UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 30, 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 November 1, 1999, was 3,175,644 shares.
INTERCOUNTY BANCSHARES, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1999, December 31, 1998
and September 30, 1998 . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Income -
Three and Nine Months Ended September 30, 1999
and 1998. . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Consolidated Statements of Comprehensive Income
and Changes in Shareholders' Equity -
Nine Months Ended September 30, 1999 and 1998 . . . . . . . .3-4
Consolidated Statements of Cash Flows -
Nine Months Ended September 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 September 30, 1999, December 31, 1998 and September 30, 1998
(thousands)
September 30, December 31, September 30,
1999 1998 1998
(unaudited) (a) (unaudited)
ASSETS:
Cash and due from banks $ 21,071 $ 18,241 $ 14,474
Federal funds sold 620 640 412
Interest bearing deposits in bank 14 38 27
------- ------- -------
Total cash and cash equivalents 21,705 18,919 14,913
Securities available for sale, at
market value 107,544 139,748 145,298
Securities held to maturity (market
value-$39,631, $37,459, and $32,718) 42,103 36,832 32,265
------- ------- -------
Total securities 149,647 176,580 177,563
Loans 339,980 305,112 295,016
Less-allowance for loan losses 3,071 2,641 2,564
------- ------- -------
Net loans 336,909 302,471 292,452
Loans held for sale 1,445 5,634 3,983
Premises and equipment 12,028 11,459 10,507
Earned income receivable 4,070 4,246 4,362
Other assets 2,396 1,244 830
------- ------- -------
TOTAL ASSETS $528,200 $520,553 $504,610
======= ======= =======
LIABILITIES:
Demand deposits $ 42,829 $ 41,748 $ 38,739
Savings, NOW, and money market
deposits 151,284 137,535 127,089
Certificates $100,000 and over 40,851 47,705 49,007
Other time deposits 148,561 147,232 146,151
------- ------- -------
Total deposits 383,525 374,220 360,986
Short-term borrowings 22,236 22,702 29,219
Long-term debt 75,539 75,539 66,647
Other liabilities 3,143 3,369 3,601
------- ------- -------
TOTAL LIABILITIES 484,443 475,830 460,453
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 7,720 7,368 7,300
Unearned ESOP shares, at cost (512) (511) (619)
Retained earnings 42,012 39,557 38,472
Accumulated other comprehensive
income, net of taxes (2,484) 188 910
Treasury shares, at cost, 643,306
shares at September 30, 1999; 640,799
at December 31, 1998; 646,919 shares
at September 30, 1998 (3,979) (2,879) (2,906)
------- ------- -------
TOTAL SHAREHOLDERS' EQUITY 43,757 44,723 44,157
------- ------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $528,200 $520,553 $504,610
======= ======= =======
<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 Nine Months Ended
September 30 September 30
------------------ -----------------
1999 1998 1999 1998
INTEREST INCOME:
Interest and fees on loans $7,059 $6,336 $20,364 $18,466
Interest on securities
available for sale:
Taxable 1,748 2,197 5,593 5,915
Non-taxable 108 125 328 205
Interest on securities held
to maturity - non-taxable 485 381 1,427 888
Interest on deposits in banks 5 3 10 21
Interest on federal funds sold 25 79 58 465
----- ----- ------ ------
TOTAL INTEREST INCOME 9,430 9,121 27,780 25,960
----- ----- ------ ------
INTEREST EXPENSE:
Interest on savings, NOW and
money market deposits 949 915 2,791 2,611
Interest on time certificates
$100,000 and over 550 649 1,725 1,525
Interest on other deposits 1,879 2,027 5,751 6,068
Interest on short-term borrowings 321 258 891 680
Interest on long-term debt 1,048 1,054 3,110 2,656
----- ----- ------ ------
TOTAL INTEREST EXPENSE 4,747 4,903 14,268 13,540
----- ----- ------ ------
NET INTEREST INCOME 4,683 4,218 13,512 12,420
PROVISION FOR LOAN LOSSES 350 225 1,050 675
----- ----- ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,333 3,993 12,462 11,745
