SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

                 ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1997

                        Commission file number 033-70920

                     INDEPENDENT COMMUNITY BANKSHARES, INC.
                 (Name of Small Business Issuer in its Charter)

                Virginia                                  54-1696103
      (State or Other Jurisdiction                     (I.R.S. Employer
           of Incorporation)                         Identification No.)

       111 West Washington Street                           20117
          Middleburg, Virginia                            (Zip Code)
(Address of Principal Executive Offices)

                                 (540) 687-6377
                (Issuer's Telephone Number, Including Area Code)

             Securities registered under Section 12(b) of the Act:

                                               Name of Each Exchange
             Title of Each Class                on Which Registered
             -------------------               ---------------------

                    None                                n/a

              Securities registered under Section 12(g) of the Act:

                                      None
                                (Title of Class)

         Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing requirements for past 90 days.
                                                              Yes  _X_   No ___

         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of  Regulation  S-B contained in this form,  and no disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

         The  issuer's  gross  income  for  its  most  recent  fiscal  year  was
$138,341.

         The aggregate  market value of the voting stock held by  non-affiliates
computed by  reference  to the average bid and asked  prices of such stock as of
March 30, 1998 was approximately $28,822,535. (The exclusion from such amount of
the  market  value of the  shares  owned by any  person  shall  not be deemed an
admission by the registrant that such person is an affiliate of the registrant.)

         The number of  outstanding  shares of Common Stock as of March 30, 1998
was 1,812,594.


<PAGE>


                                TABLE OF CONTENTS

                                     PART I

                                                                          Page

ITEM 1.  DESCRIPTION OF BUSINESS........................................... 3

ITEM 2.  DESCRIPTION OF PROPERTY........................................... 4

ITEM 3.  LEGAL PROCEEDINGS................................................. 5

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE
                      OF SECURITY HOLDERS.................................. 5

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED
                      STOCKHOLDER MATTERS.................................. 5

ITEM 6.  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATION................... 6

ITEM 7.  FINANCIAL STATEMENTS............................................. 25

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                      ON ACCOUNTING AND FINANCIAL DISCLOSURE.............. 26

                                    PART III

ITEM  9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
                      CONTROL PERSONS; COMPLIANCE WITH SECTION
                      16(a) OF THE EXCHANGE ACT........................... 26

ITEM 10. EXECUTIVE COMPENSATION........................................... 27

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                      OWNERS AND MANAGEMENT............................... 30

ITEM 12  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 31

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K........................... 31



                                      -2-
<PAGE>


                                     Part I

ITEM 1.  DESCRIPTION OF BUSINESS

General

         Independent Community  Bankshares,  Inc. ("ICBI" or the "Company") is a
bank holding company that was incorporated under the laws of the Commonwealth of
Virginia in 1993.  The Company  owns all of the stock of its  subsidiaries,  The
Middleburg Bank (the "Bank"),  an independent  commercial bank, and The Tredegar
Trust Company  ("Tredegar"),  an independent  trust  company,  both of which are
chartered under the laws of Commonwealth of Virginia.

         The Bank has three  branches.  The Bank has its main office at 111 West
Washington  Street,  Middleburg,  Virginia  20117,  and has  branch  offices  in
Purcellville  and  Leesburg,  Virginia.  The Bank opened for business on July 1,
1924.

         Tredegar has its main office at Riverfront  Plaza,  901 E. Byrd Street,
Suite  190,  Richmond,  Virginia  23219,  and a  branch  office  in  Middleburg,
Virginia. Tredegar opened for business in January 1994.

         The local  community  that is served by the Bank is  defined as Western
Loudoun County.  Loudoun County is in Northwestern  Virginia and included in the
Washington-Baltimore Metropolitan statistical area, the fourth largest market in
the United States.  Loudoun County's  population is  approximately  120,000 with
slightly over one-third of the  population  located in the markets served by the
Bank and Tredegar. The local economy is driven by service industries requiring a
higher  skill  level,  self-employed  individuals,  the equine  industry and the
independently  wealthy.  Tredegar  serves  primarily  the greater  Richmond area
including the counties of Henrico, Chesterfield, Hanover, Goochland and Powhatan
as well as Loudoun County. However,  Tredegar does have customers outside of its
primary market. Richmond is the state capital of Virginia and is home to over 20
Fortune 500 Companies.  The greater  Richmond area has a population in excess of
750,000 people.

         The Company, through its subsidiaries,  offers a wide range of banking,
fiduciary and investment  management  services available to both individuals and
small  businesses.  The banking  services  include various types of checking and
savings deposit accounts, and the making of business, real estate,  development,
mortgage, home equity, automobile and other installment,  demand and term loans.
Also, the Bank offers ATM's at all locations,  travelers' checks,  money orders,
safe  deposit  rentals,  collections,  notary  public,  wire  services and other
traditional  bank  services  to its  customers.  Tredegar  provides a variety of
investment   management  and  fiduciary  services  including  trust  and  estate
settlement. Tredegar can also serve as escrow agent, attorney-in-fact,  guardian
of property or trustee of an IRA.

         The Bank has one  wholly  owned  subsidiary,  Middleburg  Bank  Service
Corporation,  which  is  incorporated  under  the  laws of the  Commonwealth  of
Virginia.  Middleburg  Bank  Service  Corporation  is a  partner  in  a  limited
liability company, Bankers Title Shenandoah, LLC, which sells title insurance to
its members.

         As of December  31, 1997,  ICBI had a total of 62 full time  equivalent
employees.  The Company considers  relations with its employees to be excellent.
The Company's employees are not represented by a collective bargaining unit.


                                      -3-
<PAGE>

Competition

         ICBI  faces  significant  competition  both  in  making  loans  and  in
attracting deposits.  Competition for loans comes from commercial banks, savings
and loan  associations  and savings  banks,  mortgage  banking  subsidiaries  of
regional commercial banks, subsidiaries of national mortgage bankers,  insurance
companies,  and other  institutional  lenders.  Its most direct  competition for
deposits has  historically  come from savings and loan  associations and savings
banks, commercial banks, credit unions and other financial  institutions.  Based
upon  total  assets  at June  30,  1996,  ICBI  is the  second  largest  banking
organization operating in Loudoun County, Virginia. ICBI may face an increase in
competition,  as a result of the continuing reduction in the restrictions on the
interstate operations of financial institutions. ICBI also faces competition for
deposits  from  short-term  money market  mutual funds and other  corporate  and
government securities funds.

         Tredegar  competes  for  customers  and  accounts  with banks and other
financial institutions. Even though many of these institutions have been engaged
in the trust or investment  management business for a considerably longer period
of time than Tredegar and have  significantly  greater  resources,  Tredegar has
grown through its  commitment to quality  trust  services and a local  community
approach to business.

         The  Company  and  its  subsidiaries  are  subject  to  regulation  and
examination by the Federal  Reserve Bank and the State  Corporation  Commission.
The  Company is also  under the  jurisdiction  of the  Securities  and  Exchange
Commission  and certain  state  securities  commissions  with respect to matters
relating  to the  offer and sale of its  securities.  In  addition,  the Bank is
subject  to  regulation  and  examination  by  the  Federal  Deposit   Insurance
Corporation.


ITEM 2.  DESCRIPTION OF PROPERTY

         The  headquarters  building  of the  Company  and the Bank,  which also
serves as a branch  office for Tredegar was completed in 1981 and is a two-story
building of brick construction,  with approximately  18,000 square feet of floor
space located at 111 West Washington  Street,  Middleburg,  Virginia 20117.  The
office operates nine teller windows, including three drive-up facilities and one
stand-alone automatic teller machine. The Bank owns the headquarters building.

         The  Purcellville  Bank branch was purchased in 1994 and is a one-story
building with a basement of brick construction,  with approximately 3,000 square
feet of floor  space  located at 431 East Main  Street,  Purcellville,  Virginia
20132. The office operates four teller windows,  including one drive-up facility
and one  stand-alone  automatic  teller  machine.  The  Bank  owns  this  branch
building.

         The  Leesburg  Bank  branch was  completed  in 1997 and is a  two-story
building with a basement of brick construction,  with approximately 6,000 square
feet of floor space located at 102 Catoctin  Circle,  S.E.,  Leesburg,  Virginia
20175.  The office  operates  five  teller  windows,  including  three  drive-up
facilities and one drive-up  automatic  teller machine.  The Bank also owns this
branch building.

         Tredegar  has  leased its main  office in  Richmond,  Virginia.  Rental
expense for this location  totaled  $20,000 for the five months  included in the
fiscal year ending December 31, 1997.

         All of the Company's properties are in good operating condition and are
adequate for the Company's present and anticipated future needs.


                                      -4-
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

         There are no material pending legal proceedings to which the company is
a party or of which the property of the Company subject.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted  during the fourth quarter of the fiscal year
covered by this report to a vote of security holders of the Company.


                                     Part II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Since  October 1997,  the Company's  Common Stock has traded on the OTC
Bulletin Board under the symbol "ICBX".  Prior to October 1997, the Common Stock
was neither  listed on any stock  exchange nor quoted on the Nasdaq Stock Market
and trades  infrequently.  During that time,  the Common Stock had  periodically
been sold in a limited number of privately negotiated  transactions.  The prices
set forth  below do not  necessarily  reflect the price that would be paid in an
active and liquid market.

                           Market Price and Dividends

                                             Sales Price           Dividends
                                         High           Low
1996:
     1st quarter.................        14.00         14.00          .09
     2nd quarter.................        14.00         14.00          .11
     3rd quarter.................        14.50         14.00          .11
     4th quarter.................        14.00         14.00          .11

1997:
     1st quarter.................        14.00         14.00          .09
     2nd quarter.................        14.50         14.00          .11
     3rd quarter.................        16.00         15.50          .12
     4th quarter.................        22.00         16.75          .12

________________
(1) All prices and dividends  are adjusted for a  two-for-one  stock split as of
    November 24, 1997.
(2) Beginning  with the first  quarter of 1997,  ICBI began paying dividends for
    the respective quarter immediately following the end of that quarter.


         ICBI  historically  has paid cash dividends on a quarterly  basis.  The
final determination of the timing, amount and payment of dividends on the Common
Stock is at the discretion of ICBI's Board of Directors and will depend upon the
earnings of ICBI and its  subsidiaries,  principally,  its subsidiary  bank, the
financial  condition  of ICBI and  other  factors,  including  general  economic
conditions and applicable


                                      -5-
<PAGE>

governmental  regulations  and policies.  ICBI or the Bank has paid regular cash
dividends for over 200 consecutive quarters.

         As of December 31, 1997, ICBI had 483 shareholders of record.


ITEM 6.     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF FINANCIAL  CONDITION  AND
            RESULTS OF OPERATION

         The  following   discussion   provides   information  about  the  major
components of the results of operations and financial  condition,  liquidity and
capital  resources  of ICBI.  This  discussion  and  analysis  should be read in
conjunction  with the  "Selected  Financial  Information"  and the  Consolidated
Financial Statements and Notes to Consolidated Financial Statements.

         On August 1, 1997, ICBI completed its acquisition of The Tredegar Trust
Company  ("Tredegar"),  an independent trust company  headquartered in Richmond,
Virginia.  Management  believes  that the  acquisition  of Tredegar will enhance
among other things,  ICBI's noninterest income.  Noninterest income for the year
ended December 31, 1996.  Trust fees  increased  $310,000 from the 1996 balance.
This is a result of the acquisition of Tredegar, which provided $292,000 of such
fees. The  acquisition of Tredegar is a key part of ICBI's  strategy to increase
noninterest  income. The acquisition was accounted for using the purchase method
of accounting.

Overview

         ICBI's  performance for 1997 showed improvement over the previous year.
Continued  high  quality  asset  growth,  an improved  net  interest  margin and
management  efficiencies  contributed  to net  income  of  $2,631,305  for 1997,
compared to $2,030,946 in 1996 and $1,706,494 in 1995.  Return on average assets
continued to increase  during 1997 to 1.52% compared to 1.35% and 1.26% for 1996
and 1995,  respectively.  Return on average equity also increased during 1997 to
13.54%, up from 11.83% for 1996 and 9.72% for 1995.

         Net interest margin  increased during 1997 to 4.98% on a tax-equivalent
basis. Net interest margin for 1996 and 1995 was 4.90% and 4.84%,  respectively.
Net interest  margin and net interest  income are influenced by  fluctuations in
market  rates and changes in both the volume and mix of average  earning  assets
and the liabilities  that fund those assets.  Loan demand was relatively  strong
during each of the three years (1995 - 1997). The average cost of funds remained
somewhat  flat during the same three year period  beginning  with 4.06% in 1995,
rising to 4.16% in 1996 and  declining  in 1997 to 4.05%.  The average  yield on
earning assets  increased from 8.11% in 1995 to 8.23% in 1996 but  experienced a
slight decline of 2 basis points to 8.21% in 1997.

         Loans,  net of unearned  income,  were $104.2  million at December  31,
1997. This is a 10.15% growth over the 1996 balance of $94.6 million. Loans, net
of unearned income  increased 16.93% in 1996 to $94.6 million from $80.9 million
in 1995. ICBI's investment  portfolio  continues to grow as excess deposits over
loans are placed in  high-quality  securities.  At  December  31,  1997,  ICBI's
securities  portfolio  represented  37.90% of  average  earning  assets  and had
increased by 22.40% over the level at December 31, 1996.  Total  securities were
$63.7 million in 1997, $52.4 million in 1996 and $48.2 million in 1995.


                                      -6-
<PAGE>

         ICBI's  efficiency  ratio, a measure of its performance  based upon the
relationship  between  non-interest  expense and income less  securities  gains,
compares favorably to other Virginia financial  institutions.  ICBI's efficiency
ratio for 1997,  1996 and 1995 was 53.70%,  59.50% and 59.00%,  respectively.  A
lower  percentage  of  the  efficiency  ratio  represents   greater  control  of
non-interest  related  costs.  A  fluctuation  in the  efficiency  ratio  can be
attributed  to relative  changes in both  non-interest  income and net  interest
income.

         ICBI is not  aware of any  current  recommendations  by any  regulatory
authorities which, if they were implemented, would have a material effect on the
registrant's liquidity, capital resources, or results of operations.

Net Interest Income

         Net interest  income  represents  the principal  source of earnings for
ICBI.  Net interest  income equals the amount by which  interest  income exceeds
interest  expense.  Changes in the volume and mix of interest earning assets and
interest bearing liabilities, as well as their respective yields and rates, have
a significant impact on the level of net interest income.

         Net interest  income was $7.5 million in 1997,  up 15.40% over the $6.5
million reported for the same period in 1996 and up 12.07% over the $5.8 million
reported for 1995. Net interest income in 1997 was affected  primarily by growth
in both the  securities  and  loan  portfolios  and  secondarily  affected  by a
strategy to restructure a portion of the securities  portfolio out of government
agencies to municipals to maximize  yield without  increasing  risk.  Loans grew
$9.6  million  in  1997,  providing  $843,000  in  additional  interest  income.
Investment  securities grew $11.3 million to $63.7 million at December 31, 1997.
The growth in securities  from 1996 to 1997 provided  $820,000 in additional net
interest income.  In 1997,  interest bearing deposits provided a majority of the
source of funds by increasing to $129.9 million,  up $14.4 million (12.50%) from
$115.5 million in 1996.  Interest  bearing  deposits  increased $11.9 million in
1996 from  $103.6  million  in 1995 to $115.5  million  in 1996.  The  growth in
deposits was a result of the recent  addition of two de nova branches as well as
offering  attractive  market rates coupled with customers' desire to place their
deposits in a locally managed,  high performing and well  capitalized  financial
corporation.  Management  anticipates  growth in net interest income,  loans and
deposits to remain strong in 1998.

         Net interest income for 1996 was $6.5 million, compared to $5.8 million
in 1995.  Like 1997, net interest  income was affected by growth in the loan and
securities  portfolios.  Loans  grew  $13.7  million  to $94.6  million in 1996,
providing  $872,000 in additional  interest income.  Investment  securities grew
$4.1  million to $52.4  million at  December  31,  1996,  providing  $452,000 of
additional interest income.  While deposits grew $11.9 million in 1996 to $115.5
million, the interest expense grew by only $400,000.

         The  Average  Balances,  Income and  Expenses,  Yields and Rates  table
depicts  interest income on earning assets and related average yields as well as
interest expense on interest bearing  liabilities and related average rates paid
for the periods indicated. Loans placed on nonaccrual status are included in the
balances and were included in the computations of yields, upon which they had no
material  effect.  The average  balances used for the purposes of this table and
other  statistical  calculation  disclosures are calculated  using daily average
balances.


