U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
FORM 10-KSB
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934 (Fee required)
For the fiscal year ended Commission File Number
December 31, 1996 33-82246
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INTERVEST BANCSHARES CORPORATION
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(Name of Small Business Issuer in its Charter)
Delaware 13-3699013
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(State or Other Jurisdiction of (I.R.S. Employer No.)
Incorporation or Organization)
10 Rockefeller Plaza, New York, New York 10020-1903
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(Address of Principal Executive Offices) (Zip Code)
(212) 757-7300
Issuer's Telephone Number, Including Area Code
Securities Registered Pursuant to Section 12(b) of the Act:
None
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(Title of Class)
Securities Register Pursuant to Section 12 (g) of the Act:
None
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(Title of Class)
Indicate by check mark whether the Issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Issuer 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-B is not contained herein, and will not be contained, to the
best of Issuer's knowledge in definitive proxy or information statements
incorporated by reference in Part III to this Form 10-KSB or any amendment to
this Form 10-KSB (X) .
The Issuer's total interest income and total other income for its most recent
fiscal year was $6,381,000 and $106,000, respectively.
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The aggregate market value of the Issuer's voting stock held by non-affiliates
computed by reference to the price at which the stock was sold is $3,000,000.
As of March 15, 1997 there were 900,000 shares of the Issuer's Class A common
stock and 200,000 shares of the Issuer's Class B common stock outstanding.
Indicate by check mark whether the Issuer is utilizing the Transitional Small
Business Format. YES ________ NO X .
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TABLE OF CONTENTS
PART I
Pages
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Item 1 Description of Business 4
Item 2 Description of Property 8
Item 3 Legal Proceedings 8
Item 4 Submission of Matters to a Vote of Security Holders 8
PART II
Item 5 Market for Common Equity and Related Stockholder Matters 8
Item 6 Management's Discussion and Analysis or Plan of Operations 10
Item 7 Financial Statements 32
Item 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 52
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons of the
Registrant; Compliance with Section 16(a) of the Exchange Act 52
Item 10 Executive Compensation 53
Item 11 Security Ownership of Certain Beneficial Owners and Management 55
Item 12 Certain Relationships and Related Transactions 56
Item 13 Exhibits, Lists and Reports on Form 8-K 58
SIGNATURES
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PART I
Item 1. Description of Business
Intervest Bancshares Corporation (the "Company) is a registered bank
holding company incorporated under the laws of the State of Delaware on February
5, 1993. The principal offices of the Company are located at 10 Rockefeller
Plaza, Suite 1015, New York, New York 10020-1903, and its telephone number is
212-757-7300. The Company's primary asset is Intervest Bank (the "Bank"), a
Florida chartered bank which is a member of the Federal Reserve System. The
Company owns approximately 96% of the issued and outstanding shares of the Bank.
The Company, through its controlling ownership of the Bank, engages in the
business of commercial banking. The Company engages in no substantial business
activities other than mortgage lending and activities related to its ownership
of the Bank.
The Bank was originally chartered in December, 1987. It operated as
Countryside Bankers until 1994, when its name was changed to Intervest Bank. The
principal executive offices of the Bank are located at 1875 Belcher Road North,
Clearwater, Florida 34625, and its telephone number is (813) 791- 6115. In
addition to its principal office, which is leased, the Bank operates three
branch offices in Clearwater, Florida at 606 Chestnut Street, 2175 Nursery Road,
and 2575 Ulmerton Road. It has also acquired property at 6750 Gulfport Blvd.,
South Pasadena, Florida and expects to open a fourth branch office at that
location in the summer of 1997.
The Bank is subject to examination and comprehensive regulation by the
Federal Reserve Board (the "FRB") and its deposits are insured by the Federal
Deposit Insurance Corporation (the "FDIC") to the extent permitted by law. The
Bank is a member of the Federal Reserve System. The Bank is also subject to the
supervision of and examination by the Florida Department of Banking and Finance.
The Bank primarily focuses on providing personalized banking services
to businesses and individuals within the market area where its banking office is
located. Management believes that this local market strategy enables the Bank to
attract and retain low cost core deposits which provide substantially all of the
Bank's funding requirements.
Deposit services include certificates of deposit, individual retirement
accounts ("IRAs") and other time deposits, checking and other demand deposit
accounts, NOW accounts, savings accounts and money market accounts. The
transaction accounts and time certificates are tailored to the principal market
areas at rates competitive to those in the area. All deposit accounts are
insured by the FDIC up to the maximum limits permitted by law. The Bank solicits
these accounts from small businesses, professional firms and households located
throughout its primary market area.
The Bank also offers ATM cards with access to local, state, and
national networks, safe deposit boxes, wire transfers, direct deposit of payroll
and social security checks, and automatic drafts for various accounts. The Bank
periodically reviews the scope of the products and services it offers so as to
assess whether additional products or services should, consistent with market
opportunities and available resources, be included in the Bank's products and
services.
The Bank conducts commercial and consumer banking business which
primarily consists of attracting deposits from the areas served by its banking
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offices and using those deposits, together with funds derived from other
sources, to originate a variety of commercial, consumer and real estate loans
(including commercial loans collateralized by real estate). Commercial loans
include both collateralized and uncollateralized loans for working capital
(including inventory and receivables), business expansion (including real estate
acquisitions and improvements), and purchases of equipment and machinery.
Consumer loans include collateralized and uncollateralized loans for financing
automobiles, boats, home improvements, and personal investments.
The revenues of the Bank are primarily derived from interest on, and
fees received in connection with, commercial real estate and other loans, and
from interest and dividends from securities, and short-term investments. The
principal sources of funds for the Bank's lending activities are its deposits,
repayment of loans, the income from and maturity of securities and capital
contributions from the Company. The principal expenses of the Bank are the
interest paid on deposits and operating and general administrative expenses.
As is the case with banking institutions generally, the Bank's
operations are materially and significantly influenced by general economic
conditions and by related monetary and fiscal policies of financial institution
regulatory agencies, including the FRB, the FDIC, and the State of Florida.
Deposit flows and cost of funds are influenced by interest rates on competing
investments and general market rates of interest. Lending activities are
affected by the demand for financing of real estate and other types of loans,
which in turn is affected by the interest rates at which such financing may be
offered and other factors affecting local demand and availability of funds. The
Bank faces strong competition in the attraction of deposits (its primary source
of lendable funds) and in the origination of loans.
Market Area
The Bank's facilities are located in Pinellas County, which is the
Bank's primary market area. Pinellas County has an estimated resident population
of approximately 850,000 people. The Bank's deposit gathering and lending
markets are concentrated on the communities surrounding its offices in
Clearwater, Florida. Management believes that its offices are located in an area
serving small and mid-sized businesses and serving middle and upper income
residential communities.
Market for Services
Management believes that the Bank's principal markets are: (i) the
established and expanding commercial market within the primary market area: and
(ii) the moderate and the affluent residential market within the primary market
area. Moreover, management believes that a community bank is well positioned to
establish these relationships with both commercial customers and households.
Management believes that the Bank is well positioned to take advantage of its
market segment.
Businesses are solicited through the personal efforts of the Bank's
directors and officers. Management believes a locally-based bank is often
perceived by the local business community as possessing a clearer understanding
of local commerce and its needs. Consequently, the Company expects that the Bank
will be able to make prudent lending decisions quickly and more equitably than
its competitors without compromising asset quality or the Bank's profitability.
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Lending Activities
The primary source of income generated by the Bank is from the interest
earned from both the loan and securities portfolios. The Bank maintains
diversification when considering investments and the granting of loan requests.
Emphasis is placed on the borrower's ability to generate cash flow to support
its debt obligations and other cash related expenses. Lending activities include
commercial and consumer loans and real estate loans. Commercial loans are
originated for working capital funding. Consumer loans include those for the
purchase of automobiles, boats, home improvements and investments. Real estate
loans include primarily the origination of loans for commercial property. While
the Bank's lending activities include single-family residential mortgages, such
lending activities are not emphasized.
At December 31, 1996 the Bank's net loan portfolio was $59.5 million,
representing 56.6% of its total assets. As of such date, the loan portfolio
consisted of 5.8% commercial loans, 94.0% real-estate mortgage loans and .2%
consumer and other loans.
Real Estate Mortgage Loans
A portion of the Bank's real estate mortgage loans are made to finance
the acquisition of single family residences. The Bank requires mortgage title
insurance and hazard insurance in amounts deemed appropriate by Management.
Commercial Lending
The Bank offers a variety of commercial loan services including term
loans, lines of credit and equipment financing. Short-to-medium term commercial
loans, both collateralized and uncollateralized, are made available to
businesses for working capital (including inventory and receivables), business
expansion (including acquisitions of real estate and improvements), and the
purchase of equipment and machinery. The purpose of a particular loan generally
determines its structure.
The Bank's commercial loans primarily are underwritten in the Bank's
primary market area on the basis of the borrower's ability to service such debt
from income. As a general practice, the Bank takes as collateral a lien on any
available real estate, equipment, or other assets. Working capital loans are
primarily collateralized by short-term assets whereas term loans are primarily
collateralized by long-term assets.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his employment and other
income and which are collateralized by real property whose value tends to be
more readily ascertainable, commercial loans typically are underwritten on the
basis of the borrower's ability to make repayment from the cash flow of his
business and generally are collateralized by business assets, such as accounts
receivable, equipment and inventory. As a result, the availability of funds for
the repayment of commercial loans may be substantially dependent on the success
of the business itself. Further, the collateral underlying the loans may
depreciate over time, cannot be appraised with as much precision as residential
real estate, and may fluctuate in value based on the success of the business.
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Consumer Loans
Consumer loans made by the Bank have included automobiles, recreation
vehicles, boats, second mortgages, home improvements, home equity lines of
credit, personal (collateralized and uncollateralized) and deposit account
collateralized loans. The terms of these loans periodically range from 36 to 180
months and vary based upon the kind of collateral and size of loan.
Consumer loans typically have a short term and carry higher interest
rates than that charged on other types of loans. Installment loans, however, do
pose additional risks of collectability when compared to traditional types of
loans granted by commercial banks such as residential mortgage loans. In many
instances, the Bank is required to rely on the borrower's ability to repay since
the collateral may be of reduced value at the time of collection. Accordingly,
the initial determination of the borrower's ability to repay is of primary
importance in the underwriting of consumer loans.
Loan Solicitation and Processing
Loan originations are derived from a number of sources. Loan
originations can be attributed to direct solicitation by the Bank's loan
officers, existing customers and borrowers, advertising, walk-in customers and
referrals from brokers.
Upon receipt of a loan application from a prospective borrower, a
credit report and verifications are ordered to verify specific information
relating to the loan applicant's employment income and credit standing. An
appraisal, where required, of any real estate intended to collateralize the
proposed loan is undertaken by an appraiser approved by the Bank.
Competition
The Bank encounters strong competition both in making loans and
attracting deposits. The deregulation of the banking industry and the widespread
enactment of state laws which permit multi-bank holding companies as well as an
increasing level of interstate banking have created a highly competitive
environment for commercial banking in the Bank's primary market area. In one or
more aspects of its business, the Bank competes with other commercial banks,
savings and loan associations, credit unions, finance companies, mutual funds,
insurance companies, brokerage and investment banking companies, and other
financial intermediaries operating in Pinellas County and elsewhere. Most of
these competitors, some of which are affiliated with large bank holding
companies, have substantially greater resources and lending limits, and may
offer certain services that the Bank does not currently provide. In addition,
many of the Company's non-bank competitors are not subject to the same extensive
federal regulations that govern bank holding companies and federally insured
banks. See "Investment Considerations and Risk Factors-Competition."
Management believes that the Company and the Bank are well positioned
to compete successfully in its primary market area, although no assurances can
be given. Competition among financial institutions is based upon interest rates
offered on deposit accounts, interest rates charged on loans and other credit
and service charges, the quality and scope of the services rendered, the
convenience of banking facilities, and, in the case of loans to commercial
borrowers, relative lending limits. As an independent community bank
headquartered in the Bank's primary market area, management believes that the
Bank's community commitment and involvement in its primary market area, as well
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as its commitment to quality, personalized banking services, are factors that
contribute to the Bank's competitiveness.
Employees
At December 31, 1996, the Company and the Bank together employed 24
full-time and 1 part-time employees. None of these employees is covered by a
collective bargaining agreement and the Company believes that its employee
relations are good.
Item 2. Description of Property
The office of the Company is at 10 Rockefeller Plaza, New York, New
York. The Bank maintains its principal office in leased premises of
approximately 6,800 square feet at 1875 Belcher Road North, Clearwater, Florida.
The Bank's office includes an outside drive-through teller station. In addition
to its principal office, the bank owns three branch offices in Clearwater,
Florida. One branch is located at 606 Chestnut Street. This facility is
undergoing extensive reconstruction and it is expected to re-open in June of
1997 as a two-story building of approximately 21,000 square feet with a drive-
through teller facility. The Bank will occupy the ground floor as its principal
office and the upper floor will be available for lease to commercial tenants.
