- -------------- Cash Flows from Investing Activities Proceeds from maturity, principal paydowns and calls of investment securities $ 2 750 431 $ 2 455 501 $ 1 015 276 Proceeds from maturity, principal paydowns and calls of securities available for sale 2 742 602 2 149 662 1 216 149 Proceeds from sale of securities available for sale 26 500 686 24 282 770 15 539 612 Purchase of investment securities (1 848 566) (2 846 520) (3 442 091) Purchase of securities available for sale (40 572 390) (30 673 806) (19 499 409) Proceeds on sale of other real estate - - - - 1 015 000 Proceeds from sale of equipment 36 335 - - 15 000 Purchases of bank premises and equipment (1 221 354) (1 623 530) (1 142 864) Net (increase) in loans (9 720 190) (13 727 421) (1 336 510) Cash acquired in acquisition 170 858 - - - - -------------- -------------- -------------- Net cash (used in) investing activities $ (21 161 588) $ (19 983 344) $ (6 619 837) -------------- -------------- --------------
See Notes to Consolidated Financial Statements. 5 INDEPENDENT COMMUNITY BANKSHARES, INC. Consolidated Statements of Cash Flows (Continued) Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995 -------------- -------------- --------------- Cash Flows from Financing Activities Net increase (decrease) in noninterest-bearing and interest-bearing demand deposits and savings accounts $ 11 627 657 $ 9 896 598 $ (3 681 539) Net increase in certificates of deposit 6 136 353 7 371 472 7 119 273 Increase in securities sold under agreements to repurchase 1 603 784 1 444 697 - - Proceeds from Federal Home Loan Bank advances 2 800 000 3 000 000 3 000 000 Repayment of Federal Home Loan Bank advances (4 000 000) (2 000 000) - - Purchase of common stock (635 348) - - (1 012 536) Proceeds from sale of common stock - - - - 73 514 Cash dividends paid (574 525) (722 264) (707 398) -------------- -------------- -------------- Net cash provided by financing activities $ 16 957 921 $ 18 990 503 $ 4 791 314 -------------- -------------- -------------- Increase (decrease) in cash and cash equivalents $ (1 309 738) $ 1 533 280 $ 458 510 Cash and Cash Equivalents Beginning 9 919 078 8 385 798 7 927 288 -------------- -------------- -------------- Ending $ 8 609 340 $ 9 919 078 $ 8 385 798 ============== ============== ============== Supplemental Disclosures of Cash Flow Information Cash payments for: Interest paid to depositors $ 4 822 840 $ 4 425 048 $ 3 964 454 Interest paid on short-term obligations 131 500 4 580 9 016 Interest paid on Federal Home Loan Bank advances 176 242 153 894 31 185 -------------- -------------- -------------- $ 5 130 582 $ 4 583 522 $ 4 004 655 ============== ============== ============== Income taxes $ 849 000 $ 863 723 $ 272 447 ============== ============== ============== Supplemental Disclosure of Noncash Transactions Issuance of common stock - stock split effected in the form of 100% stock dividend $ 4 531 485 $ - - $ - - ============== ============== ============== Issuance of common stock in acquisition of subsidiary $ 1 936 200 $ - - $ - - ============== ============== ============== Unrealized gain (loss) on securities available for sale $ 485 718 $ (383 994) $ 1 902 036 ============== =============== ==============
See Notes to Consolidated Financial Statements. 6 INDEPENDENT COMMUNITY BANKSHARES, INC. Notes to Consolidated Financial Statements Note 1. Nature of Banking Activities and Significant Accounting Policies Independent Community Bankshares' banking subsidiary grants commercial, financial, agricultural, residential and consumer loans to customers principally in Loudoun County and Fauquier County, Virginia. The loan portfolio is well diversified and generally is collateralized by assets of the customers. The loans are expected to be repaid from cash flow or proceeds from the sale of selected assets of the borrowers. The non-banking subsidiary offers a comprehensive range of fiduciary and investment management services to individuals and businesses. The accounting and reporting policies of the Company conform to generally accepted accounting principles and to accepted practice within the banking industry. Principles of Consolidation The consolidated financial statements of Independent Community Bankshares, Inc. and its wholly-owned subsidiaries, The Middleburg Bank, The Tredegar Trust Company and Middleburg Bank Service Corporation, include the accounts of all four companies. All material intercompany balances and transactions have been eliminated in consolidation. Securities The Company adopted FASB No. 115, "Accounting for Certain Investments in Debt and Equity Securities". This statement addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Those investments are classified in three categories and accounted for as follows: a. Securities Held to Maturity Securities classified as held to maturity are those debt securities the Company has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost adjusted for amortization of premium and accretion of discount, computed by the interest method over their contractual lives. b. Securities Available for Sale Securities classified as available for sale are those debt and equity securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Securities available for sale are carried at fair value. Unrealized gains or losses are reported as increases or decreases in shareholders' equity, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. 