                                      -7-
<PAGE>

             Average Balances, Income and Expenses, Yields and Rates
<TABLE>
<CAPTION>

                                                                             Years Ended December 31,
                                             ---------------------------------------------------------------------------------------
                                                         1997                          1996                        1995
                                             ---------------------------  ----------------------------- --------- --------- --------
                                              Average   Income/   Yield/    Average   Income/   Yield/   Average   Income/   Yield/
                                              Balance   Expense    Rate     Balance   Expense    Rate    Balance   Expense    Rate
                                             --------- --------- --------  --------- --------- -------- --------- --------- --------
                                                                          (Dollars in thousands)
<S>                                          <C>       <C>        <C>     <C>        <C>        <C>     <C>        <C>         <C>
Assets :
Securities:
   Taxable                                     $41,242   $2,469   5.99%    $34,550    $2,023    5.86%    $30,953     $1,832    5.92%
   Tax-exempt (1) (2)                           19,721    1,574   7.98%     15,238     1,200    7.87%     12,452        939    7.54%
                                             --------- --------           --------   -------            --------   --------
       Total Securities                         60,963    4,043   6.63%     49,788     3,223    6.47%     43,405      2,771    6.38%
Loans
   Taxable                                      96,179    8,956   9.31%     87,358     8,137    9.31%     79,639      7,265    9.12%
   Tax-exempt                                      376       24   6.38%          -         -                   -          -
                                             --------- --------           --------   -------            --------   --------
       Total Loans                              96,555    8,980   9.30%     87,358     8,137    9.31%     79,639      7,265    9.12%
Federal Funds Sold                               2,928      160   5.46%      2,431       130    5.35%      2,470        138    5.59%
Interest on Money Market investments               365       13   3.56%        125         5    4.00%          -          -       -
Interest Bearing Deposits in
   other financial institutions                     84        8   9.52%         15         1    6.67%          -          -       -
                                             --------- --------           --------   -------            --------   --------
       Total earning assets                    160,895   13,204   8.21%    139,717    11,496    8.23%    125,514     10,174    8.11%

Less: allowances for credit
   Losses                                        (952)                       (894)                         (931)
Total nonearning assets                         12,730                      10,340                         9,345
                                             ---------                    --------                      --------

Total assets                                  $172,673                    $149,163                      $133,928
                                             =========                    ========                      ========


Liabilities (1):
Interest-bearing deposits:
   Checking                                    $19,886      360   1.81%    $18,348      $390    2.13%    $17,919       $436    2.43%
   Regular savings                              15,631      577   3.69%     14,562       561    3.85%     14,003        534    3.81%
   Money market savings                         30,071      883   2.94%     28,735       869    3.02%     26,980        834    3.09%
   Time deposits:
      $100,000 and over                         16,480      936   5.68%     12,013       738    6.14%     12,523        689    5.50%
      Under $100,000                            40,100    2,130   5.31%     34,760     1,898    5.46%     28,775      1,563    5.43%
                                             --------- --------           --------   -------            --------   --------

      Total interest-bearing
      Deposits                                 122,168    4,886   4.00%    108,418     4,456    4.11%    100,200      4,056    4.05%

Federal Home Loan Bank
   Advances                                      2,999      172   5.74%      3,188       187    5.87%        514         31    6.03%
Securities sold under agreements
   To repurchase                                 2,662      119   4.47%          8
                                                                                                              -          -
Federal Funds Purchased                            272       15   5.51%         73         4    5.48%        145          9    6.21%
                                             --------- --------           --------   -------            --------   --------
       Total interest-bearing
         Liabilities                           128,101    5,192   4.05%    111,687     4,647    4.16%    100,859      4,096    4.06%
Non-interest bearing liabilities
   Demand Deposits                              24,025                      19,211                        15,691
   Other liabilities                             1,112                         923                           751

Total liabilities                              153,238                     131,821                       117,301
Shareholders' equity                            19,435                      17,342                        16,627

Total liabilities and shareholders'
   Equity                                     $172,673                    $149,163                      $133,928
                                             =========                    ========                      ========

Net interest income                                      $8,012                       $6,849                         $6,078
                                                       ========                      =======                       ========

Interest rate spread                                              4.16%                         4.07%                          4.05%
Interest expense as a percent of
   Average earning assets                                         3.23%                         3.33%                          3.26%
Net interest margin                                               4.98%                         4.90%                          4.84%
</TABLE>
--------------------------
(1) Income and yields are reported on tax  equivalent  basis  assuming a federal
    tax rate of 34%
(2) Income  and  yields  include  dividends  on  preferred  bonds  which are 70%
    excludable for tax purposes.



                                      -8-
<PAGE>

         The  following   table   analyzes   changes  in  net  interest   income
attributable  to changes in volume of  interest-bearing  assets and  liabilities
compared to changes in interest rates. The change in interest due to both volume
and rate has been  allocated  to volume and rate  changes in  proportion  to the
relationship of the absolute  dollar amounts of the change in each.  Nonaccruing
loans are included in average loans outstanding:
<TABLE>
<CAPTION>

                                                            Volume and Rate Analysis
                                                            (Tax equivalent basis)
                                                            Years Ended December 31,
                                       ---------------------------------------------------------------
                                                1997 vs 1996                     1996 vs 1995
                                          Increase (Decrease) Due          Increase (Decrease) Due
                                                to Changes in:                  to Changes in:
                                       -------------------------------  ------------------------------
                                        Volume     Rate       Total        Volume      Rate      Total
<S>                                    <C>        <C>        <C>         <C>         <C>       <C>
Earning Assets:
Securities:
  Taxable                              $   400    $    46    $   446      $   209    $  (18)   $    191
  Tax-exempt                               357         17        374          218         43        261
Loans:
  Taxable                                  819          -        819          718        154        872
  Tax-exempt                                24          -         24            -
                                                                               24          -          -
Federal funds sold                          28          2         30          (2)        (6)        (8)
Interest on money market
  investments                                8          -          8            5          -          5
Interest bearing deposits in other
  Financial institutions                     6          1          7            1          -          1
                                       -------    -------    -------      -------    -------    -------
     Total earning assets              $ 1,642    $    66    $ 1,708      $ 1,149    $   173    $ 1,322

Interest-Bearing Liabilities:
Interest checking                      $    38    $  (68)       (30)     $     11       (57)       (46)
Regular savings deposits                  (21)         16         21
                                                                               37          6         27
Money market deposits                     (19)         14         54         (19)
                                                                                          33         35
Time deposits
  $100,000 and over                      (103)         31       (72)         (26)         75         49
  Under $100,000                           541       (39)        502          326          9        335
                                       -------    -------    -------      -------    -------    -------
  Total interest bearing deposits      $   546    $ (116)   $    430      $   386    $    14    $   400
  Federal Home Loan Bank
      Advances                            (11)        (4)       (15)          157        (1)        156
  Securities sold under agree-
    ment to repurchase                     119          -        119            -          -          -
  Federal Funds Purchased                   11          -         11          (4)        (1)        (5)
                                       -------    -------    -------      -------    -------    -------
    Total interest bearing
       Liabilities                     $   665    $  (120)   $   545      $   539    $    12    $   551

Change in net interest income          $   977    $   186    $ 1,163      $   610    $   161    $   771
                                       =======    =======    =======      =======    =======    =======
</TABLE>

         ICBI's  Asset/Liability  Committee  (ALCO) is responsible for reviewing
the  Corporation's  liquidity  requirements and maximizing the Corporation's net
interest income consistent with capital requirements,  liquidity,  interest rate
and  economic  outlooks,  competitive  factors  and  customer  needs.  Liquidity
requirements  are also reviewed in detail at the banking  subsidiary of ICBI and
overall asset/liability  management is performed at the banking subsidiary level
with  participation  from  management  of the  holding  company  as  well as the
non-banking subsidiary.


                                      -9-
<PAGE>

Interest Rate Risk

         Interest rate risk represents the sensitivity of earnings to changes in
market  interest rates. As interest rates change the interest income and expense
streams associated with the Company's financial  instruments also change thereby
impacting  net interest  income  (NII),  the primary  component of the Company's
earnings.  ALCO utilizes the results of a detailed and dynamic  simulation model
to quantify the  estimated  exposure of NII to sustained  interest rate changes.
While ALCO routinely  monitors simulated NII sensitivity over a rolling two-year
horizon,  it also utilizes  additional  tools to monitor  potential  longer-term
interest rate risk.

         The simulation model captures the impact of changing  interest rates on
the  interest  income  received  and  interest  expense  paid on all  assets and
liabilities  reflected on the Company's balance sheet. This sensitivity analysis
is compared to ALCO policy  limits which specify a maximum  tolerance  level for
NII exposure  over a one year horizon,  assuming no balance sheet growth,  given
both a 200 basis  point (bp) upward and  downward  shift in  interest  rates.  A
parallel  and pro rata shift in rates  over a 12 month  period is  assumed.  The
following  reflects the range of the Company's NII  sensitivity  analysis during
the fiscal year 1997 as compared to the 10% Board approved policy limit.

                                                 Estimated
             Rate Change                       NII Sensitivity
             -----------                       ---------------

                                       High          Low         Average
                                       ----          ---         -------
               +200 bp                 1.32%         .22%         .80%
               -200 bp                (2.06%)       (.65%)        .27%


         Based on the averages  presented  in the table above,  had the interest
rates shifted  upwards 200 basis points,  then the effect to net interest income
of the banking  subsidiary could have been an increase of $60,000 for the fiscal
year 1997.  If interest  rates had decreased 200 basis points during fiscal year
1997,  then the effect to net interest  income of the banking  subsidiary  could
have been an increase of $20,000.

         The  preceding  sensitivity  analysis  does  not  represent  a  Company
forecast and should not be relied upon as being indicative of expected operating
results.  These  hypothetical  estimates  are based  upon  numerous  assumptions
including:  the nature and timing of interest rate levels  including yield curve
shape,  prepayments  on loans  and  securities,  deposit  decay  rates,  pricing
decisions on loans and deposits, reinvestment/replacement of asset and liability
cashflows,  and others.  While  assumptions  are  developed  based upon  current
economic and local market conditions,  the Company cannot make any assurances as
to the predictive nature of these assumptions including how customer preferences
or competitor influences might change.

         Also, as market  conditions  vary from those assumed in the sensitivity
analysis, actual results will also differ due to:  prepayment/refinancing levels
likely deviating from those assumed,  the varying impact of interest rate change
caps or floors on adjustable rate assets,  the potential effect of changing debt
service  levels  on  customers  with  adjustable  rate  loans,  depositor  early
withdrawals  and  product  preference  changes,   and  other   internal/external
variables.  Furthermore,  the sensitivity analysis does not reflect actions that
ALCO might take in responding to or anticipating changes in interest rates.


                                      -10-
<PAGE>

Noninterest Income

         Noninterest  income for the year ended  December  31,  1997,  increased
$407,000,  or 54.85% from the $742,000  balance at December 31, 1996. Trust fees
increased $310,000 from the 1996 balance. This is a result of the acquisition of
Tredegar, which provided $292,000 of such fees. Service charges, commissions and
fees, the largest  single item of noninterest  income were $887,000 for 1997, up
31.48% over the comparable  period a year ago. The increase in this category for
1997  results  mostly  from  the  increase  in fees  earned  by the  non-deposit
investment sales. 1996 noninterest income increased  $48,000,  or 6.91% over the
December 31, 1995 balance. Other operating income decreased $2,000 from the 1996
balance of $16,000. The 1995 balance of other income reflects the recognition of
a  $150,000  gain  on  other  real  estate  sold.  Net  securities  losses  were
approximately  $91,000 in 1997,  compared to the $20,000 of securities  gains in
1996.

<TABLE>
<CAPTION>
                                                                            Noninterest Income

                                                                      Years Ended December 31,
                                                           -------------------------------------------------------
                                                                 1997               1996               1995
                                                           -----------------   ----------------   ----------------
                                                                           (Dollars in thousands)
<S>                                                           <C>                <C>                <C>
Service charges, commissions and fees                         $         887      $         677      $         651
Trust fee income                                                        339                 29                  -
Other operating income                                                   14                 16                166
                                                           -----------------   ----------------   ----------------
  Noninterest income                                           $      1,240      $         722      $         817
Profits (losses) on securities available for sale, net                 (93)                 22              (123)
Securities gains (losses), net                                            2                (2)                  -
                                                           -----------------   ----------------   ----------------
  Total noninterest income                                     $      1,149      $         742      $         694
                                                           =================   ================   ================
</TABLE>


Noninterest Expense

            Total  noninterest  expense for the year ended  December  31,  1997,
increased $588,000, or 13.42% from the December 31, 1996, balance of $4,383,000.
This increase was primarily due to a $331,000 or 13.07% increase in salaries and
employee  benefits  resulting from the hiring of additional staff to support the
lending efforts at the Company's Middleburg and Leesburg branches.  In addition,
salaries of Tredegar  employees  earned  subsequent to the acquisition  date are
reflected  in the  December  31,1997,  salary  expense  balance.  Net  occupancy
expenses  increased  $31,000  or  5.52%  over the 1996  $562,000  balance.  This
increase  is  primarily  due to the  depreciation  expense  related to the newly
constructed  and  furnished  Leesburg  branch  building  as well  as  additional
expenses  for  Tredegar's  main office in  Richmond.  The  $129,000  increase in
occupancy  expenses  from  1995 to 1996  also  relates  to the  addition  of the
Company's  temporary  Leesburg branch site. The advertising  expenses  decreased
$18,000 or 10.98% from the December 31, 1996, balance of $164,000. The Company's
December 31, 1997, FDIC insurance  increased  $15,000 from the $2,000 balance at
December 31,  1996.  The December  31,  1996,  balance had  decreased  98.52% or
$133,000 form the December 31, 1995,  balance.  The Company's  computer services
expense had increased $48,000 or 53.33% during 1997. The increase results mostly
from the  Company's  additional  efforts to utilize  technology  to operate more
efficiently. Computer services increased $12,000 during 1996.


                                      -11-
<PAGE>

                               Noninterest Expense

<TABLE>
<CAPTION>
                                                          Years Ended December 31,
                                               ------------------------------------------
                                                    1997          1996           1995
                                               -------------  -------------  ------------
                                                           (Dollars in thousands)
<S>                                            <C>            <C>            <C>
Salaries and employee benefits                 $      2,864   $      2,533   $      2,163
Net occupancy expense of premises                       593            562            433
Advertising                                             146            164            106
FDIC insurance                                           17              2            135
Computer services                                       138             90             78
Other operating expenses                              1,213          1,032          1,152
                                               -------------  -------------  ------------
  Total                                        $      4,971   $      4,293   $      3,989
                                               =============  =============  ============
</TABLE>

Income Taxes

         Reported income tax expense at December 31, 1997, was $862,000, up from
$728,000  in  1996,  and  $625,000in  1995.  The  increase  in  income  taxes is
attributable to increased taxable earnings at the federal statutory rate of 34%.
Note 11 to the  Consolidated  Financial  Statements  provides  a  reconciliation
between the amount of income tax expense  computed  using the federal  statutory
rate and the Company's  actual  income tax expense.  Also included in Note 11 to
the  Consolidated  Financial  Statements is information  regarding the principal
items giving rise to deferred taxes for the three years ended December 31, 1997.

Loan Portfolio

         Loans,  net of unearned  income,  were $104.2  million at December  31,
1997,  up 10.15% from the $94.6  million at December 31,  1996.  The Company has
experienced  continued loan growth from 1993.  Loans had increased $13.7 million
from 1995 to 1996, $1.2 million from 1994 to 1995, and $8.5 million from 1993 to
1994, an increase of 16.93%, 1.50%, and 11.93%, respectively.

         At December 31, 1997,  real estate  residential  (1 to 4 family)  loans
comprised 43.40% of the total loan portfolio.  Non-farm,  non-residential  loans
provided  25.0% of total loans at December  31, 1997.  Construction  real estate
loans  comprised  3.64% of the total  portfolio  at that same date.  Home equity
lines  and  agricultural   loans  made  up  3.04%  and  2.05%  of  total  loans,
respectively, at December 31, 1997.

         The Company's  commercial,  financial and  agricultural  loan portfolio
consists mostly of secured and unsecured loans extended to small businesses.  At
December 31, 1997,  these loans  comprised  14.50% of total loans.  The consumer
portion of the loan  portfolio  is  comprised  of mostly  unsecured  installment
credit.

         Consistent  with  its  focus  on  providing  community-based  financial
services,  the Company  generally  does not extend loans  outside its  principle
market area, which encompasses Fauquier and Loudoun Counties, Virginia.

         The  Company's  unfunded  loan  commitments  totaled  $12.4  million at
December 31, 1997,  and $6.6  million at December  31,  1996.  This  increase is
attributed to an increase in customer demand.


                                      -12-
<PAGE>

         At December 31, 1997, the Company had no  concentration of loans in any
one  industry  in excess of 10  percent of its total  loan  portfolio.  However,
because of the nature of the Company's market,  loan collateral is predominantly
real estate related.

<TABLE>
<CAPTION>

                                 Loan Portfolio


                                                                                     December 31,
                                                 ----------------------------------------------------------------------
                                                     1997           1996           1995           1994          1993
                                                 ----------------------------------------------------------------------
                                                                                     (In thousands)
<S>                                              <C>            <C>            <C>             <C>            <C>
Commercial, financial and agricultural           $    15,111    $  11,648      $   10,215      $  9,064       $  10,928
Real estate construction                               3,798        4,182           1,791         2,432           1,488
Real estate mortgage:
  Residential (1-4 family)                            45,231       41,246          34,490        38,029          33,138
  Home equity lines                                    3,165        2,614           2,188         1,512           1,271
  Multifamily                                              -            -               -             3               6
  Non-farm, non-residential (1)                       26,054       24,774          21,697        18,271          17,093
  Agricultural                                         2,140        2,105           1,549         1,040           1,098
Consumer installment                                  8,738         8,061           9,170         9,837           6,773
                                                 -----------    ---------      ----------      --------       ---------

  Total loans                                        104,237       94,630          81,100        80,188          71,795
Less unearned income                                      10           35             186           481             597
                                                 -----------    ---------      ----------      --------       ---------
Loans-net of unearned income                     $   104,227    $  94,595      $   80,914      $ 79,707     $    71,198
                                                 ======================================================================
</TABLE>

----------------------------
(1) This category  generally  consists of commercial and industrial  loans where
    real estate constitutes a source of collateral.


                                      -13-
<PAGE>

         The  following  table  reflects the maturity  distribution  of selected
loans:

                           Remaining Maturities of Selected Loans

                                             December 31, 1997
                                      -----------------------------
                                      Commercial,          Real
                                      Financial and       Estate
                                      Agricultural     Construction
                                              (in thousands)

         Within 1 year                $       6,225   $         642
                                      -------------   -------------

         Variable Rate:
           1 to 5 years                         234               -
           After 5 years                        764               -
                                      -------------   -------------

           Total                      $         998   $           -
                                      -------------   -------------

         Fixed Rate:
           1 to 5 years                       6,638            3156
           After 5 years                      1,250               -
                                      -------------   -------------

           Total                      $       7,888   $       3,156
                                      -------------   -------------

         Total Maturities             $      15,111   $       3,798
                                      =============   =============

Asset Quality

         The allowance for loan losses is an estimate of the amount that will be
adequate  to provide  for  potential  losses in the  Company's  loan  portfolio.
General economic trends as well as any conditions affecting individual borrowers
affect  the  level of loan  losses.  The  allowance  is  subject  to  regulatory
examinations and determinations as to its adequacy,  which may take into account
such factors as the methodology  used to calculate the allowance and the size of
the  allowance in comparison to peer  financial  institutions  identified by the
regulatory agencies.