Another branch is located at 2175 Nursery Road and consists of a facility of
approximately 2,700 square feet and likewise includes drive-through teller
facilities. The third branch is located in a three-story building at 2575
Ulmerton Road. The branch office occupies the ground floor, which consists of
approximately 2,500 square feet. This branch office likewise includes
drive-through teller facilities. The Bank subleases a portion of its office
space at its principal office and leases a portion of available office space in
its branch office at 2575 Ulmerton Road to commercial tenants. During 1996, the
Bank acquired a former bank office located at Gulfport Boulevard in South
Pasadena, Florida, which consists of a one-story building of approximately 2,500
square feet, with a drive-through teller facility. The building will be
renovated and it is anticipated that it will open as a branch office on or about
July of 1997.
Item 3. Legal Proceedings
The Company and the Bank are periodically parties to or otherwise
involved in legal proceedings arising in the normal course of business, such as
claims to enforce liens, claims involving the making and servicing of real
property loans, and other issues incident to the Bank's business. Management
does not believe that there is any pending or threatened proceeding against the
Company or the Bank which, if determined adversely, would have a material effect
on the business, results of operations, or financial position of the Company or
the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
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PART II
Item 5. Market for Common Equity and Related Stockholders Matters
Market for Securities
There is no established public trading market for the securities of the
Company, and it is not presently contemplated that the Company's securities will
be included in any established exchange. The Company currently has 900,000
shares of Class A common stock and 200,000 shares of Class B common stock issued
and outstanding. In addition, the Company has 1,019,110 shares of Class A common
stock and 100,000 shares of Class B Common Stock reserved for issuance upon the
exercise of warrants issued or to be issued by the Company. The 200,000 shares
of the Company's Class B common stock are convertible in some circumstances into
200,000 shares of the Company's Class A common stock. There are currently
approximately 90 holders of record of the Company's Class A common stock; and
three shareholders of record of the Company's Class B common stock. The shares
of Class B common stock and the Shares of Class A common stock into which they
are convertible, together with the 600,000 shares of the Company's shares of
Class A common stock held of record by the three initial shareholders, may be
sold pursuant to Securities and Exchange Commission Rule 144, promulgated under
the Securities Act, if the conditions of Rule 144 are met.
Dividends
Holders of the Company's Class A common stock are entitled to receive
dividends when and if declared by the Board of Directors out of funds legally
available therefor. No dividends may be declared or paid with respect to shares
of Class B common stock until January 1, 2000.
The Company has not paid any cash dividends on its capital stock and
there is no immediate prospect or contemplation of the payment of dividends on
the Company's Stock.
The Company's ability to pay dividends is generally limited to earnings
from the prior year, although retained earnings and dividends from the Bank to
the Company may also be used to pay dividends under certain circumstances. The
primary source of funds for dividends payable by the Company to its shareholders
is dividends payable to it by the Bank.
The payment of dividends by the Bank is subject to a determination by
the Bank's Board of Directors and is dependent upon a number of factors,
including capital requirements, regulatory limitations, the Bank's results of
operations and financial condition, tax considerations of the Bank and the
Company, the number of outstanding shares of stock, and general economic
conditions. There are various legal limitations with respect to the Bank's
financing or otherwise supplying funds to the Company. In particular, under
federal banking law, the Bank may not declare a dividend that exceeds undivided
profits. In addition, the approval of the Federal Reserve Bank of Atlanta (the
"Atlanta FRB"), as well as the Florida Department of Banking and Finance, is
required if the total amount of all dividends declared in any calendar year
exceeds the Bank's net profits, as defined, for that year, combined with its
retained net profits for the proceeding two years. The Atlanta FRB also has the
authority to limit further the payment of dividends by the Bank under certain
circumstances. In addition, federal banking laws prohibit or restrict the Bank
from extending credit to the Company under certain circumstances. The FRB not
only has established certain financial and capital requirements that affect the
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ability of the Bank to pay dividends, but it has also the general authority to
prohibit the Bank from engaging in an unsafe or unsound practice in conducting
its business. Depending upon the financial condition of the Bank, the payment of
cash dividends could be deemed to constitute such an unsafe or unsound practice.
Both the FRB and the Florida Department of Banking and Finance, which
regulate and supervise the Bank and the Company, have publicly stated their view
that it is generally an unsafe and unsound practice to pay cash dividends except
out of current operating earnings. Under FRB policy, a bank holding company is
expected to act as a source of financial strength to its subsidiary banks and to
commit resources to support each such bank. Consistent with this policy, the FRB
has stated that, as a matter of prudent banking, a bank holding company
generally should not pay cash dividends unless the available net earnings of the
bank holding company is sufficient to fully fund the dividends, and the
prospective rate of earnings retention appears to be consistent with the
Company's capital needs, asset quality and overall financial condition.
The ability of the Bank and the Company to pay cash dividends is
currently, and in the future could be further influenced by bank regulatory
policies or agreements and by capital guidelines. Accordingly, the actual
amount, if any, and timing of future dividends will depend on, among other
things, future earnings, the financial condition of the Bank and the Company,
the amount of cash on hand at the Company level, outstanding debt obligations,
if any, and the requirements imposed by regulatory authorities.
Item 6. Management's Discussion and Analysis or Plan of Operation
General
The Company's principal asset is its ownership of a controlling
interest in the Bank. Accordingly, the Company's results of operations are
primarily dependent upon the results of operations of the Bank. The Bank
conducts a commercial banking business which consists of attracting deposits
from the general public and applying those funds to the origination of
commercial, consumer and real estate loans (including commercial loans
collateralized by real estate). The Bank's profitability depends primarily on
net interest income, which is the difference between interest income generated
from interest-earning assets (i.e., loans and investments) less the interest
expense incurred on interest-bearing liabilities (i.e., customer deposits and
borrowed funds). Net interest income is affected by the relative amounts of
interest-earning assets and interest-bearing liabilities, and the interest-rate
earned and paid on these balances. Net interest income is dependent upon the
Bank's interest-rate spread, which is the difference between the average yield
earned on its interest-earning assets and the average rate paid on its
interest-bearing liabilities. When interest-earning assets approximate or exceed
interest-bearing liabilities, any positive interest rate spread will generate
net interest income. The interest rate spread is impacted by interest rates,
deposit flows, and loan demand. Additionally, and to a lesser extent, the Bank's
profitability is affected by such factors as the level of noninterest income and
expenses, the provision for credit losses, and the effective tax rate.
Noninterest income consists primarily of loan and other fees. Noninterest
expense consists of compensation and benefits, occupancy related expenses,
deposit insurance premiums paid to the FDIC, and other operating expenses.
Since its acquisition of control of the Bank in 1993, the Company has
sought to strengthen the operation of the Bank, to improve asset quality, to
increase the loan portfolio and to decrease nonperforming loans. During 1994,
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the Company completed a public offering of 300,000 Units for gross proceeds of
$3,000,000 (the "1994 Offering"). Each Unit consisted of one share of the
Company's common stock and one warrant to purchase an additional share of Class
A common stock. The Company has issued additional warrants related to 384,800
shares of Class A common stock to officers, directors, and employees of the
Company and the Bank, which are exercisable at a price of $10 per share. During
1996, a warrant to purchase shares of Class A Common Stock was issued to the
Company's Executive Vice President, which is exercisable for 334,310 shares on
or before January 31, 2006 at $10 per share. The Company has reserved a total of
1,019,110 shares of Class A stock for issuance upon exercise of the Company's
warrants to purchase shares of Class A Common Stock. During 1996, the Board of
Directors authorized the issuance of a warrant to purchase 100,000 shares of
Class B Common Stock to its Executive Vice President. That warrant is
exercisable at $10.00 per share on or before January 31, 2007.
In November of 1994, the Bank acquired two bank branches located in
Clearwater, Florida, each of which includes a single free-standing office
facility. The aggregate purchase price for the properties was $1,077,000. In
1995, the Bank acquired and opened a third branch office in Clearwater, Florida,
which is a three-story office building. The purchase price for that facility was
$850,000. During 1996, the Bank also acquired a branch site in South Pasadena,
Florida at a purchase price of $187,700 and expects to open a branch there in
the summer of 1997. Management believes that additional capital is the key to
any expansion program and, to this end, it will continually assess the need for
capital, both at the Bank and the Company levels. If it is determined that
additional capital is necessary to support the operations of the Company or the
Bank or to support any expansion or acquisition activities, transactions to
obtain additional financing will be considered by the Company. In that regard,
during 1995, the Company purchased 200,000 additional shares of the common stock
of the Bank at a purchase price of $5.00 per share, for an aggregate amount of
$1.0 million. In connection with that transaction, the Company was granted a
warrant, exercisable from time to time, in whole or in part, to purchase up to
200,000 additional shares at that price. The warrant expires December 31, 1999.
The Bank's present offices are located in Clearwater, Florida.
Clearwater is located in Pinellas County, which is the most populous county in
the Tampa Bay area of Florida. It anticipates an additional office in South
Pasadena, which is also in Pinellas County. The "Tampa Bay" area is located on
the West Coast of Florida, midway up the Florida peninsula. The major cities in
the area are Tampa (Hillsborough County) and St. Petersburg and Clearwater
(Pinellas County).
The current population of the Tampa Bay area is estimated at
approximately 2,200,000, which reflects population increases of approximately
45% between 1970 and 1980, and approximately 27% between 1980 and 1990. Pinellas
is the most densely populated county in Florida, with more than 2,800 people per
square mile. The average age of the population for the region is estimated at 45
years (as compared to 38 years for the State of Florida), and this reflects the
history of Pinellas County as a retirement area. Recent years have shown a
slight drop in average age due to an increase in office and manufacturing
employment opportunities.
The economy of Pinellas County has historically been tourist and
retirement oriented. Pinellas County has recently attracted a larger share of
new business, particularly in the high technology industries. Total per capita
personal income in Pinellas County increased from approximately $15,000 in 1984
to approximately $22,700 in 1992. Employment in the region reflects a
broad-based economy, with an emphasis on the retail trade and service
industries.
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The housing market in the region remains stable in the view of
management, although housing starts have slowed from the high levels experienced
during the 1970's.
Clearwater is the county seat of Pinellas County and its second largest
city. It encompasses approximately 32 square miles and has a population of
approximately 100,000.
Management's discussion and analysis of earnings and related financial
data are presented herein to assist investors in understanding the financial
condition and results of operations of the Company for the years ended December
31, 1996 and 1995. This discussion should be read in conjunction with the
consolidated financial statements and related footnotes presented elsewhere
herein.
Results Of Operations
Comparison of Year Ended December 31, 1996 and 1995.
General
Net earnings for the year ended December 31, 1996 were $558,000
compared to $270,000 for the year ended December 31, 1995. This increase in the
Company's net earnings was primarily due to an increase in net interest income
partially offset by an increase in other expenses and provision for income
taxes.
Interest Income and Expense
Interest income increased by $2,191,000 from $4,190,000 for the year
ended December 31, 1995 to $6,381,000 for the year ended December 31, 1996.
Interest income on loans increased $1,746,000 due to an increase in the average
loan portfolio balance from $28.1 million for the year ended December 31, 1995
to $49.3 million for 1996, partially offset by a decrease in the weighted
average yield of 87 basis points. Interest on securities increased $434,000 due
to an increase in the average securities balance from $16.8 million in 1995 to
$25.6 million in 1996, partially offset by a decrease in average yield from
6.44% in 1995 to 5.92% in 1996. Interest on other interest-earning assets
increased $11,000 primarily due to an increase from $4.3 million in average
other interest-earning assets in 1995 to $4.7 million in 1996.
Interest expense increased to $3,745,000 for the year ended December
31, 1996 from $2,225,000 for the year ended December 31, 1995. Interest expense
on deposit accounts increased because of a $28.6 million increase in the average
balance, although there was a decrease of 6 basis points in the average yield
paid on deposits for the year ended December 31, 1996 compared to 1995.
Provision for Loan Losses
The provision for loan losses is charged to earnings to bring the total
allowance to a level deemed appropriate by management and is based upon
historical experience, the volume and type of lending conducted by the Bank,
industry standards, the amount of nonperforming loans, general economic
conditions, particularly as they relate to the Bank's market areas, and other
factors related to the collectability of the Bank's loan portfolio. The
provision increased from $233,000 for the year ended December 31, 1995 to
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$250,000 for the year ended December 31, 1996. The ratio of net charge-offs to
average loans outstanding was .001 at December 31, 1996 and 1995. The ratio of
allowance for loan losses to period-end total loans was .013 at December 31,
1996 and .016 at December 31, 1995. At December 31, 1996, there were no
non-performing loans. Management believes that the allowance for loan loss of
$811,000 is adequate at December 31, 1996.
Other Income
Total other income increased $17,000 for the year ended December 31,
1996 compared to 1995.
Other Expenses
Total other expenses increased $136,000 for the year ended December 31,
1996 when compared to 1995, primarily due to an increase in employee
compensation and benefits, partially offset by a decrease in occupancy and
equipment expenses and federal insurance premiums. The increase in employee
compensation and benefits is primarily due to additional personnel for the new
branches. The decrease in occupancy and equipment expense is due to an increase
in income from the leasing of space in Company buildings to third parties.
Provision for Income Taxes
In 1996 the provision for income taxes is $383,000, an effective income
tax rate of 40.7%, as compared to $136,000 and 33.5% respectively, in 1995. The
increase is primarily due to an increase in net earnings of the holding company,
which are taxed at a higher state income tax rate than those of the Bank.
