-----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, LD3FaqQYHf1HNRZsV5wZ6+LJ7rAv5mqw6ZZqPpNz2wVoh5MbWwjtg/NRcHEt+Ckh o8LHS5JjyBtMQbf/cG4W5w== 0001002105-00-000016.txt : 20000322 0001002105-00-000016.hdr.sgml : 20000322 ACCESSION NUMBER: 0001002105-00-000016 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000321 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: 000-24159 FILM NUMBER: 574325 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 - INDEPENDENT COMMUNITY BANKSHARES, INC. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 Commission file number 0-24159 INDEPENDENT COMMUNITY BANKSHARES, INC. (Name of Small Business Issuer in its Charter) Virginia 54-1696103 (State or Other Jurisdiction (I.R.S. Employer of Incorporation) Identification No.) 111 West Washington Street 20117 Middleburg, Virginia (Zip Code) (Address of Principal Executive Offices) (703) 777-6327 (Issuer's Telephone Number, Including Area Code) Securities registered under Section 12(b) of the Exchange Act: Name of Each Exchange Title of Each Class on Which Registered ------------------- ------------------- None n/a Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $5.00 per share (Title of Class) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes X No ----- ----- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The issuer's gross income for its most recent fiscal year was $18,468,000. The aggregate market value of the voting stock held by non-affiliates computed by reference to the average of the closing bid and asked prices of such stock as of February 17, 2000 was approximately $28,103,826. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.) The number of outstanding shares of Common Stock as of February 17, 2000 was 1,778,994. (This report also covers 276,600 Contractual Rights to Contingent Merger Consideration, which are registered under the Securities Act of 1933, as amended, pursuant to a registration statement declared effective on June 27, 1997.) DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement for the 2000 Annual Meeting of Shareholders - Part III -2- TABLE OF CONTENTS PART I Page ITEM 1. DESCRIPTION OF BUSINESS........................................... 4 ITEM 2. DESCRIPTION OF PROPERTY........................................... 9 ITEM 3. LEGAL PROCEEDINGS................................................ 10 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................. 10 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................................ 10 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.................. 11 ITEM 7. FINANCIAL STATEMENTS............................................. 30 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.............. 30 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT........................... 30 ITEM 10. EXECUTIVE COMPENSATION........................................... 30 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................... 30 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 31 ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K............................31 -3- PART I ITEM 1. DESCRIPTION OF BUSINESS General Independent Community Bankshares, Inc. ("ICBI" or the "Company") is a bank holding company that was incorporated under Virginia law in 1993. The Company owns all of the stock of its subsidiaries, The Middleburg Bank (the "Bank") and The Tredegar Trust Company ("Tredegar"), both of which are chartered under Virginia law. The Bank has four full service branches and one limited service facility. The Bank has its main office at 111 West Washington Street, Middleburg, Virginia 20117, and has offices in Purcellville, Leesburg and Ashburn, Virginia. The Bank opened for business on July 1, 1924. Tredegar has its main office at Riverfront Plaza, 901 E. Byrd Street, Suite 190, Richmond, Virginia 23219, and a branch office in Middleburg, Virginia. Tredegar opened for business in January 1994. The Bank's market is western Loudoun County. Loudoun County is in northwestern Virginia and included in the Washington-Baltimore Metropolitan statistical area. Loudoun County's population is approximately 150,000 with slightly over one-third of the population located in the markets served by the Bank and Tredegar. The local economy is driven by service industries requiring a higher skill level, self-employed individuals, the equine industry and the independently wealthy. Tredegar serves primarily the greater Richmond area including the counties of Henrico, Chesterfield, Hanover, Goochland and Powhatan as well as Loudoun County. However, Tredegar does have customers outside of its primary market. Richmond is the capital of Virginia, and the greater Richmond area has a population in excess of 800,000 people. The Company, through its subsidiaries, offers a wide range of banking, fiduciary and investment management services to individuals and small businesses. The banking services include various types of checking and savings accounts, and business, real estate, development, mortgage, home equity, automobile and other installment, demand and term loans. The Bank also offers ATMs at all locations, internet banking, travelers' checks, money orders, safe deposit rentals, collections, notary public, wire services and other traditional bank services to its customers. Tredegar provides a variety of investment management and fiduciary services including trust and estate settlement. Tredegar can also serve as escrow agent, attorney-in-fact, guardian of property or trustee of an IRA. The Bank has one wholly owned subsidiary, Middleburg Bank Service Corporation. Middleburg Bank Service Corporation is a partner in a limited liability company, Bankers Title Shenandoah, LLC, which sells title insurance to its members. It has also invested in another limited liability company, Virginia Bankers Insurance Center, LLC, which acts as a broker for insurance sales for its member banks. At December 31, 1999, ICBI had a total of 95 full time equivalent employees. The Company considers relations with its employees to be excellent. The Company's employees are not represented by a collective bargaining unit. Competition ICBI faces significant competition for both loans and deposits. Competition for loans comes from commercial banks, savings and loan associations and savings banks, mortgage banking subsidiaries -4- of regional commercial banks, subsidiariesof national mortgage bankers, insurance companies, and other institutional lenders. Its most direct competition for deposits has historically come from savings and loan associations and savings banks, commercial banks, credit unions and other financial institutions. Based upon total assets at June 30, 1999, the Company is the largest banking organization in terms of deposits operating in Loudoun County, Virginia. The Company faces competition for deposits from short-term money market mutual funds and other corporate and government securities funds. Tredegar competes for customers and accounts with banks, other financial institutions and money managers. Even though many of these institutions have been engaged in the trust or investment management business for a considerably longer period of time than Tredegar and have significantly greater resources, Tredegar has grown through its commitment to quality trust services and a local community approach to business. Supervision and Regulation Banks and their holding companies are extensively regulated. ICBI is a bank holding company subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve") and the Virginia State Corporation Commission (the "SCC"). ICBI's sole banking subsidiary is the Bank, a Virginia chartered bank that is subject to supervision and regulation by the Federal Reserve and the SCC. Tredegar is a Virginia chartered trust company also regulated by the SCC and the Federal Reserve. The regulatory discussion is divided into two major subject areas, each of which has three subsections. First, the discussion addresses the general regulatory considerations governing holding companies and focuses on the primary regulatory considerations applicable to ICBI as a bank holding company. Second, the discussion addresses the general regulatory provisions governing financial institutions and focuses on the regulatory considerations of the Bank and Tredegar. The discussion below is only a summary of the principal laws and regulations that comprise the regulatory framework. The descriptions of these laws and regulations, as well as descriptions of laws and regulations contained elsewhere herein, do not purport to be complete and are qualified in their entirety by reference to applicable laws and regulations. Bank Holding Companies General. The Federal Reserve has jurisdiction under the Bank Holding Company Act of 1956, as amended (the "BHC Act"), to approve any bank or nonbank acquisition, merger or consolidation proposed by a bank holding company. The BHC Act generally limits the activities of a bank holding company and its subsidiaries to that of banking, managing or controlling banks, or any other activity which is so closely related to banking or to managing or controlling banks as to be a proper incident thereto. The activities permissible to bank holding companies and their affiliates were substantially expanded by the Gramm-Leach-Bliley Act, which the President signed on November 12, 1999. Gramm-Leach-Bliley repeals the anti-affiliation provisions of the Glass-Steagall Act to permit the common ownership of commercial banks, investment banks and insurance companies. Under Gramm-Leach-Bliley, a bank holding company can elect to be treated as a financial holding company. A financial holding company may engage in any activity and acquire and retain any company that the Federal Reserve determines to be financial in nature. A financial holding company also may engage in any activity that is complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. The Federal Reserve must consult -5- with the Secretary of the Treasury in determining whether an activity is financial in nature or incidental to a financial activity. There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries that are designed to reduce potential loss exposure to the depositors of the depository institutions and to the Federal Deposit Insurance Corporation ("FDIC") insurance fund. For example, under a policy of the Federal Reserve with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. In addition, the "cross-guarantee" provisions of federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by the FDIC as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interest of the Bank Insurance Fund ("BIF"). The FDIC's claim for damages is superior to claims of shareholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institutions. Banking laws also provide that amounts received from the liquidation or other resolution of any insured depository institution by any receiver must be distributed (after payment of secured claims) to pay the deposit liabilities of the institution prior to payment of any other general or unsecured senior liability, subordinated liability, general creditor or shareholder. This provision would give depositors a preference over general and subordinated creditors and shareholders in the event a receiver is appointed to distribute the assets of any bank subsidiaries. Regulatory Capital Requirements. All financial institutions are required to maintain minimum levels of regulatory capital. The federal bank regulatory agencies have established substantially similar risked based and leverage capital standards for financial institutions they regulate. These regulatory agencies also may impose capital requirements in excess of these standards on a case-by-case basis for various reasons, including financial condition or actual or anticipated growth. Under the risk-based capital requirements of these regulatory agencies, ICBI is required to maintain a minimum ratio of total capital to risk-weighted assets of at least 8%. At least half of the total capital is required to be "Tier 1 capital" which consists principally of common and certain qualifying preferred stockholders' equity, less certain intangibles and other adjustments. The remainder ("Tier 2 capital") consists of a limited amount of subordinated and other qualifying debt (including certain hybrid capital instruments) and a limited amount of the general loan loss allowance. Based upon the applicable Federal Reserve regulations, at December 31, 1999, ICBI would be considered "well capitalized." In addition, the federal regulatory agencies have established a minimum leverage capital ratio (Tier 1 capital to tangible assets). These guidelines provide for a minimum leverage capital ratio of 4% for banks and their respective holding companies that meet certain specified criteria, including that they have the highest regulatory examination rating and are not contemplating significant growth or expansion. All other institutions are expected to maintain a leverage ratio of at least 100 to 200 basis points above that minimum. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Each federal regulatory agency is required to revise its risk-based capital standards to ensure that those standards take adequate account of interest rate risk, concentration of credit risk and the risks of nontraditional activities, as well as reflect the actual performance and expected risk of loss on multifamily -6- mortgages. The Federal Reserve and the FDIC have jointly solicited comments on a proposed framework for implementing the interest rate risk component of the risk-based capital guidelines. Under the proposal, an institution's assets, liabilities, and off-balance sheet positions would be weighed by risk factors that approximate the instruments' price sensitivity to a 100 basis point change in interest rates. Institutions with interest rate risk exposure in excess of a threshold level would be required to hold additional capital proportional to that risk. In 1994, the federal bank regulatory agencies solicited comments on a proposed revision to the risk-based capital guidelines to take account of concentration of credit risk and the risk of nontraditional activities. The revision proposed to amend each agency's risk-based capital standards by explicitly identifying concentration of credit risk and the risk arising from nontraditional activities, as well as an institution's ability to manage those risks, as important factors to be taken into account by the agency in assessing an institution's overall capital adequacy. The proposal was adopted as a final rule by the federal bank regulatory agencies and subsequently became effective on January 17, 1995. Limits on Dividends and Other Payments. Certain state law restrictions are imposed on distributions of dividends to shareholders of ICBI. ICBI shareholders are entitled to receive dividends as declared by the ICBI Board of Directors. However, no such distribution may be made if, after giving effect to the distribution, it would not be able to pay its debts as they became due in the usual course of business or its total assets would be less than its total liabilities. There are similar restrictions with respect to stock repurchases and redemptions. The Bank is subject to legal limitations on capital distributions including the payment of dividends, if, after making such distribution, the institution would become "undercapitalized" (as such term is used in the statute). For all state member banks of the Federal Reserve seeking to pay dividends, the prior approval of the applicable Federal Reserve Bank is required if the total of all dividends declared in any calendar year will exceed the sum of the bank's net profits for that year and its retained net profits for the preceding two calendar years. Federal law also generally prohibits a depository institution from making any capital distribution (including payment of a dividend or payment of a management fee to its holding company) if the depository institution would thereafter fail to maintain capital above regulatory minimums. Federal Reserve Banks are also authorized to limit the payment of dividends by any state member bank if such payment may be deemed to constitute an unsafe or unsound practice. In addition, under Virginia law no dividend may be declared or paid that would impair a Virginia chartered bank's paid-in capital. The SCC has general authority to prohibit payment of dividends by a Virginia chartered bank if it determines that the limitation is in the public interest and is necessary to ensure the bank's financial soundness. The Bank General. In addition to the regulatory provisions regarding holding companies addressed above, the Bank is subject to extensive regulation as well. The following discussion addresses certain primary regulatory considerations affecting the Bank. The Bank is regulated extensively under both federal and state law. The Bank is organized as a Virginia chartered banking corporation and is regulated and supervised by the Bureau of Financial Institutions of the SCC. As a member of the Federal Reserve System as well, the Bank is regulated and supervised by the Federal Reserve Bank of Richmond. The SCC and the Federal Reserve Bank of Richmond conduct regular examinations of the Bank, reviewing such matters as the adequacy of loan loss reserves, quality of loans and investments, management practices, compliance with laws, and other aspects of their operations. In addition to these regular examinations, the Bank must furnish the SCC and the Federal Reserve with periodic reports containing a full and accurate statement of its affairs. -7- Supervision, regulation and examination of banks by these agencies are intended primarily for the protection of depositors rather than shareholders. Insurance of Accounts, Assessments and Regulation by the FDIC. The Bank's deposits are insured up to $100,000 per insured depositor (as defined by law and regulation) through the BIF. The BIF is administered and managed by the FDIC. As insurer, the FDIC is authorized to conduct examinations of and to require reporting by BIF-insured institutions. The actual assessment to be paid by each BIF member is based on the institution's assessment risk classification and whether the institution is considered by its supervisory agency to be financially sound or to have supervisory concerns. The FDIC is authorized to prohibit any BIF-insured institution from engaging in any activity that the FDIC determines by regulation or order to pose a serious threat to the respective insurance fund. Also, the FDIC may initiate enforcement actions against banks, after first giving the institution's primary regulatory authority an opportunity to take such action. The FDIC may terminate the deposit insurance of any depository institution, including the Bank, if it determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed in writing by the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If deposit insurance is terminated, the deposits at the institution at the