UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended June 30, 2000
Commission file number 0-23134
INTERCOUNTY BANCSHARES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 31-1004998
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
48 North South Street, Wilmington, Ohio 45177
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(937) 382-1441
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 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 the past 90 days.
Yes X No
The number of shares outstanding of the issuer's common stock, without par
value, as of August 1, 2000, was 3,203,784 shares.
INTERCOUNTY BANCSHARES, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 2000, December 31, 1999
and June 30, 1999 . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Income -
Three and six Months Ended June 30, 2000
and 1999. . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Comprehensive Income
and Changes in Shareholders' Equity -
Six Months Ended June 30, 1999 and 2000 . . . . . . . . .3-4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2000 and 1999 . . . . . . . . .5
Notes to Consolidated Financial Statements . . . . . . . .6-8
Independent Accountants' Review Report . . . . . . . . . . 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . 10-16
Item 3. Quantitative and Qualitative Disclosures
about Market Risks. . . . . . . . . . . . . . . . . . .16
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 17
Item 2. Changes in Securities and Use of Proceeds . . . . . . . 17
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . 17
Item 4. Submission of Matters to a Vote of Security Holders . . 17
Item 5. Other Information . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . 17
Part I - Financial Information
Item 1. Financial Statements
INTERCOUNTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
At June 30, 2000, December 31, 1999 and June 30, 1999
(thousands)
June 30, December 31, June 30,
2000 1999 1999
(unaudited) (a) (unaudited)
ASSETS:
Cash and due from banks $ 19,921 $ 18,813 $ 17,317
Federal funds sold 147 283 82
Interest bearing deposits in banks 1 242 58
------- ------- -------
Total cash and cash equivalents 20,069 19,338 17,457
Securities available for sale, at
market value 101,438 110,723 121,554
Securities held to maturity (market
value-$42,158, $40,412, and $37,717) 44,348 44,304 38,851
------- ------- -------
Total securities 145,786 155,027 160,405
Loans 370,818 350,955 331,830
Less-allowance for loan losses 3,508 3,222 2,806
------- ------- -------
Net loans 367,310 347,733 329,024
Loans held for sale 1,564 1,599 1,286
Premises and equipment 11,501 11,745 12,182
Earned income receivable 4,184 4,321 4,049
Other assets 2,864 2,785 2,320
------- ------- -------
TOTAL ASSETS $553,278 $542,548 $526,723
======= ======= =======
LIABILITIES:
Demand deposits $ 41,026 $ 43,715 $ 41,349
Savings, NOW, and money market
deposits 141,843 145,465 141,792
Certificates $100,000 and over 43,468 40,226 40,263
Other time deposits 162,802 150,526 145,810
------- ------- -------
Total deposits 389,139 379,932 369,214
Short-term borrowings 34,802 40,358 35,737
Long-term debt 80,431 75,431 75,539
Other liabilities 2,929 2,796 3,356
------- ------- -------
TOTAL LIABILITIES 507,301 498,517 483,846
------- ------- -------
SHAREHOLDERS' EQUITY:
Preferred shares-no par value,
authorized 100,000 shares; none
issued
Common shares-no par value,
authorized 6,000,000 shares;
issued 3,818,950 shares 1,000 1,000 1,000
Surplus 8,080 7,921 7,520
Unearned ESOP shares, at cost (406) (405) (512)
Retained earnings 44,760 43,119 41,167
Accumulated other comprehensive
income (loss), net of taxes (3,135) (3,331) (2,126)
Treasury shares, at cost, 615,166
shares at June 30, 2000; 630,636
at December 31, 1999; 674,606 shares
at June 30, 1999 (4,322) (4,273) (4,172)
------- ------- -------
TOTAL SHAREHOLDERS' EQUITY 45,977 44,031 42,877
------- ------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $553,278 $542,548 $526,723
======= ======= =======
<FN>
(a) Financial information as of December 31, 1999, has been derived from the
audited, consolidated financial statements of the Registrant.
</FN>
The accompanying notes to financial statements are an integral part of these
statements.
