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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, 1996
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 $29.00 per share on March 4, 1997. Based upon such
price, the aggregate market value of the issuer's shares held by nonaffiliates
was $24,823,623.
As of February 28, 1997, 1,542,075 common shares were issued and outstanding.
INTERCOUNTY BANCSHARES, INC.
For the Year Ended December 31, 1996
Table of Contents
Part I Page
- ------ ----
Item 1: Business 3
Item 2: Properties 29
Item 3: Legal Proceedings 30
Item 4: Submission of Matters to a Vote of Security Holders 30
Part II
- -------
Item 5: Market for Registrant's Common Equity and Related
Stockholder Matters 31
Item 6: Selected Financial Data 31
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations 32
Item 8: Financial Statements and Supplementary Data 47
Item 9: Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 73
Part III
- --------
Item 10: Directors and Executive Officers of the Registrant 73
Item 11: Executive Compensation 76
Item 12: Security Ownership of Certain Beneficial Owners
and Management 82
Item 13: Certain Relationships and Related Transactions 84
Part IV
- -------
Item 14: Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 85
Exhibit Index 86
Signatures 87
-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
13 full-service offices. In addition, the Bank has two offices which are
drive-in facilities only and two remote service units. The Bank has also
installed 10 cash dispensers in convenience stores as of the end of 1996, and
has contracted to install 25 more units during the first quarter of 1997. The
Bank also has a trust department which presently administers 921 accounts
having combined assets of $152 million.
On September 1, 1992, the Bank acquired Kentucky National Bank of Ohio with
two locations in Georgetown, Ohio for $3,200,000 in cash.
On December 29, 1993, InterCounty acquired the Williamsburg Building & Loan
Company, a mutual savings and loan with total assets of $17.1 million and
equity of $2.9 million. In connection with this merger conversion,
InterCounty issued 229,475 shares of its common stock, principally to
depositors and other members of Williamsburg and the general public in
subscription and community offerings.
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 determination of the adequacy of the loan loss
allowance;
2. The effect of changes in interest rates;
3. Growth in the commercial and industrial loan portfolio; and
4. 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,
----------------------------------------------------------
1996 1995 1994
----------------------------------------------------------
% of % of % of
Amount total Amount total Amount total
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Commercial and
industrial $ 57,985 22% $ 46,952 19% $ 43,254 21%
Commercial real estate 31,118 11 27,274 11 27,049 13
Agricultural 16,304 6 14,515 6 12,451 6
Residential real estate 79,761 30 79,355 33 57,243 27
Installment 81,033 30 68,821 29 63,572 31
Credit card - - 3,268 1 2,303 1
Other 2,228 1 1,561 1 1,659 1
------- --- ------- --- ------- ---
Total loans $268,429 100% $241,746 100% $207,531 100%
=== === ===
Deferred net
origination costs 853 761 623
Allowance for loan
losses (2,686) (2,644) (2,561)
------- ------- -------
Net loans $266,596 $239,863 $205,593
======= ======= =======
At December 31,
----------------------------------
1993 1992
----------------------------------
% of % of
Amount total Amount total
------ ----- ------ -----
(Dollars in thousands)
Commercial and
industrial $ 32,919 17% $ 21,261 13%
Commercial real estate 25,351 13 25,674 16
Agricultural 12,822 7 11,994 7
Residential real estate 59,639 31 62,016 37
Installment 58,301 30 41,934 25
Credit card 1,979 1 1,770 1
Other 1,628 1 822 1
------- --- ------- ---
Total loans $192,639 100% $165,471 100%
=== ===
Deferred net
origination costs 562 94
Allowance for loan
losses (2,474) (2,000)
------- -------
Net loans $190,727 $163,565
======= =======
Loan Maturity Schedule. The following table sets forth certain information at
December 31, 1996, 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 $11,926 $24,691 $21,367 $ 57,984
Commercial real estate 2,882 3,320 24,916 31,118
Agricultural 6,178 5,048 5,077 16,303
------ ------ ------ -------
Total $20,986 $33,059 $51,360 $105,405
====== ====== ====== ======
The following table sets forth the dollar amount of certain loans, due after
one year from December 31, 1996, which have predetermined interest rates and
floating or adjustable interest rates:
Predetermined Floating or
rates adjustable rates Total
------------- ---------------- -------
(In thousands)
Commercial and industrial $21,499 $24,559 $46,058
Commercial real estate 2,421 25,815 28,236
Agricultural 2,489 7,636 10,125
------ ------ ------
Total $26,409 $58,010 $84,419
====== ====== ======
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, 1996, the Bank had $58.0 million, or 22% 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, 1996, the Bank had $31.1 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, 1996, the Bank had $16.3 million, or 6% 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, 1996, the Bank had $79.8
million, or 30% 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, 1996, the Bank had $81.0 million, or 30% of total loans,
invested in installment loans. The Bank expects to continue, subject to
market conditions, to expand its consumer lending activities as part of its
plan to provide a wide range of personal financial services to its customers.
In the fourth quarter of 1996, the Bank sold its $3.9 million credit card loan
portfolio to a correspondent bank, recording a gain on the sale of $326,000.
Of the total loans, approximately $102,000 sixty days or more delinquent was
sold with recourse. The Bank will continue to offer credit card services
indirectly through this correspondent bank.
-7-
Loan Processing. Loan officers are authorized by the Board of Directors to
approve loans up to specified limits. Loans exceeding the loan officers'
approval authority are referred to the Bank's Senior Loan Committee. The
Senior Loan Committee has approval authority up to specified limits. Any
loans made by the Bank in excess of the limits established for the Senior Loan
Committee must be approved by the Chairman of the Board and the President of
the Bank as representatives of the Board of Directors. All loans in excess of
$100,000 are reported to the Board on a monthly basis.
Loan Originations, Purchases and Sales. Although the Bank generally does not
purchase loans, purchases could occur in the future. It did, however, make a
purchase of $21 million in residential real estate loans in late 1995 to
enhance earnings. Fixed-rate residential real estate loans are originated for
sale in the secondary market. From time to time, the Bank sells participation
interests in loans it originates.
Delinquent Loans, Non-performing Assets and Classified Assets. The Bank
attempts to minimize loan delinquencies through aggressive collection efforts.
When a borrower fails to make a required payment on a loan, the Bank attempts
to cause the deficiency to be cured by contacting the borrower. In most
cases, deficiencies are cured promptly.
Generally, when a real estate loan becomes delinquent more than 90 days, an
evaluation of the security is performed. If the evaluation indicates that the
value of the collateral is less than the book value of the loan, a valuation
allowance is established for such loan. When deemed appropriate by
management, the Bank institutes action to foreclose on the real estate or to
acquire the real estate by deed in lieu of foreclosure. A decision as to
whether and when to initiate foreclosure proceedings is based on such factors
as the amount of the outstanding loan in relation to the original
indebtedness, the extent of the delinquency and the borrower's ability and
willingness to cooperate in curing delinquencies. If a foreclosure occurs,
the real estate is sold at public sale and may be purchased by the Bank.
Installment loans are generally charged off if four payments have been missed.
Generally, all other loans are placed on non-accrual status if they are 90
days or more delinquent. A loan may remain on an accrual status after it is
90 days delinquent if it is reasonably certain the account will be settled in
its entirety or brought current within a 30-day period. The current year's
accrued interest on loans placed on non-accrual status is charged against
earnings. Previous year's accrued interest is charged against the allowance
for loan losses. Cash payments received on non-accrual loans are applied
against principal until the balance is repaid. Any remaining payments are
credited to earnings. Non-performing loans include non-accrual loans,
renegotiated loans and ninety days or more past due loans. All loans, except
one-to four-family real estate, which are ten days delinquent are sent to the
Collections Department for collection. One- to four-family real estate loans
are sent when they are fifteen days delinquent. As of December 31, 1996,
management knew of no significant loans not now disclosed that would cause
management to have serious doubts as to the ability of the borrowers to comply
with present loan repayment terms.
-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,
--------------------------------------
1996 1995 1994 1993 1992
(In thousands)
Loans accounted for on
nonaccrual basis $535 $314 $239 $ 77 $ 723
Accruing loans which are
past due 90 days or more 90 208 402 43 146
Renegotiated loans - - 211 205 461
--- --- --- --- -----
Total $625 $522 $852 $325 $1,330
=== === === === =====
If interest on non-accrual loans had been recognized during 1996, such income
would have been $38,000. 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, 1996, the Bank's allowance for loan losses
totaled $2.7 million and was allocated primarily to the consumer segment of
the loan portfolio. A similar allocation existed for all other dates
presented.
-9-
The following table sets forth an analysis of the Bank's allowance for losses
on loans for the periods indicated:
December 31,
------------------------------------------
1996 1995 1994 1993 1992
(Dollars in thousands)
Balance at beginning of
period $ 2,644 $ 2,561 $ 2,474 $ 2,000 $ 1,580
Charge-offs:
Commercial and industrial (28) (13) (40) (48) (76)
Commercial real estate - - - (57) -
Agricultural (3) (46) - (8) (12)
Residential real estate (1) (2) (11) (45) (19)
Installment (560) (356) (287) (282) (462)
Credit card (189) (55) (38) (28) (47)
Other (4) - - - -
------- ------- ------- ------- -------
Total charge-offs (785) (472) (376) (468) (616)
------- ------- ------- ------- -------
Recoveries:
Commercial and industrial 42 10 12 18 26
Commercial real estate - - 1 5 -
Agricultural 8 1 9 7 66
Residential real estate - 6 3 77 8
Installment 158 159 149 155 165
Credit card 13 19 13 20 21
Other 6 - 1 - -
------ ----- ----- ----- -----
Total recoveries 227 195 188 282 286
------ ----- ----- ----- -----
Net charge-offs (558) (277) (188) (186) (330)
Provision for possible
loan losses 600 360 275 660 450
Allowance of acquired bank - - - - 300
------- ------- ------- ------- -------
Balance at end of period $ 2,686 $ 2,644 $ 2,561 $ 2,474 $ 2,000
======= ======= ======= ======= =======
Ratio of net charge-offs to
average loans outstanding
during the period 0.22% 0.13% 0.09% 0.11% 0.23%
==== ==== ==== ==== ====
Average loans outstanding $256,761 $218,552 $201,531 $177,084 $144,852
======= ======= ======= ======= =======
Because the loan loss allowance is based on estimates, it is monitored
regularly and adjusted as necessary to provide an adequate allowance. For
1997, the Bank anticipates about the same amount of loan net charge-offs for
each type of loan as that experienced in 1996. See Exhibit 99, "Safe Harbor
Under the Private Securities Litigation Reform Act of 1995" attached hereto
which is incorporated herein by reference.
-10-
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,
-----------------------------------
1996 1995 1994
(In thousands)
U.S. Treasuries & U.S.
agency notes $42,122 $40,962 $28,503
U.S. Government agency
mortgage-backed securities 25,577 25,014 14,198
Other mortgage-backed
securities 9,556 11,189 -
Other securities 3,470 3,274 844
------ ------ ------
Total securities available
for sale 80,725 80,439 43,545
------ ------ ------
Municipal securities 7,463 8,191 11,414
Mortgage-backed securities - - 2,472
------ ------ ------
Total securities held
to maturity 7,463 8,191 13,886
------ ------ ------
Total securities $88,188 $88,630 $57,431
====== ====== ======
In December 1994 the Bank restructured its taxable security portfolio and sold
$42.4 million of U.S. Treasury securities at a loss of $1.4 million and
purchased $28.5 million in U.S. Treasury and U.S. Agency securities with
incremental maturities over a five-year period. The remaining $12.5 million
was used to purchase U.S. Agency mortgage-backed securities with an average
maturity of 5.3 years that would provide regular monthly cash flows available
for reinvestment at current rates. As these securities mature, they are
reinvested in the five-year maturity range. All of these securities are
classified as available for sale to provide flexibility in managing the
portfolio. The result of this restructure is evidenced by the substantial
increase in interest income on securities achieved in 1995 and 1996, and a
reduction in the interest rate risk in the Bank's portfolio. See Notes 1 and
2 of the Notes to Consolidated Financial Statements. Most of the municipal
securities held by the Bank were purchased in 1985 and are being held until
maturity due to their yield and tax benefits.
-11-
The following table sets forth the amortized cost of the Bank's securities
portfolio at December 31, 1996. 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.
Less than 1 year 1 to 5 years 5 to 10 years
---------------- ------------------ ----------------
Weighted Weighted Weighted
Book average Book average Book average
yield yield yield
---- ------- ---- ------- ---- -------
(Dollars in thousands)
U.S. Treasuries
and U.S. Agency
obligations $6,485 7.71% $32,637 7.02 $ 3,000 6.84%
U.S. Agency
mortgage-backed
securities 2,108 7.38 8,432 7.38 15,037 7.38
Other mortgage-
backed securities - - - - - -
Other securities 14 6.21 - - - -
----- ------ ------
Total securities
available for
sale 8,607 7.63 41,069 7.09 18,037 7.28
----- ------ ------
Municipal
securities 981 8.06 5,879 8.42 603 8.86
----- ------ ------
Total securities
held to maturity 981 8.06 5,879 8.42 603 8.86
----- ------ ------
Total securities $9,588 7.65% $46,948 7.27% $18,640 7.33%
===== ====== ======
-12-
Over 10 years Total
---------------- ------------------
Weighted Weighted
Book average Book average
yield yield
---- ------- ---- -------
(Dollars in thousands)
U.S. Treasuries
and U.S. Agency
obligations $ - -% $42,122 7.11
U.S. Agency
mortgage-backed
securities - - 25,577 7.38
Other mortgage-
backed
securities 9,556 6.78 9,556 6.28
Other securities 3,456 6.23 3,470 6.23
------ ------
Total securities
available for
sale 13,012 6.27 80,725 7.06
------ ------
Municipal
securities - - 7,463 8.41
------ ------
Total securities
held to maturity - - 7,463 8.41
------ ------
Total securities $13,012 6.27% $88,188 7.17%
====== ======
-13-
Trust Services
The Bank received trust powers in 1922 and currently holds $152 million in net
assets in the Trust Department. The Annual Report of Trust Assets filed with
the FDIC and the OCC reports $115 million in managed assets among 575
accounts, and an additional $41 million of non-discretionary assets held in
347 accounts on December 31, 1996. 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
1996, 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 four staff members and generated $733,000 in fee
income during 1996.
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 Bank does
not use brokers to attract deposits. The amount of deposits from outside the
Bank's market area is not significant.
-14-
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
1996 of total 1995 of total 1994 of total
---- -------- ---- -------- ---- --------
(Dollars in thousands)
Demand $35,731 12% $36,188 12% $30,591 12%
NOW 49,015 16 45,927 16 46,184 19
Savings 35,702 11 37,562 13 49,025 20
Money market
deposit 28,009 9 20,465 7 5,185 2
CDs less than
$100,000 141,679 46 130,062 45 103,591 41
CDs greater than
$100,000 18,788 6 21,110 7 14,219 6
Other 203 - 189 - 146 -
------- --- ------- --- ------- ---
Total
deposits(1) $309,127 100% $291,503 100% $248,941 100%
======= === ======= === ======= ===
Percent Percent
1993 of total 1992 of total
---- -------- ---- --------
(Dollars in thousands)
Demand $27,419 11% $24,788 11%
NOW 46,686 19 44,041 19
Savings 58,350 24 60,716 26
Money market
deposit 4,504 2 4,864 2
CDs less than
$100,000 91,014 38 88,256 38
CDs greater than
$100,000 15,325 6 9,663 4
Other 186 - 194 -
------- --- ------- ---
Total
deposits(1) $243,484 100% $232,522 100%
======= === ======= ===
____________________________________
(1)IRAs are offered under all deposit account types.
At December 31, 1996, the Bank's certificates of deposit, excluding deposits
greater than $100,000, totaled $141.7 million, or 46% of total deposits. Of
such amount, approximately $83.9 million matures within one year.
-15-
The following table sets forth the dollar amount of time deposits greater than
$100,000 maturing in the periods indicated:
Maturity At December 31, 1996
-------- --------------------
(In thousands)
Three months or less $ 5,953
Over 3 months to 6 months 3,915
Over 6 months to 12 months 3,555
Over twelve months 5,365
------
Total $18,788
======
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 $17.2
million of borrowings from the Federal Home Loan Bank to fund the purchase of
adjustable-rate, one-to four-family real estate loans and other purposes.
The following table sets forth certain information regarding the Bank's
outstanding borrowings at the dates and for the periods indicated:
December 31,
--------------------------
1996 1995 1994
(Dollars in thousands)
Maximum amount of short-term
borrowings outstanding at any
month end during period $34,401 $31,193 $10,087
Average amount of short-term
borrowings outstanding during
period 32,186 11,864 7,708
Amount of short-term borrowings
outstanding at end of period 31,113 31,110 8,736
Weighted average interest rate of
short-term borrowings during period 5.27% 5.33% 3.78%
Weighted average interest rate of
short-term borrowings at end of
period 5.27 5.39 5.19
-16-
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.
