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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 2000
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 $17.75 per share on February 23, 2001. Based upon
such price, the aggregate market value of the issuer's shares held by
nonaffiliates was $33,468,015.
As of March 23, 2001, 3,205,554 common shares were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following sections of the definitive Proxy Statement for the 2001 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.
-1-
INTERCOUNTY BANCSHARES, INC.
For the Year Ended December 31, 2000
Table of Contents
PART I
Page
----
Item 1: Business 3
Item 2: Properties 24
Item 3: Legal Proceedings 25
Item 4: Submission of Matters to a Vote of Security Holders 25
Part II
-------
Item 5: Market for Registrant's Common Equity and Related
Stockholder Matters 26
Item 6: Selected Financial Data 26
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations 28
Item 7A: Quantitative and Qualitative Disclosures About
Market Risk 47
Item 8: Financial Statements and Supplementary Data 48
Item 9: Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 76
Part III
--------
Item 10: Directors and Executive Officers of the Registrant 76
Item 11: Executive Compensation 76
Item 12: Security Ownership of Certain Beneficial Owners
and Management 76
Item 13: Certain Relationships and Related Transactions 76
Part IV
-------
Item 14: Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 77
Exhibit Index 78
Signatures 79
-2-
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 has drive-in facilities only and two remote service
units. The Bank has also installed 83 cash dispensers in convenience stores
in three states as of the end of 2000. The Bank also has a trust department
which presently administers 779 accounts having combined assets of $234
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. In December 2000, The Phillips Insurance Agency, Inc.'s name was
changed to NB&T Insurance Agency, Inc. The NB&T Insurance Agency, Inc. has
its principal office in Wilmington, Ohio.
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.
-3-
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. Management's determination of the adequacy of the loan loss
allowance;
3. The effect of changes in interest rates;
4. Growth in the real estate and commercial 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-
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.
The following table sets forth the composition of the Bank's loan portfolio
by type of loan at the dates indicated:
At December 31,
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Commercial and
industrial $ 92,328 25% $ 86,521 25% $ 78,801 26% $ 63,661 23% $ 57,985 22%
Commercial real
estate 42,694 11 37,833 11 29,936 10 30,835 11 31,118 11
Agricultural 18,256 5 18,343 5 17,925 6 18,387 7 16,304 6
Residential real
estate 145,582 39 117,392 33 92,069 30 82,838 30 79,761 30
Installment 71,414 19 87,996 25 83,173 27 79,115 28 81,033 30
Other 3,209 1 2,069 1 2,402 1 2,097 1 2,228 1
------- --- ------ --- ------- --- ------- --- ------- ---
Total loans $373,483 100% 350,154 100% 304,306 100% 276,933 100% 268,429 100%
=== === === === ===
Deferred net
origination costs 618 801 806 778 853
Allowance for loan
losses (3,802) (3,222) (2,641) (2,761) (2,686)
------- ------- ------- ------- -------
Net loans $370,299 $347,733 $302,471 $274,950 $266,596
======= ======= ======= ======= =======
-5-
Loan Maturity Schedule. The following table sets forth certain information
at December 31, 2000, 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:
Due 0-1 Year Due 1-5 Years Due 5 + Years Total
(In thousands)
Commercial and
industrial $38,979 $45,857 $ 7,491 $92,327
Commercial real estate 12,173 2,652 27,870 42,695
Agricultural 7,495 3,090 7,671 18,256
------ ------ ------ -------
Total $58,647 $51,599 $43,032 $153,278
====== ====== ====== =======
The following table sets forth the dollar amount of certain loans, due after
one year from December 31, 2000, which have predetermined interest rates and
floating or adjustable interest rates:
Predetermined Floating or
rates adjustable rates Total
------------- ---------------- -------
(In thousands)
Commercial and industrial $14,730 $38,618 $53,348
Commercial real estate 4,290 26,232 30,522
Agricultural 966 9,795 10,761
------ ------ ------
Total $19,986 $74,645 $94,631
====== ====== =======
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, 2000 the Bank had $92.3 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.
-6-
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, 2000, the Bank had $42.7 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.
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, 2000, 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, 2000, the
Bank had $145.6 million, or 39% 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, 2000, the Bank had $71.4 million, or 19% 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
-7-
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.
Credit Card Service. The Bank offers credit card services directly through
a correspondent bank.
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. 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 $50,000 are reported to the Board on a monthly basis.
Loan, Originated, Purchases and Sales. Although the Bank generally does
not purchase loans, purchases could occur in the future. 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.
-8-
The following table sets forth certain information regarding the past-due,
non-accrual and renegotiated loans of the Bank at the dates indicated:
At December 31,
--------------------------------------
2000 1999 1998 1997 1996
(In thousands)
Loans accounted for on
nonaccrual basis $4,098 $ 955 $599 $509 $535
Accruing loans which are
past due 90 days or more 113 96 343 241 90
Renegotiated loans - - - - -
----- --- --- --- ---
Total $4,211 $1,051 $942 $750 $625
===== ===== === === ===
If interest on non-accrual loans had been recognized during 2000, such
income would have been $279,000. 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, 2000, the Bank's allowance for loan
losses totaled $3.8 million and 56% was allocated to specific credits, and
the rest was allocated based on previous charge-off experience, portfolio
risk, economic conditions and anticipated loan growth.
-9-
The following table sets forth an analysis of the Bank's allowance for losses
on loans for the periods indicated:
December 31,
------------------------------------------
2000 1999 1998 1997 1996
(Dollars in thousands)
Balance at beginning of
period $ 3,222 $ 2,641 $ 2,761 $ 2,686 $ 2,644
Charge-offs:
Commercial and industrial (858) (200) (702) (178) (28)
Commercial real estate (15) (10) (45) - -
Agricultural (107) (10) - - (3)
Residential real estate (66) (9) - (6) (1)
Installment (825) (842) (681) (694) (560)
Credit card - - - (64) (189)
Other - - (7) - (4)
------- ------- ------- ------- -------
Total charge-offs (1,871) (1,071) (1,435) (942) (785)
------- ------- ------- ------- -------
Recoveries:
Commercial and industrial 62 27 7 63 42
Commercial real estate - 9 - - -
Agricultural 5 - - - 8
Residential real estate 1 1 - 2 -
Installment 183 213 145 133 158
Credit card 1 2 12 17 13
Other - - 1 2 6
------ ----- ----- ----- -----
Total recoveries 252 252 165 217 227
------ ----- ----- ----- -----
Net charge-offs (1,619) (819) (1,270) (725) (558)
Provision for possible
loan losses 2,199 1,400 1,150 800 600
------- ------- ------- ------- -------
Balance at end of period $ 3,802 $ 3,222 $ 2,641 $ 2,761 $ 2,686
======= ======= ======= ======= =======
Ratio of net charge-offs to
average loans outstanding
during the period 0.44% 0.25% 0.44% 0.26% 0.22%
==== ==== ==== ==== ====
Average loans outstanding $367,419 $330,734 $287,674 $274,372 $256,761
======= ======= ======= ======= =======
-10-
Because the loan loss allowance is based on estimates, it is monitored
regularly and adjusted as necessary to provide an adequate allowance.
Investment Activities
The following table sets forth the composition of the Bank's securities
portfolio, based on amortized cost, at the dates indicated:
At December 31,
-----------------------------------
2000 1999 1998
(In thousands)
Securities available
for sale:
U.S. Treasuries & U.S.
Agency notes $ 49,641 $ 34,730 $ 35,983
U.S. Agency mortgage-
backed securities 39,857 55,324 73,124
Other mortgage-backed
securities 11,164 11,320 16,337
Municipals 8,567 8,563 8,558
Other securities 6,269 5,833 5,461
------- ------- -------
Total securities available
for sale 115,498 115,770 139,463
------- ------- -------
Securities held to
maturity:
Municipal securities 44,374 44,304 36,832
------- ------- -------
Total securities held
to maturity 44,374 44,304 36,832
------- ------- -------
Total securities $159,872 $160,074 $176,295
======= ======= =======
The following table sets forth the amortized cost of the Bank's securities
portfolio at December 31, 2000. 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.
-11-
Less than 1 year 1 to 5 years 5 to 10 years Over 10 years Total
---------------- ------------- ------------- ------------- -----
Weighted Weighted Weighted Weighted Weighted
Amortized average Amortized average Amortized average Amortized average Amortized average
cost yield cost yield cost yield cost yield cost yield
---- ----- ---- ----- ---- ----- ---- ----- ---- -----
(Dollars in thousands)
Securities available
for sale:
U.S. Treasuries
and U.S. Agency
notes $ 6,169 5.40% $34,057 6.98% $ 8,415 7.24% $ 1,000 7.00% $ 49,641 6.82%
U.S. Agency
mortgage-backed
securities 6,005 7.10 15,528 6.79 9,921 7.16 8,403 6.77 39,857 6.92
Other mortgage-
backed
securities 8,620 6.71 1,238 6.77 426 6.96 880 6.98 11,164 6.75
Municipals - - - - - - 8,567 5.04 8,567 5.04
Other securities - - 10 - - - 6,259 6.83 6,269 6.81
------ ------ ------ ------ -------
Total securities
available for
sale 20,794 6.43 50,833 6.91 18,762 7.19 25,109 6.01 115,498 6.35
------ ------ ------ ------ -------
Securities held
to maturity:
Municipal
securities - - 827 9.15 100 4.50 43,447 5.13 44,374 5.21
------ ------ ------ ------ -------
Total securities
held to maturity - - 827 9.15 100 4.50 43,447 5.13 44,374 5.21
------ ------ ------ ------ -------
Total securities $20,794 6.43% $51,660 6.95% $18,862 7.18% $68,556 4.62% $159,872 6.03%
====== ====== ====== ====== =======
-12-
Trust Services
The Bank received trust powers in 1922 and currently holds $234 million in
net assets held in 794 accounts on December 31, 2000 in the Trust
Department. 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 four officers and five staff members and generated $1,276,000 in
fee income during 2000.