-1-
Part I - Financial Information
(Continued)
Item 1. Financial Statements
INTERCOUNTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(thousands, except shares and per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
2000 1999 2000 1999
INTEREST INCOME:
Interest and fees on loans $ 7,794 $6,754 $15,283 $13,305
Interest on securities
available for sale:
Taxable 1,607 1,895 3,271 3,845
Non-taxable 108 112 216 220
Interest on securities held
to maturity - non-taxable 575 484 1,155 942
Interest on deposits in banks 2 2 8 4
Interest on federal funds sold 13 9 18 34
------ ----- ------ ------
TOTAL INTEREST INCOME 10,099 9,256 19,951 18,350
------ ----- ------ ------
INTEREST EXPENSE:
Interest on savings, NOW and
money market deposits 997 929 1,959 1,842
Interest on time certificates
$100,000 and over 633 565 1,189 1,175
Interest on other deposits 2,208 1,900 4,207 3,872
Interest on short-term borrowings 460 312 976 570
Interest on long-term debt 1,150 1,038 2,216 2,062
------ ----- ------ ------
TOTAL INTEREST EXPENSE 5,448 4,744 10,547 9,521
------ ----- ------ ------
NET INTEREST INCOME 4,651 4,512 9,404 8,829
PROVISION FOR LOAN LOSSES 375 350 850 700
------ ----- ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,276 4,162 8,554 8,129
------ ----- ------ ------
NON-INTEREST INCOME:
Trust services 338 292 624 563
Service charges on deposits 460 373 839 718
Other service charges and fees 81 95 169 182
ATM network fees 175 177 336 319
Insurance agency commissions 334 251 633 458
Securities gains - 21 - 21
Other 189 260 367 483
------ ----- ------ ------
TOTAL NON-INTEREST INCOME 1,577 1,469 2,968 2,744
------ ----- ------ ------
NON-INTEREST EXPENSES:
Salaries 1,623 1,583 3,340 3,132
Employee benefits 321 263 646 523
Equipment 586 526 1,149 1,013
Occupancy 218 208 432 417
State franchise tax 101 105 239 261
Marketing 98 72 154 141
Other 1,002 943 1,949 1,811
----- ----- ------ ------
TOTAL NON-INTEREST EXPENSE 3,949 3,700 7,909 7,298
----- ----- ------ ------
INCOME BEFORE INCOME TAX 1,904 1,931 3,613 3,575
PROVISION FOR INCOME TAX 371 485 762 893
----- ----- ------ ------
NET INCOME $1,533 $1,446 $2,851 $2,682
===== ===== ===== =====
Basic earnings per common share $ 0.48 $ 0.46 $ 0.90 $ 0.85
Diluted earnings per common share 0.48 0.45 0.89 0.83
Dividends declared per common share 0.19 0.17 0.38 0.34
AVERAGE SHARES OUTSTANDING:
To compute basic earnings
per common share 3,177,706 3,164,687 3,176,384 3,163,925
To computed diluted earnings
per common share 3,206,382 3,241,716 3,210,716 3,241,413
The accompanying notes to financial statements are an integral part of these
statements.
-2-
Part I - Financial Information
(Continued)
Item 1. Financial Statements
INTERCOUNTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME and CHANGES IN SHAREHOLDERS' EQUITY
(thousands, except per share data)
(unaudited)
Retained
Unearned Earnings Accumulated
ESOP Less Cost Other Total Total
Common Shares of Treasury Comprehensive Shareholders' Comprehensive
Shares Surplus at Cost Shares Income (Loss) Equity Income
Balance January 1, 1999 $1,000 $7,368 $(511) $36,678 $ 188 $44,723
Comprehensive
Income:
Net income 2,682 2,682 $2,682
Net unrealized (losses)
on securities available
for sale (net of taxes
of $237) (2,300) (2,300) (2,300)
Reclassification adjustment
for net realized gain on
sale of available-for-sale
securities included in net
income (net of taxes of $7) (14) (14) (14)
-----
Total comprehensive income $ 368
=====
Dividends declared
($0.34 per share) (1,071) (1,071)
Treasury shares purchased (1,360) (1,360)
Stock options exercised 109 66 175
ESOP shares earned 43 (1) 42
----- ----- --- ------ ----- ------
Balance June 30, 1999 $1,000 $7,520 $(512) $36,995 $(2,126) $42,877
===== ===== === ====== ===== ======
-3-
Part I - Financial Information
(Continued)
Item 1. Financial Statements
INTERCOUNTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME and CHANGES IN SHAREHOLDERS' EQUITY (Continued)
(thousands, except per share data)
(unaudited)
Retained
Unearned Earnings Accumulated
ESOP Less Cost Other Total Total
Common Shares of Treasury Comprehensive Shareholders' Comprehensive
Shares Surplus at Cost Shares Income (Loss) Equity Income
Balance January 1, 2000 $1,000 $7,921 $(405) $38,846 $(3,331) $44,031
Comprehensive
Income:
Net income 2,851 2,851 $2,851
Net unrealized gains
on securities available
for sale (net of taxes
of $102) 196 196 196
-----
