-----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, FR/74YKOSAEKn7t05mHS1YHHi/ORumdivWCOibVR342pomzzIKbhABeRfiYYuDxI iz+5bJPidlVScolE5OSApQ== 0001002105-97-000080.txt : 19970704 0001002105-97-000080.hdr.sgml : 19970704 ACCESSION NUMBER: 0001002105-97-000080 CONFORMED SUBMISSION TYPE: 424B3 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19970703 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: INDEPENDENT COMMUNITY BANKSHARES INC CENTRAL INDEX KEY: 0000914138 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 541696103 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-24523 FILM NUMBER: 97636437 BUSINESS ADDRESS: STREET 1: 111 WEST WASHINGTON STREET 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 424B3 1 424B3 FILED BY INDEPENDENT COMMUNITY BANKSHARES The Tredegar Trust Company P.O. Box 1832 Richmond, Virginia 23218 804-644-2848 F.E. Deacon, III President Chief Executive Officer June 27, 1997 Dear Fellow Shareholder: You are cordially invited to attend the Annual Meeting of Shareholders (the "Meeting") of The Tredegar Trust Company ("TTC") to be held at the offices of TTC, 901 East Byrd Street, Richmond, Virginia on July 23, 1997 at 9:30 a.m. At the Meeting, shareholders will consider and vote on the Agreement and Plan of Reorganization, dated as of March 28, 1997 (the "Agreement"), between TTC, Independent Community Bankshares, Inc. ("ICBI") and TTC Acquisition Subsidiary, Inc., a wholly-owned subsidiary of ICBI ("Acquisition") pursuant to which, among other things, Acquisition will merge with TTC (the "Reorganization"). Under the terms of the Agreement, each share of TTC Common Stock outstanding immediately prior to consummation of the Reorganization will be exchanged for shares of ICBI Common Stock, with cash being paid in lieu of issuing fractional shares, as described in the accompanying Proxy Statement/Prospectus. Following the Reorganization, TTC will continue to carry on its trust business as a wholly-owned subsidiary of ICBI in substantially the same manner as before the Reorganization. Details of the proposed Reorganization, are set forth in the accompanying Proxy Statement/Prospectus, which you are urged to read carefully in its entirety. Approval of the Reorganization requires the affirmative vote of a majority of the outstanding shares of TTC Common Stock. Your Board of Directors has approved the Reorganization and believes that it is in the best interests of TTC and its shareholders. Accordingly, the Board recommends that you VOTE FOR the Reorganization. At the Meeting, you also will vote on the election of nine (9) Directors for a term of one year each. Your Board of Directors unanimously supports these individuals and recommends that you VOTE FOR them as directors. We hope you can attend the Meeting. Whether or not you plan to attend, please complete, sign and date the enclosed proxy card and return it promptly in the enclosed envelope. Your vote is important regardless of the number of shares you own. We look forward to seeing you at the Meeting. Sincerely, F. E. Deacon, III THE TREDEGAR TRUST COMPANY NOTICE OF ANNUAL MEETING OF SHAREHOLDERS To be held on July 23, 1997 at 9:30 a.m. The Annual Meeting of Shareholders (the "Meeting") of The Tredegar Trust Company ("TTC") will be held on July 23, 1997 at 9:30 a.m. at the offices of TTC, 901 East Byrd Street, Richmond, Virginia for the following purposes: 1. To approve the Agreement and Plan of Reorganization, dated as of March 28, 1997, between TTC, Independent Community Bankshares, Inc. ("ICBI") and TTC Acquisition Subsidiary, Inc. ("Acquisition") and a related Plan of Merger (collectively, the "Reorganization Agreement"), providing for a Merger of TTC and Acquisition (the "Reorganization") upon the terms and conditions therein, including among other things that each issued and outstanding share of TTC Common Stock will be exchanged for shares of ICBI Common Stock, with cash being paid in lieu of issuing fractional shares. The Reorganization Agreement is enclosed with the accompanying Proxy Statement/Prospectus as Appendix A. 2. To elect nine (9) directors to serve for a one year term and until their successors are elected and qualified. 3. To transact such other business as may properly come before the Meeting or any adjournments or postponements thereof. Proxies voting against the proposal to approve the Reorganization Agreement will not be used by management to vote for adjournment to permit further solicitation of proxies. The Board of Directors has fixed June 26, 1997 as the record date for the Meeting, and only holders of record of TTC Common Stock at the close of business on that date are entitled to receive notice of and to vote at the Meeting or any adjournments or postponements thereof. By Order of the Board of Directors F. E. Deacon, III President and Chief Executive Officer June 27, 1997 PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING. THE BOARD OF DIRECTORS OF THE TREDEGAR TRUST COMPANY RECOMMENDS THE SHAREHOLDERS VOTE TO APPROVE THE REORGANIZATION AGREEMENT. THE TREDEGAR TRUST COMPANY PROXY STATEMENT PROSPECTUS OF INDEPENDENT COMMUNITY BANKSHARES, INC. INTRODUCTION This Proxy Statement/Prospectus is being furnished to shareholders of The Tredegar Trust Company ("TTC") in connection with the solicitation of proxies by the Board of Directors of TTC for use at the Annual Meeting of Shareholders (the "TTC Meeting"), and any postponements or adjournments of the meeting. At the TTC Meeting, shareholders of record of TTC Common Stock as of the close of business on June 26, 1997, will consider and vote on a proposal to approve the Agreement and Plan of Reorganization, dated as of March 28, 1997, and the related Plan of Merger (together, the "Reorganization Agreement") by and among Independent Community Bankshares, Inc., a Virginia corporation ("ICBI"), TTC Acquisition Subsidiary, Inc., an interim Virginia trust company wholly-owned by ICBI ("Acquisition"), and TTC, pursuant to which, among other things, Acquisition will merge into TTC (the "Reorganization"). Upon consummation of the Reorganization, which is expected to occur on or about July 31, 1997 (the "Effective Date"), each outstanding share of TTC Common Stock (other than shares held by dissenting shareholders) shall be converted into and represent the right to receive a maximum of 0.25 shares of ICBI Common Stock (the "Initial Merger Consideration"), promptly after the Effective Date, and additional shares of ICBI Common Stock, payable approximately three years after the consummation of the Reorganization if TTC's net earnings in the three years that follow the Reorganization equal or exceed $638,946, subject to adjustment as described herein (the "Contingent Merger Consideration"). Cash will be paid in lieu of fractional shares. See "The Reorganization" for a more complete description of the Reorganization. A copy of the Reorganization Agreement is enclosed as Appendix A. At the TTC Meeting shareholders also will vote to elect nine (9) Directors of TTC for a one year term. See "The Tredegar Trust Company Election of Directors; Management" for additional information. This Proxy Statement/Prospectus also serves as the Prospectus of ICBI relating to approximately 79,029 shares of ICBI Common Stock and 276,600 contractual rights to receive the Contingent Merger Consideration issuable to the shareholders of TTC in connection with the Reorganization. This Proxy Statement/Prospectus is first being mailed to shareholders of TTC on or about June 27, 1997. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SHARES OF ICBI COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY. The date of this Proxy Statement/Prospectus is June 27, 1997. AVAILABLE INFORMATION Independent Community Bankshares, Inc. ("ICBI") is not subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and, accordingly, does not file reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). ICBI has filed with the Commission a Registration Statement on Form S-4, as amended, under the Securities Act of 1933, as amended, with respect to the shares of ICBI Common Stock issuable in the Reorganization. This Proxy Statement/Prospectus does not contain all of the information set forth in the Registration Statement, certain items of which have been omitted in accordance with the rules and regulations of the Commission. For further information pertaining to ICBI and the shares of ICBI Common Stock issuable in the Reorganization, reference is made to the Registration Statement and amendments and exhibits thereto, which may be inspected and copied at the offices of the Commission, at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at regional offices of the Commission at the following locations: Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and World Trade Center, New York, New York 10048. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition, the Commission maintains a Web site (address: http://www.sec.gov) that contains the Registration Statement of ICBI. ------------------------- No person is authorized to give any information or to make any representation not contained or incorporated by reference in this Proxy Statement/Prospectus, and, if given or made, such information or representation should not be relied upon as having been authorized. This Proxy Statement/Prospectus does not constitute an offer to sell, or a solicitation of an offer to purchase, the securities offered by this Proxy Statement/Prospectus in any jurisdiction to or from any person to whom it is unlawful to make such an offer or solicitation in such jurisdiction. Neither the delivery of this Proxy Statement/Prospectus nor any distribution of the securities being offered pursuant to this Proxy Statement/Prospectus shall, under any circumstances, create an implication that there has been no change in the affairs of ICBI or TTC or the information set forth herein since the date of this Proxy Statement/Prospectus. -2- TABLE OF CONTENTS
Page ---- Introduction....................................................................................................1 Available Information...........................................................................................2 Summary.........................................................................................................4 The Companies..............................................................................................4 The Shareholder Meeting....................................................................................4 Glossary of Terms..........................................................................................4 The Reorganization.........................................................................................7 Comparative Per Share Information..............................................................................13 Selected Financial Information.................................................................................15 ICBI Selected Historical Financial Information............................................................16 TTC Selected Historical Financial Information.............................................................17 ICBI and TTC Selected Pro Forma Combined Financial Information............................................18 The Shareholder Meeting........................................................................................19 The Reorganization.............................................................................................21 Financial Advisor's Opinion....................................................................................36 The Tredegar Trust Company.....................................................................................39 The Tredegar Trust Company Election of Directors; Management...................................................39 The Tredegar Trust Company Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................46 Independent Accountants........................................................................................49 Other Business.................................................................................................49 Independent Community Bankshares, Inc..........................................................................50 Independent Community Bankshares, Inc. Management..............................................................51 Independent Community Bankshares, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................57 Description of ICBI Capital Stock..............................................................................77 Comparative Rights of Security Holders.........................................................................77 Supervision and Regulation.....................................................................................84 Experts ......................................................................................................89 Legal Opinion..................................................................................................89 Pro Forma Financial Information (Unaudited)....................................................................90 Pro Forma Combined Condensed Balance Sheet (Unaudited)....................................................91 Pro Forma Combined Condensed Income Statements (Unaudited)................................................92 Notes to Pro Forma Condensed Financial Information (Unaudited)............................................94 Appendices General A Agreement and Plan of Reorganization.....................................................................A-1 The Tredegar Trust Company B The Tredegar Trust Company Financial Statements (including the audited December 31, 1996 Financial Statements)......................................................B-1 C Opinion of Scott & Stringfellow, Inc.....................................................................C-1 D Excerpts from the Virginia Stock Corporation Act Relating to Dissenting Shareholders...........................................................................D-1 Independent Community Bankshares, Inc. E Independent Community Bankshares, Inc. Financial Statements (including the audited December 31, 1996 Financial Statements)......................................................E-1 F Tax Opinion of Williams, Mullen, Christian & Dobbins, P.C................................................F-1
-3- SUMMARY The following summary is not intended to be complete and is qualified in its entirety by the more detailed information and financial statements contained elsewhere in this Proxy Statement/Prospectus, including the Appendices hereto and the documents incorporated herein by reference. THE COMPANIES ICBI. ICBI is a bank holding company headquartered in Middleburg, Virginia. ICBI has one subsidiary, The Middleburg Bank, a Virginia-chartered bank that operates three banking offices and offers a full range of banking services principally to individuals and to small and medium sized businesses in Loudoun County, Virginia. ICBI was formed in 1993 to serve as the parent bank holding company for The Middleburg Bank. The Middleburg Bank began business in 1924. At December 31, 1996, ICBI had total assets of $163 million, deposits of $139 million, and total stockholders' equity of $18 million. ICBI's principal executive offices are located at 111 West Washington Street, Middleburg, Virginia 20117 and its telephone number is (540) 687-6377. See "Independent Community Bankshares, Inc.," "Pro Forma Financial Information" and the documents relating to ICBI accompanying this Proxy Statement/Prospectus. TTC. TTC is a Virginia-chartered independent trust company and provides trust and investment services, primarily to customers in Virginia, through its office in Richmond, Virginia. At December 31, 1996, TTC had total assets of $1.36 million and stockholders' equity of $1.33 million. The principal executive offices of TTC are located at 901 East Byrd Street, Richmond, Virginia 23219 and its telephone number is (804) 644-2848. In 1995 TTC and The Middleburg Bank entered into a contract under which TTC provides various services to the trust department of The Middleburg Bank. TTC also provides investment advisory services to ICBI. See "The Tredegar Trust Company" and "The Tredegar Trust Company Management's Discussion and Analysis of Financial Condition and Results of Operation." THE SHAREHOLDER MEETING The TTC Meeting will be held at the offices of TTC, 901 East Byrd Street, Richmond, Virginia on July 23, 1997 at 9:30 a.m. Only holders of record of TTC Common Stock at the close of business on June 26, 1997, will be entitled to vote at the TTC Meeting. See "The Shareholder Meeting." GLOSSARY OF TERMS Depending on the operations of TTC prior to and after the Effective Date of the Reorganization, the amount of consideration receivable by TTC shareholders may be variable and involves complex calculations. This Glossary is intended to help TTC shareholders understand the discussion that follows. All terms explained below also are defined in Section 1.4 of the Reorganization Agreement, which is Appendix A to this Proxy Statement/Prospectus. Other capitalized terms in this section that are not defined here shall have the respective meanings ascribed to them in the Reorganization Agreement. Merger Consideration This term refers to the consideration that TTC shareholders will receive from ICBI if the Reorganization is consummated. It consists of the Initial Merger Consideration and the Contingent Merger Consideration. -4- Initial Merger Consideration This term refers to the ICBI Common Stock that will be distributed to TTC shareholders as soon as practicable after the consummation of the Reorganization. It will be a maximum of 0.25 shares of ICBI Common Stock for each share of TTC Common Stock. The Initial Merger Consideration will be less if TTC Operating Losses (from January 1, 1997 to the Effective Date) exceed $30,000. For the four months ended April 30, 1997, TTC Operating Losses were $14,935. If TTC Operating Losses exceed $30,000, the Initial Merger Consideration will be the fraction of a share of ICBI Common Stock, the denominator of which will be 276,600 and the numerator of which will be the difference between $1,936,200 and the amount by which TTC Operating Losses exceed $30,000, such difference then to be divided by $28.00. Unless the performance of TTC from May 1, 1997 to the Effective Date is materially worse than TTC's performance in the four months ended April 30, 1997, there would not be any adjustment to the Initial Merger Consideration. The management of TTC does not anticipate that TTC Operating Losses will exceed $30,000 or that there will be any adjustment to the Initial Merger Consideration. The following table, however, illustrates the amount of the potential adjustment to the Initial Merger Consideration, based on various levels of TTC Operating Losses. Hypothetical TTC Operating Initial Merger Losses (1) Consideration (2) ---------- ----------------- $ 30,000 0.25 50,000 0.2474 75,000 0.2442 100,000 0.2410 (1) For the four months ended April 30, 1997, TTC Operating Losses were $14,935. (2) Shares of ICBI Common Stock per share of TTC Common Stock. There is no minimum number of shares of ICBI Common Stock that TTC shareholders will receive on a per share basis. TTC will not resolicit shareholders if the actual per share amount is less than 0.25 shares of ICBI Common Stock for each share of TTC Common Stock. Cash will be paid in lieu of fractional shares at the rate of $28.00 per share of ICBI Common Stock. Contingent Merger Consideration This term refers to additional consideration that TTC shareholders will receive if TTC's cumulative net earnings in the three years following the consummation of the Reorganization exceed the Required Net Earnings. The Contingent Merger Consideration will be significantly less than the Initial Merger Consideration. If the Contingent Merger Consideration is earned, its value will depend on the value of ICBI Common Stock at the time the Contingent Merger Consideration is paid. The following table illustrates the value of the Contingent Merger Consideration to a holder of 1,000 shares of TTC Common Stock, assuming various per share values of ICBI Common Stock at the time of payment: -5- Value of Contingent Payment Value Per Share of ICBI on 1,000 shares of TTC Common Stock Common Stock $20 $ 859 25 1002 30 1036 35 1125 40 1214 Required Net Earnings This term is the cumulative amount of net earnings that TTC must generate in the three years following the Effective Date in order for TTC shareholders to receive the Contingent Merger Consideration. The Reorganization Agreement provides that the Required Net Earnings will be $638,946 unless the sum of the severance benefits paid to TTC officers (a total of $106,128) and TTC Transaction Costs exceed $150,000. If that occurs, the Required Net Earnings will be increased by the difference between the amount by which such expenses exceed $150,000 and the amount, if any, by which TTC Operating Losses are less $30,000. As of March 31, 1997, TTC Transaction Costs (including the $38,724 fee that will be payable to Scott & Stringfellow, Inc.) totaled approximately $176,043. Because the sum of TTC Transaction Costs and severance benefits exceeded $150,000 at March 31, 1997 and because TTC will have additional transaction costs after March 31, 1997 and before the Effective Date, the amount of Required Net Earnings is likely to exceed $638,946. In no event will the Required Net Earnings be less than $638,946. After the Effective Date, the trust business of The Middleburg Bank will be transferred to TTC and The Middleburg Bank will cease to operate a separate trust department. As a result, after the Effective Date, TTC will have all of the revenue and expense of The Middleburg Bank's trust department. See "The Reorganization Transfer of Trust Business of The Middleburg Bank" and "The Tredegar Trust Company." TTC Operating Losses This term refers to the excess, if any, of TTC expenses over TTC revenues from January 1, 1997 to the Effective Date. The parties agreed, however, that certain expenses related to the Reorganization will be excluded from the computation of TTC Operating Losses. The excluded expenses are severance benefits paid to TTC officers, TTC Transaction Costs, the amortization or write-off of TTC start-up costs and any fees payable by TTC to The Middleburg Bank after June 30, 1997. If TTC Operating Losses exceed $30,000, the Initial Merger Consideration will be reduced. For the four months ended April 30, 1997, the TTC Operating Losses were $14,935. TTC Transaction Costs This term refers to expenses of TTC accrued after December 31, 1996 in connection with the Reorganization. Such costs include fees and expenses of consultants, investment bankers, accountants, counsel and printers. -6- THE REORGANIZATION The Reorganization Agreement provides for the conversion of each outstanding share of TTC Common Stock into the Merger Consideration. ICBI will then serve as the parent holding company for TTC, which will continue to carry on its business in substantially the same manner as before the Reorganization and with no material change in its management, except that the President of ICBI will become the Chairman of the Board of Directors of TTC. The Initial Merger Consideration will be paid as promptly as practicable after the consummation of the Reorganization, and the Contingent Merger Consideration, if payable, will be paid approximately three years after the consummation of the Reorganization. Recommendation of the Board of Directors The Board of Directors of TTC has approved the Reorganization, including the Reorganization Agreement. Several factors influenced the TTC Board's decision. First, the business relationship between TTC and ICBI's subsidiary, The Middleburg Bank, had demonstrated the compatibility of the management of ICBI and TTC and their similar cultures and shared philosophies of direct customer contact and service. In addition, the Reorganization would add a presence for TTC in Loudoun County and, considering the area's relative affluence and the profile of ICBI's customer base, would enhance TTC's prospects for continued growth. Moreover the post-Reorganization TTC would operate under the same name as before the Reorganization and would retain its management with headquarters in Richmond, Virginia. Other important factors included the dividend paid on ICBI Common Stock, the undertaking of ICBI to seek to have its stock quoted on the Nasdaq SmallCap Market or OTC Bulletin Board and the opinion of TTC's financial advisor that ICBI's operating performance and financial condition compare favorably with selected other banks and that the market value of ICBI Common Stock is reasonable in comparison to those other banks. Because no steps will be taken in furtherance of ICBI's undertaking to have the ICBI Common Stock quoted on the Nasdaq SmallCap Market or OTC Bulletin Board until after the Effective Date, the benefits of enhanced liquidity that might result are uncertain. See "Comparative Per Share Information," "The Reorganization - Background and Reasons for the Reorganization" and "Financial Advisor's Opinion." The Board of Directors believes that the Reorganization is fair to and in the best interests of shareholders of TTC and recommends a VOTE FOR the Reorganization. Interests of Certain Persons in the Reorganization Holders of voting stock of TTC should be aware that members of TTC's Board of Directors and senior management have certain interests in the Reorganization that are in addition to the interests of shareholders of TTC generally. The potential shares of ICBI Common Stock which the TTC directors may receive in aggregate pursuant to the Reorganization are 13,625 shares, which would have had a value of approximately $381,500 as of March 31, 1997. It is expected that all directors of TTC will continue to serve as directors of TTC after the Effective Date. In the past, TTC has not paid directors' fees. See "The Reorganization - Interest of Certain Persons in the Reorganization." On March 27, 1997 TTC and F. E. Deacon, III, its President and Chief Executive Officer, entered into an Employment Agreement. Previously, ICBI had indicated to TTC that ICBI would be unwilling to enter into the Reorganization Agreement unless Mr. Deacon and TTC entered into an Employment Agreement in form and substance satisfactory to ICBI. The Employment Agreement will terminate if the Reorganization Agreement terminates. If the Reorganization is consummated, the term of the Agreement will end on the third anniversary of the Effective Date. Under the Employment Agreement, Mr. Deacon's -7- annual base salary is $119,000 and he will be entitled to bonuses if TTC's cumulative net earnings equal or exceed 27%, 60% and 100%, respectively, of the Required Net Earnings in the three years following the Effective Date. The maximum amount of such bonus in any year will be $27,000. Mr. Deacon's base salary represents a reduction in his salary in 1995 and 1996. The bonus arrangement was structured in order that any bonus to which Mr. Deacon is entitled will be related to the amount of net earnings that TTC must achieve in order for its shareholders to receive the Contingent Merger Consideration. The Employment Agreement does not provide for any additional compensation in the event of a change in control of ICBI and does prohibit Mr. Deacon from competing with TTC for a period of one year following a termination of his employment by TTC for any reason. Opinion of Financial Advisor Scott & Stringfellow, Inc. ("Scott & Stringfellow") has served as financial advisor to TTC in connection with the Reorganization and has rendered its opinion to the Board of Directors of TTC that, as of the date of this Proxy Statement/Prospectus and on the basis of the matters referred to herein, the consideration to be received pursuant to the Reorganization Agreement is fair, from a financial point of view, to the TTC shareholders. A copy of the opinion of Scott & Stringfellow is attached as Appendix C to this Proxy Statement/Prospectus and should be read in its entirety for information with respect to the assumptions made and other matters considered by Scott & Stringfellow in rendering its opinion. See "Financial Advisor's Opinion." Vote Required Approval of the Reorganization requires the affirmative vote of the holders of a majority of the outstanding shares of TTC Common Stock. As of the record date for the TTC Meeting, directors of TTC and their affiliates owned beneficially an aggregate of 54,500 shares of TTC Common Stock, or approximately 19.7% of the shares of TTC Common Stock outstanding on such date. The directors of TTC have indicated their intention to vote their shares of TTC Common Stock in favor of the Reorganization. See "The Shareholder Meeting." In addition, Joseph L. Boling, President and Chief Executive Officer of ICBI, owned beneficially an aggregate of 2,000 shares of TTC Common Stock on the record date. Mr. Boling intends to vote his shares in favor of the Reorganization. Effective Date If the Reorganization is approved by the requisite vote of the shareholders of TTC, and if the applications of ICBI to acquire TTC pursuant to the Reorganization are approved by the Federal Reserve and the Virginia State Corporation Commission (the "SCC"), and if other conditions to the Reorganization are satisfied (or waived to the extent permitted by applicable law), the Reorganization will be consummated and effected upon the issuance of a Certificate of Merger by the SCC pursuant to the Virginia Stock Corporation Act (the "Effective Date"). If the Reorganization is approved by the shareholders, the Federal Reserve and the SCC, it is anticipated that the Effective Date will be on or about July 31, 1997, or as soon thereafter as practicable. Under the Reorganization Agreement, either party may terminate the Reorganization Agreement if the transaction is not consummated by September 30, 1997. -8- Post-Closing Audit The Initial Merger Consideration will be 0.25 shares of ICBI Common Stock for each share of TTC Common Stock unless TTC Operating Losses exceed $30,000. Under the Agreement, if the parties do not agree on the size of any TTC Operating Loss, an audit of TTC from January 1, 1997 through the Effective Date will be performed by Yount, Hyde and Barbour, P.C., the independent certified public accountants for ICBI. If either party objects to the post-closing audit, the dispute will be resolved by arbitration. A similar process will be employed if the parties do not agree on whether or not the Contingent Merger Consideration is payable. Distribution of Stock Certificates and Payment for Fractional Shares If no post-closing audit is necessary, as soon as practicable after the Effective Date, The Middleburg Bank, as the exchange agent, will mail to each TTC shareholder (other than dissenting shareholders) a letter of transmittal and instructions for use in order to surrender the certificates, which immediately prior to the Effective Date represented shares of TTC Common Stock, in exchange for certificates for shares of ICBI Common Stock representing the Initial Merger Consideration. Cash (without interest) will be paid to TTC shareholders in lieu of the issuance of any fractional shares in an amount equal to the fraction of a share of ICBI Common Stock to which such shareholder would otherwise be entitled, multiplied by $28.00. If a post-closing audit is necessary, the exchange of shares of TTC Common Stock for the Initial Merger Consideration will be delayed. Such a delay would likely be for at least 90 days and, if the parties resort to arbitration, significantly longer. The right to receive the Contingent Merger Consideration will not be represented by any form of certificate or instrument, will not have voting or dividend rights, will not be assignable or transferable, except by operation of law, and will not have a separate trading market. Certain Federal Income Tax Consequences Williams, Mullen, Christian & Dobbins, counsel for ICBI, has delivered an opinion (the "Tax Opinion"), that addresses the federal income tax consequences of the Reorganization. The Tax Opinion is Exhibit F to this Proxy Statement/Prospectus. Although the Tax Opinion concludes that the Reorganization qualifies as a reorganization under the Internal Revenue Code of 1986, as amended (the "Code"), and that TTC shareholders will not recognize gain or loss upon receiving the Initial Merger Consideration, the Tax Opinion points out that there is uncertainty about the proper federal income tax treatment of the Contingent Merger Consideration. The issue is whether or not the Contingent Merger Consideration should be treated as shares of ICBI Common Stock or, instead, as separate property, independent of the underlying shares of ICBI Common Stock, the receipt of which may be taxable. The Tax Opinion describes both possible tax treatments of the Contingent Merger Consideration. ICBI does not intend to treat the Contingent Merger Consideration as a separate property right and would contest any effort of the Internal Revenue Service to do so. The Tax Opinion concludes that even if the Contingent Merger Consideration is properly treated as separate property, the Reorganization qualifies as a reorganization under the Code and that TTC shareholders will not recognize gain or loss upon receipt of the Initial Merger Consideration. -9- The following discussion describes the tax treatment of the Reorganization, first under the assumption that the Contingent Merger Consideration is not separate property, and second, describes the treatment of the Reorganization if the Internal Revenue Service were to assert that the Contingent Merger Consideration is separate property and were to prevail in such assertion. The Tax Opinion provides, among other things, (i) the Reorganization will constitute a "reorganization" under the Code, (ii) no gain or loss will be recognized for federal income tax purposes by TTC shareholders as a result of their receipt of solely ICBI Common Stock as Initial Merger Consideration in exchange for their shares of TTC Common Stock, (iii) no gain or loss will be recognized for federal income tax purposes by TTC shareholders as a result of their receipt of solely ICBI Common Stock as Contingent Merger Consideration unless the Contingent Merger Consideration is determined to be separate property, (iv) any TTC shareholder who receives cash in lieu of a fractional share interest will be treated as receiving a payment in redemption of such fractional interest, with gain or loss recognized to such shareholder, measured by the difference between the redemption price and the portion of the shareholder's basis in TTC Common Stock allocable to such fractional share interest, (v) the aggregate tax basis of the shares of ICBI Common Stock received by each TTC shareholder will equal the aggregate tax basis of such shareholder's shares of TTC Common Stock surrendered therefor in the Reorganization, (vi) the holding period for shares of ICBI Common Stock received by each shareholder of TTC will include the holding period for the shares of TTC Common Stock of such shareholder surrendered therefor in the Reorganization, provided that the TTC shareholder held such stock as a capital asset on the Effective Date, (vii) any dissenting shareholder of TTC who receives solely cash in exchange for shares of TTC Common Stock will be treated as receiving a distribution in redemption of such stock, and (viii) no gain, other income or loss will be recognized by ICBI, Acquisition or TTC as a result of the Reorganization. If the Internal Revenue Service were to assert that any portion of the Contingent Merger Consideration is a separate property right and prevail in such assertion, except as set forth in clause (iv) below, there would be no change in the tax treatment of the shares of ICBI Common Stock received as Initial Merger Consideration and (i) gain, if any, will be recognized by the TTC shareholders upon the receipt of the Contingent Merger Consideration in an amount not in excess of the value of the ICBI Common Stock, or portion thereof, treated as received pursuant to the separate property right, (ii) if the receipt of the Contingent Merger Consideration has the effect of the distribution of a dividend, the amount of any gain recognized that is not in excess of the ratable share of the undistributed earnings and profits of TTC will be treated as a dividend, (iii) the remainder, if any, of gain recognized will be treated as a gain from the exchange of property and will be recognized as capital gain, provided the TTC Common Stock was a capital asset in the hands of the TTC shareholder on the Effective Date, (iv) the determination of whether or not the exchange has the effect of a distribution of a dividend will be made on a shareholder by shareholder basis in accordance with the principles of Section 302 of the Code, (v) no loss may be recognized on the receipt of the Contingent Merger Consideration and (vi) the aggregate tax basis of shares of ICBI Common Stock received as Contingent Merger Consideration will be equal to the value of such shares when received and the aggregate basis of shares received by each TTC shareholder as Initial Merger Consideration will be decreased by the value of any shares of ICBI Common Stock received as Contingent Merger Consideration and increased by any gain recognized upon receipt of the Contingent Merger Consideration. The Tax Opinion states that in situations where contingent rights to acquire stock, in addition to the stock itself, are issued in connection with a reorganization, the question arises as to whether the contingent right is a separate property right independent of the stock itself. In situations where the contingent right could only give rise to the receipt of additional shares of stock and there is a valid business -10- reason for granting the contingent right rather than the stock itself, the courts and Internal Revenue Service have generally held that the contingent right is not separate property. However, in order to obtain an advance ruling from the Internal Revenue Service regarding a reorganization that includes contingent stock, the terms of the contingency must meet certain guidelines set forth in Revenue Procedure 84-42, 1984-1 C.B. 521. These guidelines include the requirements that (i) the maximum number of shares that may be issued must be set forth in the agreement and (ii) at least fifty percent (50%) of the maximum number of shares that may eventually be issued, must be issued in the initial distribution. Because there is no maximum number of shares that may be received by the shareholders of TTC as Contingent Merger Consideration, two of the requirements set forth in the advance ruling guidelines are not met. Accordingly, the Service would not issue an advance ruling that the Reorganization qualifies as a reorganization under Section 368(a) of the Code if such a ruling was requested. The guidelines contained in Revenue Procedure 84-42 do not purport to constitute a statement of existing substantive law, but rather are only conditions to the issuance of an advance ruling. Nevertheless, the advance ruling guidelines create an uncertainty as to whether or not it is the Internal Revenue Service's position that there must be a limit on the number of shares that may be issued to avoid treating the contingent right as separate property. In light of this uncertainty and because Williams, Mullen, Christian & Dobbins has not identified any authority, either favorable or unfavorable, that specifically addresses whether such a limit is necessary, it has not expressed an opinion on whether or not the Contingent Merger Consideration will be treated as separate property or as stock. See "The Reorganization - Federal Income Tax Matters." Due to the individual nature of the tax consequences of the Reorganization, it is recommended that each TTC shareholder consult his or her tax advisor concerning the tax consequences of the Reorganization. Conditions to Consummation of the Reorganization Consummation of the Reorganization is subject to various conditions, including among other matters: (i) receipt of the approval of the shareholders of TTC solicited hereby; (ii) approval of the SCC; (iii) approval of the Federal Reserve under the Bank Holding Company Act of 1956, as amended ("BHC Act"); and (iv) receipt of an opinion of counsel as to the tax-free nature of the Reorganization for shareholders (except for cash received in lieu of fractional shares or upon the exercise of dissenters' rights). TTC has advised ICBI that the tax opinion attached hereto as Appendix F is satisfactory to TTC . It is a condition of ICBI's obligation to consummate the Reorganization that the sum of TTC Transaction Costs, severance benefits payable to TTC officers and TTC Operating Losses not exceed $200,000 without the consent of ICBI. At March 31, 1997, the total of such items was $184,772. Substantially all of the conditions to consummation of the Reorganization may be waived, in whole or in part, to the extent permissible under applicable law by the party for whose benefit the condition has been imposed, without the approval of the shareholders of that party. Shareholder and regulatory approvals, however, may not be waived. See "The Reorganization - Representations and Warranties; Conditions to the Reorganization" and "The Reorganization - Regulatory Approvals." The Reorganization Agreement may be terminated and the Reorganization abandoned notwithstanding shareholder approval (i) by mutual agreement of the Boards of Directors of ICBI and TTC or (ii) by either ICBI or TTC if the Effective Date has not occurred by September 30, 1997, or (iii) if certain specified events occur. See "The Reorganization - Waiver, Amendment and Termination." -11- Effects of the Reorganization on the Rights of TTC Shareholders Upon consummation of the Reorganization, TTC shareholders shall become shareholders of ICBI. The rights of the former shareholders of TTC, now governed by the Virginia Stock Corporation Act (the "Virginia SCA"), will continue to be governed by the Virginia SCA after the Effective Date and the rights of TTC shareholders will also be as provided for under the Articles of Incorporation and Bylaws of ICBI. The provisions of the Articles of Incorporation and Bylaws of ICBI differ in certain material respects from the Articles of Incorporation and Bylaws of TTC. See "Comparative Rights of Security Holders." Accounting Treatment It is intended that the Reorganization will be treated as a purchase for accounting and financial reporting purposes. Rights of Dissent and Appraisal Each holder of TTC shares may dissent from the Reorganization and is entitled to the rights and remedies of dissenting shareholders provided in Article 15 of the Virginia SCA, subject to compliance with the procedures set forth therein, including the right to appraisal of his or her stock. A copy of Article 15 is attached as Appendix D to this Proxy Statement/Prospectus and a summary thereof is included under "The Reorganization - Rights of Dissenting Shareholders." Markets and Market Prices ICBI Common Stock is neither listed on any stock exchange nor quoted on the Nasdaq Stock Market and trades infrequently. ICBI Common Stock has periodically been sold in a limited number of privately negotiated transactions. Based on information available to it, ICBI believes that the per share selling price of ICBI Common Stock ranged from $28.00 to $29.00 in 1996 and in the first two quarters of 1997. There may, however, have been other transactions at other prices not known to ICBI. TTC Common Stock is neither listed on any stock exchange nor quoted on the Nasdaq Stock Market and trades sporadically. The information below provides the price per share of ICBI Common Stock and TTC Common Stock prior to the public announcement of the Reorganization on February 10, 1997 and as of a recent date. The historical price of ICBI Common Stock, $28.00, is based on the last known sale of ICBI Common Stock prior to the public announcement of the Reorganization, a trade involving 30 shares on December 20, 1996. The historical price of TCC Common Stock, $12.50, is based on the last known sale of TCC Common Stock prior to the public announcement of the Reorganization, a trade involving 2,500 shares on June 30, 1996. -12- ICBI Common Stock TTC Common Stock ----------------- ---------------- Equivalent Historical Price Historical Price Per Share Price* ---------------- ---------------- ---------------- February 10, 1997 $28.00 $12.50 $7.00 June 5, 1997 $28.00 $12.50 $7.00 - --------------------- * TTC shareholders will receive a maximum of 0.25 shares of ICBI Common Stock for each share of TTC Common Stock outstanding as the Initial Merger Consideration. The Contingent Merger Consideration is not shown because its receipt is dependent on future events, the occurrence of which is uncertain. This table merely reflects the historical value of the Initial Merger Consideration (i) on the last date before the Reorganization Agreement was announced that ICBI Common Stock was traded and (ii) on a recent date for ICBI Common Stock. No assurance can be given as to the market price or trading value of ICBI Common Stock at or after the Effective Date. COMPARATIVE PER SHARE INFORMATION The following unaudited consolidated financial information reflects certain comparative per share data relating to the Reorganization. The information shown below should be read in conjunction with the historical financial statements of ICBI and TTC, including the respective notes thereto, which are included elsewhere in this Proxy Statement/Prospectus or in documents delivered herewith, and in conjunction with the unaudited pro forma consolidated financial information appearing elsewhere in this Proxy Statement/Prospectus. See "Pro Forma Financial Information." The following information is not necessarily indicative of the results of operations or combined financial position that would have resulted had the Reorganization been consummated at the beginning of the periods indicated, nor is it necessarily indicative of the results of operations in future periods. The following table presents selected comparative consolidated unaudited per share information (i) for ICBI on a historical basis and on a pro forma combined basis assuming the Reorganization had been effective during the periods presented and accounted for as a purchase and (ii) for TTC on a historical basis and on a pro forma equivalent basis. -13- ICBI AND TTC
For the Three Months Ended For the Year Ended December 31, ------------ ---------------------------------------------------------- March 31, 1997 1996 1995 1994 -------------- ---------------- ---------------- ----------------- Per Common Share: Net Income: ICBI historical (1) $ 0.71 $ 2.36 $ 1.92 $ 2.06 TTC historical (4)(5) (0.67) (1.40) (2.28) (3.38) Pro forma combined 0.44 1.69 1.19 1.32 TTC pro forma equivalent (2) 0.11 0.42 0.30 0.33 Cash Dividends Declared: ICBI historical (1) $ - $ 0.84 $ 0.80 $ 0.80 TTC historical (4) - - - - Pro forma combined (3) - 0.84 0.80 0.80 TTC pro forma equivalent (2)(3) - 0.21 0.20 0.20 Book Value: ICBI historical(1) $ 21.30 $ 20.94 $ 19.72 $ 17.52 TTC historical 4.15 4.82 6.21 7.37 Pro forma combined 22.11 21.94 20.33 18.16 TTC pro forma equivalent (2) 5.53 5.49 5.08 4.54
(1) All information for ICBI has been adjusted to reflect a 100% stock dividend paid in February 1994. (2) TTC pro forma equivalent amounts represent pro forma combined information multiplied by the maximum Initial Merger Consideration of 0.25 shares of ICBI Common Stock for each share of TTC Common Stock. (3) Pro forma combined dividends per share represent historical dividends per share paid by ICBI. See "The Reorganization - ICBI and TTC Market Prices and Dividends" for additional information. (4) TTC commenced business on January 12, 1994. (5) The per share loss of ($.67) for the three months ended March 31, 1997 includes all costs related to the Reorganization. The per share loss exclusive of these items was ($.03). -14- SELECTED FINANCIAL INFORMATION The following tables set forth certain selected historical financial information for ICBI and TTC and certain consolidated pro forma financial information giving effect to the Reorganization using the purchase method of accounting. See "The Reorganization - Accounting Treatment." The selected historical financial information is based on, derived from and should be read in conjunction with the historical consolidated financial statements of ICBI and the historical financial statements of TTC and the respective notes thereto included elsewhere in this Proxy Statement/Prospectus. See "Available Information." All of the following selected financial information should be read in conjunction with the unaudited pro forma consolidated financial information, including the notes thereto, appearing elsewhere in this Proxy Statement/Prospectus. See "Pro Forma Financial Information." The pro forma financial information is not necessarily indicative of the results that actually would have occurred had the Reorganization been consummated on the dates indicated or that may be obtained in the future. -15- INDEPENDENT COMMUNITY BANKSHARES, INC. Selected Historical Financial Information
Three Months Ended March 31, Years Ended December 31, ---------------------- ------------------------------------------------------------ 1997 1996 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- ---- (In thousands, except ratios and per share amounts) Income Statement Data: Interest income $2,958 $2,563 $11,111 $9,855 $8,931 $8,285 $9,546 Interest expense 1,227 1136 4,647 4,096 3,198 3,151 4,183 ---------- ---------- ----------- ----------- ---------- ----------- ----------- Net interest income 1,731 1,427 6,464 5,759 5,733 5,134 5,363 Provision for loan losses 55 - 65 55 0 228 163 ---------- ---------- ----------- ----------- ---------- ----------- ----------- Net interest income after provision for loan losses 1,676 1,427 6,399 5,704 5,733 4,906 5,200 Noninterest income 228 179 721 817 650 569 511 Securities gains 3 14 21 (123) (125) 111 5 Noninterest expense 1,077 1,050 4,383 4,067 3,672 3,228 2,869 ---------- ---------- ----------- ----------- ---------- ----------- ----------- Income before income taxes 830 570 2,758 2,331 2,586 2,358 2,847 Income taxes 223 139 728 625 748 609 827 ---------- ---------- ----------- ----------- ---------- ----------- ----------- Net income $607 $431 $2,030 $1,706 $1,838 $1,749 $2,020 ========== ========== =========== =========== ========== =========== =========== Per Share Data (1): Net Income $0.71 $0.50 $2.36 $1.92 $2.06 $1.95 $2.25 Cash Dividends - 0.18 0.84 0.80 0.80 0.80 0.80 Book value at period end 21.30 19.68 20.94 19.72 17.52 17.98 16.91 Balance Sheet Data: Assets $166,142 $141,817 $162,966 $142,013 $134,045 $120,662 $121,714 Loans, net of unearned income 93,627 81,468 93,711 80,048 78,767 70,339 66,203 Securities 52,058 47,422 52,402 48,291 41,411 35,160 30,011 Deposits 142,028 120,965 138,790 121,522 118,084 104,097 106,171 Shareholders' equity 17,848 16,929 18,008 16,953 15,660 16,106 15,149 Average shares outstanding (1) 855 860 860 889 892 896 896 Performance Ratios: Return on Average Assets (3) 1.49% 1.22% 1.35% 1.26% 1.45% 1.46% 1.71% Return on Average Equity (3) 13.36% 10.17% 11.83% 9.72% 11.03% 11.23% 13.73% Capital to Assets 11.15% 11.94% 11.63% 12.41% 12.26% 12.93% 11.97% Dividend payout - 35.94% 35.57% 41.44% 38.90% 40.99% 35.50% Efficiency (2) 52.20% 62.00% 59.5% 59.0% 55.0% 53.8% 47.0% Capital and Liquidity Ratios: Risk-based capital ratios: Tier 1 capital 18.9% 21.1% 19.3% 20.9% 18.9% 23.1% 23.6% Total capital 19.8% 22.2% 20.2% 21.9% 20.0% 24.4% 24.9% Leverage 11.3% 12.4% 12.4% 12.9% 11.8% 13.6% 13.0%
(1) Restated giving retroactive effect to 100% stock dividend declared in 1994. (2) Computed by dividing noninterest expense by the sum of net interest income on a tax equivalent basis and noninterest income, net of securities gains or losses. (3) Annualized for three months ended March 31, 1997 and 1996. -16- THE TREDEGAR TRUST COMPANY Selected Historical Financial Information (1)
Three months Ended March 31, Years Ended December 31, ------------------------------------------------------------------ 1997 1996 1995 1994 ---- ---- ---- ---- (In thousands, except ratios and per share amounts) Income Statement Data: Interest income $14 $69 $68 $55 Interest expense - - - - ------------------- ------------- ------------- ------------- Net interest income 14 69 68 55 Provision for loan losses 0 - - - ------------------- ------------- ------------- ------------- Net interest income after provision for loan losses 14 69 68 55 Noninterest income 184 562 314 69 Securities gains - - - - Noninterest expense 383 1,017 939 730 ------------------- ------------- ------------- ------------- Loss before income taxes (185) (386) (557) (606) Income taxes - - - - ------------------- ------------- ------------- ------------- Net loss (2) ($185) ($386) ($557) ($606) =================== ============= ============= ============= Per Share Data: Net Loss ($0.67) ($1.40) ($2.28) ($3.38) Cash Dividends - - - - Book value at period end 4.15 4.82 6.21 7.37 Balance Sheet Data: Assets $1,154 $1,362 $1,726 $1,732 Loans, net - - - - Securities 879 1,067 1,330 1,358 Deposits 0 - - - Long Term Debt - - 2 4 Shareholders' equity 1,147 1,332 1,719 1,699 Average shares outstanding 277 277 244 179 Performance Ratios: Return on Average Assets -14.70% -25.91% -36.47% -33.51% Return on Average Equity -14.76% -26.13% -36.64% -33.72% Dividend payout - - - - Efficiency (3) 198.48% 161.2% 245.8% 588.7% Capital and Liquidity Ratios: Risk-based capital ratios: Tier 1 capital n/a n/a n/a Total capital n/a n/a n/a Leverage n/a n/a n/a
(1) TTC began operations on January 12, 1994. (2) Of the Net Loss for the Three Months ended March 31, 1997, costs related to the Reorganization were $176,043. (3) Computed by dividing noninterest expense by the sum of net interest income on a tax equivalent basis and noninterest income, net of securities gains or losses. -17- INDEPENDENT COMMUNITY BANKSHARES, INC. AND THE TREDEGAR TRUST COMPANY Selected Pro Forma Combined Financial Information
Three Months Ended Year Ended March 31, December 31, ------------------------------------- ----------------- 1997 1996 1996 ---- ---- ---- (In thousands, except ratios and per share amounts) Income Statement Data: Interest income $2,972 $2,581 $11,180 Interest expense 1,227 1,136 4,647 ------------------ ----------------- ------------------ Net interest income 1,745 1,445 6,533 Provision for loan losses 55 - 65 ------------------ ----------------- ------------------ Net interest income after provision for loan losses 1,690 1,445 6,468 Noninterest income 384 296 1,236 Securities gains 3 14 20 Noninterest expense 1,449 1,291 5,422 ------------------ ----------------- ------------------ Income before income taxes 628 464 2,302 Income taxes 223 140 728 ------------------ ----------------- ------------------ Net income $405 $324 $1,574 ================== ================= ================== Per Share Data : Net Income $0.44 $0.35 $1.69 Cash Dividends - 0.18 0.84 Book value at period end 22.11 21.10 21.94 Balance Sheet Data: Assets $168,338 $144,509 $165,352 Loans, net 93,627 81,468 93,711 Securities 52,937 48,750 53,469 Deposits 142,029 120,965 138,790 Shareholders' equity 20,036 19,599 20,364 Average shares outstanding 924 929 929 Performance Ratios: Return on Average Assets (2) 0.99% 0.95% 1.04% Return on Average Equity (2) 8.34% 7.33% 8.37% Capital to Assets 11.90% 13.56% 12.32% Dividend payout - 51.61% 49.58% Efficiency (1) 58.72% 69.90% 66.7% Capital and Liquidity Ratios: Risk-based capital ratios: Tier 1 capital 19.35% 22.30% 20.6% Total capital 20.28% 23.39% 21.5% Leverage 12.12% 13.60% 12.5%
