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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-23134
INTERCOUNTY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Ohio 31-1004998
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
48 N. South Street, Wilmington, Ohio 45177
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (513) 382-1441
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to 12(g) of the Act:
Common Shares, without par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The issuer's common shares are not traded on any securities exchange and are
not quoted by a national quotation service. Management is aware of a sale of
the issuer's shares for $46.00 per share on March 9, 1998. Based upon such
price, the aggregate market value of the issuer's shares held by nonaffiliates
was $58,191,058.
As of March 18, 1998, 1,265,023 common shares were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following sections of the definitive Proxy Statement for the 1998 Annual
Meeting of Shareholders of InterCounty Bancshares, Inc. (the "Proxy
Statement"), are incorporated by reference into Part III of this Form 10-K:
1. Board of Directors;
2. Executive Officers;
3. Section 16(a) Beneficial Ownership Reporting Compliance;
4. Compensation of Executive Officers and Directors;
5. Voting Securities and Ownership of Certain Beneficial Owners
and Management; and
6. Certain Relationships and Related Transactions.
INTERCOUNTY BANCSHARES, INC.
For the Year Ended December 31, 1997
Table of Contents
PART I
Page
----
Item 1: Business 3
Item 2: Properties 33
Item 3: Legal Proceedings 34
Item 4: Submission of Matters to a Vote of Security Holders 34
Part II
-------
Item 5: Market for Registrant's Common Equity and Related
Stockholder Matters 35
Item 6: Selected Financial Data 35
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations 37
Item 7A: Quantitative and Qualitative Disclosures About
Market Risk 56
Item 8: Financial Statements and Supplementary Data 57
Item 9: Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 93
Part III
--------
Item 10: Directors and Executive Officers of the Registrant 93
Item 11: Executive Compensation 93
Item 12: Security Ownership of Certain Beneficial Owners
and Management 93
Item 13: Certain Relationships and Related Transactions 93
Part IV
-------
Item 14: Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 94
Exhibit Index 95
Signatures 96
-2-
PART I
Item 1. Description of Business
GENERAL
InterCounty Bancshares, Inc. ("InterCounty"), an Ohio corporation, is a bank
holding company which owns all of the issued and outstanding common shares of
The National Bank and Trust Company, chartered under the laws of the United
States (the "Bank").
The Bank is engaged in the commercial banking business in Southwestern Ohio,
providing a variety of consumer and commercial financial services. The
primary business of the Bank consists of accepting deposits, through various
consumer and commercial deposit products, and using such deposits to fund
consumer loans, including automobile loans, loans secured by residential and
non-residential real estate, and commercial and agricultural loans. All of
the foregoing deposit and lending services are available at each of the Bank's
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
-3-
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.
-4-
Lending Activities
General. The Bank's income consists primarily of interest income generated by
lending activities, including the origination of loans secured by residential
and nonresidential real estate, commercial and agricultural loans, and
consumer loans.
The following table sets forth the composition of the Bank's loan portfolio by
type of loan at the dates indicated:
At December 31,
----------------------------------------------------------
1997 1996 1995
----------------------------------------------------------
% of % of % of
Amount total Amount total Amount total
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Commercial and
industrial $ 63,661 23% $ 57,985 22% $ 46,952 19%
Commercial real estate 30,835 11 31,118 11 27,274 11
Agricultural 18,387 7 16,304 6 14,515 6
Residential real estate 82,838 30 79,761 30 79,355 33
Installment 79,115 28 81,033 30 68,821 29
Credit card - - - - 3,268 1
Other 2,097 1 2,228 1 1,561 1