7 Notes to Consolidated Financial Statements c. Trading Securities Trading securities, which are generally held for the short term in anticipation of market gains, are carried at fair value. Realized and unrealized gains and losses on trading account assets are included in interest income on trading account securities. The Company had no trading securities at December 31, 1997 and 1996. Loans Loans are shown on the balance sheets net of unearned discounts and the allowance for loan losses. Interest is computed by methods which result in level rates of return on principal. Loans are charged off when in the opinion of management they are deemed to be uncollectible after taking into consideration such factors as the current financial condition of the customer and the underlying collateral and guarantee. Interest is computed on the loan balance outstanding for all loans. On January 1, 1995, the Company adopted FASB No. 114, "Accounting by Creditors for Impairment of a Loan." This statement has been amended by FASB No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." Statement 114, as amended, requires that the impairment of loans that have been separately identified for evaluation is to be measured based on the present value of expected future cash flows or, alternatively, the observable market price of the loans or the fair value of the collateral. However, for those loans that are collateral dependent (that is, if repayment of those loans is expected to be provided solely by the underlying collateral) and for which management has determined foreclosure is probable, the measure of impairment of those loans is to be based on the fair value of the collateral. Statement 114, as amended, also requires certain disclosures about investments in impaired loans and the allowance for credit losses and interest income recognized on loans. The Company considers all consumer installment loans and residential mortgage loans to be homogeneous loans. These loans are not subject to impairment under FASB 114. A loan is considered impaired when it is probable that the Company will be unable to collect all principal and interest amounts according to the contractual terms of the loan agreement. Factors involved in determining impairment include, but are not limited to, expected future cash flows, financial condition of the borrower, and current economic conditions. A performing loan may be considered impaired, if the factors above indicate a need for impairment. A loan on nonaccrual status may not be impaired if in the process of collection or there is an insignificant shortfall in payment. An insignificant delay of less than 30 days or a shortfall of less than 5% of the required principal and interest payment generally does not indicate an impairment situation, if in management's judgment the loan will be paid in full. Loans that meet the regulatory definitions of doubtful or loss generally qualify as impaired loans under FASB 114. Charge-offs for impaired loans occur when the loan, or portion of the loan is determined to be uncollectible, as is the case for all loans. The Company had no loans subject to FASB 114 at December 31, 1997 and 1996. 8 Notes to Consolidated Financial Statements Loans are placed on nonaccrual when a loan is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more. Any unpaid interest previously accrued on those loans is reversed from income. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are applied as a reduction of the loan principal balance. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received. Allowance for Loan Losses The allowance for loan losses is maintained at a level which, in management's judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management's evaluation of the collectibility of the loan portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries. Changes in the allowances relating to impaired loans are charged or credited to the provision for loan losses. Because of uncertainties inherent in the estimation process, management's estimate of credit losses inherent in the loan portfolio and the related allowance may change in the near term. Bank Premises and Equipment Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation of property and equipment is computed principally on the straight-line method over the following estimated useful lives: Years ----- Buildings and improvements 31.5-39 Furniture and equipment 3-10 Maintenance and repairs of property and equipment are charged to operations and major improvements are capitalized. Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the accounts and gain or loss is included in operations. Other Real Estate Real estate acquired by foreclosure is carried at the lower of cost or fair market value less an allowance for estimated selling expenses on the future disposition of the property. Goodwill Goodwill is amortized using the straight-line method over 20 years. 9 Notes to Consolidated Financial Statements Income Taxes Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences, operating loss carryforwards, and tax credit carryforwards. Deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Earnings Per Share In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share." Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. The Company had no potential common stock as of December 31, 1997, 1996 and 1995. Computations are based on the weighted average number of shares outstanding during each year after giving retroactive effect to the 100% stock dividend declared in 1997. Weighted average shares were 1,740,966, 1,719,676 and 1,778,000 for the years ended 1997, 1996 and 1995, respectively. Pension Plan The Company has a trusteed, noncontributory, defined benefit pension plan covering substantially all full-time employees. The Company computes the net periodic pension cost of the plan in accordance with FASB No. 87, "Employers' Accounting For Pensions." Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, other temporary investments and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Advertising Costs The Company follows the policy of charging the costs of advertising to expense as incurred. 10 Notes to Consolidated Financial Statements Note 2. Securities Amortized costs and fair values of securities being held to maturity as of December 31, 1997 and 1996 are summarized as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value --------------- ---------------- -------------- ---------------- 1997 ----------------------------------------------------------------------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 2 005 491 $ - - $ (20 626) $ 1 984 865 Obligations of states and political subdivisions 13 849 322 282 000 (1 207) 14 130 115 Mortgage-backed securities 571 149 1 909 - - 573 058 --------------- ---------------- ------------- ---------------- $ 16 425 962 $ 283 909 $ (21 833) $ 16 688 038 =============== ================ ============== ================ 1996 ----------------------------------------------------------------------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 3 012 050 $ - - $ (67 845) $ 2 944 205 Obligations of states and political subdivisions 13 396 166 106 404 (69 500) 13 433 070 Mortgage-backed securities 957 809 9 265 (4 582) 962 492 --------------- ---------------- -------------- ---------------- $ 17 366 025 $ 115 669 $ (141 927) $ 17 339 767 =============== ================ ============== ================
The amortized cost and fair value of securities being held to maturity as of December 31, 1997 by contractual maturity are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties. Therefore, these securities are not included in the maturity categories in the following maturity summary.
Amortized Fair Cost Value --------------- ---------------- Due in one year or less $ 2 073 579 $ 2 059 753 Due after one year through five years 5 390 472 5 430 722 Due after five years through 10 years 6 276 836 6 417 758 Due after 10 years 2 113 926 2 206 747 Mortgage-backed securities 571 149 573 058 --------------- ---------------- $ 16 425 962 $ 16 688 038 =============== ================
11 Notes to Consolidated Financial Statements Amortized costs and fair values of securities available for sale as of December 31, 1997 and 1996, are summarized as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value --------------- ---------------- -------------- ---------------- 1997 ----------------------------------------------------------------------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 2 458 729 $ 7 531 $ (2 930) $ 2 463 330 Obligations of states and political subdivisions 12 081 525 54 937 - - 12 136 462 Mortgage-backed securities 29 945 864 33 893 (400 919) 29 578 838 Corporate preferred 2 376 980 31 766 (25 346) 2 383 400 Other 707 800 - - - - 707 800 --------------- ---------------- -------------- ---------------- $ 47 570 898 $ 128 127 $ (429 195) $ 47 269 830 =============== ================ ============== ================ 1996 ----------------------------------------------------------------------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 4 987 626 $ 745 $ (38 408) $ 4 949 963 Mortgage-backed securities 27 216 393 17 851 (713 390) 26 520 854 Corporate preferred 3 033 996 6 876 (60 461) 2 980 411 Other 585 000 - - - - 585 000 --------------- ---------------- -------------- ---------------- $ 35 823 015 $ 25 472 $ (812 259) $ 35 036 228 =============== ================ ============== ================
