UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(THIS AMENDED FORM 10-K IS BEING FILED BECAUSE
THE ORIGINAL FILING WAS INCOMPLETE.)
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-23134
INTERCOUNTY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Ohio 31-1004998
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
48 N. South Street, Wilmington, Ohio 45177
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (513) 382-1441
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to 12(g) of the Act:
Common Shares, without par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The issuer's common shares are not traded on any securities exchange and are
not quoted by a national quotation service. Management is aware of a sale of
the issuer's shares for $23.00 per share on March 17, 2000. Based upon such
price, the aggregate market value of the issuer's shares held by nonaffiliates
was $46,391,966.
As of March 6, 2000, 3,188,314 common shares were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following sections of the definitive Proxy Statement for the 2000 Annual
Meeting of Shareholders of InterCounty Bancshares, Inc. (the "Proxy
Statement"), are incorporated by reference into Part III of this Form 10-K:
1. Board of Directors;
2. Executive Officers;
3. Section 16(a) Beneficial Ownership Reporting Compliance;
4. Compensation of Executive Officers and Directors;
5. Voting Securities and Ownership of Certain Beneficial Owners
and Management; and
6. Certain Relationships and Related Transactions.
<PAGE>
INTERCOUNTY BANCSHARES, INC.
For the Year Ended December 31, 1998
Table of Contents
<TABLE>
<CAPTION>
PART I
Page
----
<S> <C> <C>
Item 1: Business 3
Item 2: Properties 29
Item 3: Legal Proceedings 29
Item 4: Submission of Matters to a Vote of Security Holders 29
Part II
-------
Item 5: Market for Registrant's Common Equity and Related
Stockholder Matters 30
Item 6: Selected Financial Data 30
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations 32
Item 7A: Quantitative and Qualitative Disclosures About
Market Risk 53
Item 8: Financial Statements and Supplementary Data 54
Item 9: Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 80
Part III
--------
Item 10: Directors and Executive Officers of the Registrant 80
Item 11: Executive Compensation 80
Item 12: Security Ownership of Certain Beneficial Owners
and Management 80
Item 13: Certain Relationships and Related Transactions 80
Part IV
-------
Item 14: Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 81
Exhibit Index 82
Signatures 83
</TABLE>
-2-
<PAGE>
PART I
Item 1. Description of Business
GENERAL
InterCounty Bancshares, Inc. ("InterCounty"), an Ohio corporation, is a bank
holding company which owns all of the issued and outstanding common shares of
The National Bank and Trust Company, chartered under the laws of the United
States (the "Bank").
The Bank is engaged in the commercial banking business in Southwestern Ohio,
providing a variety of consumer and commercial financial services. The
primary business of the Bank consists of accepting deposits, through various
consumer and commercial deposit products, and using such deposits to fund
consumer loans, including automobile loans, loans secured by residential and
non-residential real estate, and commercial and agricultural loans. All of
the foregoing deposit and lending services are available at each of the Bank's
17 full-service offices. In addition, the Bank has one office which is
drive-in facilities only and two remote service units. The Bank has also
installed 95 cash dispensers in convenience stores as of the end of 1999.
The Bank also has a trust department which presently administers 836 accounts
having combined assets of $236 million.
On October 8, 1998, the Bank acquired all of the outstanding common shares
of Phillips Insurance Agency Group, Inc. ("Phillips Group"), the holding
company for Phillips Casualty Insurance Agency, Inc., and Phillips Life
Insurance Agency, Inc. (the "Phillips Agencies"). The shares of Phillips
Group were exchanged for 53,606 common shares of InterCounty. On December 11,
1998, the Bank acquired all of the outstanding common shares of Arnold Jones
Insurance Agency, Inc. (the "Jones Agency"), in exchange for 17,777 common
shares of InterCounty. In July 1999, the three operating agencies were merged
into one agency called The Phillips Insurance Agency, Inc. The Phillips
Insurance Agency has its principal office in Blanchester, Ohio. The assets
and income of the insurance agency business were immaterial to the financial
condition and operations of InterCounty during fiscal year 1998.
On September 1, 1992, the Bank acquired Kentucky National Bank of Ohio with
two locations in Georgetown, Ohio for $3,200,000 in cash.
On December 29, 1993, InterCounty acquired the Williamsburg Building & Loan
Company, a mutual savings and loan with total assets of $17.1 million and
equity of $2.9 million. In connection with this merger conversion,
InterCounty issued shares of its common stock, principally to depositors and
other members of Williamsburg and the general public in subscription and
community offerings.
-3-
<PAGE>
Because of its ownership of all the outstanding stock of the Bank, InterCounty
is subject to regulation, examination and oversight by the Board of Governors
of the Federal Reserve System (the "FRB") under the Bank Holding Company Act
of 1956, as amended (the "BHCA"). The Bank, as a national bank, is subject to
regulation, examination and oversight by the Office of the Comptroller of the
Currency (the "OCC") and special examination by the FRB. The Bank is a member
of the Federal Reserve Bank of Cleveland. In addition, since its deposits are
insured by the Federal Deposit Insurance Corporation (the "FDIC"), the Bank is
also subject to some regulation, oversight and special examination by the
FDIC. The Bank must file periodic financial reports with the FDIC, the OCC
and the Federal Reserve Bank of Cleveland. Examinations are conducted
periodically by these federal regulators to determine whether the Bank and
InterCounty are in compliance with various regulatory requirements and are
operating in a safe and sound manner.
Since its incorporation in 1980, InterCounty's activities have been limited
primarily to holding the common shares of the Bank. Consequently, the
following discussion focuses primarily on the business of the Bank.
FORWARD LOOKING STATEMENTS
In addition to the historic financial information contained herein with
respect to InterCounty, the following discussion contains forward-looking
statements that involve risks and uncertainties. Economic circumstances,
InterCounty's operations and InterCounty's actual results could differ
significantly from those discussed in the forward-looking statements. Some of
the factors that could cause or contribute to such differences are discussed
herein but also include changes in the economy and interest rates in the
nation and InterCounty's general market area. The forward-looking statements
contained herein include those with respect to the following matters:
1. Management's expectation that it will continue to expand its
consumer lending activities, other than automobile loans;
2. The Bank's expected amount of loan net charge-offs and management's
determination of the adequacy of the loan loss allowance;
3. The effect of changes in interest rates;
4. Growth in the commercial and industrial loan portfolio; and
5. Management's belief that a substantial percentage of the certificates
of deposit maturing within one year will renew with the Bank at
maturity.
-4-
<PAGE>
Lending Activities
General. The Bank's income consists primarily of interest income generated by
lending activities, including the origination of loans secured by residential
and nonresidential real estate, commercial and agricultural loans, and
consumer loans.
<TABLE>
The following table sets forth the composition of the Bank's loan portfolio by
type of loan at the dates indicated:
<CAPTION>
At December 31,
----------------------------------------------------------
1999 1998 1997
----------------------------------------------------------
% of % of % of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial and
industrial $ 86,521 25% $ 78,801 26% $ 63,661 23%
Commercial real estate 37,833 11 29,936 10 30,835 11
Agricultural 18,343 5 17,925 6 18,387 7
Residential real estate 117,391 33 92,069 30 82,838 30
Installment 87,997 25 83,173 27 79,115 28
Other 2,069 1 2,402 1 2,097 1
------- --- ------- --- ------- ---
Total loans $350,154 100% 304,306 100% 276,933 100%
=== === ===
Deferred net
origination costs 801 806 778
Allowance for loan
losses (3,222) (2,641) (2,761)
------- ------- -------
Net loans $347,733 $302,471 $274,950
======= ======= =======
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
At December 31,
----------------------------------
1996 1995
----------------------------------
% of % of
Amount Total Amount Total
------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial and
industrial $ 57,985 22% $46,952 19%
Commercial real estate 31,118 11 27,274 11
Agricultural 16,304 6 14,515 6
Residential real estate 79,761 30 79,355 33
Installment 81,033 30 68,821 29
Credit card - - 3,268 1
Other 2,228 1 1,561 1
------- --- ------- ---
Total loans $268,429 100% $241,746 100%
=== ===
Deferred net
origination costs 853 761
Allowance for loan
losses (2,686) (2,644)
------- -------
Net loans $266,596 $239,863
======= =======
</TABLE>
<TABLE>
Loan Maturity Schedule. The following table sets forth certain information at
December 31, 1999, regarding the net dollar amount of loans maturing in the
Bank's portfolio, based on contractual terms to maturity. Demand loans, loans
having no stated schedule of repayment and no stated maturity and overdrafts
are reported as due in one year or less:
<CAPTION>
Due 0-1 Year Due 1-5 Years Due 5 + Years Total
(In thousands)
<S> <C> <C> <C> <C>
Commercial and
industrial $18,401 $25,917 $42,202 $86,520
Commercial real estate 8,454 2,632 26,747 37,833
Agricultural 6,261 3,129 8,953 18,343
------ ------ ------ -------
Total $33,116 $31,678 $77,902 $142,696
====== ====== ====== =======
</TABLE>
-6-
<PAGE>
<TABLE>
The following table sets forth the dollar amount of certain loans, due after
one year from December 31, 1999, which have predetermined interest rates and
floating or adjustable interest rates:
<CAPTION>
Predetermined Floating or
rates adjustable rates Total
------------- ---------------- -------
(In thousands)
<S> <C> <C> <C>
Commercial and industrial $20,284 $47,835 $ 68,119
Commercial real estate 3,409 25,969 29,378
Agricultural 1,118 10,965 12,083
------ ------ -------
Total $24,811 $84,769 $109,580
====== ====== =======
</TABLE>
Commercial and Industrial Lending. Commercial and industrial lending has been
an area of growth for the Bank. The Bank originates loans to businesses in its
market area, including "floor plan" loans to automobile dealers and loans
guaranteed by the Small Business Administration. The typical commercial
borrower is a small to mid-sized company with annual sales under $5,000,000.
The majority of commercial loans are made at adjustable rates of interest tied
to the prime rate. Commercial loans typically have terms of up to five years.
At December 31, 1999 the Bank had $86.5 million, or 25% of total loans,
invested in commercial and industrial loans.
Commercial and industrial lending entails significant risks. Such loans are
subject to greater risk of default during periods of adverse economic
conditions. Because such loans are secured by equipment, inventory, accounts
receivable and other non-real estate assets, the collateral may not be
sufficient to ensure full payment of the loan in the event of a default.
Commercial Real Estate. The Bank makes loans secured by commercial real
estate located in its market area. Such loans generally are adjustable-rate
loans for terms of up to 20 years. The types of properties securing loans in
the Bank's portfolio include warehouses, retail outlets and general industrial
use properties. At December 31, 1999, the Bank had $37.8 million, or 11% of
total loans, invested in commercial real estate loans.
Commercial real estate lending generally entails greater risks than
residential real estate lending. Such loans typically involve larger balances
and depend on the income of the property to service the debt. Consequently,
the risk of default on such loans may be more sensitive to adverse economic
conditions. The Bank attempts to minimize such risks through prudent
underwriting practices.
-7-
<PAGE>
Agricultural Loans. The Bank makes agricultural loans, which include loans to
finance farm operations, equipment purchases, and land acquisition. The
repayment of such loans is significantly dependent upon income from farm
operations, which can be adversely affected by weather and other physical
conditions, government policies and general economic conditions. At December
31, 1999, the Bank had $18.3 million, or 5% of total loans, invested in
agricultural loans.
Residential Real Estate. The Bank makes loans secured by one- to four-family
residential real estate and multi-family (over four units) real estate located
in its market area. The Bank originates both fixed-rate mortgage loans and
adjustable-rate mortgage loans ("ARMs"). Fixed-rate loans with terms of 15 to
30 years are typically originated for sale in the secondary market. ARMs are
held in the Bank's portfolio. At December 31, 1999, the Bank had $117.4
million, or 33% of total loans, invested in residential real estate loans.
Installment Loans. The Bank makes a variety of consumer installment loans,
including home equity loans, automobile loans, recreational vehicle loans, and
overdraft protection. Consumer loans involve a higher risk of default than
loans secured by one- to four-family residential real estate, particularly in
the case of consumer loans which are unsecured or secured by rapidly
depreciating assets, such as automobiles. Repossessed collateral for a
defaulted consumer loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of the greater likelihood of damage, loss
or depreciation, and the remaining deficiency may not warrant further
substantial collection efforts against the borrower. In addition, consumer
loan collections depend on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, illness or personal
bankruptcy. Various federal and state laws, including federal and state
bankruptcy and insolvency laws, may also limit the amount which can be
recovered on such loans. Management believes that the Bank's underwriting
practices have resulted in a favorable delinquency ratio and loan loss
experience for this portion of the Bank's total loan portfolio.
At December 31, 1999, the Bank had $88.0 million, or 25% of total loans,
invested in installment loans. The Bank has reduced its efforts to
originate new and used automobile loans due to increased competition and
narrowing interest rate spreads. The Bank expects to continue, subject to
market conditions, to expand its other consumer lending activities as part
of its plan to provide a wide range of personal financial services to its
customers.
In the fourth quarter of 1996, the Bank sold its $3.9 million credit card loan
portfolio to a correspondent bank, recording a gain on the sale of $326,000.
Of the total loans, approximately $102,000 sixty days or more delinquent was
sold with recourse. Beginning in 1997, new corporate customer credit card
accounts were sold with recourse to the same financial institution. The
recourse feature was eliminated in 1999. The Bank will continue to offer credit
card services indirectly through this correspondent bank.
-8-
<PAGE>
Loan Processing. Loan officers are authorized by the Board of Directors to
approve loans up to specified limits. Loans exceeding the loan officers'
approval authority are referred to the Bank's Senior Loan Committee. The
Senior Loan Committee has approval authority up to specified limits. Any
loans made by the Bank in excess of the limits established for the Senior Loan
Committee must be approved by the Chairman of the Board and the President of
the Bank as representatives of the Board of Directors. All loans in excess of
$100,000 are reported to the Board on a monthly basis.
Loan Originations, Purchases and Sales. Although the Bank generally does not
purchase loans, purchases could occur in the future. It did, however, make a
purchase of $21 million in residential real estate loans in late 1995 to
enhance earnings. Fixed-rate residential real estate loans are originated for
sale in the secondary market. From time to time, the Bank sells participation
interests in loans it originates.
Delinquent Loans, Non-performing Assets and Classified Assets. The Bank
attempts to minimize loan delinquencies through aggressive collection efforts.
When a borrower fails to make a required payment on a loan, the Bank attempts
to cause the deficiency to be cured by contacting the borrower. In most
cases, deficiencies are cured promptly.
Generally, when a real estate loan becomes delinquent more than 90 days, an
evaluation of the security is performed. If the evaluation indicates that the
value of the collateral is less than the book value of the loan, a valuation
allowance is established for such loan. When deemed appropriate by
management, the Bank institutes action to foreclose on the real estate or to
acquire the real estate by deed in lieu of foreclosure. A decision as to
whether and when to initiate foreclosure proceedings is based on such factors
as the amount of the outstanding loan in relation to the original
indebtedness, the extent of the delinquency and the borrower's ability and
willingness to cooperate in curing delinquencies. If a foreclosure occurs,
the real estate is sold at public sale and may be purchased by the Bank.
Installment loans are generally charged off if four payments have been missed.
Generally, all other loans are placed on non-accrual status if they are 90
days or more delinquent. A loan may remain on an accrual status after it is
90 days delinquent if it is reasonably certain the account will be settled in
its entirety or brought current within a 30-day period. The current year's
accrued interest on loans placed on non-accrual status is charged against
earnings. Previous year's accrued interest is charged against the allowance
for loan losses. Cash payments received on non-accrual loans are applied
against principal until the balance is repaid. Any remaining payments are
credited to earnings. Non-performing loans include non-accrual loans,
renegotiated loans and ninety days or more past due loans. All loans, except
one-to four-family real estate, which are ten days delinquent are sent to the
Collections Department for collection. One- to four-family real estate loans
are sent when they are fifteen days delinquent.
-9-
<PAGE>
<TABLE>
The following table sets forth certain information regarding the past-due,
non-accrual and renegotiated loans of the Bank at the dates indicated:
<CAPTION>
At December 31,
--------------------------------------
1999 1998 1997 1996 1995
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on
nonaccrual basis $ 955 $599 $509 $535 $314
Accruing loans which are
past due 90 days or more 96 343 241 90 208
Renegotiated loans - - - - -
----- --- --- --- ---
Total $1,051 $942 $750 $625 $522
===== === === === ===
</TABLE>
If interest on non-accrual loans had been recognized during 1999, such income
would have been $59,000. The amount recognized was not material.
Real estate acquired, or deemed acquired, by the Bank as a result of
foreclosure proceedings is classified as other real estate owned ("OREO")
until it is sold. Interest accrual, if any, ceases no later than the date of
acquisition of the real estate, and all costs incurred from such date in
maintaining the property are expensed. Costs relating to the development and
improvement of the property are capitalized. OREO is recorded by the Bank at
the lower of cost or fair value less estimated costs of disposal, and any
write-down resulting therefrom is charged to the allowance for loan losses.
If fair value less estimated costs of disposal subsequently falls below the
carrying amount, a valuation allowance account is established in the amount of
the deficiency. If the fair value less estimated costs of disposal
subsequently increases and is more than the carrying amount, the valuation
allowance is reduced, but not below zero. Increases or decreases in the
valuation allowance are charged or credited to income.
