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, 1998
Commission file number 0-23134
INTERCOUNTY BANCSHARES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 31-1004998
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
48 North South Street, Wilmington, Ohio 45177
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(937) 382-1441
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares outstanding of the issuer's common stock, without par
value, as of November 1, 1998, was 3,154,254 shares.
<PAGE>
INTERCOUNTY BANCSHARES, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1998, December 31, 1997
and September 30, 1997 . . . . . . . . . . . . . . . . . .1
Consolidated Statements of Income -
Three and nine Months Ended September 30, 1998
and 1997 . . . . . . . . . . . . . . . . . . . . . . . . .2
Consolidated Statements of Changes in
Shareholders' Equity -
Nine Months Ended September 30, 1998 and 1997 . . . . . .3-4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 . . . . . .5
Notes to Consolidated Financial Statements . . . . . . . .6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . .9-15
Item 3. Quantitative and Qualitative Disclosures
about Market Risks. . . . . . . . . . . . . . . . . . .16
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 17
Item 2. Changes in Securities and Use of Proceeds . . . . . . . 17
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . 17
Item 4. Submission of Matters to a Vote of Security Holders . . 17
Item 5. Other Information . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . 17-18
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
<TABLE>
INTERCOUNTY BANCSHARES, INC. and
THE NATIONAL BANK & TRUST COMPANY
CONSOLIDATED BALANCE SHEETS
At September 30, 1998, December 31, 1997 and September 30, 1997
(thousands)
<CAPTION>
September 30, December 31, September 30,
1998 1997 1997
(unaudited) (a) (unaudited)
<S> <C> <C> <C>
ASSETS:
Cash and due from banks $14,435 $ 17,787 $ 17,925
Federal funds sold 412 4,176 7,657
Other short-term investments 27 1,538 25
------ ------- -------
Total cash and cash equivalents 14,874 23,501 25,607
Securities available for sale, at
market value 145,298 111,975 86,589
Securities held to maturity (market
value-$32,718, $11,624, and $7,398) 32,265 11,164 7,051
------- ------- -------
Total securities 177,563 123,139 93,640
Loans 298,999 277,711 278,238
Less-allowance for loan losses 2,564 2,761 2,652
------- ------- -------
Net loans 296,435 274,950 275,586
Premises and equipment 10,507 10,503 10,162
Earned income receivable 4,362 3,691 3,745
Other assets 714 660 768
------- ------- -------
TOTAL ASSETS $504,455 $436,444 $409,508
======= ======= =======
LIABILITIES:
Demand deposits $ 38,739 $ 38,662 $ 35,920
Savings, NOW, and money market
deposits 127,089 117,552 119,322
Certificates $100,000 and over 49,007 26,899 27,780
Other time deposits 146,151 146,219 145,397
------- ------- -------
Total deposits 360,986 329,332 328,419
Short-term borrowings 95,219 62,734 37,966
Long-term debt 647 716 847
Other liabilities 3,553 2,756 2,603
------- ------- -------
TOTAL LIABILITIES 460,405 395,538 369,835
------- ------- -------
SHAREHOLDERS' EQUITY:
Preferred stock-no par value,
authorized 100,000 shares; none
issued
Common stock-no par value, authorized
3,000,000 shares; issued 1,909,475
shares 1,000 1,000 1,000
Surplus 7,621 7,462 7,393
Unearned ESOP shares, at cost (619) (620) (729)
Retained earnings 38,365 35,674 34,706
Accumulated other comprehensive
income 910 515 433
Treasury shares, at cost, 359,151
shares at September 30, 1998; 363,137
at December 31, 1997; 363,737 shares
at September 30, 1997 (3,227) (3,125) (3,130)
------- ------- -------
TOTAL SHAREHOLDERS' EQUITY 44,050 40,906 39,673
------- ------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $504,455 $436,444 $409,508
======= ======= =======
<FN>
(a) Financial information as of December 31, 1997, has been derived from the
audited, consolidated financial statements of the Registrant.
</FN>
The accompanying notes to financial statements are an integral part of these
statements.
