UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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
incorporation or organization) Identification Number)
48 N. South Street, Wilmington, Ohio 45177
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (513) 382-1441
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to 12(g) of the Act:
Common Shares, without par value
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The issuer's common shares are not traded on any securities exchange and are
not quoted by a national quotation service. Management is aware of a sale of
the issuer's shares for $28.00 per share on March 15, 1999. Based upon such
price, the aggregate market value of the issuer's shares held by nonaffiliates
was $54,297,152.
As of March 19, 1999, 3,190,542 common shares were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following sections of the definitive Proxy Statement for the 1999 Annual
Meeting of Shareholders of InterCounty Bancshares, Inc. (the "Proxy
Statement"), are incorporated by reference into Part III of this Form 10-K:
1. Board of Directors;
2. Executive Officers;
3. Section 16(a) Beneficial Ownership Reporting Compliance;
4. Compensation of Executive Officers and Directors;
5. Voting Securities and Ownership of Certain Beneficial Owners
and Management; and
6. Certain Relationships and Related Transactions.
INTERCOUNTY BANCSHARES, INC.
For the Year Ended December 31, 1998
Table of Contents
PART I
Page
----
Item 1: Business 3
Item 2: Properties 28
Item 3: Legal Proceedings 28
Item 4: Submission of Matters to a Vote of Security Holders 28
Part II
-------
Item 5: Market for Registrant's Common Equity and Related
Stockholder Matters 29
Item 6: Selected Financial Data 29
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations 31
Item 7A: Quantitative and Qualitative Disclosures About
Market Risk 51
Item 8: Financial Statements and Supplementary Data 52
Item 9: Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 82
Part III
--------
Item 10: Directors and Executive Officers of the Registrant 82
Item 11: Executive Compensation 82
Item 12: Security Ownership of Certain Beneficial Owners
and Management 82
Item 13: Certain Relationships and Related Transactions 82
Part IV
-------
Item 14: Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 83
Exhibit Index 84
Signatures 85
-2-
PART I
Item 1. Description of Business
GENERAL
InterCounty Bancshares, Inc. ("InterCounty"), an Ohio corporation, is a bank
holding company which owns all of the issued and outstanding common shares of
The National Bank and Trust Company, chartered under the laws of the United
States (the "Bank").
The Bank is engaged in the commercial banking business in Southwestern Ohio,
providing a variety of consumer and commercial financial services. The
primary business of the Bank consists of accepting deposits, through various
consumer and commercial deposit products, and using such deposits to fund
consumer loans, including automobile loans, loans secured by residential and
non-residential real estate, and commercial and agricultural loans. All of
the foregoing deposit and lending services are available at each of the Bank's
16 full-service offices. In addition, the Bank has one office which is
drive-in facilities only and two remote service units. The Bank has also
installed 95 cash dispensers in convenience stores as of the end of 1998.
The Bank also has a trust department which presently administers 808 accounts
having combined assets of $217 million.
On October 8, 1998, the Bank acquired all of the outstanding common shares
of Phillips Insurance Agency Group, Inc. ("Phillips Group"), the holding
company for Phillips Casualty Insurance Agency, Inc., and Phillips Life
Insurance Agency, Inc. (the "Phillips Agencies"). The shares of Phillips
Group were exchanged for 53,606 common shares of InterCounty. On December 11,
1998, the Bank acquired all of the outstanding common shares of Arnold Jones
Insurance Agency, Inc. (the "Jones Agency"), in exchange for 17,777 common
shares of InterCounty. The Phillips Agencies and the Jones Agency have
their principal offices in Blanchester, Ohio. The assets and income of
the insurance agency business were immaterial to the financial condition
and operations of InterCounty during fiscal year 1998.
On September 1, 1992, the Bank acquired Kentucky National Bank of Ohio with
two locations in Georgetown, Ohio for $3,200,000 in cash.
On December 29, 1993, InterCounty acquired the Williamsburg Building & Loan
Company, a mutual savings and loan with total assets of $17.1 million and
equity of $2.9 million. In connection with this merger conversion,
InterCounty issued 458,950 shares of its common stock, principally to
depositors and other members of Williamsburg and the general public in
subscription and community offerings.
-3-
Because of its ownership of all the outstanding stock of the Bank, InterCounty
is subject to regulation, examination and oversight by the Board of Governors
of the Federal Reserve System (the "FRB") under the Bank Holding Company Act
of 1956, as amended (the "BHCA"). The Bank, as a national bank, is subject to
regulation, examination and oversight by the Office of the Comptroller of the
Currency (the "OCC") and special examination by the FRB. The Bank is a member
of the Federal Reserve Bank of Cleveland. In addition, since its deposits are
insured by the Federal Deposit Insurance Corporation (the "FDIC"), the Bank is
also subject to some regulation, oversight and special examination by the
FDIC. The Bank must file periodic financial reports with the FDIC, the OCC
and the Federal Reserve Bank of Cleveland. Examinations are conducted
periodically by these federal regulators to determine whether the Bank and
InterCounty are in compliance with various regulatory requirements and are
operating in a safe and sound manner.
Since its incorporation in 1980, InterCounty's activities have been limited
primarily to holding the common shares of the Bank. Consequently, the
following discussion focuses primarily on the business of the Bank.
FORWARD LOOKING STATEMENTS
In addition to the historic financial information contained herein with
respect to InterCounty, the following discussion contains forward-looking
statements that involve risks and uncertainties. Economic circumstances,
InterCounty's operations and InterCounty's actual results could differ
significantly from those discussed in the forward-looking statements. Some of
the factors that could cause or contribute to such differences are discussed
herein but also include changes in the economy and interest rates in the
nation and InterCounty's general market area. The forward-looking statements
contained herein include those with respect to the following matters:
1. Management's expectation that it will continue to expand its
consumer lending activities, other than automobile loans;
2. The Bank's expected amount of loan net charge-offs and management's
determination of the adequacy of the loan loss allowance;
3. The effect of changes in interest rates;
4. Growth in the commercial and industrial loan portfolio; and
5. Management's belief that a substantial percentage of the certificates
of deposit maturing within one year will renew with the Bank at
maturity.
-4-
Lending Activities
General. The Bank's income consists primarily of interest income generated by
lending activities, including the origination of loans secured by residential
and nonresidential real estate, commercial and agricultural loans, and
consumer loans.
The following table sets forth the composition of the Bank's loan portfolio by
type of loan at the dates indicated:
At December 31,
----------------------------------------------------------
1998 1997 1996
----------------------------------------------------------
% of % of % of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Commercial and
industrial $ 78,801 26 $ 63,661 23% $ 57,985 22%
Commercial real estate 29,936 10 30,835 11 31,118 11
Agricultural 17,925 6 18,387 7 16,304 6
Residential real estate 92,069 30 82,838 30 79,761 30
Installment 83,173 27 79,115 28 81,033 30
Other 2,402 1 2,097 1 2,228 1
------- --- ------- --- ------- ---
Total loans $304,306 100% 276,933 100% $268,429 100%
=== === ===
Deferred net
origination costs 806 778 853
Allowance for loan
losses (2,641) (2,761) (2,686)
------- ------- -------
Net loans $302,471 $274,950 $266,596
======= ======= =======
-5-
At December 31,
----------------------------------
1995 1994
----------------------------------
% of % of
Amount Total Amount Total
------ ----- ------ -----
(Dollars in thousands)
Commercial and
industrial $ 46,952 19 43,254 21%
Commercial real estate 27,274 11 27,049 13
Agricultural 14,515 6 12,451 6
Residential real estate 79,355 33 57,243 27
Installment 68,821 29 63,572 31
Credit card 3,268 1 2,303 1
Other 1,561 1 1,659 1
------- --- ------- ---
Total loans $241,746 100% $207,531 100%
=== ===
Deferred net
origination costs 761 623
Allowance for loan
losses (2,644) (2,561)
------- -------
Net loans $239,863 $205,593
======= =======
Loan Maturity Schedule. The following table sets forth certain information at
December 31, 1998, regarding the net dollar amount of loans maturing in the
Bank's portfolio, based on contractual terms to maturity. Demand loans, loans
having no stated schedule of repayment and no stated maturity and overdrafts
are reported as due in one year or less:
Due 0-1 Year Due 1-5 Years Due 5 + Years Total
(In thousands)
Commercial and
industrial $12,254 $26,695 $39,852 $78,801
Commercial real estate 3,100 623 26,213 29,936
Agricultural 8,682 1,768 7,475 17,925
------ ------ ------ -------
Total $24,036 $29,086 $73,540 $126,662
====== ====== ====== =======
-6-
The following table sets forth the dollar amount of certain loans, due after
one year from December 31, 1998, which have predetermined interest rates and
floating or adjustable interest rates:
Predetermined Floating or
rates adjustable rates Total
------------- ---------------- -------
(In thousands)
Commercial and industrial $26,422 $40,125 $66,547
Commercial real estate 3,506 23,330 26,836
Agricultural 566 8,677 9,243
------ ------ ------
Total $30,494 $72,132 $102,626
====== ====== =======
Commercial and Industrial Lending. Commercial and industrial lending has been
an area of growth for the Bank. The Bank originates loans to businesses in its
market area, including "floor plan" loans to automobile dealers and loans
guaranteed by the Small Business Administration. The typical commercial
borrower is a small to mid-sized company with annual sales under $5,000,000.
The majority of commercial loans are made at adjustable rates of interest tied
to the prime rate. Commercial loans typically have terms of up to five years.
At December 31, 1998 the Bank had $78.8 million, or 26% of total loans,
invested in commercial and industrial loans.
Commercial and industrial lending entails significant risks. Such loans are
subject to greater risk of default during periods of adverse economic
conditions. Because such loans are secured by equipment, inventory, accounts
receivable and other non-real estate assets, the collateral may not be
sufficient to ensure full payment of the loan in the event of a default.
Commercial Real Estate. The Bank makes loans secured by commercial real
estate located in its market area. Such loans generally are adjustable-rate
loans for terms of up to 20 years. The types of properties securing loans in
the Bank's portfolio include warehouses, retail outlets and general industrial
use properties. At December 31, 1998, the Bank had $29.9 million, or 10% of
total loans, invested in commercial real estate loans.
Commercial real estate lending generally entails greater risks than
residential real estate lending. Such loans typically involve larger balances
and depend on the income of the property to service the debt. Consequently,
the risk of default on such loans may be more sensitive to adverse economic
conditions. The Bank attempts to minimize such risks through prudent
underwriting practices.
-7-
Agricultural Loans. The Bank makes agricultural loans, which include loans to
finance farm operations, equipment purchases, and land acquisition. The
repayment of such loans is significantly dependent upon income from farm
operations, which can be adversely affected by weather and other physical
conditions, government policies and general economic conditions. At December
31, 1998, the Bank had $17.9 million, or 6% of total loans, invested in
agricultural loans.
Residential Real Estate. The Bank makes loans secured by one- to four-family
residential real estate and multi-family (over four units) real estate located
in its market area. The Bank originates both fixed-rate mortgage loans and
adjustable-rate mortgage loans ("ARMs"). Fixed-rate loans with terms of 15 to
30 years are typically originated for sale in the secondary market. ARMs are
held in the Bank's portfolio. At December 31, 1998, the Bank had $92.1
million, or 30% of total loans, invested in residential real estate loans.
Installment Loans. The Bank makes a variety of consumer installment loans,
including home equity loans, automobile loans, recreational vehicle loans, and
overdraft protection. Consumer loans involve a higher risk of default than
loans secured by one- to four-family residential real estate, particularly in
the case of consumer loans which are unsecured or secured by rapidly
depreciating assets, such as automobiles. Repossessed collateral for a
defaulted consumer loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of the greater likelihood of damage, loss
or depreciation, and the remaining deficiency may not warrant further
substantial collection efforts against the borrower. In addition, consumer
loan collections depend on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, illness or personal
bankruptcy. Various federal and state laws, including federal and state
bankruptcy and insolvency laws, may also limit the amount which can be
recovered on such loans. Management believes that the Bank's underwriting
practices have resulted in a favorable delinquency ratio and loan loss
experience for this portion of the Bank's total loan portfolio.
At December 31, 1998, the Bank had $83.2 million, or 27% of total loans,
invested in installment loans. The Bank has reduced its efforts to
originate new and used automobile loans due to increased competition and
narrowing interest rate spreads. The Bank expects to continue, subject to
market conditions, to expand its other consumer lending activities as part
of its plan to provide a wide range of personal financial services to its
customers.
In the fourth quarter of 1996, the Bank sold its $3.9 million credit card loan
portfolio to a correspondent bank, recording a gain on the sale of $326,000.
Of the total loans, approximately $102,000 sixty days or more delinquent was
sold with recourse. Beginning in 1997, new corporate customer credit card
accounts are sold with recourse to the same financial institution. The Bank
will continue to offer credit card services indirectly through this
correspondent bank.
-8-
Loan Processing. Loan officers are authorized by the Board of Directors to
approve loans up to specified limits. Loans exceeding the loan officers'
approval authority are referred to the Bank's Senior Loan Committee. The
Senior Loan Committee has approval authority up to specified limits. Any
loans made by the Bank in excess of the limits established for the Senior Loan
Committee must be approved by the Chairman of the Board and the President of
the Bank as representatives of the Board of Directors. All loans in excess of
$50,000 are reported to the Board on a monthly basis.
Loan Originations, Purchases and Sales. Although the Bank generally does not
purchase loans, purchases could occur in the future. It did, however, make a
purchase of $21 million in residential real estate loans in late 1995 to
enhance earnings. Fixed-rate residential real estate loans are originated for
sale in the secondary market. From time to time, the Bank sells participation
interests in loans it originates.
Delinquent Loans, Non-performing Assets and Classified Assets. The Bank
attempts to minimize loan delinquencies through aggressive collection efforts.
When a borrower fails to make a required payment on a loan, the Bank attempts
to cause the deficiency to be cured by contacting the borrower. In most
cases, deficiencies are cured promptly.
Generally, when a real estate loan becomes delinquent more than 90 days, an
evaluation of the security is performed. If the evaluation indicates that the
value of the collateral is less than the book value of the loan, a valuation
allowance is established for such loan. When deemed appropriate by
management, the Bank institutes action to foreclose on the real estate or to
acquire the real estate by deed in lieu of foreclosure. A decision as to
whether and when to initiate foreclosure proceedings is based on such factors
as the amount of the outstanding loan in relation to the original
indebtedness, the extent of the delinquency and the borrower's ability and
willingness to cooperate in curing delinquencies. If a foreclosure occurs,
the real estate is sold at public sale and may be purchased by the Bank.
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. 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. All loans, except
one-to four-family real estate, which are ten days delinquent 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 December 31, 1998,
management knew of no significant loans not now disclosed as non-performing
that would cause management to have serious doubts as to the ability of the
borrowers to comply with present loan repayment terms.
-9-
The following table sets forth certain information regarding the past-due,
non-accrual and renegotiated loans of the Bank at the dates indicated:
At December 31,
--------------------------------------
1998 1997 1996 1995 1994
(In thousands)
Loans accounted for on
nonaccrual basis $599 $509 $535 $314 $239
Accruing loans which are
past due 90 days or more 343 241 90 208 402
Renegotiated loans - - - - 211
--- --- --- --- ---
Total $942 $750 $625 $522 $852
=== === === === ===
If interest on non-accrual loans had been recognized during 1998, such income
would have been $45,000. The amount recognized was not material.
Real estate acquired, or deemed acquired, by the Bank as a result of
foreclosure proceedings is classified as other real estate owned ("OREO")
until it is sold. Interest accrual, if any, ceases no later than the date of
acquisition of the real estate, and all costs incurred from such date in
maintaining the property are expensed. Costs relating to the development and
improvement of the property are capitalized. OREO is recorded by the Bank at
the lower of cost or fair value less estimated costs of disposal, and any
write-down resulting therefrom is charged to the allowance for loan losses.
If fair value less estimated costs of disposal subsequently falls below the
carrying amount, a valuation allowance account is established in the amount of
the deficiency. If the fair value less estimated costs of disposal
subsequently increases and is more than the carrying amount, the valuation
allowance is reduced, but not below zero. Increases or decreases in the
valuation allowance are charged or credited to income.
Allowance for Loan Losses. Federal regulations require that the Bank
establish prudent general allowances for loan losses. Senior management, with
oversight responsibility provided by the Board of Directors, reviews on a
monthly basis the allowance for loan losses as it relates to a number of
relevant factors, including but not limited to, historical trends in the level
of non-performing assets and classified loans, current charge-offs and the
amount of the allowance as a percent of the total loan portfolio. While
management believes that it uses the best information available to determine
the allowance for loan losses, unforeseen market conditions could result in
adjustments, and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. At December 31, 1998, the Bank's allowance for loan losses
totaled $2.6 million and was allocated primarily to the consumer segment of
the loan portfolio. A similar allocation existed for all other dates
presented.