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.
-13-
The following table sets forth the dollar amount of deposits in the various
types of products offered by the Bank as of December 31:
Percent Percent Percent Percent Percent
2000 of Total 1999 of Total 1998 of Total 1997 of Total 1996 of Total
---- -------- ---- -------- ---- -------- ---- -------- ---- --------
(Dollars in thousands)
Demand $ 42,965 11% $ 43,715 12% $ 41,748 11% $ 38,662 12% $ 35,731 12%
NOW 81,540 20 67,027 18 61,616 16 53,386 17 49,030 16
Savings 32,397 8 35,658 9 35,983 10 34,445 10 35,687 11
Money market
deposit 33,533 8 42,780 11 39,935 11 29,721 9 28,009 9
CDs less than
$100,000 172,982 43 150,281 40 147,003 39 146,005 44 141,680 46
CDs greater than
$100,000 43,040 10 40,226 10 47,705 13 26,899 8 18,788 6
Other 231 - 245 - 230 - 214 - 203 -
------- --- ------- --- ------- --- ------- --- ------- ---
Total
deposits(1) $406,688 100% $379,932 100% $374,220 100% $329,332 100% $309,128 100%
======= === ======= === ======= === ======= === ======= ===
-14-
The following table sets forth the dollar amount of time deposits greater
than $100,000 maturing in the periods indicated:
Maturity At December 31, 2000
-------- --------------------
(In thousands)
Three months or less $18,193
Over 3 months to 6 months 7,576
Over 6 months to 12 months 8,201
Over twelve months 9,070
------
Total $43,040
======
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
$86.0 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.
The following table sets forth certain information regarding the Bank's
outstanding borrowings at the dates and for the periods indicated:
December 31,
--------------------------
2000 1999 1998
(Dollars in thousands)
Maximum amount of short-term
borrowings outstanding at any
month end during period $41,624 $40,358 $37,903
Average amount of short-term
borrowings outstanding during
period 33,486 26,518 31,582
Amount of short-term borrowings
outstanding at end of period 40,148 40,358 22,702
Weighted average interest rate of
short-term borrowings during period 6.05% 4.78% 5.14%
Weighted average interest rate of
short-term borrowings at end of
period 6.14% 4.45% 4.41%
-15-
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.
2000 1999 1998
---------------------------- ---------------------- ------------------------------
Average Interest Average Interest Average Interest
outstanding Yield/ earned/ outstanding Yield/ earned/ outstanding Yield/ earned/
balance rate paid balance rate paid balance rate paid
Loans (1) $367,419 8.59% $31,549 $330,734 8.38% $27,728 $287,675 8.68% $24,959
Securities
available
for sale 104,483 6.77 7,073 123,212 6.27 7,725 131,224 6.43 8,434
Securities
held to
maturity 44,344 5.17 2,291 39,533 5.03 1,989 23,931 5.64 1,349
Deposits in
banks 234 4.49 10 283 4.73 14 533 4.81 26
Federal funds
sold 2,067 6.11 126 1,708 4.86 83 9,237 5.47 505
------- ------ ------- ------ ------- ------
Total interest-
earning
assets 518,547 7.92 41,049 495,470 7.58 37,539 452,600 7.79 35,273
Non-earning
assets 36,631 33,930 29,002
Allowance for
loan losses (3,612) (2,945) (2,702)
------- ------- -------
Total assets $551,566 $526,455 $478,900
======= ======= =======
-16-
Savings
deposits $ 34,069 1.75 595 $ 36,566 2.01 734 $ 35,509 2.58 918
NOW and MMDA 109,935 3.24 3,565 107,664 2.81 3,025 89,276 2.92 2,603
CD's over
$100M 43,672 5.95 2,600 43,186 5.28 2,281 39,728 5.53 2,198
Other time
deposits 162,709 5.72 9,315 147,890 5.20 7,685 145,014 5.60 8,118
Short-term
borrowings 33,482 6.05 2,024 26,554 4.77 1,267 31,582 5.14 1,622
Long-term debt 79,406 5.81 4,612 75,539 5.51 4,158 54,430 5.66 3,081
------- ------ ------- ------ ------- ------
Total interest-
bearing
liabilities 463,273 4.90 22,711 437,399 4.38 19,150 395,539 4.69 18,540
------ ------ ------
Demand
deposits 39,846 41,536 37,560
Other
liabilities 2,725 3,094 2,996
Capital 45,722 44,426 42,805
------- ------- -------
Total
liabilities
and capital $551,566 $526,455 $478,900
======= ======= =======
Net interest
income $18,338 $18,389 $16,733
====== ====== ======
Interest rate
spread 3.01% 3.20%
Net interest
income margin 3.54 3.71
Ratio of
interest-earning
assets to
interest-bearing
liabilities 111.93% 113.28%
(1) Includes nonaccrual loans.
-17-
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,
------------------------------------
2000 vs 1999
------------------------------------
Increase (decrease) due to
------------------------------------
Rate/
Volume Rate Volume Total
------ ---- ------- -----
(In thousands)
Interest income attributable to:
Loans $ 3,067 $ 708 $ 46 $3,821
Securities available for sale (1,176) 620 (96) (652)
Securities held to maturity 242 53 7 302
Deposits in banks (3) (1) - (4)
Federal funds sold 17 21 5 43
----- ----- --- -----
Total interest-earning assets 2,147 1,401 (38) 3,510
----- ----- --- -----
Interest expense attributable to:
Savings deposits (50) (95) 6 (139)
NOW and MMDA 64 466 10 540
CD's over $100,000 26 291 2 319
Other time deposits 770 782 78 1,630
Short-term borrowings 331 338 88 757
Long-term debt 209 234 11 454
----- ----- --- -----
Total interest-bearing
liabilities 1,350 2,016 195 3,561
----- ----- --- -----
Net interest income $ 797 $ (615) $(233) $ (51)
===== ===== === =====
-18-
Years ended December 31,
------------------------------------
1999 vs 1998
------------------------------------
Increase (decrease) due to
------------------------------------
Rate/
Volume Rate Volume Total
------ ---- ------- -----
(In thousands)
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
----- ----- --- -----
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
===== ===== === =====
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
-19-
with several regional bank holding companies, each with assets far
exceeding those of the Bank. 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.
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. In general, the FRB may initiate enforcement actions
for violations of law and regulations.
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 of at least 4% of average total
consolidated assets. InterCounty was in compliance with these capital
requirements at December 31, 2000. For InterCounty's capital ratios, see
Note 18 to the Consolidated Financial Statements in Item 8.
-20-
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, other than companies engaged in certain activities
determined by the FRB to be closely related to banking. 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 permits, effective March 11, 2000,
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
-21-
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.
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.
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, 2000. For the Bank capital ratios, see Note 18
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
-22-
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, 2000, met
the standards for the highest capital category, a well-capitalized bank.
A national bank is subject to restrictions on the payment of dividends,
including dividends to a holding company. A dividend may not be paid if it
would cause the bank not to meet its capital requirements. In addition,
the dividends that a Bank subsidiary can pay to its holding company without
prior approval of regulatory agencies is limited to net income plus its
retained net income for the preceding two years. 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, 2000.
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 Bank is a member of the BIF, and, at December 31, 2000, it had $387.8
million in deposits insured in the BIF, as well as $18.9 million, acquired
in a merger, insured in the SAIF.
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
-23-
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. Insurance of deposits may be terminated by the FDIC if
it finds that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations, or has violated
any applicable law, regulation, rule, order or condition enacted or imposed
by the institution's regulatory agency.
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, 2000, 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 $ 5,912,000 at
December 31, 2000. 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.
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 a
building at 52 E. Main Street, Wilmington, Ohio that houses the Bank's
insurance agency. InterCounty's net book value of investments in land
and buildings was $8.8 million as of December 31, 2000.
-24-
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.
-25-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
There were 3,205,284 common shares of the Company outstanding on December
31, 2000, held of record by approximately 435 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 $.19 in each quarter in 2000. Dividends per share
declared in 1999 were $.17 in each quarter of 1999.
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 resale of
the shares issued will not violate the limitations of Rule 147.
Item 6. Selected Financial Data
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:
December 31,
Statement of financial 2000 1999 1998 1997 1996
condition and other data: (Dollars in thousands)
Total amount of
Assets $579,232 $542,548 $520,553 $436,605 $380,607
Cash and due from banks 19,331 18,813 18,241 17,807 11,005
Securities 160,210 155,027 176,580 123,139 88,831
Loans receivable-net 370,299 347,733 302,471 274,950 266,596
Deposits 406,688 379,932 374,220 329,332 309,127
Short-term borrowings 40,148 40,358 22,702 32,734 31,113
Long-term debt 80,323 75,431 75,539 30,716 914
Shareholders' equity 49,482 44,031 44,723 40,980 36,806
Number of full service
offices 17 17 16 14 13
-26-
Year ended December 31,
2000 1999 1998 1997 1996
Statement of income data: (In thousands)
Interest and loan fee
income $ 41,049 $37,539 $35,273 $31,604 $28,824
Interest expense 22,711 19,150 18,540 15,490 13,830
------- ------- ------ ------ ------
Net interest income 18,338 18,389 16,733 16,114 14,994
Provision for loan
losses 2,199 1,400 1,150 800 600
------- ------- ------- ------ ------
Net interest income
after provision for
loan losses 16,139 16,989 15,583 15,314 14,394
Non-interest income 4,051 5,227 5,526 4,533 4,007
Non-interest expense 15,372 15,227 13,846 12,600 11,592
------- ------- ------ ------ ------
Income before income
taxes 4,818 6,989 7,263 7,247 6,809
Federal income taxes 772 1,281 1,889 2,259 1,877
------- ------- ------ ------ ------
Net income $ 4,046 $ 5,708 $ 5,374 $ 4,988 $ 4,932
======= ======= ====== ====== ======
Year ended December 31,
Selected financial ratios: 2000 1999 1998 1997 1996
Return on average equity 8.85% 12.85% 12.56% 12.98% 14.11%
Return on average assets .73 1.08 1.12 1.23 1.34
Equity-to-assets ratio 8.54 8.12 8.59 9.39 9.66
Dividend payout ratio(1) 58.27 37.57 29.71 23.90 17.83
Ratio of non-performing
loans to total loans(2) 1.13 0.33 0.31 0.31 0.36
Ratio of loan loss allowance
to total loans 1.02 0.91 0.87 0.99 1.00
Ratio of loan loss allowance
to non-performing loans(2) 90% 307% 280% 316% 273%
Earnings per share(3) $1.27 $1.81 $1.70 $1.59 $1.57
Dividends declared
per share(3) 0.76 0.68 0.505 0.38 0.28
- -------------------------------
(1) Dividends paid per share divided by earnings per share.
