U.S. SECURTIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO _______
Commission File No. 000-23377
INTERVEST BANCSHARES CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware
------------------------------------
(State or other jurisdiction of incorporation)
13-3699013
------------------------------------
(I.R.S. employer identification no.)
10 Rockefeller Plaza, Suite 1015
New York, New York 10020-1903
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(Address of principal executive offices)
(212) 757-7300
------------------------------------
(Issuer's telephone number, including area code)
------------------------------------
(Former name, address and fiscal year, if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by Section
12, 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days: YES XX NO .
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Title of Each Class:
--------------------
Class A Common Stock, $1.00 par value per share
-----------------------------------------------
Class B Common Stock, $1.00 par value per share
-----------------------------------------------
Shares Outstanding:
-------------------
2,157,915 Outstanding at July 17, 1998
--------------------------------------
300,000 Outstanding at July 17, 1998
------------------------------------
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
FORM 10-QSB
June 30, 1998
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Financial Condition as of
June 30, 1998 and December 31, 1997.................. 1
Condensed Consolidated Statements of Income for the Quarters Ended
June 30, 1998 and 1997.................................. 2
Condensed Consolidated Statements of Income for the Six Months Ended
June 30, 1998 and 1997.................................. 3
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the Six Months Ended June 30, 1998 and 1997.. 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1998 and 1997................. 5
Notes to Condensed Consolidated Financial Statements ..... 6
Item 2. Management's Discussion and Analysis or Plan of Operation......... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 16
Item 2. Changes in Securities............................................. 16
Item 3. Defaults Upon Senior Securities................................... 16
Item 4. Submission of Matters to a Vote of Security Holders............... 16
Item 5. Other Information................................................. 17
Item 6. Exhibits and Reports on Form 8-K ................................. 17
Signatures................................................................ 18
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Intervest Bancshares Corporation and Subsidiary
Condensed Consolidated Statements of Financial Condition
(Unaudited)
June 30, December 31,
($ in thousands, except par value) 1998 1997 Change
- - --------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 6,676 $ 1,738 $4,938
Federal funds sold 6,021 162 5,859
Short-term investments 6,399 7,276 (877)
----- ----- ----
Total cash and cash equivalents 19,096 9,176 9,920
Interest-bearing deposits with banks 199 99 100
Securities held to maturity, net
(estimated fair value of
$60,965 and $58,836, respectively) 60,842 58,821 2,021
Federal Reserve Bank stock, at cost 233 233 -
Loans receivable (net of allowance for loan
losses of $1,405 and $1,173, respectively) 89,556 75,652 13,904
Accrued interest receivable 1,513 1,327 186
Premises and equipment, net 5,028 4,877 151
Deferred income tax asset 479 485 (6)
Other assets 751 85 666
- - --------------------------------------------------------------------------------
Total assets $177,697 $150,755 $26,942
- - --------------------------------------------------------------------------------
LIABILITIES
Deposits:
Demand deposits $ 2,898 $ 3,490 $ (592)
Savings and NOW deposits 22,504 17,119 5,385
Money-market deposits 21,944 17,180 4,764
Time deposits 101,496 93,378 8,118
------- ------ -----
Total deposits 148,842 131,167 17,675
Convertible debentures 7,000 - 7,000
Other liabilities 3,314 1,947 1,367
- - --------------------------------------------------------------------------------
Total liabilities 159,156 133,114 26,042
- - --------------------------------------------------------------------------------
Minority interest 23 21 2
STOCKHOLDERS' EQUITY
Preferred stock
(300,000 shares authorized, none issued) - - -
Class A common stock
($1.00 par value, 7,500,000 shares
authorized, 2,157,915 and 2,124,415
shares issued and outstanding, respectively) 2,158 2,124 34
Class B common stock
($1.00 par value, 700,000 shares authorized,
300,000 issued and outstanding) 300 300 -
Additional paid-in-capital, common 13,591 13,360 231
Retained earnings 2,469 1,836 633
- - --------------------------------------------------------------------------------
Total stockholders' equity 18,518 17,620 898
- - --------------------------------------------------------------------------------
Total liabilities, minority interest and
stockholders' equity $177,697 $150,755 $26,942
- - --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
1
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Condensed Consolidated Statements of Income
(Unaudited)
For the Quarter Ended
June 30,
---------------------
($ in thousands, except per share data) 1998 1997 Change
- - --------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Loans receivable $1,991 $1,569 $ 422
Securities 1,009 623 386
Other interest-earning assets 109 27 82
- - --------------------------------------------------------------------------------
Total interest and dividend income 3,109 2,219 890
- - --------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 1,958 1,378 580
Borrowed funds 17 1 16
- - --------------------------------------------------------------------------------
Total interest expense 1,975 1,379 596
- - --------------------------------------------------------------------------------
Net interest and dividend income 1,134 840 294
Provision for loan losses 130 92 38
- - --------------------------------------------------------------------------------
Net interest and dividend income
after provision for loan losses 1,004 748 256
- - --------------------------------------------------------------------------------
NONINTEREST INCOME
Customer service fees 43 29 14
Other 8 8 --
- - --------------------------------------------------------------------------------
Total noninterest income 51 37 14
- - --------------------------------------------------------------------------------
NONINTEREST EXPENSES
Salaries and employee benefits 270 222 48
Occupancy and equipment, net 82 101 (19)
Advertising and promotion 4 31 (27)
Professional fees 60 50 10
Other 111 75 36
- - --------------------------------------------------------------------------------
Total noninterest expenses 527 479 48
- - --------------------------------------------------------------------------------
Income before income taxes 528 306 222
Income taxes 203 119 84
- - --------------------------------------------------------------------------------
Net income $ 325 $ 187 $ 138
- - --------------------------------------------------------------------------------
Basic earnings per share $ 0.13 $ 0.11 $ 0.02
Diluted earnings per share $ 0.10 $ 0.09 $ 0.01
- - --------------------------------------------------------------------------------
See accompanying notes to the condensed consolidated financial statements.
