Item 1. Description of Business
GENERAL
InterCounty Bancshares, Inc. ("InterCounty"), an Ohio corporation, is a bank holding company which owns all of the issued and outstanding common shares of The National Bank and Trust Company, chartered under the laws of the United States (the "Bank"). The Bank is engaged in the commercial banking business in Southwestern Ohio, providing a variety of consumer and commercial financial services. The primary business of the Bank consists of accepting deposits, through various consumer and commercial deposit products, and using such deposits to fund consumer loans, including automobile loans, loans secured by residential and non-residential real estate, and commercial and agricultural loans. All of the foregoing deposit and lending services are available at each of the Bank's 17 full-service offices. In addition, the Bank has one office which has drive-in facilities only and two remote service units. The Bank has also installed 83 cash dispensers in convenience stores in three states as of the end of 2000. The Bank also has a trust department which presently administers 779 accounts having combined assets of $234 million. On October 8, 1998, the Bank acquired all of the outstanding common shares of Phillips Insurance Agency Group, Inc. ("Phillips Group"), the holding company for Phillips Casualty Insurance Agency, Inc., and Phillips Life Insurance Agency, Inc. (the "Phillips Agencies"). The shares of Phillips Group were exchanged for 53,606 common shares of InterCounty. On December 11, 1998, the Bank acquired all of the outstanding common shares of Arnold Jones Insurance Agency, Inc. (the "Jones Agency"), in exchange for 17,777 common shares of InterCounty. In July 1999, the three operating agencies were merged into one agency called The Phillips Insurance Agency, Inc. In December 2000, The Phillips Insurance Agency, Inc.'s name was changed to NB&T Insurance Agency, Inc. The NB&T Insurance Agency, Inc. has its principal office in Wilmington, Ohio.
Because of its ownership of all the outstanding stock of the Bank, InterCounty is subject to regulation, examination and oversight by the Board of Governors of the Federal Reserve System (the "FRB") under the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Bank, as a national bank, is subject to regulation, examination and oversight by the Office of the Comptroller of the Currency (the "OCC") and special examination by the FRB. The Bank is a member of the Federal Reserve Bank of Cleveland. In addition, since its deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC"), the Bank is also subject to some regulation, oversight and special examination by the FDIC. The Bank must file periodic financial reports with the FDIC, the OCC and the Federal Reserve Bank of Cleveland. Examinations are conducted periodically by these federal regulators to determine whether the Bank and InterCounty are in compliance with various regulatory requirements and are operating in a safe and sound manner.
Since its incorporation in 1980, InterCounty's activities have been limited primarily to holding the common shares of the Bank. Consequently, the following discussion focuses primarily on the business of the Bank.
FORWARD LOOKING STATEMENTS
In addition to the historic financial information contained herein with respect to InterCounty, the following discussion contains forward-looking statements that involve risks and uncertainties. Economic circumstances, InterCounty's operations and InterCounty's actual results could differ significantly from those discussed in the forward-looking statements. Some of the factors that could cause or contribute to such differences are discussed herein but also include changes in the economy and interest rates in the nation and InterCounty's general market area. The forward-looking statements contained herein include those with respect to the following matters:
1. Management's expectation that it will continue to expand its consumer lending activities, other than automobile loans; 2. Management's determination of the adequacy of the loan loss allowance; 3. The effect of changes in interest rates; 4. Growth in the real estate and commercial loan portfolio; and 5. Management's belief that a substantial percentage of the certificates of deposit maturing within one year will renew with the Bank at maturity.
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.
Commercial and Industrial Lending. Commercial and industrial lending has been an area of growth for the Bank. The Bank originates loans to businesses in its market area, including "floor plan" loans to automobile dealers and loans guaranteed by the Small Business Administration. The typical commercial borrower is a small to mid-sized company with annual sales under $5,000,000. The majority of commercial loans are made at adjustable rates of interest tied to the prime rate. Commercial loans typically have terms of up to five years. At December 31, 2000 the Bank had $92.3 million, or 25% of total loans, invested in commercial and industrial loans.
Commercial and industrial lending entails significant risks. Such loans are subject to greater risk of default during periods of adverse economic conditions. Because such loans are secured by equipment, inventory, accounts receivable and other non-real estate assets, the collateral may not be sufficient to ensure full payment of the loan in the event of a default.
Commercial Real Estate. The Bank makes loans secured by commercial real estate located in its market area. Such loans generally are adjustable-rate loans for terms of up to 20 years. The types of properties securing loans in the Bank's portfolio include warehouses, retail outlets and general industrial use properties. At December 31, 2000, the Bank had $42.7 million, or 11% of total loans, invested in commercial real estate loans.
Commercial real estate lending generally entails greater risks than residential real estate lending. Such loans typically involve larger balances and depend on the income of the property to service the debt. Consequently, the risk of default on such loans may be more sensitive to adverse economic conditions. The Bank attempts to minimize such risks through prudent underwriting practices.
Agricultural Loans. The Bank makes agricultural loans, which include loans to finance farm operations, equipment purchases, and land acquisition. The repayment of such loans is significantly dependent upon income from farm operations, which can be adversely affected by weather and other physical conditions, government policies and general economic conditions. At December 31, 2000, the Bank had $18.3 million, or 5% of total loans, invested in agricultural loans.
Residential Real Estate. The Bank makes loans secured by one- to four-family residential real estate and multi-family (over four units) real estate located in its market area. The Bank originates both fixed-rate mortgage loans and adjustable-rate mortgage loans ("ARMs"). Fixed-rate loans with terms of 15 to 30 years are typically originated for sale in the secondary market. ARMs are held in the Bank's portfolio. At December 31, 2000, the Bank had $145.6 million, or 39% of total loans, invested in residential real estate loans.
Installment Loans. The Bank makes a variety of consumer installment loans, including home equity loans, automobile loans, recreational vehicle loans, and overdraft protection. Consumer loans involve a higher risk of default than loans secured by one- to four-family residential real estate, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciating assets, such as automobiles. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation, and the remaining deficiency may not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections depend on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, illness or personal bankruptcy. Various federal and state laws, including federal and state bankruptcy and insolvency laws, may also limit the amount which can be recovered on such loans. Management believes that the Bank's underwriting practices have resulted in a favorable delinquency ratio and loan loss experience for this portion of the Bank's total loan portfolio.
At December 31, 2000, the Bank had $71.4 million, or 19% of total loans, invested in installment loans. The Bank has reduced its efforts to originate new and used automobile loans due to increased competition and
narrowing interest rate spreads. The Bank expects to continue, subject to market conditions, to expand its other consumer lending activities as part of its plan to provide a wide range of personal financial services to its customers.
Credit Card Service. The Bank offers credit card services directly through a correspondent bank.
Loan Processing. Loan officers are authorized by the Board of Directors to approve loans up to specified limits. Loans exceeding the loan officers' approval authority are referred to the Bank's Senior Loan Committee. Any loans made by the Bank in excess of the limits established for the Senior Loan Committee must be approved by the Chairman of the Board and the President of the Bank as representatives of the Board of Directors. All loans in excess of $50,000 are reported to the Board on a monthly basis.
Loan, Originated, Purchases and Sales. Although the Bank generally does not purchase loans, purchases could occur in the future. Fixed-rate residential real estate loans are originated for sale in the secondary market. From time to time, the Bank sells participation interests in loans it originates.
Delinquent Loans, Non-performing Assets and Classified Assets. The Bank attempts to minimize loan delinquencies through aggressive collection efforts. When a borrower fails to make a required payment on a loan, the Bank attempts to cause the deficiency to be cured by contacting the borrower. In most cases, deficiencies are cured promptly.
Generally, when a real estate loan becomes delinquent more than 90 days, an evaluation of the security is performed. If the evaluation indicates that the value of the collateral is less than the book value of the loan, a valuation allowance is established for such loan. When deemed appropriate by management, the Bank institutes action to foreclose on the real estate or to acquire the real estate by deed in lieu of foreclosure. A decision as to whether and when to initiate foreclosure proceedings is based on such factors as the amount of the outstanding loan in relation to the original indebtedness, the extent of the delinquency and the borrower's ability and willingness to cooperate in curing delinquencies. If a foreclosure occurs, the real estate is sold at public sale and may be purchased by the Bank. Installment loans are generally charged off if four payments have been missed. Generally, all other loans are placed on non-accrual status if they are 90 days or more delinquent. A loan may remain on an accrual status after it is 90 days delinquent if it is reasonably certain the account will be settled in its entirety or brought current within a 30-day period. The current year's accrued interest on loans placed on non-accrual status is charged against earnings. Previous year's accrued interest is charged against the allowance for loan losses. Cash payments received on non-accrual loans are applied against principal until the balance is repaid. Any remaining payments are credited to earnings. Non-performing loans include non-accrual loans, renegotiated loans and ninety days or more past due loans.
