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 March 31, 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)
(513) 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 May 1, 1999, was 3,190,542 shares.
<PAGE>
INTERCOUNTY BANCSHARES, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1999, December 31, 1998
and March 31, 1998. . . . . . . . . . . . . . . . . . .1
Consolidated Statements of Income -
Three Months Ended March 31, 1999 and 1998. . . . . . .2
Consolidated Statements of Comprehensive Income
and Changes in Shareholders' Equity -
Three Months Ended March 31, 1998 and 1999.. . . . . .3-4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 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. .. . . .9-14
Item 3. Quantitative and Qualitative Disclosures
about Market Risk . . . . . . . . . . . . . . . . . . .14
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . .15
Item 2. Changes in Securities and Use of Proceeds . . . . . . . .15
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . .15
Item 4. Submission of Matters to a Vote of Security Holders . . .15
Item 5. Other Information . . . . . . . . . . . . . . . . . . . .15
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . .15
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
<TABLE>
INTERCOUNTY BANCSHARES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
At March 31, 1999, December 31, 1998 and March 31, 1998
(thousands)
<CAPTION>
March 31, December 31, March 31,
1999 1998 1998
(unaudited) (a) (unaudited)
<S> <C> <C> <C>
ASSETS:
Cash and due from banks $ 15,563 18,241 15,370
Federal funds sold 2,097 640 14,717
Interest bearing deposits in bank 15 38 12
------- ------- -------
Total cash and cash equivalents 17,675 18,919 30,099
Securities available for sale, at
market value 135,402 139,748 101,403
Securities held to maturity (market
value-$37,293, $37,459, and $18,643) 36,841 36,832 18,248
------- ------- -------
Total securities 172,243 176,580 119,651
Loans 316,368 305,112 273,613
Less-allowance for loan losses 2,767 2,641 2,820
------- ------- -------
Net loans 313,601 302,471 270,793
Loans held for sale 563 5,634 2,366
Premises and equipment 12,236 11,459 10,446
Earned income receivable 4,109 4,246 3,359
Other assets 1,692 1,244 948
------- ------- -------
TOTAL ASSETS $522,119 520,553 437,662
======= ======= =======
LIABILITIES:
Demand deposits $ 38,171 41,748 38,224
Savings, NOW, and money market
deposits 143,442 137,535 121,146
Certificates $100,000 and over 45,644 47,705 28,140
Other time deposits 148,350 147,232 143,249
------- ------- -------
Total deposits 375,607 374,220 330,759
Short-term borrowings 22,569 22,702 31,148
Long-term debt 75,539 75,539 30,693
Other liabilities 3,291 3,369 3,144
------- ------- -------
TOTAL LIABILITIES 477,006 475,830 395,744
------- ------- -------
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 7,499 7,368 7,273
Unearned ESOP shares, at cost (512) (511) (620)
Retained earnings 40,253 39,557 36,870
Accumulated other comprehensive
income, net of taxes (271) 188 455
Treasury shares, at cost, 628,408
shares at March 31, 1999; 640,799
at December 31, 1998; 639,701 shares
at March 31, 1998 (2,856) (2,879) (3,060)
------- ------- -------
TOTAL SHAREHOLDERS' EQUITY 45,113 44,723 41,918
------- ------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $522,119 520,553 437,662
======= ======= =======
<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.