-10-
The following table sets forth an analysis of the Bank's allowance for losses
on loans for the periods indicated:
December 31,
------------------------------------------
1998 1997 1996 1995 1994
(Dollars in thousands)
Balance at beginning of
period $ 2,761 $ 2,686 $ 2,644 $ 2,561 $ 2,474
Charge-offs:
Commercial and industrial (702) (178) (28) (13) (40)
Commercial real estate (45) - - - -
Agricultural - - (3) (46) -
Residential real estate - (6) (1) (2) (11)
Installment (681) (694) (560) (356) (287)
Credit card - (64) (189) (55) (38)
Other (7) - (4) - -
------- ------- ------- ------- -------
Total charge-offs (1,435) (942) (785) (472) (376)
------- ------- ------- ------- -------
Recoveries:
Commercial and industrial 7 63 42 10 12
Commercial real estate - - - - 1
Agricultural - - 8 1 9
Residential real estate - 2 - 6 3
Installment 145 133 158 159 149
Credit card 12 17 13 19 13
Other 1 2 6 - 1
------ ----- ----- ----- -----
Total recoveries 165 217 227 195 188
------ ----- ----- ----- -----
Net charge-offs (1,270) (725) (558) (277) (188)
Provision for possible
loan losses 1,150 800 600 360 275
------- ------- ------- ------- -------
Balance at end of period $ 2,641 $ 2,761 $ 2,686 $ 2,644 $ 2,561
======= ======= ======= ======= =======
Ratio of net charge-offs to
average loans outstanding
during the period 0.44% 0.26% 0.22% 0.13% 0.09%
==== ==== ==== ==== ====
Average loans outstanding $287,674 $274,372 $256,761 $218,552 $201,531
======= ======= ======= ======= =======
-11-
Because the loan loss allowance is based on estimates, it is monitored
regularly and adjusted as necessary to provide an adequate allowance. For
1998, the Bank anticipates about the same amount of loan net charge-offs for
each type of loan as that experienced in 1997 except less is expected in
commercial and industrial loans. See Exhibit 99, "Safe Harbor Under the
Private Securities Litigation Reform Act of 1995" attached hereto which is
incorporated herein by reference.
Investment Activities
The following table sets forth the composition of the Bank's securities
portfolio, based on amortized cost, at the dates indicated:
At December 31,
-----------------------------------
1998 1997 1996
(In thousands)
Securities available
for sale:
U.S. Treasuries & U.S.
Agency notes $35,983 $44,380 $42,122
U.S. Agency mortgage-
backed securities 73,124 49,256 25,577
Other mortgage-backed
securities 16,337 13,212 9,556
Municipals 8,558 - -
Other securities 5,461 4,347 3,470
------- ------- ------
Total securities available
for sale 139,463 111,195 80,725
------- ------- ------
Securities held to
maturity:
Municipal securities 36,832 11,164 7,463
------- ------- ------
Total securities held
to maturity 36,832 11,164 7,463
------- ------- ------
Total securities $176,295 $122,359 $ 88,188
======= ======= ======
Average securities as a percent of assets was 23.3% in 1996, 25.4% in 1997,
and 32.4% in 1998. The securities portfolio at December 31, 1998 consists
of $139.7 million of securities available for sale and $36.8 million of
securities which management intends to hold to maturity. The available for
sale portion of the portfolio is generally structured into a five-year ladder
of cash flows that will allow the Bank to take advantage of rising market
-12-
rates or lock in rates should market rates stay stable or fall. Mortgage-
backed securities provide a regular monthly cash flow available for
reinvestment at current rates. During 1996 and 1997 the majority of the
additions to the portfolio have been in medium-term callable U.S. Agency
bonds and mortgage-backed securities with projected average lives of three
to seven years. During the fourth quarter of 1997 and throughout 1998 the
Bank increased its non-taxable portion of the portfolio to $46.0 million
through the purchase of 15-20 year maturity municipal bonds. Also during
the fourth quarter of 1997 and during 1998 the Bank purchased $65 million
U.S. Agency mortgage-backed securities with funds borrowed from the Federal
Home Loan Bank at anticipated spreads of 130-150 basis points before tax.
The effect of these transactions will be an enhancement to earnings and an
effective use of capital. The portfolio has approximately $912,000
appreciation over the amortized book value at December 31, 1998.
The following table sets forth the amortized cost of the Bank's securities
portfolio at December 31, 1998. U.S. agency mortgage-backed securities are
categorized according to their expected prepayment speeds. All other
securities are categorized based on contractual maturity. Actual maturities
may differ from contractual maturities when borrowers have the right to call
or prepay obligations. Yields do not include the effects of income taxes.
Less than 1 year 1 to 5 years 5 to 10 years
---------------- ------------------ ----------------
Weighted Weighted Weighted
Book average Book average Book average
yield yield yield
---- ------- ---- ------- ---- -------
(Dollars in thousands)
Securities available
for sale:
U.S. Treasuries
and U.S. Agency
notes $ 1,997 7.89% $14,990 6.01% $16,995 6.14%
U.S. Agency
mortgage-backed
securities 13,187 6.65 29,526 6.69 17,984 6.64
Other mortgage-
backed securities 2,487 6.38 10,432 5.45 3,418 5.73
Municipals - - - - - -
Other securities - - - - - -
------ ------ ------
Total securities
available for
sale 17,671 6.75 54,948 6.27 38,397 6.34
------ ------ ------
-13-
Securities held
to maturity:
Municipal
securities 1,546 9.25 692 8.94 100 4.50
------ ------ ------
Total securities
held to maturity 1,546 9.25 692 8.94 100 4.50
------ ------ ------
Total securities $19,217 6.95% $55,640 6.30% $38,497 6.33%
====== ====== ======
Over 10 years Total
---------------- ------------------
Weighted Weighted
Book average Book average
yield yield
---- ------- ---- -------
(Dollars in thousands)
Securities available
for sale:
U.S. Treasuries
and U.S. Agency
notes $ 2,001 6.51% $35,983 6.21%
U.S. Agency
mortgage-backed
securities 12,427 6.62 73,124 6.66
Other mortgage-
backed
securities - - 16,337 5.65
Municipals 8,558 5.04 8,558 5.04
Other securities 5,461 6.94 5,461 6.94
------ -------
Total securities
available for
sale 28,447 6.04 139,463 6.34
------ -------
Securities held
to maturity:
Municipal
securities 34,494 4.95 36,832 5.20
------ -------
Total securities
held to maturity 34,494 4.95 36,832 5.20
------ ------
Total securities $62,941 5.39% $176,295 6.10%
====== =======
-14-
Trust Services
The Bank received trust powers in 1922 and currently holds $217 million in net
assets in the Trust Department. The Annual Report of Trust Assets filed with
the FDIC and the OCC reports $159 million in managed assets among 540
accounts, and an additional $60 million of non-discretionary assets held in
268 accounts on December 31, 1998. These assets are not included in the
Bank's balance sheet because, under federal law, neither the Bank nor its
creditors can assert any claim against funds held by the Bank in its fiduciary
capacity.
In addition to administering trusts, the services offered by the Trust
Department include investment management, estate planning and administration,
tax and financial planning and employee benefit plan administration. During
1997, the Trust Department entered into an agreement with a licensed broker-
dealer and insurance agent to provide investment services to customers of the
Bank and others, enabling them to purchase fixed annuities, variable
annuities, mutual funds, and stocks and bonds. The Trust Department is
staffed by five officers and two staff members and generated $1,105,000 in
fee income during 1998.
Deposits and Borrowings
General. Deposits have traditionally been the primary source of the Bank's
funds for use in lending and other investment activities. In addition to
deposits, the Bank derives funds from interest payments and principal
repayments on loans and income on earning assets. Loan payments are a
relatively stable source of funds, while deposit inflows and outflows
fluctuate more in response to general interest rates and money market
conditions.
Deposits. Deposits are attracted principally from within the Bank's market
area through the offering of numerous deposit instruments, including checking
accounts, regular passbook savings accounts, NOW accounts, money market
deposit accounts, term certificate accounts and individual retirement accounts
("IRAs"). Interest rates paid, maturity terms, service fees and withdrawal
penalties for the various types of accounts are established periodically by
the Bank's Asset/Liability Committee and the Executive Committee based on the
Bank's liquidity requirements, growth goals and market trends. The Bank does
not use brokers to attract deposits. The amount of deposits from outside the
Bank's market area is not significant.
-15-
The following table sets forth the dollar amount of deposits in the various
types of products offered by the Bank as of December 31:
Percent Percent Percent
1998 of Total 1997 of Total 1996 of Total
---- -------- ---- -------- ---- --------
(Dollars in thousands)
Demand $41,748 11 $38,662 12% $35,731 12%
NOW 61,616 16 53,386 17 49,030 16
Savings 35,983 10 34,445 10 35,687 11
Money market
deposit 39,935 11 29,721 9 28,009 9
CDs less than
$100,000 147,003 39 146,005 44 141,680 46
CDs greater than
$100,000 47,705 13 26,899 8 18,788 6
Other 230 - 214 - 203 -
------- --- ------- --- ------- ---
Total
deposits(1) $374,220 100% 329,332 100% $309,128 100%
======= === ======= === ======= ===
Percent Percent
1995 of Total 1994 of Total
---- -------- ---- --------
(Dollars in thousands)
Demand $36,188 12% $30,591 12%
NOW 45,927 16 46,184 19
Savings 37,562 13 49,025 20
Money market
deposit 20,465 7 5,185 2
CDs less than
$100,000 130,062 45 103,591 41
CDs greater than
$100,000 21,110 7 14,219 6
Other 189 - 146 -
------- --- ------- ---
Total
deposits(1) $291,503 100% $248,941 100%
======= === ======= ===
- --------------------------------
<FN>
(1)IRAs are offered under all deposit account types.
</FN>
-16-
At December 31, 1998, the Bank's certificates of deposit, excluding deposits
greater than $100,000, totaled $147.2 million, or 39% of total deposits. Of
such amount, approximately $98.9 million matures within one year.
The following table sets forth the dollar amount of time deposits greater than
$100,000 maturing in the periods indicated:
Maturity At December 31, 1998
-------- --------------------
(In thousands)
Three months or less $ 8,287
Over 3 months to 6 months 13,094
Over 6 months to 12 months 15,808
Over twelve months 10,516
------
Total $47,705
======
Borrowings. The Federal Reserve System functions as a central reserve bank
providing credit for its member banks and certain other financial
institutions. As a member in good standing of the Federal Reserve Bank of
Cleveland, the Bank is authorized to apply for advances, provided certain
standards of credit-worthiness have been met. The Bank is also a member of
the Federal Home Loan Bank system. The Bank currently has outstanding $81.0
million of borrowings from the Federal Home Loan Bank to fund the purchase of
adjustable-rate, one-to four-family real estate loans, U.S. Agency mortgage-
backed securities and municipal bonds.
The following table sets forth certain information regarding the Bank's
outstanding borrowings at the dates and for the periods indicated:
December 31,
--------------------------
1998 1997 1996
(Dollars in thousands)
Maximum amount of short-term
borrowings outstanding at any
month end during period $37,903 $33,364 $34,401
Average amount of short-term
borrowings outstanding during
period 31,582 37,928 32,186
Amount of short-term borrowings
outstanding at end of period 22,702 32,734 31,113
Weighted average interest rate of
short-term borrowings during period 5.14% 5.42% 5.27%
-17-
Weighted average interest rate of
short-term borrowings at end of
period 4.41% 6.00% 5.27%
Average Balance Sheets
The following table presents, for the years indicated, the total dollar
amounts of interest from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates. The table does not reflect
any effect of income taxes and includes non-performing loans in the
calculations.
1998 1997
---------------------------- ---------------------------
Average Interest Average Interest
outstanding Yield/ earned/ outstanding Yield/ earned/
balance rate paid balance rate paid
Loans (1) $287,675 8.68% $24,959 $274,372 8.76% $24,039
Securities
available
for sale 131,224 6.43 8,434 95,029 7.05 6,699
Securities
held to
maturity 23,931 5.64 1,349 7,867 7.89 621
Deposits in banks 533 4.81 26 866 5.16 45
Federal funds sold 9,237 5.47 505 3,582 5.60 200
------- ------ ------- ------
Total interest-
earning assets 452,600 7.79 35,273 381,716 8.28 31,604
Non-earning
assets 29,002 26,718
Allowance for
loan losses (2,702) (2,682)
------- -------
Total assets $478,900 $405,752
======= =======
-18-
Savings deposits $ 35,509 2.58 918 $ 34,538 2.79 963
NOW and MMDA 89,276 2.92 2,603 81,461 2.89 2,358
CD's over $100M 39,728 5.53 2,198 25,190 5.53 1,394
Other time
deposits 145,014 5.60 8,118 145,105 5.73 8,307
Short-term
borrowings 31,582 5.14 1,622 37,928 5.42 2,057
Long-term debt 54,430 5.66 3,081 6,791 6.05 411
------- ------ ------- ------
Total interest-
bearing
liabilities 395,539 4.69 18,540 331,013 4.68 15,490
------ ------
Demand deposits 37,560 33,516
Other liabilities 2,996 2,780
Capital 42,805 38,443
------- -------
Total liabilities
and capital $478,900 $405,752
======= =======
Net interest
income $16,733 $16,114
====== ======
Interest rate
spread 3.10% 3.60%
Net interest
income margin 3.70 4.22
Ratio of
interest-earning
assets to
interest-bearing
liabilities 114.43% 115.43%
1996
----------------------------
Average Interest
outstanding Yield/ earned/
balance rate paid
Loans (1) $256,761 8.73% $22,413
Securities
available for sale 78,235 7.14 5,583
Securities
held to
maturity: 7,632 8.27 632
Deposits in banks 155 5.78 9
Federal funds sold 3,562 5.27 187
------- ------
-19-
Total interest-
earning assets 346,345 8.32 28,824
Non-earning
assets 24,263
Allowance for
loan losses (2,682)
-------
Total assets $367,926
=======
Savings deposits $ 36,851 2.80 1,033
NOW and MMDA 71,177 2.79 1,987
CD's over $100M 19,650 5.44 1,069
Other time
deposits 136,534 5.82 7,942
Short-term
borrowings 32,186 5.28 1,714
Long-term debt 1,070 7.98 85
------- ------
Total interest-
bearing
liabilities 297,468 4.64 13,830
------
Demand deposits 32,857
Other liabilities 2,644
Capital 34,957
-------
Total liabilities
and capital $367,926
=======
Net interest
income $14,994
======
Interest rate
spread 3.68%
Net interest
income margin 4.33
Ratio of
interest-earning
assets to
interest-bearing
liabilities 116.43%
- -------------------------------------------
<FN>
(1) Includes nonaccrual loans.
</FN>
-20-
The following table describes the extent to which the changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected the Bank's interest income and expense during the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (the
difference between the average volume for the periods compared, multiplied
by the prior year's yield or rate paid), (ii) changes in rate (the difference
between the weighted average yield or rate paid for the periods compared,
multiplied by the prior year's average volume) and (iii) changes not solely
attributable to either volume or rate.
Years ended December 31,
------------------------------------
1998 vs 1997
------------------------------------
Increase (decrease) due to
------------------------------------
Rate/
Volume Rate volume Total
------ ---- ------- -----
(In thousands)
Interest income attributable to:
Loans $1,083 $ (127) $ (35) $ 921
Securities available for sale 2,096 (514) 153 1,735
Securities held to maturity 1,269 (178) (363) 728
Deposits in banks (17) (3) 1 (19)
Federal funds sold 316 (5) (7) 304
----- ----- --- -----
Total interest-earning assets 4,747 (827) (251) 3,669
----- ----- --- -----
Interest expense attributable to:
Savings deposits 27 (70) (2) (45)
NOW and MMDA 226 18 2 246
CD's over $100,000 805 - - 805
Other time deposits (5) (185) - (190)
Short-term borrowings (352) (100) 17 (435)
Long-term debt 2,939 (34) (236) 2,669
----- ----- --- -----
Total interest-bearing
liabilities 3,640 (371) (219) 3,050
----- ----- --- -----
Net interest income $1,107 $ (456) $ (32) $ 619
===== ===== === =====
-21-
Years ended December 31,
------------------------------------
1997 vs 1996
------------------------------------
Increase (decrease) due to
------------------------------------
Rate/
Volume Rate volume Total
------ ---- ------- -----
(In thousands)
Interest income attributable to:
Loans $1,460 $ (143) $ 309 $1,626
Securities available for sale 1,184 (52) (16) 1,116
Securities held to maturity 19 (28) (1) (10)
Deposits in banks 41 (1) (4) 36
Federal funds sold 1 12 - 13
----- ----- --- -----
Total interest-earning assets 2,705 (212) 288 2,781
----- ----- --- -----
Interest expense attributable to:
Savings deposits (65) (5) - (70)
NOW and MMDA 287 73 11 371
CD's over $100,000 301 18 5 324
Other time deposits 499 (126) (8) 365
Short-term borrowings 287 44 12 343
Long-term debt 325 4 (1) 328
----- ----- --- -----
Total interest-bearing
liabilities 1,634 8 19 1,661
----- ----- --- -----
Net interest income $1,071 $ (220) $ 269 $1,120
===== ===== === =====
-22-
Competition
The Bank competes for deposits with other commercial banks, savings
associations and credit unions and with the issuers of commercial paper and
other securities, such as shares in money market mutual funds. The primary
factors in competing for deposits are interest rates and convenience of office
location. In making loans, the Bank competes with other commercial banks,
savings associations, mortgage bankers, consumer finance companies, credit
unions, leasing companies, insurance companies and other lenders. The Bank
competes for loan originations primarily through the interest rates and loan
fees it charges and through the efficiency and quality of services it provides
to borrowers. Competition is affected by, among other things, the general
availability of lendable funds, general and local economic conditions, current
interest rate levels and other factors which are not readily predictable.