Net Interest Income
Net interest income, which constitutes the principal source of income
for the Company, represents the difference between income on interest-earning
assets and interest expense on interest-bearing liabilities. The principal
interest-earning assets are investments and loans made to businesses and
individuals. Interest-bearing liabilities primarily consist of time deposits,
interest paying checking accounts ("NOW accounts"), retail savings deposits and
money market accounts. Funds attracted by these interest-bearing liabilities are
invested in interest-earning assets. Accordingly, net interest income depends
upon the volume of the average interest-earning assets and average
interest-bearing liabilities and the interest rates earned or paid on them.
Net interest income was $2,636,000 for the Company for the year ended
December 31, 1996 compared with $1,965,000 for the year ended December 31, 1995.
This improvement in net interest income is primarily a result of a higher volume
of net interest-earning assets.
13
<PAGE>
The following tables set forth, for the periods indicated, information
regarding (i) the total dollar amount of interest and dividend income of the
Company from interest-earning assets and the resultant average yields; (ii) the
total dollar amount of interest expense on interest-bearing liabilities and the
resultant average costs; (iii) net interest/dividend income; (iv) interest rate
spread; (v) net interest margin. Average balances are based on average daily
balances.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1996 1995
------------------------------------------------------------------------
(Dollars in thousands)
Interest Average Interest Average
Average and Yield/ Average and Yield/
Balance Dividends Rate Balance Dividends Rate
------- --------- ---- ------- --------- ----
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans(1) $49,266 4,624 9.39% $28,052 2,878 10.26%
Securities 25,577 1,514 5.92% 16,775 1,080 6.44%
Other interest-earning assets(2) 4,730 243 5.14% 4,266 232 5.44%
------- ---- ------- ------- -----
Total interest-earning
assets 79,573 6,381 8.02% 49,093 4,190 8.53%
------- -----
Noninterest-earning assets 4,089 4,007
----- -----
Total assets $83,662 53,100
======= =====
Interest-bearing liabilities:
Demand, money market and
NOW deposits 8,432 310 3.68% 5,515 141 2.56%
Savings 1,470 62 4.22% 681 15 2.20%
Certificates of deposit 59,437 3,371 5.67% 34,562 2,068 5.98%
Other 34 2 5.88% 17 1 5.88%
------ ----- ---- ------ -----
Total interest-bearing
liabilities 69,373 3,745 5.40% 40,775 2,225 5.46%
------- -----
Noninterest-bearing liabilities 4,840 3,356
Stockholders' equity 9,449 8,969
------- -----
Total liabilities and
stockholders' equity $83,662 $53,100
======= =======
Net interest/dividend income $ 2,636 $ 1,965
======= =======
Interest rate spread(3) 2.62% 3.07%
===== =====
Net interest margin(4) 3.31% 4.00%
===== =====
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.15 1.20
==== ====
</TABLE>
14
<PAGE>
- ------------------------------------
(1) Includes nonaccrual loans.
(2) Includes interest-bearing deposits.
(3) Interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of
interest-bearing liabilities.
(4) Net interest margin is net interest income divided by average
interest-earning assets.
Rate/Volume Analysis
The following table sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in rate (change
in rate multiplied by prior volume), (2) changes in volume (change in volume
multiplied by prior rate) and (3) changes in rate-volume (change in rate
multiplied by change in volume).
December 31,
1996 vs. 1995
--------------------------
Increase (Decrease) Due to
--------------------------
Rate/
Rate Volume Volume Total
---- ------ ------ -----
(Dollars in thousands)
Interest-earning assets:
Loans $(245) 2,176 (185) 1,746
Securities (87) 567 (46) 434
Other interest-earning assets (13) 25 (1) 11
----- ----- ----- -----
Total $(345) 2,768 (232) 2,191
----- ----- ----- -----
Interest-bearing liabilities:
Demand, Money Market and NOW Deposits 62 74 33 169
Savings 14 17 16 47
Certificates of Deposit (107) 1,488 (78) 1,303
Other Borrowings -- 1 -- 1
----- ----- ----- -----
Total (31) 1,580 (29) 1,520
----- ----- ----- -----
Net change in net interest income
before provision for credit losses $(314) 1,188 (203) 671
===== ===== ===== =====
Income Taxes
At December 31, 1996, the Company had net operating loss carryforwards for
federal income tax purposes available to offset future federal taxable income.
They were in the aggregate amount of $826,000, with specified portions expiring
in each year from 2004 through 2008. The carryforwards are subject to an annual
limitation of $332,000.
At the time of its incorporation, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," which requires it to take into account changes in tax rates when valuing
the deferred income tax amounts carried on its balance sheets.
15
<PAGE>
Asset/Liability Management
A principal objective of the Bank's asset/liability management strategy is to
minimize the Bank's exposure to changes in interest rates by matching the
maturity and repricing horizons of interest-earning assets and interest-bearing
liabilities. This strategy is overseen in part through the direction of the
Asset and Liability Committee of the Bank (the "ALCO Committee") which
establishes policies and monitors results to control interest rate sensitivity.
As a part of the Bank's interest rate risk management policy, the ALCO
Committee examines the extent to which its assets and liabilities are "interest
rate-sensitive" and monitors the Bank's interest rate sensitivity "gap." An
asset or liability is considered to be interest rate-sensitive if it will
reprice or mature within the time period analyzed, usually one year or less. The
interest rate-sensitivity gap is the difference between interest-earning assets
and interest-bearing liabilities scheduled to mature or reprice within such time
period. A gap is considered positive when the amount of interest rate-sensitive
assets exceeds the amount of interest rate-sensitive liabilities. A gap is
considered negative when the amount of interest rate-sensitive liabilities
exceeds interest rate-sensitive assets. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income, while
a positive gap would tend to result in an increase in net interest income.
During a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income, while a positive gap would tend to
adversely affect net interest income. If the repricing of the Bank's assets and
liabilities were equally flexible and moved concurrently, the impact of any
increase or decrease in interest rates on net interest income would be minimal.
A simple interest rate "gap" analysis by itself may not be an accurate
indicator of how net interest income will be affected by changes in interest
rates. Accordingly, the ALCO Committee also evaluates how the repayment of
particular assets and liabilities is impacted by changes in interest rates.
Income associated with interest-earning assets and costs associated with
interest-bearing liabilities may not be affected uniformly by changes in
interest rates. In addition, the magnitude and duration of changes in interest
rates may have a significant impact on net interest income. For example,
although certain assets and liabilities may have similar maturities or periods
of repricing, they may react in different degrees to changes in market interest
rates. Interest rates on certain types of assets and liabilities fluctuate in
advance of changes in general market interest rates, while interest rates on
other types may lag behind changes in general market rates. In addition, certain
assets, such as adjustable rate mortgage loans, have features (generally
referred to as "interest rate caps") which limit changes in interest rates on a
short-term basis and over the life of the asset. In the event of a change in
interest rates, prepayment and early withdrawal levels also could deviate
significantly from those assumed in calculating the interest-rate gap. The
ability of many borrowers to service their debts also may decrease in the event
of an interest-rate increase.
Management's strategy is to maintain a balanced interest rate risk position to
protect its net interest margin from market fluctuations. To this end, the ALCO
Committee reviews, on a monthly basis, the maturity and repricing of assets and
liabilities. The ALCO Committee has adopted a goal of achieving and maintaining
a six-month ratio between rate sensitive assets to rate sensitive liabilities of
.80 to 1.20.
Principal among the Bank's asset/liability management strategies has been the
emphasis on managing its interest-rate sensitive liabilities in a manner
designed to attempt to reduce the Bank's exposure during periods of fluctuating
interest rates. Management believes that the type and amount of the Bank's
interest rate-sensitive liabilities may reduce the potential impact that a rise
in interest rates might have on the Bank's net interest income. Additionally,
the Bank maintains a "floor," or minimum rate, on many of its floating or prime
based loans. The "floor" amount for each specific loan is determined in relation
to the prevailing market rates on the date of origination and management retains
a great deal of flexibility in connection with the establishment of floors for
particular loans. Management recognizes that floors allow the Bank to continue
to earn a higher rate when the floating rate falls below the established "floor"
rate.
16
<PAGE>
The following table sets forth certain information relating to the Company's
interest-earning assets and interest-bearing liabilities at December 31, 1996
that are estimated to mature or are scheduled to reprice within the period
shown.
<TABLE>
<CAPTION>
More than More than
One Year and Five Years and
0-3 4-12 Less than Less than
Months Months Five Years Ten Years Total
------ ------ ---------- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Mortgage and commercial loans (1):
Commercial loans $2,554 $382 $578 $----- $3,514
Commercial real estate loans 5,941 9,617 38,581 59 54,198
Residential mortgage loans 238 547 400 1,599 2,784
Consumer loans 57 8 92 --- 157
------- ------ ------- ------- ------
Total loans 8,790 10,554 39,651 1,658 60,653
----- ------ ------ ----- ------
Federal funds sold 3,452 ---- ---- ---- 3,452
Interest-bearing deposits with banks ---- ---- 99 ---- 99
Securities (2)(3) 4,492 3,650 26,365 203 34,710
----- ----- ------ --- ------
Total rate-sensitive assets 16,734 14,204 66,115 1,861 98,914
====== ====== ====== ===== ======
Deposit accounts (2):
Money market deposits 7,507 ----- ----- ----- 7,507
NOW deposits 4,536 ----- ----- ----- 4,536
Savings deposits 4,742 ----- ----- ----- 4,742
Certificates of deposit 11,826 30,994 30,613 828 74,261
------ ------ ------ --- ------
Total rate-sensitive liabilities 28,611 30,994 30,613 91,046
====== ====== ====== ===== ======
GAP (repricing differences) $(11,877) (16,790) 35,502 1,033 7,868
--------- -------- ------ ----- -----
Cumulative GAP (11,877) (28,667) 6,835 7,868
-------- -------- ----- -----
Cumulative GAP/total assets (11.29)% (27.25)% 6.50% 7.48%
===== ======== ===== =====
</TABLE>
- -------------------------------
(1) In preparing the table above, adjustable-rate loans are included in the
period in which the interest rates are next scheduled to adjust rather
than in the period in which the loans mature. Fixed rate loans are
scheduled, including repayment, according to their maturities.
(2) Money market, NOW, and savings deposits are regarded as ready
accessible withdrawable accounts. All other time deposits are scheduled
through the maturity dates. Securities are also scheduled through the
maturity dates.
(3) Includes Federal Reserve Bank stock.
17
<PAGE>
Financial Condition
Lending Activities
A significant source of income for the Company is the interest earned
on loans. At December 31, 1996, the Company's total assets were $105.2 million
and its net loans were $59.5 million or 57% of total assets as compared to $68.9
million of total assets at December 31, 1995, and net loans of $36.5 million
representing 53% of the total assets at December 31, 1995.
Lending activities are conducted pursuant to a written policy which has
been adopted by the Bank. Each loan officer has defined lending authority beyond
which loans, depending upon their type and size, must be reviewed and approved
by a loan committee comprised of certain directors of the Bank.
LOAN PORTFOLIO ANALYSIS
The following table sets forth information concerning the Company's
loan portfolio by type of loan at the dates indicated.
At December 31, 1996 At December 31, 1995
-------------------- --------------------
% of % of
Amount Total Amount Total
(Dollars in thousands)
Commercial loans $ 3,514 5.8% $ 4,391 11.8%
Commercial real estate loans 54,198 89.4 29,719 79.7
Residential mortgage loans 2,784 4.6 3,046 8.2
Consumer loans 157 .2 115 .3
------ ---- ------ ----
Total loans 60,653 100.0% 37,271 100.0%
------ ---- ------ ----
Add (Deduct):
Deferred loan fees (343) (186)
Unamortized discount -- (27)
------ ------
Loans, net $ 60,310 $ 37,058
======== =========
18
<PAGE>
The following table reflects the contractual principal repayments by
period of the Company's loan portfolio at December 31, 1996.
Residential Commercial
Years Ended Commercial Mortgage Real Estate Consumer
December 31, Loans Loans Loans Loans Total
- ------------ ----- ----- ----- ----- -----
(Dollars in thousands)
1997 $2,872 362 4,012 96 7,342
1998 237 372 3,438 33 4,080
1999 156 300 6,962 12 7,430
2000-2001 184 582 17,502 16 18,284
2002-2003 65 437 4,279 --- 4,781
2004-2010 --- 731 18,005 --- 18,736
------- --- ------ --- ------
Total $3,514 $2,784 $54,198 $157 $60,653
====== ====== ======= ==== =======
Of the $53.3 million of loans due after 1997, 25.9% of such loans have
fixed interest rates and 74.1% have adjustable interest rates.
The following table sets forth total loans originated and repaid during
the periods indicated.
Year Ended Year Ended
December 31, December 31,
1996 1995
---- ----
(in thousands)
Originations:
Commercial loans $ 497 777
Commercial real estate loans 30,802 18,709
Consumer loans 145 124
-------- --------
Total loans originated 31,444 19,610
Principal reductions (8,082) (5,174)
-------- --------
Increase (decrease) in total loans $ 23,362 14,436
======== ========
Asset Quality
Management seeks to maintain a high quality of assets through
conservative underwriting and sound lending practices. The majority of the loans
in the Bank's loan portfolio are collateralized by commercial real estate
mortgages. As of December 31, 1996, approximately 89.4%, and as of December 31,
1995, approximately 79.7% of the total loan portfolio was collateralized by this
type of property. The level of delinquent loans and foreclosed real estate also
is relevant to the credit quality of a loan portfolio. As of December 31, 1996,
non-performing assets totaled $185,000, while as of December 31, 1995, there
were no non-performing assets.
