Item 1. Description of Business
GENERAL
InterCounty Bancshares, Inc. ("InterCounty"), an Ohio corporation, is a bank holding company which owns all of the issued and outstanding common shares of The National Bank and Trust Company, chartered under the laws of the United States (the "Bank").
The Bank is engaged in the commercial banking business in Southwestern Ohio, providing a variety of consumer and commercial financial services. The primary business of the Bank consists of accepting deposits, through various consumer and commercial deposit products, and using such deposits to fund consumer loans, including automobile loans, loans secured by residential and non-residential real estate, and commercial and agricultural loans. All of the foregoing deposit and lending services are available at each of the Bank's 17 full-service offices. In addition, the Bank has one office which is drive-in facilities only and two remote service units. The Bank has also installed 95 cash dispensers in convenience stores as of the end of 1999. The Bank also has a trust department which presently administers 836 accounts having combined assets of $236 million.
On October 8, 1998, the Bank acquired all of the outstanding common shares of Phillips Insurance Agency Group, Inc. ("Phillips Group"), the holding company for Phillips Casualty Insurance Agency, Inc., and Phillips Life Insurance Agency, Inc. (the "Phillips Agencies"). The shares of Phillips Group were exchanged for 53,606 common shares of InterCounty. On December 11, 1998, the Bank acquired all of the outstanding common shares of Arnold Jones Insurance Agency, Inc. (the "Jones Agency"), in exchange for 17,777 common shares of InterCounty. In July 1999, the three operating agencies were merged into one agency called The Phillips Insurance Agency, Inc. The Phillips Insurance Agency has its principal office in Blanchester, Ohio. The assets and income of the insurance agency business were immaterial to the financial condition and operations of InterCounty during fiscal year 1998.
On September 1, 1992, the Bank acquired Kentucky National Bank of Ohio with two locations in Georgetown, Ohio for $3,200,000 in cash.
On December 29, 1993, InterCounty acquired the Williamsburg Building & Loan Company, a mutual savings and loan with total assets of $17.1 million and equity of $2.9 million. In connection with this merger conversion, InterCounty issued shares of its common stock, principally to depositors and other members of Williamsburg and the general public in subscription and community offerings.
Because of its ownership of all the outstanding stock of the Bank, InterCounty is subject to regulation, examination and oversight by the Board of Governors of the Federal Reserve System (the "FRB") under the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Bank, as a national bank, is subject to regulation, examination and oversight by the Office of the Comptroller of the Currency (the "OCC") and special examination by the FRB. The Bank is a member of the Federal Reserve Bank of Cleveland. In addition, since its deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC"), the Bank is also subject to some regulation, oversight and special examination by the FDIC. The Bank must file periodic financial reports with the FDIC, the OCC and the Federal Reserve Bank of Cleveland. Examinations are conducted periodically by these federal regulators to determine whether the Bank and InterCounty are in compliance with various regulatory requirements and are operating in a safe and sound manner.
Since its incorporation in 1980, InterCounty's activities have been limited primarily to holding the common shares of the Bank. Consequently, the following discussion focuses primarily on the business of the Bank.
FORWARD LOOKING STATEMENTS
In addition to the historic financial information contained herein with respect to InterCounty, the following discussion contains forward-looking statements that involve risks and uncertainties. Economic circumstances, InterCounty's operations and InterCounty's actual results could differ significantly from those discussed in the forward-looking statements. Some of the factors that could cause or contribute to such differences are discussed herein but also include changes in the economy and interest rates in the nation and InterCounty's general market area. The forward-looking statements contained herein include those with respect to the following matters:
1. Management's expectation that it will continue to expand its consumer lending activities, other than automobile loans; 2. The Bank's expected amount of loan net charge-offs and management's determination of the adequacy of the loan loss allowance; 3. The effect of changes in interest rates; 4. Growth in the commercial and industrial loan portfolio; and 5. Management's belief that a substantial percentage of the certificates of deposit maturing within one year will renew with the Bank at maturity.