Allowance for Loan Losses. Federal regulations require that the Bank
establish prudent general allowances for loan losses. Senior management, with
oversight responsibility provided by the Board of Directors, reviews on a
monthly basis the allowance for loan losses as it relates to a number of
relevant factors, including but not limited to, historical trends in the level
of non-performing assets and classified loans, current charge-offs and the
amount of the allowance as a percent of the total loan portfolio. While
management believes that it uses the best information available to determine
the allowance for loan losses, unforeseen market conditions could result in
adjustments, and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. At December 31, 1999, the Bank's allowance for loan losses
totaled $3.2 million and was allocated primarily to the consumer segment of
the loan portfolio. A similar allocation existed for all other dates
presented.
-10-
<PAGE>
<TABLE>
The following table sets forth an analysis of the Bank's allowance for losses
on loans for the periods indicated:
<CAPTION>
December 31,
------------------------------------------
1999 1998 1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period $ 2,641 $ 2,761 $ 2,686 $ 2,644 $ 2,561
Charge-offs:
Commercial and industrial (200) (702) (178) (28) (13)
Commercial real estate (10) (45) - - -
Agricultural (10) - - (3) (46)
Residential real estate (9) - (6) (1) (2)
Installment (842) (681) (694) (560) (356)
Credit card - - (64) (189) (55)
Other - (7) - (4) -
------- ------- ------- ------- -------
Total charge-offs (1,071) (1,435) (942) (785) (472)
------- ------- ------- ------- -------
Recoveries:
Commercial and industrial 27 7 63 42 10
Commercial real estate 9 - - - -
Agricultural - - - 8 1
Residential real estate 1 - 2 - 6
Installment 213 145 133 158 159
Credit card 2 12 17 13 19
Other - 1 2 6 -
------ ----- ----- ----- -----
Total recoveries 252 165 217 227 195
------ ----- ----- ----- -----
Net charge-offs (819) (1,270) (725) (558) (277)
Provision for possible
loan losses 1,400 1,150 800 600 360
------- ------- ------- ------- -------
Balance at end of period $ 3,222 $ 2,641 $ 2,761 $ 2,686 $ 2,644
======= ======= ======= ======= =======
Ratio of net charge-offs to
average loans outstanding
during the period 0.25% 0.44% 0.26% 0.22% 0.13%
==== ==== ==== ==== ====
Average loans outstanding $330,734 $287,674 $274,372 $256,761 $218,552
======= ======= ======= ======= =======
</TABLE>
-11-
<PAGE>
Because the loan loss allowance is based on estimates, it is monitored
regularly and adjusted as necessary to provide an adequate allowance. For
1999, the Bank anticipates about the same amount of loan net charge-offs for
each type of loan as that experienced in 1998 except less is expected in
commercial and industrial loans. See Exhibit 99, "Safe Harbor Under the
Private Securities Litigation Reform Act of 1995" attached hereto which is
incorporated herein by reference.
Investment Activities
<TABLE>
The following table sets forth the composition of the Bank's securities
portfolio, based on amortized cost, at the dates indicated:
<CAPTION>
At December 31,
-----------------------------------
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Securities available
for sale:
U.S. Treasuries & U.S.
Agency notes $ 34,730 $ 35,983 $ 44,380
U.S. Agency mortgage-
backed securities 55,324 73,124 49,256
Other mortgage-backed
securities 11,320 16,337 13,212
Municipals 8,563 8,558 -
Other securities 5,833 5,461 4,347
------- ------- -------
Total securities available
for sale 115,770 139,463 111,195
------- ------- -------
Securities held to
maturity:
Municipal securities 44,304 36,832 11,164
------- ------- -------
Total securities held
to maturity 44,304 36,832 11,164
------- ------- -------
Total securities $160,074 $176,295 $122,359
======= ======= =======
</TABLE>
-12-
<PAGE>
Average securities as a percent of assets was 25.4% in 1997, grew to
32.4% in 1998, and fell to 30.9% in 1999. The securities portfolio at
December 31, 1999 consists of $110.7 million of securities available
for sale and $44.3 million of securities that management intends to
hold to maturity. The available-for-sale portion of the portfolio
consists of primarily fixed-rate securities with an average life of 8.5
years, an average repricing term of 7.7 years, and an average tax-
equivalent yield of 6.62%. This portion includes 32% callable U.S.
Agency bonds, 55% fixed-rate mortgage-backed securities, 5% adjustable-
rate mortgage-backed securities, and 8% long-term fixed-rate tax-exempt
municipal securities. During 1998 and 1999 additions to the available-
for-sale portfolio have included medium-term callable U.S. Agency bonds,
mortgage-backed securities with projected average lives of three to
seven years and 15-20 year maturity municipal bonds. Some of these
purchases were funded through $45 million of borrowed funds from the
Federal Home Loan Bank. The held-to-maturity portion of the portfolio
consisted entirely of long-term fixed-rate tax-exempt municipal
securities with both average life and repricing term of 20.8 years.
At December 31, 1999 the total security portfolio had 5.9% market value
depreciation.
The following table sets forth the amortized cost of the Bank's securities
portfolio at December 31, 1999. U.S. agency mortgage-backed securities are
categorized according to their expected prepayment speeds. All other
securities are categorized based on contractual maturity. Actual maturities
may differ from contractual maturities when borrowers have the right to call
or prepay obligations. Yields do not include the effects of income taxes.
<TABLE>
<CAPTION>
Less than 1 year 1 to 5 years 5 to 10 years
---------------- ------------------ ----------------
Weighted Weighted Weighted
Amortized average Amortized average Amortized average
cost yield cost yield cost yield
---- ------- ---- ------- ---- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available
for sale:
U.S. Treasuries
and U.S. Agency
notes $ 5,832 5.55% $ 9,982 6.38% $17,916 6.21%
U.S. Agency
mortgage-backed
securities 7,005 6.82 16,784 6.79 13,942 6.77
Other mortgage-
backed securities 6,285 6.66 1,736 6.34 471 6.29
Municipals - - - - - -
Other securities - - 10 - - -
------ ------ ------
-13-
<PAGE>
Total securities
available for
sale 19,122 6.38 28,512 6.62 32,329 6.45
------ ------ ------
Securities held
to maturity:
Municipal
securities - - 737 9.15 100 4.50
------ ------ ------
Total securities
held to maturity - - 737 9.15 100 4.50
------ ------ ------
Total securities $19,122 6.38% $29,249 6.68% $32,429 6.45%
====== ====== ======
Over 10 years Total
---------------- ------------------
Weighted Weighted
Amortized average Amortized average
cost yield cost yield
---- ------- ---- -------
(Dollars in thousands)
Securities available
for sale:
U.S. Treasuries
and U.S. Agency
notes $ 1,000 6.87% $34,730 6.17%
U.S. Agency
mortgage-backed
securities 17,593 6.84 55,324 6.80
Other mortgage-
backed
securities 2,828 6.50 11,320 6.55
Municipals 8,563 5.04 8,563 5.04
Other securities 5,823 6.67 5,833 6.65
------ -------
Total securities
available for
sale 35,807 4.08 115,770 6.08
------ -------
Securities held
to maturity:
Municipal
securities 43,467 5.06 44,304 5.13
------ -------
Total securities
held to maturity 43,467 5.06 44,304 5.13
------ -------
Total securities $79,274 4.62% $160,074 5.81%
====== =======
</TABLE>
-14-
<PAGE>
Trust Services
The Bank received trust powers in 1922 and currently holds $236 million in net
assets in the Trust Department. The Annual Report of Trust Assets filed with
the FDIC and the OCC reports $181 million in managed assets among 543
accounts, and an additional $59 million of non-discretionary assets held in
268 accounts on December 31, 1999. These assets are not included in the
Bank's balance sheet because, under federal law, neither the Bank nor its
creditors can assert any claim against funds held by the Bank in its fiduciary
capacity.
In addition to administering trusts, the services offered by the Trust
Department include investment management, estate planning and administration,
tax and financial planning and employee benefit plan administration. During
1997, the Trust Department entered into an agreement with a licensed broker-
dealer and insurance agent to provide investment services to customers of the
Bank and others, enabling them to purchase fixed annuities, variable
annuities, mutual funds, and stocks and bonds. The Trust Department is
staffed by five officers and six staff members and generated $1,191,000 in
fee income during 1999.
Deposits and Borrowings
General. Deposits have traditionally been the primary source of the Bank's
funds for use in lending and other investment activities. In addition to
deposits, the Bank derives funds from interest payments and principal
repayments on loans and income on earning assets. Loan payments are a
relatively stable source of funds, while deposit inflows and outflows
fluctuate more in response to general interest rates and money market
conditions.
Deposits. Deposits are attracted principally from within the Bank's market
area through the offering of numerous deposit instruments, including checking
accounts, regular passbook savings accounts, NOW accounts, money market
deposit accounts, term certificate accounts and individual retirement accounts
("IRAs"). Interest rates paid, maturity terms, service fees and withdrawal
penalties for the various types of accounts are established periodically by
the Bank's Asset/Liability Committee and the Executive Committee based on the
Bank's liquidity requirements, growth goals and market trends. The Company
has not used brokers in the past to attract deposits, although,
competition from banks and other financial institutions has caused the
Company to include this as a viable alternative to funding needs.
Currently the amount of deposits from outside the Bank's market area is not
significant.
-15-
<PAGE>
<TABLE>
The following table sets forth the dollar amount of deposits in the various
types of products offered by the Bank as of December 31:
<CAPTION>
Percent Percent Percent
1999 of Total 1998 of Total 1997 of Total
---- -------- ---- -------- ---- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand $ 43,715 12 $ 41,748 11 $38,662 12%
NOW 62,222 16 61,616 16 53,386 17
Savings 35,658 9 35,983 10 34,445 10
Money market
deposit 47,585 13 39,935 11 29,721 9
CDs less than
$100,000 150,281 40 147,003 39 146,005 44
CDs greater than
$100,000 40,226 10 47,705 13 26,899 8
Other 245 - 230 - 214 -
------- --- ------- --- ------- ---
Total
deposits(1) $379,932 100% $374,220 100% 329,332 100%
======= === ======= === ======= ===
Percent Percent
1996 of Total 1995 of Total
---- -------- ---- --------
(Dollars in thousands)
Demand $ 35,731 12% $36,188 12%
NOW 49,030 16 45,927 16
Savings 35,687 11 37,562 13
Money market
deposit 28,009 9 20,465 7
CDs less than
$100,000 141,680 46 130,062 45
CDs greater than
$100,000 18,788 6 21,110 7
Other 203 - 189 -
------- --- ------- ---
Total
deposits(1) $309,128 100% $291,503 100%
======= === ======= ===
- --------------------------------
<FN>
(1)IRAs are offered under all deposit account types.
</FN>
</TABLE>
-16-
<PAGE>
At December 31, 1999, the Bank's certificates of deposit, excluding deposits
greater than $100,000, totaled $150.5 million, or 40% of total deposits. Of
such amount, approximately $106.4 million matures within one year.
<TABLE>
The following table sets forth the dollar amount of time deposits greater than
$100,000 maturing in the periods indicated:
<CAPTION>
Maturity At December 31, 1999
-------- --------------------
(In thousands)
<S> <C>
Three months or less $12,500
Over 3 months to 6 months 13,350
Over 6 months to 12 months 11,425
Over twelve months 2,951
------
Total $40,226
======
</TABLE>
Borrowings. The Federal Reserve System functions as a central reserve bank
providing credit for its member banks and certain other financial
institutions. As a member in good standing of the Federal Reserve Bank of
Cleveland, the Bank is authorized to apply for advances, provided certain
standards of credit-worthiness have been met. The Bank is also a member of
the Federal Home Loan Bank system. The Bank currently has outstanding $81.0
million of borrowings from the Federal Home Loan Bank used primarily to fund
the purchase of U.S. Agency mortgage-backed securities and municipal bonds.
Six million of the borrowings have a one-year maturity and adjust
daily at the prime rate. The remaining $75 million consist of three
fixed-rate notes with maturities in 2002 and 2008. At the option of
the FHLB, these notes can be converted to variable-rate instruments
that adjust quarterly at the three month LIBOR rate. Conversion dates
are January 2000 for $30 million, October 2001 for $15 million, and
April 2003 for $30 million.
<TABLE>
-17-
<PAGE>
The following table sets forth certain information regarding the Bank's
outstanding borrowings at the dates and for the periods indicated:
<CAPTION>
December 31,
--------------------------
1999 1998 1997
(Dollars in thousands)
<S> <C> <C> <C>
Maximum amount of short-term
borrowings outstanding at any
month end during period $40,358 $37,903 $33,364
Average amount of short-term
borrowings outstanding during
period 26,518 31,582 37,928
Amount of short-term borrowings
outstanding at end of period 40,358 22,702 32,734
Weighted average interest rate of
short-term borrowings during period 4.78% 5.14% 5.42%
Weighted average interest rate of
short-term borrowings at end of
period 4.45% 4.41% 6.00%
</TABLE>
Average Balance Sheets
The following table presents, for the years indicated, the total dollar
amounts of interest from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates. The table does not reflect
any effect of income taxes and includes non-performing loans in the
calculations.
<TABLE>
<CAPTION>
1999 1998
---------------------------- ---------------------------
Average Interest Average Interest
outstanding Yield/ earned/ outstanding Yield/ earned/
balance rate paid balance rate paid
<S> <C> <C> <C> <C> <C> <C>
Loans (1) $330,734 8.38% $27,728 $287,675 8.68% $24,959
Securities
available
for sale 123,212 6.27 7,725 131,224 6.43 8,434
Securities
held to
maturity 39,533 5.03 1,989 23,931 5.64 1,349
-18-
<PAGE>
Deposits in banks 283 4.73 14 533 4.81 26
Federal funds sold 1,708 4.86 83 9,237 5.47 505
------- ------ ------- ------
Total interest-
earning assets 495,470 7.58 37,539 452,600 7.79 35,273
Non-earning
assets 33,930 29,002
Allowance for
loan losses (2,945) (2,702)
------- -------
Total assets $526,455 $478,900
======= =======
Savings deposits $ 36,566 2.01 734 $ 35,509 2.58 918
NOW and MMDA 107,664 2.81 3,025 89,276 2.92 2,603
CD's over $100M 43,186 5.28 2,281 39,728 5.53 2,198
Other time
deposits 147,890 5.20 7,685 145,014 5.60 8,118
Short-term
borrowings 26,554 4.77 1,267 31,582 5.14 1,622
Long-term debt 75,539 5.51 4,159 54,430 5.66 3,081
------- ------ ------- ------
Total interest-
bearing
liabilities 437,399 4.38 19,150 395,539 4.69 18,540
------ ------
Demand deposits 41,536 37,560
Other liabilities 3,094 2,996
Capital 44,426 42,805
------- -------
Total liabilities
and capital $526,455 $478,900
======= =======
Net interest
income $18,389 $16,733
====== ======
Interest rate
spread 3.20% 3.10%
Net interest
income margin 3.71 3.70
Ratio of
interest-earning
assets to
interest-bearing
liabilities 113.28% 114.43%
-19-
<PAGE>
1997
----------------------------
Average Interest
outstanding Yield/ earned/
balance rate paid
Loans (1) $274,372 8.76% $24,039
Securities
available for sale 95,029 7.05 6,699
Securities
held to
maturity: 7,867 7.89 621
Deposits in banks 866 5.16 45
Federal funds sold 3,582 5.60 200
------- ------
Total interest-
earning assets 381,716 8.28 31,604
Non-earning
assets 26,718
Allowance for
loan losses (2,682)
-------
Total assets $405,752
=======
Savings deposits $ 34,538 2.79 963
NOW and MMDA 81,461 2.89 2,358
CD's over $100M 25,190 5.53 1,394
Other time
deposits 145,105 5.73 8,307
Short-term
borrowings 37,928 5.42 2,057
Long-term debt 6,791 6.05 411
------- ------
Total interest-
bearing
liabilities 331,013 4.68 15,490
------
Demand deposits 33,516
Other liabilities 2,780
Capital 38,443
-------
Total liabilities
and capital $405,752
=======
Net interest
income $16,114
======
-20-
<PAGE>
Interest rate
spread 3.60%
Net interest
income margin 4.22
Ratio of
interest-earning
assets to
interest-bearing
liabilities 115.43%
- -------------------------------------------
<FN>
(1) Includes nonaccrual loans.
</FN>
</TABLE>
<TABLE>
The following table describes the extent to which the changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected the Bank's interest income and expense during the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (the
difference between the average volume for the periods compared, multiplied
by the prior year's yield or rate paid), (ii) changes in rate (the difference
between the weighted average yield or rate paid for the periods compared,
multiplied by the prior year's average volume) and (iii) changes not solely
attributable to either volume or rate.