</TABLE>
-1-
<PAGE>
Part I - Financial Information
(Continued)
Item 1. Financial Statements
<TABLE>
INTERCOUNTY BANCSHARES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(thousands)
(unaudited)
<CAPTION>
Three Months Ended
March 31
----------------------
1999 1998
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $6,551 6,003
Interest on securities available for sale -
taxable 1,950 1,745
non-taxable 108 -
Interest on securities held to maturity -
non-taxable 459 197
Interest on deposits in banks 3 7
Interest on federal funds sold 26 202
----- -----
TOTAL INTEREST INCOME 9,097 8,154
----- -----
INTEREST EXPENSE:
Interest on savings, NOW and money
market deposits 913 829
Interest on time certificates $100,000 and over 611 376
Interest on other deposits 1,973 2,050
Interest on short-term borrowings 258 419
Interest on long-term debt 1,025 437
----- -----
TOTAL INTEREST EXPENSE 4,780 4,111
----- -----
NET INTEREST INCOME 4,317 4,043
PROVISION FOR LOAN LOSSES 350 225
----- -----
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,967 3,818
----- -----
NON-INTEREST INCOME:
Trust services 271 238
Service charges on deposits 345 321
Other service charges and fees 87 77
ATM network fees 142 105
Insurance agency commissions 206 208
Other 224 319
----- -----
TOTAL NON-INTEREST INCOME 1,275 1,268
----- -----
NON-INTEREST EXPENSES:
Salaries 1,549 1,411
Employee benefits 259 251
Equipment 488 472
Occupancy 209 192
State franchise tax 157 156
Marketing 70 72
Other 867 835
----- -----
TOTAL NON-INTEREST EXPENSE 3,599 3,389
----- -----
INCOME BEFORE INCOME TAX 1,643 1,697
PROVISION FOR INCOME TAX 407 513
----- -----
NET INCOME $1,236 1,184
===== =====
Basic earnings per common share $ 0.39 0.38
Diluted earnings per common share $ 0.38 0.37
AVERAGE SHARES OUTSTANDING:
To compute basic earnings
per common share 3,163,158 3,146,357
To compute diluted earnings
per common share 3,243,604 3,231,123
</TABLE>
-2-
<PAGE>
Part I - Financial Information
(Continued)
Item 1. Financial Statements
<TABLE>
INTERCOUNTY BANCSHARES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME and CHANGES IN SHAREHOLDERS' EQUITY
(thousands)
(unaudited)
<CAPTION>
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
<S> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1998 $1,000 7,141 (620) 32,944 515 40,980
Comprehensive
Income:
Net income 1,184 1,184 $1,184
Net unrealized (losses)
on securities available
for sale (net of taxes
of $31) (60) (60) (60)
-----
Total comprehensive income $1,124
=====
Dividends declared
($.125 per share) (383) (383)
Stock options exercised 121 65 186
ESOP shares earned 11 11
----- ----- --- ------ --- ------
Balance March 31, 1998 $1,000 7,273 (620) 33,810 455 41,918
===== ===== === ====== === ======
</TABLE>
-3-
<PAGE>
Part I - Financial Information
(Continued)
Item 1. Financial Statements
<TABLE>
INTERCOUNTY BANCSHARES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME and CHANGES IN SHAREHOLDERS' EQUITY (Continued)
(thousands)
(unaudited)
<CAPTION>
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
<S> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1999 $1,000 7,368 (511) 36,678 188 44,723
Comprehensive
Income:
Net income 1,236 1,236 $1,236
Net unrealized (losses)
on securities available
for sale (net of taxes
of $237) (459) (459) (459)
-----
Total comprehensive income $ 777
=====
Dividends declared
($.17 per share) (540) (540)
Treasury shares purchased (43) (43)
Stock options exercised 109 66 175
ESOP shares earned 22 (1) 21
----- ----- --- ------ --- ------
Balance March 31, 1999 $1,000 7,499 (512) 37,397 (271) 45,113
===== ===== === ====== === ======
</TABLE>
-4-
<PAGE>
Part I - Financial Information
(Continued)
Item 1. Financial Statements
<TABLE>
INTERCOUNTY BANCSHARES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(unaudited)
<CAPTION>
Three Months Ended
March 31
---------------------
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,236 1,184
Adjustments for non-cash items -
Depreciation and amortization 305 294
Provision for loan losses 350 225
Provision for deferred taxes (57) (93)
Net discount amortization (accretion)of securities
held for sale 110 13
Net discount accretion of securities held to maturity (9) (36)
Origination of mortgage loans held for sale (147) (2,366)
Proceeds from sales of mortgage loans held for sale 5,218 -
Decrease in income receivable 137 332