----- ----- ------ ------
NON-INTEREST INCOME:
Trust services 314 298 876 806
Service charges on deposits 389 348 1,107 1,011
Other service charges and fees 101 95 283 250
ATM network fees 201 167 520 414
Insurance agency commissions 244 209 701 625
Securities (losses), net (390) - (368) -
Other 186 217 670 800
----- ----- ------ ------
TOTAL NON-INTEREST INCOME 1,045 1,334 3,789 3,906
----- ----- ------ ------
NON-INTEREST EXPENSES:
Salaries 1,638 1,472 4,770 4,306
Employee benefits 279 226 801 711
Equipment 512 501 1,525 1,448
Occupancy 206 201 623 586
State franchise tax 130 153 391 462
Marketing 101 66 242 220
Other 907 867 2,720 2,512
----- ----- ------ ------
TOTAL NON-INTEREST EXPENSE 3,773 3,486 11,072 10,245
----- ----- ------ ------
INCOME BEFORE INCOME TAX 1,605 1,841 5,179 5,406
PROVISION FOR INCOME TAX 225 518 1,117 1,524
----- ----- ------ ------
NET INCOME $1,380 $1,323 $ 4,062 $ 3,882
===== ===== ====== ======
Basic earnings per common share $ 0.44 $ 0.42 $ 1.29 $1.23
Diluted earnings per common share 0.43 0.41 1.26 1.20
Dividends declared per common share 0.17 0.125 0.51 0.375
AVERAGE SHARES OUTSTANDING:
To compute basic earnings
per common share 3,136,419 3,153,571 3,154,657 3,152,933
To computed diluted earnings
per common share 3,206,239 3,237,533 3,228,350 3,234,981
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 3,879 3,879 $3,879
Net unrealized gains
on securities available
for sale (net of taxes
of $203) 395 395 395
-----
Total comprehensive income $4,274
=====
Dividends declared
($.375 per share) (1,155) (1,155)
Treasury shares purchased (173) (173)
Stock options exercised 123 71 194
ESOP shares earned 36 1 37
----- ----- ---- ------ ----- ------
Balance
September 30, 1998 $1,000 7,300 (619) 35,566 910 $44,157
===== ===== === ====== ===== ======
-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 4,062 4,062 $4,062
Net unrealized (losses)
on securities available
for sale (net of taxes
of $1,502) (2,915) (2,915) (2,915)
Reclassification adjustment
for net realized loss on
sale of available-for-sale
securities included in net
income (net of taxes of $125) 243 243 243
-----
Total comprehensive income $1,390
=====
Dividends declared
($0.51 per share) (1,607) (1,607)
Treasury shares purchased (1,359) (1,359)
Stock options exercised 288 259 547
ESOP shares earned 64 (1) 63
----- ----- ---- ------ ----- ------
Balance
September 30, 1999 $1,000 7,720 (512) 38,033 (2,484) $43,757
===== ===== === ====== ===== ======
-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)
Nine Months Ended
September 30
------------------
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,062 $ 3,882
Adjustments for non-cash items -
Depreciation and amortization 943 924
Provision for loan losses 1,050 675
Net realized losses on securities available for sale 368 -
Net premium amortization of securities
available for sale 252 90
Net discount (accretion) amortization of
securities held to maturity 7 (109)
Origination of mortgage loans held for sale (2,471) (7,123)
Proceeds from sales of mortgage loans held for sale 6,660 3,527
(Increase) decrease in income receivable 176 (671)
(Increase) decrease in other assets 273 (308)
Increase in interest payable 164 416
Increase (decrease) in income taxes payable (151) 435
Decrease in other accrued expenses (132) (105)
FHLB stock dividends (276) (221)
ESOP shares earned 63 37
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,988 1,449
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available
for sale 23,603 51,723
Proceeds from sales of securities available for sale 23,040 -
Purchases of securities available for sale (18,832) (84,316)
Proceeds from maturities of securities held to
maturity 1,000 3,890
Purchases of securities held to maturity (6,278) (24,882)
Net increase in loans (35,488) (18,564)
Purchases of premises and equipment (1,512) (871)
------ ------
