U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A-1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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Commission File Number 000-23377
INTERVEST BANCSHARES CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 13-3699013
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(State or other (I.R.S. employer
jurisdiction of incorporation) identification no.)
10 Rockefeller Plaza, Suite 1015
New York, New York 10020-1903
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(Address of principal executive offices)
(212) 218-2800
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(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b)
of the Securities Exchange Act of 1934
None
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(Title of class)
Securities registered pursuant to Section 12(g)
of the Securities Exchange Act of 1934
Class A Common Stock, par value $1.00 per share
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(Title of class)
Indicate by check mark whether the issuer: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days: Yes XX No .
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 the Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment of
this Form 10-KSB. [X]
The Issuer's total interest income and total other income for its most recent
fiscal year was $12,934,000 and $349,000, respectively.
The aggregate market value of 1,190,121 shares of the Issuer's Class A Common
stock on February 16, 1999, which excludes 994,904 shares held by affiliates as
a group, was $11,306,150. This value is based on the average bid and ask prices
of $9.50 per share on February 16, 1999 of the Issuer's Class A common stock on
the NASDAQ Small Cap Market.
As of February 16, 1999, there were 2,185,025 shares of the Issuer's Class A
common stock and 305,000 shares of the Issuer's Class B common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Proxy Statement for the 1999 Annual Meeting of Stockholders are
incorporated by reference to Part III of this Form 10-KSB.
<PAGE>
Intervest Bancshares Corporation and Subsidiary
1998 ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
PART I
Page
Item 1 Description of Business .................................... 1
Item 2 Description of Properties .................................. 11
Item 3 Legal Proceedings .......................................... 11
Item 4 Submission of Matters to Vote of Security Holders .......... 11
PART II
Item 5 Market for Common Equity and Related Stockholder Matters ... 11
Item 6 Management's Discussion and Analysis or Plan of Operation .. 13
Item 7 Financial Statements and Supplementary Data ................ 30
Item 8 Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure ........................ 57
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act ......... 57
Item 10 Executive Compensation .................................... 59
Item 11 Security Ownership of Certain Beneficial Owners and Management 59
Item 12 Certain Relationships and Related Transactions ............ 59
Item 13 Exhibits, Lists and Reports on Form 8-K ................... 60
Signatures ......................................................... 61
<PAGE>
PART I
Item 1. Description of Business
General
Private Securities Litigation Reform Act Safe Harbor Statement
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The Company is making this statement in order to satisfy the "Safe Harbor"
provision contained in the Private Securities Litigation Reform Act of 1995. The
statements contained in this report on Form 10-KSB that are not statements of
historical fact may include forward-looking statements that involve a number of
risks and uncertainties. Such forward-looking statements are made based on
management's expectations and beliefs concerning future events impacting the
Company and are subject to uncertainties and factors relating to the Company's
operations and economic environment, all of which are difficult to predict and
many of which are beyond the control of the Company, that could cause actual
results of the Company to differ materially from those matters expressed in or
implied by forward-looking statements. The following factors are among those
that could cause actual results to differ materially from the forward-looking
statements: changes in general economic, market and regulatory conditions, the
development of an interest rate environment that may adversely affect the
Company's interest rate spread, other income or cash flow anticipated from the
Company's operations, investment and lending activities; and changes in laws and
regulations affecting banks and bank holding companies.
Intervest Bancshares Corporation
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Intervest Bancshares Corporation is a registered bank holding company (the
"Holding Company") incorporated in 1993 under the laws of the State of Delaware.
Its principal office is located at 10 Rockefeller Plaza, Suite 1015, New York,
New York 10020, and its telephone number is 212-218-2800. The Holding Company's
Class A common stock was approved for listing on the NASDAQ SmallCap Market
(Symbol: IBCA) in November 1997. Prior to then, there had been no established
trading market for the securities of the Holding Company. At December 31, 1998,
the Holding Company owned 99.78% of the outstanding common and 100% of the
outstanding preferred stock of Intervest Bank (the "Bank"). Hereafter, the
Holding Company and the Bank are referred to collectively as the "Company," on a
consolidated basis. The Company's results of operations are primarily dependent
upon the Bank's results of operations.
At December 31, 1998, the Company had total assets of $200,522,000, deposits of
$170,467,000, convertible debentures of $7,000,000 and stockholders' equity of
$19,544,000, compared to total assets of $150,755,000, deposits of $131,167,000
and stockholders' equity of $17,620,000 at year-end 1997.
The Holding Company's primary business is the operation of the Bank. It does not
engage in any other substantial business activities other than a limited amount
of real estate mortgage lending. In 1998, the Holding Company also sold
convertible debentures that raised funds for working capital purposes. At
December 31, 1998, the Holding Company had total assets of $27,143,000,
convertible debentures of $7,000,000 and stockholders' equity of $19,544,000,
compared to total assets of $17,675,000 and stockholders' equity of $17,620,000
at December 31, 1997.
In December 1998, the Office of the Comptroller of the Currency granted
preliminary approval of the Holding Company's application to form a new
nationally-chartered commercial bank. The new bank will be called "Intervest
National Bank" and will have its headquarters, which is also a full service
branch, located at One Rockefeller Plaza in Manhattan, New York. The new bank
will be a member of the Federal Reserve Banking system and its deposits will be
insured by the Federal Deposit Insurance Corporation (the "FDIC"). Intervest
National Bank will provide full banking services and is anticipated to open for
business in the spring of 1999.
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<PAGE>
Intervest Bank
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The Bank is a Florida state-chartered commercial bank that provides a wide range
of banking services to small and middle-market businesses and individuals
through its banking offices located in Pinellas County, Florida. The principal
executive offices of the Bank are located at 625 Court Street, Clearwater,
Florida 33756. In addition, the Bank has four branches; three in Clearwater,
Florida and one in South Pasadena, Florida.
At December 31, 1998, the Bank had total assets of $184,460,000, deposits of
$170,467,000 and stockholders' equity of $11,104,000, compared to total assets
of $142,480,000, deposits of $131,167,000 and stockholders' equity of $9,420,000
at December 31, 1997.
The Bank is subject to examination and regulation by the Federal Reserve Board
(the "FRB") and its deposits are insured by the FDIC to the extent permitted by
law. The Bank is also subject to the supervision of and examination by the
Florida Department of Banking and Finance. The Bank conducts a personalized
commercial and consumer banking business, which consists of attracting deposits
from the areas served by its banking offices. Those deposits, together with
funds derived from other sources, are used to originate a variety of commercial,
consumer and real estate loans and to purchase investment securities. Commercial
loans include both collateralized and uncollateralized loans for: working
capital (including inventory, receivables and business expansion); 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.
As is the case with banking institutions generally, the Bank's operations are
significantly influenced by general economic conditions and by related monetary
and fiscal policies of banking regulatory agencies, including the FRB, the FDIC
and Florida Department of Banking and Finance. Deposit flows and the rates paid
thereon 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 funds) and in
the origination of loans.
The revenues of the Bank are primarily derived from interest on, and fees
received in connection with, loans and from interest and dividends from
securities and other short-term investments. The principal sources of funds for
the Bank's lending activities are deposits, repayment of loans, maturities and
calls of securities and cash flow generated from operating activities. The
Bank's principal expenses are interest paid on deposits and operating and
general administrative expenses.
Market Area
The Bank's facilities are located in Pinellas County, which is the Bank's
primary market area and is the most populous county in the Tampa Bay area of
Florida with an estimated resident population of over 800,000 people. The area
has many more seasonal residents. 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 over
2,000,000, which reflects significant population increases since 1970. Pinellas
is the most densely populated county in Florida, with nearly 3,000 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), which reflects the
history of Pinellas County as a retirement area. Recent years have shown a
slight drop in average age due to an increase in office and manufacturing
employment opportunities. Clearwater is the county seat of Pinellas County and
its second largest city, encompassing approximately 32 square miles with a
population of about 100,000. The Bank's deposit gathering and lending markets
are concentrated in 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.
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<PAGE>
The Holding Company's direct lending activities have, to date, been concentrated
in the New York City metropolitan region. It also considers Connecticut,
Florida, New Jersey, Pennsylvania and Washington D.C. as its primary lending
market.
Competition
The deregulation of the banking industry and the widespread enactment of state
laws that permit multi-bank holding companies, as well as an increasing level of
interstate banking, have created a highly competitive environment for commercial
banking. 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. 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 Bank's non-bank
competitors are not subject to the same extensive Federal regulations that
govern bank holding companies and Federally insured banks.
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. Management believes that a community bank is better positioned
to establish personalized relationships with both commercial customers and
individual households. The Bank's community commitment and involvement in its
primary market area, as well as its commitment to quality and personalized
banking services are factors that contribute to the Bank's competitiveness.
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, management believes that the Bank can compete
successfully in its primary market area by making prudent lending decisions
quickly and more efficiently than its competitors, without compromising asset
quality or profitability, although no assurances can be given that such factors
will assure success. In addition, management believes a personalized service
approach enables the Bank to attract and retain core deposits.
Asset Quality
Management seeks to maintain a high level of asset quality. The Company seeks to
maintain diversification when considering investments in securities and the
originations of loans. In originating loans, emphasis is placed on the
borrower's ability to generate cash flow to support its debt obligations and
other cash related expenses. Lending activities are conducted pursuant to
written policies. Each loan officer has defined lending authority. Depending on
their type and size, certain loans must be reviewed and approved by a Loan
Committee comprised of certain members of the Board of Directors prior to being
originated. As part of its loan portfolio management strategy, the Company
typically limits its loans to a maximum of 80% of the value of the underlying
real estate as determined by an appraisal. In addition, knowledgeable members of
management make physical inspections of properties being considered for mortgage
loans. Further, the Loan Committee 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.
Management also has in place a review process with the objective of quickly
identifying, evaluating and initiating necessary corrective actions for any
problem loans. The goal of this loan review process is to address any classified
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. Management believes that its policies and procedures reduce the
Company's exposure to the risks associated with a downturn in real estate
values. However, there can be no assurance that a downturn in real estate
values, as well as other economic factors, would not have an adverse impact on
the Company's profitability.
-3-
<PAGE>
At December 31, 1998 and 1997, the Bank did not have any nonperforming assets.
Lending Activities
The Company's lending activities include real estate loans and commercial and
consumer loans. Real estate loans include primarily the origination of loans for
commercial and multifamily properties. While the Company's lending activities
include single-family residential mortgages, such lending has not been
emphasized. Commercial loans are originated for working capital funding.
Consumer loans include those for the purchase of automobiles, boats, home
improvements and investments.
At December 31, 1998, the Company's loan portfolio amounted to $98,221,000,
compared to $77,226,000 at December 31, 1997. At December 31, 1998 and 1997, the
loan portfolio consisted predominantly of real estate mortgage loans.
Real Estate Mortgage Lending
- ----------------------------
The Company offers real estate loans secured by commercial and residential real
estate. A substantial portion of the Company's loan portfolio is comprised of
loans secured by commercial and multifamily real estate, including apartment
buildings, office buildings and retail shopping centers. The properties are
located mostly in the Company's primary market area.
Commercial and multifamily mortgage lending generally involves greater risk than
1-4 family residential lending. Such lending typically involves larger loan
balances to single borrowers and repayment of loans secured by income producing
properties is typically dependent upon the successful operation of the
underlying real estate.
The Company's underwriting procedures require mortgage title insurance, hazard
insurance and an appraisal of the property securing the loan to determine the
property's adequacy as security. Loan-to-value ratios (the ratio that the
original principal amount of the loan bears to the lower of the purchase price
or appraised value of the property securing the loan at the time of origination)
on new loans originated by the Company typically do not exceed 80%.
New mortgage loans on commercial real estate and multifamily properties are
normally originated for terms of no more than 20 years with interest rates that
are predominantly variable rate, based on a fixed margin mainly over the prime
rate and the five-year constant maturity treasury index.
Commercial Lending
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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 needs (including those secured by inventory, receivables and
other assets), 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 its 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 longer-term assets.
-4-
<PAGE>
Unlike 1-4 family residential mortgage loans, (which generally are made on the
basis of the borrower's ability to make repayment from their 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
their 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.
Consumer Lending
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Consumer loans made by the Bank have included those for: the purchase of
automobiles, recreation vehicles and boats; second mortgages; home improvements;
home equity lines of credit; and personal loans (both collateralized and
uncollateralized). Consumer loans typically have a short term and carry higher
interest rates than that charged on other types of loans. In addition, consumer
loans 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.
Loan Solicitation and Processing
- --------------------------------
Loan originations are derived from: direct solicitation by the Company'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, the Company orders a credit report and other verifications to
substantiate specific information relating to the 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
Company.
Security Investment Activities
The Bank's investment policy and strategy is reviewed and approved by the Board
of Directors and its Investment Committee. The Bank has historically only
purchased securities that are issued directly by the U.S. Government or one of
its agencies. Accordingly, the Bank's investments in securities carry a
significantly lower credit risk than its loan portfolio. To manage interest rate
risk, the Bank normally purchases securities that have adjustable rates or
securities with fixed rates that have short- to intermediate-maturity terms. The
Holding Company normally invests its excess cash in short-term investments of
three months or less. Securities held to maturity totaled $82,338,000 at
December 31, 1998, compared to $58,821,000 at December 31, 1997.
Deposit Activities
Deposits are the major source of the Bank's funds for lending and other
investment purposes. At December 31, 1998, deposit liabilities totaled
$170,467,000, compared to $131,167,000 at December 31, 1997. The majority of
deposit accounts are solicited from small business, professional firms and
households located throughout the Bank's primary market area through the
offering of a broad variety of deposit services. These services include:
certificates of deposit (including "jumbo" certificates in denominations of
$100,000 or more); individual retirement accounts ("IRAs"); other time deposits;
checking and other demand deposit accounts; negotiable order of withdrawal (NOW)
accounts, savings accounts and money market accounts. Transaction accounts and
time deposits are tailored to the principal market area of the Bank at rates
competitive to those in the area. In addition, the determination of rates and
terms also considers the Bank's liquidity requirements, growth goals and Federal
regulations. Maturity terms, service fees and withdrawal penalties are reviewed
and established by the Bank on a periodic basis. The Bank also offers ATM
services with access to local, state and national networks, wire transfers,
direct deposit of payroll and social security checks and automated drafts for
various accounts. In addition, the Bank offers safe deposit boxes to its
customers. The Bank periodically reviews the scope of the banking products and
services it offers so as to determine whether to add to or modify them,
consistent with market opportunities and available resources.
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<PAGE>
Other Sources of Funds
The Bank, from time to time, obtains funds through the Federal funds market when
such funds are available at attractive rates. Such funds were not emphasized in
1988 or 1997. In June 1998, the Holding Company sold $7,000,000 of convertible
subordinated debentures for net proceeds of approximately $6,500,000. The
proceeds are part of the Holding Company's working capital. For a further
discussion of the convertible debentures, see page 25.
Employees
At December 31 1998, the Company employed 32 full-time employees and 3 part-time
employees. None of the employees are covered by a collective bargaining
agreement and the Company believes that its employee relations are good.
Federal and State Taxation
The Holding Company and the Bank file a consolidated Federal income tax return
on a calendar year basis. Consolidated returns have the effect of eliminating
intercompany distributions, including dividends, from the computation of
consolidated taxable income for the taxable year in which the distributions
occur. Banks and bank holding companies are subject to Federal and state income
taxes in the same manner as other corporations. In accordance with an income tax
sharing agreement, income tax charges or credits are, for financial reporting
purposes, allocated to the Holding Company and its subsidiary on the basis of
their respective taxable income or loss included in the consolidated income tax
return.
Although a bank's income tax liability is determined under provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), which is applicable to
all taxpayers, Sections 581 through 597 of the Code apply specifically to
financial institutions. The two primary areas in which the treatment of
financial institutions differs from the treatment of other corporations under
the Code are in the areas of bond gains and losses and bad debt deductions. Bond
gains and losses generated from the sale or exchange of portfolio instruments
are generally treated for financial institutions as ordinary gains and losses as
opposed to capital gains and losses for other corporations, as the Code
considers bond portfolios held by banks to be inventory in a trade or business
rather than capital assets. Banks are allowed a statutory method for calculating
a reserve for bad debt deductions. Based on the asset size of the bank, a bank
is permitted to maintain a bad debt reserve calculated on an experience method,
based on chargeoffs and recoveries for the current and preceding five years, or
a "grandfathered" base year reserve, if larger.
The Holding Company files a state income tax return in New York and New Jersey
and a franchise tax return in Delaware. The Bank files a state income tax return
in Florida. Florida taxes banks under primarily the same provisions as other
corporations. The Holding Company's activities, other than the bank operations,
are taxable in the State of New York. Generally, New York State taxable income
is calculated under applicable Code sections with some modifications required by
state law.
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<PAGE>
Investment in Subsidiary
The following schedule sets forth information with respect to investments in,
income from dividends, and equity in earnings of the Holding Company's
consolidated subsidiary:
<TABLE>
<CAPTION>
At December 31, 1998 Holding Company's Share
($ in thousands) % of Equity in of Earnings for the Years
Voting Total Underlying Ended December 31,
Subsidiary Stock Investment Net Assets 1998 1997
- ---------- ----- ---------- ---------- ---- ----
<S> <C> <C> <C> <C> <C>
Intervest Bank 99.78% $11,081 $11,081 $1,149 $753
</TABLE>
There were no dividends paid to the Holding Company by the Bank in 1998 or 1997.
Supervision and Regulation
Bank holding companies and banks are extensively regulated under both Federal
and state laws and regulations that are intended to protect depositors, not
stockholders. To the extent that the following information describes statutory
and regulatory provisions, it is qualified in its entirety by reference to the
particular statutory and regulatory provisions. Any change in the applicable law
or regulation may have a material effect on the business and prospects of the
Holding Company and its subsidiary.
Bank Holding Company Regulation
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As a bank holding company registered under the Bank Holding Company Act of 1956
(BHCA), the Holding Company is subject to the regulation and supervision of the
FRB. The Holding Company is required to file with the FRB periodic reports and
other information regarding its business operations and those of its subsidiary.
Under the BHCA, the Holding Company's activities and those of its subsidiary are
limited to banking, managing or controlling banks, furnishing services to or
performing services for its subsidiary or engaging in any other activity which
the FRB determines to be so closely related to banking or managing or
controlling banks as to be properly incident thereto.
As a bank holding company, the Holding Company is required to obtain the prior
approval of the FRB before acquiring direct or indirect ownership or control of
more than 5% of the voting shares of a bank or bank holding company. The FRB
will not approve any acquisition, merger or consolidation that would have a
substantial anti-competitive result, unless the anti-competitive effects of the
proposed transaction are outweighed by a greater public interest in meeting the
needs and convenience of the public. The FRB also considers managerial, capital
and other financial factors in acting on acquisition or merger applications. A
bank holding company may not engage in, or acquire direct or indirect control of
more than 5% of the voting shares of any company engaged in any non-banking
activity, unless such activity has been determined by the FRB to be closely
related to banking or managing banks. The FRB has identified by regulation
various non-banking activities in which a bank holding company may engage with
notice to, or prior approval by, the FRB.