2
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Condensed Consolidated Statements of Income
(Unaudited)
For the Six Months Ended
June 30,
------------------------
($ in thousands, except per share data) 1998 1997 Change
- - --------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Loans receivable $ 3,801 $ 3,003 $ 798
Securities 2,038 1,232 806
Other interest-earning assets 179 69 110
- - --------------------------------------------------------------------------------
Total interest and dividend income 6,018 4,304 1,714
- - --------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 3,796 2,687 1,109
Borrowed funds 18 1 17
- - --------------------------------------------------------------------------------
Total interest expense 3,814 2,688 1,126
- - --------------------------------------------------------------------------------
Net interest and dividend income 2,204 1,616 588
Provision for loan losses 230 184 46
- - --------------------------------------------------------------------------------
Net interest and dividend income
after provision for loan losses 1,974 1,432 542
- - --------------------------------------------------------------------------------
NONINTEREST INCOME
Customer service fees 88 56 32
Other 12 12 --
- - --------------------------------------------------------------------------------
Total noninterest income 100 68 32
- - --------------------------------------------------------------------------------
NONINTEREST EXPENSES
Salaries and employee benefits 516 438 78
Occupancy and equipment, net 156 191 (35)
Advertising and promotion 11 42 (31)
Professional fees 103 64 39
Other 250 205 45
- - --------------------------------------------------------------------------------
Total noninterest expenses 1,036 940 96
- - --------------------------------------------------------------------------------
Income before income taxes 1,038 560 478
Income taxes 405 213 192
- - --------------------------------------------------------------------------------
Net income $ 633 $ 347 $ 286
- - --------------------------------------------------------------------------------
Basic earnings per share $ 0.26 $ 0.21 $ 0.05
Diluted earnings per share $ 0.19 $ 0.18 $ 0.01
- - --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Condensed Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
For the Six Months Ended
June 30,
------------------------
($ in thousands) 1998 1997
ClASS A COMMON STOCK
Balance at beginning of period $ 2,124 $ 900
Issuance of 33,500 shares upon exercise of warrants 34 --
- - --------------------------------------------------------------------------------
Balance at end of period 2,158 900
- - --------------------------------------------------------------------------------
ClASS B COMMON STOCK
- - --------------------------------------------------------------------------------
Balance at beginning and end of period 300 200
- - --------------------------------------------------------------------------------
ADDITIONAL PAID-IN-CAPITAL, COMMON
Balance at beginning of period 13,360 7,655
Compensation related to issuance of stock warrants 30 --
Issuance of 33,500 shares upon exercise of stock warrants 201 --
- - --------------------------------------------------------------------------------
Balance at end of period 13,591 7,655
- - --------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of period 1,836 992
Net income for the period 633 347
- - --------------------------------------------------------------------------------
Balance at end of period 2,469 1,339
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Total stockholders' equity at end of period $18,518 $10,094
- - --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months Ended
June 30,
------------------------
($ in thousands) 1998 1997
- - --------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 633 $ 347
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 125 108
Provision for loan losses 230 184
Provision for deferred income taxes 18 31
Accrued interest expense on debentures 16 --
Compensation expense related to stock warrants 30 --
Amortization of premiums, fees and discounts, net 69 12
Increase in accrued interest receivable and other assets (374) (183)
Increase in other liabilities 1,246 579
----- ---
Net cash provided by operating activities 1,993 1,078
----- -----
INVESTING ACTIVITIES
Increase to interest-earning deposits (100) --
Principal repayments of securities held to maturity 21,576 11,358
Purchases of securities held to maturity (23,568) (15,128)
Net increase in loans receivable (14,136) (10,256)
Purchases of premises and equipment, net (278) (1,135)
Sales of foreclosed real estate -- 184
------- -------
Net cash used by investing activities (16,506) (14,977)
------- -------
FINANCING ACTIVITIES
Net increase in demand, savings, NOW and
money-market deposits 9,557 10,017
Net increase in time deposits 8,118 1,398
Proceeds from convertible debentures and
other borrowed funds 7,683 --
Repayment of other borrowed funds (1,160) --
Proceeds from issuance of common stock 235 --
------ ------
Net cash provided by financing activities 24,433 11,415
------ ------
Net increase (decrease) in cash and cash equivalents 9,920 (2,484)
Cash and cash equivalents at beginning of period 9,176 6,320
------ ------
Cash and cash equivalents at end of period $ 19,096 $ 3,836
------ ------
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 3,798 $ 2,684
Income taxes 229 397
Noncash financing activities:
Outstanding stock warrants 30 --
Interest on convertible debentures 16 --
------- -------
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Notes to Condensed Consolidated Financial Statements (Unaudited)
- - --------------------------------------------------------------------------------
Note 1 - General
The consolidated financial statements of Intervest Bancshares
Corporation and Subsidiary (the "Company") in this report have not been audited
except for the information derived from the audited Consolidated Statement of
Financial Condition as of December 31, 1997. These statements should be read in
conjunction with the consolidated financial statements and related notes thereto
included in the Company's Annual Report to Stockholders on Form 10-KSB for the
year ended December 31, 1997.