------- --- ------- --- ------- ---
Total loans $276,933 100% $268,429 100% $241,746 100%
=== === ===
Deferred net
origination costs 778 853 761
Allowance for loan
losses (2,761) (2,686) (2,644)
------- ------- -------
Net loans $274,950 $266,596 $239,863
======= ======= =======
-5-
At December 31,
----------------------------------
1994 1993
----------------------------------
% of % of
Amount total Amount total
------ ----- ------ -----
(Dollars in thousands)
Commercial and
industrial $ 43,254 21% $ 32,919 17%
Commercial real estate 27,049 13 25,351 13
Agricultural 12,451 6 12,822 7
Residential real estate 57,243 27 59,639 31
Installment 63,572 31 58,301 30
Credit card 2,303 1 1,979 1
Other 1,659 1 1,628 1
------- --- ------- ---
Total loans $207,531 100% $192,639 100%
=== ===
Deferred net
origination costs 623 562
Allowance for loan
losses (2,561) (2,474)
------- -------
Net loans $205,593 $190,727
======= =======
Loan Maturity Schedule. The following table sets forth certain information at
December 31, 1997, regarding the net dollar amount of loans maturing in the
Bank's portfolio, based on contractual terms to maturity. Demand loans, loans
having no stated schedule of repayment and no stated maturity and overdrafts
are reported as due in one year or less:
Due 0-1 Year Due 1-5 Years Due 5 + Years Total
(In thousands)
Commercial and
industrial $11,480 $28,195 $23,986 $ 63,661
Commercial real estate 2,679 3,856 24,300 30,835
Agricultural 7,787 4,627 5,973 18,387
------ ------ ------ -------
Total $21,946 $36,678 $54,259 $112,883
====== ====== ====== =======
-6-
The following table sets forth the dollar amount of certain loans, due after
one year from December 31, 1997, which have predetermined interest rates and
floating or adjustable interest rates:
Predetermined Floating or
rates adjustable rates Total
------------- ---------------- -------
(In thousands)
Commercial and industrial $24,644 $27,538 $52,182
Commercial real estate 1,911 26,244 28,155
Agricultural 2,988 7,612 10,600
------ ------ ------
Total $29,543 $61,394 $90,937
====== ====== ======
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.
-7-
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.
-8-
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.
-9-
The following table sets forth certain information regarding the past-due,
non-accrual and renegotiated loans of the Bank at the dates indicated:
At December 31,
--------------------------------------
1997 1996 1995 1994 1993
(In thousands)
Loans accounted for on
nonaccrual basis $509 $535 $314 $239 $ 77
Accruing loans which are
past due 90 days or more 241 90 208 402 43
Renegotiated loans - - - 211 205
--- --- --- --- ---
Total $750 $625 $522 $852 $325
=== === === === =====
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.
-10-
The following table sets forth an analysis of the Bank's allowance for losses
on loans for the periods indicated:
December 31,
------------------------------------------
1997 1996 1995 1994 1993
(Dollars in thousands)
Balance at beginning of
period $ 2,686 $ 2,644 $ 2,561 $ 2,474 $ 2,000
Charge-offs:
Commercial and industrial (178) (28) (13) (40) (48)
Commercial real estate - - - - (57)
Agricultural - (3) (46) - (8)
Residential real estate (6) (1) (2) (11) (45)
Installment (694) (560) (356) (287) (282)
Credit card (64) (189) (55) (38) (28)
Other - (4) - - -
------- ------- ------- ------- -------
Total charge-offs (942) (785) (472) (376) (468)
------- ------- ------- ------- -------
Recoveries:
Commercial and industrial 63 42 10 12 18
Commercial real estate - - - 1 5
Agricultural - 8 1 9 7
Residential real estate 2 - 6 3 77
Installment 133 158 159 149 155
Credit card 17 13 19 13 20
Other 2 6 - 1 -
------ ----- ----- ----- -----
Total recoveries 217 227 195 188 282
------ ----- ----- ----- -----
Net charge-offs (725) (558) (277) (188) (186)
Provision for possible
loan losses 800 600 360 275 660
------- ------- ------- ------- -------
Balance at end of period $ 2,761 $ 2,686 $ 2,644 $ 2,561 $ 2,474
===== ===== ===== ===== =====
Ratio of net charge-offs to
average loans outstanding
during the period 0.26% 0.22% 0.13% 0.09% 0.11%
==== ==== ==== ==== ====
Average loans outstanding $274,372 $256,761 $218,552 $201,531 $177,084
======= ======= ======= ======= =======
-11-
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.