Total comprehensive income $3,047
=====
Dividends declared
($0.38 per share) (1,210) (1,210)
Treasury shares purchased (221) (221)
Stock options exercised 133 172 305
ESOP shares earned 26 (1) 25
----- ----- --- ------ ----- ------
Balance June 30, 2000 $1,000 $8,080 $(406) $40,438 $(3,135) $45,977
===== ===== === ====== ===== ======
-4-
Part I - Financial Information
(Continued)
Item 1. Financial Statements
INTERCOUNTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(unaudited)
Six Months Ended
June 30
------------------
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,851 $ 2,682
Adjustments for non-cash items -
Depreciation and amortization 733 618
Provision for loan losses 850 700
Net realized gains on securities available for sale - (21)
Net premium amortization of securities
available for sale 60 198
Net discount accretion of securities held to maturity (44) (1)
Decrease in mortgage loans held for sale 35 4,348
Decrease in income receivable 137 197
Decrease (increase) in other assets (181) 164
Increase in interest payable 201 63
Increase in income taxes payable 286 143
Decrease in other accrued expenses (258) (300)
FHLB stock dividends (198) (176)
ESOP shares earned 25 40
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,497 8,655
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available
for sale 4,770 20,322
Proceeds from sales of securities available for sale 4,951 6,357
Purchases of securities available for sale - (11,992)
Proceeds from maturities of securities held to
maturity - 1,000
Purchases of securities held to maturity - (3,018)
Net increase in loans (20,427) (27,253)
Purchases of premises and equipment (489) (1,341)
------ -------
NET CASH USED IN INVESTING ACTIVITIES (11,195) (15,925)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 9,207 (5,006)
Net increase (decrease) in short-term borrowings (5,556) 13,035
Additions to long-term debt 5,000 -
Cash dividends paid (1,143) (950)
Proceeds from stock options exercised 142 88
Purchase of treasury shares (221) (1,359)
------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,429 5,808
------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS 731 (1,462)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,338 18,919
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,069 $17,457
====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 10,346 $ 9,458
Income taxes paid 604 807
The accompanying notes to financial statements are an integral part of these
statements.
-5-
PART I. FINANCIAL INFORMATION
(Continued)
Item 1. Notes to Consolidated Financial Statements
INTERCOUNTY BANCSHARES, INC. AND SUBSIDIARY
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, the unaudited consolidated
financial statements include all adjustments (consisting of normal, recurring
accruals) considered necessary for a fair presentation of financial position,
results of operations and cash flows for the interim periods.
The financial information presented on pages 1 through 8 of this Form 10-Q
has been subject to a review by J.D. Cloud & Co. L.L.P., the Company's
independent certified public accountants, as described in their report on
page 9.
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.
Results of operations and cash flows for the six month period ended
June 30, 2000, are not necessarily indicative of the results to be expected
for the full year to end December 31, 2000. These unaudited consolidated
financial statements should be read in conjunction with the consolidated
financial statements, accounting policies and financial notes thereto
included in the Company's Annual Report and Form 10-K for the year ended
December 31, 1999 filed with the Commission.
EFFECT OF RECENT ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133" established the effective
date for the new standard as fiscal years beginning after June 15, 2000.
-6-
PART I. FINANCIAL INFORMATION
(Continued)
Item 1. Notes to Consolidated Financial Statements, continued
Currently, the Company does not hold any derivatives or conduct hedging
activities as defined by the standard. In most instances the standard, once
adopted, precludes any held-to-maturity security from being designated as a
hedged item. If the Company had adopted SFAS No. 133 in the first quarter
of 2000, the impact would have been limited to transfers, if any, of
securities from the held-to-maturity classification to available for sale.