time of termination, less subsequent withdrawals, shall continue to be insured for a period from six months to two years, as determined by the FDIC. Management is aware of no existing circumstances that could result in termination of the Bank's deposit insurance. Other Safety and Soundness Regulations. The federal banking agencies have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized," as such terms are defined under uniform regulations defining such capital levels issued by each of the federal banking agencies. In addition, FDIC regulations require that management report on the institution's responsibility to prepare financial statements, and to establish and to maintain an internal control structure and procedures for financial reporting and compliance with designated laws and regulations concerning safety and soundness; and that independent auditors attest to and report separately on assertions in management's reports concerning compliance with such laws and regulations, using FDIC-approved audit procedures. Each of the federal banking agencies also must develop regulations addressing certain safety and soundness standards for insured depository institutions and depository institution holding companies, including compensation standards, operational and managerial standards, asset quality, earnings and stock valuation. The federal banking agencies have issued a joint notice of proposed rulemaking, which requested comment on the implementation of these standards. The proposed rule sets forth general operational and managerial standards in the areas of internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. The proposal contemplates that each federal agency would determine compliance with these standards through the examination process, and if necessary to correct weaknesses, require an institution to file a written safety and soundness compliance plan. ICBI has not yet determined the effect that the proposed rule would have on its operations and the operations of its depository institution subsidiary if it is enacted substantially as proposed. -8- Community Reinvestment. The requirements of the Community Reinvestment Act ("CRA") affect the Bank. The CRA imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those institutions. Each financial institution's efforts in meeting community credit needs currently are evaluated as part of the examination process pursuant to twelve assessment factors. These factors also are considered in evaluating mergers, acquisitions and applications to open a branch or facility. The Bank is meeting its obligations under the CRA. Tredegar operates as a subsidiary trust company pursuant to the Virginia Banking Act. As such, it is subject to supervision and regulation by the Federal Reserve and by the SCC and its Bureau of Financial Institutions, which have authority over Virginia banks and savings institutions and other financial institutions, including independent trust companies. As a subsidiary trust company, it is subject to periodic investigations and examinations by the SCC and the Federal Reserve. ITEM 2. DESCRIPTION OF PROPERTY The headquarters building of the Company and the Bank, which also serves as a branch office for Tredegar, was completed in 1981 and is a two-story building of brick construction, with approximately 18,000 square feet of floor space located at 111 West Washington Street, Middleburg, Virginia 20117. The office operates nine teller windows, including three drive-up facilities and one stand-alone automatic teller machine. The Bank owns the headquarters building. The Purcellville bank branch was purchased in 1994 and is a one-story building with a basement of brick construction, with approximately 3,000 square feet of floor space located at 431 East Main Street, Purcellville, Virginia 20132. The office operates four teller windows, including three drive-up facilities and one drive-up automatic teller machine. The Bank owns this branch building. The Leesburg bank branch was completed in 1997 and is a two-story building of brick construction, with approximately 6,000 square feet of floor space located at 102 Catoctin Circle, S.E., Leesburg, Virginia 20175. The office operates five teller windows, including three drive-up facilities and one drive-up automatic teller machine. The Bank also owns this branch building. The Leesburg limited service facility, located at 200 North King Street, was leased beginning April 1999. The leased space consists of 200 square feet with one teller window and a stand-alone automated teller machine. Transactions in this branch are limited to paying and receiving teller functions. The initial term of this lease is five years with two additional renewal periods of five years each. The annual lease expense associated with this location is $5,400. The Ashburn bank branch was leased beginning January 1999 and consists of 24,969 rentable square feet at 20955 Professional Plaza, Suite 100, Ashburn, Virginia 20147. The office is a full service branch with five teller windows, three drive-up facilities and a drive-up automated teller machine. The initial term of the lease is 15 years with two five-year renewal options. The annual lease expense associated with this location is $68,000. The mortgage banking department of The Middleburg Bank leased office space in June 1999. The space includes 1,822 rentable square feet used primarily for mortgage banking operations and loan originator office space. The initial term of the lease is for five years with no renewal options. The annual lease expense associated with this location is $35,000. -9- Tredegar has leased its main office in Richmond, Virginia. Rental expense for this location totaled $44,000 in the fiscal year ended December 31, 1999. All of the Company's properties are in good operating condition and are adequate for the Company's present and anticipated future needs. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the company is a party or of which the property of the Company is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders of the Company. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Since October 1997, the Company's common stock has traded on the OTC Bulletin Board under the symbol "ICBX." The following table sets forth, for the quarters indicated, the high and low sales prices for the common stock and per share dividends for the periods indicated. Market Price and Dividends Sales Price ($) Dividends ($) --------------- ------------- High Low ---- --- 1998: 1st quarter........................ 28.50 21.00 .15 2nd quarter........................ 29.00 27.75 .15 3rd quarter........................ 29.50 25.50 .15 4th quarter........................ 25.50 22.00 .15 1999: 1st quarter........................ 23.88 20.00 .17 2nd quarter........................ 24.00 23.25 .17 3rd quarter........................ 29.25 22.00 .17 4th quarter........................ 26.25 21.75 .17 ICBI historically has paid cash dividends on a quarterly basis. The final determination of the timing, amount and payment of dividends on the Common Stock is at the discretion of ICBI's Board of Directors and will depend upon the earnings of ICBI and its subsidiaries, principally, its subsidiary bank, the financial condition of ICBI and other factors, including general economic conditions and applicable governmental regulations and policies. ICBI or the Bank has paid regular cash dividends for over 200 consecutive quarters. -10- As of March 1, 2000, ICBI had 950 shareholders of record. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following discussion provides information about the major components of the results of operations and financial condition, liquidity, and capital resources of ICBI. This discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and Notes to Consolidated Financial Statements. Overview ICBI is headquartered in Middleburg, Virginia and has two wholly owned subsidiaries, the Bank and Tredegar. The Bank is a community bank serving Western Loudoun County, Virginia with four full service branches and one limited service facility. Tredegar is a trust company subsidiary headquartered in Richmond, Virginia with a branch office in Middleburg, Virginia. Tredegar was acquired by ICBI in August 1997 and accounted for using the purchase method of accounting. In 1999, ICBI realized growth in assets and net earnings exceeding that of the previous two years. Results for 1999 were favorably affected by the growth in revenues from Tredegar and the Bank's mortgage banking operation, as well as significant branch banking growth. By December 31, 1999, total assets were $243.9 million, an increase of 18.7% over total assets at December 31, 1998, which were $205.4 million. Net loans grew 17.9% from $120.3 million at December 31, 1998 to $141.8 million at December 31, 1999. Total deposits experienced the same growth rate as assets and loans with a $31.2 million increase from $172.7 million at December 31, 1998 to $203.8 million at December 31, 1999. In light of the growth experienced in 1999, ICBI remains well capitalized with risk-adjusted core capital and total capital ratios well above the regulatory minimums. Asset quality measures also remained strong throughout the year. On August 9, 1999, ICBI purchased one percent of the issued and outstanding capital stock of Gilkison Patterson Investment Advisors, Inc. ("GPIA"), an investment advisory firm based in Alexandria, Virginia. In connection with this purchase, ICBI acquired the right to purchase all of the remaining authorized, issued and outstanding shares of GPIA capital stock on or after July 1, 2001. The consideration for these shares and the merger option consisted of $1.2 million in cash. Upon exercise of the merger option, ICBI will purchase all the remaining issued and outstanding shares of GPIA capital stock for an additional $4.8 million in cash and shares of the Company's common stock. ICBI is not aware of any current recommendations by any regulatory authorities that, if they were implemented, would have a material effect on the registrant's liquidity, capital resources or results of operations. Results of Operations Net Income Net income for 1999 was $3.6 million, an increase of 19.9% over 1998's net income of $3.0 million. Net income for 1998 increased 13.0% over 1997's net income of $2.6 million. For 1999 earnings per diluted share were $1.99 compared to $1.63 and $1.51 for 1998 and 1997, respectively. -11- Return on average assets ("ROA") measures how effectively ICBI employs its assets to produce net income. ICBI increased its ROA to 1.60% for the year ended December 31, 1999 from 1.54% for the same period in 1998. An increased net interest margin, growth in earning assets as well as a 35.8% increase in non-interest income contributed to the growth in the ROA. The ROA for 1997 was 1.52%. Return on average equity ("ROE"), another measure of earnings performance, indicates the amount of net income earned in relation to the total equity capital invested. ROE increased to 15.48% for the year ended December 31, 1999. ROE was 13.24% and 13.54% for the years ended December 31, 1998 and 1997, respectively. -12- Average Balances, Income and Expenses, Yields and Rates
---------------------------------------------------------------------------------------- Years Ended December 31, ---------------------------------------------------------------------------------------- 1999 1998 1997 Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate ---------------------------------------------------------------------------------------- (In thousands) Assets: Securities: Taxable $ 30,368 $ 1,937 6.38% $ 31,657 $ 1,804 5.70% $ 41,242 $2,469 5.99% Tax-exempt (1) (2) 30,291 2,264 7.47% 28,931 2,204 7.62% 19,721 1,574 7.98% ----------------------- ---------------------- --------------------- Total securities 60,659 4,201 6.93% 60,588 4,008 6.62% 60,963 4,043 6.63% Loans Taxable 135,735 11,677 8.60% 112,281 10,181 9.07% 96,179 8,956 9.31% Tax-exempt 371 26 7.01% 416 36 8.74% 376 24 6.38% ----------------------- ---------------------- --------------------- Total loans 136,106 11,703 8.60% 112,697 10,217 9.07% 96,555 8,980 9.30% Federal funds sold 6,030 290 4.81% 3,842 211 5.49% 2,928 160 5.46% Interest on money market investments 1,884 98 5.20% 1,817 90 4.95% 365 13 3.56% Interest-bearing deposits in other financial institutions 24 1 4.17% 134 7 5.22% 84 8 9.52% ----------------------- ---------------------- --------------------- Total earning assets 204,703 16,293 7.96% 179,078 14,533 8.12% 160,895 13,204 8.21% Less: Allowance for credit losses (1,223) (1,044) (952) Total nonearning assets 18,979 15,084 12,730 ------------- ------------ ----------- $ Total assets $ 222,459 $193,118 172,673 ============= ============ =========== Liabilities (1): Interest-bearing deposits: Checking $ 29,583 292 0.99% $ 23,853 306 1.28% $ 19,886 360 1.81% Savings and IRA's 19,000 570 3.00% 17,075 602 3.53% 15,631 577 3.69% Money market savings 41,701 1,139 2.73% 34,195 1,002 2.93% 30,071 883 2.94% Time deposits: $100,000 and over 21,965 1,094 4.98% 18,151 949 5.23% 16,480 936 5.68% Under $100,000 35,707 1,703 4.77% 38,557 2,044 5.30% 40,100 2,130 5.31% ----------------------- ---------------------- --------------------- Total interest-bearing deposits 147,956 4,798 3.24% 131,831 4,903 3.72% 122,168 4,886 4.00% Federal Home Loan Bank advances 56 3 5.36% 1,319 70 5.31% 2,999 172 5.74% Securities sold under agreements to repurchase 5,863 253 4.32% 2,833 125 4.41% 2,662 119 4.47% Long-term debt 5,000 281 5.62% 3,740 206 5.51% - - - Federal funds purchased 179 10 5.59% 146 9 6.16% 272 15 5.51% ----------------------- ---------------------- --------------------- Total interest-bearing liabilities 159,054 5,345 3.36% 139,869 5,313 3.80% 128,101 5,192 4.05% Non-interest bearing liabilities Demand deposits 39,154 29,782 24,025 Other liabilities 1,213 997 1,112 Total liabilities 199,421 170,648 153,238 Shareholders' equity 23,038 22,470 19,435 Total liabilities and shareholders' equity $ 222,459 $193,118 $172,673 ============= ============ =========== Net interest income $ 10,948 $ 9,220 $8,012 =========== ========== ========== Interest rate spread 4.60% 4.32% 4.16% Interest expense as a percent of average earning assets 2.61% 2.97% 3.23% Net interest margin 5.35% 5.15% 4.98%
- -------------------------------- (1) Income and yields are reported on tax equivalent basis assuming a federal tax rate of 34% (2) Income and yields include dividends on preferred bonds, which are 70% excludable for tax purposes. -13- Net Interest Income Net interest income represents the principal source of earnings of ICBI. Net interest income equals the amount by which interest generated from earning assets exceeds the expense associated with funding those assets. Changes in volume and mix of interest earning assets and interest bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income. Net interest income on a fully tax-equivalent basis was $10.9 million for the year ended December 31, 1999. This represents an increase of 18.7% over the $9.2 million reported for the same period in 1998. Net interest income for 1998 increased 15.1% over the $8.0 million reported for 1997. When net interest income is presented on a fully tax-equivalent basis, interest income from tax-exempt earning assets is increased by an amount equivalent to the federal income taxes that would have been paid if this income were taxable at the statutory federal tax rate of 34%. The increase in net interest income in 1999 resulted primarily from continued growth in average earning assets and reduction of funding costs. The combination of these two factors contributed to the strengthening of the net interest margin, which increased 20 basis points to 5.35% for 1999. The average balance in the portfolio of securities did not increase. The tax-equivalent yield; however, increased 31 basis points to 6.93%. The asset/liability strategies employed by management increased the investment portfolio yield. The average loan portfolio increased 20.8% during 1999, potentially providing $2.0 million in interest income. Average yield on the loan portfolio, however, decreased 47 basis points. The net effect to interest income provided by the loan portfolio was an increase of $1.5 million in 1999. Excess deposit growth over loan growth was placed in temporary investments including federal funds sold and money market investments. The average balances in those accounts increased $2.1 million during 1999 and provided $81,000 in additional interest income. ICBI enjoyed significant growth in 1999 in core deposits, which contributed to the 48 basis point decrease in cost of funds. Management's strategy to continue attracting core deposits resulted in a 20.2% increase in checking, savings and money market deposit accounts and only a $91,000 increase in interest expense. The average balances in certificates of deposits increased $964,000 while the interest expense associated with these deposits decreased $196,000. ICBI's reliance on other funding sources increased on average by $3.1 million with a related increase in interest expense of $137,000. Total interest expense for 1999 was $5.3 million, an increase of $32,000 compared to 1998. The increase in net interest income in 1998 resulted primarily from an 11.3% increase in the volume of average earning assets from 1997 to 1998 and secondarily by the reduction of funding costs in a declining interest rate environment. The 16.7% increase in average loans outstanding during 1998 provided $1.5 million in additional interest income while a decrease of 23 basis points in yield from 9.30% in 1997 to 9.07% in 1998 decreased interest income on average loans by $214,000. The yield on the investment securities portfolio decreased one basis point to 6.62% in 1998 from 6.63% in 1997, on a tax-equivalent basis. The average investment securities portfolio decreased $375,000, decreasing tax-equivalent interest income by $35,000 from 1997 to 1998. During 1998 excess funds were temporarily invested in federal funds sold or money market accounts. The $2.4 million increase in average balances in those temporary investments provided $128,000 in additional interest income. Average interest bearing deposits increased 7.91% during 1998, while the average rate paid on those deposits decreased 28 basis points to 3.72% in 1998 from 4.0% in 1997. The increase in interest expense on interest bearing deposits in 1998 was $17,000. The control of interest expense on deposits in 1998 resulted from a pricing strategy to grow core deposit relationships rather than those affected by interest rate alone. During 1998 ICBI's reliance on other funding sources on average increased 35.48%, increasing expense associated with those sources by $104,000. -14- The following table analyzes changes in net interest income attributable to changes in the volume of interest-bearing assets and liabilities compared to changes in interest rates. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. Nonaccruing loans are included in the average outstanding loans.