-12-
Investment Activities
The following table sets forth the composition of the Bank's securities
portfolio, based on amortized cost, at the dates indicated:
At December 31,
-----------------------------------
1997 1996 1995
(In thousands)
U.S. Treasuries & U.S.
agency notes $44,380 $42,122 $40,962
U.S. Government agency
mortgage-backed securities 49,256 25,577 25,014
Other mortgage-backed
securities 13,212 9,556 11,189
Other securities 4,347 3,470 3,274
------- ------ ------
Total securities available
for sale 111,195 80,725 80,439
------- ------ ------
Municipal securities 11,164 7,463 8,191
------- ------ ------
Total securities held
to maturity 11,164 7,463 8,191
------- ------ ------
Total securities $122,359 $88,188 $88,630
======= ====== ======
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.
-13-
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.
Less than 1 year 1 to 5 years 5 to 10 years
---------------- ------------------ ----------------
Weighted Weighted Weighted
Book average Book average Book average
yield yield yield
---- ------- ---- ------- ---- -------
(Dollars in thousands)
U.S. Treasuries
and U.S. Agency
obligations $14,218 6.94% $10,964 6.53% $19,198 6.92%
U.S. Agency
mortgage-backed
securities 10,533 7.34 26,408 7.09 12,315 6.78
Other mortgage-
backed securities - - - - - -
Other securities - - - - - -
------ ------ ------
Total securities
available for
sale 24,751 7.11 37,372 8.93 31,513 6.86
------ ------ ------
Municipal
securities 5,575 7.12 3,781 9.20 1,237 8.94
------ ------ ------
Total securities
held to maturity 5,575 7.12 3,781 9.20 1,237 8.94
------ ------ ------
Total securities $30,326 7.11% $41,153 7.14% $32,750 6.94%
===== ====== ======
-14-
Over 10 years Total
---------------- ------------------
Weighted Weighted
Book average Book average
yield yield
---- ------- ---- -------
(Dollars in thousands)
U.S. Treasuries
and U.S. Agency
obligations $ - -% $44,380 6.83%
U.S. Agency
mortgage-backed
securities - - 49,256 7.07
Other mortgage-
backed
securities 13,212 5.70 13,212 5.70
Other securities 4,347 7.16 4,347 7.16
------ -------
Total securities
available for
sale 17,559 6.06 111,195 6.81
------ -------
Municipal
securities 571 5.23 11,164 7.93
------ -------
Total securities
held to maturity 571 5.23 11,164 7.93
------ ------
Total securities $18,130 6.03% $122,359 6.91%
====== ======
-15-
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.
-16-
The following table sets forth the dollar amount of deposits in the various
types of products offered by the Bank as of December 31:
Percent Percent Percent
1997 of total 1996 of total 1995 of total
---- -------- ---- -------- ---- --------
(Dollars in thousands)
Demand $38,662 12% $35,731 12% $36,188 12%
NOW 53,994 17 49,015 16 45,927 16
Savings 34,445 10 35,702 11 37,562 13
Money market
deposit 29,113 9 28,009 9 20,465 7
CDs less than
$100,000 146,005 44 141,679 46 130,062 45
CDs greater than
$100,000 26,899 8 18,788 6 21,110 7
Other 214 - 203 - 189 -
------- --- ------- --- ------- ---
Total
deposits(1) $329,332 100% $309,127 100% $291,503 100%
======= === ======= === ======= ===
Percent Percent
1994 of total 1993 of total
---- -------- ---- --------
(Dollars in thousands)
Demand $30,591 12% $27,419 11%
NOW 46,184 19 46,686 19
Savings 49,025 20 58,350 24
Money market
deposit 5,185 2 4,504 2
CDs less than
$100,000 103,591 41 91,014 38
CDs greater than
$100,000 14,219 6 15,325 6
Other 146 - 186 -
------- --- ------- ---
Total
deposits(1) $248,941 100% $243,484 100%
======= === ======= ===
____________________________________
(1)IRAs are offered under all deposit account types.
-17-
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.
The following table sets forth the dollar amount of time deposits greater than
$100,000 maturing in the periods indicated:
Maturity At December 31, 1997
-------- --------------------
(In thousands)
Three months or less $ 7,893
Over 3 months to 6 months 10,319
Over 6 months to 12 months 4,768
Over twelve months 3,919
------
Total $26,899
======
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.
