-----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, WKD26E90+IltvdHID2NqF7PHh78JSEkV1VepQ7qnxf45bBPWQJZkdd+SWFDf6ARd 1jz9U5fMnfnJ9Slfu2uGBg== 0001002105-99-000051.txt : 19990331 0001002105-99-000051.hdr.sgml : 19990331 ACCESSION NUMBER: 0001002105-99-000051 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INDEPENDENT COMMUNITY BANKSHARES INC CENTRAL INDEX KEY: 0000914138 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 541696103 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-24159 FILM NUMBER: 99578022 BUSINESS ADDRESS: STREET 1: 111 W WASHINGTON ST STREET 2: C/O MIDDLEBURG BANK CITY: MIDDLEBURG STATE: VA ZIP: 22117 BUSINESS PHONE: 5406876377 MAIL ADDRESS: STREET 1: 111 WEST WASHINGTON STREET STREET 2: C/O MIDDLEBURG BANK CITY: MIDDLEBURG STATE: VA ZIP: 22117 10KSB 1 10KSB - INDEPENDENT COMMUNITY BANKSHARES, INC. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 Commission file number 0-24159 INDEPENDENT COMMUNITY BANKSHARES, INC. (Name of Small Business Issuer in its Charter) Virginia 54-1696103 (State or Other Jurisdiction (I.R.S. Employer of Incorporation) Identification No.) 111 West Washington Street 20117 Middleburg, Virginia (Zip Code) (Address of Principal Executive Offices) (540) 687-6377 (Issuer's Telephone Number, Including Area Code) Securities registered under Section 12(b) of the Exchange Act: Name of Each Exchange Title of Each Class on Which Registered None n/a Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $5.00 per share (Title of Class) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes X No ----- ----- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The issuer's gross income for its most recent fiscal year was $15,953,000. The aggregate market value of the voting stock held by non-affiliates computed by reference to the average of the closing bid and asked prices of such stock as of March 22, 1999 was approximately $24,946,808. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.) The number of outstanding shares of Common Stock as of March 22, 1999 was 1,778,994. (This report also covers 276,600 Contractual Rights to Contingent Merger Consideration, which are registered under the Securities Act of 1933, as amended, pursuant to a registration statement declared effective on June 27, 1997.) DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement for the 1999 Annual Meeting of Shareholders - Part III -2- TABLE OF CONTENTS PART I Page ITEM 1. DESCRIPTION OF BUSINESS............................................ 4 ITEM 2. DESCRIPTION OF PROPERTY............................................ 9 ITEM 3. LEGAL PROCEEDINGS.................................................. 10 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................. 10 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............................................. 10 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION............................... 11 ITEM 7. FINANCIAL STATEMENTS............................................... 33 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................... 33 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT........................................ 33 ITEM 10. EXECUTIVE COMPENSATION............................................. 34 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................ 34 ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................... 34 ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K............................. 34 -3- PART I ITEM 1. DESCRIPTION OF BUSINESS General Independent Community Bankshares, Inc. ("ICBI" or the "Company") is a bank holding company that was incorporated under the laws of the Commonwealth of Virginia in 1993. The Company owns all of the stock of its subsidiaries, The Middleburg Bank (the "Bank"), an independent commercial bank, and The Tredegar Trust Company ("Tredegar"), an independent trust company, both of which are chartered under the laws of Commonwealth of Virginia. The Bank has three branches. The Bank has its main office at 111 West Washington Street, Middleburg, Virginia 20117, and has branch offices in Purcellville and Leesburg, Virginia. The Bank opened for business on July 1, 1924. Tredegar has its main office at Riverfront Plaza, 901 E. Byrd Street, Suite 190, Richmond, Virginia 23219, and a branch office in Middleburg, Virginia. Tredegar opened for business in January 1994. The local community that is served by the Bank is defined as Western Loudoun County. Loudoun County is in Northwestern Virginia and included in the Washington-Baltimore Metropolitan statistical area, the fourth largest market in the United States. Loudoun County's population is approximately 150,000 with slightly over one-third of the population located in the markets served by the Bank and Tredegar. The local economy is driven by service industries requiring a higher skill level, self-employed individuals, the equine industry and the independently wealthy. Tredegar serves primarily the greater Richmond area including the counties of Henrico, Chesterfield, Hanover, Goochland and Powhatan as well as Loudoun County. However, Tredegar does have customers outside of its primary market. Richmond is the state capital of Virginia and is home to over 20 Fortune 500 Companies. The greater Richmond area has a population in excess of 800,000 people. The Company, through its subsidiaries, offers a wide range of banking, fiduciary and investment management services available to both individuals and small businesses. The banking services include various types of checking and savings deposit accounts, and the making of business, real estate, development, mortgage, home equity, automobile and other installment, demand and term loans. Also, the Bank offers ATM's at all locations, internet banking, travelers' checks, money orders, safe deposit rentals, collections, notary public, wire services and other traditional bank services to its customers. Tredegar provides a variety of investment management and fiduciary services including trust and estate settlement. Tredegar can also serve as escrow agent, attorney-in-fact, guardian of property or trustee of an IRA. The Bank has one wholly owned subsidiary, Middleburg Bank Service Corporation, which is incorporated under the laws of the Commonwealth of Virginia. Middleburg Bank Service Corporation is a partner in a limited liability company, Bankers Title Shenandoah, LLC, which sells title insurance to its members. As of December 31, 1998, ICBI had a total of 76 full time equivalent employees. The Company considers relations with its employees to be excellent. The Company's employees are not represented by a collective bargaining unit. -4- Competition ICBI faces significant competition both in making loans and in attracting deposits. Competition for loans comes from commercial banks, savings and loan associations and savings banks, mortgage banking subsidiaries of regional commercial banks, subsidiaries of national mortgage bankers, insurance companies, and other institutional lenders. Its most direct competition for deposits has historically come from savings and loan associations and savings banks, commercial banks, credit unions and other financial institutions. Based upon total assets at June 30, 1998, ICBI is the second largest banking organization operating in Loudoun County, Virginia. ICBI may face an increase in competition, as a result of the continuing reduction in the restrictions on the interstate operations of financial institutions. ICBI also faces competition for deposits from short-term money market mutual funds and other corporate and government securities funds. Tredegar competes for customers and accounts with banks and other financial institutions. Even though many of these institutions have been engaged in the trust or investment management business for a considerably longer period of time than Tredegar and have significantly greater resources, Tredegar has grown through its commitment to quality trust services and a local community approach to business. Supervision and Regulation Banks and their holding companies are extensively regulated. ICBI is a bank holding company subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve") and the Virginia State Corporation Commission (the "SCC"). ICBI's sole bank subsidiary is the Bank, a Virginia chartered bank that is subject to supervision and regulation by the Federal Reserve and the SCC. Tredegar is a Virginia chartered trust company regulated by the SCC and the Federal Reserve. The regulatory discussion is divided into two major subject areas, each of which has three subsections. First, the discussion addresses the general regulatory considerations governing holding companies and focuses on the primary regulatory considerations applicable to ICBI as a bank holding company. Second, the discussion addresses the general regulatory provisions governing financial institutions and focuses on the regulatory considerations of the Bank and Tredegar. The discussion below is only a summary of the principal laws and regulations that comprise the regulatory framework. The descriptions of these laws and regulations, as well as descriptions of laws and regulations contained elsewhere herein, do not purport to be complete and are qualified in their entirety by reference to applicable laws and regulations. Bank Holding Companies General. The Federal Reserve has jurisdiction under the Bank Holding Company Act of 1956, as amended (the "BHC Act"), to approve any bank or nonbank acquisition, merger or consolidation proposed by a bank holding company. The BHC Act generally limits the activities of a bank holding company and its subsidiaries to that of banking, managing or controlling banks, or any other activity which is so closely related to banking or to managing or controlling banks as to be a proper incident thereto. Formerly the BHC Act prohibited the Federal Reserve from approving an application from a bank holding company to acquire shares of a bank located outside the state in which the operations of the holding company's banking subsidiaries are principally conducted, unless such an acquisition was authorized by -5- statute of the state where the bank whose shares were to be acquired was located. However, under federal legislation enacted in 1994, the restriction on interstate acquisitions was abolished, effective September 1995. A bank holding company from any state now may acquire banks and bank holding companies located in any other state, subject to certain conditions, including nationwide and state imposed concentration limits. Effective June 1, 1997, banks were able to branch across state lines by acquisition, merger or de novo (unless state law would permit such interstate branching at an earlier date), provided certain conditions are met, including that applicable state law must expressly permit such interstate branching. There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries that are designed to reduce potential loss exposure to the depositors of the depository institutions and to the Federal Deposit Insurance Corporation ("FDIC") insurance fund. For example, under a policy of the Federal Reserve with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. In addition, the "cross-guarantee" provisions of federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by the FDIC as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interest of the Bank Insurance Fund ("BIF"). The FDIC's claim for damages is superior to claims of shareholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institutions. Banking laws also provide that amounts received from the liquidation or other resolution of any insured depository institution by any receiver must be distributed (after payment of secured claims) to pay the deposit liabilities of the institution prior to payment of any other general or unsecured senior liability, subordinated liability, general creditor or shareholder. This provision would give depositors a preference over general and subordinated creditors and shareholders in the event a receiver is appointed to distribute the assets of any bank subsidiaries. Regulatory Capital Requirements. All financial institutions are required to maintain minimum levels of regulatory capital. The federal bank regulatory agencies have established substantially similar risked based and leverage capital standards for financial institutions they regulate. These regulatory agencies also may impose capital requirements in excess of these standards on a case-by-case basis for various reasons, including financial condition or actual or anticipated growth. Under the risk-based capital requirements of these regulatory agencies, ICBI is required to maintain a minimum ratio of total capital to risk-weighted assets of at least 8%. At least half of the total capital is required to be "Tier 1 capital" which consists principally of common and certain qualifying preferred stockholders' equity, less certain intangibles and other adjustments. The remainder ("Tier 2 capital") consists of a limited amount of subordinated and other qualifying debt (including certain hybrid capital instruments) and a limited amount of the general loan loss allowance. Based upon the applicable Federal Reserve regulations, at December 31, 1998, ICBI would be considered "well capitalized." In addition, the federal regulatory agencies have established a minimum leverage capital ratio (Tier 1 capital to tangible assets). These guidelines provide for a minimum leverage capital ratio of 3% for banks and their respective holding companies that meet certain specified criteria, including that they have the highest regulatory examination rating and are not contemplating significant growth or expansion. All -6- other institutions are expected to maintain a leverage ratio of at least 100 to 200 basis points above that minimum. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Each federal regulatory agency is required to revise its risk-based capital standards to ensure that those standards take adequate account of interest rate risk, concentration of credit risk and the risks of nontraditional activities, as well as reflect the actual performance and expected risk of loss on multifamily mortgages. The Federal Reserve and the FDIC have jointly solicited comments on a proposed framework for implementing the interest rate risk component of the risk-based capital guidelines. Under the proposal, an institution's assets, liabilities, and off-balance sheet positions would be weighed by risk factors that approximate the instruments' price sensitivity to a 100 basis point change in interest rates. Institutions with interest rate risk exposure in excess of a threshold level would be required to hold additional capital proportional to that risk. In 1994, the federal bank regulatory agencies solicited comments on a proposed revision to the risk-based capital guidelines to take account of concentration of credit risk and the risk of nontraditional activities. The revision proposed to amend each agency's risk-based capital standards by explicitly identifying concentration of credit risk and the risk arising from nontraditional activities, as well as an institution's ability to manage those risks, as important factors to be taken into account by the agency in assessing an institution's overall capital adequacy. The proposal was adopted as a final rule by the federal bank regulatory agencies and subsequently became effective on January 17, 1995. ICBI does not expect the final rule to have a material impact on its capital requirements; however, the federal regulatory agencies may, as an integral part of their examination process, require ICBI to provide additional capital based on such agency's judgments of information available at the time of examination. Limits on Dividends and Other Payments. Certain state law restrictions are imposed on distributions of dividends to shareholders of ICBI. ICBI shareholders are entitled to receive dividends as declared by the ICBI Board of Directors. However, no such distribution may be made if, after giving effect to the distribution, it would not be able to pay its debts as they became due in the usual course of business or its total assets would be less than its total liabilities. There are similar restrictions with respect to stock repurchases and redemptions. The Bank is subject to legal limitations on capital distributions including the payment of dividends, if, after making such distribution, the institution would become "undercapitalized" (as such term is used in the statute). For all state member banks of the Federal Reserve seeking to pay dividends, the prior approval of the applicable Federal Reserve Bank is required if the total of all dividends declared in any calendar year will exceed the sum of the bank's net profits for that year and its retained net profits for the preceding two calendar years. Federal law also generally prohibits a depository institution from making any capital distribution (including payment of a dividend or payment of a management fee to its holding company) if the depository institution would thereafter fail to maintain capital above regulatory minimums. Federal Reserve Banks are also authorized to limit the payment of dividends by any state member bank if such payment may be deemed to constitute an unsafe or unsound practice. In addition, under Virginia law no dividend may be declared or paid that would impair a Virginia chartered bank's paid-in capital. The SCC has general authority to prohibit payment of dividends by a Virginia chartered bank if it determines that the limitation is in the public interest and is necessary to ensure the bank's financial soundness. -7- The Bank General. In addition to the regulatory provisions regarding holding companies addressed above, the Bank is subject to extensive regulation as well. The following discussion addresses certain primary regulatory considerations affecting the Bank. The Bank is regulated extensively under both federal and state law. The Bank is organized as a Virginia chartered banking corporation and is regulated and supervised by the Bureau of Financial Institutions of the SCC. As a member of the Federal Reserve System as well, the Bank is regulated and supervised by the Federal Reserve Bank of Richmond. The SCC and the Federal Reserve Bank of Richmond conduct regular examinations of the Bank, reviewing such matters as the adequacy of loan loss reserves, quality of loans and investments, management practices, compliance with laws, and other aspects of their operations. In addition to these regular examinations, the Bank must furnish the SCC and the Federal Reserve with periodic reports containing a full and accurate statement of its affairs. Supervision, regulation and examination of banks by these agencies are intended primarily for the protection of depositors rather than shareholders. Insurance of Accounts, Assessments and Regulation by the FDIC. The Bank's deposits are insured up to $100,000 per insured depositor (as defined by law and regulation) through the BIF. The BIF is administered and managed by the FDIC. As insurer, the FDIC is authorized to conduct examinations of and to require reporting by BIF-insured institutions. The actual assessment to be paid by each BIF member is based on the institution's assessment risk classification and whether the institution is considered by its supervisory agency to be financially sound or to have supervisory concerns. The FDIC is authorized to prohibit any BIF-insured institution from engaging in any activity that the FDIC determines by regulation or order to pose a serious threat to the respective insurance fund. Also, the FDIC may initiate enforcement actions against banks, after first giving the institution's primary regulatory authority an opportunity to take such action. The FDIC may terminate the deposit insurance of any depository institution, including the Bank, if it determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed in writing by the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If deposit insurance is terminated, the deposits at the institution at the time of termination, less subsequent withdrawals, shall continue to be insured for a period from six months to two years, as determined by the FDIC. Management is aware of no existing circumstances that could result in termination of the Bank's deposit insurance. Other Safety and Soundness Regulations. The federal banking agencies have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized," as such terms are defined under uniform regulations defining such capital levels issued by each of the federal banking agencies. In addition, FDIC regulations require that management report on the institution's responsibility to prepare financial statements, and to establish and to maintain an internal control structure and procedures for financial reporting and compliance with designated laws and regulations concerning safety and soundness; and that independent auditors attest to and report separately on assertions in management's reports concerning compliance with such laws and regulations, using FDIC-approved audit procedures. -8- Each of the federal banking agencies also must develop regulations addressing certain safety and soundness standards for insured depository institutions and depository institution holding companies, including compensation standards, operational and managerial standards, asset quality, earnings and stock valuation. The federal banking agencies have issued a joint notice of proposed rulemaking, which requested comment on the implementation of these standards. The proposed rule sets forth general operational and managerial standards in the areas of internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. The proposal contemplates that each federal agency would determine compliance with these standards through the examination process, and if necessary to correct weaknesses, require an institution to file a written safety and soundness compliance plan. ICBI has not yet determined the effect that the proposed rule would have on its operations and the operations of its depository institution subsidiary if it is enacted substantially as proposed. Community Reinvestment. The requirements of the Community Reinvestment Act ("CRA") affect the Bank. The CRA imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those institutions. Each financial institution's efforts in meeting community credit needs currently are evaluated as part of the examination process pursuant to twelve assessment factors. These factors also are considered in evaluating mergers, acquisitions and applications to open a branch or facility. The Bank is meeting its obligations under the CRA. Tredegar operates as a subsidiary trust company pursuant to the Virginia Banking Act. As such, it is subject to supervision and regulation by the Federal Reserve and by the SCC and its Bureau of Financial Institutions, which have authority over Virginia banks and savings institutions and other financial institutions, including independent trust companies. As a subsidiary trust company, it is subject to periodic investigations and examinations by the SCC and the Federal Reserve. ITEM 2. DESCRIPTION OF PROPERTY The headquarters building of the Company and the Bank, which also serves as a branch office for Tredegar, was completed in 1981 and is a two-story building of brick construction, with approximately 18,000 square feet of floor space located at 111 West Washington Street, Middleburg, Virginia 20117. The office operates nine teller windows, including three drive-up facilities and one stand-alone automatic teller machine. The Bank owns the headquarters building. The Purcellville bank branch was purchased in 1994 and is a one-story building with a basement of brick construction, with approximately 3,000 square feet of floor space located at 431 East Main Street, Purcellville, Virginia 20132. The office operates four teller windows, including three drive-up facilities and one stand-alone automatic teller machine. The Bank owns this branch building. The Leesburg bank branch was completed in 1997 and is a two-story building of brick construction, with approximately 6,000 square feet of floor space located at 102 Catoctin Circle, S.E., Leesburg, Virginia 20175. The office operates five teller windows, including three drive-up facilities and one drive-up automatic teller machine. The Bank also owns this branch building. Tredegar has leased its main office in Richmond, Virginia. Rental expense for this location totaled $44,000 in the fiscal year ending December 31, 1998. -9- All of the Company's properties are in good operating condition and are adequate for the Company's present and anticipated future needs. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the company is a party or of which the property of the Company subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders of the Company. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Since October 1997, the Company's Common Stock has traded on the OTC Bulletin Board under the symbol "ICBX." Prior to October 1997, the Common Stock was neither listed on any stock exchange nor quoted on the Nasdaq Stock Market and traded infrequently. During that time, the Common Stock had periodically been sold in a limited number of privately negotiated transactions. The prices set forth below do not necessarily reflect the price that would be paid in an active and liquid market. Market Price and Dividends