1996 1995
---------------------------- ---------------------------
Average Interest Average Interest
outstanding Yield/ earned/ outstanding Yield/ earned/
balance rate paid balance rate paid
Loans (1) $256,761 8.73% $22,413 $218,552 8.90% $19,449
Securities
available
for sale 78,235 7.14 5,583 61,659 7.41 4,569
Investment
securities:
Taxable - - - - - -
Non-taxable 7,632 8.27 632 10,158 8.25 838
Deposits in banks 155 5.78 9 111 6.28 7
Federal funds sold 3,562 5.27 187 5,812 5.95 346
------- ------ ------- ------
Total interest-
earning assets 346,345 8.32 28,824 296,292 8.51 25,209
Non-earning
assets 24,263 20,770
Allowance for
loan losses (2,682) (2,627)
------- -------
Total assets $367,926 $314,435
======= =======
Savings deposits $ 36,851 2.80 1,033 $ 40,782 2.80 1,140
NOW and MMDA 71,177 2.79 1,987 57,687 2.60 1,497
CD's over $100M 19,650 5.44 1,069 19,650 5.69 1,119
Other time
deposits 136,535 5.82 7,942 119,741 5.84 6,992
Short-term
borrowings 32,186 5.28 1,699 11,864 5.17 613
Long-term debt 1,070 7.98 85 1,262 8.56 108
------- ------ ------- ------
Total interest-
bearing
liabilities 297,467 4.64 13,815 250,986 4.57 11,469
------ ------
Demand deposits 32,857 29,965
Other liabilities 2,644 2,157
Capital 34,957 31,327
------- -------
Total liabilities
and capital $367,926 $314,435
======= =======
Net interest
income $15,009 $13,740
====== ======
-17-
Interest rate
spread 3.68 3.94
Net interest
income margin 4.33% 4.64%
Ratio of
interest-earning
assets to
interest-bearing
liabilities 116.43% 118.05%
1994
----------------------------
Average Interest
outstanding Yield/ earned/
balance rate paid
Loans (1) $201,531 8.31% $16,749
Securities
available for sale 43,214 4.42 1,909
Investment
securities:
Taxable 3,882 4.92 191
Non-taxable 11,523 8.23 948
Deposits in banks 174 4.03 7
Federal funds sold 3,036 4.31 131
------- ------
Total interest-
earning assets 263,360 7.57 19,935
Non-earning
assets 20,553
Allowance for
loan losses (2,558)
-------
Total assets $281,355
=======
Savings deposits $ 54,741 2.81 1,537
NOW and MMDA 51,296 2.19 1,125
CD's over $100M 13,030 4.04 527
Other time
deposits 94,568 4.48 4,235
Short-term
borrowings 7,708 3.54 273
Long-term debt 1,450 6.76 98
------- ------
Total interest-
bearing
liabilities 222,793 3.50 7,795
------
Demand deposits 29,086
Other liabilities 1,576
Capital 27,900
-------
Total liabilities
and capital $281,355
=======
Net interest
income $12,140
======
-18-
Interest rate
spread 4.07
Net interest
income margin 4.61
Ratio of
interest-earning
assets to
interest-bearing
liabilities 118.21%
(1) Includes nonaccrual loans.
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,
------------------------------------
1996 vs 1995
------------------------------------
Increase (decrease) due to
------------------------------------
Rate/
Volume Rate volume Total
------ ---- ------- -----
(In thousands)
Interest income attributable to:
Loans $3,401 $ (372) $ (65) $2,964
Securities available for sale 1,227 (168) (45) 1,014
Investment securities:
Taxable - - - -
Non-taxable (208) 3 (1) (206)
Deposits in banks 3 (1) - 2
Federal funds sold (134) (40) 15 (159)
----- ----- --- -----
Total interest-earning assets 4,289 (578) (96) 3,615
----- ----- --- -----
Interest expense attributable to:
Savings deposits (110) 3 - (107)
NOW and MMDA 350 114 26 490
CD's over $100,000 - (50) - (50)
Other time deposits 981 (27) (4) 950
Short-term borrowings 1,050 13 23 1,086
Long-term debt (17) (7) 1 (23)
----- ----- --- -----
Total interest-bearing
liabilities 2,254 46 46 2,346
----- ----- --- -----
Net interest income $2,035 $ (624) $(142) $1,269
===== ===== === =====
-19-
Years ended December 31,
------------------------------------
1995 vs 1994
------------------------------------
Increase (decrease) due to
------------------------------------
Rate/
Volume Rate volume Total
------ ---- ------- -----
(In thousands)
Interest income attributable to:
Loans $1,415 $1,185 $ 100 $2,700
Securities available for sale 815 1,293 552 2,660
Investment securities:
Taxable (191) - - (191)
Non-taxable (112) 3 (1) (110)
Deposits in banks (3) 4 (1) -
Federal funds sold 120 50 45 215
----- ----- --- -----
Total interest-earning assets 2,044 2,535 695 5,274
----- ----- --- -----
Interest expense attributable to:
Savings deposits (392) (7) 2 (397)
NOW and MMDA 140 206 26 372
CD's over $100,000 268 215 109 592
Other time deposits 1,127 1,287 343 2,757
Short-term borrowings 147 125 68 340
Long-term debt (13) 26 (3) 10
----- ----- --- -----
Total interest-bearing
liabilities 1,277 1,852 545 3,674
----- ----- --- -----
Net interest income $ 767 $ 683 $ 150 $1,600
===== ===== === =====
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 and other lenders. The Bank competes for loan
originations primarily through the interest rates and loan fees it charges and
through the efficiency and quality of services it provides to borrowers.
Competition is affected by, among other things, the general availability of
lendable funds, general and local economic conditions, current interest rate
levels and other factors which are not readily predictable.
For years the Bank has competed within its market area with several regional
bank holding companies, each with assets in excess of $4 billion. The size of
these financial institutions and others competing with the Bank is likely to
increase further as a result of changes in statutes and regulations
eliminating various restrictions on interstate and inter-industry branching
and acquisitions. Community banks will be challenged by these larger
competitors and the greater capital resources they control.
-20-
REGULATION
General
Because of its ownership of all the outstanding stock of the Bank, InterCounty
is subject to regulation, examination and oversight by the FRB as a bank
holding company under the BHCA. The Bank, as a national bank, is subject to
regulation, examination and oversight by the OCC and special examination by
the FRB. The Bank is a member of the Federal Reserve Bank of Cleveland and a
member of the Federal Home Loan Bank of Cincinnati. In addition, since its
deposits are insured by the FDIC, the Bank is also subject to some regulation,
oversight and special examination by the FDIC. The Bank must file periodic
financial reports with the FDIC, the OCC and the Federal Reserve Bank of
Cleveland. Examinations are conducted periodically by these federal
regulators to determine whether the Bank and InterCounty are in compliance
with various regulatory requirements and are operating in a safe and sound
manner.
Bank Holding Company Regulation
General. InterCounty is subject to the BHCA and the regulations of the FRB
promulgated thereunder. It is registered with the FRB as a bank holding
company and must file periodic reports with that agency. Under the BHCA,
InterCounty must notify the FRB if, during any one-year period, it intends to
redeem shares in an amount such that total redemptions, net of sales, are
greater than 10% of the net worth of InterCounty.
Capital Adequacy and Source of Strength. The FRB has adopted capital adequacy
guidelines for bank holding companies, pursuant to which such companies, on a
consolidated basis, 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 (such as standby letters
of credit), which are weighted at percentage levels ranging from 0% to 100%,
depending 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, 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", which includes
subordinated debt and intermediate-term preferred stock (up to 50% of Tier 2
capital), certain hybrid capital instruments and other debt securities, any
remaining perpetual preferred stock, and general loan loss allowances (up to
1.25% of risk-weighted assets). In addition to this risk-based capital
requirement, the FRB requires bank holding companies to meet a leverage ratio
of a minimum level of Tier 1 capital to average total consolidated assets of
3%, if they have the highest regulatory examination rating, well-diversified
risk and minimal anticipated growth or expansion. All other bank holding
companies are expected to maintain a leverage ratio from at least 4% to 5% of
average total consolidated assets. InterCounty was in compliance with these
capital requirements at December 31, 1996. The FRB has proposed an interest
rate risk component to the risk-based capital requirement which is the same as
that proposed for national banks. See "National Bank Regulation - Capital
Requirements."
-21-
A summary of the regulatory capital of InterCounty and the Bank and the
minimum capital levels required by the FRB as of December 31, 1996, is as
follows:
InterCounty Bank
---------------- ----------------
(Dollars in thousands)
Total risk-based
Actual $38,871 14.06% $39,612 14.33%
Required 22,112 8.00 22,112 8.00
------ ----- ------ -----
Excess $16,759 6.06% $17,500 6.33%
====== ===== ====== =====
Tier 1 risk-based
Actual $36,185 13.09% $36,926 13.36%
Required 11,056 4.00 11,056 4.00
------ ----- ------ -----
Excess $25,129 9.09% $25,870 9.36%
====== ===== ====== =====
Tier 1 leverage
Actual $36,185 9.53% $36,926 9.72%
Required 11,395 3.00 11,395 3.00
------ ----- ------ -----
Excess $24,790 6.53% $25,531 6.72%
====== ===== ====== =====
The FRB has issued regulations under the BHCA requiring a bank holding company
to serve as a source of financial and managerial strength to its subsidiary
banks and to operate in a safe and sound manner. It is the policy of the FRB
that a bank holding company be ready and able to use its resources to provide
capital to its subsidiary banks during periods of financial stress or
adversity. 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. Such guarantee is
limited to the lesser of (i) 5% of the institution's total assets at the time
the institution becomes undercapitalized, or (ii) the amount which is
necessary (or would have been necessary) to bring the institution into
compliance with all applicable capital standards as of the time the
institution fails to comply with such capital restoration plan.
Activity and Acquisition Restrictions. The BHCA prohibits InterCounty from
engaging in or from acquiring ownership or control of more than 5% of the
outstanding shares of any class of voting stock of any company engaged in a
nonbanking business, unless such business is determined by the FRB to be so
closely related to banking as to be a proper incident thereto. 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.
-22-
Congress is considering a number of legislative proposals which would expand
the permissible activities of InterCounty or a new form of holding company for
InterCounty. These proposals include an expansion of permissible securities,
insurance and other financial activities, and one of the proposals would
allow, subject to some limitation, real estate development, industrial and
other commercial activities. Many of these proposed new activities involve
greater financial risk to InterCounty than the current permissible activities.
No assurance can be given as to what form, if any, final legislation in this
regard may take.
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 -- Transactions With Insiders and Affiliates."
The BHCA prohibits InterCounty from acquiring direct or indirect control of
more than 5% of any class of voting stock or substantially all of the assets
of any bank or from merging or consolidating with another bank holding company
without the prior approval of the FRB. The BHCA also prohibits InterCounty
from acquiring control of any bank operating outside of Ohio, unless such
acquisition is specifically authorized by the statutes of the state in which
the bank to be acquired is located. Since September 1995, InterCounty is
permitted to acquire banks located in other states. The FRB is authorized by
the BHCA to approve the application of a bank holding company to acquire any
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, and imposes assessments
on national banks based on their asset size to cover the costs of general
supervision and examination. The OCC also may initiate enforcement actions
against national banks and certain persons affiliated with them for violations
of laws or regulations or for engaging in unsafe or unsound practices. If the
grounds provided by law exist, the OCC may appoint a conservator or receiver
for a national bank.
Activities and Investments. 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, including the
type of lending that such institutions may engage in and the investments in
real estate, subsidiaries and corporate or government securities that they may
make. National banks are limited generally to engaging in those activities
and making those investments that constitute the business of banking. These
consist of activities and investments specifically permitted by federal law or
deemed to be incidental to a specifically authorized power. Federal law
generally prohibits national banks from making equity or real estate
investments, other than investments in certain federal government corporations
or entities, office premises, or in OREO for up to five years. They may
invest in operating subsidiaries, of which they must own at least 80% of the
capital stock, in any amount and in bank service corporations, owned with
other banks located in the same state, up to the lessor of 10% of unimpaired
capital and surplus and 5% of assets. Both operating subsidiaries and bank
service corporations are currently limited to national bank activities.
Regulations of the OCC allow operating subsidiaries of national banks to
engage in certain additional activities which are related to or incidental to
the business of banking and which a national bank may not engage in directly.
-23-
The Bank has no operating subsidiaries or bank service corporations. National
banks may engage in discount brokerage, and may underwrite government
securities; however, debt investments in any one issuer are limited to 10%
of unimpaired capital and surplus. They are also subject to activity and
investment limits imposed on state-chartered banks, unless those limits
infringe on powers specifically authorized by federal law or would impose an
undue burden on the conduct of their banking business. These state law limits
are enforced by the OCC, not the state banking authorities.
Until recently, a national bank was permitted to branch only within the state
in which its main office is located, subject to any more restrictive state law
limits and OCC approval. Branches include any office at which deposits are
received or from which checks are paid or money is lent. Total investment in
office premises may not exceed the amount of a national bank's paid-in capital
stock without OCC approval. Pursuant to recent federal legislation, national
banks may branch across state lines, if the law of the state in which the
branch is to be located permits such interstate branching. Effective in June
1997, the Bank will be permitted to merge or consolidate with a bank located
in another state, unless that state has specifically prohibited such an
interstate transaction. In addition, the OCC is considering permitting
national banks to utilize multi-user automated teller machines across state
lines.
The OCC is authorized to grant trust powers to a national bank to the extent
such powers are authorized by the laws of the state in which the bank is
located. National banks authorized to exercise trust powers are required to
follow OCC guidelines on conducting such a business and are subject to special
OCC examinations. The Bank is authorized to and does engage in a trust
business. 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. Failure to abide by federal laws and regulations
governing community reinvestment could limit the ability of a national bank to
open a new branch or engage in a merger transaction. The OCC has proposed
revised regulations governing community reinvestment, which will evaluate
actual lending and investment within a bank's designated service area, with
particular emphasis on low-to-moderate income areas and borrowers. These
proposed regulations would also evaluate a bank's service to low-to-moderate
income areas in terms of branch locations.
Capital Requirements. 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, 1996. See "Bank Holding
Company Regulation - Capital Adequacy and Source of Strength."
The OCC is required by federal law to revise its risk-based capital
requirements to address risks that arise from interest rates, concentrations
of credit and nontraditional activities. 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.
Under an outstanding proposal, the OCC is considering requiring additional
capital for those entities with interest rate risk in excess of an acceptable
level and is seeking public comment on how to define interest rate risk
exposure and how to calculate the additional capital required for those with
interest rate risk exceeding acceptable levels. InterCounty is unable to
predict in what form any changes to the risked-based capital requirements will
be adopted. However, any such changes are not expected to have a material
impact on the Bank.
-24-
The OCC must approve any change in equity capital, including increases in
authorized stock, certain reductions in capital and stock dividends. In
addition, if the capital stock is impaired due to losses, the OCC may assess
shareholders, which for the Bank would be InterCounty, for such deficiency.
If the deficiency is not made up, the OCC may close the bank or require that
its directors sell the shareholders' stock at public auction.
The OCC has adopted regulations governing prompt corrective action to resolve
the problems of capital deficient and otherwise troubled national banks. At
each successively lower defined capital category, a national bank is subject
to more restrictive and numerous mandatory or discretionary regulatory actions
or limits, and the OCC has less flexibility in determining how to resolve the
problems of the institution. In addition, the OCC generally can downgrade a
national bank's capital category, notwithstanding its capital level, if, after
notice and opportunity for hearing, the national bank is deemed to be engaging
in an unsafe or unsound practice, because it has not corrected deficiencies
that resulted in it receiving a less than satisfactory examination rating on
matters other than capital or it is deemed to be in an unsafe or unsound
condition. National banks are prohibited from making a capital distribution
to anyone or paying management fees to any person having control of the bank
if, after such distribution or payment, the bank would be undercapitalized.
All undercapitalized national banks must submit a capital restoration plan to
the OCC within 45 days after it becomes undercapitalized. Such banks will be
subject to increased monitoring and asset growth restrictions and will be
required to obtain prior approval for acquisitions, branching and engaging in
new lines of business. Any company controlling a national bank that is
subject to a capital restoration plan must provide a limited performance
guaranty of the plan. Furthermore, critically undercapitalized national banks
must be placed in conservatorship or receivership within 90 days of reaching
that capitalization level, except under limited circumstances. The Bank's
capital at December 31, 1996, met the standards for the highest capital
category, a well-capitalized national bank.
Dividend Limits. A national bank is prohibited from paying dividends if it
would decrease its surplus below its level of paid-in-capital or if less than
1/10 of net profits for the preceding six months for a quarterly or
semi-annual dividend, or the preceding year for an annual dividend, was
transferred to surplus. In addition, the OCC must approve any dividend in
property or any dividend that would increase total dividends during a calendar
year to a level in excess of net profits for that year and retained net
profits during the prior two years, less any required transfers to surplus or
stock retirement funds. At December 31, 1996, the Bank had $7.3 million
available to pay dividends.
The OCC can prohibit the payment of any dividend by the Bank it believes to it
to be an unsafe or unsound practice. In addition, no capital contributions
are permitted if such payment would render the national bank
"undercapitalized" under the prompt corrective action regulations. 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.
Lending Limits. OCC regulations generally limit the aggregate amount that a
national bank can lend to one borrower 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." Certain types of loans are not subject to
these limits. In applying these limits, the regulations require that loans to
certain related borrowers be aggregated. Effective in March 1995, the measure
of capital and surplus for the lending limit is total risk-based capital, plus
all loan and lease reserves not included in that capital category.
-25-
Transactions with Insiders and Affiliates. Loans to executive officers,
directors and principal shareholders and their related interests must conform
to the OCC lending limit, and the total of all such loans cannot exceed the
national bank's capital and surplus for purposes of the lending limit. Most
loans to directors, executive officers and principal shareholders must be
approved in advance by a majority of the "disinterested" members of the board
of directors of the bank with any "interested" director not participating.
All loans to directors, executive officers and principal shareholders must be
made on terms substantially the same as offered in comparable transactions
with the general public or under a program applicable to all Bank employees,
and loans to executive officers are subject to additional limitations. The
Bank was in compliance with such restrictions at December 31, 1996.
All transactions between national banks and their affiliates, including
InterCounty, must comply with Sections 23A and 23B of the FRA. An affiliate
of a national bank is any company or entity that controls, is controlled by or
is under common control with the national bank. Generally, Sections 23A and
23B of the FRA (i) limit the extent to which a national bank or its
subsidiaries may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such association's capital stock and surplus, (ii)
limit the aggregate of all such transactions with all affiliates to an amount
equal to 20% of such capital stock and surplus, and (iii) require that all
such transactions be on terms substantially the same, or at least as favorable
to the bank, as those in transactions with a non-affiliate. The term "covered
transaction" includes the making of loans, purchase of assets, issuance of a
guarantee and other similar types of transactions. In addition to the limits
in Sections 23A and 23B, a national bank may not make any loan or other
extension of credit to an affiliate unless the affiliate is engaged only in
activities permissible for a bank holding company and may not purchase or
invest in securities of any affiliate except shares of a subsidiary. The Bank
was in compliance with these requirements and restrictions at December 31,
1996.