(1) Computed by dividing noninterest expense by the sum of net interest income on a tax equivalent basis and noninterest income, net of securities gains or losses. (2) Annualized for the three months ended 1997 and 1996. -18- THE SHAREHOLDER MEETING Date, Place and Time. The TTC Meeting will be held at the offices of TTC, 901 East Byrd Street, Richmond, Virginia on July 23, 1997 at 9:30 a.m. Record Date. The Board of Directors of TTC has fixed the close of business on June 26, 1997 as the record date (the "TTC Record Date") for the determination of the holders of TTC Common Stock entitled to receive notice of and to vote at the TTC Meeting. At the close of business on the TTC Record Date, there were 276,600 shares of TTC Common Stock outstanding held by 72 shareholders of record. Vote Required. Each share of TTC Common Stock outstanding on the TTC Record Date entitles the holder to cast one vote upon each matter properly submitted at the TTC Meeting. The affirmative vote of the holders of a majority of the shares of TTC Common Stock outstanding, as of the TTC Record Date, in person or by proxy, is required to approve the Reorganization Agreement. In the election of directors, those receiving the greatest number of votes will be elected even if they do not receive a majority. Abstentions and broker non-votes will not be considered a vote for, or a vote against, a director. As of the TTC Record Date, directors and executive officers of TTC and their affiliates, persons and entities as a group, owned of record and beneficially a total of 54,500 shares of TTC Common Stock, or approximately 19.7% of the shares of TTC Common Stock outstanding on such date. The Directors and the executive officer of TTC have indicated an intention to vote their shares of TTC Common Stock FOR the Reorganization and FOR the election of the nominees set forth on the enclosed proxy. In addition to these votes, Preston S. Smith and A.G. Goodykoontz, former officers of TTC, have agreed to vote their shares for the Reorganization. They owned of record and beneficially a total of 8,300 shares of TTC Common Stock, or 3.0% of the shares of TTC Common Stock outstanding. Together, these individuals collectively owned of record and beneficially a total of 60,000 shares or 21.7% of the shares of TTC Common Stock outstanding on the Record Date. A failure to vote, either by not returning the enclosed proxy or by checking the "abstain" box thereon, will have the same effect as a vote against approval of the Reorganization Agreement. A shareholder may abstain or (only with respect to the election of TTC directors) withhold his vote (collectively, "abstentions") with respect to each item submitted for shareholder approval. Abstentions will be counted for purposes of determining the existence of a quorum. Abstentions will be counted as not voting in favor of the relevant item. Since the election of TTC directors is determined by a plurality vote, abstentions will not affect such election. Since approval of the Reorganization Agreement requires an affirmative vote of a specified number of shares outstanding, abstentions will have the effect of a negative vote with respect thereto. Brokers who hold shares in street name have the authority to vote on certain items if they have not received instructions from the beneficial owners. Except for certain items for which brokers are prohibited from exercising their discretion, a broker is entitled to vote on matters put to shareholders without instructions from the beneficial owner. Where brokers do not have or do not exercise such discretion, the inability or failure to vote is referred to as a broker non-vote. Under the circumstances where the broker is not permitted to or does not exercise its discretion, assuming proper disclosure to TTC of such inability to vote, broker non-votes will be counted for purposes of determining the existence of a quorum, but also will be counted as not voting in favor of the particular matter. Because the TTC election of directors is determined by a plurality vote, broker non-votes, if any, will not have any effect on the outcome of any -19- matter submitted for shareholder approval. Because the approval of the Reorganization Agreement requires an affirmative vote of a specified number of shares outstanding, broker non-votes, if any, and abstentions will have the effect of a negative vote with respect thereto. Voting and Revocation of Proxies. Shareholders of TTC are requested to complete, date and sign the accompanying form of proxy and return it promptly to TTC in the enclosed envelope. If a proxy is properly executed and returned in time for voting, it will be voted as indicated thereon. If no voting instructions are given, proxies received by TTC will be voted for approval of the Reorganization Agreement and for approval of the directors slated for election on the proxy. With respect to the election of directors, each shareholder entitled to vote at the TTC Meeting has one vote per share owned at the TTC Record Date. TTC shareholders have no cumulative voting rights. The directors will be elected by plurality of the votes cast assuming that at least a majority of the total number of outstanding shares of TTC Common Stock is present in person or by proxy at the TTC Meeting to constitute a quorum. A proxy may be revoked at any time before it is voted by giving written notice of revocation to TTC by executing and delivering a substitute proxy to TTC or by attending the TTC Meeting and voting in person. If a TTC shareholder desires to revoke a proxy by written notice, such notice should be mailed or delivered on or prior to the meeting date to Delman H. Eure, Secretary, The Tredegar Trust Company, 901 East Byrd Street, Richmond, Virginia 23219. If a proxy is signed and returned without indicating any voting instructions, shares of TTC Common Stock represented by the proxy will be voted FOR the Reorganization Agreement and FOR those nominated by the Board of Directors. If a sufficient number of signed proxies enabling the persons named as proxies to vote in favor of the Reorganization are not received by TTC by the time scheduled for the TTC Meeting, the persons named as proxies may propose one or more adjournments of the meeting to permit continued solicitation of proxies with respect to such approval. If an adjournment is proposed, the persons named as proxies will vote in favor of such adjournment those proxies which are entitled to be voted in favor of the Reorganization Agreement and against such adjournment those proxies containing instructions to vote against approval of the Reorganization Agreement, unless the shareholder clearly writes on the face of that proxy specific instructions stating how that proxy should be voted in the case of an adjournment proposed prior to a vote on the Reorganization. Adjournment of the TTC Meeting will be proposed only if the Board of Directors of TTC believes that additional time to solicit proxies might permit the receipt of sufficient votes to approve the Reorganization Agreement, or at the request of ICBI. It is anticipated that any such adjournment would be for a relatively short period of time, but in no event for more than 120 days. Any shareholder may revoke such shareholder's proxy during any period of adjournment in the manner described above. Solicitation of Proxies. TTC will bear the cost of the solicitation of proxies. Solicitations may be made by mail, facsimile, telephone, telegraph or personally by directors, officers and employees at TTC, none of whom will receive additional compensation for performing such services. TTC shall pay all of the expenses of printing and mailing the Proxy Statement/Prospectus. -20- THE REORGANIZATION The following is a summary description of the material terms of the Reorganization Agreement, and is qualified in its entirety by reference to the Reorganization Agreement which is attached as Appendix A hereto. All holders of TTC Common Stock are urged to read the Reorganization Agreement in its entirety. Background and Reasons for the Reorganization In early December 1996, ICBI informed TTC of ICBI's interest in acquiring TTC. TTC convened a meeting of its Long Range Planning Committee and Chief Executive Officer on December 12, 1996 to meet with ICBI representatives. At the meeting, Joseph L. Boling, President and Chief Executive Officer of ICBI and The Middleburg Bank, presented the Committee with an unsolicited proposal which the Committee decided to present to TTC's full Board of Directors later that same day. Following a discussion of the proposal, the Board appointed a Special Committee to explore and make various recommendations to the full Board with respect to an acquisition of, or business combination involving, TTC or TTC's remaining independent, and authorized the Special Committee to retain the necessary professionals required to help the Special Committee carry out its responsibilities. The members of the Special Committee were James W. Harkness, Jr. (Chairman), formerly a director of TTC, and Messrs. Siegel and Wheat. The Special Committee met on December 13, 1996. At the meeting, representatives of Scott & Stringfellow, Inc. ("Scott & Stringfellow"), financial advisor to TTC, were invited to provide the Committee with a preliminary assessment of the ICBI proposal. Scott & Stringfellow was selected by the TTC Board of Directors based upon its expertise and reputation in providing valuation, merger and acquisition, and advisory services to financial institutions. See "Financial Advisor's Opinion." The Special Committee directed Scott & Stringfellow not only to evaluate the ICBI proposal, but also to identify and contact other potential buyers. The Special Committee wanted to let the market determine the fair market value of TTC through a modified auction process. The Special Committee placed no instructions or limits on Scott & Stringfellow with respect to the investigation to be made or the procedures to be followed in pursuing potential buyers. There are no material relationships between Scott & Stringfellow and TTC, ICBI, or such outside parties. On December 19, 1996, the Board met to receive a report from the Special Committee, including a report about the efforts by Scott & Stringfellow to determine the interest of others in a transaction with TTC. In addition to exploring options involving third parties, the Board also considered the merits of remaining independent, based on analyses submitted by certain officers of TTC. During the last three weeks of December 1996, Scott & Stringfellow identified and contacted ten potential buyers. These potentials buyers included regional banks with material trust operations, another local independent trust company, a regional broker-dealer with a large money management and trust subsidiary, and several national trust companies. Scott & Stringfellow provided each of these parties with a preliminary due diligence package that described TTC's business, financial condition, and results of operations since its inception, as well as material contracts and resumes of key personnel. Only one of the contacted parties expressed interest in acquiring TTC, for an amount, either in cash or in that party's stock, less than that offered by ICBI. This offer would have given TTC shareholders an interest in a company with very small capitalization, few shareholders and no liquid market -21- for its stock. On January 3, 1997, the Special Committee met again to review the status of various contacts made by Scott & Stringfellow on behalf of TTC. In mid-January, the Special Committee and the Board of Directors met again to review various options available to TTC, and set a deadline of January 21, 1997 for receipt of all final proposals. The Board also received Scott & Stringfellow's report concerning other possible merger or acquisition prospects and two proposals for reorganizing the Company and remaining independent. After considering the options, the Board authorized Scott & Stringfellow to contact ICBI and determine if it would raise its bid to $7.00 per share plus a potential $1.00 per share in Contingent Merger Consideration. Although ICBI initially stated the amount of consideration to be paid, extensive negotiations resulted in the final transaction amounts. Scott & Stringfellow expressed the opinion that the ICBI offer of $7.00 of ICBI stock up-front with the potential for approximately an additional $1.00 in Contingent Merger Consideration was more favorable to shareholders than the other proposed offer. On January 23, 1997, the Board of Directors met to consider the final ICBI proposal. After an extensive review of the alternatives, including consideration of remaining independent or a sale to or affiliation with another party, the Board approved the ICBI proposal. In deciding to enter into the Reorganization Agreement, the TTC Board of Directors considered a number of factors. While the Board did not assign any relative or specific weights to the factors considered, several principal factors led to the approval of the proposal of ICBI by the TTC Board. First, the business relationship between TTC and ICBI's subsidiary, The Middleburg Bank, had demonstrated the compatibility of the management of ICBI and TTC and their similar cultures and shared philosophies. Both companies emphasize direct customer contact and personal service. The Reorganization also would not require any systems or operational conversions, as ICBI is currently using TTC's system for the management of its trust assets, and would provide operational benefits of a combination, including the management and economic resources available to TTC from ICBI. In addition, the Reorganization would add a presence for TTC in Loudoun County and, considering the area's relative affluence and the profile of ICBI's customer base, would enhance TTC's prospects for continued growth. Following consummation of the Reorganization, TTC, as a subsidiary of ICBI, would also retain a certain amount of autonomy. After the Reorganization, TTC would operate under the same name as before the Reorganization and would retain its management and Board of Directors, with headquarters in Richmond, Virginia. Other material factors considered were the belief of TTC's financial advisor, Scott & Stringfellow, Inc., that the ICBI proposal presented TTC shareholders with a reasonable opportunity for appreciation, compared to their investment in TTC; the ability of TTC to compete more effectively for larger trust accounts and estates with ICBI's larger capital base; the Merger Consideration offered for TTC Common Stock; the agreement by ICBI to list its stock on the Nasdaq SmallCap Market or OTC Bulletin Board and the resulting increased marketability of ICBI Common Stock; the historical dividend paid on ICBI Common Stock; the financial condition and history of performance of ICBI; and diversification of risk associated with ownership of an institution with a broader geographic market area; and the well capitalized position and historical earnings of ICBI. The TTC Board has concluded that the terms of the Reorganization Agreement, which were determined on the basis of arms-length negotiations, are fair to TTC shareholders. As explained below, this conclusion is supported by the opinion of an independent financial advisor. In determining that the Merger Consideration and the exchange ratio of .25 were fair to TTC, the Board of TTC and its financial advisor considered the estimated value per share of ICBI Common Stock at the close of business on January 23, 1997 ($28.00) and the dollar value of the Initial Merger Consolidation which would have been -22- received by TTC shareholders on that day ($7.00 per share); information concerning the financial condition, results of operations and prospects of TTC and ICBI; and, the tax-free nature of the Reorganization to the shareholders of TTC to the extent they receive ICBI Common Stock in exchange for their shares of TTC Common Stock. In establishing the Merger Consideration, the representatives of TTC also considered the Merger Consideration in relation to the market value and earnings per share of TTC Common Stock and ICBI Common Stock, and information concerning the financial condition, results of operations and the prospects of TTC and ICBI. For example, the Board gave considerable weight to the belief that the price of ICBI Common Stock is low as compared to the other community banks in Virginia with assets under $2.5 billion. The Board also noted the impressive historical growth of capital by ICBI. The Board felt that such growth was likely to continue and offered the potential for increased value for the TTC shareholders. The Board noted that ICBI's book value is approximately $21.00 per share. The Board also reviewed market valuations for similar institutions. The Board believed that, if ICBI's net capital (after dividends) grows by 10% over each of the next four years, then the book value would grow to $30.66 per share. If at that time ICBI Common Stock traded at its current valuation multiple of 1.3 times book value (a number that is low compared to ICBI's peer group and the industry average), it would trade at $40.00 per share (equivalent to $10.00 per share of TTC Common Stock). If at that time ICBI Common Stock traded at the industry comparable average of 1.7 times book value, then it would trade at $52.00 per share (equivalent to $13.00 per share of TTC Common Stock). In addition, the Board realized the potential impact of the Contingent Merger Consideration. The potential earn out represented by the Contingent Merger Consideration may add approximately $1.00 per share to the purchase price of $7.00 per share. The historical market price for TTC share has been set by two different private offerings. The price determined for the first offering was $10.00 per share, and the price determined for the second offering was $12.50 per share. While the Board of Directors recognized that the ICBI offer is below such offering prices, the Board believes that the transaction offers many benefits for TTC shareholders that make up for the difference in ICBI's offering price and the most recent price stated for shares offered by TTC. These reasons include: (1) the valuation of ICBI Common Stock relative to its peer group, (2) the economies of scale and scope of resources generated by the combined entity, (3) the liquidity provided by the Nasdaq SmallCap Market or the OTC Bulletin Board, (4) the ICBI stock dividend, (5) the quality of ICBI management, (6) the excellent working relationship that management and staff of both companies have enjoyed during the past two years, (7) the reputation of The Middleburg Bank, (8) the historical performance of The Middleburg Bank, and (9) the recommendation of Scott & Stringfellow. Based upon these and other factors, TTC's Board of Directors believes that the exchange ratio is fair and potentially affords TTC shareholders substantially greater appreciation than that of TTC's remaining independent or accepting the other offer. TTC shareholders should note that because ICBI will not take any steps to have ICBI Common Stock quoted on the Nasdaq SmallCap Market or the OTC Bulletin Board until after the Effective Date, the enhanced liquidity that might result therefrom is an uncertain benefit of the Reorganziation. See also "Financial Advisor's Opinion." Pursuant to the Reorganization Agreement, the directors, officers and employees of TTC will not change as a result of the Reorganization, except that ICBI is expected to designate Joseph L. Boling, the President and Chief Executive Officer of ICBI, to serve as Chairman of TTC's Board of Directors from and after the Effective Date. The Reorganization Agreement notwithstanding, ICBI will have the power after the Effective Date to elect the entire Board of Directors of TTC. -23- The Board of Directors of TTC believes that the Reorganization is in the best interests of TTC and its shareholders. The TTC directors have all committed to vote shares under their control in favor of the Reorganization to the extent of their fiduciary ability. The TTC Board of Directors recommends that TTC shareholders vote FOR the approval of the Reorganization Agreement. All TTC directors voted for the Reorganization Agreement with the exception of one, who abstained. Terms of the Reorganization The Reorganization Agreement provides for the conversion of each outstanding share of TTC Common Stock into the Merger Consideration. The Merger Consideration consists of the Initial Merger Consideration, which will be paid as promptly as practicable after the consummation of the Reorganization and the Contingent Merger Consideration, which, if payable, will be paid approximately three years after the consummation of the Reorganization. The Initial Merger Consideration will consist of a maximum of 0.25 shares of ICBI Common Stock for each share of TTC Common Stock. The Contingent Merger Consideration will consist of additional shares of ICBI Common Stock for each share of TTC Common Stock. See "Summary - Glossary of Terms." Shareholders of TTC are entitled to exercise their dissenters' rights with respect to the Reorganization. See "The Reorganization - Rights of Dissenting Shareholders." Transfer of Trust Business of The Middleburg Bank The Reorganization Agreement provides that, as soon as practicable after the Effective Date, ICBI shall cause the trust business of The Middleburg Bank to be transferred to TTC. It is anticipated that such transfer will occur within sixty days of the Effective Date. The Reorganization Agreement, however, provides that for purposes of computing the Required Net Earnings of TTC, the revenue and expense of TTC shall be deemed to include the revenue and expense of the trust department of The Middleburg Bank from and after the Effective Date. Lock-Up Option In addition to the Reorganization Agreement, ICBI and TTC each entered into an agreement on February 5, 1997 providing for ICBI to have an option to purchase TTC Common Stock under certain conditions (the "Lock-Up Option"). Specifically, the Lock-Up Option provides that ICBI shall have an option to purchase 68,800 shares of TTC Common Stock at a price no greater than $7.00 per share. The TTC Board agreed to this $7.00 price because it is consistent with the value of the ICBI Common Stock to be offered to TTC shareholders in the Reorganization. Both the number of options available and the price will be proportionately adjusted automatically in the event TTC increases (or decreases) the number of shares of TTC Common Stock outstanding. The option is exercisable only under limited circumstances. The Lock-Up Option provides that ICBI has an option to purchase stock in TTC only upon the occurrence of the following events: (i) TTC authorizes, recommends or publicly proposes (or publicly announces an intention to authorize, recommend or propose) or enters into an agreement with a third person to engage in a merger, consolidation, sale of substantially all the assets of TTC, or sale of securities representing more than 9.9% of the voting power of TTC or (ii) a third person acquires 9.9% or more of the outstanding TTC Common Stock. The exercise price represents the estimate of fair value per share of TTC Common Stock at the time the Lock-Up Option was executed. -24- Effective Date If the Reorganization Agreement is approved by the requisite vote of the shareholders of TTC and ICBI and by the Federal Reserve and the SCC (see "The Reorganization - Regulatory Approvals") and other conditions to the Reorganization are satisfied (or waived to the extent permitted by the Reorganization Agreement and applicable law), the Reorganization will be consummated and effected at the time a Certificate of Merger is issued by the SCC pursuant to the Virginia SCA. See "The Reorganization - Representations and Warranties; Conditions to the Reorganization." It is anticipated that the Effective Date will be on or about July 31, 1997, but there can be no assurance as to whether or when the Reorganization will occur. Post-Closing Audit The Initial Merger Consideration will be 0.25 shares of ICBI Common Stock for each share of TTC Common Stock unless TTC Operating Losses exceed $30,000. Under the Agreement, if ICBI and F. E. Deacon, III (representing the TTC shareholders) do not agree on the size of any TTC Operating Losses, an audit of TTC from January 1, 1997 through the Effective Date will be performed by Yount, Hyde & Barbour, P.C., the independent certified public accountants for ICBI. If either party objects to the post-closing audit, the dispute will be resolved by arbitration. A similar process (with Mr. Deacon acting as the representative of the TTC shareholders) will be employed if the parties do not agree on whether or not the Contingent Merger Consideration is payable. For the three months ended March 31, 1997, the TTC Operating Losses were $8,729. Distribution of Stock Certificates and Payment for Fractional Shares If no post-closing audit is necessary, as soon as practicable after the Effective Date, The Middleburg Bank, as the exchange agent, will mail to each TTC shareholder (other than dissenting shareholders) a letter of transmittal and instructions for use in order to surrender the certificates which immediately prior to the Effective Date represented the shares of TTC Common Stock in exchange for certificates for shares of ICBI Common Stock representing the Initial Merger Consideration. Cash (without interest) will be paid to TTC shareholders in lieu of the issuance of any fractional shares in an amount equal to the fraction of a share of ICBI Common Stock to which such shareholder would otherwise be multiplied by $28.00. If a post-closing audit is necessary, the exchange of shares of TTC Common Stock for the Initial Merger Consideration will be delayed. Such a delay would likely be for at least 90 days and, if the parties resort to arbitration, significantly longer. TTC SHAREHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE SUCH INSTRUCTIONS. Promptly after surrender of one or more certificates for TTC Common Stock, together with a properly completed letter of transmittal, the holder of such certificates will receive a certificate or certificates representing the number of shares of ICBI Common Stock to which he or she is entitled and, where applicable, a check for the amount payable in cash in lieu of issuing a fractional share. Lost, stolen, mutilated or destroyed certificates will be treated in accordance with the existing procedures of ICBI. -25- The shares of ICBI Common Stock representing the Initial Merger Consideration will be deemed issued as of the Effective Date. After the Effective Date, TTC shareholders will be entitled to vote the number of shares of ICBI Common Stock constituting the Initial Merger Consideration for which their TTC Common Stock has been exchanged, regardless of whether they have surrendered their TTC certificates. The Reorganization Agreement provides, however, that no dividend or distribution payable to the holders of record of ICBI Common Stock at or as of any time after the Effective Date will be paid to the holder of any TTC certificate until such holder physically surrenders such certificate, promptly after which time all such dividends or distributions will be paid (without interest). With respect to the dividend for the three months ending June 30, 1997, ICBI will not declare or establish a record date for such dividend prior to July 9, 1997. Three years after the Effective Date, TTC's net earnings for such three year period will be calculated and if such earnings exceed the Required Net Earnings, each person who was a holder of TTC Common Stock at the Effective Date will receive a ratable share of the Contingent Merger Consideration. After the Effective Date, TTC will operate as a subsidiary of ICBI and separate financial records of TTC will be maintained. Financial statements of TTC after the Effective Date will be audited by ICBI's independent certified public accountants. The initial determination of whether or not the Contingent Merger Consideration is due will be made by ICBI, together with F. E. Deacon, III, who will act as the representative of the TTC shareholders. If ICBI and Mr. Deacon do not agree, the dispute will be resolved by arbitration. Shares of ICBI Common Stock representing the Contingent Merger Consideration will not be considered issued or outstanding for any purpose until such shares are issued. In addition, the right to receive the Contingent Merger Consideration will not be represented by any form of certificate or instrument, will not have voting or dividend rights, will not be assignable or transferable, except by operation of law, and will not have a separate trading market. Representations and Warranties; Conditions to the Reorganization The Reorganization Agreement contains representations and warranties by ICBI and TTC regarding, among other things, their respective organizations, authorizations to enter into the Reorganization Agreement, capitalization, financial statements and pending and threatened litigation. These representations and warranties (except as otherwise provided in the Reorganization Agreement) will not survive the Effective Date. The obligations of ICBI and TTC to consummate the Reorganization are subject to the following conditions, among others: approval and adoption of the Reorganization Agreement by the requisite TTC shareholder votes; receipt of all regulatory approvals necessary to consummate the Reorganization, not conditioned or restricted in a manner that, in the judgment of the Boards of Directors of ICBI and TTC, materially adversely affects the economic or business benefits of the Reorganization so as to render inadvisable consummation thereof; the absence of certain actual or threatened proceedings before a court or other governmental body relating to the Reorganization; receipt of a current fairness opinion from the financial advisor for TTC; and the receipt of an opinion of counsel as to certain Federal income tax consequences of the Reorganization. TTC has advised ICBI that the tax opinion attached hereto as Appendix F is satisfactory to TTC. Also, under the terms of the Reorganization Agreement, ICBI agreed that, following the Effective Date, it will indemnify those persons associated with TTC and its subsidiaries who are entitled to indemnification as of the Effective Date of the Reorganization. It is a condition of ICBI's obligation to consummate the Reorganization that the sum of TTC's Transaction Costs, severance -26- benefits payable to TTC officers and TTC's Operating Losses after December 31, 1996 not exceed $200,000 without the consent of ICBI. As of April 30, 1997, the sum of such items was $184,772. In addition, each party's obligation to effect the Reorganization, unless waived, is subject to performance by the other party of its obligations under the Reorganization Agreement, the accuracy, in all material respects, of the representations and warranties of the other party contained therein, and the receipt of certain opinions and certificates from the other party. Regulatory Approvals ICBI's acquisition of TTC pursuant to the Reorganization is subject to approval by the Federal Reserve under the BHC Act, which requires that the Federal Reserve take into consideration the financial and managerial resources of ICBI, the future prospects of the existing and proposed institutions and the effect of the transaction on competition. The BHC Act prohibits the Federal Reserve from approving the Reorganization if it would result in a monopoly or if it would be in furtherance of any combination or conspiracy to monopolize or to attempt to monopolize the business of banking in any part of the United States, or if its effect may be substantially to lessen competition or to tend to create a monopoly, or if it would be in any other manner a restraint of trade, unless the Federal Reserve finds that the anti-competitive effects of the Reorganization are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the communities to be served. The BHC Act provides for the publication of notice and the opportunity for administrative hearings relating to the applications, and it authorizes the regulatory agency to permit interested parties to intervene in the proceedings. If an interested party is permitted to intervene, such intervention could substantially delay the regulatory approvals required for consummation of the Reorganization. The Reorganization is further subject to the approval of the SCC. To obtain such approval, the SCC must conclude that after the Reorganization, TTC will be operated efficiently and fairly, in the public interest and in accordance with law. Applications for approval of the Reorganization have been filed with the Federal Reserve and the SCC. None of the agencies has yet approved the applications. ICBI and TTC are not aware of any other governmental approvals or actions that are required for consummation of the Reorganization, except as described above. Should any such approval or action be required, it is currently contemplated that such approval or action would be sought. There can be no assurance that any such approval or action, if needed, could be obtained. Business Pending the Reorganization Until consummation of the Reorganization (or termination of the Reorganization Agreement), TTC is obligated to operate its businesses only in the ordinary and usual course, consistent with past practice, and to use its best efforts to maintain its business organization, employees and business relationships and to retain the services of its officers and key employees. Until consummation of the Reorganization (or termination of the Reorganization Agreement) TTC may not, without the consent of ICBI, among other things: (a) declare or pay dividends on its capital stock; (b) enter into any merger, consolidation or business combination (other than the Reorganization) or any acquisition or disposition of a material amount of assets or securities or solicit proposals in respect thereof; (c) amend its charter or bylaws (except as may be required by the Reorganization Agreement); (d) incur any obligation in excess of $5,000 without the prior consent of ICBI; (e) issue any capital stock; or (f) purchase or redeem any of its capital stock. No options -27- or warrants to purchase TTC Common Stock will be exercised before the Effective Date and all such options and warrants will be terminated on or prior to the Effective Date. Waiver, Amendment and Termination At any time on or prior to the Effective Date, any term or condition of the Reorganization may be waived by the party which is entitled to the benefits thereof, without shareholder approval, to the extent permitted under applicable law. The Reorganization Agreement may be amended at any time prior to the Effective Date by agreement of the parties whether before or after the TTC Meeting (except that the Merger Consideration shall not be changed after approval of the Reorganization Agreement by TTC shareholders). Any material change in a material term of the Reorganization Agreement after this Proxy Statement/Prospectus is mailed to shareholders of TTC would require a resolicitation of TTC shareholders. Such a material change would include, but not be limited to, a change in the tax consequences to TTC shareholders. The Reorganization Agreement may be terminated by ICBI or TTC, whether before or after the approval of the Reorganization Agreement by the shareholders: (a) if the other party materially breaches any representation, warranty or agreement which is not properly cured by such breaching party; (b) if the Reorganization is not consummated by September 30, 1997; (c) by mutual consent of the Boards of Directors of ICBI and TTC; or (d) if the Federal Reserve or the SCC have denied approval of the Reorganization. The Reorganization Agreement also may be terminated at any time by the mutual consent of ICBI and TTC. In the event of termination, the Reorganization Agreement shall become null and void, except that certain provisions thereof relating to expenses and confidentiality of information exchanged between the parties shall survive any such termination. Resales of ICBI Common Stock All shares of ICBI Common Stock received by TTC shareholders in connection with the Reorganization will be transferable without restriction, except that ICBI Common Stock received by persons who are deemed to be "affiliates" (as such term is defined in Rule 144 under the Securities Act of 1933, as amended (the "1933 Act")) of TTC may be resold by them only in transactions permitted by the resale provisions of Rule 145 under the 1933 Act. For purposes of Rule 144 as applied to TTC, the directors of TTC are the only affiliates who will be subject to the resale limitations. Interest of Certain Persons in the Reorganization In considering the recommendations of the Board of Directors of TTC with respect to the Reorganization, holders of voting stock should be aware that certain members of TTC's Board of Directors and senior management have certain interests in the Reorganization that are in addition to the interest of shareholders of TTC generally. The Board of Directors of TTC was aware of these interests and considered them, among other factors, in approving the Reorganization. These interests are as follows: Employment Agreements. Before executing the Reorganization Agreement, ICBI required that TTC enter into a three year employment agreement with F. E. Deacon, III. For additional information regarding the terms of this employment agreement, see "The Tredegar Trust Company Election of Directors; Management - Employment Agreement." -28- Projected ICBI Common Stock Ownership. The table below sets forth (i) the projected holdings of ICBI Common Stock by all TTC Directors and executive officers, both individually and in the aggregate, upon the consummation of the Reorganization, as a result of their receipt of the Initial Merger Consideration and (ii) the estimated value of such shares. No director or executive officer of TTC is projected to receive shares of ICBI Common Stock representing as much as one percent of the issued and outstanding shares of ICBI Common Stock. No. of ICBI Shares Value($)(1) Heriot Clarkson 1,250 35,000 F. E. Deacon, III 2,625 73,500 Delman H. Eure 625 17,500 Gary D. LeClair 1,250 35,000 Ivor Massey, Jr. 3,000 84,000 John D. Perrin 375 10,500 Richard L. Ramsey 625 17,500 Stuart C. Siegel 1,500 42,000 James C. Wheat, III 2,375 66,500 All present executive officers and directors as a group (9 persons) 13,625 381,500 (1) Based on the last known sale of ICBI Common Stock, which was a trade involving 100 shares at $28.00 per share on June 5, 1997. Accounting Treatment The Reorganization will be treated as a purchase for accounting and financial reporting purposes. Federal Income Tax Matters Set forth below is a discussion of federal income tax consequences under the Internal Revenue Code of 1986, as amended (the "Code") to TTC shareholders who receive ICBI Common Stock solely in exchange for TTC Common Stock as a result of the Reorganization and TTC shareholders who receive cash in lieu of fractional shares or who receive cash for their shares upon exercise of dissenters' rights. The discussion does not deal with all aspects of federal taxation that may be relevant to particular TTC shareholders. In view of the individual nature of tax consequences, TTC shareholders are urged to consult their own tax advisors as to the specific tax consequences to them of the Reorganization, including the applicability of federal, state, local and foreign tax laws. To meet a condition to consummation of the Reorganization, ICBI and TTC will receive from Williams, Mullen, Christian & Dobbins, counsel to ICBI, the Tax Opinion included as Appendix F to this Proxy Statement/Prospectus as to certain of the federal income tax consequences of the Reorganization (the "Tax Opinion"). The Tax Opinion is neither binding on the IRS nor precludes it from adopting a contrary -29- position. Neither ICBI nor TTC has requested a ruling from the Internal Revenue Service ("IRS") in connection with the Reorganization. Although the Tax Opinion concludes that the Reorganization qualifies as a reorganization under the Internal Revenue Code of 1986, as amended (the "Code"), and that TTC shareholders will not recognize gain or loss upon receiving the Initial Merger Consideration, the Tax Opinion points out that there is uncertainty about the proper federal income tax treatment of the Contingent Merger Consideration. The issue is whether or not the Contingent Merger Consideration should be treated as shares of ICBI Common Stock or, instead, as separate property, independent of the underlying shares of ICBI Common Stock, the receipt of which may be taxable. The Tax Opinion describes both possible tax treatments of the Contingent Merger Consideration. ICBI does not intend to treat the Contingent Merger Consideration as a separate property right and would contest any effort of the Internal Revenue Service to do so. The Tax Opinion concludes that even if the Contingent Merger Consideration is properly treated as separate property, the Reorganization qualifies as a reorganization under the Code and that TTC shareholders will not recognize gain or loss upon receipt of the Initial Merger Consideration. The following discussion describes the tax treatment of the Reorganization, first under the assumption that the Contingent Merger Consideration is not separate property, and second, describes the treatment of the Reorganization if the Internal Revenue Service were to assert that the Contingent Merger Consideration is separate property and were to prevail in such assertion. The Tax Opinion provides, among other things, (i) the Reorganization will constitute a "reorganization" under the Code, (ii) no gain or loss will be recognized for federal income tax purposes by TTC shareholders as a result of their receipt of solely ICBI Common Stock as Initial Merger Consideration in exchange for their shares of TTC Common Stock, (iii) no gain or loss will be recognized for federal income tax purposes by TTC shareholders as a result of their receipt of solely ICBI Common Stock as Contingent Merger Consideration unless the Contingent Merger Consideration is determined to be separate property, (iv) any TTC shareholder who receives cash in lieu of a fractional share interest will be treated as receiving a payment in redemption of such fractional interest, with gain or loss recognized to such shareholder, measured by the difference between the redemption price and the portion of the shareholder's basis in TTC Common Stock allocable to such fractional share interest, (v) the aggregate tax basis of the shares of ICBI Common Stock received by each TTC shareholder will equal the aggregate tax basis of such shareholder's shares of TTC Common Stock surrendered therefor in the Reorganization, (vi) the holding period for shares of ICBI Common Stock received by each shareholder of TTC will include the holding period for the shares of TTC Common Stock of such shareholder surrendered therefor in the Reorganization, provided that the TTC shareholder held such stock as a capital asset on the Effective Date, (vii) any dissenting shareholder of TTC who receives solely cash in exchange for shares of TTC Common Stock will be treated as receiving a distribution in redemption of such stock, and (viii) no gain, other income or loss will be recognized by ICBI, Acquisition or TTC as a result of the Reorganization. If the Internal Revenue Service were to assert that any portion of the Contingent Merger Consideration is a separate property right and prevail in such assertion, except as set forth in clause (iv) below, there would be no change in the tax treatment of the shares of ICBI Common Stock received as Initial Merger Consideration and (i) gain, if any, will be recognized by the TTC shareholders upon the receipt of the Contingent Merger Consideration in an amount not in excess of the value of the ICBI -30- Common Stock, or portion thereof, treated as received pursuant to the separate property right, (ii) if the receipt of the Contingent Merger Consideration has the effect of the distribution of a dividend, the amount of any gain recognized that is not in excess of the ratable share of the undistributed earnings and profits of TTC will be treated as a dividend, (iii) the remainder, if any, of gain recognized will be treated as a gain from the exchange of property and will be recognized as capital gain, provided the TTC Common Stock was a capital asset in the hands of the TTC shareholder on the Effective Date, (iv) the determination of whether or not the exchange has the effect of a distribution of a dividend will be made on a shareholder by shareholder basis in accordance with the principles of Section 302 of the Code, (v) no loss may be recognized on the receipt of the Contingent Merger Consideration and (vi) the aggregate tax basis of shares of ICBI Common Stock received as Contingent Merger Consideration will be equal to the value of such shares when received and the aggregate basis of shares received by each TTC shareholder as Initial Merger Consideration will be decreased by the value of any shares of ICBI Common Stock received as Contingent Merger Consideration and increased by any gain recognized upon receipt of the Contingent Merger Consideration. The Tax Opinion states that in situations where contingent rights to acquire stock, in addition to the stock itself, are issued in connection with a reorganization, the question arises as to whether the contingent right is a separate property right independent of the stock itself. In situations where the contingent right could only give rise to the receipt of additional shares of stock and there is a valid business reason for granting the contingent right rather than the stock itself, the courts and Internal Revenue Service have generally held that the contingent right is not separate property. However, in order to obtain an advance ruling from the Internal Revenue Service regarding a reorganization that includes contingent stock, the terms of the contingency must meet certain guidelines set forth in Revenue Procedure 84-42, 1984-1 C.B. 521. These guidelines include the requirements that (i) the maximum number of shares that may be issued must be set forth in the agreement and (ii) at least fifty percent (50%) of the maximum number of shares that may eventually be issued, must be issued in the initial distribution. Because there is no maximum number of shares that may be received by the shareholders of TTC as Contingent Merger Consideration, two of the requirements set forth in the advance ruling guidelines are not met. Accordingly, the Service would not issue an advance ruling that the Reorganization qualifies as a reorganization under Section 368(a) of the Code if such a ruling was requested. The guidelines contained in Revenue Procedure 84-42 do not purport to constitute a statement of existing substantive law, but rather are only conditions to the issuance of an advance ruling. Nevertheless, the advance ruling guidelines create an uncertainty as to whether or not it is the Internal Revenue Service's position that there must be a limit on the number of shares that may be issued to avoid treating the contingent right as separate property. In light of this uncertainty and because Williams, Mullen, Christian & Dobbins has not identified any authority, either favorable or unfavorable, that specifically addresses whether such a limit is necessary, it has not expressed an opinion on whether or not the Contingent Merger Consideration will be treated as separate property or as stock. See "The Reorganization - Federal Income Tax Matters." Due to the individual nature of the tax consequences of the Reorganization, it is recommended that each TTC shareholder consult his or her tax advisor concerning the tax consequences of the Reorganization. Any cash received by shareholders, whether as a result of an exercise of their dissenters' rights or in lieu of the issuance of fractional shares, could result in taxable income to the shareholders. The receipt of such cash generally will be treated as a sale or exchange of the stock resulting in capital gain or loss measured by the difference between the cash received and an allocable portion of the basis of the stock relinquished. The receipt of such cash may be treated as a dividend and taxed as ordinary income in certain limited situations. In the case of cash payments in lieu of fractional shares, however, such payments will -31- be small in amount and not a material concern to TTC shareholders. Shareholders should consult their own tax advisors concerning proper treatment of such cash amounts. Rights of Dissenting Shareholders A shareholder of TTC Common Stock who objects to the Reorganization (a "Dissenting Shareholder") and who complies with provisions of Article 15 of Title 13.1 of the Virginia SCA ("Article 15") may demand the right to receive a cash payment, if the Reorganization is consummated, for the fair value of his or her stock immediately before the Effective Date, exclusive of any appreciation or depreciation in anticipation of the Reorganization unless such exclusion would be inequitable. In order to receive payment, a Dissenting Shareholder must deliver to TTC prior to the TTC Meeting a written notice of intent to demand payment for his or her shares if the Reorganization is consummated (an "Intent to Demand Payment") and must not vote his or her shares in favor of the Reorganization. The Intent to Demand Payment should be addressed to Delman H. Eure, Secretary, The Tredegar Trust Company, 901 East Byrd Street, Richmond, Virginia 23219. A VOTE AGAINST THE REORGANIZATION WILL NOT ITSELF CONSTITUTE SUCH WRITTEN NOTICE AND A FAILURE TO VOTE WILL NOT CONSTITUTE A TIMELY WRITTEN NOTICE OF INTENT TO DEMAND PAYMENT. A shareholder of record of TTC Common Stock may assert dissenters' rights as to fewer than all the shares registered in his or her name only if the shareholder dissents with respect to all shares beneficially owned by any one person and notifies TTC in writing of the name and address of each person on whose behalf he asserts dissenters' rights. The rights of such a partial dissenter are determined as if the shares to which he dissents and his other shares were registered in the names of different shareholders. A beneficial shareholder of TTC Common Stock may assert dissenters' rights as to shares held on his behalf by a shareholder of record only if (i) he submits to TTC the record shareholder's written consent to the dissent not later than the time when the beneficial shareholder asserts dissenters' rights, and (ii) he dissents with respect to all shares of which he is the beneficial shareholder or over which he has power to direct the vote. Within 10 days after the Effective Date, TTC is required to deliver a notice in writing (a "Dissenter's Notice") to each Dissenting Shareholder who has filed an Intent to Demand Payment and who has not voted such shares in favor of the Reorganization. The Dissenter's Notice shall (i) state where the demand for payment (the "Payment Demand") shall be sent and where and when stock certificates shall be deposited; (ii) inform holders of uncertificated shares of the extent to which transfer of the shares will be restricted after the payment demand is received; (iii) supply a form for demanding payment; (iv) set a date by which TTC must receive the Payment Demand; and (v) be accompanied by a copy of Article 15. A Dissenting Shareholder who is sent a Dissenter's Notice must submit the Payment Demand and deposit his or her stock certificates in accordance with the terms of, and within the time frames set forth in, the Dissenter's Notice. As a part of the Payment Demand, the Dissenting Shareholder must certify whether he or she acquired beneficial ownership of the shares before or after the date of the first public announcement of the terms of the proposed Reorganization (the "Announcement Date"), which was February 10, 1997. TTC will specify the Announcement Date in the Dissenter's Notice. Except with respect to shares acquired after the Announcement Date, TTC shall pay a Dissenting Shareholder the amount TTC estimates to be the fair value of his or her shares, plus accrued interest. Such payment shall be made within 30 days of receipt of the Dissenting Shareholder's Payment Demand. As to shares acquired after the Announcement Date, TTC is only obligated to estimate the fair value of the shares, plus accrued interest, and to offer to pay this amount to the Dissenting Shareholder conditioned upon the Dissenting Shareholder's agreement to accept it in full satisfaction of his or her claim. -32- If a Dissenting Shareholder believes that the amount paid or offered by TTC is less than the fair value of his or her shares, or that the interest due is incorrectly calculated, that Dissenting Shareholder may notify TTC of his or her own estimate of the fair value of his shares and amount of interest due and demand payment of such estimate (less any amount already received by the Dissenting Shareholder) (the "Estimate and Demand"). The Dissenting Shareholder must notify TTC of the Estimate and Demand within 30 days after the date TTC makes or offers to make payment to the Dissenting Shareholder. Within 60 days after receiving the Estimate and Demand, TTC must either commence a proceeding in the appropriate circuit court to determine the fair value of the Dissenting Shareholder's shares and accrued interest, or TTC must pay each Dissenting Shareholder whose demand remains unsettled the amount demanded. If a proceeding is commenced, the court must determine all costs of the proceeding and must assess those costs against TTC, except that the court may assess costs against all or some of the Dissenting Shareholders to the extent the court finds that the Dissenting Shareholders did not act in good faith in demanding payment of the Dissenting Shareholder's Estimates. The foregoing discussion is a summary of the material provisions of Article 15. Shareholders are strongly encouraged to review carefully the full text of Article 15, which is included as Appendix D to this Proxy Statement/Prospectus. The provisions of Article 15 are technical and complex, and a shareholder failing to comply strictly with them may forfeit his Dissenting Shareholder's rights. Any shareholder who intends to dissent from the Reorganization should review the text of those provisions carefully and also should consult with his attorney. No further notice of the events giving rise to dissenters' rights or any steps associated therewith will be furnished to TTC shareholders, except as indicated above or otherwise required by law. Any Dissenting Shareholder who perfects his or her right to be paid the fair value of his or her shares will recognize gain or loss, if any, for federal income tax purposes upon the receipt of cash for his or her shares. The amount of gain or loss and its character as ordinary or capital gain or loss will be determined in accordance with applicable provisions of the Internal Revenue Code. See "The Reorganization - Federal Income Tax Matters." Certain Differences in Rights of Security Holders ICBI is a corporation subject to the provisions of the Virginia SCA, and TTC also is a corporation subject to the provisions of the Virginia SCA. Shareholders of TTC, whose rights are governed by TTC's Articles of Incorporation and Bylaws, will, upon consummation of the Reorganization, become shareholders of ICBI. The rights of the former TTC shareholders will then be governed by the Articles of Incorporation and Bylaws of ICBI and the Virginia SCA. There are no material differences between the rights of a TTC shareholder under TTC's Articles of Incorporation and Bylaws and the Virginia SCA, on the one hand, and the rights of a ICBI shareholder under the Articles of Incorporation and Bylaws of ICBI and the Virginia SCA, on the other hand, except as disclosed in the section "Comparative Rights of Security Holders." Expenses of the Reorganization Whether or not the Reorganization is consummated, TTC and ICBI will pay their own expenses incident to preparing, entering into and carrying out the Reorganization Agreement, preparing and filing the Registration Statement of which this Proxy Statement/Prospectus is a part, except under circumstances -33- involving willful breaches of certain provisions of the Reorganization Agreement. In general, the Reorganization Agreement provides for each party to pay its own expenses in this regard. If, however, either party materially breaches the Reorganization Agreement, that party must pay the costs associated with this transaction incurred by the non-breaching party. TTC and ICBI have incurred and will continue to incur expenses related to the Reorganization, which expenses include, among other things, legal fees, filing fees, accounting fees, investment banking fees, printing charges and costs of mailing. ICBI and TTC Market Prices and Dividends TTC. TTC Common Stock is not listed on any stock exchange and is traded infrequently. Trades occur on a local basis. The last sale of TCC Common Stock, which was made on an arms-length basis on June 30, 1996, involved 2,500 shares at $12.50 per share. TTC has never paid a cash dividend. The future payment of dividends is solely in the discretion of the Board of Directors of TTC and is dependent upon certain legal and regulatory considerations and upon the earnings and financial condition of TTC and such other factors as TTC's Board of Directors may, from time to time, deem relevant. As of March 31, 1997, TTC had 72 shareholders of record. ICBI. ICBI Common Stock is neither listed on any stock exchange nor quoted on the Nasdaq Stock Market and trades infrequently. ICBI Common Stock has periodically been sold in a limited number of privately negotiated transactions. The prices set forth below do not necessarily reflect the price that would be paid in an active and liquid market. -34- ICBI Market Price and Dividends
Sales Price Dividends ----------- --------- High Low ---- --- 1995: 1st quarter................................... 32.00 29.00 .18 2nd quarter................................... 30.00 30.00 .18 3rd quarter................................... 30.00 29.50 .18 4th quarter................................... 28.00 28.00 .26 1996: 1st quarter................................... 28.00 28.00 .18 2nd quarter................................... 28.00 28.00 .22 3rd quarter................................... 29.00 28.00 .22 4th quarter................................... 28.00 28.00 .22 1997: 1st quarter................................... 28.00 28.00 (1) 2nd quarter................................... 29.00 28.00 .21 (through June 11, 1997)
(1) Beginning with the first quarter of 1997, ICBI began paying dividends for the respective quarter immediately following the end of that quarter. ICBI historically has paid cash dividends on a quarterly basis. The final determination of the timing, amount and payment of dividends on ICBI 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 Middleburg Bank has paid regular cash dividends for over 200 consecutive quarters. As of March 31, 1997, ICBI had 455 shareholders of record. -35- FINANCIAL ADVISOR'S OPINION TTC management relied upon the advice of a qualified financial advisor in analyzing the Reorganization and recommending it to TTC shareholders. The TTC Board of Directors retained the investment banking firm of Scott & Stringfellow to evaluate the terms of the Reorganization Agreement, and Scott & Stringfellow has rendered its opinion to the TTC Board of Directors that the terms of the Reorganization Agreement are fair from a financial point of view to the TTC shareholders. A more detailed analysis of the Reorganization, from the point of view of TTC's financial advisor, follows. Scott & Stringfellow has rendered its opinion to the Board of Directors of TTC that the terms of the Reorganization Agreement are fair from a financial point of view. In developing its opinion, Scott & Stringfellow reviewed and analyzed: (1) the Reorganization Agreement; (2) the Form S-4 Registration Statement filed with the Securities and Exchange Commission in connection with the Reorganization; (3) TTC's audited financial statements for the three years ended December 31, 1996; (4) TTC's unaudited financial statements for the three months ended March 31, 1996 and 1997 and other financial and non-financial internal information relating to TTC prepared by TTC's management; (5) information regarding the trading markets for TTC Common Stock and ICBI Common Stock and the price ranges within which the respective stocks have traded; (6) ICBI's annual reports to shareholders and its financial statements for the three years ended December 31, 1996; and (7) ICBI's unaudited financial statements for the three months ended March 31, 1996 and 1997 and other financial and non-financial internal information relating to ICBI prepared by ICBI's management including but not limited to asset quality, reserve adequacy, margin analysis, interest rate sensitivity, internal controls, loan policies, budgets, regulatory matters and legal matters. Scott & Stringfellow has discussed with members of TTC's and ICBI's management the background of the Reorganization, the reasons and basis for the Reorganization, and the business and future prospects of TTC and ICBI individually and as a combined entity. No instructions or limitations were given or imposed in connection with the scope of or the examination or investigations made by Scott & Stringfellow in arriving at its findings. Finally, Scott & Stringfellow has conducted such other studies, analysis and investigations particularly of the trust and banking industries, and considered such other information as it deemed appropriate, the material portion of which is described below. A copy of Scott & Stringfellow's opinion, which sets forth the assumptions made, matters considered and qualifications made on the review undertaken, is attached as Appendix C hereto and should be read in its entirety. Scott & Stringfellow used the information gathered to evaluate the financial terms of the Reorganization using standard valuation methods, including market comparable analysis, and dilution analysis. Market Comparable Analysis. Scott & Stringfellow analyzed the performance and financial condition of ICBI relative to the Bank Group, which includes the following financial institutions: Central Virginia Bankshares, Inc., F&M National Corp., George Mason Bankshares, Inc., James River Bankshares, Inc., Jefferson Bankshares, Inc., MainStreet BankGroup, Inc., Resource Bank, Southern Financial Bancorp, Inc., Tysons Financial Corporation, and Union Bankshares Corporation. Among the financial information compared was information relating to tangible equity to assets, loans to deposits, net interest margin, non-performing assets, total assets, non-accrual loans, and efficiency ratio. Additional information compared for the trailing twelve-month period ended March 31, 1997, was (i) price to book value ratio which was 1.31x for ICBI, compared to an average of 1.91x for the Bank Group (ii) price to trailing earnings ratio which was 10.9x for ICBI, compared to an average of 16.4x for the Bank Group, (iii) return on assets which was 1.49% for ICBI, compared to an average of 1.19% for the Bank Group, -36- (iv) return on equity which was 13.36% for ICBI, compared to an average of 12.27% for the Bank Group, and (v) a dividend yield of 3.0% for ICBI, compared to an average of 2.17% for the Bank Group. Overall, in the opinion of Scott & Stringfellow, ICBI's operating performance and financial condition were slightly better than the Bank Group average and ICBI's market value was reasonable when compared to the Bank Group. Accordingly, TTC shareholders shall receive ICBI Common Stock that, in the opinion of Scott & Stringfellow, is reasonably valued when compared to the Bank Group. Dilution Analysis. Based upon publicly available financial information and assumptions on 1997 performance of TTC and ICBI, Scott & Stringfellow considered the effect of the transaction on the book value, earnings, and market value of TTC and ICBI. The immediate effect on ICBI was to decrease estimated 1997 earnings by $0.18 per share or 6.04%, to increase fiscal year end 1996 book value by $0.51 per share or 2.39% and, as a result of the generation of an estimated $1,042,000 of goodwill, to decrease tangible book value by $0.64 per share or 3.06%. The effect on TTC under the same assumptions is to increase estimated earnings $0.37 per share or 115.6%, to increase book value by $1.31 per share or 31.6%, to increase tangible book value $1.52 per share or 41.6%, and to receive dividends of $0.21 per share where historically no dividends have ever been paid by TTC. Scott & Stringfellow concluded from this analysis that the transaction would have a significant positive effect on TTC and the TTC shareholders in that net income per share, book value per share, tangible book value per share, and dividends per share to be received by the TTC shareholders, after giving effect to the Merger Consideration, would represent a substantial increase in each of these factors, although there can be no assurance that pro forma amounts are indicative of actual future results. Additionally, the TTC stock was not listed on any exchange prior to the Reorganization and ICBI has represented it will list its stock on the Nasdaq SmallCap Market or OTC Bulletin Board, which should have the effect of increasing the liquidity of the ICBI stock compared to the TTC stock prior to the Effective Date. The summary set forth above includes the material factors considered, but does not purport to be a complete description of the presentation by Scott & Stringfellow to TTC or of the analyses performed by Scott & Stringfellow. The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to partial analysis or summary description. Accordingly, notwithstanding the separate factors summarized above, Scott & Stringfellow believes that its analysis must be considered as a whole and that selecting portions of its analyses and the factors considered by it, without considering all analyses and factors, would create an incomplete view of the process underlying the preparation of its opinion. As a whole, these various analyses, contributed to Scott & Stringfellow's opinion that the terms of the Reorganization Agreement are fair from a financial point of view to TTC shareholders. While Scott & Stringfellow recognized the potential value of the Contingent Merger Consideration to TTC's shareholders, it gave no value to the Contingent Merger Consideration in determining the fairness of the transaction to the TTC shareholders. Scott & Stringfellow recommended the Reorganization based upon the Initial Merger Consideration, and the Board of Directors of TTC accepted the consideration, without regard to the Contingent Merger Consideration. Both the Board of Directors and Scott & Stringfellow realized the potential for the additional consideration; however, they considered such additional payments only as a potential source of additional consideration. The Board of Directors of TTC and Scott & Stringfellow examined company projections to determine if TTC could meet the limits on TTC expenses and TTC Operating Losses. Projections were contained in other proposals that were provided to the Board, but, once the decision was made to go -37- forward with the proposal from ICBI, the projections in those proposals were not relied upon. No projections were used to estimate the Contingent Merger Consideration. Scott & Stringfellow is a full service investment banking and brokerage firm headquartered in Richmond, Virginia, that provides a broad array of services to financial institutions, corporations, and state and local governments. The Financial Institutions Group of Scott & Stringfellow actively works with financial institutions in Virginia, Maryland, North Carolina, the District of Columbia, and West Virginia on these and other matters. As part of its investment banking practice, it is continually engaged in the valuation of financial institutions and their securities in connection with mergers and acquisitions, negotiated underwritings, and secondary distribution of listed and unlisted securities. Scott & Stringfellow was selected by the TTC Board of Directors based upon its expertise and reputation in providing valuation, merger and acquisition, and advisory services to financial institutions. In exchange for its services, Scott & Stringfellow, Inc. will receive from TTC prior to the Effective Date a fee of $38,724. -38- THE TREDEGAR TRUST COMPANY TTC was incorporated under the laws of the Commonwealth of Virginia on August 3, 1993, and commenced business as an independent trust company on January 12, 1994. TTC provides a full range of investment, trust, estate settlement and custodial services to individuals and organizations, primarily in the Richmond, Virginia metropolitan area. TTC presently has one office located at 901 East Byrd Street, Riverfront Plaza - West Tower in Richmond, Virginia. As of March 1, 1997, TTC employed six full-time employees. On February 17, 1995, TTC and The Middleburg Bank entered into an agreement for TTC to provide certain services, including investment, recordkeeping and reporting services to the trust department of The Middleburg Bank, which was in organization at the time. The Middleburg Bank's trust department began business on November 1, 1995 and at December 31, 1996 had assets of $13.4 million. The investment and custody of those funds is handled by TTC and such funds represented 8.4% of TTC's assets under accountability and administration at December 31, 1996. The contract between TTC and The Middleburg Bank provides for the compensation of TTC, based on the gross fees charged by The Middleburg Bank to its trust department customers. TTC also advises ICBI on equity investments by ICBI. In 1996, the gross revenue of TTC from its relationships with The Middleburg Bank and ICBI was $95,888, or 15.2% of TTC's gross income. THE TREDEGAR TRUST COMPANY ELECTION OF DIRECTORS; MANAGEMENT The Nominating Committee has recommended the hereinafter listed nominees to serve as directors of TTC. It is the intention of the persons named in the accompanying form of Proxy, unless shareholders specify otherwise by their Proxies, to vote for the election of the nominees named below for a term of one (1) year. Although the Board of Directors does not expect that any of the persons named will be unable to serve as a director, should any of them be unable to accept nomination or election, it is intended that shares represented by the accompanying form of Proxy will be voted by the Proxy holders for such other persons or persons as may be designated by the present Board of Directors. -39-