(2) Non-performing loans include non-accrual loans, renegotiated loans and
accruing loans 90 days or more past due.
-27-
(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.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis comparing 2000 to prior years should be
read in conjunction with the audited consolidated financial statements at
December 31, 2000 and 1999 and for the three years ended December 31, 2000.
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 2000 was $4.046 million, a decrease of 29.1% from 1999. Net
income per share was $1.27 in 2000, compared to $1.81 in 1999. In the third
quarter of 2000, the Company restructured a portion of its securities
portfolio and during the third and fourth quarters increased its provision for
loan losses. Both of these items had a significant negative impact on Company
net income for the year 2000. The restructuring of the securities portfolio,
resulting in the recognition of an after-tax loss of $1.37 million, was
undertaken to enhance future earnings and reduce interest rate risk. Net
interest income decreased slightly from $18.4 million in 2000 to $18.3 million
in 1999. The provision for loan losses was increased 57.1% to $2.2 million
in 2000 from the $1.4 million recorded in 1999. Non-interest income increased
9.4%, excluding securities losses, to $6.1 million for 2000. Non-interest
expense was held to a 1.0% increase for 2000 compared to 1999. Performance
ratios for 2000 included a return on average assets of .73%, and a return on
average equity of 8.85%.
-28-
Table 1 - Selected Financial Highlights
(dollars in thousands)
2000 1999 1998 1997 1996
------------------------------------------------
Net interest income $ 18,338 $ 18,389 $ 16,733 $ 16,114 $ 14,994
Net income 4,046 5,708 5,374 4,988 4,932
Earnings per share 1.27 1.81 1.70 1.59 1.57
Dividends per share 0.76 0.68 0.51 0.38 0.28
AVERAGE BALANCES
Assets $551,566 $526,455 $478,900 $405,752 $367,926
Loans 367,419 330,734 287,674 274,372 256,761
Securities 148,827 162,744 155,155 102,896 85,867
Deposits 390,231 376,843 347,087 319,809 297,070
Long-term debt 79,406 75,539 53,753 6,792 1,070
Shareholders' equity 45,722 44,426 42,805 38,443 34,957
RATIOS AND STATISTICS
Net interest margin
(tax equivalent) 3.72% 3.88% 3.71% 4.22% 4.33%
Return on average
assets 0.73 1.08 1.12 1.23 1.34
Return on average
equity 8.85 12.85 12.56 12.98 14.11
Loans to assets 64.59 64.98 58.61 63.63 70.75
Equity to assets 8.54 8.12 8.59 9.39 9.66
Total risk-based
capital ratio 14.04 14.29 14.18 14.66 14.06
Efficiency ratio 60.47 61.25 62.20 61.03 61.01
Full service offices 17 17 16 14 13
NET INTEREST INCOME
Net interest income decreased to $18.3 million in 2000 from $18.4 million in
1999, a decrease of 0.3%. The Company's tax equivalent yield on average
interest-earning assets increased to 8.09% in 2000 from 7.74% in 1999.
Average interest-earning assets increased $23.1 million (4.7%) from 1999.
Interest and fees on loans increased 13.8% from last year as the average
balance rose $36.7 million (11.1%) and the average yield increased from 8.38%
in 1999 to 8.59% in 2000. By the end of May 2000 the prime rate increased 100
basis points to 9.50%.
The securities portfolio showed a decrease in average balance and an increase
in yield. The average balance of the portfolio decreased $13.9 million (8.6%)
from 1999, and the tax equivalent yield increased from 6.48% to 6.91%. The
restructuring of the securities portfolio involved the sale of $38.0 million
book value of long-term fixed-rate securities with a weighted average life of
7.3 years and a weighted average yield of 6.27%, resulting in an after-tax
loss of $1.37 million. A portion of the proceeds of the sale, $26.7 million,
was reinvested in similar securities with a weighted average life of 5.3 years
-29-
and a weighted average yield of 7.33%. Another $10 million was used to
purchase Bank Owned Life Insurance (BOLI) with a cash surrender value that
increases during the first year at a tax-equivalent yield of 9.97% and the
cash surrender value increases during future years at an adjustable rate. The
restructuring is expected to increase pre-tax income by $542,000 in 2001 and
continue to increase earnings in future years. Another important result of
the restructuring was to reduce the interest rate risk of the Company by
shortening the weighted average maturity of the Company's assets and reducing
the amount of fixed-rate assets with maturities over five years.
Rising interest rates caused interest expense to increase 18.6% in 2000
compared to 1999. Average interest-bearing liabilities increased $25.9
million (5.9%) during 2000, and the cost increased from 4.38% in 1999 to 4.90%
in 2000. The average balance of retail certificates of deposit increased
$14.8 million (10.0%), and average short-term borrowing increased $6.9 million
(26.1%). All categories showed an increase in cost in 2000 compared to 1999.
Average tax equivalent net interest margin decreased from 3.88% in 1999 to
3.72% in 2000.
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%.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $2.20 million in 2000, an increase of
$800,000 from the provision recorded in 1999, which was an increase of
$250,000 from the provision recorded in 1998. Net charge-offs in 2000 were
$1,618,000 compared to $820,000 in 1999 and $1,270,000 in 1998. The increased
provision in the past three years was in response to 11.1%, 15.0% and 4.8%
increases in average loans for those years, and also increases in the amount
of net charge-offs in 2000 and 1998. Additionally in 2000 the provision
increased in contemplation of certain potential losses associated with $6.0
million in loans to a longstanding Bank customer. See "Allowance for Loan
Losses" for further discussion of this credit. The ratio of the allowance
for loan losses as a percent of total loans at December 31 was 1.02% in 2000,
.91% in 1999, and .87% in 1998.
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NON-INTEREST INCOME
Table 2 details the components of non-interest income, excluding securities
gains and losses, and how they relate each year as a percent of average
assets. Total non-interest income was $6.12 million in 2000, $5.60 million in
1999, and $5.22 million in 1998. Non-interest income represents a ratio of
1.11% of average assets in 2000, 1.06% in 1999, and 1.09% 1998. Trust income
increased 7.0% in 2000, and 7.9% in 1999, due to increases in fees during
2000, and increases in the number of accounts and the amount of funds under
management during 1999. At December 31 total assets in the Trust Department
were approximately $234 million in 2000, compared to $236 million in 1999 and
$217 million in 1998. Service charges and fees have increased over the last
three years due to increased charges and growth in the number of accounts.
Also, their percentage of average assets has increased to .31% in 2000
compared to .28% for both 1999 and 1998. Late in 1996 the Company began
installing cash dispensing units in convenience stores, as of the end of 2000
there were eighty-three machines installed in three states. ATM network fees
generated were $725,000 in 2000, $702,000 in 1999, and $574,000 in 1998. 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. Commission income has increased
from $833,000 in 1998 to $1,140,000 in 2000.
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Table 2 - Non-Interest Income
(in thousands)
2000 1999 1998
---- ---- ----
Percent Percent Percent
of average of average of average
Amount Assets Amount Assets Amount Assets
-----------------------------------------------------------------------
Service charge on
deposits $ 1,731 0.31% $1,485 0.28% $1,351 0.28%
Other service charges 306 0.06 376 0.07 336 0.07
Trust income 1,276 0.23 1,192 0.23 1,105 0.23
ATM network fees 725 0.13 701 0.13 574 0.12
Insurance agency
commissions 1,140 0.21 966 0.18 833 0.17
Other 943 0.17 875 0.17 1,025 0.22
----- ---- ----- ---- ----- ----
Total non-interest
income $ 6,121 1.11% $5,595 1.06% $5,224 1.09%
===== ==== ===== ==== ===== ====
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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 $13.8 million in 1998, to $15.2 million in 1999, and to $15.4
million in 2000. These figures represent a percent of average assets of 2.79%
in 2000 and 2.89% in both 1999 and 1998.
Salaries and benefits expense, which is the largest component of non-interest
expense, decreased slightly to $7.58 million in 2000. This decrease was
primarily due to the reduction of officer bonus expense as a result of not
meeting performance related goals. Salaries and benefits expense increased to
$7.69 million in 1999 from $6.77 million in 1998. Salaries and benefits as a
percent of average assets was 1.37% in 2000, 1.46% in 1999 and 1.42% in 1998.
The average number of full-time equivalent employees was 217 in 1998 and 222
in 1999 and 220 in 2000.
Other non-interest expense categories have remained substantially the same as
a percent of average assets from 1998 to 2000. Equipment expense has been
.40%, and occupancy expense has been .16% of average assets for all three
years. State franchise tax decreased to .09% in 2000 and 1999 from .13% in
1998 due to adjustments in the capital of the Bank in the form of dividends
to the parent company recorded in December 1998. Other expense as a percent
of average assets has decreased to .70% in 2000 from .72% in 1998.
