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 14 full-service offices. In addition, the Bank has two offices which are drive-in facilities only and two remote service units. The Bank has also installed 86 cash dispensers in convenience stores as of the end of 1997. The Bank also has a trust department which presently administers 957 accounts having combined assets of $178 million.
The Company and the Bank have entered into a definitive agreement to purchase the Phillips Insurance Agency Group, Inc. for common shares of InterCounty valued at $1.1 million. The transaction is expected to close in the first half of 1998.
On September 1, 1992, the Bank acquired Kentucky National Bank of Ohio with two locations in Georgetown, Ohio for $3,200,000 in cash.
On December 29, 1993, InterCounty acquired the Williamsburg Building & Loan Company, a mutual savings and loan with total assets of $17.1 million and equity of $2.9 million. In connection with this merger conversion, InterCounty issued 229,475 shares of its common stock, principally to depositors and other members of Williamsburg and the general public in subscription and community offerings.
Because of its ownership of all the outstanding stock of the Bank, InterCounty is subject to regulation, examination and oversight by the Board of Governors of the Federal Reserve System (the "FRB") under the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Bank, as a national bank, is subject to regulation, examination and oversight by the Office of the Comptroller of the Currency (the "OCC") and special examination by the FRB. The Bank is a member of the Federal Reserve Bank of Cleveland. In addition, since its deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC"), the Bank is also subject to some regulation, oversight and special examination by the FDIC. The Bank must file periodic financial reports with the FDIC, the OCC and the Federal Reserve Bank of Cleveland. Examinations are conducted periodically by these federal regulators to determine whether the Bank and
InterCounty are in compliance with various regulatory requirements and are operating in a safe and sound manner.
Since its incorporation in 1980, InterCounty's activities have been limited primarily to holding the common shares of the Bank. Consequently, the following discussion focuses primarily on the business of the Bank.
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 commercial and industrial loan portfolio; and 5. Management's belief that a substantial percentage of the certificates of deposit maturing within one year will renew with the Bank at maturity.
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, 1997 the Bank had $63.7 million, or 23% 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, 1997, the Bank had $30.8 million, or 11% of total loans, invested in commercial real estate loans.
Commercial real estate lending generally entails greater risks than residential real estate lending. Such loans typically involve larger balances and depend on the income of the property to service the debt. Consequently, the risk of default on such loans may be more sensitive to adverse economic conditions. The Bank attempts to minimize such risks through prudent underwriting practices.
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, 1997, the Bank had $18.4 million, or 7% 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, 1997, the Bank had $82.8 million, or 30% of total loans, invested in residential real estate loans.
Installment Loans. The Bank makes a variety of consumer installment loans, including home equity loans, automobile loans, recreational vehicle loans, and overdraft protection. Consumer loans involve a higher risk of default than loans secured by one- to four-family residential real estate, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciating assets, such as automobiles. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation, and the remaining deficiency may not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections depend on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, illness or personal bankruptcy. Various federal and state laws, including federal and state bankruptcy and insolvency laws, may also limit the amount which can be recovered on such loans. Management believes that the Bank's underwriting practices have resulted in a favorable delinquency ratio and loan loss experience for this portion of the Bank's total loan portfolio.
At December 31, 1997, the Bank had $79.1 million, or 28% of total loans, invested in installment loans. The Bank has reduced its efforts to originate new and used automobile loans due to increased competition and narrowing interest rate spreads. The Bank expects to continue, subject to market conditions, to expand its other consumer lending activities as part of its plan to provide a wide range of personal financial services to its customers.
In the fourth quarter of 1996, the Bank sold its $3.9 million credit card loan portfolio to a correspondent bank, recording a gain on the sale of $326,000. Of the total loans, approximately $102,000 sixty days or more delinquent was sold with recourse. Beginning in 1997, new corporate customer credit card accounts are sold with recourse to the same financial institution. The Bank will continue to offer credit card services indirectly through this 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. The Senior Loan Committee has approval authority up to specified limits. Any loans made by the Bank in excess of the limits established for the Senior Loan Committee must be approved by the Chairman of the Board and the President of the Bank as representatives of the Board of Directors. All loans in excess of $50,000 are reported to the Board on a monthly basis.
Loan Originations, Purchases and Sales. Although the Bank generally does not purchase loans, purchases could occur in the future. It did, however, make a purchase of $21 million in residential real estate loans in late 1995 to enhance earnings. Fixed-rate residential real estate loans are originated for sale in the secondary market. From time to time, the Bank sells participation interests in loans it originates.
Delinquent Loans, Non-performing Assets and Classified Assets. The Bank attempts to minimize loan delinquencies through aggressive collection efforts. When a borrower fails to make a required payment on a loan, the Bank attempts to cause the deficiency to be cured by contacting the borrower. In most cases, deficiencies are cured promptly.
Generally, when a real estate loan becomes delinquent more than 90 days, an evaluation of the security is performed. If the evaluation indicates that the value of the collateral is less than the book value of the loan, a valuation allowance is established for such loan. When deemed appropriate by management, the Bank institutes action to foreclose on the real estate or to acquire the real estate by deed in lieu of foreclosure. A decision as to whether and when to initiate foreclosure proceedings is based on such factors as the amount of the outstanding loan in relation to the original indebtedness, the extent of the delinquency and the borrower's ability and willingness to cooperate in curing delinquencies. If a foreclosure occurs, the real estate is sold at public sale and may be purchased by the Bank. Installment loans are generally charged off if four payments have been missed.
Generally, all other loans are placed on non-accrual status if they are 90 days or more delinquent. A loan may remain on an accrual status after it is 90 days delinquent if it is reasonably certain the account will be settled in its entirety or brought current within a 30-day period. The current year's accrued interest on loans placed on non-accrual status is charged against earnings. Previous year's accrued interest is charged against the allowance for loan losses. Cash payments received on non-accrual loans are applied against principal until the balance is repaid. Any remaining payments are credited to earnings. Non-performing loans include non-accrual loans, renegotiated loans and ninety days or more past due loans. All loans, except one-to four-family real estate, which are ten days delinquent are sent to the Collections Department for collection. One- to four-family real estate loans are sent when they are fifteen days delinquent. As of December 31, 1997, management knew of no significant loans not now disclosed that would cause management to have serious doubts as to the ability of the borrowers to comply with present loan repayment terms.
If interest on non-accrual loans had been recognized during 1997, such income would have been $41,000. 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, 1997, the Bank's allowance for loan losses totaled $2.8 million and was allocated primarily to the consumer segment of the loan portfolio. A similar allocation existed for all other dates presented.
Because the loan loss allowance is based on estimates, it is monitored regularly and adjusted as necessary to provide an adequate allowance. For 1998, the Bank anticipates about the same amount of loan net charge-offs for each type of loan as that experienced in 1997. See Exhibit 99, "Safe Harbor Under the Private Securities Litigation Reform Act of 1995" attached hereto which is incorporated herein by reference.
Investment Activities
In December 1994 the Bank restructured its taxable security portfolio and sold $42.4 million of U.S. Treasury securities at a loss of $1.4 million and purchased $28.5 million in U.S. Treasury and U.S. Agency securities with incremental maturities over a five-year period. The remaining $12.5 million was used to purchase U.S. Agency mortgage-backed securities with an average maturity of 5.3 years that would provide regular monthly cash flows available for reinvestment at current rates. As these securities mature, they are reinvested in the five-year maturity range. All of these securities are classified as available for sale to provide flexibility in managing the portfolio. The result of this restructure is evidenced by the substantial increase in interest income on securities achieved in 1995 through 1997, and a reduction in the interest rate risk in the Bank's portfolio. During 1996 and 1997, the majority of the additions to the portfolio have been in medium-term callable U.S.Agency bonds and mortgage-backed securities with projected average lives of three to seven years. See Notes 1 and 2 of the Notes to Consolidated Financial Statements. Most of the municipal securities held by the Bank were purchased in 1985 and are being held until maturity due to their yield and tax benefits.
During the fourth quarter of 1997, the Bank purchased approximately $4.6 million of 15-20 year maturity tax exempt securities. Also during the fourth quarter of 1997, the Bank purchased $30 million of U.S. Agency mortgage-backed securities with funds borrowed from the Federal Home Loan Bank at an anticipated spread of 150 basis points before tax. The portfolio has approximately $1.2 million of net appreciation over the amortized cost at December 31, 1997.
The following table sets forth the amortized cost of the Bank's securities portfolio at December 31, 1997. 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 $174 million in net assets in the Trust Department. The Annual Report of Trust Assets filed with the FDIC and the OCC reports $137 million in managed assets among 532 accounts, and an additional $41 million of non-discretionary assets held in 425 accounts on December 31, 1997. These assets are not included in the Bank's balance sheet because, under federal law, neither the Bank nor its creditors can assert any claim against funds held by the Bank in its fiduciary capacity.
In addition to administering trusts, the services offered by the Trust Department include investment management, estate planning and administration, tax and financial planning and employee benefit plan administration. During 1997, the Trust Department entered into an agreement with a licensed broker- dealer and insurance agent to provide investment services to customers of the Bank and others, enabling them to purchase fixed annuities, variable annuities, mutual funds, and stocks and bonds. The Trust Department is staffed by five officers and four staff members and generated $927,000 in fee income during 1997.
Deposits and Borrowings
General. Deposits have traditionally been the primary source of the Bank's funds for use in lending and other investment activities. In addition to deposits, the Bank derives funds from interest payments and principal repayments on loans and income on earning assets. Loan payments are a relatively stable source of funds, while deposit inflows and outflows fluctuate more in response to general interest rates and money market conditions.