The amortized cost and fair value of securities available for sale as of December 31, 1997, by contractual maturity are shown below. Maturities may differ from contractual maturities in corporate and mortgage-backed securities because the securities and mortgages underlying the securities may be called or repaid without any penalties. Therefore, these securities are not included in the maturity categories in the following maturity summary. 12 Notes to Consolidated Financial Statements
Amortized Fair Cost Value --------------- ---------------- Due in one year or less $ 639 120 $ 639 120 Due after one year through five years 1 575 428 1 580 305 Due after five years through 10 years 244 181 243 905 Due after 10 years 12 081 525 12 136 462 Mortgage-backed securities 29 945 864 29 578 838 Corporate preferred 2 376 980 2 383 400 Other 707 800 707 800 --------------- ---------------- $ 47 570 898 $ 47 269 830 =============== ================
Proceeds from sales of securities available for sale during 1997, 1996 and 1995 were $26,500,686, $24,282,770 and $15,539,612, respectively. Gross gains of $53,384, $42,269 and $125,906 and gross losses of $145,986, $19,773 and $248,604 were realized on those sales, respectively. The carrying value of securities pledged to qualify for fiduciary powers, to secure public monies as required by law and for other purposes amounted to $5,945,089 and $1,430,421 at December 31, 1997 and 1996, respectively. Note 3. Loans, Net The composition of the net loans is as follows:
December 31, ---------------------------------- 1997 1996 --------------- ---------------- (in thousands) Real estate loans: Construction and land development $ 3 798 $ 4 182 Secured by farmland 2 140 2 105 Secured by 1-4 family residential 48 396 43 860 Other real estate loans 26 054 24 774 Loans to farmers (except secured by real estate) 961 891 Commercial and industrial loans (except those secured by real estate) 14 062 10 681 Loans to individuals for personal expenditures 8 738 8 061 All other loans 88 76 --------------- ---------------- Total loans $ 104 237 $ 94 630 Less: Unearned income 10 35 Allowance for loan losses 974 884 --------------- ---------------- Net loans $ 103 253 $ 93 711 =============== ================
13 Notes to Consolidated Financial Statements Note 4. Allowance for Loan Losses Transactions in the allowance for loan losses are as follows:
1997 1996 1995 -------------- ------------- -------------- Balance, beginning $ 883 536 $ 866 173 $ 940 081 Provision charged to operating expense 177 602 65 000 54 950 Recoveries 40 235 77 523 82 860 Loan losses charged to the allowance (127 013) (125 160) (211 718) -------------- ------------- -------------- $ 974 360 $ 883 536 $ 866 173 ============== ============= ==============
Nonaccrual loans excluded from impaired loan disclosure under FASB 114 amounted to $242,583 and $76,227 at December 31, 1997 and 1996, respectively. If interest on these loans had been accrued, such income would have approximated $14,898 and $1,993 for 1997 and 1996, respectively. Note 5. Bank Premises and Equipment, Net Bank premises and equipment consists of the following:
1997 1996 ---------------- --------------- Land $ 1 516 423 $ 989 520 Banking facilities 3 057 340 1 989 570 Furniture, fixtures and equipment 3 141 736 2 706 998 Construction in progress and deposits on equipment 119 261 1 028 027 ---------------- --------------- $ 7 834 760 $ 6 714 115 Less accumulated depreciation 2 307 657 2 015 529 ---------------- --------------- $ 5 527 103 $ 4 698 586 ================ ===============
Depreciation expense was $396,833, $301,497 and $251,390 for the years ended December 31, 1997, 1996 and 1995, respectively. 14 Notes to Consolidated Financial Statements Note 6. Deposits The aggregate amount of jumbo time deposits, each with a minimum denomination of $100,000, was approximately $17,268,984 and $14,012,755 in 1997 and 1996, respectively. At December 31, 1997, the scheduled maturities of time deposits are as follows: 1998 $ 39 137 574 1999 7 210 439 2000 10 186 691 2001 266 688 2002 and thereafter 448 551 ---------------- $ 57 249 943 ================ Note 7. Federal Home Loan Bank Advances As of December 31, 1997 and 1996, the Company had borrowed $2,800,000 and $4,000,000, respectively, on a short-term basis from its $16,000,000 line of credit with the Federal Home Loan Bank of Atlanta. The Company has pledged real estate loans and Federal Home Loan Bank stock as collateral on these borrowings. Note 8. Business Combination On August 1, 1997, the Company acquired The Tredegar Trust Company. The Company issued 69,150 shares of common stock for all of the outstanding shares of common stock of Tredegar. The excess of the total acquisition cost over the fair value of the net assets acquired is being amortized over 20 years by the straight-line method. The acquisition has been accounted for as a purchase and results of operations of Tredegar since the date of acquisition are included in the consolidated financial statements. Note 9. Stock Option Plan In 1997, the Board of Directors approved the 1997 Stock Option Plan for employees subject to approval by the Company's shareholders at the 1998 Annual Meeting of Shareholders. The plan allows for incentive stock options and nonqualified stock options. 