19
<PAGE>
In an effort to maintain the quality of the loan portfolio management
seeks to minimize higher risk types of lending. In view of the relative
significance of real estate related loans, a downturn in the value of the real
estate could have an adverse impact on the Company's profitability. However, as
part of its loan portfolio management strategy, the Company typically limits its
loans to a maximum of 75% of the value of the underlying real estate as
determined by an MAI appraisal. In addition, knowledgeable members of management
make physical inspections of properties being considered for mortgage loans.
Management believes that such precautions reduce the Company's exposure to the
risks associated with a downturn in real estate values. See "Investment
Considerations and Risk Factors--Local Economic Conditions."
Commercial loans also entail risks since repayment is usually dependent
upon the successful operation of the commercial enterprise. They also are
subject to adverse conditions in the economy. Commercial loans are generally
riskier than mortgage loans because they are typically underwritten on the basis
of the ability to repay from the cash flow of a business rather than on the
ability of the borrower or guarantor to repay. Further, the collateral
underlying commercial loans may depreciate over time, cannot be appraised with
as much precision as real estate, and may fluctuate in value based on the
success of the business.
Loan concentrations are defined as amounts loaned to a number of
borrowers engaged in similar activities which would cause them to be similarly
impacted by economic or other conditions. The Company, on a routine basis,
monitors these concentrations in order to make necessary adjustments in its
leading practices that most clearly reflect the economic conditions, loan to
deposit ratios, and industry trends. Concentrations of loans in the following
categories constituted the total loan portfolio as of December 31, 1996:
Commercial loans 5.8%
Real estate mortgage loans 94.0%
Consumer and other loans .2%
The Loan Committee of the Board of Directors of the Bank concentrates
its efforts and resources, and that of its senior management and lending
officers, on loan review and underwriting procedures. Internal controls include
ongoing reviews of loans made to monitor documentation and ensure the existence
and valuations of collateral. In addition, management of the Bank has
established a review process with the objective of quickly identifying,
evaluating, and initiating necessary corrective action for marginal loans. The
goal of the loan review process is to address classified and non-performing
loans as early as possible. Management maintains a cautious outlook in
anticipating the potential effects of uncertain economic conditions (both
locally and nationally) and the possibility of more stringent regulatory
standards.
See "Investment Considerations and Risk Factors-Supervision and Regulation."
Classification of Assets
Generally, interest on loans is accrued and credited to income based
upon the principal balance outstanding. It is management's policy to discontinue
the accrual of interest income and classify a loan as non-accrual when principal
or interest is past due 90 days or more and the loan is not adequately
collateralized, or when in the opinion of management, principal or interest is
not likely to be paid in accordance with the terms of the obligation. Consumer
installment loans will be charged-off after 90 days of delinquency unless
adequately collateralized and in the process of collection. Loans will not be
returned to accrual status until principal and interest payments are brought
current and future payments appear reasonably certain. Interest accrued and
unpaid at the time a loan is placed on nonaccrual status is charged against
interest income. Subsequent payments received are applied to the outstanding
principal balance.
20
<PAGE>
Real estate acquired by the Bank as a result of foreclosure or by deed
in lieu of foreclosure is classified as foreclosed real estate. At December 31,
1996, the Bank had foreclosed real estate totaling $185,000. Foreclosed real
estate is recorded at the lower of cost or fair value less estimated selling
costs, and the estimated loss, if any, is charged to the allowance for loan
losses at the time it is transferred. Further allowances for losses are recorded
at the time management believes additional deterioration in value has occurred.
The following table sets forth certain information on nonaccrual loans
and foreclosed real estate, the ratio of such loans and foreclosed real estate
to total assets as of the dates indicated, and certain other related
information.
At December 31,
1996 1995
---- ----
(Dollars in thousands)
Nonaccrual loans:
Residential mortgage loans -- --
Commercial loans -- --
Consumer and other loans -- --
---- -------
Total non-accrual loans -- --
==== =======
Total nonperforming loans -- --
==== =======
Total nonperforming loans to
total loans --% --%
Total nonperforming loans to
total assets -- --
---- -------
Foreclosed real estate:
Real estate acquired by foreclosure or
deed in lieu of foreclosure $185 --
---- -------
Total nonperforming loans and
foreclosed real estate $185 --
==== =======
Total nonperforming loans and
foreclosed real estate to total assets .17% --%
==== =======
Loan Impairment and Losses
On January 1, 1995, the Company adopted Statements of Financial
Accounting Standards No. 114 and 118 ("SFAS 114 and 118"). These Statements
address the accounting by creditors for impairment of certain loans. The
Statements generally require the Company to identify loans for which the Company
probably will not receive full repayment of principal and interest, as impaired
loans. The Statements require that impaired loans be valued at the present value
of expected future cash flows, discounted at the loan's effective interest rate,
or at the observable market price of the loan, or the fair value of the
underlying collateral if the loan is collateral dependent. The Company has
implemented the Statements by modifying its monthly review of the adequacy of
the allowance for loan losses to also
21
<PAGE>
identify and value impaired loans in accordance with guidance in the Statements.
The adoption of the Statements did not have any material effect on the results
of operations for the years ended December 31, 1996 and 1995.
Management considers a variety of factors in determining whether a loan
is impaired, including (i) any notice from the borrower that the borrower will
be unable to repay all principal and interest amounts contractually due under
the loan agreement, (ii) any delinquency in the principal and interest payments
other than minimum delays or shortfalls in payments, and (iii) other information
known by management which would indicate that full repayment of the principal
and interest is not probable. In evaluating loans for impairment, management
generally considers delinquencies of 60 days or less to be minimum delays, and
accordingly does not consider such delinquent loans to be impaired in the
absence of other indications of impairment.
Management evaluates smaller balance, homogeneous loans for impairment
and adequacy of allowance for loan losses collectively, and evaluates other
loans for impairment individually, on a loan-by-loan basis. The Company
evaluates the consumer loan portfolio which are smaller homogeneous loans for
impairment on an aggregate basis, and utilizes its own historical charge-off
experience, as well as the charge-off experience of its peer group and industry
statistics to evaluate the adequacy of the allowance for loan losses. For all
commercial, commercial real estate and residential mortgage loans, the Company
evaluates loans for impairment on a loan-by-loan basis.
The Company evaluates all nonaccrual loans as well as any accruing
loans exhibiting collateral or other credit deficiencies for impairment. With
respect to impaired, collateral-dependent loans, any portion of the recorded
investment in the loan that exceeds the fair value of the collateral is charged
off.
For impairment recognized in accordance with SFAS 114 and 118, the
entire change in the present value of expected cash flows, or the entire change
in estimated fair value of collateral for collateral dependent loans is reported
as a provision for loan losses in the same manner in which impairment initially
was recognized or as a reduction in the amount of the provision that otherwise
would be reported.
The Company had no impaired loans at December 31, 1996 or 1995. The
average recorded investment in impaired loans during 1996 and 1995 was $31,000
and $5,000, respectively. No interest income on impaired loans was recognized in
1996 or 1995.
Loans are reported at the principal amount outstanding net of the
allowance for loan losses and unamortized premiums, discounts and deferred loan
origination fees and costs.
The allowance for loan losses is established through a provision for
loan losses charged to operations. Loans are charged against the allowance for
loan losses when management believes that the collectability of the principal is
unlikely. Subsequent recoveries are added to the allowance. The allowance is an
amount that management believes will be adequate to absorb possible losses
inherent in existing loans and loan commitments, based on evaluations of
collectability and prior loss experience. Management evaluates the adequacy of
the allowance monthly, or more frequently if considered necessary. The
evaluation takes into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, loan concentrations,
specific problem loans and commitments, and current and anticipated economic
conditions that may affect the borrower's ability to repay.
Management continues to actively monitor the Bank's asset quality and
to charge-off loans against the allowance for loan losses when appropriate or to
provide specific loss allowances when necessary. Although management believes it
uses the best information available to make determinations with respect to the
allowance for loan losses, future adjustments may be necessary if economic
conditions differ from the economic conditions in the assumptions used in
22
<PAGE>
making the initial determinations. The Bank's allowance at December 31, 1995 was
$593,000, and the Bank increased its allowance for loan losses to $811,000 as of
December 31, 1996, consistent with the increase in the loan portfolio,
reflecting management's intent to maintain reserves at a level management
believes to be adequate. See "Investment Considerations and Risk
Factors--Adequacy of Allowance for Loan Losses."
The following table sets forth information with respect to activity in
the Bank's allowance for loan losses during the periods indicated:
Year Ended Year Ended
December 31, December 31
1996 1995
----------------------
(Dollars in thousands)
Average loans outstanding, net $49,266 $28,052
------- -------
Allowance at beginning of period 593 369
------- -------
Charge-offs:
Real estate loans 62 --
Commercial loans -- 23
Consumer loans 3 7
------- -------
Total loans charged-off 65 30
------- -------
Recoveries 33 21
------- -------
Net charge-offs 32 9
------- -------
Provision for loan losses charged
to operating expenses 250 233
------- -------
Allowance at end of period $ 811 $ 593
======= =======
Ratio of net charge-offs to
average loans outstanding .001 .001
======= =======
Ratio of allowance for loan losses
to period-end total loans .013 .016
======= =======
Ratio of allowance for loan losses
to nonperforming loans -- --
======= =======
Period end total loan $60,653 $37,271
======= =======
23
<PAGE>
The following table presents information regarding the Company's total
allowance for losses as well as the allocation of such amounts to the various
categories of loans:
At December 31, 1996 At December 31, 1995
-------------------- --------------------
Loans to Loans to
Total Total
Amount Loans Amount Loans
------ ----- ------ -----
(Dollars in thousands)
Commercial loans $ 82 10.1% $140 23.6%
Commercial real estate loans 677 83.5 378 63.7
Residential real estate loans 50 6.2 72 12.2
Consumer loans and other 2 .2 3 .5
---- ----- ---- -----
Total allowance for
loan losses $811 100.0% $593 100.0%
==== ===== ==== =====
The allowance for loan losses represented 1.3% of the total loans
outstanding at December 31, 1996, compared with 1.6% at December 31, 1995.
Securities
The following table sets forth the carrying value of the Bank's
securities portfolio as of the dates indicated:
At December 31,
---------------
1996 1995
(in thousands)
Securities held to maturity:
U.S. Treasury securities $ 1,499 $ 2,265
Other U.S. Government and
agency securities 33,008 17,365
------- -------
$34,507 $19,630
======= =======
24
<PAGE>
The following table sets forth, by maturity distribution, certain
information pertaining to the securities held-to maturity portfolio as follows:
<TABLE>
<CAPTION>
One Year After One Year After Five Years
Or Less to Five Years to Ten Years Total
---------------------- -------------------- ------------------ -------------------
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1996:
U.S. Treasury Securities $ 500 6.04% $ 999 6.17% $----- ----% $ 1,499 6.12%
Other U.S. Government
agency securities 8,142 5.97 22,856 6.16 2,010 6.33 33,008 6.12
----- ---- ------ ---- ----- ---- ------ ----
Total $ 8,642 5.97% $23,855 6.16% $2,010 6.33% $34,507 6.12%
======= ==== ======= ==== ====== ==== ======= ====
December 31, 1995:
U.S. Treasury Securities $ 2,265 5.21% $----- --% $----- -----% $ 2,265 5.21%
Other U.S. Government
agency securities 8,856 6.11 7,503 6.01 1,006 5.86 17,365 6.05
----- ---- ----- ---- ----- ---- ------ ----
$11,121 5.93% $ 7,503 6.01% $1,006 5.86% $19,630 5.95%
======= ==== ======= ==== ====== ==== ======= ====
</TABLE>
Deposit Activities
Deposits are the major source of the Bank's funds for lending and other
investment purposes. Deposits are attracted principally from within the Bank's
primary market area through the offering of a broad variety of deposit
instruments including checking accounts, money market accounts, regular savings
accounts, term certificate accounts (including "jumbo" certificates in
denominations of $100,000 or more) and retirement savings plans.
Maturity terms, service fees and withdrawal penalties are established by
the Bank on a periodic basis. The determination of rates and terms is predicated
on funds acquisition and liquidity requirements, rates paid by competitors,
growth goals and federal regulations.
Regulations promulgated by the FDIC pursuant to the Federal Deposit
Insurance Company Improvement Act of 1991 ("1991 Banking Law") place limitations
on the ability of certain insured depository institutions to accept, renew, or
rollover deposits by offering rates of interest which are significantly higher
than the prevailing rates of interest on deposits offered by other insured
depository institutions having the same type of charter in such depository
institution's normal market area. Under these regulations, "well capitalized"
depository institutions may accept, renew, or roll such deposits over without
restriction, "adequately capitalized" depository institutions may accept, renew
or roll such deposits over with a waiver from the FDIC (subject to certain
restrictions on payments of rates), and "undercapitalized" depository
institutions may not accept, renew or roll such deposits over. The regulations
contemplate that the definitions of "well capitalized," "adequately capitalized"
and "undercapitalized" will be the same as the definitions adopted by the
agencies to implement the corrective action provisions of the 1991 Banking Law."