Deposits. Deposits are attracted principally from within the Bank's market area through the offering of numerous deposit instruments, including checking accounts, regular passbook savings accounts, NOW accounts, money market deposit accounts, term certificate accounts and individual retirement accounts ("IRAs"). Interest rates paid, maturity terms, service fees and withdrawal penalties for the various types of accounts are established periodically by the Bank's Asset/Liability Committee and the Executive Committee based on the Bank's liquidity requirements, growth goals and market trends. The Bank does not use brokers to attract deposits. The amount of deposits from outside the Bank's market area is not significant.
At December 31, 1997, the Bank's certificates of deposit, excluding deposits greater than $100,000, totaled $146.0 million, or 44% of total deposits. Of such amount, approximately $94.1 million matures within one year.
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 $44.2 million of borrowings from the Federal Home Loan Bank to fund the purchase of adjustable-rate, one-to four-family real estate loans and U.S. Agency mortgage-backed securities.
Average Balance Sheets
The following table presents, for the years indicated, the total dollar amounts of interest from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. The table does not reflect any effect of income taxes and includes non-performing loans in the calculations.
Competition
The Bank competes for deposits with other commercial banks, savings associations and credit unions and with the issuers of commercial paper and other securities, such as shares in money market mutual funds. The primary factors in competing for deposits are interest rates and convenience of office location. In making loans, the Bank competes with other commercial banks, savings associations, mortgage bankers, consumer finance companies, credit unions, leasing companies, insurance companies and other lenders. The Bank competes for loan originations primarily through the interest rates and loan fees it charges and through the efficiency and quality of services it provides to borrowers. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels and other factors which are not readily predictable.
For years the Bank has competed within its market area with several regional bank holding companies, each with assets in excess of $4 billion. The size of these financial institutions and others competing with the Bank is likely to increase further as a result of changes in statutes and regulations eliminating various restrictions on interstate and inter-industry branching and acquisitions. Community banks will be challenged by these larger competitors and the greater capital resources they control.
REGULATION
General
Because of its ownership of all the outstanding stock of the Bank, InterCounty is subject to regulation, examination and oversight by the FRB as a bank holding company under the BHCA. The Bank, as a national bank, is subject to regulation, examination and oversight by the OCC and special examination by the FRB. The Bank is a member of the Federal Reserve Bank of Cleveland and a member of the Federal Home Loan Bank of Cincinnati. In addition, since its deposits are insured by the FDIC, the Bank is also subject to some regulation, oversight and special examination by the FDIC. The Bank must file periodic financial reports with the FDIC, the OCC and the Federal Reserve Bank of Cleveland. Examinations are conducted periodically by these federal regulators to determine whether the Bank and InterCounty are in compliance with various regulatory requirements and are operating in a safe and sound manner.
Bank Holding Company Regulation
General. InterCounty is subject to the BHCA and the regulations of the FRB promulgated thereunder. It is registered with the FRB as a bank holding company and must file periodic reports with that agency. Under the BHCA, InterCounty must notify the FRB if, during any one-year period, it intends to purchase or redeem shares in an amount such that the total amount paid for such purchases or redemptions, net of amounts received for sales of shares, is greater than 10% of the net worth of InterCounty.
Capital Adequacy and Source of Strength. The FRB has adopted capital adequacy guidelines for bank holding companies, pursuant to which such companies, on a consolidated basis, must maintain total capital of at least 8% of risk- weighted assets. Risk-weighted assets consist of all assets, plus credit equivalent amounts of certain off-balance sheet items (such as standby letters of credit), which are weighted at percentage levels ranging from 0% to 100%, 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", which includes subordinated debt and intermediate-term preferred stock (up to 50% of Tier 2 capital), certain hybrid capital instruments and other debt securities, any remaining perpetual preferred stock, and general loan loss allowances (up to 1.25% of risk-weighted assets). In addition to this risk-based capital requirement, the FRB requires bank holding companies to meet a leverage ratio of a minimum level of Tier 1 capital to average total consolidated assets of 3%, if they have the highest regulatory examination rating, well-diversified risk and minimal anticipated growth or expansion. All other bank holding companies are expected to maintain a leverage ratio from at least 4% to 5% of average total consolidated assets. InterCounty was in compliance with these capital requirements at December 31, 1997.
The FRB has issued regulations under the BHCA requiring a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks and to operate in a safe and sound manner. It is the policy of the FRB that a bank holding company be ready and able to use its resources to provide capital to its subsidiary banks during periods of financial stress or adversity. A bank holding company is required by law to guarantee the compliance of any insured depository institution subsidiary that may become "undercapitalized" (defined in the regulations as not meeting minimum capital requirements) with the terms of the capital restoration plan filed by such subsidiary with its appropriate federal banking agency. Such guarantee is limited to the lesser of (i) 5% of the institution's total assets at the time the institution becomes undercapitalized, or (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with such capital restoration plan.
Activity and Acquisition Restrictions. The BHCA prohibits InterCounty from engaging in or from acquiring ownership or control of more than 5% of the outstanding shares of any class of voting stock of any company engaged in a nonbanking business, unless such business is determined by the FRB to be so closely related to banking as to be a proper incident thereto. In addition, the FRB has the authority to require a bank holding company to terminate any activity or relinquish control of any nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the determination by the FRB that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company. InterCounty currently has no nonbank subsidiaries.
Congress is considering a number of legislative proposals which would expand the permissible activities of InterCounty or a new form of holding company for InterCounty. These proposals include an expansion of permissible securities, insurance and other financial activities. Many of these proposed new activities may involve greater financial risk to InterCounty than the current permissible activities. No assurance can be given as to what form, if any, final legislation in this regard may take.
Transactions between InterCounty and the Bank are subject to statutory limits in Sections 23A and 23B of the Federal Reserve Act (the "FRA"). See "National Bank Regulation -- Transactions With Insiders and Affiliates."
The BHCA prohibits InterCounty from acquiring direct or indirect control of more than 5% of any class of voting stock or substantially all of the assets of any bank or from merging or consolidating with another bank holding company without the prior approval of the FRB. The FRB is authorized to 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, and imposes assessments on national banks based on their asset size to cover the costs of general supervision and examination. The OCC also may initiate enforcement actions against national banks and certain persons affiliated with them for violations of laws or regulations or for engaging in unsafe or unsound practices. If the grounds provided by law exist, the OCC may appoint a conservator or receiver for a national bank.
Activities and Investments. The OCC issues regulations governing the operation of national banks and, in accordance with federal law, prescribes the permissible investments and activities of national banks, including the type of lending that such institutions may engage in and the investments in real estate, subsidiaries and corporate or government securities that they may make. National banks are limited generally to engaging in those activities and making those investments that constitute the business of banking. These
consist of activities and investments specifically permitted by federal law or deemed to be incidental to a specifically authorized power. Federal law generally prohibits national banks from making equity or real estate investments, other than investments in certain federal government corporations or entities, office premises, or in OREO for up to five years. They may invest in operating subsidiaries, of which they must own more than 50% of the voting (or similar type of controlling) interest, of the capital stock, in any amount and in bank service corporations, owned with other banks, up to the lesser of 10% of unimpaired capital and surplus and 5% of assets. Regulations of the OCC allow operating subsidiaries of national banks to engage in certain activities which are related to or incidental to the business of banking and which a national bank may not engage in directly.
The Bank has no operating subsidiaries or bank service corporations. National banks may engage in discount brokerage, and may underwrite government securities; however, debt investments in any one issuer are limited to 10% of unimpaired capital and surplus. They are also subject to activity and investment limits imposed on state-chartered banks, unless those limits infringe on powers specifically authorized by federal law or would impose an undue burden on the conduct of their banking business. These state law limits are enforced by the OCC, not the state banking authorities.
Until recently, a national bank was permitted to branch only within the state in which its main office is located, subject to any more restrictive state law limits and OCC approval. Branches include any office at which deposits are received or from which checks are paid or money is lent. Total investment in office premises may not exceed the amount of a national bank's paid-in capital stock without OCC approval. Effective in June 1997, the Bank is permitted to merge or consolidate with a bank located in another state, unless that state has specifically prohibited such an interstate transaction.
The OCC is authorized to grant trust powers to a national bank to the extent such powers are authorized by the laws of the state in which the bank is located. National banks authorized to exercise trust powers are required to follow OCC guidelines on conducting such a business and are subject to special OCC examinations. The Bank is authorized to and does engage in a trust business. See "Description of Business-Trust Services."
National banks are subject to regulatory oversight under various consumer protection and fair lending laws. These laws govern, among other things, truth-in-lending disclosure, equal credit opportunity, fair credit reporting and community reinvestment. Failure to abide by federal laws and regulations governing community reinvestment, which evaluate actual lending and investment within a bank's designated service area, with particular emphasis on low-to- moderate income areas and borrowers, could limit the ability of a national bank to open a new branch or engage in a merger transaction.
Capital Requirements. The Bank is required to meet certain minimum capital requirements set by the OCC. These requirements consist of risk-based capital
guidelines and a leverage ratio, which are substantially the same as the capital requirements imposed on InterCounty. The Bank was in compliance with those capital requirements at December 31, 1997. See "Bank Holding Company Regulation - Capital Adequacy and Source of Strength."
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 must approve any change in equity capital, including increases in authorized stock, certain reductions in capital and stock dividends. In addition, if the capital stock is impaired due to losses, the OCC may assess shareholders, which for the Bank would be InterCounty, for such deficiency. If the deficiency is not made up, the OCC may close the bank or require that its directors sell the shareholders' stock at public auction.