         The Company's loans are subject to independent  review by the Company's
external  auditors.  The Company's Loan Committee and Board of Directors take an
active role in the monthly  review of the  Company's  problem  credits and their
affect on the allowance for loan losses.


                                      -14-
<PAGE>

<TABLE>
<CAPTION>

                                                                                  Allowance for Loan Losses
                                                                                        (In thousands)

                                                                                         December 31,
                                                              --------------------------------------------------------------------
                                                                  1997          1996           1995          1994          1993
                                                              -----------    ----------     ----------    ----------    ----------

<S>                                                           <C>            <C>            <C>           <C>           <C>
Balance, beginning of period                                  $       884    $      866     $      940    $      859    $      853
  Loans charged off:
    Commercial, financial, and agricultural                            42             6             13            38           119
    Real estate construction                                            -             -              -             -             -
    Real estate mortgage                                                -            79            115            36            99
    Consumer installment                                               86            40             83           142            77
                                                              -----------    ----------     ----------    ----------    ----------

      Total loans charged off                                 $       128    $      125     $      211    $      216    $      295
                                                              -----------    ----------     ----------    ----------    ----------

  Recoveries:
    Commercial, financial, and agricultural                   $        12    $        5     $       43    $      210    $       25
    Real estate construction                                            -             -              -             -             -
    Real estate mortgage                                                7            26              4             -             -
    Consumer installment                                               21            47             35            87            48
                                                              -----------    ----------     ----------    ----------    ----------

      Total recoveries                                        $        40    $       78     $       82    $      297    $       73
                                                              -----------    ----------     ----------    ----------    ----------

Net charge offs (recoveries)                                           88            47            129          (81)           222
Provision for loan losses                                             178            65             55             -           228
                                                              -----------    ----------     ----------    ----------    ----------

Balance, end of period                                        $       974    $      884     $      866    $      940    $      859
                                                              ===========    ==========     ==========    ==========    ==========

Ratio of allowance for loan lossess
   to loans outstanding at end of period                            0.93%         0.93%          1.07%         1.18%         1.21%

Ratio of net charge offs (recoveries)to
   Average loans outstanding during period                          0.09%         0.05%          0.16%        -0.11%         0.32%

</TABLE>

         Loan   classifications  for  regulatory  purposes  as  loss,  doubtful,
substandard,  or special  mention,  do not  represent  or result  from trends or
uncertainties which management  reasonably expects will materially impact future
operating results, liquidity, or capital resources or represent material credits
about which  management is aware of any information  which causes  management to
have serious  doubt as to the ability of such  borrowers to comply with the loan
repayment terms.

         The  Company's  charge offs had  increased  $41,000  from the  previous
year's net charge offs of $47,000.  The increase experienced results mostly from
the increase  charge offs of consumer  loans.  Net charge offs to average  loans
were 0.09% and 0.05% for 1997 and 1996, respectively.


                                      -15-
<PAGE>

         The provision to the allowance for loan losses was $178,000 for 1997. A
provision of $65,000 was made in 1996, and one of $55,000 was made for 1995. The
ratio of the allowance for loan losses to total loans , net of unearned  income,
has  decreased  over the past four years.  There was no change in the ratio from
1996 to 1997.  The  decreases  experienced  in the  ratio in recent  years  were
attributed to the significant loan growth experienced by the Company.

         The  allowance  for loan losses was $974,000 at December  31, 1997,  an
increase  of  $90,000  from the  $884,000  balance at  December  31,  1996.  The
allowance was $866,000 at December 31, 1995.

         The ratio of allowance for loan losses to nonperforming  assets totaled
401% at December 31, 1997,  1163% at December 31, 1996,  and 52% at December 31,
1995.  Management  evaluates  nonperforming  loans relative to their  collateral
value and makes  appropriate  reductions  in the  carrying  value of those loans
based on that review. Management believes, based on its review, that the Company
has adequate reserves to absorb any necessary future write-down on these loans.

         The following  table shows the balance and  percentage of the Company's
allowance for loan losses allocated to each major category of loan:
<TABLE>
<CAPTION>

                                                        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,
<S>                   <C>          <C>           <C>           <C>            <C>          <C>            <C>           <C>
   1997               $362         14.50%        $107          3.64%          $159         73.49%         $346           8.37%
   1996                244         12.31%         101          4.42%           182         74.79%          357           8.48%
   1995                246         12.62%          23          2.21%           346         74.07%          251          11.10%
</TABLE>

         The Company has allocated the allowance  according to the amount deemed
reasonably  necessary to provide for the  possibility  of losses being  incurred
within each of the above categories of loans. The allocation of the allowance as
shown in the table above should not be  interpreted  as an indication  that loan
losses in future years will occur in the same proportions or that the allocation
indicates future loan loss trends.  Additionally,  the portion allocated to each
loan  category  is not the total  amount  that may be  available  for the future
losses that could occur within such  categories  since the total  allowance is a
general allowance applicable to the entire portfolio.

Nonperforming Assets

         Total   nonperfroming   assets,   which  consist  of   nonaccrual   and
restructured loans and foreclosed property,  were $243,000 at December 31, 1997,
an increase of $167,000  from the  December  31,  1996,  balance.  Nonperforming
assets at December 31, 1995 decreased  $963,000 from the $2.6 million balance at
December 31, 1994. The increase in nonperforming  assets in 1997 resulted from a
real estate loan being placed on nonaccrual status during the year.


                                      -16-
<PAGE>

<TABLE>
<CAPTION>

                                                                             Nonperforming Assets


                                                                                 December 31,
                                              ------------------------------------------------------------------------
                                                  1997          1996          1995            1994             1993
                                              -----------   ----------    -----------     ------------    ------------
                                                                        (In thousands)
<S>                                            <C>          <C>           <C>             <C>             <C>
Nonaccrual loans                               $      243   $       76    $     1,654     $      1,700    $      2,138
Restructured loans                                      -            -              -                -               -
Foreclosed property                                     -            -              -              917             960
                                              -----------   ----------    -----------     ------------    ------------
  Total nonperforming assets                   $      243   $       76    $     1,654     $      2,617    $      3,098
                                              ========================================================================


Allowance for loan losses
  to period end loans                               0.93%        0.93%          1.07%            1.18%           1.21%

Allowance for loan losses
  to nonperforming assets                            401%        1163%            52%              36%             28%

Nonperforming assets to
  Period end loans                                  0.23%        0.08%          2.04%            3.28%           4.35%

Net charge offs to
  Average loans                                     0.09%        0.05%          0.16%           -0.11%           0.32%
</TABLE>

         Loans are placed on nonaccrual  status when collection of principal and
interest is doubtful,  generally  when loans become 90 days past due.  There are
three  negative  implications  for earnings  when a loan is placed on nonaccrual
status.  All  interest  accrued  but  unpaid  at the date the loan is  placed on
nonaccrual  status is either  deducted from interest  income or written off as a
loss. Secondly,  accruals of interests are discontinued until it becomes certain
that both  principal  and interest can be repaid.  Finally,  there may be actual
losses  which may require that  additional  provisions  for loan losses  charged
against earnings.

         During 1997,  approximately $15,000 in additional interest income would
have been  recorded if the  Company's  nonaccrual  loans had been current and in
accordance  with their  original  terms.  During 1996,  approximately  $2,000 of
additional interest income would have been recorded if the Company's  nonaccrual
loans had been current and in accordance with their original terms.

         At  December  31,  1997,  potential  problem  loans were  approximately
$408,000.  These loans are  subject to regular  management  attention  and their
status is reviewed on a regular  basis.  Several of the potential  problem loans
identified at December 31, 1997,  are unsecured  consumer  loans.  However,  the
majority of the balance is secured by real estate.

         The Company  expects loan growth to continue at rates  similar to those
experienced during 1997.


                                      -17-
<PAGE>

Securities

         The carrying  value of the  securities  portfolio  was $63.7 million at
December 31,  1997,  an increase of $11.3  million,  or 21.56% from the carrying
value of $52.4 million at December 31, 1996. The increase results primarily from
the  Company's  intentional  investing  of surplus  funds into  securities.  The
majority of the investments  purchased were in the form of municipal  bonds. The
Company  holds  bonds  issued  from the  State  of  Virginia  and its  political
subdivisions  having an  aggregate  book value of $3.5  million and an aggregate
market  value  of $3.5  million.  These  aggregate  holdings  exceed  10% of the
Company's  stockholders'  equity at December 31, 1997. At December 31, 1996, the
Company  held  bonds  issued  from  the  State  of  Virginia  and its  political
subdivisions, which had an aggregate book value of $4.9 million and an aggregate
market  value of $4.1 million.  These  aggregate  holdings  exceeded  10% of the
Company's stockholders' equity at December 31, 1996.

         The securities portfolio consists of two components, securities held to
maturity and securities available for sale. Securities are classified as held to
maturity when  management  has the intent and the Company has the ability at the
time of purchase to hold the securities to maturity. Securities held to maturity
are carried at cost  adjusted  for  amortization  of premiums  and  accretion of
discounts.  Securities to be held for indefinite  periods of time are classified
as  available  for sale  and  accounted  for at fair  market  value.  Securities
available for sale include securities that may be sold in response to changes in
market interest rates,  changes in the security's  prepayment risk, increases in
loan demand, general liquidity needs and other similar factors.

         Financial  Accounting  Standards Board Pronouncement No. 115, effective
January 1, 1994,  required  the Company to show the effect of market  changes in
the value of  securities  available  for sale  (AFS).  The  market  value of AFS
securities at December 31, 1997, was $47.3 million.  The unrealized  loss on the
AFS  securities  amounted to $199,000 and  $519,000  for December 31, 1997,  and
December 31, 1996, respectively. This loss is reflected, net of income taxes, as
a separate line item in shareholders' equity.

         It is the Company's policy not to engage in activities considered to be
derivative in nature, such as futures, options,  contracts, swaps, caps, floors,
collars, or forward commitments.  The Company does hold in its loan and security
portfolios  investments  that  adjust or float  according  to changes in "prime"
lending  rate.  These  holdings  are  not  considered  speculative  but  instead
necessary for good asset/liability management.


                                      -18-
<PAGE>

             Investment Portfolio and Securities Available for Sale

The carrying value of investment securities at the dates indicated was:
<TABLE>
<CAPTION>

                                                                                         December 31,
                                                                        --------------------------------------------------
                                                                                 (Dollars in thousands)
                                                                            1997               1996             1995
                                                                        ---------------  ---------------- ----------------


<S>                                                                       <C>             <C>                <C>
                  U.S. Government securities                              $      2,006    $        3,012     $      4,367

                  States and political subdivisions                             13,849            13,396           11,396

                  Mortgaged-backed securities                                      571               958            1,248
                                                                        ---------------  ---------------- ----------------

                                     Total                                 $    16,426     $      17,366      $    17,011
                                                                        ===============  ================ ================
</TABLE>

The carrying value of securities available for sale at the dates indicated was:
<TABLE>
<CAPTION>

                                                                                         December 31,
                                                                        --------------------------------------------------
                                                                                    (Dollars in thousands)
                                                                             1997               1996             1995
                                                                        ----------------  ----------------- --------------


<S>                                                                        <C>              <C>                <C>
                  U.S. Government securities                               $      2,464     $        4,950     $     3,874
                  States and political subdivisions                              12,136                  -               -
                  Mortgaged-backed securities                                    29,579             26,521          23,886
                  Other securities                                                3,091              3,565           3,519
                                                                        ----------------  ----------------- ---------------

                                     Total                                  $    47,270      $      35,036     $    31,279
                                                                        ================  ================= ===============
</TABLE>



                                      -19-
<PAGE>

                 Maturity Distribution and Yields of Securities

                                December 31, 1997
                            Taxable-Equivalent Basis


<TABLE>
<CAPTION>

                                    Due in 1 year   Due after 1 through  Due after 5 Through  Due after 10 years and
                                        Or Less           5 years             10 Years          Equity Securities         Total
                                   --------------- -------------------- --------------------  ---------------------- ---------------

                                   Amount    Yield    Amount    Yield    Amount    Yield         Amount   Yield       Amount   Yield

                                                                            (Dollars in thousands)
<S>                               <C>        <C>     <C>        <C>     <C>        <C>          <C>        <C>       <C>       <C>
Securities held for investment:
  U.S. Government securities      $ 1,500    3.43%   $   506    5.28%   $     -       -         $     -       -      $ 2,006   3.90%
  Mortgage backed securities           86    7.73%         -       -         30    7.73%            455    7.04%         571   7.18%
  Other taxable securities              -       -          -       -          -       -               -       -            -       -
                                  -------            -------            -------                 -------              -------

  Total taxable                     1,586    3.66%       506    5.28%        30    7.73%            455    7.04%       2,577   4.63%

Tax-exempt securities (1)             574    7.61%     4,885    6.84%     6,277    7.33%          2,114    7.86%      13,850   7.25%
                                  -------            -------            -------                 -------              -------
  Total                           $ 2,160    4.71%   $ 5,391    6.69%   $ 6,307    7.34%        $ 2,569    7.72%     $16,427   6.84%


Securities available for sale:
  U.S. Government securities      $   639    4.99%   $ 1,580    5.85    $   244    7.45%        $     -       -      $ 2,463   5.78%
  Mortgage backed securities            -       -      2,137    5.19%     5,546    5.88%         21,896    6.45%      29,579   6.25%
  Corporate preferred                   -       -          -       -          -                   2,383   12.71%       2,383  12.71%
                                  -------            -------            -------                 -------              -------

  Total taxable                   $   639    4.99%   $ 3,717    5.47%   $ 5,790    5.95%        $24,279    7.07%     $34,425   6.65%

Tax-exempt securities (1)               -       -          -       -          -       -          12,136    7.82%      12,136   7.82%
                                  -------            -------            -------                 -------              -------

  Total                           $   639    4.99%   $ 3,717    5.47%   $ 5,790    5.95%        $36,415    7.32%     $46,561   6.96%
                                  -------            -------            -------                 -------              -------

Total securities                  $ 2,799    4.77%   $ 9,108    6.19%   $12,097    6.67%        $38,984    7.35%     $62,988   6.63%
                                  =======            =======            =======                 =======              =======
</TABLE>

(1) Yields on tax- exempt  securities  have been  computed on a tax - equivalent
    basis
(2) Excludes  Federal Reserve Stock of $134,400 and Federal Home Loan Bank Stock
    of $573,600


                                      -20-
<PAGE>

Deposits

         The  Company  has made an  effort  in  recent  years to  increase  core
deposits and control cost of funds.  Deposits  provide funding for the Company's
investments  in loans and  securities.  The interest  paid for deposits  must be
managed carefully to control the level of interest expense.

         As shown below,  average  total  deposits  grew by 14.54%  during 1997,
10.13% in 1996, and 5.70% during 1995. The growth of both  non-interest  bearing
deposits  and the  certificate  of deposits  greater  than  $100,000  were large
contributors of 1997's increased balance. During the Spring of 1997, the Company
had held a certificate of deposit promotion.  The promotion generated nearly $10
million in new deposit money for the Company.

         The Company will continue funding assets deposit liability accounts and
focus on core deposit  growth as the primary source for liquidity and stability.
The Company offers individuals and small to medium sized businesses a variety of
deposit accounts,  including demand deposit,  interest  checking,  money market,
savings and time deposits accounts.

         The following table is a summary of average  deposits and average rates
paid.

                             Deposits and Rates Paid

<TABLE>
<CAPTION>

                                                                                           December 31,
                                                  ----------------------------------------------------------------------------------
                                                             1997                        1996                        1995
                                                  -------------------------    -------------------------   -------------------------

                                                     Amount         Rate          Amount          Rate         Amount       Rate
                                                  -------------  ----------    -----------   -----------   ------------  -----------
                                                                             (Dollars in thousands)
<S>                                                <C>             <C>         <C>               <C>       <C>              <C>
Noninterest-bearing
  Deposits                                         $    24,025         -       $    19,211          -      $   15,691          -

Interest-bearing accounts:
  Interest checking                                     19,886     1.81%            18,348       2.13%         17,919       2.43%
  Regular savings                                       15,631     3.69%            14,562       3.85%         14,003       3.81%
  Money market accounts                                 30,071     2.94%            28,735       3.02%         26,980       3.09%
  Time deposits:
    $ 100,000 and over                                  16,480     5.46%            12,013       6.14%         12,523       5.50%
    Under $ 100,000                                     40,100     5.40%            34,760       5.46%         28,775       5.43%
                                                  -------------                -----------                -----------


Total interest-bearing deposits                        122,168     4.00%           108,418       4.11%        100,200       4.05%
                                                  -------------              -------------                -----------

    Total                                           $  146,193                  $  127,629                 $  115,891
                                                  =============              =============                ===========
</TABLE>

         The Company neither  purchases  brokered deposits nor solicits deposits
from  sources  outside its primary  market  area.  In 1998,  deposit  levels are
expected to continue to increase over those at the end of December 31, 1997.


                                      -21-
<PAGE>

         The following is a summary of the maturity distribution of certificates
of deposit equal to or greater than $100,000 as December 31, 1997:


           Maturities of Certificates of Deposit of $100,000 and Over

<TABLE>
<CAPTION>

                                       Within         Three to          Six to           Over                          Percent
                                        Three           Six             Twelve           One                          of Total
                                       Months          Months           Months           Year          Total          Deposits
                                   --------------  --------------  ---------------  --------------  -------------   ------------
                                                                   (In thousands)

<S>                                 <C>             <C>              <C>             <C>             <C>                <C>
At December 31, 1997                $      1,675    $      4,474     $      5,157    $      5,963    $    17,269        11.0%
</TABLE>


Capital Resources

         The adequacy of the  Company's  capital is reviewed by management on an
ongoing  basis  with  reference  to the size,  composition  and  quality  of the
Company's  asset  and  liability   levels  and  is  consistent  with  regulatory
requirements  and  industry  standards.  Management  seeks to maintain a capital
structure that will assure an adequate  level of capital to support  anticipated
asset growth and absorb potential losses.