The consolidated financial statements include the accounts of Intervest
Bancshares Corporation, a bank holding company, and its subsidiary, Intervest
Bank. The holding company's primary business activity is the ownership of the
bank. All intercompany accounts and transactions have been eliminated in
consolidation. In the opinion of management, all material adjustments necessary
for a fair presentation of financial condition and results of operations for the
interim periods presented have been made. These adjustments are of a normal
recurring nature. The results of operations for the interim periods are not
necessarily indicative of results that may be expected for the entire year or
any other interim period. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses. Actual results
could differ from those estimates. Certain reclassifications have been made to
prior period amounts to conform to the current periods' presentations.
Note 2 - Loan Impairment and Credit Losses
No loans were identified as being impaired during the 1998 and 1997
reporting periods. The table below summarizes the activity in the allowance for
loan losses:
- - --------------------------------------------------------------------------------
For the For the
Quarter Ended Six Months Ended
June 30, June 30,
------------- ----------------
($ in thousands) 1998 1997 1998 1997
- - --------------------------------------------------------------------------------
Balance at beginning of period $1,274 $ 906 $1,173 $ 811
Provision for loan losses
charged to operations 130 92 230 184
Recoveries 1 1 2 4
- - --------------------------------------------------------------------------------
Balance at end of period $1,405 $ 999 $1,405 $ 999
- - --------------------------------------------------------------------------------
Note 3 - Convertible Debentures
On June 26, 1998, the Company sold $7,000,000 of Convertible Subordinated
Debentures (the "Debentures"). The proceeds from the sale, net of underwriting
discounts, commissions and other fees, amounted to approximately $6,500,000. The
proceeds are part of the Company's capital funds and are not restricted to their
usage. The Debentures are due July 1, 2008 and are convertible at the option of
the holders at any time prior to April 1, 2008, unless previously redeemed by
the Company, into shares of Class A common stock at an initial conversion price
of $11.50 per share through December 31, 1998. The initial conversion price was
determined based on the average closing prices of the Class A common stock
during the 20 trading days prior to June 26, 1998. The table that follows on
page 7 shows the conversion prices beginning January 1, 1999.
6
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Notes to Condensed Consolidated Financial Statements (Unaudited)
- - --------------------------------------------------------------------------------
Period Conversion Price Per Share
------ --------------------------
From January 1, 1999 to June 30, 1999 $12.50
From July 1, 1999 to June 30, 2000 14.00
From July 1, 2000 to June 30, 2001 15.50
From July 1, 2001 to June 30, 2002 17.00
From July 1, 2002 to June 30, 2003 18.50
From July 1, 2003 to June 30, 2004 20.50
From July 1, 2004 to June 30, 2005 22.50
From July 1, 2005 to June 30, 2006 25.50
From July 1, 2006 to June 30, 2007 28.50
From July 1, 2007 to April 1, 2008 32.50
The Company has the right to establish conversion prices per share which
are less than the conversion prices set forth above for such periods as the
Company may determine. The conversion prices are also subject to adjustments
based on certain conditions and circumstances.
The Company also has the option at any time to call all or any part of the
Debentures for payment and redeem the same at any time prior to maturity
thereof. The redemption price for the Debentures is (i) the face amount plus a
2% premium if the date of redemption is prior to July 1, 1999, (ii) the face
amount plus a 1% premium if redemption occurs on or after July 1, 1999 and prior
to July 1, 2000, or (iii) the face amount if the date of redemption is on or
after July 1, 2000. In all cases, the debenture holder will also receive accrued
interest to the date of redemption.
Interest on the Debentures will accrue and compound each calendar quarter
at 8%, which represents the prime rate of Chase Manhattan Bank on June 26, 1998,
less one-half of one percent. All accrued interest is payable at the maturity of
the Debentures whether by acceleration, redemption or otherwise. Any debenture
holder may, on or before July 1 of each year commencing July 1, 2003, elect to
be paid all accrued interest and to thereafter receive payments of interest
quarterly. Once made, the election to receive interest is irrevocable.