Increase in other assets (163) (450)
Increase (decrease) in interest payable 71 (870)
Increase in income taxes payable 300 762
Increase (decrease)in other accrued expenses (480) 733
FHLB stock dividends (88) (72)
ESOP shares earned 19 17
------ ------
NET CASH FLOW FROM OPERATING ACTIVITIES 6,802 (327)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available
for sale 12,620 26,560
Purchases of securities available for sale (8,992) (16,019)
Proceeds from maturities of securities held to
maturity 1,000 1,840
Purchases of securities held to maturity (1,000) (8,888)
Net (increase) decrease in loans (11,480) 3,962
Purchases of premises and equipment (1,082) (186)
------ ------
NET CASH FLOW FROM INVESTING ACTIVITIES (8,934) 7,269
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 1,387 1,427
Repayment of capital lease obligation - (23)
Net increase (decrease) in short-term borrowings (133) (1,586)
Cash dividends paid (411) (291)
Proceeds from stock options exercised 88 109
Purchase of treasury shares (43) -
------ ------
NET CASH FLOW FROM FINANCING ACTIVITIES 888 (364)
------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,244) 6,578
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 18,919 23,521
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,675 30,099
====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 4,709 4,980
Income taxes paid (refunded) 164 (160)
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 SUBSIDIARIES
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 and cash flows for the three month period ended
March 31, 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.
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.
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." The statement
requires financial and descriptive information about operating segments of a
business. The statement also requires companies to report revenues for each
major product and service. Adoption of SFAS No. 131 had no effect on the
-6-
<PAGE>
PART I. FINANCIAL INFORMATION
(Continued)
Item 1. Notes to Consolidated Financial Statements, continued
Company's reported consolidated financial position or net income.
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, 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, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1999 1998
------------------
<S> <C> <C>
Reported net income $1,236 1,184
Proforma net income 1,230 1,180
Reported earnings per share-
assuming dilution 0.38 0.37
Proforma earnings per share-
assuming dilution 0.38 0.37
</TABLE>
-7-
<PAGE>
PART I. FINANCIAL INFORMATION
(Continued)
Item 1. Notes to Consolidated Financial Statements, continued
SEGMENTS
The Company has four principal business units that offer different products
and services. They are managed separately for various reasons including
differing technologies, marketing strategies, and regulations. Revenues
from these business segments for the three months ended March 31 were as
follows: (thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Banking $ 9,753 8,871
Trust services 271 238
ATM network 142 105
Insurance agencies 206 208
------ -----
$10,372 9,422
====== =====
</TABLE>
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.
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.
-8-
<PAGE>
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
Net income for the first quarter of 1999 was $1.24 million, an increase of
4.4% from the $1.18 million earned in the first quarter of 1998. Net income
per share-basic was $.39 compared to $.38 per share for the first quarter of
1998, an increase of 2.6%. The primary reasons for the increase in earnings
were a 6.8% increase in net interest income and a decrease in the Company's
effective tax rate to 24.8% during the first quarter of 1999 from 30.2% for
the first quarter of 1998. The decreased tax rate is primarily due to an
increase of $27.3 million in tax-free municipal bonds in the securities
portfolio. This quarter also showed a 55.6% increase in provision for loan
losses and 6.2% increase in non-interest expense.
Net interest income was $4.32 million, 6.8% above the first quarter of 1998.
Compared to the first quarter of 1998, average interest-earning assets
increased $83.6 million (20.5%) to $490.5 million. The volume increase
consisted primarily of $39.9 million in loans $56.4 million in securities.