The OCC has adopted regulations governing prompt corrective action to resolve the problems of capital deficient and otherwise troubled national banks. At each successively lower defined capital category, a national bank is subject to more restrictive and numerous mandatory or discretionary regulatory actions or limits, and the OCC has less flexibility in determining how to resolve the problems of the institution. In addition, the OCC generally can downgrade a national bank's capital category, notwithstanding its capital level, if, after notice and opportunity for hearing, the national bank is deemed to be engaging in an unsafe or unsound practice, because it has not corrected deficiencies that resulted in it receiving a less than satisfactory examination rating on matters other than capital or it is deemed to be in an unsafe or unsound condition. National banks are prohibited from making a capital distribution to anyone or paying management fees to any person having control of the bank if, after such distribution or payment, the bank would be undercapitalized. All undercapitalized national banks must submit a capital restoration plan to the OCC within 45 days after it becomes undercapitalized. Such banks will be subject to increased monitoring and asset growth restrictions and will be required to obtain prior approval for acquisitions, branching and engaging in new lines of business. Any company controlling a national bank that is subject to a capital restoration plan must provide a limited performance guaranty of the plan. Furthermore, critically undercapitalized national banks must be placed in conservatorship or receivership within 90 days of reaching that capitalization level, except under limited circumstances. The Bank's capital at December 31, 1997, met the standards for the highest capital category, a well-capitalized national bank.
Dividend Limits. A national bank is prohibited from paying dividends if it would decrease its surplus below its level of paid-in-capital or if less than 1/10 of net profits for the preceding six months for a quarterly or semi-annual dividend, or the preceding year for an annual dividend, was transferred to surplus. In addition, the OCC must approve any dividend in property or any dividend that would increase total dividends during a calendar year to a level in excess of net profits for that year and retained net profits during the prior two years, less any required transfers to surplus or stock retirement funds. At December 31, 1997, the Bank had $7.7 million available to pay dividends.
The OCC can prohibit the payment of any dividend by the Bank it believes to it to be an unsafe or unsound practice. In addition, no capital contributions are permitted if such payment would render the national bank "undercapitalized" under the prompt corrective action regulations. Based on the current financial condition of the Bank, these provisions are not expected to affect the current ability of the Bank to pay dividends to InterCounty.
Lending Limits. OCC regulations generally limit the aggregate amount that a national bank can lend to one borrower to an amount equal to 15% of the bank's unimpaired capital and surplus. A national bank may loan to one borrower an additional amount not to exceed 10% of the association's unimpaired capital and surplus, if the additional amount is fully secured by certain forms of "readily marketable collateral." Certain types of loans are not subject to these limits. In applying these limits, the regulations require that loans to certain related borrowers be aggregated. The measure of capital and surplus for the lending limit is total risk-based capital, plus all loan and lease reserves not included in that capital category.
Transactions with Insiders and Affiliates. Loans to executive officers, directors and principal shareholders and their related interests must conform to the OCC lending limit, and the total of all such loans cannot exceed the national bank's capital and surplus for purposes of the lending limit. Most loans to directors, executive officers and principal shareholders must be approved in advance by a majority of the "disinterested" members of the board of directors of the bank with any "interested" director not participating. All loans to directors, executive officers and principal shareholders must be made on terms substantially the same as offered in comparable transactions with the general public or under a program applicable to all Bank employees, and loans to executive officers are subject to additional limitations. The Bank was in compliance with such restrictions at December 31, 1997.
All transactions between national banks and their affiliates, including InterCounty, must comply with Sections 23A and 23B of the FRA. An affiliate of a national bank is any company or entity that controls, is controlled by or is under common control with the national bank. Generally, Sections 23A and 23B of the FRA (i) limit the extent to which a national bank or its subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10% of such association's capital stock and surplus, (ii) limit the aggregate of all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus, and (iii) require that all such transactions be on terms substantially the same, or at least as favorable to the bank, as those in transactions with a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and other similar types of transactions. The Bank was in compliance with these requirements and restrictions at December 31, 1997.
Federal Deposit Insurance Corporation and Assessments. The FDIC is an independent federal agency that insures the deposits up to prescribed statutory limits, of federally insured banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The FDIC
administers two separate insurance funds, the BIF for commercial banks and state savings banks and the SAIF for savings associations and banks who have acquired SAIF deposits. The FDIC is required to maintain designated levels of reserves in each fund.
The SAIF deposits of Williamsburg obtained by the Bank in the Merger- Conversion, including the attributed growth factor, which were $15.1 million at December 31, 1997, remain insured in the SAIF. The Bank is a member of the BIF, and, at December 31, 1997, it had $314.3 million in deposits insured in the BIF. Deposit accounts are insured by the FDIC, up to the prescribed limits.
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.
Because the reserves of the BIF fund exceed the statutorily set minimum, assessments for healthy BIF institutions were significantly decreased in the last half of 1995. Because the SAIF reserves did not meet the minimum required, assessments paid by healthy institutions on deposits in the SAIF have exceeded those paid by healthy banks beginning in 1996.
Federal legislation, which was effective September 30, 1996, provided for the recapitalization of the SAIF by means of a special assessment of $.657 per $100 of SAIF deposits held at March 31, 1995, in order to increase SAIF reserves to the level required by law. Certain banks were required to pay the special assessment on only 80% of SAIF deposits held at that date. That legislation also required that BIF members begin to share the cost of prior thrift failures. As a result of the recapitalization of the SAIF and this cost sharing between BIF and SAIF members, FDIC assessments for healthy institutions during 1997 and 1998 have been set at $.013 per $100 in BIF deposits and $.064 per $100 in SAIF deposits.
The SAIF deposits of the Bank at March 31, 1995, totaled $14.2 million. The Bank paid a special assessment of $94,102 on November 27, 1996, which was accounted for and recorded as of September 30, 1996. Beginning in 1997, the Bank has paid FDIC assessments of $.064 on its deposits attributed to the SAIF and $.013 on its BIF deposits.
Federal Reserve System. The FRA requires national banks to maintain reserves against their net transaction accounts (primarily checking and NOW accounts). Such regulations currently require that reserves of 3% be maintained against
net transaction accounts up to $47.8 million (subject to an exemption of up to $4.7 million), and that reserves of 10% be maintained against that portion of total net transaction accounts in excess of $47.8 million. These percentages are subject to adjustment by the FRB. At December 31, 1997, the Bank was in compliance with its reserve requirements.
Federal Home Loan Banks
The Federal Home Loan Banks (the FHLBs), under the regulatory oversight of the Federal Housing Financing Board, provide credit to their members in the form of advances. The Bank became a member of the FHLB of Cincinnati in early 1994. To remain a member, the Bank must maintain an investment in the capital stock of the FHLB of Cincinnati in an amount equal to the greater of 1% of the aggregate outstanding principal amount of the Bank's residential real estate loans, home purchase contracts and similar obligations at the beginning of each year, or 5% of its advances from the FHLB. The Bank is in compliance with this requirement with an investment in FHLB of Cincinnati stock having a book value of $4,013,000 at December 31, 1997.
Upon the origination or renewal of a loan or advance, the FHLB of Cincinnati is required by law to obtain and maintain a security interest in collateral in one or more of the following categories: fully disbursed, whole first mortgage loans on improved residential property or securities representing a whole interest in such loans; securities issued, insured or guaranteed by the U.S. government or an agency thereof; deposits in any FHLB; or other real estate related collateral (up to 30% of the member's capital) acceptable to the applicable FHLB, if such collateral has a readily ascertainable value and the FHLB can perfect its security interest in the collateral.
An FHLB member that does not meet the qualified thrift lender ("QTL") test is eligible to receive FHLB advances if it holds FHLB stock equal to 5% of total advances divided by the percentage of qualified assets under the QTL test. The QTL test requires that either (a) 65% of the member's "portfolio assets" (total assets less goodwill and other intangibles, property used to conduct business and liquid assets in an amount not exceeding 20% of total assets) consist of qualified thrift investments on a monthly average basis in 9 out of 12 months or (b) 60% of the member's assets (on a tax basis) must consist of assets specified in the thrift test in the Internal Revenue Code of 1986, as amended, which includes residential, deposit and education loans and certain government obligations.
Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLBs. The standards take into account a member's performance under the Community Reinvestment Act and its record of lending to first-time home buyers. All long-term advances by each FHLB must be made only to provide funds for residential housing finance.
Item 2.
Item 2. Description of Property
The following table sets forth certain information at December 31, 1997, regarding the properties on which the offices of the Bank are located:
Owned Date Location or leased acquired - -------- --------- -------- 48 North South Street Wilmington, Ohio Owned 1915
108 N. South Street Wilmington, Ohio Owned 1980
1334 Rombach Avenue Wilmington, Ohio Owned 1991
141 W. Main Street New Vienna, Ohio Owned 1967
114 N. Howard Street Sabina, Ohio Owned 1969
11 E. Washington Street Sabina, Ohio Owned 1969
125 Main Street Blanchester, Ohio Owned 1978
2248 Courseview Dr. Mason, Ohio Owned 1988
452 N. Main Street Mt. Orab, Ohio Owned 1981
120 S. Main Street Georgetown, Ohio Owned 1992
885 S. Main Street Georgetown, Ohio Owned 1992
733 Lila Avenue Milford, Ohio Owned 1991
244 W. Main Street Williamsburg, Ohio Owned 1993
7110 Bachman Road Sardinia, Ohio Leased 1994
201 East Main Street Batavia, Ohio Owned 1996
101 Harry Sauner Road Hillsboro, Ohio Owned 1997
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 1,546,338 common shares of InterCounty outstanding on December 31, 1997 held of record by approximately 377 shareholders. There is presently no active public trading market for InterCounty's shares, nor are the prices at which common shares have been traded published by any national securities association or quotation service. The Company's shares are quoted on the OTC Bulletin Board under the symbol "ICYB". Dividends per share declared in 1996 were $.14 in each of March, June, September and December. Dividends per share declared in 1997 were $.19 in each of March, June, September and December.
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 1997 to prior years should be read in conjunction with the audited consolidated financial statements at December 31, 1997 and 1996 and for the three years ended December 31, 1997. In addition to the historical information contained herein with respect to InterCounty Bancshares, Inc. (the "Company"), and The National Bank and Trust Company (the "Bank"), the following discussion contains forward-looking statements that involve risks and uncertainties. Economic circumstances, the Company's operations and the Company's actual results could differ significantly from those discussed in the forward-looking statements. Some of the factors that could cause or contribute to such differences include changes in the economy and interest rates in the nation and the Company's general market area.