Federal Deposit Insurance Corporation and Assessments. 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 banks who have
acquired SAIF deposits. The FDIC is required to maintain designated levels of
reserves in each fund. The reserves of the SAIF are below the level required
by law because a significant portion of the assessments paid into the fund
have been and are being used to pay the cost of prior thrift failures. In May
1995, reserves of the BIF met the level required by law.
Depository institutions are generally prohibited from converting from one
insurance fund to the other until the SAIF meets its designated reserve level,
except with the prior approval of the FDIC in certain limited cases, provided
applicable exit and entrance fees are paid. The insurance fund conversion
provisions do not prohibit a SAIF member from converting to a bank charter or
merging with a bank during the moratorium, as long as the resulting bank
continues to pay the applicable insurance assessments to the SAIF during that
period and certain other conditions are met. The SAIF deposits of
Williamsburg obtained by the Bank in the Merger-Conversion, including the
attributed growth factor, which were $16.8 million at December 31, 1996,
remain insured in the SAIF. The Bank is a member of the BIF, and, at December
31, 1996, it had $259.3 million in deposits insured in the BIF. Deposit
accounts are insured by the FDIC, up to the prescribed limits.
-26-
The FDIC is authorized to establish separate annual assessment rates for
deposit insurance each for members of the BIF and the SAIF. The FDIC may
increase assessment rates for either fund if necessary to restore the fund's
ratio of reserves to insured deposits to its target level within a reasonable
time and may decrease such rates if such target level has been met. The FDIC
has established a risk-based assessment system for both SAIF and BIF members.
Under this system, assessments vary based on the risk the institution poses to
its deposit insurance fund. The risk level is determined based on the
institution's capital level and the FDIC's level of supervisory concern about
the institution.
Because the reserves of the BIF fund exceed the statutorily set minimum,
assessments for healthy BIF institutions were significantly decreased in the
last half of 1995 and have been reduced to $2,000 per year for well-
capitalized, well-managed banks, like the Bank, effective in 1996.
Assessments paid by healthy institutions on deposits in the SAIF exceed that
paid by healthy banks by approximately $.23 per $100 in deposits beginning in
1996.
Federal legislation, which was effective September 30, 1996, provided for the
recapitalization of the SAIF by means of a special assessment of $.657 per
$100 of SAIF deposits held at March 31, 1995, in order to increase SAIF
reserves to the level required by law. Certain banks were required to pay the
special assessment on only 80% of SAIF deposits held at that date. That
legislation also required that BIF members begin to share the cost of prior
thrift failures. As a result of the recapitalization of the SAIF and this
cost sharing between BIF and SAIF members, FDIC assessments for healthy
institutions during 1997 have been set at $.013 per $100 in BIF deposits and
$.064 per $100 in SAIF deposits.
The SAIF deposits of the Bank at March 31, 1995, totaled $14.2 million. The
Bank paid a special assessment of $94,102 on November 27, 1996, which was
accounted for and recorded as of September 30, 1996. Beginning in 1997, the
Bank has paid FDIC assessments of $.064 on its $14.2 million in deposits
attributed to the SAIF and $.013 on its BIF deposits, which were $295.0
million at December 31, 1996.
Federal Reserve System. The FRA requires national banks to maintain reserves
against their net transaction accounts (primarily checking and NOW accounts).
Such regulations currently require that reserves of 3% be maintained against
net transaction accounts up to $49.3 million (subject to an exemption of up to
$4.4 million), and that reserves of 10% be maintained against that portion of
total net transaction accounts in excess of $49.3 million. These percentages
are subject to adjustment by the FRB. At December 31, 1996, the Bank was in
compliance with its reserve requirements.
-27-
Federal Home Loan Banks
The Federal Home Loan Banks (the FHLBs), under the regulatory oversight of the
Federal Housing Financing Board, provide credit to their members in the form
of advances. The Bank became a member of the FHLB of Cincinnati in early
1994. To remain 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 $3,122,000 at December 31, 1996.
Upon the origination or renewal of a loan or advance, the FHLB of Cincinnati
is required by law to obtain and maintain a security interest in collateral in
one or more of the following categories: fully disbursed, whole first
mortgage loans on improved residential property or securities representing a
whole interest in such loans; securities issued, insured or guaranteed by the
U.S. government or an agency thereof; deposits in any FHLB; or other real
estate related collateral (up to 30% of the member's capital) acceptable to
the applicable FHLB, if such collateral has a readily ascertainable value and
the FHLB can perfect its security interest in the collateral.
An FHLB member that does not meet the qualified thrift lender ("QTL") test is
eligible to receive FHLB advances if it holds FHLB stock equal to 5% of total
advances divided by the percentage of qualified assets under the QTL test.
The QTL test requires that either (a) 65% of the member's "portfolio assets"
(total assets less goodwill and other intangibles, property used to conduct
business and 20% of liquid assets) consist of qualified thrift investments on
a monthly average basis in 9 out of 12 months or (b) 60% of the member's
assets (on a tax basis) must consist of assets specified in the thrift test in
the Internal Revenue Code of 1986, as amended, which includes residential,
deposit and education loans and certain government obligations.
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a member's
performance under the Community Reinvestment Act and its record of lending to
first-time home buyers. All long-term advances by each FHLB must be made only
to provide funds for residential housing finance.
-28-
Item 2. Description of Property
The following table sets forth certain information at December 31, 1996,
regarding the properties on which the offices of the Bank are located:
Owned Date
Location or leased acquired
- -------- --------- --------
48 North South Street
Wilmington, Ohio Owned 1915
108 N. South Street
Wilmington, Ohio Owned 1980
1334 Rombach Avenue
Wilmington, Ohio Owned 1991
141 W. Main Street
New Vienna, Ohio Owned 1967
114 N. Howard Street
Sabina, Ohio Owned 1969
11 E. Washington Street
Sabina, Ohio Owned 1969
125 Main Street
Blanchester, Ohio Owned 1978
2248 Courseview Dr.
Mason, Ohio Owned 1988
452 N. Main Street
Mt. Orab, Ohio Owned 1981
120 S. Main Street
Georgetown, Ohio Owned 1992
885 S. Main Street
Georgetown, Ohio Owned 1992
733 Lila Avenue
Milford, Ohio Owned 1991
244 W. Main Street
Williamsburg, Ohio Owned 1993
7110 Bachman Road
Sardinia, Ohio Leased 1994
201 East Main Street
Batavia, Ohio Owned 1996
-29-
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.
-30-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There were 1,540,039 common shares of InterCounty outstanding on December 31,
1996 held of record by approximately 375 shareholders. There is presently no
active public trading market for InterCounty's shares, nor are the prices at
which common shares have been traded published by any national securities
association or quotation service. Dividends per share declared in 1995 were
$.08 in March, and $.10 in June, September and December. Dividends per share
declared in 1996 were $.14 in March, June, September and December.
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 1996 1995 1994 1993 1992
condition and other data: (Dollars in thousands)
Total amount of
Assets $380,607 $360,271 $289,267 $280,029 $259,630
Cash and due from banks 11,005 13,680 12,657 12,157 13,518
Securities 88,831 90,760 57,265 60,032 69,965
Loans receivable-net 266,596 239,863 205,593 190,727 163,565
Deposits 309,127 291,503 248,941 243,484 232,522
Short-term borrowings 31,113 31,110 8,736 6,694 5,110
Long-term debt 914 1,108 1,299 1,487 959
Shareholders' equity 36,748 33,834 28,714 27,051 20,058
Number of full service
offices 13 12 12 11 11
-31-
Year ended December 31,
1996 1995 1994 1993 1992
Statement of income data: (In thousands)
Interest and loan fee
income $ 28,824 $25,209 $19,935 $18,933 $17,800
Interest expense 13,815 11,469 7,795 7,482 7,948
------- ------ ------ ------ ------
Net interest income 15,009 13,740 12,140 11,451 9,852
Provision for loan
losses 600 360 275 660 450
------- ------- ------ ------ ------
Net interest income
after provision for
loan losses 14,409 13,380 11,865 10,791 9,402
Non-interest income 3,138 2,339 828 3,303 2,533
Non-interest expense 10,827 10,103 9,881 9,472 7,907
------- ------ ------ ------ ------
Income before income
taxes 6,720 5,616 2,812 4,622 4,028
Federal income taxes 1,858 1,591 617 1,513 1,046
------- ------ ------ ------ ------
Net income $ 4,862 $ 4,025 $ 2,195 $ 3,109 $ 2,982
======= ====== ====== ====== ======
Year ended December 31,
Selected financial ratios: 1996 1995 1994 1993 1992
Return on average equity 13.91% 12.85% 7.87% 13.96% 16.14%
Return on average assets 1.32 1.28 .78 1.16 1.34
Equity-to-assets ratio 9.66 9.39 9.93 9.66 7.73
Dividend payout ratio(1) 17.61 14.45 18.75
Ratio of non-performing
loans to total loans(2) 0.23 0.21 0.41 0.17 0.80
Ratio of loan loss allowance
to total loans 1.00 1.09 1.23 1.28 1.21
Ratio of loan loss allowance
to non-performing loans(2) 430% 507% 301% 761% 150%
Pro forma earnings per
share(3) $2.08
Earnings per share $3.18 $2.63 $1.44
Dividends declared
per share .56 .38 .27 .19 .14
_________________________________
(1) Dividends paid per share divided by earnings per share.
(2) Non-performing loans include non-accrual loans, renegotiated loans and
loans 90 days or more past due.
(3) Pro forma calculations are based upon pooled net income which includes an
acquisition in December 1993. Common shares issued in the transaction are
assumed to have been issued and outstanding since January 1, 1993. The income
per share calculation includes adjustments relating to the investment of
proceeds from common shares issued in the merger conversion. Because the
acquisition involved a mutual savings and loan company, per share information
for prior periods is not comparable with 1993 and could be misleading.
Accordingly, such data is not presented.
-32-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis comparing 1996 to prior years should be
read in conjunction with the audited consolidated financial statements at
December 31, 1996 and 1995 and for the three years ended December 31, 1996.
In addition to the historical information contained herein with respect to
InterCounty Bancshares, Inc. (the "Company"), and The National Bank and Trust
Company (the "Bank"), the following discussion contains forward-looking
statements that involve risks and uncertainties. Economic circumstances, the
Company's operations 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 1996 was $4.862 million, an increase of 20.8% from 1995. About
half of the increase is the result of a net after tax gain of $215,000 on the
sale of the Bank's credit card loan portfolio, and a historical tax credit of
$216,000 for the renovations to the Bank's main office buildings. Other
highlights include a 9.2% increase in net interest income, a 66.7% increase in
the provision for loan losses to $600,000, an increase of 34.2% in
non-interest income, and a 7.2% increase in non-interest expense. Operating
earnings, which excludes securities transactions, the credit card sale
premium, and income taxes, increased 12.8% from 1995. Performance ratios for
1996 included a return on average assets of 1.32% and a return on average
equity of 13.91%.
Table 1 - Selected Financial Highlights
(dollars in thousands)
1996 1995 1994 1993 1992
------------------------------------------------
Net interest income $ 15,009 $ 13,740 $ 12,140 $ 11,451 $ 9,852
Net income 4,862 4,025 2,195 3,109 2,982
AVERAGE BALANCES
Assets $367,926 $314,435 $281,355 $267,484 $222,087
Loans 256,761 218,552 201,531 177,084 144,852
Securities 85,867 71,816 58,619 66,712 54,255
Deposits 297,070 267,833 242,721 236,532 177,044
Shareholders' equity 34,957 31,327 27,900 22,274 18,475
RATIOS AND STATISTICS
Net interest margin 4.33% 4.64% 4.61% 4.58% 4.72%
Return on average
assets 1.32 1.28 .78 1.16 1.34
Return on average
equity 13.91 12.85 7.87 13.96 16.14
Loans to assets 70.75 67.73 72.05 68.11 63.00
Equity to assets 9.66 9.39 9.93 9.66 7.73
Total risk-based
capital ratio 14.06 14.09 14.58 15.46 13.15
Efficiency ratio 59.95 62.94 68.62 69.36 67.77
Full service offices 13 12 12 11 11
Employees (full-time
equivalent) 176 159 162 152 144
-33-
Net income for 1995 was $4.025 million, an increase of 83.4% from 1994. A
significant portion of the increase is the difference between the results of
securities transactions from 1994 to 1995. During 1994, net securities losses
were $945,000 after tax as a result of our securities portfolio restructure.
Net securities gains were $15,000 after tax for 1995. Other highlights
include a 13.2% increase in net interest income, a 31% increase in the
provision for loan losses to $360,000, an increase of 2.5% in non-interest
income, and a modest 2.2% increase in non-interest expense. Operating
earnings, which excludes securities transactions and income taxes, increased
31.7% from 1994. Performance ratios for 1995 included a return on average
assets of 1.28%, and a return on average equity of 12.85%, compared to .78%
and 7.87%, respectively, for 1994.
NET INTEREST INCOME
Net interest income increased to $15.0 million in 1996 from $13.7 million in
1995, an increase of 9.2%. The Bank's yield on average interest-earning
assets decreased to 8.32% in 1996 from 8.51% in 1995. Average interest-
earning assets increased $50.1 million (16.9%) from 1995. Interest and fees
on loans increased 15.2% from last year as the average portfolio balance rose
$38.2 million (17.5%) and the average yield decreased from 8.90% in 1995 to
8.73% in 1996. Lending interest rates were fairly stable throughout 1996.
The prime rate began the year at 8.5% and decreased 25 basis points to 8.25%
in early February, and remained at that level for the rest of 1996. The
securities portfolio also showed an increase in balances and a decrease in
yield. The average balance of the portfolio increased $14.1 million from
1995, and the yield decreased from 7.53% to 7.24%. Both the loan and security
portfolios experienced the maturity of higher yielding assets and the
reinvestment of those funds in the lower rates that were available during
1996. Average interest-bearing liabilities increased $46.5 million during
1996, and the cost increased slightly to 4.64% in 1996 from 4.57% in 1995.
The increase in cost of funds was primarily due to movement from savings
accounts to higher yielding money market accounts. Net interest margin
decreased to 4.33% from 4.64%.
Net interest income increased to $13.7 million in 1995 from $12.1 million in
1994, an increase of 13.2%. During 1995, the U.S. Treasury yield curve
flattened significantly. Longer term rates decreased about 200 basis points,
while shorter term rates decreased less than half of that. The prime rate
began and ended 1995 at 8.5%, and increased to 9% during the second quarter.
The Bank's yield on average interest-earning assets increased to 8.51% from
7.57% in 1994, while the cost of interest-bearing liabilities increased to
4.57% from 3.50%. Net interest margin increased slightly to 4.64% in 1995
from 4.61% in 1994. Average interest-earning assets increased $32.9 million
(12.5%) from 1994. Interest and fees on loans increased 16.1% from 1994 as
the average balance rose $17.0 million (8.4%) and the average yield improved
from 8.31% to 8.90% during 1995. The securities portfolio also contributed to
the improvement in the yield on interest-earning assets. The average balance
of the portfolio increased $13.2 million from 1994, and the yield increased
233 basis points to 7.53% as a result of the restructure that took place in
late 1994. The increase in cost of funds of 107 basis points was the result
of a continuing transfer by customers from lower cost savings deposits to
higher cost certificates and money market accounts.
-34-
PROVISION FOR LOAN LOSSES
The provision for loan losses was $600,000 in 1996, an increase of $240,000
from the provision recorded in 1995. The provision for loan losses was
$367,000 in 1995, an increase of $85,000 from the provision recorded in 1994.
Net charge-offs in 1996 were $558,000 compared to $277,000 in 1995 and
$188,000 in 1994. The increased provision in 1996 and 1995 was in response to
an 11.0% and 16.5% increase in loans and increased net charge-offs for those
years. The ratio of the allowance for loan losses as a percent of total loans
was 1.00% in 1996, 1.09% in 1995, and 1.23% in 1994.
Table 2 - Non-Interest Income
(in thousands)
Percent Percent
of average of average
1996 assets 1995 assets
-----------------------------------------------
Service charges on
deposits $1,099 0.30% $ 982 0.31%
Other service charges 307 0.08 290 0.09
Trust income 733 0.20 660 0.21
Net gains (losses) on
securities available
for sale 86 0.02 23 0.01
Other 913 0.25 384 0.12
----- ---- ----- ----
Total non-interest
income $3,138 0.85% $2,339 0.74%
===== ==== ===== ====
Percent
of average
1994 assets
-----------------------
Service charges on
deposits $ 966 0.34%
Other service charges 267 0.09
Trust income 648 0.23
Net gains (losses) on
securities available
for sale (1,432) (0.51)
Other 379 0.14
----- ----
Total non-interest
income $ 828 0.29%
===== ====
NON-INTEREST INCOME
Table 2 details the components of non-interest income and how they relate each
year as a percent of average assets. Total non-interest income was $3.1
million in 1996, $2.3 million in 1995, and $.8 million in 1994. Non-interest
income, excluding securities gains and losses, represents a ratio of .83% of
average assets in 1996, .73% in 1995, and .81% in 1994. Late in the fourth
quarter of 1996, the Bank sold its credit card loan portfolio and recorded a
net gain of $326,000. Service charges and fees have increased over the last
three years due to growth in the number of accounts, although the ratio has
declined slightly during this period. Trust income increased 11.0% in 1996,
-35-
and 1.9% in 1995 due to increases in both the number of accounts and the
amount of funds under management. At December 31, 1996, total assets in the
Trust Department were approximately $152 million, compared to $129 million and
$106 million at December 31, 1995 and 1994, respectively.