If interest on non-accrual loans had been recognized during 2000, such income would have been $279,000. The amount recognized was not material.
Real estate acquired, or deemed acquired, by the Bank as a result of foreclosure proceedings is classified as other real estate owned ("OREO") until it is sold. Interest accrual, if any, ceases no later than the date of acquisition of the real estate, and all costs incurred from such date in maintaining the property are expensed. Costs relating to the development and improvement of the property are capitalized. OREO is recorded by the Bank at the lower of cost or fair value less estimated costs of disposal, and any write-down resulting therefrom is charged to the allowance for loan losses. If fair value less estimated costs of disposal subsequently falls below the carrying amount, a valuation allowance account is established in the amount of the deficiency. If the fair value less estimated costs of disposal subsequently increases and is more than the carrying amount, the valuation allowance is reduced, but not below zero. Increases or decreases in the valuation allowance are charged or credited to income.
Allowance for Loan Losses. Federal regulations require that the Bank establish prudent general allowances for loan losses. Senior management, with oversight responsibility provided by the Board of Directors, reviews on a monthly basis the allowance for loan losses as it relates to a number of relevant factors, including but not limited to, historical trends in the level of non-performing assets and classified loans, current charge-offs and the amount of the allowance as a percent of the total loan portfolio. While management believes that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments, and net earnings could be significantly affected if circumstances differ substantially from the assumptions used in making the final determination. At December 31, 2000, the Bank's allowance for loan losses totaled $3.8 million and 56% was allocated to specific credits, and the rest was allocated based on previous charge-off experience, portfolio risk, economic conditions and anticipated loan growth.
Because the loan loss allowance is based on estimates, it is monitored regularly and adjusted as necessary to provide an adequate allowance.
Investment Activities
The following table sets forth the amortized cost of the Bank's securities portfolio at December 31, 2000. U.S. agency mortgage-backed securities are categorized according to their expected prepayment speeds. All other securities are categorized based on contractual maturity. Actual maturities may differ from contractual maturities when borrowers have the right to call or prepay obligations. Yields do not include the effects of income taxes.
Trust Services
The Bank received trust powers in 1922 and currently holds $234 million in net assets held in 794 accounts on December 31, 2000 in the Trust Department. These assets are not included in the Bank's balance sheet because, under federal law, neither the Bank nor its creditors can assert any claim against funds held by the Bank in its fiduciary capacity.
In addition to administering trusts, the services offered by the Trust Department include investment management, estate planning and administration, tax and financial planning and employee benefit plan administration. During 1997, the Trust Department entered into an agreement with a licensed broker- dealer and insurance agent to provide investment services to customers of the Bank and others, enabling them to purchase fixed annuities, variable annuities, mutual funds, and stocks and bonds. The Trust Department is staffed by four officers and five staff members and generated $1,276,000 in fee income during 2000.
Deposits and Borrowings
General. Deposits have traditionally been the primary source of the Bank's funds for use in lending and other investment activities. In addition to deposits, the Bank derives funds from interest payments and principal repayments on loans and income on earning assets. Loan payments are a relatively stable source of funds, while deposit inflows and outflows fluctuate more in response to general interest rates and money market conditions.
Deposits. Deposits are attracted principally from within the Bank's market area through the offering of numerous deposit instruments, including checking accounts, regular passbook savings accounts, NOW accounts, money market deposit accounts, term certificate accounts and individual retirement accounts ("IRAs"). Interest rates paid, maturity terms, service fees and withdrawal penalties for the various types of accounts are established periodically by the Bank's Asset/Liability Committee and the Executive Committee based on the Bank's liquidity requirements, growth goals and market trends. The Company has not used brokers in the past to attract deposits, although competition from banks and other financial institutions has caused the Company to include this as a viable alternative to funding needs. Currently the amount of deposits from outside the Bank's market area is not significant.
Borrowings. The Federal Reserve System functions as a central reserve bank providing credit for its member banks and certain other financial institutions. As a member in good standing of the Federal Reserve Bank of Cleveland, the Bank is authorized to apply for advances, provided certain standards of credit-worthiness have been met. The Bank is also a member of the Federal Home Loan Bank system. The Bank currently has outstanding $86.0 million of borrowings from the Federal Home Loan Bank used primarily to fund the purchase of U.S. Agency mortgage-backed securities and municipal bonds.
Average Balance Sheets
Competition
The Bank competes for deposits with other commercial banks, savings associations and credit unions and with the issuers of commercial paper and other securities, such as shares in money market mutual funds. The primary factors in competing for deposits are interest rates and convenience of office location. In making loans, the Bank competes with other commercial banks, savings associations, mortgage bankers, consumer finance companies, credit unions, leasing companies, insurance companies and other lenders. The Bank competes for loan originations primarily through the interest rates and loan fees it charges and through the efficiency and quality of services it provides to borrowers. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels and other factors which are not readily predictable. For years the Bank has competed within its market area
with several regional bank holding companies, each with assets far exceeding those of the Bank. The size of these financial institutions and others competing with the Bank is likely to increase further as a result of changes in statutes and regulations eliminating various restrictions on interstate and inter-industry branching and acquisitions. Community banks will be challenged by these larger competitors and the greater capital resources they control.
REGULATION
General
Because of its ownership of all the outstanding stock of the Bank, InterCounty is subject to regulation, examination and oversight by the FRB as a bank holding company under the BHCA. The Bank, as a national bank, is subject to regulation, examination and oversight by the OCC and special examination by the FRB. The Bank is a member of the Federal Reserve Bank of Cleveland and a member of the Federal Home Loan Bank of Cincinnati. In addition, since its deposits are insured by the FDIC, the Bank is also subject to some regulation, oversight and special examination by the FDIC. The Bank must file periodic financial reports with the FDIC, the OCC and the Federal Reserve Bank of Cleveland. Examinations are conducted periodically by these federal regulators to determine whether the Bank and InterCounty are in compliance with various regulatory requirements and are operating in a safe and sound manner. In general, the FRB may initiate enforcement actions for violations of law and regulations.
Bank Holding Company Regulation
As a bank holding company, InterCounty may be subject to restrictions on share repurchases.
The FRB has also adopted capital adequacy guidelines for bank holding companies, pursuant to which, on a consolidated basis, InterCounty must maintain total capital of at least 8% of risk-weighted assets. Risk-weighted assets consist of all assets, plus credit equivalent amounts of certain off- balance sheet items, which are weighted at percentage levels ranging from 0% to 100%, based on the relative credit risk of the asset. At least half of the total capital to meet this risk-based requirement must consist of core or "Tier 1" capital, which includes common stockholders' equity, qualifying perpetual preferred stock (up to 25% of Tier 1 capital) and minority interests in the equity accounts of consolidated subsidiaries, less goodwill. The remainder of total capital may consist of supplementary or "Tier 2 capital". In addition to this risk-based capital requirement, the FRB requires bank holding companies to meet a leverage ratio of a minimum level of Tier 1 capital to average total consolidated assets of 3%, if they have the highest regulatory examination rating, well-diversified risk and minimal anticipated growth or expansion. All other bank holding companies are expected to maintain a leverage ratio of at least 4% of average total consolidated assets. InterCounty was in compliance with these capital requirements at December 31, 2000. For InterCounty's capital ratios, see Note 18 to the Consolidated Financial Statements in Item 8.
A bank holding company is required by law to guarantee the compliance of any insured depository institution subsidiary that may become "undercapitalized" (defined in the regulations as not meeting minimum capital requirements) with the terms of the capital restoration plan filed by such subsidiary with its appropriate federal banking agency.
The BHCA restricts InterCounty's ownership or control of the outstanding shares of any class of voting stock of any company engaged in a nonbanking business, other than companies engaged in certain activities determined by the FRB to be closely related to banking. In addition, the FRB has the authority to require a bank holding company to terminate any activity or relinquish control of any nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the determination by the FRB that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company. InterCounty currently has no nonbank subsidiaries, except subsidiaries of the Bank. The ownership of subsidiaries of the Bank is regulated by the OCC, rather than the FRB.
On November 12, 1999, President Clinton signed into law the Gramm-Leach- Bliley Act (also known as the Financial Services Modernization Act of 1999). The Financial Services Modernization Act permits, effective March 11, 2000, bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized under the Federal Deposit Insurance Corporation Act of 1991 prompt corrective action provisions is well managed, and has at least a satisfactory rating under the Community Reinvestment Act, by filing a declaration that the bank holding company wishes to become a financial holding company. No regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board.
The Financial Services Modernization Act defines "financial in nature" to include:
- securities underwriting, dealing and market making; - sponsoring mutual funds and investment companies; - insurance underwriting and agency; - merchant banking; and - activities that the Federal Reserve Board has determined to be closely related to banking.