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, 1999 the Bank had $86.5 million, or 25% of total loans, invested in commercial and industrial loans.
Commercial and industrial lending entails significant risks. Such loans are subject to greater risk of default during periods of adverse economic conditions. Because such loans are secured by equipment, inventory, accounts receivable and other non-real estate assets, the collateral may not be sufficient to ensure full payment of the loan in the event of a default.
Commercial Real Estate. The Bank makes loans secured by commercial real estate located in its market area. Such loans generally are adjustable-rate loans for terms of up to 20 years. The types of properties securing loans in the Bank's portfolio include warehouses, retail outlets and general industrial use properties. At December 31, 1999, the Bank had $37.8 million, or 11% of total loans, invested in commercial real estate loans.
Commercial real estate lending generally entails greater risks than residential real estate lending. Such loans typically involve larger balances and depend on the income of the property to service the debt. Consequently, the risk of default on such loans may be more sensitive to adverse economic conditions. The Bank attempts to minimize such risks through prudent underwriting practices.
Agricultural Loans. The Bank makes agricultural loans, which include loans to finance farm operations, equipment purchases, and land acquisition. The repayment of such loans is significantly dependent upon income from farm operations, which can be adversely affected by weather and other physical conditions, government policies and general economic conditions. At December 31, 1999, the Bank had $18.3 million, or 5% of total loans, invested in agricultural loans.
Residential Real Estate. The Bank makes loans secured by one- to four-family residential real estate and multi-family (over four units) real estate located in its market area. The Bank originates both fixed-rate mortgage loans and adjustable-rate mortgage loans ("ARMs"). Fixed-rate loans with terms of 15 to 30 years are typically originated for sale in the secondary market. ARMs are held in the Bank's portfolio. At December 31, 1999, the Bank had $117.4 million, or 33% of total loans, invested in residential real estate loans.
Installment Loans. The Bank makes a variety of consumer installment loans, including home equity loans, automobile loans, recreational vehicle loans, and overdraft protection. Consumer loans involve a higher risk of default than loans secured by one- to four-family residential real estate, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciating assets, such as automobiles. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation, and the remaining deficiency may not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections depend on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, illness or personal bankruptcy. Various federal and state laws, including federal and state bankruptcy and insolvency laws, may also limit the amount which can be recovered on such loans. Management believes that the Bank's underwriting practices have resulted in a favorable delinquency ratio and loan loss experience for this portion of the Bank's total loan portfolio.
At December 31, 1999, the Bank had $88.0 million, or 25% of total loans, invested in installment loans. The Bank has reduced its efforts to originate new and used automobile loans due to increased competition and narrowing interest rate spreads. The Bank expects to continue, subject to market conditions, to expand its other consumer lending activities as part of its plan to provide a wide range of personal financial services to its customers.
In the fourth quarter of 1996, the Bank sold its $3.9 million credit card loan portfolio to a correspondent bank, recording a gain on the sale of $326,000. Of the total loans, approximately $102,000 sixty days or more delinquent was sold with recourse. Beginning in 1997, new corporate customer credit card accounts were sold with recourse to the same financial institution. The recourse feature was eliminated in 1999. The Bank will continue to offer credit card services indirectly through this correspondent bank.
Loan Processing. Loan officers are authorized by the Board of Directors to approve loans up to specified limits. Loans exceeding the loan officers' approval authority are referred to the Bank's Senior Loan Committee. The Senior Loan Committee has approval authority up to specified limits. Any loans made by the Bank in excess of the limits established for the Senior Loan Committee must be approved by the Chairman of the Board and the President of the Bank as representatives of the Board of Directors. All loans in excess of $100,000 are reported to the Board on a monthly basis.