The Company is evaluating when to adopt SFAS No. 133 and the desirability of
potential investment security reclassifications.
EMPLOYEE STOCK OPTIONS
The Company applies APB No. 25 in accounting for its stock option plans.
Had compensation expense for the Company's stock options granted after
1996 been recognized under the methodology prescribed in SFAS No. 123,
the Company's net income and earnings per share would have been impacted
as follows: (in thousands, expect per share data)
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
------------------ ------------------
Reported net income $1,533 $1,466 $2,851 $2,682
Proforma net income 1,516 1,440 2,824 2,671
Reported earnings per share-
assuming dilution .48 .45 .89 .83
Proforma earnings per share-
assuming dilution .48 .44 .89 .82
SEGMENTS
The Company has four principal business units that offer different products
and services. They are managed separately for various reasons including
differing technologies, marketing strategies, and regulations. Revenues
from these business segments were as follows: (thousands)
-7-
PART I. FINANCIAL INFORMATION
(Continued)
Item 1. Notes to Consolidated Financial Statements (Continued)
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
------------------ -----------------
Banking $10,829 $ 9,984 $21,326 $19,733
Trust services 338 292 624 563
ATM network 175 177 336 319
Insurance agencies 334 251 633 458
------ ------ ------ ------
$11,676 $10,704 $22,919 $21,073
====== ====== ====== ======
Additional reportable segment information under SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information" are not applicable
since the information as it relates solely to the banking operations would
be the same as the consolidated financial statements in all material respects.
-8-
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Shareholders and Board of Directors
InterCounty Bancshares, Inc.
We have reviewed the accompanying consolidated balance sheets of InterCounty
Bancshares, Inc. and subsidiaries as of June 30, 2000 and 1999, the
related consolidated statements of income for each of the three-month and
six-month periods ended June 30, 2000 and 1999, and the related consolidated
statements of comprehensive income and changes in shareholders' equity, and
cash flows for each of the six-month periods ended June 30, 2000 and 1999.
These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying consolidated interim financial statements
for them to be in conformity with generally accepted accounting principles.
We previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1999 (presented
herein), and the related consolidated statements of income, comprehensive
income and changes in shareholders' equity, and cash flows for the year then
ended (not presented herein), and in our report dated February 10, 2000, we
expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 1999, is fairly stated in all material
respects.
/s/ J.D. Cloud & Co. L.L.P.
Cincinnati, Ohio
August 8, 2000
-9-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
INTERCOUNTY BANCSHARES, INC. AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS
Certain matters disclosed herein may be deemed to be forward-looking
statements that involve risks and uncertainties, including regulatory policy
changes, interest rate fluctuations, loan demand, loan delinquencies and
losses, and other risks. Actual strategies and results in future time periods
may differ materially from those currently expected. Such forward-looking
statements represent the Company's judgment as of the current date. The
Company disclaims, however, any intent or obligation to update such forward-
looking statements. See Exhibit 99 attached hereto, which is incorporated
herein by reference.
RESULTS OF OPERATIONS
Net income for the second quarter of 2000 was $1.53 million, an increase of
6.0% from the $1.45 million earned in the second quarter of 1999. Net income
per share-basic was $.48, compared to $.46 per share, an increase of 4.3%.
The primary reason for the increase in earnings was a 3.1% increase in net
interest income during the second quarter of 2000 from the second quarter of
1999. This quarter also showed an increase of 7.3% in non-interest income, a
7.2% increase in provision for loan losses, and a 6.7% increase in non-
interest expense from the second quarter of 1999.
Net income for the first six months of 2000 was $2.85 million, an increase of
6.3% from the $2.68 million earned in the first six months of 1999. Basic net
income per share also increased 5.9% to $.90 from $.85.
Net interest income was $4.65 million, 3.1% above the second quarter of 1999.