Sales Price ($) (1) Dividends ($) (1) ------------------- ----------------- High Low ---- --- 1997: 1st quarter................................... 14.00 14.00 .09 2nd quarter................................... 14.50 14.00 .11 3rd quarter................................... 16.00 15.50 .12 4th quarter................................... 22.00 16.75 .12 1998: 1st quarter................................... 28.50 21.00 .15 2nd quarter................................... 29.00 27.75 .15 3rd quarter................................... 29.50 25.50 .15 4th quarter................................... 25.50 22.00 .15
__________________ (1) All prices and dividends are adjusted for a two-for-one stock split as of November 24, 1997. ICBI historically has paid cash dividends on a quarterly basis. The final determination of the timing, amount and payment of dividends on the Common Stock is at the discretion of ICBI's Board of Directors and will depend upon the earnings of ICBI and its subsidiaries, principally, its subsidiary bank, -10- the financial condition of ICBI and other factors, including general economic conditions and applicable governmental regulations and policies. ICBI or the Bank has paid regular cash dividends for over 200 consecutive quarters. As of March 3, 1999, ICBI had 950 shareholders of record. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following discussion provides information about the major components of the results of operations and financial condition, liquidity, and capital resources of ICBI. This discussion and analysis should be read in conjunction with the Company's consolidated financial statements and notes thereto. Overview ICBI is headquartered in Middleburg, Virginia and has two wholly owned subsidiaries, The Middleburg Bank (TMB) and The Tredegar Trust Company (Tredegar). The Middleburg Bank is a community bank serving Western Loudoun County, Virginia with three branches. The Tredegar Trust Company is a trust company subsidiary headquartered in Richmond, Virginia with a branch office in Middleburg, Virginia. Tredegar was acquired by ICBI in August 1997 and accounted for using the purchase method of accounting. ICBI's performance for 1998 marked another year of growth in earnings and assets. Results were favorably affected by the growing momentum in revenues from the newer branch offices and the addition of the mortgage origination department in April 1998. By December 31, 1998 total assets were $205.4 million an increase of 11.1% over the $184.9 million at December 31, 1997. In September 1998 ICBI repurchased and retired 33,600 shares at $24.50 per share. This reduced capital by $823 thousand and marginally improved returns on equity and earnings per share. ICBI remains well capitalized with risk-adjusted core capital and total capital ratios well above regulatory minimums. Asset quality measures also remained strong throughout the year. -11- Average Balances, Income and Expenses, Yields and Rates
Years Ended December 31, --------------------------------------------------------------------------------------- 1998 1997 1996 --------------------------- ----------------------------- --------- --------- -------- Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate --------- --------- -------- --------- --------- -------- --------- --------- -------- (Dollars in thousands) Assets : Securities: Taxable $ 31,657 $ 1,804 5.70% $ 41,242 $ 2,469 5.99% $ 34,550 $ 2,023 5.86% Tax-exempt (1) (2) 28,931 2,204 7.62% 19,721 1,574 7.98% 15,238 1,200 7.87% --------- -------- --------- --------- --------- -------- Total Securities 60,588 4,008 6.62% 60,963 4,043 6.63% 49,788 3,223 6.47% Loans Taxable 112,281 10,181 9.07% 96,179 8,956 9.31% 87,358 8,137 9.31% Tax-exempt 416 36 8.74% 376 24 6.38% - - --------- -------- --------- --------- --------- -------- Total Loans 112,697 10,217 9.07% 96,555 8,980 9.30% 87,358 8,137 9.31% Federal Funds Sold 3,842 211 5.49% 2,928 160 5.46% 2,431 130 5.35% Money Market investments 1,817 90 4.95% 365 13 3.56% 125 5 4.00% Interest Bearing Deposits in other financial institutions 134 7 5.22% 84 8 9.52% 15 1 6.67% --------- -------- --------- --------- --------- -------- Total earning assets 179,078 14,533 8.12% 160,895 13,204 8.21% 139,717 11,496 8.23% Less: allowances for credit Losses (1,044) (952) (894) Total nonearning assets 15,084 12,730 10,340 --------- --------- --------- Total assets $ 193,118 $ 172,673 $ 149,163 ========= ========= ========= Liabilities (1): Interest-bearing deposits: Checking $ 23,853 $ 306 1.28% $ 19,886 $ 360 1.81% $ 18,348 $ 390 2.13% Regular savings 17,075 602 3.53% 15,631 577 3.69% 14,562 561 3.85% Money market savings 34,195 1,002 2.93% 30,071 883 2.94% 28,735 869 3.02% Time deposits: $100,000 and over 18,151 949 5.23% 16,480 936 5.68% 12,013 738 6.14% Under $100,000 38,557 2,044 5.30% 40,100 2,130 5.31% 34,760 1,898 5.46% --------- -------- --------- --------- --------- -------- Total interest-bearing Deposits 131,831 4,903 3.72% 122,168 4,886 4.00% 108,418 4,456 4.11% Federal Home Loan Bank Advances 1,319 70 5.31% 2,999 172 5.74% 3,188 187 5.87% Securities sold under agreements to repurchase 2,833 125 4.41% 2,662 119 4.47% 8 - - Long-term debt 3,740 206 5.51% - - - - - - Federal Funds Purchased 146 9 6.16% 272 15 5.51% 73 4 5.48% --------- -------- --------- --------- --------- -------- Total interest-bearing Liabilities 139,869 5,313 3.80% 128,101 5,192 4.05% 111,687 4,647 4.16% Non-interest bearing liabilities Demand Deposits 29,782 24,025 19,211 Other liabilities 997 1,112 923 Total liabilities 170,648 153,238 131,821 Shareholders' equity 22,470 19,435 17,342 Total liabilities and shareholders' Equity $ 193,118 $ 172,673 $ 149,163 ========= ========= ========= Net interest income $ 9,220 $ 8,012 $ 6,849 ======== ========= ======== Interest rate spread 4.32% 4.16% 4.07% Interest expense as a percent of average earning assets 2.97% 3.23% 3.33% Net interest margin 5.15% 4.98% 4.90%
____________________________ (1) Income and yields are reported on tax equivalent basis assuming a federal tax rate of 34%. (2) Income and yields include dividends on preferred bonds which are 70% excludable for tax purposes. -12- Results of Operations Net income for 1998 was $3.0 million, an increase of 13.0% over 1997's net income of $2.6 million and a 29.6% increase in 1997 over 1996's net income of $2.0 million. For 1998 earnings per diluted share were $1.63 compared to $1.51 per diluted share for 1997 and $1.18 per diluted share for 1996. The September 1998 stock repurchase increased earnings per diluted share by $.01 for 1998. Return on average assets (ROA) measures how effectively ICBI employs its assets to produce net income. ICBI's ROA increased slightly during 1998 to 1.54% compared to 1.52% and 1.35% for 1997 and 1996, respectively. Return on average equity (ROE) is another measure of earnings performance, indicates the amount of net income earned in relation to the total equity capital invested. ICBI's ROE was 13.24% for 1998, a decrease compared to 13.54% for 1997 and an increase compared to 11.83% for 1996. Net interest margin increased during 1998 to 5.15% on a tax-equivalent basis. Net interest margin for 1997 and 1996 was 4.98% and 4.90%, respectively. Net interest margin and net interest income are influenced by fluctuations in market rates and changes in both volume and mix of average earning assets and the liabilities that fund those assets. Loan growth was particularly strong with an increase of 21.0%. The average yield on earning assets declined 9 basis points to 8.12% for 1998 compared to 8.21% and 8.23% for 1997 and 1996, respectively. The average cost of funds continued to decrease in 1998 to 3.80% compared to 4.05% in 1997 and 4.16% in 1996. ICBI's efficiency ratio, a measure of its performance based upon the relationship between non-interest expense and income excluding securities gains and losses, compares favorably to other Virginia institutions. ICBI's efficiency ratio for 1998, 1997 and 1996 was 58.49%, 53.70% and 59.50%, respectively. A lower percentage of the efficiency ratio represents greater control of non-interest related costs. A fluctuation in the efficiency ratio can be attributed to relative changes in both non-interest income and net interest income. Loans, net of unearned income, were $124.9 million at December 31, 1998, a 21.0% growth over the 1997 balance of $104.2 million. Loans, net of unearned income increased 10.15% in 1997 to $104.2 million from $94.6 million at December 31, 1996. ICBI's investment portfolio declined during 1998 as it used funds from matured investments to fund loan growth. At December 31, 1998, ICBI's securities portfolio represented 28.13% of earning assets as compared to 34.46% at December 31, 1997. Total securities were $57.8 million in 1998, $63.7 million in 1997 and $52.4 million in 1996. ICBI is not aware of any current recommendations by any regulatory authorities which, if they were implemented, would have a material effect on the registrant's liquidity, capital resources, or results of operations. Income Statement Analysis Net Interest Income Net interest income represents the principal source of earnings for ICBI. Net interest income equals the amount by which interest generated from earning assets exceeds the expense associated with funding those assets. Changes in the volume and mix of interest earning assets and interest bearing -13- liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income. Net interest income on a fully tax-equivalent basis was $9.2 million in 1998, up 15.08% over the $8.0 million reported in 1997. Net interest income in 1997 increased 16.98% over the $6.8 million reported for 1996. When net interest income is presented on a fully tax-equivalent basis, interest income from tax-exempt earning assets is increased by the amount of equivalent to the federal income taxes which would have been paid if this income were taxable at the statutory federal tax rate of 34%. The increase in net interest income in 1998 resulted primarily from a 11.30% increase volume of average earning assets from 1997 to 1998 and secondarily by the reduction of funding costs in a declining interest rate environment. The 16.72% increase in average loans outstanding during 1998 provided $1.5 million in additional interest income while a decrease of 23 basis points in yield from 9.30% in 1997 to 9.07% in 1998 decreased interest income on average loans by $214 thousand. The yield on the investment securities portfolio decreased 1 basis point to 6.62% in 1998 from 6.63% in 1997, on a tax-equivalent basis and the average securities portfolio decreased $375 thousand, decreasing tax equivalent interest income $35 thousand from 1997 to 1998. During 1998 excess funds were temporarily invested in federal funds sold or money market accounts. The $2.4 million increase in average balances in those temporary investments provided $128 thousand in additional interest income. Average interest bearing deposits increased 7.91% during 1998, while the average rate paid on these deposits decreased 28 basis points to 3.72% in 1998 from 4.0% in 1997. The increase in interest expense on interest bearing deposits in 1998 was $17 thousand. The control of interest expense on deposits in 1998 resulted from a pricing strategy to grow core deposit relationships rather than those affected by interest rate alone. During 1998 ICBI's reliance on other fundings sources on average increased 35.48%, increasing the expense associated with those sources by $104 thousand. In 1997, the increase in fully tax-equivalent interest income was the result of both the growth in the average balances in the investment portfolio and the loan portfolio as well as the increase in average yield on the investment portfolio. The 22.45% increase in average securities from 1996 to 1997 provided $757 thousand in additional tax equivalent interest income while the 16 basis point increase in yield provided another $63 thousand in tax equivalent interest income. The 10.53% increase in average loan outstandings for 1997 increased tax equivalent interest income in 1997 by $843 thousand compared to 1996. During 1997, the average balances in interest bearing deposits increased by 12.68% which would have caused ICBI to pay $546 thousand in additional interest expense had the average rate paid on those deposit not decreased by 11 basis points saving ICBI $116 thousand in interest expense. In 1997, ICBI introduced the securities sold under a agreement to repurchase product for its larger business customers which increased the average of other interest bearing liabilities by $2.7 million causing $119 thousand in additional interest expense. Tax equivalent net interest income increased $1.2 million in 1997 compared to 1996. A stable interest rate environment during 1997 allowed for the growth in average earning assets to provide additional interest income which exceeded the cost of additional interest bearing liabilities. -14- The following table analyzes changes in net interest income attributable to changes in the volume of interest-bearing assets and liabilities compared to changes in interest rates. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. Nonaccruing loans are included in the averages outstandings. Volume and Rate Analysis (Tax equivalent basis)
Years Ended December 31, ------------------------------------------------------------------------------------- 1998 vs 1997 1997 vs 1996 Increase (Decrease) Due Increase (Decrease) Due to Changes in: to Changes in: ------------------------------------------ ------------------------------------- Volume Rate Total Volume Rate Total ------ ---- ----- ------ ---- ----- Earning Assets: Securities: Taxable $ (550) $ (115) $ (665) $ 400 $ 46 $ 446 Tax-exempt 697 (67) 630 357 17 374 Loans: Taxable 1,448 (223) 1,225 819 - 819 Tax-exempt 3 9 12 24 - 24 Federal funds sold 49 2 51 28 2 30 Interest on money market investments 79 (2) 77 8 - 8 Interest bearing deposits in other financial institutions (4) 3 (1) 6 1 7 --------- -------- --------- --------- -------- --------- Total earning assets $ 1,722 $ (393) $ 1,329 $ 1,642 $ 66 $ 1,708 Interest-Bearing Liabilities: Interest checking $ 115 $ (169) (54) $ 38 $ (68) (30) Regular savings deposits 47 (22) 25 37 (21) 16 Money market deposits 122 (3) 119 33 (19) 14 Time deposits $100,000 and over 17 (4) 13 (103) 31 (72) Under $100,000 (58) (28) (86) 541 (39) 502 --------- -------- --------- --------- -------- --------- Total interest bearing deposits $ 243 $ (226) $ 17 $ 546 $ (116) $ 430 Federal Home Loan Bank Advances (90) (12) (102) (11) (4) (15) Securities sold under agree- ment to repurchase 8 (2) 6 119 - 119 Long-term debt 206 - 206 - - - Federal Funds Purchased (8) 2 (6) 11 - 11 --------- -------- --------- --------- -------- --------- Total interest bearing Liabilities $ 359 $ (238) $ 121 $ 665 $ (120) $ 545 Change in net interest income $ 1,363 $ (155) $ 1,208 $ 977 $ 186 $ 1,163 ========= ======== ========= ========= ======== =========
-15- Non-interest Income Non-interest income has been and will continue to be an important factor for increasing profitability. Management recognizes this and continues to review and consider areas where non-interest income can be increased. One initiative towards the goal of increasing non-interest income was achieved by TMB which opened its mortgage department in April 1998. Total non-interest income increased by $1.0 million or 88.77% in 1998 compared to 1997, which follows a $407 thousand increase in 1997 over 1996. The increase is due primarily to the increase in trust fees, fees on loans held for sale and service charges on deposit accounts. In 1998, trust fees increased to $855 thousand, an increase of $517 thousand over 1997. The increase resulted from the acquisition of Tredegar in August 1997. In its first nine months of operation the mortgage banking department generated $241 thousand of fees accounting for 23.63% of the increase in non-interest income. Service charges, commissions and fees on deposit accounts were $916 thousand for 1998, an increase of $135 thousand over 1997, due primarily to growth in transaction based deposit accounts. Other operating income increased $55 thousand in 1998 to $175 thousand, primarily due to the increase in sales of alternative investment products. Net securities losses were $18 thousand in 1998 compared to $91 thousand in 1997. These securities were sold as a part of a plan to reinvest the proceeds into higher yielding investments. In 1997 non-interest income increased 54.85% or $407 thousand to $1.1 million from $742 thousand. Trust fees increased $310 thousand from the 1996 balance accounting for 76.17% of the increase. Noninterest Income
Years Ended December 31, --------------------------------------------------------- 1998 1997 1996 ----------------- ----------------- ------------------ Service charges, commissions and fees $ 916 $ 781 $ 677 Trust fee income 855 339 29 Fees on loans held for sale 241 - - Other operating income 175 120 16 ----------------- ----------------- ------------------ Noninterest income $ 2,187 $ 1,240 $ 722 Profits (losses) on securities available for sale, net (18) (93) 22 Securities gains (losses), net - 2 (2) ================= ================= ================== Total noninterest income $ 2,169 $ 1,149 $ 742 ================= ================= ==================
Non-Interest Expense Improving operating efficiency is as important to management as enhancing non-interest income. Total non-interest expense increased 34.27% or $1.7 million to $6.7 million in 1998. This increase resulted primarily from a full year of Tredegar's expenses, the new mortgage banking department and expansion of staffing within the bank branches. Salaries and employee benefits were $3.8 million for 1998, an increase of $887 thousand. An increase in Tredegar's salaries and benefit expense for a full calendar year of $453 thousand accounted for 51.07% of the increase. The new mortgage department within TMB accounted for another $254 thousand of the overall increase from 1997 to 1998. Net occupancy and equipment expense increased $179 thousand or 30.19% to $772 thousand in 1998 compared to $593 thousand in 1997. During 1998, TMB upgraded its computer network and at the same time, adopted a shorter time period in which to depreciate those assets, causing $95 thousand in additional depreciation -16- expense. The remaining increase in net occupancy and equipment expense is related to branch expansion and the Tredegar acquisition. Advertising expense increased 60.27% in 1998 to $234 thousand. TMB implemented a new image advertising campaign in Loudoun County to raise awareness throughout the County, anticipating future branch expansion. Computer operations expense increased 78.99% during 1998 to $247 thousand compared to $138 thousand in 1997. This increase is related to the remediation process for the Year 2000 issue and upgrading of the computer network at TMB. Other operating expenses were $1.7 million in 1998, an increase of 35.77% compared to $1.2 million for 1997. Tredegar accounted for $187 thousand or 42.50% of the $440 thousand increase from 1997 to 1998. Non-interest expense increased 13.42% to $5.0 million in 1997 compared to $4.4 million in 1996. The increase in 1997 was related primarily to a $331 thousand increase in salaries and benefit as the result of hiring additional support staff for TMB's branching efforts, as well as the acquisition of Tredegar. Noninterest Expense
Years Ended December 31, ---------------------------------------------- 1998 1997 1996 ------------- -------------- ------------- Salaries and employee benefits $ 3,751 $ 2,864 $ 2,533 Net occupancy and equipment expense 772 593 562 Advertising 234 146 164 Computer operations 247 138 90 Other operating expenses 1,670 1,230 1,034 ============= ============== ============= $ 6,674 $ 4,971 $ 4,383 ============= ============== =============