See "Supervision and Regulation--Impact of the 1991 Banking Law." At December
31, 1996, the Bank met the definition of a "well capitalized" depository
institution.
25
<PAGE>
The following table shows the distribution of, and certain other
information relating to, the Bank's deposit accounts by type:
<TABLE>
<CAPTION>
At December 31, 1996 At December 31, 1995
----------------------------- -------------------------
% of % of
Amount Deposits Amount Deposits
(Dollars in thousands)
<S> <C> <C> <C> <C>
Demand deposits $2,401 2.6 $2,729 4.7%
NOW deposits 4,536 4.9 2,705 4.6
Money market deposits 7,507 8.0 3,518 6.0
Savings deposits 4,742 5.0 595 1.0
----- --- ------ ---
Subtotal 19,186 20.5 9,547 16.3
------ ---- ------ ----
Certificate of deposits:
3.00%-3.99% --- ---- 24 ----
4.00%-4.99% 1,682 1.8 255 .4
5.00%-5.99% 53,507 57.3 23,756 40.5
6.00%-6.99% 13,307 14.2 14,109 24.2
7.00%-7.99% 5,765 6.2 10,910 18.6
------ ---- ------ ----
Total certificates
of deposit (1) 74,261 79.5 49,054 83.7
------ ---- ------ ----
Total deposit $93,447 100.0% 58,601 100.0%
======= ====== ====== ======
</TABLE>
- -------------------------
(1) Includes individual retirement accounts ("IRAs") totaling $5,434,000 and
$3,464,000 at December 31, 1996 and 1995 respectively, all of which are
in the form of certificates of deposit.
26
<PAGE>
The following table shows the average amount of and the average rate
paid on each of the following deposit account categories during the periods
indicated:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
------------ ------------
1996 1995
Average Average Average Average
Balance Yield Balance Yield
------- ----- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Demand, money market
& NOW $8,432 3.68% 5,515 2.56%
Savings deposit 1,470 4.22 681 2.20
Certificates of deposit 59,437 5.67 34,562 5.98
Other 34 5.88 17 5.88
------ ---- ------ ----
Total deposits $69,373 5.40% 40,775 5.46%
======= ===== ====== =====
</TABLE>
The Bank does not have a concentration of deposits from any one source,
the loss of which would have a material adverse effect on the business of either
the Bank or the Company. Management believes that substantially all of the
Bank's depositors are residents in its primary market area. The Bank currently
does not accept brokered deposits.
27
<PAGE>
The following tables presents by various interest rate categories the
amounts of certificates of deposit at December 31, 1996 and December 31, 1995
which mature during the periods indicated:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------------------------------------------------------
1997 1998 1999 2000 2001 Total
---- ---- ---- ---- ---- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996:
4.00%-4.99% $ 1,636 46 --- --- --- 1,682
5.00%-5.99% 36,664 10,477 620 3,741 2,005 53,507
6.00%-6.99% 4,545 404 803 465 7,090 13,307
7.00%-7.99% ---- 62 1,831 3,631 241 5,765
-------- ------- ----- ----- ------ ------
Total certificates of deposit $42,845 10,989 3,254 7,837 9,336 74,261
======= ====== ===== ===== ===== ======
Year Ending December 31,
------------------------------------------------------------------------
1996 1997 1998 1999 2000 Total
---- ---- ---- ---- ---- -----
(dollars in thousands)
December 31, 1995:
3.00%-3.99% $ 24 --- --- --- --- 24
4.00%-4.99% 189 66 --- --- --- 255
5.00%-5.99% 15,218 3,152 1,582 12 3,792 23,756
6.00%-6.99% 7,865 4,214 393 806 831 14,109
7.00%-7.99% 5,440 --- 61 1,751 3,658 10,910
------ ------- ------ ----- ----- ------
Total certificates of deposit $28,736 7,432 2,036 2,569 8,281 49,054
======= ===== ===== ===== ===== ======
</TABLE>
28
<PAGE>
Jumbo certificates ($100,000 and over) mature as follows:
At December 31, At December 31,
--------------- ----------------
1996 1995
(in thousands)
Due three months or less $ 733 630
Due over three months to six months 2,136 923
Due over six months to one year 2,566 2,048
Due over one year 1,826 1,221
----- ------
$7,261 4,822
====== ======
The following table sets forth the net deposit flows of the Bank during the
periods indicated:
Year Ended Year Ended
December 31, 1996 December 31, 1995
----------------- -----------------
(in thousands)
Net increase (decrease) before
interest credited $31,168 26,343
Net interest credited $ 3,678 2,166
------- -------
Net deposit increase 34,846 28,509
======= =======
Liquidity and Capital Resources
The Company's principal sources of funds are those generated by the
Bank. The Bank's principal sources of funds are deposits, principal and interest
payments on loans, maturities and interest on securities, and capital
contributions from the Company. The Company's cash flow is affected by its
operations, investing activities, and financing activities. Net cash provided
from operations primarily results from net earnings adjusted for noncash
accounting entries.
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that the Bank
meets all capital adequacy requirements to which it is subject.
29
<PAGE>
As of December 31, 1996, the most recent notification from the State and
Federal regulators categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the Bank's
category.
<TABLE>
<CAPTION>
To be Well
Capitalized under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
------ ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars in thousands)
As of December 31, 1996:
Total capital
<S> <C> <C> <C> <C> <C> <C>
(to Risk Weighted Assets) $8,051 11.90% $5,412 8.00% $6,765 10.0%
Tier I Capital
(to Risk Weighted Assets) 7,240 10.70% 2,706 4.00% 4,059 6.0%
Tier I Capital
(to Average Assets) 7,240 7.48% 3,871 4.00% 4,839 5.0%
As of December 31, 1995:
Total capital
(to Risk Weighted Assets) 7,272 16.11% 3,610 8.00% 4,512 10.0%
Tier I Capital
(to Risk Weighted Assets) 6,699 14.85% 1,805 4.00% 2,708 6.0%
Tier I Capital
(to Average Assets) 6,699 10.83% 2,475 4.00% 3,093 5.0%
</TABLE>
Management believes that additional capital is the key to any expansion
program and, to this end, it will continually assess the need for capital, both
at the Bank and the holding company levels. If it is determined that additional
capital is necessary to support the operations of the Company or the Bank or to
support any expansion or acquisition activities, transactions to obtain
additional funds will be considered by the Company. In that regard, during 1995,
the Company purchased 200,000 shares of common stock of the Bank at a purchase
price of $5.00 per share, for an aggregate purchase price of $1.0 million. In
consideration for the Company's purchase, the Company was also granted a warrant
to purchase up 200,000 additional shares at a price of $5.00 per share,
exercisable from time to time, in whole or in part, until and including December
31, 1999.
Future Accounting Matters
The FASB has issued Statement of Financial Accounting Standards No. 125
("SFAS 125"). This Statement provides accounting and reporting standards for
transfers and servicing of financial assets as well as extinguishments of
liabilities. This Statement also provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. SFAS 125 is effective for transfers and servicing of
financial assets as well as extinguishments of liabilities occurring in 1997.
Management does not anticipate SFAS 125 will have a material impact on the
Company.
30
<PAGE>
Impact of Inflation and Changing Prices
The financial statements and related financial data concerning the
Company presented herein have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. The primary impact of inflation on the operations of the Company is
reflected in increased operating costs. Unlike most industrial companies,
virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, changes in interest rates have a more
significant impact on the performance of a financial institution than do the
effects of changes in the general rate of inflation and changes in prices.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services.
Item 7. Financial Statements
The following financial statements are included herein:
Intervest Bancshares Corporation and Subsidiary
Independent Auditors' Report
Balance Sheets as of December 31, 1996 and 1995
Statements of Earnings for the Years Ended December 31, 1996 and 1995 Statements
of Stockholders' Equity for the Years Ended December 31, 1996 and 1995
Statements of Cash Flows for the Years Ended December 31, 1996 and 1995 Notes to
Financial Statements
All schedules are omitted because of the absence of conditions under which
they are required or because the required information is included in the
Financial Statements and related Notes.
31
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders
Intervest Bancshares Corporation
New York, New York:
We have audited the accompanying consolidated balance sheets of Intervest
Bancshares Corporation and Subsidiary (the "Company") as of December 31, 1996
and 1995, and the related consolidated statements of earnings, stockholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
HACKER, JOHNSON, COHEN & GRIEB
Tampa, Florida
January 7, 1997
32
<PAGE>
<TABLE>
<CAPTION>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
($ in thousands, except per share amounts)
At December 31,
---------------
Assets 1996 1995
---- ----
<S> <C> <C>
Cash and due from banks $ 2,868 2,844
Federal funds sold 3,452 5,707
-------- --------
Total cash and cash equivalents 6,320 8,551
Interest-bearing deposits with banks 99 298
Securities held to maturity 34,507 19,630
Loans receivable, net of allowance for loan losses of $811
in 1996 and $593 in 1995 59,499 36,465
Accrued interest receivable 842 643
Premises and equipment, net 2,940 2,449
Restricted securities, Federal Reserve Bank stock, at cost 203 203
Foreclosed real estate 185 --
Deferred income tax asset 526 593
Other assets 75 110
-------- --------
$105,196 68,942
======== ========
Liabilities and Stockholders' Equity
Liabilities:
Demand deposits 2,401 2,729
Savings and NOW deposits 9,278 3,300
Money-market deposits 7,507 3,518
Other time deposits 74,261 49,054
-------- --------
Total deposits 93,447 58,601
Other liabilities 1,676 807
-------- --------
Total liabilities 95,123 59,408
-------- --------
Minority interest 326 345
-------- --------
Commitments (Notes 4 and 7)
Stockholders' Equity:
Class A common stock - $1 par value, 2,600,000 shares
authorized; 900,000 shares issued and outstanding 900 900
Class B common stock - $1 par value, 400,000 shares
authorized; 200,000 shares issued and outstanding 200 200
Additional paid-in capital 7,655 7,655
Retained earnings 992 434
-------- --------
Total stockholders' equity 9,747 9,189
-------- --------
$105,196 68,942
======== ========
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
33
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Earnings
($ in thousands except per share amounts)
Year Ended December 31,
-----------------------
1996 1995
---- ----
Interest income:
Loans receivable $ 4,624 2,878
Securities held to maturity 1,514 1,080
Other interest earning assets 243 232
---------- ----------
Total interest income 6,381 4,190
---------- ----------
Interest expense:
Deposits 3,745 2,225
---------- ----------
Net interest income 2,636 1,965
Provision for loan losses 250 233
---------- ----------
Net interest income after
provision for loan losses 2,386 1,732
---------- ----------
Noninterest income:
Customer service charges 89 82
Other 17 7
---------- ----------
Total noninterest income 106 89
---------- ----------
Noninterest expenses:
Salaries and employee benefits 739 577
Occupancy and equipment 342 379
Advertising and promotion 9 12
Professional fees 88 81
Deposit insurance premiums 2 38
General insurance 31 29
Stationery, printing and supplies 51 45
Other 270 243
Minority interest in subsidiary 19 11
---------- ----------
Total noninterest expenses 1,551 1,415
---------- ----------
Earnings before income taxes 941 406
Income taxes 383 136
---------- ----------
Net earnings $ 558 270
========== ==========
Earnings per share $ .51 .25
========== ==========
Weighted-average number of shares outstanding 1,100,000 1,100,000
========= =========
See Accompanying Notes to Consolidated Financial Statements
34
<PAGE>
<TABLE>
<CAPTION>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(In thousands)
Unrealized
Loss on
Class A Class B Additional Securities Total
Common Common Paid-In Retained Available Stockholders'
Stock Stock Capital Earnings for Sale Equity
----- ----- ------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 900 200 7,668 164 (48) 8,884
Net earnings -- -- -- 270 -- 270
Stock issuance cost -- -- (13) -- -- (13)
Decrease in unrealized loss on
securities available for sale -- -- -- -- 48 48
------ ------ ------ ------ ------
Balance, December 31, 1995 900 200 7,655 434 -- 9,189
Net earnings -- -- -- 558 -- 558
------ ------ ------ ------ ------ ------
Balance, December 31, 1996 $ 900 200 7,655 992 -- 9,747
====== === ===== === == =====
See Accompanying Notes to Consolidated Financial Statements
35
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 558 270
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation 176 170
Provision for deferred income taxes 67 127
Decrease in other assets 35 35
Increase in other liabilities 850 11
Increase in accrued interest receivable (199) (387)
Net amortization of fees, premiums and discounts 271 (36)
Provision for loan losses 250 233
-------- --------
Net cash provided by operating activities 2,008 423
-------- --------
Cash flows from investing activities:
Purchase of Federal Reserve Bank stock -- (30)
Purchase of securities held to maturity (30,025) (22,703)
Maturities of securities held to maturity 15,050 11,900
Net purchases of premises and equipment (667) (1,286)
Net increase in loans (23,642) (14,436)
Purchase of interest-bearing deposits -- (298)
Maturity of interest-bearing deposits 199 397
-------- --------
Net cash used in investing activities (39,085) (26,456)
-------- --------
Cash flows from financing activities:
Net increase in demand, savings,
NOW and money market deposits 9,639 1,894
Net increase in time deposits 25,207 26,615
Stock issuance costs -- (13)
-------- --------
Net cash provided by financing activities 34,846 28,496
-------- --------
Net (decrease) increase in
cash and cash equivalents (2,231) 2,463
Cash and cash equivalents at beginning of year 8,551 6,088
-------- --------
Cash and cash equivalents at end of year $ 6,320 8,551
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 3,678 2,166
======== ========
Income taxes $ 17 --
======== ========
Noncash transactions:
Reclassification of loans
to other real estate owned $ 185 --
======== ========
Unrealized gain on securities available for sale,
net of income tax benefit $ -- (48)
======== ========
Reclassify securities from available for sale
to held to maturity $ -- 750
======== ========
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
36
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1996 and 1995
(1) Description of Business and Summary of Significant Accounting Policies
General. Intervest Bancshares Corporation (the "Holding Company") was
incorporated on February 5, 1993. The Holding Company owns 95.76% of the
outstanding common stock of Intervest Bank (the "Bank") (collectively the
"Company"). The Bank is a Florida state-chartered bank, is insured by the
Federal Deposit Insurance Corporation and is a member of the Federal Reserve
Bank. The Holding Company's primary business is the operation of the Bank.