For years the Bank has competed within its market area with several regional
bank holding companies, each with assets in excess of $4 billion. The size of
these financial institutions and others competing with the Bank is likely to
increase further as a result of changes in statutes and regulations
eliminating various restrictions on interstate and inter-industry branching
and acquisitions. Community banks will be challenged by these larger
competitors and the greater capital resources they control.
-23-
REGULATION
General
Because of its ownership of all the outstanding stock of the Bank, InterCounty
is subject to regulation, examination and oversight by the FRB as a bank
holding company under the BHCA. The Bank, as a national bank, is subject to
regulation, examination and oversight by the OCC and special examination by
the FRB. The Bank is a member of the Federal Reserve Bank of Cleveland and a
member of the Federal Home Loan Bank of Cincinnati. In addition, since its
deposits are insured by the FDIC, the Bank is also subject to some regulation,
oversight and special examination by the FDIC. The Bank must file periodic
financial reports with the FDIC, the OCC and the Federal Reserve Bank of
Cleveland. Examinations are conducted periodically by these federal
regulators to determine whether the Bank and InterCounty are in compliance
with various regulatory requirements and are operating in a safe and sound
manner.
Bank Holding Company Regulation
As a bank holding company, InterCounty may be subject to restrictions on
share repurchases.
The FRB has also adopted capital adequacy guidelines for bank holding
companies, pursuant to which, on a consolidated basis, InterCounty must
maintain total capital of at least 8% of risk-weighted assets. Risk-weighted
assets consist of all assets, plus credit equivalent amounts of certain off-
balance sheet items, which are weighted at percentage levels ranging from 0%
to 100%, based on the relative credit risk of the asset. At least half of the
total capital to meet this risk-based requirement must consist of core or
"Tier 1" capital, which includes common stockholders' equity, qualifying
perpetual preferred stock (up to 25% of Tier 1 capital) and minority interests
in the equity accounts of consolidated subsidiaries, less goodwill. The
remainder of total capital may consist of supplementary or "Tier 2 capital".
In addition to this risk-based capital requirement, the FRB requires bank
holding companies to meet a leverage ratio of a minimum level of Tier 1
capital to average total consolidated assets of 3%, if they have the highest
regulatory examination rating, well-diversified risk and minimal anticipated
growth or expansion. All other bank holding companies are expected to
maintain a leverage ratio from at least 4% to 5% of average total consolidated
assets. InterCounty was in compliance with these capital requirements at
December 31, 1998. For InterCounty's capital ratios, see Note 17 to the
Consolidated Financial Statements in Item 8.
-24-
A bank holding company is required by law to guarantee the compliance of
any insured depository institution subsidiary that may become
"undercapitalized" (defined in the regulations as not meeting minimum capital
requirements) with the terms of the capital restoration plan filed by such
subsidiary with its appropriate federal banking agency.
The BHCA restricts InterCounty's ownership or control of the outstanding
shares of any class of voting stock of any company engaged in a
nonbanking business. In addition, the FRB has the authority to require a bank
holding company to terminate any activity or relinquish control of any nonbank
subsidiary (other than a nonbank subsidiary of a bank) upon the determination
by the FRB that such activity or control constitutes a serious risk to the
financial soundness and stability of any bank subsidiary of the bank holding
company. InterCounty currently has no nonbank subsidiaries, except
subsidiaries of the Bank. The ownership of subsidiaries of the Bank is
regulated by the OCC, rather than the FRB.
Congress is considering a number of legislative proposals which would expand
the permissible activities of InterCounty or a new form of holding company for
InterCounty. These proposals include an expansion of permissible securities,
insurance and other financial activities. Many of these proposed new
activities may involve greater financial risk to InterCounty than the current
permissible activities. No assurance can be given as to what form, if any,
final legislation in this regard may take.
Transactions between InterCounty and the Bank are subject to statutory limits
in Sections 23A and 23B of the Federal Reserve Act (the "FRA"). See "National
Bank Regulation -- Transactions With Insiders and Affiliates."
The FRB must approve the application of a bank holding company to acquire any
bank or savings association.
National Bank Regulation
Office of the Comptroller of the Currency. The OCC is an office in the
Department of the Treasury and is subject to the general oversight of the
Secretary of the Treasury. The OCC is responsible for the regulation and
supervision of all national banks, including the Bank. The OCC issues
regulations governing the operation of national banks and, in accordance
with federal law, prescribes the permissible investments and activities of
national banks. The Bank is authorized to exercise trust powers in accordance
with OCC guidelines. See "Description of Business-Trust Services." National
banks are subject to regulatory oversight under various consumer protection
and fair lending laws. These laws govern, among other things, truth-in-
lending disclosure, equal credit opportunity, fair credit reporting and
community reinvestment.
-25-
The Bank is required to meet certain minimum capital requirements set by the
OCC. These requirements consist of risk-based capital guidelines and a
leverage ratio, which are substantially the same as the capital requirements
imposed on InterCounty. The Bank was in compliance with those capital
requirements at December 31, 1998. For the Bank capital ratios, see Note 17
to the Consolidated Financial Statements in Item 8. The OCC may adjust the
risk-based capital requirement of a national bank on an individualized basis
to take into account risks due to concentrations of credit or nontraditional
activities.
The OCC has adopted regulations governing prompt corrective action to resolve
the problems of capital deficient and otherwise troubled national banks. At
each successively lower defined capital category, a national bank is subject
to more restrictive and numerous mandatory or discretionary regulatory actions
or limits, and the OCC has less flexibility in determining how to resolve the
problems of the institution. In addition, the OCC generally can downgrade a
national bank's capital category, notwithstanding its capital level, if, after
notice and opportunity for hearing, the national bank is deemed to be engaging
in an unsafe or unsound practice, because it has not corrected deficiencies
that resulted in it receiving a less than satisfactory examination rating on
matters other than capital or it is deemed to be in an unsafe or unsound
condition. The Bank's capital at December 31, 1998, met the standards for
the highest capital category, a well-capitalized bank.
A national bank is subject to restrictions on the payment of dividends.
During the year 1999, dividends that the Bank subsidiary can pay to the
Holding Company without prior approval of regulatory agencies is limited
to net income in 1999. Based on the current financial condition of the Bank,
these provisions are not expected to affect the current ability of the Bank
to pay dividends to InterCounty in an amount customary for the Bank.
OCC regulations generally limit the aggregate amount that a national bank can
lend to one borrower or aggregated groups of related borrowers to an amount
equal to 15% of the bank's unimpaired capital and surplus. A national bank
may loan to one borrower an additional amount not to exceed 10% of the
association's unimpaired capital and surplus, if the additional amount is
fully secured by certain forms of "readily marketable collateral." Loans to
executive officers, directors and principal shareholders and their related
interests must conform to the OCC lending limits. All transactions between
national banks and their affiliates, including InterCounty, must comply with
Sections 23A and 23B of the FRA. The Bank was in compliance with these
requirements and restrictions at December 31, 1998.
Effective in June 1997, the Bank is permitted to merge or consolidate with a
bank located in another state, unless that state has specifically prohibited
such an interstate transaction.
Federal Deposit Insurance Corporation. The FDIC is an independent federal
agency that insures the deposits, up to prescribed statutory limits, of
federally insured banks and thrifts and safeguards the safety and soundness
-26-
of the banking and thrift industries. The FDIC administers two separate
insurance funds, the BIF for commercial banks and state savings banks and
the SAIF for savings associations and banks who have acquired SAIF deposits.
The FDIC is required to maintain designated levels of reserves in each fund.
The SAIF deposits of Williamsburg obtained by the Bank in the Merger-
Conversion, including the attributed growth factor, which were $17.6 million
at December 31, 1998, remain insured in the SAIF. The Bank is a member of
the BIF, and, at December 31, 1998, it had $356.6 million in deposits insured
in the BIF.
The FDIC is authorized to establish separate annual assessment rates for
deposit insurance for members of each of the BIF and the SAIF. The FDIC may
increase assessment rates for either fund if necessary to restore the fund's
ratio of reserves to insured deposits to its target level within a reasonable
time and may decrease such rates if such target level has been met. The FDIC
has established a risk-based assessment system for both SAIF and BIF members.
Under this system, assessments vary based on the risk the institution poses to
its deposit insurance fund. The risk level is determined based on the
institution's capital level and the FDIC's level of supervisory concern about
the institution.
Federal Reserve Board. The FRA requires national banks to maintain reserves
against their net transaction accounts (primarily checking and NOW accounts).
The amounts are subject to adjustment by the FRB. At December 31, 1998, the
Bank was in compliance with its reserve requirements.
Federal Home Loan Banks. The Federal Home Loan Banks (the FHLBs) provide
credit to their members in the form of advances. As a member, the Bank must
maintain an investment in the capital stock of the FHLB of Cincinnati in an
amount equal to the greater of 1% of the aggregate outstanding principal
amount of the Bank's residential real estate loans, home purchase contracts
and similar obligations at the beginning of each year, or 5% of its advances
from the FHLB. The Bank is in compliance with this requirement with an
investment in FHLB of Cincinnati stock having a book value of $5,127,000 at
December 31, 1998. The FHLB advances are secured by collateral in one or
more specified categories. The amount a member may borrow from the FHLB is
limited based upon the amounts of various assets held by the member. All
long-term advances by each FHLB must be made only to provide funds for
residential housing finance.
Ohio Department of Insurance. The Bank's insurance agency operating
subsidiaries are subject to the insurance laws and regulations of the State
of Ohio and the Ohio Department of Insurance. The insurance laws and
regulations require education and licensing of agencies and individual agents,
require reports and impose business conduct rules.
-27-
Item 2. Properties
InterCounty Bancshares, Inc. and The National Bank and Trust Company own
and occupy their main offices located at 48 North South Street, Wilmington,
Ohio. The National Bank and Trust Company also owns or leases sixteen
full-service branch offices, one remote drive-through ATM facility, and
one remote drive-in facility, all of which are located in Clinton, Brown,
Clermont, Warren, and Highland Counties, Ohio. The Bank also owns and is
holding for future expansion, a building at 52 E. Main Street, Wilmington,
Ohio. This building is currently leased on a short-term basis. InterCounty's
net book value of investments in land and buildings was $8.4 million as of
December 31, 1998.
Item 3. Legal Proceedings
Neither InterCounty nor the Bank is presently involved in any legal
proceedings of a material nature. From time to time, the Bank is a party to
legal proceedings incidental to its business to enforce its security interest
in collateral pledged to secure loans made by the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
-28-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There were 3,178,151 common shares of the Company outstanding on December
31, 1998, held of record by approximately 404 shareholders. There is
presently no active trading market for the Company's shares, nor are the
prices at which common shares have been traded published by any national
securities association or quotation service. The Company's shares are
quoted on the OTC Bulletin Board under the symbol "ICYB". The Company's
primary market maker is Sweney Cartwright & Co., 17 South High Street,
Suite 300, Columbus, OH 43215, (800) 334-7481. Dividends per share
declared in 1998 were $.125 in each of March, June, and September, and
$.13 per share in December. Dividends per share declared in 1997 were
$.095 in each of March, June, September and December.
On October 8, 1998, InterCounty issued 53,606 common shares in consideration
for all of the outstanding common shares of Phillips Group for the purpose of
providing insurance agency services through an operating subsidiary of the
Bank. On December 11, 1998, InterCounty issued 17,777 common shares in
consideration for all of the outstanding common shares of Jones Agency,
another insurance agency, which became a subsidiary of Bank. In both
instances, InterCounty relied upon the exemption from registration under the
Securities Act of 1933 contained in Section 3(a)(11) and Rule 147 thereunder.
All of the shareholders of both agencies to whom shares of InterCounty were
issued are residents of Ohio, the state in which InterCounty is incorporated
and doing business, and precautions have been taken to ensure that resales of
the shares issued will not violate the limitations of Rule 147.
Item 6. Selected Financial Data
The following table sets forth certain information concerning the consolidated
financial condition, earnings and other data regarding InterCounty at the
dates and for the periods indicated:
December 31,
Statement of financial 1998 1997 1996 1995 1994
condition and other data: (Dollars in thousands)
Total amount of
Assets $520,553 $436,605 $380,607 $360,271 $289,267
Cash and due from banks 18,241 17,807 11,005 13,680 12,657
Securities 176,580 123,139 88,831 90,760 57,265
Loans receivable-net 302,471 274,950 266,596 239,863 205,593
Deposits 374,220 329,332 309,127 291,503 248,941
Short-term borrowings 22,702 32,734 31,113 31,110 8,736
Long-term debt 75,539 30,716 914 1,108 1,299
Shareholders' equity 44,723 40,980 36,806 33,822 28,714
Number of full service
offices 16 14 13 12 12
-29-
Year ended December 31,
1998 1997 1996 1995 1994
Statement of income data: (In thousands)
Interest and loan fee
income $35,273 $31,604 $28,824 $25,209 $19,935
Interest expense 18,540 15,490 13,830 11,469 7,795
------- ------ ------ ------ ------
Net interest income 16,733 16,114 14,994 13,740 12,140
Provision for loan
losses 1,150 800 600 360 275
------- ------- ------ ------ ------
Net interest income
after provision for
loan losses 15,583 15,314 14,394 13,380 11,865
Non-interest income 5,526 4,533 4,007 2,339 828
Non-interest expense 13,846 12,600 11,592 10,103 9,881
------- ------ ------ ------ ------
Income before income
taxes 7,263 7,247 6,809 5,616 2,812
Federal income taxes 1,889 2,259 1,877 1,591 617
------- ------ ------ ------ ------
Net income $ 5,374 $ 4,988 $ 4,932 $ 4,025 $ 2,195
======= ====== ====== ====== ======
Year ended December 31,
Selected financial ratios: 1998 1997 1996 1995 1994
Return on average equity 12.56% 12.98% 14.11% 12.85% 7.87%
Return on average assets 1.12 1.23 1.34 1.28 .78
Equity-to-assets ratio 8.59 9.39 9.66 9.39 9.93
Dividend payout ratio(1) 29.71 23.90 17.83 14.45 18.75
Ratio of non-performing
loans to total loans(2) 0.31 0.31 0.36 0.21 0.41
Ratio of loan loss allowance
to total loans 0.87 0.99 1.00 1.09 1.23
Ratio of loan loss allowance
to non-performing loans(2) 280% 316% 273% 507% 301%
Earnings per share(3) $1.70 $1.59 $1.57 $1.32 $0.72
Dividends declared
per share(3) 0.505 0.38 0.28 0.19 0.135
_________________________________
<FN>
(1) Dividends paid per share divided by earnings per share.
-30-
(2) Non-performing loans include non-accrual loans, renegotiated loans and
loans 90 days or more past due.
(3) All share information and per share data has been retroactively restated
to reflect a two-for-one stock split in the form of a stock dividend effected
on October 26, 1998.
</FN>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis comparing 1998 to prior years should be
read in conjunction with the audited consolidated financial statements at
December 31, 1998 and 1997 and for the three years ended December 31, 1998.
In addition to the historical information contained herein with respect to
InterCounty Bancshares, Inc. (the "Company"), and The National Bank and Trust
Company (the "Bank"), the following discussion contains forward-looking
statements that involve risks and uncertainties. Economic circumstances, the
Company's operations and the Company's actual results could differ
significantly from those discussed in the forward-looking statements. Some of
the factors that could cause or contribute to such differences include changes
in the economy and interest rates in the nation and the Company's general
market area.