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<PAGE>
It is the policy of the FRB that bank holding companies should pay cash
dividends on common stock only out of income available over the past year and
only if prospective earnings retention is consistent with the organization's
expected future needs and financial condition. The policy provides that bank
holding companies should not maintain a level of cash dividends that undermines
the bank holding company's ability to serve as a source of strength to its
banking subsidiaries. In addition, the Federal regulatory agencies are
authorized to prohibit a banking institution or bank holding company from
engaging in an unsafe or unsound banking practice. Depending upon the
circumstances, the agencies could take the position that paying a dividend would
constitute an unsafe or unsound banking practice. Under FRB policy, a bank
holding company is expected to act as a source of financial strength to its
banking subsidiaries and to commit resources to their support. Such support may
be required at times when, absent this FRB policy, a holding company may not be
inclined to provide it. As discussed below, a bank holding company in certain
circumstances could be required to guarantee the capital plan of an
undercapitalized banking subsidiary.
The FRB monitors the capital adequacy of bank holding companies and has adopted
risk-based capital adequacy guidelines to evaluate bank holding companies on a
consolidated basis. The guidelines require a ratio of "Tier 1" or Core Capital
(generally, common stockholders' equity, perpetual noncumulative, preferred
stock and minority interests in consolidated subsidiaries, less goodwill, other
disallowed intangibles and disallowed deferred tax assets, among other items) to
total risk-weighted assets of at least 4% and a ratio of total capital to
risk-weighted assets of at least 8%. At December 31, 1998, the Company's
consolidated ratio of total capital to risk-weighted assets was 17.01% and its
risk-based Tier 1 capital ratio was 15.75%.
The FRB also uses a leverage ratio to evaluate the capital adequacy of bank
holding companies. The leverage ratio applicable to the Holding Company requires
a ratio of Tier 1 capital to adjusted total average assets of not less than 3%,
although most organizations are expected to maintain leverage ratios that are
100-200 basis points above this minimum ratio. The Holding Company's leverage
ratio at December 31, 1998, was 72.35%. The Federal banking agencies' risk-based
and leverage ratios are minimum supervisory ratios generally applicable to
banking organizations that meet certain specified criteria, assuming that they
have the highest regulatory rating. Banking organizations not meeting these
criteria are expected to operate with capital positions well above the minimum
ratios. The FRB guidelines also provide that banking organizations experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets. In addition, the regulations of the
FRB provide that concentration of credit risk and certain risk arising from
nontraditional activities, as well as an institution's ability to manage these
risks, are important factors to be taken into account by regulatory agencies in
assessing an organization's overall capital adequacy.
The FRB and the other Federal banking agencies have adopted amendments to their
risk-based capital regulations to provide for the consideration of interest rate
risk in the agency's determination of a banking institution's capital adequacy.
The amendments require such institutions to effectively measure and monitor
their interest rate risk and to maintain capital adequate for that risk.
Bank Regulation
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The Bank is a state-chartered banking corporation subject to the supervision and
regular examination by the FRB, the Florida Department of Banking and Finance
and the FDIC. The operations of the Bank are subject to numerous statutes and
regulations. Such statutes and regulations relate to required reserves against
deposits, investments, loans, mergers and consolidations, issuance of
securities, payment of dividends, establishment of branches, and other aspects
of the Bank's operations. Various consumer laws and regulations also affect the
operations of the Bank, including state usury laws, laws relating to
fiduciaries, consumer credit and equal credit, and fair credit reporting. Under
the provisions of the Federal Reserve Act, the Bank is subject to certain
restrictions on any extensions of credit to the Holding Company or, with certain
exceptions, other affiliates, on investments in the stock or other securities of
national banks, and on the taking of such stock or securities as collateral.
These regulations and restrictions may limit the Holding Company's ability to
obtain funds from the Bank for its cash needs, including funds for acquisitions,
and the payment of dividends, interest and operating expenses. Further, the Bank
is prohibited from engaging in certain tying arrangements in connection with any
extension of credit, lease or sale of property or furnishing of services. For
example, the Bank may not generally require a customer to obtain other services
from the Bank or the Holding Company, and may not require the customer to
promise not to obtain other services from a competitor as a condition to an
extension of credit. The Bank is also subject to certain restrictions imposed by
the Federal Reserve Act on extensions of credit to executive officers,
directors, principal stockholders or any related interest of such persons.
Extensions of credit (i) must be made on substantially the same terms (including
interest rates and collateral) as, and following credit underwriting procedures
that are not less stringent than those prevailing at the time for, comparable
transactions with persons not covered above and who are not employees and (ii)
must not involve more than the normal risk of repayment or present other
unfavorable features. In addition, extensions of credit to such persons beyond
limits set by FRB regulations must be approved by the Board of Directors. The
Bank is also subject to certain lending limits and restrictions on overdrafts to
such persons. A violation of these restrictions may result in the assessment of
substantial civil monetary penalties on the Bank or any officer, director,
employee, agent or other person participating in the conduct of the affairs of
the Bank or the imposition of a cease and desist order.
-8-
<PAGE>
Applicable law provides the Federal banking agencies with broad powers to take
prompt corrective action to resolve problems of insured depository institutions.
The extent of those powers depends upon whether the institution in question is
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," or "critically undercapitalized." The Federal banking
agencies have issued uniform regulations defining such capital levels. Under the
regulations, a bank is considered "well capitalized" if it has (i) a total
risk-based capital ratio of 10% or greater, (ii) a Tier 1 risk-based capital
ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not
subject to any order or written directive to meet and maintain a specific
capital level for any capital measure. An "adequately capitalized" bank is
defined as one that has (i) a total risk-based capital ratio of 8% or greater,
(ii) a Tier 1 risk-based capital ratio of 4% or greater, and (iii) a leverage
ratio of 4% or greater (or 3% or greater in the case of a bank with a composite
CAMEL rating of 1). A bank is considered (a) "undercapitalized" if it has (i) a
total risk-based capital ratio of less than 8%, (ii) a Tier 1 risk-based
capitalized ratio of less than 4%, or (iii) a leverage ratio of less than 4% (or
3% in the case of a bank with a composite CAMEL rating of 1); (b) "significantly
undercapitalized" if the bank has (i) a total risk-based capital ratio of less
than 6%, (ii) a Tier 1 risk-based Capital ratio of less than 3% or (iii) a
leverage ratio of less than 3%, and (c) "critically undercapitalized" if the
bank has a ratio of tangible equity to total assets equal to or less than 2%.
At December 31, 1998 and 1997, the Bank met the definition of a well-capitalized
institution.
The deposits of the Bank are insured by the FDIC through the Bank Insurance Fund
(the "BIF") to the extent provided by law. Under the FDIC's risk-based insurance
system, BIF-insured institutions are currently assessed premiums of between zero
and $0.27 per $100 of eligible deposits, depending upon the institutions capital
position and other supervisory factors. Congress has enacted legislation that,
among other things, provides for assessments against BIF insured institutions
that will be used to pay certain financing corporation ("FICO") obligations. In
addition to any BIF insurance assessments, BIF-insured banks are expected to
make payments for the FICO obligations equal to an estimated $0.0129 per $100 of
eligible deposits each year during 1997 through 1999 and an estimated $0.024 per
$100 of eligible deposits thereafter.
Regulations promulgated by the FDIC pursuant to the Federal Deposit Insurance
Corporation 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 depository
institutions having the same type of charter in such depository institutions
normal market area. Under these regulations, well-capitalized institutions may
accept, renew or rollover such deposits without restriction, while adequately
capitalized institutions may accept, renew or rollover such deposits with a
waiver from the FDIC (subject to certain restrictions on payment of rates).
Undercapitalized institutions may not accept, renew or rollover such deposits.
The Bank is subject to Sections 23A and 23B of the Federal Reserve Act, which
governs certain transactions, such as loans, extensions of credit, investments
and purchases of assets between member banks and their affiliates, including
their parent holding companies. These restrictions limit the transfer of funds
to the Holding Company, as defined in the statute, in the form of loans,
extensions of credit, investment or purchases of assets ("Transfers"), and they
require that the Bank's transactions with the Holding Company be on terms no
less favorable to the Bank than comparable transaction between the Bank and
unrelated third parties. Transfers by the Bank to the Holding Company are
limited in amount to 10% of the Bank's capital and surplus, and transfers to all
affiliates are limited in the aggregate to 20% of the Bank's capital and
surplus. Furthermore, such loans and extensions of credit are also subject to
various collateral requirements.
-9-
<PAGE>
Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), a depository institution insured by the FDIC can be held liable for
any loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to a commonly controlled
FDIC-insured institution in danger of default. "Default" is defined generally as
the appointment of a conservator or receiver and "in danger of Default" is
defined generally as the existence of certain conditions indicating that a
"default" is likely to occur in the absence of regulatory assistance. The
Federal Community Reinvestment Act of 1977 ("CRA"), among other things, allows
regulators to withhold approval of an acquisition or the establishment of a
branch unless the applicant has performed satisfactorily under the CRA.
Satisfactory performance means adequately meeting the credit needs of the
communities the institution serves, including low and moderate income areas. The
applicable Federal regulators now regularly conduct CRA examinations to assess
the performance of financial institutions. The Bank has received a
"satisfactory" rating in its most recent CRA examination.
The Federal regulators have adopted regulations and examination procedures
promoting the safety and soundness of individual institutions by specifically
addressing, among other things: (i) internal controls; information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv)
interest rate exposure; (v) asset growth; (vi) ratio of classified assets to
capital; (vii) minimum earnings; and (viii) compensation and benefits standards
for management officials.
The laws and regulations affecting banks and bank holding companies are
continually being reviewed and revised. The rules of the regulatory agencies in
this area have changed significantly over recent years and there is reason to
expect that similar changes will continue in the future. It is difficult to
predict the outcome of these changes.
The FRB and the other Federal banking agencies have broad enforcement powers,
including the power to terminate deposit insurance, and impose substantial fines
and other civil and criminal penalties and appoint a conservative or receiver.
Failure to comply with applicable laws, regulations and supervisory agreements
could subject the Holding Company or its banking subsidiary, as well as
officers, directors and other institution-affiliated parties of these
organizations, to administrative sanctions and potentially civil monetary
penalties. In addition, the Florida Department of Banking and Finance possesses
certain enumerated enforcement powers to address violations of the Florida State
Law by state-chartered banks and to preserve safety and soundness, including, in
the most severe cases, the authority to take possession of a state bank.
Monetary Policy and Economic Control
- ------------------------------------
The commercial banking business in which the Company engages is affected not
only by general economic conditions, but also by the monetary policies of the
FRB. Changes in the discount rate on member bank borrowing, availability of
borrowing at the "discount window," open market operations, the imposition of
changes in reserve requirements against member banks' deposits and assets of
foreign branches and the imposition of and changes in reserve requirements
against certain borrowings by banks and their affiliates are some of the
instruments of monetary policy available to the FRB. These monetary policies are
used in varying combinations to influence overall growth and distributions of
bank loans, investments and deposits, and this use may affect interest rates
charged on loans or paid on deposits. The monetary policies of the FRB have had
a significant effect on the operating results of commercial banks and are
expected to do so in the future. The monetary policies of these agencies are
influenced by various factors, including inflation, unemployment, short-term and
long-term changes in the international trade balance and in the fiscal policies
of the United States Government. Future monetary policies and the effect of such
policies on the future business and earnings of the Company cannot be predicted.
-10-
<PAGE>
Item 2. Description of Properties
The office of the Holding Company is located at 10 Rockefeller Plaza, New York,
N.Y, 10020. The Bank maintains its principal office at 625 Court Street,
Clearwater, Florida, 33756. In addition, the Bank operates four branch offices;
three of which 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 through June 2007, 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. on the ground floor. 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.
Subject to final regulatory approval to commence operations, Intervest National
Bank's main office will be located on the third floor of One Rockefeller Plaza
in New York City, N.Y. The office consists of approximately 7,000 sq. ft. and
has been leased through May 2008. See page 1 under the heading "Intervest
Bancshares Corporation" for a further discussion of Intervest National Bank.
Item 3. Legal Proceedings
The Company is periodically party 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 real property loans, and other issues
incident to the Company's business. Management does not believe that there is
any pending or threatened proceeding against the Company which, if determined
adversely, would have a material effect on the business, results of operations,
or financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of the fiscal year ended
December 31, 1998, to a vote of security holders of the Company, through the
solicitation of proxies or otherwise.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Market for Securities
The Holding Company's Class A common stock was approved for listing on the
NASDAQ SmallCap Market (Symbol: IBCA) in November 1997. Prior to then, there had
been no established public trading market for the securities of the Holding
Company. At December 31, 1998, there were approximately 700 holders of record of
the Holding Company's Class A common stock, which includes persons or entities
who hold their stock in nominee form or "street name" through various brokerage
firms. At December 31, 1998, there were three holders of record of Class B
common stock. There is no public-trading market for the Class B common stock.
-11-
<PAGE>
The high and low sale price for the Class A common stock by calendar quarter for
1998 are as follows:
High Low
- --------------------------------------------------------------------------------
First quarter $15.25 $11.00
Second quarter $16.00 $11.25
Third quarter $13.00 $ 8.25
Fourth quarter $10.00 $ 8.00
- --------------------------------------------------------------------------------
The high and low sale price for the Class A common stock during the period from
November 25, 1997, when trading commenced, through December 31, 1997 were $12.25
and $11.50, respectively. The aforementioned prices were obtained from Nasdaq.
Dividends
Holders of the Holding 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 therefore. No dividends may be declared or paid with respect to shares
of Class B common stock until January 1, 2000. The Holding 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 its stock. The Holding Company's
ability to pay dividends is generally limited to earnings from the prior year,
although retained earnings and dividends from its subsidiary to the Holding
Company may also be used to pay dividends under certain circumstances. The
primary source of funds for dividends payable by the Holding Company to its
shareholders is the 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 Holding 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 Holding Company. In particular, under Federal banking
law, the Bank may not declare a dividend that exceeds undivided profits. In
addition, the approval of the 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 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 Holding Company under certain
circumstances. The FRB not only has established certain financial and capital
requirements that affect the ability of banks to pay dividends, but it has also
the general authority to prohibit banks from engaging in an unsafe or unsound
practice in conducting 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.
The FRB and Florida Department of Banking and Finance have publicly stated their
view that it is generally an unsafe and unsound practice to pay cash dividends
except out of current operating earnings. Under FRB policy, a bank holding
company is expected to act as a source of financial strength to its subsidiary
banks and to commit resources to support each such bank. Consistent with this
policy, the FRB has stated that, as a matter of prudent banking, a bank holding
company generally should not pay cash dividends unless the available net
earnings of the bank holding company is sufficient to fully fund the dividends,
and the prospective rate of earnings retention appears to be consistent with the
Company's capital needs, asset quality and overall financial condition.
The ability of the Bank and the Holding Company to pay cash dividends is
currently, and in the future could be further influenced by 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 Holding Company, the
amount of cash on hand at the Holding Company level, outstanding debt
obligations and the requirements imposed by regulatory authorities.
-12-
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation
Selected Financial Data
The following table presents selected consolidated financial data for the
Company. 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 as well as Management's Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in this report.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
At or For The Year Ended December 31,
-------------------------------------
($ in thousands, except per share amounts) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Condition Data:
Total assets $ 200,522 $ 150,755 $ 105,196 $ 68,942 $ 40,117
Cash and cash equivalents 13,472 9,176 6,320 8,551 6,088
Loans receivable, net of deferred fees 97,736 76,825 60,310 37,058 22,754
Securities, net 82,338 58,821 34,507 19,630 8,638
Deposits 170,467 131,167 93,447 58,601 30,092
Convertible debentures 7,000 -- -- -- --
Stockholders' equity 19,544 17,620 9,747 9,189 8,884
Nonaccrual loans -- -- -- -- 101
Allowance for loan loss reserves 1,662 1,173 811 593 369
Loan chargeoffs -- -- 65 30 16
Loan recoveries 10 10 33 21 10
- -------------------------------------------------------------------------------------------------------------
Operations Data:
Interest and dividend income $ 12,934 $ 9,347 $ 6,381 $ 4,190 $ 2,158
Interest expense 8,297 5,894 3,745 2,225 803
------------------------------------------------------------------
Net interest and dividend income 4,637 3,453 2,636 1,965 1,355
Provision for loan loss reserves 479 352 250 233 124
------------------------------------------------------------------
Net interest and dividend income after
provision for loan loss reserves 4,158 3,101 2,386 1,732 1,231
Other noninterest income 349 136 106 89 112
Other noninterest expenses 2,133 1,906 1,551 1,415 1,054
------------------------------------------------------------------
Earnings before income taxes 2,374 1,331 941 406 289
Provision for income taxes 939 487 383 136 108
------------------------------------------------------------------
Net earnings $ 1,435 $ 844 $ 558 $ 270 $ 181
- -------------------------------------------------------------------------------------------------------------
Per Share Data:
Basic earnings per share $ 0.58 $ 0.49 $ 0.34 $ 0.16 $ 0.11
Diluted earnings per share 0.46 0.41 0.34 0.16 0.11
Common book value per share 7.87 7.27 5.91 5.57 5.38
Dividends per share -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------
Other Data and Ratios:
Common shares outstanding 2,484,515 2,424,415 1,650,000 1,650,000 1,650,000
Average common shares used to calculate:
Basic earnings per share 2,457,113 1,712,292 1,650,000 1,650,000 1,650,000
Diluted earnings per share 3,473,516 2,072,459 1,650,000 1,650,000 1,650,000
Adjusted net earnings for diluted
earnings per share $ 1,607 $ 844 $ 558 $ 270 $ 181
Full-service banking offices 5 5 4 4 1
Return on average assets 0.81% 0.68% 0.67% 0.51% 0.58%
Return on average equity 7.74% 7.53% 5.91% 3.01% 2.46%
Stockholders' equity to total assets 9.75% 11.69% 9.27% 13.32% 22.15%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
-13-
<PAGE>
General
Management's discussion and analysis of financial condition and results of
operations that follows should be read in conjunction with the Consolidated
Financial Statements and Notes thereto beginning on page 33.
Intervest Bancshares Corporation's principal assets are its 99.87% and 100%
ownership interest in Intervest Bank's outstanding common and preferred stock,
respectively. Intervest Bancshares Corporation (the "Holding Company") and
Intervest Bank (the "Bank") are referred to collectively as the "Company," on a
consolidated basis. The Holding Company's primary business is the operation of
the Bank and it does not engage in any other substantial business activities
other than a limited amount of real estate mortgage lending. As a result, the
Company's results of operations are primarily dependent upon the Bank's results
of operations. The Bank conducts a commercial banking business, which consists
of attracting deposits from the general public and investing those funds,
together with other source of funds, through the origination of commercial and
residential real estate loans, commercial and consumer loans, and the purchase
of security investments.