Net securities gains were $86,000 in 1996, compared to net gains of $23,000 in
1995, and net securities losses of $1,432,000 in 1994. In December 1994, the
Bank restructured its taxable security portfolio and sold $42.4 million of
U.S. Treasury securities at a loss of $1.4 million and purchased $28.5 million
in U.S. Treasury and U.S. Agency securities with incremental maturities over a
five-year period. The remaining $12.5 million was used to purchase U.S.
Agency mortgage-backed securities with an average maturity of 5.3 years that
would provide regular monthly cash flows available for reinvestment at current
rates. As these securities mature, they are reinvested in U.S. Treasury and
U.S. Agency mortgage-backed securities with maturities in the five-year range.
All of these securities are classified as available for sale to provide
flexibility in managing the portfolio. The result of this restructure is
evidenced by the substantial increase in interest income on securities
achieved in 1995 and 1996 and a reduction in the interest rate risk in the
Bank's portfolio.
Table 3 - Non-Interest Expense
(in thousands)
Percent Percent
of average of average
1996 assets 1995 assets
-----------------------------------------------
Salaries $ 4,423 1.20% $ 4,111 1.31%
Benefits 984 0.27 1,147 0.36
Equipment 941 0.26 815 0.26
Occupancy 652 0.18 557 0.18
Deposit insurance 104 0.03 303 0.10
State franchise tax 492 0.13 445 0.14
Legal, audit and
professional 368 0.10 337 0.11
Marketing 266 0.07 238 0.07
Other 2,597 0.70 2,150 0.68
------ ---- ------ ----
Total non-interest
expense $10,827 2.94% $10,103 3.21%
====== ==== ====== ====
Percent
of average
1994 assets
-----------------------
Salaries $ 3,793 1.35%
Benefits 1,026 0.36
Equipment 843 0.30
Occupancy 592 0.21
Deposit insurance 530 0.19
State franchise tax 422 0.15
Legal, audit and
professional 323 0.11
Marketing 233 0.08
Other 2,119 0.76
------ ----
Total non-interest
expense $ 9,881 3.51%
====== ====
-36-
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 $9.88 million in 1994 to $10.10 million in 1995 and to $10.83
million in 1996. These figures represent a percent of average assets of 3.51%
in 1994, 3.21% in 1995, and 2.94% in 1996. The significant improvement during
1996 was due primarily to reductions in benefits expense and deposit
insurance. The rest of the categories of expense remained about the same as
1995 as a percent of average assets. Improvements during 1995 were achieved
through an 11.8% increase in average assets while these expenses increased
only 2.2%.
Personnel expense, which is the largest component of non-interest expense,
increased from $4.82 million in 1994 to $5.25 million in 1995 but decreased as
a percent of average assets. The average number of full-time equivalent
employees increased from 162 to 163. Personnel expense increased to $5.41
million in 1996. Salaries expense in 1996 increased 7.6%, but was reduced to
1.20% of average assets from 1.31% in 1995. Benefits expense decreased 14.2%
from 1995 and to .27% of assets as the result of a reduction in required
contributions to retirement plans.
During the third quarter of 1996, the Bank incurred a one-time deposit
insurance assessment of $97,000 for deposits obtained by the Bank in 1993 when
it merged with The Williamsburg Building & Loan Company. During the third
quarter of 1995, the Company received a $150,000 refund of deposit insurance
premiums from the Federal Deposit Insurance Corporation covering the period of
June through September. Premiums for the fourth quarter of 1995 and all of
1996 were also significantly reduced. This resulted in a 42.8% reduction in
this expense during 1995 from 1994.
All other non-interest expense categories have decreased as a percent of
average assets from 1994 to 1996. Equipment expense has been .26%, .26%, and
.30% of average assets for the years 1996, 1995 and 1994, respectively. The
higher level in 1994 was due to investments in computer mainframe equipment
and data processing software, and the expansion of the computer network
throughout the branch offices. The Bank has continued this investment during
1995 and 1996, but asset growth has outpaced the growth in this expense.
Occupancy expense was .18% in 1996 and 1995 and was .21% of average assets for
1994. State franchise taxes increased in all three years as a result of the
increase in capital, on which it is based, but has become a smaller percent of
average assets. Legal, audit and professional expense decreased slightly to
.10% from .11% of average assets in 1995 and 1994. Other expense as a percent
of average assets was .70% in 1996, .68% in 1995, and .76% in 1994.
INCOME TAXES
The effective tax rates for 1996, 1995 and 1994 were 27.6%, 28.3% and 22.0%,
respectively. Tax expense in 1996 was reduced by a $216,000 historical tax
credit for renovations done to the Bank's main office. The low effective rate
in 1994 was due to the tax benefit of $487,000 on the securities losses
incurred. Without this benefit, the effective tax rate for 1994 would have
been 26.0%.
FINANCIAL CONDITION
ASSETS
Average total assets increased 17.0% during 1996 to $367.9 million. Average
interest-earning assets increased 16.9%, and remained at 94% of total assets,
the same as the last two years.
-37-
SECURITIES
Average securities as a percent of assets was 20.8% in 1994, 22.8% in 1995,
and grew slightly to 23.3% in 1996. The securities portfolio at December 31,
1996 consisted of $81.4 million of securities available for sale and $7.5
million of securities which management intends to hold to maturity. Late in
the fourth quarter of 1994, the securities available for sale were
restructured in a five-year ladder portfolio consisting of U.S. Treasury and
U.S. Agency bonds, and U.S. Agency mortgage-backed securities with an average
maturity of 3.6 years. The result of this restructure was a substantial
increase in interest income and a reduction of the interest rate risk in the
portfolio. These securities began to mature in the second quarter of 1995.
The majority of these funds continues to be reinvested in securities with
maturities in the five-year range. During 1995 and 1996, the majority of
the additions to the portfolio have been in medium term callable U.S.
Agency bonds, and mortgage- backed securities with projected average lives
of three to seven years. The five-year ladder will allow the Bank to
take advantage of rising market rates, or lock in rates should market rates
stay stable or fall. The mortgage-backed securities will provide a regular
monthly cash flow available for reinvestment at current rates. The portfolio
has approximately $1.2 million in appreciation over the amortized book value
at December 31, 1996.
LOANS
Table 4 shows loans outstanding at period end by type of loan. Average total
loans as a percent of average assets was 71.6% in 1994, 69.5% in 1995 and
69.8% in 1996. The portfolio composition has stayed relatively the same
during the three-year period. Commercial and industrial loans grew from $43.3
million in 1994 to $47.0 million in 1995 and to $58.0 million in 1996,
primarily as a result of increased origination of working capital and
equipment loans. Management anticipates moderate growth in the commercial and
industrial loan portfolio. During 1995, volume growth in residential real
estate loans was the result of the Bank purchasing in November a $21 million
pool of one-year adjustable rate loans in the secondary market. This was
match funded at an attractive spread through borrowings from the Federal Home
Loan Bank. Both the loans and the funding for these transactions have been
reduced to $11.1 million at the end of 1996, and have been replaced by
residential real estate loans originated locally through our branch network.
The majority of fixed rate residential real estate loans originated are
immediately sold in the secondary market and therefore are not recorded on the
Bank's books, while holding the adjustable rate loans in the portfolio. New
and used automobile loans have been the emphasis in the installment area.
This category has increased from $63.6 million in 1994 to $81.0 million in
1996.
The general economy of the Bank's market area has been stable to good for the
past several years. The Bank has experienced an increase in automobile
lending and commercial lending, both real estate and industrial, because of
the general economic conditions and the movement of the Bank into new markets,
such as Clermont County. The Bank focused its commercial lending on small to
medium sized companies in its market area, most of which are companies with
long established track records. Net charge-offs in these categories for the
last three years have been fairly low. As of December 31, 1996, the percent
of fixed-rate loans to total loans was 41%, of which 69% mature within five
years.
-38-
Table 4 - Loan Portfolio
(in thousands)
at December 31,
1996 1995
Percent of Percent of
Amount Total Amount Total
---------------------------------------------
Commercial and industrial $ 57,985 22% $ 46,952 19%
Commercial real estate 31,118 11 27,274 11
Agricultural 16,304 6 14,515 6
Residential real estate 79,761 30 79,355 33
Installment 81,033 30 68,821 29
Credit card - - 3,268 1
Other 2,228 1 1,561 1
Deferred net origination
costs 853 - 761 -
------- --- ------- ---
$269,282 100% $242,507 100%
======= === ======= ===
1994 1993
Percent of Percent of
Amount Total Amount Total
---------------------------------------------
Commercial and industrial $ 43,254 21% $ 32,919 17%
Commercial real estate 27,049 13 25,351 13
Agricultural 12,451 6 12,822 7
Residential real estate 57,243 27 59,639 31
Installment 63,572 31 58,301 30
Credit card 2,303 1 1,979 1
Other 1,659 1 1,628 1
Deferred net origination
costs 623 - 562 -
------- --- ------- ---
$208,154 100% $193,201 100%
======= === ======= ===
1992
Percent of
Amount Total
------------------------
Commercial and industrial $ 21,261 13%
Commercial real estate 25,674 16
Agricultural 11,994 7
Residential real estate 62,016 37
Installment 41,934 25
Credit card 1,770 1
Other 822 1
Deferred net origination
costs 94 -
------- ---
$165,565 100%
======= ===
-39-
ALLOWANCE FOR LOAN LOSSES
Table 5 shows selected information relating to the Bank'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.
Loan quality has been excellent over the last five years as net charge-offs as
a percent of average loans has averaged .16% and was .22% in 1996. The
allowance for loan losses is 1.00% of total loans as of December 31, 1996, and
has ranged from 1.09% to 1.28% for the previous four years. The percentage
decreased from the 1.20% range at the end of 1994 because of the addition of
the purchased real estate loan pool. The Bank does not allocate the allowance
for loan losses to specific types of loans. In assessing the adequacy of the
allowance for loan losses, the Bank considers three principal factors: (1)
three-year rolling average charge-off percentage applied to the current
outstanding balance by portfolio type; (2) specific percentage applied to
individual loans estimated by management to have a potential loss; and (3)
estimated losses attributable to anticipated portfolio growth, economic
conditions and portfolio risk. Economic conditions considered include
unemployment levels, the condition of the agricultural business, and other
local economic factors.
Non-accrual loans for the last five years are listed in Table 5. The amount
in this category increased to $535,000 from $314,000 in 1995, and $239,000 in
1994. The 1994 amount was due to seven loans experiencing difficulties
ranging from employment, economic conditions, and collateral valuations. The
1995 amount of $314,000 included eight loans, all of which were secured by
real estate, six with first mortgages, and two with second mortgages. (All of
the 1995 loans were resolved as expected and the Bank's recorded loss was
$27,000.) The 1996 amount of $535,000 consisted of nine loans, most of which
are secured with real estate. Five are to be resolved by the first quarter,
one within six months, and the remainder are anticipated to be long-term
workouts. The anticipated aggregate loss from these loans is $125,000. As of
December 31, 1996, management knows of no significant loans not now disclosed
as nonaccruing or 90 days or more past due that would cause management to have
serious doubts as to the ability of the borrowers to comply with present loan
repayment terms.
-40-
Table 5 - Allowance for Loan Losses and Asset Quality
(in thousands)
1996 1995 1994 1993 1992
-------------------------------------------------
Allowance for loan
losses $2,686 $2,644 $2,561 $2,474 $2,000
Provision for loan
losses 600 360 275 660 450
Net charge-offs 558 277 188 186 330
Non-accrual loans 535 314 239 77 723
Loans 90 days or more
past due 90 208 402 43 146
Renegotiated loans - - 211 205 461
Other real estate
owned 358 - - - -
----- ----- ----- ----- -----
Total non-performing
assets 983 522 852 325 1,330
RATIOS
Allowance to total
loans 1.00% 1.09% 1.23% 1.28% 1.21%
Net charge-offs to
average loans 0.22 0.13 0.09 0.11 0.23
Non-performing assets
to total loans and
other real estate
owned 0.36 0.21 0.41 0.17 0.80
DEPOSITS
Table 6 presents a summary of period end deposit balances. The deposit mix in
1993 is essentially the same as 1992. As rates began rising in 1994, savings
accounts dropped to 20% of total deposits from 24% in 1993. These funds
flowed into time certificates as consumers began locking in higher rates.
This trend continued in 1995 and 1996 as savings accounts decreased in amounts
and percent of deposits. Money market accounts rose to 7% of deposits in
1995, and then to 9% of deposits in 1996, as a result of adding a third and
higher interest rate tier for large balance accounts.
Deposits are attracted principally from within the Bank's market area through
the offering of numerous deposit instruments, including checking accounts,
savings accounts, NOW accounts, money market deposit accounts, term
certificate accounts and individual retirement accounts. Interest rates paid,
maturity terms, service fees, and withdrawal penalties for the various types
of accounts are established periodically by management based on the Bank's
liquidity requirements, growth goals and market trends. The Bank does not use
brokers to attract deposits. The amount of deposits from outside the Bank's
market area is not significant.
-41-
Table 6 - Deposits
(in thousands)
at December 31,
1996 1995 1994
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
--------------------------------------------------------
Demand $ 35,731 12% $ 36,188 12% $ 30,591 12%
NOW 49,030 16 45,927 16 46,184 19
Savings 35,687 11 37,562 13 49,025 20
Money market
deposits 28,009 9 20,465 7 5,185 2
CD's less than
$100,000 141,680 46 130,062 45 103,591 41
CD's greater
than $100,000 18,788 6 21,110 7 14,219 6
Other 203 - 189 - 146 -
------- --- ------- --- ------- ---
Total $309,128 100% $291,503 100% $248,941 100%
======= === ======= === ======= ===
1993 1992
Percent of Percent of
Amount Total Amount Total
--------------------------------------
Demand $ 27,419 11% $ 24,788 11%
NOW 46,686 19 44,041 19
Savings 58,350 24 60,716 26
Money market
deposits 4,504 2 4,864 2
CD's less than
$100,000 91,014 38 88,256 38
CD's greater
than $100,000 15,325 6 9,663 4
Other 186 - 194 -
------- --- ------- ---
Total $243,484 100% $232,522 100%
======= === ======= ===
CAPITAL AND LIQUIDITY
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. Through the end
of 1994, dividends had been declared and paid on a semi-annual basis in June
and December of each year. During the five years ended in 1994, the dividend
rate increased nine out of ten payments. Beginning in 1995, the Board of
Directors began to pay dividends on a quarterly basis. The dividend rate was
increased over 40% in both 1995 and 1996. The Company's equity to assets
ratio at December 31, 1996, was 9.66%. As of that same date, tier 1
risk-based capital was 13.1%, and total risk-based capital was 14.1%. 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.
-42-
The Company manages liquidity on both the asset and liability sides of the
balance sheet. The loan to deposit ratio at December 31, 1996, was 87.1%,
compared to 83.2% at the same date in 1995. Loans to deposits plus other
borrowings was 79.1% at the end of 1996, compared to 75.2% at the same time
last year. The securities portfolio is primarily "available for sale"
securities that are readily marketable. Approximately 46% of the portfolio is
pledged to secure public deposits 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 94% core
deposits, makes the Bank less susceptible to large fluctuations in funding
needs.
INTEREST RATE SENSITIVITY
Interest rate risk is monitored on a monthly basis through asset/liability
management committee meetings. Techniques used include both interest rate gap
management, rate shocks, and simulation modeling that measures the effect of
rate changes on net interest income under different rate scenarios. The
interest rate gap analysis (Table 7), quantifies the balance sheet sensitivity
to interest rates as of December 31, 1996. As shown, the Bank was liability
sensitive for periods through six months, slightly asset sensitive six months
to one year, and significantly asset sensitive within the one- to five-year
period. The cumulative gap as a percent of total assets through one year is
(13.5)%. In a falling interest rate environment, a financial institution with
negative interest rate sensitivity gap would be expected generally to
experience a greater decrease in the cost of its interest-bearing liabilities
than in the yield on its interest-earning assets. Conversely, in an
environment of rising interest rates, the cost of funds of an institution with
a negative interest rate sensitivity gap would be expected generally to
increase more rapidly than the yield on its assets. Changes in interest rates
would be expected generally to have the opposite effect on a financial
institution with a positive interest rate sensitivity gap. The Bank has not
experienced the level of earnings volatility that could be indicated by its
gap position, as evidenced by the stability of the net interest margin over
the past five years, ranging from 4.33% to 4.72%. Reacting to changes in
economic conditions, interest rates and market forces, the Bank 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 Bank has been able to maintain a fairly
stable flow of net interest income.
-43-
Table 7 - Interest Rate Gap Analysis
(in thousands)
at December 31, 1996
0-3 3-6 6-12 1-5 5+
Total Months Months Months Years Years
-----------------------------------------------------
Loans (1) $268,429 $ 64,947 $ 17,834 $ 34,976 $129,218 $21,454
Securities held
for sale (2) 81,368 26,131 4,841 9,885 37,065 3,446
Securities held to
maturity 7,463 640 - 190 6,633 -
Federal funds sold 1,016 1,016 - - - -
Deposits in banks 126 126 - - - -
------- ------- ------ ------ ------- ------
Total earning
assets 358,402 92,860 22,675 45,051 172,916 24,900
------- ------- ------ ------ ------- ------
Savings 35,687 1,338 1,338 2,676 21,408 8,927
NOW and MMDA 77,039 77,039 - - - -
CD's less than
$100,000 141,679 35,010 20,904 28,025 54,921 2,819
CD's greater than
$100,000 18,788 5,953 3,915 3,555 5,365 -
Other time deposits 203 - - 203 - -
Short-term
borrowings 31,113 19,913 2,800 8,400 - -
Long-term debt 914 914 - - - -
------- ------- ------ ------ ------- ------
Total interest-
bearing funds 305,423 140,167 28,957 42,859 81,694 11,746
------- ------- ------ ------ ------- ------
Period gap 52,979 (47,307) (6,282) 2,192 91,222 13,154
Cumulative gap - (47,307) (53,589) (51,397) 39,825 52,979
Gap as a percent
of assets 13.92% (12.43)% (14.08)% (13.50)% 10.46% 13.92%
(1) Excludes adjustments for deferred net origination costs and allowance for
losses.