The average tax equivalent yield on interest-earning assets decreased from
8.18% to 7.66%. Average interest-bearing liabilities increased 23.2% to
$434.2 million and their cost decreased to 4.46% from 4.73% in the first
quarter of 1998. Most of the volume growth in interest-bearing liabilities
was $20.3 million in NOW and money market accounts, and $36.8 million in
additional borrowing from the Federal Home Loan Bank (FHLB)to fund U.S. Agency
mortgage-backed securities purchases. Also, more aggressive bidding to
attract certificates of deposit over $100,000 resulted in an increase of $19.7
million in the average balance. As a result, tax equivalent net interest
margin decreased from 4.08% in the first quarter of 1998 to 3.71% in 1999.
The provision for loan losses was increased to $350,000 for the first quarter
of 1999, compared to $225,000 for the same period in 1998. Net charge-offs
for the first quarter of 1999 were .07% of average loans, compared to .06% for
the first quarter of the prior year.
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):
<TABLE>
<CAPTION>
-9-
<PAGE>
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
March 31, December 31, March 31,
1999 1998 1998
-------- ----------- ---------
<S> <C> <C> <C>
Loans accounted for on
non-accrual basis $1,230 599 532
Accruing loans which are
past due 90 days or more 191 343 241
Renegotiated loans - - -
----- --- ---
Total $1,420 942 773
===== === ===
</TABLE>
There has been an increase of $631,000 in non-accrual loans from December 31,
1998, primarily in credit line and real estate loans. Credit line non-accrual
loans increased $36,000 to a total of $50,000. These loans are collateralized
with mortgages and are currently in liquidation. It is estimated the Bank
will incur an $18,000 loss as a result of the liquidation. Real estate non-
accrual loans increased $602,000 to a total of $716,000. Most of this
increase is attributed to one commercial real estate loan in the amount of
$562,000. Following notification of foreclosure, the Bank received three
monthly payments, and it is anticipated the loan will return to accrual status
upon meeting the Bank's policy requirements of consistent payment history.
Of the non-accrual loans, eleven are collateralized with first mortgages and
two with second mortgages, one is an 80% guaranteed SBA business loan, and the
rest have 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 $93,000.
At March 31, 1999, the Bank's allowance for loan losses totaled $2.77 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):
-10-
<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
March 31
--------
1999 1998
---- ----
<S> <C> <C>
Balance, beginning of period $2,641 2,761
Charge-offs:
Commercial - 59
Residential real estate 10 -
Installment 284 152
Credit Card - -
Other 3 3
----- -----
Total 297 214
----- -----
Recoveries:
Commercial 1 1
Residential real estate - 1
Installment 72 42
Credit Card - 4
Other - -
----- -----
Total 73 48
----- -----
Net Charge-offs (224) (166)
Provision for loan losses 350 225
----- -----
Balance, end of period $2,767 2,820
===== =====
</TABLE>
Non-interest income was $1,275,000 for the first quarter of 1999, an increase
of 0.5% from the $1,268,000 earned in the first quarter of 1998. Most
categories in this section have shown increases. Trust income increased 13.7%
and deposit service charges were up 7.2%. ATM network fees were up 35.2%.
Loan related insurance and processing fees were down $34,000 (18.6%) due
primarily to an experience-related rebate on credit life insurance sales of
$74,000 in 1998.
-11-
<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 6.2% for the quarter over the same period in
1998. Salaries and benefits increased 8.8% for the quarter due mostly to an
increase of 31 full-time equivalent employees. The increase was the result
of opening new branch offices in Owensville and Waynesville, the addition
of 14 employees as a result of the acquisition of two insurance agencies, and
additional support staff in various areas of the Bank. Equipment expense
increased 3.4% from last year and occupancy expense increased 9.1% for the
quarter. Other expense has increased 3.7% from the first quarter of last
year.
The Company's effective tax rate decreased to 24.8% during the first quarter
of 1999 from 30.2% for the first quarter of 1998, primarily due to an increase
of $27.3 million in tax free municipal bonds in the securities portfolio.
