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, 1998
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, 1998, was 1,553,933 shares.
INTERCOUNTY BANCSHARES, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1998, December 31, 1997
and June 30, 1997 . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Income -
Three and six Months Ended June 30, 1998
and 1997. . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Changes in
Shareholders' Equity -
Six Months Ended June 30, 1997 and 1998 . . . . . . . . .3-4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and 1997 . . . . . . . . .5
Notes to Consolidated Financial Statements . . . . . . . .6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . .9-13
Item 3. Quantitative and Qualitative Disclosures
about Market Risks. . . . . . . . . . . . . . . . . . .13
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 14
Item 2. Changes in Securities and Use of Proceeds . . . . . . . 14
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Security Holders . . 14
Item 5. Other Information . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . 14
Part I - Financial Information
Item 1. Financial Statements
INTERCOUNTY BANCSHARES, INC. and
THE NATIONAL BANK & TRUST COMPANY
CONSOLIDATED BALANCE SHEETS
At June 30, 1998, December 31, 1997 and June 30, 1997
(thousands)
June 30, December 31, June 30,
1998 1997 1997
(unaudited) (a) (unaudited)
ASSETS:
Cash and due from banks $ 16,985 $ 17,787 $ 16,919
Federal funds sold 3,235 4,176 2,962
Other short-term investments 1,480 1,538 26
------- ------- -------
Total cash and cash equivalents 21,700 23,501 19,907
Securities available for sale, at
market value 144,595 111,975 97,686
Securities held to maturity (market
value-$22,559, $11,624, and $7,457) 22,198 11,164 7,054
------- ------- -------
Total securities 166,793 123,139 104,740
Loans 283,416 277,711 278,227
Less-allowance for loan losses 2,666 2,761 2,667
------- ------- -------
Net loans 280,750 274,950 275,560
Premises and equipment 10,359 10,503 9,387
Earned income receivable 3,826 3,691 3,436
Other assets 894 660 1,378
------- ------- -------
TOTAL ASSETS $484,322 $436,444 $414,408
======= ======= =======
LIABILITIES:
Demand deposits $ 38,788 $ 38,662 $ 34,022
Savings, NOW, and money market
deposits 123,241 117,552 115,194
Certificates $100,000 and over 38,066 26,899 26,658
Other time deposits 143,978 146,219 146,586
------- ------- -------
Total deposits 344,073 329,332 322,460
Short-term borrowings 93,891 62,734 49,728
Long-term debt 670 716 869
Other liabilities 2,911 2,756 2,759
------- ------- -------
TOTAL LIABILITIES 441,545 395,538 375,816
------- ------- -------
SHAREHOLDERS' EQUITY:
Preferred stock-no par value,
authorized 100,000 shares; none
issued
Common stock-no par value, authorized
3,000,000 shares; issued 1,909,475
shares 1,000 1,000 1,000
Surplus 7,606 7,462 7,385
Unearned ESOP shares, at cost (620) (620) (730)
Retained earnings 37,439 35,674 33,633
Accumulated other comprehensive
income 412 515 390
Treasury shares, at cost, 355,542
shares at June 30, 1998; 363,137
at December 31, 1997; 362,237 shares
at June 30, 1997 (3,060) (3,125) (3,086)
------- ------- -------
TOTAL SHAREHOLDERS' EQUITY 42,777 40,906 38,592
------- ------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $484,322 $436,444 $414,408
======= ======= =======
<FN>
(a) Financial information as of December 31, 1997, 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
THE NATIONAL BANK & TRUST COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(thousands)
(unaudited)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1998 1997 1998 1997
INTEREST INCOME:
Interest and fees on loans $6,127 $5,964 $12,130 $11,785
Interest on securities
available for sale:
Taxable 1,973 1,732 3,718 3,188
Non-taxable 80 - 80 -
Interest on securities held
to maturity - non-taxable 310 147 507 299
Interest on deposits in banks 11 1 18 3
Interest on federal funds sold 185 23 386 35
----- ----- ------ ------
TOTAL INTEREST INCOME 8,686 7,867 16,839 15,310
----- ----- ------ ------
INTEREST EXPENSE:
Interest on savings, NOW and
money market deposits 866 812 1,696 1,605
Interest on time certificates
$100,000 and over 500 346 876 598
Interest on other deposits 1,991 2,070 4,041 4,100
Interest on short-term borrowings 1,154 611 1,995 1,067