(2) At amortized cost.
The entire balance of interest-bearing demand deposits and money market
deposit accounts are included in the first gap period. Although these
deposits are subject to repricing or withdrawal in a relatively short period
of time, they have been a stable base of retail core deposits for the Bank.
Also, their sensitivity to change in interest rates is much less than some
other deposits, such as certificates of deposit over $100,000. Savings
accounts, because of their susceptibility to withdrawal and investment into
time certificates, as the Bank experienced during 1994 through 1996, were
assumed to run off at 15% per year.
-44-
Rate shock analysis, in which all rates were assumed to increase or decrease
by 200 basis points gradually over a one-year period, have resulted in a 2.5%
decrease in net interest income under rising rates, and a 1.7% increase in net
interest income under falling rates. In the Bank's simulation models, each
asset and liability category's sensitivity to changes in interest rates is
estimated, the effects on net interest income are then projected based on a
stable, rising and falling rate scenario and analyzed on a monthly basis. The
results of this analysis are used in decisions made concerning pricing
strategies for loans and deposits, balance sheet mix, securities portfolio
strategies, liquidity and capital adequacy. The Bank's current short-term
simulation models indicate a slight decline in yields on earning assets and
the cost of interest-bearing liabilities and a slightly positive effect on
projected net interest margin the next twelve months.
IMPACT OF INFLATION AND CHANGING PRICES
The majority of a financial institution's assets and liabilities are monetary
in nature. Changes in interest rates affect the financial condition of a
financial institution to a greater degree than inflation. Although interest
rates are determined in large measure by changes in the general level of
inflation, they do not change at the same rate nor in the same magnitude, but
rather react in correlation to changes in the expected rate of inflation and
to changes in monetary and fiscal policy.
The Bank'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
As required, the Bank adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," in 1995. SFAS No. 114 specifies how allowances for
credit losses related to certain loans should be determined. Impaired loans
under this Statement 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. Adopting SFAS No. 114 did
not have a material effect on the consolidated financial statements.
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," was adopted on January 1, 1996. It
requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of these assets may not be recoverable. Adoption of
SFAS No. 121 did not have a material effect on the consolidated financial
statements.
SFAS No. 123, "Accounting for Stock-Based Compensation," effective January 1,
1996, encourages, but does not require, adoption of a fair-value-based
accounting method for employee stock options. Management elected to continue
to recognize compensation cost using the intrinsic-value-based method of
accounting in Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees." However, the nature of the Company's stock
options is such that the accounting treatment is the same under both
pronouncements. Compensation cost is recorded during the service period of
the optionees based on changes in the book value of the shares since at the
election of the optionees, when the options are exercised, the Company is
obligated to repurchase the shares at book value. If the Company's shares
begin trading on an established market at greater than book value such that
optionees will likely not elect to put the shares to the Company, the accrued
compensation will be recognized as additional consideration for the stock
issued.
-45-
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" as amended by SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of [SFAS] Statement No. 125," provides
accounting and reporting standards to distinguish transfers of financial
assets that are sales from transfers that are secured borrowings. Generally,
the new standards are first applicable to transactions occurring after
December 31, 1997. Adoption of SFAS No. 125 is not expected to have a
material effect on the consolidated financial statements.
-46-
Item 8. Financial Statements and Supplementary Data
- I N D E X -
PAGE
INDEPENDENT AUDITORS' REPORT 48
FINANCIAL STATEMENTS
Consolidated Balance Sheets 49
Consolidated Statements of Income 50
Consolidated Statements of Changes in
Shareholders' Equity 51-52
Consolidated Statements of Cash Flows 53-54
Notes to Consolidated Financial Statements 55-72
-47-
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 subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of InterCounty
Bancshares, Inc. and subsidiary as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ J.D. CLOUD & CO. P.L.L.
Certified Public Accountants
Cincinnati, Ohio
January 30, 1997
-48-
InterCounty Bancshares, Inc. and
The National Bank & Trust Company
CONSOLIDATED BALANCE SHEETS
December 31 (thousands)
1996 1995
ASSETS:
Cash and due from banks $ 11,005 $ 13,680
Federal funds sold 1,016 4,527
------- -------
Total cash and cash equivalents 12,021 18,207
Interest-bearing deposits in banks 126 133
Securities available for sale, at market value 81,368 82,569
Securities held to maturity (market value-$8,061
in 1996 and $9,058 in 1995) 7,463 8,191
------- -------
Total securities 88,831 90,760
Loans 269,282 242,507
Less-allowance for loan losses 2,686 2,644
------- -------
Net loans 266,596 239,863
Premises and equipment 8,653 7,505
Earned income receivable 3,308 3,248
Other assets 1,072 555
------- -------
TOTAL ASSETS $380,607 $360,271
======= =======
LIABILITIES:
Demand deposits $ 35,731 $ 36,188
Savings, NOW, and money market deposits 112,726 103,954
Certificates $100,000 and over 18,788 21,110
Other time deposits 141,883 130,251
------- -------
Total deposits 309,128 291,503
Short-term borrowings 31,113 31,110
Long-term debt 914 1,108
Other liabilities 2,704 2,716
------- -------
TOTAL LIABILITIES 343,859 326,437
------- -------
SHAREHOLDERS' EQUITY:
Preferred shares-no par value, authorized
100,000 shares; none issued - -
Common shares-no par value, authorized
3,000,000 shares; issued 1,909,475 shares 1,000 1,000
Surplus 7,246 7,224
Net unrealized gain on securities available for sale 424 1,405
Unearned ESOP shares, at cost (732) (845)
Retained earnings 31,869 27,863
Treasury shares, at cost, 369,436 shares in 1996
and 360,498 shares in 1995 (3,059) (2,813)
------- -------
TOTAL SHAREHOLDERS' EQUITY 36,748 33,834
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $380,607 $360,271
======= =======
The accompanying notes to financial statements are an integral part of these
statements.
-49-
InterCounty Bancshares, Inc. and
The National Bank & Trust Company
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31 (thousands, except per common share data)
1996 1995 1994
INTEREST INCOME:
Interest and fees on loans $22,413 $19,449 $16,749
Interest on securities available
for sale-taxable 5,583 4,569 1,909
Interest on securities held to maturity-
Taxable - - 191
Non-taxable 632 838 948
Interest on deposits in banks 9 7 7
Interest on federal funds sold 187 346 131
------ ------ ------
TOTAL INTEREST INCOME 28,824 25,209 19,935
------ ------ ------
INTEREST EXPENSE:
Interest on deposits-
Interest on savings, NOW and
money market deposits 3,020 2,637 2,662
Interest on time certificates
$100,000 and over 1,069 1,119 527
Interest on other deposits 7,942 6,992 4,235
------ ------ ------
Total Interest on Deposits 12,031 10,748 7,424
Interest on short-term borrowings 1,699 613 273
Interest on long-term debt 85 108 98
------ ------ ------
TOTAL INTEREST EXPENSE 13,815 11,469 7,795
------ ------ ------
NET INTEREST INCOME 15,009 13,740 12,140
PROVISION FOR LOAN LOSSES 600 360 275
------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 14,409 13,380 11,865
------ ------ ------
NON-INTEREST INCOME:
Trust income 733 660 648
Service charges on deposits 1,099 982 966
Other service charges and fees 307 290 267
Securities gains (losses) 86 23 (1,432)
Other 913 384 379
------ ------ ------
TOTAL NON-INTEREST INCOME 3,138 2,339 828
------ ------ ------
NON-INTEREST EXPENSE:
Salaries 4,423 4,111 3,793
Pension and benefits 984 1,147 1,026
Equipment 941 815 843
Occupancy 652 557 592
Deposit insurance 104 303 530
State franchise tax 492 445 422
Marketing 266 238 233
Other 2,965 2,487 2,442
------ ------ ------
TOTAL NON-INTEREST EXPENSE 10,827 10,103 9,881
------ ------ ------
INCOME BEFORE INCOME TAX 6,720 5,616 2,812
PROVISION FOR INCOME TAX 1,858 1,591 617
------ ------ ------
NET INCOME $ 4,862 $ 4,025 $ 2,195
====== ====== ======
Earnings per common share $ 3.18 $ 2.63 $ 1.44
The accompanying notes to financial statements are an integral part of these
statements.
-50-
InterCounty Bancshares, Inc. and
The National Bank & Trust Company
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(thousands)
Net Retained
Unrealized Unearned Earnings Total
Securities ESOP Less Cost Share-
Common Gains Shares, of Treasury holders
Shares Surplus (Losses) at Cost Shares Equity
Balance
January 1,
1994 $1,000 $7,135 $ 4 $(1,078) $19,990 $27,051
Net income 2,195 2,195
Dividends
declared (541) (541)
Treasury
shares
issued 8 6 14
ESOP
shares
earned 108 108
Net changes
in unrealized
gains
(losses) on
securities
available for
sale (113) (113)
----- ----- ----- ----- ------ ------
Balance
December 31,
1994 1,000 7,143 (109) (970) 21,650 28,714
Net income 4,025 4,025
Dividends
declared (580) (580)
Treasury
shares
purchased (94) (94)
Stock options
exercised 71 49 120
ESOP shares
earned 10 125 - 135
Net changes
in unrealized
gains (losses)
on securities
available for
sale 1,514 1,514
----- ----- ----- ----- ------ ------
Balance
December 31,
1995 1,000 7,224 1,405 (845) 25,050 33,834
-51-
Net income 4,862 4,862
Dividends
declared (856) (856)
Treasury
shares
purchased (249) (249)
Stock options
exercised 3 3 6
ESOP shares
earned 19 113 132
Net changes
in unrealized
gains (losses)
on securities
available for
sale (981) (981)
----- ----- ----- ----- ------ ------
Balance
December 31,
1996 $1,000 $7,246 $ 424 $ (732) $28,810 $36,748
===== ===== ===== ===== ====== ======
The accompanying notes to financial statements are an integral part of these
statements.
-52-
InterCounty Bancshares, Inc. and
The National Bank & Trust Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 (thousands)
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,862 $ 4,025 $ 2,195
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 791 677 703
Provision for loan losses 600 360 275
Provision for deferred taxes (61) (46) (184)
Net premium amortization (discount
accretion) of securities (353) (566) 116
Net realized (gains) losses on securities
available for sale (86) (23) 1,432
Gain on sale of other assets (344) - (11)
Increase in income receivable (60) (753) (379)
Decrease (increase) in other assets (112) 90 77
Increase (decrease) in interest payable (42) 419 87
Increase (decrease) in accrued taxes and
other liabilities 336 625 (3)
FHLB stock dividends (209) (73) (19)
ESOP shares earned 132 135 108
------- ------- -------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 5,454 4,870 4,397
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing
deposits in banks 7 (31) 498
Proceeds from sales of securities
available for sale 5,395 1,500 75,994
Purchases of securities available
for sale (27,263) (50,617) (77,049)
Proceeds from maturities of securities
available for sale 22,129 15,137 -
Proceeds from maturities of securities
held to maturity 830 3,441 2,517
Purchases of securities held to maturity - - (394)
Net increase in loans (31,203) (34,630) (15,141)
Proceeds from sale of credit card loans 4,241 - -
Purchases of premises and equipment (2,189) (1,742) (795)
Proceeds from sale of equipment 18 - 12
------- ------- -------
NET CASH USED IN INVESTING
ACTIVITIES (28,035) (66,942) (14,358)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 17,624 42,562 5,457
Repayment of capital lease obligation (86) (83) (80)
Cash dividends paid (795) (549) (417)
Net increase in short-term borrowings 3 22,374 2,042
Repayment of ESOP debt (108) (108) (108)
Proceeds from stock options exercised 6 120 14
Purchase of treasury shares (249) (94) -
------- ------- -------
-53-
NET CASH PROVIDED BY FINANCING
ACTIVITIES 16,395 64,222 6,908
------- ------- -------
NET CHANGE IN CASH AND
CASH EQUIVALENTS (6,186) 2,150 (3,053)
------- ------- -------
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 18,207 16,057 19,110
------- ------- -------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 12,021 $ 18,207 $ 16,057
======= ======= =======
The accompanying notes to financial statements are an integral part of these
statements.
-54-
InterCounty Bancshares, Inc. and
The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
InterCounty Bancshares, Inc. (the Company) is a one-bank holding company. Its
wholly-owned subsidiary, The National Bank & Trust Company (the Bank),
provides full banking services, including trust and brokerage services, to
customers located principally in Clinton, Brown, Clermont and Warren counties
in Ohio. The Bank grants agribusiness, commercial, consumer, and residential
loans to customers throughout its market area. The accounting and reporting
policies of the Company and its subsidiary conform with generally accepted
accounting principles (GAAP) and with general practices within the banking
industry. The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. The following is a summary of the significant
policies:
Basis Of Presentation-
The consolidated financial statements include the accounts of the Company and
its subsidiary. All intercompany accounts and transactions have been
eliminated in consolidation. Certain prior period data has been reclassified
to conform to current period presentation.
Securities-
Investment securities that the Bank has the intent and ability to hold to
maturity are reported at amortized cost. Any discount or premium is amortized
to maturity 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 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.
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 fees or costs. The allowance for loan
losses is established through a provision for loan losses charged to expense.
Credit losses are charged against the allowance when management believes that
the collectibility of the principal is unlikely. 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.
-55-
InterCounty Bancshares, Inc. and
The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In 1995, the Bank adopted SFAS No. 114 "Accounting by Creditors for Impairment
of a Loan" as amended by SFAS No. 118 "Accounting by Creditors for Impairment
of a Loan -- Income Recognition and Disclosures". SFAS No. 114 specifies how
allowances for credit losses related to certain loans should be determined.
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 and are excluded from SFAS No. 114
measurement methods. Adopting SFAS No. 114 and No. 118 did not have a
material effect on the overall allowance for loan losses and did not affect
the Bank's charge-off or income recognition policies.
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.
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, including those
considered impaired under the provisions of SFAS No. 114, 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.
Income Recognition-
Interest income on loans is based on the principal balance outstanding. Loan
origination fees and certain direct loan origination costs are deferred and
the net amount amortized using the interest method as an adjustment of loan
yields. These amounts are being amortized over the lives of the related
loans.
Pension Plan-
The Bank has a noncontributory pension plan covering substantially all
employees. The retirement plan cost is made up of several components that
reflect different aspects of the Bank's financial arrangements as well as the
cost of benefits earned by employees. These components are determined using
the projected unit credit actuarial cost method and are based on certain
actuarial assumptions.
Marketing Expense-
Marketing costs are expensed as incurred.
-56-
InterCounty Bancshares, Inc. and
The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Options-
Stock options are accounted for under Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees." As more fully
explained in Note 13, at the election of optionees, when the options are
exercised, the Company is obligated to repurchase the shares at book value.
Since the Company's shares are not traded on an established market,
compensation cost and a liability are recorded during the service period based
on changes in book value. Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation" which the Company, as
permitted, has not adopted, treats awards of this nature in the same manner.
Income Taxes-
Certain income and expenses are recognized in different periods for financial
reporting than for purposes of computing income taxes currently payable.
Deferred taxes are provided on such temporary differences. These differences
relate principally to the allowance for loan losses, depreciation and stock
option accruals.
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 is calculated by dividing net income by the weighted
average number of common shares outstanding during the period. The assumed
exercise of stock options would not have a material dilutive effect.
Fair Value Of Financial Instruments-
For cash and due from banks, interest-bearing deposits in banks and federal
funds sold, the carrying amounts reported in the Consolidated Balance Sheet
approximate fair value. For securities, fair market value equals quoted
market price, if available. If a quoted market price was not available, fair
value was estimated using quoted market prices for similar securities. The
estimated fair value of loans was based on the discounted value of future cash
flows expected to be received. The discount rate used was the rate at which
the same loans would be made under current conditions.
The approximate fair value of demand deposits, savings accounts, and other
deposit liabilities without defined maturities is the carrying amount at the
reporting date. The fair value of fixed-maturity certificates of deposit was
estimated using a discounted cash flow calculation applying interest rates
currently offered for deposits of similar remaining maturities. Carrying
value approximates fair value for short-term borrowings and the Company's
variable rate long-term debt.
-57-
InterCounty Bancshares, Inc. and
The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 2 - SECURITIES
The following tables present amortized cost and estimated fair values of
securities at December 31 (thousands):
1996
------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Securities available for sale:
U.S. Treasury and U.S.
Agency notes $42,122 $ 402 $ 63 $42,461
U.S. Agency mortgage-backed
securities 25,577 417 93 25,901
Other mortgage-backed
securities 9,556 73 93 9,536
Federal Reserve/FHLB stock 3,446 - - 3,446
Other 24 - - 24
------ ----- --- ------
$80,725 $ 892 $249 $81,368
====== ===== === ======
Securities held to maturity:
Municipals $ 7,463 $ 599 $ 1 $ 8,061
====== ===== === ======
1995
------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Securities available for sale:
U.S. Treasury and U.S.
Agency notes $40,962 $1,062 $ 5 $42,019
U.S. Agency mortgage-backed
securities 25,014 870 25 25,859
Other mortgage-backed
securities 11,189 229 1 11,417
Federal Reserve/FHLB stock 3,237 - - 3,237
Other 37 - - 37
------ ----- --- ------
$80,439 $2,161 $ 31 $82,569
====== ===== === ======
Securities held to maturity:
Municipals $ 8,191 $ 868 $ 1 $ 9,058
====== ===== === ======
Gross gains realized on sales of securities available for sale were $86,000
for 1996, $23,000 for 1995, and $102,000 for 1994. Gross losses during the
three year period were $1,534,000 in 1994. Securities with a carrying value
of approximately $41.1 million and $40.1 million at December 31, 1996 and
1995, respectively, were pledged to secure public deposits, short-term
borrowings and for other purposes as required by law.
