io 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, 1997 000-23377
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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
(Title of Class)
Securities Register Pursuant to Section 12 (g) of the Act:
None
(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 $9,347,000 and $136,000, respectively.
<PAGE>
The aggregate market value of the Issuer's voting stock held by non-affiliates
as of March 15, 1998 was $16,228,310.
As of March 15, 1998 there were 2,136,675 shares of the Issuer's Class A common
stock and 300,000 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 .
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting to be held on May 27, 1998 - Part III
<PAGE>
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TABLE OF CONTENTS
PART I
Pages
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<S> <C>
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 9
Item 6 Management's Discussion and Analysis of Plan or Operations 11
Item 7 Financial Statements 33
Item 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 33
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons of the
Registrant; Compliance with Section 16(a) of the Exchange Act 58
Item 10 Executive Compensation 58
Item 11 Security Ownership of Certain Beneficial Owners and Management 58
Item 12 Certain Relationships and Related Transactions 58
Item 13 Exhibits, Lists and Reports on Form 8-K 59
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 99.78% 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. The principal
executive offices of the Bank are located at 625 Court Street, Clearwater,
Florida 34625, and its telephone number is (813) 442- 2551. In addition to its
principal office, the Bank operates four branch offices, three in Clearwater,
Florida at 1875 Belcher Road North, 2175 Nursery Road, and 2575 Ulmerton Road,
and one in South Pasadena, Florida at 6750 Gulfport Blvd.
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 offices
are 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 services 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
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
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(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 890,000 people. The area has many more seasonal residents. The
Bank's deposit gathering and lending markets are concentrated on the communities
surrounding its offices in Clearwater and South Pasadena, 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 efficiently 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, 1997 the Bank's net loan portfolio was $74.9 million,
representing 52.6% of its total assets. As of such date, the loan portfolio
consisted of 4.4% commercial loans, 95.3% real-estate mortgage loans and 0.3%
consumer and other loans.
Real Estate Mortgage Loans
A substantial portion of the Bank's loan portfolio is composed of loans
secured by commercial real estate, including apartment buildings, office
buildings and retail shopping centers. The properties are personally inspected
by representatives of the Bank and the Bank's real estate loans relate primarily
to properties in the Bank's primary market area. 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
7
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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, 1997, the Company and the Bank together employed 30
full-time employees and 1 part-time employee. 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 at 625 Court Street, Clearwater,
Florida. In addition to its principal office the bank operates four branch
offices. Three of the branch offices are in Clearwater, Florida, at 1875 Belcher
Road North, 2175 Nursery Road and 2575 Ulmerton Road, and one is at 6750
Gulfport Blvd., South Pasadena, Florida. With the exception of the Belcher Road
office, which is leased, all of the offices are owned by the Bank.
The office at 625 Court Street consists of a two story building
containing approximately 22,000 sq. ft. The Bank occupies the ground floor
(approximately 8,500 sq. ft.) and leases the 2nd floor to a single commercial
tenant. The branch office at 1875 Belcher Road is a two story building in which
the bank leases approximately 5,100 sq. ft. for its branch office. The branch
office at 2175 Nursery Road is a one story building containing approximately
2,700 sq. ft. which is entirely occupied by the Bank. The branch office at 2575
Ulmerton Road is a three story building containing approximately 17,000 sq. ft.
The bank occupies the ground floor (approximately 2,500 sq. ft.) and leases the
upper floors to commercial tenants. The branch office at 6750 Gulfport Blvd. is
a one story building containing approximately 2,800 sq. ft. which is entirely
occupied by the Bank. In addition, each of the Bank's offices include
drive-through teller facilities.
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
8
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PART II
Item 5. Market for Common Equity and Related Stockholders Matters
Market for Securities
The Company's Class A Common Stock was approved for listing on the
NASDAQ SmallCap Market (Symbol: IBCA) in November of 1997. Prior to then, there
had been no established public trading market for the securities of the Company.
The high and low sales prices for Class A Common Stock during the period from
November 25, 1997, when trading commenced, and December 31, 1997 were $12.25 and
$11.50, respectively. At December 31, 1997, there were approximately 272 holders
of record of the Company's Class A Common Stock and three holders of record of
the Company's Class B Common Stock.
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
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
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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.
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Item 6. Management's Discussion and Analysis or Plan of Operation
SELECTED FINANCIAL DATA
The following table presents selected financial data for the Company
and the Bank. The data set forth below for the seven months ended December 31,
1993, five months ended May 31, 1993, and the years ended December 31, 1997,
1996, 1995 and 1994 are derived from the audited consolidated financial
statements of the Company or the Bank, as the case may be. The selected
financial data should be read in conjunction with, and are qualified in their
entirety by, the Consolidated Financial Statements and the Notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere herein.
<TABLE>
<CAPTION>
At or for the
Seven At or for the
At or for the Years Ended Months Ended Five Months Ended
December 31, December 31, May 31,
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1997 1996 1995 1994 1993(1) 1993(2)
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(Dollars in Thousands, Except Per Share Data)
Balance Sheet Data:
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Total assets .............. $ 150,755 105,196 68,942 40,117 29,071 22,557
Cash and cash equivalents . 9,176 6,320 8,551 6,088 5,519 2,569
Net Loans ................. 75,652 59,499 36,465 22,385 16,224 16,163
Securities ................. 58,821 34,507 19,630 8,638 5,231 2,958
Deposits .................. 131,167 93,447 58,601 30,092 22,195 20,138
Borrowed funds ............ -- -- -- -- -- --
Retained earnings
(Accumulated deficit) ... 1,836 992 434 164 (17) (2,050)
Total stockholders' equity 17,620 9,747 9,189 8,884 5,828 1,275
Income Statement Data:
Interest income ........... 9,347 6,381 4,190 2,158 1,007 741
Interest expense .......... 5,894 3,745 2,225 803 345 335
Net interest income ....... 3,453 2,636 1,965 1,355 662 406
Provision for loan losses . (352) (250) (233) (124) -- (90)
Net interest income after
provision for loan losses 3,101 2,386 1,732 1,231 662 316
Other income .............. 136 106 89 112 59 102
Other expense ............. (1906) (1,551) (1,415) (1,054) (738) (401)
Earnings (Loss) before
income taxes .............. 1,331 941 406 289 (17) 17
Provision for income taxes (487) (383) (136) (108) -- --
Net earnings (Loss) ....... 844 558 270 181 (17) 17
Per Share Data:
Net Basic earnings (Loss) ... .49 .34 .16 .11 (.01) .05
Book value at period end .... $ 7.27 5.91 5.57 5.38 3.53 3.64
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(1) Includes the consolidated financial information of the Company from
June 1, 1993.
(2) Financial information of the Bank only
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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 1997,
the Company completed a public offering of 747,500 Units for gross proceeds of
$7,475,000 (the "1997 Offering"). Each Unit consisted of one share of the
Company's Class A Common Stock and one warrant to purchase an additional share
of Class A Common Stock. In connection with the 1997 Offering, the Company
issued warrants related to 145,850 shares of Class A Common Stock to the
Underwriter and participating broker/dealers. The Company has reserved a total
of 2,494,348 shares of Class A stock for issuance upon exercise of the Company's
warrants to purchase shares of Class A Common Stock.
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.
The Bank's present offices are located in or near Clearwater, Florida.
Clearwater is located in Pinellas County, which is the most populous county in
the Tampa Bay area of Florida. It also has a branch 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
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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.
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, 1997 and 1996. 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, 1997 and 1996.
General
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Net earnings for the year ended December 31, 1997 were $844,000
compared to $558,000 for the year ended December 31, 1996. This increase in the
Company's net earnings was primarily due to an increase in net interest income
partially offset by an increase in noninterest expenses and the provision for
income taxes.
Interest Income and Expense
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Interest income increased by $2,966,000 from $6,381,000 for the year
ended December 31, 1996 to $9,347,000 for the year ended December 31, 1997.
Interest income on loans increased $1,791,000 due to an increase in the average
loan portfolio balance from $49.3 million for the year ended December 31, 1996
to $68.7 million for 1997, partially offset by a decrease in the weighted
average yield of 5 basis points. Interest on securities increased $1,118,000 due
to an increase in the average securities balance from $25.6 million in 1996 to
$42.8 million in 1997 and an increase in the average yield from 5.92% in 1996 to
6.15% in 1997. Interest on other interest-earning assets increased $57,000
primarily due to an increase from $4.7 million in average other interest-earning
assets in 1996 to $6.9 million in 1997.
Interest expense increased to $5,894,000 for the year ended December
31, 1997 from $3,745,000 for the year ended December 31, 1996. Interest expense
on deposit accounts increased primarily because of a $39.0 million increase in
the average balance, in addition to an increase of 4 basis points in the average
yield paid on deposits for the year ended December 31, 1997 compared to 1996.
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Provision for Loan Losses
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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 $250,000 for the year ended December 31, 1996 to
$352,000 for the year ended December 31, 1997. At December 31, 1997, there were
no non-performing loans. Management believes that the allowance for loan loss of
$1,173,000 is adequate at December 31, 1997.
Other Income
- ------------
Total other income increased $30,000 for the year ended December 31,
1997 compared to 1996.
Other Expenses
- --------------
Total other expenses increased $355,000 for the year ended December 31,
1997 when compared to 1996, primarily due to an increase in employee
compensation and benefits and occupancy and equipment expenses. The increase is
primarily due to additional costs for the new branches and the overall growth of
the Company.
Provision for Income Taxes
- --------------------------
In 1997 the provision for income taxes is $487,000, an effective income
tax rate of 36.6%, as compared to $383,000 and 40.7% respectively, in 1996. In
1996, a greater portion of the consolidated earnings was generated by the
holding company which has a higher state income tax rate.
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 securities 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 $3,453,000 for the Company for the year ended
December 31, 1997 compared with $2,636,000 for the year ended December 31, 1996.
This improvement in net interest income is primarily a result of a higher volume
of net interest-earning assets.