The Company's profitability depends primarily on net interest income, which is
the difference between interest income generated from its interest-earning
assets less the interest expense incurred on interest-bearing liabilities. 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 interest-rate spread, which
is the difference between the average yield earned on interest-earning assets
and the average rate paid on 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, the
Company's profitability is affected by such factors as the level of noninterest
income and expenses, the provision for loan loss reserves, and its effective
income tax rate. Noninterest income consists primarily of loan and other banking
fees. Noninterest expense consists of compensation and benefits, occupancy and
equipment related expenses, data processing expenses, deposit insurance
premiums, and other operating expenses. The Company's profitability is also
significantly affected by general economic and competitive conditions, changes
in market interest rates, government policies and actions of regulatory
authorities.
In November 1997, the Holding 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 Holding 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 Holding Company also issued warrants related to
shares of Class A common stock to the underwriter and participating
broker/dealers.
In June 1998, the Holding Company completed the sale of Convertible Subordinated
Debentures (the iDebenturesi) in the principal amount of $7,000,000, for net
proceeds of approximately $6,500,000. The Debentures are due July 1, 2008 and
are convertible at the option of the holders at any time prior to April 1, 2008
into shares of Class A common stock at various conversion prices. The Holding
Company can also redeem the Debentures at any time prior to maturity at various
redemption prices, including the payment of all accrued interest. Interest on
the Debentures accrues and compounds each calendar quarter at 8%. All accrued
interest is payable at the maturity of the Debentures whether by acceleration,
redemption or otherwise. Any Debenture holder may, on or before July 1 of each
year commencing July 1, 2003, elect to be paid all accrued interest and to
thereafter receive payments of interest quarterly.
In December 1998, the Office of the Comptroller of the Currency granted
preliminary approval of the Holding Company's application to establish a new
nationally-chartered commercial bank. The new bank will be called "Intervest
National Bank" and will be located at One Rockefeller Plaza in New York City.
The new bank will be a member of the Federal Reserve Banking system and its
deposits will be insured by the Federal Deposit Insurance Corporation. Intervest
National Bank will provide full banking services and is anticipated to open for
business in the spring of 1999.
-14-
<PAGE>
At December 31, 1998, the Company had total assets of $200,522,000, deposits of
$170,467,000, convertible debentures of $7,000,000 and stockholders' equity of
$19,544,000. The Company's net earnings increased 70% to $1,435,000 in 1998,
from $844,000 in 1997. Return on average assets amounted to 0.81% in 1998, up
from 0.68% in 1997. Return on average equity amounted to 7.74% for 1998, also up
from 7.53% in 1997. Asset quality continued to remain strong as there were no
loans on a nonaccrual or impaired status at December 31, 1998 or 1997. Book
value per common share rose to $7.87 at December 31, 1998, from $7.27 a year
ago. At December 31, 1998 and 1997, the Bank exceeded all regulatory capital
requirements for designation as a well-capitalized institution.
Results of Operations
Comparison of the Years Ended December 31, 1998 and 1997.
General
- -------
The Company earned $1,435,000 for the year ended December 31, 1998, compared to
$844,000 in 1997. On a diluted per share basis, net earnings were $0.46 for
1998, compared to $0.41 for 1997. (The computation of earnings per share for
1998 included a higher average number of common shares resulting from the public
offering of Class A common stock in November 1997 and an increase in potentially
dilutive common stock warrants and convertible debentures outstanding.)
The increase in net earnings was primarily due to higher net interest and
dividend income resulting from growth in interest-earning assets. This
improvement was partially offset by increases in the provisions for income taxes
and loan loss reserves, and higher operating expenses.
Net Interest and Dividend Income
- --------------------------------
Net interest and dividend income is the Company's largest source of earnings and
is influenced primarily by the amount, distribution and repricing
characteristics of its interest-earning assets and interest-bearing liabilities
as well as by the relative levels and movements of interest rates. The Company's
net interest and dividend income increased to $4,637,000 in 1998, from
$3,453,000 in 1997. The increase was due to growth in interest-earning assets,
partially offset by a decline in the net interest margin from 2.92% in 1997 to
2.75% in 1998.
The decline in the margin was a function of a lower interest rate spread caused
by a decline in the yield on the Company's earning assets and an increase in its
cost of funds. The yield on earning assets declined by 22 basis points largely
due to a decline in the yield on the loan portfolio as well as an increase in
securities and short-term investments. Securities and short-term investments
have a lower yield than the Company's loan portfolio. The Company's cost of
funds increased by 4 basis points due to higher-cost funds obtained through sale
of the Debentures, partially offset by a slight decline in the average cost for
deposit accounts.
The effect of the decrease in the interest rate spread described above was
partially offset by an increase of $7,007,000 in net average interest-earning
assets. This increase was largely due to the investment of the proceeds from the
issuance of common stock as well as the reinvestment of earnings generated from
operations.
The table that follows sets forth information on the Company's average assets,
liabilities and stockholders' equity; yields earned on interest-earning assets;
and rates paid on interest-bearing liabilities for 1998 and 1997. The yields and
rates shown are based on a computation of income/expense for each year divided
by average interest-earning assets/interest-bearing liabilities during each
year. Certain yields and rates shown are adjusted for related fee income or
expense. Average balances are derived from daily balances. Net interest margin
is computed by dividing net interest and dividend income by the average of total
interest-earning assets during each year.
-15-
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1998 1997
----------------------------- ------------------------------
Average Interest Yield/ Average Interest Yield/
($ in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
- ---------------- ------- --------- ---- ------- --------- ----
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans $ 90,470 $ 8,278 9.15% $ 68,711 $ 6,415 9.34%
Securities 69,508 4,224 6.08 42,763 2,632 6.15
Other interest-earning assets 8,344 432 5.18 6,913 300 4.34
- -------------------------------------------------------------------------------------------------------------
Total interest-earning assets 168,322 $ 12,934 7.68% 118,387 $ 9,347 7.90%
- -------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 8,395 6,619
- -------------------------------------------------------------------------------------------------------------
Total assets $176,717 $125,006
- -------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Demand, money market and NOW deposits $ 28,756 $ 1,324 4.60% $ 18,087 $ 816 4.51%
Savings deposits 17,210 832 4.83 9,128 446 4.89
Time deposits 101,547 5,821 5.73 81,149 4,631 5.71
- -------------------------------------------------------------------------------------------------------------
Total deposit accounts 147,513 7,977 5.41 108,364 5,893 5.44
- -------------------------------------------------------------------------------------------------------------
Federal funds purchased 20 1 5.00 18 1 5.56
Convertible debentures 3,777 319 8.45 -- -- --
- -------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 151,310 $ 8,297 5.48% 108,382 $ 5,894 5.44%
- -------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 3,096 2,325
Noninterest-bearing liabilities 3,782 3,088
Stockholders' equity 18,529 11,211
- -------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $176,717 $125,006
- -------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $ 4,637 2.20% $ 3,453 2.46%
- -------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 17,012 2.75% $ 10,005 2.92%
- -------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.11x 1.09x
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The table below provides information regarding changes in interest and dividend
income and interest expense. 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).
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998 vs. 1997
---------------------------------------------
Increase (Decrease) Due To Change In:
-------------------------------------
($ in thousands) Rate Volume Rate/Volume Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans $ (131) $2,032 $ (38) $1,863
Securities (30) 1,645 (23) 1,592
Other interest-earning assets 58 62 12 132
- --------------------------------------------------------------------------------
Total interest-earning assets (103) 3,739 (49) 3,587
- --------------------------------------------------------------------------------
Interest-bearing liabilities:
Demand, money market and NOW deposits 16 481 11 508
Savings deposits (5) 395 (4) 386
Time deposits 16 1,165 9 1,190
---------------------------------
Total deposit accounts 27 2,041 16 2.084
---------------------------------
Federal funds purchased -- -- -- --
Convertible debentures -- -- 319 319
- --------------------------------------------------------------------------------
Total interest-bearing liabilities 27 2,041 335 2,403
- --------------------------------------------------------------------------------
Net change in interest and dividend income $ (130) $1,698 $ (384) $1,184
- --------------------------------------------------------------------------------
</TABLE>
-16-
<PAGE>
Provision for Loan Loss Reserves
- --------------------------------
The provision for loan loss reserves is based on management's ongoing assessment
of the adequacy of the allowance for loan loss reserves. The provision amounted
to $479,000 in 1998, compared to $352,000 in 1997. The increase reflected a
higher level of outstanding loans as well as management's intent to maintain the
allowance at a level it believes to be adequate. At December 31, 1998 and 1997,
the Company did not have any nonaccrual or impaired loans.
Noninterest Income
- ------------------
Total noninterest income increased to $349,000 in 1998, from $136,000 in 1997.
The increase primarily reflected an increase in service charge fee income as
well as a higher level of loan prepayment fees.
Noninterest Expenses
- --------------------
Noninterest expenses increased to $2,133,000 in 1998, from $1,906,000 in 1997.
The increase was largely due to higher salaries and employee benefits, as well
as an increase in professional fees and services, resulting primarily from the
Company's growth, need for additional staff and normal merit increases.
Provision for Income Taxes
- --------------------------
The provision for income taxes increased to $939,000 in 1998, from $487,000 in
1997, largely due to higher pre-tax earnings. The Company's effective tax rate
(inclusive of state and local taxes) amounted to 39.6% in 1998, compared to
36.6% in 1997. The higher rate for 1998 reflects an increase in the earnings of
the Holding Company, which has a higher state income tax rate than the Bank.
Comparison of the Years Ended December 31, 1997 and 1996.
General
- -------
Net earnings for the year ended December 31, 1997 were $844,000, compared to
$558,000 for the year ended December 31, 1996. On a diluted per share basis, net
earnings was $0.41 for 1997, compared to $0.34 for 1996. The increase in the
Company's net earnings was primarily due to higher net interest and dividend
income, partially offset by increases in noninterest expenses, the provision for
income taxes and provision for loan loss reserves.
Net Interest and Dividend Income
- --------------------------------
Net interest and dividend income increased to $3,453,000 in 1997, from
$2,636,000 in 1996. The increase was due to growth in the Company's
interest-earning assets, partially offset by a lower net interest margin. The
lower margin was a function of a lower yield on earning assets, an increase in
deposit rates and a decline in the ratio of interest-earning assets to
interest-bearing liabilities. The yield on earning assets declined by 12 basis
points primarily due to a lower yield earned on loans and an increase in
securities and short-term investments. The cost of funds increased slightly by 4
basis points due to higher rates paid on deposits.
The table that follows sets forth information on the Company's average assets,
liabilities and stockholders' equity; yields earned on interest-earning assets;
and rates paid on interest-bearing liabilities for 1997 and 1996. The yields and
rates shown are based on a computation of interest income/expense for each year
divided by average interest-earning assets/interest-bearing liabilities during
each year. Certain yields and rates shown are adjusted for related fee income or
expense. Average balances are derived from daily balances. Net interest margin
is computed by dividing net interest and dividend income by the average of total
interest-earning assets during each year.
-17-
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1997 1996
------------------------------- ----------------------------------
Average Interest Yield/ Average Interest Yield/
($ in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans $ 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 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 6,619 4,089
- ------------------------------------------------------------------------------------------------------------------
Total assets $125,006 $ 83,662
- ------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Demand, money market and NOW deposits $ 18,087 $ 816 4.51% $ 8,432 $ 310 3.68%
Savings deposits 9,128 446 4.89 1,470 62 4.22
Time deposits 81,149 4,631 5.71 59,437 3,371 5.67
-------------------------------------------------------------------
Total deposit accounts 108,364 5,893 5.44 69,339 3,743 5.40
Federal funds purchased 18 1 5.56 34 2 5.88
- ------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 108,382 $ 5,894 5.44% 69,373 $ 3,745 5.40%
- ------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 2,325 2,709
Noninterest-bearing liabilities 3,088 2,131
Stockholders' equity 11,211 9,449
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $125,006 $ 83,662
- ------------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $ 3,453 2.46% $ 2,636 2.62%
- ------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 10,005 2.92% $ 10,200 3.31%
- ------------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.09x 1.15x
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The table provides information regarding changes in interest and dividend income
and interest expense. 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).
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997 vs. 1996
---------------------------------------------
Increase (Decrease) Due To Change In:
-------------------------------------
($ in thousands) Rate Volume Rate/Volume Total
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans $ (25) $ 1,826 $ (10) $ 1,791
Securities 59 1,020 39 1,118
Other interest-earning assets (38) 112 (17) 57
- --------------------------------------------------------------------------------------
Total interest-earning assets (4) $ 2,958 12 $ 2,966
- --------------------------------------------------------------------------------------
Interest-bearing liabilities:
Demand, money market and NOW deposits 70 $ 356 80 $ 506
Savings deposits 10 323 51 384
Time deposits 24 1,228 8 1,260
-----------------------------------------
Total deposit accounts 104 1,907 139 2,150
Federal funds purchased (2) (2) 3 (1)
- --------------------------------------------------------------------------------------
Total interest-bearing liabilities 102 1,905 142 2,149
- --------------------------------------------------------------------------------------
Net change in interest and dividend income $ (106) $ 1,053 $ (130) $ 817
- --------------------------------------------------------------------------------------
</TABLE>
-18-
<PAGE>
Provision for Loan Loss Reserves
- --------------------------------
The provision for loan loss reserves is based on management's ongoing assessment
of the adequacy of the allowance for loan loss reserves. The provision increased
from $250,000 for the year ended December 31, 1996, to $352,000 for the year
ended December 31, 1997, reflecting growth in the Company's loan portfolio. At
December 31, 1997, there were no nonperforming or impaired loans.
Noninterest Income and Noninterest Expenses
- -------------------------------------------
Total noninterest income increased $30,000 to $136,000 in 1997, from $106,000
1996, reflecting increased fee income. Total noninterest expenses increased
$355,000 to $1,906,000 for the year ended December 31, 1997, compared to
$1,551,000 in 1996. The increase was primarily due to higher salaries and
benefits and occupancy and equipment expense resulting from additional costs for
the Bank's new branches and overall growth of the Company.
Provision for Income Taxes
- --------------------------
In 1997, the provision for income taxes amounted to $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.
Financial Condition
Comparison of December 31, 1998 and December 31, 1997.
Overview
- --------
Total assets increased from $150,755,000 at December 31, 1997, to $200,522,000
at December 31, 1998, reflecting a higher level of securities held to maturity,
loans receivable and cash and cash equivalents. Total liabilities increased from
$133,135,000 at December 31, 1997, to $180,978,000 at December 31, 1998,
reflecting an increase in deposit liabilities and the borrowing of funds through
the sale of the Debentures. Stockholders' equity grew from $17,620,000 at
December 31, 1997, to $19,544,000 at year-end 1998, reflecting an increase in
retained earnings and additional common stock outstanding.
The Company's balance sheet was comprised of the following:
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1997
-------------------- --------------------
Carrying % of Carrying % of
($ in thousands) Value Total Assets Value Total Assets
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 13,472 6.7% $ 9,176 6.1%
Securities held to maturity, net 82,338 41.1 58,821 39.0
Loans receivable, net 96,074 47.9 75,652 50.2
All other assets 8,638 4.3 7,106 4.7
- -----------------------------------------------------------------------------------------------
Total assets $200,522 100.0% $150,755 100.0%
- -----------------------------------------------------------------------------------------------
Deposits $170,467 85.0% $131,167 87.0%
Convertible debentures 7,000 3.5 -- --
All other liabilities 3,511 1.8 1,968 1.3
- -----------------------------------------------------------------------------------------------
Total liabilities 180,978 90.3 133,135 88.3
- -----------------------------------------------------------------------------------------------
Stockholders' equity 19,544 9.7 17,620 11.7
- -----------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $200,522 100.0% $150,755 100.0%
- -----------------------------------------------------------------------------------------------
</TABLE>
-19-
<PAGE>
Securities
- ----------
The Company invests in securities after satisfying its liquidity objectives and
lending commitments. The Company has historically only purchased securities that
are issued by the U.S. government or one of its agencies. Accordingly, the
Company's investments in securities carry lower yields, but also have a
significantly lower credit risk than its loan portfolio. To manage interest rate
risk, the Company normally purchases securities that have adjustable rates or
securities with fixed rates that have short- to intermediate-maturity terms.
Securities for which the Company has the intent and ability to hold to maturity
are classified as held to maturity and carried at amortized cost. Securities
held to maturity totaled $82,338,000 at December 31, 1998, compared to
$58,821,000 at December 31, 1997. The increase reflected purchases of
securities, partially offset by principal repayments and calls. The estimated
fair value of the held-to-maturity portfolio was $82,173,000 at December 31,
1998 and $58,836,000 at December 31, 1997. At December 31, 1998, the securities
portfolio consisted of fixed-rate debt obligations of the Federal Home Loan
Bank, Federal Farm Credit Bank and Federal National Mortgage Association. The
securities have terms that allow the issuer the right to call or prepay its
obligation without prepayment penalty.
From time to time, the Bank may also maintain a securities available-for-sale
account to provide flexibility in the management of asset/liability strategies.
During 1998 and 1997, there were no securities classified as available for sale.
The Company does not engage in trading activities.
The investment in the capital stock of the Federal Reserve Bank (FRB), which
pays a dividend, is required in order to be a member of the Federal Reserve
Banking System. The amount of the investment was $233,000 at December 31, 1998
and 1997.
Loans Receivable
- ----------------
Loans receivable, before the allowance for loan loss reserves, increased to
$97,736,000 at December 31, 1998, from $76,825,000 at December 31, 1997, due to
new originations of commercial real estate and multifamily loans, partially
offset by principal repayments on the loan portfolio. The portfolio consisted of
$28,944,000 of fixed-rate loans and $69,277,000 of adjustable-rate loans. At
December 31, 1998 and 1997, the Company did not have any loans on a nonaccrual
status or classified as impaired.
Almost all of of the loans in the Company's loan portfolio are collateralized by
commercial real estate and multifamily properties. As of December 31, 1998, 94%
of the loan portfolio was concentrated in loans collateralized by such
properties, compared to 92% at December 31, 1997. Loan concentrations are
defined as amounts loaned to a number of borrowers engaged in similar
activities, which would cause them to be similarly impacted by economic or other
conditions.
Credit risk, which represents the possibility of the Company not recovering
amounts due from its borrowers, is significantly related to local economic
conditions as well as the Company's underwriting standards. Economic conditions
affect the income levels of borrowers and the market value of the underlying
collateral. In addition, although commercial real estate and multifamily loans
typically bear higher interest rates than 1-4 family residential loans, they
entail certain risks not normally found in 1-4 family residential mortgage
lending. Commercial real estate and multifamily loans usually involve larger
loans to single borrowers. In addition, satisfactory payment experience on loans
secured by income-producing properties (such as office buildings, shopping
centers and rental and cooperative apartment buildings) is largely dependent on
high levels of occupancy. Thus, these loans are more subject to adverse
conditions in the real estate market and economy or specific conditions at or in
the vicinity of the property's location.