Interest on long-term debt 15 21 28 40
----- ----- ------ ------
TOTAL INTEREST EXPENSE 4,526 3,860 8,636 7,410
----- ----- ------ ------
NET INTEREST INCOME 4,160 4,007 8,203 7,900
PROVISION FOR LOAN LOSSES 225 200 450 400
----- ----- ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,935 3,807 7,753 7,500
----- ----- ------ ------
NON-INTEREST INCOME:
Trust services 270 216 508 414
Service charges on deposits 342 326 663 612
Other service charges and fees 78 67 155 138
Other 238 162 490 323
----- ----- ------ ------
TOTAL NON-INTEREST INCOME 928 771 1,816 1,487
----- ----- ------ ------
NON-INTEREST EXPENSES:
Salaries 1,307 1,195 2,602 2,357
Employee benefits 222 258 460 492
Equipment 300 308 592 581
Occupancy 180 164 359 335
State franchise tax 153 141 308 281
Marketing 80 66 150 135
Other 770 704 1,565 1,401
----- ----- ------ ------
TOTAL NON-INTEREST EXPENSE 3,012 2,836 6,036 5,582
----- ----- ------ ------
INCOME BEFORE INCOME TAX 1,851 1,742 3,533 3,405
INCOME TAX 489 541 998 1,058
----- ----- ------ ------
NET INCOME $ 1,362 $1,201 $ 2,535 $ 2,347
===== ===== ====== ======
Basic earnings per common share $ 0.88 $ 0.78 $ 1.65 $ 1.53
Diluted earnings per common share 0.86 0.76 1.60 1.49
Dividends declared per common share 0.25 0.19 0.50 0.38
AVERAGE SHARES OUTSTANDING:
To compute basic earnings
per common share 1,543,717 1,534,814 1,540,618 1,531,506
To computed diluted earnings
per common share 1,585,109 1,577,717 1,581,519 1,577,171
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
THE NATIONAL BANK AND TRUST COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(thousands)
(unaudited)
Retained
Unearned Earnings
ESOP Less Cost
Common Shares of Treasury
Shares Surplus at Cost Shares
Balance January 1, 1997 $1,000 $7,246 $(732) $28,810
Comprehensive
Income:
Net income 2,347
Net unrealized
loss on available-
for-sale securities,
net of tax
Total comprehensive income
Dividends declared
($.38 per share) (583)
Treasury shares purchased (128)
Stock options exercised 129 101
ESOP shares earned 10 2
----- ----- ---
Balance June 30, 1997 $1,000 $7,385 $(730)
===== ===== ====
Part I - Financial Information
(Continued)
Item 1. Financial Statements
INTERCOUNTY BANCSHARES, INC. and
THE NATIONAL BANK AND TRUST COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Continued)
(thousands)
(unaudited)
Accumulated
Other Total
Comprehensive Comprehensive Shareholders'
Income Income Equity
Balance January 1, 1997 $424 $36,748
Comprehensive
Income:
Net income $2,347 2,347
Net unrealized
loss on available-
for-sale securities,
net of tax (34) (34) (34)
-----
Total comprehensive income $2,313
=====
Dividends declared
($.38 per share) (583)
Treasury shares purchased (128)
Stock options exercised 230
ESOP shares earned 12
---- ------
Balance June 30, 1997 $390 $38,592
=== ======
-3-
Part I - Financial Information
(Continued)
Item 1. Financial Statements
INTERCOUNTY BANCSHARES, INC. and
THE NATIONAL BANK AND TRUST COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Continued)
(thousands)
(unaudited)
Retained
Unearned Earnings
ESOP Less Cost
Common Shares of Treasury
Shares Surplus at Cost Shares
Balance January 1, 1998 $1,000 $7,426 $(620) $32,549
Comprehensive
Income:
Net income 2,535
Net unrealized
loss on available-
for-sale securities,
net of tax
Total comprehensive income
Dividends declared
($.50 per share) (770)
Stock options exercised 121 65
ESOP shares earned 23
----- ----- --- ------
Balance June 30, 1998 $1,000 $7,606 $(620) $34,379
===== ===== ==== ======
Part I - Financial Information
(Continued)
Item 1. Financial Statements
INTERCOUNTY BANCSHARES, INC. and
THE NATIONAL BANK AND TRUST COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Continued)
(thousands)
(unaudited)
Accumulated
Other Total
Comprehensive Comprehensive Shareholders'
Income Income Equity
Balance January 1, 1998 $515 $40,906
Comprehensive
Income:
Net income $2,535 2,535
Net unrealized
loss on available-
for-sale securities,
net of tax (103) (103) (103)
-----
Total comprehensive income $2,432
=====
Dividends declared
($.50 per share) (770)
Stock options exercised 186
ESOP shares earned 23
---- ------
Balance June 30, 1998 $412 $42,777
=== ======
-4-
Part I - Financial Information
(Continued)
Item 1. Financial Statements
INTERCOUNTY BANCSHARES, INC. and