Volume and Rate Analysis (Tax Equivalent Basis) Years Ended December 31, ---------------------------------------------------------------------------------- 1999 vs 1998 1998 vs 1997 Increase (Decrease) Due Increase (Decrease) Due to Changes in: to Changes in: ---------------------------------------------------------------------------------- Volume Rate Total Volume Rate Total ------ ---- ----- ------ ---- ----- (In thousands) Earning Assets: Securities: Taxable $ (69) $ 202 $ 133 $ (550) $ (115) $ (665) Tax-exempt 103 (43) 60 697 (67) 630 Loans: Taxable 1,990 (494) 1,496 1,448 (223) 1,225 Tax-exempt (4) (6) (10) 3 9 12 Federal funds sold 101 (22) 79 49 2 51 Interest on money market investments 3 5 8 79 (2) 77 Interest bearing deposits in other financial institutions (5) (1) (6) (4) 3 (1) ------------ ------------- ------------ ------------- ----------- ------------- Total earning assets $ 2,119 $ (359) $ 1,760 $ 1,722 $ (393) $ 1,329 Interest-Bearing Liabilities: Interest checking $ (246) $ 232 $ (14) $ 115 $ (169) $ (54) Regular savings deposits 96 (128) (32) 47 (22) 25 Money market deposits 199 (62) 137 122 (3) 119 Time deposits $100,000 and over 188 (43) 145 17 (4) 13 Under $100,000 (145) (196) (341) (58) (28) (86) ------------ ------------- ------------ ------------- ----------- ------------- Total interest bearing deposits $ 92 $ (197) $ (105) $ 243 $ (226) $ 17 Federal Home Loan Bank Advances (68) 1 (67) (90) (12) (102) Securities sold under agreement to repurchase 130 (2) 128 8 (2) 6 Long-term debt 71 4 75 206 - 206 Federal Funds Purchased 2 (1) 1 (8) 2 (6) ------------ ------------- ------------ ------------- ----------- ------------- Total interest bearing liabilities $ 227 $ (195) $ (32) $ 359 $ (238) $ 121 Change in net interest income $ 1,892 $ (164) $ 1,728 $ 1,363 $ (155) $ 1,208 ============ ============= ============ ============= =========== =============
Provision for Loan Losses ICBI's loan loss provision during 1999 was $420,000, an increase of $285,000 from 1998. The increase is reflective of the growth of ICBI's loan portfolio. ICBI is committed to making loan loss -15- provisions which maintain an allowance that adequately reflects the risk inherent in the loan portfolio. See "-- Asset Quality" below. Other Income Other income has been and will continue to be an important factor for increasing profitability. Management recognizes this and continues to review and consider areas where non-interest income can be increased. Other income includes fees generated by the mortgage banking department of the Bank as well as Tredegar. Trust fee income increased 34.3% during 1999 to $1.1 million. Strong business development efforts at Tredegar during 1999 resulted in a 24.0% increase in assets under management and accountability. Typically, trust fees are generated based upon a percentage of the assets; thus, any increases in assets under management and accountability result in a similar increase in fees. The mortgage banking department contributed an additional $320,000 of fees on loans held for sale during 1999, an increase of 132.8% over the contribution for 1998. The growth in transaction deposit accounts also provided additional service charge and fee income. The service charges and fees associated with deposit accounts increased 17.5% during 1999. Other operating income for 1999 includes $20,000 of fees received from GPIA for accounting and business services. Total other income for 1999 was $2.9 million compared to $2.2 million for 1998. Other income for 1998 increased 88.7% to $2.2 million from $1.1 million in 1997. The increase is due primarily to the increase in trust fee income, fees on loans held for sale and service charges on deposit accounts. In 1998, trust fee income increased to $855,000, an increase of $517,000 over 1997. The increase resulted from the acquisition of Tredegar in August 1997. The Bank's mortgage banking department opened in April 1998 and contributed $241,000 to other income by generating fees on loans held for sale. Service charges, commission and fees on deposit accounts were $916,000 for 1998, an increase of $135,000 over 1997. The increase in these fees was due primarily to deposit growth. Other Income
------------------------------------------------------------- Years Ended December 31, ------------------------------------------------------------- 1999 1998 1997 (In thousands) Services, commission and fees $ 1.076 $ 916 $ 781 Trust fee income 1,148 855 339 Fees on loans held for sale 561 241 - Other operating income 174 175 122 -------------------- ------------------- ------------------ Noninterest income $ 2,959 $ 2,187 $ 1,242 (Losses) on securities available for sale, net (13) (18) (93) -------------------- ------------------- ------------------ Total noninterest income $ 2,946 $ 2,169 $ 1,149 ==================== =================== ==================
Other Expenses Improving operating efficiency is as important to management as enhancing other income. Total other expenses increased 20.4% or $1.4 million to $8.0 million in 1999. Salaries and employee benefits increased $708,000 or 18.4% due to additions of management and staff related to expanding the branch network, increased trust operations and enhancing the internal infrastructure to facilitate this larger network. In Loudoun County, Virginia, the unemployment rates hover around 1.5%, causing increased pressures to provide competitive salary and benefit programs. This situation also factors into the increased salary and benefit cost for 1999. Occupancy and equipment expense increased $241,000 or -16- 31% to $1.0 million. During 1999, the Bank opened one full service branch and a limited service facility and moved its mortgage banking operation to its own offices. The Bank entered into lease contracts for these endeavors. The Purcellville branch was remodeled during 1999 to include interior enhancements and expanded drive-through capabilities. These investments have positioned the Bank for future growth and productivity. Advertising expenses increased $91,000 to $325,000 for 1999. During the latter part of 1998, the Bank began a new marketing program to promote the awareness of the bank. The campaign was very successful, and management believes that it contributed to the significant deposit growth the Bank experienced during 1999. Computer operations expense increased 25.5% to $310,000 during 1999. The increase in this expense was related to the remediation process for Year 2000, as well as customer awareness campaigns about the progress of the Company. Other operating expenses increased $263,000 to $1.8 million for 1999, compared to $1.6 million for 1998. Other expenses increased 34.27% or $1.7 million to $6.7 million in 1998. This increase resulted primarily from a full year of Tredegar's expenses, the new mortgage banking department and expansion of staff within the bank branches. Other Expenses
Years Ended December 31, ------------------------------------------------------------------------------ 1999 1998 1997 ---------------------- ------------------------- -------------------------- (In thousands) Salaries and employee benefits $ 4,547 $ 3,839 $ 2,864 Net occupancy and equipment expense 1,013 772 593 Advertising 325 234 146 Computer operations 310 247 138 Other operating expenses 1,845 1,582 1,230 ---------------------- ------------------------- -------------------------- Total $ 8,040 $ 6,674 $ 4,971 ====================== ========================= ==========================
Income Taxes Reported income tax expense was $1.1 million for 1999, an increase of $240,000 compared to $857,000 for 1998. The effective tax rate for 1999 was 23.5% compared to 22.4% in 1998 and 24.7% in 1997. The increase in the effective tax rate for 1999 was influenced by the change in the mix of the investment securities portfolio as well as the increased provision for allowance for loan losses. Note 12 of the Company's Consolidated Financial Statements provides a reconciliation between the amount of income tax expense computed using the federal statutory rate and ICBI's actual income tax expense. Also included in Note 12 to the Consolidated Financial Statements is information regarding the principal items giving rise to deferred taxes for the three years ended December 31, 1999. Market and Interest Rate Risk Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates or prices such as interest rates, foreign currency exchange rates, commodity prices and equity prices. ICBI's primary market risk exposure is interest rate risk, while the assets under management by Tredegar are affected by equity price risk. The ongoing monitoring and management of this risk is an important component of ICBI's asset/liability management process, which is governed by policies established by its Board of Directors that are reviewed and approved annually. The Board of Directors delegates responsibility for carrying out asset/liability management policies to the Asset/Liability Committee ("ALCO") of the Bank. In this capacity, ALCO develops guidelines and strategies that govern ICBI's -17- asset/liability management related activities, based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends. Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with ICBI's financial instruments also change, affecting net interest income ("NII"), the primary component of ICBI's earnings. ALCO uses a detailed and dynamic simulation model to quantify the estimated exposure of NII to sustained interest rate changes. While ALCO routinely monitors simulated NII sensitivity over a rolling two-year horizon, it also employs additional tools to monitor potential longer-term interest rate risk. The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all assets and liabilities reflected on ICBI's balance sheet. This sensitivity analysis is compared to ALCO policy limits which specify a maximum tolerance level for NII exposure over a one year horizon, assuming no balance sheet growth, given both a 200 basis point (bp) upward and downward shift in interest rates. A parallel and pro rata shift in rates over a 12 month period is assumed. The following reflects the range of ICBI's NII sensitivity analysis during the fiscal years of 1999 and 1998 as compared to the 10% policy limit approved by the Board of Directors. 1999 Rate Change Estimated NII Sensitivity ----------- ------------------------- High Low Average ---- --- ------- +200 bp (-1.07%) .15% .09% - 200 bp 1.66% (-.08%) .64% 1998 Rate Change Estimated NII Sensitivity ----------- ------------------------- High Low Average ---- --- ------- +200 bp (.91%) .02% (.27%) - 200 bp 1.55% (.01%) .52% Based on the averages presented in the tables above, had interest rates increased 200 basis points (bp) in each year independently, then the effect to net interest income of ICBI could have been a increase of $4,000 in 1999 and an decrease of $23,000 in 1998. If interest rates had decreased 200 basis points during fiscal years 1998 and 1998, then the effect to net interest income of the banking subsidiary could have been an increase of $34,000 and $44,000, respectively. The preceding sensitivity analysis does not represent an ICBI forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions such as the nature and timing of interest rate levels, including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment or replacement of asset and liability cashflows, and others. While assumptions are developed based upon current economic and local market conditions, ICBI cannot make any assurances about predictive nature of these assumptions, including how customer preferences or competitor influences might change. Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to prepayment and refinancing levels likely deviating from those assumed, the varying -18- impact of interest rate change, caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other internal and external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in response to or anticipation of changes in interest rates. Financial Condition ICBI's total assets were $243.9 million as of December 31, 1999, up $38.5 million or 18.7% from the $205.4 million level at December 31, 1998. Investment securities increased $9.9 million or 17.2% from 1998 to 1999. Loans increased by $18.5 million or 14.7% from 1998 to 1999, while deposits increased $31.2 million or 18.0% during the same period. Total shareholders' equity at year end 1999 and 1998 was $23.1 and $22.9 million, respectively. Loans ICBI's loan portfolio is its largest and most profitable component of average earning assets, totaling 66.5% of average earning assets in 1999. ICBI continues to emphasize loan portfolio growth and diversification as a means of increasing earnings while minimizing credit risk. Loans, net of unearned income, were $144.5 million at December 31, 1999, an increase of 14.7% from the total of $126.0 million at December 31, 1998. Proactive sales efforts, competitive pricing and the branch network supported the increase in loans during 1999. Loans increased 20.9% from $104.2 million at December 31, 1997 to $126.0 million at December 31, 1998. The loan to deposit ratio decreased to 70.9% at December 31, 1999 compared to 73.0% at December 31, 1998 and 66.6% at December 31, 1997. The strong growth in deposits during 1999 affected this ratio. Loan Portfolio
December 31, --------------------------------------------------------------------- 1999 1998 1997 1996 1995 --------------------------------------------------------------------- (In thousands) Commercial, financial and agricultural $ 19,055 $ 18,880 $ 15,111 $ 11,648 $ 10,215 Real estate construction 12,151 5,436 3,798 4,182 1,791 Real estate mortgage: Residential (1-4 family) 61,062 55,595 45,231 41,246 34,490 Loans held for sale 1,232 4,672 - - - Home equity lines 4,382 3,617 3,165 2,614 2,188 Non-farm, non-residential (1) 36,361 28,643 26,054 24,774 21,697 Agricultural 379 1,057 2,140 2,105 1,549 Consumer installment 9,845 8,095 8,738 8,061 9,170 ------------- ------------------------------------------------------- Total loans 144,467 125,995 104,237 94,630 81,100 Less unearned income - - 10 35 186 ------------- ------------------------------------------------------- Loans-net of unearned income $144,467 $ 125,995 $ 104,227 $ 94,595 $ 80,914 ============= =======================================================