         The  Federal  Reserve,   along  with  the  Federal  Deposit   Insurance
Corporation,  has adopted  capital  guidelines to supplement the  definitions of
capital for  regulatory  purposes and to establish  minimum  capital  standards.
Specifically,  the guidelines categorize assets and off-balance sheet items into
four risk-weighted categories.  The minimum ratio of qualifying total capital to
risk-weighted  assets is 8.0%,  of which at least  4.0% must be Tier I  capital,
composed  of common  equity and  retained  earnings.  The Company had a ratio of
risk-weighted  assets to total capital of 19.7% at December 31, 1997,  and 20.2%
at December 31, 1996.  The ratio of  risk-weighted  assets to Tier I capital was
18.8% at December 31, 1997,  and 19.3% at December 31, 1996.  Both ratios exceed
the  minimum  capital  requirements  adopted  by  the  federal  bank  regulatory
agencies.



                                      -22-
<PAGE>

                               Analysis of Capital

                                                      December 31,
                                             -----------------------------

                                                  1997            1996
                                             --------------   ------------


Tier 1 Capital:
  Common stock                               $        9,063   $      4,299
  Capital surplus                                     1,948          1,411
  Retained earnings                                  10,874         12,817
  Unrealized net loss on
     Equity securities                              (1,181)           (35)
                                             --------------   ------------
  Total Tier 1 capital                               20,704         18,492

Tier 2 Capital:
  Allowance for loan losses                             974            884
                                             --------------   ------------
  Total tier 2 capital                                  974            884

  Total risk-based capital                   $       21,678   $     19,376
                                             ==============   ============

Risk weighted assets                         $      110,041   $     95,921

CAPITAL RATIOS:
  Tier 1 risk-based capital ratio                     18.8%          19.3%
  Total risk-based capital ratio                      19.7%          20.2%
  Tier 1 capital to average total assets              11.8%          11.7%


Liquidity

         Liquidity  represents  an  institution's  ability to meet  present  and
future  financial  obligations  through  either the sale or maturity of existing
assets or the  acquisition  of additional  funds through  liability  management.
Liquid assets include cash,  interest-bearing deposits with banks, federal funds
sold,  securities  classified  as  available  for sale and loan and  investments
maturing  within one year.  As a result of the  Company's  management  of liquid
assets  and  the  ability  to  generate  liquidity  through  liability  funding,
management  believes  the Company  maintains  overall  liquidity  sufficient  to
satisfy its depositors' requirements and meet its customers' credit needs.


                                      -23-
<PAGE>

         The Company also maintains  additional  sources of liquidity  through a
variety of borrowing arrangements. The Company maintains federal fund lines with
large regional and  money-center  banking  institutions.  These  available lines
total in excess of $8 million,  of which none had been  outstanding  at December
31, 1997. Federal funds purchased during 1997 averaged $2,934,000.  During 1996,
average  federal  funds  borrowed  totaled  $73,000.  At December 31, 1997,  the
Company  had $3.0  million of  outstanding  borrowings  pursuant  to  securities
repurchase  agreement  transactions,  with  maturities  of one  day.  Securities
repurchase agreement transactions totaled $1.4 million at December 31, 1996. The
Company has a credit line in the amount of $16 million at the Federal  Home Loan
Bank.  This line may be  utilized  for short  and/or  long-term  borrowing.  The
Company  joined the  Federal  Home Loan Bank  system in 1995 in order to enter a
program of long term and short term borrowing which is restricted to be invested
in Residential  Housing  Finance  Assets  (RHFA).  RHFA are defined as (1) Loans
secured by  residential  real  property;  (2)  Mortgage-backed  securities;  (3)
Participations in loans secured by residential real property; (4) Loans financed
by Community  Investment  Program  advances;  (5) Loans secured by  manufactured
housing,  regardless  of whether such  housing  qualifies  as  residential  real
property;  or (6) Any loans or  investments  which the Federal  Housing  Finance
Board  and  the  Company,  in  their  discretion,   otherwise  determine  to  be
residential  housing finance  assets.  In 1997,  short-term  borrowings from the
Federal Home Loan Bank system for RHFA investments  were $2,800,000  maturing in
1998.

         At December 31, 1997,  cash,  interest  bearing deposits with financial
institutions, federal funds sold, securities available for sale, investments and
loans  maturing  within  one year  were  26.41%  of  total  deposits  and  other
liabilities.

Year 2000

         ICBI has  established  a  committee  within the banking  subsidiary  to
address  and  evaluate  problems  that  may  be  encountered  within  all of the
subsidiaries  with  respect  to the Year 2000.  The  committee  is charged  with
identifying  potential  problems and  uncertainties  that would cause  financial
reporting to be inaccurate,  addressing the cost  associated  with resolving any
Year 2000  problems,  and  compiling  of  documentation  relating  to testing of
computer  programs  and  equipment.  The  committee  has prepared a written plan
detailing the steps to be taken for Year 2000  readiness  that is being reviewed
by the Board of Directors.

         Each subsidiary  utilizes and is dependent upon data processing systems
and software to conduct its business.  The data processing  systems and software
include a mainframe processing system and various software packages, licensed to
the  subsidiaries  by an  outside  vendor,  which are run on  in-house  computer
equipment.  The subsidiaries'  mainframe software vendor and the majority of the
other vendors  (including  vendors for systems and equipment other than for data
processing)  which have been contacted have indicated that their hardware and/or
software will be Year 2000 ready.

         Upgrading and replacing personal computers  throughout the subsidiaries
is expected to be a large part of the Year 2000 readiness plan. The cost of such
expense  is  not  expected  to  have a  material  effect  on  the  Corporation's
consolidated financial statements.

Forward-Looking Statements

         Certain   information   contained  in  this   discussion   may  include
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements are generally identified by phrases
such as "the  Company  expects,"  "the  Company  believes"  or words of  similar
import.  Such  forward-


                                      -24-
<PAGE>

looking  statements  involve known and unknown risks including,  but not limited
to,  changes  in  general  economic  and  business  conditions,   interest  rate
fluctuations,  competition  within and from  outside the banking  industry,  new
products and services in the banking industry,  risks values, changing trends in
customer profiles and changes in laws and regulations applicable to the Company.
Although  the  Company   believes   that  its   expectations   with  respect  to
forward-looking  statements  are based upon  reasonable  assumptions  within the
bounds  of its  knowledge  of  its  business  and  operations,  there  can be no
assurance that actual  results,  performance or achievements of the Company will
not differ  materially  from any future  results,  performance  or  achievements
expressed or implied by such forward-looking statements.

Recent Accounting Pronouncements

         In 1997, the Corporation  adopted FASB Statement No. 128, "Earnings per
Share."  Statement  128 replaced the  calculation  of primary and fully  diluted
earnings  per share with basic and diluted  earnings per share,  unlike  primary
earnings per share,  basic earnings per share  excludes any dilutive  effects of
options, warrants and convertible securities.  Diluted earning per share is very
similar to the  previously  reported  fully  diluted  earnings  per share.  This
statement had no effect on the  Corporation's  earnings per share for any period
presented.

         In June 1996, the FASB issued FASB No. 125,  "Accounting  for Transfers
and Servicing of Financial  Assets and  Extinguishments  of  Liabilities."  This
Statement  provides   accounting  and  reporting  standards  for  transfers  and
servicing  of  financial  assets  and  extinguishments  of  liabilities.   Those
standards are based on consistent application of a financial components approach
that focuses on control of the affected  asset or liability  that it controls or
surrenders. This Statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996, and
is to be applied prospectively.

         In October 1996, the FASB issued FASB Statement No. 127, which deferred
for one  year  paragraphs  9-12  (Accounting  for  Transfers  and  Servicing  of
Financial  Assets)  under  FASB  No.  125  for  securities  lending,  repurchase
agreements,  dollar rolls, and other secured transactions.  The FASB also agreed
to defer for one year  paragraph 15 (Secured  Borrowings and  Collateral)  under
FASB No. 125 for all transactions.

         During  June  1997,   the  FASB   issued   FASB  No.  130,   "Reporting
Comprehensive  Income." This pronouncement  established  standards for reporting
and display of  comprehensive  income and its  components  (revenues,  expenses,
gains and losses) in a full set of general purpose  financial  statements.  FASB
No. 130 is effective for financial statements beginning after December 15, 1997.

         Additionally  during  June of 1997,  the  FASB  issued  FASB  No.  131,
"Disclosures about Segments of an Enterprise and Related  Information." FASB No.
131 establishes standards for the way that public enterprises report information
about operating segments in annual financial  statements and requires that those
enterprises  report selected  information  about  operating  segments in interim
financial  reports issued to  shareholders.  It also  establishes  standards for
related  disclosures  about  products and services,  geographic  areas and major
customers. This statement becomes effective for financial statements for periods
beginning after December 31, 1997.



ITEM 7.  FINANCIAL STATEMENTS

         The following  financial  statements are filed as a part of this report
following Item 13 below:


                                      -25-
<PAGE>

         Independent Auditor's Report
         Consolidated Balance Sheets as of December 31, 1997 and 1996
         Consolidated  Statements  of Income for the Years  Ended  December  31,
              1997, 1996 and 1995
         Consolidated Statements of Changes in Shareholders'
              Equity for the Years Ended December 31, 1997, 1996 and 1995
         Consolidated  Statements of Cash Flows for the Years Ended December 31,
              1997, 1996 and 1995
         Notes to Consolidated Financial Statements


ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         There  were  no  changes  in  or  disagreements   with  accountants  on
accounting and financial disclosure during the last two fiscal years.


                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT


Directors

         Howard M. Armfield, 55, has been a director since 1984. Mr. Armfield is
Executive  Vice  President  and owner of Armfield,  Harrison & Thomas,  Inc., an
independent insurance agency in Leesburg, Virginia.

         Joseph L. Boling,  53, has been a director  since 1993.  Mr. Boling has
been the Chairman and Chief Executive  Officer of the Company and The Middleburg
Bank, a subsidiary of the Company (the "Bank"),  since April 1997. From February
1993 to April 1997, he was President and Chief Executive  Officer of the Company
and the Bank.  Prior to  employment by the Company and the Bank, he was a Senior
Vice President of Crestar Bank in Richmond, Virginia.

         Childs Frick Burden,  47, has been a director since 1997. Mr. Burden is
a partner with Secor Group, an investment firm in Washington, D.C.

         J. Lynn Cornwell, Jr., 73, has been a director since 1984. Mr. Cornwell
is President  and owner of J. Lynn  Cornwell,  Inc.,  a real estate  development
company in Loudoun County.

         William F. Curtis,  69, has been a director  since 1962.  Mr. Curtis is
currently  retired.  Until  February  1993, he had served as President and Chief
Executive Officer of the Bank for 25 years.

         F. E. Deacon,  III, 42, has been a director  since 1997.  Mr. Deacon is
President and Chief  Executive  Officer of The Tredegar Trust  Company,  a trust
company in Richmond, Virginia and a subsidiary of the Company ("Tredegar").

         George A. Horkan,  Jr., 75, has been a director  since 1961. Mr. Horkan
is President of George A. Horkan, Jr., P.C., a law firm in Upperville, Virginia.


                                      -26-
<PAGE>

         C. Oliver  Iselin,  III, 68, has been a director since 1975. Mr. Iselin
is owner and operator of the Wolver Hill Farm.

         William S. Leach,  69, has been a director  since 1970.  Mr. Leach is a
retired  businessman  with over 30 years  experience.  Most recently he served a
three year term as Town Administrator for the Town of Middleburg.

         Thomas W. Nalls,  56, has been a director  since 1997.  Mr.  Nalls is a
partner with Hazel & Thomas, P.C., a law firm in Leesburg, Virginia.

         John C. Palmer,  62, has been a director since 1974. Mr. Palmer retired
as Senior Vice President of the Bank in 1995 after 27 years of service.

         John Sherman,  57, has been a director since 1997. Mr. Sherman is owner
and operator of The Ashley Inn in Paris, Virginia.

         Millicent  W. West,  76, has been a director  since 1975.  Ms. West has
served in many volunteer positions in the Garden Club of America and Garden Club
of Virginia.

         Edward T. Wright,  61, has been a director  since 1972.  Mr.  Wright is
Senior  Vice   President  of  the  Bank  and  his   principal   duties   include
administration of the loan portfolio, marketing and branch management.

Executive Officers Who Are Not Directors

         Alice P.  Frazier,  33, has served as Senior Vice  President  and Chief
Financial  Officer since April 1993.  From May 1991 until April 1993, she served
as the Bank's Loan Review  Officer.  From  December  1988 until May 1991 she was
employed by Yount, Hyde & Barbour, P.C., certified public accountants.

         Arch A.  Moore,  46, has  served as Senior  Vice  President  and Senior
Lender  since  February  1995.  From March 1983 to February  1995,  he served in
various  positions,  the last of which  was  Manager  of the  Northern  Virginia
Business Banking Group, with First American/First Union.

         William E. Doyle, 45, has served as Senior Vice President, Mortgage and
Retail  Services,  since  November  1997.  From  1996 to 1997,  he was a private
consultant in the banking industry, and, from 1982 to 1996, he was a Senior Vice
President with Crestar Bank.


ITEM 10. EXECUTIVE COMPENSATION

Executive Compensation

         The  following  table shows,  for the fiscal  years ended  December 31,
1997,  1996  and  1995,  the  cash  compensation  paid  by the  Company  and its
subsidiaries,  as well as certain other  compensation  paid or accrued for those
years, to each of the named  executive  officers in all capacities in which they
served:


                                      -27-
<PAGE>

                           Summary Compensation Table
<TABLE>
<CAPTION>
                                                                                                          Long Term
                                                                   Annual Compensation                   Compensation
                                                                                                Securities
            Name and                                                         Other Annual       Underlying        All Other
       Principal Position             Year      Salary ($)    Bonus ($)     Compensation ($)     Options      Compensation ($)(1)
       ------------------             ----      ----------    ---------     ----------------    ----------    -------------------

<S>                                   <C>         <C>           <C>            <C>                <C>              <C>
Joseph L. Boling                      1997        184,045       17,000              *             20,000            13,000
Chairman and Chief Executive          1996        186,980       20,000              *                  -            21,433
   Officer                            1995        178,820       15,000              *                  -            21,363

Edward T. Wright                      1997        122,873        5,105              *              2,000             8,638
Senior Vice President                 1996        119,294        8,350              *                  -             7,821
                                      1995        107,150        8,929              *                  -             7,748

Arch A. Moore, III                    1997        105,430        4,217              *             10,000            17,000
Senior Vice President                 1996        101,375        7,096              *                  -             8,967
                                      1995         91,711        7,500         21,712 (2)              -             8,943

F. E. Deacon, III (3)                 1997         52,333        3,900              *             10,000                 -
President and Chief Executive
   Officer of Tredegar
</TABLE>

*    All  benefits  that might be considered of a personal nature did not exceed
     the  lesser of  $50,000 or 10% of total annual salary and bonus for all the
     officers named in the table.

(1)  Amounts presented represent gross value of payments made by the Bank during
     such fiscal year pursuant to split-dollar life insurance agreements between
     the Company and the named executive officers.
(2)  Amount  presented  includes  $12,500  paid  by the  Bank  for  Mr.  Moore's
     initiation  fees for the  Middleburg  Tennis Club and the Loudoun  Golf and
     Country  Club and $7,883 paid by the Bank for the  increase in Mr.  Moore's
     income tax associated with such benefits.
(3)  The Company  acquired  Tredegar on August 1, 1997, and the amount presented
     reflects  the amount  earned by Mr.  Deacon from August 1, 1997 to December
     31, 1997. Mr. Deacon's annual salary is $130,000.


Director Compensation

         As  compensation  for  their  services,  each  member  of the  Board of
Directors receives a fee of $300 for each meeting of the Board and $250 for each
Committee meeting  attended.  Board members who are also officers do not receive
any additional  compensation above their regular salary for attending  committee
meetings.  In 1997,  directors received $84,050 in the aggregate as compensation
for their services as directors.

Stock Options

         The  following  table sets forth for the year ended  December 31, 1997,
the grants of stock options to the named executive officers:


                                      -28-
<PAGE>

                        Option Grants In Last Fiscal Year
<TABLE>
<CAPTION>

                                Percent of Total
                            Number of Securities    Options Granted to
                             Underlying Options    Employees in Fiscal      Exercise or Base
                              Granted (#) (1)          Year (%) (2)         Price ($/Share)       Expiration Date
                              ---------------          ------------         ---------------       ---------------

<S>                                 <C>                    <C>                   <C>             <C>
Joseph L. Boling                    20,000                 37.0                  17.00           November 12, 2007

Edward T. Wright                     2,000                  3.7                  17.00           November 12, 2007

Arch A. Moore, III                  10,000                 18.5                  17.00           November 12, 2007

F. E. Deacon, III                   10,000                 18.5                  17.00           November 12, 2007
</TABLE>

--------------------
(1)  Stock  options were awarded at or above the fair market value of the shares
     of Common  Stock at the date of award.
(2)  Options to purchase 54,000 shares of Common Stock were granted to employees
     during the year ended  December 31, 1997.