Performance ratios for the first quarter of 1999 included a return on assets
of .96%, and a return on equity of 11.14%, compared to 1.11% and 11.64%,
respectively, for the first quarter of 1998.
FINANCIAL CONDITION
The changes that have occurred in InterCounty's financial condition during
1999 are as follows (in thousands):
<TABLE>
<CAPTION>
March 31 December 31
1999 1998 Amount Percent
-------- ---------- ------ -------
<S> <C> <C> <C> <C>
Total Assets $522,119 520,553 1,566 -
Loans 316,368 305,112 11,256 4
Loans held for sale 563 5,634 (5,071) (90)
Securities 172,243 176,580 (4,337) (2)
Demand deposits 38,171 41,748 (3,577) (9)
Savings, Now, MMDA deposits 143,442 137,535 5,907 4
CD's $100,000 and over 45,644 47,705 (2,061) (4)
Total deposits 375,607 374,220 1,387 -
</TABLE>
-12-
<PAGE>
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
The loan portfolio grew 3.9% 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 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 demand
deposits and large certificates of deposit since December 31, 1998. Book
value per share was $14.14, compared to $14.07 at December 31, 1998. Equity
to assets was 8.64%, compared to 8.59% at the end of last year.
Total assets grew 19.3% from the first quarter of 1998, to a total of $522.1
million. Total loans increased to $316.4 million, an increase of 14.8%.
Commercial loan average grew $20.4 million (19.0%), real estate loan average
grew $18.3 million (27.6%), and these areas continue to provide the majority
of the increase in the portfolio. The securities portfolio average has grown
$56.4 million (48.3%) from the first quarter of last year through purchases
funded with borrowings from the FHLB and deposit growth. Total deposits
increased 13.6% to $375.6 million. Average non-interest bearing deposits
increased 5.8% from last year. Average interest-bearing liabilities grew
$81.7 million (23.2%), of which $36.8 million was increased FHLB borrowing.
Average interest-bearing transaction accounts increased $20.3 million (24.6%),
and average large certificates increased $19.7 million (72.3%). Total equity
increased 7.6% to $45.1 million at March 31, 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 liability
sides of the balance sheet. The loan to total funds ratio at March 31, 1999
was 67%, compared to 70% 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 72% 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 88% 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 4%, respectively. At March 31, 1999,
InterCounty had a total risk-based capital ratio of 14.58%, a Tier 1 risk-
based capital ratio of 13.74%, and a Tier 1 leverage ratio of 8.69%.
-13-
<PAGE>
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
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 carries out its plan for
identifying, testing and implementing solutions for Y2K. This is being
accomplished through internal evaluation and testing, and verifiable
documentation from the vendors of specific software and hardware. Senior
management oversees the project and regularly reports to the Board of
Directors. The Bank has substantially completed all year 2000 testing at
March 31, 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, most of which
has been accomplished. These costs will be amortized over the expected life
of each item, usually three to five years. Most of this hardware and software
would have been upgraded anyway within the next two years, and therefore the
year 2000 only 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 has drafted contingency plans to identify alternatives if mission
critical applications do not meet the Bank's readiness plan, and to develop a
course of action to assure business continuity in the event there are system
failures on critical dates. Contingency plans include consideration of
critical service providers as determined appropriate based on their responses
to the Bank's year 2000 readiness inquires.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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.
-14-
<PAGE>
PART II. OTHER INFORMATION
INTERCOUNTY BANCSHARES, INC. and
THE NATIONAL BANK AND 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
<TABLE>
<CAPTION>
Exhibit
No. Description
<C> <S>
11 Computation of Consolidated
Earnings Per Common Share
For the Three Months Ended
March 31, 1999 and 1998
27 Financial Data Schedule for
the Three Months Ended
March 31, 1999.
99 Safe Harbor Under the Private
Securities Litigation Reform Act
of 1995.
