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 September 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 November 1, 2000, was 3,204,984 shares.
INTERCOUNTY BANCSHARES, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 2000, December 31, 1999
and September 30, 1999 . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Income -
Three and Nine Months Ended September 30, 2000
and 1999. . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Comprehensive Income
and Changes in Shareholders' Equity -
Nine Months Ended September 30, 1999 and 2000 . . . . . .3-4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2000 and 1999 . . . . . .5
Notes to Consolidated Financial Statements . . . . . . . .6-9
Independent Accountants' Review Report . . . . . . . . . . 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . 11-16
Item 3. Quantitative and Qualitative Disclosures
about Market Risks. . . . . . . . . . . . . . . . . .16-17
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 18
Item 2. Changes in Securities and Use of Proceeds . . . . . . . 18
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . 18
Item 4. Submission of Matters to a Vote of Security Holders . . 18
Item 5. Other Information . . . . . . . . . . . . . . . . . . . 18
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . 18
Part I - Financial Information
Item 1. Financial Statements
INTERCOUNTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
At September 30, 2000, December 31, 1999 and September 30, 1999
(thousands)
September 30, December 31, September 30,
2000 1999 1999
(unaudited) (a) (unaudited)
ASSETS:
Cash and due from banks $ 16,566 $ 18,813 $ 21,071
Federal funds sold 13,038 283 620
Interest bearing deposits in banks 77 242 14
------- ------- -------
Total cash and cash equivalents 29,681 19,338 21,705
Securities available for sale, at
market value 97,161 110,723 107,544
Securities held to maturity (market
value-$42,454, $40,412, and $39,631) 44,361 44,304 42,103
------- ------- -------
Total securities 141,522 155,027 149,647
Loans 374,158 350,955 339,980
Less-allowance for loan losses 4,002 3,222 3,071
------- ------- -------
Net loans 370,156 347,733 336,909
Loans held for sale 1,556 1,599 1,445
Premises and equipment 11,267 11,745 12,028
Earned income receivable 4,528 4,321 4,070
Other assets 12,203 2,785 2,396
------- ------- -------
TOTAL ASSETS $570,913 $542,548 $528,200
======= ======= =======
LIABILITIES:
Demand deposits $ 37,530 $ 43,715 $ 42,829
Savings, NOW, and money market
deposits 151,623 145,465 151,284
Certificates $100,000 and over 44,852 40,226 40,851
Other time deposits 170,767 150,526 148,561
------- ------- -------
Total deposits 404,772 379,932 383,525
Short-term borrowings 36,159 40,358 22,236
Long-term debt 80,431 75,431 75,539
Other liabilities 2,382 2,796 3,143
------- ------- -------
TOTAL LIABILITIES 523,744 498,517 484,443
------- ------- -------
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 8,093 7,921 7,720
Unearned ESOP shares, at cost (407) (405) (512)
Retained earnings 44,021 43,119 42,012
Accumulated other comprehensive
income (loss), net of taxes (1,224) (3,331) (2,484)
Treasury shares, at cost, 613,966
shares at September 30, 2000; 630,636
at December 31, 1999; 643,306 shares
at September 30, 1999 (4,314) (4,273) (3,979)
------- ------- -------
TOTAL SHAREHOLDERS' EQUITY 47,169 44,031 43,757
------- ------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $570,913 $542,548 $528,200
======= ======= =======
<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 Nine Months Ended
September 30, September 30,
------------------ ----------------
2000 1999 2000 1999
INTEREST INCOME:
Interest and fees on loans $ 8,118 $7,059 $23,401 $20,364
Interest on securities
available for sale:
Taxable 1,687 1,748 4,957 5,593
Non-taxable 108 108 325 328
Interest on securities held
to maturity - non-taxable 568 485 1,722 1,427
Interest on deposits in banks 1 5 10 10
Interest on federal funds sold 43 25 61 58
------ ----- ------ ------
TOTAL INTEREST INCOME 10,525 9,430 30,476 27,780
------ ----- ------ ------
INTEREST EXPENSE:
Interest on savings, NOW and
money market deposits 1,048 949 3,007 2,791
Interest on time certificates