Note 4 - Earnings Per Share (EPS) and Common Stock Warrants
Basic EPS is calculated by dividing net income by the weighted-average number of
shares of common stock outstanding. Diluted EPS is calculated by dividing
adjusted net income by the weighted-average number of shares of common stock and
dilutive potential common stock shares that may be outstanding in the future.
Diluted EPS reflects the potential dilution that could occur if the Company's
outstanding stock warrants and Convertible Subordinated Debentures were
converted into common stock that then shared in the earnings of the Company.
Adjusted net income for Diluted EPS represents net income plus the addback of
interest expense, net of taxes, on the Convertible Subordinated Debentures
outstanding. This adjustment would arise from a hypothetical conversion of all
the debentures into common stock. Potential common stock shares consist of
outstanding dilutive common stock warrants (which are computed using the
treasury stock method) and the shares of common stock that would arise from the
conversion of the debentures. Prior to the public stock offering in November
1997, there was no public market for the Company's common stock. For purposes of
calculating Diluted EPS for the 1997 periods, the $10 stock offering price is
assumed to be the market price.
7
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Notes to Condensed Consolidated Financial Statements (Unaudited)
- - --------------------------------------------------------------------------------
Net income applicable to common stock and the weighted-average number of shares
used for basic and diluted earnings per share computations are summarized as
follows:
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------
For the For the
Quarter Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic earnings per share:
Net income applicable to common stockholders $ 325,000 $ 187,000 $ 633,000 $ 347,000
Average number of common shares outstanding 2,453,140 1,650,000 2,440,595 1,650,000
Basic earnings per share amount $ 0.13 $ 0.11 $ 0.26 $ 0.21
Diluted earnings per share:
Adjusted net income applicable to common stockholders $ 334,000 $ 187,000 $ 642,000 $ 347,000
Average number of common shares outstanding:
Common shares outstanding 2,453,140 1,650,000 2,440,595 1,650,000
Potential dilutive shares from conversion of warrants 862,455 355,615 839,291 355,616
Potential dilutive shares from conversion of debentures 67,037 -- 33,518 --
--------- --------- --------- ---------
Total average number of common shares outstanding used 3,382,632 2,005,615 3,313,404 2,005,615
Diluted earnings per share amount $ 0.10 $ 0.09 $ 0.19 $ 0.18
- - ------------------------------------------------------------------------------------------------------------
</TABLE>
On March 16, 1998, the Board of Directors authorized the grant of stock
warrants to directors of the Company and officers, directors and employees of
Intervest Bank, its subsidiary, to purchase a total of 122,000 shares of Class A
common stock at an initial price of $14.00 per share, which represented the
market price of the common stock on such date. The grant was approved by the
Company's shareholders on May 27, 1998. The warrants vest immediately and expire
on December 31, 2002. The warrants were not included in the computations of
Diluted EPS for the 1998 periods because the warrants' exercise price was
greater than the average market price of the common shares. Also, the
Convertible Subordinated Debentures were not outstanding for the entire part of
1998. Accordingly, if the debentures had been outstanding throughout 1998,
approximately 560,000 of additional shares would have been included in the
Diluted EPS computations for 1998.
On April 27, 1998, the Board of Directors also authorized the issuance of
stock warrants to the Chairman of the Board to purchase a total of 50,000 shares
of Class B common stock, exercisable on or before January 31, 2008, at a price
of $10.00 per share. The issuance of these stock warrants was also approved by
the Company's shareholders on May 27, 1998. The warrants vest as follows: 7,100
immediately; 7,100 on each anniversary of the grant date for five years; and
7,400 on the sixth anniversary date. The warrants become fully vested earlier
upon certain conditions. The exercise price of the warrants was below the market
price of the common shares at the date of grant. Therefore, in accordance with
APB No. 25, "Accounting for Stock Issued to Employees," approximately $14,000,
net of taxes, was charged to earnings in the second quarter of 1998 in
connection with the issuance of these warrants.
8
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Notes to Condensed Consolidated Financial Statements (Unaudited)
- - --------------------------------------------------------------------------------
Note 5 - Regulatory Capital
The Company's subsidiary, Intervest Bank, is required to maintain
certain minimum regulatory capital requirements. The following is a summary at
June 30, 1998 of the regulatory capital requirements and Intervest Bank's actual
capital on a percentage basis:
<TABLE>
<CAPTION>
To Be
Ratios of Minimum Considered Well
the Bank Requirement Capitalized
-------- ----------- -----------
<S> <C> <C> <C>
Total capital to risk-weighted assets 10.45% 8.00% 10.00%
Tier 1 capital to risk-weighted assets 9.20% 4.00% 6.00%
Tier 1 capital to total average assets - leverage ratio 6.01% 4.00% 5.00%
</TABLE>
Note 6 - Proposed Bank
On July 10, 1998, an application for a national bank charter was filed with
the Office of the Comptroller of the Currency and the FDIC by Intervest National
Bank In organization. The new bank will be a wholly owned subsidiary of the
Company, with a principal office in the City of New York. The new bank will have
initial capital of approximately $9,000,000, which will be provided by the
Company.