THE NATIONAL BANK & TRUST COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(unaudited)
Six Months Ended
June 30
------------------
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,535 $ 2,347
Adjustments for non-cash items -
Depreciation and amortization 613 463
Provision for loan losses 450 400
Net premium amortization (discount accretion)
of securities held for sale 49 (72)
Net discount accretion of securities held to maturity (78) (66)
Increase in income receivable (135) (128)
Increase in other assets (505) (310)
Increase (decrease) in interest payable 183 (56)
Increase (decrease) in income taxes payable 384 (49)
Increase (decrease) in other accrued expenses (160) 34
FHLB stock dividends (146) (111)
----- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,190 2,452
------ -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits
in banks - 100
Proceeds from maturities of securities available
for sale 35,511 8,256
Purchases of securities available for sale (68,190) (24,443)
Proceeds from maturities of securities held to
maturity 2,340 525
Purchases of securites held to maturity (13,296) -
Net increase in loans (6,205) (9,364)
Purchases of premises and equipment (435) (1,166)
------ ------
NET CASH USED IN INVESTING ACTIVITIES (50,275) (26,092)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 14,741 13,333
Repayment of capital lease obligation (46) (45)
Net increase in short-term borrowings 31,157 18,615
Cash dividends paid (677) (505)
Proceeds from stock options exercised 109 230
Purchase of treasury shares - (128)
------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 45,284 31,500
------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,801) 7,860
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 23,501 12,047
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 21,700 $19,907
====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 8,454 $ 7,513
Income taxes paid 707 1,109
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
THE NATIONAL BANK & TRUST COMPANY
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 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 for the three and six month periods ended June 30, 1998,
and cash flows for the six month period ended June 30, 1998, are not
necessarily indicative of the results to be expected for the full year to end
December 31, 1998. 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, 1997 filed with the Commission.
Certain amounts in prior periods have been reclassified to conform to the
current presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" provides accounting and reporting standards to distinguish
transfers of financial assets that are sales from transfers that are
secured borrowings. Adoption of SFAS No. 125 had no effect on the
Company's consolidated financial position or results of operations.
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." The new rules establish standards for reporting
comprehensive income and its components in financial statements.
Comprehensive income consists of net income and other gains and losses
affecting shareholders' equity that, under generally accepted accounting
principles, are excluded from net income. For the Company, such items
consist solely of unrealized gains and losses on investment securities
available for sale. The adoption of SFAS No. 130 did not have an impact
on the Company's consolidated financial position or results of
operations, but did affect the presentation of the Company's
consolidated statement of changes in shareholders' equity and
consolidated balance sheet.
-6-
PART I. FINANCIAL INFORMATION
(Continued)
Item 1. Notes to Consolidated Financial Statements (Continued)
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" requires financial and descriptive information about
operating segments of a business. The consolidated statement
also requires companies to report revenues for each major product and
service. It is effective for fiscal years beginning after December 15,
1997. SFAS No. 131 will result in additional financial statement
disclosures, with no effect on the Company's reported consolidated
financial position or net income. SFAS No. 131 is not required for
interim financial reporting purposes during 1998. The Company is in the
process of assessing the additional disclosures, if any, required by
SFAS No. 131.