Years ended December 31,
------------------------------------
1999 vs 1998
------------------------------------
Increase (decrease) due to
------------------------------------
Rate/
Volume Rate Volume Total
------ ---- ------- -----
(In thousands)
<S> <C> <C> <C> <C>
Interest income attributable to:
Loans $3,736 $ (841) $(126) $2,769
Securities available for sale (515) (207) 13 (709)
Securities held to maturity 879 (145) (94) 640
Deposits in banks (12) - - (12)
Federal funds sold (412) (56) 46 (422)
----- ----- --- -----
Total interest-earning assets 3,676 (1,249) (161) 2,266
----- ----- --- -----
-21-
<PAGE>
Interest expense attributable to:
Savings deposits 27 (203) (8) (184)
NOW and MMDA 536 (95) (19) 422
CD's over $100,000 191 (100) (8) 83
Other time deposits 161 (582) (12) (433)
Short-term borrowings (258) (115) 18 (355)
Long-term debt 1,195 (85) (33) 1,077
----- ----- --- -----
Total interest-bearing
liabilities 1,852 (1,180) (62) 610
----- ----- --- -----
Net interest income $1,824 $ (69) $(99) $1,656
===== ===== === =====
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
1998 vs 1997
------------------------------------
Increase (decrease) due to
------------------------------------
Rate/
Volume Rate Volume Total
------ ---- ------- -----
(In thousands)
<S> <C> <C> <C> <C>
Interest income attributable to:
Loans $1,083 $ (127) $ (35) $ 921
Securities available for sale 2,096 (514) 153 1,735
Securities held to maturity 1,269 (178) (363) 728
Deposits in banks (17) (3) 1 (19)
Federal funds sold 316 (5) (7) 304
----- ----- --- -----
Total interest-earning assets 4,747 (827) (251) 3,669
----- ----- --- -----
Interest expense attributable to:
Savings deposits 27 (70) (2) (45)
NOW and MMDA 226 18 2 246
CD's over $100,000 805 - - 805
Other time deposits (5) (185) - (190)
Short-term borrowings (352) (100) 17 (435)
Long-term debt 2,939 (34) (236) 2,669
----- ----- --- -----
Total interest-bearing
liabilities 3,640 (371) (219) 3,050
----- ----- --- -----
Net interest income $1,107 $ (456) $ (32) $ 619
===== ===== === =====
</TABLE>
-22-
<PAGE>
Competition
The Bank competes for deposits with other commercial banks, savings
associations and credit unions and with the issuers of commercial paper and
other securities, such as shares in money market mutual funds. The primary
factors in competing for deposits are interest rates and convenience of office
location. In making loans, the Bank competes with other commercial banks,
savings associations, mortgage bankers, consumer finance companies, credit
unions, leasing companies, insurance companies and other lenders. The Bank
competes for loan originations primarily through the interest rates and loan
fees it charges and through the efficiency and quality of services it provides
to borrowers. Competition is affected by, among other things, the general
availability of lendable funds, general and local economic conditions, current
interest rate levels and other factors which are not readily predictable.
For years the Bank has competed within its market area with several regional
bank holding companies, each with assets in excess of $4 billion. The size of
these financial institutions and others competing with the Bank is likely to
increase further as a result of changes in statutes and regulations
eliminating various restrictions on interstate and inter-industry branching
and acquisitions. Community banks will be challenged by these larger
competitors and the greater capital resources they control.
-23-
<PAGE>
REGULATION
General
Because of its ownership of all the outstanding stock of the Bank, InterCounty
is subject to regulation, examination and oversight by the FRB as a bank
holding company under the BHCA. The Bank, as a national bank, is subject to
regulation, examination and oversight by the OCC and special examination by
the FRB. The Bank is a member of the Federal Reserve Bank of Cleveland and a
member of the Federal Home Loan Bank of Cincinnati. In addition, since its
deposits are insured by the FDIC, the Bank is also subject to some regulation,
oversight and special examination by the FDIC. The Bank must file periodic
financial reports with the FDIC, the OCC and the Federal Reserve Bank of
Cleveland. Examinations are conducted periodically by these federal
regulators to determine whether the Bank and InterCounty are in compliance
with various regulatory requirements and are operating in a safe and sound
manner.
Bank Holding Company Regulation
As a bank holding company, InterCounty may be subject to restrictions on
share repurchases.
The FRB has also adopted capital adequacy guidelines for bank holding
companies, pursuant to which, on a consolidated basis, InterCounty must
maintain total capital of at least 8% of risk-weighted assets. Risk-weighted
assets consist of all assets, plus credit equivalent amounts of certain off-
balance sheet items, which are weighted at percentage levels ranging from 0%
to 100%, based on the relative credit risk of the asset. At least half of the
total capital to meet this risk-based requirement must consist of core or
"Tier 1" capital, which includes common stockholders' equity, qualifying
perpetual preferred stock (up to 25% of Tier 1 capital) and minority interests
in the equity accounts of consolidated subsidiaries, less goodwill. The
remainder of total capital may consist of supplementary or "Tier 2 capital".
In addition to this risk-based capital requirement, the FRB requires bank
holding companies to meet a leverage ratio of a minimum level of Tier 1
capital to average total consolidated assets of 3%, if they have the highest
regulatory examination rating, well-diversified risk and minimal anticipated
growth or expansion. All other bank holding companies are expected to
maintain a leverage ratio from at least 4% to 5% of average total consolidated
assets. InterCounty was in compliance with these capital requirements at
December 31, 1999. For InterCounty's capital ratios, see Note 14 to the
Consolidated Financial Statements in Item 8.
-24-
<PAGE>
A bank holding company is required by law to guarantee the compliance of
any insured depository institution subsidiary that may become
"undercapitalized" (defined in the regulations as not meeting minimum capital
requirements) with the terms of the capital restoration plan filed by such
subsidiary with its appropriate federal banking agency.
The BHCA restricts InterCounty's ownership or control of the outstanding
shares of any class of voting stock of any company engaged in a
nonbanking business. In addition, the FRB has the authority to require a bank
holding company to terminate any activity or relinquish control of any nonbank
subsidiary (other than a nonbank subsidiary of a bank) upon the determination
by the FRB that such activity or control constitutes a serious risk to the
financial soundness and stability of any bank subsidiary of the bank holding
company. InterCounty currently has no nonbank subsidiaries, except
subsidiaries of the Bank. The ownership of subsidiaries of the Bank is
regulated by the OCC, rather than the FRB.
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley
Act (also known as the Financial Services Modernization Act of 1999). The
Financial Services Modernization Act will, effective March 11, 2000, permit
bank holding companies to become financial holding companies and thereby
affiliate with securities firms and insurance companies and engage in other
activities that are financial in nature. A bank holding company may become a
financial holding company if each of its subsidiary banks is well capitalized
under the Federal Deposit Insurance Corporation Act of 1991 prompt corrective
action provisions is well managed, and has at least a satisfactory rating
under the Community Reinvestment Act, by filing a declaration that the bank
holding company wishes to become a financial holding company. No regulatory
approval will be required for a financial holding company to acquire a
company, other than a bank or savings association, engaged in activities that
are financial in nature or incidental to activities that are financial in
nature, as determined by the Federal Reserve Board.
The Financial Services Modernization Act defines "financial in nature" to
include:
- securities underwriting, dealing and market making;
- sponsoring mutual funds and investment companies;
- insurance underwriting and agency;
- merchant banking; and
- activities that the Federal Reserve Board has determined to be
closely related to banking.
-25-
<PAGE>
A national bank also may engage, subject to limitations on investment, in
activities that are financial in nature, other than insurance underwriting,
insurance company portfolio investment, real estate development and real
estate investment, through a financial subsidiary of the bank, if the bank is
well capitalized, well managed and has at least a satisfactory Community
Reinvestment Act rating. Subsidiary banks of a financial holding company or
national banks with financial subsidiaries must continue to be well
capitalized and well managed in order to continue to engage in activities that
are financial in nature without regulatory actions or restrictions, which
could include divestiture of the financial in nature subsidiary or
subsidiaries. In addition, a financial holding company or a bank may not
acquire a company that is engaged in activities that are financial in nature
unless each of the subsidiary banks of the financial holding company or the
bank has a Community Reinvestment Act rating of satisfactory or better.
The specific effects of the enactment of the Financial Services Modernization
Act on the banking industry in general and on the Bank and InterCounty in
particular have yet to be determined due to the fact that the Financial
Services Modernization Act was only recently adopted.
Transactions between InterCounty and the Bank are subject to statutory limits
in Sections 23A and 23B of the Federal Reserve Act (the "FRA"). See "National
Bank Regulation -- Office of the Comptroller of the Currency."
The FRB must approve the application of a bank holding company to acquire any
bank or savings association.
National Bank Regulation
Office of the Comptroller of the Currency. The OCC is an office in the
Department of the Treasury and is subject to the general oversight of the
Secretary of the Treasury. The OCC is responsible for the regulation and
supervision of all national banks, including the Bank. The OCC issues
regulations governing the operation of national banks and, in accordance
with federal law, prescribes the permissible investments and activities of
national banks. The Bank is authorized to exercise trust powers in accordance
with OCC guidelines. See "Description of Business-Trust Services." National
banks are subject to regulatory oversight under various consumer protection
and fair lending laws. These laws govern, among other things, truth-in-
lending disclosure, equal credit opportunity, fair credit reporting and
community reinvestment.
-26-
<PAGE>
The Bank is required to meet certain minimum capital requirements set by the
OCC. These requirements consist of risk-based capital guidelines and a
leverage ratio, which are substantially the same as the capital requirements
imposed on InterCounty. The Bank was in compliance with those capital
requirements at December 31, 1999. For the Bank capital ratios, see Note 14
to the Consolidated Financial Statements in Item 8. The OCC may adjust the
risk-based capital requirement of a national bank on an individualized basis
to take into account risks due to concentrations of credit or nontraditional
activities.
The OCC has adopted regulations governing prompt corrective action to resolve
the problems of capital deficient and otherwise troubled national banks. At
each successively lower defined capital category, a national bank is subject
to more restrictive and numerous mandatory or discretionary regulatory actions
or limits, and the OCC has less flexibility in determining how to resolve the
problems of the institution. In addition, the OCC generally can downgrade a
national bank's capital category, notwithstanding its capital level, if, after
notice and opportunity for hearing, the national bank is deemed to be engaging
in an unsafe or unsound practice, because it has not corrected deficiencies
that resulted in it receiving a less than satisfactory examination rating on
matters other than capital or it is deemed to be in an unsafe or unsound
condition. The Bank's capital at December 31, 1999, met the standards for
the highest capital category, a well-capitalized bank.
A national bank is subject to restrictions on the payment of dividends.
During the year 2000, dividends that the Bank subsidiary can pay to the
Holding Company without prior approval of regulatory agencies is limited
to net income in 2000. Based on the current financial condition of the Bank,
these provisions are not expected to affect the current ability of the Bank
to pay dividends to InterCounty in an amount customary for the Bank.
OCC regulations generally limit the aggregate amount that a national bank can
lend to one borrower or aggregated groups of related borrowers to an amount
equal to 15% of the bank's unimpaired capital and surplus. A national bank
may loan to one borrower an additional amount not to exceed 10% of the
association's unimpaired capital and surplus, if the additional amount is
fully secured by certain forms of "readily marketable collateral." Loans to
executive officers, directors and principal shareholders and their related
interests must conform to the OCC lending limits. All transactions between
national banks and their affiliates, including InterCounty, must comply with
Sections 23A and 23B of the FRA, which limit the amounts of such transactions
and require that the terms of the transactions be at least as favorable to the
Bank as the terms would be of a similar transaction between the Bank and an
unrelated party. The Bank was in compliance with these requirements and
restrictions at December 31, 1999.
The Bank is permitted to merge or consolidate with a bank located in another
state, unless that state has specifically prohibited such an interstate
transaction.
-27-
<PAGE>
Federal Deposit Insurance Corporation. The FDIC is an independent federal
agency that insures the deposits, up to prescribed statutory limits, of
federally insured banks and thrifts and safeguards the safety and soundness
of the banking and thrift industries. The FDIC administers two separate
insurance funds, the BIF for commercial banks and state savings banks and
the SAIF for savings associations and for banks that have acquired SAIF
deposits. The FDIC is required to maintain designated levels of reserves in
each fund.
The SAIF deposits of Williamsburg obtained by the Bank in the Merger-
Conversion, including the attributed growth factor, which were $17.6 million
at December 31, 1999, remain insured in the SAIF. The Bank is a member of
the BIF, and, at December 31, 1999, it had $364.2 million in deposits insured
in the BIF.
The FDIC is authorized to establish separate annual assessment rates for
deposit insurance for members of each of the BIF and the SAIF. The FDIC may
increase assessment rates for either fund if necessary to restore the fund's
ratio of reserves to insured deposits to its target level within a reasonable
time and may decrease such rates if such target level has been met. The FDIC
has established a risk-based assessment system for both SAIF and BIF members.
Under this system, assessments vary based on the risk the institution poses to
its deposit insurance fund. The risk level is determined based on the
institution's capital level and the FDIC's level of supervisory concern about
the institution.
Federal Reserve Board. The FRA requires national banks to maintain reserves
against their net transaction accounts (primarily checking and NOW accounts).
The amounts are subject to adjustment by the FRB. At December 31, 1999, the
Bank was in compliance with its reserve requirements.
Federal Home Loan Banks. The Federal Home Loan Banks (the FHLBs) provide
credit to their members in the form of advances. As a member, the Bank must
maintain an investment in the capital stock of the FHLB of Cincinnati in an
amount equal to the greater of 1% of the aggregate outstanding principal
amount of the Bank's residential real estate loans, home purchase contracts
and similar obligations at the beginning of each year, or 5% of its advances
from the FHLB. The Bank is in compliance with this requirement with an
investment in FHLB of Cincinnati stock having a book value of $5,498,000 at
December 31, 1999. The FHLB advances are secured by collateral in one or
more specified categories. The amount a member may borrow from the FHLB is
limited based upon the amounts of various assets held by the member. All
long-term advances by each FHLB must be made only to provide funds for
residential housing finance.
-28-
<PAGE>
Ohio Department of Insurance. The Bank's insurance agency operating
subsidiaries are subject to the insurance laws and regulations of the State
of Ohio and the Ohio Department of Insurance. The insurance laws and
regulations require education and licensing of agencies and individual agents,
require reports and impose business conduct rules.
Item 2. Properties
InterCounty Bancshares, Inc. and The National Bank and Trust Company own
and occupy their main offices located at 48 North South Street, Wilmington,
Ohio. The National Bank and Trust Company also owns or leases seventeen
full-service branch offices, one remote drive-through ATM facility, and
one remote drive-in facility, all of which are located in Clinton, Brown,
Clermont, Warren, and Highland Counties, Ohio. The Bank also owns and is
holding for future expansion, a building at 52 E. Main Street, Wilmington,
Ohio. This building is currently leased on a short-term basis. InterCounty's
net book value of investments in land and buildings was $8.5 million as of
December 31, 1999.
Item 3. Legal Proceedings
Neither InterCounty nor the Bank is presently involved in any legal
proceedings of a material nature. From time to time, the Bank is a party to
legal proceedings incidental to its business to enforce its security interest
in collateral pledged to secure loans made by the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
-29-
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There were 3,188,314 common shares of the Company outstanding on December
31, 1999, held of record by approximately 437 shareholders. There is
presently no active trading market for the Company's shares, nor are the
prices at which common shares have been traded published by any national
securities association or quotation service. The Company's shares are
quoted on the OTC Bulletin Board under the symbol "ICYB". Dividends per
share declared were $.17 in each quarter in 1999. Dividends per share
declared in 1998 were $.125 in each of March, June, and September, and
$.13 per share in December.
On October 8, 1998, InterCounty issued 53,606 common shares in consideration
for all of the outstanding common shares of Phillips Group for the purpose of
providing insurance agency services through an operating subsidiary of the
Bank. On December 11, 1998, InterCounty issued 17,777 common shares in
consideration for all of the outstanding common shares of Jones Agency,
another insurance agency, which became a subsidiary of Bank. In both
instances, InterCounty relied upon the exemption from registration under the
Securities Act of 1933 contained in Section 3(a)(11) and Rule 147 thereunder.
All of the shareholders of both agencies to whom shares of InterCounty were
issued are residents of Ohio, the state in which InterCounty is incorporated
and doing business, and precautions have been taken to ensure that resales of
the shares issued will not violate the limitations of Rule 147.
Item 6. Selected Financial Data
<TABLE>
The following table sets forth certain information concerning the consolidated
financial condition, earnings and other data regarding InterCounty at the
dates and for the periods indicated:
<CAPTION>
December 31,
Statement of financial 1999 1998 1997 1996 1995
condition and other data: (Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total amount of
Assets $542,548 $520,553 $436,605 $380,607 $360,271
Cash and due from banks 18,813 18,241 17,807 11,005 13,680
Securities 155,027 176,580 123,139 88,831 90,760
Loans receivable-net 347,733 302,471 274,950 266,596 239,863
Deposits 379,932 374,220 329,332 309,127 291,503
Short-term borrowings 40,358 22,702 32,734 31,113 31,110
Long-term debt 75,431 75,539 30,716 914 1,108
Shareholders' equity 44,031 44,723 40,980 36,806 33,822
Number of full service
offices 17 16 14 13 12
</TABLE>
-30-
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997 1996 1995
Statement of income data: (In thousands)
<S> <C> <C> <C> <C> <C>
Interest and loan fee
income $37,539 $35,273 $31,604 $28,824 $25,209
Interest expense 19,150 18,540 15,490 13,830 11,469
------- ------- ------ ------ ------
Net interest income 18,389 16,733 16,114 14,994 13,740
Provision for loan
losses 1,400 1,150 800 600 360
------- ------- ------- ------ ------
Net interest income
after provision for
loan losses 16,989 15,583 15,314 14,394 13,380
Non-interest income 5,227 5,526 4,533 4,007 2,339
Non-interest expense 15,227 13,846 12,600 11,592 10,103
------- ------- ------ ------ ------
Income before income
taxes 6,989 7,263 7,247 6,809 5,616
Federal income taxes 1,281 1,889 2,259 1,877 1,591
------- ------- ------ ------ ------
Net income $ 5,708 $ 5,374 $ 4,988 $ 4,932 $ 4,025
======= ======= ====== ====== ======
Year ended December 31,
Selected financial ratios: 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Return on average equity 12.85% 12.56% 12.98% 14.11% 12.85%
Return on average assets 1.08 1.12 1.23 1.34 1.28
Equity-to-assets ratio 8.12 8.59 9.39 9.66 9.39
Dividend payout ratio(1) 37.57 29.71 23.90 17.83 14.45
Ratio of non-performing
loans to total loans(2) 0.33 0.31 0.31 0.36 0.21
Ratio of loan loss allowance
to total loans 0.91 0.87 0.99 1.00 1.09
Ratio of loan loss allowance
to non-performing loans(2) 307% 280% 316% 273% 507%
Earnings per share(3) $1.81 $1.70 $1.59 $1.57 $1.32
Dividends declared
per share(3) 0.68 0.505 0.38 0.28 0.19
_________________________________
<FN>
(1) Dividends paid per share divided by earnings per share.