A national bank also may engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, through a financial subsidiary of the bank, if the bank is well capitalized, well managed and has at least a satisfactory Community
Reinvestment Act rating. Subsidiary banks of a financial holding company or national banks with financial subsidiaries must continue to be well capitalized and well managed in order to continue to engage in activities that are financial in nature without regulatory actions or restrictions, which could include divestiture of the financial in nature subsidiary or subsidiaries. In addition, a financial holding company or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank has a Community Reinvestment Act rating of satisfactory or better.
Transactions between InterCounty and the Bank are subject to statutory limits in Sections 23A and 23B of the Federal Reserve Act (the "FRA"). See National Bank Regulation -- Office of the Comptroller of the Currency."
The FRB must approve the application of a bank holding company to acquire any bank or savings association.
National Bank Regulation
Office of the Comptroller of the Currency. The OCC is an office in the Department of the Treasury and is subject to the general oversight of the Secretary of the Treasury. The OCC is responsible for the regulation and supervision of all national banks, including the Bank. The OCC issues regulations governing the operation of national banks and, in accordance with federal law, prescribes the permissible investments and activities of national banks. The Bank is authorized to exercise trust powers in accordance with OCC guidelines. See "Description of Business-Trust Services." National banks are subject to regulatory oversight under various consumer protection and fair lending laws. These laws govern, among other things, truth-in-lending disclosure, equal credit opportunity, fair credit reporting and community reinvestment.
The Bank is required to meet certain minimum capital requirements set by the OCC. These requirements consist of risk-based capital guidelines and a leverage ratio, which are substantially the same as the capital requirements imposed on InterCounty. The Bank was in compliance with those capital requirements at December 31, 2000. For the Bank capital ratios, see Note 18 to the Consolidated Financial Statements in Item 8. The OCC may adjust the risk-based capital requirement of a national bank on an individualized basis to take into account risks due to concentrations of credit or nontraditional activities.
The OCC has adopted regulations governing prompt corrective action to resolve the problems of capital deficient and otherwise troubled national banks. At each successively lower defined capital category, a national bank is subject to more restrictive and numerous mandatory or discretionary regulatory actions or limits, and the OCC has less flexibility in determining how to resolve the problems of the institution. In addition, the OCC generally can downgrade a national bank's capital category, notwithstanding its capital level, if, after notice and opportunity for hearing, the national bank is
deemed to be engaging in an unsafe or unsound practice, because it has not corrected deficiencies that resulted in it receiving a less than satisfactory examination rating on matters other than capital or it is deemed to be in an unsafe or unsound condition. The Bank's capital at December 31, 2000, met the standards for the highest capital category, a well-capitalized bank.
A national bank is subject to restrictions on the payment of dividends, including dividends to a holding company. A dividend may not be paid if it would cause the bank not to meet its capital requirements. In addition, the dividends that a Bank subsidiary can pay to its holding company without prior approval of regulatory agencies is limited to net income plus its retained net income for the preceding two years. Based on the current financial condition of the Bank, these provisions are not expected to affect the current ability of the Bank to pay dividends to InterCounty in an amount customary for the Bank.
OCC regulations generally limit the aggregate amount that a national bank can lend to one borrower or aggregated groups of related borrowers to an amount equal to 15% of the bank's unimpaired capital and surplus. A national bank may loan to one borrower an additional amount not to exceed 10% of the association's unimpaired capital and surplus, if the additional amount is fully secured by certain forms of "readily marketable collateral." Loans to executive officers, directors and principal shareholders and their related interests must conform to the OCC lending limits. All transactions between national banks and their affiliates, including InterCounty, must comply with Sections 23A and 23B of the FRA, which limit the amounts of such transactions and require that the terms of the transactions be at least as favorable to the Bank as the terms would be of a similar transaction between the Bank and an unrelated party. The Bank was in compliance with these requirements and restrictions at December 31, 2000.
Federal Deposit Insurance Corporation. The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of federally insured banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The FDIC administers two separate insurance funds, the BIF for commercial banks and state savings banks and the SAIF for savings associations and for banks that have acquired SAIF deposits. The FDIC is required to maintain designated levels of reserves in each fund.
The Bank is a member of the BIF, and, at December 31, 2000, it had $387.8 million in deposits insured in the BIF, as well as $18.9 million, acquired in a merger, insured in the SAIF.
The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of each of the BIF and the SAIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to its target level within a reasonable
time and may decrease such rates if such target level has been met. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments vary based on the risk the institution poses to its deposit insurance fund. The risk level is determined based on the institution's capital level and the FDIC's level of supervisory concern about the institution. Insurance of deposits may be terminated by the FDIC if it finds that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition enacted or imposed by the institution's regulatory agency.
Federal Reserve Board. The FRA requires national banks to maintain reserves against their net transaction accounts (primarily checking and NOW accounts). The amounts are subject to adjustment by the FRB. At December 31, 2000, the Bank was in compliance with its reserve requirements.
Federal Home Loan Banks. The Federal Home Loan Banks (the FHLBs) provide credit to their members in the form of advances. As a member, the Bank must maintain an investment in the capital stock of the FHLB of Cincinnati in an amount equal to the greater of 1% of the aggregate outstanding principal amount of the Bank's residential real estate loans, home purchase contracts and similar obligations at the beginning of each year, or 5% of its advances from the FHLB. The Bank is in compliance with this requirement with an investment in FHLB of Cincinnati stock having a book value of $ 5,912,000 at December 31, 2000. The FHLB advances are secured by collateral in one or more specified categories. The amount a member may borrow from the FHLB is limited based upon the amounts of various assets held by the member. All long-term advances by each FHLB must be made only to provide funds for residential housing finance.
Ohio Department of Insurance. The Bank's insurance agency operating subsidiaries are subject to the insurance laws and regulations of the State of Ohio and the Ohio Department of Insurance. The insurance laws and regulations require education and licensing of agencies and individual agents, require reports and impose business conduct rules.
Item 2.
Item 2. Properties
InterCounty Bancshares, Inc. and The National Bank and Trust Company own and occupy their main offices located at 48 North South Street, Wilmington, Ohio. The National Bank and Trust Company also owns or leases seventeen full-service branch offices, one remote drive-through ATM facility, and one remote drive-in facility, all of which are located in Clinton, Brown, Clermont, Warren, and Highland Counties, Ohio. The Bank also owns a building at 52 E. Main Street, Wilmington, Ohio that houses the Bank's insurance agency. InterCounty's net book value of investments in land and buildings was $8.8 million as of December 31, 2000.
Item 3.
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.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There were 3,205,284 common shares of the Company outstanding on December 31, 2000, held of record by approximately 435 shareholders. There is presently no active trading market for the Company's shares, nor are the prices at which common shares have been traded published by any national securities association or quotation service. The Company's shares are quoted on the OTC Bulletin Board under the symbol "ICYB". Dividends per share declared were $.19 in each quarter in 2000. Dividends per share declared in 1999 were $.17 in each quarter of 1999.
On October 8, 1998, InterCounty issued 53,606 common shares in consideration for all of the outstanding common shares of Phillips Group for the purpose of providing insurance agency services through an operating subsidiary of the Bank. On December 11, 1998, InterCounty issued 17,777 common shares in consideration for all of the outstanding common shares of Jones Agency, another insurance agency, which became a subsidiary of Bank. In both instances, InterCounty relied upon the exemption from registration under the Securities Act of 1933 contained in Section 3(a)(11) and Rule 147 thereunder. All of the shareholders of both agencies to whom shares of InterCounty were issued are residents of Ohio, the state in which InterCounty is incorporated and doing business, and precautions have been taken to ensure that resale of the shares issued will not violate the limitations of Rule 147.
Item 6.
Item 6. Selected Financial Data
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis comparing 2000 to prior years should be read in conjunction with the audited consolidated financial statements at December 31, 2000 and 1999 and for the three years ended December 31, 2000. In addition to the historical information contained herein with respect to InterCounty Bancshares, Inc. and subsidiaries (the "Company"), the following discussion contains forward-looking statements that involve risks and uncertainties. Economic circumstances, the Company's operation and the Company's actual results could differ significantly from those discussed in the forward-looking statements. Some of the factors that could cause or contribute to such differences include changes in the economy and interest rates in the nation and the Company's general market area.
RESULTS OF OPERATIONS
OVERVIEW Net income for 2000 was $4.046 million, a decrease of 29.1% from 1999. Net income per share was $1.27 in 2000, compared to $1.81 in 1999. In the third quarter of 2000, the Company restructured a portion of its securities portfolio and during the third and fourth quarters increased its provision for loan losses. Both of these items had a significant negative impact on Company net income for the year 2000. The restructuring of the securities portfolio, resulting in the recognition of an after-tax loss of $1.37 million, was undertaken to enhance future earnings and reduce interest rate risk. Net interest income decreased slightly from $18.4 million in 2000 to $18.3 million in 1999. The provision for loan losses was increased 57.1% to $2.2 million in 2000 from the $1.4 million recorded in 1999. Non-interest income increased 9.4%, excluding securities losses, to $6.1 million for 2000. Non-interest expense was held to a 1.0% increase for 2000 compared to 1999. Performance ratios for 2000 included a return on average assets of .73%, and a return on average equity of 8.85%.