Note 7 - Recent Accounting Pronouncements
Reporting Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting comprehensive income. Comprehensive income
is defined by the standard as the change in equity of an enterprise except for
those changes resulting from stockholder transactions. All components of
comprehensive income are required to be reported in a new financial statement
that is displayed with equal prominence as existing financial statements. The
Company has no items of comprehensive income, therefore such a statement is not
presented.
Employers' Disclosures about Pensions and Other Postretirement Benefits
In February 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits - an amendment of SFAS No. 87, 88 and 106." The statement revises,
deletes or adds certain disclosures with regard to such plans. It does not
change the measurement or recognition of those plans. The statement is effective
for fiscal years beginning after December 15, 1997. This standard has no impact
to the Company's financial statement disclosures, since the Company currently
does not provide these benefits.
9
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Notes to Condensed Consolidated Financial Statements (Unaudited)
- - --------------------------------------------------------------------------------
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires, among other things, that an entity recognizes all derivatives as
either assets or liabilities in the statement of financial condition and
measures those instruments at fair value. The statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1998. Since the Company
does not currently use derivative financial instruments, the standard will not
have any impact to the Company's financial statements when adopted.
Accounting for Start-Up Costs
In April 1998, the AICPA issued Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-Up Activities," which is effective for all
nongovermental entities, except as provided for therein, for fiscal years
beginning after December 15, 1998. The SOP requires that all start-up costs
(except for those that are capitalizable under other GAAP) be expensed as
incurred.
At June 30, 1998, the Company had approximately $90,000 of deferred costs
associated with organizing the proposed bank. Upon adoption of this statement,
it is anticipated that a significant portion of these deferred costs will be
expensed. In addition, the Company expects additional start-up costs to be
incurred in the third quarter of 1998 in connection with organizing the proposed
bank.
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which is effective
for all nongovermental entities for fiscal years beginning after December 15,
1998. The SOP, among other things, provides guidance as to when and what types
of costs should be capitalized as it relates to internal-use software. Upon
adoption, the Company expects that this SOP will not have any impact on its
financial statements.
10
<PAGE>
ITEM 2. Management's Discussion and Analysis or Plan of Operation
Overview of the First Half of 1998
Intervest Bancshares Corporation and Subsidiary (the "Company") earned
$325,000 for the second quarter of 1998, an increase of 74% from $187,000 in the
second quarter of 1997. On a diluted per share basis, net income was $0.10,
compared to $0.09 in the second quarter of 1997. For the first half of 1998, net
income nearly doubled to $633,000 or $0.19 per diluted share, from $347,000, or
$0.18 per diluted share, for the same period of 1997. (The computations of net
income per share for the 1998 periods included a higher amount of common shares,
due to the public offering of Class A common stock in November 1997 and an
increase in common stock warrants outstanding.) The increase in net income for
both periods of 1998 over the corresponding periods of 1997 was primarily due to
higher net interest and dividend income resulting from growth in net
interest-earning assets.
The following table shows selected ratios at the end of or for the
period indicated:
- - --------------------------------------------------------------------------------
For the Six Months
Quarter Ended Ended
June 30, June 30,
1998 1997 1998 1997
- - --------------------------------------------------------------------------------
Stockholders' equity to total assets 10.42% 8.59% 10.42% 8.59%
Average stockholders' equity to total assets 10.28% 8.51% 10.15% 8.43%
Return on average assets 0.77% 0.64% 0.77% 0.61%
Return on average equity 7.12% 7.48% 7.02% 7.00%
Average interest-earning assets to
interest-bearing liabilities 1.11x 1.08x 1.11x 1.08x
Net interest margin 2.83% 3.03% 2.82% 2.97%
Noninterest expense to average assets 1.25% 1.65% 1.26% 1.64%
- - --------------------------------------------------------------------------------
On June 26, the Company completed the sale of $7,000,000 of Convertible
Subordinated Debentures (the "Debentures"). The Debentures are due July 1, 2008
and are convertible at the option of the holders at any time prior to April 1,
2008 into shares of Class A common stock at an initial conversion price of
$11.50 per share. The conversion price per share increases Over the life of the
Debentures as noted in note 3 on page 7. The Company can also redeem the
Debentures plus accrued interest at any time prior to maturity at various
redemption prices. Interest on the Debentures will accrue and compound quarterly
at 8%. All accrued interest is payable at maturity.
In July, an application for a national bank charter was filed with the OCC
and FDIC by Intervest National Bank, In Organization. The new bank will be a
wholly owned subsidiary of the Company, with a principal office in the City of
New York. The new bank will have initial capital of $9,000,000, which will be
provided by the Company.