NET CASH USED IN INVESTING ACTIVITIES (14,467) (73,020)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 9,305 31,654
Repayment of capital lease obligation - (69)
Net (decrease) in short-term borrowings (466) (3,515)
Cash dividends paid (1,480) (1,071)
Advances of long-term debt - 36,000
Proceeds from stock options exercised 265 118
Purchase of treasury shares (1,359) (173)
----- ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,265 62,944
----- ------
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,786 (8,627)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 18,919 23,501
----- ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $21,705 $14,874
====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $14,104 $13,123
Income taxes paid 1,317 1,077
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 nine month periods ended September 30,
1999, and cash flows for the nine month period ended September 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 Nine Months Ended
September 30 September 30
1999 1998 1999 1998
------------------ ------------------
Reported net income $1,380 $1,323 $4,062 $3,882
Proforma net income 1,375 1,319 4,046 3,870
Reported earnings per share-
assuming dilution 0.43 0.40 1.26 1.20
Proforma earnings per share-
assuming dilution 0.43 0.40 1.25 1.19
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 Nine Months Ended
September 30 September 30
1999 1998 1999 1998
------------------ -----------------
Banking $10,107 $ 9,781 $29,840 $28,021
Trust services 313 298 876 806
ATM network 201 167 520 414
Insurance agencies 243 209 701 625
------- ------ ------- ------
$10,864 $10,455 $31,937 $29,866
====== ====== ====== ======
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
Results of Operation
- --------------------
Net income for the third quarter of 1999 was $1.38 million, an increase of
4.3% from the $1.32 million earned in the third quarter of 1998. Net income
per share-basic was $.44, compared to $.42 per share, an increase of 4.8%. The
primary reason for the increase in earnings was an 11.0% increase in net
interest income. Also the Company's effective tax rate decreased to 14.0%
during the third quarter of 1999 from 28.1% for the third quarter of 1998,
primarily due to the exercise of stock options by certain executive
officers that are taxable to the executives and tax deductible to the Company,
and an increase of $7.6 million in tax-free municipal bonds in the securities
portfolio. This quarter also showed a 55.8% increase in provision for loan
losses, a 7.6% increase in non-interest income excluding net losses on sales
of investment securities, and a 8.2% increase in non-interest expense.
Net income for the first nine months of 1999 was $4.06 million, an increase of
4.7% from the $3.88 million earned in the first nine months of 1998. Net
income per share-basic also increased 4.7% to $1.29 from $1.23.
Net interest income was $4.68 million, 11.0% above the third quarter of 1998.
Average interest-earning assets increased $24.3 million (5.2%) to $493.4
million. The volume change consisted primarily of a $45.4 million increase in
loans with a $21.1 million decrease in securities and short-term investments.
Loan growth was concentrated in average small business loans, up 13.5%, and
average real estate loans, up 31.2%. The average tax equivalent (TE) yield on
interest-earning assets decreased from 7.87% to 7.76%. Average interest-
bearing liabilities increased 6.2% to $436.6 million but their cost decreased
to 4.31% from 4.73% in the third quarter of 1998. Most of the volume growth
in interest-bearing liabilities was $18.7 million in NOW and money market
accounts and $5.3 million in additional short-term borrowing to fund daily
liquidity needs. Also, average non-interest bearing deposits increased $4.2
million, or 11.1%. As a result, TE net interest margin increased from 3.72%
in the third quarter of 1998 to 3.94% in the same quarter of 1999.