-58-
InterCounty Bancshares, Inc. and
The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 2 - SECURITIES (Continued)
At December 31, 1996, 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 $ 6,485 $ 6,519 $ 981 $ 997
Due from one to five years 32,637 32,960 5,879 6,290
Due from five to ten years 3,000 2,982 603 774
------ ------ ----- -----
42,122 42,461 7,463 8,061
U.S. Agency mortgage-backed
securities 25,577 25,901 - -
Other mortgage-backed
securities 9,556 9,536 - -
Federal Reserve/FHLB stock 3,470 3,470 - -
------ ------ ----- -----
Total securities $80,725 $81,368 $7,463 $8,061
====== ====== ===== =====
NOTE 3 - LOANS
Major classifications of loans as of December 31 were as follows (thousands):
1996 1995
Commercial and industrial $ 57,985 $ 46,952
Commercial real estate 31,118 27,274
Agricultural 16,304 14,515
Residential real estate 79,761 79,355
Installment 81,033 68,821
Credit card - 3,268
Other 2,228 1,561
------- -------
Total 268,429 241,746
Deferred net origination costs 853 761
Allowance for loan losses (2,686) (2,644)
------- -------
Net loans $266,596 $239,863
======= =======
In 1996, the Bank sold its $3.9 million credit card loan portfolio. The gain
on the sale of $326,000 is included in Other Non-Interest Income in the
Consolidated Statements of Income. The portion of the credit card portfolio
sold with recourse was $102,000.
-59-
InterCounty Bancshares, Inc. and
The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 3 - LOANS (Continued)
Changes in the allowance for loan losses for the year ended December 31 were
as follows (thousands):
1996 1995 1994
Balance at beginning of period $2,644 $2,561 $2,474
Provision for loan losses 600 360 275
Charge offs (785) (472) (376)
Recoveries 227 195 188
----- ----- -----
Balance at end of period $2,686 $2,644 $2,561
===== ===== =====
The total recorded investment in impaired loans at December 31, 1996, the
average for the year, and the related allowance for credit losses as
determined in accordance with SFAS No. 114 were not material. Loans on which
the accrual of interest had been discontinued amounted to $535,000, $314,000
and $239,000 at December 31, 1996, 1995 and 1994, respectively. If interest
on those loans had been accrued, such income would have approximated $38,000,
$27,000 and $16,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. Interest income recognized in the respective years on these
nonaccrual loans was not material. The Bank is not committed to lend
additional funds to debtors whose loans have been modified to provide a
reduction or deferral of principal or interest because of a deterioration in
the financial position of the borrower.
NOTE 4 - PREMISES AND EQUIPMENT
Premises and equipment were as follows at December 31 (thousands):
1995 1994
Land $ 1,230 $ 1,230
Buildings and leasehold improvements 7,605 6,700
Equipment 5,176 4,364
------ ------
Total cost 14,011 12,294
Accumulated depreciation and amortization (5,358) (4,789)
------ ------
Premises and equipment $ 8,653 $ 7,505
====== ======
Depreciation and amortization expense related to premises and equipment was
$695,000, $601,000 and $618,000 for the years ended December 31, 1996, 1995
and 1994, respectively.
-60-
InterCounty Bancshares, Inc. and
The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 5 - LEASES
Data processing equipment held under capital lease, included in premises and
equipment, had a carrying value of $159,000 and $246,000 at December 31, 1996
and 1995, respectively. Amortization expense for 1996, 1995 and 1994 was
$87,000, $83,000 and $80,000, respectively.
Future minimum lease payments under the capital equipment lease and non-
cancelable operating leases having initial terms in excess of one year are as
follows (thousands):
Capital Operating
Lease Lease
1997 $ 95 $ 33
1998 71 33
1999 - 33
2000 - 32
2001 - 31
Remaining years - 261
--- ---
Total minimum lease payments 166 $423
===
Less: Amount representing
interest 7
--- ---
Present value of net minimum
lease payments $159
===
Rent expense for all Bank premises and equipment leases was $59,000, $43,000
and $63,000 in 1996, 1995 and 1994, respectively.
NOTE 6 - DEPOSITS
Certificates of deposit issued in amounts of $100,000 or more and their
remaining maturities at December 31 were as follows (thousands):
1996 1995
Three months or less $ 5,953 $ 9,365
Over three through six months 3,915 4,342
Over six through twelve months 3,555 4,017
Over twelve months 5,365 3,386
------ ------
Total $18,788 $21,110
====== ======
-61-
InterCounty Bancshares, Inc. and
The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 7 - PENSION PLAN
The Bank's noncontributory defined benefit retirement plan covers
substantially all Bank employees who meet minimum age and length of service
requirements. Benefits are based on years of service and employee's
compensation. The Bank's funding policy is to contribute at least the minimum
amounts required by the Employee Retirement Income Security Act or additional
amounts to assure that plan assets will be adequate to provide retirement
benefits. Based upon actuarial conclusions, a contribution of $124,000 and
$171,000 was made to the plan in 1996 and 1995, respectively. No contribution
was made in 1994.
A summary of the plan's funded status as of December 31, 1996 and 1995 follows
(thousands):
1996 1995
Actuarial present value of benefit obligation:
Vested $ 1,040 $ 911
Non-vested 140 101
------ ------
Accumulated benefit obligation $ 1,180 $ 1,012
====== ======
Plan assets at fair value, 1996-47% common stock
and 53% fixed income investments $ 1,330 $ 1,138
Projected benefit obligation for service
rendered to date (1,318) (1,123)
------ ------
Plan assets in excess of or (less than) projected
benefit obligation 12 15
Unrecognized reduction in prior service cost
resulting from plan amendment (267) (296)
Unrecognized transition obligation being amortized
over 15 years 29 34
Unrecognized net loss 120 153
------ ------
Pension liability $ (106) $ (94)
====== ======
The following assumptions were used in determining the actuarial present value
of the projected benefit obligation:
1996 1995
Assumed discount rate 8% 7.5%
Expected long-term rate of return on plan assets 9% 9%
Rate of increase in future compensation levels 4.5% 4%
-62-
InterCounty Bancshares, Inc. and
The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 7 - PENSION PLAN (Continued)
Changes in assumed rates had the effect of increasing the projected
benefit obligation by $91,000 at December 31, 1996. Net periodic pension
cost for the years ended December 31 consisted of the following (thousands):
1996 1995 1994
Service cost $ 165 $ 134 $ 162
Interest cost 92 85 86
Return on plan assets-
Actual (150) (229) 4
Deferred 45 137 (108)
Amortization of reduction in prior
service cost (29) (29) (29)
Amortization of unrecognized initial
net obligation 5 5 5
Amortization of unrecognized net (gain) loss 8 3 15
---- ---- ----
Net periodic pension cost $ 136 $ 106 $ 135
==== ==== ====
NOTE 8 - EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
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
$36,000, $165,000 and $163,000 for the years ended December 31, 1996, 1995 and
1994, 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 1996 and 1995, the Company
purchased 9,357 shares and 4,420 shares, respectively, from ESOP participants.
The estimated fair value of allocated shares remaining in the ESOP was
$7,530,000 and $6,860,000 at December 31, 1996 and 1995, respectively. The
estimated fair value for 1995 was based on the independent appraisal. The
1996 independent appraisal has not been completed and, therefore, estimated
fair value at December 31, 1996 is based on the 1995 relationship of appraised
value to book value applied to the December 31, 1996 book value.
Shares purchased by the ESOP since 1993 are accounted for in accordance with
Statement of Position 93-6. Accordingly, as these shares are released from
collateral, the Company reports compensation expense equal to the current
estimated fair value of the released shares. Once released, the shares are
considered outstanding for earnings-per-share (EPS) computations. Dividends
on allocated shares reduce retained earnings; dividends on unallocated shares
are recorded as a reduction of ESOP debt.
-63-
InterCounty Bancshares, Inc. and
The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 8 - EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST (Continued)
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:
1996 1995
---------------- ----------------
1993 1986 1993 1986
Shares Shares Shares Shares
Allocated shares 5,004 254,761 2,447 255,521
Shares released for allocation 2,380 12,082 2,557 12,978
Unreleased shares 13,268 67,357 15,648 79,439
------- ------- ------ -------
Total ESOP shares 20,652 334,200 20,652 347,938
======= ======= ====== =======
At December 31, 1996, the estimated fair value of unreleased 1993 shares was
$385,000. ESOP compensation expense was $25,000, $105,000 and $76,000 for
1996, 1995 and 1994, respectively.
NOTE 9 - SHORT-TERM BORROWINGS
A summary of short-term borrowings follows (thousands):
1996 1995
-------------- --------------
Amount Rate Amount Rate
At December 31
Federal Home Loan Bank borrowings $17,200 5.64% $21,250 5.76%
Securities sold under agreements
to repurchase 9,017 4.55 8,656 4.45
U.S. Treasury demand notes 1,486 6.15 1,204 5.50
Federal funds purchased 3,410 4.94 -
------ ------
Total short-term borrowings $31,113 5.27 $31,110 5.39
====== ======
Years ended December 31
Average amount outstanding $32,186 $11,864
Maximum month-end balance 34,401 31,193
Weighted average interest rate 5.28 5.33
At December 31, 1996, Federal Home Loan Bank borrowings were collateralized by
a blanket pledge of certain residential real estate loans totaling
approximately $59.6 million.
-64-
InterCounty Bancshares, Inc. and
The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 10 - LONG-TERM DEBT
Long-term debt consists of the following at December 31 (thousands):
1996 1995
ESOP Trust debt guarantee $755 $ 862
Capital lease obligation 159 246
--- -----
$914 $1,108
=== =====
The ESOP Trust loan agreement contains various covenants for the Company which
include a minimum net worth and restrictions on additional indebtedness. The
note may be prepaid without penalty with prepayments applying in the inverse
order of the maturities of the scheduled payments. Interest is due quarterly
at the prime rate, 8.25% at December 31, 1996. Scheduled principal payments
are $108,000 annually through 2003.
NOTE 11 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The Bank paid interest of $13,857,000, $11,050,000 and $7,796,000 in 1996,
1995 and 1994, respectively. The Bank paid federal income taxes of $1,761,000,
$1,388,000 and $863,000 in 1996, 1995 and 1994, respectively.
NOTE 12 - INCOME TAXES
Income taxes provided for in the statements of income at December 31 consist
of the following (thousands):
1996 1995 1994
Income taxes currently payable:
Applicable to income exclusive of
securities transactions $1,890 $1,629 $1,288
Applicable to securities transactions 29 8 (487)
----- ----- -----
Total income taxes currently payable 1,919 1,637 801
----- ----- -----
Deferred income taxes resulting
from temporary differences:
Provision for loan losses (60) (73) (75)
Depreciation 16 68 (62)
Stock option accruals (70) (91) (44)
Loan origination fees-net (2) 1 32
FHLB stock dividends 71 25 6
Accruals deductible for tax purposes when paid (6) 29 (58)
Other (10) (5) 17
----- ----- -----
Total deferred income taxes (61) (46) (184)
----- ----- -----
Income taxes $1,858 $1,591 $ 617
===== ===== =====
-65-
InterCounty Bancshares, Inc. and
The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 12 - INCOME TAXES (Continued)
A reconciliation of the statutory income tax rate to the Company's effective
tax rate at December 31 follows:
1996 1995 1994
Statutory tax rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Tax exempt interest (3.3) (5.4) (11.7)
Tax credits (3.2) - -
Other-net .1 (.3) (.3)
---- ---- ----
Effective tax rate 27.6% 28.3% 22.0%
==== ==== ====
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):
1996 1995
Deferred tax assets:
Allowance for loan losses $ 481 $ 421
Stock option accruals 291 221
Deferred loan fees 43 41
Accruals not currently deductible 43 37
---- -----
Total deferred tax assets 858 720
---- -----
Deferred tax liabilities:
Depreciation of premises and equipment (229) (213)
Unrealized gains on securities available for sale (218) (724)
FHLB stock dividends (129) (58)
Other-net (25) (35)
---- -----
Total deferred tax liabilities (601) (1,030)
---- -----
Net deferred taxes $ 257 $ (310)
==== =====
Due primarily to the Company's taxable position in prior years, a valuation
allowance for deferred tax assets was unnecessary at December 31, 1996 and
1995.
-66-
InterCounty Bancshares, Inc. and
The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 13 - SHAREHOLDERS' EQUITY
In 1992, the Board of Directors of the Company approved a nonqualified
compensatory stock option plan (the 1992 Plan), pursuant to which a maximum
aggregate of 7% of the authorized and issued common shares of the Company may
be reserved by the Board for the purpose of granting options under the plan to
key bank personnel. Awards under the 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. If the Company's shares are not traded on
an established market at the date of grant, book value as of the most recent
annual report equals fair value under the terms of the Plan.
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.
At the election of optionees, when the options are exercised in the future,
the Company is obligated to repurchase the shares at book value as reflected
in the most recent audited annual report. Compensation expense in connection
with this plan is included in pension and benefits expense in the consolidated
statements of income in the amounts of $173,000, $205,000 and $115,000 for
1996, 1995 and 1994, respectively.
Details of the 1992 Plan are as follows:
Weighted-
Average Shares
Exercise Shares Shares Available
Price Outstanding Exercisable for Grant
-------- ----------- ----------- ---------
Balance, December 31, 1993 $ 11.45 61,600 9,800 72,063
Granted 19.25 3,253 (3,253)
Became exercisable 12,320
Exercised 13.12 (315) (315)
------ ------ ------
Balance, December 31, 1994 11.83 64,538 21,805 68,810
Granted 24.00 16,750 (16,750)
Became exercisable 12,971
Exercised 13.12 (315) (315)
------ ------ ------
Balance, December 31, 1995 14.35 80,973 34,461 52,060
Became exercisable 16,321
Exercised 13.12 (315) (315)
------ ------ ------
Balance, December 31, 1996 $ 14.35 80,658 50,467 52,060
====== ====== ======
In 1993, the Board of Directors of the Company approved a stock option plan
(the 1993 Plan) pursuant to which options for 22,947 common shares in the
aggregate were granted to certain directors, officers and employees of an
acquired building and loan company. The option price was $19.25. No options
granted under the 1993 Plan are exercisable after March 31, 1997.
Compensation expense in connection with this plan is included in pension and
benefits expense in the consolidated statements of income in the amount of
$34,000 and $54,000 for 1996 and 1995, respectively. No compensation expense
was recorded for this plan in 1994. Options for 104 and 5,996 shares were
exercised in 1996 and 1995, respectively. None were exercised in 1994. Total
options outstanding under the 1993 Plan at December 31, 1996, are 16,847.
-67-
InterCounty Bancshares, Inc. and
The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit 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 Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contract amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. Financial
instruments whose contract amounts represent off-balance-sheet credit risk at
December 31 were as follows (thousands):
1996 1995
Commitments to extend credit $26,013 $30,231
Standby letters of credit 2,087 1,449
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements.
The Bank evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained if deemed necessary by the Bank is based on
management's credit evaluation of the counter party. Collateral held varies,
but may include accounts receivable, crops, inventory, property, plant and
equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. At December 31,
1996 and 1995, these guarantees were primarily issued to support public bond
financing by state and local government units. These guarantees expire during
the period from 1997 through 2012. Approximately 78% of the amount
outstanding at December 31, 1996 was secured. Approximately 96% of the amount
outstanding at December 31, 1995 was secured.
The Parent Company and its subsidiary are parties 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.
-68-
InterCounty Bancshares, Inc. and
The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 15 - RELATED PARTY TRANSACTIONS
The Bank has entered into related party transactions with certain directors,
executive officers and principal shareholders. Such transactions originate in
the normal course of the Bank's operations as a depository and lending
institution. At December 31, 1996 and 1995, certain executive officers,
directors and companies in which they have a direct or indirect interest, were
indebted to the Bank directly or as guarantors in the aggregate amount of
$6,607,000 and $6,569,000, respectively. During 1996, $3,026,000 in new loans
were made; repayments totaled $2,988,000.
NOTE 16 - FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
The following disclosures are made in accordance with the provisions of SFAS
No. 107, "Disclosures About Fair Value of Financial Instruments," which
requires disclosure of fair value information about both on- and off-balance
sheet financial instruments for which it is practicable to estimate that
value. Because SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements, any aggregation of
the fair value amounts presented would not represent the underlying value of
the Company.
Carrying amounts and estimated fair values for financial instruments as of
December 31 were as follows (thousands):
1996 1995
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
FINANCIAL ASSETS:
Cash and due from banks $ 11,005 $ 11,005 $ 13,680 $ 13,680
Federal funds sold 1,016 1,016 4,527 4,527
Interest-bearing deposits in banks 126 126 133 133
Securities available for sale 81,368 81,368 82,569 82,569
Securities held to maturity 7,463 8,061 8,191 9,058
Loans, net 266,596 266,784 239,863 241,137
FINANCIAL LIABILITIES:
Deposits 309,127 310,409 291,503 293,637
Short-term borrowings 31,113 31,113 31,110 31,110
Long-term debt 914 914 1,108 1,108
The fair value of off-balance-sheet financial instruments at December 31, 1996
and 1995, was not material.
-69-
InterCounty Bancshares, Inc. and
The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 17 - REGULATORY MATTERS
The principal source of income and funds for the Holding Company is dividends
paid by the Bank subsidiary. During the year 1997, dividends that the Bank
subsidiary can pay to the Holding Company without prior approval of regulatory
agencies is limited to the total of 1997 net income and approximately
$7,260,000 of retained earnings from the previous two years.