- -------------------------------------------- (1) This category generally consists of commercial and industrial loans where real estate constitutes a source of collateral. At December 31, 1999, residential real estate (1-4 family) portfolio loans constituted 42.3% of the total portfolio and increased $5.5 million during the year. Real estate construction loans consists primarily of pre-sold 1-4 family residential loans along with a marginal amount of commercial -19- construction. Real estate construction increased to $12.2 million at December 31, 1999 and is 8.4% of the total loan portfolio. ICBI's construction product competes successfully in a high growth market like Loudoun County because ICBI is local and can respond quickly to inspections and construction draw requests. Non-farm, non-residential loans are typically owner-occupied commercial buildings. Non-farm, non-residential loans were 25.2% of the total loan portfolio at December 31, 1999. The branch network has helped to support the loan portfolio diversification, such as increased commercial real estate loans. Loans held for sale, home equity lines and agricultural real estate loans were 0.9%, 3.0% and 0.3% of total loans, respectively, at December 31, 1999. ICBI's commercial, financial and agricultural loan portfolio consists of secured and unsecured loans extended to small businesses. At December 31, 1999, these loans comprised 13.2% of the loan portfolio. This portfolio increased 0.9% in 1999 to $19.1 million. Consumer installment loans primarily consists of unsecured installment credit and accounts for 6.8% of the loan portfolio. Consistent with its focus on providing community-based financial services, ICBI generally does not extend loans outside its principal market area. ICBI's market area for its lending services encompasses Fauquier and Loudoun Counties, Virginia, where it operates full service branches. ICBI's unfunded loan commitments totaled $26.7 million at December 31, 1999 and $17.1 million at December 31, 1998. The increase in the amount of unfunded commitments is attributed in part to the increase in real estate construction financing as well as customer demand for line of credit type of products (i.e., home equity lines). At December 31, 1999, ICBI had no concentration of loans in any one industry in excess of 10% of its total loan portfolio. However, because of the nature of ICBI's market, loan collateral is predominantly real estate related. The following table reflects the maturity distribution of selected loan categories: Remaining Maturities of Selected Loan Categories December 31, 1999 ---------------------------------------- Commercial, Real Financial and Estate Agricultural Construction ---------------------------------------- (Dollars in thousands) Within 1 year $ 8,324 $ 8,869 ---------------------------------------- Variable Rate: 1 to 5 years 664 73 After 5 years 1,073 - ---------------------------------------- Total $ 1,737 $ 73 ---------------------------------------- Fixed Rate: 1 to 5 years 8,482 2,511 After 5 years 512 698 ---------------------------------------- Total $ 8,994 $ 3,209 ---------------------------------------- Total Maturities $ 19,055 $ 12,151 ======================================== -20- Asset Quality ICBI has policy and procedures designed to control credit risk and to maintain the quality of its loan portfolio. These policy and procedures include underwriting standards for new originations and ongoing monitoring and reporting of asset quality and adequacy of reserve for loan losses. Total nonperforming assets, which consist of nonaccrual, restructured loans and foreclosed property, were $531,000 at December 31, 1999. This amount represents a decrease of 13.0% from the December 31, 1998 balance of $609,000. Nonperforming assets at December 31, 1998 increased $366,000 from $243,000 at December 31, 1997. Total nonperforming assets as a percentage of total loans were .4% at December 31, 1999. The decrease in nonperforming assets for 1999 was the result of the sale of 1998 foreclosures in 1999. Nonperforming Assets Loans are placed on nonaccrual status when collection of principal and interest is doubtful, generally when a loan becomes 90 days past due. There are three negative implications for earnings when a loan is placed on nonaccrual status. All interest accrued but unpaid at the date that the loan is placed on nonaccrual status is either deducted from interest income or written off as a loss. Secondly, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Finally, there may be actual losses that may require that additional provisions for loan losses be charged against earnings. For real estate loans, upon foreclosure, the balance of the loan is transferred to "Other Real Estate Owned" ("OREO") and carried at the lower of the outstanding loan balance or the fair market value of the property based on current appraisals and other current market trends. If a write down of the OREO property is necessary at the time of foreclosure, the amount is charged-off against the allowance for loan losses. A review of the recorded property value is performed in conjunction with normal loan reviews, and if market conditions indicate that the recorded value exceeds the fair market value, additional write downs of the property value are charged directly to operations. Nonperforming Assets
December 31, -------------------------------------------------------------------- 1999 1998 1997 1996 1995 -------------------------------------------------------------------- (In thousands) Nonaccrual loans $ 530 $ 409 $ 243 $ 76 $ 1,654 Restructured loans - - - - - Foreclosed property - 200 - - - ------------ ------------- ------------- ------------- ------------- Total nonperforming assets $ 530 $ 609 $ 243 $ 76 $ 1,654 ============ ============= ============= ============= ============= Allowance for loan losses to period end loans 1.01% 0.84% 0.93% 0.93% 1.07% Allowance for loan losses to nonperforming assets 274% 175% 401% 1163% 52% Nonperforming assets to period end loans 0.37% 0.48% 0.23% 0.08% 2.04%
-21- During 1999 and 1998, approximately $12,000 and $4,000, respectively, in additional interest income would have been recorded if ICBI's nonaccrual loans had been current and in accordance with their original terms. At December 31, 1999, potential problem loans totaled $531,000. These loans are subject to regular management attention and their status is reviewed on a regular basis. Several of the potential problem loans at December 31, 1999 are unsecured consumer loans. However, real estate and other collateral secure most of the balance of the problem loans. The allowance for loan losses was 274% of nonperforming loans at December 31, 1999. At December 31, 1998 and 1997, the allowance for loan losses was 175% and 401% of nonperforming loans. Management evaluates nonperforming loans relative to their collateral value and makes appropriate reductions in the carrying value of those loans based on that review. Allowance For Loan Losses The allowance for loan losses is an estimate of the amount that will be adequate to provide for potential future losses in ICBI's loan portfolio. Management's methodology in evaluating the adequacy of the allowance for loan losses considers potential specific losses, past loan loss experience, and the volume, growth and composition of the current portfolio. General economic trends as well as any conditions affecting individual borrowers may also affect the level of loan losses. The allowance is subject to regulatory examinations as to its adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance in comparison to peer financial institutions identified by the regulatory agencies. ICBI's Loan Committee and Board of Directors take an active role in the monthly review of any problem loans and their effect on the allowance for loan losses. In management's opinion, the allowance for loan losses is adequate to absorb the current estimated risk of loss in the existing loan portfolio. ICBI's management continually evaluates the adequacy of the allowance for loan losses and changes in the annual provision are based on the analyzed inherent risk of the loan portfolio. While ICBI has experienced considerable loan growth in 1999, 1998 and 1997, the credit quality of the portfolio has improved since 1995, as evidenced by a low level of nonperforming assets and net charge-offs during those years. -22- The following table depicts the transactions, in summary form, which occurred to the allowance for loan losses in each year presented: Allowance for Loan Losses
December 31, ------------------------------------------------------------------ 1999 1998 1997 1996 1995 ------------------------------------------------------------------ (In thousands) Balance, beginning of period $ 1,064 $ 974 $ 884 $ 866 $ 940 Loans charged off: Commercial, financial, and agricultural 26 8 42 6 13 Real estate construction - - - - - Real estate mortgage 29 - - 79 115 Consumer installment 96 77 86 40 83 ------------ -------------------------- -------------------------- Total loans charged off $ 151 $ 85 $ 128 $ 125 $ 211 ------------ -------------------------- -------------------------- Recoveries: Commercial, financial, and agricultural $ 7 $ 1 $ 12 $ 5 $ 43 Real estate construction - - - - - Real estate mortgage 79 6 7 26 4 Consumer installment 34 33 21 47 35 ------------ -------------------------- -------------------------- Total recoveries $ 120 $ 40 $ 40 $ 78 $ 82 ------------ -------------------------- -------------------------- Net charge offs (recoveries) 31 45 88 47 129 Provision for loan losses 420 135 178 65 55 ------------ -------------------------- -------------------------- Balance, end of period $ 1,453 $ 1,064 $ 974 $ 884 $ 866 ============ ========================== ========================== Ratio of allowance for loan losses to loans outstanding at end of period 1.01% 0.84% 0.93% 0.93% 1.07% Ratio of net charge offs (recoveries)to average loans outstanding during period 0.02% 0.04% 0.09% 0.05% 0.16%
The allowance for loan losses was $1.5 million at December 31, 1999, an increase of $389,000 from $1.1 million at December 31, 1998. The allowance was $974,000 at December 31, 1997. In 1999, ICBI's net charge-offs decreased $14,000 from the previous year's net charge-offs of $45,000. ICBI experienced higher consumer loan charge-offs during 1999, which were offset by a large recovery in real estate mortgages. Net charge-offs as a percentage of average loans were 0.02% and 0.04% for 1999 and 1998, respectively. The provision for loan losses was $420,000 for 1999 and $135,000 for 1998. -23- The following table shows the balance and percentage of the ICBI's allowance for loan losses allocated to each major category of loan: Allocation of Allowance for Loan Losses
Commercial, Financial, Real Estate Real Estate Agricultural Construction Mortgage Consumer ------------------------------------------------------------------------------------------------------ Reserve Percent of Reserve Percent of Reserve Percent of Reserve Percent of for Loan in for Loan in for Loan in For Loan in Credit Category to Credit Category to Credit Category to Credit Category to Losses Total Loans Losses Total Loans Losses Total Loans Losses Total Loans ------------------------------------------------------------------------------------------------------ (In thousands) December 31, 1999 $ 580 13.19% $ 350 8.41% $ 178 71.58% $ 345 6.82% 1998 $ 442 14.98% $ 100 4.31% $ 144 74.28% $ 378 6.43% 1997 $ 362 14.50% $ 107 3.64% $ 159 73.49% $ 346 8.37% 1996 $ 244 12.31% $ 101 4.42% $ 182 74.79% $ 357 8.48% 1995 $ 246 12.62% $ 23 2.21% $ 346 74.07% $ 251 11.10%
ICBI has allocated the allowance according to the amount deemed reasonably necessary to provide for the possibility of losses being incurred within each of the above categories of loans. The allocation of the allowance as shown in the table above should not be interpreted as an indication that loan losses in future years will occur in the same proportions or that the allocation indicates future loan loss trends. Additionally, the proportion allocated to each loan category is not the total amount that may be available for the future losses that could occur within such categories since the total allowance is a general allowance applicable to the total portfolio. Securities ICBI manages its investment securities portfolio consistent with established policies, which include guidelines for earnings, rate sensitivity, liquidity and pledging needs. ICBI holds bonds issued from the Commonwealth of Virginia and its political subdivisions with an aggregate book value of $3.9 million and an aggregate market value of $3.8 million at December 31, 1999. At December 31, 1998, ICBI held the bonds issued by the Commonwealth of Virginia and its political subdivision, which had an aggregate book value of $3.3 million and market value of $3.4 million. In both years the aggregate holdings of these bonds exceeded 10% of ICBI's shareholders' equity. ICBI accounts for securities under Financial Accounting Standards Board ("FASB") Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This standard requires classification of investments into three categories, "held to maturity" ("HTM"), "available for sale" ("AFS"), or "trading," as further defined in Note 1 to the Company's Consolidated Financial Statements. ICBI does not maintain a trading account and has classified no securities in this category. HTM securities are required to be carried on the financial statements at amortized cost. AFS securities are carried on the financial statements at fair value. The unrealized gains or losses, net of deferred income taxes, are reflected in shareholders' equity. The HTM classification places restrictions on ICBI's ability to sell securities or to transfer securities into the AFS classification. Since ICBI want the flexibility to respond to changing balance sheet needs through investment portfolio management, it has chosen to classify only a small portion of its portfolio in this category. At December 31, 1999, 11.5% of the portfolio was classified as HTM. -24- FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", requires companies to record derivatives on the balance sheet as assets and liabilities, measured at fair market value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. However this statement also allowed, upon adoption, a one time re-allocation of securities from HTM to AFS without penalty to the company. In December 1999, ICBI adopted FASB Statement No. 133 and elected to transfer certain municipal securities with a book value and market value of $3.1 million from the HTM classification to the AFS classification. It is ICBI's policy not to engage in activities considered to be derivative in nature, such as futures, options, contracts, swaps, caps, floors, collars or forward commitments. ICBI holds in its loan and securities portfolios investments that adjust or float according to changes in "prime" lending rate. These holdings are not considered speculative but instead necessary for good asset/liability management. The carrying value of the securities portfolio was $67.7 million at December 31, 1999, an increase of $9.9 million or 17.1% from the carrying value of $57.8 million at December 31, 1998. During 1999, excess deposit growth over loan growth was invested within the securities portfolio to maximize interest income. The market value of the AFS securities at December 31, 1999 was $59.9 million. The unrealized loss on the AFS securities was $3.0 million and offset slightly by an unrealized gain of $14,000 at December 31, 1999. The net market value loss at December 31, 1999 is reflective of the increase in interest rates in comparison to the rates on the securities held within the portfolio. The unrealized gain on the AFS securities was $272,000 at December 31, 1998. Investment Securities Portfolio The carrying value of securities held to maturity at the dates indicated were:
------------------------------------------- December 31, 1999 1998 1997 ------------------------------------------- (In thousands) U.S. Government securities $ 250 $ 502 $ 2,006 State and political subdivision obligations 7,433 12,182 13,849 Mortgage-backed securities 112 162 571 ----------------------------- ------------- $ 7,795 $ 12,846 $ 16,426 ============================= =============
The carrying value of securities available for sale at the dates indicated were:
------------------------------------------- December 31, 1999 1998 1997 ------------------------------------------- (In thousands) U.S. Government securities $ 4,824 $ 2,678 $ 2,464 State and political subdivision obligations 22,261 18,189 12,136 Mortgage-backed securities 26,789 20,878 29,579 Other securities 6,070 3,195 3,091 ------------------------------------------- $ 59,944 $ 44,940 $ 47,270 ===========================================
-25- The following table indicates the increased favorable return experienced by ICBI with the lengthening of the maturity of the investment securities portfolio. Securities with maturities greater than five years total $40.4 million and have an average yield greater than 7.0%. The securities portfolio is managed first for proper matching with interest rate risk guidelines and secondarily for investment performance. Maturity Distribution and Yields of Investment Securities December 31, 1999 Taxable-Equivalent Basis
