UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended June 30, 1999
Commission file number 0-23134
INTERCOUNTY BANCSHARES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 31-1004998
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
48 North South Street, Wilmington, Ohio 45177
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(937) 382-1441
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares outstanding of the issuer's common stock, without par
value, as of August 1, 1999, was 3,144,344 shares.
INTERCOUNTY BANCSHARES, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1999, December 31, 1998
and June 30, 1998 . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Income -
Three and six Months Ended June 30, 1999
and 1998. . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Comprehensive Income
and Changes in Shareholders' Equity -
Six Months Ended June 30, 1998 and 1999 . . . . . . . . .3-4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1999 and 1998 . . . . . . . . .5
Notes to Consolidated Financial Statements . . . . . . . .6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . .9-15
Item 3. Quantitative and Qualitative Disclosures
about Market Risks. . . . . . . . . . . . . . . . . . .15
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 16
Item 2. Changes in Securities and Use of Proceeds . . . . . . . 16
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . 16
Item 4. Submission of Matters to a Vote of Security Holders . . 16
Item 5. Other Information . . . . . . . . . . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . 16
Part I - Financial Information
Item 1. Financial Statements
INTERCOUNTY BANCSHARES, INC. and
THE NATIONAL BANK & TRUST COMPANY
CONSOLIDATED BALANCE SHEETS
At June 30, 1999, December 31, 1998 and June 30, 1998
(thousands)
June 30, December 31, June 30,
1999 1998 1998
(unaudited) (a) (unaudited)
ASSETS:
Cash and due from banks $ 17,317 $ 18,241 $ 17,024
Federal funds sold 82 640 3,235
Interest bearing deposits in bank 58 38 1,480
------- ------- -------
Total cash and cash equivalents 17,457 18,919 21,739
Securities available for sale, at
market value 121,554 139,748 144,595
Securities held to maturity (market
value-$37,717, $37,459, and $22,559) 38,851 36,832 22,198
------- ------- -------
Total securities 160,405 176,580 166,793
Loans 331,830 305,112 281,084
Less-allowance for loan losses 2,806 2,641 2,666
------- ------- -------
Net loans 329,024 302,471 278,418
Loans held for sale 1,286 5,634 2,332
Premises and equipment 12,182 11,459 10,359
Earned income receivable 4,049 4,246 3,826
Other assets 2,320 1,244 1,010
------- ------- -------
TOTAL ASSETS $526,723 $520,553 $484,477
======= ======= =======
LIABILITIES:
Demand deposits $ 41,349 $ 41,748 $ 38,788
Savings, NOW, and money market
deposits 141,792 137,535 123,241
Certificates $100,000 and over 40,263 47,705 38,066
Other time deposits 145,810 147,232 143,978
------- ------- -------
Total deposits 369,214 374,220 344,073
Short-term borrowings 35,737 22,702 93,891
Long-term debt 75,539 75,539 670
Other liabilities 3,356 3,369 2,970
------- ------- -------
TOTAL LIABILITIES 483,846 475,830 441,604
------- ------- -------
SHAREHOLDERS' EQUITY:
Preferred stock-no par value,
authorized 100,000 shares; none
issued
Common stock-no par value, authorized
6,000,000 shares; issued 3,818,950
shares 1,000 1,000 1,000
Surplus 7,520 7,368 7,285
Unearned ESOP shares, at cost (512) (511) (620)
Retained earnings 41,167 39,557 37,856
Accumulated other comprehensive
income, net of taxes (2,126) 188 412
Treasury shares, at cost, 674,606
shares at June 30, 1999; 640,799
at December 31, 1998; 639,701 shares
at June 30, 1998 (4,172) (2,879) (3,060)
------- ------- -------
TOTAL SHAREHOLDERS' EQUITY 42,877 44,723 42,873
------- ------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $526,723 $520,553 $484,477
======= ======= =======
<FN>
(a) Financial information as of December 31, 1998, has been derived from the
audited, consolidated financial statements of the Registrant.