RESULTS OF OPERATIONS
OVERVIEW
Net income for 1998 was $5.374 million, an increase of 7.7% from 1997. Net
income per share was $1.70 in 1998 compared to $1.59 in 1997. Highlights
include a 3.8% increase in net interest income, a 43.8% increase in the
provision for loan losses to $1,150,000, an increase of 21.9% in non-interest
income, and a 9.9% increase in non-interest expense. These results include
non-interest income of $833,000 in 1998, and $792,000 in 1997, and non-
interest expense of $789,000 in 1998, and $776,000 in 1997, from the
operations of two insurance agencies acquired during the fourth quarter of
1998, which were accounted for as a pooling of interests. The effect on the
net earnings of the Company was minimal. Performance ratios for 1998 included
a return on average assets of 1.12%, and a return on average equity of 12.56%.
-31-
Overview (Continued)
Net income for 1997 was $4.988 million, an increase of 1.1% from 1996.
Net income per share was $1.59 in 1997 compared to $1.57 in 1996.
Highlights include a 7.4% increase in net interest income, a 33.3%
increase in the provision for loan losses to $800,000, an increase of
13.1% in non-interest income, and a 8.7% increase in non-interest
expense. Operating earnings, which excludes securities transactions, the
credit card sale premium, and income taxes, increased 8.6% from 1996.
Performance ratios for 1997 included a return on average assets of 1.23% and
a return on average equity of 12.98%, compared to a return on average assets
of 1.34% and a return on average equity of 14.11% for 1996.
Table 1 - Selected Financial Highlights
(dollars in thousands)
1998 1997 1996 1995 1994
------------------------------------------------
Net interest income $ 16,733 $ 16,114 $ 14,994 $ 13,740 $ 12,140
Net income 5,374 4,988 4,932 4,025 2,195
Earnings per share 1.70 1.59 1.57 1.32 0.72
Dividends per share 0.51 0.38 0.28 0.19 0.14
AVERAGE BALANCES
Assets $478,900 $405,752 $367,926 $314,435 $281,355
Loans 287,674 274,372 256,761 218,552 201,531
Securities 155,155 102,896 85,867 71,816 58,619
Deposits 347,087 319,809 297,070 267,833 242,721
Long-term debt 53,753 6,792 1,070 1,262 1,450
Shareholders' equity 42,805 38,443 34,957 31,327 27,900
RATIOS AND STATISTICS
Net interest margin 3.71% 4.22% 4.33% 4.64% 4.61%
Return on average
assets 1.12 1.23 1.34 1.28 .78
Return on average
equity 12.56 12.98 14.11 12.85 7.87
Loans to assets 58.61 63.63 70.75 67.73 72.05
Equity to assets 8.59 9.39 9.66 9.39 9.93
Total risk-based
capital ratio 14.18 14.66 14.06 14.09 14.58
Efficiency ratio 62.20 61.03 61.01 62.94 68.62
Full service offices 16 14 13 12 12
-32-
NET INTEREST INCOME
Net interest income increased to $16.7 million in 1998 from $16.1 million
in 1997, an increase of 3.8%. The Bank's yield on average interest-earning
assets decreased to 7.79% in 1998 from 8.28% in 1997. Average interest-
earning assets increased $70.9 million (18.6%) from 1997.
Interest and fees on loans increased 3.8% from last year as the average
balance rose $13.3 million (4.8%) and the average yield decreased from 8.76%
in 1997 to 8.68% in 1998. During 1998, lending rates were fairly stable
until the prime rate decreased 75 basis points during the fourth quarter.
The securities portfolio showed an increase in balances and a
decrease in yield. The average balance of the portfolio increased $52.3
million (50.8%) from 1997, and the yield decreased from 7.11% to 6.31%.
The securities portfolios experienced the maturity and call of higher yielding
assets and the reinvestment of those funds in the lower rates that were
available during 1998. Also nontaxable municipal securities, which have a
lower pre-tax yield than taxable securities, were increased by an average of
$22.6 million during 1998.
Average interest-bearing liabilities increased $64.5 million (19.5%) during
1998, and the cost decreased from 4.68% in 1997 to 4.67% in 1998. Although
all categories showed a decrease in cost, the amount of higher-costing long-
term funds borrowed from the Federal Home Loan Bank increased $47.0 million
and was 13.6% of funds in 1998 compared to 2.1% during 1997. Net interest
margin decreased to 3.71% in 1998 from 4.22% in 1997.
Net interest income increased to $16.1 million in 1997 from $15.0 million in
1996, an increase of 7.4%. Although average interest-earning assets increased
$35.4 million (10.2%) from 1996, the Bank's yield on average interest-earning
assets decreased slightly to 8.28% in 1997 from 8.32% in 1996.
Interest and fees on loans increased 7.3% from 1996 as the average balance
grew $17.6 million (6.9%) and the average yield increased from 8.73% in 1996
to 8.76% in 1997. During 1997 lending rates were fairly stable throughout the
year. The prime rate began the year at 8.25%, increased 25 basis points to
8.50% in March, and remained at that level for the rest of 1997. The
securities portfolio showed an increase in balances and a decrease in
yield. The average balance of the securities portfolio increased $17.0
million (19.8%) from 1996, and the yield decreased from 7.24% to 7.11%. The
securities portfolios experienced the maturity and call of higher yielding
assets and the reinvestment of those funds in the lower rates that were
available due to flattening of the U.S. Treasury yield curve during 1997.
Average interest-bearing liabilities increased $33.5 million during 1997,
and the cost increased slightly to 4.68% in 1997 from 4.64% in 1996. The
increase in cost of funds was primarily due to increases in certificates over
$100,000 and Federal Home Loan Bank borrowings. The net interest margin
decreased to 4.22% in 1997 from 4.33% in 1996.
-33-
PROVISION FOR LOAN LOSSES
The provision for loan losses was $1,150,000 in 1998, an increase of $350,000
from the $800,000 provision recorded in 1997,which was an increase of
$200,000 from the provision recorded in 1996. Net charge-offs in 1998 were
$1,270,000 compared to $725,000 in 1997 and $558,000 in 1996. The increased
provision in 1998 and 1997 was in response to a 4.8% and 6.9% increase in
average loans for those years, and also increases in the amount of net
charge-offs in those years. The ratio of the allowance for loan losses as a
percent of total loans was .87% in 1998, .99% in 1997, and 1.00% in 1996.
Table 2 - Non-Interest Income
(in thousands)
1998 1997
---- ----
Percent Percent
of average of average
Amount assets Amount assets
-----------------------------------------------
Service charge on
deposits $1,351 0.28% $1,263 0.31
Other service charges 336 0.07 287 0.07
Trust income 1,105 0.23 927 0.23
ATM network fees 574 0.12 206 0.05
Insurance agency
commissions 833 0.17 792 0.20
Net security gains 302 0.06 300 0.07
Other 1,025 0.22 758 0.19
----- ---- ----- ----
Total income $5,526 1.15% $4,533 1.12%
===== ==== ===== ====
-34-
1996
----
Percent
of average
Amount assets
-----------------------
Service charge on
deposits $1,099 0.30%
Other service charges 307 0.08
Trust income 733 0.20
ATM network fees - -
Insurance agency
commissions 869 0.24
Net security gains 86 0.02
Other 913 0.25
----- ----
Total $4,007 1.09%
===== ====
NON-INTEREST INCOME
Table 2 details the components of non-interest income and how they relate each
year as a percent of average assets. Total non-interest income was $5.5
million in 1998, $4.5 million in 1997, and $4.0 million in 1996. Non-interest
income represents a ratio of 1.15% of average assets in 1998, 1.12% in 1997,
and 1.09% in 1996. Service charges and fees have increased over the last
three years due to increased charges and growth in the number of accounts;
however, the percentage of average assets has remained fairly consistent
during this period. Trust income increased 19.2% in 1998, and 26.5% in 1997,
due to increases in both the number of accounts and the amount of funds under
management. At December 31, 1998, total assets in the Trust Department were
approximately $217 million, compared to $174 million and $150 million at
December 31, 1997 and 1996, respectively. Late in the fourth quarter of 1996
the Bank sold its credit card loan portfolio and recorded a net gain of
$326,000. Also late in 1996 the Bank began installing cash dispensing units
in convenience stores. This continued in 1997 and 1998 and the total
installations at the end of 1998 were ninety-five machines. ATM network fees
generated in 1998 and 1997 were $574,000 and $206,000, respectively. In the
fourth quarter of 1998 the Bank acquired two insurance agencies, and because
the acquisitions were accounted for as a pooling of interests, their
commission income is included in the non-interest income section of the
Company's results of operations for the three years presented. Net securities
gains were $302,000 in 1998, compared to net gains of $300,000 in 1997, and
net gains of $86,000 in 1996.
-35-
Table 3 - Non-Interest Expense
(in thousands)
1998 1997
---- ----
Percent Percent
of average of average
Amount assets Amount assets
-----------------------------------------------
Salaries $ 5,781 1.21% $ 5,394 1.33%
Benefits 984 0.21 970 0.24
Equipment 1,917 0.40 1,553 0.38
Occupancy 790 0.16 741 0.18
Deposit Insurance 47 0.01 47 0.01
State franchise tax 615 0.13 557 0.14
Marketing 312 0.06 279 0.07
Other 3,400 0.71 3,059 0.75
------ ---- ------ ----
Total $13,846 2.89% $12,600 3.10%
====== ==== ====== ====
1996
----
Percent
of average
Amount assets
-----------------------
Salaries $ 4,825 1.31%
Benefits 1,056 0.29
Equipment 942 0.26
Occupancy 738 0.20
Deposit Insurance 104 0.03
State franchise tax 493 0.13
Marketing 271 0.07
Other 3,163 0.86
------ ----
Total $11,592 3.15%
====== ====
-36-
NON-INTEREST EXPENSE
Table 3 details the components of non-interest expense and how they relate
each year as a percent of average assets. This section includes the non-
interest expense of the two acquired insurance companies for the three years
in this table. Total non-interest expense has increased from $11.6 million
in 1996, to $12.6 million in 1997, and to $13.8 million in 1998. These
figures represent a percent of average assets of 3.15% in 1996, 3.10% in
1997, and 2.89% in 1998. Improvements in the percentages in 1998 from 1997
were primarily due to an 18.0% increase in average assets while non-interest
expense increased just 9.9%. The improvement during 1997 was due primarily
to reductions in benefits expense, deposit insurance, and outside data
processing. The rest of the categories of expense remained about the same
as 1996 as a percent of average assets.
Salaries and benefits expense, which is the largest component of non-interest
expense, increased to $6.8 million in 1998, but decreased as a percent of
average assets. Salaries and benefits expense increased to $6.4 million in
1997 from $5.9 million in 1996 but also decreased as a percent of average
assets between those two years. The average number of full-time equivalent
employees increased from 185 in 1996 to 198 in 1997, and to 217 in 1998.
Salaries expense in 1998 increased 7.2%, primarily because of the increase
in employees, but decreased to 1.21% of assets. Salaries expense in 1997
increased 11.8%, but benefits expense decreased 8.1% from 1996 and to .24%
of assets. In 1997 the Board of Directors and the participants in the
InterCounty Bancshares, Inc. Nonqualified Stock Option Plan agreed to
eliminate the optionee's right to require the Company to repurchase option
shares at book value. Accordingly, the Company discontinued accruing
compensation expense for the plan in 1997. In 1996 compensation expense
under the plan was $173,000.
Deposit insurance in 1998 was the same as in 1997. Deposit insurance for 1997
was 55.2% less than for 1996. During the third quarter of 1996, the Bank
incurred a one-time assessment of $97,000 for deposits obtained by the Bank
in 1993 when it merged with The Williamsburg Building & Loan Company. A
one-time assessment was levied on all financial institutions holding deposits
insured by the Savings Association Insurance Fund of the Federal Deposit
Insurance Company ("FDIC") based on the amount of such deposits held.
Most other non-interest expense categories have remained about the same as
a percent of average assets from 1996 to 1998. Equipment expense has been
.40%, .38%, and.26% of average assets for the years 1998, 1997 and 1996,
respectively. The higher levels in 1998 and 1997 were due to the expansion
of the computer network throughout the Bank, the development of the cash
dispenser machine network, and the opening of branch offices in Batavia in
1996, Hillsboro in 1997, and Owensville and Waynesville in 1998. Occupancy
expense as a percent of average assets was .16% in 1998, .18% in 1997, and
.20% in 1996. State franchise tax increased in all three years as a result of
the increase in capital, on which it is based, and has remained about the same
as a percent of average assets. Other expense as a percent of average assets
was .71% in 1998, .75% in 1997, and .86% in 1996. Outside processing in 1997
was reduced $102,000 from 1996 primarily as a result of the sale of
the credit card portfolio.
-37-
INCOME TAXES
The effective tax rates for 1998, 1997 and 1996 were 26.0%, 31.2% and 27.6%,
respectively. The decrease in the 1998 effective tax rate was primarily due
to the increase in tax exempt municipal bond income and the exercise of stock
options. Tax expense in 1996 was reduced by a $214,000 rehabilitation tax
credit for renovations done to the Bank's main office.
FINANCIAL CONDITION
ASSETS
Average total assets increased 18.0% during 1998 to $478.9 million. Average
interest-earning assets increased 18.6%, and remained at 94% of total assets,
the same as the last two years.
SECURITIES
Average securities as a percent of assets was 23.3% in 1996, 25.4% in 1997,
and 32.4% in 1998. The securities portfolio at December 31, 1998 consisted
of $139.7 million of securities available for sale and $36.8 million of
securities which management intends to hold to maturity. The available-for-
sale portion of the portfolio is generally structured into a five-year ladder
of cash flows that will allow the Bank to take advantage of rising market
rates or lock in rates should market rates stay stable or fall. Mortgage-
backed securities provide a regular monthly cash flow available for
reinvestment at current rates. During 1996 and 1997 the majority of the
additions to the portfolio have been in medium-term callable U.S. Agency
bonds and mortgage-backed securities with projected average lives of three
to seven years. During the fourth quarter of 1997 and throughout 1998 the
Bank increased its non-taxable portion of the portfolio to $46.0 million
through the purchase of 15-20 year maturity municipal bonds. Also during
the fourth quarter of 1997 and during 1998 the Bank purchased $65 million of
U.S. Agency mortgage-backed securities with funds borrowed from the Federal
Home Loan Bank at anticipated spreads of 130-150 basis points before tax.
The effect of these transactions will be an enhancement to earnings and an
effective use of capital. The portfolio has approximately $912,000 of
appreciation over the amortized book value at December 31, 1998.
LOANS
Table 4 shows loans outstanding at period end by type of loan. Average total
loans as a percent of average assets was 69.8% in 1996, 67.6% in 1997, and
60.1% in 1998. The portfolio composition has stayed relatively the same
during the three-year period. Commercial and industrial loans grew from $58.0
million in 1996 to $63.7 million in 1997 and to $78.8 million in 1998,
primarily as a result of increased origination of working capital and
equipment loans. Management anticipates moderate growth in the commercial and
industrial loan portfolio. During 1998 the growth in residential real estate
loans was the result of the Bank originating loans locally through the branch
network. For interest rate risk management purposes, the Bank currently
sells, or holds for sale, the majority of fixed-rate residential real estate
loans originated, while holding the adjustable-rate loans in the portfolio.
-38-
The Bank expects the growth in the real estate portfolio to continue as long
as rates remain around current levels. New and used automobile loans have
been the emphasis in the installment area, although the Bank has reduced its
efforts to originate installment loans due to increased competition and
narrowing interest rate spreads. The amount of installment loans outstanding
has increased slightly from $79.1 million in 1997 to $83.2 million in 1998.
The general economy of the Bank's market area has been stable to good for the
past several years. The Bank has experienced an increase in automobile
lending, residential real estate lending, and commercial lending, both real
estate and industrial, because of the general economic conditions and the
movement of the Bank into new markets, such as Clermont and Highland Counties.
The Bank focused its commercial lending on small to medium-sized companies in
its market area, most of which are companies with long established track
records. The Bank has avoided concentrations of lending in any one industry.
As of December 31, 1998, the percent of fixed-rate loans to total loans was
45%, of which 66% matures within five years.