Banks and bank holding companies must meet certain minimum capital
requirements set by federal banking agencies. A summary of the regulatory
capital of the Holding Company and the Bank at December 31 follows
(thousands):
1996 1995
------------------ ------------------
Holding Holding
Company Bank Company Bank
------- ---- ------- ----
Regulatory Capital:
Shareholders' equity $36,748 $37,489 $33,834 $34,690
Goodwill and other intangibles (139) (139) (208) (208)
Net unrealized securities gains (424) (424) (1,405) (1,405)
------ ------ ------ ------
Tier I risk-based capital 36,185 36,926 32,221 33,077
Eligible allowance for loan
losses 2,686 2,686 2,644 2,644
------ ------ ------ ------
Total risk-based capital $38,871 $39,612 $34,865 $35,721
====== ====== ====== ======
Capital Ratios:
Total risk-based 14.06% 14.33% 14.02% 14.36%
Tier I risk-based 13.09 13.36 12.96 13.30
Tier I leverage 9.53 9.72 9.00 9.24
The minimum regulatory capital ratios are 8% for total risk-based, 4% for Tier
I risk-based, and 3% 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. At
December 31, 1996, the Holding Company and the Bank were classified as well
capitalized.
The Federal Reserve Act requires depository institutions to maintain cash
reserves with the Federal Reserve Bank. In 1996 and 1995, the Bank's average
reserve balances were $1,832,000 and $813,000, respectively.
-70-
InterCounty Bancshares, Inc. and
The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 18 - PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for InterCounty Bancshares, Inc. (parent
company only) follows (thousands):
Condensed Balance Sheets
December 31
1996 1995
Assets:
Cash $ 2 $ 52
Investment in subsidiary 37,488 34,690
Other assets 218 107
------ ------
Total assets $37,708 $34,849
====== ======
Liabilities:
Long-term debt $ 755 $ 862
Other liabilities 205 153
------ ------
Total liabilities 960 1,015
Shareholders' equity 36,748 33,834
------ ------
Total liabilities and
shareholders' equity $37,708 $34,849
====== ======
Condensed Statements of Income
Years ended December 31
1996 1995 1994
Income:
Dividends from subsidiary $1,115 $ 568 $ 542
----- ----- -----
Expenses:
Interest on long-term debt 72 88 78
Other expense 35 34 2
----- ----- -----
Total expense 107 122 80
----- ----- -----
Income before income tax benefit and
equity in undistributed income of
subsidiary 1,008 446 462
Income tax benefit 2 11 -
Equity in undistributed income of
subsidiary 3,852 3,568 1,733
----- ----- -----
Net income $4,862 $4,025 $2,195
===== ===== =====
-71-
InterCounty Bancshares, Inc. and
The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 18 - PARENT COMPANY FINANCIAL INFORMATION (Continued)
Condensed Statements of Cash Flows
Years ended December 31 (thousands)
1996 1995 1994
Cash flows from operating activities:
Net income $ 4,862 $ 4,025 $ 2,195
Adjustments for non-cash items-
Equity in undistributed income
of subsidiary (3,852) (3,568) (1,733)
Payment of interest on long-term debt
by subsidiary 72 87 78
(Increase) decrease in other assets (111) 17 (124)
Provision for deferred taxes (2) (11) -
Release of earned ESOP shares 25 27 -
----- ----- -----
Net cash provided by operating activities 994 577 416
----- ----- -----
Cash flows from financing activities:
Cash dividends paid (795) (549) (417)
Payments to acquire treasury shares (249) (103) (9)
Proceeds from stock options exercised 6 120 14
Other, net (6) - -
----- ----- -----
Net cash used in financing activities (1,044) (532) (412)
----- ----- -----
Net change in cash (50) 45 4
Cash at beginning of year 52 7 3
----- ----- -----
Cash at end of year $ 2 $ 52 $ 7
===== ===== =====
-72-
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
BOARD OF DIRECTORS
Election of Directors
The Articles of Incorporation of InterCounty provide for a Board of Directors
consisting of not less than seven nor more than eleven directors, such number
to be fixed or changed by the Board of Directors or the shareholders. The
Board of Directors currently consists of nine directors divided into two
classes. Each class serves for a two-year period. Each of the directors of
InterCounty is also a director of the Bank.
The Board of Directors proposes the election of the following persons to terms
which will expire in 1999:
Position(s) Director
Name Age(1) Held Since
- ---- ------ ----------- --------
S. Craig Beam 45 Director 1990
James W. Foland 75 Director and Secretary 1983
B. Anthony Williams 62 Director and Chairman
of the Board 1981
Darleen M. Myers 64 Director 1995
Robert A. Raizk 42 Director 1995
______________________
(1) As of February 28, 1997.
If any nominee is unable to stand for election, the Proxies will be voted for
such substitute as the Board of Directors recommends.
The following directors will continue to serve after the Annual Meeting for
the terms indicated:
Position(s) Director Term
Name Age(1) Held Since Expires
- ---- ------ ----------- -------- -------
George F. Bush 61 Director 1988 1998
Charles L. Dehner 49 Director and Executive
Vice President of Inter-
County and the Bank and
Treasurer of InterCounty 1989 1998
Georgia H. Miller 59 Director 1990 1998
Timothy L. Smith 46 Director, Chief Executive
Officer and President of
InterCounty and the Bank 1989 1998
(1) As of February 28, 1997.
-73-
S. Craig Beam has been the President of Melvin Stone Company since 1989 and
served as General Manager before being elected President. Mr. Beam is also
the President of MC Trucking and a Trustee of Wilmington College.
James W. Foland, the Secretary of InterCounty, was employed by the Bank from
1956 until his retirement as Senior Vice President in 1983.
B. Anthony Williams has been Chairman of the Board of InterCounty since 1986.
Mr. Williams is also self-employed in agribusiness.
Darleen M. Myers is a Clinton County Commissioner. From 1993 to 1994, Ms.
Myers served as the Director of the Rainbow Village Child Day Care Center, and
from 1976 to 1993, she was an Extension Agent for The Ohio Cooperative
Extension Services.
Robert A. Raizk has been the President and Chief Executive Officer of The
Wilmington Iron & Metal Co., Inc., since August 1990. From 1985 to 1990, Mr.
Raizk was a commercial real estate broker with The Tipton Group, Inc.
George F. Bush has been the President and owner of Bush Auto Place, Inc.,
since 1970 and Bush Leasing, Inc., since 1971. Mr. Bush is also a member of
the Clinton Memorial Hospital Board of Directors.
Charles L. Dehner has been the Executive Vice President of InterCounty since
1993, Treasurer of InterCounty since 1984 and Executive Vice President of the
Bank since 1991. Mr. Dehner was Senior Vice President and Controller of the
Bank from 1988 to 1991.
Georgia H. Miller, formerly Manager of Volunteer Services and Patient
Representative for Clinton Memorial Hospital, retired in 1993. Ms. Miller
serves as a volunteer for Clinton Memorial Hospital and Auxiliary and is a
guardian ad litem for the Juvenile Court of Clinton County. Ms. Miller is
also a member of the Board of Habitat for Humanity.
Timothy L. Smith has been the President and Chief Executive Officer of
InterCounty and the Bank since 1989. From July 1988 until October 1989, Mr.
Smith was a Senior Vice President and Senior Loan Officer of the Bank. He is
also Chairperson of Chatfield College.
-74-
EXECUTIVE OFFICERS
The only executive officers of InterCounty are Messrs. Dehner, Foland, Smith
and Williams.
In addition to Mr. Smith and Mr. Dehner, the following persons are executive
officers of the Bank and may be deemed to participate in policy making for
InterCounty:
Name Age(1) Positions Held During Last Five Years
- ---- ------ -------------------------------------
Andrew J. McCreanor 47 Senior Vice President, Director of
Marketing and Customer Service; formerly
Vice President, Branch Administrator
R. James Parker 58 Executive Vice President, Senior Loan
Officer; prior to October 1991, Executive
Vice President of Bank One of Cincinnati
Walter H. Rowsey 48 Senior Vice President, Branch
Administrator; formerly Vice President,
Loan Division Manager
Howard T. Witherby 41 Senior Vice President, Operations
Division Manager; formerly Vice President
______________________________
(1) As of February 28, 1997.
SECTION 16 (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the federal securities laws, InterCounty's directors and executive
officers and persons holding more than ten percent (10%) of the common shares
of InterCounty are required to report their ownership of common shares and
changes in such ownership to the Securities and Exchange Commission (the
"SEC") and InterCounty. The SEC has established specific due dates for such
reports. Based upon a review of such reports, InterCounty must disclose any
failures to file such reports timely in Proxy Statements used in connection
with annual meetings of shareholders. The ESOP failed to timely file three
reports over the last three years, and Messrs. Beam and Raizk filed Forms 4
late in 1996.
-75-
Item 11. Executive Compensation
The following table presents certain information regarding the cash
compensation received by the chief executive officer of InterCounty and the
Bank and each executive officer of InterCounty or the Bank whose cash
compensation exceeded $100,000 during the fiscal years ended December 31,
1996, 1995 and 1994:
SUMMARY COMPENSATION TABLE
Annual Compensation(1)
-----------------------------------------------------
Name and Other Annual
Principal Position Year Salary($) Bonus($) Compensation($)
- ------------------ -----------------------------------------------------
Timothy L. Smith 1996 $167,374(2) $67,697 $400(5)
Chief Executive Officer, 1995 156,000(3) 43,036 401(5)
President of 1994 138,000(4) 56,169 559(5)
InterCounty and Bank
Charles L. Dehner 1996 117,459(2) 35,257 520(5)
Treasurer, 1995 109,795(9) 27,513 521(5)
Executive Vice 1994 104,125(4) 29,290 521(5)
President of InterCounty,
Executive Vice President
of Bank
R. James Parker 1996 110,834 35,917 685(5)
Executive Vice 1995 105,545 28,081 685(5)
President, Senior Loan 1994 101,125 31,844 685(5)
Officer of Bank
Long-Term Compensation
Awards
-----------------------------
Restricted Securities
Name and Stock Underlying All other
Principal Position Year Award(s)($) Options/SARs(#) Compensation
- ------------------ -----------------------------------------------------
Timothy L. Smith 1996 -0- -0-/-0- $ 1,426(6)
Chief Executive Officer, 1995 -0- 5,000/-0- 27,148(7)
President of 1994 -0- 3,253/-0- 21,007(8)
InterCounty and Bank
Charles L. Dehner 1996 -0- -0-/-0- 1,644(6)
Treasurer, 1995 -0- 3,500/-0- 24,387(7)
Executive Vice 1994 -0- -0-/-0- 18,729(8)
President of InterCounty,
Executive Vice President
of Bank
R. James Parker 1996 -0- -0-/-0- 3,048(6)
Executive Vice 1995 -0- 3,500/-0- 21,322(7)
President, Senior Loan 1994 -0- -0-/-0- 17,211(8)
Officer of Bank
-76-
(1) Cash compensation does not include amounts attributable to other
miscellaneous benefits received by executive officers. The cost to
InterCounty and the Bank of providing such benefits to each of the executive
officers listed above during the years ended December 31, 1996, 1995 and 1994,
was less than 10% of the officer's cash compensation, and such cost for all
executive officers as a group was less than 10% of the group's aggregate cash
compensation.
(2) Includes $6,625 of director's fees.
(3) Includes $4,500 of director's fees.
(4) Includes $3,000 of director's fees.
(5) Consists of amounts reimbursed to such executive officers for taxes paid
on whole life insurance premiums paid for the benefit of such executive
officers.
(6) Consists of premiums paid on whole life insurance for the benefit of the
officer. At the latest practicable date, the number of shares to be allocated
to the accounts of the ESOP participants for 1996 had not yet been determined.
(7) Consists of premiums paid in the amount of $1,426, $1,644 and $3,048 paid
on whole life insurance for the benefit of Messrs. Smith, Dehner and Parker,
respectively, and $25,722, $22,743, and $18,274 representing the aggregate
value at the date of allocation of 967, 855 and 687 shares allocated to the
ESOP accounts of Messrs. Smith, Dehner and Parker, respectively.
(8) Consists of premiums in the amount of $1,426, $1,644 and $3,048 paid on
whole life insurance for the benefit of Messrs. Smith, Dehner and Parker,
respectively, and $19,581, $17,085 and $14,163 representing the aggregate
value at the date of allocation of 918, 801 and 644 shares, respectively,
allocated to the ESOP accounts of Messrs. Smith, Dehner and Parker,
respectively.
(9) Includes $4,250 of director's fees.
-77-
The following table sets forth information regarding the number and value of
unexercised options held at December 31, 1996, by the persons named in the
Summary Compensation Table:
Aggregated Option/SAR Exercises In Last Fiscal Year
and 12/31/96 Option/SAR Values
Value of
Number of Securities Unexercised
Underlying Unexercised In-the-Money
Options/SARs Options/SARs
at 12/31/96(#) at 12/31/96(1)
Shares Acquired Value
on Exercise Realized Exercisable Exercisable/
Name (#) ($) /Unexercisable Unexercisable
- ---- ------------------------------------------------------------------
Timothy L. Smith -0- -0- 24,702/11,551 $377,314/119,520
Charles L. Dehner -0- -0- 17,500/7,000 $275,011/ 77,284
R. James Parker -0- -0- 2,800/4,200 $31,948/ 28,882
_____________________________
(1) An option is "in-the-money" if the fair market value of the underlying
stock exceeds the exercise price of the option. The figure represents the
value of such options, determined by multiplying the number of unexercised
options by the difference between the exercise price and the fair market value
of InterCounty's common shares on December 31, 1996, of $27.25 per share for
InterCounty's common shares at December 31, 1996. No established market for
InterCounty's common shares existed at December 31, 1996, InterCounty's common
shares are not traded on any securities exchange and the prices at which its
shares are traded are not quoted by a national quotation service.
Defined Benefit Plan
InterCounty sponsors a defined benefit pension plan (the "Pension Plan")
covering all employees age 21 or older who have completed at least one year of
service to InterCounty.
Due to an amendment of the Pension Plan in 1989, the retirement benefit
payable upon retirement at or after age 65 depends upon whether the employee
had credited service with InterCounty or the Bank before September 30, 1989.
If the employee had no credited service before September 30, 1989, the annual
retirement benefit will be equal to (1) 1.25% of annual compensation for each
plan year in which the employee was a participant in the Pension Plan and was
credited with a year of service, plus (2) for each plan year in which the
participant was credited with a year of service, 0.55% of that portion of the
employee's annual compensation that was above the employee's "Social Security
Covered Compensation," which is based upon the Social Security Taxable Wage
Base published by the federal government and which is changed annually.
-78-
If the employee had credited service before September 30, 1989, the annual
retirement benefit will be equal to (1) an amount determined by applying the
above formula for years of service after September 30, 1989; plus (2) the
greater of (a) 60% of the employee's average monthly compensation for the five
calendar years in which the employee's compensation was its highest preceding
the employee's 65th birthday or September 30, 1989 (whichever is earlier),
less 50% of the employee's primary Social Security benefits payable under
Title II of the Federal Social Security Act, the difference of which is
reduced proportionately for the number of years less than 30 that the employee
worked; or (b) 1.5% of the employee's average monthly compensation for the
three calendar years in which the employee's compensation was its highest
preceding the employee's 65th birthday or September 30, 1989 (whichever is
earlier); provided, however, that in making such computation in this clause
(b), the employee's compensation for any calendar year after 1980 will not
exceed the employee's 1980 calendar year compensation.
Under either formula, the credited years of service will be limited to 30. In
addition, for plan years beginning in 1987 through 1993, the term
"compensation" means all compensation paid or accrued up to $200,000 per year,
as adjusted for cost of living increases, and for years after 1993,
"compensation" includes all compensation paid or accrued up to $150,000, as
adjusted annually for cost of living increases.
The estimated annual benefit payable at age 65 pursuant to the Pension Plan to
each of Messrs. Smith, Dehner and Parker is $66,041, $52,736 and $27,003,
respectively.
Director Compensation
InterCounty does not pay director's fees. Each director of InterCounty who is
not a full-time employee of the Bank currently receives for services as a
director of the Bank a fee of $5,500 per year and $500 for each meeting of the
Board of Directors attended. Directors of the Bank who are full-time
employees of the Bank receive $3,000 per year and $375 for each meeting of the
Board of Directors attended.
Compensation Committee Report
InterCounty Bancshares, Inc. (the "Company"), is a bank holding company which
directly owns all of the outstanding capital stock of The National Bank and
Trust Company (the "Bank"). The Company's business consists primarily of the
business of the Bank. The financial results of the Company depend primarily
upon the Bank's financial results.
The Compensation Committee of the Board of Directors of the Bank (the
"Committee") is composed exclusively of non-employee directors. The
Committee's philosophy is to tie executive compensation to the achievement of
the Bank's goals and the resulting performance of the Company. The Committee
reviews executive performance and compensation and makes recommendations to
the full Board of Directors of the Bank for approval.
The Committee's goal is to accomplish the following specific objectives
through the use of base salary and incentive plans:
(1) Motivate personnel to perform and succeed according to the goals outlined
in the Bank's annual business plan;
(2) Retain key personnel critical to the long-term success of the Bank; and
(3) Utilize incentive plans, such as stock options, that reward executives
for corporate success and align the interests of management with those of the
shareholders;
-79-
Base Salary. Base Salary is the foundation of the Bank's compensation
program, providing income on which the executive can rely, but which is not so
large as to eliminate the executive's motivation to work hard to increase
shareholder value. An executive's base salary is directly related to his or
her position, job responsibilities, performance and contribution to the Bank's
success. The Committee reviews peer group information with respect to
compensation and company performance on a regional and national basis to
ensure salaries are competitive and in line with the industry.
Incentive Plan. The Bank also has an incentive compensation plan pursuant to
which awards are based on the Bank's achievement of predetermined goals
relating to return on average equity and return on average assets, and on the
participant's achievement of goals relating to his or her individual
contributions to the Bank. Threshold, target and maximum goals for corporate
performance are generally established at the beginning of each fiscal year.
All awards are established as a percentage of each participant's base salary.
Awards differ due to the contribution of the individual to the Bank's success.
Participants (except the Chief Executive Officer) earn awards by achieving
individual goals and assisting in achieving the Bank's goals. The more
control and influence a participant has on either individual goals or Bank
goals, the greater the participant's weighting on that particular factor. The
Chief Executive Officer's incentive plan awards are based solely on the
achievement of the Bank's goals.