Loan Originations, Purchases and Sales. Although the Bank generally does not purchase loans, purchases could occur in the future. It did, however, make a purchase of $21 million in residential real estate loans in late 1995 to enhance earnings. Fixed-rate residential real estate loans are originated for sale in the secondary market. From time to time, the Bank sells participation interests in loans it originates.
Delinquent Loans, Non-performing Assets and Classified Assets. The Bank attempts to minimize loan delinquencies through aggressive collection efforts. When a borrower fails to make a required payment on a loan, the Bank attempts to cause the deficiency to be cured by contacting the borrower. In most cases, deficiencies are cured promptly.
Generally, when a real estate loan becomes delinquent more than 90 days, an evaluation of the security is performed. If the evaluation indicates that the value of the collateral is less than the book value of the loan, a valuation allowance is established for such loan. When deemed appropriate by management, the Bank institutes action to foreclose on the real estate or to acquire the real estate by deed in lieu of foreclosure. A decision as to whether and when to initiate foreclosure proceedings is based on such factors as the amount of the outstanding loan in relation to the original indebtedness, the extent of the delinquency and the borrower's ability and willingness to cooperate in curing delinquencies. If a foreclosure occurs, the real estate is sold at public sale and may be purchased by the Bank. Installment loans are generally charged off if four payments have been missed.
Generally, all other loans are placed on non-accrual status if they are 90 days or more delinquent. A loan may remain on an accrual status after it is 90 days delinquent if it is reasonably certain the account will be settled in its entirety or brought current within a 30-day period. The current year's accrued interest on loans placed on non-accrual status is charged against earnings. Previous year's accrued interest is charged against the allowance for loan losses. Cash payments received on non-accrual loans are applied against principal until the balance is repaid. Any remaining payments are credited to earnings. Non-performing loans include non-accrual loans, renegotiated loans and ninety days or more past due loans. All loans, except one-to four-family real estate, which are ten days delinquent are sent to the Collections Department for collection. One- to four-family real estate loans are sent when they are fifteen days delinquent.
If interest on non-accrual loans had been recognized during 1999, such income would have been $59,000. The amount recognized was not material.
Real estate acquired, or deemed acquired, by the Bank as a result of foreclosure proceedings is classified as other real estate owned ("OREO") until it is sold. Interest accrual, if any, ceases no later than the date of acquisition of the real estate, and all costs incurred from such date in maintaining the property are expensed. Costs relating to the development and improvement of the property are capitalized. OREO is recorded by the Bank at the lower of cost or fair value less estimated costs of disposal, and any write-down resulting therefrom is charged to the allowance for loan losses. If fair value less estimated costs of disposal subsequently falls below the carrying amount, a valuation allowance account is established in the amount of the deficiency. If the fair value less estimated costs of disposal subsequently increases and is more than the carrying amount, the valuation allowance is reduced, but not below zero. Increases or decreases in the valuation allowance are charged or credited to income.
Allowance for Loan Losses. Federal regulations require that the Bank establish prudent general allowances for loan losses. Senior management, with oversight responsibility provided by the Board of Directors, reviews on a monthly basis the allowance for loan losses as it relates to a number of relevant factors, including but not limited to, historical trends in the level of non-performing assets and classified loans, current charge-offs and the amount of the allowance as a percent of the total loan portfolio. While management believes that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments, and net earnings could be significantly affected if circumstances differ substantially from the assumptions used in making the final determination. At December 31, 1999, the Bank's allowance for loan losses totaled $3.2 million and was allocated primarily to the consumer segment of the loan portfolio. A similar allocation existed for all other dates presented.
Because the loan loss allowance is based on estimates, it is monitored regularly and adjusted as necessary to provide an adequate allowance. For 1999, the Bank anticipates about the same amount of loan net charge-offs for each type of loan as that experienced in 1998 except less is expected in commercial and industrial loans. See Exhibit 99, "Safe Harbor Under the Private Securities Litigation Reform Act of 1995" attached hereto which is incorporated herein by reference.