NET INTEREST INCOME Net interest income decreased to $18.3 million in 2000 from $18.4 million in 1999, a decrease of 0.3%. The Company's tax equivalent yield on average interest-earning assets increased to 8.09% in 2000 from 7.74% in 1999. Average interest-earning assets increased $23.1 million (4.7%) from 1999. Interest and fees on loans increased 13.8% from last year as the average balance rose $36.7 million (11.1%) and the average yield increased from 8.38% in 1999 to 8.59% in 2000. By the end of May 2000 the prime rate increased 100 basis points to 9.50%.
The securities portfolio showed a decrease in average balance and an increase in yield. The average balance of the portfolio decreased $13.9 million (8.6%) from 1999, and the tax equivalent yield increased from 6.48% to 6.91%. The restructuring of the securities portfolio involved the sale of $38.0 million book value of long-term fixed-rate securities with a weighted average life of 7.3 years and a weighted average yield of 6.27%, resulting in an after-tax loss of $1.37 million. A portion of the proceeds of the sale, $26.7 million, was reinvested in similar securities with a weighted average life of 5.3 years
and a weighted average yield of 7.33%. Another $10 million was used to purchase Bank Owned Life Insurance (BOLI) with a cash surrender value that increases during the first year at a tax-equivalent yield of 9.97% and the cash surrender value increases during future years at an adjustable rate. The restructuring is expected to increase pre-tax income by $542,000 in 2001 and continue to increase earnings in future years. Another important result of the restructuring was to reduce the interest rate risk of the Company by shortening the weighted average maturity of the Company's assets and reducing the amount of fixed-rate assets with maturities over five years.
Rising interest rates caused interest expense to increase 18.6% in 2000 compared to 1999. Average interest-bearing liabilities increased $25.9 million (5.9%) during 2000, and the cost increased from 4.38% in 1999 to 4.90% in 2000. The average balance of retail certificates of deposit increased $14.8 million (10.0%), and average short-term borrowing increased $6.9 million (26.1%). All categories showed an increase in cost in 2000 compared to 1999. Average tax equivalent net interest margin decreased from 3.88% in 1999 to 3.72% in 2000.
Net interest income increased to $18.4 million in 1999 from $16.7 million in 1998, an increase of 9.9%. The Company's tax equivalent yield on average interest-earning assets decreased to 7.74% in 1999 from 7.92% in 1998. Average interest-earning assets increased $42.9 million (9.5%) from 1998. Interest and fees on loans increased 11.1% from last year as the average balance rose $43.1 million (15.0%) and the average yield decreased from 8.68% in 1998 to 8.38% in 1999. During 1999 lending rates were generally lower due to prime rate decreases and competition. The securities portfolio showed an increase in average balance and a decrease in yield. The average balance of the portfolio increased $7.6 million (4.9%) from 1998, and the tax equivalent yield decreased from 6.67% to 6.48%. The reinvestment of matured and called securities was also at lower rates during 1999.
Average interest-bearing liabilities increased $41.9 million (10.6%) during 1999, and the cost decreased from 4.68% in 1998 to 4.38% in 1999. Although all categories showed a decrease in cost, the amount of higher-costing long- term funds borrowed from the Federal Home Loan Bank increased $21.2 million and was 17.2% of funds in 1999 compared to 13.6% during 1998. Tax equivalent net interest margin increased to 3.88% from 3.82%.
PROVISION FOR LOAN LOSSES The provision for loan losses was $2.20 million in 2000, an increase of $800,000 from the provision recorded in 1999, which was an increase of $250,000 from the provision recorded in 1998. Net charge-offs in 2000 were $1,618,000 compared to $820,000 in 1999 and $1,270,000 in 1998. The increased provision in the past three years was in response to 11.1%, 15.0% and 4.8% increases in average loans for those years, and also increases in the amount of net charge-offs in 2000 and 1998. Additionally in 2000 the provision increased in contemplation of certain potential losses associated with $6.0 million in loans to a longstanding Bank customer. See "Allowance for Loan Losses" for further discussion of this credit. The ratio of the allowance for loan losses as a percent of total loans at December 31 was 1.02% in 2000, .91% in 1999, and .87% in 1998.
NON-INTEREST INCOME Table 2 details the components of non-interest income, excluding securities gains and losses, and how they relate each year as a percent of average assets. Total non-interest income was $6.12 million in 2000, $5.60 million in 1999, and $5.22 million in 1998. Non-interest income represents a ratio of 1.11% of average assets in 2000, 1.06% in 1999, and 1.09% 1998. Trust income increased 7.0% in 2000, and 7.9% in 1999, due to increases in fees during 2000, and increases in the number of accounts and the amount of funds under management during 1999. At December 31 total assets in the Trust Department were approximately $234 million in 2000, compared to $236 million in 1999 and $217 million in 1998. Service charges and fees have increased over the last three years due to increased charges and growth in the number of accounts. Also, their percentage of average assets has increased to .31% in 2000 compared to .28% for both 1999 and 1998. Late in 1996 the Company began installing cash dispensing units in convenience stores, as of the end of 2000 there were eighty-three machines installed in three states. ATM network fees generated were $725,000 in 2000, $702,000 in 1999, and $574,000 in 1998. In the fourth quarter of 1998 the Company acquired two insurance agencies, and because they were accounted for as a pooling of interests, their commission income is included in the non-interest income section of the Company's results of operations for the three years presented. Commission income has increased from $833,000 in 1998 to $1,140,000 in 2000.
NON-INTEREST EXPENSE Table 3 details the components of non-interest expense and how they relate each year as a percent of average assets. Total non-interest expense has increased from $13.8 million in 1998, to $15.2 million in 1999, and to $15.4 million in 2000. These figures represent a percent of average assets of 2.79% in 2000 and 2.89% in both 1999 and 1998.
Salaries and benefits expense, which is the largest component of non-interest expense, decreased slightly to $7.58 million in 2000. This decrease was primarily due to the reduction of officer bonus expense as a result of not meeting performance related goals. Salaries and benefits expense increased to $7.69 million in 1999 from $6.77 million in 1998. Salaries and benefits as a percent of average assets was 1.37% in 2000, 1.46% in 1999 and 1.42% in 1998. The average number of full-time equivalent employees was 217 in 1998 and 222 in 1999 and 220 in 2000.
Other non-interest expense categories have remained substantially the same as a percent of average assets from 1998 to 2000. Equipment expense has been .40%, and occupancy expense has been .16% of average assets for all three years. State franchise tax decreased to .09% in 2000 and 1999 from .13% in 1998 due to adjustments in the capital of the Bank in the form of dividends to the parent company recorded in December 1998. Other expense as a percent of average assets has decreased to .70% in 2000 from .72% in 1998.
INCOME TAXES The effective tax rates were 16.0% for 2000, 18.4% for 1999, and 26.0% for 1998. The decreases in the 2000 and 1999 effective tax rates were primarily due to the increases in tax-exempt municipal bond interest income. Also, the exercise of stock options by certain executive officers that are taxable to the executives and tax deductible to the Company contributed to the decrease in the effective tax rate from 1998 to 1999. Tax-exempt municipal bond income increased 12.2% in 2000 and 45.2% in 1999 from the comparative years.
FINANCIAL CONDITION
ASSETS Average total assets increased 4.8% during 2000 to $551.6 million. Average interest-earning assets increased 4.7%, and remained at 94% of total average assets, the same as the last two years.
SECURITIES Average securities as a percent of assets was 32.4% in 1998, fell to 30.9% in 1999 and fell again to 27.0% in 2000. The securities portfolio restructure effected in 2000 is expected to increase pre-tax income in the coming years and also has reduced the interest rate risk of the Company by shortening the weighted average maturity of the Bank's assets and reducing the amount of fixed-rate assets with maturities over five years. The securities portfolio at December 31, 2000 consists of $115.8 million of securities available for sale and $44.4 million of securities that management intends to hold to maturity. The available-for-sale portion of the portfolio consists primarily of fixed-rate securities with an average life of 4.9 years, an average repricing term of 4.2 years, and an average tax-equivalent yield of 7.10%. Of the total available-for-sale portion, 48% consists of callable U.S. Agency bonds, 38% consists of fixed-rate mortgage-backed securities, 6% consists of adjustable-rate mortgage-backed securities, and 8% consists of long-term fixed-rate tax-exempt municipal securities. During 1999 and 2000 additions to the available-for-sale portfolio have included medium-term callable U.S. Agency bonds, mortgage-backed securities with projected average lives of three to seven years. Some of these purchases were funded with borrowed funds from the Federal Home Loan Bank. The held-to-maturity portion of the portfolio consisted entirely of long-term fixed-rate tax-exempt municipal securities with both average life and repricing term of 12.8 years. At December 31, 2000 the total security portfolio had $232,000 market value appreciation.