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Table 3 - Non-Interest Expense
(in thousands)
2000 1999 1998
---- ---- ----
Percent Percent Percent
of average of average of average
Amount Assets Amount Assets Amount Assets
-------------------------------------------------------------------------
Salaries $ 6,415 1.16% $ 6,563 1.25% $5,781 1.21%
Benefits 1,167 0.21 1,130 0.21 984 0.21
Equipment 2,233 0.40 2,108 0.40 1,917 0.40
Occupancy 866 0.16 824 0.16 790 0.16
State franchise tax 477 0.09 488 0.09 615 0.13
Marketing 379 0.07 386 0.07 312 0.06
Other 3,835 0.70 3,728 0.71 3,447 0.72
------ ---- ------ ---- ------ ----
Total $15,372 2.79% $15,227 2.89% 13,846 2.89%
====== ==== ====== ==== ====== ====
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INCOME TAXES
The effective tax rates were 16.0% for 2000, 18.4% for 1999, and 26.0% for
1998. The decreases in the 2000 and 1999 effective tax rates were primarily
due to the increases in tax-exempt municipal bond interest income. Also, the
exercise of stock options by certain executive officers that are taxable to
the executives and tax deductible to the Company contributed to the decrease
in the effective tax rate from 1998 to 1999. Tax-exempt municipal bond income
increased 12.2% in 2000 and 45.2% in 1999 from the comparative years.
FINANCIAL CONDITION
ASSETS
Average total assets increased 4.8% during 2000 to $551.6 million. Average
interest-earning assets increased 4.7%, and remained at 94% of total average
assets, the same as the last two years.
SECURITIES
Average securities as a percent of assets was 32.4% in 1998, fell to 30.9% in
1999 and fell again to 27.0% in 2000. The securities portfolio restructure
effected in 2000 is expected to increase pre-tax income in the coming years
and also has reduced the interest rate risk of the Company by shortening the
weighted average maturity of the Bank's assets and reducing the amount of
fixed-rate assets with maturities over five years. The securities portfolio
at December 31, 2000 consists of $115.8 million of securities available for
sale and $44.4 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 4.9 years, an average
repricing term of 4.2 years, and an average tax-equivalent yield of 7.10%.
Of the total available-for-sale portion, 48% consists of callable U.S. Agency
bonds, 38% consists of fixed-rate mortgage-backed securities, 6% consists of
adjustable-rate mortgage-backed securities, and 8% consists of long-term
fixed-rate tax-exempt municipal securities. During 1999 and 2000 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. Some of these purchases were funded with 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 12.8 years. At
December 31, 2000 the total security portfolio had $232,000 market value
appreciation.
LOANS
Average total loans as a percent of average assets was 60.1% in 1998, 62.8% in
1999, and 66.6% in 2000. Table 4 shows loans outstanding at period end by
type of loan. The portfolio composition has stayed relatively the same during
the last three years. Commercial and industrial loans grew from $78.8 million
in 1998 to $86.5 million in 1999 and to $92.3 million in 2000, primarily as a
result of increased origination of working capital and equipment loans.
Residential real estate loans grew $25.3 million during 1999 and $28.2 million
during 2000 as the result of increased efforts by the Company in originating
loans locally through the branch network. For interest rate risk management
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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 has experienced an
increase in residential real estate lending and commercial lending, both real
estate and industrial, because of 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
expects to continue the emphasis on growth in the real estate and commercial
portfolios. Installment loans outstanding has decreased from $88.0 million in
1999 to $71.4 because the Company has reduced its efforts to originate
indirect automobile loans due to increased competition and narrowing interest
rate spreads. Installment loans have decreased to 19% of the portfolio at
December 31, 2000 from 25% at December 31, 1999. The Company has avoided
concentration of lending in any one industry. As of December 31, 2000, the
percent of fixed-rate loans to total loans was 34%, of which 75% matures
within five years.
Table 4 - Loan Portfolio
(in thousands)
at December 31,
2000 1999
---- ----
Percent of Percent of
Amount Total Amount Total
---------------------------------------------
Commercial and industrial $ 92,328 25% $ 86,521 25%
Commercial real estate 42,694 11 37,833 11
Agricultural 18,256 5 18,343 5
Residential real estate 145,582 39 117,392 33
Installment 71,414 19 87,996 25
Other 3,209 1 2,069 1
Deferred net origination
costs 618 - 801 -
------- --- ------- ---
Total $374,101 100% $350,955 100%
======= === ======= ===
-36-
1998 1997
Percent of Percent of
Amount Total Amount Total
---------------------------------------------
Commercial and industrial $ 78,801 26% $ 63,661 23%
Commercial real estate 29,936 10 30,835 11
Agricultural 17,925 6 18,387 7
Residential real estate 92,069 30 82,838 30
Installment 83,173 27 79,115 28
Other 2,402 1 2,097 1
Deferred net origination costs 806 - 778 -
------- --- ------- ---
Total $305,112 100% $277,711 100%
======= === ======= ===
1996
Percent of
Amount Total
------------------------
Commercial and industrial $ 57,985 22%
Commercial real estate 31,118 11
Agricultural 16,304 6
Residential real estate 79,761 30
Installment 81,033 30
Other 2,228 1
Deferred net origination costs 853 -
------- ---
Total $269,282 100%
======= ===
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.
The allowance for loan losses was 1.02% of total loans as of December 31,
2000, an increase from the .91% at the end of 1999, and has ranged from .87%
to 1.00% for the years 1996 through 1998. Net charge-offs as a percentage of
average loans increased to .44% for the year 2000, compared to .25% for the
year 1999. The increase in net charge-offs during 2000 was concentrated in
the commercial loan area and was primarily related to three business entities
that were identified at the end of 1999 as non-accrual or impaired loans. The
-37-
Company allocates the allowance for loan losses to specifically classified
loans and generally based on three-year net charge off history. 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
of non-accrual loans increased to $4,098,000 at year-end 2000 from $955,000 in
1999. The $955,000 reported as non-accrual loans as of December 31, 1999, was
resolved through payments or collateral disposition of $402,000, $202,000
carried over into 2001 with payments being made and $351,000 charged off
during the year 2000. Non-accrual loans as of December 31, 2000 consisted of
33 relationships. Fifteen of those relationships are collateralized with a
first mortgage; eleven have a second mortgage; four are collateralized with
titled units awaiting sale; two have partial Farm Services Agency (FSA) and US
Department of Agriculture (USDA) government guarantees, and the remaining
relationship is collateralized by a general chattel filing on furniture,
fixtures, and inventory.
All loans and leases are expected to be resolved through payments or through
liquidation of collateral in the normal course of business. The anticipated
loss in the year 2001 from all but two of these relationships is $50,000.
One of the remaining two relationships, is Bush Leasing, Inc., a company
whose primary owner is George F. Bush, a former director of the Company.
The servicing and collection of the related lease receivables of $866,000
has been outsourced. Management is unable to determine the potential for
losses on this account since the receivables are collateralized with
vehicles whose condition at the end of the lease can either negatively
or positively impact the final amount received. The second relationship
is with a longstanding customer whose outstanding balances with the
Company are approximately $6.0 million, $4.3 million of which has an 80%
guarantee by a U.S Government agency. Several meetings have taken place
with the customer with the intent of restructuring a portion of the debt.
Due to the early stages of this situation, a loss to the Company, if any,
cannot be determined. Projected losses are based on currently available
information and actual losses may differ significantly from those discussed
above.
In addition, management has identified two relationships that are not
included in the non-performing categories at December 31, 2000, but about
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. These two relationships total $757,000 with a government guarantee
of $300,000 supporting one of the relationships. Management is unable at
this time to determine any loss potential due to the early stages of these
situations.
-38-
Table 5 - Asset Quality
(in thousands)
2000 1999 1998 1997 1996
-------------------------------------------------
Allowance for loan
losses $3,802 $3,222 $2,641 $2,761 $2,686
Provision for loan
losses 2,199 1,400 1,150 800 600
Net charge-offs 1,619 819 1,270 725 558
Non-accrual loans $4,098 $ 955 $ 599 $ 509 $ 535
Loans 90 days or more
past due 113 96 343 241 90
Renegotiated loans - - - - -
Other real estate owned 67 80 - 125 358
----- ----- ----- ----- -----
Total non-performing
assets $4,278 $1,131 $ 942 $ 875 $ 983
===== ===== ===== ===== =====
RATIOS
Allowance to total loans 1.02% 0.91% 0.87% 0.99% 1.00%
Net charge-offs to
average loans 0.44 0.25 0.50 0.26 0.22
Non-performing assets
to total loans 1.14 0.32 0.31 0.31 0.36
OTHER ASSETS
As part of the investment portfolio restructure in September 2000, $10 million
was used to purchase Bank Owned Life Insurance with a cash surrender value
that increases during the first year at a tax-equivalent yield of 9.97% and
the cash surrender value increases during future years at an adjustable rate.
Beginning in the fourth quarter of 1996 and during the ensuing years the
Company has been installing cash dispenser machines in convenience stores and
supermarkets. There were 83 machines located in Ohio, Kentucky and Indiana at
the end of 2000. The Company's investment in this segment of business
includes $1.4 million in equipment cost and an average of $4.3 million in
cash to supply the machines. The Company anticipates little change in the
number of machines installed at the end of 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 $82,000 in 2000, compared to $29,000 for 1999 and $110,000 net
book loss before tax for 1998.