-31-
<PAGE>
(2) Non-performing loans include non-accrual loans, renegotiated loans and
loans 90 days or more past due.
(3) All share information and per share data has been retroactively restated
to reflect a two-for-one stock split in the form of a stock dividend effected
on October 26, 1998.
</FN>
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis comparing 1999 to prior years should be
read in conjunction with the audited consolidated financial statements at
December 31, 1999 and 1998 and for the three years ended December 31, 1999. In
addition to the historical information contained herein with respect to
InterCounty Bancshares, Inc. and subsidiaries (the "Company"), the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Company's operation and the
Company's actual results could differ significantly from those discussed
in the forward-looking statements. Some of the factors that could cause or
contribute to such differences include changes in the economy and interest
rates in the nation and the Company's general market area.
RESULTS OF OPERATIONS
OVERVIEW
Net income for 1999 was $5.708 million, an increase of 6.2% from 1998. Net
income per share was $1.81 in 1999, compared to $1.70 in 1998. Highlights
include a 9.9% increase in net interest income, a 21.8% increase in the
provision for loan losses to $1.40 million, an increase of 7.2% in non-interest
income, excluding securities losses, and a 10.0% increase in non-interest
expense. Performance ratios for 1999 included a return on average assets of
1.08%, and a return on average equity of 12.85%.
Net income for 1998 was $5.374 million, an increase of 8.1% from 1997. Net
income per share was $1.70 in 1998 compared to $1.59 in 1997. Highlights
include a 3.8% increase in net interest income, a 43.8% increase in the
provision for loan losses to $1.15 million, an increase of 21.9% in non-
interest income, and a 9.9% increase in non-interest expense. These results
include non-interest income of $833,000 in 1998, and $792,000 in 1997, and non-
interest expense of $789,000 in 1998, and $776,000 in 1997, from the operations
of two insurance agencies acquired during the fourth quarter of 1998, which
were accounted for as a pooling of interests. The effect on the net earnings
of the Company was minimal. Performance ratios for 1998 included a return on
average assets of 1.12%, and a return on average equity of 12.56%.
-32-
<PAGE>
<TABLE>
<CAPTION>
Table 1 - Selected Financial Highlights
(dollars in thousands)
1999 1998 1997 1996 1995
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 18,389 $ 16,733 $ 16,114 $ 14,994 $ 13,740
Net income 5,708 5,374 4,988 4,932 4,025
Earnings per share 1.81 1.70 1.59 1.57 1.32
Dividends per share 0.68 0.51 0.38 0.28 0.19
AVERAGE BALANCES
Assets $526,455 $478,900 $405,752 $367,926 $314,435
Loans 330,734 287,674 274,372 256,761 218,552
Securities 162,744 155,155 102,896 85,867 71,816
Deposits 376,843 347,087 319,809 297,070 267,833
Long-term debt 75,539 53,753 6,792 1,070 1,262
Shareholders' equity 44,426 42,805 38,443 34,957 31,327
RATIOS AND STATISTICS
Net interest margin 3.88% 3.71% 4.22% 4.33% 4.64%
Return on average
assets 1.08 1.12 1.23 1.34 1.28
Return on average
equity 12.85 12.56 12.98 14.11 12.85
Loans to assets 64.98 58.61 63.63 70.75 67.73
Equity to assets 8.12 8.59 9.39 9.66 9.39
Total risk-based
capital ratio 14.29 14.18 14.66 14.06 14.09
Efficiency ratio 61.25 62.20 61.03 61.01 62.94
Full service offices 17 16 14 13 12
</TABLE>
-33-
<PAGE>
NET INTEREST INCOME
Net interest income increased to $18.4 million in 1999 from $16.7 million in
1998, an increase of 9.9%. The Company's tax equivalent yield on average
interest-earning assets decreased to 7.74% in 1999 from 7.92% in 1998. Average
interest-earning assets increased $42.9 million (9.5%) from 1998.
Interest and fees on loans increased 11.1% from last year as the average
balance rose $43.1 million (15.0%) and the average yield decreased from 8.68%
in 1998 to 8.38% in 1999. During 1999 lending rates were generally lower due
to prime rate decreases and competition. The securities portfolio showed an
increase in average balance and a decrease in yield. The average balance of
the portfolio increased $7.6 million (4.9%) from 1998, and the tax equivalent
yield decreased from 6.67% to 6.48%. The reinvestment of matured and called
securities was also at lower rates during 1999.
Average interest-bearing liabilities increased $41.9 million (10.6%) during
1999, and the cost decreased from 4.68% in 1998 to 4.38% in 1999. Although all
categories showed a decrease in cost, the amount of higher-costing long-term
funds borrowed from the Federal Home Loan Bank increased $21.2 million and was
17.2% of funds in 1999 compared to 13.6% during 1998. Tax equivalent net
interest margin increased to 3.88% from 3.82%.
Net interest income increased to $16.7 million in 1998 from $16.1 million in
1997, an increase of 3.8%. The Company's yield on average interest-earning
assets decreased to 7.79% in 1998 from 8.28% in 1997. Average interest-earning
assets increased $70.9 million (18.6%) from 1997.
Interest and fees on loans increased 3.8% from 1997 to 1998 as the average
balance rose $13.3 million (4.8%) and the average yield decreased from 8.76% in
1997 to 8.68% in 1998. During 1998 lending rates were fairly stable until prime
rate decreased 75 basis points during the fourth quarter. The securities
portfolio showed an increase in balances and a decrease in yield when
comparing 1998 to 1997. The average balance of the portfolio increased $52.3
million (50.8%) from 1997, and the tax equivalent yield decreased from 7.32% to
6.67%. The securities portfolio experienced the maturity and call of higher
yielding assets and the reinvestment of those funds in the lower rates that
were available during 1998.
Average interest-bearing liabilities increased $64.5 million (19.5%) during
1998 compared to 1997, and the cost decreased from 4.68% in 1997 to 4.67% in
1998. Although all categories showed a decrease in cost, the amount of higher-
costing long-term funds borrowed from the Federal Home Loan Bank increased
$47.0 million and was 13.6% of total interest-bearing funds in 1998, compared
to 2.1% during 1997. Tax equivalent net interest margin decreased to 3.82% in
1998 from 4.28% in 1997.
-34-
<PAGE>
PROVISION FOR LOAN LOSSES
The provision for loan losses was $1.40 million in 1999, an increase of
$250,000 from the provision recorded in 1998, which was an increase of $350,000
from the provision recorded in 1997. Net charge-offs in 1999 were $820,000
compared to $1,270,000 in 1998 and $725,000 in 1997. The increased provision
in the past three years was in response to 15.0%, 4.8% and 6.9% increases
in average loans for those years, and also increases in the amount of net
charge-offs in 1998 and 1997. The ratio of the allowance for loan losses as a
percent of total loans at December 31 was .91% in 1999, .87% in 1998, and .99%
in 1997.
NON-INTEREST INCOME
Table 2 details the components of non-interest income and how they relate each
year as a percent of average assets. Total non-interest income was $5.2
million in 1999, $5.5 million in 1998, and $4.5 million in 1997. Non-interest
income represents a ratio of .99% of average assets in 1999, 1.15% in 1998, and
1.12% 1997. Service charges and fees have increased over the last three years
due to increased charges and growth in the number of accounts, although their
percentage of average assets has remained fairly consistent during this period.
Trust income increased 7.9% in 1999, and 19.2% in 1998, due to increases in
both the number of accounts and the amount of funds under management. At
December 31 total assets in the Trust Department were approximately $236
million in 1999, compared to $217 million in 1998 and $174 million in 1997.
Late in 1996 the Company began installing cash dispensing units in convenience
stores. This continued through 1999 and there were ninety-five machines
installed at the end of 1999. ATM network fees generated were $702,000 in
1999, $574,000 in 1998, and $206,000 in 1997. In the fourth quarter of 1998
the Company acquired two insurance agencies, and because they were
accounted for as a pooling of interests, their commission income is included in
the non-interest income section of the Company's results of operations for the
three years presented. Net securities losses were $368,000 in 1999, compared
to net gains of $302,000 in 1998, and net gains of $300,000 in 1997.
-35-
<PAGE>
<TABLE>
<CAPTION>
Table 2 - Non-Interest Income
(in thousands)
1999 1998 1997
---- ---- ----
Percent Percent Percent
of average of average of average
Amount Assets Amount Assets Amount Assets
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service charge on
deposits $1,485 0.28% $1,351 0.28% $1,263 0.31%
Other service charges 376 0.07 336 0.07 287 0.07
Trust income 1,192 0.23 1,105 0.23 927 0.23
ATM network fees 701 0.13 574 0.12 206 0.05
Insurance agency
commissions 966 0.18 833 0.17 792 0.20
Net security gains
(losses) (368) (0.07) 302 0.06 300 0.07
Other 875 0.17 1,025 0.22 758 0.19
----- ---- ----- ----- ----- ----
Total income $5,227 0.99% $5,526 1.15% $4,533 1.12%
===== ==== ===== ===== ===== ====
</TABLE>
-36-
<PAGE>
NON-INTEREST EXPENSE
Table 3 details the components of non-interest expense and how they relate each
year as a percent of average assets. Total non-interest expense has increased
from $12.6 million in 1997, to $13.8 million in 1998, and to $15.2 million in
1999. These figures represent a percent of average assets of 3.10% in 1997,
and 2.89% in both 1998 and 1999. Improvements in the percentages were
primarily due to a 29.7% increase in average assets, while non-interest expense
increased just 20.8% during the period from 1997 to 1999.
Salaries and benefits expense, which is the largest component of non-interest
expense, increased to $7.7 million in 1999, and increased as a percent of
average assets to 1.46%. Salaries and benefits expense increased to $6.8
million in 1998 from $6.4 million in 1997 but decreased as a percent of average
assets to 1.42% in 1998 from 1.57% in 1997. The average number of full-time
equivalent employees increased from 198 in 1997 to 217 in 1998, and to 222 in
1999. The increases during that period were the result of opening branch
offices in Hillsboro, Owensville and Waynesville, and additional support staff
in various areas of the Company.
Most other non-interest expense categories have remained about the same as a
percent of average assets from 1997 to 1999. Equipment expense has been .40%,
.40%, and .38%, of average assets for the years 1999, 1998, and 1997,
respectively. Occupancy expense was .16% in both 1999 and 1998, and was .18%
of average assets for 1997. State franchise tax has decreased 20.6% from 1998
due to adjustments in the capital of The National Bank and Trust Company (the
"Bank") in the form of dividends to the parent company recorded in December
1998. Other expense as a percent of average assets was .70% in 1999, .71% in
1998, and .75% in 1997.
-37-
<PAGE>
<TABLE>
<CAPTION>
Table 3 - Non-Interest Expense
(in thousands)
1999 1998 1997
---- ---- ----
Percent Percent Percent
of average of average of average
Amount Assets Amount Assets Amount Assets
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries $ 6,563 1.25% $5,781 1.21% $ 5,394 1.33%
Benefits 1,130 0.21 984 0.21 970 0.24
Equipment 2,108 0.40 1,917 0.40 1,553 0.38
Occupancy 824 0.16 790 0.16 741 0.18
State franchise tax 488 0.09 615 0.13 557 0.14
Marketing 386 0.07 312 0.06 279 0.07
Other 3,728 0.71 3,447 0.72 3,106 0.76
------ ---- ------ ---- ------ ----
Total $15,227 2.89% 13,846 2.89% $12,600 3.10%
====== ==== ====== ==== ====== ====
</TABLE>
-38-
<PAGE>
INCOME TAXES
The effective tax rates were 18.3% for 1999, 26.0% for 1998, and 31.2% for
1997. The decreases in the 1999 and 1998 effective tax rates were primarily
due to the exercise of stock options by certain executive officers that are
taxable to the executives and tax deductible to the Company. Also, increases in
tax-exempt municipal bond income of 45.2% in 1999 and 168.9% in 1998 from the
previous years have contributed to the reduction of the effective tax rate for
those years.
FINANCIAL CONDITION
ASSETS
Average total assets increased 9.9% during 1999 to $526.5 million. Average
interest-earning assets increased 9.5%, and remained at 94% of total assets,
the same as the last two years.
SECURITIES
Average securities as a percent of assets was 25.4% in 1997, grew to 32.4% in
1998, and fell to 30.9% in 1999. The securities portfolio at December 31, 1999
consists of $110.7 million of securities available for sale and $44.3 million
of securities that management intends to hold to maturity. The available-for-
sale portion of the portfolio consists primarily of fixed-rate securities with
an average life of 8.5 years, an average repricing term of 7.7 years,
and an average tax-equivalent yield of 6.62%. This portion includes 32%
callable U.S. Agency bonds, 55% fixed-rate mortgage-backed securities, 5%
adjustable-rate mortgage-backed securities, and 8% long-term fixed-rate tax-
exempt municipal securities. During 1998 and 1999 additions to the available-
for-sale portfolio have included medium-term callable U.S. Agency bonds,
mortgage-backed securities with projected average lives of three to seven years
and 15-20 year maturity municipal bonds. Some of these purchases were funded
through $45 million of borrowed funds from the Federal Home Loan Bank. The
held-to-maturity portion of the portfolio consisted entirely of long-term
fixed-rate tax-exempt municipal securities with both average life and repricing
term of 20.8 years. At December 31, 1999 the total security portfolio had 5.9%
market value depreciation.
LOANS
Average total loans as a percent of average assets was 67.6% in 1997, 60.1% in
1998, and 62.8% in 1999. Table 4 shows loans outstanding at period end by type
of loan. The portfolio composition has stayed relatively the same during the
three-year period. Commercial and industrial loans grew from $63.7 million in
1997, to $78.8 million in 1998, and to $86.5 million in 1999, primarily as a
result of increased origination of working capital and equipment loans.
During the 1998 and 1999 periods the growth in residential real estate loans
of $9.2 million and $25.3 million, respectively, was the result of increased
efforts by the Company in originating loans locally through the branch network.
For interest rate risk management purposes the Company currently sells, or
holds for sale, the majority of fixed-rate residential real estate loans
originated, while holding the adjustable-rate loans in the portfolio. The
Company expects to continue the emphasis on growth in the real estate
portfolio. New and used automobile loans have been the emphasis in the
installment area, although the Company has reduced its efforts to originate
indirect automobile loans due to increased competition and narrowing interest
rate spreads. The amount of installment loans outstanding has increased
slightly from $83.2 million in 1998 to $88.0 million in 1999, although it has
decreased to 25% of the portfolio at December 31, 1999 from 27% at December 31,
1998.
-39-
<PAGE>
The general economy of the Company's market area has been stable to good for
the past several years. The Company has experienced an increase in automobile
lending, residential real estate lending, and commercial lending, both real
estate and industrial, because of the general economic conditions and the
movement of the Company into new markets, such as Clermont, Highland and
Warren Counties. The Company focused its commercial lending on small to
medium-sized companies in its market area, most of which are companies with
long established track records. The Company has avoided concentration of
lending in any one industry. As of December 31, 1999, the percent of
fixed-rate loans to total loans was 44%, of which 67% matures within five
years.
<TABLE>
<CAPTION>
Table 4 - Loan Portfolio
(in thousands)
at December 31,
1999 1998
---- ----
Percent of Percent of
Amount Total Amount Total
---------------------------------------------
<S> <C> <C> <C> <C>
Commercial and industrial $ 86,521 25% $ 78,801 26%
Commercial real estate 37,833 11 29,936 10
Agricultural 18,343 5 17,925 6
Residential real estate 117,391 33 92,069 30
Installment 87,997 25 83,173 27
Credit card - - - -
Other 2,069 1 2,402 1
Deferred net origination
costs 801 - 806 -
------- --- ------- ---
Total $350,955 100% $305,112 100%
======= === ======= ===
-40-
<PAGE>
1997 1996
Percent of Percent of
Amount Total Amount Total
---------------------------------------------
Commercial and industrial $ 63,661 23% $ 57,985 22%
Commercial real estate 30,835 11 31,118 11
Agricultural 18,387 7 16,304 6
Residential real estate 82,838 30 79,761 30
Installment 79,115 28 81,033 30
Credit card - - - -
Other 2,097 1 2,228 1
Deferred net origination costs 778 - 853 -
------- --- ------- ---
Total $277,711 100% $269,282 100%
======= === ======= ===
1995
Percent of
Amount Total
------------------------
Commercial and industrial $ 46,952 19%
Commercial real estate 27,274 11
Agricultural 14,515 6
Residential real estate 79,355 33
Installment 68,821 29
Credit card 3,268 1
Other 1,561 1
Deferred net origination costs 761 -
------- ---
Total $242,507 100%
======= ===
</TABLE>
ALLOWANCE FOR LOAN LOSSES
Table 5 shows selected information relating to the Company's loan quality and
allowance for loan losses. The allowance is maintained to absorb potential
losses in the portfolio. Management's determination of the adequacy of the
reserve is based on reviews of specific loans, loan loss experience, general
economic conditions and other pertinent factors. If, as a result of charge-
offs or increases in risk characteristics of the loan portfolio, the reserve is
below the level considered by management to be adequate to absorb possible
future loan losses, the provision for loan losses is increased. Loans deemed
not collectible are charged off and deducted from the reserve. Recoveries on
loans previously charged off are added to the reserve.