Investment Activities
Average securities as a percent of assets was 25.4% in 1997, grew to 32.4% in 1998, and fell to 30.9% in 1999. The securities portfolio at December 31, 1999 consists of $110.7 million of securities available for sale and $44.3 million of securities that management intends to hold to maturity. The available-for-sale portion of the portfolio consists of primarily fixed-rate securities with an average life of 8.5 years, an average repricing term of 7.7 years, and an average tax- equivalent yield of 6.62%. This portion includes 32% callable U.S. Agency bonds, 55% fixed-rate mortgage-backed securities, 5% adjustable- rate mortgage-backed securities, and 8% long-term fixed-rate tax-exempt municipal securities. During 1998 and 1999 additions to the available- for-sale portfolio have included medium-term callable U.S. Agency bonds, mortgage-backed securities with projected average lives of three to seven years and 15-20 year maturity municipal bonds. Some of these purchases were funded through $45 million of borrowed funds from the Federal Home Loan Bank. The held-to-maturity portion of the portfolio consisted entirely of long-term fixed-rate tax-exempt municipal securities with both average life and repricing term of 20.8 years.
At December 31, 1999 the total security portfolio had 5.9% market value depreciation.
The following table sets forth the amortized cost of the Bank's securities portfolio at December 31, 1999. U.S. agency mortgage-backed securities are categorized according to their expected prepayment speeds. All other securities are categorized based on contractual maturity. Actual maturities may differ from contractual maturities when borrowers have the right to call or prepay obligations. Yields do not include the effects of income taxes.
Trust Services
The Bank received trust powers in 1922 and currently holds $236 million in net assets in the Trust Department. The Annual Report of Trust Assets filed with the FDIC and the OCC reports $181 million in managed assets among 543 accounts, and an additional $59 million of non-discretionary assets held in 268 accounts on December 31, 1999. These assets are not included in the Bank's balance sheet because, under federal law, neither the Bank nor its creditors can assert any claim against funds held by the Bank in its fiduciary capacity.
In addition to administering trusts, the services offered by the Trust Department include investment management, estate planning and administration, tax and financial planning and employee benefit plan administration. During 1997, the Trust Department entered into an agreement with a licensed broker- dealer and insurance agent to provide investment services to customers of the Bank and others, enabling them to purchase fixed annuities, variable annuities, mutual funds, and stocks and bonds. The Trust Department is staffed by five officers and six staff members and generated $1,191,000 in fee income during 1999.
Deposits and Borrowings
General. Deposits have traditionally been the primary source of the Bank's funds for use in lending and other investment activities. In addition to deposits, the Bank derives funds from interest payments and principal repayments on loans and income on earning assets. Loan payments are a relatively stable source of funds, while deposit inflows and outflows fluctuate more in response to general interest rates and money market conditions.
Deposits. Deposits are attracted principally from within the Bank's market area through the offering of numerous deposit instruments, including checking accounts, regular passbook savings accounts, NOW accounts, money market deposit accounts, term certificate accounts and individual retirement accounts ("IRAs"). Interest rates paid, maturity terms, service fees and withdrawal penalties for the various types of accounts are established periodically by the Bank's Asset/Liability Committee and the Executive Committee based on the Bank's liquidity requirements, growth goals and market trends. The Company has not used brokers in the past to attract deposits, although, competition from banks and other financial institutions has caused the Company to include this as a viable alternative to funding needs. Currently the amount of deposits from outside the Bank's market area is not significant.
At December 31, 1999, the Bank's certificates of deposit, excluding deposits greater than $100,000, totaled $150.5 million, or 40% of total deposits. Of such amount, approximately $106.4 million matures within one year.