</TABLE>
-1-
<PAGE>
Part I - Financial Information
(Continued)
Item 1. Financial Statements
<TABLE>
INTERCOUNTY BANCSHARES, INC. and
THE NATIONAL BANK & TRUST COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(thousands)
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $6,336 $6,188 $18,466 $17,974
Interest on securities
available for sale:
Taxable 2,197 1,629 5,915 4,817
Non-taxable 125 - 205 -
Interest on securities held
to maturity - non-taxable 381 158 888 457
Interest on deposits in banks 3 - 21 3
Interest on federal funds sold 79 35 465 70
----- ----- ------ ------
TOTAL INTEREST INCOME 9,121 8,010 25,960 23,321
----- ----- ------ ------
INTEREST EXPENSE:
Interest on savings, NOW and
money market deposits 915 840 2,611 2,444
Interest on time certificates
$100,000 and over 649 392 1,525 990
Interest on other deposits 2,027 2,103 6,068 6,204
Interest on short-term borrowings 1,297 560 3,292 1,628
Interest on long-term debt 15 16 43 56
----- ----- ------ ------
TOTAL INTEREST EXPENSE 4,903 3,911 13,539 11,322
----- ----- ------ ------
NET INTEREST INCOME 4,218 4,099 12,421 11,999
PROVISION FOR LOAN LOSSES 225 200 675 600
----- ----- ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,993 3,899 11,746 11,399
----- ----- ------ ------
NON-INTEREST INCOME:
Trust services 298 248 806 662
Service charges on deposits 348 331 1,011 943
Other service charges and fees 95 79 250 218
Securities gains - 292 - 292
Other 208 119 698 440
----- ----- ------ ------
TOTAL NON-INTEREST INCOME 949 1,069 2,765 2,555
----- ----- ------ ------
NON-INTEREST EXPENSES:
Salaries 1,355 1,253 3,957 3,610
Employee benefits 214 284 674 776
Equipment 316 302 908 884
Occupancy 188 168 547 503
State franchise tax 152 141 460 422
Marketing 63 66 213 201
Other 828 770 2,393 2,169
----- ----- ------ ------
TOTAL NON-INTEREST EXPENSE 3,116 2,984 9,152 8,565
----- ----- ------ ------
INCOME BEFORE INCOME TAX 1,826 1,984 5,359 5,389
INCOME TAX 515 620 1,513 1,677
----- ----- ------ ------
NET INCOME $1,311 $1,364 $ 3,846 $ 3,712
===== ===== ====== ======
Basic earnings per common share $ 0.86 $ 0.89 $ 2.50 $ 2.42
Diluted earnings per common share 0.83 0.86 2.43 2.35
Dividends declared per common share 0.25 0.19 0.75 0.57
AVERAGE SHARES OUTSTANDING:
To compute basic earnings
per common share 1,541,094 1,534,122 1,540,775 1,532,384
To computed diluted earnings
per common share 1,583,075 1,581,526 1,581,799 1,581,960
The accompanying notes to financial statements are an integral part of these
statements.
</TABLE>
-2-
<PAGE>
Part I - Financial Information
(Continued)
Item 1. Financial Statements
<TABLE>
INTERCOUNTY BANCSHARES, INC. and
THE NATIONAL BANK AND TRUST COMPANY
CONSOLIDATED STATMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(thousands)
(unaudited)
<CAPTION>
Retained
Unearned Earnings Accumulated
ESOP Less Cost Other
Common Shares of Treasury Comprehensive Comprehensive Shareholders'
Shares Surplus at Cost Shares Income Income Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1997 $1,000 $7,246 $(732) $28,810 $424 $36,748
Comphrensive
Income:
Net Income 3,712 $3,712 3,712
Net unrealized
gain on available-
for-sale securities,
net of tax 9 9 9
-----
Total comprehensive income $3,721
=====
Dividends declared
($.57 per share) (875) (875)
Treasury shares purchased (172) (172)
Stock options exercised 129 101 230
ESOP shares earned 18 3 21
----- ----- --- ------ --- ------
Balance September 30,
1997 $1,000 $7,393 $(729) $31,576 $433 $39,673
===== ===== === ====== === ======
</TABLE>
-3-
<PAGE>
Part I - Financial Information
(Continued)
Item 1. Financial Statements
<TABLE>
INTERCOUNTY BANCSHARES, INC. and
THE NATIONAL BANK AND TRUST COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(thousands)
(unaudited)
<CAPTION>
Retained
Unearned Earnings Accumulated
ESOP Less Cost Other Total
Common Shares of Treasury Comprehensive Comprehensive Shareholders'
Shares Surplus at Cost Shares Income Income Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1998 $1,000 $7,462 $(620) $32,549 $515 $40,906
Comprehensive
Income:
Net income 3,846 $3,846 3,846
Net unrealized
loss on available-
for-sale securities,
net of tax 395 395 395
-----
Total comprehensive income $4,241
=====
Dividends declared
($.75 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 $7,621 $(619) $35,138 $910 $44,050
===== ===== === ====== === ======
</TABLE>
-4-
<PAGE>
Part I - Financial Information
(Continued)
Item 1. Financial Statements
<TABLE>
INTERCOUNTY BANCSHARES, INC. and
THE NATIONAL BANK & TRUST COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(unaudited)
<CAPTION>
Nine Months Ended
September 30
------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,846 $ 3,712
Adjustments for non-cash items -
Depreciation and amortization 924 791
Provision for loan losses 675 600
Net premium amortization (discount accretion)
of securities held for sale 90 (101)
Net discount accretion of securities held to maturity (109) (113)