Employment Agreements

         Effective  as of January 1, 1997,  the Bank and Joseph L.  Boling,  who
serves as  Chairman  of the  Bank,  entered  into an  employment  contract.  Mr.
Boling's  employment  contract  is for five  years at a base  annual  salary  of
$194,086  and  he is  eligible  for  bonuses  as  determined  by  the  executive
committee, in the discretion of the Board of Directors.  Mr. Boling's employment
may be  terminated  by the Bank,  with or  without  cause.  If he is  terminated
without  cause,  however,  he is  entitled  to  payment  for the  greater of the
remainder of his contract or three years. If there is a change in control of the
Bank and Mr.  Boling's  employment  terminates,  he is entitled to severance pay
equal to his salary and benefits for the longer of the remainder of his contract
or three years,  unless he is offered and accepts a position  with the acquiror.
Mr. Boling's contract contains a covenant not to compete if, for any reason, his
employment terminates.

         A deferred  compensation  plan has been  adopted for the  Chairman  and
Chief Executive Officer.  Benefits are to be paid in monthly installments for 15
years following  retirement or death. The agreement provides that, if employment
is terminated  for reasons  other than death or disability  prior to age 65, the
amount of benefits would be reduced. The deferred compensation expense for 1997,
1996 and  1995,  based on the  present  value of the  retirement  benefits,  was
$16,627, $15,539 and $14,522,  respectively. The plan is unfunded. However, life
insurance has been acquired on the life of the employee in an amount  sufficient
to discharge the obligation.

         Effective  as of March 27, 1997,  Tredegar  and F. E. Deacon,  III, who
serves as President  and Chief  Executive  Officer of Tredegar,  entered into an
employment  agreement  that will expire on August 1, 2000.  Under his employment
agreement,  Mr. Deacon's base annual salary is $119,000, and he will be entitled
to a bonus, up to a maximum of $27,000 in any year, if Tredegar's cumulative net
earnings  equal or exceed  certain  levels as described in the  agreement.  This
employment  agreement  does not provide for any additional  compensation  in the
event of a change in control of the Company and does  prohibit  Mr.  Deacon from
competing  with Tredegar for a period of one year following a termination of his
employment by Tredegar for any reason.


                                      -29-
<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


Security Ownership of Management

         The  following   table  sets  forth,  as  of  March  11,  1998  certain
information with respect to beneficial  ownership of Common Stock by the members
of the Board of  Directors  and by all  directors  and  executive  officers as a
group.  Beneficial  ownership  includes shares,  if any, held in the name of the
spouse,  minor children or other relatives of a director living in such person's
home,  as well as shares,  if any,  held in the name of another  person under an
arrangement  whereby the director or executive officer can vest title in himself
at once or at some future time.

                                 Amount and Nature of
Name                             Beneficial Ownership       Percent of Class (%)

Howard M. Armfield                      18,104                      1.00
Joseph L. Boling (1)                    26,526                      1.45
Childs Frick Burden                      5,760                         *
J. Lynn Cornwell, Jr.                    3,644                         *
William F. Curtis (2)                   88,844                      4.90
F. E. Deacon, III (1)                   15,250                         *
George A. Horkan, Jr.                   72,000                      3.97
C. Oliver Iselin, III                   42,400                      2.34
William S. Leach (2)                    46,784                      2.58
Thomas W. Nalls                            400                         *
John C. Palmer                          24,526                      1.35
John Sherman                                30                         *
Millicent W. West                      262,504                     14.48
Edward T. Wright (1)                    60,420                      3.33

Directors and executive officers
   as a group (17 persons) (1)         688,164                     36.91
_______________

*    Percentage of ownership is less than one percent of the outstanding  shares
     of Common Stock.

(1)  Amounts disclosed include shares of Common Stock issuable upon the exercise
     of stock options exercisable within 60 days of March 11, 1998.
(2)  Amounts  disclosed include shares of Common Stock  beneficially  owned by a
     trust of which Messrs. Curtis and Leach serve as trustees.


Security Ownership of Certain Beneficial Owners

         Millicent W. West,  P.O. Box 236,  Upperville,  Virginia,  owns 262,504
shares,  or 14.48% of the  outstanding  shares of Common Stock. To the Company's
knowledge,  no other person owns five percent of more of the outstanding  shares
of Common Stock.


                                      -30-
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


         Some of the directors and officers of the Company are at present, as in
the past, customers of the Company, and the Company has had, and expects to have
in the future,  banking transactions in the ordinary course of its business with
directors,   officers,   principal   shareholders  and  their   associates,   on
substantially the same terms,  including interest rates and collateral on loans,
as those  prevailing at the same time for comparable  transactions  with others.
These transactions do not involve more than the normal risk of collectibility or
present other unfavorable features. The balance of loans to directors, executive
officers and their associates  totaled $2,783,606 at December 31, 1997, or 12.8%
of the Company's equity capital at that date.

         There were no transactions  during 1997 between the Company's directors
or officers and the Company's  retirement or profit sharing plans, nor are there
any proposed transactions. Additionally, there are no legal proceedings to which
any director,  officer, principal shareholder or associate is a party that would
be material and adverse to the Company.


ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K

         (a)      Exhibits.

                  3.1      Articles of  Incorporation  of Independent  Community
                           Bankshares,  Inc.  (restated in  electronic  format),
                           attached as Exhibit 3.1 to the Registration Statement
                           on Form S-4,  Registration No. 333-24523,  filed with
                           the  Commission  on April 4, 1997 (the  "Form  S-4"),
                           incorporated herein by reference.

                  3.2      Bylaws of Independent  Community  Bankshares,  Inc.,
                           attached as Exhibit 3.2 to the Form S-4, incorporated
                           herein by reference.

                  10.1     Revised Employment Agreement,  dated January 1, 1997,
                           between  The  Middleburg  Bank and Joseph L.  Boling,
                           attached   as   Exhibit   10.1  to  the   Form   S-4,
                           incorporated herein by reference.

                  21       Subsidiaries of the Registrant.

                  27       Financial Data Schedule (filed electronically only).

         (b)      Reports on Form 8-K.

                           No  reports  on Form  8-K were  filed by the  Company
                  during the last quarter of the period covered by this report.


                                      -31-
<PAGE>
                     INDEPENDENT COMMUNITY BANKSHARES, INC.

                              Middleburg, Virginia

                                FINANCIAL REPORT

                                DECEMBER 31, 1997


<PAGE>


                                 C O N T E N T S


                                                                     Page


INDEPENDENT AUDITOR'S REPORT ON THE
  CONSOLIDATED FINANCIAL STATEMENTS                                     1

FINANCIAL STATEMENTS

  Consolidated balance sheets                                           2
  Consolidated statements of income                                     3
  Consolidated statements of changes in shareholders' equity            4
  Consolidated statements of cash flows                           5 and 6
  Notes to consolidated financial statements                         7-25


<PAGE>





                          INDEPENDENT AUDITOR'S REPORT










To the Board of Directors
Independent Community Bankshares, Inc.
Middleburg, Virginia


               We have audited the accompanying  consolidated  balance sheets of
Independent Community Bankshares,  Inc. and Subsidiaries as of December 31, 1997
and  1996,  and the  related  consolidated  statements  of  income,  changes  in
shareholders'  equity and cash flows for the years ended December 31, 1997, 1996
and 1995.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.


               We conducted our audits in  accordance  with  generally  accepted
auditing  standards.  Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.


               In our opinion, the consolidated financial statements referred to
above  present  fairly,  in all material  respects,  the  financial  position of
Independent Community Bankshares,  Inc. and Subsidiaries as of December 31, 1997
and 1996,  and the  results of its  operations  and its cash flows for the years
ended December 31, 1997,  1996 and 1995, in conformity  with generally  accepted
accounting principles.




Winchester, Virginia
January 26, 1998


                                       1
<PAGE>





                     INDEPENDENT COMMUNITY BANKSHARES, INC.

                           Consolidated Balance Sheets
                           December 31, 1997 and 1996

<TABLE>
<CAPTION>

             Assets                                                                       1997                  1996
                                                                                    ---------------       ---------------


<S>                                                                                 <C>                   <C>
Cash and due from banks                                                             $     6 128 036       $     6 348 208
Interest-bearing deposits in banks                                                          455 919                29 859
Temporary investments:
  Federal funds sold                                                                      1 300 000             3 400 000
  Other money market investments                                                            725 385               141 011
Securities (fair value:  1997, $63,957,868;
  1996, $52,375,995) (Notes 1 and 2)                                                     63 695 792            52 402 253
Loans, net (Notes 1, 3, 4 and 12)                                                       103 253 407            93 710 819
Bank premises and equipment, net (Notes 1 and 5)                                          5 527 103             4 698 586
Accrued interest receivable and other assets                                              3 774 064             2 235 220
                                                                                    ---------------       ---------------

         Total assets                                                               $   184 859 706       $   162 965 956
                                                                                    ===============       ===============


   Liabilities and Shareholders' Equity

Liabilities
  Deposits:
    Noninterest-bearing demand deposits                                             $    26 601 922       $    23 242 448
    Savings and interest-bearing demand deposits                                         72 702 285            64 434 102
    Time deposits (Note 6)                                                               57 249 943            51 113 590
                                                                                    ---------------       ---------------
         Total deposits                                                             $   156 554 150       $   138 790 140

  Securities sold under agreements to repurchase                                          3 048 481             1 444 697
  Federal Home Loan Bank advances (Note 7)                                                2 800 000             4 000 000
  Accrued interest and other liabilities                                                    770 947               723 252
  Commitments and contingent liabilities (Notes 13 and 15)                                      - -                   - -
                                                                                    ---------------       ---------------
         Total liabilities                                                          $   163 173 578       $   144 958 089
                                                                                    ---------------       ---------------

Shareholders' Equity
  Common stock, par value $5 per share, authorized
    10,000,000  shares;  issued 1997, 1,812,594 shares;
    issued 1996, 859,838 shares                                                     $     9 062 970       $     4 299 190
  Capital surplus                                                                         1 948 246             1 411 174
  Retained earnings (Notes 8 and 14)                                                     10 873 617            12 816 782
  Unrealized gain (loss) on securities
    available for sale, net                                                                (198 705)             (519 279)
                                                                                    ----------------      ----------------
         Total shareholders' equity                                                 $    21 686 128       $    18 007 867
                                                                                    ---------------       ---------------

         Total liabilities and shareholders' equity                                 $   184 859 706       $   162 965 956
                                                                                    ===============       ===============

</TABLE>

See Notes to Consolidated Financial Statements.


                                       2
<PAGE>


                     INDEPENDENT COMMUNITY BANKSHARES, INC.

                        Consolidated Statements of Income
                  Years Ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>

                                                                        1997                1996                1995
                                                                   -------------       -------------       -------------
<S>                                                                <C>                 <C>                 <C>
Interest Income
  Interest and fees on loans                                       $   8 972 418       $   8 137 263       $   7 264 647
  Interest and dividends on investment securities:
    Taxable interest income                                              121 314             194 506             314 910
    Interest income exempt from federal income taxes                     686 140             588 431             620 429
  Interest and dividends on securities available for sale:
    Taxable interest income                                            2 292 662           1 786 669           1 503 322
    Interest income exempt from federal income taxes                     151 183                 - -                 - -
    Dividends                                                            280 645             267 791              13 884
  Interest on deposits in banks                                            7 970                 804                 - -
  Interest income on federal funds sold and other money
    market investments                                                   172 568             135 765             137 514
                                                                   -------------       -------------       -------------
         Total interest income                                     $  12 684 900       $  11 111 229       $   9 854 706
                                                                   -------------       -------------       -------------

Interest Expense
  Interest on deposits                                             $   4 886 480       $   4 455 684       $   4 055 755
  Interest on short-term borrowings                                      134 457               4 580               9 016
  Interest on Federal Home Loan Bank advances                            171 509             186 513              31 185
                                                                   -------------       -------------       -------------
         Total interest expense                                    $   5 192 446       $   4 646 777       $   4 095 956
                                                                   -------------       -------------       -------------

         Net interest income                                       $   7 492 454       $   6 464 452       $   5 758 750

  Provision for loan losses (Note 4)                                     177 602              65 000              54 950
                                                                   -------------       -------------       -------------

         Net interest income after provision
            for loan losses                                        $   7 314 852       $   6 399 452        $  5 703 800
                                                                   -------------       -------------       -------------


Other Income
  Service charges, commissions and fees                            $     886 720       $     676 655       $     651 327
  Trust fee income                                                       338 613              29 316                 - -
  Investment securities gain (loss)                                        2 055              (1 875)                - -
  Profits (losses) on securities available for sale, net                 (92 602)             22 496            (122 698)
  Other                                                                   14 415              15 551             165 932
                                                                   -------------       -------------       -------------
         Total other income                                        $   1 149 201       $     742 143       $     694 561
                                                                   -------------       -------------       -------------


Other Expenses
  Salaries and employees' benefits (Notes 1, 9 and 10)             $   2 863 878       $   2 532 777       $   2 163 447
  Net occupancy and equipment expense                                    593 246             561 760             433 269
  Advertising                                                            146 009             164 189             105 590
  FDIC insurance                                                          16 999               2 000             134 787
  Computer services                                                      138 138              90 062              77 728
  Other operating expenses                                             1 212 256           1 031 782           1 152 317
                                                                   -------------       -------------       -------------
         Total other expenses                                      $   4 970 526       $   4 382 570       $   4 067 138
                                                                   -------------       -------------       -------------

         Income before income taxes                                $   3 493 527       $   2 759 025       $   2 331 223

  Income tax expense (Notes 1 and 11)                                    862 167             728 079             624 729
                                                                   -------------       -------------       -------------

         Net income                                                $   2 631 360       $   2 030 946       $   1 706 494
                                                                   =============       =============       =============

Earnings per Share, basic and diluted (Note 1)                     $        1.51       $        1.18       $         .96
                                                                   =============       =============       =============
</TABLE>

See Notes to Consolidated Financial Statements.



                                       3
<PAGE>





                     INDEPENDENT COMMUNITY BANKSHARES, INC.

           Consolidated Statements of Changes in Shareholders' Equity
                  Years Ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>


                                                                                                 Unrealized
                                                                                                 Gain (Loss)
                                                                                                on Securities
                                          Common          Capital            Retained           Available for
                                           Stock           Surplus            Earnings            Sale, Net        Total
                                           -----           -------            --------            ---------        -----


<S>                                    <C>              <C>               <C>              <C>                <C>
Balance, December 31, 1994             $ 4 468 415      $  2 180 971      $  10 509 004    $   (1 498 139)   $   15 660 251
  Net income - 1995                            - -               - -          1 706 494                - -        1 706 494
  Cash dividends - 1995
    ($0.40 per share)                          - -               - -          (707 398)                - -        (707 398)
  Purchase of common stock
    (36,162 shares)                      (180 810)         (831 726)                - -                - -      (1 012 536)
  Sale of common stock
    (2,317 shares)                          11 585            61 929                - -                - -           73 514
  Change in unrealized gain
    (loss) on securities available
    for sale, net of deferred
    income taxes of $669,740                   - -               - -                - -          1 232 296        1 232 296
                                      ------------     -------------      -------------       ------------    -------------
Balance, December 31, 1995            $  4 299 190     $   1 411 174      $  11 508 100    $     (265 843)    $  16 952 621
  Net income - 1996                            - -               - -          2 030 946                - -        2 030 946
  Cash dividends - 1996
    ($0.42 per share)                          - -               - -          (722 264)                - -        (722 264)
  Change in unrealized gain
    (loss) on securities available
    for sale, net of deferred
    income taxes of $130,558                   - -               - -                - -          (253 436)        (253 436)
                                      ------------     -------------      -------------       ------------    -------------
Balance, December 31, 1996            $  4 299 190     $   1 411 174     $   12 816 782    $     (519 279)  $    18 007 867
  Net income - 1997                            - -               - -          2 631 360                - -        2 631 360
  Cash dividends - 1997
    ($0.32 per share)                          - -               - -          (574 525)                - -        (574 525)
  Purchase of common stock
    (22,691 shares)                      (113 455)         (521 893)                - -                - -        (635 348)
  Issuance of common stock -
    stock split effected in the
    form of 100% stock dividend
    (906,297 shares)                     4 531 485       (4 531 485)                - -                - -              - -
  Issuance of common stock in
    acquisition of subsidiary
    (69,150 shares) (Note 8)               345 750         1 590 450                - -                - -        1 936 200
  Discretionary transfer from
    retained earnings                          - -         4 000 000        (4 000 000)                - -              - -
  Change in unrealized gain
    (loss) on securities available
    for sale, net of deferred
    income taxes of $165,144                   - -               - -                - -            320 574          320 574
                                      ------------     -------------      -------------    ---------------    -------------
Balance, December 31, 1997            $  9 062 970     $   1 948 246      $  10 873 617    $     (198 705)    $   1 686 128
                                      ============     =============      =============    ==============     =============
</TABLE>

See Notes to Consolidated Financial Statements.


                                       4
<PAGE>


                     INDEPENDENT COMMUNITY BANKSHARES, INC.

                      Consolidated Statements of Cash Flows
                  Years Ended December 31, 1997, 1996 and 1995


<TABLE>
<CAPTION>


                                                                         1997              1996                 1995
                                                                  ---------------     --------------       --------------
Cash Flows from Operating Activities
<S>                                                               <C>                 <C>                  <C>
  Net income                                                      $    2 631 360      $    2 030 946       $    1 706 494
  Adjustments to reconcile net income to net cash
    provided by operating activities:
      Depreciation                                                       396 833             301 497              251 390
      Amortization                                                        41 617              16 487               16 487
      Provision for loan losses                                          177 602              65 000               54 950
      Net (gain) loss on investment securities                           (2 055)               1 875                  - -
      Net (gain) loss on securities available for sale                    92 602            (22 496)              122 698
      Net (gain) loss on sale of assets                                    7 343                 - -              (6 437)
      Net (gain) on sale of other real estate                                - -                 - -             (97 624)
      Discount accretion and premium amortization
        on securities, net                                               180 181             157 657               69 601
      Deferred income taxes                                             (19 508)              68 349               82 137
      Changes in assets and liabilities:
        (Increase) in other assets                                     (669 146)           (289 041)            (138 836)
        Increase in other liabilities                                     57 100             195 847              226 173
              Net cash provided by operating activities           $    2 893 929      $    2 526 121       $    2 287 033
                                                                  --------------      --------------       --------------

Cash Flows from Investing Activities
  Proceeds from maturity, principal paydowns
    and calls of investment securities                            $    2 750 431      $    2 455 501       $    1 015 276
  Proceeds from maturity, principal paydowns
    and calls of securities available for sale                         2 742 602           2 149 662            1 216 149
  Proceeds from sale of securities
    available for sale                                                26 500 686          24 282 770           15 539 612
  Purchase of investment securities                                  (1 848 566)         (2 846 520)          (3 442 091)
  Purchase of securities available for sale                         (40 572 390)        (30 673 806)         (19 499 409)
  Proceeds on sale of other real estate                                      - -                 - -            1 015 000
  Proceeds from sale of equipment                                         36 335                 - -               15 000
  Purchases of bank premises and equipment                           (1 221 354)         (1 623 530)          (1 142 864)
  Net (increase) in loans                                            (9 720 190)        (13 727 421)          (1 336 510)
  Cash acquired in acquisition                                           170 858                 - -                  - -
                                                                  --------------      --------------       --------------
          Net cash (used in) investing activities                 $ (21 161 588)     $  (19 983 344)      $   (6 619 837)
                                                                  --------------      --------------       --------------
</TABLE>


See Notes to Consolidated Financial Statements.