Table 4 - Loan Portfolio
(in thousands)
at December 31,
1998 1997
---- ----
Percent of Percent of
Amount Total Amount Total
---------------------------------------------
Commercial and industrial $ 78,801 26% $ 63,661 23%
Commercial real estate 29,936 10 30,835 11
Agricultural 17,925 6 18,387 7
Residential real estate 92,069 30 82,838 30
Installment 83,173 27 79,115 28
Credit card - - - -
Other 2,402 1 2,097 1
Deferred net origination
costs 806 - 778 -
------- --- ------- ---
Total $305,112 100% $277,711 100%
======= === ======= ===
-39-
1996 1995
Percent of Percent of
Amount Total Amount Total
---------------------------------------------
Commercial and industrial $ 57,985 22% $ 46,952 19%
Commercial real estate 31,118 11 27,274 11
Agricultural 16,304 6 14,515 6
Residential real estate 79,761 30 79,355 33
Installment 81,033 30 68,821 29
Credit card - - 3,268 1
Other 2,228 1 1,561 1
Deferred net origination
costs 853 - 761 -
------- --- ------- ---
Total $269,282 100% $242,507 100%
======= === ======= ===
1994
Percent of
Amount Total
------------------------
Commercial and industrial $ 43,254 21%
Commercial real estate 27,049 13
Agricultural 12,451 6
Residential real estate 57,243 27
Installment 63,572 31
Credit card 2,303 1
Other 1,659 1
Deferred net origination
costs 623 -
------- ---
Total $208,154 100%
======= ===
ALLOWANCE FOR LOAN LOSSES
Table 5 shows selected information relating to the Bank's loan quality and
allowance for loan losses. The allowance is maintained to absorb potential
losses in the portfolio. Management's determination of the adequacy of the
reserve is based on reviews of specific loans, loan loss experience, general
economic conditions and other pertinent factors. If, as a result of
charge-offs or increases in risk characteristics of the loan portfolio, the
reserve is below the level considered by management to be adequate to absorb
possible future loan losses, the provision for loan losses is increased.
Loans deemed not collectible are charged off and deducted from the reserve.
Recoveries on loans previously charged off are added to the reserve.
-40-
Overall loan quality has been good over the last five years. During 1998 the
Bank charged off one loan in the amount of $446,000 that caused the net
charge-off percentage of average loans to increase to .50% in 1998 from .26%
in 1997, and therefore the Bank increased the provision for loan losses to
$1,150,000 in 1998 from $800,000 in 1997. The allowance for loan losses is
.87% of total loans as of December 31, 1998, and has ranged from .99% to
1.23% for the previous four years. The Bank does not allocate the allowance
for loan losses to specific types of loans. In assessing the adequacy of the
allowance for loan losses, the Bank considers three principal factors:
(1) the three-year rolling average charge-off percentage applied to the
current outstanding balance by portfolio type; (2) a specific percentage
applied to individual loans estimated by management to have a potential loss;
and (3) estimated losses attributable to anticipated portfolio growth,
economic conditions and portfolio risk. Economic conditions considered
include unemployment levels, the condition of the agricultural business,
and other local economic factors.
Non-accrual loans for the last five years are listed in Table 5. The amount
in this category increased to $599,000 from $509,000 in 1997, and was $535,000
in 1996. The 1997 amount of $509,000 was resolved through payoffs of
$163,000, losses of $71,000 and a credit upgrade that reestablished $275,000
back to accrual status. As of December 31, 1998, the $599,000 consisted of
fifteen loans. Six are collateralized with first mortgage positions, four
loans have a second mortgage position in addition to miscellaneous
collateral, and the remaining loans are collateralized with equipment, crops
and fixtures. All loans are expected to be repaid in accordance with their
terms or through liquidation of collateral in the normal course of business.
The anticipated aggregate loss in 1998 from these loans is $65,000. As of
December 31, 1998, management knows of no significant loans not now disclosed
as non-performing that would cause management to have serious doubts as to the
ability of borrowers to comply with present loan repayment terms.
Table 5 - Allowance for Loan Losses
(in thousands)
1998 1997 1996 1995 1994
-------------------------------------------------
Allowance for loan
losses $2,641 $2,761 $2,686 $2,644 $2,561
Provision for loan
losses 1,150 800 600 360 275
Net charge-offs 1,270 725 558 277 188
Non-accrual loans 599 509 535 314 239
Loans 90 days or more
past due 343 241 90 208 402
Renegotiated loans - - - - 211
Other real estate owned - 125 358 - -
----- ----- ----- ----- -----
Total non-performing
assets 942 875 983 522 852
-41-
RATIOS
Allowance to total loans 0.87% 0.99% 1.00% 1.09% 1.23%
Net charge-offs to
average loans 0.50 0.26 0.22 0.13 0.09
Non-performing assets
to total loans and
other real estate
owned 0.31 0.31 0.36 0.21 0.41
OTHER ASSETS
Beginning in the fourth quarter of 1996 and during 1997 and 1998 the Bank has
been installing cash dispenser machines in convenience stores and
supermarkets. There were 95 machines located in Ohio, Kentucky, West
Virginia, and Indiana at the end of 1998. The Bank's investment in this
segment of business includes $1.3 million in equipment cost and an additional
amount in cash to supply the machines. The Bank anticipates installation of
only a few machines in 1999. The Bank charges a fee for withdrawals from
anyone who does not have a transaction account with the Bank. The Bank
recorded a net book loss on this segment of business of $110,000 before taxes
for 1998 and $155,000 before taxes for 1997, and anticipates a smaller net
book loss for 1999. On a cash flow basis the machines are providing a
positive return on investment. The Bank's experience indicates a six-to-
twelve-month period before a machine begins covering costs, depending on
transaction volume. Other sources of revenue, including advertising, stamps,
and coupons, are being pursued that would help the profitability of this
segment of business.
DEPOSITS
Table 6 presents a summary of period end deposit balances. As rates began
rising in 1994, savings accounts were 20% of total deposits. These funds
flowed into time certificates as consumers began locking in higher rates.
This trend continued from 1995 through 1998 even though rates remained
relatively stable during this period. Savings accounts decreased in amounts
and were 10% of deposits by the end of 1998. Money market accounts rose to
7% of deposits in 1995, and gradually to 11% by the end of 1998, as a result
of adding a third and higher interest rate tier for large balance accounts.
Certificates of $100,000 or more rose to 13% of deposits in 1998 from 8% in
1997 as a result of a slightly more aggressive pricing strategy in our
market area for this type of funds.
Deposits are attracted principally from within the Bank's market area through
the offering of numerous deposit instruments, including checking accounts,
savings accounts, NOW accounts, money market deposit accounts, term
certificate accounts and individual retirement accounts. Interest rates paid,
maturity terms, service fees, and withdrawal penalties for the various types
of accounts are established periodically by management based on the Bank's
liquidity requirements, growth goals and market trends. The Bank does not use
brokers to attract deposits. The amount of deposits from outside the Bank's
market area is not significant.
-42-
Table 6 - Deposits
(in thousands)
at December 31,
1998 1997 1996
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
--------------------------------------------------------
Demand $ 41,748 11% $ 38,662 12% $ 35,731 12%
NOW 61,616 16 53,386 16 49,030 16
Savings 35,983 10 34,445 11 35,687 11
Money market 39,935 11 29,721 9 28,009 9
CD's less than
$100,000 147,003 39 146,005 44 141,680 46
CD's $100,000
and over 47,705 13 26,899 8 18,788 6
Other 230 - 214 - 203 -
------- --- ------- --- ------- ---
Total $374,220 100% $329,332 100% $309,128 100%
======= === ======= === ======= ===
1995 1994
Percent of Percent of
Amount Total Amount Total
--------------------------------------
Demand $ 36,188 12% $ 30,591 12%
NOW 45,927 16 46,184 19
Savings 37,562 13 49,025 20
Money market 20,465 7 5,185 2
CD's less than
$100,000 130,062 45 103,591 41
CD's $100,000
and over 21,110 7 14,219 6
Other 189 - 146 -
------- --- ------- ---
Total $291,503 100% $248,941 100%
======= === ======= ===
CAPITAL
The declaration and payment of dividends by the Company are subject to the
discretion of the Board of Directors and to the earnings and financial
condition of the Company and applicable laws and regulations. Through the end
of 1994, dividends had been declared and paid on a semi-annual basis in June
and December of each year. During the five years ended in 1994, the dividend
rate increased nine out of ten payments. Beginning in 1995, the Board of
-43-
Directors began to pay dividends on a quarterly basis. The dividend rate was
increased over 40% in both 1995 and 1996, and over 32% in both 1997 and 1998.
The Company's equity to assets ratio at December 31, 1998, was 8.6%. As of
that same date, tier 1 risk-based capital was 13.4%, and total risk-based
capital was 14.2%. The minimum tier 1 and total risk-based capital ratios
required by the Board of Governors of the Federal Reserve are 4% and 8%,
respectively.
The Bank declared dividends to the Company of $10.3 million in 1998, compared
to $1.1 million in both 1997 and 1996. The additional dividends in 1998 will
lower the aggregate Ohio corporate franchise tax paid by the separate
companies. The Company's capital is taxed by the State at 0.4%. The tax rate
on the capital of Ohio banks is 1.4%. The Bank remains well capitalized
after payment of the 1998 dividends. Note 17 to the Consolidated Financial
Statements summarizes the capital adequacy of the Company and the Bank.
LIQUIDITY
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 December 31, 1998, was 81.5%, compared to 84.3%
at the same date in 1997. Loans to total assets were 58.6% at the end of
1998, compared to 63.4% at the same time last year. The securities portfolio
79% "available for sale" securities that are readily marketable.
Approximately 72% 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 87% core deposits, makes the Bank less susceptible to large
fluctuations in funding needs.
MARKET RISK MANAGEMENT
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 Bank 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 Bank's market risk is composed primarily
of interest rate risk.
The Bank's Asset/Liability Committee (ALCO) is responsible for reviewing the
interest rate sensitivity position of the Bank and establishing policies to
monitor and limit exposure to interest rate risk. The guidelines established
by ALCO are approved by the Bank's Board of Directors. The primary goal of
the asset/liability management function is to maximize net interest income
within the interest rate risk limits set by ALCO. Interest rate risk is
monitored on a monthly basis through ALCO meetings. Techniques used include
both interest rate gap management and simulation modeling that measures the
effect of rate changes on net interest income under different rate scenarios.
-44-
The interest rate gap analysis schedule (Table 7) quantifies the asset/
liability static sensitivity as of December 31, 1998. As shown, the Bank was
liability sensitive for periods through one year, and asset sensitive within
the one-to-five-year period and the over-five-year-period. The cumulative
gap as a percent of total assets through one year is (25.8)%. The entire
balance of NOW and MMDA accounts are included in the first gap period.
Although these deposits are subject to be repriced or withdrawal in a
relatively short period of time, they have been a stable base of retail core
deposits for the Bank. Also, their sensitivity to changes in interest rates
is significantly less than some other deposits, such as certificates of
deposit. Without these deposits included, the cumulative gap as a percent of
total assets through one year is (6.2%). Savings accounts, because of their
susceptibility to withdrawal and investment in time certificates, are
scheduled to run off at fifteen percent per year.
In the Bank's simulation models, each asset and liability category's
sensitivity to changes in interest rates is estimated. The effects on
net interest income are then projected based on a stable, rising and
falling rate scenario and analyzed on a monthly basis. The results of
this analysis are used in decisions made concerning pricing strategies
for loans and deposits, balance sheet mix, securities portfolio strategies,
liquidity and capital adequacy. The Bank's current one-year simulation
models under stable rates indicate a decline of 3 basis points in yields
on interest-earning assets and also a 26 basis point decline in the cost
of interest-bearing liabilities. This will have a positive effect on
projected net interest margin the next twelve months.
Simulation models performed where rates are increased or decreased by 300
basis points instantaneously have resulted in one-year changes in net
interest income that would not be considered significant and are well
within ALCO guidelines of 10%. The model includes assumptions as to the
sensitivity to rate changes and changes in the cash flows for most of the
asset and liability categories under different rate scenarios. For example,
certain deposit rates generally do not move up or down as quickly or to
the same extent as loan rates. Also, cash flows for mortgage-backed
securities and real estate loans could be different at different rate levels.
-45-
Table 7 - Interest Rate Gap Analysis
(in thousands)
at December 31, 1998
0-3 3-6 6-12 1-5 5+
Total Months Months Months Years Years
-----------------------------------------------------
Loans (1) $310,743 $ 65,044 $ 19,308 $ 32,202 $161,362 $ 32,827
Securities (2) 176,601 24,865 6,714 13,112 47,365 84,545
Short-term funds 678 678 - - - -
------- ------- ------ ------ ------- -------
Total earning
assets 488,022 90,587 26,022 45,314 208,727 117,372
------- ------- ------ ------ ------- -------
Savings 36,213 1,347 1,347 2,694 21,554 9,271
NOW and MMDA 101,551 101,551 - - - -
Other time deposits 194,707 46,739 40,181 49,005 58,139 643
Short-term
borrowings 22,702 22,702 - - - -
Long-term debt 75,539 539 - 30,000 45,000 -
------- ------- ------ ------ ------- -------
Total interest-
bearing funds 430,712 172,878 41,528 81,699 124,693 9,914
------- ------- ------ ------ ------- -------
Period gap 57,310 (82,291) (15,506) (36,385) 84,034 107,458
Cumulative gap - (82,291) (97,797)(134,182) (50,148) 57,310
Gap as a percent
of assets 11.0% (15.8)% (18.8)% (25.8)% (9.6)% 11.0%
<FN>
(1) Excludes adjustments for deferred net origination costs and allowance for
losses.
(2) At amortized cost.
</FN>
-46-
The Bank's simulation models provide results in extreme interest rate
environments and results are used accordingly. Reacting to changes in
economic conditions, interest rates and market forces, the Bank has been
able to alter the mix of short-and long-term loans and investments, and
increase or decrease the emphasis on fixed- and variable-rate products
in response to changing market conditions. By managing the interest rate
sensitivity of its asset and liability composition in this manner, the Bank
has been able to maintain a fairly stable flow of net interest income. Table
8 provides information about the Company's market sensitive financial
instruments other than cash and cash equivalents, FHLB and Federal Reserve
Bank stock, and demand deposit accounts as of December 31, 1998. The
information presented is based on repricing opportunities and projected cash
flows that include expected prepayment speeds and likely call dates.
Table 8 - Financial Instruments Market Risk
(in thousands)
At December 31, 1998
1999 2000 2001 2002
----------------------------------------
Fixed rate loans $ 39,526 $28,821 $20,176 $15,647
Average interest rate 8.68% 8.89% 8.77% 8.62%
Adjustable rate loans 77,031 24,378 29,344 9,247
Average interest rate 8.15 8.15 7.96 8.05
Securities 44,671 17,016 13,115 8,359
Average interest rate 6.46 6.12 6.12 6.12
Interest-bearing deposits 242,865 55,813 9,487 8,314
Average interest rate 3.70 5.61 5.14 3.50
Short-term borrowings 22,702 - - -
Average interest rate 4.31 - - -
Long-term debt 30,539 - 15,000 -
Average interest rate 5.71 - 4.75 -
-47-
Later Fair
2003 Years Total Value
----------------------------------------
Fixed rate loans $10,683 $24,963 $139,816 $141,047
Average interest rate 8.39% 8.50% 8.67%
Adjustable rate loans 23,066 7,864 170,930 171,831
Average interest rate 7.82 6.71 8.00
Securities 8,875 84,544 176,580 177,207
Average interest rate 6.27 5.60 5.96
Interest-bearing deposits 6,079 9,914 332,472 334,117
Average interest rate 4.36 3.04 4.05
Short-term borrowings - - 22,702 22,704
Average interest rate - - 4.31
Long-term debt 30,000 - 75,539 75,594
Average interest rate 5.63 - 5.49
IMPACT OF INFLATION AND CHANGING PRICES
The majority of a financial institution's assets and liabilities are monetary
in nature. Changes in interest rates affect the financial condition of a
financial institution to a greater degree than inflation. Although interest
rates are determined in large measure by changes in the general level of
inflation, they do not change at the same rate nor in the same magnitude, but
rather react in correlation to changes in the expected rate of inflation and
to changes in monetary and fiscal policy.
The Bank's ability to react to changes in interest rates has a significant
impact on financial results. As discussed previously, management attempts to
control interest rate sensitivity in order to protect against wide interest
rate fluctuations.
YEAR 2000 READINESS DISCLOSURE
As with all financial institutions, the Bank's operations rely extensively on
computer systems. The Bank is addressing problems associated with the
possibility that computer systems will not recognize the year 2000 (Y2K)
correctly. A project team of Bank employees has been assembled, with specific
goals and target dates, to ensure the Bank has an effective plan for
identifying, testing and implementing solutions for Y2K. This is being
accomplished either through internal evaluation and testing, or verifiable
documentation from the vendors of specific software and hardware. Senior
management oversees the project and regularly reports to the Board of
Directors. The Bank has substantially completed all year 2000 testing.