Net realized gains from sale of securities
available for sale - (292)
Increase in income receivable (671) (437)
Increase in other assets (308) (8)
Increase (decrease) in interest payable 416 (154)
Increase in income taxes payable 435 85
Decrease in other accrued expenses (32) (148)
FHLB stock dividends (221) (170)
----- ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,045 3,765
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits
in banks - 100
Proceeds from maturities of securities available
for sale 51,723 28,620
Proceeds from sale of securities available for sale - 6,763
Purchases of securities available for sale (84,316) (40,028)
Proceeds from maturities of securities held to
maturity 3,890 525
Purchases of securities held to maturity (24,882) -
Net increase in loans (22,160) (9,590)
Purchases of premises and equipment (871) (1,934)
------ ------
NET CASH USED IN INVESTING ACTIVITIES (76,616) (15,544)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 31,654 19,292
Repayment of capital lease obligation (69) (67)
Net increase in short-term borrowings 32,485 6,853
Cash dividends paid (1,071) (797)
Proceeds from stock options exercised 118 230
Purchase of treasury shares (173) (172)
------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 62,944 25,339
------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS (8,627) 13,560
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 23,501 12,047
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $14,874 $25,607
====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $13,123 $11,476
Income taxes paid 1,077 1,654
The accompanying notes to financial statements are an integral part of these
statements.
</TABLE>
-5-
<PAGE>
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, 1998, and cash flows for the nine month period ended September 30, 1998,
are not necessarily indicative of the results to be expected for the full year
to end December 31, 1998. These unaudited consolidated financial statements
should be read in conjunction with the consolidated financial statements,
accounting policies and financial notes thereto included in the Company's
Annual Report and Form 10-K for the year ended December 31, 1997 filed with
the Commission.
Certain amounts in prior periods have been reclassified to conform to the
current presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." The new rules establish standards for reporting
comprehensive income and its components in financial statements.
Comprehensive income consists of net income and other gains and losses
affecting shareholders' equity that, under generally accepted accounting
principles, are excluded from net income. For the Company, such items
consist solely of unrealized gains and losses on investment securities
available for sale. The adoption of SFAS No. 130 did not have an impact
on the Company's consolidated financial position or results of operations,
but did affect the presentation of the Company's consolidated statement of
changes in shareholders' equity and consolidated balance sheet.
-6-
<PAGE>
PART I. FINANCIAL INFORMATION
(Continued)
Item 1. Notes to Consolidated Financial Statements (Continued)
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" requires financial and descriptive information about
operating segments of a business. The statement also requires companies
to report revenues for each major product and service. It is effective
for fiscal years beginning after December 15, 1997. SFAS No. 131 will
result in additional financial statement disclosures, with no effect on
the Company's reported consolidated financial position or net income. SFAS
No. 131 is not required for interim financial reporting purposes during 1998.
The Company is in the process of assessing the additional disclosures, if
any, required by SFAS No. 131.
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities".
SFAS No. 133 establishes standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for
hedging activities. It requires an entity to recognize all derivatives
as either assets or liabilities in the statement of financial position
and measure those instruments at fair value. SFAS No.133 is effective
for all fiscal years beginning after June 15, 1999. Earlier application
is encouraged but should not be applied retroactively to financial
statements of prior periods. Currently, the Company does not hold any
derivatives or conduct hedging activities as defined by the standard.
In most instances the standard, once adopted, precludes any held-to-
maturity security from being designated as a hedged item. If the
Company had adopted SFAS No. 133 as of July 1, 1998, the impact would
have been limited to transfers, if any, of securities from the held-to-
maturity classification to available for sale. The Company is evaluating
when to adopt SFAS No. 133 and the desirability of potential investment
security reclassifications.