14
<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,
---------------------------------------------------------------
1997 1996
--------------------------------- -----------------------------
(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>
Loans(1) ....................... $ 68,711 6,415 9.34% $49,266 4,624 9.39%
Securities ..................... 42,763 2,632 6.15% 25,577 1,514 5.92%
Other interest-earning assets(2) 6,913 300 4.34% 4,730 243 5.14%
----- --- ---- ----- --- ----
Total interest-earning
assets .............. 118,387 9,347 7.90% 79,573 6,381 8.02%
----- -----
Noninterest-earning assets ....... 14,823 4,089
------ -----
Total assets ............ $133,210 $83,662
======== ========
Interest-bearing liabilities:
Demand, money market and
NOW deposits ................ 18,087 816 4.51% 8,432 310 3.68%
Savings ....................... 9,128 446 4.89% 1,470 62 4.22%
Certificates of deposit ....... 81,167 4,632 5.71% 59,437 3,371 5.67%
Other ......................... -- -- -- 34 2 5.88%
------ --- ---- ----- --- ----
Total interest-bearing
liabilities .......... 108,382 5,894 5.44% 69,373 3,745 5.40%
-----
Noninterest-bearing liabilities .. 5,425 4,840
Stockholders' equity ............. 19,403 9,449
------ -----
Total liabilities and
stockholders' equity . $133,210 $83,662
======== =======
Net interest/dividend income ..... $ 3,453 $ 2,636
======== ========
Interest rate spread(3) .......... 2.46% 2.62%
==== ====
Net interest margin(4) ........... 2.92% 3.31%
==== ====
Ratio of average interest-earning
assets to average interest-
bearing liabilities ........... 1.09 1.15
==== ====
</TABLE>
15
<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,
1997 vs. 1996
--------------------------------------
Increase (Decrease) Due to
--------------------------------------
Rate/
Rate Volume Volume Total
---- ------ ------ -----
Interest-earning assets: (Dollars in thousands)
Loans $ (25) 1,826 (10) 1,791
Securities 59 1,020 39 1,118
Other interest-earning assets (38) 112 (17) 57
------ ------ ------ ------
Total (4) 2,958 12 2,966
------ ------ ------ ------
Interest-bearing liabilities:
Demand, Money Market and NOW Deposits 70 356 80 506
Savings 10 323 51 384
Certificates of Deposit 24 1,228 9 1,261
Other Borrowings (2) (2) 2 (2)
------ ------ ------ ------
Total 102 1,905 142 2,149
------ ------ ------ ------
Net change in net interest income
before provision for credit losses $ (106) 1,053 (130) 817
====== ====== ====== ======
Income Taxes
- ------------
At December 31, 1997, 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 $494,000, with specified portions expiring
in each year from 2006 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.
16
<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.
17
<PAGE>
The following table sets forth certain information relating to the Company's
interest-earning assets and interest-bearing liabilities at December 31, 1997
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 $ 2,371 386 333 191 3,281
Commercial real estate loans 4,390 10,213 55,819 111 70,533
Residential mortgage loans 275 526 1,112 1,237 3,150
Consumer loans 15 14 233 -- 262
-------- -------- -------- -------- --------
Total loans 7,051 11,139 57,497 1,539 77,226
Federal funds sold 162 -- -- -- 162
Interest-bearing deposits with banks -- -- 99 -- 99
Securities (2)(3) 11,065 9,382 33,122 12,761 66,330
-------- -------- -------- -------- --------
Total rate-sensitive assets 18,278 20,521 90,718 14,300 143,817
-------- -------- -------- --------
Deposit accounts (2):
Money market deposits 17,180 -- -- -- 17,180
NOW deposits 4,290 -- -- -- 4,290
Savings deposits 12,829 -- -- -- 12,829
Certificates of deposit 13,930 33,059 45,235 1,154 93,378
-------- -------- -------- -------- --------
Total rate-sensitive liabilities 48,229 33,059 45,235 1,154 127,677
-------- -------- -------- -------- --------
GAP (repricing differences) $(29,951) (12,538) 45,483 13,146 16,140
======== ======== ======== ======== ========
Cumulative GAP $(29,951) (42,489) 2,994 16,140
======== ======== ======== ========
Cumulative GAP/total assets (19.87%) (28.18%) 1.99% 10.71%
======== ======== ======== ========
- -------------------------------
</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 and short-term investments.
18
<PAGE>
Financial Condition
Lending Activities
- ------------------
A significant source of income for the Company is the interest earned
on loans. At December 31, 1997, the Company's total assets were $150.8 million
and its net loans were $75.7 million or 50% of total assets as compared to
$105.2 million of total assets at December 31, 1996, and net loans of $59.5
million representing 57% of the total assets at December 31, 1996.
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, 1997 At December 31, 1996
------------------------ ---------------------
% of % of
Amount Total Amount Total
------ ----- ------ -----
(Dollars in thousands)
Commercial loans $ 3,281 4.3% $ 3,514 5.8%
Commercial real estate loans 70,533 91.3 54,198 89.4
Residential mortgage loans 3,150 4.1 2,784 4.6
Consumer loans 262 .3 157 .2
------ ---- ------ ----
Total loans 77,226 100.0% 60,653 100.0%
===== =====
Add (Deduct):
Deferred loan fees (401) (343)
Allowance for loan losses (1,173) (811)
------ ----
Loans, net $ 75,652 $ 59,499
======== =========
19
<PAGE>
The following table reflects the contractual principal repayments by
period of the Company's loan portfolio at December 31, 1997.
<TABLE>
<CAPTION>
Residential Commercial
Years Ended Commercial Mortgage Real Estate Consumer
December 31, Loans Loans Loans Loans Total
------------ ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
1998 $2,513 482 5,321 67 8,383
1999 431 279 6,650 66 7,426
2000-2001 269 457 21,602 87 22,415
2002-2003 68 657 18,587 42 19,354
2004-2010 ---- 1,275 18,373 ---- 19,648
-------- ----- ------ ---- ------
Total $3,281 3,150 70,533 262 77,226
====== ===== ====== === ======
</TABLE>
Of the $68.8 million of loans due after 1998, 33% of such loans have
fixed interest rates and 67% have adjustable interest rates.
The following table sets forth total loans originated and repaid during
the periods indicated.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Originations:
Commercial loans $ 502 $ 497
Real estate loans 23,180 30,802
Consumer loans 162 145
------- -------
Total loans originated 23,844 31,444
Principal reductions (7,271) (8,082)
------- -------
Increase (decrease) in total loans $16,573 $23,362
======= =======
</TABLE>
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, 1997, approximately 91.3%, and as of December 31,
1996, approximately 89.4% 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. There were no
non-performing assets at December 31, 1997, while as of December 31, 1996
non-performing assets totaled $185,000.
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
20
<PAGE>
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, 1997:
Commercial loans 4.2%
------
Real estate mortgage loans 91.3%
-----
Consumer and other loans 4.5%
------
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.
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,
1997, the Bank had no foreclosed real estate. 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.
21
<PAGE>
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,
---------------
1997 1996
---- ----
(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
- --------------------------
The Company follows 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 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, 1997 and 1996.
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
22
<PAGE>
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, 1997 or 1996. The
average recorded investment in impaired loans during 1996 was$31,000. There were
no impaired loans identified during 1997. No interest income on impaired loans
was recognized in 1996.
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 making
the initial determinations. The Bank's allowance at December 31, 1996 was
$811,000, and the Bank increased its allowance for loan losses to $1,173,000 as
of December 31, 1997, 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."
23
<PAGE>
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,
1997 1996
---- ----
(Dollars in thousands)
Average loans outstanding, net $ 68,711 $ 49,266
-------- --------
Allowance at beginning of year 811 593
-------- --------
Charge-offs:
Real estate loans -- 62
Commercial loans -- --
Consumer loans -- 3
-------- --------
Total loans charged-off -- 65
-------- --------
Recoveries 10 33
-------- --------
Net recoveries (charge-offs) 10 (32)
-------- --------
Provision for loan losses charged
to operating expenses 352 250
-------- --------
Allowance at end of year $ 1,173 $ 811
======== ========
Ratio of net charge-offs to
average loans outstanding -- .001
======== ========
Ratio of allowance for loan losses
to period-end total loans .015 .013
======== ========
Ratio of allowance for loan losses
to nonperforming loans -- --
======== ========
Period end total loans $ 77,226 $ 60,653
======== ========
24
<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, 1997 At December 31, 1996
-------------------- --------------------
Loans to Loans to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in thousands)
Commercial loans $ 50 4.3% $ 82 5.8%
Commercial real estate loans 1,071 91.3 677 89.4
Residential real estate loans 48 4.1 50 4.6
Consumer loans and other 4 .3 2 .2
------ ----- ------ -----
Total allowance for
loan losses $1,173 100% $ 811 100.0%
====== ===== ====== =====
The allowance for loan losses represented 1.5% of the total loans
outstanding at December 31, 1997, compared with 1.3% at December 31, 1996.
Securities
The following table sets forth the carrying value of the Bank's
securities portfolio as of the dates indicated:
At December 31,
---------------
1997 1996
---- ----
(in thousands)
Securities held to maturity:
U.S. Treasury securities $ 4,027 $ 1,499
Other U.S. Government and
agency securities 54,794 33,008
------- -------
$58,821 $34,507
======= =======
25
<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)
December 31, 1997:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities $ 1,996 6.10 $ 2,031 6.03% $---- ---% $ 4,027 6.06%
Other U.S. Government
agency securities 11,173 6.08 30,859 6.23 12,762 6.46 54,794 6.28
------ ---- ------ ---- ------ ---- ------ ----
Total $13,169 6.08% $32,890 6.21% $12,762 6.46% $ 58,821 6.24%
======= ==== ======= ==== ======= ==== ======== ====
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%
======= ==== ======= ==== ======= ==== ======== ====
</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, 1997, the Bank met the definition of a "well capitalized" depository
institution.
26
<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, 1997 At December 31, 1996
----------------------------- -------------------------
% of % of
Amount Deposits Amount Deposits
------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Demand deposits $3,490 2.7% $2,401 2.6%
NOW deposits 4,290 3.3 4,536 4.9
Money market deposits 17,180 13.1 7,507 8.0
Savings deposits 12,829 9.7 4,742 5.0
------ ----- ----- ---
Subtotal 37,789 28.8 19,186 20.5
------ ---- ------ ----
Certificate of deposits:
4.00%-4.99% 30 --- 1,682 1.8
5.00%-5.99% 69,855 53.3 53,507 57.3
6.00%-6.99% 16,882 12.9 13,307 14.2
7.00%-7.99% 6,611 5.0 5,765 6.2
------- ----- ------ ----
Total certificates
of deposit (1) 93,378 71.2 74,261 79.5
------ ---- ------ ----
Total deposit $131,167 100.00% $93,447 100.0%
======== ======= ======= ======
- -------------------------
</TABLE>
(1) Includes individual retirement accounts ("IRAs") totaling $7,136,000 and
$5,569,000 at December 31, 1997 and 1996 respectively, all of which are
in the form of certificates of deposit.
27
<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,
------------ ------------
1997 1996
Average Average Average Average
Balance Yield Balance Yield
------- ----- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Money market
& NOW $18,087 4.51% $8,432 3.68%
Savings deposit 9,128 4.89 1,470 4.22
Certificates of deposit 81,167 5.71 59,437 5.67
------ ---- ------ ----
Total deposits $108,382 5.44% $69,339 5.40%
======== ===== ======= =====
</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.