The following table sets forth certain information regarding the Bank's
outstanding borrowings at the dates and for the periods indicated:
December 31,
--------------------------
1997 1996 1995
(Dollars in thousands)
Maximum amount of short-term
borrowings outstanding at any
month end during period $63,364 $34,401 $31,193
Average amount of short-term
borrowings outstanding during
period 43,845 32,186 11,864
Amount of short-term borrowings
outstanding at end of period 62,734 31,113 31,110
Weighted average interest rate of
short-term borrowings during period 5.44% 5.27% 5.33%
Weighted average interest rate of
short-term borrowings at end of
period 5.86 5.27 5.39
-18-
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.
1997 1996
---------------------------- ---------------------------
Average Interest Average Interest
outstanding Yield/ earned/ outstanding Yield/ earned/
balance rate paid balance rate paid
Loans (1) $274,372 8.76% $24,039 $256,761 8.73% $22,413
Securities
available
for sale 95,029 7.05 6,699 78,235 7.14 5,583
Securities
held to
maturity 7,867 7.89 621 7,632 8.27 632
Deposits in banks 866 5.16 45 155 5.78 9
Federal funds sold 3,582 5.60 200 3,562 5.27 187
------- ------ ------- ------
Total interest-
earning assets 381,716 8.28 31,604 346,345 8.32 28,824
Non-earning
assets 26,718 24,263
Allowance for
loan losses (2,682) (2,682)
------- -------
Total assets $405,752 $367,926
======= =======
Savings deposits $ 34,538 2.79 963 $ 36,851 2.80 1,033
NOW and MMDA 81,461 2.89 2,358 71,177 2.79 1,987
CD's over $100M 25,190 5.53 1,394 19,650 5.44 1,069
Other time
deposits 145,105 5.73 8,307 136,535 5.82 7,942
Short-term
borrowings 43,845 5.44 2,386 32,186 5.28 1,699
Long-term debt 874 8.37 73 1,070 7.98 85
------- ------ ------- ------
Total interest-
bearing
liabilities 331,013 4.68 15,481 297,467 4.64 13,815
------ ------
-19-
Demand deposits 33,516 32,857
Other liabilities 2,780 2,644
Capital 38,443 34,957
------- -------
Total liabilities
and capital $405,752 $367,926
======= =======
Net interest
income $16,123 $15,009
====== ======
Interest rate
spread 3.60% 3.68%
Net interest
income margin 4.22 4.33
Ratio of
interest-earning
assets to
interest-bearing
liabilities 115.43% 116.43%
1995
----------------------------
Average Interest
outstanding Yield/ earned/
balance rate paid
Loans (1) $218,552 8.90% $19,449
Securities
available for sale 61,659 7.41 4,569
Securities
held to
maturity: 10,158 8.25 838
Deposits in banks 111 6.28 7
Federal funds sold 5,812 5.95 346
------- ------
Total interest-
earning assets 296,292 8.51 25,209
Non-earning
assets 20,770
Allowance for
loan losses (2,627)
-------
Total assets $314,435
=======
-20-
Savings deposits $ 40,782 2.80 1,140
NOW and MMDA 57,687 2.60 1,497
CD's over $100M 19,650 5.69 1,119
Other time
deposits 119,741 5.84 6,992
Short-term
borrowings 11,864 5.17 613
Long-term debt 1,262 8.56 108
------- ------
Total interest-
bearing
liabilities 250,986 4.57 11,469
------
Demand deposits 29,965
Other liabilities 2,157
Capital 31,327
-------
Total liabilities
and capital $314,435
=======
Net interest
income $13,740
======
Interest rate
spread 3.94%
Net interest
income margin 4.64
Ratio of
interest-earning
assets to
interest-bearing
liabilities 118.05%
- -------------------------------------------
(1) Includes nonaccrual loans.
-21-
The following table describes the extent to which the changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected the Bank's interest income and expense during the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (the
difference between the average volume for the periods compared, multiplied
by the prior year's yield or rate paid), (ii) changes in rate (the difference
between the weighted average yield or rate paid for the periods compared,
multiplied by the prior year's average volume) and (iii) changes not solely
attributable to either volume or rate.