NOMINEES Principal Occupation or Employment Name (Age) During the Last Five Years Director Since - ---------- -------------------------- -------------- Heriot Clarkson (59) Consultant; former President, Virginia Precast 1995 Corporation, a consultant to numerous businesses on marketing and sales issues F. E. Deacon, III (41) President and Chief Executive Officer 1993 The Tredegar Trust Company Delman H. Eure (68) Partner, Eure, Kizer & Bell, P.C., a law firm; former 1995 Partner, Taylor, Hazen & Kauffman, L.C., a law firm Gary D. LeClair (42) Chairman, LeClair Ryan, A Professional 1993 Corporation, a law firm Ivor Massey, Jr. (49) Attorney 1993 John D. Perrin (43) Vice President-Northern Region, Dillard Paper 1993 Company, a paper distribution company Richard L. Ramsey (44) Chairman, LocusOne Communications, Inc., a 1993 provider of national wireless electronic mail services Stuart C. Siegel (54) Chairman, S & K Famous Brands, Inc., a retail 1993 clothing company James C. Wheat, III (44) Partner, Riverfront Partners, a general partner of 1993 the Commonwealth Investors LP, a private investment fund; Partner, Collonade Capital, LLC, a general partner of the Commonwealth Investors II LP, a private investment fund focusing on leveraged acquisitions
THE BOARD OF DIRECTORS RECOMMENDS THAT THE NOMINEES BE ELECTED AS DIRECTORS. -40- Security Ownership of Management The following table sets forth information as of May 15, 1997 regarding the number of shares of TTC Common Stock beneficially owned by all directors and nominees, by the executive officer named in the Summary Compensation Table herein and by all directors and executive officers as a group. For the purposes of this table, beneficial ownership has been determined in accordance with the provisions of Rule 13d-3 under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), under which, in general, a person is deemed to be a beneficial owner of a security if he has or shares the power to vote or direct the voting of the security or the power to dispose or direct disposition of the security, or if he has the right to acquire beneficial ownership of the security within 60 days. Common Stock Name Beneficially Owned Percent of Class ---- ------------------ ---------------- Directors --------- Heriot Clarkson 5,000 1.8% F. E. Deacon, III 10,500 3.8% Delman H. Eure 2,500 * Gary D. LeClair 5,000 1.8% Ivor Massey, Jr. 12,000 4.3% John D. Perrin 1,500 * Richard L. Ramsey 2,500 * Stuart C. Siegel 6,000 2.2% James C. Wheat, III 9,500 3.6% All present executive officers 54,500 19.7% and directors as a group (9 persons) ----------------------- * Indicates that holdings amount to less than 1% of the issued and outstanding TTC Common Stock. Committees and Meetings of the Board of Directors The Board of Directors of TTC, as required by the Bureau of Financial Institutions ("BFI"), held regular monthly meetings until February 1996. On March 13, 1996, the BFI approved bimonthly meetings, which commenced in May 1996. The meetings were regularly attended by at least a majority of the directors, constituting a quorum. The meetings followed an agenda included in a booklet with reports and other information to be considered, which was distributed at each meeting. Comprehensive minutes were kept of the meetings and are on file in the corporate records. For the year ended December 31, 1996, none of TTC's directors attended fewer than 75% of the aggregate number of Board meetings and meetings of committees of which the respective directors were members during their term. There are five standing committees of the Board of Directors: Executive, Audit, Trust, Compensation, and Marketing and Business Development. In addition, there are three ad hoc committees -- Capital, Nominating and Long Range Planning -- and the Board appointed the Special Committee to -41- consider the Reorganization and other alternatives. All members of the Board serve on one or more of the Committees. The Executive Committee consists of Messrs. Deacon, Massey, Ramsey and Wheat. Mr. Deacon is the Chairman. The Committee meets on the call of the Chairman. Due to the frequency of the full Board meetings, during the year ended 1996, there were no meetings of the Executive Committee. TTC has an Audit Committee consisting of Messrs. Massey, LeClair, and Perrin. The Audit Committee ensures that appropriate financial and fiduciary controls and procedures are in effect for the operation of TTC, which reviews the audits of TTC and the examination reports received from the bank regulatory agencies and coordinates with the management and the Board of Directors, TTC's response to examinations. The Audit Committee reports to the Board of Directors. Mr. Massey serves as the Chairman. The Committee meets on the call of the Chairman. During the year ended December 31, 1996, there were three meetings of the Audit Committee. The Compensation Committee consists of Messrs. Ramsey, Eure, LeClair, Massey, and Perrin. Mr. Ramsey serves as the Chairman. The Compensation Committee reviews the performance of TTC officers and employees and recommends compensation of those individuals to the Board of Directors. The Committee meets on the call of the Chairman. The Trust Committee is responsible for review of all fiduciary accounts maintained by the Company to assure that the accounts, and the management of TTC in general, conform to the policies and procedures adopted by the Board. The Trust Committee consists of Messrs. Wheat, Deacon and Eure. Mr. Wheat is the Chairman. Mr. Eure is Trust Counsel for TTC. The Trust Committee holds regular meetings normally each month, as required by the BFI. The Trust Committee annually reviews all accounts and regularly reviews the Corporation's investment strategy, philosophy and implementation of investment programs. The Trust Committee reviews all new accounts and TTC's administration of fiduciary accounts. During the year ended 1996, there were seven meetings of the Trust Committee. The Marketing and Business Development Committee consists of Messrs. Perrin, the Chairman, Clarkson, Deacon, Massey and Siegel. The Committee meets on the call of the chairman and reports to the Board of Directors. During the year ended 1996, there were three meetings of the Marketing and Business Development Committee. The Nominating Committee consists of Messrs. LeClair and Deacon. Mr. LeClair is the Chairman. The Nominating Committees meets on the call of the chair and reports to the Board of Directors. It is the practice of the Board for the Board's ad hoc Nominating Committee to recommend individuals for the Board to nominate directors for the shareholders' consideration. During the year ended 1996, there was one meeting of the Nominating Committee. The Capital Committee consists of Messrs. Deacon, LeClair, and Wheat. Mr. Deacon serves as the Chairman. The Capital Committee meets on the call of the chair and reports to the Board of Directors. During the year ended 1996, the Capital Committee did not meet. The Board of Directors appointed a Long Range Planning Committee on September 16, 1996 to review the structure and operations of TTC. The Long Range Planning Committee consists of Messrs. Eure, LeClair, Massey and Wheat. Mr. Massey serves as its chair. The Committee meets on the call of the Chair and reports to the Board of Directors. During the year ended 1996, there were three meetings of the Long Range Planning Committee. -42- Remuneration Summary of Cash and Certain Other Compensation The following table shows, for the fiscal years ended December 31, 1996, 1995 and 1994, the cash compensation paid by TTC, as well as certain other compensation paid or accrued for those years, to the named Executive Officers in all capacities in which they served: SUMMARY COMPENSATION TABLE
Long Term Annual Compensation (a) Compensation Securities All Other Name and Underlying Compensation Principal Position Year Salary ($) Options (#) ($)(b) ------------------ ---- ---------- ----------- ------ F. E. Deacon, III 1996 129,000 -0- 3,870 President and Chief 1995 129,000 -0- 3,870 Executive Officer 1994 117,616 42,750 -0- Preston S. Smith 1996 129,000 -0- 3,870 Executive Vice 1995 129,000 -0- 3,870 President and Chief 1994 117,616 42,750 -0- Financial Officer A. G. Goodykoontz 1996 108,000 -0- 3,240 Executive Vice 1995 102,000 19,950 3,060 President and Chief 1994 80,320 -0- -0- Investment Officer
- -------------------- (a) The value of perquisites and other personal benefits did not exceed the greater of $50,000 or ten percent of total annual salary and bonus. (b) "All Other Compensation" represents amounts contributed by TTC to the TTC Section 401(k) Plan on behalf of the respective executive officer. Officer Resignations; Separation Agreements. Effective February 15, 1997, Preston S. Smith and, effective March 1, 1997, A. Gordon Goodykoontz resigned as officers and Directors of TTC and entered into Separation Agreements with TTC. Mr. Smith served as the Chief Financial Officer of TTC, and Mr. Goodykoontz served as its Chief Investment Officer. At the time ICBI initiated discussions with TTC in December 1996, Messrs. Smith and Goodykoontz indicated that they desired that TTC remain independent. After ICBI and TTC executed a letter of intent on February 5, 1997, TTC proceeded to negotiate Separation Agreements with each of Messrs. Smith and Goodykoontz. Such Separation Agreements were executed on March 3, 1997. Under -43- those Agreements, Mr. Smith and Mr. Goodykoontz each received $50,000 in the nature of severance pay. Messrs. Smith and Goodykoontz each resigned as a Director, officer and employee of TTC and agreed to vote all of his shares of TTC Common Stock in favor of the Reorganization and not to take any action to challenge, hinder or delay the Reorganization. Mr. Smith and Mr. Goodykoontz each surrendered all options to purchase TTC Common Stock and agreed not to compete with TTC or solicit or attempt to solicit any customer of TTC or any other person prior to June 30, 1997. Options Grants in Last Fiscal Year TTC did not grant any stock options in 1996. Option Exercises and Holdings No options were exercised by any of the named Executive Officers in the year ended December 31, 1996. Prior to entering into the Reorganization Agreement, ICBI required that all options to purchase TTC Common Stock be terminated. The severance agreements of Messrs. Smith and Goodykoontz provided for the termination of all stock options held by them. Mr. Deacon holds an option to purchase up to 42,750 shares at $10.00 per share and has agreed to surrender such stock option, contingent on the consummation of the Reorganization. Mr. Deacon will not be compensated for surrendering this stock option. Employment Agreement On March 27, 1997 TTC and F. E. Deacon, III, its President and Chief Executive Officer, entered into an Employment Agreement. Previously, ICBI had indicated to TTC that ICBI would be unwilling to enter into the Reorganization Agreement unless Mr. Deacon and TTC entered into an Employment Agreement in form and substance satisfactory to ICBI. The Employment Agreement will terminate if the Reorganization Agreement terminates. If the Reorganization is consummated, the term of the Agreement will end on the third anniversary of the Effective Date. Under the Employment Agreement, Mr. Deacon's annual base salary is $119,000 and he will be entitled to bonuses if TTC's cumulative net earnings equal or exceed 27%, 60% and 100%, respectively, of the Required Net Earnings in the three years following the Effective Date. The maximum amount of such bonus in any year will be $27,000. Mr. Deacon's base salary represents a reduction in his salary in 1995 and 1996. The bonus arrangement was structured in order that any bonus to which Mr. Deacon is entitled will be related to the amount of net earnings that TTC must achieve in order for its shareholders to receive the Contingent Merger Consideration. The Employment Agreement does not provide for any additional compensation in the event of a change in control of ICBI and does prohibit Mr. Deacon from competing with TTC for a period of one year following a termination of his employment by TTC for any reason. Compensation of Directors TTC's directors are not compensated for attending Board of Directors meetings. -44- Transactions with Directors and Officers During the past year, some directors and officers of TTC, as well as certain business organizations and individuals associated with them, have been customers and had normal transactions with TTC in the normal course of business and are expected to continue to do so. TTC has and expects to have in the future, transactions in the ordinary course of its business with its directors, officers, principal shareholders and their associates on substantially the same terms as those prevailing at the same time for comparable transactions with others. TTC has from time to time retained the firms of LeClair Ryan, A Professional Corporation, and Taylor Hazen & Kauffman, L.C., in connection with certain legal representation and expects to continue to do so in the future. Gary D. LeClair, a director of TTC, is a shareholder, director and officer of LeClair Ryan, and Delman H. Eure, a director and Secretary of TTC, was formerly a partner in Taylor, Hazen & Kauffman. -45- THE TREDEGAR TRUST COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides information about the major components of the results of operations, financial condition and capital position of TTC. This discussion and analysis should be read in conjunction with the accompanying "Selected Financial Information -- TTC Selected Historical Financial Information" and the TTC Financial Statements and Notes to Financial Statements appearing elsewhere in this Proxy Statement/Prospectus. Overview TTC was incorporated in 1993 as an independent trust company, under the Trust Company Act adopted by the Virginia legislature that year. It commenced operations on January 12, 1994. Summary data set forth below for 1994 are for the period from January 12, 1994 through December 31, 1994. Information for 1995 and 1996 reflects the full twelve-month periods ended December 31, 1995 and December 31, 1996, respectively. The business of an independent trust company consists of serving as agent, trustee, executor, custodian and investment counselor for its trust customers and their beneficiaries. The confidential and fiduciary nature of the trust business requires considerable lead time to identify potential customers, establish a performance record, and persuade customers to establish relationships with TTC, in many instances requiring them to sever established relationships with other institutions. TTC was founded because its management believed that a market for high quality trust services existed in certain areas of Virginia. The acquisition of several larger Virginia banks by out of state banking organizations had resulted in fewer trust departments and a decrease in the personal attention to customers by the large out of state trust departments. TTC believed that these changes have had an adverse impact on certain bank trust departments' ability to properly serve certain Virginia communities and that customers could be attracted by personal service, high quality, comprehensive fiduciary expertise, tailored, flexible investment management and a commitment to the local communities throughout Virginia. TTC's marketing efforts are directed to those individuals and institutions with readily investible assets and those individuals with high net worth and relies primarily on referral relationships with law firms, accountants, community banks and existing clients, one-on-one sales presentations, and the reputation of TTC's Board and management. TTC competes for customers and accounts with banks and other financial institutions. Even though many of these institutions have been engaged in the trust or investment management business for a considerably longer period of time than TTC and have significantly greater resources than TTC, TTC has grown through its commitment to quality trust services and a local community approach to business. During the past three years, TTC has developed a number of substantial relationships that have led to the generation of business. The most notable of these relationships has been the one with The Middleburg Bank. The management of The Middleburg Bank and TTC have a shared philosophy about the need for community-based trust services, and, as a result, the relationship has strengthened both TTC and The Middleburg Bank. -46- Trust Assets Under Administration Fees earned on trust accounts administered by TTC or for which it is accountable reflect the principal source of income of TTC and are reported as "Assets Under Administration and Accountability." The following table sets forth the total amount of trust and related assets that TTC administered or for which it was accountable to customers, under trust agreements and similar arrangements, at the end of 1996, 1995 and 1994, respectively. (Dollars in millions) 1996 1995 1994 ---- ---- ---- Customer assets and accounts $159.8 $101.2 $54.0 Results of Operations As one of Virginia's first independent trust companies, TTC expected and faced challenges in starting its operations, such as the time required to establish customer relationships and accounts as a start-up enterprise. TTC's results for its first three years were consistent with management's expectation that a period of time would be required to grow the business to a size sufficient to cover the relatively large investment in personnel and systems. Operating revenues (principally fees from trust accounts under administration or management, and excluding interest and other investment income) increased to $557,498 (or approximately 78%) in 1996, compared with operating revenues of $313,633 in 1995. In 1994, TTC's first year of operations, operating revenues were $69,322. The following table reflects the principal categories of revenues from which the foregoing operating results were derived. Revenue Year Ended December 31 (Dollars in Thousands) 1996 1995 1994 ---- ---- ---- Agency, Trust and IRA Fees $ 478 $ 248 $ 33 Investment Advisory 40 28 21 Custody Services 36 37 15 Estate Fees 3 - - ---- ---- ---- Operating Revenue 557 313 69 Interest Income/Other 74 69 55 ---- ---- ---- Total Revenue $ 631 $ 382 $ 124 ===== ===== ===== Expenses The increase in expenses in 1996 over 1995 was primarily due to costs associated with referral fees paid to The Middleburg Bank, rising costs with the employees' medical insurance, and the hiring of an additional account officer with business development responsibilities. The 1996 results reflect referral fees -47- of $29,316 paid to The Middleburg Bank, which represents a significant increase in the $411 in referral fees paid to The Middleburg Bank in 1995. In addition, TTC must maintain a certain level of expense for employees and systems in order to operate in its industry. TTC believes that it can support significant additional growth in Assets under Administration and Accountability without a correspondingly significant increase in operating expenses. The 1995 expense increase over 1994 was primarily attributable to servicing the asset growth in 1995 over 1994 with personnel and payroll tax expenses in the operations area, combined with safekeeping and custody expenses as a result of the asset growth from the previous year. TTC's Board implemented a 401(k) plan requiring a matching contribution from TTC. The following table reflects the principal categories of expenses for the periods indicated. Expenses Year Ended December 31 (Dollars in Thousands) 1996 1995 1994 ---- ---- ---- Salaries and Employees' Benefits $587 $523 $413 Net Occupancy and Equipment Expenses 64 61 52 Advertising 11 12 33 Other Operating Expense 355 343 232 --- --- --- Total Expense $1,017 $939 $730 ====== ---- ==== On a weighted average per share basis, reported losses from operations of ($3.38) per share in 1994, declined to ($2.28) per share in 1995, and further declined to ($1.40) per share in 1996. For the three-month period ended March 31, 1997, losses from operations were ($.03), prior to TTC Transaction Costs. Liquidity and Capital Resources Management of TTC seeks to maintain a capital structure that is adequate to support anticipated growth of its trust asset under administration and to absorb projected or unexpected losses. The capital position of TTC is also subject to periodic examination by the Bureau of Financial Institutions of the Virginia State Corporation Commission. TTC believes that its capital is adequate for regulatory purposes. Generally, TTC funds its operations with cash flow generated by fees primarily from trust and agency accounts administered by TTC and or for which TTC is accountable. TTC reached monthly profitability in February 1997 and March 1997 (prior to transaction costs related to the Reorganization). As of March 31, 1997, TTC's capital position was $1,147,361. Management believes that TTC remains adequately capitalize and is well-positioned in terms of technology, markets, and products to serve its clients. As of March 31, 1997, TTC had approximately $879,900 of marketable investments that could be converted to cash if needed. In the unusual event that TTC needs to encroach its capital position for future operations, the capital position is readily available and is substantially above the $500,000 minimum statutory requirement under the Code of Virginia. -48- INDEPENDENT ACCOUNTANTS The Board of Directors of TTC selected the accounting firm of Harris, Hardy & Johnstone, P.C., independent accountants, to be TTC's independent accountants for the year ended December 31, 1996. A representative of Harris, Hardy & Johnstone, P.C. is expected to be present at the TTC Meeting, will have the opportunity to make a statement at the TTC Meeting if he or she desires to do so, and will be available to respond to appropriate questions. The Board of Directors has not yet made a determination regarding the selection of independent accountants for the year ending December 31, 1997. Under TTC's Articles of Incorporation and Bylaws, shareholders are not required to ratify or confirm the selection of independent accountants made by the Board of Directors. OTHER BUSINESS If any other matters come before the TTC Meeting, not referred to in the enclosed Proxy, including matters incident to the conduct of the TTC Meeting, the Proxies will vote the shares represented by the proxies in accordance with their best judgment. Management is not aware of any other business to come before the TTC Meeting as of the date of the preparation of this Proxy Statement/Prospectus. -49- INDEPENDENT COMMUNITY BANKSHARES, INC. General Independent Community Bankshares, Inc. is a Virginia corporation that was organized in 1993 for the purpose of becoming the holding company for The Middleburg Bank. Currently ICBI does not transact any material business other than through its sole subsidiary, The Middleburg Bank. The Middleburg Bank currently conducts its business from its corporate headquarters in Middleburg, Virginia, and through two branch offices located in Purcellville and Leesburg, Virginia. The Middleburg Bank's deposits are insured up to the maximum allowable amount by the Federal Deposit Insurance Corporation (the "FDIC"). The Middleburg Bank is regulated by the Federal Reserve, the SCC and the FDIC. At December 31, 1996, ICBI had total deposits of $139 million, total assets of $163 million and total stockholders' equity of $18 million. ICBI's corporate headquarters is located at 111 West Washington Street, Middleburg, Virginia. The telephone number is (540) 687-6377. Market Area ICBI has three offices located in Western Loudoun County. Loudoun County is in Northwestern Virginia and is included in the Washington-Baltimore Metropolitan Statistical Area, the fourth largest market in the United States. Loudoun County is becoming a center for the technology business with such businesses as American OnLine located just east of Leesburg. The county seat is Leesburg and is one of the county's largest employers. United Airlines' headquarters is also a significant employer that is located in the county. Loudoun County's population is approximately 110,000 with slightly over one-third of the population located in the markets served by ICBI's offices. The local economy is driven by service industries requiring a higher skill level, self-employed individuals, the equine industry and the independently wealthy. Loudoun County is becoming a bedroom community to surrounding counties whose economies are driven by government contracting, technology and other service industries. Competition ICBI faces significant competition both in making loans and in attracting deposits. Competition for loans comes from commercial banks, savings and loan associations and savings banks, mortgage banking subsidiaries of regional commercial banks, subsidiaries of national mortgage bankers, insurance companies, and other institutional lenders. Its most direct competition for deposits has historically come from savings and loan associations and savings banks, commercial banks, credit unions and other financial institutions. Based upon total assets at June 30, 1996, ICBI is the second largest banking organization operating in Loudoun County, Virginia. ICBI may face an increase in competition as a result of the continuing reduction in the restrictions on the interstate operations of financial institutions. ICBI also faces competition for deposits from short-term money market mutual funds and other corporate and government securities funds. Personnel. At December 31, 1996, ICBI had 53 full-time equivalent employees. ICBI's employees are not represented by a collective bargaining unit, and ICBI considers its relationship with its employees to be excellent. -50- Properties. The headquarters building of the Bank was completed in 1981 and is a 2-story building of brick construction, with approximately 18,000 square feet of floor space located at 111 West Washington Street, Middleburg, Virginia 22117. The office operates 9 teller windows, including 3 drive-up facilities and one stand alone automatic teller machine. The Bank owns its headquarters building. The Purcellville 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 22132. The office operates 4 teller windows, including one drive-up facility and one stand-alone automatic teller machine. The Bank owns this branch building. The Leesburg branch will be complete in April 1997 and is a two-story building of brick construction with approximately 6,000 square feet of floor space located at 102 Catoctin Circle, SE, Leesburg, Virginia 20175. The office will operate 5 teller windows, including 3 drive-up facilities and one drive-up automatic teller machine. The Bank also owns this branch building. Principal Shareholders Management of ICBI is aware that the following individual beneficially owns 5% or more of the outstanding ICBI Common Stock: Millicent W. West, P. O. Box 236, Upperville, Virginia 22176 beneficially owns 131,252 shares of ICBI Common Stock, or 15.26% of the shares issued and outstanding. INDEPENDENT COMMUNITY BANKSHARES, INC. MANAGEMENT Management The following biographical information discloses each director's age, business experience in the past five years and the year each individual was first elected to the Board of Directors of ICBI or its predecessor. Howard M. Armfield, 54, has been a director since 1984. Mr. Armfield is Executive Vice President and owner of Armfield, Harrison & Thomas, Inc. in Leesburg, Virginia, an independent insurance agency. Joseph L. Boling, 52, has been a director since 1993. Mr. Boling has been the President and CEO of ICBI and The Middleburg Bank since February 1993. Prior to employment by ICBI and The Middleburg Bank, he was a Senior Vice President of Crestar Bank in Richmond, Virginia. J. Lynn Cornwell, Jr., 72, has been a director since 1984. Mr. Cornwell is President and owner of J. Lynn Cornwell, Inc. whose principal business is real estate development in Loudoun County. -51- William F. Curtis, 68, has been a director since 1962. Mr. Curtis is currently retired. Until February 1993, he had served as President and CEO of the Bank for 25 years. J. Gordon Grayson, 79, has been a director since 1968. Mr. Grayson is owner of Blue Ridge Farm, specializing in farming and thoroughbred horse breeding. George A. Horkan, Jr., 74, has been a director since 1961. Mr. Horkan is President of George A. Horkan, Jr., P.C. which is a law office located in Upperville, Virginia. C. Oliver Iselin, III, 67, has been a director since 1975. Mr. Iselin is owner and operator of the Wolver Hill Farm. William S. Leach, 68, has been a director since 1970. Mr. Leach is a retired businessman with over 30 years experience. Most recently he served a three year term as Town Administrator for the Town of Middleburg. John C. Palmer, 61, has been a director since 1974. Mr. Palmer retired as Senior Vice President of the Bank in 1995 after 27 years of service. Millicent W. West, 75, has been a director since 1975. Ms. West served in many volunteer positions in the Garden Club of America and Garden Club of Virginia. Edward T. Wright, 60, has been a director since 1972. Mr. Wright is Senior Vice President of the Bank and his principal duties include administration of the loan portfolio, marketing and branch management. The following table sets forth, as of March 12, 1997 certain information with respect to beneficial ownership of ICBI Common Stock, par value $5.00 per share, by the members of the Board of Directors and by all Directors and Executive Officers as a group. Beneficial ownership includes shares, if any, held in the name of the spouse, minor children or other relatives of a Director living in such person's home, as well as shares, if any, held in the name of another person under an arrangement whereby the Director or Executive Officer can vest title in himself at once or at some future time. -52-
Name Amount and Nature of Beneficial Ownership Percent of Class (%) ---- ----------------------------------------- -------------------- Howard M. Armfield 9,052 1.05 Joseph L. Boling 2,564 .30 J. Lynn Cornwell, Jr. 1,972 .22 William F. Curtis 35,252 4.10 J. Gordon Grayson 19,508 2.27 George A. Horkan, Jr. 36,000 4.19 C. Oliver Iselin, III 21,200 2.47 William S. Leach 15,796 1.84 John C. Palmer 12,293 1.43 Millicent W. West 131,252 15.26 Edward T. Wright 29,210 3.40 Directors and executive officers 314,604 36.59 as a group (14 persons)
ICBI is unaware of any arrangement that may operate at a subsequent date to effect a change in control of ICBI. Committees. The same individuals are Directors of ICBI and The Middleburg Bank. ICBI has no Board committees. The following discussion describes the Board Committees of The Middleburg Bank. The Executive Committee, which acts for the Board of Directors when the Board is not in session, consists of Mrs. West and Messrs. Horkan, Leach, Boling, Armfield and Curtis. The Executive Committee met six times during the year ended December 31, 1996. The Bank has an Examining and Compliance Committee, which consists of Mrs. West and Messrs. Armfield, Grayson, Cornwell, Iselin and Leach. The Examining and Compliance Committee is responsible for examining the affairs of the Bank at least annually, reporting the results of examinations and recommending changes in the manner of doing business. The Examining and Compliance Committee held three meetings during the year ended December 31, 1996. The Nominating Committee consists of Mrs. West and Messrs. Horkan, Iselin, Curtis and Boling and nominates the individuals proposed for election as directors. The Nominating Committee met two times during the year ended December 31, 1996. The Loan Committee, which examines and approves loans and other extensions of credit, consists of Messrs. Boling, Curtis, Cornwell, Leach, Palmer and Wright. The Investment Committee, which sets the Bank's policy for investment in marketable securities, consists of Messrs. Grayson, Palmer, Boling, Iselin and Wright. The Asset/Liability Committee, which monitors and implements Board policies on interest rates, product pricing and operating ratios, consists of Messrs. Boling and Wright. In 1996, the Loan Committee met 17 times; the Investment Committee met five times; and the Asset/Liability Committee met once. The Trust Committee consists of Messrs. Horkan, Boling, Cornwell and Palmer. The Trust Committee met three times in 1996. -53- There were 12 meetings of the Board of Directors in 1996. Each Director attended greater than 75% of the aggregate number of meetings of the Board of Directors and its committees of which he was a member in 1996. There are no family relationships among any of the Directors or among any Directors and any officer. As compensation for their services, each member of the Board of Directors receives a fee of $300 for each meeting of the Board and $250 for each Committee meeting attended. Board members who are also officers do not receive any additional compensation above their regular salary for attending committee meetings. In 1996, Directors received $89,350 in the aggregate as compensation for their services as directors. Executive Officers Who Are Not Directors Alice P. Frazier (Age 32) has served as Chief Financial Officer since April 1993. From May 1991 until April 1993, she served as the Bank's Loan Review Officer. From December 1988 until May 1991 she was employed by Yount, Hyde & Barbour, P.C., certified public accountants. Arch A. Moore (Age 45) has served as Senior Vice President and Senior Lender since February 1995. From March 1983 to February 1995, he served in various positions, the last of which was Manager of the Northern Virginia Business Banking Group, with First American/First Union. Thomas E. Sebrell, IV (Age 54) has served as Vice President since January 1994. From April 1978 until January 1994, he served in various capacities, including Executive Vice President, at Farmers & Merchants National Bank of Hamilton and its successor, F&M Bank-Winchester. Executive Compensation The following table shows, for the fiscal years ended December 31, 1996, 1995 and 1994, the cash compensation paid by ICBI, as well as certain other compensation paid or accrued for those years, to each of the named Executive Officers in all capacities in which they served: -54- SUMMARY COMPENSATION TABLE
Long Term Annual Compensation Compensation All Other Name and Other Annual Compensation ($)(2) Principal Position Year Salary ($) Bonus ($) Compensation ($) - ---------------------------- ------------- -------------- -------------- --------------------- ---------------------- Joseph L. Boling 1996 186,980 20,000 (1) 21,433 President and CEO 1995 178,820 15,000 (1) 21,363 1994 167,500 27,000 (1) 21,299 Edward T. Wright 1996 119,294 8,350 (1) 7,821 Senior Vice President 1995 107,150 8,929 (1) 7,748 1994 104,030 8,669 (1) 7,673 Arch A. Moore, III 1996 101,375 7,096 (1) 8,967 Senior Vice President 1995 91,711 7,500 21,712 (3) 8,943
(1) All benefits which might be considered of a personal nature did not exceed the lesser of $50,000 or 10% of total annual salary and bonus for all the officers named in the table. (2) Amounts presented represent gross value of payments made by the Bank during such fiscal year pursuant to split-dollar life insurance agreements between ICBI and the named executive officers. (3) Amount presented includes $12,500 paid by the Bank for Mr. Moore's initiation fees for the Middleburg Tennis Club and the Loudoun Golf and Country Club and $7,883 paid by the Bank for the increase in Mr. Moore's income tax associated with such benefits. ICBI has no stock option plans and has not granted stock options or stock appreciation rights to any of its officers or employees. Employment Agreements There are no commission agreements or any employment contracts between the Bank and its directors or officers, except for that with Joseph L. Boling, President of the Bank. Effective January 1, 1997, The Middleburg Bank and Joseph L. Boling, its President and Chief Executive Officer, entered into an employment contract. Mr. Boling's employment contract is for five years at a base annual salary of $194,086 and he is eligible for bonuses as determined by the executive committee, in the discretion of the Board of Directors. Mr. Boling's employment may be terminated by The Middleburg Bank, with or without cause; but if terminated without cause, he is entitled to payment for the greater of the remainder of his contract or three years. If there is a change in control of The Middleburg Bank and Mr. Boling's employment terminates, he is entitled to severance pay equal to his salary and benefits for the longer of the remainder of his contract or three years, unless he is offered and accepts a position with the acquiror. Mr. Boling's contract contains a covenant not to compete if, for any reason, his employment terminates. -55- 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 1996 and 1995, based on the present value of the retirement benefits, was $15,539 and $14,522. The plan is unfunded. However, life insurance has been acquired on the life of the employee in an amount sufficient to discharge the obligation. Transactions with Management Some of the directors and officers of ICBI are at present, as in the past, customers of ICBI and ICBI has had, and expects to have in the future, banking transactions in the ordinary course of its business with directors, officers, principal shareholders and their associates, on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with others. These transactions do not involve more than the normal risk of collectibility or present other unfavorable features. The largest aggregate outstanding balance of loans to directors, executive officers and their associates, as a group, in 1996 was approximately $1,759,000. Such balances totaled $845,656 at December 31, 1996, or 4.7% of ICBI's equity capital at that date. ICBI had, and expects to have in the future, banking transactions in the ordinary course of its business with directors, officers, principal shareholders, and their associates, on the same terms, including interest rates and collateral on loans as those prevailing at the same time for comparable transactions with others, and which do not involve more than the normal risk of collectibility or present other unfavorable features. There were no transactions during 1996 between ICBI's directors or officers and ICBI's retirement or profit sharing plans, nor are there any proposed transactions. Additionally, there are no legal proceedings to which any director, officer, principal shareholder or associate is a party that would be material and adverse to ICBI. -56- INDEPENDENT COMMUNITY BANKSHARES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 "ICBI Selected Historical Financial Information" and the Consolidated Financial Statements and Notes to Consolidated Financial Statements. Overview ICBI's performance for the first quarter of 1997 evidenced improvement over the same quarter a year ago. Net income increased 40.84% in the first quarter of 1997 to $607,000, compared to $431,000 during the same quarter of 1996. The increase in earnings was primarily due to an increase in the net interest margin. Return on average assets on an annualized basis was 1.49% for March 31, 1997, compared to 1.22% at March 31, 1996. Return on average equity showed an increase of 319 basis points to 13.36% at March 31, 1997 from 10.17% at March 31, 1996. ICBI's performance for 1996 showed improvement over the previous year, even after opening a new branch and trust department. Continued high asset quality, an excellent interest margin and improved management efficiencies contributed to net income of $2,030,946 for 1996, compared with $1,706,494 in 1995 and $1,837,740 in 1994. Return on average assets increased during 1996 to 1.36% compared to 1.27% for 1995. Return on average assets decreased in 1995 to 1.27% from 1.46% in 1994. Return on average equity increased during 1996 to 11.70%, up from 10.26% for 1995 and down from 11.93% in 1994. The decrease in both return on average assets and return on average equity during 1995 compared to 1994 was directly related to the start-up cost of both a trust department and a third branch in the fourth quarter of 1995. Also in January 1995, ICBI hired a senior loan officer to replace another senior loan officer who retired in December 1995. As both the trust department and branch grew during 1996, the additional revenues increased the returns. The net interest margin for March 31, 1997 was 4.84%, a 29 basis point increase from 4.55% at March 31, 1996 and a 6 basis point decrease from 4.90% at December 31, 1996. Net interest margin increased slightly during 1996 to 4.90% on a tax-equivalent basis. Net interest margin for 1995 and 1994 was 4.84% and 5.08%, respectively. Net interest margin and net interest income are influenced by fluctuations in market rates and changes in both the volume and mix of average earning assets and the liabilities that fund those assets. Loan demand remained relatively strong during each of the three years (1994 - 1996). The average cost of funds has decreased 23 basis points from 4.27% at March 31, 1996 to 4.04% at March 31, 1997, while the average yield on earning assets increased 9 basis points from 7.98% to 8.07% at March 31, 1996 and 1997 respectively. Overall, the average cost of funds increased 75 basis points from 3.36% in 1994 to 4.06% in 1995 then to 4.16% in 1996, and was not matched by the increase in the average yield on earning assets which only increased 45 basis points from 7.78% in 1994 to 8.11% in 1995 then to 8.23% in 1996. Loans, net of unearned income, were $94.5 million and $94.6 million at March 31, 1997 and December 31, 1996, respectively. This represents a growth of 17% over the December 31, 1995 balance of $80.9 million. Loans, net of unearned income increased only 1.5% in 1995 to $80.9 million from $79.7 million in 1994. ICBI's investment portfolio continues to grow as excess deposits over loans are placed in high-quality securities. At March 31, 1997, ICBI's securities portfolio was 34% of average earning assets -57- and had decreased slightly since December 31, 1996 to $52.1 million. At December 31, 1996, ICBI's securities portfolio represented 35.6% of average earning assets and had increased by 14.7% over the level at December 31, 1995. Total securities were $52.4 million at December 31, 1996, $48.2 million at December 31, 1995 and $41.4 million at December 31, 1994. ICBI's efficiency ratio, a measure of its performance based upon the relationship between non-interest expense and income less securities gains, compares favorably to other Virginia financial institutions. ICBI's efficiency ratio for March 31, 1997 was 52.2% compared to 62.01% at March 31, 1996. ICBI's efficiency ratio for 1996, 1995, and 1994 was 57.9%, 59.0%, and 55.0%, respectively. A lower percentage of the efficiency ratio represents greater control of non-interest related costs. A fluctuation in the efficiency ratio can be attributed to relative changes in both noninterest income and net interest income. ICBI is not aware of any current recommendations by any regulatory authorities which, if they were implemented, would have a material effect on its liquidity, capital resources, or results of operations. Net Interest Income Net interest income represents the principal source of earnings for ICBI. Net interest income equals the amount by which interest income exceeds interest expense. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income. Net interest income was $1.7 million for the first quarter of 1997, compared to $1.4 million for the same period in 1996. This represents an increase of 21% affected primarily by the growth in earning assets during the remainder of 1996 and the increase in the net interest margin. Loan growth provided $281,000 in additional income for the first quarter of 1997. Interest bearing deposits grew 12% from $104 million at March 31, 1996 to $118 million. During the growth, ICBI was able to decrease the average cost of funds by 23 basis points. Net interest income was $6.5 million in 1996, up 12.25% over the $5.8 million reported for the same period in 1995 and up .44% in 1995 over the $5.7 million reported for 1994. Net interest income in 1996 was affected primarily by growth in the both the securities and loan portfolios. Loans grew $13.7 million to $94.6 million in 1996, providing $872,000 in additional interest income. Investment securities grew $4.1 million to $52.4 at December 31, 1996. The growth in securities from 1995 to 1996 provided $391,000 of additional interest income. In 1996, interest bearing deposits provided a majority of the sources of funds by increasing to $115.5 million, up $11.9 million, or 11.5%, from $103.6 million in 1995. Interest bearing deposits increased $4.2 million in 1995 from $99.4 million in 1994. The growth was a result of opening two new branches as well as offering attractive market rates, coupled with customers' desires to place investments in a strong, highly capitalized financial institution. Management anticipates growth in net interest income, loans and deposits to remain equally strong in 1997. Net interest income for 1995 was $5.8 million, compared to $5.7 million for 1994. Net interest income was affected by low loan demand as well as loan run-off early in 1995. To gain market share, and anticipating rising interest rates, management increased deposit rates early in the year. This resulted in a 70 basis point increase in the average cost of funds and contributed to the decrease in net interest margin from 5.08% in 1994 to 4.84% in 1995. Loan growth was minimal at 1.6%, ending 1995 with a balance of $80 million. Deposit growth was slightly higher at 3.8%, ending with balances at $121.5 million at December 31, 1995. Noninterest bearing deposits decreased 4.2%, to $17.9 million at year end 1995, which also added to the rising cost of funds. -58- The following table depicts interest income on earning assets and related average yields as well as interest expense on interest-bearing liabilities and related average rates paid for the periods indicated. Loans placed on a nonaccrual status are included in the balances and were included in the computation of yields, upon which they had no material effect. The average balances used for the purpose of this table and other statistical calculation disclosures were calculated by using daily average balances. -59- Average Balances, Income and Expenses, Yields and Rates
Three months Ended, March 31 ------------------------------------------------------------------------- 1997 1996 ----------------------------------------------------------------------- Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate (3) Balance Expense Rate ------- ------- -------- ------- ------- ---- Assets : Securities: Taxable $ 36,268 $ 540 5.96% $ 34,550 $ 2,023 5.86% Tax-exempt (1) (2) 16,400 324 7.91% 15,238 1,200 7.87% ------------------------- ------------------------- Total Securities 52,668 864 6.56% 49,788 3,223 6.47% Loans Taxable 94,094 2,134 9.07% 87,358 8,137 9.31% Tax-exempt 271 6 8.86% - - ------------------------- ------------------------- Total Loans 94,365 2,140 9.07% 87,358 8,137 9.31% Federal Funds Sold 4,609 57 4.95% 2,431 130 5.35% Interest Bearing Deposits in other financial institutions 177 3 6.78% 140 6 4.29% ------------------------- ------------------------- Total earning assets 151,819 3,064 8.07% 139,717 11,496 8.23% Less: allowances for credit losses (892) (894) Total nonearning assets 12,108 10,340 ------------- ------------- Total assets $ 163,035 $ 149,163 ============= ============= Liabilities (1): Interest-bearing deposits: Checking $ 18,779 88 1.87% $ 18,348 $ 390 2.13% Regular savings 15,159 142 3.75% 14,562 561 3.85% Money market savings 28,944 210 2.90% 28,735 869 3.02% Time deposits: $100,000 and over 15,502 184 4.75% 12,013 738 6.14% Under $100,000 37,242 529 5.68% 34,760 1,898 5.46% ------------------------- ------------------------- Total interest-bearing deposits 115,626 1,153 3.99% 108,418 4,456 4.11% Federal Home Loan Bank advances 3,656 50 5.47% 3,188 187 5.87% Securities sold under agreements to repurchase 2,225 24 4.31% 8 Federal Funds Purchased - - 73 4 5.48% ----------------------------------- ------------------------- Total interest-bearing liabilities 121,507 1,227 4.04% 111,687 4,647 4.16% Non-interest bearing liabilities Demand Deposits 22,298 19,211 Other liabilities 1,056 923 Total liabilities 144,861 131,821 Shareholders' equity 18,174 17,342 Total liabilities and shareholders' equity $ 163,035 $ 149,163 ============= ============= Net interest income $ 1,837 $ 6,849 ============ ============ Interest rate spread 4.03% 4.07% Interest expense as a percent of average earning assets 3.23% 3.33% Net interest margin 4.84% 4.90%
Average Balances, Income and Expenses, Yields and Rates
Years Ended December 31, ---------------------------------------------------------------------- 1995 1994 ---------------------------------------------------------------------- Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- (Dollars in Assets : Securities: Taxable $ 30,953 $ 1,832 5.92% $ 28,583 $ 1,596 5.58% Tax-exempt (1) (2) 12,452 939 7.54% 11,166 876 7.84% ------------------------- ------------------------- Total Securities 43,405 2,771 6.38% 39,749 2,472 6.22% Loans Taxable 79,639 7,265 9.12% 73,483 6,542 8.90% Tax-exempt - - - - ------------------------- ------------------------- Total Loans 79,639 7,265 9.12% 73,483 6,542 8.90% Federal Funds Sold 2,470 138 5.59% 5,390 215 3.99% Interest Bearing Deposits in other financial institutions - - - - - - ------------------------- ------------------------- Total earning assets 125,514 10,174 8.11% 118,622 9,229 7.78% Less: allowances for credit losses (931) (931) Total nonearning assets 9,345 8,033 ------------- ------------- Total assets $ 133,928 125,724 ============= ============= Liabilities (1): Interest-bearing deposits: Checking $ 17,919 $ 436 2.43% $ 17,057 $ 414 2.43% Regular savings 14,003 534 3.81% 13,356 454 3.40% Money market savings 26,980 834 3.09% 29,817 803 2.69% Time deposits: $100,000 and over 12,523 689 5.50% 11,424 524 4.59% Under $100,000 28,775 1,563 5.43% 23,530 1,003 4.26% ------------------------- ------------------------- Total interest-bearing deposits 100,200 4,056 4.05% 95,184 3,198 3.36% Federal Home Loan Bank advances 514 31 6.03% - - - Securities sold under agreements to repurchase - - - - - Federal Funds Purchased 145 9 6.21% - - - ------------------------- ------------------------- Total interest-bearing liabilities 100,859 4,096 4.06% 95,184 3,198 3.36% Non-interest bearing liabilities Demand Deposits 15,691 14,467 Other liabilities 751 665 Total liabilities 117,301 110,316 Shareholders' equity 16,627 15,408 Total liabilities and shareholders' equity $ 133,928 $ 125,724 ============= ============= Net interest income $ 6,078 $ 6,031 ============ ============ Interest rate spread 4.05% 4.42% Interest expense as a percent of average earning assets 3.26% 2.70% Net interest margin 4.84% 5.08%
(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. (3) Yield/Rate has been annualized for the quarter ended March 31, 1997. -60- 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 average loans outstanding. Volume and Rate Analysis (Tax equivalent basis)
Period Ended March 31, Year Ended December 31, ----------------------------------------------------------------------------------- 1997 vs 1996 1996 vs 1995 Increase (Decrease) Due Increase (Decrease) Due to Changes in: to Changes in: ---------------------------------------------------------------------------------- Volume Rate Total Volume Rate Total ------ ---- ----- ------ ---- ----- Earning Assets: Securities: Taxable $ 29 $ 25 $ 54 $ 209 $ (18) $ 191 Tax-exempt 39 16 55 218 43 261 Loans: Taxable 287 (10) 277 718 154 872 Tax-exempt 6 - 6 - Federal funds sold 25 (4) 21 (2) (6) (8) Interest bearing deposits in other financial institutions 1 1 2 6 - 6 ------------- ----------- --------------- ------------ ----------- ----------- Total earning assets $ 387 $ 28 $ 415 $ 1,149 $ 173 $ 1,322 Interest-Bearing Liabilities: Interest checking $ - $ (22) (22) $ 11 (57) (46) Regular savings deposits 12 (6) 6 21 6 27 Money market deposits 32 (33) (1) 54 (19) 35 Time deposits $100,000 and over 26 (16) 10 (26) 75 49 Under $100,000 68 - 68 326 9 335 ------------- ----------- --------------- ------------ ----------- ----------- Total interest bearing deposits $ 138 $ (77) $ 61 $ 386 $ 14 $ 400 Federal Home Loan Bank Advances 8 (3) 5 157 (1) 156 Securities sold under agree- ment to repurchase 24 - 24 - - - Federal Funds Purchased - - - (4) (1) (5) ------------- ----------- --------------- ------------ ----------- ----------- Total interest bearing liabilities $ 170 $ (80) $ 90 $ 539 $ 12 $ 551 Change in net interest income $ 217 $ 108 $ 325 $ 610 $ 161 $ 771 ============= =========== =============== ============ =========== ===========
Volume and Rate Analysis (Tax equivalent basis)
Year Ended December 31, ---------------------------------------- 1995 vs 1994 Increase (Decrease) Due to Changes in: -------------------------------------- Volume Rate Total ------ ---- ----- Earning Assets: Securities: Taxable $ 136 $ 100 $ 236 Tax-exempt 94 (31) 63 Loans: Taxable 558 165 723 Tax-exempt Federal funds sold (296) 219 (77) Interest bearing deposits in other financial institutions - - ------------ ----------- ------------ Total earning assets $ 492 $ 453 $ 945 Interest-Bearing Liabilities: Interest checking $ 22 $ - $ 22 Regular savings deposits 23 57 80 Money market deposits (55) 86 31 Time deposits $100,000 and over 54 111 165 Under $100,000 251 309 560 ------------ ----------- ------------ Total interest bearing deposits $ 295 $ 563 $ 858 Federal Home Loan Bank Advances 31 - 31 Securities sold under agree- ment to repurchase - - - Federal Funds Purchased 9 - 9 ------------ ----------- ------------ Total interest bearing liabilities $ 335 $ 563 $ 898 Change in net interest income $ 157 $ (110) $ 47 ============ =========== ============
Interest Sensitivity The primary goals of interest rate risk management are to minimize fluctuations in net interest margin as a percentage of earning assets and to increase the dollars of net interest margin at a growth rate consistent with the growth rate of total assets. An important element of interest rate risk management is monitoring the interest sensitivity gap. The interest sensitivity gap is the difference between the interest-sensitive assets and interest-sensitive liabilities in a specific time interval. The gap can be managed by repricing assets or liabilities, by selling investments available for sale, by replacing an asset or liability at -61- maturity, or by adjusting the interest rate during the life of an asset or liability. Matching the amounts of assets and liabilities repricing in the same time interval helps to hedge the risk and minimize the impact on net interest income in periods of rising or falling interest rates. ICBI evaluates interest sensitivity risk and then formulates guidelines regarding asset generation and pricing, funding sources and pricing, and off-balance sheet commitments in order to decrease sensitivity risk. These guidelines are based upon management's forecasts of future interest rate movements, the state of the regional and national economy, and other financial and business risk factors. Interest rate gaps are managed through investments, loan pricing and deposit pricing. When an unacceptable positive gap within a one-year time frame occurs, maturities can be extended by selling shorter term investments and buying longer term investments. The same effect can also be accomplished by reducing emphasis on variable rate loans. When an unacceptable negative gap occurs, variable rate loans can be increased and more investment in shorter term investments can be made. Pricing policies on either or both loans and deposits can be changed to accomplish such goals. ICBI reviews the interest sensitivity position of its subsidiary quarterly. At March 31, 1997, ICBI had $9 million more interest sensitive liabilities than interest sensitive assets subject to repricing within one year and was, therefore, in an liability sensitive position. A liability sensitive institution's net interest margin and net interest income generally will be impacted favorably by declining interest rates, while that of a asset sensitive institution generally will be impacted favorably by rising interest rates. -62- The following table analyzes ICBI's rate interest sensitivity at March 31, 1997. This is a one-day position which is continually changing and is not necessarily indicative of ICBI's position at any other time. Rate Sensitivity Analysis
March 31, 1997 Repricing Time Frame ------------------------------------------------------------------------------- Beyond 1 - 90 Day 91 - 365 Day 1 to 5 Years 5 Years or Sensitivity Sensitivity Sensitivity Insensitive Total -------------- ---------------- --------------- ------------- -------------- Earning Assets: (Dollars in thousands) Loans, net unearned (1) Fixed rate $ 7,787 $ 13,948 $ 57,915 $ 2,812 $ 82,462 Variable rate 11,566 13 507 - 12,086 -------------- ---------------- --------------- ------------- -------------- Total loans 19,353 13,961 58,422 2,812 94,548 Securities (2) (3) Fixed rate 250 1,219 8,417 30,539 40,425 Variable rate 5,220 1,502 3,540 640 10,902 Federal Funds sold and other 7,300 7,300 -------------- ---------------- --------------- ------------- -------------- Total rate sensitive assets $ 32,123 $ 16,682 $ 70,379 $ 33,991 $ 153,175 Interest Bearing Liabilities: Interest checking (4) $ - $ - $ - $ 19,095 $ 19,095 Regular savings (4) - - - 15,224 15,224 Money market savings 30,392 - - - 30,392 Time deposits $100,000 and over 1,371 2,574 11,623 - 15,568 Under $100,000 7,671 10,763 19,710 - 38,144 Short-term borrowings 5,116 - - - 5,116 -------------- ---------------- --------------- ------------- -------------- Total interest bearing liabilities $ 44,550 $ 13,337 $ 31,333 $ 34,319 $ 123,539 Period gap (12,427) 3,345 39,046 (328) 29,636 Cumulative gap (12,427) (9,082) 29,964 29,636 Ratio of cumulative gap to total -8.11% -5.93% 19.56% 19.35% rate sensitive assets
(1) Does not include non accrual loans of $118,000. (2) Does not include Federal Reserve Stock of $134,400 and Federal Home Loan Bank Stock of $450,600 (3) Variable rate securities are categorized by repricing date rather than maturity date. (4) ICBI has determined that interest checking and savings accounts are not sensitive to changes in market rates as a result of minimal fluctuation in the balances during periods of wide fluctuations in interest rates thus considering these as core deposits. -63- Noninterest Income Noninterest income for the three months ended March 31, 1997 increased $37,000 over the same period in 1996. Noninterest income for 1996 increased $48,000, or 6.9%, over the same period in 1995. Service charges on deposit accounts, the largest single item of noninterest income, were $204,000 for the first quarter of 1997, an increase of 16.57% from the prior year's first quarter balance. Service charges were $677,000 for 1996, up 3.9% over the comparable period a year ago. Other operating income decreased $150,000 in 1996 from $166,000 to $16,000. In 1995, ICBI recorded a $150,000 gain on other real estate sold. Trust fee income for 1996 was $29,000, which arises from a new service that ICBI anticipates will provide additional fee income in future years. Securities gains were $22,000 in 1996, compared to a loss of $123,000 in 1995. Securities gains are realized when market conditions exist that are favorable for ICBI and/or conditions dictate additional liquidity is desirable. Noninterest income increased $170,000, or 32% from $524,000 in 1994 to $694,000 in 1995. Service charges on deposit accounts, were $651,000, compared to $614,000 in 1994. Other income was $166,000 in 1995 compared to $35,000 in 1994. Securities losses remained relatively the same at $123,000 and $125,000 for 1995 and 1994, respectively. The losses incurred in 1994 and 1995 relate directly to the approximate $18 million of securities purchased in 1993. Because the securities purchased at that time were yielding lower returns than those currently available, management decided to take the losses to reposition the portfolio to strengthen the yield and liquidity position. The effects of the actions taken resulted in an increase of 16 basis points in the yield of the portfolio from 1994 to 1995. The yield of the portfolio increased nine basis points from 1995 to 1996. Noninterest Income
Three Months Ended March 31, Year Ended December 31, -------------------------- ----------------------------------------- 1997 1996 1996 1995 1994 ------------- ------------ ------------- ------------ ------------ (Dollars in thousands) Services, commissions and fees $ 204 $ 175 $ 677 $ 651 $ 614 Trust fee income 23 4 29 - - Other operating income 1 1 16 166 35 ------------- ------------ ------------- ------------ ------------ Noninterest income $ 228 $ 180 $ 722 $ 817 $ 649 Profits (losses) on securities available for 3 14 22 (123) (125) sale, net Securities gains (losses), net - - (2) - - ------------- ------------ ------------- ------------ ------------ Total noninterest income $ 231 $ 194 $ 742 $ 694 $ 524 ============= ============ ============= ============ ============
NonInterest Expense Total noninterest expense increased $27,000, or 2.57% from the March 31, 1996 balance to $1,077,000 at March 31, 1997. Total noninterest expense increased $316,000, or 7.7% from $4.1 million in 1995 to $4.4 million in 1996. Salaries and employee benefits increased $33,000 from March 31, 1996 to $643,000 at March 31, 1997. These same expenses increased $370,000 or 17.1% in 1996. The net occupancy expenses, including furniture and fixture expense increased $14,000 from March 31, 1996 to $132,000 at March 31, 1997. These expenses also increased $129,000 or 29.7% during 1996. The advertising expenses decreased $25,000 from March 31, 1996 to the three months ending 1997. During 1996, the advertising expenses increased $58,000 or 54.7%. At March 31, 1997, ICBI's FDIC insurance increased $7,000 from the March 31, 1996 balance of $1,000. This expense had decreased $133,000 or -64- 98.5% during 1996. Other operating expenses decreased $2,000 during the first quarter of 1997 compared to the prior year's same period. These expenses had also decreased $108,000 or 8.7% during 1996. The primary reason for the increase in noninterest expense was the opening of both a new branch and trust department in 1996, partially offset by the reduction in FDIC insurance expense. The FDIC deposit insurance fund achieved a level deemed adequate by regulatory authorities to protect deposits, therefore, the premiums were adjusted in the third quarter of 1995 to reflect this achievement. For 1995, noninterest expense increased $395,000, or 10%, over 1994. This increase was primarily due to a $283,000 or 15% increase in salaries and employee benefits which is the result of hiring additional staffing for the new branch (opened January 1996) and trust officer late in the year for training. Net occupancy expenses increased $107,000 or 32.8% over 1994, a full year of the first branch opened in 1994 and renovations of the main office contributed to this increase. The increase of $103,000 or 9.1% in other operating expenses is the result of one additional branch and start up costs of a new branch and trust department. FDIC insurance decreased $99,000 or 42.3% as a result of the adjustment in premiums in late 1995.