300,000 shares of the Company's common stock have been reserved for the issuance of stock options under the Employee Plan. The Board granted 54,000 options (subject to shareholders' approval of the plan) to key employees of the Bank at $17.00 per share. Of the 54,000 options, a total of 26,544 were vested November 13, 1997 with the remaining options vesting 12,548 per year for 1998 and 1999 and 2,360 vesting in 2000. 15 Notes to Consolidated Financial Statements Note 10. Employee Benefits The amount charged to expense for the Company's pension plan totaled $113,433, $85,739 and $86,294 for the years ended December 31, 1997, 1996 and 1995, respectively. The components of the pension cost charged to expense for 1997, 1996 and 1995 consisted of the following:
1997 1996 1995 -------------- ------------- -------------- Service cost $ 120 165 $ 103 203 $ 86 803 Interest cost on projected benefit obligation 121 209 133 703 121 361 Actual return on plan assets (140 632) (163 858) (134 561) Net amortization and deferral 12 691 12 691 12 691 -------------- ------------- -------------- $ 113 433 $ 85 739 $ 86 294 ============== ============= ==============
The following table sets forth the plan's funded status as of September 30, 1997 and 1996, and the amount recognized in the accompanying balance sheets as of December 31, 1997 and 1996:
1997 1996 --------------- ------------- Actuarial present value of benefit obligations: Vested benefits $ 1 065 024 $ 908 635 ============== ============= Accumulated benefits $ 1 146 766 $ 998 018 ============== ============= Projected benefits $ (1 746 565) $ (1 425 983) Plan assets at fair value 1 840 995 1 480 340 -------------- ------------- Funded status $ 94 430 $ 54 357 Unrecognized net loss 125 410 88 368 Unrecognized net transition (asset) (43 771) (47 751) Unrecognized prior service cost 200 049 216 720 -------------- ------------- Asset on balance sheet as of September 30 $ 376 118 $ 311 694 Fourth quarter entries, employer contributions 177 947 181 472 -------------- ------------- Asset on balance sheet as of December 31 $ 554 065 $ 493 166 ============== =============
The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the benefit obligations were 8.5% and 6.0%, respectively. The expected long-term rate of return on plan assets was 9.5%. 16 Notes to Consolidated Financial Statements Plan assets consist of diversified bond and common stock mutual funds. Bond funds account for approximately 40% of plan assets and equity funds approximate 60% of plan assets. A deferred compensation plan was adopted for the President and Chief Executive Officer. Benefits are to be paid in monthly installments for 15 years following retirement or death. The agreement provides that if employment is terminated for reasons other than death or disability prior to age 65, the amount of benefits would be reduced. The deferred compensation expense for 1997 and 1996, based on the present value of the retirement benefits, was $15,809 and $15,539. The plan is unfunded. However, life insurance has been acquired on the life of the employee in an amount sufficient to discharge the obligation. Note 11. Income Taxes Net deferred tax assets (liabilities) consist of the following components as of December 31, 1997 and 1996:
1997 1996 ------------- --------------- Deferred tax assets: Allowance for loan losses $ 216 313 $ 185 432 Deferred compensation 24 655 19 280 Unearned loan fees 2 159 4 607 Interest on nonaccrual loans 4 819 678 Loss on capital assets 28 391 - - Securities available for sale 102 363 267 508 ------------- ---------------- $ 378 700 $ 477 505 ------------- ---------------- Deferred tax liabilities: Property and equipment $ 287 409 $ 259 774 Prepaid pension costs 185 644 166 447 ------------- ---------------- $ 473 053 $ 426 221 ------------- ---------------- $ (94 353) $ 51 284 ============= ================
The provision for income taxes charged to operations for the years ended December 31, 1997, 1996 and 1995 consists of the following:
1997 1996 1995 ------------ -------------- -------------- Current tax expense $ 881 675 $ 659 730 $ 542 592 Deferred tax expense (benefit) (19 508) 68 349 82 137 ------------- -------------- -------------- $ 862 167 $ 728 079 $ 624 729 ============ ============== ==============
17 Notes to Consolidated Financial Statements The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the years ended December 31, 1997, 1996 and 1995, due to the following:
1997 1996 1995 ------------ ------------ ------------ Computed "expected" tax expense $ 1 187 799 $ 938 069 $ 792 614 Increase (decrease) in income taxes resulting from: Tax exempt interest income (284 689) (175 099) (185 166) Other, net (40 943) (34 891) 17 281 ------------ ------------ ------------ $ 862 167 $ 728 079 $ 624 729 ============ ============ ============