11
<PAGE>
Comparison of Financial Condition at June 30, 1998 and December 31, 1997
------------------------------------------------------------------------
Overview. Total assets at June 30, 1998 increased to $177,697,000, from
$150,755,000 at December 31, 1997. The increase was primarily due to a higher
level of loans receivable and cash and cash equivalents. Total liabilities
increased from $133,135,000 at December 31, 1997, to $159,179,000 at June 30,
1998, reflecting increases in deposit liabilities and borrowed funds.
The Company's balance sheet was comprised of the following:
<TABLE>
<CAPTION>
At June 30, 1998 At December 31, 1997
---------------- --------------------
% of % of
($ in thousands) Carrying Total Carrying Total
Value Assets Value Assets
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 19,096 10.7 $ 9,176 6.1%
Securities held to maturity, net 60,842 34.2 58,821 39.1
Loans receivable, net 89,556 50.5 75,652 50.1
All other assets 8,203 4.6 7,106 4.7
- - --------------------------------------------------------------------------------------
Total assets $177,697 100.0% $150,755 100.0%
- - --------------------------------------------------------------------------------------
Deposits $148,842 83.8% $131,167 87.0%
Convertible debentures 7,000 3.9 -- --
All other liabilities 3,337 1.9 1,968 1.3
- - --------------------------------------------------------------------------------------
Total liabilities 159,179 89.6 133,135 88.3
- - --------------------------------------------------------------------------------------
Stockholders' equity 18,518 10.4 17,620 11.7
- - --------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $177,697 100.0% $150,755 100.0%
- - --------------------------------------------------------------------------------------
</TABLE>
Cash and Cash Equivalents. Cash and cash equivalents increased primarily
due to the net proceeds from the sale of the Debentures.
Loans Receivable. Loans receivable increased due to new originations of
commercial real estate loans, partially offset by principal repayments on the
portfolio. At June 30, 1998 and December 31, 1997, the Company did not have any
loans on a nonaccrual status or classified as impaired.
Allowance for Loan Losses. The Company monitors its loan portfolio to
determine the appropriate level of the allowance for loan losses based on
various factors that are discussed on pages 21 and 22 of the Company's 1997
Annual Report on Form 10-KSB. At June 30, 1998, the allowance amounted to
$1,405,000, compared to $1,173,000 at year-end 1997. The increase reflected the
growth in the loan portfolio.
Deposits. Deposit liabilities increased due to net deposit inflows and
growth in deposit accounts. At June 30, 1998, time deposit accounts totaled
$101,496,000 and demand deposits and savings and checking accounts aggregated
$47,346,000. This compared to deposits of $93,378,000 and $37,789,000,
respectively, at December 31, 1997. Time deposits represented 68% of total
deposits at June 30, 1998, compared to 71% at year-end 1997.
12
<PAGE>
Stockholders' Equity and Regulatory Capital. Stockholders' equity increased
primarily as a result of net income of $633,000 for the first half of 1998 and
$235,000 of proceeds from the issuance of 33,500 of shares Class A common stock
upon the exercise of stock warrants. Intervest Bank's Tier 1 leverage capital
ratio was 6.01% at June 30, 1998, compared to 6.53% at December 31, 1997. The
Bank's total risk-based capital ratio amounted to 10.45% at June 30, 1998,
compared to 11.46% at year-end 1997. The decline in these ratios reflected the
growth in the bank's assets.
Comparison of Results of Operations for the Quarters Ended
June 30, 1998 and 1997
- - --------------------------------------------------------------------------------
Overview. Net income for the second quarter of 1998 increased to
$325,000, or $0.10 per diluted share, from $187,000, or $0.09 per diluted share,
for the same quarter of 1997. Higher net income was due to a $294,000 increase
in net interest and dividend income, partially offset by increases of $84,000 in
the provision for income taxes, $38,000 in the provision for loan losses and
$48,000 in noninterest expenses.
Net Interest and Dividend Income. Net interest and dividend income is
the Company's largest source of earnings and is influenced primarily by the
amount, distribution and repricing characteristics of its interest-earning
assets and interest-bearing liabilities as well as by the relative levels and
movements of interest rates. The table below sets forth information on average
assets, liabilities and stockholders' equity; yields earned on interest-earning
assets; and rates paid on interest-bearing liabilities for the periods
indicated. The yields and rates shown are based on a computation of annualized
income/expense for each period divided by average interest-earning
assets/interest-bearing liabilities during each period. Certain yields and rates
shown are adjusted for related fee income or expense. Average balances are
derived from daily balances. Net interest margin is computed by dividing
annualized net interest and dividend income by the average of total
interest-earning assets during each period.