-20-
<PAGE>
The following table sets forth information concerning the Company's loan
portfolio by type of loan:
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1997
-------------------- --------------------
($ in thousands) # of loans Amount % of Total # of loans Amount % of Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial real estate loans 95 $ 68,828 70.1% 106 $ 64,270 83.2%
Residential multifamily loans 51 23,707 24.1 34 6,903 8.9
Residential 1-4 family loans 47 2,627 2.7 49 3,162 4.1
Construction loans -- -- -- 1 158 0.2
Commercial loans 49 2,875 2.9 49 2,641 3.4
Consumer loans 17 184 0.2 13 92 0.2
- ----------------------------------------------------------------------------------------------------
Total gross loans receivable 259 98,221 100.0% 252 77,226 100.0%
- ----------------------------------------------------------------------------------------------------
Deferred loan fees (485) (401)
Allowance for loan loss reserves (1,662) (1,173)
- ----------------------------------------------------------------------------------------------------
Loans receivable, net $ 96,074 $ 75,652
- ----------------------------------------------------------------------------------------------------
</TABLE>
The following table shows the scheduled contractual principal repayments by
period of the Company's loan portfolio:
At December 31,
---------------
($ in thousands) 1998 1997
- -------------------------------------------
Within one year $15,674 $ 8,383
Over one to five years 69,416 49,195
Over five years 13,131 19,648
- -------------------------------------------
$98,221 $77,226
- -------------------------------------------
At December 31, 1998, $56,551,000 of loans with adjustable rates and $25,996,000
of loans with fixed rates were due after one year.
The following table sets forth the activity in the loan portfolio:
For the Year Ended December 31,
-------------------------------
($ in thousands) 1998 1997
- --------------------------------------------------------------------------------
Loans receivable, net, at beginning of year $ 75,652 $ 59,499
Loans originated 33,222 23,844
Principal repayments (12,237) (7,281)
Recoveries 10 10
Increase in unearned loan fees (84) (58)
-------------------------------
Net loan activity 96,563 76,014
Increase in allowance for loan loss reserves (489) (362)
- --------------------------------------------------------------------------------
Loans receivable, net, at end of year $ 96,074 $ 75,652
- --------------------------------------------------------------------------------
Nonaccrual Loans
- ----------------
Generally, interest on loans is accrued and credited to income based upon the
principal balance outstanding. The Company's policy is to discontinue the
accrual of interest income and classify a loan as nonaccrual when principal or
interest is past due 90 days or more and the loan is not adequately
collateralized and in the process of collection, or when in the opinion of the
Company's management, principal or interest is not likely to be paid in
accordance with the terms of the loan. Consumer installment loans are charged
off after 90 days of delinquency unless they are adequately collateralized and
in the process of collection. Loans are not 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 reversed and charged against interest income. Subsequent
payments received on loans in nonaccrual status are applied to the outstanding
principal. During 1998 and 1997, the Company did not have any loans on a
nonaccrual status.
-21-
<PAGE>
Allowance for Loan Loss Reserves
- --------------------------------
The allowance for loan loss reserves is established through a provision for loan
loss reserves charged to operations. Loans are charged against the allowance for
loan loss reserves when management believes that the collectability of the
principal is unlikely. Subsequent recoveries are added to the allowance. The
adequacy of the allowance is evaluated monthly or more frequently when necessary
with consideration given to: the nature and volume of the loan portfolio;
overall portfolio quality; loan concentrations; specific problem loans and
commitments and estimates of fair value thereof; historical chargeoffs and
recoveries; adverse situations which may affect the borrowers' ability to repay;
and management's perception of the current and anticipated economic conditions
in the Company's lending region. Although management believes it uses the best
information available to make determinations with respect to the allowance for
loan loss reserves, future adjustments may be necessary if economic conditions,
or other factors, differ from those assumed in the determination of the level of
the allowance.
In addition, SFAS No. 114, as amended by SFAS No. 118, specifies the manner in
which the portion of the allowance for loan loss reserves related to impaired
loans is computed. A loan is normally deemed impaired when, based upon current
information and events, it is probable the Company will be unable to collect
both full principal and interest due according to the contractual terms of the
loan agreement. Impairment for larger balance loans such as commercial real
estate and multifamily loans are required to be measured based on: the present
value of expected future cash flows, discounted at the loan's effective interest
rate; or the observable market price of the loan; or the estimated fair value of
the loan's collateral, if payment of the principal and interest is dependent
upon the collateral. When the fair value of the property is less than the
recorded investment in the loan, this deficiency is recognized as a valuation
allowance within the overall allowance for loan loss reserves and a charge
through the provision for loan loss reserves. The Company normally charges off
any portion of the recorded investment in the loan that exceeds the fair value
of the collateral. The net carrying amount of an impaired loan does not at any
time exceed the recorded investment in the loan.
The Company 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 interest amounts contractually due under the loan
agreement, (ii) any delinquency in the principal and/or interest payments other
than minimum delays or shortfalls in payments, and (iii) other information known
by management that would indicate the full repayment of principal and interest
is not probable. In evaluating loans for impairment, management generally
considers delinquencies of 60 days or less to be minimum delays, and accordingly
does not consider such delinquent loans to be impaired in the absence of other
indications. Impaired loans normally consist of loans on nonaccrual status.
Management evaluates all commercial real estate, residential mortgage loans and
commercial loans for impairment on a loan-by-loan basis. For smaller balance
homogeneous loans, such as consumer loans, evaluations for impairment is done on
an aggregate basis. The Company 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 loss reserves for
consumer loans. Lastly, the Company's regulators, as an integral part of their
examination process, periodically review the allowance for loan loss reserves.
Accordingly, the Company may be required to take certain chargeoffs and/or
recognize additions to the allowance based on the regulators' judgment
concerning information available to them during their examination.
At December 31, 1998, the Company's allowance for loan loss reserves amounted to
$1,662,000, compared to $1,173,000 at year-end 1997. The increase reflected the
growth in the loan portfolio and management's intent to maintain the reserves at
a level it believes to be adequate. During 1998 and 1997, the Company did not
have any loans on a nonaccrual status or classified as impaired. At December 31,
1998 and 1997, the allowance for loan loss reserves was predominately allocated
to commercial real estate and multifamily loans.
-22-
<PAGE>
The following table sets forth certain information with respect to the Company's
allowance for loan loss reserves:
For the Year Ended December 31,
-------------------------------
($ in thousands) 1998 1997
- --------------------------------------------------------------------------------
Allowance at beginning of year $ 1,173 $ 811
Provision charged to operations 479 352
Recoveries 10 10
- --------------------------------------------------------------------------------
Allowance at end of year $ 1,662 $ 1,173
- --------------------------------------------------------------------------------
Ratio of allowance to total loans 1.70% 1.53%
Total loans, net of deferred fees $97,736 $76,825
Average loans during the year $90,470 $68,711
- --------------------------------------------------------------------------------
Foreclosed Real Estate
- ----------------------
Real estate acquired by the Company as a result of foreclosure or deed in lieu
of foreclosure is classified as foreclosed real estate. Foreclosed real estate
is recorded at the lower of cost or fair value less estimated selling costs.
This estimated loss, if any, is charged to the allowance for loan loss reserves
at the time the loan is transferred. An additional valuation allowance is
recorded at the time management believes that further deterioration in value has
occurred subsequent to the transfer of the loan.
During 1998 and 1997, the Company did not have any foreclosed real estate.
All Other Assets
- ----------------
All other assets increased to $8,638,000 at December 31, 1998, from $7,106,000
at December 31, 1997. The increase was almost all due to unamortized costs
related to the sale of the Debentures ($522,000), start-up costs associated with
organizing the new nationally-chartered bank ($309,000), and increases in
accrued interest receivable ($473,000) and deferred tax benefits ($94,000).
In April 1998, the AICPA issued Statement of Position (SOP) 98-5, "Reporting on
the Costs of Start-Up Activities," which is effective for the Company's 1999
financial statements. The SOP requires that all start-up costs (except for those
that are capitalizable under other generally accepted accounting principles) be
expensed as incurred. Previously, start-up costs were generally capitalized and
amortized over a period of time. Upon adoption of this statement, approximately
$160,000 of start-up costs already incurred in organizing the new bank will be
expensed in the first quarter of 1999. Additional expenses also will be incurred
in the first quarter in connection with organizing Intervest National Bank.
Deposits
- --------
Deposit liabilities increased to $170,467,000 at December 31, 1998, from
$131,167,000 at December 31, 1997. The increase was due to net deposit inflows
and growth in deposit accounts. At December 31, 1998, time deposit accounts
totaled $99,033,000 and demand deposits and savings and checking accounts
aggregated $71,434,000. This compared to deposits of $93,378,000 and
$37,789,000, respectively, at December 31, 1997. Time deposits represented 58%
of total deposits at December 31, 1998, compared to 71% at year-end 1997.
The Bank does not have a concentration of deposits from any one source.
Management believes that substantially all of the Bank's depositors are
residents in its primary market area. The Bank does not accept brokered
deposits.
-23-
<PAGE>
<TABLE>
<CAPTION>
The following table shows the distribution of deposit accounts by type:
At December 31, 1998 At December 31, 1997
-------------------- --------------------
($ in thousands) Amount % of Total Amount % of Total
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Demand deposits $ 3,027 1.8% $ 3,490 2.7%
NOW deposits 7,955 4.7 4,290 3.3
Money market deposits 33,629 19.7 17,180 13.1
Savings deposits 26,823 15.7 12,829 9.7
- ------------------------------------------------------------------------------------
71,434 41.9 37,789 28.8
- ------------------------------------------------------------------------------------
Certificates of deposit (1):
4.00% to 4.99% 13,968 8.2 30 --
5.00% to 5.99% 62,472 36.6 69,855 53.3
6.00% to 6.99% 16,824 9.9 16,882 12.9
7.00% to 7.99% 5,769 3.4 6,611 5.0
- ------------------------------------------------------------------------------------
99,033 58.1 93,378 71.2
- ------------------------------------------------------------------------------------
Total deposit accounts $170,467 100.0% $131,167 100.0%
- ------------------------------------------------------------------------------------
(1) Includes individual retirement accounts totaling $7,986,000
and $7,065,000 at December 31, 1998 and 1997, respectively,
all of which are in the form of certificates of deposit.
</TABLE>
The following table presents by various interest rate categories the amounts of
certificates of deposit at December 31, 1998 and 1997, which mature during the
periods indicated:
Year Ending December 31,
------------------------
2003 &
($ in thousands) 1999 2000 2001 2002 thereafter Total
- --------------------------------------------------------------------------------
At December 31, 1998:
4.00% to 4.99% $11,525 $ 2,130 $ 109 $ 43 $ 161 $13,968
5.00% to 5.99% 40,912 10,358 2,597 3,427 5,178 62,472
6.00% to 6.99% 795 905 7,347 6,996 781 16,824
7.00% to 7.99% 1,898 3,659 100 110 2 5,769
- --------------------------------------------------------------------------------
$55,130 $17,052 $10,153 $10,576 $ 6,122 $99,033
- --------------------------------------------------------------------------------
Year Ending December 31,
------------------------
2002 &
($ in thousands) 1998 1999 2000 2001 thereafter Total
- --------------------------------------------------------------------------------
At December 31, 1997:
4.00% to 4.99% $ 30 $ -- $ -- $ -- $ -- $ 30
5.00% to 5.99% 46,513 13,955 4,149 1,873 3,365 69,855
6.00% to 6.99% 349 791 656 7,389 7,697 16,882
7.00% to 7.99% 62 1,808 4,641 100 -- 6,611
- --------------------------------------------------------------------------------
$46,954 $16,554 $ 9,446 $ 9,362 $11,062 $93,378
- --------------------------------------------------------------------------------
The following table shows the maturities of certificates of deposit in
denominations of $100,000 or more:
At December 31,
---------------
($ in thousands) 1998 1997
- --------------------------------------------------------------------------------
Due within three months or less $ 1,800 $ 1,554
Due over three months to six months 1,757 1,149
Due over six months to one year 3,796 1,787
Due over one year 3,609 5,016
- --------------------------------------------------------------------------------
$10,962 $ 9,506
- --------------------------------------------------------------------------------
-24-
<PAGE>
The following table shows the net deposit flows for the Bank:
For the Year Ended December 31,
-------------------------------
($ in thousands) 1998 1997
- --------------------------------------------------------------------------------
Net increase before interest credited $31,323 $32,164
Net interest credited 7,977 5,556
- --------------------------------------------------------------------------------
Net deposit increase $39,300 $37,720
- --------------------------------------------------------------------------------
Convertible Debentures
- ----------------------
In June 1998, the Holding Company sold $7,000,000 of Convertible Subordinated
Debentures (the "Debentures") in a public offering. The proceeds from the sale,
net of underwriting discounts, commissions and other fees, amounted to
approximately $6,500,000. The proceeds are part of the Holding Company's working
capital.
The Debentures are due July 1, 2008 and are convertible at the option of the
holders at any time prior to April 1, 2008, unless previously redeemed by the
Holding Company, into shares of Class A common stock at various conversion
prices. The Holding Company also has the option at any time to call all or any
part of the Debentures for payment and redeem the same at any time prior to
maturity thereof. Interest on the Debentures accrues and compounds each calendar
quarter at 8%. All accrued interest is payable at maturity whether by
acceleration, redemption or otherwise. Any debenture holder may, on or before
July 1 of each year commencing July 1, 2003, elect to be paid all accrued
interest and to thereafter receive payments of interest quarterly. See note 7 to
the consolidated financial statements for a discussion of conversion prices and
redemption premiums.
Other Borrowed Funds
- --------------------
The Bank, from time to time, obtains funds through Federal funds purchases when
such funds are available at attractive rates. There was an insignificant amount
of borrowings during 1998 and 1997 from this source. At December 31, 1998 and
1997, there were no outstanding borrowings.
Stockholders' Equity
- --------------------
Stockholders' equity increased to $19,544,000 at December 31, 1998, from
$17,620,000 at year-end 1997. The increase was almost all due to net earnings of
$1,435,000 and $446,000 of proceeds from the issuance of 60,100 shares of Class
A common stock upon the exercise of stock warrants.
-25-
<PAGE>
Asset/Liability Management
The Company's primary objective in managing interest-rate risk is to minimize
the adverse impact of changes in interest rates on the Company's net interest
income and capital, while adjusting the Company's asset/liability structure to
maximize the net yield on that structure. The Company relies primarily on its
asset-liability strategy to control interest rate risk. This strategy is
overseen in part through the direction of the Asset and Liability Committee
("ALCO") of the Board of Directors, which establishes policies and monitors
results to control interest rate sensitivity.
As a part of the Company's interest rate risk management policy, ALCO examines
the extent to which the Company's assets and liabilities are "interest
rate-sensitive" and monitors the Company's interest rate sensitivity "gap." An
asset or liability is normally considered to be interest rate-sensitive if it
will reprice or mature within 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. Conversely, a gap is
considered negative when the opposite is true.
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 Company'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 due to
the following reasons. 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 market rates. In addition,
certain assets, such as adjustable-rate mortgage loans, may 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, asset prepayment and early deposit 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, and the behavior of
depositors may be different than those assumed in the gap analysis.
For purposes of creating the gap analysis on page 27, deposits with no stated
maturities are treated as readily accessible accounts. Given this assumption,
the Company's negative one-year interest rate sensitivity gap was 36.7% at
December 31, 1998 and 28.2% at December 31, 1997. However, if those deposits
were treated differently in the gap analysis, then the interest-rate sensitivity
gap would be lower. The behavior of core depositors may not necessarily result
in the immediate withdrawal of funds in the event deposit rates offered by the
Company did not change as quickly and uniformly as changes in general market
rates. For example, if only 25% of deposits with no stated maturity were assumed
to be readily accessible (within the one year buckets), the Company's negative
one-year gap would have been 11.1% at year-end 1998 and year-end 1997.
-26-
<PAGE>
The Company also maintains a "floor," or minimum rate, on many of its
floating-rate loans. The contractual "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. Notwithstanding the
aforementioned, there can be no assurances that a sudden and substantial
increase in interest rates may not 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 following table summarizes information relating to the Company's
interest-earning assets and interest-bearing liabilities as of December 31,
1998, that are scheduled to mature or reprice within the periods shown.
<TABLE>
<CAPTION>
0-3 4-12 Over 1-5 Over 5
--- ---- -------- ------
($ in thousands) Months Months Years Years Total
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans (1) $ 21,846 $ 15,011 $ 60,035 $ 1,329 $ 98,221
Securities (2) 500 1,515 68,099 12,224 82,338
Federal funds sold 6,473 -- -- -- 6,473
Short-term investments 4,123 -- -- -- 4,123
Federal reserve bank stock 233 -- -- -- 233
Interest-bearing deposits 199 -- -- -- 199
- ----------------------------------------------------------------------------------------------
Total rate-sensitive assets $ 33,374 $ 16,526 $128,134 $ 13,553 $191,587
- ----------------------------------------------------------------------------------------------
Deposit accounts (3):
Money market deposits $ 33,629 $ -- $ -- $ -- $ 33,629
NOW deposits 7,955 -- -- -- 7,955
Savings deposits 26,823 -- -- -- 26,823
Time deposits 16,555 38,575 42,903 1,000 99,033
--------------------------------------------------------
Total deposits 84,962 38,575 42,903 1,000 167,440
Convertible subordinated debentures -- -- -- 7,000 7,000
Accrued interest on debentures -- -- -- 299 299
- ----------------------------------------------------------------------------------------------
Total rate-sensitive liabilities $ 84,962 $ 38,575 $ 42,903 $ 8,299 $174,739
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
GAP (repricing differences) $(51,588) $(22,049) $ 85,231 $ 5,254 $ 16,848
- ----------------------------------------------------------------------------------------------
Cumulative GAP $(51,588) $(73,637) $ 11,594 $ 16,848 $ 16,848
- ----------------------------------------------------------------------------------------------
Cumulative GAP to total assets -25.7% -36.7% 5.8% 8.4% 8.4%
- ----------------------------------------------------------------------------------------------
</TABLE>
Assumptions used in preparing the table above:
(1) Adjustable-rate loans are included in the period in which
their interest rates are next scheduled to adjust rather than in
the period in which the loans mature. Fixed-rate loans are
scheduled, including repayments, according to their contractual
maturities; (2) securities are scheduled according to their
contractual maturity dates, which does not take into
consideration the effects of possible prepayments that may
result from the issuer's right to call a security before its
contractual maturity date; (3) money market, NOW and savings
deposits are regarded as ready accessible withdrawable accounts;
and all other time deposits are scheduled through their maturity
dates.
Liquidity and Capital Resources
The Company manages its liquidity position on a daily basis to assure that funds
are available to meet operations, loan and investment funding commitments,
deposit withdrawals and the repayment of borrowed funds. The Company's primary
sources of funds consist of: retail deposits obtained through the Bank's branch
offices; amortization, satisfactions and repayments of loans; the maturities and
calls of securities; and cash provided by operating activities. For additional
information about the cash flows from the Company's operating, investing and
financing activities, see the consolidated statements of cash flows included in
the financial statements.
At December 31, 1998, the Company's total commitment to lend aggregated
$3,175,000. The Company also had approximately $600,000 in signed contracts for
the purchase of furniture, equipment and other leasehold improvements in
connection with the formation of the new national bank. Based on its cash flow
projections, the Company believes that it can fund all of its outstanding
commitments and future capital expenditures from the aforementioned sources of
funds.