EMPLOYEE STOCK OPTIONS
SFAS No. 123, "Accounting for Stock-Based Compensation," effective
January 1, 1996, encouraged, but did not require, adoption of a fair-
value based accounting method for employee stock options. Management
elected to continue to recognize compensation cost using the intrinsic-
value-based method of accounting in Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees." The nature
of the Company's agreements with optionees prior to 1997 was such that
the accounting treatment was the same under both pronouncements. Prior
to 1997, compensation cost was recorded because the Company had a
-7-
<PAGE>
PART I. FINANCIAL INFORMATION
(Continued)
Item 1. Notes to Consolidated Financial Statements (Continued)
contingent obligation to repurchase the shares. During 1997, all
outstanding option agreements were revised, eliminating the Company's
contingent obligation. Had compensation expense for the Company's stock
options granted after 1996 been recognized under the methodology
prescribed in SFAS No. 123, the Company's net income and earnings per
share would have been impacted as follows: (in thousands, except per
share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
------------------ ------------------
<S> <C> <C> <C> <C>
Reported net income $1,311 $1,364 $3,846 $3,712
Proforma net income 1,307 1,360 3,834 3,700
Reported earnings per share-
assuming dilution 0.83 0.89 2.43 2.42
Proforma earnings per share-
assuming dilution 0.83 0.86 2.42 2.34
</TABLE>
-8-
<PAGE>
PART I. FINANCIAL INFORMATION
(Continued)
INTERCOUNTY BANCSHARES, INC. and
THE NATIONAL BANK & TRUST COMPANY
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
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 third quarter of 1998 was $1.31 million, a decrease of 3.9%
from the $1.36 million earned in the third quarter of 1997. Net income per
share-basic decreased 3.4% to $.86 from $.89 for the third quarter of 1997.
The third quarter of 1997 included $193,000 in after-tax gains on the sale of
securities compared to none in 1998. The third quarter of 1998 showed an
increase in net interest income of 2.9% compared to the same quarter last
year. Non-interest income, excluding securities gains, was 22.1% above the
third quarter of 1997 primarily due to increases in trust income, deposit
service charges, and loan related insurance and processing fees. This quarter
also showed a 12.5% increase in provision for loan losses and a 4.4% increase
in non-interest expense.
Net income for the first nine months of 1998 was $3.85 million, an increase of
3.6% from the $3.71 million earned in the first nine months of 1997. Net
income per share-basic increased 3.1% to $2.50 from $2.42.
Net interest income was $4.22 million in the third quarter of 1998, 2.9% above
the third quarter of 1997. Average interest-earning assets in the third
quarter of 1998 increased $86.85 million (22.7%) to $469.07 million from
$382.22 million. The volume increase consisted primarily of $11.21 million in
loans, $72.29 million in securities, and an increase of $3.14 million in
federal funds sold. The average tax equivalent (TE) yield on interest-earning
assets decreased from 8.38% in 1997 to 7.87% in 1998.
Average interest-bearing liabilities increased 23.8% to $411.00 million in the
third quarter of 1998 and their cost increased to 4.73% from 4.67% in the
third quarter of 1997. Most of the volume growth in interest-bearing
-9-
<PAGE>
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
liabilities was in additional borrowing from the Federal Home Loan Bank (FHLB)
to fund purchases of U.S. Agency mortgage-backed securities and tax-exempt
municipal bonds. Also, more aggressive bidding on certificates over $100,000
resulted in an increase of $18.53 million in the average balance, and their
cost decreased from 5.58% to 5.55%. As a result, TE net interest margin
decreased from 4.32% in the third quarter of 1997 to 3.72% in third quarter
of 1998.
Net interest income for the first nine months of 1998 increased 3.5% from the
same period last year. Average interest-earning assets increased 17.4% from
last year, and the TE yield on these decreased from 8.38% to 8.01%. Interest-
bearing liabilities increased 18.1%, while the cost increased from 4.66% to
4.72%. TE net interest margin has averaged 3.89% in 1998 versus 4.34% in
1997.
The provision for loan losses increased to $225,000 for the third quarter of
1998, compared to $200,000 for the same period in 1997. Net charge-offs for
the third quarter of 1998 were .11% of average loans, compared to .08% for
the prior year.
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 accrual status after it is 90
days delinquent if it is reasonably certain the account will be settled in
its entirety or brought current within a 30-day period. The current year's
accrued interest on loans placed on non-accrual status is charged against
earnings. The previous year's accrued interest is charged against the
allowance for loan losses. Cash payments received on non-accrual loans are
applied against principal until the balance is repaid. Any remaining payments
are credited to earnings. Non-performing loans include non-accrual loans,
renegotiated loans and ninety days or more past due loans. Loans that are ten
days delinquent, excluding one-to-four family real estate loans, are sent to
the Collections Department for collection. One-to-four family real estate
loans are sent when they are fifteen days delinquent.