Average loans increased 12.5%, and average securities decreased 13.5% when
compared to the same period last year, which resulted in an increase of 3.6%
in average interest-earning assets. Loan growth was concentrated in the
average amount of small business loans, up 11.0%, and the average amount of
real estate loans, up 23.4%. This change in the mix of the balance sheet
increased the tax equivalent yield on interest-earning assets from 7.72% in
the second quarter of 1999 to 8.08% in the second quarter of 2000. Average
interest-bearing liabilities increased 4.3% to $455.9 million, and their cost
increased to 4.81% from 4.40% in the second quarter of 1999. Most of the
volume growth in average interest-bearing liabilities was in retail
certificates of deposit, an $11.9 million increase, and additional long-term
borrowing, an increase of $5.0 million, to fund loan growth. As a result, tax
equivalent net interest margin decreased slightly from 3.84% in the second
quarter of 1999 to 3.82% in the second quarter of 2000.
-10-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Net interest income for the first six months of 2000 increased 6.5% from the
same period last year. Average interest-earning assets increased 3.5% from
last year, and the tax equivalent yield on these increased from 7.66% to
8.04%. Interest-bearing liabilities increased 4.1%, while the cost increased
from 4.41% to 4.68%. Tax equivalent net interest margin has averaged 3.88% in
2000 versus 3.76% in 1999.
The provision for loan losses was increased to $375,000 for the second quarter
of 2000, compared to $350,000 for the same period in 1999. Net charge-offs
for the second quarter of 2000 were .06% of average loans, compared to .10%
for the prior year. The provision for loan losses year-to-date 2000 was
$850,000, compared to $700,000 for the same period in 1999. Net charge-offs
year-to-date 2000 were .16% of average loans, compared to .17% for the prior
year. The increase in the provision is the result of the Company's continued
loan growth.
The allowance is an amount that management believes will be adequate to absorb
potential losses on existing loans that may become uncollectible. This
evaluation is based on prior loan loss experience and such factors as changes
in the nature and volume of the loan portfolio, overall portfolio quality,
review of specific problem loans, and current economic conditions that may
affect the borrowers' ability to pay.
The following table sets forth certain information regarding the past-due,
non-accrual and renegotiated loans of the Company at the dates indicated (in
thousands):
June 30 December 31 June 30
2000 1999 1999
------- ----------- -------
Loans accounted for on
non-accrual basis $3,047 $ 955 $576
Accruing loans which are
past due 90 days or more 608 96 93
Renegotiated loans - - -
----- ----- ---
Total $3,655 $1,051 $669
===== ===== ===
-11-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
As of June 30, 2000, the $3,047,000 in non-accrual loans consisted of twenty-
nine relationships, twenty of which are collateralized with either a first or
second mortgage. Two of the remaining relationships have partial FSA and US
Department of Agriculture government guarantees, nine are collateralized with
titled vehicles awaiting sale and the remaining are collateralized with
general chattel filings on machinery/equipment, fixtures and crops. All loans
are expected to be resolved through term payments or through liquidation of
collateral in the normal course of business. The anticipated loss in the year
2000 from all but one loan is $139,000. The remaining account is a $1,500,000
loan to Bush Leasing, Inc., a company whose primary owner is George F. Bush, a
former director of the Company. Management is unable to determine the
potential loss on this account until the Chapter 11 bankruptcy plan is
complete.
Projected losses are based on currently available information and actual
losses may differ significantly from those discussed above. In addition,
management has identified two other potential problem loans that total
$779,000. These loans, which are not included in the non-performing
categories at June 30, 2000, are defined as loans about which management,
through normal credit review procedures, has developed information regarding
possible credit problems that could cause the borrowers future difficulties
in complying with present loan repayment terms. Management knows of no other
significant potential problem loans.
At June 30, 2000, the Company's allowance for loan losses totaled $3.51
million. The following table sets forth an analysis of the Company's
allowance for losses on loans for the periods indicated (in thousands):
-12-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Six Months Ended
June 30
----------------
2000 1999
Balance, beginning of period $3,222 $2,641
Charge-offs:
Commercial 401 136
Residential real estate 2 10
Installment 318 514
Credit Card - -
Other 2 5
----- -----
Total 723 665
Recoveries:
Commercial 44 8
Residential real estate - 10
Installment 113 110
Credit Card 1 1
Other 1 1
----- -----
Total 159 130
----- -----
Net Charge-offs (564) (535)
Provision for loan losses 850 700
----- -----
Balance, end of period $3,508 $2,806
===== =====
Non-interest income was $1.58 million for the second quarter of 2000, an
increase of 7.3% from the $1.47 million earned in the second quarter of 1999.