LOANS Average total loans as a percent of average assets was 60.1% in 1998, 62.8% in 1999, and 66.6% in 2000. Table 4 shows loans outstanding at period end by type of loan. The portfolio composition has stayed relatively the same during the last three years. Commercial and industrial loans grew from $78.8 million in 1998 to $86.5 million in 1999 and to $92.3 million in 2000, primarily as a result of increased origination of working capital and equipment loans. Residential real estate loans grew $25.3 million during 1999 and $28.2 million during 2000 as the result of increased efforts by the Company in originating loans locally through the branch network. For interest rate risk management
purposes the Company currently sells, or holds for sale, the majority of fixed-rate residential real estate loans originated, while holding the adjustable-rate loans in the portfolio. The Company has experienced an increase in residential real estate lending and commercial lending, both real estate and industrial, because of the movement of the Company into new markets, such as Clermont, Highland and Warren Counties. The Company focused its commercial lending on small- to medium-sized companies in its market area, most of which are companies with long established track records. The Company expects to continue the emphasis on growth in the real estate and commercial portfolios. Installment loans outstanding has decreased from $88.0 million in 1999 to $71.4 because the Company has reduced its efforts to originate indirect automobile loans due to increased competition and narrowing interest rate spreads. Installment loans have decreased to 19% of the portfolio at December 31, 2000 from 25% at December 31, 1999. The Company has avoided concentration of lending in any one industry. As of December 31, 2000, the percent of fixed-rate loans to total loans was 34%, of which 75% matures within five years.
ALLOWANCE FOR LOAN LOSSES Table 5 shows selected information relating to the Company's loan quality and allowance for loan losses. The allowance is maintained to absorb potential losses in the portfolio. Management's determination of the adequacy of the reserve is based on reviews of specific loans, loan loss experience, general economic conditions and other pertinent factors. If, as a result of charge- offs or increases in risk characteristics of the loan portfolio, the reserve is below the level considered by management to be adequate to absorb possible future loan losses, the provision for loan losses is increased. Loans deemed not collectible are charged off and deducted from the reserve. Recoveries on loans previously charged off are added to the reserve.
The allowance for loan losses was 1.02% of total loans as of December 31, 2000, an increase from the .91% at the end of 1999, and has ranged from .87% to 1.00% for the years 1996 through 1998. Net charge-offs as a percentage of average loans increased to .44% for the year 2000, compared to .25% for the year 1999. The increase in net charge-offs during 2000 was concentrated in the commercial loan area and was primarily related to three business entities that were identified at the end of 1999 as non-accrual or impaired loans. The
Company allocates the allowance for loan losses to specifically classified loans and generally based on three-year net charge off history. In assessing the adequacy of the allowance for loan losses, the Company considers three principal factors: (1) the three-year rolling average charge-off percentage applied to the current outstanding balance by portfolio type; (2) specific percentage applied to individual loans estimated by management to have a potential loss; and (3) estimated losses attributable to anticipated portfolio growth, economic conditions and portfolio risk. Economic conditions considered include unemployment levels, the condition of the agricultural business, and other local economic factors.
Non-accrual loans for the last five years are listed in Table 5. The amount of non-accrual loans increased to $4,098,000 at year-end 2000 from $955,000 in 1999. The $955,000 reported as non-accrual loans as of December 31, 1999, was resolved through payments or collateral disposition of $402,000, $202,000 carried over into 2001 with payments being made and $351,000 charged off during the year 2000. Non-accrual loans as of December 31, 2000 consisted of 33 relationships. Fifteen of those relationships are collateralized with a first mortgage; eleven have a second mortgage; four are collateralized with titled units awaiting sale; two have partial Farm Services Agency (FSA) and US Department of Agriculture (USDA) government guarantees, and the remaining relationship is collateralized by a general chattel filing on furniture, fixtures, and inventory.
All loans and leases are expected to be resolved through payments or through liquidation of collateral in the normal course of business. The anticipated loss in the year 2001 from all but two of these relationships is $50,000. One of the remaining two relationships, is Bush Leasing, Inc., a company whose primary owner is George F. Bush, a former director of the Company. The servicing and collection of the related lease receivables of $866,000 has been outsourced. Management is unable to determine the potential for losses on this account since the receivables are collateralized with vehicles whose condition at the end of the lease can either negatively or positively impact the final amount received. The second relationship is with a longstanding customer whose outstanding balances with the Company are approximately $6.0 million, $4.3 million of which has an 80% guarantee by a U.S Government agency. Several meetings have taken place with the customer with the intent of restructuring a portion of the debt. Due to the early stages of this situation, a loss to the Company, if any, cannot be determined. Projected losses are based on currently available information and actual losses may differ significantly from those discussed above.
In addition, management has identified two relationships that are not included in the non-performing categories at December 31, 2000, but about which management, through normal credit review procedures, has developed information regarding possible credit problems that could cause the borrowers future difficulties in complying with present loan repayment terms. These two relationships total $757,000 with a government guarantee of $300,000 supporting one of the relationships. Management is unable at this time to determine any loss potential due to the early stages of these situations.
OTHER ASSETS As part of the investment portfolio restructure in September 2000, $10 million was used to purchase Bank Owned Life Insurance with a cash surrender value that increases during the first year at a tax-equivalent yield of 9.97% and the cash surrender value increases during future years at an adjustable rate. Beginning in the fourth quarter of 1996 and during the ensuing years the Company has been installing cash dispenser machines in convenience stores and supermarkets. There were 83 machines located in Ohio, Kentucky and Indiana at the end of 2000. The Company's investment in this segment of business includes $1.4 million in equipment cost and an average of $4.3 million in cash to supply the machines. The Company anticipates little change in the number of machines installed at the end of 2000. The Company charges a fee for withdrawals from anyone who does not have a transaction account with the Company. The Company recorded a net book income before taxes on this segment of business of $82,000 in 2000, compared to $29,000 for 1999 and $110,000 net book loss before tax for 1998.
DEPOSITS Table 6 presents a summary of period end deposit balances. Deposit categories have remained fairly constant as a percent of total deposits throughout the five-year period. Interest-bearing NOW accounts have increased to 20% of deposits due to the introduction of a high yielding, high balance checking account early in 2000. Savings accounts continue to decrease each year both in amounts and as a percent of deposits. Money market accounts decreased to 8% of deposits by the end of 2000 as a result of the high yielding checking account and the increase in retail certificates of deposit to 43% of the total. Certificates of $100,000 and over are primarily short-term public funds. Balances of such large certificates fluctuate depending on the Company's pricing strategy and funding needs at any particular time and were about the same percent of total deposits in 2000 as in 1999. Deposits are attracted principally from within the Company's market area through the offering of numerous deposit instruments. Interest rates, maturity terms, service fees, and withdrawal penalties for the various types of accounts are established periodically by management based on the Company's liquidity requirements, growth goals and market trends. The Company has not used brokers in the past to attract deposits, although competition from banks and other financial institutions has caused the Company to consider broker deposits as a viable alternative to funding needs. The amount of deposits currently from outside the Company's market area is not significant.
OTHER BORROWINGS During the fourth quarter of 1997 and during 1998, the Company purchased $65 million in U.S. Agency mortgage-backed securities and $10 million in long-term tax-exempt municipal bonds with funds borrowed from the FHLB at anticipated spreads of 130-150 basis points before tax. The effect of these transactions has been an enhancement to earnings and an effective use of capital. At December 31, 2000, the Bank had outstanding $86.0 million of total borrowings from the FHLB. Six million of the borrowings have a one-year maturity and adjust daily at the prime rate. Of the remaining $80 million, $50 million consists of three fixed-rate notes with maturities in 2002, 2008 and 2010. At the option of the FHLB, these notes can be converted at certain dates to instruments that adjust quarterly at the three-month LIBOR rate. The note amount and nearest optional conversion dates at December 31, 2000, are $5 million in March 2001; $15 million in October 2001; and $30 million in April 2003.
In January 2000, a $30 million fixed-rate note that matures in 2002 was converted to a variable-rate note that adjusts quarterly at the three-month LIBOR rate, which was 6.76% at year end. In January 2001 this note was paid off and restructured into three $12 million notes with a weighted average rate of 5.01% and maturity dates in January 2011. At the option of the FHLB, these notes can be converted at certain conversion dates to instruments that adjust quarterly at the three-month LIBOR rate. The optional conversion dates are January 2002, 2004, and 2006.
CAPITAL The declaration and payment of dividends by the Company are subject to the discretion of the Board of Directors and to the earnings and financial condition of the Company and applicable laws and regulations. The dividend rate was increased 33% in 1999 and 12% in 2000. The Company's equity to assets ratio at December 31, 2000 was 8.5%. As of that same date, tier 1
risk-based capital was 13.0%, and total risk-based capital was 14.0%. The minimum tier 1 and total risk-based capital ratios required by the Board of Governors of the Federal Reserve are 4% and 8%, respectively.