28
<PAGE>
The following tables presents by various interest rate categories the
amounts of certificates of deposit at December 31, 1997 and 1996 which mature
during the periods indicated:
<TABLE>
<CAPTION>
Year Ending December 31,
-------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 & thereafter Total
---- ---- ---- ---- ----------------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997:
4.00%-4.99% $ 30 ---- ---- ---- ---- 30
5.00%-5.99% 46,513 13,955 4,149 1,873 3,365 69,855
6.00%-6.99% 349 791 656 7,389 7,697 16,882
7.00%-7.99% 62 1,808 4,641 100 ---- 6,611
-------- ----- ----- ------ ------- ------
Total certificates of deposit $46,954 16,554 9,446 9,362 11,062 93,378
======= ====== ===== ===== ====== ======
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
======= ====== ===== ===== ===== ======
</TABLE>
29
<PAGE>
Jumbo certificates ($100,000 and over) mature as follows:
<TABLE>
<CAPTION>
At December 31, At December 31,
--------------- ---------------
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Due three months or less $1,554 $733
Due over three months to six months 1,149 2,136
Due over six months to one year 1,787 2,566
Due over one year 5,016 1,826
------ -----
$9,506 $7,261
====== ======
</TABLE>
The following table sets forth the net deposit flows of the Bank during the
periods indicated:
<TABLE>
<CAPTION>
Year Ended Year Ended
---------- ----------
December 31, 1997 December 31, 1996
(in thousands)
Net increase (decrease) before
<S> <C> <C>
interest credited $32,164 $31,168
Net interest credited 5,556 $ 3,678
------ -------
Net deposit increase $37,720 34,846
======= ======
</TABLE>
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 Company'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, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.
30
<PAGE>
As of December 31, 1997, 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)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total capital
(to Risk Weighted Assets) $9,420 10.53% $7,157 8.00% $8,948 10.00%
Tier I Capital
(to Risk Weighted Assets) 9,125 10.20% 3,578 4.00 5,367 6.00%
Tier I Capital
(to Average Assets) 9,125 6.85% 5,328 4.00 6,660 5.00%
As of December 31, 1996:
Total capital
(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%
</TABLE>
The Company continues to explore a variety of alternatives related to
the expansion of its business, including both branch expansions in and near the
Bank's existing markets, as well as the acquisition or de novo chartering of an
additional bank outside the Bank's existing market. While management believes
that its current capital is adequate to finance any expansion opportunities it
may pursue in the near term, the Company will consider activities designed to
raise additional capital. In that regard, 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 funds will be considered by the
Company. In 1997, the Company completed the 1997 Offering, resulting in gross
proceeds of $7,475,000.
Future Accounting Matters
- -------------------------
Financial Accounting Standards 130 - Reporting Comprehensive Income
establishes standards for reporting comprehensive income. The Standard defines
comprehensive income as the change in equity of an enterprise except those
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 will be required
to adopt this Standard effective January 1, 1998. As the Statement addresses
reporting and presentation issues only, there will be no impact on operating
results from the adoption of this Standard.
31
<PAGE>
Financial Accounting Standards 131 - Disclosures about Segments of an
Enterprise and Related Information establishes standards for related disclosures
about products and services, geographic areas, and major customers. The Company
will be required to adopt this Standard effective January 1, 1998. As the
Standard addresses reporting and disclosure issues only, there will be no impact
on operating results from adoption of this Standard.
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.
Market Risk
- -----------
Market risk is the risk of loss from adverse changes in market prices
and rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending and deposit taking activities. To that end, management
actively monitors and manages its interest rate risk exposure. The measurement
of market risk associated with financial instruments is meaningful only when all
related and offsetting on- and off-balance-sheet transactions are aggregated,
and the resulting net positions are identified. Disclosures about the fair value
of financial instruments, which reflect changes in market prices and rates, can
be found in Note 7 of Notes to Consolidated Financial Statements.
The Company's primary objective in managing interest-rate risk is to
minimize the adverse impact of changes in interest rates on the Bank's net
interest income and capital, while adjusting the Company's asset-liability
structure to obtain the maximum yield-cost spread on that structure. The Company
relies primarily on its asset-liability structure to control interest rate risk.
However, a sudden and substantial increase in interest rates may adversely
impact the Company's earnings, to the extent that the interest rates borne by
assets and liabilities do not change at the same speed, to the same extent, or
on the same basis. The Company does not engage in trading activities.
Year 2000 Compliance
- --------------------
The Bank has an ongoing program designed to ensure that its operational
and financial systems will continue to function properly on and after the year
2000, free of software failures due to processing errors arising from
calculations using the year 2000 date. The Bank does not expect to incur any
significant expenditures over the next three years on its program to redevelop,
replace, or repair its computer applications to make them "year 2000 compliant."
While the Bank believes it is doing everything technologically possible to
assure year 2000 compliance, it is to some extent dependent upon vendor
cooperation. The Bank is requiring its computer system and software vendors to
represent that the products provided are, or will be, year 2000 compliant, and
has planned a program of testing for compliance. It is recognized that any year
2000 compliance failures could result in additional expense to the Bank.
32
<PAGE>
Item 7. Financial Statements
The following financial statements are included herein:
Intervest Bancshares Corporation and Subsidiary
- -----------------------------------------------
Independent Auditors' Report - page 34
Consolidated Balance Sheets as of December 31, 1997 and 1996 - page 35
Consolidated Statements of Earnings for the Years Ended December 31, 1997 and
1996 - page 36
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1997 and 1996 - page 37
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997 and
1996 - page 38
Notes to Consolidated Financial Statements - pages 39-57
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.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
33
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
a. Directors. The information required by this item is contained in the
section entitled "Election of Directors" in the Company's Proxy Statement for
its 1998 Annual Meeting (the "Proxy Statement") and is incorporated herein by
reference.
b. Executive Officer. All of the executive officers of the Company also
serve as directors and the information required by this item is incorporated by
reference from the section of the Proxy Statement entitled "Election of
Directors."
c. Compliance with Section 16(a). Information contained in the section
of the Proxy Statement entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" is incorporated herein by reference.
Item 10. Executive Compensation
The information contained in the section entitled "Executive
Compensation" of the Proxy Statement is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information contained in the section entitled "Security Ownership of
Certain Beneficial Owners and Management" of the Proxy Statement is incorporated
herein by reference.
Item 12. Certain Relationships and Related Transactions
The information contained in the section entitled "Certain Relationships
and Related Transactions" in the Proxy Statement is incorporated herein by
reference.
<TABLE>
<CAPTION>
Item 13. Exhibits, Lists and Reports on Form 8-K
(a) The following exhibits are incorporated by reference herein:
Exhibit Number Description of Exhibit
- -------------- ----------------------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company, incorporated
by reference from Amendment No. 1 to the Company's Registration
Statement on Form SB-2 (No. 333-33419), filed with the
Commission on September 22, 1997 (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.
58
<PAGE>
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 for Class A Common Stock, incorporated by
reference from the Registration Statement, wherein such document
is identified as Exhibit 4.3.
4.5 Form of Warrant Agreement between the Company and the Bank
of New York, incorporated by reference from the Registration
Statement, wherein such document is identified as Exhibit 4.4.
</TABLE>
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
59
<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 24th day of
March, 1998.
INTERVEST BANCSHARES CORPORATION
(Registrant)
By:/S/Lowell S. Dansker, President
--------------------------------
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 3/24/98
- ---------------------------
Lawrence G. Bergman Secretary and Director
/S/Michael A. Callen Director 3/25/98
- ---------------------------
Michael A. Callen
/S/Jerome Dansker Chairman of the Board, 3/24/98
- ---------------------------
Jerome Dansker Executive Vice President, Director
/S/Lowell S. Dansker President, Treasurer and 3/24/98
- ---------------------------
Lowell S. Dansker Director (Principal Executive),
Financial and Accounting Officer)
/S/Milton F. Gidge Director 3/25/98
- ---------------------------
Milton F. Gidge
/S/William F. Holly Director 3/23/98
- ---------------------------
William F. Holly
/S/Edward J. Merz Director 3/25/98
- ---------------------------
Edward J. Merz
/S/David J. Willmott Director 3/25/98
- ---------------------------
David J. Willmott
/S/WESLEY T. WOOD Director 3/25/98
- ---------------------------
Wesley T. Wood
</TABLE>
60
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
New York, New York
Audited Consolidated Financial Statements
December 31, 1997 and 1996 and
for the Years then Ended
(Together with Independent Auditors' Report)
<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") at December 31, 1997 and
1996 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, 1997 and 1996 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 PA
Tampa, Florida
January 23, 1998
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
-----------------------
<S> <C> <C>
Assets 1997 1996
---- ----
Cash and due from banks.......................................................... $ 1,738 2,318
Federal funds sold............................................................... 162 3,452
Short-term investments........................................................... 7,276 550
--------- --------
Total cash and cash equivalents........................................... 9,176 6,320
Interest-bearing deposits with banks............................................. 99 99
Securities held to maturity...................................................... 58,821 34,507
Loans receivable, net of allowance for loan losses of $1,173
in 1997 and $811 in 1996...................................................... 75,652 59,499
Accrued interest receivable...................................................... 1,327 842
Premises and equipment, net...................................................... 4,877 2,940
Restricted securities, Federal Reserve Bank stock, at cost ...................... 233 203
Foreclosed real estate........................................................... - 185
Deferred income tax asset........................................................ 485 526
Other assets ............................................................... 85 75
---------- ---------
$ 150,755 105,196
======= =======
Liabilities and Stockholders' Equity
Liabilities:
Demand deposits............................................................... 3,490 2,401
Savings and NOW deposits...................................................... 17,119 9,278
Money-market deposits......................................................... 17,180 7,507
Time deposits................................................................. 93,378 74,261
-------- -------
Total deposits............................................................ 131,167 93,447
Other liabilities............................................................. 1,947 1,676
-------- --------
Total liabilities......................................................... 133,114 95,123
------- -------
Minority interest................................................................ 21 326
---------- ---------
Commitments (Notes 4 and 7)
Stockholders' Equity:
Preferred stock, 300,000 shares authorized, issued none....................... - -
Class A common stock - $1 par value, 7,500,000 shares
authorized; 2,124,415 and 900,000 shares issued
and outstanding in 1997 and 1996............................................ 2,124 900
Class B common stock - $1 par value, 700,000 shares
authorized; 300,000 and 200,000 shares issued
and outstanding in 1997 and 1996............................................ 300 200
Additional paid-in capital.................................................... 13,360 7,655
Retained earnings............................................................. 1,836 992
-------- ---------
Total stockholders' equity................................................ 17,620 9,747
------- --------
$ 150,755 105,196
======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Earnings
($ in thousands except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Interest income:
Loans receivable.............................................................. $ 6,415 4,624
Securities held to maturity................................................... 2,632 1,514
Other interest earning assets................................................. 300 243
----------- -----------
Total interest income..................................................... 9,347 6,381
Interest expense on deposits..................................................... 5,894 3,745
---------- ----------
Net interest income....................................................... 3,453 2,636
Provision for loan losses........................................................ 352 250
----------- -----------
Net interest income after
provision for loan losses............................................... 3,101 2,386
---------- ----------
Noninterest income:
Customer service charges...................................................... 121 89
Other... ............................................................... 15 17
------------ -----------
Total noninterest income.................................................. 136 106
----------- -----------
Noninterest expenses:
Salaries and employee benefits................................................ 907 739