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DEPOSITS
Table 6 presents a summary of period end deposit balances. Deposit categories
have remained fairly constant as a percent of total deposits throughout the
five-year period. Interest-bearing NOW accounts have increased to 20% of
deposits due to the introduction of a high yielding, high balance checking
account early in 2000. Savings accounts continue to decrease each year both
in amounts and as a percent of deposits. Money market accounts decreased to
8% of deposits by the end of 2000 as a result of the high yielding checking
account and the increase in retail certificates of deposit to 43% of the
total. Certificates of $100,000 and over are primarily short-term public
funds. Balances of such large certificates fluctuate depending on the
Company's pricing strategy and funding needs at any particular time and were
about the same percent of total deposits in 2000 as in 1999. Deposits are
attracted principally from within the Company's market area through the
offering of numerous deposit instruments. 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 consider broker
deposits as a viable alternative to funding needs. The amount of deposits
currently from outside the Company's market area is not significant.
Table 6 - Deposits
(in thousands)
at December 31,
2000 1999 1998
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
--------------------------------------------------------
Demand $ 42,965 11% $ 43,715 12% $ 41,748 11%
NOW 81,540 20 67,027 18 61,616 16
Savings 32,397 8 35,658 9 35,983 10
Money market 33,533 8 42,780 11 39,935 11
CD's less than
$100,000 172,982 43 150,281 40 147,003 39
CD's $100,000
and over 43,040 10 40,226 10 47,705 13
Other 231 - 245 - 230 -
------- --- ------- --- ------- ---
Total $406,688 100% $379,932 100% $374,220 100%
======= === ======= === ======= ===
-40-
1997 1996
Percent of Percent of
Amount Total Amount Total
--------------------------------------
Demand $ 38,662 12% $ 35,731 12%
NOW 53,386 16 49,030 16
Savings 34,445 11 35,687 11
Money market 29,721 9 28,009 9
CD's less than
$100,000 146,005 44 141,680 46
CD's $100,000
and over 26,899 8 18,788 6
Other 214 - 203 -
------- --- ------- ---
Total $329,332 100% $309,128 100%
======= === ======= ===
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 FHLB at anticipated
spreads of 130-150 basis points before tax. The effect of these transactions
has been an enhancement to earnings and an effective use of capital. At
December 31, 2000, the Bank had outstanding $86.0 million of total borrowings
from the FHLB. Six million of the borrowings have a one-year maturity and
adjust daily at the prime rate. Of the remaining $80 million, $50 million
consists of three fixed-rate notes with maturities in 2002, 2008 and 2010.
At the option of the FHLB, these notes can be converted at certain dates
to instruments that adjust quarterly at the three-month LIBOR rate.
The note amount and nearest optional conversion dates at December 31, 2000,
are $5 million in March 2001; $15 million in October 2001; and $30 million
in April 2003.
In January 2000, a $30 million fixed-rate note that matures in 2002 was
converted to a variable-rate note that adjusts quarterly at the three-month
LIBOR rate, which was 6.76% at year end. In January 2001 this note was paid
off and restructured into three $12 million notes with a weighted average
rate of 5.01% and maturity dates in January 2011. At the option of the FHLB,
these notes can be converted at certain conversion dates to instruments that
adjust quarterly at the three-month LIBOR rate. The optional conversion
dates are January 2002, 2004, and 2006.
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 33% in 1999 and 12% in 2000. The Company's equity to
assets ratio at December 31, 2000 was 8.5%. As of that same date, tier 1
-41-
risk-based capital was 13.0%, and total risk-based capital was 14.0%. 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.
Community bank liquidity management currently involves the challenge of
attracting deposits while maintaining positive loan growth at a reasonable
interest rate spread. The loan to deposit ratio at December 31, 2000, was
92.0%, compared to 92.4% at the same date in 1999. Loans to total assets were
64.6% at the end of 2000, compared to 64.7% at the same time last year. The
securities portfolio is 72% available-for-sale securities that are readily
marketable. Approximately 46% 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 FHLB. The Company has
the ability to obtain deposits 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, 2000. 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 at the end of 2000 was negative 12.0% compared to negative
16.8% at the end of 1999. The balances of transaction type NOW and MMDA
accounts are scheduled to run off over their expected lives. Although the
-42-
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.
Table 7 - Interest Rate Gap Analysis
(in thousands)
at December 31, 2000
0-3 3-6 6-12 1-5 5+
Total Months Months Months Years Years
-----------------------------------------------------
Loans (1) $375,620 $ 69,760 $ 30,203 $ 41,348 $196,607 $ 37,702
Securities (2) 160,210 25,548 3,735 18,294 35,398 77,235
Short-term funds 64 64 - - - -
------- ------- ------ ------ ------- -------
Total earning
assets 535,894 95,372 33,938 59,642 232,005 114,937
------- ------- ------ ------ ------- -------
Savings, NOW and
MMDA 147,470 5,267 5,267 10,533 84,269 42,134
Other time deposits 216,253 54,652 37,115 55,118 69,006 362
Short-term
borrowings 40,148 40,148 - - - -
Long-term debt 80,323 35,323 - 15,000 30,000 -
------- ------- ------ ------ ------- -------
Total interest-
bearing funds 484,194 135,390 42,382 80,651 183,275 42,496
------- ------- ------ ------ ------- -------
Period gap 51,700 (40,018) (8,444) (21,009) 48,730 72,441
Cumulative gap (40,018) (48,462) (69,471) (20,741) 51,700
Gap as a percent
of assets 8.93% (6.91)% (8.37)% (11.99)% (3.58)% 8.93%
(1) Excludes adjustments for deferred net origination costs and allowance for
losses.
(2) At amortized cost.
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
-43-
adequacy. The Company's current one-year simulation models under stable rates
indicate a level yield on interest-earning assets and a 10 basis point
decrease in the cost of interest-bearing liabilities. This position should
have a slightly positive effect on projected net interest margin over 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, 2000 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, 2000. The information presented is
based on repricing opportunities and projected cash flows that include
expected prepayment speeds and likely call dates.
-44-
Table 8 - Financial Instruments Market Risk
(in thousands)
At December 31, 2000
Later Fair
2001 2002 2003 2004 2005 Years Total Value
---------------------------------------------------------------------------
Fixed rate loans $ 35,918 $21,693 $17,474 $11,861 $ 7,843 $31,549 $126,338 $123,289
Average interest rate 9.29% 9.32% 9.27% 9.30% 9.12% 8.20% 9.01%
Adjustable rate loans 105,393 41,439 49,386 27,469 19,441 6,154 249,282 247,937
Average interest rate 9.03 8.02 8.20 7.96 8.17 7.11 8.47
Securities 47,577 14,030 11,546 4,802 5,021 77,234 160,210 160,104
Average interest rate 6.97 7.01 7.23 7.16 6.75 5.66 6.36
Interest-bearing deposits 167,952 82,815 27,206 21,531 21,723 42,496 363,723 351,850
Average interest rate 5.59 5.74 3.79 3.19 3.23 3.14 4.92
Short-term borrowings 40,148 - - - - - 40,148 40,148
Average interest rate 6.41 - - - - - 6.41
Long-term debt 50,323 - 30,000 - - - 80,323 79,347
Average interest rate 6.11 - 5.63 - - 5.93
-45-
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 or 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.
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 2000, the impact would have
been limited to transfers, if any, of securities from the held-to-maturity
classification to available for sale. The Company will be adopting SFAS
No.133 in the first quarter of 2001, and is evaluating the desirability of
potential investment security reclassifications.
MARKET PRICE OF THE COMPANY'S COMMON SHARES AND RELATED SECURITY HOLDER
MATTERS
There were 3,205,284 common shares of the Company outstanding on December 31,
2000 held of record by approximately 435 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 automated quotation service. Information about the Company's
shares is posted on the OTC Bulletin Board under the symbol ICYB. Dividends
per share declared were $.19 in each quarter in 2000 and were $.17 per
share in each quarter in 1999.
-46-
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 M. Martin, Senior Vice President
The National Bank and Trust Company
48 North South Street, PO Box 711
Wilmington, Ohio 45177
(937) 283-3077.
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.
The annual meeting of the shareholders of InterCounty Bancshares, Inc. will
be held on April 24, 2001, at 48 North South Street, Wilmington, Ohio, at
9:00 am.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
See "Market Risk Management" in Item 7, which is incorporated herein by
reference.
-47-
Item 8. Financial Statements and Supplementary Data
- I N D E X -
PAGE
INDEPENDENT AUDITORS' REPORT 49
FINANCIAL STATEMENTS
Consolidated Balance Sheets 50
Consolidated Statements of Income 51
Consolidated Statements of Comprehensive
Income and Changes in Shareholders' Equity 52
Consolidated Statements of Cash Flows 53
Notes to Consolidated Financial Statements 54-75
-48-
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, 2000
and 1999, 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, 2000. 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 U.S. 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, 2000 and
1999, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000, in conformity
with U.S. generally accepted accounting principles.
/s/J.D. CLOUD & CO. L.L.P.
Certified Public Accountants
Cincinnati, Ohio
February 7, 2001
-49-
InterCounty Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31 (thousands)
2000 1999
ASSETS:
Cash and due from banks $ 19,331 $18,813
Federal funds sold 15 283
Interest bearing deposits in banks 49 242
------- -------
Total cash and cash equivalents 19,395 19,338
Securities available for sale, at market value 115,836 110,723
Securities held to maturity (market value -
$44,268 in 2000 and $40,412 in 1999) 44,374 44,304
------- -------
Total securities 160,210 155,027
Loans 374,101 350,955
Less - allowance for loan losses 3,802 3,222
------- -------
Net loans 370,299 347,733
Loans held for sale 1,519 1,599
Premises and equipment 11,532 11,745
Earned income receivable 5,002 4,321
Other assets 11,275 2,785
------- -------
TOTAL ASSETS $579,232 $542,548
======= =======
LIABILITIES:
Demand deposits $ 42,965 $ 43,715
Savings, NOW, and money market deposits 147,470 145,465
Certificates $100,000 and over 43,040 40,226
Other time deposits 173,213 150,526
------- -------
Total deposits 406,688 379,932
Short-term borrowings 40,148 40,358
Long-term debt 80,323 75,431
Other liabilities 2,591 2,796
------- -------
TOTAL LIABILITIES 529,750 498,517
------- -------
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 8,128 7,921
Unearned ESOP shares, at cost (299) (405)
Retained earnings 44,742 43,119
Accumulated other comprehensive income
(loss), net of taxes 223 (3,331)
Treasury shares, at cost, 613,666 shares in 2000
and 630,636 shares in 1999 (4,312) (4,273)
------- -------
TOTAL SHAREHOLDERS' EQUITY 49,482 44,031
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $579,232 $542,548
======= =======
The accompanying notes to financial statements are an integral part of these
statements.