-48-
Because compliance work is largely being completed by internal staff, the
Bank does not expect to incur any significant costs with outside contractors
relative to the completion of this portion of the project. It is estimated
at this time that the Bank will spend approximately $500,000 to $750,000
upgrading hardware and software to be Y2K compliant, most of which has been
accomplished. These costs will be amortized over the expected life of each
item, usually three to five years. Most of this hardware and software would
have been upgraded anyway within the next two years, and therefore Y2K
advanced the timing of these expenditures. These projections are only
estimates and may differ materially from the actual results through the end
of 1999.
In addition, financial institutions may experience increases in problem loans
and credit losses in the event that the borrowers fail to properly respond
to the issue, and higher funding costs may come about if consumers react to
publicity about the issue by withdrawing deposits. The Bank has identified
individually significant customers covering both funds providers and funds
takers, to assess the Y2K financial risk originating from them. The Bank
also could be impacted if third parties it deals with in conducting its
business, such as governmental agencies, clearing houses, telephone companies,
utilities companies, and other service providers, fail to properly address
this issue. Accordingly, the Bank is developing contingency plans to assess
these areas and minimize their effect.
EFFECT OF RECENT ACCOUNTING STANDARDS
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.
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information". The statement
requires financial and descriptive information about operating segments of
a business. The statement also requires companies to report revenues for
each major product and service. Adoption of SFAS No. 131 had no effect on
the Company's reported consolidated financial position or net income. See
Note 18 to the Consolidated Financial Statements for the related disclosures.
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
-49-
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 in
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.
-50-
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
See "Market Risk Management" in Item 7, which is incorporated herein by
reference.
-51-
Item 8. Financial Statements and Supplementary Data
- I N D E X -
PAGE
INDEPENDENT AUDITORS' REPORT 53
FINANCIAL STATEMENTS
Consolidated Balance Sheets 54
Consolidated Statements of Income 55
Consolidated Statements of Comprehensive
Income and Changes in Shareholders' Equity 56
Consolidated Statements of Cash Flows 57
Notes to Consolidated Financial Statements 58
-52-
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
InterCounty Bancshares, Inc.
Wilmington, Ohio
We have audited the accompanying consolidated balance sheets of InterCounty
Bancshares, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, comprehensive income and changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of InterCounty
Bancshares, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/J.D. CLOUD & CO. L.L.P.
Certified Public Accountants
Cincinnati, Ohio
February 5, 1999
-53-
InterCounty Bancshares, Inc. and
The National Bank & Trust Company
CONSOLIDATED BALANCE SHEETS
December 31 (thousands)
1998 1997
ASSETS:
Cash and due from banks $ 18,241 $ 17,807
Federal funds sold 640 4,176
Interest bearing deposits in bank 38 1,538
------- -------
Total cash and cash equivalents 18,919 23,521
Securities available for sale, at market value 139,748 111,975
Securities held to maturity (market value-$37,459
in 1998 and $11,624 in 1997) 36,832 11,164
------- -------
Total securities 176,580 123,139
Loans 305,112 277,711
Less-allowance for loan losses 2,641 2,761
------- -------
Net loans 302,471 274,950
Loans held for sale 5,634 -
Premises and equipment 11,459 10,512
Earned income receivable 4,246 3,692
Other assets 1,244 791
------- -------
TOTAL ASSETS $520,553 $436,605
======= =======
LIABILITIES:
Demand deposits $ 41,748 $ 38,662
Savings, NOW, and money market deposits 137,535 117,552
Certificates $100,000 and over 47,705 26,899
Other time deposits 147,232 146,219
------- -------
Total deposits 374,220 329,332
Short-term borrowings 22,702 32,734
Long-term debt 75,539 30,716
Other liabilities 3,369 2,843
------- -------
TOTAL LIABILITIES 475,830 395,625
------- -------
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
Surplus 7,368 7,141
Unearned ESOP shares, at cost (511) (620)
Retained earnings 39,557 35,748
Accumulated other comprehensive income,
net of taxes 188 515
Treasury shares, at cost, 640,799 shares in 1998
and 726,274 shares in 1997 (2,879) (2,804)
------- -------
TOTAL SHAREHOLDERS' EQUITY 44,723 40,980
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $520,553 $436,605
======= =======
The accompanying notes to financial statements are an integral part of these
statements.
-54-
InterCounty Bancshares, Inc. and
The National Bank & Trust Company
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31 (thousands, except per common share data)
1998 1997 1996
INTEREST INCOME:
Interest and fees on loans $24,959 $24,039 $22,413
Interest on securities available
for sale
Taxable 8,113 6,699 5,583
Non-taxable 321 - -
Interest on securities held to
maturity - non-taxable 1,349 621 632
Interest on deposits in banks 26 45 9
Interest on federal funds sold 505 200 187
------ ------ ------
TOTAL INTEREST INCOME 35,273 31,604 28,824
------ ------ ------
INTEREST EXPENSE:
Interest on savings, NOW and
money market deposits 3,521 3,321 3,020
Interest on time certificates
$100,000 and over 2,198 1,394 1,069
Interest on other deposits 8,118 8,307 7,942
------ ------ ------
Total Interest on Deposits 13,837 13,022 12,031
Interest on short-term borrowings 1,622 2,057 1,714
Interest on long-term debt 3,081 411 85
------ ------ ------
TOTAL INTEREST EXPENSE 18,540 15,490 13,830
------ ------ ------
NET INTEREST INCOME 16,733 16,114 14,994
PROVISION FOR LOAN LOSSES 1,150 800 600
------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 15,583 15,314 14,394
------ ------ ------
NON-INTEREST INCOME:
Trust income 1,105 927 733
Service charges on deposits 1,351 1,263 1,099
Other service charges and fees 336 287 307
ATM network fees 574 206 -
Insurance agency commissions 833 792 869
Securities gains 302 300 86
Other 1,025 758 913
------ ------ ------
TOTAL NON-INTEREST INCOME 5,526 4,533 4,007
------ ------ ------
NON-INTEREST EXPENSE:
Salaries 5,781 5,394 4,825
Pension and benefits 984 970 1,056
Equipment 1,917 1,553 942
Occupancy 790 741 738
Deposit insurance 47 47 104
State franchise tax 615 557 493
Marketing 312 279 271
Other 3,400 3,059 3,163
------ ------ ------
TOTAL NON-INTEREST EXPENSE 13,846 12,600 11,592
------ ------ ------
INCOME BEFORE INCOME TAX 7,263 7,247 6,809
PROVISION FOR INCOME TAX 1,889 2,259 1,877
------ ------ ------
NET INCOME $ 5,374 $ 4,988 $ 4,932
====== ====== ======
Earnings per common share $ 1.70 $ 1.59 $ 1.57
Earnings per common share-assuming
dilution $ 1.66 $ 1.55 $ 1.54
The accompanying notes to financial statements are an integral part of these
statements.
-55-
InterCounty Bancshares, Inc. and
The National Bank & Trust Company
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ANE
CHANGES IN SHAREHOLDERS' EQUITY
(thousands)
Retained
Unearned Earnings Accumulated
ESOP Less Cost Other Total Total
Common Shares, of Treasury Comprehensive Shareholders' Comprehensive
Shares Surplus at Cost Shares Income Equity Income
Balance
January 1, 1996 $1,000 $6,903 $ (845) $25,359 $ 1,405 $33,822
Comprehensive income:
Net income 4,932 4,932 $ 4,932
Net unrealized (losses)
on securities available
for sale (net of taxes
of $476) (924) (924) (924)
Reclassification
adjustment for net
realized gain on sale
of available for sale
securities included in
net income (net of
taxes of $29) (57) (57) (57)
-----
Total comprehensive
income 3,951
=====
Dividends declared (856) (856)
Treasury shares
purchased (249) (249)
Stock options
exercised 3 3 6
ESOP shares
earned 19 113 132
----- ----- --- ------ ----- ------
Balance
December 31, 1996 1,000 6,925 (732) 29,189 424 36,806
Comprehensive
Income:
Net income 4,988 4,988 4,988
Net unrealized gains
on securities available
for sale (net of taxes
of $149) 289 289 289
Reclassification
adjustment for net
realized gain on sale
of available for sale
securities included in
net income (net of
taxes of $102) (198) (198) (198)
-----
Total comprehensive
income 5,079
=====
Dividends declared (1,167) (1,167)
Treasury shares
purchased (172) (172)
Stock options
exercised 188 106 294
ESOP shares
earned 28 112 140
----- ----- --- ------ ----- ------
Balance
December 31, 1997 1,000 7,141 (620) 32,944 515 40,980
Comprehensive
Income:
Net income 5,374 5,374 5,374
Net unrealized (losses)
on securities available
for sale (net of taxes
of $86) (167) (167) (167)
Reclassification
adjustment for net
realized gain on sale
of available for sale
securities included in
net income (net of
taxes of $82) (160) (160) (160)
-----
Total comprehensive
income $5,047
=====
Dividends declared (1,567) (1,567)
Treasury shares
purchased (172) (172)
Stock options
exercised 175 99 274
ESOP shares
earned 52 109 161
----- ----- --- ------ ----- ------
Balance
December 31, 1998 1,000 7,368 (511) 36,678 188 44,723
===== ===== === ====== ===== ======
The accompanying notes to financial statements are an integral part of these
statements.
-56-
InterCounty Bancshares, Inc. and
The National Bank & Trust Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 (thousands)
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,374 $ 4,988 $ 4,932
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,228 1,073 791
Provision for loan losses 1,150 800 600
Provision for deferred taxes 27 328 (61)
Net premium amortization (discount
accretion) on securities 4 (236) (353)
Net realized gains on securities
available for sale (302) (300) (86)
Gain on sale of other assets - - (344)
Origination of mortgage loans
held for sale (10,912) (4,370) -
Proceeds from sales of mortgage
loans held for sale 5,665 3,983 -
Increase in income receivable (434) (474) (56)
Decrease (increase) in other assets (833) 132 (112)
Increase (decrease) in interest payable 177 10 (42)
Increase (decrease) in accrued taxes and
other liabilities 651 (366) 336
FHLB stock dividends (298) (240) (209)
ESOP shares earned 161 140 132
------- ------- -------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,658 5,468 5,528
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities
available for sale 10,647 6,480 5,395
Purchases of securities available
for sale (120,056) (85,614) (27,263)
Proceeds from maturities of securities
available for sale 81,622 49,313 22,129
Purchases of securities held to maturity (29,993) (4,604) -
Proceeds from maturities of securities
held to maturity 4,440 1,030 830
Net increase in loans (29,057) (8,853) (31,203)
Proceeds from sale of credit card loans - - 4,241
Purchases of premises and equipment (2,098) (2,544) (2,189)
Proceeds from sale of equipment - - 18
------- ------- -------
NET CASH USED IN INVESTING
ACTIVITIES (84,495) (44,792) (28,042)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 44,888 20,204 17,624
Cash dividends paid (1,447) (1,089) (795)
Net increase (decrease) in short-
term borrowings (10,032) 1,621 3
Advances of long-term debt 45,000 30,000 -
Repayment of long-term debt (177) (198) (194)
Proceeds from stock options exercised 175 237 6
Purchase of treasury shares (172) (172) (249)
------- ------- -------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 78,235 50,603 16,395
------- ------- -------
NET CHANGE IN CASH AND
CASH EQUIVALENTS (4,602) 11,279 (6,119)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 23,521 12,242 18,361
------- ------- -------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 18,919 $ 23,521 $ 12,242
======= ======= =======
The accompanying notes to financial statements are an integral part of these
statements.
-57-
InterCounty Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMTNS
Years ended December 31, 1998, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
InterCounty Bancshares, Inc. (the Company) is a one-bank holding company.
Its wholly-owned subsidiary, The National Bank and Trust Company (the Bank),
provides full banking services, including trust and brokerage services, to
customers located principally in Clinton, Brown, Clermont, Warren and
Highland counties in Ohio. The Bank grants agribusiness, commercial,
consumer, and residential loans to customers throughout its market area. In
1998, the Bank began offering insurance products through its wholly-owned
subsidiaries, the Phillips Group of insurance agencies and the Arnold Jones
Insurance Agency. Available products include property, casualty, and life
insurance.
Basis of Presentation-
The consolidated financial statements include the accounts of the Company
and its direct and indirect subsidiaries. All intercompany accounts and
transactions are eliminated in consolidation. Certain prior period data has
been reclassified to conform to current period presentation.
Use of Estimates-
The preparation of financial statements in conformity with GAAP 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.
Securities-
Investment securities that the Bank has the intent and ability to hold to
maturity are reported at amortized cost, adjusted for amortization of
premiums and accretion of discounts using the interest method. Securities
that are available for sale are reported at fair value with unrealized
holding gains and losses reported net of income taxes as Accumulated Other
Comprehensive Income, a separate component of shareholders' equity.
Realized gains and losses on the sale of securities available for sale are
determined using the specific identification method.
Federal Home Loan Bank (FHLB) stock is an equity interest in the Federal
Home Loan Bank of Cincinnati. It can be sold only at its par value of $100
per share and only to the FHLB or to another member institution. In
addition, the equity ownership rights are more limited than would be the
-58-
case for a public company, because of the oversight role exercised by the
Federal Housing Finance Board in the process of budgeting and approving
dividends. Federal Reserve Bank stock is similarly restricted in
marketability and value. Although classified as securities available for
sale, both investments are carried at cost, which is their par value.
Loans Held for Sale-
Mortgage loans originated for sale in the secondary market are carried at
the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges to
income.
Loans and Allowance for Loan Losses-
Loans are stated at the amount of unpaid principal, reduced by an allowance
for loan losses and net of any deferred origination fees or costs. Net
deferred fees and costs are amortized over the lives of the related loans
using the interest method as an adjustment of loan yields. The allowance for
loan losses is established through provisions charged to expense. 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 borrower's ability to pay. Loans are considered impaired
when management believes, based on current information and events, it is
probable that the Bank will be unable to collect all amounts due according
to the contractual terms of the loan agreement. Impaired loans are measured
by the present value of expected future cash flows using the loan's
effective interest rate. Impaired collateral-dependent loans may be
measured based on collateral value. Smaller-balance homogenous loans,
including residential mortgage and consumer installment loans, are
collectively evaluated for impairment.
Credit losses are charged against the allowance when management believes
that the collectibility of the principal is unlikely. Accrual of interest is
discontinued on a loan when management believes, after considering economic
and business conditions and collection efforts, that the borrower's
financial condition is such that collection of interest is doubtful.
Subsequent cash receipts on nonaccrual loans are recorded as a reduction of
principal, and interest income is recorded once principal recovery is
reasonably assured. 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 probable 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. Previous years' accrued interest is
charged against the allowance for loan losses.
-59-
Premises and Equipment-
Premises and equipment are carried at cost, less accumulated depreciation.
Depreciation is computed using principally the straight-line method over the
estimated useful lives of the related assets.
Marketing Expense-
Marketing costs are expensed as incurred.
Stock Options-
Stock options are accounted for under Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees." In years before
1997, optionees could elect, when the options were exercised, to have the
Company repurchase the shares at book value. Compensation cost and a
liability were recorded during the service period based on changes in book
value. Effective in 1997, and as approved by all optionees, this contingent
obligation of the Company was eliminated. The recorded liability at
December 31, 1996 is recognized as additional consideration for the related
stock when issued. Because options are only granted at a price equal to
market value on the day of grant, under the intrinsic value method of APB
No. 25, the Company, beginning in 1997, does not recognize compensation
expense for options granted.
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation" prescribes the recognition of compensation expense
based on the fair value of options determined on the grant date. As
permitted by SFAS No. 123, the Company has elected to continue applying the
intrinsic value method of APB No. 25. The pro forma disclosures required by
SFAS No. 123 are shown in Note 13.
Income Taxes-
Certain income and expenses are recognized in different periods for
financial reporting than for purposes of computing income taxes currently
payable. Deferred taxes are provided on such temporary differences. These
differences relate principally to the allowance for loan losses,
depreciation and stock option accruals.
Statements of Cash Flows-
For purposes of reporting cash flows, cash equivalents include all highly
liquid investments with a maturity of three months or less when purchased.
Earnings per Common Share-
Earnings per common share (EPS) is calculated by dividing net income by the
weighted average number of common shares outstanding during the period.
Certain shares held in suspense by the Company's employee stock ownership
plan are not considered outstanding until they are committed to be released
for allocation to participants' accounts.
-60-
Stock Split-
On October 1, 1998, the Company's board of directors approved a two-for-one
stock split in the form of a stock dividend. The additional shares
resulting from the split were distributed on October 26, 1998 to
shareholders of record as of October 11, 1998. The consolidated financial
statements, notes and other references to share and per share data have been
retroactively restated to reflect the impact of the stock split.