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):
-10-
<PAGE>
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
<TABLE>
<CAPTION>
September 30 December 31 September 30
1998 1997 1997
------- ----------- --------
<S> <C> <C> <C>
Loans accounted for on
non-accrual basis $399 $509 $568
Accruing loans which are
past due 90 days or more 309 241 207
Renegotiated loans - - -
--- --- ---
Total $708 $750 $775
=== === ===
</TABLE>
Non-accrual loans totaled $399,000 at September 30, 1998, a decrease of
$286,000 from the June 30 amount of $685,000. The decrease was attributed
in large part to liquidation of collateral and subsequent charge-off of
unpaid balances. The September 30 amount of $399,000 consists of seven
collateralized commercial loans. One loan included in this total has a
remaining balance of $222,000 and is currently considered a probable loss.
This loan has been charged down from a balance of $446,000; it could possibly
be resolved by year-end through a settlement agreement that would result in
a long-term work-out with the borrower. If this loan is not resolved and
becomes an actual loss before year end, an extra provision to the allowance
for loan losses would be likely. The remaining balance of $177,000 has a
potential loss of $14,000. As of September 30, 1998, management knew of no
significant loans not disclosed herein that would cause management to have
serious doubts as to the ability of the borrowers to comply with present loan
repayment terms.
At September 30, 1998, the Bank's allowance for loan losses was $2.56 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):
-11-
<PAGE>
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance, beginning of period $2,666 $2,667 $2,761 $2,686
Charge-offs:
Commercial 212 98 502 178
Residential real estate - - - -
Installment 141 154 481 506
Credit Card - - - 64
Other - - 5 5
----- ----- ----- -----
Total 353 252 988 753
----- ----- ----- -----
Recoveries:
Commercial - 7 2 9
Residential real estate - - - -
Installment 23 26 104 99
Credit Card 2 4 9 11
Other 1 - 1 -
----- ----- ----- -----
Total 26 37 116 119
----- ----- ----- -----
Net Charge-offs (327) (215) (872) (634)
Provision for loan losses 225 200 675 600
----- ----- ----- -----
Balance, end of period $2,564 $2,652 $2,564 $2,652
===== ===== ===== =====
</TABLE>
Non-interest income was $949,000 for the third quarter of 1998, an increase of
22.1% from the $777,000 earned, excluding securities gains, in the third
quarter of 1997. Most categories in this section have shown increases from
the same quarter last year. Trust income increased 20.0% due to an increase
in the dollar amount of assets managed. Deposit-related and other service
charges were up 8.0%. Loan related insurance and processing fees were up
43.1%. For the first nine months of 1998, non-interest income, excluding
securities gains, was up 22.2% from the same period in 1997.
-12-
<PAGE>
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Non-interest expense increased 4.4% for the third quarter 1998 over the same
period in 1997. Salaries and benefits increased 2.1% for the quarter due
mostly to an increase of 15 full-time equivalent employees from the third
quarter last year. The increase was the result of opening new branch offices
in Hillsboro and Owensville, Ohio, and additional support staff in various
areas of the Bank. Equipment expense increased 4.5% and occupancy expense
increased 11.8% for the quarter compared to the same quarter last year. State
franchise tax has increased 8.1% due to the increase in Bank capital on which
it is based. Other expense has increased 7.6% from the third quarter of last
year. For the first nine months of the year total non-interest expense was up
6.9% from the same period last year.
Performance ratios for the third quarter of 1998 included a return on assets
of 1.05%, and a return on equity of 12.08%, compared to 1.33% and 13.88%,
respectively, for the third quarter of 1997. Performance ratios for the first
nine months of 1998 included a return on assets of 1.11%, and a return on
equity of 12.19%, compared to 1.25% and 13.10%, respectively for the first
nine months of 1997.
FINANCIAL CONDITION
The changes that have occurred in InterCounty's financial condition during
1998 are as follows (in thousands):
<TABLE>
<CAPTION>
September 30 December 31
1998 1997 Amount Percent
---------- ----------- ------ -------
<S> <C> <C> <C> <C>
Total assets $504,455 $436,444 $ 68,011 16
Loans 298,999 277,711 21,288 8
Securities 177,563 123,139 54,424 44
Federal funds sold 412 4,176 (3,764) (90)
Savings, NOW, MMDA
deposits 127,089 117,552 9,537 8
CD's $100,000 and over 49,007 26,899 22,108 82
Other time deposits 146,151 146,219 (68) -
FHLB borrowings 72,000 44,200 27,800 63
</TABLE>
The loan portfolio has increased almost eight percent since year end, although
the structure has changed very little. The growth has been primarily in
commercial loans and during the third quarter in one-to-four family residential
real estate. The Bank has begun retaining fixed-rate real estate loans that
meet certain yield criteria, instead of selling these loans in the secondary
market.
These loans may be sold if doing so becomes advantageous to the Bank.