Noninterest Expense Three Months Ended March 31, Year Ended December 31, ------------------------------------------------------------------- 1997 1996 1996 1995 1994 ------------ -------------------------- ------------ ------------- (Dollars in thousands) Salaries and employee benefits $ 643 $ 610 $ 2,533 $ 2,163 $ 1,880 Net occupancy expense of premises 132 118 562 433 326 Advertising 29 54 164 106 105 FDIC insurance 8 1 2 135 234 Other operating expenses 265 267 1,122 1,230 1,127 ------------ -------------------------- ------------ ------------- Total $ 1,077 $ 1,050 $ 4,383 $ 4,067 $ 3,672 ============ ========================== ============ =============
Income Taxes Income tax expense increased $84,000 from $139,000 for the three months ended March 31, 1996 to $223,000 for the three months ended March 31, 1997 due to increase in income. Reported income tax expense for the year ended December 31, 1996 was $728,000, up from $625,000 and decreased from $748,000 in 1994. The increase in income taxes is attributable to increased taxable earnings at the federal statutory tax rate of 34%. Note 10 to the Consolidate Financial Statements provides a reconciliation between the amount of income tax expense computed using the federal statutory tax rate and ICBI's actual income tax expense. Also included in Note 10 to the Consolidated Financial Statements is information regarding the principal items giving rise to deferred taxes for the three years ended December 31, 1996. Loan Portfolio Loans, net of unearned income, were $94.5 million at March 31, 1997, up from $82.4 million at March 31, 1996. Loans, net of unearned income $94.6 million at December 31, 1996, up 16.9% from the $80.9 million at December 31, 1995. ICBI has experienced continued loan growth from 1992. Loans -65- increased $1.2 million from 1994 to 1995, $8.5 million from 1993 to 1994, and $4.1 million from 1992 to 1993, increases of 1.5%, 11.9% and 6.2%, respectively. The real estate secured portfolio is comprised mostly of one to four family residential secured loans. At December 31, 1996, these loans constituted 43.6% of the total loan portfolio. Non-farm, non-residential loans provided 26.2% of total loans at December 31, 1996. Construction real estate loans comprised 4.4% of the total portfolio at that same date. Home equity lines and agricultural loans made up 2.8% and 3.2% of total loans, respectively, at December 31, 1996. ICBI's commercial, financial and agricultural loan portfolio, the second largest segment of the total portfolio, consists mostly of secured and unsecured loans extended to small businesses. The consumer loan portfolio is comprised of mostly unsecured installment credit. Consistent with its focus on providing community-based financial services, ICBI generally does not extend loans outside its principal market area, which encompasses Fauquier and Loudoun Counties, Virginia. ICBI's unfunded loan commitments (excluding unused home equity lines of credit) totaled $6.8 million at March 31, 1997, $6.6 million at December 31, 1996 and $3.3 million at December 31, 1995. This increase is attributed to both an increase in customer demand and the addition of the Purcellville and Leesburg branches. At both March 31, 1997 and December 31, 1996, ICBI had no concentration of loans in any one industry in excess of 10 percent of its total loan portfolio. However, because of the nature of ICBI's market, loan collateral is predominantly real estate related. Loan Portfolio
Three months ended March 31, December 31, --------------------------------------------------------------- 1997 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- (In thousands) Commercial, financial and agricultural $12,183 $11,648 $10,215 $ 9,064 $10,928 $ 6,677 Real estate construction 3,702 4,182 1,791 2,432 1,488 1,949 Real estate mortgage: Residential (1-4 family) 40,300 41,246 34,490 38,029 33,138 33,753 Home equity lines 2,803 2,614 2,188 1,512 1,271 2,019 Multifamily -- -- -- 3 6 9 Non-farm, non-residential (1) 25,643 24,774 21,697 18,271 17,093 14,786 Agricultural 2,093 2,105 1,549 1,040 1,098 1,163 Consumer installment 7,852 8,061 9,170 9,837 6,773 7,371 ------- ------- ------- ------- ------- ------- Total loans 94,576 94,630 81,100 80,188 71,795 67,727 Less unearned income 28 35 186 481 597 665 ------- ------- ------- ------- ------- ------- Loans-net of unearned income $94,548 $94,595 $80,914 $79,707 $71,198 $67,062 ======= ======= ======= ======= ======= =======
(1) This category generally consists of commercial and industrial loans where real estate constitutes a source of collateral. -66-
Remaining Maturities of Selected Loans March 31, 1997 December 31, 1996 ------------------------------ ------------------------------- Commercial, Real Commercial, Real Financial and Estate Financial and Estate Agricultural Construction Agricultural Construction (Dollars in thousands) Within 1 year $ 6,691 $ 3,007 $ 6,463 $ 3,435 -------------- -------------- --------------- --------------- Variable Rate: 1to 5 years 316 - 259 - After 5 years - - - - -------------- -------------- --------------- --------------- Total $ 316 $ - $ 259 $ - -------------- -------------- --------------- --------------- Fixed Rate: 1to 5 years 4864 695 4,641 747 After 5 years 312 - 285 - -------------- -------------- --------------- --------------- Total $ 5,176 $ 695 $ 4,926 $ 747 -------------- -------------- --------------- --------------- Total Maturities $ 12,183 $ 3,702 $ 11,648 $ 4,182 ============== ============== =============== ===============
Asset Quality The allowance for loan losses is an estimate of the amount that will be adequate to provide for potential losses in ICBI's loan portfolio. The level of loan losses is affected by general economic trends as well as any conditions affecting individual borrowers. The allowance is subject to regulatory examinations and determinations as to its adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance in comparison to peer financial institutions identified by the regulatory agencies. ICBI's loans are subject to independent review by ICBI's in-house Loan Review Officer and by its external auditors. ICBI's Loan Committee and Board of Directors take an active role in the monthly review of the ICBI's problem credits and their effect on the allowance for loan losses. -67- Allowance for Loan Losses
Three months ended March 31, December 31, ----------------------- ----------------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- ---- (In thousands) Balance, beginning of period $ 884 $ 866 $ 866 $ 940 $ 859 $ 853 $ 1,053 Loans charged off: Commercial, financial, and 11 - 6 13 38 119 185 agricultural Real estate construction - - - - - - - Real estate mortgage - - 79 115 36 99 - Consumer installment 16 5 40 83 142 77 228 ---------- ---------- ----------- ---------- ----------- ----------- ---------- Total loans charged off $ 27 $ 5 $ 125 $ 211 $ 216 $ 295 $ 413 ---------- ---------- ----------- ---------- ----------- ----------- ---------- Recoveries: Commercial, financial, and $ 2 $ - $ 5 $ 43 $ 210 $ 25 $ 7 agricultural Real estate construction - - - - - - - Real estate mortgage 1 21 26 4 - - 8 Consumer installment 6 21 47 35 87 48 35 ---------- ---------- ----------- ---------- ----------- ----------- ---------- Total recoveries $ 9 $ 42 $ 78 $ 82 $ 297 $ 73 $ 50 ---------- ---------- ----------- ---------- ----------- ----------- ---------- Net charge offs (recoveries) 18 (37) 47 129 (81) 222 363 Provision for loan losses 55 - 65 55 - 228 163 ---------- ---------- ----------- ---------- ----------- ----------- ---------- 37 Balance, end of period $ 921 $ 903 $ 884 $ 866 $ 940 $ 859 $ 853 ========== ========== =========== ========== =========== =========== ========== Ratio of allowance for loan losses to loans outstanding at end of 0.97% 1.10% 0.93% 1.07% 1.18% 1.21% 1.27% period Ratio of net charge offs (recoveries)to average loans outstanding during 0.02% -0.05% 0.05% 0.16% -0.11% 0.32% 0.53% period
Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention, do not represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources or represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. In 1996, ICBI's net charge offs declined $82,000 from the previous year's $129,000 in net charge offs. The improved charge off experience resulted from both the strengthened economy and an improved loan policy. Net charge offs to average loans were 0.05% and 0.16% for 1996 and 1995, respectively. At March 31, 1997, the provisions to the allowance for loan losses totaled $55,000. The provision to the allowance for loan losses was $65,000 for 1996. A provision of $55,000 was made in 1995, while no provision was deemed necessary for 1994. The ratio of the allowance for loan losses to total loans, net of unearned income has decreased over the past five years. More recently the decrease was attributed to -68- the significant loan growth experienced by the ICBI. However, the increase in the reserve was not necessarily due to a decline in nonperforming assets and charge offs. The allowance for loan losses was $921,000 at March 31, 1997, an increase of $18,000 from the March 31, 1996 balance. The allowance was $883,536 at December 31, 1996, an increase of $17,363 from the $866,173 balance at December 31, 1995. The allowance was $940,081 at December 31, 1994. The ratio of allowance for loan losses to nonperforming assets totaled 658% at March 31, 1997; 1163% at December 31, 1996; 52% at December 31, 1995, and 36 % at December 31, 1994. Management evaluates nonperforming loans relative to their collateral value and makes appropriate reductions in the carrying value of those loans based on that review. Management believes, based on its review, that ICBI has adequate reserves to absorb any necessary future write-down on these loans. The following table shows the balance and percentage of ICBI's allowance for loan losses allocated to each major category of loans:
Allocation of Allowance for Loan Losses Commercial, Real Estate Real Estate Financial, and Agricultural Construction Mortgage Consumer ------------------------- ------------------------------------------------ ----------------------- Reserve Percent of Reserve Percent of Reserve Percent of Reserve Percent of for Loan in for Loan in for Loan in for Loan in Credit Category to Credit Category to Credit Category to Credit Category to Losses Total Loans Losses Total Loans Losses Total Loans Losses Total Loans ------ ----------- ------ ----------- ------ ----------- ------ ----------- (In thousands) March 31, 1997 224 12.88% 198 3.91% 146 74.94% 353 8.27% 1996 179 10.55% 177 1.91% 310 77.52% 237 10.02% December 31, 1996 244 12.31% 101 4.42% 182 74.79% 357 8.48% 1995 246 12.62% 23 2.21% 346 74.07% 251 11.10% 1994 363 11.37% 17 3.05% 342 73.84% 218 11.74%
ICBI has allocated the allowance according to the amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within each of the above categories of loans. The allocation of the allowance as shown in the table above should not be interpreted as an indication that loan losses in future years will occur in the same proportions or that the allocation indicates future loan loss trends. Additionally, the portion allocated to each loan category is not the total amount that may be available for the future losses that could occur within such categories since the total allowance is a general allowance applicable to the entire portfolio. Nonperforming Assets Total nonperforming assets, which consist of nonaccrual and restructured loans and foreclosed property, were $140,000 at March 31, 1997, an increase of $64,000 from the December 31, 1996 balance. Total nonperforming assets were $76,000 at December 31, 1996, a decrease of $1,578,000 from the December 31, 1995 balance. Nonperforming assets at December 31, 1994, decreased $481,000 from the $3,098,000 December 31, 1993 balance. The majority of the $1,578,000 1996 decrease reflects the return -69- of several loans to accrual status. Because the loans were current with repayment and adequately secured, regulators, during their 1996 examination, recommended returning the loans to accrual status. Nonperforming Assets
Three months ended March 31, December 31, -------------------------------------------------------------------------- 1997 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- (In thousands) Nonaccrual loans $ 140 $ 76 $ 1,654 $ 1,700 $ 2,138 $ 2,194 Restructured loans - - - - - - Foreclosed property - - - 917 960 1,325 ------------ ---------- ---------- ---------- ----------- ------------ Total nonperforming assets $ 140 $ 76 $ 1,654 $ 2,617 $ 3,098 $ 3,519 ============ ========== ========== ========== =========== ============ Allowance for loan losses to period end loans 0.97% 0.93% 1.07% 1.18% 1.21% 1.27% Allowance for loan losses to nonperforming assets 658% 1163% 52% 36% 28% 24% Nonperforming assets to period end loans 0.15% 0.08% 2.04% 3.28% 4.35% 5.25% Net charge offs to average loans 0.02% 0.05% 0.16% -0.11% 0.32% 0.53%
Loans are placed on nonaccrual status when loans become 90 days past due unless they are well-secured and collection of principal and interest will occur. There are three negative implications for earnings when a loan is placed on nonaccrual status. All interest accrued but unpaid at the date the loan is placed on nonaccrual status is either deducted from interest income or written off as a loss. Second, accrual of interest is discontinued until it becomes certain that both principal and interest can be repaid or payments of both interest and principal have been made consistently. Third, there may be actual losses which necessitate additional provisions for loan losses charged against earnings. During 1996, approximately $1,993 in additional interest income would have been recorded if ICBI's nonaccrual loans had been current and in accordance with their original terms. During 1995, approximately $21,708 of additional interest income would have been recorded if ICBI's nonaccrual loans had been current and in accordance with their original terms. At March 31, 1997, potential problem loans totaled $282,092. At December 31, 1996, potential problem loans were approximately $170,180. These loans are subject to regular management attention and their status is reviewed on a regular basis. Several of the potential problem loans identified at December 31, 1996 are unsecured consumer loans. However, the majority of the balance of the total problem loans is secured by real estate and automobiles. ICBI expects loan growth to continue at similar rates to those experienced during 1996. -70- Securities The carrying value of the securities portfolio was $52.0 million at March 31, 1997. The carrying value at December 31, 1996 was $52.4 million, compared to $48.3 million at December 31, 1995. The $4.1 million change represents an increase of 8.5% in securities, compared to the $6.9 million, or 16.6%, increase experienced in 1995 over 1994 total carrying value. The increase in 1996 over 1995 is primarily due to the $2.3 million increased investment in mortgaged-backed securities. At March 31, 1997, ICBI held bonds issued from the Commonwealth of Virginia and its political subdivisions having an aggregate book value of $3,847,536 and an aggregate market value of $3,801,347. These aggregate holdings exceeded 10% of ICBI's stockholder's equity at March 31, 1997. At December 31, 1996, ICBI held bonds issued from the Commonwealth of Virginia and its political subdivisions which had an aggregate book value of $4,923,597 and an aggregate market value of $4,107,144. These aggregate holdings exceeded 10% of ICBI's stockholder's equity at December 31, 1996. The securities portfolio consists of two components, securities held to maturity and securities available for sale. Securities are classified as held to maturity when management has the intent and ICBI has the ability at the time of purchase to hold the securities to maturity. Securities held to maturity are carried at cost adjusted for amortization of premiums and accretion of discounts. Securities to be held for indefinite periods of time are classified as available for sale and accounted for at fair market value. Securities available for sale include securities that may be sold in response to changes in market interest rates, changes in the security's prepayment risk, increases in loan demand, general liquidity needs and other similar factors. Financial Accounting Standards Board Pronouncement No. 115, effective January 1, 1994, required ICBI to show the effect of market changes in the value of securities available for sale (AFS). The market value of AFS securities at March 31, 1997 and December 31, 1996 was $35 million. The unrealized loss on the AFS securities amounted to $651,176 at March 31, 1997 and $519,279 at December 31, 1996. This loss is reflected, net of income taxes, as a separate line item in shareholders' equity. 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 does hold in its loan and securities portfolio investments that adjust or float according to changes in the "prime" lending rate or other indexes that are not considered speculative, but are necessary for good asset/liability management. -71- Investment Portfolio and Securities Available for Sale The carrying value of investment securities at the dates indicated was: March 31, December 31, --------- ------------------------------ (Dollars in thousands) 1997 1996 1995 1994 ---- ---- ---- ---- U.S. Government securities $ 2,510 $ 3,012 $ 4,367 $ 5,630 States and political subdivisions 13,241 13,396 11,396 11,523 Mortgaged-backed securities 854 958 1,248 1,646 ------- ------- ------- ------- Total $16,605 $17,366 $17,011 $18,799 ======= ======= ======= ======= The carrying value of securities available for sale at the dates indicated was: March 31, December 31, --------- ------------------------------ (Dollars in thousands) 1997 1996 1995 1994 ---- ---- ---- ---- U.S. Government securities $ 4,820 $ 4,950 $ 3,874 $ 566 Mortgaged-backed securities 27,892 26,521 23,886 21,911 Other securities 2,741 3,565 3,519 135 ------- ------- ------- ------- Total $35,453 $35,036 $31,279 $22,612 ======= ======= ======= ======= -72- The amortized cost and fair value of securities by contractual maturity are shown below. Maturity Distribution and Yields of Securities March 31, 1997 Taxable-Equivalent Basis
Due in 1 year Due after 1 through Due after 5 through or less 5 years 10 years ------------------------------------------------------------------------------- (Dollars in thousands) Amount Yield Amount Yield Amount Yield ------ ----- ------ ----- ------ ----- Securities held for investment: U.S. Government securities $ 502 4.83% $ 2,008 4.04% $ - - Mortgage backed securities - - 87 7.72% 55 7.72% Other taxable securities - - - - - - ------- --------- ------- Total taxable 502 4.83% 2,095 4.19% 55 7.72% Tax-exempt securities (1) 967 6.09% 4,659 6.86% 6,235 7.22% ------- --------- ------- Total $ 1,469 5.66% $ 6,754 6.03% $ 6,290 7.23% ------- --------- ------- Securitites available for sale: U.S. Government securitites $ - - $ 835 6.13% $ 3,859 7.42% Mortgage backed securities - - 2,353 5.24% 8,891 5.88% Corporate preferred - - - - - - ------- --------- ------- Total $ - - $ 3,188 5.48% $12,750 6.35% ------- --------- ------- Total securities $ 1,469 5.39% $ 9,942 5.86% $19,040 6.64% ======= ========= =======
Due after 10 years and Equity Securities Total ------------------------------------------------------------------- (Dollars in thousands) Amount Yield Amount Yield ------ ----- ------ ----- Securities held for investment: U.S. Government securities $ - - $ 2,510 4.20% Mortgage backed securities 712 7.05% 854 7.16% Other taxable securities - - - - ------ -------- Total taxable 712 7.05% 3,364 4.95% Tax-exempt securities (1) 1,380 7.79% 13,241 7.07% ------ -------- Total $ 2,092 7.53% $ 16,605 6.64% ------ -------- Securitites available for sale: U.S. Government securitites $ - - $ 4,694 7.14% Mortgage backed securities 15,811 6.46% 27,055 6.17% Corporate preferred 2,996 12.26% 2,996 11.86% ------ -------- Total $18,807 7.38% $ 34,745 6.79% ------ -------- Total securities $20,899 7.39% $ 51,350 6.74% ======= ========
(1) Yields on tax- exempt securitites have been computed on a tax - equivalent basis (2) Excludes Federal Reserve Stock of $134,400 and Federal Home Loan Bank Stock of $573,600. Deposits ICBI has made an effort in recent years to increase core deposits and control the cost of funds. Deposits provide funding for investments in loans and securities. The interest paid for deposits must be managed carefully to control the level of interest expense. As shown below, average total deposits grew by 8.1% from December 31, 1996 to March 31, 1997, and 10.1% in 1996 and 5.7% in 1995. Growth experienced in the certificates of deposits less than $100,000 category was the greatest contributor to the 1996 increase in deposits. The average aggregate interest rate paid on interest-bearing deposits was 3.99% at March 31, 1997 and 4.11% in 1996, compared to 4.05% for 1995 and 3.36% for 1994. Recent deposit growth is the result of ICBI's branching efforts. After 70 years of a main office in Middleburg, Virginia with no branches, in 1994, ICBI opened its first branch in a neighboring community. In early 1996, ICBI established its second branch, in Leesburg, Virginia. Although still operating from a temporary facility, the second branch has substantially contributed to deposit growth. ICBI will continue funding assets with deposit liability accounts and focus upon core deposit growth as the primary source for liquidity and stability. ICBI offers individuals and small to medium sized businesses a variety of deposit accounts, including demand deposit, interest checking, money market, savings and time deposit accounts. -73- The following table is summary of average deposits and average rates paid: Deposits and Rates Paid
Three months ended March 31, December 31, --------------------- --------------------------------------------------------------------- 1997 1996 1995 1994 --------------------- ----------------------------------------------- --------------------- Amount Rate Amount Rate Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- ------ ---- (Dollars in thousands) Noninterest-bearing deposits $ 22,298 - $ 19,211 - $ 15,691 - $ 14,467 - Interest-bearing accounts: Interest checking 18,779 1.87% 18,348 2.13% 17,919 2.43% 17,057 2.43% Regular savings 15,159 3.75% 14,562 3.85% 14,003 3.81% 13,356 3.40% Money market accounts 28,944 2.90% 28,735 3.02% 26,980 3.09% 29,817 2.69% Time deposits: Less than $ 100,000 37,242 5.68% 34,760 5.46% 28,775 5.43% 23,530 4.26% $ 100,000 and more 15,502 4.75% 12,013 6.14% 12,523 5.50% 11,424 4.59% -------- -------- -------- ------- Total interest-bearing deposits 115,626 3.99% 108,418 4.11% 100,200 4.05% 95,184 3.3% -------- -------- -------- ------- Total $ 137,924 $ 127,629 $ 115,891 $ 109,651 ========== ========== ========== ==========
ICBI neither purchases brokered deposits nor solicits deposits from sources outside its primary market area. In 1997, deposit levels are expected to continue to increase over those at the end of December 31, 1996 with the completion of the Leesburg Branch facility. The following is a summary of the maturity distribution of certificates of deposit equal to and greater than $100,000 as of March 31, 1997 and December 31, 1996: Maturities of CD's of $100,000 and Over
Within Three to Six to Over Percent Three Six Twelve One of Total Months Months Months Year Total Deposits ------------ ------------ ------------- ------------ ------------ ------------ (In thousands) At March 31, 1997 $ 1,017 $ 889 $ 1,147 $ 12,515 $ 15,568 11.00% At December 31, 1996 $ 2,023 $ 1,456 $ 2,323 $ 8,211 $ 14,013 10.00%
Capital Resources The adequacy of the ICBI's capital is reviewed by management on an ongoing basis with reference to the size, composition and quality of the ICBI's asset and liability levels and consistent with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and absorb potential losses. -74- The Federal Reserve, along with the Federal Deposit Insurance Corporation, have adopted capital guidelines to supplement the definitions of capital for regulatory purposes and to establish minimum capital standards. Specifically, the guidelines categorize assets and off-balance sheet items into four risk-weighted categories. The minimum ratio of qualifying total capital to risk-weighted assets is 8.0%, of which at least 4.0% must be Tier I capital, composed of common equity and retained earnings. ICBI had a ratio of risk-weighted assets to total capital of 19.8% at March 31, 1997 and 20.2% at December 31, 1996. The ratio of risk-weighted assets to Tier I capital was 18.9% at March 31, 1997 and 19.3% at December 31, 1996. Both of these exceed the capital requirements adopted by the federal bank regulatory agencies. Analysis of Capital
Three months ended March 31, December 31, ---------------- --------------------------------- 1997 1996 1995 ---------------- --------------- ---------------- Tier 1 Capital: Common stock $ 4,185 $ 4,299 $ 4,299 Capital surplus 889 1,411 1,411 Retained earnings 13,424 12,817 11,508 Unrealized net loss on equity securities (25) (35) - --------- --------- --------- Total Tier 1 capital 18,473 18,492 17,218 Tier 2 Capital: Allowance for loan losses 921 844 866 --------- --------- --------- Total tier 2 capital 921 844 866 Total risk-based capital $ 19,394 $ 19,336 $ 18,084 ================ =============== ================ Risk weighted assets $ 97,790 $ 95,921 $ 82,580 CAPITAL RATIOS: Tier 1 risk-based capital ratio 18.9% 19.3% 20.9% Total risk-based capital ratio 19.8% 20.2% 21.9% Tier 1 capital to average total assets 11.3% 11.7% 12.4%
Liquidity Liquidity represents an institution's ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, securities classified for available for sale and loans and investments maturing within one year. As a result of ICBI's management of liquid assets and the ability to generate liquidity through liability funding, management -75- believes the 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 a large regional and a money-center banking institutions totaling in excess of $8 million, of which none was borrowed at March 31, 1997. ICBI has not borrowed Federal Funds during the first quarter of 1997. Federal funds borrowed during 1996 averaged $73,000. At March 31, 1997, the Bank had $2.1 million of outstanding borrowings pursuant to securities repurchase agreement transactions, with maturities of one day. The Bank has a credit line totaling $16 million from the Federal Home Loan Bank that can be utilized for short and/or long-term borrowing. At December 31, 1996, cash, interest-bearing deposits with financial institutions, federal funds sold, securities available for sale, investments and loans maturing within one year were 50.96% of total deposits and other liabilities. ICBI joined the Federal Home Loan Bank system in 1995 in order to enter a program of long-term and short-term borrowing which is restricted to be invested in Residential Housing Finance Assets (RHFA). RHFA are defined as (1) Loans secured by residential real property; (2) Mortgage-backed securities; (3) Participations in loans secured by residential real property; (4) Loans financed by Community Investment Program advances; (5) Loans secured by manufactured housing, regardless of whether such housing qualifies as residential real property; or (6) Any loans or investments which the Federal Housing Finance Board and ICBI, in their discretion, otherwise determine to be residential housing finance assets. In 1996, short-term borrowings from the Federal Home Loan Bank system for RHFA investments were $4 million maturing in 1997. Accounting Rule Changes FASB Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," was issued in June, 1996 and establishes, among other things, new criteria for determining whether a transfer of financial assets in exchange for cash or other consideration should be accounted for as a sale or as a pledge of collateral in a secured borrowing. Statement 125 also establishes new accounting requirements for pledged collateral. As issued, Statement 125 is effective for all transfers and servicing of financial assets and extinguishments of liabilities occurring after December 1996. FASB Statement No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125," defers for one year the effective date (a) paragraph 15 of Statement 125 and (b) for repurchase agreement, dollar-roll, securities lending, or similar transactions, of paragraph 9-12 and 237(b) of Statement 125. The effects of these Statements on the Company's consolidated financial statements are not expected to be material. -76- DESCRIPTION OF ICBI CAPITAL STOCK ICBI is authorized to issue up to 10,000,000 shares of common stock, par value $5.00 per share. ICBI had 837,149 shares of common stock outstanding at March 31, 1997, held by 455 shareholders of record. The following summary description of the capital stock of ICBI is qualified in its entirety by reference to the Articles of Incorporation of ICBI (the "ICBI Articles") and ICBI's Bylaws, copies of which are available for inspection as exhibits to the registration statement filed with the Securities and Exchange Commission (the "SEC") in connection with this Proxy Statement/Prospectus. The holders of ICBI Common Stock are entitled to one vote per share on all matters submitted to a vote of shareholders. Holders of ICBI Common Stock are entitled to receive dividends when and as declared by the ICBI Board of Directors from funds legally available therefor. All outstanding shares of ICBI Common Stock are fully paid and non-assessable. Holders of ICBI Common Stock are not entitled to cumulative voting rights. Therefore, the holders of a majority of the shares voted in the election of directors can elect all of the directors then standing for election subject to the rights of preferred stock, if and when issued. Holders of ICBI Common Stock have no preemptive or other subscription rights, and there are no conversion rights or redemption or sinking fund provisions with respect to ICBI Common Stock. COMPARATIVE RIGHTS OF SECURITY HOLDERS General ICBI is a Virginia corporation subject to the provisions of the Virginia SCA. TTC is a Virginia corporation and also is subject to the provisions of the Virginia SCA. Shareholders of TTC, whose rights are governed by TTC's Articles of Incorporation and Bylaws and by the Virginia SCA, will become shareholders of ICBI upon consummation of the Reorganization. The rights of such shareholders as shareholders of ICBI will then be governed by the Articles of Incorporation and Bylaws of ICBI and by the Virginia SCA. Except as set forth below, there are no material differences between the rights of a TTC shareholder under its Articles and Bylaws and under the Virginia SCA, on the one hand, and the rights of an ICBI shareholder under the Articles of Incorporation and Bylaws of ICBI and under the Virginia SCA, on the other hand. This summary is qualified in its entirety by reference to the Articles of Incorporation and Bylaws of TTC and to the Virginia SCA and the Articles of Incorporation and Bylaws of ICBI and the Virginia SCA. Amendment of Articles of Incorporation or Bylaws The Virginia SCA provides that an amendment to a corporation's articles of incorporation must be approved by each voting group entitled to vote on the proposed amendment. Under Virginia law, an amendment to the corporation's articles of incorporation must be approved by more than two-thirds of all votes entitled to be cast by that voting group. However, the corporation's articles of incorporation may require a greater vote or a lesser vote, which may not be not less than a majority, by each voting group entitled to vote on the transaction. A corporation's board of directors may require a greater vote. -77- TTC. The TTC Articles do not address amendments, so TTC is governed by the provisions of the Virginia SCA. Accordingly, amendments to TTC's Articles of Incorporation must be approved by two-thirds of all votes entitled to be cast by each voting group. TTC's Bylaws provide that the power to amend the Bylaws is vested in the Board of Directors. Thus, TTC's Bylaws may be amended by a majority of the directors present at a meeting which was properly called and at which a quorum is present. Also, under Virginia law, the Bylaws may be amended by action of the majority of the shareholders. ICBI. The Articles of Incorporation of ICBI provide that amendments must be approved by a majority of the votes entitled to be cast by each voting group entitled to vote and, unless such action is approved by at least two-thirds of the Continuing Directors, by holders of more than two-thirds of the issued and outstanding shares of ICBI Common Stock (the vote generally required under Virginia law). The term "Continuing Director" is defined in the Articles of Incorporation of ICBI to mean (i) any individual who was an initial director of ICBI or (ii) who has been elected to the Board of Directors of ICBI at an annual meeting of the shareholders of ICBI more than one time or (iii) who has been elected to fill a vacancy on the Board of Directors of ICBI and received the affirmative vote of a majority of the Continuing Directors then on the Board of Directors and thereafter elected to the Board of Directors at an annual meeting of shareholders at least one time. ICBI's Bylaws may be amended by a majority vote of the directors in office or by the shareholders. Mergers, Consolidations and Sales of Assets. ICBI. The Articles of Incorporation of ICBI provide that a plan of merger or share exchange or a direct or indirect sale, lease, exchange or other disposition of all or substantially all of the property of ICBI not in the ordinary course of business may be approved by the same vote that is required in order to amend the Articles of Incorporation. Additionally, consistent with Virginia law, the Board of Directors of ICBI may condition its submission of such plan of merger or share exchange or such a sale or disposition of assets to the shareholders on any basis, including the requirement of a greater vote than the required vote described above. A proposed merger, share exchange or sale of substantially all assets of ICBI that is favored by two-thirds of the Continuing Directors could be adopted as long as a majority (rather than two-thirds) of the outstanding shares entitled to vote in each voting group entitled to vote are voted in favor of the proposed action. In addition to requiring the affirmative vote of a majority of the shares entitled to vote in each voting group entitled to vote, the Articles of Incorporation of ICBI would require that, unless a proposed action is approved by at least two-thirds of the Continuing Directors, more than two-thirds of the issued and outstanding shares vote in favor of the proposed action. The purpose of such additional requirements is to ensure that if a proposed major corporate action does not have the support of a board of directors who can provide continuity to and an in-depth knowledge of the business of ICBI, the action must be supported by more than two-thirds of the issued and outstanding shares of ICBI Common Stock. TTC. The Articles of Incorporation of TTC provide that a plan of merger or share exchange or sale, lease or exchange or other disposition of all or substantially all of the property of TTC not in the ordinary course of business may be approved by a majority of the shareholders of entitled to vote on such matter. -78- Authorized Capital TTC. TTC's Articles of Incorporation (the "TTC Articles") authorize the issuance of up to 500,000 shares of common stock, par value $2.50 per share, of which 276,600 shares were issued and outstanding as of March 31, 1997. TTC is not authorized to issue shares of preferred stock. ICBI. ICBI is authorized to issue 10,000,000 shares of common stock, par value $5.00 per share, of which 837,149 shares were issued and outstanding as of March 31, 1997. See "Description of ICBI Capital Stock" for additional information. Size and Classification of Board of Directors TTC. TTC's Bylaws provide that its Board of Directors shall consist of no less than five and no more than 12 individuals. Under Virginia law a majority of the directors must be residents of Virginia and each director must own TTC stock having a par value of not less than $2,000. The entire Board of Directors is elected at each annual meeting of shareholders. ICBI. ICBI's Bylaws provide for a board of directors consisting of 11 individuals. Directors are elected annually to serve until their successors are elected and qualified. Vacancies and Removal of Directors TTC. TTC's Bylaws provide that any vacancy on the board of directors may be filled by an election by the active board members. TTC's Articles of Incorporation contain no provision relating to removal of directors. Therefore, under the Virginia SCA, shareholders may remove directors with or without cause at a special meeting of shareholders. ICBI. Under the Articles of Incorporation of ICBI, vacancies occurring in the Board of Directors, including vacancies created by newly created directorships resulting from an increase in the number of directors, may be filled by the affirmative vote of a majority of the remaining directors, even if less than a quorum, until the next election of directors by shareholders. The Articles of Incorporation of ICBI allow removal of directors from office, with or without cause, if at least 75% of the votes cast are cast in favor of removal. Shareholders of ICBI may not call a special meeting for the purpose of removing a director. Director Liability and Indemnification The Virginia SCA provides that in any proceeding brought by or in the right of a corporation or brought by or on behalf of shareholders of the corporation, the damages assessed against an officer or director arising out of a single transaction, occurrence or course of conduct may not exceed the lesser of (1) the monetary amount, including the elimination of liability, specified in the articles of incorporation or, if approved by the shareholders, in the bylaws as a limitation on or elimination of the liability of the officer or director; or (2) the greater of (a) $100,000 or (b) the amount of cash compensation received by the officer or director from the corporation during the twelve months immediately preceding the act or omission for which liability was imposed. The liability of an officer or director is not limited under the Virginia SCA or a corporation's articles of incorporation and bylaws if the officer or director engaged in willful misconduct or a knowing violation of the criminal law or of any federal or state securities law. -79- TTC. TTC's Articles of Incorporation provide that each director and officer shall be indemnified by TTC against liability (including amounts paid in settlement) by reason of having been such a director or officer, whether or not then continuing so to be, and against all expenses (including counsel fees) reasonably incurred by him in connection therewith, except in relation to matters as to which he shall have been finally adjudged to be liable by reason of having been guilty of willful misconduct or a knowing violation of the criminal law. The Articles also provide that the indemnification rights set forth therein shall also extend to every person who may have served at TTC's request as a director, officer or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise. The Articles of Incorporation do not limit the liability of TTC Directors. ICBI. The Articles of Incorporation of ICBI provide that to the full extent that Virginia law permits the limitation or elimination of the liability of directors and officers, they will not be liable to ICBI or its shareholders for any money damages in excess of one dollar. At this time, Virginia law does not permit any limitation of liability if a director engages in willful misconduct or a knowing violation of the criminal law or any federal or state securities law. To the fullest extent permitted by Virginia law, ICBI's Articles of Incorporation require it to indemnify any director or officer of ICBI who is made a party to any proceeding because he was or is a director or officer of ICBI against any liability, including reasonable expenses and legal fees, incurred in the proceeding. Under ICBI's Articles of Incorporation, "proceeding" is broadly defined to include pending, threatened or completed actions of all types, including actions by or in the right of ICBI. Similarly, "liability" is defined to include, not only judgments, but also settlements, penalties, fines and certain excise taxes. ICBI's Articles of Incorporation also provide that ICBI may, but is not obligated to, indemnify its other employees or agents. ICBI must indemnify any person who or is or was serving at the written request of ICBI as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, the full extent provided by Virginia law. The indemnification provisions also require ICBI to pay reasonable expenses incurred by a director or officer of ICBI in a proceeding in advance of the final disposition of any such proceeding, provided that the indemnified person undertakes to repay ICBI if it is ultimately determined that such person was not entitled to indemnification. Virginia law does not permit indemnification against willful misconduct or a knowing violation of the criminal law. The rights of indemnification provided in ICBI's Articles of Incorporation are not exclusive of any other rights which may be available under any insurance or other agreement, by vote of shareholders or disinterested directors or otherwise. In addition, the Articles of Incorporation authorize ICBI to maintain insurance on behalf of any person who is or was a director, officer, employee or agent of ICBI, whether or not ICBI would have the power to provide indemnification to such person. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the Holding Company pursuant to the foregoing provisions, the Holding Company has been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is therefore unenforceable. Special Meetings of Shareholders TTC. TTC's Bylaws provide that special meetings of shareholders may be held on the call of the Chairman or Vice Chairman of the Board, the President, a majority of the Board or by holders of at least 20% of the TTC Common Stock. -80- ICBI. The Bylaws of ICBI provide that special meetings of shareholders may be held whenever called by the President, Chairman of the Board of Directors or by the Board of Directors, itself, which means that the shareholders of ICBI do not have the right to call special meetings. Director Nominations TTC. TTC's Bylaws do not prescribe procedures for directors' nominations. It is the practice of TTC for the board to nominate directors for shareholders' consideration. ICBI. ICBI's Bylaws set forth certain advance notice or information requirements and time limitations on any director nomination or any new business which a shareholder wishes to propose for consideration at an annual or special meeting of shareholders. Any director nomination must be stated in writing and filed with the Secretary of ICBI at least 60 days prior to the date of the shareholder meeting. The notice must contain certain information relating to the nominee for director. The presiding officer of the meeting must reject any nomination proposal not timely made or supported by insufficient information. The Bylaws of ICBI require that the shareholder's notice set forth as to each nominee (i) the name, age, business address and residence address of such nominee, (ii) the principal occupation or employment of such nominee, (iii) the class and number of shares of ICBI which are beneficially owned by each nominee, and (iv) any other information relating to such nominee that is required under federal securities laws to be disclosed in solicitations of proxies for the election of directors, or is otherwise required (including, without limitation, such nominee's written consent to being named in a proxy statement as nominee and to serving as a director if elected). The Bylaws of ICBI further require that the shareholder's notice set forth as to the shareholder giving the notice (i) the name and address of such shareholder and the names and addresses of any other person or entity who owns, beneficially or of record, any shares of ICBI and who, to the knowledge of the shareholders giving notice, supports the nominee and (ii) the class and amount of such shareholder's (or other supporting entity's) beneficial ownership of ICBI capital stock. If the information supplied by shareholder is deficient in any material aspect or if the foregoing procedure is not followed, the chairman of the annual meeting may determine that such shareholder's nomination should not be brought before the annual meeting and that such nominee shall not be eligible for election as a director of ICBI. Shareholder Proposals TTC. The Articles of Incorporation and Bylaws of TTC do not contain any requirements relating to the timing or content of shareholder proposals for shareholder vote. ICBI. Under ICBI's Bylaws, notice of a proposed nomination or a shareholder proposal meeting certain specified requirements must be received by ICBI not less than 60 nor more than 90 days prior to any meeting of shareholders called for the election of directors, provided in each case that if fewer than 70 days' notice of the meeting is given to shareholders, such written notice shall be received not later than the close of business of the tenth day following the day on which notice of the meeting was mailed to shareholders. Shareholder Voting Rights in General The Virginia SCA generally provides that shareholders do not have cumulative voting rights unless those rights are provided in the corporation's articles. The Virginia SCA requires the approval of a majority of a corporation's board of directors and the holders of more than two-thirds of all the votes -81- entitled to be cast by each voting group entitled to vote on any plan of merger or consolidation, plan of share exchange or sale of substantially all of the assets of a corporation not in the ordinary course of business. The Virginia SCA also specifies additional voting requirements for Affiliated Transactions which are discussed below under "State Anti-Takeover Statutes." TTC. TTC's Articles of Incorporation do not provide shareholders cumulative voting rights for the election of directors. Therefore, the holders of a majority of the shares voted in the election of directors can elect all of the directors then standing for election. The holders of TTC Common Stock are entitled to one vote per share on all matters submitted to a vote of shareholders. Holders of TTC Common Stock have no preemptive or other subscription rights, and there are no conversion rights or redemption or sinking fund provisions with respect to the TTC Common Stock. ICBI. See "Description of ICBI Capital Stock." State Anti-Takeover Statutes The Virginia SCA restricts transactions between a corporation and its affiliates and potential acquirors. The summary below is necessarily general and is not intended to be a complete description of all the features and consequences of those provisions, and is qualified in its entirety by reference to the statutory provisions contained in the Virginia SCA. Affiliated Transactions. The Virginia SCA contains provisions governing "Affiliated Transactions" found at Sections 13.1-725 - 727.1 of the Virginia SCA. Affiliated Transactions include certain mergers and share exchanges, certain material dispositions of corporate assets not in the ordinary course of business, any dissolution of a corporation proposed by or on behalf of an Interested Shareholder (as defined below), and reclassifications, including reverse stock splits, recapitalizations or mergers of a corporation with its subsidiaries, or distributions or other transactions which have the effect of increasing the percentage of voting shares beneficially owned by an Interested Shareholder by more than 5%. For purposes of the Virginia SCA, an Interested Shareholder is defined as any beneficial owner of more than 10% of any class of the voting securities of a Virginia corporation. Subject to certain exceptions discussed below, the provisions governing Affiliated Transactions require that, for three years following the date upon which any shareholder becomes an Interested Shareholder, any Affiliated Transaction must be approved by the affirmative vote of holders of two-thirds of the outstanding shares of the corporation entitled to vote, other than the shares beneficially owned by the Interested Shareholder, and by a majority (but not less than two) of the Disinterested Directors (as defined below). A Disinterested Director is defined in the Virginia SCA as a member of a corporation's board of directors who (i) was a member before the later of January 1, 1988 or the date on which an Interested Shareholder became an Interested Shareholder and (ii) was recommended for election by, or was elected to fill a vacancy and received the affirmative vote of, a majority of the Disinterested Directors then on the corporation's board of directors. At the expiration of the three year period after a shareholder becomes an Interested Shareholder, these provisions require approval of the Affiliated Transaction by the affirmative vote of the holders of two-thirds of the outstanding shares of the corporation entitled to vote, other than those beneficially owned by the Interested Shareholder. The principal exceptions to the special voting requirement apply to Affiliated Transactions occurring after the three year period has expired and require either that the transaction be approved by a majority of the corporation's Disinterested Directors or that the transaction satisfy certain fair price requirements of the statute. In general, the fair price requirements provide that the shareholders must -82- receive the higher of: the highest per share price for their shares as was paid by the Interested Shareholder for his or its shares, or the fair market value of the shares. The fair price requirements also require that, during the three years preceding the announcement of the proposed Affiliated Transaction, all required dividends have been paid and no special financial accommodations have been accorded the interested Shareholder, unless approved by a majority of the Disinterested Directors. None of the foregoing limitations and special voting requirements applies to a transaction with an Interested Shareholder who has been an Interested Shareholder continuously since the effective date of the statute (January 26, 1988) or who became an Interested Shareholder by gift or inheritance from such a person or whose acquisition of shares making such person an Interested Shareholder was approved by a majority of the Disinterested Directors of the corporation. These provisions were designed to deter certain takeovers of Virginia corporations. In addition, the Virginia SCA provides that by affirmative vote of a majority of the voting shares other than shares owned by any Interested Shareholder, a corporation may adopt by meeting certain voting requirements, an amendment to its articles of incorporation or bylaws providing that the Affiliated Transactions provisions shall not apply to the corporation. Neither ICBI nor TTC has adopted such an amendment. Currently, no shareholder of TTC owns or controls 10% or more of TTC Common Stock, and there are no Interested Shareholders of TTC or ICBI as defined by the Virginia SCA. Control Share Acquisitions. The Virginia Control Share Acquisitions statute, found at Sections 13.1-728 - 728.8 of the Virginia SCA, also is designed to afford shareholders of a public company incorporated in Virginia protection against certain types of non-negotiated acquisitions in which a person, entity or group ("Acquiring Person") seeks to gain voting control of that corporation. With certain enumerated exceptions, the statute applies to acquisitions of shares of a corporation which would result in an Acquiring Persons ownership of the corporation's shares entitled to vote in the election of directors falling within any one of the following ranges: 20% to 33-1/3%, 33-1/3% to 50% or 50% or more (a "Control Share Acquisition"). Shares that are the subject of a Control Share Acquisition ("Control Shares") will not be entitled to voting rights unless the holders of a majority of the "Disinterested Shares" vote at an annual or special meeting of shareholders of the corporation to accord the Control Shares with voting rights. Disinterested Shares do not include shares owned by the Acquiring Person or by officers and inside directors of the TTC company. Under certain circumstances, the statute permits an Acquiring Person to call a special shareholders' meeting for the purpose of considering granting voting rights to the holders of the Control Shares. As a condition to having this matter considered at either an annual or special meeting, the Acquiring Person must provide shareholders with detailed disclosures about his identity, the method and financing of the Control Share Acquisition and any plans to engage in certain transactions with, or to make fundamental changes to, the corporation, its management or business. Under certain circumstances, the statute grants dissenters' rights to shareholders who vote against granting voting rights to the Control Shares. The Virginia Control Share Acquisitions Statute also enables a corporation to make provisions for redemption of Control Shares with no voting rights. A corporation may opt-out of the statute, which ICBI has done, by so providing in its articles of incorporation or bylaws. Among the acquisitions specifically excluded from the statute are acquisitions which are a part of certain negotiated transactions to which the corporation is a party and which, in the case of mergers or share exchanges, have been approved by the corporation's shareholders under other provisions of the Virginia SCA. Dissenters' Rights The provisions of Article 15 of the Virginia SCA provide shareholders of Virginia corporations certain rights of appraisal or dissent, for payment of the fair value of their shares in the event of mergers, -83- consolidations and certain other corporate transactions. The Virginia SCA provides dissenters' rights in a share exchange only to the acquired corporation, and not the acquiring corporation. Therefore, the shareholders of TTC have dissenters' rights and may exercise that right and obtain payment of the fair value of their shares upon compliance and in accordance with the provisions of Article 15 of the Virginia SCA. SUPERVISION AND REGULATION Banks and their holding companies are extensively regulated. ICBI is a bank holding company subject to supervision and regulation by the Federal Reserve and the SCC. ICBI's sole subsidiary is The Middleburg Bank, a Virginia chartered bank which is subject to supervision and regulation by the Federal Reserve and the SCC. TTC is a Virginia chartered independent trust company regulated by the SCC. The regulatory oversight of TTC and ICBI will not change as a result of the Reorganization, except that after the Reorganization TTC will be regulated as a trust subsidiary of ICBI and not as an independent trust company. The regulatory discussion is divided into two major subject areas, each of which have three subsections. First, the discussion addresses the general regulatory considerations governing holding companies. This 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. This focuses on the regulatory considerations of The Middleburg Bank and TTC. The discussion below is only a summary of the principal laws and regulations that comprise the regulatory framework before and after the Reorganization. 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 As a result of the Reorganization, TTC will become a subsidiary of ICBI. The Federal Reserve has jurisdiction under the BHC Act to approve any bank or nonbank acquisition, merger or consolidation proposed by a bank holding company. The BHC Act generally limits the activities of a bank holding company and its subsidiaries to that of banking, managing or controlling banks, or any other activity which is so closely related to banking or to managing or controlling banks as to be a proper incident thereto. Formerly the BHC Act prohibited the Federal Reserve from approving an application from a bank holding company to acquire shares of a bank located outside the state in which the operations of the holding company's banking subsidiaries are principally conducted, unless such an acquisition was authorized by statute of the state where the bank whose shares were to be acquired was located. However, under federal legislation enacted in 1994, the restriction on interstate acquisitions was abolished, effective September 1995. A bank holding company from any state now may acquire banks and bank holding companies located in any other state, subject to certain conditions, including nationwide and state imposed concentration limits. Banks also will be able to branch across state lines by acquisition, merger or de novo, effective June 1, 1997 (unless state law would permit such interstate branching at an earlier date), provided certain conditions are met, including that applicable state law must expressly permit such interstate branching. There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries that are designed to reduce potential loss exposure to the depositors of -84- the depository institutions and to the 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 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. Certain Regulatory Considerations of ICBI Following the Reorganization 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, 1996, ICBI would be considered "well capitalized." In addition, the federal regulatory agencies have established a minimum leverage capital ratio (Tier 1 capital to tangible assets). These guidelines provide for a minimum leverage capital ratio of 3% for banks and their respective holding companies that meet certain specified criteria, including that they have the highest regulatory examination rating and are not contemplating significant growth or expansion. All 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. The Reorganization will not materially affect the capital ratios of ICBI. 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 -85- nontraditional activities, as well as reflect the actual performance and expected risk of loss on multifamily mortgages. The Federal Reserve and the FDIC have jointly solicited comments on a proposed framework for implementing the interest rate risk component of the risk-based capital guidelines. Under the proposal, an institution's assets, liabilities, and off-balance sheet positions would be weighed by risk factors that approximate the instruments' price sensitivity to a 100 basis point change in interest rates. Institutions with interest rate risk exposure in excess of a threshold level would be required to hold additional capital proportional to that risk. In 1994, the federal bank regulatory agencies solicited comments on a proposed revision to the risk-based capital guidelines to take account of concentration of credit risk and the risk of nontraditional activities. The revision proposed to amend each agency's risk-based capital standards by explicitly identifying concentration of credit risk and the risk arising from nontraditional activities, as well as an institution's ability to manage those risks, as important factors to be taken into account by the agency in assessing an institution's overall capital adequacy. The proposal was adopted as a final rule by the federal bank regulatory agencies and subsequently became effective on January 17, 1995. ICBI does not expect the final rule to have a material impact on its capital requirements; however, the Federal regulatory agencies may, as an integral part of their examination process, require ICBI to provide additional capital based on such agency's judgments of information available at the time of examination. Limits on Dividends and Other Payments Certain state law restrictions are imposed on distributions of dividends to shareholders of ICBI. ICBI shareholders are entitled to receive dividends as declared by the ICBI Board of Directors. However, no such distribution may be made if, after giving effect to the distribution, it would not be able to pay its debts as they became due in the usual course of business or its total assets would be less than its total liabilities. There are similar restrictions with respect to stock repurchases and redemptions. The Middleburg 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. With the consent of the Federal Reserve, The Middleburg Bank paid dividends to ICBI totaling $4.6 million in 1995, $704,000 in 1996 and $635,292 for the first quarter of 1997. Dividends received by ICBI from The Middleburg Bank have been employed to fund dividends on ICBI Common Stock, repurchases of ICBI Common Stock totaling $1,647,828 from January 1, 1995 to March 31, 1997 and to purchase equity securities held by ICBI. Because of the level of dividends paid to ICBI by The Middleburg Bank, ICBI anticipates that Federal Reserve approval of dividend payments by The Middleburg Bank is likely to be necessary through 1999. It is possible that the Federal Reserve would not approve the payment of dividends from The Middleburg Bank to ICBI. However, because The Middleburg Bank is well-capitalized and profitable, ICBI does not believe that the Federal Reserve will refuse to permit future dividends to ICBI in amounts sufficient to fund the dividend payments on ICBI Common Stock. Although there can be no assurance of Federal Reserve approval, ICBI itself had approximately $3 million in securities available for sale and other liquid assets that might be used to fund dividend payments on ICBI Common Stock. 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 -86- declared or paid that would impair a Virginia chartered bank's paid-in capital. The Virginia 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. Following the consummation of the Reorganization, ICBI's ability to pay dividends to its shareholders will depend on its liquid assets (approximately $3,128,809 at December 31, 1996) and on dividends paid to it by The Middleburg Bank and TTC. Based on the current condition of ICBI and The Middleburg Bank, ICBI expects that the above-described provisions will have no impact on ICBI's ability to pay dividends to its shareholders. The Middleburg Bank In addition to the regulatory provisions regarding holding companies addressed above, The Middleburg Bank is subject to extensive regulation as well. The following discussion addresses certain primary regulatory considerations affecting The Middleburg Bank. The Middleburg Bank is regulated extensively under both federal and state law. The Middleburg Bank each is organized as a Virginia chartered banking corporation and is regulated and supervised by the Bureau of Financial Institutions of the Virginia SCC. As a member of the Federal Reserve System as well, The Middleburg Bank is regulated and supervised by the Federal Reserve Bank of Richmond. The Virginia SCC and the Federal Reserve Bank of Richmond conduct regular examinations of The Middleburg 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 Middleburg Bank must furnish the Virginia SCC and the Federal Reserve with periodic reports containing a full and accurate statement of its affairs. Supervision, regulation and examination of banks by these agencies are intended primarily for the protection of depositors rather than shareholders. Insurance of Accounts, Assessments and Regulation by the FDIC The Middleburg Bank's deposits are insured up to $100,000 per insured depositor (as defined by law and regulation) through the Bank Insurance Fund ("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 Middleburg 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 -87- is aware of no existing circumstances that could result in termination of The Middleburg 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. Community Reinvestment. The requirements of the Community Reinvestment Act ("CRA") affect The Middleburg 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 Middleburg Bank is meeting its obligations under the CRA. TTC. TTC operates as an independent trust company pursuant to the Virginia Trust Company Act ("VTCA"). As such, it is subject to supervision and regulation 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 regulated independent trust company, TTC is required, among other things, periodically to file reports of its financial condition and other reports or statements the SCC may specify. It also is subject to -88- periodic investigations and examinations (at least twice each three-year period) by the SCC and is required to pay fees in connection with such examinations and investigations set forth in the VTCA. Under the VTCA, the SCC has substantial discretion and latitude in the exercise of its supervisory and regulatory authority over TTC, including the statutory authority to promulgate regulations affecting the conduct of business and the operations of TTC. The SCC also has the ability to exercise substantial remedial powers with respect to TTC in the event it determines that TTC is not in compliance with applicable laws, orders or regulations governing its operations, is operating in an unsafe or unsound manner, or is engaging in any irregular practices. If the shareholders of TTC approve the Reorganization and it becomes effective, the business of TTC will be operated as a subsidiary of ICBI and will continue to be subject to substantially the same supervision and regulation by the SCC under the Virginia Trust Subsidiary Act. It also will be subject to supervision and regulation by the Federal Reserve under the Bank Holding Company Act. EXPERTS The financial statements of TTC included in this Proxy Statement/Prospectus have been so included in reliance on the report of Harris, Hardy & Johnstone, P.C., independent accountants, given upon their authority as experts in accounting and auditing. The consolidated financial statements of ICBI included in this Proxy Statement/Prospectus have been so included in reliance on the report of Yount, Hyde & Barbour, P.C., independent accountants, given upon their authority as experts in accounting and auditing. LEGAL OPINION The validity of ICBI Common Stock to be issued in connection with the Reorganization will be passed upon by Williams, Mullen, Christian & Dobbins. -89- PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma combined condensed financial statements give effect to the proposed Reorganization using the purchase method of accounting. Accordingly, the assets and liabilities of TTC have been recorded on ICBI's books at their fair market value and TTC's capital accounts have been eliminated. The amount by which the sum of (1) the cash paid by ICBI and (2) the market value of the ICBI Common Stock issued in the Reorganization exceeds the net fair market value of TTC's assets and liabilities has been allocated to goodwill. The pro forma balance sheet combines the balance sheet of ICBI and TTC as of March 31, 1997 and December 31, 1996. The pro forma income statements for the three months ended March 31, 1997 and for the year ended December 31, 1996 combine the results of operations of ICBI and TTC the for the respective periods. The pro forma balance sheet and income statements for three months ended March 31, 1997 and for the year ended December 31, 1996 have been derived from audited financial statements included elsewhere herein. The information shown is not necessarily indicative of the results of future operations of the combined entity or the actual results that would have occurred had the Reorganization been in effect during the periods presented. These statements and the related notes should be read in conjunction with the related consolidated financial statements of ICBI and TTC and the notes thereto appearing elsewhere herein. -90- ICBI and TTC PRO FORMA COMBINED CONDENSED BALANCE SHEET As of March 31, 1997 (in thousands)