</FN>
The accompanying notes to financial statements are an integral part of these
statements.
-1-
Part I - Financial Information
(Continued)
Item 1. Financial Statements
INTERCOUNTY BANCSHARES, INC. and
THE NATIONAL BANK & TRUST COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(thousands, except shares and per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1999 1998 1999 1998
INTEREST INCOME:
Interest and fees on loans $6,754 $6,127 $13,305 $12,130
Interest on securities
available for sale:
Taxable 1,895 1,972 3,845 3,718
Non-taxable 112 80 220 80
Interest on securities held
to maturity - non-taxable 484 311 942 507
Interest on deposits in banks 2 10 4 18
Interest on federal funds sold 9 185 34 386
----- ----- ------ ------
TOTAL INTEREST INCOME 9,256 8,685 18,350 16,839
----- ----- ------ ------
INTEREST EXPENSE:
Interest on savings, NOW and
money market deposits 929 866 1,842 1,696
Interest on time certificates
$100,000 and over 565 500 1,175 876
Interest on other deposits 1,900 1,991 3,872 4,041
Interest on short-term borrowings 312 4 570 422
Interest on long-term debt 1,038 1,167 2,062 1,604
----- ----- ------ ------
TOTAL INTEREST EXPENSE 4,744 4,528 9,521 8,639
----- ----- ------ ------
NET INTEREST INCOME 4,512 4,157 8,829 8,200
PROVISION FOR LOAN LOSSES 350 225 700 450
----- ----- ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,162 3,932 8,129 7,750
----- ----- ------ ------
NON-INTEREST INCOME:
Trust services 292 270 563 508
Service charges on deposits 373 342 718 663
Other service charges and fees 95 78 182 155
ATM network fees 177 141 319 247
Insurance agency commissions 251 208 458 416
Securities gains 21 - 21 -
Other 260 265 483 583
----- ----- ------ ------
TOTAL NON-INTEREST INCOME 1,469 1,304 2,744 2,572
----- ----- ------ ------
NON-INTEREST EXPENSES:
Salaries 1,583 1,423 3,132 2,834
Employee benefits 263 234 523 485
Equipment 526 475 1,013 947
Occupancy 208 194 417 385
State franchise tax 105 153 261 309
Marketing 72 83 141 154
Other 943 806 1,811 1,645
----- ----- ------ ------
TOTAL NON-INTEREST EXPENSE 3,700 3,368 7,298 6,759
----- ----- ------ ------
INCOME BEFORE INCOME TAX 1,931 1,868 3,575 3,563
PROVISION FOR INCOME TAX 485 494 893 1,006
----- ----- ------ ------
NET INCOME $1,446 $1,374 $ 2,682 $ 2,557
===== ===== ====== ======
Basic earnings per common share $ 0.46 $ 0.43 $ 0.85 $ 0.81
Diluted earnings per common share 0.45 0.42 0.83 0.79
Dividends declared per common share 0.17 0.125 0.34 0.25
AVERAGE SHARES OUTSTANDING:
To compute basic earnings
per common share 3,164,687 3,158,817 3,163,925 3,152,619
To computed diluted earnings
per common share 3,241,716 3,241,601 3,241,413 3,234,421
The accompanying notes to financial statements are an integral part of these
statements.