-13-
<PAGE>
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
The securities portfolio has increased $54 million since year end due primarily
to the purchase of $20 million of U.S. Agency mortgage-backed securities and $10
million tax-exempt municipal securities that have been funded through a similar
amount of borrowing from the Federal Home Loan Bank at an anticipated tax
equivalent spread of 130 basis points. The rest of the increase was in
purchases of long-term municipal securities, U.S. Agency callable bonds and
fixed-rate CMO's.
Deposit growth has occurred in interest-bearing transaction accounts and large
certificates of deposit. Large certificates are typically less than one year in
maturity and very rate sensitive.
Book value per share was $28.41, compared to $26.45 at December 31, 1997.
Equity to assets was 8.73%, compared to 9.37% at the end of last year.
Total assets grew 23.2% from September 30, 1997, to a total of $504.4 million.
Total loans increased to $299.0 million, an increase of 7.5%. Average
commercial loans grew $8.3 million (7.9%), and commercial loans continue to
provide the majority of increase in the portfolio. The securities portfolio
average has grown $47.0 million (47.5%) from the third quarter of last year
through purchases funded with borrowing from the FHLB and excess federal
funds. Total deposits increased 9.9% to $361.0 million. Average non-interest
bearing deposits increased 13.0% from last year. Average interest-bearing
liabilities grew $58.6 million (18.1%), of which $35.8 million was increased
FHLB borrowing. Average interest-bearing transaction accounts increased $6.5
million (8.1%), and average retail certificates decreased $.6 million (-.4%).
Total equity capital increased 11.0% to $44.1 million at September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The maintenance of an adequate level of liquidity will ensure that the cash flow
requirements of depositors and borrowers, as well as Company cash needs, are
met. InterCounty manages liquidity on both the asset and liability sides of the
balance sheet. The loan-to-total-funds ratio at September 30, 1998 was 66%,
compared to 76% for the same date in 1997. Management strives to keep this
ratio below 80%. The securities portfolio is primarily "available for sale"
securities that are readily marketable. Approximately 71% of the portfolio
is pledged to secure public deposits and for other purposes as required by
law. The balance of the "available for sale" portfolio could be sold if
necessary for liquidity purposes. Also, a stable deposit base, consisting
of 86% core deposits, makes the Bank less susceptible to large fluctuations
in funding needs.
-14-
<PAGE>
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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, 1998,
InterCounty had a total risk-based capital ratio of 14.44%, a Tier 1 risk-
based capital ratio of 13.63%, and a Tier 1 leverage ratio of 8.55%.
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 was assembled, with specific
goals and target dates, to ensure the Bank has an effective plan for
identifying, testing and implementing solutions for Y2K. This will be
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 expects to be substantially complete with all Y2K
testing by December 31, 1998. 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.
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.
Accordingly, the Bank is developing contingency plans to assess these areas
and minimize their effect.
-15-
<PAGE>
PART I. FINANCIAL INFORMATION
(Continued)
Item 3. Quantitative and Qualitative Disclosures about Market Risks
Since December 31, 1997, there have been no material changes in the Company's
market risks, which for the Company is primarily interest rate risk.
-16-
<PAGE>
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 September 22, 1998, a Special Meeting of the shareholders of
the Company was held. Amendment of the Company's Articles of
Incorporation to increase the number of authorized common shares
from 3,000,000 to 6,000,000 was approved by the votes indicated:
FOR AGAINST WITHHELD
1,254,556 12,448 2,199
Item 5. Other Information
Stock Dividend - On October 1, 1998, the Board of Directors of
the Company declared a two-for-one stock split in the form of a
dividend payable on October 26, 1998, to Shareholders of record
on October 11, 1998.
Acquisition - On October 8, 1998, the National Bank & Trust Company
acquired all of the outstanding shares of Phillips Insurance Agency
Group, Inc., an Ohio corporation (the "Agency"). In exchange for
the shares of the Agency, InterCounty Bancshares, Inc. issued 26,803
common shares (before adjustment for the two-for-one stock split) to
the Agency's shareholders. The acquisition was accounted for as a
pooling of interests. The Agency's gross revenues in 1997 were
approximately $600,000. Total assets of the Agency is not material
to the Consolidated Financial Statements.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
<C> <S>
11 Computation of Consolidated
Earnings Per Common Share
For the Three and Nine Months
Ended September 30, 1998 and 1997
-17-
<PAGE>
PART II. OTHER INFORMATION
INTERCOUNTY BANCSHARES, INC. and
THE NATIONAL BANK & TRUST COMPANY
Item 6. Exhibits and Reports on Form 8-K (Continued)
Exhibit
No. Description
27 Financial Data Schedule for
the Nine Months Ended
September 30, 1998.