$100,000 and over 722 550 1,911 1,725
Interest on other deposits 2,501 1,879 6,708 5,751
Interest on short-term borrowings 548 321 1,523 891
Interest on long-term debt 1,194 1,048 3,411 3,110
------ ----- ------ ------
TOTAL INTEREST EXPENSE 6,013 4,747 16,560 14,268
------ ----- ------ ------
NET INTEREST INCOME 4,512 4,683 13,916 13,512
PROVISION FOR LOAN LOSSES 725 350 1,575 1,050
------ ----- ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,787 4,333 12,341 12,462
------ ----- ------ ------
NON-INTEREST INCOME:
Trust services 333 314 957 876
Service charges on deposits 463 389 1,302 1,107
Other service charges and fees 81 101 250 283
ATM network fees 187 201 523 520
Insurance agency commissions 227 244 859 701
Securities losses, net (2,070) (390) (2,070) (368)
Other 192 186 560 670
------ ----- ------ ------
TOTAL NON-INTEREST INCOME (587) 1,045 2,381 3,789
------ ----- ------ ------
NON-INTEREST EXPENSES:
Salaries 1,435 1,638 4,775 4,770
Employee benefits 229 279 875 801
Equipment 543 512 1,692 1,525
Occupancy 214 206 646 623
State franchise tax 119 130 358 391
Marketing 112 101 266 242
Other 984 907 2,933 2,720
----- ----- ------ ------
TOTAL NON-INTEREST EXPENSE 3,636 3,773 11,545 11,072
----- ----- ------ ------
INCOME BEFORE INCOME TAX (436) 1,605 3,177 5,179
INCOME TAX (BENEFIT) PROVISION (304) 225 458 1,117
----- ----- ------ ------
NET INCOME $ (132) $1,380 $ 2,719 $ 4,062
===== ===== ===== ======
Basic earnings per common share $(0.04) $ 0.44 $ 0.85 $ 1.29
Diluted earnings per common share (0.04) 0.43 0.84 1.26
Dividends declared per common share 0.19 0.17 0.57 0.51
AVERAGE SHARES OUTSTANDING:
To compute basic earnings
per common share 3,192,988 3,136,419 3,194,260 3,154,657
To compute diluted earnings
per common share 3,207,656 3,206,239 3,206,367 3,228,350
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 4,062 4,062 $4,062
Net unrealized (losses)
on securities available
for sale (net of taxes
of $1,502) (2,915) (2,915) (2,915)
Reclassification adjustment
for net realized loss on
sale of available-for-sale
securities included in net
income (net of taxes of $125) 243 243 243
-----
Total comprehensive income $1,390
=====
Dividends declared
($0.51 per share) (1,607) (1,607)
Treasury shares purchased (1,359) (1,359)
Stock options exercised 288 259 547
ESOP shares earned 64 (1) 63
----- ----- ---- ------ ----- ------
Balance
September 30, 1999 $1,000 7,720 (512) 38,033 (2,484) $43,757
===== ===== === ====== ===== ======
-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 2,719 2,719 $2,719
Net unrealized gains
on securities available
for sale (net of taxes
of $382) 741 741 741
Reclassification
Adjustment for net
realized loss on sale
of available-for-sale
securities included in
net income (net of
tax benefit of $704) 1,366 1,366 1,366
-----
Total comprehensive income $4,826
=====
Dividends declared
($.57 per share) (1,817) (1,817)
Treasury shares purchased (221) (221)
Stock options exercised 130 180 310
ESOP shares earned 42 (2) 40
----- ----- --- ------ ----- ------
Balance
September 30, 2000 $1,000 $8,093 $(407) $39,707 $(1,224) $47,169
===== ===== === ====== ===== ======
-4-
Part I - Financial Information
(Continued)
Item 1. Financial Statements
INTERCOUNTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(unaudited)
Nine Months Ended
September 30,
------------------
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,719 $ 4,062
Adjustments for non-cash items -
Depreciation, amortization and accretion 1,129 1,202
Provision for loan losses 1,575 1,050
Net realized losses on securities available for sale 2,070 368
Decrease in mortgage loans held for sale 43 4,189
Increase (decrease) in income receivable (207) 176
Decrease (increase) in other assets (503) 273
Increase in interest payable 381 164
Decrease in income taxes payable (303) (151)
Decrease in other accrued expenses (398) (132)
FHLB stock dividends (306) (276)
ESOP shares earned 40 63
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,240 10,988
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available
for sale 7,117 23,603
Proceeds from sales of securities available for sale 40,998 23,040
Purchases of securities available for sale (33,195) (18,832)