</TABLE>
b. The Company was not required to file Form 8-K during the quarter
ended March 31, 1999.
-15-
<PAGE>
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: May 12, 1999 /s/Charles L. Dehner
--------------------
Charles L. Dehner
Treasurer, Executive Vice President
and Principal Accounting Officer
-16-
Exhibit 11
InterCounty Bancshares, Inc.
Computation of Consolidated Earnings Per Common Share
For the Three Months Ended March 31, 1999 and 1998
(in thousands, except shares and per share data)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
----------------------
1999 1998
<S> <C> <C>
Net income $ 1,236 1,184
========= =========
Weighted average
common shares issued 3,180,364 3,167,857
Less-Unreleased common shares
held by ESOP 17,206 21,500
--------- ---------
Weighted average number of
shares outstanding used in
the calculation of basic
earnings per common share 3,163,158 3,146,357
Add -Dilutive effect of stock
options (1) 80,446 84,766
--------- ---------
Adjusted weighted average number
of shares outstanding used in the
calculation of diluted earnings
per common share 3,243,604 3,231,123
========= =========
Basic earnings per common share $.39 .38
Diluted earnings per common share .38 .37
<FN>
(1) There is presently no active public 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 $27.00 at March 31, 1999,
and $22.50 at March 31, 1998.
</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 MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000908837
<NAME> INTERCOUNTY BANCSHARES
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 15,563
<INT-BEARING-DEPOSITS> 15
<FED-FUNDS-SOLD> 2,097
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 135,402
<INVESTMENTS-CARRYING> 36,841
<INVESTMENTS-MARKET> 37,293
<LOANS> 316,368
<ALLOWANCE> 2,767
<TOTAL-ASSETS> 522,119
<DEPOSITS> 375,607
<SHORT-TERM> 22,569
<LIABILITIES-OTHER> 3,291
<LONG-TERM> 75,539
0
0
<COMMON> 1,000
<OTHER-SE> 44,113
<TOTAL-LIABILITIES-AND-EQUITY> 522,119
<INTEREST-LOAN> 6,551
<INTEREST-INVEST> 2,517
<INTEREST-OTHER> 29
<INTEREST-TOTAL> 9,097
<INTEREST-DEPOSIT> 3,497
<INTEREST-EXPENSE> 1,283
<INTEREST-INCOME-NET> 4,317
<LOAN-LOSSES> 350
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,599
<INCOME-PRETAX> 1,643
<INCOME-PRE-EXTRAORDINARY> 1,643
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,236
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.38
<YIELD-ACTUAL> 7.66
<LOANS-NON> 1,230
<LOANS-PAST> 191
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,641
<CHARGE-OFFS> 297
<RECOVERIES> 73
<ALLOWANCE-CLOSE> 2,767
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,767
</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 March 31, 1999, is forward-looking. In some
cases, information regarding certain important factors that could cause actual
results of operations or outcomes of other events to differ materially from
any such forward-looking statement appear together with such statement. In
addition, forward-looking statements are subject to other 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.
-1-
<PAGE>
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.
-2-
<PAGE>
For several years, Congress has been considering various changes to the
charters, permissible activities and regulatory authorities of banks, savings
associations, and bank and savings association holding companies and
subsidiaries. InterCounty cannot predict at this time whether and when
Congress will actually adopt such "financial modernization" legislation or in
what form it will be adopted. It is possible that the permissible activities
of the Bank and its subsidiaries will be restricted and that the financial
condition and results of operations of InterCounty could be adversely
affected.
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.
Federal legislation effective in 1996 provides for the merger of the BIF and
the SAIF effective January 1, 1999, assuming there are no savings associations
under federal law. Although the federal thrift charter has not been
eliminated and its elimination seems unlikely in the near future, Congress is
still considering the merger of the BIF and the SAIF. InterCounty cannot
predict the impact of such a merger on InterCounty or the Bank until the
legislation is enacted.
-3-