Due in 1 year Due after 1 Due after 5 Due after 10 years year years or less through 5 years through 10 years and Equities Total ------------------------------------------------------------------------------------------- Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield ------------------------------------------------------------------------------------------- (In thousands) Securities held for investment: U.S. Government securities $ - - $ - - $ - - $ 250 7.00% $ 250 7.00% Mortgage backed securities 5 6.83% 14 7.43% 15 7.53% 78 7.52% 112 7.48% ---------- --------- ---------- ----------- ---------- Total taxable $ 5 6.83% $ 14 7.43% $ 15 7.53% $ 328 7.52% $ 362 7.15% Tax-exempt securities (1) 822 7.10% 3,358 7.45% 3,153 7.77% 100 7.20% 7,433 7.54% ---------- --------- ---------- ----------- ---------- Total $ 827 7.10% $ 3,372 7.45% $ 3,168 7.77% $ 428 7.45% $ 7,795 7.53% ---------- --------- ---------- ----------- ---------- Securities available for sale (2): U.S. Government securities $ 192 5.61% $ 2,579 6.52% $ 1,413 7.09% $ 640 6.66% $ 4,824 6.67% Mortgage backed securities 3,101 6.28% 10,578 6.60% 6,111 6.56% 6,999 5.45% 26,789 6.25% Other - - 2,893 7.44% 434 7.01% 460 6.77% 3,787 7.31% Corporate preferred - - - - - - 2,603 8.66% 2,603 8.66% ---------- --------- ---------- ----------- ---------- Total taxable $ 3,293 5.75% $16,050 6.19% $ 7,958 6.01% $ 10,702 7.29% $ 38,003 6.58% Tax-exempt securities (1) - - 2,875 6.70% 5,448 7.18% 12,703 7.39% 21,026 7.24% ---------- --------- ---------- ----------- ---------- Total $ 3,293 5.75% $18,925 6.27% $ 13,406 6.49% $ 23,405 7.34% $ 59,029 6.81% ---------- --------- ---------- ----------- ---------- Total securities $ 4,120 5.94% $22,297 6.42% $ 16,574 7.01% $ 23,833 7.15% $ 66,824 6.90% ========== ========= ========== =========== ==========
(1) Yields on tax-exempt securities have been computed on a tax-equivalent basis (2) Excludes Federal Reserve Stock of $134,400 and Federal Home Loan Bank Stock of $780,500 Other Earning Assets ICBI's average investments in federal funds sold and money market investments in 1999 were $6.0 million and $1.9 million, an increase of $2.2 million and $67,000, respectively. Average investments in federal funds sold and money market investments in 1998 were $3.8 million and $1.8 million, respectively. Fluctuations in federal funds sold and money market investments reflect excess deposit growth over loan growth as well as management's goal to maximize asset yields while maintaining proper asset/liability structure. Deposits Deposits continue to be an important funding source and primary supply of ICBI's growth. ICBI's strategy has been to increase its core deposits at the same time controlling its cost of funds. The continued maturation of the branch network as well as the increased advertising campaigns have contributed to the significant growth in deposits over the last several years. By monitoring interest rates -26- within the local market and then pricing the deposits within the range of the local market, ICBI has developed a core base of deposits in each branch. The following table is a summary of average deposits and average rates paid on those deposits: Average Deposits and Rates Paid
December 31, --------------------------------------------------------------------- 1999 1998 1997 Amount Rate Amount Rate Amount Rate --------------------- ---------------------------------------------- (In thousands) Non-interest bearing deposits $ 39,154 - $ 29,782 - $ 24,025 - Interest-bearing accounts: Interest checking 29,583 0.99% 23,853 1.28% 19,886 1.81% Regular savings 19,000 3.00% 17,075 3.53% 15,631 3.69% Money market accounts 41,701 2.73% 34,195 2.93% 30,071 2.94% Time deposits: $ 100,000 and over 21,965 4.98% 18,151 5.23% 16,480 5.68% Under $ 100,000 35,707 4.77% 38,557 5.30% 40,100 5.31% ------------- ------------- ------------- Total interest-bearing deposits 147,956 3.24% 131,831 3.72% 122,168 4.00% ------------- ------------- ------------- Total $187,110 $161,613 $146,193 ============= ============= =============
Average total deposits increased 15.8% during 1999, 10.5% during 1998 and 14.5% during 1997. During 1999, the average balance of non-interest bearing deposits grew 31.5%. The average balance in interest checking and money market accounts grew 24.0% and 21.9% during 1999. ICBI will continue to fund assets primarily with deposits and will focus on core deposit growth as the primary source of liquidity and stability. ICBI offers individuals and small to medium-sized businesses a variety of deposit accounts, including demand and interest checking, money market, savings and time deposit accounts. ICBI neither purchases brokered deposits nor solicits deposits from sources outside its primary market area. The following table is a summary of the maturity distribution of certificates of deposit equal to or greater than $100,000 as of December 31, 1999: Maturities of Certificates of Deposit of $100,000 and Greater
Within Three to Six to Over Percent Three Six Twelve One of Total Months Months Months Year Total Deposits -------------------------- -------------------------- --------------------- (In thousands) At December 31, 1999 $9,347 $8,012 $6,613 $2,682 $26,654 13.1%
-27- Capital Resources and Dividends ICBI has an ongoing strategic objective of maintaining a capital base, which supports the pursuit of profitable business opportunities, provides resources to absorb risks inherent in its activities and meets or exceeds all regulatory requirements. The Federal Reserve, along with the FDIC, has established minimum regulatory capital standards. The regulatory capital guidelines categorize assets and off-balance sheet items into four categories, which weight balance sheet assets according to risk, requiring more capital for holding higher risk assets. The minimum ratio of qualifying total capital to risk-weighted assets is 8.0%, of which at least 4.0% must be Tier 1 capital, composed of common equity and retained earnings. ICBI had a ratio of risk-weighted assets to total capital of 14.8% at December 31, 1999 compared to 17.9% at December 31, 1998. The ratio of risk-weighted assets to Tier 1 capital was 14.0% and 17.1% at December 31, 1999 and 1998, respectively. Both ratios exceed the minimum capital requirements adopted by the federal bank regulatory agencies. Analysis of Capital
December 31, ------------------------------------- 1999 1998 ---------------- ----------------- Tier 1 Capital: Common stock $ 8,895 $ 8,895 Capital surplus 1,293 1,293 Retained earnings 14,852 12,496 Goodwill (1,060) (1,121) ---------------- ----------------- Total Tier 1 capital $ 23,980 $ 21,563 Tier 2 Capital: Allowance for loan losses 1,453 1,063 ---------------- ----------------- Total Tier 2 capital 1,453 1,063 Total risk-based capital $ 25,433 $ 22,626 ================ ================= Risk weighted assets $ 171,324 $ 126,398 CAPITAL RATIOS: Tier 1 risk-based capital ratio 14.0% 17.1% Total risk-based capital ratio 14.8% 17.9% Tier 1 capital to average total assets 10.8% 11.2%
ICBI's equity to asset ratio decreased to 9.5% at December 31, 1999 compared to 11.1% at December 31, 1998. The equity to asset ratio for December 31, 1997 was 11.7%. The growth that ICBI experienced, as well as the market value decline of the investment securities portfolio, reduced this ratio in 1999. The primary source of funds for dividends paid by ICBI to its shareholders is the dividends received from its subsidiaries. Federal regulatory agencies impose certain restrictions on the payment of dividends and the transfer of assets from the banking subsidiaries to the holding company. Historically, these restrictions have not had an adverse impact on ICBI's dividend policy, and it is not anticipated that they will in the future. -28- Liquidity Liquidity represents an institution's ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, short-term investments, securities classified as available for sale, as well as loans and securities maturing within one year. As a result of ICBI's management of liquid assets and the ability to generate liquidity through liability funding, management believes that ICBI maintains overall liquidity sufficient to satisfy its depositors' requirements and meet its customers' credit needs. ICBI also maintains additional sources of liquidity through a variety of borrowing arrangements. The Bank maintains federal funds lines with large regional and money-center banking institutions. These available lines total in excess of $8 million, none of which were outstanding at December 31, 1999. Federal funds purchased during 1999 averaged $179,000 compared to an average of $146,000 during 1998. At December 31, 1999 and 1998, the Bank had $10.8 million and $2.5 million, respectively, of outstanding borrowings pursuant to securities sold under agreement to repurchase transactions, with maturities of one day. The Bank has a credit line in the amount of $38 million at the Federal Home Loan Bank of Atlanta. This line may be utilized for both short- and long-term borrowing. The Bank joined the Federal Home Loan Bank system in 1995 in order to enter a program of long-term and short-term borrowing, which is restricted to be invested in support of residential real estate loans. In 1999, long-term borrowings from the Federal Home Loan Bank system were $5.0 million maturing in 2003 with a call feature in 2000. At December 31, 1999, cash, interest-bearing deposits with financial institutions, federal funds sold, short-term investments, securities available for sale, loans and securities maturing within one year were 58.0 % of total deposits and liabilities. Forward-Looking Statements Certain information contained in this discussion may include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are generally identified by phrases such as "the Company expects," "the Company believes" or words of similar import. Such forward-looking statements involve known and unknown risks including, but not limited to, changes in general economic and business conditions, interest rate fluctuations, competition within and from outside the banking industry, new products and services in the banking industry, risk inherent in making loans such as repayment risks and fluctuating collateral values, problems with technology utilized by the Company, changing trends in customer profiles and changes in laws and regulations applicable to the Company. Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Recent Accounting Pronouncements There are no recent accounting pronouncements that will have an effect on ICBI. -29- ITEM 7. FINANCIAL STATEMENTS The following financial statements are filed as a part of this report following Item 13 below: Independent Auditor's Report Consolidated Balance Sheets as of December 31, 1999 and 1998 Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with accountants on accounting and financial disclosure during the last two fiscal years. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Pursuant to General Instruction E(3) of Form 10-KSB, the information contained under the headings "Election of Directors," "Executive Officers Who Are Not Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for the 2000 Annual Meeting of Shareholders is incorporated herein by reference. ITEM 10. EXECUTIVE COMPENSATION Pursuant to General Instruction E(3) of Form 10-KSB, the information contained under the headings "Director Compensation," "Executive Compensation," "Stock Options," and "Employment Agreements" in the Company's Proxy Statement for the 2000 Annual Meeting of Shareholders is incorporated herein by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Pursuant to General Instruction E(3) of Form 10-KSB, the information contained under the headings "Security Ownership of Management" and "Security Ownership of Certain Beneficial Owners" in the Company's Proxy Statement for the 2000 Annual Meeting of Shareholders is incorporated herein by reference. -30- ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Pursuant to General Instruction E(3) of Form 10-KSB, the information contained under the heading "Transactions with Management" in the Company's Proxy Statement for the 2000 Annual Meeting of Shareholders is incorporated herein by reference. ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K (a) Exhibits. 3.1 Articles of Incorporation of the Company (restated in electronic format), attached as Exhibit 3.1 to the Registration Statement on Form S-4, Registration No. 333-24523, filed with the Commission on April 4, 1997 (the "Form S-4"), incorporated herein by reference. 3.2 Bylaws of the Company, attached as Exhibit 3.2 to the Form S-4, incorporated herein by reference. 10.1 Employment Agreement, dated as of January 1, 1998, between the Company and Joseph L. Boling, attached as Exhibit 10.1 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1998, incorporated herein by reference. 10.2 Independent Community Bankshares, Inc. 1997 Stock Option Plan, as amended, attached as Exhibit 4.3 to the Registration Statement on Form S-8, Registration No. 333-93447, filed with the Commission on December 22, 1999, incorporated herein by reference. 10.3 Agreement and Plan of Reorganization dated as of August 9, 1999, between GPIA, the Company and Tredegar, attached as Exhibit 10.1 to the Company's Quarterly Report on Form 10-QSB for the period ended September 30, 1999 (the "Form 10-QSB"), incorporated herein by reference. 10.4 Shareholder Agreement dated as of August 9, 1999, between Robert C. Gilkison, James H. Patterson, the Company and GPIA, attached as Exhibit 10.2 to the Form 10-QSB, incorporated herein by reference. 10.5 Stock Purchase Agreement dated as of August 9, 1999, between Robert C. Gilkison, James H. Patterson and the Company, attached as Exhibit 10.3 to the Form 10-QSB, incorporated herein by reference. 21 Subsidiaries of the Registrant. 27 Financial Data Schedule (filed electronically only). (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the last quarter of the period covered by this report. -31- INDEPENDENT COMMUNITY BANKSHARES, INC. Middleburg, Virginia FINANCIAL REPORT DECEMBER 31, 1999 C O N T E N T S Page INDEPENDENT AUDITOR'S REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS 1 FINANCIAL STATEMENTS Consolidated balance sheets 2 Consolidated statements of income 3 Consolidated statements of changes in shareholders' equity 4 Consolidated statements of cash flows 5 and 6 Notes to consolidated financial statements 7-30 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Independent Community Bankshares, Inc. Middleburg, Virginia We have audited the accompanying consolidated balance sheets of Independent Community Bankshares, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the years ended December 31, 1999, 1998 and 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Independent Community Bankshares, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the years ended December 31, 1999, 1998 and 1997, in conformity with generally accepted accounting principles. /s/ Yount, Hyde & Barbour, P.C. Winchester, Virginia January 21, 2000 1 INDEPENDENT COMMUNITY BANKSHARES, INC. Consolidated Balance Sheets December 31, 1999 and 1998 (In Thousands, Except for Share Data)