Most categories in this section have shown increases. Trust income increased
15.7%, deposit service charges were up 23.4%, and insurance agency commissions
were up 32.8%. Loan related processing fees were down $85,000 (45.5%) due
primarily to a decreased volume in originations of fixed-rate real estate
loans in 2000, and an experience-related rebate on credit life insurance sales
of $60,000 received in 1999. For the first half of 2000 non-interest income
was up 8.2% from the same period in 1999.
-13-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Non-interest expense increased 6.7% for the quarter over the same period in
1999. Salaries and benefits increased 5.3% for the quarter due to general
wage increases and the increased cost of retirement and medical benefits.
Equipment expense increased 11.5% from last year due to the continued upgrade
of our computer network. Occupancy expense increased 4.8% for the quarter.
Other expense has increased 7.1% from the second quarter of last year. For
the first six months of the year total non-interest expense was up 8.4% from
the same period last year.
The Company's effective tax rate decreased to 19.5% during the second quarter
of 2000 from 25.1% for the second quarter of 1999, primarily due to increases
in tax-free municipal bonds in the securities portfolio.
Performance ratios for the second quarter of 2000 included a return on assets
of 1.13%, and a return on equity of 13.73%, compared to 1.10% and 12.84%,
respectively for the second quarter of 1999. Performance ratios for the first
half of 2000 included a return on assets of 1.06%, and a return on equity of
12.84%, compared to 1.04% return on assets and 12.02% return on equity for the
first half of 1999.
FINANCIAL CONDITION
The changes that have occurred in InterCounty's financial condition during
2000 are as follows (in thousands):
Change
June 30 December 31 -----------------
2000 1999 Amount Percent
------- ----------- ------ -------
Total Assets $553,278 $542,548 $10,730 2%
Loans 370,818 350,955 19,863 6
Securities 145,786 155,027 (9,241) (6)
Demand deposits 41,026 43,715 (2,689) (6)
Savings, Now, MMDA deposits 141,843 145,465 (3,622) (2)
CD's $100,000 and over 43,468 40,226 3,242 8
Other time deposits 162,802 150,526 12,276 8
Total deposits 389,139 379,932 9,207 2
Short-term borrowing 34,802 40,358 (5,556) (14)
Long-term borrowing 80,431 75,431 5,000 7
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PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Although total assets have increased slightly during 2000, the balance sheet
mix has changed somewhat. The loan portfolio grew $19.9 million since year-
end, most of the increase being in small business and real estate loans. The
growth was funded through a $9.2 million decrease in the securities portfolio
and a $9.2 million increase in deposits. The securities portfolio has
decreased because of maturities of U.S. Agency bonds and prepayments of
mortgage-backed securities. Deposit growth has occurred in both large and
small certificates, with a decrease in interest-bearing transaction accounts
and demand deposits. Short-term borrowing has been reduced as a result of an
additional $5 million in long-term borrowing.
Total assets grew 5.0% from June 30, 1999, to a total of $553.3 million.
Total loans increased to $370.8 million, an increase of 11.7% from June 30,
1999. Year to date average commercial loans grew $15.8 million (12.1%), and
average real estate loans grew $19.0 million (22.2%) from the averages for
the first six months of 1999. These areas continue to provide the majority of
increase in the portfolio. The securities portfolio average has decreased
$23.1 million (13.5%) from the first six months of last year because of
maturities, sales, and calls of U.S. Agency callable bonds, and prepayments of
mortgage-backed securities.
Total deposits increased 5.4% to $389.1 million from June 30, 1999. Average
non-interest bearing deposits increased 1.3% from the average for the first
six months of last year. Average interest-bearing liabilities grew $17.7
million (4.1%) comparing the first six months of 2000 to the first six months
of 1999. Average interest-bearing transaction accounts increased $3.6 million
(3.4%), and average large certificates decreased $3.0 million (6.7%) comparing
the same six month periods. Average total equity decreased 1.0% to $44.6
million from the first six months of last year.