-50-
InterCounty Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2000, 1999 and 1998
(thousands, except per common share data)
2000 1999 1998
INTEREST INCOME:
Interest and fees on loans $31,549 27,728 24,959
Interest on securities available for sale
Taxable 6,640 7,289 8,113
Non-taxable 433 436 321
Interest on securities held to maturity
- non-taxable 2,291 1,989 1,349
Interest on deposits in banks 10 14 26
Interest on federal funds sold 126 83 505
------ ------ ------
TOTAL INTEREST INCOME 41,049 37,539 35,273
------ ------ ------
INTEREST EXPENSE:
Interest on savings, NOW and money
market deposits 4,160 3,759 3,521
Interest on time certificates $100,000
and over 2,600 2,281 2,198
Interest on other deposits 9,315 7,685 8,118
------ ------ ------
Total Interest on Deposits 16,075 13,725 13,837
Interest on short-term borrowings 2,024 1,267 1,622
Interest on long-term debt 4,612 4,158 3,081
------ ------ ------
TOTAL INTEREST EXPENSE 22,711 19,150 18,540
------ ------ ------
NET INTEREST INCOME 18,338 18,389 16,733
PROVISION FOR LOAN LOSSES 2,199 1,400 1,150
------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 16,139 16,989 15,583
------ ------ ------
NON-INTEREST INCOME:
Trust income 1,276 1,192 1,105
Service charges on deposits 1,731 1,485 1,351
Other service charge and fees 306 376 336
ATM network fees 725 701 574
Insurance agency commissions 1,140 966 833
Securities gains (losses) (2,070) (368) 302
Other 943 875 1,025
------ ------ ------
TOTAL NON-INTEREST INCOME 4,051 5,227 5,526
------ ------ ------
NON-INTEREST EXPENSE:
Salaries 6,415 6,563 5,781
Pension and benefits 1,167 1,130 984
Equipment 2,233 2,108 1,917
Occupancy 866 824 790
State franchise tax 477 488 615
Marketing 379 386 312
Other 3,835 3,728 3,447
------ ------ ------
TOTAL NON-INTEREST EXPENSE 15,372 15,227 13,846
------ ------ ------
INCOME BEFORE INCOME TAX 4,818 6,989 7,263
PROVISION FOR INCOME 772 1,281 1,889
------ ------ ------
NET INCOME $ 4,046 $ 5,708 $ 5,374
====== ====== ======
Earnings per common share $1.27 $1.81 $1.70
Earnings per common share, assuming dilution 1.26 1.77 1.66
The accompanying notes to financial statements are an integral part of these
statements.
-51-
InterCounty Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND
CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2000, 1999 and 1998
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
(thousands)
Balance
January 1, 1998 $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 $1,937) (3,761) (3,761) (3,761)
Reclassification
adjustment for
net realized loss
on sale of
available-for-sale
securities included
in net income (net
of tax benefit of
$126) 242 242 242
-----
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
Comprehensive Income:
Net income 4,046 4,046 4,046
Net unrealized
gains on securities
available for sale
(net of taxes of
$1,127) 2,188 2,188 2,188
Reclassification
adjustment for
net realized loss
on sale of
available-for-sale
securities included
in net income (net
of tax benefit of
$704) 1,366 1,366 1,366
-----
Total comprehensive
income $7,600
=====
Dividends declared (2,423) (2,423)
Treasury shares purchased (221) (221)
Stock options exercised 151 182 333
ESOP shares earned 56 106 162
----- ----- ---- ------ ----- ------
Balance
December 31, 2000 $1,000 $8,128 $(299) $40,430 $ 223 $49,482
===== ===== ==== ====== ====== ======
The accompanying notes to financial statements are an integral part of these
statements.
-52-
InterCounty Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2000, 1999 and 1998
(thousands)
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,046 $ 5,708 $ 5,374
Adjustments to reconcile net
income to net cash provided by operating
activities:
Depreciation, amortization and accretion 1,714 1,513 1,299
Provision for loan losses 2,199 1,400 1,150
Provision for deferred taxes (78) 71 27
Net realized losses (gains) on
securities available for sale 2,070 368 (302)
Origination of mortgage loans held
for sale (1,241) (6,104) (10,912)
Proceeds from sales of mortgage
loans held for sale 1,241 9,904 5,665
Increase in income receivable (653) (75) (434)
Decrease (increase) in other assets (402) 372 (833)
Increase in interest payable 242 27 177
Increase (decrease) in accrued taxes
and other liabilities (209) (426) 651
FRB/FHLB stock dividends (436) (372) (298)
ESOP shares earned 162 195 161
------ ------ ------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 8,655 12,581 1,725
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities
available for sale 40,998 23,044 10,647
Purchases of securities available for sale (52,525) (27,856) (120,056)
Proceeds from maturities of securities
available for sale 10,212 28,244 81,622
Purchases of securities held to maturity - (8,993) (29,993)
Proceeds from maturities of securities
held to maturity - 1,540 4,440
Purchase of bank-owned life insurance
policies (10,000) - -
Net increase in loans (25,015) (46,448) (29,124)
Purchases of premises and equipment (1,283) (1,530) (2,098)
------ ------ ------
NET CASH USED IN INVESTING ACTIVITIES (37,613) (31,999) (84,562)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 26,756 5,712 44,888
Cash dividends paid (2,356) (2,017) (1,447)
Net increase (decrease) in
short-term borrowings (210) 17,656 (10,032)
Advances of long-term debt 5,000 - 45,000
Repayment of long-term debt (108) (108) (177)
Proceeds from stock options exercised 154 437 175
Purchase of treasury shares (221) (1,843) (172)
------ ------ ------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 29,015 19,837 78,235
------ ------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS 57 419 (4,602)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 19,338 18,919 23,521
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 19,395 $ 19,338 $ 18,919
====== ====== ======
The accompanying notes to financial statements are an integral part of these
statements.
-53-
InterCounty Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMTNS
Years ended December 31, 2000, 1999 and 1998
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, NB&T Insurance Agency, Inc. (formerly known as 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 U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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.
-54-
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 aggregate
amount of overdrawn demand deposit accounts are included in net loans. 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.
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.
-55-
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 14.
Stock option accruals were recognized 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.
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, FHLB stock
dividends, and stock option accruals.
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.
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.
-56-
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., which had two subsidiary insurance
agencies, 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, all three agencies were
merged together. In 2000, the name of Phillips Insurance Agency, Inc. was
changed to NB&T Insurance Agency, Inc.
-57-
NOTE 3 - SECURITIES
The following tables present amortized cost and estimated fair values of
securities at December 31 (thousands):
2000
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Securities available
for sale:
U.S. Agency notes $ 49,641 $629 $ 31 $ 50,239
U.S. Agency mortgage-
backed securities 39,857 214 162 39,909
Other mortgage-backed
securities 11,164 12 270 10,906
Municipals 8,567 20 74 8,513
Federal Reserve/FHLB
stock 6,259 - - 6,259
Other 10 - - 10
------- --- --- -------
$115,498 $875 537 $115,836
======= === === =======
Securities held to maturity:
Municipals $ 44,374 $165 $271 $ 44,268
======= === === =======
1999
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
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
======= === ===== =======
-58-
Gross gains realized on sales of securities available for sale were
$41,000 for 1999, $302,000 for 1998. Gross losses realized on sales of
securities available for sale were $2,070,000 for 2000 and $409,000 for
1999. Securities with a carrying value of approximately $94.6 million,
and $107.9 million at December 31, 2000, 1999, respectively, were pledged
to secure public deposits, short-term and long-term borrowings and for
other purposes as required or permitted by law.
At December 31, 2000 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):
Available for Sale Held to Maturity
--------------------- -------------------
Amortized Market Amortized Market
Cost Value Cost Value
Due within one year $ 6,170 $ 6,200 $ - $ -
Due from one to five years 34,057 34,431 827 912
Due from five to ten years 8,415 8,626 100 101
Due after ten years 9,566 9,495 43,447 43,255
------- ------- ------ ------
58,208 58,752 44,374 44,268
U.S. Agency mortgage-backed
securities 39,857 39,909 - -
Other mortgage-backed
securities 11,164 10,906 - -
Federal Reserve/FHLB
stock/other 6,269 6,269 - -
------- ------- ------ ------
Total securities $115,498 $115,836 $44,374 $44,268
======= ======= ====== ======
NOTE 4 - LOANS
Major classifications of loans as of December 31 were as follows
(thousands):
2000 1999
Commercial and industrial $ 92,328 $ 86,521
Commercial real estate 42,694 37,833
Agricultural 18,256 18,343
Residential real estate 145,582 117,392
Installment 71,414 87,996
Other 3,209 2,069
------- -------
Total 373,483 350,154
Deferred net origination costs 618 801
Allowance for loan losses (3,802) (3,222)
------- -------
Net loans $370,299 $347,733
======= =======
-59-
Mortgage loans serviced for the Federal Home Loan Mortgage Corporation
and excluded from the Consolidated Balance Sheets at December 31, 2000
and 1999 were $15,345,000 and $15,484,000, respectively.