Occupancy and equipment....................................................... 406 342
Advertising and promotion..................................................... 40 9
Professional fees............................................................. 48 57
State assessment.............................................................. 26 19
Audit and accounting.......................................................... 48 27
Data processing............................................................... 21 9
Deposit insurance premiums.................................................... 12 2
General insurance............................................................. 31 31
Stationery, printing and supplies............................................. 83 51
Other ............................................................... 282 246
Minority interest in subsidiary............................................... 2 19
------------ ------------
Total noninterest expenses................................................ 1,906 1,551
---------- ----------
Earnings before income taxes..................................................... 1,331 941
Income taxes.............................................................. 487 383
----------- -----------
Net earnings ............................................................... $ 844 558
=========== ===========
Basic earnings per share......................................................... $ .49 .34
============ ============
Diluted earnings per share....................................................... $ .41 .34
============ ============
Weighted-average number of shares
outstanding for basic earnings per share...................................... 1,712,292 1,650,000
========= =========
Weighted-average number of shares
outstanding for diluted earnings per share.................................... 2,072,459 1,650,000
========= =========
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
3
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
($ in thousands)
<TABLE>
<CAPTION>
Shares of
Class A Class A Class B Additional Total
Common Common Common Paid-In Retained Stockholders'
Stock Stock Stock Capital Earnings Equity
----- ----- ----- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995......................... 900,000 $ 900 200 7,655 434 9,189
Net earnings.................... - - - - 558 558
------------ ------- ---- ------ ----- ------
Balance at December 31,
1996 ....................... 900,000 900 200 7,655 992 9,747
Effect of 1.5 for 1 stock
split ....................... 450,000 450 100 (550) - -
Proceeds from 747,500 shares
of stock issued, net of stock
issuance cost of $755........ 747,500 748 - 5,972 - 6,720
Net earnings.................... - - - - 844 844
Issuance of common stock
in exchange for common
stock of minority
stockholders of
subsidiary................... 26,915 26 - 283 - 309
--------- ------ ---- ------- ------- -------
Balance at December 31,
1997 ........................ 2,124,415 $ 2,124 300 13,360 1,836 17,620
========= ===== === ====== ===== ======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
4
<PAGE>
<TABLE>
<CAPTION>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In thousands)
Year Ended
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings....................................................................... $ 844 558
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation................................................................ 260 176
Provision for deferred income taxes......................................... 41 67
(Increase) decrease in other assets......................................... (10) 35
Increase in other liabilities............................................... 275 850
Increase in accrued interest receivable..................................... (485) (199)
Net amortization of fees, premiums and discounts............................ 19 271
Provision for loan losses................................................... 352 250
------- -------
Net cash provided by operating activities.............................. 1,296 2,008
------ ------
Cash flows from investing activities:
Purchase of securities held to maturity............................................ (44,450) (30,025)
Maturities of securities held to maturity.......................................... 20,175 15,050
Net purchases of premises and equipment............................................ (2,197) (667)
Net increase in loans.............................................................. (16,563) (23,642)
Proceeds from sale of foreclosed real estate....................................... 185 -
Purchase of Federal Reserve Bank stock............................................. (30) -
Maturity of interest-bearing deposits.............................................. - 199
--------- -------
Net cash used in investing activities.................................. (42,880) (39,085)
------ ------
Cash flows from financing activities:
Net increase in demand, savings, NOW and
money market deposits.......................................................... 18,603 9,639
Net increase in time deposits...................................................... 19,117 25,207
Proceeds from issuance of common stock, net of stock issuance costs................ 6,720 -
------- -------
Net cash provided by financing activities.............................. 44,440 34,846
------ ------
Net increase (decrease) in cash and cash equivalents................... 2,856 (2,231)
Cash and cash equivalents at beginning of year.......................................... 6,320 8,551
------ ------
Cash and cash equivalents at end of year................................................ $ 9,176 6,320
====== ======
Supplemental disclosure of cash flow information: Cash paid during the year for:
Interest............................................................... $ 5,832 3,678
====== ======
Income taxes........................................................... $ 700 17
======= =======
Noncash transactions:
Reclassification of loans to foreclosed real estate.................... $ - 185
========= =======
Issuance of common stock in exchange of common
stock of minority stockholders of subsidiary....................... $ 309 -
====== ======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1997 and 1996
(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 owned 99.78% and
95.76% at December 31, 1997 and 1996, respectively, 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 five banking offices located in Pinellas County, Florida.
The principal executive offices of the Bank are located at 625 Court
Street, Clearwater, Florida. In addition, the Bank has four branch
offices, three in Clearwater, Florida located at (i) 2575 Ulmerton
Road; (ii) 2175 Nursery Road; and (iii) 1875 Belcher Road and one in
South Pasadena, Florida at 6750 Gulfport Boulevard.
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.
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.
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.
(continued)
6
<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 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.
Stock-Based Compensation. Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("Statement 123")
establishes a "fair value" based method of accounting for stock-based
compensation plans and encourages all entities to adopt that method of
accounting for all of their stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those
plans using the intrinsic value based method of accounting prescribed
by APB Opinion No. 25, "Accounting for Stock Issued to Employees"
(Opinion 25). The Company has elected to follow Opinion 25 and related
interpretations in accounting for its stock-based compensation which is
in the form of stock warrants. Statement 123 requires the disclosure of
proforma net earnings and earnings per share determined as if the
Company accounted for its stock warrants under the fair value method of
that Statement.
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.
FairValues 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 interest-bearing deposits with banks
approximate their fair value.
Securities Held to Maturity. Fair values for securities held to
maturity are based on quoted market prices.
(continued)
7
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Description of Business and Summary of Significant Accounting Policies,
Continued
FairValues of Financial Instruments, Continued. Federal Reserve Bank
Stock. Book value for these securities approximates fair value.
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 ("EPS") of common stock has been
computed on the basis of the weighted-average number of shares of
common stock outstanding. 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 the $10 stock offering
price is assumed to be the market price for the entire year ended
December 31, 1997. For 1997, outstanding warrants are considered
dilutive securities for purposes of calculating diluted EPS which is
computed using the treasury stock method. Such warrants were not
considered dilutive in 1996. The following table presents the
calculations of EPS (See Note 16) ($ in thousands, except per share
amounts).
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS:
<S> <C> <C> <C>
Net earnings available to common stockholders............. $ 844 1,712,292 $ .49
===
Effect of dilutive securities-
Incremental shares from assumed conversion
of warrants ........................................... 360,167
----------
Diluted EPS:
Net earnings available to common stockholders
and assumed conversions................................. $ 844 2,072,459 $ .41
=== ========= ===
</TABLE>
(continued)
8
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Description of Business and Summary of Significant Accounting Policies,
Continued
Earnings Per Share, Continued. Warrants to purchase 1,528,665 and 150,000
shares of Class A and Class B common stock at $6.67 per share were
assumed to be exercised on January 1, 1997 and June 1, 1997,
respectively. Warrants to purchase 989,083 shares of Class A common
stock at $10.00 per share are not included in the computation of
diluted EPS because the warrants' exercise price approximated the
market price of the stock. None of the above warrants have been
exercised as of December 31, 1997.
Reclassifications. Certain amounts in the 1996 financial statements have
been reclassified to conform to the 1997 presentation.
Future Accounting Requirements. Financial Accounting Standards 130 -
Reporting Comprehensive Income establishes standards for reporting
comprehensive income. The Standard defines comprehensive income as the
change in equity of an enterprise except those 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
will be required to adopt this Standard effective January 1, 1998. As
the Statement addresses reporting and presentation issues only, there
will be no impact on operating results from the adoption of this
Standard.
Financial Accounting Standards 131 - Disclosures about Segments of an
Enterprise and Related Information establishes standards for related
disclosures about products and services, geographic areas, and major
customers. The Company will be required to adopt this Standard
effective January 1, 1998. As the Standard addresses reporting and
disclosure issues only, there will be no impact on operating results
from adoption of this Standard.
(continued)
9
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(2) Securities Held to Maturity
Debtsecurities 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):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
December 31, 1997:
U.S. Treasury securities............. $ 4,027 15 - 4,042
U.S. Government and
agency securities................ 54,794 64 64 54,794
------ -- --- ------
Total............................ $ 58,821 79 64 58,836
====== == === ======
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
====== == === ======
</TABLE>
There were no sales of securities during the years ended December 31, 1997
or 1996.
The scheduled maturities of securities held to maturity at December 31,
1997 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Due in one year or less................................................... $ 13,169 13,186
Due after one year through five years..................................... 32,890 32,896
Due after five years through ten years.................................... 12,762 12,754
------ ------
Total ............................................................. $ 58,821 58,836
====== ======
</TABLE>
(continued)
10
<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):
<TABLE>
<CAPTION>
At December 31,
---------------
1997 1996
---- ----
<S> <C> <C>
Commercial loans........................................................ $ 3,281 3,514
Commercial real estate.................................................. 70,533 54,198
Residential real estate................................................. 3,150 2,784
Consumer loans.......................................................... 262 157
-------- --------
77,226 60,653
Deferred loan fees...................................................... (401) (343)
Allowance for loan losses............................................... (1,173) (811)
------ ------
$ 75,652 59,499
====== ======
</TABLE>
An analysis of the change in the allowance for loan losses follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Balance at beginning of year.............................................. $ 811 593
----- ---
Loans charged-off......................................................... - (65)
Recoveries................................................................ 10 33
------ ---
Net................................................................... 10 (32)
------ ---
Provision for loan losses................................................. 352 250
----- ---
Balance at end of year.................................................... $ 1,173 811
===== ===
</TABLE>
The Company had no impaired loans at December 31, 1997 or 1996. The average
recorded investment in impaired loans during the year ended December
31, 1996 was $31,000. There were no impaired loans identified during
1997. No interest income was recognized on impaired loans during 1996.
(continued)
11
<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):
<TABLE>
<CAPTION>
At December 31,
---------------
1997 1996
---- ----
<S> <C> <C>
Land................................................................. $ 915 729
Bank buildings....................................................... 3,570 1,926
Leasehold improvements............................................... 162 61
Furniture and fixtures and equipment................................. 1,203 565
----- -----
Total, at cost.................................................... 5,850 3,281
Less accumulated depreciation and amortization....................... (973) (341)
------ -----
Net book value.................................................... $ 4,877 2,940
===== =====
</TABLE>
The Bank leases its Belcher Road office. The lease is accounted for as an
operating lease and will expire on October 31, 2007. 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 $125,000 and $163,000
for the years ended December 31, 1997 and 1996, respectively.