Years ended December 31,
------------------------------------
1997 vs 1996
------------------------------------
Increase (decrease) due to
------------------------------------
Rate/
Volume Rate volume Total
------ ---- ------- -----
(In thousands)
Interest income attributable to:
Loans $1,460 $ (143) $ 309 $1,626
Securities available for sale 1,184 (52) (16) 1,116
Securities held to maturity 19 (28) (1) (10)
Deposits in banks 41 (1) (4) 36
Federal funds sold 1 12 - 13
----- ----- --- -----
Total interest-earning assets 2,705 (212) 288 2,781
----- ----- --- -----
Interest expense attributable to:
Savings deposits (65) (5) - (70)
NOW and MMDA 287 73 11 371
CD's over $100,000 301 18 5 324
Other time deposits 499 (126) (8) 365
Short-term borrowings 632 44 12 688
Long-term debt (16) 4 (1) (13)
----- ----- --- -----
Total interest-bearing
liabilities 1,638 8 19 1,665
----- ----- --- -----
Net interest income $1,067 $ (220) $ 269 $1,116
===== ===== === =====
-22-
Years ended December 31,
------------------------------------
1996 vs 1995
------------------------------------
Increase (decrease) due to
------------------------------------
Rate/
Volume Rate volume Total
------ ---- ------- -----
(In thousands)
Interest income attributable to:
Loans $3,401 $ (372) $ (65) $2,964
Securities available for sale 1,227 (168) (45) 1,014
Securities held to maturity (208) 3 (1) (206)
Deposits in banks 3 (1) - 2
Federal funds sold (134) (40) 15 (159)
----- ---- --- -----
Total interest-earning assets 4,289 (578) (96) 3,615
----- ---- --- -----
Interest expense attributable to:
Savings deposits (110) 3 - (107)
NOW and MMDA 350 114 26 490
CD's over $100,000 - (50) - (50)
Other time deposits 981 (27) (4) 950
Short-term borrowings 1,050 13 23 1,086
Long-term debt (17) (7) 1 (23)
----- ---- --- -----
Total interest-bearing
liabilities 2,254 46 46 2,346
----- ---- --- -----
Net interest income $2,035 $ (624) $(142) $1,269
===== ===== === =====
-23-
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.
-24-
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.
-25-
A summary of the regulatory capital of InterCounty and the Bank and the
minimum capital levels required by the FRB as of December 31, 1997, is as
follows:
InterCounty Bank
---------------- ----------------
(Dollars in thousands)
Total risk-based
Actual $43,072 14.66% $43,701 14.87%
Required 23,507 8.00 23,507 8.00
------ ----- ------ -----
Excess $19,565 6.66% $20,194 6.87%
====== ===== ====== =====
Tier 1 risk-based
Actual $40,311 13.72% $40,940 13.93%
Required 11,753 4.00 11,753 4.00
------ ----- ------ -----
Excess $28,558 9.72% $29,187 9.93%
====== ===== ====== =====
Tier 1 leverage
Actual $40,311 9.25% $40,940 9.40%
Required 13,068 3.00 13,068 3.00
------ ----- ------ -----
Excess $27,243 6.25% $27,872 6.40%
====== ===== ====== =====
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.
-26-
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
-27-
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
-28-
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.
-29-
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
-30-
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
-31-
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.