RESULTS OF OPERATIONS
OVERVIEW Net income for 1997 was $4.972 million, an increase of 2.3% from 1996. Net income per share was $3.24 in 1997 compared to $3.18 in 1996. Highlights include a 7.4% increase in net interest income, a 33.3% increase in the provision for loan losses to $800,000, an increase of 7.7% in non-interest income, and a 6.1% increase in non-interest expense. Operating earnings, which excludes securities transactions, the credit card sale premium, and income taxes, increased 9.6% from 1996. Performance ratios for 1997 included a return on average assets of 1.23% and a return on average equity of 12.93%.
Net income for 1996 was $4.862 million, an increase of 20.8% from 1995. About half of the increase is the result of a net after-tax gain of $215,000 on the sale of the Bank's credit card loan portfolio, and a historical tax credit of $214,000 for the renovations to the Bank's main office buildings. Other highlights include a 9.2% increase in net interest income, a 66.7% increase in the provision for loan losses to $600,000, an increase of 34.2% in non-interest income, and a 7.2% increase in non-interest
Overview (Continued)
expense. Operating earnings, which excludes securities transactions the credit card sale premium, and income taxes, increased 12.7% from 1995. Performance ratios for 1996 included a return on average assets of 1.32%, and a return on average equity of 13.91%, compared to 1.28% and 12.85% respectively, for 1995.
NET INTEREST INCOME Net interest income increased to $16.1 million in 1997 from $15.0 million in 1996, an increase of 7.4%. Although average interest-earning assets increased $35.4 million (10.2%) from 1996, the Bank's yield on average interest-earnings assets decreased slightly to 8.28% in 1997 from 8.32% in 1996.
Interest and fees on loans increased 7.3% from last year as the average balance rose $17.6 million (6.9%) and the average yield increased from 8.73% in 1996 to 8.76% in 1997. During 1997 lending rates were fairly stable throughout the year. The prime rate began the year at 8.25%, increased 25 basis points to 8.50% in March, and remained at that level for the rest of 1997. The securities portfolio showed an increase in balances and a decrease in yield. The average balance of the securities portfolio increased $17.0 million (19.8%) from 1996, and the yield decreased from 7.24% to 7.11%. The securities portfolios experienced the maturity and call of higher yielding assets and the reinvestment of those funds in the lower rates that were available due to the flattening of the U.S. Treasury yield curve during 1997.
Average interest-bearing liabilities increased $33.5 million during 1997, and the cost increased slightly to 4.68% in 1997 from 4.64% in 1996. The increase in cost of funds was primarily due to increases in certificates over $100,000 and Federal Home Loan Bank borrowing. The net interest margin decreased to 4.22% in 1997 from 4.33% in 1996.
Net interest income increased to $15.0 million in 1996 from $13.7 million in 1995, an increase of 9.2%. The Bank's yield on average interest-earning assets decreased to 8.32% in 1996 from 8.51% in 1995. Average interest- earning assets increased $50.1 million (16.9%) from 1995. Interest and fees on loans increased 15.2% from 1995 to 1996 as the average balance rose $38.2 million (17.5%) and the average yield decreased from 8.90% in 1995 to 8.73% in 1996. During 1996 lending rates were fairly stable throughout the year. The prime rate began the year at 8.5%, decreased 25 basis points to 8.25% in early February, and remained at that level for the rest of 1996. The securities portfolio also showed an increase in balances and a decrease in yield. The average balance of the securities portfolio increased $14.1 million from 1995, and the yield decreased from 7.53% to 7.24%. Both the loan and security portfolios experienced the maturity of higher yielding assets and the reinvestment of those funds in the lower rates that were available during 1996.
Average interest bearing liabilities increased $46.5 million during 1996, and the cost increased slightly to 4.64% in 1996 from 4.57% in 1995. The increase in cost of funds was primarily due to movement from savings accounts to higher yielding money market accounts. The net interest margin decreased to 4.33% in 1997 from 4.64% in 1996.
PROVISION FOR LOAN LOSSES The provision for loan losses was $800,000 in 1997, an increase of $200,000 from the $600,000 provision recorded in 1996,which was an increase of $240,000 from the provision recorded in 1995. Net charge-offs in 1997 were $725,000, compared to $558,000 in 1996 and $277,000 in 1995. The increased provision in 1997 and 1996 was in response to a 6.9% and 17.5% increase in average loans for those years, and also increases in the amount of net charge-offs in those years. The ratio of the allowance for loan losses as a percent of total loans was .99% in 1997, 1.00% in 1996, and 1.09% in 1995.
NON-INTEREST INCOME Table 2 details the components of non-interest income and how they relate each year as a percent of average assets. Total non-interest income was $3.4 million in 1997, $3.1 million in 1996, and $2.3 million in 1995. Non-interest income, excluding securities gains and losses, represents a ratio of .76% of average assets in 1997, .83% in 1996, and .73% in 1995. Service charges and fees have increased over the last three years from $1.0 million to $1.1 million and $1.3 million due to increased charges and growth in the number of accounts; however, the ratio of service charges and fees to average assets has remained fairly consistent during this period. Trust income increased 26.5% in 1997, and 11.0% in 1996 due to increases in both the number of accounts and the amount of funds under management. At December 31, 1997, total assets in the Trust Department were approximately $174 million, compared to $150 million and $129 million at December 31, 1996 and 1995, respectively. Net securities gains were $300,000 in 1997, compared to net gains of $86,000 in 1996, and net gains of $23,000 in 1995. Late in the fourth quarter of 1996, the Bank sold its credit card loan portfolio and recorded a net gain of $326,000.
Also late in 1996 the Bank began installing cash dispensing units in convenience stores. Additional installations continued throughout 1997 with a total of 86 machines at year end. The 1997 operating results for this new segment of the Bank's business were total fees of $218,000 and a net loss before taxes, which is included in other non-interest income, of $155,000. Included in the net loss is depreciation expense of $138,000.
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 $10.1 million in 1995, to $10.8 million in 1996, and to $11.5 million in 1997. These figures represent a percent of average assets of 3.21% in 1995, 2.94% in 1996, and 2.83% in 1997. The improvement during 1997 was due primarily to reductions in benefits expense, deposit insurance premiums, and outside data processing. The rest of the categories of expense remained about the same as 1996 as a percent of average assets. Improvements during 1996 were achieved through a 17.0% increase in average assets from 1995 while these expenses increased only 7.2% from 1995.
Personnel expense (salaries, pensions and benefits), which is the largest component of non-interest expense, increased to $5.8 million in 1997, but decreased as a percent of average assets. Personnel expense increased to $5.4 million in 1996 from $5.3 million in 1995 but also decreased as a percent of average assets between those two years. The average number of full-time equivalent employees increased from 163 in 1995 to 172 in 1996 and to 183 in 1997. Salaries expense in 1997 increased 11.8%, but benefits expense decreased 8.8% from 1996. In 1997 the Board of Directors and the participants in the InterCounty Bancshares, Inc. Nonqualified Stock Option Plan agreed to eliminate the optionee's right to require the Company to repurchase option shares at book value. Accordingly, the Company discontinued accruing compensation expense for the plan in 1997. In 1996 and 1995, compensation expense under the plan was $173,000 and $205,000, respectively.
Deposit insurance for 1997 was 55.2% less than 1996. During the third quarter of 1996, the Bank incurred a one-time assessment of $97,000 for deposits obtained by the Bank in 1993 when it merged with The Williamsburg Building & Loan Company. A one-time assessment was levied on all financial institutions holding deposits insured by the Savings Association Insurance Fund of the Federal Deposit Insurance Company (The "FDIC") based on the amount of such deposits held. Premiums for the second half of 1995 and all of 1996 were also significantly reduced for most banks. This resulted in a net 65.7% reduction in this expense during 1996 compared to 1995.
Most other non-interest expense categories have remained about the same as a percent of average assets from 1995 to 1997. Equipment expense has been .29%, .26%, and.26% of average assets for the years 1997, 1996 and 1995, respectively. The higher level in 1997 was due to the expansion of the computer network throughout the Bank and the opening of branch offices in Batavia in 1996 and Hillsboro in 1997. Occupancy expense was .17% of average assets in 1997 and .18% of average assets for 1996 and 1995. The state franchise tax increased in all three years as a result of the increase in capital, on which it is based, and has remained about the same as a percent of average assets. Legal, audit and professional expense decreased slightly as a percent of average assets to .09% in 1997 compared to .10% in
1996, and .11% in 1995. Other expense as a percent of average assets was .63% in 1997, .70% in 1996, and .68% in 1995. Outside data processing in 1997 was reduced $102,000 from 1996 primarily as a result of the sale of the credit card portfolio.
INCOME TAXES The effective tax rates for 1997, 1996 and 1995 were 31.1%, 27.6% and 28.3%, respectively. Tax expense in 1996 was reduced by a $214,000 rehabilitation tax credit for renovations to the Bank's main office.
FINANCIAL CONDITION
ASSETS Average total assets increased 10.2% during 1997 to $405.8 million. Average interest-earning assets increased 10.2%, and remained at 94% of total assets, the same as the last two years.