Approximate future minimum annual rental payments under this
noncancellable lease at December 31, 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C> <C>
1998.......................................................................... $ 94
1999.......................................................................... 96
2000.......................................................................... 99
2001.......................................................................... 102
2002.......................................................................... 106
Thereafter.................................................................... 514
------
Total......................................................................... $ 1,011
=====
</TABLE>
(continued)
12
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(4) Premises and Equipment, Continued
The Company leases a portion of their office space in the branch office
located on Ulmerton Road and beginning in September, 1997, office space
at the new main office on Court Street, to other companies. Such leases
begin to expire in 1998. Rental income during the years ended December
31, 1997 and 1996 totaled approximately $195,000 and $159,000,
respectively. Approximate future minimum lease income under these
leases at December 31, 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
<S> <C> <C>
1998................................................................................. $ 343
1999................................................................................. 275
2000................................................................................. 271
2001................................................................................. 211
2002................................................................................. 190
Thereafter........................................................................... 792
------
Total................................................................................ $ 2,082
=====
</TABLE>
This table gives no effect to the future rental value of office space
subsequent to lease expiration dates.
(5) Deposits
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000, was approximately $9,506,000 and $7,261,000 at December
31, 1997 and 1996, respectively.
Scheduled maturities of certificates of deposit at December 31, 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C> <C>
1998................................................................................. $ 46,954
1999................................................................................. 16,554
2000................................................................................. 9,446
2001................................................................................. 9,362
2002 and thereafter.................................................................. 11,062
------
Total................................................................................ $ 93,378
======
</TABLE>
(continued)
13
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(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, 1997 or 1996.
(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)
14
<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, 1997 At December 31, 1996
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents............................... $ 9,176 9,176 6,320 6,320
Securities held to maturity............................. 58,821 58,836 34,507 34,453
Loans receivable, net................................... 75,652 75,658 59,499 59,692
Accrued interest receivable............................. 1,327 1,327 842 842
Federal Reserve Bank stock.............................. 233 233 203 203
Interest-bearing deposits with bank..................... 99 99 99 99
Financial liabilities-
Deposit liabilities..................................... 131,167 131,491 93,447 93,713
</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, 1997 follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Unfunded loan commitments at variable rates............................... $ 2,950
=====
Available lines of credit................................................. $ 527
=====
Standby letters of credit................................................. $ 100
=====
</TABLE>
(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, 1997, the Company's loan portfolio
contained a concentration of credit risk in retail shopping centers,
apartment buildings and office buildings totaling $55,707,000.
(continued)
15
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(9) Income Taxes
The provision for income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, 1997: Current Deferred Total
----------------------------- ------- -------- -----
<S> <C> <C> <C>
Federal....................................................... $ 377 35 412
State......................................................... 69 6 75
---- --- ---
Total..................................................... $ 446 41 487
=== == ===
Year Ended December 31, 1996:
Federal....................................................... 244 63 307
State......................................................... 72 4 76
--- --- ---
Total..................................................... $ 316 67 383
=== == ===
</TABLE>
The reasons for the differences between the statutory Federal income tax
rate and the effective tax rate are summarized as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Tax provision at statutory rate............................................ 34.0% 34.0%
Increase (decrease) in taxes resulting from:
State income taxes..................................................... 3.8 8.1
Other.................................................................. (1.2) (1.4)
---- ----
Income tax provision ...................................................... 36.6% 40.7%
==== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets relate to the following (in
thousands):
<TABLE>
<CAPTION>
At December 31,
---------------
1997 1996
---- ----
Net deferred tax assets:
<S> <C> <C>
Allowance for loan losses............................................. $ 298 185
Depreciation.......................................................... (19) (20)
Deferred loan fees.................................................... 13 19
Net operating loss carryforward....................................... 186 311
Other................................................................. 7 31
----- ---
Net deferred tax assets........................................... $ 485 526
=== ===
</TABLE>
(continued)
16
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(9) Income Taxes, Continued
At December 31, 1997, 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):
<TABLE>
<CAPTION>
Expiration
----------
<S> <C> <C>
2006..................................................................... $ 194
2007..................................................................... 297
2008..................................................................... 3
----
$ 494
</TABLE>
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.
(10) Related Parties
The Bank has entered into loan transactions with certain of its directors
and their related entities. The activity is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Balance at beginning of year............................................ $ 2,941 1,484
Additions............................................................... 510 1,570
Repayments.............................................................. (209) (113)
----- ------
Balance at end of year.................................................. $ 3,242 2,941
===== =====
</TABLE>
Thereare no loans to directors or officers of the Holding Company,
Intervest Bancshares Corporation.
(11) Employee Stock Option Plan of the Bank
Priorto 1993, an officer of the Bank had been granted options to acquire
11,000 shares of the Bank's common stock. These options were to expire
on December 31, 2001, and were exercisable at $5 per share. All such
options were exchanged for warrants of the Holding Company by the
officer during 1997. In 1997 the option plan was terminated.
(continued)
17
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(12) Profit Sharing Plan
The Bank 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 $21,377 and $12,181 for the years ended
December 31, 1997 and 1996, respectively.
(13) Common Stock Warrants of the Bank
In 1995, Intervest Bancshares Corporation purchased 200,000 shares of the
Bank's common stock at $5 per share and received warrants to purchase
an additional 200,000 shares of common stock at $5 par value. In June,
1997, Intervest Bancshares Corporation exercised the warrants and
purchased 200,000 shares of the Bank's common stock.
(14) Stockholders' Equity
The Bank, 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.
(15) Regulatory Matters
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 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, 1997, that the Bank meets all capital
adequacy requirements to which it is subject.
(continued)
18
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(15) Regulatory Matters, Continued
As of December 31, 1997, 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, 1997:
Total capital (to Risk
<S> <C> <C> <C> <C> <C> <C>
Weighted Assets)............... $ 9,420 10.53% $ 7,157 8.00% $ 8,948 10.00%
Tier I Capital (to Risk
Weighted Assets)............... 9,125 10.20 3,578 4.00 5,367 6.00
Tier I Capital
(to Average Assets)............ 9,125 6.85 5,328 4.00 6,660 5.00
As of December 31, 1996:
Total capital (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
</TABLE>
(16) Capital Stock
Bothclasses 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.
(continued)
19
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(16) Capital Stock, Continued
On September 19, 1997, the Holding Company's charter was amended to
increase the authorized number of shares of Class A common stock to
7,500,000, Class B common stock to 700,000 and preferred stock to
300,000.
In addition, on September 18, 1997, the Board of Directors of the Holding
Company declared a 1.5 for 1 Class A and Class B common stock split
payable on September 19, 1997 to stockholders of record on September
19, 1997. All per share amounts reflect the effect of these stock
splits.
(17) Common Stock Warrants
The Company has outstanding warrants which entitle the registered holders
thereof to purchase one share of common stock for each issued warrant.
All warrants were exercisable when issued. These warrants have been
issued in connection with public stock offerings, to directors and
employees of the Bank and directors of the Holding Company and to
outside third parties for performance of services. A summary of stock
warrant transactions follows ($ in thousands, except per share
amounts).
<TABLE>
<CAPTION>
Weighted-
Weighted- Average
Average Contractual
Exercise Per Aggregate Life At
Number of Price Per Warrant Warrant December 31,
Class A Common Stock Warrants: Warrants Warrant Price Price 1997
-------- ------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
Outstanding at December 31,1995....... 1,288,500 $ 6.67 $ 6.67 $ 8,594 5.4 years
Warrants granted...................... 240,165 6.67 6.67 1,602 5.1 years
--------- ------
Outstanding at December 31, 1996...... 1,528,665 6.67 6.67 10,196 5.4 years
Warrants granted...................... 949,183 10.00 10.00 9,492 2.0 years(1)
Warrants granted...................... 16,500 10.00 10.00 165 4.0 years
---------- -------
Outstanding at December 31, 1997...... 2,494,348 $ 6.67-10.00 $ 7.96 19,853 4.1 years
========= ========== ==== ====== =========
</TABLE>
- -------------------------------------
(1) These warrants entitle the holder to purchase one share of Class A
common stock at a price of $10.00 per share through December 31, 1999;
$11.50 per share from January 1, 2000 through December 31, 2000; $12.50 per
share from January 1, 2001 through December 31, 2001 and $13.50 per share
from January 1, 2002 through December 31, 2002. For purposes of the above
table it is assumed that these warrants will be exercised on December 31,
1999.
(continued)
20
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(17) Common Stock Warrants, Continued
<TABLE>
<CAPTION>
Weighted-
Weighted- Average
Average Contractual
Option Per Aggregate Life At
Number of Price Per Warrant Warrant December 31,
Class B Common Stock Warrants: Warrants Warrant Price Price 1997
-------- ------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
Outstanding at December 31,1995
and 1996........................... - - - - -
Warrants granted........................ 150,000 $ 6.67 $ 6.67 $ 1,001 9.0 years
------- -----
Outstanding at December 31, 1997........ 150,000 $ 6.67 $ 6.67 $ 1,001 9.0 years
======= ==== ==== ===== =========
</TABLE>
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 issued to employees and directors of the
Bank, directors of the Holding Company and to outside third parties for
performance of services being greater than or approximating the market
value of the common stock at the date of grant, no compensation expense
has been recognized in the consolidated statements of earnings.