Income Taxes Reported income tax expense was $857 thousand for 1998, an decrease of $5 thousand compared to $862 thousand in 1997 and an increase of $129 thousand compared to $728 thousand for 1996. While pretax income increased 9.67% in 1998, the decrease in income taxes is the result of an increased emphasis on investing in tax exempt securities. The effective tax rate for 1998 was 22.36% compared to 24.68% in 1997 and 26.39% in 1996. Note 12 of the Consolidated Financial Statements provides a reconciliation between the amount of income tax expense computed using the federal statutory rate and ICBI's actual income tax expense. Also included in Note 12 to the Consolidated Financial Statements is information regarding the principal items giving rise to deferred taxes for the three years ended December 31, 1998. Market and Interest Rate Risk Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices such as interest rates, foreign currency exchange rates, commodity prices, and equity prices. ICBI's primary market risk exposure is interest rate risk. The ongoing monitoring and management of this risk is an important component of ICBI's asset/liability management process which is governed by policies established by its Board of Directors that are reviewed and approved annually. The Board of Directors delegates responsibility for carrying out the asset/liability management policies to the Asset/Liability Committee (ALCO) of TMB. In this capacity ALCO develops guidelines and strategies that govern ICBI's asset/liability management related activities, based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends. -17- Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with ICBI's financial instruments also change, affecting net interest income (NII), the primary component of ICBI's earnings. ALCO utilizes the results of a detailed and dynamic simulation model to quantify the estimated exposure of NII to sustained interest rate changes. While ALCO routinely monitors simulated NII sensitivity over a rolling two-year horizon, it also employs additional tools to monitor potential longer-term interest rate risk. The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all assets and liabilities reflected on ICBI's balance sheet. This sensitivity analysis is compared to ALCO policy limits which specify a maximum tolerance level for NII exposure over a one year horizon, assuming no balance sheet growth, given both a 200 basis point (bp) upward and downward shift in interest rates. A parallel and pro rata shift in rates over a 12 month period is assumed. The following reflects the range of ICBI's NII sensitivity analysis during the fiscal years of 1998 and 1997 as compared to the 10% Board approved policy limit. 1998 Rate Change Estimated NII Sensitivity ----------- ------------------------- High Low Average ---- --- ------- +200 bp (.91%) .02% (.27%) - 200 bp 1.55% (.01%) .52% 1997 Rate Change Estimated NII Sensitivity ----------- ------------------------- High Low Average ---- --- ------- +200 bp 1.32% .22% .80% - 200 bp (2.06%) (.65%) .27% Based on the averages presented in the tables above, had interest rates increased 200 basis points (bp) in each year independently, then the effect to net interest income of ICBI could have been a decrease of $23 thousand in 1998 and for 1997 an increase of $60 thousand. If interest rates had decreased 200 basis points during fiscal years 1998 and 1997, then the effect to net interest income of the banking subsidiary could have been an increase of $44 thousand and $20 thousand, respectively. The preceding sensitivity analysis does not represent an ICBI forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including, the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment or replacement of asset and liability cashflows, and others. While assumptions are developed based upon current economic and local market conditions, ICBI cannot make any assurances about predictive nature of these assumptions, including how customer preferences or competitor influences might change. Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to: prepayment and refinancing levels likely deviating from those assumed, the varying -18- impact of interest rate change, caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other internal and external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in response to or anticipation of changes in interest rates. Loan Portfolio ICBI's loan portfolio is its largest and most profitable component of average earning assets, totalling 62.93% of average earning assets in 1998. ICBI continues to emphasize loan portfolio growth as a means of increasing earnings. Loans, net of unearned income, were $126.0 million at December 31, 1998, up 20.89% from the $104.2 million at December 31, 1997. The increase in total loans in 1998 is largely related to the maturation of TMB's bank branches in its newest markets and the new mortgage banking department. Loans increased $9.6 million from 1996 to 1997, $13.7 million from 1995 to 1996 and $1.2 million from 1994 to 1995, increases of 10.18%, 16.91%, 1.51%, respectively. The loan to deposit ratio has maintained its upward trend in 1998, ending the year at 72.96%. This ratio compares to 66.58% at December 31, 1997 and 68.16% at December 31, 1996. At December 31, 1998, residential real estate (1 to 4 family) loans constituted 44.1% of the total loan portfolio with an increase of $10.4 million or 22.91% over 1997. This increase is the result of the TMB's niche in funding jumbo real estate loans within its market. Non- farm, non-residential real estate loans provided 22.73% of total loans at December 31, 1998 with a 9.94% increase over 1997. ICBI has continued to broaden its focus on the small business financing market with additional commercial lending staff and several new products. Construction real estate loans comprised 4.31% of the total portfolio at that same date. Loans held for sale, home equity lines and agricultural real estate loans made up 3.70%, 2.87% and 0.84% of total loans, respectively, at December 31, 1998. ICBI's commercial, financial and agricultural loan portfolio consists mostly of secured and unsecured loans extended to small businesses. At December 31, 1998, these loans comprised 15.0% of the loan portfolio. This portfolio increased 24.94% in 1998 to $18.9 million. The consumer portion of the loan portfolio consists of mostly unsecured installment credit and accounts for 6.42% of the loan portfolio. Consistent with its focus on providing community-based financial services, ICBI generally does not extend loans outside its principal market area. ICBI's market area encompasses Fauquier and Loudoun Counties, Virginia. ICBI's unfunded loan commitments totaled $17.1 million at December 31, 1998, and $12.4 million at December 31, 1997. The increase in the amount of the unfunded commitments is attributed to an increase in customer demand. At December 31, 1998, ICBI had no concentration of loans in any one industry in excess of 10% of its total loan portfolio. However, because of the nature of the ICBI's market, loan collateral is predominantly real estate related. -19- Loan Portfolio
December 31, ---------------------------------------------------- 1998 1997 1996 1995 1994 ---------------------------------------------------- (In thousands) Commercial, financial and agricultural $ 18,880 $ 15,111 $ 11,648 $ 10,215 $ 9,064 Real estate construction 5,436 3,798 4,182 1,791 2,432 Real estate mortgage: Residential (1-4 family) 55,595 45,231 41,246 34,490 38,029 Loans held for resale 4,672 - - - - Home equity lines 3,617 3,165 2,614 2,188 1,512 Multifamily - - - - 3 Non-farm, non-residential (1) 28,643 26,054 24,774 21,697 18,271 Agricultural 1,057 2,140 2,105 1,549 1,040 Consumer installment 8,095 8,738 8,061 9,170 9,837 --------- --------- -------- -------- -------- Total loans 125,995 104,237 94,630 81,100 80,188 Less unearned income - 10 35 186 481 --------- --------- -------- -------- -------- Loans-net of unearned income $ 125,995 $ 104,227 $ 94,595 $ 80,914 $ 79,707 ========= ========= ======== ======== ========
The following table reflects the maturity distribution of selected loans: Remaining Maturities of Selected Loans December 31, 1998 ---------------------------------- Commercial, Real Financial and Estate Agricultural Construction ----------------- ---------------- (Dollars in thousands) Within 1 year $ 8,671 $ 3,586 ----------------- ---------------- Variable Rate: 1 to 5 years 608 76 After 5 years 800 - ----------------- ---------------- Total $ 1,408 $ 76 ----------------- ---------------- Fixed Rate: 1 to 5 years 7,294 1,774 After 5 years 1,507 - ----------------- ---------------- Total $ 8,801 $ 1,774 ----------------- ---------------- Total Maturities $ 18,880 $ 5,436 ================= ================ -20- Asset Quality Overall asset quality for the year was sound. Total nonperforming assets, which consist of nonaccrual and restructured loans and foreclosed property, were $609 thousand at December 31, 1998, an increase of $366 thousand from the December 31, 1997 balance. Total nonperforming assets as a ratio to total loans was .48% at December 31, 1998. The increase in nonperforming assets for 1998 results from a slight increase in ICBI's nonaccrual loans and the foreclosure on one real estate loan previously in nonaccrual status during 1997. However, net charge-offs to average loans decreased 5 basis points from .09% in 1997 to .04% in 1998. Nonperforming Assets
December 31, ------------------------------------------------------------------ 1998 1997 1996 1995 1994 ------------ ------------ -------------- ------------ ------------ (In thousands) Nonaccrual loans $ 409 $ 243 $ 76 $ 1,654 $ 1,700 Restructured loans - - - - - Foreclosed property 200 - - - 917 ------------ ------------ -------------- ------------ ------------ Total nonperforming assets $ 609 $ 243 $ 76 $ 1,654 $ 2,617 ============ ============ ============== ============ ============ Allowance for loan losses to period end loans 0.84% 0.93% 0.93% 1.07% 1.18% Allowance for loan losses to nonperforming assets 175% 401% 1163% 52% 36% Nonperforming assets to Period end loans 0.48% 0.23% 0.08% 2.04% 3.28% Net charge offs to Average loans 0.04% 0.09% 0.05% 0.16% -0.11%
Loans are placed on nonaccrual status when collection of principal and interest is doubtful, generally when loans become 90 days past due. There are three negative implications for earnings when a loan is placed on nonaccrual status. All interest accrued but unpaid at the date the loan is placed on nonaccrual status is either deducted from interest income or written off as a loss. Secondly, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Finally, there may be actual losses that may require that additional provisions for loan losses be charged against earnings. For real estate loans, upon foreclosure, the balance of the loan is transferred to "Other Real Estate Owned" (OREO) and carried at the lower of the outstanding loan balance or the fair market value of the property based on current appraisals and other current market trends. If a writedown of the OREO property is necessary at the time of foreclosure, the amount is charged off against the allowance for loan losses. A review of recorded property value is performed in conjunction with normal loan reviews, and if market conditions indicate that the recorded value exceeds the fair market value, additional writedowns of the property value are charged directly to operations. -21- During 1998, approximately $4 thousand in additional interest income would have been recorded if the Company's nonaccrual loans had been current and in accordance with their original terms. During 1997, approximately $15 thousand of additional interest income would have been recorded if ICBI's nonaccrual loans had been current and in accordance with their original terms. At December 31, 1998, potential problem loans totaled $409 thousand. These loans are subject to regular management attention and their status is reviewed on a regular basis. Several of the potential problem loans identified at December 31, 1998 are unsecured consumer loans. However, real estate and other collateral secure most of the balance of problem loans. The allowance for loan losses is an estimate of the amount that will be adequate to provide for potential losses in ICBI's loan portfolio. General economic trends as well as any conditions affecting individual borrowers affect the level of loan losses. The allowance is subject to regulatory examinations as to its adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance in comparison to peer financial institutions identified by the regulatory agencies. ICBI's loans are subject to independent review by its external auditors. ICBI's Loan Committee and Board of Directors take an active role in the monthly review of any problem credits and their affect on the allowance for loan losses. In management's opinion, the allowance for loan losses is adequate to absorb the current estimated risk of loss in the existing loan portfolio. ICBI's management continually evaluates the adequacy of the allowance for loan losses and changes in the annual provision are based on the analyzed inherent risk of the loan portfolio. While ICBI experienced considerable loan growth during 1998, 1997 and 1996, the credit quality of the portfolio has improved over the years prior to 1996, as evidenced by a low level of nonperforming assets and the low level of net charges-offs during those years. -22- Allowance for Loan Losses
December 31, ---------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------ ------------ ------------ ------------ ------------ (In thousands) Balance, beginning of period $ 974 $ 884 $ 866 $ 940 $ 859 Loans charged off: Commercial, financial, and agricultural 8 42 6 13 38 Real estate construction - - - - - Real estate mortgage - - 79 115 36 Consumer installment 78 86 40 83 142 ------------ ------------ ------------ ------------ ------------ Total loans charged off $ 86 $ 128 $ 125 $ 211 $ 216 ------------ ------------ ------------ ------------ ------------ Recoveries: Commercial, financial, and agricultural $ 1 $ 12 $ 5 $ 43 $ 210 Real estate construction - - - - - Real estate mortgage 6 7 26 4 - Consumer installment 33 21 47 35 87 ------------ ------------ ------------ ------------ ------------ Total recoveries $ 40 $ 40 $ 78 $ 82 $ 297 ------------ ------------ ------------ ------------ ------------ Net charge offs (recoveries) 46 88 47 129 (81) Provision for loan losses 135 178 65 55 - ------------ ------------ ------------ ------------ ------------ Balance, end of period $ 1,063 $ 974 $ 884 $ 866 $ 940 ============ ============ ============ ============ ============ Ratio of allowance for loan losses to loans outstanding at end of period 0.84% 0.93% 0.93% 1.07% 1.18% Ratio of net charge offs (recoveries)to average loans outstanding during period 0.04% 0.09% 0.05% 0.16% -0.11%
The allowance for loan losses was $1.1 million at December 31, 1998, an increase of $89 thousand from the $974 thousand at December 31, 1997. The allowance was $884 thousand at December 31, 1996. In 1998, ICBI's net loan charge offs had decreased $42 thousand from the previous year's net charge offs of $88 thousand. The decrease was primarily experienced in the commercial, financial, and agricultural loan category. Net loan charge offs to average loans were 0.04% and 0.09% for 1998 and 1997, respectively. The provision to the allowance for loan losses was $135 thousand for 1998. A provision of $178 thousand was made in 1997. The ratio of allowance for loan losses to nonperforming assets totaled 175% at December 31, 1998, 401% at December 31, 1997, and 1163% at December 31, 1996. Management evaluates nonperforming loans relative to their collateral value and makes appropriate reductions in the carrying value of those loans based on that review. Management believes, based on its review, that ICBI's allowance for loan losses is adequate. -23- The following table shows the balance and percentage of the Company's allowance for loan losses allocated to each major category of loan: Allocation of Allowance for Loan Losses
Commercial, Financial, Real Estate Real Estate and Agricultural Construction Mortgage Consumer --------------------------- --------------------------- --------------------------- --------------------------- Reserve Percent of Reserve Percent of Reserve Percent of Reserve Percent of for Loan in for Loan in for Loan in for Loan in Credit Category to Credit Category to Credit Category to Credit Category to Losses Total Loans Losses Total Loans Losses Total Loans Losses Total Loans ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- (In thousands) December 31, 1998 $442 14.98% $100 4.31% $144 74.28% $378 6.43% 1997 362 14.50% 107 3.64% 159 73.49% 346 8.37% 1996 244 12.31% 101 4.42% 182 74.79% 357 8.48% 1995 246 12.62% 23 2.21% 346 74.07% 251 11.10% 1994 363 11.37% 17 3.05% 342 73.84% 218 11.74%
ICBI has allocated the allowance according to the amount deemed reasonably necessary to provide for the possibility of losses being incurred within each of the above categories of loans. The allocation of the allowance as shown in the table above should not be interpreted as an indication that loan losses in future years will occur in the same proportions or that the allocation indicates future loan loss trends. Additionally, the proportion allocated to each loan category is not the total amount that may be available for the future losses that could occur within such categories since the total allowance is a general allowance applicable to the total portfolio. Securities Portfolio and Other Earning Assets The carrying value of the securities portfolio was $57.8 million at December 31, 1998, a decrease of $5.9 million, or 9.0% from the carrying value of $63.7 million at December 31, 1997. The decrease results from both accelerated paydowns experienced on the mortgage backed securities held in the portfolio and ICBI's intentional use of those funds from paydowns and maturities to help fund the loan growth during 1998. The majority of investments purchased during the year were in the form of municipal bonds. ICBI holds bonds issued from the State of Virginia and its political subdivisions with an aggregate book value of $3.3 million and an aggregate market value of $3.4 million. These aggregate holdings exceed 10% of ICBI's stockholder's equity at December 31, 1998. At December 31, 1997, ICBI held bonds issued from the State of Virginia and its political subdivisions, which had an aggregate book value of $3.5 million and an aggregate market value of $3.5 million. These aggregate holdings exceeded 10% of ICBI's stockholder's equity at December 31, 1997. The securities portfolio consists of two components, securities held to maturity and securities available for sale. Securities are classified as held to maturity when management had the intent and ICBI has the ability at the time of purchase to hold the securities to maturity. Securities held to maturity are carried at cost adjusted for amortization of premiums and accretion of discounts. Securities to be held for indefinite periods of time are classified as available for sale and accounted for at fair market value. Securities available for sale include securities that may be sold in response to changes in market interest rates, changes in the security's prepayment risk, increase in loan demand, general liquidity needs and other similar factors. -24- Financial Accounting Standards Board Pronouncement No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective January 1, 1994, requires ICBI to show the effect of market changes in the value of securities designated as available for sale (AFS). The market value of AFS securities at December 31, 1998, was $44.9 million. The unrealized gain on the AFS securities totaled $180 thousand at December 31,1998. At December 31, 1997, the unrealized loss on the AFS securities was $199 thousand. The unrealized gain or loss is reflected, net of income taxes, as a separate line item in shareholder's equity. All other securities are classified as held to maturity or investment securities. As of December 31, 1998, 77.77% of the securities portfolio was classified as AFS. ICBI's approach in recent years has been to classify new purchases as AFS to increase the potential liquidity of the securities portfolio. ICBI does not have any securities classified as trading and it has no plans to establish such classification at the present time. During 1997 and 1998, ICBI has increased its holdings of tax-exempt securities by $12.6 million and $4.4 million, respectively. The lower interest rate environment has made tax-exempt securities a more attractive investment in spite of the unfavorable laws relating to investments in tax-exempt assets and corporate minimum tax. Future investments in tax-exempt securities will generally depend upon comparisons to taxable yields and the liquidity needs of ICBI. Investment Portfolio and Securities Available for Sale The carrying value of investment securities at the dates indicated was:
December 31, ----------------------------------------- (Dollars in thousands) 1998 1997 1996 ------------- ------------- ------------- U.S. Government securities $ 502 $ 2,006 $ 3,012 States and political subdivisions 12,183 13,849 13,396 Mortgaged-backed securities 162 571 958 ------------- ------------- ------------- Total $ 12,847 $ 16,426 $ 17,366 ============= ============= =============
The carrying value of securities available for sale at the dates indicated was:
December 31, ----------------------------------------- (Dollars in thousands) 1998 1997 1996 ------------- ------------- ------------- U.S. Government securities $ 2,678 $ 2,464 $ 4,950 States and political subdivisions 18,189 12,136 - Mortgaged-backed securities 20,878 29,579 26,521 Other securities 3,196 3,091 3,565 ------------- ------------- ------------- Total $ 44,941 $ 47,270 $ 35,036 ============= ============= =============
-25- The following table indicates the increased favorable return experienced by ICBI with the lengthening of the maturity of the portfolio. Securities with maturities greater than 5 years total $32.7 million or 57.29% of the portfolio. The securities portfolio is managed first for investment performance and secondly for proper matching with interest rate risk guidelines. Maturity Distribution and Yields of Securities December 31, 1998 Taxable-Equivalent Basis
Due in 1 year Due after 1 year Due after 5 years Due after 10 years or less through 5 years through 10 years and Equities Total ----------------- ----------------- ----------------- ------------------- --------------- Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- (Dollars in thousands) Securities held for investment: U.S. Government securities $ 502 5.34% $ - 0.00% $ - - $ - - $ 502 5.34% Mortgage backed securities 78 2.43% 13 4.56% 10 7.25% 60 7.25% 161 4.70% Other taxable securities - - - - - - - - - - ------- ------- ------- ------- ------- Total taxable 580 4.96% 13 4.57% 10 7.25% 60 7.25% 663 5.18% Tax-exempt securities (1) 1,150 7.20% 5,456 6.84% 4,922 7.58% 655 7.77% 12,183 7.22% ------- ------- ------- ------- ------- Total $ 1,730 6.45% $ 5,469 6.83% $ 4,932 7.58% $ 715 7.73% $12,846 7.12% ------- ------- ------- ------- ------- Securities available for sale: U.S. Government securities $ 469 7.66% $ 1,709 6.28% $ - - $ 500 6.52% $ 2,678 6.57% Mortgage backed securities 4,057 5.55% 10,522 5.99% 2,642 6.23% 3,656 6.19% 20,877 5.97% Corporate preferred - - - - - - 2,426 8.20% 2,426 8.20% ------- ------- ------- ------- ------- Total taxable $ 4,526 5.75% $12,231 6.19% $ 2,642 6.01% $ 6,582 7.29% $25,981 6.24% Tax-exempt securities (1) - - 398 7.62% 1,746 6.91% 16,045 7.41% 18,189 7.37% ------- ------- ------- ------- ------- Total $ 4,526 5.75% $12,629 6.24% $ 4,388 6.37% $22,627 7.38% $44,170 6.71% ------- ------- ------- ------- ------- Total securities $ 6,256 5.94% $18,098 6.42% $ 9,320 7.01% $23,342 7.15% $57,016 6.62% ======= ======= ======= ======= =======