Proceeds from maturities of securities held to
maturity - 1,000
Purchases of securities held to maturity - (6,278)
Net increase in loans (23,998) (35,488)
Purchase of bank-owned life insurance policies (10,000) -
Purchases of premises and equipment (638) (1,512)
------ -------
NET CASH USED IN INVESTING ACTIVITIES (19,716) (14,467)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 24,840 9,305
Net decrease in short-term borrowings (4,199) (466)
Advances of long-term debt 5,000 -
Cash dividends paid (1,750) (1,480)
Proceeds from stock options exercised 149 265
Purchase of treasury shares (221) (1,359)
------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 23,819 6,265
------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS 10,343 2,786
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,338 18,919
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $29,681 $21,705
====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $16,179 $14,104
Income taxes paid 888 1,317
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 9 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 10.
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 nine month period ended
September 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 three
quarters 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.
ALLOWANCE FOR LOAN LOSSES
At September 30, 2000, the Company's allowance for loan losses totaled
$4.0 million. The following table sets forth an analysis of the Company's
allowance for losses on loans for the periods indicated (in thousands):
Nine Months Ended
September 30
----------------
2000 1999
Balance, beginning of period $3,222 $2,641
Charge-offs:
Commercial 447 146
Residential real estate 2 10
Installment 536 652
Credit Card - -
Other 21 7
----- -----
Total 1,006 815
Recoveries:
Commercial 52 14
Residential real estate - 10
Installment 157 167
Credit Card 1 2
Other 1 2
----- -----
Total 211 195
----- -----
Net Charge-offs (795) (620)
Provision for loan losses 1,575 1,050
----- -----
Balance, end of period $4,002 $3,071
===== =====
-7-
PART I. FINANCIAL INFORMATION
(Continued)
Item 1. Notes to Consolidated Financial Statements, continued
Loans on which the accrual of interest had been discontinued amounted to
$2,771,000 at September 30, 2000 and $955,000 at December 31, 1999.
As of September 30, 2000 the $2,771,000 in non-accrual loans consisted of
twenty-two relationships, seventeen of which are collateralized with
mortgages on real estate. Two of the relationships have partial Farm
Service Agency and US Department of Agriculture government guarantees, a
titled unit collateralizes one, and the remaining are collateralized with
general chattel filings on machinery, equipment, inventory and fixtures.
Management expects all loans to be resolved through term payments or through
liquidation of collateral in the normal course of business. Management
anticipates a loss in the year 2000 from all but one loan is $246,000. The
remaining account is a $1,300,000 loan to Bush Leasing, Inc., a company whose
primary owner is George F. Bush, a former director of the company. The
servicing of this account has been outsourced and management is unable to
determine the potential loss on this account until the customer receivables
have been accurately recorded.
Projected losses are based on currently available information and actual
losses may differ significantly from those discussed above. In addition,
management has identified three other potential problem loans which are
not included in the non-performing categories at September 30, 2000.
Two of these loans total $766,000. These loans 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. In addition, the third identified problem loan results from
management becoming aware of business problems being experienced by a
longstanding Bank customer. The customer has outstanding loan balances with
the Bank of approximately $6.1 million, $4.3 million of which has an 80%
guarantee by a U.S. Government agency. Several meetings have taken place
with the customer with the intent of restructuring a portion of the debt.
Due to the early stages of this situation, a loss, if any, to the Bank cannot
be determined.