-9-
Net interest income for the first nine months of 1999 increased 8.8% from the
same period last year. Average interest-earning assets increased 12.2% from
last year, but the TE yield on these decreased from 8.01% to 7.69%. Interest-
bearing liabilities increased 13.8%, while the cost decreased from 4.72% to
4.38%. TE net interest margin has averaged 3.82% in 1999, versus 3.89% in
1998.
The provision for loan losses was increased to $350,000 for the third quarter
of 1999, compared to $225,000 for the same period in 1998. Net charge-offs
for the third quarter of 1999 were .03% of average loans, compared to .11% 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):
September 30 December 31 September 30
1999 1998 1998
------------ ----------- ------------
Loans accounted for on
non-accrual basis $ 676 $ 599 $ 399
Accruing loans which are
past due 90 days or more 75 343 309
Renegotiated loans - - -
--- --- ---
Total $ 751 $ 942 $ 708
=== === ===
Non-accrual loans have increased $77,000 from December 31, 1998. These loans
at September 30, 1999 consist of perfected liens on two vehicle titles written
down to estimated market value; three real estate loans collateralized with
first mortgages, four with second mortgages, 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
$106,000.
-10-
At September 30, 1999, the Bank's allowance for loan losses totaled $3.07
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 Nine Months Ended
September 30 September 30
1999 1998 1999 1998
------------------ ------------------
Balance, beginning of period $2,806 $2,666 $2,641 $2,761
Charge-offs:
Commercial 10 212 146 502
Residential real estate - - 10 -
Installment 138 141 652 481
Credit Card - - - -
Other 2 - 7 5
----- ----- ----- -----
Total 150 353 815 988
Recoveries:
Commercial 6 - 14 2
Residential real estate - - 10 -
Installment 57 24 167 104
Credit Card 1 2 2 9
Other 1 - 2 1
----- ----- ----- -----
Total 65 26 195 116
----- ----- ----- -----
Net Charge-offs (85) (327) (620) (872)
----- ----- ----- -----
Provision for loan losses 350 225 1,050 675
----- ----- ----- -----
Balance, end of period $3,071 $2,564 $3,071 $2,564
===== ===== ===== =====
During the quarter ended September 30, 1999, the Bank sold $17 million of
securities at a net loss of $390,000. The purpose of the sale was to reinvest
the funds in loans and higher-yielding securities.
Non-interest income before losses on sales of investment securities was
$1,435,000 for the third quarter 1999, an increase of 7.6% from the
$1,334,000 earned in the third quarter of 1998. Most categories in this
section have shown increases. Trust income increased 5.3% and deposit
service charges were up 11.7%. ATM network fees were up 20.1% and insurance
agency commissions increased 17.0%. For the first nine months of 1999 non-
interest income is up 6.4% from the same period in 1998.
Non-interest expense increased 8.2% for the quarter over the same period in
1998. Salaries and benefits increased 12.9% for the quarter due mostly to an
increase of nineteen full-time equivalent employees. The increase was the
result of opening new branch offices in Owensville and Waynesville, Ohio and
-11-
additional support staff in various areas of the Bank. Equipment expense and
occupancy expense increased 2.2% for the quarter. State franchise tax has
decreased 15.0% due to adjustments in the Bank's capital recorded in December
1998. Other expense has increased 4.6% from the third quarter of last year
including increases in loan processing costs due to increases in loan volume,
and telephone expenses related to improving the Bank's internal communications
network. For the first nine months of 1999 total non-interest expense was
up 8.1% from the same period last year.
The Company's effective tax rate decreased to 14.0% for the third quarter of
1999 from 28.1% for the third quarter of 1998, primarily due to the exercise
of stock options by certain executive officers that are taxable to the
executives and tax deductible to the Company, and an increase of $10.2 million
in the average of tax-free municipal bonds in the securities portfolio.