-2-
Part I - Financial Information
(Continued)
Item 1. Financial Statements
INTERCOUNTY BANCSHARES, INC. and THE NATIONAL BANK & TRUST COMPANY
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME and CHANGES IN SHAREHOLDERS' EQUITY
(thousands, except per share data)
(unaudited)
Retained
Unearned Earnings Accumulated
ESOP Less Cost Other Total Total
Common Shares of Treasury Comprehensive Shareholders' Comprehensive
Shares Surplus at Cost Shares Income Equity Income
Balance January 1, 1998 $1,000 7,141 (620) 32,944 515 40,980
Comprehensive
Income:
Net income 2,557 2,557 $2,557
Net unrealized (losses)
on securities available
for sale (net of taxes
of $53) (103) (103) (103)
-----
Total comprehensive income $2,454
=====
Dividends declared
($.25 per share) (770) (770)
Stock options exercised 121 65 186
ESOP shares earned 23 23
----- ----- --- ------ --- ------
Balance June 30, 1998 $1,000 7,285 (620) 34,796 412 42,873
===== ===== === ====== === ======
-3-
Part I - Financial Information
(Continued)
Item 1. Financial Statements
INTERCOUNTY BANCSHARES, INC. and THE NATIONAL BANK & TRUST COMPANY
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME and CHANGES IN SHAREHOLDERS' EQUITY (Continued)
(thousands, except per share data)
(unaudited)
Retained
Unearned Earnings Accumulated
ESOP Less Cost Other Total Total
Common Shares of Treasury Comprehensive Shareholders' Comprehensive
Shares Surplus at Cost Shares Income Equity Income
Balance January 1, 1999 $1,000 7,368 (511) 36,678 188 44,723
Comprehensive
Income:
Net income 2,682 2,682 $2,682
Net unrealized (losses)
on securities available
for sale (net of taxes
of $237) (2,300) (2,300) (2,300)
Reclassification adjustment
for net realized gain on
sale of available-for-sale
securities included in net
income (net of taxes of $7) (14) (14) (14)
-----
Total comprehensive income $ 368
=====
Dividends declared
($.34 per share) (1,071) (1,071)
Treasury shares purchased (1,360) (1,360)
Stock options exercised 109 66 175
ESOP shares earned 43 (1) 42
----- ----- --- ------ ----- ------
Balance June 30, 1999 $1,000 7,520 (512) 36,995 (2,126) 42,877
===== ===== === ====== ===== ======
-4-
Part I - Financial Information
(Continued)
Item 1. Financial Statements
INTERCOUNTY BANCSHARES, INC. and
THE NATIONAL BANK & TRUST COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(unaudited)
Six Months Ended
June 30
------------------
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,682 $ 2,535
Adjustments for non-cash items -
Depreciation and amortization 618 613
Provision for loan losses 700 450
Net realized gains on securities available for sale (21) -
Net premium amortization of securities
available for sale 198 49
Net discount accretion of securities held to maturity (1) (78)
Origination of mortgage loans held for sale (1,910) (3,721)
Proceeds from sales of mortgage loans held for sale 6,258 1,388
Increase in income receivable 197 (135)
Increase in other assets 164 (505)
Increase (decrease) in interest payable 63 183
Increase (decrease) in income taxes payable 143 384
Increase (decrease) in other accrued expenses (300) (183)
FHLB stock dividends (176) (146)
ESOP shares earned 40 23
------ -----
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,655 857
------ -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available
for sale 20,322 35,511
Proceeds from sales of securities available for sale 6,357 -
Purchases of securities available for sale (11,992) (68,190)
Proceeds from maturities of securities held to
maturity 1,000 2,340
Purchases of securites held to maturity (3,018) (13,296)
Net increase in loans (27,253) (3,872)
Purchases of premises and equipment (1,341) (435)
------ ------
NET CASH USED IN INVESTING ACTIVITIES (15,925) (47,942)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits (5,006) 14,741
Repayment of capital lease obligation - (46)
Net increase in short-term borrowings 13,035 31,157
Cash dividends paid (950) (677)
Proceeds from stock options exercised 88 109
Purchase of treasury shares (1,359) -
------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,808 45,284
------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,462) (1,801)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 18,919 23,501
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,457 $21,700
====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 9,458 $ 8,454
Income taxes paid 807 707
The accompanying notes to financial statements are an integral part of these
statements.