LIQUIDITY Effective liquidity management ensures that the cash flow requirements of depositors and borrowers, as well as Company cash needs, are met. The Company manages liquidity on both the asset and liability sides of the balance sheet. Community bank liquidity management currently involves the challenge of attracting deposits while maintaining positive loan growth at a reasonable interest rate spread. The loan to deposit ratio at December 31, 2000, was 92.0%, compared to 92.4% at the same date in 1999. Loans to total assets were 64.6% at the end of 2000, compared to 64.7% at the same time last year. The securities portfolio is 72% available-for-sale securities that are readily marketable. Approximately 46% of the available-for-sale portfolio is pledged to secure public deposits, short-term and long-term borrowings and for other purposes as required by law. The balance of the available-for-sale securities could be sold if necessary for liquidity purposes. Also, a stable deposit base, consisting of 89% core deposits, makes the Company less susceptible to large fluctuations in funding needs. The Company has short-term borrowing lines of credit with several correspondent banks. The Company also has both short- and long-term borrowing available through the FHLB. The Company has the ability to obtain deposits in the brokered certificate of deposit market to help provide liquidity to fund loan growth.
MARKET RISK MANAGEMENT Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to interest rate risk, exchange rate risk, equity price risk and commodity price risk. The Company does not maintain a trading account for any class of financial instrument, and is not currently subject to foreign currency exchange rate risk, equity price risk or commodity price risk. The Company's market risk is composed primarily of interest rate risk.
The Company's Asset/Liability Committee (ALCO) is responsible for reviewing the interest rate sensitivity position of the Company and establishing policies to monitor and limit exposure to interest rate risk. The guidelines established by ALCO are approved by the Company's Board of Directors. The primary goal of the asset/liability management function is to maximize net interest income within the interest rate risk limits set by ALCO. Interest rate risk is monitored on a quarterly basis through ALCO meetings. Techniques used include both interest rate gap management and simulation modeling that measures the effect of rate changes on net interest income and market value of equity under different rate scenarios. The interest rate gap analysis schedule (Table 7), quantifies the asset/liability static sensitivity as of December 31, 2000. As shown, the Company was liability sensitive for periods through one year, and asset sensitive within the one- to five-year period and the over-five-year period. The cumulative gap as a percent of total assets through one year at the end of 2000 was negative 12.0% compared to negative 16.8% at the end of 1999. The balances of transaction type NOW and MMDA accounts are scheduled to run off over their expected lives. Although the
entire balance of these deposits is subject to repricing or withdrawal in a relatively short period of time, they have been a stable base of retail core deposits for the Company. Also their sensitivity to changes in interest rates is significantly less than some other deposits, such as certificates of deposit.
In the Company's simulation models, each asset and liability balance is projected over a one-year horizon. Net interest income is then projected based on expected cash flows and projected interest rates under a stable rate scenario and analyzed on a quarterly basis. The results of this analysis are used in decisions made concerning pricing strategies for loans and deposits, balance sheet mix, securities portfolio strategies, liquidity and capital
adequacy. The Company's current one-year simulation models under stable rates indicate a level yield on interest-earning assets and a 10 basis point decrease in the cost of interest-bearing liabilities. This position should have a slightly positive effect on projected net interest margin over the next twelve months.
Simulation models are also performed under an instantaneous parallel 300 basis point increase or decrease in interest rates. The model includes assumptions as to repricing and expected prepayments, anticipated calls, and expected decay rates of transaction accounts under the different rate scenarios. The results of these simulations include changes in both net interest income and market value of equity. ALCO guidelines that measure interest rate risk by the percent of change from stable rates, and capital adequacy, have been established and as of December 31, 2000 the results of these simulations are within those guidelines.
The Company's rate shock simulation models provide results in extreme interest rate environments and results are used accordingly. Reacting to changes in economic conditions, interest rates and market forces, the Company has been able to alter the mix of short- and long-term loans and investments, and increase or decrease the emphasis on fixed- and variable-rate products in response to changing market conditions. By managing the interest rate sensitivity of its asset composition in this manner, the Company has been able to maintain a fairly stable flow of net interest income. Table 8 provides information about the Company's market sensitive financial instruments other than cash and cash equivalents, FHLB and Federal Reserve Bank stock, and demand deposit accounts as of December 31, 2000. The information presented is based on repricing opportunities and projected cash flows that include expected prepayment speeds and likely call dates.
IMPACT OF INFLATION AND CHANGING PRICES The majority of a financial institution's assets and liabilities are monetary in nature. Changes in interest rates affect the financial condition of a financial institution to a greater degree than inflation. Although interest rates are determined in large measure by changes in the general level of inflation, they do not change at the same rate or in the same magnitude, but rather react in correlation to changes in expected rate of inflation and to changes in monetary and fiscal policy. The Company's ability to react to changes in interest rates has a significant impact on financial results. As discussed previously, management attempts to control interest rate sensitivity in order to protect against wide interest rate fluctuations.
EFFECT OF RECENT ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 established the effective date for the new standard as fiscal years beginning after June 15, 2000. Currently, the Company does not hold any derivatives or conduct hedging activities as defined by the standard. In most instances the standard, once adopted, precludes any held-to-maturity security from being designated as a hedged item. If the Company had adopted SFAS No. 133 in 2000, the impact would have been limited to transfers, if any, of securities from the held-to-maturity classification to available for sale. The Company will be adopting SFAS No.133 in the first quarter of 2001, and is evaluating the desirability of potential investment security reclassifications.
MARKET PRICE OF THE COMPANY'S COMMON SHARES AND RELATED SECURITY HOLDER MATTERS There were 3,205,284 common shares of the Company outstanding on December 31, 2000 held of record by approximately 435 shareholders. There is presently no active trading market for the Company's shares, nor are the prices at which common shares have been traded published by any national securities association or automated quotation service. Information about the Company's shares is posted on the OTC Bulletin Board under the symbol ICYB. Dividends per share declared were $.19 in each quarter in 2000 and were $.17 per share in each quarter in 1999.
The National Bank and Trust Company serves as transfer agent and dividend disbursing agent for the Company's shares. Communication regarding change of address, transfer of shares, lost certificates and dividends should be sent to:
Sarah M. Martin, Senior Vice President The National Bank and Trust Company 48 North South Street, PO Box 711 Wilmington, Ohio 45177 (937) 283-3077.
A copy of the Company's Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, will be available at no charge to shareholders upon request to:
Charles L. Dehner, Executive Vice President InterCounty Bancshares, Inc. 48 North South Street, PO Box 711 Wilmington, Ohio 45177 (937) 283-3002.
The annual meeting of the shareholders of InterCounty Bancshares, Inc. will be held on April 24, 2001, at 48 North South Street, Wilmington, Ohio, at 9:00 am.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
See "Market Risk Management" in Item 7, which is incorporated herein by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data
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PAGE
INDEPENDENT AUDITORS' REPORT 49
FINANCIAL STATEMENTS
Consolidated Balance Sheets 50
Consolidated Statements of Income 51
Consolidated Statements of Comprehensive Income and Changes in Shareholders' Equity 52
Consolidated Statements of Cash Flows 53
Notes to Consolidated Financial Statements 54-75
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors InterCounty Bancshares, Inc. Wilmington, Ohio
We have audited the accompanying consolidated balance sheets of InterCounty Bancshares, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, comprehensive income and changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with U.S. generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of InterCounty Bancshares, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with U.S. generally accepted accounting principles.
/s/J.D. CLOUD & CO. L.L.P. Certified Public Accountants
Cincinnati, Ohio February 7, 2001
InterCounty Bancshares, Inc. and Subsidiaries
InterCounty Bancshares, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMTNS Years ended December 31, 2000, 1999 and 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
InterCounty Bancshares, Inc. is a one-bank holding company. Its wholly-owned subsidiary, The National Bank and Trust Company (the Bank), provides full banking services, including trust and brokerage services, to customers located principally in Clinton, Brown, Clermont, Warren and Highland counties in Ohio. The Bank grants agribusiness, commercial, consumer, and residential loans to customers throughout its market area. The Bank offers insurance products including property, casualty and life through its wholly-owned subsidiary, NB&T Insurance Agency, Inc. (formerly known as Phillips Insurance Agency, Inc.)
BASIS OF PRESENTATION- The consolidated financial statements include the accounts of InterCounty Bancshares, Inc. and its direct and indirect subsidiaries (the Company). All intercompany accounts and transactions are eliminated in consolidation. Certain prior period data has been reclassified to conform to current period presentation.