Overall loan quality has been good over the last five years. During 1998 the
Company charged off one loan in the amount of $446,000 that caused the net
charge-off percentage of average loans to increase to .50% in 1998 from .26% in
1997, and therefore the Company increased the provision for loan losses to
$1,150,000 in 1998 from $800,000 in 1997. The allowance for loan losses is
-41-
<PAGE>
.91% of total loans as of December 31, 1999, and has ranged from .87% to 1.09%
for the previous four years. The Company does not allocate the allowance for
loan losses to specific types of loans. In assessing the adequacy of the
allowance for loan losses, the Company considers three principal factors: (1)
the three-year rolling average charge-off percentage applied to the current
outstanding balance by portfolio type; (2) specific percentage applied to
individual loans estimated by management to have a potential loss; and (3)
estimated losses attributable to anticipated portfolio growth, economic
conditions and portfolio risk. Economic conditions considered include
unemployment levels, the condition of the agricultural business, and other
local economic factors.
Non-accrual loans for the last five years are listed in Table 5. The amount in
this category increased to $955,000 from $599,000 in 1998, and was $509,000 in
1997. The 1998 amount of $599,000 was resolved through payoffs of $79,000,
losses of $187,000, a $17,000 credit upgrade to accrual status and $316,000
that remained on non-accrual due to bankruptcy filings, and one liquidation
workout.
As of December 31, 1999 the $955,000 consisted of fourteen relationships. Four
are collateralized with first mortgages, two have second mortgages, two are
titled vehicles awaiting sale, and the remaining loans are collateralized by
general chattel filings on machinery, equipment, crops, fixtures, and
additional mortgage positions. All loans are expected to be resolved through
term payments or through liquidation of collateral in the normal course of
business. The anticipated loss in year 2000 from these loans is $47,000. In
addition, management has identified ten other potential problem loans that
total $4.0 million. These are defined as loans that are not included
in the non-performing categories at December 31, 1999 but which management,
through normal credit review procedures, has developed information regarding
possible credit problems that could cause the borrowers future difficulties in
complying with present loan repayment terms. Nine of these accounts have a
projected loss in year 2000 of $103,000. The remaining account is a $1,700,000
loan to Bush Leasing, Inc., a company whose primary owner is George F. Bush, a
former director of the Company. Management is unable to determine the potential
loss on this account until the recently filed Chapter 11 bankruptcy plan is
complete. Projected losses are based on currently available information and
actual losses may differ significantly from those discussed above.
Management knows of no other significant potential problem loans.
-42-
<PAGE>
<TABLE>
<CAPTION>
Table 5 - Asset Quality
(in thousands)
1999 1998 1997 1996 1995
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan
losses $3,222 $2,641 $2,761 $2,686 $2,644
Provision for loan
losses 1,400 1,150 800 600 360
Net charge-offs 819 1,270 725 558 277
Non-accrual loans $ 955 $ 599 $ 509 $ 535 $ 314
Loans 90 days or more
past due 96 343 241 90 208
Renegotiated loans - - - - -
Other real estate owned 80 - 125 358 -
----- ----- ----- ----- -----
Total non-performing
assets $1,131 $ 942 $ 875 $ 983 $ 522
===== ===== ===== ===== =====
RATIOS
Allowance to total loans 0.91% 0.87% 0.99% 1.00% 1.09%
Net charge-offs to
average loans 0.25 0.50 0.26 0.22 0.13
Non-performing assets
to total loans 0.33 0.31 0.31 0.36 0.21
</TABLE>
OTHER ASSETS
Beginning in the fourth quarter of 1996 and during 1997 through 1999 the
Company has been installing cash dispenser machines in convenience stores and
supermarkets. There were 95 machines located in Ohio, Kentucky, West Virginia,
and Indiana at the end of 1999. The Company's investment in this segment of
business includes $1.4 million in equipment cost and an average of $4.7 million
in cash to supply the machines. The Company anticipates little change in the
number machines installed during 2000. The Company charges a fee for
withdrawals from anyone who does not have a transaction account with the
Company. The Company recorded a net book income before taxes on this segment
of business of $29,000 in 1999, compared to a net book loss before taxes of
$110,000 for 1998 and $155,000 for 1997. On a cash flow basis the machines
are providing a positive return on investment.
-43-
<PAGE>
DEPOSITS
Table 6 presents a summary of period end deposit balances. Demand and NOW
accounts have remained fairly constant as a percent of total deposits
throughout the five-year period. Savings accounts decreased slightly both in
amounts and as a percent of deposits during this same period. Money market
accounts rose to 9% of deposits through 1997, and gradually to 13% by the end
of 1999, as a result of adding a third and higher interest rate tier for large
balance accounts. Retail certificates of deposit have been growing slightly in
amount over the five-year period and are currently 40% of total deposits.
Certificates of $100,000 and over are primarily short-term public funds and
balances fluctuate depending on the Company's pricing strategy and funding
needs at any particular time.
Deposits are attracted principally from within the Company's market area
through the offering of numerous deposit instruments, including checking
accounts, savings accounts, NOW accounts, money market deposit accounts, term
certificate accounts and individual retirement accounts. Interest rates,
maturity terms, service fees, and withdrawal penalties for the various types of
accounts are established periodically by management based on the Company's
liquidity requirements, growth goals, and market trends. The Company has not
used brokers in the past to attract deposits, although, competition from banks
and other financial institutions has caused the Company to include this as a
viable alternative to funding needs. The amount of deposits currently from
outside the Company's market area is not significant.
<TABLE>
<CAPTION>
Table 6 - Deposits
(in thousands)
at December 31,
1999 1998 1997
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
--------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand $ 43,715 12% $ 41,748 11% $ 38,662 12%
NOW 62,222 16 61,616 16 53,386 16
Savings 35,658 9 35,983 10 34,445 11
Money market 47,585 13 39,935 11 29,721 9
CD's less than
$100,000 150,281 40 147,003 39 146,005 44
CD's $100,000
and over 40,226 10 47,705 13 26,899 8
Other 245 - 230 - 214 -
------- --- ------- --- ------- ---
Total $379,932 100% $374,220 100% $329,332 100%
======= === ======= === ======= ===
-44-
<PAGE>
1996 1995
Percent of Percent of
Amount Total Amount Total
--------------------------------------
Demand $ 35,731 12% $ 36,188 12%
NOW 49,030 16 45,927 16
Savings 35,687 11 37,562 13
Money market 28,009 9 20,465 7
CD's less than
$100,000 141,680 46 130,062 45
CD's $100,000
and over 18,788 6 21,110 7
Other 203 - 189 -
------- --- ------- ---
Total $309,128 100% $291,503 100%
======= === ======= ===
</TABLE>
OTHER BORROWINGS
During the fourth quarter of 1997 and during 1998 the Company purchased $65
million in U.S. Agency mortgage-backed securities and $10 million in long-term
tax-exempt municipal bonds with funds borrowed from the Federal Home Loan Bank
(FHLB) at anticipated spreads of 130-150 basis points before tax. The effect of
these transactions will be an enhancement to earnings and an effective use of
capital. At December 31, 1999 and 1998, the Bank had outstanding $81.0 million
of total borrowings from the FHLB. Six million of the borrowings have a one-
year maturity and adjust daily at the prime rate. The remaining $75 million
consist of three fixed-rate notes with maturities in 2002 and 2008. At the
option of the FHLB, these notes can be converted to variable-rate instruments
that adjust quarterly at the three-month LIBOR rate. Conversion dates are
January 2000 for $30 million, October 2001 for $15 million, and April 2003 for
$30 million.
CAPITAL
The declaration and payment of dividends by the Company are subject to the
discretion of the Board of Directors and to the earnings and financial
condition of the Company and applicable laws and regulations. The dividend
rate was increased 34% in 1998 and 33% in 1999. The Company's equity to assets
ratio at December 31, 1999 was 8.1%. As of that same date, tier 1 risk-based
capital was 13.4%, and total risk-based capital was 14.3%. The minimum tier 1
and total risk-based capital ratios required by the Board of Governors of the
Federal Reserve are 4% and 8%, respectively.
LIQUIDITY
Effective liquidity management ensures that the cash flow requirements of
depositors and borrowers, as well as Company cash needs, are met. The Company
manages liquidity on both the asset and liability sides of the balance sheet.
-45-
<PAGE>
The loan to deposit ratio at December 31, 1999, was 92.4%, compared to 81.5% at
the same date in 1998. This increase in this ratio reflects the challenge of
attracting deposits while maintaining positive loan growth. Loans to total
assets were 64.7% at the end of 1999, compared to 58.6% at the same time last
year. The securities portfolio is 71% available for sale securities that
are readily marketable. Approximately 86% of the available for sale
portfolio is pledged to secure public deposits, short-term and
long-term borrowings and for other purposes as required by law. The balance of
the available for sale securities could be sold if necessary for liquidity
purposes. Also a stable deposit base, consisting of 89% core deposits, makes
the Company less susceptible to large fluctuations in funding needs. The
Company has short-term borrowing lines of credit with several correspondent
banks. The Company also has both short- and long-term borrowing available
through the Federal Home Loan Bank (FHLB). The Company has also begun to
explore deposit opportunities in the brokered certificate of deposit market to
help provide liquidity to fund loan growth.
MARKET RISK MANAGEMENT
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to interest rate risk, exchange rate risk, equity
price risk and commodity price risk. The Company does not maintain a trading
account for any class of financial instrument, and is not currently subject to
foreign currency exchange rate risk, equity price risk or commodity price
risk. The Company's market risk is composed primarily of interest rate risk.
The Company's Asset/Liability Committee (ALCO) is responsible for reviewing the
interest rate sensitivity position of the Company and establishing policies to
monitor and limit exposure to interest rate risk. The guidelines established
by ALCO are approved by the Company's Board of Directors. The primary goal of
the asset/liability management function is to maximize net interest income
within the interest rate risk limits set by ALCO. Interest rate risk is
monitored on a quarterly basis through ALCO meetings. Techniques used include
both interest rate gap management and simulation modeling that measures the
effect of rate changes on net interest income and market value of equity under
different rate scenarios. The interest rate gap analysis schedule (Table 7),
quantifies the asset/liability static sensitivity as of December 31, 1999. As
shown, the Company was liability sensitive for periods through one year,
and asset sensitive within the one- to five-year period and the over-five-year
period. The cumulative gap as a percent of total assets through one year is
(16.8)%. The balances of transaction type NOW and MMDA accounts are scheduled
to run off over their expected lives. Although the entire balance of these
deposits is subject to repricing or withdrawal in a relatively short period of
time, they have been a stable base of retail core deposits for the Company.
Also their sensitivity to changes in interest rates is significantly less than
some other deposits, such as certificates of deposit.
-46-
<PAGE>
<TABLE>
<CAPTION>
Table 7 - Interest Rate Gap Analysis
(in thousands)
at December 31, 1998
0-3 3-6 6-12 1-5 5+
Total Months Months Months Years Years
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans (1) $352,554 $ 68,543 $ 19,193 $ 41,500 $184,339 $ 38,979
Securities (2) 155,027 7,948 2,218 3,953 29,519 111,389
Short-term funds 525 525 - - - -
------- ------- ------ ------ ------- -------
Total earning
assets 508,106 77,016 21,411 45,453 213,858 150,368
------- ------- ------ ------ ------- -------
Savings, NOW and
MMDA 145,465 5,146 5,146 10,293 82,339 42,541
Other time deposits 190,752 49,597 51,982 42,017 46,531 625
Short-term
borrowings 40,358 40,358 - - - -
Long-term debt 75,431 30,431 - - 45,000 -
------- ------- ------ ------ ------- -------
Total interest-
bearing funds 452,006 125,532 57,128 52,310 173,870 43,166
------- ------- ------ ------ ------- -------
Period gap 56,100 (48,516) (35,717) (6,857) 39,988 107,202
Cumulative gap - (48,516) (84,233) (91,090) (51,102) 56,100
Gap as a percent
of assets 10.3% (8.9)% (15.5)% (16.8)% (9.4)% 10.3%
<FN>
(1) Excludes adjustments for deferred net origination costs and allowance for
losses.
(2) At amortized cost.
</FN>
</TABLE>
-47-
<PAGE>
In the Company's simulation models, each asset and liability balance is
projected over a one-year horizon. Net interest income is then projected
based on expected cash flows and projected interest rates under a stable rate
scenario and analyzed on a quarterly basis. The results of this analysis are
used in decisions made concerning pricing strategies for loans and deposits,
balance sheet mix, securities portfolio strategies, liquidity and capital
adequacy. The Company's current one-year simulation models under stable rates
indicate an increase of 7 basis points in yields on interest-earning assets and
a 1 basis point increase in the cost of interest-bearing liabilities. This
will have a slightly positive effect on projected net interest margin the next
twelve months.
Simulation models are also performed under an instantaneous parallel 300 basis
point increase or decrease in interest rates. The model includes assumptions
as to repricing and expected prepayments, anticipated calls, and expected decay
rates of transaction accounts under the different rate scenarios. The results
of these simulations include changes in both net interest income and market
value of equity. ALCO guidelines that measure interest rate risk by the
percent of change from stable rates, and capital adequacy, have been
established and as of December 31, 1999 the results of these simulations are
within those guidelines.
The Company's rate shock simulation models provide results in extreme interest
rate environments and results are used accordingly. Reacting to changes in
economic conditions, interest rates and market forces, the Company has been
able to alter the mix of short- and long-term loans and investments, and
increase or decrease the emphasis on fixed- and variable-rate products in
response to changing market conditions. By managing the interest rate
sensitivity of its asset composition in this manner, the Company has been able
to maintain a fairly stable flow of net interest income. Table 8 provides
information about the Company's market sensitive financial instruments other
than cash and cash equivalents, FHLB and Federal Reserve Bank stock, and demand
deposit accounts as of December 31, 1999. The information presented is based
on repricing opportunities and projected cash flows that include expected
prepayment speeds and likely call dates.
-48-
<PAGE>
<TABLE>
<CAPTION>
Table 8 - Financial Instruments Market Risk
(in thousands)
At December 31, 1999
2000 2001 2002 2003
----------------------------------------
<S> <C> <C> <C> <C>
Fixed rate loans $ 49,193 $26,985 $22,746 $16,707
Average interest rate 8.49% 8.86% 8.77% 8.58%
Adjustable rate loans 80,043 34,247 27,940 24,935
Average interest rate 8.80 7.83 7.81 7.80
Securities 14,119 7,404 7,878 9,437
Average interest rate 6.65 6.81 6.54 6.38
Interest-bearing deposits 164,181 59,674 25,977 22,306
Average interest rate 4.88 4.34 3.33 2.76
Short-term borrowings 40,358 - - -
Average interest rate 5.57 - - -
Long-term debt 30,431 15,000 - 30,000
Average interest rate 5.75 4.75 - 5.63
-49-
<PAGE>
Later Fair
2004 Years Total Value
----------------------------------------
<S> <C> <C> <C> <C>
Fixed rate loans $10,227 $29,802 $155,660 $148,176
Average interest rate 8.47% 8.21% 8.55%
Adjustable rate loans 20,551 9,178 196,894 196,942
Average interest rate 7.84 7.20 8.19
Securities 4,800 111,389 155,027 145,722
Average interest rate 6.60 5.93 6.12
Interest-bearing deposits 20,915 43,164 336,217 323,839
Average interest rate 2.59 2.59 4.09
Short-term borrowings - - 40,358 40,358
Average interest rate - - 5.57
Long-term debt - - 75,431 74,743
Average interest rate - - 5.50
</TABLE>
IMPACT OF INFLATION AND CHANGING PRICES
The majority of a financial institution's assets and liabilities are
monetary in nature. Changes in interest rates affect the financial condition
of a financial institution to a greater degree than inflation. Although
interest rates are determined in large measure by changes in the general level
of inflation, they do not change at the same rate nor in the same
magnitude, but rather react in correlation to changes in expected rate of
inflation and to changes in monetary and fiscal policy.
The Company's ability to react to changes in interest rates has a significant
impact on financial results. As discussed previously, management attempts to
control interest rate sensitivity in order to protect against wide interest
rate fluctuations.
YEAR 2000
The Company successfully addressed problems associated with the possibility
that computer systems would not recognize the year 2000 (Y2K) correctly. It is
estimated that the Company spent approximately $750,000 upgrading hardware and
software to be Y2K compliant. These costs have been expensed or 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. In addition, the Company did not experience increases in problem
loans and credit losses due to borrowers failing to properly respond to the
Y2K issue, or incur higher funding costs due to consumers reacting to
publicity about the issue by withdrawing deposits.
-50-
<PAGE>
EFFECT OF RECENT ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 established the effective date for
the new standard as fiscal years beginning after June 15, 2000. Currently, the
Company does not hold any derivatives or conduct hedging activities as defined
by the standard. In most instances the standard, once adopted, precludes any
held-to-maturity security from being designated as a hedged item. If the
Company had adopted SFAS No. 133 in 1999, 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.
MARKET PRICE OF THE COMPANY'S COMMON SHARES
AND RELATED SECURITY HOLDER MATTERS
There were 3,188,314 common shares of the Company outstanding on December 31,
1999 held of record by approximately 437 shareholders. There is presently no
active trading market for the Company's shares, nor are the prices at which
common shares have been traded published by any national securities association
or quotation service. The Company's shares are quoted on the OTC Bulletin
Board under the symbol ICYB. Dividends per share declared were $.17 in each
quarter in 1999. Dividends per share declared in 1998 were $.125 in each of
March, June, and September, and $.13 per share in December.
The National Bank and Trust Company serves as transfer agent and dividend
disbursing agent for the Company's shares. Communication regarding change of
address, transfer of shares, lost certificates and dividends should be sent to:
Sarah E. Barker, Senior Vice President
The National Bank and Trust Company
48 North South Street, PO Box 711
Wilmington, Ohio 45177
(937) 283-3082.