Fair Value of Financial Instruments-
For cash and due from banks, federal funds sold and other short-term
investments, the carrying amounts reported in the Consolidated Balance Sheet
approximate fair value. For securities, fair market value equals quoted
market price, if available. If a quoted market price was not available,
fair value was estimated using quoted market prices for similar securities.
The estimated fair value of loans was based on the discounted value of
future cash flows expected to be received. The discount rate used was the
rate at which the same loans would be made under current conditions.
The approximate fair value of demand deposits, savings accounts, and other
deposit liabilities without defined maturities is the carrying amount at the
reporting date. The fair value of fixed-maturity certificates of deposit
was estimated using a discounted cash flow calculation applying interest
rates currently offered for deposits of similar remaining maturities.
Carrying value approximates fair value for short-term borrowings and the
Company's variable rate long-term debt. The fair value of fixed rate long-
term debt is based on discounted cash flows using current market rates for
debt with similar terms and remaining maturities.
NOTE 2 - ACQUISITIONS
In October 1998, the Bank acquired all the outstanding common shares of
Phillips Insurance Agency Group, Inc. in exchange for 53,606 shares of the
Company. In December 1998, the Bank acquired all the outstanding common
shares of Arnold Jones Insurance Agency, Inc. in exchange for 17,777 shares
of the Company. The acquisitions qualified as tax-free reorganizations and
have been accounted for as a pooling of interests. Accordingly, the
Company's consolidated financial statements have been restated to
retroactively combine the Company's and the agencies' financial statements
as if the acquisitions had occurred at the beginning of the earliest period
presented. The acquisitions had no material effect on consolidated
shareholders' equity as previously reported. In connection with the
acquisitions, the Bank incurred professional and regulatory fees of $75,000
which were charged to operations in 1998.
-61-
The following table presents the revenues of the agencies included as a
component of non-interest income, the net income of the agencies, and
reconciles the net income previously reported by the Company to the net
income presented in the accompanying consolidated financial statements
(thousands):
1998 1997 1996
Insurance Agency Commissions
Revenues prior to acquisition:
Phillips Group $ 443 $ 593 $ 691
Jones Agency 213 199 178
Revenues since acquisition 177 - -
----- ----- -----
$ 833 $ 792 $ 869
===== ===== =====
Net Income
InterCounty Bancshares, Inc. and
The National Bank & Trust Company $5,330 $4,972 $ 4,862
Insurance agencies 44 16 70
----- ----- -----
$5,374 $4,988 $4,932
===== ===== =====
-62-
NOTE 3 - SECURITIES
The following tables present amortized cost and estimated fair values of
securities at December 31 (thousands):
1998
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Securities available
for sale:
U.S. Treasury and U.S.
Agency notes $ 35,983 $ 113 $ 90 $ 36,006
U.S. Agency mortgage-
backed securities 73,124 202 99 73,227
Other mortgage-backed
securities 16,337 70 86 16,321
Municipals 8,558 175 - 8,733
Federal Reserve/FHLB stock 5,451 - - 5,451
Other 10 - - 10
------- --- --- -------
$139,463 $ 560 $ 275 $139,748
======= === === =======
Securities held to
maturity:
Municipals $ 36,832 $ 760 $ 133 $ 37,459
======= === === =======
1997
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Securities available
for sale:
U.S. Treasury and U.S.
Agency notes $ 44,380 $ 235 $ 18 $ 44,597
U.S. Agency mortgage-
backed securities 49,256 456 9 49,703
Other mortgage-backed
securities 13,212 127 11 13,328
Federal Reserve/FHLB stock 4,337 - - 4,337
Other 10 - - 10
------- --- --- -------
$111,195 $ 818 $ 38 $111,975
======= === === =======
Securities held to
maturity:
Municipals $ 11,164 $ 460 $ - $ 11,624
======= === === =======
-63-
Gross gains realized on sales of securities available for sale were $302,000
for 1998, $300,000 for 1997, and $86,000 for 1996. There were no realized
losses during the three-year period ended December 31, 1998. Securities
with a carrying value of approximately $137.3 million and $67.3 million at
December 31, 1998 and 1997, respectively, were pledged to secure public
deposits, short-term and long-term borrowings and for other purposes as
required by law.
At December 31, 1998 the amortized cost and estimated market value of debt
securities by contractual maturity was as follows. Expected maturities may
differ from contractual maturities when borrowers have the right to call or
prepay obligations (thousands):
Available for Sale Held to Maturity
---------------------- ----------------------
Amortized Market Amortized Market
Cost Value Cost Value
Due within one year $ 1,997 $ 2,020 $ 1,546 $ 1,571
Due from one to five years 14,990 15,023 692 852
Due from five to ten years 16,995 16,957 100 104
Due after ten years 10,559 10,739 34,494 34,932
------- ------- ------ ------
44,541 44,739 36,832 37,459
U.S. Agency mortgage-backed
securities 73,124 73,227 - -
Other mortgage-backed
securities 16,337 16,321 - -
Federal Reserve/FHLB stock 5,461 5,461 - -
------- ------- ------ ------
Total securities $139,463 $139,748 $36,832 $ 37,459
======= ======= ====== ======
-64-
NOTE 4 - LOANS
Major classifications of loans as of December 31 were as follows
(thousands):
1998 1997
Commercial and industrial $ 78,801 $ 63,661
Commercial real estate 29,936 30,835
Agricultural 17,925 18,387
Residential real estate 92,069 82,838
Installment 83,173 79,115
Other 2,402 2,097
------- -------
Total 304,306 276,933
Deferred net origination costs 806 778
Allowance for loan losses (2,641) (2,761)
------- -------
Net loans $302,471 $274,950
======= =======
Mortgage loans serviced for the Federal Home Loan Mortgage Corporation and
excluded from the Consolidated Balance Sheets at December 31, 1998 and 1997
were $8,043,000 and $3,428,000, respectively. In 1996, the Bank sold a $3.9
million credit card loan portfolio. The gain on the sale of $326,000 is
included in Other Non-Interest Income in the Consolidated Statements of
Income.
Changes in the allowance for loan losses for the years ended December 31
were as follows (thousands):
1998 1997 1996
Balance at beginning of period $ 2,761 $ 2,686 $ 2,644
Provision for loan losses 1,150 800 600
Charge offs (1,435) (942) (785)
Recoveries 165 217 227
----- ----- -----
Balance at end of period $ 2,641 $ 2,761 $ 2,686
===== ===== =====
-65-
The total recorded investment in impaired loans at December 31, 1998, the
average for the year, and the related allowance for credit losses as
determined in accordance with SFAS No. 114 were not material. Loans on
which the accrual of interest had been discontinued amounted to $599,000,
$509,000 and $535,000 at December 31, 1998, 1997 and 1996, respectively. If
interest on those loans had been accrued, such income would have
approximated $45,000, $41,000 and $38,000 for the years ended December 31,
1998, 1997 and 1996, respectively. Interest income recognized in the
respective years on these nonaccrual loans was not material. The Bank is
not committed to lend additional funds to debtors whose loans have been
modified to provide a reduction or deferral of principal or interest because
of a deterioration in the financial position of the borrower.
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment were as follows at December 31 (thousands):
1998 1997
Land $ 1,488 $ 1,413
Buildings and leasehold improvements 9,117 8,512
Equipment 6,385 5,512
------ ------
Total cost 16,990 15,437
Accumulated depreciation and amortization (5,531) (4,925)
------ ------
Premises and equipment $11,459 $10,512
====== ======
Depreciation expense related to premises and equipment was $1,148,000,
$1,013,000 and $695,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
-66-
NOTE 6 - LEASES
Future minimum lease payments under non-cancelable operating leases having
initial terms in excess of one year are as follows (thousands):
1999 $ 71
2000 72
2001 71
2002 46
2003 36
Remaining years 200
---
Total minimum lease payments $496
===
Rent expense for all premises and equipment leases was $108,000, $62,000
and $59,000 in 1998, 1997 and 1996, respectively.
NOTE 7 - DEPOSITS
Contractual maturities of certificates of deposit at December 31, 1998 were as follows (thousands):
Certificates All Other
over $100,000 Certificates Total
------------- ------------ -----
1999 $ 37,189 $ 98,927 $ 136,116
2000 10,035 40,429 50,464
2001 332 3,766 4,098
2002 - 2,925 2,925
2003 - 691 691
Thereafter 149 494 643
------ ------- -------
$ 47,705 $ 147,232 $ 194,937
====== ======= =======
-67-
NOTE 8 - EMPLOYEE BENEFIT PLANS
The Bank had a defined benefit pension plan which covered substantially all
employees. Benefits under the Plan were based on a percentage of annual
compensation and years of service. The Bank's funding policy was to
contribute annually an amount necessary to satisfy ERISA funding standards.
Effective December 1, 1997, the defined benefit plan was terminated.
Regulatory approval and final settlement of all benefits under this
Plan occurred during 1998. The settlement of benefits did not have a
significant impact on the Company's financial condition or results of
operations. Net periodic pension cost was $117,000 and $136,000 in 1997 and
1996, respectively. There were no costs associated with the Plan in 1998.
In 1996, the Bank adopted a 401(k) salary deferral plan. Substantially all
employees who meet minimum age and length of service requirements are
eligible to participate. Employee deferrals may be subject to employer-
matching contributions up to specified limits. Discretionary contributions
may also be made to the plan. Total matching and discretionary
contributions made by the Bank for 1998 amounted to $88,000. There were no
employer contributions for 1997 or 1996.
The Company sponsors a leveraged employee stock ownership plan (ESOP)
covering substantially all of its employees who meet minimum age and length
of service requirements. The Company is obligated to make annual
contributions sufficient to enable the ESOP to repay the loan, including
interest. The shares pledged as collateral are reported as unearned ESOP
shares in the consolidated balance sheets. Additional contributions to the
Trust are determined by the Board of Directors. Total Company contributions
were $96,000, $202,000 and $36,000 for the years ended December 31, 1998,
1997 and 1996, respectively.
Shares are held in a suspense account for allocation among participants as
the loan is repaid. The number of shares released is based on the
proportion of debt service paid in the year. Released shares are allocated
to participants' accounts on the basis of compensation. Dividends on
unallocated shares are used to repay the loan. Dividends on allocated
shares are allocated to the participants' accounts.
Benefits are payable upon retirement, death, disability or separation from
service. Benefits are paid in common shares of the Company. If the common
shares of the Company are not tradable on an established market when
benefits are distributed, participants have the option to put the shares to
the Company at a value determined by independent appraisal. In 1998 and
1997, the Company purchased 8,418 shares and 3,000 shares, respectively,
from ESOP participants. The estimated fair value of allocated shares
remaining in the ESOP was $11,502,000 and $10,861,000 at December 31, 1998
and 1997, respectively. The estimated fair value for 1997 was based on the
independent appraisal. The 1998 independent appraisal has not been
completed and, therefore, estimated fair value at December 31, 1998 is based
on the 1997 relationship of appraised value to book value applied to the
December 31, 1998 book value.
-68-
Shares purchased by the ESOP since 1993 are accounted for in accordance with
Statement of Position 93-6. Accordingly, as these shares are released from
collateral, the Company reports compensation expense equal to the current
estimated fair value of the released shares. Once released, the shares are
considered outstanding for earnings-per-share (EPS) computations. Dividends
on allocated shares reduce retained earnings; dividends on unallocated
shares are recorded as a reduction of ESOP debt.
Compensation expense for ESOP shares acquired in 1986 is equal to the
principal repaid on the related borrowing plus any additional cash
contributions. Dividends on 1986 ESOP shares are charged to retained
earnings. These shares are considered outstanding for EPS computations.
The ESOP shares as of December 31 were as follows:
1998 1997
---------------- ----------------
1993 1986 1993 1986
Shares Shares Shares Shares
Allocated shares 17,060 510,564 13,518 516,302
Shares released for allocation 4,330 21,958 4,502 22,986
Unreleased shares 17,704 89,770 22,034 111,728
------ ------- ------ -------
Total ESOP shares 39,094 622,292 40,054 651,016
====== ======= ====== =======
At December 31, 1998, the estimated fair value of unreleased 1993 shares was
$386,000. ESOP compensation expense was $105,000, $178,000, and $25,000 for
1998, 1997 and 1996, respectively.
NOTE 9 - SHORT-TERM BORROWINGS
A summary of short-term borrowings follows (thousands):
1998 1997
-------------- --------------
Amount Rate Amount Rate
At December 31
Federal Home Loan Bank borrowings $ 6,000 5.15% $14,200 5.92%
Securities sold under agreements
to repurchase 16,547 4.13 16,438 6.11
U.S. Treasury demand notes 155 5.25 2,096 5.75
------ ------
Total short-term borrowings $22,702 4.41 $32,734 6.00
====== ======
Years ended December 31:
Average amount outstanding $31,582 $37,928
Maximum month-end balance 37,903 33,364
Weighted average interest rate 5.14 5.42
-69-
NOTE 10 - LONG-TERM DEBT
Long-term debt consists of the following at December 31 (thousands):
1998 1997
Federal Home Loan Bank borrowings $75,000 $30,000
ESOP Trust debt guarantee 539 647
Capital lease obligation - 69
------ ------
$75,539 $30,716
====== ======
Maturities of long-term debt are as follows (thousands):
Year
- ----
1999 $ 108
2000 108
2001 108
2002 30,108
2003 107
thereafter (2008) 45,000
The FHLB borrowings consist of three fixed-rate notes with a weighted
average rate of 5.49%. Interest is payable monthly. At the option of the
Federal Home Loan Bank, these notes can be converted to variable-rate
instruments at certain dates. The first such date is October 1999. If
converted, the rate would be the three month LIBOR rate, adjusted quarterly.
Until the conversion date of each note, there is a prepayment penalty. At
December 31, 1998, FHLB borrowings, including short-term borrowings of
$6,000,000, were collateralized by a blanket pledge of certain residential
real estate loans totaling approximately $75 million and mortgage-backed
securities with a carrying value of $59 million.
-70-
The ESOP Trust loan agreement contains various covenants for the Company
which include a minimum net worth and restrictions on additional
indebtedness. The note may be prepaid without penalty with prepayments
applying in the inverse order of the maturities of the scheduled payments.
Interest is due quarterly at the prime rate, 7.75% at December 31, 1998.
Scheduled principal payments are approximately $108,000 annually through
2003.
NOTE 11 - INCOME TAXES
Income taxes provided for in the statements of income at December 31 consist
of the following (thousands):
1998 1997 1996
Income taxes currently payable:
Applicable to income exclusive of
securities transactions $1,759 $1,829 $1,909
Applicable to securities transactions 103 102 29
----- ----- -----
Total income taxes currently payable 1,862 1,931 1,938
----- ----- -----
Deferred income taxes resulting
from temporary differences:
Provision for loan losses 41 (71) (60)
Depreciation (129) 258 16
Stock option accruals 33 15 (70)
Loan origination fees-net - 43 (2)
FHLB stock dividends 101 81 71
Accruals deductible for tax purposes when paid (45) 17 (6)
Other 26 (15) (10)
----- ----- -----
Total deferred income taxes 27 328 (61)
----- ----- -----
Provision for income tax $1,889 $2,259 $1,877
===== ===== =====
A reconciliation of the statutory income tax rate to the Company's effective
tax rate at December 31 follows:
1998 1997 1996
Statutory tax rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Tax exempt interest (7.0) (2.9) (3.3)
Tax credits - - (3.2)
Other-net (1.0) .1 .1
---- ---- ----
Effective tax rate 26.0% 31.2% 27.6%
==== ==== ====
-71-
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and their basis for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities at December 31 were as
follows (thousands):
1998 1997
Deferred tax assets:
Allowance for loan losses $ 556 $ 552
Stock option accruals 224 276
Accruals not currently deductible 9 26
---- ----
Total deferred tax assets 789 854
---- ----
Deferred tax liabilities:
Depreciation of premises and equipment (357) (487)
Unrealized gains on securities available for sale (97) (265)
FHLB stock dividends (312) (211)
Other-net - (9)
---- ----
Total deferred tax liabilities (766) (972)
---- ----
Net deferred taxes $ 23 $ (118)
==== ====
Due primarily to the Company's taxable position in prior years, a valuation
allowance for deferred tax assets was unnecessary at December 31, 1998 and
1997.
-72-
NOTE 12- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The Bank paid interest of $18,363,000, $15,471,000 and $13,857,000 in 1998,
1997 and 1996, respectively. The Bank paid federal income taxes of
$1,452,000, $2,251,000 and $1,761,000 in 1998, 1997 and 1996, respectively.