Performance ratios for the third quarter of 1999 included a return on assets
of 1.04%, and a return on equity of 12.60%, compared to 1.06% return on assets
and 12.19% return on equity for the third quarter of 1998. Performance ratios
for the first nine months of 1999 included a return on assets of 1.04%, and a
return on equity of 12.20%, compared to 1.12% return on assets and 12.30%
return on equity for the first nine months of 1998.
Financial Condition
- -------------------
The changes that have occurred in InterCounty's financial condition during
1999 are as follows (in thousands):
September 30 December 31
1999 1998 Amount Percent
------------ ----------- ------ -------
Total Assets $528,200 $520,553 $ 7,647 1
Loans 339,980 305,112 34,868 11
Loans held for sale 1,445 5,634 (4,189) (74)
Securities 149,647 176,580 (26,933) (15)
Savings, Now, MMDA deposits 151,284 137,535 13,749 10
CD's $100,000 and over 40,851 47,705 (6,854) (14)
Total deposits 383,525 374,220 9,305 2
The loan portfolio grew 11.9% since year-end 1999, most of the increase being
in small business and real estate loans. The growth was funded through the
sale of loans held for sale, a decrease in the securities portfolio, and
deposit growth. 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 $13.78 at September 30, 1999, compared to $14.07 at
December 31, 1998. Equity to assets was 8.28% compared to 8.59% at the end
of last year.
Average total assets grew 6.1% from the third quarter 1998, to $525.4 million.
-12-
Average total loans increased to $336.2 million during the third quarter of
1999, an increase of 15.6% compared to the same period in 1998. Commercial
loan average grew $16.1 million (13.5%), real estate loan average grew $22.1
million (31.2%), and these areas continue to provide the majority of increase
in the portfolio. The securities portfolio average has decreased $17.7
million (10.2%) from the third quarter of last year through sales, calls, and
maturities. Compared to the third quarter of 1998, average total deposits
increased 6.1% to $377.1 million. Average non-interest bearing deposits
increased 11.1% compared to the same period in 1998. Average interest-bearing
liabilities grew $25.6 million (6.2%). Average interest-bearing transaction
accounts increased $18.7 million (20.7%), and average large certificates
decreased $4.2 million (9.1%). Average total equity increased 0.9% to $43.5
million for the third quarter of 1999.
Liquidity and Capital Resources
- -------------------------------
The maintenance of an adequate level of liquidity is necessary to ensure that
sufficient funds are available to meet customers' loan demand and deposit
withdrawal. InterCounty manages liquidity on both the asset and the liability
side of the balance sheet. The loan to total funds ratio at September 30, 1999
was 71%, 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 86% 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 (risk-based capital ratios). Bank
holding companies must maintain total risk-based, Tier 1 risk-based and Tier 1
leverage ratios of 8%, 4% and 3%, respectively. At September 30, 1999,
InterCounty had a total risk-based capital ratio of 14.19%, a Tier 1 risk-
based capital ratio of 13.31%, and a Tier 1 leverage ratio of 8.75%.
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 an effective plan for
identifying, testing and implementing solutions for Y2K. This has been
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 completed all year 2000 testing at September 30,
1999. Because compliance work was largely completed by internal staff, the
Bank has not incurred any significant costs with outside contractors relative
to completion of this portion of the project. It is estimated at this time
that the Bank has spent 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
-13-
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.
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 in 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. Quantitive and Qualitive Disclosures about Market Risks
Since December 31, 1998, there have been no material changes in the Company's
market risk, which for the Company is primarily interest rate risk.
-14-
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 - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
No. Description
11 Computation of Consolidated
Earnings Per Common Share
For the Three and Nine Months
Ended September 30, 1999 and 1998
27 Financial Data Schedule for
the Nine Months Ended
September 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 September 30, 1999.
-15-
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: November 12, 1999 /s/ Charles L. Dehner
----------------------------------
Charles L. Dehner
Treasurer, Executive Vice President
and Principal Accounting Officer
-16-