(1) Yields on tax- exempt securities have been computed on a tax - equivalent basis (2) Excludes Federal Reserve Stock of $134,400 and Federal Home Loan Bank Stock of $635,300 It is ICBI's policy not to engage in activities considered to be derivative in nature, such as futures, options, contracts, swaps, caps, floors, collars, or forward commitments. ICBI holds in its loan and security portfolios investments that adjust or float according to changes in "prime" lending rate. These holdings are not considered speculative but instead necessary for good asset/liability management. ICBI's average investments in federal funds sold and money market investments during 1998 were $3.8 million and $1.8 million, an increase of $914 thousand and $1.5 million, respectively. Average investments in federal funds sold and money market investments in 1997 were $2.9 million and $365 -26- thousand. Fluctuations in federal funds sold and money market investments reflect management's goal to maximize asset yields while maintaining proper asset/liability structure. Deposits Deposits provide funding for ICBI's investments in loans and securities. ICBI's strategy has been to continue to increase its core deposits at the same time controlling its cost of funds. The maturation of the two branches added in 1994 and 1996 have provided a majority of the growth in the years 1996 through 1998. By monitoring interest rates within the local market and then pricing the deposits within the range of the local market, TMB has developed a core base of deposits in each branch. Average total deposits increased 10.5% during 1998, 14.5% during 1997, and 10.1% during 1996. During 1998, the average balance of non-interest bearing checking accounts grew 23.96%. The average balance in interest bearing checking and money market accounts grew 19.95 and 13.71% during 1998. The growth in 1997 and 1998 can be attributed to branch expansion, increased market awareness of TMB as well as continued market turmoil as the result of bank mergers. The following table is a summary of average deposits and average rates paid. Average Deposits and Rates Paid
December 31, -------------------------------------------------------------------------------------------- 1998 1997 1996 ---------------------------- ---------------------------- ---------------------------- Amount Rate Amount Rate Amount Rate ------------ ------------ ------------ ------------ ------------ ------------ (Dollars in thousands) Noninterest-bearing Deposits $ 29,782 - $ 24,025 - $ 19,211 - Interest-bearing accounts: Interest checking 23,853 1.28% 19,886 1.81% 18,348 2.13% Regular savings 17,075 3.53% 15,631 3.69% 14,562 3.85% Money market accounts 34,195 2.93% 30,071 2.94% 28,735 3.02% Time deposits: $ 100,000 and over 18,151 5.23% 16,480 5.68% 12,013 6.14% Under $ 100,000 38,557 5.30% 40,100 5.31% 34,760 5.46% ----------- ------------ ------------ Total interest-bearing deposits 131,831 3.72% 122,168 4.00% 108,418 4.11% ----------- ------------ ------------ Total $ 161,613 $ 146,193 $ 127,629 =========== ============ ============
ICBI will continue funding assets primarily with deposits and will focus on core deposit growth as the primary source for liquidity and stability. ICBI offers individuals and small to medium sized businesses a variety of deposit accounts, including demand deposits, interest checking, money market, savings and time deposit accounts. ICBI neither purchases brokered deposits nor solicits deposits from sources outside its primary market area. -27- The following is a summary of the maturity distribution of certificates of deposit equal to or greater than $100 thousand as December 31, 1998: Maturities of Certificates of Deposit of $100,000 and Over
Within Three to Six to Over Percent Three Six Twelve One of Total Months Months Months Year Total Deposits ------------ ------------- ------------ ------------ ------------ ------------ (In thousands) At December 31, 1998 $ 2,847 $ 3,517 $ 5,278 $ 6,515 $ 18,157 10.5%
Capital Resources The adequacy of ICBI's capital is reviewed by management on an ongoing basis with reference to the amount, composition and quality of ICBI's asset and liability levels, as well for consistency with regulatory requirements and industry standards. Management seeks to maintain an adequate level of capital to support anticipated asset growth and absorb potential losses. The Federal Reserve, along with the Federal Deposit Insurance Corporation, has established minimum regulatory capital standards. The regulatory capital guidelines categorize assets and off-balance sheet items into categories which weight balance sheet assets according to risk, and requiring more capital for holding higher risk assets. The minimum ratio of qualifying total capital to risk-weighted assets is 8.0%, of which at least 4.0% must be Tier 1 capital, composed of common equity and retained earnings. ICBI had a ratio of risk-weighted assets to total capital of 17.90% at December 31, 1998 compared to 19.70% at December 31, 1997. The ratio of risk-weighted assets to Tier 1 capital was 17.06% and 18.80% at December 31, 1998 and 1997, respectively. Both ratios exceed the minimum capital requirements adopted by the federal bank regulatory agencies. The primary source of funds for dividends paid by ICBI to its shareholders is the dividends received from its subsidiary banks. Federal regulatory agencies impose certain restrictions on the payment of dividends and the transfer of assets from the banking subsidiaries to the holding company. Historically, these restrictions have not had an adverse impact on ICBI's dividend policy, and it is not anticipated that they will in the future. -28- Analysis of Capital
December 31, ------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Tier 1 Capital: Common stock $ 8,895 $ 9,063 $ 4,299 Capital surplus 1,293 1,948 1,411 Retained earnings 12,496 10,874 12,817 Goodwill (1,121) (1,181) - ----------- ----------- ----------- Total Tier 1 capital $ 21,563 $ 20,704 $ 18,527 Tier 2 Capital: Allowance for loan losses 1,063 974 884 ----------- ----------- ----------- Total tier 2 capital 1,063 974 884 ----------- ----------- ----------- Total risk-based capital $ 22,626 $ 21,678 $ 19,411 =========== =========== =========== Risk weighted assets $ 126,398 $ 110,041 $ 95,921 CAPITAL RATIOS: Tier 1 risk-based capital ratio 17.1% 18.8% 19.3% Total risk-based capital ratio 17.9% 19.7% 20.2% Tier 1 capital to average total assets 11.2% 11.8% 11.7%
ICBI's equity to assets ratio decreased to 11.13% at December 31, 1998 compared to 11.73% at December 31, 1997. The equity to assets ratio for December 31, 1996 was 11.05%. The increase in 1997 was the result of the issuance of new capital in the acquisition of Tredegar. The growth in assets as well as a stock repurchase of 33,600 shares reduced this ratio in 1998. Liquidity Liquidity represents an institution's ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, short-term investments, securities classified as available for sale as well as loan and securities maturing within one year. As a result of ICBI's management of liquid assets and the ability to generate liquidity through liability funding, management believes ICBI maintains overall liquidity sufficient to satisfy its depositors' requirements and meet its customers' credit needs. ICBI also maintains additional sources of liquidity through a variety of borrowing arrangements. TMB maintains federal funds lines with large regional and money-center banking institutions. These available lines total in excess of $8 million, of which none was outstanding at December 31, 1998. Federal funds purchased during 1998 averaged $146 thousand compared to an average of $272 thousand during 1997. At December 31, 1998 and 1997, ICBI had $2.5 million and $3.0 million, respectively, of outstanding borrowings pursuant to securities sold under agreement to repurchase transactions, with maturities of one day. ICBI has a credit line in the amount of $27 million at the Federal Home Loan Bank -29- of Atlanta. This line may be utilized for short and/or long-term borrowing. The Company joined the Federal Home Loan Bank system in 1995 in order to enter a program of long term and short term borrowing which is restricted to be invested in support of residential real estate loans. In 1998, long-term borrowings from the Federal Home Loan Bank system were $5.0 million maturing in 2003 with a call feature in 2000. At December 31, 1998, cash, interest-bearing deposits with financial institutions, federal funds sold, short-term investments, securities available for sale, loans and securities maturing within one year were 55.82% of total deposits and liabilities. Year 2000 In recent months, there has been increasing public awareness and attention paid to the year 2000 problem, which stems from the inability of certain computerized devices (hardware, software and equipment) to process year-dates properly after 1999. Leap years and other dates may be included as related to the year 2000 problem. Affected devices may fail or malfunction unless repaired or replaced. Although the actual magnitude and effect of the issue cannot be reasonably determined in advance, ICBI has given it high priority by appointing a Year 2000 team. In 1997 the Year 2000 team began its analysis of the possible implications to ICBI of the year 2000 problem and the development of a plan to prevent the problem from adversely affecting its operations. ICBI's year 2000 plans are subject to guidelines promulgated by the Federal Financial Institutions Examination Council ("FFIEC"). The Federal Reserve Bank of Richmond periodically measures the status of the Company's plans and progress, as outlined in the FFIEC guidelines. The plan as adopted and refined by ICBI to handle year 2000 issues can be divided into two principal areas: (1) Resolution of the internal aspects of the year 2000 problem. The focus of this area includes the effects of the year 2000 problem on ICBI's technology, including computer hardware and software systems. ICBI's internal technology plan includes (a) locating, listing and prioritizing the specific technology that is potentially subject to the year 2000 problem (referred to as the "inventory" phase), (b) assessing the actual exposure of such technology to the year 2000 problem by inquiry, research, testing and other means (the "assessment" phase), (c) selecting the method necessary to resolve the year 2000 problems that were identified, including replacement, upgrade, repair or abandonment and implementing the selected resolution method (the "remediation" phase), and (d) testing the remediated or converted technology to determine the efficacy of the resolutions (the "testing" phase). (2) Determination and control of the external aspects of the year 2000 problem. The focus of this area includes (a) assessing the potential for credit and liquidity problems within ICBI as a result of the investments in, loans to and deposits from our significant customers as well as the risk of possible business interruption by relying on vendors of goods and services due to year 2000 problems affecting their technology or business, and (b) developing contingency plans to address failures by external parties to remediate fully any year 2000 problems that are material to ICBI. Assessment of external parties is accomplished by written and verbal inquiry, and by research to the extent that reliable information is available. -30- ICBI had substantially completed both the internal and external testing by December 31, 1998 and plans to further test its computer systems during 1999 to confirm compliance with year 2000 data processing standards. ICBI considers its current state of readiness in addressing the year 2000 problem to be adequate and expects to meet the timetable. The total cost of remediation and testing is estimated to be between $250 thousand and $350 thousand, with a majority of the costs being incurred during 1998. This estimate includes some costs, such as the purchase of computer hardware and software that qualifies as a depreciable or amortizable assets for accounting purposes, with the related depreciation or amortization recognized over the estimated lives of the related assets. However, the majority of the costs will be expensed as incurred. Through December 31, 1998, the Company had incurred approximately $175 thousand in noninterest expense associated with the year 2000 problem. ICBI has concluded that customer awareness about year 2000 and banking is the key factor in minimizing customer concerns about ICBI's progress in planning for the year 2000. During 1999, ICBI plans to inform its customers about its progress through question and answer brochures, seminars and direct mailings. The Year 2000 team of has developed a preliminary contingency plan for areas deemed "mission critical" for continual operation. The preliminary contingency plan considers the likelihood of problem occurrences based on test results. ICBI's preliminary and final contingency plan addresses operational issues, including communication links with other entities and the utility and availability of alternative sources among key vendor relationships. The Year 2000 team anticipates presenting its preliminary contingency plan to the Board of Directors early in 1999 with final contingency plan tested and complete by mid 1999. The Year 2000 team will monitor the status of each item as well . At this time, ICBI believes that the most likely worst case year 2000 scenario would not have a material effect on ICBI's results of operations, liquidity and financial condition for the year ending December 31, 2000. ICBI does not foresee a material loss of revenue due to the year 2000 problem. ICBI's contingency plan, however, is based on assessments of the likelihood of a problematic occurrence; ICBI believes that no entity can address the virtually unlimited possible circumstances relating to year 2000 issues, including risks outside of the ICBI's primary marketplace of Loudoun County, Virginia. While considered unlikely, the failure of ICBI to successfully implement its year 2000 plan, including modifications and conversions, or to adequately assess the likelihood of various events relating to the year 2000 issue, could have a material adverse effect on ICBI's results of operations and financial condition. Additionally, there can be no assurances that the federal regulators will not issue new regulatory requirements that require additional work by ICBI and, if issued, that new regulatory requirements will not increase the cost or delay the completion of ICBI's year 2000 plan. The cost of the project and the date on which ICBI plans to complete the year 2000 modifications are based on management's best estimates, which are based on numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. There can be no guarantee that these estimates will be achieved and actual results could differ materially from our plans. Specific factors that might cause such material differences include, but are not limited to, the availability of personnel trained in this area, the ability of third party vendors to correct their software and hardware, the ability of significant customers to remedy their year 2000 issues and similar uncertainties. -31- Forward-Looking Statements Certain information contained in this discussion may include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are generally identified by phrases such as "the Company expects," "the Company believes" or words of similar import. Such forward-looking statements involve known and unknown risks including, but not limited to, changes in general economic and business conditions, interest rate fluctuations, competition within and from outside the banking industry, new products and services in the banking industry, risk inherent in making loans such as repayment risks and fluctuating collateral values, problems with technology utilized by the Company, changing trends in customer profiles and changes in laws and regulations applicable to the Company. Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Recent Accounting Pronouncements In October 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise, an amendment of FASB Statement No. 65." FASB Statement No. 65, as amended, requires that, after securitization of a mortgage loan held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed security as a trading security. This Statement further amends Statement No. 65 to require that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities or other retained interests based on its ability and intent to sell or hold those investments. This Statement conforms the subsequent accounting for securities retained after the securitization of mortgage loans by a mortgage banking enterprise with the subsequent accounting for securities retained after securitization of other types of assets by a non-mortgage banking enterprise. This Statement is effective beginning in 1999. In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, "Employers Disclosures about Pensions and Other Post Retirement Benefits." This statement revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. This statement standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures. Restatement of disclosures for earlier periods is required. This statement is effective for the Company's financial statements for the year ended December 31, 1998. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires companies to record derivatives on the balance sheet as assets and liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. This statement is not expected to have a material impact on the Company's financial statements. This statement is effective for -32- fiscal years beginning after June 15, 1999, with earlier adoption encouraged. The Company will adopt this accounting standard as required by January 1, 2000. In March 1998, the American Institute of Certified Public Accountants (the "AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This SOP provides guidance on accounting for the costs of computer software developed or obtained for internal use. This SOP requires that entities capitalize certain internal use software costs once certain criteria are met. This SOP is not expected to have a material impact on the Company's financial statements. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities," which requires the costs of start-up activities and organization costs to be expensed as incurred. This SOP is not expected to have a material impact on the Company's financial statements. ITEM 7. FINANCIAL STATEMENTS The following financial statements are filed as a part of this report following Item 13 below: Independent Auditor's Report Consolidated Balance Sheets as of December 31, 1998 and 1997 Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with accountants on accounting and financial disclosure during the last two fiscal years. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Pursuant to General Instruction E(3) of Form 10-KSB, the information contained under the headings "Election of Directors," "Executive Officers Who Are Not Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" on pages 3 through 5 of the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders is incorporated herein by reference. -33- ITEM 10. EXECUTIVE COMPENSATION Pursuant to General Instruction E(3) of Form 10-KSB, the information contained under the headings "Director Compensation," "Executive Compensation," "Stock Options," and "Employment Agreements" on pages 6 through 9 of the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders is incorporated herein by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Pursuant to General Instruction E(3) of Form 10-KSB, the information contained under the headings "Security Ownership of Management" and "Security Ownership of Certain Beneficial Owners" on pages 4 and 5 of the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders is incorporated herein by reference. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Pursuant to General Instruction E(3) of Form 10-KSB, the information contained under the heading "Transactions with Management" on page 9 of the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders is incorporated herein by reference. ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K (a) Exhibits. 3.1 Articles of Incorporation of Independent Community Bankshares, Inc. (restated in electronic format), attached as Exhibit 3.1 to the Registration Statement on Form S-4, Registration No. 333-24523, filed with the Commission on April 4, 1997 (the "Form S-4"), incorporated herein by reference. 3.2 Bylaws of Independent Community Bankshares, Inc., attached as Exhibit 3.2 to the Form S-4, incorporated herein by reference. 10.1 Employment Agreement, dated as of January 1, 1998, between Independent Community Bankshares, Inc. and Joseph L. Boling. 10.2 Independent Community Bankshares, Inc. 1997 Stock Option Plan. 21 Subsidiaries of the Registrant. 27 Financial Data Schedule (filed electronically only). (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the last quarter of the period covered by this report. -34- INDEPENDENT COMMUNITY BANKSHARES, INC. Middleburg, Virginia FINANCIAL REPORT DECEMBER 31, 1998 C O N T E N T S Page INDEPENDENT AUDITOR'S REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS 1 FINANCIAL STATEMENTS Consolidated balance sheets 2 Consolidated statements of income 3 Consolidated statements of changes in shareholders' equity 4 and 5 Consolidated statements of cash flows 6 and 7 Notes to consolidated financial statements 8-29 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Independent Community Bankshares, Inc. Middleburg, Virginia We have audited the accompanying consolidated balance sheets of Independent Community Bankshares, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the years ended December 31, 1998, 1997 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Independent Community Bankshares, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for the years ended December 31, 1998, 1997 and 1996, in conformity with generally accepted accounting principles. /s/ Yount, Hyde & Barbour, P.C. Winchester, Virginia January 22, 1999 INDEPENDENT COMMUNITY BANKSHARES, INC. Consolidated Balance Sheets December 31, 1998 and 1997