Borrowings. The Federal Reserve System functions as a central reserve bank providing credit for its member banks and certain other financial institutions. As a member in good standing of the Federal Reserve Bank of Cleveland, the Bank is authorized to apply for advances, provided certain standards of credit-worthiness have been met. The Bank is also a member of the Federal Home Loan Bank system. The Bank currently has outstanding $81.0 million of borrowings from the Federal Home Loan Bank used primarily to fund the purchase of U.S. Agency mortgage-backed securities and municipal bonds. Six million of the borrowings have a one-year maturity and adjust daily at the prime rate. The remaining $75 million consist of three fixed-rate notes with maturities in 2002 and 2008. At the option of the FHLB, these notes can be converted to variable-rate instruments that adjust quarterly at the three month LIBOR rate. Conversion dates are January 2000 for $30 million, October 2001 for $15 million, and April 2003 for $30 million.
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
As a bank holding company, InterCounty may be subject to restrictions on share repurchases.
The FRB has also adopted capital adequacy guidelines for bank holding companies, pursuant to which, on a consolidated basis, InterCounty must maintain total capital of at least 8% of risk-weighted assets. Risk-weighted assets consist of all assets, plus credit equivalent amounts of certain off- balance sheet items, which are weighted at percentage levels ranging from 0% to 100%, based on the relative credit risk of the asset. At least half of the total capital to meet this risk-based requirement must consist of core or "Tier 1" capital, which includes common stockholders' equity, qualifying perpetual preferred stock (up to 25% of Tier 1 capital) and minority interests in the equity accounts of consolidated subsidiaries, less goodwill. The remainder of total capital may consist of supplementary or "Tier 2 capital". In addition to this risk-based capital requirement, the FRB requires bank holding companies to meet a leverage ratio of a minimum level of Tier 1 capital to average total consolidated assets of 3%, if they have the highest regulatory examination rating, well-diversified risk and minimal anticipated growth or expansion. All other bank holding companies are expected to maintain a leverage ratio from at least 4% to 5% of average total consolidated assets. InterCounty was in compliance with these capital requirements at December 31, 1999. For InterCounty's capital ratios, see Note 14 to the Consolidated Financial Statements in Item 8.
A bank holding company is required by law to guarantee the compliance of any insured depository institution subsidiary that may become "undercapitalized" (defined in the regulations as not meeting minimum capital requirements) with the terms of the capital restoration plan filed by such subsidiary with its appropriate federal banking agency.
The BHCA restricts InterCounty's ownership or control of the outstanding shares of any class of voting stock of any company engaged in a nonbanking business. In addition, the FRB has the authority to require a bank holding company to terminate any activity or relinquish control of any nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the determination by the FRB that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company. InterCounty currently has no nonbank subsidiaries, except subsidiaries of the Bank. The ownership of subsidiaries of the Bank is regulated by the OCC, rather than the FRB.
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act (also known as the Financial Services Modernization Act of 1999). The Financial Services Modernization Act will, effective March 11, 2000, permit bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized under the Federal Deposit Insurance Corporation Act of 1991 prompt corrective action provisions is well managed, and has at least a satisfactory rating under the Community Reinvestment Act, by filing a declaration that the bank holding company wishes to become a financial holding company. No regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board.
The Financial Services Modernization Act defines "financial in nature" to include:
- securities underwriting, dealing and market making; - sponsoring mutual funds and investment companies; - insurance underwriting and agency; - merchant banking; and - activities that the Federal Reserve Board has determined to be closely related to banking.
A national bank also may engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, through a financial subsidiary of the bank, if the bank is well capitalized, well managed and has at least a satisfactory Community Reinvestment Act rating. Subsidiary banks of a financial holding company or national banks with financial subsidiaries must continue to be well capitalized and well managed in order to continue to engage in activities that are financial in nature without regulatory actions or restrictions, which could include divestiture of the financial in nature subsidiary or subsidiaries. In addition, a financial holding company or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank has a Community Reinvestment Act rating of satisfactory or better.