In June 1998, the Financial Accounting Standards Board issued 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.133 is effective
for all fiscal years beginning after June 15, 1999. Earlier application
is encouraged but should not be applied retroactively to financial
statements of prior periods. 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 as of July 1, 1998, 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
SFAS No. 123, "Accounting for Stock-Based Compensation," effective
January 1, 1996, encouraged, but did not require, adoption of a fair-
value based accounting method for employee stock options. Management
elected to continue to recognize compensation cost using the intrinsic-
value-based method of accounting in Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees." The nature
of the Company's agreements with optionees prior to 1997 was such that
the accounting treatment was the same under both pronouncements. Prior
to 1997, compensation cost was recorded because the Company had a
contingent obligation to repurchase the shares. During 1997, all
outstanding option agreements were revised, eliminating the Company's
contingent obligation. 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, except per
share data)
-7-
PART I. FINANCIAL INFORMATION
(Continued)
Item 1. Notes to Consolidated Financial Statements (Continued)
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
------------------ ------------------
Reported net income $1,362 $1,201 $2,535 $2,347
Proforma net income 1,358 1,197 2,527 2,339
Reported earnings per share-
assuming dilution 0.86 0.76 1.60 1.49
Proforma earnings per share-
assuming dilution 0.86 0.76 1.60 1.48
-8-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
INTERCOUNTY BANCSHARES, INC. and
THE NATIONAL BANK & TRUST COMPANY
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 OPERATION
Net income for the second quarter of 1998 was $1.36 million, an increase of
13.4% from the $1.20 million earned in the second quarter of 1997. The
primary reasons for the increase in earnings were a 3.8% increase in net
interest income and a 20.3% increase in non-interest income. This quarter
also showed a 12.5% increase in provision for loan losses and a 6.2% increase
in non-interest expense. Net income per share increased 12.8% to $.88 from
$.78 for the second quarter of 1997.
Net income for the first six months of 1998 was $2.54 million, an increase of
8.0% from the $2.35 million earned in the first six months of 1997. Net
income per share increased 7.8% to $1.65 from $1.53.
Net interest income was $4.16 million in the second quarter of 1998, 3.8%
above the second quarter of 1997. Average interest-earning assets in the
second quarter of 1998 increased $61.80 million (16.3%) to $441.73 million
from $379.93 million. The volume increase consisted primarily of $6.61
million in loans, $42.71 million in securities, and an increase of $11.81
million in federal funds sold. The average yield on interest-earning assets
decreased from 8.30% in 1998 to 7.88% in 1997.
Average interest-bearing liabilities increased 16.8% to $385.46 million in
1998 and their cost increased to 4.71% from 4.69% in the second quarter of
1997. Most of the volume growth in interest-bearing liabilities was in
additional borrowing from the Federal Home Loan Bank (FHLB) to fund purchases
of U.S. Agency mortgage-backed securities and tax-exempt municipal bonds.
Also, more aggressive bidding on certificates over $100,000 resulted in an
increase of $10.56 million in average balance, and their cost rose from 5.51%
to 5.61%. As a result, net interest margin decreased from 4.23% in the second
quarter of 1997 to 3.77% in 1998.
Net interest income for the first half of 1998 increased 3.8% from the same
period last year. Average interest-earning assets increased 14.6% from last
year, and the yield on these decreased from 8.32% to 7.99%. Average interest-
bearing liabilities increased 15.0%, while the cost increased from 4.66% to
4.72%. Net interest margin has averaged 3.89% in 1998 versus 4.29% in 1997.
The provision for loan losses increased to $225,000 for the second quarter of
1998, compared to $200,000 for the same period in 1997. Net charge-offs for
the second quarter of 1998 were .14% of average loans, compared to .07% for
the prior year.
-9-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Installment loans are generally charged off if four payments have been missed.
Generally, all other loans are placed on non-accrual status if they are 90
days or more delinquent. A loan may remain on an accrual status after it is
90 days delinquent if it is reasonably certain the account will be settled in
its entirety or brought current within a 30-day period. The current year's
accrued interest on loans placed on non-accrual status is charged against
earnings. The previous year's accrued interest is charged against the
allowance for loan losses. Cash payments received on non-accrual loans are
applied against principal until the balance is repaid. Any remaining payments
are credited to earnings. Non-performing loans include non-accrual loans,
renegotiated loans and ninety days or more past due loans. Loans that are ten
days delinquent, excluding one- to four-family real estate loans, are sent to
the Collections Department for collection. One- to four-family real estate
loans are sent when they are fifteen days delinquent. As of June 30, 1998,
management knew of no significant loans not now disclosed that would cause
management to have serious doubts as to the ability of the borrowers to comply
with present loan repayment terms.