Assets 1998 1997 -------------- -------------- Cash and due from banks $ 8,161,096 $ 6,128,036 Interest-bearing deposits in banks 108,765 455,919 Temporary investments: Federal funds sold 1,421,000 1,300,000 Other money market investments 3,122,109 725,385 Securities (fair value: 1998, $58,158,915; 1997, $63,957,868) 57,786,149 63,695,792 Loans, net 120,259,410 103,253,407 Loans held for sale 4,672,327 -- Bank premises and equipment, net 5,852,827 5,527,103 Accrued interest receivable and other assets 3,819,424 3,774,064 Other real estate 200,000 -- ------------ ------------ Total assets $205,403,107 $184,859,706 ============ ============ Liabilities and Shareholders' Equity Liabilities Deposits: Noninterest-bearing demand deposits $ 36,882,791 $ 26,601,922 Savings and interest-bearing demand deposits 80,426,910 72,702,285 Time deposits 55,370,288 57,249,943 ------------ ------------ Total deposits $172,679,989 $156,554,150 Securities sold under agreements to repurchase 2,530,057 3,048,481 Federal Home Loan Bank advances 1,000,000 2,800,000 Long-term debt 5,000,000 -- Accrued interest and other liabilities 1,329,987 770,947 Commitments and contingent liabilities -- -- ------------ ------------ Total liabilities $182,540,033 $163,173,578 ------------ ------------ Shareholders' Equity Common stock, par value $5 per share, authorized 10,000,000 shares; issued 1998, 1,778,994 shares; issued 1997, 1,812,594 shares $ 8,894,970 $ 9,062,970 Capital surplus 1,293,046 1,948,246 Retained earnings 12,495,550 10,873,617 Accumulated other comprehensive income (loss) 179,508 (198,705) ------------ ------------ Total shareholders' equity $ 22,863,074 $ 21,686,128 ------------ ------------ Total liabilities and shareholders' equity $205,403,107 $184,859,706 ============ ============
See Notes to Consolidated Financial Statements. 2 INDEPENDENT COMMUNITY BANKSHARES, INC. Consolidated Statements of Income Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------ ------------ ------------ Interest Income Interest and fees on loans $ 10,204,989 $ 8,972,418 $ 8,137,263 Interest on investment securities: Taxable interest income 69,645 121,314 194,506 Interest income exempt from federal income taxes 617,865 686,140 588,431 Interest and dividends on securities available for sale: Taxable interest income 1,615,719 2,292,662 1,786,669 Interest income exempt from federal income taxes 717,419 151,183 -- Dividends 251,577 280,645 267,791 Interest on deposits in banks 6,975 7,970 804 Interest on federal funds sold 211,021 159,458 134,765 Interest on other money market investments 89,838 13,110 1,000 ------------ ------------ ------------ Total interest income $ 13,785,048 $ 12,684,900 $ 11,111,229 ------------ ------------ ------------ Interest Expense Interest on deposits $ 4,903,216 $ 4,886,480 $ 4,455,684 Interest on securities sold under agreement to repurchase 134,164 134,457 4,580 Interest on Federal Home Loan Bank advances 69,607 171,509 186,513 Interest on long-term debt 206,432 -- -- ------------ ------------ ------------ Total interest expense $ 5,313,420 $ 5,192,446 $ 4,646,777 ------------ ------------ ------------ Net interest income $ 8,471,628 $ 7,492,454 $ 6,464,452 Provision for loan losses 135,000 177,602 65,000 ------------ ------------ ------------ Net interest income after provision for loan losses $ 8,336,628 $ 7,314,852 $ 6,399,452 ------------ ------------ ------------ Other Income Service charges, commissions and fees $ 916,012 $ 780,998 $ 676,655 Trust fee income 855,483 338,613 29,316 Fees on loans held for sale 240,541 -- -- Investment securities gain (loss) -- 2,055 (1,875) Profits (losses) on securities available for sale, net (18,288) (92,602) 22,496 Other 175,055 120,137 15,551 ------------ ------------ ------------ Total other income $ 2,168,803 $ 1,149,201 $ 742,143 ------------ ------------ ------------ Other Expenses Salaries and employees' benefits $ 3,751,366 $ 2,863,878 $ 2,532,777 Net occupancy and equipment expense 771,696 593,246 561,760 Advertising 234,146 146,009 164,189 Computer operations 246,726 138,138 90,062 Other operating expenses 1,670,042 1,229,255 1,033,782 ------------ ------------ ------------ Total other expenses $ 6,673,976 $ 4,970,526 $ 4,382,570 ------------ ------------ ------------ Income before income taxes $ 3,831,455 $ 3,493,527 $ 2,759,025 Income tax expense 856,801 862,167 728,079 ------------ ------------ ------------ Net income $ 2,974,654 $ 2,631,360 $ 2,030,946 ============ ============ ============ Earnings per Share, basic $ 1.65 $ 1.51 $ 1.18 ============ ============ ============ Earnings per Share, diluted $ 1.63 $ 1.51 $ 1.18 ============ ============ ============
See Notes to Consolidated Financial Statements. 3 INDEPENDENT COMMUNITY BANKSHARES, INC. Consolidated Statements of Changes in Shareholders' Equity Years Ended December 31, 1998, 1997 and 1996
Common Capital Retained Stock Surplus Earnings ----------- ----------- ----------- Balance, December 31, 1995 $ 4,299,190 $ 1,411,174 $11,508,100 Comprehensive income: Net income - 1996 -- -- 2,030,946 Other comprehensive income net of tax: Unrealized holding (losses) arising during the period (net of tax, $122,908) -- -- -- Reclassification adjustment (net of tax, $7,649) -- -- -- Other comprehensive income (net of tax, $130,557) -- -- -- Total comprehensive income -- -- -- Cash dividends - 1996 ($0.42 per share) -- -- (722,264) ----------- ----------- ----------- Balance, December 31, 1996 $ 4,299,190 $ 1,411,174 $12,816,782 Comprehensive income: Net income - 1997 -- -- 2,631,360 Other comprehensive income net of tax: Unrealized holding gains arising during the period (net of tax, $133,660) -- -- -- Reclassification adjustment (net of tax, $31,484) -- -- -- Other comprehensive income (net of tax, $165,144) -- -- -- Total comprehensive income -- -- -- Cash dividends - 1997 ($0.32 per share) -- -- (574,525) Purchase of common stock (22,691 shares) (113,455) (521,893) -- Issuance of common stock - stock split effected in the form of a 100% stock dividend (906,297 shares) 4,531,485 (4,531,485) -- Issuance of common stock in acquisition of subsidiary (69,150 shares) 345,750 1,590,450 -- Discretionary transfer from retained earnings -- 4,000,000 (4,000,000) ----------- ----------- ----------- Balance, December 31, 1997 $ 9,062,970 $ 1,948,246 $10,873,617 Comprehensive income: Net income - 1998 -- -- 2,974,654 Other comprehensive income net of tax: Unrealized holding gains arising during the period (net of tax, $188,619) -- -- -- Reclassification adjustment (net of tax, $6,218) -- -- -- Other comprehensive income (net of tax, $194,776) -- -- -- Total comprehensive income -- -- -- Cash dividends - 1998 ($0.75 per share) -- -- (1,352,721) Purchase of common stock (33,600 shares) (168,000) (655,200) -- ----------- ----------- ----------- Balance, December 31, 1998 $ 8,894,970 $ 1,293,046 $12,495,550 =========== =========== ===========
See Notes to Consolidated Financial Statements.
Accumulated Other Comprehensive Comprehensive Income (Loss) Income Total ------------- ------------- ------------- Balance, December 31, 1995 $ (265,843) $ 16,952,621 Comprehensive income: Net income - 1996 -- $ 2,030,946 2,030,946 Other comprehensive income net of tax: Unrealized holding (losses) arising during the period (net of tax, $122,908) -- (238,589) -- Reclassification adjustment (net of tax, $7,649) -- (14,847) -- ------------- Other comprehensive income (net of tax, $130,557) (253,436) $ (253,436) (253,436) ------------- Total comprehensive income -- $ 1,777,510 -- ============= Cash dividends - 1996 ($0.42 per share) -- (722,264) ------------- ------------- Balance, December 31, 1996 $ (519,279) $ 18,007,867 Comprehensive income: Net income - 1997 -- $ 2,631,360 2,631,360 Other comprehensive income net of tax: Unrealized holding gains arising during the period (net of tax, $133,660) -- 259,457 -- Reclassification adjustment (net of tax, $31,484 -- 61,117 -- ------------- Other comprehensive income (net of tax, $165,144) 320,574 $ 320,574 320,574 ------------- Total comprehensive income -- $ 2,951,934 -- ============= Cash dividends - 1997 ($0.32 per share) -- (574,525) Purchase of common stock (22,691 shares) -- (635,348) Issuance of common stock - stock split effected in the form of a 100% stock dividend (906,297 shares) -- -- Issuance of common stock in acquisition of subsidiary (69,150 shares) -- 1,936,200 Discretionary transfer from retained earnings -- -- ------------- ------------- Balance, December 31, 1997 $ (198,705) $ 21,686,128 Comprehensive income: Net income - 1998 -- $ 2,974,654 2,974,654 Other comprehensive income net of tax: Unrealized holding gains arising during the period (net of tax, $188,619) -- 366,143 -- Reclassification adjustment (net of tax, $6,218) -- 12,070 -- ------------- Other comprehensive income (net of tax, $194,776) 378,213 $ 378,213 378,213 ------------- Total comprehensive income -- $ 3,352,867 -- ============= Cash dividends - 1998 ($0.75 per share) -- (1,352,721) Purchase of common stock (33,600 shares) -- (823,200) ------------- ------------- Balance, December 31, 1998 $ 179,508 $ 22,863,074 ============= =============
See Notes to Consolidated Financial Statements. INDEPENDENT COMMUNITY BANKSHARES, INC. Consolidated Statements of Cash Flows Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------ ------------ ------------ Cash Flows from Operating Activities Net income $ 2,974,654 $ 2,631,360 $ 2,030,946 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 513,769 396,833 301,497 Amortization 79,548 41,617 16,487 Provision for loan losses 135,000 177,602 65,000 Net (gain) loss on investment securities -- (2,055) 1,875 Net (gain) loss on securities available for sale 18,288 92,602 (22,496) Net loss on sale of assets -- 7,343 -- Discount accretion and premium amortization on securities, net 193,609 180,181 157,657 Deferred income taxes (benefit) (15,998) (19,508) 68,349 Origination of loans held for sale (11,947,922) -- -- Proceeds from sales of loans held for sale 7,275,595 -- -- Changes in assets and liabilities: (Increase) in other assets (124,908) (669,146) (289,041) Increase in other liabilities 113,414 57,100 195,847 ------------ ------------ ------------- Net cash provided by (used in) operating activities $ (784,951) $ 2,893,929 $ 2,526,121 ------------ ------------ ------------- Cash Flows from Investing Activities Proceeds from maturity, principal paydowns and calls of investment securities $ 3,495,979 $ 2,750,431 $ 2,455,501 Proceeds from maturity, principal paydowns and calls of securities available for sale 9,164,066 2,742,602 2,149,662 Proceeds from sale of securities available for sale 9,886,732 26,500,686 24,282,770 Purchase of investment securities -- (1,848,566) (2,846,520) Purchase of securities available for sale (16,276,043) (40,572,390) (30,673,806) Proceeds from sale of equipment -- 36,335 -- Purchases of bank premises and equipment (839,493) (1,221,354) (1,623,530) Net (increase) in loans (17,341,003) (9,720,190) (13,727,421) Cash acquired in acquisition -- 170,858 -- ------------ ------------ ------------- Net cash (used in) investing activities $(11,909,762) $(21,161,588) $ (19,983,344) ------------ ------------ -------------
See Notes to Consolidated Financial Statements. INDEPENDENT COMMUNITY BANKSHARES, INC. Consolidated Statements of Cash Flows (Continued) Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------ ------------ ------------ Cash Flows from Financing Activities Net increase in noninterest-bearing and interest- bearing demand deposits and savings accounts $ 18,005,494 $ 11,627,657 $ 9,896,598 Net increase (decrease) in certificates of deposit (1,879,655) 6,136,353 7,371,472 Increase (decrease) in securities sold under agreements to repurchase (518,424) 1,603,784 1,444,697 Proceeds from long-term debt 5,000,000 -- -- Decrease in short-term borrowings (1,800,000) (1,200,000) (1,000,000) Purchase of common stock (823,200) (635,348) -- Cash dividends paid (1,085,872) (574,525) (722,264) ------------- ------------ ------------ Net cash provided by financing activities $ 16,898,343 $ 16,957,921 $ 18,990,503 ------------- ------------ ------------ Increase (decrease) in cash and cash equivalents $ 4,203,630 $ (1,309,738) $ 1,533,280 Cash and Cash Equivalents Beginning 8,609,340 9,919,078 8,385,798 ------------- ------------ ------------ Ending $ 12,812,970 $ 8,609,340 $ 9,919,078 ============= ============ ============ Supplemental Disclosures of Cash Flow Information Cash payments for: Interest paid to depositors $ 5,039,942 $ 4,822,840 $ 4,425,048 Interest paid on short-term obligations 9,077 131,500 4,580 Interest paid on Federal Home Loan Bank advances 97,493 176,242 153,894 Interest paid on long-term debt 137,432 -- -- ------------- ------------ ------------ $ 5,283,944 $ 5,130,582 $ 4,583,522 ============= ============ ============ Income taxes $ 835,000 $ 849,000 $ 863,723 ============= ============ ============ Supplemental Disclosure of Noncash Transactions Issuance of common stock - stock split effected in the form of 100% stock dividend $ -- $ 4,531,485 $ -- ============= ============ ============ Issuance of common stock in acquisition of subsidiary $ -- $ 1,936,200 $ -- ============= ============ ============ Unrealized gain (loss) on securities available for sale $ 572,989 $ 485,718 $ 383,994) ============= ============ ============ Loan balances transferred to foreclosed properties $ 200,000 $ -- $ -- ============= ============ ============
See Notes to Consolidated Financial Statements. INDEPENDENT COMMUNITY BANKSHARES, INC. Notes to Consolidated Financial Statements Note 1. Nature of Banking Activities and Significant Accounting Policies The Middleburg Bank, the banking subsidiary of Independent Community Bankshares, grants commercial, financial, agricultural, residential and consumer loans to customers principally in Loudoun County and Fauquier County, Virginia. The loan portfolio is well diversified and generally is collateralized by assets of the customers. The loans are expected to be repaid from cash flow or proceeds from the sale of selected assets of the borrowers. The Tredegar Trust Company, a non-banking subsidiary, offers a comprehensive range of fiduciary and investment management services to individuals and businesses. The accounting and reporting policies of the Company conform to generally accepted accounting principles and to accepted practice within the banking industry. Principles of Consolidation The consolidated financial statements of Independent Community Bankshares, Inc. and its wholly-owned subsidiaries, The Middleburg Bank, The Tredegar Trust Company and Middleburg Bank Service Corporation, include the accounts of all four companies. All material intercompany balances and transactions have been eliminated in consolidation. Securities Investments are classified in three categories and accounted for as follows: a. Securities Held to Maturity Securities classified as held to maturity are those debt securities the Company has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost adjusted for amortization of premium and accretion of discount, computed by the interest method over their contractual lives. b. Securities Available for Sale Securities classified as available for sale are those debt and equity securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Securities available for sale are carried at fair value. Unrealized gains or losses are reported as a separate component of other comprehensive income, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Notes to Consolidated Financial Statements c. Trading Securities Trading securities, which are generally held for the short term in anticipation of market gains, are carried at fair value. Realized and unrealized gains and losses on trading account assets are included in interest income on trading account securities. The Company had no trading securities at December 31, 1998 and 1997. Loans Loans are shown on the balance sheets net of unearned discounts and the allowance for loan losses. Interest is computed by methods which result in level rates of return on principal. Loans are charged off when in the opinion of management they are deemed to be uncollectible after taking into consideration such factors as the current financial condition of the customer and the underlying collateral and guarantee. Interest is computed on the loan balance outstanding for all loans. The Company has adopted FASB No. 114, "Accounting by Creditors for Impairment of a Loan." This statement has been amended by FASB No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." Statement 114, as amended, requires that the impairment of loans that have been separately identified for evaluation is to be measured based on the present value of expected future cash flows or, alternatively, the observable market price of the loans or the fair value of the collateral. However, for those loans that are collateral dependent (that is, if repayment of those loans is expected to be provided solely by the underlying collateral) and for which management has determined foreclosure is probable, the measure of impairment of those loans is to be based on the fair value of the collateral. Statement 114, as amended, also requires certain disclosures about investments in impaired loans and the allowance for loan losses and interest income recognized on loans. The Company considers all consumer installment loans and residential mortgage loans to be homogeneous loans. These loans are not subject to impairment under FASB 114. A loan is considered impaired when it is probable that the Company will be unable to collect all principal and interest amounts according to the contractual terms of the loan agreement. Factors involved in determining impairment include, but are not limited to, expected future cash flows, financial condition of the borrower, and current economic conditions. A performing loan may be considered impaired, if the factors above indicate a need for impairment. A loan on nonaccrual status may not be impaired if in the process of collection or there is an insignificant shortfall in payment. An insignificant delay of less than 30 days or a shortfall of less than 5% of the required principal and interest payment generally does not indicate an impairment situation, if in management's judgment the loan will be paid in full. Loans that meet the regulatory definitions of doubtful or loss generally qualify as impaired loans under FASB 114. Charge-offs for impaired loans occur when the loan, or portion of the loan is determined to be uncollectible, as is the case for all loans. Notes to Consolidated Financial Statements Loans are placed on nonaccrual when a loan is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more. Any unpaid interest previously accrued on those loans is reversed from income. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are applied as a reduction of the loan principal balance. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received. Allowance for Loan Losses The allowance for loan losses is maintained at a level which, in management's judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management's evaluation of the collectibility of the loan portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries. Changes in the allowances relating to impaired loans are charged or credited to the provision for loan losses. Because of uncertainties inherent in the estimation process, management's estimate of credit losses inherent in the loan portfolio and the related allowance may change in the near term. Loans Held for Sale Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Bank Premises and Equipment Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation of property and equipment is computed principally on the straight-line method over the following estimated useful lives: Years Buildings and improvements 31.5-39 Furniture and equipment 3-10 Maintenance and repairs of property and equipment are charged to operations and major improvements are capitalized. Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the accounts and gain or loss is included in operations. Other Real Estate Real estate acquired by foreclosure is carried at the lower of cost or fair market value less an allowance for estimated selling expenses on the future disposition of the property. Notes to Consolidated Financial Statements Goodwill Goodwill is amortized using the straight-line method over 20 years. Income Taxes Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences, operating loss carryforwards, and tax credit carryforwards. Deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Earnings Per Share In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share." Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. Computations are based on the weighted average number of shares outstanding during each year after giving retroactive effect to the 100% stock dividend declared in 1997. Pension Plan In 1998, the Company adopted Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This pronouncement does not change the measurement or recognition of amounts recognized in the Company's financial statements applicable to its defined benefit plan. Statement No. 132 revises the existing disclosure requirements by standardizing the disclosure requirements for pensions requiring certain additional information on changes in the benefit obligations and fair values of plan assets, and eliminating certain disclosures. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, other temporary investments and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Notes to Consolidated Financial Statements Advertising Costs The Company follows the policy of charging the costs of advertising to expense as incurred. Comprehensive Income As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net income or shareholders' equity. The Statement requires that other comprehensive income include unrealized gains and losses on securities available for sale, which prior to adoption were reported separately in shareholders' equity. The financial statements have been reclassified to conform to the requirements of SFAS No. 130. Note 2. Securities Amortized costs and fair values of securities being held to maturity as of December 31, 1998 and 1997 are summarized as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ------------- ------------- ------------- ------------- 1998 --------------------------------------------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 502,454 $ 2,703 $ -- $ 505,157 Obligations of states and political subdivisions 12,182,506 371,630 (383) 12,553,753 Mortgage-backed securities 161,513 288 (1,472) 160,329 ------------- ------------- ------------- ------------- $ 12,846,473 $ 374,621 $ (1,855) $ 13,219,239 ============= ============= ============= ============= 1997 --------------------------------------------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 2,005,491 $ -- $ (20,626) $ 1,984,865 Obligations of states and political subdivisions 13,849,322 282,000 (1,207) 14,130,115 Mortgage-backed securities 571,149 1,909 -- 573,058 ------------- ------------- ------------- ------------- $ 16,425,962 $ 283,909 $ (21,833) $ 16,688,038 ============= ============= ============= =============
Notes to Consolidated Financial Statements The amortized cost and fair value of securities being held to maturity as of December 31, 1998 by contractual maturity are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties. Therefore, these securities are not included in the maturity categories in the following maturity summary.