In order to calculate the fair value of the warrants issued to employees
and directors of the Bank, directors of the Holding Company and to
outside third parties for the performance of services, it was assumed
that the risk-free interest rate was 6.0%, there would be no dividends
paid by the Company over the exercise period, the expected life of the
warrants would be the entire exercise period, except for warrants
issued in 1997 that have increasing option prices which is the end of
the initial exercise period, and stock volatility would be zero due to
the lack of an active market for the stock. The following information
pertains to the fair value of the such warrants granted to purchase
common stock in 1996 and 1997 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996
---- ----
Weighted-average grant date fair value of warrants
<S> <C> <C>
issued during the year.................................................... $ 622 470
=== ===
Proforma net earnings.......................................................... $ 222 88
=== ===
Proforma basic earnings per share.............................................. $ .13 .05
=== ===
</TABLE>
(continued)
21
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(18) Holding Company Financial Information
The Holding Company's financial information is as follows (in thousands):
<TABLE>
<CAPTION>
Condensed Balance Sheets
At December 31,
---------------
1997 1996
---- ----
Assets
<S> <C> <C>
Cash..................................................................... $ 223 698
Short-term securities.................................................... 7,276 550
------ ------
Cash and cash equivalents............................................ 7,499 1,248
Loans receivable......................................................... 752 1,230
Investment in subsidiary................................................. 9,399 7,340
Organizational costs, net................................................ 2 32
Other assets............................................................. 23 17
-------- ------
Total assets......................................................... $ 17,675 9,867
====== =====
Liabilities and Stockholders' Equity
Liabilities.............................................................. 55 120
Stockholders' equity..................................................... 17,620 9,747
------ -----
Total liabilities and stockholders' equity........................... $ 17,675 9,867
====== =====
Condensed Statements of Earnings
For the Year Ended
December 31,
------------
1997 1996
---- ----
Revenues..................................................................... $ 264 325
Expenses..................................................................... 172 224
--- ---
Earnings before earnings of subsidiary.................................. 92 101
Earnings of subsidiary.................................................. 752 457
--- ---
Net earnings............................................................ $ 844 558
=== ===
</TABLE>
(continued)
22
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(18) Holding Company Financial Information, Continued
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
Year Ended
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings.......................................................... $ 844 558
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Equity in undistributed earnings of
subsidiary.................................................... (752) (457)
Net decrease in organizational costs.............................. 30 29
Other............................................................. (69) 72
------ ------
Net cash provided by operating activities..................... 53 202
------ -----
Cash flows used in investing activities -
Net decrease (increase) in loans...................................... 478 (62)
------ -----
Cash flows from financing activities:
Proceeds from issuance of common stock................................ 6,720 -
Purchase of common stock of subsidiary................................ (1,000) (40)
----- -----
Net cash provided by (used in) financing
activities.................................................. 5,720 (40)
----- -----
Net increase in cash and cash equivalents.................................. 6,251 100
Cash and cash equivalents at beginning of
the year.............................................................. 1,248 1,148
----- -----
Cash and cash equivalents at end of year................................... $ 7,499 1,248
===== =====
</TABLE>
(continued)
23
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(19) Selected Quarterly Financial Data (unaudited)
Summarized quarterly financial data follows ($ in thousands, except per
share figures):
<TABLE>
<CAPTION>
Year Ended December 31, 1997
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income.......................................... $ 2,085 2,219 2,337 2,706
Interest expense......................................... 1,309 1,379 1,480 1,726
----- ----- ----- -----
Net interest income...................................... 776 840 857 980
Provision for loan losses................................ 92 92 82 86
------- ------ ------ ------
Net interest income after provision
for loan losses....................................... 684 748 775 894
Noninterest income....................................... 31 37 28 40
Noninterest expense...................................... 461 479 467 499
------ ------ ----- -----
Earnings before income taxes............................. 254 306 336 435
Income taxes............................................. 94 119 121 153
------ ----- ----- -----
Net earnings ............................................ $ 160 187 215 282
===== ===== ===== =====
Basic earnings per share................................. $ .10 .11 .13 .15
===== ===== ====== =====
Diluted earnings per share............................... $ .09 .09 .11 .12
===== ===== ====== =====
Year Ended December 31, 1996
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Interest income.......................................... $ 1,377 1,480 1,637 1,887
Interest expense......................................... 788 840 975 1,142
------ ----- ----- -----
Net interest income...................................... 589 640 662 745
Provision for loan losses................................ 73 55 62 60
------ ----- ----- ------
Net interest income after provision
for loan losses....................................... 516 585 600 685
Noninterest income....................................... 30 48 24 4
Noninterest expense...................................... 361 404 374 412
------ ----- ----- ------
Earnings before income taxes............................. 185 229 250 277
Income taxes............................................. 75 97 101 110
------ ------ ----- -----
Net earnings ............................................ $ 110 132 149 167
===== ====== ===== =====
Basic earnings per share................................. $ .07 .08 .09 .10
====== ====== ===== ======
Diluted earnings per share............................... $ .07 .08 .09 .10
====== ====== ===== ======
</TABLE>
24
<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") at December 31, 1997 and
1996 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, 1997 and 1996 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 PA
Tampa, Florida
January 23, 1998
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
-----------------------
<S> <C> <C>
Assets 1997 1996
---- ----
Cash and due from banks.......................................................... $ 1,738 2,318
Federal funds sold............................................................... 162 3,452
Short-term investments........................................................... 7,276 550
--------- --------
Total cash and cash equivalents........................................... 9,176 6,320
Interest-bearing deposits with banks............................................. 99 99
Securities held to maturity...................................................... 58,821 34,507
Loans receivable, net of allowance for loan losses of $1,173
in 1997 and $811 in 1996...................................................... 75,652 59,499
Accrued interest receivable...................................................... 1,327 842
Premises and equipment, net...................................................... 4,877 2,940
Restricted securities, Federal Reserve Bank stock, at cost ...................... 233 203
Foreclosed real estate........................................................... - 185
Deferred income tax asset........................................................ 485 526
Other assets ............................................................... 85 75
---------- ---------
$ 150,755 105,196
======= =======
Liabilities and Stockholders' Equity
Liabilities:
Demand deposits............................................................... 3,490 2,401
Savings and NOW deposits...................................................... 17,119 9,278
Money-market deposits......................................................... 17,180 7,507
Time deposits................................................................. 93,378 74,261
-------- -------
Total deposits............................................................ 131,167 93,447
Other liabilities............................................................. 1,947 1,676
-------- --------
Total liabilities......................................................... 133,114 95,123
------- -------
Minority interest................................................................ 21 326
---------- ---------
Commitments (Notes 4 and 7)
Stockholders' Equity:
Preferred stock, 300,000 shares authorized, issued none....................... - -
Class A common stock - $1 par value, 7,500,000 shares
authorized; 2,124,415 and 900,000 shares issued
and outstanding in 1997 and 1996............................................ 2,124 900
Class B common stock - $1 par value, 700,000 shares
authorized; 300,000 and 200,000 shares issued
and outstanding in 1997 and 1996............................................ 300 200
Additional paid-in capital.................................................... 13,360 7,655
Retained earnings............................................................. 1,836 992
-------- ---------
Total stockholders' equity................................................ 17,620 9,747
------- --------
$ 150,755 105,196
======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Earnings
($ in thousands except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Interest income:
Loans receivable.............................................................. $ 6,415 4,624
Securities held to maturity................................................... 2,632 1,514
Other interest earning assets................................................. 300 243
----------- -----------
Total interest income..................................................... 9,347 6,381
Interest expense on deposits..................................................... 5,894 3,745
---------- ----------
Net interest income....................................................... 3,453 2,636
Provision for loan losses........................................................ 352 250
----------- -----------
Net interest income after
provision for loan losses............................................... 3,101 2,386
---------- ----------
Noninterest income:
Customer service charges...................................................... 121 89
Other... ............................................................... 15 17
------------ -----------
Total noninterest income.................................................. 136 106
----------- -----------
Noninterest expenses:
Salaries and employee benefits................................................ 907 739
Occupancy and equipment....................................................... 406 342
Advertising and promotion..................................................... 40 9
Professional fees............................................................. 48 57
State assessment.............................................................. 26 19
Audit and accounting.......................................................... 48 27
Data processing............................................................... 21 9
Deposit insurance premiums.................................................... 12 2
General insurance............................................................. 31 31
Stationery, printing and supplies............................................. 83 51
Other ............................................................... 282 246
Minority interest in subsidiary............................................... 2 19
------------ ------------
Total noninterest expenses................................................ 1,906 1,551
---------- ----------
Earnings before income taxes..................................................... 1,331 941
Income taxes.............................................................. 487 383
----------- -----------
Net earnings ............................................................... $ 844 558
=========== ===========
Basic earnings per share......................................................... $ .49 .34
============ ============
Diluted earnings per share....................................................... $ .41 .34
============ ============
Weighted-average number of shares
outstanding for basic earnings per share...................................... 1,712,292 1,650,000
========= =========
Weighted-average number of shares
outstanding for diluted earnings per share.................................... 2,072,459 1,650,000
========= =========
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
3
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
($ in thousands)
<TABLE>
<CAPTION>
Shares of
Class A Class A Class B Additional Total
Common Common Common Paid-In Retained Stockholders'
Stock Stock Stock Capital Earnings Equity
----- ----- ----- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995......................... 900,000 $ 900 200 7,655 434 9,189
Net earnings.................... - - - - 558 558
------------ ------- ---- ------ ----- ------
Balance at December 31,
1996 ....................... 900,000 900 200 7,655 992 9,747
Effect of 1.5 for 1 stock
split ....................... 450,000 450 100 (550) - -
Proceeds from 747,500 shares
of stock issued, net of stock
issuance cost of $755........ 747,500 748 - 5,972 - 6,720
Net earnings.................... - - - - 844 844
Issuance of common stock
in exchange for common
stock of minority
stockholders of
subsidiary................... 26,915 26 - 283 - 309
--------- ------ ---- ------- ------- -------
Balance at December 31,
1997 ........................ 2,124,415 $ 2,124 300 13,360 1,836 17,620
========= ===== === ====== ===== ======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
4
<PAGE>
<TABLE>
<CAPTION>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In thousands)
Year Ended
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings....................................................................... $ 844 558
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation................................................................ 260 176
Provision for deferred income taxes......................................... 41 67
(Increase) decrease in other assets......................................... (10) 35
Increase in other liabilities............................................... 275 850
Increase in accrued interest receivable..................................... (485) (199)
Net amortization of fees, premiums and discounts............................ 19 271
Provision for loan losses................................................... 352 250
------- -------
Net cash provided by operating activities.............................. 1,296 2,008
------ ------
Cash flows from investing activities:
Purchase of securities held to maturity............................................ (44,450) (30,025)
Maturities of securities held to maturity.......................................... 20,175 15,050
Net purchases of premises and equipment............................................ (2,197) (667)
Net increase in loans.............................................................. (16,563) (23,642)
Proceeds from sale of foreclosed real estate....................................... 185 -
Purchase of Federal Reserve Bank stock............................................. (30) -
Maturity of interest-bearing deposits.............................................. - 199
--------- -------
Net cash used in investing activities.................................. (42,880) (39,085)
------ ------
Cash flows from financing activities:
Net increase in demand, savings, NOW and
money market deposits.......................................................... 18,603 9,639
Net increase in time deposits...................................................... 19,117 25,207
Proceeds from issuance of common stock, net of stock issuance costs................ 6,720 -
------- -------
Net cash provided by financing activities.............................. 44,440 34,846
------ ------
Net increase (decrease) in cash and cash equivalents................... 2,856 (2,231)
Cash and cash equivalents at beginning of year.......................................... 6,320 8,551
------ ------
Cash and cash equivalents at end of year................................................ $ 9,176 6,320
====== ======
Supplemental disclosure of cash flow information: Cash paid during the year for:
Interest............................................................... $ 5,832 3,678
====== ======
Income taxes........................................................... $ 700 17
======= =======
Noncash transactions:
Reclassification of loans to foreclosed real estate.................... $ - 185
========= =======
Issuance of common stock in exchange of common
stock of minority stockholders of subsidiary....................... $ 309 -
====== ======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1997 and 1996
(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 owned 99.78% and
95.76% at December 31, 1997 and 1996, respectively, 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 five banking offices located in Pinellas County, Florida.