Assets 1999 1998 Cash and due from banks $ 8,037 $ 8,161 Interest-bearing deposits in banks 87 109 Temporary investments: Federal funds sold 12,139 1,421 Other money market investments 293 3,122 Securities (fair value: 1999, $ 67,745; 1998, $58,159) 67,739 57,786 Loans, net of allowance for loan losses of $1,453 in 1999 and $1,064 in 1998 141,782 120,259 Loans held for sale 1,232 4,672 Bank premises and equipment, net 6,285 5,853 Accrued interest receivable and other assets 6,331 3,820 Other real estate -- 200 Total assets $ 243,925 $ 205,403 Liabilities and Shareholders' Equity Liabilities Deposits: Noninterest-bearing demand deposits $ 44,900 $ 36,883 Savings and interest-bearing demand deposits 97,208 80,427 Time deposits 61,729 55,370 Total deposits $ 203,837 $ 172,680 Securities sold under agreements to repurchase 10,811 2,530 Federal Home Loan Bank advances -- 1,000 Long-term debt 5,000 5,000 Accrued interest and other liabilities 1,202 1,330 Commitments and contingent liabilities -- -- Total liabilities $ 220,850 $ 182,540 Shareholders' Equity Common stock, par value $5 per share, authorized 10,000,000 shares; issued 1999, 1,778,994 shares; issued 1998, 1,778,994 shares; $ 8,895 $ 8,895 Capital surplus 1,293 1,293 Retained earnings 14,852 12,496 Accumulated other comprehensive income (loss) (1,965) 179 Total shareholders' equity $ 23,075 $ 22,863 Total liabilities and shareholders' equity $ 243,925 $ 205,403
See Notes to Consolidated Financial Statements. 2 INDEPENDENT COMMUNITY BANKSHARES, INC. Consolidated Statements of Income Years Ended December 31, 1999, 1998 and 1997 (In Thousands, Except for Per Share Data)
1999 1998 1997 ---- ---- ---- (in thousands) Interest Income Interest and fees on loans $11,694 $10,205 $ 8,973 Interest and dividends on investment securities: Taxable interest income 36 70 121 Interest income exempt from federal income taxes 536 618 686 Interest and dividends on securities available for sale: Taxable interest income 1,731 1,616 2,293 Interest income exempt from federal income taxes 893 717 151 Dividends 243 252 281 Interest on deposits in banks 1 7 8 Interest on federal funds sold 290 211 159 Interest on other money market investments 98 89 13 ------- ------- ------- Total interest income $15,522 $13,785 $12,685 ------- ------- ------- Interest Expense Interest on deposits $ 4,798 $ 4,903 $ 4,886 Interest on short-term borrowings 263 134 134 Interest on Federal Home Loan Bank advances 3 70 172 Interest on long-term debt 281 206 -- ------- ------- ------- Total interest expense $ 5,345 $ 5,313 $ 5,192 ------- ------- ------- Net interest income $10,177 $ 8,472 $ 7,493 Provision for loan losses 420 135 178 ------- ------- ------- Net interest income after provision for loan losses $ 9,757 $ 8,337 $ 7,315 ------- ------- ------- Other Income Service charges, commissions and fees $ 1,076 $ 91 $ 781 Trust fee income 1,148 855 339 Fees on loans held for sale 561 241 -- (Losses) on securities available for sale, net (13) (18) (93) Other 174 175 122 ------- ------- ------- Total other income $ 2,946 $ 2,169 $ 1,149 ------- ------- ------- Other Expenses Salaries and employees' benefits $ 4,547 $ 3,839 $ 2,864 Net occupancy and equipment expense 1,013 772 593 Advertising 325 234 146 Computer operations 310 247 138 Other operating expenses 1,845 1,582 1,230 ------- ------- ------- Total other expenses $ 8,040 $ 6,674 $ 4,971 ------- ------- ------- Income before income taxes $ 4,663 $ 3,832 $ 3,493 Income tax expense $ 1,097 $ 857 $ 862 ------- ------- ------- Net income $ 3,566 $ 2,975 $ 2,631 ------- ------- ------- Earnings per Share, basic $ 2.0 $ 1.6 $ 1.51 ======= ======= ======= Earnings per Share, diluted $ 1.9 $ 1.6 $ 1.51 ======= ======= =======
See Notes to Consolidated Financial Statements. 3 INDEPENDENT COMMUNITY BANKSHARES, INC. Consolidated Statements of Changes in Shareholders' Equity Years Ended December 31, 1999, 1998 and 1997 (In Thousands, Except Share Data)
Accumulated Other Compre- Compre- Common Capital Retained hensive hensive Stock Surplus Earnings Income (Loss) Income Total ----- ------- -------- ------------- ------ ----- Balance, December 31, 1996 $ 4,299 $ 1,411 $ 12,817 $ (519) $ 18,008 Comprehensive income: Net income - 1997 -- -- 2,631 -- $ 2,631 2,631 Other comprehensive income net of tax: Unrealized holding gains arising during the period (net of tax, $134) -- -- -- -- 259 -- Reclassification adjustment (net of tax, $31) -- -- -- -- 61 -- -------- Other comprehensive income (net of tax, $165) -- -- -- 320 $ 320 320 -------- Total comprehensive income -- -- -- -- $ 2,951 -- ======== Cash dividends - 1997 ($0.32 per share) -- -- (574) -- (574) Purchase of common stock (22,600 shares) (113) (522) -- -- (635) Issuance of common stock - stock split effected in the form of 100% stock dividend (906,200 shares) 4,531 (4,531) -- -- -- Issuance of common stock in acquisition of subsidiary (69,200 shares) 346 1,590 -- -- 1,936 Discretionary transfer from retained earnings -- 4,000 (4,000) -- -- ------- ------- -------- ------- -------- Balance, December 31, 1997 $ 9,063 $ 1,948 $ 10,874 $ (199) $ 21,686 Comprehensive income: Net income - 1998 -- -- 2,975 -- $ 2,975 2,975 Other comprehensive income net of tax: Unrealized holding gains arising during the period (net of tax, $189) -- -- -- -- 366 -- Reclassification adjustment (net of tax, $6) -- -- -- -- 12 -- -------- Other comprehensive income (net of tax, $195) -- -- -- 378 $ 378 378 -------- Total comprehensive income -- -- -- -- $ 3,353 -- ======== Cash dividends - 1998 ($0.75 per share) -- -- (1,353) -- (1,353) Purchase of common stock (33,600 shares) (168) (655) -- -- (823) ------- ------- -------- ------- -------- Balance, December 31, 1998 $ 8,895 $ 1,293 $ 12,496 $ 179 $ 22,863 Comprehensive income: Net income - 1999 -- -- 3,566 -- $ 3,566 3,566 Other comprehensive income net of tax: Unrealized holding losses arising during the period (net of tax, $1,100) -- -- -- -- (2,153) -- Reclassification adjustment (net of tax, $4) -- -- -- -- 9 -- -------- Other comprehensive income (net of tax, $1,104) -- -- -- (2,144) $ (2,144) (2,144) -------- Total comprehensive income -- -- -- -- $ 1,422 -- ======== Cash dividends - 1999 ($0.68 per share) -- -- (1,210) -- (1,210) ------- ------- -------- ------- -------- Balance, December 31, 1999 $ 8,895 $ 1,293 $ 14,852 $(1,965) $ 23,075 ======= ======= ======== ======= ========
See Notes to Consolidated Financial Statements. 4 INDEPENDENT COMMUNITY BANKSHARES, INC. Consolidated Statements of Cash Flows Years Ended December 31, 1999, 1998 and 1997 (In Thousands)
1999 1998 1997 ---- ---- ---- Cash Flows from Operating Activities Net income $ 3,566 $ 2,975 $ 2,631 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 605 514 397 Amortization 60 79 42 Provision for loan losses 420 135 178 Net loss on securities available for sale 13 18 93 Net (gain) loss on sale of assets (5) -- 7 Net loss on the sale of other real estate 5 -- -- Discount accretion and premium amortization on securities, net 64 194 180 Deferred income taxes (benefit) (186) (16) (20) Origination of loans held for sale 0,744) (11,948) -- Proceeds from sales of loans held for sale 4,184 7,276 -- Changes in assets and liabilities: (Increase) in other assets (1,372) (125) (669) Increase (decrease) in other liabilities (71) 113 57 -------- -------- -------- Net cash provided by (used in) operating activities $ 6,539 $ (785) $ 2,896 -------- -------- -------- Cash Flows from Investing Activities Proceeds from maturity, principal paydowns and calls of investment securities $ 1,905 $ 3,496 $ 2,748 Proceeds from maturity, principal paydowns and calls of securities available for sale 5,300 9,164 2,743 Proceeds from sale of investment securities 850 -- -- Proceeds from sale of securities available for sale 1,988 9,887 26,501 Purchase of investment securities -- -- (1,849) Purchase of securities available for sale (22,473) (16,276) (40,572) Proceeds from sale of equipment 131 -- 36 Purchases of bank premises and equipment (1,164) (839) (1,221) Net (increase) in loans (21,942) (17,341) (9,720) Proceeds from the sale of other real estate 195 -- -- Cash acquired in acquisition -- -- 171 -------- -------- -------- Net cash (used in) investing activities $(36,060) $(11,909) $(21,163) -------- -------- --------
See Notes to Consolidated Financial Statements. 5 INDEPENDENT COMMUNITY BANKSHARES, INC. Consolidated Statements of Cash Flows (Continued) Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997 ---- ---- ---- Cash Flows from Financing Activities Net increase in noninterest-bearing and interest- bearing demand deposits and savings accounts $ 24,798 $ 18,005 $ 11,628 Net increase (decrease) in certificates of deposit 6,359 (1,880) 6,136 Increase (decrease) in securities sold under agreements to repurchase 8,282 (518) 1,604 Proceeds from long-term debt -- 5,000 -- Decrease in short-term borrowings (1,000) (1,800) (1,200) Purchase of common stock -- (823) (635) Cash dividends paid (1,175) (1,086) (575) -------- -------- -------- Net cash provided by financing activities $ 37,264 $ 16,898 $ 16,958 -------- -------- -------- Increase (decrease) in cash and cash equivalents $ 7,743 $ 4,204 $ (1,310) Cash and Cash Equivalents Beginning 12,813 8,609 9,919 -------- -------- -------- Ending $ 20,556 $ 12,813 $ 8,609 ======== ======== ======== Supplemental Disclosures of Cash Flow Information Cash payments for: Interest paid to depositors $ 5,073 $ 5,040 $ 4,823 Interest paid on short-term obligations 10 9 132 Interest paid on Federal Home Loan Bank advances 276 235 176 -------- -------- -------- $ 5,359 $ 5,284 $ 5,131 -------- -------- -------- Income taxes $ 1,287 $ 835 $ 849 ======== ======== ======== Supplemental Disclosure of Noncash Transactions Issuance of common stock - stock split effected in the form of 100% stock dividend $ - - $ - - $ 4,531 ======== ======== ======== Issuance of common stock in acquisition of subsidiary $ - - $ - - $ 1,936 ======== ======== ======== Unrealized gain (loss) on securities available for sale $ (3,248) $ 573 $ 486 ======== ======== ======== Loan balances transferred to foreclosed properties $ - - $ 200 $ - - ======== ======== ========
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, The Middleburg Bank, grants commercial, financial, agricultural, residential and consumer loans to customers principally in Loudoun County and Fauquier County, Virginia. The loan portfolio is well diversified and generally is collateralized by assets of the customers. The loans are expected to be repaid from cash flow or proceeds from the sale of selected assets of the borrowers. The Tredegar Trust Company, a non-banking subsidiary, offers a comprehensive range of fiduciary and investment management services to individuals and businesses. The accounting and reporting policies of the Company conform to generally accepted accounting principles and to accepted practice within the banking industry. Principles of Consolidation The consolidated financial statements of Independent Community Bankshares, Inc. and its wholly-owned subsidiaries, The Middleburg Bank, The Tredegar Trust Company and Middleburg Bank Service Corporation, include the accounts of all four companies. All material intercompany balances and transactions have been eliminated in consolidation. Securities Investments are accounted for as follows: a. Securities Held to Maturity Securities classified as held to maturity are those debt securities the Company has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost adjusted for amortization of premium and accretion of discount, computed by the interest method over their contractual lives. b. Securities Available for Sale Securities classified as available for sale are those debt and equity securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Securities available for sale are carried at fair value. Unrealized gains or losses are reported as increases or decreases in shareholders' equity, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. 7 Notes to Consolidated Financial Statements Loans Held for Sale Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Loans The Company grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans throughout Loudoun County and Fauquier County, Virginia. The ability of the Company's debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances less the allowance for loan losses. Interest income is accrued on the unpaid principal balance. The accrual of interest on mortgage and commercial loans is discontinued at the time loan is 90 days delinquent unless the credit is well-secured and in process of collection. Personal loans are typically charged off no later than 180 days past due. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Allowance for Loan Losses The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest 8 Notes to Consolidated Financial Statements owed Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures. Loans are placed on nonaccrual when a loan is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more. Any unpaid interest previously accrued on those loans is reversed from income. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are applied as a reduction of the loan principal balance. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received. Loan Fees and Costs Loan origination and commitment fees and direct loan costs are being recognized as collected and incurred. The use of this method of recognition does not product results that are materially different from results which would have been produced if such costs and fees were deferred and amortized as an adjustment of the loan yield over the life of the related loan. Bank Premises and Equipment Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation of property and equipment is computed principally on the straight-line method over the following estimated useful lives: Years ----- Buildings and improvements 31.5-39 Furniture and equipment 3-10 Maintenance and repairs of property and equipment are charged to operations and major improvements are capitalized. Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the accounts and gain or loss is included in operations. Other Real Estate Real estate acquired by foreclosure is carried at the lower of cost or fair market value less an allowance for estimated selling expenses on the future disposition of the property. Goodwill Goodwill is amortized using the straight-line method over 20 years. 9 Notes to Consolidated Financial Statements Income Taxes Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences, operating loss carryforwards, and tax credit carryforwards. Deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Earnings Per Share Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options, and are determined using the treasury stock method. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, other temporary investments and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and deferred taxes. Advertising Costs The Company follows the policy of charging the costs of advertising to expense as incurred. Comprehensive Income The Company adopted SFAS 130, Reporting Comprehensive Income, as of January 1, 1998. Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income are components of comprehensive income. The adoption of SFAS 130 had no effect on the Company's net income or shareholders' equity. 10 Notes to Consolidated Financial Statements Derivative Financial Instruments As of October 1, 1999, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Statement 133 establishes accounting and reporting standards for derivative financial instruments and other financial instruments and for hedging activities. As permitted under SFAS No. 133, the Company transferred securities held to maturity with a book value of $3,114,000 and a market value of $3,117,000 to securities available for sale as of October 1, 1999. The Corporation does not have any derivative instruments and hedging activities as defined under this statement. Note 2. Securities Amortized costs and fair values of securities being held to maturity as of December 31, 1999 and 1998 are summarized as follows: 11 Notes to Consolidated Financial Statements
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ---- ----- -------- ----- 1999 ----------------------------------------- (In Thousands) U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 250 $ -- $ (25) $ 225 Obligations of states and political subdivisions 7,433 40 (8) 7,465 Mortgage-backed securities 112 -- (1) 111 ------- ------- ------- ------- $ 7,795 $ 40 $ (34) $ 7,801 ======= ======= ======= =======