A copy of the Company's Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission, will be available at no charge to
shareholders upon request to:
Charles L. Dehner, Executive Vice President
InterCounty Bancshares, Inc.
48 North South Street, PO Box 711
Wilmington, Ohio 45177
(937) 283-3002.
-51-
<PAGE>
The annual meeting of the shareholders of InterCounty Bancshares, Inc. will be
held on April 18, 2000, at 48 North South Street, Wilmington, Ohio, at 9:00 am.
-52-
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
See "Market Risk Management" in Item 7, which is incorporated herein by
reference.
-53-
<PAGE>
Item 8. Financial Statements and Supplementary Data
- I N D E X -
PAGE
INDEPENDENT AUDITORS' REPORT 55
FINANCIAL STATEMENTS
Consolidated Balance Sheets 56
Consolidated Statements of Income 57
Consolidated Statements of Comprehensive
Income and Changes in Shareholders' Equity 58
Consolidated Statements of Cash Flows 59
Notes to Consolidated Financial Statements 60-79
-54-
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
InterCounty Bancshares, Inc.
Wilmington, Ohio
We have audited the accompanying consolidated balance sheets of
InterCounty Bancshares, Inc. and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of income,
comprehensive income and changes in shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
InterCounty Bancshares, Inc. and subsidiaries as of December 31, 1999 and
1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.
/s/J.D. CLOUD & CO. L.L.P.
Certified Public Accountants
Cincinnati, Ohio
February 10, 2000
-55-
<PAGE>
InterCounty Bancshares, Inc. and Subsidiaries
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31 (thousands)
1999 1998
<S> <C> <C>
ASSETS:
Cash and due from banks $18,813 $18,241
Federal funds sold 283 640
Interest bearing deposits in banks 242 38
------- -------
Total cash and cash equivalents 19,338 18,919
Securities available for sale, at market value 110,723 139,748
Securities held to maturity (market value -
$40,412 in 1999 and $37,459 in 1998) 44,304 36,832
------- -------
Total securities 155,027 176,580
Loans 350,955 305,112
Less - allowance for loan losses 3,222 2,641
------- -------
Net loans 347,733 302,471
Loans held for sale 1,599 5,634
Premises and equipment 11,745 11,459
Earned income receivable 4,321 4,246
Other assets 2,785 1,244
------- -------
TOTAL ASSETS $542,548 $520,553
LIABILITIES:
Demand deposits $ 43,715 $ 41,748
Savings, NOW, and money market deposits 145,465 137,535
Certificates $100,000 and over 40,226 47,705
Other time deposits 150,526 147,232
------- -------
Total deposits 379,932 374,220
Short-term borrowings 40,358 22,702
Long-term debt 75,431 75,539
Other liabilities 2,796 3,369
------- -------
TOTAL LIABILITIES 498,517 475,830
SHAREHOLDERS' EQUITY:
Preferred shares - no par value, authorized
100,000 shares; none issued - -
Common shares - no par value, authorized
6,000,000 shares; issued 3,818,950 shares 1,000 1,000
Surplus 7,921 7,368
Unearned ESOP shares, at cost (405) (511)
Retained earnings 43,119 39,557
Accumulated other comprehensive income
(loss), net of taxes (3,331) 188
Treasury shares, at cost, 630,636 shares in 1999
and 640,799 shares in 1998 (4,273) (2,879)
------- -------
TOTAL SHAREHOLDERS' EQUITY 44,031 44,723
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $542,548 $520,553
======= =======
The accompanying notes to financial statements are an integral part of these
statements.
</TABLE>
-56-
<PAGE>
InterCounty Bancshares, Inc. and Subsidiaries
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Years ended December 31 (thousands, except per common share data)
1999 1998 1997
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $27,728 $24,959 $24,039
Interest on securities available for sale
Taxable 7,289 8,113 6,699
Non-taxable 436 321 -
Interest on securities held to maturity
- non-taxable 1,989 1,349 621
Interest on deposits in banks 14 26 45
Interest on federal funds sold 83 505 200
------ ------ ------
TOTAL INTEREST INCOME 37,539 35,273 31,604
------ ------ ------
INTEREST EXPENSE:
Interest on savings, NOW and money
market deposits 3,759 3,521 3,321
Interest on time certificates $100,000
and over 2,281 2,198 1,394
Interest on other deposits 7,685 8,118 8,307
------ ------ ------
Total Interest on Deposits 13,725 13,837 13,022
Interest on short-term borrowings 1,267 1,622 2,057
Interest on long-term debt 4,158 3,081 411
------ ------ ------
TOTAL INTEREST EXPENSE 19,150 18,540 15,490
------ ------ ------
NET INTEREST INCOME 18,389 16,733 16,114
PROVISION FOR LOAN LOSSES 1,400 1,150 800
------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 16,989 15,583 15,314
------ ------ ------
NON-INTEREST INCOME:
Trust income 1,192 1,105 927
Service charges on deposits 1,485 1,351 1,263
Other service charge and fees 376 336 287
ATM network fees 701 574 206
Insurance agency commissions 966 833 792
Securities gains (losses) (368) 302 300
Other 875 1,025 758
------ ------ ------
TOTAL NON-INTEREST INCOME 5,227 5,526 4,533
------ ------ ------
NON-INTEREST EXPENSE:
Salaries 6,563 5,781 5,394
Pension and benefits 1,130 984 970
Equipment 2,108 1,917 1,553
Occupancy 824 790 741
State franchise tax 488 615 557
Marketing 386 312 279
Other 3,728 3,447 3,106
------ ------ ------
TOTAL NON-INTEREST EXPENSE 15,227 13,846 12,600
------ ------ ------
INCOME BEFORE INCOME TAX 6,989 7,263 7,247
PROVISION FOR INCOME TAX 1,281 1,889 2,259
------ ------ ------
NET INCOME $ 5,708 $ 5,374 $ 4,988
====== ====== ======
Earnings per common share $1.81 $1.70 $1.59
Earnings per common share, assuming dilution 1.77 1.66 1.55
The accompanying notes to financial statements are an integral part of these
statements.
</TABLE>
-57-
<PAGE>
InterCounty Bancshares, Inc. and Subsidiaries
<TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND
CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
(thousands)
Retained
Unearned Earnings Accumulated
ESOP Less Cost Other Total Total
Common Shares, of Treasury Comprehensive Shareholders' Comprehensive
Shares Surplus at Cost Shares Income Equity Income
<C> <C> <C> <C> <C> <C> <C> <C>
Balance
January 1, 1997 $1,000 $6,925 $(732) $29,189 $ 424 $36,806
Comprehensive Income:
Net income 4,988 4,988 $ 4,988
Net unrealized gains
on securities
available for sale
(net of taxes of $149) 289 289 289
Reclassification
adjustment for net
realized gain on sale
of available for sale
securities included
in net income (net
of taxes of $102) (198) (198) (198)
-----
Total comprehensive
income 5,079
=====
Dividends declared (1,167) (1,167)
Treasury shares purchased (172) (172)
Stock options exercised 188 106 294
ESOP shares earned 28 112 140
----- ----- ---- ------ ----- ------ -----
Balance
December 31, 1997 1,000 7,141 (620) 32,944 515 40,980
Comprehensive Income:
Net income 5,374 5,374 5,374
Net unrealized
(losses) on
securities available
for sale (net
of taxes of $86) (167) (167) (167)
Reclassification
adjustment for
net realized gain
on sale of
available for sale
securities included
in net income (net
of taxes of $82) (160) (160) (160)
-----
Total comprehensive
income 5,047
=====
Dividends declared (1,567) (1,567)
Treasury shares purchased (172) (172)
Stock options exercised 175 99 274
ESOP shares earned 52 109 161
----- ----- ---- ------ ----- ------ -----
Balance
December 31, 1998 1,000 7,368 (511) 36,678 188 44,723
Comprehensive Income:
Net income 5,708 5,708 5,708
Net unrealized
(losses) on
securities available
for sale (net of
taxes of $1,813) (3,519) (3,519) (3,519)
-----
Total comprehensive
income $2,189
=====
Dividends declared (2,144) (2,144)
Treasury shares purchased (1,843) (1,843)
Stock options exercised 464 447 911
ESOP shares earned 89 106 195
----- ----- ---- ------ ----- ------ -----
Balance
December 31, 1999 $1,000 $7,921 $(405) $38,846 $(3,331) $44,031
===== ===== ==== ====== ====== ======
The accompanying notes to financial statements are an integral part of these
statements.
</TABLE>
-58-
<PAGE>
InterCounty Bancshares, Inc. and Subsidiaries
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years ended December 31 (thousands)
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $5,708 $5,374 $4,988
Adjustments to reconcile net
income to net cash provided by operating
activities:
Depreciation, amortization and accretion 1,513 1,299 903
Provision for loan losses 1,400 1,150 800
Provision for deferred taxes 71 27 328
Net realized losses (gains) on
securities available for sale 368 (302) (300)
Origination of mortgage loans held
for sale (6,104) (10,912) (4,370)
Proceeds from sales of mortgage
loans held for sale 9,904 5,665 3,983
Increase in income receivable (75) (434) (474)
Decrease (increase) in other assets 372 (833) 132
Increase in interest payable 27 177 10
Increase (decrease) in accrued taxes
and other liabilities (426) 651 (366)
FHLB stock dividends (372) (298) (240)
ESOP shares earned 195 161 140
------ ------ ------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 12,581 1,725 5,534
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities
available for sale 23,044 10,647 6,480
Purchases of securities available for sale (27,856) (120,056) (85,614)
Proceeds from maturities of securities
available for sale 28,244 81,622 49,313
Purchases of securities held to maturity (8,993) (29,993) (4,604)
Proceeds from maturities of securities
held to maturity 1,540 4,440 1,030
Net increase in loans (46,448) (29,124) (8,919)
Purchases of premises and equipment (1,530) (2,098) (2,544)
------ ------ ------
NET CASH USED IN INVESTING ACTIVITIES (31,999) (84,562) (44,858)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 5,712 44,888 20,204
Cash dividends paid (2,017) (1,447) (1,089)
Net increase (decrease) in
short-term borrowings 17,656 (10,032) 1,621
Advances of long-term debt - 45,000 30,000
Repayment of long-term debt (108) (177) (198)
Proceeds from stock options exercised 437 175 237
Purchase of treasury shares (1,843) (172) (172)
------ ------ ------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 19,837 78,235 50,603
------ ------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS 419 (4,602) 11,279
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 18,919 23,521 12,242
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $19,338 $18,919 $23,521
====== ====== ======
The accompanying notes to financial statements are an integral part of these
statements.
</TABLE>
-59-
<PAGE>
InterCounty Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMTNS
Years ended December 31, 1999, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
InterCounty Bancshares, Inc. is a one-bank holding company.
Its wholly-owned subsidiary, The National Bank and Trust
Company (the Bank), provides full banking services, including
trust and brokerage services, to customers located principally
in Clinton, Brown, Clermont, Warren and Highland counties in
Ohio. The Bank grants agribusiness, commercial, consumer, and
residential loans to customers throughout its market area. The
Bank offers insurance products including property, casualty and
life through its wholly-owned subsidiary, Phillips Insurance
Agency, Inc.
Basis of Presentation-
The consolidated financial statements include the accounts of
InterCounty Bancshares, Inc. and its direct and indirect
subsidiaries (the Company). All intercompany accounts and
transactions are eliminated in consolidation. Certain prior
period data has been reclassified to conform to current period
presentation.
Use of Estimates-
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
Securities-
Investment securities that management has the intent and
ability to hold to maturity are reported at amortized cost,
adjusted for amortization of premiums and accretion of
discounts using the interest method. Securities that are
available for sale are reported at fair value with unrealized
holding gains and losses reported net of income taxes as
Accumulated Other Comprehensive Income, a separate component of
shareholders' equity. Realized gains and losses on the sale of
securities available for sale are determined using the specific
identification method.
Federal Home Loan Bank (FHLB) stock is an equity interest in
the Federal Home Loan Bank of Cincinnati. It can be sold only
at its par value of $100 per share and only to the FHLB or to
another member institution. In addition, the equity ownership
rights are more limited than would be the case for a public
company, because of the oversight role exercised by the Federal
Housing Finance Board in the process of budgeting and approving
dividends. Federal Reserve Bank stock is similarly restricted
in marketability and value. Although classified as securities
available for sale, both investments are carried at cost, which
is their par value.
-60-
<PAGE>
Loans Held for Sale-
Mortgage loans originated for sale in the secondary market are
carried at the lower of cost or estimated market value in the
aggregate. Net unrealized losses are recognized through a
valuation allowance by charges to income.
Loans and Allowance for Loan Losses-
Loans are stated at the amount of unpaid principal, reduced by
an allowance for loan losses and net of any deferred
origination fees or costs. Net deferred fees and costs are
amortized over the lives of the related loans using the
interest method as an adjustment of loan yields. The allowance
for loan losses is established through provisions charged to
expense. The allowance is an amount that management believes
will be adequate to absorb potential losses on existing loans
that may become uncollectible. This evaluation is based on
prior loan loss experience and such factors as changes in the
nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic
conditions that may affect the borrower's ability to pay.
Loans are considered impaired when management believes, based
on current information and events, it is probable that the Bank
will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Impaired loans are
measured by the present value of expected future cash flows
using the loan's effective interest rate. Impaired collateral-
dependent loans may be measured based on collateral value.
Smaller-balance homogenous loans, including residential
mortgage and consumer installment loans, are collectively
evaluated for impairment.
Credit losses are charged against the allowance when management
believes that the collectibility of the principal is unlikely.
Accrual of interest is discontinued on a loan when management
believes, after considering economic and business conditions
and collection efforts, that the borrower's financial condition
is such that collection of interest is doubtful. Subsequent
cash receipts on nonaccrual loans are recorded as a reduction
of principal, and interest income is recorded once principal
recovery is reasonably assured. Installment loans are
generally charged off if four payments have been missed.
Generally, all other loans are placed on non-accrual status if
they are 90 days or more delinquent. A loan may remain on an
accrual status after it is 90 days delinquent if it is probable
the account will be settled in its entirety or brought current
within a 30 day period. The current year's accrued interest on
loans placed on non-accrual status is charged against earnings.
Previous years' accrued interest is charged against the
allowance for loan losses.
-61-
<PAGE>
Premises and Equipment-
Premises and equipment are carried at cost, less accumulated
depreciation. Depreciation is computed using principally the
straight-line method over the estimated useful lives of the
related assets.
Marketing Expense-
Marketing costs are expensed as incurred.
Non-qualified Stock Options-
Stock options are accounted for under Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees."
Options are granted at a price equal to market value of a common
share on the day of grant. Under the intrinsic value method of APB
No. 25, the Company does not recognize compensation expense for
options granted. Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation" prescribes the
recognition of compensation expense based on the fair value of
options determined on the grant date. The pro forma disclosures
required by SFAS No. 123 are shown in Note 13.
Income Taxes-
Certain income and expenses are recognized in different periods for
financial reporting than for purposes of computing income taxes
currently payable. Deferred taxes are provided on such temporary
differences. These differences relate principally to the allowance
for loan losses, depreciation and stock option accruals. Stock
option accruals originated in years prior to 1997. In 1997,
optionees approved the elimination of the Company's contingent
obligation to repurchase the shares. The recorded liability at
December 31, 1996 is recognized as additional consideration for the
related stock when issued.
Statements of Cash Flows-
For purposes of reporting cash flows, cash equivalents include all
highly liquid investments with a maturity of three months or less
when purchased.
Earnings per Common Share-
Earnings per common share (EPS) is calculated by dividing net income
by the weighted average number of common shares outstanding during
the period. Certain shares held in suspense by the Company's
employee stock ownership plan are not considered outstanding until
they are committed to be released for allocation to participants'
accounts.
-62-
<PAGE>
Fair Value of Financial Instruments-
For cash and due from banks, federal funds sold and other short-term
investments, the carrying amounts reported in the Consolidated
Balance Sheet approximate fair value. For securities, fair market
value equals quoted market price, if available. If a quoted market
price was not available, fair value was estimated using quoted
market prices for similar securities. The estimated fair value of
loans was based on the discounted value of future cash flows
expected to be received. The discount rate used was the rate at
which the same loans would be made under current conditions.
The approximate fair value of demand deposits, savings accounts, and
other deposit liabilities without defined maturities is the carrying
amount at the reporting date. The fair value of fixed-maturity
certificates of deposit was estimated using a discounted cash flow
calculation applying interest rates currently offered for deposits
of similar remaining maturities. Carrying value approximates fair
value for short-term borrowings and the Company's variable rate
long-term debt. The fair value of fixed rate long-term debt is
based on discounted cash flows using current market rates for debt
with similar terms and remaining maturities.
NOTE 2 - ACQUISITIONS
In October 1998, the Bank acquired all the outstanding common shares of
Phillips Insurance Agency Group, Inc. in exchange for 53,606 shares of
InterCounty Bancshares, Inc. In December 1998, the Bank acquired all
the outstanding common shares of Arnold Jones Insurance Agency, Inc. in
exchange for 17,777 shares of InterCounty Bancshares, Inc. The
acquisitions qualified as tax-free reorganizations and have been
accounted for as a pooling of interests. Accordingly, the Company's
consolidated financial statements were restated to retroactively include
the agencies' as if the acquisitions had occurred at the beginning of
the earliest period presented. The acquisitions had no material effect
on consolidated shareholders' equity as previously reported. In
connection with the acquisitions, the Bank incurred professional
and regulatory fees of $75,000 which were charged to operations in 1998.
In 1999, the two agencies were merged together.