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)
-8-
PART I. FINANCIAL INFORMATION
(Continued)
Item 1. Notes to Consolidated Financial Statements, continued
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------------ ------------------
Reported net income $(132) $1,380 $2,719 $4,062
Proforma net income 1,375 2,677 4,046
Reported earnings per share-
assuming dilution (0.04) 0.43 0.84 1.26
Proforma earnings per share-
assuming dilution (0.05) 0.43 0.84 1.25
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,
excluding security losses, from these business segments were as follows:
(thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------------ -----------------
Banking $11,261 $10,105 $32,588 $29,840
Trust services 333 314 957 876
ATM network 187 201 523 520
Insurance agencies 227 244 859 701
------ ------ ------ ------
$12,008 $10,864 $34,927 $31,937
====== ====== ====== ======
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.
-9-
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 September 30, 2000 and 1999, the
related consolidated statements of income for each of the three-month and
nine-month periods ended September 30, 2000 and 1999, and the related
consolidated statements of comprehensive income and changes in shareholders'
equity, and cash flows for each of the nine-month periods ended September 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
November 13, 2000
-10-
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
During the third quarter of 2000 InterCounty Bancshares, Inc. recorded a net
loss of $132,000, compared to net income of $1,380,000 earned during the
third quarter of 1999. Net loss per share was $.04 for the quarter, compared
to $.44 net income per share for the same quarter last year.
In the last few days of the month of September 2000, the Company restructured
a portion of its securities portfolio and increased its provision for loan
losses. Both of these items had a significant negative impact on Company
third quarter net income and year 2000 net income.
The restructuring of the securities portfolio involved the sale of $38.0
million of long-term fixed-rate securities with a weighted average life of
7.3 years and a weighted average yield of 6.27%, resulting in an after-tax
loss of $1.37 million. A portion of the proceeds of the sale, $33.2 million,
was reinvested in similar securities with a weighted average life of 5.3
years and a weighted average yield of 7.33%. Another $10 million was used to
purchase Bank Owned Life Insurance (BOLI) with a cash surrender value that
increases during the first year at a tax-equivalent yield of 9.97% and
increases during future years at an adjustable rate.
The restructuring is expected to increase pre-tax income by $542,000 in 2001
and continue to increase earnings in future years. Another important result
of the restructuring was to reduce the interest rate risk of The National
Bank and Trust Company (Bank), the Company's wholly owned subsidiary, by
shortening the weighted average maturity of the Bank's assets and reducing
the fixed rate assets with maturities over five years as a percentage of
total assets from 31.8% on June 30, 2000 to 25.5% on September 30, 2000.
-11-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Additionally, the Bank has become aware of business problems being
experienced by a longstanding Bank customer. The customer has outstanding
loan balances with the Bank of approximately $6.1 million, $4.3 million of
which has an 80% guarantee by a U.S. Government agency. Repayment of the
portion of the $4.3 million loan that is not guaranteed and the other $1.8
million loan is uncertain. Although interest payments on the loans are
current, the Bank does not anticipate collecting all amounts due under the
contractual terms of the loan agreements. The Bank has recorded a $725,000
provision for loan losses in the third quarter, a portion of which has been
recorded in anticipation of potential losses on these loans. Due to the
early stage of this situation, the ultimate loss to the Bank, if any, cannot
be determined.
Net interest income decreased 3.6% from the third quarter of 1999 due to
rising interest rates. Excluding security losses, non-interest income
increased 3.4% due to increases in service charge income and trust income.
Partially offsetting the negative effects of the securities loss and the
additional provision for loan loss, certain performance related officer bonus
expense and retirement plan expense was reduced in the third quarter by
$350,000.
Net income for the nine months ended September 30, 2000, was $2,719,000,
compared to the $4,062,000 earned during the first nine months of 1999. Net
income per share was $.85 through September 30, 2000, compared to $1.29 per
share for the same period last year.
The third quarter of 2000 showed a decrease in net interest income of 3.6%
compared to the same quarter last year. Average loans increased 11.1% and
average securities decreased 2.7% when compared to the same period last year,
which resulted in an increase of 6.8% in average interest-earning assets.