The principal executive offices of the Bank are located at 625 Court
Street, Clearwater, Florida. In addition, the Bank has four branch
offices, three in Clearwater, Florida located at (i) 2575 Ulmerton
Road; (ii) 2175 Nursery Road; and (iii) 1875 Belcher Road and one in
South Pasadena, Florida at 6750 Gulfport Boulevard.
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.
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.
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.
(continued)
6
<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 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.
Stock-Based Compensation. Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("Statement 123")
establishes a "fair value" based method of accounting for stock-based
compensation plans and encourages all entities to adopt that method of
accounting for all of their stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those
plans using the intrinsic value based method of accounting prescribed
by APB Opinion No. 25, "Accounting for Stock Issued to Employees"
(Opinion 25). The Company has elected to follow Opinion 25 and related
interpretations in accounting for its stock-based compensation which is
in the form of stock warrants. Statement 123 requires the disclosure of
proforma net earnings and earnings per share determined as if the
Company accounted for its stock warrants under the fair value method of
that Statement.
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.
FairValues 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 interest-bearing deposits with banks
approximate their fair value.
Securities Held to Maturity. Fair values for securities held to
maturity are based on quoted market prices.
(continued)
7
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Description of Business and Summary of Significant Accounting Policies,
Continued
FairValues of Financial Instruments, Continued. Federal Reserve Bank
Stock. Book value for these securities approximates fair value.
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 ("EPS") of common stock has been
computed on the basis of the weighted-average number of shares of
common stock outstanding. 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 the $10 stock offering
price is assumed to be the market price for the entire year ended
December 31, 1997. For 1997, outstanding warrants are considered
dilutive securities for purposes of calculating diluted EPS which is
computed using the treasury stock method. Such warrants were not
considered dilutive in 1996. The following table presents the
calculations of EPS (See Note 16) ($ in thousands, except per share
amounts).
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS:
<S> <C> <C> <C>
Net earnings available to common stockholders............. $ 844 1,712,292 $ .49
===
Effect of dilutive securities-
Incremental shares from assumed conversion
of warrants ........................................... 360,167
----------
Diluted EPS:
Net earnings available to common stockholders
and assumed conversions................................. $ 844 2,072,459 $ .41
=== ========= ===
</TABLE>
(continued)
8
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Description of Business and Summary of Significant Accounting Policies,
Continued
Earnings Per Share, Continued. Warrants to purchase 1,528,665 and 150,000
shares of Class A and Class B common stock at $6.67 per share were
assumed to be exercised on January 1, 1997 and June 1, 1997,
respectively. Warrants to purchase 989,083 shares of Class A common
stock at $10.00 per share are not included in the computation of
diluted EPS because the warrants' exercise price approximated the
market price of the stock. None of the above warrants have been
exercised as of December 31, 1997.
Reclassifications. Certain amounts in the 1996 financial statements have
been reclassified to conform to the 1997 presentation.
Future Accounting Requirements. Financial Accounting Standards 130 -
Reporting Comprehensive Income establishes standards for reporting
comprehensive income. The Standard defines comprehensive income as the
change in equity of an enterprise except those 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
will be required to adopt this Standard effective January 1, 1998. As
the Statement addresses reporting and presentation issues only, there
will be no impact on operating results from the adoption of this
Standard.
Financial Accounting Standards 131 - Disclosures about Segments of an
Enterprise and Related Information establishes standards for related
disclosures about products and services, geographic areas, and major
customers. The Company will be required to adopt this Standard
effective January 1, 1998. As the Standard addresses reporting and
disclosure issues only, there will be no impact on operating results
from adoption of this Standard.
(continued)
9
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(2) Securities Held to Maturity
Debtsecurities 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):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
December 31, 1997:
U.S. Treasury securities............. $ 4,027 15 - 4,042
U.S. Government and
agency securities................ 54,794 64 64 54,794
------ -- --- ------
Total............................ $ 58,821 79 64 58,836
====== == === ======
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
====== == === ======
</TABLE>
There were no sales of securities during the years ended December 31, 1997
or 1996.
The scheduled maturities of securities held to maturity at December 31,
1997 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Due in one year or less................................................... $ 13,169 13,186
Due after one year through five years..................................... 32,890 32,896
Due after five years through ten years.................................... 12,762 12,754
------ ------
Total ............................................................. $ 58,821 58,836
====== ======
</TABLE>
(continued)
10
<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):
<TABLE>
<CAPTION>
At December 31,
---------------
1997 1996
---- ----
<S> <C> <C>
Commercial loans........................................................ $ 3,281 3,514
Commercial real estate.................................................. 70,533 54,198
Residential real estate................................................. 3,150 2,784
Consumer loans.......................................................... 262 157
-------- --------
77,226 60,653
Deferred loan fees...................................................... (401) (343)
Allowance for loan losses............................................... (1,173) (811)
------ ------
$ 75,652 59,499
====== ======
</TABLE>
An analysis of the change in the allowance for loan losses follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Balance at beginning of year.............................................. $ 811 593
----- ---
Loans charged-off......................................................... - (65)
Recoveries................................................................ 10 33
------ ---
Net................................................................... 10 (32)
------ ---
Provision for loan losses................................................. 352 250
----- ---
Balance at end of year.................................................... $ 1,173 811
===== ===
</TABLE>
The Company had no impaired loans at December 31, 1997 or 1996. The average
recorded investment in impaired loans during the year ended December
31, 1996 was $31,000. There were no impaired loans identified during
1997. No interest income was recognized on impaired loans during 1996.
(continued)
11
<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):
<TABLE>
<CAPTION>
At December 31,
---------------
1997 1996
---- ----
<S> <C> <C>
Land................................................................. $ 915 729
Bank buildings....................................................... 3,570 1,926
Leasehold improvements............................................... 162 61
Furniture and fixtures and equipment................................. 1,203 565
----- -----
Total, at cost.................................................... 5,850 3,281
Less accumulated depreciation and amortization....................... (973) (341)
------ -----
Net book value.................................................... $ 4,877 2,940
===== =====
</TABLE>
The Bank leases its Belcher Road office. The lease is accounted for as an
operating lease and will expire on October 31, 2007. 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 $125,000 and $163,000
for the years ended December 31, 1997 and 1996, respectively.
Approximate future minimum annual rental payments under this
noncancellable lease at December 31, 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C> <C>
1998.......................................................................... $ 94
1999.......................................................................... 96
2000.......................................................................... 99
2001.......................................................................... 102
2002.......................................................................... 106
Thereafter.................................................................... 514
------
Total......................................................................... $ 1,011
=====
</TABLE>
(continued)
12
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(4) Premises and Equipment, Continued
The Company leases a portion of their office space in the branch office
located on Ulmerton Road and beginning in September, 1997, office space
at the new main office on Court Street, to other companies. Such leases
begin to expire in 1998. Rental income during the years ended December
31, 1997 and 1996 totaled approximately $195,000 and $159,000,
respectively. Approximate future minimum lease income under these
leases at December 31, 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
<S> <C> <C>
1998................................................................................. $ 343
1999................................................................................. 275
2000................................................................................. 271
2001................................................................................. 211
2002................................................................................. 190
Thereafter........................................................................... 792
------
Total................................................................................ $ 2,082
=====
</TABLE>
This table gives no effect to the future rental value of office space
subsequent to lease expiration dates.
(5) Deposits
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000, was approximately $9,506,000 and $7,261,000 at December
31, 1997 and 1996, respectively.
Scheduled maturities of certificates of deposit at December 31, 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C> <C>
1998................................................................................. $ 46,954
1999................................................................................. 16,554
2000................................................................................. 9,446
2001................................................................................. 9,362
2002 and thereafter.................................................................. 11,062
------
Total................................................................................ $ 93,378
======
</TABLE>
(continued)
13
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(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, 1997 or 1996.
(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)
14
<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, 1997 At December 31, 1996
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents............................... $ 9,176 9,176 6,320 6,320
Securities held to maturity............................. 58,821 58,836 34,507 34,453
Loans receivable, net................................... 75,652 75,658 59,499 59,692
Accrued interest receivable............................. 1,327 1,327 842 842
Federal Reserve Bank stock.............................. 233 233 203 203
Interest-bearing deposits with bank..................... 99 99 99 99
Financial liabilities-
Deposit liabilities..................................... 131,167 131,491 93,447 93,713
</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, 1997 follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Unfunded loan commitments at variable rates............................... $ 2,950
=====
Available lines of credit................................................. $ 527
=====
Standby letters of credit................................................. $ 100
=====
</TABLE>
(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, 1997, the Company's loan portfolio
contained a concentration of credit risk in retail shopping centers,
apartment buildings and office buildings totaling $55,707,000.
(continued)
15
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(9) Income Taxes
The provision for income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, 1997: Current Deferred Total
----------------------------- ------- -------- -----
<S> <C> <C> <C>
Federal....................................................... $ 377 35 412
State......................................................... 69 6 75
---- --- ---
Total..................................................... $ 446 41 487
=== == ===
Year Ended December 31, 1996:
Federal....................................................... 244 63 307
State......................................................... 72 4 76
--- --- ---
Total..................................................... $ 316 67 383
=== == ===
</TABLE>
The reasons for the differences between the statutory Federal income tax
rate and the effective tax rate are summarized as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Tax provision at statutory rate............................................ 34.0% 34.0%
Increase (decrease) in taxes resulting from:
State income taxes..................................................... 3.8 8.1
Other.................................................................. (1.2) (1.4)
---- ----
Income tax provision ...................................................... 36.6% 40.7%
==== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets relate to the following (in
thousands):
<TABLE>
<CAPTION>
At December 31,
---------------
1997 1996
---- ----
Net deferred tax assets:
<S> <C> <C>
Allowance for loan losses............................................. $ 298 185
Depreciation.......................................................... (19) (20)
Deferred loan fees.................................................... 13 19
Net operating loss carryforward....................................... 186 311
Other................................................................. 7 31
----- ---
Net deferred tax assets........................................... $ 485 526
=== ===
</TABLE>
(continued)
16
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(9) Income Taxes, Continued
At December 31, 1997, 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):
<TABLE>
<CAPTION>
Expiration
----------
<S> <C> <C>
2006..................................................................... $ 194
2007..................................................................... 297
2008..................................................................... 3
----
$ 494
</TABLE>
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.