99 Safe Harbor Under the Private
Securities Litigation Reform Act
of 1995.
</TABLE>
b. One report on Form 8-K was filed during the third quarter (Date
of Report - August 13, 1998) reporting on Item 5, Other Events.
The Company announced a special meeting of shareholders to be held
to adopt an amendment to the Company's Articles of Incorporation to
authorize additional shares. The Company announced that 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
to the Articles.
-18-
<PAGE>
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 13, 1998 /s/ Charles L. Dehner
-----------------------------------
Charles L. Dehner
Treasurer, Executive Vice President
and Principal Accounting Officer
<PAGE>
Exhibit 11
InterCounty Bancshares, Inc.
Computation of Consolidated Earnings Per Common Share
For the Three and Nine Months Ended September 30, 1998 and 1997
(in thousands, except shares and per share data)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income $ 1,311 $ 1,364 $ 3,846 $ 3,712
========= ========= ========= =========
Weighted average common
shares issued 1,550,776 1,545,983 1,550,991 1,544,808
Less-Unreleased common
shares held by ESOP 9,682 11,861 10,216 12,424
--------- --------- --------- ---------
Weighted average number
of shares outstanding
used in the calculation
of basic earnings per
common share 1,541,094 1,534,122 1,540,775 1,532,384
Add - Dilutive effect of
stock options (1) 41,981 47,404 41,024 49,576
--------- --------- --------- ---------
Adjusted weighted average
number of shares outstanding
used in the calculation of
diluted earnings per common
share 1,583,075 1,581,526 1,581,799 1,581,960
========= ========= ========= =========
Basic earnings per common
share $.86 $.89 $2.50 $2.42
Diluted earnings per common
share .83 .86 2.43 2.35
<FN>
(1) 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. Fair value for earnings
per common share purposes was assumed to be $49.00 at September 30, 1998, and
$35.00 at September 30, 1997.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT FOR INTERCOUNTY BANCSHARES, INC. ON FORM 10-Q FOR THE
QUARTER ENDED SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000908837
<NAME> INTERCOUNTY BANCSHARES
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 14,435
<INT-BEARING-DEPOSITS> 27
<FED-FUNDS-SOLD> 412
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 145,298
<INVESTMENTS-CARRYING> 32,265
<INVESTMENTS-MARKET> 32,718
<LOANS> 298,999
<ALLOWANCE> 2,564
<TOTAL-ASSETS> 504,455
<DEPOSITS> 360,986
<SHORT-TERM> 95,219
<LIABILITIES-OTHER> 3,553
<LONG-TERM> 647
0
0
<COMMON> 1,000
<OTHER-SE> 43,050
<TOTAL-LIABILITIES-AND-EQUITY> 504,455
<INTEREST-LOAN> 18,466
<INTEREST-INVEST> 7,008
<INTEREST-OTHER> 486
<INTEREST-TOTAL> 25,960
<INTEREST-DEPOSIT> 10,204
<INTEREST-EXPENSE> 13,539
<INTEREST-INCOME-NET> 12,421
<LOAN-LOSSES> 675
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,152
<INCOME-PRETAX> 5,359
<INCOME-PRE-EXTRAORDINARY> 5,359
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,846
<EPS-PRIMARY> 2.50
<EPS-DILUTED> 2.43
<YIELD-ACTUAL> 8.01
<LOANS-NON> 399
<LOANS-PAST> 309
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,761
<CHARGE-OFFS> 988
<RECOVERIES> 116
<ALLOWANCE-CLOSE> 2,564
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,564
</TABLE>
EXHIBIT 99
Safe Harbor Under the Private Securities Litigation Reform Act of 1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. InterCounty
Bancshares, Inc. ("InterCounty") desires to take advantage of the "safe
harbor" provisions of the Act. Certain information, particularly information
regarding future economic performance and finances and plans and objectives of
management, contained or incorporated by reference in InterCounty's Report on
Form 10-Q for the quarter ended September 30, 1998, is forward-looking.
Forward-looking statements are subject to risks and uncertainties affecting
the financial institutions industry, including, but not limited to, the
following:
Interest Rate Risk
InterCounty's operating results are dependent to a significant degree on its
net interest income, which is the difference between interest income from
loans, investments and other interest-earning assets and interest expense on
deposits, borrowings and other interest-bearing liabilities. The interest
income and interest expense of InterCounty change as the interest rates on
interest-earning assets and interest-bearing liabilities change. Interest
rates may change because of general economic conditions, the policies of
various regulatory authorities and other factors beyond InterCounty's control.