The following table sets forth certain information regarding the past-due,
non-accrual and renegotiated loans of the Bank at the dates indicated (in
thousands):
June 30 December 31 June 30
1998 1997 1997
------- ----------- -------
Loans accounted for on
non-accrual basis $685 $509 $541
Accruing loans which are
past due 90 days or more 104 241 112
Renegotiated loans - - -
--- --- ---
Total $789 $750 $653
=== === ===
Non-accrual loans totaled $685,000 at June 30, 1998, an increase of $176,000
from December 31, 1997. This amount includes two loans totaling $115,000
collateralized by residential first mortgages, and one $42,000 loan
guaranteed by the SBA. Also included is one loan with a remaining balance
of $345,000 collateralized by receivables with a 50% chance of being
collected in full. The remaining balance of $183,000 is collateralized
by secondary mortgage positions, purchase money security interests in
automobiles and recreational vehicles and chattel filings on equipment and
fixtures. All but two are expected to be resolved this year, and those two
are expected to be long-term workouts. Management believes the value of
the related collateral, if necessary to collect the principal outstanding
limits the Bank's exposure to a potential loss of $426,000. As of June 30,
1998, management knew of no significant loans not disclosed herein that
would cause management to have serious doubts as to the ability of the
borrowers to comply with present loan repayment terms.
-10-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
At June 30, 1998, the Bank's allowance for loan losses totaled $2.67 million
and was allocated primarily to the consumer segment of the loan portfolio. A
similar allocation existed for all other dates presented. The following table
sets forth an analysis of the Bank's allowance for losses on loans for the
periods indicated (in thousands):
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
Balance, beginning of period $2,820 $2,651 $2,761 $2,686
Charge-offs:
Commercial 231 26 290 80
Residential real estate - - - -
Installment 188 194 340 351
Credit Card - 3 - 64
Other 2 4 5 5
----- ----- ----- -----
Total 421 227 635 500
----- ----- ----- -----
Recoveries:
Commercial - 2 2 2
Residential real estate - - - -
Installment 39 38 81 72
Credit Card 3 3 7 6
Other - - - 1
----- ----- ----- -----
Total 42 43 90 81
----- ----- ----- -----
Net Charge-offs (379) (184) (545) (419)
Provision for loan losses 225 200 450 400
----- ----- ----- -----
Balance, end of period $2,666 $2,667 $2,666 $2,667
===== ===== ===== =====
Non-interest income was $928,000 for the second quarter of 1998, an increase
of 20.3% from the $771,000 earned in the second quarter of 1997. Most
categories in this section have shown increases from the same quarter last
year. Trust income increased 24.8% due to an increase in the dollar amount of
assets managed. Deposit-related and other service charges were up 6.5%. Loan
related insurance and processing fees were up 21.4%. For the first half of
1998, non-interest income is up 22.2% from the same period in 1997.
-11-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Non-interest expense increased 6.2% for the second quarter 1998 over the same
period in 1997. Salaries and benefits increased 5.2% for the quarter due
mostly to an increase of 12 full-time equivalent employees. The increase was
the result of opening a new branch office in Hillsboro and additional support
staff in various areas of the Bank. Equipment expense decreased 2.4% from
last year and occupancy expense increased 10.1% for the quarter. State
franchise tax has increased 8.7% due to the increase in Bank capital on which
it is based. Other expense has increased 10.3% from the second quarter of
last year. For the first six months of the year, total non-interest expense
was up 8.1% from the same period last year.
Performance ratios for the second quarter of 1998 included a return on assets
of 1.17%, and a return on equity of 12.94%, compared to 1.20% and 12.83%,
respectively, for the second quarter of 1997. Performance ratios for the
first half of 1998 included a return on assets of 1.14%, and a return on
equity of 12.24%, compared to 1.20% and 12.68%, respectively, for the first
half of 1997.
FINANCIAL CONDITION
The changes that have occurred in InterCounty's financial condition during
1998 are as follows (in thousands):
June 30 December 31
1998 1997 Amount Percent
------- ----------- ------ -------
Total assets $484,322 $436,444 $47,878 11
Loans 283,416 277,711 5,705 2
Securities 166,793 123,139 43,654 35
Savings, NOW, MMDA
deposits 123,241 117,552 5,689 5
CD's $100,000 and over 38,066 26,899 11,167 42
Other time deposits 143,978 146,219 (2,241) (2)
FHLB borrowings 72,000 44,200 27,800 63
The loan portfolio showed little change since year end 1997 in both balance
and structure, with the growth being primarily in commercial loans. The
securities portfolio has increased $44 million due primarily to the purchase
of $20 million of U.S. Agency mortgage-backed securities and $10 million of
tax-exempt municipal securities that have been funded through a similar amount
of borrowing from the Federal Home Loan Bank at an anticipated tax equivalent
spread of 130 basis points. The rest of the increase was in purchases of U.S.