The specific effects of the enactment of the Financial Services Modernization Act on the banking industry in general and on the Bank and InterCounty in particular have yet to be determined due to the fact that the Financial Services Modernization Act was only recently adopted.
Transactions between InterCounty and the Bank are subject to statutory limits in Sections 23A and 23B of the Federal Reserve Act (the "FRA"). See "National Bank Regulation -- Office of the Comptroller of the Currency."
The FRB must approve the application of a bank holding company to acquire any bank or savings association.
National Bank Regulation
Office of the Comptroller of the Currency. The OCC is an office in the Department of the Treasury and is subject to the general oversight of the Secretary of the Treasury. The OCC is responsible for the regulation and supervision of all national banks, including the Bank. The OCC issues regulations governing the operation of national banks and, in accordance with federal law, prescribes the permissible investments and activities of national banks. The Bank is authorized to exercise trust powers in accordance with OCC guidelines. See "Description of Business-Trust Services." National banks are subject to regulatory oversight under various consumer protection and fair lending laws. These laws govern, among other things, truth-in- lending disclosure, equal credit opportunity, fair credit reporting and community reinvestment.
The Bank is required to meet certain minimum capital requirements set by the OCC. These requirements consist of risk-based capital guidelines and a leverage ratio, which are substantially the same as the capital requirements imposed on InterCounty. The Bank was in compliance with those capital requirements at December 31, 1999. For the Bank capital ratios, see Note 14 to the Consolidated Financial Statements in Item 8. The OCC may adjust the risk-based capital requirement of a national bank on an individualized basis to take into account risks due to concentrations of credit or nontraditional activities.
The OCC has adopted regulations governing prompt corrective action to resolve the problems of capital deficient and otherwise troubled national banks. At each successively lower defined capital category, a national bank is subject to more restrictive and numerous mandatory or discretionary regulatory actions or limits, and the OCC has less flexibility in determining how to resolve the problems of the institution. In addition, the OCC generally can downgrade a national bank's capital category, notwithstanding its capital level, if, after notice and opportunity for hearing, the national bank is deemed to be engaging in an unsafe or unsound practice, because it has not corrected deficiencies that resulted in it receiving a less than satisfactory examination rating on matters other than capital or it is deemed to be in an unsafe or unsound condition. The Bank's capital at December 31, 1999, met the standards for the highest capital category, a well-capitalized bank.
A national bank is subject to restrictions on the payment of dividends. During the year 2000, dividends that the Bank subsidiary can pay to the Holding Company without prior approval of regulatory agencies is limited to net income in 2000. Based on the current financial condition of the Bank, these provisions are not expected to affect the current ability of the Bank to pay dividends to InterCounty in an amount customary for the Bank.
OCC regulations generally limit the aggregate amount that a national bank can lend to one borrower or aggregated groups of related borrowers to an amount equal to 15% of the bank's unimpaired capital and surplus. A national bank may loan to one borrower an additional amount not to exceed 10% of the association's unimpaired capital and surplus, if the additional amount is fully secured by certain forms of "readily marketable collateral." Loans to executive officers, directors and principal shareholders and their related interests must conform to the OCC lending limits. All transactions between national banks and their affiliates, including InterCounty, must comply with Sections 23A and 23B of the FRA, which limit the amounts of such transactions and require that the terms of the transactions be at least as favorable to the Bank as the terms would be of a similar transaction between the Bank and an unrelated party. The Bank was in compliance with these requirements and restrictions at December 31, 1999.
The Bank is permitted to merge or consolidate with a bank located in another state, unless that state has specifically prohibited such an interstate transaction.
Federal Deposit Insurance Corporation. The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of federally insured banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The FDIC administers two separate insurance funds, the BIF for commercial banks and state savings banks and the SAIF for savings associations and for banks that have acquired SAIF deposits. The FDIC is required to maintain designated levels of reserves in each fund.