USE OF ESTIMATES- The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
SECURITIES- Investment securities that management has the intent and ability to hold to maturity are reported at amortized cost, adjusted for amortization of premiums and accretion of discounts using the interest method. Securities that are available for sale are reported at fair value with unrealized holding gains and losses reported net of income taxes as Accumulated Other Comprehensive Income, a separate component of shareholders' equity. Realized gains and losses on the sale of securities available for sale are determined using the specific identification method.
Federal Home Loan Bank (FHLB) stock is an equity interest in the Federal Home Loan Bank of Cincinnati. It can be sold only at its par value of $100 per share and only to the FHLB or to another member institution. In addition, the equity ownership rights are more limited than would be the case for a public company, because of the oversight role exercised by the Federal Housing Finance Board in the process of budgeting and approving dividends. Federal Reserve Bank stock is similarly restricted in marketability and value. Although classified as securities available for sale, both investments are carried at cost, which is their par value.
LOANS HELD FOR SALE- Mortgage loans originated for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income.
LOANS AND ALLOWANCE FOR LOAN LOSSES- Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses and net of any deferred origination fees or costs. Net deferred fees and costs are amortized over the lives of the related loans using the interest method as an adjustment of loan yields. The aggregate amount of overdrawn demand deposit accounts are included in net loans. The allowance for loan losses is established through provisions charged to expense. The allowance is an amount that management believes will be adequate to absorb potential losses on existing loans that may become uncollectible. This evaluation is based on prior loan loss experience and such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower's ability to pay. Loans are considered impaired when management believes, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured by the present value of expected future cash flows using the loan's effective interest rate. Impaired collateral-dependent loans may be measured based on collateral value. Smaller-balance homogenous loans, including residential mortgage and consumer installment loans, are collectively evaluated for impairment.
Credit losses are charged against the allowance when management believes that the collectibility of the principal is unlikely. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection of interest is doubtful. Subsequent cash receipts on nonaccrual loans are recorded as a reduction of principal, and interest income is recorded once principal recovery is reasonably assured. Installment loans are generally charged off if four payments have been missed. Generally, all other loans are placed on non-accrual status if they are 90 days or more delinquent. A loan may remain on an accrual status after it is 90 days delinquent if it is probable the account will be settled in its entirety or brought current within a 30-day period. The current year's accrued interest on loans placed on non-accrual status is charged against earnings. Previous years' accrued interest is charged against the allowance for loan losses.
PREMISES AND EQUIPMENT- Premises and equipment are carried at cost, less accumulated depreciation. Depreciation is computed using principally the straight-line method over the estimated useful lives of the related assets.
MARKETING EXPENSE- Marketing costs are expensed as incurred.
NON-QUALIFIED STOCK OPTIONS- Stock options are accounted for under Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees." Options are granted at a price equal to market value of a common share on the day of grant. Under the intrinsic value method of APB No. 25, the Company does not recognize compensation expense for options granted. Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" prescribes the recognition of compensation expense based on the fair value of options determined on the grant date. The pro forma disclosures required by SFAS No. 123 are shown in Note 14.
Stock option accruals were recognized in years prior to 1997. In 1997, optionees approved the elimination of the Company's contingent obligation to repurchase the shares. The recorded liability at December 31, 1996 is recognized as additional consideration for the related stock when issued.
INCOME TAXES- Certain income and expenses are recognized in different periods for financial reporting than for purposes of computing income taxes currently payable. Deferred taxes are provided on such temporary differences. These differences relate principally to the allowance for loan losses, depreciation, FHLB stock dividends, and stock option accruals.
STATEMENTS OF CASH FLOWS- For purposes of reporting cash flows, cash equivalents include all highly liquid investments with a maturity of three months or less when purchased.
EARNINGS PER COMMON SHARE- Earnings per common share (EPS) is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Certain shares held in suspense by the Company's employee stock ownership plan are not considered outstanding until they are committed to be released for allocation to participants' accounts.
FAIR VALUE OF FINANCIAL INSTRUMENTS- For cash and due from banks, federal funds sold and other short-term investments, the carrying amounts reported in the Consolidated Balance Sheet approximate fair value. For securities, fair market value equals quoted market price, if available. If a quoted market price was not available, fair value was estimated using quoted market prices for similar securities. The estimated fair value of loans was based on the discounted value of future cash flows expected to be received. The discount rate used was the rate at which the same loans would be made under current conditions.
The approximate fair value of demand deposits, savings accounts, and other deposit liabilities without defined maturities is the carrying amount at the reporting date. The fair value of fixed-maturity certificates of deposit was estimated using a discounted cash flow calculation applying interest rates currently offered for deposits of similar remaining maturities. Carrying value approximates fair value for short-term borrowings and the Company's variable rate long-term debt. The fair value of fixed rate long-term debt is based on discounted cash flows using current market rates for debt with similar terms and remaining maturities.
NOTE 2 - ACQUISITIONS
In October 1998, the Bank acquired all the outstanding common shares of Phillips Insurance Agency Group, Inc., which had two subsidiary insurance agencies, in exchange for 53,606 shares of InterCounty Bancshares, Inc. In December 1998, the Bank acquired all the outstanding common shares of Arnold Jones Insurance Agency, Inc. in exchange for 17,777 shares of InterCounty Bancshares, Inc. The acquisitions qualified as tax-free reorganizations and have been accounted for as a pooling of interests. Accordingly, the Company's consolidated financial statements were restated to retroactively include the agencies' as if the acquisitions had occurred at the beginning of the earliest period presented. The acquisitions had no material effect on consolidated shareholders' equity as previously reported. In connection with the acquisitions, the Bank incurred professional and regulatory fees of $75,000 which were charged to operations in 1998. In 1999, all three agencies were merged together. In 2000, the name of Phillips Insurance Agency, Inc. was changed to NB&T Insurance Agency, Inc.
NOTE 3 - SECURITIES
Gross gains realized on sales of securities available for sale were $41,000 for 1999, $302,000 for 1998. Gross losses realized on sales of securities available for sale were $2,070,000 for 2000 and $409,000 for 1999. Securities with a carrying value of approximately $94.6 million, and $107.9 million at December 31, 2000, 1999, respectively, were pledged to secure public deposits, short-term and long-term borrowings and for other purposes as required or permitted by law.
NOTE 4 - LOANS
Mortgage loans serviced for the Federal Home Loan Mortgage Corporation and excluded from the Consolidated Balance Sheets at December 31, 2000 and 1999 were $15,345,000 and $15,484,000, respectively.
Average impaired loans were $3.9 million in 2000, $3.7 million in 1999 and $5.1 million in 1998. Interest income recognized on impaired loans was $480,000 in 2000, $191,000 in 1999, and $65,000 in 1998. At December 31, 2000, the Bank had no material commitments to lend additional funds to customers whose loans are considered impaired.
NOTE 5 - PREMISES AND EQUIPMENT
Depreciation expense related to premises and equipment was $1,496,000, $1,244,000 and $1,148,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
NOTE 6 - OTHER ASSETS At December 31, 2000, other assets include bank-owned life insurance (BOLI) with cash surrender values totaling $10,161,000. Under the terms of the policies, the cash surrender values will increase at credited adjustable rates over the policy terms. Income is recorded on the policies based on the reported increase in cash surrender value and is reflected in other non- interest income in the consolidated statements of income.
NOTE 7 - LEASES
Rent expense for all premises and equipment leases was $118,000, $129,000 and $108,000 in 2000, 1999 and 1998, respectively.
NOTE 8 - DEPOSITS
NOTE 9 - EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) salary deferral plan. Substantially all employees who meet minimum age and length of service requirements are eligible to participate. Employee deferrals may be subject to employer- matching contributions up to specified limits. Discretionary contributions may also be made to the Plan. Total matching and discretionary contributions made by the Company amounted to $106,000, $98,000 and $89,000 in 2000, 1999 and 1998, respectively.
The Company sponsors a leveraged employee stock ownership plan (ESOP) covering substantially all of its employees who meet minimum age and length of service requirements. The Company is obligated to make annual contributions sufficient to enable the ESOP to repay the loan, including interest. The shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance sheets. Additional contributions to the Trust are determined by the Board of Directors. Total Company contributions were $90,000, $78,000 and $96,000 in 2000, 1999 and 1998, respectively.
Shares are held in a suspense account for allocation among participants as the loan is repaid. The number of shares released is based on the proportion of debt service paid in the year. Released shares are allocated to participants' accounts on the basis of compensation. Dividends on unallocated shares are used to repay the loan. Dividends on allocated shares are allocated to the participants' accounts.
Benefits are payable upon retirement, death, disability or separation from service. Benefits are paid in common shares of the Company. If the common shares of the Company are not tradable on an established market when benefits are distributed, participants have the option to put the shares to the Company at a value determined by independent appraisal. In 2000 and 1999, the Company purchased 9,900 shares and 2,079 shares, respectively, from ESOP participants. The estimated fair value of allocated shares remaining in the ESOP was $16.0 million and $13.9 million at December 31, 2000 and 1999, respectively. The estimated fair value for 1999 was based on an independent appraisal. The 2000 independent appraisal has not been completed and, therefore, the estimated fair value at December 31, 2000 is based on allocated shares remaining in the ESOP at December 31, 2000 multiplied by the 1999 per share appraised value.