If individual goals are achieved but the Bank fails to achieve its goals, no
incentive award will be made to any participant.
Stock Options. The Committee annually reviews the appropriateness of granting
stock options to senior management. The purposes of this long-term incentive
compensation are to provide an incentive to officers and key employees to
promote the success of the business and thereby increase shareholder value,
and to attract and retain the best available personnel. The Committee grants
options based on an individual's performance and contribution to the Bank's
success. All options granted to date have a term of 10 years and may be first
exercised to the extent of one-fifth each year for the first five years after
the date of grant.
CEO Compensation. Timothy L. Smith has been the President and the Chief
Executive Officer ("CEO") of the Company since October 1989. The Committee
used the executive compensation policy described above to determine Mr.
Smith's compensation.
In setting the base salary, cash incentive award and amount of stock options,
the Committee made an overall assessment of Mr. Smith's leadership in
achieving the Bank's long-term strategic and business goals. The Bank
achieved its corporate goals, including those related to return on equity and
return on assets, and Mr. Smith was determined to have contributed
substantially to the Bank's success.
Compensation Committee
S. Craig Beam
Georgia H. Miller
George F. Bush
Darleen M. Myers
James W. Foland
Robert A. Raizk
-80-
Compensation Committee Interlocks and Insider Participation
The Board of Directors of the Bank has a Compensation Committee whose members
are Messrs. Beam, Bush, Foland and Raizk and Mmes. Myers and Miller. None of
such persons are employees of the Bank or InterCounty.
Performance Graph
The following line graph compares the yearly percentage change in
InterCounty's cumulative total shareholder return against the cumulative
return of a broad index of The Nasdaq National Market and an index of banks
with total assets of $250 million to $500 million. The graph assumes the
investment of $100 on November 30, 1993. Cumulative total shareholder return
is measured by dividing (i) the sum of (A) the cumulative amount of dividends
for the measurement period, assuming dividend reinvestment, and (B) the
difference between the price of InterCounty's common shares at the end and at
the beginning of the measurement period; by (ii) the price of InterCounty's
common shares at the beginning of the measurement period.
[Performance Graph Represented by the Following Chart]
Period Ending
11/30/93 6/30/94 12/31/94 6/30/95 12/31/95 6/30/96 12/31/96
-------- ------- -------- ------- -------- ------- --------
InterCounty
Bancshares, Inc. 100.00 100.62 123.63 127.20 129.59 161.85 148.49
NASDAQ-Total U.S. 100.00 93.86 100.47 125.28 142.08 160.88 174.76
SNL Banks
($250M to $500M)
Index 100.00 110.16 109.04 124.40 147.16 162.96 191.08
-81-
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to the only
persons known to InterCounty to own beneficially more than five percent of
InterCounty's outstanding common shares as of February 28, 1997:
Percent of
Name and Address Amount Beneficially Common Shares
of Beneficial Owner Owned(1) Outstanding
- ------------------- ------------------- -------------
B. Anthony Williams(2)
6172 U. S. 22 East
Wilmington, Ohio 45177 224,098(2) 14.5%
Brooke A. Williams
148 E. 30th Street
Apartment 5D
New York, New York 10016 85,621 5.6%
Dana L. Williams
General Delivery
Telluride, Colorado 81435 86,228 5.6%
Lynn A. Williams
524 N. 27th Street
Richmond, Virginia 23223 85,449 5.5%
Beth Ellingwood
325 W. Sixth Street
Columbus, Ohio 43201 84,441 5.5%
Wilmington College
Fife Avenue
Wilmington, Ohio 45177 83,632 5.4%
The National Bank and
Trust Company and
InterCounty Bancshares, Inc.
Employee Stock Ownership Plan(3)
48 N. South Street
Wilmington, Ohio 45177 354,852(3) 23%
_____________________________
(1) Except as indicated for the shares held by the InterCounty Bancshares,
Inc. Employee Stock Ownership Plan (the "ESOP"), the beneficial owner has sole
voting and dispositive power.
(2) B. Anthony Williams is a director of InterCounty and The National Bank
and Trust Company (the "Bank").
(3) Such shares are held by the Bank as Trustee for the ESOP. Pursuant to
the ESOP, the Bank, as Trustee, has the power to vote in its sole discretion
all ESOP shares that have not been allocated to the accounts of participants.
At February 28, 1997, 95,087 shares had not been allocated. The Trustee may
dispose of shares held in the ESOP Trust only under limited circumstances
specified in the ESOP.
-82-
The following table sets forth certain information with respect to the number
of common shares of InterCounty beneficially owned by each director of
InterCounty and each executive officer of InterCounty whose cash compensation
during 1996 exceeded $100,000 and by all directors and executive officers of
InterCounty as a group as of February 28, 1997:
Amount and Nature of
Beneficial Ownership
------------------------------------
Sole Voting and Shared Voting and Percent of Common
Name Investment Power Investment Power Shares Outstanding
- ---- ------------------------------------ ------------------
S. Craig Beam 891 3,002 .3%
George F. Bush 2,655 -0- .2%
Charles L. Dehner 30,202(1) 14,105(2) 2.9%
James W. Foland 7,105 -0- .5%
Georgia H. Miller 498 -0- -%
Darleen M. Myers 4,234 -0- .3%
Robert A. Raizk 2,260 -0- .1%
Timothy L. Smith 40,683(3) 16,596(4) 3.7%
B. Anthony Williams 224,098 -0- 14.5%
R. James Parker 5,894(5) 2,940(6) .6%
All directors and
officers of
InterCounty as a
group (13 persons) 328,237(7) 60,118(8) 21.3%
_______________________________
(1) Includes 21,700 shares that may be acquired currently upon the exercise
of options.
(2) Consists of shares allocated to Mr. Dehner's ESOP account, with respect
to which Mr. Dehner has voting but not investment power.
(3) Includes 30,302 shares that may be acquired currently upon the exercise
of options.
(4) Consists of shares allocated to Mr. Smith's ESOP account, with respect to
which Mr. Smith has voting but not investment power.
(5) Includes 3,500 shares that may be acquired currently upon the exercise of
options.
(6) Consists of shares allocated to Mr. Parker's ESOP account, with respect
to which Mr. Parker has voting but not investment power.
(7) Includes 5,611 shares owned with sole voting and investment power by four
executive officers of the Bank, including Mr. Parker, who may be deemed to
perform policy making functions for InterCounty and 10,320 shares that may be
acquired currently by such persons upon the exercise of options.
(8) Includes 482 shares with respect to which the four executive officers
share voting and investment power and 26,418 shares allocated to the ESOP
accounts of such persons, with respect to which such persons have voting
power.
-83-
Item 13. Certain Relationships and Related Transactions
The Bank occasionally makes loans of various types to directors, officers and
employees of the Bank. Any of such loans outstanding during the last two
years were made in the ordinary course of business, on substantially the same
terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other Bank customers and did not involve
more than the normal risk of collectibility or present other unfavorable
features.
-84-
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements - See Index to Consolidated Financial
Statements on page 47 of this Form 10-K.
(2) Financial Statement Schedules - None
(3) Exhibits - See Exhibit Index at page 86 of this Form 10-K.
(b) No reports on Form 8-K have been filed during the last quarter of
the fiscal year covered by this Report.
-85-
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
11 Articles of Incorporation of
InterCounty Bancshares,Inc. Incorporated by reference to the
Registration Statement on Form S-1
filed by InterCounty on July 2, 1993
(the "S-1") with the Securities and
Exchange Commission (the "SEC"),
Exhibit 3.1 (Registration No. 33-
65608).
3.3 Code of Regulations of
InterCounty Bancshares, Inc. Incorporated by reference to the S-1,
Exhibit 3.2.
10.1 InterCounty Bancshares, Inc.
1993 Stock Option Plan Incorporated by reference to Exhibit
10.1 to the Registrant's Annual Report
on Form 10-K for the year ended
December 31, 1993.
10.2 InterCounty Bancshares, Inc.
Non-qualified Stock Option
Plan Incorporated by reference to the S-1,
Exhibit 10.1.
10.3 The National Bank and Trust
Company Recognition
and Retention Plan Incorporated by reference to
Amendment No. 1 to the Form S-1
filed by InterCounty with the SEC on
October 12, 1993, Exhibit 10.3.
11 Computation of Consolidated
Earnings Per Common Share
for the Years Ended
December 31, 1996, 1995 and
1994
21 Subsidiary of InterCounty
Bancshares, Inc.
23 Consent of Independent Certified
Public Accountants
27 Financial Data Schedule
99 Safe Harbor Under the Private
Securities Litigation Reform
Act of 1995
-86-
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
-------------------------
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 below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /s/ Charles L. Dehner By /s/ B. Anthony Williams
- ---------------------------- ------------------------------
Charles L. Dehner B. Anthony Williams
Executive Vice President, Chairman of the Board and a Director
Treasurer and a Director
(Principal Accounting Officer)
Date March 18, 1997 Date March 18, 1997
By /s/ James W. Foland By /s/ Timothy L. Smith
- --------------------------- ------------------------------
James W. Foland Timothy L. Smith
Secretary and a Director President, Chief Executive Officer
and a Director
Date March 18, 1997 Date March 18, 1997
By /s/ S. Craig Beam By /s/ George F. Bush
- --------------------------- ------------------------------
S. Craig Beam George F. Bush
Director Director
Date March 18, 1997 Date March 18, 1997
By /s/ Georgia H. Miller By /s/ Robert A. Raizk
- --------------------------- ------------------------------
Georgia H. Miller Robert A. Raizk
Director Director
Date March 18, 1997 Date March 18, 1997
By /s/ Darleen M. Myers
- ---------------------------
Darleen M. Myers
Director
Date March 18, 1997
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Exhibit 11
InterCounty Bancshares, Inc.
Computation of Consolidated Earnings Per Common Share
For the Years Ended December 31, 1996, 1995 and 1994
(In thousands, except shares and per share data)
1996 1995 1994
Net income $ 4,862 $ 4,025 $ 2,195
Weighted average shares:
Common shares issued 1,544,954 1,547,743 1,546,744
Unreleased common shares
held by ESOP 14,458 16,921 19,428
--------- --------- ---------
Common shares outstanding 1,530,496 1,530,822 1,527,316
Add -common equivalent shares
representing shares issuable
upon exercise of employee
stock options 27,932 27,932 17,218
--------- --------- ---------
Adjusted weighted average number
of shares outstanding used in
calculation of primary
earnings per common share 1,568,574 1,558,754 1,544,534
Add -incremental shares representing
shares issuable upon exercise
of employee stock options based
on year-end estimated fair
value (a) 3,673 6,819 2,772
--------- --------- ---------
Adjusted weighted average number
of shares outstanding used in
calculation of fully diluted
earnings per common share 1,572,247 1,565,573 1,547,306
========= ========= =========
Earnings per common share $3.18 $ 2.63 $ 1.44
Primary earnings per common share 3.10 2.58 1.42
Fully diluted earnings per common
share 3.09 2.57 1.42
(a) Since there is presently no active public trading market for the
Company's shares, nor are the prices at which common shares have
been traded published by any national securities association or
quotation service, fair value for earnings per common share purposes
was assumed to be $27.25 and $24.00 at December 31, 1996 and 1995,
respectively, and book value or $18.56 at December 31, 1994.
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Exhibit 21
INTERCOUNTY BANCSHARES, INC.
SUBSIDIARIES OF THE REGISTRANT
At December 31, 1996
STATE OF PERCENTAGE
NAME OF CORPORATION INCORPORATION OF OWNERSHIP
- ------------------- ------------- ------------
The National Bank & Trust Company Ohio 100%
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EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
InterCounty Bancshares, Inc. on Form S-8, filed on March 23, 1995, of our
report dated January 30, 1997, on the 1996 Consolidated Financial Statements
of InterCounty Bancshares, Inc.
/s/ J.D. Cloud & Co. P.L.L.
Cincinnati, Ohio
March 27, 1997
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EXHIBIT 99
Safe Harbor Under the Private Securities Litigation Reform Act of 1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. InterCounty
Bancshares, Inc. ("InterCounty") desires to take advantage of the "safe
harbor" provisions of the Act. Certain information, particularly information
regarding future economic performance and finances and plans and objectives of
management, contained or incorporated by reference in InterCounty's Annual
Report on Form 10-K for fiscal year 1996 is forward-looking. In some cases,
information regarding certain important factors that could cause actual
results of operations or outcomes of other events to differ materially from
any such forward-looking statement appear together with such statement. In
addition, forward-looking statements are subject to other risks and
uncertainties affecting the financial institutions industry, including, but
not limited to, the following:
Interest Rate Risk
InterCounty's operating results are dependent to a significant degree on its
net interest income, which is the difference between interest income from
loans, investments and other interest-earning assets and interest expense on
deposits, borrowings and other interest-bearing liabilities. The interest
income and interest expense of InterCounty change as the interest rates on
interest-earning assets and interest-bearing liabilities change. Interest
rates may change because of general economic conditions, the policies of
various regulatory authorities and other factors beyond InterCounty's control.
In a rising interest rate environment, loans tend to prepay slowly and new
loans at higher rates increase slowly, while interest paid on deposits
increases rapidly because the terms to maturity of deposits tend to be shorter
than the terms to maturity or prepayment of loans. Such differences in the
adjustment of interest rates on assets and liabilities may negatively affect
InterCounty's income.
Possible Inadequacy of the Allowance for Loan Losses
InterCounty maintains an allowance for loan losses based upon a number of
relevant factors, including, but not limited to, trends in the level of
nonperforming assets and classified loans, current and anticipated economic
conditions in the primary lending area, past loss experience, possible losses
arising from specific problem loans and changes in the composition of the loan
portfolio. While the Board of Directors of InterCounty believes that it uses
the best information available to determine the allowance for loan losses,
unforeseen market conditions could result in material adjustments, and net
earnings could be significantly adversely affected if circumstances differ
substantially from the assumptions used in making the final determination.
Loans not secured by one- to four-family residential real estate are generally
considered to involve greater risk of loss than loans secured by one- to
four-family residential real estate due, in part, to the effects of general
economic conditions. The repayment of commercial loans and multifamily
residential and nonresidential real estate loans generally depends upon the
cash flow from the operation of the business or property, which may be
negatively affected by national and local economic conditions. Construction
loans may also be negatively affected by such economic conditions,
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particularly loans made to developers who do not have a buyer for a property
before the loan is made. The risk of default on consumer loans increases
during periods of recession, high unemployment and other adverse economic
conditions. When consumers have trouble paying their bills, they are more
likely to pay mortgage loans than consumer loans. In addition, the collateral
securing such loans, if any, may decrease in value more rapidly than the
outstanding balance of the loan.
Competition
The National Bank and Trust Company (the "Bank") competes for deposits with
other commercial banks, savings associations and credit unions and issuers of
commercial paper and other securities, such as shares in money market mutual
funds. The primary factors in competing for deposits are interest rates and
convenience of office location. In making loans, the Bank competes with other
commercial banks, savings and loan associations, savings banks, consumer
finance companies, credit unions, leasing companies, mortgage companies and
other lenders. Competition is affected by, among other things, the general
availability of lendable funds, general and local economic conditions, current
interest rate levels and other factors which are not readily predictable. The
size of financial institutions competing with the Bank is likely to increase
as a result of changes in statutes and regulations eliminating various
restrictions on interstate and inter-industry branching and acquisitions.
Such increased competition may have an adverse effect upon the Bank.
Legislation and Regulation That May Adversely Affect InterCounty's Earnings
The Bank is subject to regulation, examination and oversight by the Office of
the Comptroller of the Currency (the "OCC"), special examination by the Board
of Governors of the Federal Reserve System (the "FRB") and some regulation,
oversight and special examination by the Federal Deposit Insurance Corporation
(the "FDIC"). As a bank holding company, InterCounty is also subject to
regulation and examination by the FRB. Such supervision and regulation of the
Bank and InterCounty are intended primarily for the protection of depositors
and not for the maximization of shareholder value and may affect the ability
of the company to engage in various business activities. The assessments,
filing fees and other costs associated with reports, examinations and other
regulatory matters are significant and may have an adverse effect on
InterCounty's net earnings.
The FDIC is authorized to establish separate annual assessment rates for
deposit insurance of members of the Bank Insurance fund (the "BIF") and the
Savings Association Insurance Fund (the "SAIF"). The FDIC has established a
risk-based assessment system for both SAIF and BIF members. Under such
system, assessments may vary depending on the risk the institution poses to
its deposit insurance fund. Such risk level is determined by reference to the
institution's capital level and the FDIC's level of supervisory concern about
the institution.
Because the reserves of the BIF exceeded the statutorily set minimum,
assessments for healthy BIF institutions were significantly decreased in the
last half of 1995 and were reduced to $2,000 per year for well-capitalized,
well-managed banks, like the Bank, in 1996. Assessments paid by healthy
institutions on deposits in the SAIF exceeded that paid by healthy banks by
approximately $.23 per $100 in deposits in 1996.
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Federal legislation that was effective September 30, 1996, provided for the
recapitalization of the SAIF by means of a special assessment of $.657 per
$100 of SAIF deposits held at March 31, 1995, in order to increase SAIF
reserves to the level required by law. Certain banks were required to pay the
special assessment on only 80% of SAIF deposits held at that date. That
legislation also required that BIF members begin to share the cost of prior
thrift failures. As a result of the recapitalization of the SAIF and this
cost sharing between BIF and SAIF members, FDIC assessments for healthy
institutions during 1997 have been set at $.013 per $100 in BIF deposits and
$.064 per $100 in SAIF deposits. The recapitalization plan also provides for
the merger of the BIF and the SAIF effective January 1, 1999, assuming there
are no savings associations under federal law. Under separate proposed
legislation, Congress is considering the elimination of the federal thrift
charter. InterCounty cannot predict the impact of such legislation on
InterCounty or the Bank until the legislation is enacted.
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