-5-
PART I. FINANCIAL INFORMATION
(Continued)
Item 1. Notes to Consolidated Financial Statements
INTERCOUNTY BANCSHARES, INC. and
THE NATIONAL BANK & TRUST COMPANY
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, the unaudited consolidated financial statements include
all adjustments (consisting of normal, recurring accruals) considered
necessary for a fair presentation of financial position, results of operations
and cash flows for the interim periods.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Results of operations for the three and six month periods ended June 30, 1999,
and cash flows for the six month period ended June 30, 1999, are not
necessarily indicative of the results to be expected for the full year to end
December 31, 1999. These unaudited consolidated financial statements should
be read in conjunction with the consolidated financial statements, accounting
policies and financial notes thereto included in the Company's Annual Report
and Form 10-K for the year ended December 31, 1998 filed with the Commission.
Certain amounts in prior periods have been reclassified to conform to the
current presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS No.133
is effective for all fiscal years beginning after June 15, 1999. Earlier
-6-
PART I. FINANCIAL INFORMATION
(Continued)
Item 1. Notes to Consolidated Financial Statements (Continued)
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, the impact would have been limited to
transfers, if any, of securities from the held-to-maturity classification to
available for sale. The Company is evaluating when to adopt SFAS No. 133 and
the desirability of potential investment security reclassifications.
EMPLOYEE STOCK OPTIONS
The Company applies APB No. 25 in accounting for its stock option plans.
Had compensation expense for the Company's stock options granted after
1996 been recognized under the methodology prescribed in SFAS No. 123,
the Company's net income and earnings per share would have been impacted
as follows: (in thousands, expect per share data)
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
------------------ ------------------
Reported net income $1,466 $1,374 $2,682 $2,557
Proforma net income 1,440 1,370 2,671 2,549
Reported earnings per share-
assuming dilution .45 .42 .83 .79
Proforma earnings per share-
assuming dilution .44 .42 .82 .79
SEGMENTS
The Company has four principal business units that offer different products
and services. They are managed separately for various reasons including
differing technologies, marketing strategies, and regulations. Revenues
from these business segments were as follows: (thousands)
-7-
PART I. FINANCIAL INFORMATION
(Continued)
Item 1. Notes to Consolidated Financial Statements (Continued)
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
------------------ -----------------
Banking $ 9,984 $9,370 $19,733 $18,240
Trust services 292 270 563 508
ATM network 177 141 319 247
Insurance agencies 251 208 458 416
------ ----- ------ ------
$10,704 $9,989 $21,073 $19,411
====== ===== ====== ======
Additional reportable segment information under SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information" are not applicable
since the information as it relates solely to the banking operations would
be the same as the consolidated financial statements in all material respects.
-8-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
INTERCOUNTY BANCSHARES, INC. and
THE NATIONAL BANK & TRUST COMPANY
FORWARD-LOOKING STATEMENTS
Certain matters disclosed herein may be deemed to be forward-looking
statements that involve risks and uncertainties, including regulatory policy
changes, interest rate fluctuations, loan demand, loan delinquencies and
losses, and other risks. Actual strategies and results in future time periods
may differ materially from those currently expected. Such forward-looking
statements represent the Company's judgment as of the current date. The
Company disclaims, however, any intent or obligation to update such forward-
looking statements. See Exhibit 99 attached hereto, which is incorporated
herein by reference.
RESULTS OF OPERATION
Net income for the second quarter of 1999 was $1.45 million, an increase of
5.2% from the $1.37 million earned in the second quarter of 1998. Net income
per share-basic was $.46 compared to $.43 per share, an increase of 7.0%. The
primary reasons for the increase in earnings were an 8.5% increase in net
interest income and a decrease in the Company's effective tax rate to 25.1%
during the second quarter of 1999 from 26.4% for the second quarter of 1998,
primarily due to an increase of $15.0 million in tax-free municipal bonds in
the securities portfolio. This quarter also showed a 55.6% increase in
provision for loan losses, an 11.0% increase in non-interest income, and a
9.8% increase in non-interest expense.
Net income for the first six months of 1999 was $2.68 million, an increase of
4.8% from the $2.56 million earned in the first six months of 1998. Net
income per share-basic also increased 4.8% to $.85 from $.81.