Amortized Fair Cost Value ------------- ------------- Due in one year or less $ 1,652,054 $ 1,659,705 Due after one year through five years 5,455,911 5,575,746 Due after five years through 10 years 4,922,098 5,135,290 Due after 10 years 654,897 688,169 Mortgage-backed securities 161,513 160,329 ------------- ------------- $ 12,846,473 $ 13,219,239 ============= =============
Amortized costs and fair values of securities available for sale as of December 31, 1998 and 1997, are summarized as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ------------- ------------- ------------- ------------- 1998 --------------------------------------------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 2,667,960 $ 9,750 $ -- $ 2,677,710 Obligations of states and political subdivisions 17,897,337 370,432 (78,869) 18,188,900 Mortgage-backed securities 20,927,905 55,078 (105,397) 20,877,586 Corporate preferred 2,404,854 33,438 (12,512) 2,425,780 Other 769,700 -- -- 769,700 ------------- ------------- ------------- ------------- $ 44,667,756 $ 468,698 $ (196,778) $ 44,939,676 ============= ============= ============= =============
Notes to Consolidated Financial Statements
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ------------- ------------- ------------- ------------- 1997 --------------------------------------------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 2,458,729 $ 7,531 $ (2,930) $ 2,463,330 Obligations of states and political subdivisions 12,081,525 54,937 -- 12,136,462 Mortgage-backed securities 29,945,864 33,893 (400,919) 29,578,838 Corporate preferred 2,376,980 31,766 (25,346) 2,383,400 Other 707,800 -- -- 707,800 ------------- ------------- ------------- ------------- $ 47,570,898 $ 128,127 $ (429,195) $ 7,269,830 ============= ============= ============= =============
The amortized cost and fair value of securities available for sale as of December 31, 1998, by contractual maturity are shown below. Maturities may differ from contractual maturities in corporate and mortgage-backed securities because the securities and mortgages underlying the securities may be called or repaid without any penalties. Therefore, these securities are not included in the maturity categories in the following maturity summary.
Amortized Fair Cost Value Due in one year or less $ 469,150 $ 469,150 Due after one year through five years 2,088,161 2,102,993 Due after five years through 10 years 1,737,088 1,746,526 Due after 10 years 16,270,898 16,547,941 Mortgage-backed securities 20,927,905 20,877,586 Corporate preferred 2,404,854 2,425,780 Other 769,700 769,700 -------------- -------------- $ 44,667,756 $ 44,939,676 ============== ==============
Proceeds from sales of securities available for sale during 1998, 1997 and 1996 were $9,886,732, $26,500,686 and $24,282,770, respectively. Gross gains of $101,567, $53,384 and $42,269 and gross losses of $119,855, $145,986 and $19,773 were realized on those sales, respectively. The carrying value of securities pledged to qualify for fiduciary powers, to secure public monies as required by law and for other purposes amounted to $8,250,945 and $5,945,089 at December 31, 1998 and 1997, respectively. Notes to Consolidated Financial Statements Note 3. Loans, Net The composition of the net loans is as follows:
December 31, ------------------------------- 1998 1997 ------------ ------------ (in thousands) Real estate loans: Construction and land development $ 5,436 $ 3,798 Secured by farmland 1,057 2,140 Secured by 1-4 family residential 59,212 48,396 Other real estate loans 28,643 26,054 Loans to farmers (except secured by real estate) 1,489 961 Commercial and industrial loans (except those secured by real estate) 17,391 14,062 Loans to individuals for personal expenditures 8,043 8,738 All other loans 52 88 ------------ ------------ Total loans $ 121,323 $ 104,237 Less: Unearned income -- 10 Allowance for loan losses 1,064 974 ------------ ------------ Net loans $ 120,259 $ 103,253 ============ ============
Note 4. Allowance for Loan Losses Transactions in the allowance for loan losses are as follows:
1998 1997 1996 ------------- ------------- ------------- Balance, beginning $ 974,360 $ 883,536 $ 866,173 Provision charged to operating expense 135,000 177,602 65,000 Recoveries 40,417 40,235 77,523 Loan losses charged to the allowance (86,219) (127,013) (125,160) ------------- ------------- ------------- $ 1,063,558 $ 974,360 $ 883,536 ============= ============= =============
Impairment of loans having recorded investments of $186,362 at December 31, 1998, has been recognized in conformity with FASB Statement No. 114. The average recorded investment in impaired loans during 1998 was $46,591. The total allowance for loan losses related to these loans was $66,085 on December 31, 1998. No interest income on impaired loans was recognized in 1998. There were no impaired loans under FASB 114 at December 31, 1997. Nonaccrual loans excluded from impaired loan disclosure under FASB 114 amounted to $223,050 and $242,583 at December 31, 1998 and 1997, respectively. If interest on these loans had been accrued, such income would have approximated $3,564 and $14,898 for 1998 and 1997, respectively. Notes to Consolidated Financial Statements Note 5. Bank Premises and Equipment, Net Bank premises and equipment consists of the following:
1998 1997 ------------ ------------ Land $ 1,516,423 $ 1,516,423 Banking facilities 3,057,340 3,057,340 Furniture, fixtures and equipment 3,623,595 3,141,736 Construction in progress and deposits on equipment 471,727 119,261 ------------ ------------ $ 8,669,085 $ 7,834,760 Less accumulated depreciation 2,816,258 2,307,657 ------------ ------------ $ 5,852,827 $ 5,527,103 ============ ============
Depreciation expense was $513,769, $396,833 and $301,497 for the years ended December 31, 1998, 1997 and 1996, respectively. Note 6. Deposits The aggregate amount of jumbo time deposits, each with a minimum denomination of $100,000, was approximately $18,157,296 and $17,268,984 in 1998 and 1997, respectively. At December 31, 1998, the scheduled maturities of time deposits are as follows: 1999 $ 35,004,445 2000 14,720,685 2001 4,016,350 2002 660,157 2003 and thereafter 968,651 ------------ $ 55,370,288 ============ Note 7. Short-Term Borrowings As of December 31, 1998 and 1997, the Company had borrowed $1,000,000 and $2,800,000, respectively, on a short-term basis from its $27,000,000 line of credit with the Federal Home Loan Bank of Atlanta. The Company has pledged real estate loans and Federal Home Loan Bank stock as collateral on these borrowings. Notes to Consolidated Financial Statements Note 8. Long-Term Debt At December 31, 1998, the Company had borrowings from the Federal Home Loan Bank system totaling $5,000,000 at an interest rate of 5.52%, maturing April 2, 2003. The FHLB has a blanket lien on real estate loans as collateral on these borrowings. Interest only is payable until maturity. The loan is callable after 2 years. Note 9. Business Combination On August 1, 1997, the Company acquired The Tredegar Trust Company. The Company issued 69,150 shares of common stock for all of the outstanding shares of common stock of Tredegar. The excess of the total acquisition cost over the fair value of the net assets acquired is being amortized over 20 years by the straight-line method. The acquisition has been accounted for as a purchase and results of operations of Tredegar since the date of acquisition are included in the consolidated financial statements. Note 10. Stock Option Plan In 1998, the Company adopted a stock option plan, which provides for granting of both incentive and nonqualified stock options. 300,000 shares of the Company's common stock have been reserved for the issuance of stock options under the Plan. Options become exercisable one-third annually beginning one year after the grant and expire ten years after grant. As permitted under generally accepted accounting principles, grants under the plan are accounted for following the provisions of APB Opinion No. 25 and its related interpretations. Accordingly, no compensation cost has been recognized for grants made to date. In determining the pro forma amounts below, the value of each grant is estimated at the grant date using the Black-Scholes option-pricing model, with the following weighted-average assumptions for grants in 1998: dividend rate of .13%; risk-free interest rates of 4.50%; expected lives of 10 years; and expected price volatility of 17.37%. Had compensation cost for the plan been determined consistent with FASB Statement No. 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share would have been reduced to the following pro forma amounts: 1998 ------------- Net Income: As Reported $ 2,974,654 Pro Forma 2,887,125 Basic EPS: As Reported 1.65 Pro Forma 1.60 Diluted EPS: As Reported 1.63 Pro Forma 1.59 Notes to Consolidated Financial Statements No options have been exercised to date and all options granted are outstanding at December 31, 1998. The following summarizes the number of grants and their respective exercise prices and grant date fair values per option, and the number outstanding and exercisable: Exercise Fair Shares Price Per Value Per Granted Share Option ----------- --------- --------- 54,000 $ 17.00 $ 6.77 1,000 27.00 10.76 31,000 23.50 9.39 Options outstanding, exercisable options and average exercise prices were: Average Options Options Exercise Outstanding Exercisable Price ----------- ----------- ---------- 86,000 19,000 $ 19.46 Options outstanding at December 31, 1998 are further summarized as follows: Options Outstanding and Exercisable -------------------------------------------- Weighted Weighted Range of Remaining Average Exercise Number Contractual Exercise Prices Outstanding Life Price ------------- ------------ ----------- -------- $17.00 54,000 8.9 years $ 17.00 27.00 1,000 9.3 27.00 23.50 31,000 10.0 23.50 ------------ $17.00-$27.00 86,000 9.3 19.46 ============ Notes to Consolidated Financial Statements Note 11. Employee Benefit Plans The Company has a trusteed noncontributory, defined benefit pension plan covering substantially all full-time employees. The Company funds pension costs in accordance with the funding provisions of the Employee Retirement Income Security Act. Information about the plan follows:
1998 1997 ------------ ------------ Change in Benefit Obligation Benefit obligation, beginning of year $ 1,746,565 $ 1,425,983 Service cost 126,063 120,165 Interest cost 148,458 121,209 Actuarial loss 507,683 241,754 Benefits paid (762,612) (162,546) ------------ ------------ Benefit obligation, end of year $ 1,766,157 $ 1,746,565 ============ ============ Change in Plan Assets Fair value of plan assets, beginning of year $ 1,840,995 $ 1,480,340 Actual return on plan assets (17,220) 345,344 Employer contributions 324,100 177,857 Benefits paid (762,612) (162,546) ------------ ------------ Fair value of plan assets, ending $ 1,385,263 $ 1,840,995 ============ ============ Funded status $ (380,894) $ 94,430 Unrecognized net actual loss 825,208 125,410 Unrecognized net obligation at transition (39,791) (43,771) Unrecognized prior service cost 183,378 200,049 ------------ ------------ Accrued benefit cost included in other liabilities $ 587,901 $ 376,118 ============ ============
1998 1997 1996 ------------ ------------ ------------ Components of Net Periodic Benefit Cost Service cost $ 126,063 $ 120,165 $ 103,203 Interest cost 148,458 121,209 133,703 Expected return on plan assets (174,895) (140,632) (163,858) Amortization of prior service cost 16,671 16,671 16,671 Amortization of net obligation at transition (3,980) (3,980) (3,980) ------------ ------------- ------------ Net periodic benefit cost $ 112,317 $ 113,433 $ 85,739 ============ ============= ============ Weighted-Average Assumptions as of December 31 Discount rate 7.50% 8.50% 8.50% Expected return on plan assets 9.00% 9.50% 9.50% Rate of compensation increase 5.00% 5.00% 6.00%
Notes to Consolidated Financial Statements A deferred compensation plan was adopted for the President and Chief Executive Officer. Benefits are to be paid in monthly installments for 15 years following retirement or death. The agreement provides that if employment is terminated for reasons other than death or disability prior to age 65, the amount of benefits would be reduced. The deferred compensation expense for 1998 and 1997, based on the present value of the retirement benefits, was $17,143 and $15,809. The plan is unfunded. However, life insurance has been acquired on the life of the employee in an amount sufficient to discharge the obligation. Note 12. Income Taxes Net deferred tax (liabilities) consist of the following components as of December 31, 1998 and 1997:
1998 1997 ------------ ------------ Deferred tax assets: Allowance for loan losses $ 246,589 $ 216,313 Deferred compensation 29,992 24,655 Unearned loan fees -- 2,159 Interest on nonaccrual loans 1,040 4,819 Loss on capital assets 38,213 28,391 Securities available for sale -- 102,363 ------------ ------------ $ 315,834 $ 378,700 ------------ ------------ Deferred tax liabilities: Property and equipment $ 296,686 $ 287,409 Prepaid pension costs 199,866 185,644 Securities available for sale 92,413 -- ------------ ------------ $ 588,965 $ 473,053 ------------ ------------ $ (273,131) $ (94,353) ============ ============
The provision for income taxes charged to operations for the years ended December 31, 1998, 1997 and 1996 consists of the following:
1998 1997 1996 ------------ ------------ ------------ Current tax expense $ 872,799 $ 881,675 $ 659,730 Deferred tax expense (benefit) (15,998) (19,508) 68,349 ------------ ------------ ------------ $ 856,801 $ 862,167 $ 728,079 ============ ============ ============
Notes to Consolidated Financial Statements The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the years ended December 31, 1998, 1997 and 1996, due to the following:
1998 1997 1996 ------------ ------------ ------------ Computed "expected" tax expense $ 1,302,695 $ 1,187,799 $ 938,069 Increase (decrease) in income taxes resulting from: Tax-exempt interest income (409,916) (284,689) (175,099) Other, net (35,978) (40,943) (34,891) ------------ ------------ ------------ $ 856,801 $ 862,167 $ 728,079 ============ ============ ============
Note 13. Related Party Transactions The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, principal officers, their immediate families and affiliated companies in which they are principal stockholders (commonly referred to as related parties), on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. These persons and firms were indebted to the Company for loans totaling $3,246,556 and $2,783,606 at December 31, 1998 and 1997, respectively. During 1998, total principal additions were $2,587,147 and total principal payments were $2,124,197. Note 14. Contingent Liabilities and Commitments In the normal course of business, there are outstanding various commitments and contingent liabilities, which are not reflected in the accompanying financial statements. The Company does not anticipate any material loss as a result of these transactions. See Note 17 with respect to financial instruments with off-balance-sheet risk. The Company must maintain a reserve against its deposits in accordance with Regulation D of the Federal Reserve Act. For the final weekly reporting period in the years ended December 31, 1998 and 1997, the aggregate amounts of daily average required reserves were approximately $1,207,000 and $1,239,000, respectively. The Company is conducting a comprehensive review of its computer systems to identify the systems that could be affected by the Year 2000 Issue, and is developing a remediation plan to resolve the Issue. The Issue is whether computer systems will properly recognize date-sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company is heavily dependent on computer processing in the conduct of its business activities. Failure of these systems could have a significant impact on the Company's operations. Notes to Consolidated Financial Statements Note 15. Earnings Per Share The following table shows the weighted average number of shares used in computing earnings per share and the effect on the weighted average number of shares of diluted potential common stock. Potential dilutive common stock has no effect on income available to common stockholders. Earnings per share amounts for prior periods have been restated to give effect to the application of Statement 128 which was adopted by the Company in 1997.