                                       5
<PAGE>


                     INDEPENDENT COMMUNITY BANKSHARES, INC.

                      Consolidated Statements of Cash Flows
                                   (Continued)
                  Years Ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>


                                                                        1997              1996                  1995
                                                                  --------------      --------------       ---------------
<S>                                                               <C>                 <C>                  <C>
Cash Flows from Financing Activities
  Net increase (decrease) in noninterest-bearing
    and interest-bearing demand deposits and
    savings accounts                                              $   11 627 657      $    9 896 598       $   (3 681 539)
  Net increase in certificates of deposit                              6 136 353           7 371 472            7 119 273
  Increase in securities sold under agreements
    to repurchase                                                      1 603 784           1 444 697                  - -
  Proceeds from Federal Home Loan Bank advances                        2 800 000           3 000 000            3 000 000
  Repayment of Federal Home Loan Bank advances                        (4 000 000)         (2 000 000)                 - -
  Purchase of common stock                                              (635 348)                - -           (1 012 536)
  Proceeds from sale of common stock                                         - -                 - -               73 514
  Cash dividends paid                                                   (574 525)           (722 264)            (707 398)
                                                                  --------------      --------------       --------------
          Net cash provided by financing activities               $   16 957 921      $   18 990 503       $    4 791 314
                                                                  --------------      --------------       --------------

          Increase (decrease) in cash and cash equivalents        $   (1 309 738)     $    1 533 280        $      458 510

Cash and Cash Equivalents
  Beginning                                                            9 919 078           8 385 798            7 927 288
                                                                  --------------      --------------       --------------

  Ending                                                          $    8 609 340      $    9 919 078       $    8 385 798
                                                                  ==============      ==============       ==============

Supplemental Disclosures of Cash Flow Information
  Cash payments for:
    Interest paid to depositors                                   $    4 822 840      $    4 425 048       $    3 964 454
    Interest paid on short-term obligations                              131 500               4 580                9 016
    Interest paid on Federal Home Loan
      Bank advances                                                      176 242             153 894               31 185
                                                                  --------------      --------------       --------------
                                                                  $    5 130 582      $    4 583 522       $    4 004 655
                                                                  ==============      ==============       ==============

      Income taxes                                                $      849 000      $      863 723       $      272 447
                                                                  ==============      ==============       ==============

Supplemental Disclosure of Noncash Transactions
  Issuance of common stock - stock split effected in the
    form of 100% stock dividend                                   $    4 531 485      $          - -       $          - -
                                                                  ==============      ==============       ==============

  Issuance of common stock in acquisition of subsidiary           $    1 936 200      $          - -       $          - -
                                                                  ==============      ==============       ==============

  Unrealized gain (loss) on securities available for sale         $      485 718      $      (383 994)     $    1 902 036
                                                                  ==============      ===============      ==============

</TABLE>

See Notes to Consolidated Financial Statements.


                                       6
<PAGE>




                     INDEPENDENT COMMUNITY BANKSHARES, INC.

                   Notes to Consolidated Financial Statements



Note 1.        Nature of Banking Activities and Significant Accounting Policies

               Independent   Community  Bankshares'  banking  subsidiary  grants
               commercial,  financial,  agricultural,  residential  and consumer
               loans to  customers  principally  in Loudoun  County and Fauquier
               County,  Virginia.  The loan  portfolio is well  diversified  and
               generally is collateralized by assets of the customers. The loans
               are  expected to be repaid  from cash flow or  proceeds  from the
               sale  of  selected  assets  of  the  borrowers.  The  non-banking
               subsidiary   offers  a  comprehensive   range  of  fiduciary  and
               investment management services to individuals and businesses.

               The accounting and reporting  policies of the Company  conform to
               generally accepted accounting principles and to accepted practice
               within the banking industry.

                  Principles of Consolidation

                      The  consolidated   financial  statements  of  Independent
                      Community   Bankshares,    Inc.   and   its   wholly-owned
                      subsidiaries,  The  Middleburg  Bank,  The Tredegar  Trust
                      Company and Middleburg Bank Service  Corporation,  include
                      the   accounts  of  all  four   companies.   All  material
                      intercompany   balances   and   transactions   have   been
                      eliminated in consolidation.

                  Securities

                      The Company adopted FASB No. 115,  "Accounting for Certain
                      Investments in Debt and Equity Securities". This statement
                      addresses the accounting and reporting for  investments in
                      equity  securities  that have  readily  determinable  fair
                      values and for all investments in debt  securities.  Those
                      investments   are  classified  in  three   categories  and
                      accounted for as follows:

                      a.   Securities Held to Maturity

                           Securities  classified  as held to maturity are those
                           debt  securities  the Company has both the intent and
                           ability to hold to maturity  regardless of changes in
                           market  conditions,  liquidity  needs or  changes  in
                           general  economic  conditions.  These  securities are
                           carried at cost adjusted for  amortization of premium
                           and  accretion of discount,  computed by the interest
                           method over their contractual lives.

                      b.   Securities Available for Sale

                           Securities classified as available for sale are those
                           debt and equity  securities  that the Company intends
                           to hold for an  indefinite  period  of time,  but not
                           necessarily  to  maturity.  Any  decision  to  sell a
                           security  classified  as available  for sale would be
                           based  on  various  factors,   including  significant
                           movements in interest rates,  changes in the maturity
                           mix  of  the   Company's   assets  and   liabilities,
                           liquidity needs,  regulatory capital  considerations,
                           and other similar factors.  Securities  available for
                           sale are carried at fair value.  Unrealized  gains or
                           losses are  reported as  increases  or  decreases  in
                           shareholders' equity, net of the related deferred tax
                           effect.  Realized gains or losses,  determined on the
                           basis of the cost of specific  securities  sold,  are
                           included in earnings.


                                       7
<PAGE>


                   Notes to Consolidated Financial Statements


                      c.   Trading Securities

                           Trading securities,  which are generally held for the
                           short  term in  anticipation  of  market  gains,  are
                           carried at fair value.  Realized and unrealized gains
                           and losses on trading  account assets are included in
                           interest  income on trading account  securities.  The
                           Company had no trading  securities  at  December  31,
                           1997 and 1996.

                  Loans

                      Loans  are shown on the  balance  sheets  net of  unearned
                      discounts and the  allowance for loan losses.  Interest is
                      computed by methods  which result in level rates of return
                      on principal. Loans are charged off when in the opinion of
                      management  they  are  deemed  to be  uncollectible  after
                      taking  into  consideration  such  factors as the  current
                      financial  condition of the  customer  and the  underlying
                      collateral and guarantee.

                      Interest is computed on the loan  balance  outstanding for
                      all loans.

                      On January 1, 1995,  the  Company  adopted  FASB No.  114,
                      "Accounting  by Creditors for  Impairment of a Loan." This
                      statement has been amended by FASB No. 118, "Accounting by
                      Creditors for  Impairment  of a Loan - Income  Recognition
                      and Disclosures." Statement 114, as amended, requires that
                      the   impairment  of  loans  that  have  been   separately
                      identified  for  evaluation is to be measured based on the
                      present   value  of   expected   future   cash  flows  or,
                      alternatively, the observable market price of the loans or
                      the fair value of the collateral. However, for those loans
                      that are  collateral  dependent  (that is, if repayment of
                      those  loans is  expected  to be  provided  solely  by the
                      underlying   collateral)  and  for  which  management  has
                      determined   foreclosure  is  probable,   the  measure  of
                      impairment of those loans is to be based on the fair value
                      of  the  collateral.   Statement  114,  as  amended,  also
                      requires certain disclosures about investments in impaired
                      loans and the  allowance  for credit  losses and  interest
                      income recognized on loans.

                      The Company  considers all consumer  installment loans and
                      residential  mortgage loans to be homogeneous loans. These
                      loans are not subject to impairment under FASB 114. A loan
                      is  considered  impaired  when  it is  probable  that  the
                      Company  will be  unable  to  collect  all  principal  and
                      interest amounts according to the contractual terms of the
                      loan agreement. Factors involved in determining impairment
                      include,  but are not  limited  to,  expected  future cash
                      flows,  financial  condition of the borrower,  and current
                      economic  conditions.  A performing loan may be considered
                      impaired,  if  the  factors  above  indicate  a  need  for
                      impairment.  A  loan  on  nonaccrual  status  may  not  be
                      impaired  if in the process of  collection  or there is an
                      insignificant shortfall in payment. An insignificant delay
                      of less than 30 days or a shortfall of less than 5% of the
                      required principal and interest payment generally does not
                      indicate  an  impairment  situation,  if  in  management's
                      judgment  the loan will be paid in full.  Loans  that meet
                      the  regulatory  definitions of doubtful or loss generally
                      qualify as impaired loans under FASB 114.  Charge-offs for
                      impaired loans occur when the loan, or portion of the loan
                      is determined to be uncollectible,  as is the case for all
                      loans.  The  Company  had no loans  subject to FASB 114 at
                      December 31, 1997 and 1996.


                                       8
<PAGE>

                   Notes to Consolidated Financial Statements



                      Loans are placed on nonaccrual when a loan is specifically
                      determined to be impaired or when principal or interest is
                      delinquent  for 90  days  or  more.  Any  unpaid  interest
                      previously accrued on those loans is reversed from income.
                      Interest  income  generally is not  recognized on specific
                      impaired  loans unless the  likelihood  of further loss is
                      remote.  Interest  payments  received  on such  loans  are
                      applied  as a  reduction  of the loan  principal  balance.
                      Interest  income on other  nonaccrual  loans is recognized
                      only to the extent of interest payments received.

                  Allowance for Loan Losses

                      The allowance  for loan  losses is  maintained  at a level
                      which,  in  management's  judgment,  is adequate to absorb
                      credit losses inherent in the loan  portfolio.  The amount
                      of the  allowance is based on  management's  evaluation of
                      the   collectibility   of  the  loan   portfolio,   credit
                      concentrations,  trends  in  historical  loss  experience,
                      specific   impaired   loans,   and  economic   conditions.
                      Allowances  for impaired  loans are  generally  determined
                      based  on  collateral  values  or  the  present  value  of
                      estimated  cash flows.  The  allowance  is  increased by a
                      provision for loan losses, which is charged to expense and
                      reduced by charge-offs, net of recoveries.  Changes in the
                      allowances  relating  to  impaired  loans are  charged  or
                      credited  to the  provision  for loan  losses.  Because of
                      uncertainties   inherent   in  the   estimation   process,
                      management's  estimate  of credit  losses  inherent in the
                      loan portfolio and the related allowance may change in the
                      near term.

                  Bank Premises and Equipment

                      Bank  premises  and  equipment  are  stated  at cost  less
                      accumulated  depreciation.  Depreciation  of property  and
                      equipment  is computed  principally  on the  straight-line
                      method over the following estimated useful lives:

                                                              Years
                                                              -----

                           Buildings and improvements        31.5-39
                           Furniture and equipment              3-10

                      Maintenance  and repairs of  property  and  equipment  are
                      charged  to   operations   and  major   improvements   are
                      capitalized. Upon retirement, sale or other disposition of
                      property   and   equipment,   the  cost  and   accumulated
                      depreciation  are eliminated from the accounts and gain or
                      loss is included in operations.

                  Other Real Estate

                      Real  estate  acquired  by  foreclosure  is carried at the
                      lower of cost or fair market value less an  allowance  for
                      estimated  selling  expenses on the future  disposition of
                      the property.

                  Goodwill

                     Goodwill is amortized using the  straight-line  method over
                     20 years.



                                       9
<PAGE>

                   Notes to Consolidated Financial Statements


                  Income Taxes

                      Deferred taxes are provided on a liability  method whereby
                      deferred  tax  assets  are   recognized   for   deductible
                      temporary differences,  operating loss carryforwards,  and
                      tax credit  carryforwards.  Deferred tax  liabilities  are
                      recognized for taxable  temporary  differences.  Temporary
                      differences  are  the  differences  between  the  reported
                      amounts  of assets  and  liabilities  and their tax bases.
                      Deferred  tax assets are reduced by a valuation  allowance
                      when, in the opinion of management, it is more likely than
                      not that some  portion or all of the  deferred  tax assets
                      will not be realized.  Deferred tax assets and liabilities
                      are  adjusted  for the  effects of changes in tax laws and
                      rates on the date of enactment.

                  Earnings Per Share

                      In 1997, the Financial  Accounting  Standards Board issued
                      Statement  No. 128,  "Earnings  Per Share."  Statement 128
                      replaced  the  calculation  of primary  and fully  diluted
                      earnings  per share with basic and  diluted  earnings  per
                      share.  Basic  earnings  per share  excludes  any dilutive
                      effects of options,  warrants and convertible  securities.
                      Diluted   earnings  per  share  is  very  similar  to  the
                      previously  reported fully diluted earnings per share. The
                      Company had no  potential  common stock as of December 31,
                      1997,  1996  and  1995.  Computations  are  based  on  the
                      weighted average number of shares  outstanding during each
                      year  after  giving  retroactive  effect to the 100% stock
                      dividend  declared in 1997.  Weighted  average shares were
                      1,740,966,  1,719,676  and  1,778,000  for the years ended
                      1997, 1996 and 1995, respectively.

                  Pension Plan

                      The  Company  has  a  trusteed,  noncontributory,  defined
                      benefit pension plan covering substantially all full-time
                      employees.  The Company computes the net periodic  pension
                      cost   of  the  plan  in  accordance  with  FASB  No.  87,
                      "Employers' Accounting For Pensions."

                  Cash and Cash Equivalents

                      For  purposes  of  reporting  cash  flows,  cash  and cash
                      equivalents  include cash on hand, amounts due from banks,
                      other  temporary   investments  and  federal  funds  sold.
                      Generally,  federal  funds  are  purchased  and  sold  for
                      one-day periods.

                  Use of Estimates

                      The preparation of financial statements in conformity with
                      generally   accepted   accounting    principles   requires
                      management to make estimates and  assumptions  that affect
                      the  reported   amounts  of  assets  and  liabilities  and
                      disclosure of  contingent  assets and  liabilities  at the
                      date of the financial  statements and the reported amounts
                      of revenues  and  expenses  during the  reporting  period.
                      Actual results could differ from those estimates.

                  Advertising Costs

                     The Company  follows  the policy of  charging  the costs of
                     advertising to expense as incurred.


                                       10
<PAGE>


                   Notes to Consolidated Financial Statements


Note 2.        Securities

               Amortized  costs  and  fair values  of  securities  being held to
               maturity as  of  December  31, 1997 and 1996  are  summarized  as
               follows:
<TABLE>
<CAPTION>

                                                                      Gross             Gross
                                                  Amortized         Unrealized        Unrealized            Fair
                                                    Cost               Gains           (Losses)             Value
                                                ---------------   ----------------   --------------    ----------------
                                                                                 1997
                                                -----------------------------------------------------------------------
<S>                                             <C>               <C>                <C>               <C>
               U.S. Treasury securities
                 and obligations of U.S.
                 government corporations
                 and agencies                   $     2 005 491   $            - -   $      (20 626)   $      1 984 865

               Obligations of states and
                 political subdivisions              13 849 322            282 000           (1 207)         14 130 115

               Mortgage-backed securities               571 149              1 909             - -              573 058
                                                ---------------   ----------------   -------------     ----------------
                                                $    16 425 962   $        283 909   $      (21 833)   $     16 688 038
                                                ===============   ================   ==============    ================

                                                                                  1996
                                                -----------------------------------------------------------------------

               U.S. Treasury securities
                 and obligations of U.S.
                 government corporations
                 and agencies                   $     3 012 050   $            - -   $      (67 845)   $      2 944 205

               Obligations of states and
                 political subdivisions              13 396 166            106 404          (69 500)         13 433 070

               Mortgage-backed securities               957 809              9 265           (4 582)            962 492
                                                ---------------   ----------------   --------------    ----------------
                                                $    17 366 025   $        115 669   $     (141 927)   $     17 339 767
                                                ===============   ================   ==============    ================

</TABLE>

               The  amortized  cost and fair value of  securities  being held to
               maturity as of  December  31, 1997 by  contractual  maturity  are
               shown below. Maturities may differ from contractual maturities in
               mortgage-backed  securities because the mortgages  underlying the
               securities  may  be  called  or  repaid  without  any  penalties.
               Therefore,  these  securities  are not  included in the  maturity
               categories in the following maturity summary.