Net interest income for the second quarter of 1999 was $4.51 million, 8.5%
above the second quarter of 1998. Average interest-earning assets increased
$53.7 million (12.2%) to $495.5 million. The volume increase consisted
primarily of $45.4 million in loans and $21.7 million in securities. Loan
growth was concentrated in small business loans, up 17.6%, and 1-4 family
residential real estate loans, up 29.7%. The average tax equivalent (TE) yield
on interest-earning assets decreased from 8.00% to 7.65%. Average interest-
bearing liabilities increased 13.3% to $436.9 million and their cost decreased
to 4.35% from 4.71% in the second quarter of 1998. Most of the volume growth
in interest-bearing liabilities was in NOW and money market accounts, $19.2
million, and additional short-term borrowing, $10.0 million, to fund daily
liquidity needs. Also, more aggressive bidding on certificates over $100,000
resulted in an increase of $7.6 million in the average balance. As a result,
TE net interest margin decreased from 3.89% in the second quarter of 1998 to
3.81% in 1999.
-9-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Net interest income for the first six months of 1999 increased 7.6% from the
same period last year. Average interest-earning assets increased 16.2% from
last year, and the TE yield on these decreased from 8.09% to 7.66%. Interest-
bearing liabilities increased 18.0%, while the cost decreased from 4.72% to
4.41%. TE net interest margin has averaged 3.76% in 1999 versus 3.98% in
1998.
The provision for loan losses was increased to $350,000 for the second quarter
of 1999, compared to $225,000 for the same period in 1998. Net charge-offs
for the second quarter of 1999 were .10% of average loans, compared to .14%
for the prior year. The increase in the provision is the result of the Bank's
continued loan growth.
The allowance is an amount that management believes will be adequate to absorb
potential losses on existing loans that may become uncollectible. This
evaluation is based on prior loan loss experience and such factors as changes
in the nature and volume of the loan portfolio, overall portfolio quality,
review of specific problem loans, and current economic conditions that may
affect the borrowers' ability to pay.
The following table sets forth certain information regarding the past-due,
non-accrual and renegotiated loans of the Bank at the dates indicated (in
thousands):
June 30 December 31 June 30
1999 1998 1998
------- ----------- -------
Loans accounted for on
non-accrual basis $576 $599 $685
Accruing loans which are
past due 90 days or more 93 343 104
Renegotiated loans - - -
--- --- ---
Total $669 $942 $789
=== === ===
Non-accrual loans have decreased by $23,000 from December 31, 1998. The
improvement is more noteworthy as it relates to the $1.2 million reported for
the period ended March 31, 1999. The improvement is related to a $562,000
commercial real estate loan that returned to accrual status. The
reclassification followed a series of large payments that met the Bank's
-10-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
policy requirement of consistent payment history. In addition to this loan,
the Bank recorded a $100,000 agricultural loan loss in the second quarter
resulting in a decrease in the commercial loan non-accruals.
Overall, non-accrual loans at June 30, 1999 consists of perfected liens on
seven vehicle titles written down to estimated market value; five real estate
loans collateralized with first mortgages, two with second mortgages, one 80%
guaranteed SBA business loan, and the rest with equipment, crops and other
general chattels as collateral. Management believes the value of the related
collateral, if necessary to collect the principal outstanding, limits the
Bank's exposure on all non-accrual loans to a potential loss of $72,000.