SECURITIES Average securities as a percent of assets was 22.8% in 1995, 23.3% in 1996, and grew to 25.4% in 1997. The securities portfolio at December 31, 1997 consisted of $112.0 million of securities available for sale and $11.2 million of securities that management intends to hold to maturity. The available-for-sale portion of the portfolio is generally structured into a five-year ladder of cash flows that will allow the Bank to take advantage of rising market rates or to lock in rates should market rates stay stable or fall. Mortgage-backed securities provide a regular monthly cash flow available for reinvestment at current rates. During 1996 and 1997 the majority of the additions to the portfolio have been in medium-term callable U.S. Agency bonds and mortgage-backed securities with projected average lives of three to seven years. During the fourth quarter of 1997, the Bank purchased approximately $4.6 million of 15-20 year maturity tax exempt securities. Also during the fourth quarter of 1997, the Bank purchased $30 million of U.S. Agency mortgage-backed securities with funds borrowed from the Federal Home Loan Bank at an anticipated spread of 150 basis points before tax. The portfolio has approximately $1.2 million of net appreciation over the amortized cost at December 31, 1997.
LOANS Table 4 shows loans outstanding at period end by type of loan. Average total loans as a percent of average assets was 69.5% in 1995, 69.8% in 1996, and 67.6% in 1997. The portfolio composition has stayed relatively the same during the three-year period. Commercial and industrial loans grew from $47.0 million in 1995 to $58.0 million in 1996 and to $63.7 million in 1997, primarily as a result of increased origination of working capital and equipment loans. Management anticipates moderate growth in the commercial and industrial loan portfolio. The growth in residential real state loans during 1997 was the result of the Bank originating loans locally through the branch network. The Bank currently sells the majority of fixed-rate residential real estate loans originated, while holding the adjustable-rate loans in the portfolio principally to manage interest rate risk. The decision to hold or
sell fixed-rate residential real estate loans is made at the time the loan is originated. Management has no intention to sell real estate loans once they are placed in the portfolio. New and used automobile loans have been the emphasis in the installment area, although the Bank has reduced its efforts to originate installment loans due to increased competition and narrowing interest rate spreads. The amount of installment loans outstanding has decreased from $81.0 million at the end of 1996 to $79.1 million at the end of 1997, and from 30% of the portfolio at December 31, 1996 to 28% at December 31, 1997.
The general economy of the Bank's market area has been stable to good for the past several years. The Bank has experienced an increase in automobile lending, residential real estate lending, and commercial lending, both real estate and industrial, because of the general economic conditions and the movement of the Bank into new markets, such as Clermont County. The Bank focused its commercial lending on small to medium-sized companies in its market area, most of which are companies with long established track records. As of December 31, 1997, the percent of fixed-rate loans to total loans was 45%, of which 82% mature within five years.
ALLOWANCE FOR LOAN LOSSES Table 5 shows selected information relating to the Bank's loan quality and allowance for loan losses. The allowance is maintained to absorb potential losses in the portfolio. Management's determination of the adequacy of the reserve is based on reviews of specific loans, loan loss experience, general economic conditions and other pertinent factors. If, as a result of charge-offs or increases in risk characteristics of the loan portfolio, the reserve is below the level considered by management to be adequate to absorb possible future loan losses, the provision for loan losses is increased. Loans deemed not collectible are charged off and deducted from the reserve. Recoveries on loans previously charged off are added to the reserve.
Loan quality has been good over the last five years as net charge-offs as a percent of average loans has averaged .17% and was .26% in 1997. The allowance for loan losses is .99% of total loans as of December 31, 1997, and has ranged from 1.00% to 1.28% for the previous four years. The Bank does not allocate the allowance for loan losses to specific types of loans.
In assessing the adequacy of the allowance for loan losses, the Bank considers three principal factors: (1) the three-year rolling average charge-off percentage applied to the current outstanding balance by portfolio type; (2) a specific percentage applied to individual loans estimated by management to have a potential loss; and (3) estimated losses attributable to anticipated portfolio growth, economic conditions and portfolio risk. Economic conditions considered include unemployment levels, the condition of the agricultural business, and other local economic factors.
Non-accrual loans for the last five years are listed in Table 5. The amount in this category decreased to $509,000 from $535,000 in 1996, and was $314,000 in 1995. The 1995 included eight loans, all of which were secured by real estate, six with first mortgages, and two with second mortgages. All of the 1995 loans were resolved as expected, and the Bank's recorded loss was $27,000. The 1996 amount consisted of nine loans, most of which were secured with real estate. During 1997 all but one of the 1996 loans were resolved and the Bank's recorded loss was $96,000. The remaining unresolved loan had a balance of $144,000 and remains on non-accrual status. The 1997 amount of $509,000 consisted of the remaining 1996 loan and nine other loans. Most are collaterized with first mortgages, one with a second mortgage, and three with both equipment and second mortgages as collateral. All but four are expected to be resolved this year, and those four are expected to be long-term workouts. The anticipated aggregate loss in 1998 from these loans is $60,000. As of December 31, 1997, management knew of no significant loans not disclosed herein that would cause management to have serious doubts as to the ability of the borrowers to comply with present loan repayment terms.
OTHER ASSETS Beginning in the fourth quarter of 1996 and during 1997 the Bank has been installing cash dispenser machines in convenience stores and super markets. There were 86 machines located in Ohio, Kentucky, and Indiana at the end of The Bank's investment in this segment of business includes $1.2 million in equipment and $2.3 million in cash to supply the machines. The Bank anticipates installation of another 40 machines in 1998. The Bank charges a fee for withdrawals from anyone who does not have a transaction account with the Bank. The Bank recorded a net loss on this segment of business for 1997 of $155,000 before taxes, and anticipates a smaller net loss for 1998 if the 40 new installations are accomplished. The Bank's experience indicates a six-to-twelve-month period before a machine begins covering costs, depending on transaction volume. Other sources of revenue, including advertising, stamps, and coupons, are being pursued that would help the profitability of this segment of business.
DEPOSITS Table 6 presents a summary of period end deposit balances. As rates began rising in 1994, savings accounts dropped to 20% of total deposits from 24% in 1993. These funds flowed into time certificates as consumers began locking in higher rates. This trend continued from 1995 through 1997 as savings accounts decreased in amounts and percent of deposits. Money market accounts rose to 7% of deposits in 1995, and then to 9% of deposits in 1996 and 1997, as a result of adding a third and higher interest rate tier for large balance accounts. Certificates of $100,000 or more rose 8% of deposits in 1997 from 6% in 1996 as a result of a slightly more aggressive pricing strategy in our market area for this type of funds.
Deposits are attracted principally from within the Bank's market area through the offering of numerous deposit instruments, including checking accounts, savings accounts, NOW accounts, money market deposit accounts, term certificate accounts and individual retirement accounts. Interest rates paid, maturity terms, service fees, and withdrawal penalties for the various types of accounts are established periodically by management based on the Bank's liquidity requirements, growth goals and market trends. The Bank does not use brokers to attract deposits. The amount of deposits from outside the Bank's market area is not significant.
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. Through the end of 1994, dividends had been declared and paid on a semi-annual basis in June and December of each year. During the five years ended in 1994, the dividend rate increased nine out of ten payments. Beginning in 1996, the Board of
Directors began to pay dividends on a quarterly basis. The dividend rate was increased over 40% in both 1995 and 1996, and over 35% in 1997. The Company's equity-to-assets ratio at December 31, 1997, was 9.4%. As of that same date, tier 1 risk-based capital was 13.7%, and total risk-based capital was 14.7%. 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 need, are met. The Company manages liquidity on both the asset and liability sides of the balance sheet. The loan to deposit ratio at December 31, 1997, was 84.3%, compared to 87.1% at the same date in 1996. Loans to deposits plus other borrowings was 70.8% at the end of 1997, compared to 79.1% at the same time last year. The securities portfolio is primarily "available for sale" securities that are readily marketable. Approximately 55% of the portfolio is pledged to secure public deposits and for other purposes as required by law. The balance of the "available for sale" securities could be sold if necessary for liquidity purposes. Also, a stable deposit base, consisting of 92% core deposits, makes the Bank less susceptible to large fluctuations in funding needs.
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 Bank 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 Bank's market risk is composed primarily of interest rate risk.
The Bank's Asset/Liability Committee (ALCO) is responsible for reviewing the interest rate sensitivity position of the Bank and establishing policies to monitor and limit exposure to interest rate risk. The guidelines established by ALCO are approved by the Bank's Board of Directors. The primary goals 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 monthly basis through asset/liability management committee meetings. Techniques used include both interest rate gap management and simulation modeling that measures the effect of rate changes on net interest income under different rate scenarios. The interest rate gap analysis (Table 7), quantifies the asset/liability static sensitivity as of December 31, 1997. As shown, the Bank was liability sensitive for periods through six months, slightly asset sensitive six months to one year, and significantly asset sensitive within the one- to five-year period. The cumulative gap as a percent of total assets through one year is (10.6)%. The entire balance of interest-bearing demand deposits and money market deposit accounts are included in the first gap period. Although these deposits may be repriced or withdrawn in a relatively short period of time,
they have been a stable base of retail core deposits for the Bank. In addition, their sensitivity to changes in interest rates is much less than some other deposits, such as certificates of deposit over $100,000. Savings accounts because of their susceptibility to being withdrawn and invested into time certificates, as the Bank experienced during 1994 through 1997, are scheduled to run off at fifteen percent per year.
In the Bank's simulation models, each asset and liability category's sensitivity to changes in interest rates is estimated. The effects on net interest income are then projected based on a stable, rising and falling rate scenario and analyzed on a monthly basis. The results of this analysis are used in decisions made concerning pricing strategies for loans and deposits, balance sheet mix, securities portfolio strategies, liquidity and capital adequacy. The Bank's current one-year simulation models under stable rates indicate a decline of 14 basis points in yields on earning assets and also a 14 basis point decline in the cost of interest- bearing liabilities. This will have a slightly positive effect on projected interest margin for the next twelve months.