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ---- ----- -------- ----- 1998 ----------------------------------------- (In Thousands) U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 502 $ 3 $ -- $ 505 Obligations of states and political subdivisions 12,182 372 -- 12,554 Mortgage-backed securities 162 -- (2) 160 ------- ------- ------- ------- $12,846 $ 375 $ (2) $13,219 ======= ======= ======= =======
12 Notes to Consolidated Financial Statements The amortized cost and fair value of securities being held to maturity as of December 31, 1999 by contractual maturity are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties. Therefore, these securities are not included in the maturity categories in the following maturity summary. Amortized Fair Cost Value ---- ----- (In Thousands) Due in one year or less $ 822 $ 823 Due after one year through five years 3,358 3,370 Due after five years through 10 years 3,153 3,171 Due after 10 years 350 325 Mortgage-backed securities 112 112 ------- ------- $ 7,795 $ 7,801 ======= ======= Amortized costs and fair values of securities available for sale as of December 31, 1999 and 1998, are summarized as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ---- ----- -------- ----- 1999 ----------------------------------------- (In Thousands) U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 4,958 $ 2 $ (136) $ 4,824 Obligations of states and political subdivisions 23,721 3 (1,463) 22,261 Mortgage-backed securities 27,730 -- (941) 26,789 Corporate preferred 2,989 9 (395) 2,603 Other 3,514 -- (47) 3,467 -------- -------- -------- -------- $ 62,912 $ 14 $ (2,982) $ 59,944 ======== ======== ======== ========
13 Notes to Consolidated Financial Statements
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ---- ----- -------- ----- 1998 ----------------------------------------- (In Thousands) U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 2,668 $ 1 $ - - $ 2,678 Obligations of states and political subdivisions $ 17,897 $ 371 $ (79) $ 18,189 Mortgage-backed securities 20,928 55 (105) 20,878 Corporate preferred 2,405 33 (13) 2,425 Other 770 -- -- 770 -------- -------- -------- -------- $ 44,668 $ 469 $ (197) $ 44,940 ======== ======== ======== ========
The amortized cost and fair value of securities available for sale as of December 31, 1999, by contractual maturity are shown below. Maturities may differ from contractual maturities in corporate and mortgage-backed securities because the securities and mortgages underlying the securities may be called or repaid without any penalties. Therefore, these securities are not included in the maturity categories in the following maturity summary. Amortized Fair Cost Value ---- ----- (In Thousands) Due in one year or less $ 200 $ 192 Due after one year through five years 5,867 5,800 Due after five years through 10 years 7,628 7,294 Due after 10 years 14,984 13,799 Mortgage-backed securities 27,730 26,789 Corporate preferred 2,989 2,603 Other 3,514 3,467 -------- -------- $ 62,912 $ 59,944 ======== ======== Proceeds from sales of securities available for sale during 1999, 1998 and 1997 were $1,988,000, $9,887,000 and $26,501,000, respectively. Gross gains of $0, $101,567 and $53,384 and gross losses of $13,000, $119,855 and $145,986 were realized on those sales, respectively. The carrying value of securities pledged to qualify for fiduciary powers, to secure public monies as required by law and for other purposes amounted to $14,814,000 and $8,251,000 at December 31, 1999 and 1998, respectively. 14 Notes to Consolidated Financial Statements Note 3. Loans, Net
December 31, ----------------------------- 1999 1998 ---- ---- (In Thousands) Real estate loans: Construction and land development $ 12,151 $ 5,436 Secured by farmland 379 1,057 Secured by 1-4 family residential 65,444 59,212 Other real estate loans 36,361 28,643 Loans to farmers (except secured by real estate) 1,438 1,489 Commercial and industrial loans (except those secured by real estate) 17,617 17,391 Loans to individuals for personal expenditures 9,694 8,043 All other loans 151 52 --------- --------- Total loans $ 143,235 $ 121,323 Less: Allowance for loan losses 1,453 1,064 --------- --------- Net loans $ 141,782 $ 120,259 ========= =========
Note 4. Allowance for Loan Losses
1999 1998 1997 ---- ---- ---- (In Thousands) Balance, beginning $ 1,064 $ 974 $ 884 Provision charged to operating expense 420 135 177 Recoveries 120 40 40 Loan losses charged to the allowance (151) (85) (127) -------- --------- ---------- $ 1,453 $ 1,064 $ 974 ======== ========= ==========
Impairment of loans having recorded investments of $67,000 and $186,000 at December 31, 1999 and 1998 has been recognized in conformity with FASB Statement No. 114. The average recorded investment in impaired loans during 1999 and 1998 was $75,000 and $47,000. The total allowance for loan losses related to these loans was $67,000 and $66,000 on December 31, 1999 and 1998. No interest income on impaired loans was recognized in 1999 or 1998. Nonaccrual loans excluded from impaired loan disclosure under FASB 114 amounted to $464,000 and $223,000 at December 31, 1999 and 1998, respectively. If interest on these loans had been accrued, such income would have approximated $12,000 and $4,000 for 1999 and 1998, respectively. 15 Notes to Consolidated Financial Statements Note 5. Bank Premises and Equipment, Net
1999 1998 ---- ---- (In Thousands) Land $ 1,516 $ 1,516 Banking facilities 3,894 3,057 Furniture, fixtures and equipment 4,169 3,624 Construction in progress and deposits on equipment 66 472 -------------- ------------- $ 9,645 $ 8,669 Less accumulated depreciation 3,360 2,816 -------------- ------------- $ 6,285 $ 5,853 ============= =============
Depreciation expense was $605,000, $514,000 and $397,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Note 6. Deposits The aggregate amount of jumbo time deposits, each with a minimum denomination of $100,000, was approximately $26,654,000 and $18,157,296 in 1999 and 1998, respectively. At December 31, 1999, the scheduled maturities of time deposits are as follows: 2000 $ 52,385 2001 6,007 2002 1,953 2003 1,041 2003 and thereafter 343 -------- $ 61,729 ======== Note 7. Short-Term Borrowings As of December 31, 1998, the Company had borrowed $1,000,000 on a short-term basis from its $38,018,000 line of credit with the Federal Home Loan Bank of Atlanta. No borrowings were outstanding at December 31, 1999. The Company has pledged real estate loans and Federal Home Loan Bank stock as collateral on these borrowings. 16 Notes to Consolidated Financial Statements Note 8. Long-Term Debt At December 31, 1999 and 1998, the Company had borrowings from the Federal Home Loan Bank system totaling $5,000,000 at an interest rate of 5.52%, maturing April 2, 2003. The FHLB has a blanket lien on real estate loans as collateral on these borrowings. Interest only is payable until maturity. The loan is callable after 2 years. Note 9. Business Combination On August 1, 1997, the Company acquired The Tredegar Trust Company. The Company issued 69,150 shares of common stock for all of the outstanding shares of common stock of Tredegar. The excess of the total acquisition cost over the fair value of the net assets acquired is being amortized over 20 years by the straight-line method. The acquisition has been accounted for as a purchase and results of operations of Tredegar since the date of acquisition are included in the consolidated financial statements. Note 10. Stock Option Plan The Company sponsors a stock option plan, which provides for granting of both incentive and nonqualified stock options. As permitted under generally accepted accounting principles, grants under the plan are accounted for following the provisions of APB Opinion No. 25 and its related interpretations. All options were granted at fair value at date of grant. Accordingly, no compensation cost has been recognized for grants made to date. In determining the pro forma amounts below, the value of each grant is estimated at the grant date using the Black-Scholes option-pricing model, with the following weighted-average assumptions for grants in 1999 and 1998: dividend rate of .22% and .13%; risk-free interest rates of 6.50% and 4.50%; expected lives of 10 years; and expected price volatility of 15.97% and 17.40%. Options granted in 1997 are included 1998 calculations to correspond with shareholder approval of the plan in 1998. Had compensation cost for the plan been determined consistent with FASB Statement No. 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share would have been reduced to the following pro forma amounts: 1999 1998 ---- ---- Net Income: As Reported $ 3,566 $ 2,975 Pro Forma $ 3,189 $ 2,664 Basic EPS: As Reported $ 2.00 $ 1.65 Pro Forma $ 1.79 $ 1.48 Diluted EPS: As Reported $ 1.99 $ 1.63 Pro Forma $ 1.78 $ 1.46 17 Notes to Consolidated Financial Statements Options outstanding at December 31, 1999 and 1998 are summarized as follows:
1999 1998 ----------------------- ------------------------ Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price ------ ----- ------ ----- Outstanding at beginning of year 86,000 $ 19.46 - - $ - - Granted 37,825 $ 24.70 86,000 $ 19.46 Exercised - - - - - - - - Forfeited (2,000) $ 17.00 - - - - ------- ------ Outstanding at end of year 121,825 $ 21.13 86,000 $ 19.46 ======= ====== Weighted average fair value of options granted during the year $ 11.53 $ 7.76
As of December 31, 1999, options outstanding and exercisable are summarized as follows:
Options Outstanding Options Exercisable ----------------------------------------- ------------------------- Weighted Weighted Weighted Range of Remaining Average Average Exercise Shares Contractual Exercise Shares Exercise Prices Outstanding Life Price Exercisable Price ------ ----------- ---- ----- ----------- ----- $ 17.00 52,000 7.9 $ 17.00 46,100 $ 17.00 $ 27.00 1,000 8.3 $ 27.00 1,000 $ 27.00 $ 23.50 31,000 9.0 $ 23.50 18,228 $ 23.50 $ 24.50 6,825 9.7 $ 24.50 6,825 $ 24.50 $ 24.75 31,000 10.0 $ 24.75 10,528 $ 24.75 ---------- ---------- 121,825 8.8 $ 21.13 82,681 $ 19.69 ========== ==========
18 Notes to Consolidated Financial Statements Note 11. Employee Benefit Plans The Company has a trustee noncontributory, defined benefit pension plan covering substantially all full-time employees. The Company funds pension costs in accordance with the funding provisions of the Employee Retirement Income Security Act. Information about the plan follows: 1999 1998 1997 ---- ---- ---- (In Thousands) Change in Benefit Obligation Benefit obligation, beginning of year $ 1,766 $ 1,747 $ 1,426 Service cost 180 126 120 Interest cost 132 148 121 Actuarial loss (62) 508 242 Benefits paid (14) (763) (162) ------- ------- ------- Benefit obligation, end of year $ 2,002 $ 1,766 $ 1,747 ======= ======= ======= Change in Plan Assets Fair value of plan assets, beginning of year $ 1,382 $ 1,841 $ 1,480 Actual return on plan assets 194 (17) 345 Employer contributions 189 324 178 Benefits paid (14) (763) (162) ------- ------- ------- Fair value of plan assets, ending $ 1,751 $ 1,385 $ 1,841 ======= ======= ======= Funded status $ (251) $ (384) $ 94 Unrecognized net actual loss 648 825 125 Unrecognized net obligation at transition (36) (40) (43) Unrecognized prior service cost 167 183 200 ------- ------- ------- Prepaid benefit cost included in other assets $ 528 $ 584 $ 376 ======= ======= ======= Components of Net Periodic Benefit Cost Service cost $ 180 $ 126 $ 103 Interest cost 132 148 134 Expected return on plan assets (111) (175) (164) Amortization of prior service cost 17 17 17 Amortization of net obligation at transition (4) (4) (4) Recognized net actuarial loss 32 -- -- ------- ------- ------- Net periodic benefit cost $ 246 $ 112 $ 86 ======= ======= ======= Weighted-Average Assumptions as of December 31 Discount rate 7.50% 7.50% 8.50% Expected return on plan assets 9.00% 9.00% 9.50% Rate of compensation increase 5.00% 5.00% 6.00% 19 Notes to Consolidated Financial Statements A deferred compensation plan was adopted for the President and Chief Executive Officer. Benefits are to be paid in monthly installments for 15 years following retirement or death. The agreement provides that if employment is terminated for reasons other than death or disability prior to age 65, the amount of benefits would be reduced. The deferred compensation expense for 1999, 1998 and 1997, based on the present value of the retirement benefits, was $19,036, $17,143 and $15,809. The plan is unfunded. However, life insurance has been acquired on the life of the employee in an amount sufficient to discharge the obligation. Note 12. Income Taxes Net deferred tax assets (liabilities) consist of the following components as of December 31, 1999 and 1998: The provision for income taxes charged to operations for the years ended December 31, 1999, 1998 and 1997 consists of the following: 1999 1998 ---- ---- (In Thousands) Deferred tax assets: Allowance for loan losses $ 379 $ 247 Deferred compensation 36 30 Interest on nonaccrual loans 5 1 Loss on capital assets 40 38 Other 17 - - Securities available for sale 1,012 - - ---------------------------- $ 1,489 $ 316 ----------------------------- Deferred tax liabilities: Property and equipment $ 294 $ 297 Prepaid pension costs 177 200 Securities available for sale - - 92 ----------------------------- $ 471 $ 589 ----------------------------- $ 1,018 $ (273)
1999 1998 1997 ---- ---- ---- (In Thousands) Current tax expense $ 1,283 $ 873 $ 882 Deferred tax expense (benefit) (186) (16) (20) ------------- ----------- ---------- $ 1,097 $ 857 $ 862 ============= =========== ==========
20 Notes to Consolidated Financial Statements The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the years ended December 31, 1999, 1998 and 1997, due to the following:
1999 1998 1997 ---- ---- ---- (In Thousands) Computed "expected" tax expense $ 1,585 $ 1,303 $ 1,188 Increase (decrease) in income taxes resulting from: Tax-exempt interest income (486) (410) (285) Other, net (2) (36) (41) ------------- ------------- ------------- $ 1,097 $ 857 $ 862 ============= ============= =============
Note 13. Related Party Transactions The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, principal officers, their immediate families and affiliated companies in which they are principal stockholders (commonly referred to as related parties), on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. These persons and firms were indebted to the Company for loans totaling $3,233,000 and $3,247,000 at December 31, 1999 and 1998, respectively. During 1999, total principal additions were $707,000 and total principal payments were $721,000. Note 14. Contingent Liabilities and Commitments In the normal course of business, there are outstanding various commitments and contingent liabilities, which are not reflected in the accompanying financial statements. The Company does not anticipate any material loss as a result of these transactions. See Note 17 with respect to financial instruments with off-balance-sheet risk. The Company must maintain a reserve against its deposits in accordance with Regulation D of the Federal Reserve Act. For the final weekly reporting period in the years ended December 31, 1999 and 1998, the aggregate amounts of daily average required reserves were approximately $25,000 and $1,207,000, respectively. 21 Notes to Consolidated Financial Statements Note 15. Earnings Per Share The following shows the weighted average number of shares used in computing earnings per share and the effect on weighted average number of shares of diluted potential common stock. Potential dilutive common stock has no effect on income available to common stockholders.