In a rising interest rate environment, loans tend to prepay slowly and new
loans at higher rates increase slowly, while interest paid on deposits
increases rapidly because the terms to maturity of deposits tend to be shorter
than the terms to maturity or prepayment of loans. Such differences in the
adjustment of interest rates on assets and liabilities may negatively affect
InterCounty's income.
Possible Inadequacy of the Allowance for Loan Losses
InterCounty maintains an allowance for loan losses based upon a number of
relevant factors, including, but not limited to, trends in the level of
nonperforming assets and classified loans, current and anticipated economic
conditions in the primary lending area, past loss experience, possible losses
arising from specific problem loans and changes in the composition of the loan
portfolio. While the Board of Directors of InterCounty believes that it uses
the best information available to determine the allowance for loan losses,
unforeseen market conditions could result in material adjustments, and net
earnings could be significantly adversely affected if circumstances differ
substantially from the assumptions used in making the final determination.
Loans not secured by one- to four-family residential real estate are generally
considered to involve greater risk of loss than loans secured by one- to
four-family residential real estate due, in part, to the effects of general
economic conditions. The repayment of commercial loans and multifamily
residential and nonresidential real estate loans generally depends upon the
cash flow from the operation of the business or property, which may be
negatively affected by national and local economic conditions. Construction
loans may also be negatively affected by such economic conditions,
particularly loans made to developers who do not have a buyer for a property
before the loan is made. The risk of default on consumer loans increases
during periods of recession, high unemployment and other adverse economic
conditions. When consumers have trouble paying their bills, they are more
likely to pay mortgage loans than consumer loans. In addition, the collateral
securing such loans, if any, may decrease in value more rapidly than the
outstanding balance of the loan.
Competition
The National Bank and Trust Company (the "Bank") competes for deposits with
other commercial banks, savings associations and credit unions and 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 and loan associations, savings banks, consumer
finance companies, credit unions, leasing companies, mortgage companies and
other lenders. 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. The
size of financial institutions competing with the Bank is likely to increase
as a result of changes in statutes and regulations eliminating various
restrictions on interstate and inter-industry branching and acquisitions.
Such increased competition may have an adverse effect upon the Bank.
Legislation and Regulation That May Adversely Affect InterCounty's Earnings
The Bank is subject to regulation, examination and oversight by the Office of
the Comptroller of the Currency (the "OCC"), special examination by the Board
of Governors of the Federal Reserve System (the "FRB") and some regulation,
oversight and special examination by the Federal Deposit Insurance Corporation
(the "FDIC"). As a bank holding company, InterCounty is also subject to
regulation and examination by the FRB. Such supervision and regulation of the
Bank and InterCounty are intended primarily for the protection of depositors
and not for the maximization of shareholder value and may affect the ability
of the company to engage in various business activities. The assessments,
filing fees and other costs associated with reports, examinations and other
regulatory matters are significant and may have an adverse effect on
InterCounty's net earnings.
The FDIC is authorized to establish separate annual assessment rates for
deposit insurance of members of the Bank Insurance fund (the "BIF") and the
Savings Association Insurance Fund (the "SAIF"). The FDIC has established a
risk-based assessment system for both SAIF and BIF members. Under such
system, assessments may vary depending on the risk the institution poses to
its deposit insurance fund. Such risk level is determined by reference to the
institution's capital level and the FDIC's level of supervisory concern about
the institution.
Because the reserves of the BIF exceeded the statutorily set minimum,
assessments for healthy BIF institutions were significantly decreased in the
last half of 1995 and were reduced to $2,000 per year for well-capitalized,
well-managed banks, like the Bank, in 1996. Assessments paid by healthy
institutions on deposits in the SAIF exceeded that paid by healthy banks by
approximately $.23 per $100 in deposits in 1996.
Federal legislation that was effective September 30, 1996, provided for the
recapitalization of the SAIF by means of a special assessment of $.657 per
$100 of SAIF deposits held at March 31, 1995, in order to increase SAIF
reserves to the level required by law. Certain banks were required to pay the
special assessment on only 80% of SAIF deposits held at that date. That
legislation also required that BIF members begin to share the cost of prior
thrift failures. As a result of the recapitalization of the SAIF and this
cost sharing between BIF and SAIF members, FDIC assessments for healthy
institutions during 1998 have been set at $.012 per $100 in BIF deposits and
$.061 per $100 in SAIF deposits. The recapitalization plan also provides for
the merger of the BIF and the SAIF effective January 1, 1999, assuming there
are no savings associations under federal law. Under separate proposed
legislation, Congress is considering the elimination of the federal thrift
charter. InterCounty cannot predict the impact of such legislation on
InterCounty or the Bank until the legislation is enacted.