Note 12. Related Party Transactions The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, principal officers, their immediate families and affiliated companies in which they are principal stockholders (commonly referred to as related parties), on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. These persons and firms were indebted to the Company for loans totaling $2,783,606 and $845,656 at December 31, 1997 and 1996, respectively. During 1997, total principal additions were $2,386,733 and total principal payments were $448,783. Note 13. Contingent Liabilities and Commitments In the normal course of business, there are outstanding various commitments and contingent liabilities, which are not reflected in the accompanying financial statements. The Company does not anticipate any material loss as a result of these transactions. See Note 15 with respect to financial instruments with off-balance-sheet risk. The Company must maintain a reserve against its deposits in accordance with Regulation D of the Federal Reserve Act. For the final weekly reporting period in the years ended December 31, 1997 and 1996, the aggregate amounts of daily average required reserves were approximately $1,239,000 and $1,073,000, respectively. 18 Notes to Consolidated Financial Statements Note 14. Retained Earnings Transfers of funds from the banking subsidiary to the parent corporation in the form of loans, advances and cash dividends are restricted by federal and state regulatory authorities. As of December 31, 1997, there were no unrestricted funds which could be transferred from the banking subsidiary to the parent corporation, without prior regulatory approval. Note 15. Financial Instruments With Off-Balance-Sheet Risk and Credit Risk The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. A summary of the contract or notional amount of the Company's exposure to off-balance-sheet risk as of December 31, 1997 and 1996, is as follows:
1997 1996 -------------- ---------------- Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $ 12 396 000 $ 6 617 119 Standby letters of credit $ 1 185 514 $ 606 364
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties. 19 Notes to Consolidated Financial Statements Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds real estate as collateral supporting those commitments for which collateral is deemed necessary. The extent of collateral held for those commitments at December 31, 1997, varies from 0 percent to 100 percent; the average amount collateralized is 30 percent. The Company has approximately $3,712,065 in deposits in financial institutions in excess of amounts insured by the Federal Deposit Insurance Corporation (FDIC) at December 31, 1997. Note 16. Disclosures About Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Short-Term Investments For those short-term instruments, the carrying amount is a reasonable estimate of fair value. Securities For securities held for investment purposes, fair values are based on quoted market prices or dealer quotes. Loans For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans were estimated using discounted cash flow analyses, using interest rates currently being offered. Deposit Liabilities The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Short-Term Liabilities For securities sold under agreements to repurchase and Federal Home Loan Bank advances, the carrying amount is a reasonable estimate of fair value. 20 Notes to Consolidated Financial Statements Off-Balance-Sheet Financial Instruments The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At December 31, 1997 and 1996, the carrying amounts and fair values of loan commitments and standby letters of credit were immaterial. The estimated fair values of the Company's financial instruments are as follows:
1997 1996 -------------------------------- ------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- (in thousands) (in thousands) Financial assets: Cash and short-term investments $ 8 609 $ 8 609 $ 9 919 $ 9 919 Securities 63 696 63 958 52 402 52 376 Loans 104 227 104 562 94 595 94 878 Less: allowance for loan losses (974) - - (884) - - ------------- -------------- -------------- ------------- Total financial assets $ 175 558 $ 177 129 $ 156 032 $ 157 173 ============ ============== ============= ============= Financial liabilities: Deposits $ 156 554 $ 156 846 $ 138 790 $ 139 149 Securities sold under agreements to repurchase 3 048 3 048 1 445 1 445 Federal Home Loan Bank advances 2 800 2 800 4 000 4 000 ------------ -------------- ------------- ------------- Total financial liabilities $ 162 402 $ 162 694 $ 144 235 $ 144 594 ============ ============== ============= =============
Note 17. Capital Requirements The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. 21 Notes to Consolidated Financial Statements Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 1997, that the Company meets all capital adequacy requirements to which it is subject. As of June 30, 1997, the most recent notification from the Federal Reserve Bank categorized the Company as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. The Company's actual capital amounts and ratios are also presented in the table.