Loan growth was concentrated in the average amount of small business loans,
up 12.3%, and the average amount of real estate loans, up 18.7%. This change
in the mix of the balance sheet increased the tax equivalent yield on
interest-earning assets from 7.76% in the third quarter of 1999 to 8.13% in
the third quarter of 2000. Average interest-bearing liabilities increased
7.8% and their cost increased from 4.31% to 5.08% when compared to the third
quarter of 1999. Most of the growth in average interest-bearing liabilities
was in retail certificates of deposit, a $21.1 million increase, and
additional short-term borrowing, an increase of $8.3 million, to fund loan
growth. Tax equivalent net interest margin decreased from 3.94% to 3.59%
during these same periods.
Net interest income for the first nine months of 2000 increased 3.0% from the
same period last year. Average interest-earning assets increased 4.6% from
last year, and the tax equivalent yield increased from 7.69% to 8.07%.
Interest-bearing liabilities increased 5.3%, while the cost increased
from 4.38% to 4.82%. Tax equivalent net interest margin has averaged 3.78%
in 2000 versus 3.82% in 1999.
-12-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The provision for loan losses was increased to $725,000 for the third quarter
of 2000, compared to $350,000 for the same period in 1999. Net charge-offs
for the third quarter of 2000 were .06% of average loans, compared to .03%
for the prior year. The provision for loan losses year-to-date 2000 was
$1,575,000, compared to $1,050,000 for the same period in 1999. Net charge-
offs year-to-date 2000 were .22% of average loans, compared to .19% for the
prior year.
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):
September 30 December 31 September 30
2000 1999 1999
------------ ----------- ------------
Loans accounted for on
non-accrual basis $2,771 $ 955 $676
Accruing loans which are
past due 90 days or more 546 96 75
Renegotiated loans - - -
----- ----- ---
Total $3,317 $1,051 $751
===== ===== ===
-13-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Non-interest income, excluding securities losses, was $1.48 million for the
third quarter of 2000, an increase of 3.4% from the $1.44 million earned in
the third quarter of 1999. Trust income increased 6.3%, and deposit service
charges were up 19.0%. For the first nine months of 2000 non-interest income
was up 7.1% from the same period in 1999.
Non-interest expense decreased 3.6% for the quarter over the same period in
1999. Salaries and benefits decreased 13.2% for the quarter due to the
adjustments to officer bonus and retirement plan expenses mentioned
above. Equipment expense increased 6.1% from last year due to the continued
upgrade of our computer network. Occupancy expense increased 3.8% for the
quarter. Other expense has increased 6.8% from the third quarter of last
year. For the first nine months of the year total non-interest expense was
up 4.3% from the same period last year.
The Company's effective tax rate decreased to 14.4% for the first nine months
of 2000 from 21.6% for the same period of 1999, primarily due to the
increases in tax-free municipal bonds in the securities portfolio.
Performance ratios for the first nine months of 2000 included a return on
assets of 0.66%, and a return on equity of 8.04%, compared to 1.04% return on
assets and 12.02% return on equity for the same period of 1999.
FINANCIAL CONDITION
The changes that have occurred in InterCounty's financial condition during
2000 are as follows (in thousands):
Change
September 30 December 31 -----------------
2000 1999 Amount Percent
------------ ----------- ------ -------
Total Assets $570,913 $542,548 $28,365 5%
Loans 374,158 350,955 23,203 7
Securities 141,522 155,027 (13,505) (9)
Demand deposits 37,530 43,715 (6,185) (14)
Savings, Now, MMDA deposits 151,623 145,465 (6,158) (4)
CD's $100,000 and over 44,852 40,226 4,626 12
Other time deposits 170,767 150,526 20,241 13
Total deposits 404,772 379,932 24,840 7
Short-term borrowing 36,159 40,358 (4,199) (10)
Long-term borrowing 80,431 75,431 5,000 7
-14-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Total assets have increased 5% during 2000, and 8.1% from September 30, 1999,
to a total of $570.9 million. The balance sheet mix has changed somewhat.