-63-
<PAGE>
NOTE 3 - SECURITIES
<TABLE>
The following tables present amortized cost and estimated fair values of
securities at December 31 (thousands):
<CAPTION>
1999
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Securities available
for sale:
U.S. Agency notes $ 34,730 $ 3 $ 1,169 $ 33,564
U.S. Agency mortgage-
backed securities 55,324 10 2,564 52,770
Other mortgage-backed
securities 11,320 1 497 10,824
Municipals 8,563 - 831 7,732
Federal Reserve/FHLB
stock 5,823 - - 5,823
Other 10 - - 10
------- --- ----- -------
$115,770 $ 14 $5,061 $110,723
======= === ===== =======
Securities held to maturity:
Municipals $ 44,304 $108 $4,000 $ 40,412
======= === ===== =======
</TABLE>
-64-
<PAGE>
NOTE 3 - SECURITIES (Continued)
<TABLE>
<CAPTION>
1998
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Securities available
for sale:
U.S. Treasury and U.S.
Agency notes $ 35,983 $113 $ 90 $ 36,006
U.S. Agency mortgage-
backed securities 73,124 202 99 73,227
Other mortgage-backed
securities 16,337 70 86 16,321
Municipals 8,558 175 - 8,733
Federal Reserve/FHLB
stock 5,451 - - 5,451
Other 10 - - 10
------- --- --- -------
$139,463 $560 $275 $139,748
======= === === =======
Securities held to maturity:
Municipals $ 36,832 $760 $133 $ 37,459
======= === === =======
</TABLE>
Gross gains realized on sales of securities available for sale were
$41,000 for 1999, $302,000 for 1998, and $300,000 for 1997. Gross
losses realized on sales of securities available for sale were $409,000
for 1999. There were no realized losses during the periods ended
December 31, 1998 and 1997. Securities with a carrying value of
approximately $132.3 million, $137.3 million and $67.3 million at
December 31, 1999, 1998 and 1997, respectively, were pledged to secure
public deposits, short-term and long-term borrowings and for other
purposes as required or permitted by law.
<TABLE>
At December 31, 1999 the amortized cost and estimated market value of
debt securities by contractual maturity was as follows. Expected
maturities may differ from contractual maturities when borrowers have
the right to call or prepay obligations (thousands):
<CAPTION>
Available for Sale Held to Maturity
--------------------- -------------------
Amortized Market Amortized Market
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due within one year $ 5,832 $ 5,815 $ - $ -
Due from one to five years 9,982 9,771 737 845
Due from five to ten years 17,916 17,043 100 97
Due after ten years 9,563 8,664 43,467 39,470
------- ------- ------ ------
43,293 41,293 44,304 40,412
U.S. Agency mortgage-backed
securities 55,324 52,770 - -
Other mortgage-backed
securities 11,320 10,827 - -
Federal Reserve/FHLB
stock/other 5,833 5,833 - -
------- ------- ------ ------
Total securities $115,770 $110,723 $44,304 $40,412
======= ======= ====== ======
</TABLE>
-65-
<PAGE>
NOTE 4 - LOANS
<TABLE>
Major classifications of loans as of December 31 were as follows
(thousands):
<CAPTION>
1999 1998
<S> <C> <C>
Commercial and industrial $ 86,521 $ 78,801
Commercial real estate 37,833 29,936
Agricultural 18,343 17,925
Residential real estate 117,392 92,069
Installment 87,996 83,173
Other 2,069 2,402
------- -------
Total 350,154 304,306
Deferred net origination costs 801 806
Allowance for loan losses (3,222) (2,641)
------- -------
Net loans $347,733 $302,471
======= =======
</TABLE>
Mortgage loans serviced for the Federal Home Loan Mortgage Corporation
and excluded from the Consolidated Balance Sheets at December 31, 1999
and 1998 were $15,484,000 and $8,043,000, respectively.
<TABLE>
Changes in the allowance for loan losses for the years ended December 31
were as follows (thousands):
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Balance at beginning of period $ 2,641 $ 2,761 $ 2,686
Provision for loan losses 1,400 1,150 800
Charge offs (1,071) (1,435) (942)
Recoveries 252 165 217
------ ------ ------
Balance at end of period $ 3,222 $ 2,641 $ 2,761
====== ====== ======
</TABLE>
<TABLE>
Loans on which the accrual of interest had been discontinued amounted
to $955,000, $599,000 and $509,000 at December 31, 1999, 1998 and 1997,
respectively. Impaired loans, under SFAS No. 114, at December 31 are
summarized as follows (thousands):
<CAPTION>
1999 1998
<S> <C> <C>
Impaired loans without a valuation allowance $ 794 $1,116
Impaired loans with a valuation allowance 3,641 4,052
----- -----
Total impaired loans $4,435 $5,168
===== =====
Valuation reserve on impaired loans $ 546 $ 608
===== =====
</TABLE>
-66-
<PAGE>
Average impaired loans were $3.6 million in 1999, $5.1 million in 1998
and $3.3 million in 1997. At December 31, 1999, the Bank had no
material commitments to lend additional funds to customers whose loans
are considered impaired.
NOTE 5- PREMISES AND EQUIPMENT
<TABLE>
Premises and equipment were as follows at December 31 (thousands):
<CAPTION>
1999 1998
<S> <C> <C>
Land $ 1,468 $ 1,488
Buildings and leasehold improvements 9,512 9,117
Equipment 7,486 6,385
------ ------
Total cost 18,466 16,990
Accumulated depreciation and amortization (6,721) (5,531)
------ ------
Premises and equipment $11,745 $11,459
====== ======
</TABLE>
Depreciation expense related to premises and equipment was $1,244,000,
$1,148,000 and $1,013,000 for the years ended December 31, 1999, 1998
and 1997, respectively.
NOTE 6 - LEASES
<TABLE>
The Company has entered into various operating leases for premises
and equipment. Future minimum lease payments under non-cancelable
operating leases having initial terms in excess of one year are as
follows (thousands):
<CAPTION>
<S> <C>
2000 $ 72
2001 71
2002 46
2003 36
2004 25
Remaining years 175
---
Total minimum lease payments $425
===
</TABLE>
Rent expense for all premises and equipment leases was $129,000, $108,000
and $62,000 in 1999, 1998 and 1997, respectively.
-67-
<PAGE>
NOTE 7 - DEPOSITS
<TABLE>
Contractual maturities of certificates of deposit at December 31, 1999
were as follows (thousands):
<CAPTION>
Certificates All Other
over $100,000 Certificates Total
<S> <C> <C> <C>
2000 $37,275 $106,421 $143,696
2001 2,069 37,019 39,088
2002 723 4,684 5,407
2003 - 1,721 1,721
2004 - 330 330
Thereafter 159 351 510
------ ------- -------
$40,226 $150,526 $190,752
====== ======= =======
</TABLE>
NOTE 8 - EMPLOYEE BENEFIT PLANS
In 1997, the Bank had a defined benefit pension plan which covered
substantially all employees. Benefits under the Plan were based on a
percentage of annual compensation and years of service. Effective
December 1, 1997, the defined benefit plan was terminated. Regulatory
approval and final settlement of all benefits under this Plan occurred
during 1998. The settlement of benefits did not have a significant impact
on the Company's financial condition or results of operations. Final net
periodic pension cost was $117,000 in 1997.
In 1996, the Company adopted a 401(k) salary deferral plan. Substantially
all employees who meet minimum age and length of service requirements are
eligible to participate. Employee deferrals may be subject to employer-
matching contributions up to specified limits. Discretionary contributions
may also be made to the Plan. Total matching and discretionary contributions
made by the Company for 1999 and 1998 amounted to $98,000 and $88,000,
respectively. There were no employer contributions for 1997.
The Company sponsors a leveraged employee stock ownership plan (ESOP)
covering substantially all of its employees who meet minimum age and length
of service requirements. The Company is obligated to make annual
contributions sufficient to enable the ESOP to repay the loan, including
interest. The shares pledged as collateral are reported as unearned ESOP
shares in the consolidated balance sheets. Additional contributions to the
Trust are determined by the Board of Directors. Total Company contributions
were $78,000, $96,000 and $202,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
Shares are held in a suspense account for allocation among participants as
the loan is repaid. The number of shares released is based on the proportion
of debt service paid in the year. Released shares are allocated to
participants' accounts on the basis of compensation. Dividends on
unallocated shares are used to repay the loan. Dividends on allocated shares
are allocated to the participants' accounts.
-68-
<PAGE>
Benefits are payable upon retirement, death, disability or separation from
service. Benefits are paid in common shares of the Company. If the common
shares of the Company are not tradable on an established market when benefits
are distributed, participants have the option to put the shares to the
Company at a value determined by independent appraisal. In 1999 and 1998,
the Company purchased 2,079 shares and 8,418 shares, respectively, from ESOP
participants. The estimated fair value of allocated shares remaining in the
ESOP was $13.5 million and $14.2 million at December 31, 1999 and 1998,
respectively. The estimated fair value for 1998 was based on the independent
appraisal. The 1999 independent appraisal has not been completed and,
therefore, estimated fair value at December 31, 1999 is based on the 1998
relationship of appraised value to book value applied to the December 31,
1999 book value.
Shares purchased by the ESOP since 1993 are accounted for in accordance with
Statement of Position 93-6. Accordingly, as these shares are released from
collateral, the Company reports compensation expense equal to the current
estimated fair value of the released shares. Once released, the shares are
considered outstanding for earnings-per-share (EPS) computations. Dividends
on allocated shares reduce retained earnings; dividends on unallocated shares
are recorded as a reduction of ESOP debt.
Compensation expense for ESOP shares acquired in 1986 is equal to the
principal repaid on the related borrowing plus any additional cash
contributions. Dividends on 1986 ESOP shares are charged to retained
earnings. These shares are considered outstanding for EPS computations.
<TABLE>
The ESOP shares as of December 31 were as follows:
<CAPTION>
1999 1998
----------------- -----------------
1993 1986 1993 1986
Shares Shares Shares Shares
<S> <C> <C> <C> <C>
Allocated shares 19,660 489,444 17,060 510,564
Shares released for allocation 3,977 20,168 4,330 21,958
Unreleased shares 13,727 69,602 17,704 89,770
------ ------- ------ -------
Total ESOP shares 37,364 579,214 39,094 622,292
====== ======= ====== =======
</TABLE>
At December 31, 1999, the estimated fair value of unreleased 1993 shares was
$364,000. ESOP compensation expense was $134,000, $105,000 and $178,000 for
1999, 1998 and 1997, respectively.
-69-
<PAGE>
NOTE 9 - SHORT-TERM BORROWINGS
<TABLE>
A summary of short-term borrowings follows (thousands):
<CAPTION>
1999 1998
------------ -------------
Amount Rate Amount Rate
<S> <C> <C> <C> <C>
At December 31:
Federal Home Loan Bank notes $ 6,000 5.90% $6,000 5.15%
Federal funds purchased 16,000 5.81 - -
Securities sold under agreements
to repurchase 16,549 2.47 16,547 4.13
U.S. Treasury demand notes 1,809 5.63 155 5.25
------ ---- ------ ----
Total short-term borrowings $40,358 4.45 $22,702 4.41
====== ======
Years ended December 31:
Average amount outstanding $26,518 $31,582
Maximum month-end balance 40,358 37,903
Weighted average interest rate 4.78 5.14
</TABLE>
NOTE 10 - LONG-TERM DEBT
<TABLE>
Long-term debt consisted of the following at December 31 (thousands):
<CAPTION>
1999 1998
<S> <C> <C>
Federal Home Loan Bank notes $75,000 $75,000
ESOP Trust debt guarantee 431 539
------ ------
$75,431 $75,539
====== ======
</TABLE>
<TABLE>
Maturities of long-term debt are as follows (thousands):
<CAPTION>
<S> <C>
2000 $ 108
2001 108
2002 30,108
2003 107
2004 -
Thereafter (2008) 45,000
</TABLE>
-70-
<PAGE>
The FHLB borrowings consist of three fixed-rate notes with a weighted
average rate of 5.49%. Interest is payable monthly. At the option of
the Federal Home Loan Bank, these notes can be converted to variable-
rate instruments at certain dates. The note amount and nearest optional
conversion dates at December 31, 1999 were as follows:
$30 million January 2000
15 million October 2001
30 million April 2003
If converted, the rate would be the three-month LIBOR rate, adjusted
quarterly. Until the conversion date of each note, there is a prepayment
penalty. At December 31, 1999, FHLB borrowings, including short-term notes
of $6 million and federal funds purchased of $4 million, were collateralized
by a blanket pledge of certain residential real estate loans totaling
approximately $79 million and primarily mortgage-backed securities with a
carrying value of $52 million.
The ESOP Trust loan agreement contains various covenants for the Company
which include a minimum net worth and restrictions on additional
indebtedness. The note may be prepaid without penalty with prepayments
applying in the inverse order of the maturities of the scheduled payments.
Interest is due quarterly at the prime rate, 8.5% at December 31, 1999.
Scheduled principal payments are approximately $108,000 annually through
2003.
NOTE 11 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid was $19,123,000, $18,363,000 and $15,471,000 in 1999, 1998 and
1997, respectively. Federal income taxes paid were $1,586,000, $1,452,000
and $2,251,000 in 1999, 1998 and 1997, respectively.
NOTE 12 - INCOME TAXES
<TABLE>
Income taxes provided for in the statements of income at December 31 consist
of the following (thousands):
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Income taxes currently payable:
Applicable to income exclusive of
securities transactions $1,335 $1,759 $1,829
Applicable to securities transactions (125) 103 102
----- ----- -----
Total income taxes currently payable 1,210 1,862 1,931
Deferred income taxes resulting
from temporary differences:
Provision for loan losses (197) 41 (71)
Depreciation (20) (129) 258
Stock option accruals 161 33 15
FHLB stock dividends 126 101 81
Accruals deductible for tax purposes
when paid - (45) 17
Other 1 26 28
----- ----- -----
Total deferred income taxes 71 27 328
----- ----- -----
Provision for income tax $1,281 $1,889 $2,259
===== ===== =====
</TABLE>
-71-
<PAGE>
<TABLE>
A reconciliation of the statutory income tax rate to the Company's effective
tax rate at December 31 follows:
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Statutory tax rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Tax exempt interest (10.4) (7.0) (2.9)
Non-qualified stock options (5.8) (1.2) (.4)
Other-net .6 .2 .5
---- ---- ----
Effective tax rate 18.4% 26.0% 31.2%
==== ==== ====
</TABLE>
<TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and their basis for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities at December 31 were as
follows (thousands):
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 753 $ 556
Stock option accruals 63 224
Unrealized losses on securities
available for sale 1,716 -
Accruals not currently deductible 9 9
----- ----
Total deferred tax assets 2,541 789
----- ----
Deferred tax liabilities:
Depreciation of premises and equipment (338) (357)
Unrealized gains on securities
available for sale - (97)
FHLB stock dividends (438) (312)
Other-net - -
----- ----
Total deferred tax liabilities (776) (766)
----- ----
Net deferred taxes $1,765 $ 23
===== ====
</TABLE>
Due primarily to the Company's taxable position in prior years, a
valuation allowance for deferred tax assets was unnecessary at December 31,
1999 and 1998.
-72-
<PAGE>
NOTE 13 - SHAREHOLDERS' EQUITY
Under the terms of the Company's nonqualified compensatory stock option
plan, 7% of the authorized and issued common shares of the Company are
reserved for the purpose of granting options to key bank personnel.
Awards under the stock option plan are made at the discretion of the Board
of Directors. The option price is not less than the fair market value
of the shares at the date of grant. The options granted have a term of
ten years and become exercisable in equal installments on the first
through fifth anniversaries of the date of grant.
The Company has elected to follow APB No. 25 in accounting for its stock
option plan. Pro forma information regarding net income and earnings per
share is required by SFAS No. 123. This information is required to be
determined as if the Company had accounted for its stock options
granted subsequent to December 31, 1994 under the fair value method of
that statement. Had compensation expense for the Company's stock options
been recognized under the methodology prescribed by SFAS No. 123, the
Company's net income and earnings per share would have been impacted as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Reported net income $5,708 $5,374 $4,988
Pro forma net income 5,670 5,354 4,956
Reported earnings per share-
assuming dilution 1.77 1.66 1.55
Pro forma earnings per share-
assuming dilution 1.76 1.65 1.54
</TABLE>
The estimated fair value of options granted during 1999, 1998 and 1997 was
$8.13, $5.13 and $4.45, respectively. The fair value, which is amortized to
expense over the option vesting period in determining the pro forma results,
was estimated at the date of grant using a Black-Scholes option pricing model
and the following assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Risk-free interest rates 6.5% 4.6% 6.5%
Expected lives 9.0 years 9.0 years 9.5 years
Expected volatility 19.0% 15.0% 22.0%
Expected dividend yields 2.5% 2.3% 2.5%
</TABLE>
-73-
<PAGE>
<TABLE>
Details of the stock option plan are as follows:
<CAPTION>
Wtd. Avg. Shares
Exercise Shares Shares Available
Price Outstanding Exercisable for Grant
<S> <C> <C> <C> <C>
Balance, December 31, 1996 $ 7.18 161,316 100,934 106,010
Granted 13.63 27,300 (27,300)
Became exercisable 32,640
Exercised 6.56 (1,830) (1,830) 1,830
----- ------- ------- -------
Balance, December 31, 1997 8.12 186,786 131,744 80,540
Granted 23.25 9,000 (9,000)
Became exercisable 18,501
Exercised 7.77 (22,510) (22,510) 22,510
----- ------- ------- -------
Balance, December 31, 1998 8.96 173,276 127,735 94,050
Granted 28.00 15,500 (15,500)
Became exercisable 15,261
Exercised 5.64 (76,340) (76,340) 76,340
----- ------- ------- -------
Balance, December 31, 1999 13.77 112,436 66,656 154,890
======= ======= =======
</TABLE>
<TABLE>
The weighted-average exercise price of exercisable options at December 31,
1999, 1998 and 1997 was $9.64, $6.83 and $6.42, respectively. The following
table summarizes information for options currently outstanding and
exercisable at December 31, 1999:
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- -----------------------
Range of Wtd. Avg. Wtd. Avg. Wtd. Avg.