-27-
<PAGE>
The Bank has agreements with correspondent banks whereby it may borrow up to
$6,000,000 on an unsecured basis. There were no significant borrowings during
1998 and 1997 from these sources. In June 1998, the Holding Company sold
convertible subordinated debentures for net proceeds of approximately
$6,500,000. These funds are part of the Holding Company's working capital
The Bank is subject to various regulatory capital requirements administered by
the Federal banking agencies. The FDIC Improvement Act of 1991, among other
matters, established five capital categories ranging from well capitalized to
critically undercapitalized. Such classifications are used by the FDIC and other
bank regulatory agencies to determine various matters, including prompt
corrective action and each institution's semi-annual FDIC deposit insurance
premium assessments. The capital categories involve quantitative measures of a
bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by the regulators that, if undertaken, could have a direct
material effect on the Company's consolidated financial statements.
The Bank is required to maintain, for regulatory compliance and reporting
purposes, regulatory defined minimum leverage and Tier 1 and total risk-based
capital ratio levels of at least 4%, 4% and 8%, respectively. At December 31,
1998, management believes that the Bank met its capital adequacy requirements.
The Bank is a well-capitalized institution as defined in the regulations, which
requires minimum Tier 1 leverage and Tier 1 and total risk-based ratios of 5%,
6% and 10%, respectively. Management believes that there are no current
conditions or events outstanding which would change the Bank's designation as a
well-capitalized institution.
<TABLE>
<CAPTION>
Information regarding the Bank's regulatory capital and related ratios, is
summarized below:
At December 31
--------------
($ in thousands) 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C>
Tier 1 Capital:
Common stockholders' equity $ 11,104 $ 9,420
Less disallowed portion of deferred tax asset (412) (295)
- -----------------------------------------------------------------------------------
Total Tier 1 capital 10,692 9,125
- -----------------------------------------------------------------------------------
Tier 2 Capital:
Allowable portion of allowance for loan loss reserves 1,354 1,118
- -----------------------------------------------------------------------------------
Total risk-based capital $ 12,046 $ 10,243
- -----------------------------------------------------------------------------------
Risk-weighted assets $ 108,050 $ 89,414
Average assets for regulatory purposes $ 177,148 $ 139,777
Tier 1 capital to average regulatory assets 6.04% 6.53%
Tier 1 capital to risk-weighted assets 9.90% 10.21%
Total capital to risk-weighted assets 11.15% 11.46%
- -----------------------------------------------------------------------------------
</TABLE>
Recent Accounting Pronouncements
Refer to note 1 to the notes to the consolidated financial Statements for a
discussion of this topic as well as page 23 for a discussion of the new
accounting principle related to start-up costs.
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.
-28-
<PAGE>
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 as of December 31, 1998 and 1997, which reflect changes in
market prices and rates, can be found in Note 19 of the 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 Company's net interest
income and capital, while adjusting the Company's asset/liability structure to
maximize the net yield on that structure. The Company relies primarily on its
asset-liability strategy to control interest rate risk. This strategy is
overseen in part through the direction of the Asset and Liability Committee of
the Board of Directors, which establishes policies and monitors results to
control interest rate sensitivity. For a further discussion, see page 26.
Year 2000 Compliance
The Company's operations are, by their nature, dependent upon its internal
computer systems as well as those of other third-party companies. The Year 2000
issue is the result of computer programs, which were written using two digits
rather than four digits to define the applicable year. As a result, such
programs may recognize a date using "00" as the year 1900 instead of the year
2000, which could result in system failures or miscalculations.
The Company is aware of the many areas affected by the Year 2000 computer issue,
as addressed by the Federal Financial Institutions Examination Council in its
interagency statement, which provided an outline for institutions to effectively
manage the Year 2000 challenges. The Board of Directors has approved a Year 2000
plan, which includes multiple phases, tasks to be completed and target dates for
completion. Issues addressed therein include awareness, assessment, renovation,
validation, implementation, testing and contingency planning.
The Company has formed a Year 2000 committee that is charged with the oversight
of completing the Year 2000 project on a timely basis. The Company has completed
its awareness, assessment and renovation phases and is actively involved in
validating and implementing its plan. At the present time, the Company is into
its testing phase and anticipates that this phase will be substantially
completed by March 31, 1999. The Company has determined that the costs of making
modifications to correct any Year 2000 issues will not materially affect
reported operating results.
The Company recognizes the importance of determining that its borrowers are
facing the Year 2000 problem in a timely manner to avoid deterioration of the
loan portfolio solely due to this issue. All material relationships have been
identified and questionnaires have been completed to assess the inherent risks.
Deposit customers have received statement stuffers and informational material in
this regard. The Company plans to work on a one-on-one basis with any borrower
who has been identified as having high Year 2000 risk exposure.
-29-
<PAGE>
Although management believes that the Company will not incur material costs
associated with the Year 2000 issue, there can be no assurances that all
hardware and software that the Company will use will be Year 2000 compliant.
Management cannot predict the amount of financial difficulties it may incur due
to customers and vendors inability to perform according to their agreements with
the Company or the effects that other third parties may cause as a result of
this issue. Therefore, there can be no assurance that the failure or delay of
others to address the Year 2000 issue or that the costs involved in such process
will not have a material adverse effect on the Company's business, financial
condition, and results of operations.
The Company's contingency plans relative to Year 2000 issues have not been
finalized. These plans are evolving as the testing of systems proceeds. During
the testing phase, management will determine if it is necessary to develop a
"worst case scenario" contingency plan. Based on testing results to date, the
Company's mission critical systems have been deemed to be Year 2000 compliant
and, therefore, a contingency plan has not been developed with respect to those
systems. With regards to non-mission critical internal systems, the Company's
contingency plans are to replace those systems that test as being noncompliant.
Alternatively, some systems could be handled manually on an interim basis.
Should outside service providers not be able to provide compliant systems, the
Company will terminate those relationships and transfer to Year 2000 compliant
vendors. It is anticipated that the Company's deposit customers will have
increased demands for cash in the latter part of 1999 and correspondingly, the
Company will maintain its liquidity levels to meet any increased demand.
Item 7. Financial Statements and Supplementary Data
Financial Statements
The following consolidated financial statements of Intervest Bancshares
Corporation and Subsidiary are included herein:
Independent Auditors' Report (page 32)
Consolidated Balance Sheets at December 31, 1998 and 1997 (page 33)
Consolidated Statements of Earnings for the Years Ended December 31, 1998 and
1997 (page 34)
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1998 and 1997 (page 35)
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 and
1997 (page 36)
Notes to the Consolidated Financial Statements (pages 37 to 56)
Supplementary Data
Securities
- ----------
The following table sets forth, by maturity distribution, information pertaining
to securities held to maturity:
<TABLE>
<CAPTION>
After One Year to After Five Years to
----------------- -------------------
One Year or less Five Years Ten Years Total
---------------- ---------- --------- -----
($ in thousands) Carrying Avg. Carrying Avg. Carrying Avg. Carrying Avg.
Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
At December 31, 1998:
- --------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 2,015 6.03% $ -- --% $ -- -- % $ 2,015 6.03%
U.S. Government
agencies securities -- -- 61,060 5.80 19,263 6.18 80,323 5.89
- --------------------------------------------------------------------------------------------------------
Total $ 2,015 6.03% $61,060 5.80% $19,263 6.18% $82,338 5.89%
- --------------------------------------------------------------------------------------------------------
At December 31, 1997:
U.S. Treasury securities $ 1,996 6.10% $ 2,031 6.03% $ -- -- % $ 4,027 6.06%
U.S. Government
agencies 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%
- --------------------------------------------------------------------------------------------------------
At December 31, 1996:
U.S. Treasury securities $ 500 6.04% $ 999 6.17% $ -- -- % $ 1,499 6.12%
U.S. Government
agencies 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% $34,507 6.12%
- --------------------------------------------------------------------------------------------------------
</TABLE>
-30-
<PAGE>
Loans and Allowance for Loan Loss Reserves
- ------------------------------------------
The following table sets forth information with respect to the composition of
loans receivable at December 31:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Carrying Carrying Carrying Carrying Carrying
($ in thousands) Value Value Value Value Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial real estate and multifamily loans $ 92,535 $ 71,173 $ 54,151 $ 29,384 $ 14,599
Residential 1-4 family loans 2,627 3,162 2,784 3,046 2,966
Construction loans -- 158 47 335 --
Commercial loans 2,875 2,641 3,514 4,391 5,053
Consumer loans 184 92 157 115 196
- --------------------------------------------------------------------------------------------------------
Total gross loans receivable 98,221 77,226 60,653 37,271 22,814
- --------------------------------------------------------------------------------------------------------
Deferred loan fees and unamortized discounts (485) (401) (343) (213) (60)
Allowance for loan loss reserves (1,662) (1,173) (811) (593) (369)
- --------------------------------------------------------------------------------------------------------
Loans receivable, net $ 96,074 $ 75,652 $ 59,499 $ 36,465 $ 22,385
- --------------------------------------------------------------------------------------------------------
Loans included above that were
on a nonaccrual status at year end $ -- $ -- $ -- $ -- $ 101
- --------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth information with respect to the allowance for
loan loss reserves at December 31:
<TABLE>
<CAPTION>
($ in thousands) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance at beginning of year $ 1,173 $ 811 $ 593 $ 369 $ 251
Provision charged to operations 479 352 250 233 124
Chargeoffs -- -- (65) (30) (16)
Recoveries 10 10 33 21 10
- -------------------------------------------------------------------------------------------------------------
Allowance at end of year $ 1,662 $ 1,173 $ 811 $ 593 $ 369
- -------------------------------------------------------------------------------------------------------------
Total loans, net of deferred fees and discounts $ 97,736 $ 76,825 $ 60,310 $ 37,058 $ 22,754
Average loans outstanding for the year $ 90,470 $ 68,711 $ 49,266 $ 28,052 $ 19,324
Net chargeoffs (recoveries) to average loans
outstanding during the year -% -% 0.06% 0.03% 0.03%
Ratio of allowance to net loans receivable 1.70% 1.53% 1.34% 1.60% 1.62%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
-31-
<PAGE>
Independent Auditors' Report
The Board of Directors
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, 1998 and
1997, and the related consolidated statements of earnings, changes in
stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 audit 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 fairly
present, in all material respects, the financial position of the Company at
December 31, 1998 and 1997, 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 15, 1999
-32-
<PAGE>
<TABLE>
<CAPTION>
Intervest Bancshares Corporation and Subsidiary
Consolidated Balance Sheets
December 31, December 31,
($ in thousands, except par value) 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,876 $ 1,738
Federal funds sold 6,473 162
Short-term investments 4,123 7,276
-----------------------
Total cash and cash equivalents 13,472 9,176
Interest-bearing deposits with banks 199 99
Securities held to maturity, net (estimated fair value of
$82,173 and $58,836, respectively) 82,338 58,821
Restricted security, Federal reserve bank stock, at cost 233 233
Loans receivable (net of allowance for loan loss reserves of
$1,662 and $1,173, respectively) 96,074 75,652
Accrued interest receivable 1,800 1,327
Premises and equipment, net 4,917 4,877
Deferred income tax asset 579 485
Other assets 910 85
- -------------------------------------------------------------------------------------------------------------
Total assets $ 200,522 $ 150,755
- -------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Demand deposits $ 3,027 $ 3,490
Savings and NOW deposits 34,778 17,119
Money-market deposits 33,629 17,180
Time deposits 99,033 93,378
-----------------------
Total deposits 170,467 131,167
Convertible debentures 7,000 --
Accrued interest on convertible debentures 299 --
Mortgage escrow funds 870 590
Official checks outstanding 1,572 719
Other liabilities 747 638
- -------------------------------------------------------------------------------------------------------------
Total liabilities 180,955 133,114
- -------------------------------------------------------------------------------------------------------------
Minority interest 23 21
Commitments and contingencies (notes 5, 16, 18 and 22)
STOCKHOLDERS' EQUITY
Preferred stock (300,000 shares authorized, none issued) -- --
Class A common stock ($1.00 par value, 7,500,000 shares authorized, 2,184,515
and 2,124,415 shares issued and outstanding, respectively) 2,184 2,124
Class B common stock ($1.00 par value, 700,000 shares authorized, 300,000 issued
and outstanding) 300 300
Additional paid-in-capital, common 13,789 13,360
Retained earnings 3,271 1,836
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 19,544 17,620
- -------------------------------------------------------------------------------------------------------------
Total liabilities, minority interest and stockholders' equity $ 200,522 $ 150,755
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
-33-
<PAGE>
<TABLE>
<CAPTION>
Intervest Bancshares Corporation and Subsidiary
Consolidated Statements of Earnings
For the Year Ended
December 31,
------------
($ in thousands, except per share data) 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans receivable $ 8,278 $ 6,415
Securities 4,224 2,632
Other interest-earning assets 432 300
- ---------------------------------------------------------------------------------------------
Total interest and dividend income 12,934 9,347
- ---------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 7,977 5,893
Convertible debentures and other borrowed funds 320 1
- ---------------------------------------------------------------------------------------------
Total interest expense 8,297 5,894
- ---------------------------------------------------------------------------------------------
Net interest and dividend income 4,637 3,453
Provision for loan loss reserves 479 352
- ---------------------------------------------------------------------------------------------
Net interest and dividend income after provision for loan loss reserves 4,158 3,101
- ---------------------------------------------------------------------------------------------
NONINTEREST INCOME
Customer service fees 139 92
Income from mortgage activities 195 32
All other 15 12
- ---------------------------------------------------------------------------------------------
Total noninterest income 349 136
- ---------------------------------------------------------------------------------------------
NONINTEREST EXPENSES
Salaries and employee benefits 1,056 907
Occupancy and equipment, net 467 457
Advertising and promotion 31 41
Professional fees and services 225 149
Stationery, printing and supplies 98 83
All other 254 267
Minority interest in subsidiary 2 2
- ---------------------------------------------------------------------------------------------
Total noninterest expenses 2,133 1,906
- ---------------------------------------------------------------------------------------------
Earnings before income taxes 2,374 1,331
Income taxes 939 487
- ---------------------------------------------------------------------------------------------
Net earnings $ 1,435 $ 844
- ---------------------------------------------------------------------------------------------
Basic earnings per share $ 0.58 $ 0.49
Diluted earnings per share $ 0.46 $ 0.41
- ---------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
-34-
<PAGE>
<TABLE>
<CAPTION>
Intervest Bancshares Corporation and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
For the Year Ended
December 31,
------------
($ in thousands) 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
CLASS A COMMON STOCK
Balance at beginning of year $ 2,124 $ 900
Effect of 1.5 for 1 stock split -- 450
Issuance of 747,500 shares in public offering -- 748
Issuance of 26,915 shares in exchange for common stock of minority
stockholders of Intervest Bank -- 26
Issuance of 60,100 shares upon exercise of stock warrants 60 --
- ---------------------------------------------------------------------------------------------
Balance at end of year 2,184 2,124
- ---------------------------------------------------------------------------------------------
CLASS B COMMON STOCK
Balance at beginning of year 300 200
Effect of 1.5 for 1 stock split -- 100
- ---------------------------------------------------------------------------------------------
Balance at end of year 300 300
- ---------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN-CAPITAL, COMMON
Balance at beginning of year 13,360 7,655
Effect of 1.5 for 1 stock split -- (550)
Issuance of 747,500 shares in public offering, net of issuance costs -- 5,972
Issuance of 26,915 shares in exchange for common stock of minority
stockholders of Intervest Bank -- 283
Compensation related to issuance of Class B stock warrants 43 --
Issuance of 60,100 shares upon exercise of stock warrants,
including tax benefits 386 --
- ---------------------------------------------------------------------------------------------
Balance at end of year 13,789 13,360
- ---------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of year 1,836 992
Net earnings for the year 1,435 844
- ---------------------------------------------------------------------------------------------
Balance at end of year 3,271 1,836
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Total stockholders' equity at end of year $ 19,544 $ 17,620
- ---------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
-35-
<PAGE>
<TABLE>
<CAPTION>
Intervest Bancshares Corporation and Subsidiary
Consolidated Statements of Cash Flows
For the Year Ended
December 31,
------------
($ in thousands) 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 1,435 $ 844
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 337 260
Provision for loan loss reserves 479 352
Deferred income tax (benefit) expense (94) 41
Accrued interest expense on debentures 299 --
Compensation expense related to stock warrants 43 --
Amortization of premiums, fees and discounts, net (218) 19
Increase in accrued interest receivable and other assets (698) (495)
Increase in other liabilities 996 115
- ---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,579 1,136
- ---------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase to interest-earning deposits (100) --
Maturities and calls of securities held to maturity 50,050 20,175
Purchases of securities held to maturity (73,650) (44,450)
Net increase in loans receivable (20,657) (16,563)
Purchases of Federal reserve bank stock -- (30)
Purchases of premises and equipment, net (377) (2,197)
Sales of foreclosed real estate -- 185
- ---------------------------------------------------------------------------------------------------------
Net cash used by investing activities (44,734) (42,880)
- ---------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in demand, savings, NOW and money-market deposits 33,645 18,603
Net increase in time deposits 5,655 19,117
Net increase in mortgage escrow funds 280 160
Net proceeds from sale of convertible debentures 6,457 --
Proceeds from issuance of common stock, net of issuance costs 414 6,720
- ---------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 46,451 44,600
- ---------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 4,296 2,856
Cash and cash equivalents at beginning of year 9,176 6,320
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 13,472 $ 9,176
- ---------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 7,929 $ 5,832
Income taxes 849 700
Noncash activities:
Compensation related to warrants 43 --
Interest on convertible debentures 299 --
Issuance of common stock in exchange for common stock of minority
stockholders of subsidiary -- 309
- ---------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
-36-
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Intervest Bancshares Corporation (the "Holding Company") was
incorporated on February 5, 1993 and is headquartered in New York City.
At December 31, 1998, the Holding Company owned 99.78% of the
outstanding common stock and 100% of the outstanding preferred stock of
Intervest Bank (the "Bank"). Hereafter, the Holding Company and the Bank
are referred to collectively as the "Company," on a consolidated basis.
The Holding Company's primary business is the operation of the Bank. The
Bank is a Florida state-chartered commercial bank that 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 December 1998, an application filed by the Holding Company for the
formation of a new nationally-chartered commercial bank, "Intervest
National Bank," was granted preliminary approval by the Office of the
Comptroller of the Currency. The new bank will be a wholly owned
subsidiary and is expected to open in the spring of 1999. The new bank
will be located at One Rockefeller Plaza in Manhattan, New York, and
will provide full banking services.
Principles of Consolidation, Basis of Presentation and Use of Estimates
The accompanying consolidated financial statements include the accounts
of the Holding Company and the Bank. All significant intercompany
accounts and transactions are eliminated in consolidation. Certain
reclassifications have been made to prior year amounts to conform to the
current year's presentation. The accounting and reporting policies of
the Company conform to generally accepted accounting principles and to
general practices within the banking industry.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent
liabilities, as of the date of the financial statements and revenues and
expenses during the reporting periods. Actual results could differ
significantly from those estimates.