Simulation models performed where rates are increased or decreased by 300 basis points gradually over a one-year period have resulted in a 5.3% increase in net interest income under rising rates, and a 5.5% decrease in net interest under falling rates. Neither of these projections would be considered a significant change under a 300 basis point rate change model and are well within ALCO guidelines of 10%. The model includes assumptions to the sensitivity to rate changes and changes in the cash flows for most of the assets and liability categories under different rate scenarios. For example, certain deposit rates generally doe not move up or down as quickly or to the same extent as loan rates. Also cash flows for mortgage-backed securities and real estate loans could be different at different rate levels.
The Bank's resulting increase in projected net interest income in a rising rate environment and decrease in projected net interest income in a falling interest rate environment, even though the Bank is liability sensitive, means that its interest-earning assets are repricing quicker and to a greater extent than its interest-bearing liabilities. The Bank has not experienced the level of earnings volatility that could be indicated by its gap position, as evidenced by the stability of the net interest margin over the past five years, ranging from 4.22% to 4.58%. Reacting to changes in economic conditions, interest rates and market forces, the Bank has been able to alter the mix of short-term and long-term loans and investments, and increase or decrease the emphasis on fixed-and variable-rate products in response to changing market conditions. By managing the interest rate sensitivity of its asset composition in this manner, the Bank has been able to maintain a fairly stable flow of net interest income. Table 8 provides information about the Bank'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, 1997.
IMPACT OF INFLATION AND CHANGING PRICES The majority of a financial institution's assets and liabilities are monetary in nature. Changes in interest rates affect the financial condition of a financial institution to a greater degree than inflation. Although interest rates are determined in large measure by changes in the general level of inflation, they do not change at the same rate nor in the same magnitude, but rather react in correlation to changes in the expected rate of inflation and to changes in monetary and fiscal policy.
The Bank's ability to react to changes in interest rates has a significant impact on financial results. As discussed previously, management attempts to control interest rate sensitivity in order to protect against wide interest rate fluctuations.
YEAR 2000 As with all financial institutions, the Bank's operations rely extensively on computer systems. The Bank is addressing problems associated with the possibility that computer systems will not recognize the year 2000 correctly. A project team of Bank employees has been assembled to review and attain certification for all the computer systems in use in the Bank. This will be accomplished either through internal evaluation and testing, or verifiable documentation from the vendors of specific software. At this time, the Bank has not identified any significant specific expenses which are reasonably likely to be incurred in connection with this issue and does not expect to incur significant expense to implement corrective measures. The Bank expects to be substantially completed with this project by the end of 1998 and will be in a better position to estimate its impact on the financial results of the Company.
EFFECT OF RECENT ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," effective January 1, 1996, encouraged but did not require, adoption of a fair-value-based accounting method for employee stock options. Management elected to continue to recognize compensation cost using the intrinsic-value-based method of accounting in Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." The nature of the Company's agreement with optionees prior to 1997 was such that the accounting treatment was the same under both pronouncements. Prior to 1997, compensation cost was recorded because the Company had a contingent obligation to repurchase the shares. During 1997, all outstanding option agreements were revised, eliminating the Company's contingent obligation. Because recording compensation cost is no longer appropriate under APB No. 25, beginning in 1997 the Company is disclosing the pro forma information required by SFAS No. 123.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" as amended by SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of [SFAS] Statement No. 125," provides accounting and reporting standards to distinguish transfers of financial assets that are sales from transfers that are secured borrowings. Provisions of SFAS No. 125 were adopted January 1, 1997 with no effect on the consolidated financial statements. It is not expected to have a material impact on the consolidated financial statements in 1998 when all provisions of the statements are effective.
SFAS No. 130, "Reporting Comprehensive Income," effective for fiscal years beginning after December 15, 1997, requires companies to report comprehensive income. Upon adoption, the Company will report net income and unrealized gains and losses on securities available for sale, net of tax as components of comprehensive income.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" requires financial and descriptive information about operating segments of a business. The statement also requires companies to report revenues for each major product and service. It is effective for fiscal years beginning after December 15, 1997. SFAS No. 131 will result in additional financial statement disclosures, with no effect on the Company's reported consolidated financial position or net income.
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," effective for fiscal years beginning after December 15, 1997, revises current disclosure requirements. It does not change the measurement or recognition of the obligation or costs associated with employer provided postretirement benefits. The effects of this statement are limited to defined benefit plans. The Company terminated its only defined benefit plan in 1997 and, accordingly, this statement will not change the nature of its postretirement benefit disclosures.
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
- I N D E X -
PAGE
INDEPENDENT AUDITORS' REPORT 58
FINANCIAL STATEMENTS
Consolidated Balance Sheets 59
Consolidated Statements of Income 61
Consolidated Statements of Changes in Shareholders' Equity 63
Consolidated Statements of Cash Flows 65
Notes to Consolidated Financial Statements 67
To the Shareholders and Board of Directors InterCounty Bancshares, Inc. Wilmington, Ohio
We have audited the accompanying consolidated balance sheets of InterCounty Bancshares, Inc. and subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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 audit.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of InterCounty Bancshares, Inc. and subsidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
/s/ J.D. CLOUD & CO. L.L.P. Certified Public Accountants
Cincinnati, Ohio January 29, 1998
InterCounty Bancshares, Inc. and The National Bank & Trust Company
InterCounty Bancshares, Inc. and The National Bank & Trust Company
InterCounty Bancshares, Inc. and The National Bank & Trust Company
InterCounty Bancshares, Inc. and The National Bank & Trust Company
InterCounty Bancshares, Inc. and The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
InterCounty Bancshares, Inc. (the Company) is a one-bank holding company. Its wholly-owned subsidiary, The National Bank & Trust Company (the Bank), provides full banking services, including trust and brokerage services, to customers located principally in Clinton, Brown, Clermont Warren and Highland counties in Ohio. The Bank grants agribusiness, commercial, consumer, and residential loans to customers throughout its market area.
The accounting and reporting policies of the Company and its subsidiary conform with generally accepted accounting principles (GAAP) and with general practices within the banking industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of the significant policies:
Basis Of Presentation- The consolidated financial statements include the accounts of the Company and its subsidiary. All intercompany accounts and transactions have been eliminated in consolidation. Certain prior period data has been reclassified to conform to current period presentation.
Securities- Investment securities that the Bank has the intent and ability to hold to maturity are reported at amortized cost, 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 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
InterCounty Bancshares, Inc. and The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Finance Board (FHFB) 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 And Allowance For Loan Losses- Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses and net of any deferred fees or costs. Net deferred fees and costs are amortized over the lives of the related loans using the interest method as an adjustment of loan yields. The allowance for loan losses is established through provisions charged to expense. The allowance is an amount that management believes will be adequate to absorb potential losses on existing loans that may become uncollectable. 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 base 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.
InterCounty Bancshares, Inc. and The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Stock Options- Stock options are accounted for under Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees." In years before 1997, optionees could elect, when the options were exercised, to have the Company repurchase the shares at book value. Compensation cost and a liability were recorded during the service period based on changes in book value. Effective in 1997, and as approved by all optionees, this contingent obligation of the Company was eliminated. The recorded liability at December 31, 1996 will be recognized as additional consideration for the related stock when issued. Because options are only granted at a price equal to market value on the day of grant, under the intrinsic value method of APB No. 125, the Company, beginning in 1997, 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. As permitted by SFAS No. 123, the Company has elected to continue applying the intrinsic value method of APB No. 25. The pro forma disclosures required by SFAS No. 123 are shown in Note 13.
Income Taxes- Certain income and expenses are recognized in different periods for financial reporting than for purposes of computing income taxes currently payable. Deferred taxes are provided on such temporary differences. These differences relate principally to the allowance for loan losses, depreciation and stock option accruals.
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.
InterCounty Bancshares, Inc. and The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
SFAS No. 128 "Earnings Per Share" was issued in 1997, and requires, in all instances, dual presentation of a basic EPS, which excludes dilution, and a diluted EPS, which gives effect to all dilutive potential common shares that were outstanding during the period. Prior period EPS data must be restated. SFAS No. 128 also requires a reconciliation of the income available to common shareholders and weighted-average shares of the basic EPS computation to the income available to common shareholders and weighted-average shares plus dilutive potential common shares of the diluted EPS computation. Adoption of SFAS No. 128 had no effect on current or previously reported EPS data.
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.
InterCounty Bancshares, Inc. and The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 2 - SECURITIES
InterCounty Bancshares, Inc. and The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 2 - SECURITIES (Continued)
Gross gains realized on sales of securities available for sale were $300,000 for 1997, and $86,000 for 1996, and $23,000 for 1995. There were no realized losses during the three year period ending December 31, 1997. Securities with a carrying value of approximately $67.3 million and $41.1 million at December 31, 1997and 1996, respectively, were pledged to secure public deposits, short- term borrowings and for other purposes as required by law.
At December 31, 1997, the amortized cost and estimated market value of debt securities by contractual maturity was as follows. Expected maturities may differ from contractual maturities when borrowers have the right to call or prepay obligations (thousands).
InterCounty Bancshares, Inc. and The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 3 - LOANS
In 1996, the Bank sold its $3.9 million credit card loan portfolio. The gain on the sale of $326,000 is included in Other Non-Interest Income in the Consolidated Statements of Income.
InterCounty Bancshares, Inc. and The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 3 - LOANS (Continued)
The total recorded investment in impaired loans at December 31, 1997, the average for the year, and the related allowance for credit losses as determined in accordance with SFAS No. 114 were not material. Loans on which the accrual of interest had been discontinued amounted to $509,000, $535,000 and $314,000 at December 31, 1997, 1996 and 1995, respectively. If interest on those loans had been accrued, such income would have approximated $41,000, $38,000 and $27,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Interest income recognized in the respective years on these nonaccrual loans was not material. The Bank is not committed to lend additional funds to debtors whose loans have been modified to provide a reduction or deferral of principal or interest because of a deterioration in the financial position of the borrower.