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------
For the Quarter Ended
---------------------
June 30, 1998 June 30, 1997
------------- -------------
Average Interest Yield/ Average Interest Yield/
($ in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans $ 86,271 $ 1,991 9.23% $ 67,986 $ 1,569 9.23%
Securities 65,870 1,009 6.13 40,665 623 6.12
Other interest-earning assets 8,241 109 5.30 2,121 27 5.07
- - ----------------------------------------------------------------------------------------------------------------
Total interest-earning assets 160,382 $ 3,109 7.75% 110,772 $ 2,219 8.01%
- - ----------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 8,591 5,688
- - ----------------------------------------------------------------------------------------------------------------
Total assets $168,973 $116,460
- - ----------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Demand, money market and NOW deposits $ 26,778 $ 310 4.63% $ 17,929 $ 203 4.53%
Savings deposits 15,824 192 4.85 8,783 107 4.87
Time deposits 101,509 1,456 5.74 75,517 1,068 5.66
------- ----- ---- ------ ----- ----
Total deposits accounts 144,111 1,958 5.44 102,229 1,378 5.39
------- ----- ---- ------- ----- ----
Convertible debentures and
other borrowed funds 801 17 8.59 9 1 6.15
- - ----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 144,912 $ 1,975 5.45% 102,238 $ 1,379 5.39%
- - ----------------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities 5,798 4,224
Stockholders' equity 18,263 9,998
- - ----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $168,973 $116,460
- - ----------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $ 1,134 2.30% $ 840 2.62%
- - ----------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 15,470 2.83% $ 8,534 3.03%
- - ----------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.11x 1.08x
- - ----------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
Net interest and dividend income increased to $1,134,000 in the second
quarter of 1998, from $840,000 in the 1997 second quarter. The increase was due
to a higher level of net interest-earning assets, partially offset by a decline
in the net interest margin. The increase in net interest-earning assets was
largely due to the investment of the proceeds from the issuance of common stock
in November 1997. The decline in the net interest margin was a function of a
lower interest rate spread resulting from a decline in the yield on earning
assets and an increase in the cost of funds.
The yield on earning assets declined by 26 basis points primarily due to
the investment of a portion of the proceeds from the public stock offering in
November 1997, as well as deposit inflow, into securities and other short-term
investments, which have lower yields than loans. The cost of funds increased
slightly by 6 basis points due to higher rates paid on deposits.
Provision for Loan Losses. The provision for loan losses is based on
management's ongoing assessment of the adequacy of the allowance for loan
losses. The provision amounted to $130,000 in the second quarter of 1998,
compared to $92,000 in the second quarter of 1997, reflecting a higher level of
outstanding loans.
Noninterest Expenses. Total noninterest expenses increased to $527,000 in
the second quarter of 1998, from $479,000 in the second quarter of 1997. The
increase over last year's period was primarily due to an increase in salaries
and employee benefits, resulting primarily from the Company's growth and
increased staff.
Provision for Income Taxes. The provision for income taxes increased to
$203,000 in the second quarter of 1998, from $119,000 in the second quarter of
1997, due to higher pre-tax earnings. The Company's effective tax rate
(inclusive of state and local taxes) amounted 38.4% in the second quarter of
1998, compared to 38.9% in the same quarter of 1997.
Comparison of Results of Operations for the Six Months Ended
June 30, 1998 and 1997
- - --------------------------------------------------------------------------------
Overview. Net income for the six months ended June 30, 1998 increased to
$633,000, or $0.19 per diluted share, from $347,000, or $0.18 per diluted share,
for the same half of 1997. Higher net income was due to a $588,000 increase in
net interest and dividend income, partially offset by increases of $192,000 in
the provision for income taxes, $46,000 in the provision for loan losses and
$96,000 in noninterest expenses. The reasons for the changes in the provision
for loan losses and income taxes as well as noninterest expenses are essentially
the same as those discussed in the comparison of the quarters ended.
Net Interest and Dividend Income. The table that follows sets forth
information similar to the table on page 13 for the six-month periods.
14
<PAGE>
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------
For the Six Months Ended
------------------------
June 30, 1998 June 30, 1997
------------- -------------
Average Interest Yield/ Average Interest Yield/
($ in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans $ 82,667 $ 3,801 9.19% $ 65,507 $ 3,003 9.17%
Securities 66,622 2,038 6.12 40,338 1,232 6.11
Other interest-earning assets 7,238 179 4.96 2,959 69 4.70
- - -------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 156,527 $ 6,018 7.69% 108,804 $ 4,304 7.91%
- - -------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 7,661 5,591
- - -------------------------------------------------------------------------------------------------------------------
Total assets $164,188 $114,395
- - -------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Demand, money market and NOW deposits $ 24,814 $ 569 4.59% $ 17,202 $ 379 4.41%
Savings deposits 15,128 366 4.84 7,635 185 4.85
Time deposits 100,216 2,861 5.71 75,563 2,123 5.62
------- ----- ---- ------ ----- ----
Total deposits accounts 140,158 3,796 5.42 100,400 2,687 5.35
------- ----- ---- ------- ----- ----
Convertible debentures and
other borrowed funds 426 18 8.44 27 1 5.76
- - -------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 140,584 $ 3,814 5.43% 100,427 $ 2,688 5.35%
- - -------------------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities 5,574 4,055
Stockholders' equity 18,030 9,913
- - -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $164,188 $114,395
- - -------------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $ 2,204 2.26% $ 1,616 2.56%
- - -------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 15,943 2.82% $ 8,377 2.97%
- - -------------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.11x 1.08x
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
Net interest and dividend income increased to $2,204,000 in the first
half of 1998, from $1,616,000 in the 1997 first half. The increase was due to a
higher level of net interest-earning assets, partially offset by a decline in
the net interest margin. The reasons for these changes are essentially the same
as those discussed in the comparison of the quarters ended June 30, 1998 and
1997.