<TABLE>
<CAPTION>

                                                                                        Amortized          Fair
                                                                                           Cost            Value
                                                                                     ---------------   ----------------

<S>                                                                                  <C>               <C>
                      Due in one year or less                                        $     2 073 579   $      2 059 753
                      Due after one year through five years                                5 390 472          5 430 722
                      Due after five years through 10 years                                6 276 836          6 417 758
                      Due after 10 years                                                   2 113 926          2 206 747
                      Mortgage-backed securities                                             571 149            573 058
                                                                                     ---------------   ----------------
                                                                                     $    16 425 962   $     16 688 038
                                                                                     ===============   ================

</TABLE>


                                       11
<PAGE>


                   Notes to Consolidated Financial Statements




               Amortized costs and fair values of securities  available for sale
               as of December 31, 1997 and 1996, are summarized as follows:
<TABLE>
<CAPTION>

                                                                      Gross             Gross
                                                  Amortized         Unrealized        Unrealized            Fair
                                                    Cost               Gains           (Losses)             Value
                                                ---------------   ----------------   --------------    ----------------
                                                                                 1997
                                                -----------------------------------------------------------------------
<S>                                             <C>               <C>                <C>               <C>

               U.S. Treasury securities
                  and obligations of U.S.
                  government corporations
                  and agencies                  $     2 458 729   $          7 531   $       (2 930)   $      2 463 330

               Obligations of states and
                  political subdivisions             12 081 525             54 937             - -           12 136 462

               Mortgage-backed securities            29 945 864             33 893         (400 919)         29 578 838

               Corporate preferred                    2 376 980             31 766          (25 346)          2 383 400

               Other                                    707 800                - -              - -             707 800
                                                ---------------   ----------------   --------------    ----------------
                                                $    47 570 898   $        128 127   $     (429 195)   $     47 269 830
                                                ===============   ================   ==============    ================


                                                                                 1996
                                                -----------------------------------------------------------------------


               U.S. Treasury securities
                  and obligations of U.S.
                  government corporations
                  and agencies                  $     4 987 626   $            745   $      (38 408)   $      4 949 963

               Mortgage-backed securities            27 216 393             17 851         (713 390)         26 520 854

               Corporate preferred                    3 033 996              6 876          (60 461)          2 980 411

               Other                                    585 000                - -              - -             585 000
                                                ---------------   ----------------   --------------    ----------------
                                                $    35 823 015   $         25 472   $     (812 259)   $     35 036 228
                                                ===============   ================   ==============    ================
</TABLE>


               The  amortized  cost and fair value of  securities  available for
               sale as of December 31, 1997, by  contractual  maturity are shown
               below.  Maturities  may differ  from  contractual  maturities  in
               corporate and  mortgage-backed  securities because the securities
               and mortgages  underlying  the securities may be called or repaid
               without  any  penalties.  Therefore,  these  securities  are  not
               included in the maturity  categories  in the  following  maturity
               summary.



                                       12
<PAGE>



                   Notes to Consolidated Financial Statements



<TABLE>
<CAPTION>

                                                                                        Amortized           Fair
                                                                                           Cost             Value
                                                                                     ---------------   ----------------

<S>                                                                                  <C>               <C>
                      Due in one year or less                                        $       639 120   $        639 120
                      Due after one year through five years                                1 575 428          1 580 305
                      Due after five years through 10 years                                  244 181            243 905
                      Due after 10 years                                                  12 081 525         12 136 462
                      Mortgage-backed securities                                          29 945 864         29 578 838
                      Corporate preferred                                                  2 376 980          2 383 400
                      Other                                                                  707 800            707 800
                                                                                     ---------------   ----------------
                                                                                     $    47 570 898   $     47 269 830
                                                                                     ===============   ================
</TABLE>

               Proceeds from sales of securities available for sale during 1997,
               1996 and 1995  were  $26,500,686,  $24,282,770  and  $15,539,612,
               respectively.  Gross gains of $53,384,  $42,269 and  $125,906 and
               gross losses of $145,986,  $19,773 and $248,604  were realized on
               those sales, respectively.

               The carrying value of securities pledged to qualify for fiduciary
               powers,  to secure public monies as required by law and for other
               purposes  amounted to $5,945,089  and  $1,430,421 at December 31,
               1997 and 1996, respectively.


Note 3.        Loans, Net

               The composition of the net loans is as follows:
<TABLE>
<CAPTION>

                                                                                                December 31,
                                                                                     ----------------------------------
                                                                                          1997               1996
                                                                                     ---------------   ----------------
                                                                                                (in thousands)
<S>                                                                                  <C>               <C>
                  Real estate loans:
                      Construction and land development                              $         3 798   $          4 182
                      Secured by farmland                                                      2 140              2 105
                      Secured by 1-4 family residential                                       48 396             43 860
                      Other real estate loans                                                 26 054             24 774
                  Loans to farmers (except secured by real estate)                               961                891
                  Commercial and industrial loans (except those
                      secured by real estate)                                                 14 062             10 681
                  Loans to individuals for personal expenditures                               8 738              8 061
                  All other loans                                                                 88                 76
                                                                                     ---------------   ----------------
                                    Total loans                                      $       104 237   $         94 630
                  Less:    Unearned income                                                        10                 35
                           Allowance for loan losses                                             974                884
                                                                                     ---------------   ----------------
                                    Net loans                                        $       103 253   $         93 711
                                                                                     ===============   ================
</TABLE>

                                       13
<PAGE>



                   Notes to Consolidated Financial Statements





Note 4.        Allowance for Loan Losses

               Transactions in the allowance for loan losses are as follows:

<TABLE>
<CAPTION>
                                                                        1997              1996               1995
                                                                  --------------     -------------     --------------

<S>                                                               <C>                <C>               <C>
                  Balance, beginning                              $      883 536     $     866 173     $      940 081
                  Provision charged to operating expense                 177 602            65 000             54 950
                  Recoveries                                              40 235            77 523             82 860
                  Loan losses charged to the allowance                  (127 013)         (125 160)          (211 718)
                                                                  --------------     -------------     --------------
                                                                  $      974 360     $     883 536     $      866 173
                                                                  ==============     =============     ==============
</TABLE>

               Nonaccrual  loans  excluded from impaired loan  disclosure  under
               FASB 114  amounted to $242,583  and $76,227 at December  31, 1997
               and  1996,  respectively.  If  interest  on these  loans had been
               accrued,  such income would have approximated  $14,898 and $1,993
               for 1997 and 1996, respectively.


Note 5.        Bank Premises and Equipment, Net

               Bank premises and equipment consists of the following:
<TABLE>
<CAPTION>

                                                                        1997               1996
                                                                  ----------------   ---------------

<S>                                                               <C>                <C>
                  Land                                            $      1 516 423   $       989 520
                  Banking facilities                                     3 057 340         1 989 570
                  Furniture, fixtures and equipment                      3 141 736         2 706 998
                  Construction in progress and deposits
                    on equipment                                           119 261         1 028 027
                                                                  ----------------   ---------------
                                                                  $      7 834 760   $     6 714 115
                  Less accumulated depreciation                          2 307 657         2 015 529
                                                                  ----------------   ---------------
                                                                  $      5 527 103   $     4 698 586
                                                                  ================   ===============
</TABLE>

               Depreciation expense was $396,833, $301,497  and $251,390 for the
               years ended December 31,  1997, 1996 and 1995, respectively.





                                       14
<PAGE>


                   Notes to Consolidated Financial Statements




Note 6.        Deposits

                The aggregate amount of jumbo time deposits, each with a minimum
                denomination  of $100,000,  was  approximately  $17,268,984  and
                $14,012,755 in 1997 and 1996, respectively.

                At December 31, 1997, the scheduled  maturities of time deposits
                are as follows:

                           1998                         $     39 137 574
                           1999                                7 210 439
                           2000                               10 186 691
                           2001                                  266 688
                           2002 and thereafter                   448 551
                                                        ----------------
                                                        $     57 249 943
                                                        ================


Note 7.        Federal Home Loan Bank Advances

               As of  December  31,  1997 and 1996,  the  Company  had  borrowed
               $2,800,000 and $4,000,000,  respectively,  on a short-term  basis
               from its  $16,000,000  line of credit with the Federal  Home Loan
               Bank of Atlanta.  The Company has pledged  real estate  loans and
               Federal Home Loan Bank stock as collateral on these borrowings.


Note 8.        Business Combination

                On August 1, 1997,  the  Company  acquired  The  Tredegar  Trust
                Company.  The Company  issued  69,150 shares of common stock for
                all of the outstanding  shares of common stock of Tredegar.  The
                excess of the total  acquisition cost over the fair value of the
                net  assets  acquired  is being  amortized  over 20 years by the
                straight-line  method. The acquisition has been accounted for as
                a purchase and results of operations of Tredegar  since the date
                of  acquisition  are  included  in  the  consolidated  financial
                statements.


Note 9.        Stock Option Plan

                In 1997,  the Board of Directors  approved the 1997 Stock Option
                Plan  for  employees   subject  to  approval  by  the  Company's
                shareholders  at the 1998 Annual  Meeting of  Shareholders.  The
                plan allows for incentive stock options and  nonqualified  stock
                options.  300,000 shares of the Company's common stock have been
                reserved  for the issuance of stock  options  under the Employee
                Plan. The Board granted 54,000 options (subject to shareholders'
                approval of the plan) to key employees of the Bank at $17.00 per
                share.  Of the 54,000  options,  a total of 26,544  were  vested
                November 13, 1997 with the remaining  options vesting 12,548 per
                year for 1998 and 1999 and 2,360 vesting in 2000.



                                       15
<PAGE>


                   Notes to Consolidated Financial Statements



Note 10.       Employee Benefits

               The amount  charged to expense  for the  Company's  pension  plan
               totaled  $113,433,  $85,739  and  $86,294  for  the  years  ended
               December 31, 1997, 1996 and 1995, respectively. The components of
               the  pension  cost  charged  to expense  for 1997,  1996 and 1995
               consisted of the following:

<TABLE>
<CAPTION>
                                                                       1997              1996               1995
                                                                  --------------     -------------     --------------

<S>                                                               <C>                <C>               <C>
                  Service cost                                    $      120 165     $     103 203     $       86 803
                  Interest cost on projected benefit
                     obligation                                          121 209           133 703            121 361
                  Actual return on plan assets                          (140 632)         (163 858)          (134 561)
                  Net amortization and deferral                           12 691            12 691             12 691
                                                                  --------------     -------------     --------------
                                                                  $      113 433     $      85 739     $       86 294
                                                                  ==============     =============     ==============
</TABLE>

               The  following  table sets forth the plan's  funded  status as of
               September  30, 1997 and 1996,  and the amount  recognized  in the
               accompanying balance sheets as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>

                                                                       1997              1996
                                                                  ---------------    -------------
<S>                                                               <C>                <C>
                  Actuarial present value of
                    benefit obligations:
                        Vested benefits                           $    1 065 024     $     908 635
                                                                  ==============     =============
                        Accumulated benefits                      $    1 146 766     $     998 018
                                                                  ==============     =============

                        Projected benefits                        $   (1 746 565)   $   (1 425 983)
                        Plan assets at fair value                      1 840 995         1 480 340
                                                                  --------------     -------------
                        Funded status                             $       94 430     $      54 357
                        Unrecognized net loss                            125 410            88 368
                        Unrecognized net transition (asset)              (43 771)          (47 751)
                        Unrecognized prior service cost                  200 049           216 720
                                                                  --------------     -------------
                        Asset on balance sheet as of
                          September 30                            $      376 118     $     311 694
                        Fourth quarter entries, employer
                          contributions                                  177 947           181 472
                                                                  --------------     -------------
                        Asset on balance sheet as of
                          December 31                             $      554 065     $     493 166
                                                                  ==============     =============
</TABLE>

               The weighted average discount rate and rate of increase in future
               compensation  levels used in  determining  the actuarial  present
               value  of  the   benefit   obligations   were   8.5%  and   6.0%,
               respectively.  The expected  long-term  rate of  return  on  plan
               assets was 9.5%.



                                       16
<PAGE>


                   Notes to Consolidated Financial Statements




               Plan assets consist of  diversified  bond and common stock mutual
               funds.  Bond funds account for  approximately  40% of plan assets
               and equity funds approximate 60% of plan assets.

               A deferred  compensation  plan was adopted for the  President and
               Chief  Executive  Officer.  Benefits  are to be paid  in  monthly
               installments  for 15 years  following  retirement  or death.  The
               agreement  provides that if employment is terminated  for reasons
               other  than  death or  disability  prior to age 65, the amount of
               benefits would be reduced. The deferred  compensation expense for
               1997 and  1996,  based  on the  present  value of the  retirement
               benefits, was $15,809 and $15,539. The plan is unfunded. However,
               life  insurance  has been acquired on the life of the employee in
               an amount sufficient to discharge the obligation.


Note 11.       Income Taxes

               Net deferred tax assets  (liabilities)  consist of the  following
               components as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>


                                                                    1997               1996
                                                                -------------     ---------------

<S>                                                             <C>               <C>
                  Deferred tax assets:
                      Allowance for loan losses                 $     216 313     $        185 432
                      Deferred compensation                            24 655               19 280
                      Unearned loan fees                                2 159                4 607
                      Interest on nonaccrual loans                      4 819                  678
                      Loss on capital assets                           28 391                  - -
                      Securities available for sale                   102 363              267 508
                                                                -------------     ----------------
                                                                $     378 700     $        477 505
                                                                -------------     ----------------

                  Deferred tax liabilities:
                      Property and equipment                    $     287 409     $        259 774
                      Prepaid pension costs                           185 644              166 447
                                                                -------------     ----------------
                                                                $     473 053     $        426 221
                                                                -------------     ----------------

                                                                $    (94 353)     $         51 284
                                                                =============     ================
</TABLE>

               The  provision  for income taxes  charged to  operations  for the
               years ended  December  31,  1997,  1996 and 1995  consists of the
               following:
<TABLE>
<CAPTION>

                                                            1997              1996             1995
                                                        ------------     --------------   --------------

<S>                                                     <C>              <C>              <C>
                  Current tax expense                   $    881 675     $      659 730   $      542 592
                  Deferred tax expense (benefit)             (19 508)            68 349           82 137
                                                        -------------    --------------   --------------
                                                        $    862 167     $      728 079   $      624 729
                                                        ============     ==============   ==============
</TABLE>


                                       17
<PAGE>


                   Notes to Consolidated Financial Statements




               The income tax  provision  differs  from the amount of income tax
               determined by applying the U.S. federal income tax rate to pretax
               income for the years ended December 31, 1997,  1996 and 1995, due
               to the following:
<TABLE>
<CAPTION>

                                                                           1997             1996              1995
                                                                       ------------     ------------     ------------

<S>                                                                    <C>              <C>              <C>
                  Computed "expected" tax expense                      $  1 187 799     $    938 069     $    792 614
                  Increase (decrease) in income taxes
                    resulting from:
                      Tax exempt interest income                           (284 689)        (175 099)        (185 166)
                      Other, net                                            (40 943)         (34 891)          17 281
                                                                       ------------     ------------     ------------
                                                                       $    862 167     $    728 079     $    624 729
                                                                       ============     ============     ============
</TABLE>


Note 12.       Related Party Transactions

               The Company  has had,  and may be expected to have in the future,
               banking  transactions  in the  ordinary  course of business  with
               directors,  principal  officers,  their  immediate  families  and
               affiliated  companies  in which they are  principal  stockholders
               (commonly  referred  to as related  parties),  on the same terms,
               including  interest rates and collateral,  as those prevailing at
               the time for comparable  transactions with others.  These persons
               and  firms  were  indebted  to the  Company  for  loans  totaling
               $2,783,606   and   $845,656  at  December   31,  1997  and  1996,
               respectively.   During  1997,  total  principal   additions  were
               $2,386,733 and total principal payments were $448,783.


Note 13.       Contingent Liabilities and Commitments

               In the normal course of business,  there are outstanding  various
               commitments and contingent  liabilities,  which are not reflected
               in the accompanying  financial  statements.  The Company does not
               anticipate any material loss as a result of these transactions.

               See  Note  15  with   respect  to  financial   instruments   with
               off-balance-sheet risk.

               The  Company  must  maintain a reserve  against  its  deposits in
               accordance  with Regulation D of the Federal Reserve Act. For the
               final  weekly  reporting  period in the years ended  December 31,
               1997 and 1996,  the aggregate  amounts of daily average  required
               reserves   were   approximately    $1,239,000   and   $1,073,000,
               respectively.



                                       18
<PAGE>


                   Notes to Consolidated Financial Statements



Note 14.       Retained Earnings

               Transfers  of funds  from the  banking  subsidiary  to the parent
               corporation in the form of loans, advances and cash dividends are
               restricted  by federal and state  regulatory  authorities.  As of
               December 31, 1997,  there were no unrestricted  funds which could
               be  transferred  from  the  banking   subsidiary  to  the  parent
               corporation, without prior regulatory approval.


Note 15.       Financial Instruments With Off-Balance-Sheet Risk and Credit Risk

               The   Company   is  a  party  to   financial   instruments   with
               off-balance-sheet  risk in the normal  course of business to meet
               the  financing  needs  of its  customers  and to  reduce  its own
               exposure to  fluctuations  in  interest  rates.  These  financial
               instruments  include  commitments  to extend  credit and  standby
               letters of credit. Those instruments involve, to varying degrees,
               elements of credit and interest rate risk in excess of the amount
               recognized in the balance sheet. The contract or notional amounts
               of those  instruments  reflect  the  extent  of  involvement  the
               Company has in particular classes of financial instruments.

               The   Company's   exposure   to  credit  loss  in  the  event  of
               nonperformance by the other party to the financial instrument for
               commitments  to extend  credit and  standby  letters of credit is
               represented  by  the   contractual   notional   amount  of  those
               instruments.  The Company uses the same credit policies in making
               commitments   and   conditional   obligations   as  it  does  for
               on-balance-sheet instruments.