NOTE 4 - PREMISES AND EQUIPMENT
Depreciation expense related to premises and equipment was $1,013,000, $695,000 and $618,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
NOTE 5 - LEASES
Data processing equipment held under capital lease, included in premises and equipment had a carrying value of $57,000 and $143,000 at December 31, 1997 and 1996, respectively. Amortization expense is approximately $86,000 annually.
InterCounty Bancshares, Inc. and The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 5 - LEASES (Continued)
Rent expense for all Bank premises and equipment leases was $62,000, $59,000 and $43,000 in 1997, 1996 and 1995, respectively.
InterCounty Bancshares, Inc. and The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 6 - DEPOSITS
NOTE 7 - EMPLOYEE BENEFIT PLANS
In 1996, the Bank adopted a 401(k) salary deferral plan. Substantially all employees who meet minimum age and length of service requirements are eligible to participate. Employee deferrals may be subject to employer- matching contributions up to specified limits. Additional profit sharing contributions are at the board of directors' discretion. Since the plan's adoption, there have been no employer contributions.
Effective August 31, 1997, the Bank froze benefit accruals under its noncontributory defined benefit plan. Benefits under the plan, which covered substantially all employees, were based on annual compensation and years of service. The Bank's funding policy was to contribute at least the minimum required by the Employee Retirement Income Security Act. Contributions to the plan were $162,000 and $124,000 in 1997 and 1996 respectively. Under the provisions of SFAS No.88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination of Benefits", the freezing of benefits resulted in the recognition of a $278,000 curtailment gain in 1997.
On December 1, 1997, the defined benefit plan was terminated. The Bank recognized a settlement loss of $319,000. Most plan participants received a lump-sum settlements prior to December 31, 1997. The accumulated benefit obligation at December 31, 1997 represents the amount needed to purchase annuity contracts for a small number of participants who elected this settlement alternative.
InterCounty Bancshares, Inc. and The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued NOTE 7 - EMPLOYEE BENEFIT PLANS (Continued)
InterCounty Bancshares, Inc. and The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 8 - EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
The Company sponsors a leveraged employee stock ownership plan (ESOP) covering substantially all of its employees who meet minimum age and length of service requirements. The Company is obligated to make annual contributions sufficient to enable the ESOP to repay the loan, including interest. The shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance sheets. Additional contributions to the Trust are determined by the Board of Directors. Total Company contributions were $202,000, $36,000 and $165,000 for the years ended December 31, 1997, 1996 and 1995, 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 1997 and 1996, the Company purchased 1,500 shares and 9,357 shares, respectively, from ESOP participants. The estimated fair value of allocated shares remaining in the ESOP was $8,689,000 and $7,530,000 at December 31, 1997 and 1996, respectively. The estimated fair value for 1996 was based on the independent appraisal. The 1997 independent appraisal has not been completed and, therefore, estimated fair value at December 31, 1997 is based on the 1996 relationship of appraised value to book value applied to the December 31, 1997 book value.
Shares purchased by the ESOP since 1993 are accounted for in accordance with Statement of Position 93-6. Accordingly, as these shares are released from collateral, the Company reports compensation expense equal to the current estimated fair value of the released shares. Once released, the shares are considered outstanding for earnings-per-share (EPS) computations. Dividends on allocated shares reduce retained earnings; dividends on unallocated shares are recorded as a reduction of ESOP debt.
Compensation expense for ESOP shares acquired in 1986 is equal to the principal repaid on the related borrowing plus any additional cash contributions. Dividends on 1986 ESOP shares are charged to retained earnings. These shares are considered outstanding for EPS computations.
InterCounty Bancshares, Inc. and The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 8 - EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST (Continued)
At December 31, 1997, the estimated fair value of unreleased 1993 shares was $361,000. ESOP compensation expense was $178,000, $25,000, and $105,000 for 1997, 1996 and 1995, respectively.
NOTE 9 - SHORT-TERM BORROWINGS
InterCounty Bancshares, Inc. and The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 9 - SHORT-TERM BORROWINGS
At December 31, 1997, Federal Home Loan Bank borrowings were collateralized by a blanket pledge of certain residential real estate loans totaling approximately $61.1 million and a mortgage-backed security with a carrying value of $9.5 million.
NOTE 10 - LONG-TERM DEBT
The ESOP Trust loan agreement contains various covenants for the Company which include a minimum net worth and restrictions on additional indebtedness. The note may be prepaid without penalty with prepayments applying in the inverse order of the maturities of the scheduled payments. Interest is due quarterly at the prime rate, 8.50% at December 31, 1997. Scheduled principal payments are $108,000 annually through 2003.
NOTE 11 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The Bank paid interest of $15,471,000, $13,857,000 and $11,050,000 in 1997, 1996 and 1995, respectively. The Bank paid federal income taxes of $2,251,000, $1,761,000 and 1,388,000 in 1997, 1996 and 1995, respectively.
InterCounty Bancshares, Inc. and The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 12 - INCOME TAXES
InterCounty Bancshares, Inc. and The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 12 - INCOME TAXES (Conintued)
Due primarily to the Company's taxable position in prior years, a valuation allowance for deferred tax assets was unnecessary at December 31, 1997 and 1996.
InterCounty Bancshares, Inc. and The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 13 - STOCKHOLDER'S EQUITY
Under the terms of the Company's 1992 nonqualified compensatory stock option plan (the 1992 Plan), a maximum aggregate equal to 7% of the authorized and issued common shares of the Company may be reserved by the Board for the purpose of granting options to key bank personnel. Awards under the Plan are made at the discretion of the Board of Directors. The option price is not less than the fair market value of the shares at the date of grant. 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. Compensation expense in connection with this plan is included in pension and benefits expense in the consolidated statements of income in the amounts of $173,000 and $205,000 for 1996 and 1995, respectively. No compensation expense was recorded for this plan in 1997.
In 1993, the Board of Directors of the Company approved a stock option plan (the 1993 Plan) pursuant to which options for 22,947 common shares in the aggregate were granted to certain directors, officers and employees of an acquired building and loan company. The option price was $19.25. The options expired March 31, 1997. Compensation expense in connection with this plan is included in pension and benefits expense in the consolidated statements of income in the amount of $34,000 and $54,000 for 1996 and 1995, respectively. No compensation expense was recorded for this plan in 1997. Options for 11,683 shares, 104 shares, and 5,996 shares were exercised in 1997, 1996, and 1995, respectively.
The Company applies APB No. 25 in accounting for its stock option plans. Accordingly, compensation expense recognized for stock options issued has been limited to the years prior to 1997 when the Company was obligated, at the optionees' election, to repurchase the shares at book value. The expense reported in 1996 and earlier years would have been the same under SFAS No. 123. Had compensation expense for the Company's stock options granted in 1997 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:
InterCounty Bancshares, Inc. and The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 13 - STOCKHOLDER'S EQUITY (Continued)
The fair value of options granted, which is amortized to expense over the option vesting period in determining the pro forma results, is estimated at the date of grant using a Black-Scholes option pricing model and assuming a risk-free interest rate of 6.5%, an expected life of 9.5 years, expected volatility of 22%, and expected dividend yield of 2.5%. Based on these assumptions, the fair value of options granted in 1997 was $8.90.
The weighted-average exercise price of exercisable options at December 31, 1997, 1996 and 1995 was $12.85, $12.37 and $11.44, respectively. The following table summarized information for options currently outstanding and exercisable at December 31, 1997:
InterCounty Bancshares, Inc. and The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 13 - STOCKHOLDER'S EQUITY (Continued)
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and certain credit card accounts sold with recourse. They involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contract amount of those instruments.
InterCounty Bancshares, Inc. and The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 14- COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank is based on management's credit evaluation of the counter party. Collateral held varies, but may include accounts receivable, crops, inventory, property, plant and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. At December 31, 1997 and 1996, these guarantees were primarily issued to support public bond financing by state and local government units. These guarantees expire during the period from 1998 through 2012. Approximately 82% of the amount outstanding at December 31, 1997 was secured. Approximately 78% of the amount outstanding at December 31, 1996 was secured.
The portion of the credit card portfolio sold in 1996 to another financial institution with recourse was limited to $102,000. Beginning in 1997, new corporate-customer credit card accounts are sold with recourse to the same financial institution.
The Parent Company and its subsidiary are parties to various claims and proceedings arising in the normal course of business. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such proceedings and claims will not be material to the consolidated financial position or results of operations.
NOTE 15 - RELATED PARTY TRANSACTIONS
At December 31, 1997 and 1996, executive officers, directors and companies in which they have a direct or indirect interest, were indebted to the Bank directly or as guarantors in the aggregate amount of $8,380,000 and $6,630,000, respectively. During 1997, $4,051,000 in new loans were made; repayments totaled $2,301,000. Such transactions originate in the normal course of the Bank's operations as a depository and lending institution.
InterCounty Bancshares, Inc. and The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 16 - FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
The following disclosures are made in accordance with the provisions of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," which requires disclosure of fair value information about both on- and off-balance sheet financial instruments for which it is practicable to estimate that value. Because SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements, any aggregation of the fair value amounts presented would not represent the underlying value of the Company.
The fair value of off-balance-sheet financial instruments at December 31, 1997 and 1996, was not material.
InterCounty Bancshares, Inc. and The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 17 - REGULATORY MATTERS
The principal source of income and funds for the Holding Company is dividends paid by the Bank subsidiary. During the year 1998, dividends that the Bank subsidiary can pay to the Holding Company without prior approval of regulatory agencies is limited to the total of 1998 net income and approximately $7,672,000 of retained earnings from the previous two years.
Banks and bank holding companies must meet certain minimum capital requirements set by federal banking agencies. The minimum regulatory capital ratios are 8% for total risk-based, 4% for Teir I risk-based, and 3% for leverage. For various regulatory purposes, institutions are classified into categories based upon capital adequacy. The highest "well capitalized" category requires capital ratios of at least 10% for total risk- based, 6% for Tier I risk-based, and 5% for leverage. As of the most recent notification from their regulators, the Holding Company and Bank were categorized as "well capitalized" under the regulatory framework for prompt corrective action.