-32-
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
-33-
201 East Main Street
Batavia, Ohio Owned 1996
101 Harry Sauner Road
Hillsboro, Ohio Owned 1997
Item 3. Legal Proceedings
Neither InterCounty nor the Bank is presently involved in any legal
proceedings of a material nature. From time to time, the Bank is a party to
legal proceedings incidental to its business to enforce its security interest
in collateral pledged to secure loans made by the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
-34-
PART II
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. Selected Financial Data
The following table sets forth certain information concerning the consolidated
financial condition, earnings and other data regarding InterCounty at the
dates and for the periods indicated:
December 31,
Statement of financial 1997 1996 1995 1994 1993
condition and other data: (Dollars in thousands)
Total amount of
Assets $436,444 $380,607 $360,271 $289,267 $280,029
Cash and due from banks 17,787 11,005 13,680 12,657 12,157
Securities 123,139 88,831 90,760 57,265 60,032
Loans receivable-net 274,950 266,596 239,863 205,593 190,727
Deposits 329,332 309,127 291,503 248,941 243,484
Short-term borrowings 62,734 31,113 31,110 8,736 6,694
Long-term debt 716 914 1,108 1,299 1,487
Shareholders' equity 40,906 36,748 33,834 28,714 27,051
Number of full service
offices 14 13 12 12 11
-35-
Year ended December 31,
1997 1996 1995 1994 1993
Statement of income data: (In thousands)
Interest and loan fee
income $ 31,604 $28,824 $25,209 $19,935 $18,933
Interest expense 15,481 13,815 11,469 7,795 7,482
------- ------ ------ ------ ------
Net interest income 16,123 15,009 13,740 12,140 11,451
Provision for loan
losses 800 600 360 275 660
------- ------- ------ ------ ------
Net interest income
after provision for
loan losses 15,323 14,409 13,380 11,865 10,791
Non-interest income 3,380 3,138 2,339 828 3,303
Non-interest expense 11,488 10,827 10,103 9,881 9,472
------- ------ ------ ------ ------
Income before income
taxes 7,215 6,720 5,616 2,812 4,622
Federal income taxes 2,243 1,858 1,591 617 1,513
------- ------ ------ ------ ------
Net income $ 4,972 $ 4,862 $ 4,025 $ 2,195 $ 3,109
======= ====== ====== ====== ======
Year ended December 31,
Selected financial ratios: 1997 1996 1995 1994 1993
Return on average equity 12.93% 13.91% 12.85% 7.87% 13.96%
Return on average assets 1.23 1.32 1.28 .78 1.16
Equity-to-assets ratio 9.37 9.66 9.39 9.93 9.66
Dividend payout ratio(1) 23.46 17.61 14.45 18.75 -
Ratio of non-performing
loans to total loans(2) 0.31 0.36 0.21 0.41 0.17
Ratio of loan loss allowance
to total loans 0.99 1.00 1.09 1.23 1.28
Ratio of loan loss allowance
to non-performing loans(2) 316% 273% 507% 301% 761%
Pro forma earnings per
share(3) $2.08
Earnings per share $3.24 $3.18 $2.63 $1.44
Dividends declared
per share .76 .56 .38 .27 .19
_________________________________
(1) Dividends paid per share divided by earnings per share.
-36
(2) Non-performing loans include non-accrual loans, renegotiated loans and
loans 90 days or more past due.
(3) Pro forma calculations are based upon pooled net income which includes an
acquisition in December 1993. Common shares issued in the transaction are
assumed to have been issued and outstanding since January 1, 1993. The income
per share calculation includes adjustments relating to the investment of
proceeds from common shares issued in the merger conversion. Because the
acquisition involved a mutual savings and loan company, per share information
for prior periods is not comparable with 1993 and could be misleading.
Accordingly, such data is not presented.
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%.
-37-
Table 1 - Selected Financial Highlights
(dollars in thousands)
1997 1996 1995 1994 1993
------------------------------------------------
Net interest income $ 16,123 $ 15,009 $ 13,740 $ 12,140 $ 11,451
Net income 4,972 4,862 4,025 2,195 3,109
Earnings per share 3.24 3.18 2.63 1.44
Pro forma earnings
per share(1) 2.08
AVERAGE BALANCES
Assets $405,752 $367,926 $314,435 $281,355 $267,484
Loans 274,372 256,761 218,552 205,531 177,084
Securities 102,896 85,867 71,816 58,619 66,712
Deposits 319,809 297,070 267,833 242,721 236,532
Shareholders' equity 38,443 34,957 31,327 27,900 22,274
RATIOS AND STATISTICS
Net interest margin 4.22% 4.33% 4.64% 4.61% 4.58%
Return on average
assets 1.23 1.32 1.28 .78 1.16
Return on average
equity 12.93 13.91 12.85 7.87 13.96
Loans to assets 63.63 70.75 67.73 72.05 68.11
Equity to assets 9.37 9.66 9.39 9.93 9.66
Total risk-based
capital ratio 14.66 14.06 14.09 14.58 15.46
Efficiency ratio 59.80 59.95 62.94 68.62 69.36
Full service offices 14 13 12 12 11
Employees (full-time
equivalent) 189 176 159 162 152
- -----------------------
(1) Pro forma calculations are based upon pooled net income which includes an
acquisition in December 1993. Common shares issued in the transaction are
assumed to have been issued and outstanding since January 1, 1993. The
income per share calculation includes adjustments relating to the investment
of the proceeds from common shares issued in the merger conversion.