               A summary of the  contract  or notional  amount of the  Company's
               exposure to  off-balance-sheet  risk as of December  31, 1997 and
               1996, is as follows:
<TABLE>
<CAPTION>

                                                                              1997            1996
                                                                         --------------  ----------------

<S>                                                                      <C>              <C>
               Financial  instruments  whose contract
                 amounts  represent credit risk:
                   Commitments to extend credit                          $   12 396 000   $     6 617 119
                   Standby letters of credit                             $    1 185 514   $       606 364
</TABLE>


               Commitments to extend credit are agreements to lend to a customer
               as long as there is no violation of any condition  established in
               the contract.  Commitments  generally have fixed expiration dates
               or other  termination  clauses and may require  payment of a fee.
               Since many of the  commitments  are  expected  to expire  without
               being drawn upon, the total commitment amounts do not necessarily
               represent future cash  requirements.  The Company  evaluates each
               customer's credit worthiness on a case-by-case  basis. The amount
               of collateral  obtained,  if deemed necessary by the Company upon
               extension of credit,  is based on management's  credit evaluation
               of the  counterparty.  Collateral  held  varies  but may  include
               accounts  receivable,  inventory,  property  and  equipment,  and
               income-producing commercial properties.


                                       19
<PAGE>

                   Notes to Consolidated Financial Statements



               Standby letters of credit are conditional  commitments  issued by
               the Company to guarantee the performance of a customer to a third
               party.  Those  guarantees are primarily  issued to support public
               and private borrowing  arrangements,  including commercial paper,
               bond  financing,  and  similar  transactions.   The  credit  risk
               involved in issuing  letters of credit is essentially the same as
               that involved in extending  loan  facilities  to  customers.  The
               Company  holds  real  estate  as  collateral   supporting   those
               commitments for which collateral is deemed necessary.  The extent
               of collateral  held for those  commitments  at December 31, 1997,
               varies  from  0  percent  to  100  percent;  the  average  amount
               collateralized is 30 percent.

               The Company has approximately $3,712,065 in deposits in financial
               institutions  in excess of amounts insured by the Federal Deposit
               Insurance Corporation (FDIC) at December 31, 1997.


Note 16.       Disclosures About Fair Value of Financial Instruments

               The following  methods and assumptions  were used to estimate the
               fair value of each class of financial instruments for which it is
               practicable to estimate that value:

                  Cash and Short-Term Investments

                  For those  short-term  instruments,  the carrying  amount is a
                  reasonable estimate of fair value.

                  Securities

                  For securities held for investment  purposes,  fair values are
                  based on quoted market prices or dealer quotes.

                  Loans

                  For  variable-rate  loans that reprice  frequently and with no
                  significant  change in credit  risk,  fair values are based on
                  carrying  values.   The  fair  values  for  other  loans  were
                  estimated using discounted cash flow analyses,  using interest
                  rates currently being offered.

                  Deposit Liabilities

                  The fair  value of  demand  deposits,  savings  accounts,  and
                  certain money market  deposits is the amount payable on demand
                  at the  reporting  date.  The  fair  value  of  fixed-maturity
                  certificates of deposit is estimated using the rates currently
                  offered for deposits of similar remaining maturities.

                  Short-Term Liabilities

                  For securities sold under agreements to repurchase and Federal
                  Home Loan Bank advances,  the carrying  amount is a reasonable
                  estimate of fair value.



                                       20
<PAGE>

                   Notes to Consolidated Financial Statements



                  Off-Balance-Sheet Financial Instruments

                  The fair value of  commitments  to extend  credit is estimated
                  using  the  fees  currently  charged  to  enter  into  similar
                  agreements,  taking into  account the  remaining  terms of the
                  agreements   and  the  present   credit   worthiness   of  the
                  counterparties.  For fixed-rate loan  commitments,  fair value
                  also  considers  the  difference  between  current  levels  of
                  interest rates and the committed rates.

                  The fair value of  standby  letters of credit is based on fees
                  currently  charged for similar  agreements or on the estimated
                  cost to  terminate  them or otherwise  settle the  obligations
                  with the counterparties at the reporting date.

                  At December 31, 1997 and 1996,  the carrying  amounts and fair
                  values of loan  commitments and standby letters of credit were
                  immaterial.

                  The  estimated   fair  values  of  the   Company's   financial
                  instruments are as follows:
<TABLE>
<CAPTION>

                                                                       1997                                1996
                                                         --------------------------------   -------------------------------
                                                              Carrying         Fair             Carrying          Fair
                                                                Amount         Value             Amount           Value
                                                                ------         -----             ------           -----
                                                                    (in thousands)                    (in thousands)
<S>                                                       <C>              <C>              <C>               <C>
               Financial assets:
                  Cash and short-term investments         $      8 609     $        8 609   $       9 919     $       9 919
                  Securities                                    63 696             63 958          52 402            52 376
                  Loans                                        104 227            104 562          94 595            94 878
                  Less:  allowance for loan losses                (974)               - -            (884)              - -
                                                          -------------    --------------   --------------    -------------
                      Total financial assets              $    175 558     $      177 129   $     156 032     $     157 173
                                                          ============     ==============   =============     =============

               Financial liabilities:
                  Deposits                                $    156 554     $      156 846   $     138 790     $     139 149
                  Securities sold under agreements
                  to repurchase                                  3 048              3 048           1 445             1 445
                  Federal Home Loan Bank advances                2 800              2 800           4 000             4 000
                                                          ------------     --------------   -------------     -------------
                      Total financial liabilities         $    162 402     $      162 694   $     144 235     $     144 594
                                                          ============     ==============   =============     =============
</TABLE>


Note 17.       Capital Requirements

               The Company is subject to various regulatory capital requirements
               administered  by the federal  banking  agencies.  Failure to meet
               minimum capital  requirements  can initiate  certain  mandatory -
               possibly  additional  discretionary - actions by regulators that,
               if  undertaken,  could  have  a  direct  material  effect  on the
               Company's financial statements. Under capital adequacy guidelines
               and the regulatory  framework for prompt corrective  action,  the
               Company  must  meet  specific  capital  guidelines  that  involve
               quantitative measures of the Company's assets,  liabilities,  and
               certain  off-balance-sheet  items as calculated  under regulatory
               accounting   practices.   The  Company's   capital   amounts  and
               classification  are also subject to qualitative  judgments by the
               regulators about components, risk weightings, and other factors.


                                       21
<PAGE>


                   Notes to Consolidated Financial Statements




               Quantitative measures established by regulation to ensure capital
               adequacy  require  the Company to  maintain  minimum  amounts and
               ratios (set forth in the table below) of total and Tier 1 capital
               to risk-weighted assets, and of Tier 1 capital to average assets.
               Management  believes,  as of December 31, 1997,  that the Company
               meets all capital adequacy requirements to which it is subject.

               As of June  30,  1997,  the  most  recent  notification  from the
               Federal Reserve Bank  categorized the Company as well capitalized
               under the regulatory  framework for prompt corrective  action. To
               be  categorized  as well  capitalized,  the Company must maintain
               minimum total risk-based,  Tier 1 risk-based, and Tier 1 leverage
               ratios as set forth in the  table.  There  are no  conditions  or
               events since that  notification  that  management  believes  have
               changed the institution's category.

               The  Company's   actual  capital  amounts  and  ratios  are  also
               presented in the table.

<TABLE>
<CAPTION>
                                                                                                          To Be Well
                                                                                                       Capitalized Under
                                                                          For Capital                  Prompt Corrective
                                           Actual                      Adequacy Purposes               Action Provisions
                                           ------                      -----------------               -----------------
                                    Amount        Ratio               Amount        Ratio             Amount        Ratio
                                    ------        -----               ------        -----             ------        -----
                                                                        (in thousands)
<S>                             <C>                  <C>        <C>             <C>             <C>             <C>
As of December 31, 1997:
  Total Capital (to Risk
    Weighted Assets):
      Consolidated              $    21 678          19.7%      $      8 803    $     8.0%                   N/A
      The Middleburg Bank       $    17 558          16.2%      $      8 694    $     8.0%      $     10 867    $    10.0%
  Tier 1 Capital (to Risk
    Weighted Assets):
      Consolidated              $    20 704          18.8%      $      4 401    $     4.0%                   N/A
      The Middleburg Bank       $    16 584          15.3%      $      4 347    $     4.0%      $      6 520    $     6.0%
  Tier 1 Capital (to
    Average Assets):
      Consolidated              $    20 704          11.8%      $      6 994    $     4.0%                   N/A
      The Middleburg Bank       $    16 584           9.8%      $      6 781    $     4.0%      $      8 477    $     5.0%

As of December 31, 1996:
  Total Capital (to Risk
    Weighted Assets):
      Consolidated              $    19 376          20.2%      $      7 680    $     8.0%                   N/A
      The Middleburg Bank       $    16 187          17.0%      $      7 627    $     8.0%      $      9 534    $    10.0%
  Tier 1 Capital (to Risk
    Weighted Assets):
      Consolidated              $    18 492          19.3%      $      3 840    $     4.0%                   N/A
      The Middleburg Bank       $    15 303          16.1%      $      3 813    $     4.0%      $      5 720    $     6.0%
  Tier 1 Capital (to
    Average Assets):
      Consolidated              $    18 492          11.7%      $      6 307    $     4.0%                   N/A
      The Middleburg Bank       $    15 303           9.9%      $      6 187    $     4.0%      $      7 733    $     5.0%


</TABLE>

                                       22
<PAGE>




                   Notes to Consolidated Financial Statements



Note 18.       Condensed Financial Information - Parent Company Only

                   Notes to Consolidated Financial Statements

                     INDEPENDENT COMMUNITY BANKSHARES, INC.
                            (Parent Corporation Only)

                                 Balance Sheets
                           December 31, 1997 and 1996

<TABLE>
<CAPTION>

                                                                                1997                1996
             Assets                                                             ----                ----

<S>                                                                          <C>                   <C>
Cash on deposit with subsidiary bank                                         $        1 255        $         7 387
Money market fund                                                                   713 403                141 011
Securities available for sale                                                     2 383 400              2 980 411
Investment in subsidiaries, at cost, plus
  equity in undistributed net income                                             17 343 024             14 818 885
Organizational expenses, net                                                         19 236                 35 723
Goodwill                                                                          1 181 110                    - -
Other assets                                                                         44 700                 24 450
                                                                             --------------        ---------------

               Total assets                                                  $   21 686 128        $    18 007 867
                                                                             ==============        ===============


   Liabilities and Shareholders' Equity

Liabilities                                                                  $          - -        $           - -
                                                                             --------------        ---------------


Shareholders' Equity
  Common stock                                                               $    9 062 970         $    4 299 190
  Capital surplus                                                                 1 948 246              1 411 174
  Retained earnings                                                              10 873 617             12 816 782
  Unrealized (loss) on securities available
     for sale, net                                                                 (198 705)              (519 279)
                                                                             --------------        ---------------


               Total shareholders' equity                                    $   21 686 128        $    18 007 867
                                                                             --------------        ---------------

               Total liabilities and shareholders' equity                    $   21 686 128        $    18 007 867
                                                                             ==============        ===============

</TABLE>



                                       23
<PAGE>

                   Notes to Consolidated Financial Statements


                     INDEPENDENT COMMUNITY BANKSHARES, INC.
                            (Parent Corporation Only)

                              Statements of Income
                  Years Ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>


                                                                  1997              1996              1995
                                                             -------------     --------------     -------------

<S>                                                          <C>               <C>                <C>
Income
  Dividends from subsidiary                                  $   1 201 074     $      704 000     $   4 621 374
  Dividends from investments                                       224 804            226 896               - -
  Interest                                                          13 110              5 351               - -
  Profits (losses) on securities
    available for sale, net                                        (83 503)               - -               - -
                                                             --------------    --------------     -------------
        Total income                                         $   1 355 485     $      936 247     $   4 621 374
                                                             -------------     --------------     -------------

Expenses
  Amortization                                               $      41 617     $       16 487     $      16 487
  Legal and professional fees                                       21 132             18 620             8 856
  Printing and supplies                                             17 270              8 818             8 601
  Other                                                                889              1 124             1 174
                                                             -------------     --------------     -------------
        Total expenses                                       $      80 908     $       45 049     $      35 118
                                                             -------------     --------------     -------------

        Income before allocated tax benefits and
          undistributed income of subsidiaries               $   1 274 577     $      891 198     $   4 586 256

Income tax expense (benefit)                                       (18 659)            10 770           (11 940)
                                                             -------------     --------------     --------------

        Income before equity (deficit) in
          undistributed income of subsidiaries               $   1 293 236     $      880 428     $   4 598 196

Equity (deficit) in undistributed
  income of subsidiaries                                         1 338 124          1 150 518        (2 891 702)
                                                             -------------     --------------     --------------

        Net income                                           $   2 631 360     $    2 030 946     $   1 706 494
                                                             =============     ==============     =============


</TABLE>

                                       24
<PAGE>

                   Notes to Consolidated Financial Statements


                     INDEPENDENT COMMUNITY BANKSHARES, INC.
                            (Parent Corporation Only)

                            Statements of Cash Flows
                  Years Ended December 31, 1997, 1996 and 1995


<TABLE>
<CAPTION>

                                                                    1997                1996                1995
                                                              ----------------      -------------       -------------
<S>                                                           <C>                   <C>                 <C>
Cash Flows from Operating Activities
  Net income                                                  $      2 631 360      $   2 030 946       $  1 706 494
  Adjustments to reconcile net income to net cash
    provided by operating activities:
      Amortization                                                      41 617             16 487             16 487
      Undistributed (earnings) deficit of subsidiary               (1 338 124)        (1 150 518)          2 891 702
      Loss on sale of securities available for sale                     83 503                - -                - -
      (Increase) decrease in other assets                             (40 554)              5 709              5 009
                                                              ----------------      -------------       ------------
            Net cash provided by
              operating activities                            $      1 377 802      $     902 624       $  4 619 692
                                                              ----------------      -------------       ------------

Cash Flow from Investing Activities
  Purchase of securities available for sale                   $    (1 334 984)    $     (100 000)      $ (2 933 996)
  Proceeds from sale of securities available
    for sale                                                         1 908 497                - -                - -
  Purchase of intangibles                                            (175 182)                - -                - -
                                                              ----------------      -------------       ------------
            Net cash provided by (used in)
              investing activities                            $        398 331     $    (100 000)      $ (2 933 996)
                                                              ----------------      -------------       ------------

Cash Flows from Financing Activities
  Purchase of common stock                                    $      (635 348)    $           - -       $(1 012 536)
  Net proceeds from sale of common stock                                   - -                - -             73 514
  Cash dividends paid                                                (574 525)          (722 264)          (707 398)
                                                              ----------------     --------------      -------------
            Net cash (used in)
              financing activities                            $    (1 209 873)    $     (722 264)     $  (1 646 420)


            Increase in cash and
              cash equivalents                                $        566 260     $       80 360      $      39 276

Cash and Cash Equivalents
  Beginning                                                            148 398             68 038             28 762
                                                              ----------------      -------------       ------------

  Ending                                                      $        714 658     $      148 398      $      68 038
                                                              ================      =============       ============
</TABLE>


                                       25
<PAGE>

                                   SIGNATURES

         In accordance  with Section 13 or 15(d) of the Securities  Exchange Act
of 1934,  as  amended,  the  registrant  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.


                              INDEPENDENT COMMUNITY
                                BANKSHARES, INC.



Date:  March 31, 1998             By:  /s/ Joseph L. Boling
             --                        --------------------------------------
                                       Joseph L. Boling
                                       President and Chief Executive Officer


         In accordance  with the Exchange Act, this report has been signed below
by the following  persons on behalf of the  registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>

                  Signature                                       Title                              Date


<S>                                           <C>                                               <C>
           /s/ Joseph L. Boling                      President and Chief Executive              March 31, 1998
-------------------------------------------               Officer and Director
              Joseph L. Boling                         (Principal Executive Officer)


            /s/ Alice P. Frazier              Senior Vice President and Chief Financial         March 31, 1998
-------------------------------------------       Officer (Principal Financial and
              Alice P. Frazier                             Accounting Officer)


-------------------------------------------                     Director                        March __, 1998
             Howard M. Armfield

           /s/ Childs Frick Burden
-------------------------------------------                     Director                        March 31, 1998
             Childs Frick Burden


-------------------------------------------                     Director                        March __, 1998
            J. Lynn Cornwell, Jr.

            /s/ William F. Curtis
-------------------------------------------                     Director                        March 31, 1998
              William F. Curtis

             /s/ F.E. Deacon III
-------------------------------------------                     Director                        March 31, 1998
               F.E. Deacon III

         /s/ George A. Horkan, Jr.
-------------------------------------------                     Director                        March 31, 1998
            George A. Horkan, Jr.

         /s/ C. Oliver Iselin, III
-------------------------------------------                     Director                        March 31, 1998
            C. Oliver Iselin, III

            /s/ William S. Leach
-------------------------------------------                     Director                        March 31, 1998
              William S. Leach


-------------------------------------------                     Director                        March __, 1998
               Thomas W. Nalls


-------------------------------------------                     Director                        March __, 1998
               John C. Palmer


-------------------------------------------                     Director                        March __, 1998
                John Sherman


-------------------------------------------                     Director                        March __, 1998
              Millicent W. West

            /s/ Edward T. Wright
-------------------------------------------                     Director                        March 31, 1998
              Edward T. Wright

</TABLE>


<PAGE>

                               INDEX TO EXHIBITS


        3.1      Articles of  Incorporation  of Independent  Community
                 Bankshares,  Inc.  (restated in  electronic  format),
                 attached as Exhibit 3.1 to the Registration Statement
                 on Form S-4,  Registration No. 333-24523,  filed with
                 the  Commission  on April 4, 1997 (the  "Form  S-4"),
                 incorporated herein by reference.

        3.2      Bylaws of Independent  Community  Bankshares,  Inc.,
                 attached as Exhibit 3.2 to the Form S-4, incorporated
                 herein by reference.

        10.1     Revised Employment Agreement,  dated January 1, 1997,
                 between  The  Middleburg  Bank and Joseph L.  Boling,
                 attached   as   Exhibit   10.1  to  the   Form   S-4,
                 incorporated herein by reference.

        21       Subsidiaries of the Registrant.

        27       Financial Data Schedule (filed electronically only).