(10) Related Parties
The Bank has entered into loan transactions with certain of its directors
and their related entities. The activity is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Balance at beginning of year............................................ $ 2,941 1,484
Additions............................................................... 510 1,570
Repayments.............................................................. (209) (113)
----- ------
Balance at end of year.................................................. $ 3,242 2,941
===== =====
</TABLE>
Thereare no loans to directors or officers of the Holding Company,
Intervest Bancshares Corporation.
(11) Employee Stock Option Plan of the Bank
Priorto 1993, an officer of the Bank had been granted options to acquire
11,000 shares of the Bank's common stock. These options were to expire
on December 31, 2001, and were exercisable at $5 per share. All such
options were exchanged for warrants of the Holding Company by the
officer during 1997. In 1997 the option plan was terminated.
(continued)
17
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(12) Profit Sharing Plan
The Bank 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 $21,377 and $12,181 for the years ended
December 31, 1997 and 1996, respectively.
(13) Common Stock Warrants of the Bank
In 1995, Intervest Bancshares Corporation purchased 200,000 shares of the
Bank's common stock at $5 per share and received warrants to purchase
an additional 200,000 shares of common stock at $5 par value. In June,
1997, Intervest Bancshares Corporation exercised the warrants and
purchased 200,000 shares of the Bank's common stock.
(14) Stockholders' Equity
The Bank, 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.
(15) Regulatory Matters
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 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, 1997, that the Bank meets all capital
adequacy requirements to which it is subject.
(continued)
18
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(15) Regulatory Matters, Continued
As of December 31, 1997, 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, 1997:
Total capital (to Risk
<S> <C> <C> <C> <C> <C> <C>
Weighted Assets)............... $ 9,420 10.53% $ 7,157 8.00% $ 8,948 10.00%
Tier I Capital (to Risk
Weighted Assets)............... 9,125 10.20 3,578 4.00 5,367 6.00
Tier I Capital
(to Average Assets)............ 9,125 6.85 5,328 4.00 6,660 5.00
As of December 31, 1996:
Total capital (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
</TABLE>
(16) Capital Stock
Bothclasses 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.
(continued)
19
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(16) Capital Stock, Continued
On September 19, 1997, the Holding Company's charter was amended to
increase the authorized number of shares of Class A common stock to
7,500,000, Class B common stock to 700,000 and preferred stock to
300,000.
In addition, on September 18, 1997, the Board of Directors of the Holding
Company declared a 1.5 for 1 Class A and Class B common stock split
payable on September 19, 1997 to stockholders of record on September
19, 1997. All per share amounts reflect the effect of these stock
splits.
(17) Common Stock Warrants
The Company has outstanding warrants which entitle the registered holders
thereof to purchase one share of common stock for each issued warrant.
All warrants were exercisable when issued. These warrants have been
issued in connection with public stock offerings, to directors and
employees of the Bank and directors of the Holding Company and to
outside third parties for performance of services. A summary of stock
warrant transactions follows ($ in thousands, except per share
amounts).
<TABLE>
<CAPTION>
Weighted-
Weighted- Average
Average Contractual
Exercise Per Aggregate Life At
Number of Price Per Warrant Warrant December 31,
Class A Common Stock Warrants: Warrants Warrant Price Price 1997
-------- ------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
Outstanding at December 31,1995....... 1,288,500 $ 6.67 $ 6.67 $ 8,594 5.4 years
Warrants granted...................... 240,165 6.67 6.67 1,602 5.1 years
--------- ------
Outstanding at December 31, 1996...... 1,528,665 6.67 6.67 10,196 5.4 years
Warrants granted...................... 949,183 10.00 10.00 9,492 2.0 years(1)
Warrants granted...................... 16,500 10.00 10.00 165 4.0 years
---------- -------
Outstanding at December 31, 1997...... 2,494,348 $ 6.67-10.00 $ 7.96 19,853 4.1 years
========= ========== ==== ====== =========
</TABLE>
- -------------------------------------
(1) These warrants entitle the holder to purchase one share of Class A
common stock at a price of $10.00 per share through December 31, 1999;
$11.50 per share from January 1, 2000 through December 31, 2000; $12.50 per
share from January 1, 2001 through December 31, 2001 and $13.50 per share
from January 1, 2002 through December 31, 2002. For purposes of the above
table it is assumed that these warrants will be exercised on December 31,
1999.
(continued)
20
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(17) Common Stock Warrants, Continued
<TABLE>
<CAPTION>
Weighted-
Weighted- Average
Average Contractual
Option Per Aggregate Life At
Number of Price Per Warrant Warrant December 31,
Class B Common Stock Warrants: Warrants Warrant Price Price 1997
-------- ------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
Outstanding at December 31,1995
and 1996........................... - - - - -
Warrants granted........................ 150,000 $ 6.67 $ 6.67 $ 1,001 9.0 years
------- -----
Outstanding at December 31, 1997........ 150,000 $ 6.67 $ 6.67 $ 1,001 9.0 years
======= ==== ==== ===== =========
</TABLE>
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 issued to employees and directors of the
Bank, directors of the Holding Company and to outside third parties for
performance of services being greater than or approximating the market
value of the common stock at the date of grant, no compensation expense
has been recognized in the consolidated statements of earnings.
In order to calculate the fair value of the warrants issued to employees
and directors of the Bank, directors of the Holding Company and to
outside third parties for the performance of services, it was assumed
that the risk-free interest rate was 6.0%, there would be no dividends
paid by the Company over the exercise period, the expected life of the
warrants would be the entire exercise period, except for warrants
issued in 1997 that have increasing option prices which is the end of
the initial exercise period, and stock volatility would be zero due to
the lack of an active market for the stock. The following information
pertains to the fair value of the such warrants granted to purchase
common stock in 1996 and 1997 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996
---- ----
Weighted-average grant date fair value of warrants
<S> <C> <C>
issued during the year.................................................... $ 622 470
=== ===
Proforma net earnings.......................................................... $ 222 88
=== ===
Proforma basic earnings per share.............................................. $ .13 .05
=== ===
</TABLE>
(continued)
21
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(18) Holding Company Financial Information
The Holding Company's financial information is as follows (in thousands):
<TABLE>
<CAPTION>
Condensed Balance Sheets
At December 31,
---------------
1997 1996
---- ----
Assets
<S> <C> <C>
Cash..................................................................... $ 223 698
Short-term securities.................................................... 7,276 550
------ ------
Cash and cash equivalents............................................ 7,499 1,248
Loans receivable......................................................... 752 1,230
Investment in subsidiary................................................. 9,399 7,340
Organizational costs, net................................................ 2 32
Other assets............................................................. 23 17
-------- ------
Total assets......................................................... $ 17,675 9,867
====== =====
Liabilities and Stockholders' Equity
Liabilities.............................................................. 55 120
Stockholders' equity..................................................... 17,620 9,747
------ -----
Total liabilities and stockholders' equity........................... $ 17,675 9,867
====== =====
Condensed Statements of Earnings
For the Year Ended
December 31,
------------
1997 1996
---- ----
Revenues..................................................................... $ 264 325
Expenses..................................................................... 172 224
--- ---
Earnings before earnings of subsidiary.................................. 92 101
Earnings of subsidiary.................................................. 752 457
--- ---
Net earnings............................................................ $ 844 558
=== ===
</TABLE>
(continued)
22
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(18) Holding Company Financial Information, Continued
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
Year Ended
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings.......................................................... $ 844 558
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Equity in undistributed earnings of
subsidiary.................................................... (752) (457)
Net decrease in organizational costs.............................. 30 29
Other............................................................. (69) 72
------ ------
Net cash provided by operating activities..................... 53 202
------ -----
Cash flows used in investing activities -
Net decrease (increase) in loans...................................... 478 (62)
------ -----
Cash flows from financing activities:
Proceeds from issuance of common stock................................ 6,720 -
Purchase of common stock of subsidiary................................ (1,000) (40)
----- -----
Net cash provided by (used in) financing
activities.................................................. 5,720 (40)
----- -----
Net increase in cash and cash equivalents.................................. 6,251 100
Cash and cash equivalents at beginning of
the year.............................................................. 1,248 1,148
----- -----
Cash and cash equivalents at end of year................................... $ 7,499 1,248
===== =====
</TABLE>
(continued)
23
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(19) Selected Quarterly Financial Data (unaudited)
Summarized quarterly financial data follows ($ in thousands, except per
share figures):
<TABLE>
<CAPTION>
Year Ended December 31, 1997
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income.......................................... $ 2,085 2,219 2,337 2,706
Interest expense......................................... 1,309 1,379 1,480 1,726
----- ----- ----- -----
Net interest income...................................... 776 840 857 980
Provision for loan losses................................ 92 92 82 86
------- ------ ------ ------
Net interest income after provision
for loan losses....................................... 684 748 775 894
Noninterest income....................................... 31 37 28 40
Noninterest expense...................................... 461 479 467 499
------ ------ ----- -----
Earnings before income taxes............................. 254 306 336 435
Income taxes............................................. 94 119 121 153
------ ----- ----- -----
Net earnings ............................................ $ 160 187 215 282
===== ===== ===== =====
Basic earnings per share................................. $ .10 .11 .13 .15
===== ===== ====== =====
Diluted earnings per share............................... $ .09 .09 .11 .12
===== ===== ====== =====
Year Ended December 31, 1996
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Interest income.......................................... $ 1,377 1,480 1,637 1,887
Interest expense......................................... 788 840 975 1,142
------ ----- ----- -----
Net interest income...................................... 589 640 662 745
Provision for loan losses................................ 73 55 62 60
------ ----- ----- ------
Net interest income after provision
for loan losses....................................... 516 585 600 685
Noninterest income....................................... 30 48 24 4
Noninterest expense...................................... 361 404 374 412
------ ----- ----- ------
Earnings before income taxes............................. 185 229 250 277
Income taxes............................................. 75 97 101 110
------ ------ ----- -----
Net earnings ............................................ $ 110 132 149 167
===== ====== ===== =====
Basic earnings per share................................. $ .07 .08 .09 .10
====== ====== ===== ======
Diluted earnings per share............................... $ .07 .08 .09 .10
====== ====== ===== ======
</TABLE>
24
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