The SAIF deposits of Williamsburg obtained by the Bank in the Merger- Conversion, including the attributed growth factor, which were $17.6 million at December 31, 1999, remain insured in the SAIF. The Bank is a member of the BIF, and, at December 31, 1999, it had $364.2 million in deposits insured in the BIF.
The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of each of the BIF and the SAIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to its target level within a reasonable time and may decrease such rates if such target level has been met. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments vary based on the risk the institution poses to its deposit insurance fund. The risk level is determined based on the institution's capital level and the FDIC's level of supervisory concern about the institution.
Federal Reserve Board. The FRA requires national banks to maintain reserves against their net transaction accounts (primarily checking and NOW accounts). The amounts are subject to adjustment by the FRB. At December 31, 1999, the Bank was in compliance with its reserve requirements.
Federal Home Loan Banks. The Federal Home Loan Banks (the FHLBs) provide credit to their members in the form of advances. As a member, the Bank must maintain an investment in the capital stock of the FHLB of Cincinnati in an amount equal to the greater of 1% of the aggregate outstanding principal amount of the Bank's residential real estate loans, home purchase contracts and similar obligations at the beginning of each year, or 5% of its advances from the FHLB. The Bank is in compliance with this requirement with an investment in FHLB of Cincinnati stock having a book value of $5,498,000 at December 31, 1999. The FHLB advances are secured by collateral in one or more specified categories. The amount a member may borrow from the FHLB is limited based upon the amounts of various assets held by the member. All long-term advances by each FHLB must be made only to provide funds for residential housing finance.
Ohio Department of Insurance. The Bank's insurance agency operating subsidiaries are subject to the insurance laws and regulations of the State of Ohio and the Ohio Department of Insurance. The insurance laws and regulations require education and licensing of agencies and individual agents, require reports and impose business conduct rules.
Item 2.
Item 2. Properties
InterCounty Bancshares, Inc. and The National Bank and Trust Company own and occupy their main offices located at 48 North South Street, Wilmington, Ohio. The National Bank and Trust Company also owns or leases seventeen full-service branch offices, one remote drive-through ATM facility, and one remote drive-in facility, all of which are located in Clinton, Brown, Clermont, Warren, and Highland Counties, Ohio. The Bank also owns and is holding for future expansion, a building at 52 E. Main Street, Wilmington, Ohio. This building is currently leased on a short-term basis. InterCounty's net book value of investments in land and buildings was $8.5 million as of December 31, 1999.
Item 3.
Item 3. Legal Proceedings
Neither InterCounty nor the Bank is presently involved in any legal proceedings of a material nature. From time to time, the Bank is a party to legal proceedings incidental to its business to enforce its security interest in collateral pledged to secure loans made by the Bank.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There were 3,188,314 common shares of the Company outstanding on December 31, 1999, held of record by approximately 437 shareholders. There is presently no active trading market for the Company's shares, nor are the prices at which common shares have been traded published by any national securities association or quotation service. The Company's shares are quoted on the OTC Bulletin Board under the symbol "ICYB". Dividends per share declared were $.17 in each quarter in 1999. Dividends per share declared in 1998 were $.125 in each of March, June, and September, and $.13 per share in December.
On October 8, 1998, InterCounty issued 53,606 common shares in consideration for all of the outstanding common shares of Phillips Group for the purpose of providing insurance agency services through an operating subsidiary of the Bank. On December 11, 1998, InterCounty issued 17,777 common shares in consideration for all of the outstanding common shares of Jones Agency, another insurance agency, which became a subsidiary of Bank. In both instances, InterCounty relied upon the exemption from registration under the Securities Act of 1933 contained in Section 3(a)(11) and Rule 147 thereunder. All of the shareholders of both agencies to whom shares of InterCounty were issued are residents of Ohio, the state in which InterCounty is incorporated and doing business, and precautions have been taken to ensure that resales of the shares issued will not violate the limitations of Rule 147.
Item 6.
Item 6. Selected Financial Data