Prices Number Remaining Life Exercise Price Number Exercise Price
<S> <C> <C> <C> <C> <C>
$5.51-6.56 27,450 2.2 years $ 5.60 27,450 $ 5.60
9.63-13.63 60,486 7.1 12.41 37,406 11.96
23.25 9,000 8.4 23.25 1,800 23.25
28.00 15,500 9.2 28.00 - -
------- ------
5.51-28.00 112,436 4.5 13.77 66,656 9.64
======= ======
</TABLE>
<TABLE>
The following is a reconciliation of weighted average shares for earnings per
share (EPS) computations to the weighted average shares including the effect of
stock options for diluted EPS computations:
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Weighted average shares for EPS 3,156,727 3,153,530 3,137,193
Effect of dilutive stock options 64,864 81,948 79,354
--------- --------- ---------
Weighted average shares for EPS -
assuming dilution 3,221,591 3,235,478 3,216,547
========= ========= =========
</TABLE>
-74-
<PAGE>
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit, standby letters of credit and certain credit card accounts sold
with recourse. They involve, to varying degrees, elements of credit risk
in excess of the amount recognized in the balance sheet. The Bank's
exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit is represented
by the contract amount of those instruments.
<TABLE>
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. Financial instruments
whose contract amounts represent off-balance-sheet credit risk at December 31
were as follows (thousands):
<CAPTION>
1999 1998
<S> <C> <C>
Commitments to extend credit $44,358 $39,341
Standby letters of credit 2,189 1,704
Loan guarantees - 1,028
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.
The Bank evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained if deemed necessary by the Bank is based on
management's credit evaluation of the counter party. Collateral held varies,
but may include accounts receivable, crops, inventory, property, plant and
equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. At December 31,
1999 and 1998, standby letters of credit were primarily issued to support
public bond financing by state and local government units and entities
involved in development and maintenance and repair. They expire during
the period from 1999 through 2012. Approximately 71% of the amount
outstanding at December 31, 1999 was secured. Approximately 62% of the
amount outstanding at December 31, 1998 was secured.
Loan guarantees consisted of business credit card accounts offered through a
correspondent bank with recourse. The recourse feature was eliminated in 1999.
The Company is party to various claims and proceedings arising in the normal
course of business. Management, after consultation with legal counsel,
believes that the liabilities, if any, arising from such proceedings and
claims will not be material to the consolidated financial position or
results of operations.
-75-
<PAGE>
NOTE 15 - RELATED PARTY TRANSACTIONS
At December 31, 1999 and 1998, executive officers, directors and companies
in which they have a direct or indirect interest, were indebted to the
Bank directly or as guarantors in the aggregate amount of $6,523,000 and
$9,213,000, respectively. During 1999, $5,597,000 in new loans were
made; repayments totaled $8,287,000. Such transactions originate in the
normal course of the Bank's operations as a depository and lending
institution. At December 31, 1999, $1.7 million outstanding to one
related-party borrower is considered by management to be a potential
problem loan, as there are serious doubts as to the ability of the borrower
to comply with the present loan repayment terms. Management has
considered this credit risk in its determination of the reserve
for loan losses at December 31, 1999.
NOTE 16 - FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
The following disclosures are made in accordance with the provisions of
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
which requires disclosure of fair value information about both on- and
off-balance sheet financial instruments for which it is practicable to
estimate that value. Because SFAS No. 107 excludes certain
financial instruments and all nonfinancial instruments from its
disclosure requirements, any aggregation of the fair value
amounts presented would not represent the underlying value of the
Company.
<TABLE>
Carrying amounts and estimated fair values for financial instruments
as of December 31 were as follows (thousands):
<CAPTION>
1999 1998
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks $ 18,813 $ 18,813 $ 18,241 $ 18,241
Federal funds sold 283 283 640 640
Interest bearing deposits
in banks 242 242 38 38
Securities available for sale 110,723 110,723 139,748 139,748
Securities held to maturity 44,304 40,412 36,832 37,459
Loans, net 347,733 343,229 302,471 304,604
Loans held for sale 1,599 1,599 5,634 5,640
1999 1998
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial Liabilities:
Deposits $379,932 $359,823 $374,220 $375,866
Short-term borrowings 40,358 40,358 22,702 22,702
Long-term debt 75,431 74,623 75,539 75,306
</TABLE>
The fair value of off-balance-sheet financial instruments at December 31,
1999 and 1998, was not material.
-76-
<PAGE>
NOTE 17 - REGULATORY MATTERS
The principal source of income and funds for InterCounty Bancshares, Inc.
is dividends paid by the Bank subsidiary. During the year 2000, dividends
that the Bank subsidiary can pay to InterCounty Bancshares, Inc. without
prior approval of regulatory agencies is limited to 1999 and 2000 combined
net income.
Banks and bank holding companies must meet certain minimum capital
requirements set by federal banking agencies. The minimum regulatory
capital ratios are 8% for total risk-based, 4% for Tier I risk-based, and
4% for leverage. For various regulatory purposes, institutions are
classified into categories based upon capital adequacy. The highest
"well capitalized" category requires capital ratios of at least 10% for
total risk-based, 6% for Tier I risk-based, and 5% for leverage. As of
the most recent notification from their regulators, InterCounty
Bancshares, Inc. and the Bank were categorized as "well capitalized"
under the regulatory framework for prompt corrective action.
<TABLE>
A summary of the regulatory capital of InterCounty Bancshares, Inc. and
the Bank at December 31 follows (thousands):
<CAPTION>
1999 1998
------------------------- -------------------------
InterCounty The National InterCounty The National
Bancshares, Bank & Trust Bancshares, Bank & Trust
Inc. Company Inc. Company
<S> <C> <C> <C> <C>
Regulatory Capital:
Shareholders' equity $44,031 $39,308 $44,723 $36,548
Net unrealized
securities (gains)/
losses 3,331 3,331 (188) (188)
------ ------ ------ ------
Tier I risk-based
capital 47,362 42,639 44,535 36,360
Eligible allowance for
loan losses 3,222 3,222 2,641 2,641
------ ------ ------ ------
Total risk-based
capital $50,584 $45,861 $47,176 $39,001
====== ====== ====== ======
Capital Ratios:
Total risk-based 14.29% 12.96% 14.18% 11.72%
Tier I risk-based 13.38 12.05 13.38 10.93
Tier I leverage 8.80 7.92 8.59 7.02
</TABLE>
The Federal Reserve Act requires depository institutions to maintain cash
reserves with the Federal Reserve Bank. In 1999 and 1998, the Bank's average
reserve balances were $6,670,000 and $4,631,000, respectively.
-77-
<PAGE>
NOTE 18 - SEGMENTS
<TABLE>
The Company has four principal business units that offer different
products and services. They are managed separately for various reasons
including differing technologies, marketing strategies, and regulations.
Revenues from these business segments for the years ended December 31
were as follows (thousands):
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Banking $39,906 $38,287 $34,242
Trust services 1,192 1,105 927
ATM network 702 574 206
Insurance agencies 966 833 792
------ ------ ------
$42,766 $40,799 $36,167
====== ====== ======
</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.
NOTE 19 - PARENT COMPANY FINANCIAL INFORMATION
<TABLE>
Condensed financial information for InterCounty Bancshares, Inc.
(parent company only) follows (thousands):
Condensed Balance Sheets
December 31
<CAPTION>
1999 1998
<S> <C> <C>
Assets:
Cash on deposit with the Bank $ 716 $ 9,113
Securities available for sale, market value 4,936 -
Investment in subsidiary 39,308 36,548
Other assets 33 3
------ ------
Total assets $44,993 $45,664
====== ======
Liabilities:
Long-term debt $ 431 $ 539
Other liabilities 531 402
------ ------
Total liabilities 962 941
Shareholders' equity 44,031 44,723
------ ------
Total liabilities and shareholders' equity $44,993 $45,664
====== ======
</TABLE>
-78-
<PAGE>
<TABLE>
Condensed Statements of Income
Years ended December 31
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Income:
Interest on securities available
for sale $ 4 $ - $ -
Dividends from subsidiary - 10,265 1,119
------ ------ ------
Total income 4 10,265 1,119
------ ------ ------
Expenses:
Interest on long-term debt 44 55 65
Other expense 100 64 40
------ ------ ------
Total expense 144 119 105
------ ------ ------
Income before income tax benefit
and equity in undistributed
income of subsidiary (140) 10,146 1,014
Income tax benefit - 1 1
Equity in undistributed income of
subsidiary 5,848 (4,773) 3,973
------ ------ ------
Net income $ 5,708 $ 5,374 $ 4,988
====== ====== ======
</TABLE>
<TABLE>
Condensed Statements of Cash Flows
Years ended December 31
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,708 $ 5,374 $ 4,988
Adjustments for non-cash items-
Equity in undistributed income
of subsidiary (5,848) 4,773 (3,973)
Payment of interest on long-term debt
by subsidiary 44 55 65
(Increase) decrease in other assets (29) 293 (78)
Provision for deferred taxes - (1) (1)
Release of earned ESOP shares 87 53 31
------ ------ ------
Net cash provided by operating
activities (38) 10,547 1,032
Cash flows from investing activities:
Purchases of securities available
for sale (4,936) - -
------ ------ ------
Cash flows from financing activities:
Cash dividends paid (2,017) (1,447) (1,089)
Payments to acquire treasury shares (1,843) (172) (172)
Proceeds from stock options exercised 437 175 237
------ ------ ------
Net cash used in financing activities (3,423) (1,444) (1,024)
------ ------ ------
Net change in cash (8,397) 9,103 8
Cash at beginning of year 9,113 10 2
------ ------ ------
Cash at end of year $ 716 $ 9,113 $ 10
====== ====== ======
</TABLE>
-79-
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information contained in the Proxy Statement under the captions "BOARD OF
DIRECTORS," "EXECUTIVE OFFICERS" and "SECTION (16)a BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE" is incorporated herein by reference.
Item 11. Executive Compensation.
The information contained in the PROXY STATEMENT under the caption
"COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS" is incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information contained in the Proxy Statement under the caption "VOITING
SECURITIES AND OWNERSHIP OF CETAIN BENEFICIAL OWNERS AND MANAGEMENT" is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information contained in the Proxy Statement under the caption "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS" is incorporated herein by reference.
-80-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements - See Index to Consolidated Financial
Statements on page 54 of this Form 10-K.
(2) Financial Statement Schedules - None
(3) Exhibits - See Exhibit Index at page 82 of this Form 10-K.
(b)
-81-
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
[C] [S]
3.1 Articles of Incorporation of
InterCounty Bancshares, Inc.: Incorporated
by reference to Annual Report on Form 10-K
for Fiscal Year Ended December 31, 1998,
Exhibit 3.1
3.2 Code of Regulations of
InterCounty Bancshares, Inc.: Incorporated by
reference to Registration Statement on Form
S-1 filed by InterCounty on July 2, 1993,
(the "S-1"), Exhibit 3.2 (Registration No.
33-65608).
10.1 InterCounty Bancshares, Inc. 1993 Stock Option
Plan: Incorporated by reference to the
Registration Statement on Form S-8 filed with
the Securities and Exchange Commission on
March 23, 1995, Exhibit 4(c).
10.2 InterCounty Bancshares, Inc. Non-qualified
Stock Option Plan: Incorporated by reference
to the S-1, Exhibit 10.1.
21 Subsidiaries of InterCounty Bancshares, Inc.
23 Consent of Independent Certified Public
Accountants
27 Financial Data Schedule for the Year Ended
December 31, 1999.
99 Safe Harbor Under the Private Securities
Litigation Reform Act of 1995
-82-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
InterCounty Bancshares, Inc.
By /s/ Timothy L. Smith
-------------------------
March 30, 2000 Timothy L. Smith
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been duly signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /s/ Charles L. Dehner
- ----------------------------
Charles L. Dehner
Executive Vice President,
Treasurer and a Director
(Principal Accounting Officer)
Date March 30, 2000
By /s/ James W. Foland By /s/ Timothy L. Smith
- --------------------------- ------------------------------
James W. Foland Timothy L. Smith
Secretary and a Director President, Chief Executive Officer
and a Director
Date March 30, 2000 Date March 30, 2000
By /s/ S. Craig Beam By /s/ Janet M. Williams
- --------------------------- ------------------------------
S. Craig Beam Janet M. Williams
Director Director
Date March 30, 2000 Date March 30, 2000
By /s/ Georgia H. Miller By /s/ Robert A. Raizk
- --------------------------- ------------------------------
Georgia H. Miller Robert A. Raizk
Director Director
Date March 30, 2000 Date March 30, 2000
By /s/ Darleen M. Myers
- ---------------------------
Darleen M. Myers
Director
Date March 30, 2000
-83-
Exhibit 21
INTERCOUNTY BANCSHARES, INC.
SUBSIDIARIES OF THE REGISTRANT
At December 31, 1999
STATE OF PERCENTAGE
NAME OF CORPORATION INCORPORATION OF OWNERSHIP
- ------------------- ------------- ------------
The National Bank & Trust Company Ohio 100%
Phillips Insurance Agency Group, Inc. Ohio 100%
Phillips Insurance Agency, Inc. Ohio 100%
-1-
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
of InterCounty Bancshares, Inc. on Form S-8, filed on March 23, 1995, of our
report dated February 10, 2000, on the 1999 Consolidated Financial Statements
of InterCounty Bancshares, Inc.
/s/ J.D. Cloud & Co. L.L.P.
Cincinnati, Ohio
March 24, 2000
-1-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE
ANNUAL REPORT FOR INTERCOUNTY BANCSHARES, INC. ON FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000908837
<NAME> INTERCOUNTY BANCSHARES
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 18,813
<INT-BEARING-DEPOSITS> 242
<FED-FUNDS-SOLD> 283
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 110,723
<INVESTMENTS-CARRYING> 44,304
<INVESTMENTS-MARKET> 40,412
<LOANS> 352,554
<ALLOWANCE> 3,222
<TOTAL-ASSETS> 542,548
<DEPOSITS> 379,932
<SHORT-TERM> 40,358
<LIABILITIES-OTHER> 2,796
<LONG-TERM> 75,431
0
0
<COMMON> 1,000
<OTHER-SE> 43,031
<TOTAL-LIABILITIES-AND-EQUITY> 542,548
<INTEREST-LOAN> 27,728
<INTEREST-INVEST> 9,714
<INTEREST-OTHER> 97
<INTEREST-TOTAL> 37,539
<INTEREST-DEPOSIT> 13,725
<INTEREST-EXPENSE> 19,150
<INTEREST-INCOME-NET> 18,389
<LOAN-LOSSES> 1,400
<SECURITIES-GAINS> (368)
<EXPENSE-OTHER> 15,227
<INCOME-PRETAX> 6,989
<INCOME-PRE-EXTRAORDINARY> 6,989
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,708
<EPS-BASIC> 1.81
<EPS-DILUTED> 1.77
<YIELD-ACTUAL> 7.58
<LOANS-NON> 955
<LOANS-PAST> 96
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,959
<ALLOWANCE-OPEN> 2,641
<CHARGE-OFFS> 1,071
<RECOVERIES> 252
<ALLOWANCE-CLOSE> 3,222
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,222
</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 Annual Report on Form 10-K for fiscal year 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>
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.
On November 12, 1999, President Clinton signed into law the Gramm-Leach-
Bliley Act (also known as the Financial Services Modernization Act of 1999).
The Financial Services Modernization Act will, effective March 11, 2000,
permit bank holding companies to become financial holding companies and
thereby affiliate with securities firms and insurance companies and engage in
other activities that are financial in nature. A bank holding company may
become a financial holding company if each of its subsidiary banks is well
capitalized under the Federal Deposit Insurance Corporation Act of 1991
prompt corrective action provisions is well managed, and has at least a
satisfactory rating under the Community Reinvestment Act, by filing a
declaration that the bank holding company wishes to become a financial
holding company. No regulatory approval will be required for a financial
holding company to acquire a company, other than a bank or savings
association, engaged in activities that are financial in nature or incidental
to activities that are financial in nature, as determined by the Federal
Reserve Board.
The Financial Services Modernization Act defines "financial in nature" to
include:
- securities underwriting, dealing and market making;
- sponsoring mutual funds and investment companies;
- insurance underwriting and agency;
- merchant banking; and
- activities that the Federal Reserve Board has determined to be
closely related to banking.
A national bank also may engage, subject to limitations on investment, in
activities that are financial in nature, other than insurance underwriting,
insurance company portfolio investment, real estate development and real
estate investment, through a financial subsidiary of the bank, if the bank is
well capitalized, well managed and has at least a satisfactory Community
Reinvestment Act rating. Subsidiary banks of a financial holding company or
national banks with financial subsidiaries must continue to be well
capitalized and well managed in order to continue to engage in activities
that are financial in nature without regulatory actions or restrictions,
which could include divestiture of the financial in nature subsidiary or
subsidiaries. In addition, a financial holding company or a bank may not
acquire a company that is engaged in activities that are financial in nature
unless each of the subsidiary banks of the financial holding company or the
bank has a Community Reinvestment Act rating of satisfactory or better.
The specific effects of the enactment of the Financial Services Modernization
Act on the banking industry in general and on the Bank and InterCounty in
particular have yet to be determined due to the fact that the Financial
Services Modernization Act was only recently adopted.
-3-