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
-38-
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.
-39-
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.
Table 2 - Non-Interest Income
(in thousands)
Percent Percent
of average of average
1997 assets 1996 assets
-----------------------------------------------
Service charges on
deposits $1,263 0.31% $1,099 0.30%
Other service charges 287 0.07 307 0.08
Trust income 927 0.23 733 0.20
Net securities gains 300 0.07 86 0.02
Other 603 0.15 913 0.25
----- ---- ----- ----
Total non-interest
income $3,380 0.83% $3,138 0.85%
===== ==== ===== ====
Percent
of average
1995 assets
-----------------------
Service charges on
deposits $ 982 0.31%
Other service charges 290 0.09
Trust income 660 0.21
Net securities gains 23 0.01
Other 384 0.12
----- ----
Total non-interest
income $2,339 0.74%
===== ====
-40-
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.
-41-
Table 3 - Non-Interest Expense
(in thousands)
Percent Percent
of average of average
1997 assets 1996 assets
-----------------------------------------------
Salaries $ 4,943 1.22% $ 4,423 1.20%
Benefits 897 0.22 984 0.27
Equipment 1,185 0.29 941 0.26
Occupancy 672 0.16 652 0.18
Deposit insurance 47 0.01 104 0.03
State franchise tax 553 0.14 492 0.13
Legal, audit and
professional 353 0.09 368 0.10
Marketing 273 0.07 266 0.07
Other 2,565 0.63 2,597 0.70
------ ---- ------ ----
Total non-interest
expense $11,488 2.83% $10,827 2.94%
====== ==== ====== ====
Percent
of average
1995 assets
-----------------------
Salaries $ 4,111 1.31%
Benefits 1,147 0.36
Equipment 815 0.26
Occupancy 557 0.18
Deposit insurance 303 0.10
State franchise tax 445 0.14
Legal, audit and
professional 337 0.11
Marketing 238 0.07
Other 2,150 0.68
------ ----
Total non-interest
expense $10,103 3.21%
====== ====
-42-
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
-43-
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
-44-
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.
Table 4 - Loan Portfolio
(in thousands)
at December 31,
1997 1996
Percent of Percent of
Amount Total Amount Total
---------------------------------------------
Commercial and industrial $ 63,661 23% $ 57,985 22%
Commercial real estate 30,835 11 31,118 11
Agricultural 18,387 7 16,304 6
Residential real estate 82,838 30 79,761 30
Installment 79,115 28 81,033 30
Credit card - - - -
Other 2,097 1 2,228 1
Deferred net origination
costs 778 - 853 -
------- --- ------- ---
Total $277,711 100% $269,282 100%
======= === ======= ===
-45-
1995 1994
Percent of Percent of
Amount Total Amount Total
---------------------------------------------
Commercial and industrial $ 46,952 19% $ 43,254 21%
Commercial real estate 27,274 11 27,049 13
Agricultural 14,515 6 12,451 6
Residential real estate 79,355 33 57,243 27
Installment 68,821 29 63,572 31
Credit card 3,268 1 2,303 1
Other 1,561 1 1,659 1
Deferred net origination
costs 761 - 623 -
------- --- ------- ---
Total $242,507 100% $208,154 100%
======= === ======= ===
1993
Percent of
Amount Total
------------------------
Commercial and industrial $ 32,919 17%
Commercial real estate 25,351 13
Agricultural 12,822 7
Residential real estate 59,639 31
Installment 58,301 30
Credit card 1,979 1
Other 1,628 1
Deferred net origination
costs 562 -
------- ---
Total $193,201 100%
======= ===
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.
-46-
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