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------ ----------------- ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (in thousands) As of December 31, 1997: Total Capital (to Risk Weighted Assets): Consolidated $ 21 678 19.7% $ 8 803 $ 8.0% N/A The Middleburg Bank $ 17 558 16.2% $ 8 694 $ 8.0% $ 10 867 $ 10.0% Tier 1 Capital (to Risk Weighted Assets): Consolidated $ 20 704 18.8% $ 4 401 $ 4.0% N/A The Middleburg Bank $ 16 584 15.3% $ 4 347 $ 4.0% $ 6 520 $ 6.0% Tier 1 Capital (to Average Assets): Consolidated $ 20 704 11.8% $ 6 994 $ 4.0% N/A The Middleburg Bank $ 16 584 9.8% $ 6 781 $ 4.0% $ 8 477 $ 5.0% As of December 31, 1996: Total Capital (to Risk Weighted Assets): Consolidated $ 19 376 20.2% $ 7 680 $ 8.0% N/A The Middleburg Bank $ 16 187 17.0% $ 7 627 $ 8.0% $ 9 534 $ 10.0% Tier 1 Capital (to Risk Weighted Assets): Consolidated $ 18 492 19.3% $ 3 840 $ 4.0% N/A The Middleburg Bank $ 15 303 16.1% $ 3 813 $ 4.0% $ 5 720 $ 6.0% Tier 1 Capital (to Average Assets): Consolidated $ 18 492 11.7% $ 6 307 $ 4.0% N/A The Middleburg Bank $ 15 303 9.9% $ 6 187 $ 4.0% $ 7 733 $ 5.0%
22 Notes to Consolidated Financial Statements Note 18. Condensed Financial Information - Parent Company Only Notes to Consolidated Financial Statements INDEPENDENT COMMUNITY BANKSHARES, INC. (Parent Corporation Only) Balance Sheets December 31, 1997 and 1996
1997 1996 Assets ---- ---- Cash on deposit with subsidiary bank $ 1 255 $ 7 387 Money market fund 713 403 141 011 Securities available for sale 2 383 400 2 980 411 Investment in subsidiaries, at cost, plus equity in undistributed net income 17 343 024 14 818 885 Organizational expenses, net 19 236 35 723 Goodwill 1 181 110 - - Other assets 44 700 24 450 -------------- --------------- Total assets $ 21 686 128 $ 18 007 867 ============== =============== Liabilities and Shareholders' Equity Liabilities $ - - $ - - -------------- --------------- Shareholders' Equity Common stock $ 9 062 970 $ 4 299 190 Capital surplus 1 948 246 1 411 174 Retained earnings 10 873 617 12 816 782 Unrealized (loss) on securities available for sale, net (198 705) (519 279) -------------- --------------- Total shareholders' equity $ 21 686 128 $ 18 007 867 -------------- --------------- Total liabilities and shareholders' equity $ 21 686 128 $ 18 007 867 ============== ===============
23 Notes to Consolidated Financial Statements INDEPENDENT COMMUNITY BANKSHARES, INC. (Parent Corporation Only) Statements of Income Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995 ------------- -------------- ------------- Income Dividends from subsidiary $ 1 201 074 $ 704 000 $ 4 621 374 Dividends from investments 224 804 226 896 - - Interest 13 110 5 351 - - Profits (losses) on securities available for sale, net (83 503) - - - - -------------- -------------- ------------- Total income $ 1 355 485 $ 936 247 $ 4 621 374 ------------- -------------- ------------- Expenses Amortization $ 41 617 $ 16 487 $ 16 487 Legal and professional fees 21 132 18 620 8 856 Printing and supplies 17 270 8 818 8 601 Other 889 1 124 1 174 ------------- -------------- ------------- Total expenses $ 80 908 $ 45 049 $ 35 118 ------------- -------------- ------------- Income before allocated tax benefits and undistributed income of subsidiaries $ 1 274 577 $ 891 198 $ 4 586 256 Income tax expense (benefit) (18 659) 10 770 (11 940) ------------- -------------- -------------- Income before equity (deficit) in undistributed income of subsidiaries $ 1 293 236 $ 880 428 $ 4 598 196 Equity (deficit) in undistributed income of subsidiaries 1 338 124 1 150 518 (2 891 702) ------------- -------------- -------------- Net income $ 2 631 360 $ 2 030 946 $ 1 706 494 ============= ============== =============