Shares purchased by the ESOP since 1993 are accounted for in accordance with Statement of Position 93-6. Accordingly, as these shares are released from collateral, the Company reports compensation expense equal to the current estimated fair value of the released shares. Once released, the shares are considered outstanding for earnings-per-share (EPS) computations. Dividends on allocated shares reduce retained earnings; dividends on unallocated shares are recorded as a reduction of ESOP debt.
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.
At December 31, 2000, the estimated fair value of unreleased 1993 shares was $270,000. ESOP compensation expense was $113,000, $134,000 and $105,000 for 2000, 1999 and 1998, respectively.
NOTE 10 - SHORT-TERM BORROWINGS
NOTE 11 - LONG-TERM DEBT
The $80 million FHLB borrowings included $50 million in three fixed-rate notes with a weighted average rate of 5.43%. The notes mature in 2008 through 2011. Interest is payable monthly. At the option of the FHLB, these notes can be converted at certain conversion dates to instruments that adjust quarterly at the three-month LIBOR rate. The note amount and nearest optional conversion dates at December 31, 2000, were: $5 million in March 2001; $15 million in October 2001; and $30 million in April 2003.
In January 2000, a $30 million fixed-rate note that matures in 2002 was converted to a variable-rate note that adjusts quarterly at the three-month LIBOR rate, which was 6.76% at year end. In January 2001 this note was paid off and restructured into three $12 million notes with a weighted average rate of 5.01% and maturity dates in January 2011. At the option of the FHLB, these notes can be converted at certain conversion dates to instruments that adjust quarterly at the three-month LIBOR rate. The optional conversion dates are January 2002, 2004, and 2006.
At December 31, 2000, FHLB borrowings, including short-term notes of $6 million and federal funds purchased of $7 million, were collateralized by a blanket pledge of certain residential real estate loans totaling approximately $112 million and primarily mortgage-backed securities with a carrying value of $37 million.
The ESOP Trust loan agreement contains various covenants for the Company which include a minimum net worth and restrictions on additional indebtedness. The note may be prepaid without penalty with prepayments applying in the inverse order of the maturities of the scheduled payments. Interest is due quarterly at the prime rate, 9.50% at December 31, 2000. Scheduled principal payments are approximately $108,000 annually through 2003.
NOTE 12 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid was $22,470,000, $19,123,000 and $18,363,000 in 2000, 1999 and 1998, respectively. Federal income taxes paid were $596,000, $1,586,000 and $1,452,000 in 2000, 1999 and 1998, respectively.
NOTE 13 - INCOME TAXES
Due primarily to the Company's taxable position in prior years, a valuation allowance for deferred tax assets was unnecessary at December 31, 2000 and 1999.
NOTE 14 - SHAREHOLDERS' EQUITY
Under the terms of the Company's nonqualified compensatory stock option plan, 7% of the authorized and issued common shares of the Company are reserved for the purpose of granting options to key bank personnel. Awards under the stock option plan are made at the discretion of the Board of Directors. The option price is not less than the fair market value of the shares at the date of grant. The options granted have a term of ten years and become exercisable in equal installments on the first through fifth anniversaries of the date of grant.
The Company has elected to follow APB No. 25 in accounting for its stock option plan. Pro forma information regarding net income and earnings per share is required by SFAS No. 123. This information is required to be determined as if the Company had accounted for its stock options granted subsequent to December 31, 1996 under the fair value method of that statement. Had compensation expense for the Company's stock options been recognized under the methodology prescribed by SFAS No. 123, the Company's net income and earnings per share would have been impacted as follows:
The estimated fair value of options granted during 2000, 1999 and 1998 was $6.42, $8.13 and $5.13, respectively. The fair value, which is amortized to expense over the option vesting period in determining the pro forma results, was estimated at the date of grant using a Black-Scholes option pricing model and the following assumptions:
NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. They involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contract amount of those instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company is based on management's credit evaluation of the counter party. Collateral held varies, but may include accounts receivable, crops, inventory, property, plant and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. At December 31, 2000 and 1999, standby letters of credit were primarily issued to support public bond financing by state and local government units and entities involved in development and maintenance and repair. They expire during the period from 2000 through 2012. Approximately 76% and 71% of the amount outstanding at December 31, 2000 and 1999, respectively, was secured.
The Company is party to various claims and proceedings arising in the normal course of business. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such proceedings and claims will not be material to the consolidated financial position or results of operations.
NOTE 16 - RELATED PARTY TRANSACTIONS
At December 31, 2000 and 1999, executive officers, directors and companies in which they have a direct or indirect interest, were indebted to the Company directly or as guarantors in the aggregate amount of $2,920,000 and $6,523,000, respectively. During 2000, $843,000 in new loans were made; repayments totaled $425,000. Such transactions originate in the normal course of the Company's operations as a depository and lending institution. At December 31, 1999, approximately $4,021,000 was attributable to parties that were no longer related to the Company in 2000.
NOTE 17 - FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
The following disclosures are made in accordance with the provisions of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," which requires disclosure of fair value information about both on- and off-balance sheet financial instruments for which it is practicable to estimate that value. Because SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements, any aggregation of the fair value amounts presented would not represent the underlying value of the Company.
The fair value of off-balance-sheet financial instruments at December 31, 2000 and 1999, was not material.
NOTE 18 - REGULATORY MATTERS
The principal source of income and funds for InterCounty Bancshares, Inc. is dividends paid by the Bank subsidiary. During the year 2001, dividends that the Bank subsidiary can pay to InterCounty Bancshares, Inc. without prior approval of regulatory agencies is limited to 1999 and 2000 retained net income plus 2001 retained net income.
Banks and bank holding companies must meet certain minimum capital requirements set by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. The minimum regulatory capital ratios are 8% for total risk-based, 4% for Tier I risk- based, and 4% for leverage. For various regulatory purposes, institutions are classified into categories based upon capital adequacy. The highest "well capitalized" category requires capital ratios of at least 10% for total risk-based, 6% for Tier I risk-based, and 5% for leverage. As of the most recent notification from their regulators, InterCounty Bancshares, Inc. and the Bank were categorized as "well capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes would have changed the Company's classification.
The Federal Reserve Act requires depository institutions to maintain cash reserves with the Federal Reserve Bank. In 2000 and 1999, the Bank's average reserve balances were $7,811,000 and $6,670,000, respectively.
NOTE 19 - SEGMENTS
Additional reportable segment information under SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" are not applicable since the information as it relates solely to the banking operations would be the same as the consolidated financial statements in all material respects.
NOTE 20 - PARENT COMPANY FINANCIAL INFORMATION
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
The information contained in the Proxy Statement under the captions "BOARD OF DIRECTORS," "EXECUTIVE OFFICERS" and "SECTION (16)a BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation.
The information contained in the under the caption "COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS" is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information contained in the Proxy Statement under the caption "VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information contained in the Proxy Statement under the caption "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" is incorporated herein by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements - See Index to Consolidated Financial Statements on page 52 of this Form 10-K.
(2) Financial Statement Schedules - None
(3) Exhibits - See Exhibit Index at page 82 of this Form 10-K.
(b) On October 4, 2000, the Company filed a Form 8-K with the Securities and Exchange Commission reporting certain events regarding its balance sheet restructuring and adverse impact of these actions and other matters on its third quarter results of operations.
On October 19, 2000, the Company filed a Form 8-K with the Securities and Exchange Commission regarding a press release issued on or about that date.
INDEX TO EXHIBITS
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
InterCounty Bancshares, Inc.
By /s/ Timothy L. Smith ------------------------------------ April 2, 2001 Timothy L. Smith President and Chief Executive Officer (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By /s/ Charles L. Dehner - ---------------------------- Charles L. Dehner Executive Vice President, Treasurer and a Director (Principal Accounting Officer)
Date April 2, 2001
By /s/ James W. Foland By /s/ Timothy L. Smith - --------------------------- ----------------------------------- James W. Foland Timothy L. Smith Secretary and a Director President, Chief Executive Officer and a Director
Date April 2, 2001 Date April 2, 2001
By /s/ S. Craig Beam By /s/ Janet M. Williams - --------------------------- ----------------------------------- S. Craig Beam Janet M. Williams Director Director
Date April 2, 2001 Date April 2, 2001
By /s/ Georgia H. Miller By /s/ Robert A. Raizk - --------------------------- ----------------------------------- Georgia H. Miller Robert A. Raizk Director Director
Date April 2, 2001 Date April 2, 2001
By /s/ Darleen M. Myers By /s/ G. David Hawley - --------------------------- ----------------------------------- Darleen M. Myers G. David Hawley Director Director
Date April 2, 2001 Date April 2, 2001