At June 30, 1999, the Bank's allowance for loan losses totaled $2.81 million
and was allocated primarily to the consumer segment of the loan portfolio. A
similar allocation existed for all other dates presented. The following table
sets forth an analysis of the Bank's allowance for losses on loans for the
periods indicated (in thousands):
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
---- ---- ---- ----
Balance, beginning of period $2,767 $2,820 $2,641 $2,761
Charge-offs:
Commercial 136 231 136 290
Residential real estate - - 10 -
Installment 230 188 514 340
Credit Card - - - -
Other 2 2 5 5
----- ----- ----- -----
Total 368 421 665 635
----- ----- ----- -----
Recoveries:
Commercial 7 1 8 2
Residential real estate 10 - 10 -
Installment 38 38 110 80
Credit Card 1 3 1 7
Other 1 - 1 1
----- ----- ----- -----
Total 57 42 130 90
----- ----- ----- -----
Net Charge-offs (311) (379) (535) (545)
Provision for loan losses 350 225 700 450
----- ----- ----- -----
Balance, end of period $2,806 $2,666 $2,806 $2,666
===== ===== ===== =====
-11-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Non-interest income was $1,469,000 for the second quarter 1999, an increase of
12.5% from the $1,304,000 earned in the second quarter of 1998. Most
categories in this section have shown increases. Trust income increased 8.2%
and deposit service charges were up 9.2%. ATM network fees were up 24.8% and
insurance agency commissions increased 20.7%. Loan related insurance and
processing fees were up $81,000 due primarily to an experience-related rebate
on credit life insurance sales of $60,000. For the first half of 1999 non-
interest income is up 6.7% from the same period in 1998.
Non-interest expense increased 9.8% for the quarter over the same period in
1998. Salaries and benefits increased 11.4% for the quarter due mostly to an
increase of fifteen full-time equivalent employees. The increase was the
result of opening new branch offices in Owensville and Waynesville, and
additional support staff in various areas of the Bank. Equipment expense
increased 10.6% from last year and occupancy expense increased 7.3% for the
quarter. State franchise tax has decreased 31.6% due to adjustments in the
Bank's capital recorded in December 1998. Other expense has increased 16.8%
from the second quarter of last year which includes increases in loan
processing costs and telephone expenses related to improving the Bank's
internal communications network. For the first six months of the year total
non-interest expense was up 8.0% from the same period last year.
The Company's effective tax rate decreased to 25.1% during the second quarter
of 1999 from 26.4% for the second quarter of 1998, primarily due to an
increase of $19.5 million in tax free municipal bonds in the securities
portfolio.
Performance ratios for the second quarter of 1999 included a return on assets
of 1.10%, and a return on equity of 12.84%, compared to 1.18% return on assets
and 13.05% return on equity for the second quarter of 1998. Performance
ratios for the first half of 1999 included a return on assets of 1.04%, and a
return on equity of 12.02%, compared to 1.20% return on assets and 12.68%
return on equity for the first half of 1998.
FINANCIAL CONDITION
The changes that have occurred in InterCounty's financial condition during
1999 are as follows (in thousands):
-12-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
June 30 December 31
1999 1998 Amount Percent
------- ----------- ------ -------
Total assets $526,723 $520,553 $ 6,170 1
Loans 331,830 305,112 26,718 9
Loans held for sale 1,286 5,634 (4,348) (77)
Securities 160,405 176,580 (16,175) (9)
Savings, NOW, MMDA
deposits 141,792 137,535 4,257 3
CD's $100,000 and over 40,263 47,705 (7,442) (16)
Total deposits 369,214 374,220 (5,006) (1)
The loan portfolio grew 8.8% since year end, most of the increase being in
small business and real estate loans. The growth was funded through the sale
of loans held for sale and a decrease in the securities portfolio. The
securities portfolio has decreased because of sales of securities, calls of
U.S. Agency callable bonds and prepayments of mortgage-backed securities.
Deposit growth has occurred in interest-bearing transaction accounts, with
decreases in large certificates of deposit. Book value per share was $13.64
compared to $14.07 at December 31, 1998. Equity to assets was 8.14% compared
to 8.59% at the end of last year.