Liquidity and Capital Resources
-------------------------------
The Company's primary source of cash for the six months ended June 30, 1998
was from the maturity of securities totaling $21,576,000 and net deposit inflows
of $17,675,000. In addition, the Company sold $7,000,000 of Convertible
Subordinated Debentures on June 26, 1998 for proceeds, net of underwriting
costs, of approximately $6,500,000. Cash flow was used primarily for net loan
originations of $14,136,000 and the purchase of securities totaling $23,568,000.
At June 30, 1998, cash and cash equivalents totaled $19,096,000, compared to
$9,176,000 at December 31, 1997.
15
<PAGE>
Interest Rate Sensitivity
-------------------------
Interest rate risk arises from differences in the repricing of assets and
liabilities within a given time period. The Company's principal objective of its
asset/liability management strategy is to minimize its exposure to changes in
interest rates by matching the maturity and repricing horizons of its
interest-earning assets and interest-bearing liabilities. The Company uses "gap
analysis" to monitor its interest rate sensitivity. For a further discussion of
interest rate risk and gap analysis, see the Company's 1997 Annual Report on
Form 10-KSB, pages 16 and 17. At June 30, 1998, the Company's one-year negative
interest-rate sensitivity gap was $40,666,000, compared to $42,489,000 at
December 31, 1997.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Not Applicable
ITEM 2. Changes in Securities
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
ITEM 3. Defaults Upon Senior Securities
Not Applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on May 27, 1998.
(b) Pursuant to the Company's charter and bylaws, one-third of the directors
are elected by the holders of Class A common stock and two-thirds are
elected by holders of Class B common stock. On all other matters, Class A
and Class B common stockholders vote together as a single class. Each of
the persons named in the Proxy Statement dated May 27, 1998 as a nominee
for Director was elected for one year terms expiring on the date of the
next annual meeting (see Item 4-C).
(c) The table on page 17 summarizes the voting results on the matters that were
submitted to the Bank's common stockholders:
16
<PAGE>
- - --------------------------------------------------------------------------------
Against or
For Withheld Abstained
- - --------------------------------------------------------------------------------
Election of Directors - Class A
- - -------------------------------
Michael A. Callen 1,342,508 - -
Milton F. Gidge 1,342,508 - -
William F. Holly 1,342,508 - -
Election of Directors - Class B
- - --------------------- ---------
Lawrence G. Bergman 300,000 - -
Jerome Dansker 300,000 - -
Lowell S. Dansker 300,000 - -
Edward J. Merz 300,000 - -
David J. Willmott 300,000 - -
Wesley T. Wood 300,000 - -
Other Matters
- - -------------
To approve the
grant of common
stock warrants
to officers,
directors and
employees of
the Company. 1,629,758 5,750 7,000
- - --------------------------------------------------------------------------------
(d) Not Applicable
ITEM 5. Other Information
Not Applicable
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index (numbered in accordance with Item 601 of Regulation S-B)
27- Financial Data Schedule (For SEC Purposes only)
(b) Reports on Form 8-K
A current report on Form 8-K dated June 26, 1998 was filed during the
quarter ended June 30, 1998. This report announced the completion of the sale of
Convertible Subordinated Debentures in the aggregate principal amount of
$7,000,000.
17
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Date: July 22, 1998 By: /s/ Lowell S. Dansker
----------------------------
Lowell S. Dansker, President and Treasurer
(Chief Financial Officer)
Date: July 22, 1998 By: /s/ Lawrence G. Bergman
----------------------------
Lawrence G. Bergman,
Vice President and Secretary
18
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,676
<INT-BEARING-DEPOSITS> 199
<FED-FUNDS-SOLD> 6,021
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 60,842
<INVESTMENTS-MARKET> 60,965
<LOANS> 90,961
<ALLOWANCE> 1,405
<TOTAL-ASSETS> 177,697
<DEPOSITS> 148,842
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,337
<LONG-TERM> 7,000
0
0
<COMMON> 16,049
<OTHER-SE> 2,469
<TOTAL-LIABILITIES-AND-EQUITY> 178,159
<INTEREST-LOAN> 3,801
<INTEREST-INVEST> 2,038
<INTEREST-OTHER> 179
<INTEREST-TOTAL> 6,018
<INTEREST-DEPOSIT> 3,796
<INTEREST-EXPENSE> 18
<INTEREST-INCOME-NET> 3,814
<LOAN-LOSSES> 230
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,036
<INCOME-PRETAX> 1,038
<INCOME-PRE-EXTRAORDINARY> 1,038
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 633
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.19
<YIELD-ACTUAL> 7.69
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,173
<CHARGE-OFFS> 0
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 1,405
<ALLOWANCE-DOMESTIC> 1,405
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,405
</TABLE>