The Bank provides a wide range of banking services to small and middle-market
businesses and individuals through its four banking offices located in
Pinellas County, Florida.
Basis of Presentation. The accompanying consolidated financial statements of the
Company include the accounts of the Holding Company and the Bank. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and to general practices within the banking
industry. The following summarizes the more significant of these policies
and practices.
Estimates. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents. For purposes of presentation in the consolidated
statements of cash flows, cash and cash equivalents are defined as those
amounts included in the balance-sheet captions "cash and due from banks and
federal funds sold."
Securities Held to Maturity. United States government treasury and agency
securities for which the Company has the positive intent and ability to hold
to maturity are reported at cost, adjusted for amortization of premiums and
accretion of discounts which are recognized in interest income using the
interest method over the period to maturity.
Loans Receivable. Loans receivable that management has the intent and ability to
hold for the foreseeable future or until maturity or pay-off are reported at
their outstanding principal adjusted for any charge-offs, the allowance for
loan losses, and any deferred fees or costs on originated loans.
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield of the related loan.
(continued)
37
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Description of Business and Summary of Significant Accounting Policies,
Continued
Loans Receivable, Continued. The accrual of interest on impaired loans is
discontinued when, in management's opinion, the borrower may be unable to
meet payments as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed. Interest income is subsequently
recognized only to the extent cash payments are received.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Company's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated
value of any underlying collateral, and current economic conditions.
Foreclosed Real Estate. Real estate properties acquired through, or in lieu of,
loan foreclosure are to be sold and are initially recorded at fair value at
the date of foreclosure establishing a new cost basis. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to sell.
Revenue and expenses from operations and changes in the valuation allowance
are included in the consolidated statement of earnings.
Income Taxes. Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As changes in
tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes.
Premises and Equipment. Land is carried at cost. Premises, furniture and
fixtures and equipment are carried at cost, less accumulated depreciation
computed by the straight-line method.
Off-Balance-Sheet Financial Instruments. In the ordinary course of business the
Company has entered into off-balance-sheet financial instruments consisting
of commitment to extend credit, unused lines of credit and stand-by-letters
of credit. Such financial instruments are recorded in the consolidated
financial statements when they are funded or related fees are incurred or
received.
Fair Values of Financial Instruments. The following methods and assumptions were
used by the Company in estimating fair values of financial instruments:
Cash and Cash Equivalents and Interest-Bearing Deposits with Banks. The carrying
amounts of cash and short-term instruments approximate their fair value.
Securities Held to Maturity. Fair values for securities held to maturity are
based on quoted market prices.
Federal Reserve Bank Stock. Book value for these securities approximates fair
value.
(continued)
38
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Description of Business and Summary of Significant Accounting Policies,
Continued
Fair Values of Financial Instruments, Continued. Loans Receivable. For
variable-rate loans that reprice frequently and have no significant change in
credit risk, fair values are based on carrying values. Fair values for
fixed-rate mortgage (e.g. one-to-four family residential), commercial real
estate and commercial loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
Deposit Liabilities. The fair values disclosed for demand, NOW, money-market and
savings deposits are, by definition, equal to the amount payable on demand at
the reporting date (that is, their carrying amounts). Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on time
deposits.
Accrued Interest. The carrying amounts of accrued interest approximate their
fair values.
Off-Balance-Sheet Instruments. Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing.
Advertising. The Company expenses all advertising as incurred.
Earnings Per Share. Earnings per share of common stock has been computed on the
basis of the weighted-average number of shares of common stock outstanding.
The effect of outstanding warrants is not dilutive.
Future Accounting Requirements. The FASB has issued Statement of Financial
Accounting Standards No. 125 ("SFAS 125"). This Statement provides accounting
and reporting standards for transfers and servicing of financial assets as
well as extinguishments of liabilities. This Statement also provides
consistent standards for distinguishing transfers of financial assets that
are sales from transfers that are secured borrowings. SFAS 125 is effective
for transfers and servicing of financial assets as well as extinguishments of
liabilities occurring in 1997. Management does not anticipate SFAS 125 will
have a material impact on the Company.
(continued)
39
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(2) Securities Held to Maturity
Debt securities have been classified in the consolidated balance sheets
according to management's intent. The carrying amount of securities and their
approximate fair values are summarized as follows (in thousands):
Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
December 31, 1996:
U.S. Treasury securities $ 1,499 7 - 1,506
U.S. Government and
agency securities 33,008 44 105 32,947
------- ------- ------- -------
Total $34,507 51 105 34,453
======= ======= ======= =======
December 31, 1995:
U.S. Treasury securities 2,265 -- 2 2,263
U.S. Government and
agency securities 17,365 70 3 17,432
------- ------- ------- -------
Total $ 19,630 70 5 19,695
======= ======= ======= =======
There were no sales of securities in 1996 or 1995.
During 1995, the Company transferred $750,000 of securities from available
for sale to held to maturity at market value which approximated amortized
book value.
The scheduled maturities of securities held to maturity at December 31, 1996
are summarized as follows (in thousands):
Amortized Fair
Cost Value
---- -----
Due in one year or less $ 8,642 8,647
Due after one year through five years 23,855 23,811
Due after five years through ten years 2,010 1,995
------- -------
Total $34,507 34,453
======= =======
(continued)
40
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(3) Loans Receivable
The components of loans in the consolidated balance sheets are summarized
as follows (in thousands):
At December 31,
---------------
1996 1995
---- ----
Commercial loans $ 3,514 4,391
Commercial real estate 54,198 29,719
Residential real estate 2,784 3,046
Consumer loans 157 115
-------- --------
60,653 37,271
Deferred loan fees (343) (186)
Unamortized discounts -- (27)
Allowance for loan losses (811) (593)
-------- --------
$ 59,499 36,465
======== ========
An analysis of the change in the allowance for loan losses follows (in
thousands):
Year Ended December 31,
-----------------------
1996 1995
---- ----
Balance at beginning of year $ 593 369
----- -----
Loans charged-off (65) (30)
Recoveries 33 21
----- -----
Net loans charged-off (32) (9)
----- -----
Provision for loan losses 250 233
----- -----
Balance at end of year $ 811 593
===== =====
The Company had no impaired loans at December 31, 1996 or 1995. The average
recorded investment in impaired loans during 1996 and 1995 was $31,000 and
$5,000, respectively. No interest income on impaired loans was recognized in
1996 or 1995.
(continued)
41
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(4) Premises and Equipment
Premises and equipment is summarized as follows (in thousands):
At December 31,
---------------
1996 1995
---- ----
Land $ 729 729
Bank buildings 1,926 1,397
Leasehold improvements 61 61
Furniture and fixtures and equipment 565 427
------- -------
Total, at cost 3,281 2,614
Less accumulated depreciation and amortization (341) (165)
------- -------
Net book value $ 2,940 2,449
======= =======
In November, 1994 the Company purchased two properties which began operations
as branch offices in March, 1995. In addition, the Company acquired another
property in 1995 which became operational as a branch office in September,
1995.
On November 15, 1996, the Company entered into an agreement to purchase a
property for $185,000 which will be a branch office of the Bank. It is
anticipated that this branch office will open in June, 1997.
Also, the Bank is currently making major renovations to its office located on
Chestnut Street, Clearwater, Florida which will be completed in May, 1997.
The Bank will move its main office to this location. At December 31, 1996,
the Bank has remaining purchase commitments of $523,000 to complete this
renovation.
On September 26, 1986, the Bank entered into a lease agreement for the office
located on Belcher Road in Clearwater, Florida with a corporation, owned
entirely by certain of the Bank's directors, to lease the Bank's premises
(none of which are directors, officers or stockholders of the Holding
Company, Intervest Bancshares Corporation). On January 1, 1989, the Bank
entered into a second lease with the same corporation for additional space in
the same building. In January, 1996, both of these leases were renegotiated
for less space and a lower rental rate. The lease is accounted for as an
operating lease and will expire on October 31, 2007.
(continued)
42
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(4) Premises and Equipment, Continued
The lease agreement contains escalation clauses based upon the consumer price
index and contains annual adjustments up to a maximum of 3% based upon the
previous year's rental. Rental expense was $163,000 and $167,000 for the
years ended December 31, 1996 and 1995, respectively. Approximate future
minimum annual rental payments under these noncancellable leases are as
follows (in thousands):
Year Ending
December 31, Amount
------------ ------
1997 $ 133
1998 92
1999 95
2000 98
2001 101
Thereafter 671
---
Total $ 1,190
=======
The Company leases a portion of their office space in the branch office
located on Ulmerton Road, Largo, Florida and through 1996, its branch office
located on Belcher Road, Clearwater, Florida to other companies. Such leases
begin to expire in 1998. Rental income during 1996 and 1995 totaled
approximately $159,000 and $35,000, respectively. Approximate future minimum
lease income under these leases is as follows (in thousands):
Year Ending
December 31, Amount
------------ ------
1997 $ 191
1998 128
1999 59
2000 58
2001 2
---
Total $ 438
===
(5) Deposits
The aggregate amount of short-term certificates of deposit with a minimum
denomination of $100,000, was approximately $7,261,000 and $4,822,000 at
December 31, 1996 and 1995, respectively.
(continued)
43
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(5) Deposits, Continued
At December 31, 1996, the scheduled maturities of certificates of deposit are
as follows (in thousands):
Year Ending
December 31, Amount
------------ ------
1997 $42,845
1998 10,989
1999 3,254
2000 7,837
2001 and thereafter 9,336
-------
$ 74,261
========
(6) Other Borrowings
The Company has agreements with correspondent banks whereby the Company may
borrow up to $1,000,000 on an overnight basis under a repurchase agreement
and up to $3,457,000 in federal funds. There were no borrowings under these
agreements at December 31, 1996 or 1995.
(7) Financial Instruments
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments are commitments to extend credit and
standby letters of credit and may involve, to varying degrees, elements of
credit and interest-rate risk in excess of the amount recognized in the
consolidated balance sheet. The contract amounts of these instruments reflect
the extent of involvement the Company has in these financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments
as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Company evaluates
each customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained if deemed necessary by the Company upon extension of
credit is based on management's credit evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loans to customers.
(continued)
44
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(7) Financial Instruments, Continued
The estimated fair values of the Company's financial instruments were as
follows (in thousands):
<TABLE>
<CAPTION>
At December 31, 1996 At December 31, 1995
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 6,320 6,320 8,551 8,551
Investment securities held to maturity 34,507 34,453 19,630 19,695
Loans receivable, net 59,499 59,692 36,465 36,653
Accrued interest receivable 842 842 643 643
Federal Reserve Bank stock 203 203 203 203
Interest-bearing deposits with bank 99 99 298 298
Financial liabilities-
Deposit liabilities 93,447 93,713 58,601 58,851
</TABLE>
A summary of the notional amounts of the Company's financial instruments,
which approximate fair value, with off balance sheet risk at December 31,
1996 follows (in thousands):
Unfunded loan commitments at variable rates $2,100
======
Available lines of credit $ 909
======
Standby letters of credit $ 100
======
(8) Credit Risk
The Company grants a majority of its loans to borrowers throughout the State
of Florida. Although the Company has a diversified loan portfolio, a
significant portion of its borrowers' ability to honor their contracts is
dependent upon the economy of the State of Florida. In addition, at December
31, 1996, the Company's loan portfolio contained a concentration of credit
risk in retail shopping centers, apartment buildings and office buildings
totaling $41,585,000.