Changes in the allowance for loan losses for the years ended December 31
were as follows (thousands):
2000 1999 1998
Balance at beginning of period $ 3,222 $ 2,641 $ 2,761
Provision for loan losses 2,199 1,400 1,150
Charge offs (1,871) (1,071) (1,435)
Recoveries 252 252 165
------ ------ ------
Balance at end of period $ 3,802 $ 3,222 $ 2,641
====== ====== ======
Impaired loans, under SFAS No.114, including loans evaluated by the
Company and place in nonaccrual status, at December 31 are summarized
as follows (thousands):
2000 1999
Impaired loans without a valuation allowance $ 730 $ 968
Impaired loans with a valuation allowance 4,015 3,641
----- -----
Total impaired loans $4,745 $4,609
===== =====
Valuation reserve on impaired loans $1,356 $ 546
===== =====
Average impaired loans were $3.9 million in 2000, $3.7 million in 1999
and $5.1 million in 1998. Interest income recognized on impaired loans
was $480,000 in 2000, $191,000 in 1999, and $65,000 in 1998. At
December 31, 2000, the Bank had no material commitments to lend additional
funds to customers whose loans are considered impaired.
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment were as follows at December 31 (thousands):
2000 1999
Land $ 1,793 $ 1,468
Buildings and leasehold improvements 9,847 9,512
Equipment 8,108 7,486
------ ------
Total cost 19,748 18,466
Accumulated depreciation and amortization (8,216) (6,721)
------ ------
Premises and equipment $11,532 $11,745
====== ======
-60-
Depreciation expense related to premises and equipment was $1,496,000,
$1,244,000 and $1,148,000 for the years ended December 31, 2000, 1999
and 1998, respectively.
NOTE 6 - OTHER ASSETS
At December 31, 2000, other assets include bank-owned life insurance (BOLI)
with cash surrender values totaling $10,161,000. Under the terms of the
policies, the cash surrender values will increase at credited adjustable
rates over the policy terms. Income is recorded on the policies based on
the reported increase in cash surrender value and is reflected in other non-
interest income in the consolidated statements of income.
NOTE 7 - LEASES
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):
2001 $ 81
2002 55
2003 45
2004 34
2005 25
Remaining years 150
---
Total minimum lease payments $390
===
Rent expense for all premises and equipment leases was $118,000, $129,000
and $108,000 in 2000, 1999 and 1998, respectively.
NOTE 8 - DEPOSITS
Contractual maturities of certificates of deposit at December 31, 2000
were as follows (thousands):
Other
Certificates Time
over $100,000 Deposits Total
2001 $33,970 $113,143 $147,113
2002 8,398 53,324 61,722
2003 430 5,675 6,105
2004 - 431 531
2005 100 522 664
Thereafter 142 118 118
------ ------- -------
$43,040 $173,213 $216,253
====== ======= =======
-61-
NOTE 9 - EMPLOYEE BENEFIT PLANS
The Company maintains 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 amounted to $106,000, $98,000 and $89,000 in 2000, 1999
and 1998, respectively.
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 $90,000, $78,000 and $96,000 in 2000, 1999 and 1998, 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.
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 2000 and 1999,
the Company purchased 9,900 shares and 2,079 shares, respectively, from ESOP
participants. The estimated fair value of allocated shares remaining in the
ESOP was $16.0 million and $13.9 million at December 31, 2000 and 1999,
respectively. The estimated fair value for 1999 was based on an independent
appraisal. The 2000 independent appraisal has not been completed and,
therefore, the estimated fair value at December 31, 2000 is based on
allocated shares remaining in the ESOP at December 31, 2000 multiplied by the
1999 per share appraised 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.
-62-
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.
The ESOP shares as of December 31 were as follows:
2000 1999
----------------- -----------------
1993 1986 1993 1986
Shares Shares Shares Shares
Allocated shares 23,475 507,410 19,660 489,444
Shares released for allocation 3,835 19,355 3,977 20,168
Unreleased shares 9,952 50,233 13,727 69,602
------ ------- ------ -------
Total ESOP shares 37,262 576,998 37,364 579,214
====== ======= ====== =======
At December 31, 2000, the estimated fair value of unreleased 1993 shares was
$270,000. ESOP compensation expense was $113,000, $134,000 and $105,000 for
2000, 1999 and 1998, respectively.
NOTE 10 - SHORT-TERM BORROWINGS
A summary of short-term borrowings follows (thousands):
2000 1999
------------ -------------
Amount Rate Amount Rate
At December 31:
Federal Home Loan Bank notes $ 6,000 6.93% $ 6,000 5.90%
Federal funds purchased 16,000 6.75 16,000 5.81
Securities sold under agreements
to repurchase 17,258 5.29 16,549 2.47
U.S. Treasury demand notes 890 6.75 1,809 5.63
------ ------
Total short-term borrowings $40,148 6.14% $40,358 4.50%
====== ======
Years ended December 31:
Average amount outstanding $33,486 $26,518
Maximum month-end balance 41,624 40,358
Weighted average interest rate 6.05% 4.78%
-63-
NOTE 11 - LONG-TERM DEBT
Long-term debt consisted of the following at December 31 (thousands):
2000 1999
Federal Home Loan Bank notes $80,000 $75,000
ESOP Trust debt guarantee 323 431
------ ------
$80,323 $75,431
====== ======
Maturities of long-term debt are as follows (thousands):
2001 $ 108
2002 30,108
2003 107
2004 -
2005 -
Thereafter 50,000
The $80 million FHLB borrowings included $50 million in three fixed-rate
notes with a weighted average rate of 5.43%. The notes mature in 2008
through 2011. Interest is payable monthly. At the option of the FHLB, these
notes can be converted at certain conversion dates to instruments that adjust
quarterly at the three-month LIBOR rate. The note amount and nearest optional
conversion dates at December 31, 2000, were: $5 million in March 2001; $15
million in October 2001; and $30 million in April 2003.
In January 2000, a $30 million fixed-rate note that matures in 2002 was
converted to a variable-rate note that adjusts quarterly at the three-month
LIBOR rate, which was 6.76% at year end. In January 2001 this note was paid
off and restructured into three $12 million notes with a weighted average
rate of 5.01% and maturity dates in January 2011. At the option of the FHLB,
these notes can be converted at certain conversion dates to instruments that
adjust quarterly at the three-month LIBOR rate. The optional conversion
dates are January 2002, 2004, and 2006.
At December 31, 2000, FHLB borrowings, including short-term notes of $6
million and federal funds purchased of $7 million, were collateralized by
a blanket pledge of certain residential real estate loans totaling
approximately $112 million and primarily mortgage-backed securities with a
carrying value of $37 million.
-64-
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, 9.50% at December 31, 2000.
Scheduled principal payments are approximately $108,000 annually through
2003.
NOTE 12 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid was $22,470,000, $19,123,000 and $18,363,000 in 2000, 1999 and
1998, respectively. Federal income taxes paid were $596,000, $1,586,000
and $1,452,000 in 2000, 1999 and 1998, respectively.
NOTE 13 - INCOME TAXES
Income taxes provided for in the statements of income at December 31 consist
of the following (thousands):
2000 1999 1998
Income taxes currently payable:
Applicable to income exclusive of
securities transactions $1,558 $1,335 $1,759
Applicable to securities transactions (704) (125) 103
----- ----- -----
Total income taxes currently payable 854 1,210 1,862
Deferred income taxes resulting
from temporary differences:
Provision for loan losses (198) (197) 41
Depreciation (58) (20) (129)
Stock option accruals 61 161 33
FHLB stock dividends 141 126 101
Accruals deductible for tax purposes
when paid 6 - (45)
Alternative minimum tax credit (34) - -
Other - 1 26
----- ----- -----
Total deferred income taxes (82) 71 27
----- ----- -----
Provision for income tax $ 772 $1,281 $1,889
===== ===== =====
-65-
A reconciliation of the statutory income tax rate to the Company's effective
tax rate at December 31 follows:
2000 1999 1998
Statutory tax rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Tax exempt interest (16.9) (10.4) (7.0)
Non-qualified stock options (1.6) (5.8) (1.2)
Bank-owned life insurance (1.1) - -
Other-net 1.6 .6 .2
---- ---- ----
Effective tax rate 16.0% 18.4% 26.0%
==== ==== ====
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):
2000 1999
Deferred tax assets:
Allowance for loan losses $ 950 $ 753
Stock option accruals 2 63
Unrealized losses on securities
available for sale - 1,716
Alternative minimum tax credit 34 -
Accruals not currently deductible 8 9
----- -----
Total deferred tax assets 994 2,541
----- -----
Deferred tax liabilities:
Depreciation of premises and equipment (280) (338)
Unrealized gains on securities
available for sale (114) -
FHLB stock dividends (579) (438)
Other-net (7) -
----- ----
Total deferred tax liabilities (980) (776)
----- -----
Net deferred taxes $ 14 $1,765
===== =====
Due primarily to the Company's taxable position in prior years, a
valuation allowance for deferred tax assets was unnecessary at
December 31, 2000 and 1999.
-66-
NOTE 14 - 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, 1996 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:
2000 1999 1998
Reported net income $4,046 $5,708 $5,374
Pro forma net income 3,988 5,670 5,354
Reported earnings per share-
assuming dilution 1.26 1.77 1.66
Pro forma earnings per share-
assuming dilution 1.24 1.76 1.65
The estimated fair value of options granted during 2000, 1999 and 1998 was
$6.42, $8.13 and $5.13, 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:
2000 1999 1998
Risk-free interest rates 6.5% 6.5% 4.6%
Expected lives 9.0 years 9.0 years 9.0 years
Expected volatility 19.0% 19.0% 15.0%
Expected dividend yields 3.0% 2.5% 2.3%
-67-
Details of the stock option plan are as follows:
Wtd. Avg. Option Option Shares
Exercise Shares Shares Available
Price Outstanding Exercisable for Grant
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
Granted 23.57 30,200 (30,200)
Became exercisable 17,060
Exercised 5.71 (26,870) (26,870) 26,870
------- ------- -------
Balance, December 31, 2000 $18.20 115,766 56,846 151,560
======= ======= =======
The weighted-average exercise price of exercisable options at December 31,
2000, 1999 and 1998 was $13.61, $9.64 and $6.83, respectively. The following
table summarizes information for options currently outstanding and
exercisable at December 31, 2000:
Options Outstanding Options Exercisable
-------------------------------------- -----------------------
Range of Wtd. Avg. Wtd. Avg. Wtd. Avg.