1999 1998 1997 ---- ---- ---- Per Per Per Share Share Share Shares Amount Shares Amount Shares Amount ------ ------ ------ ------ ------ ------ Basic EPS 1,779,000 $ 2.00 1,803,000 $ 1.65 1,741,000 $ 1.51 Effect of dilutive securities: Stock options 16,000 18,000 - - --------- --------- --------- Diluted EPS 1,795,000 $ 1.99 1,821,000 $ 1.63 1,741,000 $ 1.51 ========= ========= ========= ========= ========= =========
In 1999, stock options representing 37,825 shares were not included in the calculation of earnings per share because they would have been antidilutive. Note 16. Retained Earnings Transfers of funds from the banking subsidiary to the Parent Company in the form of loans, advances and cash dividends are restricted by federal and state regulatory authorities. As of December 31, 1999, the aggregate amount of unrestricted funds which could be transferred from the Company's subsidiaries to the Parent Company, without prior regulatory approval, totaled $3,460,000 or 15.0% of the total consolidated net assets. Note 17. Financial Instruments With Off-Balance-Sheet Risk and Credit Risk The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. 22 Notes to Consolidated Financial Statements A summary of the contract or notional amount of the Company's exposure to off-balance-sheet risk as of December 31, 1999 and 1998, is as follows: 1999 1998 ---- ---- Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $ 26,725,000 $ 17,060,000 Standby letters of credit 1,328,000 1,162,000 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties. Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. Those lines of credit may not be drawn upon to the total extent to which the Company is committed. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds real estate as collateral supporting those commitments for which collateral is deemed necessary. The extent of collateral held for those commitments at December 31, 1999, varies from 0 percent to 100 percent; the average amount collateralized is 12.3 percent. The Company has approximately $3,713,000 in deposits in financial institutions in excess of amounts insured by the Federal Deposit Insurance Corporation (FDIC) at December 31, 1999. Note 18. Disclosures About Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Short-Term Investments For those short-term instruments, the carrying amount is a reasonable estimate of fair value. Securities For securities held for investment purposes, fair values are based on quoted market prices or dealer quotes. 23 Notes to Consolidated Financial Statements Loans Held for Sale Fair values of loans held for sale are based on commitments on hand from investors or prevailing market prices. Loans For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans were estimated using discounted cash flow analyses, using interest rates currently being offered. Accrued Interest The carrying amounts of accrued interest approximate fair values. Deposits and Borrowings The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. For all other deposits and borrowings, the fair value is determined using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar products. Off-Balance-Sheet Financial Instruments The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At December 31, 1999 and 1998, the carrying amounts and fair values of loan commitments and standby letters of credit were immaterial 24 The estimated fair values of the Company's financial instruments are as follows:
1999 1998 ---- ---- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- (In Thousands) Financial assets: Cash and short-term investments $ 20,556 $ 20,556 $ 12,813 $ 12,813 Securities 67,739 67,745 57,786 58,159 Loans held for sale 1,232 1,230 4,672 4,672 Loans 141,782 141,436 120,259 122,342 Accrued interest receivable 1,310 1,310 1,155 1,155 Financial liabilities: Deposits $203,837 $204,009 $172,680 $173,008 Securities sold under agreements to repurchase 10,811 10,811 2,530 2,530 Federal Home Loan Bank advances -- -- 1,000 1,008 Long-term debt 5,000 4,805 5,000 5,000 Accrued interest payable 500 500 519 519
Note 19. Capital Requirements The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's and Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 1999, that the Company and the Bank meet all capital adequacy requirements to which it is subject. As of December 31 1999, the most recent notification from the Federal Reserve Bank categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. 25 The Company's and the Bank's actual capital amounts and ratios are also presented in the table.
Minimum To Be Well Minimum Capitalized Under Capital Prompt Corrective Actual Requirement Action Provisions Amount Ratio Amount Ratio Amount Ratio -------------------------- ---------------------------- ---------------------------- (in thousands) As of December 31, 1999: Total Capital (to Risk Weighted Assets): Consolidated $ 25,433 14.8% =>$ 13,706 => 8.0% N/A The Middleburg Bank $ 18,531 11.9% =>$ 13,393 => 8.0% =>$ 16,741 => 10.0% Tier 1 Capital (to Risk Weighted Assets): Consolidated $ 23,980 14.0% =>$ 6,853 => 4.0% N/A The Middleburg Bank $ 18,531 11.1% =>$ 6,696 => 4.0% =>$ 10,044 => 6.0% Tier 1 Capital (to Average Assets): Consolidated $ 23,980 10.8% =>$ 8,907 => 4.0% N/A The Middleburg Bank $ 18,531 8.6% =>$ 8,645 => 4.0% =>$ 10,807 => 5.0% As of December 31, 1998: Total Capital (to Risk Weighted Assets): Consolidated $ 22,626 17.9% =>$ 10,112 => 8.0% N/A The Middleburg Bank $ 18,012 14.4% =>$ 9,977 => 8.0% =>$ 12,471 => 10.0% Tier 1 Capital (to Risk Weighted Assets): Consolidated $ 21,563 17.1% =>$ 5,056 => 4.0% N/A The Middleburg Bank $ 16,949 13.6% =>$ 4,988 => 4.0% =>$ 7,482 => 6.0% Tier 1 Capital (to Average Assets): Consolidated $ 21,563 11.2% =>$ 7,723 => 4.0% N/A The Middleburg Bank $ 16,949 9.0% =>$ 7,499 => 4.0% =>$ 9,374 => 5.0%
26 Note 20. Proposed Acquisition On August 9, 1999, the Company purchased one percent of the issued and outstanding capital stock of Gilkison Patterson Investment Advisors, Inc. ("GPIA"), an investment advisory firm based in Alexandria, Virginia. In addition, the Company acquired the right to purchase all of the remaining authorized, issued and outstanding shares of GPIA capital stock on or after July 1, 2001. The consideration for the shares and the merger option consisted of $2.26 million in cash and other non-stock consideration. Upon exercise of the merger option, the Company will purchase all the remaining issued and outstanding shares of GPIA capital stock for an additional $3.8 million in cash and shares of the Company's common stock, and GPIA will be merged into the Company's wholly-owned subsidiary, the Tredegar Trust Company. 27 Notes to Consolidated Financial Statements Note 21. Condensed Financial Information - Parent Corporation Only INDEPENDENT COMMUNITY BANKSHARES, INC. (Parent Corporation Only) Balance Sheets December 31, 1999 and 1998
Assets 1999 1998 (In Thousands) Cash on deposit with subsidiary bank $ 2 $ 1 Money market fund 24 1,394 Securities available for sale 2,205 2,426 Investment in subsidiaries, at cost, plus equity in undistributed net income 17,962 18,088 Note receivable 1,000 -- Goodwill 1,060 1,121 Other assets 1,602 65 -------- -------- Total assets $ 23,855 $ 23,095 ======== ======== Liabilities and Shareholders' Equity Liabilities Other liabilities $ 780 $ 232 -------- -------- Shareholders' Equity Common stock $ 8,895 $ 8,895 Capital surplus 1,293 1,293 Retained earnings 14,852 12,496 Accumulated other comprehensive income (loss) (1,965) 179 -------- -------- Total shareholders' equity $ 23,075 $ 22,863 -------- -------- Total liabilities and shareholders' equity $ 23,855 $ 23,095 ======== ========
28 Notes to Consolidated Financial Statements INDEPENDENT COMMUNITY BANKSHARES, INC. (Parent Corporation Only) Statements of Income Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997 ---- ---- ---- (In Thousands) Income Dividends from subsidiary $ 1,865 $ 2,586 $ 1,201 Dividends from investments 178 197 225 Interest on money market 48 33 13 Interest from note receivable 32 -- -- Management fees 40 -- -- (Losses) on securities available for sale, net (5) (29) $ (84) --------- ---------- ----------- Total income $ 2,158 $ 2,787 $ 1,355 ------- ---------- ----------- Expenses Salaries and employee benefits $ 132 $ - $ -- Amortization 60 80 42 Legal and professional fees 42 32 21 Printing and supplies 42 23 17 Directors fees 34 -- -- Interest expense on loan from subsidiary 17 -- -- Other 27 73 1 ------- ---------- ----------- Total expenses $ 354 $ 208 $ 81 ------- ---------- ----------- Income before allocated tax benefits and undistributed income of subsidiaries $ 1,804 $ 2,579 $ 1,274 Income tax expense (benefit) (20) (16) (19) ------- ---------- ----------- Income before equity in undistributed income of subsidiaries $ 1,824 $ 2,595 $ 1,293 Equity in undistributed income of subsidiaries 1,742 380 1,338 ------- ---------- ----------- Net income $ 3,566 $ 2,975 $ 2,631 ======= ========== ===========
29 Notes to Consolidated Financial Statements INDEPENDENT COMMUNITY BANKSHARES, INC. (Parent Corporation Only) Statements of Cash Flows Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997 ---- ---- ---- (In Thousands) Cash Flows from Operating Activities Net income $ 3,566 $ 2,975 $ 2,631 Adjustments to reconcile net income to net cash provided by operating activities: Amortization 60 79 42 Undistributed earnings of subsidiaries (1,742) (380) (1,338) Loss on sale of securities available for sale 5 29 83 (Increase) decrease in other assets (1,433) (20) (40) Decrease in other liabilities 48 (37) -- ------- ------- ------- Net cash provided by operating activities $ 504 $ 2,646 $ 1,378 ------- ------- ------- Cash Flows from Investing Activities Purchase of securities available for sale $ (399) $(1,275) $(1,335) Proceeds from sale of securities available for sale 201 1,218 1,908 Increase in note receivable (1,000) Purchase of intangibles -- -- (175) ------- ------- ------- Net cash provided by (used in) investing activities $(1,198) $ (57) $ 398 ------- ------- ------- Cash Flows from Financing Activities Purchase of common stock $ -- $ (823) $ (635) Net proceeds from sale of common stock 500 -- -- Cash dividends paid (1,175) (1,086) (574) ------- ------- ------- Net cash (used in) financing activities $ (675) $(1,909) $(1,209) ------- ------- ------- Increase in cash and cash equivalents $(1,369) $ 680 $ 567 Cash and Cash Equivalents Beginning 1,395 715 148 ------- ------- ------- Ending $ 26 $ 1,395 $ 715 ======= ======= =======
30 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INDEPENDENT COMMUNITY BANKSHARES, INC. Date: March 15, 2000 By: /s/ Joseph L. Boling ------------------------------------- Joseph L. Boling President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date /s/ Joseph L. Boling President and Chief Executive March 15, 2000 - ------------------------------------------- Officer and Director Joseph L. Boling (Principal Executive Officer) /s/ Alice P. Frazier Senior Vice President and Chief Financial March 15, 2000 - ------------------------------------------- Officer (Principal Financial and Alice P. Frazier Accounting Officer) /s/ Howard M. Armfield Director - ------------------------------------------- March 15, 2000 Howard M. Armfield /s/ Childs Frick Burden Director March 15, 2000 - ------------------------------------------- Childs Frick Burden /s/ J. Lynn Cornwell, Jr. Director March 15, 2000 - ------------------------------------------- J. Lynn Cornwell, Jr. /s/ William F. Curtis Director March 15, 2000 - ------------------------------------------- William F. Curtis /s/ F.E. Deacon III Director March 15, 2000 - ------------------------------------------- F.E. Deacon III /s/ Robert C. Gilkison Director March 15, 2000 - ------------------------------------------- Robert C. Gilkison /s/ C. Oliver Iselin, III Director March 15, 2000 - ------------------------------------------- C. Oliver Iselin, III /s/ William S. Leach Director March 15, 2000 - ------------------------------------------- William S. Leach /s/ Thomas W. Nalls Director March 15, 2000 - ------------------------------------------- Thomas W. Nalls Director March 15, 2000 - ------------------------------------------- John C. Palmer Director March 15, 2000 - ------------------------------------------- John Sherman /s/ Millicent W. West Director March 15, 2000 - ------------------------------------------- Millicent W. West /s/ Edward T. Wright Director March 15, 2000 - ------------------------------------------- Edward T. Wright
INDEX TO EXHIBITS Number Document 3.1 Articles of Incorporation of Independent Community Bankshares, Inc. (the "Company")(restated in electronic format), attached as Exhibit 3.1 to the Registration Statement on Form S-4, Registration No. 333-24523, filed with the Commission on April 4, 1997 (the "Form S-4"), incorporated herein by reference. 3.2 Bylaws of the Company, attached as Exhibit 3.2 to the Form S-4, incorporated herein by reference. 10.1 Employment Agreement, dated as of January 1, 1998, between the Company and Joseph L. Boling, attached as Exhibit 10.1 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1998, incorporated herein by reference. 10.2 Independent Community Bankshares, Inc. 1997 Stock Option Plan, as amended, attached as Exhibit 4.3 to the Registration Statement on Form S-8, Registration No. 333-93447, filed with the Commission on December 22, 1999, incorporated herein by reference. 10.3 Agreement and Plan of Reorganization dated as of August 9, 1999, between Gilkison Patterson Investment Advisors, Inc. ("GPIA"), the Company and The Tredegar Trust Company, attached as Exhibit 10.1 to the Company's Quarterly Report on Form 10-QSB for the period ended September 30, 1999 (the "Form 10-QSB"), incorporated herein by reference. 10.4 Shareholder Agreement dated as of August 9, 1999, between Robert C. Gilkison, James H. Patterson, the Company and GPIA, attached as Exhibit 10.2 to the Form 10-QSB, incorporated herein by reference. 10.5 Stock Purchase Agreement dated as of August 9, 1999, between Robert C. Gilkison, James H. Patterson and the Company, attached as Exhibit 10.3 to the Form 10-QSB, incorporated herein by reference. 21 Subsidiaries of the Registrant. 27 Financial Data Schedule (filed electronically only). EX-21 2 EXHIBIT 21 Exhibit 21 Subsidiaries of Independent Community Bankshares, Inc. ------------------------------------------------------ Name of Subsidiary State of Incorporation ------------------ ---------------------- The Middleburg Bank Virginia - Middleburg Bank Service Corporation Virginia The Tredegar Trust Company Virginia EX-27 3 FDS --
9 1000 12-MOS DEC-31-1999 DEC-31-1999 8037 87 12139 0 59944 7795 7801 144467 1453 243925 203837 10811 1202 5000 0 0 8895 14180 243925 11694 3828 0 15522 4798 5345 10177 420 (13) 8040 4663 4663 0 0 3566 2.00 1.99 5.35 530 0 0 531 1064 151 120 1453 401 0 1052
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