(9) Income Taxes
The provision for income taxes for the years ended December 31, 1996 and 1995
consisted of the following (in thousands):
Year Ended December 31, 1996:
Current Deferred Total
----------------------
Federal $244 63 307
State 72 4 76
---- ---- ----
Total $316 67 383
==== ==== ====
Year Ended December 31, 1995:
Federal 9 108 117
State -- 19 19
---- ---- ----
Total $ 9 127 136
==== ==== ====
(continued)
45
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(9) Income Taxes, Continued
The reasons for the differences between the statutory Federal income tax
rate and the effective tax rate are summarized as follows:
Year Ended December 31,
1996 1995
---- ----
Tax provision at statutory rate 34.0% 34.0%
Increase (decrease) in taxes resulting from:
State taxes . 8.1 3.2
Other (1.4) (3.7)
---- ----
Income tax provision 40.7% 33.5%
==== ====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets relate to the following at December 31
(in thousands):
1996 1995
---- ----
Net deferred tax assets:
Allowance for loan losses $ 185 95
Depreciation (20) (28)
Deferred loan fees 19 25
Net operating loss carryforward 311 443
Push-down accounting adjustments 31 56
Other -- 2
----- -----
Net deferred tax assets $ 526 593
===== =====
At December 31, 1996, the Company has the following net operating loss
carryforwards relating to the operations of the Bank for federal income tax
purposes available to offset future federal taxable income (in thousands):
Expiration Amount
---------- ------
2004 $149
2005 18
2006 358
2007 298
2008 3
----
$826
====
The net operating loss carryforwards are subject to an annual limitation of
$332,000 due to the ownership change of the Bank when the Holding Company
purchased its controlling ownership interest.
(continued)
46
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(10) Related Parties
The Bank has entered into loan transactions with certain of its directors
and their related entities. The activity for the year ended December 31,
1996 is as follows (in thousands):
Amount
------
Balance at beginning of year $ 1,484
Additions 1,570
Repayments (113)
-------
Balance at end of year $ 2,941
=======
There are no loans to directors or officers of the Holding Company, Intervest
Bancshares Corporation.
(11) Employee Stock Option Plan of the Bank
Prior to 1993, an officer of the Bank had been granted options to acquire 11,000
shares of the Bank's common stock. These options expire on December 31, 2001,
and are exercisable at $5 per share. All such options were exercisable and
outstanding during the years ended December 31, 1996 and 1995.
(12) Profit Sharing Plan
TheBank sponsors a profit sharing plan established in accordance with the
provisions of Section 401(k) of the Internal Revenue Code. The profit sharing
plan is available to all employees electing to participate after meeting
certain length-of-service requirements. The Bank's contributions to the
profit sharing plan are discretionary and are determined annually. Expense
relating to the Bank's contributions to the profit sharing plan included in
the accompanying consolidated financial statements was $12,181 for 1996. The
Bank did not contribute to the profit sharing plan in 1995.
(13) Common Stock Warrants of the Bank
In 1995, Intervest Bancshares Corporation purchased 200,000 shares of the Bank's
common stock at $5.00 per share and received warrants to purchase an
additional 200,000 shares of common stock at $5.00 par value. These warrants
expire December 31, 1999.
(14) Stockholders' Equity
TheBank, as a state-chartered bank, is limited in the amount of cash dividends
that may be paid. The amount of cash dividends that may be paid is based on
the Bank's net earnings of the current year combined with the Bank's retained
net earnings of the preceding two years, as defined by state banking
regulations. However, for any dividend declaration, the Bank must consider
additional factors such as the amount of current period net earnings,
liquidity, asset quality, capital adequacy and economic conditions. It is
likely that these factors would further limit the amount of dividends which
the Bank could declare. In addition, bank regulators have the authority to
prohibit banks from paying dividends if they deem such payment to be an
unsafe or unsound practice. The ability of the Holding Company to pay
dividends could be affected by the amount of dividends the Bank is able to
pay to the Holding Company.
(continued)
47
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(15) Regulatory Matters
TheBank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgements by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1996,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the State and Federal
regulators categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier
I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
Bank's category. The Bank's actual capital amounts and ratios are also
presented in the table (dollars in thousands).
<TABLE>
<CAPTION>
For Well
For Capital Capitalized
Actual Adequacy Purposes: Purposes:
--------------------- -------------------- --------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1996:
Total capital (to Risk
<S> <C> <C> <C> <C> <C> <C>
Weighted Assets) $ 8,051 11.90% $ 5,412 8.00% $ 6,765 10.0%
Tier I Capital (to Risk
Weighted Assets) 7,240 10.70 2,706 4.00 4,059 6.0
Tier I Capital
(to Average Assets) 7,240 7.48 3,871 4.00 4,839 5.0
As of December 31, 1995:
Total capital (to Risk
Weighted Assets) 7,272 16.11 3,610 8.00 4,512 10.0
Tier I Capital (to Risk
Weighted Assets) 6,699 14.85 1,805 4.00 2,708 6.0
Tier I Capital
(to Average Assets) 6,699 10.83 2,475 4.00 3,093 5.0
</TABLE>
(continued)
48
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(16) Holding Company Financial Information
The Holding Company's financial information is as follows at and for the
years ended December 31, 1996 and 1995 (in thousands):
Condensed Balance Sheets
At December 31,
---------------
1996 1995
---- ----
Assets
Cash $ 90 109
Short-term securities 1,158 1,039
------ ------
Cash and cash equivalents 1,248 1,148
Loans receivable 1,230 1,168
Investment in subsidiary 7,340 6,845
Organizational costs, net 32 61
Other assets 17 25
------ ------
Total assets $9,867 9,247
====== ======
Liabilities and Stockholders' Equity
Liabilities 120 58
Stockholders' equity 9,747 9,189
------ ------
Total liabilities and stockholders' equity $9,867 9,247
====== ======
Condensed Statements of Earnings
For the Year Ended
December 31,
------------
1996 1995
---- ----
Revenues $ 325 169
Expenses 224 107
------ ------
Earnings before earnings of subsidiary 101 62
Earnings of subsidiary 457 208
------ ------
Net earnings $ 558 270
====== ======
(continued)
49
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(16) Holding Company Financial Information, Continued
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
For the Year Ended
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 558 270
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Equity in undistributed income of subsidiary (457) (208)
Net decrease in organizational costs 29 30
Other 53 90
Decrease in minority interest 19 --
------- -------
Net cash provided by operating activities 202 182
------- -------
Cash flows used in investing activities -
Net increase in loans (62) (1,168)
------- -------
Cash flows from financing activities-
Purchase of common stock of subsidiary (40) (1,000)
------- -------
Net cash used in financing activities (40) (1,000)
------- -------
Net increase (decrease) in cash and cash equivalents 100 (1,986)
Cash and cash equivalents at beginning of the year 1,148 3,134
------ -------
Cash and cash equivalents at end of year $ 1,248 1,148
======= =======
</TABLE>
(17) Common Stock Recapitalization and Stock Warrants
On July 19, 1994, the Company's charter was amended to authorize 200,000
shares of Class B Common Stock, 200,000 shares of Preferred Stock and to
increase the authorized shares of Class A Common Stock to 2,600,000. At that
time, the Company issued the 200,000 shares of Class B Common Stock to its
then stockholders without any change in total stockholders' equity. On
October 10, 1996, the Company's charter was further amended to increase the
authorized number of shares of Class B Common Stock to 400,000.
(continued)
50
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(17) Common Stock Recapitalization and Stock Warrants, Continued
Both classes of common stock have equal voting rights as to all matters, except
that, so long as at least 50,000 shares of Class B Common Stock remain issued
and outstanding the holders of the outstanding shares of Class B Common Stock
are entitled to vote for the election of two-thirds of the directors (rounded
to the nearest whole number) and the holders of the outstanding shares of
Class A Common Stock are entitled to vote for the remaining directors of the
Company. No dividends may be declared or paid with respect to shares of Class
B Common Stock until January 1, 2000, after which time the holders of Class A
Common Stock and Class B Common Stock will share ratably in dividends. The
shares of Class B Common Stock are convertible, on a share-for-share basis,
into Class A Common Stock at any time after January 1, 2000.
At December 31, 1996, there were issued and outstanding warrants related to the
purchase of 1,019,110 shares of Class A Common Stock and the Company has
reserved a total of 1,019,110 shares of its Class A Common Stock for
issuance, from time to time, upon exercise of these warrants. Of these
warrants, 684,800 are exercisable at any time on or before December 31, 2001
and represent the right to purchase one share of Class A Common Stock at a
purchase price of $10.00 per share (subject to adjustment in connection with
certain issuances of securities). The remaining warrant is exercisable at any
time on or before January 31, 2006 and represents the right to purchase
334,310 shares of Class A Common Stock at a purchase price of $10.00 per
share (subject to adjustment in connection with certain future issuances of
securities). As of December 31, 1996 none of the Company's warrants had been
exercised.
During 1996, the Board of Directors authorized, subject to regulatory approval,
the issuance of a warrant to purchase 100,000 shares of Class B Common Stock
to its Chairman of the Board. The warrant is exercisable at a price of $10.00
per share at any time on or before January 31, 2007 (subject to adjustment in
connection with certain future issuances of securities). A total of 100,000
shares of the Company's Class B Common Stock has been reserved for issuance
upon exercise of the foregoing warrant. It is expected that this warrant will
be issued in February, 1997.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," which
establishes financial accounting and reporting standards for stock-based
employee compensation plans. As permitted by this Statement, the Company has
elected to continue utilizing the intrinsic value method of accounting
defined in APB Opinion No. 25. Due to the exercise price of the warrants
approximating the market value of the common stock at the date of grant, no
compensation expense has been recognized in the consolidated statement of
operations.
Each warrant entitles the holder to purchase one share of common stock. All
warrants, when issued, were immediately exercisable and the exercise price
and number of shares for all warrants are subject to adjustments in
connection with future issuance of securities. No warrants were exercised or
forfeited during 1996 or 1995.
Dueto the adjustable nature of the warrants issued to purchase Class A common
stock, it was not possible to reasonably estimate the fair value of the
warrants, therefore the estimate of compensable cost was based on the current
intrinsic value of the warrants as if the warrants were currently exercised,
which would result in no compensation cost.
51
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
Lawrence G. Bergman, age 52, serves as a Director, Vice President and
Secretary of the Company and has served in such capacities since the Company was
organized. Mr. Bergman received a Bachelor of Science degree and a Master of
Engineering (Electrical) degree from Cornell University, and a Master of Science
in Engineering and a Ph.D degree from The Johns Hopkins University. Mr. Bergman
is also Co-Chairman of the Board of Directors and a member of the Loan Committee
of the Bank and a Director, Vice-President and Secretary of Intervest
Corporation of New York. During the past five years Mr. Bergman has been
actively involved in the ownership and operation of real estate and mortgage
investments.
Michael A. Callen, age 56, serves as a Director of the Company, and has
served in such capacity since May, 1994. Mr Callen received a Bachelor of Arts
degree from the University of Wisconsin in Economics and Russian. Mr. Callen has
been Senior Advisor, The National Commercial Bank, Jeddah, Kingdom of Saudi
Arabia since May, 1993. From the fall of 1992 through February of 1993, he was
an Adjunct Professor of International Banking at Columbia University Business
School. From 1987 until February of 1992 he was a Director and Sector Executive
at Citicorp/Citibank, responsible for corporate banking activities in North
America, Europe and Japan. He is also a Director of Intervest Corporation of New
York and AMBAC, Inc.
Jerome Dansker, age 78, serves as Chairman of the Board of Directors and
Executive Vice President of the Company. He has served as Executive Vice
President since 1994 and as Chairman of the Board since 1996. Mr. Dansker
received a Bachelor of Science degree from the New York University School of
Commerce, Accounts and Finance, a law degree from the New York University School
of Law, and is admitted to practice as an attorney in the State of New York. Mr.
Dansker is also a Director and Chairman of the Loan Committee of the Bank and is
Chairman of the Board of Directors and Executive Vice President of Intervest
Corporation of New York. During the past five years, Mr. Dansker has been
actively involved in the ownership and operation of real estate and mortgage
investments.
Lowell S. Dansker, age 46, serves as a Director, President and Treasurer
of the Company, and has served in such capacities since the Company was
organized. Mr. Dansker received a Bachelor of Science in Business Administration
from Babson College, a law degree from the University of Akron School of Law,
and is admitted to practice as an attorney in New York, Ohio, Florida and the
District of Columbia. Mr. Dansker is also Co-Chairman of the Board of Directors
and a member of the Loan Committee of the Bank and a Director, President and
Treasurer of Intervest Corporation of New York. During the past five years, Mr.
Dansker has been actively involved in the ownership and operation of real estate
and mortgage investments.
Milton F. Gidge, age 67, serves as a Director of the Company, and has
served in such capacity since March, 1994. Mr. Gidge received a Bachelor of
Business Administration degree in Accounting from Adelphi University and a
Masters Degree in Banking and Finance from New York University. Mr. Gidge
retired in 1994 and, prior to his retirement, was a Director and Chairman-Credit
Policy of Lincoln Savings Bank, F.S.B. (headquartered in New York City). He is
also a Director of Intervest Corporation of New York, Interboro Mutual Indemnity
Insurance Company and Vicon Industries, Inc. Mr. Gidge was an officer of Lincoln
Savings Bank, F.S.B. for more than five years.
52
<PAGE>
William F. Holly, age 68, serves as a Director of the Company and has
served in such capacity since March, 1994. Mr. Holly received a Bachelor of Arts
degree in Economics from Alfred University. Mr. Holly is Chairman of the Board
and CEO of Sage, Rutty & Co., Inc., members of the Boston Stock Exchange, with
offices in Rochester, New York and Canandaigua, New York, and is also a Director
of Intervest Corporation of New York and a Trustee of Alfred University. Mr.