Cash Equivalents
For purposes of the statements of cash flows, cash equivalents include
Federal funds sold and short-term investments. Federal funds are
generally sold for one-day periods and short-term investments have
maturities of three months or less.
Securities
Securities for which the Company has the ability and intent to hold
until maturity are classified as securities held to maturity and are
carried at cost, adjusted for accretion of any discounts and
amortization of premiums, which are recognized into interest income
using the interest method over the period to maturity. Securities that
are held for indefinite periods of time which management intends to use
as part of its asset/liability management strategy, or that may be sold
in response to changes in interest rates or other factors, are
classified as available for sale and are carried at fair value.
Unrealized gains and losses are reported as a separate component of
stockholders' equity, net of related income taxes. Realized gains and
losses from sales are determined using the specific identification
method.
-37-
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
1. Description of Business and Summary of Significant Accounting Policies,
Continued
Loans Receivable
Loans that the Company has the intent and ability to hold for the
foreseeable future or until maturity or satisfaction are carried at
their outstanding principal net of chargeoffs, the allowance for loan
loss reserves, unamortized discounts and deferred loan origination fees
or costs. Loan origination and commitment fees, net of certain costs,
are deferred and amortized to interest income as an adjustment to the
yield of the related loans over the contractual life of the loans using
the interest method. When a loan is paid off or sold, or if a commitment
expires unexercised, any unamortized net deferred amount is credited or
charged to income as appropriate.
Loans are placed on nonaccrual status when principal or interest becomes
90 days or more past due. Accrued interest receivable previously
recognized is reversed when a loan is placed on nonaccrual status.
Amortization of net deferred fee income is discontinued for loans placed
on nonaccrual status. Interest payments received on loans in nonaccrual
status are recognized as income on a cash basis unless future
collections of principal are doubtful, in which case the payments
received are applied as a reduction of principal. Loans remain on
nonaccrual status until principal and interest payments are current.
Allowance for Loan Loss Reserves
The allowance for loan loss reserves is netted against loans receivable
and is increased by provisions charged to operations and decreased by
chargeoffs (net of recoveries). The adequacy of the allowance is
evaluated monthly with consideration given to: the nature and volume of
the loan portfolio; overall portfolio quality; loan concentrations;
specific problem loans and commitments and estimates of fair value
thereof; historical chargeoffs and recoveries; adverse situations which
may affect the borrowers' ability to repay; and management's perception
of the current and anticipated economic conditions in the Company's
lending region. In addition, SFAS No. 114 specifies the manner in which
the portion of the allowance for loan loss reserves is computed related
to certain loans that are impaired. A loan is normally deemed impaired
when, based upon current information and events, it is probable the
Company will be unable to collect both principal and interest due
according to the contractual terms of the loan agreement. Impaired loans
normally consist of loans on nonaccrual status. Interest income on
impaired loans is recognized on a cash basis. Impairment for commercial
real estate and residential loans is required to be measured based on:
the present value of expected future cash flows, discounted at the
loan's effective interest rate; or the observable market price of the
loan; or the estimated fair value of the loan's collateral, if payment
of the principal and interest is dependent upon the collateral.
When the fair value of the property is less than the recorded investment
in the loan, this deficiency is recognized as a valuation allowance
within the overall allowance for loan loss reserves and a charge through
the provision for loan losses. The Company normally charges off any
portion of the recorded investment in the loan that exceeds the fair
value of the collateral. The net carrying amount of an impaired loan
does not at any time exceed the recorded investment in the loan.
Lastly, the Company's regulators, as an integral part of their
examination process, periodically review the allowance for loan loss
reserves. Accordingly, the Company may be required to take certain
chargeoffs and/or recognize additions to the allowance based on the
regulators' judgment concerning information available to them during
their examination.
-38-
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
1. Description of Business and Summary of Significant Accounting Policies,
Continued
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan foreclosure
are to be sold. Upon foreclosure of the property, the related loan is
transferred from the loan portfolio to foreclosed real estate at the
lower of the loan's carrying value at the date of transfer, or estimated
fair value of the property less estimated selling costs. Such amount
becomes the new cost basis of the property. Adjustments made to the
carrying value at the time of transfer are charged to the allowance for
loan loss reserves. After foreclosure, management periodically performs
market valuations and the real estate is carried at the lower of cost or
estimated fair value less estimated selling costs. Revenue and expenses
from operations and changes in the valuation allowance of the property
are included in the consolidated statement of earnings.
Premises and Equipment
Land is carried at cost. Buildings, leasehold improvements and
furniture, fixtures and equipment are carried at cost, less accumulated
depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful life of the asset.
Leasehold improvements are amortized using the straight-line method over
the terms of the related leases, or the useful life of the asset,
whichever is shorter. Maintenance, repairs and minor improvements are
charged to operating expense as incurred, while major improvements are
capitalized.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," 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 their stock-based
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 Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." The
Company has elected to follow APB No. 25 and related interpretations in
accounting for its stock-based compensation, which is in the form of
stock warrants. Statement 123 requires pro forma disclosures of net for
earnings and earnings per share determined as if the Company accounted
for its stock warrants under the fair value method.
Advertising Costs
Advertising costs are expensed as incurred.
Income Taxes
Under SFAS No. 109, "Accounting for Income Taxes," deferred tax assets
and liabilities are recognized for the estimated future tax consequences
attributable to temporary differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the year in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax law or rates is recognized in income in the period that includes
the enactment date of change. A valuation allowance is recorded if it is
more likely than not that some portion or all of the deferred tax assets
will not be realized based on a review of available evidence.
-39-
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
1. Description of Business and Summary of Significant Accounting Policies,
Continued
Earnings Per Share (EPS)
Basic EPS is calculated by dividing net earnings by the weighted-average
number of shares of common stock outstanding. Diluted EPS is calculated
by dividing adjusted net earnings by the weighted-average number of
shares of common stock and dilutive potential common stock shares that
may be outstanding in the future. Potential common stock shares consist
of outstanding dilutive common stock warrants (which are computed using
the treasury stock method) and convertible debentures (computed using
the "if converted method"). Diluted EPS considers the potential dilution
that could occur if the Company's outstanding stock warrants and
convertible debentures were converted into common stock that then shared
in the Company's earnings (as adjusted for expense that would no longer
occur if the debentures were converted). Prior to the public stock
offering in November 1997, there was no public market for the Company's
common stock. For purposes of calculating Diluted EPS for 1997, the $10
public stock offering price is assumed to be the market price.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Company enters into off-balance
sheet financial instruments consisting of commitments to extend credit,
unused lines of credit and standby letters of credit. Such financial
instruments are recorded in the consolidated financial statements when
they are funded or related fees are incurred or received.
Recent Accounting Pronouncements
Reporting Comprehensive Income. On January 1, 1998, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which established standards for reporting
comprehensive income. Comprehensive income is defined by the standard as
the change in equity of an enterprise except for those changes resulting
from stockholder transactions. All components of comprehensive income
are required to be reported in a new financial statement that is
displayed with equal prominence as existing financial statements. The
Company had no items of comprehensive income in 1998 or 1997, therefore
such a statement is not presented.
Employers' Disclosures about Pensions and Other Postretirement Benefits.
On December 31, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits - an
amendment of SFAS No. 87, 88 and 106." The statement revised, deleted or
added certain disclosures with regard to such plans. It did not change
the measurement or recognition of those plans. The adoption of this
standard had no impact on the Company's financial statement disclosures.
Accounting for Start-Up Costs. In April 1998, the American Institute of
Certified Public Accountants (AICPA) issued Statement of Position (SOP)
98-5, "Reporting on the Costs of Start-Up Activities," which is
effective for fiscal years beginning after December 15, 1998. The SOP
requires that all start-up costs (except for those that are
capitalizable under other generally accepted accounting principles) be
expensed as incurred.
-40-
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
1. Description of Business and Summary of Significant Accounting Policies,
Continued
Accounting for Start-Up Costs, Continued. Previously, start-up costs
were generally capitalized and amortized over a period of time. Upon
adoption of this statement, approximately $160,000 of start-up costs
associated with organizing the new bank will be expensed in the first
quarter of 1999. Additional expenses also will be incurred in the first
quarter in connection with organizing the new bank.
Accounting for Derivative Instruments and Hedging Activities. In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for
hedging activities. It requires, among other things, that an entity
recognizes all derivatives as either assets or liabilities in the
balance sheet and measures those instruments at fair value. The
statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Since the Company does not currently use derivative
financial instruments, the standard will not have any impact on the
Company's financial statements when adopted.
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. In March 1998, the AICPA issued SOP 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use,"
which is effective for fiscal years beginning after December 15, 1998.
The SOP, among other things, provides guidance as to when and what types
of costs should be capitalized as it relates to internal-use software.
Upon adoption, the Company expects that this SOP will not have any
impact on its financial statements.
2. Securities Held To Maturity
The carrying and estimated fair values of securities held to maturity are
summarized as follows:
Gross Gross Estimated
----- ----- ---------
Amortized Unrealized Unrealized Fair
--------- ---------- ---------- ----
($ in thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------
At December 31, 1998:
U.S. Treasury securities $ 2,015 $ 15 $ -- $ 2,030
U.S. Government and agency securities 80,323 186 366 80,143
- --------------------------------------------------------------------------------
$82,338 $ 201 $ 366 $82,173
- --------------------------------------------------------------------------------
At December 31, 1997:
U.S. Treasury securities $ 4,027 $ 15 $ -- $ 4,042
U.S. Government and agency securities 54,794 64 64 54,794
- --------------------------------------------------------------------------------
$58,821 $ 79 $ 64 $58,836
- --------------------------------------------------------------------------------
At December 31, 1998 and 1997, the securities portfolio was comprised of
securities with fixed rates of interest. The weighted-average yield of
the portfolio was approximately 5.89% at December 31, 1998 and 6.24% at
December 31, 1997.
At December 31, 1998, U.S Government and agency securities consist of
debt obligations of the Federal Home Loan Bank, Federal Farm Credit Bank
and Federal National Mortgage Association. There were no sales of
securities during the years ended December 31, 1998 and 1997.
-41-
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
2. Securities Held To Maturity, Continued
The carrying and estimated fair values of securities held to maturity at
December 31, 1998, by remaining term to contractual maturity are
summarized as follows:
Amortized Estimated Fair
--------- --------------
($ in thousands) Cost Value
- --------------------------------------------------------------------------------
Due in one year or less $ 2,015 $ 2,030
Due after one year through five years 61,060 60,870
Due after five years through ten years 19,263 19,273
- --------------------------------------------------------------------------------
$82,338 $82,173
- --------------------------------------------------------------------------------
3. Loans Receivable
Loans receivable are summarized as follows:
At December 31, 1998 At December 31, 1997
-------------------- --------------------
($ in thousands) # of loans Amount # of loans Amount
- --------------------------------------------------------------------------------
Commercial real estate loans 95 $ 68,828 106 $ 64,270
Residential multifamily loans 51 23,707 34 6,903
Residential 1-4 family loans 47 2,627 49 3,162
Construction loans -- -- 1 158
Commercial loans 49 2,875 49 2,641
Consumer loans 17 184 13 92
- --------------------------------------------------------------------------------
Loans receivable 259 98,221 252 77,226
- --------------------------------------------------------------------------------
Deferred loan fees (485) (401)
Allowance for loan loss reserves (1,662) (1,173)
- --------------------------------------------------------------------------------
Loans receivable, net $ 96,074 $ 75,652
- --------------------------------------------------------------------------------
At December 31, 1998 and 1997, there were no loans held for sale.
The geographic distribution of the loan portfolio is summarized as
follows:
At December 31, 1998 At December 31, 1997
-------------------- --------------------
($ in thousands) Amount % of Total Amount % of Total
- --------------------------------------------------------------------------------
Florida $82,167 83.7% $72,649 94.1%
New York City 16,054 16.3 4,577 5.9
- --------------------------------------------------------------------------------
$98,221 100.0% $77,226 100.0%
- --------------------------------------------------------------------------------
Credit risk, which represents the possibility of the Company not
recovering amounts due from its borrowers, is significantly related to
local economic conditions as well as the Companyis underwriting
standards. Economic conditions affect the income levels of borrowers and
the market value of the underlying collateral. In addition, although
commercial real estate and multifamily loans typically bear higher
interest rates than 1-4 family residential loans, they entail certain
risks not normally found in 1-4 family residential mortgage lending.
Commercial real estate and multifamily loans usually involve larger
loans to single borrowers. In addition, satisfactory payment experience
on loans secured by income-producing properties (such as office
buildings, shopping centers and rental and cooperative apartment
buildings) is largely dependent on high levels of occupancy. Thus, these
loans are more subject to adverse conditions in the real estate market
and economy or specific conditions at or in the vicinity of the
property's location.
-42-
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
4. Allowance for Loan Loss Reserves
Activity in the allowance for loan loss reserves is summarized as
follows:
For the Year Ended December 31,
-------------------------------
($ in thousands) 1998 1997
- --------------------------------------------------------------------------------
Balance at beginning of year $1,173 $ 811
Provision charged to operations 479 352
Recoveries 10 10
- --------------------------------------------------------------------------------
Balance at end of year $1,662 $1,173
- --------------------------------------------------------------------------------
There were no loans on nonaccrual status or classified as impaired
during the years ended December 31, 1998 or 1997.
5. Premises and Equipment, Lease Commitments and Rental Expense
Premises and equipment is summarized as follows:
At December 31,
---------------
($ in thousands) 1998 1997
- --------------------------------------------------------------------------------
Land $ 1,264 $ 1,064
Buildings 3,419 3,398
Leasehold improvements 136 162
Furniture, fixtures and equipment 1,289 1,226
- --------------------------------------------------------------------------------
Total cost 6,108 5,850
- --------------------------------------------------------------------------------
Less accumulated deprecation and amortization (1,191) (973)
- --------------------------------------------------------------------------------
Net book value $ 4,917 $ 4,877
- --------------------------------------------------------------------------------
The Bank leases its Belcher Road office, which is accounted for as an
operating lease expiring in June 2007. The lease contains escalation
clauses based upon the consumer price index and several adjustments up
to a maximum of 3% of the previous year's rental.
The Holding Company has leased office space for the new proposed
national bank in Manhattan, New York, which is accounted for as an
operating lease expiring in May 2008. The rental payments are fixed at
$257,261 per annum beginning on July 1, 1999, increasing to $285,073 per
annum on December 1, 2003 until expiration.
The Company's rental expense aggregated $94,000 and $125,000, for 1998
and 1997, respectively.
Future minimum annual lease rental payments under noncancellable
operating leases at December 31, 1998, aggregated as follows: $225,000
in 1999; $356,000 in 2000; $359,000 in 2001; $363,000 in 2002; $369,000
in 2003; and $1,665,000 thereafter.
The Bank subleases certain of its space to other companies under leases
that expire at various times through August 2007. Sublease rental income
aggregated $338,000 and $195,000 for 1998 and 1997, respectively. Future
sublease rental income at December 31, 1998 is summarized as follows:
$281,000 in 1999, $271,000 in 2000, $211,000 in 2001, $190,000 in 2002,
$161,000 in 2003 and $631,000 thereafter.
-43-
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
6. Deposits
Scheduled maturities of certificates of deposit accounts are summarized
as follows:
At December 31, 1998 At December 31, 1997
-------------------- --------------------
Wtd-Avg Wtd-Avg
($ in thousands) Amount Stated Rate Amount Stated Rate
- --------------------------------------------------------------------------------
Within one year $55,130 5.36% $46,954 5.46%
Over one to two years 17,052 5.90 16,554 5.97
Over two to three years 10,153 6.00 9,446 6.40
Over three to four years 10,576 6.06 9,362 6.05
Over four years 6,122 5.85 11,062 6.07
- --------------------------------------------------------------------------------
$99,033 5.62% $93,378 5.78%
- --------------------------------------------------------------------------------
Certificates of deposit accounts of $100,000 or more totaled $10,962,000
and $9,506,000 at December 31, 1998 and 1997, respectively. At December
31, 1998, certificates of deposit accounts of $100,000 or more by
remaining maturity were as follows: due within one year $7,353,000; over
one to two years $1,619,000; over two to three years $1,028,000; over
three to four years $862,000; and over four years $100,000.
Interest expense on deposits is summarized as follows:
For the Year Ended December 31,
-------------------------------
($ in thousands) 1998 1997
- --------------------------------------------------------
Money-market and NOW accounts $1,324 $ 816
Savings accounts 832 446
Certificates of deposit accounts 5,821 4,631
- --------------------------------------------------------
$7,977 $5,893
- --------------------------------------------------------
7. Convertible Debentures
In June 1998, the Holding Company sold $7,000,000 of principal amount of
Convertible Subordinated Debentures (the "Debentures") in a public
offering. The proceeds from the sale, net of underwriting discounts and
other fees, amounted to approximately $6,500,000. The Debentures are due
July 1, 2008 and are convertible at the option of the holders at any
time prior to April 1, 2008, unless previously redeemed by the Holding
Company, into shares of Class A common stock of the Holding Company at
the following current conversion prices per share: $10.00 through
December 31, 1999, $12.50 in 2000; $14.00 in 2001; $15.00 in 2002;
$16.00 in 2003; $18.00 in 2004; $21.00 in 2005; $24.00 in 2006; $27.00
in 2007 and $30.00 from January 1, 2008 through April 1, 2008.
The Holding Company has the right to establish conversion prices that
are less than those set forth above for such periods as it may
determine. On January 13, 1999, the conversion prices were adjusted
downward from those set at the original offering date to the prices
shown above. The Holding Company also has the option at any time to call
all or any part of the Debentures for payment and redeem the same at any
time prior to maturity thereof. The redemption price for the Debentures
is (i) the face amount plus a 2% premium if the date of redemption is
prior to July 1, 1999, (ii) the face amount plus a 1% premium if
redemption occurs on or after July 1, 1999 and prior to July 1, 2000, or
(iii) the face amount if the date of redemption is on or after July 1,
2000.
-44-
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
7. Convertible Debentures, Continued
Interest on the Debentures will accrue and compound each calendar
quarter at 8%. All accrued interest is payable at the maturity of the
Debentures whether by acceleration, redemption or otherwise. Any
Debenture holder may, on or before July 1 of each year commencing July
1, 2003, elect to be paid all accrued interest and to thereafter receive
payments of interest quarterly.
8. Other Borrowed Funds
The Bank has agreements with correspondent banks whereby the Bank may
borrow up to $6,000,000 on an unsecured basis. There were no outstanding
borrowings under these agreements at December 31, 1998 or 1997.
9. Stockholders' Equity
The Holding Company's Board of Directors is authorized to issue up to
300,000 shares of preferred stock of the Holding Company without
stockholder approval. The powers, preferences and rights, and the
qualifications, limitations, and restrictions thereof on any series of
preferred stock issued is determined by the Board of Directors. At
December 31, 1998 and 1997, there was no preferred stock issued and
outstanding.
Class A and B 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 Board of 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 Holding Company. 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. 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 in
September 1997. All per share amounts reflect the effect of these stock
splits.