Agency callable bonds and fixed rate CMO's.
Deposit growth has occurred in interest-bearing transaction accounts and large
certificates of deposit. Large certificates are typically less than one year
in maturity and very rate sensitive.
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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 $27.53 at June 30, 1998 compared to $26.45 at
December 31, 1997. Equity to assets was 8.83% compared to 9.37% at the end of
last year.
Total assets grew 16.9% from June 30, 1997, to a total of $484.3 million.
Over the same period total loans increased to $283.4 million, an increase of
.9%. The commercial loan portfolio average grew $7.8 million (7.6%), and
continues to provide the majority of the increase in the portfolio. The
securities portfolio average has grown $34.1 million (34.7%) from the second
half of last year through purchases funded with borrowings from the FHLB.
Total deposits increased 6.7% to $344.1 million. Average non-interest-bearing
deposits increased 12.1% from the same quarter of last year. Average interest-
bearing liabilities grew $48.2 million (15.0%), of which $30.5 million was
increased FHLB borrowing. Average interest-bearing transaction accounts
increased $5.7 million (7.3%), and average retail certificates decreased $.4
million (-.3%). Total equity increased 10.8% since June 30, 1997 to $42.8
million at June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The maintenance of an adequate level of liquidity is necessary to ensure that
sufficient funds are available to meet customers' loan demand and deposit
withdrawal. InterCounty manages liquidity on both the asset and the liability
side of the balance sheet. The loan to total funds ratio at June 30, 1998
was 65%, compared to 75% for the same date in 1997. Management strives to
keep this ratio below 80%. The securities portfolio is primarily "available
for sale" securities that are readily marketable. Approximately 46% of the
portfolio is pledged to secure public deposits and for other purposes as
required by law. The balance of the "available for sale" portfolio could be
sold if necessary for liquidity purposes. A stable deposit base consisting of
90% core deposits also makes the Bank less susceptible to large fluctuations
in funding needs.
The Federal Reserve Board has adopted risk-based capital guidelines which
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, 1998, InterCounty
had a total risk-based capital ratio of 15.51%, a Tier 1 risk-based capital
ratio of 14.60%, and a Tier 1 leverage ratio of 8.86%.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
Since December 31, 1997, there have been no material changes in the Company's
market risks, which for the Company is primarily interest rate risk.
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PART II. OTHER INFORMATION
INTERCOUNTY BANCSHARES, INC. and
THE NATIONAL BANK & TRUST COMPANY
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 21, 1998, 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 2000 by the votes indicated:
FOR WITHHELD
George F. Bush 1,219,416 4,236
Charles L. Dehner 1,219,416 4,236
Georgia S. Miller 1,219,416 4,236
Timothy L. Smith 1,219,416 4,236
Item 5. Other Information
Any proposals of shareholders intended to be included in InterCounty's
proxy statement for the 1999 Annual Meeting of Shareholders should be sent
to InterCounty by certified mail and must be received by InterCounty not
later than December 7, 1998. In addition, if a shareholder intends to
present a proposal at the 1999 Annual Meeting without including the proposal
in the proxy materials related to that meeting, and if the proposal is not
received by February 17, 1999, then the proxies designated by the Board of
Directors of InterCounty for the 1999 Annual Meeting of Shareholders of
InterCounty may vote in their discretion on any such proposal any shares for
which they have been appointed proxies without mention of such matter in the
proxy statement or on the proxy card for such meeting.
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, 1998 and 1997
27 Financial Data Schedule for
the Six Months Ended
June 30, 1998.
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, 1998.
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PART II. OTHER INFORMATION
INTERCOUNTY BANCSHARES, INC. and
THE NATIONAL BANK & TRUST COMPANY
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 14, 1998 /s/ Charles L. Dehner
-----------------------------------
Charles L. Dehner
Treasurer, Executive Vice President
and Principal Accounting Officer
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