Pro Forma ICBI TTC Adjustments Combined -------------- ------------- -------------- -------------- Assets Cash and due from banks $ 5,164 $ 22 $ 5,186 Securities 52,058 924 C 52,982 Federal funds sold 7,300 7,300 Loans, net 93,627 93,627 Property and equipment 5,179 51 5,230 Accrued interest receivable $ 1,936 B and other assets 2,814 157 (894) A 4,013 ------------- ------------- ------------- ------------- Total Assets $ 166,142 $ 1,154 $ 1,042 D $ 168,338 Liabilities and Shareholders' Equity Liabilities Deposits: Noninterest bearing $ 23,605 $ - $ - $ 23,605 Interest bearing 118,424 - - 118,424 ------------- ------------- ------------- ------------- Total deposits $ 142,029 $ - $ - $ 142,029 Securities sold under agreements to repurchase 2,115 - 2,115 Federal Home Loan Bank advances 3,000 - 3,000 Accrued interest and other liabilities 1,151 7 1,158 ------------- ------------- ------------- ------------- Total liabilities $ 148,295 $ 7 $ - $ 148,302 Shareholders' Equity Common Stock, par value $5 per share $ 4,185 $ - 346 B 4,531 Common Stock, par value $2.50 per share 691 (691) A Capital Surplus 889 2,190 1,590 B 2,479 (2,190) A Retained Earnings 13,424 (1,734) 1,987 A 13,677 Unrealized gain(loss) on securities available for sale, net (651) - (651) ------------- ------------- ------------- ------------- Total shareholders' equity $ 17,847 $ 1,147 $ 1,042 D $ 20,036 Total liabilities and shareholders/ equity $ 166,142 $ 1,154 $ 1,042 D $ 168,338 ============= ============== ============== =============
- ----------------------------------------------------------- A: Elimination of acquired company's equity under purchase accounting rules, which includes additional expenses of $253,000 anticipated to occur before closing. B: Market value of newly issued shares C: Securities are carried at both amortized cost for investments held to maturity and fair value for investments available for sale. The fair value for the entire portfolio as of March 31, 1997 was $52,786,900 D: Goodwill acquired in the transaction as of March 31, 1997. ICBI has reasonably estimated and included the remaining transaction costs, severance costs and operating losses prior to consummation of the merger. See notes to Pro Forma Condensed Financial Information -91- ICBI and TTC PRO FORMA COMBINED CONDENSED INCOME STATEMENT For the Three Months Ended March 31, 1997 (in thousands)
Pro Forma ICBI TTC Adjustments Combined ---------------- ----------- ------------------ ---------- Interest Income Interest and fees on loans $ 2,138 $ - $ - $ 2,138 Interest and fees on investment securities: Taxable interest income 36 14 50 Interest exempt from federal income taxes 160 160 Interest and dividends on securities available for sale: Taxable interest income 498 498 Dividends 69 69 Interest income on federal funds sold 57 57 -------------- ----------- ------------- ------------- Total interest income $ 2,958 $ 14 $ - $ 2,972 Interest Expense Interest expense on deposits $ 1,153 $ - $ - $ 1,153 Interest on short-term borrowings 24 24 Interest on Federal Home Loan Bank advances 50 50 -------------- ----------- ------------- ------------- Total interest expense $ 1,227 $ - $ - $ 1,227 Net interest income $ 1,731 $ 14 $ - $ 1,745 Provision for loan losses 55 - - 55 -------------- ----------- ------------- ------------- Net interest income after provision for loan losses $ 1,676 $ 14 $ - $ 1,690 Other Income Service charges, commissions and fees 205 $ - $ - $ 205 Trust fee income 23 184 (23) A 179 (5) A Investment securities (loss) - - Profits on securities available for sale 3 3 Other - - - - -------------- ----------- ------------- ------------- Total other income $ 231 $ 184 $ (28) $ 387 Other Expenses Salaries and employees' benefits $ 643 $ 110 $ - $ 753 Net occupancy and equipment expense 132 19 151 Advertising 29 - 29 FDIC insurance 8 - 8 Other operating expenses 265 254 (5) A 508 (23) A 17 B -------------- ----------- ------------- ------------- Total other expenses $ 1,077 $ 383 $ (11) $ 1,449 Income before taxes $ 830 $ (185) $ (17) $ 628 Income tax expense 223 - - 223 -------------- ----------- ------------- ------------- Net income $ 607 $ (185) $ (17) $ 405 EARNINGS PER SHARE $ 0.71 (0.67) C $ 0.44 AVERAGE SHARES OUTSTANDING 854,796 276,600 923,946
- ----------------------------------------------------------- A: Elimination of intercompany transactions B: Amortization of goodwill C: The per share loss of ($.67) for TTC for the three months ended March 31, 1997 includes all costs related to the Reorganization. The per share loss exclusive of these items was ($.03). See Notes to Pro Forma Condensed Financial Information -92- ICBI and TTC PRO FORMA COMBINED CONDENSED INCOME STATEMENT For the Year Ended December 31, 1996
For the Year Ended December 31, 1996 (in thousands) Pro Forma ICBI TTC Adjustments Combined ---------------- ---------------- ---------------- --------------- Interest Income Interest and fees on loans $ 8,137 $ - $ - $ 8,137 Interest and fees on investment securities: Taxable interest income 195 69 264 Interest exempt from federal income taxes 588 588 Interest and dividends on securities available for sale: Taxable interest income 1,793 1,793 Dividends 268 268 Interest income on federal funds sold 130 130 ---------------- ---------------- ---------------- --------------- Total interest income $ 11,111 $ 69 $ - $ 11,180 Interest Expense Interest expense on deposits $ 4,456 $ - $ - $ 4,456 Interest on short-term borrowings 5 5 Interest on Federal Home Loan Bank 186 186 ---------------- ---------------- ---------------- --------------- Total interest expense $ 4,647 $ - $ - $ 4,647 Net interest income $ 6,464 $ 69 $ - $ 6,533 Provision for loan losses 65 - - 65 ---------------- ---------------- ---------------- --------------- Net interest income after provision for $ 6,399 $ 69 $ - $ 6,468 loan losses Other Income Service charges, commissions and fees $ 677 $ - $ - $ 677 Trust fee income 29 557 (29) A 538 (19) A Investment securities (loss) (2) (2) Profits on securities available for sale 22 22 Other 16 5 - 21 ---------------- ---------------- ---------------- --------------- Total other income $ 742 $ 562 $ (48) $ 1,256 Other Expenses Salaries and employees' benefits $ 2,533 $ 587 $ - $ 3,120 Net occupancy and equipment expense 562 64 626 Advertising 164 11 175 FDIC insurance 2 - 2 Other operating expenses 1,122 355 (19) A 1,499 (29) A 70 B ---------------- ---------------- ---------------- --------------- Total other expenses $ 4,383 $ 1,017 $ 22 $ 5,422 Income before taxes $ 2,758 $ (386) $ (70) $ 2,302 Income tax expense 728 - - 728 ---------------- ---------------- ---------------- --------------- Net income $ 2,030 $ (386) $ (70) $ 1,574 EARNINGS PER SHARE $ 2.36 $ (1.40) $ 1.69 AVERAGE SHARES OUTSTANDING 859,838 276,600 928,988
- ------------------------------------------- A: Elimination of intercompany transactions B: Amortization of goodwill See Notes to Pro Forma Condensed Financial Information -93- Notes to Pro Forma Condensed Financial Information 1. The pro forma information presented is not necessarily indicative of the results of operations or the financial position that would have resulted had the Reorganization been consummated at the beginning of the period indicated, nor is it necessarily indicative of the results of operations in future periods or the future financial position of the combined entities. 2. The Reorganization involves the exchange of ICBI Common Stock having a value of $1,936,200 which at December 31, 1996 would represent approximately 69,150 shares, based on a market price of $28.00 per share, for all the assets and liabilities of TTC and will be accounted for on a purchase accounting basis. Pro forma condensed balance sheet amounts at December 31, 1996 and pro forma statements of income for the year ended December 31, 1996 include TTC historical balance sheet and income statement amounts. As a result, information was appropriately adjusted for the Reorganization by the (I) addition of 69,150 shares of ICBI Common Stock amounting to $345,750, at par value, (II) elimination of 276,600 shares of TTC Common Stock amounting to $691,500, (III) elimination of capital surplus of $2,189,750 and accumulated (deficit) of $(1,549,118), and (IV) increase in capital surplus of $1,590,450 to record the market value of newly issued shares. 3. The excess of purchase price over net assets acquired is calculated as follows:
Purchase Price.............................................. $ 1,936,200 Less: Fair market value of net assets acquired Cash (22,258) Other current assets (33,387) Investments (924,112) Property and equipment, net (51,304) Other assets (123,648) Current liabilities 7,353 Add: Remaining TTC transaction costs and operating losses 50,000 Write-off TTC organizational costs 123,648 ICBI transaction costs 80,000 ----------- Excess of purchase price over net assets acquired (a) $ 1,042,492
The basis of all assets and liabilities acquired assumed to approximate market value as of December 31, 1996. (a) Amortization of excess purchase price over net assets acquired are being amortized over the estimated life of 15 years. 4. Per share data has been computed based on the combined historical net income applicable to common shareholders of ICBI and TTC using the historical weighted average shares outstanding of ICBI and the weighted average shares, adjusted to equivalent shares of ICBI, of TTC, as of the earliest period presented. -94- Appendix A AGREEMENT AND PLAN OF REORGANIZATION between The Tredegar Trust Company and Independent Community Bankshares, Inc. and TTC Acquisition Subsidiary, Inc. March 28, 1997 TABLE OF CONTENTS ARTICLE 1 The Reorganization and Related Matters
Page 1.1 The Reorganization.......................................................................... 1 1.2 Management and Business of TTC and ICBI..................................................... 1 1.3 The Closing and Effective Date.............................................................. 2 1.4 Definitions................................................................................. 2 ARTICLE 2 Basis and Manner of Exchange 2.1 Conversion of Common Stock.................................................................. 4 2.2 Calculation and Payment of Merger Consideration............................................. 4 2.3 Manner of Exchange.......................................................................... 6 2.4 Fractional Shares........................................................................... 7 2.5 Dividends................................................................................... 7 2.6 Dissenting Shareholders..................................................................... 7 ARTICLE 3 Representations and Warranties 3.1 Representations and Warranties of TTC....................................................... 7 (a) Organization, Standing and Power................................................... 7 (b) Authority.......................................................................... 8 (c) Capital Structure.................................................................. 8 (d) Ownership of the Stock............................................................. 8 (e) Financial Statements............................................................... 8 (f) Absence of Undisclosed Liabilities................................................. 8 (g) Legal Proceedings; Compliance with Laws............................................ 9 (h) Regulatory Approvals............................................................... 9 (i) Labor Relations.................................................................... 9 (j) Tax Matters........................................................................ 9 (k) Property........................................................................... 9 (l) Reports............................................................................ 10 (m) Employee Benefit Plans............................................................. 10 (n) Investment Securities.............................................................. 10 (o) Certain Contacts................................................................... 10 (p) Insurance.......................................................................... 11 (q) Absence of Material Changes and Events............................................. 11 (r) Statements True and Correct........................................................ 11 (s) Brokers and Finders................................................................ 11 (t) Repurchase Agreements.............................................................. 11 (u) Administration of Trust Accounts, Consents......................................... 12 (v) Environmental Matters.............................................................. 12 3.2 Representations and Warranties of ICBI...................................................... 13 (a) Organization, Standing and Power................................................... 13 (b) Authority.......................................................................... 13 (c) Capital Structure.................................................................. 14 (d) Ownership of the ICBI Subsidiaries; Capital Structure of the ICBI Subsidiaries; and Organization of the ICBI Subsidiaries....................................................................... 14 (e) Financial Statements............................................................... 15 (f) Absence of Undisclosed Liabilities................................................. 15 (g) Legal Proceedings; Compliance with Laws............................................ 15 (h) Regulatory Approvals............................................................... 15 (i) Labor Relations.................................................................... 16 (j) Tax Matters........................................................................ 16 (k) Property........................................................................... 16 (l) Reports............................................................................ 16 (m) Employee Benefit Plans............................................................. 16 (n) Investment Securities.............................................................. 17 (o) Certain Contacts................................................................... 17 (p) Insurance.......................................................................... 18 (q) Loans, OREO and Allowance for Loan Losses.......................................... 18 (r) Absence of Material Changes and Events............................................. 19 (s) Statements True and Correct........................................................ 19 (t) Brokers and Finders................................................................ 19 (u) Repurchase Agreements.............................................................. 19 (v) Administration of Trust Accounts................................................... 19 (w) Environmental Matters.............................................................. 20 ARTICLE 4 Conduct Prior to the Effective Date 4.1 Access to Records and Properties............................................................ 21 4.2 Confidentiality............................................................................. 21 4.3 Registration Statement, Proxy Statement and Shareholder Approval............................ 21 4.4 Operation of the Business of TTC & ICBI..................................................... 22 4.5 Dividends................................................................................... 23 4.6 No Solicitation............................................................................. 23 4.7 Regulatory Filings.......................................................................... 23 4.8 Public Announcements........................................................................ 23 4.9 Notice of Breach............................................................................ 23 4.10 Reorganization Consummation................................................................. 24 ii ARTICLE 5 Additional Agreements 5.1 Benefit Plans............................................................................... 24 5.2 Indemnification............................................................................. 24 5.3 Transfer of Trust Business.................................................................. 25 5.4 NASDAQ Listing.............................................................................. 25 5.5 Expense Allocation.......................................................................... 25 ARTICLE 6 Conditions to the Reorganization 6.1 Conditions to Each Party's Obligations to Effect the Reorganization......................... 25 (a) Shareholder Approval............................................................... 25 (b) Regulatory Approvals............................................................... 25 (c) Registration Statement............................................................. 25 (d) Tax Opinion........................................................................ 25 (e) Opinions of Counsel................................................................ 26 (f) Legal Proceedings.................................................................. 26 6.2 Conditions to Obligations of ICBI........................................................... 26 (a) Representations and Warranties..................................................... 26 (b) Performance of Obligations......................................................... 26 (c) Affiliate Letters.................................................................. 26 (d) TTC Expenses; Operating Losses..................................................... 26 (e) TTC Options........................................................................ 26 6.3 Conditions to Obligations of TTC............................................................ 27 (a) Representations and Warranties..................................................... 27 (b) Performance of Obligations......................................................... 27 (c) Investment Banking Letter.......................................................... 27 ARTICLE 7 Termination 7.1 Termination................................................................................. 27 7.2 Effect of Termination....................................................................... 28 7.3 Non-Survival of Representations, Warranties and Covenants................................... 28 7.4 Expenses.................................................................................... 28 ARTICLE 8 General Provisions 8.1 Entire Agreement............................................................................ 29 8.2 Waiver and Amendment........................................................................ 29 iii 8.3 Descriptive Headings........................................................................ 29 8.4 Governing Law............................................................................... 29 8.5 Notices..................................................................................... 29 8.6 Counterparts................................................................................ 30 8.7 Severability................................................................................ 30 8.8 Subsidiaries................................................................................ 30
Exhibit A - Plan of Merger between TTC Acquisition Subsidiary, Inc. and The Tredegar Trust Company iv AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and entered into as of March 28, 1997 by and between The Tredegar Trust Company, a Virginia trust company with its principal office located in Richmond, Virginia ("TTC" or the "Surviving Corporation"), Independent Community Bankshares, Inc., a Virginia corporation with its principal office located in Middleburg, Virginia ("ICBI"), and TTC Acquisition Subsidiary, Inc., a Virginia trust company wholly-owned by ICBI ("Acquisition"). WITNESSETH: WHEREAS, TTC and ICBI desire to combine their respective businesses; and WHEREAS, the boards of directors of ICBI, Acquisition and TTC deem it advisable to merge Acquisition into TTC pursuant to this Agreement, the Plan of Merger attached as Exhibit A (the "Plan") and the provisions of Va. Code Section 13.1-716 whereby the holders of shares of common stock of TTC will receive common stock of ICBI and/or cash in exchange therefor; and WHEREAS, the parties desire to adopt a plan of reorganization in accordance with the provisions of Section 368(a) of the United States Internal Revenue code as amended (the "Code"); WHEREAS, ICBI and TTC have entered into a Stock Option Agreement dated February 5, 1997 (the "Option Agreement") pursuant to which TTC has granted ICBI an option to purchase shares of TTC common stock in accordance with the terms of such Option Agreement; and WHEREAS, the respective Boards of Directors of TTC and ICBI have resolved that the transactions described herein are in the best interests of the parties and their respective shareholders and have authorized and approved the execution and delivery of this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements set forth herein, the parties hereby agree as follows: ARTICLE 1 The Reorganization and Related Matters 1.1 The Reorganization. Subject to the terms and conditions of this Agreement, at the Effective Date as defined in Section 1.3 hereof, Acquisition will be merged with and into TTC (the "Reorganization"). The separate corporate existence of Acquisition shall thereupon cease, and TTC will be the Surviving Corporation in the Reorganization. At the Effective Date TTC shall become a subsidiary trust company of ICBI, within the meaning of Article 3.1, Chapter 2, Title 6.1 of the Code of Virginia, as amended. 1.2 Management and Business of TTC and ICBI. On the Effective Date, the directors, officers and employees of TTC on the Effective Date will remain the directors, officers and employees of the Surviving Corporation; provided that the President of ICBI will become Chairman of the Board of Directors of the Surviving Corporation. 1.3 The Closing and Effective Date. The closing of the transactions contemplated by this Agreement and the Plan shall take place at the offices of Williams, Mullen, Christian & Dobbins, 1021 East Cary Street, Richmond, Virginia or at such other place as may be mutually agreed upon by the parties. The Reorganization shall become effective on the date shown on the Certificate of Merger issued by the State Corporation Commission of Virginia effecting the Reorganization (the "Effective Date"). Unless otherwise agreed upon in writing by the chief executive officers of ICBI and TTC, subject to the conditions to the obligations of the parties to effect the Reorganization as set forth in Article 6, the parties shall use their best efforts to cause the Effective Date to occur on June 15, 1997. All documents required by the terms of this Agreement to be delivered at or prior to consummation of the Reorganization will be exchanged by the parties at the closing of the Reorganization (the "Reorganization Closing"), which shall be held on or before the Effective Date. Prior to the Reorganization Closing, Acquisition and TTC shall execute and deliver to the Virginia State Corporation Commission (the "SCC") Articles of Merger containing a Plan of Merger in substantially the form of Exhibit A hereto. 1.4 Definitions. Any term defined anywhere in this Agreement shall have the meaning ascribed to it for all purposes of this Agreement (unless expressly noted to the contrary). In addition: (a) the term "Contingent Merger Consideration" shall mean, with respect to each share of the common stock of TTC, par value $2.50 per share ("TTC Common Stock") issued and outstanding on the Effective Date a ratable share of the sum of (y) 4,940 shares of the common stock of ICBI, par value $5.00 per share ("ICBI Common Stock") and (z) the number of shares of ICBI Common Stock determined by dividing $138,300 by the Fair Market Value Per Share of ICBI Common Stock. (b) the term "Fair Market Value Per Share of ICBI Common Stock" shall mean the average of the last sale price for ICBI Common Stock as reported on the OTC Bulletin Board, the NASDAQ SmallCap Market or the NASDAQ National Market, as appropriate, for the ten trading day period ending on the tenth day prior to the date that the Contingent Merger Consideration is paid; provided, however, that if a transaction involving a proposed change of control of ICBI is announced during the thirty-six (36) month period referred to in Section 1.4(f), the measuring period shall be the ten trading days immediately prior to the first public announcement of such proposed change of control. (c) the term "Initial Merger Consideration" shall mean, with respect to each share of TTC Common Stock issued and outstanding on the Effective Date, 0.25 shares of ICBI Common Stock unless TTC Operating Losses exceed $30,000. If TTC Operating Losses exceed $30,000, the Initial Merger Consideration shall be the fraction of a share of ICBI Common Stock, the denominator of which shall be 276,600 and the numerator of which shall be the difference between $1,936,200 and the amount by which TTC Operating Losses exceed $30,000, such difference then to be divided by $28.00. (d) the term "knowledge" when used with respect to a party shall mean the knowledge, after due inquiry, of any "Executive Officer" of such party, as such term is defined in Regulation O, (12 C.F.R. 215); 2 (e) the term "Material Adverse Effect", when applied to a party, shall mean an event, occurrence or circumstance (including without limitation (i) the making of any provisions for possible loan and lease losses, write-downs or other real estate and taxes and (ii) any breach of a representation or warranty by such party) which (a) has or is reasonably likely to have a material adverse effect on the financial position, results of operations or business of the party and its subsidiaries, taken as a whole, or (b) would materially impair the party's ability to perform its obligations under this Agreement or the consummation of the Reorganization and the other transactions contemplated by this Agreement; provided, however, that solely for purposes of measuring whether an event, occurrence or circumstance has a material adverse effect on such party's results of operations, the term "results of operations" shall mean net interest income plus non-interest income (less securities gains) less gross expenses (excluding provisions for possible loan and lease losses, write-downs of other real estate and taxes); and provided further, that material adverse effect and material impairment shall not be deemed to include the impact of (i) changes in banking and similar laws of general applicability or interpretations thereof by courts or governmental authorities, (ii) changes in generally accepted accounting principles or regulatory accounting requirements applicable to banks and bank holding companies generally, and (iii) the Reorganization on the operating performance of the parties to this Agreement; and (f) the term "Merger Consideration" shall mean, with respect to each share of TTC Common Stock issued and outstanding on the Effective Date, the Initial Merger Consideration and, if the Surviving Corporation's aggregate net earnings for the thirty-six (36) month period, beginning with the month following the month in which the Effective Date occurs, equal or exceed the Required Net Earnings, the Contingent Merger Consideration. (g) the term "Previously Disclosed" by a party shall mean information set forth in a written disclosure letter that is delivered by that party to the other party prior to or contemporaneously with the execution of this Agreement and specifically designated as information "Previously Disclosed" pursuant to this Agreement. (h) the term "Required Net Earnings" shall mean $638,946 at a minimum, plus the amount, if any, by which (y) severance payments and benefits (including payroll taxes and insurance) paid to TTC officers and (z) TTC Transaction Costs (as defined below), in the aggregate, exceed $150,000, net of the amount by which TTC Operating Losses (as defined below) are less than $30,000. (i) the term "TTC Operating Losses" shall mean the excess, if any, of TTC expenses over TTC revenue (each computed according to generally accepted accounting principles consistently applied) from January 1, 1997 to the Effective Date; provided, however, that there shall be excluded from TTC expenses (i) severance benefits (including payroll taxes and insurance) payable to TTC officers, (ii) TTC Transaction Costs (iii) the amortization or write-off of TTC start-up costs and (iv) any referral fees payable by TTC to The Middleburg Bank after June 30, 1997. (j) the term "TTC Transaction Costs" shall mean the expenses of TTC accrued on the books of TTC after December 31, 1996 in connection with the negotiation and preparation of the Option Agreement and the February 5, 1997 letter of intent between ICBI and TTC and expenses of TTC incurred in connection with the negotiation, performance and consummation of this Agreement, including fees and expenses of consultants, investment 3 bankers, accountants, counsel and printers. ARTICLE 2 Effect of Reorganization on Common Stock 2.1 Conversion of Common Stock. (a) At the Effective Date, by virtue of the Reorganization and without any action on the part of the holders thereof, each share of TTC Common Stock issued and outstanding immediately prior to the Effective Date (other than shares of TTC Common Stock held by ICBI and Dissenting Shares as defined in Section 2.6) shall cease to be outstanding and shall be converted into the right to receive the Merger Consideration. (b) Each holder of a certificate representing any shares of TTC Common Stock shall thereafter cease to have any rights with respect to such TTC Common Stock, except the right to receive the consideration described in Sections 2.1 and 2.4 upon the surrender of such certificate in accordance with Section 2.3. (c) In the event ICBI changes the number of shares of ICBI Common Stock issued and outstanding prior to the date that the Initial Merger Consideration or Contingent Merger Consideration is paid, as a result of any stock split, stock dividend, recapitalization or similar transaction with respect to the outstanding ICBI Common Stock and the record date therefor shall be prior to the date that the Initial Merger Consideration or Contingent Merger Consideration is paid, the Merger Consideration shall be proportionately adjusted. (d) At the Effective Date, by virtue of the Reorganization and without any action on the part of the holder thereof, each share of the common stock of Acquisition issued and outstanding immediate prior to the Effective Date shall cease to be outstanding and shall be converted into one share of TTC Common Stock. 2.2 Calculation and Payment of Merger Consideration. (a) If, within 30 days following the Effective Date, the parties agree on the amount, if any, of the TTC Operating Losses, the Initial Merger Consideration shall be calculated and paid as soon as practicable following the Effective Date in accordance with Section 2.3(a). If the parties do not so agree, the Initial Merger Consideration will be determined as follows: (i) Closing Financial Statement. ICBI shall cause to be prepared an income statement (the "Closing Financial Statement") showing the TTC Operating Losses as of the Effective Date. The Closing Financial Statement shall be prepared in accordance with generally accepted accounting principles consistently applied with prior periods, except for adjustments for determining the TTC Operating Losses. (ii) Audit. The Closing Financial Statement and related footnotes (if any) shall be audited and reported on by Yount, Hyde & Barbour ("Yount, Hyde"). The report of Yount, Hyde shall be unqualified except as necessary to reflect adjustments in determining the TTC Operating Losses as required herein. ICBI shall exercise its reasonable best efforts to cause the Closing Financial Statement, together with the report of Yount, Hyde thereon, to be delivered within 60 days after the Effective Date, subject to the provisions of subsection (iii) hereof. Such delivery shall be made to F. E. Deacon, III, as the representative of the TTC Shareholders (the "Shareholders' Representative"), at the address designated by him to ICBI. ICBI and 4 the Surviving Corporation shall, and shall cause their respective employees and agents to, fully cooperate in all respects in the audit and review process and take such actions and make such undertaking as are customary in connection therewith. (iii) Review. Following delivery of the Closing Financial Statement to the Shareholders' Representative, ICBI shall cause Yount, Hyde to provide the Shareholders' Representative with an opportunity to observe all aspects of the audit and to review Yount, Hyde's work papers, and to discuss the same with Yount, Hyde representatives. ICBI shall be responsible for the cost of the audit, including the fees and expenses of Yount, Hyde. The Shareholders' Representative shall have 30 days to review the Closing Financial Statement and to give notice to ICBI that he has a material disagreement with Yount, Hyde regarding the Closing Financial Statement. Failing such notice, the Closing Financial Statement as delivered to the Shareholders' Representative shall be final and binding on the parties hereto. (iv) Objection Period. If the Shareholders' Representative gives an objection notice in a timely manner, but ICBI and the Shareholders' Representative are able to resolve such objections, the Closing Financial Statement, as modified to resolve such objections, shall be binding on the parties hereto. If ICBI and the Shareholders' Representative are unable to reach agreement as to all differences within 15 days after ICBI's receipt of the Shareholders' Representative's objection notice, then the unresolved differences shall be submitted to arbitration to resolve the dispute and make a determination which shall be binding on the parties to this Agreement. Such arbitration shall be conducted by an arbitrator experienced in the matters at issue and selected in accordance with the then current Commercial Arbitration Rules of the American Arbitration Association (the "Rules"). The arbitration shall be held in Richmond, Virginia and shall be conducted in accordance with the Rules. The decision of the arbitrator shall be final and binding as to any matters submitted to arbitration; provided that, if necessary, such decision may be enforced by either ICBI or the Shareholders' Representative in any court having competent jurisdiction. After delivery of the arbitrator's decision, the Closing Financial Statement, modified as appropriate to reflect the arbitrator's decision, shall be final and binding. The determination of which party (or combination thereof) bears the costs and expenses incurred in connection with any such arbitration proceedings shall be determined by the arbitrator. (b) If, within 30 days following the end of the 36 month period, beginning with the month that follows the month in which the Effective Date occurs, ICBI and the Shareholders' Representative agree that the net earnings of the Surviving Corporation exceed the Required Net Earnings, the Contingent Merger Consideration shall be calculated and paid as soon as practicable in accordance with Section 2.3(b). If the parties do not so agree, the decision to pay or not to pay Contingent Merger Consideration will be determined as follows: (i) Post Closing Financial Statement. ICBI shall cause to be prepared an income statement (the "Post Closing Financial Statement") showing the Surviving Corporation's net earnings for such 36 month period and calculating the Required Net Earnings. The Post Closing Financial Statement shall be prepared in accordance with generally accepted accounting principles consistently applied with prior periods. 5 (ii) Audit. The Post Closing Financial Statement and related footnotes (if any) shall be audited and reported on by Yount, Hyde & Barbour ("Yount, Hyde"). The report of Yount, Hyde shall be unqualified. ICBI shall exercise its reasonable best efforts to cause the Post Closing Financial Statement, together with the report of Yount, Hyde thereon, to be delivered within 60 days after the end of the 36 month period described in Section 2.2(b)(i), subject to the provisions of subsection (iii) hereof. Such delivery shall be made to the Shareholders' Representative at the address designated by him to ICBI. ICBI and the Surviving Corporation shall, and shall cause their respective employees and agents to, fully cooperate in all respects in the audit and review process and take such actions and make such undertaking as are customary in connection therewith. (iii) Review. Following delivery of the Post Closing Financial Statement to the Shareholders' Representative, ICBI shall cause Yount, Hyde to provide the Shareholders' Representative with an opportunity to observe all aspects of the audit and to review Yount, Hyde's work papers, and to discuss the same with Yount, Hyde representatives. ICBI shall be responsible for the cost of the audit, including the fees and expenses of Yount, Hyde. The Shareholders' Representative shall have 30 days to review the Post Closing Financial Statement and to give notice to ICBI that he has a material disagreement with Yount, Hyde regarding the Post Closing Financial Statement. Failing such notice, the Post Closing Financial Statement as delivered to the Shareholders' Representative shall be final and binding on the parties hereto. (iv) Objection Period. If the Shareholders' Representative gives an objection notice in a timely manner, but ICBI and the Shareholders' Representative are able to resolve such objections, the Post Closing Financial Statement, as modified to resolve such objections, shall be binding on the parties hereto. If ICBI and the Shareholders' Representative are unable to reach agreement as to all differences within 15 days after ICBI's receipt of the Shareholders' Representative's objection notice, then the unresolved differences shall be submitted to arbitration to resolve the dispute and make a determination which shall be binding on the parties to this Agreement. Such arbitration shall be conducted by an arbitrator experienced in the matters at issue and selected in accordance with the then current Commercial Arbitration Rules of the American Arbitration Association (the "Rules"). The arbitration shall be held in Richmond, Virginia and shall be conducted in accordance with the Rules. The decision of the arbitrator shall be final and binding as to any matters submitted to arbitration; provided that, if necessary, such decision may be enforced by either ICBI or the Shareholders' Representative in any court having competent jurisdiction. After delivery of the arbitrator's decision, the Post Closing Financial Statement, modified as appropriate to reflect the arbitrator's decision, shall be final and binding. The determination of which party (or combination thereof) bears the costs and expenses incurred in connection with any such arbitration proceedings shall be determined by the arbitrator. 2.3 Manner of Exchange. As promptly as practicable after the Effective Date, ICBI shall cause The Middleburg Bank, acting as the exchange agent ("Exchange Agent"), to send to each former shareholder of record of TTC immediately prior to the Effective Date transmittal materials for use in exchanging such shareholder's certificates of TTC Common Stock (other than shares held by shareholders who perfect their dissenters' rights as provided under Section 2.6 6 hereof) for the consideration set forth in Section 2.1 above and Section 2.4 below. Any fractional share checks which a TTC shareholder shall be entitled to receive in exchange for such shareholder's shares of TTC Common Stock, and all dividends paid on any shares of ICBI Common Stock that such shareholder shall be entitled to receive prior to the delivery to the Exchange Agent of such shareholder's certificates representing all of such shareholder's shares of TTC Common Stock will be delivered to such shareholder only upon delivery to the Exchange Agent of the certificates representing all of such shares (or indemnity satisfactory to ICBI and the Exchange Agent, in their judgment, if any of such certificates are lost, stolen or destroyed). No interest will be paid on any such fractional share checks or dividends to which the holder of such shares shall be entitled to receive upon such delivery. 2.4 Fractional Shares. ICBI shall issue cash in lieu of fractional shares. ICBI will pay the value of such fractional shares in cash on the basis of $28.00 per share of ICBI Common Stock. 2.5 Dividends. No dividend or other distribution payable to the holders of record of ICBI Common Stock at or as of any time after the Effective Date shall be paid to the holder of any certificate representing shares of TTC Common Stock issued and outstanding at the Effective Date until such holder physically surrenders such certificate for exchange as provided in Section 2.3 of this Agreement, promptly after which time all such dividends or distributions shall be paid (without interest). With respect to its dividend for the three months ending June 30, 1997, ICBI will not declare or establish a record date for such dividend prior to July 9, 1997. 2.6 Dissenting Shares. Shareholders of TTC shall have the right to demand and receive payment of the fair value of their shares of TTC Common Stock pursuant to the provisions of Virginia Code ss. 13.1-729 et seq. (the "Dissenting Shares"). If, however, a holder shall have failed to perfect his right to dissent or shall have effectively withdrawn or lost such right, each of his shares of TTC Common Stock shall be deemed to have been converted into, at the Effective Date, the right to receive the Merger Consideration and cash in lieu of any fractional shares pursuant to Section 2.3 hereof. ARTICLE 3 Representation and Warranties 3.1 Representations and Warranties of TTC. TTC represents and warrants to ICBI as follows: (a) Organization, Standing and Power. (1) TTC is a corporation and a trust company, duly organized, validly existing and in good standing under the laws of Virginia, and it has all requisite corporate power and authority to carry on its business as now being conducted and to own and operate its assets, properties and business. TTC has no subsidiaries. TTC has the corporate power and authority to execute and deliver this Agreement and perform the respective terms of this Agreement and the Plan of Merger. (2) All of the shares of capital stock of TTC are fully paid and nonassessable. 7 (b) Authority. (1) The execution and delivery of this Agreement and the Plan and the consummation of the Reorganization, have been duly and validly authorized by all necessary corporate action on the part of TTC, except the approval of shareholders. The Agreement represents the legal, valid, and binding obligations of TTC, enforceable against TTC in accordance with its terms (except in all such cases as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and except that the availability of the equitable remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding may be brought). (2) Neither the execution and delivery of this Agreement, the consummation of the transactions contemplated herein, nor compliance by TTC with any of the provisions hereof will: (i) conflict with or result in a breach of any provision of TTC's Articles of Incorporation or Bylaws; (ii) except as Previously Disclosed, constitute or result in the breach of any term, condition or provision of, or constitute a default under, or give rise to any right of termination, cancellation or acceleration with respect to, or result in the creation of any lien, charge or encumbrance upon, any property or assets of TTC pursuant to (A) any note, bond, mortgage, indenture, or (B) any material license, agreement, lease, or other instrument or obligation, to which TTC is a party or by which it or any of its properties or assets may be bound, or (iii) subject to the receipt of the requisite approvals referred to in Section 4.7, violate any order, writ, injunction, decree, statute, rule or regulation applicable to TTC or any or its properties or assets. (c) Capital Structure. The authorized capital stock of TTC consists of 500,000 shares of common stock, par value $2.50 per share, of which, as of the date hereof, 276,600 shares are issued, outstanding, fully paid and nonassessable, not subject to shareholder preemptive rights and were not issued in violation of any agreement to which TTC is a party or otherwise bound, or of any registration or qualification provisions of any federal or state securities laws. Except as Previously Disclosed, there are no outstanding options, warrants or other rights to subscribe for or purchase from TTC any capital stock of TTC or securities convertible into or exchangeable for capital stock of TTC. (d) Ownership of the Stock. TTC does not beneficially own, directly or indirectly, 5% or more of the outstanding capital stock or other voting securities of any corporation or other organization except as Previously Disclosed. (e) Financial Statements. TTC has previously furnished to ICBI true and complete copies of its audited consolidated balance sheets and related consolidated statements of income, statements of cash flows, and statements of stockholders' equity for the three year period ended December 31, 1996 (together with the notes thereto, the "TTC Financial Statements"). The TTC Financial Statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis during the periods presented, and present fairly the financial position of TTC as of the respective dates thereof and the results of its operations for the three year period then ended. (f) Absence of Undisclosed Liabilities. At December 31, 1996 TTC had no obligation or liability (contingent or otherwise) of any nature which was not reflected in the TTC Financial Statements, except for those which in the aggregate are immaterial or have been Previously Disclosed. 8 (g) Legal Proceedings; Compliance with Laws. Except as Previously Disclosed, there are no actions, suits or proceedings instituted or pending or, to the best knowledge of TTC's management, threatened against TTC, or against any property, asset, interest or right of TTC. TTC is not a party to any agreement or instrument or subject to any judgment, order, writ, injunction, decree or rule that might reasonably be expected to have a material adverse effect on the condition (financial or otherwise), business or prospects of TTC. Except as Previously Disclosed, TTC has complied in all material respects with all laws, ordinances, requirements, regulations or orders applicable to its business (including environmental laws, ordinances, requirements, regulations or orders). (h) Regulatory Approvals. To the knowledge of TTC there is no reason why the regulatory approvals referred to in Section 6.1(b) should not be obtained without the imposition of any condition of the type referred to in Section 6.1(b). (i) Labor Relations. TTC is not a party to or bound by any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization, nor is it the subject of a proceeding asserting that it has committed an unfair labor practice (within the meaning of the National Labor Relations Act) or seeking to compel it to bargain with any labor organization as to wages and conditions of employment, nor is there any strike or other labor dispute involving it, pending or, to the best of its knowledge, threatened, nor is it aware of any activity involving its employees seeking to certify a collective bargaining unit or engaging in any other organization activity. (j) Tax Matters. TTC has filed all federal, state and local tax returns and reports required to be filed, and all taxes shown by such returns to be due and payable have been paid or are reflected as a liability in the TTC Financial Statements or are being contested in good faith and have been Previously Disclosed. Except to the extent that liabilities therefor are specifically reflected in the TTC Financial Statements, there are no federal, state or local tax liabilities of TTC other than liabilities that have arisen since December 31, 1996, all of which have been properly accrued or otherwise provided for on the books and records of TTC. Except as Previously Disclosed, no tax return or report of TTC is under examination by any taxing authority or the subject of any administrative or judicial proceeding, and no unpaid tax deficiency has been asserted against TTC by any taxing authority. (k) Property. Except as Previously Disclosed or reserved against in the TTC Financial Statements, TTC has good and marketable title free and clear of all material liens, encumbrances, charges, defaults or equities of whatever character to all of the material properties and assets, tangible or intangible, reflected in the TTC Financial Statements as being owned by TTC as of the dates thereof. To the best knowledge of TTC, all buildings, and all fixtures, equipment, and other property and assets which are material to its business on a consolidated basis, held under leases or subleases by TTC are held under valid instruments enforceable in accordance with their respective terms (except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and except that the availability of the equitable remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding may be brought). The buildings, structures, and appurtenances owned, leased, or occupied by TTC are in good operating condition and in a state of good maintenance and repair, and to the best knowledge 9 of TTC (i) comply with applicable zoning and other municipal laws and regulations, and (ii) there are no latent defects therein. (l) Reports. Since January 1, 1993, TTC has filed all reports and statements, together with any amendments required to be made with respect thereto, that were required to be filed with the SCC and to the best knowledge of TTC, any other governmental or regulatory authority or agency having jurisdiction over its operations. (m) Employee Benefit Plans. (1) TTC will deliver for ICBI's review, as soon as practicable, true and complete copies of all material pension, retirement, profit-sharing, deferred compensation, stock option, bonus, vacation or other material incentive plans or agreements, all material medical, dental or other health plans, all life insurance plans and all other material employee benefit plans or fringe benefit plans, including, without limitation, all "employee benefit plans" as that term is defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), currently adopted, maintained by, sponsored in whole or in part by, or contributed to by TTC for the benefit of employees, retirees or other beneficiaries eligible to participate (collectively, the "TTC Benefit Plans"). Any of the TTC Benefit Plans which is an "employee pension benefit plan," as that term is defined in Section (32) of ERISA, is referred to herein as a "TTC ERISA Plan." No TTC Benefit Plan is or has been a multi-employer plan within the meaning of Section 3(37) of ERISA. (2) Except as Previously Disclosed, all TTC Benefit Plans are in compliance with the applicable terms of ERISA and the Internal Revenue Code of 1986, as amended (the "IRC") and any other applicable laws, rules and regulations, the breach or violation of which could result in a material liability to TTC on a consolidated basis. (3) No TTC ERISA Plan is a defined benefit pension plan. (n) Investment Securities. Except as Previously Disclosed, none of the investment securities reflected in the TTC Financial Statements is subject to any restriction, contractual, statutory, or otherwise, which would impair materially the ability of the holder of such investment to dispose freely of any such investment at any time. (o) Certain Contracts. (1) Except as Previously Disclosed, TTC is not a party to, or is bound by, (i) any material agreement, arrangement or commitment, (ii) any agreement, indenture or other instrument relating to the borrowing of money by TTC or the guarantee by TTC of any such obligation, (iii) any agreement, arrangement or commitment relating to the employment of a consultant or the employment, election, retention in office or severance of any present or former director or officer, (iv) any agreement to make loans or for the provision, purchase or sale of goods, services or property between TTC and any director of officer of TTC, or any member of the immediate family or affiliate of any of the foregoing, or (v) any agreement between TTC and any 5% or more shareholder of TTC; in each case other than agreements entered into in the ordinary course of the business of TTC consistent with past practice. (2) Neither TTC nor, to the knowledge of TTC, the other party thereto, is in default under any material agreement, commitment, arrangement, lease, insurance policy or other instrument whether entered into in the ordinary course of business or otherwise, nor has there occurred any event that, with the lapse of time or giving of notice or both, would constitute such a default. 10 (3) Since December 31, 1996 TTC has not incurred or paid any obligation or liability that would be material to TTC, except obligations incurred or paid in connection with transactions in the ordinary course of business of TTC consistent with its practice and, except as Previously Disclosed, from December 31, 1996 to the date hereof, TTC has not taken any action that, if taken after the date hereof, would breach any of the covenants contained in Section 4.4 hereof. (p) Insurance. A complete list of all policies or binders of fire, liability, product liability, workmen's compensation, vehicular and other insurance held by or on behalf of TTC has previously been furnished to ICBI and all such policies or binders are valid and enforceable in accordance with their terms, are in full force and effect, and insure against risks and liabilities to the extent and in the manner customary for the industry and are deemed appropriate and sufficient by TTC. TTC is not in default with respect to any provision contained in any such policy or binder and has not failed to give any notice or present any claim under any such policy or binder in due and timely fashion. TTC has not received notice of cancellation or non-renewal of any such policy or binder. TTC has no knowledge of any inaccuracy in any application for such policies or binders, any failure to pay premiums when due or any similar state of facts or the occurrence of any event that is reasonably likely to form the basis for any material claim against it not fully covered (except to the extent of any applicable deductible) by the policies or binders referred to above. TTC has not received notice from any of its insurance carriers that any insurance premiums will be increased materially in the future or that any such insurance coverage will not be available in the future on substantially the same terms as now in effect. (q) Absence of Material Changes and Events. Since December 31, 1996, there has not been any material adverse change in the condition (financial or otherwise), aggregate assets or liabilities, assets under management, cash flow, earnings or business of TTC, and except for entering into this Agreement, TTC has conducted its business only in the ordinary course consistent with past practice. (r) Statements True and Correct. None of the information supplied or to be supplied by TTC pursuant to Section 4.1 or for inclusion in the Registration Statement on Form S-4 (the "Registration Statement") to be filed by ICBI with the SEC, the Proxy Statement/Prospectus (as defined in Section 4.3) to be mailed to every TTC shareholder or any other document to be filed with the SEC, the SCC, the Federal Reserve, or any other regulatory authority in connection with the transactions contemplated hereby, will, at the respective time such documents are filed, and, in the case of the Registration Statement, when it becomes effective and with respect to the Proxy Statement/Prospectus, when first mailed to TTC shareholders, be false or misleading with respect to any material fact or omit to state any material fact necessary in order to make the statements therein not misleading, or, in the case of the Proxy Statement/Prospectus or any supplement thereto, at the time of the TTC Shareholders' Meeting (as defined in Section 4.3), be false or misleading with respect to any material fact or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of any proxy for the TTC Shareholders' Meeting. (s) Brokers and Finders. Neither TTC nor any of its officers, directors or employees, has employed any broker, finder or financial advisor or incurred any liability for any fees or commissions in connection with the transactions contemplated herein, except for Scott & Stringfellow, Inc. 11 (t) Repurchase Agreements. With respect to all agreements pursuant to which TTC or any TTC Subsidiary has purchased securities subject to an agreement to resell, if any, TTC or such TTC Subsidiary, as the case may be, has a valid, perfected first lien or security interest in the government securities or other collateral securing the repurchase agreement, and the value of such collateral equals or exceeds the amount of the debt secured thereby. (u) Administration of Trust Accounts; Consents. TTC has properly administered, in all respects material and which could reasonably be expected to be material to the business, operations or financial condition of TTC all accounts for it acts as fiduciary including but not limited to accounts for which it serves as executor trustee, agent, custodian, personal representative, guardian, conservator or investment advisor, in accordance with the terms of the governing documents and applicable law and regulation and common law. Neither TTC, nor any director, officer or employee of TTC has committed any breach of trust with respect to any such fiduciary account which is material to or could reasonably be expected to be material to the business, operations or financial condition of TTC and the accountings for each such fiduciary account are true and correct in all material respects and accurately reflect the assets of such fiduciary account in all material respects. (v) Environmental Matters. (1) There are no legal, administrative, arbitral or other claims, causes of action or governmental investigations of any nature, seeking to impose, or that could result in the imposition, on TTC of any liability arising under any Environmental Laws pending or, to the best knowledge of TTC, threatened against (A) TTC, (B) any person or entity whose liability for any Environmental Claim TTC has or may have retained or assumed either contractually or by operation of law, or (C) any real or personal property which TTC owns or leases, or has been or is judged to have managed or to have supervised or participated in the management of, which liability might have a material adverse effect on the business, financial condition or results of operations of TTC. TTC is not subject to any agreement, order, judgment, decree or memorandum by or with any court, governmental authority, regulatory agency or third party imposing any such liability. (2) To the best knowledge of TTC, there are no past or present actions, activities, circumstances, conditions, events or incidents, including, without limitation, the release, emission, discharge or disposal of any Materials of Environmental Concern, that could reasonably form the basis of any Environmental Claim or other claim or action or governmental investigation that could result in the imposition of any liability arising under any Environmental Laws currently in effect or adopted but not yet effective against TTC or against any person or entity whose liability for any Environmental Claim TTC or any TTC Subsidiary has or may have retained or assumed either contractually or by operation of law. (3) For the purpose of this Agreement, the following terms shall have the following meanings: (i) "Communication" means a communication which is of a substantive nature and which is made (A) in writing to TTC or any TTC Subsidiary on the one hand or to ICBI or any ICBI Subsidiary on the other hand, or (B) orally to a senior officer of TTC or any TTC Subsidiary or of ICBI or any ICBI Subsidiary, whether from a governmental authority or a third party. 