10. Asset and Dividend Restrictions
The Bank is required under Federal Reserve Board regulations to maintain
reserves, generally consisting of cash or noninterest-earning accounts,
against its transaction accounts. At December 31, 1998 and 1997,
balances maintained as reserves were not material.
As a member of the Federal Reserve Bank, the Bank must maintain an
investment in the capital stock of the Federal Reserve Bank. At December
31, 1998 and 1997, such investment aggregated to $233,000.
The payment of dividends by the Holding Company and the Bank is subject
to various regulatory restrictions. These restrictions take into
consideration various factors such as whether there are sufficient net
earnings, as defined, liquidity, asset quality, capital adequacy and
economic conditions. Additionally, 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 any dividend. The Holding Company has never
paid a common dividend to its shareholders and currently has no
intentions of paying a common dividend.
-45-
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
11. Profit Sharing Plan
The Bank sponsors a tax-qualified, profit sharing plan in accordance
with the provisions of Section 401(k) of the Internal Revenue Code. The
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. Total
expense related to the contributions to the plan included in the
accompanying consolidated financial statements aggregated $22,220 and
$21,377 for 1998 and 1997, respectively.
12. Related Party Transactions
The Bank has made loans to certain of its directors and their related
entities. The activity is as follows:
For the Year Ended December 31,
-------------------------------
($ in thousands) 1998 1997
- --------------------------------------------------------
Balance at beginning of year $ 3,242 $ 2,941
Additions 868 510
Repayments (177) (209)
- --------------------------------------------------------
Balance at end of year $ 3,933 $ 3,242
- --------------------------------------------------------
There are no loans to directors or officers of the Holding Company. The
Bank participates with Intervest Corporation of New York (ICNY) in one
mortgage with a balance of $237,000 at December 31, 1998, and three
mortgages at December 31, 1997 aggregating $1,310,000. The shareholders
of ICNY are shareholders, directors and officers of the Company.
13. Common Stock Warrants
The Holding Company has common stock warrants outstanding, which entitle
the registered holders thereof to purchase one share of common stock for
each warrant. All warrants are exercisable when issued, except for Class
B common stock warrants issued in 1998. The Holding Company's 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.
<TABLE>
<CAPTION>
Data concerning common stock warrants is summarized as follows:
Exercise Price Per Warrant Total Wtd-Avg
-------------------------- ----- -------
Class A Common Stock Warrants: $ 6.67 $ 10.00 $14.00 (2) Warrants Exercise Price
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Outstanding at December 31,1996 1,528,665 -- -- 1,528,665 $ 6.67
Granted in 1997 (1) -- 949,183 -- 949,183 $ 10.00
Granted in 1997 -- 16,500 -- 16,500 $ 10.00
---------------------------------------------------
Outstanding at December 31,1997 1,528,665 965,683 -- 2,494,348 $ 7.96
Granted in 1998 -- 20 122,000 122,020 $ 14.00
Exercised in 1998 (56,100) (4,000) -- (60,100) $ 6.89
- ------------------------------------------------------------------------------------------
Outstanding at December 31,1998 1,472,565 961,703 122,000 2,556,268 $ 8.27
- ------------------------------------------------------------------------------------------
Remaining contractual life in years
at December 31, 1998 4.4 4.0 4.0 4.2
- ------------------------------------------------------------------------------------------
(1) These warrants entitle the holder to purchase one share of Class A common
stock at a price of $10.00 per share through year-end 1999; $11.50 per share in
2000; $12.50 per share in 2001 and $13.50 per share in 2002.
(2) These warrants entitle the holder to purchase one share of Class A common
stock at a price of $14.00 per share through year-end 1999; $15.00 per share in
2000; $16.00 per share in 2001 and $17.00 per share in 2002.
</TABLE>
-46-
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
13. Common Stock Warrants, Continued
Exercise Price
--------------
Per Warrant Total Wtd-Avg
----------- ----- -------
Class B Common Stock Warrants: $ 6.67 $ 10.00 Warrants Exercise Price
- --------------------------------------------------------------------------------
Outstanding at December 31,1996 -- -- -- $ --
Granted in 1997 150,000 -- 150,000 $ 6.67
------------------------------
Outstanding at December 31,1997 150,000 -- 150,000 $ 6.67
Granted in 1998 (1) -- 50,000 50,000 $10.00
- --------------------------------------------------------------------
Outstanding at December 31,1998 150,000 50,000 200,000 $ 7.50
- --------------------------------------------------------------------
Remaining contractual life in years
at December 31, 1998 8.1 9.1 8.3
- --------------------------------------------------------------------------------
(1) At December 31, 1998, 7,100 of these warrants were immediately
exercisable. An additional 7,100 warrants vest and become exercisable
on each April 27th of 1999, 2000, 2001, 2002, 2003 and the remaining
7,400 on April 27, 2004. The warrants, which expire on January 31,
2008, become fully vested earlier upon certain conditions.
The Company uses the intrinsic value-based method prescribed under APB
Opinion No. 25, "Accounting for Stock Issued to Employees," in
accounting for its stock warrants. Under this method, compensation
expense related to stock warrants is the excess, if any, of the market
price of the stock as of the grant date over the exercise price of the
warrant. The exercise price of the Class B warrants granted in 1998 was
below the market price of the common shares at the date of grant.
Therefore, in accordance with APB Opinion No. 25, approximately $43,000
was included in salaries and employee benefits expense for 1998 in
connection with the issuance of these warrants. No compensation expense
was recorded related to the remaining stock warrants granted in 1998
because their exercise prices were the same as the market price of the
common shares at the date of grant.
Had compensation expense been determined based on the estimated fair
value of the warrants at the grant date in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net earnings
and earnings per share would have been reduced to the pro forma amounts
as follows:
For the Year Ended December 31,
-------------------------------
($ in thousands, except per share amounts) 1998 1997
- -----------------------------------------------------------------
Reported net earnings $ 1,435 $ 844
Pro forma net earnings (1) $ 1,146 $ 384
Reported basic earnings per share $ 0.58 $ 0.49
Pro forma basic earnings per share $ 0.47 $ 0.22
Reported diluted earnings per share $ 0.46 $ 0.41
Pro forma diluted earnings per share $ 0.38 $ 0.19
- -----------------------------------------------------------------
(1) Pro forma net earnings for 1998 does not reflect the full impact of
calculating compensation expense related to Class B stock warrants
granted in 1998, since the total expense calculated under SFAS No.123
is apportioned over the vesting period of those warrants.
The per share weighted-average estimated fair value of 172,000 stock
warrants granted to employees and directors in 1998 was $3.63 on the
date of grant using the Black-Scholes option-pricing model. The
following weighted-average assumptions were used: no expected dividends;
expected life of 2.9 years, expected price volatility of 25% and a 5.5%
risk-free interest rate. The per share weighted-average estimated fair
value of 166,500 stock warrants granted to employees and directors in
1997 was $2.76 on the date of grant based on the following
weighted-average assumptions: no expected dividends; expected life of
8.4 years, no expected stock volatility and a 6.0% risk-free interest
rate. The assumptions are subjective in nature, involve uncertainties
and cannot be determined with precision.
-47-
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
14. Income Taxes
The Holding Company and its subsidiary file a consolidated Federal
income tax return on a calendar year basis. The Holding Company files
state income tax returns in New York and New Jersey and franchise tax
returns in Delaware. The Bank files a state income tax return in
Florida. At December 31, 1998, the Company had net operating loss
carryforwards (NOLs) of $163,000 relating to the operations of the Bank
available to reduce future Federal taxable income. The NOLs expire in
2007 and 2008.
At December 31, 1998 and 1997, the Company had a net deferred tax asset
of $579,000 and $485,000, respectively. The asset relates to the
unrealized benefit for: net temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases that will result in future tax deductions; and
unused operating loss carryforwards. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than
not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of such assets is dependent upon the
generation of sufficient taxable income during the periods in which
those temporary differences become deductible. Management believes that
it is more likely than not that the Company's deferred tax asset will be
realized and accordingly, a valuation allowance for deferred tax assets
was not maintained at any time during 1998 and 1997.
The provision for income tax expense consisted of the following:
($ in thousands) Current Deferred Total
- --------------------------------------------------------------
Year Ended December 31, 1998:
Federal $ 815 $ (80) $ 735
State and Local 218 (14) 204
- --------------------------------------------------------------
$ 1,033 $ (94) $ 939
- --------------------------------------------------------------
Year Ended December 31, 1997:
Federal $ 377 $ 35 $ 412
State and Local 69 6 75
- --------------------------------------------------------------
$ 446 $ 41 $ 487
- --------------------------------------------------------------
The components of deferred tax (benefit) expense are summarized as follows:
For the
Year Ended December 31,
-----------------------
($ in thousands) 1998 1997
- -----------------------------------------------------
Allowance for loan loss reserves $(185) $(113)
Depreciation (38) (1)
Deferred loan fees 7 6
Net operating loss carryforwards 125 125
All other (3) 24
- -----------------------------------------------------
$ (94) $ 41
- -----------------------------------------------------
-48-
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
14. Income Taxes, Continued
The tax effects of the temporary differences that give rise to the net
deferred tax asset are summarized as follows:
At December 31,
---------------
($ in thousands) 1998 1997
- ---------------------------------------------------
Deferred Tax Asset:
Allowance for loan loss reserves $ 483 $ 298
Deferred loan fees 6 13
Net operating loss carryforwards 61 186
Depreciation 19 --
All other 10 7
----------------
Total gross deferred tax asset 579 504
Deferred Tax Liability:
Depreciation -- (19)
- ---------------------------------------------------
Net deferred tax asset $ 579 $ 485
- ---------------------------------------------------
The reconciliation between the statutory Federal income tax rate and the
Company's effective tax rate (including state and local taxes) is as follows:
For the
Year Ended December 31,
-----------------------
($ in thousands) 1998 1997
- --------------------------------------------------------------------------------
Tax provision at statutory rate 34.0% 34.0%
Increase (decrease) in taxes resulting from:
State and local income taxes, net of Federal benefit 5.6 3.8
Other -- (1.2)
- --------------------------------------------------------------------------------
39.6% 36.6%
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
15. Earnings Per Share
Net earnings applicable to common stock and the weighted-average number
of shares used for basic and diluted earnings per share computations are
summarized as follows:
For the Year Ended December 31,
-------------------------------
($ in thousands, except share and per share amounts) 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Basic earnings per share:
Net earnings applicable to common stockholders $ 1,435 $ 844
Average number of common shares outstanding 2,457,113 1,712,292
- --------------------------------------------------------------------------------------------------
Basic earnings per share amount $ 0.58 $ 0.49
- --------------------------------------------------------------------------------------------------
Diluted earnings per share:
Net earnings applicable to common stockholders $ 1,435 $ 844
Adjustment to net earnings from assumed conversion of debentures 172 --
------------------------
Adjusted net earnings for diluted earnings per share computation $ 1,607 $ 844
------------------------
Average number of common shares outstanding:
Common shares outstanding 2,457,113 1,712,292
Potential dilutive shares resulting from exercise of warrants 630,457 360,167
Potential dilutive shares resulting from conversion of debentures 385,946 --
------------------------
Total average number of common shares outstanding used for dilution 3,473,516 2,072,459
- --------------------------------------------------------------------------------------------------
Diluted earnings per share amount $ 0.46 $ 0.41
- --------------------------------------------------------------------------------------------------
</TABLE>
-49-
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
15. Earnings Per Share, Continued
A total of 122,000 common stock warrants with an exercise price of
$14.00 were not included in the computation of diluted EPS for 1998
because their exercise price was greater than the average market price
of the common shares during 1998. Warrants to purchase 989,083 shares of
Class A common stock at $10.00 per share were not included in the
computation for diluted EPS for 1997 because the warrants' exercise
price approximated the market price of the stock.
16. Contingencies
As a result of transactions conducted in the ordinary course of
business, the Company is a defendant in various legal actions.
Management, after consultation with legal counsel, believes that the
ultimate liability, if any, arising from such legal actions will not
materially affect the Company's financial condition, liquidity or its
results of operations.
17. Regulatory Matters
The Holding Company and the Bank are subject to regulation, examination
and supervision by the Federal Reserve Bank. In addition, the Bank is
also subject to regulation, examination and supervision by the Florida
Department of Banking and Finance and the Federal Deposit Insurance
Corporation. The Bank is also governed by numerous Federal and state
laws and regulations, including the FDIC Improvement Act of 1991
(FDICIA). Among other matters, FDICIA established five capital
categories ranging from well capitalized to critically undercapitalized.
Such classifications are used by the FDIC and other bank regulatory
agencies to determine various matters, including prompt corrective
action and each institution's semi-annual FDIC deposit insurance premium
assessments.
As of December 31, 1998, the most recent notification from the
regulators categorized the Bank as a well-capitalized institution under
the criteria of FDICIA, which requires minimum Tier 1 leverage and Tier
1 and total risk-based capital ratios of 5%, 6% and 10%, respectively.
Management believes that there are no current conditions or events
outstanding that would change the designation from well capitalized.
<TABLE>
<CAPTION>
The tables below present information regarding the Bank's capital
adequacy.
For Capital For Well-Capitalized
----------- --------------------
Actual Adequacy Purposes Purposes
------ ----------------- --------
($ in thousands) Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31,1998:
Total capital to risk-weighted assets $12,046 11.15% $ 8,644 8.00% $10,805 10.00%
Tier 1 capital to risk-weighted assets $10,692 9.90 $ 4,322 4.00% $ 6,483 6.00%
Tier 1 capital to average assets $10,692 6.04% $ 7,086 4.00% $ 8,857 5.00%
As of December 31,1997:
Total capital to risk-weighted assets $10,243 11.46% $ 7,153 8.00% $ 8,941 10.00%
Tier 1 capital to risk-weighted assets $ 9,125 10.21% $ 3,577 4.00% $ 5,365 6.00%
Tier 1 capital to average assets $ 9,125 6.53% $ 5,591 4.00% $ 6,988 5.00%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
-50-
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
18. Off-Balance Sheet Financial Instruments
The Company is 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 in the form of 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
amounts recognized in the consolidated balance sheets. 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
off-balance sheet financial instruments 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 funds to a customer
as long as there is no violation of any condition established in the
contract. Such commitments generally have fixed expiration dates or
other termination clauses and may require payment of fees. Since some of
the commitments are expected to expire without being drawn upon, the
total commitment amount does 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
managementis 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.
The following is a summary of the notional amounts of the Company's off-
balance sheet financial instruments.
At December 31,
---------------
($ in thousands) 1998 1997
- --------------------------------------------
Unfunded loan commitments $3,175 $2,950
Available lines of credit 628 527
Standby letters of credit 1,100 100
- --------------------------------------------
$4,903 $3,577
- --------------------------------------------
19. Estimated Fair Value of Financial Instruments
Fair value estimates are made at a specific point in time based on
available information about each financial instrument. Where available,
quoted market prices are used. However, a significant portion of the
Company's financial instruments, such as commercial real estate loans,
do not have an active marketplace in which they can be readily sold or
purchased to determine fair value. Consequently, fair value estimates
for such instruments are based on assumptions made by management that
include the financial instrument's credit risk characteristics and
future estimated cash flows and prevailing interest rates. As a result,
these fair value estimates are subjective in nature, involve
uncertainties and matters of significant judgment and therefore, cannot
be determined with precision. Accordingly, changes in any of
management's assumptions could cause the fair value estimates to deviate
substantially. The fair value estimates also do not reflect any
additional premium or discount that could result from offering for sale,
at one time, the Company's entire holdings of a particular financial
instrument, nor estimated transaction costs. Further, the tax
ramifications related to the realization of unrealized gains and losses
can have a significant effect on and have not been considered in the
fair value estimates. Finally, fair value estimates do not attempt to
estimate the value of anticipated future business, the Company's
customer relationships, branch network, and the value of assets and
liabilities that are not considered financial instruments, such as core
deposit intangibles and premises and equipment.
-51-
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
19. Estimated Fair Value of Financial Instruments, Continued
The carrying and estimated fair values of the Company's financial
instruments are summarized as follows:
At December 31, 1998 At December 31, 1997
-------------------- --------------------
Carrying Fair Carrying Fair
($ in thousands) Value Value Value Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 13,472 $ 13,472 $ 9,176 $ 9,176
Securities held to maturity, net 82,338 82,173 58,821 58,836
Loans receivable, net 96,074 96,139 75,652 75,658
Federal reserve bank stock 233 233 233 233
Interest-bearing deposits 199 199 99 99
Accrued interest receivable 1,800 1,800 1,327 1,327
Financial Liabilities:
Deposit liabilities 170,467 172,194 131,167 131,491
Convertible debentures plus accrued interest 7,299 7,299 -- --
- ------------------------------------------------------------------------------------------
</TABLE>
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Securities. The estimated fair value of securities held to maturity are
based on quoted market prices. The carrying value of the Federal Reserve
Bank stock approximated fair value since these securities do not present
credit concerns and are redeemable at cost.
Loans Receivable. The estimated fair value of variable rate loans that
reprice frequently and have no significant change in credit risk
approximates their carrying values. For fixed-rate loans (one-to-four
family residential, commercial real estate and commercial loans),
estimated fair value is based on a discounted cash flow analysis, using
interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality.
Management can make no assurance that its perception and quantification
of credit risk would be viewed in the same manner as that of a potential
investor. Therefore, changes in any of management's assumptions could
cause the fair value estimates of loans to deviate substantially.
Deposits. The estimated fair value of deposits with no stated maturity,
such as savings, money market, checking and noninterest-bearing demand
deposit accounts approximates carrying value. The estimated fair value
of certificates of deposit are based on the discounted value of their
contractual cash flows. The discount rate used in the present value
computation was estimated by comparison to current interest rates
offered by the Bank for certificates of deposit with similar remaining
maturities.
Convertible Debentures. The estimated fair value of the convertible
debentures and related accrued interest is based on a discounted cash
flow analysis. The discount rate used in the present value computation
was estimated by comparison to the Holding Company's incremental
borrowing rates for a similar arrangement. Such rate was estimated to
approximate the stated interest rate of the debentures.
All Other Financial Assets and Liabilities. The carrying value of cash
and due from banks, Federal funds sold, short-term investments and
accrued interest receivable approximated fair value since these
instruments are payable on demand or have short-term maturities.
Off-Balance Sheet Instruments. The carrying amounts of commitments to
lend at December 31, 1998 and 1997 were not significant and approximated
estimated fair value.