1998 1997 1996 ------------------------- ------------------------- ------------------------- Per Per Per Share Share Share Shares Amount Shares Amount Shares Amount ----------- ----------- ----------- ----------- ----------- ----------- Basic EPS 1,802,744 $ 1.65 1,740,966 $ 1.51 1,719,676 $ 1.18 =========== =========== =========== Effect of dilutive securities: Stock options 18,511 -- -- ----------- ----------- ----------- Diluted EPS 1,821,255 $ 1.63 1,740,966 $ 1.51 1,719,676 $ 1.18 =========== =========== =========== =========== =========== ===========
Note 16. Retained Earnings Transfers of funds from the banking subsidiary to the Parent Corporation in the form of loans, advances and cash dividends are restricted by federal and state regulatory authorities. As of December 31, 1998, the aggregate amount of unrestricted funds which could be transferred from the Company's subsidiaries to the Parent Corporation, without prior regulatory approval, totaled $2,868,092, 12.5% of the total consolidated net assets. Note 17. Financial Instruments With Off-Balance-Sheet Risk and Credit Risk The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Notes to Consolidated Financial Statements A summary of the contract or notional amount of the Company's exposure to off-balance-sheet risk as of December 31, 1998 and 1997, is as follows:
1998 1997 ------------ ------------ Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $ 17,060,000 $ 12,396,000 Standby letters of credit $ 1,162,184 $ 1,185,514
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds real estate as collateral supporting those commitments for which collateral is deemed necessary. The extent of collateral held for those commitments at December 31, 1998, varies from 0 percent to 100 percent; the average amount collateralized is 16 percent. The Company has approximately $5,319,841 in deposits in financial institutions in excess of amounts insured by the Federal Deposit Insurance Corporation (FDIC) at December 31, 1998. Note 18. Disclosures About Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Short-Term Investments For those short-term instruments, the carrying amount is a reasonable estimate of fair value. Notes to Consolidated Financial Statements Securities For securities held for investment purposes, fair values are based on quoted market prices or dealer quotes. Loans For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans were estimated using discounted cash flow analyses, using interest rates currently being offered. Deposits and Borrowings The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. For all other deposits and borrowings, the fair value is determined using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar products. Off-Balance-Sheet Financial Instruments The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At December 31, 1998 and 1997, the difference between the carrying amounts and fair values of loan commitments and standby letters of credit were immaterial. Notes to Consolidated Financial Statements The estimated fair values of the Company's financial instruments are as follows:
1998 1998 ------------------------- ------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ----------- ----------- ----------- ----------- (in thousands) (in thousands) Financial assets: Cash and short-term investments $ 12,813 $ 12,813 $ 8,609 $ 8,609 Securities 57,786 58,159 63,696 63,958 Loans 120,259 122,342 103,253 104,562 Loans held for sale 4,672 4,672 -- -- ----------- ----------- ----------- ----------- Total financial assets $ 195,530 $ 197,986 $ 175,558 $ 177,129 =========== =========== =========== =========== Financial liabilities: Deposits $ 172,680 $ 173,008 $ 156,554 $ 156,846 Securities sold under agreements to repurchase 2,530 2,530 3,048 3,048 Federal Home Loan Bank advances 1,000 1,008 2,800 2,800 Long-term debt 5,000 5,000 -- -- ----------- ----------- ----------- ----------- Total financial liabilities $ 181,210 $ 181,546 $ 162,402 $ 162,694 =========== =========== =========== ===========
Note 19. Capital Requirements The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 1998, that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 1998, the most recent notification from the Federal Reserve Bank categorized the Company as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. Notes to Consolidated Financial Statements 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, 1998: Total Capital (to Risk Weighted Assets): Consolidated $ 22,626 17.9% =>$ 10,112 => 8.0% N/A The Middleburg Bank $ 18,012 14.4% =>$ 9,977 => 8.0% =>$ 12,471 => 10.0% Tier 1 Capital (to Risk Weighted Assets): Consolidated $ 21,563 17.1% =>$ 5,056 => 4.0% N/A The Middleburg Bank $ 16,949 13.6% =>$ 4,988 => 4.0% =>$ 7,482 => 6.0% Tier 1 Capital (to Average Assets): Consolidated $ 21,563 11.2% =>$ 7,723 => 4.0% N/A The Middleburg Bank $ 16,949 9.0% =>$ 7,499 => 4.0% =>$ 9,374 => 5.0% As of December 31, 1997: Total Capital (to Risk Weighted Assets): Consolidated $ 21,678 19.7% =>$ 8,803 => 8.0% N/A The Middleburg Bank $ 17,558 16.2% =>$ 8,694 => 8.0% =>$ 10,867 => 10.0% Tier 1 Capital (to Risk Weighted Assets): Consolidated $ 20,704 18.8% =>$ 4,401 => 4.0% N/A The Middleburg Bank $ 16,584 15.3% =>$ 4,347 => 4.0% =>$ 6,520 => 6.0% Tier 1 Capital (to Average Assets): Consolidated $ 20,704 11.8% =>$ 6,994 => 4.0% N/A The Middleburg Bank $ 16,584 9.8% =>$ 6,781 => 4.0% =>$ 8,477 => 5.0%
Notes to Consolidated Financial Statements Note 20. Condensed Financial Information - Parent Corporation Only INDEPENDENT COMMUNITY BANKSHARES, INC. (Parent Corporation Only) Balance Sheets December 31, 1998 and 1997
Assets 1998 1997 ---------------- --------------- Cash on deposit with subsidiary bank $ 1,161 $ 1,255 Money market fund 1,393,787 713,403 Securities available for sale 2,425,780 2,383,400 Investment in subsidiaries, at cost, plus equity in undistributed net income 18,088,219 17,343,024 Organizational expenses, net - - 19,236 Goodwill 1,120,798 1,181,110 Other assets 65,044 44,700 ---------------- --------------- Total assets $ 23,094,789 $ 21,686,128 ================ =============== Liabilities and Shareholders' Equity Liabilities Other liabilities $ 231,715 $ -- ---------------- --------------- Shareholders' Equity Common stock $ 8,894,970 $ 9,062,970 Capital surplus 1,293,046 1,948,246 Retained earnings 12,495,550 10,873,617 Accumulated other comprehensive income (loss) 179,508 (198,705) ---------------- --------------- Total shareholders' equity $ 22,863,074 $ 21,686,128 ---------------- --------------- Total liabilities and shareholders' equity $ 23,094,789 $ 21,686,128 ================ ===============
INDEPENDENT COMMUNITY BANKSHARES, INC. (Parent Corporation Only) Statements of Income Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------- -------------- ------------- Income Dividends from subsidiary $ 2,586,000 $ 1,201,074 $ 704,000 Dividends from investments 197,150 224,804 226,896 Interest 33,198 13,110 5,351 (Losses) on securities available for sale, net (28,889) (83,503) -- ------------- -------------- ------------- Total income $ 2,787,459 $ 1,355,485 $ 936,247 ------------- -------------- ------------- Expenses Amortization $ 79,548 $ 41,617 $ 16,487 Legal and professional fees 32,385 21,132 18,620 Printing and supplies 22,605 17,270 8,818 Other 73,310 889 1,124 ------------- -------------- ------------- Total expenses $ 207,848 $ 80,908 $ 45,049 ------------- -------------- ------------- Income before allocated tax benefits and undistributed income of subsidiaries $ 2,579,611 $ 1,274,577 $ 891,198 Income tax expense (benefit) (15,593) (18,659) 10,770 ------------- -------------- ------------- Income before equity in undistributed income of subsidiaries $ 2,595,204 $ 1,293,236 $ 880,428 Equity in undistributed income of subsidiaries 379,450 1,338,124 1,150,518 ------------- -------------- ------------- Net income $ 2,974,654 $ 2,631,360 $ 2,030,946 ============= ============== =============
INDEPENDENT COMMUNITY BANKSHARES, INC. (Parent Corporation Only) Statements of Cash Flows Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996 ---------------- ------------- ------------- Cash Flows from Operating Activities Net income $ 2,974,654 $ 2,631,360 $ 2,030,946 Adjustments to reconcile net income to net cash provided by operating activities: Amortization 79,548 41,617 16,487 Undistributed earnings of subsidiaries (379,450) (1,338,124) (1,150,518) Loss on sale of securities available for sale 28,889 83,503 -- (Increase) decrease in other assets (20,345) (40,554) 5,709 Decrease in other liabilities (37,170) -- -- ---------------- ------------- ------------- Net cash provided by operating activities $ 2,646,126 $ 1,377,802 $ 902,624 ---------------- ------------- ------------- Cash Flows from Investing Activities Purchase of securities available for sale $ (1,275,000) $ (1,334,984) $ (100,000) Proceeds from sale of securities available for sale 1,218,236 1,908,497 -- Purchase of intangibles - - (175,182) -- ---------------- ------------- ------------- Net cash provided by (used in) investing activities $ (56,764) $ 398,331 $ (100,000) ---------------- ------------- ------------- Cash Flows from Financing Activities Purchase of common stock $ (823,200) $ (635,348) $ -- Cash dividends paid (1,085,872) (574,525) (722,264) ---------------- ------------- ------------- Net cash (used in) financing activities $ (1,909,072) $ (1,209,873) $ (722,264) ---------------- ------------- ------------- Increase in cash and cash equivalents $ 680,290 $ 566,260 $ 80,360 Cash and Cash Equivalents Beginning 714,658 148,398 68,038 ---------------- ------------- ------------- Ending $ 1,394,948 $ 714,658 $ 148,398 ================ ============= =============
SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INDEPENDENT COMMUNITY BANKSHARES, INC. Date: March 29, 1999 By: /s/ Joseph L. Boling ------------------------------------- Joseph L. Boling President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date /s/ Joseph L. Boling President and Chief Executive March 23, 1999 - ------------------------------------------- Officer and Director Joseph L. Boling (Principal Executive Officer) /s/ Alice P. Frazier Senior Vice President and Chief Financial March 23, 1999 - ------------------------------------------- Officer (Principal Financial and Alice P. Frazier Accounting Officer) Director - ------------------------------------------- March __, 1999 Howard M. Armfield /s/ Childs Frick Burden Director March 26, 1999 - ------------------------------------------- Childs Frick Burden /s/ J. Lynn Cornwell, Jr. Director March 26, 1999 - ------------------------------------------- J. Lynn Cornwell, Jr. /s/ William F. Curtis Director March 29, 1999 - ------------------------------------------- William F. Curtis Director March __, 1999 - ------------------------------------------- F.E. Deacon III /s/ George A. Horkan, Jr. Director March 26, 1999 - ------------------------------------------- George A. Horkan, Jr. Director March __, 1999 - ------------------------------------------- C. Oliver Iselin, III /s/ William S. Leach Director March 26, 1999 - ------------------------------------------- William S. Leach Director March __, 1999 - ------------------------------------------- Thomas W. Nalls /s/ John C. Palmer Director March 29, 1999 - ------------------------------------------- John C. Palmer Director March __, 1999 - ------------------------------------------- John Sherman /s/ Millicent W. West Director March 29, 1999 - ------------------------------------------- Millicent W. West /s/ Edward T. Wright Director March 25, 1999 - ------------------------------------------- Edward T. Wright
INDEX TO EXHIBITS Number Document 3.1 Articles of Incorporation of Independent Community Bankshares, Inc. (restated in electronic format), attached as Exhibit 3.1 to the Registration Statement on Form S-4, Registration No. 333-24523, filed with the Commission on April 4, 1997 (the "Form S-4"), incorporated herein by reference. 3.2 Bylaws of Independent Community Bankshares, Inc., attached as Exhibit 3.2 to the Form S-4, incorporated herein by reference. 10.1 Employment Agreement, dated as of January 1, 1998, between Independent Community Bankshares, Inc. and Joseph L. Boling. 10.2 Independent Community Bankshares, Inc. 1997 Stock Option Plan. 21 Subsidiaries of the Registrant. 27 Financial Data Schedule (filed electronically only). EX-10 2 EXHIBIT 10.1 Exhibit 10.1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("AGREEMENT"), made as of the 1st day of January, 1998, by and between INDEPENDENT COMMUNITY BANKSHARES, INC., a Virginia corporation ("Corporation") and JOSEPH L. BOLING ("Executive"). WHEREAS, it is the desire of the Corporation to have the benefit of Executive's loyalty, service and counsel; and WHEREAS, the Executive wishes to continue in the employ of the Corporation as its Chairman, President and Chief Executive Officer; and WHEREAS, the Corporation desires to continue to employ the Executive in his present capacity; and WHEREAS, Executive possesses certain valuable knowledge, professional skills and expertise essential to the continued success of the business of the Corporation; and WHEREAS, the Corporation desires to continue to utilize the aforesaid knowledge, professional skills and expertise of the Executive in the conduct of the business of the Corporation; and WHEREAS, the Corporation and Executive desire to continue to set forth, in writing, the terms and conditions of their agreements and understandings; NOW, THEREFORE, in consideration of the foregoing, of the mutual promises herein contained, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending legally to be bound, agree as follows: 1. Employment: The Corporation agrees to continue to employ the Executive as Chairman, President and Chief Executive Officer and the Executive agrees to serve the Corporation upon the terms and conditions herein provided. The Executive also shall serve as the Chairman, President and Chief Executive Officer of The Middleburg Bank, a wholly owned subsidiary of the Corporation (the "Bank"). The Executive agrees to perform such managerial duties and responsibilities as shall be assigned to him by the Boards of Directors of the Corporation and the Bank. The Executive shall devote his full time and attention to the discharge of the duties undertaken by him hereunder. 2. Term of Employment: The term of this Agreement and the employment of the Executive hereunder shall be deemed to have commenced on January 1, 1998, and shall continue to December 31, 2002, unless sooner terminated in accordance with the provisions of Section 5. Beginning on December 31, 2000, and on December 31 of each of the succeeding seven (7) years thereafter, the term of this Agreement and all its terms and provisions shall be automatically extended for one additional year, unless terminated in accordance with the provisions of Section 5. If Executive's employment by the Corporation terminates, his employment by the Bank shall terminate automatically at the same time. 3. Compensation: (a) As compensation for the services to be rendered by the Executive under this Agreement, the Executive shall receive a base annual salary of One Hundred Ninety-One Thousand Four Hundred Eight Dollars ($191,408) for the year 1998. The Executive may receive base salary increases and incentive or bonus compensation in the amounts determined by the Executive Committee of the Board of Directors of the Corporation in accordance with performance objectives established by the Board of Directors. (b) Except as otherwise expressly set forth herein, no compensation shall be paid pursuant to this Agreement subsequent to any termination of Executive's employment by the Corporation; provided, however, that Executive's right to exercise stock options following a termination of employment shall be governed by the terms of the Corporation's stock option plans and any stock option agreements between the Corporation and the Executive. No stock options shall be granted to Executive after his employment terminates. 4. Additional Benefits: (a) In addition to all the benefits which are provided to all other senior officers of the Corporation and the Bank, Executive shall be eligible for participation in annual salary increases and any additional plans, programs or forms of compensation or benefits that the Board of Directors of the Corporation might hereafter provide to the employees of the Corporation or its subsidiaries, to include but not be limited to, major medical and dental insurance, membership in the Middleburg Tennis Club and in a local golf club. (b) The Corporation shall provide to Executive an automobile and payment of all related automobile expenses. 5. Termination: (a) For Cause. Notwithstanding any other provision hereof, the Corporation may terminate Executive's employment under this Agreement for cause. The termination shall be evidenced by written notice thereof to the Executive, which shall specify the cause of termination. For purposes hereof, the term "cause" shall mean failure of the Executive to perform his duties under this Agreement for any reason other than disability; unlawful business conduct; theft; commission of a felony; or a material breach of this Agreement. The term "cause" shall also include the failure of Executive for any reason, within ten (10) days after receipt by Executive of written notice thereof from the Board of Directors of the Corporation to correct, cease, or otherwise alter any action or omission that materially or adversely affects the Corporation's profits or operations. (b) Resignation. (1) The Executive may resign or voluntarily leave the employ of the Corporation upon giving the Corporation ninety (90) days advance notice and on the effective -2- date of such resignation, the Corporation's obligations to Executive under this Agreement shall terminate and the Corporation shall have no further liability to Executive under this Agreement. (2) However, if Executive resigns or voluntarily leaves the employ of the Corporation for "good reason" (as hereafter defined), then Executive shall be entitled to the compensation and benefits set forth in Sections 3 and 4 hereof for the period of time set forth in Section 5(c) hereof. Notwithstanding anything in this Agreement to the contrary, if Executive breaches Section 6 or Section 7(a), Executive will not thereafter be entitled to receive any further compensation or benefits pursuant to this Section 5(b). For purposes of this Agreement, "good reason" shall mean: (i) The assignment of duties to the Executive by the Corporation which result in the Executive having significantly less authority or responsibility than he has on the date hereof, without his express written consent; (ii) The removal of the Executive from or any failure to re-elect him to the position of Chairman, President and Chief Executive Officer of the Corporation and the Bank; (iii) Requiring the Executive to maintain his principal office outside of Loudoun County, Virginia; (iv) A reduction by the Corporation of the Executive's base salary, as the same may have been increased from time to time; (v) The failure of the Corporation to provide the Executive with substantially the same fringe benefits that were provided to him immediately prior to the date hereof; (vi) The Corporation's failure to comply with any material term of this Agreement; or (vii) The failure of the Corporation to obtain the assumption of and agreement to perform this Agreement by any successor as contemplated in Section 9 hereof. (c) Without Cause. The Corporation may at any time, elect to terminate Executive's employment without "cause" and remove Executive from employment on thirty (30) days written notice. If the Corporation elects to terminate Executive's employment without "cause", then Executive shall be entitled to receive the salary provided under Section 3 and the medical and dental insurance, automobile and club memberships provided under Section 4 of this Agreement for a period of time which is the greater of (i) the remaining term of employment provided for in this Agreement, or (ii) thirty-six (36) months, commencing on the date of termination. Executive shall not be entitled to receive any bonuses or other form of incentive compensation following a termination of employment pursuant to Section 5(b)(2) or this Section 5(c). Notwithstanding anything in this Agreement to the contrary, if Executive breaches Section 6 or Section 7(a), Executive will not thereafter be entitled to receive any further compensation or benefits pursuant -3- to this Section 5(c). (d) Death. This Agreement shall terminate upon death of the Executive; provided, however, that in such event the Corporation shall pay to the estate of the Executive the compensation including salary and accrued bonus, if any, which otherwise would be payable to the Executive through the end of the month in which his death occurs. (e) Disability. The Corporation may terminate this Agreement, after having established the Executive's disability by giving to the Executive written notice of its intention to terminate his employment for disability and his employment with the Corporation shall terminate effective on the 90th day after receipt of such notice if within 90 days after such receipt the Executive shall fail to return to full-time performance of the essential functions of his position (and if the Executive's inability to perform has been established pursuant to the definition of "disability" set forth below). For purposes of this Agreement, "disability " means either (i) a physical or mental impairment which after the expiration of more than 13 consecutive weeks after its commencement is determined by a physician selected and paid for by the Corporation or its insurers, and acceptable to the Executive or his legal representative, which consent shall not be unreasonably withheld, to be such that the Executive is permanently unable to perform the essential functions of his position or (ii) disability as defined in the policy of disability insurance maintained by the Corporation or the Bank for the benefit of the Executive. Notwithstanding the foregoing, the Corporation shall comply with all requirements of the Americans with Disabilities Act, 42 U.S.C. ss. 12101 et. seq. 6. Confidentiality/Nondisclosure Executive covenants and agrees that any and all information concerning the customers, businesses and services of the Corporation and its subsidiaries of which he has knowledge or access as a result of his association with the Corporation in any capacity, shall be deemed confidential in nature and shall not, without the proper written consent of the Corporation, be directly or indirectly used, disseminated, disclosed or published by Executive to third parties other than in connection with the usual conduct of the business of the Corporation. Such information shall expressly include, but shall not be limited to, information concerning the Corporation's and its subsidiaries' trade secrets, business operations, business records, customer lists or other customer information. Upon termination of employment the Executive shall deliver to the Corporation all originals and copies of documents, forms, records or other information, in whatever form it may exist, concerning the Corporation and its subsidiaries or their business, customers, products or services. In construing this provision it is agreed that it shall be interpreted broadly so as to provide the Corporation with the maximum protection. This Section 6 shall not be applicable to any information which, through no misconduct or negligence of Executive, has previously been disclosed to the public by anyone other than Executive. 