NOTE 13 - STOCKHOLDER'S EQUITY
Under the terms of the Company's 1992 nonqualified compensatory stock option
plan (the 1992 Plan), 7% of the authorized and issued common shares of the
Company are reserved for the purpose of granting options to key bank
personnel. Awards under the Plan are made at the discretion of the Board of
Directors. The option price is not less than the fair market value of the
shares at the date of grant. The options granted have a term of ten years
and become exercisable in equal installments on the first through fifth
anniversaries of the date of grant. Compensation expense in connection with
this plan is included in pension and benefits expense in the consolidated
statements of income in the amount of $173,000 for 1996. No compensation
expense was recorded for this plan in 1998 or 1997.
The Company applies APB No. 25 in accounting for its stock option plans.
Accordingly, compensation expense recognized for stock options issued has
been limited to the years prior to 1997 when the Company was obligated, at
the optionees' election, to repurchase the shares at book value. The
expense reported in 1996 and earlier years would have been the same under
SFAS No. 123. Had compensation expense for the Company's stock options
granted in 1997 and 1998 been recognized under the methodology prescribed by
SFAS No. 123, the Company's net income and earnings per share would have
been impacted as follows:
1998 19977
Report net income $5,374 4,988
Pro forma net income 5,354 4,956
Reported earnings per share-
assuming dilution 1.66 1.55
Pro forma earnings per share-
assuming dilution 1.65 1.54
-73-
The fair value of options granted, which is amortized to expense over the
option vesting period in determining the pro forma results, was estimated at
the date of grant using a Black-Scholes option pricing model and the
following assumptions for 1998 and 1997, respectively: risk-free interest
rates of 4.6% and 6.5%, expected lives of 9.0 and 9.5 years, expected
volatility of 15% and 22%, and expected dividend yields of 2.3% and 2.5%.
Based on these assumptions, the fair value of options granted in 1998 and
1997 was $5.13 and $4.45, respectively.
Details of the 1992 Plan are as follows:
Weighted-
Average Shares
Exercise Shares Shares Available
Price Outstanding Exercisable for Grant
-------- ----------- ----------- ---------
Balance, December 31, 1995 $ 7.18 161,946 68,922 105,380
Became exercisable 32,642
Exercised 6.56 (630) (630) 630
------- ------- -------
Balance, December 31, 1996 7.18 161,316 100,934 106,010
Granted 13.63 27,300 (27,300)
Became exercisable 32,640
Exercised 6.56 (1,830) (1,830) 1,830
------- ------- -------
Balance, December 31, 1997 8.12 186,786 131,744 80,540
Granted 23.25 9,000 (9,000)
Became exercisable 18,501
Exercised 7.77 (22,510) (22,510) 22,510
------- ------- -------
Balance, December 31, 1998 8.96 173,276 127,735 94,050
======= ======= =======
-74-
The weighted-average exercise price of exercisable options at December 31,
1998, 1997 and 1996 was $6.83, $6.42 and $6.19, respectively. The
following table summarizes information for options currently outstanding and
exercisable at December 31, 1998:
Options Outstanding
------------------------------------------------
Range of Wtd. Avg. Wtd. Avg.
Prices Number Remaining Life Exercise Price
-------- ------ -------------- --------------
$ 5.51-6.56 101,550 3.1 years $ 5.55
9.63-13.63 62,726 7.1 years 12.43
23.25 9,000 9.4 years 23.25
------
5.51-23.25 173,276 4.9 years 8.96
=======
Options Exercisable
--------------------------------------
Wtd. Avg.
Number Exercise Price
------ --------------
101,550 $ 5.55
26,185 11.78
- -
-------
127,735 6.83
=======
The following is a reconciliation of weighted average shares for earnings per
share (EPS) computations to the weighted average shares including the effect
of stock options for diluted EPS computations:
1998 1997 1996
Weighted average shares for EPS 3,153,530 3,137,193 3,132,375
Effect of dilutive stock options 81,948 79,354 69,634
--------- --------- ---------
Weighted average shares for EPS-
assuming dilution 3,235,478 3,216,547 3,202,009
========= ========= =========
-75-
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, standby
letters of credit and certain credit card accounts sold with recourse. They
involve, to varying degrees, elements of credit risk in excess of the amount
recognized in the balance sheet. The Bank's exposure to credit loss in the
event of nonperformance by the other party to the financial instrument for
commitments to extend credit is represented by the contract amount of those
instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. Financial
instruments whose contract amounts represent off-balance-sheet credit risk at
December 31 were as follows (thousands):
1998 1997
Commitments to extend credit $39,341 $30,951
Standby letters of credit 1,704 1,977
Loan guarantees 1,028 784
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements.
The Bank evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained if deemed necessary by the Bank is based on
management's credit evaluation of the counter party. Collateral held varies,
but may include accounts receivable, crops, inventory, property, plant and
equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. At December 31,
1998 and 1997, standby letters of credit were primarily issued to support
public bond financing by state and local government units. They expire during
the period from 1999 through 2012. Approximately 62% of the amount
outstanding at December 31, 1998 was secured. Approximately 82% of the amount
outstanding at December 31, 1997 was secured.
-76-
Loan guarantees consist of business credit card accounts offered through a
correspondent bank with recourse. Of the aggregate credit limit for these
accounts at December 31, 1998 and 1997, the amount outstanding was $164,000
and $117,000, respectively.
The Parent Company and its subsidiary are parties to various claims and
proceedings arising in the normal course of business. Management, after
consultation with legal counsel, believes that the liabilities, if any,
arising from such proceedings and claims will not be material to the
consolidated financial position or results of operations.
NOTE 15 - RELATED PARTY TRANSACTIONS
At December 31, 1998 and 1997, executive officers, directors and companies
in which they have a direct or indirect interest, were indebted to the Bank
directly or as guarantors in the aggregate amount of $9,213,000 and
$8,380,000, respectively. During 1998, $3,842,000 in new loans were made;
repayments totaled $3,009,000. Such transactions originate in the normal
course of the Bank's operations as a depository and lending institution.
NOTE 16 - FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
The following disclosures are made in accordance with the provisions of SFAS
No. 107, "Disclosures About Fair Value of Financial Instruments," which
requires disclosure of fair value information about both on- and off-balance
sheet financial instruments for which it is practicable to estimate that
value. Because SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements, any aggregation of
the fair value amounts presented would not represent the underlying value of
the Company.
Carrying amounts and estimated fair values for financial instruments as of
December 31 were as follows (thousands):
1998 1997
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
FINANCIAL ASSETS:
Cash and due from banks $ 18,241 $ 18,241 $ 17,807 $ 17,807
Federal funds sold 640 640 4,176 4,176
Interest bearing deposits in banks 38 38 1,538 1,538
Securities available for sale 139,748 139,748 111,975 111,975
Securities held to maturity 36,832 37,459 11,164 11,624
Loans, net 302,471 304,604 274,950 277,590
Loans held for sale 5,634 5,640 - -
FINANCIAL LIABILITIES:
Deposits 374,220 375,866 329,332 330,490
Short-term borrowings 22,702 22,702 32,734 32,734
Long-term debt 75,539 75,306 30,716 30,716
The fair value of off-balance-sheet financial instruments at December 31, 1998
and 1997, was not material.
-77-
NOTE 17 - REGULATORY MATTERS
The principal source of income and funds for the Holding Company is dividends
paid by the Bank subsidiary. During the year 1999, dividends that the Bank
subsidiary can pay to the Holding Company without prior approval of regulatory
agencies is limited to net income in 1999.
Banks and bank holding companies must meet certain minimum capital
requirements set by federal banking agencies. The minimum regulatory
capital ratios are 8% for total risk-based, 4% for Tier I risk-based, and
4% for leverage. For various regulatory purposes, institutions are
classified into categories based upon capital adequacy. The highest "well
capitalized" category requires capital ratios of at least 10% for total risk-
based, 6% for Tier I risk-based, and 5% for leverage. As of the most recent
notification from their regulators, the Holding Company and Bank were
categorized as "well capitalized" under the regulatory framework for prompt
corrective action.
A summary of the regulatory capital of the Holding Company and the Bank at
December 31 follows (thousands):
1998 1997
------------------ ------------------
Holding Holding
Company Bank Company Bank
------- ---- ------- ----
Regulatory Capital:
Shareholders' equity $44,723 $36,548 $40,980 $41,609
Goodwill and other intangibles - - (80) (80)
Net unrealized securities gains (188) (188) (515) (515)
------ ------ ------ ------
Tier I risk-based capital 44,535 36,360 40,385 41,014
Eligible allowance for loan
losses 2,641 2,641 2,761 2,761
------ ------ ------ ------
Total risk-based capital $47,176 $39,001 $43,146 $43,775
====== ====== ====== ======
Capital Ratios:
Total risk-based 14.18% 11.72% 14.66% 14.87%
Tier I risk-based 13.38 10.93 13.72 13.93
Tier I leverage 8.59 7.02 9.25 9.40
The Federal Reserve Act requires depository institutions to maintain cash
reserves with the Federal Reserve Bank. In 1998 and 1997, the Bank's average
reserve balances were $4,631,000 and $3,782,000, respectively.
-78-
NOTE 18 - 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 for the years ended December 31 were as
follows: (thousands)
1998 1997 1996
Banking $ 38,287 $ 34,242 $ 31,229
Trust services 1,105 927 733
ATM network 574 206 -
Insurance agencies 833 792 869
------ ------ ------
$ 40,799 $ 36,167 $ 32,831
====== ====== ======
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.
-79-
NOTE 19 - PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for InterCounty Bancshares, Inc. (parent
company only) follows (thousands):
Condensed Balance Sheets
December 31
1998 1997
Assets:
Cash $ 9,113 $ 10
Investment in subsidiary 36,548 41,603
Other assets 3 297
------ ------
Total assets $45,664 $41,910
====== ======
Liabilities:
Long-term debt $ 539 $ 647
Other liabilities 402 283
------ ------
Total liabilities 941 930
Shareholders' equity 44,723 40,980
------ ------
Total liabilities and
shareholders' equity $45,664 $41,910
====== ======
Condensed Statements of Income
Years ended December 31
1998 1997 1996
Income:
Dividends from subsidiary $10,265 $1,119 $1,115
----- ----- -----
Expenses:
Interest on long-term debt 55 65 72
Other expense 64 40 35
----- ----- -----
Total expense 119 105 107
----- ----- -----
Income before income tax benefit and
equity in undistributed income of
subsidiary 10,146 1,014 1,008
Income tax benefit 1 1 2
Equity in undistributed income of
subsidiary (4,773) 3,973 3,922
----- ----- -----
Net income $ 5,374 $4,988 $4,932
====== ===== =====
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Condensed Statements of Cash Flows
Years ended December 31 (thousands)
1998 1997 1996
Cash flows from operating activities:
Net income $ 5,374 $ 4,988 $ 4,932
Adjustments for non-cash items-
Equity in undistributed income
of subsidiary 4,773 (3,973) (3,922)
Payment of interest on long-term debt
by subsidiary 55 65 72
(Increase) decrease in other assets 294 (78) (111)
Provision for deferred taxes 5 (1) (2)
Release of earned ESOP shares 109 31 25
Other, net 47 - -
------ ----- -----
Net cash provided by operating activities 10,657 1,032 994
------ ----- -----
Cash flows from financing activities:
Cash dividends paid (1,458) (1,089) (795)
Payments to acquire treasury shares (173) (172) (249)
Proceeds from stock options exercised 175 237 6
Other, net (98) - (6)
----- ----- -----
Net cash used in financing activities (1,554) (1,024) (1,044)
----- ----- -----
Net change in cash 9,103 8 (50)
Cash at beginning of year 10 2 52
----- ----- -----
Cash at end of year $9,113 $ 10 $ 2
===== ===== =====
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Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information contained in the Proxy Statement under the captions "BOARD OF
DIRECTORS," "EXECUTIVE OFFICERS" and "SECTION (16)a BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE" is incorporated herein by reference.
Item 11. Executive Compensation.
The information contained in the PROXY STATEMENT under the caption
"COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS" is incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information contained in the Proxy Statement under the caption "VOITING
SECURITIES AND OWNERSHIP OF CETAIN BENEFICIAL OWNERS AND MANAGEMENT" is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information contained in the Proxy Statement under the caption "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS" is incorporated herein by reference.
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements - See Index to Consolidated Financial
Statements on page 57 of this Form 10-K.
(2) Financial Statement Schedules - None
(3) Exhibits - See Exhibit Index at page of this Form 10-K.
(b) A report on Form 8-K was filed (Date of Report - August 13, 1998)
reporting on Item 5, Other Events. Announced a special meeting of
shareholders to adopt an amendment to its Articles of Incorporation
to authorize additional shares. The Board of Directors expected to
declare a two-for-one stock split in the form of a stock dividend
if the shareholders adopt the amendment.
A report on Form 8-K was filed (Date of Report - October 1, 1998)
reporting on Item 5, Other Events. Announced the Board of
Directors of InterCounty Bancshares, Inc. declared a two-for-one
stock split in the form of a stock dividend payable on October 26,
1998, to shareholders of record on October 11, 1998.
A report on Form 8-K was filed (Date of Report - October 8, 1998)
reporting on Item 5, Other Events. Announced that on October 8,
1998, The National Bank and Trust Company, a wholly owned
subsidiary of InterCounty Bancshares, Inc. consummated the
acquisition of all the outstanding shares of Phillips Insurance
Agency Group, Inc., an Ohio corporation for 26,803 (before effect
of two-for-one stock split on October 26, 1998) common shares
of InterCounty Bancshares, Inc.
A report on Form 8-K was filed (Date of Report - November 13, 1998)
reporting on Item 5, Other Events. Submitted a copy of the
Agreement and Plan of Reorganization, dated November 13, 1998,
that provides for the acquisition of Arnold Jones Insurance Agency,
Inc. by the National Bank and Trust Company. Submitted a copy of
the InterCounty Bancshares News Release dated November 13, 1998,
reporting that under the terms of the agreement, the shareholders
of Jones will receive shares of InterCounty in exchange for all
the outstanding shares of Jones.
A report on Form 8-K was filed (Date of Report - December 11, 1998)
reporting on Item 5, Other Events. Announced that on December 11,
1998 National Bank and Trust Company acquired all of the
outstanding shares of Arnold Jones Insurance Agency, Inc. for
17,777 common shares of InterCounty Bancshares, Inc.
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
[C] [S]
3.1 Articles of Incorporation of
InterCounty Bancshares, Inc.
3.2 Code of Regulations of
InterCounty Bancshares, Inc. Incorporated by
reference to the S-1, Exhibit 3.2.
10.1 InterCounty Bancshares, Inc. 1993 Stock Option
Plan Incorporated by reference to the
Registration Statement on Form S-8 filed with
the Securities and Exchange Commission on
March 23, 1995, Exhibit 4(c).
10.2 InterCounty Bancshares, Inc. Non-qualified
Stock Option Plan Incorporated by reference
to the S-1, Exhibit 10.1.
21 Subsidiaries of InterCounty Bancshares, Inc.
23 Consent of Independent Certified Public
Accountants
27.1 Financial Data Schedule for the Year Ended
December 31, 1998.
27.2 Restated Financial Data Schedule for the Three
Months Ended March 31, 1998.
27.3 Restated Financial Data Schedule for the Six
Months Ended June 30, 1998.
27.4 Restated Financial Data Schedule for the Nine
Months Ended September 30, 1998.
27.5 Restated Financial Data Schedule for the Three
Months Ended March 31, 1997.
27.6 Restated Financial Data Schedule for the Six
Months Ended June 30, 1997.
27.7 Restated Financial Data Schedule for the Nine
Months Ended September 30, 1997.
27.8 Restated Financial Data Schedule for the Year
Ended December 31, 1997.
27.9 Restated Financial Data Schedule for the Year
Ended December 31, 1996.
99 Safe Harbor Under the Private Securities
Litigation Reform Act of 1995
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ Timothy L. Smith
-------------------------
March 30, 1999 Timothy L. Smith
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been duly signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /s/ Charles L. Dehner
- ----------------------------
Charles L. Dehner
Executive Vice President,
Treasurer and a Director
(Principal Accounting Officer)
Date March 30, 1999
By /s/ James W. Foland By /s/ Timothy L. Smith
- --------------------------- ------------------------------
James W. Foland Timothy L. Smith
Secretary and a Director President, Chief Executive Officer
and a Director
Date March 30, 1999 Date March 30, 1999
By /s/ S. Craig Beam By /s/ George F. Bush
- --------------------------- ------------------------------
S. Craig Beam George F. Bush
Director Director
Date March 31, 1999 Date March 30, 1999
By /s/ Georgia H. Miller By /s/ Robert A. Raizk
- --------------------------- ------------------------------
Georgia H. Miller Robert A. Raizk
Director Director
Date March 30, 1999 Date March 30, 1999
By /s/ Darleen M. Myers
- ---------------------------
Darleen M. Myers
Director
Date March 30, 1999
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