12 (ii) "Environmental Claim" means any Communication from any governmental authority or third party alleging potential liability (including, without limitation, potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries, or penalties) arising out of, based on or resulting from the presence, or release into the environment, of any Material of Environmental Concern. (iii) "Environmental Laws" means all applicable federal, state and local laws and regulations, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, that relate to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata). This definition includes, without limitation, laws and regulations relating to emissions, discharges, releases or threatened releases of Materials of Environmental Concern, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Materials of Environmental Concern. (iv) "Materials of Environmental Concern" means pollutants, contaminants, wastes, toxic substances, petroleum and petroleum products and any other materials regulated under Environmental Laws. 3.2 Representations and Warranties of ICBI. represents and warrants to TTC as follows: (a) Organization, Standing and Power. (1) ICBI is a corporation duly organized, validly existing and in good standing under the laws of Virginia. It has all requisite corporate power and authority to carry on its business as now being conducted and to own and operate its assets, properties and business, and ICBI has the corporate power and authority to execute and deliver this Agreement and perform the respective terms of this Agreement and Plan of Reorganization. ICBI is duly registered as a bank holding company under the Bank Holding Company Act of 1956. The Middleburg Bank, a wholly owned subsidiary of ICBI, is a Virginia corporation and a Virginia state bank, duly organized, validly existing and in good standing under the laws of Virginia, is in compliance in all material respects with all rules and regulations promulgated by any relevant regulatory authority, and it has all requisite corporate power and authority to carry on a commercial banking business as now being conducted and to own and operate its assets, properties and business. (2) ICBI has Previously Disclosed its subsidiary corporations (and the subsidiaries thereof), all of which are duly organized, validly existing and in good standing in their respective states of incorporation and which have all requisite corporate power and authority to carry on their businesses as now being conducted and to own and operate their assets, properties and business (the "ICBI Subsidiaries" and, collectively with ICBI, the "ICBI Companies"). Each ICBI Subsidiary that is a depository institution is an "insured bank" as defined in the Federal Deposit Insurance Act and applicable regulations thereunder. All of the shares of capital stock of the ICBI Subsidiaries held by ICBI are duly and validly issued, fully paid and nonassessable, and all such shares are owned by ICBI or a ICBI Subsidiary free and clear of any claim, lien, pledge or encumbrance of any kind, and were not issued in violation of the preemptive rights of any shareholder or in violation of any agreement or of any registration or qualification provisions of federal or state securities laws. Except as Previously Disclosed, none of the ICBI Companies owns any equity securities of any other corporation or entity. Except as Previously Disclosed, each of the ICBI Companies is in good standing as a foreign corporation in each jurisdiction where the 13 properties owned, leased or operated, or the business conducted, by it require such qualification and where failure to so qualify either singly or in the aggregate would have a material adverse effect on the financial condition, properties, businesses or results of operations of the ICBI Companies. (b) Authority. (1) The execution and delivery of this Agreement and the Plan and the consummation of the Reorganization have been duly and validly authorized by all necessary corporate action on the part of ICBI. The Agreement represents the legal, valid, and binding obligation of ICBI, enforceable against ICBI in accordance with its terms (except in all such cases as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and except that the availability of the equitable remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding may be brought). (2) Neither the execution and delivery of the Agreement, the consummation of the transactions contemplated therein, nor the compliance by ICBI with any of the provisions thereof will (i) conflict with or result in a breach of any provision of the Articles of Incorporation or Bylaws of ICBI, (ii) except as Previously Disclosed, constitute or result in the breach of any term, condition or provision of, or constitute default under, or give rise to any right of termination, cancellation or acceleration with respect to, or result in the creation of any lien, charge or encumbrance upon, any property or assets of the ICBI Companies pursuant to (A) any note, bond, mortgage, indenture, or (B) any material license, agreement, lease or other instrument or obligation, to which any of the ICBI Companies is a party or by which any of them or any of their properties or assets may be bound, or (iii) subject to the receipt of the requisite approvals referred to in Section 4.7, violate any order, writ, injunction, decree, statute, rule or regulation applicable to any of the ICBI Companies or any of their properties or assets. (c) Capital Structure. The authorized capital stock of ICBI consists of: 10,000,000 shares of common stock, par value $5.00 per share ("ICBI Common Stock), of which 837,149 shares are issued and outstanding, fully paid and nonassessable, not subject to shareholder preemptive rights, and not issued in violation of any agreement to which ICBI is a party or otherwise bound, or of any registration or qualification provisions of any federal or state securities laws. The shares of ICBI Common Stock to be issued upon consummation of the Reorganization will have been duly authorized and, when issued in accordance with the terms of this Agreement, will be validly issued, fully paid and nonassessable and subject to no preemptive rights. Except as Previously Disclosed, there are no outstanding understandings or commitments of any character pursuant to which ICBI and any of the ICBI Companies could be required or expected to issue shares of capital stock. (d) Ownership of the ICBI Subsidiaries; Capital Structure of ICBI Subsidiaries; and Organization of the ICBI Subsidiaries. (1) ICBI does not own, directly or indirectly, 5% or more of the outstanding capital stock or other voting securities of any corporation, bank or other organization actively engaged in business except as Previously Disclosed (collectively the "ICBI" Subsidiaries" and each individually a "ICBI Subsidiary"). The outstanding shares of capital stock of each ICBI Subsidiary have been duly authorized and are validly issued, and are fully paid and nonassessable and all such shares are directly or indirectly owned by ICBI free and clear of all liens, claims and encumbrances. No Rights are authorized, issued or outstanding with respect to the capital stock of any ICBI Subsidiary and there are no agreements, understandings or commitments relating to the right of ICBI to vote or to dispose of 14 said shares. None of the shares of capital stock of any ICBI Subsidiary has been issued in violation of the preemptive rights of any person. (2) Each ICBI Subsidiary is a duly organized corporation, validly existing and in good standing under applicable laws. Each ICBI Subsidiary (i) has full corporate power and authority to own, lease and operate its properties and to carry on its business as now conducted except where the absence of such power or authority would not have a material adverse effect on the financial condition, results of operations or business of ICBI on a consolidated basis, and (ii) is duly qualified to do business in the states of the United States and foreign jurisdictions where its ownership or leasing of property or the conduct of its business requires such qualification and where failure to do qualify would have a material adverse effect on the financial condition, results of operations or business of ICBI on a consolidated basis. Each ICBI Subsidiary has all federal, state, local and foreign governmental authorizations and licenses necessary for it to own or lease its properties and assets and to carry on its business as it is now being conducted, except where failure to obtain such authorization or license would not have a material adverse effect on the business of such ICBI Subsidiary. (e) Financial Statements. ICBI has previously furnished to TTC true and complete copies of its audited consolidated balance sheets and related consolidated statements of income, statements of cash flows, and statements of stockholders equity for the three year period ended December 31, 1996 (together with the notes thereto, the "ICBI Financial Statement"). The ICBI Financial Statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis during the periods presented, and present fairly the financial position of ICBI as a of the respective dates thereof and the results of its operations for the three year period then ended. (f) Absence of Undisclosed Liabilities. At December 31, 1996, none of the ICBI Companies had any obligation or liability (contingent or otherwise) of any nature which were not reflected in the ICBI Financial Statements, except for those which in the aggregate are immaterial or have been Previously Disclosed. (g) Legal Proceedings; Compliance with Laws. Except as Previously Disclosed, there are no actions, suits or proceedings instituted or pending or, to the best knowledge of ICBI's management, threatened or probable of assertion against any of the ICBI Companies, or against any property, asset, interest or right of any of them, that are reasonably expected to have, either individually or in the aggregate, a material adverse effect on the financial condition of ICBI on a consolidated basis or that are reasonably expected to threaten or impede the consummation of the transactions contemplated by this Agreement. None of the ICBI Companies is a party to any agreement or instrument or subject to any judgment, order, writ, injunction, decree or rule that might reasonably be expected to have a material adverse effect on the condition (financial or otherwise), business or prospects of ICBI on a consolidated basis. Except as Previously Disclosed, as of the date of this Agreement, none of the ICBI Companies nor any of their properties is a party to or is subject to any order, decree, agreement, memorandum of understanding or similar arrangement with, or a commitment letter or similar submission to, any federal or state governmental agency or authority charged with the supervision or regulation of depository institutions or mortgage lenders or engaged in the insurance of deposits which restricts or purports to restrict in any material respect the conduct of the business of it or any of its subsidiaries or properties, or in any manner relates to the capital, liquidity, credit policies or management of it; and except as Previously Disclosed, none of the ICBI Companies has been advised by any such 15 regulatory authority that such authority is contemplating issuing or requesting (or is considering the appropriateness of issuing or requesting) any such order, decree, agreement, memorandum of understanding, commitment letter or similar submission. To the best knowledge of ICBI, the ICBI Companies have complied in all material respects with all laws, ordinances, requirements, regulations or orders applicable to its business (including environmental laws, ordinances, requirements, regulations or orders). (h) Regulatory Approvals. ICBI knows of no reason why the regulatory approvals referred to in Section 6.1(b) should not be obtained without the imposition of any condition of the type referred to in Section 6.1(b). (i) Labor Relations. None of the ICBI Companies is a party to, or is bound by any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization, nor is it the subject of a proceeding asserting that is has committed an unfair labor practice (within the meaning of the National Labor Relations Act) or seeking to compel it to bargain with any labor organization as to wages and conditions of employment, nor is there any strike or other labor dispute involving it, pending or, to the best of its knowledge, threatened, nor is it aware of any activity involving its employees seeking to certify a collective bargaining unit or engaging in any other organizational activity. (j) Tax Matters. The ICBI Companies have filed all federal, state, and local tax returns and reports required to be filed, and all taxes shown by such returns to be due and payable have been paid or are reflected as a liability in the ICBI Financial Statements or are being contested in good faith and have been Previously Disclosed. Except to the extent that liabilities therefor are specifically reflected in the ICBI Financial Statements, there are no federal, state or local tax liabilities of the ICBI Companies other than liabilities that have arisen since December 31, 1996, all of which have been properly accrued or otherwise provided for on the books and records of the ICBI Companies. Except as Previously Disclosed, no tax return or report of any of the ICBI Companies is under examination by any taxing authority or the subject of any administrative or judicial proceeding, and no unpaid tax deficiency has been asserted against any of the ICBI Companies by any taxing authority. (k) Property. Except as Previously Disclosed or reserved against in the ICBI Financial Statements, all of the ICBI Companies have good and marketable title free and clear of all material liens, encumbrances, charges, defaults or equities of whatever character to all of the material properties and assets, tangible or intangible, reflected in the ICBI Financial Statements as being owned by the ICBI Companies as of the dates thereof. To the best knowledge of ICBI, all buildings, and all fixtures, equipment, and other property and assets which are material to its business on a consolidated basis, held under leases or subleases by the ICBI Companies are held under valid instruments enforceable in accordance with their respective terms, subject to bankruptcy, insolvency, reorganization, moratorium and similar laws. The buildings, structures, and appurtenances owned, leased, or occupied by the ICBI Companies are, to the best knowledge of ICBI, in good operating condition, in a state of good maintenance and repair and (i) comply with applicable zoning and other municipal laws and regulations, and (ii) there are no latent defects therein. (l) Reports. Since January 1, 1991, the ICBI Companies have filed all reports and statements, together with any amendments required to be made with respect thereto, that were 16 required to be filed with the Federal Reserve, the SCC, and any other governmental or regulatory authority or agency having jurisdiction over their operations. (m) Employee Benefit Plans. (1) ICBI will deliver for TTC's review, as soon as practicable, true and complete copies of all material pension, retirement, profit-sharing, deferred compensation, stock option, bonus, vacation or other material incentive plans or agreements, all material medical, dental or other health plans, all life insurance plans and all other material employee benefit plans or fringe benefit plans, including, without limitation, all "employee benefit plans" as that term is defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), currently adopted, maintained by, sponsored in whole or in part by, or contributed to by ICBI for the benefit of employees, retirees or other beneficiaries eligible to participate (collectively, the "ICBI Benefit Plans"). Any of the ICBI Benefit Plans which is an "employee pension benefit plan," as that term is defined in Section 3(2) of ERISA, is referred to herein as a "ICBI ERISA Plan." No ICBI Benefit Plan is or has been a multi-employer plan within the meaning of Section 3(37) of ERISA. (2) Except as Previously Disclosed, all ICBI Benefit Plans are in compliance with the applicable terms of ERISA and the Internal Revenue Code of 1986, as amended (the "IRC") and any other applicable laws, rules and regulations the breach or violation of which could result in a material liability to ICBI on a consolidated basis. (3) No ICBI ERISA Plan which is a defined benefit pension plan has any "unfunded current liability," as that term is defined in Section 302(d)(8)(A) of ERISA, and the present fair market value of the assets of any such plan exceeds the plan's "benefit liabilities," as that term is defined in Section 4001(a)(16) of ERISA, when determined under actuarial factors that would apply if the plan was terminated in accordance with all applicable legal requirements. (n) Investment Securities. Except for pledges to secure public and trust deposits and obligations under agreements pursuant to which any of the ICBI Companies has sold securities subject to an obligation to repurchase, none of the investment securities reflected in the ICBI Financial Statements is subject to any restriction, contractual, statutory, or otherwise, which would impair materially the ability of the holder of such investment to dispose freely of any such investment at any time. (o) Certain Contracts. (1) Except as Previously Disclosed, neither ICBI nor any ICBI subsidiary is a party to, or is bound by, (i) any material agreement, arrangement or commitment, (ii) any agreement, indenture or other instrument relating to the borrowing of money by ICBI or any ICBI Subsidiary or the guarantee by ICBI or any ICBI Subsidiary of any such obligation, (iii) any agreement, arrangement or commitment relating to the employment of a consultant or the employment, election, retention in office or severance of any present or former director or officer, (iv) any agreement to make loans or for the provision, purchase or sale of goods, services or property between ICBI or any ICBI Subsidiary and any director or officer of ICBI or any ICBI Subsidiary, or any member of the immediate family or affiliate of any of the foregoing, or (v) any agreement between ICBI or any ICBI Subsidiary and any 5% or more shareholder of ICBI; in each case other than agreements entered into in the ordinary course of the banking business of ICBI or a ICBI Subsidiary consistent with past practice. (2) Neither ICBI or any ICBI Subsidiary, nor to the knowledge of ICBI, the other party thereto, is in default under any material agreement, commitment, arrangement, lease, 17 insurance policy or other instrument whether entered into in the ordinary course of business or otherwise, nor has there occurred any event that, with the lapse of time or giving of notice or both, would constitute such a default, other than defaults of loan agreements by borrowers from ICBI or a ICBI Subsidiary in the ordinary course of its business. (p) Insurance. A complete list of all policies or binders of fire, liability, product liability, workmen's compensation, vehicular and other insurance held by or on behalf of the ICBI Companies has previously been furnished to TTC and all such policies or binders are valid and enforceable in accordance with their terms, are in full force and effect, and insure against risks and liabilities to the extent and in the manner customary for the industry and are deemed appropriate and sufficient by ICBI. The ICBI Companies are not in default with respect to any provision contained in any such policy or binder and have not failed to give any notice or present any claim under any such policy or binder in due and timely fashion. None of the ICBI Companies has received notice of cancellation or non-renewal of any such policy or binder. None of the ICBI Companies has knowledge of any inaccuracy in any application for such policies or binders, any failure to pay premiums when due or any similar state of facts or the occurrence of any event that is reasonably likely to form the basis for any material claim against it not fully covered (except to the extent of any applicable deductible) by the policies or binders referred to above. None of the ICBI Companies has received notice from any of its insurance carriers that any insurance premiums will be increased materially in the future or that any such insurance coverage will not be available in the future on substantially the same terms as now in effect. (q) Loans, OREO, and Allowance for Loan Losses. (1) Except as Previously Disclosed, and except for matters which individually or in the aggregate, do not materially adversely affect the Reorganization or the financial condition of ICBI, to ICBI's best knowledge each loan reflected as an asset in the ICBI Financial Statements (i) is evidenced by notes, agreements, or other evidences of indebtedness which are true, genuine and what they purport to be, (ii) to the extent secured, has been secured by valid liens and security interests which have been perfected, and (iii) is the legal, valid and binding obligation of the obligor named therein, enforceable in accordance with its terms, subject to bankruptcy, insolvency, and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. All loans and extensions of credit which are subject to regulation of the Federal Reserve which have been made by ICBI and the ICBI Subsidiaries comply therewith. (2) The classification on the books and records of ICBI and each ICBI Subsidiary of loans and/or non-performing assets as nonaccrual, troubled debt restructuring, OREO or other similar classification, complies in all material respects with generally accepted accounting principles and applicable regulatory accounting principles. (3) Except for liens, security interests, claims, charges, or such other encumbrances as have been appropriately reserved for in the ICBI Financial Statements or are not material, title to the OREO is good and marketable, and there are no adverse claims or encumbrances on the OREO. All title, hazard and other insurance claims and mortgage guaranty claims with respect to the OREO have been timely filed and neither ICBI nor any ICBI Subsidiary has been received any notice of denial of any such claim. (4) ICBI and each ICBI Subsidiary are in possession of all of the OREO or, if any of the OREO remains occupied by the mortgagor, eviction or summary proceedings have been commenced or rental arrangements providing for market rental rates have been agreed upon and 18 ICBI and/or each ICBI Subsidiary are diligently pursuing such eviction of summary proceedings or such rental arrangements. Except as Previously Disclosed, no legal proceeding or quasi-legal proceeding is pending or, to the knowledge of ICBI and each ICBI Subsidiary, threatened concerning any OREO or any servicing activity or omission to provide a servicing activity with respect to any of the OREO. (5) Except as Previously Disclosed, all loans made by any of the ICBI Companies to facilitate the disposition of OREO are performing in accordance with their terms. (6) The allowance for possible loan losses shown on the ICBI Financial Statements was, and the allowance for possible loan losses shown on the financial statements of ICBI as of dates subsequent to the execution of this Agreement will be, in each case as of the dates thereof, adequate in all material respects to provide for possible losses, net of recoveries relating to loans previously charged off, on loans outstanding (including accrued interest receivable) of the ICBI Companies and other extensions of credit (including letters of credit and commitments to make loans or extend credit) by ICBI. (r) Absence of Material Changes and Events. Since December 31, 1996, there has not been any material adverse change in the condition (financial or otherwise), aggregate assets or liabilities, cash flow, earnings or business or ICBI, and ICBI has conducted its business only in the ordinary course consistent with past practice. (s) Statements True and Correct. None of the information supplied or to be supplied by ICBI pursuant to Section 4.1 or for inclusion in the Registration Statement, the Proxy Statement/Prospectus or any other document to be filed with the SEC or any other regulatory authority in connection with the transactions contemplated hereby, will, at the respective time such documents are filed, and, in the case of the Registration Statement, when it becomes effective and with respect to the Proxy Statement/Prospectus, when first mailed to TTC shareholders, be false or misleading with respect to any material fact or omit to state any material fact necessary in order to make the statements therein not misleading, or, in the case of the Proxy Statement/Prospectus or any supplement thereto, at the time of the TTC Shareholders' Meeting, be false or misleading with respect to any material fact or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of any proxy for the TTC Shareholders' Meeting. All documents that ICBI is responsible for filing with the SEC or any other regulatory authority in connection with the transactions contemplated, hereby will comply as to form in all material respects with the provisions of applicable law, including applicable provisions of federal and state securities law. (t) Brokers and Finders. Neither ICBI nor any ICBI Subsidiary, nor any of their respective officers, directors or employees, has employed any broker, finder or financial advisor or incurred any liability for any fees or commissions in connection with the transactions contemplated herein, except for the Davenport & Co. of Virginia, Inc.. (u) Repurchase Agreements. With respect to all agreements pursuant to which ICBI or any ICBI Subsidiary has purchased securities subject to an agreement to resell, if any, ICBI or such ICBI Subsidiary, as the case may be, has a valid, perfected first lien or security interest in the government securities or other collateral securing the repurchase agreement, and the value of such collateral equals or exceeds the amount of the debt secured thereby. 19 (v) Administration of Trust Accounts. ICBI and ICBI Subsidiaries have properly administered, in all respects material and which could reasonably be expected to be material to the business, operations or financial condition of ICBI and ICBI Subsidiaries, taken as a whole, all accounts for which they act as fiduciaries including but not limited to accounts for which they serve as trustees, agents, custodians, personal representatives, guardians, conservators or investment advisors, in accordance with the terms of the governing documents and applicable state and federal law and regulation and common law. Neither ICBI nor a ICBI Subsidiary, nor any director, officer or employee of ICBI or a ICBI Subsidiary has committed any breach of trust with respect to any such fiduciary account which is material to or could reasonably be expected to be material to the business, operations or financial condition of ICBI, or a ICBI Subsidiary, taken as a whole, and the accountings for each such fiduciary account are true and correct in all material respects and accurately reflect the assets of such fiduciary account in all material respects. (w) Environmental Matters. (1) Except as Previously Disclosed, to the best of ICBI's knowledge, neither ICBI nor any ICBI Subsidiary owns or leases any properties affected by toxic waste, radon gas or other hazardous conditions or constructed in part with the use of asbestos. Each of ICBI and the ICBI Subsidiaries is in substantial compliance with all Environmental Laws applicable to real or personal properties in which it has a direct fee ownership or, with respect to a direct interest as lessee, applicable to the leasehold premises or, to the best knowledge of ICBI and the ICBI Subsidiaries, the premises on which the leasehold is situated. Neither ICBI nor any ICBI Subsidiary has received any Communication alleging that ICBI or such ICBI Subsidiary is not in such compliance and, to the best knowledge of ICBI and the ICBI Subsidiaries, there are no present circumstances (including Environmental Laws that have been adopted but are not yet effective) that would prevent or interfere with the continuation of such compliance. (2) There are no legal, administrative, arbitral or other claims, causes of action or governmental investigations of any nature, seeking to impose, or that could result in the imposition, on ICBI and the ICBI Subsidiaries of any liability arising under any Environmental Laws pending or, to the best knowledge of ICBI and the ICBI Subsidiaries, threatened against (A) ICBI or any ICBI Subsidiary, (B) any person or entity whose liability for any Environmental Claim, ICBI or any ICBI Subsidiary has or may have retained or assumed either contractually or by operation of law, or (C) any real or personal property which ICBI or any ICBI Subsidiary owns or leases, or has been or is judged to have managed or to have supervised or participated in the management of, which liability might have a material adverse effect on the business, financial condition or results of operations of ICBI. ICBI and the ICBI Subsidiaries are not subject to any agreement, order, judgment, decree or memorandum by or with any court, governmental authority, regulatory agency or third party imposing any such liability. (3) To the best knowledge of ICBI and the ICBI Subsidiaries, there are no legal, administrative, arbitral or other proceedings, or Environmental Claims or other claims, causes of action or governmental investigations of any nature, seeking to impose, or that could result in the imposition, on ICBI or any ICBI Subsidiary of any liability arising under any Environmental Laws pending or threatened against any real or personal property in which ICBI or any ICBI Subsidiary holds a security interest in connection with a loan or a loan participation which liability might have a material adverse effect on the business, financial condition or results of operations of ICBI. ICBI and the ICBI Subsidiaries are not subject to any agreement, order, judgment, decree or memorandum by or with any court, governmental authority, regulatory agency or third party imposing any such liability. 20 (4) With respect to all real and personal property owned or leased by ICBI or any ICBI Subsidiary, other than OREO, ICBI has made available to TTC copies of any environmental audits, analyses and surveys that have been prepared relating to such properties. With respect to all OREO held by ICBI or any ICBI Subsidiary and all real or personal property which ICBI or any ICBI Subsidiary has been or is judged to have managed or to have supervised or participated in the management of, ICBI has made available to TTC the information relating to such OREO available to ICBI. ICBI and the ICBI Subsidiaries are in compliance in all material respects with all recommendations contained in any environmental audits, analyses and surveys relating to any of the properties, real or personal, described in this subsection (4). (5) There are no past or present actions, activities, circumstances, conditions, events or incidents, including, without limitation, the release, emission, discharge or disposal of any Materials of Environmental Concern, that could reasonably form the basis of any Environmental Claim or other claim or action or governmental investigation that could result in the imposition of any liability arising under any Environmental Laws currently in effect or adopted but not yet effective against ICBI or any ICBI Subsidiary or against any person or entity whose liability for any Environmental Claim ICBI or any ICBI Subsidiary has or may have retained or assumed either contractually or by operation of law. ARTICLE 4 Conduct Prior to the Effective Date 4.1 Access to Records and Properties. TTC will keep ICBI, and ICBI will keep TTC advised of all material developments relevant to their respective businesses prior to consummation of the Reorganization. Prior to the Effective Date, ICBI, on the one hand, and TTC on the other, agree to give to the other party reasonable access to all the premises and books and records (including tax returns filed and those in preparation) of it and its subsidiaries and to cause its officers to furnish the other with such financial and operating data and other information with respect to the business and properties as the other shall from time to time request for the purposes of verifying the warranties and representations set forth herein; provided, however, that any such investigation shall be conducted in such manner as not to interfere unreasonably with the operation of the respective business of the other. 4.2 Confidentiality. Between the date of this Agreement and the Effective Date, ICBI and TTC each will maintain in confidence, and cause its directors, officers, employees, agents and advisors to maintain in confidence, and not use to the detriment of the other party, any written, oral or other information obtained in confidence from the other party or a third party in connection with this Agreement or the transactions contemplated hereby unless such information is already known to such party or to others not bound by a duty of confidentiality or unless such information becomes publicly available through no fault of such party, unless use of such information is necessary or appropriate in making any filing or obtaining any consent or approval required for the consummation of the transactions contemplated hereby or unless the furnishing or use of such information is required by or necessary or appropriate in connection with legal proceedings. If the Reorganization is not consummated, each party will return or destroy as much of such written information as may reasonably be requested. 4.3 Registration Statement, Proxy Statement and Shareholder Approval. The Board of Directors of TTC will duly call and will hold a meeting of the TTC shareholders as soon 21 as practicable for the purpose of approving the Reorganization (the "TTC Shareholders' Meeting") and, subject to the fiduciary duties of the Board of Directors of TTC (as advised in writing by its counsel), TTC shall use its best efforts to solicit and obtain votes of the holders of its Common Stock in favor of the Reorganization and will comply with the provisions in its Articles of Incorporation and Bylaws relating to the call and holding of a meeting of shareholders for such purpose; each member of the Board of Directors of TTC shall vote all shares of TTC Common Stock under his control (and not held in a fiduciary capacity) in favor of the Reorganization; and TTC shall, at the request of ICBI, recess or adjourn the meeting if such recess or adjournment is deemed by ICBI to be necessary or desirable. ICBI and TTC will prepare jointly the proxy statement/prospectus to be used in connection with the TTC Shareholders' Meeting (the "Proxy Statement"). ICBI will prepare and file with the SEC the Registration Statement, of which such Proxy Statement shall be a part and will use its best efforts to have the Registration Statement declared effective as promptly as possible. When the Registration Statement or any post-effective amendment or supplement thereto shall become effective, and at all times subsequent to such effectiveness, up to and including the date of the Meeting, such Registration Statement and all amendments or supplements thereto, with respect to all information set forth therein furnished or to be furnished by TTC relating to TTC and by ICBI relating to the ICBI Companies, (i) will comply in all material respects with the provisions of the Securities Act of 1933 and any other applicable statutory or regulatory requirements, including applicable state blue-sky and securities laws, and (ii) will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements contained therein not misleading; provided, however, in no event shall any party hereto be liable for any untrue statement of a material fact or omission to state a material fact in the Registration Statement made in reliance upon, and in conformity with, written information concerning another party furnished by such other party specifically for use in the Registration Statement. 4.4 Operation of the Businesses of TTC and ICBI. (a) TTC agrees that from the date hereof to the Effective Date it will operate its business substantially as presently operated and only in the ordinary course, and, consistent with such operation, it will use its best efforts to preserve intact its relationships with persons having business dealings with it. Without limiting the generality of the foregoing, TTC agrees that it will not, without the prior written consent of ICBI: (i) Make any change in its authorized capital stock, or issue or sell any additional shares of, securities convertible into or exchangeable for, or options, warrants or rights to purchase, its capital stock, nor shall it purchase, redeem or otherwise acquire any of its outstanding shares of capital stock; (ii) Voluntarily make any changes in the composition of its officers, directors or other key management personnel; (iii) Make any change in the compensation or title of any officer, director or key management employee or make any change in the compensation or title of any other employee, other than permitted by current employment policies in the ordinary course of business, any of which changes shall be reported promptly to ICBI; (iv) Enter into any bonus, incentive compensation, stock option, deferred compensation, profit sharing, thrift, retirement, pension, group insurance or other benefit plan or any employment or consulting agreement; 22 (v) (i) Incur any obligation or liability in excess of $5,000 (whether absolute or contingent, excluding suits instituted against it) or (ii) make any pledge, or encumber any of its assets, nor dispose of any of its assets in any other manner, except in the ordinary course of its business and for adequate value, or as otherwise specifically permitted in this Agreement; (vi) Contract to issue any shares of its Common Stock, options for shares of its Common Stock, or securities exchangeable for or convertible into such shares; (vii) Knowingly waive any right to substantial value: (viii) Enter into material transactions otherwise than in the ordinary course of its business; (ix) Alter, amend or repeal its Bylaws or Articles of Incorporation; or (x) Propose or take any other action which would make any representation or warranty in Section 3.1 hereof untrue. (b) ICBI agrees that from the date hereof to the Effective Date it will operate its business substantially as presently operated and only in the ordinary course and, consistent with such operation, it will use its best efforts to preserve intact its relationships with persons having business dealings with it; provided, however, that nothing herein shall be interpreted to prevent ICBI from paying dividends on its common stock, repurchasing shares of its common stock or engaging in discussions with respect to, or pursuing, acquisitions of other corporations. 4.5 Dividends. TTC agrees that it will not declare or pay any cash dividend from the date of this Agreement through the Effective Date. 4.6 No Solicitation. Unless and until this Agreement shall have been terminated pursuant to its terms, neither TTC nor any of its officers, directors, representatives or agents shall, directly or indirectly, (i) encourage, solicit or initiate discussions or negotiations with any person other than ICBI concerning any merger, share exchange, sale of substantial assets, tender offer, sale of shares of capital stock or similar transaction involving TTC, (ii) enter into any agreement with any third party providing for a business combination transaction, equity investment or sale of a significant amount of assets, or (iii) furnish any information to any other person relating to or in support of such transaction. TTC and its directors, officers and employees, advisors and representatives may, however, furnish information, and enter into discussions or negotiations in response to unsolicited bona fide requests or bids, if TTC's Board of Directors determines in good faith, upon advice of counsel, that such action is in the best interests of TTC and its shareholders. TTC will promptly communicate to ICBI the terms of any proposal which it may receive in respect to any of the foregoing transactions. 4.7 Regulatory Filings. ICBI and TTC shall prepare jointly all regulatory filings required to consummate the transactions contemplated by the Agreement and the Plan of Merger and submit the filings for approval with the Federal Reserve Board and the SCC, and any other governing regulatory authority, as soon as practicable after the date hereof. ICBI and TTC shall use their best efforts to obtain approvals of such filings. 23 4.8 Public Announcements. Each party will consult with the other before issuing any press release or otherwise making any public statements with respect to the Reorganization and shall not issue any such press release or make any such public statement prior to such consultations except as may be required by law. 4.9 Notice of Breach. ICBI and TTC will give written notice to the other promptly upon becoming aware of the impending or threatened occurrence of any event which would cause or constitute a breach of any of the representations, warranties or covenants made to the other party in this Agreement and will use its best efforts to prevent or promptly remedy the same. 4.10 Reorganization Consummation. Subject to the terms and conditions of this Agreement, each party shall use its best efforts in good faith to take, or cause to be taken, all actions, and to do or cause to be done all things necessary, proper or desirable, or advisable under applicable laws, as promptly as practicable so as to permit consummation of the Reorganization at the earliest possible date, consistent with Section 1.3 herein, and to otherwise enable consummation of the transactions contemplated hereby and shall cooperate fully with the other parties hereto to that end, and each of TTC and ICBI shall use, and shall cause each of their respective subsidiaries to use, its best efforts to obtain all consents (governmental or other) necessary or desirable for the consummation of the transactions contemplated by this Agreement. ARTICLE 5 Additional Agreements 5.1 Benefit Plans. Upon consummation of the Reorganization, as soon as administratively practicable and subject to ICBI's best efforts, employees of TTC shall be entitled to participate in ICBI pension, benefit, health and similar plans on the same terms and conditions as employees of ICBI and its subsidiaries, without waiting periods and giving effect to years of service with TTC as if such service were with ICBI. ICBI also shall cause TTC to honor in accordance with their terms as in effect on the date hereof (or as amended after the date hereof with the prior written consent of ICBI), all employment, severance, consulting and other compensation contracts and agreements Previously Disclosed and executed in writing by TTC on the one hand and any individual current or former director, officer or employee thereof on the other hand, copies of which have previously been delivered by TTC to ICBI. 5.2 Indemnification. ICBI agrees that following the Effective Date, TTC may indemnify and hold harmless any person who has rights to indemnification from TTC, to the same extent and on the same conditions as such person is entitled to indemnification pursuant to Virginia law and TTC's Articles of Incorporation or Bylaws, as in effect on the date of this Agreement, to the extent legally permitted to do so, with respect to matters occurring on or prior to the Effective Date. ICBI further agrees that any such person is expressly made a third party beneficiary of this Section 5.2 and may directly, in such person's personal capacity, enforce such rights through an action at law or in equity or through any other manner or means of redress allowable under Virginia law to the same extent as if such person were a party hereto. Without limiting the foregoing, in any case in which corporate approval may be required to effectuate any indemnification, TTC shall direct, at the election of the party to be indemnified, that the determination of permissibility of indemnification shall be made by independent counsel mutually agreed upon between TTC and the indemnified party. 24 With respect to matters occurring after the Effective Date, (i) ICBI shall cover TTC's directors and officers under ICBI's directors' and officers' liability insurance policy and (ii) directors and officers of TTC shall have the same rights of indemnification under ICBI's Articles of Incorporation as directors and officers of ICBI and its existing subsidiaries. 5.3 Transfer of Trust Business. As soon as practicable after the Effective Date, ICBI shall cause the trust business of The Middleburg Bank to be transferred to TTC in accordance with applicable law, including Section 6.1-32.9 of the Code of Virginia, as amended. Until such transfer is complete, for purposes of Section 1.4(h) hereof, the revenue and expense of TTC shall be deemed to include the revenue and expense of the trust department of The Middleburg Bank. 5.4 NASDAQ Listing. ICBI shall use its best efforts to have the ICBI Common Stock quoted on the NASDAQ SmallCap Market or OTC Bulletin Board within thirty (30) days after the Effective Date. 5.5 Expense Allocation. For purposes of calculating the Required Net Earnings, the Surviving Corporation shall be deemed to have the benefit of the TTC net operating loss carryforwards and no expense shall be charged or allocated to the Surviving Corporation for (a) ICBI overhead, (b) ICBI expenses other than the Surviving Corporation's proportionate share of direct expenses for goods and services reasonably incurred by ICBI and requested by the Surviving Corporation, (c) good will resulting from the Reorganization, to the extent such good will is amortized over a period of less than fifteen years, or (d) any amount in excess of one-half of the annual salary of the chief executive officer of the Surviving Corporation paid to such officer as severance pay. Section 1.4(h) and this Section 5.5 shall be interpreted and applied consistently. ARTICLE 6 Conditions to the Reorganization 6.1 Conditions to Each Party's Obligations to Effect the Reorganization. The respective obligations of each of ICBI and TTC to effect the Reorganization and the other transactions contemplated by this Agreement shall be subject to the fulfillment or waiver at or prior to the Effective Date of the following conditions: (a) Shareholder Approval. Shareholders of TTC shall have approved all matters relating to this Agreement and the Reorganization required to be approved by such shareholders in accordance with Virginia law. (b) Regulatory Approvals. This Agreement and the Plan of Merger shall have been approved by the Federal Reserve, the SCC, and any other regulatory authority whose approval is required for consummation of the transactions contemplated hereby, and such approvals shall not have imposed any condition or requirement which would so materially adversely impact the economic or business benefits of the transactions contemplated by this Agreement as to render inadvisable the consummation of the Reorganization in the reasonable opinion of the Board of Directors of ICBI or TTC. 25 (c) Registration Statement. The Registration Statement shall have been declared effective and shall not be subject to a stop order or any threatened stop order. (d) Tax Opinion. ICBI and TTC shall have received an opinion of Williams, Mullen, Christian & Dobbins, or other counsel reasonably satisfactory to ICBI and TTC, to the effect that the Reorganization will constitute a reorganization within the meaning of Section 368 of the Internal Revenue Code and that no gain or loss will be recognized by the shareholders of TTC to the extent they receive ICBI Common Stock solely in exchange for their TTC Common Stock in the Reorganization. (e) Opinions of Counsel. TTC shall have delivered to ICBI and ICBI shall have delivered to TTC opinions of counsel, dated as of the Effective Date, as to such matters as they may each reasonably request with respect to the transactions contemplated by this Agreement and in a form reasonably acceptable to each of them. (f) Legal Proceedings. Neither ICBI nor TTC shall be subject to any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits the consummation of the Reorganization. 6.2 Conditions to Obligations of ICBI. The obligations of ICBI to effect the Reorganization shall be subject to the fulfillment or waiver at or prior to the Effective Date of the following additional conditions: (a) Representations and Warranties. Each of the representations and warranties contained herein of TTC shall be true and correct as of the date of this Agreement and upon the Effective Date with the same effect as though all such representations and warranties had been made on the Effective Date, except (i) for any such representations and warranties made as of a specified date, which shall be true and correct as of such date, (ii) as expressly contemplated by this Agreement, or (iii) for representations and warranties the inaccuracies of which relate to matters that, individually or in the aggregate, do not materially adversely affect the Reorganization and the other transactions contemplated by this Agreement and ICBI shall have received a certificate or certificates signed by the Chief Executive Officer and Chief Financial Officer of TTC dated the Effective Date, to such effect. (b) Performance of Obligations. TTC shall have performed in all material respects all obligations required to be performed by it under this Agreement prior to the Effective Date, and ICBI shall have received a certificate signed by the Chief Executive Officer of TTC to that effect. (c) Affiliate Letters. Each shareholder of TTC who may be deemed by counsel for ICBI to be an "affiliate" of TTC within the meaning of Rule 145 under the Securities Act of 1933 shall have executed and delivered a commitment and undertaking to the effect that (1) such shareholder will dispose of the shares of ICBI Common Stock received by him in connection with the Reorganization only in accordance with the provisions of paragraph (d) of Rule 145; (2) such shareholders will not dispose of any such shares until ICBI has received an opinion of counsel acceptable to it that such proposed disposition will not violate the provisions of any applicable securities laws; and (3) the certificates representing said shares may bear a conspicuous legend referring to the forgoing restrictions. 26 (d) TTC Expenses; Operating Losses. The sum of (i) the TTC Operating Losses; (ii) severance benefits (including payroll taxes and insurance) payable to TTC officers; and (iii) TTC Transaction Costs shall not have exceeded $200,000, without the consent of ICBI. (e) TTC Options. All options, warrants or rights to purchase TTC Common Stock shall have been terminated. 6.3 Conditions to Obligations of TTC. The obligations of TTC to effect the Reorganization shall be subject to the fulfillment or waiver at or prior to the Effective Date of the following additional conditions: (a) Representations and Warranties. Each of the representations and warranties contained herein of ICBI shall be true and correct as of the date of this Agreement and upon the Effective Date with the same effect as though all such representations and warranties had been made on the Effective date, except (i) for any such representations and warranties made as of a specified date, which shall be true and correct as of such date, (ii) as expressly contemplated by this Agreement, or (iii) for representations and warranties the inaccuracies of which relate to matters that, individually or in the aggregate, do not materially adversely affect the Reorganization and the other transactions contemplated by this Agreement and TTC shall have received a certificate or certificates signed by the Chief Executive Officer and Chief Financial Officer of ICBI dated the Effective Date, to such effect. (b) Performance of Obligations. ICBI shall have performed in all material respects all obligations required to be performed by it under this Agreement prior to the Effective Date, and TTC shall have received a certificate signed by Chief Executive Officer of ICBI to that effect. (c) Investment Banking Letter. TTC shall have received a written opinion in form and substance satisfactory to TTC from Scott & Stringfellow, Inc. addressed to TTC and dated the date the Proxy Statement/Prospectus is mailed to shareholders of TTC, to the effect that the terms of the Reorganization, including the Merger Consideration, are fair, from a financial point of view, to TTC. At its option, TTC may require that such fairness opinion be updated as of the Effective Date and, in such event, it shall also be a condition to TTC's obligation to consummate the Reorganization that TTC receive such updated opinion. ARTICLE 7 Termination 7.1 Termination. Notwithstanding any other provision of this Agreement, and notwithstanding the approval of this Agreement and the Plan of Merger by the shareholders of TTC, this Agreement may be terminated and the Reorganization abandoned at any time prior to the Effective Date: (a) By the mutual consent of the Board of Directors of each of ICBI and TTC; 27 (b) By the respective Boards of Directors of ICBI or TTC if the conditions set forth in Section 6.1 have not been met or waived by ICBI and TTC; (c) By the Board of Directors of ICBI if the conditions set forth in Section 6.2 have not been met or waived by ICBI; (d) By the Board of Directors of TTC if the conditions set forth in Section 6.3 have not been met or waived by TTC; (e) By the respective Boards of Directors ICBI or TTC if the Reorganization is not consummated by September 30, 1997. (f) By the Board of Directors of ICBI if the Board of Directors of TTC receives a subsequent bona-fide offer to acquire TTC and does not within fourteen (14) days after receipt of such subsequent offer confirm in writing to ICBI that each member of the Board of Directors of TTC supports the Reorganization, will vote his shares of TTC Common Stock in favor of the Reorganization, and will recommend to the shareholders of TTC that they approve the Reorganization. (g) By the Board of Directors of TTC if, before the Effective Date, ICBI shall enter into any agreement or letter of intent providing for the direct or indirect acquisition of substantially all of the assets and liabilities or voting stock of ICBI. 7.2 Effect of Termination. In the event of the termination and abandonment of this agreement and the Reorganization pursuant to Section 7.1, this Agreement shall become void and have no effect, except that (i) the last sentence of Section 4.2 and all of Sections 4.8 and 7.4 shall survive any such termination and abandonment and (ii) no party shall be relieved or released from any liability arising out of an intentional breach of any provision of this Agreement. 7.3 Non-Survival of Representations, Warranties and Covenants. Except for Sections 1.2, 1.4, 2.1, 2.2, 2.3, 2.4, 5.1, 5.2, 5.3, 5.4, 5.5 and 7.4 of this Agreement, none of the respective representations and warranties, obligations, covenants and agreements of the parties shall survive the Effective Date, provided that no such representations, warranties, obligations, covenants and agreements shall be deemed to be terminated or extinguished so as to deprive ICBI or TTC (or any director, officer, or controlling person thereof) of any defense in law or equity which otherwise would be available against the claims of any person, including without limitation any shareholder or former shareholder of either ICBI or TTC. 7.4 Expenses. The parties provide for the payment of expenses as follows: (a) Except as provided below, each of the parties shall bear and pay all costs and expenses incurred by it or on its behalf in connection with the transactions contemplated herein, including fees and expenses of its own consultants, investment bankers, accountants and counsel. 28 (b) If this Agreement is terminated by ICBI or TTC because of a willful and material breach by the other of any representation, warranty, covenant, undertaking or restriction set forth herein, and provided that the terminating party shall not have been in breach (in any material respect) of any representation and warranty, covenant, undertaking or restriction contained herein, then the breaching party shall bear and pay all such costs and expenses of the other party, including fees and expenses of consultants, investment bankers, accountants, counsel, printers, and persons involved in the transactions contemplated by this Agreement, including the preparation of the Registration Statement and the Proxy Statement. (c) Final settlement with respect to the payment of such fees and expenses by the parties shall be made within thirty (30) days after the termination of this Agreement. ARTICLE 8 General Provisions 8.1 Entire Agreement. This Agreement contains the entire agreement among ICBI and TTC with respect to the Reorganization and the related transactions and supersedes all prior arrangements or understandings with respect thereto. 8.2 Waiver and Amendment. Any term or provision of this Agreement may be waived in writing at any time by the party which is, or whose shareholders are, entitled to the benefits thereof, and this Agreement may be amended or supplemented by written instructions duly executed by the parties hereto at any time, whether before or after the meetings of TTC and ICBI shareholders referred to in Section 6.1(a) hereof, except statutory requirements and requisite approvals of shareholders and regulatory authorities. 8.3 Descriptive Headings. Descriptive headings are for convenience only and shall not control or affect the meaning and construction of any provisions of this Agreement. 8.4 Governing Law. Except as required otherwise or otherwise indicated herein, this Agreement shall be construed and enforced according to the laws of the Commonwealth of Virginia. 8.5 Notices. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, addressed as follows: If to ICBI: Joseph L. Boling Independent Community Bankshares, Inc. 111 West Washington Street Middleburg, VA 20117 (Tel. 540-687-4220) 29 Copy to: Wayne A. Whitham, Jr. Williams, Mullen, Christian & Dobbins 1021 East Cary Street P.O. Box 1320 Richmond, Virginia 23210-1320 (Tel. 804-783-6473) If to TTC: F. E. Deacon, III The Tredegar Trust Company 901 East Byrd Street Richmond, VA 23219 (Tel. 804-644-2848) Copy to: Gary D. LeClair LeClair, Ryan 707 E. Main Street, #1100 Richmond, VA 23219 (Tel. 804-783-2003) 8.6 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but such counterparts together shall constitute one and the same agreement. 8.7 Severability. In the event any provisions of this Agreement shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provisions hereof. Any provision of this Agreement held invalid or unenforceable only in part or degree shall remain in full force and effect to the extent not held invalid or unenforceable. Further, the parties agree that a court of competent jurisdiction may reform any provision of this Agreement held invalid or unenforceable so as to reflect the intended agreement of the parties hereto. 8.8 Subsidiaries. All representations, warranties, and covenants herein, where pertinent, include and shall apply to the wholly owned subsidiaries belonging to the party making such representations, warranties, and covenants. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in counterparts by their duly authorized officers and their corporate seals to be affixed hereto, all as of the dates first written above. Independent Community Bankshares, Inc. By: -------------------------------------- Joseph L. Boling, President and Chief Executive Officer ATTEST: 30 - --------------------- Secretary The Tredegar Trust Company By: -------------------------------------- F. E. Deacon, III President and Chief Executive Officer ATTEST: - ---------------------- Secretary TTC Acquisition Subsidiary, Inc. By: -------------------------------------- Joseph L. Boling, President and Chief Executive Officer ATTEST: - ----------------------- Secretary 31 EXHIBIT A to the Agreement and Plan of Reorganization PLAN OF MERGER OF TTC ACQUISITION SUBSIDIARY, INC. INTO THE TREDEGAR TRUST COMPANY ARTICLE 1 TTC Acquisition Subsidiary, Inc., a Virginia trust company ("Acquisition") shall upon the time that the Articles of Merger are made effective by the State Corporation Commission of Virginia (the "Effective Time"), be merged (the "Merger") into The Tredegar Trust Company ("TTC or the "Surviving Corporation"), a Virginia trust company. TTC shall be the Surviving Corporation. Acquisition is a wholly-owned subsidiary of Independent Community Bankshares, Inc., a Virginia corporation ("ICBI"). At the Effective Time TTC shall become a subsidiary trust company of ICBI, within the meaning of Article 3.1, Chapter 2, Title 6.1 of the Code of Virginia, as amended. ARTICLE 2 Definitions For all purposes of this Plan: 2.1 the term "Charter" shall mean articles of incorporation. 2.2 the term "Contingent Merger Consideration" shall mean, with respect to each share of the common stock of TTC, par value, $2.50 per share ("TTC Common Stock") issued and outstanding on the Effective Date a ratable share of the sum of (y) 4,940 shares of the common stock of ICBI, par value $5.00 per share ("ICBI Common Stock") and (z) the number of shares of ICBI Common Stock determined by dividing $138,300 by the Fair Market Value Per Share of ICBI Common Stock. A-1 2.3 the term "Fair Market Value Per Share of ICBI Common Stock" shall mean the average of the last sale or high bid price for ICBI Common Stock as reported on the OTC Bulletin Board, the NASDAQ SmallCap Market or the NASDAQ National Market, as appropriate, for the ten trading day period ending on the tenth day prior to the date that the Contingent Merger Consideration is paid; provided, however, that if a transaction involving a proposed change of control of ICBI is announced during the thirty-six (36) month period referred to in Section 1.4(f), the measuring period shall be the ten trading days immediately prior to the first public announcement of such proposed change of control. 2.4 the term "Initial Merger Consideration" shall mean, with respect to each share of the common stock of TTC Common Stock issued and outstanding on the Effective Date, 0.25 shares of ICBI Common Stock unless TTC Operating Losses exceed $30,000. If TTC Operating Losses exceed $30,000, the Initial Merger Consideration shall be the fraction of a share of ICBI Common Stock, the denominator of which shall be 276,600 and the numerator of which shall be the difference between $1,936,200 and the amount by which TTC Operating Losses exceed $30,000, such difference then to be divided by $28.00. 2.5 the term "Merger Consideration" shall mean, with respect to each share of TTC Common Stock issued and outstanding on the Effective Date, the Initial Merger Consideration and, if the Surviving Corporation's aggregate net earnings for the thirty-six (36) month period, beginning with the month following the month in which the Effective Date occurs, equal or exceed the Required Net Earnings, the Contingent Merger Consideration (which, if payable, shall be paid as promptly as practicable after the end of the thirty-sixth (36th) month following the month in which the Effective Date occurs. 2.6 the term "Required Net Earnings" shall mean $638,946 at a minimum, plus the amount, if any, by which (y) severance payments and benefits (including payroll taxes and insurance) paid to TTC officers and (z) TTC Transaction Costs (as defined below), in the aggregate, exceed $150,000, net of the amount by which TTC operating losses (as defined below) as less than $30,000. 2.7 the term "TTC Operating Losses" shall mean the excess, if any, of TTC expenses over TTC revenue (each computed according to generally accepted accounting principles consistently applied) from January 1, 1997 to the Effective Date; provided, however, that there shall be excluded from TTC expenses (i) severance benefits (including payroll taxes and insurance) payable to TTC officers, (ii) TTC Transaction Costs (iii) the amortization or write-off of TTC start-up costs and (iv) any referral fees payable by TTC to The Middleburg Bank after June 30, 1997. 2.8 the term "TTC Transaction Costs" shall mean the expenses of TTC accrued on the books of TTC after December 31, 1996 in connection with the negotiation and preparation of the Option Agreement and the February 5, 1997 letter of intent between ICBI and TTC and expenses of TTC incurred in connection with the negotiation, performance and consummation of this Agreement, including fees and expenses of consultants, investment bankers, accountants, counsel and printers. ARTICLE 3 Effect of Reorganization on Common Stock 3.1 (a) At the Effective Time, by virtue of the Merger and without any action on the part of the holders thereof, each share of TTC Common Stock issued and outstanding immediately prior to the Effective Time(other than shares of TTC Common Stock held by ICBI and Dissenting Shares as defined in Section 3.6) shall cease to be outstanding and shall be converted into the right to receive the Merger Consideration. A-2 (b) Each holder of a certificate representing any shares of TTC Common Stock shall thereafter cease to have any rights with respect to such TTC Common Stock, except the right to receive the consideration described in Sections 3.1 and 3.4 upon the surrender of such certificate in accordance with Section 3.3. (c) In the event ICBI changes the number of shares of ICBI Common Stock issued and outstanding prior to the date that the Initial Merger Consideration or Contingent Merger Consideration is paid, as a result of any stock split, stock dividend, recapitalization or similar transaction with respect to the outstanding ICBI Common Stock and the record date therefor shall be prior to the date that the Initial Merger Consideration or Contingent Merger Consideration is paid, the Merger Consideration shall be proportionately adjusted. (d) At the Effective Time, by virtue of the Reorganization and without any action on the part of the holder thereof, each share of the common stock of Acquisition issued and outstanding immediate prior to the Effective Time shall cease to be outstanding and shall be converted into one share of TTC Common Stock. 3.2 Calculation and Payment of Merger Consideration. (a) If, within 30 days following the Effective Time, the parties agree on the amount, if any, of the TTC Operating Losses, the Initial Merger Consideration shall be calculated and paid as soon as practicable following the Effective Date in accordance with Section 3.3(a). If the parties do not so agree, the Initial Merger Consideration will be determined as follows: (i) Closing Financial Statement. ICBI shall cause to be prepared an income statement (the "Closing Financial Statement") showing the TTC Operating Losses as of the Effective Date. The Closing Financial Statement shall be prepared in accordance with generally accepted accounting principles consistently applied with prior periods, except for adjustments for determining the TTC Operating Losses. (ii) Audit. The Closing Financial Statement and related footnotes (if any) shall be audited and reported on by Yount, Hyde & Barbour ("Yount, Hyde"). The report of Yount, Hyde shall be unqualified except as necessary to reflect adjustments in determining the TTC Operating Losses as required herein. ICBI shall exercise its reasonable best efforts to cause the Closing Financial Statement, together with the report of Yount, Hyde thereon, to be delivered within 60 days after the Effective Date, subject to the provisions of subsection (iii) hereof. Such delivery shall be made to F. E. Deacon, III, as the representative of the TTC Shareholders (the "Shareholders' Representative"), at the address designated by him to ICBI. ICBI and the Surviving Corporation shall, and shall cause their respective employees and agents to, fully cooperate in all respects in the audit and review process and take such actions and make such undertaking as are customary in connection therewith. (iii) Review. Following delivery of the Closing Financial Statement to the Shareholders' Representative, ICBI shall cause Yount, Hyde to provide the Shareholders' Representative with an opportunity to observe all aspects of the audit and to review Yount, Hyde's work papers, and to discuss the same with Yount, Hyde representatives. ICBI shall be responsible for the cost of the audit, including the fees and expenses of Yount, Hyde. The Shareholders' Representative shall have 30 days to A-3 review the Closing Financial Statement and to give notice to ICBI that he has a material disagreement with Yount, Hyde regarding the Closing Financial Statement. Failing such notice, the Closing Financial Statement as delivered to the Shareholders' Representative shall be final and binding on the parties hereto. (iv) Objection Period. If the Shareholders' Representative gives an objection notice in a timely manner, but ICBI and the Shareholders' Representative are able to resolve such objections, the Closing Financial Statement, as modified to resolve such objections, shall be binding on the parties hereto. If ICBI and the Shareholders' Representative are unable to reach agreement as to all differences within 15 days after ICBI's receipt of the Shareholders' Representative's objection notice, then the unresolved differences shall be submitted to arbitration to resolve the dispute and make a determination which shall be binding on the parties to this Agreement. Such arbitration shall be conducted by an arbitrator experienced in the matters at issue and selected in accordance with the then current Commercial Arbitration Rules of the American Arbitration Association (the "Rules"). The arbitration shall be held in Richmond, Virginia and shall be conducted in accordance with the Rules. The decision of the arbitrator shall be final and binding as to any matters submitted to arbitration; provided that, if necessary, such decision may be enforced by either ICBI or the Shareholders' Representative in any court having competent jurisdiction. After delivery of the arbitrator's decision, the Closing Financial Statement, modified as appropriate to reflect the arbitrator's decision, shall be final and binding. The determination of which party (or combination thereof) bears the costs and expenses incurred in connection with any such arbitration proceedings shall be determined by the arbitrator. (b) If, within 30 days following the end of the 36 month period, beginning with the month that follows the month in which the Effective Date occurs, ICBI and the Shareholders' Representative agree that the net earnings of the Surviving Corporation exceed the Required Net Earnings, the Contingent Merger Consideration shall be calculated and paid as soon as practicable in accordance with Section 3.3(b). If the parties do not so agree, the decision to pay or not to pay Contingent Merger Consideration will be determined as follows: (i) Post Closing Financial Statement. ICBI shall cause to be prepared an income statement (the "Post Closing Financial Statement") showing the Surviving Corporation's net earnings for such 36 month period and calculating the Required Net Earnings. The Post Closing Financial Statement shall be prepared in accordance with generally accepted accounting principles consistently applied with prior periods. (ii) Audit. The Post Closing Financial Statement and related footnotes (if any) shall be audited and reported on by Yount, Hyde & Barbour ("Yount, Hyde"). The report of Yount, Hyde shall be unqualified. ICBI shall exercise its reasonable best efforts to cause the Post Closing Financial Statement, together with the report of Yount, Hyde thereon, to be delivered within 60 days after the end of the 36 month period described in Section 3.2(b)(i), subject to the provisions of subsection (iii) hereof. Such delivery shall be made to the Shareholders' Representative, at the address designated by him to ICBI. ICBI and the Surviving Corporation shall, and shall cause their respective employees and agents to, fully cooperate in all respects in the audit and review process and take such actions and make such undertaking as are customary in A-4 connection therewith. (iii) Review. Following delivery of the Post Closing Financial Statement to the Shareholders' Representative, ICBI shall cause Yount, Hyde to provide the Shareholders' Representative with an opportunity to observe all aspects of the audit and to review Yount, Hyde's work papers, and to discuss the same with Yount, Hyde representatives. ICBI shall be responsible for the cost of the audit, including the fees and expenses of Yount, Hyde. The Shareholders' Representative shall have 30 days to review the Post Closing Financial Statement and to give notice to ICBI that he has a material disagreement with Yount, Hyde regarding the Post Closing Financial Statement. Failing such notice, the Post Closing Financial Statement as delivered to the Shareholders' Representative shall be final and binding on the parties hereto. (iv) Objection Period. If the Shareholders' Representative gives an objection notice in a timely manner, but ICBI and the Shareholders' Representative are able to resolve such objections, the Post Closing Financial Statement, as modified to resolve such objections, shall be binding on the parties hereto. If ICBI and the Shareholders' Representative are unable to reach agreement as to all differences within 15 days after ICBI's receipt of the Shareholders' Representative's objection notice, then the unresolved differences shall be submitted to arbitration to resolve the dispute and make a determination which shall be binding on the parties to this Agreement. Such arbitration shall be conducted by an arbitrator experienced in the matters at issue and selected in accordance with the then current Commercial Arbitration Rules of the American Arbitration Association (the "Rules"). The arbitration shall be held in Richmond, Virginia and shall be conducted in accordance with the Rules. The decision of the arbitrator shall be final and binding as to any matters submitted to arbitration; provided that, if necessary, such decision may be enforced by either ICBI or the Shareholders' Representative in any court having competent jurisdiction. After delivery of the arbitrator's decision, the Post Closing Financial Statement, modified as appropriate to reflect the arbitrator's decision, shall be final and binding. The determination of which party (or combination thereof) bears the costs and expenses incurred in connection with any such arbitration proceedings shall be determined by the arbitrator. 3.3 Manner of Conversion. As promptly as practicable after the Effective Date, ICBI shall cause The Middleburg Bank, acting as the exchange agent ("Exchange Agent"), to send to each former shareholder of record of TTC immediately prior to the Effective Date transmittal materials for use in exchanging such shareholder's certificates of TTC Common Stock (other than shares held by shareholders who perfect their dissenters' rights as provided under Section 3.6 hereof) for the consideration set forth in Section 3.1 above and Section 3.4 below. Any fractional share checks which a TTC shareholder shall be entitled to receive in exchange for such shareholder's shares of TTC Common Stock, and all dividends paid on any shares of ICBI Common Stock that such shareholder shall be entitled to receive prior to the delivery to the Exchange Agent of such shareholder's certificates representing all of such shareholder's shares of TTC Common Stock will be delivered to such shareholder only upon delivery to the Exchange Agent of the certificates representing all of such shares (or indemnity satisfactory to ICBI and the Exchange Agent, in their judgment, if any of such certificates are lost, stolen or destroyed). No interest will be paid on any such fractional share checks or dividends to which the holder of such shares shall be entitled to receive upon such delivery. A-5 3.4 Fractional Shares. ICBI shall issue cash in lieu of fractional shares. ICBI will pay the value of such fractional shares in cash on the basis of $28.00 per share of ICBI Common Stock. 3.5 Dividends. No dividend or other distribution payable to the holders of record of ICBI Common Stock at or as of any time after the Effective Date shall be paid to the holder of any certificate representing shares of TTC Common Stock issued and outstanding at the Effective Date until such holder physically surrenders such certificate for exchange as provided in Section 2.2 of this Agreement, promptly after which time all such dividends or distributions shall be paid (without interest). With respect to its dividend for the three months ending June 30, 1997, ICBI will not declare or establish a record date for such dividend prior to July 9, 1997. 3.6 Dissenting Shares. Shareholders of TTC shall have the right to demand and receive payment of the fair value of their shares of TTC Common Stock pursuant to the provisions of Virginia Code ss. 13.1-729 et seq. (the "Dissenting Shares"). If, however, a holder shall have failed to perfect his right to dissent or shall have effectively withdrawn or lost such right, each of his shares of TTC Common Stock shall be deemed to have been converted into, at the Effective Date, the right to receive the Merger Consideration and cash in lieu of any fractional shares pursuant to Section 3.4 hereof. ARTICLE 4 Name, Charter and Bylaws 4.1 At the Effective Time, the name, Charter of TTC (amended as described in Section 4.2) and bylaws of TTC shall be the name, Charter and bylaws of the Surviving Corporation. 4.2 The Articles of Merger shall include articles of restatement of the Charter of the Surviving Corporation, that amend the Charter of the Surviving Corporation as follows: (a) Article II shall read as follows: "The purpose for which the corporation is formed is to engage in the trust business under Title 6.1, Chapter 2, Article 3.1 of the Code of Virginia, as amended from time to time"; and (b) Article V shall read as follows: "The number of directors constituting the Board of Directors shall be determined in accordance with the Bylaws." A-6 THE TREDEGAR TRUST COMPANY BOARD OF DIRECTORS Each of the undersigned members of the Board of Directors of The Tredegar Trust Company agrees to be bound by his personal obligations as provided in Sections 4.3 and 4.6 of the Agreement and Plan of Reorganization, dated March __, 1997 by and among The Tredegar Trust Company, Independent Community Bankshares, Inc., a Virginia corporation and TTC Acquisition subsidiary, Inc., a Virginia corporation. ____________________, 1997 _______________________________(SEAL) Heriot Clarkson ____________________, 1997 _______________________________(SEAL) F. E. Deacon, III ____________________, 1997 _______________________________(SEAL) Delman H. Eure, Esq. ____________________, 1997 _______________________________(SEAL) James W. Harkness, Jr. ____________________, 1997 _______________________________(SEAL) Gary D. LeClair, Esq. ____________________, 1997 _______________________________(SEAL) Ivor Massey, Jr. ____________________, 1997 _______________________________(SEAL) John D. Perrin ____________________, 1997 _______________________________(SEAL) Richard L. Ramsey ____________________, 1997 _______________________________(SEAL) Stuart C. Siegel ____________________, 1997 _______________________________(SEAL) James C. Wheat, III Appendix B THE TREDEGAR TRUST COMPANY AUDITED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 CONTENTS AUDITED FINANCIAL STATEMENTS: INDEPENDENT AUDITOR'S REPORT.......................................... Page 1 BALANCE SHEETS........................................................ 2 - 3 STATEMENTS OF OPERATIONS.............................................. 4 STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY.............................................. 5 STATEMENTS OF CASH FLOWS.............................................. 6 NOTES TO FINANCIAL STATEMENTS......................................... 7 - 13 [Harris, Hardy, & Johnstone, P.C.] INDEPENDENT AUDITOR'S REPORT Stockholders and Board of Directors The Tredegar Trust Company Richmond, Virginia We have audited the accompanying balance sheets of The Tredegar Trust Company (a Virginia corporation) as of December 31, 1996 and 1995, and the related statements of operations, changes in stockholders' equity and cash flows for the years then ended. 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 financial statements referred to above present fairly, in all material respects, the financial position of The Tredegar Trust Company at December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Harris, Hardy & Johnstone, P.C. Richmond, Virginia February 5, 1997, except for Notes to Financial Statements as to which the date is May 8, 1997 -1- THE TREDEGAR TRUST COMPANY BALANCE SHEETS