7. Covenant Not to Compete. (a) During the term of this Agreement and throughout any further period that he is an officer or employee of the Corporation, and for a period of twelve (12) months from and after the date that Executive is (for any reason) no longer employed by the Corporation or for a period of twelve (12) months from the date of entry by a court of competent jurisdiction of a final judgment enforcing this covenant in the event of a breach by Executive, whichever is later, Executive covenants and agrees that he will not, directly or indirectly, either as a principal, agent, employee, employer, stockholder, co-partner or in any other individual or -4- representative capacity whatsoever: (i) engage in a Competitive Business anywhere within a 25 mile radius of any office operated by the Corporation or the Bank on the date the Executive's employment terminates; or (ii) solicit, or assist any other person or business entity in soliciting, any depositors or other customers of the Corporation or the Bank to make deposits in or to become customers of any other financial institution conducting a Competitive Business; or (iii) induce any individuals to terminate their employment with the Corporation or the Bank. As used in this Agreement, the term "Competitive Business" means all banking and financial products and services that are substantially similar to those offered by the Corporation or the Bank on the date that the Executive's employment terminates. (b) Notwithstanding the foregoing, Section 7(a) shall not apply if Executive's employment terminates after a Change of Control. A "change of control" is defined as any of the following: (i) any person, including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, becomes the owner or beneficial owner of Corporation securities having twenty percent or more of the combined voting power of the then outstanding Corporation securities that may be cast for the election of the Corporation's directors, other than as a result of an issuance of securities initiated by Corporation, or open market purchases approved by the Board of Directors, as long as the majority of the Board of Directors approving the purchases is a majority at the time the purchases are made; (ii) a contested election of directors in which less than a majority of the individuals nominated by the Board of Directors of the Corporation are elected; or (iii) a merger or consolidation of Corporation with, or into, another corporation or the sale, conveyance or other transfer of substantially all of the assets or stock of Corporation if, immediately following such transaction, those who were directors of the Corporation immediately before such transaction do not constitute at least a majority of the surviving or resulting corporation. In the event that there is a transaction under a plan which involves a change of control of the Corporation, then the date of change of control shall be the date that the last step in the plan causes a change of control of the Corporation to occur. 8. Injunctive Relief. The Executive agrees that given the nature of the positions held by Executive with the Corporation, that each and every one of the covenants and restrictions set forth in Sections 6 and 7(a) above are reasonable in scope, length of time and geographic area and are necessary for the protection of the significant investment of the Corporation in developing, maintaining and expanding its business. Accordingly, the parties hereto agree that in the event of any breach by Executive of any of the provisions of Sections 6 or 7(a) that monetary damages alone will not adequately compensate the Corporation for its losses and, therefore, that it may seek any and all legal or equitable relief available to it, specifically including, but not limited to, injunctive relief. The covenants contained in Sections 6 and 7(a) shall be construed and interpreted in any judicial proceeding to permit their enforcement to the maximum extent permitted by law. Should a court of competent jurisdiction determine that any provision of the covenants and restrictions set forth in Section 7(a) above is unenforceable as being overbroad as to time, area or scope, the court may strike the offending provision or reform such provision to substitute such other terms as are reasonable to protect the Corporation's legitimate business interests. 9. Successors. The Corporation will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business, -5- stock or assets of the Corporation, by agreement in form and substance reasonably satisfactory to the Executive, to expressly assume and agree to perform this Agreement in its entirety. Failure of the Corporation to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to the compensation described in Section 5(b)(2). As used in this Agreement, "Corporation" shall mean Independent Community Bankshares Inc., a Virginia corporation, and any successor to its respective business, stock or assets as aforesaid which executes and delivers the agreement provided for in this Section 9 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. 10. Limitation Of Benefits: It is the intention of the parties that no payment be made or benefit provided to the Executive pursuant to this Agreement that would constitute an "excess parachute payment" within the meaning of Section 280G of the Code and any regulations thereunder, thereby resulting in a loss of an income tax deduction by the Corporation or the imposition of an excise tax on the Executive under Section 4999 of the Code. If the independent accountants serving as auditors for the Corporation determine that some or all of the payments or benefits scheduled under this Agreement, as well as any other payments or benefits to which the Executive is entitled, would be nondeductible by the Company under Section 280G of the Code, then the payments scheduled under this Agreement will be reduced to one dollar less than the maximum amount which may be paid without causing any such payment or benefit to be nondeductible. The determination made as to the reduction of benefits or payments required hereunder by the independent accountants shall be binding on the parties. The Executive shall have the right to designate within a reasonable period, which payments or benefits will be reduced; provided, however, that if no direction is received from the Executive, the Corporation shall implement the reductions in its discretion. 11. Severability: The provisions of this Agreement shall be deemed severable, and the invalidity or unenforceability of any one or more of the provisions of this Agreement shall not affect the validity and enforceability of the other provisions. 12. Miscellaneous: The Corporation, by the signature of all members of the Board of Directors (except the Executive), hereby approves this Employment Agreement with the Executive dated as of January 1, 1998. This Agreement shall be governed by the laws of the Commonwealth of Virginia except to the extent the federal banking laws may be controlling. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. INDEPENDENT COMMUNITY BANKSHARES, INC. By: /s/ Howard M. Armfield --------------------------(SEAL) Howard M. Armfield -6- By: /s/ Childs Frick Burden --------------------------(SEAL) Childs Frick Burden By: /s/ J. Lynn Cornwell, Jr. --------------------------(SEAL) J. Lynn Cornwell, Jr. By: /s/ William F. Curtis --------------------------(SEAL) William F. Curtis By: /s/ F. E. Deacon, III --------------------------(SEAL) F. E. Deacon, III By: /s/ George A. Horkan, Jr. --------------------------(SEAL) George A. Horkan, Jr. By: /s/ C. Oliver Iselin, III --------------------------(SEAL) C. Oliver Iselin, III By: /s/ William S. Leach --------------------------(SEAL) William S. Leach By: /s/ Thomas W. Nalls --------------------------(SEAL) Thomas W. Nalls By: /s/ John C. Palmer --------------------------(SEAL) John C. Palmer By: /s/ John Sherman --------------------------(SEAL) John Sherman By: /s/ Millicent W. West --------------------------(SEAL) Millicent W. West By: /s/ Edward T. Wright --------------------------(SEAL) Edward T. Wright EXECUTIVE /s/ Joseph L. Boling ------------------------------(SEAL) Joseph L. Boling -7- EX-10 3 EXHIBIT 10.2 Exhibit 10.2 INDEPENDENT COMMUNITY BANKSHARES, INC. 1997 STOCK OPTION PLAN ARTICLE I Definitions 1.01 Affiliate means any entity that is a subsidiary corporation of the Company. For this purpose, "subsidiary corporation" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of the granting of the Option one or more of the corporations other than the last corporation in the unbroken chain owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in such corporation. 1.02 Agreement means a written agreement (including any amendment or supplement thereto) between the Company and a Participant specifying the terms and conditions of an Option granted to such Participant. 1.03 Board means the Board of Directors of the Company. 1.04 Code means the Internal Revenue Code of 1986 and any amendments thereto. 1.05 Common Stock means the common stock of the Company. 1.06 Company means Independent Community Bankshares, Inc. 1.07 Fair Market Value means, on any given date, (i) the mean between the bid and asked prices of the Common Stock for such date or, if the Common Stock was not traded on such day, then on the next preceding day that the Common Stock was so traded, or (ii) in the event the Board determines that the bid and asked prices for the Common Stock are not available to do not provide an accurate measure of Fair Market Value, such other amount as the Board shall determine based upon a good faith method of valuation to be the Fair Market Value. 1.08 Option means a stock option that entitles the holder to purchase from the Company a stated number of shares of Common Stock at the price set forth in an Agreement. 1.09 Participant means an employee of the Company or of an Affiliate who satisfies the requirements of Article IV and is selected by the Board to receive an Option. 1.10 Plan means the Independent Community Bankshares, Inc. 1997 Stock Option Plan. ARTICLE II Purposes The Plan is intended to foster and promote the long-term growth and financial success of the Company and its Affiliates by assisting the Company in recruiting and retaining key employees with ability and initiative by enabling individuals who contribute significantly to the Company or an Affiliate to participate in its future success and to associate their interests with those of the Company. The proceeds received by the Company from the sale of Common Stock pursuant to this Plan shall be used for general corporate purposes. The Plan is not expected to have any material effect on the value of issued and outstanding shares of the Company's Common Stock. The Plan is intended to enable stock options granted under the Plan to qualify as incentive stock options ("Incentive Stock Options") under Section 422A of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"). ARTICLE III Administration The Plan shall be administered by the Board. The Board shall have authority to grant Options upon such terms (not inconsistent with the provisions of this Plan) as the Board may consider appropriate. Such terms may include conditions (in addition to those contained in the Plan) on the exercisability of all or any part of an Option. In addition, the Board shall have complete authority to interpret all provisions of this Plan; to prescribe the form of Agreements; to adopt, amend and rescind rules and regulations pertaining to the administration of the Plan; and to make all other determinations necessary or advisable for the administration of this Plan. The express grant in the Plan of any specific power to the Board shall not be construed as limiting any power or authority of the Board. Any decision made, or action taken, by the Board in connection with the administration of this Plan shall be final and conclusive. No member of the Board shall be liable for any act done with respect to this Plan or any Agreement or Option. All expenses of administering this Plan shall be borne by the Company. ARTICLE IV Eligibility 4.01 General. Any employee of the Company or of any Affiliate (including any corporation that becomes an Affiliate after the adoption of this Plan) who, in the judgment of the Board, has contributed significantly or can be expected to contribute significantly to the profits or growth of the Company or an Affiliate may receive one or more Options. 4.02 Grants. The Board shall designate individuals to whom Options are to be granted and will specify the number of shares of Common Stock subject to each grant. All Options granted under this Plan shall be evidenced by Agreements which shall be subject to applicable provisions of this Plan and to such other provisions as the Board may adopt. ARTICLE V Shares Subject to Plan Upon the exercise of any Option, the Company shall deliver to the Participant authorized but unissued shares of Common Stock. The maximum aggregate number of shares of Common Stock that may be issued pursuant to the exercise of Options under this Plan is 45,000, subject to the adjustment as provided in Article XII. If an Option is cancelled by mutual agreement of the Company and a Participant or terminated, in whole or in part, for any reason other than its exercise, the number of shares of Common Stock allocated to the Option or portion thereof may be reallocated to other Options to be granted under this Plan. ARTICLE VI Tax Character of Options The Board shall have the discretion to designate whether Options shall be Incentive Stock Options or non-statutory options. To the extent that an Option exceeds the limitation described in Article X, the Option shall not be an Incentive Stock Option. 2 ARTICLE VII Price The price per share paid by a Participant for Common Stock purchased on the exercise of an Incentive Stock Option shall be equal to the Fair Market Value per share of the Company's Common stock on the date the Option is granted. In the discretion of the Board, the price per share paid by a Participant in connection with a non-statutory stock Option may be less then at the Fair Market Value per share of the Company's Common Stock on the date the Option is granted. ARTICLE VIII Exercise of Options 8.01 Maximum Option Period. No Option shall be exercisable after the expiration of ten years from the date Option was granted. The Board, at the time of grant, may direct that an Option be exercisable for a period of less than such maximum period. 8.02 Nontransferability. Any Option granted under this Plan shall be nontransferable except by will or by the laws of descent and distribution. During the lifetime of the Participant to whom the Option is granted, the Option may be exercised only by the Participant. No right or interest of the Participant in any Option shall be liable for, or subject to, any lien, obligation, or liability of such Participant. 8.03 Employee Status. In the event that the terms of any Option provide that it may be exercised only during employment or within a specified period of time after termination of employment, the Board may decide in each case to what extent leaves of absences for governmental or military service, illness, temporary disability, or other reason shall not be deemed interruptions of continuous employment. ARTICLE IX Method of Exercise of Options 9.01 Exercise. Subject to the provision of Articles VIII and XIII, an Option may be exercised in whole at any time or in part from time to time at such times and in compliance with such requirements as the Board shall determine. An Option granted under this Plan may be exercised with respect to any number of whole shares less then the full number for which the Option could be exercised. Such partial exercise of an Option shall not affect the right to exercise the Option from time to time in accordance with this Plan with respect to remaining shares subject to the Option. 9.02 Payment. Unless otherwise provided by the Agreement, payment of the Option price shall be made in cash or a cash equivalent acceptable to the Board. If the Agreement provides, payment of all or part of the Option price may be made by surrendering shares of Common Stock to the Company. If Common Stock is used to pay all or part of the Option price, the shares surrendered must have a Fair market Value (determined as of the day preceding the date of exercise) that is not less than such price or part thereof. 9.03 Shareholder Rights. No Participant shall, as a result of receiving an Option, have any rights as a shareholder until the date he exercises such Option. ARTICLE X Limitations on Incentive Stock Options No Incentive Stock Option shall be granted to any optionee which would cause the aggregate Fair Market Value of the stock with respect to which Incentive Stock Options are exercisable by such optionee for the first time during any calendar year to exceed $100,000. For the purposes of this Article, Incentive Stock Options include all Incentive Stock Options under plans of the Company and its Affiliates. 3 ARTICLE XI Change in Control 11.01 Options. An Agreement may provide that an Option that is outstanding on a Change in Control Date shall be exercisable in whole or in part on that date and thereafter during the remainder of the option period stated in the Agreement. 11.02 Change in Control. A Change in Control occurs if, after the date of the Agreement, (i) any person who is not a Director of the Company on the date that this Plan is adopted by the shareholders of the Company, including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, becomes the owner or beneficial owner of Company securities having 20% or more of the combined voting power of the then outstanding Company securities that may be cast for the election of the Company's directors (other than as a result of an issuance of securities initiated by the Company, or open market purchases approved by the Board, as long as the majority of the Board approving the purchases is a majority at the time the purchases are made); or (ii) as the direct or indirect result of, or in connection with, a cash tender or exchange offer, a merger or other business combination, a sale of assets, a contested election, or any combination of these transactions, the persons who were Directors of the Company before such transactions cease to constitute a majority of the Company's Board, or any successor's board, within two years of the last of such transactions; or (iii) with respect to a Participant employed by an Affiliate, an event occurs with respect to the employer such that, after the event, the employer is no longer an Affiliate and the Participant is not longer employed by the Company or an Affiliate. For purposes of this Agreement, the Control Change Date is the date on which an event described in (i), (ii) or (iii) occurs. If a Change in Control occurs on account of a series of transactions, the Control Change Date is the date of the last of such transactions. ARTICLE XII Adjustment Upon Change in Common Stock Should the Company effect one or more stock dividends, stock split-ups, subdivisions or consolidations of shares, the number of shares as to which Options may be granted under this Plan shall be proportionately adjusted and the terms of Options shall be adjusted as the Board shall determine to be equitably required. Any determination made under this Article XII by the Board shall be final and conclusive. The issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property or for labor or services, either upon direct sale or upon the exercise of rights or warrants to subscribe therefore, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, Options. ARTICLE XIII Compliance with Law and Approval of Regulatory Bodies No Option shall be exercisable, no Common Stock shall be issued, no certificates for shares of Common Stock shall be delivered, and no payment shall be made under this Plan except in compliance with all applicable federal and state laws and regulations (including, without limitations, withholding tax requirements) and the rules of all domestic stock exchanges on which the Company's shares may be listed. The Company shall have the right to rely on an opinion of its counsel as to such compliance. Any share certificate issued to evidence Common Stock for which an Option is exercised may bear such legends and statements as the Board may deem advisable to assure compliance with federal and state laws and regulations. No Option shall be exercisable, no Common Stock shall be issued, no certificate for shares shall be delivered, and no payment shall be made under this Plan until the Company has obtained such 4 consent or approval as the Board may deem advisable from regulatory bodies having jurisdiction over such matters. ARTICLE XIV General Provisions 14.01 Effect of Employment. Neither the adoption of this Plan, nor any Agreement or other document describing or referring to this Plan (or any part thereof) shall confer upon any employee any right to continue in the employ of the Company or an Affiliate or in any way affect any right and power of the Company or an Affiliate to terminate the employment of any employee at any time with or without assigning a reason therefor. 14.02 Unfunded Plan. The Plan, insofar as it provides for grants shall be unfunded, and neither the Company nor any Affiliate shall be required to segregate any assets that may at any time be represented by grants under this Plan. Any liability of the Company or an Affiliate to any person with respect to any grant under this Plan shall be based solely upon any contractual obligations that may be created pursuant to this Plan. No such obligation of the Company or an Affiliate shall be deemed to be secured by any pledge of, or other encumbrance on, any property of the Company or an Affiliate. 14.03 Rules of Construction. Headings are given to the articles of this Plan solely as a convenience to facilitate reference. The reference to any statute, regulations, or other provision of law shall be construed to include any amendment to or successor of such provision of law. ARTICLE XV Amendment The Board may amend or terminate this Plan from time to time; provided, however, that if this Plan is approved by the Company's shareholders, no amendment may become effective until shareholder approval of such amendment is obtained if the amendment (i) materially increases the aggregate number of shares that may be issued pursuant to Options, (ii) materially increases the benefits accruing to Participants under the Plan, or (iii) materially changes the class of employees eligible to become Participants. No amendment shall, without a Participant's consent, adversely affect any rights of such Participant under an Option outstanding at the time such amendment is made. ARTICLE XVI Duration of Plan No Option may be granted under this Plan after November 12, 2007. Options granted before such date shall remain valid in accordance with their terms. 5 EX-21 4 EXHIBIT 21 Exhibit 21 Subsidiaries of Independent Community Bankshares, Inc. ------------------------------------------------------ Name of Subsidiary State of Incorporation ------------------ ---------------------- The Middleburg Bank Virginia - Middleburg Bank Service Corporation Virginia The Tredegar Trust Company Virginia EX-27 5 FDS --
9 1 12-MOS DEC-31-1998 DEC-31-1998 8,161,096 3,230,874 1,421,000 0 44,939,676 12,846,473 13,219,239 125,995,295 1,063,558 205,403,107 172,679,989 3,530,057 1,329,987 5,000,000 0 0 8,894,970 13,968,104 205,403,107 10,204,989 3,272,225 307,834 13,785,048 4,903,216 5,313,420 8,471,628 135,000 0 6,673,976 3,831,455 3,831,455 0 0 2,974,654 1.65 1.63 4.73 409,412 0 0 430,561 974,360 86,219 40,417 1,063,558 1,063,558 0 701,525
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