Prices Number Remaining Life Exercise Price Number Exercise Price
$ 6.56 1,150 2.1 years $ 6.56 1,150 $ 6.56
9.63-13.63 59,916 5.1 12.42 48,996 12.16
21.38-24.50 39,200 8.8 23.50 3,600 23.25
28.00 15,500 8.2 28.00 3,100 28.50
------- ------
6.56-28.00 115,766 6.7 18.20 56,846 13.61
======= ======
-68-
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:
2000 1999 1998
Weighted average shares for EPS 3,185,157 3,156,727 3,153,530
Effect of dilutive stock options 21,350 64,864 81,948
--------- --------- ---------
Weighted average shares for EPS -
assuming dilution 3,206,507 3,221,591 3,235,478
========= ========= =========
NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company 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
and standby letters of credit. They involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance sheet. The
Company'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.
The Company 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):
2000 1999
Commitments to extend credit $41,804 $44,358
Standby letters of credit 1,691 2,189
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 Company evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary by the Company
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.
-69-
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. At December 31,
2000 and 1999, 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 2000 through 2012. Approximately 76% and 71% of the amount
outstanding at December 31, 2000 and 1999, respectively, was secured.
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.
NOTE 16 - RELATED PARTY TRANSACTIONS
At December 31, 2000 and 1999, executive officers, directors and companies in
which they have a direct or indirect interest, were indebted to the Company
directly or as guarantors in the aggregate amount of $2,920,000 and
$6,523,000, respectively. During 2000, $843,000 in new loans were made;
repayments totaled $425,000. Such transactions originate in the normal
course of the Company's operations as a depository and lending institution.
At December 31, 1999, approximately $4,021,000 was attributable to parties
that were no longer related to the Company in 2000.
NOTE 17 - 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.
-70-
Carrying amounts and estimated fair values for financial instruments
as of December 31 were as follows (thousands):
2000 1999
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial Assets:
Cash and due from banks $ 19,331 $ 19,331 $ 18,813 $ 18,813
Federal funds sold 15 15 283 283
Interest bearing deposits
in banks 49 49 242 242
Securities available for sale 115,836 115,836 110,723 110,723
Securities held to maturity 44,374 44,268 44,303 40,412
Loans, net 370,299 369,707 347,733 343,229
Loans held for sale 1,519 1,519 1,599 1,599
Financial Liabilities:
Deposits $406,688 $388,188 $379,932 $359,823
Short-term borrowings 40,148 40,148 40,358 40,358
Long-term debt 80,323 79,347 75,431 74,623
The fair value of off-balance-sheet financial instruments at December 31,
2000 and 1999, was not material.
NOTE 18 - REGULATORY MATTERS
The principal source of income and funds for InterCounty Bancshares, Inc. is
dividends paid by the Bank subsidiary. During the year 2001, dividends that
the Bank subsidiary can pay to InterCounty Bancshares, Inc. without prior
approval of regulatory agencies is limited to 1999 and 2000 retained net
income plus 2001 retained net income.
Banks and bank holding companies must meet certain minimum capital
requirements set by federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possible additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. 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. There are no conditions or events
since that notification that management believes would have changed the
Company's classification.
-71-
A summary of the regulatory capital of InterCounty Bancshares, Inc. and
the Bank at December 31 follows (thousands):
2000 1999
------------------------- -------------------------
InterCounty The National InterCounty The National
Bancshares, Bank & Trust Bancshares, Bank & Trust
Inc. Company Inc. Company
Regulatory Capital:
Shareholders' equity $49,482 $43,142 $44,031 $39,308
Net unrealized
securities (gains)/
losses (223) (223) 3,331 3,331
------ ------ ------ ------
Tier I risk-based
capital 49,259 42,919 47,362 42,639
Eligible allowance for
loan losses 3,802 3,802 3,222 3,222
------ ------ ------ ------
Total risk-based
capital $53,061 $46,721 $50,584 $45,861
====== ====== ====== ======
Capital Ratios:
Total risk-based 14.04% 12.41% 14.29% 12.96%
Tier I risk-based 13.03 11.40 13.38 12.05
Tier I leverage 8.70 7.58 8.80 7.92
The Federal Reserve Act requires depository institutions to maintain cash
reserves with the Federal Reserve Bank. In 2000 and 1999, the Bank's average
reserve balances were $7,811,000 and $6,670,000, respectively.
NOTE 19 - SEGMENTS
The Company has four principal business units that offer different
products and services. They are managed separately for various reasons
including differing technologies, marketing strategies, and regulations.
Revenues from these business segments for the years ended December 31
were as follows (thousands):
2000 1999 1998
Banking $41,959 $39,906 $38,287
Trust services 1,276 1,192 1,105
ATM network 725 702 574
Insurance agencies 1,140 966 833
------ ------ ------
$45,100 $42,766 $40,799
====== ====== ======
-72-
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 20 - PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for InterCounty Bancshares, Inc.
(parent company only) follows (thousands):
Condensed Balance Sheets
December 31
2000 1999
Assets:
Cash on deposit with the Bank $ 1,090 $ 716
Securities available for sale, market value 6,169 4,936
Investment in subsidiary 43,142 39,308
Other assets 3 33
------ ------
Total assets $50,404 $44,993
====== ======
Liabilities:
Long-term debt $ 323 $ 431
Other liabilities 599 531
------ ------
Total liabilities 922 962
Shareholders' equity 49,482 44,031
------ ------
Total liabilities and shareholders' equity $50,404 $44,993
====== ======
-73-
Condensed Statements of Income
Years ended December 31
2000 1999 1998
Income:
Interest on securities available
for sale $ 11 $ 4 $ -
Dividends from subsidiary 4,000 - 10,265
------ ----- ------
Total income 4,011 4 10,265
------ ----- ------
Expenses:
Interest on long-term debt 40 44 55
Other expense 64 100 64
------ ----- ------
Total expense 104 144 119
------ ----- ------
Income before income tax benefit
and equity in undistributed
income of subsidiary 3,907 (140) 10,146
Income tax (expense) benefit (1) - 1
Equity in undistributed income of
subsidiary 140 5,848 (4,773)
------ ----- ------
Net income $ 4,046 $5,708 $ 5,374
====== ====== ======
Condensed Statements of Cash Flows
Years ended December 31
2000 1999 1998
Cash flows from operating activities:
Net income $4,046 $ 5,708 $ 5,374
Adjustments for non-cash items-
Equity in undistributed income
of subsidiary (140) (5,848) 4,773
Payment of interest on long-term
debt by subsidiary 40 44 55
(Increase) decrease in other assets 30 (29) 293
Deferred tax provision (benefit) 1 - (1)
Release of earned ESOP shares 53 87 53
----- ----- ------
Net cash provided by operating
activities 4,030 (38) 10,547
----- ----- ------
-74-
Cash flows from investing activities:
Purchases of securities available
for sale (6,169) (4,936) -
Proceeds from sale of securities
available for sale 4,936 - -
------ ----- -----
Net cash used in investing
activities (1,233) (4,936) -
----- ----- -----
Cash flows from financing activities:
Cash dividends paid (2,356) (2,017) (1,447)
Payments to acquire treasury shares (221) (1,843) (172)
Proceeds from stock options exercised 154 437 175
----- ----- -----
Net cash used in financing activities (2,423) (3,423) (1,444)
----- ----- -----
Net change in cash 374 (8,397) 9,103
Cash at beginning of year 716 9,113 10
----- ----- -----
Cash at end of year $1,090 $ 716 $9,113
===== ===== =====
-75-
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 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 "VOTING
SECURITIES AND OWNERSHIP OF CERTAIN 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.
-76-
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 52 of this Form 10-K.
(2) Financial Statement Schedules - None
(3) Exhibits - See Exhibit Index at page 82 of this Form 10-K.
(b) On October 4, 2000, the Company filed a Form 8-K with the
Securities and Exchange Commission reporting certain events
regarding its balance sheet restructuring and adverse impact
of these actions and other matters on its third quarter
results of operations.
On October 19, 2000, the Company filed a Form 8-K with the
Securities and Exchange Commission regarding a press
release issued on or about that date.
-77-
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
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
99.1 Safe Harbor Under the Private Securities
Litigation Reform Act of 1995
99.2 Proxy Statement for 2001 annual meeting of
shareholders; incorporated by reference to
definitive proxy statement to be filed on or
before April 6, 2001.
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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
------------------------------------
April 2, 2001 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 April 2, 2001
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 April 2, 2001 Date April 2, 2001
By /s/ S. Craig Beam By /s/ Janet M. Williams
- --------------------------- -----------------------------------
S. Craig Beam Janet M. Williams
Director Director
Date April 2, 2001 Date April 2, 2001
By /s/ Georgia H. Miller By /s/ Robert A. Raizk
- --------------------------- -----------------------------------
Georgia H. Miller Robert A. Raizk
Director Director
Date April 2, 2001 Date April 2, 2001
By /s/ Darleen M. Myers By /s/ G. David Hawley
- --------------------------- -----------------------------------
Darleen M. Myers G. David Hawley
Director Director
Date April 2, 2001 Date April 2, 2001
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