ASSETS March 31, December 31, --------- ------------ 1997 1996 1995 ---- ---- ---- (Unaudited) ----------- CURRENT ASSETS Cash and cash equivalents $ 67,154 $ 65,459 $ 105,374 Accounts receivable 9,757 19,804 7,847 Investments - held to maturity 879,216 1,067,108 1,329,716 Prepaid expenses and other assets 23,587 16,536 19,658 ----------- ----------- ------------ TOTAL CURRENT ASSETS 979,714 1,168,907 1,462,595 ----------- ----------- ------------ PROPERTY AND EQUIPMENT Office furniture and equipment 81,785 80,109 65,193 Software 26,008 26,008 26,008 ----------- ----------- ------------ 107,793 106,117 91,201 Less accumulated depreciation and amortization (56,484) (53,354) (36,135) ----------- ----------- ------------ 51,309 52,763 55,066 ----------- ----------- ------------ OTHER ASSETS Organization costs (net of amortization of $199,988 in 1996 and $131,854 in 1995) 123,648 140,682 208,816 ----------- ----------- ------------ $1,154,671 $1,362,352 $ 1,726,477 ========== ========== ===========
See Notes to Financial Statements -2- LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31, --------- ------------ 1997 1996 1995 ---- ---- ---- (Unaudited) ----------- CURRENT LIABILITIES Accounts payable $ 5,853 $ 28,235 $ 3,979 Current installments of obligation under capital lease 1,457 1,985 2,011 ----------- ------------ ------------ TOTAL CURRENT LIABILITIES 7,310 30,220 5,990 LONG-TERM DEBT Obligation under capital lease, excluding current installments - - 1,985 ----------- ------------ ------------ TOTAL LIABILITIES 7,310 30,220 7,975 ----------- ------------ ------------ STOCKHOLDERS' EQUITY Common stock, par value $2.50 per share: Authorized 500,000 shares; issued and outstanding 276,600 shares 691,500 691,500 691,500 Capital surplus 2,189,750 2,189,750 2,189,750 Accumulated deficit (1,733,889) (1,549,118) (1,162,748) ---------- ----------- ----------- 1,147,361 1,332,132 1,718,502 ----------- ----------- ----------- $1,154,671 $1,362,352 $ 1,726,477 ========== ========== ===========
See Notes to Financial Statements -3- THE TREDEGAR TRUST COMPANY STATEMENTS OF OPERATIONS
Three Months Ended Year Ended March 31, December 31, ---------------------- ------------ 1997 1996 1996 1995 ---- ---- ---- ---- (Unaudited) (Unaudited) INCOME Fees $ 181,030 $124,950 $ 557,498 $ 313,633 Interest and other 16,954 18,793 73,827 68,415 --------- -------- ---------- --------- TOTAL INCOME 197,984 143,743 631,325 382,048 --------- -------- ---------- --------- GENERAL AND ADMINISTRATIVE EXPENSES Salaries 96,389 118,445 491,820 462,433 Insurance 21,788 16,868 80,774 73,789 Amortization - 19,248 77,058 76,861 Accounting and legal 4,974 10,534 55,932 60,096 Other 9,443 14,838 41,176 36,428 Rent 11,684 7,350 34,456 30,520 Referral fees 25,303 1,243 30,559 411 Taxes 8,159 10,376 29,459 28,224 Custody service fee 4,826 6,280 25,624 47,838 Consulting 1,500 1,500 22,232 6,000 Office supplies 3,857 4,638 18,602 17,727 Equipment rent 4,688 4,482 18,235 18,564 Investment research 4,635 5,050 17,931 8,273 Retirement plan - 3,553 14,592 13,873 State examination fee - - 12,840 11,120 Marketing 586 1,076 11,223 11,565 Depreciation 2,512 2,445 11,158 13,218 Telephone 2,257 2,094 8,182 9,130 Travel 585 1,478 6,595 3,425 Postage 490 1,773 5,977 4,769 Dues and subscriptions 136 905 3,270 4,682 Placement fee 2,900 - - - ---------- -------- ----------- ---------- TOTAL GENERAL AND ADMINISTRATIVE EXPENSES 206,712 234,176 1,017,695 938,946 ---------- -------- ----------- ---------- NET LOSS BEFORE COSTS RELATED TO MERGER $ (8,728) $(90,433) $ (386,370) $(556,898)
See Notes to Financial Statements -4- THE TREDEGAR TRUST COMPANY STATEMENTS OF OPERATIONS - Continued
Three Months Ended Year Ended March 31, December 31, --------- ------------ 1997 1996 1996 1995 ---- ---- ---- ---- (Unaudited) (Unaudited) NET LOSS BEFORE COSTS RELATED TO MERGER $ (8,728) $ (90,433) $(386,370) $(556,898) COSTS RELATED TO MERGER Amortization 17,652 - - - Salaries 106,745 - - - Accounting and legal 50,637 - - - Other 1,009 - - - --------- -------- --------- --------- NET LOSS $(184,771) $(90,433) $(386,370) $(556,898) ========= ======== ========= ========= LOSS PER SHARE Per average share outstanding, net loss $ (.67) $ (.33) $ (1.40) $ (2.28) =========== ========= ========== ==========
See Notes to Financial Statements -5- THE TREDEGAR TRUST COMPANY STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON CAPITAL ACCUMULATED STOCK SURPLUS DEFICIT TOTAL BALANCE AT DECEMBER 31, 1994 $ 576,250 $1,728,750 $ (605,850) $1,699,150 Net loss for the year - - (556,898) (556,898) Issuance of 46,100 shares of common stock 115,250 461,000 - 576,250 --------- ------------ ------------ ---------- BALANCE AT DECEMBER 31, 1995 691,500 2,189,750 (1,162,748) 1,718,502 Net loss for the year - - (386,370) (386,370) --------- ------------ ------------ ---------- BALANCE AT DECEMBER 31, 1996 691,500 2,189,750 (1,549,118) 1,332,132 Net loss for the period (unaudited) - - (184,771) (184,771) --------- ------------ ------------ ---------- BALANCE AT MARCH 31, 1997 (UNAUDITED) $ 691,500 $2,189,750 $(1,733,889) $1,147,361 ========= ========== =========== ==========
See Notes to Financial Statements -6- THE TREDEGAR TRUST COMPANY STATEMENTS OF CASH FLOWS
Three Months Ended Year Ended March 31, December 31, ---------------------- ------------ 1997 1996 1996 1995 ---- ---- ---- ---- (Unaudited) (Unaudited) OPERATING ACTIVITIES Net loss $(184,771) $(90,433) $ (386,370) $ (556,898) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 20,164 21,693 88,216 90,079 Loss on sale of assets - - 2,748 - (Increase) decrease in accounts receivable 10,047 (16) (11,957) (6,847) (Increase) decrease in prepaid expenses and other assets (7,051) (20,416) 3,122 (74) Increase (decrease) in accounts payable (22,382) 398 24,256 (22,567) ---------- -------- ----------- ---------- NET CASH USED BY OPERATING ACTIVITIES (183,993) (88,774) (279,985) (496,307) ---------- -------- ---------- ---------- INVESTING ACTIVITIES Purchase of furniture and equipment (1,676) (1,365) (21,177) (1,264) Proceeds from sale of property and equipment - - 650 - Proceeds from maturity of investment securities 187,892 202,000 1,128,100 1,505,894 Purchase of securities - (176,906) (865,492) (2,835,610) ------------- ---------- ----------- ----------- NET CASH PROVIDED BY (USED BY) INVESTING ACTIVITIES 186,216 23,729 242,081 (1,330,980) ---------- -------- ----------- ----------- FINANCING ACTIVITIES Proceeds from issuance of common stock - - - 576,250 Reduction of capital lease obligation (528) (247) (2,011) (1,862) ----------- ------- ------------ ------------ NET CASH PROVIDED BY (USED BY) FINANCING ACTIVITIES (528) (247) (2,011) 574,388 ----------- ------- ------------ ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,695 (65,292) (39,915) (1,252,899) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 65,459 105,374 105,374 1,358,273 ----------- --------- ----------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 67,154 $ 40,082 $ 65,459 $ 105,374 ========== ========= =========== ========== Cash paid during the period for: Interest $ 42 $ 74 $ 268 $ 387
See Notes to Financial Statements -7- THE TREDEGAR TRUST COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business The Tredegar Trust Company (the "Company") was formed in August, 1993 as an independent trust company under the Trust Company Act enacted by the Virginia legislature in 1993. The Company provides a full range of investment management, trust, estate settlement and custodial services. The Company is headquartered in Richmond, Virginia, and operates in the Commonwealth of Virginia. 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 dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Property and Equipment Property and equipment are stated on the basis of cost. Expenditures for ordinary maintenance and repairs are charged to income as incurred. Costs of betterments, renewals and major replacements are capitalized. At the time properties are retired or otherwise disposed of, the related costs and allowances for depreciation are eliminated from the accounts and any gain or loss on disposition is reflected in income. Provision for depreciation is computed using an accelerated method at rates calculated to amortize the cost of the assets over their estimated useful lives. The estimated useful lives of these assets are five to seven years. Investments The Company's investments are classified as held-to-maturity and reported at amortized cost which approximates fair market value. Gains and losses on sales of securities are recognized when realized on a specific identification basis. Premiums and discounts are amortized into interest income using a level yield method. Trust Fees Trust fees are recorded on the accrual basis. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. -8- THE TREDEGAR TRUST COMPANY NOTES TO FINANCIAL STATEMENTS - Continued DECEMBER 31, 1996 AND 1995 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Loss per Share Loss per share amounts are based on the weighted average number of shares outstanding (276,000 in 1996 and 244,000 in 1995). The assumed exercise of warrants and stock options do not result in material dilution. Interim Financial Information The balance sheet as of March 31, 1997 and the related statements of operations, changes in stockholders' equity, and cash flows for the three months ended March 31, 1997 and 1996 have been prepared by the Company, without audit. In the opinion of management, all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position at March 31, 1997 and the results of operations and cash flows for the interim periods presented have been made. The statement of operations for the three months ended March 31, 1997 is not necessarily indicative of the results to be expected for the full year. NOTE B - INVESTMENTS Investments shown in the balance sheet at December 31 were as follows:
Gross Gross Amortized Unrealized Unrealized Estimated December 31, 1995 Cost Gains Losses Market Value ------------ ----------- ----------- ------------ Held to maturity U.S. Treasury note $ 198,773 $ 712 $ - $ 199,485 U.S. Treasury bills 1,027,053 506 - 1,027,559 Certificate of deposit 103,890 - - 103,890 ----------- --------- --------- ----------- Total Investment Securities $1,329,716 $ 1,218 $ - $1,330,934 ========== ======= ========= ========== December 31, 1996 Held to maturity U.S. Treasury notes $ 437,325 $ 408 $ - $ 437,733 U.S. Treasury bills 425,162 - 1,058 424,104 Certificate of deposit 204,621 - 512 204,109 ----------- --------- -------- ----------- Total Investment Securities $1,067,108 $ 408 $ 1,570 $1,065,946 ========== ======= ======= ==========
-9- THE TREDEGAR TRUST COMPANY NOTES TO FINANCIAL STATEMENTS - Continued DECEMBER 31, 1996 AND 1995 NOTE B - INVESTMENTS - Continued The scheduled maturities of securities to be held to maturity at December 31, 1996 were as follows: Amortized Estimated Cost Market Value Due in one year or less $ 827,909 $ 826,274 Due from one year to five years 239,199 239,672 ---------- ---------- $1,067,108 $1,065,946 NOTE C - OPERATING LEASES The Company has several operating leases for equipment. Equipment rent expense totaled $18,235 and $18,564 for the years ended December 31, 1996 and 1995, respectively. An additional operating lease exists on the office facility from which the Company conducts its business. Rental expense on the office facility was $34,456 for 1996 and $30,520 for 1995. Minimum future lease payments under operating leases are as follows: Year Real Estate Equipment ---- ----------- --------- 1997 $ 46,734 $ 9,264 1998 47,241 2,920 1999 48,900 600 2000 50,855 - 2001 47,829 - ---------- ----------- $ 241,559 $ 12,784 ========= ======== NOTE D - CAPITALIZED LEASE OBLIGATION The Company entered into a lease agreement in 1994 for a copier. The lease term is 36 months with a purchase option at the end of the lease. The present value of the net minimum lease payments is summarized as follows: Total minimum lease payments $ 2,061 Less amount representing interest (76) ------- Present value of net minimum lease payments $ 1,985 ======= -10- THE TREDEGAR TRUST COMPANY NOTES TO FINANCIAL STATEMENTS - Continued DECEMBER 31, 1996 AND 1995 NOTE D - CAPITALIZED LEASE OBLIGATION - Continued The leased copier is included in office furniture and equipment at a cost of $6,008 with accumulated depreciation of $4,278 and $3,125 as of December 31, 1996 and 1995, respectively. NOTE E - OUTSTANDING WARRANTS At December 31, 1996 and 1995, the Company had outstanding warrants to purchase 20,000 shares of the Company's common stock at $10 per share. The warrants were sold for $20,000, which was included in capital surplus. The warrants became exercisable in 1993 and expire September 20, 2003. No warrants were exercised in 1996 and 1995. NOTE F - ORGANIZATION COSTS The Company commenced business on January 12, 1994. Prior to that date the Company had approximately $340,670 of start-up and organization costs which are being amortized using the straight-line method over a five year period. Amortization for 1996 and 1995 was $68,134 and $68,134, respectively. NOTE G - INCOME TAXES The Company's total deferred tax assets, and deferred tax asset valuation allowances are as follows: December 31, 1996 December 31, 1995 ----------------- ----------------- Total deferred tax assets $507,400 $376,034 Less valuation allowance (507,400) (376,034) -------- -------- Total deferred tax assets $ 0 $ 0 ========== ========== The deferred tax assets were calculated with respect to net operating loss carryforwards. Management considers the valuation allowance necessary due to expected loss of the net operating loss. The Company has a net operating loss carryforward of approximately $1,527,100. The loss carryforward is available to offset future federal taxable income. Approximately $600,000 of the loss expires in 2009, $544,700 expires in 2010, and $382,400 expires in 2011. -11- THE TREDEGAR TRUST COMPANY NOTES TO FINANCIAL STATEMENTS - Continued DECEMBER 31, 1996 AND 1995 NOTE H - STOCK OPTION PLAN The Company has a stock option plan (the "Plan") that reserves up to 150,000 shares of common stock for the issuance of stock options and corresponding stock appreciation rights to certain employees, directors, advisors and consultants of the Company. The Plan is intended to permit the issuance of both options qualifying under Section 422 of the Internal Revenue Code ("Incentive Stock Options") and options not so qualifying. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for options granted to date under such Plan. In accordance with APB 25, no compensation cost has been recognized since the exercise price equals or exceeds the market price of the stock on the date of grant. All options granted under the Plan are exercisable at $10 per share and expire in 2003. No stock options have been exercised since the adoption of the Plan. A summary of the status of the Company's options as of December 31, 1996 and 1995 and changes for the years then ended are as follows: 1996 1995 ---- ---- Outstanding shares - beginning of year 105,450 85,500 Granted - 19,950 ---------- -------- Outstanding shares - end of year 105,450 105,450 ======= ======= Exercisable shares - end of year 29,330 18,200 ======= ======= Had the Company used the fair value - based accounting method to account for stock based compensation, consistent with the method prescribed by SFAS No. 123, the effect on the Company's compensation expense, net loss and loss per share would be de minimus based on the Company's lack of profitability and the absence of dividend payments since inception. NOTE I - RETIREMENT PLAN The Company has a 401(k) profit sharing plan for all employees at least 21 years old who have been credited with at least 1,000 hours of service. Employer contributions were $14,592 and $13,873 for 1996 and 1995, respectively, and are discretionary. Employees become 100% vested in Company contributions immediately. The plan also allows for employees to make contributions based upon a percentage of their compensation. Employees are 100% vested in their contributions at all times. NOTE J - PROPOSED MERGER Independent Community Bankshares, Inc. and the Company have entered into a Letter of Intent dated February 5, 1997. The transaction is subject to the approval of regulatory authorities and shareholders of the Company. The proposed merger will entitle the shareholders of the Company to receive, in a tax-free -12- THE TREDEGAR TRUST COMPANY NOTES TO FINANCIAL STATEMENTS - Continued DECEMBER 31, 1996 AND 1995 NOTE J - PROPOSED MERGER - Continued exchange, .25 shares of Independent Community Bankshares, Inc. common stock for each share of the Company's common stock, and up to 9,879 additional shares contingent on a three-year net earnings requirement. NOTE K - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following discloses the fair value of financial instruments as of December 31, 1996 and 1995, whether or not recognized in the balance sheets, for which it is practical to estimate fair value. As required under generally accepted accounting principles, these disclosures exclude certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating the fair value as of December 31, 1996 and 1995, for its financial instruments: Cash: The carrying amount approximated fair value. Cash Equivalents: The carrying amounts of federal funds sold and interest-bearing deposits at other banks approximated fair value. Investments Held to Maturity: The fair value of investments held to maturity was determined using current market prices. See Note B. Interest Receivable: The carrying amount approximated fair value. NOTE L - RELATED PARTY TRANSACTIONS At December 31, 1996, the accounts payable balance of the Company included $12,187 owed to LeClair Ryan, PC for legal services. Gary LeClair is a stockholder and Director of The Tredegar Trust Company and a stockholder of LeClair Ryan, PC. During 1996 and 1995 the Company paid LeClair Ryan, PC $5,815 and $22,124, respectively, for legal services. NOTE M - RECLASSIFICATIONS Certain items for 1995 have been reclassified to conform with the 1996 presentation. Such reclassifications had no effect on net income or stockholders' equity as previously reported. -13- Appendix C [LETTERHEAD] June __, 1997 Board of Directors The Tredegar Trust Company 901 E. Byrd Street - Suite 190 Richmond, VA 23219 Gentlemen: You have asked us to render our opinion relating to the fairness, from a financial point of view, to the shareholders of The Tredegar Trust Company ("TTC") of the terms of the Agreement and Plan of Reorganization and the Plan of Merger by and between Independent Community Bankshares, Inc., ("ICBI") and TTC Acquisition Subsidiary, Inc., a wholly-owned subsidiary of ICBI ("Acquisition") dated March 28, 1997 (together, the "Agreement"). The Agreement provides for the merger of TTC with Acquisition (the "Reorganization") and further provides that each share of Common Stock of TTC which is issued and outstanding immediately prior to the Effective Date of the Reorganization shall be converted into and represent the right to receive a maximum of 0.25 shares of ICBI Common Stock (the "Initial Merger Consideration") and each TTC shareholder will receive a ratable share of the sum of (i) 4,940 shares of ICBI Common Stock and (ii) the number of shares of ICBI Common Stock determined by dividing $138,300 by the Fair Market Value Per Share of ICBI Common Stock approximately three years after the consummation of the Reorganization if TTC's net earnings in the three years that follow the Reorganization equal or exceed $638,946, subject to adjustment as described in the Agreement (the "Contingent Merger Consideration"). In developing our opinion, we have, among other things, reviewed and analyzed: (1) the Agreement; (2) the Registration Statement and this Proxy Statement; (3) TTC's audited financial statements for the three years ended December 31, 1996; (4) other internal information relating to TTC prepared by TTC's management; (5) information regarding the trading market for the common stocks of TTC and ICBI and the price ranges within which the respective stocks have traded; (6) the relationship of prices paid to relevant financial data such as net worth, assets, deposits and earnings in this transaction and the relative valuation of ICBI compared to a group of peer banks located within the Commonwealth of Virginia with assets less than $2.0 billion; (7) ICBI's annual reports to shareholders and its audited financial statements for the three years ended December 31, 1996; and (8) other internal information relating to ICBI prepared by ICBI's management. We have discussed with members of management of TTC and ICBI the background to the Reorganization, reasons and basis for the Reorganization and the business and future prospects of TTC and ICBI individually and as a combined entity. Finally, we have conducted such other studies, analyses and investigations, particularly of the trust and banking industries, and considered such other information as we deemed appropriate. In conducting our review and arriving at our opinion, we have relied upon and assumed the accuracy and completeness of the information furnished to us by or on behalf of TTC and ICBI. We have not attempted independently to verify such information, nor have we made any independent appraisal of the assets of TTC or ICBI. We have taken into account our assessment of general economic, financial market and industry conditions as they exist and can be evaluated at the date hereof, as well as our experience in business valuation in general. On the basis of our analyses and review and in reliance on the accuracy and completeness of the information furnished to us and subject to the conditions noted above, it is our opinion that, as of the date hereof the terms of the Agreement are fair from a financial point of view to the shareholders of TTC Common Stock. Very truly yours, SCOTT & STRINGFELLOW, INC. By: /s/ G. Jacob Savage III -------------------------------- G. Jacob Savage III, CFA Managing Director Financial Institutions Group Appendix D Code of Virginia (1950), as amended Title 13.1 Chapter 9 Article 15. Dissenters' Rights. ss. 13.1-729. Definitions. In this article: "Corporation" means the issuer of the shares held by a dissenter before the corporate action, except that (i) with respect to a merger, "corporation" means the surviving domestic or foreign corporation or limited liability company by merger of that issuer, and (ii) with respect to a share exchange, "corporation" means the acquiring corporation by share exchange, rather than the issuer, if the plan of share exchange places the responsibility for dissenters' rights on the acquiring corporation. "Dissenter" means a shareholder who is entitled to dissent from corporate action under ss. 13.1-730 and who exercises that right when and in the manner required by ss.ss. 13.1-732 through 13.1-739. "Fair value," with respect to a dissenter's shares, means the value of the shares immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable. "Interest" means interest from the effective date of the corporate action until the date of payment, at the average rate currently paid by the corporation on its principal bank loans or, if none, at a rate that is fair and equitable under all the circumstances. "Record shareholder" means the person in whose name shares are registered in the records of a corporation or the beneficial owner of shares to the extent of the rights granted by a nominee certificate on file with a corporation. "Beneficial shareholder" means the person who is a beneficial owner of shares held by a nominee as the record shareholder. "Shareholder" means the record shareholder or the beneficial shareholder. ss. 13.1-730. Right to dissent. A. A shareholder is entitled to dissent from, and obtain payment of the fair value of his shares in the event of, any of the following corporate actions: D-1 1. Consummation of a plan of merger to which the corporation is a party (i) if shareholder approval is required for the merger by ss. 13.1-718 or the articles of incorporation and the shareholder is entitled to vote on the merger or (ii) if the corporation is a subsidiary that is merged with its parent under ss. 13.1-719; 2. Consummation of a plan of share exchange to which the corporation is a party as the corporation whose shares will be acquired, if the shareholder is entitled to vote on the plan; 3. Consummation of a sale or exchange of all, or substantially all, of the property of the corporation if the shareholder was entitled to vote on the sale or exchange or if the sale or exchange was in furtherance o a dissolution on which the shareholder was entitled to vote, provided that such dissenter's rights shall not apply in the case of (i) a sale or exchange pursuant to court order, or (ii) a sale for cash pursuant to a plan by which all or substantially all of the net proceeds of the sale will be distributed to the shareholders within one year after the date of sale; 4. Any corporate action taken pursuant to a shareholder vote to the extent the articles of incorporation, bylaws, or a resolution of the board of directors provides that voting or nonvoting shareholders are entitled to dissent and obtain payment for their shares. B. A shareholder entitled to dissent and obtain payment for his shares under this article may not challenge the corporate action creating his entitlement unless the action is unlawful or fraudulent with respect to the shareholder or the corporation. C. Notwithstanding any other provision of this article, with respect to a plan of merger or share exchange or a sale or exchange of property there shall be no right of dissent in favor of holders of shares of any class or series which, at the record date fixed to determine the shareholders entitled to receive notice of and to vote at the meeting at which the plan of merger or share exchange or the sale or exchange of property is to be acted on, were (i) listed on a national securities exchange or on the National Association of Securities Dealers Automated Quotation System (NASDAQ) or (ii) held by at least 2,000 record shareholders, unless in either case: 1. The articles of incorporation of the corporation issuing such shares provide otherwise; 2. In the case of a plan of merger or share exchange, the holders of the class or series are required under the plan of merger orshare exchange to accept for such shares anything except: a. Cash; b. Shares or membership interests, or shares or membership interests and cash in lieu of fractional shares (i) of the surviving or acquiring corporation or limited liability company or (ii) of any other corporation or limited liability company which, at the record date fixed to determine the shareholders entitled to receive notice of and to vote at the meeting at which the plan of merger or share exchange is to be acted on, were either listed subject to notice of issuance on a national securities exchange or held of record by at least 2,000 record shareholders or members; or c. A combination of cash and shares or membership interests as set forth in subdivisions 2 a and 2 b of this subsection; or D-2 3. The transaction to be voted on is an "affiliated transaction" and is not approved by a majority of "disinterested directors" as such terms are defined in ss. 13.1-725. D. The right of a dissenting shareholder to obtain payment of the fair value of his shares shall terminate upon the occurrence of any one of the following events: 1. The proposed corporate action is abandoned or rescinded; 2. A court having jurisdiction permanently enjoins or sets aside the corporate action; or 3. His demand for payment is withdrawn with the written consent of the corporation. ss. 13.1-731. Dissent by nominees and beneficial owners. A. A record shareholder may assert dissenters' rights as to fewer than all the shares registered in his name only if he dissents with respect to all shares beneficially owned by any one person and notifies the corporation in writing of the name and address of each person on whose behalf he asserts dissenters' rights. The rights of a partial dissenter under this subsection are determined as if the shares as to which he dissents and his other shares were registered in the names of different shareholders. B. A beneficial shareholder may assert dissenters' rights as to shares held on his behalf only if: 1. He submits to the corporation the record shareholder's written consent to the dissent not later than the time the beneficial shareholder asserts dissenters' rights; and 2. He does so with respect to all shares of which he is the beneficial shareholder or over which he has power to direct the vote. ss. 13.1-732. Notice of dissenters' rights. A. If proposed corporate action creating dissenters' rights under ss. 13.1-730 is submitted to a vote at a shareholders' meeting, the meeting notice shall state that shareholders are or may be entitled to assert dissenters' rights under this article and be accompanied by a copy of this article. B. If corporate action creating dissenters' rights under ss. 13.1-730 is taken without a vote of shareholders, the corporation, during the ten-day period after the effectuation of such corporate action, shall notify in writing all record shareholders entitled to assert dissenters' rights that the action was taken and send them the dissenters' notice described in ss. 13.1-734. ss. 13.1-733. Notice of intent to demand payment. A. If proposed corporate action creating dissenters' rights under ss. 13.1-730 is submitted to a vote at a shareholders' meeting, a shareholder who wishes to assert dissenters' rights (i) shall deliver to the D-3 corporation before the vote is taken written notice of his intent to demand payment for his shares if the proposed action is effectuated and (ii) shall not vote such shares in favor of the proposed action. B. A shareholder who does not satisfy the requirements of subsection A of this section is not entitled to payment for his shares under this article. ss. 13.1-734. Dissenters' notice. A. If proposed corporate action creating dissenters' rights under ss. 13.1-730 is authorized at a shareholders' meeting, the corporation, during the ten-day period after the effectuation of such corporate action, shall deliver a dissenters' notice in writing to all shareholders who satisfied the requirements of ss. 13.1-733. B. The dissenters' notice shall: 1. State where the payment demand shall be sent and where and when certificates for certificated shares shall be deposited; 2. Inform holders of uncertificated shares to what extent transfer of the shares will be restricted after the payment demand is received; 3. Supply a form for demanding payment that includes the date of the first announcement to news media or to shareholders of the terms of the proposed corporate action and requires that the person asserting dissenters' rights certify whether or not he acquired beneficial ownership of the shares before or after that date; 4. Set a date by which the corporation must receive the payment demand, which date may not be fewer than thirty nor more than Sixty days after the date of delivery of the dissenters' notice; and 5. Be accompanied by a copy of this article. ss. 13.1-735. Duty to demand payment. A. A shareholder sent a dissenters' notice described in ss. 13.1-734 shall demand payment, certify that he acquired beneficial ownership of the shares before or after the date required to be set forth in the dissenters' notice pursuant to subdivision 3 of subsection B of ss. 13.1-734, and, in the case of certificated shares, deposit his certificates in accordance with the terms of the notice. B. The shareholder who deposits his shares pursuant to subsection A of this section retains all other rights of a shareholder except to the extent that these rights are canceled or modified by the taking of the proposed corporate action. C. A shareholder who does not demand payment and deposits his share certificates where required, each by the date set in the dissenters' notice, is not entitled to payment for his shares under this article. D-4 ss. 13.1-736. Share restrictions. A. The corporation may restrict the transfer of uncertificated shares from the date the demand for their payment is received. B. The person for whom dissenters' rights are asserted as to uncertificated shares retains all other rights of a shareholder except to the extent that these rights are canceled or modified by the taking of the proposed corporate action. ss. 13.1-737. Payment. A. Except as provided in ss. 13.1-738, within thirty days after receipt of a payment demand made pursuant to ss. 13.1-735, the corporation shall pay the dissenter the amount the corporation estimates to be the fair value of his shares, plus accrued interest. The obligation of the corporation under this paragraph may be enforced (i) by the circuit court in the city or county where the corporation's principal office is located, or, if none in this Commonwealth, where its registered office is located or (ii) at the election of any dissenter residing or having its principal office in the Commonwealth, by the circuit court in the city or county where the dissenter resides or has its principal office. The court shall dispose of the complaint on an expedited basis. B. The payment shall be accompanied by: 1. The corporation's balance sheet as of the end of a fiscal year ending not more than sixteen months before the effective date of the corporate action creating dissenters' rights, an income statement for that year, a statement of changes in shareholders' equity for that year, and the latest available interim financial statements, if any; 2. An explanation of how the corporation estimated the fair value of the shares and of how the interest was calculated; 3. A statement of the dissenters' right to demand payment under ss. 13.1-739; and 4. A copy of this article. ss. 13.1-738. After-acquired shares. A. A corporation may elect to withhold payment required by ss. 13.1-737 from a dissenter unless he was the beneficial owner of the shares on the date of the first publication by news media or the first announcement to shareholders generally, whichever is earlier, of the terms of the proposed corporate action, as set forth in the dissenters' notice. B. To the extent the corporation elects to withhold payment under subsection A of this section, after taking the proposed corporate action, it shall estimate the fair value of the shares, plus accrued interest, and shall offer to pay this amount to each dissenter who agrees to accept it in full satisfaction of his demand. The corporation shall send with its offer an explanation of how it estimated the D-5 fair value of the shares and of how the interest was calculated, and a statement of the dissenter's right to demand payment under ss. 13.1-739. ss. 13.1-739. Procedure if shareholder dissatisfied with payment or offer. A. A dissenter may notify the corporation in writing of his own estimate of the fair value of his shares and amount of interest due, and demand payment of his estimate (less any payment under ss. 13.1-737), or reject the corporation's offer under ss. 13.1-738 and demand payment of the fair value of his shares and interest due, if the dissenter believes that the amount paid under ss. 13.1-737 or offered under ss. 13.1-738 is less than the fair value of his shares or that the interest due is incorrectly calculated. B. A dissenter waives his right to demand payment under this section unless he notifies the corporation of his demand in writing under subsection A of this section within thirty days after the corporation made or offered payment for his shares. ss. 13.1-740. Court action. A. If a demand for payment under ss. 13.1-739 remains unsettled, the corporation shall commence a proceeding within sixty days after receiving the payment demand and petition the circuit court in the city or county described in subsection B of this section to determine the fair value of the shares and accrued interest. If the corporation does not commence the proceeding within the sixty-day period, it shall pay each dissenter whose demand remains unsettled the amount demanded. B. The corporation shall commence the proceeding in the city or county where its principal office is located, or, if none in this Commonwealth, where its registered office is located. If the corporation is a foreign corporation without a registered office in this Commonwealth, it shall commence the proceeding in the city or county in this Commonwealth where the registered office of the domestic corporation merged with or whose shares were acquired by the foreign corporation was located. C. The corporation shall make all dissenters, whether or not residents of this Commonwealth, whose demands remain unsettled parties to the proceeding as in an action against their shares and all parties shall be served with a copy of the petition. Nonresidents may be served by registered or certified mail or by publication as provided by law. D. The corporation may join as a party to the proceeding any shareholder who claims to be a dissenter but who has not, in the opinion of the corporation, complied with the provisions of this article. If the court determines that such shareholder has not complied with the provisions of this article, he shall be dismissed as a party. E. The jurisdiction of the court in which the proceeding is commenced under subsection B of this section is plenary and exclusive. The court may appoint one or more persons as appraisers to receive evidence and recommend a decision on the question of fair value. The appraisers have the powers described in the order appointing them, or in any amendment to it. The dissenters are entitled to the same discovery rights as parties in other civil proceedings. F. Each dissenter made a party to the proceeding is entitled to judgment (i) for the amount, if any, by which the court finds the fair value of his shares, plus interest, exceeds the amount paid by the D-6 corporation or (ii) for the fair value, plus accrued interest, of his after-acquired shares for which the corporation elected to withhold payment under ss. 13.1-738. ss. 13.1-741. Court costs and counsel fees. A. The court in an appraisal proceeding commenced under ss. 13.1-740 shall determine all costs of the proceeding, including the reasonable compensation and expenses of appraisers appointed by the court. The court shall assess the costs against the corporation, except that the court may assess costs against all or some of the dissenters, in amounts the court finds equitable, to the extent the court finds the dissenters did not act in good faith in demanding payment under ss. 13.1-739. B. The court may also assess the reasonable fees and expenses of experts, excluding those of counsel, for the respective parties, in amounts the court finds equitable: 1. Against the corporation and in favor of any or all dissenters if the court finds the corporation did not substantially comply with the requirements of ss.ss. 13.1-732 through 13.1-739; or 2. Against either the corporation or a dissenter, in favor of any other party, if the court finds that the party against whom the fees and expenses are assessed did not act in good faith with respect to the rights provided by this article. C. If the court finds that the services of counsel for any dissenter were of substantial benefit to other dissenters similarly situated, the court may award to these counsel reasonable fees to be paid out of the amounts awarded the dissenters who were benefited. D. In a proceeding commenced under subsection A of ss. 13.1-737 the court shall assess the costs against the corporation, except that the court may assess costs against all or some of the dissenters who are parties to the proceeding, in amounts the court finds equitable, to the extent the court finds that such parties did not act in good faith in instituting the proceeding. D-7 Appendix E 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, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the years ended December 31, 1996, 1995 and 1994. 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, 1996 and 1995, and the results of its operations and its cash flows for the years ended December 31, 1996, 1995 and 1994, in conformity with generally accepted accounting principles. /s/Yount, Hyde & Barbour, P.C. Winchester, Virginia January 24, 1997, except for Note 17, as to which the date is February 5, 1997. E-1 INDEPENDENT COMMUNITY BANKSHARES, INC. Consolidated Balance Sheets December 31, 1996 and 1995
Assets 1996 1995 --------------- ---------------- Cash and due from banks $ 6 519 078 $ 3 285 798 Securities (fair value: 1996, $52,375,995; 1995, $48,080,263) (Notes 1 and 2) 52 402 253 48 290 890 Federal funds sold 3 400 000 5 100 000 Loans, net (Notes 1, 3, 4 and 11) 93 710 819 80 048 398 Bank premises and equipment, net (Notes 1 and 5) 4 698 586 3 376 553 Accrued interest receivable and other assets (Notes 9 and 10) 2 235 220 1 911 382 --------------- ---------------- Total assets $ 162 965 956 $ 142 013 021 =============== ================ Liabilities and Shareholders' Equity Liabilities Deposits: Noninterest bearing $ 23 242 448 $ 17 898 501 Interest bearing 115 547 692 103 623 569 --------------- ---------------- Total deposits (Note 6) $ 138 790 140 $ 121 522 070 Securities sold under agreements to repurchase 1 444 697 - - Federal Home Loan Bank advances (Note 7) 4 000 000 3 000 000 Accrued interest and other liabilities 723 252 538 330 Commitments and contingent liabilities (Notes 12 and 14) - - - - --------------- ---------------- Total liabilities $ 144 958 089 $ 125 060 400 --------------- ---------------- Shareholders' Equity Common stock, par value $5 per share, authorized 10,000,000 shares; issued and outstanding 859,838 shares $ 4 299 190 $ 4 299 190 Capital surplus 1 411 174 1 411 174 Retained earnings (Notes 8 and 13) 12 816 782 11 508 100 Unrealized gain (loss) on securities available for sale, net (519 279) (265 843) --------------- ---------------- Total shareholders' equity $ 18 007 867 $ 16 952 621 --------------- ---------------- Total liabilities and shareholders' equity $ 162 965 956 $ 142 013 021 =============== ================
See Notes to Consolidated Financial Statements. E-2 INDEPENDENT COMMUNITY BANKSHARES, INC. Consolidated Statements of Income Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994 -------------- -------------- -------------- Interest Income Interest and fees on loans $ 8 137 263 $ 7 264 647 $ 6 542 366 Interest and dividends on investment securities: Taxable interest income 194 506 314 910 298 814 Interest income exempt from federal income taxes 588 431 620 429 577 987 Interest and dividends on securities available for sale: Taxable interest income 1 792 824 1 503 322 1 288 515 Dividends 267 791 13 884 8 064 Interest income on federal funds sold 130 414 137 514 215 495 -------------- -------------- -------------- Total interest income $ 11 111 229 $ 9 854 706 $ 8 931 241 -------------- -------------- -------------- Interest Expense Interest on deposits (Note 6) $ 4 455 684 $ 4 055 755 $ 3 198 173 Interest on short-term borrowings 4 580 9 016 - - Interest on Federal Home Loan Bank advances 186 513 31 185 - - -------------- -------------- -------------- Total interest expense $ 4 646 777 $ 4 095 956 $ 3 198 173 -------------- -------------- -------------- Net interest income $ 6 464 452 $ 5 758 750 $ 5 733 068 Provision for loan losses (Note 4) 65 000 54 950 - - -------------- -------------- -------------- Net interest income after provision for loan losses $ 6 399 452 $ 5 703 800 $ 5 733 068 -------------- -------------- -------------- Other Income Service charges, commissions and fees $ 676 655 $ 651 327 $ 614 116 Trust fee income 29 316 - - - - Investment securities (loss) (1 875) - - - - Profits (losses) on securities available for sale, net 22 496 (122 698) (125 312) Other 15 551 165 932 35 450 -------------- -------------- -------------- Total other income $ 742 143 $ 694 561 $ 524 254 -------------- -------------- -------------- Other Expenses Salaries and employees' benefits (Notes 1, 8 and 9) $ 2 532 777 $ 2 163 447 $ 1 880 059 Net occupancy and equipment expense 561 760 433 269 325 519 Advertising 164 189 105 590 104 569 FDIC insurance 2 000 134 787 234 187 Other operating expenses 1 121 844 1 230 045 1 127 114 -------------- -------------- -------------- Total other expenses $ 4 382 570 $ 4 067 138 $ 3 671 448 -------------- -------------- -------------- Income before income taxes $ 2 759 025 $ 2 331 223 $ 2 585 874 Income tax expense (Notes 1 and 10) 728 079 624 729 748 134 -------------- -------------- -------------- Net income (Note 8) $ 2 030 946 $ 1 706 494 $ 1 837 740 ============== ============== ============== Earnings per Share (Notes 1 and 8) Per average share outstanding, net income $ 2.36 $ 1.92 $ 2.06 ============== ============== ==============
See Notes to Consolidated Financial Statements. E-3 INDEPENDENT COMMUNITY BANKSHARES, INC. Consolidated Statements of Changes in Shareholders' Equity Years Ended December 31, 1996, 1995 and 1994
Unrealized Gain (Loss) on Securities Common Capital Retained Available Stock Surplus Earnings for Sale, Net Total ----- ------- -------- ------------- ----- Balance, December 31, 1993 $ 2 240 000 $ 2 240 000 $ 11 626 226 $ - - $ 16 106 226 Net income - 1994 (Note 8) - - - - 1 837 740 - - 1 837 740 Cash dividends - 1994 ($0.80 per share) - - - - (714 962) - - (714 962) Issuance of common stock - stock split effected in the form of 100% stock dividend (448,000 shares) 2 240 000 (2 240 000) - - - - - - Discretionary transfer from retained earnings - - 2 240 000 (2 240 000) - - - - Purchase of common stock (4,072 shares) (20 360) (105 544) - - - - (125 904) Sale of common stock (1,755 shares) 8 775 46 515 - - - - 55 290 Change in unrealized gain (loss) on securities available for sale, net of deferred income taxes of $806,690 - - - - - - (1 498 139) (1 498 139) ------------- -------------- -------------- -------------- --------------- Balance, December 31, 1994 $ 4 468 415 $ 2 180 971 $ 10 509 004 $ (1 498 139) $ 15 660 251 Net income - 1995 - - - - 1 706 494 - - 1 706 494 Cash dividends - 1995 ($0.80 per share) - - - - (707 398) - - (707 398) Purchase of common stock (36,162 shares) (180 810) (831 726) - - - - (1 012 536) Sale of common stock (2,317 shares) 11 585 61 929 - - - - 73 514 Change in unrealized gain (loss) on securities available for sale, net of deferred income taxes of $669,740 - - - - - - 1 232 296 1 232 296 ------------- -------------- -------------- -------------- --------------- Balance, December 31, 1995 $ 4 299 190 $ 1 411 174 $ 11 508 100 $ (265 843) $ 16 952 621 Net income - 1996 - - - - 2 030 946 - - 2 030 946 Cash dividends - 1996 ($0.84 per share) - - - - (722 264) - - (722 264) Change in unrealized gain (loss) on securities available for sale, net of deferred income taxes of $130,558 - - - - - - (253 436) (253 436) ------------- -------------- -------------- -------------- --------------- Balance, December 31, 1996 $ 4 299 190 $ 1 411 174 $ 12 816 782 $ (519 279) $ 18 007 867 ============= ============== ============== ============== ===============
See Notes to Consolidated Financial Statements. E-4 INDEPENDENT COMMUNITY BANKSHARES, INC. Consolidated Statements of Cash Flows Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994 --------------- --------------- ---------------- Cash Flows from Operating Activities Net income $ 2 030 946 $ 1 706 494 $ 1 837 740 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 301 497 251 390 161 411 Amortization 16 487 16 487 12 366 Provision for loan losses 65 000 54 950 - - Net loss on investment securities 1 875 - - - - Net (gain) loss on securities available for sale (22 496) 122 698 125 312 Net (gain) loss on sale of assets - - (6 437) 20 877 Net (gain) on sale of other real estate - - (97 624) - - Discount accretion and premium amortization on securities, net 157 657 69 601 72 017 Deferred income taxes 68 349 82 137 86 328 Changes in assets and liabilities: (Increase) in accrued interest receivable (56 251) (47 694) (248 667) (Increase) decrease in prepaid income taxes (84 032) 65 772 (65 772) (Increase) in other assets (148 758) (156 914) (244 322) Increase (decrease) in accrued interest payable 63 255 91 601 (45 475) Increase (decrease) in other liabilities 132 592 134 572 (17 496) --------------- --------------- --------------- Net cash provided by operating activities $ 2 526 121 $ 2 287 033 $ 1 694 319 --------------- --------------- --------------- Cash Flows from Investing Activities Proceeds from maturity, principal paydowns and calls of investment securities $ 2 455 501 $ 1 015 276 $ 1 244 668 Proceeds from maturity, principal paydowns and calls of securities available for sale 2 149 662 1 216 149 765 300 Proceeds from sale of securities available for sale 24 282 770 15 539 612 13 933 294 Purchase of investment securities (2 846 520) (3 442 091) (4 455 208) Purchase of securities available for sale (30 673 806) (19 499 409) (20 240 599) Proceeds on sale of other real estate - - 1 015 000 395 000 Proceeds from sale of equipment - - 15 000 6 505 Purchases of bank premises and equipment (1 623 530) (1 142 864) (1 350 559) Net (increase) in loans (13 727 421) (1 336 510) (8 795 648) --------------- --------------- --------------- Net cash (used in) investing activities $ (19 983 344) $ (6 619 837) $ (18 497 247) --------------- --------------- ---------------
See Notes to Consolidated Financial Statements. E-5 INDEPENDENT COMMUNITY BANKSHARES, INC. Consolidated Statements of Cash Flows (Continued) Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994 --------------- --------------- --------------- Cash Flows from Financing Activities Net increase (decrease) in demand deposits, NOW accounts and savings accounts $ 9 896 598 $ (3 681 539) $ 8 359 147 Net increase in certificates of deposit 7 371 472 7 119 273 5 627 777 Increase in securities sold under agreements to repurchase 1 444 697 - - - - Repayment of Federal Home Loan Bank advances (2 000 000) - - - - Proceeds from Federal Home Loan Bank advances 3 000 000 3 000 000 - - Purchase of common stock - - (1 012 536) (125 904) Proceeds from sale of common stock - - 73 514 55 290 Cash dividends paid (722 264) (707 398) (714 962) --------------- --------------- --------------- Net cash provided by financing activities $ 18 990 503 $ 4 791 314 $ 13 201 348 --------------- --------------- --------------- Increase (decrease) in cash and cash equivalents $ 1 533 280 $ 458 510 $ (3 601 580) Cash and Cash Equivalents Beginning 8 385 798 7 927 288 11 528 868 --------------- --------------- --------------- Ending $ 9 919 078 $ 8 385 798 $ 7 927 288 =============== =============== =============== Supplemental Disclosures of Cash Flow Information Cash payments for: Interest paid to depositors $ 4 425 048 $ 3 964 454 $ 3 244 466 Interest paid on short-term obligations 4 580 9 016 - - Interest paid on Federal Home Loan Bank advances 153 894 31 185 - - --------------- --------------- --------------- $ 4 583 522 $ 4 004 655 $ 3 244 466 =============== =============== =============== Income taxes $ 863 723 $ 272 447 $ 746 646 =============== =============== =============== Supplemental Disclosure of Noncash Transactions Other real estate acquired in settlement of loans $ - - $ - - $ 367 377 =============== =============== =============== Unrealized gain (loss) on securities available for sale $ (383 994) $ 1 902 036 $ (2 304 829) =============== =============== ===============
See Notes to Consolidated Financial Statements. E-6 INDEPENDENT COMMUNITY BANKSHARES, INC. Notes to Consolidated Financial Statements Note 1. Nature of Banking Activities and Significant Accounting Policies Independent Community Bankshares, Inc. and Subsidiaries (the Company) grant 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 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 and Middleburg Bank Service Corporation, include the accounts of all three companies. All material intercompany balances and transactions have been eliminated in consolidation. Securities The Company adopted FASB No. 115, "Accounting for Certain Investments in Debt and Equity Securities". This statement addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Those investments are classified in three categories and accounted for as follows: a. Securities Held to Maturity Securities classified as held to maturity are those debt securities the Company has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost adjusted for amortization of premium and accretion of discount, computed by the interest method over their contractual lives. b. Securities Available for Sale Securities classified as available for sale are those debt and equity securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Securities available for sale are carried at fair value. Unrealized gains or losses are reported as increases or decreases in shareholders' equity, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. E-7 Notes to Consolidated Financial Statements c. Trading Securities Trading securities, which are generally held for the short term in anticipation of market gains, are carried at fair value. Realized and unrealized gains and losses on trading account assets are included in interest income on trading account securities. The Company had no trading securities at December 31, 1996 and 1995. Loans Loans are shown on the balance sheets net of unearned discounts and the allowance for loan losses. Interest is computed by methods which result in level rates of return on principal. Loans are charged off when in the opinion of management they are deemed to be uncollectible after taking into consideration such factors as the current financial condition of the customer and the underlying collateral and guarantee. Unearned interest on installment loans is amortized to income over the life of the loans, using the sum-of-digits formula. For all other loans, interest is computed on the loan balance outstanding. On January 1, 1995, the Company adopted FASB No. 114, "Accounting by Creditors for Impairment of a Loan." This statement has been amended by FASB No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." Statement 114, as amended, requires that the impairment of loans that have been separately identified for evaluation is to be measured based on the present value of expected future cash flows or, alternatively, the observable market price of the loans or the fair value of the collateral. However, for those loans that are collateral dependent (that is, if repayment of those loans is expected to be provided solely by the underlying collateral) and for which management has determined foreclosure is probable, the measure of impairment of those loans is to be based on the fair value of the collateral. Statement 114, as amended, also requires certain disclosures about investments in impaired loans and the allowance for credit losses and interest income recognized on loans. The Company considers all consumer installment loans and residential mortgage loans to be homogeneous loans. These loans are not subject to impairment under FASB 114. A loan is considered impaired when it is probable that the Company will be unable to collect all principal and interest amounts according to the contractual terms of the loan agreement. Factors involved in determining impairment include, but are not limited to, expected future cash flows, financial condition of the borrower, and current economic conditions. A performing loan may be considered impaired, if the factors above indicate a need for impairment. A loan on nonaccrual status may not be impaired if in the process of collection or there is an insignificant shortfall in payment. An insignificant delay of less than 30 days or a shortfall of less than 5% of the required principal and interest payment generally does not indicate an impairment situation, if in management's judgment the loan will be paid in full. Loans that meet the regulatory definitions of doubtful or loss generally qualifies as an impaired loan under FASB 114. Charge-offs for impaired loans occur when the loan, or portion of the loan is determined to be uncollectible, as is the case for all loans. E-8 Notes to Consolidated Financial Statements Loans are placed on nonaccrual when a loan is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more. Any unpaid interest previously accrued on those loans is reversed from income. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are applied as a reduction of the loan principal balance. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received. Allowance for Loan Losses The allowance for loan losses is maintained at a level which, in management's judgement, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management's evaluation of the collectibility of the loan portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries. Changes in the allowances relating to impaired loans are charged or credited to the provision for loan losses. Because of uncertainties inherent in the estimation process, management's estimate of credit losses inherent in the loan portfolio and the related allowance may change in the near term. Bank Premises and Equipment Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation of property and equipment is computed principally on the straight-line method over the following estimated useful lives: Years ----- Buildings and improvements 31.5-39 Furniture and equipment 3-10 Maintenance and repairs of property and equipment are charged to operations and major improvements are capitalized. Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the accounts and gain or loss is included in operations. Other Real Estate Real estate acquired by foreclosure is carried at the lower of cost or fair market value less an allowance for estimated selling expenses on the future disposition of the property. E-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 and Dividends Paid Per Share Computations are based on the weighted average number of shares outstanding during each year after giving retroactive effect to the 100% stock dividend declared in 1994. Pension Plan The Company has a trusteed, noncontributory, defined benefit pension plan covering substantially all full-time employees. The Company computes the net periodic pension cost of the plan in accordance with FASB No. 87, "Employers' Accounting For Pensions." Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Advertising Costs The Company follows the policy of charging the costs of advertising to expense as incurred. E-10 Notes to Consolidated Financial Statements Note 2. Securities Amortized costs and fair values of securities being held to maturity as of December 31, 1996 and 1995 are summarized as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ---- ----- -------- ----- 1996 ---------------------------------------------------------------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 3 012 050 $ - - $ (67 845) $ 2 944 205 Obligations of states and political subdivisions 13 396 166 106 404 (69 500) 13 433 070 Mortgage-backed securities 957 809 9 265 (4 582) 962 492 -------------- --------------- -------------- --------------- $ 17 366 025 $ 115 669 $ (141 927) $ 17 339 767 ============== =============== ============== ===============
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ---- ----- -------- ----- 1995 ---------------------------------------------------------------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 4 367 134 $ 1 314 $ (199 052) $ 4 169 396 Obligations of states and political subdivisions 11 396 358 69 204 (60 167) 11 405 395 Mortgage-backed securities 1 248 074 7 686 (29 612) 1 226 148 -------------- --------------- -------------- --------------- $ 17 011 566 $ 78 204 $ (288 831) $ 16 800 939 ============== =============== ============== ===============
E-11 Notes to Consolidated Financial Statements The amortized cost and fair value of securities being held to maturity as of December 31, 1996 by contractual maturity are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties. Therefore, these securities are not included in the maturity categories in the following maturity summary.