The loan portfolio grew $23.2 million since year-end, and 10.1% from
September 30, 1999, to $374.2 million, most of the increase being in small
business and real estate loans. Year to date average commercial loans grew
$16.1 million (12.1%), and average real estate loans grew $18.5 million
(21.0%) from the averages for the first nine months of 1999. These areas
continue to provide the majority of increase in the portfolio. The growth
was funded through a $13.5 million decrease in the securities portfolio and a
$24.8 million increase in deposits. The securities portfolio has decreased
because of maturities, sales, and calls of U.S. Agency callable bonds, and
prepayments of mortgage-backed securities. The securities portfolio average
has decreased $16.8 million (10.1%) from the first nine months of last year.
Average interest-bearing liabilities grew $23.1 million (5.3%) comparing the
first nine months of 2000 to the first nine months of 1999. Deposit growth
has occurred in both large and small certificates, with a decrease in
interest-bearing transaction accounts and demand deposits. Total deposits
increased 5.5% to $404.8 million from September 30, 1999. Average non-
interest bearing deposits decreased 2.0% from the average for the first nine
months of last year. Average interest-bearing transaction accounts
increased $1.8 million (1.7%), and average small certificates increased $12.3
million (8.3%) comparing the same nine month periods.
Short-term borrowing has been reduced as a result of an additional $5 million
in long-term borrowing. At September 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
September 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 $5.0 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%. Average
total equity decreased 1.5% to $45.2 million from the first nine months of
last year.
-15-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Book value per share was $14.72 at September 30, 2000 compared to $13.78 at
September 30, 1999. Equity to assets was 8.26%, compared to 8.28% at the end
of the third quarter last year.
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 September 30, 2000, was 92.4%,
compared to 88.7% 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 65.5% at the end of the third quarter of
2000, compared to 64.4% at the same time last year. Management strives to
keep this ratio below 70%. The securities portfolio is 69% "available for
sale" securities that are readily marketable. Approximately 89% 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. 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 September 30, 2000,
InterCounty had a total risk-based capital ratio of 13.75%, a Tier 1 risk-
based capital ratio of 12.70%, and a Tier 1 leverage ratio of 8.48%.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
Market risk is the risk of loss arising from adverse changes in the fair
value of financial instruments due to interest rate risk, exchange rate risk,
equity price risk and commodity price risk. The Company does not maintain a
trading account for any class of financial instrument, and is not currently
subject to foreign currency exchange rate risk, equity price risk or
commodity price risk. The Company's market risk is composed primarily of
interest rate risk.
-16-
PART I. FINANCIAL INFORMATION
(Continued)
Item 3. Quantitative and Qualitative Disclosures about Market Risks
(continued)
Techniques used to measure interest rate risk include both interest rate gap
management and simulation modeling that measures the effect of rate changes
on net interest income and market value of equity under different rate
scenarios. The securities portfolio restructure mentioned above resulted in
a significant reduction in interest rate risk. The weighted average maturity
of the portion of the securities portfolio that was sold was reduced by two
years from 7.3 years to 5.3 years. As a result the cumulative gap as a
percent of total assets through one year improved from negative 16.8% at
December 31, 1999 to negative 10.6% at September 30, 2000. Also, the Market
Value of Equity change from stable rates under an instantaneous parallel 300
basis point increase in interest rates was reduced from a negative 39.7% at
December 31, 1999, to a negative 35.8%, along with a 46% reduction in the
price sensitivity of that portion of the portfolio under the same rate
scenario.
-17-
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 - Not Applicable
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 Nine Months
Ended September 30, 2000 and 1999
15 Letter of J.D. Cloud & Co. L.L.P.
Independent Certified
Public Accountants,
dated November 13, 2000,
relating to Financial Information
27 Financial Data Schedule for
the Nine Months Ended
September 30, 2000.
99 Safe Harbor Under the Private
Securities Litigation Reform Act
of 1995.
b. On October 4, 2000, the Company filed a Form 8-K with the Securities
and Exchange Commission reporting certain events regarding its
balance sheet restructuring and adverse impact of these actions
and other matters on its third quarter results of operations.
On October 19, 2000, the Company filed a Form 8-K with the
Securities and Exchange Commission regarding a press release
issued on or about that date.
-18-
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: November 14, 2000 /s/ Charles L. Dehner
-----------------------------------
Charles L. Dehner
Treasurer, Executive Vice President
and Principal Accounting Officer
-19-