InterCounty Bancshares, Inc. and The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 17 - REGULATORY MATTERS (Continued)
The Federal Reserve Act requires depository institutions to maintain cash reserves with the Federal Reserve Bank. In 1997 and 1996, the Bank's average reserve balances were $3,782,000 and $1,832,000, respectively.
NOTE 18 - PARENT COMPANY FINANCIAL INFORMATION
InterCounty Bancshares, Inc. and The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 18 - PARENT COMPANY FINANCIAL INFORMATION (Continued)
InterCounty Bancshares, Inc. and The National Bank & Trust Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 18 - PARENT COMPANY FINANCIAL INFORMATION (Continued)
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 PROXY STATEMENT 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 "VOITING SECURITIES AND OWNERSHIP OF CETAIN 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 57 of this Form 10-K.
(2) Financial Statement Schedules - None
(3) Exhibits - See Exhibit Index at page 95 of this Form 10-K.
(b) One report on Form 8-K was filed during the last fiscal quarter of 1997 (Date of Report - November 21, 1997) reporting on Item 5, Other Events. Submitted a copy of the Agreement and Plan of Reorganization, dated November 21, 1997, that provides for the acquisition of Phillips Insurance Agency Group, Inc. by The National Bank and Trust Company. Submitted a copy of the InterCounty News Release dated November 21, 1997, reporting that under the terms of the agreement, the shareholders of Phillips will receive shares of InterCounty in exchange for all the outstanding shares of Phillips.
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
3.1 Articles of Incorporation of InterCounty Bancshares,Inc. Incorporated by reference to the Registration Statement on Form S-1 filed by InterCounty on July 2, 1993 (the "S-1") with the Securities and Exchange Commission (the "SEC"), Exhibit 3.1 (Registration No. 33- 65608).
3.2 Code of Regulations of InterCounty Bancshares, Inc. Incorporated by reference to the S-1, Exhibit 3.2.
10.1 InterCounty Bancshares, Inc. 1993 Stock Option Plan Incorporated by reference to Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.
10.2 InterCounty Bancshares, Inc. Non-qualified Stock Option Plan Incorporated by reference to the S-1, Exhibit 10.1.
21 Subsidiary of InterCounty Bancshares, Inc.
23 Consent of Independent Certified Public Accountants
27 Financial Data Schedule
99 Safe Harbor Under the Private Securities Litigation Reform Act of 1995
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
InterCounty Bancshares, Inc.
By /s/ Timothy L. Smith ------------------------- March 17, 1998 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 By /s/ B. Anthony Williams - ---------------------------- ------------------------------ Charles L. Dehner B. Anthony Williams Executive Vice President, Chairman of the Board and a Director Treasurer and a Director (Principal Accounting Officer)
Date March 17, 1998 Date March 17, 1998
By /s/ James W. Foland By /s/ Timothy L. Smith - --------------------------- ------------------------------ James W. Foland Timothy L. Smith Secretary and a Director President, Chief Executive Officer and a Director
Date March 17, 1998 Date March 17, 1998
By /s/ S. Craig Beam By - --------------------------- ------------------------------ S. Craig Beam George F. Bush Director Director
Date March 17, 1998 Date
By /s/ Georgia H. Miller By /s/ Robert A. Raizk - --------------------------- ------------------------------ Georgia H. Miller Robert A. Raizk Director Director
Date March 17, 1998 Date March 17, 1998
By /s/ Darleen M. Myers - --------------------------- Darleen M. Myers Director
Date March 17, 1998
Exhibit 21
INTERCOUNTY BANCSHARES, INC.
SUBSIDIARIES OF THE REGISTRANT
At December 31, 1997
STATE OF PERCENTAGE NAME OF CORPORATION INCORPORATION OF OWNERSHIP - ------------------- ------------- ------------
The National Bank & Trust Company Ohio 100%
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of InterCounty Bancshares, Inc. on Form S-8, filed on March 23, 1995, of our report dated January 29, 1998, on the 1997 Consolidated Financial Statements of InterCounty Bancshares, Inc.
/s/ J.D. Cloud & Co. L.L.P.
Cincinnati, Ohio March 27, 1998
EXHIBIT 99
Safe Harbor Under the Private Securities Litigation Reform Act of 1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. InterCounty Bancshares, Inc. ("InterCounty") desires to take advantage of the "safe harbor" provisions of the Act. Certain information, particularly information regarding future economic performance and finances and plans and objectives of management, contained or incorporated by reference in InterCounty's Annual Report on Form 10-K for fiscal year 1997 is forward-looking. In some cases, information regarding certain important factors that could cause actual results of operations or outcomes of other events to differ materially from any such forward-looking statement appear together with such statement. In addition, forward-looking statements are subject to other risks and uncertainties affecting the financial institutions industry, including, but not limited to, the following:
Interest Rate Risk
InterCounty's operating results are dependent to a significant degree on its net interest income, which is the difference between interest income from loans, investments and other interest-earning assets and interest expense on deposits, borrowings and other interest-bearing liabilities. The interest income and interest expense of InterCounty change as the interest rates on interest-earning assets and interest-bearing liabilities change. Interest rates may change because of general economic conditions, the policies of various regulatory authorities and other factors beyond InterCounty's control. In a rising interest rate environment, loans tend to prepay slowly and new loans at higher rates increase slowly, while interest paid on deposits increases rapidly because the terms to maturity of deposits tend to be shorter than the terms to maturity or prepayment of loans. Such differences in the adjustment of interest rates on assets and liabilities may negatively affect InterCounty's income.
Possible Inadequacy of the Allowance for Loan Losses
InterCounty maintains an allowance for loan losses based upon a number of relevant factors, including, but not limited to, trends in the level of nonperforming assets and classified loans, current and anticipated economic conditions in the primary lending area, past loss experience, possible losses arising from specific problem loans and changes in the composition of the loan portfolio. While the Board of Directors of InterCounty believes that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in material adjustments, and net earnings could be significantly adversely affected if circumstances differ substantially from the assumptions used in making the final determination.
Loans not secured by one- to four-family residential real estate are generally considered to involve greater risk of loss than loans secured by one- to four-family residential real estate due, in part, to the effects of general economic conditions. The repayment of commercial loans and multifamily residential and nonresidential real estate loans generally depends upon the cash flow from the operation of the business or property, which may be negatively affected by national and local economic conditions. Construction loans may also be negatively affected by such economic conditions, particularly loans made to developers who do not have a buyer for a property before the loan is made. The risk of default on consumer loans increases during periods of recession, high unemployment and other adverse economic conditions. When consumers have trouble paying their bills, they are more likely to pay mortgage loans than consumer loans. In addition, the collateral securing such loans, if any, may decrease in value more rapidly than the outstanding balance of the loan.
Competition
The National Bank and Trust Company (the "Bank") competes for deposits with other commercial banks, savings associations and credit unions and issuers of commercial paper and other securities, such as shares in money market mutual funds. The primary factors in competing for deposits are interest rates and convenience of office location. In making loans, the Bank competes with other commercial banks, savings and loan associations, savings banks, consumer finance companies, credit unions, leasing companies, mortgage companies and other lenders. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels and other factors which are not readily predictable. The size of financial institutions competing with the Bank is likely to increase as a result of changes in statutes and regulations eliminating various restrictions on interstate and inter-industry branching and acquisitions. Such increased competition may have an adverse effect upon the Bank.
Legislation and Regulation That May Adversely Affect InterCounty's Earnings
The Bank is subject to regulation, examination and oversight by the Office of the Comptroller of the Currency (the "OCC"), special examination by the Board of Governors of the Federal Reserve System (the "FRB") and some regulation, oversight and special examination by the Federal Deposit Insurance Corporation (the "FDIC"). As a bank holding company, InterCounty is also subject to regulation and examination by the FRB. Such supervision and regulation of the Bank and InterCounty are intended primarily for the protection of depositors and not for the maximization of shareholder value and may affect the ability of the company to engage in various business activities. The assessments, filing fees and other costs associated with reports, examinations and other regulatory matters are significant and may have an adverse effect on InterCounty's net earnings.
The FDIC is authorized to establish separate annual assessment rates for deposit insurance of members of the Bank Insurance fund (the "BIF") and the Savings Association Insurance Fund (the "SAIF"). The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under such system, assessments may vary depending on the risk the institution poses to its deposit insurance fund. Such risk level is determined by reference to the institution's capital level and the FDIC's level of supervisory concern about the institution.
Because the reserves of the BIF exceeded the statutorily set minimum, assessments for healthy BIF institutions were significantly decreased in the last half of 1995 and were reduced to $2,000 per year for well-capitalized, well-managed banks, like the Bank, in 1996. Assessments paid by healthy institutions on deposits in the SAIF exceeded that paid by healthy banks by approximately $.23 per $100 in deposits in 1996.
Federal legislation that was effective September 30, 1996, provided for the recapitalization of the SAIF by means of a special assessment of $.657 per $100 of SAIF deposits held at March 31, 1995, in order to increase SAIF reserves to the level required by law. Certain banks were required to pay the special assessment on only 80% of SAIF deposits held at that date. That legislation also required that BIF members begin to share the cost of prior thrift failures. As a result of the recapitalization of the SAIF and this cost sharing between BIF and SAIF members, FDIC assessments for healthy institutions during 1997 have been set at $.013 per $100 in BIF deposits and $.064 per $100 in SAIF deposits. The recapitalization plan also provides for the merger of the BIF and the SAIF effective January 1, 1999, assuming there are no savings associations under federal law. Under separate proposed legislation, Congress is considering the elimination of the federal thrift charter. InterCounty cannot predict the impact of such legislation on InterCounty or the Bank until the legislation is enacted.