24 Notes to Consolidated Financial Statements INDEPENDENT COMMUNITY BANKSHARES, INC. (Parent Corporation Only) Statements of Cash Flows Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995 ---------------- ------------- ------------- Cash Flows from Operating Activities Net income $ 2 631 360 $ 2 030 946 $ 1 706 494 Adjustments to reconcile net income to net cash provided by operating activities: Amortization 41 617 16 487 16 487 Undistributed (earnings) deficit of subsidiary (1 338 124) (1 150 518) 2 891 702 Loss on sale of securities available for sale 83 503 - - - - (Increase) decrease in other assets (40 554) 5 709 5 009 ---------------- ------------- ------------ Net cash provided by operating activities $ 1 377 802 $ 902 624 $ 4 619 692 ---------------- ------------- ------------ Cash Flow from Investing Activities Purchase of securities available for sale $ (1 334 984) $ (100 000) $ (2 933 996) Proceeds from sale of securities available for sale 1 908 497 - - - - Purchase of intangibles (175 182) - - - - ---------------- ------------- ------------ Net cash provided by (used in) investing activities $ 398 331 $ (100 000) $ (2 933 996) ---------------- ------------- ------------ Cash Flows from Financing Activities Purchase of common stock $ (635 348) $ - - $(1 012 536) Net proceeds from sale of common stock - - - - 73 514 Cash dividends paid (574 525) (722 264) (707 398) ---------------- -------------- ------------- Net cash (used in) financing activities $ (1 209 873) $ (722 264) $ (1 646 420) Increase in cash and cash equivalents $ 566 260 $ 80 360 $ 39 276 Cash and Cash Equivalents Beginning 148 398 68 038 28 762 ---------------- ------------- ------------ Ending $ 714 658 $ 148 398 $ 68 038 ================ ============= ============
25 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INDEPENDENT COMMUNITY BANKSHARES, INC. Date: March 31, 1998 By: /s/ Joseph L. Boling -- -------------------------------------- Joseph L. Boling President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date /s/ Joseph L. Boling President and Chief Executive March 31, 1998 - ------------------------------------------- Officer and Director Joseph L. Boling (Principal Executive Officer) /s/ Alice P. Frazier Senior Vice President and Chief Financial March 31, 1998 - ------------------------------------------- Officer (Principal Financial and Alice P. Frazier Accounting Officer) - ------------------------------------------- Director March __, 1998 Howard M. Armfield /s/ Childs Frick Burden - ------------------------------------------- Director March 31, 1998 Childs Frick Burden - ------------------------------------------- Director March __, 1998 J. Lynn Cornwell, Jr. /s/ William F. Curtis - ------------------------------------------- Director March 31, 1998 William F. Curtis /s/ F.E. Deacon III - ------------------------------------------- Director March 31, 1998 F.E. Deacon III /s/ George A. Horkan, Jr. - ------------------------------------------- Director March 31, 1998 George A. Horkan, Jr. /s/ C. Oliver Iselin, III - ------------------------------------------- Director March 31, 1998 C. Oliver Iselin, III /s/ William S. Leach - ------------------------------------------- Director March 31, 1998 William S. Leach - ------------------------------------------- Director March __, 1998 Thomas W. Nalls - ------------------------------------------- Director March __, 1998 John C. Palmer - ------------------------------------------- Director March __, 1998 John Sherman - ------------------------------------------- Director March __, 1998 Millicent W. West /s/ Edward T. Wright - ------------------------------------------- Director March 31, 1998 Edward T. Wright
INDEX TO EXHIBITS 3.1 Articles of Incorporation of Independent Community Bankshares, Inc. (restated in electronic format), attached as Exhibit 3.1 to the Registration Statement on Form S-4, Registration No. 333-24523, filed with the Commission on April 4, 1997 (the "Form S-4"), incorporated herein by reference. 3.2 Bylaws of Independent Community Bankshares, Inc., attached as Exhibit 3.2 to the Form S-4, incorporated herein by reference. 10.1 Revised Employment Agreement, dated January 1, 1997, between The Middleburg Bank and Joseph L. Boling, attached as Exhibit 10.1 to the Form S-4, incorporated herein by reference. 21 Subsidiaries of the Registrant. 27 Financial Data Schedule (filed electronically only). EX-21 2 EXHIBIT 21 Exhibit 21 Subsidiaries of Independent Community Bankshares, Inc. Name of Subsidiary State of Incorporation ------------------ ---------------------- The Middleburg Bank Virginia The Tredegar Trust Company Virginia EX-27 3 FDS
9 1000 12-MOS DEC-31-1997 DEC-31-1997 6128 129952 1300 0 47270 16426 16688 104247 974 184860 156554 5848 771 0 0 0 9063 12623 184860 8972 3713 0 12685 4886 5192 7492 178 (91) 4971 3494 3494 0 0 2631 1.51 1.51 4.98 243 0 0 408 884 128 40 974 974 0 0
-----END PRIVACY-ENHANCED MESSAGE-----