Amortized Fair Cost Value ---- ----- Due in one year or less $ 2 225 891 $ 2 219 627 Due after one year through five years 6 066 498 6 009 785 Due after five years through 10 years 6 551 484 6 573 589 Due after 10 years 1 564 343 1 574 274 Mortgage-backed securities 957 809 962 492 --------------- ---------------- $ 17 366 025 $ 17 339 767 =============== ================
Amortized costs and fair values of securities available for sale as of December 31, 1996 and 1995, are summarized as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ---- ----- -------- ----- 1996 ---------------------------------------------------------------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 4 987 626 $ 745 $ (38 408) $ 4 949 963 Mortgage-backed securities 27 216 393 17 851 (713 390) 26 520 854 Corporate preferred 3 033 996 6 876 (60 461) 2 980 411 Other 585 000 - - - - 585 000 -------------- --------------- -------------- --------------- $ 35 823 015 $ 25 472 $ (812 259) $ 35 036 228 ============== =============== ============== =============== 1995 ---------------------------------------------------------------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 3 871 194 $ 5 101 $ (2 333) $ 3 873 962 Mortgage-backed securities 24 291 927 22 439 (428 000) 23 886 366 Corporate preferred 2 933 996 - - - - 2 933 996 Other 585 000 - - - - 585 000 -------------- --------------- -------------- --------------- $ 31 682 117 $ 27 540 $ (430 333) $ 31 279 324 ============== =============== ============== ===============
E-12 Notes to Consolidated Financial Statements The amortized cost and fair value of securities available for sale as of December 31, 1996, 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 ---- ----- Due after one year through five years $ 900 789 $ 893 762 Due after five years through 10 years 3 877 784 3 848 920 Due after 10 years 209 053 207 281 Mortgage-backed securities 27 216 393 26 520 854 Corporate preferred 3 033 996 2 980 411 Other 585 000 585 000 --------------- ---------------- $ 35 823 015 $ 35 036 228 =============== ================
Proceeds from sales of securities available for sale during 1996, 1995 and 1994 were $24,282,770, $15,539,612 and $13,933,294, respectively. Gross gains of $42,269, $125,906 and $71,374 and gross losses of $19,773, $248,604 and $196,686 were realized on those sales, respectively. As allowed by the Question and Answer Guide to FASB No. 115, "Accounting for Certain Investments in Debt and Equity Securities" issued in November of 1995, debt securities with an amortized cost of $4,191,051 were transferred from held-to-maturity to available-for-sale in December, 1995. The securities had a net unrealized gain of $1,623. 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 $1,430,421 and $1,436,694 at December 31, 1996 and 1995, respectively. E-13 Notes to Consolidated Financial Statements Note 3. Loans, Net The composition of the net loans is as follows:
December 31, 1996 1995 --------------- --------------- (in thousands) Real estate loans: Construction and land development $ 4 182 $ 1 791 Secured by farmland 2 105 1 549 Secured by 1-4 family residential 43 860 36 678 Other real estate loans 24 774 21 697 Loans to farmers (except secured by real estate) 891 936 Commercial and industrial loans (except those secured by real estate) 10 681 9 211 Loans to individuals for personal expenditures 8 061 9 170 All other loans 76 68 --------------- ---------------- Total loans $ 94 630 $ 81 100 Less: Unearned income 35 186 Allowance for loan losses 884 866 --------------- ---------------- Net loans $ 93 711 $ 80 048 =============== ================
Note 4. Allowance for Loan Losses Transactions in the allowance for loan losses are as follows:
1996 1995 1994 --------------- -------------- --------------- Balance, beginning $ 866 173 $ 940 081 $ 859 341 Provision charged to operating expense 65 000 54 950 - - Recoveries 77 523 82 860 296 581 Loan losses charged to the allowance (125 160) (211 718) (215 841) --------------- -------------- --------------- $ 883 536 $ 866 173 $ 940 081 =============== ============== ===============
E-14 Notes to Consolidated Financial Statements Information about impaired loans as of and for the years ended December 31, 1996 and 1995 is as follows:
1996 1995 --------------- -------------- Impaired loans for which an allowance has been provided $ - - $ 662 177 Impaired loans for which no allowance has been provided - - - - --------------- -------------- Total impaired loans $ - - $ 662 177 =============== ============== Allowance provided for impaired loans, included in the allowance for loan losses $ - - $ 168 677 Average balance in impaired loans $ 180 860 $ 1 018 695 Interest income recognized $ 102 846 $ 43 852
All impaired loans for 1996 and 1995 have been measured based on the fair value of the collateral. The impaired loans for 1995 are included on the nonperforming assets table under nonaccrual loans along with other nonaccrual loans excluded from impaired loan disclosure under FASB 114. Nonaccrual loans excluded from impaired loan disclosure under FASB 114 amounted to $76,227 and $991,513 at December 31, 1996 and 1995, respectively. If interest on these loans had been accrued, such income would have approximated $1,993 and $21,708 for 1996 and 1995, respectively. Note 5. Bank Premises and Equipment, Net Bank premises and equipment consists of the following:
1996 1995 --------------- --------------- Land $ 989 520 $ 989 520 Banking facilities 1 989 570 1 959 690 Furniture, fixtures and equipment 2 706 998 2 075 065 Construction in progress and deposits on equipment 1 028 027 66 310 ---------------- --------------- $ 6 714 115 $ 5 090 585 Less accumulated depreciation 2 015 529 1 714 032 ---------------- --------------- $ 4 698 586 $ 3 376 553 ================ ===============
The Company is presently under a construction contract, dated November 20, 1995 to construct a new branch facility in Leesburg, Virginia. The estimate of total construction costs is approximately $1,350,000 of which $650,063 is held in construction in progress as of December 31, 1996. E-15 Notes to Consolidated Financial Statements Depreciation expense was $301,497, $251,390 and $161,411 for the years ended December 31, 1996, 1995 and 1994, respectively. Note 6. Deposits Deposits outstanding at December 31, 1996, 1995 and 1994, and the related interest expense for the periods then ended are summarized as follows:
1996 1995 ----------------------------------------------------------------------- Amount Expense Amount Expense ------ ------- ------ ------- Noninterest bearing $ 23 242 448 $ - - $ 17 898 501 $ - - --------------- ---------------- --------------- ---------------- Interest bearing: Interest checking $ 20 641 101 $ 389 569 $ 19 055 900 $ 435 812 Money market accounts 28 808 722 868 900 26 872 893 833 746 Regular savings and IRA's 14 984 279 561 193 13 952 658 533 867 Certificates of deposit: Less than $100,000 37 100 835 1 897 940 31 735 740 1 563 232 $100,000 and more 14 012 755 738 082 12 006 378 689 098 --------------- ---------------- --------------- ---------------- Total interest bearing $ 115 547 692 $ 4 455 684 $ 103 623 569 $ 4 055 755 --------------- ---------------- --------------- ---------------- Total deposits $ 138 790 140 $ 4 455 684 $ 121 522 070 $ 4 055 755 =============== ================ =============== ================
1994 ---------------------------------- Amount Expense ------ ------- Noninterest bearing $ 18 697 684 $ - - --------------- ---------------- Interest bearing: Interest checking $ 20 247 199 $ 414 056 Money market accounts 27 980 367 803 064 Regular savings and IRA's 14 536 241 454 050 Certificates of deposit: Less than $100,000 25 225 321 1 003 259 $100,000 and more 11 397 524 523 744 --------------- ---------------- Total interest bearing $ 99 386 652 $ 3 198 173 --------------- ---------------- Total deposits $ 118 084 336 $ 3 198 173 =============== ================
E-16 Notes to Consolidated Financial Statements Note 7. Federal Home Loan Bank Advances As of December 31, 1996 and 1995, the Company had borrowed $4,000,000 and $3,000,000, respectively, on a short-term basis from its $16,000,000 line of credit with the Federal Home Loan Bank of Atlanta. Note 8. Prior Period Adjustment In 1995, the Company changed its method for accounting for split-dollar insurance premiums paid on behalf of key executive officers. In prior years, premiums paid by the Company were recorded as an asset whereas only the cash surrender value of the policy should have been recorded with the remainder being recognized in the statements of income. The result of the change for 1994 was to increase net income by approximately $5,633 or $.01 per share. Note 9. Employee Benefits The amount charged to expense for the Company's pension plan totaled $85,739, $86,294 and $28,541 for the years ended December 31, 1996, 1995 and 1994, respectively. The components of the pension cost charged to expense for 1996, 1995 and 1994 consisted of the following:
1996 1995 1994 --------------- -------------- --------------- Service cost $ 103 203 $ 86 803 $ 72 428 Interest cost on projected benefit obligation 133 703 121 361 177 184 Actual return on plan assets (163 858) (134 561) (226 209) Net amortization and deferral 12 691 12 691 5 138 --------------- -------------- --------------- $ 85 739 $ 86 294 $ 28 541 =============== ============== ===============
E-17 Notes to Consolidated Financial Statements The following table sets forth the plan's funded status as of September 30, 1996 and 1995, and the amount recognized in the accompanying balance sheets as of December 31, 1996 and 1995:
1996 1995 --------------- -------------- Actuarial present value of benefit obligations: Vested benefits $ 908 635 $ 1 132 394 =============== ============== Accumulated benefits $ 998 018 $ 1 180 231 =============== ============== Projected benefits $ (1 425 983) $ (1 576 391) Plan assets at fair value 1 480 340 1 728 227 --------------- -------------- Funded status $ 54 357 $ 151 836 Unrecognized net (gain) loss 88 368 (80 254) Unrecognized net transition (asset) (47 751) (51 731) Unrecognized prior service cost 216 720 233 391 --------------- -------------- Asset on balance sheet as of September 30 $ 311 694 $ 253 242 Fourth quarter entries, employer contributions 181 472 145 200 --------------- -------------- Asset on balance sheet as of December 31 $ 493 166 $ 398 442 =============== ==============
The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the benefit obligations were 8.5% and 6%, respectively. The expected long-term rate of return on plan assets was 9.5%. Plan assets consist of diversified domestic bond and common stock mutual funds. Bond funds account for approximately 40% of plan assets and equity funds approximate 60% of plan assets. A deferred compensation plan was adopted for the President and Chief Executive Officer. Benefits are to be paid in monthly installments for 15 years following retirement or death. The agreement provides that if employment is terminated for reasons other than death or disability prior to age 65, the amount of benefits would be reduced. The deferred compensation expense for 1996 and 1995, based on the present value of the retirement benefits, was $15,539 and $14,522. The plan is unfunded. However, life insurance has been acquired on the life of the employee in an amount sufficient to discharge the obligation. E-18 Notes to Consolidated Financial Statements Note 10. Income Taxes Net deferred tax assets (liabilities) consist of the following components as of December 31, 1996 and 1995:
1996 1995 --------------- -------------- Deferred tax assets: Allowance for loan losses $ 185 432 $ 179 503 Deferred compensation 19 280 14 035 Unearned loan fees 4 607 9 469 Interest on nonaccrual loans 678 29 531 Securities available for sale 267 508 136 950 --------------- --------------- $ 477 505 $ 369 488 --------------- --------------- Deferred tax liabilities: Property and equipment $ 259 774 $ 245 286 Prepaid pension costs 166 447 135 127 --------------- --------------- $ 426 221 $ 380 413 --------------- --------------- $ 51 284 $ (10 925) =============== ===============
The provision for income taxes charged to operations for the years ended December 31, 1996, 1995 and 1994 consists of the following:
1996 1995 1994 ------------ -------------- -------------- Current tax expense $ 659 730 $ 542 592 $ 661 806 Deferred tax expense 68 349 82 137 86 328 ------------ -------------- -------------- $ 728 079 $ 624 729 $ 748 134 ============ ============== ==============
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, 1996, 1995 and 1994, due to the following:
1996 1995 1994 ----------- ------------- ------------- Computed "expected" tax expense $ 938 069 $ 792 614 $ 877 282 Increase (decrease) in income taxes resulting from: Tax exempt interest income (175 099) (185 166) (176 816) Other, net (34 891) 17 281 47 668 ----------- ------------- ------------- $ 728 079 $ 624 729 $ 748 134 =========== ============= =============
E-19 Notes to Consolidated Financial Statements Note 11. 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 $845,656 and $1,625,801 at December 31, 1996 and 1995, respectively. During 1996, total principal additions were $389,642 and total principal payments were $1,169,787. Note 12. 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 14 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, 1996 and 1995, the aggregate amounts of daily average required reserves were approximately $1,073,000 and $1,007,000, respectively. Note 13. Retained Earnings Transfers of funds from the banking subsidiary to the parent corporation in the form of loans, advances and cash dividends are restricted by federal and state regulatory authorities. As of December 31, 1996, there were no unrestricted funds which could be transferred from the banking subsidiary to the parent corporation, without prior regulatory approval. Note 14. 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. E-20 Notes to Consolidated Financial Statements The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. A summary of the contract or notional amount of the Company's exposure to off-balance-sheet risk as of December 31, 1996 and 1995, is as follows:
1996 1995 ------------- ------------ Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $ 6 617 119 $ 3 323 697 Standby letters of credit $ 606 364 $ 568 744
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds real estate as collateral supporting those commitments for which collateral is deemed necessary. The extent of collateral held for those commitments at December 31, 1996, varies from 0 percent to 100 percent; the average amount collateralized is 40.6 percent. The Company has approximately $4,412,704 in deposits in financial institutions in excess of amounts insured by the Federal Deposit Insurance Corporation (FDIC) at December 31, 1996. E-21 Notes to Consolidated Financial Statements Note 15. Disclosures About Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Short-Term Investments For those short-term instruments, the carrying amount is a reasonable estimate of fair value. Securities For securities held for investment purposes, fair values are based on quoted market prices or dealer quotes. Loans For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans were estimated using discounted cash flow analyses, using interest rates currently being offered. Deposit Liabilities The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. 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 stand-by 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, 1996 and 1995, the carrying amounts and fair values of loan commitments and stand-by letters of credit were immaterial. E-22 Notes to Consolidated Financial Statements The estimated fair values of the Company's financial instruments are as follows:
1996 1995 ---------------------------------- ------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- (in thousands) (in thousands) Financial assets: Cash and short-term investments $ 9 919 $ 9 919 $ 8 386 $ 8 386 Securities 52 402 52 376 48 291 48 080 Loans 94 595 94 878 80 914 82 269 Less: allowance for loan losses (884) - - (866) - - ------------- -------------- ------------- -------------- Total financial assets $ 156 032 $ 157 173 $ 136 725 $ 138 735 ------------- -------------- ------------- -------------- Financial liabilities: Deposits $ 138 790 $ 139 149 $ 121 522 $ 121 952 Securities sold under agreements to repurchase 1 445 1 445 - - - - Federal Home Loan Bank advances 4 000 4 000 3 000 3 004 ------------- -------------- ------------- -------------- Total financial liabilities $ 144 235 $ 144 594 $ 124 522 $ 124 956 ------------- -------------- ------------- --------------
Note 16. Capital Requirements The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off- balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 1996, that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 1996, the most recent notification from the Federal Reserve Bank categorized the Company as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. E-23 The Company's actual capital amounts and ratios are also presented in the table.
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------- -------------------- -------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (in thousands) As of December 31, 1996: Total Capital (to Risk Weighted Assets): Consolidated $ 19 376 20.2% >=$ 7 680 >= 8.0% N/A The Middleburg Bank $ 16 187 17.0% >=$ 7 627 >= 8.0% >=$ 9 534 >= 10.0% Tier 1 Capital (to Risk Weighted Assets): Consolidated $ 18 492 19.3% >=$ 3 840 >= 4.0% N/A The Middleburg Bank $ 15 303 16.1% >=$ 3 813 >= 4.0% >=$ 5 720 >= 6.0% Tier 1 Capital (to Average Assets): Consolidated $ 18 492 11.7% >=$ 6 307 >= 4.0% N/A The Middleburg Bank $ 15 303 9.9% >=$ 6 187 >= 4.0% >=$ 7 733 >= 5.0% As of December 31, 1995: Total Capital (to Risk Weighted Assets): Consolidated $ 18 085 21.9% >=$ 6 603 >= 8.0% N/A The Middleburg Bank $ 15 030 18.4% >=$ 6 552 >= 8.0% >=$ 8 190 >= 10.0% Tier 1 Capital (to Risk Weighted Assets): Consolidated $ 17 218 20.9% >=$ 3 301 >= 4.0% N/A The Middleburg Bank $ 14 164 17.3% >=$ 3 276 >= 4.0% >=$ 4 914 >= 6.0% Tier 1 Capital (to Average Assets): Consolidated $ 17 218 12.4% >=$ 5 574 >= 4.0% N/A The Middleburg Bank $ 14 164 10.2% >=$ 5 564 >= 4.0% >=$ 6 955 >= 5.0%
Note 17. Proposed Merger The Tredegar Trust Company (Tredegar) and the Company have entered into a Letter of Intent dated February 5, 1997. The transaction is subject to the approval of regulatory authorities and shareholders of Tredegar. The proposed merger will entitle the shareholders of Tredegar to receive, in a tax-free exchange, .25 shares of Independent Community Bankshares, Inc. common stock for each share of Tredegar common stock, and up to 9,879 additional shares contingent on a three-year net earnings requirement. E-24 Notes to Consolidated Financial Statements Note 18. Condensed Financial Information - Parent Company Only INDEPENDENT COMMUNITY BANKSHARES, INC. (Parent Corporation Only)
Balance Sheets December 31, 1996 and 1995 Assets 1996 1995 --------------- ---------------- Cash on deposit with subsidiary bank $ 7 387 $ 2 703 Money market fund 141 011 65 335 Securities available for sale 2 980 411 2 933 996 Investment in subsidiaries, at cost, plus equity in undistributed net income 14 818 885 13 886 437 Organizational expenses, net 35 723 52 210 Other assets 24 450 11 940 --------------- ---------------- Total assets $ 18 007 867 $ 16 952 621 =============== ================ Liabilities and Shareholders' Equity Liabilities $ - - $ - - --------------- ---------------- Shareholders' Equity Common stock $ 4 299 190 $ 4 299 190 Capital surplus 1 411 174 1 411 174 Retained earnings 12 816 782 11 508 100 Unrealized (loss) on securities available for sale, net (519 279) (265 843) --------------- ---------------- Total shareholders' equity $ 18 007 867 $ 16 952 621 --------------- ---------------- Total liabilities and shareholders' equity $ 18 007 867 $ 16 952 621 =============== ================
E-25 INDEPENDENT COMMUNITY BANKSHARES, INC. (Parent Corporation Only) Statements of Income Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994 -------------- --------------- -------------- Income Dividends from subsidiary $ 704 000 $ 4 621 374 $ 940 829 Dividends 226 896 - - - - Interest 5 351 - - - - -------------- --------------- -------------- Total income $ 936 247 $ 4 621 374 $ 940 829 -------------- --------------- -------------- Expenses Amortization of organization expenses $ 16 487 $ 16 487 $ 12 366 Legal and professional fees 18 620 8 856 32 744 Printing and supplies 8 818 8 601 10 041 Other 1 124 1 174 1 266 -------------- --------------- -------------- Total expenses $ 45 049 $ 35 118 $ 56 417 -------------- --------------- -------------- Income before allocated tax benefits and undistributed income of subsidiaries $ 891 198 $ 4 586 256 $ 884 412 Income tax (benefit) 10 770 (11 940) (18 066) -------------- --------------- -------------- Income before equity (deficit) in undistributed income of subsidiaries $ 880 428 $ 4 598 196 $ 902 478 Equity (deficit) in undistributed income of subsidiaries 1 150 518 (2 891 702) 935 262 -------------- --------------- -------------- Net income $ 2 030 946 $ 1 706 494 $ 1 837 740 ============== =============== ==============
E-26 INDEPENDENT COMMUNITY BANKSHARES, INC. (Parent Corporation Only) Statements of Cash Flows Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994 -------------- --------------- -------------- Cash Flows from Operating Activities Net income $ 2 030 946 $ 1 706 494 $ 1 837 740 Adjustments to reconcile net income to net cash provided by operating activities: Amortization 16 487 16 487 12 366 Undistributed (earnings) deficit of subsidiary (1 150 518) 2 891 702 (935 262) Decrease in other assets 5 709 5 009 (100 506) -------------- --------------- -------------- Net cash provided by operating activities $ 902 624 $ 4 619 692 $ 814 338 -------------- --------------- -------------- Cash Flow from Investing Activities, purchase of securities available for sale $ (100 000) $ (2 933 996) $ - - -------------- --------------- -------------- Cash Flows from Financing Activities Purchase of common stock $ - - $ (1 012 536) $ (125 904) Net proceeds from sale of common stock - - 73 514 55 290 Cash dividends paid (722 264) (707 398) (714 962) -------------- --------------- -------------- Net cash (used in) financing activities $ (722 264) $ (1 646 420) $ (785 576) -------------- --------------- -------------- Increase in cash and cash equivalents $ 80 360 $ 39 276 $ 28 762 Cash and Cash Equivalents Beginning 68 038 28 762 - - -------------- --------------- -------------- Ending $ 148 398 $ 68 038 $ 28 762 ============== =============== ==============
E-27 INDEPENDENT COMMUNITY BANKSHARES, INC. Consolidated Balance Sheet (Unaudited) For the Three Months Ended March 31, 1997 Assets Cash and due from banks $ 5 163 681 Securities (fair value $51,862,900) 52 058 440 Federal funds sold 7 300 000 Loans, net 93 626 582 Bank premises and equipment, net 5 179 172 Accrued interest receivable and other assets 2 814 394 ---------------- Total assets $ 166 142 269 ================ Liabilities and Shareholders' Equity Liabilities Deposits: Noninterest bearing $ 23 604 901 Interest bearing 118 423 603 ---------------- Total deposits $ 142 028 504 Securities sold under agreements to repurchase 2 115 521 Federal Home Loan Bank advances 3 000 000 Accrued interest and other liabilities 1 150 716 Commitments and contingent liabilities - - ---------------- Total liabilities $ 148 294 741 ---------------- Shareholders' Equity Common stock, par value $5 per share, authorized 10,000,000 shares; issued and outstanding 837,149 shares $ 4 185 745 Capital surplus 889 327 Retained earnings 13 423 632 Unrealized (loss) on securities available for sale, net (651 176) ---------------- Total shareholders' equity $ 17 847 528 ---------------- Total liabilities and shareholders' equity $ 166 142 269 ================ See Notes to Consolidated Financial Statements. E-28 INDEPENDENT COMMUNITY BANKSHARES, INC. Consolidated Statements of Income (Unaudited) For the Three Months Ended March 31, 1997 and 1996
1997 1996 ----------------- --------------- Interest Income Interest and fees on loans $ 2 138 407 $ 1 857 278 Interest on investment securities: Taxable interest income 36 086 50 634 Interest income exempt from federal income taxes 160 577 135 530 Interest and dividends on securities available for sale: Taxable interest income 497 671 428 137 Dividends 68 841 55 278 Interest income on federal funds sold 56 511 36 200 ----------------- ---------------- Total interest income $ 2 958 093 $ 2 563 057 ----------------- ---------------- Interest Expense Interest on deposits $ 1 152 536 $ 1 091 151 Interest on short-term borrowings 24 187 376 Interest on Federal Home Loan Bank advances 50 408 44 683 ----------------- ---------------- Total interest expense $ 1 227 131 $ 1 136 210 ----------------- ---------------- Net interest income $ 1 730 962 $ 1 426 847 Provision for loan losses 55 400 - - ----------------- ---------------- Net interest income after provision for loan losses $ 1 675 562 $ 1 426 847 ----------------- ---------------- Other Income Service charges, commission and fees $ 204 898 $ 175 225 Trust fee income 22 500 4 242 Profits on securities available for sale, net 3 143 14 242 Other 100 - - ----------------- ---------------- Total other income $ 230 641 $ 193 709 ----------------- ---------------- Other Expenses Salaries and employees' benefits $ 643 372 $ 610 342 Net occupancy and equipment expense 131 559 117 960 Advertising 28 818 53 965 FDIC insurance 8 035 500 Other operating expenses 264 693 267 474 ----------------- ---------------- Total other expenses $ 1 076 477 $ 1 050 241 ----------------- ---------------- Income before income taxes $ 829 726 $ 570 315 Income tax expense 222 876 139 652 ----------------- ---------------- Net income $ 606 850 $ 430 663 ================= ================ Earnings Per Share, per average share outstanding, net income $ 0.71 $ 0.50 ================= ================
See Notes to Consolidated Financial Statements. E-29 INDEPENDENT COMMUNITY BANKSHARES, INC. Consolidated Statements of Changes in Shareholders' Equity (Unaudited) For the Three Months Ended March 31, 1997 and 1996
Unrealized Gain (Loss) on Securities Common Capital Retained Available for Stock Surplus Earnings Sale, Net Total ----- ------- -------- --------- ----- Balance, December 31, 1995 $ 4 299 190 $ 1 411 174 $ 11 508 100 $ (265 843) $ 16 952 621 Net income - 1996 - - - - 430 663 - - 430 663 Cash dividends - 1996 - - - - (154 771) - - (154 771) Change in unrealized gain (loss) on securities available for sale, net - - - - - - (299 396) (299 396) ------------- -------------- ---------------- --------------- -------------- Balance, March 31, 1996 $ 4 299 190 $ 1 411 174 $ 11 783 992 $ (565 239) $ 16 929 117 ============= ============== ================ =============== ============== Balance, December 31, 1996 $ 4 299 190 $ 1 411 174 $ 12 816 782 $ (519 279) $ 18 007 867 Net income - 1997 - - - - 606 850 - - 606 850 Purchase of common stock (22,689 shares) (113 445) (521 847) - - - - (635 292) Change in unrealized gain (loss) on securities available for sale, net - - - - - - (131 897) (131 897) ------------- -------------- ---------------- --------------- -------------- Balance, March 31, 1997 $ 4 185 745 $ 889 327 $ 13 423 632 $ (651 176) $ 17 847 528 ============= ============== ================ =============== ==============
See Notes to Consolidated Financial Statements. E-30 INDEPENDENT COMMUNITY BANKSHARES, INC. Consolidated Statements of Cash Flows (Unaudited) For the Three Months Ended March 31, 1997 and 1996
1997 1996 ----------------- ---------------- Cash Flows from Operating Activities Net income $ 606 850 $ 430 663 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 99 000 67 608 Amortization 4 122 4 122 Provision for loan losses 55 400 - - Net (gain) on securities available for sale (3 143) (14 242) Discount accretion and premium amortization on securities, net 46 825 51 951 Deferred taxes - - 10 911 Changes in assets and liabilities: Decrease in accrued interest receivable 15 302 53 898 (Increase) in prepaid income taxes (2 365) - - (Increase) in other assets (94 479) (70 857) (Decrease) in accrued interest payable (3 796) (1 629) Increase (decrease) in other liabilities (2 547) 19 571 ---------------- --------------- Net cash provided by operating activities $ 721 169 $ 551 996 ---------------- --------------- Cash Flows from Investing Activities Proceeds from maturity, principal paydowns and calls of investment securities $ 953 687 $ 830 336 Proceeds from maturity, principal paydowns and calls of securities available for sale 931 886 540 654 Proceeds from sale of securities available for sale 1 077 494 9 982 384 Purchase of investment securities (206 628) (678 114) Purchase of securities available for sale (2 656 151) (10 295 755) Purchases of bank premises and equipment (579 586) (421 473) Net (increase) decrease in loans 28 836 (1 419 961) ----------------- --------------- Net cash (used in) investing activities $ (450 462) $ (1 461 929) ----------------- --------------- Cash Flows from Financing Activities Net increase (decrease) in demand deposits, NOW accounts and savings accounts $ 639 605 $ (2 155 960) Net increase in certificates of deposit 2 598 759 1 599 355 Increase in securities sold under agreements to repurchase 670 824 - - Repayments on Federal Home Loan Bank advances (1 000 000) - - Purchase of common stock (635 292) - - Cash dividends paid - - (154 771) ----------------- --------------- Net cash provided by (used in) financing activities $ 2 273 896 $ (711 376) ----------------- ---------------
See Notes to Consolidated Financial Statements. E-31 INDEPENDENT COMMUNITY BANKSHARES, INC. Consolidated Statements of Cash Flows (Unaudited) (Continued) For the Three Months Ended March 31, 1997 and 1996
1997 1996 ----------------- ---------------- Increase (decrease) in cash and cash equivalents $ 2 544 603 $ (1 621 309) Cash and Cash Equivalents Beginning 9 919 078 8 385 798 ----------------- ---------------- Ending $ 12 463 681 $ 6 764 489 ================= ================ Supplemental Disclosures of Cash Flow Information Cash payments for: Interest paid to depositors $ 1 145 027 $ 1 092 780 Interest paid on short-term obligations 24 187 376 Interest paid on Federal Home Loan Bank advances 54 121 44 683 ----------------- ---------------- $ 1 223 335 $ 1 137 839 ================= ================ Income taxes $ - - $ 120 191 ================= ================ Supplemental Disclosure of Noncash Transactions, unrealized (loss) on securities available for sale $ (199 844) $ (453 630) ================= ================
See Notes to Consolidated Financial Statements. E-32 INDEPENDENT COMMUNITY BANKSHARES, INC. Notes to Consolidated Financial Statements (Unaudited) For the Three Months Ended March 31, 1997 and 1996 Note 1. In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of March 31, 1997, and the results of operations and changes in cash flows for the three months ended March 31, 1997 and 1996. The statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company's Annual Report for the year ended December 31, 1996. The results of operations for the three-month periods ended March 31, 1997 and 1996, are not necessarily indicative of the results to be expected for the full year. Note 2. Securities Amortized costs and fair values of securities being held to maturity as of March 31, 1997 are summarized as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ---- ----- -------- ----- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 2 510 284 $ - - $ (64 219) $ 2 446 065 Obligations of states and political subdivisions 13 241 378 28 982 (162 182) 13 108 178 Mortgage-backed securities 853 754 6 937 (5 058) 855 633 -------------- --------------- -------------- --------------- $ 16 605 416 $ 35 919 $ (231 459) $ 16 409 876 ============== =============== ============== ===============
The amortized cost and fair value of securities being held to maturity as of March 31, 1997 by contractual maturity are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties. Therefore, these securities are not included in the maturity categories in the following maturity summary.
Amortized Fair Cost Value Due in one year or less $ 1 469 230 $ 1 466 390 Due after one year through five years 6 666 691 6 557 133 Due after five years through 10 years 6 234 867 6 165 547 Due after 10 years 1 380 874 1 365 173 Mortgage-backed securities 853 754 855 633 -------------- --------------- $ 16 605 416 $ 16 409 876 ============== ================
E-33 Notes to Consolidated Financial Statements (Unaudited) The amortized costs and fair values of securities available for sale as of March 31, 1997, are summarized as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ---- ----- -------- ----- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 4 820 681 $ - - $ (126 954) $ 4 693 727 Mortgage-backed securities 27 891 610 9 429 (845 875) 27 055 164 Corporate preferred 3 033 996 - - (37 663) 2 996 333 Other 707 800 - - - - 707 800 -------------- --------------- -------------- --------------- $ 36 454 087 $ 9 429 $ (1 010 492) $ 35 453 024 ============== =============== ============== ===============
The amortized cost and fair value of securities available for sale as of March 31, 1997, by contractual maturity are shown below. Maturities may differ from contractual maturities in corporate and mortgage-backed securities because the securities and mortgages underlying the securities may be called or repaid without any penalties. Therefore, these securities are not included in the maturity categories in the following maturity summary.
Amortized Fair Cost Value ---- ----- Due after one year through five years $ 849 894 $ 834 767 Due after five years through 10 years 3 970 787 3 858 960 Mortgage-backed securities 27 891 610 27 055 164 Corporate preferred 3 033 996 2 996 333 Other 707 800 707 800 --------------- --------------- $ 36 454 087 $ 35 453 024 =============== ===============
Proceeds from sales of securities available for sale for the three months ended March 31, 1997 and 1996 were $1,077,494 and $9,982,384, respectively. Gross gains of $4,907 and $31,195 and gross losses of $1,764 and $16,953 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 $7,187,782 at March 31, 1997. E-34 Notes to Consolidated Financial Statements (Unaudited) Note 3. Loans, Net The composition of the net loans is as follows: March 31, 1997 -------------- (In Thousands) Real estate loans: Construction and land development $ 3 702 Secured by farmland 2 093 Secured by 1-4 family residential 43 103 Other real estate loans 25 643 Loans to farmers (except secured by real estate) 884 Commercial and industrial loans (except those secured by real estate) 11 244 Loans to individuals for personal expenditures 7 852 All other loans 55 -------------- Total loans $ 94 576 Less: Unearned income 28 Allowance for loan losses 921 -------------- Net loans $ 93 627 ============== Note 4. Allowance for Loan Losses Transactions in the allowance for loan losses are as follows: March 31, 1997 1996 ------------ (In Thousands) Balance, beginning January 1, 1997 $884 $866 Provision charged to operating expense 55 -- Recoveries 9 42 Loan losses charged to the allowance 27 5 ---- ---- $921 $903 ==== ==== As of March 31, 1997, the Company had no impaired loans. Nonaccrual loans excluded from impaired loan disclosure under FASB 114 amounted to $140,000 at March 31, 1997. If interest on these loans had been accrued, such income would have approximated $2,345 for the quarter ended March 31, 1997. E-35 Notes to Consolidated Financial Statements (Unaudited) Note 5. Deposits Deposits outstanding at March 31, 1997 and 1996, and the related interest expense for the three-month periods then ended are summarized as follows:
1997 1996 --------------------------------------------------------------------- Amount Expense Amount Expense ------ ------- ------ ------- Noninterest bearing $ 23 604 901 $ - - $ 16 811 176 $ - - ---------------- ------------- --------------- ------------- Interest bearing: Interest checking $ 19 094 549 $ 87 915 $ 18 587 112 $ 109 768 Money market accounts 30 392 244 210 010 26 139 196 210 835 Regular savings and IRA's 15 224 461 141 195 14 086 509 135 631 Certificates of deposit: Less than $100,000 38 143 942 529 218 33 826 020 460 702 $100,000 and more 15 568 407 184 198 11 515 453 174 215 ---------------- ------------- --------------- ------------- Total interest bearing $ 118 423 603 $ 1 152 536 $ 104 154 290 $ 1 091 151 ---------------- ------------- --------------- ------------- Total deposits $ 142 028 504 $ 1 152 536 $ 120 965 466 $ 1 091 151 ================ ============= =============== =============
E-36 Appendix F June ____, 1997 Board of Directors Independent Community Bankshares, Inc. 111 West Washington Street Middleburg, Virginia 20117 Board of Directors The Tredegar Trust Company 901 East Byrd Street Richmond, Virginia 23219 Re: Tax Opinion - Merger of TTC Acquisition Subsidiary, Inc. with and into The Tredegar Trust Company Ladies and Gentlemen: You have requested our opinion as to certain federal income tax consequences of the proposed merger (the "Merger") of TTC Acquisition Subsidiary, Inc. ("Acquisition"), a wholly owned subsidiary of Independent Community Bankshares, Inc. ("ICBI"), with and into The Tredegar Trust Company ("TTC") pursuant to the Agreement and Plan of Reorganization by and between these parties dated March 28, 1997 (the "Merger Agreement"). Our opinion is given pursuant to Section 6.1(d) of the Merger Agreement. FACTS: ICBI is a bank holding company headquartered in Middleburg, Virginia. In addition to Acquisition, ICBI has one other subsidiary, The Middleburg Bank, a Virginia-chartered bank that operates three banking offices and offers a full range of banking services. ICBI was formed in 1993 to serve as the parent holding company for The Middleburg Bank. TTC is a Virginia-chartered independent trust company and provides trust and investment services, primarily to customers in Virginia, through its offices in Richmond, Virginia. Pursuant to the Merger Agreement, Acquisition will be merged with and into TTC in accordance with the provisions of Title 13.1 of the Code of Virginia of 1950, as amended. After the Merger, TTC will continue its existing business and operations as a wholly owned subsidiary of ICBI. Upon consummation of the Merger (the "Effective Date"), each outstanding share of common stock of TTC will be converted into and represent the right to receive, as of the Effective Date, a maximum of .25 shares of common stock of ICBI (the "Initial Merger Consideration"). The Initial Merger Consideration will be less than .25 shares if TTC's losses from January 1, 1997 to the Effective Date exceed $30,000. Additional shares of common stock of ICBI will be issued with respect to the TTC common stock approximately three years after the Effective Date if the net earnings of TTC for the 36 month period after the Effective Date exceed $638,946 plus certain adjustments (the "Contingent Merger Consideration"). The number of ICBI shares paid as Contingent Merger Consideration will be the ratable share of the sum of (1) 4,940 shares plus (ii) the number of shares determined by dividing $138,300 by the average last sale price for ICBI common stock for the ten trading day period ending on the tenth day prior to the date the Contingent Merger Consideration is paid. Cash will be paid in lieu of any fractional shares. In connection with this opinion, we have examined (i) the Merger Agreement, (ii) the Registration Statement of ICBI on Form S-4, dated May 23, 1997, including the Joint Proxy Statement/Prospectus contained therein, and (iii) such other documents concerning the Merger as we have deemed necessary ((i), (ii), and (iii) collectively, the "Merger Documents"). With respect to the various factual matters material to our opinions, we have relied upon certificates of management of ICBI and TTC (the "Officers' Certificates"). We have assumed the correctness of the factual matters contained in such reliance sources and have made no independent investigation for the purpose of confirming that such factual matters are correct. We have assumed (i) the genuineness of all signatures on the Merger Documents, (ii) the due authorization, execution, and delivery of all documents and the validity and binding effect thereof, (iii) the authenticity of all documents submitted to us as originals, (iv) the conformity to the originals of all documents submitted to us as copies and the authenticity of the originals from which the copies were made, and (v) the legal capacity of natural persons. REPRESENTATIONS: In connection with the proposed Merger, the following representations have been made to us by the management of ICBI and the management of TTC, respectively, in the Officers' Certificates upon which we have been authorized to rely: A. The fair market value of the ICBI stock received by TTC shareholders in the Merger will be approximately equal to the fair market value of the TTC stock surrendered by such shareholders in exchange therefor. B. To the best of the knowledge of the management of ICBI and the management of TTC, there is no plan or intention on the part of TTC's shareholders to sell, exchange or otherwise dispose of a number of the shares of ICBI stock received by them in the Merger that would reduce such shareholders' ownership of ICBI to a number of shares having a value, as of the date of the Merger, of less than fifty percent (50%) of the value of all of the formerly outstanding shares of TTC, as of the date of the same date. For purposes of this representation, shares of TTC stock surrendered by dissenters or exchanged for cash in lieu of fractional shares of ICBI stock will be treated as outstanding TTC stock on the date of the transaction. Moreover, shares of TTC stock and shares of ICBI stock held by TTC shareholders and otherwise sold, redeemed, or disposed of before or after the transaction will be considered in making this representation. C. ICBI has no plan or intention to reacquire any of its stock issued in the Merger. D. ICBI has no plan or intention to sell or otherwise dispose of any of the assets of TTC acquired in the Merger except for dispositions made in the ordinary course of business. E. Following the Merger, TTC will hold assets representing at least ninety percent (90%) of the fair market value of the net assets and at least seventy percent (70%) of the fair market value of the gross assets held by TTC and Acquisition immediately prior to the Merger. For this purpose, amounts used to pay dissenters and all redemptions and distributions (except for regular, normal dividends) made by TTC immediately prior to the Merger will be considered as assets held by TTC immediately prior to the Merger. F. TTC has not redeemed any of its stock, made any distributions with respect to any of its stock or disposed of any of its assets in anticipation of or as part of the Merger. G. ICBI has no plan or intention to liquidate TTC, to merge TTC into another corporation, to sell or otherwise dispose of the stock of TTC or to cause TTC to issue additional shares of stock that would result in ICBI losing control of TTC within the meaning of Section 368(c) of the Internal Revenue Code of 1986, as amended (the "Code"). H. At the time of the transaction, TTC will not have outstanding any warrants, options, convertible securities, or any other type of rights pursuant to which any person could acquire stock in TTC that, if exercised or converted, would affect ICBI's acquisition or retention of control of TTC, as defined in Section 368(c) of the Code. I. ICBI does not presently own, nor has it ever owned, directly or indirectly, any of the stock of TTC. J. There is no intercompany indebtedness of ICBI, Acquisition or TTC that was issued, acquired or will be settled at a discount as a result of the Merger. K. The sole consideration to be issued by ICBI in the Merger will be shares of its voting common stock for the voting common stock of TTC plus cash for fractional shares. Further, no liabilities of TTC or its shareholders will be assumed by ICBI, nor will any of the TTC stock acquired be subject to any liabilities. L. TTC will pay its dissenting shareholders the value of their stock out of its own funds. No funds will be supplied for that purpose, directly or indirectly, by ICBI nor will ICBI directly or indirectly reimburse TTC for any payments to dissenters. M. The payment of cash in lieu of fractional shares of ICBI stock is solely for the purpose of avoiding the expense and inconvenience to ICBI of issuing fractional shares and does not represent separately bargained for consideration. N. Following the Merger, TTC will continue its historic business in a substantially unchanged manner or continue to use a significant portion of its historic business assets in a business. O. At the time of the Merger, the fair market value of the assets of TTC will exceed the sum of its liabilities, including any liabilities to which its assets are subject. P. TTC is not under the jurisdiction of a court in a case under Title 11 of the United States Code, as amended, or a similar case within the meaning of Section 368(a)(3)(A) of the Code. Q. No two parties to the Merger are investment companies as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code. R. ICBI, Acquisition, TTC and the shareholders of TTC will pay their own expenses, if any, incurred in connection with the Merger. S. None of the shares of common stock of ICBI received by any stockholder-employee of TTC pursuant to the Merger are or will be consideration for services rendered. Any compensation paid to any stockholder-employee of TTC will be for services actually rendered and will be commensurate with the amounts paid to third parties bargaining at arms length for similar services. T. The right to receive the Contingent Merger Consideration can only give rise to the right to receive additional shares of ICBI common stock. U. The issuance of additional shares of ICBI stock for the Contingent Merger Consideration will not be triggered by an event the occurrence or non-occurrence of which is or will be within the control of ICBI, TTC or the TTC shareholders. V. The issuance of additional shares of ICBI stock for the Contingent Merger Consideration will not be triggered by the payment of additional tax or reduction in tax paid as a result of an Internal Revenue Service examination of ICBI, TTC or the TTC shareholders. TREATMENT OF CONTINGENT MERGER CONSIDERATION Section 354 of the Code provides that no gain or loss is recognized if stock in a corporation that is a party to a reorganization under Section 368 of the Code is exchanged for stock in another corporation that is also a party to the reorganization. However, when contingent rights to acquire stock, rather than the stock itself, are issued in connection with a reorganization, the question arises as to whether the contingent right is a separate property right independent of the stock itself which may be taxable. In situations where the contingent right could only give rise to additional shares of stock and there was a valid business reason for granting the contingent right rather than the stock itself, the courts and the Internal Revenue Service (the "Service") have generally held that the contingent right is not separate property. Rather, such rights are viewed as the equivalent of stock and, therefore, may be received without recognizing gain or loss in the context of a reorganization. However, in order to obtain an advance ruling from the Service regarding a reorganization that includes contingent stock, the terms of the contingency must meet certain guidelines set forth in Revenue Procedure 84-42, 1984-1 C.B. 521. These guidelines include the requirements that (i) the maximum number of shares that may be issued must be set forth in the Agreement and (ii) at least fifty percent (50%) of the maximum number of shares that may eventually be issued must be issued in the initial distribution. Because there is no maximum number of shares that may be received by the shareholders of TTC as Contingent Merger Consideration, two of the requirements set forth in the advance ruling guidelines are not met. Accordingly, the Service would not issue an advance ruling that the Merger qualifies as a reorganization under Section 368(a) of the Code if such a ruling was requested. In any event the parties have not nor do they intend to seek such an advance ruling. The guidelines contained in Revenue Procedure 84-42 do not necessarily constitute a statement of existing substantive law but rather are only conditions to the issuance of an advance ruling. Nevertheless, the advance ruling guidelines create an uncertainty as to whether it is the Service's position that there must be a limit on the number of shares that may be issued to avoid treating the contingent right as separate property. In light of this uncertainty and because we have not identified any authority, either favorable or unfavorable, that specifically addresses whether a limit is necessary, we have not expressed an opinion regarding whether the Contingent Merger Consideration will be treated as separate property or as stock. Instead, our opinion describes the tax treatment of the Contingent Merger Consideration under each alternative. OPINION: Based on the foregoing and subject to the limitations and qualifications set forth herein, we give our opinion as follows: 1. Whether or not the Contingent Merger Consideration is treated as separate property, the proposed Merger will qualify as a reorganization within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code, and ICBI, Acquisition and TTC will each qualify as a "party to a reorganization" within the meaning of Section 368(b) of the Code. 2. No gain or loss will be recognized for federal tax purposes by ICBI, Acquisition or TTC as a result of the Merger. 3. No gain or loss will be recognized for federal tax purposes by the shareholders of TTC as a result of their receipt of solely common stock of ICBI as Initial Merger Consideration in exchange for their common stock of TTC. 4. If the Contingent Merger Consideration is treated as stock and not as a separate property right, no gain or loss will be recognized for federal tax purposes by the shareholders of TTC as a result of their receipt of solely ICBI common stock as Contingent Merger Consideration. 5. If the right to receive the Contingent Merger Consideration, or a portion thereof, is treated as a separate property right, gain, if any, will be recognized by the shareholders of TTC upon the receipt of the Contingent Merger Consideration in an amount not in excess of the value of the ICBI stock, or portion thereof, treated as received pursuant to the separate property right. If the exchange has the effect of the distribution of a dividend, the amount of any gain recognized that is not in excess of the ratable share of the undistributed earnings and profits of TTC will be treated as a dividend. The remainder, if any, of gain recognized will be treated as a gain from the exchange of property and will be recognized as capital gain, provided the TTC common stock was a capital assets in the hands of the TTC shareholder on the Effective Date. The determination of whether the exchange has the effect of a distribution of a dividend will be made on a shareholder by shareholder basis in accordance with the principles of Section 302 of the Code. No loss may be recognized on the exchange. 6. Any dissenting shareholder of TTC who receives solely cash in exchange for shares of TTC stock will be treated as receiving a distribution in redemption of such stock subject to the provisions and limitations of Section 302 of the Code. 7. Any shareholder of TTC who receives cash in lieu of a fractional share interest shall be treated as receiving a payment in redemption of such fractional interest subject to the provisions of Section 302 of the Code. Gain or loss will be realized and recognized to such shareholder measured by the difference between the redemption price and the portion of the shareholder's basis in TTC stock allocable to such fractional share interest. 8. The aggregate tax basis of the shares of ICBI stock received by each shareholder of TTC, except for any shares of ICBI stock treated as received pursuant to a separate property right, will be equal to the aggregate tax basis of such shareholder's shares of TTC stock surrendered therefor in the Merger, decreased by the value of any shares of ICBI stock received which are treated as received pursuant to a separate property right, and increased by any gain recognized. The tax basis of any shares of ICBI stock treated as received pursuant to a separate property right will be equal to the value of such shares when received. 9. The holding period under Section 1223 of the Code for the shares of ICBI stock received by each shareholder of TTC, except for shares of ICBI stock treated as received pursuant to a separate property right, will include the holding period for the shares of TTC stock of such shareholder surrendered therefor in the Merger, provided that the TTC shareholder held such stock as a capital asset on the date of the Merger. In rendering our opinion, we have considered the applicable provisions of the Code, Treasury Regulations promulgated thereunder, pertinent judicial authorities, interpretive rulings of the Internal Revenue Service, and other authorities as we have considered relevant. Our opinion is limited to the federal tax law of the United States and is expressed as of the date hereof. We do not assume any obligation to update or supplement our opinion to reflect any fact or circumstance which hereafter comes to our attention or any change in law which hereafter occurs. Our opinions are limited to the matters expressly stated; no opinion is implied or may be inferred beyond such matters. Our opinion expressed herein is made in connection with the Merger and is solely for the benefit of ICBI and its Shareholders, and TTC and its shareholders. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement, which has been filed by ICBI with the Securities and Exchange Commission, and to the reference to our firm under the caption "Certain Federal Income Tax Consequences" in the Joint Proxy Statement/Prospectus forming a part of the Registration Statement. This opinion may not, without our prior written consent, be otherwise distributed or relied upon by any other person, filed with any other government agency or quoted in any other document. Very truly yours, WILLIAMS, MULLEN, CHRISTIAN & DOBBINS By: ___________________________________ -----END PRIVACY-ENHANCED MESSAGE-----