At June 30, 2000 and 1999, the Company had outstanding $86.0 million and $81.0
million, respectively, of total borrowings from the Federal Home Loan Bank
(FHLB). Of the borrowings at June 30, 2000, $6.0 million have a one-year
maturity and adjust daily at the prime rate. In January 2000, a $30 million
fixed-rate note that matures in 2002 was converted to a variable-rate note
that adjusts quarterly at the three-month LIBOR rate. At the option of the
Company, this note can be prepaid in full or in part on the interest rate
adjustment date. The additional $5 million in long-term borrowing was a FHLB
fixed-rate note maturing in 2010. At the option of the FHLB, beginning in
March 2001, this note can be converted to a variable-rate instrument that
adjusts quarterly at the three-month LIBOR rate if that rate equals or exceeds
8.00%.
Book value per share was $14.35 at June 30, 2000 compared to $13.64 at June
30, 1999. Equity to assets was 8.31%, compared to 8.14% at the end of the
second quarter last year.
-15-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES
Effective liquidity management ensures that the cash flow requirements of
depositors and borrowers, as well as Company cash needs, are met. The Company
manages liquidity on both the asset and liability sides of the balance sheet.
The loan to deposit ratio at June 30, 2000, was 95.7%, compared to 90.2% at
the same date in 1999. The increase in this ratio reflects the challenge of
attracting deposits while maintaining positive loan growth. Loans to total
assets were 67.0% at the end of the second quarter of 2000, compared to 63.0%
at the same time last year. Management strives to keep this ratio below 70%.
The securities portfolio is 70% "available for sale" securities that are
readily marketable. Approximately 91% of the "available for sale" portfolio
is pledged to secure public deposits, short-term and long-term borrowings and
for other purposes as required by law. The balance of the "available for
sale" securities could be sold if necessary for liquidity purposes. Since
unrealized losses may be triggered, management has no immediate plan to sell
securities without careful evaluation of the consequences. Also, a stable
deposit base, consisting of 89% core deposits, makes the Company less
susceptible to large fluctuations in funding needs. The Company has short-
term borrowing lines of credit with several correspondent banks. The Company
also has both short- and long-term borrowing available through the Federal
Home Loan Bank (FHLB). The Company has also begun to explore deposit
opportunities in the brokered certificate of deposit market to help provide
liquidity to fund loan growth.
The Federal Reserve Board has adopted risk-based capital guidelines that
assign risk weightings to assets and off-balance sheet items and also define
and set minimum capital requirements (risk-based capital ratios). Bank
holding companies must maintain total risk-based, Tier 1 risk-based and Tier 1
leverage ratios of 8%, 4% and 3%, respectively. At June 30, 2000, InterCounty
had a total risk-based capital ratio of 14.35%, a Tier 1 risk-based capital
ratio of 13.39%, and a Tier 1 leverage ratio of 8.88%.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
Since December 31, 1999, there have been no material changes in the Company's
market risks, which for the Company is primarily interest rate risk.
-16-
PART II. OTHER INFORMATION
INTERCOUNTY BANCSHARES, INC. AND SUBSIDIARIES
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities and Use of Proceeds - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
On April 18, 2000, the Annual Meeting of the shareholders of the Company was
held. The following members of the Board of Directors of the Company were re-
elected for terms expiring in 2002 by the votes indicated:
FOR WITHHELD
Charles L. Dehner 2,380,197 0
Georgia H. Miller 2,378,197 2,000
Timothy L. Smith 2,380,197 0
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
No. Description
11 Computation of Consolidated
Earnings Per Common Share
For the Three and Six Months
Ended June 30, 2000 and 1999
15 Letter of J.D. Cloud & Co. L.L.P.
Independent Certified
Public Accountants,
dated August 8, 2000,
relating to Financial Information
27 Financial Data Schedule for
the Six Months Ended
June 30, 2000.
99 Safe Harbor Under the Private
Securities Litigation Reform Act
of 1995.
b. The Company was not required to file Form 8-K during the quarter
ended June 30, 2000.
-17-
PART II. OTHER INFORMATION
INTERCOUNTY BANCSHARES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERCOUNTY BANCSHARES, INC.
Registrant
Date: August 11, 2000 /s/ Charles L. Dehner
-----------------------------------
Charles L. Dehner
Treasurer, Executive Vice President
and Principal Accounting Officer
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