-52-
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
20. Holding Company Financial Information
Condensed Balance Sheets
At December 31,
---------------
($ in thousands) 1998 1997
- --------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 44 $ 223
Short-term investments 4,123 7,276
--------------------
Total cash and cash equivalents 4,167 7,499
Interest-bearing deposits 100 --
Loans receivable (net of allowance for loan
loss reserves of $55 at December 31, 1998) 10,729 752
Investment in subsidiary 11,081 9,399
Deferred debenture offering costs 522 --
All other assets 544 25
- --------------------------------------------------------------------------------
Total assets $27,143 $17,675
- --------------------------------------------------------------------------------
LIABILITIES
Convertible debentures $ 7,000 $ --
Accrued interest on convertible debentures 299 --
All other liabilities 300 55
- --------------------------------------------------------------------------------
Total liabilities 7,599 55
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock and paid-in capital 16,273 15,784
Retained earnings 3,271 1,836
- --------------------------------------------------------------------------------
Total stockholders' equity 19,544 17,620
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $27,143 $17,675
- --------------------------------------------------------------------------------
Condensed Statements of Earnings
For the Year Ended
------------------
December 31,
-------------
($ in thousands) 1998 1997
- --------------------------------------------------------------------------------
Interest income $ 993 $ 234
Interest expense 319 --
-------------------------------
Net interest income 674 234
Provision for loan loss reserves 55 --
Noninterest income 109 30
Noninterest expense 197 98
-------------------------------
Earnings before income taxes 531 166
Income taxes 245 74
-------------------------------
Net earnings before earnings of subsidiary 286 92
Earnings of subsidiary 1,149 752
- --------------------------------------------------------------------------------
Net earnings $1,435 $ 844
- --------------------------------------------------------------------------------
-53-
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
20. Holding Company Financial Information, Continued
Condensed Statements of Cash Flows
For the Year Ended
------------------
December 31,
------------
($ in thousands) 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 1,435 $ 844
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Equity in undistributed earnings of subsidiary (1,149) (752)
Provision for loan loss reserves 55 --
Deferred income tax benefit (45) --
Compensation expense related to Class B warrants issued 43 --
(Increase) decrease in accrued interest receivable and other assets (410) 24
Accrued interest expense on debentures 299 --
All other 59 (75)
- --------------------------------------------------------------------------------------------
Net cash provided by operating activities 287 41
- --------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase in interest-earning deposits (100) --
Investment in preferred stock of subsidiary (500) --
Investment in common stock of subsidiary -- (1,000)
Net (increase) decrease in loans receivable (10,032) 478
- --------------------------------------------------------------------------------------------
Net cash used by investing activities (10,632) (522)
- --------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in mortgage escrow funds 142 12
Proceeds from sale of convertible debentures 6,457 --
Proceeds from exercise of common stock warrants 414 --
Proceeds from issuance of common stock, net of issuance costs -- 6,720
- --------------------------------------------------------------------------------------------
Net cash provided by financing activities 7,013 6,732
- --------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (3,332) 6,251
Cash and cash equivalents at beginning of year 7,499 1,248
- --------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 4,167 $ 7,499
- --------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Income taxes $ 200 $ 150
Noncash transactions:
Compensation related to warrants 43 --
Interest on convertible debentures 299 --
Issuance of common stock in exchange for common
stock of minority stockholders of subsidiary -- 309
- --------------------------------------------------------------------------------------------
</TABLE>
-54-
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
21. Quarterly Financial Data (Unaudited)
The following is a summary of the consolidated statements of earnings by
quarter:
For the Year Ended December 31, 1998
------------------------------------
First Second Third Fourth
($ in thousands, except per share amounts) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Interest and dividend income $2,892 $3,075 $3,420 $3,547
Interest expense 1,838 1,975 2,192 2,292
--------------------------------------
Net interest and dividend income 1,054 1,100 1,228 1,255
Provision for loan loss reserves 100 130 127 122
--------------------------------------
Net interest and dividend income after
provision for loan loss reserves 954 970 1,101 1,133
Noninterest income 65 85 71 128
Noninterest expense 509 527 518 579
--------------------------------------
Earnings before income taxes 510 528 654 682
Income taxes 202 203 261 273
- --------------------------------------------------------------------------------
Net earnings $ 308 $ 325 $ 393 $ 409
- --------------------------------------------------------------------------------
Basic earnings per share $ .13 $ .13 $ .16 $ .16
Diluted earnings per share $ .09 $ .10 $ .13 $ .14
- --------------------------------------------------------------------------------
For the Year Ended December 31, 1997
------------------------------------
First Second Third Fourth
($ in thousands, except per share amounts) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Interest and dividend income $2,085 $2,219 $2,337 $2,706
Interest expense 1,309 1,379 1,480 1,726
--------------------------------------
Net interest and dividend income 776 840 857 980
Provision for loan loss reserves 92 92 82 86
--------------------------------------
Net interest and dividend income after
provision for loan loss reserves 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
- --------------------------------------------------------------------------------
-55-
<PAGE>
Intervest Bancshares Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
22. Year 2000 Issue
The Company is aware of the many areas affected by the Year 2000
computer issue, as addressed by the Federal Financial Institutions
Examination Council in its interagency statement, which provided an
outline for institutions to effectively manage the Year 2000 challenges.
The Board of Directors has approved a Year 2000 plan, which includes
multiple phases, tasks to be completed and target dates for completion.
Issues addressed therein include awareness, assessment, renovation,
validation, implementation, testing and contingency planning.
The Company has formed a Year 2000 committee that is charged with the
oversight of completing the Year 2000 project on a timely basis. The
Company has completed its awareness, assessment and renovation phases
and is actively involved in validating and implementing its plan. At the
present time, the Company is into its testing phase and anticipates that
this phase will be substantially completed by March 31, 1999. The
Company has determined that the costs of making modifications to correct
any Year 2000 issues will not materially affect reported operating
results.
The Company recognizes the importance of determining that its borrowers
are facing the Year 2000 problem in a timely manner to avoid
deterioration of the loan portfolio solely due to this issue. All
material relationships have been identified and questionnaires have been
completed to assess the inherent risks. Deposit customers have received
statement stuffers and informational material in this regard. The
Company plans to work on a one-on-one basis with any borrower who has
been identified as having high Year 2000 risk exposure.
Although management believes that the Company will not incur material
costs associated with the Year 2000 issue, there can be no assurances
that all hardware and software that the Company will use will be Year
2000 compliant. Management cannot predict the amount of financial
difficulties it may incur due to customers and vendors inability to
perform according to their agreements with the Company or the effects
that other third parties may cause as a result of this issue. Therefore,
there can be no assurance that the failure or delay of others to address
the Year 2000 issue or that the costs involved in such process will not
have a material adverse effect on the Company's business, financial
condition, and results of operations.
The Company's contingency plans relative to Year 2000 issues have not
been finalized. These plans are evolving as the testing of systems
proceeds. During the testing phase, management will determine if it is
necessary to develop a "worst case scenario" contingency plan. Based on
testing results to date, the Company's mission critical systems have
been deemed to be Year 2000 compliant and, therefore, a contingency plan
has not been developed with respect to those systems. With regards to
non-mission critical internal systems, the Company's contingency plans
are to replace those systems that test as being noncompliant.
Alternatively, some systems could be handled manually on an interim
basis. Should outside service providers not be able to provide compliant
systems, the Company will terminate those relationships and transfer to
Year 2000 compliant vendors. It is anticipated that the Company's
deposit customers will have increased demands for cash in the latter
part of 1999 and correspondingly, the Company will maintain its
liquidity levels to meet any increased demand.
-56-
<PAGE>
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
a. Directors. The information required by this item is contained under the
section entitled "Election of Directors" in the Company's Proxy Statement for
its 1999 Annual Meeting (the "Proxy Statement") and is incorporated herein by
reference.
b. Executive Officers. The following information is furnished with respect to
executive officers and key employees of the Company.
Jerome Dansker, age 80, serves as Chairman of the Board of
Directors and Executive Vice President of Intervest Bancshares Corporation . He
has served as Executive Vice President since 1994 and as Chairman of the Board
since 1996. Mr. Dansker received a Bachelor of Science degree from the New York
University School of Commerce, Accounts and Finance, a Law degree from the New
York University School of Law, and is admitted to practice as an attorney in the
State of New York. Mr. Dansker also serves as Chairman of the Board of Directors
and Chairman of the Loan Committee of Intervest National Bank, In Organization.
He is also a Director and Chairman of the Loan Committee of the Intervest Bank
and is Chairman of the Board of Directors and Executive Vice President of
Intervest Corporation of New York. During the past five years, Mr. Dansker has
been actively involved in the ownership and operation of real estate and
mortgage investments.
Lowell S. Dansker, age 48, serves as a Director, President and
Treasurer of the Intervest Bancshares Corporation, and has served in such
capacities since the Company was organized. Mr. Dansker received a Bachelor of
Science in Business Administration from Babson College, a Law degree from the
University of Akron School of Law, and is admitted to practice as an attorney in
New York, Ohio, Florida and the District of Columbia. Mr. Dansker is also
Co-Chairman of the Board of Directors and a member of the Loan Committee of the
Intervest Bank, a Director, Chief Executive Officer and member of the Loan
Committee of Intervest National Bank, In Organization, and a Director, President
and Treasurer of Intervest Corporation of New York. During the past five years,
Mr. Dansker has been actively involved in the ownership and operation of real
estate and mortgage investments.
-57-
<PAGE>
Lawrence G. Bergman, age 54, serves as a Director, Vice
President and Secretary of the Intervest Bancshares Corporation and has served
in such capacities since the company was organized. Mr. Bergman received a
Bachelor of Science degree and a Master of Engineering (Electrical) degree from
Cornell University and a Master of Science in Engineering and a Ph.D. degree
from The Johns Hopkins University. Mr. Bergman is also Co-Chairman of the Board
of Directors and a member of the Loan Committee of the Intervest Bank. He is
also a Director and a member of the Loan Committee of the Intervest National
Bank, In Organization, and a Director, Vice-President and Secretary of Intervest
Corporation of New York. During the past five years Mr. Bergman has been
actively involved in the ownership and operation of real estate and mortgage
investments.
Keith A. Olsen, age 45, serves as President of Intervest Bank
and has served in such capacity since 1994. Prior to that, Mr. Olsen was a
Senior Vice President of Intervest Bank since 1991. Mr. Olsen received an
Associates Degree from St. Petersburg Junior College and a Bachelors Degree in
Business Administration and Finance from the University of Florida, Gainesville.
He is also a graduate of the Florida School of Banking of the University of
Florida, Gainesville, the National School of Rea Estate Finance of Ohio State
University and the Graduate School of Banking of the South of Louisiana State
University. Mr. Olsen has been a banker for more than 15 years and has served as
a senior bank officer for more than 10 years.
Petra H. Coover, age 52, serves as Vice President of Intervest
Bank and has served in such capacity since 1994. Ms. Coover received a B.A.
degree in business administration from Eckerd College. She has also attended The
National School of Real Estate Finance of Ohio State University, the Commercial
Lending School of the University of South Florida and the International Business
Institute in the Netherlands. Ms. Coover has been a bank officer for more than
14 years.
-58-
<PAGE>
Charlotte H. Grant, age 60, serves as Vice President and Cashier
of Intervest Bank and has served in that capacity since July 1998. Ms. Grant
received her Bachelors degree from the University of South Florida and her
Masters Degree from the University of Tampa. Ms. Grant is a Certified Public
Accountant. Prior to joining Intervest Bank, Ms. Grant served as Chief Financial
Officer of First Community Bank of America from October 1987 to July 1998 and as
an Accountant in Practice with the firm of Hacker, Johnson, Cohen and Grieb, PA
(the Company's auditors) from 1993 to 1997. Prior to that, Ms. Grant was a
Manager of Financial Reporting for First Florida Bank.
Raymond C. Sullivan, age 52, has been an employee of Intervest
Bancshares Corporation since March 1998. He serves as President and Director of
Intervest National Bank, In Organization, and has served in that capacity since
March 1999. Mr. Sullivan received an MBA degree from Fordham University, an M.S.
degree from City College of New York and a B.A. degree from St. Francis College.
Mr. Sullivan also has a Certificate in Advanced Graduate Study in Accounting
from Pace University and is a graduate of the National School of Finance and
Management. Mr. Sullivan has over 27 years of banking experience. Prior to
joining Intervest Bancshares Corporation, Mr. Sullivan was the Operations
Manager of the New York Agency Office of Banco Mercantile, C.A. from 1994 to
1997, a Senior Associate at LoBue Associates, Inc. from 1992 to 1993, and an
Executive Vice President, Chief Operations Officer and Director of Central
Federal Savings Bank from 1985 to 1992.
John J. Arvonio, age 36, has been an employee of Intervest
Bancshares Corporation since April 1998. He serves as Vice President, Controller
and Corporate Secretary of Intervest National Bank, In Organization, and has
served in that capacity since inception of the bank. Mr. Arvonio received a
B.B.A. degree from Iona College and is a Certified Public Accountant. Mr.
Arvonio has 10 years of banking experience. Prior to joining Intervest
Bancshares Corporation, Mr. Arvonio served as Second Vice President, Technical
Advisor and Assistant Controller for The Greater New York Savings Bank from 1992
to 1997. Prior to that, Mr. Arvonio was Manager of Financial Reporting for the
Leasing and Investment Banking Divisions of Citicorp.
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" of the Proxy Statement is incorporated herein by
reference.
-59-
<PAGE>
Item 13. Exhibits, Lists and Reports on Form 8-K
a. The following exhibits are incorporated by reference herein:
Exhibit No. Description of Exhibit
- ----------- ----------------------
3.1 Restated Certificate of Incorporation of the Company,
incorporated by reference to Amendment No.1 to the
Company's Registration Statement on Form SB-2 (No
333-33419), filed with the Securities and Exchange
Commission (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 to the
Registration Statement, where in such document is
identified as Exhibit 3.1.
4.1 Form of Certificate for Shares of Class A common stock,
incorporated by reference to the Company's Pre-Effective
Amendment No.1 to the Registration Statement on Form SB-2
(No. 33-82246), filed with the Commission on September 15,
1994.
4.2 Form of Certificate for Shares of Class B Common stock,
incorporated by reference to the Company's Pre-Effective
Amendment No.1 to the 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 to 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 to 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 to the Registration
Statement, wherein such document is identified as Exhibit
4.4.
4.6 Form of Indenture between the Company and the Bank of New
York, as Trustee, incorporated by reference to the
Company's Registration Statement on Form SB-2 (333-50113)
filed with the Commission on April 15,1998.
12 Statement re: computation of ratios of earnings to fixed
charges.
23 Consent of Independent Accountants.
27 Financial Data Schedule (For SEC purposes only).
-60-
<PAGE>
b. No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
<TABLE>
<CAPTION>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Bank has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, on the date indicated.
INTERVEST BANCSHARES CORPORATION
(Registrant)
<S> <C> <C>
By: /s/ Lowell S. Dansker Date: March 12, 1999
- -------------------------------------- -----------------
Lowell S. Dansker, President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the date indicated.
Chairman of the Board, Executive Vice President and Director:
By: /s/ Jerome Dansker Date: March 12, 1999
- ----------------------------------- ----------------------------
Jerome Dansker
President, Treasurer and Director
(Principal Executive, Financial and Accounting Officer):
By: /s/ Lowell S. Dansker Date: March 12, 1999
- ----------------------------------- ----------------------------
Lowell S. Dansker
Vice President, Secretary and Director:
By: /s/ Lawrence G. Bergman Date: March 12, 1999
- ----------------------------------- ----------------------------
Lawrence G. Bergman
Directors:
By: /s/ Michael A. Callen Date: March 12, 1999
- ----------------------------------- ----------------------------
Michael A. Callen
By: /s/ Milton F. Gidge Date: March 12, 1999
- ----------------------------------- ----------------------------
Milton F. Gidge
By: /s/ William F. Holly Date: March 12, 1999
- ----------------------------------- ----------------------------
William F. Holly
By: /s/ Edward J. Merz Date: March 12, 1999
- ----------------------------------- ----------------------------
Edward J. Merz
By: /s/ David J. Willmott Date: March 12, 1999
- ----------------------------------- ----------------------------
David J. Willmott
By: /s/ Wesley T. Wood Date: March 12, 1999
- ----------------------------------- ----------------------------
Wesley T. Wood
</TABLE>
-61-
<PAGE>
Exhibit 12
Intervest Bancshares Corporation and Subsidiary
Computation of Ratios of Earnings to Fixed Charges
For the Year Ended December 31, 1998
------------------------------------
Intervest
Bancshares
Corporation & Intervest
Intervest Bank Bancshares
($ in thousands) Consolidated Corporation
- --------------------------------------------------------------------------------
Earnings before income taxes $ 2,374 $ 531
Fixed charges, excluding interest on deposits 320 319
------------------------------
Earnings before income taxes and fixed charges,
excluding interest on deposits 2,694 850
Interest on deposits 7,977 --
------------------------------
Earnings before income taxes and fixed charges,
including interest on deposits $10,671 $ 850
- --------------------------------------------------------------------------------
Earnings to fixed charges ratios:
Excluding interest on deposits 8.42 x 2.66 x
Including interest on deposits 1.29 x 2.66 x
- --------------------------------------------------------------------------------
Note: Fixed charges for 1998 represent interest on convertible debentures and
federal funds purchased, and amortization of debenture offering costs.
For the Year Ended December 31, 1997
------------------------------------
Intervest
Bancshares
Corporation & Intervest
Intervest Bank Bancshares
($ in thousands) Consolidated Corporation
- --------------------------------------------------------------------------------
Earnings before income taxes $1,331 $ 166
Fixed charges, excluding interest on deposits 1 --
------------------------------
Earnings before income taxes and fixed charges,
excluding interest on deposits 1,332 166
Interest on deposits 5,893
------------------------------
Earnings before income taxes and fixed charges,
including interest on deposits $7,225 $ 166
- --------------------------------------------------------------------------------
Earnings to fixed charges ratios:
Excluding interest on deposits 1,332.00 x --
Including interest on deposits 1.23 x --
- --------------------------------------------------------------------------------
Note: Fixed charges for 1997 represent interest on federal funds purchased.
<PAGE>
Exhibit 23
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (No.333-26583, declared effective November 23, 1998) of
Intervest Bancshares Corporation of our report dated January 15, 1999 appearing
in this Form 10-KSB.
Hacker, Johnson, Cohen & Grieb PA
Tampa, Florida
February 25, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,876
<INT-BEARING-DEPOSITS> 199
<FED-FUNDS-SOLD> 6,473
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 82,338
<INVESTMENTS-MARKET> 82,173
<LOANS> 97,736
<ALLOWANCE> 1,662
<TOTAL-ASSETS> 200,522
<DEPOSITS> 170,467
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,511
<LONG-TERM> 7,000
0
0
<COMMON> 2,484
<OTHER-SE> 17,060
<TOTAL-LIABILITIES-AND-EQUITY> 200,522
<INTEREST-LOAN> 8,278
<INTEREST-INVEST> 4,224
<INTEREST-OTHER> 432
<INTEREST-TOTAL> 12,934
<INTEREST-DEPOSIT> 7,977
<INTEREST-EXPENSE> 8,297
<INTEREST-INCOME-NET> 4,637
<LOAN-LOSSES> 479
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,133
<INCOME-PRETAX> 2,374
<INCOME-PRE-EXTRAORDINARY> 2,374
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,435
<EPS-PRIMARY> .58
<EPS-DILUTED> .46
<YIELD-ACTUAL> 7.68
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,173
<CHARGE-OFFS> 0
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 1,662
<ALLOWANCE-DOMESTIC> 1,662
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