Holly has been an officer and director of Sage, Rutty & Co., Inc. for more than
five years.
David J. Willmott, age 59, serves as a Director of the Company, and has
served in such capacity since March, 1994. Mr. Willmott is a graduate of Becker
Junior College and attended New York University Extension and Long Island
University Extension of Southampton College. Mr. Willmott is the Editor and
Publisher of Suffolk Life Newspapers, which he founded more than 25 years ago
and is a Director of Intervest Corporation of New York.
Wesley T. Wood, age 54, serves as a Director of the Company, and has
served in such capacity since March, 1994. Mr. Wood received a Bachelor of
Science degree from New York University, School of Commerce. Mr. Wood is
President of Marketing Capital Corporation, an international marketing
consulting and investment firm which he founded in 1973. He is also a Director
of Intervest Corporation of New York, a Director of the Center of Direct
Marketing at New York University, a member of the Marketing Committee at
Fairfield University in Connecticut, and a Trustee of St. Dominics R.C. Church
in Oyster Bay, New York.
All of the directors of the Company have been elected to serve as
directors until the next annual meeting of the Company's shareholders. Each of
the officers of the Company has been elected to serve as an officer until the
next annual meeting of the Company's directors.
Mr. Bergman's wife is the sister of Lowell S. Dansker, and Jerome
Dansker is the father of Lowell S. Dansker and Mrs. Bergman.
Item 10. Executive Compensation
The following table sets forth all compensation paid during the last
three years to the Bank's chief executive officer. No other officer of the
Company or Bank had annual compensation in excess of $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
Other Annual
Name and Principal Year Salary(1) Bonuses Compensation Awards(2) Pay-Outs
---- ------ ------- ------------ --------- --------
Position
<S> <C> <C> <C> <C> <C> <C>
Keith A. Olsen, 1994 $87,500 $ 6,500 ---- ---- ----
President
1995 $90,000 $10,000 ---- 10,000
1996 $95,000 $10,000 ---- 10,000
</TABLE>
- ------------------------------
(1) All compensation or enumeration paid to employees is paid by the Bank.
At the present time, there are no separate employees of the Company and
there is no compensation paid by the Company.
(2) These represent warrants to purchase shares of Class A Common Stock.
53
<PAGE>
Directors of the Company are paid director's fees of $500 per meeting.
Directors of the Bank are paid director's fees of $100 per meeting.
The Bank has a written agreement with Mr. Keith A. Olsen. The agreement
provides for a four-year term of employment at a base annual salary of not less
than $125,000. The agreement provides for the payment of one year severance upon
termination of employment.
Fringe Benefits
The Bank maintains a 401(k) and Profit Sharing Plan which encourages the
accumulation of savings for participants' retirement. While the plan permits
401(k) matching contributions, as well as employer profit-sharing contributions
in the discretion of the Bank, no such contributions have been made to date.
Stock Option Plan-Bank
The Bank maintains a 1992 Stock Option Plan (the "Option Plan"), which
provides for the grant of options to key employees of the Bank. The Compensation
Committee administers the Option Plan and determines those employees to whom
options will be granted. Up to 70,000 shares of common stock of the Bank may be
issued pursuant to options granted under the Option Plan, and no option may be
granted after April 16, 2002.
The options granted pursuant to the Option Plan are non-transferable
other than by will or under the laws of descent and distribution. The options
vest over 5 years after the date of grant at the rate of 20% per year. Options
may not be exercised more than 10 years after the date of grant. The exercise
price of options granted under the Option Plan may not be less than the fair
market value of the common stock of the Bank on the date of grant.
As of December 31, 1996, no shares of common stock had been issued upon
the exercise of options granted under the Option Plan, and options to purchase
11,000 shares of common stock at an exercise price of $5.00 were held by one
employee, which expires on December 31, 2001. It is expected that no further
options will be granted under the Option Plan.
Warrants
At December 31, 1996, there were issued and outstanding warrants related
to the purchase of 1,019,110 shares of Class A Common Stock and the Company has
reserved a total of 1,019,110 shares of Class A Common Stock for issuance, from
time to time, upon exercise of these warrants. Of these warrants, 684,800 are
exercisable at any time on or before December 31, 2001 and represent the right
to purchase one share of Class A Common Stock at a purchase price of $10.00 per
share (subject to adjustment in connection with certain issuances of
securities). The remaining warrant is exercisable at any time on or before
January 31, 2006 and represents the right to purchase 334,310 shares of Class A
Common Stock at a purchase price of $10.00 per share (subject to adjustment in
connection with certain future issuances of securities). As of December 31, 1996
none of the Company's warrants had been exercised.
During 1996, the Board of Directors authorized the issuance of a warrant
to purchase 100,000 shares of Class B Common Stock to the Chairman of the Board.
The warrant is exercisable at a price of $10.00 per share at any time on or
54
<PAGE>
before January 31, 2007 (subject to adjustment in connection with certain future
issuances of securities). A total of 100,000 shares of the Company's Class B
Common Stock has been reserved for issuance upon exercise of the foregoing
warrant.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding common stock as of March 15, 1997 by
directors and executive officers of the Company, and the other person who owns
more than 5% of the issued and outstanding shares. Except as otherwise
indicated, the persons named in the table have sole voting and investment power
with respect to all shares of common stock owned by them.
<TABLE>
<CAPTION>
Class A Common Stock Class B Common Stock
Name and Address of
Beneficial Holder Number of Shares Percent of Class(Number of Shares Percent of Class
- ----------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Helene D. Bergman 150,000 16.67% 50,000 16.67%
201 East 62nd Street
New York, New York 10021
Lawrence G. Bergman 205,000(2) 20.21% 50,000 16.67%
201 East 62nd Street
New York, New York 10021
Lowell S. Dansker 355,000(2) 36.17% 100,000 33.33%
360 West 55th Street
New York, New York 10019
Michael A. Callen 30,000(3) 2.72% 0 0%
Ryutat
Jeddah, Saudi Arabia
Jerome Dansker 335,000(4) 26.23% 100,000 33.33%
860 Fifth Avenue
New York, New York 10021
Milton F. Gidge 21,000(5) 1.75% 0 0%
43 Salem Ridge Drive
Huntington, New York 11743
William F. Holly 30,000(6) 2.70% 0 0%
206 Edgemere Drive
Rochester, New York 14612
David J. Wilmott 63,000(7) 6.21% 0 0%
West Way
Southhampton, New York
Wesley T. Wood 65,000(8) 6.42% 0 0%
24 Timber Ridge Drive
Oyster Bay, New York 11771
All directors and executive
officers as a group 1,254,000 85.98% 200,000 100%
---------
</TABLE>
55
<PAGE>
- -----------------------------
(1) Percentages have been computed based upon the total outstanding shares
of the Company plus, for each person and the group, shares that person
or the group has the right to acquire pursuant to warrants.
(2) Includes 55,000 shares of Class A common stock issuable upon the
exercise of warrants.
(3) Includes 22,500 shares of Class A common stock issuable upon the
exercise of warrants.
(4) The 335,000 shares of Class A common stock are issuable upon the
exercise of outstanding warrants. The 100,000 shares of Class B Common
Stock are issuable upon exercise of a warrant.
(5) Includes 18,000 shares of Class A common stock issuable upon the
exercise of warrants.
(6) Includes 22,500 shares of Class A common stock issuable upon the
exercise of warrants.
(7) Includes 4,000 shares of Class A common stock owned by members of Mr.
Willmott's family, as well as 35,000 shares of Class A common stock
which Mr. Willmott has the right to acquire (and 4,000 shares of Class
A common stock which family members have the right to acquire) upon the
exercise of warrants.
(8) Includes 40,000 shares of Class A common stock which Mr. Wood has the
right to acquire upon the exercise of warrants.
Item 12. Certain Relationships and Related Transactions
The Bank has had, and expects to have in the future, various loan and
other banking transactions in the ordinary course of business with directors,
and executive officers (or associates of such persons). In the opinion of
management, all such transactions: (i) have been and will be made the ordinary
course of business, (ii) have been and will be made on substantially the same
terms, including interest rates and collateral on loans, as those generally
prevailing at the time for comparable transactions with unrelated persons, and
(iii) have not and will not involve more than the normal risk of collectability
or present other unfavorable features. The total dollar amount of extensions of
credit, including unused lines of credit, to directors and executive officers
and any of their associates was $2.9 million as of December 31, 1996, which
represented approximately 29.9% of total stockholders' equity.
The holding company, as well as corporations affiliated with certain
directors of the Company, have in the past and may in the future participate in
mortgage loans originated by the Bank. Such participations are on substantially
the same terms as would apply for comparable transactions with other persons and
the interest of the participants in the collateral securing those loans is pari
passu with the Bank.
Except for the lease described below and outside of normal customer
relationships, none of the directors, officers, or present shareholders of the
Company and no corporations or firms with which such persons or entities are
associated, currently maintains or has maintained since the beginning of the
last fiscal year, any significant business or personal relationship with the
Company or the Bank, other than such as arises by virtue of such position or
ownership interest in the Company or the Bank.
The Bank leases certain office facilities from a corporation in which
Robert J. Carroll, a director of the Bank, is an officer and in which he has an
ownership interest. See Note 4 to Notes to Consolidated Financial Statements.
56
<PAGE>
Item 13. Exhibits, Lists and Reports on Form 8-K
(a) The following exhibits are incorporated by reference herein:
Exhibit Number Description of Exhibit
- -------------- ----------------------
3.1 Restated Certificate of Incorporation of the Company,
incorporated by reference from the Company Registration
Statement on Form SB-2 (No. 33-82246), filed with the
Commission on August 1, 1994 (the "Registration Statement"),
wherein such document is identified as Exhibit 3.1.
3.2 Bylaws of the Company, incorporated by reference from the
Registration Statement, wherein such document is identified
as Exhibit 3.2.
4.1 Form of Certificate for Shares of Class A Common Stock,
incorporated by reference from the Company's Pre-Effective
Amendment No. 1 to Registration Statement on Form SB-2 (No.
33- 82246), filed with the Commission on September 15, 1994.
4.2 Form of Certificate for Shares of Class B Common Stock,
incorporated by reference from Pre-Effective Amendment No. 1
to Registration Statement on Form SB-2 (No. 33-82246), filed
with the Commission on September 15, 1994.
4.3 Form of Warrant issued to Mr. Jerome Dansker, incorporated
by reference from the Company's Report on Form 10-K for the
year ended December 31, 1995, wherein such document is
identified as Exhibit 4.2.
4.4 Form of Warrant is included as Exhibit A to Exhibit 4.5
below.
4.5 Form of Warrant Agreement between the Company and the Bank
of New York, incorporated by reference from Pre-Effective
Amendment No. 1 to Registration Statement on Form SB-2 (No.
33-82246), filed with the Commission on September 15, 1994.
57
<PAGE>
4.6 Amendment to Warrant Agreement between the Company and the
Bank of New York, incorporated by reference from the
Company's Report on Form 10-K for the year ended December
31, 1995, wherein such document is identified as Exhibit
4.6.
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
58
<PAGE>
SIGNATURES
PURSUANT to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 26th day of
March, 1997.
INTERVEST BANCSHARES CORPORATION
(Registrant)
By: /s/ Lowell S. Dansker
---------------------
Lowell S. Dansker, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Title Date
----- ----
<S> <C> <C>
/s/ Lawrence G. Bergman Vice President, 3/26/97
- --------------------------
Lawrence G. Bergman Secretary and Director
Director __________________
- --------------------------
Michael A. Callen
/s/ Jerome Dansker Chairman of the Board, 3/26/97
- --------------------------
Jerome Dansker Executive Vice President, Director
/s/ Lowell S. Dansker President, Treasurer and 3/26/97
- --------------------------
Lowell S. Dansker Director (Principal Executive),
Financial and Accounting Officer)
Director ___________________
- --------------------------
Milton F. Gidge
/s/ William F. Holly Director 3/26/97
- --------------------------
William F. Holly
Director ___________________
- --------------------------
David J. Willmott
/s/ Wesley T. Wood Director 3/26/97
- --------------------------
Wesley T. Wood
</TABLE>
59
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,868
<INT-BEARING-DEPOSITS> 99
<FED-FUNDS-SOLD> 3,452
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 34,507
<INVESTMENTS-MARKET> 34,453
<LOANS> 60,310
<ALLOWANCE> 811
<TOTAL-ASSETS> 105,196
<DEPOSITS> 93,447
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,002
<LONG-TERM> 0
0
0
<COMMON> 1,100
<OTHER-SE> 8,647
<TOTAL-LIABILITIES-AND-EQUITY> 105,196
<INTEREST-LOAN> 4,624
<INTEREST-INVEST> 1,514
<INTEREST-OTHER> 243
<INTEREST-TOTAL> 6,381
<INTEREST-DEPOSIT> 3,745
<INTEREST-EXPENSE> 3,745
<INTEREST-INCOME-NET> 2,636
<LOAN-LOSSES> 250
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,551
<INCOME-PRETAX> 941
<INCOME-PRE-EXTRAORDINARY> 941
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 558
<EPS-PRIMARY> .51
<EPS-DILUTED> .51
<YIELD-ACTUAL> 8.02
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 593
<CHARGE-OFFS> 65
<RECOVERIES> 33
<ALLOWANCE-CLOSE> 811
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