Average total assets grew 12.4% from the second quarter 1998, to $525.5
million. Average total loans increased to $325.2 million, an increase of
16.2%. Commercial loan average grew $20.2 million (17.6%), real estate loan
average grew $19.7 million (29.7%), and these areas continue to provide the
majority of increase in the portfolio. The securities portfolio average has
grown $21.7 million (14.7%) from the second quarter of last year through
purchases funded with borrowing from the FHLB and deposit growth. Average
total deposits increased 10.7% to $374.2 million. Average non-interest
bearing deposits increased 8.4% from last year. Average interest-bearing
liabilities grew $51.4 million (13.3%), of which $8.6 million was increased
FHLB borrowing. Average interest-bearing transaction accounts increased $19.2
million (22.1%), and average large certificates increased $7.6 million
(21.2%). Average total equity increased 6.9% to $45.2 million for the second
quarter of 1999.
-13-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES
The maintenance of an adequate level of liquidity is necessary to ensure that
sufficient funds are available to meet customers' loan demand and deposit
withdrawals. InterCounty manages liquidity on both the asset and liability
side of the balance sheet. The loan to total funds ratio at June 30, 1999 was
69%, compared to 65% for the same date in 1998. Management strives to keep
this ratio below 80%. The securities portfolio is primarily "available for
sale" securities that are readily marketable. Approximately 90% of the
"available for sale" portfolio is pledged to secure public deposits and for
other purposes as required by law. The balance of this portfolio could be
sold if necessary for liquidity purposes. Also a stable deposit base,
consisting of 89% core deposits, makes the Bank less susceptible to large
fluctuations in funding needs.
The Federal Reserve Board has adopted risk-based capital guidelines which
assign risk weightings to assets and off-balance sheet items and also define
and set minimum capital requirements. Bank holding companies must maintain
total risk-based, Tier 1 risk-based and Tier 1 leverage ratios of 8%, 4% and
3%, respectively. At June 30, 1999, InterCounty had a total risk-based
capital ratio of 14.08%, a Tier 1 risk-based capital ratio of 13.25%, and a
Tier 1 leverage ratio of 8.54%.
YEAR 2000 CONSIDERATIONS
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 and carries out 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 is substantially completed with all year 2000 testing at
June 30, 1999. 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 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. 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 the year 2000 advanced the timing of
these expenditures. These projections are only estimates and may differ
materially from the actual results through the end of 1999.
-14-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
In addition, financial institutions may experience increases in problem loans
and credit losses in the event that 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.
Management's contingency plan was completed May 1999. The plan identifies
four mission critical functions and, should any of these functions fail, the
plan develops an alternative course of action to assure business continuity
in the event there are system failures on critical dates. This plan has been
tested internally and reviewed by the Bank's independent outside auditors.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
Since December 31, 1998, there have been no material changes in the Company's
market risks, which for the Company is primarily interest rate risk.
-15-
PART II. OTHER INFORMATION
INTERCOUNTY BANCSHARES, INC. and
THE NATIONAL BANK & TRUST COMPANY
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities and Use of Proceeds - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
On April 20, 1999, the Annual Meeting of the shareholders of the Company was
held. The following members of the Board of Directors of the Company were re-
elected for terms expiring in 2001 by the votes indicated:
FOR WITHHELD
S. Craig Beam 2,443,121 7,658
James W. Foland 2,443,121 7,658
Darleen M. Myers 2,443,121 7,658
Robert A. Raizk 2,443,121 7,658
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
No. Description
11 Computation of Consolidated
Earnings Per Common Share
For the Three and Six Months
Ended June 30, 1999 and 1998
27 Financial Data Schedule for
the Six Months Ended
June 30, 1999.
99 Safe Harbor Under the Private
Securities Litigation Reform Act
of 1995.
b. The Company was not required to file Form 8-K during the quarter
ended June 30, 1999.
-16-
PART II. OTHER INFORMATION
INTERCOUNTY BANCSHARES, INC. and
THE NATIONAL BANK & TRUST COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERCOUNTY BANCSHARES, INC.
Registrant
Date: August 13, 1999 /s/ Charles L. Dehner
-----------------------------------
Charles L. Dehner
Treasurer, Executive Vice President
and Principal Accounting Officer
-17-